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M&M: Auto division drives growth - Views on News from Equitymaster
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M&M: Auto division drives growth
Jul 28, 2010

M&M has announced its 1QFY11 results. The company has reported a growth of 22% and 40% in sales and net profits respectively on a standalone basis. Here is our analysis of the results.

Performance summary
  • Standalone sales increase by 22% YoY during 1QFY11 led by growth from the company's automotive and farm equipment businesses. While the former grew by 28% YoY, the latter grew by 15% YoY.
  • Operating profits rise by a quicker pace of 27% YoY as operating margins expand by 0.6% YoY to 15%. Lower employee and other expenses (both as a percentage of sales) are key reasons for the same.
  • Profits grow by 40% YoY during the quarter. Apart from a strong operating performance, interest income (as against an interest expense during 1QFY10) and a lower tax outgo are reasons for the same.
  • Consolidated total income (gross revenues and other income) and profits rise by 9% YoY and 44% YoY respectively.


Standalone financial performance
(Rs m) 1QFY10 1QFY11 Change
Sales 42,426 51,601 21.6%
Expenditure 36,336 43,845 20.7%
Operating profit (EBDITA) 6,090 7,756 27.4%
Operating profit margin (%) 14.4% 15.0%  
Other income 236 205 -13.1%
Interest (net) 60 (227)  
Depreciation 885 976 10.3%
Extraordinary income/(expense) - -  
Profit before tax 5,381 7,211 34.0%
Tax 1,373 1,588 15.7%
Profit after tax/(loss) 4,009 5,624 40.3%
Net profit margin (%) 9.4% 10.9%  
No. of shares (m) 278.8 578.4  
Diluted earnings per share (Rs)*   37.3  
P/E ratio (x)*   17.3  
(*On a trailing 12-month basis; adjusted for extraordinary items)

What has driven performance in 1QFY11?
  • Mahindra and Mahindra (M&M) reported a standalone topline growth of 22% YoY. This was largely led by both its main businesses – automotive and farm equipment. While the former saw a faster growth of 28% YoY, the latter segment's revenues grew by 15% YoY. Growth in both the segments was largely volume driven. In the automotive division, the company posted a volume growth of 11% YoY, while the farm equipment segment reported a 14% YoY increase in volumes. It may be noted that the increase in revenues cannot be comparable to the change in volumes on the back of the change in product mix.

  • During the quarter ending June 2010, the company lost some market share in the UV segment on the back of supply constraints. The company (along with the industry) is facing problems in three areas – rubber (tyres), castings and fuel engine equipments. As per the management, sales would have been higher by about 7% to 8% had it not been for these problems. While these problems are likely to exist in the next quarter as well (though to a lower extent), the company expects these problems to go away thereafter.

    Segmental break up…
    Segment 1QFY10 1QFY11 % change
    Automotive
    Vehicles sold 48,720 53,948 10.7%
    Revenues 22,575 28,798 27.6%
    Share of total revenues 53% 56%  
    PBIT 2,302 3,521 53.0%
    PBIT margin 10.2% 12.2%  
    Farm Equipment Segment
    Tractors sold 42,130 47,916 13.7%
    Revenues 19,750 22,739 15.1%
    Share of total revenues 46% 44%  
    PBIT 3,344 3,894 16.4%
    PBIT margin 16.9% 17.1%  
    Other segments
    Revenues 198 137 -31.1%
    PBIT 27 2 -91.6%
    PBIT margin 13.8% 1.7%  
    Total* 42,524 51,673 21.5%
    *Excluding intersegment revenues

  • At the operating level, M&M did well to contain costs, despite a 28% YoY increase in absolute input costs. With the same happening, the share of raw material costs rose to 69.6% of sales during the quarter as compared to 66.1% last year. While staff costs increased marginally, other expenses reduced by 8% YoY in absolute terms as compared to 1QFY10. The key reason for the same was lower forex losses. Operating margins during the quarter stood at 15% as compared to 14.4% last year. Apart from the cost contain measures by the company, the fact that volumes jumped significantly have helped matters.

  • M&M's profits rose by a sharp 40% YoY. Apart from a strong operating performance, interest income during the quarter (expense during 1QFY10), a benign increase in depreciation costs and a lower tax outgo helped the company record a sharp increase in profits.

  • As for the company's consolidated numbers, M&M's total income for the quarter ended June 2010 grew by 9.4% YoY, while profits grew by 44% YoY.

What to expect?
At the current price of Rs 647, the stock is trading at a multiple of 17.3 times its trailing 12-month standalone earnings. The company’s management expects to regain its market share once the problems relating to its supply side are curbed. In addition, the company is also launching a numbers of variants in the auto space, which would help boost volumes. On the whole, the industry is expected to grow at a pace of 14% to 15% (auto industry). However, the management seems to be confident of beating the industry growth levels. The management’s view on the tractor segment is similar. We however have a ‘cautious’ view on the stock currently (ResearchPro subscribers, kindly click here).

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