Deciphering M&M’s two deals

Deciphering M&M’s two deals
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First Published: Wed, Jul 30 2008. 11 19 PM IST

Updated: Wed, Jul 30 2008. 11 19 PM IST
After Mahindra and Mahindra Ltd’s, or M&M’s, decision to buy the operating and current assets of Kinetic Motor Co. Ltd became public, shares of both firms rose. Do shareholders of both gain from the deal?
Kinetic rose by about 5% after the announcement that its operating assets are valued at Rs137.5 crore.
The company will receive Rs110 crore in cash and will have a 20% stake in the new operating company, worth Rs27.5 crore at current valuations. In comparison with its market capitalization of about Rs40 crore prior to the deal, this looks very impressive. But note that much of the cash will be used to pay back creditors. The company will be left with real estate worth Rs40 crore, and early indications are that it will be used for a new business venture. It would be naïve for shareholders to expect a special payout because of the cash inflow or the real estate. But, by and large the deal is positive for the company as it can pay back creditors and still left with a 20% stake in the operating business.
The net value of Kinetic Motor’s fixed assets (excluding depreciation) stands at about Rs107 crore. So the valuation is at a premium of about 29%. It’s also a premium of about 30% to trailing 12-month revenues. One must also note that Kinetic’s product portfolio isn’t very popular, so it may take much more investment in introducing new products and branding exercises, for the acquisition to become fruitful. Since the investment isn’t much compared with M&M’s overall size, the market isn’t unduly worried.
The reason M&M’s shares rose, however, was because of the merger ratio with Punjab Tractors Ltd. Based on Tuesday’s share prices, every M&M share was worth 2.3 shares of Punjab Tractors. The merger ratio of 3:1 clearly favoured M&M from the market’s perspective, and this is also reflected in the 18% drop in Punjab Tractors’ share price on Wednesday.
M&M’s results were broadly in line with expectations, with raw material costs rising 135 basis points as a percentage of sales. Operating profit before tax rose about 11%, much lower than the 26% rise in revenues. Adjusted for the value of its units, the stock now trades at a single-digit price-earnings multiple, reflecting the lacklustre outlook for earnings growth in the near future.
Tata Motors hits new lows in June quarter
Tata Motors Ltd’s reported operating margin of 7.65% for the June quarter is the lowest in the past 26 quarters. The only time when margins were lower in the last 10 years was during the tumultuous period in 2000 and 2001, when the company had slipped into the red. Worse still, it made a change in accounting policy with respect to provisions for doubtful receivables in its vehicle financing business. But for this relaxation, margins would be 6.92%. According to the company, its provision norms were too aggressive and are still higher than those prescribed for non-banking financial companies. Still, the timing gives the impression that it’s done to buttress margins.
Could the company sink as low as it did in 2000-01? That’s unlikely, considering that its product portfolio is much more diversified and it’s less dependent on medium and heavy commercial vehicles. Not only does it have a sizeable exposure to passenger vehicles, but even in the commercial vehicles segment, it has introduced more light commercial vehicles and a small-size commercial vehicle, Ace.
So, although it’s facing the double whammy of pressure on demand owing to a slowdown in the economy and rising interest rate, as well as input cost pressures, it’s relatively better placed. According to the management, it has learnt its lessons and is keeping a keen eye on inventory and receivables. Thanks to its cost reduction programme over the past eight years, the break-even point has significantly reduced.
Still, as the company itself says, this will be one of the most challenging years for the auto industry. A look at auto companies’ results for the past few quarters indicates that Tata Motors is among the worst hit.
To add to that, the company has the challenge of managing the Jaguar-Land Rover acquisition and tying up funds to repay its bridge loan. The state the markets are in, even the fund raising will be an uphill task.
India Infoline cuts jobs; economic risks continue
India Infoline Ltd has reduced its headcount from 14,000 at the end of March to around 12,000, said chairman Nirmal Jain at an analysts’ conference call on the company’s June quarter results. He said most of the reduction has happened in the insurance distribution business and that it has let go of many of those who were on probation. Interestingly, the headcount has gone down despite the firm increasing the number of its branches.
Analysts say cutting jobs during the tough times the industry is passing through is inevitable and will help cushion the firm’s net profit. It has also kept a tight grip on administration expenses, which have come down by 12% from the March quarter.
India Infoline’s much-touted diversification didn’t help much, with earnings before interest, depreciation, tax and amortisation lower by 40% compared with the March quarter. At the net level, profits were down a comparatively low 16% from the previous quarter.
Compared with the March quarter, many of the company’s non-broking businesses have declined more than the 17% decline in the equity broking business. For instance, income from the financing business dropped 42%. It says that’s because it did a lot of financing for the Reliance Power Ltd issue in the March quarter and it was this that offset the decline in broking revenues then.
In the broking business, it’s not just volumes that are falling but yields too are down, since broking revenues have fallen 18% quarter-on-quarter while volumes are down 11%. Its market share in broking, however, has improved. The company has increased its retail and property loan portfolio from Rs3,300 crore at the end of March to Rs6,200 crore. Around 60-65% of this portfolio consists of home equity loans. It’s clear the management is setting a lot of store by the expansion of consumer finance franchise.
But with the slowdown and higher interest rates, the problem is that risks are rising in this business as well.
Write to us at marktomarket@livemint.com
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First Published: Wed, Jul 30 2008. 11 19 PM IST