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Mahindra & Mahindra (M&M) experienced a significant decline in its share price on Wednesday, plummeting over 6% to reach the day's low of Rs 2,737 on the Bombay Stock Exchange (BSE). This downturn was triggered by the company's decision to reduce prices for its compact crossover SUV, the XUV700.
While a price reduction might have a marginally negative impact on M&M's earnings, analysts interpret it as a signal of weakening demand in the automotive sector. The company's management attributed the price cuts to the need to respond to increased discounts offered by competitors and the overall sluggish retail demand.
These price adjustments are described as 'special prices' and will be in effect for the next four months. The XUV700 has consistently achieved an average monthly volume of around 6,000 units, representing approximately 15% of M&M's total SUV sales. Notably, the top two trims, AX7 and AX7L, account for a substantial portion of the model's volume, ranging from 50% to 60%.
Domestic brokerage firm Axis Capital, which maintains an 'add' rating on M&M with a target price of Rs 3,150, expressed a positive outlook on the company within the sector. Their analysis indicates that the price cuts could translate to an estimated EBITDA impact of Rs 300-350 million per month. Even if this price reduction becomes the new norm, the annual impact would be in the range of Rs 3.6-4 billion, representing approximately 2-3% of their overall EBITDA estimate for M&M.
However, Axis Capital believes that M&M could benefit from a potential increase in sales volume following the price cuts. The company's management anticipates that the overall XUV700 volume could rise to 8,000 units per month. The price cuts, specifically targeting certain variants of the XUV700, have a marginal impact on the overall earnings per share (EPS). This reflects the broader weakening demand and pricing environment prevalent in the passenger vehicle (PV) industry.
The situation underscores the challenges faced by automakers as they navigate a market characterized by softening demand and intensified competition. The price cuts implemented by M&M demonstrate the company's proactive efforts to stimulate sales and maintain market share. The success of these strategies will depend on the consumer response and the overall market dynamics in the coming months.