M&M:: Annual Report Analysis ::CLSA

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Annual Report Analysis
M&M’s FCF was negative in FY11 despite strong OCF due to higher capex,
Ssangyong acquisition and rising equity investments into subsidiaries.
Investment in auto subsidiaries now stands at a high Rs79/sh. As expected,
Mahindra Navistar and Mahindra Two-wheelers were loss-making in FY11.
M&M has granted ESOPs to employees at par in FY11 – a variation from
previous ESOP schemes. Commentary on new UV launches is positive but the
lack of mention on the ‘Yuvraj’ comes as a surprise. BUY.
Strong OCF but high capex and investments in subs makes FCF negative
In FY11, M&M registered an 87% rise in OCF boosted by some working capital
improvement. However, capex rose 39% while investment in subsidiaries rose 5x
(mainly Ssanyong acquisition) due to which FCF remained negative. M&M’s standalone
net D/E is low at 0.1x at end-FY11 and ROEs at 28% are robust.
Rising deployment of cash into subsidiaries
M&M has 110 subsidiaries and 19 joint venture/associate companies at end-FY11.
It invested Rs29bn into subs/associates in FY11, including Rs17bn in Ssangyong,
Rs4.5bn to increase stake in Tech Mahindra, and Rs3.8bn equity infusion in
Mahindra Vehicle Manufactures Ltd (MVML). M&M’s subsidiary book now stands at
US$1.5bn – up 76% YoY. Investment in auto subsidiaries (to which we assign no
value), now stands at a meaningful Rs79/sh. In FY11, subs/associates added 18%
to consol profits vs. 21% in FY10. ROE on subsidiary book declined to 10% while
dividend received from subsidiaries was 2.4% of the subsidiary book. As was
being feared, Mahindra Navistar and Mahindra Two-wheelers were loss-making in
FY11 to the extent of Rs1.9bn and Rs1.7bn respectively. Combined losses from
the two are 12% of consol profits. Consol net D/E remained almost flat YoY at
0.8x while consol ROEs slipped slightly to 24% in FY11 from 27% in FY10.
Rise in ESOP grants; ESOPs have been granted at par value
M&M allotted 17.4m shares to the ESOP Trust in FY11 and granted 3.2m ESOPs to
employees at par (Rs5/sh). This amounts to 0.6% of outstanding shares versus
0.1% of shares in FY10. The amortization of the accounting value of the options
(under Deferred employee compensation) is part of FY11 staff costs.
Lack of mention on the ‘Yuvraj’ comes as a surprise
The annual report mentions the new UV launches due later in FY11 – new SUV,
compact Xylo etc – but surprisingly makes no mention of the progress and targets
for the low-cost tractor - ‘Yuvraj’. We wonder if M&M has suffered any reversal
here. Commentary on Ssangyong turnaround, Mahindra Defense Systems and
agri-solutions business is positive. We maintain our BUY recommendation on the
stock given multiple new product launches over FY12-13 and minimal incremental
competition in both tractors as well as UVs.