After utility vehicle maker Mahindra and Mahindra (M&M) reported a 4.3 percent growth in first quarter (April-June) profit at Rs 896.4 crore , analysts believe the numbers are healthy and slightly better than street expectations.
Ajay Shethiya, VP- Auto & Auto Ancillary, Centrum Broking says EBITDA margin at 14.3 percent is quite healthy as compared to the earlier quarters on a like-to-like basis and therefore, he is positive in terms of the overall results.
Echoing his views, Surjit Arora, Reseach Analyst- Institutional Equities, Prabhudas Lilladher says the operating margins have come ahead of expectations even for the combined entity which is Mahindra & Mahindra plus MVML put together.
"We were expecting some drop in margins but contrary to our expectations both on automotive as well as in the tractor division margins are quite healthy," he says in a discussion on CNBC-TV18.
With the festival season round the corner, Arora expects better volumes and believes the operating leverage will come at play and hence the company will be able to sustain its Q1 margins.
Below are excerpts from the discussion:
Ajay Shethiya, VP- Auto & Auto Ancillary, Centrum Broking
Q: What is your view on Mahindra & Mahindrs's Q1 earnings?
A: At the operating front M&M and MVML looks to be better than what street was building. EBITDA margins have come at 14.3 percent which is quite healthy as compared to the earlier quarters on a like-to-like basis, so, positive in terms of the overall results. Also, the PAT expectations was closer to Rs 850-860 crore, on that front also it seems to be slightly on the higher side. So net-net, overall numbers as of now given the details looks to be quite decent, in fact slightly better than the expectations.
Q: There is tractor segment improvement in the P&L. The company has given the revenues of the tractor segment at Rs 3,932 crore versus Rs 3,899 crore. So, there is a growth on the revenue side. Even on the EBIT front it is Rs 666 crore versus Rs 652. So, tractor segment EBIT absolute number has gone up this time around. However, even the automotive segment EBIT actually has gone up to Rs 624 crore versus Rs 585 crore, your initial thoughts on that?
A: On the tractors front the EBITDA margin seasonally is slightly on the weaker side as compared to the earlier quarter. However, the EBIT margins also seem to be healthy on the tractor side and that is again a good sign given the kind of weakness which we have seen in the overall volumes. So, per se indicating that pricing power continues to remain strong plus companies efforts in terms of the cost rationalisation is something playing out.
Surjit Arora, Reseach Analyst- Institutional Equities, Prabhudas Lilladher
Q: What would be your analysis on the numbers?
A: The operating margins have come ahead of our expectations even on the combined entity which is Mahindra & Mahindra plus MVML put together the operating margin for the entity is 14.3 percent vis-à-vis 13.8 percent last year same quarter. We were expecting some drop in margins but contrary to our expectations both on automotive as well as in the tractor division margins are quite healthy.
Q: Overall, 14.3 percent margin, do you think it could be sustainable going forward because up until now we didn't have the ex-merger margins but adjusted for that the management has given it in the press release. So going forward, do you think this 14.3 percent margin could be sustainable?
A: Yes, it would be difficult for quarter-over-quarter (QoQ) performance but if you look at it on a sustainable basis given that volumes have bottomed out in the utility vehicle segment and their pickup segment is also doing pretty well. They are gaining market share.
Overall, volumes should stage a comeback in next couple of quarters and that will help in terms of operating leverage and maintaining this 14 percent kind of margin in operating level. So yes, incrementally, with now festive season also coming in and you will have better volumes, I think operating leverage will come at play and hence they will be able to sustain these margins.
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