Shares of Mahindra and Mahindra Ltd (M&M) touched a new 52-week low on Wednesday, mirroring investor disappointment about the company’s June quarter results
Indeed, revenue and profit margins came slightly ahead of the Street’s forecasts. But the all-round weakness in revenue and profit underscored weakness in both automotive (auto) and farm equipment (FE) segments.
Overall, M&M’s June quarter net revenue of 12,805.5 crores was 4.1% lower year-on-year. Further, negative operating leverage due to plummeting sales dented the Ebitda margin, which fell by 180 basis points to 14%. A basis point is one-hundredth of a percentage point.
Investors reckon that the auto segment’s operating performance was worse than expected. Even improved realizations failed to compensate for the cost pressures. The upshot: the Ebit margin declined by a sharp 290 basis points to 6.5%.
According to Bharat Gianani, an analyst at Sharekhan Ltd, “This was below the estimated 8.8%. Higher marketing expense on the back of new launches and increased discounting dragged the auto segment margins."
It is well known that the general mood in the auto industry is sombre. In passenger vehicles (PVs), Q1 FY20 marks the fourth quarter of contraction in sales, the worst since Q3 FY01. The company adds that a 32% year-on-year drop in the commercial vehicle (CV) sales make it the worst-ever in 23 quarters. Note that M&M has a presence in both PVs and CVs.
This is not to say that there was any respite in the FE segment. Sales fell 14.3%, in tandem with the industry sales drop during the quarter. Weak and untimely monsoon with poor spatial distribution led to weak price realizations in this segment. This hurt the Ebit margin, which narrowed by 160 basis points to 19.3%.
In short, on the whole, weak sales and margins translated into a 15% year-on-year drop in Ebitda to 1,794 crores.
The saga doesn’t end here. Sales across the board continue to plummet, raising concerns about the anticipated demand pickup in the second half of FY20. July figures were dismal too, with auto segment sales declining by 16% year-on-year and FE sales by 12% year-on-year.
Hopes are that the pickup in the monsoon and close to 110 basis point rate cut by the central bank so far in 2019 should improve sentiment both in rural and urban areas.
On Wednesday, the M&M stock ultimately closed 6% lower. Since April, the stock has dropped 23%, worse than the 18% and 8% drop in the Nifty Auto index and the Nifty 200 index, respectively. This is not surprising given that the auto giant, a formidable force in both auto and FE segments, is not immune to the slowdown.
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