BackPrice hikes, lower costs lift Mahindra’s profit margin
While operating margin for M&M in the September quarter was 123 bps higher y-o-y, this does not indicate improvement in the firm's business environment
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Mahindra and Mahindra Ltd (M&M) staged a comeback on profitability in the September quarter against a year ago, despite lacklustre demand across key product segments.
Operating margin at 13.2% for M&M, along with Mahindra Vehicle Manufacturers Ltd, was a neat 123 basis points higher than the previous year period. Unfortunately, this does not indicate an improvement in the firm’s business environment.
Higher realization on sales propped up margins. This came on the back of price hikes both in the automotive and farm equipment segments. A report by Angel Broking Pvt. Ltd attributes higher margins to better product mix, price hikes and cost-cutting strategies. Average realizations rose 8% year-on-year and helped to offset the 10% drop in vehicles sold during the quarter.
This was steered by the automotive division whose drop in sales volumes was not too sharp. In fact, utility vehicle sales are slowly improving. M&M is a relatively new entrant in the compact utility vehicle arena, where new launches helped improve sales. Realizations rose by a strong 4.8%, while margin (before interest and tax) rose nearly 185 basis points. One basis point is 0.01%.
In contrast, the farm equipment segment was a let-down. Sales dipped by 26% from a year back, due to a general economic slowdown apart from the rainfall deficit of two consecutive years. But the firm hiked prices of tractors that, in turn, fuelled realizations by 12.8% and profit margin by nearly 100 basis points.
On the whole, better realizations contained the revenue drop at 4.2%. Further, expenses too fell by 5.5%. A combination of these two factors helped to improve operating profit during the quarter from a year back, though it fell when compared with the June quarter.
M&M’s net profit at ₹ 978 crore was little changed from a year back. The stock has outperformed the S&P BSE Auto index and the benchmark S&P BSE Sensex given its resilience during times of adversity. Perhaps the worst is over too.
The management said in the analysts’ conference call that future prospects depend on the agricultural output in the kharif season and sales growth in commercial vehicles and utility vehicles, where its market share has eroded considerably.
Indeed, the low base effect will kick in from the forthcoming quarters and analysts are hopeful of a 10% compound annual growth rate in net profit between fiscal years 2015 and 2017. All this assumes a recovery in sales volume across segments, which is critical to sustain profitability at least at current levels.
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