Mahindra and Mahindra Ltd’s stock has tumbled 12% since mid-August, when the GST (goods and services tax) Council proposed to hike the cess on mid- and large-size cars including sport utility vehicles (SUVs).
Since then, the Mahindra stock has steadily underperformed the benchmark indices too, like the BSE Auto index, which is northbound on the back of upbeat sales in the sector.
The cess hike that will result in a 5-7% increase in the company’s vehicle prices could impact demand for the higher-end SUVs. These comprise about 10% of the auto segment’s sales.
That apart, almost half of Mahindra’s auto portfolio comprises SUVs. Further, the firm has hardly a presence in compact SUVs, where the price hikes may be less pronounced in absolute terms.
This will only worsen the already-weak profitability of the auto segment, which was hit by poor sales. A couple of years ago, Mahindra lost the head start it had in the SUV segment. Taking a back seat on new launches and variants when competition was busy bombarding the market with compact SUVs cost Mahindra both revenue and profits.
The auto segment’s Ebit (earnings before interest and tax) margins have run down by 300 basis points from 10.2% to 7% between the first quarter of fiscal year 2016 (Q1FY16) and Q1FY18. Weak sales may add more pressure on margins, what with rising costs to battle against too.
Fortunately, the rain gods appear to be in Mahindra’s favour. A good monsoon and improving agricultural production, along with farm loan waivers, have aided tractor and farm-equipment sales. This segment enjoys significantly higher margins of 16-17%. Strong sales growth forecasts for FY18, the firm’s rising market share and stable margins augur well for this segment.
However, car sales may take a few quarters to align to the fickle regulatory changes. Any consequent blip in sales would weigh on overall profitability of the auto maker. Can the robust farm-equipment sales offset this?
The Street may prefer to wait and watch at least until a few months after the festive euphoria.