M&M: Surging subsidiaries

The rapid growth of its diverse divisions is set to drive up M&M's future prospects

Strong volumes of 25 per cent y-o-y and higher realisations in both the automotive and farm equipment sectors drove Mahindra and Mahindra's (M&M)net sales up by 28 per cent to Rs 2,450 crore in the September quarter.

Cost re-engineering efforts helped the operating profit margin expand by 200 basis points y-o-y to 13.4 per cent, with both segments turning more efficient. In fact, PBIT margins were at their all-time best for both segments, rising by 240 basis points.

Thus the operating profit rose a smart 51 per cent to Rs 303 crore. Driven by good performances from its subsidiaries, consolidated gross revenues were up 46 per cent to Rs 4,620 crore, while the profit after tax before extraordinary items rose 63 per cent to Rs 360 crore.

A pick-up in the sales of Scorpio, especially the new variant, and also the three-wheeler Champion Alfa helped the automotive segment post higher volumes of 21 per cent y-o-y. Looking ahead, this segment should manage to grow volumes by about 10 per cent for the next couple of years, thanks to a 50 per cent growth in exports.

As for tractors, the 29 per cent y-o-y growth seen in H1 FY07 should taper off somewhat in the rest of the year, primarily because inventories have started building up, as a result of which banks have slowed down their lending.

Over the next few years, this segment should grow at around 13 to 14 per cent with exports picking up. However, it's the subsidiaries, in the spaces of technology, auto components, finance and realty that are growing faster and will drive growth in the future, contributing nearly 40 per cent of consolidated profits by 2009.

At the current price of Rs 767, the stock trades at around 12 times FY08 consolidated earnings and is attractively valued given that the company has diversified revenue streams and that the joint ventures for passenger cars and commercial vehicles should break even by 2009.

SAIL: Better margins

SAIL, in contrast to Tata Steel, has been able to offset higher input costs, owing to better price realisations and has managed to improve its operating margins in the September 2006 quarter.

The company's operating profit grew by 18.9 per cent y-o-y to Rs 2,333 crore in the last quarter, broadly in tune with its growth in net sales, which amounted to Rs 8,539.09 crore. Its operating profit margin stood at 27.3 per cent in the last quarter. Tata Steel's operating profit margin had declined 180 basis points y-o-y to 40.7 per cent in Q2 FY07.

SAIL saw its sales improve by 4 per cent y-o-y to 2.91 million tonne in the last quarter. Analysts point out that in SAIL's sales mix, the proportion of semi-finished steel has come down, while higher-value products, such as rails, have gone up.

As a result, its realisations grew by an estimated 13.8 per cent y-o-y to Rs 29,343 per tonne. Tata Steel had seen its realisations improve by merely 7.35 per cent y-o-y to Rs 35,352 per tonne.

Surging realisations helped SAIL offset higher input prices, such as coking coal, as raw material costs as a percentage of net sales jumped 520 basis points y-o-y to 38.4 per cent in Q2 FY07.

It had raised prices of galvanised steel recently, but analysts repeatedly highlight possible pressure on steel prices due to surging Chinese output. As a result, the SAIL stock gets a discounting of barely 5.5 times estimated FY07 earnings.

Cipla: Dearer inputs

Cipla has once again leveraged its partnership model to expand sales in the overseas markets in the September 2006 quarter, but it has seen a dip in its operating margins, owing to the growing exports of low-margin API (active pharmaceutical ingredients).

In addition, it also had to grapple with higher raw material costs. As a result, the company has grown its operating profit by 28.1 per cent y-o-y in Q2 FY07, as compared with a 33.3 per cent growth in net sales.

Also, the company's operating profit margin fell 100 basis points y-o-y to 25.4 per cent in the last quarter. Earlier, generics player Ranbaxy had seen its operating profit margin surge 1,360 basis points to 16.7 per cent in the last quarter.

Meanwhile, Cipla's total exports grew by an impressive 37.2 per cent in the last quarter, helped by its API exports surging 120 per cent y-o-y. API exports typically have lower margin than formulations, point out analysts.

As a result, the company was not able to offset higher raw material costs, which rose 250 basis points y-o-y to 45.8 per cent of sales in Q2. In the domestic market, the company's sales grew by 22.2 per cent, owing to improved sales in anti-asthmatic and cardiovascular segments.

Going forward, analysts highlight the possibility of price cuts, voluntary or otherwise, in the 350 products which come under the government's essential list, putting further pressure on the company's operating margins.

However, the company is expected to maintain its growth in export markets. But, with the stock trading at 26 times estimated FY07 earnings, there is little room for an upside.

With contributions from Amriteshwar Mathur and Shobhana Subramanian