Annual Report Analysis - Mahindra & Mahindra :: Edelweiss

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Mahindra & Mahindra’s (M&M) FY14 annual report analysis highlights an improved performance of Ssangyong Motor Company (SMC) with 20% revenue growth and EBITDA/ PAT margin rising to 3.7%/ 0.1% respectively (FY13: 0.1%/ (3.1)%). During the year, M&M debited INR6.7bn, (3.0% of networth) directly from reserves on account of merger of trucks business of Mahindra Trucks & Buses (MTBL; INR2.1bn) and unification of auto components business (INR4.6bn) pertaining to an agreement entered into with CIE Automotives, Spain (CIE). Goodwill on consolidation fell 32.7% to INR13.4bn, 5.8% of net worth, in FY14 (FY13: INR20.0bn, at 10.0%). Consolidated operating cash flow, post interest, improved to INR48.8bn (FY13: INR43.1bn) led by subsidiaries. Cash conversion cycle stood at (6) days whereas adjusted for acceptances it stood steady at 16 days; however, partly supported by higher SMC payable days versus peers. Total R&D expenditure incurred in FY14 stood at INR15.2bn, of which INR8.4bn (55.5% of total R&D) was capitalised under development expenditure. Outstanding development expenditure (capitalised under intangibles) stood at INR7.7bn and intangibles under development stood at INR9.5bn aggregating to INR17.2bn, 7.4% of networth (FY13: INR11.4bn, 5.7%).

What’s on track?

SMC posted a stellar operating performance with PAT rising to INR0.8bn in FY14 from INR(5.1)bn in FY13. PAT margin stood at 0.1% during the year (FY13: (3.1)%). Mahindra & Mahindra Financial Services’ (MMFS) profitability remained robust.

Goodwill on consolidation fell 32.7% to INR13.4bn, 5.8% of net worth, in FY14 (FY13: INR20.0bn, at 10.0%). We believe this is the result of merger of Trucks segment belonging to MTBL and transactions undertaken with CIE for unification of auto components business.

Cash flow from operations post interest rose to INR48.8bn in FY14 (FY13: INR43.1bn) despite rise in working capital requirement due to trade/ other payables rising by INR10.1bn vis-à-vis INR32.3bn in FY13.

What needs tracking?

Reserves were directly debited by INR6.7bn on account of merger of trucks business and change in group interest on sale of subsidiaries engaged in auto components business to CIE. Further, exceptional income consists of INR3.7bn on account of change in ownership interest in subsidiaries (FY13: INR4.5bn).

SMC’s trade payable days increased from 75 to 96 and stood higher versus peers, leading to negative working capital cycle.

M&M sold stake in loss making subsidiary, Mahindra Two Wheelers Ltd (MTWL) in FY14. Consequently, the company’s stake in the latter fell to 88.5% during the year (FY13: 93.0%). M&M infused additional funds of INR2.9bn in MTWL. Losses posted by MTWL rose to INR4.6bn in FY14 from INR2.6bn in FY13.

Intangible assets under development rose by 85.2% YoY to INR9.5bn (4.1% of net worth). Total R&D expenditure as % of net worth rose from 5.7% in FY13 to 7.4% in FY14.

During the year, MAT credit of INR4.9bn arose, thereby MAT credit entitlement rising to INR5.8bn in FY14, at 2.5% of net worth (FY13: INR0.9bn, at 0.4%). Effective tax rate fell to 25.7% during the year (FY13: 34.7%).