The trail ahead of M&M

Monsoon could spoil the party for tractor division, however automotive segment holds the key

Mahindra & Mahindra's splendid run has continued, with profit before exceptionals and taxes jumping 135.4 per cent in the June quarter. But that was expected, especially since the tractor division was at a low base same time last year.

The tractor/farm equipment sector had an EBIT (earnings before interest and tax) margin of just 4.1 per cent in Q1FY04, which jumped to 8.6 per cent last quarter. This, however, is much lower than the preceding two quarters, when margins were 13.65 and 10.76 per cent, respectively.

Strangely, the June quarter and the December quarter are the best periods for the company. It seems, tractor margins had peaked last quarter. If that is the case, year-on-year profitability gains may stop from the next quarter.

This, along with the monsoons, may dampen performance in the second half of the year. But, according to the company, over 50 per cent of the company's tractor market has received sufficient rainfall, and coupled with better financing options, would lead to higher sales even later in the year.

Importantly, over 70 per cent of the company's profit comes from the automotive segment, which should continue to do well. Production of 'Scorpio' is set to increase by about 25 per cent soon, which will obviously help since there is currently a wait-list of around three months for this brand.

EBIT margins of this segment jumped to 10.9 per cent, compared to 9 per cent in FY04. But higher raw material costs could spoil the party going forward. In any case, profit growth for the full year is expected to be well below the first quarter levels.

Grasim Inds

Grasim Industries Ltd's first-quarter results beat the street with profit after taxes growing 68 per cent to Rs 219.2 crore in the June quarter. That wasn't surprising, considering that both volumes as well as product prices in all its key divisions improved.

In the cement division, production was up 3 per cent year-on-year, sales volumes grew 5 per cent, while realisations improved by 13 per cent.

As a result, segment revenues grew by 19 per cent. Profits increased much more, by 87 per cent, thanks to cost reductions, in particular reducing power consumption, and increasing the proportion of blended cement.

As a result, margins were up by almost 700 basis points. But it was the sponge iron division that contributed the most to the rise in profits, with net realisations growing a huge 61 per cent year-on-year, while sales volumes rose 17 per cent.

This neutralised the rise in raw material costs and led to segment profits rising by 162 per cent. Margins accordingly rose by almost 10 percentage points.

Going forward, the only concern would be the impact of the monsoon on VSF production. On a consolidated basis, the challenge is to successfully integrate the recently acquired UltraTech CemCo Ltd with its existing cement business and improve the profitability of the subsidiary.

Tata Consultancy Services"�margin call

One major highlight in TCS's FY04 financials is that its gross margin, according to consolidated US GAAP numbers, is even higher than that of Infosys. To be precise, TCS's gross margin is 260 basis points higher than Infy's. This probably makes TCS the most profitable IT company at the gross margin level.

This is strange, because TCS scores low on many of the parameters that are believed to impact margins. The proportion of revenues from offshore work was just 36 per cent, compared to 45 per cent for Infy. Besides, fixed price contracts constituted 55.5 per cent of revenues, much higher than Infy's 34 per cent. Finally, TCS got 18 per cent of its revenues from the GE group. All this should have resulted in lower margins.

So what could be the reason for TCS's higher margins at the gross profit level? It turns out that TCS records the salary cost of software consultants who are not engaged in providing services (bench) under selling, general, and administrative (SG&A) expenses, and not under cost of revenues. Competitors like Infosys record this expense under cost of revenues/direct cost. To that extent, TCS's gross profit (revenues - cost of revenues) would obviously be bloated.

It's no big wonder then that TCS's margins at the operating level is over 200 basis points lower than that of Infy. It certainly makes more sense to look at operating margins of the company. To be fair to the company, although its operating margins are lower than Infy's, it's better most other competitors, including Wipro.

With contributions from Mobis Philipose and Amriteshwar Mathur.