M&M: Reaping a good harvest

The profitability of M&M's farm equipment segment has been improving

Mahindra & Mahindra has posted a 23 per cent rise in total sales at Rs 2,186 crore for the December quarter, driven by a 33.5 per cent y-o-y rise in tractor sales.

The growth in the automotive segment was a more subdued 17 per cent y-o-y. Operating profit too was up 24 per cent y-o-y, with raw material costs having been kept in check""raw material to sales was down by 270 basis points at 68 per cent.

However, other expenditure at 13.3 per cent of sales was much higher compared with 10.6 per cent in Q3 FY05 with the result that operating profit margin improved by just 20 basis points y-o-y to 12.1 per cent.

Profitability (before exceptional items) for the farm equipment segment was at 12.4 per cent compared with 11.9 per cent for the automotive division.

The profitability of the automotive segment has improved in the last three quarters, owing to price hikes and a better product mix with M&M selling more number of higher-end Scorpio models.

Farm profitability too has been improving, with the company getting more operating leverage on higher volumes.

In the December quarter, tractor volumes were up 26 per cent y-o-y compared with the industry growth of 16 per cent. At the current price of Rs 559, the stock is reasonably valued at 12.4 times estimated EPS FY07 consolidated earnings.

HCL Tech: The new order

Though HCL Technologies' results have been slightly below expectations, the company's focus on multi-year, multi-million orders is attracting investors.

During the quarter, it signed a few such deals, and as a result, the stock was one of the top performers in the sector. Just a day after its results, HCL Tech announced bagging a five-year, Rs 1,500 crore outsourcing deal from a European electrical retailer.

For the December quarter, HCL Tech posted a 10.1 per cent q-o-q growth in EBITDA to Rs 237.7 crore, though revenue growth was lower at 8.6 per cent q-o-q. EBITDA margin also improved by 30 basis point sequentially to 22.5 per cent, though it was lower by 50 basis points on a y-o-y basis.

Software services revenues grew 7.6 per cent q-o-q and better utilisation rates led to an EBITDA growth of 8.3 per cent. Revenues in the BPO business remained flat for the second consecutive quarter, though EBITDA margins improved. Infrastructure services saw a 45.6 per cent growth in EBITDA.

In its guidance, the company expects to reach the billion-dollar revenue mark for year ending June 2006, implying a sequential growth of 10 per cent in the next two quarters. The management expects to maintain margins at the current levels.

The BPO business is expected to post higher growth as the company has ramped up facilities, added 1,562 employees and bagged two clients. The stock is reasonably valued at an estimated FY07 P/E of about 19.

Shipping sector: In choppy waters 

Shipping freight rates have eased considerably in the December 2005 quarter on a y-o-y basis, which has impacted domestic shipping companies' performance during the quarter.

Spot freight rates in tanker segments such as VLCC had more or less peaked in Q3 FY05 at about $125,400 per day and in Q3 FY06, they were estimated to be about 35 per cent lower. Similarly, in the dry bulk segment, freight rates are also down by about 35-40 per cent y-o-y in Q3 FY06.

As a result of lower rates, Great Eastern Shipping has reported 27.3 per cent fall on a y-o-y basis in operating profit to Rs 252.67 crore (excluding other income and sale of ships) in the December quarter.

To the company's credit, it has attempted to offset the weaker spot freight price environment by placing a number of its tankers on long-term contracts.

However, during the last quarter, the company undertook six dry dockings, mainly of older vessels, which resulted in an increase in its expenditure relating to repairs and maintenance. As a result, segment profit of the key shipping division fell 31.78 per cent y-o-y to Rs 183.57 crore in the last quarter.

Shipping Corporation of India, however, managed to grow its operating profit (excluding sale of ship and other income) by 16.4 per cent y-o-y to Rs 343.12 crore, due to a reduction in staff cost and other expenditure.

Going forward, freight rates have shown signs of picking up. Also, the recent regulatory approval received by Great Eastern Shipping would enable unlocking of value in its two divisions and help the stock price reflect the inherent value of the respective businesses.

With contributions from Amriteshwar Mathur and Shobhana Subramanian