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With profits coming in much lower than expectations, markets gave a thumbs down to Mahindra & Mahindra's March quarter numbers. Even as the revenues grew at a healthy 26.5 per cent, profits grew just by 6.3 per cent over the same period a year ago, resulting in the stock being knocked down by over five per cent on Monday. One reason for the tepid profit growth was a 61 per cent rise in employee costs. This increase was due to an additional Rs 26 crore on account of amortisation of ESOPs. Besides, an additional outgo of Rs 10 crore has been incurred for providing for an extra one percentage point interest on PF. An enhancement in the provision for gratuity and leave encashment based on actuarial valuation conducted at the end of the year has also escalated the employee costs.
Apart from this, raw material costs as a percentage of sales too has inched up to 62 per cent from 59 per cent a year ago. With tractors being more raw material intensive than other segments, the input cost increases have impacted margins significantly. Operating margins dropped from 15.9 per cent in the same quarter of last year to 12.6 per cent currently. Consequently, the operating profit has fallen by 1.3 per cent.
Other income helps
However, what has helped the moderate growth in net profits is the 161 per cent growth in other income this quarter to Rs 47 crore (partly due to dividends received) and the savings in interest costs to the extent of Rs 16 crore as against the interest expense of Rs 90 crore in Q4FY10.
Margin pressures are expected to keep profitability in check. Although commodity prices have been moderating in the last 4- 6 weeks, the company expects the average costs during FY12 to be higher by by 6-9 per cent than FY11. Also, after two years of high growth, auto industry volumes are expected to moderate in FY12. Hence, realisations may be under a bit of a strain as the company may not be able to pass on as much input cost escalations as it could last year.
M&M has already taken a price increase of about three per cent in tractors and two per cent in other vehicles in April. Nevertheless, upcoming launches such as the global SUV and the mini Xylo may keep volumes ticking. Given the shortage in availability of farm labour, M&M also expects tractor sales to grow at around 12 per cent, higher than the 10-year average of about seven per cent.
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