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Mahindra & Mahindra
Direct debit to reserves and exceptional income boosts profitability
Mahindra & Mahindra (M&M) adjusted provision for diminution in investments of INR 0.7
bn against investment fluctuation reserve; otherwise, PBT would have been lower by INR
0.7 bn (~1.9%). The investment fluctuation reserve stood at INR 6.2 bn as at FY10 end.
The company has FCCBs outstanding of USD 189.5 mn convertible at INR 461.0/share
on or before March 7, 2011. M&M adjusts the redemption premium payable on bonds
against the securities premium account in the year of issue. Had the same been charged
through P&L on YTM basis, FY10 PBT would have been lower by INR 533 mn (1.3%).
ESOPs have been accounted on the intrinsic value basis. Had the company accounted
the same on fair value basis, PAT would have been lower by INR 264.4 mn (~1.1%).
Net exceptional gains for FY10 stood at INR 2.5 bn [FY09: INR (0.8) bn], of which, INR
1.8 bn pertains to the profit realised on sale of investments; and INR 0.8 bn, ~2% of
PBT, is deemed divestiture gain on account of effective dilution of its investments (refer
table on page 2 for details).
The company accounts deemed divesture gain as exceptional income instead of the
conventional practice of adjusting it against reserves.
Accounting Tech Mahindra as JV and consolidation of Satyam to impact financials
Tech Mahindra (TML) ceased to be a subsidiary of M&M w.e.f. March 22, 2010 on
acquisition of stake by AT&T. Post acquisition, M&M’s share (including stake through
subsidiary) has reduced from 48.6% to 44.0%.
Accordingly, TML has been accounted as a joint venture as at BS date and was
proportionately consolidated based on the JV accounting principles, which impacted
M&M’s consolidated financials.
Investments have jumped from INR 33.8 bn as at FY09 end to INR 48.1 bn at FY10 end,
primarily due to investments in Satyam Computer Services (SCSL), which was not
consolidated as at FY10 end, since it is in the process of restating its financials.
Post BS date, SCSL financials have been restated and reported a net loss of INR 1.2 bn
in FY10, with M&M’s share of INR 234 mn, ~0.9% of consolidated PAT.
Automotive and farm equipment boost revenue/margins; IT and Systech dampeners
ROAE has jumped from 21.3% in FY09 to 25.5% in FY10, primarily on the back of
higher NOPAT margin (up from 6.9% to 9.5%). The increase was contributed by the
following factors:
• Rise in automotives and farm equipment revenues from INR 150.4 bn in FY09 to
INR 202.7 bn in FY10 due to robust sales in domestic and export market. Lower
commodity prices aided increase in EBIT margins from 6.2% to 13.2%.
• Poor sales due to global recession and margin pressure, resulting in IT services’
EBIT proportion dipping to 23.5% from 42.8%.
• Systech revenues slipping to INR 25.5 bn from INR 36.2 bn due to lower sales of
auto-components in European countries due to recessionary conditions.
During FY10, outstanding fully convertible debentures (FCD), aggregating INR 7 bn to
Golboot Holdings (owned by Goldman Sachs Group), were converted into 9.4 mn equity
shares of INR 10 at premium of INR 735/share. Consequently, securities premium has
increased by INR 6.9 bn and share capital by INR 94 mn.
The company, through M&M Benefit Trust, holds ~51.8 mn treasury shares (~9.5% of
equity capital) at book value of INR 14.6 bn (14.3% of net worth). Post IFRS from FY12,
the treasury shares will be consolidated, which will increase the reported EPS of INR
42.2/share in FY10 to INR 46.2/share.
The company has received an order for payment of differential excise duty (including
penalty) of INR 3.3 bn. M&M has reflected the above amount along with interest of INR
1.7 bn as contingent liability as at FY10 end (FY09 end: Nil).
Loans and advances jumped from INR 88.6 bn in FY09 to INR 107.7 bn in FY10, of which
loans against assets increased from INR 66.2 bn to INR 79.7 bn.
M&M applies hedge accounting principles as per AS 30 for derivative transactions. Hedge
reserve balance of INR 0.8 bn as at FY10 end (FY09: INR (4.8) bn) (net of tax) is on
account of mark-to-market gains/(losses) on cash flow hedges outstanding at the year
end.
Unhedged foreign currency exposure as at FY10 end is INR 8.2 bn (FY09 end: INR 11.2
bn), primarily on account of USD exposure on zero coupon convertible bonds.
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