Weak volumes can threaten M&M’s margin expansion next fiscal

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It is not without reason that Anand Mahindra, chairman of Mahindra and Mahindra, is waiting for the new government


Anand Mahindra has said that many, including consumers, are waiting for the elections to get over to decide on investments and purchases.

It is not without reason that Anand Mahindra, chairman of Mahindra and Mahindra Ltd (M&M), is waiting for the new government. Attending a round table meeting in February, Mahindra has said that many, including consumers, are waiting for the elections to get over to decide on investments and purchases.
The comments emphasize the anxiety about consumer purchases among the automobile companies. To be sure, M&M is doing well. Healthy financial performance at the relatively more profitable farm equipment division is helping the company overcome the sluggishness in the automobile business. That enabled the company to expand its operating margins for the least three quarters. But heading into the new fiscal year, the margin expansion trend may take a breather.
Due to poor demand, sales at the automobile division are falling. To arrest the fall, the company is planning product refreshes and new launches. While the all-new vehicles will come next year, high competition in the compact utility vehicle segment (that is seeing strong demand) means that margins in the segment are low. “The compact SUV segment (the UV1 category), where most of the new launches are going to come in, is more car-like in nature and will enjoy margins in between the low-margin passenger cars and the high margins UV2 segment (Bolero, Scorpio, XUV500),” Emkay Global Financial Services Ltd said in a note.
That’s not all; the margins of the (compact utility vehicles) segment will be tied to the success of the new products. According to Emkay “management believes that profitability in the UV1 segment launches would be reasonable, if they are able to clock around 5,000 units per month per platform.” The current compact utility vehicle (Quanto) is registering monthly sales of less than 500. With intense competition in the business, it will be challenging for M&M to quickly ramp-up and extract economies of scale.
The other segment that can weigh on Mahindra’s margin expansion is the trucks business. Volumes at the division (light, medium and heavy commercial vehicles put together) fell 33% to 7,058 units in first 11 months of the current fiscal year. As in compact utility vehicles, the company has a threshold volume level (beyond which its profits will get a boost) that is higher than the current run rate.
True, the farm equipment business continues to do well. But falling sales in the automobile division and high competition in the compact utility vehicle segment indicates it will be tough for M&M to retain economies of scale and grow its margins in the next fiscal year. “The management has demonstrated ability to manage profitability despite pressure on volumes…. However, we believe that FY15 performance would be impacted by adverse product lifecycle for UVs in period where competitive intensity is increasing meaningfully,” Motilal Oswal Securities Ltd said in a note.

This article is taken from : http://www.livemint.com/Money/Xcr7y...hreaten-MMs-margin-expansion-next-fiscal.html
 

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