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M & M : In the red - Views on News from Equitymaster
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  • Jul 31, 2001

    M & M : In the red

    Tractor and utility major, Mahindra and Mahindra (M & M) has reported a net loss of Rs 296 m for 1QFY02 as compared to a net profit of Rs 343 m in 1QFY01. The dismal perfomance was driven by lower volumes in both its tractor and automotive divisions, resulting in a 570 basis points reduction in operating margins to 2.8% in 1QFY02 . The overall slowdown in the rural economy has taken its toll on the company's bottomline.

    (Rs m) 1QFY01 1QFY02 Change
    Sales 8,485 6,859 -19.2%
    Other Income 357 137 -61.8%
    Expenditure 7,760 6,664 -14.1%
    Operating Profit (EBDIT) 725 195 -73.1%
    Operating Profit Margin (%) 8.5% 2.8%  
    Interest 272 217 -20.4%
    Depreciation 324 373 15.0%
    Profit before Tax 485 -258 -153.2%
    Provisions and contingencies 23 26 13.0%
    Extraordinary items - 13 -
    Tax 120 0 -100.0%
    Profit after Tax/(Loss) 343 -296 -186.4%
    Net profit margin (%) 4.0% -4.3%  
    No. of Shares (eoy) (m) 110.5 110.5  
    Diluted number of shares 110.5 110.5  
    Diluted Earnings per share* 12.4 -10.7  

    In the tractor market, the company has reported a decline in volumes by 35% YoY to 12,909 tractors in 1QFY02, this is higher than the decline in industry volumes by 11.5% YoY. As a result, its market share fell from 36% in 1QFY01 to 27.7% in 1QFY02. The company had been very aggressive in pushing tractor sales in FY01, however with a huge inventory pile up. Consequently, it is now reducing its pipeline inventory and adjusting stocks with dealers in accordance with market demand. The slowdown in the agriculture sector during the past two years has taken its toll on the domestic tractor market. Even though M & M gained substantial market share in FY01, it now seems to be facing a tougher time as compared to its competitor Punjab Tractors, who had earlier been more conservative.

    The automotive division of the company also reported a decline in its volumes as rural demand has slowed down considerably since the past year. As M & M is more dependant on the rural utility vehicles market as compared to the urban utility vehicle market, the company has had a tougher quarter.

    Volumes 1QFY01 1QFY02 % change
    Tractors 19,792 12,909 -35%
    LCVs 1,904 1,087 -43%
    Utility vehicles 13,624 12,149 -11%
    Three wheelers - 273 -
    Total 35,320 26,418 -25%

    On costs front, the company is taking measures to reduce expenses and increase operational efficiency while aiming for a leaner organisation. The company's overall expenses fell by 14% YoY in 1QFY02. Despite this margins dipped as the decline in its sales was steeper. The company's raw material expenses fell by 15% YoY in 1QFY02 and staff costs declined by 8.9% during this period. However, other expenses rose by 7% during this period.

    The company has offered a voluntary retirement scheme for its workers and staff at all its offices and plants in Mumbai. Till July 30th, 2,263 employees (32% of total workforce in Mumbai ) have opted for the scheme. The extraordinary item relates to Rs 12.6 m on account of its voluntary retirement costs and other retirement benefits for its scheme in the current financial year. This expense will be amortised every year for the next five years in the 1Q of every year.

    As monsoons have been normal, rural incomes are expected to improve in 2HFY02, this should give a boost to tractor and UV sales in the 2H. However, we feel the company needs to get more aggressive on reducing expenses for this to have a positive impact on the company's bottomline.

    These results are worse off than market expectations, hence we expect the stock to fall further. The stock closed 5% lower today. On the current price of Rs 68, it is trading at 6.2x FY01 EPS of Rs 10.9.



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