M&M Q4 sales decline less than estimated

Higher realisations prevent sharper fall in sales, tractor margins down 300 bps to 11%

Weak rural demand impacted Mahindra & Mahindra’s performance in the March quarter. Tractor volumes declined 30 per cent year-on-year and automobile volumes declined 12 per cent. Despite the sharp fall, the company managed to arrest the decline in revenue (M&M and MVML). Sales for the quarter fell 11 per cent year-on-year  to Rs 9,122 crore, which is better than the Street's estimates. The surprise came largely from higher realisations.

Realisations improved sequentially for M&M, which helped arrest decline in sales. The auto segment saw a five per cent improvement in realisations sequentially and the  farm segment saw realisations increase 13 per cent. M&M's sales decline was better than estimated as realisations in both automotive and farm equipment segment s  improved shar-ply. Consolidated operating margins were a tad below the Street's estimate at 11 per cent, on weak volume offtake and higher discounting in the tractor segment. Explains Reliance Securities, “We are impressed by the operational performance of M&M during the quarter which we believe marks a bottom for the company and expect times to improve here on.”

Margins for both the auto and tractor segments surprised the Street. While the auto segment's margin rose 50 basis points (bps) sequentially to 8.8 per cent, the  farm segment's margin saw a sharp decline of 300 bps  to 11 per cent. Analysts believe  lower operating leverage in the farm equipment segment may have impacted margins during the quarter and higher share of utility vehicles may have helped boost the  auto segment's margins. According to Emkay Global, tractor Ebit  margins were lower than estimates, possibly driven by poor operating leverage from a 39 per cent sequential decline in volumes.

The year ahead could see a pick-up in demand for M&M if rains are normal. The auto segment is expected to see nine new launches, which would drive volume growth. The company is expected to launch three new platforms, three refreshes and three variants of existing platforms over the next nine months. Though the profit growth was weak in the March quarter, analysts remain positive on the stock, as it currently factors in all the negatives. However, if rains are below normal, then it would be severely impacted, as it  derives a large part of its sales from rural India.