Mahindra and Mahindra: Decent show in March quarter, but positives priced in

Despite rising concerns on the impact of the recent ban on diesel vehicles in some regions and dull rural sentiment, Mahindra turned in decent results for the March quarter


Utility vehicles—Mahindra and Mahindra core business—grew at a faster pace of 15% during the quarter than passenger vehicles, where demand grew in low single digits. Photo: Bloomberg
Utility vehicles—Mahindra and Mahindra core business—grew at a faster pace of 15% during the quarter than passenger vehicles, where demand grew in low single digits. Photo: Bloomberg

Despite rising concerns on the impact of the recent ban on diesel vehicles in some regions and dull rural sentiment, Mahindra and Mahindra Ltd (M&M) turned in decent results for the March quarter.

Importantly, the company sold 15% more vehicles and 13% more farm equipment when compared with the year-ago period.

Utility vehicles—its core business—grew at a faster pace of 15% during the quarter than passenger vehicles, where demand grew in low single digits. Even the demand for farm equipment finally caught up, after nearly eight dull quarters.

Product pricing, too, was stable through the quarter across segments, though there weren’t any sizzling price hikes that could increase realization on vehicles sold.

Therefore, net revenue of M&M along with subsidiary Mahindra Vehicle Manufacturers Ltd (MVML) rose by 11.4% to Rs.10,160.2 crore, slightly better than analysts’ estimates.

But higher revenue did not lead to greater profitability. The benefits of lower commodity prices have ebbed and M&M’s excise duty benefits at its Haridwar plant also expired. Meanwhile the farm equipment segment, which is reckoned to have higher profitability, had a lower share of total sales during the quarter.

All these factors contributed to an operating margin of 12.5%, just marginally higher than a year ago and lower than the preceding December quarter by a significant 165 basis points. Within this, the farm equipment segment’s profitability was much lower than what most analysts estimated. A basis point is 0.01%.

That said, in spite of the higher excise duty on diesel vehicles compared with others and a weaker product portfolio in the fast-growing compact utility vehicle segment compared with its peers, the company’s ability to maintain its profit margin at the earlier levels is commendable. M&M has since launched several products in this compact utility vehicle segment.

The company’s stable profitability didn’t enthuse investors. Perhaps, they had already backed the stock after it clocked good sales in the last few months amid odds. Winds of recovery in the rural economy, which, to some extent, determines the fortunes of M&M, also brought back investor confidence.

At Rs.1,331.80, the stock reasonably discounts all the positives. It outperformed benchmark indices in the last couple of months, rising about 15% since end-March. Also, the 7% rise in M&M+MVML’s net profit from a year-back (excluding adjustments for exceptional items) had nothing to warrant any change in the outlook on the Street.

The near term is crucial for M&M as the company’s strategies to counter the ban on diesel vehicles, which form the backbone of its business, will determine its sales momentum.

The writer does not own shares in the above-mentioned companies.

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