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Sunday, Jun 23, 2002

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Mahindra & Mahindra: Will Scorpio help switch gears?

S. Muralidhar

Recommendation: Hold
Risk Averse: Sell on uptrend

MAHINDRA & Mahindra Ltd's bottomline took a hit of 15 per cent in 2001-02, despite the company's efforts at reining in costs. Higher non-operational income in the last quarter of the year gave the bottomline a rev, but could not make good the overall fall in profitability for the full year. The company's audited results for the year ended March 31, 2002 show that M&M's topline also eroded by about 7.5 per cent compared to the previous year.

Moreover, the near 25 per cent jump in interest costs also took its toll on the company's bottomline. The net profit for 2001-02 before prior period adjustments was Rs 102.69 crore compared to Rs 120.56 crore for the previous year. The net sales and income from operations for 2001-02 was Rs 3,273.08 crore compared to Rs 3,538.41 crore for 2000-01.

However, the net profit for the full year represents an improvement over the Rs. 4.76 crore reported for the first nine months of the year 2001-02. This improvement in profits was largely due to the success of the cost re-engineering, right-sizing and restructuring initiatives carried out by the company during the year, according to the company.

Farm equipment sector

The performance of the farm equipment division, the core business of M&M, slipped during the year under review. It is a fact that continued sluggishness in the rural economy continues to apply pressure on farm incomes and, consequently, dampens the prospects of the tractor industry.

However, M&M's practice during the previous few years of pushing dealer-level sales, without a commensurate increase in retail sales, had forced the company to retrace its steps to balance its retail and dealer-level sales during 2001-02.

This resulted in a drastic 27 per cent fall in its sales during 2001-02, compared to the tractor industry level sales slowdown of 13.5 per cent.

Automotive sector

At Rs 1,827.55 crore, the company's automotive segment contributed as much as 55 per cent of the total revenues for 2001-02 and an equal percentage contribution was made by the division to the company's bottomline. However, the automotive division took up a higher allocation of funds and the capital employed in this segment constituted nearly 60 per cent of the total capital employed during 2001-02.

The higher allocation to this division can be explained by the investments made in the new `Project Scorpio'.

The company sold 55,920 MUVs in 2001-02 and, thereby, increased its market share from 46.2 per cent in 2000-2001 to 47.5 per cent in 2001-02.

In the light commercial vehicle segment, the company improved its market share from 11.0 per cent in 2000-2001 to 11.5 per cent in 2001-02.

In three-wheelers, M&M started making its presence felt by selling 2,950 units during the year under review as against 191 in 2000-2001.

Future outlook

M&M hopes to further improve its position this year with the launch of its new contemporary range of utility vehicles from Project Scorpio, under which a range of variants from a single platform is expected.

The company is also hoping to generate growth from new models introduced in financial year 2002.

The performance of the M&M stock in the medium term will hinge on the response that the Scorpio MUV and its variants receive in the market.

The tractor industry is unlikely to witness any noteworthy upward trend this fiscal.

Further, with the demand for M&M's Bolero tapering and with an ageing fleet of passenger vehicles, the company needs a new introduction to infuse fresh blood into its product portfolio. The Scorpio could be M&M's trump card.

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