Robust volumes and a smaller raw material bill have boosted profits.

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Mahindra and Mahindra (M&M) was expected to post a good set of numbers for the September 2009 quarter, given that the company has recorded high increases in terms of volumes for both utility vehicles (up 44 per cent) and tractors. Stand-alone revenues were up 35 per cent at Rs 4,465 crore, with the company having reaped the benefit of the festive season that kicked in earlier this year.

While the expansion in the operating margin (OPM) on a year-on-year basis was expected, given that raw material prices have come off sharply, its rise to 18.24 per cent has surpassed expectations. The share of raw materials to sales during the quarter has come down by 630 basis points.

Clearly, the synergies from the merger of PTL are paying off and the company is able to save a significant amount on the cost of production, thanks to the much higher scale of operations. In the utility vehicles space, M&M now has a share of 65 per cent, having gained 1,000 basis points over the past year. Contrary to expectations, the Xylo hasn’t eaten into the share of the Scorpio, and Bolero continues to be its best selling model.

While the outlook for the automotive sector continues to be fairly bright, given that rural incomes remain strong and urban markets are looking up, what could start pinching is the rise in the prices of raw materials, especially steel strips and tyres.

However, it’s unlikely that volumes would suffer, unless the company passes on the costs to consumers through price hikes. As for farm equipment, with 40 per cent of rural incomes not dependent on agriculture, a weak monsoon shouldn’t hurt demand from the hinterland. Besides, the government’s focus on rural India is expected to put money in the pockets of rural consumers.

The M&M stock has had a strong run, gaining 228 per cent since the start of the year, compared with a move of 62 per cent for the Sensex, though there was a brief period in between when it underperformed the market on concerns that a weak monsoon would hurt sales. Analysts had a sum-of-the-parts valuation for the stock of about Rs1,000 and it’s unlikely this would be upgraded significantly.

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