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Will M&M trip where Tata slipped?

Shyam G. Menon

MUMBAI, Oct. 29

IT certainly isn't the sort of thing a market-savvy company like Mahindra & Mahindra Ltd would like to hear. But, following Wednesday's announcement of a 78 per cent slide in its second-quarter net profit, some auto industry analysts in the city's stock market are asking if M&M is showing signs of doing a Tata Engineering.

Last week, the Tata outfit returned a second-quarter loss of Rs 146.39 crore on net sales/income of Rs 1,900.58 crore. Its Rs 1,700-crore car project achieved cash break-even in the first half, but analysts who advocate spinning it off see the project as a drag on the company.

The Tatas have defended their investment. However, the company's scrip, declining under the combined burden of the car project and the downturn in commercial vehicle sales, closed at Rs 72.45 at the Bombay Stock Exchange on Friday.

Pricewise, the smaller M&M is better off at Rs 133.40. But its steep dip in second-quarter profit follows a 33.13 per cent fall in the first quarter to Rs 34.28 crore. This is a different note from a company, once with an iron grip on its main product li nes, besides riding the infotech wave courtesy its 57 per cent equity share in Mahindra British Telecom.

In the first quarter, M&M registered a 13 per cent decline in sales of utility vehicles (UVs), from 15,581 units to 13,624. By the end of the first half, sales of UVs dipped by 17.95 per cent, from 31,443 units to 25,797. This is against data showing ind ustry sales rising from 53,106 units to 57,529 in the same period.

This included a gain for Tata Engineering from 14,656 units to 15,235 and a 11,849 units-strong portfolio for new entrant, Toyota Kirloskar Motor.

What is worrying analysts is the pressure on M&M's margins. Tata Engineering's Spacio is hitting M&M's best margin UV, the Commander series, while Toyota Kirloskar has fetched good numbers at the market with its Qualis.

At a recent analysts' meet, M&M officials are said to have ascribed the lower margins mainly to high advertising and marketing costs and absorption of costs pertaining to meeting higher emission norms.

Analysts suspect that it may be just part of the whole picture -- which would be complete only when the 9.5 per cent growth in first-half tractor sales amid a 11 per cent sectoral decline is also factored in, begging the question: Did it have anything to do with UV losses?

An aggressive sales strategy is often accompanied by incentives. Further, as always after a numbers game, there is fear that first-half tractor sales of 40,150 vehicles could mean sluggishness till January-February 2001.

But that is not the end of the story. Analysts say that M&M's margins could be under pressure for some time. Why?

If the Tatas had Indica, M&M has Scorpio. However, though with a lower investment of Rs 600-700 crore, the new platform's arrival by mid-2001 has a catch. Should it make an aggressive foray into low-segment UVs, M&M may be required to promote a `strong v alue for money' marketing line for Scorpio, which usually means absorbing cost.

On the other hand, if the platform hits out at the top end, then M&M will incur high expenses on advertising and marketing to position the product in what is perceived as a rather unexplored market segment. Catch-22, to say the least.