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M&M shares are now down only 13% from its highs in February, compared to a 22% drop in the Nifty Auto index from its highs earlier in the year. (Bloomberg)
M&M shares are now down only 13% from its highs in February, compared to a 22% drop in the Nifty Auto index from its highs earlier in the year. (Bloomberg)

M&M’s margin surprise and exit from loss-making units enthuses investors

M&M shares are now down only 13% from its highs in February, compared to the 22% drop in the Nifty Auto index

Mahindra and Mahindra Ltd (M&M) shares gained 7% on Friday to add 4,000 crore to its market cap, despite posting a massive loss of 3,255 crore in the March quarter. What explains this?

The huge loss was the result of a write-down of M&M’s investment in Ssangyong and other international subsidiaries, something that was already factored in. Barring this, the company would have reported a profit of 323 crore. What really enthused investors was the better-than-expected operating performance and the management’s comments on loss-making units.

Graphic: Sarvesh Kumar Sharma/Mint
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Graphic: Sarvesh Kumar Sharma/Mint

Reported revenue dropped 35% on a year-on-year basis, a shade lower than the 38-40% drop expected by Kotak Institutional Equities and Nomura Research analysts. While the brokers expected margins to fall sharply owing to negative operating leverage, M&M actually managed to maintain margins at the year-ago levels.

This is in stark contrast to other auto manufacturers, whose margins fell. M&M’s performance was helped by relatively better demand for farm equipment, a large business segment for the firm. It managed to maintain tractor sales at the previous year’s levels despite the covid-19 disruption.

“M&M delivered strong performance in 4QFY20 on the back of better traction from its farm equipment segment despite subdued performance of auto business," said Mitul Shah, vice president-research, Reliance Securities. Sales at the automotive division, constituting utility and commercial vehicles, dropped 48%. Another positive for investors was its decision not to invest in Ssangyong, besides shutting down the loss-making US electric scooters business. The company also said that it will evaluate and exit other loss-making business units. It has booked a large part of the impairment losses (80%) from the Ssangyong and US scooters business.

M&M has gained market share in tractors and light commercial vehicles. “Rural opportunity is really strong; seeing very strong demand," the management said. The optimism is reflective in its farm equipment sales in the domestic market, which recovered and rose 2% last month. Channel checks by analysts indicated good demand recovery for tractors. So much so that some dealers in south India, Uttar Pradesh and Gujarat fear inventory shortages due to constrained supplies from manufacturers, said JM Financial Institutional Securities Ltd analysts.

M&M said it was moving quickly to address the concerns. Plants are operating at 80% capacity and the firm expects normalization of logistics and supplies soon. M&M shares are now down only 13% from its highs in February, compared to the 22% drop in the Nifty Auto index. While the firm’s tractor exposure is certainly helping, tough decisions on loss-making ventures are also aiding investor sentiment.

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