M&M: Hit from all sides

Hit by a double whammy of rising raw material prices and higher VAT in Q4.

After a dream run over a couple of years, auto companies are in for tough times. On Monday, Mahindra and Mahindra’s (M&M) stock fell 5.4 per cent, as the company disappointed the Street with poor fourth quarter numbers. The company has not only been hit by rising raw material prices but also by the Maharashtra government’s decision to extend the value added tax (VAT) benefit only to vehicles sold in the state. Both these factors have impacted the company’s profitability.

While the company’s revenues grew 27.8 per cent to Rs 6,778 crore in the fourth quarter, what spooked the markets was the company’s operating margins. In the fourth quarter, the company’s margin dropped to 12.7 per cent, the lowest in eight quarters. This is reflected in the operating profit, which grew by 1.9 per cent year-on-year to Rs 861.7 crore. Net profit for the fourth quarter grew 6.4 per cent y-o-y to Rs 606.5 crore from Rs 570.3 crore.

Historically, the company has maintained an average margin of 15.5 per cent. So, a fall to 12 per cent means the company is unlikely to grow its profits or earnings per share in FY12, even if it manages to grow volumes by 10-12 per cent, claim analysts. The company’s raw material to sales ratio stands at 70.6 per cent, which clearly shows raw material prices are an issue. Also, the company has been hit by an unexpected VAT-related impact in this quarter. According to the changes announced by the Maharashtra government, companies that were given customised package benefits for starting operations in the state will be able now be able to derive tax benefit for vehicles sold only in Maharashtra. The state has withdrawn some benefits given to auto companies that export vehicles to other states. For 15 days in March, the impact of this has been Rs 7 crore.

For the full year, the company’s gross revenues (stand-alone) and other income grew 25.7 per cent y-o-y to Rs 25,896 crore against Rs 20,595.5 crore in the previous year. The company sold 230,110 vehicles in FY11 with a market share of 60.9 per cent. Net profit for the year grew 27.5 per cent to Rs 2,662.1 crore. The company attributes its profitability to high volumes and focus on efficiency. However, managing profitability may well be a challenge.