Mahindra's utility vehicles sales may hit a speed bump - Livemint

Mahindra is facing increasing competition in the segment and will bear the brunt of an additional 3% duty M&M has started working on down-sizing engines, reducing ground clearance, and shortening vehicles to fit into a classification that allows it to offset the additional cess. Photo: Ramesh Pathania/Mint Mumbai: Mahindra and Mahindra Ltd (M&M), the utility vehicles (UV) market leader, may see its surge in the segment slowing as competition intensifies and it bears the brunt of an additional 3% excise duty on such vehicles. Apart from the Renault Duster and Maruti Suzuki India Ltd's Ertiga, it will shortly have the Ford EcoSport to contend with. On top of that, the price of diesel, which powers most of its vehicles, is being increased by increments, narrowing the gap with petrol. Analysts perceive strategic risks for the firm rising as demand for petrol models revive. Hindustan Times reported on 13 May that diesel is actually now costlier than petrol in Goa. Partly in response to this, M&M has started working on down-sizing engines, reducing ground clearance, and shortening vehicles to fit into a classification that allows it to offset the additional cess, according to an official, who added that it would take the firm a while to launch the modified models. Thanks to its UV portfolio, M&M was one of the few auto firms that saw sales advance month on month in the last fiscal year, easily outperforming rivals in a gloomy market. Car sales in India dropped 7.6% to 1,895,471 in the year ended 31 March. However, the UV segment dominated by M&M grew 52% to 553,660, largely fuelled by launch of new models and a preference for diesel-driven vehicles. Analysts said that while UVs will continue to outpace cars, growth will slow, a trend accentuated by the base effect. M&M's Bolero, Scorpio, Xylo and XUV 5OO models have been among the biggest beneficiaries of the demand for diesel UVs. But with a 3% price increase owing to the higher excise duty announced in the February budget kicking in, M&M's UV sales expanded just 2% to 20,748 units in April. Meanwhile, with rivals launching new models in the past year, its share of the UV segment dropped to 47.67% from 55.69% a year ago, according to the Society of Indian Automobile Manufacturers (SIAM) lobby group. M&M ceded marketshare to Renault India Pvt. Ltd and Maruti Suzuki. Renault's Duster sports utility vehicle (SUV), launched in July 2012, boosted its segment share from almost nothing to 7.15% in April, while Maruti's Ertiga multi-utility vehicle (MUV) rose to 14.3% from 1.79% a year ago. The "company's strategic risk is going up", said Mahantesh Sabarad, senior vice-president, equity, at Fortune Equity Brokers (India) Ltd, referring to M&M's diesel-dominated passenger vehicle portfolio. "It would get a new lease of life only after the jointly developed products with Ssangyong Motor (M&M's South Korean subsidiary) start rolling out in 2015." M&M currently sells the Rexton, a premium SUV from the Ssangyong range, in India. It is currently evaluating the Korando Turismo, launched in Korea recently, for the Indian market, said Pravin Shah, chief executive, automotive sector, M&M. Any shift in the sales trend will have an impact on earnings, said Bank of America-Merril Lynch analyst S. Arun in a 7 May report. "Our analysis shows 5% shift in sales will impact FY14E EPS (earnings per share) of standalone operations by 2.5%," he said. "Our base assumption for UVs is 11% CAGR (compounded annual growth rate) over FY14-15." Shah said its range will ensure there won't be any significant effect. "While it is correct that a majority of M&M's products have diesel fuel option, the wide range of models at different price points in both personal and commercial segments will ensure its operations do not get impacted." Diesel prices were increased for the fourth time this year on 10 May. With India aiming to reduce the subsidy on diesel, state-owned oil firms were mandated in January to raise prices by up to Rs.0.50 per litre every month. In Mumbai, diesel now costs Rs.56.04 a litre. On the other hand, petrol prices were cut by Rs.3 per litre on 30 April in line with global rates to Rs.63.09 (Delhi) and Rs.69.73 (Mumbai) leading to a revival of interest in petrol models. "Such an increase will not reduce the demand for UVs or commercial vehicles," Shah said. "It may result in some shift in demand for small and mid-size passenger cars from diesel to petrol. Other than that, I do not see it having an overall impact in terms of industry volumes. The impact will not be such that the demand for petrol cars will ever go back to where it was three years ago but yes, the ratio may tilt more towards petrol." Mitul Shah, an analyst at domestic brokerage Karvy Stock Broking Ltd, expects a decline. "The company's passenger vehicles expanded 31% last year; we expect growth to taper from double-digits in the months ahead," he said, adding that he expects a bounce back to high double-digit expansion in fiscal 2015. Meanwhile, there's more competition on the way in the form of the long-awaited EcoSport from Ford India Pvt. Ltd. Competition in the UV segment will become as intense as it is in cars, said Ajay Shethiya, an analyst at Centrum Broking Pvt. Ltd. "With an ageing model line up, it would be challenging for Mahindra to turn in brisk volumes as it has done in the past," he said. Sales of best-selling models such as the XUV 5OO have moderated to 3,000-plus units a month from 4,000-plus, he said. While the company may lose some share as more models enter the market in the next two years, M&M will still lead the pack, said the company's Shah. "The real game is on product and the value that we are offering with the product," he said. "We have a comprehensive range of six products in the segment." Joseph George, an analyst at India Infoline Ltd, agreed with this. The threat posed by competition has been overestimated as there are hardly any models that can pose a serious threat to M&M. While there are four new models set to enter the UV segment in 2013, only the Ford EcoSport shows volume potential, George said. And it's more likely to eat into the market share of high-end hatchbacks and entry level sedans rather than full-sized UVs. "The Nissan Evalia (multipurpose vehicle) did not find takers due to its boxy van-like looks, and the upcoming Ashok Leyland Stile (a rebadged Evalia) and the Chevrolet Enjoy (multi-purpose vehicle), we believe, may be no different. Maruti's XA Alpha is at least 15 months away, whereas Nissan has delayed plans to launch a rebadged Duster due to resistance from Renault India," said George. As far as modifications are concerned, Mahindra will be careful not to design a vehicle that simply qualifies for lower duty. "We do not want to develop a product that will just satisfy the excise requirement and not customer requirements," said M&M's Shah. To qualify for the lower duty of 27%, a vehicle has to be less than 4m in length, have an engine capacity below 1.5 litres, and a ground clearance of less than 170mm. The Quanto is the only model that M&M has in the sub-4m category and has an engine capacity less than 1.5 litres. "We could look to see whether it is possible for us to redefine our vehicles to have lower than 170mm ground clearance," Shah said. M&M could potentially look at whether other vehicles can be built with an engine under 1.5 litres. via Technology - Google News http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNF6N_7nJv3XXKQUTY9rMtd4ZU-BRQ&url=http://www.livemint.com/Industry/hd9dsf4GH2TBbx5NrjQeZO/Mahindras-utility-vehicles-sales-may-hit-a-speed-bump.html

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