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					                                                                                                           30 May 2011
                                                                           4QFY11 Results Update | Sector: Automobiles

                                                                 Mahindra & Mahindra
BSE SENSEX                S&P CNX
18,232                      5,473    CMP: Rs665                    TP: Rs844                                     Buy
Bloomberg                   MM IN
Diluted Eq. Shares (m)      590.3
52-Week Range (Rs)        826/550
1,6,12 Rel.Perf.(%)       -7/-8/14
M.Cap. (Rs b)               390.5
M.Cap. (US$ b)                 8.7

 M&M standalone 4QFY11 results are below estimates with EBITDA margins of 12.7% (v/s est 15%) impacted by higher
 than estimated cost. Key highlights:
  Net sales grew by 27% YoY (~10% QoQ) to Rs66.8b (v/s est Rs65.3b), driven by volume growth of 22% YoY (~8%
     QoQ) and realization improvement of 4.5% YoY (~2.5% QoQ) to Rs422,287/unit (v/s est Rs413,717/units). EBITDA
     margins declined by 240bp QoQ (~330bp YoY) to 12.7% (v/s est 15.0%) impacted by 140bp QoQ (~310bp YoY) RM
     cost inflation, and 60bp QoQ (~130bp YoY) increase in staff cost.
  Auto segment PBIT margins contracted 170bp QoQ (-250bp YoY) to 10.6% while Tractor business PBIT margins
     contracted by 150bp QoQ & 300bps YoY to 17.0%. Lower EBITDA margin (12.7%) restricted adj PAT to Rs6.06b -
     a growth of 6% YoY (~2% QoQ decline). Adj for non-recurring staff cost, EBITDA margins would have been 13.4%.
  It maintained its FY12 volume guidance at 11-13% for tractors (v/s est 13%) and 12-14% for UVs (v/s est 15%),
     subject to normal monsoons. However, full impact of withdrawal of VAT set-off for non-Maharashtra sales from
     Chakan plant would put pressure on EBITDA margins (incl MVML), as price increases only cover the impact of
     higher commodity prices. For Ssangyong, management guided for volume growth of ~50% to 120,000 units. However,
     it does not expect to break-even in FY12.

 Valuation and view: We are cutting our standalone EPS for FY12 and FY13 by 7.4% and 7.6% respectively and
 consolidated EPS by ~3% and ~3.7% respectively, to model a) higher cost in 4QFY11, b) withdrawal of sales tax
 incentive for non-Maharashtra sales for Chakan plant, c) improvement in performance of Systech and Financial services
 subsidiaries. Maintain Buy with lowered target price of Rs844 (FY13 based SOTP).

Jinesh K Gandhi (;Tel:+91 22 3982 5416
                                                                                                                      Mahindra & Mahindra

              Robust volumes drive revenues
               4QFY11 revenues grew by 26.6% YoY (~10.0% QoQ) to Rs66.8b, driven by 22%
                YoY (~8% QoQ) volume growth to 160,511 units. Volume growth was driven by 41%
                YoY growth in 3Ws, 16% growth in UV's and 26.5% growth in tractors.
               Realizations improved by 4.5% YoY (~2.5% QoQ), driven by price increases and
                better product mix. While Auto segment realizations improved by 1.5% QoQ (led by
                0.5-2% price hike taken in January), farm segment realizations improved by 4.7%
                QoQ (driven by improvement in product mix and price hike). It has taken further price
                increase of ~2% in Auto segment and ~3% in FES segment since Apr-11.

              Volume break-up (units nos)
                                                      4QFY11               4QFY10               CHG (%)               3QFY11           CHG (%)
              Utility Vehicle                          83,452               71,814                    16.2             74,217              12.4
                % of total                               52.0                 54.7                                       49.9
              Three Wheelers                           17,671               12,529                    41.0             15,806              11.8
                % of total                                11.0                  9.5                                      10.6
              Total Automotive                        101,123               84,343                    19.9             90,023                24
                % of total                               63.0                 64.2                                       60.6
              Tractors                                 59,388               46,964                    26.5             58,608               1.3
                % of total                               37.0                 35.8                                       39.4
              Total Volumes                           160,511              131,307                    22.2            148,631               8.0
              Of which exports
              UVs                                             5,158            4,229                  22.0             5,020          2.7
              Tractors                                        3,095            2,862                   8.1             3,120         -0.8
              Total Exports                                   8,253            7,091                  16.4             8,140          1.4
                                                                                                                      Source: Company/MOSL

              Trend in business mix (Rs m)
              Revenues                                4QFY11               4QFY10               CHG (%)               3QFY11           CHG (%)
              Automotive                                 39,598             31,139                    27.2            34,716         14.1
                % of total                                 58.3               58.6                                      56.6
              Farm Equipment                             27,997             21,763                    28.6            26,383          6.1
                % of total                                 41.2               41.0                                      43.0
              Others                                        289                201                    43.8               210         37.7
                % of total                                   0.4                0.4                                       0.3
              Total Revenues                             67,883             53,103                    27.8            61,308         10.7
                                                                                                                      Source: Company/MOSL

              Trend in realizations (Rs/unit)

               525,000                                                              Automotive                 FES

















                                                                                                                      Source: Company/MOSL

30 May 2011                                                                                                                                          2
                                                                                                 Mahindra & Mahindra

              Cost push & Government policy change impacts EBITDA margins
               EBITDA margins declined by 240bp QoQ (~330bp YoY) to 12.7% (v/s est 15.0%)
                impacted by 60bp QoQ (~130bp YoY) increase in staff cost, 140bp QoQ (~310bp
                YoY) RM cost inflation.
               Staff cost was higher by Rs260m in this quarter on account of amortization of recently
                granted ESOPs. Additionally, Rs90-100m expense was borne by the company towards
                1% increase in interest on PF. Further, there was a Rs250-300m increase in provisioning
                for employee benefits based on actuarial valuation. Adjusting for non-recurring staff
                cost (but including ESOP charge), EBITDA margins would have been 13.4%. Auto
                segment PBIT margins declined by 170bp QoQ (250bp YoY) to 10.6%. Tractor
                business PBIT margins also declined by 150bp QoQ (~300 bps YoY) to 17%.
               Adjusting for Mahindra Vehicle Manufacturers (MVML), a 100% subsidiary where
                new Chakan plant is housed, EBITDA margins would have been higher by 110bp at
                13.8% (v/s standalone margins of 12.7%). MVML earned PBIT of Rs729m. In
                4QFY11, there is an impact of Rs70m on account of change in the sales tax incentive
                scheme of Maharashtra Government, which was enforced from mid-March 2011.
                The full impact of the change in sales tax incentive scheme will be reflected in FY12.

              Trend in EBITDA

                                EBITDA (Rs m)         EBITDA Margin (%)

                                                   16.2       17.2
                                                                       15.2     16.0     15.0    15.8    15.1
                10.0     9.4         9.2
                                                                               8,492            8,483   9,238       8,619
                                                   6,869   7,694      6,855             7,756

               3,298                       4,173
                       3,159    2,666

                 1Q      2Q          3Q     4Q      1Q        2Q          3Q    4Q       1Q      2Q          3Q      4Q

                              FY09                                 FY10                               FY11

                                                                                                 Source: Company/MOSL

              Trend in PBIT mix (Rs m)
                                                    4QFY11           4QFY10      CHG (%)        3QFY11            CHG (%)
              Automotive                              4,182           4,065             2.9       4,266         (2.0)
                Margins (%)                            10.6            13.1                        12.3
              Farm Equipment                          4,756           4,358             9.1       4,872         (2.4)
                Margins (%)                            17.0            20.0                        18.5
              Others                                     60              53            12.1            6       891.7
                Margins (%)                            20.6            26.5                          2.9
              Total PBIT                              8,997           8,476             6.1       9,143         (1.6)
                Margins (%)                            13.3            16.0                        14.9
                                                                                                 Source: Company/MOSL

              Subsidiaries performance disappoint, except Systech which continues to
              M&M consolidated revenues grew by 15.2%YoY (~8% QoQ) to Rs103b, driven by
              continued improvement in both core and subsidiaries performance. Consolidated
              performance is not comparable on YoY basis due to change in treatment for Tech Mahindra,
              which was considered a subsidiary in 4QFY10, but a JV since 1QFY11.

30 May 2011                                                                                                                 3
                                                                                   Mahindra & Mahindra

              Trend in consolidated revenues (Rs m)
                                              4QFY11      4QFY10     CHG (%)      3QFY11     CHG (%)
              Automotive                       43,870      32,722        34.1      37,708         16.3
                % of total                       41.2        36.9                    39.5
              Farm Equipment                   31,279      25,233        24.0      28,667          9.1
                % of total                       29.3        28.4                    30.0
              IT Services                       6,744      11,767       -42.7       6,646          1.5
                % of total                         6.3       13.3                      7.0
              Systech                           9,889       7,408        33.5       8,782         12.6
                % of total                         9.3         8.3                     9.2
              Others                           14,794      11,619        27.3      13,663          8.3
                % of total                       13.9        13.1                    14.3
              Total Revenues                  106,576      88,748        20.1      95,466         11.6
                                                                                   Source: Company/MOSL

              Consolidated PBIT margins declined by 40bp QoQ (~250bp YoY) at 12.9%, led by decline
              in core business PBIT margins as well as in performance of key subsidiaries. Financial
              services PBIT margin declined by 870bp YoY (~240bp QoQ) and infrastructure business
              margin declined by 60bp QoQ (~330bp YoY). However, Systech group (up 270bp QoQ)
              and Hospitality business (up 250bps QoQ) performance improved QoQ.

              Trend in consolidated PBIT (Rs m)
                                              4QFY11      4QFY10     CHG (%)      3QFY11     CHG (%)
              Automotive                        4,459       3,785        17.8       4,018         11.0
                PBIT Margins (%)                 10.2         11.6                   10.7
              Farm Equipment                    4,921       4,112        19.7       4,761          3.4
                PBIT Margins (%)                 15.7        16.3                    16.6
              IT Services                       1,280       3,069       -58.3       1,295         -1.2
                PBIT Margins (%)                 19.0        26.1                    19.5
              Systech                             282        -312      -190.5          16      1,685.4
                PBIT Margins (%)                   2.9        -4.2                     0.2
              Others                            2,789       3,042        -8.3       2,598          7.4
                PBIT Margins (%)                 18.9        26.2                    19.0
              Total PBIT                       13,731      13,696         0.3      12,687          8.2
                PBIT Margins (%)                 12.9        15.4                    13.3
                                                                                   Source: Company/MOSL

              Volume outlook remains positive as levers present to support volume
               After factoring in the potential impact of macro headwinds, cost inflation and vehicle
                 demand based on normal monsoons, management expects Auto growth at ~12%-16%
                 and 11-13% for the Tractor industry in FY12. The management has guided to 15-20%
                 export growth in FY12. We model 15% growth for UVs and 13% for tractors business
                 of M&M in FY12.
               While it is confident of strong volumes for tractors due to several growth drivers, it
                 indicated that any prolonged sustenance of macro-headwinds could impact auto business
               It has 8 launches lined up for FY12 including a new SUV, which is expected to be
                 launched in 2H FY12. This, coupled with full benefit of ~9 launches in FY11, would
                 also support volumes.
               In tractors, it has witnessed very good demand for low-cost tractor Yuvraj, sold ~5,776
                 units of Yuvraj in FY11 and expects to sell ~20,000 units (full capacity) in FY12 (~50%
                 of incremental tractor volumes).
30 May 2011                                                                                            4
                                                                                      Mahindra & Mahindra

               It expects commodity costs to increase by ~6-7% in FY12, which it would partly pass-
                on to the consumer with a lag.
               It has sufficient capacities to support volume growth in FY12, with all constraints
                being taken care of.

              Change in sales-tax incentive scheme by the Maharashtra Government
              would exert pressure on margins
               The Maharashtra government has withdrawn set-off of sales tax on sales outside the
                state from mid-March 2011. While it does not reduce the benefit, which is fixed as a
                % of total capex, the benefit would now be realized over a much longer period.
               On account of these changes, 4QFY11 consolidated performance saw an impact of
                Rs70m (for 15 days). Impact of this withdrawal would be higher in FY12 as Chakan
                plant ramps up from ~11% of auto segment volumes to ~25% of auto segment volumes
                in FY12, as all new launches would be produced at Chakan plant.
               It has approached the state government for reconsidering this withdrawal and is hopeful
                of some relief on this front.
               These change in incentives coupled with higher commodity cost would put pressure
                on EBITDA margins, impact of which would be off-set by price increases in Auto
                (~2% in 1QFY12) and tractors (~3% on 1QFY12).

              Ssangyong: guides for 50% volume growth in CY11, but not to break even
              in CY11
               The management has guided for ~50% volume growth to 120,000 units for Ssangyong
                  for CY11, driven by recovery in its markets as well as recent launch of Korando-C.
               It has capacity of 120,000 units (on single shit basis) which it expects to fully utilize in
                  CY11. As a result, it expects revenue growth of 50% to US$3b in CY11 for Ssangyong.
               Despite strong volume growth, it indicated that it would not break even at PAT level in
               Our estimates do not yet factor in for Ssangyong given limited disclosure of its financials.
                  However, we factor in for negative impact on interest income due to payment of
                  purchase consideration.

              Downgrading consolidated EPS by 3-4%
              We are cutting our standalone EPS for FY12 and FY13 by 7.4% to Rs44.9 and 7.6% to
              Rs50.9 respectively and consolidated EPS by ~3% to Rs61.7 and ~3.7% to Rs71.6
              respectively to model a) higher cost in 4QFY11, b) withdrawal of sales tax incentive for
              non-Maharashtra sales from Chakan plant, c) improvement in performance of Systech
              and Financial services subsidiaries. Our key assumptions are:
               UVs volume growth of 15% in FY12 and 12.5% in FY13 and Tractor volume growth
                  of 13% and 10% respectively.
               RM cost push of 130bp in FY12 (~10bp lower than 4QFY11), but ~30bp savings in
               Of 17.35m share allotted to ESOP trust, 10% to be granted as ESOPs annually at
                  CMP of Rs655. The difference between fair value (assumed to be CMP) and exercise
                  price is written-off over vesting period of 5 years.
               It continues to maintain its Capex guidance of Rs50b for FY12-14 and investments of
                  Rs30b in subsidiaries and JVs.
30 May 2011                                                                                               5
                                                                                           Mahindra & Mahindra

              Revised forecast (Rs m)
                                                      FY12E                                 FY13E
                                           Rev          Old    Chg (%)              Rev       Old     Chg (%)
              Volumes ('000 units)       650.2         647.1        0.5            723.6     720.2          0.5
              Net Sales                278,405       272,354        2.2          316,931   310,276          2.1
              EBITD Margins (%)           13.3          14.6    -130bp              13.5      14.8      -130bp
              Net Profit                26,501        28,630       -7.4           30,060    32,530         -7.5
              EPS (Rs)                    44.9          48.5       -7.4             50.9      55.1         -7.6
              Cons EPS (Rs)               61.7          63.6       -2.9             71.6      74.4         -3.7
                                                                                           Source: Company/MOSL

              Valuation and view
              We believe that the current valuations largely factors in for the withdrawal of sales-tax
              incentive and consequent margin and earnings downgrade. Short term headwinds
              notwithstanding, we remain positive on M&M's prospects, driven by dominance in core
              business of UVs & tractors, coupled with cheap valuations. Continued dominance in core
              business of UVs and tractors with favourable competitive dynamics, and strong volume
              growth momentum. It would be one of the biggest beneficiaries of normal monsoon, given
              high dependence on rural market for demand of its products. The stock trades at attractive
              valuations of 10.8x FY12 and 9.3x FY13 consol EPS. Maintain Buy with lowered target
              price of Rs844 (FY13-based SOTP).

              M&M: Sum-of-the-parts (Rs/Share)
                                                                     FY12E                          FY13E
              Value of core business
              Core EPS (excl. subsidiary dividend)                        42.5                        48.2
              PE attributable (x)                                          14                          14
              Target price                                                595                         674

              Value of listed subsidiaries
              1. Tech Mahindra
                 Value per share of M&M                                    73                           73
                 Value p.s. of M&M after 20% disc.                         59                           59

              2. M&M Financial Services
                 Value per share of M&M                                    66                           66
                 Value p.s. of M&M after 20% disc.                         52                           52

              3. Mahindra Lifespaces
                 Value per share of M&M                                    10                           10
                 Value p.s. of M&M after 20% disc.                          8                            8

              4. Mahindra Holidays
                 Value per share of M&M                                    41                           41
                 Value p.s. of M&M after 20% disc.                         32                           32

              5. Others - Value per share of M&M                           23                           18
              Target price (@ 20% HoldCo discount)                        770                          844
                                                                                                    Source: MOSL

30 May 2011                                                                                                     6
                                                                                                             Mahindra & Mahindra

Mahindra & Mahindra: an investment profile
M&M is the market leader in UV and tractors, with market              Successful integration and turnaround of Ssangyong
share of over 50% and 40% respectively. It has recently                would be key challenge.
entered 3-wheelers and CV segment. Apart from core auto
business, it has subsidiaries/associates in various businesses   Recent developments
like IT, NBFC, Auto ancillaries, hospitality, infrastructure      Management has announced a total dividend of Rs11.5
etc.                                                               per share, including a special dividend of Re.1 per share
                                                                   on account of a special profit of Rs.1.17b booked by
Key investment arguments                                           the company on the sale of its holding of Owens Corning
 Limited competition in key segment of UVs and tractors           India Ltd.
  augurs well for M&M.
 Competitive dynamics in both UVs and tractors are
                                                                 Valuation and view
  favorable, with limited competition and consolidated
                                                                  The stock trades at 14.8x FY12E standalone EPS and
  nature of the industry.
                                                                   10.8x FY12E consolidated EPS.
 M&M would be one of the biggest beneficiaries of
                                                                  Maintain Buy with lowered target price of Rs844 (FY13-
  normal monsoon, given its rural centric product portfolio.
                                                                   based SOTP).
 M&M's investments in its subsidiary and associate
  companies add substantially to the company's valuations.
  Value unlocking in these companies would act as                Sector view
  catalyst for M&M's stock.                                       We remain bullish on the macro growth picture for
                                                                    passenger cars in India
                                                                  We also believe that within passenger cars, UVs will
Key investments risks
                                                                    increase their market share consistently over the next
 While its own capacity wouldn't be constraint, managing
                                                                    few years
  supply chain would be key challenge.
                                                                  We maintain an overweight stance on the sector.
 Hardening interest rate would result in slower demand

Comparative valuations                                           EPS: MOSL forecast v/s consensus (Rs)
                              M&M        Maruti   Tata Motors                          MOSL             Consensus       Variation
P/E (x) *        FY12E          10.8      13.2        8.0                             Forecast           Forecast          (%)
                 FY13E           9.3      11.0        7.2            FY12                61.7              58.0            6.4
EPS Gr (%)       FY12E          49.2      13.3       12.7            FY13                71.6              63.9           12.0
                 FY13E          16.0      20.3       11.0
RoE (%)          FY12E          21.7      16.3       36.4        Target price and recommendation
                 FY13E          21.0      16.7       30.0            Current          Target               Upside        Reco.
EV/EBITDA (x)    FY12E           8.5       6.6        4.5            Price (Rs)      Price (Rs)             (%)
                 FY13E           7.1       4.9        3.9              665               844               26.9           Buy
* Consolidated
                                                                 Stock performance (1 year)

                                                                                  Mahindra & Mahindra         Sensex - Rebased

Shareholding pattern (%)                                          800
                           Mar-11       Dec-10        Mar-10
Promoter                     25.0          22.8          26.4
Domestic Inst                23.6          24.3          24.9
Foreign                      32.7          35.0          32.4
                                                                   May-10           Aug-10        Nov-10      Feb-11      May-11
Others                       18.7          17.9          16.3

30 May 2011                                                                                                                      7
                           Mahindra & Mahindra

Financials and Valuation

30 May 2011                                 8
                          Mahindra & Mahindra

              N O T E S

30 May 2011                                9
                                                                                                                                               Mahindra & Mahindra

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       Disclosure of Interest Statement                                          Mahindra & Mahindra
       1. Analyst ownership of the stock                                                 No
       2. Group/Directors ownership of the stock                                         No
       3. Broking relationship with company covered                                      No
       4. Investment Banking relationship with company covered                           No

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30 May 2011                                                                                                                                                              10