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M&M: Challenging year - Views on News from Equitymaster

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M&M: Challenging year
May 28, 2008

Performance summary
  • Topline grows by 15% YoY for the full year, led by 15% YoY growth in automotive volumes (excluding Logan).
  • Operating margins suffer a decline of 100 basis points during FY08 as higher expenses take toll.

  • Bottomline growth for the full year stands at 3% YoY, led by lower operating margins and higher interest and depreciation charges.

  • For the fourth quarter ended March 31, 2008, the company has recorded a 6% YoY drop in net profits on the back of a 15% YoY growth in topline.

(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 27,474 31,482 14.6% 100,503 115,035 14.5%
Expenditure 24,340 28,058 15.3% 87,874 101,672 15.7%
Operating profit (EBDITA) 3,134 3,424 9.2% 12,629 13,363 5.8%
EBDITA margin (%) 11.4% 10.9%   12.6% 11.6%  
Other income 354 273 -22.8% 1,950 1,682 -13.7%
Interest (net) (205) 139   (675) 242  
Depreciation 609 649 6.4% 2,096 2,387 13.9%
Profit before tax 3,083 2,909 -5.6% 13,157 12,416 -5.6%
Extraordinary income/(expense) 81 139   1,220 1,652 35.4%
Tax 804 837 4.1% 3,693 3,034 -17.8%
Profit after tax/(loss) 2,360 2,211 -6.3% 10,684 11,034 3.3%
Net profit margin (%) 8.6% 7.0%   10.6% 9.6%  
No. of shares (m) 238.0 239.1   238.0 239.1  
Diluted earnings per share (Rs)       44.9 46.2  
Price to earnings ratio (x)*         13.9  

What has driven performance in FY08?
  • The robust topline performance for the full year has been led by the automotive division, where led by 15% YoY growth in volumes, topline has grown by 18% YoY. UV sales, which account for the bulk of the company’s volumes in the automotive segment, witnessed an impressive growth of 16% YoY over FY07. This was significantly higher than the industry growth rate of 5% YoY, enabling the company to gain market share. The success of the refreshed ‘Bolero’ and the new ‘VLX Scorpio’ helped the company grow its volumes in this segment. Among other segments, LCV also performed well, managing to grow its sales by 20% YoY. Besides, exports also grew handsomely, registering a gain of 54% YoY as the company’s efforts of exploring new geographies like Australia and Chile bore fruit. On the margins front, segmental margins came in lower by 60 basis points, a satisfactory performance, considering the fact that prices of most raw materials inched higher during the year.

  • As far as the farm equipment segment is concerned, owing to tough industry wide conditions, volumes were down by 4% YoY, led by 5% decline in domestic volumes. However, the company can draw comfort from the fact that its market share remained intact. Nevertheless, improved product mix ensured that topline growth remained positive as it came in higher by 8% YoY. The company also did well to preserve the margins of the segment, as they were lower only marginally as compared to FY07.

    segmental break up
    Segment 4QFY07 4QFY08 % change FY07 FY08 % change
    Automotive            
    Units sold 54,217 58,546 8.0% 178,201 205,448 15.3%
    Revenues 17,855 20,779 16.4% 60,961 71,792 17.8%
    PBIT 1,752 2,075 18.4% 6,806 7,633 12.1%
    PBIT margin 9.8% 10.0%   11.2% 10.6%  
    Farm Equipment Segment            
    Units sold 23,476 22,974 -2.1% 102,529 98,710 -3.7%
    Revenues 8,724 9,804 12.4% 37,165 39,969 7.5%
    PBIT 1,045 1,419 35.7% 5,087 5,421 6.5%
    PBIT margin 12.0% 14.5%   13.7% 13.6%  
    Other segments            
    Revenues 1,398 2,123 51.8% 4,691 6,701 42.9%
    PBIT 122 62 -49.1% 264 145 -45.0%
    PBIT margin 8.7% 2.9%   5.6% 2.2%  

  • As against a net interest income in the previous year, the company had to pay interest for the funds that it raised during the year, mostly to fund its huge capex needs. This also took the sheen off its other income, which too were impacted negatively, falling by 14% YoY. Furthermore, with depreciation rising 14% YoY for the full year, the company’s net profit growth stood at a modest 3% YoY during FY08. Barring exceptional items though, the net profit suffered a marginal fall of 1% YoY.

  • As far as the consolidated performance is concerned, owing to improved performance by its group companies like Tech Mahindra, Mahindra Finance and Mahindra Holidays, the topline growth came in at an impressive 37% YoY. Its consolidated bottomline however, could manage a growth of only 5% YoY as certain one time exceptional expenses took their toll.

What to expect?
At the current price of Rs 641, the stock is trading at a 27% discount to our earlier sum of the parts valuation of Rs 877 per share. The company’s bottomline has come in 6% below our FY08 estimates (excluding exceptional). While we believe that with the acquisition of Punjab Tractors, the company has managed to strengthen its competitive position in the tractor space, in the automotive segment, competition is likely to intensify further. Further, with raw material prices showing no signs of cooling off, margins are also likely to remain under pressure. We will consider these factors and also have a relook at its subsidiaries when we come out with our revised estimates on the company.

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