Cruise control

There are reasons why M&M has not been hit by market volatility

Mahindra & Mahindra's tractor business, it seems, has reached its inflection point in the quarter ended September 2003, when EBIT (earnings before interest and tax) margins had plunged to a low of 3.1 per cent.

Last quarter, the tractor business reported quite a turnaround - a 21.3 per cent jump in sales and 475 basis points jump in EBIT margins led to a 118 per cent jump in segment earnings. In volume terms, the decline in tractor sales stand at 6 per cent in the nine months till December.

And thanks to the double-digit growth in monthly volumes since September, sales are expected to be flat by the end of FY04. This is significant as the tractor industry has seen four years of declining sales.

The reduction in interest on farm loans and the extension of the Kisan Credit card scheme to all eligible farmers, which were announced by the finance minister in his interim budget, will further boost demand for farm equipment.

What's more, exports of tractors have also recorded impressive growth and by the end of FY04, the company expects to export around 6000 tractors.

The automotive division, on the other hand, continued its good performance. Sales jumped 46.4 per cent to Rs 935 crore last quarter, and EBIT margins improved 460 basis points, in line with the increase in profitability in the first six months.

The performance of the automotive division continued to be driven by higher sales of Scorpio, which now accounts for around 28 per cent of UV sales.

Domestic UV sales improved 32 per cent last quarter, and significantly LCV volumes witnessed a marginal 3 per cent increase. This marks a turnaround as LCV volumes had fallen in the first two quarters of the year.

Last year's normal monsoon, coupled with a correction in the inventory levels at the dealers' end is expected to result in a growth in tractor sales in FY05, just as it has since September 2003.

Besides, demand from hobby farmers is expected to maintain the pick-up in exports to the US (90 per cent of total tractor exports). Besides, cost-cutting and debt restructuring initiatives are expected to result in higher growth in earnings.

It's no wonder the Mahindra and Mahindra stock has not been affected much by the volatility in the markets and continues to trade at around 19 times FY04 earnings.

The inflation edgedown

Inflation was at 6.13 per cent as on January 17, slightly lower than the previous week's 6.21 per cent. Both the finance minister and the RBI governor insist, however, that inflation will be between 4 to 4.5 per cent by end-March. Is that reasonable?

Note that the wholesale price index hardly moved between August 17, 2002, and January 4, 2003, rising from 167 to 167.5 during the period. In contrast, between August 16, 2003, to January 3, 2004, the WPI rose from 173.8 to 177.7, an increase of 3.9 points and much higher than the rise in the preceding year.

Between January 3 to March 29, 2003, the WPI rose from 167.5 to 172.3, a rise of 4.5 points. If the WPI rises by the same amount this year, the rate of inflation as at end-March will be 5.9 per cent.

Clearly, therefore, the RBI believes that the rise in the WPI will be much less, at about 2.3 points, for inflation to be 4.5 per cent by the end of this fiscal. And there's already been a rise of 0.5 points between January 3 to January 17.

The 4.5 point rise in the WPI between January to end-March last year was due to a 1.5 per cent rise in food articles over the period, a 7.2 per cent rise in non-food products, a 1.5 per cent rise in the manufactures index, and a 6.2 per cent rise in the fuel index.

The decline in the food index in the current year is at par with the decline in the preceding year, despite the good monsoons. Non-food items have risen by 4.2 per cent in the last couple of months, and they rose by 1.6 per cent in the week to January 17.

The RBI is hoping that the rise in non-food primary articles will be lower this year, and, with the elections around the corner, the government will not raise fuel prices.

The lower customs duties will also help in reducing the prices of manufactured products. But perhaps the interim budget's assumption of an 8 per cent growth rate and 5.2 per cent inflation for the current year will be nearer the mark. It's no wonder that, despite abundant liquidity, the bond markets are hesitant.

With contribution from Mobis Philipose