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Mahindra & Mahindra Automobile

INITIATING COVERAGE

BUY

Shareholding Pattern as on Dec 2014

Particulars Dec'14 Sep'14 Jun'14 Mar'14

Promoters 25.7% 25.8% 25.3% 25.3%

FIIs 38.6% 40.2% 39.2% 36.9%

DIIs 17.7% 16.4% 15.5% 15.9%

Non Inst. 12.6% 12.3% 14.9% 16.9%

Others 5.4% 5.3% 5.1% 5.0%

Relative Capital Market Strength

Mahindra & Mahindra (M&M) is one of leading companies in Indian automobile industry. Present in India since 1947, M&M is the flagship company of the Mahindra Group and is mainly involved in the automobile manufacturing. M&M is the market leader in utility vehicles (UV) and tractors, with market share of over 41% and 40% respectively.

Improving Demand Scenario of Automobile Industry

The demand scenario of Automobile Industry is reviving after witnessing slowdown over the past two fiscals driven by reviving economic scenario. Inflation remaining below RBI’s target over the past couple of months has strengthen the case for interest rate cut, while the improvement in industrial and infrastructure activity is also gaining momentum on the back of key initiatives by the new government . Overall, consumers’ sentiments have improved in country helping to augment the domestic demand. During April-February FY15, industry volume growth increase by around 8% as compared to 2-4% growth in the previous two fiscal. We expect a strong recovery in vehicles demand driven by thrust of government given for infrastructure development, easing interest rate in economy and increase in income levels and lifestyle aspirations.

New Product Launches to aid Market Share Improvement in UV Segment

M&M plans to launch three new model launches (two compact UVs + one small CV) – one each in 1Q/2Q/3Q of FY16. Besides, the company will also launch three refreshes and three new variants of existing products by 3QFY16. Compact sport utility vehicles (SUVs), which will be launched with both petrol and diesel engines variants, will help to claw back some of the lost market share (37.2% in 11mFY15 vs. 47.7% in FY13).

Tractor Demand likely to revive in FY16E, FY17E

Tractor demand has been remained sluggish so far this fiscal as weak prices (MSPs) and low crop yields has significantly eroded the profitability of farming households. Though H1FY16 is expected to remain under pressure due to lower farm output prices and unseasonal rains, H2FY16 is expected to witness growth in tractor volume led by likelihood of normal monsoon in FY16, benign liquidity and interest rates, and increase in tractor usage for haulage purposes. M&M also expects that long-term CAGR of tractor in India remains 7-8% despite the slowdown witnessed in FY15. Tractor demand continues to grow at this rate until FY23 when penetration saturates. Afterward, tractor demand would be driven by only replacement sales in India.

Valuation

To value M&M stock, we conducted fundamental analysis using the Economy-Industry-Company (E-I-C) framework and used SOTP Valuation method. Core business is valued at 9.65x FY17E EV/EBIDTA stands at Rs.963 and subsidiaries at a 25% discount to CMP at Rs.456. On the basis of SOTP Valuation, we arrive at Potential Price of Rs.1419 for a period of 10-12 months. With the double digit potential upside at 12.8%, we have a ‘BUY’ recommendation on the stock.

Satish Kumar Sharma | Desk Phone: 022 - 6707 9858 | [email protected]

1 © CHOICE INSTITUTIONAL RESEARCH

April 13, 2015

Key Financials (Standalone) Rs. Crore

Particulars FY13 FY14 FY15E FY16E FY17E

Net Sales 40441 40509 38084 43099 49396 Growth 27.0% 0.2% -6.0% 13.2% 14.6% EBIDTA 4694 4721 4570 5087 5962 EBIDTA Margin 11.6% 11.7% 12.0% 11.8% 12.1% PAT 3353 3758 3299 3609 4341 NPM 8.3% 9.3% 8.7% 8.4% 8.8% EPS 56.8 63.7 55.9 61.1 73.5 ROE 22.9% 22.4% 17.2% 16.5% 17.2% ROCE 21.0% 17.6% 15.0% 14.8% 15.6% Net Worth 14659 16791 19216 21899 25178 BVPS 248 284 326 371 427

Rating Matrix

CMP Rs.1258

Rating Buy

Potential Price Rs.1419

Target Period 10-12 Months

Upside Potential 12.8%

52 week H/L Rs.1421/964

Face value Rs.5

Category Large Cap

Sector Automobile

0.000.200.400.600.801.001.201.40

Sensex M&M


INITIATING COVERAGE

BUY

Improving Indian Economic Growth Scenario

After recording an average growth rate of 8% during FY08-FY12, Indian economic growth had slowed down to below 5% (with old 2004-05 base year) during the past two financial years. Prevailing high interest rate, stubborn inflation, low investments and slow execution of infrastructure projects were the leading factors, impacted country’s economy growth. However, Indian economy has shown signs of nascent recovery and grew by 5.5% during the first half (April-September) of FY15 as compared to 4.9% in the same period in FY14. Besides, key macro-economic indicators such as inflation, industrial production, CAD and infrastructure activity are also reviving, putting positive influence on economic growth. Industrial production during April-December FY15 grew by 2.1% as against 0.1% in the April-December FY14, indicating that the economy is far better position now from previous fiscal. Given the weak outlook for both oil and industrial commodities prices through 2015, the country's macroeconomic indicators are likely to strengthen further in coming months. Retail inflation at around 5% over the past few months has come at well below the Reserve Bank of India’s (RBI) medium term target of 6.0% by January 2016, strengthening the case for interest rate cut. Furthermore, improved consumers sentiments on the back of renewed policy thrust by new government, declining interest rate and a pickup in consumer demand are likely to provide impetus to economic growth in coming future. Indian economic growth is likely to improve to 5.5% in FY15 and further enhanced to 6-7% in FY16 and FY17. Though, India has become fastest growing economy in the world on the basis of new 2011-12 base year for GDP calculation. With the gradually growing domestic economy, per capita income of people in India has been growing at a pace of CAGR of 10% over the last eight years and is expected to grow at the same pace annually over the next ten years.



April 13, 2015

Peer Group Comparison ( TTM Avg. Share Price, Last reported Result' FY14 ) M&M Maruti Suzuki Force Motors Escorts

Market Cap. ( Rs Crore) 72,902.1 86,178.7 1,162.5 1,574.4

Net Worth 16,791.2 20,978.0 1,227.7 1,831.4 P/E (Trailing) * 19.0 39.2 22.8 6.4 P/BV 4.3 4.1 0.9 0.9 P/Sales 1.8 2.0 0.6 0.3 EBIDTA Margin 11.7% 13.5% 7.7% 7.4% EPS (Rs.) 63.7 92.1 59.0 20.5 EV/EBIDTA 15.91 14.84 6.31 4.28 Return on Net Worth 22.4% 13.3% 6.3% 13.4% Face Value (Rs.) 5 5 10 10

Indian GDP Growth

8.6% 8.9%

6.7%

4.5% 4.7% 5.5%

6.5% 7.0% 5.1%

6.9% 7.4% 8.0% 8.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

2004-05 Base Year 2011-12 Base Year


INITIATING COVERAGE

BUY

Revival in Economic Growth to provide Impetus to Automobile Sector

Automobile industry is highly correlated to economic scenario as vehicles demand is largely depended upon people disposable income. Industry revenue grows at 1.5-2.0x India’s GDP. India is currently the seventh-largest automobiles producer in the world with an average annual production of 17.5 million vehicles. Indian automobile industry is segregated into various segments include two wheelers, three wheelers, passenger vehicles and commercial vehicles. Two wheelers is the major segment of the industry accounts for around 77% of the total automobile production in India, while passenger vehicle segment stands at 2nd with 15% share. The automobile industry accounts for 22% of the country's manufacturing Gross Domestic Product (GDP) and is one of the biggest job creators sector, employs about 19 million people both directly and indirectly.

Over the past two fiscals, domestic automobile demand remained sluggish with the growth declining to around 2-4% from double digit growth recorded in past few fiscal. This gloomy performance was due to the cascading effect of low Indian economic growth, weak consumers’ sentiments, high inflation, increase in cost of vehicle ownership owing to the high vehicle financing rates and elevated fuel prices. Meanwhile, the present demand scenario in India has improved significantly in current fiscal driven by reviving economic condition. The growth in total vehicle sales has increased by 8% to 181 lakh units (vehicles) during the April-February FY15 from 167 lakh recorded in the same year ago period. Passenger vehicles sales number also increased to 23 lakh during April-February FY15, a growth of 4% over the corresponding period of previous fiscal.

With the increasing demand on back of rising income, favorable demographics include expanding middle class and young population base in addition to a large pool of skilled manpower and growing technology will propel India to be among the world's top five auto-producers by 2015. Indian automobile industry is described as the next sun rise sector of Indian economy on the back of focused growth drivers and appropriate planning for the sector. Government latest announcement in Budget 2015-16 like Rs.70,000 crore investment in infrastructure including construction of one lakh kilometres of new road will provide boost to automobile sector growth. According to the Society of Indian Automobile Manufacturers (SIAM), the potential size of the Indian vehicle market (Passenger Vehicles + Commercial Vehicles) is likely to grow by a growth rate of 10% per year to around 4.5 million vehicles by FY18 from current size 3.13 million mainly driven by the increase in income levels and lifestyle aspirations.



April 13, 2015

Industry Growth Trend

26.4% 25.9%

12.1%

2.5% 3.5%

7.9%

0.0%

10.0%

20.0%

30.0%

020406080

100120140160180200

2009-10 2010-11 2011-12 2012-13 2013-14 Apr-Feb 2014-15 (YoY)

Sale

s in

Lak

h U

nits

Total Vehicles Passenger Vehicles Growth in Auto Sales


INITIATING COVERAGE

BUY

Falling Crude Oil Prices, Interest Rate cut bring Cheer to Automobile Industry

Crude oil prices have declined significantly in past six months and are hovering at around $55/barrel after touching six -year low level at about $45/barrel in January due to ample global supplies and weak demand. Following the reduction in global oil prices, petrol price had been cut by Rs 17.11 per litre in ten reductions since August and diesel by Rs 12.96 a litre since its deregulation in October 2014. This trend was inverted when rates were raised in February due to marginal reversal in global crude oil prices but followed with further decline in fuel prices in April. According to Global research firms like Barclays and Goldman Sachs, global crude oil prices are likely to remain below $60/barrel for this year amid low global demand. Therefore, domestic industry is likely to witness a major margin boost in coming future as low diesel and petrol will increase the vehicles demand. Furthermore, industry players are also likely to take the benefit from easing of interest rate as more than 80% of the new cars sold in India are financed. In order to control the inflation, the RBI had maintained the key repo rate at 8% over the past 12 months. As the inflation has come within the central bank target range, it has started easing interest rate. It is expected that the RBI will further cut repo rate by upto 100 basis points in 2015, which could be proved as a big boost for Indian automobile industry.



April 13, 2015

Key Financial Forecasts and Projections (M&M)

• We expect net sales of the company to grow at 13.2% in FY16E and 14.6% in FY17E after declining 6% in FY15E. The improvement in sales volume will be led by reviving growth as well as the company new vehicles launches.

• EBIDTA margin is expected to improve to around 12% in next three forecasted years, given the company ongoing initiatives to control the operating expenditures as well as the benign commodity prices.

• Net profit is expected to decline 12% in FY15E. However, we expect a strong recovery in net profit growth going forward. Net profit is expected to increase by 9.4% in FY16E and 20% in the FY17E as we believe that growth going forward is likely to be driven by reviving economic growth as well as ongoing measures of M&M for cost control.

102 100 103 105 98 96 91

81

66

54 49

57 55

0

20

40

60

80

100

120

7.20%

7.30%

7.40%

7.50%

7.60%

7.70%

7.80%

7.90%

8.00%

8.10%

Mar'14 Apr'14 May'14 Jun'14 Jul'14 Aug'14 Sep'14 Oct'14 Nov'14 Dec'14 Jan'15 Feb'15 Mar'15

Interest Rate (%) Brent Crude Oil Prices (US$/ barrel)


INITIATING COVERAGE

BUY

Company Analysis

Mahindra & Mahindra (M&M) is one of leading companies in Indian automobile industry. Present in India since 1947, M&M is the flagship company of the Mahindra Group, a multinational conglomerate based in Mumbai, India. The company is mainly involved in the automobile manufacturing and is the market leader in utility vehicles (UV) and tractors, with market share of over 41% and 40% respectively. Despite making revolutionary UVs like the Scorpio and Bolero, M&M offers cars, electric vehicles, pickups, and commercial vehicles that are fuel-efficient, tough, reliable and environmentally friendly. Mahindra has strong distribution network in domestic market, reaching out to 477 districts in India out of a total of 657 and provide vehicles services even in the remote area of the country. Besides, the company has significant presence in overseas markets include Australia, Europe, Latin America, Malaysia, South Korea, and South Africa. The acquisition of the Ssangyong in 2011, a major South Korean utility manufacturer focused on SUV segment in global markets, has brought presence in more than 90 countries into the Mahindra fold.

Products and Services

M&M operates in the various segments of the automotive industry ranging from commercial vehicles, tractors to passenger vehicles segments. Among four wheelers segment, the company manufactures commercial vehicles and passenger vehicles. Commercial vehicles (CV) are further segregated into heavy commercial vehicles and light to medium commercial vehicles while passenger vehicles include cars and utility vehicles. In the domestic market, M&M has maintained leadership position in utility vehicles and tractors segments for the third consecutive year. With the top brands like Scorpio and Bolero, Mahindra continued to strengthen its iconic status in utility vehicles segment. Bolero has retained the title of India’s largest selling UV for the 8th consecutive year and also has crossed I lakh units sales in 2014. Further, Bolero is also the 5th highest selling passenger vehicle in India and the only UV to feature on the list of top 10 selling passenger vehicles in India. The recently launched Cheetah inspired XUV500 continued to capture the attention of customers. The company also holds leadership position in Indian tractor market with a market share of around 40%. A key contributor to significant growth in tractor segment is the launch of multiple tractor variants including Arjun and Mahindra Brands to meet customer requirements across a variety of applications. Apart from four wheelers, M&M also manufactures three wheelers and auto parts/ agricultures implements



April 13, 2015


INITIATING COVERAGE

BUY

Business Model Analysis

Core Capabilities

M&M is known worldwide for the quality of its products and services. Customers are at the core of Mahindra’s business processes and new product development. The company manufactures vehicles which can deliver greater earning potential for customers in terms of fuel efficiency and durability. M&M’s emphasis to produce quality, innovate and standardize products, operational and internal efficiencies and also aggressive advertisement campaigns are the core capabilities of the firm, driving the volume’s growth as well as improving margins. In order to stay ahead of the general marketplace, the company adopts the strategy to constantly introducing new products to suit well the requirements of a globally competitive market.

Sustained focus on R&D to grow in Competitive Market

Further, M&M has sustained focus on Research and Development (R&D) and innovation to bring new products with improved performance features and products for special applications. M&M has set up Automotive Division, Mahindra Technical Academy (MTA) and Mahindra Research Valley (MRV) in Chennai India, the groups are continued on developing new products and technologies to meet the growing/changing customer needs as well as regulatory requirements of emission and safety. Some of the key thrust areas in this direction are reducing cost pressure through Value Analysis Value Engineering (VAVE) approach, weight reduction by using alternate materials, designing modularity to take care of variants, developing capabilities for increasing reliability in automotive electronics and adaptation of safety technologies and technologies for achieving emission targets. The advanced Noise, vibration, and harshness (NVH) labs and the primary safety assessment labs have also been operationalized in these divisions, adding value to the firms. The significant efforts by M&M towards technology absorption, adaptation and innovation has been extending major benefits to the company like launch of new and innovative products, operating efficiency improvement through rationalization and indigenization of raw materials. Over the past two years, Automotive Division has helped M&M to launch a number of variants with superior technology like new BMT Plus, Bolero Pick-up Single Cab Refresh, Verito Vibe, Xylo D2 Maxx and Tractors with electronic engine which provides much higher fuel consumption with enhanced NVH and comfort for the farmers. The company is also focusing on developing efficient aggregates with less frictional losses to implement the planned mission ‘First Time Right Products’ and ‘Every Time Right Products’. This approach will make the design and development robust and reliable and will drive the volume growth. Going forward the company will continue its efforts on developing new products and technologies in order to meet the demands, competitive pressures and regulatory requirements.

Diversified Presence with Well Distributed Network across India

M&M has well distributed network sales mix across all regions of India. The company has expanded its network to 477 districts in the country out of a total of 657. As the services centers plays important role in the automotive industry, M&M is expanding its services centers networks. Vehicles from the Mahindra can now be serviced even in the remotest areas of India like Kargil, Port Blair and Reckong Peo in Himachal Pradesh. In order to enhance reach into areas where showrooms would not be viable, the company has started a 'Gramveer' program, where local people are appointed as subdealers. Further, the company has been offering its existing dealers the option of setting up sub-dealerships in new areas. The area where the company feels the dealer does not have the appropriate reach, it has been carving out these regions and assigning new dealers. All these initiative are likely to boost the company revenue.

On supplier front, Mahindra and Mahindra has been working closely with its key suppliers to minimize any supply constraints through capacity planning and longer term contracts. As the company plants spread across the country, the selection of suppliers depend upon the factors such as total cost, capability, performance, on-time delivery, compliance on environment, health & safety and keenness to participate in sustainable supply chain.



April 13, 2015


INITIATING COVERAGE

BUY

Aggressive Capacity Expansion to lead to Volume Growth for Company

The lifecycles of automotive products is reducing very fast, on the other hand, consumers have become more demanding and their needs are also changed rapidly. For driving growth in business and to come among the top 10 automotive brands in the world, the company is investing in an aggressive new product development programme. Over the last four years, Company has taken many measures to become a globally recognized automotive manufacturer. These initiatives are acquisition of Ssangyong Motor Company, majority stake in Mahindra Reva and setting up of Mahindra Research Valley (MRV) and Mahindra Vehicle Manufacturers Ltd. (MVML) plant, a largest manufacturing facility of M&M producing over 100,000 vehicles in FY14. The acquisition of a majority stake in Ssangyong Motor Company was aimed at leveraging synergy benefits in the areas of product development, expanding range of SUVs and expanding company’s global footprints. The work is underway between both companies for joint development of a new vehicle platform and a new series of engine family with both diesel and gasoline fuel options. As the demand for vehicles powered by CNG and LPG is increasing in the market, the company is well prepared to meet this demand and has proactively invested in the development of vehicles that run on CNG, Biodiesel and Hydrogen. Mahindra Reva has already launched the Mahindra e2o in India, Bhutan and Nepal and is currently working on developing electric variants for domestic as well as exports markets. New electric brand Mahindra Halo is expected to launch soon in India and Europe. The company also planned to invest around Rs. 7500 crore as a capital expenditure over the next three years.

Business Analysis

M&M collects around 65% revenue from automotive division (PV+CV) and around 35% of farm equipment segment (sales of tractors). In spite of the strong presence in domestic market, the company is continued to strengthen its global footprint with a focus on the key markets of South Africa, Chile, USA and China amongst other regions. Currently, around 10% of the revenue collected from the overseas markets.



April 13, 2015

Four Wheelers

Commercial Vehicles

HCV

LCV/MCV

Passenger Vehicles

Tractors Three Wheelers Auto/Spares Parts

Four Wheelers Parts

Tractor/Agri Implements.

Mahindra Products

Cars

Utility Vehicles


INITIATING COVERAGE

BUY

Automotive Segment

In the automotive segment, the company manufactures four wheelers and three wheelers. Four wheelers segment is further divided into commercial vehicles and passenger vehicles segment. Last two fiscals remained worst year for the company as M&M sales declined significantly. The sales growth of M&M in the domestic market has declined by 9% to 434652 vehicles (units) in FY15 and 8% to 477,517 in FY14 as compared to 519013 in FY13. Economic slowdown coupled with the high interest rate and inflation had impacted the vehicle demand in the domestic market. Exports too have remained sluggish with a marginal growth of 2% to 30196 vehicles in FY15 due the prevailing economic downturn in global countries. Overall, automotive segment of the company witnessed a contraction of 8.3% in sales growth to 464848 vehicles as compared to 507,176 vehicles sold in the previous year.



April 13, 2015

15.5%

41.4%

22.0%

-18.1%

-17.4%

15.0% 16.0%

-30.0%-20.0%-10.0%0.0%10.0%20.0%30.0%40.0%50.0%

0

50000

100000

150000

200000

250000

300000

350000

FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Commercial Vehicles Passenger Vehicles Gr. In PV

PV, CV Volume and Growth Trend

The utility vehicles segment, which the Mahindra have dominant position in the Indian industry is continued to remain under pressure and market share of the segment is falling drastically. UV market share of the company has declined to 37.4% in Q3FY15 against 50% share in Q1FY13. Low demand in the market, the absence of new models and stiff completion from Compact SUV’s are the leading factors impacting M&M UVs sales. Furthermore, diesel petrol price parity as prices between these fuels is narrowing also shift the consumer preference towards the petrol prices models. On the other hand, most of the M&M UVs models are diesel based.

M&M-UV Market Share Trend

49.8% 45.5%

47.9% 47.8% 46.0% 39.6% 38.3%

43.3% 40.5%

33.2% 37.4%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15


INITIATING COVERAGE

BUY

Expects Strong Recovery in UVs sales driven by Planned New Compact SUVs Launches

However, we believe that that the market share of the company is likely to improve gradually in coming future as the company has planned to launch two compact sport utility vehicles (SUVs) in FY16 with both petrol and diesel engines variants. Meanwhile, M&M cleared that new products would have a higher break-even point due to higher average development cost of around Rs. 10 billion for each of the newer models and likely lower prices of compact UVs than M&M’s current UVs products. Therefore, the break even volume of new models would be higher than 3,000 units/month for XUV500. The demand of existing leading brands of the company like Bolero, Scorpio and XUV500 has revived in last three month of previous year. The newly launched Scorpio model has clocked highest Q3 volume in three years and Bolero is also likely to cross 1 lakhs sales in 2015 for the third consecutive years. Overall, we believe that utility vehicle sale (in units) is likely to improve to around 15% in FY16 and FY17 as compared to expected contraction of around 12% in the FY15. Three wheelers segment is also expected to revive to around 5% growth in FY16E and FY17E. Finally, passenger vehicles volume is expected to grow at average annual growth of 15% to 280168 units in FY17E from 210,021 units recorded in FY15.

Contrary to the passenger vehicles, commercial vehicle segment of the company is doing well witnessing gradually expansion. In the previous fiscal, commercial vehicles segment grew by 10.2% to 167867 vehicles as compared to 152398 vehicles in FY14 even in the subdued market. The share of Mahindra Truck and Bus Division (MTB) is continued to rise in the domestic automotive market. M&M truck share has increased to around 2.7% in the FY15 as compared to 2.2% in the year ago period. Furthermore, in Budget 2015-16, custom duty on import of completely built unit of commercial vehicles increased to 20% from 10%. The government’s latest move will boost domestic CV segment revenue by making Indian brands more competitive. Given the likely improvement in country infrastructure on the back new government recently taken initiative as well as the recovery in domestic economy, CV segment is expected to grow at a CAGR of 12% during projected period.



April 13, 2015

Volume Break Up (in Units) Particulars FY13 FY14 FY15 FY16E FY17E Passenger Vehicles 310706 254344 210021 241524 280168 Utility Vehicles 263925 219421 192632 221527 256971 Commercial Vehicles 142797 152398 167867 188011 216213 3W Total 65496 62614 56764 59602 62582 Total Dom. Vehicles 519013 477517 434652 489137 558963 Exports 32456 29659 30196 30800 31724 Total Vehicles (Automotives) 551469 507176 464848 519937 590687 Tractors Sold (with Exports) 224844 268487 234023 245724 256782 Total Units Sold 776313 775663 698871 765661 847469


INITIATING COVERAGE

BUY

Farm Equipment Segment

Mahindra has leadership position in Indian tractor industry with a market share of around 40%. With the brand like Arjun and Swaraj tractors, M&M has been dominating the domestic tractor market from the last 31 years. The sale of tractors grew at a CAGR of 11% to 268487 units in FY14 from 175196 in FY10. M&M with a growth of 21.5% in FYI14 to 2,58,339 tractors also outperformed the domestic tractor industry which recorded a growth of 20.2% to 6,33,656 tractors. However, during the current fiscal the segment remained under pressure, given the poor performance of the Indian Agriculture sector. The agriculture sector output was contracted by 0.4% in Q3FY15 as compared to around 4% recorded in the same quarter of previous fiscal due to the below normal monsoon this year impacted kharif crops output. In line with the sector growth, M&M tractor sales also declined by 12.8% to 234023 units during FY15 as against 268487 units sales recorded in the previous fiscal, a largest annual decline over the decade.



April 13, 2015

Agriculture Sector Growth

2.7%

3.6% 3.8% 3.5%

2.0%

-0.4%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Q1FY14 Q2FY14 Q3FY14 Q1FY15 Q2FY15 Q3FY15

At constant (2011-12) prices

Tractor Volume to improve in FY16E, FY17E

The situation is not likely to improve soon as the unseasonable rain during March in country’s crucial crops producing region is likely to impact Rabi production as well as the farmers incomes. However, there is high probability that the monsoon in current will remain normal which will recover the demand going forward. Despite some short term disruptions, industry is of the view that tractor demand in domestic market continue to grow till 2023, afterwards it will start reducing. Tractors demand generates from rural India and distribution is the key to rural marketing. Over the few past years, M&M has formed a strong distribution network with 2,500 sales and service centers across the country including 1,000 dealerships which it attained through the acquisition of Punjab Tractors, which manufactures Swaraj tractors. Furthermore, M&M has new launched in coming years like tractor Dhurv by the end of 2016, one more new vehicle in 2017 and few more offering from Swaraj Division in next 12 months. On policy front, the Government has given more emphasis on rural economy and proposed Rs.25000 crore in Budget 2015-16 for rural development, which in turn will boost tractors demand. We expect that tractor units turnover will grew at an annual growth rate of 5% to 256782 units in FY17E.

M&M Tractor Market Share

41.4% 40.2%

41.4%

37.9%

41.4% 40.6%

41.9%

38.7%

42.2% 40.6%

39.6%

34.0%

36.0%

38.0%

40.0%

42.0%

44.0%

Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15


INITIATING COVERAGE

BUY

Sales Volume likely to witness Firm Recovery during FY16E, FY17E

In line with the industry trend, the revenue growth of M&M remained flat at 0.2% YoY to Rs. 40,508 crore in FY14 due to economic slowdown and persistent high interest rates in order to check rising inflation. Sales volume did not show any sign of revival even in this fiscal as sales of the company during 9MFY15 declined by 0.5% YoY to Rs. 28980 crore as against the double digit growth in the previous three fiscals. Though revenue is expect to remain 6% lower in FY15E at Rs. 38008 crore, we expects a strong recovery in sales volume going forward. Improving economic conditions coupled with the declining interest rate scenario and the company new launches in auto and farm segment is likely to provide impetus to the sales volume growth. Net sale is projected to grow at 13.2% and 14.6% on YoY basis in FY16E and FY17E. Net Realization per unit is expected to increase 4% during the projected period as against 0% in FY14% as high excise duty to increase vehicles prices.



April 13, 2015

Trend in business mix (Rs. Crore) Particulars FY13 FY14 FY15E FY16E FY17E Automotive 28405 26166 25182 29292 34609 Growth (YoY) 41.3% -7.9% -3.8% 16.3% 18.2% Farm Equipment 11990 14333 12868 13782 14762 Growth (YoY) 2.6% 19.5% -10.2% 7.1% 7.1% Total Revenue from Auto, Farm 40395 40499 38049 43074 49371

Expect Growth at CAGR of 7% in Net Sales during Projected Period

27.0%

0.2%

-6.0%

13.2% 14.6%

-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%25.0%30.0%

0

10000

20000

30000

40000

50000

FY13 FY14 FY15E FY16E FY17E

Rs. C

rore

Net Sales % Growth

Quarterly Sales Projection

02000400060008000

100001200014000

Rs. C

rore


INITIATING COVERAGE

BUY

Easing Raw Material Prices Improving Margins

Among total operating expenditure, raw material expenditure accounts for around 80% of the total operating expenditure. Raw material cost as a percentage of net sales declined to 73% in FY14 from 75% in the previous fiscal due to benign commodity prices. Furthermore, better mix and continued cost reduction initiatives undertaken by the Company also helped to check the cost. During 9MFY15, raw material cost declined by 3% YoY improving the EBIDTA margin of the company. Commodity prices are likely to remain soft in coming future, given the subdued global demand. Therefore, raw material cost is expected to increase at a CAGR of 7.4% during forecasted period as compared to a CAGR of 11% during FY12-FY14. Accordingly, EBIDTA margin of the company will improve to 12.1% in FY17E from 11.7% in FY14 as M&M continues with its rigorous cost restructuring exercises and efficiency improvements.



April 13, 2015

Cost Break-Up

M&M’s Net Profit to Improve during Forecasted Period

In spite of flat sales growth during FY14, net profit of M&M grew by 12% YoY to Rs. 3758.4 crore on the back of significant performance on cost control front. However, the profit declined marginally by 3% to 2770.6 during 9MFY15 as compared to 2861.5 in 9MFY15 mainly impacted by high advertisement, selling expenses amid subdued demand. With the recovery in economic situation, financial condition of the company is expected to improve going forward. Company’s PAT is expected to increase to Rs. 3609 crore in FY16E and Rs. 4340 crore in FY17E. Accordingly, Return on Equity (ROE) is likely to improve to 17.2% in FY17E.

83.0%

0.6%

6.0% 1.0%

5.6% 4.4%

Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Exp. Selling and Admin. Expen. Miscellaneous Expenses

EBIDTA Margin to Improve in Projected Period

11.6% 11.7%

12.0%

11.8%

12.1%

11.3%11.4%11.5%11.6%11.7%11.8%11.9%12.0%12.1%12.2%

0

5000

10000

15000

20000

25000

30000

35000

40000


Rs. C

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Raw Materials Cost EBITDA Margin %


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April 13, 2015

Low debt/equity to Fuel Expansion

M&M’s has strong balance sheet with minimal debt (D/E of 0.3:1). Thus any expansion plan will not put any stress to the balance sheet and in turn will further strengthen the company’s position in the domestic automobile industry. Though, the company follows a judicious financial policy and aims not to surpass an optimum financial gearing at any time. M&M maintains highest credit rating for both long and short-term debt (CRISIL-Long Term Banking facilities at “AA+/Stable”, ICRA- Long Term Rating at “AAA+ (stable)” and CARE- “AA+”) which in turn is helping firm to attract the best proposals from lending agencies at fine pricing levels to finance its future growth plans. At the same time, M&M continued to focus on handling cash efficiently to maintain adequate liquidity as the economy is facing tight liquidity conditions with interest rates remaining high mainly to contain inflationary pressures.

Portability Trend of M&M

8.3% 9.3%

8.7% 8.4% 8.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0.0500.0

1000.01500.02000.02500.03000.03500.04000.04500.05000.0


Rs. C

rore

Adj. PAT Net Profit Margin %ROE

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%



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April 13, 2015

Valuation

We believe that revival in Indian economic growth, favorable demographics include expanding middle class, improving infrastructure and rising income of people and lifestyle aspirations will propel the vehicles demand in the country. To value M&M stock, we conducted fundamental analysis using the Economy-Industry-Company (E-I-C) framework and used the Sum of the Parts (SOTP) valuation method. Core business is valued at 9.65x FY17E EV/EBIDTA stands at Rs.963 and subsidiaries at a 25% discount to CMP at Rs.456. On the basis of SOTP Valuation, we arrive at Potential Price of Rs.1419 for a period of 10-12 months. With the double digit potential upside, we have a ‘BUY’ recommendation on the stock.

Issues and Concerns

Economic Uncertainties: Automobile industry is highly correlated to the economic growth as rising disposable income strengthen the vehicle demand. Though, Indian economy growth has shown sign of rebounding with inflation declining to around 5%. However, interest rate in economy is still hovering double digit mark, gripped the sector’s growth. Likelihood of reversal in inflation and crude oil prices in coming future and high interest rate can impact the economy as well as the sector growth.

Losing Market Share in UV Segment: M&M hold leadership position in Utility Vehicles (UVs) segment and loosing share in this segment could be a big concern for the company. Although, the domestic UV segment has witnessed a slowdown in volume growth, M&M has underperformed the industry and lost market share due to the increase in competitive intensity. We expect M&M’s UV volumes to recover over FY16E-17E on the back of improving economic situation as well as the new launched of M&M going ahead. However, persistent slowdown in the segment or a loss of significant market share could have a negative impact on our revenue and earnings estimates.

Failure of New UV Model Launches: With the declining price difference between diesel and petrol prices, consumer preference is shifting towards compact UV petrol version. However, M&M is mainly having diesel version of UVs. With a view to capture lost market share, the company announced new compact UV model launches with both diesel and petrol version and accordingly we forecasts M&M to claw back its market share. A below-than-expected volume rate of its new launches will pose downside risk to growth prospect of the company.

Sluggish Agriculture Sector impacting Tractor Volumes: Tractor industry volume has declined considerably during FY15 mainly owing to the poor performance of the agriculture sector. Tractor sale of M&M declined by 12.8% YoY to 234023 units during FY15, a largest annual decline over the decade and was higher than the company anticipated. We forecasts that tractors volumes to normalize over FY16E-17E, subject to normal monsoon. Below normal monsoon with unseasonably rains like in February, March 2015 could damage crops production and rural cash flow and thus is a risk to our estimates.

SOTP Valuation Particulars Basis (CMP) Discount (%) M&M (%) Value/ share (Rs.) Listed Subsidiaries

Tech Mahindra 657 25% 47.4% 234

Mahindra Finance 262 25% 51.2% 101

Mahindra Holidays 260 25% 75.0% 28

Mahindra CIE 194 25% 20.2% 16

Mahindra Life 467 25% 51.0% 12

Ssangyong ( Expected Equity Value) Rs. 7500 Cr 25% 70.0% 66

Total subsidiaries’ value 456

M&M 9.65x FY17E EV/EBIDTA 920

Value for core business (M&M + MVML) 9.65x FY17E EV/EBIDTA 963

Potential Price 1419


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April 13, 2015

Particulars FY13 FY14 FY15E FY16E FY17E Net Sales 40441.2 40508.5 38084.5 43099.0 49396.3 % Growth 27.0% 0.2% -6.0% 13.2% 14.6% Total Revenue 41005.5 41226.5 38814.2 43913.6 50389.4 % Growth 26.8% 0.5% -5.9% 13.1% 14.7% Staff Costs 1866.5 2163.7 2037.7 2037.7 2225.1 % of Net Sales 4.6% 5.3% 5.4% 4.7% 4.5% Other Manufacturing/Operating costs 32563.5 32033.4 29887.1 34641.0 39709.9 % of Net Sales 80.5% 79.1% 78.5% 80.4% 80.4% Other Expenses 1317.1 1590.1 1590.1 1333.3 1499.4 % of Net Sales 3.3% 3.9% 4.2% 3.1% 3.0% Total Operating Expenditures 35747.0 35787.3 33515.0 38012.0 43434.3 % of Net Sales 88.4% 88.3% 88.0% 88.2% 87.9% EBITDA 4694.1 4721.2 4569.5 5087.1 5962.0 EBITDA Margin % 11.6% 11.7% 12.0% 11.8% 12.1% Growth % 25.3% 0.6% -3.2% 11.3% 17.2% Depreciation & Amortisation 710.8 863.3 860.6 984.5 1090.4 EBIT 3983.3 3857.9 3708.9 4102.6 4871.6 Financial Charges 191.2 259.2 274.6 289.6 299.6 Other Income 564.3 718.0 729.7 814.6 993.1 Exceptional Income / Expenses 90.6 52.8 0.0 0.0 0.0 PBT 4447.1 4369.4 4164.0 4627.5 5565.1 Pre-tax Margin % 11.0% 10.8% 10.9% 10.7% 11.3% Tax 1094.2 611.1 865.3 1018.1 1224.3

Effective Tax Rate % 24.6% 14.0% 20.8% 22.0% 22.0% Reported PAT 3352.8 3758.4 3298.8 3609.5 4340.8 Net Profit Margin % 8.3% 9.3% 8.7% 8.4% 8.8% Growth in Reported PAT % 16.5% 12.1% -12.2% 9.4% 20.3% Ex. ordinary Income 0.0 0.0 0.0 0.0 0.0 Adjusted PAT 3352.8 3758.4 3298.8 3609.5 4340.8 Shares In Issue 59.03 59.03 59.03 59.03 59.03 Adjusted EPS 56.8 63.7 55.9 61.1 73.5 Growth % 16.5% 12.1% -12.2% 9.4% 20.3% Dividend paid 798.2 862.3 874.0 926.3 1062.2 Dividend pay out ratio 23.8% 22.9% 26.5% 25.7% 24.5%

Net profit transferred to Reserves Acccount 2554.7 2896.1 2424.8 2683.2 3278.6 Adjusted PAT incl MVML 3634.0 3905.0 3417.9 3751.6 4546.1

Particulars FY13 FY14 FY15E FY16E FY17E Gross Asset 9005.78 10796.1 12258.1 13908.3 16080.4

Accumulated Depriciation 4047.92 4919.17 5779.79 6764.28 7854.68 Capital WIP 863.48 1228.44 1610.97 1784.3 2045.01 Net Fixed Asset 5821.34 7105.39 8089.23 8928.29 10270.7

Investments & Deposits 11833.5 11379.9 13572.9 16313.7 18144.2 Current Asset 10038.1 13077.1 12232.7 12511.4 14205.4 Cash 1781.41 2950.39 2102.19 2242.48 2767.62 Inventories 2419.77 2803.63 2932.51 3047.29 3461.42 Trade Debtors 2208.35 2509.84 2399.32 2565.69 3009.93

Loans and Advances 3628.53 4813.24 4798.65 4655.93 4966.39

Current Liabilities & Provisions 8688.36 9629.22 9186.87 10062.3 11450.6

Net Current Asset Exc. Cash -431.71 497.49 943.603 206.646 -12.808

Capital Deployed 19004.5 21933.1 24707.9 27691.1 31169.7

Debt and other Long-term Liabilities 4345.58 5141.93 5491.93 5791.93 5991.93

Total Non Current Liabilities 4345.58 5141.93 5491.93 5791.93 5991.93 Share Capital 295.16 295.16 295.16 295.16 295.16

Reserve and Surplus 14363.8 16496 18920.8 21604 24882.6

Total Stock Holder's Equity 14658.9 16791.2 19215.9 21899.1 25177.8

Capital Employed 19004.5 21933.1 24707.9 27691.1 31169.7 DIFF 0.0 0.0 0.0 0.0 0.0

Profit And Loss Statement (Rs. Crore)

Balance Sheet (Rs. Crore)


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April 13, 2015

Particulars FY13 FY14 FY15E FY16E FY17E Profit before tax 4447.1 4369.4 4164.0 4627.5 5565.1 Depreciation 475.8 871.3 860.6 984.5 1090.4 Interest Expense 191.2 259.2 274.6 289.6 299.6 Operating Profit Before WC Changes 5114.1 5499.9 5299.2 5901.6 6955.1 Changes In WC 181.6 -929.2 -446.1 737.0 219.5 Gross cash generated from Operations 5295.6 4570.7 4853.1 6638.6 7174.6 Direct taxes paid 1094.3 611.1 865.3 1018.1 1224.3 Cash Flow from Operations 4201.4 3959.6 3987.9 5620.5 5950.2 Cash Flow from Investing Activities Capital Expenditure (CAPEX) -1209.1 -2155.3 -1844.5 -1823.5 -2432.9 Investments -1536.1 453.6 -2193.0 -2740.8 -1830.5 Net Cash Used In Investing Activities -2745.2 -1701.7 -4037.5 -4564.4 -4263.3 Cash Flow from Financing Activities Change in Debt 126.6 796.4 350.0 300.0 200.0 Change in Equity 0.6 0.0 0.0 0.0 0.0 Dividends Paid -798.2 -862.3 -874.0 -926.3 -1062.1 Interest Paid -191.2 -259.2 -274.6 -289.6 -299.6 Others -1.1 -763.8 0.0 0.0 0.0 Net Cash used in Financing Activities -863.2 -1089.0 -798.6 -915.9 -1161.7 Net Increase in Cash and Cash Equivalents 593.0 1169.0 -848.2 140.3 525.2 Cash and cash equivalents At the beginning 1188.4 1781.4 2950.4 2102.2 2242.5 Net Increase in Cash and Cash Equivalents 593.0 1169.0 -848.2 140.3 525.2 Cash and cash equivalents At the end 1781.4 2950.4 2102.2 2242.5 2767.6 Cash balance as per balance sheet 1781.4 2950.4 2102.2 2242.5 2767.6 difference 0.0 0.0 0.0 0.0 0.0

Cash Flow Statement (Rs. Crore) Financial Ratios (Rs. Crore) Particulars FY13 FY14 FY15E FY16E FY17E

Profitability Ratios Return on Assets (ROA) 12.1% 11.9% 9.7% 9.6% 10.2% Return on Equity (ROE) 22.9% 22.4% 17.2% 16.5% 17.2% Return on Capital Employed (ROCE) 21.0% 17.6% 15.0% 14.8% 15.6% Dupont Analysis-ROE Decomposition PAT/PBT (Tax Efficiency) 0.8 0.9 0.8 0.8 0.8 PBT/EBIT (Interest Burden) 1.1 1.1 1.1 1.1 1.1 EBIT/Sales (OPM) 0.1 0.1 0.1 0.1 0.1 Sales/Total Assets (Asset Turnover) 1.5 1.3 1.1 1.1 1.2 TA/NW (Financial Leverage) 1.9 1.9 1.8 1.7 1.7 ROE 22.9 22.4 17.2 16.5 17.2 Liquidity Ratios Current Ratio 1.2 1.4 1.3 1.2 1.2 Acid Test Ratio 0.9 1.1 1.0 0.9 0.9 Debt-Equity Ratio 0.3 0.3 0.3 0.3 0.2 Efficiency Ratios Assets Turnover Ratio 1.5 1.3 1.1 1.1 1.2 Working Capital Turnover Ratio 30.0 11.7 12.5 17.6 17.9 F.A. Turnover Ratio 6.9 5.7 4.7 4.8 4.8 C.A. Turnover Ratio 4.0 3.1 3.1 3.4 3.5 Debtors Velocity 19.9 22.6 23.0 21.7 22.2 Margin Ratios (%) EBITDA Margin 11.6% 11.7% 12.0% 11.8% 12.1% Pre-Tax Margin 11.0% 10.8% 10.9% 10.7% 11.3% Net Profit Margin 8.3% 9.3% 8.7% 8.4% 8.8% Growth Ratios YoY (%) Net Sales 27.0% 0.2% -6.0% 13.2% 14.6% EBITDA 25.3% 0.6% -3.2% 11.3% 17.2% Adj.PAT 16.5% 12.1% -12.2% 9.4% 20.3% Adj.EPS 16.5% 12.1% -12.2% 9.4% 20.3% Working Ratios (Days) Inventory 21.8 25.3 28.1 25.8 25.6 Debtors 19.9 22.6 23.0 21.7 22.2 Net Working Capital Excluding Cash -431.7 497.5 943.6 206.6 -12.8 Other Ratios (%) Other Income/PBT 12.7% 16.4% 17.5% 17.6% 17.8% Enterprise Value 50674 55909 76292 87313 86988 FCF Margin (%) 17.3% 1.5% -0.3% 5.0% 5.0% Capex/Sales (%) 5.6% 4.1% 2.6% 4.4% 4.4% FCF Margin (%) 6.4% 2.5% 3.7% 6.9% 5.1% Tax/EBIT Rate (%) 27.5% 15.8% 23.3% 24.8% 25.1% Capex/Sales (%) 3.0% 5.3% 4.8% 4.2% 4.9% Per Share (Rs.) Adj.EPS 56.8 63.7 55.9 61.1 73.5 CEPS 68.8 78.3 70.5 77.8 92.0 DPS 13.5 14.6 14.8 15.7 18.0 BVPS 248.3 284.5 325.5 371.0 426.5 Cash Per Share 30.2 50.0 35.6 38.0 46.9 Valuation Parameters (@TTM Avg. Price) P/E 14.3 14.3 22.1 23.2 19.3 P/CEPS 11.8 11.6 17.5 18.2 15.4 P/BV 3.3 3.2 3.8 3.8 3.3 EV/EBIDTA 10.8 11.8 16.7 17.2 14.6 Trailing 12 Months Avg. Share Price 815 910 1235 1419 1419

es


INITIATING COVERAGE

Disclaimer This is solely for information of clients of Choice Broking and does not construe to be an investment advice. It is also not intended as an offer or solicitation for the purchase and sale of any financial instruments. Any action taken by you on the basis of the information contained herein is your responsibility alone and Choice Broking its subsidiaries or its employees or associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained in this recommendation, but Choice Broking or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this recommendation or any action taken on basis of this information. This report is based on the fundamental analysis with a view to forecast future price. The Research analysts for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Choice Broking has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Choice Broking makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. The information and any disclosures provided herein are in summary form and have been prepared for informational purposes. The recommendations and suggested price levels are intended purely for stock market investment purposes. The recommendations are valid for the day of the report and will remain valid till the target period. The information and any disclosures provided herein may be considered confidential. Any use, distribution, modification, copying, forwarding or disclosure by any person is strictly prohibited. The information and any disclosures provided herein do not constitute a solicitation or offer to purchase or sell any security or other financial product or instrument. The current performance may be unaudited. Past performance does not guarantee future returns. There can be no assurance that investments will achieve any targeted rates of return, and there is no guarantee against the loss of your entire investment.

POTENTIAL CONFLICT OF INTEREST DISCLOSURE (as on date of report) Disclosure of interest statement – • Analyst interest of the stock /Instrument(s): - No. • Firm interest of the stock / Instrument (s): - No.

Choice’s Rating Rationale The price target for a large cap stock represents the value the analyst expects the stock to reach over next 12 months. For a stock to be classified as Outperform, the expected return must exceed the local risk free return by at least 5% over the next 12 months. For a stock to be classified as Underperform, the stock return must be below the local risk free return by at least 5% over the next 12 months. Stocks between these bands are classified as Neutral.

BUY Absolute Return >12%

Accumulate Absolute Return Between 10-12%

Hold Absolute Return Between 0-10%

Reduce Absolute Return 0 To Negative 10%

Sell Absolute Return > Negative 10%

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+91-022-6707 9999 +91-022-6707 9959 www.choiceindia.com

Institutional Equity Team

Name Designation Email id Contact No.

Ajay Kejariwal President [email protected] 022- 6707 9850 Sumeet Bagadia Head of Research [email protected] 022 - 6707 9830

Amit Singh VP - Institutional Sales [email protected] 022 - 6707 9859

Devendra Gaikwad Sr. Manager - Institutional Sales [email protected] 022 - 6707 9878 Satish Kumar Research Associate [email protected] 022 - 6707 9858 Rajnath Yadav Research Associate [email protected] 022 - 6707 9819

Amit Pawar Research Associate [email protected] 022 - 6707 9835 Rohan Shinde Research Associate [email protected] 022 - 6707 9852 Ritesh Patel Research Associate [email protected] 022 - 6707 9852

Deveya Gaglani Research Advisor [email protected] 022 - 6707 9870 Bhavik Shah Equity Dealer [email protected] 022 - 6707 9835 / 838

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