M&M to invest Rs 18,000 cr in three years

Mahindra & Mahindra (M&M), which on Wednesday reported a 19.85% decline in its standalone profit after tax (PAT) to Rs 848.81 crore for the fourth quarter, has earmarked an investment of around Rs 18,000 crore for the next three years. This includes Rs 12,000 crore in capital expenditure and another Rs 6,000 crore in investment towards product development and newer technologies, among others.

V S Parthasarathy, group CFO at M&M, said the company is not slowing down its investments despite the prolonged demand recession in the industry. In the earlier cycle, the company had invested around Rs 15,000 crore that included Rs 10,000 of capital expenditure and another Rs 5,000 crore of other investments.

The net profit during the March quarter fell despite the company reporting a minor jump in its revenue from operations to Rs 13,807.88 crore. As per a regulatory filing by M&M, the company posted a PAT of Rs 4,796.04 crore for 2018-19, up 10.1% as compared with Rs 4,356.01 crore in 2017-18.

Total vehicle sales during the fourth quarter were at 1,63,937 units as against 1,56,453 units in the year-ago quarter, a growth of 5%. Passenger vehicle sales were at 77,607 units, up 7% over the year-ago period. Tractor sales were at 56,903 units in the fourth quarter, compared with 66,885 units, a fall of 15%.

According to the M&M executives, the muted demand in rural India on account of poor distribution and deficit of monsoon in some parts of the country, and weak agricultural incomes due to poor price realisation, stress in the NBFC sector leading to tight credit conditions along with low demand in urban India and the overall sluggishness in the economy led to a fall in both the tractor and automotive industry during Q4.

After seven successive quarters of growth, the domestic automotive industry witnessed a reversal in Q4 F2019. Pawan Goenka, managing director, M&M, said it really was a case of two halves. "In all segments we are in, the growth of the industry for the first half was significantly higher than the second half."

Rajan Wadhera, president - automotive sector, M&M, said the inventory level in M&M showrooms has been about 2-3 days more than what he thought was comfortable for the automotive sector, though it is in line with the industry standards.

The company management said they will be keeping a tab on five elements during 2019-20 which is likely to affect the company's performance. These include the government policies going forward, availability and affordability of finance, monsoon, trade protectionism and sanctions and transition into BS-VI regime. The company is of the view that the growth projection for the fiscal is expected to be better than what was done by trade body Society of Indian Automobile Manufacturers (SIAM) around a couple of months ago as some external factors like mandate of a stable government at a Centre. SIAM had projected a conservative growth of 3-5% for passenger vehicles, 10-12% for commercial vehicles and 5% for tractors. SIAM, which is expecting the new government to push the reforms, has asked the government to reduced the GST to 18% on automotive sector from 28% at present.

The company management said it would have to take a decision by mid-November as to how much of BS-IV vehicles need to be produced so that it does not turn into a scrap after the April 1, 2020, deadline following which such vehicles cannot be sold.

According to Mitul Shah, VP - research, Reliance Securities, going forward M&M may face some margin pressure on account of turbulence in rural economy, competitive environment in the domestic utility vehicle (UV) space and slowdown in tractor industry. "However, we believe that new XUV300 would drive company's overall volumes and profitability going forward. Its success is likely to compensate for slowdown in other segments," said Shah.