Input costs mar M&M’s Q2 but outlook is bright

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Mahindra and Mahindra Ltd’s (M&M) September-quarter performance was a mixed bag. Although the year-on-year (y-o-y) profit jump seems to have caught investors’ attention, operating metrics did not make the cut. The company’s margins reflected the global chip shortage and rising input costs, even as tractor sales failed to lift sentiments.

In the auto segment, the electronic control units (ECU) shortages meant that the company faced a volume loss of 32,000 units. That said, M&M was able to report 9% y-o-y growth in vehicle sales. The company’s efforts to push models without ECU issues and strong growth in exports of both auto and farm businesses helped. But the 5% drop in tractor sales pulled down overall sales volume growth to a mere 3%.

Even as sales suffered, the company faced headwinds of input cost inflation. The management said hot-rolled steel prices were up 58% y-o-y, and there has been a 63% rise in aluminium prices. The pressure on margins was palpable. That said, the company was able to hike prices which somewhat softened the blow of cost inflation. According to analysts, M&M’s standalone net realizations were up 12% y-o-y and 11% sequentially to 6,98,000 per unit. This has been better than Street expectations.

Under pressure 

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Under pressure 

Analysts at Motilal Oswal Financial Services had expected net realizations to stand at 640,578. The auto segment reported 13% y-o-y growth and 12% sequential growth in realizations. Given the strong demand for passenger vehicles, the company would find it easy to hike prices further, analysts said. That would improve the prospects of margins for the coming quarters. With improved realizations, the company was able to report 15% y-o-y growth in sales revenue.

Notwithstanding price hikes, the operating margin for the September quarter was 12.5%, lower than 14% in the previous quarter. Furthermore, the company reported 19% y-o-y fall in Ebitda for the September quarter. Ebitda stands for earnings before interest, tax, depreciation and amortization. Indeed, price hikes have not been able to soften the full impact of cost inflation.

The performance of the tractors business has been underwhelming on the whole. Apart from the drop in sales, realizations, too, grew at a modest 8% y-o-y and 4% sequentially. To be sure, the modest performance is also due to a high base of the previous years.

Analysts expected the farm segment to improve in the coming quarters due to a better monsoon and robust rabi season output. However, the silver lining in the farm segment has been the 190 basis points gain in market share for the company. One basis point is one-hundredth of a percentage point.

The outlook for the auto segment is also sanguine despite the current headwinds. The global chip shortage is expected to ease, which would mean that the company can capitalize on its robust booking pipeline of vehicles. Besides, new launches may keep the excitement for the passenger vehicles segment intact. The company has more than 160,000 bookings for automobiles that need to be supplied. The recent XUV7OO launch is leading the way with 70,000-plus bookings. Besides, the company has a refreshed its SUV portfolio, which includes XUV300, Thar and Bolero Neo, which are adding to the healthy order book to drive sales.

A strong product pipeline in utility vehicles and tractors is also expected to help M&M outperform the industry.

Another positive is that the company’s efforts to turn around its international subsidiaries are also yielding results. A strong focus on the turnaround of international subsidiaries (FES and Auto) led to reduced losses, and most subsidiaries have achieved breakeven. It was the fourth consecutive quarter of positive EBIT in FES global subsidiaries, analysts said. Dividends from subsidiaries boosted higher other income. This meant that its standalone net profit before exceptional income was up 29% y-o-y. The upbeat outlook for the company, along with the jump in net profit, seems to have given enough reason for investors to drive M&M shares up by more than 5% on Tuesday.

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