Mahindra’s Q3 net rises over two-fold on strong operational performance

Mahindra and Mahindra’s standalone net profit jumped two-and-a-half times year-on-year in the December quarter. However, the company’s profit before exceptional items and tax during the quarter dropped to Rs 1,644.67 crore from Rs 2,239.28 crore in the corresponding year.

Despite a volume contraction of 9 per cent in tractors and 2 per cent in automobiles (including SUVs and commercial vehicles) the company’s net profit (after exceptional items) jumped 155 per cent to Rs 1,353 crore from Rs 531 crore in the corresponding period last year. A higher contribution of pricier models in the sales mix (auto business) bumped up the average realisations.

Net sales at the maker of XUV7OO and Scorpio models also rose 8 per cent to Rs 15,239 crore from Rs 14,057 crore in the corresponding period last year.

However, commodity inflation, shortage of semiconductors which led to a production loss resulting in a negative operating leverage, impacted the operating margins crimping it to 11.9 per cent from 17.1 per cent in the year ago quarter.

M&M lost production of 20,000 units during the quarter owing to a chip shortage. Mahindra has a booking pipeline of 155,000 units.

Driven by a good operational performance of the hospitality, real estate and other unlisted businesses, M&M’s consolidated net profit (after exceptional items) during the quarter also rose 57 per cent to Rs 1,987 crore over the year-ago period.

“The strong operational performance of the segments (after exceptional items), despite supply chain challenges and high input costs, show that the capital allocation actions taken by the company in the last couple of years have started paying off,” said Anish Shah, MD and CEO, Mahindra Group.

Rajesh Jejurikar, executive director – farm equipment and automotive sectors, M&M said, volumes for the auto business will improve further in the coming months supply chain issues have eased.

“The worst is behind us,” said Jejurikar alluding to chip shortage. However, the demand supply mismatch for the critical component that has been denting production volumes at automakers globally for almost one and half years may continue for another six to nine months.

M&M has taken a series of measures including on-boarding multiple suppliers, maintaining a buffer stock of semiconductors and finding alternatives to chips via re-engineering the products and variants to overcome the shortage, said Veejay Nakra, chief executive, automotive division.

Meanwhile, a slowdown in the government’s rural spending, unfavorable terms of trade (input costs increase being higher than the selling price of crops) becoming negative and a delayed monsoon impacted tractor sales, said Hemant Sikka—president farm equipment sector, Mahindra.

M&M’s tractor volumes during the quarter declined to 91,769 units over 100,696 units in the same period a year ago. “The industry is likely to end FY22 with a 6 per cent YoY decline.” Domestic tractor makers sold 900,000 tractors in FY21, said Sikka.

“M&M recorded subdued performance in Q3FY22 as its EBITDA margins stood at 11.9 per cent versus our estimate of 13.1 per cent,” wrote Mitul Shah, head of research at Reliance Securities in a post earnings research note.

Over the near term, he expects M&M to face some volume pressure owing to the competitive environment in domestic UV space and semiconductor issues. However, new products and stronger presence in rural markets is expected to drive its overall volume and profitability.

He expects the PV industry to recover in FY23E with a strong bounce back in 1HFY23E, which would support MM’s business.