M&M maintains margins in December

M&M maintains margins in December

Mahindra and Mahindra Ltd’s (M&M) December quarter profit—net of one-time income—fell short of Street expectations, but investors shrugged it off.

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After the company reported a 49.2% gain in net profit from a year ago, they boosted the stock 4% on Wednesday in a weak market.

Perhaps investors were overjoyed at M&M’s margins. Operating margin for the three months ended December stood at 15.21% against 14.95% a year ago.

Now, a 26 basis points increase might not mean much by itself, but it comes at a time when rivals are struggling because of rising lending rates and higher raw material costs. One basis point is one-hundredth of a percentage point.

For the same period, Maruti Suzuki India Ltd’s margins fell five percentage points, and Hero Honda Motors Ltd’s declined six percentage points, to name just two.

M&M’s success could be explained by increasing sales of its higher margin tractor business and better realizations from its utility vehicle business.

Ebit (earnings before interest and tax) margin for the tractor business has increased by 20 basis points to 18.4%, while its share in the overall revenue gained.

Things look better in the utility vehicle segment where the Ebit margin has risen by one percentage point as M&M took a price hike and also sold more in overseas markets, where margins are better.

The big question—and this is something that will determine the stock’s direction in the medium term—is whether M&M will be able to sustain these numbers.

The prognosis doesn’t look good. Rising lending rates are crimping growth. In January, auto industry production growth from a year ago came down to less than 20%, significantly lower than the 30% growth seen in the first nine months of the fiscal.

If sales stutter, firms will also find it difficult to pass on the hikes in raw material costs at a time when steel prices are trending upward.

These concerns are priced in auto industry stocks. The auto index of the Bombay Stock Exchange has shed 16.24% since its November highs, underperforming the Sensex by four percentage points.

M&M has fallen 17.16% since then. Today’s investor reaction may yet be an aberration.

Graphics by Yogesh Kumar/Mint

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