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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

EXECUTIVE SUMMARY India's domestic automotive industry, enjoyed high growth in financial year-05, continuing the healthy trend set in financial year-04. Increased industrial growth contributed to the upward trend. All the automotive industry segments in which M&M has a presence witnessed a growth in demand in financial year-05. The Indian tractor industry too saw an upward trend after a severe downturn period, due to favorable monsoon and better credit terms helped to build positive sentiments. The major players in the Commercial Vehicle Segment are Ashok Leyland Ltd, Hindustan Motors Ltd, Telco, Volvo India Pvt.Ltd, Bajaj Tempo Ltd, Eicher Motors Ltd, Mahindra & Mahindra Ltd, and Swaraj Mazda Ltd. Mahindra & Mahindra Limited (M&M) is the flagship company of around Rs. 8000 crore Mahindra Group, which has a significant presence in key sectors of the Indian economy. A consistently high performer, M&M is one of the most respected companies in the country. Set up in 1945 to make general-purpose utility vehicles for the Indian market, M&M soon branched out into manufacturing agricultural tractors and light commercial

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

vehicles

(LCVs).

The

company

later

expanded

its

operations from automobiles and tractors to secure a significant presence in many more important sectors. The company has, over the years, transformed itself into a Group that caters to the Indian and overseas markets with a presence in vehicles, farm equipment, information technology, trade and finance related services, and infrastructure development. Mahindra & Mahindra Ltd (M&M) is a leading player in the Indian utility vehicles and tractors segment with market shares of 49.5% in Jeeps / MUVs, 30.9% in 3-wheelers, and market share of 25.9% in Tractors in the FY2005. This study tries to cover the industry related data and in depth company study and an overview of the economy, evaluates the company on various valuation models.

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

THEORETICAL BACKGROUND FUNDAMENTAL ANALYSIS: Fundamental analysis is the examination of the underlying forces that affect the well being of the economy, industry groups, and companies. As with most analysis, the goal is to derive a forecast and profit from future price movements. At the company level, fundamental analysis may involve examination of financial data, management, business concept and competition. At the industry level, there might be an examination of supply and demand forces for the products offered. For the national economy, fundamental analysis might focus on economic data to assess the present and future growth of the economy. To forecast future stock prices, fundamental analysis combines economic, industry, and company analysis to derive a stock's current fair value and forecast future value. If fair value is not equal to the current stock price, fundamental analysts believe that the stock is either over or under valued and the market price will ultimately gravitate towards fair value. Fundamentalists do not heed the advice of the random walkers and believe that markets are weak form efficient. By believing that prices do not
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STRENGTHS AND WEAKNESS OF FUNDAMENTAL ANALYSIS Long-term Trends: Fundamental analysis is good for long-term investments based on long-term trends.com 4 technological or consumer trends can benefit patient investors who pick the right industry groups . a strong balance sheet.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA accurately reflect all available information. stable earnings and staying power. Value Spotting: Sound fundamental analysis will help identify companies that represent good value. Some of the most legendary investors think long-term and value. The ability to identify and predict long-term economic. Babasabpatilfreepptmba. or companies. very long-term. Fundamental analysis can help uncover companies with valuable assets. Graham and Dodd. fundamental analysts look to capitalize on perceived price discrepancies. Warren Buffett and John Neff are seen as the champions of value investing. demographic.

Babasabpatilfreepptmba. value driven (oil). After such painstaking research and analysis.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Business Acumen: One of the most obvious. rewards of fundamental analysis is the development of a thorough understanding of the business. fundamental analysis allows investors to develop an understanding of the key value drivers and companies within an industry. non-cyclical (consumer staples). Its industry group heavily influences a stock’s price. an investor will be familiar with the key revenue and profit drivers behind a company. Earnings and earnings expectations can be potent drivers of equity prices. investors can better position themselves to identify opportunities that are high-risk (tech). but less tangible. In addition to understanding the business. low-risk (utilities). cyclical (transportation) or income oriented (high yield). By studying these groups. growth oriented (computer).com 5 . Even some technicians will agree to that. A good understanding can help investors avoid companies that are prone to shortfalls and identify those that continue to deliver.

a group. This happened to many of the pure internet retailers. which were not really internet companies. but plain retailers.com 6 . WEAKNESS Time Constraints: Fundamental analysis may offer excellent insights. By can understanding a better position investors themselves to categorize stocks within their relevant industry group. Business can change rapidly and with it the revenue mix of a company. Knowing a company's business and being able to place it in a group can make a huge difference in relative valuations. but it can be extraordinarily time consuming. Time-consuming Babasabpatilfreepptmba.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Knowing Who's Who: Stocks move as company's business.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA models often produce valuations that are contradictory to the current price. a different technique and model is required for different industries and different companies. This can get quite time consuming and limit the amount of research that can be performed. Any changes to growth or multiplier assumptions can greatly alter the ultimate valuation.com 7 . the only question is how much so. Subjectivity: Fair value is based on assumptions. For this reason. a best-case valuation and a worstcase valuation. most models are almost always bullish. Industry/Company Specific: Valuation techniques vary depending on the industry group and specifics of each company. Fundamental analysts are generally aware of this and use sensitivity analysis to present a base-case valuation. even on a worst case. Babasabpatilfreepptmba. However.

is not the difference in valuation techniques across assets.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Analyst Bias: The majority of the information that goes into the analysis comes from the company itself. What is surprising. but the degree of similarity in basic principles. Introduction to Investment Valuation Every asset. financial as well as real. Often that uncertainty comes from the asset Babasabpatilfreepptmba. Any asset can be valued. but some assets are easier to value than others. the valuation of a share of a real estate property will require different information and follow a different format from the valuation of a publicly traded stock. The key to successfully investing in and managing these assets lies in understanding not only what the value is. however. but the sources of the value. Thus. There is undeniably uncertainty associated with valuation. has value.com 8 . Companies employ investor relations managers specifically to handle the analyst community and release information. and the details of valuation will vary from case to case.

There are those who are disingenuous Babasabpatilfreepptmba. A PHILOSOPHICAL BASIS FOR VALUATION A surprising number of investors subscribe to the “bigger fool” theory of investing. A postulate of sound investing is that an investor does not pay more for an asset than its worth. although the valuation model may add to that uncertainty. since there is no guarantee that such an investor will still be around when the time to sell comes. which argues that the value of an asset is irrelevant as long as there is a “bigger fool” around who is willing to buy the asset from them. it is a dangerous game to play. but it is forgotten and rediscovered at some time in every generation and in every market.com 9 . This statement may seem logic and obvious.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA being valued. While this may provide a basis for some profits.

which implies that the price that is paid for any asset should reflect the cash flows it is expected to generate.com 10 . perceptions of value have to be backed up by reality. There are many areas in valuation where there is room for disagreement. THE ROLE OF VALUATION Babasabpatilfreepptmba. Asset prices cannot be justified merely by using the argument that there will be other investors around willing to pay a higher price in the future.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA enough to argue that value is in the eyes of the beholder. but investors do not (and should not) buy most assets for aesthetic or emotional reasons. The models of valuation described in this book attempt to relate value to the level and expected growth of these cash flows. But there is one point on which there can be no disagreement. Consequently. That is patently absurd. and that any price can be justified if there are other investors willing to pay that price. Perceptions may be all that matter when the asset is a painting or a sculpture. financial assets are acquired for the cash flows expected from owning them. including how to estimate true value and how long it will take for prices to adjust to true value.

who trust in their abilities to foresee the direction of the overall stock or bond markets. Valuation plays a minimal role in portfolio management for a passive investor. is different in different arenas. and in corporate finance. on security selection who believe that their skills lie in funding under or over valued securities. and the focus is on market valuation rather than on firm specific valuation. whereas it plays a larger role for an active investor. Valuation and Portfolio Management The role that valuation plays in portfolio management is determined in large part by the investment philosophy of the investor. valuation plays a central role in portfolio Babasabpatilfreepptmba. Market timers use valuation much less than do investors who pick stocks. however. Even among active investors.com 11 . Among security selectors.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Valuation is useful in a wide range of tasks. in acquisition analysis. the nature and role of valuation are different for different types of active investors can be categorized as either market timers. The role it plays. The following section lays out the relevance in portfolio management.

( c ) Deviations from the relationship are corrected in a reasonable time period. Any deviation from this true value is a sign that a stock is under or overvalued. while others use multiples such as price/earnings and price/book value ratios. (b) The relationship is stable over time. and cash flows.com 12 . It is a longterm investment strategy and the assumptions underlying it are that: (a) The relationship between value and the underlying financial factors can be measured. prospects. Different philosophies and the role played by valuation in each. Valuation is the central focus in fundamental analysis. Fundamental Analysts The underlying theme in fundamental analysis is that the true value of the firm can be related to its financial characteristicsits growth prospects. Some analysts’ use discounted cash flow models to value firms. Since investors using this approach hold a large number of "undervalued' stocks in Babasabpatilfreepptmba.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA management for fundamental analysts and a peripheral role for technical analysis. risk profile. The following subsections describe. in broad terms.

“Franchise buyers concentrate on a few businesses they understand well and attempt to acquire undervalued firms. as in the case of Mr. “That means they must be relatively simple and stable in character. As a long-term strategy. their hope is that. Often. franchise buyers wield influence on the management of these firms and can change financial and investment policy. (b) These undervalued businesses can be acquired without driving the price above the true value. “We try to stick to businesses we believe we. these portfolios will do better than the market. on average. we're not smart enough to predict future cash flows.com 13 . Understand.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA their portfolios. Babasabpatilfreepptmba. Franchise Buyers The philosophy of a franchise buyer is best expressed by an investor who has been very successful at it -Warren Buffet. the underselling assumptions are that: (a) Investors who understand a business well are in a better position to value it correctly. If a business is complex and subject to constant change.Buffett writes.” Mr. Buffet.

They are also interested in how much additional value they can create by restructuring the business and running it right. trading volume. The information available from trading .com 14 . and so forth gives an indication of investor psychology and future price movements. While valuation does not play much of a role in charting. since franchise buyers arc attracted to a particular business because they believe it is undervalued. that there are not enough marginal investors taking advantage of these patterns to eliminate them. For instance valuation can be used to determine support and resistance lines4 on price chart. Babasabpatilfreepptmba. short sales.price movements.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Valuation plays a key role in this philosophy. Chartists Chartists believe that prices are driven as much by investor psychology as by any underlying financial variables. there are ways in which an enterprising chartist can incorporate it into analysis. The assumptions here are that prices move in predictable patterns. and that the average investor in the market is driven more by emotion than by rational analysis.

The underlying assumption is that these traders can anticipate information market. Thus an information trader may buy an “overvalued” firm if he or she believes that the next information announcement is going to cause the price to go up because it contains better-than-expected news. rather than on value per se. For information trader the focus is on the relationship between information and changes in value. Information traders attempt to trade in advance of new information or shortly after it is revealed to financial markets. If there is a relationship between how undervalue or overvalued a company is and how its stock price reacts to new information then valuation could play a role in investing for an information trader. Market Timers announcements and gauge the market reaction to them better than the average investor in the Babasabpatilfreepptmba.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Information Traders Prices move on information about the firm.com 15 . buying on good news and selling on bad.

For example.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Market timers note. Efficient Marketer Babasabpatilfreepptmba. that the payoff to calling turns in markets is much greater than the returns from stock picking. market timing strategies can use valuation in at least two ways: (a) The overall market itself can be valued and compared to the current level. (b) A valuation model can be used to value all stocks. there may be reason to believe that the market is overvalued. and the results from the cross-section can be used to determine whether the market is over or undervalued. While valuation of individual stocks may not be of any use to a market timer. with some legitimacy. They argue that it is easier to predict market movements than to select stocks and that these predictions can be based upon factors that are observable. as the numbers of stocks that are overvalued using the dividend discount model increases relative to the numbers that are undervalued.com 16 .

The bidding firm or individual has to decide on a fair value for the target firm before making a bid. Since the underlying assumption is that the market price is the best estimate of the true value of the company.or overvalued firms. For efficient marketers. and cannot be arbitraged away. valuation is a useful exercise to determine why. and that any inefficiencies in the market are caused by friction. that marginal investors promptly exploit any inefficiencies. the objective becomes determining what assumptions about growth and risk are implied in this market price. Valuation in Acquisition Analysis – Valuation should play a central part in acquisition analysis. They assume that markets aggregate information quickly and accurately. rather than on finding under.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Efficient marketers believe that the market price at any point in time represents the best estimate of the true value of the firm and that any attempt to exploit perceived market efficiencies will cost more than it will make in excess profits. stock sells for the price it does.com 17 . and the Babasabpatilfreepptmba. such as transaction costs.

Target firms may be overly optimistic in estimating value. the effects on value of changing management and restructuring the target firm will have to be taken into account in deciding on a fair price. Finally. Those who suggest that synergy is impossible to value and should not be considered impossible to value should not be considered in quantitative terms are wrong. Second. This is of particular concern in hostile takeovers. Similarly. especially when the takeover is hostile and they are trying to convince their stockholders that the offer price is too low. there is a significant problem with bias in takeover valuations. There are also special factors to consider in takeover valuation. Babasabpatilfreepptmba.com 18 . to do an acquisition. First. for strategic reasons. if the bidding firm has decided.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA target firm has to determine a reasonable value for itself before deciding to accept or reject the offer. there may be strong pressure on the analyst to come up with an estimate of value that backs up the acquisition decision. the effects of synergy on the combined value of the two firms (target plus bidding firm) have to be considered before a decision is made on the bid.

management-consulting firms have started offering companies advice on how to increase value. In recent years. on how it finances them. Understanding this relationship is key to making value-increasing decisions and to sensible financial restructuring. The value of a firm can be directly related to decisions that it makes-on that projects it takes. and on its dividend policy. Subtracting out the firm’s outstanding debt should yield the value of equity. Babasabpatilfreepptmba.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Valuation in Corporate Finance The objective in corporate finance is the maximization of firm value. and then the relationship between financial decisions. and firm value has to be delineated. Their suggestions have often provided the basis for the restructuring of these firms. Equity represents a residual cash flow rather than a promised cash flow. You can value equity in one of two ways: • By discounting cash flows to equity at the cost of equity to arrive at the value of equity directly. corporate strategy. • By discounting cash flows to the firm at the cost of capital to arrive at the value of the business.com 19 .

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Two Measures of Cash Flows Cash flows to Equity: These are the cash flows generated by the asset after all expenses and taxes. operating expenses and taxes. is called the cash flow to the firm. but at the total cash flows generated by the asset for both the equity investor and the lender. where we look at not just the equity investor in the asset. is called the cash flow to equity investors. which is after debt payments. and also after payments due on the debt. Babasabpatilfreepptmba.com 20 . This cash flow. Cash flow to Firm: There is also a broader definition of cash flow that we can use. Two Measures of Discount Rates Cost of Equity: This is the rate of return required by equity investors on an investment. which is before debt payments but after operating expenses and taxes. the greater the premium. This cash flow. It will incorporate a premium for equity risk –the greater the risk.

Regardless Babasabpatilfreepptmba.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Cost of capital: This is a composite cost of all of the capital invested in an asset or business. FCF is a measure that aims to cut through the arbitrariness and "guesstimations" involved in reported earnings. However.com 21 . it does have its limits and is not immune to accounting trickery. It signals a company's ability to pay debt.all important undertakings from an investor's perspective. Smart investors love companies that produce plenty of free cash flow (FCF). while free cash flow is a great gauge of corporate health. buy back stock and facilitate the growth of business . It will be a weighted average of the cost of equity and the after-tax cost of borrowing. and the same holds true for cash flow. What Is Free Cash Flow? By establishing how much cash a company has after paying its bills for ongoing activities and growth. FREE CASH FLOWS TO THE FIRM The best things in life are free. pay dividends.

grab the income statement and balance sheet.Cash Flow from Operations (Operating Cash) .Change in Working Capital . To calculate FCF. free cash flow tracks the money. Make an additional adjustment for changes in working capital. There you will find the item cash flow from operations (also referred to as "operating cash").Net income + Depreciation/Amortization .Capital Expenditure It might seem odd to add back depreciation/amortization since it accounts for capital Babasabpatilfreepptmba. or spending on plants and equipment: .Capital Expenditure To do it another way. which is done by subtracting current liabilities from current assets. Then subtract capital expenditure.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet. make a beeline for the company's cash flow statement and balance sheet.com 22 . From this number subtract estimated capital expenditure required for current operations: . Start with net income and add back charges for depreciation and amortization.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

spending. The reasoning behind the adjustment, however, is that free cash flow is meant to measure money being spent right now, not transactions that happened in the past. This makes FCF a useful instrument for identifying growing companies with high up-front costs, which may eat into earnings now but have the potential to pay off later. What Does Free Cash Flow Indicate? Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF - due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distributions or debt elimination - can reward investors tomorrow. That is why many in the investment community cherish FCF as a measure of value. When a firm's share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be on the up. By contrast, shrinking FCF signals trouble ahead. In the absence of decent free cash flow, companies are unable to sustain earnings growth. An insufficient FCF for earnings growth can force a company to boost its debt
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levels. Even worse, a company without enough FCF may not have the liquidity to stay in business.

RESEARCH DESIGN OF THE STUDY INTRODUCTION: Every stock available in the markets has a value called market price, which is the indicator of the company’s performance. According to fundamental analysis we will try to find the intrinsic value of a particular stock, which is the true value of the stock, based on which investment arguments take place. STATEMENT OF PROBLEM:

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Every asset, financial as well as real, has value. The key to successfully investing in and managing these assets lies in understanding not only what the value is, but the sources of the value. Any asset at can be valued but some assets are easier to value than others, and the details of the valuation will vary from case to case. Thus, the valuation of a share of a real estate property will require different information and follow a different format from the valuation of a publicly traded stock. What is surprising; however, is not the difference in valuation techniques across assets, but the degree of similarity in basic principles. There is undeniably uncertainty associated with valuation. Often the uncertainty comes from the asset being valued, although the valuation model may add to that ascertained. A postulate of sound investing is that an investor does not pay more for asset than its worth. This statement may seem logical and obvious as financial assets are acquired for the cash flows expected from owning them, which implies that the price that is paid for any asset should reflect the cash flows it is expected to generate. The problem in valuation is not that there are not enough models to value an asset; it is that there are too
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but they do share some common characteristics so in the study we tried to use price-earning multiples and discounted cash flow models of valuation. Choosing the right model to use in valuation is as critical to arriving at a reasonable value as understanding how to use the model. These models often make different assumptions about pricing. Analysts use a wide variety of models from simple to the sophisticated. Babasabpatilfreepptmba. OBJECTIVES OF THE STUDY: • To understand the macroeconomic variables those will an impact on the company progress.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA many.com 26 .

SCOPE OF THE STUDY: The study basically tries to identify the intrinsic value of the company by using the published financial details of the company. • To understand the various investment valuation models that can be used. challenges of the industry in which the company operates. The study the intrinsic value of the company. opportunities.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA • To study the various trends.com 27 . • Find the intrinsic value of the stock and compare with market value of the study. also includes testing Babasabpatilfreepptmba. • To understand the various policies of the company those have impact on the financial performance of the company. hold or sell the stock based on the analysis. The study is restricted to one particular company in the sector. • To select the appropriate model that suits the stock. • To recommend whether to buy.

are known as secondary data.com 28 . it just simply describes the variables. It constitutes the blue print for the collection. and analysis of data. Meeting the company professionals personally collected the information necessary for the study. Secondary data Data. In this research secondary data Babasabpatilfreepptmba. which are not originally collected but rather obtained from published or unpublished sources. measurement. The type of research adopted for the study is descriptive research as the research does not require any manipulation of variables and does not establish causal relationship between events.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA RESEARCH METHODOLOGY: Type of research: Research design is the conceptual structure within which research is conducted. Sources of data: Primary data Those are the data that are obtained by a study specially designed to fulfill the data needs of the problem.

: One company from automobile : Non-probabilistic judgment RESEARCH INSTRUMENTS: Financial calculations: .FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA was collected through sources like Internet. research reports. Sample size sector.This test was used to test the hypothesis.This was done to find the various valuation ratios and necessary calculations to find the intrinsic value of the company. Z – Test: . the sample selected from the selected sector. Calculate the various valuation ratios and other financial Babasabpatilfreepptmba. magazines.com 29 . and company journals. PLAN OF ANALYSIS: After having collected the financial data related to the entities i. Sampling plan: Type of sampling sampling..e.

which might not hold true over a long period of time. LIMITATIONS OF THE STUDY: • The study was confined only to one particular sector. OPERATIONAL DEFINITIONS OF THE CONCEPTS: 1) BETA: Babasabpatilfreepptmba. This helps in finding out the intrinsic value of the company’s share. • The study was more confined with secondary data.com 30 . • The study assumes no changes in the tax rates in the country. • As the scope is defined by the researcher it restricts the number of variables which Influence the industry. • The study was done for a short period of time. Then hypothesis was tested whether the company is under or over valued.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA calculations that will help in the company valuation.

com 31 . This can be written as: 4) COST OF EQUITY: The return that stockholders require for a company for the capital invested.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA A measure of a security's or portfolio's volatility. or systematic risk. industrial buildings. or equipment. in comparison to the market as a whole. 3) CAGR: The year over year growth rate of an investment over a specified periodoftime. It is also known as "beta coefficient. Calculated by taking the nth root of the total percentage growth rate where n is the number of years in the period being considered." 2) CAPEX: Funds used by a company to acquire or upgrade physical assets such as property. The traditional formula is the dividend capitalization model: Babasabpatilfreepptmba.

Since it is a non-cash expense. it increases free earnings. It indicates what proportion of equity and debt the company is using to finance its assets. 9) DUPONT ANALYSIS: cash flow while decreasing reported Babasabpatilfreepptmba.com 32 . 7) DIVIDEND PAYOUT RATIO: The percentage of earnings paid to shareholders in dividends. 6) DEPRECIATION: An expense recorded to reduce the value of a longterm tangible asset. Note: Sometimes investors only use interest bearing longterm debt instead of total liabilities.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA 5) DEBT/EQUITY RATIO: A measure of a company's financial leverage calculated by dividing long-term debt by shareholders equity.

Calculated as: 11) EFFECTIVE TAX RATE: The portion of a company's profit allocated to each outstanding share of common stock. 10) EPS: The portion of a company's profit allocated to each outstanding share of common stock.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA A method of performance measurement that was started by the DuPont Corporation in the 1920s. Like all debt management ratios. With this method. assets are measured at their gross book value rather than at net book value in order to produce a higher ROI.com 33 . the equity multiplier is a way of examining how a company uses debt to finance Babasabpatilfreepptmba. Calculated as: 12) EQUITY MULTIPLIER: A measure of financial leverage calculated as: Total Assets divided by Total Stockholders' Equity. and has been used by them ever since.

Formula: 14) FUNDMENTAL ANALYSIS: The amount of sales generated for every dollar's worth of assets. Formula: 15) MARKET CAPITALISATION: It is the total value of all outstanding shares of particular company. which is represented in the market. 13) ASSET TURN OVER RATIO: The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in rupees by assets in rupees.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA its assets. It's calculated by multiplying the number of shares times Babasabpatilfreepptmba.com 34 . It is also known as the financial leverage ratio or leverage ratio. It is calculated by dividing sales in rupees by assets in rupees.

This term is often referred to as market cap.com 35 . 16) PE (PRICE EARNING MULTIPLES): A valuation ratio of a company's current share price compared to its per-share earnings.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA the current market price. Calculated as: 17) PEG (PRICE EARNING TO GROWTH): A valuation ratio of a company's current share price compared to its per-share earnings. calculated as: Babasabpatilfreepptmba. 18) ROE: A measure of a corporation's profitability. A valuation ratio of a company's current share price compared to its per-share earnings.

and any other longterm debt.com 36 . WACC is calculated by multiplying the cost of each capital component summing: by its proportional weighting and then Babasabpatilfreepptmba. Included in the WACC calculations are all capital sources.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA 19) WACC: A calculation of a firm's cost of capital that weight each category of capital proportionately. preferred stock. including common stock. bonds.

Chapter: 2 RESEARCH DESIGN A research design serves as a bridge between what has been done in the conduct of study to realize the specified objectives. Chapter: 3 PROFILES This chapter includes the profile of the industry as well as the company in which the study is conducted.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA CHAPTER SCHEME Chapter: 1 STUDY This chapter mainly deals with secondary data collected to support the study and the reasons to problem of study. Babasabpatilfreepptmba. This is also tries to deal with trends and prospects in the industry as well as the company. It is an outline of the projects working.com 37 THEORITICAL BACKGROUND OF THE .

com 38 . A growth rate higher than 8% has been achieved in the past in only three years . While the rupee Babasabpatilfreepptmba. Exports have grown by 17. Hypothesis test is done to find whether the value of the company is under or over valued.1% in 2003-04 in USD terms. Chapter: 5 SUMMARY OF FINDINGS. 1975-76 and 1988-89. India’s GDP which grew by 8. CONCLUSIONS AND SUGGESTIONS In this chapter we will actually include all that we have analyzed and what has been found.1967-68.10% was principally on account of a strong recovery in the agriculture sector and accelerated growth in the industry and services sectors. Finally conclude checking whether the objective of the study has been achieved or not.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Chapter: 4 ANALYSES AND INTERPRETATION In this chapter using the analyzed data we have tried to find out the intrinsic value of the company. ECONOMIC ANALYSIS Economic Outlook: During the fiscal year 2003-04.

Overall economic conditions look positive and expected to post a GDP growth of 6-6. it depreciated against the currencies of major non –dollar-trading partners. GRAPH 1: ACCELERATING GROWTH OF GDP Babasabpatilfreepptmba. Foreign Institutional Investors (FIIs) investments saw a sharp rise during the year.3 billion as on 31st March 2004.5% during FY05. which amounted to USD 10 billion. Foreign exchange reserves crossed the levels of USD 100 billion mark on December 2003 and stood at USD 199.com 39 .FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA appreciated against USD in 2003-04.

CMI) Babasabpatilfreepptmba.3 (Average) % Rupee .8 (%) Interest Rate Decline Hardeni ng 6.0 6.4 GDP - (%) Fiscal Deficit 4.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA TABLE 1: INDIA .com 40 .1 F 05 6.US Apprecia Steady Dollar ted (Source: RBI.5 4.ECONOMIC PARAMETERS F 04 Growth 8.5 d Inflation 5.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA GRAPH 2: SHOWING INDIA’S REAL GDP GROWTH As chart also shows.com 41 . and better allocation of resources. domestically and internationally. it is likely that India’s strong nonagricultural growth performance last year was due entirely too robust domestic demand. Although a breakdown of Indian real GDP into its demand components is not readily available.8% per annum since 2000.India has liberalized its economy over the past decade or so. growth in nonagricultural GDP remained solid during 2004. has contributed to this strong growth in per capita income. The 10% rise in the production of consumer goods last year and the 20% increase in auto sales suggest that consumer spending has been very strong indeed. much more needs to be done. Babasabpatilfreepptmba. Consumer spending in India has been supported recently by strong income growth as growth in real per capita GDP has averaged 3.

the industry and services sectors have also maintained their momentum with the GDP growth by achieving a growth rate of 6. lower than the 8.5% and 8.com 42 .FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA The Real Gross Domestic Product (GDP) is estimated to have grown by 8. While the agricultural sector grew by 9. But the global crude oil shock will definitely have an adverse affect on the growth during fiscal 2005. driven by increases in fuel and commodity prices.2% growth registered in January-March 2004 and 10.10% in 2003-04. Non food credit has increased by 11.4% during April-June 2004 period. GRAPH 3: INFLATION Babasabpatilfreepptmba.4% respectively during the year.5% during the April-September corresponding 2004 year’s period 6% as against the previous indicating progressive economic activities.5% in October-December 2003 quarter.1% during the FY04. The growth GDP has grown by 7. Inflation is also inching up higher. buoyed by a strong agricultural recovery.

The domestic reasons include excess liquidity in the market and delay in monsoon that Babasabpatilfreepptmba. The domestic fuel prices have risen by more than 10% during the fiscal 2004-05 over last years. basic metals. textiles.4%.5% as against the previous corresponding fiscals average of 3. leather and leather products. the prime movers being sugar. iron and steel. edible oils. India being no exception to this. The reasons for the high inflation are both domestic and international.55% for the week ended June 5th 2004 due to the excess money supply in the economy. With the increase of few commodity prices mainly the crude oil prices have increased the global inflation levels from June 2004.33% for the week ended August 28th 2004 from 5.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA The average inflation during fiscal year 2003-04 was around 5. The inflation during the fiscal year 2004-05 touched three and a half years high of 8. alloys.com 43 .

M3. the gradual reduction in the CRR over the past few years in successive credit policies had been one of the major contributors for the sustained reduction in the interest rates on auto loans. These moves were expected to draw out around Rs.5 percent. global increase in the prices of commodities. To check the rising prices.5 per cent in July 2004.25 per cent in July 2003. supply side shock and growth in china’s demand for goods. The international causes are inexorable rise in oil prices.com 44 . Later. compared to 11. the measure of money supply grew by 15. Since crude oil import constitute almost one third of the total exports.20% in the last week of September. This is cost-push inflation wherein the supply problems in a few important commodities push up prices of commodities. we can say that the present situation is on account of imported inflation. the inflation was reduced to 7.5% in two tranches of 25 basis points and has also cut the rate of interest payable on eligible cash balances maintained with it by banks by 250 basis points to 3. With the increase in the Babasabpatilfreepptmba. In fact. government took some measures like duty cuts on steel and oil products.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA increased the prices of essential commodities.8000 crore from the banking system. Reserve Bank of India raised the Cash Reserve Ratio to 5% from 4.

thus having an adverse effect on the auto industry sales.com 45 . It can be seen from the below chart that the industry’s sales is positively correlated with the economic growth with a co-relation of 0. Industry: Sales: The automobile industry growth relies mainly on the country’s economic and general conditions.5%. Babasabpatilfreepptmba. The average inflation for the fiscal 2004-05 is expected to stay around 6-6.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA interest rates the auto loans will become costlier.96. Any slowdown in the economic momentum would definitely slowdown the growth of the industry.

in) Rubber Prices: With the increase in rural activities. Sports Utility Vehicles (SUV) after being a very big hit in the domestic market. But the increase in the input prices like steel and rubber has a negative impact on the industry profitability. '000 Crore) G D Pa n dA u tos a le s 1 4 5 0 1 4 0 0 1 3 5 0 1 3 0 0 1 2 5 0 1 2 0 0 1 1 5 0 1 1 0 0 1 9 9 9 0 0 G D P 2 0 0 0 0 1 2 0 0 1 0 2 2 0 0 2 0 3 2 0 0 3 0 4 8 0 7 5 7 0 6 5 6 0 5 5 5 0 4 5 4 0 N oo fu n its (inla kh s) (Source: www.nic. the players now are planning to introduce them to the domestic market. the commercial vehicles are expected to grow.indiabudget. Babasabpatilfreepptmba.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA GRAPH 4: GDP AND AUTO SALES Real GDP (Rs. The trucker’s strike has affected the auto player’s production and distribution to certain extent.com No of units(in lakhs) At 1993-94 price levels 46 .

000 20.000 10.Dec. the tyre manufacturers in other countries. sourcing natural rubber from India which has led to the increase in the exports thereby reducing the domestic stock levels to less than sixty days of consumption of the rubber user’s sector.Apr.Jul-01 Nov.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA GRAPH 5: SHOWING RUBBER PRICES Interntional & Domestic Rubber Prices 1600 1400 USD/Ton 1200 1000 800 600 400 Mar.000 0 Source: indiainfoline A combination of internal and external factors has contributed to the price volatility in the rubber market. Since the domestic prices of rubber are less than the global prices.000 60. the subsidy given by the Babasabpatilfreepptmba.com Rs/Ton 47 . Also.000 40.Dec.000 30.Apr.Apr01 01 02 02 02 03 03 03 04 USD/Ton Rs/Ton 70.000 50.Aug.Aug.

While the cost of iron ore went up by 75% during the period June2003 to July 2004. coke.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA government for exports of rubber has resulted in an increase in the exports. power. The steel prices GRAPH 6: SHOWING STEEL PRICES Steel Prices Rs/Tonne 40.com 48 .000 G Csheets Source: indiainfoline The steel prices are on rise following a sharp increase in the prices of raw materials like iron ore. coal. gas and scrap.000 Apr-02 Apr-04 Apr-03 Oct-02 Oct-03 Jan-03 Jan-04 Oct-04 Jul-02 Jul-03 Jul-04 20. the scrap prices jumped up by 91%.000 30. There are no signs of decline in the prices of steel products following a strong demand Babasabpatilfreepptmba. Coke’s prices saw an increase of 50% during the same period.

But any shortfall in demand from China may be offset by growth in demand in the US. Competition and Market In the Automotive Sector the continuing convergence between the car and the UV markets is a positive development. as compared to 16% in F-00.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA from the housing and infrastructure sectors. After the success of the Scorpio and Bolero. with additional growth potential in the auto and consumer durables sectors too. High-end MUV sales accounted for 51% of mid-size car sales in India in F-04. MUVs will continue to take an increasing share of this market. With China taking steps to cool down its overheated economy. demand from that country is expected to slow down.com 49 . Europe and Japan as economic recovery gathers momentum leaving no scope for the steel price declines in the near short term. Reduced interest rates with the maturing of the vehicle financing market will also add an impetus to vehicle sales growth. The Co also believes that as the car market expands in India. Increased penetration of such financing products in rural and semi-urban markets will directly benefit the Babasabpatilfreepptmba.

Being an agrarian economy India’s GDP growth is much dependent on the fortunes of the agro sector. ASEAN. MMFSL has a wide rural network. Today anybody can walk in and put up a plant and start operations. However in terms of per capita usage it still scores low against comparable developing nations.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Company given its strong presence in these markets. SAARC countries and the Mercosur countries are likely to lead to lowered tariffs across many of our target export markets. This could provide the Co with a significant opportunity to generate larger volumes from export sales. This provides for ample scope of growth for the industry in future.com 50 . M&M has the additional advantage that its subsidiary. The Indian Tractor industry is the largest in the world in terms of production and sales. With liberalization restrictions on capacities and production were removed. Babasabpatilfreepptmba. Given this backdrop the Tractor industry assumes significance. The ongoing WTO & Free Trade Area negotiations with Thailand.

com 51 . which has a significant presence in key sectors of the Indian Babasabpatilfreepptmba.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA COMPANY PROFILE: Mahindra & Mahindra Limited (M&M) is the flagship company of around US $ 2.5 billion Mahindra Group.

M&M soon branched out into manufacturing agricultural tractors and light commercial vehicles (LCVs). information technology. The Company has. Babasabpatilfreepptmba. A consistently high performer. The Tractor Division has won the coveted Deming Application Prize 2003. M&M has two main operating divisions: 1) The Automotive Division manufactures utility vehicles. 2) The Tractor (Farm Equipment) Division makes agricultural tractors and implements that are used in conjunction with tractors. The company later expanded its operations from automobiles and tractors to secure a significant presence in many more important sectors. Set up in 1945 to make general-purpose utility vehicles for the Indian market.com 52 . making it the only tractor manufacturing company in the world to secure this prize. transformed itself into a Group that caters to the Indian and overseas markets with a presence in vehicles. farm equipment. light commercial vehicles and three wheelers. and has also ventured into manufacturing of industrial engines. trade and finance related services.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA economy. over the years. and infrastructure development. M&M is one of the most respected companies in the country.

M&M's outstanding manufacturing and engineering skills allow it to constantly innovate and launch new products for the Indian market. M&M has also set up two satellite plants for tractor assembly.the Mahindra Sarpanch 595 DI Super Turbo. has created an opportunity to strengthen the company through an entry into the Auto Components business. The Company's significant recent product launch. The Company has launched India's first tractor with turbo technology . domestic and export demand.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA The resurgence of the automotive industry and M&M's success in exploiting it. This network is connected to the Company's sales departments by an extensive IT infrastructure. It has 49 sales offices that are supported by a network of over 780 dealers across the country. M&M employs around 11. the growth of which is being fueled by both.500 people and has six state-of-the-art manufacturing facilities spread over 500. Babasabpatilfreepptmba. the "Scorpio". resulted in the Company winning the National Award for outstanding inhouse research and development from the Department of Science and Industry of the Government in 2003.com 53 .000 square meters.

946 units in the corresponding period previous fiscal. exemption from customs duty. As a result.com . a facility that will house the Company's engineering research and product development wings. under one roof. the company has implemented several programs that have benefited the people and institutions in its areas of operations. M&M is also known for its progressive labour management practices. Mahindra and Mahindra continues to be a solid company • Company has registered a 28 % rise in its total vehicle sales at 11. service tax. The M&M philosophy of growth is centered on its belief in people. In the community development sphere. the company has put in place initiatives that seek to reward and retain the best talent in the industry.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA The Company's commitment to technology-driven innovation is reflected in Company's plans of setting up of the Mahindra Research Valley. central excise. • ‘Mahindra City’ was granted special economic zone (SEZ) which includes 100% tax holiday for the next 5 years and a 50% tax holiday for the next five years.484 units for August 2004 as against 8. 54 Babasabpatilfreepptmba.

Dubai and South Africa for sale of Scorpio and Bolero models in these markets. • Regained dominance as a leader in both utility vehicles and tractors acquiring 50% market share. it is now eyeing to capture the tractor market in the Bihar state in a big way. • Company has set up four overseas operations in Uruguay.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA education cess. and all local taxes levied by the state. Also. • Launched India's first tractor with turbo technology in Patna.com 55 . Italy. With the difference between the passenger car and the MUV segments fast disappearing. Recent Developments &Future plans: The company’s long-term focus will continue to be MUVs. under its own brand. • Enters in to segments such as retailing agri-inputs. as the market for MUVs is likely to see a spurt in the near future. manage corn and soya as collateral for banks. outside Japan. • The Farm Equipment Sector is the first Tractor Company in the world to win the Deming Prize. central sales tax. The Babasabpatilfreepptmba. it is the fourth company in India and the 10th in the world. to win this prize. export fruit to European supermarkets.

Marketing competencies: Flanking its strategy to become a global player. The company is growing at rate of 80 per cent in the US. giving M&M a handsome market share in the 40-60 hp ranges in Texas. M&M is banking on its key brand attributes which essentially signify three basic things: trust. On the cards are a number of improvements on the Maxx. The company will also launch 85-horse power (HP) and 100HP models within the next 18 months to meet the specific demand for high-powered tractors in the European and US markets. reliability. based on customer feedback. M&M has introduced the Marshal Royale. and value-forBabasabpatilfreepptmba. intends to overcome lack of similar size in utility vehicles (UV) manufacture by being a niche player. M&M`s main US markets are in the South and South West. The company also plans to expand its appeal with new variants. Apart from US it also plans to market its tractors in Europe through a sister-trading firm after rescheduling plans to set up a subsidiary in the region. For the low-end personal segment.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA company plans to be the world’s biggest tractor maker by 2006.com 56 . Their tractors were selling well in the US.

Production and distribution: The Company’s manufacturing facilities are located at Kandivli. Nagpur. The tractor segment where the company has 26% market share mainly depends on the distribution channels of the company. Customer Touch – Build a database of Customers for targeted marketing. Jaipur and Rudrapur. Bolero and Maxx. These are the three brands. The overall marketing game plan involves a strategy around creating strong brands. M&M has identified its 3 Weapons for the UV market. which will be M&M’s future brand platform. value engineering and strategic . Zaheerabad.com 57 required. Igatpuri. the three brands . Bolero will be one hub. Each brand will be positioned uniquely targeting various spectrum of the market. Providing a unique customer experience Unique showrooms which give an entirely new buying experience are being planned and 40 dealerships would be converted into such modern showrooms during the current year and Improve Operational Efficiencies – through outsourcing wherever sourcing.Scorpio. while Scorpio will be one up market hub.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA money. Nashik. Company has two main tractor manufacturing Babasabpatilfreepptmba.

They have recently introduced two new schemes. the company also proposes to implement a compulsory early day-off at 5 pm at least once a week. situated in all the major cities and covering all the principal states. Apart from these two main manufacturing units. Under this scheme. which is being effectively Babasabpatilfreepptmba. They are trying to follow ergonomic rules for providing efficient working atmosphere.com 58 . The Company has a strong and extensive dealer network of over 450 dealers for sales and service of tractors and spare parts. 28 area offices. company has changed its leave policy wherein it has introduced a compulsory 15day leave for its middle and top-level officials. which are in the pipeline for its top-level managers in order to bring balance in their work and personal life. manage this dealer network. Besides this.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA plants located at Mumbai and Nagpur in Maharashtra. the Farm Equipment Sector has satellite plants located at Rudrapur in Uttaranchal and Jaipur in Rajasthan. They want their employees to spend value time with their family at home. Employee Relations Employee relations have been generally cordial at all plants of the company.

The Vice-Chairman & Managing Director and the four Executive Directors are Whole-time Directors.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA implemented by companies abroad. These measures will surely help in retaining its efficient contributors.com 59 . Board of directors: Mr. The company is also focusing on training and development programmers for the career mapping of its employees and provides them with a meaningful professional career ahead. the company also plans to implement various development plans for training different level of employees. Reimbursement of expenses incurred in the discharge of their duties. the remuneration Babasabpatilfreepptmba. In addition. The Company presently has seventeen Directors. The Board reviews and approves strategy and oversees the actions and results of management to ensure that the long-term objectives of enhancing stakeholder value are met. Anand G Mahindra Vice-Chairman &Managing Director and the four Executive Directors of the Company manage the Company.

Directors or the Management or relatives. together with the tax on distributed profit. utility vehicles (UVs) and tractors. that may have potential conflict with the interests of the Company at large. Though three-wheelers and Babasabpatilfreepptmba. passenger cars.71. The Company has not entered into any materially significant transactions with its Promoters.9 per share).com 60 .98 crores) and will be paid to those shareholders whose names stand registered in the books of the Company as on the book closure date. 1956 as Non-Executive Directors. The dividend.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA that these Directors would be entitled to under the Companies Act.117. INDUSTRY PROFILE: The Indian automobile sector can be divided into several segments: 2 & 3 wheelers. Dividend policy: The Directors have recommended a dividend at 90% (Rs.79 crores (previous year Rs. The industry is highly capital intensive in nature. etc. commercial vehicles (Heavy CVs/ Medium CVs/Light CVs). will absorb a sum of Rs.

INDUSTRY GROWTH IN VARIOUS SEGMENTS Babasabpatilfreepptmba. distribution network and spare parts availability increase entry barriers. This is because the industry has a high fixed cost component. as multinationals and domestic players have set up largescale manufacturing facilities to meet future needs. average cost of selling incremental unit comes down when demand recovers. The industry is highly fragmented in nature.com 61 . capital expenditure will rise to attune to future safety regulations. With the Indian market moving towards complying with global standards. other segments are capital and technology intensive. Costs involved in branding.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA tractors have low barriers to entry in terms of technology. there is an absence of pricing power with manufacturers. As a result. As number of units sold increases. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance. as global majors are planning to enter India either through direct investment or imports. supply has outstripped demand. In the last ten years. Competition is expected to increase further. Automobile majors increase profitability by selling more units.

due to stiff competition and its fragmented nature.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Passenger cars Utility vehicles Light commercial vehicles 3 wheelers : 17% : 23% : 12% : 23% : 8% Heavy and multi commercial vehicles PORTER FIVE FORCES MODEL: Supply: The Indian automobile market is plagued with excess capacity. competition is stiff. The competition is expected to increase even further. Seasonality is also a vital factor. technology.com 62 . Bargaining power of suppliers: Low. Demand: Is largely cyclical in nature and dependent upon economic growth and per capita income. Bargaining power of customers: Very high due to availability of options. and availability of auto components. Babasabpatilfreepptmba. distribution network. Barriers to entry: High capital costs. Competition: Except for heavy commercial vehicles segment.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA PROSPECT IN THE SECTOR: • The government spending on infrastructure in roads and airports and higher GDP growth in the future could benefit the auto sector in general. While good monsoon is a positive for the sector. • Though the market size is expected to grow by 12% -15%. volumes may not recover sharply.com 63 . Utility vehicle segment is expected to grow at around 8% in FY05. This combined with a softer interest rate environment will play a vital role in providing a fillip to demand. given the fact that the country has had erratic rainfall in the past. But the longer-term picture is Babasabpatilfreepptmba. competitive pressure could keep prices and margins under control. • After three years in the wilderness. tractor industry seems to have finally come out of the trough as it grew by 10% during FY05.

• With an estimated 39% of CVs plying on the roads 10 years old. While the industry is cyclical in nature. demand for HCVs is expected to grow by 8% in FY05. Also.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA impressive in light of poor mechanization levels in the country. Since raw material costs account for almost 50% of revenues of auto companies in general. Also adding the positives are higher crop output. this is a positive.com . steel prices have shown some signs of softening and this is likely to have a positive impact on the margins of the players. industrial sector growth and favorable interest rate environment. we expect this factor to weaken in the medium term arising out of structural changes in the industry. The privatization of select state transport undertakings and hiking of bus fares bodes well for the bus segment as well. • The reduction in peak customs duty from 30% to 25% in the budget will result in savings on the raw material front as well. • We expect Indian auto majors to increase capital expenditure budget at an average of 4%-5% of revenues in FY05 as against around 2%-3% 64 Babasabpatilfreepptmba.

Product Pricing: The Indian automobiles are slowly shifting away from the price sensitiveness towards the value addition concept.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA historically. But the Indian customer’s perception is slowly changing and moving towards the value additions such as the size of the car. it is true that still price plays an important role Babasabpatilfreepptmba. With MNCs willing to sacrifice profitability for growth in the short-term. the style. the comfort. the industry was highly price sensitive and the sales were dependent on price brackets. At the same time. even the SIAM has changed the norms of classification from the previously followed Price basis to the size/ length of the vehicle. it has become imperative for domestic players to spruce up R&D efforts. the level of service offered by the manufacturers. Besides.com 65 . This would be towards product development and complying with new environmental regulations. Even though the perception is changing. Previously. cash flow position is much stronger now given that most manufacturers have reduced working capital and debt. This would mean financing bulk of incremental capex from internal accruals. the variants available in the category etc.

Even though the economic growth rate during the year was 8. Thus. The rise in Babasabpatilfreepptmba. but in the other segments they are very much reactive to the price fluctuations. while the other players in the segments use price as weapon along with their core service.Economic growth: There is a direct co-relationship between the per capita income of the people and the demand for automobiles.Income level: The level of income has got a direct impact on the sales of the automobile. 2. Growth Drivers: 1.5 percent without any economic reforms. Due to the increased business activity. These players also offer discounts during festival season to boost the sales. the some players in segments concentrate on the value addition to achieve competitive advantage. The role of price may be very negligible in some segments. the future average growth rate is expected to be around 6. The demand for automobile is expected to grow with the improved standard of living. the economy supports the industry growth as well as generates employment.com 66 .056 percent.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA in the industry.

With the entry of MNCs especially in the IT. With their increased buying power. the rural sector is expected generate more jobs in the rural economy and more income. both are encouraging the younger generation. when the income of a lower middle class family increases. The lifestyle of the people tends to change automatically. results in increase in the number of people crossing the income threshold. 3.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA income level. the income level and lifestyle. thus increasing the purchasing power of Babasabpatilfreepptmba. With the arrival of monsoons. For E. thereby indirectly increasing the sales of new cars. they would lookout for more comfort. around 65 percent of the national income is contributed by the agricultural sector and constitutes about 22 percent in the GDP. thus changing the profile of customer.g.Monsoons/ Rural economy: The monsoon is the backbone of the Indian agriculture. ITES and BPO sector. This has also reduced the average age of a car buyer. say they would like to shift from two-wheeler to buy a used car.com 67 . This in turn increases the demand for used car market and a good resale value for the seller. The monsoons support the economic growth. In India.

A more active lifestyle. With the manufacturer’s only coming forward to buy back their models. Besides.Used car Segment: The industry saw a growth of around 30 percent in the used car segment during fiscal year. Along with this. the organized used car segment is slowly growing in India. even other industries performance will boost up. the used cars are becoming affordable due to the reduced Equated Monthly Installments (EMI) and increased repayment period. The profile of an Indian Car buyer has been changing due to the increasing purchasing power. 5. Even though this market is unorganized to a large extent.com 68 . has in turn helped the sales of new vehicles. Thus. 4. the demand mainly for utility vehicles increases with the better performance of the rural sector. rising disposable income and lower cost of replacement are guiding the customers to change their cars once every three years now.Availability of finance for both new and used vehicles: With the ease in the availability of finance both the new and used auto market segment has been Babasabpatilfreepptmba.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA people.

Infrastructure: Due to the increased investment in infrastructural projects especially in the development and improvement of road projects. Traffic on roads is growing at a rate of 7 to 10% per annum while the vehicle population growth for the past few years is of the order of 12% per annum. They are having tie-ups with the finance providers or floating their own finance companies. Previously. loans were provided only for the new vehicles. With the increasing competition among the finance providers. So Babasabpatilfreepptmba. the overall transport business activities and the tourism is expected to grow. but now the financial institutions have come forward to offer the loans for used vehicles too. which in turn creates a good demand for the utility vehicles. Along with this. they are reducing the rates day by day. Auto manufacturers are using this as a tool to increase the sales. The interest rate has almost halved in comparison to the rates during 1998 and has touched as low as 6.5 percent per annum. thereby helping the growth of the used auto segment. even some companies go beyond the industry benchmark by financing up to seven year old vehicles.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA witnessing a growth.com 69 . 6.

which will mainly be driven by compact and mid size car segment. These giants are planning to use their Indian facilities as hub for their worldwide operations. poor road infrastructure and traffic congestion can be a bottleneck in the growth of vehicle industry.8 70 Babasabpatilfreepptmba.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA there is a need for the development of good infrastructural roads for the growth of the automobile industry. With this move. 7. India is expected to increase its exports. TABLE 2: COST ANALYSIS As % of net sales Raw Material FY05 69. which will have an important role in International product development.Exports: With the global players looking at developing vehicles that can be launched in multiple markets to reduce their developmental cost and to reduce their development costs. On the other side. The country’s car sales and exports is expected to register around 8. General motors and Daimler Chrysler both have their R & D center in Bangalore.4 FY04 67.5 lakh units by the fiscal 2006-07. Toyota has plans to turn India into its lowest costmanufacturing center. MUL is also becoming a hub for small cars for Suzuki Motor Corporation.com .

9 Other expenditure 13.4 Source: India Infoline Research Raw material cost pressures was faced by most of the companies in the sector. Major competitors and Market position: Prior to 1980. 5. Punjab Tractors maintained its margins in spite of a high rise in raw material cost due to savings in staff cost and other expenditure.7 percentage points for Punjab Tractors. With the entry of Maruti Udyog Limited (MUL) in 1980. Premier Automobiles Limited (PAL) and Hindustan Motors (HM) had dominated the Indian passenger car market.0 5.1 13.2 percentage points for BAL.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Staff Cost 5. Staff cost declined by 66bps and other expenditure increased 41bps as a percentage of net sales.com 71 . Punjab Tractors and M&M enjoyed the benefit of a reduced staff cost by 370bps and 230bps as a percentage of net sales. 2.5 percentage points for Tata Motors. For instance. the former players faced a tough Babasabpatilfreepptmba. raw material cost as a percentage of net sales increased by 5.8 percentage points for ALL and 2.

with the entry of foreign players. their market share drastically reduced. The overall market share of MUL fell from 70. General motors. Even though they were able to maintain their volumes.1 percent during 199900. MUL faced tough time in the upper segment.5 lakhs. however MUL is still the market leader in the passenger car segment. MUL dominated the passenger car market and faced no competition till early 1990’s. With the launch of the models like Indica. After the liberalization took place. This can be attributed to the increased competition from Hyundai. Zen.com 72 . and was able to maintain its market share with its successful models like Maruti 800. Fiat. since MUL had depreciated its plant already by then. During the initial stages of liberalization. Babasabpatilfreepptmba. But. no player in the industry was able to match MUL’s Maruti 800’s entry price.2 percent in 1995-96 to 58. Tata motors. MUL started loosing its market share slowly. Santro and Matiz by Tata.4.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA competition. But still. which further declined to 51 percent as on February 2004. MUL’s market share fell down sharply. Hindustan motors and Honda Siel. Wagon R and Alto. Esteem. Hyundai and Daewoo respectively. the problems began for MUL. in the price range of 3.

There are three players in the upper B segment. with Tata in the No. which manufactures the models like omni and versa. This ahs been followed by Hyundai’s percent and 22 percent respectively.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA In the A segment. Toyota’s Corolla and Honda’s Accord are dominant in the D & E segments respectively Accent and Ford Ikon. Its model Indica accounts to 86 percent of the total sales in the segment. the utility vehicles sales are in an upward trend. In the utilities segment Mahindra & Mahindra has been able to maintain its leader position.com 73 . Honda Siel occupies the dominant position with its City model. followed by Hyundai. Alto and Wagon R. which has dominated the market with 31 percent share. But. MUL’s Esteem lost its leadership position to Tata’s Indigo. model wise Santro tops the segment with its 37 percent share in this segment. The launch of Qualis model has given a new look to the Babasabpatilfreepptmba. MUL holds the leadership position with its three models in the segments viz Zen. With the launch of new models in MUVs and SUVs. followed by MUL. whose market shares are 27. MUL hold the monopoly position with its 800 model and no other player has been able to enter this segment. This model alone accounts for about 25 percent of the total sales of the passenger cars.1 position. In the lower B segment.

Even. Watching the Scorpio’s success a new range of SUVs were launched by other players in the industry. dragging the passenger car customers.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA industry. The launch of Mahindra’s SUV Scorpio also moved along the lines of Qualis. which are launched. With this move by the players. The new SUV models. Babasabpatilfreepptmba. Ford’s Endeavour. Chevrolet’s Forester and Hyundai’s Terracan.com 74 . since the customers perceived it as a big car. recently are Maruti’s Jimny. the red line between the utilities and the passenger car is slowly vanishing. unlike other utility vehicles. it grabbed some share of passenger car industry. Suzuki’s Vitara. which is even easy to drive.

com 75 .FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA GRAPH 7: SHARE OF PLAYERS IN THE PASSENGER CAR SEGMENT AS ON FEB 2004-05 M arket Share: Com panyw ise 16% 3% 3% 9% 18% Maruti Hyundai Ford Tata Eng Honda Siel Others 51% Babasabpatilfreepptmba.

The auto component industry maintained a low but positive growth rate mainly due to its export performance. But.com 76 . Babasabpatilfreepptmba. over a period of time this industry has achieved its objective along with being a good foreign exchange earner.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA GRAPH 8: SHARE OF PLAYERS IN THE UTILITIES SEGMENT AS ON FEB2004-05 U tilitie s m a rk e t s h a re 16% 15% 1%3% 34% B a ja j T e m p o Mah & m ah M a ru ti U d yo g Te lc o To yo ta K irlo s k a r O th e rs 31% Suppliers: The Indian Auto component industry was started with an aim of reducing the imports and being self-sufficient.

which helps them to build their own competitive advantage. is dependent on the demand for new vehicles. In India. India’s automotive component industry manufactures the entire range of parts required by the domestic automobile industry and currently component employs about 250. Babasabpatilfreepptmba.000 supply to persons. The demand from the OEM market. the auto component manufacturers are found working close in proximity with the vehicle manufacturers ensuring the just in time deliveries. two Auto of manufacturers kinds customers – original equipment manufacturers (OEM) and the replacement market. The replacement market is characterized by the presence of several small-scale suppliers who score over the organized players in terms of excise duty exemptions and lower overheads. The trend of the auto component industry is to outsource manufacturing assembly to component suppliers while the OEM imperative is to cut costs. on the other hand.com 77 . The strict reform by the Government with respect to the indigenization programme has led the OEM’s to increase their indignation over the years.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA This industry has maintained a 10 percent to 12 percent share of exports in its total production. improve customer responsiveness and build to order.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

Government Regulations: Even though the auto sector has been deregularised, the government still vests the powers with itself to influence the industry, in terms of controlling the import, excise and customs duties and emission norms. After the lifting of licensing in 1993, 16 ventures came up to manufacture cars. The government’s auto policy has restricted import of cars and automotive vehicles in completely built (CBU) form or in completely knocked down (CKD) or in Semi knocked down (SKD) condition. And the car manufacturers were issued licenses to import components in CKD or SKD form only after execution of the Memorandum of Understanding (MOU) with the Director General Foreign trade (DGFT). 11 companies signed MOU and they have agreed to bring in minimum foreign equity of US $ 50 mn, if a joint venture is involved in majority foreign equity ownership. Along with this, they have also agreed to indigenize components up to a minimum of 50 percent in the third year and 70 percent in the fifth year. The government has permitted for 100% foreign equity investments for the manufacturing of automobiles and components. The Government will review the automotive
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tariff structure periodically to encourage demand, promote the growth of the industry and prevent India from becoming a dumping ground for international rejects. The incidence of import tariff will be fixed in a manner so as to facilitate development of manufacturing capabilities as opposed to mere assembly without giving undue protection, to ensure balanced transition to open trade, to promote increased competition in the market and enlarge purchase options to the Indian customer. Appropriate measures including anti dumping duties will be put in place to check dumping and unfair trade practices. The conditions for import of new Completely Built Units (CBUs) will be as per Public Notice issued by the Director General Foreign Trade (DGFT) having regard to environment and safety regulations. Used vehicles imported into the country would have to meet CMVR, environmental requirements as per Public Notice issued by DGFT laying down specific standards and other criteria for such imports. The government’s policy allows weighted tax deduction for the sponsored research and in-house R&D expenditure and also excise duty rebate of 1% of the gross turnover. The government is also encouraging auto design firms by providing them tax breaks and concessional duty. The
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government

is

supporting

the

development

and

introduction of vehicles propelled by energy sources other than hydrocarbons by promoting appropriate automotive technology. The road tax on vehicles varies from state to state and a lifetime road tax is in existence. The government controls the import of automobiles and its components through its EXIM policy. It has allowed the import of used cars with some restrictions and they should confirm to the Central Motor Vehicle Rules, (1989). Excise duty on (Basic + SED) on cars and MUVs reduced from 32% to 24% and for CKD and SKD kits reduced from 30% to 25%. The government has announced 48 new road projects with an estimated cost of Rs400bn and it a levy of 50 paisa on per liter of diesel will be collected for the funding of the above road projects. By the year 2010, the Indian safety regulations will be completely aligned with the ECE regulations like anti-theft, EMC, noise, front, side and lateral collision, etc. Emission: The need to reduce vehicular pollution has led to emission control through regulations in conjunction with increasingly environment-friendly technologies. It was only in 1991 that the first stage emission norms came into force
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Availability of ULP was further extended to 42 major cities and now it is available throughout the country. From April 1995 mandatory fitment of catalytic converters in new petrol passenger cars sold in the four metros of Delhi. Calcutta. India is behind Euro norms by few years. In this move. From the year 2000. and emission norms are being aligned with Euro standards and vehicular technology is being accordingly upgraded. Euro II equivalent Bharat Stage II norms are in force from 2001 in 4 metro’s of Delhi. a beginning has been made. Chennai and Kolkata. the passenger cars and commercial vehicles are meeting Euro I equivalent India-2000 norms. Mumbai and Chennai along with supply of Unleaded Petrol (ULP) was affected. Currently. there is a gap in comparison with technologies available in the USA or Europe. Vehicle manufactures are also working towards bridging the gap between Euro standards and Indian emission norms. Since India embarked on a formal emission control regime only in 1991. the government is making all efforts to implement Euro III from 2005 effectively WTO: Babasabpatilfreepptmba.com 81 . however. Mumbai.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA for petrol vehicles and in 1992 for diesel vehicles.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA The WTO restrictions came into effect from 1st April 2001 and the Indian industries were feeling a sense of threat pulled of down cheaper the imports. of However.com 82 . Kolkata and Chennai. where they have been manufactured and they should comply with the Central Motor Vehicle Rules. government laid down many restrictions with regard to imports. it curtains Besides. It allowed the import of vehicles only from the country. The government has decided to allow the entry of second hand vehicles into the country only through the Mumbai port. threat. The government has lifted quantitative Restrictions on imports of second-hand automobiles. with the the government’s decision to hike up the imports tariffs. Used vehicles being imported should not be more than three years old and the importing agency is expected to submit a certificate issued by a testing agency notified by the central government that the second hand vehicle being imported has been tested immediately before shipment and that the vehicle conforms to all the regulations specified in Motor Vehicles Babasabpatilfreepptmba. 1989) and import of new cars would be allowed through only through few ports viz Mumbai. in order to save the country from being the dumping ground for deteriorate foreign products. (CMVR.

1988. The vehicles should necessarily have right-hand steering controls. a speedometer indicating the speed in kilometers and a photometry of the headlamps to suit 'keep-left' traffic. Challenges: Price is the factor to penetrate the Indian automobile market. MNCs bring in with them enormous research and development skills. All these steps were taken in order to limit the imports only to the upper end segment. global design expertise and years of experience in manufacturing and selling automobiles in multiple countries. Indian companies are Babasabpatilfreepptmba. which totally bans the import of cars whose engine capacity ranges from 1000 to 2500cc. Import of left hand vehicles was banned. The policy lays down that imported automobiles should have a minimum residual life of five years and the importer should ensure supply of spares and service during this period. The government made a policy.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Act. All these restrictions were made in order to see to it that the Indian customer gets the best vehicle from abroad.com 83 .

com 84 . customers’ needs and styling and shortening product life cycle are the challenges that Indian companies have to face.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA taking small steps in entering new markets with one or two offering compared to global companies. Future Outlook: The overall elements in the economy seem to be in favor of growth of automobile industry. with the extension of services of finance providers to the rural market. Babasabpatilfreepptmba. Now. availability of finance for both new and old cars with low EMI’s. increasing income level. Besides. The passenger car segment is expected to grow at around 8% during the period 2004-07. The manufacturers are even concentrating to sell their new launches including SUV’s in the rural market. new launches. new infrastructural projects and export growth are the factors which fuel the growth of the automobile industry. changing lifestyle of people. the car and utility vehicles sales are expected to move up. The GDP growth. Ability to meet changing technology. the exports are also expected to grow. which will be driven by the increasing demand for compact cars.

almost all the players in the market have come out with their competitive models.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA With a big success of SUV concept in India. Despite the excise duty cut. India is expected to emerge as an International hub for product development. However. To overcome this problem. With the companies establishing their R & D centers here. the steel prices are on a bullish trend. yen and euro. the automotive industry has to work closely with the dealers and vendors to make the Babasabpatilfreepptmba. With this. the manufacturers are in a thought of replacing the steel components with aluminum. since it means higher cost of import and lowered revenue. the automobile manufacturers are benefited with the improved margins. All the players are concentrating on cost cuts and cost effective methods in order increase the profits of their supply chain. The government has reduced the excise duty on steel from previous 16 percent to 8 percent from first week of March. then the industry’s profits will be squeezed. which reduces their cost considerably.com 85 . If the rupee continues to appreciate against dollar and depreciate against the won. thus hotting up the competition.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA expected growth possible. Dieselization is going to be a future trend in the Indian market with rising petrol prices and the significant difference between petrol and diesel prices. Most Indian players are sourcing their component requirement from Indian component makers only. will survive. However Indian markets are very advanced in using the state-of-the-art makers technology are and Indian auto component becoming global sourcing partners for auto makers. which improve their processes regularly. 20-25% diesel engines are in use in the Indian Babasabpatilfreepptmba.both in India as well the world’s best. Currently. The automobile industry needs to aggressively benchmark its products and processes with the Industry best . Indian automobile Industry needs to learn the best practices quickly to survive the threat of WTO. Any paradigm shift in technology with the emission norms and alternate fuels will likely increase the technology gap between the local companies and MNCs here. So a substantial investment in R&D is necessary for domestic players. Further.com 86 . Only those companies.

in the future small and compact cars are likely to face competition from UVs. So. Babasabpatilfreepptmba. With infrastructure facilities increasing more people prefer the UVs for inter city travel. and this is likely to grow up to 30-35% in the medium term. Another trend that might be seen in the near future is rise in the utility vehicle sales.com 87 . the car industry will see a 12-15% compounded annual growth rate in the medium term. As the economy is growing. 1) Analyst Assumptions 2) WACC 3) Value Drivers 4 Income Statements 5) Balance Sheet 6) Dupont analysis 7) PE multiples. As long as India continues to grow economically and the income of Indians continues to rise.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA market. India will become a major automobile consumer and producer.

com 88 .00 % % Income statement Sales growth Operating Margins Other Income as a % of investments Marc h ' 07 9.00 % Babasabpatilfreepptmba.00 % % 17.76 15.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA TABLE 3: ASSUMPTIONS MADE FOR THE STUDY Assumptio ns Marc Marc h' h' 05 06 10.00 % % 9.28 10.00 % 15.00% 10.00 10.

93 % Cost of debt (Pre tax) 10. Crore) Tax rate Cost of debt Cost of equity WACC 7.75 % of sales % 22.00% 1.00 % 7.50% 0.30 50.00 % 7.58 934.02 51.15 Sales % Depreciation as % 6.00 % 12.00 % 29.com 89 .50 % 0.00 % 7.00 % 22.50 % 22.89 of sales % Current liabilities as a 26.35 50.00 % 12.81 % Investments as a % of 22.00% 3.00 % 26.00% 16.50 % 22.Assets % Dividend payout 11. Crore) Market value of debt (Rs.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Effective Tax rate 21.00 % 12.48% 16.54 % Debt to equity 0.61 G.31% Babasabpatilfreepptmba.18% 14.44 Gross asets a % of 51.00 % TABLE 4: WEIGHTED AVERAGE COST OF CAPITAL Risk free rate Market rate of return Beta Interest Paid (Rs.00 % 29.00 % 26.82 37.74 total Sales % Current assets as a % 28.00 % 7.00% 12.66 % Dividend Tax 12.

com 90 . 46 25002 1. 06 399675 36671 .48 488546 .23 1. 0 Crore) P/E (Trailing) P/E 14. 11 488546 .86 8 P/B 3.48 335286 .6 94378.86 1. 03 Mar' 05 582924 .26 5.3 0 Mar ' 04 44526 5 78549.5 1.24 15.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA TABLE 5: VALUE DRIVERS 2005 2004 2003 Market 5417.9 399675 36671 .26 5. 39 (Rs Babasabpatilfreepptmba.17 TABLE 6: INCOME STATEMENT in Lakhs) Income statement Gross Sales Less: Excise Net Sales Operating Income Total Income Less: Raw Material + Purchases Employee Cost Mar ' 03 399675 .6 Capitalisation (Rs.9 211723 .52 41745.1 36991.8 38129.

88 Babasabpatilfreepptmba. 83 7693. 56 16519.9 9 18581. 81 13830. 22 Provisions 1235.9 (+) Dec.1 2 18183. 91 13938.3 3 15283.9 43188. 27 Change in Stock (-) Inc.0 1577. 01 1150. 61 2143. 58 25275.21 1748.3 5 Miscellaneous expenses 15243.5 77 5 486.95 6. 66 19732.com 91 . 62 16056.68 5. 6 3128.0 8 17314.4 3 19171. 99 4010.3 9 12679.2 7 37658.76 443194 . 59 2955. 4 Expenses Capitalised Amortisation Total Operating Expenses Operating Profit Interest Gross Profit Depreciation PBT before non op and extra ord Non Operaing Income 19539.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Selling Expenses 19982./ 6440.6 2 5285.9 5 356486 35288 . 29 3974.9 7 1070.2 3 1917. 99 44. 9 21138. 67 17912.65 45351.3 2 Other Expenses 59545.2 5 25795. 7 3377. 1 Administrative Expenses 2505. 98 2357.

com 92 . Income Less: Extra Ord Expenses PBT Provision for Taxation Deffered taxation PAT Prior Year (+)Inc.05 Babasabpatilfreepptmba.8 2 12. 34854.55 30.55 1337.4 7 0 0 0 0 8.6 10441. 3 54709. 43 89563.4 7 9691.35 5765./ (-)Exp.4 7 360 -2520 9691.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Add: Extra Ord. 73 6380. 41 3 14553. 4 48 817. 41 1230 3920 0 43819.8 1 3 0 19703.5 8 0 7531. 3 6350 2615 14553. 1 0 34854. 41 36539.6 2947. Reported PAT B/F Profit available for allocation Proposed Equity Dividend Dividend Tax Equity Dividend (%) Eps 1728.

7 6 66199. 11 5274. 24 483661 . 77 20636.88 10353. 9 8965 34854. 83 7693. 00 45063.2 7 57391. 81 5407.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA TABLE7: EXPECTED INCOME STATEMENT Expected income statement Operating Income Non Operating Income Operating expenses Operating Profit Interest Gross Profit Depreciation Other Non operating exp Tax PAT Dividends Babasabpatilfreepptmba.51 58576. 91 39167.23 19330. 48 192. 32 527190 .31 11378.02 53740. 29 154. 81 443194 .13 17734.6 93 . 37 16519.com March ' 05 488546 . March ' 06 537401 . 42 4700. 72 5398. 43 10441.2 8 72508.48 19732.0 March ' 07 585767 .65 45351. 59 18943.

20 38.96 38980.74 6 675. 03 20325 27080 9. 09 0 27096 7. 36 21569. 82 33.8 6 0 0 138800 145382 165902 .55 72980. 78 24458. 36 21569.82 TABLE 8: BALANCE SHEET March ' 03 SOURCES OF FUNDS Owner's Fund Equity Share Capital Share Application Money Preference Share Capital Reserves & Surplus Loan Funds Secured Loans Unsecured Loans Deferred Tax Liability (Net) Total March ' 04 March ' 05 1160. 13 30.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Dividends Tax Retained Earnings Expected EPS 48 1337. 09 17710.8 6 0 0 1160.51 33879.23 .8 2 23075.8 6 0 0 1160.49 92415.54 92415.13 Babasabpatilfreepptmba.6 .com 94 .02 9 587. 01 28867 7.

4 0.24 68162.8 102304 .79 130687 . 49 964.7 .9 6 28867 7.02 109478 .42 27080 9.01 3841. Loans & Advances Less : Current Liabilities & Provisions Total Net Current Assets Miscellaneous expenses not written Total 206803 243681 249879 .55 116582 . 41 0 80012.0 1 0 86226.8 111115 .31 150256 . 78 3971.69 0 0 0 87954.13 Babasabpatilfreepptmba.3 19569. 96 161348 . 79 173236 .94 .00 28810 7.64 105074 .1 2021.86 5231.08 141377 .FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA USES OF FUNDS Fixed Assets Gross Block Less : Revaluation Reserve Less : Accumulated Depreciation Net Block Capital Work-inprogress Intangible assets Investments Net Current Assets Current Assets.com 95 .25 51869. 5 141377 .68 133297 .86 34873.

38.6 2.27 15.icicidirect.65 06 13. 32.46 1. 33. 91 PEG 06 0. Tempo 55 Mahind ra & Mahind 30.64% (Source: www.06% 24.36% 11 14.32% Maruti Udyog 18.com) EPS Curre Growth( nt P/E 07) P/E 06 14.18 0.)3% Bajaj 33.0 2.3 Leyland 3 2 1 23. 06 11. 16. 39. 32.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA TABLE 9: RELATIVE P/E AND PEG RATIO EPS EPS EPS EPS (06 (07 Growth( 05 ) ) 06) Ashok 1. ra 04 74 82 12.07% Babasabpatilfreepptmba.22% 20. Motors 96 98 6 43. Ltd 77 2 40 71.55% Hindust an Motors Tata 22.1 4 0.com 96 .

41 1 0.37 22.7 1 0.4 6 11.67 2 152.08 2.4 7 1. 4.99 15.1 1 1.47 98 101. 45.17 5. 96 19.6 P/ BV NP M( %) 2.1 6 1. 32 1.6 4 0.2 6 0.com) Babasabpatilfreepptmba.2 5.7 5 2.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA EP S Ashok Leylan d Bajaj Tempo Mahin dra & Mahin dra Maruti Udyog Ltd Hindus tan Motors Tata Motors 16.5 83.1 6. 10.8 4 2.1 08 4 2 TABLE 10: RELATIVE RATIOS (Source: www.35 123.8 1.5 15 7.0 2 22.04 35. 13.6 74 5 1 10.8 8 30. 28 33.icicidirect.45 23.72 38.2 1. 04 32 18. 18 47 6.4 0.48 57.4 5.8 8 2. 4.4 1 0.3 19.32 0.com 97 . 76 5.17 116. 13.6 2 1 145. 55 Boo k Debt valu To e Equi Curre per OP CEP ty nt shar M( S ROE Ratio e %) 24.9 0.

T DOWN DOWN 9 2 2 6 7 8 Debt Babasabpatilfreepptmba.7 0.9 1.6 % 4% 2004 2005 200 3 6.07 Sales UP UP 0.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA TABLE 11: DUPONT ANALYSIS ROE 200 4 2005 9.2 Equity to L.97 3.92 7.2 % % % 2.27 19.7 2.44 % Analysis ROE UP UP NPM UP UP Assets UP UP Assets NPM Equity Turnover Turnover Multiplier 200 200 200 Equity DOWN DOWN 200 200 200 3 4 5 200 200 200 Multiplier 3 4 5 3 4 5 2.com 98 .5 2.

For the first year of our forecast we have sales growth of 10%. We used our growth in sales to help forecast many of the company’s accounts. and expectations are high as ever. The company has shown great improvement and promise throughout its history. We feel these numbers are accurate gbowth rates due to company’s history. We feel the company will continue to grow at a good pace.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Mahindra and Mahindra Valuation: Mahindra and Mahindra is one the leading names in the Automotive solid and farm sector and industry. This is why we placed such an importance on sales for our valuation model. The company is very well developed and in the growth and expansion of their lifecycle. and the following four years have growth reducing by 1% every year. We feel the five year period is Babasabpatilfreepptmba. By using sales growth. Sales are expected to continue to grow and the company will continue to flourish.com 99 . or a percentage of sales to forecast we feel our numbers safely represent where the company is headed. brand The name company’s reputation recognition give them a great advantage in their field. We chose to forecast the five year period for a few reasons.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA enough time to avoid any questions or uncertainties as number of new players entering the market. to complete our valuation model we had to find our target stock price. Free Cash Flow of M&M Co. To find the cost of debt we had to use interest and total debt funds of the company and interest spread. This allowed us to find the company’s cost of debt to be 3. For the DCF Model we use free cash flows to find the stock price of Rs 517. operating Profit.22. We also used the relative P/E ratio analysis as well as PEG Babasabpatilfreepptmba. To find the WACC we had to find the cost of equity and debt for the company. Last. In order to find our price we used the DCF Model. These are important numbers needed to find our target stock price. The WACC was a very important part of our valuation model. With these numbers we were then able to find company’s WACC of 14.48%. Through the forecasting of the company’s major financials we were able to find important value driver calculations. We were able to find the Reported PAT.31%.com 100 . In order to find the cost of equity we used the CAPM equation.18%. This allowed us to find the company’s cost of equity of 16.

22 crore which can be attributed to the robust demand in the market due to the increased economic activity.58 crore during the half-year period in FY04 as against corresponding period of the last year’s figure of Rs.977. we found comparable companies to Mahindra. The sales of the company grew by a hopping 39% to Rs.com 101 . 2. Babasabpatilfreepptmba. as against corresponding period of last year’s figure of Rs 199.To use the relative P/E analysis.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA ratio . and their respective price to earning ratios. The company’s operating profit moved up by 11.24crore.The company made a major change in the operating margin due to the following reasons Strong fixed and variable Cost reductions (58 bps reduction in Employee cost / revenues. Financial performance Half yearly results The company managed to post a double digit growth in its both top line and the bottom line for the six months period ending 30th September during the FY05. 2142.69% to Rs 348.09 crore during the period.

RECOMMENDATION OF THE STOCK Mahindra & Mahindra Ltd (M&M) is a homegrown auto major and the flagship company of the Mahindra group. farm equipment. M&M contributes nearly 70% of the group's total turnover of Rs6. Vendor meets). This front-runner of the group is into manufacture and marketing of utility vehicles (UVs).45%.4911crore along with the net profit margin which moved up from last year’s 6.com 102 . Price Increases and Increased Productivity.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Value engineering. But the bottom line of the company rose by 96% to Rs. telecom. the UV and the LCV segment contributed 73% of the total revenue while the farm equipment segments added the balance 23%. The group has varied business interests ranging from automobiles. For the nine-month period ended December 2003. 200 crore. Strategic Sourcing.42% to 4. light commercial vehicles (LCVs) and farm equipment ie tractors. infrastructure development to trade and financial services. The automotive division manufactures and sells a wide range of UVs Babasabpatilfreepptmba.

Classic. Ho denotes the null hypothesis.9x We FY2005E maintain and our 10. Voyager). and Champion. Hypothesis testing deals with a procedure. passenger vehicles (Scorpio. Alternate Hypothesis: 2. a sports utility vehicle launched by the company has been a huge success in the sports utility vehicles segment. a 3-wheeler diesel vehicle. we mean a statement about the population parameters.0x buy FY2006E earnings. HYPOTHESIS TESTING: By hypothesis. At the current market price of Rs493.com 103 . There are two types of hypothesis. Null Hypothesis: It states that there is no significant difference between the market value and the intrinsic value of the company. the stock trades at 11. 1.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA (Commander. which accepts or rejects the hypothesis. Bolero) and LCVs (the Cabking & FJ series of load carriers and minibuses). Armada. Babasabpatilfreepptmba. recommendation on the stock with a price target of Rs 519. Scorpio.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA In case the null hypothesis is rejected.com 104 . This shows there is difference between the market value and intrinsic value of the company. we should have an alternate hypothesis to accept. σ − P P E S S 6 Babasabpatilfreepptmba. this indicates that company price is significantly under valued.5.04 and the standard error comes to (1.55).84) which is negative. BEST CASE SCENARIO -POPT WORST CASE SCENARIO -P PESS MOST LIKELY SCENARIO -P ML E P PP T =O + 4* P M L 6 + P P E S S σ P O P T ( P) = M P − E P Ζ = ( P) Based on the above calculations the expected price comes to Rs 518. It also explains whether the company is under valued or over valued. We use Z test and calculate Z value (. Alternate hypothesis is denoted by HA.

com 105 . as lower duties and low interest rates on loans make cars affordable to more people. companies those are able to introduce cost-competitive models without compromising on contemporary features will attract Babasabpatilfreepptmba. As such.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA FINDINGS Volumes set to grow: Company expect a 19.10% CAGR in volumes over the period FY2004-FY2006.

there is huge headroom available for growth. Even excluding the relatively large mass of households whose incomes are well below the threshold limit and therefore cannot afford passenger vehicles.The Babasabpatilfreepptmba. Car density in India lowest across the world: Car density ie. the country's penetration would measure at 27 per thousand households. as part of the Union Budget 2005. Automobile prices are falling on reduced excise duties: The reduction in basic excise duty from 32% to 24%. has already led to a 28% surge in domestic vehicle volumes . Mahindra & Mahindra (M&M) expect this stock to yield returns of around 25% over the next 12 months. Hence. Further.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA buyers and be the biggest beneficiaries.. With rising per capita income and low interest rates making cars more affordable. the lowest in the world. we expect India's car penetration to nearly double over the next three years.com 106 . the widening reach of the car manufacturer through the distribution network would provide added fillip to the growth. car ownership per 1000 people is three in India.

Interest rates are at their historical low levels at present. propose a further cut to 16% over the next two years Meanwhile.com 107 . aided by low interest rates and expanding reach of lending companies. We expect a rise in the number of loan-financed purchases. enabling them to cut prices further. Softer interest rates: The declining interest regime has been a party time not only for banks but also for automakers. which have been accepted by the government. the cut in the peak customs duty on components and the abolition of the 4% special additional duty will reduce costs for manufacturers. The interest rates have come down from 15-17% in 199899 to around 10% this year.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Kelkar Committee recommendations. The reach of car financing banks is Babasabpatilfreepptmba. It is not only affordability but also the availability of cheap finance that will provide a further fillip to demand growth. This would also boost demand growth. Availability of cheap loans is the biggest demand driver.

5-4% rise in prices of vehicles. The number of competitively priced models is on the rise--take for instance M&M's Scorpio. General Motors's Tavera (under the Chevrolet brand) and a new vehicle from Tata Motors. M&M recently raised prices of its UVs by 1.Growth will accelerate by the increasing recognition of these vehicles' superior ride comfort and luggage space and therefore their proposition as a cost-competitive alternative to midsized cars. we believe that trends will be different--volume growth of UVs would match that of passenger cars. expected to be launched in 2005.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA set grow three fold over next two years.5-2%. Last year's 40% rise in steel prices would necessitate a 3. thus protecting its operating profit margins. Babasabpatilfreepptmba.com 108 . Operating margin to improve: Popularity of its vehicles would allow M&M to hike prices in case of rise in raw material prices. Almost all private banks are in an expansion mode in their retail loans segment. We expect Utility Vehicles to establish a viable alternative to cars: Going forward.

The major contributors to this hike would be savings in employee costs (to the tune of 3%) and other expenses (to the tune of 2. The company has its presence in all the HP segments from 25 HP to 45 HP and above. pulling it down by 0. the tractor industry grew by 18% on the back of a strong performance of the monsoon last year.80% by FY2006.70%. We expect its operating margins to improve by 4.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA The company also benefits from its cost economics. is no longer a drag on the topline of the company. In the first half of FY2005.50%). rising commodity prices will act as a drag on operating margins. the tractor industry has shown negative growth of 17%. Farm equipment segment no longer a drag: The farm equipment segment. We think that the tractor segment will actively contribute to the revenues. In Q3FY2005. Over the last two years. which mainly includes tractors. the industry showed a decline of 9%.com 109 . with more than 20% share in all segments. the fortunes of the division have started turning for the better. Babasabpatilfreepptmba. However. However.

804 units. which will be reflected in the net profit. The targeted 30% increase in farm credit in FY2005 by the government is already showing signs of assisting Babasabpatilfreepptmba. the increased rural and agricultural focus of the new UPA government augurs well. In FY2005.61% in FY2006 from 3. This will reduce outgo on interest costs. The profit will almost double to 7. tractor volumes have increased by 39% to 47.8% in FY2003 to 24. The company is expected to retire almost 50% of the debt by FY2006.3% in FY2006.com 110 .88% as of now. We expect RoCE to improve from 8. Monsoon: Below normal monsoons throughout the country remains a cause for concern for tractor manufacturers including M&M. Declining capital expenditure would help the company to increase its free cash flows. While monsoons remain a wild card for the company.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA Return ratios to improve: M&M has already done considerable investments on product development and capacity expansion over the past three years.

So company should have check on the steel prices.com 111 . the rupee appreciation against the foreign currencies. • Increase in the fuel prices on account of rising global crude oil prices would affect the domestic demand especially for CVs. • As the company is active in the overseas markets. Babasabpatilfreepptmba. • Increase in the inflation rates.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA demand push. SUGGESTIONS • Increasing steel price and other inputs are the major concerns for the company from its margins point of view. especially dollar would adversely affect the topline of the company.

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA • Various new products launches have helped retain customer focus on the new auto market. As most of the company products are diesel products. With infrastructure facilities increasing more people prefer the UVs for inter city travel.com 112 . Babasabpatilfreepptmba. So company should try to launch vehicles such as Scorpio and many such products. • Dieselization is going to be a future trend in the Indian automobile market with rising petrol prices and the significant difference between petrol and diesel prices. so the company should focus on this particular aspect. • Another trend that might be seen in the near future is rise in the utility vehicle sales. • Discounts. special editions and festive based offers should be adopted to boost the sales of the company. the company should try to specialize in that particular segment.

We all have personal biases and every analyst has some sort of bias. it is important to be familiar with the analyst behind the report. it is that there are too many.com 113 .FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA CONCLUSION Fundamental analysis can be valuable. The problem in valuation is not that there are not enough models to value an asset. There is nothing wrong with this and the research can still be of great value. but they do share some common characteristics so in the study we tried to use price-earning multiples and discounted cash flow models of valuation. but it should be approached with caution. In the automotive segment. Bolero and Scorpio models. M&M has a strong presence in high-growth segments backed by pick-ups (Maxx range). three- Babasabpatilfreepptmba. Choosing the right model to use in valuation is as critical to arriving at a reasonable value as understanding how to use the model. Analysts use a wide variety of models from simple to the sophisticated. If you are reading research written by a sell-side analyst. These models often make different assumptions about pricing.

High operating leverage in tractors. three-wheelers and UVs) are the main demand drivers for M&M's product portfolio. cost reduction.com 114 . and LCVs (load carrying as well as passenger LCVs). productivity gains and reduced interest costs will drive a 34% CAGR in PAT over the period Babasabpatilfreepptmba. The current government's focus on agricultural growth (helping volume growth in tractors and UVs) and continued focus on infrastructure development (structural growth driver for LCVs.FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA wheelers (Champion).