GRAND PROJECT OF SECURITY ANALYSIS

Performance Analysis of Tata Steel and M&M Financial Services limited along with its Economic aspects, respective Industry Analysis

SEPTEMBER 16, 2016

PRAKASH CHANDRASHEKAR Guided By: Prof. Abhay Raja

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Table of Contents Tata steel ................................................................................................................................................ 3

Introduction of the Company .......................................................................................................... 3

History ............................................................................................................................................ 3

Performance of Company in Stock Market .................................................................................... 4

Returns of Tata Steel Vs Returns of BSE Metal ............................................................................. 4

Stock Price Fluctuations since last 5 Years..................................................................................... 4

Important Ratios and values ............................................................................................................ 5

Risk associated with the Company .................................................................................................. 5

Systematic Risk ............................................................................................................................... 5

Operational Risk ............................................................................................................................. 6

Financial Risks ................................................................................................................................ 7

Economic Analysis ............................................................................................................................ 7

Macro-Economic Variables affecting Industry .......................................................................... 8

Industry Analysis of Steel ............................................................................................................... 10

Porter’s Five Force Model of Steel Industry ............................................................................ 11

Driving Forces in the Industry ................................................................................................... 12

Competitive Performance of companies in Industry ............................................................... 12

Performance of Return of Industry Index with the overall Market ....................................... 13

Financial and Non-Financial Performance ................................................................................... 14

Financial Performance of Tata Steel ......................................................................................... 14

Altman Z score ............................................................................................................................ 16

Key Ratio Trends ........................................................................................................................ 17

Non-financial Performance ............................................................................................................ 18

My View on the Company in Present Context ............................................................................. 18

M & M Financial Services Limited ................................................................................................... 19

Introduction to the Company..................................................................................................... 19

Performance of Company in Stock Market .................................................................................. 20

Stock Price Fluctuations since last 5 Years............................................................................... 20

Important Ratios and Values ..................................................................................................... 21

Risk Associated with the Company ............................................................................................... 21

Systematic Risk ........................................................................................................................... 21

Economic Analysis .......................................................................................................................... 22

Industry Analysis of Non-Banking Financial Services ................................................................ 23

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Roles of NBFC ............................................................................................................................. 25

Performance of BSE Finance in comparison with BSE Sensex .............................................. 25

Importance of NBFC .................................................................................................................. 26

Porter’s Five Force Model .......................................................................................................... 26

Overview of NBFC’s present position ....................................................................................... 27

Conclusion ................................................................................................................................... 27

Financial and Non-Financial Performance of the Company ...................................................... 28

Financial Performance of M&M Financials ............................................................................. 28

Non-Financial Performance ....................................................................................................... 30

My View on the company in present context ................................................................................ 30

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Tata steel

Introduction of the Company

Tata Steel Limited (formerly Tata Iron and Steel Company Limited (TISCO)) is an Indian

multinational steel-making company headquartered in Mumbai, Maharashtra, India, and a

subsidiary of the Tata Group. It was the 11th largest steel producing company in the world in

2013, with an annual crude steel capacity of 25.3 million tonnes, and the second largest steel

company in India (measured by domestic production) with an annual capacity of 9.7 million

tonnes after SAIL.

Tata Steel has manufacturing operations in 26 countries, including Australia, China, India, the

Netherlands, Singapore, Thailand and the United Kingdom, and employs around 80,500

people. Tata Steel primarily serves customers in the automotive, construction, consumer goods,

engineering, packaging, lifting and excavating, energy and power, aerospace, shipbuilding, rail

and defence and security sectors. Tata Steel's major competitors include ArcelorMittal, Essar Steel,

Jindal Steel and Power, JSW Steel, SAIL and VISA Steel.

Through its investments in Corus, Millennium steel (Tata steel Thailand) and Nat Steel holdings,

Singapore Tata Steel has created a manufacturing and marketing network in Europe, south East Asia

and pacific-rim countries. Corus which manufactured over 20 MTPA of steel in 2008 has operations in

UK, Netherlands, Germany, France, Norway and Belgium.

History

Tata Iron and Steel Company was founded by Jamshedji Tata and established by Dorabji Tata

on 26 August 1907, as part of his father Jamsetji's Tata Group. By 1939 it operated the largest

steel plant in the British Empire. The company launched a major modernization and expansion

program in 1951. Later in 1958, the program was upgraded to 2 Million metric tonnes per

annum (MTPA) project. By 1970, the company employed around 40,000 people at

Jamshedpur, with a further 20,000 in the neighbouring coal mines. In 1971 and 1979, there

were unsuccessful attempts to nationalise the company. In 1990, it started expansion plan and

established its subsidiary Tata Inc. in New York. The company changed its name from TISCO

to Tata Steel in 2005. Tata Steel bought three strip product services centres in Sweden, Finland

and Norway from SSAB to strengthen its offering in Nordic region. [E]

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Performance of Company in Stock Market

Returns of Tata Steel Vs Returns of BSE Metal

Stock Price Fluctuations since last 5 Years

-30.000%

-20.000%

-10.000%

0.000%

10.000%

20.000%

30.000%

40.000%

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Performance of Tata steel stock in comparison with BSE Metal

Return of BSE Metal Return of Tata steel

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Important Ratios and values

Particulars Values (as on September 2016)

Market Capitalization Rs 35633.89 Crores

Book Value Rs 293.24

Face Value Rs 10

P/E ratio 8.43

P/BV ratio (X) 0.51

P/CF ratio 5.78

Industry P/E ratio (Metal) 8.12

Interpretation

P/E ratio: As the current P/E ratio of the company is 8.43, it conveys that for every 1

Rupee of earnings per share, investors are ready to pay Rs. 8.43 for it which is good. In

general if the P/E ratio is high, it means that investors are expecting a higher earnings

growth in future compared to companies with low P/E.

P/BV ratio: Here the P/BV value is less than 1. It means for every 1 Rupee per share of

Book value, the market price is 0.55 which tells us that company is trading less than its

book value. In this scenario, it normally tells the investors one of the two things which

is either the market believes that asset value is over stated or the company is earning

very poor (even negative) returns on its assets. Admittedly Book value has short

comings which investors need to recognize but it is easy to use tool for identifying over

or undervalued companies. For this reason, relation between share price and book value

would attract attention of investors.

Price to cash flow ratio: Here the P/CF is 5.78 meaning for every 1 Rupee of cash flow

generated per share, the company’s stock price is relatively Rs. 5.78.

Risk associated with the Company

Systematic Risk

Beta of the Company with respect to BSE Sensex is 1.58 and Beta of Company with respect to

BSE Metal is 1.30. This Beta is calculated by taking the data for last 7 years. Theoretically, we

can say that as Beta is >1, stock of the company is 58% more volatile than the entire market (

BSE Sensex) and stock of the company is 30% more volatile than the Overall steel market

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(BSE Metal). The standard deviation of the returns of the company for last 7 years is 0.123

which means the total risk is 12.3%. Both standard deviations and Beta are calculated in the

Excel file “Prakash_Sa-gp” and sheet name “TS returns &charts”.

Strategic Risk

Macro environment and global steel over capacity impact operating markets:

Tata Steel’s operations in India, UK, mainland Europe and South East Asia are affected

by local demand environment as well as global competition. Tata Steel is committed to

mitigating these risks to the extent possible.

Long term growth dependent on success of capacity expansion projects,

restructuring:

Tata Steel continues to pursue its growth strategy in India through growth projects that

may involve uncertainties over execution. The Company has project management

expertise and processes deployed to manage these risks.

Operational Risk

Supply chain disruptions could increase operating costs:

The raw material used in steel making, accounting for 60-70% of the cost, poses a key

risk as it may be subject to supply disruption and market price volatility. The Company

maintains significant integration of raw materials for its Indian operations and strategic

sourcing for the other regions. To achieve greater raw material security, Tata Steel is

also pursuing various mining projects.

Tata Steel is committed to Employee Health and Safety and to enhancing

productivity:

The Company’s Board and Executive Management have a strong commitment towards

creating and providing a safe working environment for all its employees and other

stakeholders. Tata Steel also believes employee productivity is one of the key factors

to be competitive in the industry. The Company’s key focus is to retain talent while

undertaking multiple initiatives to facilitate cross geography knowledge transfer and

improve productivity.

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Balancing economic value as well as ecological and societal value:

The Company is committed to responsible environmental practices. It also engages in

number of activities that improve the quality of life of the communities it serves.

Financial Risks

Adverse movements in credit rating and level of indebtedness could affect our

financial flexibility:

Failure to maintain our credit ratings could adversely affect our cost of funds. The

Company’s outstanding indebtedness in an adverse environment could have significant

impact on financial flexibility and business as a whole. The Company has an

impeccable credit history. In order to mitigate any potential refinancing risk, the

Company regularly refinances its debt in advance.

Social costs - Pension:

Tata Steel’s assumptions while estimating pension funding are subject to capital market

and actuarial risks and any shortfall could put pressure on financial performance. A

framework to manage pension risks has been deployed to ensure that obligations remain

affordable and sustainable, whilst protecting the asset market exposure.

Impairment of tangible and intangible assets:

Tata Steel undertakes impairment reviews as per the Company policy and it involves a

number of significant assumptions and estimates. Risk to underlying assumptions exist

due to the dynamic market environment.

Economic Analysis

Establishment of Tata Steel plants in economically backward areas has given a boost to

economic activities thus benefiting the support population providing different types of

services. Over the years, a large group of ancillary industries has also developed steel plants

in the vicinity of Tata Steel. This has created jobs for local unemployed persons and

development of entrepreneurships has emerged.

Commodity future markets play a prominent role in global financial economy. Steel demand

has been growing continuously in the developing economies and any sudden price

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fluctuations creates detrimental effects in production process within these economies as they

heavily depend on steel for infrastructure.

Macro-Economic Variables affecting Industry

GDP/ Economic Growth

India’s economic growth is dependent upon the growth of Indian Steel Industry. Consumption

of steel is considered as an indicator of economic development. While steel continues to have

an iron grip in traditional sector such as constructions, housing and transportation it is also

increasingly used in engineering industries such as power generation, petrochemicals and

fertilizers. Global Steel giants from across the world have shown interest in industry due to its

phenomenal performance. Moreover, the government proactive incentive plan to boost

economic growth by injecting funds in various industries which includes steel is an added

value. Study reveals that steel consumption in India is expected to grow significantly in coming

years as per capita finished steel consumption is far less than its regional counterparts.

According to government estimates, Iron and Steel Industry contributes around 3% of total

GDP in which Tata Steel contributions is humongous.

Inflation

High inflation has severely hit steel industry like Tata Steel. They have caused slowdown in

the sector. Automobile and construction industries have been major consumers of steel

industry. Slowdown in these industries have further hit steel industry adversely.

Few effects of inflation are:

Seller’s market results in deterioration of quality good products.

Disrupts the smooth functioning of price mechanism

Wages do not rise proportionally with rise in cost of living. If they are well organized in trade

and unions, they may not suffer.

Unemployment The demand for goods and services and a return on investment are drivers of machine of capitalism. If

people are unemployed, production of goods and provisions of services fall off and simultaneously

people who are unemployed lack the power to purchase goods and services.

Effects of unemployment

Low economic growth

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A loss of production and output because those who are unemployed are not stable to

add towards GDP

A misallocation of resource happens because those who are employed will have a

burden of paying for the unemployed.

A decline in labour market skills

A cost to government that government must fund unemployment which increases

budget deficit.

Industrial Trade policy Resolutions in 1991 for steel Industry

Exempted from Industrial licence

Abolition of price controls

Liberalizing conditions for FDI

Lowering tariff levels.

When we compare the pre liberalization to now, many changes have occurred. Market has been

moved from seller’s market to buyer’s market. The excessive control of government has been

replaced with private players like Tata Steel. Administered price has been replaced by Supply-

Demand market driven prices.

Major Environmental Concerns of Steel Industry

Selection of plant site effect on neighbourhood, eology, communication

facilities.

Space for water treatment and recycling solid waste water disposal.

Pollution control measure

Upto 15% of cost of capital is being incurred on pollution control devices.

Availability of Raw Materials

The industry needs efficient raw materials base with enough supportive infrastructure.

India today enjoys leading position due to its raw materials base but unless other related

sectors show an equally and much needed growth this advantage will be a total waste.

Major raw materials required are

Iron ore

Coking coal

Non Coking Coal

Raw Materials for Feroy alloy Industry.

Power

Labour

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Capital Cost and infrastructure

Industry Analysis of Steel India is the third-largest steel producer in the world. In 2015, India produced 91.46 million

tonnes (MT) of finished steel. Total finished steel production in the country increased at a

CAGR of 7.45 per cent over FY011–15.

Driven by rising infrastructure development and growing demand for automotive, steel

consumption is expected to reach 104 MT by 2017. India’s steel production is expected to

increase from 100 MTPA to 112.5 MTPA by FY16 and 300 MTPA by 2025. The Government

of India has allowed 100 per cent foreign direct investment (FDI) in the steel sector under the

automatic route. Nearly 301 MoUs have been signed with various states for planned capacity

of about 486.7 MT.

A new scheme, ‘The scheme for the promotion of R&D in the iron and steel sector’, has been

approved with budgetary provision of US$ 24.6 million to initiate and implement the

provisions of the scheme as per the 11th Five-Year Plan which has continued in the 12th Five

Year Plan. The development of technology for Cold-Rolled Grain Oriented (CRGO) steel

sheets and other value-added products is also included under the policy purview and is

allocated US$ 6.7 million.

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Clearly steel Industry is in the Expansion stage of Industry Life Cycle as it is already an

emergence of industry leader and there is a stability in growth. Further there are many

competitors. Higher the growth, greater the risk would be here. The CAGR of consumption of

steel is 5.74%. During FY11-15, import of steel grew at a compounded annual rate of 9.01 per

cent, whereas, exports increased at a CAGR of 11.32 percent. India was a net importer of steel

till FY13, but turned a net exporter of the same in FY14. In 2015, India imported 9.32 MT of

steel while exports declined to 5.59 MT in FY15 from 5.98 MT during 2013-14. Total domestic

demand for steel is estimated at 113.3 MTPA by 2016-17.

Porter’s Five Force Model of Steel Industry

Threat from New Entrants (Low to Moderate)

Industry is capital Intensive

Regulatory Environment

Threat of Substitute (Low)

Carbon Fibre, plastic, aluminium.

Bargaining power of Supplier (Moderate to High)

Availability of Iron but price as per international benchmark.

Coking Coal supplier have considerable power.

Bargaining power of Buyer (Moderate)

Demand is high which indeed outpaces supply.

Access to global market.

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Rivalry among existing competitors (low to moderate)

Steel attributes by 4 major competitors

Excess demand are met by import (esp. China)

High cost of exit.

Driving Forces in the Industry

Automobile sector growth as passenger vehicles segment grew by 6.7% (in June 2016)

when compared to last year and is expected to increase at a higher pace in 2017.

Many automobile manufacturers increasing operations or establishing manufacturing

operations in India.

With growth in demand for steel outpacing growth in domestic production over the last

few years, imports have increased.

It is expected that consumption per capita would increase supported by rapid growth in

the industrial sector, and rising infra expenditure projects in railways, roads &

highways, etc. For FY15, per capita consumption of steel in India was 60 kg against the

world average of 222 kg.

Companies are increasing their focus on downstream and solution driven products for

their high value.

Technology Improvement

Boiler Projects to generate around 3,50000 pounds of steam per hour

Now it would not require coking coal but thermal coal directly

Iron is directly produced using iron ores fines and non-coking coal.

Ministry of steel approves more than 60 Research and development projects costing

more than 410 crores in last 5 years.

Merger and acquisitions has been a major growth driver in the industry leading to

economic development.

Competitive Performance of companies in Industry

Here, 3 companies are analysed to provide an overall competitive edge in the industry.

Tata Steel

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Annual crude steel making capacity of 29 million tons per annum. It is now

the world's second-most geographically-diversified steel producer, with operations in

26 countries and a commercial presence in over 50 countries.

Tata steel is continuing its expansion of hot and steelmaking capacity.

Massive expansion of its capacities through various green field projects of

Jharkhand, Orissa and Chhattisgarh.

Steel Authority of India limited

Annual steelmaking capacity of 14.3 million tons per annum.

Sail and Rail India Technical and Economic Services joint venture movement

to establish Wagon manufacturing facility in West Bengal was competitive

move.

JSW Steel

One of the low cost steel producers in the world

Joint venture with Georgia for setting up steel plant boosted its profits at a faster

pace.

Acquiring a controlling stake in the Ispat Industries ltd, mining assets in Chile,

USA and Mozambique burgeoned it to be in the competition.

Performance of Return of Industry Index with the overall Market

-20.000%

-15.000%

-10.000%

-5.000%

0.000%

5.000%

10.000%

15.000%

20.000%

25.000%

30.000%

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Performance of BSE Metal in comparison with BSE Sensex

Return of BSE Metal Return of Sensex

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The above chart depicts the performance of Metal industry index in comparison with BSE

Sensex. It shows how entire steel industry is performing in the overall market.

Financial and Non-Financial Performance

Financial Performance of Tata Steel

1933.11

1997.59

1928.7

1640.38

1151.44

0 500 1000 1500 2000 2500

2015-16

2014-15

2013-14

2012-13

2011-12

Rs in Crores

Ye

ars

Depreciation

5870.91

6959.32

9866.93

7283.76

11125.28

0 5000 10000 15000

2015-16

2014-15

2013-14

2012-13

2011-12

Rs in Crores

Ye

ars

Capital Expenditure

48.67

64.49

64.21

50.28

67.84

0 20 40 60 80

2015-16

2014-15

2013-14

2012-13

2011-12

Rs

Ye

ars

EPS

4900.95

6439.12

6412.19

5062.97

6696.42

0 2000 4000 6000 8000

2015-16

2014-15

2013-14

2012-13

2011-12

Rs in Cr

Ye

ars

Profit After Tax

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Interpretation

PAT: The profits of the company is declining year on year and has a CAGR of -6.05 from last

five years which is an area of concern.

Depreciation: The depreciation of the company has a CAGR of 10.92% as it has more tangible

assets from last five years.

Capital Expenditure: The capital expenditure has declined since last 3 years and has a CAGR

of -12% from last five years.

EPS: The EPS has declined in 2015-16 when compared to the previous year and has a CAGR

of -6.43% from last five years.

926.27

929.99

1037.4

905.7

1347.03

0 500 1000 1500

2015-16

2014-15

2013-14

2012-13

2011-12

Rs in crores

Ye

ars

Dividends including tax on dividends

749.08

709.82

653.03

591.88

566.69

0 200 400 600 800

2015-16

2014-15

2013-14

2012-13

2011-12

Rs

Ye

ars

Net worth per share

0.34

0.4

0.41

0.44

0.41

0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5

2015-16

2014-15

2013-14

2012-13

2011-12

Times

Ye

ars

Net debt to Equity

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Debt to Equity Ratio

As the debt to equity ratio is <1, we can say that company has a more financially stable

business. In FY 2015-16, for 1 Rupee of Equity per share, company is having debt of 0.34 Rs.

Net worth per share: The net worth per share is continuously increasing at a stable pace since

last five years. It has a CAGR of 5.74%.

Altman Z score

Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E

Where:

A = working capital / total assets, B = retained earnings / total assets, C = earnings

before interest and tax / total assets, D = market value of equity / total liabilities, E =

sales / total assets.

A score below 1.8 means the company might go for bankruptcy, while companies with

score above 3 are not likely to go bankrupt. The company’s Altman Z-Score is 0.8193

which means company is financially not stable at this point of time.

Current Ratio of the company in FY 2015-16 is 0.68 which means the company would be

performing average and it is managing the financials to meet up its liabilities. For 1 Rupee of

Current liability, it has Rs. 0.68 of Current Assets.

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Key Ratio Trends

[E]

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Non-financial Performance

Tata Steel was able to produce 9698 (‘000 tonnes) in steel division.

The total employment in the industry is more than 3 million including direct and

indirect employment. Most of the steel plants are situated in economically backward

region of the country. Hence steel companies like Tata Steel has contributed to overall

development of civic, medical and educational areas.

Export tax has been introduced on specific iron ore and steel products so as to achieve

increase in Supply in domestic market which is beneficial for Tata Steel.

The rural consumption of steel is also as low as 2Kg per capita per annum. This is

largely because steel is considered to be expensive among villagers. Tata Steel is

making efforts to capture rural steel market through various means.

Tata Steel exports in steel are mainly Exports of processed steels and Exports of iron

ore.

Tata Steel Europe has become a net importer of steel for the first time since 2008. The

net import was 4 metric tonne in 2015 with imports of 37 metric tonne which exceeded

exports of 34 metric tonne.

Tata Steel exports of steel and other materials valued for Rs 1001.37 crores as on FY

2015-16.

My View on the Company in Present Context Globally, the steel industry of India encountered one of the most difficult phases of its business

cycle during the year. The global steel prices were at their lowest levels since 2003.The

slowdown of the Chinese economy reduced the global demand for steel and its domestic

overcapacity pushed firms to export at aggressively lower prices. India witnessed increase in

net steel imports by over 200% to 8 million tonnes. While the domestic demand increased by

4.5%, majority of the demand was serviced by imports.

Even during these challenging times, Tata Steel continued to record strong growth by

posting higher volumes by approximately 9% (total deliveries from India were 9.54 million

tonnes and the turnover was 38,210 crore).The growth was strong across segments with the

automotive and special products sales aggregately recording highest ever sales of 1.43 million

tonnes, contributing to 15% of total sales. Tata Steel’s branded products and retail sales surged

to 3.35 million tonnes which contributed to approximately 35% of total sales. Its largest brand

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‘TISCON’ registered highest ever sales of 2.51 million tonnes, a growth of 13%. Their retail

customers increased to around 30 lakh households across India.

Although the fundamentals of Tata Steel is not as good as it was earlier in the present context,

it can be said that the company would do better in future because of Government initiatives -

FDI inflow, Anti-dumping policy and buttressing domestic markets. It is recommended to hold

the shares if already bought as it has great prospects in future.

M & M Financial Services Limited

Introduction to the Company

Mahindra & Mahindra Financial Services Limited (MMFSL) is one of India’s leading Rural

NBFC headquartered in Mumbai, India. It is amongst the top tractor financer in India and offers

a wide range of financial products to address varied customer requirements. It is a subsidiary

of Mahindra and Mahindra limited. Its enriched portfolios are in Vehicle financing, pre-owned

vehicle financing, SME Financing, Housing financing, Personal loan and Insurance Broking.

History

The Mahindra Finance journey started on January 1, 1991, as Maxi Motors Financial Services

Limited. They received the certificate of commencement of business on February 19, 1991. On

November 3, 1992, Mahindra Finance changed their name to Mahindra & Mahindra Financial

Services Limited, Mahindra Finance is registered with the Reserve Bank of India as an asset

finance, deposit taking NBFC.

In 1993 it commenced financing M & M Utility vehicles and in 1995 started its first branch

outside Mumbai, in Jaipur. Began financing Non M & M vehicles in 2002 and got into the

business of financing of Commercial Vehicles and Construction Equipment’s in 2009. 2011

was the year in which they had a Joint Venture with Rabobank subsidiary for tractor financing

in USA and consolidated the product portfolio by introducing Small and Medium Enterprises

(SME) financing.

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Performance of Company in Stock Market

Stock Price Fluctuations since last 5 Years

-30.00%

-25.00%

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Jul-

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Performance of M & M financials in comparison with BSE Finance

Return of M&M finance Return of BSE Finance

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Important Ratios and Values

Particulars Values (as on September 2016)

Market Capitalization Rs 19593.95 Crores

Book Value Rs 107.06

Face Value Rs 2

P/E ratio 29.22

P/BV ratio (X) 3.22

P/CF ratio 27.54

Industry P/E ratio (Finance) 29.16

Interpretation

P/E ratio: As the current P/E ratio of the company is 29.22, it conveys that for every 1

Rupee of earnings per share, investors are ready to pay Rs. 29.22 for it which is good.

In general if the P/E ratio is high, it means that investors are expecting a higher earnings

growth in future compared to companies with low P/E.

P/BV ratio: Here the P/BV value is more than 1. It means for every 1 Rupee per share

of Book value, the market price is 3.22 which tells us that company is trading more than

its book value. In this scenario, it normally tells the investors that a company with high

share price relative to its assets is likely to be the one that is earning high returns.

Admittedly Book value has short comings which investors need to recognize but it is

easy to use tool for identifying over or undervalued companies. For this reason, relation

between share price and book value would attract attention of investors.

Price to cash flow ratio: Here the P/CF is 27.54 meaning for every 1 Rupee of cash flow

generated per share, the company’s stock price is relatively Rs. 27.54.

Industry P/E Ratio: As Company P/E is more than Industry P/E, we can say that the

company is doing well in the industry.

Risk Associated with the Company

Systematic Risk

Beta of the Company with respect to BSE Sensex is 0.295 and Beta of Company with respect

to BSE Finance is 0.162. This Beta is calculated by taking the data for last 7 years.

Theoretically, we can say that as Beta is <1, it is less volatile than the market i.e. stock of the

22 | P a g e PGDM 2015-17 1011517068

company is 70.5% less volatile than the entire market ( BSE Sensex) and stock of the company

is 83.8% less volatile than the Overall financial market (BSE finance). The standard deviation

of the returns of the company for last 7 years is 0.079 which means the total risk is 7.9%. Both

standard deviations and Beta are calculated in the Excel file “Prakash_Sa-gp” and sheet name

“M&M returns &charts”.

Economic Analysis

Gross Domestic savings remained above 30% of GDP.

India’s housing finance industry which is also offered by M&M financials is expected

to be driven by commendable economic performance, high disposable income and the

Government’s sustained focus on affordable housing. Over the last decade, housing

finance in India has emerged as one of the most secured asset classes with low failures.

In 2015, global economic activity remained subdued. Growth in emerging market and

developing economies while still accounting for over 70% of global growth declined

for the fifth consecutive year, while a modest recovery continued in advanced

economies. Three key transitions continue to influence the global outlook: (1) the

gradual slowdown and rebalancing of economic activity in China away from investment

and manufacturing towards consumption and services, (2) lower prices for energy and

other commodities, and (3) a gradual tightening in monetary policy in the United States

in the context of a resilient U.S. recovery as several other major advanced economy

central banks continue to ease monetary policy. Overall, financial conditions within

advanced economies remain very accommodative.

Domestic economic activity lost pace in the second half of 2015-16, slowed down by

muted investment and a prolonged contraction in exports. While private consumption

has been the mainstay in holding up aggregate demand, it has largely been an urban

phenomenon; coincident indicators of rural consumption have generally remained weak

or in negative territory. Aggregate supply moderated with the impact of deficient

monsoons on agriculture. Gross value added in industry benefited from the decline in

input costs while services remained in expansion mode.

Through its various Corporate Social Responsibility (CSR) initiatives, the Mahindra

Group is enabling entire communities to ‘RISE’. With a vision of transforming the lives

of youth from socially weaker and economically disadvantaged sections of society, the

Mahindra Group is committed to building possibilities to enable them to ‘RISE’ above

23 | P a g e PGDM 2015-17 1011517068

their limiting circumstances by innovatively supporting them through programs in the

domains of education, health and environment.

In the fiscal policy of 2015-16, fiscal deficit has been budgeted at 3.9 per cent of GDP.

At the end of the second quarter of 2015-16, there is marked improvement in fiscal

parameters when compared to corresponding period of the previous financial year.

The efficiency of financial sector gets worse due to the high rate of inflation through

financial market frictions and slows the economic performance down. Governments are

prejudice to enforce additional tax burden on the financial sector to decrease their

budget deficit in inflationary periods. It is examined that inflation blocks the

performance of inflation markets by decreasing the level of investment in the economy.

Once the rate of inflation touches a particular critical threshold, “all of the damage to

the financial system has already been done.” Further increases in inflation will have no

additional consequences for financial sector performance or economic growth.

1. Higher rates of inflation are connected with greater inflation and stock return variability

of the company.

2. Higher inflation entails less long-run financial activity. In markets with high inflation,

intermediaries will lend less and designate capital less efficiently, and equity markets

will be smaller and less liquid.

3. Numerous inflation thresholds may describe the relationship between inflation and

financial sector conditions. Most significantly, once inflation goes beyond a critical

point, incremental increases in the (long-run) rate of inflation may have no additional

impact on financial sector activity.

4. Higher long-run inflation entails lower long-run levels of real activity and/or slower

long-run growth rates.

Industry Analysis of Non-Banking Financial Services

The country’s financial services sector consists of the capital markets, insurance sector and

non-banking financial companies (NBFCs). India’s gross domestic savings (GDS) as a

percentage of Gross Domestic Product (GDP) has remained above 30 per cent since 2004.It is

24 | P a g e PGDM 2015-17 1011517068

projected that national savings in India will reach US$ 1,272 billion by 2019. Over 95 per cent

of household savings in India are invested in bank deposits and only 5 per cent in other financial

asset classes.

The Government of India has taken various steps to deepen the reforms in the capital markets,

including simplification of the Initial Public Offer (IPO) process which allows qualified foreign

investors (QFIs) to access the Indian bond markets.

NBFCs have been playing a complementary role to the other financial institutions including

banks in meeting the funding needs of the economy. They help fill the gaps in the availability

of financial services that otherwise occur in the unbanked & the underserved areas. NBFCs

account for 12.3% assets of the total financial system.

A Non-banking finance company (NBFC) is a company registered under the company’s act

1956, and is engaged in business loan, advances, acquisition of shares, bonds etc issued by

Government or local authority or other securities of like marketable nature, leasing, chit

business etc. A Non-banking finance institution has its principal business of receiving deposits

under any scheme or arrangement is also a NBFC.

The NBFC segment has witnessed considerable growth in the last few years and is now being

recognised as complementary to the banking sector due to implementation of innovative

marketing strategies, introduction of tailor-made products, customer-oriented services,

attractive rates of return on deposits and simplified procedures, etc.

NBFCs have been at the forefront of catering to the financial needs and creating livelihood

sources of the so-called unbankable masses in the rural and semi-urban areas. Through strong

linkage at the grassroots level, they have created a medium of reach and communication and

are very effectively serving this segment. Thus, NBFCs have all the key characteristics to

enable the government and regulator to achieve the mission of financial inclusion in the given

time.

NBFC are companies carrying financial business. There is no bar on NBFC carrying activity

other than financial activity. Major limitation is that it cannot provide checking facility. FDI is

25 | P a g e PGDM 2015-17 1011517068

up-to 100% is permitted. It is comparatively much easier to get a licence for NBFC.

Regulations have much lesser control over NBFC than others.

Roles of NBFC

Development of sectors like transport and infrastructure

Substantial employment generation

Help and increase wealth creation

Broad base economic development

Major thrust on semi urban and rural areas & first time buyers

To finance economically weaker sections

Performance of BSE Finance in comparison with BSE Sensex

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

No

rmal

Re

turn

s (%

)

Months

Performance of BSE Finance in comparison with BSE Sensex

Return of BSE Finance Return of Sensex

26 | P a g e PGDM 2015-17 1011517068

Importance of NBFC

In present economic environment, it is very difficult to cater the needs of f society by

banks alone. So role of NBFC and Micro finance companies become indispensable.

The role of NBFC as effective financial intermediary has been well recognized as they

have inherent ability to take quicker decisions, assume greater risks and customize their

services, charge more according to their needs of clients.

At present NBFC in India has become prominent in wide range of activities like hire

purchase finance, equipment lease finance, loans and investments.

Porter’s Five Force Model

Threat of New Entrants

Stringent regulatory norms prevent new entrants

Customer’s prefer to invest their money with a reputed financial service

company offering a wide range of services

Substitute products

Low threat of substitutes

Less number of substitutes available for financial products

Bargaining power of Suppliers

Low bargaining power of suppliers as industry is highly regulated by

RBI.

Bargaining power of customers

Medium bargaining power of customers. Although customers do not have much

bargaining power, they can easily switch another company based on the terms and

quality of service provided.

Competitive Rivalry

27 | P a g e PGDM 2015-17 1011517068

Competitive rivalry between big players is intense in the industry

Financial service companies often compete on the basis of offering lower financing

rates, higher deposit rates and investment services.

Overview of NBFC’s present position

NBFC’s are highly heterogeneous, continue to offer wide range of niche financial

services. In terms of relative importance of various activities financed by them, hire

purchase finance is the largest activity accounting for greater than 1/3rd of total assets

followed by loans and equipment leasing.

Number of NBFC have declined after FY 2000 due to mergers, closures, cancellations

of licenses, regulatory strictness.

NPA of NBFC have not shown a clear decline over last couple of years.

RBI has decided to impose penalties on NBFC having deposits of Rs 50 crore and

above if they don’t submit periodic return.

Conclusion

NBFC have not been much profitable

Operating cost of NBFC has increased and it stands higher than cooperative banks.

This is one area where improvement is needed.

The credit delivery mechanism needs to be more transparent and hassle free. There

should be more stringent norms for defaulters.

28 | P a g e PGDM 2015-17 1011517068

Financial and Non-Financial Performance of the Company

Financial Performance of M&M Financials

5905.1

5584.71

4953

3894.7

2794.59

0 2000 4000 6000 8000

2015-16

2014-15

2013-14

2012-13

2011-12

Total Income (Crores)

5975.19

5556.58

4981.51

4341.97

2848.32

0 2000 4000 6000 8000

2015-16

2014-15

2013-14

2012-13

2011-12

Reserves and Surplus (Crores)

39579.48

35074.15

31665.72

25492.42

18561.56

0 10000 20000 30000 40000 50000

2015-16

2014-15

2013-14

2012-13

2011-12

Total Assets (Crores)

6088.11

5669.41

5094.22

4454.58

2951.01

0 2000 4000 6000 8000

2015-16

2014-15

2013-14

2012-13

2011-12

Net worth (Crores)

26706.33

24331.1

25400.02

23838.58

19504.33

0 10000 20000 30000

2015-16

2014-15

2013-14

2012-13

2011-12

Estimated value of assets financed

(Crores)

4156944

3634688

3119034

2557172

2024038

0 2000000 4000000 6000000

2015-16

2014-15

2013-14

2012-13

2011-12

Number of contracts

29 | P a g e PGDM 2015-17 1011517068

Interpretation

Total income: Here total income is growing at a CAGR 16.14% from last 5 years data which

is good.

Reserves and surplus: This is growing at a CAGR 15.97% from last 5 years data which is good.

Total Assets: This is growing at a CAGR 16.35% from last 5 years data which is good.

Net worth: This is growing at a CAGR 15.59% from last 5 years data which is good.

Number of contracts: It has been increasing consistently since last 5 years which is good sign.

Estimated value of assets financed: It is growing at a CAGR of 6.49% since last 5 years.

1038.18

1253.64

1345.77

1279.2

925.26

0 500 1000 1500

2015-16

2014-15

2013-14

2012-13

2011-12

PBT (Crores)

11.92

14.75

15.75

16.59

12.09

0 5 10 15 20

2015-16

2014-15

2013-14

2012-13

2011-12

EPS (RS)

672.6

831.78

887.23

882.69

620.12

0 200 400 600 800 1000

2015-16

2014-15

2013-14

2012-13

2011-12

PAT (Crores)

200

200

190

180

140

0 50 100 150 200 250

2015-16

2014-15

2013-14

2012-13

2011-12

Dividend (%)

30 | P a g e PGDM 2015-17 1011517068

PBT: This is growing at a CAGR 2.33% from last 5 years data which is good.

EPS: This is growing at a CAGR of -0.28% as in the year FY 2015-16, EPS reduced which is

an area of concern.

PAT: This is growing at a CAGR of 1.64% from last 5 years data.

Debt to Equity ratio: IN FY 2015-16, debt to equity ratio is 4.86:1 which means for 1 Rupee

of Equity, the company is having debt of 4.86 which is an area of concern.

The current ratio for FY 2015-16 is 1.27 which means the company is stable enough to pay its

bills as for every 1 Rupee of Current liability, company has 1.27 Rs of Current Assets.

Non-Financial Performance

The Company practices a culture that is built on core values and ethical governance

practices and is committed to transparency in all its dealings.

The increase in the Remuneration is in line with the financial performance of the

Company, market trends and Industry benchmarking. On an average, employees

received an annual increase of 9.93 %. The individual increment varied from 8% to

12% based on individual performance.

The Key Managerial Personnel were paid approximately 0.65% in aggregate of the

Profit before Tax during the Financial Year 2015-16.

In case the performance of the Company exceeds the budgeted performance, the

Company declares an additional ex-gratia bonus or a reward to its employees, at its

discretion which is beneficial to employees.

My View on the company in present context

M&M financials has strong lending practices and good understanding about the

needs of its consumers which helps the company to beat out its competition.

It is a Niche Financing Company

It is a proxy play on Rural Prosperity: Shift in availability of cheap agricultural

labour has led to increase in usage of machines.

It has strong competitive advantage over its peers due to its parentage which gives

large volume of captive business.

31 | P a g e PGDM 2015-17 1011517068

Comment: Indian Rural markets are still very much underpenetrated in financial services.

There is huge opportunities of financial firms like M&M financials and will continue to gain

market share in growing future. With large companies tapping rural markets to take advantage

of increasing prosperity, MMFSL is best positioned company to provide financial services to

this unbanked population. It is also beneficial because of its increasing strength of its parent

M&M financials. It is recommended to buy the shares as company’s fundamentals is very

strong and it is increasing year after year.