Pressures on the raw material and employee expenses front, a higher proportion of traded goods and a consequent fall in operating profit margins to 13.3 per cent (15 per cent in QIFY11) have been the key reasons for the muted 7.6 per cent growth in Mahindra & Mahindra (M&M)'s profits in the first quarter. As tractors are more raw material-intensive and use a comparatively higher proportion of steel castings, forgings and rubber, the effect of the commodity price increase has been felt more by M&M than its peers.

The company currently derives about 40 per cent of its total volumes from the sale of tractors. Besides being impacted by input cost increases, auto margins in the quarter have also been dampened by the non-availability/deferment of VAT refunds (tax incentive) on inter-state sale, for vehicles produced in the MVML (Mahindra Vehicle Manufacturers) plant in Maharashtra. However, what has led to a strong topline growth of 30 per cent is the better-than-industry volume growth in this period. As against the overall auto industry growth of 15 per cent, the company's volumes have grown by 23 per cent, thanks to recent launches such as the Maxximo mini van, Genio double cab, Verito (Logan) and a Scorpio variant. Tractor volumes too, at 19 per cent, have grown faster than industry. M&M has also taken a price increase in the quarter.

Outlook

If global growth turns more uncertain, raw material cost pressures could ease henceforth, as they have already stabilised in the first quarter. Although auto sales are facing a moderation, considering the impending launch of the global SUV, an SUV from the Ssangyong stable and the two new versions of the Verito, the company expects to outpace the industry. On the tractor side, even as it is expanding capacities for the low-cost ‘Yuvraj', M&M is bracing for a moderation. After two successive years of over 20 per cent jump in volumes, growth here is expected to be at around 12 per cent, in line with the industry.

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