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M&M: Tractor tonic! - Views on News from Equitymaster

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M&M: Tractor tonic!

Jul 26, 2006

Performance Summary
In 1QFY07, M&M recorded the highest ever quarterly sales of its tractors and quite expectedly, this division helped the company put up a robust financial performance. The topline of the company has grown by 23% YoY while the bottomline has shown a sharp jump of 41%, thanks mainly to a 150 basis point expansion in operating margins. On a consolidated basis, the gross revenues of the company have jumped by 43% while the bottomline has increased by 47% YoY (after deducting minority share). The enthusing results at the consolidated level could be attributed to the robust performance put up by the group companies.

Financial performance: Standalone snapshot
(Rs m) 1QFY06 1QFY07 Change
Net sales 18,119 22,362 23.4%
Expenditure 16,190 19,660 21.4%
Operating profit (EBDITA) 1,929 2,702 40.1%
EBDITA margin (%) 10.6% 12.1%  
Other income 204 454 123.2%
Interest (net) 54 147 172.4%
Depreciation 466 463 -0.7%
Profit before tax 1,720 2,840 65.1%
Extraordinary income/(expense) (15) (15)  
Tax 253 784 210.3%
Profit after tax/(loss) 1,453 2,042 40.6%
Net profit margin (%) 8.0% 9.1%  
No. of shares (m) 116.0 236.6  
Diluted earnings per share (Rs)* 24.6 34.5  
Price to earnings ratio (x)**   14.0  
(* annualised, ** on trailing twelve months earnings)

What is the company’s business?
Mahindra & Mahindra (M&M) is engaged in the manufacture of utility vehicles (UV), tractors, light commercial vehicles (LCV) and three-wheelers. The automotive division, comprising UV, LCV and three-wheelers, contributed to 61% of FY06 volumes sales. The farm equipment division accounted for 33% while exports accounted for the rest (29% market share in tractors in FY06). Through investment in its subsidiaries, the company has interest in other sectors like software, auto ancillaries, hospitality, real estate and financial services as well. In FY06, M&M had a 51% market share in the MUV segment

What has driven performance in 1QFY07?
Record performance by the farm equipment segment: After recording two successive years of double digit growth rate, tractor industry has continued in similar vein during 1QFY07, notching a growth rate of 34% over 1QFY06. M&M, by virtue of being the market leader has benefited from such a trend as it also improved its volumes by 32% YoY. Market share of the company though fell a bit but still remains a clear number one with a 32% share of the tractor industry.

As far as the performance of its automotive segment is concerned, the launch of an all-new Scorpio aided the company in improving its volumes by 17% as compared to same quarter last year. Sales of total utility vehicles however improved by a meager 1.5% as compared to the industry growth rate of 6%. The lower than industry growth rate could be attributed to the poor performance of its soft-top utility vehicles, whose popularity is on the wane as their numbers have been dwindling over the past few years.

From the company’s other offerings, while the sales of large 3-wheelers fell by 1.6% as against the industry decline of 8.4%, LCVs grew in line with the industry growth rate of 6%. Exports continue to impress as they grew 55% YoY for the automotive segment. Tractor exports however grew at a rather sedate 6% YoY.

Cost break-up…
(Rs m) 1QFY06 1QFY07 Change
Raw materials 12,501 15,441 23.5%
% sales 69.0% 69.0%  
Staff cost 1,438 1,629 13.3%
% sales 7.9% 7.3%  
Other expenses 2,251 2,589 15.0%
% sales 12.4% 11.6%  

Operating margin improvement comes as a surprise: At a time when all the auto companies are experiencing pressure at the input price level, M&M has done the opposite and has been able to expand margins by a good 150 basis points. Raw material cost as a percentage of sales has remained constant for the company, largely a result of improved product mix and price hikes that the company undertook on its certain models. Staff cost and other expenses have on the other hand shown a decline as a percentage of sales and this has helped improve the operating margins of the company.

PBIT break up…
Segment 1QFY06 1QFY07 % change
Revenues 10,991 12,438 13.2%
PBIT 969 1,237 27.6%
PBIT margin 8.8% 9.9%  
Farm Equipment Segment
Revenues 6,823 9,463 38.7%
PBIT 672 1,283 91.0%
PBIT margin 9.8% 13.6%  
Other segments
Revenues 634 926 46.0%
PBIT 29 35 20.0%
PBIT margin 4.6% 3.8%  

Interest as well as other income helps company offset higher tax outgo: Tax provisioning for the company has more than tripled during the quarter but this has not impacted the bottomline to a great degree on account of YoY growth of 123% and 173% in other income and interest income respectively. It should be noted that the company recently tapped the bond markets for a US$ 200 m FCCB and seems to have currently parked most of these funds in interest earning instruments. Thus, on account of higher other income as well as improved operating performance, the bottomline of the company has grown by an impressive 40% over corresponding previous quarter.

What to expect?
The stock is currently trading at Rs 562, implying a price to cash flow of 12 times its estimated FY08 earnings. We are in the process of updating our research report on the company and would come out with our analysis soon.

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