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M&M: An impressive performance - Views on News from Equitymaster

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M&M: An impressive performance
Feb 10, 2011

M&M announced its 3QFY11 results. The company has reported a growth of 36% and 78% in sales and net profits respectively on a standalone basis. Here is our analysis of the results.

Performance summary
  • Standalone revenues rise by 36% YoY during 3QFY11 led by growth in both the segments - automotive and farm equipment (each up by about 36% YoY).
  • Operating profits rise at a marginally sharper pace (as compared to sales) as operating margins expand by 0.2% YoY to 15.1%. Margin expansion led by lower employee and other expenses (as a percentage of sales).
  • Net profits increase by 78% YoY. Apart from a strong operating performance, higher other income, a benign increase in depreciation charges and an exceptional income of Rs 1.2 bn led to a sharper rise in profits. On excluding the extraordinary income, profits rise by 49% YoY.
  • During 9mFY11, standalone revenues and profits rise by 26% YoY and 36% YoY (adjusted for extraordinary items during both the periods).
  • Consolidated total income (gross revenues and other income) and profits rise by 21% YoY and 74% YoY respectively during the quarter.

Standalone financial performance
(Rs m)  3QFY10   3QFY11  Change  9mFY10   9mFY11  Change
Sales 44,971  61,211 36.1% 132,975  167,156 25.7%
Expenditure 38,276  51,973 35.8%  111,878  141,212 26.2%
Operating profit (EBDITA) 6,695 9,238 38.0% 21,097 25,943 23.0%
Operating profit margin (%) 14.9% 15.1%   15.9% 15.5%  
Other income  244  419 72.0% 1,812   2,621 44.6%
Interest (net)  82  (27)    269  (345)  
Depreciation  984 1,022 3.9%   2,760   2,968 7.5%
Exceptional items -    1,175    908 1,175  
Profit before tax 5,873 9,836 67.5%   20,787 27,116 30.4%
Tax 1,736 2,490 43.4% 5,612   6,560 16.9%
Profit after tax/(loss) 4,137 7,347 77.6%  15,175 20,556 35.5%
Net profit margin (%) 9.2% 12.0%   11.4% 12.3%  
No. of shares (m)         278.8   596.6  
Diluted earnings per share (Rs)*         39.0  
P/E ratio (x)*         16.8  
(*On a trailing 12-month basis; adjusted for extraordinary items)

What has driven performance in 3QFY11?
  • Mahindra and Mahindra (M&M) reported an impressive standalone revenue growth of 36% YoY during the quarter. Both the company segments - automotive and farm equipment reported strong growth during the quarter. Sales volumes in the company's ‘automotive' division stood at about 56,200 vehicles during the quarter, and managed to retain its leadership with a market share of 62% (UV segment). Other product segments such as the small load carriage segment and three wheelers (growing faster than the industry) did well too. It is reported that three-wheeler and mini four-wheeler sales grew by 52% YoY. The company also saw a strong rise in exports during the quarter. M&M exported 5,020 vehicles (as against 3,331 vehicles last year) to regions such as SAARC, South Africa & South America, amongst others.

    Growing revenues by 37% YoY, M&M's ‘farm equipment' contributed to about 43% of the company's topline (same as last year) during the quarter. Growth was largely led by higher volumes which stood at 55,649 units (domestic; of both Mahindra and Swaraj brands; 42,473 units during preceding quarter) as compared to 41,074 units (35% YoY increase in 3QFY11) during the corresponding quarter last year. With this, M&M also increased its market share in the domestic market as the domestic tractor industry volumes grew by about 30% YoY only. As per the company, the domestic tractor industry's volumes stood at 128,288 units during the quarter as compared to 98,338 units during the corresponding quarter last year.

    Segmental break-up...
    Segment 3QFY10 3QFY11 % change
    Automotive
    Revenues 25,568 34,716 35.8%
    Share of total revenues 57% 57%
    PBIT 2,868 4,266 48.7%
    PBIT margin 11.2% 12.3%
    Farm Equipment Segment
    Revenues 19,282 26,383 36.8%
    Share of total revenues 43% 43%
    PBIT 3,523 4,872 38.3%
    PBIT margin 18.3% 18.5%
    Other segments
    Revenues 212 210 -1.0%
    PBIT 7 6 -10.4%
    PBIT margin 3.2% 2.9%
    Total* 45,062 61,308 36.1%
    *Excluding intersegment revenues

  • M&M continued to impress at the operating level as well with the company's margins expanding by 0.2% YoY to 15.1% during 3QFY11. The company was able to expand its margins on the back of it keeping its costs (employee and other expenditure) under control in addition to the price increases it took over time. As the whole industry has been witnessing, M&M too faced pressures on the raw material front as they increased by 41% YoY and stood at 69% of sales (as compared to 67% last year).

    Cost break up
    (Rs m)  3QFY10   3QFY11   Change 
    Raw material 30,140 42,358 41%
    % of net sales 67.0% 69.2%  
    Employee cost 3,300 3,475 5%
    % of net sales 7.3% 5.7%  
    Other expenses 4,837 6,140 27%
    % of net sales 10.8% 10.0%  

  • M&M's profits rose by 78% YoY during the quarter. Apart from a strong operating performance, the company's profits were boosted by an exception income of Rs 1.2 bn (sale of long term investment). On excluding the same, the profit growth came in at 49% YoY, which is still higher than the increase in operating profits. This was on account of higher other income and interest income earned during the quarter (as opposed to interest expense during 3QFY10).

    What to expect?
      At the current price of Rs 654, the stock is trading at a multiple of 17 times its trailing 12-month standalone earnings. While M&M was able to offset the impact of rising input costs through various methods, the management did admit that going forward commodity prices will play a key role in determining profitability for both the industries - auto and farm equipment. This would be the case for the sector as a whole. Within that, a key factor would be the pricing power each player commands in each segment. Further, considering that interest rates have risen significantly in recent times (up by about 2% to 2.5% in about two quarters), demand through vehicle financing could be an issue going forward. While tractor financing rates are prevailing at about 14% to 18%, auto financing rates vary from 11% to 18%. The management added that, rising interest rates have not been an issue till now. But going forward, it could dampen the growth. This is also considering that the input costs have been rising, wherein auto manufacturers have been passing on costs to protect margins.

      As for the overall industry growth for the next year (FY12), it is estimated at about 10% to 12% for the tractor industry and about 15% to 18% for the auto industry as a whole.

      M&M's performance during the 9mFY11 period has been way above our estimates (profitability wise). We will update our research report soon. Till then we suggest investors to hold on to the stock.

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