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Automobiles

Sixth Gear

Tractor demand yet to peak. In the second edition of our thematic product, we highlight the maximum potential for tractor demand in India. We believe tractor penetration in India is low and likely to peak only by 2030. Low crop yields, rising labor costs and a rise in alternative use of tractors is likely to drive long-term demand. However we expect tractor demand to grow at a modest rate over the next few years due to flat farmer profitability and modest growth in non-farm use of tractors.

India’s tractor population can reach 16 mn from the current 4.3 mn

We estimate India’s tractor population can reach 16 mn as current penetration is low: Only 5% of agricultural households own tractors. We believe tractor demand will be boosted by shortage of farm labor, rising cost of labor and bullocks, the need to raise crop yields that are significantly below global levels and increase in the use of tractors for non-agricultural purposes. We expect tractor penetration to peak in FY2030 if the sales CAGR clocks 7-8%.

Strong growth in the tractor cycle is dependent on strong demand for renting tractors

We estimate that a farmer with over six acres of land can afford a tractor, supported by agricultural income. 82% of India’s farmers have less than five acres of land and hence they depend on renting tractors to increase the productivity of their land. We believe tractor demand will get a significant boost if non-agricultural use of tractors, like haulage, transport and construction, grows strongly. This will boost farmers’ income from tractors and drive the need to buy additional tractors.

We expect tractor demand to remain subdued over next few years

We believe tractor demand will remain subdued over the next few years as farmer profitability is likely to be flat given a sharp rise in input costs and a muted rise in crop prices. Construction demand growth is also likely to slow over the next few years, in our view, which will limit the need to buy additional tractors. We also expect tractor prices to rise by 2% yoy over the next few years against 5% CAGR over the past decade.

We retain our ADD rating on M&M

We retain our ADD rating on Mahindra & Mahindra as we believe the standalone business is in a sweet spot due to a sharp rise in demand for UV/SUVs and steady demand for tractors. We believe the stock has factored most of the positives and we see a modest upside from current levels. Our target price is Rs1,000 based on sum-of-the-parts methodology.

ATTRACTIVE

January 01, 2013

THEME

BSE-30:19,581

INSIDE The number of tractors in India can reach 16 mn by 2030 …pg04 Only 5% of agricultural households own tractors…pg17 Static farmer profitability to result in modest volume growth for tractors over the next few years…pg19

Hitesh Goel [email protected] Mumbai: +91-22-6634-1327 Vinay Kumar [email protected] Mumbai: +91-22-6634-1216

Kotak Institutional Equities Research Important disclosures appear at the back

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Automobiles Sixth Gear

TABLE OF CONTENTS

Tractor penetration likely to peak by 2030 .............................................3

India’s tractor population can reach 16 mn ............................................4

Tractor penetration in India is still low ..................................................17

We expect tractor demand to be subdued in the short term.................19

Tractor penetration is likely to rise in South and West India ..................23

The prices in this report are based on the market close of January 1, 2013.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Sixth Gear Automobiles

TRACTOR PENETRATION LIKELY TO PEAK BY 2030 In the second edition of our thematic report on long-term trends impacting the automobile sector, we focus

on the potential demand of tractors in India and drivers needed to boost tractor demand. In this report we

discuss the maximum potential of tractor demand in India, measures required to boost tractor demand and

the need to improve farm yields.

Our key conclusions in this report are as follows:

We estimate India’s tractor population can reach 16 mn units, which would be sufficient to till arable land in India. We have assumed that land area under agriculture will remain unchanged and we expect tractor penetration to peak when all arable land in India will be tilled by tractors.

We believe a farmer with over six acres of land can afford a tractor in India with agricultural income and income derived from renting out tractors to farmers who cannot afford them.

We believe the tractor population in India is about 4.3 mn units. We estimate only 5% of agricultural households own tractors. More important, 19% of households that can afford tractors, own tractors. We believe tractor penetration is likely to peak in 2030 if it follows its long-term trajectory of 7-8% sales CAGR.

We expect tractor penetration to rise, driven by low crop yields versus global levels, increase in use of tractors for non-agricultural purposes, a shortening replacement cycle and shortage of farm labor.

Over the past decade, farmer profitability per acre of land has quadrupled, driven by a sustained rise in crop prices and improvement in crop yields. However, over the past four years, farmer profitability has been stagnant due to a sharp rise in input costs like labor and seeds and a moderate rise in minimum support prices. We believe over the next few years, a sharp rise in minimum support prices is unlikely given the high fiscal deficit and good crop output, which could put pressure on tractor demand.

We also expect the average selling price of tractors to rise at a muted pace given the slowdown in construction activity and flat growth in farmer profitability.

India’s relative market share in exports has fallen sharply for commodities like rice, wheat and refined sugar. In our view, a sharp increase in agricultural exports is necessary to incentivize a farmer to increase agricultural yields, which in turn will drive mechanization of farms.



INDIA’S TRACTOR POPULATION CAN REACH 16 MN We estimate the tractor population can reach 16 mn units in India. Tractor demand will be driven by shortage

of agricultural labor, need for faster turnaround of agricultural work, increase in multi-cropping and

alternative use of tractors for non-agricultural activity. We believe saturation in the tractor market may come

in 2030 if tractor volume growth follows its historical long-term growth trajectory.

We estimate India’s tractor population can reach 16 mn units, which would be sufficient to till arable land in India. We have assumed that land area under agriculture will stay unchanged and expect tractor penetration to peak when all arable land in India will be tilled by tractors. Our key assumptions are as follows:

Based on our discussions with farmers we have assumed tractor hours required per acre per year is about 20 hours. Hence total tractor hours required per year to till 393 mn acres of land is about 7,855 mn hours.

A tractor can work for a maximum of 10 hours a day and the number of days a tractor will be required to work assuming two cropping seasons in a year would be about 60 days. Hence total availability of tractor hours in a year is about 600 hours.

We thus compute the number of tractors required to till India’s arable land only by tractors to be 13 mn units. 20% of the tractors are used purely for non-agricultural purposes, which could add 3.3 mn more units to the potential tractor population. Hence the maximum potential for tractor population is about 16 mn units, in our view.

Over the past decade, domestic tractor volumes have clocked 8-9% CAGR. We believe it is very difficult to project annual tractor demand given wide fluctuations in crop prices and dependence on the monsoons and agricultural credit. Hence we have tried to estimate the time by which tractor demand would saturate if tractor sales continue their historical long-term average growth rate of 7-8% CAGR. We believe the saturation point for tractor growth will come by 2030.

Exhibit 1: We estimate total requirement of 16.4 mn tractors in India by 2030 Computation of maximum tractor population penetration in India

Total area under agriculture (mn acres) 393 Tractor-hours required per acre per year (hours) (a) 20 Number of tractor-hours required per year (mn hours) 7,855 Number of hours a tractor can work per day (hours) 10 Number of days that a tractor is required in a year (b) 60 Number of tractor-hours available per tractor per year (hours) 600 Total number of tractors required for agricultural purposes (mn) 13.1 Add: Tractors used for non-agricultural purposes (mn) (c) 3.3 Total number of tractors required in India (mn) 16.4

Notes:(a) based on our discussion with a farmer.(b) assuming two crops a year and 30 days of sowing and weeding per crop season.(c) 20% of tractors are used for non-agricultural purposes as per an M&M presentation.

Source: Company, field research, Kotak Institutional Equities estimates



Exhibit 2: The number of tractors required to till agricultural land can reach 13 mn units Sensitivity to maximum tractor population potential versus the number of hours a tractor can work in a day

Number of hours a tractor can work per day (hours)13.1 7 8 9 10 11 12 13

14 13.1 11.5 10.2 9.2 8.3 7.6 7.0 16 15.0 13.1 11.6 10.5 9.5 8.7 8.1 18 16.8 14.7 13.1 11.8 10.7 9.8 9.1 20 18.7 16.4 14.5 13.1 11.9 10.9 10.1 22 20.6 18.0 16.0 14.4 13.1 12.0 11.1 24 22.4 19.6 17.5 15.7 14.3 13.1 12.1 26 24.3 21.3 18.9 17.0 15.5 14.2 13.1

Trac

tor-

ho

urs

re

qu

ired

per

acr

e p

er y

ear

(ho

urs

)

Source: Kotak Institutional Equities estimates

Exhibit 3: 29% of the net sown area is cropped twice in India Cropping pattern across land holdings, March fiscal year-ends, 2007 (%)

More thanSize of holdings Once Twice twice Total2007Marginal (<1 ha) 60 39 1.6 100Small (1-2 ha) 72 27 1.9 100Semi-medium (2-4 ha) 74 25 0.4 100Medium (4-10 ha) 74 26 0.2 100Large (>10 ha) 75 25 0.2 100All size classes 71 29 0.9 100

Percentage of net sown area

Source: Ministry of Agriculture, Kotak Institutional Equities

Exhibit 4: Domestic tractor volumes have clocked 9% CAGR over the past decade Annual domestic tractor volumes, March fiscal year-ends, 2000-2012 (units)

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2011

2012

Tractor sales ('000 units)('000 units)

9% CAGR

Source: Company, Kotak Institutional Equities



Exhibit 5: The tractor market is likely to be saturated only by 2030 in our view Estimated number of tractors in India at different CAGR of annual tractor sales

CAGR in annual sales (%)Year 6 7 8 9 10 11 122012 4.3 4.3 4.3 4.3 4.3 4.3 4.3 2013E 4.8 4.8 4.8 4.8 4.8 4.8 4.8 2021E 9.0 9.2 9.5 9.8 10.1 10.4 10.7 2022E 9.5 9.8 10.2 10.6 11.0 11.4 11.8 2023E 10.0 10.4 10.9 11.4 11.9 12.5 13.1 2024E 10.6 11.1 11.7 12.3 13.0 13.7 14.4 2025E 11.2 11.8 12.6 13.3 14.1 15.0 16.0 2026E 11.8 12.6 13.5 14.4 15.4 16.4 16.4 2027E 12.5 13.4 14.5 15.6 16.4 2028E 13.2 14.3 15.5 16.4 2029E 14.0 15.3 16.4 2030E 14.9 16.4 2031E 15.9 16.4 2032E 16.4


Why will tractor penetration increase?

We believe tractor penetration is expected to rise, driven by low crop yields, increased use of tractors for non-agricultural purposes, shortening replacement cycle and scarce farm labour.

We believe the key reasons for increase in tractor penetration in India are as follows:

Crop yields in India are almost half of those in China and other major global agricultural economies due to use of lower quality seeds and low mechanization of farms. We believe a rising population and an increase in per capita food consumption would require Indian farmers to increase crop yields.

Exhibit 6: Paddy yields in India are 50% lower than the world average Comparison of paddy yields in India versus other countries, 2009 (Hg/hectare)

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30,000

45,000

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90,000

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Sri L

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USA

(Hg/ha)

Source: Directorate of Economics and Statistics, Kotak Institutional Equities

Exhibit 7: Wheat yield in India is comparable to the world average but is much lower than China’s Comparison of wheat yields in India versus other countries, 2009 (Hg/hectare)

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y(Hg/ha)




Only 29% of farmers cultivate two crops a year on their farms, which explains India’s low farm output. We believe with increased use of tractors instead of manual labor and bullock carts, farmers will be able to crop twice on their farms, boosting farm output.

Tractors are being extensively used in rural areas as transport and for construction work. We expect a sharp rise in rural construction in India over the next decade, which would boost tractor demand.

The replacement cycle of tractors has shrunk to 8-10 years from 10-12 years earlier, driven by an increase in the use of tractors: Tractors are rented out for agricultural work and used in construction activity. We believe a shorter replacement cycle will be crucial to boost tractor volume growth.

India is self-sufficient in food grains and hence to incentivize farmers to increase grain output, India needs to increase its share in global agricultural exports. India’s exports have clocked 20% CAGR since 2004 but they comprise just 2% of global agricultural exports.

Irrigation across Indian farms has increased rapidly. The irrigated area to net sown area has almost doubled since 1982, resulting in higher crop yields.

Exhibit 8: Irrigation in India has increased significantly over the past three decades Irrigation across land holdings, March fiscal year-ends, (hectares, %)

1982 1987 1992 1997 2002 2007Net irrigated area ('000 ha)Marginal (<1 ha) 6,872 8,062 9,457 12,280 12,923 13,552 Small (1-2 ha) 6,618 7,656 9,085 10,576 11,437 11,403 Semi-Medium (2-4 ha) 8,713 9,684 10,971 12,401 12,662 12,396 Medium (4-10 ha) 9,873 10,360 11,286 12,208 12,062 11,982 Large (>10 ha) 4,727 4,700 4,905 5,490 4,458 4,937 All size classes 36,803 40,462 45,704 52,955 53,542 54,270 Net sown area ('000 ha)Marginal (<1 ha) 17,083 18,843 21,713 24,599 25,354 23,557 Small (1-2 ha) 20,214 22,345 25,471 27,389 27,964 24,314 Semi-Medium (2-4 ha) 29,708 31,570 33,420 34,360 32,651 27,682 Medium (4-10 ha) 40,724 39,701 37,966 35,654 31,700 26,838 Large (>10 ha) 28,912 24,968 21,843 19,059 14,526 13,464 All size classes 136,641 137,427 140,413 141,061 132,195 115,855 Irrigated area as a percentage of sown area (%)Marginal (<1 ha) 40.2 42.8 43.6 49.9 51.0 57.5 Small (1-2 ha) 32.7 34.3 35.7 38.6 40.9 46.9 Semi-Medium (2-4 ha) 29.3 30.7 32.8 36.1 38.8 44.8 Medium (4-10 ha) 24.2 26.1 29.7 34.2 38.1 44.6 Large (>10 ha) 16.3 18.8 22.5 28.8 30.7 36.7 All size classes 26.9 29.4 32.5 37.5 40.5 46.8


Tractors are replacing bullock carts and labor as the cost of ownership of a 15-hp tractor is lower than the cost of owning two bullocks to pull a cart (see Exhibit 10); and renting a tractor is more lucrative than owning a tractor. It is also cumbersome to maintain a bullock due to the high frequency of disease. We also highlight that a tractor offers more tangible and intangible benefits to a farmer than a bullock cart. For example, a tractor works much faster than bullocks, which helps the farmer to crop land twice a year. Tractors also offer an opportunity to earn rental income as farmers lease them to other small farmers during the cropping season.



Exhibit 9: Renting a tractor is cheaper than owning a bullock for less than six acres of holding The difference between the rental cost of a tractor and ownership cost of a bullock cart

Ownership cost of a bullock cart with two bullsAverage weight of an Indian bull (kg) 1,000 Daily feed required as percentage of body weight (%) 2.5 Total feed required (kg) 25 Cost per feed (Rs/kg) 2.0 Annual feed required for two bulls (Rs) 36,500 Other costs (medical etc.) 12,000 Annual cost of owning a bullock cart 48,500 Capital cost to buy two bulls 40,000 Life of a bull (years) 10 Total cost of ownership (Rs) 525,000 Renting a 40 hp tractorRent per hour (Rs) 400 Number of hours required per year per acre (hours) 20 Annual rent per acre 8,000 Rent for 10 years (Rs) 80,000 Number of acres 6 Total cost of renting a tractor (Rs) 480,000

Notes:(a) Assuming a stable rate of inflation.

Source: Field research, Kotak Institutional Equities estimates

Exhibit 10: Buying a low hp tractor is a cheaper option than owning a bullock cart with two bulls The difference between ownership cost of a tractor and that of a bullock cart

Ownership cost of a bullock cart with two bullsAverage weight of an Indian bull (kg) 1,000 Daily feed required as percentage of body weight (%) 2.5 Total feed required (kg) 25 Cost per feed (Rs/kg) 2.0 Annual feed required for two bulls (Rs) 36,500 Other costs (medical etc.) 12,000 Total annual cost of owning a bullock cart 48,500 Capital cost of buying two bulls 40,000 Life of a bull (years) 10 Total cost of ownership 525,000 Ownership cost of a tractorCapital cost of a 15 HP tractor (Rs) 200,000 Loan taken as a percentage of the principal (%) 80 Total loan taken (Rs) 160,000 Interest (%) 16 Tenure (months) 60 Annual EMI cost 45,610 Annual operating cost (b) 29,740 Annual cost of owning a tractor 75,350 Life of a tractor (years) 10 Resale value after 10 years (Rs) 50,000 Total cost of ownership 515,452

Notes:(a) Assuming a stable rate of inflation.(b) Annual operating costs include diesel and maintenance costs.(c) Assuming a six-acre land holding to calculate the ownership cost of a tractor.

Source: Field Research, Kotak Institutional Equities estimates



Exhibit 11: Renting a 40-hp tractor is cheaper than owning a Yuvraj for small land holdings The difference between ownership cost of a 15-hp tractor and the rental cost of a 40-hp tractor

Ownership cost of a 15-hp tractorCapital cost of q 15-hp tractor (Rs) 200,000 Loan taken as percentage of the principal (%) 80 Total loan taken (Rs) 160,000 Interest (%) 16 Tenure (months) 60 Tractor EMI 3,801 Annual EMI cost 45,610 Annual operating cost (b) 29,740 Annual cost of owning a tractor 75,350 Total effective cost 75,350 Life of a tractor (years) 10 Resale value after 10 years (Rs) 50,000 Total cost of ownership 515,452 Renting a 40-hp tractorRent per hour (Rs) 400 Hours required per year per acre (hours) 20 Annual rent per acre 8,000 Rent for 10 years (Rs) 80,000 Number of acres 6 Total cost of renting a tractor (Rs) 480,000

Notes:(a) Assuming a stable rate of inflation.

Source: Field Research, Kotak Institutional Equities estimates

Exhibit 12: Tractor use is rising rapidly across various land holdings The use of a tractor compared with use of a bullock cart (number per 100 operational holders) (%)

1987 1992 1997 2002 2007Tractor Marginal (<1 ha) 0.5 2.5 4.6 10.2 28.8 Small (1-2 ha) 1.4 3.8 8.1 15.6 31.6 Semi-Medium (2-4 ha) 3.1 4.7 12.6 21.8 36.1 Medium (4-10 ha) 6.5 8.7 20.0 31.6 42.7 Large (>10 ha) 11.4 23.1 32.4 42.3 50.2 All size classes 1.8 3.8 7.7 14.4 31.1 Bullock carts Marginal (<1 ha) 14.1 10.1 17.6 19.8 20.1 Small (1-2 ha) 39.4 26.1 36.0 39.6 34.4 Semi-Medium (2-4 ha) 49.0 37.2 44.9 47.8 40.0 Medium (4-10 ha) 64.4 50.8 53.5 54.0 43.0 Large (>10 ha) 66.9 62.9 58.4 54.0 38.3 All size classes 28.9 20.8 27.4 29.6 26.4


Farm subsidies are likely to rise given poor returns from farming

We believe farm subsidies are likely to rise given the poor returns from farming in India. We believe returns from farming will continue to be low until India improves its supply chain to provide higher returns to farmers for their produce. 30-40% of the produce is wasted, which reduces returns for farmers. Agricultural subsidies have quadrupled over the past decade and agricultural credit has increased by 7X as the cost of inputs has risen sharply due to high inflation.



Exhibit 13: Fertilizer subsidy to agriculture has risen by 14% CAGR since 1999 Fertilizer subsidy for agriculture, March fiscal year-ends, 1999-2012 (Rs bn)

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Fertilizer subsidy (Rs bn)(Rs bn)

Source: Fertilizer Association of India, Kotak Institutional Equities

Exhibit 14: The flow of institutional credit to the farm sector has risen by 22% CAGR since 1999 Institutional credit flow to agriculture, March fiscal year-ends, 1999-2012 (Rs bn)

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2,000

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6,000

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2010

2011

2012

Institutional credit flow to agriculture (Rs bn)(Rs bn)

22% CAGR

Source: Ministry of Agriculture, NABARD, Kotak Institutional Equities

Increase in non-agricultural use of tractors has increased farmer income

We believe a rise in non-agricultural use of tractors has boosted farmers’ income from tractors. Tractors are extensively used to haul construction material, as personal transport and to transport agricultural produce to mandis. We believe due to poor returns from farming, the use of tractors for non-agricultural activities is essential to boost tractor demand.



Exhibit 15: Allocation of Bharat Nirman by the Central Government has risen at 30% CAGR over 2006-12 Budget outlay for Bharat Nirman, March fiscal year-ends, 2006-12 (Rs bn)

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Bharat Nirman outlay (Rs bn)(Rs bn)

30% CAGR

Source: Government of India, Kotak Institutional Equities

Government initiatives to improve agricultural production

The Government of India, in association with state governments, has launched several schemes over the past decade, aimed at improving farmers’ access to quality farm inputs and thus increasing production and yields. Some of these are briefly discussed below:

National Food Security Mission (NFSM). Launched in 2007 as part of the Eleventh Five Year Plan, NFSM aimed to increase production of rice, wheat and pulses by 10, 8 and 2 mn tons respectively by the end of 2011-12. The crop development scheme was approved with a budget outlay of Rs 49 bn for five years and aimed to improve farmers’ access to technologically superior seeds, soil management and farm mechanization techniques. The Government continued the mission in the succeeding five-year plan with a proposed outlay of Rs256 bn, a five-fold increase over the previous outlay. We note the mission achieved its previous target of an additional 25 mn tons of production a year before the deadline.

Rashtriya Krishi Vikas Yojana (RKVY). Launched in August 2007, RKVY is a joint scheme of the state and Central governments to boost public investment in agriculture and thus increase productivity of Indian farms. The scheme seeks to provide assistance to states in different areas of the agriculture value chain such as seed production and distribution, irrigation, storage and processing facilities and farm mechanization. The budget allocation for RKVY has increased steadily since its inception (see Exhibit 16).

Macro Management of Agriculture (MMA). Launched in 2001, MMA is essentially a Central Government-sponsored scheme, focusing on provision and promotion of hybrid seeds, farm mechanization and integrated cereal-development programs.

Water and Irrigation Management. Total irrigation outlay by state governments has increased by 17% a year, on average, between 2003 and 2012, reflecting state governments’ efforts to increase irrigation. The Planning Commission in its Twelfth Five-Year Plan (2012-17) recommended outlay of Rs3,419 bn to execute Major and Medium Irrigation (MMI) projects in India, up from Rs2,318 bn recommended during the preceding plan.



Exhibit 16: Allocation to Government schemes has increased steadily over the years Details of approved outlays for Central and state government schemes, March fiscal year-ends, 2006-12 (Rs bn)

2006 2007 2008 2009 2010 2011 2012Rashtriya Krishi Vikas YojanaApproved budget (Rs bn) NA NA 15 40 48 84 88 Number of projects completed NA NA 421 654 899 918 354 Macro Management of AgricultureApproved budget (Rs bn) 7 9 11 10 10 NA NA

Source: Government of India, Kotak Institutional Equities

Exhibit 17: Budget allocation for irrigation projects by state governments has increased by 17% a year on average over 2003-12 Total irrigation budget in India, March fiscal year-ends, 2003-12 (Rs bn)

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Irrigation outlay (Rs bn)(Rs bn)

17% CAGR

Source: Planning commission, Kotak Institutional Equities

Exports need to rise sharply to drive mechanization of farms

Even though India’s agriculture exports have clocked 20% CAGR over 2004-12, India’s relative market share in exports has fallen sharply for commodities like rice, wheat and refined sugar. In our view, a sharp increase in agriculture exports is necessary to incentivize a farmer to increase agricultural yields, which in turn will drive mechanization of farms.

India’s agricultural exports have been led mainly by a sharp increase in cotton, basmati rice, groundnut and meat. Wheat exports declined to almost nil due to export restrictions placed by the Government in view of a drought-like situation in India.



Exhibit 18: India’s agricultural exports have clocked 20% CAGR since 2004 Indian agricultural exports break-up across crops, March fiscal year-ends, 2004-2013YTD (Rs mn)

Value (Rs mn) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013YTD CAGR (%)Pulses 3,286 6,026 11,152 7,733 5,264 5,402 4,074 8,528 10,930 5,277 16.2 Rice Basmati 19,931 28,239 30,431 27,928 43,446 94,770 108,895 105,815 154,223 100,197 29.1 Rice (other than Basmati) 21,749 39,450 31,782 42,431 74,100 16,874 3,653 2,203 82,697 77,115 18.2 Wheat 23,912 14,598 5,575 354 2 15 1 7 9,684 46,875 (10.7) Tea 16,374 18,403 17,307 19,695 20,342 26,889 29,435 31,745 41,228 24,205 12.2 Coffee 10,859 10,691 15,887 19,690 18,723 22,558 20,321 29,121 45,687 28,163 19.7 Sesamum seed 7,089 7,090 7,466 9,396 16,423 14,943 14,941 21,944 26,511 16,819 17.9 Groundnut 1,791 5,470 5,137 7,985 10,541 12,390 14,259 20,998 52,446 25,541 52.5 Sugar 12,166 1,495 5,691 31,275 54,122 44,487 1,102 103,390 88,254 72,729 28.1 Molasses 194 55 288 1,334 2,506 827 198 9,965 2,052 1,395 34.3 Fresh fruit 7,840 8,623 11,207 14,140 14,466 19,452 22,691 21,443 25,088 16,305 15.6 Fresh vegetables 9,539 8,630 9,198 15,465 14,779 24,542 29,417 25,308 28,651 14,773 14.7 Processed vegetables 2,912 3,625 4,945 6,502 6,022 7,112 7,523 7,330 10,595 6,764 17.5 Processed fruit juices 3,437 3,692 5,999 7,114 7,734 10,992 11,593 10,064 16,491 11,415 21.7 Meat & Preparations 17,144 19,053 27,502 33,140 37,495 53,714 62,861 87,759 140,033 90,412 30.0 Marine products 61,056 64,692 70,359 80,010 69,267 70,664 99,000 115,480 165,105 108,783 13.2 Cotton (raw including waste) 9,424 4,226 29,044 61,078 88,654 28,659 95,371 129,810 207,293 61,725 47.2 Total agricultural exports 372,665 416,027 492,170 624,114 790,397 859,517 893,413 1,201,855 1,563,947 1,187,297 19.6

Notes:(a) YTDFY2013 data is until October 2012.(b) CAGR (%) is the growth rate from 2004 to 2012.


However India’s exports as a percentage of world agricultural exports remain low at about 2% (~4% for China). Exhibit 19 shows that India has consistently lagged behind China in agricultural exports over the years, despite having more land under agriculture, due to poor productivity of farm holdings in India.

Exhibit 19: Despite having more arable land, India has lagged China in agricultural exports Total agricultural exports of China and India in US$ bn, at current prices, 2000-11

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2.5

China (US$bn) India (US$ bn) India's share of total world exports (%)

(US$ bn) (%)

Source: World Trade Organization, Kotak Institutional Equities



Exhibit 20: China’s agricultural yields are much higher than those of India Sown area, production and yields for China and India, 2009

China IndiaSown area (mn ha)Rice 30 42Wheat 24 28Cotton 5 9Production (mn tons)Rice 195 134Wheat 115 81Cotton 6 5Yields (kg/ha)Rice 6,529 3,195Wheat 4,739 2,907Cotton 1,288 517

Source: China Statistical Yearbook 2010, Ministry of Agriculture India, Kotak Institutional Equities

Exhibit 21 shows India’s declining relative share of exports of rice and wheat and fluctuating share of exports of refined sugar. We note the rapid increase in the share of cotton exports coupled with a significant increase in cotton yields (see Exhibit 22). Yields of rice and wheat were flat during the past decade in India, which has limited the exports of these commodities.

Exhibit 21: India’s share of exports of wheat and rice has declined due to restrictions placed by the Government India’s relative share of exports among the top 20 exporters for commodities, calendar year-ends, 2004-10 (%)

Commodity 2004 2005 2006 2007 2008 2009 2010Coffee 2.7 3.0 3.4 2.6 2.5 2.1 2.9 Cotton 1.0 7.4 13.5 18.8 7.4 21.3 21.3 Maize 1.3 0.5 0.7 2.5 3.6 2.7 2.2 Mangoes 18.0 25.1 24.2 22.4 24.7 24.3 20.5

Rice 16.8 14.1 15.9 19.8 8.6 7.5 7.1

Sesame seed 21.7 20.8 23.7 32.9 21.6 18.6 26.2 Soyabean cake 4.7 8.5 8.0 8.1 8.7 5.6 6.6 Sugar refined NA 1.1 6.2 11.7 10.9 NA 4.7 Tea 11.4 9.9 11.9 11.6 11.4 12.1 12.5

Wheat 1.7 0.6 0.0 0.0 0.0 0.0 0.0

Source: FAO, Kotak Institutional Equities

Exhibit 22: Cotton yield has increased by 12% since 2003, led by strong growth in exports Production and yield of cotton in India, March fiscal year-ends, 2000-12

-

5

10

15

20

25

30

35

40

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-

100

200

300

400

500

600Production (mn bales) [LHS] Yield (Kg/ha) [RHS} (Kg/ha)(mn bales)




Exhibit 23: Rice yield has been flat over the past decade Production and yield of rice in India, March fiscal year-ends, 2000-12

-

20

40

60

80

100

120

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1,500

1,750

2,000

2,250

2,500

Production (mn tons) [LHS]Yield (Kg/ha) [RHS}(mn tons) (Kg/ha)


Exhibit 24: Wheat yield has grown by ~1% over the past decade Production, yield of wheat in India, March fiscal year-ends,2000-12

-

20

40

60

80

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2,400

2,500

2,600

2,700

2,800

2,900

3,000

Production (mn tons) [LHS]Yield (Kg/ha) [RHS} (Kg/ha)(mn tons)


We note that India is a significant player in the world agriculture industry, having the second largest arable area in the world (after the US). However, low yields and production have lowered India’s share in world production (see Exhibit 25) and consequently India’s participation in world agricultural trade. Exports of certain essential commodities have frequently been restricted by the Government of India in the past due to shortage of production as a result of the vagaries of the weather.

Exhibit 25: Poor agricultural yields lower India’s share of agricultural output relative to crop area India’s share of total world crop area and production of different crops, March fiscal year-end, 2009 (%)

26

12

5

19

23

20

12

2

1715

0

5

10

15

20

25

30

Paddy Wheat Maize Sugarcane Ground nut

% of world cropped area % of world production(%)


We note that India is self-sufficient in production and consumption of agricultural products (see Exhibit 26). We believe improvement in yields from the current low levels can boost India’s share of trade in world agricultural markets. As discussed above, Government measures such as a thrust on irrigation for agriculture and other farm inputs can lead to steady levels of production and exports. We believe India has huge export potential that it can tap and realize, which could drive growth in farmers’ incomes and farm mechanization.



Exhibit 26: India is self-sufficient in production of wheat and rice Production and consumption of wheat and rice in India, March fiscal year-ends, 2000-12 (mn tons)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012WheatProduction 76 70 73 66 72 69 69 76 79 81 81 86 88 Consumption 67 65 75 69 73 70 73 76 71 78 82 81 85 RiceProduction 90 85 93 72 89 83 92 93 97 99 89 95 103 Consumption 76 88 80 86 81 85 87 90 91 86 90 92 95

Source: Ministry of Agriculture, US Department of Agriculture, Kotak Institutional Equities



TRACTOR PENETRATION IN INDIA IS STILL LOW Tractor penetration in India is still low in our view. Tractor ownership is restricted to only 5% of agricultural

households, and more importantly, only to 19% of the addressable agricultural households who can buy a

tractor.

The number of tractors in India is about 4.3 mn, in our view, and we believe the Indian tractor market is underpenetrated for the following reasons:

According to our calculations, a farmer with more than six acres of land can afford a tractor in India with agricultural income and income derived from renting out tractors to farmers who cannot afford to buy their own.

Mahindra & Mahindra (M&M) estimated that the tractor population was about 3.4 mn units in FY2009. M&M also estimated that out of 82 mn agricultural households, only 18% of households held more than five acres of land, which is the minimum land holding required to buy a tractor. About 15 mn agricultural households in India have more than five acres of agricultural land and can afford to buy tractors.

Only 38% of farmers with more than 20 acres of land and 18% of farmers with land holdings of between five and 20 acres had tractors in FY2009 according to M&M. Ownership of tractors by farmers with less than five acres of agricultural land is just 1% due to low income from agriculture.

We believe tractor ownership will be restricted to farmers with more than six acres of land until farmer incomes improve significantly. However the use of tractors in marginal and small farms is also increasing rapidly as small farmers rent tractors to save time and increase the productivity of their land.

Exhibit 27: Tractor penetration is still low in India Tractor penetration across land holdings, March fiscal year-end, 2009 (%)

Source: Mahindra & Mahindra presentation, Kotak Institutional Equities



Exhibit 28: A farmer needs to have 5.5 acres of land to own a tractor, in our view Computation of minimum land required to own a tractor (Rs)

Farmer economicsIncome per acre 25,000

Total acres ownership 5.5 Annual income from agriculture (Rs) 137,374 Income from leasing out tractors/hour (Rs) 250 Annual income from leasing out tractors (Rs) (a) 32,525 Total annual income for farmer 169,899 Monthly per capita expenditure in rural area (Rs) 1,054 Average family size 6.5 Annual consumer expenditure in rural area (Rs) 82,184 Annual EMI of tractor 87,715 Total annual expenditure for farmer 169,899 Tractor EMI calculationTractor capital cost, 40 HP (Rs) 400,000 Loan taken as % of principal (%) 80 Total loan taken (Rs) 320,000 Interest (%) 14 Tenure (months) 60 Tractor EMI 7,310 Annual EMI cost 87,715

Source: Field research, MSPI, Kotak Institutional Equities estimates

Exhibit 29: Fragmentation of agricultural land has led to a sharp increase in land holdings of less than one hectare Operating land holdings across land sizes, March fiscal year-ends, 1971-2011 (units)

1971 1976 1981 1986 1991 1996 2001 2006 2011Operation holdings (mn)Marginal (<1 ha) 36 45 50 56 63 71 75 84 92 Small (1-2 ha) 13 15 16 18 20 22 23 24 25 Semi-Medium (2-4 ha) 11 12 12 13 14 14 14 14 14 Medium (4-10 ha) 8 8 8 8 8 7 7 6 6 Large (>10 ha) 3 2 2 2 2 1 1 1 1 Total 71 82 89 97 107 116 120 129 138 Area operated (mn ha)Marginal (<1 ha) 15 18 20 22 25 28 30 32 35 Small (1-2 ha) 19 21 23 26 29 31 32 33 35 Semi-Medium (2-3 ha) 30 32 35 37 38 39 38 38 38 Medium (4-10 ha) 48 50 49 47 45 41 38 37 34 Large (>10 ha) 50 43 38 33 29 24 21 19 17 Total 162 163 164 165 166 163 159 158 159 Average holding (ha)Marginal (<1 ha) 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 Small (1-2 ha) 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 Semi-Medium (2-3 ha) 2.8 2.8 2.8 2.8 2.8 2.7 2.7 2.7 2.7 Medium (4-10 ha) 6.1 6.0 6.0 6.0 5.9 5.8 5.8 5.7 5.8 Large (>10 ha) 18.1 17.6 17.4 17.2 17.3 17.2 17.1 17.1 17.4 Total 2.3 2.0 1.8 1.7 1.6 1.4 1.3 1.2 1.2




WE EXPECT TRACTOR DEMAND TO BE SUBDUED IN THE SHORT TERM Over the past decade, farmer profitability per acre of land has quadrupled, driven by a sustained rise in crop

prices and improvement in crop yields. However, over the past four years, farmer profitability has stagnated

due to a sharp rise in input costs like labor and seeds and a moderate rise in minimum support prices. We

believe that over the next few years a sharp rise in minimum support prices is unlikely given the high fiscal

deficit and good crop output, which could put pressure on tractor demand.

We believe an improvement in farmers’ profitability is critical to incentivize them to invest in farm mechanization. Farmer operating profits have been static over the past few years and real returns are negative as CPI inflation has been about 10%. The cost of labor has risen sharply while minimum support prices have not increased much over past few years. Tractor prices have increased by 15-20% over the past four years, which has increased the cost of ownership of a tractor. We expect farmer profitability to remain static due to (1) rising labor costs, (2) a modest rise in minimum support prices due to a high fiscal deficit and (3) our expectations of a steady rise in agricultural subsidies (7-8% increase each year).

Exhibit 30: The minimum support prices of crops has almost doubled over the past seven years MSP across crops, March fiscal year-ends, 2006-2012 (Rs/quintal)

2006 2007 2008 2009 2010 2011 2012 5 yr CAGR (%)Paddy 570 580 850 850 950 1,000 1,080 10.9 Wheat 650 750 1,000 1,080 1,100 1,120 1,285 9.4 Bajra 525 540 600 840 840 880 980 10.4 Maize 540 540 600 840 840 880 980 10.4 Groundnut 1,520 1,520 1,550 2,100 2,100 2,300 2,700 10.0 Arhar 1,400 1,410 1,550 2,000 2,300 3,000 3,200 14.6 Urad 1,520 1,520 1,700 2,520 2,520 2,900 3,300 13.8 Moong 1,520 1,520 1,700 2,520 2,760 3,170 3,500 14.9 Masur 1,535 1,545 1,700 1,870 1,870 2,250 2,800 10.4 Soyabean 900 900 910 1,350 1,350 1,400 1,650 10.6




Exhibit 31: Operating profits have been flat over the past few years Economics for gram in AP (Rs)

2009 2010 2011 2012Human labor 5,991 6,460 6,804 8,845

Casual 4,246 4,807Attached 7 55Family 1,739 1,598

Bullock labor 1,684 1,295 1,360 1,591Hired 772 337Owned 912 958

Machine labor 1,369 2,395 2,422 2,632Hired 1,335 2,378Owned 34 16

Seed 1,778 2,140 2,226 2,315Fertilizer and manure 2,250 1,352 1,396 1,488

Fertilizer 1,355 1,316 1,359 1,451Manure 895 35 36 37

Insecticides 732 1,016 1,042 1,042Irrigation charges 11 4 4 4Interest on working capital 377 408 449 494Miscellaneous — 1 1 1Total cash cost 14,193 15,070 15,703 18,411Yield per ha (qtl) 16.69 12.43 16.69 16.69Value of the main product per ha (Rs) 36,691 26,069 34,499 41,488Value of the by-product per ha (Rs) 980 805 845 887Implcit price (Rs/qtl) 2198 2,097 2,067 2,486Total revenue 37,671 26,874 35,344 42,376Operating profits 23,478 11,804 19,641 23,965

Note: (a) Gram prices until FY2010 are as per the Government's Rabi report, FY2012.(b) Gram prices thereafter have been computed using the WPI.




Exhibit 32: Operating profits have been static over the past few years Wheat economics in Punjab (Rs)

2009 2010 2011 2012Human labor 4,035 4,302 4,947 5,689

Casual 1,987 2,020Attached 512 524Family 1,536 1,758

Bullock labor 78 92 99 107Hired 1 1Owned 77 91

Machine labor 5,272 5,399 5,461 5,935Hired 3,882 4,056Owned 1,390 1,343

Seed 1,371 1,817 2,108 2,445Fertilizer and manure 2,924 3,017 3,283 3,604

Fertilizer 2,894 2,969 3,228 3,541Manure 30 48 55 63

Insecticides 1,038 1,117 1,146 1,146Irrigation charges 297 505 1,629 871Interest on working capital 425 456 501 551Miscellaneous 124 87 96 106Total cash cost 15,564 16,792 19,270 20,455Yield per ha (qtl) 39.83 41.18 41.18 41.18Value of the main product per ha (Rs) 43,649 45,309 46,623 45,690Value of the by-product per ha (Rs) 4,478 6,227 6,538 6,865Implcit price (Rs/qtl) 1096 1,100 1,132 1,110Total revenue 48,127 51,536 53,161 52,555Operating profits 32,563 34,744 33,890 32,100

Note: (a) Wheat prices until FY2010 are as per the Government's Rabi report, FY2012.(b) Wheat prices thereafter have been computed using the WPI.


Exhibit 33: Operating profits from the paddy crop have improved slightly since FY2009 Paddy economics for Punjab (Rs)

2008 2009 2010 2011 2012Human labor 5,472 8,370 9,388 10,530 11,582

Casual 2,599 4,256Attached 879 1,470Family 1,995 2,645

Bullock labor 90 162 172 183 194Hired 1 0Owned 89 162

Machine labor 3,631 4,510 4,686 4,869 4,918Hired 1,877 2,428Owned 1,754 2,082

Seed 726 902 929 958 986Fertilizer and manure 2,518 3,064 3,224 3,395 3,471

Fertilizer 2,338 2,722 2,842 2,969 2,998Manure 180 342 382 426 473

Insecticides 1,486 1,977 2,006 2,036 2,057Irrigation charges 1,636 1,406 2,930 6,104 6,119Interest on working capital 425 555 611 672 739Miscellaneous 29 24 27 29 32Total cash cost 16,014 20,971 23,974 28,776 30,099Yield per ha (qtl) 68.01 67.41 67.41 67.41 67.41Value of the main product per ha (Rs) 56,037 66,794 75,144 79,502 81,887Value of the by-product per ha (Rs) 616 197 216 238 262Implcit price (Rs/qtl) 824 991 1,115 1,179 1,215Total revenue 56,653 66,991 75,360 79,740 82,149Operating profits 40,640 46,020 51,386 50,964 52,050

Note: (a) Rice prices until FY2009 are as per the Government's Kharif report, FY2012.(b) Rice prices thereafter have been computed using the WPI.




We expect marginal rise in tractor average selling prices over the next few years

The average selling price of tractors have risen by 5% on average each year over the past decade, helped by a sharp improvement in farmer profitability and an increase in alternative uses of tractors, which has boosted farmers’ incomes from tractors. We believe the average selling price will rise by a muted 2% over the next few years as we expect farmer profitability to improve slowly and we do not expect significant improvement in construction activity, which could boost income from renting out tractors.

We also note that the utilization of the tractor industry capacity in India has remained at 65-70% over the past three years. With several players expected to ramp up their capacities over the next 2-3 years, we expect utilization to remain at sub 70% for the next few years as well, which would deter tractor manufacturers from taking steep price hikes.

Exhibit 34: Tractor ASPs have clocked 5% CAGR over the past decade, due to a shift to higher horse power tractors Tractor average selling prices for M&M, March fiscal year-ends, 1994-2012 (‘000 Rs)

-

100

200

300

400

500

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

('000 Rs)

Source: Company, Kotak Institutional Equities

Exhibit 35: We expect utilization of the tractor industry capacity in India to remain below 70% over the next few years Industry capacity and utilization of the tractor industry, March fiscal year-ends, 2009-15E

-

200

400

600

800

1,000

1,200

2009

2010

2011

2012

2013

E

2014

E

2015

E

40

50

60

70

80Industry capacity ('000 units) [LHS] Domestic sales ('000 units) [LHS]

Utilization (%) [RHS]

(%)('000 units)

Source: Company, Kotak Institutional Equities estimates



TRACTOR PENETRATION IS LIKELY TO RISE IN SOUTH AND WEST INDIA We believe South and West India are likely to drive tractor demand in India due to (1) low penetration of

tractors in South and West India, (2) a sharp increase in production of cotton and paddy, which are

predominantly produced in West and South India and (3) improved irrigation in South and West India.

We believe tractor volume growth will be boosted by West and South India due to (1) low penetration of tractors in West and South India, (2) improved irrigation in these regions and (3) increase in cotton and paddy production, predominately produced in these regions.

M&M has 44-50% market share in South and West India, which is higher than its overall market share of 42%. M&M is in a weaker position in North India with market share of 35%. We believe M&M will gain from the shift of tractor demand from North India to South India due to its high market share in West and South India. We do not expect a major change in regional market share due to strong brand recall and resale value of tractor brands in different regional markets.

Exhibit 36: Tractor penetration is high in UP, Haryana and Punjab Tractor penetration across states in India, FY2010, number of tractors per 1,000 hectares (units)

0

10

20

30

40

50

60

Ass

am

Wes

t Be

ngal

Oris

sa

Mah

aras

htra MP

HP

Raja

stha

n

Kar

nata

ka J&K

Guj

arat

Biha

r

AP

Tam

il N

adu

UP

Punj

ab

Har

yana

Source: ICRA



Exhibit 37: Shares of UP, Punjab and Haryana in domestic tractor sales was very high in FY2000 Statewise domestic tractor volumes, FY2000 (units)

UP28%

Maharashtra8%

Gujarat6%

Rajasthan9%

MP9%

AP6%

Karnataka3%

Bihar5%

TN4%

Haryana7%

Punjab9%

Others6%

Source: TMA, Kotak Institutional Equities

Exhibit 38: Shares of UP, Punjab and Haryana in domestic tractor sales has declined significantly since FY2000 Statewise domestic tractor volumes, FY2012 (units)

Others10%Punjab

5%

Haryana5%

TN5%

Bihar5%

Karnataka6%

AP8% MP

9%

Rajasthan10%

Gujarat11%

Maharashtra11%

UP15%


Exhibit 39: Tractor demand is likely to shift to South, West and East India Region, horsepower and company-wise break-down of domestic tractor demand in India, March fiscal year-ends, 2004-2012 (%)

2004 2005 2006 2007 2008 2009 2010 2011 2012CompanyM&M (with PTL) 38 39 40 38 39 41 42 42 42 TAFE (with Eicher Motors) 22 23 23 24 23 22 22 21 23 Escorts Ltd 13 13 10 14 15 14 13 13 11 Sonalika 11 11 11 11 10 9 9 9 8 Others (John Deere, New Holland etc) 17 15 16 13 13 15 14 15 15 Total 100 100 100 100 100 100 100 100 100 Horsepower wise breakup Upto 30 hp 23 20 18 17 16 16 16 15 15 31-40 hp 50 51 51 49 46 46 46 46 46 41-50 hp 21 21 23 26 27 25 24 27 27 51 hp and above 6 8 8 8 11 14 14 12 13 Total 100 100 100 100 100 100 100 100 100 Region-wiseNorth 50 43 39 40 39 41 42 35 36 West and Central 26 27 24 24 24 23 23 30 33 South 14 20 25 26 26 22 19 19 19 East 10 11 11 11 11 14 16 16 12 Total 100 100 100 100 100 100 100 100 100




Exhibit 40: Cotton and pulses production has increased faster than cereals Production of major crops in India, March fiscal year-ends, 2000-11 (mn tons)

Year Rice Wheat Cotton Sugarcane Soyabean Pulses2000 90 76 12 299 7 132001 85 70 10 296 5 112002 93 73 10 297 6 132003 72 66 9 287 5 112004 89 72 14 234 8 152005 83 69 16 237 7 132006 92 69 19 281 8 132007 93 76 23 356 9 142008 97 79 26 348 11 152009 99 81 22 285 10 152010 89 81 24 292 10 152011 95 86 33 339 13 18

Notes:Production data of cotton is in million bales.


Exhibit 41: M&M has a relatively high market share in South and East India Region-wise market share, March fiscal year-ends, 2011-13YTD

2011 2012 2013YTDNorthM&M 33.7 34.1 34.7 TAFE 14.9 18.5 18.1 Escorts 20.0 17.2 16.8 John Deere 4.3 4.0 3.5 Sonalika 10.8 9.7 10.7 West & CentralM&M 43.9 44.2 43.7 TAFE 10.7 12.3 13.0 Escorts 11.2 8.7 8.5 John Deere 9.3 8.0 5.9 Sonalika 8.1 7.9 9.6 SouthM&M 50.2 48.9 49.1 TAFE 15.5 16.8 18.6 Escorts 5.1 4.8 5.0 John Deere 14.6 14.4 10.2 Sonalika 3.9 4.1 5.0 EastM&M 48.8 47.1 48.0 TAFE 9.3 10.2 10.7 Escorts 11.9 11.2 11.3 John Deere 5.0 5.4 4.7 Sonalika 10.8 11.6 11.2

Notes:(a) 2013YTD data is till September 2012.




We retain our ADD rating on Mahindra and Mahindra

We retain our ADD rating on M&M as we believe standalone operations are in a sweet spot due to customer preference for diesel vehicles and recovery in tractor volumes driven by expectations of a good Rabi crop. However, we have built strong volume growth in the utility vehicle and tractor segments over the next few years and thus we see limited scope of earnings surprises. The UV/SUV segment share in the overall passenger vehicle segment has risen from 14% in FY2011 to 23% in YTDFY2013, which we believe may be unsustainable.

The stock outperformed the Sensex by 11% over the past 12 months. We believe the stock is fairly valued at about 12X PE multiple (ex-subsidiary value) on our M&M + MVML FY2014E earnings estimates as we see limited scope of earnings surprises, potential risk due to likelihood of a tax on diesel passenger vehicles and concerns about capital allocation to unproductive assets.

Exhibit 42: We value M&M at Rs1,000 based on SOTP methodology M&M sum-of-the-parts valuation methodology

EPS MultipleValue per

share(Rs/share) (X) (Rs) Comment

M&M standalone + MVML 58.8 13.0 764 Based on 13X 12-month forward EPS less dividend income from subsSubsidiaries 235Tech Mahindra 79 Based on KIE target price price of Rs1,000/shareMahindra Holidays 30 Based on current price of Rs332/shareM&M Financial Services Ltd 77 Based on current price price of Rs1,005/shareMahindra Lifespace Developers Ltd 11 Based on current market price of Rs 416/shareMahindra Forgings 3 Based on current price of Rs53/shareSsangyong Motors 34 Based on investment made by M&M in the firm of 463 mn dollarsSOTP-based value 999Target price 1,000

Notes(1) The subsidiaries have been valued at a holding company discount of 20%.


Exhibit 43: We expect tractor volumes to grow by 7-8% over FY2014-15 after flat growth in FY2013 M&M sales volume estimates, March fiscal year-ends, 2010-15E (units)

2010 2011 2012 2013E 2014E 2015EUtility vehicles - domestic 201,489 230,110 261,440 282,355 316,238 363,673 XUV500 14,253 48,000 52,800 58,080 Quanto 15,000 30,000 33,000 Utility vehicles - exports 10,567 19,042 29,176 37,929 43,618 50,161 Utility vehicles 212,056 249,152 304,869 383,284 442,656 504,914 Maxximo + Gio 12,639 44,683 79,337 91,238 104,923 120,662 Three wheelers 57,424 62,142 67,440 67,440 70,812 76,477 Verito 17,776 18,665 30,665 33,731 Auto division 282,119 355,977 469,422 560,626 649,056 735,784 Tractors 174,634 213,653 235,452 235,452 251,934 272,088 Total vehicles 456,753 569,630 704,874 796,078 900,990 1,007,873 Growth (yoy %)Utility vehicles - domestic 31.1 14.2 13.6 8.0 12.0 15.0 XUV500 236.8 10.0 10.0 Quanto 100.0 10.0 Utility vehicles - exports 24.3 80.2 53.2 30.0 15.0 15.0 Utility vehicles 30.8 17.5 22.4 25.7 15.5 14.1 Maxximo + Gio 253.5 77.6 15.0 15.0 15.0 Three wheelers 28.9 8.2 8.5 — 5.0 8.0 Verito 5.0 64.3 10.0 Auto division 36.5 26.2 31.9 19.4 15.8 13.4 Tractors 83.2 22.3 10.2 — 7.0 8.0 Total vehicles 51.2 24.7 23.7 12.9 13.2 11.9




Exhibit 44: We estimate earnings will clock 14% CAGR over FY2012-15E M&M standalone profit and loss, balance sheet and cash flow statement, March fiscal year-ends, 2010-15E (Rs mn)

2010 2011 2012 2013E 2014E 2015EProfit model (Rs mn)Net sales 186,021 234,937 319,529 406,412 468,865 534,997 EBITDA 29,552 34,655 37,907 47,434 53,263 60,600 Other income 1,994 3,095 3,366 3,728 3,983 4,223 Interest (278) 503 (536) (303) 191 580 Depreciation (3,708) (4,139) (5,761) (7,000) (8,577) (9,792) Profit before tax 27,560 34,114 34,976 43,859 48,860 55,611 Current tax (7,493) (7,617) (5,382) (11,184) (12,459) (14,181) Deferred tax (97) (958) (1,888) — — —Net profit 20,878 26,714 28,789 32,675 36,401 41,430 Adjusted net profit 20,878 25,619 27,706 32,675 36,401 41,430 Adjusted earnings per share (Rs) 33.9 41.7 45.1 53.2 59.3 67.5 Adjusted earnings per share ex subs dividends (Rs) 32.5 39.7 42.6 49.5 55.1 62.9 Balance sheet (Rs mn)Equity 80,671 106,678 126,982 148,510 172,494 199,790 Total borrowings 28,802 24,053 35,808 33,425 25,687 15,687 Current liabilities 52,000 67,676 76,330 93,498 104,412 116,505 Total liabilities 161,473 198,406 239,120 275,433 302,592 331,982 Net fixed assets 37,027 43,719 50,808 63,808 70,231 75,439 Investments 63,980 93,253 103,105 112,105 120,105 128,105 Cash 17,432 6,146 11,884 10,223 9,113 11,146 Other current assets 42,992 55,288 73,323 89,298 103,144 117,292 Miscellaneous expenditure 41 — — — — —Total assets 161,473 198,406 239,120 275,433 302,592 331,982 Free cash flow (Rs mn)Operating cash flow excluding working capital 23,409 27,724 32,192 36,251 40,803 46,419 Working capital changes (45) 2,074 (4,843) 1,193 (2,932) (2,055) Capital expenditure (9,607) (12,070) (13,404) (20,000) (15,000) (15,000) Free cash flow 13,758 17,728 13,945 17,444 22,872 29,364 RatiosEBITDA margin (%) 15.9 14.8 11.9 11.7 11.4 11.3 PAT margin (%) 11.2 11.4 9.0 8.0 7.8 7.7 Debt/equity (X) 0.4 0.2 0.3 0.2 0.1 0.1 Net debt/equity (X) 0.1 0.2 0.2 0.2 0.1 0.0 Book value (Rs/share) 131.4 168.0 198.2 233.3 272.3 316.8 RoAE (%) 30.5 28.2 24.6 24.7 23.4 22.9 RoACE (%) 19.2 19.6 16.9 17.9 17.9 18.6




Exhibit 45: MVML’s profit is expected to rise sharply as production at the Chakan plant increases M&M + MVML profit and loss statement, March fiscal year-ends, 2012-15E (Rs mn)

2012 2013E 2014E 2015EVolumes 704,874 796,078 900,990 1,007,873 Average realization 489,898 543,787 557,382 568,529 Gross sales 345,317 432,897 502,195 573,005 Excise duty 31,506 46,753 54,237 61,885 Net sales 313,811 386,144 447,958 511,121 Raw materials 223,947 276,093 322,530 368,007 Staff costs 17,946 20,638 23,734 27,294 Other expenses 30,306 36,367 41,822 48,095 Total expenses 272,199 333,098 388,086 443,396 EBITDA 41,613 53,046 59,873 67,725 Other income 4,735 5,445 6,099 6,831 Interest expense 2,874 3,000 2,600 2,100 Depreciation 6,699 7,938 9,514 10,729 Extraordinary income 1,083 — — —Profit before tax 37,858 47,554 53,857 61,726 Tax expenses 7,887 12,459 14,111 16,172 Profit after tax 29,970 35,095 39,746 45,554 Adj profit before tax 28,888 35,095 39,746 45,554 EPS FD 47.0 57.2 64.7 74.2 EPS FD ex subs dividends 44.5 53.4 60.6 69.6 Ratios (%)EBITDA margin (%) 13.3 13.7 13.4 13.3 Raw material cost (percentage of sales) 71.4 71.5 72.0 72.0 Staff cost (percentage of sales) 5.7 5.3 5.3 5.3 Other expenses (percentage of sales) 9.7 9.4 9.3 9.4 Excise duty (percentage of sales) 9.1 10.8 10.8 10.8 Tax rate (%) 20.8 26.2 26.2 26.2 MVML profit 1,181 2,420 3,346 4,124 MVML profit/share 1.9 3.9 5.4 6.7




"I, Hitesh Goel, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report."



Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of September 30, 2012

Percentage of companies covered by Kotak Institutional Equities, within the specified category.

Percentage of companies within each category for which Kotak Institutional Equities and or its affiliates has provided investment banking services within the previous 12 months.

* The above categories are defined as follows: Buy = We expect this stock to deliver more than 15% returns over the next 12 months; Add = We expect this stock to deliver 5-15% returns over the next 12 months; Reduce = We expect this stock to deliver -5-+5% returns over the next 12 months; Sell = We expect this stock to deliver less than -5% returns over the next 12 months. Our target prices are also on a 12-month horizon basis. These ratings are used illustratively to comply with applicable regulations. As of 30/09/2012 Kotak Institutional Equities Investment Research had investment ratings on 172 equity securities.

18.0%23.3%

35.5%

23.3%

3.5%7.6%

0.0% 1.2%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Analyst coverage Companies that the analyst mentioned in this document follow

Covering Analyst: Hitesh Goel

Company name Ticker

Ashok Leyland ASOK.BO

Bajaj Auto BJAT.BO

Bharat Forge BFRG.BO

Exide Industries (EXID.BO)

Hero Honda HROH.BO

Mahindra & Mahindra MAHM.BO

Maruti Udyog MRTI.BO

Motherson Sumi MOSS.BO

Tata Motors TAMO.BO

Source: Kotak Institutional Equities research

Disclosures


Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to deliver more than 15% returns over the next 12 months.

ADD. We expect this stock to deliver 5-15% returns over the next 12 months.

REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.

SELL. We expect this stock to deliver <-5% returns over the next 12 months.

Our target prices are also on a 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

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