Product mix crucial to Mahindra’s margin outlook

Doubts on product mix cropped up as Mahindra’s tractor sales fell by 1.5% from the year-ago quarter
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First Published: Sun, Feb 10 2013. 05 03 PM IST
Mahindra’s utility vehicles (UV) segment’s margin before interest and tax rose by nearly 1 percentage point to 11.2% from a year ago, thanks to the contribution from its new UV, XUV500. Photo: Sandesh Bhandare/Mint
Mahindra’s utility vehicles (UV) segment’s margin before interest and tax rose by nearly 1 percentage point to 11.2% from a year ago, thanks to the contribution from its new UV, XUV500. Photo: Sandesh Bhandare/Mint
Updated: Sun, Feb 10 2013. 10 45 PM IST
Concerns over the sales outlook of Mahindra and Mahindra Ltd (including Mahindra Vehicle Manufacturers Ltd) weighed down the stock in spite of a decent show in the December quarter. The stock fell 1.4% on Friday, continuing the slide in stock price seen since early January, although it’s still outperforming the benchmark indices.
Doubts on sales growth and the product mix cropped up as the firm’s tractor sales dipped by 1.5% from the year-ago quarter. The management in an analysts’ conference call said demand in four key states—Andhra Pradesh, Tamil Nadu, Gujarat and Maharashtra—contracted by 20% and could recover only gradually. Hope hinges on a good monsoon this year that could release pent-up demand and drive up tractor sales.
This is critical because tractors comprise one-third of the company’s revenue and nearly 35% of the profit before interest and tax. Margins from the tractor segment were maintained at around 15.5% in spite of a paltry 4.8% revenue growth. Surjit Arora, analyst, Prabhudas Lilladher Pvt. Ltd, in his report says this was commendable given the poor demand in the market, and was perhaps the effect of price hikes taken in the segment.
Of course, growth in utility vehicles (UV) has been helping the company beat the slowdown in the auto sector over several quarters. The December quarter’s overall 24.7% growth in net revenue to Rs.10,242.6 crore was driven by a huge 37.8% surge in revenue from the automotive segment, which sold nearly 11% more vehicles when compared to the year-ago quarter. The segment’s margin before interest and tax rose by nearly 1 percentage point to 11.2% from a year ago, thanks to the contribution from its new UV, XUV500. It remains to be seen if higher contribution from the recently launched UV, Quanto, which is relatively at the lower end, will lead to erosion in profitability, unless operating leverage kicks in with higher volumes.
Mahindra’s intent to launch new variants in the auto segment should keep demand buoyant and sustain volume expansion. Analysts estimate a 12-13% compounded growth in the segment over two years.
A key concern that looms over the Mahindra stock is the possibility of higher tax on diesel vehicles, which may impact growth in UVs and profitability. Besides, other firms like Ford, Tata Motors Ltd and Toyota are becoming more aggressive in the segment and competition could threaten its existing share of nearly half the UV market. Growth in other segments like light commercial vehicles is expected to be below 10% a year.
If Mahindra cruises past these challenges, adding volumes in tractors and the higher end of the UV range, then it could rev up profitability and the stock price too.
The December quarter’s operating margin at 13.5% was around the year-ago period though a tad below the Street’s estimates. Operating profit grew at a lower than expected rate of around 27%, a reason why the stock reacted negatively to the results. Thanks to lower tax, net profit zoomed nearly 30% from a year ago at Rs.914.9 crore.
Still, going by the sum-of-the-parts valuation of several brokerages, Mahindra’s stock has a 9-10% upside from its current price of Rs.882.2.
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First Published: Sun, Feb 10 2013. 05 03 PM IST
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