Mahindra & Mahindra (M&M) and Mahindra Vehicle Manufacturers (MVML) reported Q2 FY2020 revenue of Rs 10,935 crore, down by 15 percent YoY, while the profit after tax slumped 24 percent at Rs 1,355 crore compared to the same period last year.
The company says the Indian auto industry, in particular, is undergoing a challenging period with all industry segments declining for two consecutive quarters for the first time in the last 15 years. In the second quarter of FY2020, M&M sold 110,824 PVs, down 21 percent and 68,359 tractors, down six percent YoY. For the first half of FY2020, M&M and MVML reported revenue of Rs 23,741 crore, down nine percent, the profit after tax came at Rs 3,615 crore a growth of 19 percent.
The company says the Indian economy continues to cope with suppressed consumer sentiment and a continuing liquidity crunch which coupled with the high consumer finance rates due to non-transmission of repo rate reduction is impacting demand. The auto industry excluding two wheelers, fell 26.6 percent on the back of a 28.7 percent reduction in PV segment and 56.4 percent reduction in the M&HCV segment. The domestic tractor industry also witnessed a fall of 9.8 percent.
Mahindra says despite such a challenging environment leading to a volume drop in both its segments, it's strong emphasis on cost management, ensured that the EBITDA drop was in-line with the revenue decline. The company also successfully increased its market share in tractors as well as passenger vehicles. This has enabled it to achieve its highest operating margin in the last four quarters. The OEM says Q3 FY2020 has started on a positive note with good deliveries (retails) both in the automotive as well as tractor segments.
Global slowdown and economic revival
Mahindra says the IMF (International Monetary Fund) has cut its projections for 2019 global growth, yet again, to 3 percent - the weakest since 2009, although a recovery is expected in 2020. On the domestic front, GDP growth slowed further to 5 percent in Q1 FY2020 and high frequency indicators suggest demand conditions continue to remain weak in Q2. The RBI (Reserve Bank of India) too pared down its growth projections to 6.1% from 6.9% earlier.
On the other hand, the monsoons caught up in the latter part of the season and all-India cumulative rainfall surpassed the LPA by 10 percent, but the distribution was uneven with floods in several states. Production of major kharif crops declined by 0.8% as per the First Advanced Estimates. Abundant rainfall in August and September has led to improved soil moisture conditions in most parts of the country and reservoir levels are higher than the 10-year average. In addition, the timely announcement of MSP for Rabi crops is likely to support sowing. All of these bode well for the Rabi crop.
The OEM says the government has also announced several sector specific measures over the last two months to support economic activity. Importantly, it slashed corporate tax rates as promised. The RBI has cut rates by a cumulative 135 bps in 2019 and has guided that it would continue with an accommodative stance ’as long as it is necessary’ to revive growth. Furthermore, the government spending has also gathered steam. The company added that sector-specific measures, a pick-up in fiscal spending and the lagged effect of interest rate cuts should help support revive consumption demand and growth going forward. However, any sharp pruning of government expenditure to meet fiscal targets at the fag-end of the year or a sharp deterioration in the global environment remain the big risk factors.