Tractors sit in a lot awaiting shipment at the Mahindra & Mahindra Ltd. Plant in Mumbai, India. (Photographer: Abhijit Bhatlekar/Bloomberg News)

M&M Expects Rural Buoyancy To Boost Margins In Third Quarter

Mahindra & Mahindra Ltd. expects to maintain its margins in the third quarter despite competitive pressure given signs of recovery in the rural economy.

Two successive years of good monsoons and government reforms such as the Rs 2.11 lakh crore ban recapitalisation and projects like the 80,000-kilometre Bharatmala scheme will lead to further buoyancy in the rural market and aid M&M, Group Chief Financial Officer VS Parthasarathy said. This will also offset losses from having to shell out further discounts in order to stay competitive, he told BloombergQuint in an interview.

There will be discounts, but given that tractor industry has been disciplined in managing competitive environment, we are reasonably confident that there is competitive pressure but there no rogue elephant in the room.
VS Parthasarathy, CFO, M&a

M&M profit’s rose in the second quarter driven by demand for its utility vehicles and tractors during the festive season even as raw material costs rose.

The company passed on part of the higher raw material costs in the tractor segment to consumers in the quarter gone by and hopes to pass on some more in Oct.-Dec. It also hopes to hike prices in the third quarter.

Here are the edited excerpts from the interview.

What is the current quarter and the rest of the year looking like?

Last quarter, both the automobile and tractor sales did very well. In fact, the automobile top line grew 16 percent and the profit before interest and tax grew at about 28 percent. Tractor sales did very well too with a bottom line growth of 38 percent and top line growth of 30 percent. So, it was a great quarter for both.

We don’t give a guidance but let me talk about the industry. In the second half, the tractor industry is slated to grow at 12-14 percent. We had earlier given a guidance for the industry at about 10-12 percent growth. The industry has upped its overall growth for the year to 12-14 percent which augurs well for the second half. The utility vehicle sales have seen traction and growth. And overall, the passenger vehicles will grow in double digits as per industry’s forecast. We hope that tractor and automobile sales do as well as the industry, if not better.

Is demand strong as the numbers suggest or are results mirroring the destocking and restocking impact?

We must look at the future with a realistic wand. For tractor sales, you have to see the season and the festivities. If you look at last year, the festive season was in September and October. This year, the festive season was centered around the second quarter. So, we were quick to point out in early Oct. that 49 percent has got the base effect of last year where it did not have the full season. So, it is better to look at September and October put together which makes the overall stocking level and the season impact come through. If you look at September and October through those parameters, you will see that there has been robust growth.

When it comes to October, you are looking at last year’s festive season and therefore it looks like relatively low growth. But I will look at it as an overall good measure and discipline in the industry in the sense that companies are not just aiming at a year-on-year growth, but are reflecting reality. Going forward, the yearly numbers have been increased by the industry because they see that there will be a good second half growth. We have seen first half industry growth at 15 percent, so the industry has maintained that second half could see double-digit growth or higher. That’s broadly the prognosis. So, I am not worried about October sales being low. It is the part of September, October season demand balancing.

Are the inventory levels with dealers normal as they have been, or are they higher than the average over last few years?

We have been disciplined and followed the approach that our retail should be more than our billing, so that it leaves the stock intact in the right place – not too much and not too little. We have followed this discipline and it has helped us have dealers’ stock. So, if you ask if at the end of October, we were comfortable with the dealers. I would say that M&M is right where it should be. Inventories are about the right size. In fact, in October there was a discussion that is the industry is overstocking but M&M is very comfortable, and the norms are exactly as we wanted them to be. Coming to the industry, it is fairly disciplined. There may be 1-2 players who may have to do some corrections either way. But overall the industry has been reasonably balanced in these areas. But as far as M&M is concerned, we are very comfortable at the inventory level.

Are you at the average inventory level or is it less or more than that?

It is a little bit less than that last couple of years’ average. We wanted it to be between 4-5 weeks of inventory at the right level. We are very much in comfort zone here.

Do you expect the pricing pressure to increase given the rise in commodity prices? Do you expect pricing pressure to affect margins?

In the last quarter, we were able to pass on the price increase effect, of about a percent to the consumers in the automobiles segment. In the tractors segment, the price effect was slightly higher, and we managed to pass on some of it. As of the third quarter, we hope that we will be able to take the price hike, so we could come on an even key. Commodity prices have firmed up and therefore we will expect inflation in commodities in the second half as we have seen in the first half. So, we do forecast passing that price increase to the consumers. It is an art and not science to pass on excess, while the question remains of demand versus price increase. But we hope to be able to make it.

Our contribution margins have remained consistent and we have got the productivity of the expenses as revenue has grown. You have to balance the revenue growth so that you can do some bit of the productivity gain in the cost structure. For contribution margins, you manage by making sure that the demand is still robust.

Going forward to be able to take the pressure in margins, we have always the pressure of competition. It cannot be said that there will not be discounts. But given that the tractor industry has been disciplined on how it has managed the competitive environment, I am confident that there is competitive pressure but there is no rogue elephant in the room.

Your peers remain divided over the question of a good third quarter. Are you bullish because you have prospects to gain market share as opposed to just sales growth?

I have talked about the industry increasing its tractor sales’ guidance to 12-14 percent from 10-12 percent earlier. The third quarter has got the base effect of previous year’s season, so I would balance that with demonetization impacting the third quarter last year. Hence, there is balance in the third and fourth quarters in the industry. That’s my assessment. The growth may not be high as that in the second quarter, but if you look at the first and second halves, I believe that there are positives happening and I am not basing my comments merely over the industry thinking that it will do well.

Look at the macro events which will help it. Good monsoon two times in a row that augurs well, the government saying that they’ll do bank recapitalization of magnitude which has never been heard before and an 80,000-km run of Bharatmala, due to which the rural market has started to feel the pulse. When rural comes to play, then there are a lot of benefits for it.

We have product launchers in both automobiles and tractors segments and you will see a driverless tractor in the next six months from M&M. Those are the things which excite us and are beneficial for the formal and rural communities.

Watch the full interview here.