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M&M: Poor end to the year - Views on News from Equitymaster
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M&M: Poor end to the year
Jun 3, 2015

Mahindra & Mahindra (M&M) announced the fourth quarter results of financial year 2014-2015 (4QFY15). The company has reported a decline of 9% YoY in sales, while net profits fall by 50% YoY (M&M and MVML combined). Here is our analysis of the results.

Performance summary
  • Revenues (M&M and MVML combined) decline by 9% YoY during 4QFY15 as revenues from both the automotive and farm equipment segments remain subdued.
  • Operating margins contract by 1.8% to 11% in 4QFY15; thus the operating profits fall by 22% YoY.
  • Net profits fall further by 50% YoY led by the poor performance at the operating level as well as tax expenses this quarter as against a tax refund in 4QFY14.

Financial performance: M&M and MVML** combined
(Rs m)  4QFY14   4QFY15  Change  FY14   FY15  Change
Sales 100,477 91,229 -9.2% 388,171 374,683 -3.5%
Expenditure 87,655 81,190 -7.4% 335,690 328,651 -2.1%
Operating profit (EBDITA) 12,823 10,039 -21.7% 52,481 46,033 -12.3%
Operating profit margin (%) 12.8% 11.0%   13.5% 12.3%
Other income  1,140  950 -16.7% 6,648 8,201 23.4%
Depreciation  2,579  2,757 6.9% 9,760 10,980 12.5%
Interest  868  833 -4.0% 3,611 3,039 -15.9%
Profit before tax 10,517  7,400 -29.6% 45,758 40,215 -12.1%
Exceptional item  528  364   528 3,357 536.0%
Tax (690)  1,903   7,235 9,339 29.1%
Profit after tax/(loss) 11,734  5,861 -50.1% 39,051 34,233 -12.3%
Net profit margin (%) 11.7% 6.4%   10.1% 9.1%
No. of shares (m)       589.3 589.9  
Diluted earnings per share (Rs)*          52.3  
P/E ratio (x)*          23.0  
(*On a trailing 12-month basis)
(**Mahindra Vehicle Manufacturers Ltd)

What has driven performance in FY15?
  • Mahindra and Mahindra (M&M) reported decline of 4% YoY in revenues during the year. This was largely due to the tepid performance of the both the automotive and farm equipment divisions. While revenues of the former were down 2% YoY, the latter saw revenues fall by 7% YoY.

  • As far as the automotive business is concerned, volumes de-grew for the company largely on account of the fall in volumes of cars, vans as well as utility vehicles. The fall in the latter was attributed to the increasing preference for petrol vehicles as opposed to diesel as the price differential between the two fuels narrowed down. As utility vehicles in the industry so far are predominantly diesel variants, M&M also faced the brunt. However, the management expects the UV industry to grow faster than cars in FY16 as more product launches and petrol options emerge in the UV segment. The company had a market share of 37% in the utility vehicles space.

  • The farm equipment segment also put up a subdued show with revenues falling by 7% YoY. The tractor industry as a whole witnessed a drop in volumes as farm incomes reduced. The latter was attributed to decline in mandi prices and kharif crop output and a fall in the rabi sowing. Poor monsoons further played spoilsport. For M&M, volumes of tractors were down 14% YoY although the company remained the market leader with a share of 40%.

    Segmental break-up...
    (Rs m)  4QFY14   4QFY15   Change   FY14   FY15   Change 
    Automotive revenues 68,898 66,212 -3.9% 246,332 242,204 -1.7%
    PBIT 6,191 5,831 -5.8% 23,457 21,506 -8.3%
    PBIT margin (%) 9.0% 8.8%   9.5% 8.9%  
    Farm Equipment revenues 31,879  25,351 -20.5%  143,337 133,468 -6.9%
    PBIT 5,442 2,834 -47.9% 24,528 19,674 -19.8%
    PBIT margin (%) 17.1% 11.2%   17.1% 14.7%  
    Others 63  55 -12.6% 251  236 -5.9%
    Total revenues 100,840  91,618 -9.1% 389,920 375,909 -3.6%
    *Excluding intersegment revenues

  • M&M's operating margins shrunk by 1.2% YoY to 12.3% during FY15 largely on account of a rise in staff costs and other expenses (as percentage of sales). Staff costs increased from 6% of sales in FY14 to 6.7% in FY15. Thus, operating profits fell by 12% YoY during the year. As far as segments are concerned, both the automotive and farm equipment divisions saw margins contract during the year.

  • Net profits fell 20% YoY during the year (on excluding the extraordinary income during both the years) led by the poor performance at the operating level as well as higher tax expenses.
What to expect?

At the current price of Rs 1,206, the stock is trading at a multiple of 23 times its trailing 12-month earnings (M&M and MVML combined). Going forward, the company has lined up a series of new launches over the first three quarters of FY16, which include 3 new platforms (2 compact UVs and 1 small LCV), 3 refreshes and 3 variants on existing platforms. In the tractor space, Dhruv will be launched towards the end of CY16, one more new product will be launched in CY17 and 2 new products will be launched in the 50 HP range from the Swaraj brand in FY16. The company has maintained its stance of earmarking Rs 75 bn for capex over the next three years and Rs 25 bn in subsidiaries and JVs.

We maintain our 'Buy' view on the stock.

We would like to remind our subscribers that for the purpose of risk minimisation, one should avoid having more than 5% exposure on any one stock from the overall equity portfolio. Please do visit our asset allocation section for further details.

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