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M&M: High input costs mar profits
Feb 8, 2012

M&M announced the third quarter results of financial year 2011-2012 (3QFY12). The company has reported a growth of 37% in sales while net profits fell by 10% YoY on a standalone basis. Here is our analysis of the results.

Performance summary
  • Standalone revenues rise by 37% YoY during 3QFY12 led by growth in both the segments - automotive and farm equipment.
  • Operating profits grow at a lower rate of 11% YoY as operating margins contract by 2.9% YoY to 12.2%. Margin contraction is on account of higher raw material costs (as a percentage of sales).
  • Led by the slower growth in operating profits and higher depreciation charges, net profits fall by 10% YoY.


Standalone financial performance
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Sales 61,211 83,868 37.0% 167,156 224,810 34.5%
Expenditure 51,973 73,660 41.7% 141,212 196,888 39.4%
Operating profit (EBDITA) 9,238 10,208 10.5% 25,943 27,922 7.6%
Operating profit margin (%) 15.1% 12.2%   15.5% 12.4%  
Other income 419 408 -2.6% 2,621 2,972 13.4%
Depreciation 1,022 1,408 37.8% 2,968 3,764 26.8%
Interest (27) 68   (345) 97  
Profit before tax 8,662 9,141 5.5% 25,941 27,033 4.2%
Exceptional items 1,175 -   1,175 -  
Tax 2,490 2,519 1.2% 6,560 6,989 6.5%
Profit after tax/(loss) 7,347 6,622 -9.9% 20,556 20,044 -2.5%
Net profit margin (%) 12.0% 7.9%   12.3% 8.9%  
No. of shares (m)       587.1 588.4  
Diluted earnings per share (Rs)*         44.4  
P/E ratio (x)*         15.5  
(*On a trailing 12-month basis; adjusted for extraordinary items)

What has driven performance in 3QFY12?
  • Mahindra and Mahindra (M&M) reported an impressive standalone revenue growth of 37% YoY during the quarter. Both the company segments - automotive and farm equipment reported strong growth during 3QFY12. Sales of the company's 'automotive' division grew by 47% YoY during the quarter, and the company managed to retain its leadership in the UV segment with a market share of 57.8%. Other product segments such as the LCV (> 2T and 3.5T) did well to record an impressive growth of 35% YoY. The company also saw a strong rise in exports during the quarter. M&M exported 7,587 vehicles (as against 5,020 vehicles in the corresponding quarter last year) to regions such as SAARC, South Africa & South America, amongst others.

    Growing revenues by 23% YoY, M&M's 'farm equipment' contributed to about 39% of the company's topline during the quarter. Within this, domestic tractor volumes grew by about 12% YoY in line with the industry growth rate of 13% YoY. The company's market share in this segment stood at 42.9%. Revenues from the engine business grew by 14% YoY during the quarter.

    Segmental break-up...
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Automotive revenues 34,716 51,164 47.4% 96,753 134,920 39.4%
    PBIT 4,266 4,179 -2.0% 12,986 12,799 -1.4%
    PBIT margin (%) 12.3% 8.2%   13.4% 9.5%  
    Farm Equipment revenues 26,383 32,513 23.2% 69,971 89,387 27.7%
    PBIT 4,872 5,084 4.4% 12,327 13,983 13.4%
    PBIT margin (%) 18.5% 15.6%   17.6% 15.6%  
    Others 210 249 18.6% 695 700 0.7%
    Total revenues 61,308 83,925 36.9% 167,419 225,007 34.4%
    *Excluding intersegment revenues

  • Like its peers in the auto industry, M&M faced pressure at the operating level as its margins contracted by 2.9% YoY to 12.2% during 3QFY12. The main culprit was raw material costs as they increased by 5% YoY and stood at 74.3% of sales. Any further decline in operating margins was, however, arrested as the company was able to keep its employee costs and other expenditure under control.

    Cost break up
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    Raw material 42,358 62,354 -32.1% 114,757 164,104 -30.1%
    % of net sales 69.2% 74.3%   68.7% 73.0%  
    Employee cost 3,475 4,497 29.4% 10,195 12,832 -20.6%
    % of net sales 5.7% 5.4%   6.1% 5.7%  
    Other expenses 6,140 6,809 10.9% 16,261 19,952 -18.5%
    % of net sales 10.0% 8.1%   9.7% 8.9%  
    Total 51,973 73,660   141,212 196,888  

  • Led by the subdued performance at the operating level and higher depreciation charges, the company's net profits fell by 10% YoY. However, it must be noted that the company received extraordinary income to the tune of Rs 1.2 bn in 3QFY11. Thus excluding this, growth in net profits stood at 7% YoY as against an 11% YoY growth in operating profits.

What to expect?
At the current price of Rs 686, the stock is trading at a multiple of 15.5 times its trailing 12-month standalone earnings. Going forward commodity prices will continue to play a key role in determining profitability for both the industries - auto and farm equipment. Rising interest rates could also act as a dampener on demand especially in the tractor industry although growth has been decent so far. Having said that, M&M intends to keep up its pace of new launches both in the automotive and farm equipment sector as well as managing capacities. Overall, we maintain our positive view on the stock from a long term perspective.

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