Report On The Tractor Sector

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ATTRACTIVE
January 01, 2013
THEME
BSE-30:19,581
Tractor demand yet to peak. In the second edition of our thematic product, we
highlight the maximum potential for tractor demand in India. We believe tractor
penetration in India is low and likely to peak only by 2030. Low crop yields, rising
labor costs and a rise in alternative use of tractors is likely to drive long-term demand.
However we expect tractor demand to grow at a modest rate over the next few years
due to flat farmer profitability and modest growth in non-farm use of tractors.
Indias tractor population can reach 16 mn from the current 4.3 mn

We estimate Indias tractor population can reach 16 mn as current penetration is low: Only
5% of agricultural households own tractors. We believe tractor demand will be boosted by
shortage of farm labor, rising cost of labor and bullocks, the need to raise crop yields that are
significantly below global levels and increase in the use of tractors for non-agricultural
purposes. We expect tractor penetration to peak in FY2030 if the sales CAGR clocks 7-8%.
INSIDE
The number of
tractors in India can
reach 16 mn by
2030 pg04
Strong growth in the tractor cycle is dependent on strong demand for renting tractors
We estimate that a farmer with over six acres of land can afford a tractor, supported by
agricultural income. 82% of Indias farmers have less than five acres of land and hence they
depend on renting tractors to increase the productivity of their land. We believe tractor
demand will get a significant boost if non-agricultural use of tractors, like haulage, transport
and construction, grows strongly. This will boost farmers income from tractors and drive the
need to buy additional tractors.
We expect tractor demand to remain subdued over next few years
We believe tractor demand will remain subdued over the next few years as farmer profitability
is likely to be flat given a sharp rise in input costs and a muted rise in crop prices. Construction
demand growth is also likely to slow over the next few years, in our view, which will limit the
need to buy additional tractors. We also expect tractor prices to rise by 2% yoy over the next
few years against 5% CAGR over the past decade.
Only 5% of
agricultural
households own
tractorspg17
Static farmer
profitability to result
in modest volume
growth for tractors
over the next few
yearspg19
We retain our ADD rating on M&M

We retain our ADD rating on Mahindra & Mahindra as we believe the standalone business is in
a sweet spot due to a sharp rise in demand for UV/SUVs and steady demand for tractors. We
believe the stock has factored most of the positives and we see a modest upside from current
levels. Our target price is Rs1,000 based on sum-of-the-parts methodology.
Hitesh Goel
hitesh.goel@kotak.com
Mumbai: +91-22-6634-1327
Vinay Kumar
vinay.h.kumar@kotak.com
Mumbai: +91-22-6634-1216
Kotak Institutional Equities

Research
Important disclosures appear
at the back
For Private Circulation Only. In the US, this document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933. This document is not for public distribution
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TABLE OF CONTENTS
Tractor penetration likely to peak by 2030 .............................................3
Indias tractor population can reach 16 mn ............................................4
Tractor penetration in India is still low ..................................................17
We expect tractor demand to be subdued in the short term.................19
Tractor penetration is likely to rise in South and West India ..................23
The prices in this report are based on the market close of January 1, 2013.
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TRACTOR PENETRATION LIKELY TO PEAK BY 2030

In the second edition of our thematic report on long-term trends impacting the automobile sector, we focus
on the potential demand of tractors in India and drivers needed to boost tractor demand. In this report we
discuss the maximum potential of tractor demand in India, measures required to boost tractor demand and
the need to improve farm yields.
Our key conclusions in this report are as follows:
` We estimate Indias tractor population can reach 16 mn units, which would be sufficient
to till arable land in India. We have assumed that land area under agriculture will remain
unchanged and we expect tractor penetration to peak when all arable land in India will
be tilled by tractors.
` We believe a farmer with over six acres of land can afford a tractor in India with
agricultural income and income derived from renting out tractors to farmers who cannot
afford them.
` We believe the tractor population in India is about 4.3 mn units. We estimate only 5% of
agricultural households own tractors. More important, 19% of households that can
afford tractors, own tractors. We believe tractor penetration is likely to peak in 2030 if it
follows its long-term trajectory of 7-8% sales CAGR.
` We expect tractor penetration to rise, driven by low crop yields versus global levels,
increase in use of tractors for non-agricultural purposes, a shortening replacement cycle
and shortage of farm labor.
` Over the past decade, farmer profitability per acre of land has quadrupled, driven by a
sustained rise in crop prices and improvement in crop yields. However, over the past four
years, farmer profitability has been stagnant due to a sharp rise in input costs like labor
and seeds and a moderate rise in minimum support prices. We believe over the next few
years, a sharp rise in minimum support prices is unlikely given the high fiscal deficit and
good crop output, which could put pressure on tractor demand.
` We also expect the average selling price of tractors to rise at a muted pace given the
slowdown in construction activity and flat growth in farmer profitability.
` Indias relative market share in exports has fallen sharply for commodities like rice, wheat
and refined sugar. In our view, a sharp increase in agricultural exports is necessary to
incentivize a farmer to increase agricultural yields, which in turn will drive mechanization
of farms.
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INDIAS TRACTOR POPULATION CAN REACH 16 MN

We estimate the tractor population can reach 16 mn units in India. Tractor demand will be driven by shortage
of agricultural labor, need for faster turnaround of agricultural work, increase in multi-cropping and
alternative use of tractors for non-agricultural activity. We believe saturation in the tractor market may come
in 2030 if tractor volume growth follows its historical long-term growth trajectory.
We estimate Indias tractor population can reach 16 mn units, which would be sufficient to
till arable land in India. We have assumed that land area under agriculture will stay
unchanged and expect tractor penetration to peak when all arable land in India will be tilled
by tractors. Our key assumptions are as follows:
` Based on our discussions with farmers we have assumed tractor hours required per acre
per year is about 20 hours. Hence total tractor hours required per year to till 393 mn
acres of land is about 7,855 mn hours.
` A tractor can work for a maximum of 10 hours a day and the number of days a tractor
will be required to work assuming two cropping seasons in a year would be about 60
days. Hence total availability of tractor hours in a year is about 600 hours.
` We thus compute the number of tractors required to till Indias arable land only by
tractors to be 13 mn units. 20% of the tractors are used purely for non-agricultural
purposes, which could add 3.3 mn more units to the potential tractor population. Hence
the maximum potential for tractor population is about 16 mn units, in our view.
` Over the past decade, domestic tractor volumes have clocked 8-9% CAGR. We believe it
is very difficult to project annual tractor demand given wide fluctuations in crop prices
and dependence on the monsoons and agricultural credit. Hence we have tried to
estimate the time by which tractor demand would saturate if tractor sales continue their
historical long-term average growth rate of 7-8% CAGR. We believe the saturation point
for tractor growth will come by 2030.
Exhibit 1: We estimate total requirement of 16.4 mn tractors in India by 2030
Computation of maximum tractor population penetration in India
Total area under agriculture (mn acres)

Tractor-hours required per acre per year (hours) (a)
Number of tractor-hours required per year (mn hours)
Number of hours a tractor can work per day (hours)
Number of days that a tractor is required in a year (b)
Number of tractor-hours available per tractor per year (hours)
Total number of tractors required for agricultural purposes (mn)
Add: Tractors used for non-agricultural purposes (mn) (c)
Total number of tractors required in India (mn)
393
20
7,855
10
60
600
13.1
3.3
16.4
Notes:
(a) based on our discussion with a farmer.
(b) assuming two crops a year and 30 days of sowing and weeding per crop season.
(c) 20% of tractors are used for non-agricultural purposes as per an M&M presentation.
Source: Company, field research, Kotak Institutional Equities estimates
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Tractor-hours
required per acre
per year (hours)
Exhibit 2: The number of tractors required to till agricultural land can reach 13 mn units
Sensitivity to maximum tractor population potential versus the number of hours a tractor can work in a day
13.1
14
16
18
20
22
24
26
7
13.1
15.0
16.8
18.7
20.6
22.4
24.3
Number of hours a tractor can work per day (hours)

8
9
10
11
12
11.5
10.2
9.2
8.3
7.6
13.1
11.6
10.5
9.5
8.7
14.7
13.1
11.8
10.7
9.8
16.4
14.5
11.9
10.9
13.1
18.0
16.0
14.4
13.1
12.0
19.6
17.5
15.7
14.3
13.1
21.3
18.9
17.0
15.5
14.2
13
7.0
8.1
9.1
10.1
11.1
12.1
13.1
Source: Kotak Institutional Equities estimates
Exhibit 3: 29% of the net sown area is cropped twice in India

Cropping pattern across land holdings, March fiscal year-ends, 2007 (%)
Size of holdings
2007
Marginal (<1 ha)
Small (1-2 ha)
Semi-medium (2-4 ha)
Medium (4-10 ha)
Large (>10 ha)
All size classes
Percentage of net sown area

More than
Twice
twice
Once
60
72
74
74
75
71
39
27
25
26
25
29
Total
1.6
1.9
0.4
0.2
0.2
0.9
100
100
100
100
100
100
Source: Ministry of Agriculture, Kotak Institutional Equities
Exhibit 4: Domestic tractor volumes have clocked 9% CAGR over the past decade
Annual domestic tractor volumes, March fiscal year-ends, 2000-2012 (units)
('000 units)
600
Tractor sales ('000 units)
500
9% CAGR
400
300
200
100
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Source: Company, Kotak Institutional Equities
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Exhibit 5: The tractor market is likely to be saturated only by 2030 in our view
Estimated number of tractors in India at different CAGR of annual tractor sales
Year
2012
2013E
2021E
2022E
2023E
2024E
2025E
2026E
2027E
2028E
2029E
2030E
2031E
2032E
6
4.3
4.8
9.0
9.5
10.0
10.6
11.2
11.8
12.5
13.2
14.0
14.9
15.9
16.4
CAGR in annual sales (%)

8
9
10
4.3
4.3
4.3
4.8
4.8
4.8
9.5
9.8
10.1
10.2
10.6
11.0
10.9
11.4
11.9
11.7
12.3
13.0
12.6
13.3
14.1
13.5
14.4
15.4
14.5
15.6
16.4
15.5
16.4
16.4
7
4.3
4.8
9.2
9.8
10.4
11.1
11.8
12.6
13.4
14.3
15.3
16.4
16.4
11
4.3
4.8
10.4
11.4
12.5
13.7
15.0
16.4
12
4.3
4.8
10.7
11.8
13.1
14.4
16.0
16.4
Why will tractor penetration increase?

We believe tractor penetration is expected to rise, driven by low crop yields, increased use of
tractors for non-agricultural purposes, shortening replacement cycle and scarce farm labour.
We believe the key reasons for increase in tractor penetration in India are as follows:
` Crop yields in India are almost half of those in China and other major global agricultural
economies due to use of lower quality seeds and low mechanization of farms. We believe
a rising population and an increase in per capita food consumption would require Indian
farmers to increase crop yields.
Exhibit 6: Paddy yields in India are 50% lower than the world
average
Comparison of paddy yields in India versus other countries, 2009
(Hg/hectare)
(Hg/ha)
90,000
Exhibit 7: Wheat yield in India is comparable to the world

average but is much lower than Chinas
Comparison of wheat yields in India versus other countries, 2009
(Hg/hectare)
(Hg/ha)
80,000
75,000
60,000
60,000
45,000
40,000
30,000
20,000
15,000
Source: Directorate of Economics and Statistics, Kotak Institutional

Equities
Germany
France
China
World
USA
India
Pakistan
Turkey
Russia
Bangladesh
USA
China
Russia
Brazil
World
Iran
Bangladesh
Sri Lanka
Pakistan
0
India
Source: Directorate of Economics and Statistics, Kotak Institutional

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` Only 29% of farmers cultivate two crops a year on their farms, which explains Indias low
farm output. We believe with increased use of tractors instead of manual labor and bullock
carts, farmers will be able to crop twice on their farms, boosting farm output.
` Tractors are being extensively used in rural areas as transport and for construction work.
We expect a sharp rise in rural construction in India over the next decade, which would
boost tractor demand.
` The replacement cycle of tractors has shrunk to 8-10 years from 10-12 years earlier,
driven by an increase in the use of tractors: Tractors are rented out for agricultural work
and used in construction activity. We believe a shorter replacement cycle will be crucial to
boost tractor volume growth.
` India is self-sufficient in food grains and hence to incentivize farmers to increase grain
output, India needs to increase its share in global agricultural exports. Indias exports have
clocked 20% CAGR since 2004 but they comprise just 2% of global agricultural exports.
` Irrigation across Indian farms has increased rapidly. The irrigated area to net sown area
has almost doubled since 1982, resulting in higher crop yields.
Exhibit 8: Irrigation in India has increased significantly over the past three decades
Irrigation across land holdings, March fiscal year-ends, (hectares, %)
1982
1987
Net irrigated area ('000 ha)
Marginal (<1 ha)
6,872
8,062
Small (1-2 ha)
6,618
7,656
Semi-Medium (2-4 ha)
8,713
9,684
Medium (4-10 ha)
9,873
10,360
Large (>10 ha)
4,727
4,700
All size classes
36,803
40,462
Net sown area ('000 ha)
Marginal (<1 ha)
17,083
18,843
Small (1-2 ha)
20,214
22,345
29,708
31,570
Medium (4-10 ha)
40,724
39,701
Large (>10 ha)
28,912
24,968
All size classes
136,641
137,427
Irrigated area as a percentage of sown area (%)
Marginal (<1 ha)
40.2
42.8
Small (1-2 ha)
32.7
34.3
29.3
30.7
Medium (4-10 ha)
24.2
26.1
Large (>10 ha)
16.3
18.8
All size classes
26.9
29.4
1992
1997
2002
2007
9,457
9,085
10,971
11,286
4,905
45,704
12,280
10,576
12,401
12,208
5,490
52,955
12,923
11,437
12,662
12,062
4,458
53,542
13,552
11,403
12,396
11,982
4,937
54,270
21,713
25,471
33,420
37,966
21,843
140,413
24,599
27,389
34,360
35,654
19,059
141,061
25,354
27,964
32,651
31,700
14,526
132,195
23,557
24,314
27,682
26,838
13,464
115,855
43.6
35.7
32.8
29.7
22.5
32.5
49.9
38.6
36.1
34.2
28.8
37.5
51.0
40.9
38.8
38.1
30.7
40.5
57.5
46.9
44.8
44.6
36.7
46.8
` Tractors are replacing bullock carts and labor as the cost of ownership of a 15-hp tractor
is lower than the cost of owning two bullocks to pull a cart (see Exhibit 10); and renting a
tractor is more lucrative than owning a tractor. It is also cumbersome to maintain a
bullock due to the high frequency of disease. We also highlight that a tractor offers more
tangible and intangible benefits to a farmer than a bullock cart. For example, a tractor
works much faster than bullocks, which helps the farmer to crop land twice a year.
Tractors also offer an opportunity to earn rental income as farmers lease them to other
small farmers during the cropping season.
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Exhibit 9: Renting a tractor is cheaper than owning a bullock for less than six acres of holding
The difference between the rental cost of a tractor and ownership cost of a bullock cart
Ownership cost of a bullock cart with two bulls

Average weight of an Indian bull (kg)
Daily feed required as percentage of body weight (%)
Total feed required (kg)
Cost per feed (Rs/kg)
Annual feed required for two bulls (Rs)
Other costs (medical etc.)
Annual cost of owning a bullock cart
Capital cost to buy two bulls
Life of a bull (years)
Total cost of ownership (Rs)
Renting a 40 hp tractor
Rent per hour (Rs)
Number of hours required per year per acre (hours)
Annual rent per acre
Rent for 10 years (Rs)
Number of acres
Total cost of renting a tractor (Rs)
1,000
2.5
25
2.0
36,500
12,000
48,500
40,000
10
525,000
400
20
8,000
80,000
6
480,000
Notes:
(a) Assuming a stable rate of inflation.
Source: Field research, Kotak Institutional Equities estimates
Exhibit 10: Buying a low hp tractor is a cheaper option than owning a bullock cart with two bulls
The difference between ownership cost of a tractor and that of a bullock cart
Ownership cost of a bullock cart with two bulls

Average weight of an Indian bull (kg)
Daily feed required as percentage of body weight (%)
Total feed required (kg)
Cost per feed (Rs/kg)
Annual feed required for two bulls (Rs)
Other costs (medical etc.)
Total annual cost of owning a bullock cart
Capital cost of buying two bulls
Life of a bull (years)
Total cost of ownership
Ownership cost of a tractor
Capital cost of a 15 HP tractor (Rs)
Loan taken as a percentage of the principal (%)
Total loan taken (Rs)
Interest (%)
Tenure (months)
Annual EMI cost
Annual operating cost (b)
Annual cost of owning a tractor
Life of a tractor (years)
Resale value after 10 years (Rs)
1,000
2.5
25
2.0
36,500
12,000
48,500
40,000
10
525,000
200,000
80
160,000
16
60
45,610
29,740
75,350
10
50,000
515,452
Notes:
(b) Annual operating costs include diesel and maintenance costs.
(c) Assuming a six-acre land holding to calculate the ownership cost of a tractor.
Source: Field Research, Kotak Institutional Equities estimates
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Exhibit 11: Renting a 40-hp tractor is cheaper than owning a Yuvraj for small land holdings
The difference between ownership cost of a 15-hp tractor and the rental cost of a 40-hp tractor
Ownership cost of a 15-hp tractor

Capital cost of q 15-hp tractor (Rs)
Loan taken as percentage of the principal (%)
Interest (%)
Tenure (months)
Tractor EMI
Annual EMI cost
Annual operating cost (b)
Annual cost of owning a tractor
Total effective cost
Life of a tractor (years)
Resale value after 10 years (Rs)
Renting a 40-hp tractor
Rent per hour (Rs)
Hours required per year per acre (hours)
Annual rent per acre
Rent for 10 years (Rs)
Number of acres
Total cost of renting a tractor (Rs)
200,000
80
160,000
16
60
3,801
45,610
29,740
75,350
75,350
10
50,000
515,452
400
20
8,000
80,000
6
480,000
Notes:
Source: Field Research, Kotak Institutional Equities estimates
Exhibit 12: Tractor use is rising rapidly across various land holdings
The use of a tractor compared with use of a bullock cart (number per 100 operational holders) (%)
Tractor
Marginal (<1 ha)
Small (1-2 ha)
Medium (4-10 ha)
Large (>10 ha)
All size classes
Bullock carts
Marginal (<1 ha)
Small (1-2 ha)
Medium (4-10 ha)
Large (>10 ha)
All size classes
1987
1992
1997
2002
2007
0.5
1.4
3.1
6.5
11.4
1.8
2.5
3.8
4.7
8.7
23.1
3.8
4.6
8.1
12.6
20.0
32.4
7.7
10.2
15.6
21.8
31.6
42.3
14.4
28.8
31.6
36.1
42.7
50.2
31.1
14.1
39.4
49.0
64.4
66.9
28.9
10.1
26.1
37.2
50.8
62.9
20.8
17.6
36.0
44.9
53.5
58.4
27.4
19.8
39.6
47.8
54.0
54.0
29.6
20.1
34.4
40.0
43.0
38.3
26.4
Farm subsidies are likely to rise given poor returns from farming
We believe farm subsidies are likely to rise given the poor returns from farming in India. We
believe returns from farming will continue to be low until India improves its supply chain to
provide higher returns to farmers for their produce. 30-40% of the produce is wasted,
which reduces returns for farmers. Agricultural subsidies have quadrupled over the past
decade and agricultural credit has increased by 7X as the cost of inputs has risen sharply due
to high inflation.
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Exhibit 13: Fertilizer subsidy to agriculture has risen by 14% CAGR since 1999
Fertilizer subsidy for agriculture, March fiscal year-ends, 1999-2012 (Rs bn)
(Rs bn)
900
Fertilizer subsidy (Rs bn)
750
600
450
300
150
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
Source: Fertilizer Association of India, Kotak Institutional Equities
Exhibit 14: The flow of institutional credit to the farm sector has risen by 22% CAGR since 1999
Institutional credit flow to agriculture, March fiscal year-ends, 1999-2012 (Rs bn)
(Rs bn)
6,000
Institutional credit flow to agriculture (Rs bn)
5,000
4,000
22% CAGR
3,000
2,000
1,000
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
Source: Ministry of Agriculture, NABARD, Kotak Institutional Equities
Increase in non-agricultural use of tractors has increased farmer income

We believe a rise in non-agricultural use of tractors has boosted farmers income from
tractors. Tractors are extensively used to haul construction material, as personal transport
and to transport agricultural produce to mandis. We believe due to poor returns from
farming, the use of tractors for non-agricultural activities is essential to boost tractor
demand.
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Exhibit 15: Allocation of Bharat Nirman by the Central Government has risen at 30% CAGR over
2006-12
Budget outlay for Bharat Nirman, March fiscal year-ends, 2006-12 (Rs bn)
(Rs bn)
Bharat Nirman outlay (Rs bn)
700
600
500
30% CAGR
400
300
200
100
2012
2011
2010
2009
2008
2007
2006
Source: Government of India, Kotak Institutional Equities
Government initiatives to improve agricultural production

The Government of India, in association with state governments, has launched several
schemes over the past decade, aimed at improving farmers access to quality farm inputs
and thus increasing production and yields. Some of these are briefly discussed below:
National Food Security Mission (NFSM). Launched in 2007 as part of the Eleventh Five
Year Plan, NFSM aimed to increase production of rice, wheat and pulses by 10, 8 and 2 mn
tons respectively by the end of 2011-12. The crop development scheme was approved with
a budget outlay of Rs 49 bn for five years and aimed to improve farmers access to
technologically superior seeds, soil management and farm mechanization techniques. The
Government continued the mission in the succeeding five-year plan with a proposed outlay
of Rs256 bn, a five-fold increase over the previous outlay. We note the mission achieved its
previous target of an additional 25 mn tons of production a year before the deadline.
Rashtriya Krishi Vikas Yojana (RKVY). Launched in August 2007, RKVY is a joint scheme
of the state and Central governments to boost public investment in agriculture and thus
increase productivity of Indian farms. The scheme seeks to provide assistance to states in
different areas of the agriculture value chain such as seed production and distribution,
irrigation, storage and processing facilities and farm mechanization. The budget allocation for
RKVY has increased steadily since its inception (see Exhibit 16).
Macro Management of Agriculture (MMA). Launched in 2001, MMA is essentially a
Central Government-sponsored scheme, focusing on provision and promotion of hybrid
seeds, farm mechanization and integrated cereal-development programs.
Water and Irrigation Management. Total irrigation outlay by state governments has
increased by 17% a year, on average, between 2003 and 2012, reflecting state
governments efforts to increase irrigation. The Planning Commission in its Twelfth Five-Year
Plan (2012-17) recommended outlay of Rs3,419 bn to execute Major and Medium Irrigation
(MMI) projects in India, up from Rs2,318 bn recommended during the preceding plan.
11
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Exhibit 16: Allocation to Government schemes has increased steadily over the years
Details of approved outlays for Central and state government schemes, March fiscal year-ends, 2006-12 (Rs
bn)
2006
Rashtriya Krishi Vikas Yojana
Approved budget (Rs bn)
NA
Number of projects completed
NA
Macro Management of Agriculture
Approved budget (Rs bn)
7
2007
2008
2009
2010
2011
2012
NA
NA
15
421
40
654
48
899
84
918
88
354
11
10
10
NA
NA
Source: Government of India, Kotak Institutional Equities
Exhibit 17: Budget allocation for irrigation projects by state governments has increased by 17% a
year on average over 2003-12
Total irrigation budget in India, March fiscal year-ends, 2003-12 (Rs bn)
(Rs bn)
700
Irrigation outlay (Rs bn)
600
500
17% CAGR
400
300
200
100
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
Source: Planning commission, Kotak Institutional Equities
Exports need to rise sharply to drive mechanization of farms

Even though Indias agriculture exports have clocked 20% CAGR over 2004-12, Indias
relative market share in exports has fallen sharply for commodities like rice, wheat and
refined sugar. In our view, a sharp increase in agriculture exports is necessary to incentivize a
farmer to increase agricultural yields, which in turn will drive mechanization of farms.
Indias agricultural exports have been led mainly by a sharp increase in cotton, basmati rice,
groundnut and meat. Wheat exports declined to almost nil due to export restrictions placed
by the Government in view of a drought-like situation in India.
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Exhibit 18: Indias agricultural exports have clocked 20% CAGR since 2004
Indian agricultural exports break-up across crops, March fiscal year-ends, 2004-2013YTD (Rs mn)
Value (Rs mn)
Pulses
Rice Basmati
Rice (other than Basmati)
Wheat
Tea
Coffee
Sesamum seed
Groundnut
Sugar
Molasses
Fresh fruit
Fresh vegetables
Processed vegetables
Processed fruit juices
Meat & Preparations
Marine products
Cotton (raw including waste)
Total agricultural exports
2004
3,286
19,931
21,749
23,912
16,374
10,859
7,089
1,791
12,166
194
7,840
9,539
2,912
3,437
17,144
61,056
9,424
372,665
2005
6,026
28,239
39,450
14,598
18,403
10,691
7,090
5,470
1,495
55
8,623
8,630
3,625
3,692
19,053
64,692
4,226
416,027
2006
11,152
30,431
31,782
5,575
17,307
15,887
7,466
5,137
5,691
288
11,207
9,198
4,945
5,999
27,502
70,359
29,044
492,170
2007
7,733
27,928
42,431
354
19,695
19,690
9,396
7,985
31,275
1,334
14,140
15,465
6,502
7,114
33,140
80,010
61,078
624,114
2008
5,264
43,446
74,100
2
20,342
18,723
16,423
10,541
54,122
2,506
14,466
14,779
6,022
7,734
37,495
69,267
88,654
790,397
2009
5,402
94,770
16,874
15
26,889
22,558
14,943
12,390
44,487
827
19,452
24,542
7,112
10,992
53,714
70,664
28,659
859,517
2010
4,074
108,895
3,653
1
29,435
20,321
14,941
14,259
1,102
198
22,691
29,417
7,523
11,593
62,861
99,000
95,371
893,413
2011
8,528
105,815
2,203
7
31,745
29,121
21,944
20,998
103,390
9,965
21,443
25,308
7,330
10,064
87,759
115,480
129,810
1,201,855
2012
10,930
154,223
82,697
9,684
41,228
45,687
26,511
52,446
88,254
2,052
25,088
28,651
10,595
16,491
140,033
165,105
207,293
1,563,947
2013YTD
5,277
100,197
77,115
46,875
24,205
28,163
16,819
25,541
72,729
1,395
16,305
14,773
6,764
11,415
90,412
108,783
61,725
1,187,297
CAGR (%)
16.2
29.1
18.2
(10.7)
12.2
19.7
17.9
52.5
28.1
34.3
15.6
14.7
17.5
21.7
30.0
13.2
47.2
19.6
Notes:
(a) YTDFY2013 data is until October 2012.
(b) CAGR (%) is the growth rate from 2004 to 2012.
Source: Directorate of Economics and Statistics, Kotak Institutional Equities
However Indias exports as a percentage of world agricultural exports remain low at about
2% (~4% for China). Exhibit 19 shows that India has consistently lagged behind China in
agricultural exports over the years, despite having more land under agriculture, due to poor
productivity of farm holdings in India.
Exhibit 19: Despite having more arable land, India has lagged China in agricultural exports
Total agricultural exports of China and India in US$ bn, at current prices, 2000-11
China (US$bn)
India (US$ bn)
India's share of total world exports (%)
(US$ bn)
70
(%)
2.5
60
2.0
50
40
1.5
30
1.0
20
0.5
10
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0.0
2000
Source: World Trade Organization, Kotak Institutional Equities
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Exhibit 20: Chinas agricultural yields are much higher than those of India
Sown area, production and yields for China and India, 2009
Sown area (mn ha)

Rice
Wheat
Cotton
Production (mn tons)
Rice
Wheat
Cotton
Yields (kg/ha)
Rice
Wheat
Cotton
China
India
30
24
5
42
28
9
195
115
6
134
81
5
6,529
4,739
1,288
3,195
2,907
517
Source: China Statistical Yearbook 2010, Ministry of Agriculture India, Kotak Institutional Equities
Exhibit 21 shows Indias declining relative share of exports of rice and wheat and fluctuating
share of exports of refined sugar. We note the rapid increase in the share of cotton exports
coupled with a significant increase in cotton yields (see Exhibit 22). Yields of rice and wheat
were flat during the past decade in India, which has limited the exports of these
commodities.
Exhibit 21: Indias share of exports of wheat and rice has declined due to restrictions placed by the Government
Indias relative share of exports among the top 20 exporters for commodities, calendar year-ends, 2004-10 (%)
Commodity
Coffee
Cotton
Maize
Mangoes
Rice
Sesame seed
Soyabean cake
Sugar refined
Tea
Wheat
2004
2.7
1.0
1.3
18.0
16.8
21.7
4.7
NA
11.4
1.7
2005
3.0
7.4
0.5
25.1
14.1
20.8
8.5
1.1
9.9
0.6
2006
3.4
13.5
0.7
24.2
15.9
23.7
8.0
6.2
11.9
0.0
2007
2.6
18.8
2.5
22.4
19.8
32.9
8.1
11.7
11.6
0.0
2008
2.5
7.4
3.6
24.7
8.6
21.6
8.7
10.9
11.4
0.0
2009
2.1
21.3
2.7
24.3
7.5
18.6
5.6
NA
12.1
0.0
2010
2.9
21.3
2.2
20.5
7.1
26.2
6.6
4.7
12.5
0.0
Source: FAO, Kotak Institutional Equities
Exhibit 22: Cotton yield has increased by 12% since 2003, led by strong growth in exports
Production and yield of cotton in India, March fiscal year-ends, 2000-12
(mn bales)
40
Production (mn bales) [LHS]
(Kg/ha)
600
Yield (Kg/ha) [RHS}
35
500
30
400
25
300
20
15
200
10
100
5
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
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Exhibit 23: Rice yield has been flat over the past decade
Production and yield of rice in India, March fiscal year-ends, 2000-12
Production (mn tons) [LHS]

Yield (Kg/ha) [RHS}
(mn tons)
120
Exhibit 24: Wheat yield has grown by ~1% over the past decade
Production, yield of wheat in India, March fiscal year-ends,2000-12
Production (mn tons) [LHS]

Yield (Kg/ha) [RHS}
(mn tons)
100
(Kg/ha)
2,500
100
(Kg/ha)
3,000
2,900
80
2,250
80
2,800
60
60
2,000
2,700
40
40
2,600
1,750
20
20
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2000
2,400
2001
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
1,500
2000
2,500
We note that India is a significant player in the world agriculture industry, having the second
largest arable area in the world (after the US). However, low yields and production have
lowered Indias share in world production (see Exhibit 25) and consequently Indias
participation in world agricultural trade. Exports of certain essential commodities have
frequently been restricted by the Government of India in the past due to shortage of
production as a result of the vagaries of the weather.
Exhibit 25: Poor agricultural yields lower Indias share of agricultural output relative to crop area
Indias share of total world crop area and production of different crops, March fiscal year-end, 2009 (%)
(%)
30
% of world cropped area
% of world production
26
23
25
20
20
19
17
15
15
12
12
10
5
5
0
Paddy
Wheat
Maize
Sugarcane
Ground nut
We note that India is self-sufficient in production and consumption of agricultural products

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

Production and consumption of wheat and rice in India, March fiscal year-ends, 2000-12 (mn tons)
Wheat
Production
Consumption
Rice
Production
Consumption
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
76
67
70
65
73
75
66
69
72
73
69
70
69
73
76
76
79
71
81
78
81
82
86
81
88
85
90
76
85
88
93
80
72
86
89
81
83
85
92
87
93
90
97
91
99
86
89
90
95
92
103
95
Source: Ministry of Agriculture, US Department of Agriculture, Kotak Institutional Equities
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TRACTOR PENETRATION IN INDIA IS STILL LOW

Tractor penetration in India is still low in our view. Tractor ownership is restricted to only 5% of agricultural
households, and more importantly, only to 19% of the addressable agricultural households who can buy a
tractor.
The number of tractors in India is about 4.3 mn, in our view, and we believe the Indian
tractor market is underpenetrated for the following reasons:
` According to our calculations, a farmer with more than six acres of land can afford a
tractor in India with agricultural income and income derived from renting out tractors to
farmers who cannot afford to buy their own.
` Mahindra & Mahindra (M&M) estimated that the tractor population was about 3.4 mn
units in FY2009. M&M also estimated that out of 82 mn agricultural households, only
18% of households held more than five acres of land, which is the minimum land holding
required to buy a tractor. About 15 mn agricultural households in India have more than
five acres of agricultural land and can afford to buy tractors.
` Only 38% of farmers with more than 20 acres of land and 18% of farmers with land
holdings of between five and 20 acres had tractors in FY2009 according to M&M.
Ownership of tractors by farmers with less than five acres of agricultural land is just 1%
due to low income from agriculture.
` We believe tractor ownership will be restricted to farmers with more than six acres of land
until farmer incomes improve significantly. However the use of tractors in marginal and
small farms is also increasing rapidly as small farmers rent tractors to save time and
increase the productivity of their land.
Exhibit 27: Tractor penetration is still low in India
Tractor penetration across land holdings, March fiscal year-end, 2009 (%)
Source: Mahindra & Mahindra presentation, Kotak Institutional Equities
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Exhibit 28: A farmer needs to have 5.5 acres of land to own a tractor, in our view
Computation of minimum land required to own a tractor (Rs)
Farmer economics
Income per acre
Total acres ownership
Annual income from agriculture (Rs)
Income from leasing out tractors/hour (Rs)
Annual income from leasing out tractors (Rs) (a)
Total annual income for farmer
Monthly per capita expenditure in rural area (Rs)
Average family size
Annual consumer expenditure in rural area (Rs)
Annual EMI of tractor
Total annual expenditure for farmer
Tractor EMI calculation
Tractor capital cost, 40 HP (Rs)
Loan taken as % of principal (%)
Interest (%)
Tenure (months)
Tractor EMI
Annual EMI cost
25,000
5.5
137,374
250
32,525
169,899
1,054
6.5
82,184
87,715
169,899
400,000
80
320,000
14
60
7,310
87,715
Source: Field research, MSPI, Kotak Institutional Equities estimates
Exhibit 29: Fragmentation of agricultural land has led to a sharp increase in land holdings of less than one hectare
Operating land holdings across land sizes, March fiscal year-ends, 1971-2011 (units)
Operation holdings (mn)

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

Over the past decade, farmer profitability per acre of land has quadrupled, driven by a sustained rise in crop
prices and improvement in crop yields. However, over the past four years, farmer profitability has stagnated
due to a sharp rise in input costs like labor and seeds and a moderate rise in minimum support prices. We
believe that over the next few years a sharp rise in minimum support prices is unlikely given the high fiscal
deficit and good crop output, which could put pressure on tractor demand.
We believe an improvement in farmers profitability is critical to incentivize them to invest in
farm mechanization. Farmer operating profits have been static over the past few years and
real returns are negative as CPI inflation has been about 10%. The cost of labor has risen
sharply while minimum support prices have not increased much over past few years. Tractor
prices have increased by 15-20% over the past four years, which has increased the cost of
ownership of a tractor. We expect farmer profitability to remain static due to (1) rising labor
costs, (2) a modest rise in minimum support prices due to a high fiscal deficit and (3) our
expectations of a steady rise in agricultural subsidies (7-8% increase each year).
Exhibit 30: The minimum support prices of crops has almost doubled over the past seven years
MSP across crops, March fiscal year-ends, 2006-2012 (Rs/quintal)
Paddy
Wheat
Bajra
Maize
Groundnut
Arhar
Urad
Moong
Masur
Soyabean
2006
570
650
525
540
1,520
1,400
1,520
1,520
1,535
900
2007
580
750
540
540
1,520
1,410
1,520
1,520
1,545
900
2008
850
1,000
600
600
1,550
1,550
1,700
1,700
1,700
910
2009
850
1,080
840
840
2,100
2,000
2,520
2,520
1,870
1,350
2010
950
1,100
840
840
2,100
2,300
2,520
2,760
1,870
1,350
2011
1,000
1,120
880
880
2,300
3,000
2,900
3,170
2,250
1,400
2012
1,080
1,285
980
980
2,700
3,200
3,300
3,500
2,800
1,650
5 yr CAGR (%)
10.9
9.4
10.4
10.4
10.0
14.6
13.8
14.9
10.4
10.6
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Exhibit 31: Operating profits have been flat over the past few years
Economics for gram in AP (Rs)
Human labor
Casual
Attached
Family
Bullock labor
Hired
Owned
Machine labor
Hired
Owned
Seed
Fertilizer and manure
Fertilizer
Manure
Insecticides
Irrigation charges
Interest on working capital
Miscellaneous
Total cash cost
Yield per ha (qtl)
Value of the main product per ha (Rs)
Value of the by-product per ha (Rs)
Implcit price (Rs/qtl)
Total revenue
Operating profits
2009
5,991
4,246
7
1,739
1,684
772
912
1,369
1,335
34
1,778
2,250
1,355
895
732
11
377
14,193
16.69
36,691
980
2198
37,671
23,478
2010
6,460
4,807
55
1,598
1,295
337
958
2,395
2,378
16
2,140
1,352
1,316
35
1,016
4
408
1
15,070
12.43
26,069
805
2,097
26,874
11,804
2011
6,804
2012
8,845
1,360
1,591
2,422
2,632
2,226
1,396
1,359
36
1,042
4
449
1
15,703
16.69
34,499
845
2,067
35,344
19,641
2,315
1,488
1,451
37
1,042
4
494
1
18,411
16.69
41,488
887
2,486
42,376
23,965
Note:
(a) Gram prices until FY2010 are as per the Government's Rabi report, FY2012.
(b) Gram prices thereafter have been computed using the WPI.
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Exhibit 32: Operating profits have been static over the past few years
Wheat economics in Punjab (Rs)
2009
4,035
1,987
512
1,536
78
1
77
5,272
3,882
1,390
1,371
2,924
2,894
30
1,038
297
425
124
15,564
39.83
43,649
4,478
1096
48,127
32,563
Human labor
Casual
Attached
Family
Bullock labor
Hired
Owned
Machine labor
Hired
Owned
Seed
Fertilizer
Manure
Insecticides
Irrigation charges
Miscellaneous
Total cash cost
Yield per ha (qtl)
Total revenue
Operating profits
2010
4,302
2,020
524
1,758
92
1
91
5,399
4,056
1,343
1,817
3,017
2,969
48
1,117
505
456
87
16,792
41.18
45,309
6,227
1,100
51,536
34,744
2011
4,947
2012
5,689
99
107
5,461
5,935
2,108
3,283
3,228
55
1,146
1,629
501
96
19,270
41.18
46,623
6,538
1,132
53,161
33,890
2,445
3,604
3,541
63
1,146
871
551
106
20,455
41.18
45,690
6,865
1,110
52,555
32,100
Note:
(a) Wheat prices until FY2010 are as per the Government's Rabi report, FY2012.
(b) Wheat prices thereafter have been computed using the WPI.
Exhibit 33: Operating profits from the paddy crop have improved slightly since FY2009
Paddy economics for Punjab (Rs)
Human labor
Casual
Attached
Family
Bullock labor
Hired
Owned
Machine labor
Hired
Owned
Seed
Fertilizer
Manure
Insecticides
Irrigation charges
Miscellaneous
Total cash cost
Yield per ha (qtl)
Total revenue
Operating profits
2008
5,472
2,599
879
1,995
90
1
89
3,631
1,877
1,754
726
2,518
2,338
180
1,486
1,636
425
29
16,014
68.01
56,037
616
824
56,653
40,640
2009
8,370
4,256
1,470
2,645
162
0
162
4,510
2,428
2,082
902
3,064
2,722
342
1,977
1,406
555
24
20,971
67.41
66,794
197
991
66,991
46,020
2010
9,388
2011
10,530
2012
11,582
172
183
194
4,686
4,869
4,918
929
3,224
2,842
382
2,006
2,930
611
27
23,974
67.41
75,144
216
1,115
75,360
51,386
958
3,395
2,969
426
2,036
6,104
672
29
28,776
67.41
79,502
238
1,179
79,740
50,964
986
3,471
2,998
473
2,057
6,119
739
32
30,099
67.41
81,887
262
1,215
82,149
52,050
Note:
(a) Rice prices until FY2009 are as per the Government's Kharif report, FY2012.
(b) Rice prices thereafter have been computed using the WPI.
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We expect marginal rise in tractor average selling prices over the next few years
The average selling price of tractors have risen by 5% on average each year over the past
decade, helped by a sharp improvement in farmer profitability and an increase in alternative
uses of tractors, which has boosted farmers incomes from tractors. We believe the average
selling price will rise by a muted 2% over the next few years as we expect farmer
profitability to improve slowly and we do not expect significant improvement in construction
activity, which could boost income from renting out tractors.
We also note that the utilization of the tractor industry capacity in India has remained at 6570% over the past three years. With several players expected to ramp up their capacities
over the next 2-3 years, we expect utilization to remain at sub 70% for the next few years as
well, which would deter tractor manufacturers from taking steep price hikes.
Exhibit 34: Tractor ASPs have clocked 5% CAGR over the past decade, due to a shift to higher horse
power tractors
Tractor average selling prices for M&M, March fiscal year-ends, 1994-2012 (000 Rs)
500
('000 Rs)
400
300
200
100
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
Source: Company, Kotak Institutional Equities
Exhibit 35: We expect utilization of the tractor industry capacity in India to remain below 70% over
the next few years
Industry capacity and utilization of the tractor industry, March fiscal year-ends, 2009-15E
('000 units)
1,200
(%)
Industry capacity ('000 units) [LHS]
Domestic sales ('000 units) [LHS]
80
Utilization (%) [RHS]

1,000
70
800
600
60
400
50
200
2015E
2014E
2013E
2012
2011
2010
40
2009
Source: Company, Kotak Institutional Equities estimates
22
Sixth Gear
Automobiles
TRACTOR PENETRATION IS LIKELY TO RISE IN SOUTH AND WEST INDIA

We believe South and West India are likely to drive tractor demand in India due to (1) low penetration of
tractors in South and West India, (2) a sharp increase in production of cotton and paddy, which are
predominantly produced in West and South India and (3) improved irrigation in South and West India.
We believe tractor volume growth will be boosted by West and South India due to (1) low
penetration of tractors in West and South India, (2) improved irrigation in these regions and
(3) increase in cotton and paddy production, predominately produced in these regions.
M&M has 44-50% market share in South and West India, which is higher than its overall
market share of 42%. M&M is in a weaker position in North India with market share of 35%.
We believe M&M will gain from the shift of tractor demand from North India to South India
due to its high market share in West and South India. We do not expect a major change in
regional market share due to strong brand recall and resale value of tractor brands in
different regional markets.
Exhibit 36: Tractor penetration is high in UP, Haryana and Punjab
Tractor penetration across states in India, FY2010, number of tractors per 1,000 hectares (units)
60
50
40
30
20
10
Haryana
Punjab
UP
Tamil Nadu
AP
Bihar
Gujarat
J&K
Karnataka
Rajasthan
HP
MP
Maharashtra
Orissa
West Bengal
Assam
Source: ICRA
23
Automobiles
Sixth Gear
Exhibit 37: Shares of UP, Punjab and Haryana in domestic

tractor sales was very high in FY2000
Statewise domestic tractor volumes, FY2000 (units)
Punjab
9%
Exhibit 38: Shares of UP, Punjab and Haryana in domestic

tractor sales has declined significantly since FY2000
Statewise domestic tractor volumes, FY2012 (units)
Others
6%
Punjab
5%
UP
28%
UP
15%
Haryana
5%
Haryana
7%
Maharashtra
11%
TN
5%
TN
4%
Bihar
5%
Bihar
5%
Maharashtra
8%
Karnataka
3%
AP
6%
Others
10%
MP
9%
Gujarat
11%
Karnataka
6%
Gujarat
6%
Rajasthan
9%
AP
8%
Source: TMA, Kotak Institutional Equities
Rajasthan
10%
MP
9%
Exhibit 39: Tractor demand is likely to shift to South, West and East India
Region, horsepower and company-wise break-down of domestic tractor demand in India, March fiscal year-ends, 2004-2012 (%)
Company
M&M (with PTL)
TAFE (with Eicher Motors)
Escorts Ltd
Sonalika
Others (John Deere, New Holland etc)
Total
Horsepower wise breakup
Upto 30 hp
31-40 hp
41-50 hp
51 hp and above
Total
Region-wise
North
West and Central
South
East
Total
2004
2005
2006
2007
2008
2009
2010
2011
2012
38
22
13
11
17
100
39
23
13
11
15
100
40
23
10
11
16
100
38
24
14
11
13
100
39
23
15
10
13
100
41
22
14
9
15
100
42
22
13
9
14
100
42
21
13
9
15
100
42
23
11
8
15
100
23
50
21
6
100
20
51
21
8
100
18
51
23
8
100
17
49
26
8
100
16
46
27
11
100
16
46
25
14
100
16
46
24
14
100
15
46
27
12
100
15
46
27
13
100
50
26
14
10
100
43
27
20
11
100
39
24
25
11
100
40
24
26
11
100
39
24
26
11
100
41
23
22
14
100
42
23
19
16
100
35
30
19
16
100
36
33
19
12
100
24
Sixth Gear
Automobiles
Exhibit 40: Cotton and pulses production has increased faster than cereals
Production of major crops in India, March fiscal year-ends, 2000-11 (mn tons)
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Rice
90
85
93
72
89
83
92
93
97
99
89
95
Wheat
76
70
73
66
72
69
69
76
79
81
81
86
Cotton
12
10
10
9
14
16
19
23
26
22
24
33
Sugarcane
299
296
297
287
234
237
281
356
348
285
292
339
Soyabean
7
5
6
5
8
7
8
9
11
10
10
13
Pulses
13
11
13
11
15
13
13
14
15
15
15
18
Notes:
Production data of cotton is in million bales.
Exhibit 41: M&M has a relatively high market share in South and East India
Region-wise market share, March fiscal year-ends, 2011-13YTD
North
M&M
TAFE
Escorts
John Deere
Sonalika
West & Central
M&M
TAFE
Escorts
John Deere
Sonalika
South
M&M
TAFE
Escorts
John Deere
Sonalika
East
M&M
TAFE
Escorts
John Deere
Sonalika
2011
2012
2013YTD
33.7
14.9
20.0
4.3
10.8
34.1
18.5
17.2
4.0
9.7
34.7
18.1
16.8
3.5
10.7
43.9
10.7
11.2
9.3
8.1
44.2
12.3
8.7
8.0
7.9
43.7
13.0
8.5
5.9
9.6
50.2
15.5
5.1
14.6
3.9
48.9
16.8
4.8
14.4
4.1
49.1
18.6
5.0
10.2
5.0
48.8
9.3
11.9
5.0
10.8
47.1
10.2
11.2
5.4
11.6
48.0
10.7
11.3
4.7
11.2
Notes:
(a) 2013YTD data is till September 2012.
25
Automobiles
Sixth Gear
We retain our ADD rating on Mahindra and Mahindra

We retain our ADD rating on M&M as we believe standalone operations are in a sweet spot
due to customer preference for diesel vehicles and recovery in tractor volumes driven by
expectations of a good Rabi crop. However, we have built strong volume growth in the
utility vehicle and tractor segments over the next few years and thus we see limited scope of
earnings surprises. The UV/SUV segment share in the overall passenger vehicle segment has
risen from 14% in FY2011 to 23% in YTDFY2013, which we believe may be unsustainable.
The stock outperformed the Sensex by 11% over the past 12 months. We believe the stock
is fairly valued at about 12X PE multiple (ex-subsidiary value) on our M&M + MVML FY2014E
earnings estimates as we see limited scope of earnings surprises, potential risk due to
likelihood of a tax on diesel passenger vehicles and concerns about capital allocation to
unproductive assets.
Exhibit 42: We value M&M at Rs1,000 based on SOTP methodology
M&M sum-of-the-parts valuation methodology
M&M standalone + MVML

Subsidiaries
Tech Mahindra
Mahindra Holidays
M&M Financial Services Ltd
Mahindra Lifespace Developers Ltd
Mahindra Forgings
Ssangyong Motors
SOTP-based value
Target price
EPS
(Rs/share)
58.8
Multiple
(X)
13.0
Value per
share
(Rs)
764
235
79
30
77
11
3
34
999
1,000
Comment
Based on 13X 12-month forward EPS less dividend income from subs
Based on KIE target price price of Rs1,000/share
Based on current price of Rs332/share
Based on current price price of Rs1,005/share
Based on current market price of Rs 416/share
Based on current price of Rs53/share
Based on investment made by M&M in the firm of 463 mn dollars
Notes
(1) The subsidiaries have been valued at a holding company discount of 20%.
Exhibit 43: We expect tractor volumes to grow by 7-8% over FY2014-15 after flat growth in FY2013
M&M sales volume estimates, March fiscal year-ends, 2010-15E (units)
Utility vehicles - domestic
XUV500
Quanto
Utility vehicles - exports
Utility vehicles
Maxximo + Gio
Three wheelers
Verito
Auto division
Tractors
Total vehicles
Growth (yoy %)
Utility vehicles - domestic
XUV500
Quanto
Utility vehicles - exports
Utility vehicles
Maxximo + Gio
Three wheelers
Verito
Auto division
Tractors
Total vehicles
2010
201,489
2011
230,110
2012
261,440
14,253
2013E
282,355
48,000
15,000
37,929
383,284
91,238
67,440
18,665
560,626
235,452
796,078
10,567
212,056
12,639
57,424
19,042
249,152
44,683
62,142
282,119
174,634
456,753
355,977
213,653
569,630
29,176
304,869
79,337
67,440
17,776
469,422
235,452
704,874
31.1
14.2
13.6
8.0
236.8
24.3
30.8
28.9
80.2
17.5
253.5
8.2
53.2
22.4
77.6
8.5
36.5
83.2
51.2
26.2
22.3
24.7
31.9
10.2
23.7
30.0
25.7
15.0
5.0
19.4
12.9
2014E
2015E
316,238
363,673
52,800
58,080
30,000
33,000
43,618
50,161
442,656
504,914
104,923
120,662
70,812
76,477
30,665
33,731
649,056
735,784
251,934
272,088
900,990 1,007,873
12.0
10.0
100.0
15.0
15.5
15.0
5.0
64.3
15.8
7.0
13.2
15.0
10.0
10.0
15.0
14.1
15.0
8.0
10.0
13.4
8.0
11.9
26
Sixth Gear
Automobiles
Exhibit 44: We estimate earnings will clock 14% CAGR over FY2012-15E
M&M standalone profit and loss, balance sheet and cash flow statement, March fiscal year-ends, 2010-15E (Rs mn)
Profit model (Rs mn)
Net sales
EBITDA
Other income
Interest
Depreciation
Profit before tax
Current tax
Deferred tax
Net profit
Adjusted net profit
Adjusted earnings per share (Rs)
Adjusted earnings per share ex subs dividends (Rs)
Balance sheet (Rs mn)
Equity
Total borrowings
Current liabilities
Total liabilities
Net fixed assets
Investments
Cash
Other current assets
Miscellaneous expenditure
Total assets
Free cash flow (Rs mn)
Operating cash flow excluding working capital
Working capital changes
Capital expenditure
Free cash flow
Ratios
EBITDA margin (%)
PAT margin (%)
Debt/equity (X)
Net debt/equity (X)
Book value (Rs/share)
RoAE (%)
RoACE (%)
2010
2011
2012
2013E
2014E
2015E
186,021
29,552
1,994
(278)
(3,708)
27,560
(7,493)
(97)
20,878
20,878
33.9
32.5
234,937
34,655
3,095
503
(4,139)
34,114
(7,617)
(958)
26,714
25,619
41.7
39.7
319,529
37,907
3,366
(536)
(5,761)
34,976
(5,382)
(1,888)
28,789
27,706
45.1
42.6
406,412
47,434
3,728
(303)
(7,000)
43,859
(11,184)
32,675
32,675
53.2
49.5
468,865
53,263
3,983
191
(8,577)
48,860
(12,459)
36,401
36,401
59.3
55.1
534,997
60,600
4,223
580
(9,792)
55,611
(14,181)
41,430
41,430
67.5
62.9
80,671
28,802
52,000
161,473
37,027
63,980
17,432
42,992
41
161,473
106,678
24,053
67,676
198,406
43,719
93,253
6,146
55,288
198,406
126,982
35,808
76,330
239,120
50,808
103,105
11,884
73,323
239,120
148,510
33,425
93,498
275,433
63,808
112,105
10,223
89,298
275,433
172,494
25,687
104,412
302,592
70,231
120,105
9,113
103,144
302,592
199,790
15,687
116,505
331,982
75,439
128,105
11,146
117,292
331,982
23,409
(45)
(9,607)
13,758
27,724
2,074
(12,070)
17,728
32,192
(4,843)
(13,404)
13,945
36,251
1,193
(20,000)
17,444
40,803
(2,932)
(15,000)
22,872
46,419
(2,055)
(15,000)
29,364
15.9
11.2
0.4
0.1
131.4
30.5
19.2
14.8
11.4
0.2
0.2
168.0
28.2
19.6
11.9
9.0
0.3
0.2
198.2
24.6
16.9
11.7
8.0
0.2
0.2
233.3
24.7
17.9
11.4
7.8
0.1
0.1
272.3
23.4
17.9
11.3
7.7
0.1
0.0
316.8
22.9
18.6
27
Automobiles
Sixth Gear
Exhibit 45: MVMLs profit is expected to rise sharply as production at the Chakan plant increases
M&M + MVML profit and loss statement, March fiscal year-ends, 2012-15E (Rs mn)
Volumes
Average realization
Gross sales
Excise duty
Net sales
Raw materials
Staff costs
Other expenses
Total expenses
EBITDA
Other income
Interest expense
Depreciation
Extraordinary income
Profit before tax
Tax expenses
Profit after tax
Adj profit before tax
EPS FD
EPS FD ex subs dividends
Ratios (%)
EBITDA margin (%)
Raw material cost (percentage of sales)
Staff cost (percentage of sales)
Other expenses (percentage of sales)
Excise duty (percentage of sales)
Tax rate (%)
MVML profit
MVML profit/share
2012
704,874
489,898
345,317
31,506
313,811
223,947
17,946
30,306
272,199
41,613
4,735
2,874
6,699
1,083
37,858
7,887
29,970
28,888
47.0
44.5
2013E
796,078
543,787
432,897
46,753
386,144
276,093
20,638
36,367
333,098
53,046
5,445
3,000
7,938
47,554
12,459
35,095
35,095
57.2
53.4
2014E
900,990
557,382
502,195
54,237
447,958
322,530
23,734
41,822
388,086
59,873
6,099
2,600
9,514
53,857
14,111
39,746
39,746
64.7
60.6
2015E
1,007,873
568,529
573,005
61,885
511,121
368,007
27,294
48,095
443,396
67,725
6,831
2,100
10,729
61,726
16,172
45,554
45,554
74.2
69.6
13.3
71.4
5.7
9.7
9.1
20.8
1,181
1.9
13.7
71.5
5.3
9.4
10.8
26.2
2,420
3.9
13.4
72.0
5.3
9.3
10.8
26.2
3,346
5.4
13.3
72.0
5.3
9.4
10.8
26.2
4,124
6.7
28
Sixth Gear
Automobiles
"I, Hitesh Goel, hereby certify that all of the views expressed in this report accurately reflect
my personal views about the subject company or companies and its or their securities. I also
certify that no part of my compensation was, is or will be, directly or indirectly, related to the
specific recommendations or views expressed in this report."
29
Automobiles
Sixth Gear
Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
Equities, within the specified category.
70%
60%
Percentage of companies within each category for which

Kotak Institutional Equities and or its affiliates has provided
investment banking services within the previous 12 months.
50%
40%
35.5%
30%
23.3%
23.3%
18.0%
20%
7.6%
10%
3.5%
0.0%
1.2%
REDUCE
SELL
0%
BUY
ADD
* The above categories are defined as follows: Buy = We

expect this stock to deliver more than 15% returns over the
next 12 months; Add = We expect this stock to deliver
5-15% returns over the next 12 months; Reduce = We
expect this stock to deliver -5-+5% returns over the next
12 months; Sell = We expect this stock to deliver less than 5% returns over the next 12 months. Our target prices are
also on a 12-month horizon basis. These ratings are used
illustratively to comply with applicable regulations. As of
30/09/2012 Kotak Institutional Equities Investment Research
had investment ratings on 172 equity securities.
Source: Kotak Institutional Equities
As of September 30, 2012
Analyst coverage
Companies that the analyst mentioned in this document follow
Covering Analyst: Hitesh Goel
Company name
Ticker
Ashok Leyland
ASOK.BO
Bajaj Auto
BJAT.BO
Bharat Forge
BFRG.BO
Exide Industries
(EXID.BO)
Hero Honda
HROH.BO
Mahindra & Mahindra
MAHM.BO
Maruti Udyog
MRTI.BO
Motherson Sumi
MOSS.BO
Tata Motors
TAMO.BO
Source: Kotak Institutional Equities research
30
Disclosures
Ratings and other definitions/identifiers

Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analysts overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)
and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving
this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and
should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.
31
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Report On The Tractor Sector

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Report On The Tractor Sector

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Indias tractor population can reach 16 mn from the current 4.3 mn

We retain our ADD rating on M&M

Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

TRACTOR PENETRATION LIKELY TO PEAK BY 2030

KOTAK INSTITUTIONAL EQUITIES RESEARCH

INDIAS TRACTOR POPULATION CAN REACH 16 MN

Total area under agriculture (mn acres)

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Number of hours a tractor can work per day (hours)

Source: Kotak Institutional Equities estimates

Exhibit 3: 29% of the net sown area is cropped twice in India

Percentage of net sown area

Source: Ministry of Agriculture, Kotak Institutional Equities

Tractor sales ('000 units)

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

CAGR in annual sales (%)

Source: Kotak Institutional Equities estimates

Why will tractor penetration increase?

Exhibit 7: Wheat yield in India is comparable to the world

Source: Directorate of Economics and Statistics, Kotak Institutional

Source: Directorate of Economics and Statistics, Kotak Institutional

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: Ministry of Agriculture, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Ownership cost of a bullock cart with two bulls

Ownership cost of a bullock cart with two bulls

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Ownership cost of a 15-hp tractor

Source: Ministry of Agriculture, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Fertilizer subsidy (Rs bn)

Source: Fertilizer Association of India, Kotak Institutional Equities

Institutional credit flow to agriculture (Rs bn)

Source: Ministry of Agriculture, NABARD, Kotak Institutional Equities

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

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Bharat Nirman outlay (Rs bn)

Source: Government of India, Kotak Institutional Equities

Government initiatives to improve agricultural production

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: Government of India, Kotak Institutional Equities

Irrigation outlay (Rs bn)

Source: Planning commission, Kotak Institutional Equities

Exports need to rise sharply to drive mechanization of farms

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Source: Directorate of Economics and Statistics, Kotak Institutional Equities

India (US$ bn)

India's share of total world exports (%)

Source: World Trade Organization, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Sown area (mn ha)

Source: FAO, Kotak Institutional Equities

Production (mn bales) [LHS]

Yield (Kg/ha) [RHS}

Source: Ministry of Agriculture, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Production (mn tons) [LHS]

Production (mn tons) [LHS]

Source: Ministry of Agriculture, Kotak Institutional Equities

Source: Ministry of Agriculture, Kotak Institutional Equities