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M&M: Riding the strong tailwinds - Views on News from Equitymaster
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M&M: Riding the strong tailwinds
May 29, 2010

M&M has announced its FY10 results. The company has reported a growth of 18% and 76% in topline and bottomline respectively on a consolidated basis. Here is our analysis of the results

Performance summary
  • On the back of strong auto sales, standalone topline grows by 42% YoY
  • Operating profits go up a huge 171% as the company makes a huge comeback on the margins front
  • Bottomline growth comes in at 150% as lower other income and higher tax outgo take some sheen away from a robust operating performance. However, it still is a fantastic bottomline performance from the company
  • Consolidated bottomline goes up by 76% YoY during the fiscal on the back of an 18% growth in topline

Financial performance
  Standalone Consolidated
(Rs m) FY09 FY10 Change FY09 FY10 Change
Sales 130,937 186,021 42.1% 267,564 315,685 18.0%
Expenditure 120,011 156,469 30.4% 230,898 260,549 12.8%
Operating profit (EBDITA) 10,926 29,552 170.5% 36,665 55,137 50.4%
Operating profit margin (%) 8.3% 15.9%   13.7% 17.5%  
Other income 2,703 1,994 -26.3% 1,635 1,194 -26.9%
Interest 453 278 -38.6% 7,502 9,798 30.6%
Depreciation 2,915 3,708 27.2% 7,493 8,735 16.6%
Profit before tax 10,262 27,560 168.6% 23,305 37,797 62.2%
Tax 1,997 7,590 280.1% 5,422 11,542 112.9%
Share of profit in associates NA NA   113 196 74.2%
Minority interest NA NA   3,115 4,126 32.5%
Extraordinary income/(expense) 103 908 783.6% (828) 2,460  
Profit after tax/(loss) 8,368 20,878 149.5% 14,054 24,786 76.4%
Net profit margin (%) 6.4% 11.2%   5.3% 7.9%  
No. of shares (m) 272.6 565.9   272.6 565.9  
Diluted earnings per share (Rs)   36.9     43.8  
P/E ratio (x)   14.8     12.5  

What has driven performance in FY10?
    Segmental break up...
    Segment FY09 FY10 % change
    Automotive      
    Units sold* 230,326 298,280 29.5%
    Revenues 73,845 106,152 43.7%
    PBIT 4,476 13,388 199.1%
    PBIT margin 6.1% 12.6%  
    Farm Equipment Segment      
    Units sold# 119,708 174,634 45.9%
    Revenues 56,672 79,351 40.0%
    PBIT 6,240 15,009 140.5%
    PBIT margin 11.0% 18.9%  
    Other segments      
    Revenues 808 841 4.0%
    PBIT                  136           139 2.1%
    PBIT margin 16.9% 16.6%  
    *Includes LCV sales of Mahindra Navistar & Logan
    # Does not inclue Punjab Tractors numbers in FY09 for period between April-July 2008

  • The 42% growth in standalone topline was driven by a robust performance across both its major divisions, viz., automotive and farm equipment. While the former managed to grow its revenues by a strong 44% during the fiscal, farm equipment segment was not far behind and posted a revenue growth of 40% YoY (farm equipment numbers are not exactly comparable as last year’s numbers for Punjab Tractors does not include April-July 2008 numbers). In the automotive space, UVs delivered a standout performance as the continued success of existing models as well as those of new launches, ensured that the company market share in the segment went up to a whopping 63% from 57% a year ago. This coupled with a better product mix, led to the 44% growth in segment topline.

  • It was not just in the automotive space that the company outperformed the industry. Even in the farm equipment segment, by growing its volumes by a strong 33% (46% if one does not take Punjab Tractors numbers between April and July 2008), it managed to beat the sector and lead to a topline growth of an impressive 40% YoY.

  • Thanks to lower costs, especially on the raw material front and better economies of scale, both the segments witnessed strong EBIT margin expansion. In fact, while the EBIT for the automotive segment nearly tripled, that for the farm equipment segment went up by nearly 2.5 times. Indeed, it was one of the better standalone performances from the company in recent years.

  • Had it not been for the 280% jump in tax outgo, the already impressive bottomline growth of 150% would have looked even better.

  • On the consolidated front, with Tech Mahindra ceasing to be the subsidiary of the company, topline growth has been impacted and same has come in at a modest 18% YoY. However, thanks to the strong operating performance of the standalone entity and that of group subsidiaries like Mahindra Finance, Mahindra Holidays and Mahindra Lifespace, net profit growth at 76% YoY has come in way higher than the topline growth and has thus resulted into what can be called as very good fiscal for the company.

What to expect?
At the current price of Rs 572, the stock trades at premium of 8% to our sum of the parts value (ResearchPro subscribers can view our report here) of Rs 530 per share from a FY12 basis. It should be noted that both volume growth as well as operating margins have more or less peaked for the company and hence, growth should revert to the long term average of 10-12% going forward. Furthermore, with the company having a conglomerate structure, the upside from its subsidiaries is also capped to that extent. Taking all of this into account and the current stretched valuations, we remain cautious on the stock. We will soon update our report shortly.

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