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M&M: A good quarter - Views on News from Equitymaster
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M&M: A good quarter
Oct 30, 2010

M&M announced its 2QFY11 results. The company has reported a growth of 19% and 8% in sales and net profits respectively on a standalone basis. Here is our analysis of the results.

Performance summary
  • Standalone revenues increase by 19% YoY during 2QFY11 led by growth in the company’s automotive segment (up 24% YoY). During 1HFY11, company’s standalone are higher by 20% YoY.
  • Operating profits rise at a slower pace of 8% YoY on the back of a 1.8% YoY contraction in margins. Margin contraction is on account of higher raw material costs (as a percentage of sales).
  • Net profits rise by 8% YoY. However, on excluding the Rs 908 m exceptional income during the quarter ended September 2009, profits rise by 24% YoY. This is on the back of higher other income as well as interest income (as against interest expense during 2QFY10). A lower tax outgo also aided the company during the quarter.
  • Consolidated total income (gross revenues and other income) and profits (excluding exceptional items) rise by 14% YoY and 10% YoY respectively.

Standalone financial performance
(Rs m)  2QFY10   2QFY11  Change  1HFY10   1HFY11  Change
Sales  45,578 54,344 19.2%   88,004  105,945 20.4%
Expenditure 37,266 45,394 21.8%   73,602   89,239 21.2%
Operating profit (EBDITA) 8,312 8,950 7.7% 14,402 16,706 16.0%
Operating profit margin (%) 18.2% 16.5%   16.4% 15.8%  
Other income 1,333 1,998 49.9%  1,569 2,203 40.4%
Interest (net)   128   (91)    187   (318)  
Depreciation   892   970 8.8% 1,777 1,946 9.5%
Exceptional items   908    -      908       -    
Profit before tax 9,533 10,068 5.6% 14,914 17,279 15.9%
Tax 2,504 2,483 -0.8% 3,876 4,071 5.0%
Profit after tax/(loss) 7,029 7,585 7.9% 11,038 13,209 19.7%
Net profit margin (%) 15.4% 14.0%   12.5% 12.5%  
No. of shares (m)       278.8  580.1  
Diluted earnings per share (Rs)*         36.6  
P/E ratio (x)*         20.0  
(*On a trailing 12-month basis; adjusted for extraordinary items)

What has driven performance in 2QFY11?
  • Mahindra and Mahindra (M&M) reported a 19% YoY increase in standalone revenues. Growth during the quarter was led by the company's 'automotive' division. This segment grew by 24% YoY and contributed to nearly 61% of the company's revenues. As per the company, M&M sold a little over 56,600 vehicles during the quarter, and managed to retain its leadership with a market share of 62%. Other product segments such as the small load carriage segment, three wheelers and two-wheelers performed well as well. It is reported that three-wheeler and mini four-wheeler sales grew by 52% YoY. The company also saw a strong rise in exports during the quarter. M&M exported 3,835 vehicles (as against 1,862 vehicles last year) to regions such as SAARC, South Africa & South America.

    As for the company's 'farm equipment' segment, it reported a revenue growth of 12% YoY and contributed to about 38% of the company's revenues during the quarter (as compared to 41% last year). Growth in this segment seems to have been due to higher volumes coupled with better realisations. The company sold 42,473 units (domestically; of both Mahindra and Swaraj brands) this quarter, which is higher by 9% YoY. Since revenues rose by 12% YoY in this segment, this would have been on account of better realisations. The overall increase in volumes was lower than the industry this quarter. As per the company, the domestic tractor industry grew by 10.6% YoY to 102,833 tractors as against 92,991 tractors sold during the corresponding quarter.

    Segmental break-up...
    (Rs m)  2QFY10   2QFY11   Change 
    Raw material 29,289 36,494 25%
    % of net sales 64.3% 67.2%  
    Employee cost 2,941 3,582 22%
    % of net sales 6.5% 6.6%  
    Other expenses 5,036 5,318 6%
    % of net sales 11.0% 9.8%  

  • M&M witnessed a certain amount of pressure in terms of higher raw material and employee costs during the quarter. This led to the company’s operating margins to contract to 16.5% from 18.2% last year. Raw material costs increased to 67.2% of revenues during the quarter (from 64.3% last year), while employee costs stood at 6.6 % of revenues (as compared to 6.5% last year).

  • M&M’s profits rose by 8% YoY during the quarter. The profit growth would have been higher had it not been for the exceptional gain of Rs 908 m during the corresponding quarter last year. The same was on account of the Mahindra Holidays IPO last year. On adjusting for the same, profits are actually higher by 24% YoY. This is mainly on account of higher other income. In addition, an interest income (as against an expense last year) coupled with a not so sharp increase in depreciation costs aided the bottomline.

  • As for the consolidated results, total income (gross revenues and other income) and profits (excluding exceptional items) rose by 14% YoY and 10% YoY respectively.

What to expect?
At the current price of Rs 732, the stock is trading at a multiple of 20 times its trailing 12-month standalone earnings. As compared to the previous quarter, the company does not expect supply constraints to be an issue as these have been resolved with its suppliers. With this, the management expects volumes during the second half to get some boost. Giving a view on the macro picture, the company is expected to do well given that the auto demand is likely to grow at a steady pace (lower double digits on the back of a high base). The agriculture sector is also poised to do well on the back of strong monsoons this year. While the company’s outlook remains buoyant, we believe the same has been priced into the company’s current price, and as such do not see much of an upside for investors at current levels.

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