Description
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
Fundamental Analysis Of Mahindra & Mahindra
EXECUTIVE SUMMARY
India's domestic automotive industry, enjoyed high
growth in fnancial year-05, continuing the healthy
trend set in fnancial year-04. Increased industrial
growth contributed to the upward trend. ll the
automotive industry segments in which !"! has a
presence witnessed a growth in demand in fnancial
year-05. #he Indian tractor industry too saw an upward
trend a$ter a severe downturn period, due to $avorable
monsoon and better credit terms helped to build
positive sentiments. #he major players in the
%ommercial &ehicle 'egment are sho( )eyland )td,
*industan !otors )td, #elco, &olvo India +vt.)td, ,ajaj
#empo )td, -icher !otors )td, !ahindra " !ahindra
)td, and 'waraj !a.da )td.
!ahindra " !ahindra )imited /!"!0 is the
1agship company o$ around 2s. 3000 crore !ahindra
4roup, which has a signifcant presence in (ey sectors
o$ the Indian economy. consistently high per$ormer,
!"! is one o$ the most respected companies in the
country. 'et up in 5645 to ma(e general-purpose utility
vehicles $or the Indian mar(et, !"! soon branched out
Fundamental Analysis Of Mahindra & Mahindra
into manu$acturing agricultural tractors and light
commercial vehicles /)%&s0. #he company later
e7panded its operations $rom automobiles and tractors
to secure a signifcant presence in many more
important sectors. #he company has, over the years,
trans$ormed itsel$ into a 4roup that caters to the Indian
and overseas mar(ets with a presence in vehicles, $arm
e8uipment, in$ormation technology, trade and fnance
related services, and in$rastructure development.
!ahindra " !ahindra )td /!"!0 is a leading player in
the Indian utility vehicles and tractors segment with
mar(et shares o$ 46.59 in :eeps ; !5.69 in #ractors in the
?@>005.
#his study tries to cover the industry related
data and in depth company study and an overview o$
the economy, evaluates the company on various
valuation models.
Fundamental Analysis Of Mahindra & Mahindra
THEORETICAL BACKGROUND
FUNDAMENTAL ANALYSIS:
?undamental analysis is the e7amination o$ the
underlying $orces that aAect the well being o$ the
economy, industry groups, and companies. s with most
analysis, the goal is to derive a $orecast and proft $rom
$uture price movements. t the company level,
$undamental analysis may involve e7amination o$
fnancial data, management, business concept and
competition. t the industry level, there might be an
e7amination o$ supply and demand $orces $or the
products oAered. ?or the national economy, $undamental
analysis might $ocus on economic data to assess the
present and $uture growth o$ the economy. #o $orecast
$uture stoc( prices, $undamental analysis combines
economic, industry, and company analysis to derive a
stoc('s current $air value and $orecast $uture value. I$
$air value is not e8ual to the current stoc( price,
$undamental analysts believe that the stoc( is either over
or under valued and the mar(et price will ultimately
gravitate towards $air value. ?undamentalists do not
heed the advice o$ the random wal(ers and believe that
Fundamental Analysis Of Mahindra & Mahindra
mar(ets are wea( $orm eAicient. ,y believing that prices
do not accurately re1ect all available in$ormation,
$undamental analysts loo( to capitali.e on perceived
price discrepancies.
STRENGTHS AND WEAKNESS OF FUNDAMENTAL
ANALYSIS
Long-term Trend:
?undamental analysis is good $or long-term
investments based on long-term trends, very long-term.
#he ability to identi$y and predict long-term economic,
demographic, technological or consumer trends can
beneft patient investors who pic( the right industry
groups or companies.
!"#$e S%ott&ng:
'ound $undamental analysis will help identi$y
companies that represent good value. 'ome o$ the most
legendary investors thin( long-term and value. 4raham
and Bodd, Carren ,uAett and
hn DeA are seen as the
champions o$ value investing. ?undamental analysis can
Fundamental Analysis Of Mahindra & Mahindra
help uncover companies with valuable assets, a strong
balance sheet, stable earnings and staying power.
B$&ne A'$men:
Ene o$ the most obvious, but less tangible, rewards
o$ $undamental analysis is the development o$ a thorough
understanding o$ the business. $ter such painsta(ing
research and analysis, an investor will be $amiliar with
the (ey revenue and proft drivers behind a company.
-arnings and earnings e7pectations can be potent
drivers o$ e8uity prices. -ven some technicians will
agree to that. good understanding can help investors
avoid companies that are prone to short$alls and identi$y
those that continue to deliver. In addition to
understanding the business, $undamental analysis allows
investors to develop an understanding o$ the (ey value
drivers and companies within an industry. Its industry
group heavily in1uences a stoc(Fs price. ,y studying
these groups, investors can better position themselves to
identi$y opportunities that are high-ris( /tech0, low-ris(
/utilities0, growth oriented /computer0, value driven /oil0,
Fundamental Analysis Of Mahindra & Mahindra
non-cyclical /consumer staples0, cyclical /transportation0
or income oriented /high yield0.
Kno(&ng W)o* W)o:
'toc(s move as a group. ,y understanding a
company's business, investors can better position
themselves to categori.e stoc(s within their relevant
industry group. ,usiness can change rapidly and with it
the revenue mi7 o$ a company. #his happened to many o$
the pure internet retailers, which were not really
internet companies, but plain retailers. Gnowing a
company's business and being able to place it in a group
can ma(e a huge diAerence in relative valuations.
WEAKNESS
T&me Contr"&nt:
Fundamental Analysis Of Mahindra & Mahindra
?undamental analysis may oAer e7cellent insights,
but it can be e7traordinarily time consuming. #ime-
consuming models o$ten produce valuations that are
contradictory to the current price.
Ind$tr+,Com%"n+ S%e'&-':
&aluation techni8ues vary depending on the industry
group and specifcs o$ each company. ?or this reason, a
diAerent techni8ue and model is re8uired $or diAerent
industries and diAerent companies. #his can get 8uite
time consuming and limit the amount o$ research that
can be per$ormed.
S$./e't&0&t+:
?air value is based on assumptions. ny changes to
growth or multiplier assumptions can greatly alter the
ultimate valuation. ?undamental analysts are generally
aware o$ this and use sensitivity analysis to present a
base-case valuation, a best-case valuation and a worst-
case valuation. *owever, even on a worst case, most
Fundamental Analysis Of Mahindra & Mahindra
models are almost always bullish, the only 8uestion is
how much so.
An"#+t B&":
#he majority o$ the in$ormation that goes into the
analysis comes $rom the company itsel$. %ompanies
employ investor relations managers specifcally to
handle the analyst community and release in$ormation.
Introd$'t&on to In0etment !"#$"t&on
-very asset, fnancial as well as real, has value. #he
(ey to success$ully investing in and managing these
assets lies in understanding not only what the value is,
but the sources o$ the value. ny asset can be valued,
but some assets are easier to value than others, and the
details o$ valuation will vary $rom case to case. #hus, the
valuation o$ a share o$ a real estate property will re8uire
diAerent in$ormation and $ollow a diAerent $ormat $rom
the valuation o$ a publicly traded stoc(. Chat is
surprisingH however, is not the diAerence in valuation
techni8ues across assets, but the degree o$ similarity in
Fundamental Analysis Of Mahindra & Mahindra
basic principles. #here is undeniably uncertainty
associated with valuation. E$ten that uncertainty comes
$rom the asset being valued, although the valuation
model may add to that uncertainty.
A 1HILOSO1HICAL BASIS FOR !ALUATION
surprising number o$ investors subscribe to the
Ibigger $oolJ theory o$ investing, which argues that the
value o$ an asset is irrelevant as long as there is a
Ibigger $oolJ around who is willing to buy the asset $rom
them. Chile this may provide a basis $or some profts, it
is a dangerous game to play, since there is no guarantee
that such an investor will still be around when the time
to sell comes.
postulate o$ sound investing is that an investor
does not pay more $or an asset than its worth. #his
statement may seem logic and obvious, but it is $orgotten
Fundamental Analysis Of Mahindra & Mahindra
and rediscovered at some time in every generation and
in every mar(et. #here are those who are disingenuous
enough to argue that value is in the eyes o$ the beholder,
and that any price can be justifed i$ there are other
investors willing to pay that price. #hat is patently
absurd. +erceptions may be all that matter when the
asset is a painting or a sculpture, but investors do not
/and should not0 buy most assets $or aesthetic or
emotional reasonsH fnancial assets are ac8uired $or the
cash 1ows e7pected $rom owning them. %onse8uently,
perceptions o$ value have to be bac(ed up by reality,
which implies that the price that is paid $or any asset
should re1ect the cash 1ows it is e7pected to generate.
#he models o$ valuation described in this boo( attempt
to relate value to the level and e7pected growth o$ these
cash 1ows.
#here are many areas in valuation where there is
room $or disagreement, including how to estimate true
value and how long it will ta(e $or prices to adjust to true
value. ,ut there is one point on which there can be no
disagreement. sset prices cannot be justifed merely by
using the argument that there will be other investors
around willing to pay a higher price in the $uture.
Fundamental Analysis Of Mahindra & Mahindra
THE ROLE OF !ALUATION
&aluation is use$ul in a wide range o$ tas(s. #he role
it plays, however, is diAerent in diAerent arenas. #he
$ollowing section lays out the relevance in port$olio
management, in ac8uisition analysis, and in corporate
fnance.
!"#$"t&on "nd 1ort2o#&o M"n"gement
#he role that valuation plays in port$olio
management is determined in large part by the
investment philosophy o$ the investor. &aluation plays a
minimal role in port$olio management $or a passive
investor, whereas it plays a larger role $or an active
investor. -ven among active investors, the nature and
role o$ valuation are diAerent $or diAerent types o$ active
investors can be categori.ed as either mar(et timers,
who trust in their abilities to $oresee the direction o$ the
overall stoc( or bond mar(ets, on security selection who
believe that their s(ills lie in $unding under or over
valued securities. !ar(et timers use valuation much less
Fundamental Analysis Of Mahindra & Mahindra
than do investors who pic( stoc(s, and the $ocus is on
mar(et valuation rather than on frm specifc valuation.
mong security selectors, valuation plays a central role
in port$olio management $or $undamental analysts and a
peripheral role $or technical analysis.
#he $ollowing subsections describe, in broad terms.
BiAerent philosophies and the role played by valuation in
each.
F$nd"ment"# An"#+t
#he underlying theme in $undamental analysis is
that the true value o$ the frm can be related to its
fnancial characteristics- its growth prospects, prospects,
ris( profle, and cash 1ows. ny deviation $rom this true
value is a sign that a stoc( is under or overvalued. It is a
long-term investment strategy and the assumptions
underlying it are thatK
/a0 #he relationship between value and the underlying
fnancial $actors can be measured.
/b0 #he relationship is stable over time.
/ c 0 Beviations $rom the relationship are corrected in a
reasonable time period.
&aluation is the central $ocus in $undamental analysis.
'ome analystsF use discounted cash 1ow models to value
Fundamental Analysis Of Mahindra & Mahindra
frms, while others use multiples such as price;earnings
and price;boo( value ratios. 'ince investors using this
approach hold a large number o$ Lundervalued' stoc(s in
their port$olios, their hope is that, on average, these
port$olios will do better than the mar(et.
Fr"n')&e B$+er
#he philosophy o$ a $ranchise buyer is best
e7pressed by an investor who has been very success$ul
at it -Carren ,uAet. ICe try to stic( to businesses we
believe we. 0s, and has
been used by them ever since. Cith this method, assets
are measured at their gross boo( value rather than at
net boo( value in order to produce a higher 2EI.
004 period as
against previous corresponding yearFs P9 indicating the
progressive economic activities. ,ut the global crude oil
Fundamental Analysis Of Mahindra & Mahindra
shoc( will defnitely have an adverse aAect on the
growth during fscal >005.
GRA1H @: INFLATION
#he average in1ation during fscal year >00=-04 was
around 5.59 as against the previous corresponding
fscals average o$ =.49, the prime movers being sugar,
edible oils, te7tiles, leather and leather products, basic
metals, alloys, iron and steel. Cith the increase o$ $ew
commodity prices mainly the crude oil prices have
increased the global in1ation levels $rom :une >004,
India being no e7ception to this. #he domestic $uel prices
have risen by more than 509 during the fscal >004-05
over last years. #he in1ation during the fscal year >004-
05 touched three and a hal$ years high o$ 3.==9 $or the
wee( ended ugust >3
th
>004 $rom 5.559 $or the wee(
Fundamental Analysis Of Mahindra & Mahindra
ended :une 5
th
>004 due to the e7cess money supply in
the economy. #he reasons $or the high in1ation are both
domestic and international. #he domestic reasons
include e7cess li8uidity in the mar(et and delay in
monsoon that increased the prices o$ essential
commodities. !=, the measure o$ money supply grew by
55.5 per cent in :uly >004, compared to 55.>5 per cent in
:uly >00=. #he international causes are ine7orable rise in
oil prices, global increase in the prices o$ commodities,
supply side shoc( and growth in chinaFs demand $or
goods. #his is cost-push in1ation wherein the supply
problems in a $ew important commodities push up prices
o$ commodities. 'ince crude oil import constitute almost
one third o$ the total e7ports, we can say that the
present situation is on account o$ imported in1ation. #o
chec( the rising prices, government too( some measures
li(e duty cuts on steel and oil products. 2eserve ,an( o$
India raised the %ash 2eserve 2atio to 59 $rom 4.59 in
two tranches o$ >5 basis points and has also cut the rate
o$ interest payable on eligible cash balances maintained
with it by ban(s by >50 basis points to =.5 percent. In
$act, the gradual reduction in the %22 over the past $ew
years in successive credit policies had been one o$ the
Fundamental Analysis Of Mahindra & Mahindra
major contributors $or the sustained reduction in the
interest rates on auto loans. #hese moves were e7pected
to draw out around 2s.3000 crore $rom the ban(ing
system. )ater, the in1ation was reduced to Q.>09 in the
last wee( o$ 'eptember. Cith the increase in the interest
rates the auto loans will become costlier, thus having an
adverse eAect on the auto industry sales. #he average
in1ation $or the fscal >004-05 is e7pected to stay around
P-P.59.
Ind$tr+:
S"#e:
#he automobile industry growth relies mainly on the
countryFs economic and general conditions. ny
slowdown in the economic momentum would defnitely
slowdown the growth o$ the industry. It can be seen $rom
the below chart that the industryFs sales is positively
correlated with the economic growth with a co-relation
o$ 0.6P.
Fundamental Analysis Of Mahindra & Mahindra
GRA1H A: GD1 AND AUTO SALES
(Source: www.indiabudget.nic.in)
R$..er 1r&'e:
Cith the increase in rural activities, the commercial
vehicles are e7pected to grow. 'ports 0 #he #ractor /?arm -8uipment0 Bivision ma(es
agricultural tractors and implements that are used in
conjunction with tractors, and has also ventured into
manu$acturing o$ industrial engines. #he #ractor
Bivision has won the coveted Beming pplication +ri.e
>00=, ma(ing it the only tractor manu$acturing company
in the world to secure this pri.e.
#he resurgence o$ the automotive industry and !"!'s
success in e7ploiting it, has created an opportunity to
strengthen the company through an entry into the uto
%omponents business, the growth o$ which is being
$ueled by both, domestic and e7port demand.
!"! employs around 55,500 people and has si7
state-o$-the-art manu$acturing $acilities spread over
500,000 s8uare meters. !"! has also set up two
satellite plants $or tractor assembly. It has 46 sales
oAices that are supported by a networ( o$ over Q30
dealers across the country. #his networ( is connected to
the %ompany's sales departments by an e7tensive I#
in$rastructure.
!"!'s outstanding manu$acturing and engineering
s(ills allow it to constantly innovate and launch new
Fundamental Analysis Of Mahindra & Mahindra
products $or the Indian mar(et. #he %ompany's
signifcant recent product launch, the L'corpioL, resulted
in the %ompany winning the Dational ward $or
outstanding in-house research and development $rom the
Bepartment o$ 'cience and Industry o$ the 4overnment
in >00=. #he %ompany has launched India's frst tractor
with turbo technology - the !ahindra 'arpanch 565 BI
'uper #urbo.
#he %ompany's commitment to technology-driven
innovation is re1ected in %ompany's plans o$ setting up
o$ the !ahindra 2esearch &alley, a $acility that will
house the %ompany's engineering research and product
development wings, under one roo$.
#he !"! philosophy o$ growth is centered on its
belie$ in people. s a result, the company has put in
place initiatives that see( to reward and retain the best
talent in the industry. !"! is also (nown $or its
progressive labour management practices. In the
community development sphere, the company has
implemented several programs that have benefted the
people and institutions in its areas o$ operations.
Fundamental Analysis Of Mahindra & Mahindra
M")&ndr" "nd M")&ndr" 'ont&n$e to .e " o#&d
'om%"n+
•%ompany has registered a >3 9 rise in its total vehicle
sales at 55,434 units $or ugust >004 as against 3,64P
units in the corresponding period previous fscal.
•S!ahindra %ityF was granted special economic .one
/'-T0 which includes 5009 ta7 holiday $or the ne7t 5
years and a 509 ta7 holiday $or the ne7t fve years,
e7emption $rom customs duty, central e7cise, service ta7,
education cess, central sales ta7, and all local ta7es
levied by the state.
•%ompany has set up $our overseas operations in
59 in
the budget will result in savings on the raw material
$ront as well. 'ince raw material costs account $or
almost 509 o$ revenues o$ auto companies in general,
this is a positive. lso, steel prices have shown some
signs o$ so$tening and this is li(ely to have a positive
impact on the margins o$ the players.
•Ce e7pect Indian auto majors to increase capital
e7penditure budget at an average o$ 49-59 o$ revenues
in ?@05 as against around >9-=9 historically. #his would
be towards product development and complying with
new environmental regulations. Cith !D%s willing to
sacrifce proftability $or growth in the short-term, it has
become imperative $or domestic players to spruce up
2"B eAorts. t the same time, cash 1ow position is
much stronger now given that most manu$acturers have
reduced wor(ing capital and debt. #his would mean
Fundamental Analysis Of Mahindra & Mahindra
fnancing bul( o$ incremental cape7 $rom internal
accruals.
1rod$'t 1r&'&ng:
#he Indian automobiles are slowly shi$ting away
$rom the price sensitiveness towards the value addition
concept. ,esides, even the 'I! has changed the norms
o$ classifcation $rom the previously $ollowed +rice basis
to the si.e; length o$ the vehicle. +reviously, the industry
was highly price sensitive and the sales were dependent
on price brac(ets. ,ut the Indian customerFs perception
is slowly changing and moving towards the value
additions such as the si.e o$ the car, the style, the
com$ort, the level o$ service oAered by the
manu$acturers, the variants available in the category etc.
-ven though the perception is changing, it is true that
still price plays an important role in the industry. #he
role o$ price may be very negligible in some segments,
but in the other segments they are very much reactive to
the price 1uctuations. #hus, the some players in
segments concentrate on the value addition to achieve
competitive advantage, while the other players in the
segments use price as weapon along with their core
Fundamental Analysis Of Mahindra & Mahindra
service. #hese players also oAer discounts during $estival
season to boost the sales.
Gro(t) Dr&0erK
LIn'ome #e0e#: #he level o$ income has got a direct
impact on the sales o$ the automobile. #he rise in income
level, results in increase in the number o$ people
crossing the income threshold, thus changing the profle
o$ customer. #he li$estyle o$ the people tends to change
automatically. Cith their increased buying power, they
would loo(out $or more com$ort. ?or -.g. when the
income o$ a lower middle class $amily increases, say they
Fundamental Analysis Of Mahindra & Mahindra
would li(e to shi$t $rom two-wheeler to buy a used car.
#his in turn increases the demand $or used car mar(et
and a good resale value $or the seller, thereby indirectly
increasing the sales o$ new cars. Cith the entry o$ !D%s
especially in the I#, I#-' and ,+E sector, the income
level and li$estyle, both are encouraging the younger
generation. #his has also reduced the average age o$ a
car buyer.
@LMonoon, R$r"# e'onom+: #he monsoon is the
bac(bone o$ the Indian agriculture. In India, around P5
percent o$ the national income is contributed by the
agricultural sector and constitutes about >> percent in
the 4B+. #he monsoons support the economic growth.
Cith the arrival o$ monsoons, the rural sector is
e7pected generate more jobs in the rural economy and
more income, thus increasing the purchasing power o$
people. long with this, even other industries
per$ormance will boost up. #hus, the demand mainly $or
utility vehicles increases with the better per$ormance o$
the rural sector.
Fundamental Analysis Of Mahindra & Mahindra
ALUed '"r Segment: #he industry saw a growth o$
around =0 percent in the used car segment during fscal
year. #he profle o$ an Indian %ar buyer has been
changing due to the increasing purchasing power.
,esides, the used cars are becoming aAordable due to
the reduced -8uated !onthly Installments /-!I0 and
increased repayment period. more active li$estyle,
rising disposable income and lower cost o$ replacement
are guiding the customers to change their cars once
every three years now. -ven though this mar(et is
unorgani.ed to a large e7tent, the organi.ed used car
segment is slowly growing in India. Cith the
manu$acturerFs only coming $orward to buy bac( their
models, has in turn helped the sales o$ new vehicles.
CLA0"&#".&#&t+ o2 -n"n'e 2or .ot) ne( "nd $ed
0e)&'#e: Cith the ease in the availability o$ fnance both
the new and used auto mar(et segment has been
witnessing a growth. +reviously, loans were provided
only $or the new vehicles, but now the fnancial
institutions have come $orward to oAer the loans $or used
vehicles too. Cith the increasing competition among the
fnance providers, they are reducing the rates day by
Fundamental Analysis Of Mahindra & Mahindra
day. long with this, even some companies go beyond the
industry benchmar( by fnancing up to seven year old
vehicles, thereby helping the growth o$ the used auto
segment. #he interest rate has almost halved in
comparison to the rates during 5663 and has touched as
low as P.5 percent per annum. uto manu$acturers are
using this as a tool to increase the sales. #hey are having
tie-ups with the fnance providers or 1oating their own
fnance companies.
DLIn2r"tr$'t$re: Bue to the increased investment in
in$rastructural projects especially in the development
and improvement o$ road projects, the overall transport
business activities and the tourism is e7pected to grow,
which in turn creates a good demand $or the utility
vehicles. #raAic on roads is growing at a rate o$ Q to 509
per annum while the vehicle population growth $or the
past $ew years is o$ the order o$ 5>9 per annum. 'o
there is a need $or the development o$ good
in$rastructural roads $or the growth o$ the automobile
industry. En the other side, poor road in$rastructure and
traAic congestion can be a bottlenec( in the growth o$
vehicle industry.
Fundamental Analysis Of Mahindra & Mahindra
ELEO%ort: Cith the global players loo(ing at developing
vehicles that can be launched in multiple mar(ets to
reduce their developmental cost and to reduce their
development costs, India is e7pected to increase its
e7ports. #hese giants are planning to use their Indian
$acilities as hub $or their worldwide operations. Cith this
move, 4eneral motors and Baimler %hrysler both have
their 2 " B center in ,angalore, which will have an
important role in International product development.
#oyota has plans to turn India into its lowest cost-
manu$acturing center. ! percentage
points $or ,), >.3 percentage points $or )) and >.5
percentage points $or #ata !otors.
'taA cost declined by PPbps and other e7penditure
increased 45bps as a percentage o$ net sales. +unjab
#ractors and !"! enjoyed the beneft o$ a reduced staA
cost by =Q0bps and >=0bps as a percentage o$ net sales.
+unjab #ractors maintained its margins in spite o$ a high
rise in raw material cost due to savings in staA cost and
other e7penditure.
M"/or 'om%et&tor "nd M"r3et %o&t&on:
+rior to 5630, +remier utomobiles )imited /+)0
and *industan !otors /*!0 had dominated the Indian
passenger car mar(et. Cith the entry o$ !aruti 59. #he
government has announced 43 new road projects with an
estimated cost o$ 2s400bn and it a levy o$ 50 paisa on
per liter o$ diesel will be collected $or the $unding o$ the
above road projects. ,y the year >050, the Indian sa$ety
regulations will be completely aligned with the -%-
regulations li(e anti-the$t, -!%, noise, $ront, side and
lateral collision, etc.
Em&&on: #he need to reduce vehicular pollution has
led to emission control through regulations in
conjunction with increasingly environment-$riendly
Fundamental Analysis Of Mahindra & Mahindra
technologies. It was only in 5665 that the frst stage
emission norms came into $orce $or petrol vehicles and in
566> $or diesel vehicles. ?rom pril 5665 mandatory
ftment o$ catalytic converters in new petrol passenger
cars sold in the $our metros o$ Belhi, %alcutta, !umbai
and %hennai along with supply o$ 000 norms. -uro II e8uivalent ,harat 'tage II norms
are in $orce $rom >005 in 4 metroFs o$ Belhi, !umbai,
%hennai and Gol(ata. 'ince India embar(ed on a $ormal
emission control regime only in 5665, there is a gap in
comparison with technologies available in the .00
9
5>.00
9
D&0&dend T"O 5>.35
9
5>.50
9
5>.50
9
In0etment " " K o2
tot"# S"#e
>>.Q4
9
>>.00
9
>>.00
9
C$rrent "et " " K
o2 "#e
>3.36
9
>6.00
9
>6.00
9
C$rrent #&".&#&t&e "
" K o2 "#e
>P.Q5
9
>P.00
9
>P.00
9
TABLE A: WEIGHTED A!ERAGE COST OF CA1ITAL
2is( $ree rate Q.009
!ar(et rate o$ return 5P.009
,eta 5.0>
Interest +aid /2s. %rore0 55.53
!ar(et value o$ debt /2s.
%rore0
6=4.3>
#a7 rate =Q.009
Cost of debt 3.48%
Cost of equit !".!8%
WACC 14.31%
Fundamental Analysis Of Mahindra & Mahindra
TABLE C: !ALUE DRI!ERS
>005 >00
4
>00=
!ar(et
%apitalisation
/2s. %rore0
545Q.P
0
+;- /#railing0
+;- 54.>4 55.5
3
5.3P
+;, =.>= 5.3P 5.5Q
TABLE D: INCOME STATEMENT
HR &n L"3)=
In'ome t"tement M"r *
G@
M"r *
GA
M"r*
GC
Gro S"#e =66PQ5
.=
445>P
5
53>6>4
.P
)essK -7cise 0 Q3546.
0P
64=Q3.
55
Net S"#e =66PQ5
.>P
=PPQ5
5.6
43354P
.43
O%er"t&ng In'ome
Tot"# In'ome =66PQ5
.>P
=PPQ5
5.6
43354P
.43
Le:
2aw !aterial O
+urchases
>55Q>=
.5
>500>
5.3
==5>3P
.5>
-mployee %ost =P665. =35>6. 45Q45.
Fundamental Analysis Of Mahindra & Mahindra
4P 0= =6
'elling -7penses 5663>.
5
565=6.
56
53535.
P
dministrative
-7penses
>505.=
>
>655.5
>
=5>3.>
5
Ether -7penses 56545.
>>
5353=.
66
>5Q65.
66
+rovisions 5>=5.=
5
4050.=
=
44.>5
!iscellaneous e7penses 55>4=.
>Q
55>3=.
63
565Q5.
P5
%hange in 'toc( /-0
Inc.; /O0 Bec.
P440.6
4
>=5Q.6
6
-
>54=.>
=
-7penses %apitalised 5Q43.6
Q
565Q.0
QQ
55QQ.5
5
mortisation 50Q0.6
5
43P.65 P.QP
Tot"# O%er"t&ng
EO%ene
=5P43P
.P3
=5>33
5.6
44=564
.P5
O%er"t&ng 1ro-t 4=533.
53
5=3=0.
05
45=55.
3=
Interest >5>Q5.
PQ
5550.=
6
QP6=.>
Q
Gro 1ro-t 5Q65>.
65
5>PQ6.
P>
=QP53.
5P
Bepreciation 5=6=3.
>6
5P05P.
Q
5P556.
6
1BT .e2ore non o%
"nd eOtr" ord
=6Q4.P
>
-
==QQ.0
3
>55=3.
PP
Don Eperaing Income 5>35.4
=
5Q=54.
33
56Q=>.
35
Fundamental Analysis Of Mahindra & Mahindra
ddK -7tra Erd. Income -
5Q>3.5
3
5QP5.P
5
>64Q.3
=
)essK -7tra Erd
-7penses
0 0 0
1BT Q5=5.4
Q
56Q0=.
45
4=356.
=
+rovision $or #a7ation =P0 5>=0 P=50
BeAered ta7ation ->5>0 =6>0 >P55
1AT 6P65.4
Q
5455=.
45
=4354.
=
+rior @ear /O0Inc.;
/-0-7p.
2eported +# 6P65.4
Q
5455=.
45
=4354.
=
,;? 0 =P5=6.
5
54Q06.
4=
+roft available $or
allocation
0 0 365P=.
Q=
+roposed -8uity
Bividend
0 P=30.P
4
50445.
43
Bividend #a7 0 35Q.55 5==Q.3
>
-8uity Bividend /90
E% IL@C LCC @GLGC
Fundamental Analysis Of Mahindra & Mahindra
TABLEE: E?1ECTED INCOME STATEMENT
EO%e'ted &n'ome
t"tement
M"r')
* GC
M"r')
* GD
M"r')
* GE
O%er"t&ng In'ome 43354P
.43
5=Q405
.5=
535QPQ
.>=
Non O%er"t&ng In'ome 56Q=>.
35
5QQ=4.
>4
56==0.
=>
O%er"t&ng eO%ene 44=564
.P5
43=PP5
.0>
5>Q560
.55
O%er"t&ng 1ro-t 45=55.
3=
5=Q40.
55
535QP.
Q>
Interet QP6=.>
Q
5>Q4.Q
P
5=63.>
3
Gro 1ro-t 5Q=65.
=Q
PP566.
56
Q>503.
QQ
De%re'&"t&on 5P556.
6
5364=.
43
>0P=P.
>6
Ot)er Non o%er"t&ng
eO%
56>.33 554.=5
T"O 36P5 50=5=.
65
55=Q3.
00
1AT =4354.
4=
=65PQ.
4>
450P=.
35
D&0&dend 50445.
43
4Q00.0
6
540Q.P
P
D&0&dend T"O 5==Q.3 53Q.55 PQ5.6P
Fundamental Analysis Of Mahindra & Mahindra
>
Ret"&ned E"rn&ng >=0Q5.
5=
==3Q6.
3>
=3630.
>0
EO%e'ted E1S =0.0> ==.Q4 =3.3>
TABLE I: BALANCE SHEET
M"r')
* G@
M"r')
* GA
M"r')
* GC
SOURCES OF
FUNDS
Ewner's ?und
-8uity 'hare
%apital
55P0.3
P
55P0.3
P
55P0.3
P
'hare pplication
!oney
0 0 0
+re$erence 'hare
%apital
0 0 0
2eserves "
'urplus
5=3300
.P
545=3>
.>=
5P560>
.46
)oan ?unds
'ecured )oans 6>455.
=P
6>455.
=P
Q>630.
Q3
55P6.
06
>55P6.
06
>4453.
0=
Be$erred #a7
)iability /Det0
0 5QQ50.
05
>0=>5
Tot"# >EGFD
ELCA
>IIDE
ELCC
>EGIG
FL0P30=
.Q
>4=P35
.64
>463Q6
.P6
)ess K 2evaluation
2eserve
0 0 0
)ess K ccumulated
Bepreciation
3Q654.
5
50>=04
.03
55P53>
.P3
Det ,loc( 545=QQ
.3P
545=QQ
.3P
5==>6Q
.05
%apital Cor(-in-
progress
=43Q=.
45
5>=5.0
5
=345.5
Intangible assets 0 0 >0>5.3
Investments 3005>.
Q6
3P>>P.
6P
555555
.=5
Det %urrent ssets
%urrent ssets,
)oans " dvances
5Q=>=P
.P4
5P5=43
.0>
550>5P
.Q6
)ess K %urrent
)iabilities "
+rovisions
5050Q4
.>4
5064Q3
.>5
5=0P3Q
.=
#otal Det %urrent
ssets
P35P>.
4
553P6.
Q3
565P6.
46
!iscellaneous
e7penses not
written
0.00 =6Q5.6
P
6P4.4>
Tot"# >IIIIDE
ELCC
>EGIG
FL.0
>
>.=
5 >=.0=9 54.=P9 55
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Fundamental Analysis Of Mahindra & Mahindra
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TABLE 9 to 4.459.
RECOMMENDATION OF THE STOCK
!ahindra " !ahindra )td /!"!0 is a
homegrown auto major and the 1agship company o$
the !ahindra group. #he group has varied business
interests ranging $rom automobiles, $arm
e8uipment, telecom, in$rastructure development to
trade and fnancial services. !"! contributes
nearly Q09 o$ the group's total turnover o$ 2sP, >00
crore.
#his $ront-runner o$ the group is into
manu$acture and mar(eting o$ utility vehicles /00=, the =9. #he
automotive division manu$actures and sells a wide
range o$ 00P. #he major
contributors to this hi(e would be savings in
employee costs /to the tune o$ =90 and other
e7penses /to the tune o$ >.5090. *owever, rising
commodity prices will act as a drag on operating
margins, pulling it down by 0.Q09.
F"rm e5$&%ment egment no #onger " dr"g:
#he $arm e8uipment segment, which mainly
includes tractors, is no longer a drag on the topline
o$ the company. Ever the last two years, the tractor
industry has shown negative growth o$ 5Q9. In the
frst hal$ o$ ?@>005, the industry showed a decline o$
69.
Fundamental Analysis Of Mahindra & Mahindra
*owever, the $ortunes o$ the division have
started turning $or the better. In V=?@>005, the
tractor industry grew by 539 on the bac( o$ a
strong per$ormance o$ the monsoon last year. Ce
thin( that the tractor segment will actively
contribute to the revenues. #he company has its
presence in all the *+ segments $rom >5 *+ to 45
*+ and above, with more than >09 share in all
segments.
Ret$rn r"t&o to &m%ro0eK
!"! has already done considerable
investments on product development and capacity
e7pansion over the past three years. Ce e7pect
2o%- to improve $rom 3.39 in ?@>00= to >4.=9 in
?@>00P.
Beclining capital e7penditure would help the
company to increase its $ree cash 1ows. #he
company is e7pected to retire almost 509 o$ the
debt by ?@>00P. #his will reduce outgo on interest
costs, which will be re1ected in the net proft. #he
proft will almost double to Q.P59 in ?@>00P $rom
=.339 as o$ now.
Monoon:
Fundamental Analysis Of Mahindra & Mahindra
,elow normal monsoons throughout the country
remains a cause $or concern $or tractor
manu$acturers including !"!. In ?@>005, tractor
volumes have increased by =69 to 4Q,304 units.
Chile monsoons remain a wild card $or the
company, the increased rural and agricultural $ocus
o$ the new 005 by
the government is already showing signs o$ assisting
demand push.
SUGGESTIONS
• Increasing steel price and other inputs are the
major concerns $or the company $rom its
margins point o$ view. 'o company should have
chec( on the steel prices.
• Increase in the in1ation rates.
Fundamental Analysis Of Mahindra & Mahindra
• s the company is active in the overseas
mar(ets, the rupee appreciation against the
$oreign currencies, especially dollar would
adversely aAect the topline o$ the company.
• Increase in the $uel prices on account o$ rising
global crude oil prices would aAect the domestic
demand especially $or %&s.
• &arious new products launches have helped
retain customer $ocus on the new auto mar(et,
so the company should $ocus on this particular
aspect.
• Biscounts, special editions and $estive based
oAers should be adopted to boost the sales o$
the company.
• Bieseli.ation is going to be a $uture trend in the
Indian automobile mar(et with rising petrol
prices and the signifcant diAerence between
petrol and diesel prices. s most o$ the company
products are diesel products, the company
should try to speciali.e in that particular
segment.
• nother trend that might be seen in the near
$uture is rise in the utility vehicle sales. Cith
Fundamental Analysis Of Mahindra & Mahindra
in$rastructure $acilities increasing more people
pre$er the
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
Fundamental Analysis Of Mahindra & Mahindra
EXECUTIVE SUMMARY
India's domestic automotive industry, enjoyed high
growth in fnancial year-05, continuing the healthy
trend set in fnancial year-04. Increased industrial
growth contributed to the upward trend. ll the
automotive industry segments in which !"! has a
presence witnessed a growth in demand in fnancial
year-05. #he Indian tractor industry too saw an upward
trend a$ter a severe downturn period, due to $avorable
monsoon and better credit terms helped to build
positive sentiments. #he major players in the
%ommercial &ehicle 'egment are sho( )eyland )td,
*industan !otors )td, #elco, &olvo India +vt.)td, ,ajaj
#empo )td, -icher !otors )td, !ahindra " !ahindra
)td, and 'waraj !a.da )td.
!ahindra " !ahindra )imited /!"!0 is the
1agship company o$ around 2s. 3000 crore !ahindra
4roup, which has a signifcant presence in (ey sectors
o$ the Indian economy. consistently high per$ormer,
!"! is one o$ the most respected companies in the
country. 'et up in 5645 to ma(e general-purpose utility
vehicles $or the Indian mar(et, !"! soon branched out
Fundamental Analysis Of Mahindra & Mahindra
into manu$acturing agricultural tractors and light
commercial vehicles /)%&s0. #he company later
e7panded its operations $rom automobiles and tractors
to secure a signifcant presence in many more
important sectors. #he company has, over the years,
trans$ormed itsel$ into a 4roup that caters to the Indian
and overseas mar(ets with a presence in vehicles, $arm
e8uipment, in$ormation technology, trade and fnance
related services, and in$rastructure development.
!ahindra " !ahindra )td /!"!0 is a leading player in
the Indian utility vehicles and tractors segment with
mar(et shares o$ 46.59 in :eeps ; !5.69 in #ractors in the
?@>005.
#his study tries to cover the industry related
data and in depth company study and an overview o$
the economy, evaluates the company on various
valuation models.
Fundamental Analysis Of Mahindra & Mahindra
THEORETICAL BACKGROUND
FUNDAMENTAL ANALYSIS:
?undamental analysis is the e7amination o$ the
underlying $orces that aAect the well being o$ the
economy, industry groups, and companies. s with most
analysis, the goal is to derive a $orecast and proft $rom
$uture price movements. t the company level,
$undamental analysis may involve e7amination o$
fnancial data, management, business concept and
competition. t the industry level, there might be an
e7amination o$ supply and demand $orces $or the
products oAered. ?or the national economy, $undamental
analysis might $ocus on economic data to assess the
present and $uture growth o$ the economy. #o $orecast
$uture stoc( prices, $undamental analysis combines
economic, industry, and company analysis to derive a
stoc('s current $air value and $orecast $uture value. I$
$air value is not e8ual to the current stoc( price,
$undamental analysts believe that the stoc( is either over
or under valued and the mar(et price will ultimately
gravitate towards $air value. ?undamentalists do not
heed the advice o$ the random wal(ers and believe that
Fundamental Analysis Of Mahindra & Mahindra
mar(ets are wea( $orm eAicient. ,y believing that prices
do not accurately re1ect all available in$ormation,
$undamental analysts loo( to capitali.e on perceived
price discrepancies.
STRENGTHS AND WEAKNESS OF FUNDAMENTAL
ANALYSIS
Long-term Trend:
?undamental analysis is good $or long-term
investments based on long-term trends, very long-term.
#he ability to identi$y and predict long-term economic,
demographic, technological or consumer trends can
beneft patient investors who pic( the right industry
groups or companies.
!"#$e S%ott&ng:
'ound $undamental analysis will help identi$y
companies that represent good value. 'ome o$ the most
legendary investors thin( long-term and value. 4raham
and Bodd, Carren ,uAett and
hn DeA are seen as thechampions o$ value investing. ?undamental analysis can
Fundamental Analysis Of Mahindra & Mahindra
help uncover companies with valuable assets, a strong
balance sheet, stable earnings and staying power.
B$&ne A'$men:
Ene o$ the most obvious, but less tangible, rewards
o$ $undamental analysis is the development o$ a thorough
understanding o$ the business. $ter such painsta(ing
research and analysis, an investor will be $amiliar with
the (ey revenue and proft drivers behind a company.
-arnings and earnings e7pectations can be potent
drivers o$ e8uity prices. -ven some technicians will
agree to that. good understanding can help investors
avoid companies that are prone to short$alls and identi$y
those that continue to deliver. In addition to
understanding the business, $undamental analysis allows
investors to develop an understanding o$ the (ey value
drivers and companies within an industry. Its industry
group heavily in1uences a stoc(Fs price. ,y studying
these groups, investors can better position themselves to
identi$y opportunities that are high-ris( /tech0, low-ris(
/utilities0, growth oriented /computer0, value driven /oil0,
Fundamental Analysis Of Mahindra & Mahindra
non-cyclical /consumer staples0, cyclical /transportation0
or income oriented /high yield0.
Kno(&ng W)o* W)o:
'toc(s move as a group. ,y understanding a
company's business, investors can better position
themselves to categori.e stoc(s within their relevant
industry group. ,usiness can change rapidly and with it
the revenue mi7 o$ a company. #his happened to many o$
the pure internet retailers, which were not really
internet companies, but plain retailers. Gnowing a
company's business and being able to place it in a group
can ma(e a huge diAerence in relative valuations.
WEAKNESS
T&me Contr"&nt:
Fundamental Analysis Of Mahindra & Mahindra
?undamental analysis may oAer e7cellent insights,
but it can be e7traordinarily time consuming. #ime-
consuming models o$ten produce valuations that are
contradictory to the current price.
Ind$tr+,Com%"n+ S%e'&-':
&aluation techni8ues vary depending on the industry
group and specifcs o$ each company. ?or this reason, a
diAerent techni8ue and model is re8uired $or diAerent
industries and diAerent companies. #his can get 8uite
time consuming and limit the amount o$ research that
can be per$ormed.
S$./e't&0&t+:
?air value is based on assumptions. ny changes to
growth or multiplier assumptions can greatly alter the
ultimate valuation. ?undamental analysts are generally
aware o$ this and use sensitivity analysis to present a
base-case valuation, a best-case valuation and a worst-
case valuation. *owever, even on a worst case, most
Fundamental Analysis Of Mahindra & Mahindra
models are almost always bullish, the only 8uestion is
how much so.
An"#+t B&":
#he majority o$ the in$ormation that goes into the
analysis comes $rom the company itsel$. %ompanies
employ investor relations managers specifcally to
handle the analyst community and release in$ormation.
Introd$'t&on to In0etment !"#$"t&on
-very asset, fnancial as well as real, has value. #he
(ey to success$ully investing in and managing these
assets lies in understanding not only what the value is,
but the sources o$ the value. ny asset can be valued,
but some assets are easier to value than others, and the
details o$ valuation will vary $rom case to case. #hus, the
valuation o$ a share o$ a real estate property will re8uire
diAerent in$ormation and $ollow a diAerent $ormat $rom
the valuation o$ a publicly traded stoc(. Chat is
surprisingH however, is not the diAerence in valuation
techni8ues across assets, but the degree o$ similarity in
Fundamental Analysis Of Mahindra & Mahindra
basic principles. #here is undeniably uncertainty
associated with valuation. E$ten that uncertainty comes
$rom the asset being valued, although the valuation
model may add to that uncertainty.
A 1HILOSO1HICAL BASIS FOR !ALUATION
surprising number o$ investors subscribe to the
Ibigger $oolJ theory o$ investing, which argues that the
value o$ an asset is irrelevant as long as there is a
Ibigger $oolJ around who is willing to buy the asset $rom
them. Chile this may provide a basis $or some profts, it
is a dangerous game to play, since there is no guarantee
that such an investor will still be around when the time
to sell comes.
postulate o$ sound investing is that an investor
does not pay more $or an asset than its worth. #his
statement may seem logic and obvious, but it is $orgotten
Fundamental Analysis Of Mahindra & Mahindra
and rediscovered at some time in every generation and
in every mar(et. #here are those who are disingenuous
enough to argue that value is in the eyes o$ the beholder,
and that any price can be justifed i$ there are other
investors willing to pay that price. #hat is patently
absurd. +erceptions may be all that matter when the
asset is a painting or a sculpture, but investors do not
/and should not0 buy most assets $or aesthetic or
emotional reasonsH fnancial assets are ac8uired $or the
cash 1ows e7pected $rom owning them. %onse8uently,
perceptions o$ value have to be bac(ed up by reality,
which implies that the price that is paid $or any asset
should re1ect the cash 1ows it is e7pected to generate.
#he models o$ valuation described in this boo( attempt
to relate value to the level and e7pected growth o$ these
cash 1ows.
#here are many areas in valuation where there is
room $or disagreement, including how to estimate true
value and how long it will ta(e $or prices to adjust to true
value. ,ut there is one point on which there can be no
disagreement. sset prices cannot be justifed merely by
using the argument that there will be other investors
around willing to pay a higher price in the $uture.
Fundamental Analysis Of Mahindra & Mahindra
THE ROLE OF !ALUATION
&aluation is use$ul in a wide range o$ tas(s. #he role
it plays, however, is diAerent in diAerent arenas. #he
$ollowing section lays out the relevance in port$olio
management, in ac8uisition analysis, and in corporate
fnance.
!"#$"t&on "nd 1ort2o#&o M"n"gement
#he role that valuation plays in port$olio
management is determined in large part by the
investment philosophy o$ the investor. &aluation plays a
minimal role in port$olio management $or a passive
investor, whereas it plays a larger role $or an active
investor. -ven among active investors, the nature and
role o$ valuation are diAerent $or diAerent types o$ active
investors can be categori.ed as either mar(et timers,
who trust in their abilities to $oresee the direction o$ the
overall stoc( or bond mar(ets, on security selection who
believe that their s(ills lie in $unding under or over
valued securities. !ar(et timers use valuation much less
Fundamental Analysis Of Mahindra & Mahindra
than do investors who pic( stoc(s, and the $ocus is on
mar(et valuation rather than on frm specifc valuation.
mong security selectors, valuation plays a central role
in port$olio management $or $undamental analysts and a
peripheral role $or technical analysis.
#he $ollowing subsections describe, in broad terms.
BiAerent philosophies and the role played by valuation in
each.
F$nd"ment"# An"#+t
#he underlying theme in $undamental analysis is
that the true value o$ the frm can be related to its
fnancial characteristics- its growth prospects, prospects,
ris( profle, and cash 1ows. ny deviation $rom this true
value is a sign that a stoc( is under or overvalued. It is a
long-term investment strategy and the assumptions
underlying it are thatK
/a0 #he relationship between value and the underlying
fnancial $actors can be measured.
/b0 #he relationship is stable over time.
/ c 0 Beviations $rom the relationship are corrected in a
reasonable time period.
&aluation is the central $ocus in $undamental analysis.
'ome analystsF use discounted cash 1ow models to value
Fundamental Analysis Of Mahindra & Mahindra
frms, while others use multiples such as price;earnings
and price;boo( value ratios. 'ince investors using this
approach hold a large number o$ Lundervalued' stoc(s in
their port$olios, their hope is that, on average, these
port$olios will do better than the mar(et.
Fr"n')&e B$+er
#he philosophy o$ a $ranchise buyer is best
e7pressed by an investor who has been very success$ul
at it -Carren ,uAet. ICe try to stic( to businesses we
believe we. 0s, and has
been used by them ever since. Cith this method, assets
are measured at their gross boo( value rather than at
net boo( value in order to produce a higher 2EI.
004 period as
against previous corresponding yearFs P9 indicating the
progressive economic activities. ,ut the global crude oil
Fundamental Analysis Of Mahindra & Mahindra
shoc( will defnitely have an adverse aAect on the
growth during fscal >005.
GRA1H @: INFLATION
#he average in1ation during fscal year >00=-04 was
around 5.59 as against the previous corresponding
fscals average o$ =.49, the prime movers being sugar,
edible oils, te7tiles, leather and leather products, basic
metals, alloys, iron and steel. Cith the increase o$ $ew
commodity prices mainly the crude oil prices have
increased the global in1ation levels $rom :une >004,
India being no e7ception to this. #he domestic $uel prices
have risen by more than 509 during the fscal >004-05
over last years. #he in1ation during the fscal year >004-
05 touched three and a hal$ years high o$ 3.==9 $or the
wee( ended ugust >3
th
>004 $rom 5.559 $or the wee(
Fundamental Analysis Of Mahindra & Mahindra
ended :une 5
th
>004 due to the e7cess money supply in
the economy. #he reasons $or the high in1ation are both
domestic and international. #he domestic reasons
include e7cess li8uidity in the mar(et and delay in
monsoon that increased the prices o$ essential
commodities. !=, the measure o$ money supply grew by
55.5 per cent in :uly >004, compared to 55.>5 per cent in
:uly >00=. #he international causes are ine7orable rise in
oil prices, global increase in the prices o$ commodities,
supply side shoc( and growth in chinaFs demand $or
goods. #his is cost-push in1ation wherein the supply
problems in a $ew important commodities push up prices
o$ commodities. 'ince crude oil import constitute almost
one third o$ the total e7ports, we can say that the
present situation is on account o$ imported in1ation. #o
chec( the rising prices, government too( some measures
li(e duty cuts on steel and oil products. 2eserve ,an( o$
India raised the %ash 2eserve 2atio to 59 $rom 4.59 in
two tranches o$ >5 basis points and has also cut the rate
o$ interest payable on eligible cash balances maintained
with it by ban(s by >50 basis points to =.5 percent. In
$act, the gradual reduction in the %22 over the past $ew
years in successive credit policies had been one o$ the
Fundamental Analysis Of Mahindra & Mahindra
major contributors $or the sustained reduction in the
interest rates on auto loans. #hese moves were e7pected
to draw out around 2s.3000 crore $rom the ban(ing
system. )ater, the in1ation was reduced to Q.>09 in the
last wee( o$ 'eptember. Cith the increase in the interest
rates the auto loans will become costlier, thus having an
adverse eAect on the auto industry sales. #he average
in1ation $or the fscal >004-05 is e7pected to stay around
P-P.59.
Ind$tr+:
S"#e:
#he automobile industry growth relies mainly on the
countryFs economic and general conditions. ny
slowdown in the economic momentum would defnitely
slowdown the growth o$ the industry. It can be seen $rom
the below chart that the industryFs sales is positively
correlated with the economic growth with a co-relation
o$ 0.6P.
Fundamental Analysis Of Mahindra & Mahindra
GRA1H A: GD1 AND AUTO SALES
(Source: www.indiabudget.nic.in)
R$..er 1r&'e:
Cith the increase in rural activities, the commercial
vehicles are e7pected to grow. 'ports 0 #he #ractor /?arm -8uipment0 Bivision ma(es
agricultural tractors and implements that are used in
conjunction with tractors, and has also ventured into
manu$acturing o$ industrial engines. #he #ractor
Bivision has won the coveted Beming pplication +ri.e
>00=, ma(ing it the only tractor manu$acturing company
in the world to secure this pri.e.
#he resurgence o$ the automotive industry and !"!'s
success in e7ploiting it, has created an opportunity to
strengthen the company through an entry into the uto
%omponents business, the growth o$ which is being
$ueled by both, domestic and e7port demand.
!"! employs around 55,500 people and has si7
state-o$-the-art manu$acturing $acilities spread over
500,000 s8uare meters. !"! has also set up two
satellite plants $or tractor assembly. It has 46 sales
oAices that are supported by a networ( o$ over Q30
dealers across the country. #his networ( is connected to
the %ompany's sales departments by an e7tensive I#
in$rastructure.
!"!'s outstanding manu$acturing and engineering
s(ills allow it to constantly innovate and launch new
Fundamental Analysis Of Mahindra & Mahindra
products $or the Indian mar(et. #he %ompany's
signifcant recent product launch, the L'corpioL, resulted
in the %ompany winning the Dational ward $or
outstanding in-house research and development $rom the
Bepartment o$ 'cience and Industry o$ the 4overnment
in >00=. #he %ompany has launched India's frst tractor
with turbo technology - the !ahindra 'arpanch 565 BI
'uper #urbo.
#he %ompany's commitment to technology-driven
innovation is re1ected in %ompany's plans o$ setting up
o$ the !ahindra 2esearch &alley, a $acility that will
house the %ompany's engineering research and product
development wings, under one roo$.
#he !"! philosophy o$ growth is centered on its
belie$ in people. s a result, the company has put in
place initiatives that see( to reward and retain the best
talent in the industry. !"! is also (nown $or its
progressive labour management practices. In the
community development sphere, the company has
implemented several programs that have benefted the
people and institutions in its areas o$ operations.
Fundamental Analysis Of Mahindra & Mahindra
M")&ndr" "nd M")&ndr" 'ont&n$e to .e " o#&d
'om%"n+
•%ompany has registered a >3 9 rise in its total vehicle
sales at 55,434 units $or ugust >004 as against 3,64P
units in the corresponding period previous fscal.
•S!ahindra %ityF was granted special economic .one
/'-T0 which includes 5009 ta7 holiday $or the ne7t 5
years and a 509 ta7 holiday $or the ne7t fve years,
e7emption $rom customs duty, central e7cise, service ta7,
education cess, central sales ta7, and all local ta7es
levied by the state.
•%ompany has set up $our overseas operations in
59 in
the budget will result in savings on the raw material
$ront as well. 'ince raw material costs account $or
almost 509 o$ revenues o$ auto companies in general,
this is a positive. lso, steel prices have shown some
signs o$ so$tening and this is li(ely to have a positive
impact on the margins o$ the players.
•Ce e7pect Indian auto majors to increase capital
e7penditure budget at an average o$ 49-59 o$ revenues
in ?@05 as against around >9-=9 historically. #his would
be towards product development and complying with
new environmental regulations. Cith !D%s willing to
sacrifce proftability $or growth in the short-term, it has
become imperative $or domestic players to spruce up
2"B eAorts. t the same time, cash 1ow position is
much stronger now given that most manu$acturers have
reduced wor(ing capital and debt. #his would mean
Fundamental Analysis Of Mahindra & Mahindra
fnancing bul( o$ incremental cape7 $rom internal
accruals.
1rod$'t 1r&'&ng:
#he Indian automobiles are slowly shi$ting away
$rom the price sensitiveness towards the value addition
concept. ,esides, even the 'I! has changed the norms
o$ classifcation $rom the previously $ollowed +rice basis
to the si.e; length o$ the vehicle. +reviously, the industry
was highly price sensitive and the sales were dependent
on price brac(ets. ,ut the Indian customerFs perception
is slowly changing and moving towards the value
additions such as the si.e o$ the car, the style, the
com$ort, the level o$ service oAered by the
manu$acturers, the variants available in the category etc.
-ven though the perception is changing, it is true that
still price plays an important role in the industry. #he
role o$ price may be very negligible in some segments,
but in the other segments they are very much reactive to
the price 1uctuations. #hus, the some players in
segments concentrate on the value addition to achieve
competitive advantage, while the other players in the
segments use price as weapon along with their core
Fundamental Analysis Of Mahindra & Mahindra
service. #hese players also oAer discounts during $estival
season to boost the sales.
Gro(t) Dr&0erK
LIn'ome #e0e#: #he level o$ income has got a direct
impact on the sales o$ the automobile. #he rise in income
level, results in increase in the number o$ people
crossing the income threshold, thus changing the profle
o$ customer. #he li$estyle o$ the people tends to change
automatically. Cith their increased buying power, they
would loo(out $or more com$ort. ?or -.g. when the
income o$ a lower middle class $amily increases, say they
Fundamental Analysis Of Mahindra & Mahindra
would li(e to shi$t $rom two-wheeler to buy a used car.
#his in turn increases the demand $or used car mar(et
and a good resale value $or the seller, thereby indirectly
increasing the sales o$ new cars. Cith the entry o$ !D%s
especially in the I#, I#-' and ,+E sector, the income
level and li$estyle, both are encouraging the younger
generation. #his has also reduced the average age o$ a
car buyer.
@LMonoon, R$r"# e'onom+: #he monsoon is the
bac(bone o$ the Indian agriculture. In India, around P5
percent o$ the national income is contributed by the
agricultural sector and constitutes about >> percent in
the 4B+. #he monsoons support the economic growth.
Cith the arrival o$ monsoons, the rural sector is
e7pected generate more jobs in the rural economy and
more income, thus increasing the purchasing power o$
people. long with this, even other industries
per$ormance will boost up. #hus, the demand mainly $or
utility vehicles increases with the better per$ormance o$
the rural sector.
Fundamental Analysis Of Mahindra & Mahindra
ALUed '"r Segment: #he industry saw a growth o$
around =0 percent in the used car segment during fscal
year. #he profle o$ an Indian %ar buyer has been
changing due to the increasing purchasing power.
,esides, the used cars are becoming aAordable due to
the reduced -8uated !onthly Installments /-!I0 and
increased repayment period. more active li$estyle,
rising disposable income and lower cost o$ replacement
are guiding the customers to change their cars once
every three years now. -ven though this mar(et is
unorgani.ed to a large e7tent, the organi.ed used car
segment is slowly growing in India. Cith the
manu$acturerFs only coming $orward to buy bac( their
models, has in turn helped the sales o$ new vehicles.
CLA0"&#".&#&t+ o2 -n"n'e 2or .ot) ne( "nd $ed
0e)&'#e: Cith the ease in the availability o$ fnance both
the new and used auto mar(et segment has been
witnessing a growth. +reviously, loans were provided
only $or the new vehicles, but now the fnancial
institutions have come $orward to oAer the loans $or used
vehicles too. Cith the increasing competition among the
fnance providers, they are reducing the rates day by
Fundamental Analysis Of Mahindra & Mahindra
day. long with this, even some companies go beyond the
industry benchmar( by fnancing up to seven year old
vehicles, thereby helping the growth o$ the used auto
segment. #he interest rate has almost halved in
comparison to the rates during 5663 and has touched as
low as P.5 percent per annum. uto manu$acturers are
using this as a tool to increase the sales. #hey are having
tie-ups with the fnance providers or 1oating their own
fnance companies.
DLIn2r"tr$'t$re: Bue to the increased investment in
in$rastructural projects especially in the development
and improvement o$ road projects, the overall transport
business activities and the tourism is e7pected to grow,
which in turn creates a good demand $or the utility
vehicles. #raAic on roads is growing at a rate o$ Q to 509
per annum while the vehicle population growth $or the
past $ew years is o$ the order o$ 5>9 per annum. 'o
there is a need $or the development o$ good
in$rastructural roads $or the growth o$ the automobile
industry. En the other side, poor road in$rastructure and
traAic congestion can be a bottlenec( in the growth o$
vehicle industry.
Fundamental Analysis Of Mahindra & Mahindra
ELEO%ort: Cith the global players loo(ing at developing
vehicles that can be launched in multiple mar(ets to
reduce their developmental cost and to reduce their
development costs, India is e7pected to increase its
e7ports. #hese giants are planning to use their Indian
$acilities as hub $or their worldwide operations. Cith this
move, 4eneral motors and Baimler %hrysler both have
their 2 " B center in ,angalore, which will have an
important role in International product development.
#oyota has plans to turn India into its lowest cost-
manu$acturing center. ! percentage
points $or ,), >.3 percentage points $or )) and >.5
percentage points $or #ata !otors.
'taA cost declined by PPbps and other e7penditure
increased 45bps as a percentage o$ net sales. +unjab
#ractors and !"! enjoyed the beneft o$ a reduced staA
cost by =Q0bps and >=0bps as a percentage o$ net sales.
+unjab #ractors maintained its margins in spite o$ a high
rise in raw material cost due to savings in staA cost and
other e7penditure.
M"/or 'om%et&tor "nd M"r3et %o&t&on:
+rior to 5630, +remier utomobiles )imited /+)0
and *industan !otors /*!0 had dominated the Indian
passenger car mar(et. Cith the entry o$ !aruti 59. #he
government has announced 43 new road projects with an
estimated cost o$ 2s400bn and it a levy o$ 50 paisa on
per liter o$ diesel will be collected $or the $unding o$ the
above road projects. ,y the year >050, the Indian sa$ety
regulations will be completely aligned with the -%-
regulations li(e anti-the$t, -!%, noise, $ront, side and
lateral collision, etc.
Em&&on: #he need to reduce vehicular pollution has
led to emission control through regulations in
conjunction with increasingly environment-$riendly
Fundamental Analysis Of Mahindra & Mahindra
technologies. It was only in 5665 that the frst stage
emission norms came into $orce $or petrol vehicles and in
566> $or diesel vehicles. ?rom pril 5665 mandatory
ftment o$ catalytic converters in new petrol passenger
cars sold in the $our metros o$ Belhi, %alcutta, !umbai
and %hennai along with supply o$ 000 norms. -uro II e8uivalent ,harat 'tage II norms
are in $orce $rom >005 in 4 metroFs o$ Belhi, !umbai,
%hennai and Gol(ata. 'ince India embar(ed on a $ormal
emission control regime only in 5665, there is a gap in
comparison with technologies available in the .00
9
5>.00
9
D&0&dend T"O 5>.35
9
5>.50
9
5>.50
9
In0etment " " K o2
tot"# S"#e
>>.Q4
9
>>.00
9
>>.00
9
C$rrent "et " " K
o2 "#e
>3.36
9
>6.00
9
>6.00
9
C$rrent #&".&#&t&e "
" K o2 "#e
>P.Q5
9
>P.00
9
>P.00
9
TABLE A: WEIGHTED A!ERAGE COST OF CA1ITAL
2is( $ree rate Q.009
!ar(et rate o$ return 5P.009
,eta 5.0>
Interest +aid /2s. %rore0 55.53
!ar(et value o$ debt /2s.
%rore0
6=4.3>
#a7 rate =Q.009
Cost of debt 3.48%
Cost of equit !".!8%
WACC 14.31%
Fundamental Analysis Of Mahindra & Mahindra
TABLE C: !ALUE DRI!ERS
>005 >00
4
>00=
!ar(et
%apitalisation
/2s. %rore0
545Q.P
0
+;- /#railing0
+;- 54.>4 55.5
3
5.3P
+;, =.>= 5.3P 5.5Q
TABLE D: INCOME STATEMENT
HR &n L"3)=
In'ome t"tement M"r *
G@
M"r *
GA
M"r*
GC
Gro S"#e =66PQ5
.=
445>P
5
53>6>4
.P
)essK -7cise 0 Q3546.
0P
64=Q3.
55
Net S"#e =66PQ5
.>P
=PPQ5
5.6
43354P
.43
O%er"t&ng In'ome
Tot"# In'ome =66PQ5
.>P
=PPQ5
5.6
43354P
.43
Le:
2aw !aterial O
+urchases
>55Q>=
.5
>500>
5.3
==5>3P
.5>
-mployee %ost =P665. =35>6. 45Q45.
Fundamental Analysis Of Mahindra & Mahindra
4P 0= =6
'elling -7penses 5663>.
5
565=6.
56
53535.
P
dministrative
-7penses
>505.=
>
>655.5
>
=5>3.>
5
Ether -7penses 56545.
>>
5353=.
66
>5Q65.
66
+rovisions 5>=5.=
5
4050.=
=
44.>5
!iscellaneous e7penses 55>4=.
>Q
55>3=.
63
565Q5.
P5
%hange in 'toc( /-0
Inc.; /O0 Bec.
P440.6
4
>=5Q.6
6
-
>54=.>
=
-7penses %apitalised 5Q43.6
Q
565Q.0
55QQ.5
5
mortisation 50Q0.6
5
43P.65 P.QP
Tot"# O%er"t&ng
EO%ene
=5P43P
.P3
=5>33
5.6
44=564
.P5
O%er"t&ng 1ro-t 4=533.
53
5=3=0.
05
45=55.
3=
Interest >5>Q5.
PQ
5550.=
6
QP6=.>
Q
Gro 1ro-t 5Q65>.
65
5>PQ6.
P>
=QP53.
5P
Bepreciation 5=6=3.
>6
5P05P.
Q
5P556.
6
1BT .e2ore non o%
"nd eOtr" ord
=6Q4.P
>
-
==QQ.0
3
>55=3.
PP
Don Eperaing Income 5>35.4
=
5Q=54.
33
56Q=>.
35
Fundamental Analysis Of Mahindra & Mahindra
ddK -7tra Erd. Income -
5Q>3.5
3
5QP5.P
5
>64Q.3
=
)essK -7tra Erd
-7penses
0 0 0
1BT Q5=5.4
Q
56Q0=.
45
4=356.
=
+rovision $or #a7ation =P0 5>=0 P=50
BeAered ta7ation ->5>0 =6>0 >P55
1AT 6P65.4
Q
5455=.
45
=4354.
=
+rior @ear /O0Inc.;
/-0-7p.
2eported +# 6P65.4
Q
5455=.
45
=4354.
=
,;? 0 =P5=6.
5
54Q06.
4=
+roft available $or
allocation
0 0 365P=.
Q=
+roposed -8uity
Bividend
0 P=30.P
4
50445.
43
Bividend #a7 0 35Q.55 5==Q.3
>
-8uity Bividend /90
E% IL@C LCC @GLGC
Fundamental Analysis Of Mahindra & Mahindra
TABLEE: E?1ECTED INCOME STATEMENT
EO%e'ted &n'ome
t"tement
M"r')
* GC
M"r')
* GD
M"r')
* GE
O%er"t&ng In'ome 43354P
.43
5=Q405
.5=
535QPQ
.>=
Non O%er"t&ng In'ome 56Q=>.
35
5QQ=4.
>4
56==0.
=>
O%er"t&ng eO%ene 44=564
.P5
43=PP5
.0>
5>Q560
.55
O%er"t&ng 1ro-t 45=55.
3=
5=Q40.
55
535QP.
Q>
Interet QP6=.>
Q
5>Q4.Q
P
5=63.>
3
Gro 1ro-t 5Q=65.
=Q
PP566.
56
Q>503.
De%re'&"t&on 5P556.
6
5364=.
43
>0P=P.
>6
Ot)er Non o%er"t&ng
eO%
56>.33 554.=5
T"O 36P5 50=5=.
65
55=Q3.
00
1AT =4354.
4=
=65PQ.
4>
450P=.
35
D&0&dend 50445.
43
4Q00.0
6
540Q.P
P
D&0&dend T"O 5==Q.3 53Q.55 PQ5.6P
Fundamental Analysis Of Mahindra & Mahindra
>
Ret"&ned E"rn&ng >=0Q5.
5=
==3Q6.
3>
=3630.
>0
EO%e'ted E1S =0.0> ==.Q4 =3.3>
TABLE I: BALANCE SHEET
M"r')
* G@
M"r')
* GA
M"r')
* GC
SOURCES OF
FUNDS
Ewner's ?und
-8uity 'hare
%apital
55P0.3
P
55P0.3
P
55P0.3
P
'hare pplication
!oney
0 0 0
+re$erence 'hare
%apital
0 0 0
2eserves "
'urplus
5=3300
.P
545=3>
.>=
5P560>
.46
)oan ?unds
'ecured )oans 6>455.
=P
6>455.
=P
Q>630.
Q3
55P6.
06
>55P6.
06
>4453.
0=
Be$erred #a7
)iability /Det0
0 5QQ50.
05
>0=>5
Tot"# >EGFD
ELCA
>IIDE
ELCC
>EGIG
FL0P30=
.Q
>4=P35
.64
>463Q6
.P6
)ess K 2evaluation
2eserve
0 0 0
)ess K ccumulated
Bepreciation
3Q654.
5
50>=04
.03
55P53>
.P3
Det ,loc( 545=QQ
.3P
545=QQ
.3P
5==>6Q
.05
%apital Cor(-in-
progress
=43Q=.
45
5>=5.0
5
=345.5
Intangible assets 0 0 >0>5.3
Investments 3005>.
Q6
3P>>P.
6P
555555
.=5
Det %urrent ssets
%urrent ssets,
)oans " dvances
5Q=>=P
.P4
5P5=43
.0>
550>5P
.Q6
)ess K %urrent
)iabilities "
+rovisions
5050Q4
.>4
5064Q3
.>5
5=0P3Q
.=
#otal Det %urrent
ssets
P35P>.
4
553P6.
Q3
565P6.
46
!iscellaneous
e7penses not
written
0.00 =6Q5.6
P
6P4.4>
Tot"# >IIIIDE
ELCC
>EGIG
FL.0
>
>.=
5 >=.0=9 54.=P9 55
0.4
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Fundamental Analysis Of Mahindra & Mahindra
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TABLE 9 to 4.459.
RECOMMENDATION OF THE STOCK
!ahindra " !ahindra )td /!"!0 is a
homegrown auto major and the 1agship company o$
the !ahindra group. #he group has varied business
interests ranging $rom automobiles, $arm
e8uipment, telecom, in$rastructure development to
trade and fnancial services. !"! contributes
nearly Q09 o$ the group's total turnover o$ 2sP, >00
crore.
#his $ront-runner o$ the group is into
manu$acture and mar(eting o$ utility vehicles /00=, the =9. #he
automotive division manu$actures and sells a wide
range o$ 00P. #he major
contributors to this hi(e would be savings in
employee costs /to the tune o$ =90 and other
e7penses /to the tune o$ >.5090. *owever, rising
commodity prices will act as a drag on operating
margins, pulling it down by 0.Q09.
F"rm e5$&%ment egment no #onger " dr"g:
#he $arm e8uipment segment, which mainly
includes tractors, is no longer a drag on the topline
o$ the company. Ever the last two years, the tractor
industry has shown negative growth o$ 5Q9. In the
frst hal$ o$ ?@>005, the industry showed a decline o$
69.
Fundamental Analysis Of Mahindra & Mahindra
*owever, the $ortunes o$ the division have
started turning $or the better. In V=?@>005, the
tractor industry grew by 539 on the bac( o$ a
strong per$ormance o$ the monsoon last year. Ce
thin( that the tractor segment will actively
contribute to the revenues. #he company has its
presence in all the *+ segments $rom >5 *+ to 45
*+ and above, with more than >09 share in all
segments.
Ret$rn r"t&o to &m%ro0eK
!"! has already done considerable
investments on product development and capacity
e7pansion over the past three years. Ce e7pect
2o%- to improve $rom 3.39 in ?@>00= to >4.=9 in
?@>00P.
Beclining capital e7penditure would help the
company to increase its $ree cash 1ows. #he
company is e7pected to retire almost 509 o$ the
debt by ?@>00P. #his will reduce outgo on interest
costs, which will be re1ected in the net proft. #he
proft will almost double to Q.P59 in ?@>00P $rom
=.339 as o$ now.
Monoon:
Fundamental Analysis Of Mahindra & Mahindra
,elow normal monsoons throughout the country
remains a cause $or concern $or tractor
manu$acturers including !"!. In ?@>005, tractor
volumes have increased by =69 to 4Q,304 units.
Chile monsoons remain a wild card $or the
company, the increased rural and agricultural $ocus
o$ the new 005 by
the government is already showing signs o$ assisting
demand push.
SUGGESTIONS
• Increasing steel price and other inputs are the
major concerns $or the company $rom its
margins point o$ view. 'o company should have
chec( on the steel prices.
• Increase in the in1ation rates.
Fundamental Analysis Of Mahindra & Mahindra
• s the company is active in the overseas
mar(ets, the rupee appreciation against the
$oreign currencies, especially dollar would
adversely aAect the topline o$ the company.
• Increase in the $uel prices on account o$ rising
global crude oil prices would aAect the domestic
demand especially $or %&s.
• &arious new products launches have helped
retain customer $ocus on the new auto mar(et,
so the company should $ocus on this particular
aspect.
• Biscounts, special editions and $estive based
oAers should be adopted to boost the sales o$
the company.
• Bieseli.ation is going to be a $uture trend in the
Indian automobile mar(et with rising petrol
prices and the signifcant diAerence between
petrol and diesel prices. s most o$ the company
products are diesel products, the company
should try to speciali.e in that particular
segment.
• nother trend that might be seen in the near
$uture is rise in the utility vehicle sales. Cith
Fundamental Analysis Of Mahindra & Mahindra
in$rastructure $acilities increasing more people
pre$er the