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Higher costs take toll on M & M's margins - Views on News from Equitymaster
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  • Oct 27, 2000

    Higher costs take toll on M & M's margins

    Mahindra & Mahindra Ltd (M & M) has reported dismal 2Q results. Its operating margins declined from 13.1% in the 2QFY00 to 4.3% in the 2QFY01. Also compared to its 1QFY01 operating margins of 8.3%, the decline has been steep.

    Let us see what have been the reasons for this performance, as given in the company's analyst meet:

    • In the 2QFY01, the company's utility vehicles (UV) volumes declined by 22% YoY to 13,646. This is higher than the fall in the 1QFY01 by 12.4% YoY to 12,151 vehicles. Hence the fall in the UV segment has been higher in the 2QFY01.

    • M &M's higher operating costs have contributed to the huge decline in operating margins in the 2QFY01. The material costs went up substantially on account of compliance costs, tractors inventories and new products. The margins are thinner on new vehicles as the costs are higher as well as they take sometime to be accepted in the market. Other costs like staff and marketing grew marginally only in the 2QFY01.

    • In the tractor segment the company has reported a growth of 19% YoY in volumes in the 2QFY01. Here the performance has been better in the 2QFY01 as compared to the 1QFY01. For the 1HFY01, tractor volumes were at 40,150 grew by 9.5% YoY.

    • The company's market share in tractors improved to 35.7% in the 1HFY01 as compared to 28.8% in the 1HFY00. This was achieved by introducing new models like Bhoomiputra and Arjun, which have been well accepted. Besides the marketing efforts and after sales service of the company has paid off.

    • In the tractor segment new product sales contributed to 45%-50% of sales in the 1HFY01 and in the automotive sector new products contributed to 44% of sales. This has resulted in a pressure on the company's margins. In the UV segment another factor that contributed to lower margins was drop in sale of soft tops as compared to hard tops. As M & M, has a 82% market share in the soft top segment, it has suffered due to the fact that in four states the government has stopped issuing permits for soft tops.

    • The company is hopeful of permits being issued in two out of four states in the next two months.

    Though there are no signs of a pick up in the rural UV market due to uneven monsoons, the company is hopeful that inspite of the diesel price hike of 10%, transport operators need to increase their tariffs by only 5.6% to get back to original profitability levels. This they feel will not be very difficult for the transport operators achieve.

    However the overall economy is undergoing a slowdown currently and unless demand picks up, the prospects for M & M's UV division continue to look bleak.

    We are currently forecasting a net profit of Rs 2,284 m for FY01E, which is a decline of only 13% YoY. However as the 2Q has been much worse than our expectations we will have to revise our forecasts downwards by atleast 20%-25%.

    On the current price of Rs 131 it is trading at 5.5x, FY00 EPS of Rs 23.8.



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