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M&M: Material costs spoil the show
Oct 29, 2008

Performance summary
  • Topline grows by 14% YoY during the quarter, led by buoyancy in the farm equipment segment.
  • Operating margins tumble by 6.3% on the back of higher raw material costs and exchange related losses. Excluding exchange related losses, margins fall by 2.1%.
  • Net profits decline 20% YoY led by operating margin decline as well as series of exceptional and special items. Excluding the impact of exceptional and special items, bottomline registers a growth of 9% on a YoY basis during the quarter.
  • Half yearly bottomline falls 19% YoY on the back of 18% growth in topline.
  • On the consolidated front, profits for 1HFY09 grow 13% YoY on the back of 24% YoY growth in gross revenues.


Standalone financial snapshot

(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Sales 27,041 30,930 14.4% 53,118 62,881 18.4%
Expenditure# 24,189 29,629 22.5% 47,562 59,211 24.5%
Operating profit (EBDITA) 2,852 1,300 -54.4% 5,556 3,671 -33.9%
Operating profit margin (%) 10.5% 4.2%   10.5% 5.8%  
Other income 1,675 1,593 -4.9% 2,041 2,192 7.4%
Interest 82 153 84.9% 31 233 644.5%
Depreciation 577 639 10.8% 1,148 1,255 9.4%
Exceptional income/(losses) - 514   - 411  
Profit before tax 3,867 2,616 -32.4% 6,418 4,785 -25.5%
Tax 1,008 348 -65.4% 1,647 924 -43.9%
Profit after tax/(loss) 2,859 2,268 -20.7% 4,771 3,861 -19.1%
Net profit margin (%) 10.6% 7.3%   9.0% 6.1%  
No. of shares (m)         258.6  
Diluted earnings per share (Rs)         30.6  
P/E ratio (x)*         9.9  
* On a trailing twelve month basis; # Other expenditure include foreign exchange losses of Rs 1.2 bn (2QFY09)

What has driven performance in 2QFY09?
  • The 14% YoY growth in M&M’s topline during 2QFY09 was driven by the farm equipment segment, which managed to grow by an impressive 28% YoY. Although volumes in the segment improved a modest 4% YoY, robust performance of the other businesses like the engine business helped put up a strong topline show. The company’s other segment – Automotive – also put up a good show, growing its topline by 8% on the back of 10% growth in volumes.

    Backed by new launches, M&M managed to improve its market share in the UV (utility vehicle) segment. However, it was the 3-wheeler division that stole the show in the segment, managing to grow its volumes by a robust 57% YoY. The fact that it was achieved against a backdrop of flat industry volumes makes it even more commendable. As far as exports are concerned, while they were higher by 7% YoY in the automotive segment, the same improved by 20% YoY during the quarter for the farm equipment segment.

    segmental break up
    Segment 2QFY08 2QFY09 % change
    Automotive      
    Units sold 57,327 63,045 10.0%
    Revenues 18,063 19,478 7.8%
    PBIT 2,554 1,326 -48.1%
    PBIT margin 14.1% 6.8%  
    Farm Equipment Segment      
    Units sold 22,227 23,156 4.2%
    Revenues 9,206 11,785 28.0%
    PBIT 1,148 1,280 11.5%
    PBIT margin 12.5% 10.9%  
    Other segments      
    Revenues 1,651 203 -87.7%
    PBIT 23 35 51.7%
    PBIT margin 1.4% 17.3%  

  • M&M’s operating margins came in lower by a huge 6.3% during the quarter. This was led by significantly higher raw material costs as well as a big jump in the other expenses. The rise in the latter was largely a result of forex related losses. Excluding the impact of the same, fall in operating margins stands reduced at 2.3%.

  • The bottomline M&M suffered a fall of 21% YoY during the quarter. While lower operating margins hurt the performance, profits were also lower on account of several special and exceptional items. If one were to exclude the impact of the same, then the bottomline actually grew by a modest 9% YoY. Exceptional items that have been excluded are exchange related losses, octroi refunds, one time profit on sale of logistics business and profits arising out of business restructuring.

  • As far as consolidated performance is considered, major group companies like Punjab Tractors, Tech Mahindra, and Mahindra Holidays, have significantly improved performance over the previous year. The performance of Punjab Tractors with a 178% growth in profits and of Tech Mahindra with a 67% profit growth, deserve special mention.

What to expect?
At the current price of Rs 375, the stock is trading at a nearly 50% discount to our sum of the parts valuation of Rs 730 per share. Buoyancy in the company’s key business segments of automotive and farm equipment augurs well for the company. Although the company has lined up huge capex plans, leadership position in its key segments of UVs and tractors and investments in fast growing sectors through its subsidiaries make the company a good long-term bet at current valuations. However, we are concerned with the growing number of acquisitions that the company is making and this could prove to be a drag on its balance sheet in the near term.

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