M&M: Weak tractor sales mar Q2 performance

Operating margins down 230 basis points q-o-q on higher employee costs and other expenses

Mahindra & Mahindra (M&M)’ s sales and profit growth in the July-September quarter was below the Street estimates.  The combined sales of M&Ms standalone business grew seven per cent to Rs 9,543 crore. Apart from the tepid revenue growth, the company’s profit growth and margins, too, have been disappointing during the quarter.

There are several other factors that have impacted the company’s profitability during the quarter. While higher wage and marketing costs impacted margins, lower volumes also put pressure on profit growth. Tractor volumes were disappointing, along with the auto segment, which has been facing competitive intensity from other companies.

M&M’s volumes during the quarter have remained flat compared to the last year. Tractor volumes were expected to recover during the quarter but have not picked up. Volume growth remained flat, despite the launch of a new platform Arjun Novo in the tractor segment. The market was factoring in tractor volumes to grow six per cent in the fiscal, but in the first six months of the year, M&M tractor volumes have remained flat.

On the operating front, M&M’s disappointed, as its margins declined 230 basis points sequentially to 12 per cent, well below the market’s estimates. Margins declined for the automotive as well as the tractor segment on a sequential basis. According to Emkay Global, lack of incentives at Chakan impacted margins on a sequential basis, as had been indicated by the company, but the fall in margin was higher than estimated by the market. Analysts claim that the gross margin decline was in line with estimates, but the decline at the operating level was much higher due to higher other expenses which went up by 170 basis points to 11.8 per cent of revenues. During the quarter, the company launched Arjun Novo and the new generation Scorpio, which pushed up other expenses. The quarter has also seen employee costs go up, which further impacted operating margins.

What saved the day was the sharp increase in other income. According to Angel Broking, other income grew 35 per cent year-on-year to Rs 490 crore and lower taxation gave a boost to profitability. Tax as a percentage of profit before tax dipped 390 basis points on a sequential basis). However, net profit declined five per cent to Rs 974 crore.