Mahindra and Mahindra Ltd’s Q4 results coincided with the early onset of the monsoon. It is on the back of good monsoon rainfall in previous years that the company’s coffers have swelled. Its shares rose on Tuesday by 2.3% on a stellar March quarter (Q4) performance. A third year of normal monsoon is good news for Mahindra, whose farm equipment and automotive businesses hinge on rural incomes.
The company’s Q4 results were slightly different this time round. The automotive division that had been struggling with weak profitability due to poor product-mix and stiff competition sprang a positive surprise. That sales grew by 20% year-on-year was known but the 10.7% Ebit (earnings before interest and tax) margin was 350 basis points higher than a year ago and well beyond what analysts had forecasted.
Improvement in margin in the auto division is an important milestone in Mahindra’s journey. It lends comfort to investors that the division has finally got its act right, after having suffered due to a lack of products in the last few years. This also explains the euphoria in the stock in the last few months.
Still the key question to be answered in the forthcoming quarters is whether the firm can regain its market share that has almost halved from its earlier level of over 50%.
The farm equipment division’s 41% acceleration in sales volume churned out a robust 42% year-on-year jump in revenue along with a 170 basis points expansion in margin. The next couple of months are crucial for this division, as the monsoon will determine growth prospects for the tractor industry, with expectations of growth in high double-digits through fiscal year 2019 (FY19) too.
Together, the two divisions lifted the consolidated profitability of Mahindra along with Mahindra Vehicle Manufacturers Ltd. The Ebitda (earnings before interest, tax, depreciation and amortization) margin vaulted by 390 basis points year-on-year and was 100 basis points higher than the 10-brokerage firm average estimate by Bloomberg.
A basis point is one-hundredth of a percentage point.
According to Bharat Shah, an analyst with Sharekhan Ltd, Mahindra reined in cost pressures effectively during the quarter partly by way of operating leverage and perhaps lower discounts offered on vehicles. In spite of the sharp rise in input prices over the last 12-18 months, operating leverage helped contain raw material cost as a percentage of sales.
Finally, the meteoric 64% jump in net profit was the icing on the cake. Such an earnings leap would trigger an upward revision in forecasts for the next year surely. That’s good news for investors as earnings growth is catching up with valuations. At Rs868, the Mahindra stock trades at 15 times its estimated earnings for FY19, leaving room for appreciation if the tide is favourable. The probable dampeners in sight are if rainfall plays truant as the season progresses or if Mahindra is unable to regain lost market share in utility vehicles.