FY2012 Annual Result Analysis on 31st May 2012

Mahindra & Mahindra announced its annual results on 30th May 2012. The annual growth in revenue and profit was on expected lines as posted in this article (please see below). We projected annual growth of 50% while growth in net profit was expected to be flat to slightly negative. The actual annual revenue and profit growth were 61% and 1.5% as shown below.

The QoQ growth in revenue and net profit was flat and 32% respectively while YoY growth saw an impressive gain of 14% and 43% in revenue and net profit.

Summary of Analysis

Increased raw material cost, pressure on margin, deceleration in economic growth, and higher inflation & interest rates are some the factors that would spoil the party. Mahindra & Mahindra is expected to show excellent growth in revenue in FY2012 but flat to negative growth in profit. The long term prospect of the company will depend on many factors. Major among them are interest rate, infra development, and economic recovery.

Our call on Mahindra & Mahindra is slightly bullish in longer term. Historically, auto companies have traded in the range of 10 to 15 PE. Hence, investors can expect its prices to hover around 600 to 720 for a year. The only trigger is improved sentiments in the market which may happen if the Government liberalizes further. We will analyse the results which will be published on 30^th May, 2012. Please keep an eye on this space.

Note: We have taken consolidated data.

Stock Summary:

M&M is available at the consolidated PE (TTM) of 13.2. This is not a high valuation but neither is it cheap to go for it now. With a muted growth in earnings for the year FY2012, investors should observe the stock for another quarter before taking a call.

The Firm & Its Business

Mahindra & Mahindra is a business conglomerate in India having its footprints in many countries around the world. Its transformation from a tractor company mainly popular in rural areas to one of the most marketing savvy company churning out aspirational SUVs is fascinating. Today, Mahindra & Mahindra is certainly the most visible brand in SUV segment. It is also one of the most recognized brands in small towns in villages across the country.

The Sector

Auto sector is now feeling the pressure on its margin because of higher raw material cost. High fuel prices have also ensured demands do not rise as much as expected putting further pressure on inventory.

While the sector is not facing any existential crisis, its next growth will depend on two major events. One is oil price and the second is infrastructure. Both of them are Government regulated which makes this sector little risky at this point because of a weak Coalition Government at the centre.

Financials of last 5 years:

Commentary on financials:

Comments on FY2011 data

• Despite slow recovery and subdued market for last 2 years, the revenue in FY2011 grew by 18% over last year and the net profit grew by just over 10%. The company is facing huge pressure on margin because of increased raw material cost. The raw material cost has gone up by 650 basis points over last year.
• The increase in raw material cost has impacted ROE in FY2011 which stands at 22.33% much lower than that of last year when ROE was 31%.
• Debt has gone up in FY2011 to 18005 crore from 13688 crore a year ago. Naturally, the interest expenses have also gone up.
• The company has done extremely well in cutting down employee cost thus increasing the productivity of operation by a huge margin. The employee cost was 14.28% of the revenue in FY2010. It has come down to 8.18% of revenue in FY2011. Despite the cost saving in employee, overall expenses went up because of huge increase in raw material cost.
• The consolidated EPS for the year FY2011 is Rs 54.19 compared to Rs 48.90 last year.
• The company is paying dividend consistently. Its FY2011 dividend of Rs 7.5 per share.

Positive points on financial trends

• Revenue and net profit have seen good growth in last 5 years. The CAGR stands at 20.29% and 18.35% respectively. This is a reasonable growth but not really great.
• The company enjoys reasonable net profit margin at 7% - 9%. While this margin is not very good as such, auto firms have similar margin. Though the company has able to manage its net profit at a respectable level, its raw material cost has gone up in last 5 years. This will certainly impact the profit margin going forward.
• ROE at 22.33% for the FY2011 is good. Though it has come down from 30%+ which is the historical ROE.
• Current ratio and quick ratio are healthy and the company has no problem in managing it working capital.
• Receivable days have come down which is a good sign.
• The cash flow has shown fluctuation over last 5 years. After 3 consecutive positive cash flows, it turned negative in FY2011.
• The company has maintained debt to asset ratio close to 0.5 for last 5 years.

Concern areas of financial trends

• The company has history of paying the dividend but the yield is very low at below 1% in FY2011.
• PEG ratio of 0.78 shows small scope of appreciation. The current PE ratio is 15.4 which show fair valuation at this price.
• Days sales in inventory has been going up for last 4 years. This means it is taking more days to deplete the inventory.

Financials for recent quarters

The growth revenue in Dec, 2011 quarter is 8.12% QoQ. However, it grew at the rate of 61.28% YoY. Net profit grew at 21.97% QoQ while the growth was -0.26% YoY. The net profit margin for all 3 quarters of FY2012 is bad at around 5%

Risk Analysis

Auto sector is impacted by the following events:

1. Interest rate - Inflation is still high and hence the possibility of further rate cuts is very limited. If the rates are not cut, it will impact auto sector directly.

2. Fuel price - Needless to say, higher price will reduce the incentive to buy vehicle.

These two risks are very real. RBI has already given hint that they will not be able to reduce the rates further.

Short term view

The short term view of the company is average. Revenue and profit growth in next few quarters will not see much growth. As per our estimate, the revenue should grow by 50% and profit growth will remain flat to negative for FY2012.

Long Term View

It is difficult to predict the long term prospect of the company because of global situation. Moreover, complete shutdown of any meaningful policy initiative by Government is hurting growth of Indian economy. Auto sector is dependent on economic growth of the nation and there is uncertainty over it. With growth projection of below 6% for next couple of years, auto companies will find it hard to increase sales. We will have to see few quarters.

Disclaimer

The data is taken from publicly available sources such as NSE, company website, and few finance portal such as moneycontrol, HDFC securities, ICICI direct etc. Investors are requested to go by their own judgement.