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M&M: The exceptional blow!

Jan 31, 2007

Performance Summary
M&M, India’s largest manufacturer of tractors and UVs, announced its 3QFY07 and 9mFY07 results today. The topline growth for the quarter has been robust at 17% YoY but it has experienced pressure at the operating level. Further, while the bottomline performance also looks subdued, if one were to just consider the operational performance (excluding exceptional items) then the bottomline growth stands at a far more respectable 35% YoY, helped in no small measure by a jump in interest income and a benign depreciation charge. Performance for the nine-month period however has been made better by exceptional items as the growth in bottomline, which currently stands at 55% YoY, reduces to 36% YoY, once the effect of exceptional items is removed. Performance at the operating level has however been admirable, as margins have expanded by 130 basis points over 9mFY06.

Standalone snapshot
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Units sold 62,845 73,913 17.6% 169,054 203,035 20.1%
Net sales 22,072 25,761 16.7% 59,338 73,028 23.1%
Expenditure 19,231 22,664 17.9% 52,387 63,534 21.3%
Operating profit (EBDITA) 2,841 3,096 9.0% 6,952 9,494 36.6%
EBDITA margin (%) 12.9% 12.0%   11.7% 13.0%  
Other income 403 412 2.4% 901 1,596 77.2%
Interest (net) (21) (168) 694.8% (123) (470) 281.2%
Depreciation 558 522 -6.5% 1,491 1,486 -0.3%
Profit before tax 2,706 3,154 16.5% 6,485 10,074 55.3%
Extraordinary income/(expense) 469 (6)   439 1,138  
Tax 841 731 -13.1% 1,565 2,889 84.6%
Profit after tax/(loss) 2,335 2,417 3.5% 5,359 8,323 55.3%
Net profit margin (%) 10.6% 9.4%   9.0% 11.4%  
No. of shares (m) 232.9 237.1   232.9 237.1  
Diluted earnings per share (Rs)* 39.4 40.8   30.1 46.8  
Price to earnings ratio (x)**         18.5  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Mahindra & Mahindra (M&M) is engaged in the manufacture of utility vehicles (UV), tractors, light commercial vehicles (LCV) and three-wheelers. The automotive division, comprising UV, LCV and three-wheelers, contributed to 61% of FY06 volumes sales. The farm equipment division accounted for 33% while exports accounted for the rest (29% market share in tractors in FY06). Through investment in its subsidiaries, the company has interest in other sectors like software, auto ancillaries, hospitality, real estate and financial services as well. In FY06, M&M had a 51% market share in the MUV segment.

What has driven performance in 2QFY07?
Its Farm equipment again: Just like the previous two quarters, it was the farm equipment division again that shouldered the maximum burden of driving the company’s profits. The company sold 18% more tractors than it managed during 3QFY06, while the revenues from the segment where up 27% YoY, indicating higher blended realisations. Exports however remained subdued as they managed grew by just 2% over corresponding previous quarter. This is the third successive year of expansion in the tractor industry but henceforth, we might witness some slowdown in growth or the growth may even turn negative as given the current credit squeeze, few institutions have begun to exercise caution over their lending to farmers.

As far as the performance of the automotive division is concerned, volumes have improved by 17% YoY during the quarter, with LCVs showing the biggest jump in sales with a growth rate of 41%. The company’s three wheelers sales, driven by some new launches in the past few quarters, continued their revival by logging in a 34% YoY growth in volumes. UV sales, biggest contributor to automotive division volumes, grew by 12% YoY. Scorpio however, grew at a slower rate of 9%. As far as market share is concerned, the company improved its market share both in large 3 wheeler segment and the 4MT LCV segment as the same stood at 21% and 45% respectively during 3QFY07 as compared to 15% and 43% respectively in the corresponding previous quarter.

As far as other segments are concerned, revenue grew by a strong 52% YoY during the quarter.

Sales break-up (3QFY07)
Domestic 3QFY06 3QFY07 % change 9mFY06 9mFY07 % change
Automotive Divn
Total UVs 29,594 33,254 12.4% 81,040 87,975 8.6%
Scorpio 7,955 8,666 8.9% 23,109 26,664 15.4%
LCVs 1,541 2,166 40.6% 5,232 6,086 16.3%
Three wheelers 6,260 8,408 34.3% 15,283 23,877 56.2%
Total (automotive) 37,395 43,828 17.2% 101,555 117,938 16.1%
Farm Equipment Divn
Tractors 22,565 26,645 18.1% 58,674 73,487 25.2%
Automotive Divn 1,432 1,954 36.5% 4,110 6,044 47.1%
Farm Equipment Divn 1,453 1,486 2.3% 4,715 5,566 18.0%
Source: Company

Input costs pressure: Although the operating margins have declined by a small 90 basis points during the quarter, in a low margin business like auto, it is enough to pull the profits down a few notches and M&M has been no different. The consequent impact has been a modest operating profit growth of just 9%. Raw material costs have been the wreckers in chief with wage cost inflation also impacting margins a bit. While the company did manage to bring about some savings on the other expenses front, it was not enough to arrest the fall in overall margins.

Cost break-up…
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Raw materials 14,916 17,583 17.9% 40,765 49,237 20.8%
% sales 67.6% 68.3%   68.7% 67.4%  
Staff cost 1,413 1,778 25.8% 4,115 5,049 22.7%
% sales 6.4% 6.9%   6.9% 6.9%  
Other expenditure 2,902 3,304 13.8% 7,507 9,248 23.2%
% sales 13.1% 12.8%   12.7% 12.7%  

With some assets having undergone full depreciation, the charges on account of the same have come down by 7% YoY during the quarter. Interest income has also jumped more than eight fold over corresponding previous three month period. While these factors have helped shore up performance, it is the exceptional item to the tune of Rs 469 m that had accrued to the company during 3QFY06 that has put a hole in the company’s overall performance. As mentioned earlier, excluding the same, growth in PAT during the quarter has been a more respectable 35% YoY.

What to expect?
At the current price of Rs 900, the stock is trading at a price to earnings multiple of 19 times its trailing twelve month earnings. Over the years, the company has done well to de-risk its business model and while it may be still early to comment, given the balance sheet strength and track record of successfully managing other businesses, we remain positive on the stock from a long-term perspective.

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