M&M: Sales surge, profits slow - Views on News from Equitymaster

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M&M: Sales surge, profits slow

Aug 12, 2011

M&M announced the fourth quarter results of financial year 2011-2012 (1QFY12). The company has reported a growth of 31% and 8% in sales and net profits respectively on a standalone basis. Here is our analysis of the results.

Performance summary
  • Standalone revenues rise by 31% YoY during 1QFY12 led by growth in both the segments - automotive and farm equipment.
  • Operating profits rise at a slower pace (as compared to sales) as operating margins contract by 1.7% YoY to 13.3%. Margin contraction is on account of higher raw material costs (as a percentage of sales).
  • Net profits growth is slower at 8% YoY on account of decline in operating margins, lower other income and higher tax expenses.

Standalone financial performance
(Rs m) 1QFY11 1QFY12 Change
Sales 51,601 67,335 30.5%
Expenditure 43,845 58,362 33.1%
Operating profit (EBDITA) 7,756 8,973 15.7%
Operating profit margin (%) 15.0% 13.3%  
Other income 432 269 -37.8%
Depreciation 976 1,099 12.6%
Profit before tax 7,211 8,143 12.9%
Tax 1,588 2,095 31.9%
Profit after tax/(loss) 5,624 6,049 7.6%
Net profit margin (%) 10.9% 9.0%  
No. of shares (m) 566.1 587.3  
Diluted earnings per share (Rs)*   44.0  
P/E ratio (x)*   16.8  
(*On a trailing 12-month basis; adjusted for extraordinary items)

What has driven performance in 1QFY12?
  • Mahindra and Mahindra (M&M) reported an impressive standalone revenue growth of 31% YoY during the quarter. Both the company segments - automotive and farm equipment reported strong growth during 1QFY12. Sales volumes of the company's 'automotive' division grew by 21% YoY in the domestic market during the quarter, and managed to retain its leadership with a market share of 56% (UV segment). Other product segments such as the small load carriage segment (particularly 'Maxximo') and three wheelers (growing faster than the industry) did well too. The company also saw a strong rise in exports during the quarter. M&M exported 5,717 vehicles (as against 3,125 vehicles in the corresponding quarter last year) to regions such as SAARC, South Africa & South America, amongst others.

    Growing revenues by 26% YoY, M&M's 'farm equipment' contributed to about 42% of the company's topline during the quarter. Within this, domestic tractor volumes grew by about 20% YoY. Exports also did well to grow by 32% YoY to 2,908 tractors as compared to 2,376 tractors in 1QFY11.

  • Segmental break-up...
    (Rs m) 1QFY11 1QFY12 Change
    Automotive revenues 28,798 38,579 34.0%
    PBIT 3,521 4,139 17.5%
    PBIT margin (%) 12.2% 10.7%  
    Farm Equipment revenues 22,739 28,615 25.8%
    PBIT 3,894 4,574 17.5%
    PBIT margin (%) 17.1% 16.0%  
    Others 137 205 50.1%
    Total revenues 51,673 67,399 30.4%
    *Excluding intersegment revenues

  • Like its peers in the auto industry, M&M faced pressure at the operating level as its margins contracted by 1.7% YoY to 13.3% during 1QFY12. The main culprit was raw material costs as they increased by 2.2% YoY and stood at 71.8% of sales (as compared to 69.6% in 1QFY11). Any further decline in operating margins was, however, arrested as the company was able to keep its employee costs and other expenditure under control.
  • Cost break-up
    (Rs m) 1QFY11 1QFY12 Change
    Raw material 35,905 48,336 -25.7%
    % of net sales 69.6% 71.8%  
    Employee cost 3,137 4,034 28.6%
    % of net sales 6.1% 6.0%  
    Other expenses 4,803 5,992 24.7%
    % of net sales 9.3% 8.9%  
    Total 43,845 58,362  

  • M&M's profits rose by a mere 8% YoY during the quarter. Besides the drop in operating margins, what also slowed growth was lower other income and higher tax expenses.

What to expect?

At the current price of Rs 739, the stock is trading at a multiple of 16.8 times its trailing 12-month standalone earnings. M&M's management has indicated that going forward commodity prices will play a key role in determining profitability for both the industries - auto and farm equipment. This would be the case for the sector as a whole. Within that, a key factor would be the pricing power each player commands in each segment. Further, considering that interest rates have risen significantly in recent times, demand through vehicle financing could be an issue going forward. The management added that, rising interest rates have not been an issue till now. But going forward, it could dampen the growth. Thus, M&M intends to counter the same by focusing on new launches both in the automotive and farm equipment sector as well as managing capacities. Overall, we have a positive view on the stock from a long term perspective.

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