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INSTITUTIONALEQUITYRESEARCH

Automobile:Tractors

God+governmentsupport=Tractormarketrevival

28March2016
INDIA|AUTOMOBILE|SectorUpdate

We expect the tractor industry to make a recovery in FY17 with 10% growth based on Companies
likely normal monsoon. Our historical analysis suggests that whenever a deficient
monsoonyearisfollowedbynormalmonsoons,averageindustrygrowthhasbeen13%. EscortsLtd.
Theindustryisstillonastructurallystrongfootingwhenwecomparethegrowthcyclein Reco BUY
the US with India, look at statewise penetration, and potential growth outlook. Both CMP,Rs Rs140
M&M and Escorts should benefit from a recovery while competitive pressure and TargetPrice,Rs Rs190
discountingshouldcooloff.WeinitiatecoverageonEscortswithaBUYratingandaTPof

Rs190webelieveitwillbethebiggestbeneficiaryofaruralrecovery.Wecontinueto
MahindraandMahindra
rateM&MNeutralitsstruggleintheUVbusinesswillleadtomarginpressures. Reco NEUTRAL
Industrytomakearecovery CMP,Rs Rs1249
TheIndiantractorindustryhasseenrobust8%CAGRinvolumesoverthelast43yearswith TargetPrice,Rs Rs1350
twostrongboutsof10%CAGRin19732000(27years)and20032014(11years).However,
unlikemanyotherconsumptionstoriesinIndia,thegrowthpathfortractorshasnotbeen
linear. In the 43 years of sales data that we have analysed (1973TD), the industry has
postedadeclinein10.Ifhistoryistobebelieved,Indiahasneverseenthreeconsecutive
years of deficient rainfall in the last four decades. Also, fading ElNino implies a very high
probability of rainfall being normal in FY17. Our analysis suggests a very high correlation
betweenmonsoonandtractorsalesinIndia;moreover,wheneveradeficientmonsoonyear
isfollowedbyanormalmonsoonyear,growthintractorsaleshasseenasharprebound(up
13% on an average), as better sentiment and low base helped. We see tractor industry
growing10%inFY17and13%inFY18.
MSPmattersmorethanjustmonsoons
Whilenormalmonsoonisagoodenoughtriggerforarecoveryinruralandtractordemand,
asustainedrecoveryprimarilycomesfromanincreaseinfarmincomes,which(inIndia)is
highlydependentonminimumsupportprices(MSPs).Ouranalysissuggeststhatinperiods
followingmorethan10%MSPhikes,tractordemandhasgrownindoubledigits.However,
whenMSPhikeshavebeenweak,thisdemandhasremainedweak(eveningoodmonsoon
years).Whilewedonotexpect10%MSPhikesthisyear,webelievetheywillbebetterthan
theanaemichikesofthelasttwoyears.
Structurally,enoughroomforgrowth
Ouranalysisofhistoricaltrendsofagrirevolution,usageoftractors,andfarmmechanisation
in the USA shows the following: (1) US took over 40 years to shift from horses/mules to
tractorsfortheirfarmpowerneeds,(2)84%offarmersintheUSAdidntownatractorin
1920thisnumberinIndiais94%currently.WhileonecouldarguethatpenetrationinIndia
looks low due to highly fragmented land holdings, we believe that even after excluding
marginalfarmers,thereisahugescopeofpenetrationgrowth(discussedindetaillater).
CompetitivescenariochangingRiseofSonalika
While M&M remains the undisputed leader and has largely maintained its market share,
competitionisheatingup.Duringourrecentchannelchecks(clickhereandhere)wesaw
ample evidence of this with Sonalika, Escorts, and TAFE aggressively launching new
products or pricing products competitively. Our checks suggested that Sonalika
(InternationalTractors) wasthe most aggressive player,pricing its products 1015%below
competition.Ithasrecentlydoubleditscapacityto200,000unitsandiseyeing~20%market
sharein23years(talltask).Whilecompetitiveactivityisheightenedcurrently;asdemand
picksup,itwillcooloffsomewhat.
InitiatecoverageonEscortswithaBUY;reiterateNEUTRALonM&M DhawalDoshi(+912266679769)
Escorts:WeinitiatecoveragewithaBUYratingandaTPofRs190itwillbethebiggest ddoshi@phillipcapital.in
beneficiaryofatractorindustryrevival.
NiteshSharma,CFA(+912266679965)
M&M:ReiterateourNeutralviewitsstruggleintheUVbusinesswouldleadtomargin nsharma@phillipcapital.in
pressures.

Page|1|PHILLIPCAPITALINDIARESEARCH

TRACTORS SECTORUPDATE

TableofContents

Industrytomakearecovery 3

Canrecoverybesharp? 4

Structurally,enoughroomforgrowthstill 7

CompetitivescenariochangingRiseofSonalika 11

ShifttohigherHPcontinues 12

Companies

EscortsLtd 14

Mahindra&Mahindra 30

Page|2|PHILLIPCAPITALINDIARESEARCH

TRACTORS SECTORUPDATE

Industrytomakearecovery
The Indian tractor industryhas seen a robust8% CAGR in volumes over the last 43
years with two strong bouts of 10% CAGR during 19732000 and 20032014.
However,thisgrowthpathhasnotbeenlinearwhichhasbeenthecasewithmany
other consumption stories in India. In the 43 years (1973TD) of sales data that we
analysed,theindustryhaspostedadeclinein10years.Ofthis,ithasseenasevere
fall in 20012003 and more recently in 201516. Historically, most of the demand
slowdownwasledbyeitherpoormonsoonorlowMSPhikesthetwoworstperiods
(including the recent slowdown) saw a combination of both weak rainfall and low
MSPhikes.

Twoboutsofstronggrowth but,recenttrendshavebeenworrying
700 IndiaSales 30% 3monthrollinggrowth
600 20%

500 10%
'000units

400 0%

300 10%

20%
200
30%
100
40%

May14

May15
Sep13
Nov13
Jan14
Mar14

Jul14
Sep14
Nov14
Jan15
Mar15

Jul15
Sep15
Nov15
Jan16
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015


Source:Company,PhillipCapitalIndiaResearch

ledbytwoyearsofweakmonsoonandlowerMSPs
Rainfall(vs.normal) MSPGrowth(Paddy) 45yravgMSPhike
20%

15%

10%

5%

0%

5%

10%

15%

20%
2011 2012 2013 2014 2015 2016

Source:Company,PhillipCapitalIndiaResearch

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TRACTO
ORS SECTORU
UPDATE

Caanrecovverybesh
harp?
Ind
dia has never seen threee consecutivee years of deficient rainffall (in record ded Weexxpecttractorind
dustrygrowthof
history).Additio
onally,recedinngElNinoimp pliesaveryhigghprobabilityyofrainfallbeeing 10%in
nFY17and13% %inFY18
normalinFY17. Ouranalysis suggestsaveeryhighcorreelationbetwee enmonsoon and
tractorsalesinIndiawheneeverabelow10%monsoon nyearisfollowedbyanormal
moonsoon year, growth in traactor sales haas seen a shaarp rebound
growing byy an
aveerage13.5%((averageofseeveninstanceesseecharttbelow)main nlyduetobettter
senntiment and low base. Inn the last fouur decades, we
w have see en nine yearss of
defficientmonsooon(10%belo ownormal),w whichledtod decliningtracttorsalesineiight
of thoseyears. Anormalmo onsoonfollow wedinsevenp proceedingye ears,allofwh
hich
saww strong dou
ubledigit tracctor growth. Based on early expectatio ons of a normal
moonsoon, we seee industry growth of 10%% in FY17 lo
ower than hisstorical averagges.
Theereisanupsiderisktoourestimatesiffdemandreco overyissharpp.Weexpect the
ind
dustrytogrowwby13%inFYY18.

Traactorsalessee
easharprebo oundintheyyearsfollowingdeficientmonsoon
40% TractorGrow
wth Rain
nfall(vs.normal)

30%

20%
0%
+10
10%

0%

10%
10%
20%

30%


Source:Company,PhillipCapitalIndiaR
Research

Likkelihoodo
ofanormallmonsoon
nishigher
Strrong ElNino occurrence
o in
n the past tw
wo years was the principal cause for In
ndia Verylo
owprobabilityofElNinoinFY17
recceiving subno
ormal (below 10%) monso oon in FY151
16. However, latest data frrom
varriousagenciesspointsatElN NinoweakeningbyJune20 016(clickhereetoreadmorein
ourruralnote).

NinoislikelyttofalltotheneutralzonebyJune2016
ElN 6


Source:AustralianBureauofMeteorolo
ogy,PhillipCapitalIndiaResearch

Pagge|4|PHILLIP
PCAPITALINDIA
ARESEARCH

TRACTO
ORS SECTORU
UPDATE

ForrecastssuggestsignificantElNinoweakkeningbyJune
e


Source:CPC/IRIUSA,PhillipCapitalIndiaResearch

As seen from th
he charts abo
ove, El Nino iss expected to fall in the ne
eutral zone frrom
ne 2016, whiich is indicattive of a norrmal monsoon in India. This
Jun T will supp port
strongertractorvolumegrow wth,majorlyfrromH2FY17.

MSPsmattersmoreth
hanjustmo
onsoons
Wh hile normalmmonsoon is a good enough trigger for a recovery in rural and tracctor MSPggrowthisextrem
melycriticalforra
dem mand,asustaainedrecoveryymainlycomeesfromaninccreaseinfarm mincomes,wh hich sustain
nedpullbackin
ntractordemaand
is highly depended on minimum supportt prices (MSP Ps) in India. Analysis of data
d
sugggests that in
n periods witth more than
n 10% MSP hikes,
h tractorss have grown n in
double digits. However,
H when MSP hikees have been n weak, tracttor demand has
remmained weak, even in good monsoon years. We conclude
c thatt MSP growth h is
exttremelycriticaalforasustain
neddemandp pullback.

MSSPgrowthmo oreimportanttforsustaineddhightractorrgrowth(than nmonsoon)


40% TractorGrowth MSPGrrowth(Paddy)

30%

20%

10%

0%

10%

20%

30%
1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015


Source:Company,PhillipCapitalIndiaR
Research

MSPhikesco
ouldbebe
etter
Minimum suppo ort prices havve seen an avverage hike off~10% from 1980s;howevver, Ourdisccussionwithindustry
FY11416 saw annaemic growtth of just 3%. This, coupleed with two consecutive bad particip
pantshighlighteedthatMSP
moonsoons dealtt a big blow to rural conssumption and d tractor saless. Our talks with
w growthcanbebetterthaninrecent
varriousindustryyparticipantshighlightedth hatinordertooboostanoth herwisedullru ural historywhichwillbo
oostrural
eco
onomy,MSP hikescouldb bebetterthan ninrecenthisstory.This,alongwithnormal econommy
moonsoonsaugurswellforassustainedreco overyintracttorsales.Governmentsthrrust
on improvingfarmincomesthroughmeasuresotherthanMSPwillaalsoplayastrong
roleinthelongeertermindusttrygrowth.

Pagge|5|PHILLIP
PCAPITALINDIA
ARESEARCH

TRACTORS SECTORUPDATE

MSPhikeshavebeenverylowrecently
30% MSPhikes Averagehike
25%

20%

15%

10%

5%

0%

5%

10%
FY81

FY83

FY85

FY87

FY89

FY91

FY93

FY95

FY97

FY99

FY01

FY03

FY05

FY07

FY09

FY11

FY13

FY15

Source:Company,PhillipCapitalIndiaResearch

Page|6|PHILLIPCAPITALINDIARESEARCH

TRACTORS SECTORUPDATE

Structurally,enoughroomforgrowthstill
India is the largest tractor market globally (by volumes). However dont get carried Indiahasoneoflowesttractor
away by this data we are still way below the world average when it comes to penetrationsintheworld
penetrationoftractorsintermsoflandholdingsorpowerbyarea.Despitebeinga
gigantic economy with high dependence on agriculture and rural economy, farm
mechanisation still has a long way to go. This low penetration, coupled with the
governments focused endeavours to improve yields, leaves immense scope for
tractorsgrowth.Below,welookat(1)howUSagrieconomytransitionedfrombeing
dependent on horses/mules to tractors for farming needs, (2) how tractors help
improveyields,and(3)keygrowthstatesahead.

Indiaisthelargestmarketfortractors(FY14)... yetithasthelowestpenetration(per1,000ha.)
700,000 500 461
450
600,000
400
500,000
350
400,000 300
300,000 250 211
200,000 200

100,000 150
88 80
100 69
0
31
50 16 16 14 11
Unitedstates

Brazil
India

China

EU

Russia

Canada
Turkey

Japan

Korea

Brazil
U.K.

Pakistan

Argentin
Japan

Italy

Germany

Egypt
France

India

a

Source:Industry,PhillipCapitalIndiaResearch

USAtook50yearstofullyshifttotractors;Indialongwayyet
Our analysis of historical trends of the agri revolution, usage of tractors, and farm
mechanisation in the USA suggest the following: (1) the US took over 40 years to
totallyshiftfromhorses/mulestotractorsfortheirfarmpowerneeds,and(2)84%of
farmersinUSAdidntownatractorin1920thisnumberinIndiais94%.

USA:%oftractorsversushorses/mulesusedonfarms
Tractors HorsesorMules
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1920 1925 1930 1935 1940 1945 1950 1954 1959 1964 1969

Source:UniversityofCalifornia,PhillipCapitalIndiaResearch

WhileitcouldbearguedthatpenetrationinIndialookslowduetohighlyfragmented
landholdings,ourcounterviewisthatevenafterexcludingmarginalfarmers(having
lessthantwohectaresofland),thereishugescopeforpenetrationgrowth(current
penetrationat25%).

Page|7|PHILLIPCAPITALINDIARESEARCH

TRACTORS SECTORUPDATE

Indiahasalongwaytogo
Tractors(RHS) Draughtanimal
100% 7%

6%
98%
5%
96% 4%

94% 3%

2%
92%
1%

90% 0%
1972 1976 1982 1986 1992 1996 2001 2006 2015

Source:CentralInstituteofAgriculturalEngineering,PhillipCapitalIndiaResearch

Indiahasoneofthelowestagriculturalyieldsintheworldcurrently,andincreased
mechanisation is one of the key ways to improve yields. As seen from the chart
below, average yields in India are 30% lower than the world average. Indias yields
arealsoinferiortomostofitsneighbouringcountries.

Indiahasoneofthelowestyieldsintheworld...
10,000

8,000

6,000
Kg/Ha

4,000

2,000

0
Netherlan

New

South

Philippines

Spain
China

Thailand
Belgium

Germany
USA

Mexico
Brazil

Pakistan
U.K.

SriLanka
World

India
Egypt

Indonesia

Bangladesh
France

Korea


Source:FAI,Industry,PhillipCapitalIndiaResearch

Analysis of statewise data suggests that states with higher farmpower usage
(kw/ha) i.e., higher penetration of tractors, enjoy better and improving yields. As
seen from the chart below, Punjab and Haryana have significantly higher yields
compared with the rest of India. While irrigation has a major role to play in this,
stateslikeWestBengal,UttarPradesh,AndhraPradesh,andTamilNaduhavehigher
yieldsduetorelativelyhighertractorpenetration.

Page|8|PHILLIPCAPITALINDIARESEARCH

TRACTO
ORS SECTORU
UPDATE

Traactorsandme
echanisation:Onewayoutt(per1,000haa.)


Source:Industry,PhillipCapitalIndiaReesearch

En
noughscop
peforincre
easedpene
etration
Pennetration of tractors
t to to
otal number of
o farm holdin ngs remains very
v low at ~6%, Tracto
orpenetration((exmarginal
anddsomewould darguethattheselevelslo ooklowbecau useofsmallanndmarginalfaarm farmerrs)standat25%
%
holdings. However, our analysis suggestss that penetrration of tracctors, even after
movingmarginalfarmhold
rem dings(<2Ha), leaveshugesscopeforgrow wth(only25% %of
meediumsizedfaarmersownaatractor).Afteersomemoreedigginginto ostatewisedaata,
weeconcludethaatwesternand dsouthernstaateswilltakeupthebatonofgrowth,given
low
werpenetratio oninthesestaates.

Souuthernandwwesternstatesstoleadlongtermgrowth
70%

60% Bihar
Har
AdjustedPenetration

50%
t ti

UP
40%
Punjab WB
Adj t d P

30%
Guj
20% MP AP Chatis
Raj
R
Karna Maha
10%

0%
5% %
10% 15% 20% 25%
10yrttractorCAGR
Source:Crisil,PhillipC
CapitalIndiaResearch

As seen in the chart


c above, states which benefitted frrom the green revolution and
theegovernmenttspush(Punjab,Haryana, Bihar,UP)havemoreorle essmaturedwwith
oveer40%penetration(innon nmarginal).RReplacementd demandwillbbeakeydriveerof
gro
owth in thesee regions. Witth enough lattent demand,, matured reggions should see
stronggrowthin ntheneartermmaswell.

Pagge|9|PHILLIP
PCAPITALINDIA
ARESEARCH

TRACTORS SECTORUPDATE

Replacementdemandwilldrivematuredstates whichhavestartedrecoveringoflate
Bihar Har Punjab UP(RHS) Bihar Haryana
40% Punjab UttarPradesh
50,000 120,000 30%
100,000 20%
40,000
10%
80,000
30,000 0%
60,000 10%
20,000
40,000 20%

10,000 30%
20,000
40%
0 0 50%


Source:Industry,PhillipCapitalIndiaResearch

ThecontributionofnorthernandwesternstatestoindustryvolumesislargeUttar Northernandwesternstatesformthe
bulkoftractorsales
Pradesh, Rajasthan, MP, Maharashtra, and Gujarat form over 57% of industry
volumes.OuranalysissuggeststhatnorthernstatesofBihar,Haryana,UP,Punjabare
wellpenetratedwith(4060%offarmersholding>2haofland).Weexpectgrowthin
thesestatestobereplacementled.

Southern and western states (Gujarat, Rajasthan, Karnataka, Maharashtra) have


ampleroomforgrowthwithpenetrationatsub20%.

Northernstatesarealargecontributortoindustryvolumes
100%
13%
5%
80% 6%
6%
7%
60% 7%
8%
100%
9%
40%
12%

20% 12%

17%
0%
UP Raj MP Maha Guj AP Bihar Karna Har Punjab Others India

Source:Crisil,PhillipCapitalIndiaResearch

Page|10|PHILLIPCAPITALINDIARESEARCH

TRACTORS SECTORUPDATE

CompetitivescenariochangingRiseofSonalika
While M&M remains the undisputed leader and has largely maintained its market
share, competition is heating up. During our recent channel checks (click here and
here) we found ample evidence of this with Sonalika, TAFE, and Escorts launching
newproductsaggressivelyorpricingtheirproductscompetitively.Asseenfromthe
chartsbelow,SonalikaandTAFEhavegainedmarketshareatthecostofsmallerand
marginalplayerswhileM&Mhasbeenabletoholdthefortwithstablemarketshare
overthelastfewyears.Competitiveactivityiscurrentlyheightenedasthemarketis
weakbutasdemandpicksup,weexpecttheintensitytocooloff.

M&Mhaslargelymaintainedmarketshare However,SonalikaandTAFEisabigthreat
Escorts Force HMT Intl.Tractors Intl.Tractors Escorts Others
Johndeere Mahindra NewHolland SAMEDEUTZ M&M TAFE
TAFE VST 20% 45%
100%
40%
80% 15%
35%
60%
10% 30%
40%
25%
5%
20%
20%

0% 0% 15%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY2011 FY2012 FY2013 FY2014 FY2015 H1FY2016

Source:Company,PhillipCapitalIndiaResearch

Sonalika:Currentlyathreat,butneedstorealignstrategyforsustainablegrowth Sonalikasellsitstractorsat1015%
Our checks suggest that Sonalika (International Tractors) is the most aggressive discounttocompetition
player pricing its products 1015% below competition. Despite such high
competitivepricing,itcontinuestoearnsignificantlyhighermarginsvs.peersasseen
fromthechartbelow.

SonalikamakeshighestEBITmargins,despitebeingverycompetitive
25% Escorts M&M Sonalika

20%

15%

10%

5%

0%
FY12 FY13 FY14 FY15
Source:Crisil,PhillipCapitalIndiaResearch

Innovativemarketingstrategiesliketractorexchange(whichSonalikapioneered)and
credittofarmershelpedthecompanyseeasharpjumpinitsmarketshareoverthe
pastfewyears.However,mostofthisgrowthhascomeatthecostoflowerdealer
profitability. Our checks suggest that the average age of Sonalikas dealers is 34
years,butthisisnotasustainabletrendoverthelongerterm.WithSonalikarecently
doubling its capacity to 200,000 units, it should soon start focusing on dealer
profitability in order to sustain volumes. It is targeting ~20% market share in two
yearsfrom12%currently(talltask).

Page|11|PHILLIPCAPITALINDIARESEARCH

TRACTORS SECTORUPDATE

ShifttohigherHPcontinues
Preference for higher horsepower continues, with farmers preferring 4150hp
tractors given their versatility (farms and haulage). The segment has doubled its
shareto46%inFY15from23%inFY10.Moreover,companieshavebeenfocusingon
technologyimprovementwithplayerslaunching4WDtractorsandantilifttractors
thisisanewtrendinIndiastractorhistory.

Marketshiftingtowards4150HP...
Upto30hp 3140hp 4150hp 51hpandabove
100%

80%

60%

40%

20%

0%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Source:CRISIL,PhillipCapitalIndiaResearch

Competitionheatingupinhighersegments
While M&M is a clear leader across segments, competition has been heating up in M&Mhaslostsubstantialmarket
thehigherHPsegments.Inthe51+HPsegment,M&Msmarketsharehashalvedto sharein51+HPand3140HPsegments.
26% from 61% between FY1215. In the 3140HP segment, it has lost 7% market Howevera13%marketsharegainin
share.M&Mhasbeenabletomaintainitsmarketsharemainlybecauseithasgained thelargest4150HPhashelpeditto
increaseitsoverallshare
alarge13%shareinthe4150HPsegment(onlygrowingsegmentsinceFY10),which
nowformsover46%ofthemarket.Thishashelpedthecompanymaintainitsshare
evenwithincreasingcompetitiveintensity.However,withmostplayersfocusingon
introducingnewproductsin40+HPsegments(ourchannelcheckssuggest),M&Mis
likelytofacestiffcompetition.

Marketshareupto30HP Marketshare3140HP
Escorts Force HMT Sonalika Mahindra TAFE VST Escorts Sonalika Johndeere Mahindra NewHolland TAFE
100% 4% 5% 100%
7% 8% 11% 10% 11% 13%
31% 32% 32% 35% 30% 30% 30%
80% 29% 29% 28% 80% 37%
27% 26% 22% 17%
40%
60% 60%
37% 36% 39%
43% 47% 52% 44% 43% 43% 37%
40% 50% 50% 51% 40% 40%
54%
38%
20% 7% 20% 12% 13% 12%
5% 2% 9% 9% 9%
2% 10% 10% 9% 9%
15% 13% 12% 5% 6% 14% 14% 13%
11% 8% 9% 9% 8% 11%
0% 3% 1% 1% 2% 0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16TD FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16TD

Source:Company,PhillipCapitalIndiaResearch

Page|12|PHILLIPCAPITALINDIARESEARCH

TRACTORS SECTORUPDATE

Marketshare4150HP Marketshare51HPandabove
Escorts Sonalika Johndeere Mahindra
Escorts Sonalika Johndeere Mahindra NewHolland TAFE
NewHolland SAMEDEUTZ TAFE
100% 100% 1% 2% 2% 1% 1% 2% 3% 4%
7% 7% 7% 9% 14%
23% 23% 22%
80% 80%
58% 24% 26% 29%
56% 57% 61% 43%
60% 29% 28% 31% 60%
30%
45%
43% 44% 18% 16%
43%
25%
40% 40% 15%
9% 9% 9% 9% 26%
30% 28% 22% 36% 31%
20% 8% 20% 27% 25%
29% 28% 25% 7% 9% 10%
24%
16% 11% 10% 10% 10% 13% 14% 14% 10%
0% 0% 4% 6% 6%
0% 0% 0% 0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16TD FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16TD

Source:Company,PhillipCapitalIndiaResearch

Page|13|PHILLIPCAPITALINDIARESEARCH
INSTITUTIONALEQUITYRESEARCH

EscortsLtd.(ESCIN)

Fromlegacytogrowth

28March2016
INDIA|AUTOMOBILES|InitiatingCoverage

WeinitiateonEscortswithaBUYratingandaTPofRs190,aswebelievethecompanyis BUY(Maintain)
nowleaner,meaner,cleaner,andgeareduptobeabigbeneficiaryofarevivalintractor CMPRS140
demand.Ourthesisisbasedon:(1)recoveryintractordemandaftertwodullyears(we
TARGETRS190(+36%)
see industry volume growth of 10%/13% in FY17/18), (2) totally revamped product

portfoliowith15newlaunches/refreshinthelasttwoyears,(3)focusonweakmarkets
COMPANYDATA
andmarketingrejig,(4)costcuttinginitiativesbearingfruits,and(5)strongtractioninits O/SSHARES(MN): 123
railways business. Escorts will double its profits between FY1618, led by 12% revenue MARKETCAP(RSBN): 17
CAGR and 200bps margin expansion. We value the company at 10x FY18 earnings MARKETCAP(USDBN): 0.3
(adjustedfortreasurystock). 52WKHI/LO(RS): 189/102
LIQUIDITY3M(USDMN): 1.2

PARVALUE(RS): 10
Tractorindustrytobounceback
WeestimatetractorstomarkarevivalinFY16(see10%/13%industrygrowthinFY17/18). SHAREHOLDINGPATTERN,%
We estimate escorts to maintain its market share at 10.4% in FY18, despite strong Dec15 Sep15 Jun15
competitionledby:(1)strongnewproductlaunches/refresh(15newproductsoverthelast PROMOTERS: 43.0 43.0 43.0
twoyears),(2)focusonnoncoresouthernregionstoimprovemarketshare,(3)revamping FII/NRI: 8.5 8.3 7.6
FI/MF: 3.8 3.4 1.6
distributionnetwork(replacingdormantdealerswithoneswithdeeppockets),and(4)new NONPRO: 18.4 19.9 18.2
branding and supply strategy with separate distribution from Powertrac and Farmtrac PUBLIC&OTHERS: 26.4 25.4 29.6
brands.Wesee12%revenueCAGRinFY1618.
PRICEPERFORMANCE,%
Leanerandmeaner 1MTH 3MTH 1YR
ABS 11.7 16.1 6.7
Escorts has lagged peers in terms of margins, mainly due to legacy costs. However, it has RELTOBSE 3.5 14.1 16.8
beentakingconsistentmeasurestocontrolcosts:(1)gave350bluecollaremployeesVRSin
FY15, reducing headcount to 2,500 in FY15, (2) whitecollar employees reduced to 1,700 PRICEVS.SENSEX
from2,200,(3)replacedpermanentemployeeswithcontractworkers,and(4)renegotiation 170
ofRMcontracts,reductioninvendorbase,anddesignchangestoreducecostsleadingto
over300bpscostsavingsinitstractordivision.Thisledtomarginsimprovingto4.5%inFY16 140
from4%inFY15,despite15%fallinvolumes.Thesecostcuttingmeasures,arevivalinthe
market,andpositiveoperatingleverageshouldleadtomarginsimprovingfurtherto6.3%in 110
FY18.
80
Railwayscouldbeasizeableopportunity
Escorts is a leading player in rail braking systems, dempers and couplers; its key products 50
include conventional and bogiemounted brakes for freight coaches and conventional and
Apr14 Oct14 Apr15 Oct15
axlemounted brakes for passenger coaches. We expect Escorts to be a key beneficiary of Escorts BSESensex
thegovernmentsthrustonrailwaysandseeitsrollingstockrising45xinthenext15years.
Source:PhillipCapitalIndiaResearch
Historically, it has supplied conventional products such as brake blocks. Its technological

breakthrough came in highvalue and advanced products such as Bogie mounted brake KEYFINANCIALS
system, axlemounted brakes through inhouse R&D, and technological tieups, which Rsmn FY16E FY17E FY18E
augurswellforourthesis. NetSales 34,793 37,874 43,957
EBIDTA 1,512 1,947 2,750
Valuations NetProfit 872 1,200 1,714
WeexpectEscortstobethebiggestbeneficiaryofarecoveryinruralspendsandthetractor EPS,Rs 7.3 10.1 14.4
industry. With new product launches, improved marketing effort, and better cost control, PER,x 19.1 13.9 9.7
EV/EBIDTA,x 11.9 8.8 5.8
thecompanywilldoubleitsearningsbetweenFY16andFY18.Weinitiatecoveragewitha
P/BV,x 0.9 0.8 0.8
BUYratingandaTPofRs190(adjustedfortreasurystock).Wevaluethecompanyata35%
ROE,% 4.7 6.1 8.1
discounttoM&Mat10xFY18earningsandwouldconsiderreratingitifitseffortsculminate Debt/Equity(%) 21.9 20.3 17.9
into strong volume growth. Key risks include delayed recovery in tractor sales, and heavy Source:PhillipCapitalIndiaResearchEst.
bleedingintheconstructionandautosegment.

Page|14|PHILLIPCAPITALINDIARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

Tractorindustrytobounceback
As highlighted in the sections above, we estimate the tractor industry to make a
revival in FY16 (see 10%/13% industry growth in FY17/18). We estimate Escorts to WeexpectEscortstoposta12%CAGR
involumesoverFY1618
losemarginalmarketshareat10.1%inFY17,giventhatitsstrongmarketsareyetto
turnaroundmeaningfully.However,itwillregain25bpsshareinFY18,drivenbythe
recoveryinthenorthernstates.Itsvolumeswillbeaidedby:(1)strongnewproduct
launches/refresh (15 new products over the last two years), (2) focus on noncore
southernandwesternregionstoimprovemarketshare,(3)revampingofdistribution
network(itisreplacingdormantdealerswithoneswithdeeppockets),and(4)new
branding and supply strategy with separate distribution from Powertrac (PT) and
Farmtrac(FT)brands.

Tractorindustryvolumeandgrowth
Volumes(units) %yoy(RHS)
800,000 40%

30%
600,000
20%

400,000 10%

0%
200,000
10%

0 20%


Source:Crisil,PhillipCapitalIndiaResearchEstimates

Sellsmajorlyundertwobrands
Escorts has two marquee brands Farmtrac (FT) and Powertrac (PT) with the former Escortshastwomarqueebrands
positionedasapremiumproduct(510%vs.competition)withbetterfeatures.Our FarmtracandPowertracwiththe
checks suggest that FT enjoys a strong brand image and an extremely strong formerpositionedasapremium
customerbase.Powertracproductsaremorefocusedonfuelefficiencyandcostof productwithbetterfeaturesandalso
ownership;thecompanyclaimsthatitsPTproductsdeliver10%bettermileage(our pricedat510%premiumvs.
competition.
checkswithdealerscorroboratethis).Escortsalsohasothersmallerbrandsnamely
Heritage(exportsmarket),FerrariTractors(sub30hppremiumtractorsforpersonal
gardening),andSteeltracTractors(14HPtractorforrowcrops).

FT and PT brands have separate strongholds Farmtrac is extremely strong in


matured states of Punjab, Haryana, Rajasthan and Western UP. Powertrac has a
strongbrandimageinMP,UP,andBihar.Ourcheckssuggestthatthecompanyhas
been allocating separate dealerships for FT and PT brands in these markets. The
entire southern market mostly remains uncatered by the company, where it is
revamping its marketing strategy along with focus on new launches (highlighted in
thesectionbelow).

Page|15|PHILLIPCAPITALINDIARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

Thecompanyspositioningisweakinover40%ofthemarket


Source:Company,PhillipCapitalIndiaResearch

IncreasingthrustonR&Dhelpedrevampproductportfolio
A strong focus on R&D, majorly from FY13, has helped the company to completely R&Dasa%ofsaleshasincreasedfrom
revampitsproductportfoliooverthepastcoupleofyears.Ithasnotonlyrefreshed 1%inFY12to2.2%inFY15
its existing products, it also launched new products with advanced technologies
partlyfillingitsproductgaps.R&Dasa%ofsaleshasincreasedto2.2%inFY15from
1%inFY12.

ConsistentlyincreasedfocusonR&D
2.5%

2.0%
R&D(%ofrevenue)

1.5%

1.0%

0.5%

0.0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15

Source:Company,PhillipCapitalIndiaResearch

Lasttwoyearshaveseenthecompanylaunch15newproducts/refresh,revamping
Lasttwoyearshaveseenthecompany
almostitsentireproductportfolio.Thesenewproductscurrentlyaccountfor66%of launch15newproducts/refreshes
its total volumes sold this number is likely to improve as the tractor market therebyrevampingalmostitsentire
recovery gathers pace. Product refreshes have seen older models making way for productportfolio
newer and lighter tractors, while retaining most features. This has benefitted the
companywithimprovinggrossmargins.

Amongnewproducts,Escortshaslaunchedsomeinanewcategorysuchasantilift
tractors focused on haulage customers and 4x4 tractors. Our checks with dealers
showedthatproductqualityandfeaturesarebetterthancompetitioninmostcases;
fuelefficiencyisalsoupto10%morethanpeers.WhilethecurrentALTlineupisin

Page|16|PHILLIPCAPITALINDIARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

the 3140HP segment, the company has started test marketing its 4150HP ALT.
Nationwide launch is seen in the coming 23 months. This will significantly bolster
volumes,giventhatthe4150HPsegmentisthelargestandfastestgrowing.

Recentproductlaunches(new+refreshed)fromEscortsstable
6

5
Numberoflaunches

0
3QFY15 4QFY15 1QFY16 2QFY16 3QFY16

Source:Company,PhillipCapitalIndiaResearch

WebelievethistotalrevampwillnotonlyhelpEscortstosaveitsturf,butalsogarner
market share as market revives and word of mouth publicity helps. It expects to
increaseitsmarketshareto1820%inthenextfiveyears(10%currently);however,
webelievethiswillbeatalltask.

Marketingstrategyrevampedinstrongstatestohelpincompetitivemarkets
Escortsisastrongplayerinthenorthernregionwithfivenorthernstatescontributing Escortsisastrongplayerinthe
to 72% of its volumes vs. 48% for the industry. Escorts dominates with over 15% northernregionwithfivenorthern
market share in these states (vs. its nationwide share of10%). Withinthe northern statescontributingover72%ofits
region,itsFTbrandhasastrongpresencethenorthwesternstates,andPTinnorth volumesvs.48%fortheindustry
eastern states. In order to bolster both brands, it has started creating separate
distributionchannelsinthenorthernregion(increasingtheserviceareaofanexisting
dealer (for lets say PT brand) and appointing another dealer (lets say FT brand),
whichtheexistingdealerwasnotabletopush).

EscortsvolumecontributionandMSinitsstrongstates
Escorts Industry EscortsMS(RHS)
30% 20%

15%
20%

10%

10%
5%

0% 0%
Bihar Haryana MadhyaPradesh Rajasthan UttarPradesh

Source:Company,PhillipCapitalIndiaResearch

Page|17|PHILLIPCAPITALINDIARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

Focusedmarketingandrejigcoulddriveincrementalshareinweakerstates
Escorts has a weak positioning in key highgrowth western and southern states of
Andhra,Gujarat,Karnataka,andMaharashtra.Thecompanyhasananaemicmarket
shareofsub3%inthesestatesasseenfromthechartbelow.Ourcheckshighlight
thatthekeyreasonforitsweakpositioningisoldsmalldealerswhoareweak,unable
to invest money in the business, do not indulge in ontheground marketing and
awarenessactivities,andaredemotivatedduetolowerROIs.

EscortsvolumecontributionandMSinitsweakstates
Escorts Industry EscortsMS(RHS)
10% 7%

6%
8%
5%
6% 4%

4% 3%

2%
2%
1%

0% 0%
AndhraPradesh Gujarat Karnataka Maharashtra

Source:Crisil,PhillipCapitalIndiaResearch

To address the issue, Escorts has undertaken a focused marketing approach and
rejigging of its distributors by: (1) reducing the number of dealers and giving them
larger service area to make their business models viable and more profitable, (2)
weeding out dealers who were unable to rampup sales, lack aggression, and are
unwillingtoinvestmuchintothebusinessandidentifyingoneswithstrongerbalance
sheets,(3)focusingononestateatatime,onthegroundruralmarketing,andtrying
to reach every village and farmer in the state to increase brand image and
accessibility,(4)entrywithspecialisedmarketingcampaignsinseedingvillageswhere
thecompanyhasnotsoldevenasingleproduct,and(5)keepingasmallmarketing
teamofEscortsatdealershipswithlowmarketsharefor23months.

Escorts has aggressively started replacing dormant dealers in Andhra Pradesh and
Maharashtra.We believe that these are steps in the right direction, but it will take
time for material benefits to be visible. The chart below shows marginal
improvementinAndhraPradeshmarketshare,butnotangibleresultsarevisiblein
Maharashtrayet.

Escortsmarketshare(3monthrollingaverage):AndhraPradesh
8%

7%

6%

5%

4%

3%

2%
Dec12

Feb13

Apr13

Jun13

Aug13

Oct13

Dec13

Feb14

Apr14

Jun14

Aug14

Oct14

Dec14

Feb15

Apr15

Jun15

Aug15

Oct15

Dec15


Source:Crisil,PhillipCapitalIndiaResearch

Page|18|PHILLIPCAPITALINDIARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

Leanerandmeanercostcuttingtobenefit
Escortshaslaggedpeersintermsofmargins(seeninchartbelow)mainlydueto:(1) Escortshaslaggedpeersintermsof
legacy costs with bluecollar salaries at 56x vs. competition, (2) raw material marginsmainlyduetolegacycosts
contractsbeingpricedatapremiumtocompetition,and(3)heavierproductleading
tohigherRMcosts.

TractorEBITmarginsEscortsvs.M&M
M&MTractorEBITMargins EscortsTractorEBITMargins
20%

15%

10%

5%

0%
Dec11

Jun12
Aug12
Oct12
Dec12

Jun13
Aug13
Oct13
Dec13

Jun14
Aug14
Oct14
Dec14

Jun15
Aug15
Oct15
Dec15
Feb12
Apr12

Feb13
Apr13

Feb14
Apr14

Feb15
Apr15


Source:Company,PhillipCapitalIndiaResearch

Escortshaslaggedpeersintermsofmargins,mainlyduetolegacycosts.However,it
has been taking consistent measures to control costs: (1) gave 350 bluecollar
employees VRS in FY15, reducing headcount to 2500, (2) whitecollar employees
reduced to 1700 from 2200, (3) replaced permanent employees with contract
workers,and(4)renegotiationofRMcontracts,reductioninvendorbase,anddesign
changes to reduce costs leading to over 300bps grossmargin expansion (partly
aidedbylowercommodityprices).Thishasledtomarginsimprovingto4.5%from4%
over FY1516, despite pressure on revenue and a 13% drop in tractor segment
volumes.

The management expects the productredesigning project to be complete by


September 2015; this has the potential to add another 120bps to margins. We
estimatethesecostcuttingmeasurescombinedwitharevivalinmarketandpositive
operatingleveragetoleadtooperatingmarginsimprovingto6.3%inFY18from~4%
currently.

Rawmaterialcoststrendingdown,variousinitiativeshelped
The company has been spending more on raw material; its RM spends have been
historically ~500bps higher than competition. In FY15, Sonalikas RM cost stood at
66%ofrevenueswhereasEscortswasatover72%.

Page|19|PHILLIPCAPITALINDIARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

Rawmaterialcostasa%ofsales
77% Escorts Sonalika

75%

73%

71%

69%

67%

65%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Source:Company,MCA,PhillipCapitalIndiaResearch

Escorts has taken multiple initiatives to correct the RM anomaly, and has seen
tangible results with improving gross margins. Design changes after the product
portfolio revamp, consolidating vendor base (to 300 vendors from 500), plant
rationalisation,andincreasedoutsourcinghashelpedittoreduceoverallcosts.Ithas
startedoutsourcingcrankshaftsandhydraulics,therebyvacatingoneplant,whichit
will use for the expansion of its railways division. The results of these efforts were
visibleinitsquarterlyperformancegrossmarginsimprovedto31%in3QFY16from
28%in1QFY14,partiallyhelpedbylowerRMpricesandcostcontrolinitiatives.

Escortsgrossmarginsimprovedconsistentlyonaquarterlybasis
32%

31%

30%

29%

28%

27%
3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16

Source:Company,PhillipCapitalIndiaResearch

Employeecoststhebiggestdragonmargins
A key reason for Escorts suppressed margins vs. peers is its high employee costs. Salaryofapermanentworkerat
Sinceitisafivedecadeoldcompany,ithasthedisadvantageofbearinglegacycosts EscortsisoverRs70,000/month
the average age of its bluecollared employees is 50+. Aged employees and closertoIndiasannualGDPpercapita
aggressivelabourlawsinIndiameanthattheaveragesalaryofapermanentworker ofRs99,000!
atthecompanyisoverRs70,000/month(closertoIndiasAnnualGDPpercapitaof
Rs 99,000). Our analysis shows that Escorts employee costs (at 11% of sales) are
three times Sonalikas and twice M&Ms competition has a healthy mix of
contractualworkers.

Page|20|PHILLIPCAPITALINDIARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

Employeecost(%ofrevenue)Escortsvs.M&Mvs.Sonalika

16% Escorts M&M Sonalika

14%

12%

10%

8%

6%

4%

2%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Source:Company,MCA,PhillipCapitalIndiaResearch

Inabidtocontrolemployeecostsandbringitinlinewithcompetition,Escortshas
beenofferingVRStoitspermanentemployeesandreplacingthemwithcontractual
workers.Inthelasttwoyears,ithassuccessfullyretiredover1000employees(500
blue collared, 500 white collared). Another round of VRS would be offered in
H2FY17/FY18,oncemarketconditionsimprove.

Employeecostslowlyfalling

1,200 EmployeeCost Employeecost(%yoyRHS) 10%

1,150 Cutitsoverallheadcountby1,000
5% employeesoverthelasttwoyears
1,100
0%
1,050
RsMn

1,000 5%

950
10%
900
15%
850

800 20%
Dec/13 Mar/14 Jun/14 Sep/14 Dec/14 Mar/15 Jun/15 Sep/15 Dec/15

Source:Company,PhillipCapitalIndiaResearch

Page|21|PHILLIPCAPITALINDIARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

Railways:Government/newproducttodrivegrowth
Railways is Escorts mostprofitable and fastest growing segment.While it is oneof Thenewmanagementteamhas
thekeybeneficiariesofincreasedspendingbyIndianrailways,thenewmanagement significantlydevelopedcapabilitiesin
team (fouryears old) has significantly developed capabilities in product upgrades, therailwayssegment
new products, and new segments. Escorts has used a blend of inhouse R&D and
technologicaltieupstoscaleupitsnewproductofferings,whichwillbeakeygrowth
enabler ahead. While the segment contributes only 6% to revenues (9MFY16), its
targetistomorethandoubletheserevenuesoverthenextthreeyears.Despiteits
lowrevenueshare,thisdivisioncontributesto14%ofprofits(upfrom9%inFY15).

Railwaysegment:Revenuesandprofitability
Revenues EBITMargins
600 25%

500
20%

400
15%
Rsmn

300
10%
200

5%
100

0%
1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16

Source:Company,PhillipCapitalIndiaResearch

Benefitssignificantlyfromthegovernmentsthrustonrailways
We expect Escorts to be a key beneficiary of the governments thrust on railways,
withrollingstockexpectedtogrow45xinthenext15years.

InvestmentbyIndianRailways
RollingStockCategory CurrentHolding(FY14) Incrementalrequirementby2032 Growth
FreightWagons 2,45,266 11,00,000 4.5x
ElectricLocomotives 4,823 28,000 5.8x
DieselLocomotives 5,633 15,000 2.7x
EMU/MEMU/DMUs 9,371 30,000 3.2x
Coaches 50,229 2,10,000 4.2x
Source:Company,PhillipCapitalIndiaResearch

Increased spending by Indian railways has seen a consistent increase in the


companysorderbook,whichhasgrownataCQGRof6.5%overthelast10quarters
toRs600mninQ3FY16fromRs340mninQ2FY14.

Page|22|PHILLIPCAPITALINDIARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

Railwaysorderbookconsistentlyrising
700

600
IncreasedataCQGRof6.5%overthe
500 last10quarters
RsMn

400

300

200

100

0
2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16
Source:Company,PhillipCapitalIndiaResearch

While most of the increase has come from conventional products, we expect new
products to be a major growth driver ahead the benefits of this are expected to
startfromH1FY17.Conventionalproductsincludeairbrakes,EPbrakes,brakepads,
couplers,anddemperswhichhaveanannualmarketsizeofRs2.5bn,withEscorts
holdingover50%.

Newproducts:Opportunitiesgalorewithhighentrybarriers
Braking systems form a large chunk of Escorts railways division revenues. NewrailproductsopenupaRs16bn
Historically,ithasbeenasupplierofconventionalproductssuchasbrakeblocksand marketforEscorts
brakepads;however,technologicalbreakthroughs(inhouseandtechnologytieup)
have opened up significant opportunities in a space dominated by a select few
multinationalcompanies. Ithas already executed the development order for bogie
mountedbrakesystems(BMBS),forwhichitexpectscommercialordersshortly.Itis
executingthedevelopmentorderforaxlemountedbrakingsystems(AMBS,likelyby
H2FY17). While these two will drive revenues in the coming 12 years, Escorts has
also developed braking systems for locomotives, for which it is awaiting a final
approvalfromIndianrailways.

BMBS: So far, Knorr Bremse has a monopoly in this segment it is the only player
supplyingBMBSsystemstotheIndianRailways.Escortswillenterintothefraysoon.
AllnewwagonsorderedbyIndianRailwayswillbeequippedbysuperiorqualityand
safer BMBS (replacing axlemounted disc brakes). Indian Railways recent tender to
procure 15,000 wagons opens up a ~Rs 4bn opportunity for BMBS. Assuming 10%
share for Escorts from this order, its order book will rise significantly. While this
represents a nearterm opportunity, replacement demand on existing wagons and
freshorderingbyIndianRailwaysopensupasignificantopportunityforEscorts.

AMBS:AsegmentcurrentlydominatedbyFaiveleyandKnorrBremse,ithasamarket
sizeof~Rs2bn,whichislikelytogrow4xwiththerailwaysincreasingmanufacturing
of Linke Hofmann Busch (LHB) coaches/year to 4000 coaches by FY18 from 1000
currently.Escortsrecentlyenteredthissegmentviaatechnologytransferagreement
withaEuropeancompanyDako,andarealreadysupplyingdevelopmentorderto
therailwaysforAMBS(tobeexecutedbyH2FY17),afterwhichitwillstartbiddingfor
commercialorders.

Locomotivebrakes:Thehighestvaluepropositioninbrakingsystems,whereEscorts
isyettoreceivefinalapproval.Thesegment(currentmarketsizeofRs2.4bn)willbe
alongtermdriver.

Metros: The segment currently is negligible for Escorts, but holds a lot of potential
with the company entering technological tieups. It had recently tied up with Bode

Page|23|PHILLIPCAPITALINDIARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

(USA)togainaccesstopneumaticdoorsystemsformetros.Itisalsoevaluating45 Thecompanyhadrecentlytiedupwith
new product segments and is on the verge of a tieup to gain technology access in Bode(USA)togainaccessto
HVACandbrakesformetrosthiswillenhancetherevenuepotentialofthisdivision pneumaticdoorsystemsformetros
further.

Escortsofferingsinrailwaysbywagon/producttypes
LHBCoach BMBSWagon EMU/DMU DieselLoco ElectricLoco Metro

Brakes YES YES YES UD UD PLAN

Couplers YES N/A YES YES YES PLAN

Shockers UD N/A YES YES YES N/A

Source:Company,PhillipCapitalIndiaResearch*UD:UnderDevelopment

Newproductstoincreasepotentialmarketsize
Products Marketpotential
ExistingProducts AirBrakes,EPBrakesCouplers,BrakePads,Suspension Rs2.5bn
NewProducts BogeyMountedBrakeSystem ~Rs6bn
AxleMountedBrakeSystem
UnderConsideration Evaluating45newproducts >Rs16bn
Source:Company,PhillipCapitalIndiaResearch

Page|24|PHILLIPCAPITALINDIARESEARCH

ESCORTSLLTD. INITIATIN
NGCOVERAGE

Ottherbussinessesttoremaiinadragg
Esccortshasaneexposuretoco
onstructioneequipment(12 2%ofrevenue es)andnonccore
autto componen nts segment (3%
( of revenu
ues). Howeveer, both segm
ments have been
lossmakingandarestrugglingwithnoneaartermrespiteeinsight.

EBITmarginscconstructioneequipmentan ndautoproduucts
1
15% ConsttructionEquipmeent A
AutoProducts

1
10%

5%

0%

5%

1
10%

1
15%

2
20%

2
25%
FY06 FY07 FY08 FY09 FY10 FY11 FY1
12 FY13 FYY14 FY15

Source:Company,PhillipCapitalIndiaR
Research

Constructioneq quipment
Theecompanyis aleadingplaayerinthecraanessegmenttwithamarkketshareofo over
47%% and has a small presen nce in compaactor and bacckhoe loaderss. Given slugggish
ecoonomic and construction
c activity, volumes from this segment have
h been unnder
preessure posting losses fro
om FY12. We do not expecct any materiial change in the
perrformanceof theconstructtiondivision. Whilecompactorshaspickkedup,given the
tractioninroadssconstruction n,thebackhoeeloaders,and dcranessegmmentcontinuesto
mainsluggish..
rem

Constructioneq quipmentreve enuesplit Esco


ortsmarketssharebyprod
duct
Cranes Backhoeloadeer Compactorrs
S
Spares14%
60%
Cranes57%
% 51%
50% 48% 48%
Compactorss
10%
40%

30%

20%
10% 10% 10%
Backhoeload 10%
er19% 3% 4% 2%
0%
FY14 FY15 FY16E

Source:Company,PhillipCapitalIndiaR
Research

Weeestimatetheeconstruction nequipmentssegmenttoreemainlargelyflattishandlo oss Reduccedbreakevenlevelsofits


maaking until FYY18; thereforre, we would d look at con
ncrete signs of a pick up
p in constrructionequipmmentsegmenttoo
connstructionacttivitybeforeturningpositivveonthisseggment.Howevver,thecompany 750unnits/quarterofsalesdownfro
om
conntinuestomaakeeffortsto reducebreakkevenlevels(ccurrentlyat7 750units/quarter 1050uunitsearlier
of sales down from 1050 units earlier). Platform rationalisation andd realignmentt of
salesandmarkeetingchannelsshavehelpedittoreduceittsbreakevenlevels.

Pagge|25|PHILLIPCAPITALINDIA
ARESEARCH

ESCORTSLLTD. INITIATIN
NGCOVERAGE

Constructioneq
quipmentvo
olumesremainunderpresssure
1200
Breakkevenlevelu
untilFY14
1000

800 Cu
urrentbreakkevenlevel

600

400

200


Source:Company,PhillipCapitalIndiaR
Research

Autocomponen nts
Thee company has
h a small presence in thhe twowheeler and three ewheeler sho ock
abssorberssegment,whichco ontributesto22%ofitsreveenues.Thisse egmentismarrred
Thecompanyisevalluatingsellingoff
by legacydisadvvantagesofhighcostandaageingblueco ollarlabouran
ndhasbeenlo oss utoproductsbu
itsau usiness,failing
maaking (in recent memory). The manaagement has realised thaat this nonccore whichhitwouldconsidershuttingitt
seggmentisadraagandislookiingatstrategicallysellingo
offthissegmenntfailingwhicchit down nbytheendofFY17
couuld look at completely shutting it dow
wn. Losses froom this segm
ment account for
16%%/11%ofourrFY17/18netprofitestimattes.

Automotivediviisionrevenue esplit Automotivedivissionlossmakkinginrecentmemory

Replacemeent FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
5
23% 0
0%
OEM
M42%

5
5%

10
0%

15
5%

20
0%
Exports35%
%

5%
25

Source:Company,PhillipCapitalIndiaR
Research

Pagge|26|PHILLIPCAPITALINDIA
ARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

Valuations
WeexpectEscortstobethebiggestbeneficiaryofarecoveryinruralspendsandin
the tractor industry. With new product launches, improved marketing effort, and
bettercostcontrol,weestimateittoalmostdoubleitsearningsbetweenFY16and
FY18.WeinitiatecoverageonEscortswithaBUYratingandaTPofRs190(adjusted
fortreasurystockamountingto30.43%ofequity).Wevaluethecompanyata35%
discounttoM&Mat10xFY18earningsandwouldcontemplatereratingitifitsefforts
culminate into strong volume growth. Key risks include delayed recovery in tractor
salesandheavybleedingintheconstructionandautosegments.

Oneyearforwardbandcharts
350 P/Eband 400 P/BV 2x
(Rs) 16x
300 350

250 12x 300 1.5x

200 250
8x
150 200 1x

100 4x 150
50 100 0.5x

0 50
50 0


30000 Mktcap/Sales 70000 EV/EBITDA
(Rsmn)
60000 (Rsmn)
25000
50000 16x
20000 0.4x
40000 12x
15000 0.3x
30000
8x
10000 0.2x
20000
4x
5000 0.1x
10000

0 0


35000 EV/Sales
(Rsmn)
30000

25000

20000 0.4x

15000 0.3x

10000
0.2x
5000 0.1x


Source:Company,PhillipCapitalIndiaResearch

Page|27|PHILLIPCAPITALINDIARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

Companysnapshot
Escorts is a leading player in the agrimachinery segment and has a presence in
construction and material handling equipment, railway equipment, and auto
components. It offers a comprehensive range of tractors more than 45 variants
starting from 25HP to 80 HP. Escort, Farmtrac, and Powertrac are widely accepted
andpreferredbrandsintractors.Intherailwaysbusiness,itoffersbrakes,couplers,
shock absorbers, rail fastening systems, composite brake blocks, and vulcanized
rubber parts. Its tractor capacity stands at 100,000 units with plants located in
Faridabad(Haryana,India).

Escortsrevenuehasseen12%CAGRoverFY0715 Escortssegmentmargins
AgriMachinery ConstructionEquipment AgriMachinery ConstructionEquipment
RailwaysProducts AutoProducts RailwaysProducts AutoProducts
50,000 %yoy(RHS) 50% 30%
45,000
40% 20%
40,000
35,000 30%
10%
30,000 20%
25,000
10% 0%
20,000
15,000 0% 10%
10,000
10%
5,000 20%
20%
30%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16EFY17EFY18E

Source:Company,PhillipCapitalIndiaResearch

Keyassumptions
(RsMn) FY14 FY15 FY16E FY17E FY18E
Revenues
AgriMachinery 35,216 32,108 27,433 29,888 34,933
ConstructionEquipment 4,668 5,158 4,643 4,924 5,470
RailwaysProducts 1,825 1,837 2,021 2,425 3,032
EBIT
AgriMachinery 4,941 2,293 1,975 2,316 2,969
ConstructionEquipment (322) (248) (302) (295) (274)
RailwaysProducts 146 175 273 346 455
Source:Company,PhillipCapitalIndiaResearch

Keyrisks
(1)Slowerthanexpectedpickupintractordemand
(2)VolatileRMprices
(3)Furtherdeteriorationinconstructionequipmentbusiness
(4)Railwaysbusinessnotrampingupasestimated

SWOTanalysis
Strengths Weaknesses
Robustbrandnameinnorthernpartsofthe Weakbrandimage,exceptinthenorthern
country regions
Qualityproductsclaimedtoprovidebetter Smallplayerintheextremelycompetitive
efficiencyandoutputvs.competition constructionequipmentmarket
Totallyrevampedproductportfolioandstrong Automotivesegmentabigdrag
R&D
Opportunities Threats
Focusinsouthernandwesternpartsofthe Increasingcompetitiveintensity
country Rawmaterialpricesandcurrencyvolatility
Newsegmentsinrailwayproducts
Source:Company,PhillipCapitalIndiaResearch

Page|28|PHILLIPCAPITALINDIARESEARCH

ESCORTSLTD. INITIATINGCOVERAGE

Financials

ConsolidatedIncomeStatement CashFlow
Y/EMar,Rsmn FY15 FY16e FY17e FY18e Y/EMar,Rsmn FY15 FY16e FY17e FY18e
Netsales 39,858 34,793 37,874 43,957 Pretaxprofit 683 918 1,371 2,212
Growth,% 37 13 9 16 Depreciation 661 633 649 667
Otherincome 0 0 0 0 Chginworkingcapital 1,082 57 94 186
Totalincome 39,858 34,793 37,874 43,957 Totaltaxpaid 191 46 171 498
Rawmaterialexpenses 28,480 24,007 26,133 30,330 Otheroperatingactivities 994 105 87 46
Employeeexpenses 4,318 4,318 4,534 4,988 Cashflowfromoperatingactivities 1,065 1,668 1,841 2,241
OtherOperatingexpenses 5,464 4,956 5,259 5,889 Capitalexpenditure 517 500 700 700
EBITDA(Core) 1,597 1,512 1,947 2,750 Otherinvestingactivities 272 108 390 431
Growth,% (58.1) (5.3) 28.8 41.2 Cashflowfrominvestingactivities 246 608 310 269
Margin,% 4.0 4.3 5.1 6.3 Dividend(incl.tax) 64 168 210 210
Depreciation 661 633 649 667 Otherfinancingactivities 493 477 477 477
EBIT 936 878 1,299 2,083 Cashflowfromfinancingactivities 1,074 645 787 887
Growth,% (68.6) (6.2) 47.8 60.4 Netchgincash 255 415 744 1,085
Margin,% 2.3 2.5 3.4 4.7
Interestpaid 571 477 477 477
OtherNonOperatingIncome 132 145 159 175 ValuationRatios
NonrecurringItems 306 0 0 0
FY15 FY16e FY17e FY18e
Pretaxprofit 683 918 1,371 2,212
PerSharedata
Taxprovided 65 46 171 498
EPS(INR) 8.8 7.3 10.1 14.4
Profitaftertax 747 872 1,200 1,714
Growth,% (56.4) (17.2) 37.5 42.9
Others(Minorities,Associates) 0 0 0 0
BookNAV/share(INR) 150.5 156.4 164.7 177.3
NetProfit 747 872 1,200 1,714
FDEPS(INR) 8.8 7.3 10.1 14.4
Growth,% (56.3) (17.2) 37.5 42.9
CEPS(INR) 16.9 12.6 15.5 20.0
NetProfit(adjusted) 1,053 872 1,200 1,714
CFPS(INR) 1.0 11.9 13.4 16.9
Unadj.shares(m) 119 119 119 119
DPS(INR) 0.5 1.4 1.8 1.8
Wtdavgshares(m) 119 119 119 119
Returnratios
Returnonassets(%) 3.3 3.5 4.5 5.6
Returnonequity(%) 5.9 4.7 6.1 8.1
BalanceSheet Returnoncapitalemployed(%) 4.6 4.8 6.0 7.7
Y/EMar,Rsmn FY15 FY16e FY17e FY18e Turnoverratios
Cash&bank 2,364 2,779 3,523 4,607 Assetturnover(x) 2.5 2.1 2.3 2.7
Debtors 3,971 3,466 3,773 4,379 Sales/Totalassets(x) 1.2 1.0 1.1 1.2
Inventory 4,159 3,506 3,817 4,429 Sales/NetFA(x) 2.4 2.1 2.3 2.7
Loans&advances 2,332 2,332 2,332 2,332 Receivabledays 36.4 36.4 36.4 36.4
Othercurrentassets 121 121 121 121 Inventorydays 38.1 36.8 36.8 36.8
Totalcurrentassets 12,947 12,204 13,565 15,868 Payabledays 66.8 64.8 65.3 66.1
Investments 3,835 4,315 4,315 4,315 Workingcapitaldays 10.2 11.1 11.1 11.1
Grossfixedassets 24,100 24,600 25,300 26,000 Liquidityratios
Less:Depreciation 8,270 8,903 9,552 10,219 Currentratio(x) 1.4 1.5 1.5 1.6
Add:CapitalWIP 555 555 555 555 Quickratio(x) 0.9 1.0 1.1 1.2
Netfixedassets 16,384 16,251 16,302 16,336 Totaldebt/Equity(%) 22.7 21.9 20.3 17.9
Noncurrentassets 227 227 227 227 Netdebt/Equity(%) 9.6 7.0 2.3 (3.9)
Totalassets 33,393 32,997 34,409 36,746 Valuation
Currentliabilities 9,464 8,364 8,887 9,919 PER(x) 15.8 19.1 13.9 9.7
Provisions 879 879 879 879 PEG(x)yoygrowth (0.3) (1.1) 0.4 0.2
Totalcurrentliabilities 10,343 9,243 9,766 10,798 Price/Book(x) 0.9 0.9 0.8 0.8
Noncurrentliabilities 5,087 5,087 4,987 4,787 Yield(%) 0.4 1.0 1.0 1.0
Totalliabilities 15,430 14,330 14,753 15,585 EV/Netsales(x) 0.5 0.5 0.5 0.4
Paidupcapital 1,193 1,193 1,193 1,193 EV/EBITDA(x) 11.5 11.9 8.8 5.8
Reserves&surplus 16,770 17,474 18,463 19,967
Shareholdersequity 17,963 18,667 19,656 21,160
Totalequity&liabilities 33,392 32,996 34,409 36,745

Source:Company,PhillipCapitalIndiaResearchEstimates

Page|29|PHILLIPCAPITALINDIARESEARCH
INSTITUTIONALEQUITYRESEARCH

Mahindra&Mahindra(MMIN)

Winsome,losesome

28March2016
INDIA|AUTOMOBILES|CompanyUpdate

WerevisitourthesisonM&MandretainourNeutralstanceincorporatingthefollowing NEUTRAL(Maintain)
changes: CMPRS1249
1) ExpectM&Mtobenefitfromarevivalintractordemandandincreaseourestimates
TARGETRS1350(+8%)
to10%volumegrowthinFY17from7.5%earlier

2) 100bpsmarginimpact,asHaridwarfiscalbenefitsexpire
COMPANYDATA
3) InfrastructurecesstomarginallyimpactUVdemand O/SSHARES(MN): 621
4) Automotive market share under threat. Maruti launched its first SUV at a very cut MARKETCAP(RSBN): 776
throatprice.FreshentryinthecompactSUVsegmentbyotherOEMs MARKETCAP(USDBN): 11.6
5) Newlaunchmomentumfadingout. 52WKHI/LO(RS): 1441/1092
LIQUIDITY3M(USDMN): 15.8
We reduce our estimates by 11%, roll over valuations to FY18, and change our TP to Rs PARVALUE(RS): 5
1,350(Rs1,320previously)
SHAREHOLDINGPATTERN,%

Dec15 Sep15 Jul15


Tractorstorevive,but PROMOTERS: 27.1 25.6 25.6
Weexpecttractorindustrytogrowat10%/13%inFY17/18andexpectM&Mtomaintainits FII/NRI: 39.4 41.3 41.8
market share (despite increasing competitive intensity as other producers gear up with FI/MF: 19.8 19.2 18.2
launches) in its mainstay 4150HP. While discounting is currently high, we expect these NONPRO: 7.1 2.7 2.4
pressurestodissipateasmarketsimprove. PUBLIC&OTHERS: 6.6 11.1 10.7

PRICEPERFORMANCE,%
UVbusiness:Headwindspersist 1MTH 3MTH 1YR
UVbusinessislikelytoseeheadwindswithincrementalpressuresbystatesandthecentral ABS 3.1 0.3 5.6
governments focus towards dissuading diesel vehicles. With petrol engines still a distant RELTOBSE 5.2 1.7 15.7
reality (in overall mix), negative sentiment is likely to impact growth. Further, with new
PRICEVS.SENSEX
launchmomentumfadingout,especiallyforTUV300,competitivepressuresshouldincrease
withcompetitionliningupaslewoflaunchesintheUVspace.Whilewecontinuetobuildin 170
18%volumegrowthinFY17forM&Msautomotivesegment(mainlydrivenbytherecently
launchedKUV100)welimitrevenueassumptionto9%(giventhatincrementalvolumesare 140
drivenbylowerticketsizeproducts).
110
Fiscalbenefitsfadingtopressuremargins
The companys management recently highlighted that fiscal benefits from its Haridwar 80
plant, which manufactures Scorpio, Bolero, and threewheelers (100,000 units/annum),
expired in Q3FY16. The company was reaping benefits of no excise and 50% income tax 50
waiverontheoutputfromthisplant.Withthesebenefitsbehind,themanagementexpects Apr14 Oct14 Apr15 Oct15
operating margins to take a hit of over 100bps. Moreover, infrastructure cess (will be M&M BSESensex

majorlypassedon)andlowmarginproductssuchasKUV100andTUV300increasemargin Source:PhillipCapitalIndiaResearch
pressure. To add to negative sentiment, increasing commodity prices could impact
profitability further. We reduce our FY17 EBITDA margin estimates by 100bps to factor in KEYFINANCIALS
pressureintheautomotivebusinessandhigherRMpricesthefallwouldbepartlyoffset Rsmn FY16E FY17E FY18E
NetSales 386,319 424,339 476,447
byimprovingFESmarginsdrivenbypositiveoperatingleverage.
EBIDTA 51,960 53,679 61,223

NetProfit 33,194 34,645 39,442


MaintainNeutral EPS,Rs 56.1 58.6 66.7
While there are some positives in terms of the tractor segment expected to do well, PER,x 22.3 21.3 18.7
headwindsintheautomotivesegmentkeepusworried.WereduceourFY18estimatesby EV/EBIDTA,x 14.4 13.8 11.9
11%,rollovervaluationtoFY18,andmaintainNeutralwithanSOTPbasedtargetpriceofRs P/BV,x 3.3 3.0 2.7
1,350. We value the standalone business at Rs 1,000 (15x FY18 earnings) and subsidiaries ROE,% 15.0 14.1 14.4
andlistedinvestmentsatRs350. Debt/Equity(%) 9.6 7.3 5.6
Source:PhillipCapitalIndiaResearchEst.

Page|30|PHILLIPCAPITALINDIARESEARCH

MAHINDRA&MAHINDRA COMPANYUPDATE

Financials

IncomeStatement CashFlow
Y/EMar,Rsmn FY15 FY16e FY17e FY18e Y/EMar,Rsmn FY15 FY16e FY17e FY18e
Netsales 374,683 386,319 424,339 476,447 Pretaxprofit 40,215 45,223 47,200 54,403
Growth,% (3) 3 10 12 Depreciation 10,980 12,400 13,225 13,975
OtherOperatingincome 0 0 0 0 Chginworkingcapital 6,960 120 2,905 4,430
Totalincome 374,683 386,319 424,339 476,447 Totaltaxpaid 8,342 12,029 12,555 14,961
Rawmaterialexpenses 257,269 263,663 291,733 327,557 Otheroperatingactivities 1,805 5,663 6,746 7,155
Employeeexpenses 24,936 27,042 30,128 33,351 Cashflowfromoperatingactivities 48,008 40,050 44,029 50,692
OtherOperatingexpenses 46,445 43,654 48,799 54,315 Capitalexpenditure 21,232 30,000 25,000 25,000
EBITDA(Core) 46,033 51,960 53,679 61,223 Otherinvestingactivities 11,718 1,518 2,041 2,035
Growth,% (12.3) 12.9 3.3 14.1 Cashflowfrominvestingactivities 32,950 28,482 22,959 22,965
Margin,% 12.3 13.5 12.7 12.9 Freecashflow 15,058 11,568 21,070 27,727
Depreciation (10,980) (12,400) (13,225) (13,975) Debtraised/(repaid) 12,696 9,115 3,190 2,712
EBIT 35,053 39,560 40,454 47,249 Otherfinancingactivities 11,726 12,086 12,217 13,505
Growth,% (20.1) 12.9 2.3 16.8 Cashflowfromfinancingactivities 24,422 21,200 15,407 16,216
Margin,% 9.4 10.2 9.5 9.9 Netchgincash 9,363 9,632 5,663 11,511
OtherNonOperatingIncome 8,201 7,791 8,570 8,827
Pretaxprofit 43,572 45,223 47,200 54,403
Taxprovided 9,339 12,029 12,555 14,961 ValuationRatios
Profitaftertax 34,233 33,194 34,645 39,442
FY15 FY16e FY17e FY18e
Others(Minorities,Associates) 0 0 0 0
PerSharedata
NetProfit 34,233 33,194 34,645 39,442
EPS(INR) 52.2 56.1 58.6 66.7
Growth,% (25.1) 7.5 4.4 13.8
Growth,% (25.2) 7.5 4.4 13.8
NetProfit(adjusted) 30,876 33,194 34,645 39,442
BookNAV/share(INR) 336.0 375.3 416.3 463.0
Unadj.shares(m) 592 592 592 592
FDEPS(INR) 52.2 56.1 58.6 66.7
Wtdavgshares(m) 592 592 592 592
CEPS(INR) 65.1 77.1 80.9 90.3
CFPS(INR) 78.1 65.2 72.5 84.1
DPS(INR) (17.4) (16.8) (17.6) (20.0)
BalanceSheet Returnratios
Y/EMar,Rsmn FY15 FY16e FY17e FY18e Returnonassets(%) 10.0 9.2 9.0 9.3
Cash&bank 21,053 11,421 17,084 28,595 Returnonequity(%) 15.5 15.0 14.1 14.4
Debtors 24,241 24,994 27,453 30,825 Returnoncapitalemployed(%) 13.9 12.7 12.3 12.9
Inventory 28,152 29,026 31,883 35,798 Turnoverratios
Loans&advances 0 0 0 0 Assetturnover(x) 6.5 5.8 5.3 5.5
Totalcurrentassets 88,503 82,003 94,639 115,258 Sales/Totalassets(x) 1.1 1.1 1.1 1.1
Investments 161,159 169,216 177,677 186,561 Sales/NetFA(x) 3.9 3.5 3.4 3.5
Grossfixedassets 165,414 195,414 220,414 245,414 Workingcapital/Sales(x) (0.1) (0.1) (0.1) (0.1)
Less:Depreciation 64,607 77,007 90,232 104,207 Fixedcapital/Sales(x) 0.4 0.5 0.5 0.5
Netfixedassets 100,807 118,407 130,182 141,207 Receivabledays 23.6 23.6 23.6 23.6
Totalassets 350,468 369,627 402,498 443,026 Inventorydays 27.4 27.4 27.4 27.4
Currentliabilities 97,117 100,369 110,247 123,785 Payabledays 64.8 65.7 65.1 65.2
Noncurrentliabilities 54,581 47,252 45,994 45,374 Workingcapitaldays (28.9) (28.1) (28.1) (28.4)
Totalliabilities 151,698 147,621 156,241 169,159 Liquidityratios
Paidupcapital 2,958 2,958 2,958 2,958 Currentratio(x) 0.9 0.8 0.9 0.9
Reserves&surplus 195,812 219,048 243,300 270,909 Quickratio(x) 0.6 0.5 0.6 0.6
Shareholdersequity 198,770 222,006 246,257 273,867 Interestcover(x) 11.5 18.6 22.2 28.3
Totalequity&liabilities 350,468 369,627 402,498 443,026 Totaldebt/Equity(%) 15.3 9.6 7.3 5.6
Netdebt/Equity(%) 4.7 4.4 0.4 (4.8)
Source:Company,PhillipCapitalIndiaResearchEstimates
Valuation
PER(x) 23.9 22.3 21.3 18.7
PEG(x)yoygrowth (0.9) 3.0 4.9 1.4
Price/Book(x) 3.7 3.3 3.0 2.7
Yield(%) (1.4) (1.3) (1.4) (1.6)
EV/Netsales(x) 2.0 1.9 1.7 1.5
EV/EBITDA(x) 16.3 14.4 13.8 11.9
EV/EBIT(x) 21.3 18.9 18.3 15.4

Page|31|PHILLIPCAPITALINDIARESEARCH

AUTOMOBILE SECTORUPDATE

StockPrice,PriceTargetandRatingHistory(Mahindra&Mahindra)
1500
B(TP1550)

B(TP1500)
B(TP1500)
1300 B(TP1310) B(TP1452)
N(TP1320)
B(TP1500)

1100

B(TP981)
B(TP1094)
B(TP1034)

900 B(TP1072)

700

500
M A13 J13 J13 A13 O13 N13 J14 F14 A14 M J14 A14 S14 N14 J15 F15 M M J15 A15 S15 N15 D15 F16
13 14 15 15

RatingMethodology
Weratestockonabsolutereturnbasis.Ourtargetpriceforthestockshasaninvestmenthorizonofone
year.

Rating Criteria Definition


BUY >=+15% Targetpriceisequaltoormorethan15%ofcurrentmarketprice
NEUTRAL 15%>to<+15% Targetpriceislessthan+15%butmorethan15%
SELL <=15% Targetpriceislessthanorequalto15%.

Page|32|PHILLIPCAPITALINDIARESEARCH

AUTOMOBILE SECTORUPDATE

Management
VineetBhatnagar(ManagingDirector) (9122)24831919
KinshukBhartiTiwari(HeadInstitutionalEquity) (9122)66679946
JigneshShah(HeadEquityDerivatives) (9122)66679735
Research
Automobiles Infrastructure&ITServices Strategy
DhawalDoshi (9122)66679769 VibhorSinghal (9122)66679949 NaveenKulkarni,CFA,FRM (9122)66679947
NiteshSharma,CFA (9122)66679965 Logistics,Transportation&Midcap AnindyaBhowmik (9122)66679764
AgriInputs VikramSuryavanshi (9122)66679951 Telecom
GauriAnand (9122)66679943 Media NaveenKulkarni,CFA,FRM (9122)66679947
Banking,NBFCs ManojBehera (9122)66679973 ManojBehera (9122)66679973
ManishAgarwalla (9122)66679962 Metals Technicals
PradeepAgrawal (9122)66679953 DhawalDoshi (9122)66679769 SubodhGupta,CMT (9122)66679762
PareshJain (9122)66679948 YashDoshi (9122)66679987 ProductionManager
Consumer Midcap GaneshDeorukhkar (9122)66679966
NaveenKulkarni,CFA,FRM (9122)66679947 AmolRao (9122)66679952 Editor
JubilJain (9122)66679766 Oil&Gas RoshanSony 9819972726
Cement SabriHazarika (9122)66679756 Sr.ManagerEquitiesSupport
VaibhavAgarwal (9122)66679967 Pharma&SpecialityChem RosieFerns (9122)66679971
Economics SuryaPatra (9122)66679768
AnjaliVerma (9122)66679969 MehulSheth (9122)66679996
Engineering,CapitalGoods MidCaps&DatabaseManager
JonasBhutta (9122)66679759 DeepakAgarwal (9122)66679944
HrishikeshBhagat (9122)66679986
Sales&Distribution CorporateCommunications
AshvinPatil (9122)66679991 SalesTrader ZarineDamania (9122)66679976
ShubhangiAgrawal (9122)66679964 DileshDoshi (9122)66679747
KishorBinwal (9122)66679989 SuniilPandit (9122)66679745
BhavinShah (9122)66679974 Execution
AshkaMehtaGulati (9122)66679934 MayurShah (9122)66679945

ContactInformation(RegionalMemberCompanies)

SINGAPORE:PhillipSecuritiesPteLtd MALAYSIA:PhillipCapitalManagementSdnBhd HONGKONG:PhillipSecurities(HK)Ltd
250NorthBridgeRoad,#0600RafflesCityTower, B36BlockBLevel3,MeganAvenueII, 11/FUnitedCentre95QueenswayHongKong
Singapore179101 No.12,JalanYapKwanSeng,50450KualaLumpur Tel(852)22776600Fax:(852)28685307
Tel:(65)65336001Fax:(65)65353834 Tel(60)321628841Fax(60)321665099 www.phillip.com.hk
www.phillip.com.sg www.poems.com.my

JAPAN:PhillipSecuritiesJapan,Ltd INDONESIA:PTPhillipSecuritiesIndonesia CHINA:PhillipFinancialAdvisory(Shanghai)Co.Ltd.


42NihonbashiKabutocho,Chuoku ANZTowerLevel23B,JlJendSudirmanKav33A, No550YanAnEastRoad,OceanTowerUnit2318
Tokyo1030026 Jakarta10220,Indonesia Shanghai200001
Tel:(81)336662101Fax:(81)336640141 Tel(62)2157900800Fax:(62)2157900809 Tel(86)2151699200Fax:(86)2163512940
www.phillip.co.jp www.phillip.co.id www.phillip.com.cn

THAILAND:PhillipSecurities(Thailand)PublicCo.Ltd. FRANCE:King&ShaxsonCapitalLtd. UNITEDKINGDOM:King&ShaxsonLtd.


15thFloor,VorawatBuilding,849SilomRoad, 3rdFloor,35RuedelaBienfaisance 6thFloor,CandlewickHouse,120CannonStreet
Silom,Bangrak,Bangkok10500Thailand 75008ParisFrance London,EC4N6AS
Tel(66)222680999Fax:(66)222680921 Tel(33)145633100Fax:(33)145636017 Tel(44)2079295300Fax:(44)2072836835
www.phillip.co.th www.kingandshaxson.com www.kingandshaxson.com

UNITEDSTATES:PhillipFuturesInc. AUSTRALIA:PhillipCapitalAustralia SRILANKA:AshaPhillipSecuritiesLimited


141WJacksonBlvdSte3050 Level37,530CollinsStreet Level4,MillenniumHouse,46/58NavamMawatha,
TheChicagoBoardofTradeBuilding Melbourne,Victoria3000,Australia Colombo2,SriLanka
Chicago,IL60604USA Tel:(61)396298380Fax:(61)396148309 Tel:(94)112429100Fax:(94)112429199
Tel(1)3123569000Fax:(1)3123569005 www.phillipcapital.com.au www.ashaphillip.net/home.htm
INDIA:PhillipCapital(India)PrivateLimited
No.1,18thFloor,UrmiEstate,95GanpatraoKadamMarg,LowerParelWest,Mumbai400013
Tel:(9122)23002999Fax:(9122)66679955www.phillipcapital.in

Page|33|PHILLIPCAPITALINDIARESEARCH

AUTOMOBILE SECTORUPDATE

DisclosuresandDisclaimers

PhillipCapital(India)Pvt.Ltd.hasthreeindependentequityresearchgroups:InstitutionalEquities,InstitutionalEquityDerivatives,andPrivateClientGroup.
ThisreporthasbeenpreparedbyInstitutionalEquitiesGroup.Theviewsandopinionsexpressedinthisdocumentmay,maynotmatch,ormaybecontraryat
timeswiththeviews,estimates,rating,andtargetpriceoftheotherequityresearchgroupsofPhillipCapital(India)Pvt.Ltd.
ThisreportisissuedbyPhillipCapital(India)Pvt.Ltd.,whichisregulatedbytheSEBI.PhillipCapital(India)Pvt.Ltd.isasubsidiaryofPhillip(Mauritius)Pvt.Ltd.
References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for
information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as
solicitationorasofferingadviceforthepurposesofthepurchaseorsaleofanysecurity,investment,orderivatives.Theinformationandopinionscontainedin
thereportwereconsideredbyPCIPLtobevalidwhenpublished.ThereportalsocontainsinformationprovidedtoPCIPLbythirdparties.Thesourceofsuch
informationwillusuallybedisclosedinthereport.WhilstPCIPLhastakenallreasonablestepstoensurethatthisinformationiscorrect,PCIPLdoesnotoffer
anywarrantyastotheaccuracyorcompletenessofsuchinformation.Anypersonplacingrelianceonthereporttoundertaketradingdoessoentirelyathisor
herownriskandPCIPLdoesnotacceptanyliabilityasaresult.SecuritiesandDerivativesmarketsmaybesubjecttorapidandunexpectedpricemovements
andpastperformanceisnotnecessarilyanindicationoffutureperformance.
Thisreportdoesnotregardthespecificinvestmentobjectives,financialsituation,andtheparticularneedsofanyspecificpersonwhomayreceivethisreport.
Investorsmustundertakeindependentanalysiswiththeirownlegal,tax,andfinancialadvisorsandreachtheirownconclusionsregardingtheappropriateness
of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future
prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the
securitiesmentionedwithinit.Theinformationcontainedintheresearchreportsmayhavebeentakenfromtradeandstatisticalservicesandothersources,
whichPCILbelieveisreliable.PhillipCapital(India)Pvt.Ltd.oranyofitsgroup/associate/affiliatecompaniesdonotguaranteethatsuchinformationisaccurate
orcompleteanditshouldnotberelieduponassuch.Anyopinionsexpressedreflectjudgmentsatthisdateandaresubjecttochangewithoutnotice.
Important:These disclosuresanddisclaimers mustbereadinconjunctionwiththeresearchreportofwhichitformspart.Receiptanduseof theresearch
reportissubjecttoallaspectsofthesedisclosuresanddisclaimers.Additionalinformationabouttheissuersandsecuritiesdiscussedinthisresearchreportis
availableonrequest.
Certifications:Theresearchanalyst(s)whopreparedthisresearchreportherebycertifiesthattheviewsexpressedinthisresearchreportaccuratelyreflectthe
researchanalystspersonalviewsaboutallofthesubjectissuersand/orsecurities,thattheanalyst(s)havenoknownconflictofinterestandnopartofthe
researchanalystscompensationwas,is,orwillbe,directlyorindirectly,relatedtothespecificviewsorrecommendationscontainedinthisresearchreport.
AdditionalDisclosuresofInterest:
UnlessspecificallymentionedinPointNo.9below:
1. TheResearchAnalyst(s),PCIL,oritsassociatesorrelativesoftheResearchAnalystdoesnothaveanyfinancialinterestinthecompany(ies)coveredin
thisreport.
2. TheResearchAnalyst,PCILoritsassociatesorrelativesoftheResearchAnalystaffiliatescollectivelydonotholdmorethan1%ofthesecuritiesofthe
company(ies)coveredinthisreportasoftheendofthemonthimmediatelyprecedingthedistributionoftheresearchreport.
3. TheResearchAnalyst,his/herassociate,his/herrelative,andPCIL,donothaveanyothermaterialconflictofinterestatthetimeofpublicationofthis
researchreport.
4. TheResearchAnalyst,PCIL,anditsassociateshavenotreceivedcompensationforinvestmentbankingormerchantbankingorbrokerageservicesorfor
anyotherproductsorservicesfromthecompany(ies)coveredinthisreport,inthepasttwelvemonths.
5. TheResearchAnalyst,PCILoritsassociateshavenotmanagedorcomanagedintheprevioustwelvemonths,aprivateorpublicofferingofsecuritiesfor
thecompany(ies)coveredinthisreport.
6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in
connectionwiththeresearchreport.
7. TheResearchAnalysthasnotservedasanOfficer,Director,oremployeeofthecompany(ies)coveredintheResearchreport.
8. TheResearchAnalystandPCILhasnotbeenengagedinmarketmakingactivityforthecompany(ies)coveredintheResearchreport.
9. DetailsofPCIL,ResearchAnalystanditsassociatespertainingtothecompaniescoveredintheResearchreport:

Sr.no. Particulars Yes/No


1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for No
investmentbankingtransactionbyPCIL
2 WhetherResearchAnalyst,PCILoritsassociatesorrelativesoftheResearchAnalystaffiliatescollectivelyholdmorethan1%ofthe No
company(ies)coveredintheResearchreport
3 WhethercompensationhasbeenreceivedbyPCILoritsassociatesfromthecompany(ies)coveredintheResearchreport No
4 PCIL or its affiliates have managed or comanaged in the previous twelve months a private or public offering of securities for the No
company(ies)coveredintheResearchreport
5 ResearchAnalyst, hisassociate,PCILoritsassociateshavereceived compensationforinvestmentbankingormerchantbanking or No
brokerage services or for any other products or services from the company(ies) covered in the Research report, in the lasttwelve
months

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment
banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek
compensationforinvestmentbankingservicesfromthesubjectissuersinthenextthree(3)months.PhillipCapital(India)Pvt.Ltdisnotamarketmakerinthe
securitiesmentionedinthisresearchreport,althoughit,oritsaffiliates/employees,mayhavepositionsin,purchaseorsell,orbemateriallyinterestedinany
ofthesecuritiescoveredinthereport.
Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or
particularrequirementsofanyindividualrecipienthereof.Certainsecuritiesmaygiverisetosubstantialrisksandmaynotbesuitableforcertaininvestors.
Eachinvestormustmakeitsowndeterminationastotheappropriatenessofanysecuritiesreferredtointhisresearchreportbaseduponthelegal,taxand
accountingconsiderationsapplicabletosuchinvestoranditsowninvestmentobjectivesorstrategy,itsfinancialsituationanditsinvestingexperience.The
value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or
politicalfactors.Pastperformanceisnotnecessarilyindicativeoffutureperformanceorresults.

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AUTOMOBILE SECTORUPDATE

Sources,CompletenessandAccuracy:ThematerialhereinisbaseduponinformationobtainedfromsourcesthatPCIPLandtheresearchanalystbelievetobe
reliable,butneitherPCIPLnortheresearchanalystrepresentsorguaranteesthattheinformationcontainedhereinisaccurateorcompleteanditshouldnot
berelieduponassuch.Opinionsexpressedhereinarecurrentopinionsasofthedateappearingonthismaterial,andaresubjecttochangewithoutnotice.
Furthermore,PCIPLisundernoobligationtoupdateorkeeptheinformationcurrent.Withoutlimitinganyoftheforegoing,innoeventshallPCIL,anyofits
affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind
includingbutnotlimitedtoanydirectorconsequentiallossordamage,howeverarising,fromtheuseofthisdocument.
Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No
reprintingorreproduction,inwholeorinpart,ispermittedwithoutthePCIPLspriorconsent,exceptthatarecipientmayreprintitforinternalcirculationonly
andonlyifitisreprintedinitsentirety.
Caution:Riskoflossintrading/investmentcanbesubstantialandevenmorethantheamount/margingivenbyyou.Therecipientshouldcarefullyconsider
whether trading/investment is appropriate for the recipient in light of the recipients experience, objectives, financial resources and other relevant
circumstances.PCIPLandanyofitsemployees,directors,associates,groupentities,oraffiliatesshallnotbeliableforlosses,ifany,incurredbytherecipient.
Therecipientisfurthercautionedthattrading/investmentsinfinancialmarketsaresubjecttomarketrisksandareadvisedtoseektrading/investmentadvice
before investing. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PCIPL and any of its employees, directors,
associates, group entities, affiliates are not inducing the recipient for trading/investing in the financial market(s). Trading/Investment decision is the sole
responsibilityoftherecipient.
ForU.S.personsonly:ThisresearchreportisaproductofPhillipCapital(India)PvtLtd.,whichistheemployeroftheresearchanalyst(s)whohaspreparedthe
researchreport.Theresearchanalyst(s)preparingtheresearchreportis/areresidentoutsidetheUnitedStates(U.S.)andarenotassociatedpersonsofany
U.S.regulated brokerdealer and therefore the analyst(s) is/are not subject to supervision by a U.S. brokerdealer, and is/are not required to satisfy the
regulatorylicensingrequirementsofFINRAorrequiredtootherwisecomplywithU.S.rulesorregulationsregarding,amongotherthings,communicationswith
asubjectcompany,publicappearances,andtradingsecuritiesheldbyaresearchanalystaccount.
This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a6(b)(4) of the U.S.
SecuritiesandExchangeAct,1934(theExchangeAct)andinterpretationsthereofbytheU.S.SecuritiesandExchangeCommission(SEC)inrelianceonRule15a
6(a)(2).IftherecipientofthisreportisnotaMajorInstitutionalInvestorasspecifiedabove,thenitshouldnotactuponthisreportandreturnthesametothe
sender.Further,thisreportmaynotbecopied,duplicated,and/ortransmittedonwardtoanyU.S.person,whichisnotaMajorInstitutionalInvestor.
InrelianceontheexemptionfromregistrationprovidedbyRule15a6oftheExchangeActandinterpretationsthereofbytheSECinordertoconductcertain
businesswithMajorInstitutionalInvestors,PhillipCapital(India)PvtLtd.hasenteredintoanagreementwithaU.S.registeredbrokerdealer,Decker&Co,LLC.
TransactionsinsecuritiesdiscussedinthisresearchreportshouldbeeffectedthroughDecker&Co,LLCoranotherU.S.registeredbrokerdealer

PhillipCapital(India)Pvt.Ltd.
Registeredoffice:No.1,18thFloor,UrmiEstate,95GanpatraoKadamMarg,LowerParelWest,Mumbai400013

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