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Home / Markets / Mark To Market /  Tractor sales are going well but Mahindra investors want more

The June quarter (Q1FY22) was not an easy one for vehicle manufacturers. Regional lockdowns aside, semiconductor shortages and rising input costs marred the three-month period. In this context, Mahindra & Mahindra Ltd’s (M&M’s) healthy Q1 performance should be appreciated.

It reported standalone Ebitda of 1,632 crore for Q1, more than double that of Q1FY21. Ebitda is earnings before interest, tax, depreciation and amortization. Net profit showed a massive increase year-on-year (y-o-y) and was slightly above Street estimates. However, a low base effect renders y-o-y comparison more of an optical treat. The pain from lockdowns and rising input costs, though, was visible on M&M’s profitability.

Healthy traction
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Healthy traction

Overall volumes were down 8% sequentially and Ebitda margins came under pressure, too. Indeed, margins were down across the board with even those of tractors shrinking 170 basis points (bps) from Q4FY21, analysts at Jefferies India Pvt. Ltd pointed out. One basis point is one-hundredth of a percentage point. Given that input costs are not expected to cool any time soon, the firm is likely to see continued pressure.

The firm has mitigated the pressure from costs somewhat. “The beat in Mahindra & Mahindra Q1 operating performance was driven by cost-saving initiatives, which diluted the impact of cost inflation," analysts at Motilal Oswal Financial Services Ltd wrote in a note.

M&M’s silver lining was the robust performance of the tractor segment with a 7% rise in volumes. Analysts at Ambit Capital Research point out that the tractor revenue mix rose 790bps sequentially, partly cushioning the adverse impact of raw material inflation. The firm also gained market share, a positive. That said, the pick-up in tractors is cyclical as it follows the agriculture cycle closely. A normal monsoon augurs well for the rural economy and M&M’s farm equipment segment, but a sustained improvement needs to be watched for. The management’s guidance of single-digit growth in this segment comes across as cautious.

That leaves us with the auto segment. Automobiles have hit a bump in Q1 after a steady recovery of two quarters. Sales here were down 20% sequentially. However, new launches have improved the firm’s prospects. The response to M&M’s sport utility vehicle (SUV) brands such as Thar, Bolero and XUV300 have been encouraging, analysts said. The launch of another new SUV could perk up this segment more. “We expect the auto business to take over the growth mantle from tractors, although deterioration in the mix would result in a lower EPS (earnings per share) CAGR (compound annual growth rate) of 18% over FY21-23 from 24% earlier," the Motilal Oswal report said.

M&M is likely to see growth pick up pace with an improvement in auto sales and steadiness in tractors. “We believe new products and a stronger presence in rural markets would drive its volume and profitability," said Mitul Shah, head of research at Reliance Securities Ltd. Shah expects the domestic passenger vehicle industry to recover in H2FY22.

Meanwhile, the company’s subsidiaries showed improvement. Subsidiaries that posted a net loss in the year-ago quarter (excluding discontinued operations of SsangYong) broke even in the June quarter. The major write-offs pertaining to SsangYong Motor Co. are now behind, according to analysts.

M&M’s shares have underperformed the Nifty since April despite a favourable tractor outlook. Some analysts have cut their earnings per share estimates, saying that further upside is limited.

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