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M&M: Sales revs up

Jul 28, 2003

M&M has announced its first quarter results today. While revenues have increased sharply, operating margins continue to remain under pressure due to poor performance of its farm equipment division. Growth in net profit is inflated due to lower base in the corresponding period previous year.

(Rs m) 1QFY03 1QFY04 Change
Net sales 8,284 9,929 19.9%
Other Income 31 209 582.9%
Expenditure 7,535 9,030 19.8%
Operating Profit (EBDIT) 749 899 20.0%
Operating Profit Margin (%) 9.0% 9.1%  
Interest 249 170 -31.8%
Depreciation 406 408 0.6%
Profit before Tax 125 530 322.3%
Extraordinary items - (47) -
Tax 48 58 22.1%
Profit after Tax/(Loss) 78 425 444.9%
Net profit margin (%) 0.9% 4.3%  
No. of Shares (m) 110.5 110.5  
Diluted Earnings per share* 2.8 15.4  
P/E Ratio (x)   11.5  
(* annualised)      

Total volumes of tractors sold was lower by 30% in the first two months of the fiscal year due to continuation of dealer correction exercise. Stock with dealers reduced from 4,100 units in March 2003 to 3,500 units as of May 2003. As a result, M&M has lost market share in 1QFY04 (27% in the last quarter as compared to 32% in 1QFY03). With inventory correction exercise expected to take six more months, industry sales is expected to be stagnant for FY04. However, the good performance of monsoons till now could throw up some surprises. But we have exercised caution in our estimates.

Though the tractor division is faced with difficult times, M&M got its act together on the utility vehicle (UVs) segment front. The UV sector registered a growth of almost 31% for the period ended April-May 2003. M&M has been increasing its market share in this segment since FY02 through new products and this was capped by the launch of 'Scorpio' last fiscal (54% share). To put things in perspective, total volumes of the company has grown by 36% in the first two months of this fiscal (cumulative Scorpio volumes stood at 15,000 units as of May 2003). Also adding to the momentum is the three-wheeler segment, where the company has posted a 119% rise to 2,003 units between April-May 2003. The topline growth has to be viewed in this context.

Despite higher volume growth, operating margins have shown a marginal rise in 1QFY04. We believe that the poor performance of its tractor division has been a drain on its profitability in the recent past. PBIT margin of the tractor division stood at just 4% as compared to 7% for its automotive division in 4QFY03.

Led by the restructuring exercise and sale of stake in Mahindra Sintered in FY03, M&M generated free cash flow in excess of Rs 4.1 bn in FY03. The company utilised this cash to reduce total debt by 17% in the last fiscal and the effect of which is also reflected 1QFY04. Interest outgo is lower by 32%. If one were to exclude extraordinary items pertaining to employee separation, net profit has grown by 5 times in 1QFY04.

The stock currently trades at Rs 177 implying a P/E multiple of 11.5x annualised 1QFY04 earnings. As far as the domestic market is concerned, we expect M&M to benefit from new launches on the UV front and higher sale of its three-wheelers. Good monsoons this fiscal has improved the outlook for the tractor segment in the next fiscal. If tractor sales rise, the company's operating margins could show improvement, thus resulting in higher profitability. Exports is also another area of focus for M&M (both for tractors and UVs). On a consolidated basis, most of the key subsidiaries of M&M turned profitable in FY03. Given this backdrop, the stock could continue to remain in the limelight.

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