IIM INDORE

FINANCE PROJECT
MAHINDRA & MAHINDRA LTD.
GROUP 9 SECTION D 3/28/2010

ROHIT RAJ| JASPREET SINGH | UBAINTHARAN| V ARUN KUMAR | SANTOSH KUMAR GUPTA

TABLE OF CONTENTS
TABLE OF CONTENTS...........................................................................................2 ....................................................................................3 CORPORATE GOVERNANCE ANALYSIS.................................................................4 STOCKHOLDER ANALYSIS....................................................................................7 Calculation of top down beta............................................................................8 Calculation of cost of debt..............................................................................11 WACC.............................................................................................................12 MEASURING INVESTMENT RETURNS..................................................................12 CAPITAL STRUCUTURE CHOICES........................................................................15 BENEFIT OF DEBT...........................................................................................15 COST OF DEBT ...............................................................................................16 OPTIMAL CAPITAL STRUCTURE..........................................................................19 OPTIMAL CAPITAL STRUCTRUE.......................................................................19 OPTIMAL CAPITAL STRUCTURE AT CONSTRAINED CREDIT RATING.................22 OPTIMAL CAPITAL STRUCTURE AT NORMALISED OPERATING INCOME...........22 RELATIVE ANALYSIS.......................................................................................23 MECHNANICS OF MOVING TO THE OPTIMAL.....................................................24 THE IMMEDIACY QUESTION............................................................................24 AFTER FINANCING MIX OR TAKE PROJECTS....................................................24 TAXATION ON DIVIDEND AND CAPITAL GAINS................................................25 COMPANY CASH FLOW ..................................................................................25 CHOICE OF MECHANICS OF MOVING TO THE OPTIMALS.................................25

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REGRESSION OF MARKET VALUE OF FIRM WITH MACROECONOMIC FACTORS ....................................................................................................................... 26 REGRESSION OF OPERATING INCOME OF THE FIRM WITH MACROECONOMIC VARIABLES......................................................................................................26 DIVIDEND POLICY.............................................................................................27 Dividend declared in the past years...............................................................27 FRAMEWORK FOR ANALYZING DIVIDENDS........................................................31 .......................................................................................................................... 33 VALUATION....................................................................................................... 33

3

CORPORATE GOVERNANCE ANALYSIS
Is this a company where there is a separation between management and ownership? If so how responsive management is to ownership? No there is not separation between ownership and management of the company. The control of the firm is in the hands of Mahindra family. Keshabh Mahindra the current chairman of the company has been the Chairman since 1963. The company itself was founded by his Father K.C. Mahindra in 1945. K.C Mahindra grandson, Anand Mahindra has also joined Mahindra group after management education at Harvard Business School. He is presently managing director of Mahindra and Mahindra ltd and also the vice chairman of the company. The company board of director consists of the following people.

1 2 3 4 5

Fig 1: Board of Directors 1

N a m e Ka ad eb hr s M a h i n M aG hr r n . ad . n M a Ad i n D kaar e St l a e hi Pk p n a l e N B r oj a ujG d r i d i j r o r e MMa n ..up Mr p u a g
4

Although the ownership of the company is in the hands of family, clearly they have strong/impartial board of Directors in place. Out of the 13 board of Directors many are from different industries and many people have their independent reputation which lends credibility to the board. For example Deepak Parekh has been chairman of HDFC pvt. Ltd. He has also been member of various committee set up by government of India. Nadir B Godrej has been director of several Godrej companies since 1977. A.S Ganguly has been Chairman of Hindustan Unilever Ltd. from 1980 to 1990. How committed management can also be seen from compensation given to Board of Directors. Mahindra and Mahindra has separate remuneration committee. The committee considers the performance of the company, the current trends in the industry, the qualification of the appointee, their experience, past performance and other relevant factors while deciding the remuneration of the directors. It also keeps track of market trends in terms of compensation level and practices in relevant industries through participation in structured surveys. How firm interact with financial markets? How do markets get information on the firm? The firm is listed in BSE 30 index of Bombay stock exchange. So there is lot of financial analysts following the firm.

MeansofCommunication • The half‐yearly/quarterly results are published in the newspapers (Mumbai edition) and arebeingsenttoeachhouseholdofshareholders. •Theresultsareusuallypublishedinthefollowingnewspapers: i. The Economic Times ii. Navbharat Times iii. The Financial Express iv. Business Standard v. The Hindu Business Line vi. Mint • The annual/half‐yearly/quarterly results, other official news releases and presentations aredisplayedonthewebsiteoftheCompany‐www.mahindra.com •TheManagementDiscussionandAnalysisReportformspartoftheDirectors’Report. How does the firm view it social obligations and manage its impact in society? Mahindra and Mahindra ltd is one of the oldest companies of India. It was founded in 1945 before the partition. The firm enjoys a particularly good reputation as a corporate citizen. It has acquired its reputation over the years by several initiatives that it takes in the following areas : 1 Health, Safety and Environmental Concern: Company has demonstrated strong commitment and responsibility towards safety, occupational health and environment of the company which stems from the vision of the company to sustain business growth with deep commitment towards safety, occupational health and environment. The company has well established safety, health & 5

Environmental Policy (SH&E) which is revised under EMS & OHSMS Standard for all the locations of the Automotive Sector. The SH&E Policy inter alia ensures safety of public, employees, plant, equipment and business associates, ensuring compliance with all statutory rules and regulations on a monthly basis, imparting training to its employees and business associates as per the Training Calendar. All Plants of the automotive sector have been certified with the amended standard for Environmental Management System ISO 14001: 2004. Keeping Safety as a key factor, the Central Safety Committee of the Mahindra Group was formed by the Mahindra Group Management Board. Mahindra Manufacturing Excellence Award for Safety, Health & Environmental activities for the year 2008-09 has been assessed by an external agency to confirm the rating of each Plant and the Company’s best safety practices and systems are shared and implemented for horizontal deployment. 2) Corporate Social Responsibility: Keeping with the Company’s core value of Good Corporate Citizenship, the Mahindra Group continues to display its social responsibility by directing 1% of its profit after tax (“PAT”) to Corporate Social Responsibility (“CSR”) initiatives which would benefit the socially and economically disadvantaged sections of society. Following are some of major of corporate social responsibility initiatives of the company. a) Mahindra Pride School: The Mahindra Pride School at Chinchwad near Pune, within plant premises provides livelihood and skills training to youth from socially disadvantaged communities (comprising mainly of Scheduled Caste/Scheduled Tribe youth). Since its establishment on 23rd March, 2007, 1,202 students have been imparted with “employable” skills through a training course of 3 months duration. The School provides training in four faculties i.e. Hospitality Craft, Customer Relationship urban, rural and tribal parts of India by providing academic Management, Hardware and Networking and Call Centre Training. b) Mid Day Meal Kitchen: Company has established Mid Day Meal Kitchen at Govindgarh Block, Jaipur District, and Rajasthan under a unique tripartite agreement between the Company, Government of Rajasthan and Naandi Foundation with the prime objective being “to fight hunger in Schools”. This centralised Mid Day Meal Kitchen ensures that high quality, hygienically prepared Mid Day Meals containing a minimum of 450 calories are served to the children. The Company has spent Rs.1 crore, for setting lower up of this central kitchen, which today feeds over 25,000 school children from Class 1 to 5, covering 314 schools in two blocks of Chomu and Govindgarh, thereby schooling and learning a complete experience. c) Mahindra All India Talent Scholarships (MAITS): During the year 510 students all over India were awarded were awarded the MAITS which enabled them to pursue job oriented diplomas at a recognized government polytechnic in India. The scholarship is awarded for 3 year period. Till date 4260 students have been awarded the MAITS with majority of them belonging to very poor families where average income of the families ranges from Rs 1500 to Rs 2000 per month. 3) Sustainability initiatives: In Oct 2008 first Mahindra group sustainability report was released setting out its triple bottom line performance i.e performance towards the environmental, social as well as economic aspects towards creating sustainable value towards all its stakeholders. This was 6

in accordance with latest guidelines of internationally accepted global reporting initiatives. The report was essentially the first step which will take the company on a sustainability journey and enabling it to make conscious plans, to reduce GHG emissions and waste as well as conserve water, biodiversity and natural resources, as a part of its growth strategy.

STOCKHOLDER ANALYSIS
Shareholding Pattern of Mahindra and Mahindra Share holding pattern as on : Face value 31/12/2009 10 No. Of Shares % Holding Promoter's holding Indian Promoters Foreign Promoters Sub total Non promoter's holding Institutional investors Banks Fin. Inst. and Insurance FII's Sub total Other investors Private Corporate Bodies NRI's/OCB's/Foreign Others Govt Others Sub total General public Grand total 69063784 7127304 76191088 24.68 2.55 27.23

59592156 64064714 139908653

21.3 22.89 50

21273737 1645395 221416 16060852 39201200 24520124 279821065

7.6 0.59 0.08 5.74 14.01 8.76 100

STOCKHOLDER PATTERN 1

Majority of the stock is held by institutional investors i.e Banks Fin Inst and Foreign Institutional Investors. So Institutional investors are the marginal investors of the firm, they are also the average investor of the Firm.

RISK AND RETURN
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Calculation of top down beta
We have done regression of daily return of Mahindra stock price against daily return of BSE index. Then we have determined the slope and coefficient of regression coefficient. The slope of the regression line gives the beta of the stock. We have also determined arithmetic mean of daily returns of Mahindra stock and stock of Mahindra counterparts.

Then using the formula given below we have determined r square of the regression. R-square of the regression tells us how much variation of dependent variable can be explained by variation of independent variables. In our case since independent variable is BSE 100 index return while dependent variable is stock return of Mahindra, r square gives the portion of systematic risk in the stock compared to total risk of the stock, while the rest is unsystematic risk of the stock. We have used the following formulas for calculations y = β0 + β1 x Where β1 = beta of the stock R-square = 1 – SSE/SSyy Proceeding in this way we have found systematic risk and unsystematic risk of Mahindra and its peers. M&M Return (Average) Risk (SD) Sharpe Ratio (Avg / SD) Beta 2.14% 14.04% 0.15237072 0.93612631 Tata Motors 1.93% 15.84% 0.121964303 1.337041402 8 Force Motors Eicher Motors Swaraj BSE 100 Mazda 1.30% 1.83% 0.43% 1.95% 17.43% 13.92% 14.29% 9.44% 0.074396613 0.13142186 0.02989 0.20624 1.036020498 0.873926498 0.53220 1

Rsquare Systematic Risk Unsystematic Risk Annual Returns

39.57% 5.56% 8.49% 28.93%

63.48% 10.05% 5.78% 25.81%

31.48% 5.49% 11.94% 16.72%

35.11% 4.89% 9.03% 24.30%

12.36% 1.77% 12.52% 5.25%

100.00% 9.44% 0.00% 26.03%

TOP DOWN BETA CALCULATION 1

RELATIVE COMPARISON OF TOP DOWN BETA 1

CALCULATION OF BOTTOM UP BETA

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Bottom up beta is found by taking weighted average of beta of firms sectors. Whereas top down beta is found by regressing firm’s stock return against market index. Hence bottom up beta is better measure of the risk of the firm as it takes into account difference in risks in different business of the firm. After calculating top down beta and systematic and unsystematic risk for Mahindra we have found bottom up beta for Mahindra and Mahindra and Mahindra. For calculating bottom up beta we have identified the sectors in which Mahindra and Mahindra operates. Then we have identified the firms in those sectors. Regression of their stock return was done against market return to find top down beta for the stocks. Then using Debt to equity ratio of these stocks we have found unlevered beta for the firms. Then using revenues of these firms we have found weighted unlevered beta for both the sectors. Equity Beta D/E Utility Vehicles: Force Motors Tata Motors Revenue Unlevered Beta 0.654999146 0.808528325 Sector Beta Light Commercial Vehicles: Tata Motors Eicher Motors Force Motors Swaraj Mazda Weigted Unlevered Beta 0.011157197 0.794755926 0.805913123

1.0360205 1.3370414

0.88138 3 0.99041 4

1237.88 71433.6 3

1.3370414 0.8739265 1.0360205 0.5322031 3

0.99041 4 0.15005 1 0.88138 3 2.28232 5

71433.6 3 1919.51 1237.88 565.07

0.808528325 0.795177099 0.654999146 0.212343222 Sector Beta

0.768482145 0.020309071 0.010788352 0.001596528 0.801176096

Tax Rate (M&M) M&M Debt M&M Equity D/E Financial Leverage Unlevered Beta Levered Beta

26% 4,052.76 30,975.1 0 0.130839 1.096821 Sales Weight

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Utility Vehicles: Light Commercial Vehicles:

0.805913123 0.801176096

0.883942496 0.878746824

7,646.72 4,333.56

0.63827 0.36172

Weigted Unleverd Beta Weighted Levered Beta: Bottom Up Beta

0.8042 0.88206

BOTTOM UP BETA 1

After getting weighted unlevered beta for both the sectors of Mahindra and Mahindra we found bottom up beta for Mahindra using its sales in both the sectors as weights. So finally we found bottom up beta of Mahindra as 0.86.158. We used bottom up beta in our later calculations instead of using bottom up beta because it is deemed to be more correct.

Calculation of cost of debt

Yield on 20 year government bonds Credit rating of the firm Default spread Pre tax cost of debt for the firm Marginal tax rate

Interst Coverage > 12.5 9.5 to 12.5 7.5 to 9.5
Calculating cost of debt 8.27% AA 1% 9.27% 26% 11

Post tax cost of debt
COST OF DEBT

6.9%

We used credit rating given by Crisil for Mahindra as credit rating of Mahindra. CRISIL has recently rated Mahindra as AA. Then we used the above table given by Ashwath Damodaran for determining debt spread for this rating. Then for risk free rate we have taken yield on 20 year Indian government bonds. This gives cost of debt of Mahindra as 9.27%.

WACC
M&M Debt M&M Equity (Market Value) Preferrence Capital Value 4,052.76 30,975.10 0 % 11.6% 88.4% 0% Top Down Beta Long Short Term Term ` 9.3% 9.3% 9.3% 26% 26% 26% 8.27% 26.03% 17.76% 0.93 0% 6.9% 24.9% 22.81% 5.12% 26.03% 20.91% 0.93612 0% 6.9% 24.7% 22.6%

Bottom Up Beta Long Term Short Term

Cost of debt Marginal Tax Rate Rf Rm Rm-Rf Beta Preferrence Capital After-tax cost of debt Cost of equity Weighted average cost of capital

9.3% 26% 8.27% 26.03% 17.76% 0.86 0% 6.9% 23.6% 21.64%
WACC

5.12% 26.03% 20.91% 0.86 0% 6.9% 23.1% 21.3%

We have determined here cost of capital both for short term using both bottom up beta. For long term we have taken yield on 20 year government bonds as risk free rate. And for short term we have taken average yield on 364 days treasury bills

MEASURING INVESTMENT RETURNS

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Firm’s current return on capital employed is well below cost of capital employed for the firm. And its current return on equity is also well below the cost of equity. As a result firm has negative economic value added presently.

Do you think accounting return is a fair measure of returns that a firm is making on existing projects? If not how would you modify the return to make it a fairer measure?

Though ROIC is not perfect. It is subject to the vagaries of asset values shown on the balance sheet. These depend on depreciation policies and the age of a company's assets. ROIC does nonetheless give investors a useful way of assessing how well a company has been run, besides that market value of equity is considerably different from book value of equity, so real return for shareholders can be considerably different from ROE. To get better idea of company’s return we can use market value of debt and equity.

NOPAT   Total S hareholders F u Equity EVA Equity EVA as %of Equi Capital Invested EVA EVA as %of Capital ROE
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We have plotted bar graph of ROC and ROE of the firm over 7 years. On the basis of that we have predicted Return on capital employed for future years. The trend line for return on capital is Y = -0.025x + 0.301 This shows that return on capital of the firm is decreasing with time The trend line for return on equity is Y = -0.026x + 0.337 This shows that return on equity is decreasing with time.

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Then we have also drawn the bar graph for equity EVA as % of equity and EVA as % of capital versus timeline. We can see that firm equity EVA was positive 2 years back consistently for 5 years but now it has turned negative, whereas firm EVA as % of capital has been consistently negative over the years. The trend line for equity EVA as % of equity is Y = -0.025x + 0.085 The trend line for EVA as % of capital is Y = 0.018x +0.013 Firm EVA as % of capital is improving over time, but firm equity EVA as % of equity is worsening over time. This is happening because ratio of book value of equity to book value of debt has changed in this period. Why might a comparison based upon economic value added lead you to different conclusions than one based upon the return differences in the earlier section? Economic value added also takes into account cost of capital employed. For equity EVA we use cost of equity and for EVA for capital we use cost of capital. Both cost of equity and cost of capital are very different from each other. So comparison of ROC and ROE with EVA can yield contrasting results.

CAPITAL STRUCUTURE CHOICES
BENEFIT OF DEBT
CURRENT FINANCING MIX : Mahindra and Mahindra has 3 times more unsecured loans compared to secured loans. BENEFITS OF DEBT: Firms faces following tax advantages 1) Firm has depreciation by book value ratio of 0.06 which means there is less depreciation to reduce tax bite. 2) Firms has made investments in tax free US 64 bonds 3) Provision for current tax, fringe benefit tax and deferred tax for the current year as percentage of profit before tax has been lower due to higher tax free income 4) Increased profit in new plant eligible for deduction under section 80ic of Income Tax Act, 1961 15

MARGINAL TAX STRUCTURE

Company Mahindra Maruti Force Swaraz Eicher tata motors

Marginal tax 0.26 0.02 0.29 0.34 0.13 0.15

Mahindra and Mahindra faces marginal tax rate of 26 % which is high compared to other firms in the industry so it gets more tax advantage from debt

COST OF DEBT
Market Value of Equity MarginalTax Rate Book Value of Firm Debt/Equity Ratio CurrentDepreciation CurrentDepreciation/BVofFirm EBITDA MarketValueof Debt MarketValueofFirm EBITDA/MVofFirm FreeCashFlow ICR 30975.10 0.26 5245.84 0.13 292.00 0.06 1383.00 4026.00 35001.10 0.04 940.41 9.76

Ratio of EBITDA to Market Value of firm is also very low which reduces the capability of the firm to handle debt Free Cash Flow Here we calculate using the firm value and EBITDA. Year EBIT EBIT(1-T) Net block Cap exp Mar Mar Mar Mar Mar 09(12) 08(12) 07(12) 06(12) 05(12) 1,462.10 1,733.61 1,667.40 1,326.75 928.61 1081.954 1282.8714 1233.876 981.795 687.1714 2567.6 1,710.96 1,541.45 1,348.98 1,340.95 856.64 169.51 192.47 8.03 7.22

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NWC Change in NWC FCFF

347.64 -715.1 940.414

1062.74 512.07 601.2914

550.67 174.84 866.566
FCFF

375.83 383.38 590.385

-7.55 -349.14 1029.0914

FCFF Diagram

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Fig: Free Cash Flow Diagram Average FCFF 805.54956 STD FCFF 199.93721 Firm has very stable positive cash flows over the last 5 years which increases its ability to take debt INTANGIBLE ASSET Company has following intangible assets in its books 1) Technical knowhow: The expenditure incurred is amortised over the estimated period of benefit, not exceeding six years commencing with the year of purchase of the technology. 2) Development expenditure: The expenditure incurred on technical services and other project/product related expenses are amortised over the estimated period of benefit, not exceeding five years. 3) Software expenditure: The expenditure incurred is amortised over three financial years equally commencing from the year in which the expenditure is incurred. So the company has much less proportion of intangible assets as compared to tangible assets in its books. As Mahindra owns most of its expertise in process rather than huge technical niche, bondholders can easily observe what equity investors are doing. OPERATING INCOME OPERATING INCOME FOR LAST 5 YEARS Mean Standard Deviation (in crores)
1423.69

320.71

Firms operating income have been very volatile in last 5 years. This increases the cost of debt for the firm. BANKRUPTCY RISK Mahindra and Mahindra Mahindra and Mahindra is part of very large conglomerate Mahindra group which has operations in large number of businesses. Hence bankruptcy risk is small AGENCY COST Mahindra group is owned by family. So increase in debt will ensure that firm is not making negative NPV decisions. FUTURE FLEXIBILITY Mahindra and Mahindra ltd. is the flagship company of Mahindra group. It is presently in automotive industry is cut throat. Lot of foreign companies are introducing new models in new future. So M

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&M ltd. needs flexibility to make future investments.

OPTIMAL CAPITAL STRUCTURE
CURRENTT CAPITAL STRUCTURE OF THE FIRM Risk Premium Risk Free Rate Beta Market Value of Equity Market Value of firm Debt Total Market Value 17.76% 8.27% 0.86 30,975.1 Cost of Equity Cost of Debt EBITDA Depreciation EBIT 4,052.76 WACC 0.23569 D/D+E 0.0927 E/D+E 1383.00 292.00 1091.00 21.64% 0.11570 0.88429

35,027.8

OPTIMAL CAPITAL STRUCTRUE
Debt Ke Interest coverage ratio credit rating Kd wacc MV-firm

0.0000 0.0500 0.1000 0.1500 0.2000 0.2500 0.3000 0.3500 0.4000 0.4500 0.5000 0.5500 0.6000 0.6500 0.7000 0.7500 0.8000 0.8500

0.119693 0.121056 25.24873 AAA 0.12257 12.62437 AAA 0.124263 8.416244 A+ 0.126167 6.312183 A 0.128325 5.049746 A0.130791 4.208122 BBB 0.133637 3.606962 BBB 0.136957 3.156091 BB 0.14088 2.805415 B+ 0.145588 2.524873 B+ 0.151343 2.295339 B 0.158536 2.104061 B 0.167784 1.94221 B0.180115 1.803481 B0.197379 1.683249 B0.223274 1.578046 B0.266433 1.485219 CCC 19

0 0.0902 0.0902 0.0977 0.1007 0.1027 0.1052 0.1052 0.1177 0.1302 0.1302 0.1477 0.1477 0.1627 0.1627 0.1627 0.1627 0.1827

0.119693 0.118341 0.116988 0.116468 0.115837 0.115243 0.114908 0.114111 0.117013 0.120841 0.120968 0.128218 0.128993 0.136983 0.138313 0.139643 0.140973 0.154883

34224.7 34615.85 35016.05 35172.38 35363.98 35546.25 35649.88 35877.03 35008.56 33899.7 33863.97 31949.16 31757.2 29904.86 29617.3 29335.21 29058.45 26448.72

0.9000 0.9500

0.35275 0.611703

1.402707 CCC 1.328881 CCC

0.1827 0.1827

0.156953 0.159023

26099.9 25760.16

We have plotted WACC, Ke and Kd against debt ratio. Both cost of debt and cost of equity increases with debt ratio. While WACC initially decreases with increase in debt to equity ratio then it starts decreasing. Lowest WACC is attained at D/E ratio of 0.5385 or debt to value ratio of 0.35. Optimal WACC is 11.41%.

WACC VS D/V

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Then we have found what will happen to firm value when firm moves to the optimal with the help of following formula New Value of firm = Old value of firm *( 1 + ( Old WACC- New WACC)/Old WACC) Then we have plotted the firm value against debt to value ratio. Optimal firm value comes out to be 35877.03 crores.

MARKET VALUE OF FIRM VS D/V

So we get the following final results At Optimal D/E ratio D/V WACC Market Value of firm Market Value of debt 21 0.5385 0.35 11.41% 35877.89135 12557.26197

Market Value of equity No. of Shares Share price

23320.62938 279,821,265.00 833.4116201

OPTIMAL CAPITAL STRUCTURE AT CONSTRAINED CREDIT RATING
The company credit rating at optimal debt to equity ratio is BBB. If we constrain the credit rating of the firm at AAA, then optimal debt to equity ratio of the firm is 0.1111. Constrained Credit rating Optimal D/E ratio Market Value of firm Market Value of debt Market Value of equity No. of Shares Share price A 0.25 35360 7072 28288 279,821,265.0 1010.93

OPTIMAL CAPITAL STRUCTURE AT NORMALISED OPERATING INCOME
If we normalize the operating income of the firm we get the following Operating Income Net Sales Sales as % of This yr Sales Standardized Operating Income Normalized Income 2002.0 344.9 3934.5 26.7 1289.6 1764.5 2003.0 483.2 4498.3 30.6 1580.6 2004.0 692.4 5887.1 40.0 1730.4 2005.0 928.6 7649.5 52.0 1786.1 2006.0 1326.8 9273.1 63.0 2105.1 2007.0 1667.4 11232. 0 76.3 2184.2 2008.0 1733.6 12894. 9 87.6 1978.0 2009.0 1462.1 14713.0 100.0 1462.1

Using this normalized operating income for the firm we get the following result for the capital structure of the firm At Optimal D/V ratio D/E WACC Market Value of firm Market Value of debt Market Value of equity 40% 0.6667 11.33% 36151.68956 14460.67582 21691.01374 22

Nor of shares Share Price

279,821,265.0 0 775.1738859

RELATIVE ANALYSIS
We have found debt and equity of firms in the same sector as Mahindra and Mahindra and find the values of factors affecting debt capacity of the firm for them and Mahindra and Mahindra and Mahindra
Company Mahindra Maruti Force Swaraz Eicher tata motors debt/mv 0.12 0.02 0.47 0.70 0.13 0.50 effective tax rate 0.29 0.02 0.29 0.34 0.13 0.15 Average OI 1423.69 2446.18 43.72 39.83 179.70 3516.94 Std (OI) 320.71 516.24 91.82 9.61 70.67 988.19 EBITDA/mv 0.05 0.06 0.27 0.09 0.20 0.04

Then we have done regression with ratio of debt to market value of firm as dependent variable. And we have taken effective tax rate of the firms, their mean operating income, standard deviation of their operating income and ebitda to market value of the firm as independent variables.
SUMMARY OUTPUT Regression Statistics Multiple R 0.86484 R Square 0.74794 Adjusted R -0.2603 Square Standard Error 0.29007 Observations 6

ANOVA df Regression Residual Total 4.000 1.000 5.000 SS 0.250 0.084 0.334 MS 0.062 0.084 F 0.742 Significance F 0.690

Coefficients Intercept effective tax rate Average OI -0.26 2.83 0.00

Standard Error 1.02 2.31 0.00

t Stat -0.25 1.23 0.55

Pvalue 0.84 0.44 0.68

Lower 95% -13.25 -26.53 -0.01

Upper 95% 12.73 32.20 0.01

Lower 95.0% -13.25 -26.53 -0.01

Upper 95.0% 12.73 32.20 0.01

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Std (OI) EBITDA/MV

0.00 -0.01

0.00 3.22

-0.62 0.00

0.65 1.00

-0.03 -40.95

0.03 40.93

-0.03 -40.95

0.03 40.93

Predicted Value of Debt/Market Value of Mahindra and Mahindra by this regression is 0.34 whereas present debt to market value ratio of company is 0.11. Hence Mahindra and Mahindra is underleveraged compared to industry.

MECHNANICS OF MOVING TO THE OPTIMAL
THE IMMEDIACY QUESTION
Name Mahindra Force Motors Swaraj Mazda Eicher Motors Tata Motors Market Value (crores) 35027.86 631.16 550.5 1671.7 55895.4 ROCE 14.83% -18.88% 8.38% 6.03% 6.88% P/E per share 15.52 3.78 21.24 44.52 19.08 Percentage of insider holdings 24.68% 51% 53.425% 55.90% 38.07%

In Mahindra and Mahindra ltd. insider holdings is quite small which makes it a take over target. And its price to earnings ratio at 15.52 is not large compared to its peer group. But its market value of 35027 crores act as deterrent against hostile takeover.

AFTER FINANCING MIX OR TAKE PROJECTS
Year Dividend Dividend(%) Div Yield(%) End 200903 278.83 100 2.61 200803 282.61 115 1.65 200703 282.23 115 1.47 200603 243.97 100 1.59 200503 150.81 130 5.23 200403 104.41 90 3.87 200303 63.81 55 11.06 200203 56.21 50 8.8

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Mahindra has been paying dividend regularly over the last 10 years. So its shareholders consist of clientele of investors who have come to expect dividends.

TAXATION ON DIVIDEND AND CAPITAL GAINS
As of 2008, equities are considered long term capital if the holding period is one year or more. Long term capital gains from equities are not taxed if shares are sold through recognised stock exchange and STT is paid on the sale. However short term capital gain from equities held for less than one year, is taxed at 10% (As on Budget 2009-10) (plus surcharge and education cess). This is applicable only for transactions that attract Securities Transaction Tax (STT) At present the dividend distribution tax is 15%, according to the Union Budget 2007, India.As per existing tax provisions, income from dividends is tax free in the hands of the investor. However, this is not to say that there is no tax levied at all. On the contrary, there is a levy of 15% of the dividend declared as distribution tax. This tax is paid out of the profits/reserves of the company declaring the dividend.

COMPANY CASH FLOW
Mar 09 Cash Flow Summary Cash and Cash Equivalents at Beginning of the year Net Cash from Operating Activities Net Cash Used in Investing Activities Net Cash Used in Financing Activities Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at End of the year 923.88 1631.3 1690.26 696.91 637.95 1561.83 Mar 08 1361.79 825.83 2075.08 811.34 -437.91 923.88 Mar 07 725.16 1168.95 -950.4 418.08 636.63 1361.79 Mar 06 630.69 686.9 -502.66 -89.78 94.46 725.15 Mar 05 233.33 414.04 -209.13 192.45 397.36 630.69

CHOICE OF MECHANICS OF MOVING TO THE OPTIMALS
Firm is not in danger of hostile takeover bid. So it does not need to move fast to its optimal capital structure but it can move gradually towards its optimal capital structure. Firm can do this in 2 ways either it can increase dividends or it can take up projects which slowly moves its capital structure towards optimal. Mahindra and Mahindra has last year decreased its payout ratio of dividends by 15%. And there is no sign in long run profitability of the firm. World economy is still not completely out of recession yet. In such a situation it is not advisable to increase dividends, moreover in India long term capital gains tax rate is zero for shareholder who had paid their securities transaction tax. But Dividend is taxed at 15% in India. But is there is a choice between paying dividends or stock buybacks to return cash to share holders. Then we will prefer dividends, because Mahindra cash flows have been stable but its not

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cash balance is not large enough to return enough cash that is required to move towards optimal capital structure.

REGRESSION OF MARKET VALUE OF FIRM WITH MACROECONOMIC FACTORS
SUMMARY OUTPUT Regression Statistics Multiple R 0.760050532 R Square 0.552525268 Adjusted R Square 0.594345288 Standard Error 8603.22811 Observations 60 ANOVA df Regression Residual Total 4 55 59 Coefficients Market Value Change in forex change in bond yield change in gdp change in inflation 22280.74104 -4142.065561 1007.17965 6.686614371 43.66474906 SS 271507330 4070854366 4342361696 Standard Error 1135.88206 2544.82756 805.203988 1.54210354 5.23108871 t Stat 19.61536 -1.62764 1.501005 2.168017 2.22591 P-value 1.7E-26 0.1093 2 0.0618 8 0.0832 8 0.0580 1 Lower 95% 20004.38253 -9242.013915 -3026.982452 -6.054457755 37.86176348 Upper 95% 24557.0995 4 957.882792 3 5041.34175 2 12.5303532 5 50.2286971 4 MS 6787683 3 7401553 4 F 3.9170 6 Significance F 0.890647222

REGRESSION OF OPERATING INCOME OF THE FIRM WITH MACROECONOMIC VARIABLES

SUMMARY

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OUTPUT Regression Statistics Multiple R 0.86 R Square 0.67 Adjusted R Square 0.79 Standard Error 8603.23 Observations 60.00 ANOVA df Regression Residual Total 4.00 55.00 59.00 SS 271507330.25 4070854365.5 1 4342361695.7 6 Standard Error 1135.88 2035.86 838.75 1.40 4.62 MS 67876832.5 6 74015533.9 2 F 4.92 Significance F 0.94

Coefficients Change in forex change in bond yield change in gdp change in inflation 15914.82 -3313.65 1119.09 6.69 39.70

t Stat 29.62 -0.63 1.65 2.56 2.62

P-value 0.00 0.12 0.04 0.07 0.06

Lower 95% 18186.58 758.07 2796.60 9.49 48.93

After doing multiple regression of firm’s market value and operating income against macroeconomic variables. We find that variation in operating income of the firm is explained by macro economic variables. Its multiple r square is 0.86 which shows that 86 % of variation is explained. Predictability of market value of firm by macroeconomic variables is also good. Multiple r square of the model is 0.76 which means 76 % of variation in market value of firm is explained by the model.

DIVIDEND POLICY
Dividend declared in the past years
Year End Dividend Dividend(%) Div Yield(%) 2009-03 2008-03 2007-03 278.83 282.61 282.23 100 115 115 2.61 1.65 1.47

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2006-03 2005-03 2004-03 2003-03 2002-03 2001-03 2000-03

243.97 150.81 104.41 63.81 56.21 60.77 60.77

100 130 90 55 50 55 55

1.59 5.23 3.87 11.06 8.8 9.15 3.42

Firm has been consistently paying dividends since several years. Firm reduced its dividend in last year.

Dividend yield of Mahindra and Mahindra reached its peak in 2003. Then it started falling. But in last year it improved it a little bit. Year End Dividend Dividend(%) Div Stock Net Cash to EPS Payout Reported Yield(%) Buyback Shareholders (annualised) (%) Net Profit (Unit Curr) 278.83 282.61 282.23 243.97 100 115 115 100 2.61 1.65 1.47 1.59 0 0 0 0 278.83 282.61 282.23 243.97 30.6 44.54 43.1 35.26 33.42 26.54 27.51 29.65 867.51 1,103.37 1,068.39 857.1

2009-03 2008-03 2007-03 2006-03

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2005-03 2004-03 2003-03 2002-03 2001-03 2000-03 Average

150.81 104.41 63.81 56.21 60.77 60.77

130 90 55 50 55 55

5.23 3.87 11.06 8.8 9.15 3.42 4.885

0 0 0 0 0 0

150.81 104.41 63.81 56.21 60.77 60.77

44.02 28.89 11.84 8.85 10.35 23.24

30.68 31.15 46.45 54.74 53.14 23.66

512.67 348.54 145.54 102.69 120.56 263.48

Dividend Payout is near 30% from last 5 years.Net increase in dividend from last 5 years (2005) is Rs. 138 Cr which is increase of 92% from last 5 years. Mahindra and Mahindra net profit decreased last year.

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Year 2009

Dividen d(Rs in Crores) 278.83 311.61 0 0 1.57

Dividen d% 100 60 0 0 15

Dividend Yield(%) 2.61 3.33 0 0 1.37 1.462

M&M Tata Motors Force Motors Eicher Motors Swaraj Mazda

Many competitors are not paying dividend

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No of Shares Foreign (Promoter & Group) Indian (Promoter & Group) Total of Promoter Non Promoter (Institution) Non Promoter (Non-Institution) Total Non Promoter Total Promoter & Non Promoter Custodians(Against Depository Receipts) Grand Total 7,127,304.00 69,063,784.0 0 76191088 140130069 47665482 187795551 263986639 15834626 279821265

% Share Holding 2.5471 24.6814 27.2285 50.0784 17.0343 67.1127 94.3412 5.6588 100

Share Holder 2 58 60 715 138374 139089 139149 3 139152

FRAMEWORK FOR ANALYZING DIVIDENDS
Year Mar 09(12) Mar 08(12) Mar 07(12) Mar 06(12) Mar 05(12)

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Dividend FCFF Total Debt Change in Debt FCFE Div/FCFE FCFE-Dividend Cash and Bank

278.83 940.414 4,052.76 1,465.70 2,406.11 0.115883952 2,127.28 1,574.43

282.61 601.2914 2,587.06 951.06 1,552.35 0.182052852 1,269.74 861.23

282.23 866.566 1,636.00 752.62 1,619.19 0.174303632 1,336.96 1,326.07

243.97 590.385 883.38 -169.24 421.15 0.579301666 177.18 730.31

150.81 1029.091 1,052.62 322.81 1,351.90 0.111554 1,201.09 623.98

They have enough money to give dividend but they need money to reinvest. Recently they are going for scooter segment and so they need money to invest in other high potential projects. Despite the recession firm has been consistently distributing cash among the shareholders in the form of dividends

Year End Payout (%) ROE ROE(%)

2009-03 33.42 0.19956 2 19.9562 4

2008-03 26.54 0.25485 5 25.4854 6

2007-03 27.51 0.30838 9 30.8388 7

2006-03 29.65 0.34117 3 34.1173 1 32

2005-03 30.68 0.28576 3 28.5763 4

2004-03 31.15 0.21140 8 21.1407 6

2003-03 46.45 0.07958 9 7.95891 1

2002-03 54.74 0.051134 5.113439

Here we can see that the firm had increasing ROE from 2003 to 2006 and started decreasing after that. Firm is having a very high ROE, this implies that they have been making good investments in the recent past. So, the company can think of retaining the earnings with themselves and can invest in some good projects rather than paying the payout almost equal to ROE. In this case investors can earn a decent return on their invested capital.

VALUATION
2009 1383.551 343.775 1727.326 4498.722 -395.168 522.6504 239.2104 1477.348 0.116949 0.04 28266.75 2.8E+08 33 2010 2074.552 376.355 2450.907 4827.124 328.4026 541.6257 18.97536 1379.948 2011 2667.776 408.935 3076.711 5155.527 428.4026 560.6011 28.97536 1993.529 2012 3144.636 441.515 3586.151 5483.93 458.4026 579.5764 35.97536 2582.333 2013 3233.617 474.095 3707.712 5812.332 528.4026 598.5518 38.97536 3018.773

Net Profit Depreciation+ Operating Cash Flows Gross Block + Capital Expenditure Working Capital Working Capital Change FCFF Discount Rate Terminal Growth Rate Present Value of Firm No. of Shares

Price per share Terminal Value PV Terminal Value

1010.172 40800.21 23469.08

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