• MAY 31, 2004

M&M: Growth story continues…

M&M, country’s leading UV and tractor manufacturer has posted impressive 4QFY04 as well as full year results. While the topline for FY04 has grown by a strong 33% YoY, the bottomline has grown at a much higher rate of 140%, thanks mainly to improved operating performance and interest savings. For 4QFY04, the corresponding figures stood at 35% and 199% respectively on a YoY basis.

(Rs m)4QFY034QFY04ChangeFY03FY04Change
Net sales 11,231 15,200 35.3% 37,321 49,591 32.9%
Other income 194 250 28.8% 797 867 8.8%
Expenditure 10,365 13,487 30.1% 34,201 44,203 29.2%
Operating profit (EBDITA) 866 1,713 97.9% 3,121 5,388 72.7%
Operating profit margin (%)7.7%11.3% 8.4%10.9% 
Interest 210 106 -49.5% 869 516 -40.6%
Depreciation 434 422 -2.8% 1,654 1,652 -0.1%
Profit before tax 416 1,435 244.9% 1,394 4,087 193.2%
Extraordinary items (71) 330 565.4% 577 295 -48.9%
Tax (142) 310 318.7% 515 897 74.1%
Profit after tax/(loss) 487 1,456 199.2% 1,455 3,485 139.5%
Net profit margin (%)4.3%9.6% 3.9%7.0% 
No. of shares (m) 116.0 116.0   116.0 116.0  
Diluted earnings per share (Rs)* 16.8 50.2   12.5 30.0  
P/E ratio (x)     13.7  
(* annualised)      

The UV division continued to power the company’s growth in FY04. However, after remaining strong for the first nine months (37% YoY growth), the volumes grew at a lower rate during the fourth quarter (24% YoY) and as a result managed a growth of 33% for the full year. M&M seems to have faced the heat from rival’s products such as ‘Sumo and ‘Safari’ which were upgraded and re-launched in the domestic market. Owing to demand for higher tonnage vehicles, light commercial vehicles (LCVs) seem to have fallen out of favor as they have managed a marginal rise of 1% in sales during the year. After remaining in the wilderness for two years, tractor division has finally managed to stage a comeback as the volumes have improved by 5% YoY.

A drought like condition in the major states of MP, Rajasthan, Gujarat and the Southern region in calendar year 2001 and a drought all over India in calendar year 2002 affected the tractor industry sales. Moreover, with nearly 65 m to 75 m tonnes of food piling up in government godowns, it led to a squeeze in purchasing, thus resulting into lesser income in the hands of rural populace. Also, on account of low recoveries of debt, the banks became skeptical of lending to farmers and this led to a marked decrease in the availability of credit. All these reasons led to a lower demand for tractors and impacted industry sales. However, starting 2QFY04, volumes have been on the rise and the company being the market leader has reaped the benefit of the same.

On the profitability front, despite pressure on steel prices throughout the year, the company has managed to improve its operating margins by a significant 250 basis points during the year. This could be attributed to improved product mix and higher capacity utilisation. It should be remembered that the sales volumes of M&M’s automotive division has improved by 80% in the last two years. Moreover, after witnessing decline during the same period, the tractor division has also staged a comeback and has seen its volumes improve by a moderate 5%. These factors have contributed towards spreading the company’s fixed costs over a larger base and thus bring about the improvement in operating margins.

Cost break-up…
(Rs m)4QFY034QFY04ChangeFY03FY04Change
Raw material 7,666 10,656 39.0% 25,002 33,529 34.1%
% sales68.3%70.1% 67.0%67.6% 
Staff cost 908 1,087 19.8% 3,813 4,175 9.5%
% sales8.1%7.2% 10.2%8.4% 
Others 1,782 1,739 -2.4% 5,347 6,466 20.9%
% sales15.9%11.4% 14.3%13.0% 

Taking advantage of stronger cash flows, the company had announced a buyback of its debentures to the tune of Rs 3.7 bn and the same has helped the company bring down its interest expenses by a significant 41% during FY04 and help in further improvement in its bottomline.

The stock is currently trading at Rs 440, implying a P/E of 15x FY04 earnings. Although we expect the UV sales to slow down this fiscal, revival in tractor business augurs well for M&M and is likely to ensure that the growth story remains intact. While the valuations look attractive from a medium to long-term perspective, poor monsoons or hike in interest rates might put a spanner in the wheels.

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