Stock Review: Mahindra & Mahindra

Mahindra & Mahindra grappled with higher operational costs (on astandalone basis) in the June '11 quarter. As a result, the company's operating profit margin weakened by 170 basis points YoY to 13.3% in the first quarter of FY12, despite its strong showing in net sales which improved 30.5% in the quarter under review.

This pressure on its margins was due to a jump in the company's purchase of traded goods in the June quarter. Analysts highlight that this cost rose due to increased purchase of models like Maxximo and Gio in the four wheeler small cargo segment by M&M from its subsidiary, Mahindra Vehicle Manufacturing. This rise in costs offset the near 6.3% y-o-y improvement in the company's average realisation per vehicle in the quarter under review.

During the quarter under review, M&M's vehicle sales under the 4-wheeler small cargo segment grew nearly 35%YoY, and it helped the company's total vehicle sales to improve by 22.6% YoY in the June quarter. To the company's credit, it has only seen a slight moderation in vehicle sales growth in the June quarter vis-àvis the growth reported during FY 11, when it was helped by its focus on rural markets through tractor portfolio and product launches in different auto segments.

Higher costs, however, resulted in its net profit increasing just 7.6% YoY in the first quarter of FY12. Nevertheless, the results for the June quarter were broadly higher than analysts' estimates. The stock gained 2.1% to . 669 on Monday, in broad contrast to the sell-off witnessed in the broader market. In the March '11 quarter too, M&M's operating profit margin fell on a YoY basis due to higher purchase of traded goods.

Going forward, despite a rather difficult operating environment, due to rising auto finance rates and commodity input prices still at elevated levels, analysts are still optimistic that M&M would maintain its vehicle growth momentum.

And, that's largely due to its strong presence in rural markets, coupled with several launches planned across different segments. However, its operating margins are expected to remain under pressure, in the short-term.

M&M trades at a standalone P/E of nearly 14.5 times on a trailing four-quarter basis. The company also has an array of investments in different sectors and analysts say the valuation of the stock factors in this aspect suitably.