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M&M: Hit by high input costs
Nov 17, 2011

M&M announced the second quarter results of financial year 2011-2012 (2QFY12). The company has reported a growth of 35% in sales while net profits fell by 3% YoY on a standalone basis. Here is our analysis of the results.

Performance summary
  • Standalone revenues rise by 35% YoY during 2QFY12 led by growth in both the segments - automotive and farm equipment.
  • Operating profits fall by 2% YoY as operating margins contract by 5% YoY to 11.9%. Margin contraction is on account of higher raw material costs (as a percentage of sales).
  • Led by the decline in operating profits and higher depreciation charges, net profits fall by 3% YoY.

Standalone financial performance
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 54,344 73,606 35.4% 105,945 140,942 33.0%
Expenditure 45,394 64,866 42.9% 89,239 123,228 38.1%
Operating profit (EBDITA) 8,950 8,740 -2.3% 16,706 17,714 6.0%
Operating profit margin (%) 16.5% 11.9%   15.8% 12.6%  
Other income 1,998 2,315 15.9% 2,203 2,564 16.4%
Depreciation 970 1,257 29.6% 1,946 2,356 21.1%
Interest (91) 49   (318) 29  
Profit before tax 10,068 9,749 -3.2% 17,279 17,893 3.5%
Tax 2,483 2,376 -4.3% 4,071 4,470 9.8%
Profit after tax/(loss) 7,585 7,374 -2.8% 13,209 13,423 1.6%
Net profit margin (%) 14.0% 10.0%   12.5% 9.5%  
No. of shares (m)       570.4 587.9  
Diluted earnings per share (Rs)*         43.6  
P/E ratio (x)*         17.7  
(*On a trailing 12-month basis; adjusted for extraordinary items)

What has driven performance in 2QFY12?
  • Mahindra and Mahindra (M&M) reported an impressive standalone revenue growth of 35% YoY during the quarter. Both the company segments - automotive and farm equipment reported strong growth during 2QFY12. Sales volumes of the company's ‘automotive' division grew by 32% YoY during the quarter, and the company managed to retain its leadership in the UV segment with a market share of 54%. Other product segments such as the small load carriage segment (particularly ‘Maxximo') and Gio did well to record an impressive growth of 48.9% YoY. The company also saw a strong rise in exports during the quarter. M&M exported 7,239 vehicles (as against 3,835 vehicles in the corresponding quarter last year) to regions such as SAARC, South Africa & South America, amongst others.

    Growing revenues by 36% YoY, M&M's ‘farm equipment' contributed to about 38% of the company's topline during the quarter. Within this, domestic tractor volumes grew by about 28.5% YoY, while exports grew by 7% YoY. The company's market share in this segment stood at 41.2%.

    Segmental break-up...
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Automotive revenues 33,239 45,177 35.9% 62,037 83,757 35.0%
    PBIT 5,199 4,481 -13.8% 8,720 8,620 -1.1%
    PBIT margin (%) 15.6% 9.9%   14.1% 10.3%  
    Farm Equipment revenues 20,850 28,260 35.5% 43,589 56,874 30.5%
    PBIT 3,561 4,325 21.4% 7,456 8,899 19.4%
    PBIT margin (%) 17.1% 15.3%   17.1% 15.6%  
    Others 348 246 -29.4% 485 451 -7.0%
    Total revenues 54,437 73,683 35.4% 106,111 141,082 33.0%
    *Excluding intersegment revenues

  • Like its peers in the auto industry, M&M faced pressure at the operating level as its margins contracted by 5% YoY to 11.9% during 2QFY12. The main culprit was raw material costs as they increased by 5% YoY and stood at 72.6% of sales. Any further decline in operating margins was, however, arrested as the company was able to keep its employee costs and other expenditure under control.

    Cost break up
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Raw material 36,494 53,414 -31.7% 72,399 101,750 -28.8%
    % of net sales 67.2% 72.6%        
    Employee cost 3,582 4,302 20.1% 6,719 8,335 -19.4%
    % of net sales 6.6% 5.8%        
    Other expenses 5,318 7,151 34.5% 10,121 13,143 -23.0%
    % of net sales 9.8% 9.7%        
    Total 45,394 64,866   89,239 123,228  

  • Led by the subdued performance at the operating level and higher depreciation charges, the company's net profits fell by 3% YoY in tandem with the decline in operating profits.

What to expect?
At the current price of Rs 773, the stock is trading at a multiple of 17.7 times its trailing 12-month standalone earnings. Going forward commodity prices will continue to play a key role in determining profitability for both the industries - auto and farm equipment. Rising interest rates could also act as a dampener on demand especially in the tractor industry although growth has been robust so far. Having said that, M&M intends to keep up its pace of new launches both in the automotive and farm equipment sector as well as managing capacities. Overall, we have a positive view on the stock from a long term perspective.

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