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    M&M Q1 results: Operating loss of the automotive division dented profits

    Synopsis

    The sharp drop in the automotive volume has ensued the operating loss for the automotive division due to negative operating leverage and cash burn during the lockdown period.

    On a standalone basis, the revenue of the automotive segment dropped 74.6% YoY to Rs 2051 crore.

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    ET Intelligence Group: The pressure on the earnings from the automotive division, coupled with lower income and higher interest expenses has compressed profits of the Mahindra & Mahindra, India’s largest tractor maker, for the June quarter. The adjusted profit after tax in the June quarter stood at Rs 39 crore compared with Bloomberg consensus estimate of Rs 180 crore.

    The volume of the automotive business dropped 78% to 27,565 units in the first quarter of the current fiscal, while the tractor’s volume which has seen the sharpest recovery across all vehicle segments dropped 22% to 64,120 units in the same period.

    The sharp drop in the automotive volume has ensued the operating loss for the automotive division due to negative operating leverage and cash burn during the lockdown period. On a standalone basis, the revenue of the automotive segment dropped 74.6% YoY to Rs 2051 crore. The segment's operating loss stood at Rs 576 crore for the June quarter.

    The operating level margin of the automotive segment slipped to negative 28% in the June quarter compared with 4.74% in the same quarter of the last fiscal year. The operating losses increased in Auto subsidiaries mainly from the South Korean car maker Ssangyong rose to Rs 890 crore in June quarter compared with Rs 410 crore in the same quarter last fiscal.

    Tractor business division which accounts for one-third of the revenue and two-third of profitability historically, has been able to minimize the pressure on earnings thanks to better profitability on the low volume. The operating profit margins of the tractor segment expanded by 116 basis points YoY to 20.42% in the June quarter, an indication of the company’s lean cost structure of its farm division.

    The stock of the M&M re-rated in the last three months thanks to new capital allocation policy and strong recovery in the tractor segment after the lockdown ended. The stock gained 50% in the previous three months. Under the new capital allocation policy, the company has mandated that every investment the company makes needs to clear a hurdle rate of 18% return on equity or it needs to have quantifiable strategic impact. M&M stated to exit or shut all its investments which are having unclear paths of profitability.

    The impact of new capital allocation policy has started to reflect in the March 2020 quarter. The company has exited its US based electric bike and scooter business Genze and decided to not invest further in the South Korean subsidiary SsangYong. The losses from international subsidiaries have been mounting in the last few years, which resulted in the company to act on to contain slippage further.

    The losses of international subsidiaries were 12-107% of the profit after tax of the company between FY18 and FY20, according to the company’s presentation. The write-off investment worth Rs 3580 crore largely related to its international investment has been the prime reason for the company to post a loss of Rs 3,255 crore in the March 2020 quarter.



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