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| M&M: Turnaround time |
| Shobhana Subramanian / Mumbai Jun 03, 2009, 00:39 IST |
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Automobiles and tractors should sell in bigger numbers now that infrastructure spends are tipped to increase.
The anticipated spends on infrastructure and expected investments in agriculture should come as a shot in the arm for Mahindra and Mahindra’s farm equipment, pickups and light commercial vehicles.
 Already, the success of the Xylo has meant better sales of utility vehicles and there’s little reason why the momentum should not sustain.
All in all, the imminent recovery in the economy suggests a far better performance for the company than was the case even six months back, when it appeared that volumes would continue to fall at least in the first half of this year.
The numbers for the month of May may have been somewhat subdued—-the year- on –year growth for the automotive segment came off fairly sharply but it’s only after the election results that consumer confidence would have started improving. Therefore, on the low base of 2009-10, it’s possible that UV sales could grow in strong double digits this year.
Of course much would depend on how quickly the economy revives but rural spends don’t seem to have dropped too much and, therefore, tractors too should see better demand than they did last year.
Now that credit seems to be more easily available and interest rates too are falling, the company’s borrowings don’t seem to be too high—analysts estimate M&M’s total debt to equity at 0.8 times which is reasonable. With cash flows only expected to ease from here on, the pressure on the balance sheet should reduce.
The company doesn’t intend to spend too much by way of capital expenditure so it’s unlikely it will dilute equity to raise resources. With prices of commodities easing, the raw materials bill should fall resulting in a slightly higher ebitda (earnings before interest, tax and depreciation) margin of around 14 per cent for 2009-10.
Merrill Lynch expects M&M’s sales in the current year at just over Rs 28,000 crore while net profits are estimated to come in at around Rs 1900 crore.
At Rs725, the stock trades at an EV/ebitda of around seven times in keeping with the historical average.
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