Rural exposure boosts M&M volumes; profit up 152%

Rural exposure boosts M&M volumes; profit up 152%
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First Published: Thu, Jul 30 2009. 09 39 PM IST

Updated: Thu, Jul 30 2009. 09 39 PM IST
Two-wheeler maker Hero Honda Motors Ltd had reported impressive earnings on Wednesday, Mahindra and Mahindra Ltd (M&M), which manufactures tractors and utility vehicles, has benefited similarly from its high exposure to rural India.
The firm reported a profit increase of 152% for the three months ended June. The numbers aren’t strictly comparable, since this is the first quarter when the full impact of absorbing Punjab Tractors Ltd is seen. Still, the net profit of Rs400 crore lifted Street expectations. A Reuters poll of 14 analysts had estimated Rs302 crore.
Adjusting for Punjab Tractors contribution, net profit would have still increased by 120%, the firm said. On the other hand, if Punjab Tractors numbers were consolidated in the June 2008 numbers, profit growth would have gained 78%. So, part of Punjab Tractors business has done much worse compared with the firm average, despite recording a higher increase in volumes.
Operating margins have grown by 6.7 percentage points compared with a year ago. The reasons for this are threefold. First, just like the other auto company, M&M has benefited from softening prices of commodities such as steel, aluminium and rubber. Raw material costs as a percentage of sales fell to 64.8% last quarter compared with 68.21% a year ago. It was also better than the 69.8% seen in the quarter ended 31 March.
Second, M&M was able to increase volumes significantly, thanks to its rural exposure. Demand in this segment is typically insulated from the vagaries of vehicle financing and the slowdown. More importantly, M&M sold a larger proportion of higher profit-making vehicles such as the Xylo, said analysts. Utility vehicle volumes have increased 28% for the quarter compared with the year-ago period. And thanks to the better product mix, average realizations increased by 3.7% to Rs4.13 lakh per vehicle.
Moreover, M&M has benefited from economies of scale in the tractor division after the merger with Punjab Tractors. For instance, the excess capacity in Punjab Tractors factories has been used to manufacture M&M brand vehicles.
The firm is optimistic about future sales and has given a guidance of 6-10% increase in tractor volumes for the September quarter. Thus, its dependence on the rural segment for most of its sales can be a bit of a dampener. Monsoon is weak, delaying sowing in many areas and casting a shadow on incomes. That might determine how its earnings will fare in the next few quarters.
Write to us at marktomarket@livemint.com
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First Published: Thu, Jul 30 2009. 09 39 PM IST