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M&M: Into higher orbit

Jul 28, 2004

Introduction to results
M&M, India's largest UV (utility vehicle) and tractor manufacturer has registered a strong all round 1QFY05 performance. While the topline of the company has grown by a healthy 42% YoY, the bottomline has grown at a much higher rate of 145% YoY, mainly due to improved operating performance and savings on the interest front.

(Rs m) 1QFY04 1QFY05 Change
Net sales 10,031 14,232 41.9%
Other income 209 83 -60.2%
Expenditure 9,131 12,419 36.0%
Operating profit (EBDITA) 900 1,812 101.3%
Operating profit margin (%) 9.0% 12.7%  
Interest 170 18 -89.6%
Depreciation 410 427 4.2%
Profit before tax 530 1,451 173.8%
Extraordinary items (47) - -
Tax 58 412 610.3%
Profit after tax/(loss) 425 1,039 144.5%
Net profit margin (%) 4.2% 7.3%  
No. of shares (m) 116.0 116.0  
Diluted earnings per share (Rs)* 14.7 35.8  
P/E (x)   12.4  
(* annualised)      

What is the company's business?
M&M is the country's largest manufacturer of tractors and UVs. It is also engaged in the manufacturing of LCVs (light commercial vehicles) and three-wheelers. While automotive division comprising of UVs, LCVs and three-wheelers contributed to 70% of FY04 domestic revenues, farm equipment division accounted for the remaining 30%. While the company had a 49% market share in the UV segment in FY04, it had a 26% share in the tractor sector. Through investment in its subsidiaries, M&M also has interests in other sectors like software, hotels, real estate and financial services.

What has driven performance in 1QFY05?
Sales:  While the automotive division (UVs, LCVs and three wheelers) has continued to witness robust growth in volumes, growth in the farm equipment segment has really propelled the overall growth of the company. Shrugging off a three-year decline, the tractor industry finally came out of the trough in FY04 (10% YoY growth) and the growth has continued during the first quarter of the current year as well. M&M, by virtue of its leadership has benefited from such a trend and has witnessed a healthy 60% YoY growth in volumes. Growth in value terms was even higher at 71% YoY. UV sales, the mainstay of the company's automotive division, were also higher by 29% YoY. This largely helped the segment volumes to grow by a similar margin of 28%. Sales of LCVs and 3-wheelers were not bad either as they grew by 20% and 30% respectively, on a YoY basis. The division also seemed to have benefited from improved product mix as is evident from the 33% growth in value terms.

Segmental break up (volume sales)...
Segment 1QFY04 1QFY05 % change
U.Vs 18,345 23,581 28.5%
LCVs 1,729 2,082 20.4%
3-wheelers 3,242 4,197 29.5%
Automotive 23,316 29,860 28.1%
Tractors 10,013 16,048 60.3%
Total 33,329 45,908 37.7%

Operating margin:  A strong 370 basis points improvement in operating margins is largely a result of higher capacity utilisation in the tractor division. It should be remembered that the performance of this division had remained lackluster in the recent past and as a result margins had suffered to that extent. Now with the division's performance improving substantially, margin improvement was along expected lines. Lower wage bill and other expenses have also helped improve the operating performance. Had it not been for higher steel prices, margins would have looked even better.

Cost break-up...
(Rs m) 1QFY04 1QFY05 Change
Raw materials 6,658 9,710 45.8%
% sales 66.4% 68.2%  
Staff cost 1,067 1,236 15.8%
% sales 10.6% 8.7%  
Other expenses 1,395 1,474 5.7%
% sales 13.9% 10.4%  

Net profits:  Growth at the PBT levels is even higher at 174%. This could be attributed to lower interest outgo of 90%. The company had earlier raised US$ 100 m by way of cheaper foreign currency convertible bonds and these seemed to have helped it in paring interest expenses. While higher tax provisioning has affected the PBT growth levels to certain extent, at 145% growth in PAT is still much higher than the topline growth.

What to expect?
The stock is currently trading at Rs 446, implying a P/E of 12x annualised 1QFY05 earnings. While the valuations look attractive, it has to be borne in mind that such a growth is not sustainable on a long-term basis. Besides, monsoons have not been good so far and this could impact volumes growth, especially in the farm equipment division. Caution needs to be exercised to that extent.

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