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M&M: volume growth alone is not enough

M&M: volume growth alone is not enough
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First Published: Mon, Nov 14 2011. 11 40 PM IST

By Bloomberg
By Bloomberg
Updated: Mon, Nov 14 2011. 11 40 PM IST
By Bloomberg
In October, when sales of the domestic passenger vehicle sector declined the most in a decade, Mahindra and Mahindra Ltd (M&M) was almost the sole exception among listed car makers. However, as the September quarter results show, a sharp growth in volume does not always make for healthy profit.
In the September quarter, the company’s net profit fell 3% from a year ago to Rs 737.4 crore. Even if one ignored the impact of rupee depreciation, the adjusted net profit of Rs 759 crore would have meant no growth from the previous year. That adjusted figure also fell short of the Rs 776 crore consensus forecast of brokerages polled by Bloomberg. Secondly, if one were to also include the numbers of its 100% subsidiary, Mahindra Vehicle Manufacturers, which makes the Maxximo model, then net profit growth would be a weak 6%.
That story is a repeat of the first quarter. Profits were driven by rising costs and shrinking margins. M&M’s total expenditure rose at a faster pace; it increased 42.3% from a year ago. As a result, operating profit declined 6% from a year ago. Earnings before interest, tax, depreciation and amortization margins shrank 4.89 percentage points from a year ago. That was sharper than the 1.7 percentage point dip seen in the June quarter.
The key risks for M&M, as with other auto companies, are raw material costs and dipping volumes.
While commodity prices are easing, their impact on rising income statements come with a lag. Therefore, raw material costs could continue eating into profit well into the third quarter as well, despite price increases by M&M in August and September.
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*** Quarterly Performance (PDF)
Secondly, the company management has projected a cautious outlook for the rest of this fiscal year, citing the deteriorating macroeconomic scenario. However, brokerages are more optimistic about volume growth. With nine launches in fiscal 2011, and eight planned this fiscal, volumes might just continue to chug along nicely as seen in October. Some models such as the XUV500 have an order backlog of as much as four months. The tractor segment is also likely to do well with normal monsoon.
Will that be enough to sustain M&M stock’s outperformance is the big question. Ssangyong Motor Co. Ltd is likely to bleed due to rising costs. The outlook for other subsidiaries such as Tech Mahindra and Mahindra Finance, too, isn’t rosy. While investors did hammer the shares almost 6% on Monday, they will wait for consolidated numbers before the next round of buying or selling.
Graphics by Yogesh Kumar/Mint
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First Published: Mon, Nov 14 2011. 11 40 PM IST