Mahindra and Mahindra Ltd’s (M&M’s) June quarter results show improving farm equipment sales on the back of a normal monsoon. While this segment beat Street expectations, the auto segment dented overall performance, with some pain resulting from the expiry of excise duty benefits at its Haridwar unit.
Taking both segments together, the company sold 12% more vehicles when compared with a year back. So M&M along with Mahindra Vehicle Manufacturers Ltd (MVML) clocked a decent 11.5% growth in net revenue to ₹ 10,524.7 crore. Note that overall sales had contracted a year ago.
Sure, auto sales rose 11%, but this did not meet the expectation on the Street. Farm equipment sales surprised, jumping 20% over the year-ago period. Benefits of higher volumes translated into a 120 basis point expansion in the segment’s profit margin to a solid 18.8%. This was the saving grace for the company, given that the auto segment’s profitability contracted by a steep 240 basis points to a thin 7.8%. A basis point is 0.01%.
A note by PhillipCapital (India) Pvt. Ltd says that low profitability of the auto division is the fallout of weak product mix, and absorption of higher raw material prices and taxes. Add to this the fact that excise duty benefits expired at the Haridwar unit, which hurt profit margins.
This will continue unless the company is able to pass on the higher excise duty to customers. This may be unlikely in the near term as M&M is just making inroads into the compact utility vehicle segment with several new launches.
Given these factors, M&M+MVML clocked an operating margin of 14.1%, which was just a tad lower than what analysts had estimated.
Meanwhile, M&M’s cost control is commendable. Most input costs and other expenses remained stable as a percentage of sales. In fact, the other expenses were lower when compared with the immediate preceding quarter.
Hence, the 11% rise in operating profit to ₹ 1,488.5 crore reflected the company’s revenue growth, as costs did not make a severe dent in profitability. The quarter’s net profit of ₹ 896 crore (after adjusting for extraordinary income of ₹ 91 crore) was a mere 7.9% higher than a year ago.
Results aside, the comforting factor is that M&M is out of the woods with a strong comeback in the farm equipment segment. With a positive outlook on the monsoon and its effect on farming, this segment should do better in the ensuing quarters. This is good news for investors because nearly a third of the company’s total revenue and half the profit (before interest and tax) is from this segment.
That said, concerns on the weak profitability of its auto division will continue, unless sales pick up. Little wonder that the M&M stock closed 2.21% lower on BSE on Wednesday.