The Mahindra and Mahindra Ltd (M&M) scrip soared 7.5% on the National Stock Exchange on Wednesday in a flat market, as the beaten-down stock managed to beat rock-bottom expectations. While the net profit for ordinary activities after tax for the stand-alone company for the September quarter, at Rs185.7 crore, was lower by 35% compared with the year-ago period, the management points out that excluding the impact of the exchange loss and other special/exceptional items, profit after tax during the quarter actually saw a growth of 9.3%. Rupee depreciation hit the company hard, resulting in an exchange loss of Rs117.8 crore. Of this amount, Rs96 crore was due to translation losses on net foreign currency borrowings. Another factor was a lower octroi refund, which affected the top-line.
While revenues from the automotive business rose by 7.8% year-on-year, earnings before interest and tax fell a huge 48%, chiefly on account of rising input costs. Average revenue per unit in this segment has declined because of a change in the product mix. Margins have been decimated.
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The performance of the farm equipment sector was better, with revenues increasing by 28% year-on-year, while earnings before interest and tax in the segment moved up by 11.5%. Here too, margin pressures are evident, but the saving grace is that the rates of growth, both in revenue and earnings before interest and tax, are around the same as in the June quarter. Volume growth in tractors during the quarter was higher by a mere 2.7% compared with the year-ago period.
In a conference call, the management pointed out that while tractors saw a price rise of around Rs9,000 per unit on an average during the June quarter, the price rise was around Rs15,000 per unit in the September quarter. They also said they would wait and watch to see if there is any dampening of demand during the second half of the year.
Analysts have been worried about M&M’s large capex programme, because it will increase overheads and drag down the return ratios. The company has said that, as of now, all their expansion plans are intact. At the consolidated level, apart from Mahindra Finance, the company’s debt-equity ratio is 0.95.
The company management also identified two headwinds it is facing: one, the sharp fluctuation in the exchange rate and two, the liquidity pressures in the market, which have led to the drying up of funds for retail financing of vehicles. On the other hand, the company pointed out that it is already seeing lower raw material prices leading to easing of pressure on input costs.
The other silver lining is the December deadline for the company’s new sport utility vehicle, Ingenio.
All the negatives, however, have long been factored into M&M’s price. At current levels of around Rs300, the stock is either less than or only a bit more than the value of the core businesses of automotive and farm equipment, with little value being given to the company’s large finance, tractor, tech and hospitality subsidiaries.
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Graphics by Paras Jain / Mint