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M&M: Will it continue?

Jul 30, 2002

M&M seems to be on the turnaround path. The company has posted a sharp rise in sales in 1QFY03 on the back of impressive performance of its farm equipment segment and higher demand for UVs. M&M is back in the black with a net profit of Rs 78 m, as compared to a net loss of Rs 296 m in 1QFY02.

(Rs m) 1QFY02 1QFY03 Change
Net sales 6,859 8,284 20.8%
Other Income 137 31 -77.7%
Expenditure 6,664 7,535 13.1%
Operating Profit (EBDIT) 195 749 284.2%
Operating Profit Margin (%) 2.8% 9.0%  
Interest 217 249 14.7%
Depreciation 373 406 8.8%
Profit before Tax (258) 125 -
Extraordinary items (38) - -
Tax - 48 -
Profit after Tax/(Loss) (296) 78 -
Net profit margin (%) -4.3% 0.9%  
No. of Shares (m) 110.5 110.5  
Diluted Earnings per share* (10.7) 2.8  
P/E Ratio (x)   33.3  
(* annualised)      

While industry demand for tractor has remained subdued in 1QFY03, M&M has managed to outperform the industry and gain market share during the same period. Industry tractor volumes have declined by 5% to 46,775 units in 1QFY03. On the other hand, M&M's unit sales have gone up 14% to 14,716 units. But this could also be on account of aggressive dealer push strategy and higher credit sales by the company. One has to wait for M&M's performance in 2QFY03 to gauge the actual industry demand scenario. Keeping in mind the draught-like situation in select Northern and Southern regions, tractor industry is expected to witness a 7% drop in volumes in FY03.

Volumes in 1QFY03…
(Nos) 1QFY02 1QFY03 Change (%)
Tractors 12,934 14,716 13.8%
% share 27.7% 33.1%  
UVs 12,256 13,241 8.0%
% share 44.0% 48.9%  
LCVs 1,128 1,881 66.8%
% share 10.7% 14.3%  
Total 26,318 29,838 13.4%
Source: M&M website

Against the industry drop of 3% in UVs, M&M has posted a 8% rise in volumes, which could have been led by new model introduction like 'Camper' and 'Maxx' range of vehicles. Contribution from 'Scorpio', the newly launched SUV, is still small when compared to its overall sales in the UV segment. Surprisingly, there has been a marked revival in LCV demand off late that is apparant from a 25% rise in industry volumes. M&M has outperformed the industry on this front as well (but on a lower base). While we expect M&M to continue its impressive performance on the UV front, volume growth for other segments is expected to remain lacklustre for FY03.

Market share gains…
(% change)* Industry M&M
Tractors -4.8% 13.8%
UVs -2.7% 8.0%
LCVs 24.7% 66.8%
*1QFY03 over 1QFY02

While volumes have increased by 13%, turnover has gone up by 20% reflecting improved product mix. A sharp rise in margins is on account of savings in employee expenses post VRS and other value engineering efforts initiated by M&M last year. The rise in interest cost is primarily on account of higher debt raised by M&M in FY02. While total debt had gone up by Rs 7.2 bn in FY02, average interest costs was 9%. The rise in interest expenses could also be on account of higher working capital requirement to fund credit sales. Over the last one and half years, tractor majors have seen a sharp rise in credit days due to stiff competition and lower offtake. M&M's receivables days had gone up to 58 days in FY02 as compared to 54 days in FY01. Since M&M wrote-off all miscelleneous expenses against share premium reserves in FY02, extraordinary items are nil in 1QFY03.

The stock currently trades at Rs 94 implying a P/E multiple of 33.3x 1QFY03 annualised earnings. On FY03E earnings, P/E multiple works out to 9.4x. The initial response to 'Scorpio' has been impressive and as a result we expect M&M to increase its market share in UV segment in FY03. However, tractor demand will remain subdued for the next 12 months in light of high inventory in the sector and lower offtake. Keeping the aforesaid factors in mind, overall volume growth for the company is expected to be around 7% levels in FY03.

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