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					India Equity Report | Company Update | Automobiles

Mahindra & Mahindra Ltd.                                            ` 644                    Gateway to Prosperity

                                                                                                 March 18, 2011
Scorpio(n) King !!!                                                    Buy
Company Background
                                                                                                 Kaustubh Naik
Mahindra & Mahindra Limited (M&M) is an auto Major and the flagship                  
company of the Mahindra Group based in Mumbai, India. Mahindra Group, a
multinational conglomerate is ranked among the top 10 industrial houses in                         Arpit Jain
India. Its products and services are grouped into seven groups, such                 
as Automotive, Farm Equipment, Trade & Financial Services, Information
Technology, Infrastructure Development, Systech and Speciality Business. The         Info Codes
company was set up in 1945. It soon ventured into manufacturing                      Reuters               MAHM.BO
general-purpose utility vehicles, with assembly under license of the iconic Willys   Bloomberg             MM@IN
Jeep in India. And since then have remained essentially into the manufacturing       NSE                   M&M
of automobiles, agricultural tractors. M&M has a global presence with its products   BSE                   500520
being exported to several countries.
Mahindra & Mahindra is a major automobile manufacturer of utility vehicles,          Market Data
passenger cars, pickups, commercial vehicles, and two wheelers. The company          52 Wk Range (`)       : 826 / 491
offers various multi utility vehicles, light commercial vehicles, three-wheelers,    Shares in Issue (mn) : 597
and tractors as well as spare parts and related services. It also provides various   Mkt. Cap (` bn)       : 389.00
services related to financing, leasing, and hire purchase of automobiles and         BSE 2 Wk Avg Vol      : 167000
tractors. With the growth in the Indian economy, it then branched out into the
manufacture of light commercial vehicles (LCVs) and agricultural tractors.           Share Holding Pattern (%)
                                                                                     Promoters             : 22.76
Today, M&M is the leader in the utility vehicle segment in India with its flagship
                                                                                   DIIs                      : 24.43
UV Scorpio and enjoys a growing global market presence in both the automotive
                                                                                   FIIs                      : 25.31
and tractor businesses. It was recently ranked Mahindra among the top 10
                                                                                   Others                    : 21.91
Indian companies in the 'Global 200: The World's Best Corporate Reputations'
list by the US based Reputation Institute.
                                                                                   Investment Theme
Financial Performance
                                                                                   M&M is Indian based major auto maker
Mahindra & Mahindra (M&M) reported a net sales growth of 36.1 % Y-O-Y to `
                                                                                   & has remained a leader since its
61.21 bn during the Q3FY11. It was mainly due to a strong overall volume
                                                                                   dealership of Willy’s jeeps in 1940s.
growth of 37%. Its passenger segment volumes increased by 39% Y-O-Y, while
                                                                                   Over the years it has expanded as well
tractor sales were higher by 34% Y-O-Y. A substantial increase in exceptional
                                                                                   as gown into a multinational brand. The
income at ` 1.8 bn (` 534 mn in Q3FY10) supported strong growth in the top
                                                                                   company has diversified and dominating
line. The above increment was due to the profit on sales on investments in
                                                                                   presence in the Utility vehicles as well
Owens Corning India Ltd. which resulted in an exceptional profit of ` 1.18 bn.
                                                                                   as agriculture tractor segments. It
The company’s EBITDA margins for Q3FY11 stood at 15.1%, a jump of 20 bps exports its products to many countries
Y-O-Y. Margin expansion was supported by the decline in the ratio of raw-material across the globe. The recent budget has
cost as a percentage of net sales to 62.7% v/s 64.6% in Q3FY10. The higher given positive boost to the sector. M&M
volumes helped the company reap the benefits of operating leverage. However, has a strong products launch in the
sequentially it fell by 138 bps Q-O-Q, as raw-material cost for the quarter pipeline and recent acquisition of SMC
increased by almost 58bp Q-O-Q.                                                    is going to boost it further. The company
M&M reported adjusted net profit growth of 49.2% Y-O-Y to ` 6.17 bn as against has been continuously posting good
` 4.14 bn in Q3FY10 due to improved operating performance and higher other financial results and is expected to
income. During the quarter, industry volume grew by 30%. Consequently, M&M’s continue in the future. Therefore we
total market share in the UV segment and tractor segment during 3QFY2011 recommend to accumulate this stock.
stood at 62.2% and 43.3%, respectively.                                                           Overdrive !!!
Investment Rationale                                                                  Cues from Budget & strong Perfor-
  Well-Diversified and Premier Market Position                                                        mance
  M&M commands a premier position in almost all key products and markets            The Union Budget gave some positive
  it operates. It is very well diversified not in the products but segment &        surprise in this budget for the auto sector.
  geographical market wise as well. M&M's automotive division makes a wide          The Union Budget 2011-12 has proposed
  range of vehicles including MUVs, LCVs and three wheelers. It offers over 20      to extend the excise duty refund avail-
  models including new generation multi-utility vehicles like the Scorpio and       able to taxis having a seating capacity
  the Bolero. Old warhorse Scorpio continues to enjoy the leadership in the         of less than 7 to vehicles having a seat-
  SUV segment. It made its entry into the passenger car segment with the            ing capacity of up to 13 passengers. It
  Logan in April 2007. M&M recently made its maiden entry into the heavy            is expected to marginally aid the sales
  trucks segment with Mahindra Navistar. M&M is one of the leading tractor          of utility vehicles in the specified cat-
  brands in the world by volume. It is also the largest manufacturer of tractors    egory. Also, the concessional excise
  in India. The recent acquisition of South Korean auto-maker, SsangYong            duty of 10 per cent has been extended
  Motor Company (SMC) would help the company strengthen it product portfo-          to vehicles based on fuel cell and hydro-
  lio as well as harness the synergy between the two companies.                     gen cell technology, which will improve
  M&M is not only diversified product-wise but also has presence in many            the long term growth prospects of
  countries worldwide. It has acquired plants in China and the United Kingdom       these vehicles.
  and has three assembly plants in the USA. M&M has partnerships with               Specified parts of hybrid vehicles have
  international companies like Renault SA, France and International Truck and       been exempted from basic customs duty
  Engine Corporation, USA. It also exports its products in the CKD form.            and special CVD in the budget. In addi-
  Bright Outlook                                                                    tion, excise duty on these parts has
  In the recent quarterly results M&M saw significant jump in the sales of both     been reduced to 5 per cent from 10 per
  passenger as well as agriculture segments. India has the largest and young-       cent earlier. These factors are expected
  est middle class group which is growing at decent levels. India’s per capita      to aid the sales of hybrid vehicles and
  income is expected to grow at around 17% in the next year. The increase in        have a marginally positive impact on the
  exemption limits of tax slabs for individual tax payers is likely to lead to      passenger cars industry over the longer
  increase disposable incomes of addressable households and thus aid two-           term.
  wheeler sales. Volume growth likely to continue driven by improved                The increase in exemption limits of tax
  consumer sentiments in rural areas backed by above normal monsoons and            slabs for individual tax payers from `
  improved non-agriculture income. Enhancement of interest subvention and           160,00 to ` 180,000 is likely to lead to
  increased allocation towards rural development are expected to have a mar-        increase disposable incomes of address-
  ginally positive impact on two-wheeler and tractor sales.                         able households, and thus aid two-
  High capex to Support Sustained Performance                                       wheeler sales. The increased expenditure
  The total capex plan stands at ` 4.5 bn till FY2013. Its Navistar joint venture   on infrastructure would also help the CV
  is currently in the ramp up stage. It is expected to launch the new FY12. We      segment.
  can expect SMC acquisition would help the company launch a new range of            Enhancement of interest subvention on
  UVs in the Indian markets.                                                        crop loans from 2 to 3 per cent, revision
                                                                                    of wage rates under the NREGA scheme
  Key Financials
                                                                                    and increased allocation towards rural
  Year Ended 31st                    Mar 08          Mar 09           Mar 10        development projects like Rashtriya
 Revenue (` mn)                        119205.5       135010.9        190082.2      Krishi Vikas Yojana are expected to have
 Rev. growth (%)                           14.09          13.26           40.79     a marginally positive impact on two-
 EBITDA (` mn)                          17330.2         14818.0         20877.5     wheeler and tractor sales. The announce-
 Net profit (` mn)                      11033.7          8408.5         20877.5     ment of the launch of the 'National Mis-
 Shares outstanding (mn)                   239.1          272.6           565.9     sion for hybrid and electric vehicles' is
 EPS (`)                                    46.2            30.8           36.9     expected to benefit sales of hybrid and
 EPS growth (%)                             2.82         (33.17)          19.61     electric vehicles over the longer term.
                                                                                    Increased expenditure on infrastructure
 P/E (x)                                     7.5             6.2           14.8
                                                                                    is expected to directly benefit the CV
 EV/ EBITDA                                 48.9            36.9          148.3
 ROCE (%)                                  18.57          10.51           20.99


Financial Statements
      Income Statement                                                                         (` mn)
               Year end                      Mar 08        Mar 09      % Chg      Mar 10      % Chg
               Total Sales + Excise         130147.7   146681.3         12.70    203236.3      38.56
               Other Income                   4903.5        4200.1     (14.34)     4918.9      17.11
               Change in Stocks               1491.1       (1562.9)   (204.82)      236.9    (115.16)
               Raw Material Con.             73929.5       86385.0      16.85    115186.8      33.34
               Employee Exp.                  8684.2       10246.1      17.99     11984.7      16.97
               Indirect Taxes                16072.6       15997.3      (0.47)    18238.3      14.01
               Other Exp.                    20525.8       21872.1       6.56     42104.8      92.50
               Operating Exp.               117721.0   136063.4         15.58    187277.7      37.64
               Operating Profit              12426.7       10617.9     (14.56)    15958.6      50.30
               Total Interest                  875.9        1497.5      70.97         0.0   (100.00)
               Gross Profit                  16454.3       13320.5     (19.05)    20877.5      56.73
               Net Dep.                       2386.6        2915.1      22.14         0.0   (100.00)
               Total Taxation                 3034.0        1996.9     (34.18)        0.0   (100.00)
               Net Profit/Loss               11033.7        8408.5     (23.79)    20877.5     148.29

      4 Years Balance Sheet                                                                    (` mn)
               Balance Sheet as on 31st                    Mar 07     Mar 08      Mar 09     Mar 10
                            SOURCES OF FUNDS               51760.3    69246.6     93027.5   106952.5
               Equity Share capital                         2380.3     2390.7      2726.2     2829.5
               Share Application Money                         0.0        0.0         0.0        0.0
               Preference Share Capital                        0.0        0.0         0.0        0.0
               Reserves & Surplus                          33020.2    40985.3     49773.7    75321.5
               Loan Funds                                   1066.5     6172.6      9810.0     6024.5
               Unsecured Loans                             15293.3    19698.0     30717.6    22777.0
                                  USES OF FUNDS            51760.3    69246.6     93027.5   106952.5
               Gross Block                                 32296.9    36561.3     48938.9    52762.9
               Less : Revaluation Reserves                   128.6      124.7       120.9      116.7
               Less : Accumulated Depreciation             16391.2    18416.8     23262.9    25377.7
               Net Block                                   15777.1    18019.8     25555.1    27268.5
               Capital Work in Progress                     2806.0     5464.5      6467.3     9642.0
               Investments                                 22009.3    40446.8     55853.9    61315.9
               Current Assets                              39012.2    39757.9     54926.9    62245.6
               Less : Current Liabilities                  28019.8    34577.7     49901.2    53560.7
               Total Net Current Assets                    10992.4     5180.2      5025.7     8684.9
               Misc. Expenses not written                    175.5      135.3       125.5       41.2
               Bk Val Unquoted Investments                 14548.2     9614.0     32736.3    37264.2
               Mkt Val. Quoted Investments             103038.9       79653.6     40493.1   130299.6
               Contingent Liabilities                       7264.6     9371.2     15045.7    20426.5
               Dividend (%)                                    115        115        100         190


       Quarterly Income Sheets                                                                               (` mn)
                   Quarter Ended                           Mar 2010       Jun 2010       Sep 2010       Dec 2010
                   Net Sales                               53046.30        51601.00       53616.70       61210.90
                   Cost Of Sales                           44590.50        43845.20       45393.90       51973.30
                   Operating Profit                            8455.80      7755.80        8222.80         9237.60
                   Recurring Income                             461.10       851.00        3061.70         1842.90
                   Adjusted PBDIT                              8916.90      8606.80       11284.50       11080.50
                   Financial Expenses                           288.90       419.20         246.60          222.30
                   Depreciation                                 947.40       976.20         970.00         1021.80
                   Other Write Offs                               0.00          0.00           0.00           0.00
                   Adjusted PBT                                7680.60      7211.40       10067.90         9836.40
                   Tax Charges                                 1978.00      1587.50        2483.00         2489.60
                   Adjusted PAT                                5702.60      5623.90        7584.90         7346.80
                   Non Recurring Items                            0.00          0.00           0.00           0.00
                   Other Non Cash Adjust                          0.00          0.00           0.00           0.00
                   Net Profit                                  5702.60      5623.90        7584.90         7346.80

   52 Week Index Relative Percentage Appreciation

                                              M&M vs SENSEX vs Auto

Risks Associated
  Raw Material Prices
  Commodity prices remain the key concern. Prices are at peak levels. Steel remain the areas of concern as rubber
  prices have melted a little bit. Also hardening interest rates is making the end products costlier.
  Rising Fuel Prices
  The recent trouble in the Middle East has severed the crude oil price issue which have crossed 100$ a barrel. This
  coupled with hardening interest rates is going to adversely affect the automobile sector has middle class in India-the
  most potential buyer is quite pricing sensitive.
  Japan Earthquake
  The earthquake in Japan has hit the component supply to auto industry as the Indian automobile companies source
  components from Japan. Though this would be a short term impact, and would not affect the sales, it could put pressure
  on the margins of the companies.

  In a Nutshell
  Mahindra & Mahindra Limited (M&M) is an auto Major and the flagship company of the Mahindra Group based in
  Mumbai, India. Established in 1945, the company has remained a leader since its dealership of Willy’s jeeps in 1940s.
  M&M has a global presence with its products being exported to several countries. The company offers various multi
  utility vehicles, light commercial vehicles, three-wheelers, and tractors as well as spare parts and related services.
  M&M has recently acquired South Korean auto-maker, SsangYong Motor Company (SMC). This is going to boost its
  already strong product pipeline. The recent budget has given much positive push to the auto sector especially M&M.
  No change in excise duty as well as extending the duty refund to vehicles having a seating capacity of up to 13
  passengers could boost the sales of Utility vehicles. The rising middle class income in India presents a strong potential
  customer class for the auto sector. Boosted by incentives in Budget for hybrid cars, the Reva average monthly sales
  have jumped 3 folds in the last month. We are quite upbeat on M&M. however, considering the changes in the overall
  market and rising crude oil as well raw material and interest charges could mar the over all performance. Hence
  recommend to accumulate the stock for long term investments.

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   Rating Interpretation
     Buy        : Expected to appreciate 20% or more over 12-months                         Reduce : Expected to depreciate up to 10% over 12-months
     Accumulate : Expected to appreciate up to 20% over 12-months                           Sell       : Expected to depreciate 10% or more over 12-months
     Trade Buy : Expected to appreciate more than 10% over 45-days                          Trade Sell : Expected to depreciate more than 10% over 45-days

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