At the end of hardship comes happiness," goes a popular Korean saying. But investors of Mahindra and Mahindra Ltd (M&M) are finding it difficult to digest the news of widening losses at its Korean unit SsangYong Motor Co. M&M shares have fallen as much as 9% in the past two trading sessions.

Even the operating performance beat in M&M’s domestic auto and farm segments did little to lift sentiment.

According to media reports in Korea last week, SsangYong’s net losses deepened to 155.9 billion won ($130 million) in the December quarter from four billion won in the year-ago period. Operating losses too deepened on the back of falling sales. A report in The Korea Times said that SsangYong’s flip-flop on announcing its 2019 earnings has raised more doubts on the sustainability of the carmaker. The Korean firm postponed scheduled board meetings three times before releasing last year’s earnings, said the news report.

Graphic by  Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

An analysts’ call of M&M on Tuesday should give clarity on the Korean subsidiary’s performance and outlook. Yet, analysts are worried. According to a report by Nomura Financial Advisory and Securities (India) Pvt. Ltd, “SsangYong profitability continues to remain dismal, thus impacting consolidated profitability which remains a concern." A report from ICICI Securities Ltd echoing similar concerns explains that the losses escalated as exports plunged over concerns in key markets on Brexit and US-China trade-related issues.

Hence, M&M’s decent show on home turf was ignored by the Street. Along with its subsidiary Mahindra Vehicle Manufacturers Ltd, Ebitda (earnings before interest, tax, depreciation and amortization) margin rose 160 basis points year-on-year (y-o-y) to 14.8%. Margins rose thanks to softer commodity prices and a better product mix.

Credit goes to the company for cutting overall expenses by 8% y-o-y. So, in spite of revenue contraction, Ebitda rose by 5% to 1,789 crore. The farm equipment segment’s Ebit margin at 19.4%, up 20 basis points y-o-y, gave a leg-up to profit margins. Even the auto segment’s margin surprised positively, with a 150 basis points rise to 7.3%.

Despite all this, net profit fell 38%, after adjusting for exceptional items.

M&M’s shares have been weak in the last six months in spite some optimism that the farm equipment business should aid profitability amid clouds of uncertainty in the auto segment. Compounding demand slowdown is the BS-VI transition that is making investors jittery on the auto sector as a whole. “We expect tractor industry to recover in FY21, which would benefit the company’s bottom line. However, the automotive segment would face tremendous pressure due to intensifying competition and increasing losses at SsangYong," said Mitul Shah, vice president (research) at Reliance Securities Ltd.

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