Pricing pressures may have hurt M&M's Q4 show: LKP Securities

Mahindra & Mahindra's earnings for the March quarter — a standalone net profit of Rs 583.7 crore and a standalone total income of Rs 10,800 crore — were broadly in line with the Street’s expectations. Its margins, however, disappointed the Street.

Ashwin Patil of LKP Securities told CNBC-TV18 said that the company’s standalone EBIDTA margin of 9.7 percent was low and farm equipment segment’s EBIT margin at 12.9 percent isn’t what the Street had expected. He said that competitive and pricing pressures may have impacted margins.

He said that the brokerage would wait for the management’s statement to take a call on its rating on M&M stock.

A CNBC-TV18 poll had predicted standalone net profit of Rs 628 crore and standalone total income at Rs 9,950 crore. While M&M’s standalone EBIDTA was Rs 1,048 crore during the quarter, the poll had estimated it at Rs 1,145 crore.Below is the transcript of Ashwin Patil’s interview with Sonia Shenoy, Nigel D’souza and Surabhi Upadhyay on CNBC-TV18.Nigel: You had a look on those numbers on the topline? It appears a bit of a beat, but as Sonia was telling us, the margins has missed estimates as well. What are you making of these numbers?A: We were expecting revenues at about Rs 10,500 or something and it came at about Rs 10,800. So, it is a bit on the topline beat but if you look at the margins at 9.6 percent is really very low kind of margins and out of that also, the farm equipment segment has underperformed despite the volumes having grown not that badly in this quarter as well as the market share improvement we have seen. Maybe some competitive pressures or pricing pressures may have resulted in this kind of numbers. But if you go down to profit after tax (PAT), because of the operational underperformance, even the PAT has come below what we were expecting. So, not a really very good set of numbers from Mahindra and Mahindra this time.Sonia: What did you make of the tractor segment, the farm equipment segment margins? They have fallen to 12.9 percent versus 15.3 percent last quarter. Is this something that the analyst fraternity was factoring in or has this come as a shock?A: We were not expecting these kind of margins but we need to speak to the management and find out what exactly has gone into it and what has resulted into this kind of below expected kind of margins. So, right now, there may be some pricing pressures or maybe the product mix on the farm equipment side may have tilted towards low margin tractors which are used for small area farming, etc. So, we are not really very sure at this point in time what is exactly gone into it. But when we speak to the management today evening, we will be able to get a better picture on that.Surabhi: Any thoughts if the market will start going now by that expectation of better demand in the coming quarters, just because the monsoon expectations are pretty strong?A: The monsoon expectations are pretty strong, but unless and until it actually happens, it actually materialises, we are not going gung ho on this stock at this point in time. Also there is a lingering or lurking issue in the form of NGT which may actually, they may come a bit harsh on the auto numbers for the auto companies and Mahindra and Mahindra being one of the biggest player in the diesel segment will get hurt to the great extent. So, that is an overhand on the stock at this point in time. And unless and until the monsoon actually materialises to a great extent, we are having a neutral rating on the stock with a target close to what it is trading right now.Sonia: But do you see any kind of derating on the stock purely because the stock had recovered 22 percent from its 52-week lows only on the expectation that the tractor segment will improve. But, now forget improve, we are actually seeing tractor segment margins at over a seven quarter low. Do you think this would lead to some concern and maybe even derating or earnings downgrades on the stock?A: That is what I said, that when we speak to the management in the evening, then only we will be able to find out what has gone into it or whether there is something exceptional which we need to factor in and what exactly the margins will be after that. We are not sure at this point in time. So, if that is not the case, if it is purely operational thing, then maybe some sort of derating in the farm equipment business numbers is on the cards. So, that is one threat that we can see from this level.