M&M shares tumble over 6%. Here's the trigger
M&M shares fell 6% due to XUV700 price cuts. Countering peer discounts and weak sales, cuts could lower earnings but increase volumes. AX7, AX7L trims are 50-60% of 6,000-8,000/month volume. Axis Capital sets a target price at Rs 3,150. Domestic brokerage firm estimates 2-3% impact on overall EBITDA. Cuts affect EBITDA by Rs 300-350 mn/month for four months.
Shares of Mahindra & Mahindra (M&M) on Wednesday fell over 6% to the day's low of Rs 2,737 on BSE amid news that the automaker has reduced prices of its compact crossover SUV namely .While a price cut would be marginally negative for earnings for M&M, analysts see it as a sign of weakening demand.
The company management said that the prices have been cut to respond to the higher discounts offered by peers and the weak retail demand in general and that these are special prices applicable only for the next four months.
“We note that the overall volume of XUV700 has been around 6,000/month (15% of M&M's overall SUV volume), and as per our understanding, the Top 2 trims of the model (AX7 and AX7L) account for around 50-60% of volume,” said domestic brokerage firm Axis Capital in a report rating M&M with an ‘add’ and a target price of Rs 3,150 while stating that they are positive on M&M in the sector.
As per our calculations, the announced price cuts imply an EBITDA impact of around Rs 300-350 mn/month, and even after assuming that this is the new normal going ahead (unlikely, in our view), the annual impact would be around Rs 3.6-
4 bn - this equates to around 2-3% of our overall EBITDA estimate for the company, Axis Capital added.
However, the brokerage firm feels that the company might benefit from a potential increase in volume post the price cuts as the management believes that the overall XUV700 volume could increase to 8,000 units/month.
The overall EPS impact of the price cuts on certain variants of XUV 700 is marginal, thereby reflecting the weakening demand and pricing environment in the overall PV industry.
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Source: Stocks-Markets-Economic Times
