M&M: Stoking a global dream

M&M's UK buyout will help keep a check on input costs

Mahindra & Mahindra (M&M) has been trying to build global economies of scale for its automotive components and engineering design business""Mahindra Systems and Automotive Technologies (MSAT).

Of course, such a strategy would enable M&M garner a larger percentage of the outsourcing component business from large European and American auto companies.

In addition, an in-house supply of key automotive components would also help M&M to keep a tight check on raw material costs, going forward.

As part of that strategy, the tractor major's latest acquisition in the forging segment has been that of the UK-based Stokes group.

While the valuations for the deal are not available, the Stokes group has two manufacturing companies and its clients include Koyo Bearings, Land Rover, Bosch and Ford. M&M had also taken over a forging unit from Amforge in the first half of CY05.

These acquisitions are a step for M&M's auto component and engineering division to achieve its target turnover of $1 billion (Rs 4,500 crore) in 2010 from the expected turnover of $250 million (Rs 1,125 crore) in FY06. Also, M&M's attempt to keep a tight check on raw material costs via in-house supplies, have shown signs of paying off.

For instance, in the first half of FY06, the company's consumption of raw materials as a percentage of net sales declined 227 basis points to 73.7 per cent. The buoyant mood on the street, helped the M&M stock gain 1.13 per cent to Rs 523.95 on Wednesday.

In December, M&M had taken over Plexion Technologies (India) and the synergies from this decision were apparent, given Plexion's expertise in computer aided engineering services for the automotive and aerospace industry.

M&M also entered into a JV, with International Truck and Engine Corporation of the US to manufacture trucks and buses in November. This JV marks the company's entry into the entire gamut of commercial vehicles. Mahindra is not a big LCV player, and this JV is an attempt to increase its market share in this segment.

Also, when the JVs with Renault and International will be operational, M&M would be present across almost all segments - farm equipment, utility vehicles, passenger cars, commercial vehicles and components. The stock appears reasonably valued with an estimated FY06 P/E multiple of around 16.

Dhampur Sugar: sweet timing

The upturn in the sugar industry has helped Dhampur Sugar's performance for year ended September 2005. The company was benefited by higher sugar prices, along with some improvement in volumes.

Dhampur was able to realise about Rs 17 per kg of sugar in FY05 compared with Rs 13.7 per kg in the previous year. Consolidated sugar production increased by 11.4 per cent to 38.4 lakh quintals.

The company managed to achieve recoveries of 9.85 per cent against 9.48 per cent in FY04, helped by an improvement in cane quality and better efficiencies. The stock has appreciated around 10 per cent since the results were declared to Rs 211.

Its consolidated net sales increased by 91 per cent for the September 2005 quarter to Rs 297.84 crore. For the full year, consolidated net sales rose by 64 per cent, while operating profits went up by 91 per cent to Rs 166 crore. The operating margin improved by 250 basis points to 17.22 per cent in FY05.

The company is investing Rs 405 crore on expansion to increase its sugar capacity by 8,000 tcd, which will come up in 2006-07, taking its total capacity to 38,750 tcd, and co-gen power capacity from 54 mw to 124 mw.

In FY05, it sold 10 mw to UPSEB, which will go up to 70 mw after the new capacity comes up. Its distillery capacity will also go up by 40 per cent to 140 kilolitre per day. This year, thus far, sugar realisations have improved further and are over Rs 17.5 per kg, which will help the company improve its margins further.

In November 2005, Dhampur had sold its 7,500 tonne crushing per day plant at Rauzagaon to Balrampur Chini for Rs 182 crore as this plant was at a distance from its two other plants.

Dhampur has had a debt problem in the past; and the company will use some of these funds in reducing debt, which will bring down interest cost.

Though the stock price has gone up 61 per cent in the past two months, with its consolidated FY05 EPS of Rs 25.57, its trailing P/E is low at 8.25 times compared with Bajaj Hindusthan's 26 and Balrampur Chini's 16.