Mahindra and Mahindra Ltd’s (M&M) robust performance for the March quarter did not seem to have impressed the Street. Its shares wobbled and closed flat at Rs657.2.
One would have expected a bounceback, given that the group’s automobile sales for the quarter rose 33% to Rs9,118.8 crore and adjusted net profit jumped by about 19.5% to Rs803 crore from a year ago.
This takes into account the performance of its subsidiary, Mahindra Vehicle Manufacturers Ltd (MVML), which makes medium and heavy commercial vehicles.
Stand-alone numbers were a tad better as net revenue for the quarter grew 38.7% to Rs9,387.2 crore from the year-ago period, largely driven by growth in automotive segment sales, which, in fact, offset the decline in tractor sales.
Automotive sales comprising utility vehicles, where the company has a 55% share of the market, have been growing steadily through the four quarters of fiscal 2012, helping M&M buck the sluggish trend in passenger vehicles.
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Quarterly performance (Graphic)
But concerns persist on tractors. Umesh Karne, an analyst at Brics Securities Ltd, said in a report that tractor sales have been falling since November 2011 because of the high cost of ownership (increase in both cost of tractors and interest), higher crop output leading to oversupply and low sale price for farmers resulting in weak sentiment.
Analysts expect this trend to continue at least for a couple of quarters. In fact, tractor sales growth is expected to moderate to 5-7% in the current year, compared with 12% in fiscal 2012.
This is perhaps why the stock has lost ground in the last few months, underperforming the BSE Auto index. That said, M&M being the world’s largest tractor maker has a 40% share of the market. Its leadership position across key product categories has allowed it to raise prices through the year to combat rising costs and duties. But better realizations did not fully offset cost pressures. Raw material costs jumped by around 290 basis points (bps) year-on-year, though they were marginally up from the December quarter. One basis point is one-hundredth of a percentage point.
Consequently, operating margin at M&M, including MVML, stood at 12.1%, 190 bps lower than a year ago. Operating profit increased by around 15% during the quarter to Rs1,102.9 crore.
The stand-alone entity’s operating margin of 10.3% was in line with Street estimates.
But reported net profit jumped 44.2% to Rs874.6 crore including a one-time tax gain of Rs108 crore as a subsidiary was absorbed into M&M.
Adjusting for this, the stand-alone entity’s net profit of Rs766.3 crore was 26% higher than the year-ago period, and way above the Bloomberg’s consensus estimates.
Yet, immediate concerns on the auto sector and moderation of tractor sales expectations will weigh on the near-term prospects of the firm’s shares, which are trading closer to the 52-week low of Rs617, the high being Rs874.8—reached in end-October after which tractor sales started sliding.
Graphic byYogesh Kumar/Mint
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