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M&M: The amalgamation boost - Views on News from Equitymaster
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M&M: The amalgamation boost
May 28, 2009

Performance summary
  • Standalone topline grows by 14% YoY for the fiscal, aided to a significant extent by the amalgamation of Punjab Tractors
  • Operating margins for the full year contract by 350 basis points as higher expenses take toll
  • Standalone bottomline declines by 24% YoY led by lower operating margins and exceptional items. PBT, which excludes the impact of exceptional items, fell by 17% during the fiscal
  • Net profits for the fourth quarter jump an impressive 89% YoY on the back of a 16% growth in topline
  • Consolidated bottomline falls by 11% YoY on the back of a 11% YoY growth in topline during the fiscal
  • Announces a dividend of Rs 10 per share for the full year (div yield of 1.5%)


(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 31,596 36,545 15.7% 115,413 130,937 13.5%
Expenditure 28,075 30,932 10.2% 101,747 120,011 17.9%
Operating profit (EBDITA) 3,520 5,612 59.4% 13,666 10,926 -20.0%
EBDITA margin (%) 11.1% 15.4%   11.8% 8.3%  
Other income 159 614 286.4% 1,304 2,703 107.4%
Interest (net) 139 209 50.5% 242 453 86.8%
Depreciation 649 932 43.7% 2,387 2,915 22.1%
Profit before tax 2,892 5,086 75.9% 12,340 10,262 -16.8%
Extraordinary income/(expense) 156     1,727 103  
Tax 837 905 8.1% 3,034 1,997 -34.2%
Profit after tax/(loss) 2,211 4,181 89.1% 11,034 8,368 -24.2%
Net profit margin (%) 7.0% 11.4%   9.6% 6.4%  
No. of shares (m) 245.7 278.8   245.7 278.8  
Diluted earnings per share (Rs)*         30.0  
Price to earnings ratio (x)*         22.0  
(* on trailing twelve months earnings)

What has driven performance in FY09?
  • On a standalone basis, the company’s topline has grown by 14% for the full year. This was mostly driven by the farm equipment segment, where topline grew a handsome 41% on the back of a 21% jump in volumes. However, it should be remembered that the financials for the year also include the financials for Punjab Tractors, which was merged into the company effective August 1, 2008. If one excludes the same, the performance was rather tepid as economic slowdown, especially during the second half of the fiscal affected both domestic as well as exports sales in the farm equipment segment.

  • Coming back to the automotive segment, revenues were up by nearly 3% for the full year. Volumes however witnessed a marginal decline of 1%. The drop was led by exports, which on the back of economic slowdown in the company’s key exports markets came in lower by a significant 31% YoY. Domestic volumes however managed to grow a decent 8% with the company increasing market share in both the UV as well the three wheeler segment. This was made possible on account of successful new launches like the Xylo and variants of Scorpio.

  • As far as segmental margins are concerned, while the farm equipment segment witnessed a 2.5% decline in the same, the fall was a steep 4.5% for the automotive segment. Consequently, PBIT for the automotive segment fell by a huge 41% during the fiscal. The drop was attributed mainly to the increase in raw material costs and the impact of difference in exchange rate.

    Segmental break up…
    Segment FY08 FY09 % change
    Automotive      
    Units sold* 231,336 228,715 -1.1%
    Revenues 71,974 73,845 2.6%
    PBIT 7,633 4,476 -41.4%
    PBIT margin 10.6% 6.1%  
    Farm Equipment Segment      
    Units sold 98,714 119,708 21.3%
    Revenues 40,159 56,672 41.1%
    PBIT 5,421 6,240 15.1%
    PBIT margin 13.5% 11.0%  
    Other segments      
    Revenues 6,707 808 -87.9%
    PBIT 145 136 -6.3%
    PBIT margin 2.2% 16.9%  
    *Includes LCV sales of Mahindra Navistar & Logan

  • With interest coming in higher by 87% YoY, the PBT for the standalone entity has come in lower by 17% for the fiscal. Despite the 34% drop in taxes, the drop in bottomline, at 24% has come in higher than the drop in PBT on account of exceptional items. Lower tax rate was due to certain benefits like the weighted deduction on R&D expenses as also the tax free status being enjoyed by the company’s Rudrapur plant.

  • As far as the consolidated performance is considered, topline growth at 11% came in quite close to the standalone topline growth of 14%, both on a YoY basis. The group’s IT business, the financial services business and Mahindra Holidays emerged as the top three performers having grown their PAT (before exceptional items) by 32%, 21% and 4% respectively during the fiscal.

What to expect?
At the current price of Rs 667, the stock trades at an 8% discount to our sum of the parts valuation of Rs 727 per share. Although the company has lined up huge capex plans, leadership position in its key segments of UVs and tractors and investments in fast growing sectors through its subsidiaries make the company a good long-term bet at current valuations. However, we are concerned with the growing number of acquisitions that the company is making and this could prove to be a drag on its balance sheet in the near term.

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