Mahindra & Mahindra: Cost control drives profit beat

M&M surprises positively on margins & profit in Q1 as costs slip sequentially

When it comes to navigating through tough times, Mahindra & Mahindra is no novice. The positive surprise the company has thrown up, in terms of profit and margin expansion in the June quarter, only endorses this fact. Given that the demand environment is expected to turn challenging, the company has tightened its belt and improved operational efficiency and managed costs.

Considering its high-margin farm equipment business saw demand slowing, analysts expected both margins and profit to come under pressure. However, revenues rose 39 per cent to Rs 9,367 crore, while net profit rose 20 per cent year-on-year to Rs 726 crore. What surprised analysts positively was the 150-basis point expansion in standalone operating margin sequentially. Standalone operating margins, expected to decline, rose to 11.8 per cent in the quarter ended June.

The main reason for this was control on expenses—sequentially and annually. Other expenses, as a percentage of sales, fell to 8.2 per cent, compared with 9.6 per cent in the previous quarter and 8.9 per cent in the year-ago period. Staff cost, as a percentage of sales, also fell to 4.6 per cent from six per cent in the year-ago period. Sharekhan’s auto analyst Deepak Jain says sequentially, all costs, except staff and raw material, declined. “In addition, interest costs, too, have come down from Rs 70 crore in the quarter ended June 2011 to Rs 46 crore. Depreciation, too, is down. The company’s cost control and operational efficiency drove profitability, which looks sustainable.”

Even if one looks at the segment performance, the earnings before interest and tax margin of the farm equipment business have held on. The market had expected a decline on higher discounts. Though tractor volumes fell one per cent year-on-year, the margins have not come off. There is no concern in the automotive segment, as volumes grew 24 per cent and consolidated margins rose to 11.2 per cent, against 10.7 per cent in the previous quarter.

The market was worried on two primary counts. With demand slowing and discounts inching up, margins were likely to come off. The other issue was the demand slowdown. This quarter shows the company sorted the issue of margins by controlling costs. Motilal Oswal, however, believes traction in sales and margin maintenance need to be watched.