Autos

India I Equities

Company Update
3 October 2013

Mahindra & Mahindra

Tractors surprise positively, PVs on expected lines; Buy
Key takeaways Passenger-vehicle sales sputtering. Higher prices of fuel, a greater degree of competition and a larger base kept Mahindra and Mahindras sales of PVs (incl. exports) on a weak and sputtering trend. They declined 19.5% yoy to 21,631 units. The ytd performance of UVs has also been contained, down 16.3% yoy. The company has decided to increase prices, effective 1 Oct13, in order to counter the higher prices of inputs. Pickups, three-wheelers decent. Sales of pickups increased by a marginal 2% yoy; ytd growth has come at 2.9% yoy. The CV-cycle slowdown has finally (in 2Q) begun to impact the LCV segment. The effect is now visible in the pickup range as well. Sales of three-wheeler were decent, at 6,403 units, 5.9% higher yoy (ytd sales were 8.4% lower). M&Ms overall auto division sales were ~10% lower yoy, but marked a noticeable 14% improvement from Aug13s lows. Tractors roar. Tractor sales surprised positively, growing 32.6% yoy, 88.1% mom, to 26,637 units, more than we expected. The company mentioned it expects the healthy growth to continue over the next few months. Ytd tractor sales were up 22.3%, while our residual growth estimate was 14.1%. A recovery in tractor demand would offset any negatives from the weak UV demand faced by M&M. Our take. UVs, the growth driver in FY13, are expected to record a lower ` growth rate in FY14, while pickups would maintain a decent pace. Tractors have registered a strong recovery in 1H; 2H should also be decent for the segment. Higher growth in the tractor segment would also result in a better operating performance for M&M. We maintain our Buy call, with a sum-ofparts-based target of `1,015. Risks. Downside: Delay in rural demand recovery, keener competition, diesel price hike, negatives on the merger of the truck business.
Volume data Sep 13 (units) Sep 13 yoy chg (%) mom chg (%) ytd FY13 yoy chg (%) Key data

Rating: Buy Target Price: `1,015 Share Price: `834

MM IN / MAHM.BO

52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding

`1026 / `742 19469 / 5764 US$20.0m `513.74bn / US$8.29bn 589m

Shareholding pattern (%)

Jun 13

Mar 13

Dec 12

Promoters - of which, Pledged Free Float - Foreign Institutions - Domestic Institutions - Public

25.35 8.10 74.65 35.82 15.37 23.46

25.18 8.18 74.82 35.01 15.54 25.27

25.30 8.85 74.70 32.86 16.40 25.44

Standalone Financials (YE Mar)

FY14e

FY15e

Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
Source: Anand Rathi Research

412,767 35,479 57.8 78.8 14.4 10.6 20.5 23.4 1.7 33.2

469,945 39,639 64.6 93.8 12.9 8.9 19.6 22.7 1.8 30.0

Passenger Vehicles 4-wheel pick-ups 3-wheeler CV Total Autos Tractors - Domestic Tractors - Exports Total Tractors Total Volumes
Source: Company, Anand Rathi Research

21,631 14,709 6,403 546 43,289 25,922 715 26,637 69,926

-19.5 2.0 5.9 -44.8 -10.5 37.1 -39.3 32.6 2.2

16.6 7.2 24.4 15.9 14.2 91.4 16.3 88.1 34.3

123,321 85,190 28,409 4,346 241,266 128,626 5,215 133,841 375,107

-16.3 2.9 -8.4 -29.0 -9.7 24.4 -13.9 22.3 -0.4

Rohan Korde
+9122 6626 6733 rohankorde@rathi.com

Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities

3 October 2013

M&M Tractors surprise positively, PVs on expected lines; Buy

Quick Glance Financials and Valuations

Fig 1 Income statement (`m)
Year-end: Mar FY11 FY12 FY13 FY14e FY15e

Fig 2 Balance sheet (`m)

Year-end: Mar FY11 FY12 FY13 FY14e FY15e

Net revenues Revenue growth (%) - Op. expenses EBIDTA EBITDA margin (%) - Interest expenses - Depreciation + Other income - Extraordinary items - Tax Effective tax rate (%) Reported Profit Adjusted Profit Adj. Profit growth (%) Adj. FDEPS (`/share) Adj. FDEPS growth (%)

233,877 26.2 200,060 33,817 14.5 725 4,139 4,342 -1,901 8,576 24.4 26,620 24,961 25.5 40.7 25.5

318,535 36.2 280,907 37,629 11.8 1,628 5,761 4,658 -2,647 8,755 23.3 28,789 26,169 4.8 42.6 4.8

404,412 27.0 357,469 46,943 11.6 1,912 7,108 5,492 -1,056 10,943 24.6 33,528 32,578 24.5 53.1 24.5

412,767 2.1 362,030 50,736 12.3 2,105 7,964 6,017 0 11,204 24.0 35,479 35,479 8.9 57.8 8.9

469,945 13.9 413,445 56,500 12.0 1,943 9,233 6,835 0 12,518 24.0 39,639 39,639 11.7 64.6 11.7

Share capital Reserves & surplus Net worth Total debt Def. tax liab. (net) Capital employed Net fixed assets Investments Net working capital Cash and bank balance Capital deployed No. of shares (m) Net debt Net debt / Equity WC turn days Book value (`/sh)

2,936 100,198 103,134 23,211 3,544 129,889 39,067 89,256 -4,580 6,146 129,890 587 -72,192 -0.7 -16 175.6

2,945 2,952 2,952 2,952 118,766 144,227 169,934 199,103 121,711 147,179 172,885 202,055 35,808 34,886 29,886 29,886 4,607 5,203 5,203 5,203 162,126 187,268 207,974 237,144 50,810 58,216 68,254 76,022 103,105 118,335 128,335 143,335 -3,671 -7,094 -3,416 -3,845 11,884 17,814 14,806 21,637 162,128 187,271 207,978 237,149 589 590 590 590 -79,181 -101,263 -113,255 -135,086 -0.7 -0.7 -0.7 -0.7 -16 -5 -9 -6 206.6 249.3 292.9 342.3

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Fig 3 Cash-flow statement (`m)

Year-end: Mar FY11 FY12 FY13 FY14e FY15e

Fig 4 Ratio analysis @ `834

Year-end: Mar FY11 FY12 FY13 FY14e FY15e

Reported Profit + Depreciation Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. cash & bank bal.

26,620 4,139 30,759 4,394 26,365 5,045 21,320 7,061 107 -5,591 25,276 -5,215 -11,286 17,432 6,146

28,789 5,761 34,550 909 33,641 18,881 14,760 7,675 9 12,597 13,848 104 5,738 6,146 11,885

33,528 7,108 40,636 -3,424 44,060 14,514 29,546 7,982 6 -922 15,230 -511 5,930 11,884 17,814

35,479 7,964 43,443 3,678 39,764 18,000 21,764 8,596 0 -5,000 10,000 1,177 -3,008 17,814 14,806

39,639 9,233 48,872 -429 49,301 17,000 32,301 9,210 0 0 15,000 1,260 6,831 14,806 21,637

Consolidated P/E (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Dividend yield (%) Dividend payout (%) Debt to equity (%) Standalone P/E (x) Cash P/E EV/sales Inventory days Receivables days Payables days Asset Turnover

17.6 4.7 15.0 24.2 26.2 1.4 32.5 0.2 20.5 17.1 1.8 27 20 63 1.8

16.3 4.0 13.7 21.5 22.4 1.5 33.2 0.3 19.6 15.6 1.3 27 23 56 1.9

13.6 3.3 10.9 22.1 24.1 1.6 27.9 0.2 15.7 12.5 1.0 22 20 51 2.1

10.6 2.8 10.0 20.5 23.4 1.7 27.5 0.2 14.4 11.4 0.9 25 22 53 1.9

8.9 2.4 8.9 19.6 22.7 1.8 26.4 0.1 12.9 10.2 0.8 25 22 53 1.9

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Fig 5 Standalone PE band

Fig 6 Standalone product mix

250,000

1,100 900

18.5x 16.0x
13.5x

200,000 150,000 100,000 50,000

700 500 300 100 Jan-10 Jan-11 Jan-12 Jan-13 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Jul-09 Jul-10 Jul-11 Jul-12 Oct-09 Oct-10 Oct-11 Oct-12 Jul-13 M&M

11.0x 8.5x 6.0x

0 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14

Oct-13

Automotive
Source: Company

Tractors

Source: Bloomberg, Anand Rathi Research

Anand Rathi Research

3 October 2013

M&M Tractors surprise positively, PVs on expected lines; Buy

Overall decent performance Overall, M&M put up a decent sales performance in Sep13, boosted by a strong performance from the farm Equipment Segment. Total sales were 69,926 units, up 2.2% yoy (and 34.3% mom). Ytd sales were lower marginally by 0.4% yoy; our residual growth estimate for 2HFY14 is 3%.
Fig 7 Month over month recovery in volumes
(Units) 80,000 70,000 60,000 50,000 40,000 Apr-11 Aug-11 Aug-12 Aug-13 Apr-12 Apr-13 Dec-11 Dec-12 40.0 20.0 0.0 -20.0 (%) 60.0 (Units) 80,000 70,000 60,000 50,000 40,000 Apr-11 Aug-11 Aug-12 Aug-13 (%) 35.0 20.0 44,000 25.0 32,000 20,000 Apr-11 Aug-11 Aug-12 Aug-13 Apr-12 Dec-11 Dec-12 Apr-13 0.0 -25.0 32,000 20,000 Apr-11 Aug-11 Apr-12 Aug-12 Apr-13 Dec-11 Dec-12 Aug-13 5.0 -10.0 -25.0 Apr-12 Dec-11 Dec-12 Apr-13 (%) 28.0 16.0 4.0 -8.0 -20.0

Volume
Source: Company

yoy growth (RHS)

Source: Company

Volume

mom growth (RHS)

Sales of PVs (incl. exports) maintained a weak trend on higher fuel prices, increased competition, and a higher base, a sales declined 19.5% yoy to 21,631 units. Ytd performance of UVs has also been subdued, down 16.3% yoy. The company has announced its decision to take a price increase effective from October 1 to combat higher input prices. Sales of pick-ups rose marginally by 2% yoy; ytd growth has been 2.9% yoy. The CV cycle slowdown finally started impacting the LCV segment in 2Q, and the effect is visible in the pick-up range as well. Three-wheeler sales were decent, at 6,403 units, 5.9% higher yoy (ytd sales are lower 8.4%). The overall auto sector sales were lower ~10% yoy, but marked an improvement of 14% from the lows of August 13.
Fig 8 Auto segment sales weak
(Units) 56,000 50.0 44,000 (%) 75.0 (Units) 56,000

Automotive
Source: Company

yoy growth (RHS)

Source: Company

Automotive

mom growth (RHS)

Tractor sales surprised positively, growing 32.6% yoy and 88.1% mom to 26,637 units, which was higher than expected. The company has mentioned that they expect healthy growth to continue over the next few months. Ytd tractor sales are up 22.3%, while our residual growth estimate is 14.1%. A recovery in tractor demand would offset any negatives from weak UV demand for M&M.

Anand Rathi Research

3 October 2013

M&M Tractors surprise positively, PVs on expected lines; Buy

Fig 9 Tractor sales robust

(Units) 30,000 25,000 20,000 15,000 10,000 Aug-11 Aug-12 Dec-11 Dec-12 Aug-13 Apr-11 Apr-12 Apr-13 0.0 -20.0 (%) 40.0 20.0 (Units) 30,000 25,000 20,000 15,000 10,000 Apr-11 Aug-11 Aug-12 Aug-13
`/sh

(%) 100.0 80.0 60.0 40.0 20.0 0.0 -20.0 -40.0 Apr-12 Dec-11 Dec-12 Apr-13

Tractors
Source: Company

yoy growth (RHS)

Source: Company

Tractors

mom growth (RHS)

Our take. UVs, the growth driver in FY13, are expected to record a lower growth rate in FY14, while pickups would maintain a decent pace. Tractors have registered a strong recovery in 1H; 2H should also be decent for the segment. Higher tractor segment growth would also result in a better operating performance for M&M. We maintain our Buy call, with a sum-ofparts-based target of `1,015.
Fig 10 Sum-of-parts Valuation
Sep 14

Core EPS Target PE multiple (x) Price Value of cash and investments Target Price
Source : Anand Rathi Research

58.3 12.5 728 287 1015

Risks. Downside: Delay in rural demand recovery, keener competition, diesel price hike, negatives on the merger of the truck business.

Anand Rathi Research

Appendix
Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter SEBI) and the analysts compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies
Rating and Target Price History (as of 1 October 2013)

1,100 1,000 900 800 700 600 500 400 300 200 100 Sep-08 Jan-08 May-08 1 2 3 4 5 6

M&M
10 9 7 8 11 12

1 2 3 4 5 6 7 8 9 10 11 12

Date 25-Feb-09 21-Apr-09 4-Jun-09 31-Jul-09 30-Oct-09 5-Apr-10 3-Nov-10 10-Feb-11 8-Oct-12 7-Dec-12 10-Apr-13 10-Jul-13

Rating Hold Hold Buy Buy Buy Buy Buy Buy Hold Hold Hold Hold

TP (`) 159 232 440 528 567 650 899 833 953 980 919 1,015

Share Price (`) 141 225 349 426 463 534 755 654 869 930 838 986

Sep-12

Sep-11

Sep-10

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Anand Rathi Ratings Definitions Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below: Ratings Guide Large Caps (>US$1bn) Mid/Small Caps (<US$1bn) Buy >15% >25% Hold 5-15% 5-25% Sell <5% <5%

Anand Rathi Research Ratings Distribution (as of 28 Feb 2013) Buy Anand Rathi Research stock coverage (184) 65% % who are investment banking clients 4%

May-09

May-10

May-11

May-12

Hold 27% 2%

May-13

Sep-09

Sep-13

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Sell 8% 0%

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