The Hindu Business Line : M&M: Muted profits despite strong sales

Mahindra and Mahindra’s net profits (standalone basis) for the quarter ended March 2008, dipped by 3 per cent excluding extraordinary items. On a sequential basis, the fall was more pronounced, at 11.25 per cent.

No fall in demand?

The fall in profits cannot be attributed to a demand slowdown as net sales grew by 14.5 per cent year-on-year and about 7 per cent quarter-on-quarter. The company, being a leading player in the utility vehicles segment, was relatively better off as it was the two-wheeler and medium and heavy vehicles segment that bore the brunt of the auto slowdown. Though farm equipment sales for M&M did decline, a growth in utility vehicles backed by the re-launched Bolero and a new Scorpio variant helped the company close with reasonable sales growth. Growth in the company’s engines business also helped, making up for the decline.

At the end of the year, the company’s market share in the domestic utility vehicles segment stood at more than 50 per cent. Sales of utility vehicles grew by 16.4 per cent, against a 5.1 per cent growth for the industry.

Active investments

The fall in profits, therefore, can be attributed mainly to pressure on the operating margins due to rising raw material costs, a lower ‘other income’ component and higher interest charges. The company’s interest cost has jumped to Rs 139 crore from Rs 72 crore in the December quarter, probably due to active investments in both expansion and acquisitions. Over the quarter, M&M acquired an Italian design firm, GRD and bought out an Italian gear firm, Metalcastello.

Going forward, interest and depreciation charges will remain high, as M&M has plans to invest an additional Rs 1,500 crore in its Chakan facility and spend another Rs 250 crore over the next few years to set up a chain of multi-brand service outlets. Total capex is expected to be about Rs 7,000 crore over a 4-year period.

Cues for Investors

M&M plans to raise Rs 700 crore through the issue of convertible debentures to an entity controlled by Goldman Sachs, resulting in an equity dilution of around 3.5 per cent. Investors may also need to brace for subdued profit numbers over the next few quarters, given the pressures on the profit margins.

More Stories on : Stocks | Financial Performance | Mahindra & Mahindra Ltd

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page