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M&M: Will monsoon propel growth? - Views on News from Equitymaster
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  • Sep 24, 2001

    M&M: Will monsoon propel growth?

    Mahindra & Mahindra, the tractors and light commercial vehicles major, reported a net loss of Rs 296 m in 1QFY02 as compared to a profit of Rs 343 m in the corresponding quarter of the previous year due to a sharp fall in sales and operating margins. Given the recent upturn in demand, what is the outlook for the company for the rest of the year?

    If one were to look back at the first quarter sales numbers, there was a sharp 25.2% fall in overall volumes of the company. Competition in the light commercial vehicles segment has intensified with the entry of Toyota and a slew of new launches by Telco under its Sumo range. Though M&M launched "Bolero" last year, after a initial pick up in sales, growth waned towards the end of the year. The contribution of the vehicles division (including multi-utility vehicles and LCVs) as a percentage of number of units sold has come down from 56.8% in FY97 to 44.3% in FY01. Though the company is the market leader in these segments, its market share in the LCV segment had come down to 10.9% in FY01 from 11.7% in FY00.

    Volumes plummet…
    (nos) 1QFY01 1QFY02 (% change)
    Tractors 19,792 12,909 -34.8%
    LCVs 1,904 1,087 -42.9%
    Utility vehicles 13,624 12,149 -10.8%
    Three wheelers - 273 -
    Total 35,320 26,418 -25.2%

    LCV production and sales for the period ended April-July 2001 for the company has fallen by 32.4% and 31.5% respectively. Similarly, the utility vehicle segment also registered a 5.8% and 5.2% fall in production and sales during the aforesaid period.

    Tractor division, which contributed to around 44% of FY01 sales, witnessed a sharp slump in demand, which has resulted in a 34.8% drop in volumes in 1QFY02. Though aggressive new launches helped the company to increase its market share in FY01, the slow down in the economy has affected rural demand. In the annual report of the company, it is also stated that an increase in dealer stocks due to lower demand last year might subdue tractor sales in the current year.

    Changing sales mix…
    (nos) FY97 FY98 FY99 FY00 FY01
    Vehicles 75,568 76,954 70,548 76,437 62,927
    % increase   1.8% -8.3% 8.3% -17.7%
    % to total units sold 56.8% 53.2% 50.4% 52.0% 44.3%
    % of total sales 58.3% 56.2% 53.2% 56.7% 49.6%
    Tractors 57,379 67,780 69,362 70,571 79,237
    % increase   18.1% 2.3% 1.7% 12.3%
    % to total units sold 43.2% 46.8% 49.6% 48.0% 55.7%
    % of total sales 33.2% 36.6% 37.9% 37.8% 44.5%

    The only silver lining is the estimates of higher agricultural output in the current year on the back of a normal monsoon. So majority of the auto majors are of the view that auto demand would pick up in the second half of the current year. However, it remains to be seen whether higher agricultural output results in a rise in tractor demand in light of higher foodstock with the government and a possible fall in agricultural prices in the current year. This might affect machanisation plans of the farmers.

    But M&M has embarked an aggressive cost cutting exercise to become more competitive and reduce the impact of weaker demand. The company's overall expenses fell by 14% YoY in 1QFY02 due to lower raw material and staff costs (staff costs declined by 8.9% in 1QFY02). The company had offered a voluntary retirement scheme for its workers and staff at all its offices and plants in Mumbai. Till July 30 '01, 2,263 employees (32% of total workforce in Mumbai ) had opted for the scheme. Therefore, the company would continue to benefit from restructuring in the coming quarters also.

    The scrip is currently trading at Rs 53 at a P/E multiple of 7.3x FY01 earnings. On the expected sales of Rs 37,164 m in FY02, market capitalisation to sales works out to 0.2 times.



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