12th March, 2009

India
M&M
Automobiles CMP: Rs. 344 Target: Rs. 430

M&M’s 3QFY09 performance was below our expectation. Reported net sales at Rs 25.2 bn
were as expected down by 17%. EBIDTA margins dipped to 3.4% led by high raw material
costs, and Foreign Exchange losses. Company’s automotive segment posted margins of -
Sovid Gupta +911243024840 1%, which was much below our expectation.
We expect the company to post much good Q4 numbers on back of reduced raw material
Equity Analyst: Fairwealth Securities prices, reduced inventory write downs, improved price realization and higher sales.
Private. Ltd.

Future Estimates:
Priced on March’12, 2009
Key Financial Numbers
±% potential +25%
Target set on 12th Mar09 FY06 FY07 FY08 FY09E* FY10E*
Net sales 8105 9848 11281 11620 13014
EBITDA 833 1058 1095 705 1350
Adj. PAT 682 975 953 560 905
Market Data Margins (%)
Beta
EBITDA 10.3% 10.7% 9.7% 6.1% 10.4%
12M hi/lo 721/236
Market cap, INR Crores 10500 NPM 8.4% 9.9% 8.4% 4.8% 7.0%
Shares in issue (mn.) 259 Per Share Data
Reuters MAHM.BO EPS 26.43 37.79 36.94 21.71 35.08
Bloomberg MAHM: IN
P/E 13.05 9.13 9.34 15.89 9.84
Source: Fairwealth Securities Research Estimates, Company data

Share Holding Pattern(%)

Promoters 26.5
FII 32.0
Institutional 26.7
Public & Others 15.0

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Quarterly Result Round up:

Standalone operations reported PAT of Rs 1.2 crore as against 405 crores same period last
year.
Production
M&M reported a 23% Y-o-Y decline in volumes to 61225 units.

PBIT Q3’09 Q3’08 Sales:.

Margin(%)
Automotive segment registered net sales of Rs. 1370 crores a fall of over 24% over last year.
Automotive
-0.76 9.4 Farm Equipment segment registered sales of Rs. 1138 crores a jump of 7% over Q3 FY08.
Segment
Farm
Equipment 10.7 13.7 PBIT:
Segment Automotive segment posted a net loss of Rs.11 crore for Q3 FY09 versus a profit of Rs. 162
Other crore for same period FY08. Profits for the division fell as sales plummeted sharply in the
14.5 1.4
Segments quarter and also because of inventory write downs. Margins for the business were -0.8
TOTAL 4.5 10.5 percent as against 9.4% in Q3FY09.

ROCE(%) Q3’09 Q3’08 Q3 FY09 Q3 FY08 % change

Automotive
-0.51 11.4 Sales
Segment
Farm Eqiup. Automotive Segment 1370.22 1800.4 -23.89
10.7 16.8
Segment Farm Equipment Segment 1138.97 1065.95 6.85
Other
17.1 5.6 Other Segments 16.94 162.97 -89.61
Segments
TOTAL 3.5 13.3 TOTAL 2526.13 3029.32 -16.61
Source: Capital Line PBIT

M&M’s automotive segment ran at Automotive Segment -10.43 168.74 -106.18

negative PBIT margins for Q3 FY’09 as Farm Equipment Segment 121.39 146.47 -17.12
sales dropped by 24%.
Other Segments 2.46 2.3 6.96
Reduced raw material prices and TOTAL 113.42 317.51 -64.28
increased sales in Q4, will help the
Capital Employed
company turnaround its main business in
Q4 Automotive Segment 2055.62 1483.51 38.56
Farm Equipment Segment 1138.79 870.56 30.81
Other Segments 14.42 41.03 -64.85
TOTAL 3208.83 2395.1 33.97
Source: Company Data

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Highlights:

XYLO has received good response  In Q3 FY’09 entire industry came out with bad set of number as global economic
from customers. gloom had its effect on Indian economy as well, which clocked only 5.3% growth in Q3.
 M&M reported a 23% Y-o-Y decline in volumes to 61225 units. Net sales however
decreased by only 14% as price realization increased by 7%.
 Although volumes decreased by 23%,corresponding decrease in raw materials was
Farm equipment segment of the company only 9%, as prices of raw materials fell only in later half of Q3(Raw material form
registered a strong growth of 40% y-o-y to approximately 67% of sales for the company) .
9,123 vehicles in Feb’09 as against 6,522  First two months of Q4 FY09 has shown much better performance against last year.
vehicles in the same period last year.
 January sales at 24,500 declined by 19% Y-o-Y as against 23% drop in Q3 FY’09.
Drop in sales was witnessed across all segments.
Product mix % 3QFY09 3QFY08  All companies have had a favorable month of February having registered impressive
growth led by improved lending, lower interest rates and reduced excise rates.
UV's 48% 51%  M&M registered sales volume of 29000 units, 10% growth over previous year.
Three Wheelers 14% 11% Maximum growth was registered in farm equipment sales as domestic tractor sales
Tractors 33% 31%
rose by 48% to 8900 units against 6000 units in corresponding period last year.
Export 5% 7%
Source: Company Data  Utility vehicles witnessed 17% growth rate on back of new product launch Xylo, finding
favour with the audience.
M&M reported a forex loss of Rs 1.4 bn on  Three wheeler segment registered a growth of 45% at 3400 units.
cancellation of forward contracts for  PV sales remain dismal and its sad that M&M is not taking part in the rise of Indian
exports due in 3QFY09.
middle class. Lone passenger vehicle Logan sales fell by 63% at 1000 units versus
2750 units for same period last year.
 Exports fell from 1800 units (combined for automotive and Farm Equipment) to 540
units a drop of 70%.

Industry Performance

Industry performed badly in Q3 FY’09 and January’09, registering a sharp drop in volume.
However February has been a turn around of sorts as voumes raised both on M-oM and Y-
o-Y basis fist time in four months. Passenger vehicles sales witnessed a huge jump in
February. CV sales continue to struggle giving signs that economy is still into troubled
waters.

There are reports that the Indian defence forces is planning to place immediate orders to
buy vehicles to meet their requirements for two years. According to the report, if the
government approves the plan, the auto sector is expected to get Rs 3,000 crore to Rs
4,000 crore worth of orders that will be spread over the next two quarters. Mahindra and
Mahindra, Ashok Leyland, Maruti Suzuki, Tata Motors and state-owned BEML are the major
vehicle suppliers for the three defence forces.

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Company Description:
M&M is the flagship company of Mahindra Group that has a significant presence in several
high growth sectors.

Standalone:
The company has two main divisions – automotive and farm equipment.

Automotive:
M&M is a dominant player in the UV segment with its ‘Scorpio’ and ‘Bolero’ models – main
constituents of sales in the automotive division and currently accounts for about half of India’s
market for utility vehicles. M&M controls a 55% share of the domestic utility vehicle market.
The auto major hopes to close this year with a 8-10% growth over the past year.
M&M is also engaged in the manufacture of three-wheelers and light commercial vehicles
(LCV’s). It is also present in domestic passenger vehicle market and manufactures Logan in
association with Renault. Going forward the company will also distribute Renault cars
manufactured in India.
Farm Equipment Segment:
With a network of 800 dealers and capacity to produce more than 150,000 tractors a years.
M&M Finance M&M is the largest manufacturers of Tractors in India. And one of the largest player globally
through plants and JV’s in US, Europe, Australia, etc.

Group Companies:

Mahindra Finance:
One of India’s leading non-banking finance companies focused on the rural and semi-urban
sectors providing finance for Utility Vehicles (UV’s), tractors and cars.
The company provides retail financing services in the rural and semi-urban areas of India, and
strategy is to provide a range of financial products and services to our customers through our
nationwide distribution network. Services provided by the company include vehicle and other
Retail Financing, Insurance and Mutual Fund selling, etc. We believe that the company has
huge growth potential and should grow at 10% compounded CAGR considering its presence
in relatively un-served rural markets,
Tech Mahindra:
Tech Mahindra (TM) is India's eighth largest software services exporter with an extensive
domain knowledge in the telecommunications industry. The company was formed in 1986 as a
joint venture between Mahindra & Mahindra (M&M) and British Telecom Plc (BT).Conservative
broker estimates value the company at 4x FY10E earnings. We have discounted Tech
Mahindra by 30% from the broker estimates of Rs. 300 per share.

Mahindra Lifespaces:

Mahindra Lifespaces developer is a smaller player in real estate development segment.

However it is one of the best managed companies and was the only player in the real estate
segment to show increased revenues on Y-0-Y basis. It has low debt and is managing
projects through internal accruals. We believe that the company has strong growth potentials
and is trading at Rs. 125 which is huge discount to its broker consensus value of Rs 500 per
share.

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Valuations:

We have valued M&M on the basis of SOTP valuations.

Core business value:

We value M&M's core business at Rs281/share (8x Mar10E EPS)

Listed Subsidiaries
Holding of 15% discounted
Valuation M.Cap Holding of
M&M value
basis (Rs. Crore) M&M (%)
(Rs. Crore) (per share basis)
Mahindra Finance CMP 1970 60% 1,182.0 39
Mahindra Forgings CMP 300 60% 180.0 6
Mahindra Life CMP 367 51% 187.2 6
Mahindra Ugine CMP 60 51% 30.6 1
Tech Mahindra CMP 3200 44% 1,408.0 46
Total 97.7
Unlisted Subsidiaries
Mahindra Resort 0.5x PE Deal 1600 98% 1,568.0 51
Sum Total 149

We have valued listed subsidiaries conservatively and have discounted their valuations by 15%.

Each of these companies has set ambitious growth targets for themselves, which would be EPS accretive for the parent company.

On individual broker consensus companies like Tech Mahindra, Mahindra Life and Mahindra Finance have been valued at double their
current market price. We believe that one year forward valuations of listed and unlisted subsidiaries would be upwards of Rs. 250 on per
share basis.

Combined value of the company comes at Rs. 430 per share. Rs. 281 for core operations and 149 for other listed and unlisted
subsidiaries.

Valuations are also supported by strong management and new initiatives of the company.

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Key Risks:
Lower growth for Indian Economy could stiffle the Automobile industry, even 10% drop in Sales
will lead to sharp drop in Margins, which will lead to downward revsion for the stock.

More than expected Derivative losses and inventory write downs in Q4 are key risk areas. More
disclosures are required from the company on the same.

M&M drives almost all its sale from two segments UV’s and Tractors. High concentration and
strong dependence on two segments is a key risk area for the company.

M&M has already started witnessing cannibalization between its recently launched model Xylo
and Scorpio. Company has reported 25% cannibalization since the launch of Xylo in February.

Automotive segment already registered negative margins with the reduction in price of Scorpio in
March (between 35000 and 70000) margins will continue to be under pressure in the Automotive
segment.

M&M share has underperformed Nifty over one

year period.
Being a diversified group with a good
management and conservative approach, we
believe the stock has been oversold by the
investors.
Stock has witnessed a sharp pull back rally over
last 45 days outperforming the benchmark index
by 30%.
We expect the stock to continue this rally and
achieve a target of Rs. 430 within next 3
months.

Stock Price movement versus Nifty.

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Investment Rational
We rate M&M shares Buy, with a target price of Rs430.
.
Lowered excise duty, lowering of interest rates and defense segment orders are likely to be
key triggers for the entire automotive pack.

M&M's utility-vehicle business is benefiting from new product launches and strong product
positioning for both Bolero and Scorpio brands.

On the tractor business we remain positive as the business has been high margin business
for the company and we expect strong growth on back of loan waivers by the UPA
government, however curtailment of further credit by banks which are witnessing rising
NPA’s will put some pressure on sector.

Long term fundamentals remain solid. Improvement in capital markets will help company in
unlocking value by delisting is Holiday and Resort business.

Management will continue to make more efforts to leverage high dollar by focusing on
exports in select markets.

We believe maximum growth to come from Non-Core businesses of the company

particularly Real Estate Division, IT-Telecom services arm(Tech Mahindra) and in M&M
Financial Services which will provide downside support for the share.

TECHNICAL OUTLOOK M&M

M & M has given a fresh breakout above 310-320 levels .The stock is in a strong medium term uptrend & one could go long in the scrip at
dips around 320 & then 290 for a price target of Rs.430.

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Annexure:

1. Income Statement: Fund Flow Statement:

Income Statement (Standalone Rs. Crore) 200803 200703 200603
SOURCES OF FUNDS :
2008(12) 2007(12) 2006 (12)
Share Capital 239.07 238.03 233.4
Income : Reserves Total 4111 3314.88 2675.47
Net Sales 11281.73 9848.86 8105.23 Total Shareholders Funds 4350.07 3552.91 2908.87
Secured Loans 617.26 106.65 216.67
Expenditure :
Unsecured Loans 1969.8 1529.35 666.71
Raw Materials 7725.91 6827.93 5713.77
Total Debt 2587.06 1636 883.38
(%age of sales) 68% 69% 70%
Employee Cost 845.77 660.1 544.99 Total Liabilities 6937.13 5189 3792
(%age of sales) 7% 7% 7%
Other Expenses 1615.57 1303.08 1013.22 APPLICATION OF FUNDS :
Net Block 1814.45 1590.57 1375.26
(%age of sales) 14% 13% 13%
Capital Work in Progress 546.45 280.6 179.19
Investments 4215.06 2237.46 1669.08
Operating Profit 1094.48 1057.75 833.25
Current Assets, Loans &
EBITDA % 10% 11% 10% Advances
Depreciation 238.66 209.59 200.01 Inventories 1084.11 878.48 878.74
EBIT 855.82 848.16 633.24 Sundry Debtors 1004.88 700.89 637.97
EBIT(%) 8% 9% 8% Cash and Bank 861.23 1326.07 730.31
Interest 87.59 19.8 26.96 Loans and Advances 705.15 842.73 502.04
Other Income 638.54 590.13 493.22 Total Current Assets 3655.37 3748.17 2749.06
PBT 1406.77 1418.49 1099.50 Less : Current Liabilities
and Provisions
Tax 303.40 350.10 242.40 Current Liabilities 26411 5609 3293
Net Profit 1103.37 1068.39 857.10 Provisions 7538 3198 2478
EO Items 150.06 93.42 174.87 Total Current Liabilities 33949 8807 5770
Adj Net profit 953.31 974.97 682.23 Net Current Assets 27518 9638 138
Source: Company Report, Capital Line
Deferred Tax Assets 3916 989 779
Deferred Tax Liability 6371 1775 1771
2. Cash Flow Statement:
Net Deferred Tax -2454 -786 -992
200803 200703 200603
Total Assets 6937.13 5188.91 3792.25
Cash Flow Summary
Cash and Cash Equivalents at Contingent Liabilities 479.04 367.6 454.33
Beginning of the year Source: Company Report, Capital Line
Net Cash from Operating Activities 2085.16 1180.03 1052.51

Net Cash Used in Investing Activities 698.87 -162.43 -458.87

Net Cash Used in Financing -
-2688.52 -881.82
Activities 1052.31
Net Inc/(Dec) in Cash and Cash
1690.16 2119.87 1468.21
Equivalent
Cash and Cash Equivalents at End of
-299.49 905.13 127.52
the year
Source: Company Report, Capital Line

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Disclaimer

This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While
the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making
any investments. Fairwealth Securities Pvt Ltd., does not bear any responsibility for the authentication of the information contained in
the reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information
updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory
Services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that,
Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale while this report is
in circulation.

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