M&M: Rising input, employee, finance costs may play spoilsport going ahead
Though impressive, this growth has, however, moderated especially when compared with the volume growth in tractor sales in FY11 over FY10.
By Bakul Chugan Tongia, ET Bureau | Updated:
Backed by a strong volume growth in passenger utility vehicles, four-wheel pick-ups and its popular sedan -- Verito, automobile maker Mahindra & Mahindra reported an impressive consolidated topline growth of 33% in FY12 compared to last year. Given its strong focus on rural markets, the company has also reportedly sold over 2.35 lakh tractors in FY12, registering a volume growth of about 10% over FY11.
Though impressive, this growth has, however, moderated especially when compared with the volume growth in tractor sales in FY11 over FY10. Volume growth has also moderated sharply in the three-wheeler segment where the company managed a sales growth of just about 9% against 40% which it clocked in FY11 over FY10.
High cost of financing could well have led to the moderation in this segment.
But given the government's emphasis on the farm sector and increased budgetary allocation for FY13, it is rather safe to assume that tractor sales will see an accelerated growth this fiscal, making M&M, a world leader in tractor sales, a clear beneficiary. Also, with interest rates expected to soften gradually, sales growth of three-wheelers and other commercial vehicles is also expected to improve in FY13.
Even as the company continues to enjoy extended comfort on the sales front, higher input costs have clearly hit its margins. According to a report by Muthoot Securities, prices of key raw materials such as steel, aluminum and rubber have risen annually at an average of 9%, 18% and 54%, respectively, from 2009 to 2011, which has not been reflected in the price increase of automobiles during this period.
For Mahindra &Mahindra, raw material cost as a percentage of sales has increased sharply from 68% to 71% in the past year. Its operating margins have resultantly dipped by over 200 basis points during this period. Other costs to have hit profitability include employee and finance costs. There has been a sharp increase of 95% in interest expense during the year.
Though impressive, this growth has, however, moderated especially when compared with the volume growth in tractor sales in FY11 over FY10. Volume growth has also moderated sharply in the three-wheeler segment where the company managed a sales growth of just about 9% against 40% which it clocked in FY11 over FY10.
High cost of financing could well have led to the moderation in this segment.
But given the government's emphasis on the farm sector and increased budgetary allocation for FY13, it is rather safe to assume that tractor sales will see an accelerated growth this fiscal, making M&M, a world leader in tractor sales, a clear beneficiary. Also, with interest rates expected to soften gradually, sales growth of three-wheelers and other commercial vehicles is also expected to improve in FY13.
Even as the company continues to enjoy extended comfort on the sales front, higher input costs have clearly hit its margins. According to a report by Muthoot Securities, prices of key raw materials such as steel, aluminum and rubber have risen annually at an average of 9%, 18% and 54%, respectively, from 2009 to 2011, which has not been reflected in the price increase of automobiles during this period.
For Mahindra &Mahindra, raw material cost as a percentage of sales has increased sharply from 68% to 71% in the past year. Its operating margins have resultantly dipped by over 200 basis points during this period. Other costs to have hit profitability include employee and finance costs. There has been a sharp increase of 95% in interest expense during the year.
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