Mahindra & Mahindra Ltd (M&M) put up a decent show during the December quarter. Net profit rose a robust 16.9% to Rs1,306 crore from a year earlier. While the base-effect of a weak December 2016 quarter played out well for M&M, profit growth was also driven by power-packed sales.

Tractors continued to drive performance, as had been the case in the past few quarters because of two consecutive years of good monsoon. Exports rose reasonably too. On the back of a 6.3% growth in sales of tractors, the division whose capacity is firing at 90% utilization levels, clocked a comfortable 110 basis points (bps) expansion in profit (before interest and tax) margin. One basis point is a hundredth of a percentage point.

The auto division too contributed to the overall show by posting a 6.6% growth in sales. Better realizations on the domestic front came largely through sales of light commercial vehicles.

While the medium and heavy commercial vehicles sales are improving, M&M’s management conceded that discounts were high. Further, the firm has not been able to regain its lost glory in utility vehicles (UV). Sales were flat as competition has raced ahead of the firm.

A report by Prabhudas Lilladher Pvt. Ltd early this year expressed concern on the 14% drop in M&M’s market share in UVs over the last four years. Yet, on the whole, the auto division clocked a 140bps increase in margin.

At the consolidated level, M&M along with Mahindra Vehicle Manufacturers’ Ltd (MVML) revved up its operating profit by 19.6% to Rs1,693 crore.

While this mirrored the strong sales growth, the operating margin of 14.7%, although wider than the year-ago period, was about 100bps lower than analysts’ estimates. The drag was perhaps due to lower UV sales, challenging times for exports in the auto division and discounts being offered to push sales.

In fact, even as most product lines are raking in decent sales growth, M&M could do well to sort out the UV business where it reigned supreme until the era of compact UVs took the firm by surprise and rivals captured the market. Analysts are hopeful that the low base of the recent past quarters and new launches in the segment should fuel UV sales growth in future. M&M’s shares too have recovered since last September when both the tractor and auto segment sales rose steadily and churned out robust profits. Adding to the optimism is the management’s statement that it expects “no headwinds in Q4FY2018 and FY2019" given the recovery in the rural economy, rural-oriented budget and the smooth transition to the goods and services tax. Even so, the risks of higher interest rates and transition away from diesel vehicles would be speed bumps that the firm along with others in the auto universe would have to contend with. Further, commodity prices are unlikely to soften in the near term, which means that sustaining profitability hinges on M&M’s ability to pass on cost pressures to its customers.

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