A project report on fundamental analysis of mahindra&mahindra company

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 tractors and
light commercial vehicles (LCVs). The 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

Babasabpatilfreepptmba.com 1


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 3-wheelers, 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 the company
on various valuation models.



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 movements. At the company level, fundamental analysis may involve
examination of financial data, management, business concept 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 stock’s 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. Time-consuming 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 worst-case
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 a 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 a 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 than on finding under- or
overvalued firms.

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, management-
consulting 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 value-increasing
decisions and to sensible financial restructuring.
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 firm’s 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 company’s 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 basic principles. There is undeniably uncertainty associated
with valuation. 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 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.



OBJECTIVES OF THE STUDY:
• To understand the macroeconomic variables those will an impact on
the company progress.
• To study the various 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 : One company from automobile sector.

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 company’s
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 a 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 a 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 long-term 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: 5 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, India’s 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 –dollar-trading 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

F 04 F 05
GDP Growth (%) 8.1 6.0 - 6.5
Fiscal Deficit (%) 4.8 4.4
Interest Rate Declined Hardenin
g
Inflation (Average) 5.3 6.5
%
Rupee - US Dollar Appreciate Steady
d
(Source: RBI, CMI)

GRAPH 2: SHOWING INDIA’S 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 India’s 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 year’s 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 2004-05 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 china’s 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 country’s
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 industry’s sales is positively
correlated with the economic growth with a co-relation of 0.96.

GRAPH 4: GDP AND AUTO SALES



Real GDP (Rs. '000 Crore)

No of units(in lakhs)
At 1993-94 price levels
GDP and Auto sales
1450 80
1400 75
1350 70
1300 65
60
1250 55
1200 50
1150 45
1100 40
1999- 2000- 2001- 2002- 2003-
00 01 02 03 04
GDP No of units (in lakhs)

(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 trucker’s strike has
affected the auto player’s production and distribution to certain extent.

GRAPH 5: SHOWING RUBBER PRICES



Interntional & Domestic Rubber Prices

1600 70,000
1400 60,000
1200 50,000
USD/Ton

Rs/Ton
40,000
1000
30,000
800 20,000
600 10,000
400 0
Mar- Jul-01 Nov- Apr- Aug- Dec- Apr- Aug- Dec- Apr-
01 01 02 02 02 03 03 03 04

USD/Ton Rs/Ton

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 user’s 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

Rs/Tonne Steel Prices
40,000
30,000
20,000
Apr-02

Apr-03

Apr-04
Oct-02

Oct-03

Oct-04
Jul-03
Jul-02

Jul-04
Jan-04
Jan-03
GC sheets

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%. Coke’s 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 India’s 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 agricultural tractors
and light commercial vehicles (LCVs). The 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 labour management practices. In the community development



sphere, 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 company’s 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 world’s 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 a 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 a 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&M’s 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 Company’s 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 top-level 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 Directors. Reimbursement of
expenses incurred in the discharge of their 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 large-scale 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 : 23%
3 wheelers : 8%

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 customer’s 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 manufacturer’s 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 a 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 cost-manufacturing center. MUL is also becoming
a hub for small cars for Suzuki Motor Corporation. The country’s 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 1990’s. 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 MUL’s Maruti 800’s 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, MUL’s 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. MUL’s Esteem lost its leadership position to Tata’s Indigo,
which has dominated the market with 31 percent share. This ahs been
followed by Hyundai’s percent and 22 percent respectively. Honda Siel
occupies the dominant position with its City model. Toyota’s Corolla and
Honda’s 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 Mahindra’s SUV Scorpio also
moved along the lines of Qualis, dragging the passenger car customers.
Watching the Scorpio’s success a new range of SUVs were launched by
other players in the industry. The new SUV models, which are launched,
recently are Maruti’s Jimny, Ford’s Endeavour, Suzuki’s Vitara, Chevrolet’s
Forester and Hyundai’s 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

Market Share: Companywise

16%
3% 3%
Maruti
9%
Hyundai
18% Ford
Tata Eng
Honda Siel
Others

51%



GRAPH 8: SHARE OF PLAYERS IN THE UTILITIES
SEGMENT AS ON FEB2004-05

Utilities market share

16% 1% 3%
Bajaj Tempo
34% Mah & mah
15%
Maruti Udyog
Telco
Toyota Kirloskar
Others
31%

Suppliers:
The Indian Auto component industry was started with an aim of
reducing the imports and being self-sufficient. 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. India’s 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
OEM’s 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 government’s 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 government’s 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
control through regulations in conjunction with increasingly 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 India-2000 norms.
Euro II equivalent Bharat Stage II norms are in force from 2001 in 4
metro’s 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 government’s 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 few ports viz Mumbai, Kolkata and Chennai. The
government has lifted 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,
a 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 the Indian automobile market.
MNCs bring in 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 EMI’s, 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 SUV’s 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 industry’s 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 world’s 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
Assumptions
Income statement March March March '
' 05 ' 06 07
Sales growth 10.00% 10.00% 9.00%
Operating Margins 9.28% 10.00% 10.00%
Other Income as a % of 17.76% 15.00% 15.00%
investments
Effective Tax rate 21.93% 22.00% 22.00%
Cost of debt (Pre tax) 10.54% 7.50% 7.50%
Debt to equity 0.44 0.35 0.30
Gross asets a % of Sales 51.15% 50.00% 50.00%
Depreciation as % G.Assets 6.61% 7.00% 7.00%
Dividend payout 11.66% 12.00% 12.00%
Dividend Tax 12.81% 12.50% 12.50%
Investments as a % of total 22.74% 22.00% 22.00%
Sales
Current assets as a % of sales 28.89% 29.00% 29.00%
Current liabilities as a % of 26.75% 26.00% 26.00%
sales

TABLE 4: WEIGHTED AVERAGE COST OF CAPITAL

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



TABLE 5: VALUE DRIVERS

2005 2004 2003
Market Capitalisation 5417.60
(Rs. Crore)
P/E (Trailing)
P/E 14.24 15.58 1.86
P/B 3.23 1.86 1.17

TABLE 6: INCOME STATEMENT (Rs in
Lakhs)
Income statement Mar ' 03 Mar ' 04 Mar' 05
Gross Sales 399675.3 445265 582924.6
Less: Excise 0 78549.0 94378.11
6
Net Sales 399675.2 366715. 488546.48
6 9
Operating Income
Total Income 399675.2 366715. 488546.48
6 9

Less:
Raw Material + Purchases 211723.1 250021. 335286.52
8
Employee Cost 36991.46 38129.0 41745.39
3
Selling Expenses 19982.1 19539.5 18581.6
9
Administrative Expenses 2505.32 2955.12 3128.25
Other Expenses 59545.22 18183.9 25795.99
9
Provisions 1235.35 4010.33 44.21


A project report on fundamental analysis of mahindra&mahindra company

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