M&M: All-round growth

Dividends from group companies push up net, margins don't fall sharply despite decline in tractor sales

The second quarter is typically good for Mahindra and Mahindra’s (M&M) bottomline, as the group firms pay dividends in this quarter. Interestingly, the dividend payout this quarter has been higher than Street expectations. So, not only is the group’s automotive segment doing well, but its subsidiaries are also putting up a good show. The company’s dividend income in Q2 is up 28 per cent year-on-year (y-o-y), which has helped the company beat the Street’s expectations on net profit. Consolidated net profit of M&M and its subsidiary Mahindra Vehicle Manufacturing grew 28.4 per cent y-o-y to Rs 978 crore.

While other income has helped boost the net profit in absolute terms, the company has managed to retain its operating margins in what is seen as a challenging year for the auto sector. The profitability of the company in the second quarter has largely been driven by the automotive segment, as demand for its utility vehicles has stayed strong. In the passenger utility vehicles segment, the company sold 62,751 vehicles in the second quarter, clocking a growth of 32 per cent over the comparable quarter in the previous year. Tractor sales, on the other hand, saw a 12 per cent decline in the quarter at 47,065 units.

The company’s consolidated operating margins for the quarter stands at 13.8 per cent, while operating margins for M&M’s standalone business stood at 11.4 per cent, registering a decline of 100 basis points annually and 30 basis points sequentially. Surjit Arora, research analyst at Prabhudas Lilladher, says: “This is commendable as the sales of tractors, which command higher margins, declined in the quarter. The auto segment's EBIT margins (M&M standalone) surprised positively at 9.4 per cent (up 60 basis points q-o-q), explains Emkay Global. The tractor segment’s EBIT margin at 14.8 per cent has declined 90 basis points sequentially and 50 basis points annually. And, the company has managed this despite a steady increase in raw material costs.

For the current financial year, however, analysts say the company’s performance will be driven by the demand for its utility vehicles. The market is building in a flat to marginal decline in tractor volumes. And, given the current margin performance, the company’s full-year earnings may see a marginal upgrade. However, for a proper upgrade, there needs to be more clarity on how the demand for tractors will be in FY14.