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At a time when the auto sector is reeling under a slowdown and most frontline companies have reported dips in profits, Mahindra and Mahindra’s Q1 results are on expected lines. During the quarter ended June 2019, the company saw its domestic tractor volumes drop by 15 per cent, while its domestic volumes in the auto segment plunged by 6 per cent in the same period.
With volumes shrinking, standalone revenue was expected to dip by 6 per cent year-on-year and net profits by a sharper 22 per cent, as per Bloomberg consensus estimates. Against this, standalone revenues dropped by 4.4 per cent to Rs 12,923 crore and adjusted net profits dipped by 22.4 per cent to Rs 947 crore. An exceptional item of Rs 1,367 crore from the gain on sale of certain investments has propped up the reported profits. Operating margins came in at 15 per cent, about 70 basis points lower than the June 2018 quarter.
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 has touched its one-year low today, after the disappointing results. While the valuation now is at a low 14 times, the tough times may not be over soon.
Tough times
The auto sector has seen steady deterioration in the headline numbers in the last one year. Patchy monsoons and a crash in farm prices have dented rural sales. Higher insurance outgo due to an increase in premiums on third-party cover has become 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 auto companies, apart from M&M, has 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 overall operating margins from 10.1 per cent a year ago to 7.9 per cent now.
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