The Hindu Business Line : M&M: Hold

THE half-yearly performance of Mahindra and Mahindra (M&M)'s has improved sharply this fiscal on the heels of marginal improvement in operational efficiency and inflow of other income.Sure, higher volumes helped increase revenues. But the impact of increased sales and cost savings on the bottomline was not strong enough to enable M&M to showcase a dramatic improvement in performance during the six months ended September 2002. Eventually, what helped boost the bottomline was a massive Rs 64.82 crore profit from the sale of M&M's entire 51 per cent holding in Mahindra Sintered Products Ltd to its UK-based joint venture partner, GKN plc.

Troubled by the slowing down of business in its farm equipment (tractor) segment, M&M's performance strategy rests on the automotive division. The company's latest addition to its utility vehicle portfolio — the Scorpio — features prominently in the improved results for the first six months of this fiscal.

However, M&M's financial performance for the first two quarters of this fiscal has to be viewed with cautious optimism partly because of the one-time (non-recurring) boost in profits.

M&M's net sales and operating income for the second quarter was Rs. 820.64 crore compared to Rs 761.10 crore for the corresponding previous period. Profit before exceptional items and tax for the quarter at Rs 32.19 crore was significantly higher than the Rs 7.92 crore reported for the second quarter of last year. The sale of equity in Mahindra Sintered Products resulted in a profit of Rs 64.82 crore, which has been reported as an exceptional item. Profit after exceptional items but before tax for the quarter was Rs 96.97 crore against a loss of Rs 4.17 crore for the corresponding previous quarter.

After providing for current and deferred taxation of Rs 38.70 crore, the net profit after tax and exceptional items for the quarter was Rs 58.27 crore against a loss of Rs 2.67 crore in the second quarter of last year. For the half-year ended September 2002, net sales was Rs 1,649.07 crore against Rs 1,446.22 crore for the same period last year. Profit after tax and exceptional items for this year's first half was Rs 66.07 crore against a loss of Rs 21.79 crore during the same period last year.

Net sales during the first half of this fiscal grew by 14.03 per cent compared to the corresponding previous period. However, profit before interest, depreciation, exceptional item (sale of equity) and tax grew by nearly 75 per cent. The total expenditure during this period only grew by 9.06 per cent. The operating profit margin for the period ended September 2002 worked out to 10.35 per cent compared to 6.75 per cent during the first half of the 2001-02 fiscal.

The company sold 15,253 Uvs in the second quarter of this year compared to 13,133 in the corresponding previous period. M&M's other mainstay, its farm equipment division, was affected by the continued fall in fortunes of the tractor industry. The industry has been hit by the fall in farm incomes consequent to the poor rainfall during the kharif crop season this year. In line with the industry trends, the company's sales also declined 24 per cent from 13,191 tractors in the second quarter last year to 10,035 tractors during the same quarter this year.

The M&M stock now trades at about Rs 85, discounting its current annualised earnings by a multiple of about 7.5 times. Shareholders can hold on to the stock and contemplate additional exposure at lower levels.

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