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M & M : Will interest sustain? - Views on News from Equitymaster
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  • Dec 18, 2000

    M & M : Will interest sustain?

    Mahindra & Mahindra (M & M), India's largest tractor manufacturer has registered positive gains on the bourses in the last few weeks. Most automobile stocks have been buoyant as a result of expectations of a favourable automobile policy. M & M besides this reason has attracted buying as its subsidiary Mahindra British Telecom (MBT) has finalized it plans of an Initial Public Offering (IPO).

    MBT plans to disinvest 6.4 m shares of face value Rs 2 each. Of this 1.1 m shares of face value Rs 2 each (17% of total offering) is to be reserved for allocation to eligible shareholders of M & M. The scheme of reservation for M & M shareholders is stated in the draft offer document, which is to be announced and finalized after SEBI's approval. The stock markets have viewed this news positively as there is some reservation for M & M shareholders.

    Though this news will provide a fillip to M & M's stock price in the short term, it is important to see whether this will be sustained. We feel unless both its sector automotive and tractors do not show signs of a pick up, the gains are expected to be short lived.

    For the period April - November 2000, the company sold 35,489 utility vehicles (UVs) a decline of 18% YoY. Its LCV volumes too declined marginally. Even for the month of November 2000 there seems to be no improvement on the volume front.

    (units) April-November 99 April-November 00 % change
    Tractors 51,341 55,332 7.8%
    Utility vehicles 43,223 35,489 -17.9%
    LCVs 4,290 4,230 -1.4%
    Total 98,854 95,051 -3.8%

    In the utility vehicle segment, M & M lost market share as a result of higher competition from Toyota's Qualis and Telco's Sumo variants. The impact of the drought and implementation of the uniform sales tax code, as well as higher competition took its toll on M & M's market share.

    M & M particularly has been hit by the downward trend in sales of soft top vehicles in India. The ban by four states on permits for soft tops, as and when lifted will provide a big boost for M & M's utility volume growth rates. M & M is a market leader in soft tops and for the 1HFY01 it had a market share of 82%. Of these four states, the significant ones are Maharashtra and Uttar Pradesh. Though the company has been hopeful of issue of soft top permits since the past two months, there are no signs of this yet.

    (units) Nov-99 Nov-00 % change
    Tractors 7,106 6,817 -4.1%
    Utility vehicles 4,996 4,513 -9.7%
    LCVs 528 424 -19.7%
    Total 12,630 11,754 -6.9%

    The company reported dismal 1HFY01 net profit as a result of loss of market share in utility vehicles and lower margins.

    The performance of the tractor industry has been slightly better in the second half of the year as compared to the first half, however due to the unevenly distributed monsoons the situation has not improved much. The industry continues to witness negative growth. For the period April-November 2000, tractor volumes declined by 11% YoY. However M & M has managed to capture a large chunk of this declining market due to its aggressive sales strategy. M & M 's tractor volumes grew by 8% YoY for the period April-November 00 as a result of higher market share.

    (Tractor volumes) April-November 99 April-November 00 % change
    M & M 51,341 55,332 7.8%
    Industry 176,235 156,948 -10.9%

    The news of its telecom software subsidiary's public offering and expected auto policy has bought back some life into M & M 's stock price, however in the long term an improvement in the fundamentals of its main businesses is needed to sustain the rally.

    On the current price of Rs 164, it is trading at 9.5x FY02E EPS of Rs 17.2.



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