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M&M: Uphill test drive

Jun 17, 2002

Mahindra & Mahindra (M&M), the diversified auto major, has posted a 8% fall in sales for the full year ended March 31, 2002. The company's net profits also dipped by 20%. But the company has achieved its objective of improving margins through cost reduction exercise.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Net sales 9,451 9,091 -3.8% 35,385 32,731 -7.5%
Other Income 63 119 88.7% 491 441 -10.2%
Expenditure 8,696 8,107 -6.8% 32,667 29,999 -8.2%
Operating Profit (EBDIT) 755 984 30.3% 2,718 2,732 0.5%
Operating Profit Margin (%)8.0%10.8%7.7%8.3%
Interest 156 170 9.2% 622 827 32.9%
Depreciation 385 327 -15.0% 1,401 1,394 -0.5%
Profit before Tax 277 605 118.5% 1,186 952 -19.7%
Extraordinary items 6 102 - 100 (199)-
Tax (10) (237)- 80 (216)-
Profit after Tax/(Loss) 293 944 222.1% 1,206 969 -19.6%
Net profit margin (%)3.1%10.4%3.4%3.0%
No. of Shares (m) 110.5 110.5 110.5 110.5
Diluted Earnings per share 10.9 8.8
P/E Ratio (x) 12.5

M&M derives close to 95% of revenues from sale of four-wheelers (utility vehicles (UVs) and light commercial vehicles (LCVs)) and farm equipments. While the company has managed to increase its market share in the UV segment thanks to the success of 'Bolero', it has lost market share in the tractor category. UV volume sales for FY02 stands at 57,035 units, marginally lower than previous year's levels despite a decline in industry growth. On the tractors front, M&M volume sales is estimated at around 58,000 units as against around 79,000 units in FY01, a fall of 26%. This was one of the key reasons for the drop in sales in FY02.

Excluding profits from sale of current investments, other income is lower by 10% for FY02. The company had aimed at improving its margins through a vendor pruning exercise as well as value engineering efforts, which seem to have benefited M&M in FY02. We expect the operating margins of the company to improve in the coming year as well. But the main cause of concern is the sharp rise in interest costs. M&M interest coverage has weakened considerably in the last four years and following downgrades by some of the credit rating agencies, average interest costs had also risen. Extraordinary items here pertain towards VRS scheme, prior period adjustments and profit from sale of current investments. The company has changed the VRS amortisation process as a result of which VRS liability in FY02 is lower by Rs 278 m.

As far as future growth prospects of the company are concerned, tractor industry continues to suffer from increased competition and subdued demand. Therefore, though we expect a 6%-8% growth in industry volumes in FY03, growth in realisations seem unlikely. On the UV front, M&M is set to launch its new vehicle 'Scorpio' in this quarter, which is directly placed in competition with Toyota and Telco. Much depends on the success of this new vehicle because M&M has committed more than Rs 6 bn in this project.

The stock currently trades at Rs 110 implying a P/E multiple of 12.5x FY02 earnings. The stock has been on the rise over the last few months in anticipation of IPO from Mahindra-British Telecom (M-BT), the software subsidiary of M&M. While it has to be mentioned that it would unlock value for M&M, the software company has been severely affected by the slowdown, particularly in the telecom segment. Most of the telecommunication majors, including BT, are on a restructuring spree and have issued earnings warning in the most recent quarter sighting slower demand recovery. If this is the case, MBT may not be able to issue shares at a significant premium. Besides, gauging from outlook provided by other Indian telecom software service providers like Hughes Software, prospects are bleak. Given this backdrop, combined with the risk of possible failures of new models, caution is the watchword at the current juncture.

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