M&M reports supply of cars struggling to keep pace with demand

Sometimes problems of plenty are good to have and sometimes they can get embarrassing. It is hard to say whether the current demand surge for the cars of Mahindra & Mahindra are positive or not. Demand is robust and that is a great development. However, if the company is not able to meet the demand adequately in the next few months, then buyers may gravitate towards cars that are available off the shelf. Too much waiting may look on paper and may also look good for numbers, but they can at times badly backfire.

Mahindra and Mahindra has recently said in a statement to the press that the demand for their cars were far outstripping production capacity. That is not hard to believe. In the last few days, there has been a surge in demand for the rough and sturdy cars made by M&M. There has been a virtual rush for its very popular sport-utility vehicles (SUV), which has helped to boost profit. While profits jumped in the June quarter, M&M also reported that sales of its passenger vehicles had soared to 149,803 units i.e. 74% growth on yoy basis.

That is not all. Compared to last year, its open bookings (i.e. bookings and payments received but cars not delivered) has grown by 273,000 vehicles. M&M has admitted that it has already kicked off a massive capacity expansion programmes but even they had not admitted such a huge surge in demand for its vehicles. Recently, there was the famous instance of Mahindra receiving over 100,000 orders within 30 minutes of opening bookings for its Scorpio-N SUV. Ironically, its annual capacity is just 6,000 units.

The bookings are worth sales of around Rs18,000 crore and that is likely to boost their sales over the next few quarters. But, they need to address this very sticky issue of being able to address this market with adequate supply. A lot of things have been working in favour of car companies like M&M. For instance, there has been a perceptible easing of the massive shortage in semiconductors that had hampered the industry over the last 2 years. Even M&M was hit hard by chip shortage and now the demand is testing them hard. 

M&M has diversified its supply of chip sourcing, including from Taiwan. However, that country is getting politically volatile and the constraints may still come back to haunt the company. Numbers have been fairly exciting for M&M, although the margins did narrow. For the June 2022 quarter, M&M reported net sales of Rs21,960 crore. However, a surge in input costs led to the operating margins of the company falling 200 bps to 11.9%. For now, the biggest concern for M&M would how to cater to this surge in demand for their cars.