M&M: Optimism returns as auto and farm segments tango
After a considerably long spell of deceleration, Mahindra and Mahindra Ltd (M&M) staged a strong comeback in the September quarter. The tractor and utility vehicle (UV) maker pulled off a gratifying operating performance through superior product mix, price hikes and strong sales in both its farm equipment and automotive divisions.
The beat in margins, when compared to what brokerage firms had estimated, was significant. The combined entity— M&M and Mahindra Vehicle Manufacturers Ltd—clocked a 16% operating margin, up nearly 200 basis points from a year back. Fuelling this was a strong 31% year-on-year jump in farm equipment sales and a 9% rise in automotive sales.
While the jump in sales is not surprising given the two consecutive years of good monsoon and the consequent improvement in rural sentiment, UV sales rose on the back of new launches and waning effect of demonetization.
Explaining the auto segment recovery, a results review note by JM Financial Services Ltd said, “Continued traction in urban sales, strong festive demand and refreshed versions of the KUV100 and TUV300 aided recovery in the compact utility vehicles portfolio, even as mainstay models such as Bolero, Scorpio and XUV500 remained on a strong footing.”
Further, the company cashed in on buoyant demand and hiked prices by 1.7% and 1.5% in farm equipment and automotive divisions, respectively, that helped pass on raw material cost increases.
As a result, profit (before interest and tax) margins for the farm equipment and auto divisions expanded from the year-ago period. This compared very favourably with the drag in profitability in the June quarter thanks to the woes of BS-IV emission norms and demonetization effects.
In fact, M&M’S auto segment was among the worst hit during the last couple of quarters as a result of the regulatory changes. Rising duties on diesel vehicles, higher tax impact to customers under the goods and services tax and the time taken to cope with new BS-IV emission norms, all pulled down performance.
Naturally, investors cheered the comeback in revenue growth and profit margins in the quarter under consideration. Even the 22% year-on-year jump in net profit was higher than forecasts. M&M’S shares rose by 2.6% in the last two trading sessions in spite of sentiment being dull on the Street.