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M&M: Farm division bucks the trend
Nov 20, 2013

Mahindra & Mahindra (M&M) announced the second quarter results of financial year 2013-2014 (2QFY14). The company has reported a decline of 6% YoY in sales while net profits grew by 5% YoY (M&M and MVML combined). Here is our analysis of the results.

Performance summary
  • Revenues (M&M and MVML combined) fall by 6% YoY during 2QFY14 largely led by growth in the automotive business.
  • Operating margins improve by 0.7% to 14.5% in 2QFY14; thus the fall in operating profits is less at 2% YoY.
  • Bottomline grows by 5% YoY during the quarter on account of a substantial reduction in tax expenses.


Financial performance: M&M and MVML** combined
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Sales 92,526 86,604 -6.4% 181,311 183,610 1.3%
Expenditure 79,729 74,060 -7.1% 156,164 157,059 0.6%
Operating profit (EBDITA) 12,797 12,544 -2.0% 25,147 26,551 5.6%
Operating profit margin (%) 13.8% 14.5%   13.9% 14.5%  
Other income 3,260 3,628 11.3% 3,922 4,600 17.3%
Depreciation 2,045 2,244 9.8% 3,845 4,325 12.5%
Interest 741 892 20.4% 1,455 1,650 13.5%
Profit before tax 13,272 13,036 -1.8% 23,770 25,177 5.9%
Tax 3,491 2,759 -21.0% 6,204 5,804 -6.4%
Profit after tax/(loss) 9,781 10,276 5.1% 17,566 19,373 10.3%
Net profit margin (%) 10.6% 11.9%   9.7% 10.6%  
No. of shares (m)       589.3 589.9  
Diluted earnings per share (Rs)*         63.1  
P/E ratio (x)*         15.0  
(*On a trailing 12-month basis)
(**Mahindra Vehicle Manufacturers Ltd)

What has driven performance in 2QFY14?
  • Mahindra and Mahindra (M&M) reported revenue decline of 6% YoY during the quarter. This was largely due to the poor performance of the automotive division, where revenues were down 16% YoY. The farm equipment division, on the other hand, grew by a decent 17% YoY thereby arresting any further fall.

  • As far as the automotive business is concerned, volumes de-grew for the company as was the trend in the industry. Besides the considerable headwinds that the auto industry overall has been witnessing, M&M's volume sales of utility vehicles (UVs) were also impacted by the rise in excise duty announced in the Union Budget. Hike in diesel prices and a high base effect (UVs grew at a stupendous rate in FY13) were some of the other reasons that could be attributed to the decline in sales from the division. The company had a market share of 39.6% in the utility vehicles space. The farm equipment segment on the other hand did quite well during the quarter on account of good monsoons and the low base effect last year. Growth in tractor volumes at around 22% YoY was in line with that of the industry. The company has a domestic market share of 40.5% in this segment.

    Segmental break-upů
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Automotive revenues 66,262 55,547 -16.2% 124,487 114,156 -8.3%
    PBIT 8,078 6,240 -22.8% 14,615 12,785 -12.5%
    PBIT margin (%) 12.2% 11.2%   11.7% 11.2%  
    Farm Equipment revenues 26,534 31,476 18.6% 57,317 70,472 22.9%
    PBIT 3,921 5,345 36.3% 8,745 11,872 35.8%
    PBIT margin (%) 14.8% 17.0%   15.3% 16.8%  
    Others 151 59 -60.7% 321 134 -58.3%
    Total revenues 92,947 87,082 -6.3% 182,125 184,762 1.4%
    *Excluding intersegment revenues

  • M&M's operating margins improved by 0.7% YoY to 14.5% during 2QFY14 largely on account of a decrease in raw material costs (as percentage of sales). Raw material costs fell by 2.9% to 68.5% of sales in 2QFY14. As a result, the decline in operating profits (down 2% YoY) was lesser than that in sales. As far as segments are concerned, the automotive segment saw a decline in margins, while the farm equipment division witnessed considerable improvement in the same.

  • Net profits during the quarter grew by 5% YoY on account of a substantial fall in tax expenses.
What to expect?
At the current price of Rs 944, the stock is trading at a multiple of 15 times its trailing 12-month earnings (M&M and MVML combined). Going forward, M&M intends to keep up its pace of new launches both in the automotive and farm equipment sector over the next three years as well as managing capacities. In this regard, it has outlined capex of Rs 75 bn over the next three years. The company has also earmarked another Rs 25 bn towards investments in its subsidiaries over the same period. The outlook for the auto industry continues to remain weak for FY14 with expectations that growth picks up in FY15. Overall, we have a 'Buy' view on the stock.

We would like to remind our subscribers that for the purpose of risk minimisation, one should avoid having more than 5% exposure on any one stock from the overall equity portfolio. Please do visit our asset allocation section for further details.

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