A project report on fundamental analysis of mahindra&mahindra company
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A project report on fundamental analysis of mahindra&mahindra company



A project report on fundamental analysis of mahindra&mahindra company

A project report on fundamental analysis of mahindra&mahindra company



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A project report on fundamental analysis of mahindra&mahindra company A project report on fundamental analysis of mahindra&mahindra company Document Transcript

  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA EXECUTIVE SUMMARY Indias domestic automotive industry, enjoyed high growth infinancial year-05, continuing the healthy trend set in financial year-04.Increased industrial growth contributed to the upward trend. All theautomotive industry segments in which M&M has a presence witnessed agrowth in demand in financial year-05. The Indian tractor industry toosaw an upward trend after a severe downturn period, due to favorablemonsoon and better credit terms helped to build positive sentiments. Themajor players in the Commercial Vehicle Segment are Ashok Leyland Ltd,Hindustan Motors Ltd, Telco, Volvo India Pvt.Ltd, Bajaj Tempo Ltd,Eicher Motors Ltd, Mahindra & Mahindra Ltd, and Swaraj Mazda Ltd. Mahindra & Mahindra Limited (M&M) is the flagship company ofaround Rs. 8000 crore Mahindra Group, which has a significant presencein key sectors of the Indian economy. A consistently high performer,M&M is one of the most respected companies in the country. Set up in1945 to make general-purpose utility vehicles for the Indian market,M&M soon branched out into manufacturing agricultural tractors andlight commercial vehicles (LCVs). The company later expanded itsoperations from automobiles and tractors to secure a significant presencein many more important sectors. The company has, over the years,transformed itself into a Group that caters to the Indian and overseasmarkets with a presence in vehicles, farm equipment, informationtechnology, trade and finance related services, and infrastructure Babasabpatilfreepptmba.com 1
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAdevelopment. Mahindra & Mahindra Ltd (M&M) is a leading player in theIndian utility vehicles and tractors segment with market shares of 49.5%in Jeeps / MUVs, 30.9% in 3-wheelers, and market share of 25.9% inTractors in the FY2005. This study tries to cover the industry related data and in depthcompany study and an overview of the economy, evaluates the companyon various valuation models. Babasabpatilfreepptmba.com 2
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRATHEORETICAL BACKGROUNDFUNDAMENTAL ANALYSIS: Fundamental analysis is the examination of the underlying forces thataffect the well being of the economy, industry groups, and companies. Aswith most analysis, the goal is to derive a forecast and profit from futureprice movements. At the company level, fundamental analysis may involveexamination of financial data, management, business concept andcompetition. At the industry level, there might be an examination of supplyand demand forces for the products offered. For the national economy,fundamental analysis might focus on economic data to assess the presentand future growth of the economy. To forecast future stock prices,fundamental analysis combines economic, industry, and company analysisto derive a stocks current fair value and forecast future value. If fair valueis not equal to the current stock price, fundamental analysts believe that thestock is either over or under valued and the market price will ultimatelygravitate towards fair value. Fundamentalists do not heed the advice of therandom walkers and believe that markets are weak form efficient. Bybelieving that prices do not accurately reflect all available information,fundamental analysts look to capitalize on perceived price discrepancies. Babasabpatilfreepptmba.com 3
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA STRENGTHS AND WEAKNESS OF FUNDAMENTAL ANALYSISLong-term Trends: Fundamental analysis is good for long-term investments based onlong-term trends, very long-term. The ability to identify and predict long-term economic, demographic, technological or consumer trends canbenefit patient investors who pick the right industry groups or companies.Value Spotting: Sound fundamental analysis will help identify companies thatrepresent good value. Some of the most legendary investors think long-term and value. Graham and Dodd, Warren Buffett and John Neff are seenas the champions of value investing. Fundamental analysis can helpuncover companies with valuable assets, a strong balance sheet, stableearnings and staying power.Business Acumen: One of the most obvious, but less tangible, rewards of fundamentalanalysis is the development of a thorough understanding of the business.After such painstaking research and analysis, an investor will be familiarwith the key revenue and profit drivers behind a company. Earnings andearnings expectations can be potent drivers of equity prices. Even sometechnicians will agree to that. A good understanding can help investorsavoid companies that are prone to shortfalls and identify those that Babasabpatilfreepptmba.com 4
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAcontinue to deliver. In addition to understanding the business, fundamentalanalysis allows investors to develop an understanding of the key valuedrivers and companies within an industry. Its industry group heavilyinfluences a stock’s price. By studying these groups, investors can betterposition themselves to identify opportunities that are high-risk (tech), low-risk (utilities), growth oriented (computer), value driven (oil), non-cyclical(consumer staples), cyclical (transportation) or income oriented (high yield).Knowing Whos Who: Stocks move as a group. By understanding a companys business,investors can better position themselves to categorize stocks within theirrelevant industry group. Business can change rapidly and with it therevenue mix of a company. This happened to many of the pure internetretailers, which were not really internet companies, but plain retailers.Knowing a companys business and being able to place it in a group canmake a huge difference in relative valuations. Babasabpatilfreepptmba.com 5
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAWEAKNESSTime Constraints: Fundamental analysis may offer excellent insights, but it can beextraordinarily time consuming. Time-consuming models often producevaluations that are contradictory to the current price.Industry/Company Specific: Valuation techniques vary depending on the industry group andspecifics of each company. For this reason, a different technique andmodel is required for different industries and different companies. This canget quite time consuming and limit the amount of research that can beperformed.Subjectivity: Fair value is based on assumptions. Any changes to growth ormultiplier assumptions can greatly alter the ultimate valuation.Fundamental analysts are generally aware of this and use sensitivity analysisto present a base-case valuation, a best-case valuation and a worst-casevaluation. However, even on a worst case, most models are almost alwaysbullish, the only question is how much so. Babasabpatilfreepptmba.com 6
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAAnalyst Bias: The majority of the information that goes into the analysis comesfrom the company itself. Companies employ investor relations managersspecifically to handle the analyst community and release information.Introduction to Investment Valuation Every asset, financial as well as real, has value. The key to successfullyinvesting in and managing these assets lies in understanding not only whatthe value is, but the sources of the value. Any asset can be valued, butsome assets are easier to value than others, and the details of valuation willvary from case to case. Thus, the valuation of a share of a real estateproperty will require different information and follow a different formatfrom the valuation of a publicly traded stock. What is surprising; however,is not the difference in valuation techniques across assets, but the degree ofsimilarity in basic principles. There is undeniably uncertainty associatedwith valuation. Often that uncertainty comes from the asset being valued,although the valuation model may add to that uncertainty. Babasabpatilfreepptmba.com 7
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAA PHILOSOPHICAL BASIS FOR VALUATION A surprising number of investors subscribe to the “bigger fool”theory of investing, which argues that the value of an asset is irrelevant aslong as there is a “bigger fool” around who is willing to buy the asset fromthem. While this may provide a basis for some profits, it is a dangerousgame to play, since there is no guarantee that such an investor will still bearound when the time to sell comes. A postulate of sound investing is that an investor does not pay morefor an asset than its worth. This statement may seem logic and obvious, butit is forgotten and rediscovered at some time in every generation and inevery market. There are those who are disingenuous enough to argue thatvalue is in the eyes of the beholder, and that any price can be justified ifthere are other investors willing to pay that price. That is patently absurd.Perceptions may be all that matter when the asset is a painting or asculpture, but investors do not (and should not) buy most assets foraesthetic or emotional reasons; financial assets are acquired for the cashflows expected from owning them. Consequently, perceptions of valuehave to be backed up by reality, which implies that the price that is paid forany asset should reflect the cash flows it is expected to generate. Themodels of valuation described in this book attempt to relate value to thelevel and expected growth of these cash flows. Babasabpatilfreepptmba.com 8
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA There are many areas in valuation where there is room fordisagreement, including how to estimate true value and how long it willtake for prices to adjust to true value. But there is one point on which therecan be no disagreement. Asset prices cannot be justified merely by usingthe argument that there will be other investors around willing to pay ahigher price in the future.THE ROLE OF VALUATION Valuation is useful in a wide range of tasks. The role it plays,however, is different in different arenas. The following section lays out therelevance in portfolio management, in acquisition analysis, and in corporatefinance.Valuation and Portfolio Management The role that valuation plays in portfolio management is determinedin large part by the investment philosophy of the investor. Valuation playsa minimal role in portfolio management for a passive investor, whereas itplays a larger role for an active investor. Even among active investors, thenature and role of valuation are different for different types of activeinvestors can be categorized as either market timers, who trust in theirabilities to foresee the direction of the overall stock or bond markets, onsecurity selection who believe that their skills lie in funding under or over Babasabpatilfreepptmba.com 9
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAvalued securities. Market timers use valuation much less than do investorswho pick stocks, and the focus is on market valuation rather than on firmspecific valuation. Among security selectors, valuation plays a central rolein portfolio management for fundamental analysts and a peripheral role fortechnical analysis.The following subsections describe, in broad terms. Different philosophiesand the role played by valuation in each.Fundamental Analysts The underlying theme in fundamental analysis is that the true value ofthe firm can be related to its financial characteristics- its growth prospects,prospects, risk profile, and cash flows. Any deviation from this true value isa sign that a stock is under or overvalued. It is a long-term investmentstrategy and the assumptions underlying it are that:(a) The relationship between value and the underlying financial factors canbe measured.(b) The relationship is stable over time.( c ) Deviations from the relationship are corrected in a reasonable timeperiod.Valuation is the central focus in fundamental analysis. Some analysts’ usediscounted cash flow models to value firms, while others use multiplessuch as price/earnings and price/book value ratios. Since investors usingthis approach hold a large number of "undervalued stocks in theirportfolios, their hope is that, on average, these portfolios will do betterthan the market. Babasabpatilfreepptmba.com 10
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAFranchise Buyers The philosophy of a franchise buyer is best expressed by an investorwho has been very successful at it -Warren Buffet. “We try to stick tobusinesses we believe we. Understand,” Mr.Buffett writes. “That meansthey must be relatively simple and stable in character. If a business iscomplex and subject to constant change, were not smart enough to predictfuture cash flows. “Franchise buyers concentrate on a few businesses theyunderstand well and attempt to acquire undervalued firms. Often, as in thecase of Mr. Buffet, franchise buyers wield influence on the management ofthese firms and can change financial and investment policy. As a long-termstrategy, the underselling assumptions are that:(a) Investors who understand a business well are in a better position tovalue it correctly.(b) These undervalued businesses can be acquired without driving the priceabove the true value. Valuation plays a key role in this philosophy, since franchise buyersarc attracted to a particular business because they believe it is undervalued.They are also interested in how much additional value they can create byrestructuring the business and running it right.Chartists Babasabpatilfreepptmba.com 11
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Chartists believe that prices are driven as much by investorpsychology as by any underlying financial variables. The informationavailable from trading - price movements, trading volume, short sales, andso forth - gives an indication of investor psychology and future pricemovements. The assumptions here are that prices move in predictablepatterns, that there are not enough marginal investors taking advantage ofthese patterns to eliminate them, and that the average investor in themarket is driven more by emotion than by rational analysis. While valuation does not play much of a role in charting, there areways in which an enterprising chartist can incorporate it into analysis. Forinstance valuation can be used to determine support and resistance lines4on price chart.Information Traders Prices move on information about the firm. Information tradersattempt to trade in advance of new information or shortly after it isrevealed to financial markets, buying on good news and selling on bad. Theunderlying assumption is that these traders can anticipate informationannouncements and gauge the market reaction to them better than theaverage investor in the market. For information trader the focus is on the relationship betweeninformation and changes in value, rather than on value per se. Thus aninformation trader may buy an “overvalued” firm if he or she believes that Babasabpatilfreepptmba.com 12
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAthe next information announcement is going to cause the price to go upbecause it contains better-than-expected news. If there is a relationshipbetween how undervalue or overvalued a company is and how its stockprice reacts to new information then valuation could play a role in investingfor an information trader.Market Timers Market timers note, with some legitimacy, that the payoff to callingturns in markets is much greater than the returns from stock picking. Theyargue that it is easier to predict market movements than to select stocksand that these predictions can be based upon factors that are observable.While valuation of individual stocks may not be of any use to a markettimer, market timing strategies can use valuation in at least two ways:(a) The overall market itself can be valued and compared to the currentlevel.(b) A valuation model can be used to value all stocks, and the results fromthe cross-section can be used to determine whether the market is over orundervalued. For example, as the numbers of stocks that are overvaluedusing the dividend discount model increases relative to the numbers thatare undervalued, there may be reason to believe that the market isovervalued. Babasabpatilfreepptmba.com 13
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAEfficient Marketer Efficient marketers believe that the market price at any point in timerepresents the best estimate of the true value of the firm and that anyattempt to exploit perceived market efficiencies will cost more than it willmake in excess profits. They assume that markets aggregate informationquickly and accurately, that marginal investors promptly exploit anyinefficiencies, and that any inefficiencies in the market are caused byfriction, such as transaction costs, and cannot be arbitraged away. For efficient marketers, valuation is a useful exercise to determinewhy, stock sells for the price it does. Since the underlying assumption isthat the market price is the best estimate of the true value of the company,the objective becomes determining what assumptions about growth andrisk are implied in this market price, rather than on finding under- orovervalued firms.Valuation in Acquisition Analysis – Valuation should play a central part in acquisition analysis. Thebidding firm or individual has to decide on a fair value for the target firmbefore making a bid, and the target firm has to determine a reasonablevalue for itself before deciding to accept or reject the offer. There are also special factors to consider in takeover valuation. First,the effects of synergy on the combined value of the two firms (target plus Babasabpatilfreepptmba.com 14
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAbidding firm) have to be considered before a decision is made on the bid.Those who suggest that synergy is impossible to value and should not beconsidered impossible to value should not be considered in quantitativeterms are wrong. Second, the effects on value of changing managementand restructuring the target firm will have to be taken into account indeciding on a fair price. This is of particular concern in hostile takeovers. Finally, there is a significant problem with bias in takeover valuations.Target firms may be overly optimistic in estimating value, especially whenthe takeover is hostile and they are trying to convince their stockholdersthat the offer price is too low. Similarly, if the bidding firm has decided, forstrategic reasons, to do an acquisition, there may be strong pressure on theanalyst to come up with an estimate of value that backs up the acquisitiondecision.Valuation in Corporate Finance The objective in corporate finance is the maximization of firm value,and then the relationship between financial decisions, corporate strategy,and firm value has to be delineated. In recent years, management-consulting firms have started offering companies advice on how to increasevalue. Their suggestions have often provided the basis for the restructuringof these firms. Babasabpatilfreepptmba.com 15
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA The value of a firm can be directly related to decisions that it makes-on that projects it takes, on how it finances them, and on its dividendpolicy. Understanding this relationship is key to making value-increasingdecisions and to sensible financial restructuring. Equity represents a residual cash flow rather than a promised cash flow. You can value equity in one of two ways:• By discounting cash flows to equity at the cost of equity to arrive at thevalue of equity directly.• By discounting cash flows to the firm at the cost of capital to arrive at thevalue of the business. Subtracting out the firm’s outstanding debt shouldyield the value of equity.Two Measures of Cash FlowsCash flows to Equity: These are the cash flows generated by the assetafter all expenses and taxes, and also after payments due on the debt. Thiscash flow, which is after debt payments, operating expenses and taxes, iscalled the cash flow to equity investors.Cash flow to Firm: There is also a broader definition of cash flow that wecan use, where we look at not just the equity investor in the asset, but atthe total cash flows generated by the asset for both the equity investor andthe lender. This cash flow, which is before debt payments but afteroperating expenses and taxes, is called the cash flow to the firm. Babasabpatilfreepptmba.com 16
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRATwo Measures of Discount RatesCost of Equity: This is the rate of return required by equity investors onan investment. It will incorporate a premium for equity risk –the greaterthe risk, the greater the premium.Cost of capital: This is a composite cost of all of the capital invested in anasset or business. It will be a weighted average of the cost of equity and theafter-tax cost of borrowing.FREE CASH FLOWS TO THE FIRM The best things in life are free, and the same holds true for cash flow.Smart investors love companies that produce plenty of free cash flow(FCF). It signals a companys ability to pay debt, pay dividends, buy backstock and facilitate the growth of business - all important undertakingsfrom an investors perspective. However, while free cash flow is a greatgauge of corporate health, it does have its limits and is not immune toaccounting trickery.What Is Free Cash Flow? By establishing how much cash a company has after paying its billsfor ongoing activities and growth, FCF is a measure that aims to cut Babasabpatilfreepptmba.com 17
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAthrough the arbitrariness and "guesstimations" involved in reportedearnings. Regardless of whether a cash outlay is counted as an expense inthe calculation of income or turned into an asset on the balance sheet, freecash flow tracks the money.To calculate FCF, make a beeline for the companys cash flow statementand balance sheet. There you will find the item cash flow from operations(also referred to as "operating cash"). From this number subtract estimatedcapital expenditure required for current operations:- Cash Flow from Operations (Operating Cash)- Capital Expenditure To do it another way, grab the income statement and balance sheet.Start with net income and add back charges for depreciation andamortization. Make an additional adjustment for changes in workingcapital, which is done by subtracting current liabilities from current assets.Then subtract capital expenditure, or spending on plants and equipment:- Net income+ Depreciation/Amortization- Change in Working Capital- Capital Expenditure It might seem odd to add back depreciation/amortization since itaccounts for capital spending. The reasoning behind the adjustment,however, is that free cash flow is meant to measure money being spentright now, not transactions that happened in the past. This makes FCF auseful instrument for identifying growing companies with high up-front Babasabpatilfreepptmba.com 18
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAcosts, which may eat into earnings now but have the potential to pay offlater.What Does Free Cash Flow Indicate? Growing free cash flows are frequently a prelude to increasedearnings. Companies that experience surging FCF - due to revenue growth,efficiency improvements, cost reductions, share buy backs, dividenddistributions or debt elimination - can reward investors tomorrow. That iswhy many in the investment community cherish FCF as a measure ofvalue. When a firms share price is low and free cash flow is on the rise, theodds are good that earnings and share value will soon be on the up. By contrast, shrinking FCF signals trouble ahead. In the absence ofdecent free cash flow, companies are unable to sustain earnings growth. Aninsufficient FCF for earnings growth can force a company to boost its debtlevels. Even worse, a company without enough FCF may not have theliquidity to stay in business. Babasabpatilfreepptmba.com 19
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRARESEARCH DESIGN OF THE STUDYINTRODUCTION: Every stock available in the markets has a value called market price,which is the indicator of the company’s performance. According tofundamental analysis we will try to find the intrinsic value of a particularstock, which is the true value of the stock, based on which investmentarguments take place.STATEMENT OF PROBLEM: Every asset, financial as well as real, has value. The key to successfullyinvesting in and managing these assets lies in understanding not only whatthe value is, but the sources of the value. Any asset at can be valued butsome assets are easier to value than others, and the details of the valuationwill vary from case to case. Thus, the valuation of a share of a real estateproperty will require different information and follow a different formatfrom the valuation of a publicly traded stock. What is surprising; however,is not the difference in valuation techniques across assets, but the degree ofsimilarity in basic principles. There is undeniably uncertainty associatedwith valuation. Often the uncertainty comes from the asset being valued,although the valuation model may add to that ascertained. Babasabpatilfreepptmba.com 20
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA A postulate of sound investing is that an investor does not pay morefor asset than its worth. This statement may seem logical and obvious asfinancial assets are acquired for the cash flows expected from owningthem, which implies that the price that is paid for any asset should reflectthe cash flows it is expected to generate. The problem in valuation is not that there are not enough models tovalue an asset; it is that there are too many. Choosing the right model touse in valuation is as critical to arriving at a reasonable value asunderstanding how to use the model. Analysts use a wide variety of modelsfrom simple to the sophisticated. These models often make differentassumptions about pricing, but they do share some common characteristicsso in the study we tried to use price-earning multiples and discounted cashflow models of valuation. Babasabpatilfreepptmba.com 21
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAOBJECTIVES OF THE STUDY: • To understand the macroeconomic variables those will an impact on the company progress. • To study the various trends, opportunities, challenges of the industry in which the company operates. • To understand the various policies of the company those have impact on the financial performance of the company. • To understand the various investment valuation models that can be used. • To select the appropriate model that suits the stock. • Find the intrinsic value of the stock and compare with market value of the study. • To recommend whether to buy, hold or sell the stock based on the analysis.SCOPE OF THE STUDY: The study basically tries to identify the intrinsic value of the companyby using the published financial details of the company. The study isrestricted to one particular company in the sector. The study also includestesting the intrinsic value of the company. Babasabpatilfreepptmba.com 22
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRARESEARCH METHODOLOGY:Type of research: Research design is the conceptual structure within which research isconducted. It constitutes the blue print for the collection, measurement,and analysis of data. The type of research adopted for the study isdescriptive research as the research does not require any manipulation ofvariables and does not establish causal relationship between events; it justsimply describes the variables.Sources of data:Primary data Those are the data that are obtained by a study specially designed tofulfill the data needs of the problem. Meeting the company professionalspersonally collected the information necessary for the study.Secondary data Data, which are not originally collected but rather obtained frompublished or unpublished sources, are known as secondary data. In thisresearch secondary data was collected through sources like Internet,research reports, magazines, and company journals. Babasabpatilfreepptmba.com 23
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRASampling plan: Type of sampling : Non-probabilistic judgment sampling. Sample size : One company from automobile sector.RESEARCH INSTRUMENTS:Financial calculations: - This was done to find the various valuationratios and necessary calculations to find the intrinsic value of thecompany.Z – Test: - This test was used to test the hypothesis.PLAN OF ANALYSIS: After having collected the financial data related to the entities i.e., thesample selected from the selected sector. Calculate the various valuationratios and other financial calculations that will help in the companyvaluation. This helps in finding out the intrinsic value of the company’sshare. Then hypothesis was tested whether the company is under or overvalued. Babasabpatilfreepptmba.com 24
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRALIMITATIONS OF THE STUDY: • The study was confined only to one particular sector. • The study was more confined with secondary data. • The study assumes no changes in the tax rates in the country. • The study was done for a short period of time, which might not hold true over a long period of time. • As the scope is defined by the researcher it restricts the number of variables which Influence the industry.OPERATIONAL DEFINITIONS OF THE CONCEPTS:1) BETA: A measure of a securitys or portfolios volatility, or systematic risk, incomparison to the market as a whole. It is also known as "betacoefficient."2) CAPEX: Funds used by a company to acquire or upgrade physical assets suchas property, industrial buildings, or equipment.3) CAGR: The year over year growth rate of an investment over a specifiedperiodoftime.Calculated by taking the nth root of the total percentage growth rate wheren is the number of years in the period being considered. Babasabpatilfreepptmba.com 25
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAThis can be written as:4) COST OF EQUITY: The return that stockholders require for a company for the capitalinvested. The traditional formula is the dividend capitalization model:5) DEBT/EQUITY RATIO: A measure of a companys financial leverage calculated by dividinglong-term debt by shareholders equity. It indicates what proportion ofequity and debt the company is using to finance its assets.Note: Sometimes investors only use interest bearing long-term debt insteadof total liabilities.6) DEPRECIATION: An expense recorded to reduce the value of a long-term tangibleasset. Since it is a non-cash expense, it increases free cash flow whiledecreasing reported earnings. Babasabpatilfreepptmba.com 26
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA7) DIVIDEND PAYOUT RATIO:The percentage of earnings paid to shareholders in dividends.9) DUPONT ANALYSIS: A method of performance measurement that was started by theDuPont Corporation in the 1920s, and has been used by them ever since.With this method, assets are measured at their gross book value rather thanat net book value in order to produce a higher ROI.10) EPS:The portion of a companys profit allocated to each outstanding share ofcommon stock. Calculated as:11) EFFECTIVE TAX RATE:The portion of a companys profit allocated to each outstanding share ofcommon stock. Calculated as:12) EQUITY MULTIPLIER:A measure of financial leverage calculated as:Total Assets divided by Total Stockholders Equity. Babasabpatilfreepptmba.com 27
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Like all debt management ratios, the equity multiplier is a way ofexamining how a company uses debt to finance its assets. It is also knownas the financial leverage ratio or leverage ratio.13) ASSET TURN OVER RATIO: The amount of sales generated for every dollars worth of assets. It iscalculated by dividing sales in rupees by assets in rupees.Formula:14) FUNDMENTAL ANALYSIS: The amount of sales generated for every dollars worth of assets. It iscalculated by dividing sales in rupees by assets in rupees.Formula:15) MARKET CAPITALISATION: It is the total value of all outstanding shares of particular company,which is represented in the market. Its calculated by multiplying thenumber of shares times the current market price. This term is oftenreferred to as market cap. Babasabpatilfreepptmba.com 28
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA16) PE (PRICE EARNING MULTIPLES): A valuation ratio of a companys current share price compared to itsper-share earnings. A valuation ratio of a companys current share pricecompared to its per-share earnings.Calculated as:17) PEG (PRICE EARNING TO GROWTH):A valuation ratio of a companys current share price compared to its per-share earnings.18) ROE:A measure of a corporations profitability, calculated as:19) WACC: A calculation of a firms cost of capital that weight eachcategory of capital proportionately. Included in the WACC calculations areall capital sources, including common stock, preferred stock, bonds, andany other long-term debt. Babasabpatilfreepptmba.com 29
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAWACC is calculated by multiplying the cost of each capital component byits proportional weighting and then summing: Babasabpatilfreepptmba.com 30
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRACHAPTER SCHEMEChapter: 1 THEORITICAL BACKGROUND OF THE STUDY This chapter mainly deals with secondary data collected to supportthe study and the reasons to problem of study.Chapter: 2 RESEARCH DESIGN A research design serves as a bridge between what has been done inthe conduct of study to realize the specified objectives. It is an outline ofthe projects working.Chapter: 3 PROFILES This chapter includes the profile of the industry as well as thecompany in which the study is conducted. This is also tries to deal withtrends and prospects in the industry as well as the company.Chapter: 4 ANALYSES AND INTERPRETATION In this chapter using the analyzed data we have tried to find out theintrinsic value of the company. Hypothesis test is done to find whether thevalue of the company is under or over valued.Chapter: 5 SUMMARY OF FINDINGS, CONCLUSIONS ANDSUGGESTIONS In this chapter we will actually include all that we have analyzed andwhat has been found. Finally conclude checking whether the objective ofthe study has been achieved or not. Babasabpatilfreepptmba.com 31
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAECONOMIC ANALYSISEconomic Outlook: During the fiscal year 2003-04, India’s GDP which grew by 8.10%was principally on account of a strong recovery in the agriculture sectorand accelerated growth in the industry and services sectors. A growth ratehigher than 8% has been achieved in the past in only three years - 1967-68,1975-76 and 1988-89. Exports have grown by 17.1% in 2003-04 in USDterms. While the rupee appreciated against USD in 2003-04, it depreciatedagainst the currencies of major non –dollar-trading partners. Foreignexchange reserves crossed the levels of USD 100 billion mark onDecember 2003 and stood at USD 199.3 billion as on 31st March 2004.Foreign Institutional Investors (FIIs) investments saw a sharp rise duringthe year, which amounted to USD 10 billion. Overall economic conditionslook positive and expected to post a GDP growth of 6-6.5% during FY05. Babasabpatilfreepptmba.com 32
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAGRAPH 1: ACCELERATING GROWTH OF GDPTABLE 1: INDIA - ECONOMIC PARAMETERS F 04 F 05 GDP Growth (%) 8.1 6.0 - 6.5 Fiscal Deficit (%) 4.8 4.4 Interest Rate Declined Hardenin g Inflation (Average) 5.3 6.5 % Rupee - US Dollar Appreciate Steady d (Source: RBI, CMI)GRAPH 2: SHOWING INDIA’S REAL GDP GROWTH Babasabpatilfreepptmba.com 33
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA As chart also shows, growth in nonagricultural GDP remained solidduring 2004. Although a breakdown of Indian real GDP into its demandcomponents is not readily available, it is likely that India’s strongnonagricultural growth performance last year was due entirely too robustdomestic demand. The 10% rise in the production of consumer goods lastyear and the 20% increase in auto sales suggest that consumer spending hasbeen very strong indeed. Consumer spending in India has been supported recently by strongincome growth as growth in real per capita GDP has averaged 3.8% perannum since 2000.India has liberalized its economy over the past decade orso, much more needs to be done, and better allocation of resources,domestically and internationally, has contributed to this strong growth inper capita income. The Real Gross Domestic Product (GDP) is estimated to have grownby 8.10% in 2003-04, buoyed by a strong agricultural recovery. While theagricultural sector grew by 9.1% during the FY04, the industry and servicessectors have also maintained their momentum with the GDP growth by Babasabpatilfreepptmba.com 34
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAachieving a growth rate of 6.5% and 8.4% respectively during the year. Thegrowth GDP has grown by 7.4% during April-June 2004 period, lowerthan the 8.2% growth registered in January-March 2004 and 10.5% inOctober-December 2003 quarter. Inflation is also inching up higher, drivenby increases in fuel and commodity prices. Non food credit has increasedby 11.5% during the April-September 2004 period as against previouscorresponding year’s 6% indicating the progressive economic activities. Butthe global crude oil shock will definitely have an adverse affect on thegrowth during fiscal 2005.GRAPH 3: INFLATION The average inflation during fiscal year 2003-04 was around 5.5% asagainst the previous corresponding fiscals average of 3.4%, the primemovers being sugar, edible oils, textiles, leather and leather products, basicmetals, alloys, iron and steel. With the increase of few commodity pricesmainly the crude oil prices have increased the global inflation levels fromJune 2004, India being no exception to this. The domestic fuel prices have Babasabpatilfreepptmba.com 35
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRArisen by more than 10% during the fiscal 2004-05 over last years. Theinflation during the fiscal year 2004-05 touched three and a half years highof 8.33% for the week ended August 28th 2004 from 5.55% for the weekended June 5th 2004 due to the excess money supply in the economy. Thereasons for the high inflation are both domestic and international. Thedomestic reasons include excess liquidity in the market and delay inmonsoon that increased the prices of essential commodities. M3, themeasure of money supply grew by 15.5 per cent in July 2004, compared to11.25 per cent in July 2003. The international causes are inexorable rise inoil prices, global increase in the prices of commodities, supply side shockand growth in china’s demand for goods. This is cost-push inflationwherein the supply problems in a few important commodities push upprices of commodities. Since crude oil import constitute almost one thirdof the total exports, we can say that the present situation is on account ofimported inflation. To check the rising prices, government took somemeasures like duty cuts on steel and oil products. Reserve Bank of Indiaraised the Cash Reserve Ratio to 5% from 4.5% in two tranches of 25 basispoints and has also cut the rate of interest payable on eligible cash balancesmaintained with it by banks by 250 basis points to 3.5 percent. In fact, thegradual reduction in the CRR over the past few years in successive creditpolicies had been one of the major contributors for the sustained reductionin the interest rates on auto loans. These moves were expected to draw outaround Rs.8000 crore from the banking system. Later, the inflation wasreduced to 7.20% in the last week of September. With the increase in the Babasabpatilfreepptmba.com 36
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAinterest rates the auto loans will become costlier, thus having an adverseeffect on the auto industry sales. The average inflation for the fiscal 2004-05 is expected to stay around 6-6.5%.Industry:Sales: The automobile industry growth relies mainly on the country’seconomic and general conditions. Any slowdown in the economicmomentum would definitely slowdown the growth of the industry. It canbe seen from the below chart that the industry’s sales is positivelycorrelated with the economic growth with a co-relation of 0.96.GRAPH 4: GDP AND AUTO SALES Babasabpatilfreepptmba.com 37
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Real GDP (Rs. 000 Crore) No of units(in lakhs) At 1993-94 price levels GDP and Auto sales 1450 80 1400 75 1350 70 1300 65 60 1250 55 1200 50 1150 45 1100 40 1999- 2000- 2001- 2002- 2003- 00 01 02 03 04 GDP No of units (in lakhs)(Source: www.indiabudget.nic.in)Rubber Prices: With the increase in rural activities, the commercial vehicles areexpected to grow. Sports Utility Vehicles (SUV) after being a very big hit inthe domestic market, the players now are planning to introduce them to thedomestic market. But the increase in the input prices like steel and rubberhas a negative impact on the industry profitability. The trucker’s strike hasaffected the auto player’s production and distribution to certain extent.GRAPH 5: SHOWING RUBBER PRICES Babasabpatilfreepptmba.com 38
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Interntional & Domestic Rubber Prices 1600 70,000 1400 60,000 1200 50,000 USD/Ton Rs/Ton 40,000 1000 30,000 800 20,000 600 10,000 400 0 Mar- Jul-01 Nov- Apr- Aug- Dec- Apr- Aug- Dec- Apr- 01 01 02 02 02 03 03 03 04 USD/Ton Rs/TonSource: indiainfoline A combination of internal and external factors has contributed to theprice volatility in the rubber market. Since the domestic prices of rubberare less than the global prices, the tyre manufacturers in other countries,sourcing natural rubber from India which has led to the increase in theexports thereby reducing the domestic stock levels to less than sixty days ofconsumption of the rubber user’s sector. Also, the subsidy given by thegovernment for exports of rubber has resulted in an increase in theexports.The steel prices Babasabpatilfreepptmba.com 39
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAGRAPH 6: SHOWING STEEL PRICES Rs/Tonne Steel Prices 40,000 30,000 20,000 Apr-02 Apr-03 Apr-04 Oct-02 Oct-03 Oct-04 Jul-03 Jul-02 Jul-04 Jan-04 Jan-03 GC sheetsSource: indiainfoline The steel prices are on rise following a sharp increase in the prices ofraw materials like iron ore, coke, coal, power, gas and scrap. While the costof iron ore went up by 75% during the period June2003 to July 2004, thescrap prices jumped up by 91%. Coke’s prices saw an increase of 50%during the same period. There are no signs of decline in the prices of steelproducts following a strong demand from the housing and infrastructuresectors, with additional growth potential in the auto and consumer durablessectors too. With China taking steps to cool down its overheated economy,demand from that country is expected to slow down. But any shortfall indemand from China may be offset by growth in demand in the US, Europeand Japan as economic recovery gathers momentum leaving no scope forthe steel price declines in the near short term.Competition and Market Babasabpatilfreepptmba.com 40
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA In the Automotive Sector the continuing convergence between thecar and the UV markets is a positive development. High-end MUV salesaccounted for 51% of mid-size car sales in India in F-04, as compared to16% in F-00. The Co also believes that as the car market expands in India,MUVs will continue to take an increasing share of this market. After thesuccess of the Scorpio and Bolero, Reduced interest rates with thematuring of the vehicle financing market will also add an impetus to vehiclesales growth. Increased penetration of such financing products in rural andsemi-urban markets will directly benefit the Company given its strongpresence in these markets. M&M has the additional advantage that itssubsidiary, MMFSL has a wide rural network. The ongoing WTO & FreeTrade Area negotiations with Thailand, ASEAN, SAARC countries and theMercosur countries are likely to lead to lowered tariffs across many of ourtarget export markets. This could provide the Co with a significantopportunity to generate larger volumes from export sales. Being an agrarian economy India’s GDP growth is much dependenton the fortunes of the agro sector. Given this backdrop the Tractorindustry assumes significance. The Indian Tractor industry is the largest inthe world in terms of production and sales. However in terms of per capitausage it still scores low against comparable developing nations. Thisprovides for ample scope of growth for the industry in future. Withliberalization restrictions on capacities and production were removed.Today anybody can walk in and put up a plant and start operations. Babasabpatilfreepptmba.com 41
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Mahindra & Mahindra Limited (M&M) is the flagship company ofaround US $ 2.5 billion Mahindra Group, which has a significant presencein key sectors of the Indian economy. A consistently high performer,M&M is one of the most respected companies in the country. Set up in 1945 to make general-purpose utility vehicles for the Indianmarket, M&M soon branched out into manufacturing agricultural tractorsand light commercial vehicles (LCVs). The company later expanded itsoperations from automobiles and tractors to secure a significant presencein many more important sectors. The Company has, over the years,transformed itself into a Group that caters to the Indian and overseasmarkets with a presence in vehicles, farm equipment, informationtechnology, trade and finance related services, and infrastructuredevelopment.M&M has two main operating divisions:1) The Automotive Division manufactures utility vehicles, light commercialvehicles and three wheelers.2) The Tractor (Farm Equipment) Division makes agricultural tractors andimplements that are used in conjunction with tractors, and has alsoventured into manufacturing of industrial engines. The Tractor Divisionhas won the coveted Deming Application Prize 2003, making it the onlytractor manufacturing company in the world to secure this prize.The resurgence of the automotive industry and M&Ms success inexploiting it, has created an opportunity to strengthen the company Babasabpatilfreepptmba.com 43
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAthrough an entry into the Auto Components business, the growth of whichis being fueled by both, domestic and export demand. M&M employs around 11,500 people and has six state-of-the-artmanufacturing facilities spread over 500,000 square meters. M&M has alsoset up two satellite plants for tractor assembly. It has 49 sales offices thatare supported by a network of over 780 dealers across the country. Thisnetwork is connected to the Companys sales departments by an extensiveIT infrastructure. M&Ms outstanding manufacturing and engineering skills allow it toconstantly innovate and launch new products for the Indian market. TheCompanys significant recent product launch, the "Scorpio", resulted in theCompany winning the National Award for outstanding in-house researchand development from the Department of Science and Industry of theGovernment in 2003. The Company has launched Indias first tractor withturbo technology - the Mahindra Sarpanch 595 DI Super Turbo. The Companys commitment to technology-driven innovation isreflected in Companys plans of setting up of the Mahindra ResearchValley, a facility that will house the Companys engineering research andproduct development wings, under one roof. The M&M philosophy of growth is centered on its belief in people.As a result, the company has put in place initiatives that seek to reward andretain the best talent in the industry. M&M is also known for itsprogressive labour management practices. In the community development Babasabpatilfreepptmba.com 44
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAsphere, the company has implemented several programs that havebenefited the people and institutions in its areas of operations.Mahindra and Mahindra continues to be a solid company• Company has registered a 28 % rise in its total vehicle sales at 11,484units for August 2004 as against 8,946 units in the corresponding periodprevious fiscal.• ‘Mahindra City’ was granted special economic zone (SEZ) which includes100% tax holiday for the next 5 years and a 50% tax holiday for the nextfive years, exemption from customs duty, central excise, service tax,education cess, central sales tax, and all local taxes levied by the state.• Company has set up four overseas operations in Uruguay, Italy, Dubaiand South Africa for sale of Scorpio and Bolero models in these markets.• Enters in to segments such as retailing agri-inputs, under its own brand,manage corn and soya as collateral for banks, export fruit to Europeansupermarkets.• The Farm Equipment Sector is the first Tractor Company in the world towin the Deming Prize. Also, it is the fourth company in India and the 10thin the world, outside Japan, to win this prize.• Launched Indias first tractor with turbo technology in Patna, it is noweyeing to capture the tractor market in the Bihar state in a big way.• Regained dominance as a leader in both utility vehicles and tractorsacquiring 50% market share. Babasabpatilfreepptmba.com 45
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRARecent Developments &Future plans: The company’s long-term focus will continue to be MUVs. With thedifference between the passenger car and the MUV segments fastdisappearing, as the market for MUVs is likely to see a spurt in the nearfuture. The company plans to be the world’s biggest tractor maker by 2006,intends to overcome lack of similar size in utility vehicles (UV)manufacture by being a niche player. Their tractors were selling well in theUS, giving M&M a handsome market share in the 40-60 hp ranges inTexas. M&M`s main US markets are in the South and South West. Thecompany is growing at rate of 80 per cent in the US. Apart from US it alsoplans to market its tractors in Europe through a sister-trading firm afterrescheduling plans to set up a subsidiary in the region. The company willalso launch 85-horse power (HP) and 100HP models within the next 18months to meet the specific demand for high-powered tractors in theEuropean and US markets. On the cards are a number of improvementson the Maxx, based on customer feedback. The company also plans toexpand its appeal with new variants. For the low-end personal segment,M&M has introduced the Marshal Royale.Marketing competencies: Flanking its strategy to become a global player, M&M is banking onits key brand attributes which essentially signify three basic things: trust,reliability, and value-for-money. The overall marketing game plan involves Babasabpatilfreepptmba.com 46
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAa strategy around creating strong brands, Customer Touch – Build adatabase of Customers for targeted marketing, Providing a uniquecustomer experience - Unique showrooms which give an entirely newbuying experience are being planned and 40 dealerships would beconverted into such modern showrooms during the current year andImprove Operational Efficiencies – through outsourcing whereverrequired, value engineering and strategic sourcing. M&M has identified its 3 Weapons for the UV market. Each brandwill be positioned uniquely targeting various spectrum of the market, thethree brands - Scorpio, Bolero and Maxx. These are the three brands,which will be M&M’s future brand platform. Bolero will be one hub, whileScorpio will be one up market hub. The tractor segment where thecompany has 26% market share mainly depends on the distributionchannels of the company.Production and distribution: The Company’s manufacturing facilities are located at Kandivli,Nashik, Igatpuri, Nagpur, Zaheerabad, Jaipur and Rudrapur. Company hastwo main tractor manufacturing plants located at Mumbai and Nagpur inMaharashtra. Apart from these two main manufacturing units, the FarmEquipment Sector has satellite plants located at Rudrapur in Uttaranchaland Jaipur in Rajasthan. The Company has a strong and extensive dealernetwork of over 450 dealers for sales and service of tractors and spare Babasabpatilfreepptmba.com 47
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAparts. 28 area offices, situated in all the major cities and covering all theprincipal states, manage this dealer network.Employee Relations Employee relations have been generally cordial at all plants of thecompany. They have recently introduced two new schemes, which are inthe pipeline for its top-level managers in order to bring balance in theirwork and personal life. Under this scheme, company has changed its leavepolicy wherein it has introduced a compulsory 15-day leave for its middleand top-level officials. Besides this, the company also proposes toimplement a compulsory early day-off at 5 pm at least once a week. Theywant their employees to spend value time with their family at home. Theyare trying to follow ergonomic rules for providing efficient workingatmosphere, which is being effectively implemented by companies abroad.The company is also focusing on training and development programmersfor the career mapping of its employees and provides them with ameaningful professional career ahead. In addition, the company also plansto implement various development plans for training different level ofemployees. These measures will surely help in retaining its efficientcontributors. Babasabpatilfreepptmba.com 48
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRABoard of directors: Mr. Anand G Mahindra Vice-Chairman &Managing Director and thefour Executive Directors of the Company manage the Company. TheBoard reviews and approves strategy and oversees the actions and resultsof management to ensure that the long-term objectives of enhancingstakeholder value are met. The Company presently has seventeenDirectors. The Vice-Chairman & Managing Director and the fourExecutive Directors are Whole-time Directors. Reimbursement ofexpenses incurred in the discharge of their duties, the remuneration thatthese Directors would be entitled to under the Companies Act, 1956 asNon-Executive Directors. The Company has not entered into anymaterially significant transactions with its Promoters, Directors or theManagement or relatives, etc. that may have potential conflict with theinterests of the Company at large.Dividend policy: The Directors have recommended a dividend at 90% (Rs.9 pershare). The dividend, together with the tax on distributed profit, willabsorb a sum of Rs.117.79 crores (previous year Rs.71.98 crores) and willbe paid to those shareholders whose names stand registered in the booksof the Company as on the book closure date. Babasabpatilfreepptmba.com 49
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAINDUSTRY PROFILE: The Indian automobile sector can be divided into several segments: 2& 3 wheelers, passenger cars, commercial vehicles (Heavy CVs/ MediumCVs/Light CVs), utility vehicles (UVs) and tractors. The industry is highlycapital intensive in nature. Though three-wheelers and tractors have lowbarriers to entry in terms of technology, other segments are capital andtechnology intensive. Costs involved in branding, distribution network andspare parts availability increase entry barriers. With the Indian marketmoving towards complying with global standards, capital expenditure willrise to attune to future safety regulations. The industry is highly fragmented in nature. In the last ten years,supply has outstripped demand, as multinationals and domestic playershave set up large-scale manufacturing facilities to meet future needs. As aresult, there is an absence of pricing power with manufacturers.Competition is expected to increase further, as global majors are planningto enter India either through direct investment or imports. Automobilemajors increase profitability by selling more units. As number of units soldincreases, average cost of selling incremental unit comes down whendemand recovers. This is because the industry has a high fixed costcomponent. This is the key reason why operating efficiency throughincreased localization of components and maximizing output per employeeis of significance. Babasabpatilfreepptmba.com 50
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAINDUSTRY GROWTH IN VARIOUS SEGMENTSPassenger cars : 17%Utility vehicles : 23%Light commercial vehicles : 12%Heavy and multi commercial vehicles : 23%3 wheelers : 8%PORTER FIVE FORCES MODEL:Supply: The Indian automobile market is plagued with excess capacity.Demand: Is largely cyclical in nature and dependent upon economicgrowth and per capita income. Seasonality is also a vital factor.Barriers to entry: High capital costs, technology, distribution network, andavailability of auto components.Bargaining power of suppliers: Low, due to stiff competition and itsfragmented nature.Bargaining power of customers: Very high due to availability of options.Competition: Except for heavy commercial vehicles segment, competitionis stiff. The competition is expected to increase even further. Babasabpatilfreepptmba.com 51
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAPROSPECT IN THE SECTOR:• The government spending on infrastructure in roads and airports andhigher GDP growth in the future could benefit the auto sector in general.This combined with a softer interest rate environment will play a vital rolein providing a fillip to demand. Utility vehicle segment is expected to growat around 8% in FY05.• Though the market size is expected to grow by 12% -15%, competitivepressure could keep prices and margins under control.• After three years in the wilderness, tractor industry seems to have finallycome out of the trough as it grew by 10% during FY05. While goodmonsoon is a positive for the sector, given the fact that the country hashad erratic rainfall in the past, volumes may not recover sharply. But thelonger-term picture is impressive in light of poor mechanization levels inthe country.• With an estimated 39% of CVs plying on the roads 10 years old, demandfor HCVs is expected to grow by 8% in FY05. Also adding the positivesare higher crop output, industrial sector growth and favorable interest rateenvironment. While the industry is cyclical in nature, we expect this factorto weaken in the medium term arising out of structural changes in theindustry. The privatization of select state transport undertakings and hikingof bus fares bodes well for the bus segment as well. Babasabpatilfreepptmba.com 52
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA• The reduction in peak customs duty from 30% to 25% in the budget willresult in savings on the raw material front as well. Since raw material costsaccount for almost 50% of revenues of auto companies in general, this is apositive. Also, steel prices have shown some signs of softening and this islikely to have a positive impact on the margins of the players.• We expect Indian auto majors to increase capital expenditure budget at anaverage of 4%-5% of revenues in FY05 as against around 2%-3%historically. This would be towards product development and complyingwith new environmental regulations. With MNCs willing to sacrificeprofitability for growth in the short-term, it has become imperative fordomestic players to spruce up R&D efforts. At the same time, cash flowposition is much stronger now given that most manufacturers havereduced working capital and debt. This would mean financing bulk ofincremental capex from internal accruals.Product Pricing: The Indian automobiles are slowly shifting away from the pricesensitiveness towards the value addition concept. Besides, even the SIAMhas changed the norms of classification from the previously followed Pricebasis to the size/ length of the vehicle. Previously, the industry was highlyprice sensitive and the sales were dependent on price brackets. But theIndian customer’s perception is slowly changing and moving towards thevalue additions such as the size of the car, the style, the comfort, the level Babasabpatilfreepptmba.com 53
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAof service offered by the manufacturers, the variants available in thecategory etc. Even though the perception is changing, it is true that stillprice plays an important role in the industry. The role of price may be verynegligible in some segments, but in the other segments they are very muchreactive to the price fluctuations. Thus, the some players in segmentsconcentrate on the value addition to achieve competitive advantage, whilethe other players in the segments use price as weapon along with their coreservice. These players also offer discounts during festival season to boostthe sales.Growth Drivers:1. Economic growth: There is a direct co-relationship between the percapita income of the people and the demand for automobiles. Due to theincreased business activity, the economy supports the industry growth aswell as generates employment. The demand for automobile is expected togrow with the improved standard of living. Even though the economicgrowth rate during the year was 8.056 percent, the future average growthrate is expected to be around 6.5 percent without any economic reforms.2. Income level: The level of income has got a direct impact on the salesof the automobile. The rise in income level, results in increase in thenumber of people crossing the income threshold, thus changing the profileof customer. The lifestyle of the people tends to change automatically.With their increased buying power, they would lookout for more comfort. Babasabpatilfreepptmba.com 54
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAFor E.g. when the income of a lower middle class family increases, say theywould like to shift from two-wheeler to buy a used car. This in turnincreases the demand for used car market and a good resale value for theseller, thereby indirectly increasing the sales of new cars. With the entry ofMNCs especially in the IT, ITES and BPO sector, the income level andlifestyle, both are encouraging the younger generation. This has alsoreduced the average age of a car buyer.3. Monsoons/ Rural economy: The monsoon is the backbone of theIndian agriculture. In India, around 65 percent of the national income iscontributed by the agricultural sector and constitutes about 22 percent inthe GDP. The monsoons support the economic growth. With the arrival ofmonsoons, the rural sector is expected generate more jobs in the ruraleconomy and more income, thus increasing the purchasing power ofpeople. Along with this, even other industries performance will boost up.Thus, the demand mainly for utility vehicles increases with the betterperformance of the rural sector.4. Used car Segment: The industry saw a growth of around 30 percentin the used car segment during fiscal year. The profile of an Indian Carbuyer has been changing due to the increasing purchasing power. Besides,the used cars are becoming affordable due to the reduced Equated MonthlyInstallments (EMI) and increased repayment period. A more activelifestyle, rising disposable income and lower cost of replacement are Babasabpatilfreepptmba.com 55
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAguiding the customers to change their cars once every three years now.Even though this market is unorganized to a large extent, the organizedused car segment is slowly growing in India. With the manufacturer’s onlycoming forward to buy back their models, has in turn helped the sales ofnew vehicles.5. Availability of finance for both new and used vehicles: With theease in the availability of finance both the new and used auto marketsegment has been witnessing a growth. Previously, loans were providedonly for the new vehicles, but now the financial institutions have comeforward to offer the loans for used vehicles too. With the increasingcompetition among the finance providers, they are reducing the rates dayby day. Along with this, even some companies go beyond the industrybenchmark by financing up to seven year old vehicles, thereby helping thegrowth of the used auto segment. The interest rate has almost halved incomparison to the rates during 1998 and has touched as low as 6.5 percentper annum. Auto manufacturers are using this as a tool to increase thesales. They are having tie-ups with the finance providers or floating theirown finance companies.6. Infrastructure: Due to the increased investment in infrastructuralprojects especially in the development and improvement of road projects,the overall transport business activities and the tourism is expected togrow, which in turn creates a good demand for the utility vehicles. Traffic Babasabpatilfreepptmba.com 56
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAon roads is growing at a rate of 7 to 10% per annum while the vehiclepopulation growth for the past few years is of the order of 12% perannum. So there is a need for the development of good infrastructuralroads for the growth of the automobile industry. On the other side, poorroad infrastructure and traffic congestion can be a bottleneck in the growthof vehicle industry.7. Exports: With the global players looking at developing vehicles that canbe launched in multiple markets to reduce their developmental cost and toreduce their development costs, India is expected to increase its exports.These giants are planning to use their Indian facilities as hub for theirworldwide operations. With this move, General motors and DaimlerChrysler both have their R & D center in Bangalore, which will have animportant role in International product development. Toyota has plans toturn India into its lowest cost-manufacturing center. MUL is also becominga hub for small cars for Suzuki Motor Corporation. The country’s car salesand exports is expected to register around 8.5 lakh units by the fiscal 2006-07, which will mainly be driven by compact and mid size car segment.TABLE 2: COST ANALYSISAs % of net sales FY05 FY04Raw Material 69.4 67.8Staff Cost 5.0 5.9Other expenditure 13.1 13.4Source: India Infoline Research Babasabpatilfreepptmba.com 57
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Raw material cost pressures was faced by most of the companies inthe sector. For instance, raw material cost as a percentage of net salesincreased by 5.7 percentage points for Punjab Tractors, 5.2 percentagepoints for BAL, 2.8 percentage points for ALL and 2.5 percentage pointsfor Tata Motors. Staff cost declined by 66bps and other expenditure increased 41bpsas a percentage of net sales. Punjab Tractors and M&M enjoyed the benefitof a reduced staff cost by 370bps and 230bps as a percentage of net sales.Punjab Tractors maintained its margins in spite of a high rise in rawmaterial cost due to savings in staff cost and other expenditure.Major competitors and Market position: Prior to 1980, Premier Automobiles Limited (PAL) and HindustanMotors (HM) had dominated the Indian passenger car market. With theentry of Maruti Udyog Limited (MUL) in 1980, the former players faced atough competition. Even though they were able to maintain their volumes,their market share drastically reduced. MUL dominated the passenger carmarket and faced no competition till early 1990’s. After the liberalizationtook place, with the entry of foreign players, the problems began for MUL.MUL started loosing its market share slowly. During the initial stages ofliberalization, since MUL had depreciated its plant already by then, noplayer in the industry was able to match MUL’s Maruti 800’s entry price.But still, MUL faced tough time in the upper segment. With the launch of Babasabpatilfreepptmba.com 58
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAthe models like Indica, Santro and Matiz by Tata, Hyundai and Daewoorespectively, in the price range of 3- 4.5 lakhs, MUL’s market share felldown sharply. But, however MUL is still the market leader in the passengercar segment, and was able to maintain its market share with its successfulmodels like Maruti 800, Esteem, Zen, Wagon R and Alto. The overallmarket share of MUL fell from 70.2 percent in 1995-96 to 58.1 percentduring 1999-00, which further declined to 51 percent as on February 2004.This can be attributed to the increased competition from Hyundai, Tatamotors, Fiat, General motors, Hindustan motors and Honda Siel. In the A segment, MUL hold the monopoly position with its 800model and no other player has been able to enter this segment. This modelalone accounts for about 25 percent of the total sales of the passenger cars.In the lower B segment, MUL holds the leadership position with its threemodels in the segments viz Zen, Alto and Wagon R, followed by Hyundai.But, model wise Santro tops the segment with its 37 percent share in thissegment. There are three players in the upper B segment, with Tata in theNo.1 position. Its model Indica accounts to 86 percent of the total sales inthe segment. MUL’s Esteem lost its leadership position to Tata’s Indigo,which has dominated the market with 31 percent share. This ahs beenfollowed by Hyundai’s percent and 22 percent respectively. Honda Sieloccupies the dominant position with its City model. Toyota’s Corolla andHonda’s Accord are dominant in the D & E segments respectively Accentand Ford Ikon, whose market shares are 27. With the launch of new Babasabpatilfreepptmba.com 59
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAmodels in MUVs and SUVs, the utility vehicles sales are in an upwardtrend. In the utilities segment Mahindra & Mahindra has been able tomaintain its leader position, followed by MUL, which manufactures themodels like omni and versa. The launch of Qualis model has given a newlook to the industry. Even, it grabbed some share of passenger car industry,since the customers perceived it as a big car, which is even easy to drive,unlike other utility vehicles. The launch of Mahindra’s SUV Scorpio alsomoved along the lines of Qualis, dragging the passenger car customers.Watching the Scorpio’s success a new range of SUVs were launched byother players in the industry. The new SUV models, which are launched,recently are Maruti’s Jimny, Ford’s Endeavour, Suzuki’s Vitara, Chevrolet’sForester and Hyundai’s Terracan. With this move by the players, the redline between the utilities and the passenger car is slowly vanishing. Babasabpatilfreepptmba.com 60
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAGRAPH 7: SHARE OF PLAYERS IN THE PASSENGER CARSEGMENT AS ON FEB 2004-05 Market Share: Companywise 16% 3% 3% Maruti 9% Hyundai 18% Ford Tata Eng Honda Siel Others 51% Babasabpatilfreepptmba.com 61
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAGRAPH 8: SHARE OF PLAYERS IN THE UTILITIESSEGMENT AS ON FEB2004-05 Utilities market share 16% 1% 3% Bajaj Tempo 34% Mah & mah 15% Maruti Udyog Telco Toyota Kirloskar Others 31%Suppliers: The Indian Auto component industry was started with an aim ofreducing the imports and being self-sufficient. But, over a period of timethis industry has achieved its objective along with being a good foreignexchange earner. The auto component industry maintained a low butpositive growth rate mainly due to its export performance. This industryhas maintained a 10 percent to 12 percent share of exports in its totalproduction. India’s automotive component industry manufactures the Babasabpatilfreepptmba.com 62
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAentire range of parts required by the domestic automobile industry andcurrently employs about 250,000 persons. Auto component manufacturerssupply to two kinds of customers – original equipment manufacturers(OEM) and the replacement market. The replacement market ischaracterized by the presence of several small-scale suppliers who scoreover the organized players in terms of excise duty exemptions and loweroverheads. The demand from the OEM market, on the other hand, isdependent on the demand for new vehicles. The strict reform by theGovernment with respect to the indigenization programme has led theOEM’s to increase their indignation over the years. In India, the autocomponent manufacturers are found working close in proximity with thevehicle manufacturers ensuring the just in time deliveries. The trend of theauto component industry is to outsource manufacturing assembly tocomponent suppliers while the OEM imperative is to cut costs, improvecustomer responsiveness and build to order, which helps them to buildtheir own competitive advantage.Government Regulations: Even though the auto sector has been deregularised, the governmentstill vests the powers with itself to influence the industry, in terms ofcontrolling the import, excise and customs duties and emission norms.After the lifting of licensing in 1993, 16 ventures came up to manufacturecars. The government’s auto policy has restricted import of cars andautomotive vehicles in completely built (CBU) form or in completely Babasabpatilfreepptmba.com 63
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAknocked down (CKD) or in Semi knocked down (SKD) condition. Andthe car manufacturers were issued licenses to import components in CKDor SKD form only after execution of the Memorandum of Understanding(MOU) with the Director General Foreign trade (DGFT). 11 companiessigned MOU and they have agreed to bring in minimum foreign equity ofUS $ 50 mn, if a joint venture is involved in majority foreign equityownership. Along with this, they have also agreed to indigenizecomponents up to a minimum of 50 percent in the third year and 70percent in the fifth year. The government has permitted for 100% foreignequity investments for the manufacturing of automobiles and components.The Government will review the automotive tariff structure periodically toencourage demand, promote the growth of the industry and prevent Indiafrom becoming a dumping ground for international rejects. The incidenceof import tariff will be fixed in a manner so as to facilitate development ofmanufacturing capabilities as opposed to mere assembly without givingundue protection, to ensure balanced transition to open trade, to promoteincreased competition in the market and enlarge purchase options to theIndian customer. Appropriate measures including anti dumping duties willbe put in place to check dumping and unfair trade practices. Theconditions for import of new Completely Built Units (CBUs) will be as perPublic Notice issued by the Director General Foreign Trade (DGFT)having regard to environment and safety regulations. Used vehiclesimported into the country would have to meet CMVR, environmentalrequirements as per Public Notice issued by DGFT laying down specific Babasabpatilfreepptmba.com 64
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAstandards and other criteria for such imports. The government’s policyallows weighted tax deduction for the sponsored research and in-houseR&D expenditure and also excise duty rebate of 1% of the gross turnover.The government is also encouraging auto design firms by providing themtax breaks and concessional duty. The government is supporting thedevelopment and introduction of vehicles propelled by energy sourcesother than hydrocarbons by promoting appropriate automotive technology.The road tax on vehicles varies from state to state and a lifetime road tax isin existence. The government controls the import of automobiles and itscomponents through its EXIM policy. It has allowed the import of usedcars with some restrictions and they should confirm to the Central MotorVehicle Rules, (1989). Excise duty on (Basic + SED) on cars and MUVsreduced from 32% to 24% and for CKD and SKD kits reduced from 30%to 25%. The government has announced 48 new road projects with anestimated cost of Rs400bn and it a levy of 50 paisa on per liter of diesel willbe collected for the funding of the above road projects. By the year 2010,the Indian safety regulations will be completely aligned with the ECEregulations like anti-theft, EMC, noise, front, side and lateral collision, etc.Emission: The need to reduce vehicular pollution has led to emissioncontrol through regulations in conjunction with increasingly environment-friendly technologies. It was only in 1991 that the first stage emissionnorms came into force for petrol vehicles and in 1992 for diesel vehicles.From April 1995 mandatory fitment of catalytic converters in new petrol Babasabpatilfreepptmba.com 65
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRApassenger cars sold in the four metros of Delhi, Calcutta, Mumbai andChennai along with supply of Unleaded Petrol (ULP) was affected.Availability of ULP was further extended to 42 major cities and now it isavailable throughout the country. From the year 2000, the passenger carsand commercial vehicles are meeting Euro I equivalent India-2000 norms.Euro II equivalent Bharat Stage II norms are in force from 2001 in 4metro’s of Delhi, Mumbai, Chennai and Kolkata. Since India embarked ona formal emission control regime only in 1991, there is a gap in comparisonwith technologies available in the USA or Europe. Currently, India isbehind Euro norms by few years, however, a beginning has been made,and emission norms are being aligned with Euro standards and vehiculartechnology is being accordingly upgraded. Vehicle manufactures are alsoworking towards bridging the gap between Euro standards and Indianemission norms. In this move, the government is making all efforts toimplement Euro III from 2005 effectivelyWTO: The WTO restrictions came into effect from 1st April 2001 and theIndian industries were feeling a sense of threat of cheaper imports.However, with the government’s decision to hike up the imports tariffs, itpulled down the curtains of threat. Besides, the government laid downmany restrictions with regard to imports, in order to save the country frombeing the dumping ground for deteriorate foreign products. It allowed theimport of vehicles only from the country, where they have beenmanufactured and they should comply with the Central Motor Vehicle Babasabpatilfreepptmba.com 66
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRARules, (CMVR, 1989) and import of new cars would be allowed throughonly through few ports viz Mumbai, Kolkata and Chennai. Thegovernment has lifted quantitative Restrictions on imports of second-handautomobiles. The government has decided to allow the entry of secondhand vehicles into the country only through the Mumbai port. Usedvehicles being imported should not be more than three years old and theimporting agency is expected to submit a certificate issued by a testingagency notified by the central government that the second hand vehiclebeing imported has been tested immediately before shipment and that thevehicle conforms to all the regulations specified in Motor Vehicles Act,1988. The policy lays down that imported automobiles should have aminimum residual life of five years and the importer should ensure supplyof spares and service during this period. Import of left hand vehicles wasbanned. The vehicles should necessarily have right-hand steering controls,a speedometer indicating the speed in kilometers and a photometry of theheadlamps to suit keep-left traffic. All these restrictions were made inorder to see to it that the Indian customer gets the best vehicle fromabroad. The government made a policy, which totally bans the import ofcars whose engine capacity ranges from 1000 to 2500cc. All these stepswere taken in order to limit the imports only to the upper end segment. Babasabpatilfreepptmba.com 67
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAChallenges: Price is the factor to penetrate the Indian automobile market.MNCs bring in with them enormous research and development skills,global design expertise and years of experience in manufacturing andselling automobiles in multiple countries. Indian companies are takingsmall steps in entering new markets with one or two offering comparedto global companies. Ability to meet changing technology, customers’needs and styling and shortening product life cycle are the challengesthat Indian companies have to face.Future Outlook: The overall elements in the economy seem to be in favor ofgrowth of automobile industry. The passenger car segment is expectedto grow at around 8% during the period 2004-07. Besides, the exportsare also expected to grow, which will be driven by the increasingdemand for compact cars. The GDP growth, increasing income level,changing lifestyle of people, availability of finance for both new and oldcars with low EMI’s, new launches, new infrastructural projects andexport growth are the factors which fuel the growth of the automobileindustry. Now, with the extension of services of finance providers to therural market, the car and utility vehicles sales are expected to move up.The manufacturers are even concentrating to sell their new launchesincluding SUV’s in the rural market. Babasabpatilfreepptmba.com 68
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA With a big success of SUV concept in India, almost all the playersin the market have come out with their competitive models, thus hottingup the competition. All the players are concentrating on cost cuts and cost effectivemethods in order increase the profits of their supply chain. Thegovernment has reduced the excise duty on steel from previous 16percent to 8 percent from first week of March. With this, theautomobile manufacturers are benefited with the improved margins.Despite the excise duty cut, the steel prices are on a bullish trend. Toovercome this problem, the manufacturers are in a thought of replacingthe steel components with aluminum, which reduces their costconsiderably. If the rupee continues to appreciate against dollar and depreciateagainst the won, yen and euro, then the industry’s profits will besqueezed, since it means higher cost of import and lowered revenue.With the companies establishing their R & D centers here, India isexpected to emerge as an International hub for product development.However, the automotive industry has to work closely with the dealersand vendors to make the expected growth possible. The automobileindustry needs to aggressively benchmark its products and processeswith the Industry best - both in India as well the world’s best. Onlythose companies, which improve their processes regularly, will survive. Babasabpatilfreepptmba.com 69
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAFurther, Indian automobile Industry needs to learn the best practicesquickly to survive the threat of WTO. However Indian markets are very advanced in using the state-of-the-art technology and Indian auto component makers are becomingglobal sourcing partners for auto makers. Most Indian players aresourcing their component requirement from Indian component makersonly. Any paradigm shift in technology with the emission norms andalternate fuels will likely increase the technology gap between the localcompanies and MNCs here. So a substantial investment in R&D isnecessary for domestic players. Dieselization is going to be a future trend in the Indian marketwith rising petrol prices and the significant difference between petroland diesel prices. Currently, 20-25% diesel engines are in use in theIndian market, and this is likely to grow up to 30-35% in the mediumterm. Another trend that might be seen in the near future is rise in theutility vehicle sales. With infrastructure facilities increasing more peopleprefer the UVs for inter city travel. So, in the future small and compactcars are likely to face competition from UVs. As the economy isgrowing, the car industry will see a 12-15% compounded annual growthrate in the medium term. As long as India continues to groweconomically and the income of Indians continues to rise, India willbecome a major automobile consumer and producer. Babasabpatilfreepptmba.com 70
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA1) Analyst Assumptions2) WACC3) Value Drivers4 Income Statements5) Balance Sheet6) Dupont analysis7) PE multiples. Babasabpatilfreepptmba.com 71
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRATABLE 3: ASSUMPTIONS MADE FOR THE STUDY Assumptions Income statement March March March 05 06 07 Sales growth 10.00% 10.00% 9.00% Operating Margins 9.28% 10.00% 10.00% Other Income as a % of 17.76% 15.00% 15.00% investments Effective Tax rate 21.93% 22.00% 22.00% Cost of debt (Pre tax) 10.54% 7.50% 7.50% Debt to equity 0.44 0.35 0.30 Gross asets a % of Sales 51.15% 50.00% 50.00% Depreciation as % G.Assets 6.61% 7.00% 7.00% Dividend payout 11.66% 12.00% 12.00% Dividend Tax 12.81% 12.50% 12.50% Investments as a % of total 22.74% 22.00% 22.00% Sales Current assets as a % of sales 28.89% 29.00% 29.00% Current liabilities as a % of 26.75% 26.00% 26.00% salesTABLE 4: WEIGHTED AVERAGE COST OF CAPITAL Risk free rate 7.00% Market rate of return 16.00% Beta 1.02 Interest Paid (Rs. Crore) 51.58 Market value of debt (Rs. Crore) 934.82 Tax rate 37.00% Cost of debt 3.48% Cost of equity 16.18% WACC 14.31% Babasabpatilfreepptmba.com 72
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRATABLE 5: VALUE DRIVERS 2005 2004 2003 Market Capitalisation 5417.60 (Rs. Crore) P/E (Trailing) P/E 14.24 15.58 1.86 P/B 3.23 1.86 1.17TABLE 6: INCOME STATEMENT (Rs inLakhs) Income statement Mar 03 Mar 04 Mar 05 Gross Sales 399675.3 445265 582924.6 Less: Excise 0 78549.0 94378.11 6 Net Sales 399675.2 366715. 488546.48 6 9 Operating Income Total Income 399675.2 366715. 488546.48 6 9 Less: Raw Material + Purchases 211723.1 250021. 335286.52 8 Employee Cost 36991.46 38129.0 41745.39 3 Selling Expenses 19982.1 19539.5 18581.6 9 Administrative Expenses 2505.32 2955.12 3128.25 Other Expenses 59545.22 18183.9 25795.99 9 Provisions 1235.35 4010.33 44.21 Babasabpatilfreepptmba.com 73
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAMiscellaneous expenses 15243.27 15283.9 19171.61 8Change in Stock (-) Inc./ (+) 6440.94 2357.99 -2143.23Dec.Expenses Capitalised 1748.97 1917.07 1577.55 7Amortisation 1070.95 486.95 6.76Total Operating Expenses 356486.6 352885. 443194.65 8 9Operating Profit 43188.58 13830.0 45351.83 1Interest 25275.67 1150.39 7693.27Gross Profit 17912.91 12679.6 37658.56 2Depreciation 13938.29 16056.7 16519.9PBT before non op and extra 3974.62 -3377.08 21138.66ordNon Operaing Income 5285.43 17314.8 19732.81 8Add: Extra Ord. Income -1728.58 5765.61 2947.83Less: Extra Ord Expenses 0 0 0PBT 7531.47 19703.4 43819.3 1Provision for Taxation 360 1230 6350Deffered taxation -2520 3920 2615PAT 9691.47 14553.4 34854.3 1Prior Year (+)Inc./ (-)Exp.Reported PAT 9691.47 14553.4 34854.3 1B/F 0 36539.1 54709.43Profit available for allocation 0 0 89563.73Babasabpatilfreepptmba.com 74
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Proposed Equity Dividend 0 6380.64 10441.48 Dividend Tax 0 817.55 1337.82 Equity Dividend (%) Eps 8.35 12.55 30.05TABLE7: EXPECTED INCOME STATEMENT Expected income statement March March March 05 06 07 Operating Income 488546.4 537401.1 585767.23 8 3 Non Operating Income 19732.81 17734.24 19330.32 Operating expenses 443194.6 483661.0 527190.51 5 2 Operating Profit 45351.83 53740.11 58576.72 Interest 7693.27 5274.76 5398.28 Gross Profit 57391.37 66199.59 72508.77 Depreciation 16519.9 18943.48 20636.29 Other Non operating exp 192.88 154.31 Tax 8965 10353.91 11378.00 Babasabpatilfreepptmba.com 75
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA PAT 34854.43 39167.42 45063.81 Dividends 10441.48 4700.09 5407.66 Dividends Tax 1337.82 587.51 675.96 Retained Earnings 23075.13 33879.82 38980.20 Expected EPS 30.02 33.74 38.82TABLE 8: BALANCE SHEET March March March 03 04 05 SOURCES OF FUNDS Owners Fund Equity Share Capital 1160.86 1160.86 1160.86 Share Application Money 0 0 0 Preference Share Capital 0 0 0 Reserves & Surplus 138800.6 145382.23 165902.49 Loan Funds Secured Loans 92415.36 92415.36 72980.78 Unsecured Loans 21569.09 21569.09 24458.03 Deferred Tax Liability 0 17710.01 20325 (Net) Total 270967.54 288677.55 270809.13 USES OF FUNDS Fixed Assets Gross Block 206803.7 243681.94 249879.69 Less : Revaluation 0 0 0 Reserve Less : Accumulated 87954.5 102304.08 116582.68 Depreciation Net Block 141377.86 141377.86 133297.01 Babasabpatilfreepptmba.com 76
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Capital Work-in-progress 34873.41 5231.01 3841.1 Intangible assets 0 0 2021.8 Investments 80012.79 86226.96 111115.31 Net Current Assets Current Assets, Loans & 173236.64 161348.02 150256.79 Advances Less : Current Liabilities 105074.24 109478.25 130687.3 & Provisions Total Net Current Assets 68162.4 51869.78 19569.49 Miscellaneous expenses 0.00 3971.96 964.42 not written Total 288107.8 288677.55 270809.13 TABLE 9: RELATIVE P/E AND PEG RATIO EPS EPS EPS EPS EPS Growth(06 Growth(07 Current P/E PEG 05 (06) (07) ) ) P/E 06 06AshokLeyland 1.63 2.02 2.31 23.)3% 14.36% 11 0.46BajajTempo 33.55 - - - - - -Mahindra &Mahindra 30.04 33.74 38.82 12.32% 15.06% 16.65 14.06 1.14MarutiUdyog 13.0Ltd 18.77 32.2 40 71.55% 24.22% 6 0.18 Babasabpatilfreepptmba.com 77
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAHindustanMotors - - - - - - -Tata 11.9Motors 22.96 32.98 39.6 43.64% 20.07% 1 0.27 (Source: www.icicidirect.com) Babasabpatilfreepptmba.com 78
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA TABLE 10: RELATIVE RATIOS Debt P/ To Book BV Equit value OP NP CEP y Curren per M(% M( EPS S ROE t Ratio share ) %)Ashok 16.2 2.2Leyland 8 24.41 0.48 19.47 1.45 83.6 11.42 5.51Bajaj 33.5 145.1 1.75Tempo 5 57.64 0.3 23.11 1.6 5 7.67 4.52Mahind 2.84ra &Mahind 30.0 152.1ra 4 45.32 0.41 19.91 0.99 8 10.47 6.88Maruti 2.88Udyog 18.7 123.7Ltd 6 38.4 0.08 15.16 1.17 4 13.25 5.61 - - 2.8Hindusta 116.3 10.9n Motors -5.02 -2.17 5.04 2 1.37 4.32 -0.47 8Tata 22.9 101.0 1.46Motors 6 35.26 0.35 22.71 0.72 8 13.14 6.12 (Source: www.icicidirect.com) Babasabpatilfreepptmba.com 79
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRATABLE 11: DUPONT ANALYSIS ROE 2003 2004 2005 6.44 9.27 % % 19.64% NPM Assets Turnover Equity Multiplier 2003 2004 2005 2003 2004 2005 2003 2004 2005 2.97 3.92 0.79 0.92 1.22 2.76 2.57 2.28Analysis % 7.07% % 2004 2005ROE UP UPNPM UP UPAssets Turnover UP UPEquity Multiplier DOWN DOWNSales UP UPEquity to L.T Debt DOWN DOWN Babasabpatilfreepptmba.com 80
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAMahindra and Mahindra Valuation:Mahindra and Mahindra is one the leading names in the Automotiveand farm sector industry. The company’s solid reputation and brandname recognition give them a great advantage in their field. Thecompany has shown great improvement and promise throughout itshistory, and expectations are high as ever. Sales are expected tocontinue togrow and the company will continue to flourish. This is why weplaced such an importance on sales for our valuation model. We usedour growth in sales to help forecast many of the company’s accounts.By using sales growth, or a percentage of sales to forecast we feel ournumbers safely represent where the company is headed. For the firstyear of our forecast we have sales growth of 10%, and the followingfour years have growth reducing by 1% every year. We feel thesenumbers are accurate gbowth rates due to company’s history. Thecompany is very well developed and in the growth and expansion oftheir lifecycle. We feel the company will continue to grow at a goodpace. We chose to forecast the five year period for a few reasons. Wefeel the five year period is enough time to avoid any questions oruncertainties as number of new players entering the market. Throughthe forecasting of the company’s major financials we were able tofind important value driver calculations.We were able to find the Reported PAT, operating Profit, Free CashFlow of M&M Co. These are important numbers needed to find our Babasabpatilfreepptmba.com 81
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAtarget stock price. The WACC was a very important part of ourvaluation model. To find the WACC we had to find the cost ofequity and debt for the company. In order to find the cost of equitywe used the CAPM equation. This allowed us to find the company’scost of equity of 16.18%. To find the cost of debt we had to useinterest and total debt funds of the company and interest spread. Thisallowed us to find the company’s cost of debt to be 3.48%. Withthese numbers we were then able to find company’s WACC of14.31%. Last, to complete our valuation model we had to find ourtarget stock price. In order to find our price we used the DCF Model.For the DCF Model we use free cash flows to find the stock price ofRs 517.22. We also used the relative P/E ratio analysis as well asPEG ratio .To use the relative P/E analysis; we found comparablecompanies to Mahindra, and their respective price to earning ratios.Financial performanceHalf yearly resultsThe company managed to post a double digit growth in its both topline and the bottom line for the six months period ending 30thSeptember during the FY05. The sales of the company grew by ahopping 39% to Rs. 2,977.58 crore during the half-year period inFY04 as against corresponding period of the last year’s figure of Rs.2142.22 crore which can be attributed to the robust demand in the Babasabpatilfreepptmba.com 82
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAmarket due to the increased economic activity. The company’soperating profit moved up by 11.69% to Rs 348.09 crore during theperiod, as against corresponding period of last year’s figure of Rs199.24crore.The company made a major change in the operatingmargin due to the following reasons Strong fixed and variable Costreductions (58 bps reduction in Employee cost / revenues,Value engineering, Strategic Sourcing, Vendor meets), Price Increasesand Increased Productivity. But the bottom line of the company roseby 96% to Rs.4911crore along with the net profit margin whichmoved up from last year’s 6.42% to 4.45%.RECOMMENDATION OF THE STOCK Mahindra & Mahindra Ltd (M&M) is a homegrown auto majorand the flagship company of the Mahindra group. The group hasvaried business interests ranging from automobiles, farm equipment,telecom, infrastructure development to trade and financial services.M&M contributes nearly 70% of the groups total turnover of Rs6,200 crore. This front-runner of the group is into manufacture andmarketing of utility vehicles (UVs), light commercial vehicles (LCVs)and farm equipment ie tractors. For the nine-month period endedDecember 2003, the UV and the LCV segment contributed 73% ofthe total revenue while the farm equipment segments added the Babasabpatilfreepptmba.com 83
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAbalance 23%. The automotive division manufactures and sells a widerange of UVs (Commander, Armada, Classic, Voyager), passengervehicles (Scorpio, Bolero) and LCVs (the Cabking & FJ series of loadcarriers and minibuses), and Champion, a 3-wheeler diesel vehicle.Scorpio, a sports utility vehicle launched by the company has been ahuge success in the sports utility vehicles segment. At the current market price of Rs493, the stock trades at11.9x FY2005E and 10.0x FY2006E earnings. We maintain ourbuy recommendation on the stock with a price target of Rs 519.HYPOTHESIS TESTING: By hypothesis, we mean a statement about the populationparameters. Hypothesis testing deals with a procedure, which acceptsor rejects the hypothesis. There are two types of hypothesis. 1. Null Hypothesis: It states that there is no significant difference between the market value and the intrinsic value of the company. Ho denotes the null hypothesis. 2. Alternate Hypothesis: In case the null hypothesis is rejected, we should have an alternate hypothesis to accept. Alternate hypothesis is denoted by HA. This shows there is difference between the market value and intrinsic value of the company. It also explains whether the company is under valued or over valued. Babasabpatilfreepptmba.com 84
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRABEST CASE SCENARIO -POPTWORST CASE SCENARIO -P PESSMOST LIKELY SCENARIO -P ML POPT + 4 * PML + PPESS EP = 6 POPT − PPESS σ( P ) = 6 MP − EP Ζ= σ(P )Based on the above calculations the expected price comes to Rs518.04 and the standard error comes to (1.55). We use Z test andcalculate Z value (- 5.84) which is negative, this indicates thatcompany price is significantly under valued. Babasabpatilfreepptmba.com 85
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAFINDINGSVolumes set to grow: Company expect a 19.10% CAGR in volumes over the periodFY2004-FY2006, as lower duties and low interest rates on loansmake cars affordable to more people. As such, companies those areable to introduce cost-competitive models without compromising oncontemporary features will attract buyers and be the biggestbeneficiaries. Mahindra & Mahindra (M&M) expect this stock to yieldreturns of around 25% over the next 12 months.Car density in India lowest across the world: Car density ie., car ownership per 1000 people is three in India.Even excluding the relatively large mass of households whoseincomes are well below the threshold limit and therefore cannotafford passenger vehicles, the countrys penetration would measure at27 per thousand households, the lowest in the world. Hence, there ishuge headroom available for growth.With rising per capita income and low interest rates making carsmore affordable, we expect Indias car penetration to nearly double Babasabpatilfreepptmba.com 86
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAover the next three years. Further, the widening reach of the carmanufacturer through the distribution network would provide addedfillip to the growth.Automobile prices are falling on reduced excise duties: The reduction in basic excise duty from 32% to 24%, as part ofthe Union Budget 2005, has already led to a 28% surge in domesticvehicle volumes .The Kelkar Committee recommendations, whichhave been accepted by the government, propose a further cut to16% over the next two yearsMeanwhile, the cut in the peak customs duty on components and theabolition of the 4% special additional duty will reduce costs formanufacturers, enabling them to cut prices further. This would alsoboost demand growth.Softer interest rates: The declining interest regime has been a party time not only forbanks but also for automakers. Interest rates are at their historicallow levels at present. Availability of cheap loans is the biggestdemand driver. We expect a rise in the number of loan-financedpurchases, aided by low interest rates and expanding reach of lendingcompanies. The interest rates have come down from 15-17% in1998-99 to around 10% this year. Babasabpatilfreepptmba.com 87
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA It is not only affordability but also the availability of cheapfinance that will provide a further fillip to demand growth. The reachof car financing banks is set grow three fold over next two years.Almost all private banks are in an expansion mode in their retail loanssegment.We expect Utility Vehicles to establish a viable alternative tocars: Going forward, we believe that trends will be different--volumegrowth of UVs would match that of passenger cars. The number ofcompetitively priced models is on the rise--take for instance M&MsScorpio, General Motorss Tavera (under the Chevrolet brand) and anew vehicle from Tata Motors, expected to be launched in2005.Growth will accelerate by the increasing recognition of thesevehicles superior ride comfort and luggage space and therefore theirproposition as a cost-competitive alternative to mid-sized cars.Operating margin to improve: Popularity of its vehicles would allow M&M to hike prices incase of rise in raw material prices, thus protecting its operating profitmargins. Last years 40% rise in steel prices would necessitate a 3.5-4% rise in prices of vehicles. M&M recently raised prices of its UVsby 1.5-2%. The company also benefits from its cost economics. We expectits operating margins to improve by 4.80% by FY2006. The majorcontributors to this hike would be savings in employee costs (to the Babasabpatilfreepptmba.com 88
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAtune of 3%) and other expenses (to the tune of 2.50%). However,rising commodity prices will act as a drag on operating margins,pulling it down by 0.70%.Farm equipment segment no longer a drag: The farm equipment segment, which mainly includes tractors,is no longer a drag on the topline of the company. Over the last twoyears, the tractor industry has shown negative growth of 17%. In thefirst half of FY2005, the industry showed a decline of 9%. However, the fortunes of the division have started turning forthe better. In Q3FY2005, the tractor industry grew by 18% on theback of a strong performance of the monsoon last year. We thinkthat the tractor segment will actively contribute to the revenues. Thecompany has its presence in all the HP segments from 25 HP to 45HP and above, with more than 20% share in all segments.Return ratios to improve: M&M has already done considerable investments on productdevelopment and capacity expansion over the past three years. Weexpect RoCE to improve from 8.8% in FY2003 to 24.3% in FY2006. Declining capital expenditure would help the company toincrease its free cash flows. The company is expected to retire almost50% of the debt by FY2006. This will reduce outgo on interest costs,which will be reflected in the net profit. The profit will almost doubleto 7.61% in FY2006 from 3.88% as of now. Babasabpatilfreepptmba.com 89
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAMonsoon: Below normal monsoons throughout the country remains acause for concern for tractor manufacturers including M&M. InFY2005, tractor volumes have increased by 39% to 47,804 units. While monsoons remain a wild card for the company, theincreased rural and agricultural focus of the new UPA governmentaugurs well. The targeted 30% increase in farm credit in FY2005 bythe government is already showing signs of assisting demand push.SUGGESTIONS • Increasing steel price and other inputs are the major concerns for the company from its margins point of view. So company should have check on the steel prices. • Increase in the inflation rates. • As the company is active in the overseas markets, the rupee appreciation against the foreign currencies, especially dollar would adversely affect the topline of the company. Babasabpatilfreepptmba.com 90
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA• Increase in the fuel prices on account of rising global crude oil prices would affect the domestic demand especially for CVs.• Various new products launches have helped retain customer focus on the new auto market, so the company should focus on this particular aspect.• Discounts, special editions and festive based offers should be adopted to boost the sales of the company.• Dieselization is going to be a future trend in the Indian automobile market with rising petrol prices and the significant difference between petrol and diesel prices. As most of the company products are diesel products, the company should try to specialize in that particular segment.• Another trend that might be seen in the near future is rise in the utility vehicle sales. With infrastructure facilities increasing more people prefer the UVs for inter city travel. So company should try to launch vehicles such as Scorpio and many such products.Babasabpatilfreepptmba.com 91
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA CONCLUSION Fundamental analysis can be valuable, but it should beapproached with caution. If you are reading research written by a sell-side analyst, it is important to be familiar with the analyst behind thereport. We all have personal biases and every analyst has some sort ofbias. There is nothing wrong with this and the research can still be ofgreat value. The problem in valuation is not that there are not enoughmodels to value an asset; it is that there are too many. Choosing theright model to use in valuation is as critical to arriving at a reasonablevalue as understanding how to use the model. Analysts use a widevariety of models from simple to the sophisticated. These modelsoften make different assumptions about pricing, but they do sharesome common characteristics so in the study we tried to use price-earning multiples and discounted cash flow models of valuation. In the automotive segment, M&M has a strong presence inhigh-growth segments backed by pick-ups (Maxx range), Bolero andScorpio models, three-wheelers (Champion), and LCVs (load carryingas well as passenger LCVs). The current governments focus onagricultural growth (helping volume growth in tractors and UVs) andcontinued focus on infrastructure development (structural growthdriver for LCVs, three-wheelers and UVs) are the main demanddrivers for M&Ms product portfolio. High operating leverage in Babasabpatilfreepptmba.com 92
  • FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRAtractors, cost reduction, productivity gains and reduced interest costswill drive a 34% CAGR in PAT over the period Babasabpatilfreepptmba.com 93