Despite facing sharp inflation in key raw materials such as steel, aluminium, copper and rubber, Mahindra & Mahindra has retained its growth outlook for FY27, betting that strong demand across its SUV, tractor and light commercial vehicle businesses will continue to offset cost pressures.
"There are positives and negatives. Commodity is one dis-enabler, we've taken prices increases, but there are other enablers which are driving demand. Keeping all of that in mind, we believe that at this point of time, the outlook that we had put out two and a half months back is what we've stayed with," Rajesh Jejurikar, Executive Director & CEO, Auto and Farm Sectors, said during the company's earnings press conference.
The company continues to expect SUV volumes to grow in the high teens, light commercial vehicles (LCVs) in the high single digits (around 8-10%), and tractors in the mid-single digits (around 5%) this fiscal.
Group CFO Amarjyoti Barua said commodity costs have surged across almost every major input used by the company. "Aluminium was up 22% during the calendar year before correcting sharply. Copper rose around 10%, while steel increased nearly 24% on a calendar-year basis. Rubber has been the steepest, rising 53%," he said. On a fiscal-year basis, steel prices are still up around 10% and rubber around 30%.
While Mahindra hedges commodities such as aluminium and copper, steel and rubber remain largely unhedged, leaving the company exposed to price volatility.
According to Barua, if Mahindra had taken no corrective measures, raw material inflation alone would have reduced margins in the auto business by 400-450 basis points.
Instead, the automaker moved early with price hikes and aggressive cost controls. "The businesses were the first to take price increases anticipating what we are seeing and have taken operating actions which allowed them to deliver the margins that they did," Barua adds.
Mahindra has implemented cumulative price increases of roughly 4.2% in its automotive business, while simultaneously reducing operating expenses and undertaking multiple cost optimisation initiatives.
Even so, management acknowledged that inflation has not completely eased.
"As I explained the math, we experienced around 450 basis points of inflation in auto. We've taken price hikes of around 4.2%. That doesn't, however, take into account some of the inflation we have continued to see in steel and rubber. There has also been an uptick in aluminium again," Barua said.
As a result, the company expects some of the cost pressure seen in the June quarter to spill over into the coming quarters.
"Some spillover is likely into Q2 because of that, and possibly into Q3," Barua said, adding that commodity markets have become extremely volatile. "In June, it was going only one direction. In the second half of June, everything crashed, and again it's picking up. So it's very difficult in this environment to predict where it's going."
Despite the near-term uncertainty, Mahindra does not expect inflation to remain elevated indefinitely.
"This is an extraordinary environment. It's not likely to sustain because somewhere demand will come down and when that does, prices will also correct. We also can't take pricing decisions that kill demand in the future. That's the balance the team has to maintain," Barua adds.
Jejurikar said future price hikes would be calibrated to commodity movements while protecting consumer demand.
"We just took one 8-10 days back, so we wouldn't do something immediately in the next month or two. The rest will depend on how commodities move and also on making sure we don't burden customers with more than we need to," he said.
Apart from commodity inflation, Mahindra also faced production disruptions during the quarter due to labour shortages at suppliers.
"We were impacted. At least three or four of our suppliers were impacted pretty badly by labour shortages, first because of the gas shortage issue, then elections, and then migration of labour to the north where wage rates had gone up. So yes, we would have produced more, and we had significant shortages in three or four cases," Jejurikar said.
Despite these headwinds, Mahindra delivered robust profitability. The auto business reported a 21% increase in profit, while the farm business recorded 15% profit growth, supported by higher volumes that helped offset the impact of margin pressure. While commodity inflation is expected to weigh on margins in the near term, strong demand, disciplined pricing and continued cost optimisation will allow the company to stay on course with its growth targets for the year, Barua said.