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M & M's profit forecast revised

Nov 27, 2000

We have recently downgraded our forecast for Mahindra & Mahindra (M&M). This follows the disappointing 2Q results. M & M's operating margins declined from 13.1% in 2QFY00 to 4.3% in 2QFY01. This was much much below expectations. As a result we have had to re-look at our earnings forecasts and downgrade them. The following are the main reasons for the downgrade:

  • Lower operating margins :

    For the 1HFY01, M & M's operating margins declined from 10.6% in the 1HFY00 to 5.2% in the 1HFY01. The main reasons for this have been high costs associated with euro compliance, as the company has avoided passing these onto consumers. Another reason has been that new product launches in both the tractor and automotive segments have lower profit margins, as compared to already established older products. In the tractor segment new product sales contributed to 45%-50% of sales in the 1HFY01 and in the automotive sector new products contributed to 44% of sales. This factor has resulted in a decline in the company's margins. We underestimated the impact of the above factors earlier and have hence reduced our operating margin figures from 9.4% for FY01E earlier to 5.6% currently.

  • Dismal volumes in the utility vehicle (UV) segment

    In the utility vehicles segment the company's performance has been below expectations. For FY01E we were expecting a decline in volume sales of UVs in the range of 3%-4%. However, due to a 18% YoY fall in UV volumes in the 1HFY01 to 25,798 units (as a result of worse performance in the 2Q/1Q), we have now assumed a drop in UV volumes of 11% in FY01E. The impact of the drought and implementation of the uniform sales tax code had a greater than anticipated impact.

For the tractor industry we have revised our forecasts upwards. This is due to higher market share gains in 2QFY01. In the tractor segment, the company's volumes went up by 19% (YoY) in 2QFY01. The performance was better in 2QFY01 as compared to 1QFY01. For the 1HFY01, tractor volumes at 40,150 grew by 9.5% YoY. The company's market share in tractors improved to 35.7% in the 1HFY01 as compared to 28.8% in the 1HFY00.

Other income too had to be revised upwards due to higher dividend income from Mahindra Holdings on sale of OTIS shares.

As a result of the above factors our new net profit forecast for FY01E is Rs 1,402 m, for FY02E is Rs 1,906 m and for FY03E is Rs 2,599 m. This works out to an EPS of Rs 12.7, Rs 17.2 and Rs 23.5 respectively.

On the current price of Rs 150, M & M is trading at 11.8 x FY01E EPS of Rs 12.7.

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