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M&M: The big, fat margin jump - Views on News from Equitymaster
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M&M: The big, fat margin jump
Jul 30, 2009

Performance summary
  • The results of M&M for 1QFY10 include the results of its erstwhile subsidiary Punjab Tractors Ltd and Mahindra Holdings and Finance Limited which were merged with the company.
  • Standalone topline grows by 29% YoY during the quarter, aided by strong 44% YoY volume growth in the farm equipment segment.
  • Operating margins for the quarter expand by 6.6% YoY mainly due to lower raw material and other expenses (as a percent of sales).
  • PBIT margin of farm equipment segment improves from 12% to 17%, while that of automotive segment sees an increase from 8% to 10% during 1QFY10.
  • Consolidated sales improve by 4% YoY, while the profits see a growth of 6% YoY.

(Rs m) 1QFY09 1QFY10 Change
Net sales 33,024 42,426 28.5%
Expenditure 30,466 36,336 19.3%
Operating profit (EBDITA) 2,559 6,090 138.0%
EBDITA margin (%) 7.7% 14.4%
Other income 294 236 -19.8%
Interest (net) 97 60 -38.8%
Depreciation 621 885 42.5%
Profit before tax 2,134 5,381 152.1%
Extraordinary income/(expense)      
Tax 541 1,373 153.6%
Profit after tax/(loss) 1,593 4,009 151.6%
Net profit margin (%) 4.8% 9.4%  
No. of shares (m) 239.5 272.9  
Diluted earnings per share (Rs)*   40.6  
Price to earnings ratio (x)*   21.0  
(* on trailing twelve months earnings)

What has driven performance in 1QFY10?
  • M&M reported a topline growth of 29% YoY during 1QFY10 on the back of strong sales from automotive and farm equipment sectors. The company recorded a volume growth of 28.5% YoY in the utility vehicle (UV) segment against an industry growth of 1.6% YoY. Its market share increased to 64.8% (from 51.2% in 1QFY09) driven by Xylo, Scorpio and Bolero. The management does not foresee a strong growth happening in the UV industry in the near future. It thus plans to grow by increasing its market share.

    Segmental break up…
    Segment 1QFY09 1QFY10 % change
    Units sold 60,054 62,868 4.7%
    Revenues 18,769 22,575 20.3%
    PBIT 1,501 2,302 53.4%
    PBIT margin 8.0% 10.2%  
    Farm Equipment Segment      
    Units sold 30,123 43,383 44.0%
    Revenues 13,296 19,750 48.5%
    PBIT 1,561 3,344 114.2%
    PBIT margin 11.7% 16.9%  
    Other segments      
    Revenues 2,017 198 -90.2%
    PBIT 34 27 -20.3%
    PBIT margin 1.7% 13.8%  
    * Revenues include intersegment revenues

  • The farm segment volumes saw a 44% YoY growth in units as compared to the domestic tractor industry sales growth of 14% YoY. The merger with Punjab Tractors has helped M&M in consolidating the position of the company in the domestic tractor market. Including Swaraj Tractors, the company’s market share during the quarter was 43.3%. The company expects the industry during the second quarter to witness decent growth of around 5% to10%, provided monsoons hold up.

  • The operating margins almost doubled during the quarter on cost control and volume enhancement measures. On account of lower metal prices, raw material costs stood at 66% as a percent of sales down from 70% during the previous quarter last year.

  • On the segmental front, the PBIT of the automotive segment improved marginally from 8% to 10% YoY. The farm division saw an increase of 5% YoY on the PBIT margin front, with margins touching 17% during the quarter. Measures taken by M&M on various fronts by leveraging synergies, complementary capabilities and relentless focus on cost reengineering led to the strong performance. Further, better product mix also aided growth.

  • The bottomline of the company surged by more than 150% YoY led by a 138% YoY increase in the operating profits. Further, the lower interest costs (down 39% YoY) also helped boost growth.

  • Consolidated sales improved by 4% YoY, while the profits saw a growth of 6% YoY. The standalone entity now contributes 6% to the consolidated revenues and 9% to the profits.

What to expect?
At the current price of Rs 853, the stock trades at a multiple of 18x its expected FY11 earnings per share. The company, like its peers benefited on account of lower raw material costs. It did a capex of Rs 2 bn during the quarter. M&M has pruned its earlier capital expenditure programme of Rs. 65 bn between 2009 and 2012 to Rs. 42 bn. It plans to launch new vehicles in the heavy and light range segment. We will update our view on the stock shortly.

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