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M&M: Volatile 1HFY03

Oct 30, 2002

Mahindra & Mahindra, the utility vehicle (UV) and tractor major, has posted a 8% rise in sales and a sharp rise in net profit for the second quarter ended September 2002 as against a net loss in the corresponding quarter previous year. While M&M has extended its market share in the UV segment, its share in tractors has fallen in 1HFY03.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Sales 7,611 8,206 7.8% 14,462 16,491 14.0%
Other Income 200 270 34.7% 418 365 -12.7%
Expenditure 7,106 7,467 5.1% 13,756 15,002 9.1%
Operating Profit (EBDIT) 505 739 46.4% 706 1,488 110.8%
Operating Profit Margin (%) 6.6% 9.0%   4.9% 9.0%  
Interest 297 282 -4.7% 587 596 1.5%
Depreciation 329 405 22.8% 702 810 15.4%
Profit before Tax 79 322 306.0% (165) 447 -
Extraordinary item (121) 648 - (173) 648 -
Tax (15) 387 - (120) 435 -
Profit after Tax/(Loss) (27) 583 - (218) 661 -
Net profit margin (%) -0.4% 7.1%   -1.5% 4.0%  
No. of Shares (m) 110.5 110.5   110.5 110.5  
Earnings per share (Rs)* (1.0) 21.1   (3.9) 12.0  
P/E (x)         6.9  

Despite a challenging macro-environment, M&M's performance in the UV and LCV segments is commedable. Apart from the success of newly launched UV model, Scorpio, other key volume models like Maxx, Royale and Bolero have also added to the growth in 2QFY03. As against an industry growth of just 1% to 59,346 units in 1HFY03, M&M's volume growth stands at 11% to 28,494 units thus hiking its market share in the segment. The company, in its press release, has said that it is ramping up production at its Nashik facility (where Scorpio is manufactured) to meet demand. We expect the company to close the year with around 5% growth in UV sales for FY03.

M&M's first half performance...
(Nos) 1QFY03 2QFY03 1HFY03
LCVs 1,881 1,935 3,816
% YoY change 66.8% 20.3% 39.5%
% market share 14.3% 12.6% 13.4%
UVs 13,241 15,253 28,494
% YoY change 8.0% 13.7% 11.0%
% market share 48.9% 47.3% 48.0%
Tractors 14,716 10,040 24,756
% YoY change 13.8% -24.0% -5.3%
% market share 33.1% 13.2% 20.5%
Total unit sales 29,838 27,228 57,066
% YoY change 13.4% -3.6% 4.6%
Source: Company website

The recessionary conditions in the tractor industry continued in the current fiscal as well. But M&M has had a volatile first half in the current fiscal. After bucking the industry trend in 1QFY03 by posting a 14% rise in volumes, it has lost considerable market share in 2QFY03. We had mentioned in our 1QFY03 analysis that the company cannot sustain such high volumes in the coming quarters due to high inventory pile up with the dealer and in light of lacklustre agricultural sector. M&M's market share that stood at almost 30% in FY02 has come down sharply in 1HFY03. We expect M&M to post around 6%-8% fall in tractor sales for FY03. There has been a marked rise in LCV sales in 1HFY03. Our interaction with Telco indicate that demand has increased in light of better consumer durable sector performance. Besides, year-on-year effect also has inflated growth numbers to an extent. M&M has reaped the benefit in 1HFY03 with volumes growing by 40% YoY.

The increase in operating margins is primarily on two counts. One is savings in raw material costs that the company has been focusing on over the last two years. Secondly, workforce rationalisation has also resulted in savings in employee related expenses thus fuelling operating profits (M&M's workforce has reduced by around 6,500 employees in the last five years). The company's average interest costs declined from 10% in FY01 to 8% in FY02. Debt reduction has been an ongoing exercise at M&M and fall in interest costs has to be viewed in this context.

Profit growth at the net level is primarily led by extraordinary income, which is profit on account of sale of M&M's 51% stake in Mahindra Sintered to the tune of Rs 648 m. This is in line with M&M's objective of exiting from select identified non-core businesses. Excluding this non-recurring income and tax outflow on account of profit from the same during 2QFY03, M&M's net profit stands reduced to Rs 326 m as against the reported profit of Rs 583 m (EPS falls by around Rs 9.3 per share adjusting for this).

The stock currently trades at Rs 83 implying a P/E multiple of 11.3x annualised 1HFY03 earnings (excluding profit on sale of Mahindra Sintered and tax thereof). We expect the company to post around 4% growth in revenues and a 27% rise in net profit for FY03. The medium-term growth prospects (i.e. 1-2 years) of the company remains challenging in light of slowdown in the economy and a weaker agricultural sector. With agricultural sector expected to degrow in the current fiscal, there could be a negative impact on both tractor and UV demand in FY04. That said, we expect M&M's market share to increase in the urban UV market following the success of 'Scorpio'.

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