M&M Q2 net plunges 88% to Rs 162 cr on sharp contraction in auto segment

Robust tractor sales cushion impact of lower volumes in automotive segment, help firm beat street estimates

Mahindra and Mahindra’s net profit, including that of Mahindra Vehicle Manufacturing (MVML), plunged 88 per cent year-on-year (YoY) in the quarter ended September 30 (Q2) as a sharp contraction in the automotive segment weighed on earnings, the firm said in a stock exchange notification.

However, robust sales of tractors cushioned the impact of lower volumes in the automotive segment and helped the firm beat Street estimates.  

Net profit of the firm fell to Rs 162 crore in Q2 as against to Rs 1,355 crore a year ago. The deep contraction came on the back of an impairment charge of Rs 115 crore taken for a long-term investment. Had it not been for the exceptional item, the net profit would have dropped only 3 per cent to Rs 1311 crore.

Aneesh Shah, deputy managing director and group chief financial officer, M&M, said, “As the company reviews performance of its international subsidiaries, there will be some more impairments in the next quarter and a quarter after that, but going beyond 31 March, there won’t be any.” M&M closed the aircraft manufacturing firm Gippsland Aeronautics as part of the larger strategy to review capital allocation and exit segments that don’t promise long-term growth.

Meanwhile, the company’s revenue during the quarter fell 6 per cent to Rs 590 crore from Rs 10,935 crore a year ago. Tractor volumes jumped 31 per cent YoY to 89,597 units in Q2.

A higher contribution of tractors in the overall mix and cost curtailment measures bumped up the operating margins to 17.8 per cent, compared with 14.1 per cent a year ago. Automotive volumes dropped 21 per cent YoY to 87,322 units.  

Mitul Shah, head of research at Reliance Securities, said while M&M is expected to face some volume pressure, owing to the competitive environment in domestic UV space, “We believe that new products and stronger presence in rural markets would drive its overall volume and profitability.”  This, he added, will come on the back of continuing healthy rural sales and a sizable presence in the tractor segment and a strong product portfolio for the region.

Rajesh Jejurikar, executive director — automotive and farm equipment business, said tractor demand has been extremely strong and the company hasn’t been able to meet it owing to supply constraints. 

“We haven’t seen this kind of exceptional demand ever,” he said, adding that the firm to shift focus from exports to meet domestic demand and will resume exports only after the festive season. The farm equipment business reported a record return on capital employed of 19.7 per cent and a negative working capital owing to high cash generation.

Even the auto business saw an improvement in operational performance. Response to the new Thar, he added, has been very good with the company having received over 21,000 bookings since its launch on October 2.