Automobiles & components / India 25 November 2011

Mahindra & Mahindra

MM IN

Target price: Rs813.80 Rs813.80 Up/downside: +15.2% Share price (25 Nov): Rs706.25

Tractors pulling in demand

The unprecedented growth in tractor demand is genuine and fundamentals strong, but growth likely to moderate Private financiers now form 25% of total tractor financing from 15% in 2008; cash purchases have increased to 25% from <10% Valuations look attractive once again; reiterate Buy (1) rating and SOTP-based target price of Rs813.8
How do we justify our view?

Ambrish Mishra

(91) 22 6622 1060 ambrish.mishra@in.daiwacm.com

Navin Matta

(91) 22 6622 8411 navin.matta@in.daiwacm.com

What's new

To gauge current tractor demand, the outlook for the industry and the concerns about sales volume, we travelled 400-450kms to western Maharashtra State to the KolhapurSatara agricultural belt.
What's the impact

reduction in average farm sizes, etc. With increasing commercial applications, the industry is seeing greater demand for high-powered tractors. Despite very strong salesvolume growth, the default rates on tractor loans are stable at ~3-4%. Though competition is rising, we believe M&M has a significant edge over its peers due to its strong brand equity, unmatched after-sales service, and competitive pricing. Farm equipment business contributes to 40% of M&Ms standalone revenue and 50% of EBIT. Hence, a positive structural change in factors driving tractor demand augurs well for the companys earnings growth outlook.
What we recommend

our FY13E EPS is 1% below, which could be due to our more conservative EBITDA margin assumptions.
Forecast revisions (%)
Year to 31 Mar Revenue change Net-profit change EPS change
Source: Daiwa forecasts

12E 4.7 2.4 2.4

13E 3.8 1.0 1.0

14E 3.5 2.0 2.0

Share price performance

(Rs) 920 830 740 650 560 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Mahindra & Mahindra (LHS) Relative to SENSEX (RHS) (%) 150 130 110 90 70

Tractor sales volume in western Maharashtra has risen at a CAGR of ~20% over the past 3-4 years. Dealers we met recorded 30-50% YoY growth for 1H FY12. Good monsoons, higher minimum support prices for sugarcane and timely payments from the sugar mills to farmers in the past few years have benefited farmers. One of the main triggers for strong tractor demand in recent years has been the increasing commercial application of tractors, which has gained momentum due to various factors like infrastructure development, industrialisation,

M&Ms share price has fallen by about 20% so far this month, which we see as an attractive investment opportunity, as the core business is now trading at a 10x FY13E PER. We reiterate our Buy (1) rating and SOTP-based six-month target price of Rs813.8, valuing the core business at a 13x FY13E PER. The key risks to our view include a sharp slowdown in Indias economic growth, pricing pressure in the tractor segment, and a poor monsoon.
How we differ

12-month range Market cap (US$bn) Average daily turnover (US$m) Shares outstanding (m) Major shareholder

595.20-870.50 8.20 31.38 605 Promoters (25.2%)

Financial summary (Rs)

Year to 31 Mar Revenue (m) Operating profit (m) Net profit (m) Core EPS EPS change (%) Daiwa vs Cons. EPS (%) PER (x) Dividend yield (%) DPS PBR (x) EV/EBITDA (x) ROE (%) 12E 293,403 32,106 28,397 46.968 7.3 3.5 15.0 1.7 12.000 3.5 12.0 25.1 13E 324,916 36,049 32,047 53.007 12.9 (1.4) 13.3 2.1 15.000 2.9 10.3 23.9 14E 367,768 40,842 36,099 59.707 12.6 (4.2) 11.8 2.5 18.000 2.5 8.8 23.0

While our FY12E EPS is 3.5% above the Bloomberg-consensus forecast,

Source: Bloomberg, Daiwa forecasts

Important disclosures, including any required research certifications, are provided on the last two pages of this report.

Automobiles & components / India

25 November 2011

MM IN

Table of contents Rural growth story intact; tractor demand not at risk .................................................................... 6 Demand drivers still holding up well, but growth likely to moderate ......................................... 7 Gross capital formation in agriculture and allied activities is improving steadily .................... 10 Financing options have improved, while defaults have stayed low ........................................... 10 Competitive environment less intense compared with other automotive segments ................ 12 Lack of pricing discipline is a long-term concern for the sector ................................................ 13 Farm equipment business contributes to a significant share of M&M's revenue... .................. 13 ...and even more to its profits ..................................................................................................... 13 Reiterate Buy (1) rating and six-month target price of Rs813.8 ................................................ 14 Some more highlights from our trip .............................................................................................. 15

-2-

Automobiles & components / India

25 November 2011

MM IN

How do we justify our view?

Growth outlook Valuation Earnings revisions

Growth outlook
We believe reasonably strong traction in tractor demand and new launches in the automotive space will drive M&Ms sales-volume growth over the next 2-3 years. M&M has been showing strong momentum in the automotive segment as well (reflected in the overwhelming response to its recently launched XUV 5OO). We forecast sales volume CAGRs for the auto and tractor segments of 16.5% and 10%, respectively, during FY11-14. We forecast M&Ms net profit to rise at a 12% CAGR over FY11-14, even though we have factored more conservative EBITDA margin assumptions into our forecasts.

M&M: sales volume growth

600 500 400 300 200 100 0 FY08 FY09 FY10 FY11 FY12E FY13E FY14E Auto ('000) - LHS Auto (% YoY) - RHS Tractor ('000) - LHS Tractor (% YoY) - RHS 20 10 0 50 40 30

Valuation
Given the growth outlook for the rural economy, rising prosperity and the increasing need for automation in agriculture, we believe M&M is still well-placed as an attractive medium-to-long term investment opportunity. After outperforming the SENSEX by about 20% since the start of 2011, M&Ms share price has corrected by ~20% so far in November 2011, making the valuations attractive once again, with the stock now trading at a 10x PER on our FY13 core EPS forecast. We therefore reiterate our Buy (1) rating and six-month target price of Rs813.8.

M&M: one-year forward valuation history (x)

30 25 20 15 10 5 0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

Oct-07

Jan-03

May-05

Jul-08

May-09

Mar-06

Dec-06

Feb-10

Nov-10

Aug-04

PER (LHS)

PBR (RHS)

Earnings revisions
While our FY12 EPS forecast is 3.5% above the Bloomberg-consensus forecast, our FY13 EPS forecast is 1.4% below, which we think could be due to our more conservative EBITDA margin assumptions. The Bloomberg-consensus EPS forecast for FY13 has seen a few upgrades in the past 2-3 months. Our forecasts do not yet include the recently acquired Ssangyong Motor Companys (SYMC) financials.

Bloomberg consensus EPS forecast trend

65 60 55 50 45 40

-3-

1-Oct-10 16-Oct-10 31-Oct-10 15-Nov-10 30-Nov-10 15-Dec-10 30-Dec-10 14-Jan-11 29-Jan-11 13-Feb-11 28-Feb-11 15-Mar-11 30-Mar-11 14-Apr-11 29-Apr-11 14-May-11 29-May-11 13-Jun-11 28-Jun-11 13-Jul-11 28-Jul-11 12-Aug-11 27-Aug-11 11-Sep-11 26-Sep-11 11-Oct-11 26-Oct-11 10-Nov-11
FY12E FY13E

Sep-11

Nov-03

Apr-02

Automobiles & components / India

25 November 2011

MM IN

Financial summary
Key assumptions
Year to 31 Mar Sales volume (units) Average selling price (LC) Sales Volume, chg YoY Average Selling Price, chg YoY Exports share in Sales volume, % Advt/Publicity Cost as % of Revenues 2007 272,124 367,533 16.1% 0.9% 5.7% 2.2% 2008 293,904 376,878 8.0% 2.5% 7.2% 2.0% 2009 327,162 383,889 11.3% 1.9% 4.7% 2.4% 2010 444,400 399,530 35.8% 4.1% 4.5% 2.5% 2011 568,398 383,881 27.9% (3.9%) 4.6% 2.5% 2012E 693,938 396,779 22.1% 3.4% 5.0% 2.4% 2013E 758,316 404,928 9.3% 2.1% 5.7% 2.4% 2014E 844,795 407,587 11.4% 0.7% 5.9% 2.4%

Profit and loss (Rs m)

Year to 31 Mar Utilty Vehicles 3 wheelers Others Total revenue Other income COGS SG&A Other op. expenses Operating profit Net-interest inc./(exp.) Assoc/forex/extraord./others Pre-tax profit Tax Min. int./pref. div./others Net profit (reported) Net profit (adjusted) EPS (reported) (Rs) EPS (adjusted) (Rs) EPS (adjusted fully-diluted) (Rs) DPS (Rs) EBIT EBITDA 2007 52,852 3,570 42,710 99,133 0 (68,519) (6,351) (15,100) 9,163 675 4,348 14,185 (3,501) 0 10,684 9,405 22.442 19.755 19.755 5.750 9,163 11,259 2008 64,711 3,485 46,288 114,484 0 (77,259) (8,045) (18,829) 10,350 (242) 3,960 14,068 (3,034) 0 11,034 9,306 23.076 19.464 19.464 5.911 10,350 12,737 2009 67,757 4,589 58,141 130,488 0 (92,742) (5,753) (22,058) 9,934 (453) 1,953 11,435 (2,760) 0 8,675 9,491 15.911 17.407 17.407 5.114 9,934 12,849 2010 97,570 4,822 82,904 185,296 0 (123,329) (8,020) (28,827) 25,120 (278) 3,626 28,468 (7,590) 0 20,878 19,970 36.893 35.289 35.289 9.711 25,120 28,828 2011 108,530 7,368 117,053 232,950 0 (162,639) (10,376) (31,240) 28,696 503 5,998 35,197 (8,575) 0 26,621 25,706 45.333 43.774 43.774 12.024 28,696 32,834 2012E 135,519 7,918 149,966 293,403 0 (210,789) (12,497) (38,011) 32,106 606 5,150 37,862 (9,466) 0 28,397 28,397 46.968 46.968 46.968 12.000 32,106 36,880 2013E 152,258 8,340 164,318 324,916 0 (231,833) (13,557) (43,477) 36,049 569 5,550 42,168 (10,120) 0 32,047 32,047 53.007 53.007 53.007 15.000 36,049 41,767 2014E 171,807 9,188 186,774 367,768 0 (262,422) (14,935) (49,570) 40,842 707 5,950 47,498 (11,400) 0 36,099 36,099 59.707 59.707 59.707 18.000 40,842 47,414

Cash flow (Rs m)

Year to 31 Mar Profit before tax Depreciation and amortisation Tax paid Change in working capital Other operational CF items Cash flow from operations Capex Net (acquisitions)/disposals Other investing CF items Cash flow from investing Change in debt Net share issues/(repurchases) Dividends paid Other financing CF items Cash flow from financing Forex effect/others Change in cash Free cash flow
Source: Company, Daiwa forecasts

2007 14,185 2,096 (3,657) 2,107 (976) 13,754 (5,263) (5,684) (289) (11,236) 7,526 (91) (3,093) 6,632 10,975 0 13,493 8,491

2008 14,068 2,387 (2,788) 2,133 1,970 17,770 (4,897) (19,776) (2,352) (27,025) 9,511 277 (3,211) (4,891) 1,686 0 (7,570) 12,872

2009 11,435 2,915 (1,348) 8,343 (363) 20,982 (8,534) (15,714) (1,515) (25,763) 14,657 14 (3,121) 6,679 18,229 0 13,448 12,447

2010 28,468 3,708 (7,493) (3,903) 1,186 21,965 (4,884) (6,116) 2,679 (8,321) (11,726) 7,194 (6,238) 1,411 (9,358) 0 4,286 17,081

2011 35,197 4,139 (7,547) 3,379 412 35,579 (10,830) (29,273) (3,909) (44,012) (4,749) 10,318 (8,026) (10,784) (13,240) 0 (21,673) 24,749

2012E 37,862 4,774 (8,330) (4,173) (606) 29,527 (9,907) (10,000) 0 (19,907) 0 87 (8,343) 2,576 (5,680) 0 3,940 19,620

2013E 42,168 5,718 (9,066) 1,136 (569) 39,387 (10,701) (6,000) 0 (16,701) (1,853) 0 (10,429) 11,541 (741) 0 21,945 28,686

2014E 47,498 6,573 (10,450) (3,560) (707) 39,355 (7,932) (6,000) 0 (13,932) (1,768) 0 (12,515) 12,553 (1,730) 0 23,693 31,423

-4-

Automobiles & components / India

25 November 2011

MM IN

Financial summary continued

Balance sheet (Rs m)
As at 31 Mar Cash & short-term investment Inventory Accounts receivable Other current assets Total current assets Fixed assets Goodwill & intangibles Other non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Share capital Reserves/R.E./others Shareholders' equity Minority interests Total equity & liabilities EV Net debt/(cash) BVPS (Rs) 2007 13,261 8,785 7,009 8,427 37,482 18,712 176 22,375 78,743 0 18,136 8,471 26,607 16,360 247 43,214 2,380 33,149 35,529 0 78,743 339,321 3,099 74.631 2008 8,612 10,841 10,049 6,942 36,444 23,609 135 42,151 102,339 0 21,503 10,759 32,262 25,871 705 58,838 2,391 41,110 43,501 0 102,339 354,945 17,258 90.979 2009 15,744 10,607 10,437 14,023 50,810 32,143 126 57,864 140,943 0 33,368 13,922 47,290 40,528 505 88,323 2,726 49,895 52,621 0 140,943 409,859 24,783 96.509 2010 17,432 11,888 12,581 18,488 60,389 37,027 41 63,980 161,438 0 32,601 19,138 51,739 28,802 2,630 83,170 2,830 75,438 78,268 0 161,438 411,036 11,369 138 2011 6,146 16,942 13,547 24,799 61,435 43,719 0 93,253 198,406 0 45,940 21,526 67,466 24,053 3,753 95,272 2,936 100,198 103,134 0 198,406 432,645 17,907 176 2012E 8,116 23,572 19,643 28,908 80,238 48,851 0 103,253 232,343 0 59,738 20,598 80,336 24,053 4,680 109,069 3,023 120,251 123,274 0 232,343 442,931 15,937 204 2013E 19,088 26,102 21,752 31,883 98,826 53,834 0 109,253 261,913 0 65,939 23,148 89,087 22,200 5,734 117,021 3,023 141,869 144,892 0 261,913 430,105 3,111 240 2014E 30,935 29,547 24,622 35,640 120,743 55,194 0 115,253 291,190 0 70,215 25,384 95,599 20,432 6,684 122,715 3,023 165,453 168,476 0 291,190 416,491 (10,503) 279

Key ratios (%)

Year to 31 Mar Sales (YoY) EBITDA (YoY) Operating profit (YoY) Net profit (YoY) EPS (YoY) Gross-profit margin EBITDA margin Operating-profit margin ROAE ROAA ROCE ROIC Net debt to equity Effective tax rate Accounts receivable (days) Payables (days) Net interest cover (x) Net dividend payout
Source: Company, Daiwa forecasts

2007 21.8 27.0 33.5 45.3 42.5 30.9 11.4 9.2 29.1 13.6 20.4 19.9 8.7 24.7 24.6 58.6 n.a. 25.6

2008 15.5 13.1 13.0 (1.0) (1.5) 32.5 11.1 9.0 23.6 10.3 17.1 16.3 39.7 21.6 27.2 63.2 42.7 25.6

2009 14.0 0.9 (4.0) 2.0 (10.6) 28.9 9.8 7.6 19.7 7.8 12.2 10.9 47.1 24.1 28.7 76.7 21.9 32.1

2010 42.0 124.4 152.9 110.4 102.7 33.4 15.6 13.6 30.5 13.2 25.1 22.1 14.5 26.7 22.7 65.0 90.3 26.3

2011 25.7 13.9 14.2 28.7 24.0 30.2 14.1 12.3 28.3 14.3 24.5 20.6 17.4 24.4 20.5 61.5 n.a. 26.5

2012E 26.0 12.3 11.9 10.5 7.3 28.2 12.6 10.9 25.1 13.2 23.4 18.5 12.9 25.0 20.6 65.7 n.a. 25.5

2013E 10.7 13.3 12.3 12.9 12.9 28.6 12.9 11.1 23.9 13.0 22.9 19.1 2.1 24.0 23.3 70.6 n.a. 28.3

2014E 13.2 13.5 13.3 12.6 12.6 28.6 12.9 11.1 23.0 13.1 22.9 20.3 net cash 24.0 23.0 67.6 n.a. 30.1

Company profile
Mahindra and Mahindra (M&M) is a leader in India's UV and tractor segments. The company is a part of the diversified Mahindra group, which has business interests in information technology, real estate, auto components, hotels and leisure, etc. The company has entered the truck business through a joint venture with Navistar in the USA. It recently acquired the South Korea SUV maker Ssangyong Motors.

-5-

Automobiles & components / India

25 November 2011

MM IN

Industry sales volume has been rising at 15-20% YoY over the past 8-10 quarters. In our view, the questions, therefore, on most investors minds now are: How sustainable is this growth?, Will the growth rate slow down or collapse due to over-capacity?, and Will this lead to huge delinquencies for the financial sector, which is trying to capitalise on this sharp spurt in demand? As a fairly large part of M&Ms fair value is derived from its robust tractor business, we found it imperative to hit the field and get answers to investors questions (to the extent that we could), which have been on our mind as well. We took a trip to western Maharashtra, best known for its sugar belts, rapid industrialisation and growing mechanisation. We travelled about 400/450kms away from Mumbai to the Kolhapur-Satara belt during our two-day field trip and met tractor dealers (across brands), commercial tractor owners, and a few tractor industry old-hands who have been observing the rural economy for many years now.

Rural growth story intact; tractor demand not at risk

After robust growth over the past few years, we see a possible moderation in tractor demand growth, but not a slowdown
The resilience of rural demand, especially for automobiles, has left many surprised. Within the automobile industry, superlative sales-volume growth for the tractor segment over the past 3-4 years has attracted investor attention, especially given that the segment has surpassed even the most bullish estimates by a significant margin over the past 12 months.

Map of Maharashtra State showing our route

Mumbai-Pune Expressway, one of the most efficient expressways in the country today

Source: agricoop.nic.in, Daiwa

Source: Daiwa

-6-

Automobiles & components / India

25 November 2011

MM IN

Demand drivers still holding up well, but growth likely to moderate

The western Maharashtra market has witnessed very strong growth in tractor demand over the past years 34 years (rising at a CAGR of around 20-25%). Most dealers we met during our field trip, in fact, said their dealerships had recorded even better-than-expected sales-volume growth (ranging from 30-50% YoY) for 1H FY12. This robust sales-volume growth was driven by several factors, the key items being strong farm
Daiwa team in the office a leading tractor dealer

output, better pricing for that output, and the increasing commercial use of tractors. Having said that, the dealers believe that such unprecedented growth is unsustainable and that a moderation in sales-volume growth would be warranted (the growth rate should correct for the longterm stability of the tractor industry and it will happen sooner-than-later, said one of the dealers). Further, we observed that the inventory levels in the industry (in the western Maharashtra belt at least) seem to be reasonably managed, currently in the range of 35-45 days (including vehicles in transit).

Daiwa team outside the showroom of another tractor dealer

Source: Daiwa

Source: Daiwa

Farm output remains healthy and is enjoying higher pricing as well

The good monsoon, higher minimum support prices (MSP) for sugarcane, and timely (organised) payments from the sugar mills over the past few years have encouraged farmers to step up their efforts to increase output, with many often working late into the evening to ensure higher output. As a result, they are reaping huge benefits, such as increased farm output, lower crop damage, higher income, etc. During our conversations, a number of tractor dealers said that even if the land for cultivation isnt increasing in size, farmers have been placing considerable effort on increasing output by stepping up their use of technology, fertiliser, pesticide, etc.

Sugarcane field ready for harvesting

Source: Daiwa

During our travels, we came across a protest organised by some sugarcane farmers (see picture below). When we investigated, we were informed that the state government of Maharashtra had cut the sugarcane MSP for the current harvesting season to about Rs1516/kg from around Rs20/kg and the farmers were -7-

Automobiles & components / India

25 November 2011

MM IN

demanding a better price (at least same as the previous season of about Rs20-21/kg). We raised this issue in our discussions with industry observers during our trip to get their view on what (according to them) could be the impact of this on tractor demand in the region. We gathered that the cut in sugarcane MSP could have a significant impact on tractor demand in the region. However, they were confident that the government would meet the farmers demands and raise the MSP for political gain. Surprisingly, the sugarcane MSP has since been raised to Rs20-22/kg, depending on the recovery levels.
Farmers protesting for higher MSP for sugarcane

Tractor used for field levelling

Source: Dept of Agriculture and Cooperation (AR 2011)

This is creating healthy income opportunities for many, especially for those who do not own farms but are ready to work hard. During our trip we met a young entrepreneur, Mr. Sool (aged 36 years), who has established a fleet of nine tractors over the past 11-12 years by just putting tractors to commercial use (as he does not own a large farm). Interestingly, his fleet of tractors is only used for agriculture purposes by his customers. As we talked more, he highlighted that business was good due to the shortage and rising cost of labour, and given that farmers are now more willing to pay to hire tractors (rather than maintaining oxen to plough the fields) as they ensure efficient time management and productive output at a reasonable cost. When asked how large he would like to expand his fleet from here, he replied I may not add more than 2-3 tractors now since it will become very difficult to manage the fleet profitably. We understand there are many such success stories in the region (and surely across other states as well).

Source: Daiwa

Applications for tractors expanding, providing good income opportunities

One of the biggest triggers for strong tractor demand in the past few years has been the growing commercial (farm/non-farm) applications for tractors. Commercial use of tractors has gained momentum for various reasons, the key reasons being: 1. Infrastructure development. 2. Rising industrialisation. 3. Reducing average farm sizes. 4. Relative cost benefit vis--vis large trucks (especially on short routes in rural market).

-8-

Automobiles & components / India

25 November 2011

MM IN

Tractor carrying sand

Tractors used for the transportation of sugarcane

Source: Daiwa

Source: Daiwa

The western belt of Maharashtra is witnessing rapid industrialisation, which has added to the economic prosperity of the people in this region. At the same time, it has led to the tractor market expanding from rising demand for the commercial application of tractors. For example, in January this year, Cummins India, the countrys leading manufacturer of diesel and natural gas engines, opened a mega site Phaltan in Satara district (see picture below), its second manufacturing location in India, to manufacture engines and components. The company has so far invested around US$100m in this project and plans to begin construction of its fifth facility, which is due to commence production by mid-2012.
Cummins: mega site in Phaltan (Maharashtra)

There is no tangible data though to accurately calculate or know the mix between commercial and agricultural use of tractors, due primarily to the industrys lack of focus on this information (until now) and the overlap in use of tractors (meaning the same tractors are used for agriculture as well as commercial applications). In our surveyed sample, we observed that of overall tractor sales in India, the share of tractors bought for commercial use has increased from just 15% in 2005 to around 30-35% in 2011. Going forward, the room for this share of commercial applications to increase substantially (as it has in the past 5-6 years) from current levels appears difficult, according to tractor dealers, unless manufacturers innovate and introduce more applications.

Use of high-powered tractors increasing

With the increasing use of tractors, especially for commercial application, we are seeing a shift towards high-powered tractors. As a result, >40HP tractors accounted for 41% of the industrys sales volume in FY11, up from 29% in FY07. This, in our view, is positive for the sector, as it ensures higher ASPs.

Source: Daiwa

In our view, the developments in western Maharashtra fairly explain the effect of industrialisation on tractor demand in the rest of the country. Apart from Maharashtra, states like Gujarat, Tamil Nadu, Haryana, etc, are witnessing the governments aggressive focus on industrialisation, which we believe would be one of the key growth drivers for commercial vehicles, which now also includes tractors, in our view. -9-

Automobiles & components / India

25 November 2011

MM IN

Trend in tractor sales by horse power

100% 80% 60% 40% 20%

Gross capital formation in agriculture and allied activities is improving steadily

Agriculture/allied sectors: GCF, GDP growth (2004-05 prices)
24% 21% 8% 6% 3% 1% -2% 2005-06 2006-07 2007-08 2008-09 2009-10

0% 2006-07 2007-08 Upto 30 HP

Source: Daiwa Research

2008-09 31-40 HP

2009-10 41-50 HP

2010-11 > 50 HP

YTD Aug'11

18% 15% 12%

Tractors no longer an expensive proposition; labour and oxen costs rising

Contrary to popular perception, we learnt that tractor users (mainly farmers) increasingly do not find tractors an expensive proposition when looked at in terms of ownership costs in totality (capital + maintenance). While the cost of a pair of oxen has increased to a high range of Rs70,000-100,000 (depending on the quality/size of the oxen), the maintenance costs have increased to about Rs300 per day, up more than 100% in the past 5 years, according to tractor dealers. The cost of labour is rising as well and now stands at Rs200 per day, which in actuality reflects a productive working time of just 5 hours a day (meaning the effective per day labour cost is at least 10-15% higher). Owning a tractor also gives an incremental opportunity of generating income through commercial use (say lending to friends, neighbours and/or relatives for ploughing), whenever needed.

GCF/GDP in Agri/allied activities, LHS

GDP growth in Agri/allied sectors, RHS

Source: Dept of Agriculture and Cooperation (AR 2011)

Investment (capital formation) in the agriculture and allied sectors has grown at a rapid pace over the past 45 years, contributed by both the public and private sectors. The investments have primarily been in the areas of irrigation works, command area development, land reclamation, construction of non-residential buildings/farm houses (mainly from private sector), wells, etc; and on the machinery front, the investments have been made in areas like tractors, transport equipment, agriculture machinery, etc. Interestingly, growth of gross capital formation (GCF) in agriculture and allied activities has outpaced GDP growth over the past five years (in this sector), indicating steady productivity (GCF/GDP) enhancement from 14.6% in 2005-06 to 20.3% in 2009-10. While GCF in the sector rose at CAGRs of 11.9% during the two periods from 2005-06 to 2009-10. Sector GDP increased at a 3% CAGR during the same period.

Financing options have improved, while defaults have stayed low

Over the past decade, the tractor industry has seen various positive and negative changes in the factors that drive demand. One of the most important amongst them has been the tractor financing situation, which has gone through favourable changes that have helped buyers by giving them more options, better rates and much more acceptable lending terms. Moreover, the increasing focus of the governments (both Central and State) towards rural development has played a very

- 10 -

Automobiles & components / India

25 November 2011

MM IN

significant role in bringing about the changes in the financing environment for the rural markets.

not entertain even a single default and repossess the asset (tractor) immediately after the first default.

Number of financiers has risen sharply over the past few years ...
Current split between various financing intermediaries

Interestingly, interest rates no more the key consideration for tractor buyers ...
As income levels have risen, tractor applications have been enhanced and availability of tractor financing has increased, we believe the sensitivity of purchase decisions to interest rates has declined over the past few years. This is clearly exemplified from the increased share of private sector financiers in the total tractor financing segment, even though the interest rates charged by them are much higher than those of public sector banks. The repayment terms and conditions too are much more severe in the case of private sector financiers.
Tractor financing rates (current)
25%

Cash 25.0%

DCC 35.0%

Private Sector 25.0%

PSU Banks 15.0%

Source: Daiwa Research

20% 20% 15% 10% 5% 0% DCC

Source: Daiwa

Growing infrastructure development, rising agriculture commodity prices, strong agricultural GDP growth, and rising income/prosperity over the past few years have attracted many financiers, as they aggressively try to reach the rural markets in search of loan growth. While the co-operative and public sector banks have been present in these markets for a long time, the rush has been more from the private sector players. Nonbanking finance companies (NBFCs), in particular, have been aggressive in lending to customers in the rural markets over the past few years, and tractors are the largest segment of the rural credit portfolios of these financiers. According to tractor dealers, private sector financiers now constitute ~25% of tractor financing, while district central co-operative banks (DCC) and PSU banks form 35% and 15%, respectively.

12%

13%

PSU Banks

Private Sector

... while default rates have remained stable

Interestingly, and against popular perception, the default rates on tractor loans have remained more-orless stable over the past many years, at about 3-4%. However, of the total defaults, more than 65-70% of the defaults are usually wilful and only the balance of 3035% is situational. In the case of loan recoveries, the public sector banks are relatively more accommodating than private lenders in terms of their repayment cycle (which currently is 12 months), and hence face higher defaults as well. On the other hand, the private sector financiers are far more efficient than their public sector counterparts and comply strictly with quarterly/sixmonthly instalment (loan repayment) cycles. They do

After some investigation, we learnt that the reason for their success is their efficient/swift loan approval/disbursal process (sometimes its just 3-4 days) and the lack of requirement for any collateral against the loan. Interestingly, the most common collateral used against a tractor loan is the land owned by the borrower. With land prices surging recently, customers prefer to go to private sector financiers who do not ask for collateral. On the other hand, the public sector banks insist on collateral (of 5-8 acres, depending on loan value) and in most cases, the value of the collateral is significantly higher than the loan amount. Also, the tractor buyers for commercial use do not own sufficient land and hence get rejected by the public sector banks. These cases get financing support from private financiers, who take the risk (without collateral) at a higher rate of interest and manage the credit portfolio with strong recovery and repossession systems.

... and cash purchases have increased

Tractor purchases on a cash basis have increased over the past three years. During our field trip, we learnt - 11 -

Automobiles & components / India

25 November 2011

MM IN

that despite an increase in finance availability and in number of players entering the tractor financing business, the share of cash purchases has grown significantly from <10% in 2008 to 25% in 2011. This
Funding breakdown of tractor sales in India

shift has been due primarily to growing cash generation from the agriculture business, as well as from the commercial application of tractors.
Funding breakdown of tractor sales in India

2008
Cash 8.0% Private Financiers 15.0% Public Sector Financiers 50.0% Public Sector Financiers 77.0%
Source: Industry, Daiwa Source: Industry, Daiwa

2011
Cash 25.0%

Private Financiers 25.0%

Competitive environment less intense compared with other automotive segments

Though competitive pressure has been on the rise, we believe M&M still enjoys a significant edge over the other players due to its strong brand pull, unmatched after-sales service, and competitive pricing. However, the competitive pricing of M&Ms tractors is due mainly to thin (and declining) dealer margins when compared to other tractor manufacturers like John
John Deere showroom

Deere, Sonalika, New Holland, etc. The listed price of M&Ms tractors have become more expensive than those of its competitors (in some cases) due to the higher price hikes (of more than 10%) undertaken by the company in the past 12-15 months, compared with the price hikes taken by other tractor manufacturers. Though the competitive environment seems to be hotting-up, we believe it may remain less threatening to M&Ms market share in the near-medium term when compared with the competitive pressure seen in other automotive segments, like passenger cars and twowheelers.
Domestic tractor market share
100% 80% 60% 40% 20% 0% 2006-07 Escorts ITL 2007-08 M&M 2008-09 TAFE 2009-10 2010-11 YTD Aug'11 New Holland Others John Deere

Source: Daiwa

Source: Daiwa

- 12 -

Automobiles & components / India

25 November 2011

MM IN

Lack of pricing discipline is a long-term concern for the sector

Amongst all the positives, we believe the sector is facing one critical threat: a lack of pricing discipline by manufacturers. Currently, tractor dealers are largely free to decide the final pricing to customers. This is very different from the other automotive segments where the pricing to customers is controlled by the manufacturers, and the scope for dealer intervention is very limited. In the current situation, tractors of the same brand can be sold to two different customers at two different prices, depending upon the dealers focus on volume/market share. Though in the near term this may not be a serious issue because dealers are yet to become aggressively focused on market share (as in the case of cars or two-wheelers).

M&M Segmental revenue share trend

100% 80% 60% 40% 20% 0%

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Auto Revenues, Rs Mn
Source: Company, Daiwa

Farm Equipment Revenues, Rs Mn

...and even more to its profits

Contribution of farm equipment business to M&Ms profitability (EBIT) has been much higher than its revenue share and the same currently forms over 50% of M&Ms total standalone EBIT (compared to ~40% revenue share). While the farm equipment business enjoys an EBIT margin of 15-16%, the EBIT in auto business is relatively lower at 10-11%. Importantly, the EBIT margin of the farm equipment business has remained buoyant despite competitive pressure, which we believe can partially also be attributed to the successful operational integration of Punjab Tractors (a tractor manufacturer acquired by M&M in 2007). As a result, the blended EBIT margin of M&M is now in the range of 11-12%, which is on the higher side when compared to peers in the Indian four-wheeler industry. In the near-to-medium term, we expect M&Ms EBIT margins to remain strong, supported by healthy profitability of its farm equipment business.

Farm equipment business contributes to a significant share of M&M's revenue...

Our focus and effort to understand the tractor growth outlook stems from the fact that the farm equipment segment (mainly tractors) has been a critical business segment for M&M. Farm equipment has, over the years, not only matched the strong auto segment growth, but also helped the company to report positive earnings during the peak of the financial crisis (i.e. 3QFY09). The share of farm equipment business in M&Ms standalone revenues hovers between 40-45%, which we do not expect to change substantially due to strong sales volume growth for both business segments.
M&M Segmental EBIT share trend
100% 80% 60% 40% 20% 0% -20%

M&M Segmental EBIT margin trend

23% 17% 11% 5% (1%)

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q1FY09

Q2FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Auto EBIT
Source: Company, Daiwa

Farm Equipment EBIT

Auto Margin
Source: Company, Daiwa

Farm Equipment Margin

Blended Margin

- 13 -

Q2FY12

Q3FY09

Q1FY11

Q2FY12

Automobiles & components / India

25 November 2011

MM IN

investment opportunity, with the core business now trading at a 10x FY13E PER.

Reiterate Buy (1) rating and sixmonth target price of Rs813.8

M&M: SOTP valuation
Core Auto Business - A Subsidiaries & JVs - Listed Subsidiaries & JVs - SYMC - Mahindra Navistar Sub-total - B Total value (A+B) Methodology 13x PER on FY13E EPS 20% discount to target price 20% discount to 1x BV 1x BV Value per share (Rs) 612 166 28 8 202 813.8

We reiterate our Buy (1) rating and six-month SOTPbased target price of Rs813.8 (see our SOTP valuation table for details), valuing the core business at a PER of 13x on our FY13 core EPS forecast. We would see the key risks to our view including a sharp slowdown in domestic economic growth momentum, pricing pressure in the tractor segment, and a poor monsoon.

Source: Company, Bloomberg, Daiwa estimates

After our field trip, we remain confident in M&Ms farm equipment growth story, which still has strong potential, in our view. We are therefore revising up our tractor sales-volume growth assumptions by 6-7% for FY12-14. On the other hand, M&M has been delivering robust sales-volume growth in the automotive segment as well, the strength of which is reflected in the overwhelming response to its recently launched XUV 5OO. With order for more than 8,000 units received within 10 days of launch, M&M has stopped accepting further bookings due to capacity constraints. The company is gearing up to launch a compact version of its successful MUV Xylo soon, which we believe would contribute to its automotive sales-volume growth momentum. On the LCV front, both the Maxximo and Genio are gaining traction as well. After outperforming the benchmark Sensex by about 20% since the start of 2011, M&Ms share price has seen a sharp correction (of ~20%) in the month of November, due mainly to its disappointing 2Q FY12 results. We expect the share price to rebound in the coming quarters, and hence see the correction in the share price as an attractive medium-long term

- 14 -

Automobiles & components / India

25 November 2011

MM IN

Some more highlights from our trip

Work-in-progress on the Pune-Bangalore highway Work-in-progress on the Pune-Bangalore highway

Source: Daiwa

Source: Daiwa

Replaced tractors parked outside a dealer showroom

Dinner at a small eat-out (inflation effect evident here as well)

Source: Daiwa

Source: Daiwa

Long queues at highway toll booths

Optimum use of a two-wheeler in rural India!

Source: Daiwa

Source: Daiwa

- 15 -

Daiwas Asia Pacific Research Directory

Hong Kong Regional Research Head Regional Research Co-head Head of Product Management Head of Thematic Research; Product Management Head of China Research; Chief Economist (Greater China) Macro Economy (Hong Kong, China) Regional Chief Strategist; Strategy (Regional) Head of Hong Kong Research; Regional Property Coordinator; Co-head of Hong Kong and China Property; Property Developers (Hong Kong) Automobiles and Components (China) Head of Greater China FIG; Banking (Hong Kong, China) Banking (Hong Kong, China) Insurance Capital Goods Electronics Equipments and Machinery (Hong Kong, China) Consumer, Pharmaceuticals and Healthcare (China) Conglomerate (Hong Kong, China) Consumer/Retail (Hong Kong, China) Head of HK and China Gaming and Leisure; Hotels, Restaurants and Leisure Casinos and Gaming (Hong Kong); Capital Goods Conglomerate (Hong Kong) Internet (Hong Kong, China) Regional Head of IT/Electronics; Semiconductor/IC Design (Regional) IT/Electronics - Semiconductor/IC Design (Taiwan) Regional Head of Materials; Materials/Energy (Regional) Materials (China) Head of Hong Kong and China Property; Property Developers (Hong Kong, China) Property (Hong Kong, China) Regional Head of Small/Medium Cap; Small/Medium Cap (Regional) Small/Medium Cap (Regional) Head of Solar Telecommunications (Greater China) Transportation Aviation, Land and Transportation Infrastructure (Regional) Transportation Transportation Infrastructure; Capital Goods Construction and Engineering (China) Regional Head of Clean Energy and Utilities; Utilities; Power Equipment; Renewables (Hong Kong, China) Head of Custom Products Group; Custom Products Group Custom Products Group Custom Products Group Custom Products Group Nagahisa MIYABE Christopher LOBELLO John HETHERINGTON Tathagata Guha ROY Mingchun SUN Kevin LAI Colin BRADBURY Jonas KAN Jeff CHUNG Grace WU Queenie POON Jennifer LAW Joseph HO Hongxia ZHU Peter CHU Matthew MARSDEN Gavin HO Alicia HU Eric CHEN Ashley CHUNG Alexander LATZER Felix LAM Danny BAO Yannis KUO Mark CHANG John CHOI Pranab Kumar SARMAH Alan KAM Kelvin LAU Edwin LEE Dave DAI Justin LAU Philip LO Jibo MA Kenji SERIZAWA (852) 2848 4971 (852) 2848 4916 (852) 2773 8787 (852) 2773 8731 (852) 2773 8751 (852) 2848 4926 (852) 2848 4983 (852) 2848 4439 (852) 2773 8783 (852) 2532 4383 (852) 2532 4381 (852) 2773 8745 (852) 2848 4443 (852) 2848 4460 (852) 2848 4430 (852) 2848 4963 (852) 2532 4384 (852) 2532 4180 (852) 2773 8702 (852) 2848 4431 (852) 2848 4463 (852) 2532 4341 (852) 2773 8715 (852) 2773 8735 (852) 2773 8729 (852) 2773 8730 (852) 2848 4441 (852) 2848 4978 (852) 2848 4467 (852) 2532 4349 (852) 2848 4068 (852) 2773 8741 (852) 2773 8714 (852) 2848 4489 (852) 2532 4159 nagahisa.miyabe@hk.daiwacm.com christopher.lobello@hk.daiwacm.com john.hetherington@hk.daiwacm.com tathagata.guharoy@hk.daiwacm.com mingchun.sun@hk.daiwacm.com kevin.lai@hk.daiwacm.com colin.bradbury@hk.daiwacm.com jonas.kan@hk.daiwacm.com jeff.chung@hk.daiwacm.com grace.wu@hk.daiwacm.com queenie.poon@hk.daiwacm.com jennifer.law@hk.daiwacm.com joseph.ho@hk.daiwacm.com hongxia.zhu@hk.daiwacm.com peter.chu@hk.daiwacm.com matthew.marsden@hk.daiwacm.com gavin.ho@hk.daiwacm.com alicia.hu@hk.daiwacm.com eric.chen@hk.daiwacm.com ashley.chung@hk.daiwacm.com alexander.latzer@hk.daiwacm.com felix.lam@hk.daiwacm.com danny.bao@hk.daiwacm.com yannis.kuo@hk.daiwacm.com mark.chang@hk.daiwacm.com john.choi@hk.daiwacm.com pranab.sarmah@hk.daiwacm.com alan.kam@hk.daiwacm.com kelvin.lau@hk.daiwacm.com edwin.lee@hk.daiwacm.com dave.dai@hk.daiwacm.com justin.lau@hk.daiwacm.com philip.lo@hk.daiwacm.com jibo.ma@hk.daiwacm.com kenji.serizawa@hk.daiwacm.com

South Korea Head of Research; Strategy; Banking/Finance Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel Banking/Finance Capital Goods (Construction and Machinery) Consumer/Retail Insurance IT/Electronics (Tech Hardware and Memory Chips) Materials (Chemicals); Oil and Gas Telecommunications; Software (Internet/Online Games) Custom Products Group Chang H LEE Sung Yop CHUNG Anderson CHA Mike OH Sang Hee PARK Yumi KIM Jae H LEE Jennifer CHOI Thomas Y KWON Shannen PARK (82) 2 787 9177 (82) 2 787 9157 (82) 2 787 9185 (82) 2 787 9179 (82) 2 787 9165 (82) 2 787 9838 (82) 2 787 9173 (82) 2 787 9121 (82) 2 787 9181 (82) 2 787 9184 chlee@kr.daiwacm.com sychung@kr.daiwacm.com anderson.cha@kr.daiwacm.com mike.oh@kr.daiwacm.com sanghee.park@kr.daiwacm.com yumi.kim@kr.daiwacm.com jhlee@kr.daiwacm.com jihye.choi@kr.daiwacm.com yskwon@kr.daiwacm.com shannen.park@kr.daiwacm.com

- 16 -

Taiwan Head of Taiwan Research; Strategy Banking/Diversified Financials Consumer/Retail IT/Technology Hardware (Communications Equipment); Software; Small/Medium Caps IT/Technology Hardware (Handsets and Components) IT/Technology Hardware (PC Hardware - Panels) IT/Technology Hardware (PC Components) Materials; Conglomerates Alex YANG Jerry YANG Yoshihiko KAWASHIMA Christine WANG Alex CHANG Chris LIN Jenny SHIH Albert HSU (886) 2 2345 3660 (886) 2 8788 1696 (886) 2 8780 5987 (886) 2 8788 1531 (886) 2 8788 1584 (886) 2 8788 1614 (886) 2 8780 1326 (886) 2 8786 2212 alex.yang@daiwacm-cathay.com.tw jerry.yang@daiwacm-cathay.com.tw y.kawashima@daiwacm-cathay.com.tw christine.wang@daiwacm-cathay.com.tw alex.chang@daiwacm-cathay.com.tw chris.lin@daiwacm-cathay.com.tw jenny.shih@daiwacm-cathay.com.tw albert.hsu@daiwacm-cathay.com.tw

India Deputy Head of Research; Strategy; Banking/Finance All Industries Automobiles and Components FMCG; Consumer Materials Pharmaceuticals and Healthcare Punit SRIVASTAVA Fumio YOKOMICHI Ambrish MISHRA Percy PANTHAKI Vishal CHANDAK Kartik A. MEHTA (91) 22 6622 1013 (91) 22 6622 1003 (91) 22 6622 1060 (91) 22 6622 1063 (91) 22 6622 1006 (91) 22 6622 1012 punit.srivastava@in.daiwacm.com fumio.yokomichi@in.daiwacm.com ambrish.mishra@in.daiwacm.com percy.panthaki@in.daiwacm.com vishal.chandak@in.daiwacm.com kartik.mehta@in.daiwacm.com

Singapore Head of Singapore Research Chief Economist; Asia Ex-JP; Macro Economy (Regional) Global Director of Quantitative Research; Quantitative Research Quantitative Research Quantitative Research Banking (ASEAN) Consumer; Food and Beverage; Small/Medium Cap (ASEAN) Tony DARWELL Prasenjit K BASU Deep KAPUR Josh CHERIAN Suzanne HO Srikanth VADLAMANI Pyari MENON (65) 6321 3050 (65) 6321 3069 (65) 6321 3079 (65) 6499 6549 (65) 6499 6545 (65) 6499 6570 (65) 6499 6566 (65) 6499 6548 (65) 6329 2102 (65) 6499 6543 tony.darwell@sg.daiwacm.com p-k.basu@sg.daiwacm.com deep.kapur@sg.daiwacm.com josh.cherian@sg.daiwacm.com suzanne.ho@sg.daiwacm.com srikanth.vadlamani@sg.daiwacm.com pyari.menon@sg.daiwacm.com adrian.loh@sg.daiwacm.com david.lum@sg.daiwacm.com ramakrishna.maruvada@sg.daiwacm.com

Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore) Adrian LOH Property and REITs Head of ASEAN & India Telecommunications; Telecommunications (ASEAN & India) David LUM Ramakrishna MARUVADA

Australia Resources/Mining/Petroleum David BRENNAN (61) 3 9916 1323 david.brennan@au.daiwacm.com

The Philippines Head of the Philippines Research; Strategy; Capital Goods; Materials Economy; Consumer; Power and Utilities; Transportation Aviation Property; Banking; Transportation Port Rommel RODRIGO Alvin AROGO Danielo PICACHE (63) 2 813 7344 ext 302 rommel.rodrigo@dbpdaiwacm.com.ph (63) 2 813 7344 ext 301 alvin.arogo@dbpdaiwacm.com.ph

(63) 2 813 7344 ext 293 danielo.picache@dbpdaiwacm.com.ph

- 17 -

Daiwas Office
Office / Branch / Affiliate DAIWA SECURITIES GROUP INC HEAD OFFICE Daiwa Securities Trust Company Daiwa Securities Trust and Banking (Europe) PLC (Head Office) Daiwa Securities Trust and Banking (Europe) PLC (Dublin Branch) Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. 5 King William Street, London EC4N 7JB, United Kingdom Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (1) 201 333 7300 (81) 3 5555 0661 (1) 201 333 7726 Address Tel Fax

(44) 207 320 8000 (44) 207 410 0129 (353) 1 603 9900 (353) 1 478 3469

DAIWA CAPITAL MARKETS LIMITED HEAD OFFICE Daiwa Capital Markets America Inc Daiwa Capital Markets America Inc. San Francisco Branch Daiwa Capital Markets Europe Limited Daiwa Capital Markets Europe Limited, Frankfurt Branch Daiwa Capital Markets Europe Limited, Paris Branch Daiwa Capital Markets Europe Limited, Geneva Branch Daiwa Capital Markets Europe Limited, Milan Branch Daiwa Capital Markets Europe Limited, Moscow Representative Office Daiwa Capital Markets Europe Limited, Bahrain Branch Daiwa Capital Markets Europe Limited, Dubai Branch Daiwa Capital Markets Hong Kong Limited Daiwa Capital Markets Singapore Limited Daiwa Capital Markets Australia Limited DBP-Daiwa Capital Markets Philippines, Inc Daiwa-Cathay Capital Markets Co Ltd Daiwa Securities Capital Markets Co Ltd, Seoul Branch Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office Daiwa SSC Securities Co Ltd Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 Financial Square, 32 Old Slip, New York, NY10005, U.S.A. 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. 5 King William Street, London EC4N 7AX, United Kingdom Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, Federal Republic of Germany 127, Avenue des Champs-Elyses, 75008 Paris, France 50 rue du Rhne, P.O.Box 3198, 1211 Geneva 3, Switzerland Via Senato 14/16, 20121 Milan, Italy 25/9, build. 1, Per. Sivtsev Vrazhek, Moscow 119002, Russian Federation 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, Manama, Bahrain The Gate village Building 1, 1st floor, Unit-6, DIFC, P.O.Box-506657, Dubai, UAE. Level 28, One Pacific Place, 88 Queensway, Hong Kong 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, Republic of Singapore Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. 6th Floor, Hana Daetoo Securities Bldg 27-3, Yeouido-Dong, Yeongdeungpo-Gu, Seoul, Republic of Korea Room 3503/3504, SK Tower, No.6 Jia Jianguomen Wai Avenue, Chaoyang District, Beijing 100022, Peoples Republic of China Room 011, 45F HSBC Tower, 1000 Lujiazui Ring Road, Pudong New Area, Shanghai 200120, Peoples Republic of China Level 8 Zuellig House, 1 Sliom Road, Bangkok 10500, Thailand 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai 400051, India Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam (03) 5555 3111 (1) 212 612 7000 (1) 415 955 8100 (03) 5555 0661 (1) 212 612 7100 (1) 415 956 1935

(44) 20 7597 8000 (44) 20 7597 8600 (49) 69 717 080 (33) 1 56 262 200 (41) 22 818 7400 (39) 02 763 271 (7) 495 617 1960 (973) 17 534 452 (971) 47 090 401 (852) 2525 0121 (65) 6220 3666 (61) 3 9916 1300 (632) 813 7344 (49) 69 723 340 (33) 1 47 550 808 (41) 22 818 7441 (39) 02 763 27250 (7) 495 244 1977 (973) 17 535 113 (971) 43 230 332 (852) 2845 1621 (65) 6223 6198 (61) 3 9916 1330 (632) 848 0105

(886) 2 2723 9698 (886) 2 2345 3638 (82) 2 787 9100 (82) 2 787 9191

(86) 10 6500 6688 (86) 10 6500 3594

(86) 21 6859 8000 (86) 21 6859 8030

Daiwa Securities Capital Markets Co. Ltd, Bangkok Representative Office Daiwa Capital Markets India Private Ltd Daiwa Securities Capital Markets Co. Ltd, Hanoi Representative Office

(66) 2 231 8381

(66) 2 231 8121

(91) 22 6622 1000 (91) 22 6622 1019 (84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE MARUNOUCHI OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 (81) 3 5202 2021

Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011

New York Research Center London Research Centre

11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom

(1) 212 612 6100

(1) 212 612 8417

(44) 207 597 8000 (44) 207 597 8550

- 18 -

Disclaimer
This publication is produced by Daiwa Securities Capital Markets Co. Ltd. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Capital Markets Co. Ltd. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Capital Markets Co. Ltd. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Capital Markets Co. Ltd., its parent, holding, subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Japan Daiwa Securities Capital Markets Co. Ltd and Daiwa Securities Group Daiwa Securities Capital Markets Co. Ltd and Daiwa Securities Group: Daiwa Securities Capital Markets Co. Ltd is a subsidiary of Daiwa Securities Group. Investment Banking Relationship Within the preceding 12 months, The Affiliates of Daiwa Securities Capital Markets Co. Ltd.* has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Patel Engineering (PEC IN); International Taifeng Holdings Limited (873 HK); Sihuan Pharmaceutical Holdings Group Limited (460 HK); Strides Arcolab Limited (STR IN); China Metal Resources Holding Limited (8071 HK); China 33 Media Group Limited (8087 HK); Sabana Shariah Compliant Industrial Real Estate Investment Trust (SSREIT SP); SBI Holdings Inc. (6488 HK); Shunfeng Photovoltaic International Limited (1165 HK); Rexlot Holdings Limited (555 HK). *Affiliates of Daiwa Securities Capital Markets Co. Ltd. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited Daiwa Capital Markets Singapore Limited Daiwa Capital Markets Australia Limited Daiwa Capital Markets India Private Limited Daiwa-Cathay Capital Markets Co., Ltd. Daiwa Securities Capital Markets Co. Ltd., Seoul Branch Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (DHK) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For Ownership of Securities information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For Investment Banking Relationship, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research. Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limiteds interest and/or its representatives interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For Ownership of Securities information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analysts personal views about the securities and issuers that are subject of the Report, and that no part of the analysts compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.

- 19 -

United Kingdom This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (FSA) and is a member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the Securities), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europes affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Dubai This document has been distributed by Daiwa Capital Markets Europe Limited, Dubai Branch. Related financial products or services are intended only for professional clients and no other person should act upon it. Daiwa Capital Markets Europe Limited is duly licensed and regulated by the Dubai Financial Services Authority. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparers views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMAs views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMAs non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For Ownership of Securities information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For Investment Banking Relationships please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For DCMA Market Making please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on Research Analyst Conflicts please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on Research Analyst Certification and Rating System please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Capital Markets Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Capital Markets Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.109 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

- 20 -