Amid auto slowdown, Street seeks solace from Mahindra’s tractor business


Auto major Mahindra and Mahindra Ltd’s (M&M) September quarter results were not too bad, considering the overall economic slowdown and demand slump in India.

Volumes declined in M&M’s automotive and farm equipment businesses, but tractor sales did a shade better than expectations. The 8% year-on-year (y-o-y) decline in tractor volumes is better than estimates, analysts said. Sales in the automotive segment fell 21% y-o-y.

Poor volumes took a toll on the company’s top line and bottom line in the September quarter. Profit after tax was down 24% y-o-y to Rs. 1,355 crore and revenue dropped nearly 15% y-o-y to Rs. 10,935 crore.

Although M&M’s operating margin fell 40 basis points y-o-y to 14%, the contraction was contained by its tractor business, said Bharat Gianani, analyst, Sharekhan by BNP Paribas. One basis point is one hundredth of a percentage point. As the alongside chart shows, margin of M&M’s automotive segment slipped to a multi-quarter low in September, while tractor margin was maintained. Gianani added that automotive segment’s margin dropped sharply due to negative operating leverage and higher discounts.

In a post-earnings press conference, M&M’s management said it witnessed market share gains in all sub-segments during the quarter. But in a de-growing industry, increased market share wouldn’t translate into higher volumes. In terms of volume contraction, the second quarter was worse than the first quarter for the automotive industry. However, the results did not quite impress the Street.

M&M shares were flat during Friday’s trading session, ending at Rs. 580 on the NSE. In this calendar year so far, the M&M stock has lost nearly 28%. And its fall was much sharper than that of the Nifty Auto index, which dipped nearly 12% during the same period. Clearly, the firm’s shares have a lot of ground to cover. The sector as a whole has been a laggard primarily affected by the broad-based consumption slowdown. While one is hopeful that the government’s measures will reverse the slowdown, analysts warned that transition to BS-VI remains the next speed bump for the sector.


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