Rural growth improves outlook, but is Mahindra spreading itself too thin?

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For Mahindra and Mahindra Ltd, the June quarter earnings were marred by one-time losses on account of the new goods and services tax (GST), akin to its peers.

There was pain across both the auto and farm equipment (FE) businesses as the firm had to offer discounts to push sales of old inventory against the backdrop of a cautious customer who was ready to postpone sales until further clarity came on pricing and taxation. The firm provided about Rs144 crore towards support to dealers through GST transition. Meanwhile, the surge in raw material prices added to the pain.

As a result, the quarter’s operating margin of M&M along with its wholly owned unit Mahindra Vehicle Manufacturers Ltd (MVML) narrowed by around 110 basis points (bps) to 13.1%.

Fortunately, M&M’s FE segment sales grew at a reasonable 13.3% from a year earlier, in spite of regulatory and financial adversities.

This perhaps contained the drag in profitability although margins of this segment were 120 bps lower than the year-before. The auto segment clocked weak sales but was better off with a 90 bps dip in margin, perhaps on account of price hikes taken earlier.

Nonetheless, given that these were one-off spoilers across companies in the June quarter, investors could pardon the 20% drop in net profit, provided the way forward looks comfortable, as is the case for some auto firms like Maruti Suzuki India Ltd.

Indeed, monsoon has been favourable too and that should fuel revenue growth in tractors, bringing in better profitability for M&M.

Brokerages estimate a 12-15% growth in tractor sales for FY2018. Rural growth should also boost light commercial vehicle sales. Further, M&M has many passenger vehicle launches and refreshes are in the pipeline, especially utility vehicles. Recall that the firm’s performance had slipped when it lost ground in the last two years, when it lacked products in the compact UV segment.

Meanwhile, there have been losses in its most recently added scooter segment, where its products are yet to make a mark. Three-wheeler sales are down too. And, the performance of trucks has not been all that great, with stiff competition.

M&M’s shares that had bucked the auto slowdown about five years ago when its UVs commanded a prized position in the market, took a U-turn to underperform the benchmark indices in the last 18-24 months.

So while tractors, LCVs and UVs along with rising scale should add up to improve earnings in the next two years, one wonders if M&M is spreading itself too thin across various auto segments.