M&M: Powering ahead

M&M rides high on utility vehicles, LCVs and three-wheelers

Mahindra & Mahindra (M&M) has closed the financial year 2003-04 in style. Its profit before exceptionals and taxes jumped 193 per cent to Rs 408.7 crore.

Much of the incremental profit came from the automotive segment, which includes utility vehicles, three-wheelers and light commercial vehicles (LCVs).

The continued success of the Scorpio utility vehicle and Champion in the three-wheeler segment helped segment revenues jump 44 per cent. What's more, EBIT (earnings before interest and tax) margin increased over 300 basis points, resulting in a 122 per cent jump in segment profit.

But rising steel prices and other cost pressures seem to be catching up, as margins were flat (up 20 bp) in the March quarter. Even sales growth slowed last quarter. Utility vehicle sales grew 24 per cent in Q4, compared with a growth of 37 per cent in the first nine months of the fiscal.

Three-wheeler sales rose by an impressive 50.6 per cent, but lower than the 84.5 per cent growth recorded in the first nine months. But that may not be a cause for worry, as growth rates were much higher in April - growth in three-wheeler sales reverted to 85 per cent, while utility vehicles grew 39 per cent.

Importantly, the farm equipment (tractor) division turned around last year. Although the start to the year was rather disastrous, with segment profit falling 67.4 per cent in the first half period, things improved dramatically in the second half.

Sales grew 36.5 per cent compared to a 15.6 per cent fall in the first half, and segment profit (before exceptionals) jumped 218.2 per cent because of the better economies of scale. From being a drag on the company's financials, the tractor division is now contributing to growth in a strong way.

This segment had margins of 12.26 per cent in the second half period, much higher than the 9.2 per cent margin of the automotive segment. One of the main reasons for the strong growth in the tractor division was last year's good monsoons, which was the best in terms of consistency and spread in the last five years. The company helped itself by correcting inventory at the dealer-level.

Another factor that helped was a better financing scenario, not only because of lower interest rates, but also due to higher reach thanks to the requirement of lower land limit.

While the company has had a great start to the year, with a 43 per cent increase in domestic sales and a 39 per cent jump in exports in April, it may be difficult to maintain similar growth as the high base of H2FY04 catches up.

In any case, it should deliver a strong double-digit growth in earnings in FY05. The 14 times discounting (trailing), in that case, is not too high.

Dr Reddy's Laboratories

Dr Reddy's reported a massive drop in profit in the March quarter, which (expectedly) prompted a 10 per cent drop in its share price. While net sales declined 1.4 per cent last quarter, the company's net loss amounted to Rs 4.25 crore (excluding deferred tax benefits) compared to a net profit of Rs 118.37 crore in the previous year. Analysts attribute the fall in sales to the lack of any big product launch in the past two years.

While profitability was lower in its key operating segment last quarter, net profit was also hit by a number of one-off charges. Recently the US FDA had barred Dr Reddy's from launching the generic version of Pfizer's anti-hypertension drug Norvasc before the patent expires in September 2007.

And with Dr Reddy's unable to launch its first speciality drug AmVaz for the American hypertension market, the company has written off Rs 11.5 crore relating to this project. There was also a charge of Rs 5.8 crore relating to the sale of the company's stake in Compact Electric Ltd.

The API (active pharmaceutical ingredients) and intermediates segment did well, with sales being driven largely by improved sales of ramipril in Europe, and better demand conditions for ciprofloxacin and atorvastatin in the domestic markets. Segment revenues rose 49 per cent and segment profit rose 52 per cent to Rs 29.61 crore.

But in the key generics business, revenues fell 66 per cent. Analysts point out that the company faced increased pricing pressure in two of its best selling generic drugs in the American market, fluoxetine and tizanadine. The segment posted a loss of Rs 9.3 crore as compared to a profit of Rs 84.51 crore a year earlier.

Dr Reddy's strategy of patent challenges, which account for approximately 74 percent of its pending U.S. applications, is increasingly viewed as more risky compared to its peers, as one recent adverse decision has the potential to change the fortunes of the company. As a result, it could be a while before investor sentiment changed for the company.

With contributions by Mobis Philipose and Amriteshwar Mathur