How Mahindra is driving out of a margin slump
Premium- As raw material costs ease, there is room for better margins, M&M’s management said
- Experts suggest key inputs prices need to reduce substantially for large margin improvement
BENGALURU/MUMBAI : Mahindra & Mahindra Ltd’s (M&M) December quarter (Q3FY22) was marred by higher costs. Standalone Ebitda (earnings before interest, taxes, depreciation, and amortization) margin at 11.9% contracted 60 basis points (bps) versus Q2.
Ebitda margin narrowed by 510bps from a year earlier. One basis point is 0.01%. The upshot: Ebitda declined by 24% from a year earlier at a time revenue increased 8.4% to ₹15,239 crore.
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As raw material costs ease, there is room for improvement in margins, reckoned M&M’s management in a post-earnings call. The company’s comments of seeing an upside in auto margins by 3% and a range of 17-19% in the tractor segment (currently at 17.3%) in the medium term imply that a further fall is unlikely.
Analysts are, however, cautious. “It is too early to say whether the worst is over for M&M in terms of margin compression. Although commodity prices are now stable, crude prices have started to harden again. As for other key inputs, their prices need to ease substantially for margins to improve meaningfully," said Mitul Shah, head of research at Reliance Securities Ltd. In a bid to combat margin pressures, M&M raised prices by 2% in the tractor sector in December 2021, the management pointed out.
Another factor that could keep margins subdued is weak tractor sales, which garners higher margins than the automotive segment. In Q3FY22, tractor volumes declined 9% year-on-year. According to the management, there is a correlation between tractor sales and government spending, which, in turn, has remained lower this time than the previous year. Also, farmers face the risk of higher inflation in input costs. If the rabi harvest is bumper, then there will be higher rural cash flows which would be favourable for tractor sales, added the management.
Further, it expects the tractor industry to see a degrowth of 6% this year due to last year’s higher base. The tractor sector continues to be plagued with subdued rural demand as agricultural output declined due to excessive rains in the kharif harvesting months, said the management.
To be sure, the M&M stock has declined by 6.7% in the past year vis-à-vis the 6% gain in the sectoral Nifty Auto index. “In the tractor segment, the company lost market share last year. This, along with weak underlying demand, could be factors for the underperformance of the M&M stock," said an analyst with a foreign research house who spoke on the condition of anonymity.
Meanwhile, the automotive segment is performing well, with Q3 volumes declining by only 1% from year-ago. Also, M&M is witnessing strong demand for its SUVs with more than 155,000 bookings. But this should be seen in conjunction with the ramp-up in production given the chip shortage. M&M said it has an additional supplier for semiconductors and that this will bode well for its strong order book.
M&M’s shares rose 1.5% on NSE after the earnings were declared. Analysts said investors are building hopes of improved performance of its auto segment and taking some comfort from price hikes. M&M’s management said that in the auto segment, it passed on around 7.5%-8% of the 17% cost inflation that it has seen. Although there is still some gap to be covered, the price increases taken by M&M in this segment have been ahead of peers, the management said.
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“The company’s SUV launches are being seen as drivers to compensate for weak tractor sales, but we need to see how that pans out. The company has taken price hikes, but with tractor demand expected to remain weak in Q4, the ability to pass on the entire cost burden is restricted. We feel Q4 will be challenging for M&M," Shah added.
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