M&M's profits hit by input, employee costs

Despite a topline growth of 37 per cent over a year ago, Mahindra and Mahindra's (M&M) adjusted profits grew only by seven per cent in the December quarter.

Its operating profit margins (12.2 per cent now vs. 15 per cent a year ago) were impacted by high employee and raw material costs. Employee costs shot up by 30 per cent. An additional Rs 28 crore (Rs 52 lakh in Q3FY11) due to amortisation of ESOPs granted in the earlier years was the main reason.

Raw materials (including traded goods) as a percentage of sales went up to 73.6 per cent compared to 69.1 per cent last year. M&M sources a part of its vehicles from Mahindra Vehicle Manufactures (MVML), its 100 per cent subsidiary at Chakan.

Hence, the sale price of fully built vehicles from MVML is shown as part of raw material cost for M&M. So M&M's financials capture only the margins on sale of these vehicles to customers.

As 25 per cent of the production comes from MVML, beginning this quarter, M&M has decided to give out the combined results for M&M and MVML. This way, the margins on conversion of raw material to finished goods will also be captured. Going by the combined financials, margins are better at 13.7 per cent for this quarter.

Nevertheless, it is still lower than 15.7 per cent recorded last year as the company has not benefited from the stabilisation of commodity prices due to the rupee depreciation. Combined top and bottomline growth came in at 34 per cent and 16 per cent respectively.

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