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Strong tractor sales to improve M&M's margin in FY17

Strong tractor sales to improve M&M's margin in FY17

  Mahindra & Mahindra reported better than expected operational performance in the September quarter driven by strong volumes in its farm equipment segment as well as double-digit growth in the auto segment.

Revenues grew 15.6 per cent to Rs 10,172 crore on the back of price hikes taken across the product range in the June quarter as well as a 36 per cent jump in tractor volumes. Its volumes in the auto segment were up 11 per cent.

While sales were marginally below expectations, it managed to report a operating profit growth of 28.3 per cent to Rs 1,468 crore and margins at 14.4 per cent, up 140 basis points over the year ago quarter.

The higher profitability was on account of better product mix, economies of scale and ongoing cost reengineering efforts.

Its net profit was up 28.8 per cent aided by a strong operational show as well as other income which went up 41 per cent. This was largely from dividends with incremental increase coming due to Tech Mahindra.

The tax outgo has also increased by half to Rs 486 crore due to the loss of fiscal incentives at various plants such as Haridwar.

Given the strong Kharif season as well as good trends of the Rabi season, the company expects its rural portfolio which includes both the tractors as well as UVs such Bolero, Scorpio as well pick-ups to do well. It has increased its industry guidance for tractors from 15 per cent to 20 per cent.

Given that M&M grew its tractor volumes at 37 per cent while the industry grew at 27.6 per cent, it has gained market share which is now pegged 42.6 per cent, its highest ever.

The increase in the tractor guidance and its faster than industry growth could translate to more market share gains going ahead. The company expects passenger vehicle growth to be in the12-15 per cent range for FY17.

With a higher proportion of tractor sales expected in the second half of FY17, M&M's margins could increase going ahead. Ebit margins in the September quarter at 17.85 per cent were 170 basis points higher than the year ago number.

In comparison, auto margins in the quarter came in at 9.66 per cent, marginally ahead of the year ago number of 9.59 per cent. While the company will continue to launch refreshes, it has planned a new product on the auto side in the second half of next year which will be followed by another launch in FY18-19. The company expects the launches of the last year to keep the sales momentum going.