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M&M: Research meeting excerpts - Views on News from Equitymaster
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M&M: Research meeting excerpts
Feb 16, 2005

We recently met with the management of Mahindra & Mahindra (M&M) in person to understand its medium to long-term growth strategy with special emphasis on the current auto cycle (FY02 to FY05) and how is it different from the previous peak in FY96 to FY97. Here are the key takeaways from the meeting.

What is the company’s business?
M&M is engaged in the manufacture of UVs (utility vehicles), tractors, light commercial vehicles (LCVs) and three-wheelers. While automotive division comprising UVs, LCVs and three-wheelers contributed to 72% of FY04 revenues, farm equipment division accounted for 22% of revenues and the rest from others. Through investment in its subsidiaries, it has interest in other sectors like software, hotels, real estate and financial services as well. While M&M has a 50% market share in the UV segment in FY04, it had a 26% share in the tractor sector.

What has changed in M&M since FY97?
The graphs below highlight the trend in EBDITA margin, net margin and interest expenses as a percentage of sales over the last eight years. What is important to note here is that despite the restructuring that M&M has done over this period, EBDITA margin in FY04 is still below FY97 (the previous peak for the auto sector in demand of units sold). At the same time, net profit margin in FY04 has come about a full circle and is back to FY97 levels. The intriguing question is why is the benefit of restructuring not reflecting in operating margins despite the company now moving on to a lean structure and better efficiencies.

The management attributed this to various reasons, as mentioned below:

  1. Its lot more competitive:  The utility vehicle (UV) and the passenger car segments (a competitor to UV sales) is extremely competitive now as compared to FY97, as a result of prices have come under pressure and there is a greater deal of investment in brand building and advertising expenses.

  2. Tractor segment still turning around:  After three consecutives years of negative volume growth (FY01 to FY03), the tractor segment is on its path to turnaround and therefore, capacity utilisation levels are lower compared to the previous peak (42% capacity utilisation in FY04 as compared to 100% in FY97). Therefore, the benefit from economies of scale on this side is not adequately reflected.

  3. Raw material price escalation:  As is evident from the graphs above, while M&M has managed to reduce workforce significantly in the last eight years (25%), much of this has been absorbed by the sharp spurt in raw material costs and selling expenses as a percentage of sales. Newer models and higher input prices (steel, rubber, lead) have subdued the benefit of restructuring.

Other takeaways are…

Launched in June 2002, FY04 to FY05 is the full year of operation for this platform. The current order backlog is about one week and the company currently produces 130 units per day (665 units exported in 9mFY05 as compared to more than 100 last year). There are no plans to increase capacity. But the company plans to introduce new variants and improvements to sustain market share.

Tractor segment growth
Expects around 5% to 6% CAGR in tractor sales over the next three years for the industry. The plan is to increase the export contribution to around 20% in the next few years to de-risk the concentration on single market. While the China acquisition is likely to gain momentum over the next three to five years, the Pacific Rim expansion is on the cards.

Venture into auto ancillaries…
This would be the third division for M&M besides the farm equipment and the automotive divisions (i.e. a part of M&M itself to start off with). Many global auto and auto ancillary majors have evinced interest in working with the company and therefore, bullish on the same. While there are no concrete numbers on this side, the company acquired SAR Auto in Rajkot three months ago (engaged in the manufacture of axles and forgings for the tractor segment).

Our view…
We had re-iterated our Buy view on the stock in January 2005 at Rs 483 with a two to three year investment horizon and we stick to this view. Key subsidiaries like MBT are performing well (growth of more than 50% in revenues in 1HFY05 with an employee base of 5,000). Mahindra Gesco is currently constructing close to 1.5 m square feet of properties (commercial and residential) that will be completed over the next one to one and half years. Not only on a standalone basis, but also on a consolidated basis, we believe there is value from a long-term standpoint.

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