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M&M’s margins decline; profit could come under further pressure

M&M’s margins decline; profit could come under further pressure
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First Published: Tue, Aug 09 2011. 01 48 AM IST
Updated: Tue, Aug 09 2011. 01 48 AM IST
The last four days have shaken financial markets and it’s natural to look at the June quarter earnings of local firms in that context. At first blush, Mahindra and Mahindra Ltd’s (M&M) stand-alone operations are more dependent on the local consumption story. Utility and commercial vehicle exports made up some 11% of overall sales for that segment in the June quarter. Similarly, tractor exports are 5% of sales in that segment. Note that these numbers don’t include those of SsangYong Motor Co. Ltd, in which M&M has a majority stake.
Also See | Moving Ahead (PDF)
The local operations more or less met Street expectations. While the firm’s volumes were higher than industry numbers, costs bit into profitability. Total expenditure grew by one-third from a year ago, outpacing the 30% rise in revenue. That increase was propelled by higher raw material costs, which grew 34% from a year ago. Consequently, operating profit growth was crimped, coming in at 15.7% and margins fell by 1.7 percentage points. There’s not much of a surprise and the story has been played out across the auto industry this earnings season.
The local consumption story is itself under pressure because of rising interest rates. That could very well hit demand growth, and, at best, companies can expect some stability in sales.
However, in an interconnected world, no firm is completely insular. And the events of the past four days could very well play a part in determining future profitability. For instance, if the US decides to unleash another round of quantitative easing, a resultant rise in commodity prices could very well affect M&M’s profitability.
Secondly, M&M’s consolidated numbers—the shares are valued based on all the businesses—include not only SsangYong, but also Tech Mahindra Ltd, whose operations are more vulnerable to global shocks. Those will also play an increasing part in determining the future course of the stock that has outperformed the broader markets so far this fiscal year.
Graphic by Naveen Kumar Saini/Mint
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First Published: Tue, Aug 09 2011. 01 48 AM IST