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Valuation of Mahindra’s auto operations has risen sharply

Valuation of Mahindra’s auto operations has risen sharply
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First Published: Sun, May 30 2010. 09 19 PM IST

Updated: Sun, May 30 2010. 09 19 PM IST
Mahindra and Mahindra Ltd’s shares had fallen by around 5% soon after it had announced results for the quarter ended December, as the reported net profit was almost 20% short of consensus estimates. With its March quarter results announcement, the reverse has happened. The company has reported a profit of Rs570 crore, around 15% higher than the median estimate of 16 analysts polled by Bloomberg.
Mahindra reported a 140 basis points (bps) improvement in its operating margin compared with the September quarter, despite rising raw material costs. One basis point is one-hundredth of a percentage point.
In fact, as a percentage of sales, raw material costs rose by around 30 bps and even other expenditure rose by 67 bps. Margins should have fallen by around 100 basis points but for large savings on employee costs, which fell to Rs266 crore from Rs330 crore in the December quarter. In the preceding quarter, employee costs included a one-time expense of around Rs10-15 crore, but even after adjusting for that, the drop is surprising.
Also See Accelerating Growth (Graphic)
According to Uday Phadke, the company’s president for finance, legal and financial services, employee costs in the March quarter are lower largely on account of a decrease in the actuarial valuation of retirement benefits. Adjustments related to actuarial valuation are done at the year-end and they change depending on the movement in interest rates. As a result, he adds, it doesn’t make much sense to look at quarterly variations in expense heads.
Even so, the street is obsessed about the quarterly reported profit and it’s important to note here that the firm’s profit last quarter was higher than estimates largely on account of a non-operational factor—actuarial valuation of retirement benefits. Therefore, it doesn’t make sense to get too excited about the results.
This is not to say that Mahindra isn’t doing well. On the contrary, it is among the best performers in the automobile industry. Mahindra’s dominance in the utility vehicles and tractors space, coupled with the strength of the rural economy, has resulted in strong volume growth. It further benefited from regularly introducing new products and new variants of existing products. For the year ended March, operating profit rose by 176% to Rs3,046 crore, on the back of a 42% increase in revenue to Rs18,602 crore.
The strong growth is expected to continue in the current fiscal, again on the back of new product launches. This has been backed by strong volume growth in the past few months. So much so that the valuation of Mahindra’s auto business has risen smartly in recent months despite its December quarter results disappointment. On 25 January, after the December quarter results, Mahindra traded at Rs546 per share (adjusted for stock split). Of this, the embedded value of Mahindra’s listed subsidiaries accounted for Rs155 on a per share basis (after applying a 25% holding company discount to market price). The value of these subsidiaries has fallen by around 14%, led by a sharp correction in Tech Mahindra Ltd’s shares. Adjusted for this, the value of the core business has risen by around 8%, at a time when the broad market indices have been flat.
Graphic by Naveen Kumar Saini/Mint
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First Published: Sun, May 30 2010. 09 19 PM IST