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The rain gods give in - Views on News from Equitymaster
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  • Aug 11, 2001

    The rain gods give in

    Mahindra & Mahindra Ltd (M & M), the flagship company of the Mahindra group, has recently reported dismal results for the June quarter. The company is the market leader in both tractors and utility vehicle segments. However, it has performed miserably in both these segments, thus losing market share. The result: Net loss of Rs 296 m in the first quarter of 1QFY02.

    Depressed agricultural growth in the past two years has hit the company’s profitability, resulting in lower demand. This has put pressure on the company’s operating margins which fell to a low of 2.8% in 1QFY02, a fall of 570 basis points YoY. The company has been reporting a continuous fall in margins since the past year

    The company’s performance in the utility vehicle segment had been far from satisfactory in FY01 and this has continued into the current financial year as well. There are many reasons for this besides lower rural demand. Higher competition, especially in the urban utility vehicle market (which is not M & M’s stronghold), ban on soft-tops in certain states as well as the fact that M & M has been slow to realize the changing market trends. As a result, Toyota’s Qualis and Tata’s Sumo, have made a mark for themselves and together cornered over 44% market share.

    Dismal results
    (Rs m) 1QFY01 1QFY02 Change
    Sales 8,485 6,859 -19%
    Other Income 357 137 -62%
    Expenditure 7,760 6,664 -14%
    Operating Profit (EBDIT) 725 195 -73%
    Operating Profit Margin (%) 8.5% 2.8%  
    Interest 272 217 -20%
    Depreciation 324 373 15%
    Profit before Tax 485 -258 -153%
    Provisions and contingencies 23 26 13%
    Extraordinary items - 13 -
    Tax 120 0 -100%
    Profit after Tax/(Loss) 343 -296 -186%
    Net profit margin (%) 4.0% -4.3%  

    In the tractor division however, the company did well in FY01, as it gained a substantial market share from its competitors in a falling market. As a result, its market share went up to 33.6% in FY01 from 27.1% in FY00. In volume terms this gain works out to 12.3% YoY. This was commendable as the industry volumes fell by 9% YoY during this period. Other players in tractors, with the exception of Punjab Tractors, lost market share in FY01. M & M managed this through its aggressive marketing strategy of ‘advancing’ tractors to farmers without any down payment, incentive schemes and flooding dealers with stocks.

    In the higher end 60 HP segment, the company’s launch of its ‘Arjun’ series Tractors also resulted in better volumes as demand in higher HP levels was much better than in the lower HP segments. M & M‘s popular ‘Bhoomiputra’ brand in the lower 25-35 HP segment did well and bucked the trend by registering strong growth as against the industry decline in these segments. In the 40 HP range, the company’s ‘Sarpanch’ brand did very well registering a growth of 29% as compared to an industry fall of 10.6% YoY in this segment. On the export front too, M & M did well and its exports grew by 7.5% YoY.

    Higher tractor market share in FY01
    (%) FY00 FY01
    M & M 27.1% 33.6%
    Punjab Tractors 19.4% 19.4%
    Escorts 19.9% 19.1%
    TAFE 17.4% 13.2%
    Eicher 8.7% 7.7%
    HMT 6.1% 5.5%
    Others 1.4% 1.5%

    However, as rural farm incomes have been under duress since the past two years, new purchases were slow to come, resulting in a huge inventory pile up in the industry during FY01. This has played havoc with M & M’s tractor division in the current year. For 1QFY02, M & M tractor volumes declined by 35% YoY, as compared to the industry decline of 11.5%. This can be attributed to the flooding of dealers stocks in FY01 as well as over billing in the last quarter of FY01. As a result on a retail level its volume growth was positive in 1QFY02. However, on the wholesale level, sales declined in 1QFY02.

    On the costs side, the company was not able to control expenses in FY01, due to higher compliance costs and also due to new product launches in tractors and utility vehicles, which meant higher marketing and raw material expenses. Raw material costs as a percentage of total costs went up from 57% in FY00 to 59% in FY01. As a result, its operating expenses went up by 4% YoY. It was unable to pass on this increase in costs to consumers as the pressure on realisations mounted.

    On a more positive note, M & M is taking measures to reduce costs in the current year. In 1QYF02, its overall operating expenses fell by 14% YoY. However, as its sales fell by 19% during this period, its margins took a beating. The company has managed to reduce its staff expenses (by 8.9% YoY) and raw material costs (by 15% YoY) in 1QFY02. It has launched a voluntary retirement scheme for its workers and employees at its plants and offices in Mumbai. As on July 30, 2001, around 2,263 employees (32% of total workforce in Mumbai) had opted for the scheme.

    Another positive step taken by the company is that of reducing interest costs. During FY01, M & M’s interest costs declined by 20% YoY. The company achieved this by retiring Rs 2.8 bn of higher cost debentures in FY01 and refinanced this by taking on long-term debt of Rs 2 bn at more competitive rates of interest.

    M & M 's 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%

    To further increase its presence in the tractor market, M & M has launched two satellite plants at Rudrapur in Uttaranchal and Jaipur in Rajasthan. These plants aim to cater to specific needs of farmers. These will serve as training centres, as well as take care of local demand, thus reducing the time of delivery and transportation costs. The company plans to open more such plants across the country.

    In the auto segment, the company expects demand for soft-top utility vehicles to pick up, as permits for these are expected to be issued in certain states. The company’s ‘Scorpio’ project in the high end urban utility market is under progress and is expected to meet the future needs of the urban utility vehicle market.

    On the whole, the prospects for M & M seem brighter in the coming months. As monsoons have been normal, rural incomes are anticipated to start improving in 2HFY02. This should give a boost to tractor and UV sales by the end of the year. However, the company needs to continue aggressive expense reduction for this to have a positive impact on its bottomline. As the company is moving towards a leaner organization, the benefits of this are likely to pay off in the coming years.

    The current valuations also are attractive at 6.6x FY01 EPS of Rs 10.9. The company’s shares have under performed the market by over 45% in the past year. As the positive scenario in future seems likely to outweigh the negatives that M & M has faced in the recent past, this could result in better performance in 2HFY02.



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