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M&M: Tractors come to the rescue - Views on News from Equitymaster

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M&M: Tractors come to the rescue
Jun 27, 2014

Mahindra & Mahindra (M&M) announced the fourth quarter results of financial year 2013-2014 (4QFY14). The company has reported a growth of 2% YoY in sales while net profits grew by 1% YoY (M&M and MVML combined). Here is our analysis of the results.

Performance summary
  • Revenues (M&M and MVML combined) grow by a modest 2% YoY during 4QFY14 largely led by growth in the farm equipment business.
  • Operating margins fall by 4% to 10.4% in 4QFY14; thus the operating profits fall by 26% YoY.
  • Bottomline manages to grow by 1% YoY during the quarter on account of tax refund this quarter as against tax outgo in 4QFY13.

(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Sales  99,830 102,144 2.3% 383,566 388,171 1.2%
Expenditure  85,478 91,540 7.1% 330,273 335,690 1.6%
Operating profit (EBDITA) 14,351  10,604 -26.1% 53,293 52,481 -1.5%
Operating profit margin (%) 14.4% 10.4%   13.9% 13.5%  
Other income 1,017 1,073 5.5% 5,697  6,648 16.7%
Depreciation 2,279 3,200 40.4% 8,178  9,760 19.3%
Interest 784 1,078 37.4% 2,964 3,611 21.9%
Profit before tax  12,304 7,399 -39.9% 47,848 45,758 -4.4%
Exceptional items 906 528 -41.7% 906 528 -41.7%
Tax 3,581 (1,750)    12,410 7,235 -41.7%
Profit after tax/(loss) 9,629 9,677 0.5% 36,344 39,051 7.4%
Net profit margin (%) 9.6% 9.5%   9.5% 10.1%  
No. of shares (m)       589.3 589.9  
Diluted earnings per share (Rs)*         63.1  
P/E ratio (x)*         18.7  

What has driven performance in FY14?
  • Mahindra and Mahindra (M&M) reported growth of a mere 1% YoY in revenues during the year. This was largely due to the poor performance of the automotive division, where revenues were down 7% YoY. The farm equipment division, on the other hand, grew by a decent 20% YoY thereby providing some cushion.

  • As far as the automotive business is concerned, volumes de-grew for the company as was the trend in the industry. Besides the considerable headwinds that the auto industry overall has been witnessing, M&M's volume sales of utility vehicles (UVs) were also impacted by the hike in diesel prices and a high base effect in FY13. Fall in volumes of UVs stood at 17% YoY during the year. The company had a market share of 41.7% in the utility vehicles space. The farm equipment segment on the other hand did quite well during the year on account of good monsoons and the low base effect last year. Growth in tractor volumes in the domestic market stood at around 21.5% YoY was above the industry growth rate of 20%. The company has a domestic market share of 40.6% in this segment.

    Segmental break-up...
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Automotive revenues 71,637 70,565 -1.5%  264,886 246,332 -7.0%
    PBIT 8,895 3,344 -62.4% 31,179 23,457 -24.8%
    PBIT margin (%) 12.4% 4.7%   11.8% 9.5%  
    Farm Equipment revenues 28,540 31,879 11.7% 119,897 143,337 19.6%
    PBIT 4,559 5,442 19.4% 18,578 24,528 32.0%
    PBIT margin (%) 16.0% 17.1%   15.5% 17.1%  
    Others 262 63 -76.0% 726 251 -65.4%
    Total revenues 100,439 102,507 2.1% 385,508 389,920 1.1%

  • M&M's operating margins fell by 0.4% YoY to 13.5% during FY14 largely on account of rise in employee costs and other expenses (as percentage of sales). Raw material costs, however, fell by 2.1% to 69.4% of sales in FY14. Because of the contraction in operating margins, operating profits fell by 1.5% YoY. As far as segments are concerned, the automotive segment saw a decline in margins, while the farm equipment division witnessed improvement in the same during the year.

  • Despite the fall in operating profits, net profits during the year grew by 7% YoY on account of a substantial fall in tax expenses.
What to expect?
At the current price of Rs 1,180, the stock is trading at a multiple of 18.7 times its trailing 12-month earnings (M&M and MVML combined). Going forward, the El Nino phenomenon could have an impact on the company's tractor volumes in the short term although in the longer term volume growth will remain healthy given the strength of the company's products and strong distribution network. As far as the UV segment is concerned, the company has lined up a few new product launches over the next few years and this is expected to bolster volumes. 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 are updating our estimates for the company and our view is that investors 'Hold' on to 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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