Mahindra and Mahindra Ltd’s (M&M’s) September quarter performance matched investor expectations on the back of robust farm equipment sales that surpassed the industry average.
A good monsoon and pent-up demand fuelled farm equipment sales that nearly doubled from a year back. Consequently, operating leverage led to a 180 basis points margin expansion to 17.7%, in spite of lower money realized on sales.
In contrast, the auto segment’s performance was tepid giving little reason for investors to cheer. An 11.7% growth in auto sales was unimpressive. Margins too fell slightly year-on-year. In contrast, during the previous boom, M&M’s auto sales—mainly utility vehicles—beat industry growth rates.
Thankfully, the quarter under consideration was not as bad as in the recent past, when both auto and tractor sales were pathetic due to the demand slowdown and the firm’s profits went downhill.
Including Mahindra Vehicle Manufacturers Ltd, the firm’s 15.3% growth in consolidated net revenue trickled down to a 28.3% jump in higher operating profit from a year ago. Although this was in line with Bloomberg’s average estimates, it has led to concerns on the future outlook.
Indeed, while the management has revved up fiscal year 2017 forecast for the farm equipment segment from 13-15% to 20%, the outlook for the auto segment is worrisome. That’s one reason why the stock closed 6% lower on Friday.
An Emkay Global Financial Services Ltd report points out that M&M’s new launches in the automotive segment have lost steam and flagship products like Bolero also suffered due to higher excise duty (30%). Besides, with new product launches planned for the second half of FY18, the strategy is to push sales of existing products.
Meanwhile, the demonetization imbroglio could also have a short-term bearing on M&M’s sales, given that a significant part of its sales are to rural customers.