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M&M: Riding on Scorpio success - Views on News from Equitymaster
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  • Jun 3, 2003

    M&M: Riding on Scorpio success

    M&M, the market leader in both the utility vehicle (UV) and tractor segments, has posted a 14% increase in revenues and a 42% jump in pre-tax profits for FY03. While the company's performance was boosted by higher volume growth in the UV segment, tractor demand continues to remain sluggish in light of the ongoing inventory correction. Pricing pressure for tractors combined with low capacity utilisation has suppressed overall margin growth for FY03 as well.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Net sales 9,091 11,231 23.5% 32,731 37,321 14.0%
    Other Income 133 194 45.7% 472 797 68.6%
    Expenditure 8,107 10,365 27.9% 29,999 34,201 14.0%
    Operating Profit (EBDIT) 984 866 -12.0% 2,732 3,121 14.2%
    Operating Profit Margin (%) 10.8% 7.7%   8.3% 8.4%  
    Interest 170 210 23.3% 827 869 5.1%
    Depreciation 327 434 32.6% 1,394 1,654 18.7%
    Profit before Tax 620 416 -32.8% 984 1,394 41.7%
    Extraordinary items 123 (71) - (173) 577 -
    Tax (237) (142) - (216) 515 -
    Profit after Tax/(Loss) 979 487 -50.3% 1,027 1,455 41.7%
    Net profit margin (%) 10.8% 4.3%   3.1% 3.9%  
    No. of Shares (m) 110.5 110.5   110.5 110.5  
    Diluted Earnings per share (Rs) 35.5 17.6   9.3 13.2  
    P/E Ratio (x)         9.6  

    As is evident from the table below, revenues from the company's automotive division (encompassing UV, LCV, three-wheelers and spare parts) has increased by 37% in FY03. The rise in substantial in 4QFY03 at 58% for the same division. The company has benefited immensely from the 16% rise in industry volumes arising out of higher demand for its newly launched UV model, Scorpio. M&M launched the model in late 2QFY03 and has been selling on an average 2,000 units per month. Riding on the back of Scorpio, M&M has seen a 23% rise in UV sales for FY03 to 68,852 units. Consequently, the company's market share has crossed the 50% mark after having suffered over the last three years due to stiff competition from both Telco and Toyota.

    Light Commercial Vehicle (LCV) segment also saw a revival of sorts during the course of this fiscal. With the consumer durable demand gaining momentum in FY03 on the back of the World Cup, demand for LCVs has been robust. But it has also got to be reminded that the industry has come out of a trough and as a result, growth is on the higher side. M&M has seen a 27% rise in LCV unit sales in FY03 as against a 16% rise in industry volumes. On the three-wheeler front, the expansion of presence in the west has enabled the company to increase unit sales to 10,029 as against 2,950 units in FY02. Despite the robustness in volumes, margin growth is on the lower side for FY03 at 20 basis points.

    Segment-wise performance…
    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Automotive 5,338 8,439 58.1% 18,275 25,113 37.4%
    PBIT margin (%) 10.9% 7.4%   5.6% 5.8%  
    Farm equipment 3,545 2,655 -25.1% 14,024 11,849 -15.5%
    PBIT margin (%) 9.0% 4.4%   5.4% 7.3%  
    Others 285 324 13.5% 562 912 62.3%
    PBIT margin (%) 0.2% -0.4%   -0.9% -2.0%  
    Total 9,167 11,418 24.6% 32,862 37,873 15.3%
    PBIT margin (%) 9.8% 6.4%   5.4% 6.1%  

    As expected, tractor sales saw a sharp correction in FY03 on the back of acceleration in inventory correction exercise. As against the industry fall of around 27%, M&M has seen a 19% decline in unit sales to 47,028 units. Though the correction phase is expected to near completion in the next four to five months, for FY04, we expect volume growth to remain sluggish. Much depends upon the monsoon, which according to earlier estimates is not promising enough for yet another year. That said, it is too early to arrive at a conclusion.

    Depreciation related expenses have shown a sharp spurt in FY03 due to the commencement of the Scorpio manufacturing facility. However, a sharp spurt in other income led by higher dividend income from its subsidiaries has provided a big fillip to the bottomline. The company, in its analyst meet, has confirmed that most of the subsidiaries have turned around in FY03 (including the likes of Mahindra Resorts). This is a positive sign of things to come considering the fact that subsidiaries in the past have been affecting consolidated profitability (except for Mahindra-British Telecom, Mahindra Finance Services, all others were in the red).

    The stock currently trades at Rs 126 implying a P/E multiple of 9.6x FY03 earnings. While the company's performance at the topline level is higher than our initial estimates, we expect the growth momentum at the net level to continue in FY04. There is significant scope for improvement in margins given the reduction in employees. With subsidiaries also turning around, the stock has seen a upturn in the last few months. The tractor sector is expected to register a turnaround in the medium-term. M&M as a market leader is likely to capitalise on the growth opportunity. This will add to the revenue growth over the long-term.



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