The set of earnings announced by automaker Mahindra and Mahindra (M&M) for the second quarter of FY19 is a classic indication of the complicated times that the domestic auto industry finds itself in. On the one hand, high raw material prices—including rising prices of crude and other commodities, catalysed also by a depreciating rupee—has eroded the operating profit margin of company. On the other, M&M’s passenger vehicle sales in rural areas grew to 51% of the company’s overall car sales volume and surpassed urban sales for the first time. This is an encouraging reaffirmation of rural consumption growth, which is ever so important to India’s overall economic prosperity.
M&M reported a revenue of Rs12,790 crore in the September quarter, up 6.4% year-on-year. While passenger cars volume rose 9.4% in the same period, the volume of tractor sales declined 4.7%. The M&M management attributed the decline in tractor sales to a shift in the festive season, which set in later than usual this year.
Rising input costs, along with increase in expenditure on account of the launch of M&M’s new utility vehicle, Marazzo, dented the Anand Mahindra-led company’s operating profit in the quarter. M&M reported earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs1,849 crore, down close to 4% over the corresponding period last year. The company’s operating profit margin declined 150 basis points over the same period.
Despite this decline in operating profit, the company managed to report a healthy 26% year-on-year growth in net profit to Rs1,779 crore, on account of exceptional gains from some sale of investments and a tax benefit.
The M&M management’s post earnings commentary is an indication that growth in auto sales isn’t likely to be what it was expected to be at the beginning of the fiscal. As a result, automobile companies will have to think out of the box to ensure that their performance doesn’t slip.
The company has indicated that growth in the passenger cars segment, which was anticipated to be around 10-11% in FY2018-19, might not be more than 7-8%. The subdued expectation with respect to growth in car sales is hardly surprising, due to factors including rising fuel and motor insurance costs. Though M&M is sticking to the earlier forecast of 12-14% growth in tractor sales, it now believes that the lower end of the guidance is more realistically achievable.
One of the ways in which carmakers will look to beat the blues in the auto market is through new launches. A research report dated November 14 by Edelweiss Securities states that M&M’s passenger car sales volume would have been lower by 3% but for the launch of the Marazzo. The new utility vehicle launched from the M&M stable has reached full production level with bookings for 13,500 units registered. To keep up the momentum, M&M will be launching another utility vehicle, Alturas G4 on November 24 and the S201 later this fiscal.
“Mahindra and Mahindra’s Q2FY19 EBITDA… missed estimate by 4% due to cost pressure, which we expect will be passed on gradually,” the Edelweiss report says. “The healthy rural demand outlook remains intact and we believe the recent liquidity tightening scenario is transitory.”