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M&M: It's farm equipment this time - Views on News from Equitymaster

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M&M: It's farm equipment this time

Aug 20, 2013

Mahindra & Mahindra (M&M) announced the first quarter results of financial year 2013-2014 (1QFY14). The company has reported a growth of 9% YoY in sales while net profits grew by 17% YoY (M&M and MVML combined). Here is our analysis of the results.

Performance summary
  • Revenues (M&M and MVML combined) rise by 9% YoY during 1QFY14 largely led by growth in the automotive business.
  • Operating margins improve by 0.5% to 14.4% in 1QFY14; thus operating profits grow by 13% YoY.
  • Bottomline grows by 17% YoY during the quarter on account of a substantial rise in other income.

Financial performance: M&M and MVML** combined
(Rs m) 1QFY13 1QFY14 Change
Sales 88,785 97,006 9.3%
Expenditure 76,435 82,998 8.6%
Operating profit (EBDITA) 12,350 14,008 13.4%
Operating profit margin (%) 13.9% 14.4%  
Other income 662 972 46.9%
Depreciation 1,800 2,080 15.6%
Interest 714 759 6.3%
Profit before tax 10,498 12,141 15.7%
Tax 2,713 3,045 12.2%
Profit after tax/(loss) 7,785 9,096 16.8%
Net profit margin (%) 8.8% 9.4%  
No. of shares (m) 589.3 589.9  
Diluted earnings per share (Rs)*   61.0  
P/E ratio (x)*   13.0  
(*On a trailing 12-month basis)
(**Mahindra Vehicle Manufacturers Ltd)

What has driven performance in 1QFY14?
  • Mahindra and Mahindra (M&M) reported revenue growth of 9% YoY during the quarter. But contrary to the past many quarters, the clear winner this time was the farm equipment division, which grew by an impressive 27% YoY, while the automotive division was at the receiving end growing by a mere 1% YoY.

  • As far as the automotive business is concerned, volumes de-grew for the company as was the trend in the industry. Besides the considerable headwinds that the auto industry overall has been witnessing, M&M's volume sales of utility vehicles (UVs) were also impacted by the rise in excise duty announced in the Union Budget. The farm equipment segment on the other hand did quite well during the quarter on account of good monsoons, increase in minimum support prices and the low base effect last year. Growth in tractor volumes at around 26% YoY was in line with that of the industry. The company has a domestic market share of 41.4% in this segment.

    Segmental break-up...
    (Rs m) 1QFY13 1QFY14 Change
    Automotive revenues 58,225 58,610 0.7%
    PBIT 6,537 6,544 0.1%
    PBIT margin (%) 11.2% 11.2%  
    Farm Equipment revenues 30,783 38,995 26.7%
    PBIT 4,824 6,527 35.3%
    PBIT margin (%) 15.7% 16.7%  
    Others 170 74 -56.2%
    Total revenues 89,178 97,679 9.5%
    *Excluding intersegment revenues

  • M&M's operating margins improved by 0.5% YoY to 14.4% during 1QFY14 on account of a decrease in raw material costs (as percentage of sales). Raw material costs fell by 1.5% to 70.2% of sales in 1QFY14. As far as segments are concerned, the company managed to maintain margins in its automotive segment, while the farm equipment division witnessed an improvement in the same.

  • Growth in net profits during the quarter was higher at 17% YoY on account of a rise in other income. This was largely due to the dividend income that the company received from its subsidiaries.
What to expect?
At the current price of Rs 791, the stock is trading at a multiple of 13 times its trailing 12-month earnings (M&M and MVML combined). Going forward commodity prices will continue to play a key role in determining profitability for both the industries - auto and farm equipment. M&M intends to keep up its pace of new launches both in the automotive and farm equipment sector over the next three years as well as managing capacities. In this regard, it has outlined capex of Rs 75 bn over the next three years. The company has also earmarked another Rs 25 bn towards investments in its subsidiaries over the same period. Near term headwinds in the auto industry are expected to continue as well as the Indian economy has yet to recover. Overall, we have a ‘Buy’ view on the stock.

We would like to remind our subscribers that for the purpose of risk minimisation, one should avoid having more than 5% exposure on any one stock from the overall equity portfolio. Please do visit our asset allocation section for further details.

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