M&M: Monsoon, newly launched products key triggers

Adverse regulatory action on diesel vehicles would be a drag

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Led by double-digit growth, both in the automobile and the farm equipment businesses, M&M has posted higher-than-expected revenue for the March quarter. Revenues at standalone-level were up about 13 per cent to Rs 10,160 crore, compared with the year-ago quarter, helped by a 14 per cent jump in auto sales (several product launches in the utility vehicle segment) and 12 per cent increase in tractor sales.

Higher volumes reflected on the operational performance as raw material and employee costs were 50-110 basis points lower as a percentage of sales. Given the multiple launches, promotional expenses were on the higher side. At 12.5 per cent, margins were 130 basis points higher than the same period a year ago. The management indicated that the number was achieved despite the incentives at the Haridwar plant ending in the December quarter.

The company, however, disappointed the Street on margins and net profit fronts. Despite higher volumes, margins were lower-than-expected, given pricing pressures and inferior product mix. There could be some pressure on margins going ahead, given the increase in commodity costs. Net profit, at Rs 668 crore, was up 14 per cent, because of the revenue performance as well as lower finance costs. Taxes were up 41 per cent. On Monday, the stock ended marginally down (minus 3.35 per cent) on the BSE.

On volumes front, the company expects its nine launches and three 'upgrades' in FY16 to help it grow in the UV space. In FY17, the company expects the UVs to grow at 10-12 per cent while cars are expected to grow by 8-10 per cent. The focus of the management is to see the current portfolio get more traction and no new platform would be launched in FY17. In line with customer preferences, the company would launch a petrol version of all its major products.

It expects tractors to grow at 10 per cent in FY17, which should help its financial performance, as this segment fetches higher margins than the auto segment. The company expects normal monsoon would lead to higher demand for tractors.

While auto segment recorded year on year volume growth of six per cent, tractor sales were down eight per cent in FY16. Net sales were up eight per cent while margins for the year were up 90 basis points to 13.4 per cent. Going ahead, a lot will depend on monsoons, not just because of the company's farm equipment portfolio but also because a significant chunk of its UV sales comes from the rural market. Regulatory and legal action against diesel vehicles will be a significant overhang, given the firm is the largest player in the segment.