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Diversification, both geographical and product-wise, has helped Mahindra & Mahindra (M&M) beat the slowdown in demand. Even as the company has witnessed a decline in its auto sales in the first quarter, a robust growth in tractor sales has helped it prop up its sales as well as profit. Over the past few years, the firm's two divisions (automotive and farm equipment) have shown disparate sales growth. So even as tractor sales declined by five per cent in FY13, in the first quarter of FY14, tractor volumes have grown 25 per cent, year-on-year (y-o-y), to 75,577 units. On the other hand, automobile volumes are down 2.4 per cent, y-o-y, to 122,985 units.
The strong demand for tractors has also helped M&M maintain its operating margin at 12.8 per cent even though overall realisations have declined by four per cent sequentially. The company's operating margins for the standalone business improved 120 basis points y-o-y and 70 basis points quarter-on-quarter to 12.8 per cent. A stronger operating margin, coupled with a sharp rise in other income, helped the company beat the Street's estimates on after-tax profit.
Lower commodity prices, strong margins, and higher other income offset the relatively slower growth in sales. Even though revenues grew seven per cent to Rs 10,020 crore, adjusted net profit rose 29 per cent to Rs 940 crore, y-o-y. The raw material to sales ratio declined 190 basis points sequentially to 73 per cent. Yaresh Kothari of Angel Broking expects tractor sales to grow by 12 per cent during FY14 and this would help offset the slowdown in the automotive segment. The operating margin is expected to rise from last year's 11.6 per cent to 12 per cent in FY14. However, if the company manages to maintain blended margins at 12.8 per cent, as seen in the first quarter, the stock could see earnings upgrades.
Despite the slowdown, M&M is among the few companies to expand earnings before interest and taxes (Ebit) margins in both the farm-equipment segment and automotive segment. Ebit margin for the tractor segment grew 100 basis points, y-o-y, to 16.7 per cent during the quarter. For the automotive segment, Ebit margins during the quarter rose 50 basis points y-o-y to 9.3 per cent. Analysts say that both have come in above estimates. Though the first quarter numbers are ahead of estimates, the overall slowdown is a cause of concern. M&M is expected to end the financial year with flat automobile sales and a 12-14 per cent growth in tractor volumes. While this would support earnings growth, any variation from these estimates would result in earnings revision. Emkay Global believes M&M is a relative pick among the domestic original equipment manufacturers and expects the stock to remain range-bound, with little limited downside.
