Stock Review: MAHINDRA & Mahindra (M&M)

MAHINDRA & Mahindra (M&M) benefited from strong demand for its array of tractors in the December 2010 quarter. It also effectively dealt with the rising input cost. The company's standalone operating profit margin for the quarter was broadly flat compared with a year earlier at 15.1%; its net sales, however, saw a jump of 36.1% at 6,121 crore. Although not strictly comparable with M&M, all leading four-wheeler companies, like Maruti Suzuki, and two-wheeler players, like Hero Honda, had reported a fall in their operating margins in the third quarter, due to the rising costs of key inputs like steel and nonferrous metals. M&M's farm equipment division, which includes tractors, benefited from a record monsoon season last year and a pick-up in the agricultural sector. In the third quarter, the number of tractors sold rose nearly 33.8% compared with a year earlier. Realisations per unit was also higher.

   In the auto segment, too, the company gained from the improved demand conditions for its range of utility vehicles.

   M&M, like other auto companies, has taken productivity improvement measures to deal with the rising costs.

As a result, its adjusted raw material costs as a percentage of net sales declined nearly 200 basis points year-on-year to 62.2% in the December quarter. M&M's core net profit (excluding exceptional items) improved 49.4% year-on-year to 617.2 crore.

The company's results were broadly in line with analysts' expectations. The stock gained 4.1% to close at 654 on Wednesday, in contrast to the sell-off witnessed on the Street.
Going forward, M&M performance will depend on its ability to manage input costs, which have not shown any signs of easing. Also, auto finance rates have shown a distinct uptrend, and this could put a brake on sales growth for the broader auto sector.
M&M had moderately hiked prices in its auto segment in early January. This, coupled with strong demand for its tractors in the short term, should help the company protect its operating margins over the next few quarters.

M&M trades at a P/E of nearly 14.7 times on a standalone trailing four-quarter basis. The valuation of the stock factors in the array of investments the company has in different sectors, analysts say.

Tata Motors trades at a consolidated P/E of 9.6 times on a trailing basis.