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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

A Project Report On COMPARATIVE STUDY OF MAHINDRA & MAHINDRA CO. Y ASH!INI NANOS"AR IN PARTIAL FULFILLMENT OF POST #RADUATE PRO#RAM IN MASTER OF MANA#EMENT STUDIES SHEILA RAHE$A SCHOOL OF USINESS MANA#EMENT AND RESEARCH %&'(&)&'(*+

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

Letter o, Tr-n./0tt-1
December 30, 2013 Dr. Vijay Wagh. Director, Sheila Raheja School of Business umbai"#000$1

anagement an! Research.

Re% COMPARATIVE STUDY OF MAHINDRA & MAHINDRA CO.& Dear Sir, 'he Re(ort outline! in the research (ro(osal of )an 2*, 201#, is com(lete. + ha,e (ersonally su(er,ise! the (roject, con!ucte! the statistical analysis, an! (re(are! this re(ort. 'he Re(ort a!!resses the -ey !ecision% .COMPARATIVE STUDY OF MAHINDRA & MAHINDRA CO. 'he -ey research /uestions in,ol,e the stu!y of Retail outlets. 0s agree! u(on the (ro(osal, the re(ort offers no s(ecific recommen!ations for managerial action, but rather, it (resents conclusions 1hich shoul! enable you to ma-e informe! !ecisions. 'hus, the conclusions confirm to the !eli,erables !escribe! in the (ro(osal letter. + ha,e successfully accom(lishe! the research (roject as !escribe! in the outline. Sincerely, 0sh1ini 2anos-ar 31#24

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

COMPARATIVE STUDY OF MAHINDRA & MAHINDRA CO.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

AC"NO!LED#EMENT

'he factors behin! the successful com(letion of my (roject ha,e been such han!s, 1hich ha,e al1ays remaine! behin! the certain but (laye! ,ery im(ortant roles. 5ence, this is a small than-s gi,ing to them through this ac-no1le!gement. + am grateful to Pro,. Dr. V0j-2 !-34, Director, 56D of S, Sheila Raheja School of Business anagement an! Research of S, for (ermitting me to un!erta-e this stu!y. 0lso, let me e7(ress my gratitu!e to1ar!s my (roject gui!e Pro,. S4-01ej- -tr- 1ho has gui!e! me com(letely from the beginning of the (roject to com(letion. 5e has hel(e! me in un!erstan!ing almost e,ery !etail of my (roject an! also 1ith the boo-s nee!e!. + ta-e this o((ortunity to than- (eo(le 1ho s(are! their more (recious time an! hel(e! me in this (roject 1or- an! e,ery frien!s an! family for (atiently 1aiting till com(letion of the (roject. lastly + 1oul! li-e to than- S4e01- R-4ej- .c4oo1 o, 56.0ne.. /-n-3e/ent -n7 re.e-rc4 for gi,ing me the o((ortunity to 1or- on this (roject, 1hich has hel(e! me to gain -no1le!ge.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

LETTER OF DECLARATION
+, 0sh1ini 2anos-ar , an S stu!ent of Sheila Raheja School 6f Business anagement 0n! Research hereby !eclare that the 1or- !one on this (roject title! .COMPARATIVE STUDY OF MAHINDRA & MAHINDRA CO& is true an! original an! any reference use! in the (roject is !uly ac-no1le!ge.

0sh1ini 2anos-ar. Date%"

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

A6t4or08e7 Letter

Date%2* )an, 201# Director, Sheila Raheja Business School, Ban!ra 38ast4. Dear stu!ents, 0fter re,ie1ing the (ro(ose! stu!y, .COMPARATIVE STUDY OF MAHINDRA & MAHINDRA CO&, (resente! by the stu!ent of SRBS, + ha,e grante! (ermission for the stu!y to be con!ucte! at the institution name. 'he (ur(ose of the stu!y is to !etermine the retail mar-eting in +n!ia. 'he (rimary acti,ity 1ill be to stu!y an! fin! out the facts relate! to ar-eting. 'he (roject 1ill be assesse! an! consi!ere! as a (art of the internal mar-s assessment of Roll 2o. 1#2 Sincerely, Director, Dr. Vijay Wagh. Sheila Raheja Business School,Ban!ra.*

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

E9ECUTIVE SUMMARY
+n!ia:s !omestic automoti,e in!ustry, enjoye! high gro1th in financial year"0$, continuing the healthy tren! set in financial year"0#. +ncrease! in!ustrial gro1th contribute! to the u(1ar! tren!. 0ll the automoti,e in!ustry segments in 1hich ; has a (resence 1itnesse! a gro1th in !eman! in financial year"0$. 'he +n!ian tractor in!ustry too sa1 an u(1ar! tren! after a se,ere !o1nturn (erio!, !ue to fa,orable monsoon an! better cre!it terms hel(e! to buil! (ositi,e sentiments. 'he major (layers in the <ommercial Vehicle Segment are 0sho- =eylan! =t!, 5in!ustan 8icher crore otors =t!, ahin!ra ; ahin!ra ; otors =t!, 'elco, Vol,o +n!ia >,t.=t!, Bajaj 'em(o =t!, ahin!ra =t!, an! S1araj a?!a =t!.

ahin!ra =imite! 3 ; 4 is the flagshi( com(any of aroun! Rs. @000 ; is one of the most res(ecte! com(anies in the country. ; soon

ahin!ra Arou(, 1hich has a significant (resence in -ey sectors of the +n!ian economy.

0 consistently high (erformer,

Set u( in 1B#$ to ma-e general"(ur(ose utility ,ehicles for the +n!ian mar-et,

branche! out into manufacturing agricultural tractors an! light commercial ,ehicles 3=<Vs4. 'he com(any later e7(an!e! its o(erations from automobiles an! tractors to secure a significant (resence in many more im(ortant sectors. 'he com(any has, o,er the years, transforme! itself into a Arou( that caters to the +n!ian an! o,erseas mar-ets 1ith a (resence in ,ehicles, farm e/ui(ment, information technology, tra!e an! finance relate! ser,ices, an! infrastructure !e,elo(ment. ahin!ra ; ahin!ra =t! 3 ; 4 is a lea!ing (layer in the EVs, +n!ian utility ,ehicles an! tractors segment 1ith mar-et shares of #B.$C in )ee(s D 30.BC in 3"1heelers, an! mar-et share of 2$.BC in 'ractors in the FG200$. 'his stu!y tries to co,er the in!ustry relate! !ata an! in !e(th com(any stu!y an! an o,er,ie1 of the economy, e,aluates the com(any on ,arious ,aluation mo!els.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

INDE9

Sr. No

Top0c Pre,-tor2 Ite/.:) )T0t1e P-3e )Letter o, tr-n./0tt-1 )A6t4or08-t0on Letter )E;ec6t0<e S6//-r2 )T-51e o, Content. Intro76ct0on:) )S0t6-t0on )Pro51e/ St-te/ent )Re.e-rc4 O5ject0<e )H2pot4e.0. )L0ter-t6re re<0e= Met4o7o1o32 :) )S-/p1e De.03n )Re.e-rc4 De.03n )D-t- Co11ect0on )D-t- An-12.0. )L0/0t-t0on. Conc16.0on )S6//-r2 -n7 conc16.0on :) )Reco//en7-t0on. Appen70ce. Re.e-rc4 Propo.-1 S-/p1e o, >6e.t0onn-0re 0510o3r-p42

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

PRO LEM STATEMENT

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

RESEARCH O $ECTIVES
'o un!erstan! the macroeconomic ,ariables those 1ill an im(act on the com(any (rogress. 'o stu!y the ,arious tren!s, o((ortunities, challenges of the in!ustry in 1hich the com(any o(erates. 'o un!erstan! the ,arious (olicies of the com(any those ha,e im(act on the financial (erformance of the com(any. 'o un!erstan! the ,arious in,estment ,aluation mo!els that can be use!. 'o select the a((ro(riate mo!el that suits the stoc-. Fin! the intrinsic ,alue of the stoc- an! com(are 1ith mar-et ,alue of the stu!y. 'o recommen! 1hether to buy, hol! or sell the stoc- base! on the analysis.

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

HYPOTHESIS STATEMENT
HYPOTHESIS TESTIN#: By hy(othesis, 1e mean a statement about the (o(ulation (arameters. 5y(othesis testing !eals 1ith a (roce!ure, 1hich acce(ts or rejects the hy(othesis. 'here are t1o ty(es of hy(othesis. (. N611 H2pot4e.0.: +t states that there is no significant !ifference bet1een the mar-et ,alue an! the intrinsic ,alue of the com(any. 5o !enotes the null hy(othesis. 2. A1tern-te H2pot4e.0.: +n case the null hy(othesis is rejecte!, 1e shoul! ha,e an alternate hy(othesis to acce(t. 0lternate hy(othesis is !enote! by 50. 'his sho1s there is !ifference bet1een the mar-et ,alue an! intrinsic ,alue of the com(any. +t also e7(lains 1hether the com(any is un!er,alue! or o,er,alue!.

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

LITERATURE REVIE!

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA INTRODUCTION THEORETICAL AC"#ROUND FUNDAMENTAL ANALYSIS: Fun!amental analysis is the e7amination of the un!erlying forces that affect the 1ell being of the economy, in!ustry grou(s, an! com(anies. 0s 1ith most analysis, the goal is to !eri,e a forecast an! (rofit from future (rice mo,ements. 0t the com(any le,el, fun!amental analysis may in,ol,e e7amination of financial !ata, management, business conce(t an! com(etition. 0t the in!ustry le,el, there might be an e7amination of su((ly an! !eman! forces for the (ro!ucts offere!. For the national economy, fun!amental analysis might focus on economic !ata to assess the (resent an! future gro1th of the economy. 'o forecast future stoc(rices, fun!amental analysis combines economic, in!ustry, an! com(any analysis to !eri,e a stoc-:s current fair ,alue an! forecast future ,alue. +f fair ,alue is not e/ual to the current stoc(rice, fun!amental analysts belie,e that the stoc- is either o,er or un!er ,alue! an! the mar-et (rice 1ill ultimately gra,itate to1ar!s fair ,alue. Fun!amentalists !o not hee! the a!,ice of the ran!om 1al-ers an! belie,e that mar-ets are 1ea- form efficient. By belie,ing that (rices !o not accurately reflect all a,ailable information, fun!amental analysts loo- to ca(itali?e on (ercei,e! (rice !iscre(ancies. A PHILOSOPHICAL ASIS FOR VALUATION 0 sur(rising number of in,estors subscribe to the .bigger fool& theory of in,esting, 1hich argues that the ,alue of an asset is irrele,ant as long as there is a .bigger fool& aroun! 1ho is 1illing to buy the asset from them. While this may (ro,i!e a basis for some (rofits, it is a !angerous game to (lay, since there is no guarantee that such an in,estor 1ill still be aroun! 1hen the time to sell comes. 0 (ostulate of soun! in,esting is that an in,estor !oes not (ay more for an asset than its 1orth. 'his statement may seem logic an! ob,ious, but it is forgotten an! re!isco,ere! at some time in e,ery generation an! in e,ery mar-et. 'here are those 1ho are !isingenuous enough to argue that ,alue is in the eyes of the behol!er, an! that any (rice can be justifie! if there are

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA other in,estors 1illing to (ay that (rice. 'hat is (atently absur!. >erce(tions may be all that matter 1hen the asset is a (ainting or a scul(ture, but in,estors !o not 3an! shoul! not4 buy most assets for aesthetic or emotional reasonsH financial assets are ac/uire! for the cash flo1s e7(ecte! from o1ning them. <onse/uently, (erce(tions of ,alue ha,e to be bac-e! u( by reality, 1hich im(lies that the (rice that is (ai! for any asset shoul! reflect the cash flo1s it is e7(ecte! to generate. 'he mo!els of ,aluation !escribe! in this boo- attem(t to relate ,alue to the le,el an! e7(ecte! gro1th of these cash flo1s. 'here are many areas in ,aluation 1here there is room for !isagreement, inclu!ing ho1 to estimate true ,alue an! ho1 long it 1ill ta-e for (rices to a!just to true ,alue. But there is one (oint on 1hich there can be no !isagreement. 0sset (rices cannot be justifie! merely by using the argument that there 1ill be other in,estors aroun! 1illing to (ay a higher (rice in the future. THE ROLE OF VALUATION Valuation is useful in a 1i!e range of tas-s. 'he role it (lays, ho1e,er, is !ifferent in !ifferent arenas. 'he follo1ing section lays out the rele,ance in (ortfolio management, in ac/uisition analysis, an! in cor(orate finance. V-16-t0on -n7 Port,o10o M-n-3e/ent 'he role that ,aluation (lays in (ortfolio management is !etermine! in large (art by the in,estment (hiloso(hy of the in,estor. Valuation (lays a minimal role in (ortfolio management for a (assi,e in,estor, 1hereas it (lays a larger role for an acti,e in,estor. 8,en among acti,e in,estors, the nature an! role of ,aluation are !ifferent for !ifferent ty(es of acti,e in,estors can be categori?e! as either mar-et timers, 1ho trust in their abilities to foresee the !irection of the o,erall stoc- or bon! mar-ets, on security selection 1ho belie,e that their s-ills lie in fun!ing un!er or o,er ,alue! securities. ar-et timers use ,aluation much less than !o in,estors 1ho (ic- stoc-s, an! the focus is on mar-et ,aluation rather than on firm s(ecific ,aluation. 0mong security selectors, ,aluation (lays a central role in (ortfolio management for fun!amental analysts an! a (eri(heral role for technical analysis.

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA 'he follo1ing subsections !escribe, in broa! terms. Different (hiloso(hies an! the role (laye! by ,aluation in each. F6n7-/ent-1 An-12.t. 'he un!erlying theme in fun!amental analysis is that the true ,alue of the firm can be relate! to its financial characteristics" its gro1th (ros(ects, (ros(ects, ris- (rofile, an! cash flo1s. 0ny !e,iation from this true ,alue is a sign that a stoc- is un!er or o,er,alue!. +t is a long"term in,estment strategy an! the assum(tions un!erlying it are that% 3a4 'he relationshi( bet1een ,alue an! the un!erlying financial factors can be measure!. 3b4 'he relationshi( is stable o,er time. 3 c 4 De,iations from the relationshi( are correcte! in a reasonable time (erio!. Valuation is the central focus in fun!amental analysis. Some analystsI use !iscounte! cash flo1 mo!els to ,alue firms, 1hile others use multi(les such as (riceDearnings an! (riceDboo- ,alue ratios. Since in,estors using this a((roach hol! a large number of Jun!er,alue!: stoc-s in their (ortfolios, their ho(e is that, on a,erage, these (ortfolios 1ill !o better than the mar-et. Fr-nc40.e 62er. 'he (hiloso(hy of a franchise buyer is best e7(resse! by an in,estor 1ho has been ,ery successful at it "Warren Buffet. .We try to stic- to businesses 1e belie,e 1e. En!erstan!,& r.Buffett 1rites. .'hat means they must be relati,ely sim(le an! stable in character. +f a business is com(le7 an! subject to constant change, 1e:re not smart enough to (re!ict future cash flo1s. .Franchise buyers concentrate on a fe1 businesses they un!erstan! 1ell an! attem(t to ac/uire un!er,alue! firms. 6ften, as in the case of a long"term strategy, the un!erselling assum(tions are that% 3a4 +n,estors 1ho un!erstan! a business 1ell are in a better (osition to ,alue it correctly. 3b4 'hese un!er,alue! businesses can be ac/uire! 1ithout !ri,ing the (rice abo,e the true ,alue. Valuation (lays a -ey role in this (hiloso(hy, since franchise buyers arc attracte! to a (articular business because they belie,e it is un!er,alue!. 'hey are also intereste! in ho1 much a!!itional ,alue they can create by restructuring the business an! running it right. r. Buffet, franchise buyers 1iel! influence on the management of these firms an! can change financial an! in,estment (olicy. 0s

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

C4-rt0.t. <hartists belie,e that (rices are !ri,en as much by in,estor (sychology as by any un!erlying financial ,ariables. 'he information a,ailable from tra!ing " (rice mo,ements, tra!ing ,olume, short sales, an! so forth " gi,es an in!ication of in,estor (sychology an! future (rice mo,ements. 'he assum(tions here are that (rices mo,e in (re!ictable (atterns, that there are not enough marginal in,estors ta-ing a!,antage of these (atterns to eliminate them, an! that the a,erage in,estor in the mar-et is !ri,en more by emotion than by rational analysis. While ,aluation !oes not (lay much of a role in charting, there are 1ays in 1hich an enter(rising chartist can incor(orate it into analysis. For instance ,aluation can be use! to !etermine su((ort an! resistance lines# on (rice chart.

In,or/-t0on Tr-7er. >rices mo,e on information about the firm. +nformation tra!ers attem(t to tra!e in a!,ance of ne1 information or shortly after it is re,eale! to financial mar-ets, buying on goo! ne1s an! selling on ba!. 'he un!erlying assum(tion is that these tra!ers can antici(ate information announcements an! gauge the mar-et reaction to them better than the a,erage in,estor in the mar-et. For information tra!er the focus is on the relationshi( bet1een information an! changes in ,alue, rather than on ,alue (er se. 'hus an information tra!er may buy an .o,er,alue!& firm if he or she belie,es that the ne7t information announcement is going to cause the (rice to go u( because it contains better"than"e7(ecte! ne1s. +f there is a relationshi( bet1een ho1 un!er,alue or o,er,alue! a com(any is an! ho1 its stoc- (rice reacts to ne1 information then ,aluation coul! (lay a role in in,esting for an information tra!er. M-r?et T0/er. ar-et timers note, 1ith some legitimacy, that the (ayoff to calling turns in mar-ets is much greater than the returns from stoc- (ic-ing. 'hey argue that it is easier to (re!ict mar-et mo,ements than to select stoc-s an! that these (re!ictions can be base! u(on factors that are obser,able.

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA While ,aluation of in!i,i!ual stoc-s may not be of any use to a mar-et timer, mar-et timing strategies can use ,aluation in at least t1o 1ays% 3a4 'he o,erall mar-et itself can be ,alue! an! com(are! to the current le,el. 3b4 0 ,aluation mo!el can be use! to ,alue all stoc-s, an! the results from the cross"section can be use! to !etermine 1hether the mar-et is o,er or un!er,alue!. For e7am(le, as the numbers of stoc-s that are o,er,alue! using the !i,i!en! !iscount mo!el increases relati,e to the numbers that are un!er,alue!, there may be reason to belie,e that the mar-et is o,er,alue!.

E,,0c0ent M-r?eter 8fficient mar-eters belie,e that the mar-et (rice at any (oint in time re(resents the best estimate of the true ,alue of the firm an! that any attem(t to e7(loit (ercei,e! mar-et efficiencies 1ill cost more than it 1ill ma-e in e7cess (rofits. 'hey assume that mar-ets aggregate information /uic-ly an! accurately, that marginal in,estors (rom(tly e7(loit any inefficiencies, an! that any inefficiencies in the mar-et are cause! by friction, such as transaction costs, an! cannot be arbitrage! a1ay. For efficient mar-eters, ,aluation is a useful e7ercise to !etermine 1hy, stoc- sells for the (rice it !oes. Since the un!erlying assum(tion is that the mar-et (rice is the best estimate of the true ,alue of the com(any, the objecti,e becomes !etermining 1hat assum(tions about gro1th an! ris- are im(lie! in this mar-et (rice, rather than on fin!ing un!er" or o,er,alue! firms. V-16-t0on 0n Ac@60.0t0on An-12.0. A Valuation shoul! (lay a central (art in ac/uisition analysis. 'he bi!!ing firm or in!i,i!ual has to !eci!e on a fair ,alue for the target firm before ma-ing a bi!, an! the target firm has to !etermine a reasonable ,alue for itself before !eci!ing to acce(t or reject the offer. 'here are also s(ecial factors to consi!er in ta-eo,er ,aluation. First, the effects of synergy on the combine! ,alue of the t1o firms 3target (lus bi!!ing firm4 ha,e to be consi!ere! before a !ecision is ma!e on the bi!. 'hose 1ho suggest that synergy is im(ossible to ,alue an! shoul! not be consi!ere! im(ossible to ,alue shoul! not be consi!ere! in /uantitati,e terms are

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA 1rong. Secon!, the effects on ,alue of changing management an! restructuring the target firm 1ill ha,e to be ta-en into account in !eci!ing on a fair (rice. 'his is of (articular concern in hostile ta-eo,ers. Finally, there is a significant (roblem 1ith bias in ta-eo,er ,aluations. 'arget firms may be o,erly o(timistic in estimating ,alue, es(ecially 1hen the ta-eo,er is hostile an! they are trying to con,ince their stoc-hol!ers that the offer (rice is too lo1. Similarly, if the bi!!ing firm has !eci!e!, for strategic reasons, to !o an ac/uisition, there may be strong (ressure on the analyst to come u( 1ith an estimate of ,alue that bac-s u( the ac/uisition !ecision.

V-16-t0on 0n Corpor-te F0n-nce 'he objecti,e in cor(orate finance is the ma7imi?ation of firm ,alue, an! then the relationshi( bet1een financial !ecisions, cor(orate strategy, an! firm ,alue has to be !elineate!. +n recent years, management"consulting firms ha,e starte! offering com(anies a!,ice on ho1 to increase ,alue. 'heir suggestions ha,e often (ro,i!e! the basis for the restructuring of these firms. 'he ,alue of a firm can be !irectly relate! to !ecisions that it ma-es"on that (rojects it ta-es, on ho1 it finances them, an! on its !i,i!en! (olicy. En!erstan!ing this relationshi( is -ey to ma-ing ,alue"increasing !ecisions an! to sensible financial restructuring. 8/uity re(resents a resi!ual cash flo1 rather than a (romise! cash flo1. Gou can ,alue e/uity in one of t1o 1ays% K By !iscounting cash flo1s to e/uity at the cost of e/uity to arri,e at the ,alue of e/uity !irectly. K By !iscounting cash flo1s to the firm at the cost of ca(ital to arri,e at the ,alue of the business. Subtracting out the firmIs outstan!ing !ebt shoul! yiel! the ,alue of e/uity.

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA T=o Me-.6re. o, C-.4 F1o=. C-.4 ,1o=. to E@60t2: 'hese are the cash flo1s generate! by the asset after all e7(enses an! ta7es, an! also after (ayments !ue on the !ebt. 'his cash flo1, 1hich is after !ebt (ayments, o(erating e7(enses an! ta7es, is calle! the cash flo1 to e/uity in,estors. C-.4 ,1o= to F0r/: 'here is also a broa!er !efinition of cash flo1 that 1e can use, 1here 1e loo- at not just the e/uity in,estor in the asset, but at the total cash flo1s generate! by the asset for both the e/uity in,estor an! the len!er. 'his cash flo1, 1hich is before !ebt (ayments but after o(erating e7(enses an! ta7es, is calle! the cash flo1 to the firm. T=o Me-.6re. o, D0.co6nt R-te. Co.t o, E@60t2% 'his is the rate of return re/uire! by e/uity in,estors on an in,estment. +t 1ill incor(orate a (remium for e/uity ris- Lthe greater the ris-, the greater the (remium. Co.t o, c-p0t-1% 'his is a com(osite cost of all of the ca(ital in,este! in an asset or business. +t 1ill be a 1eighte! a,erage of the cost of e/uity an! the after"ta7 cost of borro1ing.

FREE CASH FLO!S TO THE FIRM 'he best things in life are free, an! the same hol!s true for cash flo1. Smart in,estors lo,e com(anies that (ro!uce (lenty of free cash flo1 3F<F4. +t signals a com(any:s ability to (ay !ebt, (ay !i,i!en!s, buy bac- stoc- an! facilitate the gro1th of business " all im(ortant un!erta-ings from an in,estor:s (ers(ecti,e. 5o1e,er, 1hile free cash flo1 is a great gauge of cor(orate health, it !oes ha,e its limits an! is not immune to accounting tric-ery. !4-t I. Free C-.4 F1o=B By establishing ho1 much cash a com(any has after (aying its bills for ongoing acti,ities an! gro1th, F<F is a measure that aims to cut through the arbitrariness an! JguesstimationsJ in,ol,e! in re(orte! earnings. Regar!less of 1hether a cash outlay is counte! as an e7(ense in

1B

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA the calculation of income or turne! into an asset on the balance sheet, free cash flo1 trac-s the money. 'o calculate F<F, ma-e a beeline for the com(any:s cash flo1 statement an! balance sheet. 'here you 1ill fin! the item cash flo1 from o(erations 3also referre! to as Jo(erating cashJ4. From this number subtract estimate! ca(ital e7(en!iture re/uire! for current o(erations% " <ash Flo1 from 6(erations 36(erating <ash4 " <a(ital 87(en!iture 'o !o it another 1ay, grab the income statement an! balance sheet. Start 1ith net income an! a!! bac- charges for !e(reciation an! amorti?ation. a-e an a!!itional a!justment for changes in 1or-ing ca(ital, 1hich is !one by subtracting current liabilities from current assets. 'hen subtract ca(ital e7(en!iture, or s(en!ing on (lants an! e/ui(ment% " 2et income M De(reciationD0morti?ation " <hange in Wor-ing <a(ital " <a(ital 87(en!iture +t might seem o!! to a!! bac- !e(reciationDamorti?ation since it accounts for ca(ital s(en!ing. 'he reasoning behin! the a!justment, ho1e,er, is that free cash flo1 is meant to measure money being s(ent right no1, not transactions that ha((ene! in the (ast. 'his ma-es F<F a useful instrument for i!entifying gro1ing com(anies 1ith high u("front costs, 1hich may eat into earnings no1 but ha,e the (otential to (ay off later. !4-t Doe. Free C-.4 F1o= In70c-teB Aro1ing free cash flo1s are fre/uently a (relu!e to increase! earnings. <om(anies that e7(erience surging F<F " !ue to re,enue gro1th, efficiency im(ro,ements, cost re!uctions, share buy bac-s, !i,i!en! !istributions or !ebt elimination " can re1ar! in,estors tomorro1. 'hat is 1hy many in the in,estment community cherish F<F as a measure of ,alue. When a firm:s share (rice is lo1 an! free cash flo1 is on the rise, the o!!s are goo! that earnings an! share ,alue 1ill soon be on the u(. By contrast, shrin-ing F<F signals trouble ahea!. +n the absence of !ecent free cash flo1, com(anies are unable to sustain earnings gro1th. 0n insufficient F<F for earnings gro1th can

20

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA force a com(any to boost its !ebt le,els. 8,en 1orse, a com(any 1ithout enough F<F may not ha,e the li/ui!ity to stay in business.

21

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

RESEARCH METHODOLO#Y:
T2pe o, re.e-rc4: Research !esign is the conce(tual structure 1ithin 1hich research is con!ucte!. +t constitutes the blue (rint for the collection, measurement, an! analysis of !ata. 'he ty(e of research a!o(te! for the stu!y is !escri(ti,e research as the research !oes not re/uire any mani(ulation of ,ariables an! !oes not establish causal relationshi( bet1een e,entsH it just sim(ly !escribes the ,ariables. So6rce. o, 7-t-: Pr0/-r2 7-t'hose are the !ata that are obtaine! by a stu!y s(ecially !esigne! to fulfill the !ata nee!s of the (roblem. eeting the com(any (rofessionals (ersonally collecte! the information necessary for the stu!y. Secon7-r2 7-tData, 1hich are not originally collecte! but rather obtaine! from (ublishe! or un(ublishe! sources, are -no1n as secon!ary !ata. +n this research secon!ary !ata 1as collecte! through sources li-e +nternet, research re(orts, maga?ines, an! com(any journals.

S-/p10n3 p1-n: T2pe o, .-/p10n3 S-/p1e .08e : 2on"(robabilistic ju!gment sam(ling. : 6ne com(any from automobile sector.

RESEARCH INSTRUMENTS: F0n-nc0-1 c-1c61-t0on.: ) 'his 1as !one to fin! the ,arious ,aluation ratios an! necessary calculations to fin! the intrinsic ,alue of the com(any. C A Te.t: ) 'his test 1as use! to test the hy(othesis.

22

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

PLAN OF ANALYSIS: 0fter ha,ing collecte! the financial !ata relate! to the entities i.e., the sam(le selecte! from the selecte! sector. <alculate the ,arious ,aluation ratios an! other financial calculations that 1ill hel( in the com(any ,aluation. 'his hel(s in fin!ing out the intrinsic ,alue of the com(anyIs share. 'hen hy(othesis 1as teste! 1hether the com(any is un!er or o,er ,alue!.

STATEMENT OF PRO LEM: 8,ery asset, financial as 1ell as real, has ,alue. 'he -ey to successfully in,esting in an! managing these assets lies in un!erstan!ing not only 1hat the ,alue is, but the sources of the ,alue. 0ny asset at can be ,alue! but some assets are easier to ,alue than others, an! the !etails of the ,aluation 1ill ,ary from case to case. 'hus, the ,aluation of a share of a real estate (ro(erty 1ill re/uire !ifferent information an! follo1 a !ifferent format from the ,aluation of a (ublicly tra!e! stoc-. What is sur(risingH ho1e,er, is not the !ifference in ,aluation techni/ues across assets, but the !egree of similarity in basic (rinci(les. 'here is un!eniably uncertainty associate! 1ith ,aluation. 6ften the uncertainty comes from the asset being ,alue!, although the ,aluation mo!el may a!! to that ascertaine!. 0 (ostulate of soun! in,esting is that an in,estor !oes not (ay more for asset than its 1orth. 'his statement may seem logical an! ob,ious as financial assets are ac/uire! for the cash flo1s e7(ecte! from o1ning them, 1hich im(lies that the (rice that is (ai! for any asset shoul! reflect the cash flo1s it is e7(ecte! to generate. 'he (roblem in ,aluation is not that there are not enough mo!els to ,alue an assetH it is that there are too many. <hoosing the right mo!el to use in ,aluation is as critical to arri,ing at a reasonable ,alue as un!erstan!ing ho1 to use the mo!el. 0nalysts use a 1i!e ,ariety of mo!els from sim(le to the so(histicate!. 'hese mo!els often ma-e !ifferent assum(tions about (ricing, but they !o share some common characteristics so in the stu!y 1e trie! to use (rice"earning multi(les an! !iscounte! cash flo1 mo!els of ,aluation.

23

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

SCOPE OF THE STUDY: 'he stu!y basically tries to i!entify the intrinsic ,alue of the com(any by using the (ublishe! financial !etails of the com(any. 'he stu!y is restricte! to one (articular com(any in the sector. 'he stu!y also inclu!es testing the intrinsic ,alue of the com(any.

2#

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

LIMITATIONS :
'he stu!y 1as confine! only to one (articular sector. 'he stu!y 1as more confine! 1ith secon!ary !ata. 'he stu!y assumes no changes in the ta7 rates in the country. 'he stu!y 1as !one for a short (erio! of time, 1hich might not hol! true o,er a long (erio! of time. 0s the sco(e is !efine! by the researcher it restricts the number of ,ariables 1hich +nfluence the in!ustry.

2$

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA OPERATIONAL DEFINITIONS OF THE CONCEPTS: (+ ETA: 0 measure of a security:s or (ortfolio:s ,olatility, or systematic ris-, in com(arison to the mar-et as a 1hole. +t is also -no1n as Jbeta coefficient.J &+ CAPE9: Fun!s use! by a com(any to ac/uire or u(gra!e (hysical assets such as (ro(erty, in!ustrial buil!ings, or e/ui(ment. D+ CA#R: 'he year o,er year gro1th rate of an in,estment o,er a s(ecifie! (erio!oftime. <alculate! by ta-ing the nth root of the total (ercentage gro1th rate 1here n is the number of years in the (erio! being consi!ere!. 'his can be 1ritten as%

*+ COST OF E>UITY: 'he return that stoc-hol!ers re/uire for a com(any for the ca(ital in,este!. 'he tra!itional formula is the !i,i!en! ca(itali?ation mo!el%

E+ DE TFE>UITY RATIO: 0 measure of a com(any:s financial le,erage calculate! by !i,i!ing long"term !ebt by sharehol!ers e/uity. +t in!icates 1hat (ro(ortion of e/uity an! !ebt the com(any is using to finance its assets. 2ote% Sometimes in,estors only use interest bearing long"term !ebt instea! of total liabilities.

29

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA G+ DEPRECIATION: 0n e7(ense recor!e! to re!uce the ,alue of a long"term tangible asset. Since it is a non" cash e7(ense, it increases free cash flo1 1hile !ecreasing re(orte! earnings. H+ DIVIDEND PAYOUT RATIO: 'he (ercentage of earnings (ai! to sharehol!ers in !i,i!en!s. I+ DUPONT ANALYSIS: 0 metho! of (erformance measurement that 1as starte! by the Du>ont <or(oration in the 1B20s, an! has been use! by them e,er since. With this metho!, assets are measure! at their gross boo- ,alue rather than at net boo- ,alue in or!er to (ro!uce a higher R6+. ('+ EPS: 'he (ortion of a com(any:s (rofit allocate! to each outstan!ing share of common stoc-. <alculate! as%

((+ EFFECTIVE TA9 RATE: 'he (ortion of a com(any:s (rofit allocate! to each outstan!ing share of common stoc-. <alculate! as%

(&+ E>UITY MULTIPLIER: 0 measure of financial le,erage calculate! as% 'otal 0ssets !i,i!e! by 'otal Stoc-hol!ers: 8/uity. =i-e all !ebt management ratios, the e/uity multi(lier is a 1ay of e7amining ho1 a com(any uses !ebt to finance its assets. +t is also -no1n as the financial le,erage ratio or le,erage ratio.

2*

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA (D+ ASSET TURN OVER RATIO: 'he amount of sales generate! for e,ery !ollar:s 1orth of assets. +t is calculate! by !i,i!ing sales in ru(ees by assets in ru(ees. Formula%

(*+ FUNDMENTAL ANALYSIS: 'he amount of sales generate! for e,ery !ollar:s 1orth of assets. +t is calculate! by !i,i!ing sales in ru(ees by assets in ru(ees. Formula%

(E+ MAR"ET CAPITALISATION: +t is the total ,alue of all outstan!ing shares of (articular com(any, 1hich is re(resente! in the mar-et. +t:s calculate! by multi(lying the number of shares times the current mar-et (rice. 'his term is often referre! to as mar-et ca(. (G+ PE %PRICE EARNIN# MULTIPLES+: 0 ,aluation ratio of a com(any:s current share (rice com(are! to its (er"share earnings. 0 ,aluation ratio of a com(any:s current share (rice com(are! to its (er"share earnings. <alculate! as%

(H+ PE# %PRICE EARNIN# TO #RO!TH+: 0 ,aluation ratio of a com(any:s current share (rice com(are! to its (er"share earnings.

2@

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

(J+ ROE: 0 measure of a cor(oration:s (rofitability, calculate! as%

(I+ !ACC: 0 calculation of a firm:s cost of ca(ital that 1eight each category of ca(ital (ro(ortionately. +nclu!e! in the W0<< calculations are all ca(ital sources, inclu!ing common stoc-, (referre! stoc-, bon!s, an! any other long"term !ebt. W0<< is calculate! by multi(lying the cost of each ca(ital com(onent by its (ro(ortional 1eighting an! then summing%

ECONOMIC ANALYSIS Econo/0c O6t1oo?: During the fiscal year 2003"0#, +n!iaIs AD> 1hich gre1 by @.10C 1as (rinci(ally on account of a strong reco,ery in the agriculture sector an! accelerate! gro1th in the in!ustry an! ser,ices sectors. 0 gro1th rate higher than @C has been achie,e! in the (ast in only three years " 1B9*"9@, 1B*$"*9 an! 1B@@"@B. 87(orts ha,e gro1n by 1*.1C in 2003"0# in ESD terms. While the ru(ee a((reciate! against ESD in 2003"0#, it !e(reciate! against the currencies of major non L!ollar"tra!ing (artners. Foreign e7change reser,es crosse! the le,els of ESD 100 billion maron December 2003 an! stoo! at ESD 1BB.3 billion as on 31 st arch 200#. Foreign +nstitutional +n,estors 3F++s4 in,estments sa1 a shar( rise !uring the year, 1hich amounte! to ESD 10 billion.

2B

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA 6,erall economic con!itions loo- (ositi,e an! e7(ecte! to (ost a AD> gro1th of 9"9.$C !uring FG0$. #RAPH (: ACCELERATIN# #RO!TH OF #DP

TA LE (: INDIA ) ECONOMIC PARAMETERS F '* #DP #ro=t4 %K+ F0.c-1 De,0c0t %K+ Intere.t R-te In,1-t0on %A<er-3e+ K Ru(ee " ES Dollar %So6rce: R IL CMI+ #RAPH &: SHO!IN# INDIAMS REAL #DP #RO!TH J.( *.J Dec10ne7 E.D 0((reciate! F 0$ 9.0 " 9.$ #.# 5ar!ening 9.$ Stea!y

30

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

0s chart

also sho1s, gro1th in nonagricultural AD> remaine! soli! !uring 200#.

0lthough a brea-!o1n of +n!ian real AD> into its !eman! com(onents is not rea!ily a,ailable, it is li-ely that +n!iaIs strong nonagricultural gro1th (erformance last year 1as !ue entirely too robust !omestic !eman!. 'he 10C rise in the (ro!uction of consumer goo!s last year an! the 20C increase in auto sales suggest that consumer s(en!ing has been ,ery strong in!ee!. <onsumer s(en!ing in +n!ia has been su((orte! recently by strong income gro1th as gro1th in real (er ca(ita AD> has a,erage! 3.@C (er annum since 2000.+n!ia has liberali?e! its economy o,er the (ast !eca!e or so, much more nee!s to be !one, an! better allocation of resources, !omestically an! internationally, has contribute! to this strong gro1th in (er ca(ita income. 'he Real Aross Domestic >ro!uct 3AD>4 is estimate! to ha,e gro1n by @.10C in 2003" 0#, buoye! by a strong agricultural reco,ery. While the agricultural sector gre1 by B.1C !uring the FG0#, the in!ustry an! ser,ices sectors ha,e also maintaine! their momentum 1ith the AD> gro1th by achie,ing a gro1th rate of 9.$C an! @.#C res(ecti,ely !uring the year. 'he gro1th AD> has gro1n by *.#C !uring 0(ril")une 200# (erio!, lo1er than the @.2C gro1th registere! in )anuary" arch 200# an! 10.$C in 6ctober"December 2003 /uarter. +nflation is also inching u( higher, !ri,en by increases in fuel an! commo!ity (rices. 2on foo! cre!it has increase! by 11.$C !uring the 0(ril"Se(tember 200# (erio! as against (re,ious corres(on!ing yearIs 9C in!icating the (rogressi,e economic acti,ities. But the global cru!e oil shoc- 1ill !efinitely ha,e an a!,erse affect on the gro1th !uring fiscal 200$. #RAPH D: INFLATION

31

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

'he a,erage inflation !uring fiscal year 2003"0# 1as aroun! $.$C as against the (re,ious corres(on!ing fiscals a,erage of 3.#C, the (rime mo,ers being sugar, e!ible oils, te7tiles, leather an! leather (ro!ucts, basic metals, alloys, iron an! steel. With the increase of fe1 commo!ity (rices mainly the cru!e oil (rices ha,e increase! the global inflation le,els from )une 200#, +n!ia being no e7ce(tion to this. 'he !omestic fuel (rices ha,e risen by more than 10C !uring the fiscal 200#"0$ o,er last years. 'he inflation !uring the fiscal year 200#"0$ touche! three an! a half years high of @.33C for the 1ee- en!e! 0ugust 2@ th 200# from $.$$C for the 1ee- en!e! )une $th 200# !ue to the e7cess money su((ly in the economy. 'he reasons for the high inflation are both !omestic an! international. 'he !omestic reasons inclu!e e7cess li/ui!ity in the mar-et an! !elay in monsoon that increase! the (rices of essential commo!ities. 3, the measure of money su((ly gre1 by 1$.$ (er cent in )uly 200#, com(are! to 11.2$ (er cent in )uly 2003. 'he international causes are ine7orable rise in oil (rices, global increase in the (rices of commo!ities, su((ly si!e shoc- an! gro1th in chinaIs !eman! for goo!s. 'his is cost"(ush inflation 1herein the su((ly (roblems in a fe1 im(ortant commo!ities (ush u( (rices of commo!ities. Since cru!e oil im(ort constitute almost one thir! of the total e7(orts, 1e can say that the (resent situation is on account of im(orte! inflation. 'o chec- the rising (rices, go,ernment too- some measures li-e !uty cuts on steel an! oil (ro!ucts. Reser,e Ban- of +n!ia raise! the <ash Reser,e Ratio to $C from #.$C in t1o tranches of 2$ basis (oints an! has also cut the rate of interest (ayable on eligible cash balances maintaine! 1ith it by ban-s by 2$0 basis (oints to 3.$ (ercent. +n fact, the gra!ual re!uction in the <RR o,er the (ast fe1 years in successi,e cre!it (olicies ha! been one of the major contributors for the sustaine! re!uction in the interest rates on auto loans. 'hese mo,es 1ere e7(ecte! to !ra1 out aroun! Rs.@000 crore from the ban-ing system. =ater, the

32

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA inflation 1as re!uce! to *.20C in the last 1ee- of Se(tember. With the increase in the interest rates the auto loans 1ill become costlier, thus ha,ing an a!,erse effect on the auto in!ustry sales. 'he a,erage inflation for the fiscal 200#"0$ is e7(ecte! to stay aroun! 9"9.$C. In76.tr2: S-1e.: 'he automobile in!ustry gro1th relies mainly on the countryIs economic an! general con!itions. 0ny slo1!o1n in the economic momentum 1oul! !efinitely slo1!o1n the gro1th of the in!ustry. +t can be seen from the belo1 chart that the in!ustryIs sales is (ositi,ely correlate! 1ith the economic gro1th 1ith a co"relation of 0.B9.

#RAPH *: #DP AND AUTO SALES

33

Real GDP (Rs. '000 Crore)

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA


At 1993-94 price levels

GDP and Auto sales


1450 1400 1350 1300 1250 1200 1150 1100 1999- 2000- 2001- 2002- 200300 01 02 03 04 GDP No of units (in lakhs) 80 75 70 65 60 55 50 45 40

(Source: www.indiabudget.nic.in) R655er Pr0ce.: With the increase in rural acti,ities, the commercial ,ehicles are e7(ecte! to gro1. S(orts Etility Vehicles 3SEV4 after being a ,ery big hit in the !omestic mar-et, the (layers no1 are (lanning to intro!uce them to the !omestic mar-et. But the increase in the in(ut (rices li-e steel an! rubber has a negati,e im(act on the in!ustry (rofitability. 'he truc-erIs stri-e has affecte! the auto (layerIs (ro!uction an! !istribution to certain e7tent.

#RAPH E: SHO!IN# RU

ER PRICES

3#

o o! units(in la"#s)

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

$nterntional % Do&estic Ru''er Prices


1600 1400 ()D*+on 1200 1000 800 600 400 Mar- ul-01 No!- "#r- "u$- D%&- "#r- "u$- D%&- "#r01 01 02 02 02 03 03 03 04 ()D*+on ,s*+on 70'000 60'000 50'000 40'000 30'000 20'000 10'000 0

Source: indiainfoline 0 combination of internal an! e7ternal factors has contribute! to the (rice ,olatility in the rubber mar-et. Since the !omestic (rices of rubber are less than the global (rices, the tyre manufacturers in other countries, sourcing natural rubber from +n!ia 1hich has le! to the increase in the e7(orts thereby re!ucing the !omestic stoc- le,els to less than si7ty !ays of consum(tion of the rubber userIs sector. 0lso, the subsi!y gi,en by the go,ernment for e7(orts of rubber has resulte! in an increase in the e7(orts.

T4e .tee1 pr0ce. #RAPH G: SHO!IN# STEEL PRICES

3$

Rs*+on

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

)teel Prices
Rs*+onne

40-000 30-000
Apr-0, Apr-04 Apr-03 /ct-0, /ct-03 .an-03 .an-04 /ct-04 .ul-0, .ul-03 .ul-04

,0-000

G- sh%%ts

Source: indiainfoline 'he steel (rices are on rise follo1ing a shar( increase in the (rices of ra1 materials li-e iron ore, co-e, coal, (o1er, gas an! scra(. While the cost of iron ore 1ent u( by *$C !uring the (erio! )une2003 to )uly 200#, the scra( (rices jum(e! u( by B1C. <o-eIs (rices sa1 an increase of $0C !uring the same (erio!. 'here are no signs of !ecline in the (rices of steel (ro!ucts follo1ing a strong !eman! from the housing an! infrastructure sectors, 1ith a!!itional gro1th (otential in the auto an! consumer !urables sectors too. With <hina ta-ing ste(s to cool !o1n its o,erheate! economy, !eman! from that country is e7(ecte! to slo1 !o1n. But any shortfall in !eman! from <hina may be offset by gro1th in !eman! in the ES, 8uro(e an! )a(an as economic reco,ery gathers momentum lea,ing no sco(e for the steel (rice !eclines in the near short term. Co/pet0t0on -n7 M-r?et +n the 0utomoti,e Sector the continuing con,ergence bet1een the car an! the EV mar-ets is a (ositi,e !e,elo(ment. 5igh"en! e7(an!s in +n!ia, EV sales accounte! for $1C of mi!"si?e car sales in +n!ia in F"0#, as com(are! to 19C in F"00. 'he <o also belie,es that as the car mar-et EVs 1ill continue to ta-e an increasing share of this mar-et. 0fter the success of the Scor(io an! Bolero, Re!uce! interest rates 1ith the maturing of the ,ehicle financing mar-et 1ill also a!! an im(etus to ,ehicle sales gro1th. +ncrease! (enetration of such financing (ro!ucts in rural an! semi"urban mar-ets 1ill !irectly benefit the <om(any gi,en its

39

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA strong (resence in these mar-ets. ; has the a!!itional a!,antage that its subsi!iary, FS=

has a 1i!e rural net1or-. 'he ongoing W'6 ; Free 'ra!e 0rea negotiations 1ith 'hailan!, 0S802, S00R< countries an! the ercosur countries are li-ely to lea! to lo1ere! tariffs across many of our target e7(ort mar-ets. 'his coul! (ro,i!e the <o 1ith a significant o((ortunity to generate larger ,olumes from e7(ort sales. Being an agrarian economy +n!iaIs AD> gro1th is much !e(en!ent on the fortunes of the agro sector. Ai,en this bac-!ro( the 'ractor in!ustry assumes significance. 'he +n!ian 'ractor in!ustry is the largest in the 1orl! in terms of (ro!uction an! sales. 5o1e,er in terms of (er ca(ita usage it still scores lo1 against com(arable !e,elo(ing nations. 'his (ro,i!es for am(le sco(e of gro1th for the in!ustry in future. With liberali?ation restrictions on ca(acities an! (ro!uction 1ere remo,e!. 'o!ay anybo!y can 1al- in an! (ut u( a (lant an! start o(erations.

3*

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

COMPANY PROFILE: ahin!ra ; billion ahin!ra =imite! 3 ; 4 is the flagshi( com(any of aroun! ES N 2.$ ; is one of the most res(ecte! com(anies in the country. ; ahin!ra Arou(, 1hich has a significant (resence in -ey sectors of the +n!ian economy. Set u( in 1B#$ to ma-e general"(ur(ose utility ,ehicles for the +n!ian mar-et,

0 consistently high (erformer,

soon branche! out into manufacturing agricultural tractors an! light commercial ,ehicles 3=<Vs4. 'he com(any later e7(an!e! its o(erations from automobiles an! tractors to secure a significant (resence in many more im(ortant sectors. 'he <om(any has, o,er the years, transforme! itself into a Arou( that caters to the +n!ian an! o,erseas mar-ets 1ith a (resence in ,ehicles, farm e/ui(ment, information technology, tra!e an! finance relate! ser,ices, an! infrastructure !e,elo(ment. ; has t1o main o(erating !i,isions% 14 'he 0utomoti,e Di,ision manufactures utility ,ehicles, light commercial ,ehicles an! three 1heelers. 24 'he 'ractor 3Farm 8/ui(ment4 Di,ision ma-es agricultural tractors an! im(lements that are use! in conjunction 1ith tractors, an! has also ,enture! into manufacturing of in!ustrial engines. 'he 'ractor Di,ision has 1on the co,ete! Deming 0((lication >ri?e 2003, ma-ing it the only tractor manufacturing com(any in the 1orl! to secure this (ri?e. 'he resurgence of the automoti,e in!ustry an! ; :s success in e7(loiting it, has create! an o((ortunity to strengthen the com(any through an entry into the 0uto <om(onents business, the gro1th of 1hich is being fuele! by both, !omestic an! e7(ort !eman!. ; em(loys aroun! 11,$00 (eo(le an! has si7 state"of"the"art manufacturing facilities ; has also set u( t1o satellite (lants for tractor s(rea! o,er $00,000 s/uare meters.

assembly. +t has #B sales offices that are su((orte! by a net1or- of o,er *@0 !ealers across the country. 'his net1or- is connecte! to the <om(any:s sales !e(artments by an e7tensi,e +' infrastructure. ; :s outstan!ing manufacturing an! engineering s-ills allo1 it to constantly inno,ate an! launch ne1 (ro!ucts for the +n!ian mar-et. 'he <om(any:s significant recent (ro!uct

3@

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA launch, the JScor(ioJ, resulte! in the <om(any 1inning the 2ational 01ar! for outstan!ing in" house research an! !e,elo(ment from the De(artment of Science an! +n!ustry of the Ao,ernment in 2003. 'he <om(any has launche! +n!ia:s first tractor 1ith turbo technology " the ahin!ra Sar(anch $B$ D+ Su(er 'urbo. 'he <om(any:s commitment to technology"!ri,en inno,ation is reflecte! in <om(any:s (lans of setting u( of the 'he ; ; ahin!ra Research Valley, a facility that 1ill house the <om(any:s engineering research an! (ro!uct !e,elo(ment 1ings, un!er one roof. (hiloso(hy of gro1th is centere! on its belief in (eo(le. 0s a result, the com(any has (ut in (lace initiati,es that see- to re1ar! an! retain the best talent in the in!ustry. is also -no1n for its (rogressi,e labour management (ractices. +n the community !e,elo(ment s(here, the com(any has im(lemente! se,eral (rograms that ha,e benefite! the (eo(le an! institutions in its areas of o(erations. M-40n7r- -n7 M-40n7r- cont0n6e. to 5e - .o107 co/p-n2 <om(any has registere! a 2@ C rise in its total ,ehicle sales at 11,#@# units for 0ugust 200# as against @,B#9 units in the corres(on!ing (erio! (re,ious fiscal. O ahin!ra <ityI 1as grante! s(ecial economic ?one 3S8P4 1hich inclu!es 100C ta7 holi!ay for the ne7t $ years an! a $0C ta7 holi!ay for the ne7t fi,e years, e7em(tion from customs !uty, central e7cise, ser,ice ta7, e!ucation cess, central sales ta7, an! all local ta7es le,ie! by the state. <om(any has set u( four o,erseas o(erations in Eruguay, +taly, Dubai an! South 0frica for sale of Scor(io an! Bolero mo!els in these mar-ets. 8nters in to segments such as retailing agri"in(uts, un!er its o1n bran!, manage corn an! soya as collateral for ban-s, e7(ort fruit to 8uro(ean su(ermar-ets. 'he Farm 8/ui(ment Sector is the first 'ractor <om(any in the 1orl! to 1in the Deming >ri?e. 0lso, it is the fourth com(any in +n!ia an! the 10th in the 1orl!, outsi!e )a(an, to 1in this (ri?e. =aunche! +n!ia:s first tractor 1ith turbo technology in >atna, it is no1 eyeing to ca(ture the tractor mar-et in the Bihar state in a big 1ay. Regaine! !ominance as a lea!er in both utility ,ehicles an! tractors ac/uiring $0C mar-et share.

3B

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Recent De<e1op/ent. &F6t6re p1-n.: 'he com(anyIs long"term focus 1ill continue to be the (assenger car an! the EVs. With the !ifference bet1een EVs is li-ely to EV segments fast !isa((earing, as the mar-et for

see a s(urt in the near future. 'he com(any (lans to be the 1orl!Is biggest tractor ma-er by 2009, inten!s to o,ercome lac- of similar si?e in utility ,ehicles 3EV4 manufacture by being a niche (layer. 'heir tractors 1ere selling 1ell in the ES, gi,ing in the #0"90 h( ranges in 'e7as. ; a han!some mar-et share ; Qs main ES mar-ets are in the South an! South West. 'he

com(any is gro1ing at rate of @0 (er cent in the ES. 0(art from ES it also (lans to mar-et its tractors in 8uro(e through a sister"tra!ing firm after resche!uling (lans to set u( a subsi!iary in the region. 'he com(any 1ill also launch @$"horse (o1er 35>4 an! 1005> mo!els 1ithin the ne7t 1@ months to meet the s(ecific !eman! for high"(o1ere! tractors in the 8uro(ean an! ES mar-ets. 6n the car!s are a number of im(ro,ements on the segment, ; has intro!uce! the arshal Royale. a77, base! on customer fee!bac-. 'he com(any also (lans to e7(an! its a((eal 1ith ne1 ,ariants. For the lo1"en! (ersonal

M-r?et0n3 co/petenc0e.: Flan-ing its strategy to become a global (layer, ; is ban-ing on its -ey bran!

attributes 1hich essentially signify three basic things% trust, reliability, an! ,alue"for"money. 'he o,erall mar-eting game (lan in,ol,es a strategy aroun! creating strong bran!s, <ustomer 'ouch L Buil! a !atabase of <ustomers for targete! mar-eting, >ro,i!ing a uni/ue customer e7(erience " Eni/ue sho1rooms 1hich gi,e an entirely ne1 buying e7(erience are being (lanne! an! #0 !ealershi(s 1oul! be con,erte! into such mo!ern sho1rooms !uring the current year an! +m(ro,e 6(erational 8fficiencies L through outsourcing 1here,er re/uire!, ,alue engineering an! strategic sourcing. ; has i!entifie! its 3 Wea(ons for the EV mar-et. 8ach bran! 1ill be (ositione! a77. ; Is future bran! (latform. Bolero 1ill be one hub,

uni/uely targeting ,arious s(ectrum of the mar-et, the three bran!s " Scor(io, Bolero an! 'hese are the three bran!s, 1hich 1ill be

1hile Scor(io 1ill be one u( mar-et hub. 'he tractor segment 1here the com(any has 29C mar-et share mainly !e(en!s on the !istribution channels of the com(any.

#0

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Pro76ct0on -n7 70.tr056t0on: 'he <om(anyIs manufacturing facilities are locate! at Ran!i,li, 2ashi-, +gat(uri, 2ag(ur, Paheeraba!, )ai(ur an! Ru!ra(ur. <om(any has t1o main tractor manufacturing (lants locate! at umbai an! 2ag(ur in aharashtra. 0(art from these t1o main manufacturing units, the Farm 8/ui(ment Sector has satellite (lants locate! at Ru!ra(ur in Ettaranchal an! )ai(ur in Rajasthan. 'he <om(any has a strong an! e7tensi,e !ealer net1or- of o,er #$0 !ealers for sales an! ser,ice of tractors an! s(are (arts. 2@ area offices, situate! in all the major cities an! co,ering all the (rinci(al states, manage this !ealer net1or-. E/p1o2ee Re1-t0on. 8m(loyee relations ha,e been generally cor!ial at all (lants of the com(any. 'hey ha,e recently intro!uce! t1o ne1 schemes, 1hich are in the (i(eline for its to("le,el managers in or!er to bring balance in their 1or- an! (ersonal life. En!er this scheme, com(any has change! its lea,e (olicy 1herein it has intro!uce! a com(ulsory 1$"!ay lea,e for its mi!!le an! to("le,el officials. Besi!es this, the com(any also (ro(oses to im(lement a com(ulsory early !ay"off at $ (m at least once a 1ee-. 'hey 1ant their em(loyees to s(en! ,alue time 1ith their family at home. 'hey are trying to follo1 ergonomic rules for (ro,i!ing efficient 1or-ing atmos(here, 1hich is being effecti,ely im(lemente! by com(anies abroa!. 'he com(any is also focusing on training an! !e,elo(ment (rogrammers for the career ma((ing of its em(loyees an! (ro,i!es them 1ith a meaningful (rofessional career ahea!. +n a!!ition, the com(any also (lans to im(lement ,arious !e,elo(ment (lans for training !ifferent le,el of em(loyees. 'hese measures 1ill surely hel( in retaining its efficient contributors.

o-r7 o, 70rector.: r. 0nan! A ahin!ra Vice"<hairman ; anaging Director an! the four 87ecuti,e

Directors of the <om(any manage the <om(any. 'he Boar! re,ie1s an! a((ro,es strategy an! o,ersees the actions an! results of management to ensure that the long"term objecti,es of

#1

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA enhancing sta-ehol!er ,alue are met. 'he <om(any (resently has se,enteen Directors. 'he Vice" <hairman ; anaging Director an! the four 87ecuti,e Directors are Whole"time Directors. Reimbursement of e7(enses incurre! in the !ischarge of their !uties, the remuneration that these Directors 1oul! be entitle! to un!er the <om(anies 0ct, 1B$9 as 2on"87ecuti,e Directors. 'he <om(any has not entere! into any materially significant transactions 1ith its >romoters, Directors or the anagement or relati,es, etc. that may ha,e (otential conflict 1ith the interests of the <om(any at large. D0<07en7 po10c2: 'he Directors ha,e recommen!e! a !i,i!en! at B0C 3Rs.B (er share4. 'he !i,i!en!, together 1ith the ta7 on !istribute! (rofit, 1ill absorb a sum of Rs.11*.*B crores 3(re,ious year Rs.*1.B@ crores4 an! 1ill be (ai! to those sharehol!ers 1hose names stan! registere! in the boo-s of the <om(any as on the boo- closure !ate.

INDUSTRY PROFILE: 'he +n!ian automobile sector can be !i,i!e! into se,eral segments% 2 ; 3 1heelers, (assenger cars, commercial ,ehicles 35ea,y <VsD e!ium <VsD=ight <Vs4, utility ,ehicles 3EVs4 an! tractors. 'he in!ustry is highly ca(ital intensi,e in nature. 'hough three"1heelers an! tractors ha,e lo1 barriers to entry in terms of technology, other segments are ca(ital an! technology intensi,e. <osts in,ol,e! in bran!ing, !istribution net1or- an! s(are (arts a,ailability increase entry barriers. With the +n!ian mar-et mo,ing to1ar!s com(lying 1ith global stan!ar!s, ca(ital e7(en!iture 1ill rise to attune to future safety regulations. 'he in!ustry is highly fragmente! in nature. +n the last ten years, su((ly has outstri((e! !eman!, as multinationals an! !omestic (layers ha,e set u( large"scale manufacturing facilities to meet future nee!s. 0s a result, there is an absence of (ricing (o1er 1ith manufacturers. <om(etition is e7(ecte! to increase further, as global majors are (lanning to enter +n!ia either through !irect in,estment or im(orts. 0utomobile majors increase (rofitability by selling more units. 0s number of units sol! increases, a,erage cost of selling incremental unit comes !o1n 1hen !eman! reco,ers. 'his is because the in!ustry has a high fi7e! cost com(onent. 'his is the

#2

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA -ey reason 1hy o(erating efficiency through increase! locali?ation of com(onents an! ma7imi?ing out(ut (er em(loyee is of significance. INDUSTRY #RO!TH IN VARIOUS SE#MENTS >assenger cars Etility ,ehicles =ight commercial ,ehicles 5ea,y an! multi commercial ,ehicles 3 1heelers % 1*C % 23C % 12C % 23C % @C

PORTER FIVE FORCES MODEL: S6pp12: 'he +n!ian automobile mar-et is (lague! 1ith e7cess ca(acity. De/-n7: +s largely cyclical in nature an! !e(en!ent u(on economic gro1th an! (er ca(ita income. Seasonality is also a ,ital factor. -rr0er. to entr2: 5igh ca(ital costs, technology, !istribution net1or-, an! a,ailability of auto com(onents. -r3-0n0n3 po=er o, .6pp10er.: =o1, !ue to stiff com(etition an! its fragmente! nature. -r3-0n0n3 po=er o, c6.to/er.: Very high !ue to a,ailability of o(tions. Co/pet0t0on: 87ce(t for hea,y commercial ,ehicles segment, com(etition is stiff. 'he com(etition is e7(ecte! to increase e,en further.

PROSPECT IN THE SECTOR: 'he go,ernment s(en!ing on infrastructure in roa!s an! air(orts an! higher AD> gro1th in the future coul! benefit the auto sector in general. 'his combine! 1ith a softer interest rate

#3

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA en,ironment 1ill (lay a ,ital role in (ro,i!ing a filli( to !eman!. Etility ,ehicle segment is e7(ecte! to gro1 at aroun! @C in FG0$. 'hough the mar-et si?e is e7(ecte! to gro1 by 12C "1$C, com(etiti,e (ressure coul! -ee( (rices an! margins un!er control. 0fter three years in the 1il!erness, tractor in!ustry seems to ha,e finally come out of the trough as it gre1 by 10C !uring FG0$. While goo! monsoon is a (ositi,e for the sector, gi,en the fact that the country has ha! erratic rainfall in the (ast, ,olumes may not reco,er shar(ly. But the longer"term (icture is im(ressi,e in light of (oor mechani?ation le,els in the country. With an estimate! 3BC of <Vs (lying on the roa!s 10 years ol!, !eman! for 5<Vs is e7(ecte! to gro1 by @C in FG0$. 0lso a!!ing the (ositi,es are higher cro( out(ut, in!ustrial sector gro1th an! fa,orable interest rate en,ironment. While the in!ustry is cyclical in nature, 1e e7(ect this factor to 1ea-en in the me!ium term arising out of structural changes in the in!ustry. 'he (ri,ati?ation of select state trans(ort un!erta-ings an! hi-ing of bus fares bo!es 1ell for the bus segment as 1ell. 'he re!uction in (ea- customs !uty from 30C to 2$C in the bu!get 1ill result in sa,ings on the ra1 material front as 1ell. Since ra1 material costs account for almost $0C of re,enues of auto com(anies in general, this is a (ositi,e. 0lso, steel (rices ha,e sho1n some signs of softening an! this is li-ely to ha,e a (ositi,e im(act on the margins of the (layers. We e7(ect +n!ian auto majors to increase ca(ital e7(en!iture bu!get at an a,erage of #C"$C of re,enues in FG0$ as against aroun! 2C"3C historically. 'his 1oul! be to1ar!s (ro!uct !e,elo(ment an! com(lying 1ith ne1 en,ironmental regulations. With 2<s 1illing to sacrifice (rofitability for gro1th in the short"term, it has become im(erati,e for !omestic (layers to s(ruce u( R;D efforts. 0t the same time, cash flo1 (osition is much stronger no1 gi,en that most manufacturers ha,e re!uce! 1or-ing ca(ital an! !ebt. 'his 1oul! mean financing bul- of incremental ca(e7 from internal accruals. Pro76ct Pr0c0n3: 'he +n!ian automobiles are slo1ly shifting a1ay from the (rice sensiti,eness to1ar!s the ,alue a!!ition conce(t. Besi!es, e,en the S+0 has change! the norms of classification from the

##

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA (re,iously follo1e! >rice basis to the si?eD length of the ,ehicle. >re,iously, the in!ustry 1as highly (rice sensiti,e an! the sales 1ere !e(en!ent on (rice brac-ets. But the +n!ian customerIs (erce(tion is slo1ly changing an! mo,ing to1ar!s the ,alue a!!itions such as the si?e of the car, the style, the comfort, the le,el of ser,ice offere! by the manufacturers, the ,ariants a,ailable in the category etc. 8,en though the (erce(tion is changing, it is true that still (rice (lays an im(ortant role in the in!ustry. 'he role of (rice may be ,ery negligible in some segments, but in the other segments they are ,ery much reacti,e to the (rice fluctuations. 'hus, the some (layers in segments concentrate on the ,alue a!!ition to achie,e com(etiti,e a!,antage, 1hile the other (layers in the segments use (rice as 1ea(on along 1ith their core ser,ice. 'hese (layers also offer !iscounts !uring festi,al season to boost the sales. #ro=t4 Dr0<er.% 1. Econo/0c 3ro=t4: 'here is a !irect co"relationshi( bet1een the (er ca(ita income of the (eo(le an! the !eman! for automobiles. Due to the increase! business acti,ity, the economy su((orts the in!ustry gro1th as 1ell as generates em(loyment. 'he !eman! for automobile is e7(ecte! to gro1 1ith the im(ro,e! stan!ar! of li,ing. 8,en though the economic gro1th rate !uring the year 1as @.0$9 (ercent, the future a,erage gro1th rate is e7(ecte! to be aroun! 9.$ (ercent 1ithout any economic reforms. 2. Inco/e 1e<e1: 'he le,el of income has got a !irect im(act on the sales of the automobile. 'he rise in income le,el, results in increase in the number of (eo(le crossing the income threshol!, thus changing the (rofile of customer. 'he lifestyle of the (eo(le ten!s to change automatically. With their increase! buying (o1er, they 1oul! loo-out for more comfort. For 8.g. 1hen the income of a lo1er mi!!le class family increases, say they 1oul! li-e to shift from t1o" 1heeler to buy a use! car. 'his in turn increases the !eman! for use! car mar-et an! a goo! resale ,alue for the seller, thereby in!irectly increasing the sales of ne1 cars. With the entry of 2<s es(ecially in the +', +'8S an! B>6 sector, the income le,el an! lifestyle, both are encouraging the younger generation. 'his has also re!uce! the a,erage age of a car buyer. 3. Mon.oon.F R6r-1 econo/2: 'he monsoon is the bac-bone of the +n!ian agriculture. +n +n!ia, aroun! 9$ (ercent of the national income is contribute! by the agricultural sector an!

#$

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA constitutes about 22 (ercent in the AD>. 'he monsoons su((ort the economic gro1th. With the arri,al of monsoons, the rural sector is e7(ecte! generate more jobs in the rural economy an! more income, thus increasing the (urchasing (o1er of (eo(le. 0long 1ith this, e,en other in!ustries (erformance 1ill boost u(. 'hus, the !eman! mainly for utility ,ehicles increases 1ith the better (erformance of the rural sector. #. U.e7 c-r Se3/ent: 'he in!ustry sa1 a gro1th of aroun! 30 (ercent in the use! car segment !uring fiscal year. 'he (rofile of an +n!ian <ar buyer has been changing !ue to the increasing (urchasing (o1er. Besi!es, the use! cars are becoming affor!able !ue to the re!uce! 8/uate! onthly +nstallments 38 +4 an! increase! re(ayment (erio!. 0 more acti,e lifestyle, rising !is(osable income an! lo1er cost of re(lacement are gui!ing the customers to change their cars once e,ery three years no1. 8,en though this mar-et is unorgani?e! to a large e7tent, the organi?e! use! car segment is slo1ly gro1ing in +n!ia. With the manufacturerIs only coming for1ar! to buy bac- their mo!els, has in turn hel(e! the sales of ne1 ,ehicles. $. A<-01-5010t2 o, ,0n-nce ,or 5ot4 ne= -n7 6.e7 <e40c1e.: With the ease in the a,ailability of finance both the ne1 an! use! auto mar-et segment has been 1itnessing a gro1th. >re,iously, loans 1ere (ro,i!e! only for the ne1 ,ehicles, but no1 the financial institutions ha,e come for1ar! to offer the loans for use! ,ehicles too. With the increasing com(etition among the finance (ro,i!ers, they are re!ucing the rates !ay by !ay. 0long 1ith this, e,en some com(anies go beyon! the in!ustry benchmar- by financing u( to se,en year ol! ,ehicles, thereby hel(ing the gro1th of the use! auto segment. 'he interest rate has almost hal,e! in com(arison to the rates !uring 1BB@ an! has touche! as lo1 as 9.$ (ercent (er annum. 0uto manufacturers are using this as a tool to increase the sales. 'hey are ha,ing tie"u(s 1ith the finance (ro,i!ers or floating their o1n finance com(anies. 9. In,r-.tr6ct6re: Due to the increase! in,estment in infrastructural (rojects es(ecially in the !e,elo(ment an! im(ro,ement of roa! (rojects, the o,erall trans(ort business acti,ities an! the tourism is e7(ecte! to gro1, 1hich in turn creates a goo! !eman! for the utility ,ehicles. 'raffic on roa!s is gro1ing at a rate of * to 10C (er annum 1hile the ,ehicle (o(ulation gro1th for the (ast fe1 years is of the or!er of 12C (er annum. So there is a nee! for the !e,elo(ment of goo!

#9

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA infrastructural roa!s for the gro1th of the automobile in!ustry. 6n the other si!e, (oor roa! infrastructure an! traffic congestion can be a bottlenec- in the gro1th of ,ehicle in!ustry. *. E;port.: With the global (layers loo-ing at !e,elo(ing ,ehicles that can be launche! in multi(le mar-ets to re!uce their !e,elo(mental cost an! to re!uce their !e,elo(ment costs, +n!ia is e7(ecte! to increase its e7(orts. 'hese giants are (lanning to use their +n!ian facilities as hub for their 1orl!1i!e o(erations. With this mo,e, Aeneral motors an! Daimler <hrysler both ha,e their R ; D center in Bangalore, 1hich 1ill ha,e an im(ortant role in +nternational (ro!uct !e,elo(ment. 'oyota has (lans to turn +n!ia into its lo1est cost"manufacturing center. also becoming a hub for small cars for Su?u-i !ri,en by com(act an! mi! si?e car segment. TA LE &: COST ANALYSIS A. K o, net .-1e. Ra1 aterial Staff <ost 6ther e7(en!iture Source: India Infoline Research FY'E 9B.# $.0 13.1 FY'* 9*.@ $.B 13.# E= is otor <or(oration. 'he countryIs car sales an!

e7(orts is e7(ecte! to register aroun! @.$ la-h units by the fiscal 2009"0*, 1hich 1ill mainly be

Ra1 material cost (ressures 1as face! by most of the com(anies in the sector. For instance, ra1 material cost as a (ercentage of net sales increase! by $.* (ercentage (oints for >unjab 'ractors, $.2 (ercentage (oints for B0=, 2.@ (ercentage (oints for 0== an! 2.$ (ercentage (oints for 'ata sales. >unjab 'ractors an! otors. ; enjoye! the benefit of a re!uce! staff cost by 3*0b(s an! Staff cost !ecline! by 99b(s an! other e7(en!iture increase! #1b(s as a (ercentage of net 230b(s as a (ercentage of net sales. >unjab 'ractors maintaine! its margins in s(ite of a high rise in ra1 material cost !ue to sa,ings in staff cost an! other e7(en!iture.

M-jor co/pet0tor. -n7 M-r?et po.0t0on: >rior to 1B@0, >remier 0utomobiles =imite! 3>0=4 an! 5in!ustan !ominate! the +n!ian (assenger car mar-et. With the entry of otors 35 4 ha! aruti E!yog =imite! 3 E=4 in

1B@0, the former (layers face! a tough com(etition. 8,en though they 1ere able to maintain

#*

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA their ,olumes, their mar-et share !rastically re!uce!. foreign (layers, the (roblems began for E=. E= !ominate! the (assenger car mar-et

an! face! no com(etition till early 1BB0Is. 0fter the liberali?ation too- (lace, 1ith the entry of E= starte! loosing its mar-et share slo1ly. E= ha! !e(reciate! its (lant alrea!y by then, E=Is aruti @00Is entry (rice. But still, E= E=Is During the initial stages of liberali?ation, since no (layer in the in!ustry 1as able to match

face! tough time in the u((er segment. With the launch of the mo!els li-e +n!ica, Santro an! ati? by 'ata, 5yun!ai an! Dae1oo res(ecti,ely, in the (rice range of 3" #.$ la-hs, mar-et share fell !o1n shar(ly. But, ho1e,er segment, an! 1as able to maintain its mar-et share 1ith its successful mo!els li-e 8steem, Pen, Wagon R an! 0lto. 'he o,erall mar-et share of E= is still the mar-et lea!er in the (assenger car aruti @00, E= fell from *0.2 (ercent in

1BB$"B9 to $@.1 (ercent !uring 1BBB"00, 1hich further !ecline! to $1 (ercent as on February 200#. 'his can be attribute! to the increase! com(etition from 5yun!ai, 'ata motors, Fiat, Aeneral motors, 5in!ustan motors an! 5on!a Siel. +n the 0 segment, E= hol! the mono(oly (osition 1ith its @00 mo!el an! no other E= hol!s the lea!ershi( (osition 1ith

(layer has been able to enter this segment. 'his mo!el alone accounts for about 2$ (ercent of the total sales of the (assenger cars. +n the lo1er B segment, its three mo!els in the segments ,i? Pen, 0lto an! Wagon R, follo1e! by 5yun!ai. But, mo!el 1ise Santro to(s the segment 1ith its 3* (ercent share in this segment. 'here are three (layers in the u((er B segment, 1ith 'ata in the 2o.1 (osition. +ts mo!el +n!ica accounts to @9 (ercent of the total sales in the segment. E=Is 8steem lost its lea!ershi( (osition to 'ataIs +n!igo, 1hich has !ominate! the mar-et 1ith 31 (ercent share. 'his ahs been follo1e! by 5yun!aiIs (ercent an! 22 (ercent res(ecti,ely. 5on!a Siel occu(ies the !ominant (osition 1ith its <ity mo!el. 'oyotaIs <orolla an! 5on!aIs 0ccor! are !ominant in the D ; 8 segments res(ecti,ely 0ccent an! For! +-on, 1hose mar-et shares are 2*. With the launch of ne1 mo!els in the utility ,ehicles sales are in an u(1ar! tren!. +n the utilities segment has been able to maintain its lea!er (osition, follo1e! by EVs an! SEVs, ahin!ra ahin!ra ;

E=, 1hich manufactures the mo!els

li-e omni an! ,ersa. 'he launch of Sualis mo!el has gi,en a ne1 loo- to the in!ustry. 8,en, it grabbe! some share of (assenger car in!ustry, since the customers (ercei,e! it as a big car, 1hich is e,en easy to !ri,e, unli-e other utility ,ehicles. 'he launch of ahin!raIs SEV Scor(io also mo,e! along the lines of Sualis, !ragging the (assenger car customers. Watching the

#@

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Scor(ioIs success a ne1 range of SEVs 1ere launche! by other (layers in the in!ustry. 'he ne1 SEV mo!els, 1hich are launche!, recently are arutiIs )imny, For!Is 8n!ea,our, Su?u-iIs Vitara, <he,roletIs Forester an! 5yun!aiIs 'erracan. With this mo,e by the (layers, the re! line bet1een the utilities an! the (assenger car is slo1ly ,anishing.

#RAPH H: SHARE OF PLAYERS IN THE PASSEN#ER CAR SE#MENT AS ON FE &''*)'E

#B

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

0ar"et )#are1 Co&pan23ise 175

35

35 95

165

Maruti ./un0ai 1or0 +ata 2n$ .on0a )i%l 3th%rs

415

#RAPH J: SHARE OF PLAYERS IN THE UTILITIES SE#MENT AS ON FE &''*)'E

$0

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

(tilities &ar"et s#are

164 154

14 34 344 5a6a6 +%7#o Mah 8 7ah Maruti (0/o$ +%l&o +o/ota 9irloskar 3th%rs

314

S6pp10er.: 'he +n!ian 0uto com(onent in!ustry 1as starte! 1ith an aim of re!ucing the im(orts an! being self"sufficient. But, o,er a (erio! of time this in!ustry has achie,e! its objecti,e along 1ith being a goo! foreign e7change earner. 'he auto com(onent in!ustry maintaine! a lo1 but (ositi,e gro1th rate mainly !ue to its e7(ort (erformance. 'his in!ustry has maintaine! a 10 (ercent to 12 (ercent share of e7(orts in its total (ro!uction. +n!iaIs automoti,e com(onent in!ustry manufactures the entire range of (arts re/uire! by the !omestic automobile in!ustry an! currently em(loys about 2$0,000 (ersons. 0uto com(onent manufacturers su((ly to t1o -in!s of customers L original e/ui(ment manufacturers 368 4 an! the re(lacement mar-et. 'he re(lacement mar-et is characteri?e! by the (resence of se,eral small"scale su((liers 1ho score o,er the organi?e! (layers in terms of e7cise !uty e7em(tions an! lo1er o,erhea!s. 'he !eman! from the 68 mar-et, on the other han!, is !e(en!ent on the !eman! for ne1 ,ehicles. 'he strict reform by the Ao,ernment 1ith res(ect to the in!igeni?ation (rogramme has le! the 68 Is to increase their in!ignation o,er the years. +n +n!ia, the auto com(onent manufacturers

$1

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA are foun! 1or-ing close in (ro7imity 1ith the ,ehicle manufacturers ensuring the just in time !eli,eries. 'he tren! of the auto com(onent in!ustry is to outsource manufacturing assembly to com(onent su((liers 1hile the 68 im(erati,e is to cut costs, im(ro,e customer res(onsi,eness an! buil! to or!er, 1hich hel(s them to buil! their o1n com(etiti,e a!,antage. #o<ern/ent Re361-t0on.: 8,en though the auto sector has been !eregularise!, the go,ernment still ,ests the (o1ers 1ith itself to influence the in!ustry, in terms of controlling the im(ort, e7cise an! customs !uties an! emission norms. 0fter the lifting of licensing in 1BB3, 19 ,entures came u( to manufacture cars. 'he go,ernmentIs auto (olicy has restricte! im(ort of cars an! automoti,e ,ehicles in com(letely built 3<BE4 form or in com(letely -noc-e! !o1n 3<RD4 or in Semi -noc-e! !o1n 3SRD4 con!ition. 0n! the car manufacturers 1ere issue! licenses to im(ort com(onents in <RD or SRD form only after e7ecution of the emoran!um of En!erstan!ing 3 6E4 1ith the 6E an! they ha,e agree! to Director Aeneral Foreign tra!e 3DAF'4. 11 com(anies signe!

bring in minimum foreign e/uity of ES N $0 mn, if a joint ,enture is in,ol,e! in majority foreign e/uity o1nershi(. 0long 1ith this, they ha,e also agree! to in!igeni?e com(onents u( to a minimum of $0 (ercent in the thir! year an! *0 (ercent in the fifth year. 'he go,ernment has (ermitte! for 100C foreign e/uity in,estments for the manufacturing of automobiles an! com(onents. 'he Ao,ernment 1ill re,ie1 the automoti,e tariff structure (erio!ically to encourage !eman!, (romote the gro1th of the in!ustry an! (re,ent +n!ia from becoming a !um(ing groun! for international rejects. 'he inci!ence of im(ort tariff 1ill be fi7e! in a manner so as to facilitate !e,elo(ment of manufacturing ca(abilities as o((ose! to mere assembly 1ithout gi,ing un!ue (rotection, to ensure balance! transition to o(en tra!e, to (romote increase! com(etition in the mar-et an! enlarge (urchase o(tions to the +n!ian customer. 0((ro(riate measures inclu!ing anti !um(ing !uties 1ill be (ut in (lace to chec- !um(ing an! unfair tra!e (ractices. 'he con!itions for im(ort of ne1 <om(letely Built Enits 3<BEs4 1ill be as (er >ublic 2otice issue! by the Director Aeneral Foreign 'ra!e 3DAF'4 ha,ing regar! to en,ironment an! safety regulations. Ese! ,ehicles im(orte! into the country 1oul! ha,e to meet < VR, en,ironmental re/uirements as (er >ublic 2otice issue! by DAF' laying !o1n s(ecific stan!ar!s an! other criteria for such im(orts. 'he go,ernmentIs (olicy allo1s 1eighte! ta7 !e!uction for the s(onsore! research an! in"house R;D e7(en!iture an! also e7cise !uty rebate

$2

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA of 1C of the gross turno,er. 'he go,ernment is also encouraging auto !esign firms by (ro,i!ing them ta7 brea-s an! concessional !uty. 'he go,ernment is su((orting the !e,elo(ment an! intro!uction of ,ehicles (ro(elle! by energy sources other than hy!rocarbons by (romoting a((ro(riate automoti,e technology. 'he roa! ta7 on ,ehicles ,aries from state to state an! a lifetime roa! ta7 is in e7istence. 'he go,ernment controls the im(ort of automobiles an! its com(onents through its 8T+ 3Basic M S8D4 on cars an! (olicy. +t has allo1e! the im(ort of use! cars 1ith some otor Vehicle Rules, 31B@B4. 87cise !uty on restrictions an! they shoul! confirm to the <entral

EVs re!uce! from 32C to 2#C an! for <RD an! SRD -its re!uce!

from 30C to 2$C. 'he go,ernment has announce! #@ ne1 roa! (rojects 1ith an estimate! cost of Rs#00bn an! it a le,y of $0 (aisa on (er liter of !iesel 1ill be collecte! for the fun!ing of the abo,e roa! (rojects. By the year 2010, the +n!ian safety regulations 1ill be com(letely aligne! 1ith the 8<8 regulations li-e anti"theft, 8 <, noise, front, si!e an! lateral collision, etc. E/0..0on: 'he nee! to re!uce ,ehicular (ollution has le! to emission control through regulations in conjunction 1ith increasingly en,ironment"frien!ly technologies. +t 1as only in 1BB1 that the first stage emission norms came into force for (etrol ,ehicles an! in 1BB2 for !iesel ,ehicles. From 0(ril 1BB$ man!atory fitment of catalytic con,erters in ne1 (etrol (assenger cars sol! in the four metros of Delhi, <alcutta, umbai an! <hennai along 1ith su((ly of Enlea!e! >etrol 3E=>4 1as affecte!. 0,ailability of E=> 1as further e7ten!e! to #2 major cities an! no1 it is a,ailable throughout the country. From the year 2000, the (assenger cars an! commercial ,ehicles are meeting 8uro + e/ui,alent +n!ia"2000 norms. 8uro ++ e/ui,alent Bharat Stage ++ norms are in force from 2001 in # metroIs of Delhi, umbai, <hennai an! Rol-ata. Since +n!ia embar-e! on a formal emission control regime only in 1BB1, there is a ga( in com(arison 1ith technologies a,ailable in the ES0 or 8uro(e. <urrently, +n!ia is behin! 8uro norms by fe1 years, ho1e,er, a beginning has been ma!e, an! emission norms are being aligne! 1ith 8uro stan!ar!s an! ,ehicular technology is being accor!ingly u(gra!e!. Vehicle manufactures are also 1or-ing to1ar!s bri!ging the ga( bet1een 8uro stan!ar!s an! +n!ian emission norms. +n this mo,e, the go,ernment is ma-ing all efforts to im(lement 8uro +++ from 200$ effecti,ely !TO: 'he W'6 restrictions came into effect from 1st 0(ril 2001 an! the +n!ian in!ustries 1ere feeling a sense of threat of chea(er im(orts. 5o1e,er, 1ith the go,ernmentIs !ecision to hi-e u(

$3

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA the im(orts tariffs, it (ulle! !o1n the curtains of threat. Besi!es, the go,ernment lai! !o1n many restrictions 1ith regar! to im(orts, in or!er to sa,e the country from being the !um(ing groun! for !eteriorate foreign (ro!ucts. +t allo1e! the im(ort of ,ehicles only from the country, 1here they ha,e been manufacture! an! they shoul! com(ly 1ith the <entral otor Vehicle Rules, 3< VR, 1B@B4 an! im(ort of ne1 cars 1oul! be allo1e! through only through fe1 (orts ,i? umbai, Rol-ata an! <hennai. 'he go,ernment has lifte! /uantitati,e Restrictions on im(orts of secon!"han! automobiles. 'he go,ernment has !eci!e! to allo1 the entry of secon! han! ,ehicles into the country only through the umbai (ort. Ese! ,ehicles being im(orte! shoul! not be more than three years ol! an! the im(orting agency is e7(ecte! to submit a certificate issue! by a testing agency notifie! by the central go,ernment that the secon! han! ,ehicle being im(orte! has been teste! imme!iately before shi(ment an! that the ,ehicle conforms to all the regulations s(ecifie! in otor Vehicles 0ct, 1B@@. 'he (olicy lays !o1n that im(orte! automobiles shoul! ha,e a minimum resi!ual life of fi,e years an! the im(orter shoul! ensure su((ly of s(ares an! ser,ice !uring this (erio!. +m(ort of left han! ,ehicles 1as banne!. 'he ,ehicles shoul! necessarily ha,e right"han! steering controls, a s(ee!ometer in!icating the s(ee! in -ilometers an! a (hotometry of the hea!lam(s to suit :-ee("left: traffic. 0ll these restrictions 1ere ma!e in or!er to see to it that the +n!ian customer gets the best ,ehicle from abroa!. 'he go,ernment ma!e a (olicy, 1hich totally bans the im(ort of cars 1hose engine ca(acity ranges from 1000 to 2$00cc. 0ll these ste(s 1ere ta-en in or!er to limit the im(orts only to the u((er en! segment.

C4-11en3e.: >rice is the factor to (enetrate the +n!ian automobile mar-et. 2<s bring in 1ith

them enormous research an! !e,elo(ment s-ills, global !esign e7(ertise an! years of e7(erience in manufacturing an! selling automobiles in multi(le countries. +n!ian com(anies are ta-ing small ste(s in entering ne1 mar-ets 1ith one or t1o offering com(are! to global com(anies. 0bility to meet changing technology, customersI nee!s an! styling an! shortening (ro!uct life cycle are the challenges that +n!ian com(anies ha,e to face.

$#

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA F6t6re O6t1oo?: 'he o,erall elements in the economy seem to be in fa,or of gro1th of automobile in!ustry. 'he (assenger car segment is e7(ecte! to gro1 at aroun! @C !uring the (erio! 200#"0*. Besi!es, the e7(orts are also e7(ecte! to gro1, 1hich 1ill be !ri,en by the increasing !eman! for com(act cars. 'he AD> gro1th, increasing income le,el, changing lifestyle of (eo(le, a,ailability of finance for both ne1 an! ol! cars 1ith lo1 8 +Is, ne1 launches, ne1 infrastructural (rojects an! e7(ort gro1th are the factors 1hich fuel the gro1th of the automobile in!ustry. 2o1, 1ith the e7tension of ser,ices of finance (ro,i!ers to the rural mar-et, the car an! utility ,ehicles sales are e7(ecte! to mo,e u(. 'he manufacturers are e,en concentrating to sell their ne1 launches inclu!ing SEVIs in the rural mar-et. With a big success of SEV conce(t in +n!ia, almost all the (layers in the mar-et ha,e come out 1ith their com(etiti,e mo!els, thus hotting u( the com(etition. 0ll the (layers are concentrating on cost cuts an! cost effecti,e metho!s in or!er increase the (rofits of their su((ly chain. 'he go,ernment has re!uce! the e7cise !uty on steel from (re,ious 19 (ercent to @ (ercent from first 1ee- of arch. With this, the automobile manufacturers are benefite! 1ith the im(ro,e! margins. Des(ite the e7cise !uty cut, the steel (rices are on a bullish tren!. 'o o,ercome this (roblem, the manufacturers are in a thought of re(lacing the steel com(onents 1ith aluminum, 1hich re!uces their cost consi!erably. +f the ru(ee continues to a((reciate against !ollar an! !e(reciate against the 1on, yen an! euro, then the in!ustryIs (rofits 1ill be s/uee?e!, since it means higher cost of im(ort an! lo1ere! re,enue. With the com(anies establishing their R ; D centers here, +n!ia is e7(ecte! to emerge as an +nternational hub for (ro!uct !e,elo(ment. 5o1e,er, the automoti,e in!ustry has to 1or- closely 1ith the !ealers an! ,en!ors to ma-e the e7(ecte! gro1th (ossible. 'he automobile in!ustry nee!s to aggressi,ely benchmar- its (ro!ucts an! (rocesses 1ith the +n!ustry best " both in +n!ia as 1ell the 1orl!Is best. 6nly those com(anies, 1hich im(ro,e their (rocesses regularly, 1ill sur,i,e. Further, +n!ian automobile +n!ustry nee!s to learn the best (ractices /uic-ly to sur,i,e the threat of W'6.

$$

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA 5o1e,er +n!ian mar-ets are ,ery a!,ance! in using the state"of"the"art technology an! +n!ian auto com(onent ma-ers are becoming global sourcing (artners for auto ma-ers. ost +n!ian (layers are sourcing their com(onent re/uirement from +n!ian com(onent ma-ers only. 0ny (ara!igm shift in technology 1ith the emission norms an! alternate fuels 1ill li-ely increase the technology ga( bet1een the local com(anies an! substantial in,estment in R;D is necessary for !omestic (layers. Dieseli?ation is going to be a future tren! in the +n!ian mar-et 1ith rising (etrol (rices an! the significant !ifference bet1een (etrol an! !iesel (rices. <urrently, 20"2$C !iesel engines are in use in the +n!ian mar-et, an! this is li-ely to gro1 u( to 30"3$C in the me!ium term. 0nother tren! that might be seen in the near future is rise in the utility ,ehicle sales. With infrastructure facilities increasing more (eo(le (refer the EVs for inter city tra,el. So, in the future small an! com(act cars are li-ely to face com(etition from EVs. 0s the economy is gro1ing, the car in!ustry 1ill see a 12"1$C com(oun!e! annual gro1th rate in the me!ium term. 0s long as +n!ia continues to gro1 economically an! the income of +n!ians continues to rise, +n!ia 1ill become a major automobile consumer an! (ro!ucer. 2<s here. So a

14 0nalyst 0ssum(tions 24 W0<< 34 Value Dri,ers # +ncome Statements $4 Balance Sheet 94 Du(ont analysis *4 >8 multi(les.

$9

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA TA LE D: ASSUMPTIONS MADE FOR THE STUDY A..6/pt0on. Inco/e .t-te/ent S-1e. 3ro=t4 Oper-t0n3 M-r30n. Ot4er Inco/e -. - K o, 0n<e.t/ent. E,,ect0<e T-; r-te Co.t o, 7e5t %Pre t-;+ De5t to e@60t2 #ro.. -.et. - K o, S-1e. Deprec0-t0on -. K #.A..et. D0<07en7 p-2o6t D0<07en7 T-; In<e.t/ent. -. - K o, tot-1 S-1e. C6rrent -..et. -. - K o, .-1e. C6rrent 10-5010t0e. -. - K o, .-1e. M-rc4 N 'E 10.00C B.2@C 1*.*9C 21.B3C 10.$#C 0.## $1.1$C 9.91C 11.99C 12.@1C 22.*#C 2@.@BC 29.*$C M-rc4 N 'G 10.00C 10.00C 1$.00C 22.00C *.$0C 0.3$ $0.00C *.00C 12.00C 12.$0C 22.00C 2B.00C 29.00C M-rc4 N 'H B.00C 10.00C 1$.00C 22.00C *.$0C 0.30 $0.00C *.00C 12.00C 12.$0C 22.00C 2B.00C 29.00C

TA LE *: !EI#HTED AVERA#E COST OF CAPITAL Ris- free rate ar-et rate of return Beta +nterest >ai! 3Rs. <rore4 ar-et ,alue of !ebt 3Rs. <rore4 'a7 rate Cost of debt Cost of equit WACC TA LE E: VALUE DRIVERS 200$ 3Rs. $#1*.90 200# 2003 *.00C 19.00C 1.02 $1.$@ B3#.@2 3*.00C 3.48% !".!8% 14.31%

ar-et <a(italisation <rore4 >D8 3'railing4 >D8 >DB

1#.2# 3.23

1$.$@ 1.@9

1.@9 1.1*

$*

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

TA LE G: INCOME STATEMENT Inco/e .t-te/ent #ro.. S-1e. =ess% 87cise Net S-1e. Oper-t0n3 Inco/e Tot-1 Inco/e Le..: Ra1 aterial M >urchases 8m(loyee <ost Selling 87(enses 0!ministrati,e 87(enses 6ther 87(enses >ro,isions iscellaneous e7(enses <hange in Stoc- 3"4 +nc.D 3M4 Dec. 87(enses <a(italise! 0mortisation Tot-1 Oper-t0n3 E;pen.e. Oper-t0n3 Pro,0t +nterest #ro.. Pro,0t De(reciation P T 5e,ore non op -n7 e;tr- or7 2on 6(eraing +ncome 0!!% 87tra 6r!. +ncome =ess% 87tra 6r! 87(enses P T M-r N 'D 3BB9*$.3 0 3BB9*$.2 9 3BB9*$.2 9 211*23.1 39BB1.#9 1BB@2.1 2$0$.32 $B$#$.22 123$.3$ 1$2#3.2* 9##0.B# 1*#@.B* 10*0.B$ 3$9#@9.9 @ #31@@.$@ 2$2*$.9* 1*B12.B1 13B3@.2B 3B*#.92 $2@$.#3 "1*2@.$@ 0 *$31.#*

%R. 0n L-?4.+ M-r N '* ##$29$ *@$#B.0 9 399*1$. B 399*1$. B 2$0021. @ 3@12B.0 3 1B$3B.$ B 2B$$.12 1@1@3.B B #010.33 1$2@3.B @ 23$*.BB 1B1*.0* * #@9.B$ 3$2@@$. B 13@30.0 1 11$0.3B 129*B.9 2 190$9.* "33**.0@ 1*31#.@ @ $*9$.91 0 1B*03.# M-rN 'E $@2B2#.9 B#3*@.11 #@@$#9.#@ #@@$#9.#@

33$2@9.$2 #1*#$.3B 1@$@1.9 312@.2$ 2$*B$.BB ##.21 1B1*1.91 "21#3.23 1$**.$$ 9.*9 ##31B#.9$ #$3$1.@3 *9B3.2* 3*9$@.$9 19$1B.B 2113@.99 1B*32.@1 2B#*.@3 0 #3@1B.3

$@

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA 1 1230 3B20 1#$$3.# 1 1#$$3.# 1 39$3B.1 0 93@0.9# @1*.$$ (&.EE

>ro,ision for 'a7ation Deffere! ta7ation PAT >rior Gear 3M4+nc.D 3"487(. Re(orte! >0' BDF >rofit a,ailable for allocation >ro(ose! 8/uity Di,i!en! Di,i!en! 'a7 8/uity Di,i!en! 3C4 Ep.

390 "2$20 B9B1.#* B9B1.#* 0 0 0 0 J.DE

93$0 291$ 3#@$#.3 3#@$#.3 $#*0B.#3 @B$93.*3 10##1.#@ 133*.@2 D'.'E

TA LEH: E9PECTED INCOME STATEMENT E;pecte7 0nco/e .t-te/ent Oper-t0n3 Inco/e Non Oper-t0n3 Inco/e Oper-t0n3 e;pen.e. M-rc4 N M-rc4 N 'E 'G #@@$#9.#@ $3*#01.1 3 1B*32.@1 1**3#.2# ##31B#.9$ #@3991.0 2 #$3$1.@3 *9B3.2* $*3B1.3* 19$1B.B @B9$ 3#@$#.#3 10##1.#@ 133*.@2 230*$.13 30.02 $3*#0.11 $2*#.*9 991BB.$B 1@B#3.#@ 1B2.@@ 103$3.B1 3B19*.#2 #*00.0B $@*.$1 33@*B.@2 33.*# M-rc4 N 'H $@$*9*.23 1B330.32 $2*1B0.$1

Oper-t0n3 Pro,0t Intere.t #ro.. Pro,0t Deprec0-t0on Ot4er Non oper-t0n3 e;p T-; PAT D0<07en7. D0<07en7. T-; Ret-0ne7 E-rn0n3. E;pecte7 EPS

$@$*9.*2 $3B@.2@ *2$0@.** 20939.2B 1$#.31 113*@.00 #$093.@1 $#0*.99 9*$.B9 3@B@0.20 3@.@2

$B

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

TA LE J: ALANCE SHEET M-rc4 N 'D SOURCES OF FUNDS 61ner:s Fun! 8/uity Share <a(ital Share 0((lication oney >reference Share <a(ital Reser,es ; Sur(lus =oan Fun!s Secure! =oans Ensecure! =oans Deferre! 'a7 =iability 32et4 Tot-1 1190.@9 0 0 13@@00.9 B2#1$.39 21$9B.0B 0 &H'IGH.E* M-rc4 N '* 1190.@9 0 0 1#$3@2.2 3 B2#1$.39 21$9B.0B 1**10.01 &JJGHH.E E M-rc4 N 'E

1190.@9 0 0 19$B02.#B *2B@0.*@ 2##$@.03 2032$ &H'J'I.(D

USES OF FUNDS Fi7e! 0ssets Aross Bloc=ess % Re,aluation Reser,e =ess % 0ccumulate! De(reciation 2et Bloc<a(ital Wor-"in"(rogress +ntangible assets +n,estments 2et <urrent 0ssets <urrent 0ssets, =oans ; 0!,ances =ess % <urrent =iabilities ; >ro,isions 'otal 2et <urrent 0ssets iscellaneous e7(enses not 1ritten Tot-1

209@03.* 0 @*B$#.$ 1#13**.@9 3#@*3.#1 0 @0012.*B 1*3239.9# 10$0*#.2# 9@192.# 0.00 &JJ('H.J

2#39@1.B # 0 10230#.0 @ 1#13**.@ 9 $231.01 0 @9229.B9 1913#@.0 2 10B#*@.2 $ $1@9B.*@ 3B*1.B9 &JJGHH.E E

2#B@*B.9B 0 119$@2.9@ 1332B*.01 3@#1.1 2021.@ 11111$.31 1$02$9.*B 1309@*.3 1B$9B.#B B9#.#2 &H'J'I.(D

90

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

TA LE I: RELATIVE PFE AND PE# RATIO EPS 'E EPS %'G+ EPS %'H+ EPS #ro=t4%'G+ 23.43C " (&.D&K *1.$$C " #3.9#C EPS #ro=t4%'H+ 1#.39C " (E.'GK 2#.22C " 20.0*C (G.GE C6rrent PFE PFE 'G 11 " (*.'G 13.09 " 11.B1 PE# 'G 0.#9 " (.(* 0.1@ " 0.2*

0sho=eylan! 1.93 2.02 2.31 Bajaj 'em(o 33.$$ " " M-40n7r& M-40n7r- D'.'* DD.H* DJ.J& aruti E!yog =t! 1@.** 32.2 #0 5in!ustan otors " " " 'ata otors 22.B9 32.B@ 3B.9 3Source% 111.icici!irect.com4

91

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA TA LE (': RELATIVE RATIOS De5t To E@60t2 EPS 0sho=eylan! Bajaj 'em(o M-40n7r& M-40n7raruti E!yog =t! 5in!ustan otors 'ata otors 19.2@ 33.$$ D'.'* 1@.*9 "$.02 22.B9 CEPS 2#.#1 $*.9# *E.D& 3@.# "2.1* 3$.29 0.#@ 0.3 '.*( 0.0@ $.0# 0.3$ ROE 1B.#* 23.11 (I.I( 1$.19 "119.32 22.*1 C6rrent R-t0o 1.#$ 1.9 '.II 1.1* 1.3* 0.*2 oo? <-16e per .4-re @3.9 1#$.1$ (E&.(J 123.*# #.32 101.0@ PF V OPM% K+ 11.#2 *.9* ('.*H 13.2$ "0.#* 13.1# NPM% K+ 2.2 $.$1 1.*$ #.$2 &.J* G.JJ 2.@@ $.91 2.@ "10.B@ 1.#9 9.12

3Source% 111.icici!irect.com4

TA LE ((: DUPONT ANALYSIS ROE &''* &''E I.&H K (I.G*K

&''D G.** K

92

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

A..et. T6rno<er &''D &''* &''E '.HI '.I& (.&&

An-12.0. &''* ROE NPM A..et. T6rno<er E@60t2 M61t0p10er S-1e. E@60t2 to L.T De5t UP UP UP DOWN UP DOWN UP UP UP DOWN UP DOWN &''E

93

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA M-40n7r- -n7 M-40n7r- V-16-t0on: ahin!ra an! ahin!ra is one the lea!ing names in the 0utomoti,e an! farm sector in!ustry. 'he com(anyIs soli! re(utation an! bran! name recognition gi,e them a great a!,antage in their fiel!. 'he com(any has sho1n great im(ro,ement an! (romise throughout its history, an! e7(ectations are high as e,er. Sales are e7(ecte! to continue to gro1 an! the com(any 1ill continue to flourish. 'his is 1hy 1e (lace! such an im(ortance on sales for our ,aluation mo!el. We use! our gro1th in sales to hel( forecast many of the com(anyIs accounts. By using sales gro1th, or a (ercentage of sales to forecast 1e feel our numbers safely re(resent 1here the com(any is hea!e!. For the first year of our forecast 1e ha,e sales gro1th of 10C, an! the follo1ing four years ha,e gro1th re!ucing by 1C e,ery year. We feel these numbers are accurate gbo1th rates !ue to com(anyIs history. 'he com(any is ,ery 1ell !e,elo(e! an! in the gro1th an! e7(ansion of their lifecycle. We feel the com(any 1ill continue to gro1 at a goo! (ace. We chose to forecast the fi,e year (erio! for a fe1 reasons. We feel the fi,e year (erio! is enough time to a,oi! any /uestions or uncertainties as number of ne1 (layers entering the mar-et. 'hrough the forecasting of the com(anyIs major financials 1e 1ere able to fin! im(ortant ,alue !ri,er calculations. We 1ere able to fin! the Re(orte! >0', o(erating >rofit, Free <ash Flo1 of ; <o. 'hese are im(ortant numbers nee!e! to fin! our target stoc- (rice. 'he W0<< 1as a ,ery im(ortant (art of our ,aluation mo!el. 'o fin! the W0<< 1e ha! to fin! the cost of e/uity an! !ebt for the com(any. +n or!er to fin! the cost of e/uity 1e use! the <0> e/uation. 'his allo1e! us to fin! the com(anyIs cost of e/uity of 19.1@C. 'o fin! the cost of !ebt 1e ha! to use interest an! total !ebt fun!s of the com(any an! interest s(rea!. 'his allo1e! us to fin! the com(anyIs cost of !ebt to be 3.#@C. With these numbers 1e 1ere then able to fin! com(anyIs W0<< of 1#.31C. =ast, to com(lete our ,aluation mo!el 1e ha! to fin! our target stoc- (rice. +n or!er to fin! our (rice 1e use! the D<F o!el. For the D<F o!el 1e use free cash flo1s to fin! the stoc- (rice of Rs ahin!ra, an! their res(ecti,e $1*.22. We also use! the relati,e >D8 ratio analysis as 1ell as >8A ratio .'o use the relati,e >D8 analysisH 1e foun! com(arable com(anies to (rice to earning ratios.

9#

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA F0n-nc0-1 per,or/-nce H-1, 2e-r12 re.61t. 'he com(any manage! to (ost a !ouble !igit gro1th in its both to( line an! the bottom line for the si7 months (erio! en!ing 30th Se(tember !uring the FG0$. 'he sales of the com(any gre1 by a ho((ing 3BC to Rs. 2,B**.$@ crore !uring the half"year (erio! in FG0# as against corres(on!ing (erio! of the last yearIs figure of Rs. 21#2.22 crore 1hich can be attribute! to the robust !eman! in the mar-et !ue to the increase! economic acti,ity. 'he com(anyIs o(erating (rofit mo,e! u( by 11.9BC to Rs 3#@.0B crore !uring the (erio!, as against corres(on!ing (erio! of last yearIs figure of Rs 1BB.2#crore.'he com(any ma!e a major change in the o(erating margin !ue to the follo1ing reasons Strong fi7e! an! ,ariable <ost re!uctions 3$@ b(s re!uction in 8m(loyee cost D re,enues, Value engineering, Strategic Sourcing, Ven!or meets4, >rice +ncreases an! +ncrease! >ro!ucti,ity. But the bottom line of the com(any rose by B9C to Rs.#B11crore along 1ith the net (rofit margin 1hich mo,e! u( from last yearIs 9.#2C to #.#$C. RECOMMENDATION OF THE STOC" ahin!ra ; com(any of the ser,ices. ; ahin!ra =t! 3 ; 4 is a homegro1n auto major an! the flagshi(

ahin!ra grou(. 'he grou( has ,arie! business interests ranging from contributes nearly *0C of the grou(:s total turno,er of Rs9, 200 crore.

automobiles, farm e/ui(ment, telecom, infrastructure !e,elo(ment to tra!e an! financial 'his front"runner of the grou( is into manufacture an! mar-eting of utility ,ehicles 3EVs4, light commercial ,ehicles 3=<Vs4 an! farm e/ui(ment ie tractors. For the nine"month (erio! en!e! December 2003, the EV an! the =<V segment contribute! *3C of the total re,enue 1hile the farm e/ui(ment segments a!!e! the balance 23C. 'he automoti,e !i,ision manufactures an! sells a 1i!e range of EVs 3<omman!er, 0rma!a, <lassic, Voyager4, (assenger ,ehicles 3Scor(io, Bolero4 an! =<Vs 3the <ab-ing ; F) series of loa! carriers an! minibuses4, an! <ham(ion, a 3"1heeler !iesel ,ehicle. Scor(io, a s(orts utility ,ehicle launche! by the com(any has been a huge success in the s(orts utility ,ehicles segment.

9$

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA At t4e c6rrent /-r?et pr0ce o, R.*IDL t4e .toc? tr-7e. -t ((.I; FY&''EE -n7 ('.'; FY&''GE e-rn0n3.. !e /-0nt-0n o6r 562 reco//en7-t0on on t4e .toc? =0t4 pr0ce t-r3et o, R. E(I.

99

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FINDIN#S
Vo16/e. .et to 3ro=: <om(any e7(ect a 1B.10C <0AR in ,olumes o,er the (erio! FG200#"FG2009, as lo1er !uties an! lo1 interest rates on loans ma-e cars affor!able to more (eo(le. 0s such, com(anies those are able to intro!uce cost"com(etiti,e mo!els 1ithout com(romising on contem(orary features 1ill attract buyers an! be the biggest beneficiaries. ahin!ra ; ahin!ra 3 ; 4 e7(ect this stoc- to yiel! returns of aroun! 2$C o,er the ne7t 12 months. C-r 7en.0t2 0n In70- 1o=e.t -cro.. t4e =or17: <ar !ensity ie., car o1nershi( (er 1000 (eo(le is three in +n!ia. 8,en e7clu!ing the relati,ely large mass of househol!s 1hose incomes are 1ell belo1 the threshol! limit an! therefore cannot affor! (assenger ,ehicles, the country:s (enetration 1oul! measure at 2* (er thousan! househol!s, the lo1est in the 1orl!. 5ence, there is huge hea!room a,ailable for gro1th. With rising (er ca(ita income an! lo1 interest rates ma-ing cars more affor!able, 1e e7(ect +n!ia:s car (enetration to nearly !ouble o,er the ne7t three years. Further, the 1i!ening reach of the car manufacturer through the !istribution net1or- 1oul! (ro,i!e a!!e! filli( to the gro1th. A6to/o501e pr0ce. -re ,-110n3 on re76ce7 e;c0.e 76t0e.: 'he re!uction in basic e7cise !uty from 32C to 2#C, as (art of the Enion Bu!get 200$, has alrea!y le! to a 2@C surge in !omestic ,ehicle ,olumes .'he Rel-ar <ommittee recommen!ations, 1hich ha,e been acce(te! by the go,ernment, (ro(ose a further cut to 19C o,er the ne7t t1o years ean1hile, the cut in the (ea- customs !uty on com(onents an! the abolition of the #C s(ecial a!!itional !uty 1ill re!uce costs for manufacturers, enabling them to cut (rices further. 'his 1oul! also boost !eman! gro1th. So,ter 0ntere.t r-te.:

9*

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA 'he !eclining interest regime has been a (arty time not only for ban-s but also for automa-ers. +nterest rates are at their historical lo1 le,els at (resent. 0,ailability of chea( loans is the biggest !eman! !ri,er. We e7(ect a rise in the number of loan" finance! (urchases, ai!e! by lo1 interest rates an! e7(an!ing reach of len!ing com(anies. 'he interest rates ha,e come !o1n from 1$"1*C in 1BB@"BB to aroun! 10C this year. +t is not only affor!ability but also the a,ailability of chea( finance that 1ill (ro,i!e a further filli( to !eman! gro1th. 'he reach of car financing ban-s is set gro1 three fol! o,er ne7t t1o years. 0lmost all (ri,ate ban-s are in an e7(ansion mo!e in their retail loans segment. !e e;pect Ut010t2 Ve40c1e. to e.t-510.4 - <0-51e -1tern-t0<e to c-r.: Aoing for1ar!, 1e belie,e that tren!s 1ill be !ifferent"",olume gro1th of EVs 1oul! match that of (assenger cars. 'he number of com(etiti,ely (rice! mo!els is on the rise""ta-e for instance ; :s Scor(io, Aeneral otors:s 'a,era 3un!er the <he,rolet bran!4 an! a ne1 ,ehicle from 'ata otors, e7(ecte! to be launche! in 200$.Aro1th 1ill

accelerate by the increasing recognition of these ,ehicles: su(erior ri!e comfort an! luggage s(ace an! therefore their (ro(osition as a cost"com(etiti,e alternati,e to mi!" si?e! cars. Oper-t0n3 /-r30n to 0/pro<e: >o(ularity of its ,ehicles 1oul! allo1 ; to hi-e (rices in case of rise in ra1 ; recently raise! (rices material (rices, thus (rotecting its o(erating (rofit margins. =ast year:s #0C rise in steel (rices 1oul! necessitate a 3.$"#C rise in (rices of ,ehicles. of its EVs by 1.$"2C. 'he com(any also benefits from its cost economics. We e7(ect its o(erating margins to im(ro,e by #.@0C by FG2009. 'he major contributors to this hi-e 1oul! be sa,ings in em(loyee costs 3to the tune of 3C4 an! other e7(enses 3to the tune of 2.$0C4. 5o1e,er, rising commo!ity (rices 1ill act as a !rag on o(erating margins, (ulling it !o1n by 0.*0C. F-r/ e@60p/ent .e3/ent no 1on3er - 7r-3:

9@

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA 'he farm e/ui(ment segment, 1hich mainly inclu!es tractors, is no longer a !rag on the to(line of the com(any. 6,er the last t1o years, the tractor in!ustry has sho1n negati,e gro1th of 1*C. +n the first half of FG200$, the in!ustry sho1e! a !ecline of BC. 5o1e,er, the fortunes of the !i,ision ha,e starte! turning for the better. +n S3FG200$, the tractor in!ustry gre1 by 1@C on the bac- of a strong (erformance of the monsoon last year. We thin- that the tractor segment 1ill acti,ely contribute to the re,enues. 'he com(any has its (resence in all the 5> segments from 2$ 5> to #$ 5> an! abo,e, 1ith more than 20C share in all segments. Ret6rn r-t0o. to 0/pro<e% ; has alrea!y !one consi!erable in,estments on (ro!uct !e,elo(ment an! ca(acity e7(ansion o,er the (ast three years. We e7(ect Ro<8 to im(ro,e from @.@C in FG2003 to 2#.3C in FG2009. Declining ca(ital e7(en!iture 1oul! hel( the com(any to increase its free cash flo1s. 'he com(any is e7(ecte! to retire almost $0C of the !ebt by FG2009. 'his 1ill re!uce outgo on interest costs, 1hich 1ill be reflecte! in the net (rofit. 'he (rofit 1ill almost !ouble to *.91C in FG2009 from 3.@@C as of no1. Mon.oon: Belo1 normal monsoons throughout the country remains a cause for concern for tractor manufacturers inclu!ing 3BC to #*,@0# units. While monsoons remain a 1il! car! for the com(any, the increase! rural an! agricultural focus of the ne1 E>0 go,ernment augurs 1ell. 'he targete! 30C increase in farm cre!it in FG200$ by the go,ernment is alrea!y sho1ing signs of assisting !eman! (ush. ; . +n FG200$, tractor ,olumes ha,e increase! by

9B

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

SU##ESTIONS
+ncreasing steel (rice an! other in(uts are the major concerns for the com(any from its margins (oint of ,ie1. So com(any shoul! ha,e chec- on the steel (rices. +ncrease in the inflation rates. 0s the com(any is acti,e in the o,erseas mar-ets, the ru(ee a((reciation against the foreign currencies, es(ecially !ollar 1oul! a!,ersely affect the to(line of the com(any. +ncrease in the fuel (rices on account of rising global cru!e oil (rices 1oul! affect the !omestic !eman! es(ecially for <Vs. Various ne1 (ro!ucts launches ha,e hel(e! retain customer focus on the ne1 auto mar-et, so the com(any shoul! focus on this (articular as(ect. Discounts, s(ecial e!itions an! festi,e base! offers shoul! be a!o(te! to boost the sales of the com(any. Dieseli?ation is going to be a future tren! in the +n!ian automobile mar-et 1ith rising (etrol (rices an! the significant !ifference bet1een (etrol an! !iesel (rices. 0s most of the com(any (ro!ucts are !iesel (ro!ucts, the com(any shoul! try to s(eciali?e in that (articular segment. 0nother tren! that might be seen in the near future is rise in the utility ,ehicle sales. With infrastructure facilities increasing more (eo(le (refer the EVs for inter city tra,el. So com(any shoul! try to launch ,ehicles such as Scor(io an! many such (ro!ucts.

*0

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

CONCLUSION Fun!amental analysis can be ,aluable, but it shoul! be a((roache! 1ith caution. +f you are rea!ing research 1ritten by a sell"si!e analyst, it is im(ortant to be familiar 1ith the analyst behin! the re(ort. We all ha,e (ersonal biases an! e,ery analyst has some sort of bias. 'here is nothing 1rong 1ith this an! the research can still be of great ,alue. 'he (roblem in ,aluation is not that there are not enough mo!els to ,alue an assetH it is that there are too many. <hoosing the right mo!el to use in ,aluation is as critical to arri,ing at a reasonable ,alue as un!erstan!ing ho1 to use the mo!el. 0nalysts use a 1i!e ,ariety of mo!els from sim(le to the so(histicate!. 'hese mo!els often ma-e !ifferent assum(tions about (ricing, but they !o share some common characteristics so in the stu!y 1e trie! to use (rice"earning multi(les an! !iscounte! cash flo1 mo!els of ,aluation. +n the automoti,e segment, ; has a strong (resence in high"gro1th segments bac-e! by (ic-"u(s 3 a77 range4, Bolero an! Scor(io mo!els, three"1heelers 3<ham(ion4, an! =<Vs 3loa! carrying as 1ell as (assenger =<Vs4. 'he current go,ernment:s focus on agricultural gro1th 3hel(ing ,olume gro1th in tractors an! EVs4 an! continue! focus on infrastructure !e,elo(ment 3structural gro1th !ri,er for =<Vs, three"1heelers an! EVs4 are the main !eman! !ri,ers for costs 1ill !ri,e a 3#C <0AR in >0' o,er the (erio! ; :s (ro!uct (ortfolio. 5igh o(erating le,erage in tractors, cost re!uction, (ro!ucti,ity gains an! re!uce! interest

*1

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

0510o3r-p42

*2

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