Mahindra and Mahindra , which will come out with its Q1 results today, will be the last among the major auto companies to do so. And expectations don’t run high. The entire sector is reeling under a slowdown, with overall vehicle sales volumes for the industry (domestic) dipping by 12.4 per cent in the April-June 2019 period.

Mahindra and Mahindra has seen its domestic tractor volumes drop by 15 per cent in the first three months of this fiscal, while its domestic volumes in the auto segment have plunged by 6 per cent in the same period. With no leverage from volumes, revenues (standalone) are expected to dip by about 6 per cent year-on-year and net profits by a sharper 22 per cent, according to Bloomberg consensus estimates.

Like many of its peers, the company has been struggling in recent times. In the quarter ended March 2019, while the company witnessed a revenue growth of a mild 5.5 per cent, its adjusted profits dropped by 10.2 per cent. The stock has lost about 40 per cent in the last year and is trading close to its one-year low of Rs 538, that it touched recently. While the valuation now is at an attractive 14-15 times, the tough times may not be over soon.

Tough times

The auto sector has seen a steady deterioration in headline numbers in the last one year. Patchy monsoons and a crash in farm prices have dented rural sales. A higher insurance outgo due to an increase in premiums on third-party cover, was a dampener. The liquidity shortage among finance companies following the IL&FS crisis also dealt a big blow, as vehicles are financed purchases. Weak demand and a piling up of inventory with dealers have been forcing companies to slash production since the fourth quarter of 2018-19.

Aggregate net sales for companies that have declared their results so far this quarter have dropped by 7.8 per cent, and aggregate net profit (adjusted) has dipped by 83 per cent. While the overall fall in profit numbers could be weighed down by the losses made by Tata Motors, frontline companies such as Bajaj Auto, Hero MotoCorp, Maruti Suzuki and Ashok Leyland did see their net profits fall by 7-42 per cent over the June 2018 quarter. Lack of operating leverage has led to shrinkage in the overall operating margins from 10.1 per cent a year ago to 7.9 per cent now.

Seen in this light, expectations from M&M remain subdued.

 

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