A Project Report On Fundamental Analysis of Mahindra&amp Mahindra Company

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA
EXECUTIVE SUMMARY India's domestic automotive industry, enjoyed high growth in financial year-05, continuing the healthy trend set in financial year-04. Increased industrial growth contributed to the upward trend. All the automotive industry segments in which M&M has a presence witnessed a growth in demand in financial year-05. The Indian tractor industry too saw an upward trend after a severe downturn period, due to favorable monsoon and better credit terms helped to build positive sentiments. The major players in the Commercial Vehicle Segment are Ashok Leyland Ltd, Hindustan Motors Ltd, Telco, Volvo India Pvt.Ltd, Bajaj Tempo Ltd, Eicher Motors Ltd, Mahindra & Mahindra Ltd, and Swaraj Mazda Ltd. Mahindra & Mahindra Limited (M&M) is the flagship company of around Rs. 8000 crore Mahindra Group, which has a significant presence in key sectors of the Indian economy. A consistently high performer, M&M is one of the most respected companies in the country. Set up in 1945 to make general-purpose utility vehicles for the Indian market, M&M soon branched out into manufacturing agricultural tractors and light commercial
Babasabpatilfreepptmba.com
vehicles
(LCVs).
The
company
later
expanded
its
operations from automobiles and tractors to secure a significant presence in many more important sectors. The company has, over the years, transformed itself into a Group that caters to the Indian and overseas markets with a presence in vehicles, farm equipment, information technology, trade and finance related services, and infrastructure development. Mahindra & Mahindra Ltd (M&M) is a leading player in the Indian utility vehicles and tractors segment with market shares of 49.5% in Jeeps / MUVs, 30.9% in 3-wheelers, and market share of 25.9% in Tractors in the FY2005. This study tries to cover the industry related data and in depth company study and an overview of the economy, evaluates the company on various valuation models.
THEORETICAL BACKGROUND FUNDAMENTAL ANALYSIS: Fundamental analysis is the examination of the underlying forces that affect the well being of the economy, industry groups, and companies. As with most analysis, the goal is to derive a forecast and profit from future price movements. At the company level, fundamental analysis may involve examination of financial data, management, business concept and competition. At the industry level, there might be an examination of supply and demand forces for the products offered. For the national economy, fundamental analysis might focus on economic data to assess the present and future growth of the economy. To forecast future stock prices, fundamental analysis combines economic, industry, and company analysis to derive a stock's current fair value and forecast future value. If fair value is not equal to the current stock price, fundamental analysts believe that the stock is either over or under valued and the market price will ultimately gravitate towards fair value. Fundamentalists do not heed the advice of the random walkers and believe that markets are weak form efficient. By believing that prices do not
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accurately reflect all available information, fundamental analysts look to capitalize on perceived price discrepancies.
STRENGTHS AND WEAKNESS OF FUNDAMENTAL ANALYSIS Long-term Trends: Fundamental analysis is good for long-term investments based on long-term trends, very long-term. The ability to identify and predict long-term economic, demographic, or companies. Value Spotting: Sound fundamental analysis will help identify companies that represent good value. Some of the most legendary investors think long-term and value. Graham and Dodd, Warren Buffett and John Neff are seen as the champions of value investing. Fundamental analysis can help uncover companies with valuable assets, a strong balance sheet, stable earnings and staying power.
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technological
or
consumer
trends
can
benefit patient investors who pick the right industry groups
Business Acumen: One of the most obvious, but less tangible, rewards of fundamental analysis is the development of a thorough understanding of the business. After such painstaking research and analysis, an investor will be familiar with the key revenue and profit drivers behind a company. Earnings and earnings expectations can be potent drivers of equity prices. Even some technicians will agree to that. A good understanding can help investors avoid companies that are prone to shortfalls and identify those that continue to deliver. In addition to understanding the business, fundamental analysis allows investors to develop an understanding of the key value drivers and companies within an industry. Its industry group heavily influences a stocks price. By studying these groups, investors can better position themselves to identify opportunities that are high-risk (tech), low-risk (utilities), growth oriented (computer), value driven (oil), non-cyclical (consumer staples), cyclical (transportation) or income oriented (high yield).
Knowing Who's Who: Stocks move as company's business, a group. By can understanding a better position
investors
themselves to categorize stocks within their relevant industry group. Business can change rapidly and with it the revenue mix of a company. This happened to many of the pure internet retailers, which were not really internet companies, but plain retailers. Knowing a company's business and being able to place it in a group can make a huge difference in relative valuations.
WEAKNESS Time Constraints: Fundamental analysis may offer excellent insights, but it can be extraordinarily time consuming. Time-consuming
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models often produce valuations that are contradictory to the current price. Industry/Company Specific: Valuation techniques vary depending on the industry group and specifics of each company. For this reason, a different technique and model is required for different industries and different companies. This can get quite time consuming and limit the amount of research that can be performed. Subjectivity: Fair value is based on assumptions. Any changes to growth or multiplier assumptions can greatly alter the ultimate valuation. Fundamental analysts are generally aware of this and use sensitivity analysis to present a base-case valuation, a best-case valuation and a worstcase valuation. However, even on a worst case, most models are almost always bullish, the only question is how much so.
Analyst Bias: The majority of the information that goes into the analysis comes from the company itself. Companies employ investor relations managers specifically to handle the analyst community and release information. Introduction to Investment Valuation Every asset, financial as well as real, has value. The key to successfully investing in and managing these assets lies in understanding not only what the value is, but the sources of the value. Any asset can be valued, but some assets are easier to value than others, and the details of valuation will vary from case to case. Thus, the valuation of a share of a real estate property will require different information and follow a different format from the valuation of a publicly traded stock. What is surprising; however, is not the difference in valuation techniques across assets, but the degree of similarity in basic principles. There is undeniably uncertainty associated with valuation. Often that uncertainty comes from the asset
being valued, although the valuation model may add to that uncertainty.
A PHILOSOPHICAL BASIS FOR VALUATION A surprising number of investors subscribe to the bigger fool theory of investing, which argues that the value of an asset is irrelevant as long as there is a bigger fool around who is willing to buy the asset from them. While this may provide a basis for some profits, 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. A postulate of sound investing is that an investor does not pay more for an asset than its worth. This statement may seem logic and obvious, but it is forgotten and rediscovered at some time in every generation and in every market. There are those who are disingenuous
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enough to argue that value is in the eyes of the beholder, and that any price can be justified if there are other investors willing to pay that price. That is patently absurd. Perceptions may be all that matter when the asset is a painting or a sculpture, but investors do not (and should not) buy most assets for aesthetic or emotional reasons; financial assets are acquired for the cash flows expected from owning them. Consequently, perceptions of value have to be backed up by reality, which implies that the price that is paid for any asset should reflect the cash flows it is expected to generate. The models of valuation described in this book attempt to relate value to the level and expected growth of these cash flows. There are many areas in valuation where there is room for disagreement, including how to estimate true value and how long it will take for prices to adjust to true value. But there is one point on which there can be no disagreement. Asset prices cannot be justified merely by using the argument that there will be other investors around willing to pay a higher price in the future. THE ROLE OF VALUATION
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Valuation is useful in a wide range of tasks. The role it plays, however, is different in different arenas. The following section lays out the relevance in portfolio management, in acquisition analysis, and in corporate finance. Valuation and Portfolio Management The role that valuation plays in portfolio management is determined in large part by the investment philosophy of the investor. Valuation plays a minimal role in portfolio management for a passive investor, whereas it plays a larger role for an active investor. Even among active investors, the nature and role of valuation are different for different types of active investors can be categorized as either market timers, who trust in their abilities to foresee the direction of the overall stock or bond markets, on security selection who believe that their skills lie in funding under or over valued securities. Market timers use valuation much less than do investors who pick stocks, and the focus is on market valuation rather than on firm specific valuation. Among security selectors, valuation plays a central role in portfolio
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management for fundamental analysts and a peripheral role for technical analysis. The following subsections describe, in broad terms. Different philosophies and the role played by valuation in each. Fundamental Analysts The underlying theme in fundamental analysis is that the true value of the firm can be related to its financial characteristicsits growth prospects, prospects, risk profile, and cash flows. Any deviation from this true value is a sign that a stock is under or overvalued. It is a longterm investment strategy and the assumptions underlying it are that: (a) The relationship between value and the underlying financial factors can be measured. (b) The relationship is stable over time. ( c ) Deviations from the relationship are corrected in a reasonable time period. Valuation is the central focus in fundamental analysis. Some analysts use discounted cash flow models to value firms, while others use multiples such as price/earnings and price/book value ratios. Since investors using this approach hold a large number of "undervalued' stocks in
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their portfolios, their hope is that, on average, these portfolios will do better than the market. Franchise Buyers The philosophy of a franchise buyer is best expressed by an investor who has been very successful at it -Warren Buffet. We try to stick to businesses we believe we. Understand, Mr.Buffett writes. That means they must be relatively simple and stable in character. If a business is complex and subject to constant change, we're not smart enough to predict future cash flows. Franchise buyers concentrate on a few businesses they understand well and attempt to acquire undervalued firms. Often, as in the case of Mr. Buffet, franchise buyers wield influence on the management of these firms and can change financial and investment policy. As a long-term strategy, the underselling assumptions are that: (a) Investors who understand a business well are in a better position to value it correctly. (b) These undervalued businesses can be acquired without driving the price above the true value.
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Valuation plays a key role in this philosophy, since franchise buyers arc attracted to a particular business because they believe it is undervalued. They are also interested in how much additional value they can create by restructuring the business and running it right. Chartists Chartists believe that prices are driven as much by investor psychology as by any underlying financial variables. The information available from trading - price movements, trading volume, short sales, and so forth gives an indication of investor psychology and future price movements. The assumptions here are that prices move in predictable patterns, that there are not enough marginal investors taking advantage of these patterns to eliminate them, and that the average investor in the market is driven more by emotion than by rational analysis. While valuation does not play much of a role in charting, there are ways in which an enterprising chartist can incorporate it into analysis. For instance valuation can be used to determine support and resistance lines4 on price chart.
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Information Traders Prices move on information about the firm. Information traders attempt to trade in advance of new information or shortly after it is revealed to financial markets, buying on good news and selling on bad. The underlying assumption is that these traders can anticipate information market. For information trader the focus is on the relationship between information and changes in value, rather than on value per se. Thus an information trader may buy an overvalued firm if he or she believes that the next information announcement is going to cause the price to go up because it contains better-than-expected news. If there is a relationship between how undervalue or overvalued a company is and how its stock price reacts to new information then valuation could play a role in investing for an information trader. Market Timers announcements and gauge the market reaction to them better than the average investor in the
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Market timers note, with some legitimacy, that the payoff to calling turns in markets is much greater than the returns from stock picking. They argue that it is easier to predict market movements than to select stocks and that these predictions can be based upon factors that are observable. While valuation of individual stocks may not be of any use to a market timer, market timing strategies can use valuation in at least two ways: (a) The overall market itself can be valued and compared to the current level. (b) A valuation model can be used to value all stocks, and the results from the cross-section can be used to determine whether the market is over or undervalued. For example, as the numbers of stocks that are overvalued using the dividend discount model increases relative to the numbers that are undervalued, there may be reason to believe that the market is overvalued.
Efficient Marketer
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Efficient marketers believe that the market price at any point in time represents the best estimate of the true value of the firm and that any attempt to exploit perceived market efficiencies will cost more than it will make in excess profits. They assume that markets aggregate information quickly and accurately, that marginal investors promptly exploit any inefficiencies, and that any inefficiencies in the market are caused by friction, such as transaction costs, and cannot be arbitraged away. For efficient marketers, valuation is a useful exercise to determine why, stock sells for the price it does. Since the underlying assumption is that the market price is the best estimate of the true value of the company, the objective becomes determining what assumptions about growth and risk are implied in this market price, rather than on finding under- or overvalued firms. Valuation in Acquisition Analysis Valuation should play a central part in acquisition analysis. The bidding firm or individual has to decide on a fair value for the target firm before making a bid, and the
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target firm has to determine a reasonable value for itself before deciding to accept or reject the offer. There are also special factors to consider in takeover valuation. First, the effects of synergy on the combined value of the two firms (target plus bidding firm) have to be considered before a decision is made on the bid. Those who suggest that synergy is impossible to value and should not be considered impossible to value should not be considered in quantitative terms are wrong. Second, the effects on value of changing management and restructuring the target firm will have to be taken into account in deciding on a fair price. This is of particular concern in hostile takeovers. Finally, there is a significant problem with bias in takeover valuations. Target firms may be overly optimistic in estimating value, especially when the takeover is hostile and they are trying to convince their stockholders that the offer price is too low. Similarly, if the bidding firm has decided, for strategic reasons, to do an acquisition, there may be strong pressure on the analyst to come up with an estimate of value that backs up the acquisition decision.
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Valuation in Corporate Finance The objective in corporate finance is the maximization of firm value, and then the relationship between financial decisions, corporate strategy, and firm value has to be delineated. In recent years, management-consulting firms have started offering companies advice on how to increase value. Their suggestions have often provided the basis for the restructuring of these firms. The value of a firm can be directly related to decisions that it makes-on that projects it takes, on how it finances them, and on its dividend policy. Understanding this relationship is key to making value-increasing decisions and to sensible financial restructuring. Equity represents a residual cash flow rather than a promised cash flow. You can value equity in one of two ways: By discounting cash flows to equity at the cost of equity to arrive at the value of equity directly. By discounting cash flows to the firm at the cost of capital to arrive at the value of the business. Subtracting out the firms outstanding debt should yield the value of equity.
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Two Measures of Cash Flows Cash flows to Equity: These are the cash flows generated by the asset after all expenses and taxes, and also after payments due on the debt. This cash flow, which is after debt payments, operating expenses and taxes, is called the cash flow to equity investors. Cash flow to Firm: There is also a broader definition of cash flow that we can use, where we look at not just the equity investor in the asset, but at the total cash flows generated by the asset for both the equity investor and the lender. This cash flow, which is before debt payments but after operating expenses and taxes, is called the cash flow to the firm. Two Measures of Discount Rates Cost of Equity: This is the rate of return required by equity investors on an investment. It will incorporate a premium for equity risk the greater the risk, the greater the premium.
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Cost of capital: This is a composite cost of all of the capital invested in an asset or business. It will be a weighted average of the cost of equity and the after-tax cost of borrowing.
FREE CASH FLOWS TO THE FIRM The best things in life are free, and the same holds true for cash flow. Smart investors love companies that produce plenty of free cash flow (FCF). It signals a company's ability to pay debt, pay dividends, buy back stock and facilitate the growth of business - all important undertakings from an investor's perspective. However, while free cash flow is a great gauge of corporate health, it does have its limits and is not immune to accounting trickery. What Is Free Cash Flow? By establishing how much cash a company has after paying its bills for ongoing activities and growth, FCF is a measure that aims to cut through the arbitrariness and "guesstimations" involved in reported earnings. Regardless
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of whether a cash outlay is counted as an expense in the calculation of income or turned into an asset on the balance sheet, free cash flow tracks the money. To calculate FCF, make a beeline for the company's cash flow statement and balance sheet. There you will find the item cash flow from operations (also referred to as "operating cash"). From this number subtract estimated capital expenditure required for current operations: - Cash Flow from Operations (Operating Cash) - Capital Expenditure To do it another way, grab the income statement and balance sheet. Start with net income and add back charges for depreciation and amortization. Make an additional adjustment for changes in working capital, which is done by subtracting current liabilities from current assets. Then subtract capital expenditure, or spending on plants and equipment: - Net income + Depreciation/Amortization - Change in Working Capital - Capital Expenditure It might seem odd to add back depreciation/amortization since it accounts for capital
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spending. The reasoning behind the adjustment, however, is that free cash flow is meant to measure money being spent right now, not transactions that happened in the past. This makes FCF a useful instrument for identifying growing companies with high up-front costs, which may eat into earnings now but have the potential to pay off later. What Does Free Cash Flow Indicate? Growing free cash flows are frequently a prelude to increased earnings. Companies that experience surging FCF - due to revenue growth, efficiency improvements, cost reductions, share buy backs, dividend distributions or debt elimination - can reward investors tomorrow. That is why many in the investment community cherish FCF as a measure of value. When a firm's share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be on the up. By contrast, shrinking FCF signals trouble ahead. In the absence of decent free cash flow, companies are unable to sustain earnings growth. An insufficient FCF for earnings growth can force a company to boost its debt
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levels. Even worse, a company without enough FCF may not have the liquidity to stay in business.
RESEARCH DESIGN OF THE STUDY INTRODUCTION: Every stock available in the markets has a value called market price, which is the indicator of the companys performance. According to fundamental analysis we will try to find the intrinsic value of a particular stock, which is the true value of the stock, based on which investment arguments take place. STATEMENT OF PROBLEM:
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Every asset, financial as well as real, has value. The key to successfully investing in and managing these assets lies in understanding not only what the value is, but the sources of the value. Any asset at can be valued but some assets are easier to value than others, and the details of the valuation will vary from case to case. Thus, the valuation of a share of a real estate property will require different information and follow a different format from the valuation of a publicly traded stock. What is surprising; however, is not the difference in valuation techniques across assets, but the degree of similarity in basic principles. There is undeniably uncertainty associated with valuation. Often the uncertainty comes from the asset being valued, although the valuation model may add to that ascertained. A postulate of sound investing is that an investor does not pay more for asset than its worth. This statement may seem logical and obvious as financial assets are acquired for the cash flows expected from owning them, which implies that the price that is paid for any asset should reflect the cash flows it is expected to generate. The problem in valuation is not that there are not enough models to value an asset; it is that there are too
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many. Choosing the right model to use in valuation is as critical to arriving at a reasonable value as understanding how to use the model. Analysts use a wide variety of models from simple to the sophisticated. These models often make different assumptions about pricing, but they do share some common characteristics so in the study we tried to use price-earning multiples and discounted cash flow models of valuation.
OBJECTIVES OF THE STUDY: To understand the macroeconomic variables those will an impact on the company progress.
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To study the various trends, opportunities, challenges of the industry in which the company operates. To understand the various policies of the company those have impact on the financial performance of the company. To understand the various investment valuation models that can be used. To select the appropriate model that suits the stock. Find the intrinsic value of the stock and compare with market value of the study. To recommend whether to buy, hold or sell the stock based on the analysis. SCOPE OF THE STUDY: The study basically tries to identify the intrinsic value of the company by using the published financial details of the company. The study is restricted to one particular company in the sector. The study the intrinsic value of the company. also includes testing
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RESEARCH METHODOLOGY: Type of research: Research design is the conceptual structure within which research is conducted. It constitutes the blue print for the collection, measurement, and analysis of data. The type of research adopted for the study is descriptive research as the research does not require any manipulation of variables and does not establish causal relationship between events; it just simply describes the variables. Sources of data: Primary data Those are the data that are obtained by a study specially designed to fulfill the data needs of the problem. Meeting the company professionals personally collected the information necessary for the study. Secondary data Data, which are not originally collected but rather obtained from published or unpublished sources, are known as secondary data. In this research secondary data
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was collected through sources like Internet, research reports, magazines, and company journals.
Sampling plan: Type of sampling sampling. Sample size sector. : One company from automobile : Non-probabilistic judgment
RESEARCH INSTRUMENTS: Financial calculations: - This was done to find the various valuation ratios and necessary calculations to find the intrinsic value of the company. Z Test: - This test was used to test the hypothesis. PLAN OF ANALYSIS: After having collected the financial data related to the entities i.e., the sample selected from the selected sector. Calculate the various valuation ratios and other financial
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calculations that will help in the company valuation. This helps in finding out the intrinsic value of the companys share. Then hypothesis was tested whether the company is under or over valued.
LIMITATIONS OF THE STUDY: The study was confined only to one particular sector. The study was more confined with secondary data. The study assumes no changes in the tax rates in the country. The study was done for a short period of time, which might not hold true over a long period of time. As the scope is defined by the researcher it restricts the number of variables which Influence the industry. OPERATIONAL DEFINITIONS OF THE CONCEPTS: 1) BETA:
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A measure of a security's or portfolio's volatility, or systematic risk, in comparison to the market as a whole. It is also known as "beta coefficient." 2) CAPEX: Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment. 3) CAGR: The year over year growth rate of an investment over a specified periodoftime. Calculated by taking the nth root of the total percentage growth rate where n is the number of years in the period being considered. This can be written as:
4) COST OF EQUITY: The return that stockholders require for a company for the capital invested. The traditional formula is the dividend capitalization model:
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5) DEBT/EQUITY RATIO: A measure of a company's financial leverage
calculated by dividing long-term debt by shareholders equity. It indicates what proportion of equity and debt the company is using to finance its assets. Note: Sometimes investors only use interest bearing longterm debt instead of total liabilities.
6) DEPRECIATION: An expense recorded to reduce the value of a longterm tangible asset. Since it is a non-cash expense, it increases free earnings. 7) DIVIDEND PAYOUT RATIO: The percentage of earnings paid to shareholders in dividends. 9) DUPONT ANALYSIS: cash flow while decreasing reported
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A method of performance measurement that was started by the DuPont Corporation in the 1920s, and has been used by them ever since. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher ROI. 10) EPS: The portion of a company's profit allocated to each outstanding share of common stock. Calculated as:
11) EFFECTIVE TAX RATE: The portion of a company's profit allocated to each outstanding share of common stock. Calculated as:
12) EQUITY MULTIPLIER: A measure of financial leverage calculated as: Total Assets divided by Total Stockholders' Equity. Like all debt management ratios, the equity multiplier is a way of examining how a company uses debt to finance
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its assets. It is also known as the financial leverage ratio or leverage ratio. 13) ASSET TURN OVER RATIO: The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in rupees by assets in rupees. Formula:
14) FUNDMENTAL ANALYSIS: The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in rupees by assets in rupees. Formula:
15) MARKET CAPITALISATION: It is the total value of all outstanding shares of particular company, which is represented in the market. It's calculated by multiplying the number of shares times
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the current market price. This term is often referred to as market cap. 16) PE (PRICE EARNING MULTIPLES): A valuation ratio of a company's current share price compared to its per-share earnings. A valuation ratio of a company's current share price compared to its per-share earnings. Calculated as:
17) PEG (PRICE EARNING TO GROWTH): A valuation ratio of a company's current share price compared to its per-share earnings.
18) ROE: A measure of a corporation's profitability, calculated as:
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19) WACC: A calculation of a firm's cost of capital that weight each category of capital proportionately. Included in the WACC calculations are all capital sources, including common stock, preferred stock, bonds, and any other longterm debt. WACC is calculated by multiplying the cost of each capital component summing: by its proportional weighting and then
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CHAPTER SCHEME Chapter: 1 STUDY This chapter mainly deals with secondary data collected to support the study and the reasons to problem of study. Chapter: 2 RESEARCH DESIGN A research design serves as a bridge between what has been done in the conduct of study to realize the specified objectives. It is an outline of the projects working. Chapter: 3 PROFILES This chapter includes the profile of the industry as well as the company in which the study is conducted. This is also tries to deal with trends and prospects in the industry as well as the company.
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THEORITICAL BACKGROUND OF THE
Chapter: 4 ANALYSES AND INTERPRETATION In this chapter using the analyzed data we have tried to find out the intrinsic value of the company. Hypothesis test is done to find whether the value of the company is under or over valued. Chapter: 5 SUMMARY OF FINDINGS, CONCLUSIONS AND SUGGESTIONS In this chapter we will actually include all that we have analyzed and what has been found. Finally conclude checking whether the objective of the study has been achieved or not.
ECONOMIC ANALYSIS Economic Outlook: During the fiscal year 2003-04, Indias GDP which grew by 8.10% was principally on account of a strong recovery in the agriculture sector and accelerated growth in the industry and services sectors. A growth rate higher than 8% has been achieved in the past in only three years - 1967-68, 1975-76 and 1988-89. Exports have grown by 17.1% in 2003-04 in USD terms. While the rupee
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appreciated against USD in 2003-04, it depreciated against the currencies of major non dollar-trading partners. Foreign exchange reserves crossed the levels of USD 100 billion mark on December 2003 and stood at USD 199.3 billion as on 31st March 2004. Foreign Institutional Investors (FIIs) investments saw a sharp rise during the year, which amounted to USD 10 billion. Overall economic conditions look positive and expected to post a GDP growth of 6-6.5% during FY05.
GRAPH 1: ACCELERATING GROWTH OF GDP
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TABLE 1: INDIA - ECONOMIC PARAMETERS F 04 Growth 8.1 F 05 6.0 6.5 4.4
GDP
(%) Fiscal Deficit 4.8 (%) Interest Rate
Decline Hardeni ng 6.5
d Inflation 5.3
(Average) % Rupee - US Apprecia Steady Dollar ted (Source: RBI, CMI)
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GRAPH 2: SHOWING INDIAS REAL GDP GROWTH
As chart
also shows, growth in nonagricultural GDP
remained solid during 2004. Although a breakdown of Indian real GDP into its demand components is not readily available, it is likely that Indias strong nonagricultural growth performance last year was due entirely too robust domestic demand. The 10% rise in the production of consumer goods last year and the 20% increase in auto sales suggest that consumer spending has been very strong indeed. Consumer spending in India has been supported recently by strong income growth as growth in real per capita GDP has averaged 3.8% per annum since 2000.India has liberalized its economy over the past decade or so, much more needs to be done, and better allocation of resources, domestically and internationally, has contributed to this strong growth in per capita income.
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The Real Gross Domestic Product (GDP) is estimated to have grown by 8.10% in 2003-04, buoyed by a strong agricultural recovery. While the agricultural sector grew by 9.1% during the FY04, the industry and services sectors have also maintained their momentum with the GDP growth by achieving a growth rate of 6.5% and 8.4% respectively during the year. The growth GDP has grown by 7.4% during April-June 2004 period, lower than the 8.2% growth registered in January-March 2004 and 10.5% in October-December 2003 quarter. Inflation is also inching up higher, driven by increases in fuel and commodity prices. Non food credit has increased by 11.5% during the April-September corresponding 2004 years period 6% as against the previous indicating progressive
economic activities. But the global crude oil shock will definitely have an adverse affect on the growth during fiscal 2005. GRAPH 3: INFLATION
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The average inflation during fiscal year 2003-04 was around 5.5% as against the previous corresponding fiscals average of 3.4%, the prime movers being sugar, edible oils, textiles, leather and leather products, basic metals, alloys, iron and steel. With the increase of few commodity prices mainly the crude oil prices have increased the global inflation levels from June 2004, India being no exception to this. The domestic fuel prices have risen by more than 10% during the fiscal 2004-05 over last years. The inflation during the fiscal year 2004-05 touched three and a half years high of 8.33% for the week ended August 28th 2004 from 5.55% for the week ended June 5th 2004 due to the excess money supply in the economy. The reasons for the high inflation are both domestic and international. The domestic reasons include excess liquidity in the market and delay in monsoon that
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increased the prices of essential commodities. M3, the measure of money supply grew by 15.5 per cent in July 2004, compared to 11.25 per cent in July 2003. The international causes are inexorable rise in oil prices, global increase in the prices of commodities, supply side shock and growth in chinas demand for goods. This is cost-push inflation wherein the supply problems in a few important commodities push up prices of commodities. Since crude oil import constitute almost one third of the total exports, we can say that the present situation is on account of imported inflation. To check the rising prices, government took some measures like duty cuts on steel and oil products. Reserve Bank of India raised the Cash Reserve Ratio to 5% from 4.5% in two tranches of 25 basis points and has also cut the rate of interest payable on eligible cash balances maintained with it by banks by 250 basis points to 3.5 percent. In fact, the gradual reduction in the CRR over the past few years in successive credit policies had been one of the major contributors for the sustained reduction in the interest rates on auto loans. These moves were expected to draw out around Rs.8000 crore from the banking system. Later, the inflation was reduced to 7.20% in the last week of September. With the increase in the
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interest rates the auto loans will become costlier, thus having an adverse effect on the auto industry sales. The average inflation for the fiscal 2004-05 is expected to stay around 6-6.5%. Industry: Sales: The automobile industry growth relies mainly on the countrys economic and general conditions. Any slowdown in the economic momentum would definitely slowdown the growth of the industry. It can be seen from the below chart that the industrys sales is positively correlated with the economic growth with a co-relation of 0.96.
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GRAPH 4: GDP AND AUTO SALES

Real GDP (Rs. '000 Crore)
G Pa dA tos le D n u a s
15 40 10 40 15 30 10 30 15 20 10 20 15 10 10 10 1999 0 0 GP D 2000 0 1 2001 0 2 2002 0 3 2003 0 4 8 0 7 5 7 0 6 5 6 0 5 5 5 0 4 5 4 0
N o u its (inla s) o f n kh
(Source: www.indiabudget.nic.in) Rubber Prices: With the increase in rural activities, the commercial vehicles are expected to grow. Sports Utility Vehicles (SUV) after being a very big hit in the domestic market, the players now are planning to introduce them to the domestic market. But the increase in the input prices like steel and rubber has a negative impact on the industry profitability. The truckers strike has affected the auto players production and distribution to certain extent.
No of units(in lakhs)
At 1993-94 price levels
46
GRAPH 5: SHOWING RUBBER PRICES

Interntional & Domestic Rubber Prices
1600 1400 USD/Ton 1200 1000 800 600 400 Mar- Jul-01 Nov- Apr- Aug- Dec- Apr- Aug- Dec- Apr01 01 02 02 02 03 03 03 04 USD/Ton Rs/Ton 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
Source: indiainfoline A combination of internal and external factors has contributed to the price volatility in the rubber market. Since the domestic prices of rubber are less than the global prices, the tyre manufacturers in other countries, sourcing natural rubber from India which has led to the increase in the exports thereby reducing the domestic stock levels to less than sixty days of consumption of the rubber users sector. Also, the subsidy given by the
Rs/Ton
47
government for exports of rubber has resulted in an increase in the exports.
The steel prices GRAPH 6: SHOWING STEEL PRICES
Steel Prices
Rs/Tonne
40,000 30,000
Apr-02 Apr-04 Apr-03 Oct-02 Oct-03 Jan-03 Jan-04 Oct-04 Jul-02 Jul-03 Jul-04
20,000
G sheets C
Source: indiainfoline The steel prices are on rise following a sharp increase in the prices of raw materials like iron ore, coke, coal, power, gas and scrap. While the cost of iron ore went up by 75% during the period June2003 to July 2004, the scrap prices jumped up by 91%. Cokes prices saw an increase of 50% during the same period. There are no signs of decline in the prices of steel products following a strong demand
48
from
the
housing
and
infrastructure
sectors,
with
additional growth potential in the auto and consumer durables sectors too. With China taking steps to cool down its overheated economy, demand from that country is expected to slow down. But any shortfall in demand from China may be offset by growth in demand in the US, Europe and Japan as economic recovery gathers momentum leaving no scope for the steel price declines in the near short term. Competition and Market In the Automotive Sector the continuing convergence between the car and the UV markets is a positive development. High-end MUV sales accounted for 51% of mid-size car sales in India in F-04, as compared to 16% in F-00. The Co also believes that as the car market expands in India, MUVs will continue to take an increasing share of this market. After the success of the Scorpio and Bolero, Reduced interest rates with the maturing of the vehicle financing market will also add an impetus to vehicle sales growth. Increased penetration of such financing products in rural and semi-urban markets will directly benefit the
49
Company given its strong presence in these markets. M&M has the additional advantage that its subsidiary, MMFSL has a wide rural network. The ongoing WTO & Free Trade Area negotiations with Thailand, ASEAN, SAARC countries and the Mercosur countries are likely to lead to lowered tariffs across many of our target export markets. This could provide the Co with a significant opportunity to generate larger volumes from export sales. Being an agrarian economy Indias GDP growth is much dependent on the fortunes of the agro sector. Given this backdrop the Tractor industry assumes significance. The Indian Tractor industry is the largest in the world in terms of production and sales. However in terms of per capita usage it still scores low against comparable developing nations. This provides for ample scope of growth for the industry in future. With liberalization restrictions on capacities and production were removed. Today anybody can walk in and put up a plant and start operations.
50
COMPANY PROFILE: Mahindra & Mahindra Limited (M&M) is the flagship company of around US $ 2.5 billion Mahindra Group, which has a significant presence in key sectors of the Indian
51
economy. A consistently high performer, M&M is one of the most respected companies in the country. Set up in 1945 to make general-purpose utility vehicles for the Indian market, M&M soon branched out into manufacturing agricultural tractors and light commercial vehicles (LCVs). The company later expanded its operations from automobiles and tractors to secure a significant presence in many more important sectors. The Company has, over the years, transformed itself into a Group that caters to the Indian and overseas markets with a presence in vehicles, farm equipment, information technology, trade and finance related services, and infrastructure development. M&M has two main operating divisions: 1) The Automotive Division manufactures utility vehicles, light commercial vehicles and three wheelers. 2) The Tractor (Farm Equipment) Division makes agricultural tractors and implements that are used in conjunction with tractors, and has also ventured into manufacturing of industrial engines. The Tractor Division has won the coveted Deming Application Prize 2003, making it the only tractor manufacturing company in the world to secure this prize.
52
The resurgence of the automotive industry and M&M's success in exploiting it, has created an opportunity to strengthen the company through an entry into the Auto Components business, the growth of which is being fueled by both, domestic and export demand. M&M employs around 11,500 people and has six state-of-the-art manufacturing facilities spread over 500,000 square meters. M&M has also set up two satellite plants for tractor assembly. It has 49 sales offices that are supported by a network of over 780 dealers across the country. This network is connected to the Company's sales departments by an extensive IT infrastructure. M&M's outstanding manufacturing and engineering skills allow it to constantly innovate and launch new products for the Indian market. The Company's significant recent product launch, the "Scorpio", resulted in the Company winning the National Award for outstanding inhouse research and development from the Department of Science and Industry of the Government in 2003. The Company has launched India's first tractor with turbo technology - the Mahindra Sarpanch 595 DI Super Turbo.
53
The Company's commitment to technology-driven innovation is reflected in Company's plans of setting up of the Mahindra Research Valley, a facility that will house the Company's engineering research and product development wings, under one roof. The M&M philosophy of growth is centered on its belief in people. As a result, the company has put in place initiatives that seek to reward and retain the best talent in the industry. M&M is also known for its progressive labour management practices. In the community development sphere, the company has implemented several programs that have benefited the people and institutions in its areas of operations. Mahindra and Mahindra continues to be a solid company Company has registered a 28 % rise in its total vehicle sales at 11,484 units for August 2004 as against 8,946 units in the corresponding period previous fiscal. Mahindra City was granted special economic zone (SEZ) which includes 100% tax holiday for the next 5 years and a 50% tax holiday for the next five years, exemption from customs duty, central excise, service tax,
54
education cess, central sales tax, and all local taxes levied by the state. Company has set up four overseas operations in Uruguay, Italy, Dubai and South Africa for sale of Scorpio and Bolero models in these markets. Enters in to segments such as retailing agri-inputs, under its own brand, manage corn and soya as collateral for banks, export fruit to European supermarkets. The Farm Equipment Sector is the first Tractor Company in the world to win the Deming Prize. Also, it is the fourth company in India and the 10th in the world, outside Japan, to win this prize. Launched India's first tractor with turbo technology in Patna, it is now eyeing to capture the tractor market in the Bihar state in a big way. Regained dominance as a leader in both utility vehicles and tractors acquiring 50% market share. Recent Developments &Future plans: The companys long-term focus will continue to be MUVs. With the difference between the passenger car and the MUV segments fast disappearing, as the market for MUVs is likely to see a spurt in the near future. The
55
company plans to be the worlds biggest tractor maker by 2006, intends to overcome lack of similar size in utility vehicles (UV) manufacture by being a niche player. Their tractors were selling well in the US, giving M&M a handsome market share in the 40-60 hp ranges in Texas. M&M`s main US markets are in the South and South West. The company is growing at rate of 80 per cent in the US. Apart from US it also plans to market its tractors in Europe through a sister-trading firm after rescheduling plans to set up a subsidiary in the region. The company will also launch 85-horse power (HP) and 100HP models within the next 18 months to meet the specific demand for high-powered tractors in the European and US markets. On the cards are a number of improvements on the Maxx, based on customer feedback. The company also plans to expand its appeal with new variants. For the low-end personal segment, M&M has introduced the Marshal Royale. Marketing competencies: Flanking its strategy to become a global player, M&M is banking on its key brand attributes which essentially signify three basic things: trust, reliability, and value-forBabasabpatilfreepptmba.com
56
money. The overall marketing game plan involves a strategy around creating strong brands, Customer Touch Build a database of Customers for targeted marketing, Providing a unique customer experience Unique showrooms which give an entirely new buying experience are being planned and 40 dealerships would be converted into such modern showrooms during the current year and Improve Operational Efficiencies through outsourcing wherever sourcing. M&M has identified its 3 Weapons for the UV market. Each brand will be positioned uniquely targeting various spectrum of the market, the three brands - Scorpio, Bolero and Maxx. These are the three brands, which will be M&Ms future brand platform. Bolero will be one hub, while Scorpio will be one up market hub. The tractor segment where the company has 26% market share mainly depends on the distribution channels of the company. Production and distribution: The Companys manufacturing facilities are located at Kandivli, Nashik, Igatpuri, Nagpur, Zaheerabad, Jaipur and Rudrapur. Company has two main tractor manufacturing
57
required,
value
engineering
and
strategic
plants located at Mumbai and Nagpur in Maharashtra. Apart from these two main manufacturing units, the Farm Equipment Sector has satellite plants located at Rudrapur in Uttaranchal and Jaipur in Rajasthan. The Company has a strong and extensive dealer network of over 450 dealers for sales and service of tractors and spare parts. 28 area offices, situated in all the major cities and covering all the principal states, manage this dealer network. Employee Relations Employee relations have been generally cordial at all plants of the company. They have recently introduced two new schemes, which are in the pipeline for its top-level managers in order to bring balance in their work and personal life. Under this scheme, company has changed its leave policy wherein it has introduced a compulsory 15day leave for its middle and top-level officials. Besides this, the company also proposes to implement a compulsory early day-off at 5 pm at least once a week. They want their employees to spend value time with their family at home. They are trying to follow ergonomic rules for providing efficient working atmosphere, which is being effectively
58
implemented by companies abroad. The company is also focusing on training and development programmers for the career mapping of its employees and provides them with a meaningful professional career ahead. In addition, the company also plans to implement various development plans for training different level of employees. These measures will surely help in retaining its efficient contributors.
Board of directors: Mr. Anand G Mahindra Vice-Chairman &Managing Director and the four Executive Directors of the Company manage the Company. The Board reviews and approves strategy and oversees the actions and results of management to ensure that the long-term objectives of enhancing stakeholder value are met. The Company presently has seventeen Directors. The Vice-Chairman & Managing Director and the four Executive Directors are Whole-time Directors. Reimbursement of expenses incurred in the discharge of their duties, the remuneration
59
that these Directors would be entitled to under the Companies Act, 1956 as Non-Executive Directors. The Company has not entered into any materially significant transactions with its Promoters, Directors or the Management or relatives, etc. that may have potential conflict with the interests of the Company at large. Dividend policy: The Directors have recommended a dividend at 90% (Rs.9 per share). The dividend, together with the tax on distributed profit, will absorb a sum of Rs.117.79 crores (previous year Rs.71.98 crores) and will be paid to those shareholders whose names stand registered in the books of the Company as on the book closure date.
INDUSTRY PROFILE: The Indian automobile sector can be divided into several segments: 2 & 3 wheelers, passenger cars, commercial vehicles (Heavy CVs/ Medium CVs/Light CVs), utility vehicles (UVs) and tractors. The industry is highly capital intensive in nature. Though three-wheelers and
60
tractors have low barriers to entry in terms of technology, other segments are capital and technology intensive. Costs involved in branding, distribution network and spare parts availability increase entry barriers. With the Indian market moving towards complying with global standards, capital expenditure will rise to attune to future safety regulations. The industry is highly fragmented in nature. In the last ten years, supply has outstripped demand, as multinationals and domestic players have set up largescale manufacturing facilities to meet future needs. As a result, there is an absence of pricing power with manufacturers. Competition is expected to increase further, as global majors are planning to enter India either through direct investment or imports. Automobile majors increase profitability by selling more units. As number of units sold increases, average cost of selling incremental unit comes down when demand recovers. This is because the industry has a high fixed cost component. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance. INDUSTRY GROWTH IN VARIOUS SEGMENTS
61
Passenger cars Utility vehicles Light commercial vehicles 3 wheelers
: 17% : 23% : 12% : 23% : 8%
Heavy and multi commercial vehicles
PORTER FIVE FORCES MODEL: Supply: The Indian automobile market is plagued with excess capacity. Demand: Is largely cyclical in nature and dependent upon economic growth and per capita income. Seasonality is also a vital factor. Barriers to entry: High capital costs, technology, distribution network, and availability of auto components. Bargaining power of suppliers: Low, due to stiff competition and its fragmented nature. Bargaining power of customers: Very high due to availability of options. Competition: Except for heavy commercial vehicles segment, competition is stiff. The competition is expected to increase even further.
62
PROSPECT IN THE SECTOR: The government spending on infrastructure in roads and airports and higher GDP growth in the future could benefit the auto sector in general. This combined with a softer interest rate environment will play a vital role in providing a fillip to demand. Utility vehicle segment is expected to grow at around 8% in FY05. Though the market size is expected to grow by 12% -15%, competitive pressure could keep prices and margins under control. After three years in the wilderness, tractor industry seems to have finally come out of the trough as it grew by 10% during FY05. While good monsoon is a positive for the sector, given the fact that the country has had erratic rainfall in the past, volumes may not recover sharply. But the longer-term picture is
63
impressive in light of poor mechanization levels in the country. With an estimated 39% of CVs plying on the roads 10 years old, demand for HCVs is expected to grow by 8% in FY05. Also adding the positives are higher crop output, industrial sector growth and favorable interest rate environment. While the industry is cyclical in nature, we expect this factor to weaken in the medium term arising out of structural changes in the industry. The privatization of select state transport undertakings and hiking of bus fares bodes well for the bus segment as well. The reduction in peak customs duty from 30% to 25% in the budget will result in savings on the raw material front as well. Since raw material costs account for almost 50% of revenues of auto companies in general, this is a positive. Also, steel prices have shown some signs of softening and this is likely to have a positive impact on the margins of the players. We expect Indian auto majors to increase capital expenditure budget at an average of 4%-5% of revenues in FY05 as against around 2%-3%
64
historically.
This
would
be
towards
product
development and complying with new environmental regulations. With MNCs willing to sacrifice profitability for growth in the short-term, it has become imperative for domestic players to spruce up R&D efforts. At the same time, cash flow position is much stronger now given that most manufacturers have reduced working capital and debt. This would mean financing bulk of incremental capex from internal accruals. Product Pricing: The Indian automobiles are slowly shifting away from the price sensitiveness towards the value addition concept. Besides, even the SIAM has changed the norms of classification from the previously followed Price basis to the size/ length of the vehicle. Previously, the industry was highly price sensitive and the sales were dependent on price brackets. But the Indian customers perception is slowly changing and moving towards the value additions such as the size of the car, the style, the comfort, the level of service offered by the manufacturers, the variants available in the category etc. Even though the perception is changing, it is true that still price plays an important role
65
in the industry. The role of price may be very negligible in some segments, but in the other segments they are very much reactive to the price fluctuations. Thus, 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 service. These players also offer discounts during festival season to boost the sales. Growth Drivers:
1.Economic
growth: There is a direct co-relationship
between the per capita income of the people and the demand for automobiles. Due to the increased business activity, the economy supports the industry growth as well as generates employment. The demand for automobile is expected to grow with the improved standard of living. Even though the economic growth rate during the year was 8.056 percent, the future average growth rate is expected to be around 6.5 percent without any economic reforms.
2.Income
level: The level of income has got a direct
impact on the sales of the automobile. The rise in

66
income level, results in increase in the number of people crossing the income threshold, thus changing the profile of customer. The lifestyle of the people tends to change automatically. With their increased buying power, they would lookout for more comfort. For E.g. when the income of a lower middle class family increases, say they would like to shift from two-wheeler to buy a used car. This in turn increases the demand for used car market and a good resale value for the seller, thereby indirectly increasing the sales of new cars. With the entry of MNCs especially in the IT, ITES and BPO sector, the income level and lifestyle, both are encouraging the younger generation. This has also reduced the average age of a car buyer.
3.Monsoons/
Rural economy: The monsoon is the
backbone of the Indian agriculture. In India, around 65 percent of the national income is contributed by the agricultural sector and constitutes about 22 percent in the GDP. The monsoons support the economic growth. With the arrival of monsoons, the rural sector is expected generate more jobs in the rural economy and more income, thus increasing the purchasing power of
67
people.
Along
with
this,
even
other
industries
performance will boost up. Thus, the demand mainly for utility vehicles increases with the better performance of the rural sector.
4.Used
car Segment:
The industry saw a growth of
around 30 percent in the used car segment during fiscal year. The profile of an Indian Car buyer has been changing due to the increasing purchasing power. Besides, the used cars are becoming affordable due to the reduced Equated Monthly Installments (EMI) and increased repayment period. A more active lifestyle, rising disposable income and lower cost of replacement are guiding the customers to change their cars once every three years now. Even though this market is unorganized to a large extent, the organized used car segment is slowly growing in India. With the manufacturers only coming forward to buy back their models, has in turn helped the sales of new vehicles.
5.Availability
of finance for both new and used
vehicles: With the ease in the availability of finance both the new and used auto market segment has been
68
witnessing a growth. Previously, loans were provided only for the new vehicles, but now the financial institutions have come forward to offer the loans for used vehicles too. With the increasing competition among the finance providers, they are reducing the rates day by day. Along with this, even some companies go beyond the industry benchmark by financing up to seven year old vehicles, thereby helping the growth of the used auto segment. The interest rate has almost halved in comparison to the rates during 1998 and has touched as low as 6.5 percent per annum. Auto manufacturers are using this as a tool to increase the sales. They are having tie-ups with the finance providers or floating their own finance companies.
6.Infrastructure:
Due to the increased investment in
infrastructural projects especially in the development and improvement of road projects, the overall transport business activities and the tourism is expected to grow, which in turn creates a good demand for the utility vehicles. Traffic on roads is growing at a rate of 7 to 10% per annum while the vehicle population growth for the past few years is of the order of 12% per annum. So
69
there
is
need
for
the
development
of
good
infrastructural roads for the growth of the automobile industry. On the other side, poor road infrastructure and traffic congestion can be a bottleneck in the growth of vehicle industry.
7.Exports:
With the global players looking at developing
vehicles that can be launched in multiple markets to reduce their developmental cost and to reduce their development costs, India is expected to increase its exports. These giants are planning to use their Indian facilities as hub for their worldwide operations. With this move, General motors and Daimler Chrysler both have their R & D center in Bangalore, which will have an important role in International product development. Toyota has plans to turn India into its lowest costmanufacturing center. MUL is also becoming a hub for small cars for Suzuki Motor Corporation. The countrys car sales and exports is expected to register around 8.5 lakh units by the fiscal 2006-07, which will mainly be driven by compact and mid size car segment. TABLE 2: COST ANALYSIS As % of net sales Raw Material FY05 69.4 FY04 67.8
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Staff Cost 5.0 5.9 Other expenditure 13.1 13.4 Source: India Infoline Research Raw material cost pressures was faced by most of the companies in the sector. For instance, raw material cost as a percentage of net sales increased by 5.7 percentage points for Punjab Tractors, 5.2 percentage points for BAL, 2.8 percentage points for ALL and 2.5 percentage points for Tata Motors. Staff cost declined by 66bps and other expenditure increased 41bps as a percentage of net sales. Punjab Tractors and M&M enjoyed the benefit of a reduced staff cost by 370bps and 230bps as a percentage of net sales. Punjab Tractors maintained its margins in spite of a high rise in raw material cost due to savings in staff cost and other expenditure.
Major competitors and Market position: Prior to 1980, Premier Automobiles Limited (PAL) and Hindustan Motors (HM) had dominated the Indian passenger car market. With the entry of Maruti Udyog Limited (MUL) in 1980, the former players faced a tough
71
competition. Even though they were able to maintain their volumes, their market share drastically reduced. MUL dominated the passenger car market and faced no competition till early 1990s. After the liberalization took place, with the entry of foreign players, the problems began for MUL. MUL started loosing its market share slowly. During the initial stages of liberalization, since MUL had depreciated its plant already by then, no player in the industry was able to match MULs Maruti 800s entry price. But still, MUL faced tough time in the upper segment. With the launch of the models like Indica, Santro and Matiz by Tata, Hyundai and Daewoo respectively, in the price range of 3- 4.5 lakhs, MULs market share fell down sharply. But, however MUL is still the market leader in the passenger car segment, and was able to maintain its market share with its successful models like Maruti 800, Esteem, Zen, Wagon R and Alto. The overall market share of MUL fell from 70.2 percent in 1995-96 to 58.1 percent during 199900, which further declined to 51 percent as on February 2004. This can be attributed to the increased competition from Hyundai, Tata motors, Fiat, General motors, Hindustan motors and Honda Siel.
72
In the A segment, MUL hold the monopoly position with its 800 model and no other player has been able to enter this segment. This model alone accounts for about 25 percent of the total sales of the passenger cars. In the lower B segment, MUL holds the leadership position with its three models in the segments viz Zen, Alto and Wagon R, followed by Hyundai. But, model wise Santro tops the segment with its 37 percent share in this segment. There are three players in the upper B segment, with Tata in the No.1 position. Its model Indica accounts to 86 percent of the total sales in the segment. MULs Esteem lost its leadership position to Tatas Indigo, which has dominated the market with 31 percent share. This ahs been followed by Hyundais percent and 22 percent respectively. Honda Siel occupies the dominant position with its City model. Toyotas Corolla and Hondas Accord are dominant in the D & E segments respectively Accent and Ford Ikon, whose market shares are 27. With the launch of new models in MUVs and SUVs, the utility vehicles sales are in an upward trend. In the utilities segment Mahindra & Mahindra has been able to maintain its leader position, followed by MUL, which manufactures the models like omni and versa. The launch of Qualis model has given a new look to the
73
industry. Even, it grabbed some share of passenger car industry, since the customers perceived it as a big car, which is even easy to drive, unlike other utility vehicles. The launch of Mahindras SUV Scorpio also moved along the lines of Qualis, dragging the passenger car customers. Watching the Scorpios success a new range of SUVs were launched by other players in the industry. The new SUV models, which are launched, recently are Marutis Jimny, Fords Endeavour, Suzukis Vitara, Chevrolets Forester and Hyundais Terracan. With this move by the players, the red line between the utilities and the passenger car is slowly vanishing.
74
GRAPH 7: SHARE OF PLAYERS IN THE PASSENGER CAR SEGMENT AS ON FEB 2004-05

M arket Share: Com panyw ise 16%
3%
3% 9%
18%
Maruti Hyundai Ford Tata Eng Honda Siel Others
51%
75
GRAPH 8: SHARE OF PLAYERS IN THE UTILITIES SEGMENT AS ON FEB2004-05
U tilitie s m a rk e t s h a re
16% 15%
1%3% 34% B a ja j T e m p o Mah & m ah M a ru ti U d yo g Te lc o To yo ta K irlo s k a r O th e rs
31%
Suppliers: The Indian Auto component industry was started with an aim of reducing the imports and being self-sufficient. But, over a period of time this industry has achieved its objective along with being a good foreign exchange earner. The auto component industry maintained a low but positive growth rate mainly due to its export performance.
76
This industry has maintained a 10 percent to 12 percent share of exports in its total production. Indias automotive component industry manufactures the entire range of parts required by the domestic automobile industry and currently component employs about 250,000 supply to persons. two Auto of manufacturers kinds
customers original equipment manufacturers (OEM) and the replacement market. The replacement market is characterized by the presence of several small-scale suppliers who score over the organized players in terms of excise duty exemptions and lower overheads. The demand from the OEM market, on the other hand, is dependent on the demand for new vehicles. The strict reform by the Government with respect to the indigenization programme has led the OEMs to increase their indignation over the years. In India, the auto component manufacturers are found working close in proximity with the vehicle manufacturers ensuring the just in time deliveries. The trend of the auto component industry is to outsource manufacturing assembly to component suppliers while the OEM imperative is to cut costs, improve customer responsiveness and build to order, which helps them to build their own competitive advantage.
77
Government Regulations: Even though the auto sector has been deregularised, the government still vests the powers with itself to influence the industry, in terms of controlling the import, excise and customs duties and emission norms. After the lifting of licensing in 1993, 16 ventures came up to manufacture cars. The governments auto policy has restricted import of cars and automotive vehicles in completely built (CBU) form or in completely knocked down (CKD) or in Semi knocked down (SKD) condition. And the car manufacturers were issued licenses to import components in CKD or SKD form only after execution of the Memorandum of Understanding (MOU) with the Director General Foreign trade (DGFT). 11 companies signed MOU and they have agreed to bring in minimum foreign equity of US $ 50 mn, if a joint venture is involved in majority foreign equity ownership. Along with this, they have also agreed to indigenize components up to a minimum of 50 percent in the third year and 70 percent in the fifth year. The government has permitted for 100% foreign equity investments for the manufacturing of automobiles and components. The Government will review the automotive
78
tariff structure periodically to encourage demand, promote the growth of the industry and prevent India from becoming a dumping ground for international rejects. The incidence of import tariff will be fixed in a manner so as to facilitate development of manufacturing capabilities as opposed to mere assembly without giving undue protection, to ensure balanced transition to open trade, to promote increased competition in the market and enlarge purchase options to the Indian customer. Appropriate measures including anti dumping duties will be put in place to check dumping and unfair trade practices. The conditions for import of new Completely Built Units (CBUs) will be as per Public Notice issued by the Director General Foreign Trade (DGFT) having regard to environment and safety regulations. Used vehicles imported into the country would have to meet CMVR, environmental requirements as per Public Notice issued by DGFT laying down specific standards and other criteria for such imports. The governments policy allows weighted tax deduction for the sponsored research and in-house R&D expenditure and also excise duty rebate of 1% of the gross turnover. The government is also encouraging auto design firms by providing them tax breaks and concessional duty. The
79
government
is
supporting
the
development
and
introduction of vehicles propelled by energy sources other than hydrocarbons by promoting appropriate automotive technology. The road tax on vehicles varies from state to state and a lifetime road tax is in existence. The government controls the import of automobiles and its components through its EXIM policy. It has allowed the import of used cars with some restrictions and they should confirm to the Central Motor Vehicle Rules, (1989). Excise duty on (Basic + SED) on cars and MUVs reduced from 32% to 24% and for CKD and SKD kits reduced from 30% to 25%. The government has announced 48 new road projects with an estimated cost of Rs400bn and it a levy of 50 paisa on per liter of diesel will be collected for the funding of the above road projects. By the year 2010, the Indian safety regulations will be completely aligned with the ECE regulations like anti-theft, EMC, noise, front, side and lateral collision, etc. Emission: The need to reduce vehicular pollution has led to emission control through regulations in conjunction with increasingly environment-friendly technologies. It was only in 1991 that the first stage emission norms came into force
80
for petrol vehicles and in 1992 for diesel vehicles. From April 1995 mandatory fitment of catalytic converters in new petrol passenger cars sold in the four metros of Delhi, Calcutta, Mumbai and Chennai along with supply of Unleaded Petrol (ULP) was affected. Availability of ULP was further extended to 42 major cities and now it is available throughout the country. From the year 2000, the passenger cars and commercial vehicles are meeting Euro I equivalent India-2000 norms. Euro II equivalent Bharat Stage II norms are in force from 2001 in 4 metros of Delhi, Mumbai, Chennai and Kolkata. Since India embarked on a formal emission control regime only in 1991, there is a gap in comparison with technologies available in the USA or Europe. Currently, India is behind Euro norms by few years, however, a beginning has been made, and emission norms are being aligned with Euro standards and vehicular technology is being accordingly upgraded. Vehicle manufactures are also working towards bridging the gap between Euro standards and Indian emission norms. In this move, the government is making all efforts to implement Euro III from 2005 effectively WTO:
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The WTO restrictions came into effect from 1st April 2001 and the Indian industries were feeling a sense of threat pulled of down cheaper the imports. of However, threat. with the the governments decision to hike up the imports tariffs, it curtains Besides, government laid down many restrictions with regard to imports, in order to save the country from being the dumping ground for deteriorate foreign products. It allowed the import of vehicles only from the country, where they have been manufactured and they should comply with the Central Motor Vehicle Rules, (CMVR, 1989) and import of new cars would be allowed through only through few ports viz Mumbai, Kolkata and Chennai. The government has lifted quantitative Restrictions on imports of second-hand automobiles. The government has decided to allow the entry of second hand vehicles into the country only through the Mumbai port. Used vehicles being imported should not be more than three years old and the importing agency is expected to submit a certificate issued by a testing agency notified by the central government that the second hand vehicle being imported has been tested immediately before shipment and that the vehicle conforms to all the regulations specified in Motor Vehicles
82
Act, 1988. The policy lays down that imported automobiles should have a minimum residual life of five years and the importer should ensure supply of spares and service during this period. Import of left hand vehicles was banned. The vehicles should necessarily have right-hand steering controls, a speedometer indicating the speed in kilometers and a photometry of the headlamps to suit 'keep-left' traffic. All these restrictions were made in order to see to it that the Indian customer gets the best vehicle from abroad. The government made a policy, which totally bans the import of cars whose engine capacity ranges from 1000 to 2500cc. All these steps were taken in order to limit the imports only to the upper end segment.
Challenges: Price is the factor to penetrate the Indian
automobile market. MNCs bring in with them enormous research and development skills, global design expertise and years of experience in manufacturing and selling automobiles in multiple countries. Indian companies are
83
taking small steps in entering new markets with one or two offering compared to global companies. Ability to meet changing technology, customers needs and styling and shortening product life cycle are the challenges that Indian companies have to face. Future Outlook: The overall elements in the economy seem to be in favor of growth of automobile industry. The passenger car segment is expected to grow at around 8% during the period 2004-07. Besides, the exports are also expected to grow, which will be driven by the increasing demand for compact cars. The GDP growth, increasing income level, changing lifestyle of people, availability of finance for both new and old cars with low EMIs, new launches, new infrastructural projects and export growth are the factors which fuel the growth of the automobile industry. Now, with the extension of services of finance providers to the rural market, the car and utility vehicles sales are expected to move up. The manufacturers are even concentrating to sell their new launches including SUVs in the rural market.
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With a big success of SUV concept in India, almost all the players in the market have come out with their competitive models, thus hotting up the competition. All the players are concentrating on cost cuts and cost effective methods in order increase the profits of their supply chain. The government has reduced the excise duty on steel from previous 16 percent to 8 percent from first week of March. With this, the automobile manufacturers are benefited with the improved margins. Despite the excise duty cut, the steel prices are on a bullish trend. To overcome this problem, the manufacturers are in a thought of replacing the steel components with aluminum, which reduces their cost considerably. If the rupee continues to appreciate against dollar and depreciate against the won, yen and euro, then the industrys profits will be squeezed, since it means higher cost of import and lowered revenue. With the companies establishing their R & D centers here, India is expected to emerge as an International hub for product development. However, the automotive industry has to work closely with the dealers and vendors to make the
85
expected growth possible. The automobile industry needs to aggressively benchmark its products and processes with the Industry best - both in India as well the worlds best. Only those companies, which improve their processes regularly, will survive. Further, Indian automobile Industry needs to learn the best practices quickly to survive the threat of WTO. However Indian markets are very advanced in using the state-of-the-art makers technology are and Indian auto component becoming global sourcing
partners for auto makers. Most Indian players are sourcing their component requirement from Indian component makers only. Any paradigm shift in technology with the emission norms and alternate fuels will likely increase the technology gap between the local companies and MNCs here. So a substantial investment in R&D is necessary for domestic players. Dieselization is going to be a future trend in the Indian market with rising petrol prices and the significant difference between petrol and diesel prices. Currently, 20-25% diesel engines are in use in the Indian
86
market, and this is likely to grow up to 30-35% in the medium term. Another trend that might be seen in the near future is rise in the utility vehicle sales. With infrastructure facilities increasing more people prefer the UVs for inter city travel. So, in the future small and compact cars are likely to face competition from UVs. As the economy is growing, the car industry will see a 12-15% compounded annual growth rate in the medium term. As long as India continues to grow economically and the income of Indians continues to rise, India will become a major automobile consumer and producer.
1) Analyst Assumptions 2) WACC 3) Value Drivers 4 Income Statements 5) Balance Sheet 6) Dupont analysis 7) PE multiples.
87
TABLE 3: ASSUMPTIONS MADE FOR THE STUDY Assumptio ns Marc Marc h' h' 05 06 10.00 10.00 % % 9.28 10.00 % % 17.76 15.00 % %
Income statement Sales growth Operating Margins Other Income as a % of investments
Marc h ' 07 9.00% 10.00 % 15.00 %
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Effective Tax rate
21.93 % Cost of debt (Pre tax) 10.54 % Debt to equity 0.44 Gross asets a % of 51.15 Sales % Depreciation as % 6.61 G.Assets % Dividend payout 11.66 % Dividend Tax 12.81 % Investments as a % of 22.74 total Sales % Current assets as a % 28.89 of sales % Current liabilities as a 26.75 % of sales %
22.00 % 7.50 % 0.35 50.00 % 7.00 % 12.00 % 12.50 % 22.00 % 29.00 % 26.00 %
22.00 % 7.50% 0.30 50.00 % 7.00% 12.00 % 12.50 % 22.00 % 29.00 % 26.00 %
TABLE 4: WEIGHTED AVERAGE COST OF CAPITAL Risk free rate Market rate of return Beta Interest Paid (Rs. Crore) Market value of debt (Rs. Crore) Tax rate Cost of debt Cost of equity WACC 7.00% 16.00% 1.02 51.58 934.82 37.00% 3.48% 16.18% 14.31%
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TABLE 5: VALUE DRIVERS 2005 2004 2003 Market 5417.6 Capitalisation (Rs. 0 Crore) P/E (Trailing) P/E 14.24 15.5 1.86 8 P/B 3.23 1.86 1.17 TABLE 6: INCOME STATEMENT in Lakhs) Income statement Gross Sales Less: Excise Net Sales Operating Income Total Income Less: Raw Material + Purchases Employee Cost Mar ' 03 399675 .3 0 Mar ' 04 44526 5 78549. 06 399675 36671 .26 5.9 399675 36671 .26 5.9 211723 .1 36991. 46 25002 1.8 38129. 03 Mar' 05 582924 .6 94378. 11 488546 .48 488546 .48 335286 .52 41745. 39 (Rs
90
Selling Expenses
19982. 1 Administrative Expenses 2505.3 2 Other Expenses 59545. 22 Provisions 1235.3 5 Miscellaneous expenses 15243. 27 Change in Stock (-) Inc./ 6440.9 (+) Dec. 4 Expenses Capitalised Amortisation Total Operating Expenses Operating Profit Interest Gross Profit Depreciation PBT before non op and extra ord Non Operaing Income
19539. 59 2955.1 2 18183. 99 4010.3 3 15283. 98 2357.9 9
18581. 6 3128.2 5 25795. 99 44.21
1748.9 7 1070.9 5 356486 35288 .68 5.9 43188. 58 25275. 67 17912. 91 13938. 29 3974.6 2 5285.4 3
19171. 61 2143.2 3 1917.0 1577.5 77 5 486.95 6.76 443194 .65 45351. 83 7693.2 7 37658. 56 16519. 9 21138. 66 19732. 81
13830. 01 1150.3 9 12679. 62 16056. 7 3377.0 8 17314. 88
91
Add: Extra Ord. Income Less: Extra Ord Expenses PBT Provision for Taxation Deffered taxation PAT Prior Year (+)Inc./ (-)Exp. Reported PAT B/F Profit available for allocation Proposed Equity Dividend Dividend Tax Equity Dividend (%) Eps
1728.5 8 0 7531.4 7 360 -2520 9691.4 7 9691.4 7 0 0 0 0 8.35
5765.6 2947.8 1 3 0 19703. 41 1230 3920 0 43819. 3 6350 2615
14553. 34854. 41 3 14553. 41 36539. 1 0 34854. 3 54709. 43 89563. 73
6380.6 10441. 4 48 817.55 1337.8 2 12.55 30.05
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TABLE7: EXPECTED INCOME STATEMENT Expected income statement Operating Income Non Operating Income Operating expenses Operating Profit Interest Gross Profit Depreciation Other Non operating exp Tax PAT Dividends
March ' 05 488546 .48 19732. 81 443194 .65 45351. 83 7693.2 7 57391. 37 16519. 9 8965 34854. 43 10441.
March ' 06 537401 .13 17734. 24 483661 .02 53740. 11 5274.7 6 66199. 59 18943. 48 192.88 10353. 91 39167. 42 4700.0
March ' 07 585767 .23 19330. 32 527190 .51 58576. 72 5398.2 8 72508. 77 20636. 29 154.31 11378. 00 45063. 81 5407.6
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Dividends Tax Retained Earnings Expected EPS
48 1337.8 2 23075. 13 30.02
9 587.51 33879. 82 33.74
6 675.96 38980. 20 38.82
TABLE 8: BALANCE SHEET March ' 03 SOURCES OF FUNDS Owner's Fund Equity Share Capital Share Application Money Preference Share Capital Reserves & Surplus Loan Funds Secured Loans Unsecured Loans Deferred Tax Liability (Net) Total March ' 04 March ' 05
1160.8 6 0 0
1160.8 6 0 0
1160.8 6 0 0
138800 145382 165902 .6 .23 .49 92415. 36 21569. 09 0 27096 7.54 92415. 36 21569. 09 17710. 01 28867 7.55 72980. 78 24458. 03 20325 27080 9.13
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USES OF FUNDS Fixed Assets Gross Block Less : Revaluation Reserve Less : Accumulated Depreciation Net Block Capital Work-inprogress Intangible assets Investments Net Current Assets Current Assets, Loans & Advances Less : Current Liabilities & Provisions Total Net Current Assets Miscellaneous expenses not written Total
206803 243681 249879 .7 .94 .69 0 0 0 87954. 5 141377 .86 34873. 41 0 80012. 79 173236 .64 105074 .24 68162. 4 0.00 28810 7.8 102304 .08 141377 .86 5231.0 1 0 86226. 96 161348 .02 109478 .25 51869. 78 3971.9 6 28867 7.55 116582 .68 133297 .01 3841.1 2021.8 111115 .31 150256 .79 130687 .3 19569. 49 964.42 27080 9.13
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TABLE 9: RELATIVE P/E AND PEG RATIO EPS EPS EPS EPS (06 (07 Growth( 05 ) ) 06) Ashok 1.6 2.0 2.3 Leyland 3 2 1 23.)3% Bajaj 33. Tempo 55 Mahind ra & Mahind 30. 33. 38. ra 04 74 82 12.32% Maruti Udyog 18. 32. Ltd 77 2 40 71.55% Hindust an Motors Tata 22. 32. 39. Motors 96 98 6 43.64% (Source: www.icicidirect.com) EPS Curre Growth( nt P/E 07) P/E 06 14.36% 11 14. 16.65 06 13. 06 11. 91 PEG 06 0.46 1.1 4 0.18 0.27
15.06% 24.22% 20.07%
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EP S Ashok Leylan d Bajaj Tempo Mahin dra & Mahin dra Maruti Udyog Ltd Hindus tan Motors Tata Motors 16. 28 33. 55
Boo k Debt valu To e Equi Curre per OP CEP ty nt shar M( S ROE Ratio e %) 24.4 1 0.48 57.6 4 0.3 19.4 7 1.45 23.1 1 1.6
P/ BV NP M( %) 2.2 1.7 5 2.8 4 2.8 8 2.8 1.4 6
11.4 5.5 83.6 2 1 145. 4.5 15 7.67 2 152. 10. 18 47 6.8 8
30. 45. 04 32 18. 76 5.0 2 22. 96
19.9 0.41 1 0.99 15.1 6 1.17 116. 32 1.37 22.7 1 0.72
38.4 0.08 2.17 5.04 35.2 6 0.35
123. 13.2 5.6 74 5 1 10. 4.32 0.47 98 101. 13.1 6.1 08 4 2
TABLE 10: RELATIVE RATIOS (Source: www.icicidirect.com)

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TABLE 11: DUPONT ANALYSIS ROE 200 4 2005 9.27 19.6 % 4% 2004 2005
200 3 6.44 % Analysis
ROE UP UP NPM UP UP Assets UP UP Assets NPM Equity Turnover Turnover Multiplier 200 200 200 Equity DOWN DOWN 200 200 200 3 4 5 200 200 200 Multiplier 3 4 5 3 4 5 2.97 3.92 7.07 Sales UP UP 0.7 0.9 1.2 % % % 2.7 2.5 2.2 Equity to L.T DOWN DOWN 9 2 2 6 7 8 Debt
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Mahindra and Mahindra Valuation: Mahindra and Mahindra is one the leading names in the Automotive solid and farm sector and industry. brand The name companys reputation
recognition give them a great advantage in their field. The company has shown great improvement and promise throughout its history, and expectations are high as ever. Sales are expected to continue to grow and the company will continue to flourish. This is why we placed such an importance on sales for our valuation model. We used our growth in sales to help forecast many of the companys accounts. By using sales growth, or a percentage of sales to forecast we feel our numbers safely represent where the company is headed. For the first year of our forecast we have sales growth of 10%, and the following four years have growth reducing by 1% every year. We feel these numbers are accurate gbowth rates due to companys history. The company is very well developed and in the growth and expansion of their lifecycle. We feel the company will continue to grow at a good pace. We chose to forecast the five year period for a few reasons. We feel the five year period is
99
enough time to avoid any questions or uncertainties as number of new players entering the market. Through the forecasting of the companys major financials we were able to find important value driver calculations. We were able to find the Reported PAT, operating Profit, Free Cash Flow of M&M Co. These are important numbers needed to find our target stock price. The WACC was a very important part of our valuation model. To find the WACC we had to find the cost of equity and debt for the company. In order to find the cost of equity we used the CAPM equation. This allowed us to find the companys cost of equity of 16.18%. To find the cost of debt we had to use interest and total debt funds of the company and interest spread. This allowed us to find the companys cost of debt to be 3.48%. With these numbers we were then able to find companys WACC of 14.31%. Last, to complete our valuation model we had to find our target stock price. In order to find our price we used the DCF Model. For the DCF Model we use free cash flows to find the stock price of Rs 517.22. We also used the relative P/E ratio analysis as well as PEG
100
ratio .To use the relative P/E analysis; we found comparable companies to Mahindra, and their respective price to earning ratios. Financial performance Half yearly results The company managed to post a double digit growth in its both top line and the bottom line for the six months period ending 30th September during the FY05. The sales of the company grew by a hopping 39% to Rs. 2,977.58 crore during the half-year period in FY04 as against corresponding period of the last years figure of Rs. 2142.22 crore which can be attributed to the robust demand in the market due to the increased economic activity. The companys operating profit moved up by 11.69% to Rs 348.09 crore during the period, as against corresponding period of last years figure of Rs 199.24crore.The company made a major change in the operating margin due to the following reasons Strong fixed and variable Cost reductions (58 bps reduction in Employee cost / revenues,
101
Value engineering, Strategic Sourcing, Vendor meets), Price Increases and Increased Productivity. But the bottom line of the company rose by 96% to Rs.4911crore along with the net profit margin which moved up from last years 6.42% to 4.45%. RECOMMENDATION OF THE STOCK Mahindra & Mahindra Ltd (M&M) is a homegrown auto major and the flagship company of the Mahindra group. The group has varied business interests ranging from automobiles, farm equipment, telecom, infrastructure development to trade and financial services. M&M contributes nearly 70% of the group's total turnover of Rs6, 200 crore. This front-runner of the group is into manufacture and marketing of utility vehicles (UVs), light commercial vehicles (LCVs) and farm equipment ie tractors. For the nine-month period ended December 2003, the UV and the LCV segment contributed 73% of the total revenue while the farm equipment segments added the balance 23%. The automotive division manufactures and sells a wide range of UVs
102
(Commander, Armada, Classic, Voyager), passenger vehicles (Scorpio, Bolero) and LCVs (the Cabking & FJ series of load carriers and minibuses), and Champion, a 3-wheeler diesel vehicle. Scorpio, a sports utility vehicle launched by the company has been a huge success in the sports utility vehicles segment. At the current market price of Rs493, the stock trades at 11.9x We FY2005E maintain and our 10.0x buy FY2006E earnings.
recommendation on the stock with a price target of Rs 519. HYPOTHESIS TESTING: By hypothesis, we mean a statement about the population parameters. Hypothesis testing deals with a procedure, which accepts or rejects the hypothesis. There are two types of hypothesis.
1.
Null Hypothesis: It states that there is no significant difference between the market value and the intrinsic value of the company. Ho denotes the null hypothesis. Alternate Hypothesis:
2.
103
In case the null hypothesis is rejected, we should have an alternate hypothesis to accept. Alternate hypothesis is denoted by HA. This shows there is difference between the market value and intrinsic value of the company. It also explains whether the company is under valued or over valued. BEST CASE SCENARIO -POPT WORST CASE SCENARIO -P PESS MOST LIKELY SCENARIO -P ML
E P PP T =O +* PL 4 M 6 + PS P ES
PP O T ( P) =
M P E P = ( P)
Based on the above calculations the expected price comes to Rs 518.04 and the standard error comes to (1.55). We use Z test and calculate Z value (- 5.84) which is negative, this indicates that company price is significantly under valued.
PE P S S 6
104
FINDINGS Volumes set to grow: Company expect a 19.10% CAGR in volumes over the period FY2004-FY2006, as lower duties and low interest rates on loans make cars affordable to more people. As such, companies those are able to introduce cost-competitive models without compromising on contemporary features will attract
105
buyers and be the biggest beneficiaries. Mahindra & Mahindra (M&M) expect this stock to yield returns of around 25% over the next 12 months. Car density in India lowest across the world: Car density ie., car ownership per 1000 people is three in India. Even excluding the relatively large mass of households whose incomes are well below the threshold limit and therefore cannot afford passenger vehicles, the country's penetration would measure at 27 per thousand households, the lowest in the world. Hence, there is huge headroom available for growth. With rising per capita income and low interest rates making cars more affordable, we expect India's car penetration to nearly double over the next three years. Further, the widening reach of the car manufacturer through the distribution network would provide added fillip to the growth. Automobile prices are falling on reduced excise duties: The reduction in basic excise duty from 32% to 24%, as part of the Union Budget 2005, has already led to a 28% surge in domestic vehicle volumes .The
106
Kelkar Committee recommendations, which have been accepted by the government, propose a further cut to 16% over the next two years Meanwhile, the cut in the peak customs duty on components and the abolition of the 4% special additional duty will reduce costs for manufacturers, enabling them to cut prices further. This would also boost demand growth. Softer interest rates: The declining interest regime has been a party time not only for banks but also for automakers. Interest rates are at their historical low levels at present. Availability of cheap loans is the biggest demand driver. We expect a rise in the number of loan-financed purchases, aided by low interest rates and expanding reach of lending companies. The interest rates have come down from 15-17% in 199899 to around 10% this year. It is not only affordability but also the availability of cheap finance that will provide a further fillip to demand growth. The reach of car financing banks is
107
set grow three fold over next two years. Almost all private banks are in an expansion mode in their retail loans segment. We expect Utility Vehicles to establish a viable alternative to cars: Going forward, we believe that trends will be different--volume growth of UVs would match that of passenger cars. The number of competitively priced models is on the rise--take for instance M&M's Scorpio, General Motors's Tavera (under the Chevrolet brand) and a new vehicle from Tata Motors, expected to be launched in 2005.Growth will accelerate by the increasing recognition of these vehicles' superior ride comfort and luggage space and therefore their proposition as a cost-competitive alternative to midsized cars. Operating margin to improve: Popularity of its vehicles would allow M&M to hike prices in case of rise in raw material prices, thus protecting its operating profit margins. Last year's 40% rise in steel prices would necessitate a 3.5-4% rise in prices of vehicles. M&M recently raised prices of its UVs by 1.5-2%.
108
The
company
also
benefits
from
its
cost
economics. We expect its operating margins to improve by 4.80% by FY2006. The major contributors to this hike would be savings in employee costs (to the tune of 3%) and other expenses (to the tune of 2.50%). However, rising commodity prices will act as a drag on operating margins, pulling it down by 0.70%. Farm equipment segment no longer a drag: The farm equipment segment, which mainly includes tractors, is no longer a drag on the topline of the company. Over the last two years, the tractor industry has shown negative growth of 17%. In the first half of FY2005, the industry showed a decline of 9%. However, the fortunes of the division have started turning for the better. In Q3FY2005, the tractor industry grew by 18% on the back of a strong performance of the monsoon last year. We think that the tractor segment will actively contribute to the revenues. The company has its presence in all the HP segments from 25 HP to 45 HP and above, with more than 20% share in all segments.
109
Return ratios to improve: M&M has already done considerable investments on product development and capacity expansion over the past three years. We expect RoCE to improve from 8.8% in FY2003 to 24.3% in FY2006. Declining capital expenditure would help the company to increase its free cash flows. The company is expected to retire almost 50% of the debt by FY2006. This will reduce outgo on interest costs, which will be reflected in the net profit. The profit will almost double to 7.61% in FY2006 from 3.88% as of now. Monsoon: Below normal monsoons throughout the country remains a cause for concern for tractor manufacturers including M&M. In FY2005, tractor volumes have increased by 39% to 47,804 units. While monsoons remain a wild card for the company, the increased rural and agricultural focus of the new UPA government augurs well. The targeted 30% increase in farm credit in FY2005 by the government is already showing signs of assisting
110
demand
push.
SUGGESTIONS Increasing steel price and other inputs are the major concerns for the company from its margins point of view. So company should have check on the steel prices. Increase in the inflation rates. As the company is active in the overseas markets, the rupee appreciation against the foreign currencies, especially dollar would adversely affect the topline of the company. Increase in the fuel prices on account of rising global crude oil prices would affect the domestic demand especially for CVs.
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Various new products launches have helped retain customer focus on the new auto market, so the company should focus on this particular aspect. Discounts, special editions and festive based offers should be adopted to boost the sales of the company. Dieselization is going to be a future trend in the Indian automobile market with rising petrol prices and the significant difference between petrol and diesel prices. As most of the company products are diesel products, the company should try to specialize in that particular segment. Another trend that might be seen in the near future is rise in the utility vehicle sales. With infrastructure facilities increasing more people prefer the UVs for inter city travel. So company should try to launch vehicles such as Scorpio and many such products.
112
CONCLUSION Fundamental analysis can be valuable, but it should be approached with caution. If you are reading research written by a sell-side analyst, it is important to be familiar with the analyst behind the report. We all have personal biases and every analyst has some sort of bias. There is nothing wrong with this and the research can still be of great value. The problem in valuation is not that there are not enough models to value an asset; it is that there are too many. Choosing the right model to use in valuation is as critical to arriving at a reasonable value as understanding how to use the model. Analysts use a wide variety of models from simple to the sophisticated. These models often make different assumptions about pricing, but they do share some common characteristics so in the study we tried to use price-earning multiples and discounted cash flow models of valuation. In the automotive segment, M&M has a strong presence in high-growth segments backed by pick-ups (Maxx range), Bolero and Scorpio models, three-
113
wheelers (Champion), and LCVs (load carrying as well as passenger LCVs). The current government's focus on agricultural growth (helping volume growth in tractors and UVs) and continued focus on infrastructure development (structural growth driver for LCVs, three-wheelers and UVs) are the main demand drivers for M&M's product portfolio. High operating leverage in tractors, cost reduction, productivity gains and reduced interest costs will drive a 34% CAGR in PAT over the period
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A Project Report On Fundamental Analysis of Mahindra&amp Mahindra Company

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

benefit patient investors who pick the right industry groups

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

5) DEBT/EQUITY RATIO: A measure of a company's financial leverage

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

18) ROE: A measure of a corporation's profitability, calculated as:

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

THEORITICAL BACKGROUND OF THE

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

GRAPH 1: ACCELERATING GROWTH OF GDP

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

TABLE 1: INDIA - ECONOMIC PARAMETERS F 04 Growth 8.1 F 05 6.0 6.5 4.4

(%) Fiscal Deficit 4.8 (%) Interest Rate

Decline Hardeni ng 6.5

(Average) % Rupee - US Apprecia Steady Dollar ted (Source: RBI, CMI)

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

GRAPH 2: SHOWING INDIAS REAL GDP GROWTH

also shows, growth in nonagricultural GDP

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

GRAPH 4: GDP AND AUTO SALES

At 1993-94 price levels

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

GRAPH 5: SHOWING RUBBER PRICES

FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

government for exports of rubber has resulted in an increase in the exports.