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M&M: Tepid start to the year - Views on News from Equitymaster
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M&M: Tepid start to the year
Sep 11, 2015

Mahindra & Mahindra (M&M) announced the first quarter results of financial year 2015-2016 (1QFY16). The company has reported a decline of 4% YoY in sales, while net profits fall by 7% YoY (M&M and MVML combined). Here is our analysis of the results.

Performance summary
  • Revenues (M&M and MVML combined) decline by 4% YoY during 1QFY16 as revenues from both the automotive and farm equipment segments remain subdued.
  • Operating margins contract marginally by 0.2% to 14.3% in 1QFY16; thus the operating profits fall by 5% YoY.
  • Net profits fall by 7% YoY on account of higher tax expenses for the quarter.

Financial performance: M&M and MVML** combined
(Rs m) 1QFY15  1QFY16  Change
Sales 98,181 94,371 -3.9%
Expenditure 83,989 80,842 -3.7%
Operating profit (EBDITA) 14,192 13,530 -4.7%
Operating profit margin (%) 14.5% 14.3%  
Other income 1,447  1,161 -19.8%
Depreciation 2,802 2,641 -5.7%
Interest 816 561 -31.3%
Profit before tax 12,021 11,488 -4.4%
Tax 3,057 3,177 3.9%
Profit after tax/(loss) 8,964 8,311 -7.3%
Net profit margin (%) 9.1% 8.8%  
No. of shares (m) 589.3 589.9  
Diluted earnings per share (Rs)*    51.2  
P/E ratio (x)*    21.8  
(*On a trailing 12-month basis)
(**Mahindra Vehicle Manufacturers Ltd)

What has driven performance in 1QFY16?
  • Mahindra and Mahindra (M&M) reported decline of 4% YoY in revenues during the quarter. This was largely due to the tepid performance of the both the automotive and farm equipment divisions. While revenues of the former were down 1% YoY, the latter saw revenues fall by 8% YoY.

  • As far as the automotive business is concerned, volumes de-grew for the company largely on account of the fall in volumes of LCVs (2 to 3.5T), vans as well as utility vehicles. However, in the LCV Goods (<2T) segment, the company reported a strong 47% YoY growth in volumes. The company's HCV portfolio (>16.2T) also saw healthy growth of 35% YoY in line with the overall revival in the MHCV industry.

  • The farm equipment segment also put up a subdued show with revenues falling by 8% YoY. The tractor industry as a whole witnessed a drop in volumes as farm incomes reduced. Erratic monsoons played spoilsport. For M&M, volumes of tractors were down 18% YoY (against industry decline of 16% YoY) although the company remained the market leader with a share of 41.5%.

    Cost break-up
    (Rs m) 1QFY15  1QFY16  Change 
    Automotive revenues 59,385 58,947 -0.7%
    PBIT 6,243 6,070 -2.8%
    PBIT margin (%) 10.5% 10.3%
    Farm Equipment revenues 38,937 35,722 -8.3%
    PBIT 6,661 6,310 -5.3%
    PBIT margin (%) 17.1% 17.7%
    Others  65 38 -41.3%
    Total revenues 98,388 94,707 -3.7%

  • M&M's operating margins shrunk by 0.2% YoY to 14.3% during 1QFY16 largely on account of a rise in staff costs and other expenses (as percentage of sales). Staff costs increased from 6.4% of sales in 1QFY15 to 7% in 1QFY16 on account of various wage settlements. Other expenses were higher because of higher spends on advertisement and sales promotion for new launches. Thus, operating profits fell by 5% YoY during the quarter. As far as segments are concerned, while margins contracted by 0.2% for the automotive sector, for the farm equipment segment, they increased by 0.6%.

  • Net profits fell 7% YoY during the quarter on account of higher tax expenses.
What to expect?

Although the growth of UVs has been slow, the company expects the scenario to improve going forward backed by new launches. The LCV segment as a whole has been de-growing and the company does not expect this to change in FY16 either. That said, growth in certain segments within the LCV segment could ramp up (especially the 3.5 to 7T) category. As far as tractors are concerned, the management has pegged the growth for the industry at around 5% fir FY16. Growth is expected to be better in the second half of the fiscal. The company has maintained its stance of earmarking Rs 75 bn for capex over the next three years and Rs 25 bn in subsidiaries and JVs.

We maintain our '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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