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M&M: A very close shave - Views on News from Equitymaster
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M&M: A very close shave
Feb 2, 2009

Performance summary
  • Standalone topline declines by 15% YoY during the quarter, led by 25% decline in overall volumes.
  • Operating margins fall by 2.2% on the back of higher raw material costs as well as wages.
  • Bottomline is barely a whisker away from slipping into the red as higher interest expenses and forex losses further hurt profitability. PBT, which excludes the impact of forex losses, registers a decline of 36% YoY during the quarter.
  • Bottomline for the nine month period falls 56% YoY on the back of 6% growth in topline. PBT, which excludes forex impact, falls 11% YoY for the period.
  • Consolidated bottomline registers a fall of 93% YoY on the back of a 6% decline in topline.


Standalone financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 29,501 25,193 -14.6% 83,817 88,676 5.8%
Expenditure 26,249 22,987 -12.4% 73,858 80,240 8.6%
Operating profit (EBDITA) 3,252 2,206 -32.2% 9,959 8,436 -15.3%
EBDITA margin (%) 11.0% 8.8%   11.9% 9.5%  
Other income 301 436 44.9% 1,145 2,026 77.0%
Interest (net) 72 141 95.1% 104 374 261.2%
Depreciation 590 653 10.5% 1,738 1,908 9.8%
Profit before tax 2,891 1,849 -36.1% 9,262 8,180 -11.7%
Extraordinary income/(expense) 1,711 (1,819)   1,758 (3,366)  
Tax 550 17 -96.9% 2,197 941 -57.2%
Profit after tax/(loss) 4,052 12 -99.7% 8,823 3,873 -56.1%
Net profit margin (%) 13.7% 0.0%   10.5% 4.4%  
No. of shares (m) 239.1 252.4   239.1 252.4  
Diluted earnings per share (Rs)*         24.1  
Price to earnings ratio (x)*         12.3  
(* on trailing twelve months earnings)

What has driven performance in 3QFY09?
    As per the company’s press release, the current quarter was extremely challenging for both auto and tractor industries. The after effects of runaway inflation of earlier months, paucity of retail finance, its high cost and lukewarm consumer sentiment in the wake of the global financial turbulence saw volumes decline in both the industries. The company sales of UVs, as compared to an industry decline of 35.5%, declined by 25.7%. The company’s tractor sales, in line with that of the industry, declined by 14.7%. The lower sales led to a 15% drop in topline during the quarter

    Despite the extremely challenging economic environment and drop in volumes, the company’s farm equipment sector improved its PBIT before charge of exchange losses. After the charge for exchange losses, its PBIT for the quarter is 17% lower than the previous quarter.

    Segmental break up…
    Segment 3QFY08 3QFY09 % change
    Automotive      
    Units sold* 58,555 41,902 -28.4%
    Revenues 18,004 13,702 -23.9%
    PBIT 1,687 (104)  
    PBIT margin 9.4% -0.8%  
    Farm Equipment Segment      
    Units sold 26,210 22,105 -15.7%
    Revenues 10,660 11,785 10.6%
    PBIT 1,465 1,214 -17.1%
    PBIT margin 13.7% 10.3%  
    Other segments      
    Revenues 1,630 169 -89.6%
    PBIT 23 25 6.9%
    PBIT margin 1.4% 14.5%  
    *Includes LCV sales of Mahindra Navistar & Logan

  • M&M’s operating margins came in lower by 2.2% during the quarter. This was led by less than proportionate fall in raw material costs as well as 3% increase in staff costs. A significant decline of 37% in other expenses helped stem any further fall in margins during the quarter.

  • The bottomline of M&M suffered a fall of 99.7% YoY during the quarter. While lower operating margins hurt the performance, profits were also lower on account of interest expenses and exceptional items. If one were to exclude the impact of the same, which is reflected in the PBT, then profits have fallen by 36% YoY. Exceptional losses during the quarter relate to forex losses. This loss is mainly on account of cancellation of forward covers entered into by the company to hedge certain anticipated exports. The exchange loss also includes a notional loss on account of revaluation of the company’s net foreign currency borrowings, which will reverse should the rupee appreciate before the borrowings become due for repayment.

  • As far as the consolidated performance is considered, major group companies like Punjab Tractors and Tech Mahindra have improved performance over the previous year. The performance of Punjab Tractors with a 38% growth in profits and of Tech Mahindra with a 12% profit growth, deserve special mention.

What to expect?
At the current price of Rs 290, the stock is trading at a nearly 59% discount to our sum of the parts valuation of Rs 730 per share. Although the company has lined up huge capex plans, leadership position in its key segments of UVs and tractors and investments in fast growing sectors through its subsidiaries make the company a good long-term bet at current valuations. However, we are concerned with the growing number of acquisitions that the company is making and this could prove to be a drag on its balance sheet in the near term.

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