M&M: Better show in Q1 despite muted volumes

Given the launch of compact UVs will be next year, recovery in market share is a some quarters away

Mahindra & Mahindra (M&M) managed to put up a good show in the June quarter despite muted volumes in both utility vehicles (UVs) and tractors. While UV volumes declined eight per cent year-on-year (y-o-y), tractor sales were flattish during the quarter. Price hikes of 1-1.5 per cent both in UVs and tractors and product mix helped M&M report one per cent increase in revenues to Rs 9,907 crore.

Despite the muted volumes, the company managed to improve its operating profit by five per cent to Rs 1,419 crore and margins by 56 basis points (bps) to 14.3 per cent, compared to a year ago. Benign commodity prices, better product mix and cost management helped increase margins. Further, M&M has not aggressively discounted prices on its products and has been at the lower end of the discount range of the sector which varies between three and five per cent. Raw material costs were down 1.8 per cent y-o-y and as a percentage of sales accounted for 68.57 per cent, 187 bps below last year's level. Richer product mix also helped, with M&M selling more of the XUV 500 model which fetches higher margins. XUV has reached sales of about 3,000 units per month.  

Although other income was up almost Rs 47 crore, depreciation charges also were up Rs 52 crore, due to the new companies Act, offsetting the gains in the former.  Higher margins and almost flat finance costs helped net profits grow 4.3 per cent y-o-y to Rs 896 crore. While profits are higher than Bloomberg consensus standalone estimates of Rs 833 crore, they are strictly not comparable, as it includes the merged trucks business of Mahindra Trucks and Buses, as well as Mahindra Vehicle Manufacturers. However, these business' contribution is small, and excluding the same, the profit show should be better than estimates.

While the company has managed to increase its market share in the tractor segment to 42.2 per cent, the highest in the past 10 quarters, it is struggling to maintain share in the UV segment. Market share of UVs has fallen from 50 per cent couple of years ago to 42 per cent in FY14, which slipped further to 40.5 per cent in the June quarter. Limited presence in the fastest-growing compact UV segments and the multipurpose vehicle space has been the reason for the disappointing show.

On the product front, M&M will launch a scooter and tractor targeting the festival season. However, the Street is eagerly awaiting action on its bread and butter UV segment, especially in the compact UV/MUV space where M&M has lined up three launches over the next 15 months.

While M&M is hopeful of a revival in monsoon and rural demand, given the situation so far it has scaled back the sector's FY15 tractor growth target from eight per cent to five per cent. In the UV space, it expects volume growth of 7.5-10 per cent.