Utility vehicle sales power M&M earnings

Since about October, the Mahindra and Mahindra Ltd (M&M) stock has been under pressure as tractor sales have trailed off.

At around the same time, the company had launched its XUV, but investors remained focused on the higher margin farm vehicles.

The higher utility vehicle numbers didn’t do much to profitability in the September and December quarters of the last fiscal.

But, starting with the March quarter, the numbers can no longer be ignored.

M&M’s automotive segment now accounts for nearly 70% of total revenue compared with 57.3% in the June 2011 quarter.

The company’s dominant position in the utility vehicle category meant that it was able to get away with hiking prices and still register good volume growth.

That, plus perhaps a higher proportion of the XUV model in its sales mix, meant that realizations grew by more than one-fifth from a year ago.

Note that these numbers are based on the stand-alone numbers of M&M.

The increase in realizations also helped the company to somewhat arrest the decline in margins.

In a conference call, the management said that price hikes and some efficiency measures helped, although raw material costs as a proportion of net sales grew 4.1 percentage points over a year ago. Employee cost is one area that has remained under control.

Operating margin for the stand-alone company was 11.8%, a good 1.5 percentage points over the March quarter. It is still less than what it had registered in June 2011, but that is the effect of the tractor sales slowdown. Thus, M&M was able to register a Street-beating 20% growth in net profit. If one considers the numbers of its subsidiary Mahindra Vehicle Manufacturers Ltd, the profit growth is much better at nearly 26%.

The Street cheered the June earnings, driving up the stock about 4% in a weak market. But then, the stock had been beaten down for the past 10 months and valuations look attractive.

The outlook, though, remains sombre. High interest rates and a poor monsoon will further put pressure on tractor sales. The sales of farm vehicles continued to decline in July and will remain dampened for some more time. Therefore, M&M’s utility vehicle division needs to sustain this kind of momentum for the stock to break out.

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