Mahindra to reap better profits from robust tractor sales
1 min read . Updated: 04 Oct 2013, 12:32 AM IST
Premium(Abhijit Bhatlekar/Mint)
Analysts expect Mahindra to maintain last year’s operating profit in the least, if not a marginal improvement in the same
Auto major Mahindra and Mahindra Ltd’s diversified product mix of utility vehicles (UVs), three-wheelers and farm-equipment, has played out in its favour. About a year ago, its performance bucked the auto slowdown as its utility vehicle segment sales grew at a scorching pace. In contrast, in the September quarter, utility vehicle sales fell by 23% from the year-ago period. In September 2012, this segment had grown by 41% when compared with the previous year. Increase in cost of ownership because of incessant diesel price hikes and increase in excise duty on UVs from 27% to 30% along with sticky interest rates dampened demand. In fact, the entire auto sector, including three-wheelers and exports, has seen a 15.4% fall.
Indeed, the steep drop in auto sales will reflect on profit numbers for the September quarter. According to Yaresh Kothari, an analyst at Angel Broking Ltd, “Severe competition and lack of new products in the utility vehicle space are negatives for Mahindra." Some analysts suggest that it might even lose market share in the segment going forward. Of course, contraction in the UV space has been seen even among its peers. Maruti Suzuki India Ltd’s UV sales fell 63% during the period.
However, robust farm-equipment sales on the back of a strong monsoon will offset this weak performance. Mahindra sold 22% more farm equipment in the September quarter than a year ago in domestic markets. Including exports, farm equipment sales were higher by 18%. Compare this to a 15% drop in sales in September 2012.
The increase in farm equipment sales will shore up its profit margin. According to Surjit Arora, an analyst at Prabhudas Lilladher Pvt. Ltd, “Operating margins are about 400 basis points higher in farm-equipment than in the auto segment." Hence, while most passenger car firms are likely to show strained profitability, analysts expect Mahindra to maintain last year’s operating profit in the least, if not a marginal improvement in the same. This will buoy the stock price, which is currently trading at a reasonable 13 times one-year forward price-earnings multiple.
