Mahindra & Mahindra Ltd recently launched its first global sports utility vehicle (SUV), XUV500, with aplomb. The company seems to rely heavily on the laurels it earned in September, in the form of rising sales figures. The fact that supports the statement is that even with the growth estimates for passenger vehicle sales consistently dropping, the company introduced XUV500 in the Indian market on 28th September 2011.
For the month of September, the automotive sales of Mahindra swelled by 25% from a year ago, wherein the sales of utility vehicles, including its sedan Verito, grew at a higher pace at 35%.
Mahindra’s current determination can also be attributed to its overpowering and unparalleled performance in domestic utility vehicle sales, with which it has taken over nearly two-third of the market share, with close rivals like Tata Safari and Toyota Innova lagging behind.
However, notwithstanding management assurances, the company is concerned over certain issues, with one of them being the extent to which Mahindra & Mahindra would cannibalize its existing brand Scorpio and, therefore, influence the overall utility vehicle sales. Another aspect that needs to be stressed upon is the pricing quotient. It has been observed that the pricing policies have reduced margins, furthermore, for cars like XUV500 which is packed with innovative high-end features that are higher in cost. Moreover, the Rs. 600 crore expense on research and development cannot be overlooked.
The estimated sales of 2,000 units a month, which was set as a target initially, is certainly not capable of counterbalancing higher costs. Moreover, the month of June speaks testimony for the fact as despite price hikes, the margins were lower when compared with a year earlier.
However, the trends which have surfaced of late, like fall in raw material prices and hike in product prices work in favour of Mahindra. Subsequently, the situation of unfavourable margins would expire as operating leverage will improve over a period of time.
Therefore, momentum in the volume of UVs is mandatory, in order to retain positive automotive and overall margins, which would imply the absence of dependence on tractors. Utility vehicle sales for the September quarter hiked around 19% from the year-ago period.
According to Abhishek Banerjee, Senior Analyst, Asian Market Securities Pvt. Ltd, “In the near term, strong domestic automotive volumes, especially in UVs where it is the market leader, will boost revenue until it gradually gains a foothold in overseas markets.”
The company is believed to have contemplated a number of launches, in order to be an integral part of the growing domestic market, over the next two to three years, including Korean firm Ssangyong’s premium category UVs, such as Korando.
While Ssangyong’s sale is escalating, it would be quite premature to observe an effect on Mahindra’s earnings. Thus, Mahindra ensures to be on the safer side, with the tractor segment accounting for half of the firm’s operating profits at the outset.
Thus, Mahindra is likely to walk through smooth paths in the future, with the ever-growing trust and reliability being displayed by its customers, boosting further confidence.
