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M&M: A costly growth - Views on News from Equitymaster

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M&M: A costly growth
Jul 30, 2008

Performance summary
  • Standalone topline grows by a healthy 26% YoY during 1QFY09, led by 21% YoY growth in volumes (excluding sales of Logan).

  • Operating margins suffer a decline of 3.1%, due mainly to forex related losses and higher raw material costs

  • Bottomline falls 17% YoY on the back of poor operating performance as well as higher interest and depreciation charges. Excluding the forex losses, bottomline has witnessed a growth of 11% YoY.



(Rs m) 1QFY08 1QFY09 Change
Units sold* 70,915 85,565 20.7%
Net sales 26,128 32,934 26.1%
Expenditure 23,357 30,465 30.4%
Operating profit (EBDITA) 2,771 2,469 -10.9%
EBDITA margin (%) 10.6% 7.5%  
Other income 316 384 21.3%
Interest (net) (51) 97  
Depreciation 571 621 8.8%
Profit before tax 2,567 2,134 -16.9%
Extraordinary income/(expense) (16)    
Tax 640 541 -15.4%
Profit after tax/(loss) 1,912 1,593 -16.7%
Net profit margin (%) 7.3% 4.8%  
No. of shares (m) 236.6 239.5  
Diluted earnings per share (Rs)**   44.7  
Price to earnings ratio (x)**   11.5  
( ** on trailing twelve months earnings)  * excludes sales of 'Logan'

What has driven performance in 1QFY09?
  • The robust topline performance for the full year has been led by the automotive division. Here, led by a 27% YoY growth in volumes, topline has grown by nearly 25% YoY. Sales of utility vehicles (UV), which account for the bulk of the company’s volumes in the automotive segment, witnessed an impressive growth of 22% YoY over 1QFY08. This was higher than the industry growth rate of 17% YoY, enabling the company to gain market share by 1.8% and take it to an imposing 51.8%. The continued success of the refreshed ‘Bolero’ and ‘Scorpio’ helped the company grow its volumes in this segment. Among other segments, 3-wheelers also performed well, managing to grow sales by 55% YoY. Besides, exports also grew handsomely, registering a gain of 31% YoY as the company’s efforts of exploring new geographies bore fruit. In 1QFY09, the company’s products were launched in Turkey and Paraguay. On the margins front, segmental margins came in lower by 0.2%, a satisfactory performance, considering the fact that prices of most raw materials inched higher during the year.

  • As far as the farm equipment segment is concerned, volumes were higher by 10% YoY, led by 11% growth in domestic volumes. However, the company can draw comfort from the fact that it continued to remain a market leader with a share of 33%. Nevertheless, improved product mix ensured that topline growth remained impressive as it came in higher by 28% YoY. The company also did well to preserve the margins of the segment, as they were lower only marginally as compared to 1QFY08.

    segmental break up

    (Rs m) 1QFY08 1QFY09 Change
    Raw materials 17,874 22,968 28.5%
    % sales 68.4% 69.7%  
    Staff cost 1,891 2,221 17.5%
    % sales 7.2% 6.7%  
    Other expenses 3,591 5,276 46.9%
    % sales 13.7% 16.0%  

  • As against a net interest income in the previous quarter, M&M had to pay interest for the funds that it raised during the year, mostly to fund its huge capex needs. Other income though recorded impressive growth, growing by 21% YoY. Furthermore, with depreciation rising 9% YoY for the full year and the company incurring forex related losses to the tune of Rs 779 m, bottomline has come in lower by 17% YoY. If one were to exclude forex related losses, bottomline growth stands at a more respectable 11% YoY.

  • As far as the consolidated performance is concerned, the topline growth came in at an impressive 29% YoY seemingly due to continued impressive performances of key subsidiaries like Tech Mahindra and Mahindra Holidays. Bottomline growth has remained even more impressive, registering a growth of 37% YoY.

What to expect?
At the current price of Rs 510, the stock is trading at a 34% discount to our sum of the parts valuation of Rs 770 per share. Buoyancy in the company’s key business segments of automotive and farm equipment augurs well for the company. Furthermore, we believe that the swap ratio for the amalgamation of Punjab Tractors with itself is value accretive for M&M shareholders, thus giving its valuations further boost. Although the company has lined up huge capex plans, leadership position in its key segments of UVs and tractors and investments in fast growing sectors through its subsidiaries make the company a good long-term bet at current valuations. However, we are concerned with the growing number of acquisitions that the company is making and this could prove to be a drag on its balance sheet in the near term.

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