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M&M: Two to tango - Views on News from Equitymaster
 
 
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  • Oct 28, 2004

    M&M: Two to tango

    Performance summary
    Riding on the back of robust volumes sales in both its automotive as well as tractors division, Mahindra & Mahindra (M&M), India’s largest UV and tractor manufacturer has reported a strong 39% YoY growth in revenues in 2QFY05. Growth in bottomline, however, is much higher at 68% YoY, thanks largely to improvement in operating margins and significant savings on the interest front. The corresponding figures for the first half stood at 41% and 96% respectively.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net sales 11,185 15,544 39.0% 21,114 29,776 41.0%
    Expenditure 10,095 13,672 35.4% 19,125 26,295 37.5%
    Operating profit (EBDITA) 1,091 1,872 71.6% 1,990 3,481 75.0%
    EBDITA margin (%) 9.8% 12.0%   9.4% 11.7%  
    Other income 209 373 78.2% 418 456 9.1%
    Interest (net) 140 17 -88.1% 310 34 -88.9%
    Depreciation 405 440 8.8% 813 867 6.7%
    Profit before tax 755 1,789 136.8% 1,285 3,036 136.2%
    Extraordinary item 126 (14)   80 189  
    Tax 152 545 258.6% 210 957 355.7%
    Profit after tax/(loss) 730 1,229 68.4% 1,155 2,268 96.4%
    Net profit margin (%) 6.5% 7.9%   5.5% 7.6%  
    No. of shares (m) 116.0 116.0   116.0 116.0  
    Diluted earnings per share (Rs)* 25.2 42.4     39.1  
    Price to earnings ratio (x)         11.0  
    (* annualised)            

    Background
    M&M is engaged in the manufacture of Utility vehicles (UVs), tractors, light commercial vehicles (LCVs) and three-wheelers. While automotive division comprising UVs, LCVs and three-wheelers contributed to 70% of FY04 revenues (domestic), farm equipment division accounted for 30% of revenues. Through investment in its subsidiaries, it has interest in other sectors like software, hotels, real estate and financial services as well. While M&M has a 49% market share in the UV segment in FY03, it had a 26% share in the tractor sector.

    What has driven performance in 2QFY05?
    Across the board growth aids topline:  Just as the previous quarter, the company has once again benefited from strong performance of both its tractor as well as automotive divisions. While the former showed a volume growth of 38% YoY during the quarter, sales of its automotive offerings have risen by 27% YoY. UV sales, main contributor to the automotive division revenues, climbed nearly 28% during the first five months of the fiscal (September data not available) and enabled the company to increase its market share to 50%. After growing by a huge 60% during the first quarter, tractor sales have slowed down but are still higher with a pretty respectable growth of 38% during 2QFY05. Industry had suffered in the past on account of weak demand and huge inventory built up. But with good monsoons in FY03, sales increased by 10% during FY04 and the positive trend has continued this year as well.

    Cost controls aid margin expansion:  Cost reduction efforts and higher capacity utilisation has seen the company improve its operating margins by a good 220 basis points during the quarter. Although prices of key inputs such as steel, rubber and plastic have been ruling at high levels, the impact of the same on the company’s cost structure seems to be marginal if any. Staff cost, on the other hand, has risen by a mere 3% during the quarter and has been largely instrumental in bringing about an improvement in margins. It should be noted that the company had undertaken an employee reduction programme and the benefits from the same have started accruing in terms of higher productivity and improved profitability.

    Cost break-up...
    (Rs m) 2QFY04 2QFY05 %Change 1HFY04 1HFY05 %Change
    Raw materials 7,421 10,450 40.8% 14,080 20160 43.2%
    % sales 66.3% 67.2%   66.7% 67.7%  
    Staff cost 1,008 1,039 3.0% 2,076 2275 9.6%
    % sales 9.0% 6.7%   9.8% 7.6%  
    Other expenses 1,665 2,183 31.1% 2,969 3861 30.0%
    % sales 14.9% 14.0%   14.1% 13.0%  

    Debt restructuring measures help profits:  Replacement of high cost borrowings with a low cost one along with subsequent reduction in debt has enabled the company pare its interest expenses by a huge 88% YoY in 2QFY05. In FY04 alone, M&M had reduced debt by Rs 4 bn thus improving its capital structure as well as further reinforcing its interest payment capabilities. But for the more than three fold jump in tax outgo, the bottomline growth of the company could have been much higher from the current 68% YoY.

    What to expect?
    At Rs 432, the stock trades at a P/E multiple of 11 times annualised 1HFY05 earnings. While the success of Scorpio inspires confidence in the company’s ability to grow its UV business, the farm equipment business continues to suffer from vagaries of monsoons, thus making it difficult to arrive at proper estimates of growth in earnings. Besides, its unrelated diversification into hotels and IT business also needs to be viewed with caution.

     

     

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