Fundamental Analysis of Mahindra Amp Mahindra

Fundamental Analysis Of Mahindra & Mahindra
EXECUTIVE SUMMARY
India's domestic automotive industry, enjoyed high
growth in financial year-05, continuing the healthy
trend set in financial year-04. Increased industrial
growth contributed to the upward trend. All the
automotive industry segments in which M&M has a
presence witnessed a growth in demand in financial
year-05. The Indian tractor industry too saw an upward
trend after a severe downturn period, due to favorable
monsoon and better credit terms helped to build
positive
sentiments.
The
major
players
in
the
Commercial Vehicle Segment are Ashok Leyland Ltd,

Hindustan Motors Ltd, Telco, Volvo India Pvt.Ltd, Bajaj
Tempo Ltd, Eicher Motors Ltd, Mahindra & Mahindra
Ltd, and Swaraj Mazda Ltd.
Mahindra & Mahindra Limited (M&M) is the
flagship company of around Rs. 8000 crore Mahindra
Group, which has a significant presence in key sectors
of the Indian economy. A consistently high performer,
M&M is one of the most respected companies in the
country. Set up in 1945 to make general-purpose utility
vehicles for the Indian market, M&M soon branched out
into manufacturing agricultural

commercial
vehicles
(LCVs).
tractors
The
and light
company
later
expanded its operations from automobiles and tractors

to
secure
significant
presence
in
many
more
important sectors. The company has, over the years,

transformed itself into a Group that caters to the Indian
and overseas markets with a presence in vehicles, farm
equipment, information technology, trade and finance
related
services,
and
infrastructure
development.
Mahindra & Mahindra Ltd (M&M) is a leading player in

the Indian utility vehicles and tractors segment with
market shares of 49.5% in Jeeps / MUVs, 30.9% in 3wheelers, and market share of 25.9% in Tractors in the
FY2005.
This study tries to cover the industry related
data and in depth company study and an overview of
the
economy,
evaluates
valuation models.
the
company
on
various
THEORETICAL BACKGROUND
FUNDAMENTAL ANALYSIS:
Fundamental analysis is the examination of the
underlying forces that affect the well being of the
economy, industry groups, and companies. As with most
analysis, the goal is to derive a forecast and profit from
future
price
fundamental
financial
movements.
analysis
data,
At
may
management,
the
involve
company
level,
examination
business
concept
of
and
competition. At the industry level, there might be an

examination of supply and demand forces for the
products offered. For the national economy, fundamental
analysis might focus on economic data to assess the
present and future growth of the economy. To forecast
future stock prices, fundamental analysis combines
economic, industry, and company analysis to derive a
stock's current fair value and forecast future value. If
fair value is not equal to the current stock price,
fundamental analysts believe that the stock is either over
or under valued and the market price will ultimately
gravitate towards fair value. Fundamentalists do not
heed the advice of the random walkers and believe that
markets are weak form efficient. By believing that prices

do not accurately reflect all available information,
fundamental analysts look to capitalize on perceived
price discrepancies.
STRENGTHS AND WEAKNESS OF FUNDAMENTAL

ANALYSIS
Long-term Trends:
Fundamental
analysis
is
good
for
long-term
investments based on long-term trends, very long-term.

The ability to identify and predict long-term economic,
demographic, technological or consumer trends can
benefit patient investors who pick the right industry
groups or companies.
Value Spotting:
Sound
fundamental
analysis
will
help
identify
companies that represent good value. Some of the most

legendary investors think long-term and value. Graham
and Dodd, Warren Buffett and John Neff are seen as the
champions of value investing. Fundamental analysis can
help uncover companies with valuable assets, a strong

balance sheet, stable earnings and staying power.
Business Acumen:
One of the most obvious, but less tangible, rewards
of fundamental analysis is the development of a thorough
understanding of the business. After such painstaking
research and analysis, an investor will be familiar with
the key revenue and profit drivers behind a company.
Earnings and earnings expectations can be potent
drivers of equity prices. Even some technicians will
agree to that. A good understanding can help investors
avoid companies that are prone to shortfalls and identify
those
that
continue
to
deliver.
In
addition
to
understanding the business, fundamental analysis allows

investors to develop an understanding of the key value
drivers and companies within an industry. Its industry
group heavily influences a stocks price. By studying
these groups, investors can better position themselves to
identify opportunities that are high-risk (tech), low-risk
(utilities), growth oriented (computer), value driven (oil),
non-cyclical (consumer staples), cyclical (transportation)

or income oriented (high yield).
Knowing Who's Who:
Stocks move as a group. By understanding a
company's
business,
investors
can
better
position
themselves to categorize stocks within their relevant

industry group. Business can change rapidly and with it
the revenue mix of a company. This happened to many of
the pure internet retailers, which were not really
internet companies, but plain retailers. Knowing a
company's business and being able to place it in a group
can make a huge difference in relative valuations.
WEAKNESS
Time Constraints:
Fundamental analysis may offer excellent insights,

but it can be extraordinarily time consuming. Timeconsuming models often produce valuations that are
contradictory to the current price.
Industry/Company Specific:
Valuation techniques vary depending on the industry
group and specifics of each company. For this reason, a
different technique and model is required for different
industries and different companies. This can get quite
time consuming and limit the amount of research that
can be performed.
Subjectivity:
Fair value is based on assumptions. Any changes to
growth or multiplier assumptions can greatly alter the
ultimate valuation. Fundamental analysts are generally
aware of this and use sensitivity analysis to present a
base-case valuation, a best-case valuation and a worstcase valuation. However, even on a worst case, most
models are almost always bullish, the only question is

how much so.
Analyst Bias:
The majority of the information that goes into the
analysis comes from the company itself. Companies
employ
investor
relations
managers
specifically
to
handle the analyst community and release information.

Introduction to Investment Valuation
Every asset, financial as well as real, has value. The
key to successfully investing in and managing these
assets lies in understanding not only what the value is,
but the sources of the value. Any asset can be valued,
but some assets are easier to value than others, and the
details of valuation will vary from case to case. Thus, the
valuation of a share of a real estate property will require
different information and follow a different format from
the valuation of a publicly traded stock. What is
surprising; however, is not the difference in valuation
techniques across assets, but the degree of similarity in
basic
principles.
There
is
undeniably
uncertainty
associated with valuation. Often that uncertainty comes

from the asset being valued, although the valuation
model may add to that uncertainty.
A PHILOSOPHICAL BASIS FOR VALUATION

A surprising number of investors subscribe to the
bigger fool theory of investing, which argues that the
value of an asset is irrelevant as long as there is a
bigger fool around who is willing to buy the asset from
them. While this may provide a basis for some profits, it
is a dangerous game to play, since there is no guarantee
that such an investor will still be around when the time
to sell comes.
A postulate of sound investing is that an investor
does not pay more for an asset than its worth. This
statement may seem logic and obvious, but it is forgotten
and rediscovered at some time in every generation and

in every market. There are those who are disingenuous
enough to argue that value is in the eyes of the beholder,
and that any price can be justified if there are other
investors willing to pay that price. That is patently
absurd. Perceptions may be all that matter when the
asset is a painting or a sculpture, but investors do not
(and should not) buy most assets for aesthetic or
emotional reasons; financial assets are acquired for the
cash flows expected from owning them. Consequently,
perceptions of value have to be backed up by reality,
which implies that the price that is paid for any asset
should reflect the cash flows it is expected to generate.
The models of valuation described in this book attempt
to relate value to the level and expected growth of these
cash flows.
There are many areas in valuation where there is
room for disagreement, including how to estimate true
value and how long it will take for prices to adjust to true
value. But there is one point on which there can be no
disagreement. Asset prices cannot be justified merely by
using the argument that there will be other investors
around willing to pay a higher price in the future.
THE ROLE OF VALUATION

Valuation is useful in a wide range of tasks. The role
it plays, however, is different in different arenas. The
following section lays out the relevance in portfolio
management, in acquisition analysis, and in corporate
finance.
Valuation and Portfolio Management
The role that valuation plays in portfolio
management
is
determined
in
large
part
by
the
investment philosophy of the investor. Valuation plays a

minimal role in portfolio management for a passive
investor, whereas it plays a larger role for an active
investor. Even among active investors, the nature and
role of valuation are different for different types of active
investors can be categorized as either market timers,
who trust in their abilities to foresee the direction of the
overall stock or bond markets, on security selection who
believe that their skills lie in funding under or over
valued securities. Market timers use valuation much less
than do investors who pick stocks, and the focus is on

market valuation rather than on firm specific valuation.
Among security selectors, valuation plays a central role
in portfolio management for fundamental analysts and a
peripheral role for technical analysis.
The following subsections describe, in broad terms.
Different philosophies and the role played by valuation in
each.
Fundamental Analysts
The underlying theme in fundamental analysis is
that the true value of the firm can be related to its
financial characteristics- its growth prospects, prospects,
risk profile, and cash flows. Any deviation from this true
value is a sign that a stock is under or overvalued. It is a
long-term investment strategy and the assumptions
underlying it are that:
(a) The relationship between value and the underlying
financial factors can be measured.
(b) The relationship is stable over time.
( c ) Deviations from the relationship are corrected in a
reasonable time period.
Valuation is the central focus in fundamental analysis.
Some analysts use discounted cash flow models to value
firms, while others use multiples such as price/earnings

and price/book value ratios. Since investors using this
approach hold a large number of "undervalued' stocks in
their portfolios, their hope is that, on average, these
portfolios will do better than the market.
Franchise Buyers
The
philosophy
of
franchise
buyer
is
best
expressed by an investor who has been very successful

at it -Warren Buffet. We try to stick to businesses we
believe we. Understand, Mr.Buffett writes. That means
they must be relatively simple and stable in character. If
a business is complex and subject to constant change,
we're not smart enough to predict future cash flows.
Franchise buyers concentrate on a few businesses they
understand well and attempt to acquire undervalued
firms. Often, as in the case of Mr. Buffet, franchise
buyers wield influence on the management of these firms
and can change financial and investment policy. As a
long-term strategy, the underselling assumptions are
that:
(a) Investors who understand a business well are in a

better position to value it correctly.
(b) These undervalued businesses can be acquired
without driving the price above the true value.
Valuation plays a key role in this philosophy, since
franchise buyers arc attracted to a particular business
because they believe it is undervalued. They are also
interested in how much additional value they can create
by restructuring the business and running it right.
Chartists
Chartists believe that prices are driven as much by
investor psychology as by any underlying financial
variables. The information available from trading - price
movements, trading volume, short sales, and so forth gives an indication of investor psychology and future
price movements. The assumptions here are that prices
move in predictable patterns, that there are not enough
marginal investors taking advantage of these patterns to
eliminate them, and that the average investor in the
market is driven more by emotion than by rational
analysis.
While valuation does not play much of a role in

charting, there are ways in which an enterprising
chartist can incorporate it into analysis. For instance
valuation
can
be
used
to
determine
support
and
resistance lines4 on price chart.
Information Traders
Prices
move
on
information
about
the
firm.
Information traders attempt to trade in advance of new

information or shortly after it is revealed to financial
markets, buying on good news and selling on bad. The
underlying
assumption
is
that
these
traders
can
anticipate information announcements and gauge the

market reaction to them better than the average investor
in the market.
For
information
trader
the
focus
is
on
the
relationship between information and changes in value,

rather than on value per se. Thus an information trader
may buy an overvalued firm if he or she believes that
the next information announcement is going to cause the
price to go up because it contains better-than-expected
news. If there is a relationship between how undervalue
or overvalued a company is and how its stock price

reacts to new information then valuation could play a
role in investing for an information trader.
Market Timers
Market timers note, with some legitimacy, that the
payoff to calling turns in markets is much greater than
the returns from stock picking. They argue that it is
easier to predict market movements than to select stocks
and that these predictions can be based upon factors
that are observable.
While valuation of individual stocks may not be of any
use to a market timer, market timing strategies can use
valuation in at least two ways:
(a) The overall market itself can be valued and compared
to the current level.
(b) A valuation model can be used to value all stocks, and
the results from the cross-section can be used to
determine whether the market is over or undervalued.
For example, as the numbers of stocks that are
overvalued using the dividend discount model increases
relative to the numbers that are undervalued, there may
be reason to believe that the market is overvalued.
Efficient Marketer
Efficient marketers believe that the market price at
any point in time represents the best estimate of the true
value of the firm and that any attempt to exploit
perceived market efficiencies will cost more than it will
make in excess profits. They assume that markets
aggregate
information
quickly
and
accurately,
that
marginal investors promptly exploit any inefficiencies,

and that any inefficiencies in the market are caused by
friction, such as transaction costs, and cannot be
arbitraged away.
For
efficient
marketers,
valuation
is
useful
exercise to determine why, stock sells for the price it

does. Since the underlying assumption is that the market
price is the best estimate of the true value of the
company,
the
objective
becomes
determining
what
assumptions about growth and risk are implied in this

market
price,
rather
overvalued firms.
than
on
finding
under-
or
Valuation in Acquisition Analysis

Valuation should play a central part in acquisition
analysis. The bidding firm or individual has to decide on
a fair value for the target firm before making a bid, and
the target firm has to determine a reasonable value for
itself before deciding to accept or reject the offer.
There are also special factors
to consider in
takeover valuation. First, the effects of synergy on the

combined value of the two firms (target plus bidding
firm) have to be considered before a decision is made on
the bid. Those who suggest that synergy is impossible to
value and should not be considered impossible to value
should not be considered in quantitative terms are
wrong.
Second,
the
effects
on
value
of
changing
management and restructuring the target firm will have

to be taken into account in deciding on a fair price. This
is of particular concern in hostile takeovers.
Finally, there is a significant problem with bias in
takeover
valuations.
Target
firms
may
be
overly
optimistic in estimating value, especially when the

takeover is hostile and they are trying to convince their
stockholders that the offer price is too low. Similarly, if

the bidding firm has decided, for strategic reasons, to do
an acquisition, there may be strong pressure on the
analyst to come up with an estimate of value that backs
up the acquisition decision.
Valuation in Corporate Finance

The
objective
in
corporate
finance
is
the
maximization of firm value, and then the relationship

between financial decisions, corporate strategy, and firm
value has to be delineated. In recent years, managementconsulting firms have started offering companies advice
on how to increase value. Their suggestions have often
provided the basis for the restructuring of these firms.
The value of a firm can be directly related to
decisions that it makes-on that projects it takes, on how
it
finances
them,
and
on
its
dividend
policy.
Understanding this relationship is key to making valueincreasing
decisions
restructuring.
and
to
sensible
financial
Equity represents a residual cash flow rather than a

promised cash flow.
You can value equity in one of two ways:
By discounting cash flows to equity at the cost of
equity to arrive at the value of equity directly.
By discounting cash flows to the firm at the cost of
capital to arrive at the value of the business. Subtracting
out the firms outstanding debt should yield the value of
equity.
Two Measures of Cash Flows
Cash flows to Equity: These are the cash flows
generated by the asset after all expenses and taxes, and
also after payments due on the debt. This cash flow,
which is after debt payments, operating expenses and
taxes, is called the cash flow to equity investors.
Cash flow to Firm: There is also a broader definition of
cash flow that we can use, where we look at not just the
equity investor in the asset, but at the total cash flows
generated by the asset for both the equity investor and
the lender. This cash flow, which is before debt payments
but after operating expenses and taxes, is called the cash

flow to the firm.
Two Measures of Discount Rates
Cost of Equity: This is the rate of return required by
equity investors on an investment. It will incorporate a
premium for equity risk the greater the risk, the greater
the premium.
Cost of capital: This is a composite cost of all of the
capital invested in an asset or business. It will be a
weighted average of the cost of equity and the after-tax
cost of borrowing.
FREE CASH FLOWS TO THE FIRM

The best things in life are free, and the same holds
true for cash flow. Smart investors love companies that
produce plenty of free cash flow (FCF). It signals a
company's ability to pay debt, pay dividends, buy back
stock and facilitate the growth of business - all important
undertakings from an investor's perspective. However,
while free cash flow is a great gauge of corporate health,

it does have its limits and is not immune to accounting
trickery.
What Is Free Cash Flow?
By establishing how much cash a company has after
paying its bills for ongoing activities and growth, FCF is
a measure that aims to cut through the arbitrariness and
"guesstimations"
involved
in
reported
earnings.
Regardless of whether a cash outlay is counted as an

expense in the calculation of income or turned into an
asset on the balance sheet, free cash flow tracks the
money.
To calculate FCF, make a beeline for the company's cash
flow statement and balance sheet. There you will find the
item cash flow from operations (also referred to as
"operating cash"). From this number subtract estimated
capital expenditure required for current operations:
- Cash Flow from Operations (Operating Cash)
- Capital Expenditure
To do it another way, grab the income statement and
balance sheet. Start with net income and add back
charges for depreciation and amortization. Make an
additional adjustment for changes in working capital,

which is done by subtracting current liabilities from
current assets. Then subtract capital expenditure, or
spending on plants and equipment:
- Net income
+ Depreciation/Amortization
- Change in Working Capital
- Capital Expenditure
It
might
seem
odd
to
add
back
depreciation/amortization since it accounts for capital

spending.
The
reasoning
behind
the
adjustment,
however, is that free cash flow is meant to measure

money being spent right now, not transactions that
happened in the past.
This makes FCF a useful
instrument for identifying growing companies with high

up-front costs, which may eat into earnings now but have
the potential to pay off later.
What Does Free Cash Flow Indicate?
Growing free cash flows are frequently a prelude to
increased earnings. Companies that experience surging
FCF - due to revenue growth, efficiency improvements,
cost reductions, share buy backs, dividend distributions

or debt elimination - can reward investors tomorrow.
That is why many in the investment community cherish
FCF as a measure of value. When a firm's share price is
low and free cash flow is on the rise, the odds are good
that earnings and share value will soon be on the up.
By contrast, shrinking FCF signals trouble ahead. In
the absence of decent free cash flow, companies are
unable to sustain earnings growth. An insufficient FCF
for earnings growth can force a company to boost its
debt levels. Even worse, a company without enough FCF
may not have the liquidity to stay in business.
RESEARCH DESIGN OF THE STUDY

INTRODUCTION:
Every stock available in the markets has a value

called market price, which is the indicator of the
companys
performance.
According
to
fundamental
analysis we will try to find the intrinsic value of a

particular stock, which is the true value of the stock,
based on which investment arguments take place.
STATEMENT OF PROBLEM:
Every asset, financial as well as real, has value. The
key to successfully investing in and managing these
assets lies in understanding not only what the value is,
but the sources of the value. Any asset at can be valued
but some assets are easier to value than others, and the
details of the valuation will vary from case to case. Thus,
the valuation of a share of a real estate property will
require different information and follow a different
format from the valuation of a publicly traded stock.
What is surprising; however, is not the difference in
valuation techniques across assets, but the degree of
similarity
in
uncertainty
basic
principles.
associated
with
There
is
valuation.
undeniably
Often
the
uncertainty comes from the asset being valued, although

the valuation model may add to that ascertained.
A postulate of sound investing is that an investor
does not pay more for asset than its worth. This
statement may seem logical and obvious as financial
assets are acquired for the cash flows expected from
owning them, which implies that the price that is paid
for any asset should reflect the cash flows it is expected
to generate.
The problem in valuation is not that there are not
enough models to value an asset; it is that there are too
many. Choosing the right model to use in valuation is as
critical
to
arriving
at
reasonable
value
as
understanding how to use the model. Analysts use a wide

variety of models from simple to the sophisticated. These
models often make different assumptions about pricing,
but they do share some common characteristics so in the
study we tried to use price-earning multiples and
discounted cash flow models of valuation.
OBJECTIVES OF THE STUDY:

To understand the macroeconomic variables those
will an impact on the company
To
study
the
various
progress.
trends,
opportunities,
challenges of the industry in which the company

operates.
To understand the various policies of the company
those have impact on the financial performance of
the company.
To understand the various investment valuation
models that can be used.
To select the appropriate model that suits the stock.
Find the intrinsic value of the stock and compare
with market value of the study.
To recommend whether to buy, hold or sell the stock

based on the analysis.
SCOPE OF THE STUDY:
The study basically tries to identify the intrinsic
value of the company by using the published financial
details of the company. The study is restricted to one
particular company in the sector. The study
also
includes testing the intrinsic value of the company.
RESEARCH METHODOLOGY:
Type of research:
Research design is the conceptual structure within
which research is conducted. It constitutes the blue print
for the collection, measurement, and analysis of data.
The type of research adopted for the study is descriptive
research
as
the
research
does
not
require
any
manipulation of variables and does not establish causal

relationship between events; it just simply describes the
variables.
Sources of data:
Primary data
Those are the data that are obtained by a study
specially designed to fulfill the data needs of the
problem. Meeting the company professionals personally
collected the information necessary for the study.
Secondary data
Data, which are not originally collected but rather
obtained from published or unpublished sources, are
known as secondary data. In this research secondary
data
was
collected
through
sources
like
Internet,
research reports, magazines, and company journals.
Sampling plan:
Type of sampling
: Non-probabilistic judgment
sampling.
Sample size
sector.
: One company from automobile
RESEARCH INSTRUMENTS:
Financial calculations: - This was done to find the
various valuation ratios and necessary
calculations to
find the intrinsic value of the company.

Z Test: - This test was used to test the hypothesis.
PLAN OF ANALYSIS:
After having collected the financial data related to
the entities i.e., the sample selected from the selected
sector. Calculate the various valuation ratios and other
financial calculations that will help in the company
valuation. This helps in finding out the intrinsic value of
the
companys
share.
Then hypothesis
was
tested
whether the company is under or over valued.
LIMITATIONS OF THE STUDY:

The study was confined only to one particular sector.
The study was more confined with secondary data.

The study assumes no changes in the tax rates in the
country.
The study was done for a short period of time, which
might not hold true over a long period of time.
As the scope is defined by the researcher it restricts
the number of variables which
Influence the industry.
OPERATIONAL DEFINITIONS OF THE CONCEPTS:
1) BETA:
A measure of a security's or portfolio's volatility, or
systematic risk, in comparison to the market as a whole.
It is also known as "beta coefficient."
2) CAPEX:
Funds used by a company to acquire or upgrade
physical assets such as property, industrial buildings, or
equipment.
3) CAGR:
The year over year growth rate of an investment
over
specified
periodoftime.
Calculated by taking the nth root of the total percentage
growth rate where n is the number of years in the period

being considered.
This can be written as:
4) COST OF EQUITY:
The return that stockholders require for a company
for the capital invested. The traditional formula is the
dividend capitalization model:
5) DEBT/EQUITY RATIO:
A
measure
of
company's
financial
leverage
calculated by dividing long-term debt by shareholders

equity. It indicates what proportion of equity and debt
the company is using to finance its assets.
Note: Sometimes investors only use interest bearing
long-term debt instead of total liabilities.
6) DEPRECIATION:
An expense recorded to reduce the value of a longterm tangible asset. Since it is a non-cash expense, it
increases free cash flow while decreasing reported
earnings.
7) DIVIDEND PAYOUT RATIO:
The percentage of earnings paid to shareholders in
dividends.
9) DUPONT ANALYSIS:
A method of performance measurement that was
started by the DuPont Corporation in the 1920s, and has
been used by them ever since. With this method, assets
are measured at their gross book value rather than at
net book value in order to produce a higher ROI.
10) EPS:
The portion of a company's profit allocated to each
outstanding share of common stock. Calculated as:
11) EFFECTIVE TAX RATE:
The portion of a company's profit allocated to each

outstanding share of common stock. Calculated as:
12) EQUITY MULTIPLIER:

A measure of financial leverage calculated as:
Total Assets divided by Total Stockholders' Equity.
Like
all
debt
management
ratios,
the
equity
multiplier is a way of examining how a company uses

debt to finance its assets. It is also known as the
financial leverage ratio or leverage ratio.
13) ASSET TURN OVER RATIO:
The amount of sales generated for every dollar's
worth of assets. It is calculated by dividing sales in
rupees by assets in rupees.
Formula:
14) FUNDMENTAL ANALYSIS:
The amount of sales generated for every dollar's

worth of assets. It is calculated by dividing sales in
rupees by assets in rupees.
Formula:
15) MARKET CAPITALISATION:

It is the total value of all outstanding shares of
particular company, which is represented in the market.
It's calculated by multiplying the number of shares times
the current market price. This term is often referred to
as market cap.
16) PE (PRICE EARNING MULTIPLES):
A valuation ratio of a company's current share price
compared to its per-share earnings. A valuation ratio of a
company's current share price compared to its per-share
earnings.
Calculated as:
17) PEG (PRICE EARNING TO GROWTH):
A valuation ratio of a company's current share price

compared to its per-share earnings.
18) ROE:
A measure of a corporation's profitability, calculated as:
19) WACC: A calculation of a firm's cost of capital that

weight each category of capital proportionately. Included
in the WACC calculations are all capital sources,
including common stock, preferred stock, bonds, and any
other long-term debt.
WACC is calculated by multiplying the cost of each
capital component by its proportional weighting and
then summing:
CHAPTER SCHEME
Chapter: 1 THEORITICAL BACKGROUND OF THE
STUDY
This chapter mainly deals with secondary data
collected to support the study and the reasons to
problem of study.
Chapter: 2 RESEARCH DESIGN

A research design serves as a bridge between what
has been done in the conduct of study to realize the
specified objectives. It is an outline of the projects
working.
Chapter: 3 PROFILES
This chapter includes the profile of the industry as
well as the company in which the study is conducted.
This is also tries to deal with trends and prospects in the
industry as well as the company.
Chapter: 4 ANALYSES AND INTERPRETATION
In this chapter using the analyzed data we have
tried to find out the intrinsic value of the company.
Hypothesis test is done to find whether the value of the
company is under or over valued.
Chapter:
SUMMARY
OF
FINDINGS,
CONCLUSIONS AND SUGGESTIONS

In this chapter we will actually include all that we
have
analyzed
and
what
has
been
found.
Finally
conclude checking whether the objective of the study has

been achieved or not.
ECONOMIC ANALYSIS
Economic Outlook:
During the fiscal year 2003-04, Indias GDP which
grew by 8.10% was principally on account of a strong
recovery in the agriculture sector and accelerated
growth in the industry and services sectors. A growth
rate higher than 8% has been achieved in the past in
only three years - 1967-68, 1975-76 and 1988-89.
Exports have grown by 17.1% in 2003-04 in USD terms.
While the rupee appreciated against USD in 2003-04, it
depreciated against the currencies of major non dollartrading partners. Foreign exchange reserves crossed the
levels of USD 100 billion mark on December 2003 and
stood at USD 199.3 billion as on 31st March 2004.
Foreign Institutional Investors (FIIs) investments saw a
sharp rise during the year, which amounted to USD 10
billion.
Overall economic conditions look positive and
expected to post a GDP growth of 6-6.5% during FY05.
GRAPH 1: ACCELERATING GROWTH OF GDP
TABLE 1: INDIA - ECONOMIC PARAMETERS
GDP
F 04
Growth 8.1
(%)
Fiscal Deficit 4.8
(%)
F 05
6.0
6.5
4.4
Decline Harden
Interest Rate
ing
6.5
d
Inflation 5.3
(Average) %
Rupee - US Appreci
Steady
Dollar
ated
(Source: RBI, CMI)
GRAPH 2: SHOWING INDIAS REAL GDP GROWTH
As chart
also shows, growth in nonagricultural
GDP remained solid during 2004. Although a breakdown

of Indian real GDP into its demand components is not
readily
available,
it
is
likely
that
Indias
strong
nonagricultural growth performance last year was due

entirely too robust domestic demand. The 10% rise in the
production of consumer goods last year and the 20%
increase in auto sales suggest that consumer spending
has been very strong indeed.
Consumer spending in India has been supported

recently by strong income growth as growth in real per
capita
GDP
has
averaged
3.8%
per
annum
since
2000.India has liberalized its economy over the past

decade or so, much more needs to be done, and better
allocation of resources, domestically and internationally,
has contributed to this strong growth in per capita
income.
The Real Gross Domestic Product (GDP) is estimated
to have grown by 8.10% in 2003-04, buoyed by a strong
agricultural recovery. While the agricultural sector grew
by 9.1% during the FY04, the industry and services
sectors have also maintained their momentum with the
GDP growth by achieving a growth rate of 6.5% and
8.4% respectively during the year. The growth GDP has
grown by 7.4% during April-June 2004 period, lower than
the 8.2% growth registered in January-March 2004 and
10.5% in October-December 2003 quarter. Inflation is
also inching up higher, driven by increases in fuel and
commodity prices. Non food credit has increased by
11.5% during the April-September 2004 period as
against previous corresponding years 6% indicating the
progressive economic activities. But the global crude oil
shock will definitely have an adverse affect on the

growth during fiscal 2005.
GRAPH 3: INFLATION
The average inflation during fiscal year 2003-04 was

around 5.5% as against the previous corresponding
fiscals average of 3.4%, the prime movers being sugar,
edible oils, textiles, leather and leather products, basic
metals, alloys, iron and steel. With the increase of few
commodity prices mainly the crude oil prices have
increased the global inflation levels from June 2004,
India being no exception to this. The domestic fuel prices
have risen by more than 10% during the fiscal 2004-05
over last years. The inflation during the fiscal year 200405 touched three and a half years high of 8.33% for the
week ended August 28th 2004 from 5.55% for the week
ended June 5th 2004 due to the excess money supply in

the economy. The reasons for the high inflation are both
domestic
and
international.
The
domestic
reasons
include excess liquidity in the market and delay in

monsoon
that
increased
the
prices
of
essential
commodities. M3, the measure of money supply grew by

15.5 per cent in July 2004, compared to 11.25 per cent in
July 2003. The international causes are inexorable rise in
oil prices, global increase in the prices of commodities,
supply side shock and growth in chinas demand for
goods. This is cost-push inflation wherein the supply
problems in a few important commodities push up prices
of commodities. Since crude oil import constitute almost
one third of the total exports, we can say that the
present situation is on account of imported inflation. To
check the rising prices, government took some measures
like duty cuts on steel and oil products. Reserve Bank of
India raised the Cash Reserve Ratio to 5% from 4.5% in
two tranches of 25 basis points and has also cut the rate
of interest payable on eligible cash balances maintained
with it by banks by 250 basis points to 3.5 percent. In
fact, the gradual reduction in the CRR over the past few
years in successive credit policies had been one of the
major contributors for the sustained reduction in the

interest rates on auto loans. These moves were expected
to draw out around Rs.8000 crore from the banking
system. Later, the inflation was reduced to 7.20% in the
last week of September. With the increase in the interest
rates the auto loans will become costlier, thus having an
adverse effect on the auto industry sales. The average
inflation for the fiscal 2004-05 is expected to stay around
6-6.5%.
Industry:
Sales:
The automobile industry growth relies mainly on the
countrys
economic
and
general
conditions.
Any
slowdown in the economic momentum would definitely

slowdown the growth of the industry. It can be seen from
the below chart that the industrys sales is positively
correlated with the economic growth with a co-relation
of 0.96.
GRAPH 4: GDP AND AUTO SALES
(Source: www.indiabudget.nic.in)
Rubber Prices:
With the increase in rural activities, the commercial
vehicles are expected to grow. Sports Utility Vehicles
(SUV) after being a very big hit in the domestic market,
the players now are planning to introduce them to the
domestic market. But the increase in the input prices
like steel and rubber has a negative impact on the

industry profitability. The truckers strike has affected
the auto players production and distribution to certain
extent.
GRAPH 5: SHOWING RUBBER PRICES
Source: indiainfoline
A combination of internal and external factors has
contributed to the price volatility in the rubber market.
Since the domestic prices of rubber are less than the

global prices, the tyre manufacturers in other countries,
sourcing natural rubber from India which has led to the
increase in the exports thereby reducing the domestic
stock levels to less than sixty days of consumption of the
rubber users sector. Also, the subsidy given by the
government for exports of rubber has resulted in an
increase in the exports.
The steel prices

GRAPH 6: SHOWING STEEL PRICES
Source: indiainfoline
The steel prices are on rise following a sharp

increase in the prices of raw materials like iron ore,
coke, coal, power, gas and scrap. While the cost of iron
ore went up by 75% during the period June2003 to July
2004, the scrap prices jumped up by 91%. Cokes prices
saw an increase of 50% during the same period. There
are no signs of decline in the prices of steel products
following a strong demand from the housing and
infrastructure sectors, with additional growth potential
in the auto and consumer durables sectors too. With
China taking steps to cool down its overheated economy,
demand from that country is expected to slow down. But
any shortfall in demand from China may be offset by
growth in demand in the US, Europe and Japan as
economic recovery gathers momentum leaving no scope
for the steel price declines in the near short term.
Competition and Market
In
the
Automotive
Sector
the
continuing
convergence between the car and the UV markets is a

positive development. High-end MUV sales accounted for
51% of mid-size car sales in India in F-04, as compared
to 16% in F-00. The Co also believes that as the car

market expands in India, MUVs will continue to take an
increasing share of this market. After the success of the
Scorpio and Bolero, Reduced interest rates with the
maturing of the vehicle financing market will also add an
impetus to vehicle sales growth. Increased penetration of
such financing products in rural and semi-urban markets
will directly benefit the Company given its strong
presence in these markets. M&M has the additional
advantage that its subsidiary, MMFSL has a wide rural
network.
The
ongoing
WTO
&
Free
Trade
Area
negotiations with Thailand, ASEAN, SAARC countries

and the Mercosur countries are likely to lead to lowered
tariffs across many of our target export markets. This
could provide the Co with a significant opportunity to
generate larger volumes from export sales.
Being an agrarian economy Indias GDP growth is
much dependent on the fortunes of the agro sector.
Given this backdrop the Tractor industry assumes
significance. The Indian Tractor industry is the largest in
the world in terms of production and sales. However in
terms of per capita usage it still scores low against
comparable developing nations. This provides for ample
scope of growth for the industry in future. With

liberalization restrictions on capacities and production
were removed. Today anybody can walk in and put up a
plant and start operations.
COMPANY PROFILE:
Mahindra
&
Mahindra
Limited
(M&M)
is
the
flagship company of around US $ 2.5 billion Mahindra

Group, which has a significant presence in key sectors of
the Indian economy. A consistently high performer, M&M
is one of the most respected companies in the country.
Set up in 1945 to make general-purpose utility
vehicles for the Indian market, M&M soon branched out
into
manufacturing
commercial
vehicles
agricultural
(LCVs).
tractors
The
and
light
company
later
expanded its operations from automobiles and tractors

to secure a significant presence in many more important
sectors. The Company has, over the years, transformed
itself into a Group that caters to the Indian and overseas
markets with a presence in vehicles, farm equipment,
information
technology,
trade
and
finance
related
services, and infrastructure development.

M&M has two main operating divisions:
1) The Automotive Division manufactures utility vehicles,
light commercial vehicles and three wheelers.
2)
The
Tractor
(Farm
Equipment)
Division
makes
agricultural tractors and implements that are used in

conjunction with tractors, and has also ventured into
manufacturing
of
industrial
engines.
The
Tractor
Division has won the coveted Deming Application Prize

2003, making it the only tractor manufacturing company
in the world to secure this prize.
The resurgence of the automotive industry and M&M's
success in exploiting it, has created an opportunity to
strengthen the company through an entry into the Auto
Components business, the growth of which is being
fueled by both, domestic and export demand.
M&M employs around 11,500 people and has six
state-of-the-art
manufacturing
facilities
spread
over
500,000 square meters. M&M has also set up two

satellite plants for tractor assembly. It has 49 sales
offices that are supported by a network of over 780
dealers across the country. This network is connected to
the Company's sales departments by an extensive IT
infrastructure.
M&M's outstanding manufacturing and engineering
skills allow it to constantly innovate and launch new
products
for
the
Indian
market.
The
Company's
significant recent product launch, the "Scorpio", resulted

in
the
Company
winning
the
National
Award
for
outstanding in-house research and development from the

Department of Science and Industry of the Government
in 2003. The Company has launched India's first tractor
with turbo technology - the Mahindra Sarpanch 595 DI
Super Turbo.
The Company's commitment to technology-driven
innovation is reflected in Company's plans of setting up
of the Mahindra Research Valley, a facility that will
house the Company's engineering research and product
development wings, under one roof.
The M&M philosophy of growth is centered on its
belief in people. As a result, the company has put in
place initiatives that seek to reward and retain the best
talent in the industry. M&M is also known for its
progressive
community
labour
management
development
sphere,
practices.
the
In
the
company
has
implemented several programs that have benefited the

people and institutions in its areas of operations.
Mahindra and Mahindra continues to be a solid

company
Company has registered a 28 % rise in its total vehicle
sales at 11,484 units for August 2004 as against 8,946
units in the corresponding period previous fiscal.
Mahindra City was granted special economic zone
(SEZ) which includes 100% tax holiday for the next 5
years and a 50% tax holiday for the next five years,
exemption from customs duty, central excise, service tax,
education cess, central sales tax, and all local taxes
levied by the state.
Company has set up four overseas operations in
Uruguay, Italy, Dubai and South Africa for sale of Scorpio
and Bolero models in these markets.
Enters in to segments such as retailing agri-inputs,
under its own brand, manage corn and soya as collateral
for banks, export fruit to European supermarkets.
The Farm Equipment Sector is the first Tractor
Company in the world to win the Deming Prize. Also, it is
the fourth company in India and the 10th in the world,
outside Japan, to win this prize.
Launched India's first tractor with turbo technology in

Patna, it is now eyeing to capture the tractor market in
the Bihar state in a big way.
Regained dominance as a leader in both utility vehicles
and tractors acquiring 50% market share.
Recent Developments &Future plans:
The companys long-term focus will continue to be
MUVs. With the difference between the passenger car
and the MUV segments fast disappearing, as the market
for MUVs is likely to see a spurt in the near future. The
company plans to be the worlds biggest tractor maker
by 2006, intends to overcome lack of similar size in
utility vehicles (UV) manufacture by being a niche player.
Their tractors were selling well in the US, giving M&M a
handsome market share in the 40-60 hp ranges in Texas.
M&M`s main US markets are in the South and South
West. The company is growing at rate of 80 per cent in
the US. Apart from US it also plans to market its tractors
in
Europe
through
sister-trading
firm
after
rescheduling plans to set up a subsidiary in the region.

The company will also launch 85-horse power (HP) and
100HP models within the next 18 months to meet the
specific
demand
for
high-powered
tractors
in
the
European and US markets. On the cards are a number of

improvements
on
the
Maxx,
based
on
customer
feedback. The company also plans to expand its appeal

with new variants. For the low-end personal segment,
M&M has introduced the Marshal Royale.
Marketing competencies:
Flanking its strategy to become a global player,
M&M is banking on its key brand attributes which
essentially signify three basic things: trust, reliability,
and value-for-money. The overall marketing game plan
involves a strategy around creating strong brands,
Customer Touch Build a database of Customers for
targeted
marketing,
Providing
unique
customer
experience - Unique showrooms which give an entirely

new buying experience are being planned and 40
dealerships would be converted into such modern
showrooms
during
the
current
year
and
Improve
Operational Efficiencies through outsourcing wherever

required, value engineering and strategic sourcing.
M&M has identified its 3 Weapons for the UV

market. Each brand will be positioned uniquely targeting
various spectrum of the market, the three brands Scorpio, Bolero and Maxx. These are the three brands,
which will be M&Ms future brand platform. Bolero will
be one hub, while Scorpio will be one up market hub.
The tractor segment where the company has 26% market
share mainly depends on the distribution channels of the
company.
Production and distribution:
The Companys manufacturing facilities are located
at Kandivli, Nashik, Igatpuri, Nagpur, Zaheerabad, Jaipur
and
Rudrapur.
Company
has
two
main
tractor
manufacturing plants located at Mumbai and Nagpur in

Maharashtra. Apart from these two main manufacturing
units, the Farm Equipment Sector has satellite plants
located at Rudrapur in Uttaranchal and Jaipur in
Rajasthan. The Company has a strong and extensive
dealer network of over 450 dealers for sales and service
of tractors and spare parts. 28 area offices, situated in
all the major cities and covering all the principal states,
manage this dealer network.
Employee Relations
Employee relations have been generally cordial at
all plants of the company. They have recently introduced
two new schemes, which are in the pipeline for its toplevel managers in order to bring balance in their work
and personal life. Under this scheme, company has
changed its leave policy wherein it has introduced a
compulsory 15-day leave for its middle and top-level
officials. Besides this, the company also proposes to
implement a compulsory early day-off at 5 pm at least
once a week. They want their employees to spend value
time with their family at home. They are trying to follow
ergonomic
rules
for
providing
efficient
working
atmosphere, which is being effectively implemented by

companies abroad. The company is also focusing on
training and development programmers for the career
mapping of its employees and provides them with a
meaningful professional career ahead. In addition, the
company also plans to implement various development
plans for training different level of employees. These
measures will surely help in retaining its efficient
contributors.
Board of directors:
Mr. Anand G Mahindra Vice-Chairman &Managing
Director
and
the
four
Executive
Directors
of
the
Company manage the Company. The Board reviews and

approves strategy and oversees the actions and results
of management to ensure that the long-term objectives
of enhancing stakeholder value are met. The Company
presently has seventeen Directors. The Vice-Chairman &
Managing Director and the four Executive Directors are
Whole-time
incurred
in
Directors.
the
Reimbursement
discharge
of
their
of
expenses
duties,
the
remuneration that these Directors would be entitled to

under the Companies Act, 1956 as Non-Executive
Directors. The Company has not entered into any
materially significant transactions with its Promoters,
Directors or the Management or relatives, etc. that may
have potential conflict with the interests of the Company
at large.
Dividend policy:
The Directors have recommended a dividend at 90%
(Rs.9 per share). The dividend, together with the tax on
distributed profit, will absorb a sum of Rs.117.79 crores
(previous year Rs.71.98 crores) and will be paid to those
shareholders whose names stand registered in the books
of the Company as on the book closure date.
INDUSTRY PROFILE:
The Indian automobile sector can be divided into
several segments: 2 & 3 wheelers, passenger cars,
commercial vehicles (Heavy CVs/ Medium CVs/Light
CVs), utility vehicles (UVs) and tractors. The industry is
highly capital intensive in nature. Though three-wheelers
and tractors have low barriers to entry in terms of
technology, other segments are capital and technology
intensive.
Costs
involved
in
branding,
distribution
network and spare parts availability increase entry

barriers.
With
the
Indian
market
moving
towards
complying with global standards, capital expenditure will

rise to attune to future safety regulations.
The industry is highly fragmented in nature. In the

last ten years, supply has outstripped demand, as
multinationals and domestic players have set up largescale manufacturing facilities to meet future needs. As a
result, there is an absence of pricing power with
manufacturers. Competition is expected to increase
further, as global majors are planning to enter India
either through direct investment or imports. Automobile
majors increase profitability by selling more units. As
number of units sold increases, average cost of selling
incremental unit comes down when demand recovers.
This is because the industry has a high fixed cost
component. This is the key reason why operating
efficiency through increased localization of components
and maximizing output per employee is of significance.
INDUSTRY GROWTH IN VARIOUS SEGMENTS
Passenger cars
: 17%
Utility vehicles
: 23%
Light commercial vehicles
: 12%
Heavy and multi commercial vehicles

3 wheelers
: 8%
: 23%
PORTER FIVE FORCES MODEL:

Supply: The Indian automobile market is plagued with
excess capacity.
Demand: Is largely cyclical in nature and dependent
upon economic growth and per capita income.
Seasonality is also a vital factor.
Barriers to entry: High capital costs, technology,
distribution network, and availability of auto
components.
Bargaining power of suppliers: Low, due to stiff
competition and its fragmented nature.
Bargaining power of customers: Very high due to
availability of options.
Competition: Except for heavy commercial vehicles
segment, competition is stiff. The competition is
expected to increase even further.
PROSPECT IN THE SECTOR:
The government spending on infrastructure in roads

and airports and higher GDP growth in the future could
benefit the auto sector in general. This combined with a
softer interest rate environment will play a vital role in
providing a fillip to demand. Utility vehicle segment is
expected to grow at around 8% in FY05.
Though the market size is expected to grow by 12%
-15%, competitive pressure could keep prices and
margins under control.
After three years in the wilderness, tractor industry
seems to have finally come out of the trough as it grew
by 10% during FY05. While good monsoon is a positive
for the sector, given the fact that the country has had
erratic rainfall in the past, volumes may not recover
sharply. But the longer-term picture is impressive in light
of poor mechanization levels in the country.
With an estimated 39% of CVs plying on the roads 10
years old, demand for HCVs is expected to grow by 8%
in FY05. Also adding the positives are higher crop
output, industrial sector growth and favorable interest
rate environment. While the industry is cyclical in
nature, we expect this factor to weaken in the medium
term arising out of structural changes in the industry.

The privatization of select state transport undertakings
and hiking of bus fares bodes well for the bus segment
as well.
The reduction in peak customs duty from 30% to 25% in
the budget will result in savings on the raw material
front as well. Since raw material costs account for
almost 50% of revenues of auto companies in general,
this is a positive. Also, steel prices have shown some
signs of softening and this is likely to have a positive
impact on the margins of the players.
We expect Indian auto majors to increase capital
expenditure budget at an average of 4%-5% of revenues
in FY05 as against around 2%-3% historically. This would
be towards product development and complying with
new environmental regulations. With MNCs willing to
sacrifice profitability for growth in the short-term, it has
become imperative for domestic players to spruce up
R&D efforts. At the same time, cash flow position is
much stronger now given that most manufacturers have
reduced working capital and debt. This would mean
financing bulk of incremental capex from internal

accruals.
Product Pricing:
The Indian automobiles are slowly shifting away
from the price sensitiveness towards the value addition
concept. Besides, even the SIAM has changed the norms
of classification from the previously followed Price basis
to the size/ length of the vehicle. Previously, the industry
was highly price sensitive and the sales were dependent
on price brackets. But the Indian customers perception
is slowly changing and moving towards the value
additions such as the size of the car, the style, the
comfort,
the
level
of
service
offered
by
the
manufacturers, the variants available in the category etc.

Even though the perception is changing, it is true that
still price plays an important role in the industry. The
role of price may be very negligible in some segments,
but in the other segments they are very much reactive to
the price fluctuations.
Thus, the some players in
segments concentrate on the value addition to achieve

competitive advantage, while the other players in the
segments use price as weapon along with their core
service. These players also offer discounts during festival

season to boost the sales.
Growth Drivers:
1.Economic growth: There is a direct co-relationship
between the per capita income of the people and the
demand for automobiles. Due to the increased business
activity, the economy supports the industry growth as
well
as
generates
employment.
The
demand
for
automobile is expected to grow with the improved

standard of living. Even though the economic growth
rate during the year was 8.056 percent, the future
average growth rate is expected to be around 6.5
percent without any economic reforms.
2.Income level: The level of income has got a direct
impact on the sales of the automobile. The rise in income
level, results in increase in the number of people
crossing the income threshold, thus changing the profile
of customer. The lifestyle of the people tends to change
automatically. With their increased buying power, they
would lookout for more comfort. For E.g. when the
income of a lower middle class family increases, say they
would like to shift from two-wheeler to buy a used car.

This in turn increases the demand for used car market
and a good resale value for the seller, thereby indirectly
increasing the sales of new cars. With the entry of MNCs
especially in the IT, ITES and BPO sector, the income
level and lifestyle, both are encouraging the younger
generation. This has also reduced the average age of a
car buyer.
3.Monsoons/ Rural economy: The monsoon is the
backbone of the Indian agriculture. In India, around 65
percent of the national income is contributed by the
agricultural sector and constitutes about 22 percent in
the GDP. The monsoons support the economic growth.
With the arrival of monsoons, the rural sector is
expected generate more jobs in the rural economy and
more income, thus increasing the purchasing power of
people.
Along
with
this,
even
other
industries
performance will boost up. Thus, the demand mainly for

utility vehicles increases with the better performance of
the rural sector.
4.Used car Segment:
The industry saw a growth of
around 30 percent in the used car segment during fiscal

year. The profile of an Indian Car buyer has been
changing due to the increasing purchasing power.
Besides, the used cars are becoming affordable due to
the reduced Equated Monthly Installments (EMI) and
increased repayment period. A more active lifestyle,
rising disposable income and lower cost of replacement
are guiding the customers to change their cars once
every three years now. Even though this market is
unorganized to a large extent, the organized used car
segment
is
slowly
growing
in
India.
With
the
manufacturers only coming forward to buy back their

models, has in turn helped the sales of new vehicles.
5.Availability of finance for both new and used
vehicles: With the ease in the availability of finance both
the new and used auto market segment has been
witnessing a growth. Previously, loans were provided
only for the new vehicles, but now the financial
institutions have come forward to offer the loans for used
vehicles too. With the increasing competition among the
finance providers, they are reducing the rates day by
day. Along with this, even some companies go beyond the

industry benchmark by financing up to seven year old
vehicles, thereby helping the growth of the used auto
segment.
The
interest
rate
has
almost
halved
in
comparison to the rates during 1998 and has touched as

low as 6.5 percent per annum. Auto manufacturers are
using this as a tool to increase the sales. They are having
tie-ups with the finance providers or floating their own
finance companies.
6.Infrastructure: Due to the increased investment in
infrastructural projects especially in the development
and improvement of road projects, the overall transport
business activities and the tourism is expected to grow,
which in turn creates a good demand for the utility
vehicles. Traffic on roads is growing at a rate of 7 to 10%
per annum while the vehicle population growth for the
past few years is of the order of 12% per annum. So
there
is
need
for
the
development
of
good
infrastructural roads for the growth of the automobile

industry. On the other side, poor road infrastructure and
traffic congestion can be a bottleneck in the growth of
vehicle industry.
7.Exports: With the global players looking at developing

vehicles that can be launched in multiple markets to
reduce their developmental cost and to reduce their
development costs, India is expected to increase its
exports. These giants are planning to use their Indian
facilities as hub for their worldwide operations. With this
move, General motors and Daimler Chrysler both have
their R & D center in Bangalore, which will have an
important role in International product development.
Toyota has plans to turn India into its lowest costmanufacturing center. MUL is also becoming a hub for
small cars for Suzuki Motor Corporation. The countrys
car sales and exports is expected to register around 8.5
lakh units by the fiscal 2006-07, which will mainly be
driven by compact and mid size car segment.
TABLE 2: COST ANALYSIS
As % of net sales
FY05
FY04
Raw Material
69.4
67.8
Staff Cost
5.0
5.9
Other expenditure 13.1
13.4
Source: India Infoline Research
Raw material cost pressures was faced by most of
the companies in the sector. For instance, raw material
cost as a percentage of net sales increased by 5.7
percentage points for Punjab Tractors, 5.2 percentage

points for BAL, 2.8 percentage points for ALL and 2.5
percentage points for Tata Motors.
Staff cost declined by 66bps and other expenditure
increased 41bps as a percentage of net sales. Punjab
Tractors and M&M enjoyed the benefit of a reduced staff
cost by 370bps and 230bps as a percentage of net sales.
Punjab Tractors maintained its margins in spite of a high
rise in raw material cost due to savings in staff cost and
other expenditure.
Major competitors and Market position:

Prior to 1980, Premier Automobiles Limited (PAL)
and Hindustan Motors (HM) had dominated the Indian
passenger car market. With the entry of Maruti Udyog
Limited (MUL) in 1980, the former players faced a tough
competition. Even though they were able to maintain
their volumes, their market share drastically reduced.
MUL dominated the passenger car market and faced no
competition till early 1990s. After the liberalization took
place, with the entry of foreign players, the problems
began for MUL. MUL started loosing its market share
slowly. During the initial stages of liberalization, since

MUL had depreciated its plant already by then, no player
in the industry was able to match MULs Maruti 800s
entry price. But still, MUL faced tough time in the upper
segment. With the launch of the models like Indica,
Santro
and
Matiz
by
Tata,
Hyundai
and
Daewoo
respectively, in the price range of 3- 4.5 lakhs, MULs

market share fell down sharply. But, however MUL is
still the market leader in the passenger car segment, and
was able to maintain its market share with its successful
models like Maruti 800, Esteem, Zen, Wagon R and Alto.
The overall market share of MUL fell from 70.2 percent
in 1995-96 to 58.1 percent during 1999-00, which
further declined to 51 percent as on February 2004. This
can be attributed to the increased competition from
Hyundai, Tata motors, Fiat, General motors, Hindustan
motors and Honda Siel.
In the A segment, MUL hold the monopoly position
with its 800 model and no other player has been able to
enter this segment. This model alone accounts for about
25 percent of the total sales of the passenger cars. In the
lower B segment, MUL holds the leadership position
with its three models in the segments viz Zen, Alto and
Wagon R, followed by Hyundai. But, model wise Santro
tops the segment with its 37 percent share in this
segment. There are three players in the upper B
segment, with Tata in the No.1 position. Its model Indica
accounts to 86 percent of the total sales in the segment.
MULs Esteem lost its leadership position to Tatas
Indigo, which has dominated the market with 31 percent
share. This ahs been followed by Hyundais percent and
22
percent
respectively.
Honda
Siel
occupies
the
dominant position with its City model. Toyotas Corolla

and Hondas Accord are dominant in the D & E segments
respectively Accent and Ford Ikon, whose market shares
are 27. With the launch of new models in MUVs and
SUVs, the utility vehicles sales are in an upward trend.
In the utilities segment Mahindra & Mahindra has been
able to maintain its leader position, followed by MUL,
which manufactures the models like omni and versa. The
launch of Qualis model has given a new look to the
industry. Even, it grabbed some share of passenger car
industry, since the customers perceived it as a big car,
which is even easy to drive, unlike other utility vehicles.
The launch of Mahindras SUV Scorpio also moved along
the
lines
of
Qualis,
dragging
the
passenger
car
customers. Watching the Scorpios success a new range

of SUVs were launched by other players in the industry.
The new SUV models, which are launched, recently are
Marutis
Jimny,
Fords
Endeavour,
Suzukis
Vitara,
Chevrolets Forester and Hyundais Terracan. With this

move by the players, the red line between the utilities
and the passenger car is slowly vanishing.
GRAPH
7:
SHARE
OF
PLAYERS
IN
THE
PASSENGER CAR SEGMENT AS ON FEB 2004-05
GRAPH 8: SHARE OF PLAYERS IN THE UTILITIES

SEGMENT AS ON FEB2004-05
Suppliers:
The Indian Auto component industry was started
with an aim of reducing the imports and being selfsufficient. But, over a period of time this industry has
achieved its objective along with being a good foreign
exchange
earner.
The
auto
component
industry
maintained a low but positive growth rate mainly due to

its export performance. This industry has maintained a
10 percent to 12 percent share of exports in its total
production.
Indias
automotive
component
industry
manufactures the entire range of parts required by the

domestic automobile industry and currently employs
about 250,000 persons. Auto component manufacturers
supply to two kinds of customers original equipment
manufacturers (OEM) and the replacement market. The
replacement market is characterized by the presence of
several
small-scale
suppliers
who
score
over
the
organized players in terms of excise duty exemptions and

lower overheads. The demand from the OEM market, on
the other hand, is dependent on the demand for new
vehicles. The strict reform by the Government with
respect to the indigenization programme has led the
OEMs to increase their indignation over the years. In
India, the auto component manufacturers are found
working
close
in
proximity
with
the
vehicle
manufacturers ensuring the just in time deliveries. The

trend of the auto component industry is to outsource
manufacturing assembly to component suppliers while
the OEM imperative is to cut costs, improve customer
responsiveness and build to order, which helps them to
build their own competitive advantage.
Government Regulations:
Even though the auto sector has been deregularised,
the government still vests the powers with itself to
influence the industry, in terms of controlling the import,
excise and customs duties and emission norms. After the
lifting of licensing in 1993, 16 ventures came up to
manufacture cars. The governments auto policy has
restricted import of cars and automotive vehicles in
completely built (CBU) form or in completely knocked
down (CKD) or in Semi knocked down (SKD) condition.
And the car manufacturers were issued licenses to
import components in CKD or SKD form only after
execution of the Memorandum of Understanding (MOU)
with the Director General Foreign trade (DGFT). 11
companies signed MOU and they have agreed to bring in
minimum foreign equity of US $ 50 mn, if a joint venture
is involved in majority foreign equity ownership. Along
with
this,
they
have
also
agreed
to
indigenize
components up to a minimum of 50 percent in the third

year and 70 percent in the fifth year. The government
has permitted for 100% foreign equity investments for
the manufacturing of automobiles and components. The
Government will review the automotive tariff structure
periodically to encourage demand, promote the growth

of the industry and prevent India from becoming a
dumping ground for international rejects. The incidence
of import tariff will be fixed in a manner so as to
facilitate development of manufacturing capabilities as
opposed
to
mere
assembly
without
giving
undue
protection, to ensure balanced transition to open trade,

to promote increased competition in the market and
enlarge
purchase
options
to
the
Indian
customer.
Appropriate measures including anti dumping duties will

be put in place to check dumping and unfair trade
practices. The conditions for import of new Completely
Built Units (CBUs) will be as per Public Notice issued by
the Director General Foreign Trade (DGFT) having
regard to environment and safety regulations. Used
vehicles imported into the country would have to meet
CMVR, environmental requirements as per Public Notice
issued by DGFT laying down specific standards and other
criteria for such imports. The governments policy allows
weighted tax deduction for the sponsored research and
in-house R&D expenditure and also excise duty rebate of
1% of the gross turnover. The government is also
encouraging auto design firms by providing them tax
breaks
and
concessional
duty.
The
government
is
supporting the development and introduction of vehicles

propelled by energy sources other than hydrocarbons by
promoting appropriate automotive technology. The road
tax on vehicles varies from state to state and a lifetime
road tax is in existence. The government controls the
import of automobiles and its components through its
EXIM policy. It has allowed the import of used cars with
some restrictions and they should confirm to the Central
Motor Vehicle Rules, (1989). Excise duty on (Basic +
SED) on cars and MUVs reduced from 32% to 24% and
for CKD and SKD kits reduced from 30% to 25%. The
government has announced 48 new road projects with an
estimated cost of Rs400bn and it a levy of 50 paisa on
per liter of diesel will be collected for the funding of the
above road projects. By the year 2010, the Indian safety
regulations will be completely aligned with the ECE
regulations like anti-theft, EMC, noise, front, side and
lateral collision, etc.
Emission: The need to reduce vehicular pollution has
led
to
emission
conjunction
with
control
through
increasingly
regulations
in
environment-friendly
technologies. It was only in 1991 that the first stage

emission norms came into force for petrol vehicles and in
1992 for diesel vehicles. From April 1995 mandatory
fitment of catalytic converters in new petrol passenger
cars sold in the four metros of Delhi, Calcutta, Mumbai
and Chennai along with supply of Unleaded Petrol (ULP)
was affected. Availability of ULP was further extended to
42 major cities and now it is available throughout the
country. From the year 2000, the passenger cars and
commercial vehicles are meeting Euro I equivalent India2000 norms. Euro II equivalent Bharat Stage II norms
are in force from 2001 in 4 metros of Delhi, Mumbai,
Chennai and Kolkata. Since India embarked on a formal
emission control regime only in 1991, there is a gap in
comparison with technologies available in the USA or
Europe. Currently, India is behind Euro norms by few
years, however, a beginning has been made, and
emission norms are being aligned with Euro standards
and vehicular technology is being accordingly upgraded.
Vehicle manufactures are also working towards bridging
the gap between Euro standards and Indian emission
norms. In this move, the government is making all efforts
to implement Euro III from 2005 effectively
WTO:
The WTO restrictions came into effect from 1st April
2001 and the Indian industries were feeling a sense of
threat
of
cheaper
imports.
However,
with
the
governments decision to hike up the imports tariffs, it

pulled
down
the
curtains
of
threat.
Besides,
the
government laid down many restrictions with regard to

imports, in order to save the country from being the
dumping ground for deteriorate foreign products. It
allowed the import of vehicles only from the country,
where they have been manufactured and they should
comply with the Central Motor Vehicle Rules, (CMVR,
1989) and import of new cars would be allowed through
only
through
Chennai.
The
few ports
viz Mumbai,
government
has
lifted
Kolkata
and
quantitative
Restrictions on imports of second-hand automobiles. The

government has decided to allow the entry of second
hand vehicles into the country only through the Mumbai
port. Used vehicles being imported should not be more
than three years old and the importing agency is
expected to submit a certificate issued by a testing
agency notified by the central government that the
second hand vehicle being imported has been tested
immediately before shipment and that the vehicle

conforms to all the regulations specified in Motor
Vehicles Act, 1988. The policy lays down that imported
automobiles should have a minimum residual life of five
years and the importer should ensure supply of spares
and service during this period. Import of left hand
vehicles was banned. The vehicles should necessarily
have
right-hand
steering
controls,
speedometer
indicating the speed in kilometers and a photometry of

the headlamps to suit 'keep-left' traffic. All these
restrictions were made in order to see to it that the
Indian customer gets the best vehicle from abroad. The
government made a policy, which totally bans the import
of cars whose engine capacity ranges from 1000 to
2500cc. All these steps were taken in order to limit the
imports only to the upper end segment.
Challenges:
Price is the factor to penetrate
automobile
market.
MNCs
bring
in
the Indian
with
them
enormous research and development skills, global

design
expertise
and
years
of
experience
in
manufacturing and selling automobiles in multiple

countries. Indian companies are taking small steps in
entering new markets with one or two offering
compared
to
global
companies.
Ability
to
meet
changing technology, customers needs and styling and

shortening product life cycle are the challenges that
Indian companies have to face.
Future Outlook:
The overall elements in the economy seem to be in
favor of growth of automobile industry. The passenger
car segment is expected to grow at around 8% during
the period 2004-07. Besides, the exports are also
expected to grow, which will be driven by the
increasing demand for compact cars. The GDP growth,
increasing income level, changing lifestyle of people,
availability of finance for both new and old cars with
low EMIs, new launches, new infrastructural projects
and export growth are the factors which fuel the
growth of the automobile industry. Now, with the
extension of services of finance providers to the rural
market, the car and utility vehicles sales are expected
to move up. The manufacturers are even concentrating

to sell their new launches including SUVs in the rural
market.
With a big success of SUV concept in India, almost
all the players in the market have come out with their
competitive models, thus hotting up the competition.
All the players are concentrating on cost cuts and
cost effective methods in order increase the profits of
their supply chain. The government has reduced the
excise duty on steel from previous 16 percent to 8
percent from first week of March. With this, the
automobile manufacturers are benefited with the
improved margins. Despite the excise duty cut, the
steel prices are on a bullish trend. To overcome this
problem, the manufacturers are in a thought of
replacing the steel components with aluminum, which
reduces their cost considerably.
If the rupee continues to appreciate against dollar
and depreciate against the won, yen and euro, then
the industrys profits will be squeezed, since it means
higher cost of import and lowered revenue. With the
companies establishing their R & D centers here, India
is expected to emerge as an International hub for

product
development.
However,
the
automotive
industry has to work closely with the dealers and

vendors to make the expected growth possible. The
automobile industry needs to aggressively benchmark
its products and processes with the Industry best both in India as well the worlds best. Only those
companies, which improve their processes regularly,
will survive. Further, Indian automobile Industry needs
to learn the best practices quickly to survive the threat
of WTO.
However Indian markets are very advanced in
using the state-of-the-art technology and Indian auto
component makers are becoming global sourcing
partners for auto makers. Most Indian players are
sourcing their component requirement from Indian
component
makers
only.
Any
paradigm
shift
in
technology with the emission norms and alternate

fuels will likely increase the technology gap between
the local companies and MNCs here. So a substantial
investment in R&D is necessary for domestic players.
Dieselization is going to be a future trend in the
Indian market with rising petrol prices and the
significant difference between petrol and diesel prices.

Currently, 20-25% diesel engines are in use in the
Indian market, and this is likely to grow up to 30-35%
in the medium term.
Another trend that might be seen in the near
future is rise in the utility vehicle sales. With
infrastructure facilities increasing more people prefer
the UVs for inter city travel. So, in the future small
and compact cars are likely to face competition from
UVs. As the economy is growing, the car industry will
see a 12-15% compounded annual growth rate in the
medium term. As long as India continues to grow
economically and the income of Indians continues to
rise, India will become a major automobile consumer
and producer.
1) Analyst Assumptions
2) WACC
3) Value Drivers
4 Income Statements
5) Balance Sheet
6) Dupont analysis
7) PE multiples.
TABLE 3: ASSUMPTIONS MADE FOR THE STUDY
Income statement
Sales growth
Operating Margins
Assumptio
ns
Marc Marc
h'
h'
05
06
10.00 10.00
%
%
9.28 10.00
%
%
Marc
h ' 07
9.00%
10.00
%
17.76
%
21.93
%
Cost of debt (Pre tax) 10.54
%
0.44
Debt to equity
51.15
Gross asets a % of
%
Sales
6.61
Depreciation as %
%
G.Assets
11.66
Dividend payout
%
12.81
Dividend Tax
%
Investments as a % of 22.74
%
total Sales
Current assets as a % 28.89
%
of sales
26.75
Current liabilities as
%
a % of sales
Other Income as a %
of investments
Effective Tax rate
15.00
%
22.00
%
7.50
%
0.35
50.00
%
7.00
%
12.00
%
12.50
%
22.00
%
29.00
%
26.00
%
15.00
%
22.00
%
7.50%
0.30
50.00
%
7.00%
12.00
%
12.50
%
22.00
%
29.00
%
26.00
%
TABLE 4: WEIGHTED AVERAGE COST OF CAPITAL

Risk free rate
Market rate of return
Beta
Interest Paid (Rs. Crore)
Market value of debt (Rs.
Crore)
Tax rate
Cost of debt
Cost of equity
WACC
7.00%
16.00%
1.02
51.58
934.82
37.00%
3.48%
16.18%
14.31%
TABLE 5: VALUE DRIVERS

2005
Market
Capitalisation
(Rs. Crore)
P/E (Trailing)
P/E
5417.6
0
P/B
3.23
14.24
200
4
2003
15.5 1.86
8
1.86 1.17
TABLE 6: INCOME STATEMENT

(Rs in Lakhs)
Income statement
Gross Sales
Less: Excise
Net Sales
Operating Income
Total Income
Less:
Raw Material +
Purchases
Employee Cost
Mar '
03
399675
.3
0
Mar '
04
44526
5
78549.
06
399675 36671
.26
5.9
Mar'
05
582924
.6
94378.
11
488546
.48
399675 36671 488546

.26
5.9
.48
211723 25002 335286
.1
1.8
.52
36991. 38129. 41745.
46
Selling Expenses
19982.
1
Administrative
2505.3
Expenses
2
Other Expenses
59545.
22
Provisions
1235.3
5
Miscellaneous expenses 15243.
27
Change in Stock (-)
6440.9
Inc./ (+) Dec.
4
Expenses Capitalised
Amortisation
Total Operating
Expenses
Operating Profit
Interest
Gross Profit
Depreciation
PBT before non op
and extra ord
Non Operaing Income
03
19539.
59
2955.1
2
18183.
99
4010.3
3
15283.
98
2357.9
9
39
18581.
6
3128.2
5
25795.
99
44.21
19171.
61
2143.2
3
1917.0 1577.5
77
5
486.95 6.76
1748.9
7
1070.9
5
356486 35288 443194
.68
5.9
.65
43188.
58
25275.
67
17912.
91
13938.
29
3974.6
2
5285.4
3
13830.
01
1150.3
9
12679.
62
16056.
7
3377.0
8
17314.
88
45351.
83
7693.2
7
37658.
56
16519.
9
21138.
66
19732.
81
Add: Extra Ord. Income 1728.5

8
Less: Extra Ord
0
Expenses
7531.4
PBT
7
Provision for Taxation
360
Deffered taxation
-2520
5765.6 2947.8
1
3
9691.4
7
14553. 34854.
41
3
9691.4
7
0
14553.
41
36539.
1
0
PAT
Prior Year (+)Inc./
(-)Exp.
Reported PAT
B/F
Profit available for
allocation
Proposed Equity
Dividend
Dividend Tax
Equity Dividend (%)

Eps
0
8.35
19703.
41
1230
3920
43819.
3
6350
2615
34854.
3
54709.
43
89563.
73
6380.6 10441.
4
48
817.55 1337.8
2
12.55
30.05
TABLE7: EXPECTED INCOME STATEMENT

Expected income
statement
Operating Income
March
' 05
488546
.48
Non Operating Income 19732.
81
443194
Operating expenses
.65
Operating Profit
Interest
Gross Profit
Depreciation
Other Non operating
exp
Tax
PAT
Dividends
Dividends Tax
March
' 06
537401
.13
17734.
24
483661
.02
March
' 07
585767
.23
19330.
32
527190
.51
45351.
83
7693.2
7
53740.
11
5274.7
6
58576.
72
5398.2
8
57391.
37
16519.
9
66199.
59
18943.
48
192.88
72508.
77
20636.
29
154.31
8965
10353.
91
11378.
00
34854.
43
10441.
48
1337.8
39167.
42
4700.0
9
587.51
45063.
81
5407.6
6
675.96
2
23075.
13
30.02
Retained Earnings
Expected EPS
33879.
82
33.74
38980.
20
38.82
TABLE 8: BALANCE SHEET
SOURCES OF
FUNDS
Owner's Fund
Equity Share
Capital
Share Application
Money
Preference Share
Capital
Reserves &
Surplus
Loan Funds
Secured Loans
Unsecured Loans
Deferred Tax
Liability (Net)
Total
USES OF FUNDS
March
' 03
March
' 04
March
' 05
1160.8
6
0
1160.8
6
0
1160.8
6
0
138800 145382 165902

.6
.23
.49
92415.
36
21569.
09
0
27096
7.54
92415.
36
21569.
09
17710.
01
28867
7.55
72980.
78
24458.
03
20325
27080
9.13
Fixed Assets
Gross Block
206803 243681 249879

.7
.94
.69
0
0
0
Less : Revaluation
Reserve
Less : Accumulated 87954.
Depreciation
5
Net Block
141377
.86
Capital Work-in34873.
progress
41
Intangible assets
0
Investments
80012.
79
Net Current Assets
Current Assets,
Loans & Advances
Less : Current
Liabilities &
Provisions
Total Net Current
Assets
Miscellaneous
expenses not
written
Total
102304
.08
141377
.86
5231.0
1
0
86226.
96
116582
.68
133297
.01
3841.1
173236
.64
105074
.24
161348
.02
109478
.25
150256
.79
130687
.3
68162.
4
0.00
51869.
78
3971.9
6
19569.
49
964.42
28810
7.8
28867
7.55
27080
9.13
2021.8
111115
.31
TABLE 9: RELATIVE P/E AND PEG RATIO

EP
S
05
Ashok
1.6
Leyland 3
Bajaj
33.
Tempo 55
Mahin
dra &
Mahin 30.
dra
04
Maruti
Udyog
18.
Ltd
77
Hindust
an
Motors
Tata
22.
Motors 96
(Source:
EP
S
(06
)
2.0
2
33.
74
32.
2
EP
S
(07
)
2.3
1
38.
82
40
EPS
EPS
Curre
PE
Growth( Growth( nt
P/E G
06)
07)
P/E
06 06
0.4
23.)3%
14.36%
11 6
-
12.32%
71.55%
15.06%
14.
16.65 06
1.1
4
24.22%
13.
06
0.1
8
11.
91
0.2
7
32. 39.
98
6
43.64%
20.07%
www.icicidirect.com)
EP
S
Ashok
Leylan
d
Bajaj
Tempo
Mahin
dra &
Mahin
dra
Maruti
Udyog
Ltd
Hindus
tan
Motors
Tata
Motors
TABLE
16.
28
33.
55
Debt
To
Equi
CEP ty
RO
S
E
24.4
1
0.48
57.6
4
0.3
30. 45.
04 32
Boo
k
valu
e
Curr per OP
ent
sha M(
Ratio re
%)
19.4
7
1.45
23.1
1
1.6
19.9
0.41 1
0.99
18.
15.1
76 38.4 0.08 6
1.17
5.0 116.
2
2.17 5.04 32
1.37
22. 35.2
22.7
96 6
0.35 1
0.72
10: RELATIVE RATIOS
P/
BV
NP
M(
%)
11.4 5.5
83.6 2
1
145.
4.5
15
7.67 2
152. 10.
18
47
6.8
8
123. 13.2 5.6

74
5
1
10.
4.32 0.47 98
101. 13.1 6.1
08
4
2
2.2
1.7
5
2.8
4
2.8
8
2.8
1.4
6
(Source: www.icicidirect.com)
TABLE 11: DUPONT ANALYSIS
Analysis
200
3
6.44
%
UP
UP
ROE
200
4 2005
9.27 19.6
%
4%
2004
UP
UP
2005
ROE
NPM
Assets
Turnover
UP
UP
Equity
DOWN
DOWN
Assets
NPM
Equity
Multiplier
Turnover
Multiplier
200 200 200
Sales
UP
UP
200 200 200
3
4
5
200 200 200
Equity to L.T
DOWN
DOWN
3
4
5
3
4
5
2.97 3.92 7.07
Debt
0.7 0.9 1.2
%
%
%
2.7 2.5 2.2
9
2
2
6
7
8
Mahindra and Mahindra Valuation:

Mahindra and Mahindra is one the leading names in
the Automotive and farm sector industry. The
companys
solid
reputation
and
brand
name
recognition give them a great advantage in their

field. The company has shown great improvement
and promise throughout its history, and expectations
are high as ever. Sales are expected to continue to
grow and the company will continue to flourish. This
is why we placed such an importance on sales for
our valuation model. We used our growth in sales to
help forecast many of the companys accounts. By
using sales growth, or a percentage of sales to
forecast we feel our numbers safely represent where
the company is headed. For the first year of our
forecast we have sales growth of 10%, and the
following four years have growth reducing by 1%
every year. We feel these numbers are accurate
gbowth
rates
due
to
companys
history.
The
company is very well developed and in the growth

and
expansion
of
their
lifecycle.
We
feel
the
company will continue to grow at a good pace. We

chose to forecast the five year period for a few
reasons. We feel the five year period is enough time

to avoid any questions or uncertainties as number of
new players entering the market. Through the
forecasting of the companys major financials we
were
able
to
find
important
value
driver
calculations.
We were able to find the Reported PAT, operating
Profit, Free Cash Flow of M&M Co. These are
important numbers needed to find our target stock
price. The WACC was a very important part of our
valuation model. To find the WACC we had to find
the cost of equity and debt for the company. In order
to find the cost of equity we used the CAPM
equation. This allowed us to find the companys cost
of equity of 16.18%. To find the cost of debt we had
to use interest and total debt funds of the company
and interest spread. This allowed us to find the
companys cost of debt to be 3.48%. With these
numbers we were then able to find companys WACC
of 14.31%. Last, to complete our valuation model we
had to find our target stock price. In order to find
our price we used the DCF Model. For the DCF
Model we use free cash flows to find the stock price
of Rs 517.22. We also used the relative P/E ratio

analysis as well as PEG ratio .To use the relative P/E
analysis;
we
found
comparable
companies
to
Mahindra, and their respective price to earning

ratios.
Financial performance
Half yearly results
The company managed to post a double digit growth
in its both top line and the bottom line for the six
months period ending 30th September during the
FY05. The sales of the company grew by a hopping
39% to Rs. 2,977.58 crore during the half-year
period in FY04 as against corresponding period of
the last years figure of Rs. 2142.22 crore which can
be attributed to the robust demand in the market
due
to
the
increased
economic
activity.
The
companys operating profit moved up by 11.69% to

Rs 348.09 crore during the period, as against
corresponding period of last years figure of Rs
199.24crore.The company made a major change in
the operating margin due to the following reasons
Strong fixed and variable Cost reductions (58 bps

reduction in Employee cost / revenues,
Value
engineering,
Strategic
Sourcing,
Vendor
meets), Price Increases and Increased Productivity.

But the bottom line of the company rose by 96% to
Rs.4911crore along with the net profit margin which
moved up from last years 6.42% to 4.45%.
RECOMMENDATION OF THE STOCK
Mahindra
&
Mahindra
Ltd
(M&M)
is
homegrown auto major and the flagship company of

the Mahindra group. The group has varied business
interests
ranging
from
automobiles,
farm
equipment, telecom, infrastructure development to

trade and financial services. M&M contributes
nearly 70% of the group's total turnover of Rs6, 200
crore.
This
front-runner
of
the
group
is
into
manufacture and marketing of utility vehicles (UVs),

light
commercial
vehicles
(LCVs)
and
farm
equipment ie tractors. For the nine-month period

ended December 2003, the UV and the LCV segment
contributed 73% of the total revenue while the farm

equipment segments added the balance 23%. The
automotive division manufactures and sells a wide
range
of
UVs
(Commander,
Armada,
Classic,
Voyager), passenger vehicles (Scorpio, Bolero) and

LCVs (the Cabking & FJ series of load carriers and
minibuses),
and
Champion,
3-wheeler
diesel
vehicle. Scorpio, a sports utility vehicle launched by

the company has been a huge success in the sports
utility vehicles segment.
At the current market price of Rs493, the
stock
trades
FY2006E
at
11.9x
earnings.
We
FY2005E
maintain
and
our
10.0x
buy
recommendation on the stock with a price

target of Rs 519.
HYPOTHESIS TESTING:
By hypothesis, we mean a statement about the
population parameters. Hypothesis testing deals
with a procedure, which accepts or rejects the
hypothesis. There are two types of hypothesis.
1. Null Hypothesis:
It states that there is no significant difference

between the market value and the intrinsic value
of the company. Ho denotes the null hypothesis.
2.
Alternate Hypothesis:
In case the null hypothesis is rejected, we
should have an alternate hypothesis to accept.

Alternate hypothesis is denoted by HA. This
shows there is difference between the market
value and intrinsic value of the company. It also
explains whether the company is under valued or
over valued.
BEST CASE SCENARIO
-POPT
WORST CASE SCENARIO -P PESS
MOST LIKELY SCENARIO -P ML
EP
POPT 4 * PML PPESS

6
( P)
POPT PPESS
6
MP EP
(P)
Based on the above calculations the expected price

comes to Rs 518.04 and the standard error comes to
(1.55). We use Z test and calculate Z value (- 5.84)
which is negative, this indicates that company price

is significantly under valued.
FINDINGS
Volumes set to grow:
Company expect a 19.10% CAGR in volumes
over the period FY2004-FY2006, as lower duties and
low interest rates on loans make cars affordable to
more people. As such, companies those are able to

introduce
cost-competitive
models
without
compromising on contemporary features will attract

buyers and be the biggest beneficiaries. Mahindra &
Mahindra (M&M) expect this stock to yield returns
of around 25% over the next 12 months.
Car density in India lowest across the world:
Car density ie., car ownership per 1000 people
is three in India. Even excluding the relatively large
mass of households whose incomes are well below
the threshold limit and therefore cannot afford
passenger vehicles, the country's penetration would
measure at 27 per thousand households, the lowest
in the world. Hence, there is huge headroom
available for growth.
With rising per capita income and low interest rates
making cars more affordable, we expect India's car
penetration to nearly double over the next three
years. Further, the widening reach of the car
manufacturer
through
the
distribution
network
would provide added fillip to the growth.

Automobile prices are falling on reduced excise
duties:
The reduction in basic excise duty from 32% to

24%, as part of the Union Budget 2005, has already
led to a 28% surge in domestic vehicle volumes .The
Kelkar Committee recommendations, which have
been accepted by the government, propose a further
cut to
16% over the next two years
Meanwhile, the cut in the peak customs duty on
components and the abolition of the 4% special
additional duty will reduce costs for manufacturers,
enabling them to cut prices further. This would also
boost demand growth.
Softer interest rates:
The declining interest regime has been a party
time not only for banks but also for automakers.
Interest rates are at their historical low levels at
present. Availability of cheap loans is the biggest
demand driver. We expect a rise in the number of
loan-financed purchases, aided by low interest rates
and expanding reach of lending companies. The
interest rates have come down from 15-17% in 199899 to around 10% this year.
It
is
not
only
affordability
but
also
the
availability of cheap finance that will provide a

further fillip to demand growth. The reach of car
financing banks is set grow three fold over next two
years. Almost all private banks are in an expansion
mode in their retail loans segment.
We expect Utility Vehicles to establish a viable
alternative to cars:
Going forward, we believe that trends will be
different--volume growth of UVs would match that of
passenger cars. The number of competitively priced
models is on the rise--take for instance M&M's
Scorpio,
General
Motors's
Tavera
(under
the
Chevrolet brand) and a new vehicle from Tata

Motors, expected to be launched in 2005.Growth
will accelerate by the increasing recognition of these
vehicles' superior ride comfort and luggage space
and therefore their proposition as a cost-competitive
alternative to mid-sized cars.
Operating margin to improve:
Popularity of its vehicles would allow M&M to

hike prices in case of rise in raw material prices,
thus protecting its operating profit margins. Last
year's 40% rise in steel prices would necessitate a
3.5-4% rise in prices of vehicles. M&M recently
raised prices of its UVs by 1.5-2%.
The
company
also
benefits
from
its
cost
economics. We expect its operating margins to

improve
by
4.80%
by
FY2006.
The
major
contributors to this hike would be savings in

employee costs (to the tune of 3%) and other
expenses (to the tune of 2.50%). However, rising
commodity prices will act as a drag on operating
margins, pulling it down by 0.70%.
Farm equipment segment no longer a drag:
The farm equipment segment, which mainly
includes tractors, is no longer a drag on the topline
of the company. Over the last two years, the tractor
industry has shown negative growth of 17%. In the
first half of FY2005, the industry showed a decline of
9%.
However, the fortunes of the division have

started turning for the better. In Q3FY2005, the
tractor industry grew by 18% on the back of a
strong performance of the monsoon last year. We
think
that
the
tractor
segment
will
actively
contribute to the revenues. The company has its

presence in all the HP segments from 25 HP to 45
HP and above, with more than 20% share in all
segments.
Return ratios to improve:
M&M
has
already
done
considerable
investments on product development and capacity

expansion over the past three years. We expect
RoCE to improve from 8.8% in FY2003 to 24.3% in
FY2006.
Declining capital expenditure would help the
company to increase its free cash flows. The
company is expected to retire almost 50% of the
debt by FY2006. This will reduce outgo on interest
costs, which will be reflected in the net profit. The
profit will almost double to 7.61% in FY2006 from
3.88% as of now.
Monsoon:
Below normal monsoons throughout the country

remains
cause
for
concern
for
tractor
manufacturers including M&M. In FY2005, tractor

volumes have increased by 39% to 47,804 units.
While monsoons remain a wild card for the
company, the increased rural and agricultural focus
of the new UPA government augurs well. The
targeted 30% increase in farm credit in FY2005 by
the government is already showing signs of assisting
demand
push.
SUGGESTIONS
Increasing steel price and other inputs are the
major concerns for the company from its
margins point of view. So company should have
check on the steel prices.
Increase in the inflation rates.
As the company is active in the overseas

markets, the rupee appreciation against the
foreign
currencies,
especially
dollar
would
adversely affect the topline of the company.

Increase in the fuel prices on account of rising
global crude oil prices would affect the domestic
demand especially for CVs.
Various new products launches have helped
retain customer focus on the new auto market,
so the company should focus on this particular
aspect.
Discounts, special editions and festive based
offers should be adopted to boost the sales of
the company.
Dieselization is going to be a future trend in the
Indian automobile market with rising petrol
prices and the significant difference between
petrol and diesel prices. As most of the company
products are diesel products, the company
should try to specialize in that particular
segment.
Another trend that might be seen in the near
future is rise in the utility vehicle sales. With
infrastructure facilities increasing more people

prefer the UVs for inter city travel. So company
should try to launch vehicles such as Scorpio
and many such products.
CONCLUSION
Fundamental analysis can be valuable, but it
should be approached with caution. If you are
reading research written by a sell-side analyst, it is
important to be familiar with the analyst behind the
report. We all have personal biases and every
analyst has some sort of bias. There is nothing
wrong with this and the research can still be of
great value.
The problem in valuation is not that there are
not enough models to value an asset; it is that there
are too many. Choosing the right model to use in
valuation is as critical to arriving at a reasonable
value as understanding how to use the model.
Analysts use a wide variety of models from simple to

the sophisticated. These models often make different
assumptions about pricing, but they do share some
common characteristics so in the study we tried to
use price-earning multiples and discounted cash
flow models of valuation.
In the automotive segment, M&M has a strong
presence in high-growth segments backed by pickups (Maxx range), Bolero and Scorpio models, threewheelers (Champion), and LCVs (load carrying as
well as passenger LCVs). The current government's
focus on agricultural growth (helping volume growth
in tractors and UVs) and continued focus on
infrastructure
development
(structural
growth
driver for LCVs, three-wheelers and UVs) are the

main demand drivers for M&M's product portfolio.
High operating leverage in tractors, cost reduction,
productivity gains and reduced interest costs will
drive a 34% CAGR in PAT over the period

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Fundamental Analysis Of Mahindra & Mahindra

Commercial Vehicle Segment are Ashok Leyland Ltd,

Fundamental Analysis Of Mahindra & Mahindra

into manufacturing agricultural

expanded its operations from automobiles and tractors

important sectors. The company has, over the years,

Mahindra & Mahindra Ltd (M&M) is a leading player in

Fundamental Analysis Of Mahindra & Mahindra

competition. At the industry level, there might be an

Fundamental Analysis Of Mahindra & Mahindra

markets are weak form efficient. By believing that prices

STRENGTHS AND WEAKNESS OF FUNDAMENTAL

investments based on long-term trends, very long-term.

companies that represent good value. Some of the most

Fundamental Analysis Of Mahindra & Mahindra

help uncover companies with valuable assets, a strong

understanding the business, fundamental analysis allows

Fundamental Analysis Of Mahindra & Mahindra

non-cyclical (consumer staples), cyclical (transportation)

themselves to categorize stocks within their relevant

Fundamental Analysis Of Mahindra & Mahindra

Fundamental analysis may offer excellent insights,

Fundamental Analysis Of Mahindra & Mahindra

models are almost always bullish, the only question is

handle the analyst community and release information.

Fundamental Analysis Of Mahindra & Mahindra

associated with valuation. Often that uncertainty comes

A PHILOSOPHICAL BASIS FOR VALUATION

Fundamental Analysis Of Mahindra & Mahindra

and rediscovered at some time in every generation and

Fundamental Analysis Of Mahindra & Mahindra

THE ROLE OF VALUATION

investment philosophy of the investor. Valuation plays a

Fundamental Analysis Of Mahindra & Mahindra

than do investors who pick stocks, and the focus is on

Fundamental Analysis Of Mahindra & Mahindra

firms, while others use multiples such as price/earnings

expressed by an investor who has been very successful

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(a) Investors who understand a business well are in a

Fundamental Analysis Of Mahindra & Mahindra

While valuation does not play much of a role in

resistance lines4 on price chart.

Information traders attempt to trade in advance of new

anticipate information announcements and gauge the

relationship between information and changes in value,

Fundamental Analysis Of Mahindra & Mahindra

or overvalued a company is and how its stock price

Fundamental Analysis Of Mahindra & Mahindra

marginal investors promptly exploit any inefficiencies,

exercise to determine why, stock sells for the price it

assumptions about growth and risk are implied in this

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Valuation in Acquisition Analysis

takeover valuation. First, the effects of synergy on the

management and restructuring the target firm will have

optimistic in estimating value, especially when the

Fundamental Analysis Of Mahindra & Mahindra

stockholders that the offer price is too low. Similarly, if

Valuation in Corporate Finance

maximization of firm value, and then the relationship

Understanding this relationship is key to making valueincreasing