According to a release issued here on Friday, the net profit for the second quarter at Rs 47.83 crore was higher than the first half, which was Rs 35.02 crore. Sales of vehicles and tractors during the second quarter were 17,756 units and 15,228 units respectively, against 15,784 units and 17,138 units respectively in the first quarter.

The main reason for the profit decline seems to be the higher interest cost of Rs 73.5 crore incurred in the first half of the current year, against Rs 59.28 crore spent in the same period last year. The provision for depreciation has increasedfrom Rs 43.57 crore to Rs 55.78 crore. According to the release, the higher charge was "largely due to the capital expenditure being incurred to position the company to further enhance its competitiveness in the years to come."

Other income has marginally dropped from Rs 56.99 crore to Rs 54.70 crore in the current half. Total expenditure has increased from Rs 1,394.19 crore to Rs 1,434.80 crore in first half of the current fiscal.

Although the first half has seen a decline in profits, the company fared better in the second quarter--the profit was Rs 47.83 crore, against Rs 35.02 crore in the first quarter. M&M's market share in utility vehicles also rose from 48 per cent last year to about 55 per cent in the current year. After a settlement with the union, production levels at the tractor plant have gone up by 43 per cent, as compared with the first quarter.

INSIGHT:

Recession takes its toll

Recession seems to have finally caught up with M&M, a fact reflected in the 4.4 per cent dropin unit-tractor sales to 32,366 for the first half ended September 1998. The automotive major had chugged its way through 1997-98, riding piggyback on its tractor sales, which improved 18.12 per cent for the 12 months ended March 1998.

M&M has posted a 6.82 per cent drop in unit sales of multi-utility vehicles, in contrast with the 2 per cent growth achieved last year. Thus, turnover for the six-month period has increased a mere 1.52 per cent.

Increasing input costs have negated efforts of the massive cost-cutting exercise attempted, reflected in the erosion of operating margins from 12.29 per cent to 11.09 per cent. Increased borrowings and ad-spend for the seven new vehicles and capex have further drained earnings.

For the future, with a revival in the automotive segment highly unlikely, M&M's fortunes would remain subdued. But things could get worse if offtakes dwindle in the tractor segment with Punjab Tractors stealing the cake (the company's sales increased 18.9 per cent in the first half). Allthis could lead to the M&M stock underperforming.