M&M eyes cost cuts to check falling margins

In its bid to arrest falling operating profit margins, Mahindra and Mahindra (M&M) intends to reduce costs further, VS Parthasarthy, group CFO, told a business news channel recently. M&M reported an operating profit margin of 12.4% for the September quarter, down 150 bps year-on-year. The Ebitda for the quarter stood at Rs 1,605 crore, down 7% . The management attributed fall in Ebitda margin to rising commodity prices and launch costs. The company, however, reported 24% y-o-y rise in its standalone net profits at Rs 1,650 crore due to higher other income and one-off gains amounting to Rs 150 crore.

Parthasarthy added, “The margins in auto were lower firstly due to commodity cost increase which we did not pass on to the customers completely. However, as the material cost cycle will improve overtime, we will be able to absorb the cost. Secondly, the launch cost of Marazzo dampened the margins in the second quarter. Price of Marazzo was lowest in the introductory phase and as the prices will mature, the margins should improve”.

However, analysts with Jefferies believe that the company’s margin is likely to decline after peaking in FY19 on account of other product launches and BS-VI norms hurting M&M’s diesel PV portfolio. The product launches by the company that are in the pipeline are SUV Alturas which will be launched on November 24, compact SUV S201, to be launched in Q4, Furio trucks in FY2020 and electric 3W Treo.

For the three months of July-September, the company reported 9.5% y-o-y fall in its utility vehicle (UV) sales volumes at 55,656 units attributing it to the high base of last year and shift in festive season. Although the entire PV industry witnessed a de-growth of 3.6% y-o-y in the second quarter due to multiple reasons ranging from rise in fuel prices, delayed festive season and increased insurance cost, the growth was largely muted for M&M.

Analysts at Edelweiss observe that the recently launched Marazzo cushioned subdued PV sales. “Without Marazzo, volumes would have declined 3% in September and October,” the analysts stated in their recent report.

Mahindra India