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M & M: Realistic valuations?

Sep 5, 2000

Mahindra & Mahindra's (M & M) stock price has under-performed the market by close to 40% in the past six months. However for the period from the beginning of December'99 to mid February'2000 M & M's shares outperformed the market by 42%. This was on the back of the news that M & M's telecom software subsidiary, Mahindra British Telecom (MBT) was coming out with an IPO. During this period the market gave M & M software valuations, hence its stock price more than doubled during this time. But what has happened to M & M's stock price in the past few months, considering that MBT has announced that it will be going public in the next couple of months. Why has the stock not performed ?

The reasons are many:

  • The software sector though continuing to still be in the limelight, is not attracting as many investors as it did in the past. This is due to more realistic valuations in the market currently.

  • M & M's performance in the past few months has been slow as its main businesses have not been performing well. The tractor industry has seen a 16% decline in volumes from April-July'2000. Despite this M & M's market share has gone upto 36%, the growth for its tractor division has been 3% for the first four months of the current year.

  • Besides, due to higher competition in the multi utility market the company's market share and volumes in this segment have fallen. The company's recent launch of Bolero, will help it gain back its lost market share in the 2H. The company's UV volumes have fallen by 15% YoY from April-July'2000.

  • Operating margins fell in the 1QFY01 to 8.3% from 12.0% in the 1QFY00, this was mainly due to higher costs related to emission norms, adverse product mix and lower volumes.

M & M's performance in the second half is expected to be better due to normal monsoons and consumers adjusting to higher sales tax in certain states.

However we feel that in the past the valuations given to M & M were unwarranted. This is also because of the software sector hype in the market. M & M's shareholders gain only to the extent of higher dividend income to the company from its wholly owned subsidiary Mahindra Information Technology Ltd, which has a 57% stake in MBT.

However keeping in mind that from FY02 companies will be have consolidated balance sheets, M & M's fundamentals would improve as MBT is expected to continue to show good growth rates. The improved fundamentals of M & M would then result in getting it higher valuations.

On the current price of Rs 187 it is trading at 7.8 xFY00 earnings

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