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M&M: Diversification paying off
May 29, 2007

Performance summary
M&M, India’s largest manufacturer of tractors and UVs announced its 4QFY07 and full year FY07 results yesterday. On a standalone basis, while the topline of the company has grown by 20% YoY during the quarter, the bottomline has fallen by 27% YoY. However, if one excludes the extraordinary and prior period items, then the bottomline has shown an impressive growth of 59% YoY. The 25% YoY growth in bottomline that the company has achieved for the full year also looks muted if one considers the extraordinary and prior period items. Excluding the same, it jumps once again to an impressive 49% YoY. Performance for the full year on a consolidated basis has been no different with the company reporting a 59% YoY growth in net profits on a 43% YoY growth in topline after excluding extraordinary items. If one includes the same, then the net profit growth stands at a modest 18% YoY.

  Standalone Consolidated
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change FY06 FY07 Change
Units sold 65,398 77,723 18.8% 234,452 280,758 19.8% - -  
Net sales 22,888 27,474 20.0% 82,227 100,503 22.2% 123,354 176,175 42.8%
Expenditure 20,168 24,340 20.7% 72,554 87,874 21.1% 106,066 149,135 40.6%
Operating profit (EBDITA) 2,721 3,134 15.2% 9,672 12,629 30.6% 17,287 27,039 56.4%
EBDITA margin (%) 11.9% 11.4%   11.8% 12.6%   14.0% 15.3%  
Other income 138 354 156.7% 1,039 1,950 87.7% 3,130 2,948 -5.8%
Interest (net) (61) (205) 236.9% (184) (675) 266.6% 2,194 2,992 36.4%
Depreciation 509 609 19.6% 2,000 2,096 4.8% 2,833 3,799 34.1%
Extraordinary income/(expense) 1,661 (110)   2,100 1,028   2,632 (1,021)  
Profit before tax 2,410 3,083 27.9% 8,895 13,157 47.9% 15,391 23,197 50.7%
Tax 859 612 -28.7% 2,424 3,501 44.4% 4,029.4 5,957 47.8%
Share of profit of Associates - - - - -   (46.7) (163.8)  
Minority share in profits - - - - -   1,342.9 1,411  
Profit after tax/(loss) 3,212 2,360 -26.5% 8,571 10,684 24.7% 12,697 14,971 17.9%
Net profit margin (%) 14.0% 8.6%   10.4% 10.6%   10.3% 8.5%  
No. of shares (m) 233.4 238.0   233.4 238.0   233.4 238.0  
Diluted earnings per share (Rs)* 51.4 35.1   34.9 40.9   51.7 57.8  
Price to earnings ratio (x)**               13.3  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Mahindra & Mahindra (M&M) is engaged in the manufacture of utility vehicles (UV), tractors, light commercial vehicles (LCV) and three-wheelers. The automotive division, comprising UV, LCV and three-wheelers, contributed to 61% of FY06 volumes sales. The farm equipment division accounted for 33% while exports accounted for the rest (29% market share in tractors in FY06). Through investment in its subsidiaries, the company has interest in other sectors like software, auto ancillaries, hospitality, real estate and financial services as well. In FY06, M&M had a 51% market share in the MUV segment.

What has driven performance in FY07?

Sales break-up (4QFY07)
Domestic 4QFY06 4QFY07 % change FY06 FY07 % change
Automotive Divn
Total UVs 33,654 39,881 18.5% 114,694 127,856 11.5%
Scorpio 8,552 11,351 32.7% 31,661 38,015 20.1%
LCVs 1,545 2,566 66.1% 6,777 8,652 27.7%
Three wheelers 7,136 9,823 37.7% 22,419 33,700 50.3%
Total (automotive) 42,335 52,270 23.5% 143,890 170,208 18.3%
Farm Equipment Divn
Tractors 19,374 21,517 11.1% 78,048 95,004 21.7%
Exports
Automotive Divn 1,424 1,977 38.8% 5,534 8,021 44.9%
Farm Equipment Divn 2,265 1,959 -13.5% 6,980 7,525 7.8%
Source: Company

Farm equipment boost: On a standalone basis, while both the major segments viz. automotive and farm equipment performed well during the fiscal, it was the latter that nosed ahead slightly, contributing 36% to total revenues as opposed to 34% in the previous fiscal. This was driven by a 21% YoY growth in overall volumes (22% domestic and 8% exports). This growth was largely in line with the industry growth rate, helping it retain its market share of 30%. Further, the company ended the fiscal with a lean, healthy pipeline with dealer stocks and outstanding amongst the lowest in the industry.

In the automotive segment, revenues were higher by 16% for the full year, almost half the growth in the farm equipment segment. This was mainly driven by an 18% YoY growth in overall domestic volumes. UV sales were higher by 19% YoY during the fourth quarter and this helped propel its UV volumes for the full year by 12% YoY. Among its other offerings, both LCVs and three wheelers recorded impressive growth in volumes of 28% YoY and 50% YoY respectively for the full year. Robust growth in three wheelers was due to the company’s entry into the smaller three wheeler segment, where its ‘Champion Alfas’ flew nearly five times faster off the shelves as compared to the year before. In the large three wheeler segment however, volumes declined by 22%, as Tata Motor’s ‘ACE’ continued to rule the roost.

The 45% growth in exports for the full year has also been impressive and is a consequence of company’s long standing efforts of catering to diverse markets such as Europe, Middle East, South America and South East Asia. On the consolidated front, with major group companies like Tech Mahindra, Mahindra Finance, Mahindra Holidays and GESCO posting strong numbers, the consolidated topline growth came in at an impressive 43% YoY. To mention a couple, Tech Mahindra and Mahindra Holidays posted strong topline growth of 130% and 54% respectively, on a YoY basis.

PBIT break up…
Segment 4QFY06 4QFY07 % change FY06 FY07 % change
Automotive
Revenues 14,848 17,855 20.3% 52,403 60,961 16.3%
PBIT (before exceptional) 1,455 1,762 21.1% 5,353 6,836 27.7%
PBIT margin 9.8% 9.9%   10.2% 11.2%  
Farm Equipment Segment
Revenues 7,641 8,964 17.3% 28,538 37,405 31.1%
PBIT (before exceptional) 802 1,054 31.4% 3,192 5,122 60.4%
PBIT margin 10.5% 11.8%   11.2% 13.7%  
Other segments
Revenues 891 1,398 56.9% 3,071 4,690 52.7%
PBIT (before exceptional) 35 122 252.8% 125 264 112.0%
PBIT margin 3.9% 8.7%   4.1% 5.6%  

Margin expansion a surprise: In an era when most of the other auto players are witnessing pressure on margins, company margin expansion for the full year, both on a standalone and consolidated basis has come as a positive surprise. Although, the margins have fallen for the fourth quarter, the drop has been a marginal 50 basis points. The expansion has been the most impressive on the consolidated level, where thanks to a significant 500 basis points drop in raw material costs as a percentage of sales, operating margins have expanded by an impressive 130 basis points, adding another 14% to the growth in operating profits. With key subsidiaries like Tech Mahindra posting impressive margin expansion, the consolidated margins have also got a boost.

Cost break-up…
  Standalone Consolidated
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change FY06 FY07 Change
Raw materials 16,373 19,282 17.8% 57,138 68,519 19.9% 69,122 89,852 30.0%
% sales 71.5% 70.2%   69.5% 68.2%   56.0% 51.0%  
Staff cost 1,403 1,613 15.0% 5,518 6,662 20.7% 13,994 23,884 70.7%
% sales 6.1% 5.9%   6.7% 6.6%   11.3% 13.6%  
Other expenditure 2,392 3,445 44.0% 9,883 12,693 28.4% 22,951 35,555 54.9%
% sales 10.5% 12.5%   12.0% 12.6%   18.6% 20.2%  

The significant extraordinary income for both the full year periods under consideration on a standalone basis is a consequence of one time gains to the company for selling its stake in key subsidiaries like Mahindra Finance and Tech Mahindra. While this has hurt standalone FY07 performance vis-à-vis FY06, it has been significantly compensated by the near doubling of other income and a more than three-fold jump in interest income. Interest expense on a consolidated basis however, has grown by 36% YoY. Other income has also fallen by 6% YoY. It should be noted that the company has made few acquisitions in FY07 and must have taken additional debt on its books to fund the same. Further, the surplus cash also being utilized towards acquisitions, other income too has taken a hit. Notwithstanding adverse movements in these costheads, bottomline has grown by 18% YoY on a consolidated basis for the full year.

What to expect?
At Rs 770, the stock is trading at a price to earnings multiple of 13 times its consolidated FY07 earnings per share. The company is trading closer to our fair value estimate of Rs 790 per share. However, the same was based on FY06 market values of its quoted subsidiaries. With the group companies having grown significantly in FY07 and the company venturing into newer businesses, we will have to incorporate the same into our valuations and we would do the needful shortly.

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