27 March 2012

India Tractors
The growth story continues. continues

Mayur Milak

(+91 22 ) 4096 9749

mayurm@dolatcapital com mayurm@dolatcapital.com

Executive summary
Why did we do a follow-up report on tractors NOW ? h The tractor industry has grown at a CAGR of ~12% during last five years. After a splendid performance, during the last two to three years, the Indian tractor industry is believed to head for a slow-down , we believe otherwise and hence our stance to buy b i into tractor at this hi juncture. j

Our takeaways: h There is an increasing lack of cheap farm labour due to migration to urban areas, leading to more mechanisation. F h Further, f farm i income h has grown at a CAGR of f 12.8% 12 8% during d i l last fi five years. We W expect this hi growth h to sustain i going i forward, which will continue to boost tractor sales. Contrary to popular belief, rainfall does not affect tractor sales directly. Other factors such as higher farm income, availability of water (irrigation facilities), cheaper and more easily available finance, successful implementation of government schemes (NREGA) and higher MSP are the key drivers for growth in tractor sales. We expect tractor demand to grow by 11-12%, going forward. All key drivers are in place and adequate availability of water is expected with a forecast of regular and timely rainfall.

h h

Our top top-pick: pick: M&M h h h h M&M has always been a leader in the farm equipment sector. After acquiring Punjab Tractors Limited (PTL), it has further consolidated its position as the No.1 player in the country. Historically, M&M tractors have outperformed the tractor industry during the last six years. With a market share of almost 41%, 41% we believe the company is well poised to take advantage of the growth in the tractor segment. Land fragmentation (bifurcation of property and formation of nuclear families) is a major deterrent to tractor growth, but the new offering from M&M, Yuvraaj, targets this issue.

Highlight: Mahindra Yuvraaj vs the bulls

Cost analysis Total cost of a pair of bulls: Basic cost: - Rs75,000 - One One-time time payment Average life - 8 years Per-year cost - Rs 9,375 Maintenance cost - Rs 4,000 Fodder cost - Rs24,000 , Cost per year - Rs37,375 The Yuvraaj: Basic cost Average life Per-year cost Maintenance cost Diesel cost Cost per year

- Rs165,000 - One-time payment -12 years - Rs13,750 - Rs 8,760 - Rs15,000 - Rs37,510

Contents
Introduction: Indian agriculture and tractors.............................................................................................................................. tractors 5 Tractor penetration in Indian farm households .. 6 The future..7 Background8 I di Indian tractor t t market: k t Sales S l (including (i l di exports.. t 9 Indian tractors: Exports ..10 Indian tractor market: Market share 11 Indian tractor market: Segment-wise sales. 13 Indian tractor market: State-wise sales 15 Current trends in farm mechanisation. 17 Key requirements for tractor growth..18 Factors affecting tractor sales..19 -Rainfall19 -Farm income............. 20 -Interest rates.21 -Tractor financing.22 -Greater credit allocation23 Company profiles Mahindra & Mahindra Limited......................... 24 Escorts Limted..36 Tafe Limited.. 40 John Deere Pvt Ltd..41 ITL..42 Appendix : Agricultural and irrigated area in India..43 Appendix : Global agri-commodity price movement. 44 Appendix : Minimum support prices (wheat, rice, sugar)...45

Introduction: Indian agriculture and tractors

h Highlights of the Indian agricultural sector
Has always been a key sector of Indias economy Currently contributes ~18% of Indian GDP Accounts A t for f ~10% 10% of f Indias I di exports t Second largest producer of rice and wheat in the world Largest producer of pulses Fourth largest producer of coarse grains Second largest producer of vegetables, groundnuts and fruits Current average growth rate: 2.8%

h Highlights of the Indian tractor industry

The Indian tractor industry has developed over the years to become the largest tractor market in the world. From just about 50,000 units in the early eighties, the size of the tractor market in the country has grown to over 600,000 units. Increased use of tractors for haulage and non-agricultural non agricultural applications. applications The opportunities are still huge considering the low farm mechanisation levels in the country, when compared to other developed economies across the world. After a splendid performance during the last two to three years, the Indian tractor industry is believed to head for a slowdown , which we believe is a myth. y

Tractor penetration in Indian farm households

46.2%
Large Farmers >20 acres 1%

21.9%

Medium Farmers

82mn farm households

5-20 acres 17%

Small Farmers 2.5-5 acres 19%

1.2%

Marginal Farmers <2.5 acres 63%

Source: NSSO (59th Round), Dolat Capital

The future
h India agriculture 2020: Government vision
Rising productivity and rapid diversification in the agricultural sector. Total proportion of work force involved in agriculture is expected to decrease from 56% to 40%. Agriculture growth rates are expected to increase from the current average of 2.8% to ~4-5%. Agriculture-based energy policy to focus on production of fuel oil and biomass power; could generate lucrative alternative markets for farm production while reducing the countrys dependence on imported fuels. Accelerated acquisition of technology capabilities to raise productivity in agriculture, industry and services.

h For the year FY12-14:

Demand outlook for FY12-14 remains positive. positive We expect the industry to grow ~11-12% 11-12% YoY. YoY Farm income growth continues to be strong and acts as a strong catalyst for demand. Tractor financing continues to enjoy priority lending status, thus attracting lower interest rates and higher participation by banks. The greater participation by NBFCs and private banks will further boost sales. sales The meteorological department has predicted a regular monsoon for this year. Although rainfall does not directly affect tractor sales, availability of water will definitely lead to higher productivity, which will boost tractor sales. Successful implementation of government schemes (NREGA) and higher minimum support prices will put more money directly y in the farmers hands, , driving g tractor demand.

Background
Before the 1960s, India had to import most of its food. However, improved farming techniques, including farm mechanization, the use of irrigation and high-yield grains, have greatly increased the food production and allowed India to become self-reliant with regard to food. Since most of the cropped area, even now, does not have any assured irrigation, monsoons are crucial for agricultural production. Agricultural development in India can be categorised into four major periods: h h h h Pre-Green Revolution - Before 1960s: there was a need for higher productivity of coarse grains and pulses per unit of land. Green Revolution (mid 1960s-1980s) - a period of expansion of area and rapid growth in productivity of wheat and rice, expansion of agricultural research and establishment of national infrastructure. Post-Green Revolution (mid 1980s-2000) - a period of expansion of area under maize, cotton, sugarcane and oil seeds and continued growth in productivity achieved through intensification of chemical use and labour. The Current Stage (2000-present) (2000 present) - characterized by the following: Further diversification of cropping patterns from lowlow value to high-value crops, such as fruits, vegetables, flowers and other horticultural crops for domestic consumption, processing and export.

Indian tractor market: Sales (including exports)

Tractor market has grown at a CAGR of 12.8%, in the last five years Comparatively young by world standards, the tractor market has expanded at a spectacular pace in the last few years. The tractor industry in India has developed over the years to become one of the largest tractor markets in the world. From only about 50,000 units in the early eighties, the size of tractor market in the country has grown by up to ~600,000 units.
Sales, steady since FY07, should increase even more (as witnessed in FY12) due to rising farm income and rural growth.

Tractor sales have always been better in the second half of the year than the first half. The exception to this was FY09, when 2HFY09 sales were 8% lower than in 1HFY09.

Source: Dolat Capital, CMIE

Indian tractors: Exports

h Indian tractors are the cheapest in the world. By some estimates, the cost of a tractor produced in India is as much as the cost of its gear box in a developed country. The scope for exports, therefore, is tremendous.

Source: Alchemy Research, CMIE

Exports in the last 10 years have been improving year-on-year (with the exception of FY10). From a mere ~2,700 tractors e po ted in FY00, exported 00, India d a managed a aged to e export po t ~42,000 2,000 t tractors acto s in FY09. 09. In FY11, , t the e e exports po ts registered eg ste ed a g growth o t o of 68% YoY. o . Exports formed around 11% of total tractor sales. India mainly exports to USA, Nepal, Bangladesh and Sri Lanka.

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Indian tractor market: Market share

h h h h Currently, there are as many as 10 players (including MNCs) in tractor manufacturing, in India. About 90% of the market is shared by only the top five to six players. Mahindra & Mahindra (M&M) continues to dominate the industry with close to 40% market share. Tractor and Farm Equipment Limited (TAFE) has the second largest market share in India at ~21%, while other players like Escorts (~12%), John Deere (~10%), ITL (~8%) and New Holland Tractors (~6%) constitute the balance.
India tractor market share - FY00 India tractor market share - FY05 India tractor market share FY11

Source: Dolat Capital, CMIE

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Indian tractor market: Market share

Change in market share in Indian tractor industry over the last 10 years:

Source: Dolat Capital, Capital CMIE

h M&M has continued to dominate the Indian tractor market during the last 10 years. In FY09, it acquired PTL, further consolidating its leadership position. h On detailed analysis, analysis we conclude that the company has gained from the synergies of acquisition: M&M M&Ms s post-acquisition post acquisition market share (39.7%), in FY11, increased from M&M and PTLs combined FY08 market share (M&M 28.5%, PTL 8.1%). h Tractor and Farm Equipment Limited (TAFE), the second largest tractor player in India, has been consistent and registered g ag growth in its market share from 17.4% in FY00 to 21.0% in FY11. h Escorts is the third largest player in India and has managed to maintain its position, but has lost much of its market share. Its ~20% share in FY00 has come down to 12.1% in FY11. h International Tractor Limited (ITL), started tractor production in FY02 and currently has a market share of ~9%.

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Indian tractor market: Segment-wise sales

h The Indian tractor market is broadly classified into five segments: less-than-20 hp (horsepower), 21-30 hp, 31-40 hp, 41-50 hp and 50+ hp. India has been predominantly a 31-40 hp market, ~42% of the industry. However, during the last 5 years, there has been a shift to higher hp tractors. The share of 40+hp tractors has gone up from 29% in FY05 to 44% in FY11, clearly indicating the multi-use of tractors.

h h

India tractor sales segment-wise - FY00

India tractor sales segment-wise - FY05

India tractor sales segment-wise FY10

Source: Dolat Capital, CMIE

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Indian tractor market: Segment-wise sales

Ch Change in i market k share h in i Indian I di tractor industry i d over the h last l decade: d d
Combined share of tractors above 40 hp has more than doubled over the last ten years

h h

21-30 hp The share of this segment has consistently declined over the last 10 years from ~22% in FY01 to ~19% in FY05 and further down to ~13% in FY11. 31-40 hp India has been predominantly a 31-40 hp market. However, market share of this segment has also declined over the last 10 y years. In FY01, , this segment g had a market share of ~55%, , which came down to ~51% in FY05. In FY11, , this segment g had a market share of ~42%. 41-50 hp This segment has seen a steady improvement in its market share over the last 10 years. The market share improved from ~15% in FY01 to ~21% in FY05. In FY11, this segment had a share of ~28% of total sales. 51 and above hp The biggest growth in market share happened in this segment. It grew from ~7% market share in FY01 to ~16% 16% in i FY11. FY11 The future: More sophisticated and powerful tractors are making their way into the market. The dependence on machines is increasing every day due to a large exodus of farmers into urban areas, which in turn makes labour scarce and costly in rural areas. Powerful tractors of over 50 hp may be in great demand, with leasing gaining importance (as the future is expected to lie in co-operative farming). Also driven by a growing demand for tractors from the infrastructure sector (mainly construction activities).

h h h

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Indian tractor market: State-wise sales

h h h About 75% of tractor sales in India come from seven to eight major states. Uttar Pradesh leads the state-wise tractor sales. Other major markets include Andhra Pradesh, Rajasthan, Maharashtra, Madhya Pradesh, Haryana, Gujarat and Punjab.
India tractor sales State-wise market share

Source: Dolat Capital, CMIE

Uttar Pradesh (U.P.) Market share of tractor sales in this state has come down significantly from ~27% 27% in FY01 to ~16% 16% in FY12 (up to January). However, U.P. continues to remain the leader in terms of highest tractor sales. It registered a growth of 11% YoY in FY12 (till January). Andhra Pradesh (A.P.) A.P registered a 3% YoY growth in tractor sales in FY12 (up to January). Its market share has declined from 9.2% in January 2011 to 8.2% in January 2012. Rajasthan (RAJ) Rajasthan registered a significant growth of 48% YoY in FY12 (up to January). Its market share has improved from 7.4% in January 2011 to 9.5% in January 2012. Maharashtra (MAH) The total market share of this state has improved from ~6% in FY01 to ~11% in FY11. In FY12, tractor sales grew 13% YoY over FY11 sales (up to January).

h h h

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Indian tractor market: State-wise sales

India tractor sales State-wise market share

Source: Dolat Capital, CMIE

h h h h h

Madhya y Pradesh ( (M.P.) ) . The state registered g ag growth of 7% YoY in FY12 ( (up p to January) y) versus industry yg growth of 15%, , thus losing market share from 10.3% in January 2011 to 9.5% in January 2012. Gujarat (GUJ) The state has registered a remarkable growth of 54% YoY in FY12 (up to January) selling almost ~48,000 tractors. Its market share improved from 7.9% in January 2011 to 10.5% in January 2012. Bihar The state has seen decline in market share. Its share was ~6% in January 2011. In FY12 (up to January), it registered a 6% YoY Y Y growth th in i volumes l t ki taking it market its k t share h d down t 5.5%. to 5 5% Punjab (PUNJ) Punjab has been amongst the loser states. The state had 8.2% share in FY01, which has come down to 6.6% in FY09. The state has registered a 2% decline in volumes in FY12. Other States Overall, tractor sales in India grew by 15%. C Compared d to this, hi Assam A grew by b 61% YoY, Y Y Tamilnadu T il d grew by b 34% YoY, Y Y J&K grew by b 17% YoY. Y Y The states which registered lower growth year-on-year were Orissa (16%), Uttarakhand (12%) and Kerela(6%).

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Current trends in farm mechanisation

h h h Increased use of tractors for haulage and non-agricultural applications. Moving towards secondary mechanisation, leading to increased use of new attachments like reapers, combines or seed drills. Farmers with small land holdings (two to four acres) are buying lower horsepower tractors because of land fragmentation (bifurcation of property and formation of nuclear families). Reduced availability of cheap farm labour. Replacement demand mainly coming from traditional north Indian states.

h h

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Key requirements for tractor growth

h Many factors influence tractor demand: h Primary demand usually comes from agricultural growth. Secondary demand comes from multi-use (non-agricultural use) of tractors. There is an immediate need to expand agri-land by conversion of wasteland. For the past 20 years, irrigated and arable land area has not increased. Availability of water is a crucial factor in agricultural yield, but should not depend only on the yearly variations and predictability of monsoons. monsoons Government implementation of major projects: e.g. the national policy on water resources (interlinking of rivers) requires urgent government attention. Even the incremental progress achieved while implementing this project will give a boost to Indian agriculture. The short-term focus must be on increasing and maintaining natural water resources such as natural water storage, ponds, lakes and retention dams. Credit and money availability has always been a big factor in the tractor industrys and mechanisations fortunes. The government must initiate a long-term policy of zero or marginal interest rates to enhance the use of agricultural mechanisation. Higher participation of commercial banks and NBFCs to offer finance to all customers with clear intention to pay. There needs to be a uniform loan p policy y and a standardised application pp format across all banks.

Th primary The i usage is i dependant d d on the h following f ll i factors: f

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Factors affecting tractor sales

Rainfall trend and tractor sales In the exhibit below, we are exploring the correlation between the rainfall and tractor sales in a fiscal year.

Growth (%)

Source: IMD, Dolat Capital

h h h

C t Contrary t popular to l b li f the belief, th last l t 10-year 10 d t depicts data d i t that th t the th rainfall i f ll has h no significant i ifi t bearing b i on the th sales l of f tractors. t t (Correlation 0.25). There has been surplus rains only in two out of last ten years while tractor sales have been positive in seven out of last ten years. Despite poor rainfall in FY09 and FY10, the growth in tractor sales in FY10 and FY11 were high.

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Factors affecting tractor sales

Farm income and tractor sales In the exhibit below, we are exploring the correlation between the farm income of one year and tractor sales in the following fiscal year.

Note: Farm income has been calculated based on crop production and MSP. Actual income may be higher Source: Dolat Capital, CMIE, Agricultural Ministry

h h h h h h

During FY06FY11, the farm income registered a CAGR of 12.5%. During the same period tractor sales registered a CAGR of 12.8%. Furthermore, there is a correlation of 0.88 between the two variables, from FY01 to FY11. Thus, it is evident that tractor sales are highly proportional to farm income. Thus income Higher farm income leads to higher tractor sales. Farm income grew 6% YoY in FY11 while tractor sales are up ~13% in FY12 (up to January). Farm income continues to be higher and should continue to benefit tractor sales in the coming years as well.

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Factors affecting tractor sales

Interest rates and tractor sales In the exhibit below, we are exploring the correlation between the interest rates and tractor sales in a fiscal year.

Source: Dolat Capital, CMIE

h h

In the above chart, we have taken the SBI prime lending rate (PLR) as a benchmark for interest rates. The chart Th h clearly l l depicts d i a strong inverse i relationship l i hi between b the h two variables. i bl Lower interest i rates have h b been one of f the h major j drivers for tractor sales and vice-versa.

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Factors affecting tractor sales

Tractor financing and tractor sales h Tractor finance qualifies for priority sector lending. The banks are mandated to lend 40% of their total lending to priority sectors. Out of this, tractors qualify for the 4% direct lending and the first 18% of indirect lending. h Currently, the share of various players in domestic tractor financing is:
PSU Banks 40-45%

Private Banks - ~10% NBFCs - ~20% Unorganised g lending g 20-25%

h The average ticket size for a tractor loan is ~Rs300,000-Rs350,000. The lending term varies from banks to NBFCs. h The banks finance ~72-74% of the loan to value (LTV) for a term up to seven years , with interest rates between 10-12%. h The NBFCs finance 66-68% of the LTV for a term up to three years (four years in some cases) with interest rates between 17-18%. h Around 90-92% of the total domestic tractor sales were financed during FY00-FY04. During the next few years, between FY05-FY09, this proportion came down to 85-90%. h In FY11, only 75-80% of total tractors sales were financed. This typically means there was a higher proportion of cash sales than in FY09. The main reason for such a strong growth in the cash sales of tractors was the higher farm income and d the h booming b i rural l economy. The Th main i reasons for f this hi were: Higher government MSP The farmers realised higher amounts for their crops due to the higher MSP. This was predominantly in Uttar Pradesh and Andhra Pradesh. The highest cash sales were witnessed in the sugarcane belt in U.P. NREGA: The rural employment guarantee has significantly added to rural India Indias s income. income This higher income has led to the purchase of more earning assets. Scarce and expensive labour: There has been a large migration of farmers from rural areas to urban areas, which, in turn, makes labour scarce and costly in rural areas. The dependence on machines is increasing every day.

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Factors affecting tractor sales

Greater credit allocation to agriculture will boost tractor sales
From the fiscal period 2003-04 to 2008-09, the Indian government increased its agriculture budget allocation significantly, by almost 300%. Credit disbursements have already gone up from Rs870bn in 2003-04 to about Rs2,500bn in 200708.

Between the fiscal period 2003-04 and 2008-09, the Indian government increased its agriculture budget allocation significantly, by almost 300%. The Rashtriya Krishi Vikas Yojana was launched in 2007-08, with an outlay of Rs250bn, to increase the growth rate of the agricultural sector to 4% per annum, during the Eleventh Pl Plan period. i d This included measures to increase the flow of credit to agriculture. Credit disbursements have already gone up from Rs870bn in 2003-04 to about Rs2,500bn in 2007-08, a threefold increase in credit, as a result of successive agriculture budgets. To strengthen the short-term co-operative credit structure, the government is implementing a revival package in 25 states involving a financial assistance of around Rs135bn. Furthermore, it has continued to provide interest subvention in 2009-10 to ensure that farmers get short-term crop loans up to Rs300,000 at ~7% p.a.. The Agricultural Debt Waiver and Debt Relief Scheme for farmers, from the 2008 agriculture budget, was implemented by 30 June, 2008 as scheduled. The scheme has been able to restore institutional credit to indebted farmers. The total debt waiver and debt relief so far, amounts to Rs653bn, covering ~36 million farmers.

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Our Top Pick: Mahindra & Mahindra Limited

In FY10, FY10 M&M became the largest tractor-selling tractor selling company in the world

CMP Rs683 TP - Rs811 (19%) Recommendation - Buy

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Company profile: Mahindra & Mahindra

h h h h M&M has always been a leader in the farm equipment sector. After acquiring Punjab Tractors Limited (PTL), it has further consolidated its position as the No.1 player in the country. Historically, M&M tractors have outperformed the tractor industry during the last six years. With a market share of almost 41%, we believe the company is well poised to take advantage of the growth in the tractor segment. segment Land fragmentation (bifurcation of property and formation of nuclear families) is a major deterrent to tractor growth, but the new offering from M&M, Yuvraaj, targets this issue.

SOTP Valuation M&M Tech Mahindra M&M Financial Services Mahindra Lifespace Mahindra Holidays & Resorts MUSCO Mahindra Forgings Mahindra Navistar

Per share 696 36 45 7 20 1 4 2 811

The stock is currently trading at 12.8xFY14E. We maintain a BUY rating with a target price of Rs811 (upside of 19%)

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Company profile: Mahindra & Mahindra

Overview h h The Mahindra Group's Farm Equipment Sector (FES) produces amongst the top-three tractor brands in the world. It also holds the distinction of being the first tractor company globally to win the Deming Application Prize in 2003. Mahindra & Mahindra acquired q the majority j y stake in Punjab j Tractors Limited ( (PTL) ) in early y 2007. Benefits of this acquisition include economies of scale, sourcing benefits and vendor rationalisation. Following the MahindraPTL merger in February 2009, PTL is now known as Swaraj Division. Today, the domestic market share of M&M is around 41%. M&M has a subsidiary agricultural tractor manufacturing company in India, known as Mahindra Gujarat Tractor Limited (MGTL).

A pioneer in the domestic industry h M&M has six state-of-the-art manufacturing plants (including two Swaraj plants) in India, two plants in China, three assembly plants in the US and one assembly plant in Australia. h Brand Mahindra sells a range of tractors that includes Bhoomiputra, Shaan, Sarpanch and Arjun Ultra Ultra-1, 1, with each (except Shaan) having a range of variants based on the horsepower (hp) and other attributes. h M&M sells its 15 hp to 60 hp category tractors in the domestic market. h The international operations of the Farm Equipment Sector are spread across 6 continents and are in around 25 countries. h It has state-of-the-art manufacturing plants in India and China with a combined capacity to produce more than 230,000 tractors a year. h Besides these plants, there are assembly plants in the USA and Australia. h FES has more than 1,000 dealers world-wide. Currently, the tractors for the international market range between 25 and 125 hp.

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Company profile: Mahindra & Mahindra

Increasing global presence Mahindra USA (MUSA) Mahindra USA (MUSA) is a wholly-owned subsidiary of M&M. It has reinforced its position in the 'compact' and 'utility' segments of tractors. The company has three assembly plants in the US: Houston (Texas), Calhoun (Georgia) and Redbluff (California). Mahindra Australia Mahindra Australia, based in Brisbane, offers a complete range of 2WD and 4WD compact tractors (20-30 hp range) and utility tractor models (45-80 hp range) along with attachments like loaders, back-hoes and mowers. These attachments can also be put to multiple uses. Mahindra China Tractor Company Ltd. (MCTCL) Mahindra China Tractor Company Ltd. (MCTCL), a joint venture between the Jiangling Motors Company Group and Mahindra & Mahindra FES, started operations in July 2005. It is increasingly becoming a centre for M&M to further expand its product range and to develop more tractors for China and other overseas markets. JV with Jiangsu Yueda Yancheng Tractor Manufacturing Co. (China) In 2008, Mahindra acquired the majority stake in the third largest tractor company in China, by forming a Joint Venture (JV) with Jiangsu Yueda Yancheng Tractor Manufacturing Co. Ltd. (Yancheng Tractor). Mahindra holds 51% in the JV. FES has footprints in many countries. Some of the major markets are in Africa (major countries: Nigeria, Mali, Chaad, Gambia, Angola, Sudan, Ghana and Morocco), ) Latin America ( (Chile and Brazil), ) South Asian countries ( (Sri Lanka, Bangladesh, g Nepal), p ) Middle-East ( (Iran, Syria, y etc.) ) and Eastern Europe (Serbia and Macedonia; FES entered the Turkey market in 2008).

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Mahindra & Mahindra product portfolio

h Bhoomiputra: ranges from 25 hp to 50 hp. h Sarpanch: ranges from 30 hp to 52 hp. h Arjun: ranges from 45 hp to 60 hp. h Shaan: This is a specialised multi-utility tractor from the M&M stable. This has been designed to look like a jeep and function like a tractor. It is specially made for haulage usage as well. h Swaraj Division: tractors range from 22 hp to 50 hp. h Yuvraaj: is the latest offering from M&M. It is a 15 hp tractor only targeted at agriculture by small and marginal farmers. Tractor price list 15 hp - ~Rs162,000 30 hp - ~Rs330,000 50 hp - ~Rs485,000 60 hp - ~Rs525,000 ~Rs525 000 The company regularly launches new products under these brands and upgrades its existing products from time to time under the slogan, ENHANCE COMFORT, REDUCE EFFORT.

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Yuvraaj: The game-changer

This is the latest offering from M&M to cater to small and marginal farmers, which form ~82% of the total Indian farm households. As depicted in Slide 5, the tractor penetration in this category of farmers is only around one per cent. M&M has strategically planned to capture this market with Yuvraaj. At this point in time, there are no significant players who have a tractor in this segment (less than 20 hp). M&M launched l h d this thi product d t only l in i Saurashtra S ht (Gujarat) (G j t) in i November N b 2009 and d sold ld around d 6000 tractors t t i FY11. in FY11 The Th company plans to launch it in four to five states (Uttar Pradesh, Madhya Pradesh, Maharashtra, Rajasthan, Tamil Nadu) in FY12 and the rest of the country in FY13. Priced at around Rs162,000, the Yuvraaj is the cheapest tractor available. It is clearly a high-volume, low-margin product and could well be the game-changer for M&M.

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Quarterly performance: Farm equipment sector

Source: Company, Dolat Capital

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Financials: Farm equipment sector

Source: Company Company, Dolat Capital

31

Financials: Auto sector

Source: Company, Dolat Capital

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M&M: Standalone financials

Profit & Loss Account Year to (Rs mn) Net Sales Raw Materials Employee Cost Other Expenses Total Expenditure EBITDA Other Income Interest Depreciation PBT Total tax PAT Less: Adjustments Adjusted PAT FY10 186,021 123,462 11,985 21,022 156,469 29,552 1,994 278 3,708 28,468 7,590 20,878 0 20,878 FY11 234,937 162,639 14,456 23,280 200,375 34,562 3,095 (503) 4,139 35,196 8,575 26,621 0 26,621 FY12E 300,570 220,017 17,058 26,450 263,525 37,045 3,871 144 4,815 35,957 9,169 26,788 0 26,788 FY13E 344,663 252,293 19,616 30,330 302,240 42,423 4,397 144 5,680 40,996 10,454 30,542 0 30,542 FY14E 397,162 290,723 22,559 34,950 348,232 48,931 4,982 144 6,685 47,083 12,006 35,077 0 35,077 Cashflow Statement Year to (Rs mn) PAT Add: Depreciation Add: Interest expense Less: Other income Change in working capital Others Cash flow from operations Change in fixed assets Change in investments Other income Others Cash flow from investing activities Change in debt Dividend & dividend tax Change in equity & share premium Interest paid Other Adjustments Cash flow from financing activities Change in cash & cash equivalents Opening cash and cash equivalents Closing cash and cash equivalents FY10 20,878 3,708 278 (1,994) (3,903) 0 18,967 (8,592) (6,116) 1,994 908 (11,806) (11,726) (6,238) 7,274 (278) 5,410 (5,557) 1,688 15,744 17,432 FY11 26,621 4,139 (503) (3,095) 3,379 0 30,540 (10,830) (29,273) 3,095 1,175 (35,833) (4,749) (8,026) 10,319 503 (4,082) (6,035) (11,286) 17,432 6,146 FY12E 26,788 4,815 144 (3,871) 1,833 0 29,709 (15,000) (12,000) 3,871 0 (23,129) 0 (8,014) 0 (144) 0 (8,158) (1,578) 6,146 4,568 FY13E 30,542 5,680 144 (4,397) (931) 0 31,038 (15,000) (15,000) 4,397 0 (25,603) 0 (8,014) 0 (144) 0 (8,158) (2,723) 4,568 1,845 FY14E 35,077 6,685 144 (4,982) (117) 0 36,808 (15,000) (15,000) 4,982 0 (25,018) 0 (8,014) 0 (144) 0 (8,158) 3,632 1,845 5,476

Source: Company, Dolat Capital

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M&M: Standalone financials

Balance Sheet Year to (Rs mn) Equity capital Reserves & Surplus Net worth Minority y interest Total debt Total FY10 2,910 75,358 78,268 0 28,802 107,104 FY11 3,276 99,858 103,134 0 24,053 127,187 FY12E 3,276 118,632 121,908 0 24,053 145,961 FY13E 3,276 141,160 144,436 0 24,053 168,489 FY14E 3,276 168,223 171,499 0 24,053 195,552 % of net sales Raw material costs Employee costs Total expenses EBIDTA PAT Asset based ratios (%) ROCE Net block Capital WIP Total fixed assets Investments Net Working capital Current Assets Inventories Debtors Cash & bank Other Current Assets Current Liabilities & Provisions Creditors Other liabilities Provisions Net Deferred Tax Assets Miscellaneous Exp Total 60,424 11,888 12,581 , 17,432 18,523 51,965 30,868 3,132 , 17,965 (2,403) 41 107,104 61,435 16,942 13,547 , 6,146 24,799 67,676 43,658 3,959 , 20,059 (3,544) 0 127,187 68,589 18,936 17,433 , 4,568 27,652 78,242 52,804 2,536 , 22,902 (3,544) 0 145,961 73,190 21,369 18,956 , 1,845 31,020 84,634 58,027 2,421 , 24,186 (3,544) 0 168,489 87,689 24,624 21,844 , 5,476 35,745 95,385 66,866 2,780 , 25,739 (3,544) 0 195,552 27,385 9,642 37,027 63,980 33,860 9,859 43,719 93,253 44,045 9,859 53,904 105,253 53,365 9,859 63,224 120,253 61,680 9,859 71,539 135,253 ROE Turnover ratios (days) Debtor days Inventory days Creditors days Working capital days Growth ratios (%) Net Sales EBITDA EPS CEPS Per share (Rs) EPS CEPS BV DPS Valuations (x) P/E P/CEPS P/BV Yield (%) EV/EBITDA EV/sales Solvency ratios Current ratio Quick ratio D/E ratio Interest coverage ratio 1.2 0.3 0.4 73.4 0.9 0.1 0.2 (50.4) 0.9 0.1 0.2 186.4 0.9 0.0 0.2 212.4 0.9 0.1 0.1 243.8 19.0 16.2 5.1 1.4 13.8 2.2 16.8 14.5 4.3 1.6 13.5 2.0 16.7 14.2 3.7 1.6 12.6 1.6 14.7 12.4 3.1 1.6 11.1 1.4 12.8 10.7 2.6 1.6 9.5 1.2 35.9 42.2 134.5 9.4 40.6 46.9 157.4 10.8 40.9 48.2 186.1 10.8 46.6 55.3 220.5 10.8 53.5 63.7 261.8 10.8 43.9 231.3 125.5 98.8 26.3 17.0 13.2 11.1 27.9 7.2 0.6 2.7 14.7 14.5 14.0 14.6 15.2 15.3 14.8 15.3 21 22 93 11 20 22 84 2 19 22 80 (10) 19 21 80 (11) 19 21 78 (9) 20.4 31.9 21.6 29.4 19.7 23.8 19.5 22.9 19.3 22.2 66.4 6.4 84.1 15.9 11.2 69.2 6.2 85.3 14.7 11.3 73.2 5.7 87.7 12.3 8.9 73.2 5.7 87.7 12.3 8.9 73.2 5.7 87.7 12.3 8.8 Ratios FY10 FY11 FY12E FY13E FY14E

Source: Company, Dolat Capital

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Other Key Players: an Overview

35

Escorts Limited
CMP Rs73 TP - Rs85 (16%) Recommendation - Buy

36

Company profile Escorts

Escorts has a tractor manufacturing capacity of 98,940 tractors per annum, which is the highest in Asia at one location. Its manufacturing operations are divided into three plants: a components plant, a tractor assembly plant, a crankshaft and hydraulic plant. Since inception, it has manufactured over one million tractors. The tractor assembly plant is divided into two lines: the Farmtrac Line and the Powertrac Line. The Farmtrac Line is a composite line that h has h machining hi i as well ll as assembly bl activities i ii f engines, for i transmissions i i and d tractors, whereas h on the h Powertrac P Li Line, only l assembly activities for engines, transmissions and tractors are being carried out.

Company volume growth versus industry growth

Source: Dolat Capital, CMIE

37

Escorts: Financials
Profit & Loss Account Year to (Rs mn) Net Sales Raw Materials Employee Cost Other Expenses Total Expenditure EBITDA Other Income Interest Depreciation PBT Total tax PAT Less: Adjustments Adjusted PAT FY10 25,980 17,741 2,815 4,330 24,886 1,094 821 860 480 575 290 286 0 286 FY11 33,783 23,225 3,296 4,812 31,333 2,450 19 181 532 1,813 490 1,323 3 1,320 FY12E 41,234 29,841 3,737 5,621 39,199 2,035 19 372 487 1,097 (153) 1,251 (13) 1,264 FY13E 44,946 32,541 4,223 5,958 42,722 2,224 50 268 522 1,484 401 1,083 0 1,083 FY14E 49,408 35,771 4,772 6,598 47,142 2,266 50 92 529 1,696 458 1,238 0 1,238 Cashflow Statement Year to (Rs mn) PAT Add: Depreciation Add: Interest expense Less: Other income Change in working capital Others Cash flow from operations Change in fixed assets Change in investments Other income Others Cash flow from investing activities Change in debt Dividend & dividend tax Change in equity & share premium Interest paid Other Adjustments Cash flow from financing activities Change in cash & cash equivalents Opening cash and cash equivalents Closing cash and cash equivalents FY10 286 480 860 (821) 4,502 3,110 8,416 (6,526) 1,315 821 12 (4,377) (4,382) (109) 0 (860) 1,794 (3,557) 540 1,423 1,964 FY11 1,320 532 181 (19) (1,417) 0 597 (300) (500) 19 0 (781) 0 0 149 (181) 0 (32) (216) 1,964 1,748 FY12E 1,264 487 372 (19) 413 0 2,516 (300) (1,000) 19 0 (1,281) (500) (120) 69 (372) 0 (922) 312 1,748 2,060 FY13E 1,083 522 268 (50) 216 0 2,039 (300) (500) 50 0 (750) (1,688) (164) 0 (268) 0 (2,119) (830) 2,060 1,230 FY14E 1,238 529 92 (50) 29 0 1,838 (300) (500) 50 0 (750) (1,832) (176) 0 (92) 0 (2,099) (1,011) 1,230 219

Source: Company, Dolat Capital

38

Escorts: Standalone financials

Balance Sheet Year to (Rs mn) Equity capital Reserves & Surplus Net worth Minority y interest Total debt Total FY10 805 13,446 14,251 401 4,020 18,671 FY11 954 14,766 15,720 401 4,020 20,140 FY12E 1,023 15,910 16,933 401 3,520 20,853 FY13E 1,023 16,830 17,853 401 1,832 20,085 FY14E 1,023 17,892 18,915 401 0 19,316 % of net sales Raw material costs Employee costs Total expenses EBIDTA PAT Asset based ratios (%) ROCE Net block Capital WIP Total fixed assets Investments Net Working capital Current Assets Inventories Debtors Cash & bank Other Current Assets Current Liabilities & Provisions Creditors Other liabilities Provisions Net Deferred Tax Assets Miscellaneous Exp Total 11,716 3,294 4,261 , 1,964 2,198 10,190 4,917 3,901 , 1,372 302 57 18,671 15,261 4,392 5,743 , 1,748 3,378 12,533 6,503 5,241 , 790 302 57 20,140 17,523 5,154 6,598 , 2,060 3,711 14,896 7,460 7,169 , 266 302 57 20,853 16,961 5,394 6,742 , 1,230 3,596 15,380 8,135 6,380 , 865 302 57 20,085 17,512 5,929 7,411 , 219 3,953 16,971 8,943 7,095 , 934 302 57 19,316 15,597 123 15,720 1,067 15,365 123 15,488 1,567 15,178 123 15,301 2,567 14,956 123 15,079 3,067 14,727 123 14,850 3,567 ROE Turnover ratios (days) Debtor days Inventory days Creditors days Working capital days Growth ratios (%) Net Sales EBITDA EPS CEPS Per share (Rs) EPS CEPS BV DPS Valuations (x) P/E P/CEPS P/BV Yield (%) EV/EBITDA EV/sales Solvency ratios Current ratio Quick ratio D/E ratio Interest coverage ratio 1.1 0.2 0.3 0.8 1.2 0.1 0.3 7.8 1.2 0.1 0.2 4.8 1.1 0.1 0.1 4.8 1.0 0.0 0.0 14.2 37.2 13.9 0.7 0.9 11.6 0.5 13.6 9.7 1.1 0.0 8.3 0.6 5.9 4.3 0.4 1.4 4.4 0.2 6.9 4.7 0.4 1.9 3.6 0.2 6.1 4.3 0.4 2.0 3.2 0.1 3.6 9.5 177.0 1.1 13.8 19.4 164.8 0.0 12.4 17.0 165.5 1.0 10.6 15.7 174.5 1.4 12.1 17.3 184.9 1.5 (2.0) NM NM 480.5 30.0 123.9 289.5 104.5 22.1 (16.9) (10.7) (12.7) 9.0 9.3 (14.3) (7.6) 9.9 1.9 14.3 10.0 81 51 111 49 54 42 90 23 55 42 85 24 54 43 87 17 52 42 87 8 3.9 2.4 7.3 8.8 8.7 7.7 6.2 6.2 6.6 6.7 68.3 10.8 95.8 4.2 1.1 68.7 9.8 92.7 7.3 3.9 72.4 9.1 95.1 4.9 3.1 72.4 9.4 95.1 4.9 2.4 72.4 9.7 95.4 4.6 2.5 Ratios FY10 FY11 FY12E FY13E FY14E

Source: Company, Dolat Capital

39

Company profile: TAFE Limited

Tractor and Farm Equipment (TAFE) is among the top five tractor manufactures in the world. TAFE was incorporated in 1960 in Chennai, India, in collaboration with Massey Ferguson (now owned by AGCO Corporation, USA). TAFE acquired the Eicher tractors business in 2005, its engine plant at Alwar and transmissions plant at Parwanoo, through a wholly-owned subsidiary, TAFE Motors and Tractors Limited. TAFE has h four f tractor manufacturing f i plants l i India, in I di in i Chennai, Ch i Bangalore, B l M d Madurai i and d Bhopal. Bh l It I has h a total l capacity i of f 80,000 80 000 tractors per annum.

Company volume growth versus industry growth

Source: Dolat Capital, CMIE

40

Company profile John Deere Pvt Ltd

John Deere India Private Limited is a subsidiary of Deere & Company, USA, in India. Its factory, located near Pune, manufactures 5000 Series agricultural tractors. It manufactures tractors in the range of 35-75 hp.

Company volume growth versus industry growth

Source: Dolat Capital, CMIE

41

Company profile ITL

International Tractors Limited (ITL) was incorporated in 1995 to manufacture tractors. ITL is manufacturing various Sonalika brand tractors from 30 hp to 90 hp, and CLASS brand tractors from 70 hp to 90 hp. ITL is one of the top tractor-selling companies in India. These tractors are also exported to various countries including South Africa, Australia, Zimbabwe, Sri Lanka, Canada, Bangladesh, Algeria, Zambia, Senegal, Ghana, etc. It has a total capacity of 42,000 tractors per annum.

Company volume growth versus industry growth

Source: Dolat Capital, CMIE

42

Appendix: Agricultural and irrigated area in India

Percentage of area under agriculture
44 43 42 41 40 39 38 37 36 35 Feb-54 Feb-58 Feb-62 Feb-66 Feb-70 Feb-74 Feb-78 Feb-82 Feb-86 Feb-90 Feb-94 Feb-98 Feb-02 Feb-06

Source: Dolat Capital, CMIE

Percentage of agricultural land under irrigation

50 45 40 35 30 25 20 15 10 5 0 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Source: Dolat Capital, CMIE

43

Appendix: Global agri-commodity price movement

(US$/tonne) 800 700 600

Wheat (No.1 western red spring), St.Lawrence

(US$/tonne 1,000 900 800 700 600 500 400 300 200 100 0

Rice (5% broken), Bangkok

500 400 300 200 100 0

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09
Mar-09

(US cent/kg) 70 60 50 40 30 20 10 0 Mar-00 Mar-01

Sugar (Raw), World

Cotton, North Europe

(US cent/kg) 250 200 150 100 50 0 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Source: Dolat Capital, CMIE

Mar-10

Mar-10

Mar-10

44

Appendix: Minimum support prices (India)

Minimum support price for rice
(Rs/Quintal) 1,200 1,000 800 600 400 200 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Minimum support price for wheat

(Rs/Quintal) 1,200 1,000 800 600 400 200 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
SS10

Minimum support price for sugar

(Rs/Quintal) 200 150 100 50 0 SS96 SS97 SS98 SS99 SS00 SS01 SS02 SS03 SS04 SS05 SS06 SS07 SS08 SS09

Source: Dolat Capital, CMIE Note: SS sugar season

45

Buy ACCUMULATE

Upside above 20% Upside above 5% and up to 20%

REDUCE SELL

Upside up to 5% Negative Returns

Name
Principal Purvag Shah

Sector

Tel. No.

Email ID

Name
Analysts

Sector

Tel. No.

Email ID

+9122 4096 9747 purvag@dolatcapital.com

Nehal Shah

Midcap

+9122 4096 9753 nehals@dolatcapital.com

Research Amit Khurana, CFA Head of Research Senior Analysts Amit Purohit Bhavin Shah Priyank Chandra R h lJ Rahul Jain i Rakesh Kumar Ram Modi Sameer Panke FMCG & Media

research@dolatcapital.com +9122 4096 9745 amit@dolatcapital.com

Associate +9122 4096 9724 amitp@dolatcapital.com Dh Dhaval l Shah Sh h Hardick Bora Hetal Shah C i lG Capital Goods d Pharma & Agro Financials +9122 9122 4096 9726 9 26 dhaval@dolatcapital.com dh l@d l i l +9122 4096 9748 hardickb@dolatcapital.com +9122 4096 9725 hetals@dolatcapital.com Pharma & Agro+9122 4096 9731 bhavin@dolatcapital.com chem Oil & Gas IT Services S i Financials +9122 4096 9737 priyank@dolatcapital.com +9122 4096 9754 rahul@dolatcapital.com h l@d l t it l +9122 4096 9750 rakesh@dolatcapital.com

M h Mahvash h Ariyanfar Ai f Economy, E Midcap Mid +9122 4096 9736 mahvash@dolatcapital.com h h@d l t it l Pranav Joshi Praveen Kumar Rohit Natarajan Financials IT Services Construction +9122 4096 9706 pranavj@dolatcapital.com +9122 4096 9723 praveen@dolatcapital.com +9122 4096 9751 rohit@dolatcapital.com rohit@dolatcapital com

Metals & Mining +9122 4096 9756 ram@dolatcapital.com Construction +9122 4096 9757 sameer@dolatcapital.com sameer@dolatcapital com

46

Sales
J Janakiram ki K Karra Vikram Babulkar Kapil Yadav

Tel. No.
+9122 9122 4096 9712 +9122 4096 9746 +9122 4096 9735

Email ID
sales@dolatcapital.com j janakiram@dolatcapital.com ki @d l t it l vikram@dolatcapital.com kapil@dolatcapital.com

Derivatives Team
Head of Derivatives A dil R. Aadil R Sethna S th

Tel. No.
+9122 9122 4096 9708

Email ID
aadil@dolatcapital.com dil@d l t it l

Derivatives Sales Traders Chirag Makati Mihir Thakar +9122 4096 9702-03 chiragm@dolatcapital.com +9122 4096 9701 mihir@dolatcapital.com

Head Dealing Equities P. Sridhar

+9122 4096 9728

sridhar@dolatcapital.com l t di @d l t it l salestrading@dolatcapital.co m parthiv@dolatcapital.com

Quantitative Research Prachi Save Derivatives Research Bloomberg Id

+9122 4096 9733

derivativesinfo@dolatcapital.com prachi@dolatcapital.com

Equity Sales Traders +9122 4096 9797 Parthiv Dalal +9122 4096 9705

dolatcapital@bloomberg.net dolatcapital@vsnl.com

Board Lines Fax Lines Production Staff Paresh Girkar Rajesh Shinde

+9122 4096 9700 +9122 2265 9200 +9122 2265 0410 +9122 2265 1278 +9122 4096 9742 +9122 4096 9743 pareshgirkar@dolatcapital.com reajesh@dolatcapital.com

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