Mahindra Profit Misses Estimates as Raw Material Costs Climb

Mahindra & Mahindra Ltd. (MM), India’s largest maker of sport utility vehicles and tractors, reported profit that missed analyst estimates for a fourth straight quarter as rising raw material costs offset higher sales.

Net income, excluding subsidiaries, fell to 6.62 billion rupees ($134 million) in the three months ended Dec. 31 from 7.35 billion rupees a year earlier, the Mumbai-based company said yesterday. That compares with the 6.84 billion-rupee median of 32 analysts’ estimates compiled by Bloomberg. Sales climbed 37 percent to 83.3 billion rupees.

The maker of Xylo and Scorpio vehicles spent 45.8 billion rupees, or 21 percent more on raw materials in the quarter, according to the statement. Mahindra, which raised prices by as much as 3 percent last month, said yesterday it expects margins will continue to be under pressure.

“Higher costs of inputs like rubber and steel have dented profit margins,” said Umesh Karne, an analyst at Brics Securities Ltd. in Mumbai. “Margin pressure is likely to continue, especially because of high prices of steel.”

Mahindra fell 2.9 percent to 689.65 rupees at the close in Mumbai trading. The stock had the biggest percentage drop on the 10-company BSE India Auto Index. The benchmark BSE India Sensitive Index dropped 0.5 percent.

‘Material Costs’

Operating margin, which tracks the percentage of sales less operating costs, was 12.2 percent last quarter, Mahindra said.

“We have not been able to pass on the increase in raw materials costs to customers entirely,” Pawan Goenka, the president of Mahindra’s automotive business, said at a press conference in Mumbai. “The way material costs have moved has impacted our profitability.”

Steel prices increased by an average of 3.5 percent in the quarter ended Dec. 31, according to data from Steel Business Briefing.

The utility-vehicle maker, which introduced the XUV500 sport-utility vehicle last year to compete in the premium SUV market, said yesterday bookings for the model had exceeded 25,000. Priced between 1.1 million rupees and 1.36 million rupees, the XUV500 initially received 8,000 orders in 10 days.

Mahindra, which sold 51,702 passenger utility vehicles in the quarter, or a 23 percent jump from a year earlier, said sales of its tractors in India grew 12 percent to 62,342 units, compared with an industrywide increase of 12.7 percent.

‘Product Mix’

“The product mix is inherently not improving as the company sold fewer tractors which are higher margin products,” Mahantesh Sabarad, an analyst with Fortune Equity Brokers India Ltd. who has a “hold” rating on Mahindra, said. “Going forward, price increases will help improve margins.”

The Reserve Bank of India raised key interest rates 13 times since the start of 2010 to rein in inflation, driving down demand for vehicles in a country where about 80 percent of such purchases are funded by loans.

The Society of Indian Automobile Manufacturers last month cut its annual local passenger-car sales forecast, the third such reduction, projecting deliveries may not grow for the first time in nine years after higher borrowing costs damped demand.

To contact the reporter on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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