November 7: Financially, Mahindra & Mahindra (M&M) has for long now been on a steady wicket. But in the recent past, the stock has failed to maintain the uptrend. In fact, the scrip has witnessed a sharp decline of 30 per cent in the last three months. From a peak of Rs 475 in the first week of August, the stock has fallen to the current level of Rs 351.

Right now, unless the markets are already privy to some negative information in terms of the sales figure, the fall appears surprising. Consider this. In the first half of 1997-98, M&M's tractor division has recorded a 20.11 per cent growth, which is much higher than the industry growth of 15.7 per cent during the same period. According to industry figures, sales during the first half are estimated to be in the region of 33,861 units, up from 28,191 units in the first half of last year. The company's market share has also inched up to 27.93 per cent. This division contributes around 35 per cent to the total sales of the company.

Even though the performance of the utility vehicles business has not been impressive in the first quarter of the current year, it has been better than other players in the industry. In fact, during the month of July, while industry sales for utility vehicles fell by 16.3 per cent, M&M has actually managed a jump of 10 per cent.

While the reasons for the fall are not very clear, one thing is sure that the fall is not because of its tractor division's performance. Perhaps, the problem lies with its utility vehicles business, which makes M&M a utility vehicle manufacturer more than a tractor player where growth has been much higher than that in the utility vehicles business. As a result, despite the fact that the tractor division has been doing well on a continuous basis, a slowdown in its main business has affected the prospects of the stock. Had M&M been a purely tractor company, capital appreciation would have been a much more stable feature for the shareholders of the company.

Rajasthan Spinning fails to impress

Rajasthan Spinning & Weaving Mills has done exceedingly well in the first half of 1997-98 to say the least. The stock market, however, has failed to react positively, with the share price remaining unchanged at around Rs 39.Consider this. For the six-month period ended September 1997, while sales jumped by 6.32 per cent from Rs 205 crore to Rs 218.94 crore, profit at the net level stood at Rs 11.23 crore, up by 1,176 per cent. Now don't these figures deserve a better response from the market?

Perhaps a host of reasons are responsible for this. A proposed merger with Bhilwara Spinners (BSL), a group company, is one of them. The board of directors has just approved the merger of BSL with Rajasthan Spinning. Poor market perception seems to be another reason. The stock has been getting a poor discounting at the bourses for quite some time. On the latest earnings, the stock gets a discounting of less than four. The roots of this problem can be traced in the company's huge equity expansions. As on March 1997, the company's equity was Rs 6.10 crore. This has bloated to the current level of Rs 19.88 crore. The impact of this has been harsh as the company failed to live upto market expectations in the recent past. Till March 1997 the performance had been impressive. From a figure of Rs 2.77 crore in 1992-93, profit at the net level rose to Rs 24.12 crore in 1994-95. During this period, other income as percentage of the pre-tax profit was lower. The rising trend, however, reversed in 1995-96 when profit declined by 78 per cent to Rs 5.45 crore. In fact, if one were to exclude the high component of other income, profit figure would worsen further.

Besides, the nature of its low margin business has also resulted in keeping foreign institutional investors away, which could have given a major boost during good times. In the last three years, the net profit margins have been hovering around two per cent. In fact, despite the fact that the company has done exceedingly well in the first-half, the net profit margin stands at only five per cent.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.