The foray into the competitive two-wheeler space could take time to pay off.
The market for two-wheelers in India may be fairly large and growing. However, given that there are already several players in the space, including the likes of Honda and Suzuki, it is somewhat difficult to understand why Mahindra and Mahindra would want to foray into this segment.
Even market leader Hero Honda hasn’t had an easy time this past year or so. The total volumes of motorcycles sold in the country in FY08 fell nearly 12 per cent to 5.7 million vehicles from 6.5 million in the previous year. So, while it may seem to be a strategic fit for the company as it will plug a gap in the auto portfolio—M&M makes UVs, cars, tractors, trucks and components — the auto-maker needs to make sure it is making the right bikes and scooters. The management has said it wants to be in the premium space, where the margins are higher, which is probably the right thing to do.
However, given that Kinetic does not have a popular product portfolio, M&M will need to pump in a huge sum — above the Rs 110 crore that it is paying upfront—-to create products, brands and distribution. When this investment will start paying off remains to be seen but it could be a while before the results start showing.
The merger of Punjab Tractor with M&M in the ratio of 3:1 is in favour of M&M shareholders: before the announcement, the M&M share was worth 2.3 shares of Punjab Tractors. The merger, may not impact earnings or dilute equity and will certainly hasten the process of integration. The merger will, of course, help bring down operational and other costs.
M&M’s domestic tractor volumes grew by 11.5 per cent y-o-y in the June 2008 quarter and it retained its leadership position in the marketplace with a share of 33 per cent. Concerns about an early revival in tractor market, however, remain on account of higher interest rates and some deficient rainfall in the southern states.
Utility vehicles sold well — volumes were up 21.6 per cent — in the June 2008 quarter helping the Bolero and Scorpio manufacturer post a decent 26 per cent rise in net sales to Rs 3,293 crore. However, sales tapered off in June after a good start in April and May, when sales rose by a smart 29 per cent y-o-y. Operating profit margins came off by just about 70 basis points y-o-y to 9.9 per cent, despite an increase in the cost of raw materials.
This was partly because the company had hiked prices by 1.5-2.5 per cent across all its categories in May. The operating profit was up 17 per cent. Despite expecting the demand to remain lacklustre, M&M has not ruled out further price hikes.
M&M is expected to close the current year with revenues in the region of Rs 12,500 crore and a net profit of Rs 950 crore. The earnings per share could rise by about 7 per cent. The M&M stock hasn’t lost too much value since the results. At the current price of Rs 520, the stock trades at around 7 times its estimated consolidated FY09 earnings and is not expensive given the value in its subsidiaries. However, the auto sector continues to see relatively weak demand.
