M&M Q2 net up 8%, sees input cost rising

M&M Q2 net up 8%, sees input cost rising

Mumbai: Mahindra & Mahindra, India’s largest utility vehicles maker, reported a 7.8% rise in second-quarter net profit, as robust volumes in a fast-growing auto market mitigated higher input costs.

Costs rose 4-7% between April and September, Mahindra’s automotive president Pawan Goenka told reporters on Friday and he expects them to increase further, which may prompt the automaker to pass on some of the rise to consumers, he added.

PINC Research auto analyst Vineet Hetamasaria said: “We expect the company to continue to do well as demand for tractors will pick up in October after the harvest season. But rising raw material prices is one concern. Interest rates will be another."

A high base effect and a slow growth in component supplies are likely to moderate growth for the company, Vaishali Jajoo, analyst at Angel Broking added.

India is one of the fastest-growing markets for automobiles as a rapidly expanding economy, expected to grow over 8% this fiscal year, boosts incomes and consumer spending, while a good monsoon spurs auto demand from rural areas.

However, rising interest rates, capacity constraints of the auto component makers, higher input prices and an inability to pass on the higher costs to customers has put pressure on the margins of automobile companies.

Mahindra, which signed an agreement in August to buy troubled Korean automaker Ssangyong Motor, is expected to close the deal and take control of the firm by end-February or March, Goenka said.

The purchase will give Mahindra an international foothold as the Korean maker of Rexton and Kyron SUVs and chairman luxury sedan also exports to China, Russia, Europe and the Middle East.

Earlier this month, Mahindra’s chairman Anand Mahindra said the company expects to sign a final agreement to buy Ssangyong by December as it starts pricing negotiations.

Strong Q2

Mahindra reported net profit of Rs758 crore ($170 million) for its fiscal second quarter ended 30 September, compared with 7.03 billion a year ago. Net sales rose 19% to Rs5,311 crore.

Higher inputs costs hurt operating margins by 300 basis points in the fiscal second quarter ended September, Goenka said. Operating margin for the quarter was 16.5%, down 190 bps from a year earlier.

“Of the total commodity price increases, some have been passed on to the consumer, some adjusted in cost reduction and the balance was absorbed in the operating margin," he added.

He expects the material costs to rise 2-3% in the second half of the fiscal year ending March 2011.

Shares in the company, valued at about $9.8 billion, closed 0.2% lower in a firm market, after falling as much as 3.7% ahead of the results. The shares have risen 36% so far this year, ahead of a 33% rise in the sector index and a 14% increase in the main index.