Mahindra & Mahindra -- On a crowded highway

Raghuvir Srinivasan

MAHINDRA & Mahindra's (M&M) performance in the second quarter (July-September 2001) of this fiscal may show signs of improvement in its fundamentals, but the company is certainly not out of the woods, yet.

M&M has managed to control its losses in the second quarter of this fiscal compared to the first, but its performance is still below par compared to the second quarter of last fiscal. Against a profit of Rs 10.17 crore in the July-September period of last year, M&M returned a loss of Rs 4.17 crore in the same period this year.

It is significant that the loss has happened despite the cost-control measures adopted by the company and the higher utility vehicle sales registered by it in July and September 2001.

The answer to M&M's troubles lies in the depression in the tractor industry, which is the company's prime business. The offtake of tractors industry-wise fell 28.90 per cent in the April-September period but M&M has seen a steeper fall of 34.79 per cent -- a sign that M&M's troubles are as much its own making as an imposition of industry-related factors. When a company sees a volume dip as large as that in its main business, there is little chance of its making it up in other segments and businesses. And, especially, when it is facing a tough market challenge in its other significant business of utility vehicles.

M&M is today fighting a tough battle in all its three businesses -- tractors, utility vehicles and commercial vehicles. It is the leader, by far, in the first two businesses but the leadership position is fast coming under threat from competitors, especially in utility vehicles. Its last offering, the Bolero, promised to hoist M&M to an unassailable position in the market, but it failed badly in that attempt. Bolero's sales are anything but buoyant as reflected in the company's free Tanishq gold coin schemes.

The tractors business seems to be stuck in a deep chasm and it appears unlikely that things will turn around in the next six months.

The President and Executive Director of the Farm Equipment Sector of M&M, Mr K. J. Davasia, is on record that the current year could see an overall dip of about 15 per cent in tractor sales. What he has left unsaid is that M&M is likely to take the brunt of this dip. The company's strategy in stuffing the pipeline with inventory has come unstuck; if anything, it has only lead to a squeeze on funds locked up in inventory.

It is in this backdrop that one has to view M&M's performance in the second quarter. The pressure on its working capital is evident from the sharp rise in interest costs, which went up 37 per cent to Rs 22.14 crore in the second quarter compared to the corresponding previous period.

The only comforting factor is M&M's success in clamping down on costs across-the-board, notably staff expenses. The company has significantly managed to rein in wages, which fell 13 per cent in the second quarter.

It is unlikely that M&M will be able to wipe off the red ink on its balance-sheet this fiscal. There are no firm positive trends in any of its three business segments.

The good monsoon this year augurs well for the tractors business, but even assuming that sales pick up, they may not be adequate to cover up for the dip in the first half of this year.

Competition in the utility vehicles business is getting stiffer; succour may come only if the Scorpio is launched in the next few months.

The M&M stock has risen sharply from its low of Rs 52 in September to Rs 95 now. Shareholders can hold on while fresh investment can be contemplated once the positive trends firm up.