Margin pressure, revised volume outlook weigh on Mahindra & Mahindra stock

The stock of Mahindra & Mahindra (M&M) was down about 2.6 per cent on margin pressure and a revision in volume outlook for both the auto and tractor segments. While September quarter results were more or less in line with estimates, the company could see pressure on profitability, going ahead.

Even in the quarter gone by, while overall margins were down 150 basis points (bps) to 14.5 per cent, segment margins for auto and tractors slid by 280 bps and 100 bps respectively. The sharper fall in auto segment margins was on account of higher raw material costs, attractive pricing for new launches, and higher marketing costs.

While the company was able to pass on some of the raw material cost pressures, it had to absorb the rest. Segment level margins for the auto sector, which came in at 7.8 per cent, could come under pressure as the firm has lined up two launches in the December and March quarters. While M&M has not indicated whether it will take up price hikes, margins could face more pressure if competitive intensity rises or volumes take a turn for the worse.

Though some of the pressures that have been impacting volumes such as higher fuel and retail financing costs are expected to come down, the Street will keep an eye out for the sales trajectory. This is because volumes in the utility vehicle and tractor segments have been lower than expectations.

The company had, in the previous quarter, given a guidance of 12-14 per cent for industry tractor growth in FY19, with a possibility of hitting the 14 per cent mark. However, after the 5 per cent fall in volumes in Q2 and a muted festival season, it now believes the sector will likely hit the 12 per cent mark.

Even in the auto segment, growth estimates for both the utility and passenger vehicles have been revised downwards to 7-8 per cent as compared to previous estimates of 10-11 per cent for the current fiscal year.

While the overall utility vehicle space has had a muted quarter, including the festival season, the management expects growth in the segment to pick up on the back of new launches both by M&M and by peers.

Given volume and margin worries, investors should await clarity on the demand front before considering the stock.