High costs hurt M&M's margins in Q3; demand remains strong
Premium- M&M saw a sharp 155% year-on-year growth in its profit at ₹1,353 crore, thanks to a ₹1,214 crore impairment it took in the third quarter of FY21
Auto major Mahindra & Mahindra on Thursday reported a 24% year-on-year decline in standalone operating profit to ₹1,806 crore for the quarter ended December due to high raw material costs and a shortage of semi-conductor supplies.
However, the company saw a sharp 155% year-on-year growth in its profit at ₹1,353 crore, thanks to a ₹1,214 crore impairment it took in the third quarter of FY21. Profit before tax and exceptional items fell 26.5% in this period. However, the group’s consolidated profit after tax and exceptional items saw a 57% jump to ₹1,987 crore in the quarter, as a result of capital allocation actions in M&M and strong performances of group businesses.
While operating margins contracted to 11.9% compared to 17% in the year-ago period, the automaker reported an 8.4% year-on-year increase in its revenue from operations at ₹15,239 crore, aided by strong demand for its passenger vehicles and the price hikes it took to offset high commodity prices.
Rajesh Jejurikar, executive director, farm & auto sectors, M&M, said the company will continue to focus on margin improvement and take further price hikes to fully pass on the impact of high input costs, but the extent and timing of the price hikes will be decided based on the latest outlook on commodity prices in the time to come.
The SUV-maker has a strong outlook for demand and improved production in the automotive business, with an open order book of over 1.55 lakh vehicles across its product line-up, including over 70,000 open orders for the newly-launched XUV700 and over 30,000 bookings for the Thar.
Although chip shortages caused a loss of 20,000 units in production in Q3, according to Anish Shah, managing director & CEO, Mahindra Group, supply chain headwinds have now eased considerably compared to the Covid-19 period. M&M said it has already achieved 85% capacity utilisation in the third quarter, and with the implementation of various measures to improve chip supply in Q4, utilisation will be near 100%.
Short and mid-term actions that M&M’s taking to remedy semi-conductor shortages include developing new sources for integrated circuits found in ECUs (electronic control units), creating a reserve stock and also buying from the open market, as well as de-bundling and simplifying ECUs to look for sourcing substitutes. M&M expects these actions to yield results in the mid-term in FY23.
M&M’s tractor business saw a revenue growth of 2% in Q3FY22 despite facing inflationary and demand pressures, on the back of market share gain of 140 basis points in the last nine months.
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“We are back to over 40% market share in the farm equipment sector in this quarter. Going forward, the outlook for tractor sales will depend on a mix of factors: Government spending on rural development schemes like the MNREGA has seen a sharp cut in FY22. We’ve seen the terms of trade have become negative for the farmer, which has resulted in reduced cash in the hands of the farmer. However, we expect a record rabi output one the harvesting starts. How the monsoon plays out will be critical to gauge demand in the market", Hemant Sikka, president, farm equipment sector told reporters in a conference call.
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