Input cost higher than M&M’s in Q2 but outlook bright

In the auto segment, the lack of Electronic Control Units (ECUs) meant that the company suffered a volume loss of 32,000 units. That said, M&M was able to post 9% growth in vehicle sales. The company’s efforts to push the model without ECU issues and strong growth in exports from both the auto and agriculture businesses helped. But a 5% drop in tractor sales reduced the overall sales growth to just 3%.

Despite sales being impacted, the company faced adverse input cost inflation. The management said hot-rolled steel prices have risen 58 per cent year-on-year and aluminum prices have risen 63 per cent. The pressure on margins was clearly visible. That said, the company was able to increase prices which somewhat softened the shock of cost inflation. According to analysts, Mahindra & Mahindra’s standalone net receipts grew 12% year-on-year and 11% sequentially. ₹6,98,000 per unit. This street has been better than the expectations.

Analysts at Motilal Oswal Financial Services had expected net realizations to remain level. ₹640,578. Auto segment registered 13% YoY growth and 12% sequential growth in receipts. Analysts said given the strong demand for passenger vehicles, it would be easier for the company to hike prices further. This will improve margin prospects for the coming quarters. With better realizations, the company was able to register a 15% year-on-year growth in sales revenue.

Despite the price hike, operating margin for the September quarter stood at 12.5 per cent, down from 14% in the previous quarter. In addition, the company reported a 19% year-on-year decline in EBITDA for the September quarter. Ebitda means earnings before interest, tax, depreciation and amortization. In fact, price escalation has not been able to offset the full impact of cost inflation.

The overall performance of the tractor business has been disappointing. In addition to declining sales, receivables also grew 8% year-over-year and 4% sequentially. Of course, the modest performance is also on account of the higher base of previous years.

Analysts expect the agriculture segment to improve in the coming quarters on the back of a better monsoon and stronger production from the rabi season. However, the silver lining in the farm segment has been a 190 basis points increase in market share for the company. One basis point is one hundredth of a percentage point.

Despite the current odds, the outlook for the auto segment is also good. The global chip shortage is expected to ease, which would mean the company can leverage its strong booking pipeline of vehicles. Moreover, the newly launched passenger vehicle segment may keep the enthusiasm alive. The company has over 160,000 bookings for automobiles that are yet to be supplied. Recently the launch of XUV7OO is going ahead with over 70,000 bookings. In addition, the company has given a facelift to its SUV portfolio, which includes XUV300, Thar and Bolero Neo, adding to the healthy order book to boost sales.

A strong product pipeline in utility vehicles and tractors is expected to help M&M outperform the industry.

Another positive is that the company’s efforts to wind up its international subsidiaries are paying off. A strong focus on the turnaround of international subsidiaries (FES and Auto) has led to a reduction in losses, and most subsidiaries have achieved breakeven. Analysts said this was the fourth consecutive quarter of positive EBIT among FES global subsidiaries. Other income increased from dividends from subsidiaries. This meant that its standalone net profit before extraordinary earnings was up 29% annually. An upbeat outlook for the company, coupled with a jump in net profit, has given investors enough reason to drive M&M shares up more than 5% on Tuesday.