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Business News/ Auto / New car launches don’t add speed to Mahindra profitability
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New car launches don’t add speed to Mahindra profitability

Going ahead, new car launches and a steady tractor business will aid Mahindra, but much depends on the sales momentum and recovery in profitability

If not for the Marazzo, Mahindra’s utility vehicle sales would be falling in the September quarter. Photo: PTIPremium
If not for the Marazzo, Mahindra’s utility vehicle sales would be falling in the September quarter. Photo: PTI

Shares of Mahindra and Mahindra Ltd lost 2.3% on the National Stock Exchange after it reported weaker-than-expected numbers for the September quarter (Q2) on Wednesday. Revenue growth was a tepid 6.6%, reflecting muted volumes. But what caught the Street off guard is a sizeable reduction in profitability of the automobile segment.

Margins from automobiles dropped 2.7 percentage points from a year ago. The rise in raw material costs, introductory pricing for the new vehicle and higher promotional expenses were the reasons. This had a bearing on the consolidated entity as well, with margins falling by a higher-than-expected 1.5 percentage points to 14.5%.

Thanks to a non-recurring income and lower tax expense, net profit jumped 26%. But with core earnings trailing estimates, this brought no cheer. With Wednesday’s fall, the stock has lost almost 17% from its June quarter results. During the same period, the Nifty lost 7.6% and indications are the underperformance may not reverse in a hurry.

Weighing on the outlook are muted demand conditions. Tractor sales during the recent festive season were subdued. As a consequence, growth outlook for the segment is now tilted towards the lower end of the 12-14% guidance (versus the higher end earlier).

That said, the recently launched utility vehicle Marazzo is seeing a good response. If not for this new vehicle, Mahindra’s utility vehicle sales would be falling (utility vehicles were up just 1% in October).

But as Bharat Gianani, analyst at Sharekhan Ltd, says, muted demand conditions mean that volume expectations for the industry have come down.

Even so, with Mahindra preparing to launch two new cars (Inferno S201 and Alturas), one in the popular compact SUV segment, volumes should rise, adds Gianani. But the big question is how much of this translates to revenue and profit growth.

ALSO READ | Mahindra to hit the brakes on TUV 300, KUV 100, Quanto

The company is yet to fully pass on the recent rise in raw material costs. New product launches mean promotional costs are expected to remain high in the current as well as the next quarter. Unless demand sees noticeable recovery and helps Mahindra spread costs, chances are profitability will remain subdued in the near term, weighing on earnings expectations.

Adding to investors’ concerns is the tight liquidity condition. The firm claims it has not lost any sales due to lack of financing. But reduced risk appetite means interest rates are expected to perk up and it has to be seen how it navigates this. A significant portion of the sales comes from rural areas where availability of finance is crucial.

To conclude, new car launches and steady farm equipment business will aid Mahindra. But much depends on the sales momentum and recovery in profitability.

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Published: 15 Nov 2018, 05:51 AM IST
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