Mahindra and Mahindra Ltd (M&M) is in a unique position among automobile manufacturers. Its large exposure to the rural market has ensured that its volumes continue to grow at a healthy pace when the top three car makers have seen falling sales.
What’s more, thanks to the strong growth in volumes, it has been able to regularly increase prices and offset the rise in material costs. The company said on Tuesday that it recently increased prices for the third time this calendar year. Prices were increased by 1.5-2% each of these times.
According to an analyst, M&M’s price increases will help it maintain margins, which is not the case with some other firms, which have hiked prices notionally, while offering discounts to woo customers at the same time.
The firm’s sales in the automotive segment grew 30% in August and tractor sales grew by 21%. While the tractor division is entirely dependent on rural sales, even a large proportion of sales in the automotive segment comes from the rural segment for M&M.
Within this segment, sales of passenger vehicles grew 14%, and overall growth was driven by a huge jump in sales of light commercial vehicles. Considering that the monsoon has been relatively good this year, volumes should continue to be healthy till the first half of next year, according to an analyst.
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Thanks to M&M’s leadership position in the main segments it operates in, and the strong growth in sales, it seems it can afford to take price increases to offset the rise in material costs. Of course, on a year-on-year basis, margins are still lower.
But the company is in a relatively decent position, with revenue growth expected to be in healthy double-digit levels. While earnings growth would be lower because of the pressure on margins, compared with the last fiscal, it is still likely to be in double digits.
Also, Ssangyong Motor Co. Ltd, in which M&M has a 70% stake, too, has been doing well. As Umesh Karne of Brics Securities Ltd points out, Ssangyong has been reporting impressive growth for the last five months. In calendar year 2010, Ssangyong reported sales volume of 83,000 units, but incurred a loss of Rs 32.5 crore. Karne says if Ssangyong’s volume continues to go up, there is a high probability that M&M would turn around the South Korean firm.
It’s no wonder M&M shares have been in demand of late. The shares have risen 21% in the past one month, at a time when the auto index of BSE has risen at a much lower rate of 5.5% and the broad markets have declined marginally.
Graphic by Naveen Kumar Saini/Mint
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