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M&M: Auto business powers growth

Oct 26, 2012

M&M announced the second quarter results of financial year 2012-2013 (2QFY13). The company has reported a growth of 33% in sales while net profits grew by 22% YoY on a standalone basis. Here is our analysis of the results.

Performance summary
  • Standalone revenues rise by 33% YoY during 2QFY13 largely led by growth in the automotive business.
  • Operating margins fall by 0.6% to 11.4% in 2QFY13; thus operating profits grow by 27% YoY.
  • Higher interest costs and depreciation charges result in relatively lower 22% YoY growth in the bottomline.
  • For the half year, sales and net profits grow by 36% YoY and 21% YoY respectively.

(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Sales 73,564 98,130 33.4% 140,834 191,804 36.2%
Expenditure 64,734 86,940 34.3% 123,051 169,520 37.8%
Operating profit (EBDITA) 8,830 11,189 26.7% 17,784 22,284 25.3%
Operating profit margin (%) 12.0% 11.4%   12.6% 11.6%  
Other income 2,484 3,229 30.0% 3,035 3,827 26.1%
Depreciation 1,257 1,784 41.9% 2,356 3,332 41.4%
Interest 308 475 54.2% 570 935 64.0%
Profit before tax 9,749 12,160 24.7% 17,893 21,844 22.1%
Tax 2,376 3,142 32.2% 4,470 5,569 24.6%
Profit after tax/(loss) 7,374 9,018 22.3% 13,423 16,274 21.2%
Net profit margin (%) 10.0% 9.2%   9.5% 8.5%  
No. of shares (m)       589.3 589.9  
Diluted earnings per share (Rs)*         53.6  
P/E ratio (x)*         16.0  
(*On a trailing 12-month basis)

What has driven performance in 2QFY13?
  • Mahindra and Mahindra (M&M) reported an impressive standalone revenue growth of 33% YoY during the quarter. The clear winner was the 'automotive' division, which grew by an impressive 58% YoY, while the farm equipment division was at the receiving end declining by 6% YoY.

  • As far as the automotive business is concerned, the company managed to retain its leadership in the UV segment as volumes were up 32% YoY. Although the overall auto segment faced considerable headwinds during the quarter, certain segments performed very well; utility vehicles (UVs) being one of them. Since M&M is the market leader in this space, the company benefitted significantly. On the exports front, M&M sold 10,349 vehicles on 2QFY13 as against 7,239 in the same period last year, a growth of 43% YoY.

    The farm equipment segment on the other hand was at the receiving end on account of the slowdown in the economy and poor monsoons. Although there was a late recovery in monsoons, the management expects a decline in production for kharif crops but expects the rabi output to be better. Revenues from this division declined by 6% YoY during the quarter. The company has a domestic market share of 40% in this segment.

    Segmental break-up...
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Automotive revenues 45,164 71,498 58.3% 83,723 134,285 60.4%
    PBIT 4,481 6,718 49.9% 8,620 12,245 42.1%
    PBIT margin (%) 9.9% 9.4%   10.3% 9.1%  
    Farm Equipment revenues 28,230 26,534 -6.0% 56,801 57,317 0.9%
    PBIT 4,325 3,921 -9.4% 8,899 8,745 -1.7%
    PBIT margin (%) 15.3% 14.8%   15.7% 15.3%  
    Others 246 151 -38.6% 451 321 -28.9%
    Total revenues 73,640 98,184 33.3% 140,975 191,923 36.1%
    *Excluding intersegment revenues

  • M&M's operating margins contracted by 0.6% YoY to 11.4% during 2QFY13 on account of increase in raw material costs by 2.3% YoY to 75% of sales. In absolute terms, raw material costs increased by 38% YoY. Staff costs were under control on the back of higher growth and better labour productivity. Thus, these fell from 5.8% of sales in 2QFY12 to 4.8% in 2QFY13.

  • Growth in net profits during the quarter was relatively lower at 22% on account of higher interest costs and depreciation charges. For the half year period, growth in revenues and net profits stood at 36% YoY and 21% YoY respectively.

What to expect?
At the current price of Rs 858, the stock is trading at a multiple of 16 times its trailing 12-month standalone earnings. Going forward commodity prices will continue to play a key role in determining profitability for both the industries - auto and farm equipment. As far as the business segments are concerned, while the UV segment has been doing well, the farm equipment segment is expected to grow by around 2% this year. M&M intends to keep up its pace of new launches both in the automotive and farm equipment sector as well as managing capacities. Overall, we maintain our 'Buy' view on the stock.

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