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M&M: Testing times - Views on News from Equitymaster
 
 
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  • Dec 14, 2001

    M&M: Testing times

    FY01 was a disappointing year for auto companies and Mahindra & Mahindra (M&M) was no exception. Though the company managed to increase volumes and market share through new product introductions in FY01, profits have come under pressure. And the trend is expected to continue in the current fiscal also. Here we take a look at the performance of the industry and M&M in 1HFY02 and the prospects for the rest of the year.

    The tractor industry, which grew at a CAGR of 16% between 1994-98, has slowed down in the last two years. Industry volumes plummeted in FY01 by 8.7% due to unfavorable monsoon and natural calamities in some states. For the current year, the demand scenario is even worse. The first half volume of 90,351 is lower by 19.6% as compared with the corresponding period of the previous year and is also the lowest in the last seven years. The North Eastern states, one of the key markets for tractors, have also slowed down (1HFY02 volumes fell by 16.5%). Though M&M is still the market leader in the tractor segment with a market share of 29%, this is significantly lower than 35% share in the same period last year.

    Industry performance...
    (Nos) Apr-Oct'00 Apr-Oct'01 Change
    Utility Vehicles 66,323 65,968 -0.5%
    LCVs 28,322 24,565 -13.3%
    Tractor 135,568 107,658 -20.6%
    Total 230,213 198,191 -13.9%

    Competition in the UV segment has also gone up substantially in the current year. Toyota's Qualis in the hard top urban UV market has captured close to 20% of the overall UV market. Telco's aggressive launch of its 'Sumo' variants has had a negative impact on M&Mís sales. M&M's market share fell to 45% in FY01. But the company's new model 'Bolero' has performed very well in recent months and is expected to stem the slide in market share.

    M&M's performance...
    (Nos) Apr-Oct'00 Apr-Oct'01 Change
    Utility Vehicles 30,980 30,195 -2.5%
    LCVs 3,812 2,976 -21.9%
    Tractor 48,515 33,554 -30.8%
    Total 83,307 66,725 -19.9%

    But M&M has been concentrating on reducing interest costs. During FY01, M&Mís interest costs declined by 20% YoY. The company achieved this by retiring Rs 2.8 bn of higher cost debentures in FY01 and refinanced this by taking on long-term debt of Rs 2 bn at more competitive rates of interest. M&M is also taking measures to reduce operating costs in the current financial year. It has launched a voluntary retirement scheme for its workers and employees at its plants and offices in Mumbai. As on July 30, 2001, around 2,263 employees (32% of total workforce in Mumbai) had opted for the scheme. In 1QYF02, its overall operating expenses fell by 14% YoY. The trend continued in 2QFY02 also.

    Though indications are for a higher kharif output in the current year, the farm prices are expected to fall by 2% in light of higher foodstock with the government. The government also has plans to lower procurement prices, which is one of the key factors that drive tractor demand. In that case, even if volumes gain pace, value growth seems unlikely as players have expanded capacity in the last two years aggressively (this was also aided by the entry of new MNC players in the Indian market). It remains to be seen whether the new model introductions by the company in the premium-end of the lower segment and expansion of 'Arjun' brand would result in higher volume growth both in the current year as well as FY03. We expect the company to register a 13%-15% drop in sales and a 70% drop in profit for FY02. However, margins would increase by 100-150 basis points largely due to the cost reduction measures undertaken by the company.

    M&M currently trades at Rs 99 implying a P/E multiple of 30x FY02E earnings.

     

     

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