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M&M: Scorpio still stings

Apr 19, 2004

Buoyed by the success of Scorpio, its offering in the SUV (Sports Utility Vehicle) segment, auto major M&M is planning a new product development programme and has already announced plans to raise US$ 100 m (approx Rs 4.4 bn) for the same. Besides, the company is also planning some acquisitions in the foreign markets. For a company, which only a few years back steadily losing market share to rivals like Tata Motors (with Sumo and Safari) and Toyota (Qualis), the turnaround couldnít have come at a more opportune time. Now that Scorpio has become a success, the company hopes to do a repeat act with a new product platform. In this article, let us review the recent performance of the company and outlook.

Spurred by the success of Scorpio, which the company launched in 2QFY03, M&M, posted a 14% increase in revenues and a healthy 42% jump in bottomline during FY03. Had it not been for the pricing pressure for tractors as well as a low capacity utilisation, the companyís performance would have looked even better. Scorpio continued to power M&Mís performance in FY04 as well and thanks to a 37% rise in volumes in its UV division, the topline of the company grew by a strong 32%, whereas its bottomline surged by 109% on a YoY basis during 9mFY04. Thanks to bottoming out of the tractor division and better sales mix, the operating margins also improved by a significant 210 basis points during the same period.

Going forward, on account of continued demand for SUVs and extremely competitive pricing policy adopted by the company, Scorpio is likely to witness robust sales. However similar launches by rivals such as Tata Motors and Toyota might prove to be a dampener. Tractor division on the other hand, is showing signs of revival. This can be further proven by the fact that the inventory with the dealers as of 31st Jan 2004 stood at 1,852 tractors, lower by around 74% from the FY02 levels and 55% from the FY03 levels. Besides, the company, which is the largest exporter of tractors in the country, is hoping to increase the contribution.

On the financials front, on account of restructuring, whereby the company retired debt to the tune of Rs 1.3 bn, the interest cost of the company has come down and stood at 7% in 9mFY04 as compared to 10% in FY03. It might further come down, following the companyís announcement to raise US$ 100 m (approx 4.4 bn) from the foreign markets.

The stock is currently trading at Rs 480, implying a P/E of 20x its annualised 9mFY04 earnings. While the valuations appear stretched from a short-term perspective, we remain positive on the future prospects of the company on account of revival in tractor division. On the flip side, as always, when the industry turns around, the company initiates big-ticket investment plans that have often led to unrelated diversifications. Investors have to exercise caution as far as the cash utilisation is concerned.

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