Mahindra & Mahindra stock falls despite recording increased profit

Mahindra-Mahindra Total revenue from operations rose 14 per cent from a year ago to Rs 11,942.90 crore | via Commons

Pressure on margins caused automobile manufacturer Mahindra & Mahindra (M&M) Ltd's stock to tank nearly 2 per cent from the previous close, even as the company reported a standalone net profit of Rs 955.21 crore for the quarter ended in June, marking a 12 per cent rise from the corresponding period a year ago.

Total revenue from operations rose 14 per cent from a year ago to Rs 11,942.90 crore, driven by a 21 per cent growth in domestic tractor sales. The company sold 71,785 tractors during the quarter, which is typically considered good for farm equipment sales. Overall sales of vehicles grew 9.7 per cent to 1,10,959 units, with utility vehicles accounting for 55,909 units, up 13 per cent from the year-ago period.

Market participants said M&M's volumes push and focus on new launches had led to a more than 200 basis point or two percentage point drop in the Ebitda (earnings before interest, tax, depreciation and amortisation) margin and the numbers show a rise because of the effect of a low base or a relatively poor performance in the year-ago period.

Umesh Mehta, head of research at brokerage Samco Securities, said, “Going forward now, the Haridwar excise benefit, which they had so far, will expire and the margin expansion (from the benefit) is not going to come. Prior to expansion, the margin just fell by 200 basis points. This shows how the company is into the volume game and KUV100 and TUV300 are basic-level models where they are not able to make huge margins. When margins come under pressure, the RoE (return on equity) will get impacted.”

Mehta added that the fall in the stock also occurred because the valuations are at an all-time high in terms of P/E (price/equity) multiples, with a trailing P/E now at 29x. “We haven't seen such valuation over the past decade,” he said.

In a press release accompanying its earnings report, M&M said, “Given the robust rainfall received thus far and IMD's prediction of normal rains for the rest of the monsoon season provide a much-needed boost to industrial activity in the country. Weak external demand, underutilised capacities and balance sheet stress, however, continue to weigh heavily on domestic private investment. But, led by the positive outlook on consumer demand as well as renewed reform efforts by the government in the recent months, business confidence is now ticking up and could lead to recovery in private capital expenditures towards the last quarter of this fiscal.”

Dalal Street will remain skeptical about the company's performance in the next two to three years also because of continuing concerns around regulatory pronouncements on diesel vehicles and lack of clarity on M&M's own plans about electric and hybrid vehicles.

To meaningfully improve its numbers in the coming quarters, M&M will have to show, in Mehta's words, “extraordinary growth” in the four-wheeler segment.

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