A project report on fundamental analysis of mahindra&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

Babasabpatilfreepptmba.com 1


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.

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 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, technological or consumer trends can

benefit patient investors who pick the right industry

groups 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.

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 stock’s 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 a group. By understanding a

company's business, investors can better position

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 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 worst-

case 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

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

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 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 characteristics- its 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

long-term 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

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.

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.

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 announcements and gauge the

market reaction to them better than the average investor

in the 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

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

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 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.

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 firm’s outstanding debt should yield the value of

equity.

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.

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 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

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 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

company’s 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:

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

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.

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 also

includes testing the intrinsic value of the company.

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 was collected through sources like Internet,

research reports, magazines, and company journals.

Sampling plan:

Type of sampling : Non-probabilistic judgment

sampling.

Sample size : One company from automobile

sector.

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 calculations that will help in the company

valuation. This helps in finding out the intrinsic value of

the company’s 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:

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:

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

long-term debt instead of total liabilities.

6) DEPRECIATION:



An expense recorded to reduce the value of a long-

term tangible asset. Since it is a non-cash expense, it

increases free cash flow while decreasing reported

earnings.

7) DIVIDEND PAYOUT RATIO:

The percentage of earnings paid to shareholders in

dividends.

9) DUPONT ANALYSIS:

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 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

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:

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 long-term debt.

WACC is calculated by multiplying the cost of each

capital component by its proportional weighting and

then summing:



CHAPTER SCHEME

Chapter: 1 THEORITICAL BACKGROUND OF THE

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.

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, India’s 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 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

TABLE 1: INDIA - ECONOMIC PARAMETERS



F 04 F 05

GDP Growth

(%)

8.1 6.0 -

6.5

Fiscal Deficit

(%)

4.8 4.4

Interest Rate Decline

d

Harden

ing

Inflation

(Average) %

5.3 6.5

Rupee - US

Dollar

Appreci

ated

Steady

(Source: RBI, CMI)

GRAPH 2: SHOWING INDIA’S 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 India’s 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.

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 2004 period as

against previous corresponding year’s 6% indicating the

progressive economic activities. But the global crude oil

shock will definitely have an adverse affect on the

growth during fiscal 2005.

GRAPH 3: INFLATION

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 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 china’s 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 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

country’s 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 industry’s sales is positively

correlated with the economic growth with a co-relation

of 0.96.

GRAPH 4: GDP AND AUTO SALES

GDP and Auto sales

11001150120012501300135014001450

1999-00

2000-01

2001-02

2002-03

2003-04

Real G

DP

(R

s. '0

00 C

rore

)

At

1993-9

4 p

rice levels

404550556065707580

No

of

un

its(i

n l

akh

s)

GDP No of units (in lakhs)



(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 trucker’s strike has affected

the auto player’s production and distribution to certain

extent.

GRAPH 5: SHOWING RUBBER PRICES



Interntional & Domestic Rubber Prices

400

600

800

1000

1200

1400

1600

Mar-01

Jul-01 Nov-01

Apr-02

Aug-02

Dec-02

Apr-03

Aug-03

Dec-03

Apr-04

US

D/T

on

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Rs/

To

n

USD/Ton Rs/Ton

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 user’s sector. Also, the subsidy given by the

government for exports of rubber has resulted in an

increase in the exports.



The steel prices

GRAPH 6: SHOWING STEEL PRICES

Steel Prices

20,000

30,000

40,000

Ap

r-02

Ju

l-02

Oct-

02

Jan

-03

Ap

r-03

Ju

l-03

Oct-

03

Jan

-04

Ap

r-04

Ju

l-04

Oct-

04

Rs/T

on

ne

GC sheets

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%. Coke’s 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 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 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 India’s 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.



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 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.

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 in-house 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.



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,



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 company’s 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

company plans to be the world’s 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-for-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

required, value engineering and strategic 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&M’s 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 Company’s manufacturing facilities are located

at Kandivli, Nashik, Igatpuri, Nagpur, Zaheerabad,



Jaipur and Rudrapur. Company has two main tractor

manufacturing 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 15-day 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 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 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 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 large-

scale 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

Passenger cars : 17%

Utility vehicles : 23%

Light commercial vehicles : 12%

Heavy and multi commercial vehicles : 23%

3 wheelers : 8%

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.

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 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% 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 customer’s 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 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 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

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



manufacturer’s 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

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

there is a 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 cost-

manufacturing center. MUL is also becoming a hub for

small cars for Suzuki Motor Corporation. The country’s



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 FY05 FY04

Raw Material 69.4 67.8

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

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 1990’s. 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 MUL’s Maruti 800’s

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, MUL’s

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 1999-00, 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.

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.

MUL’s Esteem lost its leadership position to Tata’s

Indigo, which has dominated the market with 31 percent

share. This ahs been followed by Hyundai’s percent and

22 percent respectively. Honda Siel occupies the



dominant position with its City model. Toyota’s Corolla

and Honda’s 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

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 Mahindra’s SUV Scorpio also moved along

the lines of Qualis, dragging the passenger car

customers. Watching the Scorpio’s success a new range

of SUVs were launched by other players in the industry.

The new SUV models, which are launched, recently are

Maruti’s Jimny, Ford’s Endeavour, Suzuki’s Vitara,

Chevrolet’s Forester and Hyundai’s Terracan. With this

move by the players, the red line between the utilities

and the passenger car is slowly vanishing.



GRAPH 7: SHARE OF PLAYERS IN THE

PASSENGER CAR SEGMENT AS ON FEB 2004-05

Market Share: Companywise

51%

18%

3%16%

3%

9%MarutiHyundaiFordTata EngHonda SielOthers



GRAPH 8: SHARE OF PLAYERS IN THE UTILITIES

SEGMENT AS ON FEB2004-05



Utilities market share

3%

34%

31%

15%

16% 1%

Bajaj TempoMah & mahMaruti UdyogTelcoToyota KirloskarOthers

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. This industry has maintained a

10 percent to 12 percent share of exports in its total

production. India’s automotive component industry



manufactures the entire range of parts required by the

domestic automobile industry and currently employs

about 250,000 persons. Auto component manufacturers

supply to two kinds of 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

OEM’s 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.

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 government’s 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 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 government’s 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 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 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 metro’s 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:



The WTO restrictions came into effect from 1st April

2001 and the Indian industries were feeling a sense of

threat of cheaper imports. However, with the

government’s decision to hike up the imports tariffs, it

pulled down the curtains of threat. Besides, the

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 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 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 EMI’s, 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 SUV’s in the rural

market.

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 industry’s 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 expected growth possible. The

automobile industry needs to aggressively benchmark

its products and processes with the Industry best -

both in India as well the world’s 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 technology and Indian auto

component makers are 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 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.

TABLE 3: ASSUMPTIONS MADE FOR THE STUDY

Assumptions

Income statement March '

March '

March ' 07



05 06Sales growth 10.00

%10.00%

9.00%

Operating Margins 9.28%

10.00%

10.00%

Other Income as a % of investments

17.76%

15.00%

15.00%

Effective Tax rate 21.93%

22.00%

22.00%

Cost of debt (Pre tax) 10.54%

7.50%

7.50%

Debt to equity 0.44 0.35 0.30Gross asets a % of Sales

51.15%

50.00%

50.00%

Depreciation as % G.Assets

6.61%

7.00%

7.00%

Dividend payout 11.66%

12.00%

12.00%

Dividend Tax 12.81%

12.50%

12.50%

Investments as a % of total Sales

22.74%

22.00%

22.00%

Current assets as a % of sales

28.89%

29.00%

29.00%

Current liabilities as a % of sales

26.75%

26.00%

26.00%

TABLE 4: WEIGHTED AVERAGE COST OF CAPITAL

Risk free rate 7.00%Market rate of return 16.00%Beta 1.02Interest Paid (Rs. Crore) 51.58



Market value of debt (Rs. Crore)

934.82

Tax rate 37.00%Cost of debt 3.48%Cost of equity 16.18%WACC 14.31%

TABLE 5: VALUE DRIVERS

2005 2004

2003

Market Capitalisation (Rs. Crore)

5417.60

P/E (Trailing) P/E 14.24 15.5

81.86

P/B 3.23 1.86 1.17

TABLE 6: INCOME STATEMENT

(Rs in Lakhs)

Income statement Mar ' 03

Mar ' 04

Mar' 05

Gross Sales 399675.3

445265

582924.6

Less: Excise 0 78549.06

94378.11

Net Sales 399675.26

366715.9

488546.48

Operating Income



Total Income 399675.26

366715.9

488546.48

Less: Raw Material + Purchases

211723.1

250021.8

335286.52

Employee Cost 36991.46

38129.03

41745.39

Selling Expenses 19982.1

19539.59

18581.6

Administrative Expenses

2505.32

2955.12

3128.25

Other Expenses 59545.22

18183.99

25795.99

Provisions 1235.35

4010.33

44.21

Miscellaneous expenses 15243.27

15283.98

19171.61

Change in Stock (-) Inc./ (+) Dec.

6440.94

2357.99

-2143.23

Expenses Capitalised 1748.97

1917.077

1577.55

Amortisation 1070.95

486.95 6.76

Total Operating Expenses

356486.68

352885.9

443194.65

Operating Profit 43188.58

13830.01

45351.83

Interest 25275.67

1150.39

7693.27

Gross Profit 17912. 12679. 37658.



91 62 56Depreciation 13938.

2916056.7

16519.9

PBT before non op and extra ord

3974.62

-3377.08

21138.66

Non Operaing Income 5285.43

17314.88

19732.81

Add: Extra Ord. Income -1728.58

5765.61

2947.83

Less: Extra Ord Expenses

0 0 0

PBT 7531.47

19703.41

43819.3

Provision for Taxation 360 1230 6350Deffered taxation -2520 3920 2615

PAT 9691.47

14553.41

34854.3

Prior Year (+)Inc./ (-)Exp.Reported PAT 9691.4

714553.41

34854.3

B/F 0 36539.1

54709.43

Profit available for allocation

0 0 89563.73

Proposed Equity Dividend

0 6380.64

10441.48

Dividend Tax 0 817.55 1337.82



Equity Dividend (%)Eps 8.35 12.55 30.05

TABLE7: EXPECTED INCOME STATEMENT

Expected income statement

March ' 05

March ' 06

March ' 07

Operating Income 488546.48

537401.13

585767.23

Non Operating Income 19732.81

17734.24

19330.32

Operating expenses 443194.65

483661.02

527190.51

Operating Profit 45351.83

53740.11

58576.72

Interest 7693.27

5274.76

5398.28

Gross Profit 57391.37

66199.59

72508.77

Depreciation 16519.9

18943.48

20636.29



Other Non operating exp

192.88 154.31

Tax 8965 10353.91

11378.00

PAT 34854.43

39167.42

45063.81

Dividends 10441.48

4700.09

5407.66

Dividends Tax 1337.82

587.51 675.96

Retained Earnings 23075.13

33879.82

38980.20

Expected EPS 30.02 33.74 38.82

TABLE 8: BALANCE SHEET

March ' 03

March ' 04

March ' 05

SOURCES OF FUNDS Owner's Fund Equity Share Capital

1160.86

1160.86

1160.86

Share Application Money

0 0 0

Preference Share Capital

0 0 0

Reserves & Surplus

138800.6

145382.23

165902.49

Loan Funds Secured Loans 92415. 92415. 72980.



36 36 78Unsecured Loans 21569.

0921569.09

24458.03

Deferred Tax Liability (Net)

0 17710.01

20325

Total 270967.54

288677.55

270809.13

USES OF FUNDS Fixed Assets Gross Block 206803

.7243681.94

249879.69

Less : Revaluation Reserve

0 0 0

Less : Accumulated Depreciation

87954.5

102304.08

116582.68

Net Block 141377.86

141377.86

133297.01

Capital Work-in-progress

34873.41

5231.01

3841.1

Intangible assets 0 0 2021.8Investments 80012.

7986226.96

111115.31

Net Current Assets Current Assets, Loans & Advances

173236.64

161348.02

150256.79

Less : Current Liabilities & Provisions

105074.24

109478.25

130687.3

Total Net Current Assets

68162.4

51869.78

19569.49



Miscellaneous expenses not written

0.00 3971.96

964.42

Total 288107.8

288677.55

270809.13

TABLE 9: RELATIVE P/E AND PEG RATIO

EPS 05

EPS (06)

EPS (07)

EPS Growth(06)

EPS Growth(07)

Current P/E

P/E 06

PEG 06

Ashok Leyland

1.63

2.02

2.31 23.)3% 14.36% 11

0.46

Bajaj Tempo

33.55 - - - - - -

Mahindra & Mahindra

30.04

33.74

38.82 12.32% 15.06% 16.65

14.06

1.14

Maruti Udyog Ltd

18.77

32.2 40 71.55% 24.22%

13.06

0.18

Hindustan Motors - - - - - - -Tata Motors

22.96

32.98

39.6 43.64% 20.07%

11.91

0.27



(Source: www.icicidirect.com)

EPS

CEPS

Debt To Equity RO

E

Current Ratio

Book value per share

OPM(%)

NPM(%)

P/BV

Ashok Leyland

16.28

24.41 0.48

19.47 1.45 83.6

11.42

5.51

2.2

Bajaj Tempo

33.55

57.64 0.3

23.11 1.6

145.15 7.67

4.52

1.75

Mahindra & Mahindra

30.04

45.32 0.41

19.91 0.99

152.18

10.47

6.88

2.84

Maruti 18. 38.4 0.08 15.1 1.17 123. 13.2 5.6 2.8



Udyog Ltd 76 6 74 5 1

8

Hindustan Motors

-5.02

-2.17 5.04

-116.32 1.37 4.32

-0.47

-10.98

2.8

Tata Motors

22.96

35.26 0.35

22.71 0.72

101.08

13.14

6.12

1.46

TABLE 10: RELATIVE RATIOS

(Source: www.icicidirect.com)

TABLE 11: DUPONT ANALYSIS


ROE200

3200

4 20056.44

%9.27

%19.6

4%

NPM200

3200

4200

52.97

%3.92

%7.07

%

Equity Multiplier

2003

2004

2005

2.76

2.57

2.28

Assets Turnover

2003

2004

2005

0.79

0.92

1.22



Analysis 2004 2005ROE UP UPNPM UP UPAssets Turnover UP UPEquity Multiplier DOWN DOWNSales UP UPEquity to L.T Debt DOWN DOWN


Mahindra and Mahindra Valuation:

Mahindra and Mahindra is one the leading names in

the Automotive and farm sector industry. The

company’s solid reputation and brand name

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 company’s 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 company’s 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 enough time

to avoid any questions or uncertainties as number of

new players entering the market. Through the

forecasting of the company’s 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 company’s 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

company’s cost of debt to be 3.48%. With these

numbers we were then able to find company’s

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 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 year’s figure of Rs. 2142.22 crore which can

be attributed to the robust demand in the market

due to the increased economic activity. The

company’s operating profit moved up by 11.69% to

Rs 348.09 crore during the period, as against

corresponding period of last year’s 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,

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 year’s 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 (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 FY2005E and 10.0x

FY2006E earnings. We maintain our buy

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.

2. Alternate Hypothesis:

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

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.

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

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

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 1998-

99 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 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 mid-sized 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%.

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.

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

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.

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.

CONCLUSIONFundamental 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-

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


A project report on fundamental analysis of mahindra&mahindra company

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