Rural demand drives Mahindra’s Q2 profit up 27%

Buoyed by a bountiful monsoon this year and surging festive demand, Mahindra & Mahindra (M&M) has reported a 27% rise in its standalone net profit at Rs 1,163 crore for the second quarter ended September 2016.

The utility vehicle manufacturer had posted a net profit of Rs 915.38 crore in the same quarter of 2015-16. Meanwhile, the company’s standalone gross revenues amounted to Rs 11,363.63 crore, up 16% year on year (YoY)

For Q2 FY2017, the company sold 114,795 vehicles, a YoY growth of 11.6%. Utility vehicle sales totalled 52,287 units, up 15.6% over the same quarter last year. Meanwhile, the company also recorded its highest ever market share in the tractor segment at 42.5%. Tractor sales for the reported quarter amounted to 57,863 units, up 36.9% YoY.

Sales of less than 3.5-tonne LCVs are back on the growth path. After 10 successive months of de-growth, the company’s LCV sales are in positive territory since Q4FY2016.

M&M exported a total of 15,181 units in the quarter under review, which includes 11,385 vehicles and 3,796 tractors. This is 13.3% more than the same quarter last year.

Outlook

M&M says it has welcomed the recent demonetisation of Rs 500 and Rs 1,000 currency notes announced by prime minister Narendra Modi. The company says that although the move is likely see a short-term impact on the sales volume, it will not have any long-term implications. As most transactions in rural areas happen in cash, it will affect the sales for a month or two, without causing any long-term distress.

Meanwhile, there is discernible traction on reforms including GST which augurs well for India’s growth trajectory. With the GST Council likely to finalise a 4-tier tax structure of 5-28 percent, M&M foresees hardly any impact on the pricing of its sub-four-metre vehicles. Further, pricing of larger cars will see limited impact. The company believes there are signs of demand recovery manifesting through broader consumption pick-up in growth rates in automobile sales, air passenger traffic and retail loans.

“India’s macroeconomic story is slowly but surely taking shape although data on industrial production and slow trade growth continued to act as ceilings to its growth. The IMF avers that in the current – and projected – global scenario, India will continue to standout with the fastest growth rate. After two years of sub-par rainfall, this year's monsoon has been abundant and well spread which will help revive farm income and push up private consumption,” said Mahindra’s official statement.

The first advance estimates released by the agriculture ministry for kharif crops this year suggests a record output, higher by 9%. Higher soil moisture due to the good monsoon also augurs well for the rabi crop.

Higher crop output will help improve spends on agri-inputs and services. Moreover, prices of key agricultural inputs have stabilised which signal that farmer balance sheets are on the mend now and this will help revive the overall rural economy.

The Seventh Pay Commission and the OROP scheme award has put money in the pockets of government employees and pensioners which will further help demand. The lag effects of interest rate cuts by the Reserve Bank of India along with the increased transmission of lower interest rates will also be supportive of consumption. All of these bode well for broad-based consumption led growth in the coming quarters.

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