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M&M: Itís the extraordinary again! - Views on News from Equitymaster

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M&M: Itís the extraordinary again!
Jan 31, 2008

Performance summary
  • Led by 16% YoY growth in volumes (excluding Logan), standalone topline grows by 14% YoY during 3QFY08.
  • Jump in staff costs and other expenses leads to operating margin contraction of 70 basis points.

  • Bottomline grows by 68% YoY led by an extraordinary income. Excluding the same, bottomline shows a modest growth of 3% YoY.

  • 9mFY08 net profits show a marginal improvement of 6% on the back of a 14% jump in topline

(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 25,761 29,402 14.1% 73,028 83,553 14.4%
Expenditure 22,664 26,087 15.1% 63,534 73,614 15.9%
Operating profit (EBDITA) 3,096 3,315 7.1% 9,494 9,939 4.7%
EBDITA margin (%) 12.0% 11.3%   13.0% 11.9%  
Other income 412 401 -2.8% 1,596 1,409 -11.7%
Interest (net) (168) 72   (470) 104 -122.1%
Depreciation 522 590 13.1% 1,486 1,738 16.9%
Profit before tax 3,154 3,053 -3.2% 10,074 9,506 -5.6%
Extraordinary income/(expense) (6) 1,548   1,138 1,513  
Tax 731 550 -24.8% 2,889 2,197 -23.9%
Profit after tax/(loss) 2,417 4,052 67.6% 8,323 8,823 6.0%
Net profit margin (%) 9.4% 13.8%   11.4% 10.6%  
No. of shares (m) 237.1 239.1   237.1 239.1  
Diluted earnings per share (Rs)*         46.8  
Price to earnings ratio (x)*         14.9  
(* on trailing twelve months earnings)

What has driven performance in 3QFY08?
  • The automotive division has come to the rescue of the company once again during 3QFY08. Here, led by an 18% growth in UVs and 48% growth in exports, revenues have edged higher 19% YoY. However, cost pressures have reduced the growth at the PBIT level to 12% YoY.

  • The farm equipment segment on the other hand has continued to fare poorly as the segmental PBIT has come off by 3% YoY despite a 5% increase in revenues.

    Segmental break upÖ
    Segment 3QFY07 3QFY08 % change 9mFY07 9mFY08 % change
    Automotive            
    Units sold 45,840 53,302 16.3% 123,984 146,902 18.5%
    Revenues 15,103 17,949 18.8% 43,106 51,014 18.3%
    PBIT 1,506 1,687 12.0% 5,054 5,558 10.0%
    PBIT margin 10.0% 9.4%   11.7% 10.9%  
    Farm Equipment Segment            
    Units sold 28,130 26,218 -6.8% 79,053 75,736 -4.2%
    Revenues 10,145 10,616 4.6% 28,441 30,165 6.1%
    PBIT 1,513 1,465 -3.2% 4,042 4,002 -1.0%
    PBIT margin 14.9% 13.8%   14.2% 13.3%  
    Other segments            
    Revenues 1,215 1,628 34.0% 3,292 4,579 39.1%
    PBIT 68 23 -66.1% 142 83 -41.4%
    PBIT margin 5.6% 1.4%   4.3% 1.8%  

  • Thus, factors like deceleration in tractor demand, adverse impact of rupee appreciation on export profitability, increase in finance costs and additional personnel to meet the future growth plans of the company have resulted into a sluggish profit growth for the company during the quarter if one exclude the extraordinary item.

    cost break up
    (Rs m) 3QFY07 3QFY08 Change
    Raw materials 16,915 18,912 11.8%
    % sales 65.7% 64.3%  
    Staff cost 1,778 2,161 21.6%
    % sales 6.9% 7.3%  
    Other expenditure 3,972 5,015 26.3%
    % sales 15.4% 17.1%  

  • On the extraordinary item, the company has recorded a gain of Rs 1.6 bn arising out of a stake sale in the forging entities in UK and Germany to the group company Mahindra Forgings Limited.

  • As far as the consolidated performance is concerned, while the combined turnover has increased by 42% YoY during the quarter, net profit before exceptional but after minority interest has witnessed a growth of 24% YoY. The growth in profits of group companies like Tech Mahindra, Mahindra Finance and Mahindra Holidays has contributed to this performance.

What to expect?
At the current price of Rs 698, the stock is trading at a 20% discount to our sum of the parts valuation of Rs 877 per share. While the recent developments like the stake sale in Mahindra Holidays and scheme of arrangement of overseas forgings subsidiaries are indeed positive, their impact on the overall valuation of the company is not likely to be much. As such, we continue to stick with our target price from a FY10 perspective.

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