M&M may see tough times ahead

Wednesday 08 February 2012, 19:50 PM by

Mahindra & Mahindra (M&M) seems to be at the receiving end of the negative market conditions and government's restrictions for automotive companies. This will be in spite of the fact that experts project the economic output of the nation to go up by 6.9 per cent. It is because the company's sales for the October to December 2011 quarter paint a bleak picture when the macroeconomic view is considered.

In the last three months of 2011, the company's profits plummeted by 9.7 per cent on Year-over-Year basis, amounting to Rs. 662.2 crores. The figures released by the manufacturer were much lower than market estimates, leading to a 2.9 per cent decrease in stocks. However, it can be said that its profits after taxes rose by 7.3 per cent if one-off income is adjusted for the given quarter. Nevertheless, the last quarter has clearly stated that high sales volume do not necessarily mean huge profits

M&M may see tough times ahead | CarTrade.com
M&M may see tough times ahead

The profit margins posted by the manufacturer have decreased constantly in the last two quarters, even though its sales volumes and product prices have gone up. M&M's operating margin reduced from 15.09 per cent in Oct-Dec 2010 to 12.17 per cent during the same period in the following year. It is anticipated that the company's fortunes will not get better in coming times despite the steady reduction in the cost of commodities like aluminium and rubber over the past few months.

There has been an increase in the sales figures of automotive firms of India in January 2012. However, it cannot be said that this recent bounce in sales will continue as most people refrain from buying a new vehicle in the death months of the year.

M&M will bear the brunt of the auto industry's losses since the tractor segment, its bastion, has suffered from a drastic decrease in sales in recent times. In November, tractor sales had fallen by 3 per cent and did not report any growth in December, followed by a 7.6 per cent loss in sales.

The projected sales figures for the tractor segment do not inspire any kind confidence either. Firstly, the segment had been growing at the rate of 28 per cent for the past three years, setting a high base value for statistics for this year. Secondly, increase in farm income is expected to fall this time, directly affecting tractor sales. Food inflation has come down in recent times and the national government has announced a measly 8 per cent raise in minimum support prices as part of its initiative in arresting increase in food costs. The government is, thus, incapable of adjusting figures for rendering financial backing for aggregate demand.

Moreover, some experts believe that the government may announce higher taxes on diesel vehicle in the upcoming budget, thereby adversely affecting M&M's sales in the Utility Vehicle (UV) segment. Additionally, car makers like Maruti Suzuki, Renault and Nissan are also gearing up to launch cars that will compete with Mahindra's UVs and capture its market share.