Operating margins fall as weak rupee offsets fall in commodities.
Mahindra and Mahindra is probably the only automotive company that has clocked double-digit volume growth. But, this growth comes at the cost of operating margins, at a two-year low of 11.9 per cent. The company and its subsidiary, Mahindra Vehicle Manufacturers, grew revenue by 34 per cent to Rs 8,298 crore at the end of the second quarter. On a standalone basis, M&M’s revenue grew 33.2 per cent year-on-year to Rs 8,198 crore. The profit after tax fell 2.8 per cent year-on-year to Rs 737.4 crore, compared to Rs 758.5 crore in the corresponding period of the previous year. In the current quarter, the company reported a one-time loss of Rs 32 crore due to forex losses on revaluation of its external commercial borrowings, as the rupee fell against the dollar.
The good news is that unlike other automobile companies, the company is seeing no slowdown in sales. The company’s passenger utility vehicle sales grew 14.2 per cent annually to 47,523. The new XUV500 has done exceptionally well, the management claims. Sales of its light commercial vehicles grew at a scorching 49 per cent. The tractor segment, too, grew at a robust pace of 28.5 per cent to 54,585 in the quarter.
Analysts say the company’s results have come as a surprise, for raw material prices were not expected to hit so hard in this quarter. Even as commodity prices have corrected, raw material as a percentage of sales moved up to 72.6 per cent from 71.8 per cent in the first quarter of this financial year. Deepak Jain of Sharekhan says, “This was not expected, as commodity prices were coming down. India has not benefited from the fall in prices of commodities, as the rupee has depreciated against the dollar.”
Consequently, the company’s Ebit (earnings before interest and tax) margin for the automobile business plummeted to 9.9 per cent from 15.6 per cent reported in the second quarter of FY11. In the first quarter of FY12, the division had reported margins of 10.7 per cent. Analysts say,these margins are a two-year low. One reason for this shrinkage could be the increase in sales of the Bolero, a low-margin product. The company’s operating margins at 11.9 per cent are the lowest in eight quarters. The extent of the impact is clear from this fall, not just annually but even sequentially. In the first quarter, the company clocked 13.3 per cent in operating margins.
Analysts are likely to downgrade earnings, as the impact of commodity price correction may not be much in the third quarter. However, things may look better from the fourth quarter, as demand is still holding up. The company has reiterated the risks emanating from rising interest rates, a deteriorating global macro-economic scenario and continued policy and regulatory uncertainty. Therefore, the outlook remains cautious for the rest of the year.
