Mahindra: Growth pangs

Manufacturing costs have gone up by more than 200 basis points in the March quarter

Mahindra & Mahindra's (M&M) standalone numbers for the March 2007 quarter were disappointing with the operating profit margin falling by 50 basis points, y-o-y to 11.4 per cent. However, it has ended FY07 with slightly improved margins of 12.6 per cent.

The growth in the top line too seems to have slowed down in the last quarter at 20 per cent y-o-y at Rs 2,747 crore "" compare this with the full year growth of 22.2 per cent at Rs 10,050 crore.

Thus, sales growth appears to be somewhat subdued and what's more even at these levels, the operating leverage doesn't seem to be coming through.

This, despite the fact that the company has managed to save on raw materials: these are lower by about 200 basis points in the March quarter and 130 basis points for the year. What's happened is that the cost of manufacturing has gone up by more than 200 basis points in the March quarter.

The fierce competition in the auto space is not allowing M&M to fully pass on the higher operating expenses, with the result that the operating profit increased just 15.2 per cent in the March quarter. For FY07 as a whole, though, the operating profit was up a smart 30.6 per cent at Rs 1,263 crore.

Looking ahead, the growth in tractors is expected to moderate to 8-12 per cent a year on a higher base. Besides, sales of utility vehicles too could lose some momentum from the 22 per cent compound growth seen over the last five years. With cost pressures unlikely to abate in the near term, margins in the automobile cannot expand significantly.

What's expected to work well for M&M are its projects with Renault (to make the Logan) and with Renault and Nissan to make UVs. While it will need to make large investments (Rs 7,000 crore with its partners), M&M's debt-equity is low at 0.17 per cent, and moreover it has a cachet of $200 million that it had borrowed earlier. These ventures should pay off in the long run as should its new platform for Ingenio, another utility vehicle.

M&M's valuations are being increasingly driven by its subsidiaries and the unlocking of value that is possible through companies such as Mahindra Holidays.

While lower effective tax rate and adjustments for exceptional items have boosted the standalone net profit by 36.8 per cent for the March quarter and 46.3 per cent for the full year, at a consolidated level, the profit after tax was up 57 per cent at Rs 1614 crore, thanks to sterling performances from Tech Mahindra, Mahindra Finance and Mahindra Gesco.

Indian Oil: High crude costs

Indian Oil's performance in the March 2007 quarter, like other oil marketing companies, was adversely affected by its inability to pass on higher crude costs to its end customers.

As a result, operating profit fell 3.3 per cent y-o-y to Rs 5044 crore in Q4 FY07 compared with 7.5 per cent growth in total income from operations (including oil bonds) to Rs 54,461 crore.

However, IOC's results of Q4 FY07 and FY07 are not strictly comparable with the earlier year's, given the merger of IBP with itself during FY07.

Nevertheless, the merged entity saw its operating profit margin fall 100 basis points y-o-y to 9.3 per cent in the last quarter. BPCL's operating profit margins had also declined 320 basis points y-o-y to 5.3 per cent in Q4 FY07.

In the last quarter, IOC's product sales (including exports) amounted to 18.44 million tonne compared with 12.31 million tonne a year earlier. To offset the under-recoveries on LPG, auto fuels and kerosene faced by IOC in the last quarter, as per the subsidy sharing mechanism, upstream players such as ONGC and GAIL provided Rs 4,241.7 crore in Q4 FY07 compared with Rs 1,369 crore a year earlier.

Meanwhile, IOC's refinery throughput was 11.8 million tonne in the March 2007 quarter, a growth of 16.8 per cent. However, its gross refining margins fell to $4.19 a barrel in Q4 FY07 compared with $4.6 a barrel a year earlier.

In FY07, IOC's operating profit margin grew 40 basis points y-o-y to 4.7 per cent. At Rs 482, the IOC stock trades at 10.7 times estimated FY08 earnings, and is unlikely to be an outperformer as there is no clarity on its ability to pass on higher global crude oil costs to consumers.

With contributions from Shobhana Subramanian and Amriteshwar Mathur