M&M Sells More And Earns More: Buy

Mahindra & Mahindra (M&M) announced their Q1 FY13 results on August 8, 2012 in which their performance was better than street expectations. They posted a topline growth of 39.53 per cent and a bottomline growth of 19.96 per cent as compared to the corresponding quarter in the previous year.Changing trends in the automobile industry may have adversely affected most companies but the situation has also given some companies, which were rightly positioned, the opportunity to grow tremendously. Overall, the demand of automobiles has seen changes like,

1.Shift in demand from petrol to diesel vehicles

2.Moderate growth in passenger cars

3.Proliferation in the demand of utility vehicles

4.Double digit decline in Medium and Heavy Commercial Vehicle (M&HCV) sales

5.High growth in Light Commercial Vehicle (LCV) sales

Having considered these changed dynamics, M&M has performed relatively better in this slowdown. They have seen phenomenal success in the utility vehicles segment through the model XUV500. Since the beginning of this financial year, the company has witnessed YoY growth in the range of 31 per cent and 33 per cent every month in the utility vehicles segment. It has also seen growth coming in from the four wheeler pickups segment where the company has launched Gio and Maximmo. This segment has seen monthly YoY growth of 27 per cent to 37 per cent from April to June 2012. M&M has also performed well on the commercial vehicles front and has seen healthy exports.

Sales Volume Growth For M&M

The growth in sales volume has been mirrored in the financials of M&M with their quarterly results glowing with robustness.

Q1 FY13 Results For M&M

The net income from operations of M&M increased from Rs.6628.07 crore in Q1 FY12 to Rs.9247.94 crore in Q1 FY13, marking a growth of 39.53 per cent. The operating profit and net profit of the company too, grew enormously with the operating reaching Rs.1109.43 crore and the net profit reaching Rs.725.64 crore. This translates into a YoY growth of 23.64 per cent and 19.96 per cent in the operating profit and net profit respectively. The operating profit margin and net profit margin were pressured and saw a reduction of 154 basis points and 128 basis points respectively. This has been caused by an increase in raw material costs and finance costs.

Segment-wise Revenue

The key tractor segment of M&M saw some sluggish growth this quarter with domestic sales volumes declining by 1.19 per cent although exports of tractors grew by 3.85 per cent. The revenue translation yet witnessed a rise of 7.74 per cent with revenue from Farm Equipment increasing to Rs.3078.29 crore in Q1 FY13 from Rs.2857.07 crore in Q1 FY12. The automotive segment, with total vehicle sales up by 22.72 per cent YoY, had revenue growing by 62.83 per cent compared to Q1 FY12.

With the updates on sales volumes and financial performance, we maintain out positive outlook on M&M. We think it will continue to outperform its peers and that buying this scrip would benefit investors. Moreover, the scrip is trading at a trailing PE of 14.71x as compared to the 22.01x for Maruti Suzuki and 62.59x for Tata Motors making our recommendation stronger.