Decent show by M&M despite farm sector odds
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Mahindra and Mahindra Ltd’s (M&M’s) December quarter performance has gone down well with investors. The diversified auto manufacturer, facing growth challenges in both farm equipment and auto segments, managed to sustain profitability on the back of decent sales growth. The stock therefore rose 5% on Monday but slipped a bit on Tuesday, even as it has outperformed the BSE Auto index in the last one year.
Fuelling growth were the nine new launches in the auto segment through fiscal year 2016 that pushed up sales by about 15% from a year ago. And the price hike helped to improve the average per vehicle revenue by about 4%. However, it was not so in the farm equipment segment, where volumes grew by only 5% year-on-year and the revenue per unit sold fell by 1.7%.
True, a weak rabi crop after two consecutive weak monsoons has dried up demand for farm equipment. Yet, as the market leader in tractors, M&M’s market share rose by about 300 basis points to 43% during the quarter. Its small commercial vehicles did not do too well. A basis point is 0.01%.
Put together, net revenue (M&M and Mahindra Vehicle Manufacturers Ltd) rose by 15%. But what enthused investors was the 250 basis points jump in operating margin, at a time when sales growth is not at its best. Analysts feel that one-offs impacted profitability. An Emkay Global Financial Services Ltd report says that provisioning in line with the new Bonus Act, value diminution of assets and revaluation of loans impacted profit margins for the quarter. Of course, the biggest relief was the lower raw material costs and efforts to trim vehicle inventory.
But this is no reason for bullishness on the company’s prospects. The forthcoming monsoon is critical in determining offtake of farm equipment and automobiles. M&M’s management has pulled down its guidance for the former in FY16 from –5% to –10% and this segment comprises a third of the consolidated revenue.
That said, the year after may see a better growth rate given the low base, and support an expansion in valuation. At present, the M&M stock trades at 10 times one-year forward price-to-earnings multiple. Given the estimated growth of 15% in annual earnings over the next two years, the stock does not seem expensive.