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M&M: It's been a mixed year - Views on News from Equitymaster
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M&M: It's been a mixed year
Jun 8, 2012

M&M announced the fourth quarter results of financial year 2011-2012 (4QFY12). The company has reported a growth of 39% in sales while net profits grew by 44% YoY on a standalone basis. Here is our analysis of the results.

Performance summary
  • Standalone revenues rise by 39% YoY during 4QFY12 largely led by growth in the automotive business.
  • Operating profits grow at a lower rate of 11% YoY as operating margins contract by 2.6% YoY to 10.3% in 4QFY12. Margin contraction is on account of higher raw material costs (as a percentage of sales).
  • Led by slower growth in operating profits, higher interest costs and depreciation charges, PBT falls by 2% YoY.
  • However, net profits during 4QFY12 grow by 44% YoY on account of an exceptional income of Rs 1 bn and considerable drop in tax expenses.

Standalone financial performance
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 67,692 93,872 38.7% 234,603 318,535 35.8%
Expenditure 58,987 84,178 42.7% 200,059 280,828 40.4%
Operating profit (EBDITA) 8,706 9,694 11.3% 34,543 37,707 9.2%
Operating profit margin (%) 12.9% 10.3%   14.7% 11.8%  
Other income 716 956 33.5% 4,342 4,658 7.3%
Depreciation 1,171 1,997 70.6% 4,139 5,761 39.2%
Interest 171 709 314.9% 725 1,628 124.5%
Profit before tax 8,080 7,943 -1.7% 34,021 34,976 2.8%
Exceptional items - 1,083   1,175 1,083 -7.8%
Tax 2,015 281 -86.1% 8,575 7,270 -15.2%
Profit after tax/(loss) 6,065 8,745 44.2% 26,621 28,789 8.1%
Net profit margin (%) 9.0% 9.3%   11.3% 9.0%  
No. of shares (m)       587.2 589.0  
Diluted earnings per share (Rs)*         47.0  
P/E ratio (x)*         14.4  
(*On a trailing 12-month basis; adjusted for extraordinary items)

What has driven performance in FY12?
  • Mahindra and Mahindra (M&M) reported an impressive standalone revenue growth of 36% YoY during FY12. During the year, while sales of the company’s 'automotive' division grew by an impressive 48% YoY, the farm equipment division grew relatively slower at 20% YoY.

  • As far as the automotive business is concerned, the company managed to retain its leadership in the UV segment with a market share of 55.1% as volumes were up 19.5% YoY. Verito cars grew by 78% YoY and garnered a market share of 9.5%. The company also saw a strong rise in exports during the year. M&M exported 29,176 vehicles (as against 17,138 vehicles in FY11) to regions such as SAARC, South Africa & South America, amongst others.

  • Growing revenues by 20% YoY, M&M's 'farm equipment' contributed to about 37% of the company's topline during the year. However, this division witnessed a slowdown on the back of a slowing economy. This was all the more evident in 4QFY12 where sales dipped by 1% YoY. During the year, domestic tractor volumes grew by about 10% YoY, while exports were up 16.2% YoY. The company's market share in this segment stood at 41.4%.
    Segmental break-up...
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Automotive revenues 39,567 66,137 67.2% 136,212 201,012 47.6%
    PBIT 4,182 5,759 37.7% 17,167 18,557 8.1%
    PBIT margin (%) 10.6% 8.7%   12.6% 9.2%  
    Farm Equipment revenues 27,939 27,611 -1.2% 97,773 116,898 19.6%
    PBIT 4,756 4,342 -8.7% 17,083 18,326 7.3%
    PBIT margin (%) 17.0% 15.7%   17.5% 15.7%  
    Others 288 196 -32.2% 983 895 -8.9%
    Total revenues 67,794 93,944 38.6% 234,967 318,804 35.7%
    *Excluding intersegment revenues

  • Like its peers in the auto industry, M&M faced pressure at the operating level as its margins contracted by 2.9% YoY to 11.8% during FY12. The main culprit was raw material costs as they increased by 4.5% YoY and stood at 73.8% of sales. In absolute terms, raw material costs increased by 44.5% YoY. Any further decline in operating margins was, however, arrested as the company was able to keep its employee costs and other expenditure under control.
    Cost break up
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Raw material 47,883 70,894 48.1% 162,639 234,998 44.5%
    % of net sales 70.7% 75.5%   69.3% 73.8%  
    Employee cost 4,176 4,294 2.8% 14,315 17,018 18.9%
    % of net sales 6.2% 4.6%   6.1% 5.3%  
    Other expenses 6,928 8,990 29.8% 23,105 28,813 24.7%
    % of net sales 10.2% 9.6%   9.8% 9.0%  
    Total 58,987 84,178   200,059 280,828  

  • Led by the subdued performance at the operating level, higher interest costs and depreciation charges, the company's PBT grew by a mere 3% YoY. At the net level, excluding extraordinary items during both periods under consideration, net profit growth was slightly higher at 9% YoY due to a fall in tax expenses.

What to expect?
At the current price of Rs 679, the stock is trading at a multiple of 14.4 times its trailing 12-month standalone earnings. Going forward commodity prices will continue to play a key role in determining profitability for both the industries - auto and farm equipment. Rising interest rates could also act as a dampener on demand especially in the tractor industry, which has begun to see growth tone down. Having said that, M&M intends to keep up its pace of new launches both in the automotive and farm equipment sector as well as managing capacities. Overall, we maintain our positive view on the stock from a long term perspective and will update our estimates shortly.

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