M&M hit by weak operational performance, interest costs

Mahindra and Mahindra's (M&M) standalone profit growth in the fourth quarter (44 per cent ) is not as robust as it appears. There was an exceptional item of Rs 108 crore arising from reversal of provision for impairment of fixed assets. This provision was initially made in the books of Mahindra Automotive Distributor Pvt Ltd which handles the Verito business. This company's automotive business was merged with M&M during the March quarter. Adjusted for this, net profits have grown by 26 per cent. Further , net profits have received a leg-up from a tax saving of Rs 148 crore. This came from carrying forward unabsorbed tax losses of the newly merged entity as a benefit in M&M. Outside these two adjustments, the financial performance is revealed by the ‘Profit before tax and exceptional item' figure. This number has reduced to Rs 794 crore from Rs 808 crore last year.

Weak operational performance coupled with higher interest costs has been the reason for the decline . Despite net sales growth of 39 per cent to Rs 9241 crore (including Rs 740 crore from the merged entity), operating profits grew by just 11 per cent to Rs 968 crore. One reason for this phenomenon is high input costs. Raw material as a percentage of sales was at 78 per cent in Q4 compared with 73 per cent last year. Operating margin came in at 10.3 per cent against 12.8 per cent last year. Second, although utility vehicles sold well, tractors faced a tough quarter. After two years of over 20 per cent growth, the tractor industry slowed in 2012. Year-on-year volumes for the industry shrank by up to 10 per cent in the January-March period. Segmental revenues for farm equipments stood at Rs 2,761 crore during the quarter, down from Rs 2,794 crore in the March 2011 quarter. Farm segment results were also lower at Rs 434 crore (Rs 475 crore) a year ago.


The company expects the de-growth in tractor sales to continue into the first half of FY13. To compensate for this, a continuation of out performance of utility vehicles over cars will provide some respite. M&M has lined up launches such as the mini-SUV, Rexton and the smaller version of the Verito for this year. However, a diesel price hike or de-regulation may put brakes on volume growth.


Published on May 30, 2012

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