Valuation of Mahindra & Mahindra Limited Assignment

Valuation of Mahindra & Mahindra Limited Assignment Words: 4950

The project comprises of valuation of Mahindra and Mahindra Ltd based on the Discounted Cash Flow Model and valuation of the equity based on the Dividend Growth Model.

This report outlines the major approaches along which the objective and quantitative valuation of the company, although a detailed discussion is far beyond its scope. The report is aimed at creating a direction into the learning of valuation models used in the industry. In the report, we have made certain assumptions, as our data collection resources are limited.

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Indian economic growth recovered strongly and relatively faster from the effects of the global financial crisis. The Government responded quickly to the crisis with a large stimulus package including reduction in indirect taxes and other fiscal and monetary measures to boost demand. As a result, industrial growth made rapid strides, registered a double digit increase in the second half of Financial Year 2010, as compared to nearly zero growth in the comparable period of Financial Year 2009. However, given the poor monsoon and rise in global commodity prices, inflation has risen sharply since November, 2009.

Containing inflation is likely to remain a key challenge for the Government and policymakers in the near term. IMF Forecast IMF World Economic Outlook ProjectionsPercentage Change, Year on Year| | April 2009 Projectionsfor 2009| April 2009 Projectionsfor 2010| World Output| -1. 30| 1. 90| Advanced Economies| -3. 80| 0. 00| India| 4. 50| 5. 60| Source: IMF World Economic Outlook, April 2010 India’s GDP Growth – F10 Projections Source: India Today, Feb 9, 2009 (For projections) Pragmatic Fiscal and Monetary Policies $ Bn FII Investments into India| F 10| F 09| Change| | 29. 05| (15. 02)| 293%|

Figures in brackets indicate outflow Source: RBI Non Food Credit Growth – F10 – 16. 9% IMF Forecast-Then ; Now Source: IMF World Economic Outlook, April 2010 INDUSTRY ANALYSIS Industry Structure The domestic Automotive Industry comprises of Multi Utility Vehicles (“MUVs”), which includes soft tops, hard tops and pick-ups, Light Commercial Vehicles (“LCVs”), three wheelers and C-segment cars. The domestic Tractor Industry is traditionally segmented by horsepower into the low horsepower of 20 hp – 30 hp segment, the middle segment of 30-40 hp and the higher segment of above 40 hp.

Indian Automotive Sector The global Automobile Industry was one of the worst affected by the financial crisis. Global Automobile production declined by 13. 5% in the year 2009, after a 3. 7% decline in the year 2008 (Source: OICA). Recognising the importance of the Automobile Industry to their economies and employment, many Governments in developed and emerging markets responded with measures to boost demand for Automobiles, especially through providing incentives for scrapping old vehicles (also known as “cash for clunker” Schemes) and by reducing taxes.

Helped by the Indian Government’s stimulus package (primarily comprising a 6% point reduction in excise duty) and multiple new product launches by manufacturers, the Indian Automobile Industry registered a healthy growth of 27. 9% in Financial Year 2010 as compared to a decline of 4. 8% in Financial Year 2009. Automobile Domestic Sales Trends| (Number of Vehicles)| Category| 2003-04| 2004-05| 2005-06| 2006-07| 2007-08| 2008-09| 009-10| Passenger Vehicles| 902,096| 1,061,572| 1,143,076| 1,379,979| 1,549,882| 1,552,703| 1,949,776| Commercial Vehicles| 260,114| 318,430| 351,041| 467,765| 490,494| 384,194| 531,395| Three Wheelers| 284,078| 307,862| 359,920| 403,910| 364,781| 349,727| 440,368| Two Wheelers| 5,364,249| 6,209,765| 7,052,391| 7,872,334| 7,249,278| 7,437,619| 9,371,231| Grand Total| 6,810,537| 7,897,629| 8,906,428| 10,123,988| 9,654,435| 9,724,243| 12,292,770| Source: Society of Indian Automobile Manufacturers Domestic industry sales| | F-08| F-09| F-10| F-09| F-10| Passenger vehicles| | 15,49,882| 15,52,703| 19,49,776| 0. %| 25. 6%| Cars| | 12,03,733| 12,20,475| 15,26,787| 1. 4%| 25. 1%| | *A1: Mini| 69,553| 49,383| 63,378| -29. 0%| 28. 3%| | A2: Compact| 8,59,197| 8,85,639| 11,28,272| 3. 1%| 27. 4%| | A3: Mid-size| 2,25,725| 2,41,683| 2,76,071| 7. 1%| 14. 2%| | A4: Executive| 42,195| 33,638| 46,346| -20. 3%| 37. 8%| | A5: Premium| 6,201| 9,093| 11,455| 46. 6%| 26. 0%| | A6: Luxury| 862| 1,093| 1,265| 26. 8%| 15. 7%| MPVs| | 1,00,865| 1,06,607| 1,50,256| 5. 7%| 40. 9%| UVs| | 2,45,284| 2,25,621| 2,72,733| -8. 0%| 20. 0%| Commercial vehicles| | 4,88,088| 3,84,194| 5,31,395| -21. %| 38. 3%| LCVs| | 2,15,912| 2,00,699| 2,86,337| -7. 0%| 42. 7%| | Passenger| 27,832| 26,952| 34,421| -3. 2%| 27. 7%| | Goods| 1,88,080| 1,73,747| 2,51,916| -7. 6%| 45. 0%| M&HCVs| | 2,74,582| 1,83,495| 2,45,058| -33. 2%| 33. 6%| | Passenger| 38,647| 34,892| 43,081| -9. 7%| 23. 5%| | Goods| 2,35,935| 1,48,603| 2,01,977| -37. 0%| 35. 9%| 3 Wheelers| | 3,64,781| 3,49,727| 4,40,368| -4. 1%| 25. 9%| | Passenger| 2,34,774| 2,68,463| 3,49,662| 14. 3%| 30. 2%| | Goods| 1,30,007| 81,264| 90,706| -37. 5%| 11. 6%| 2 Wheelers| | 96,54,435| 74,37,619| 93,71,231| -23. %| 26. 0%| | Scooters| 10,50,109| 11,48,007| 14,62,507| 9. 3%| 27. 4%| | Motorcycles| 57,68,342| 58,31,953| 73,41,139| 1. 1%| 25. 9%| | Mopeds| 4,13,759| 4,31,214| 5,64,584| 4. 2%| 30. 9%| | Electric| 17,068| 26,445| 3,001| 54. 9%| -88. 7%| Source: Society of Indian Automobile Manufacturers * Classification of A1, A2 etc as per Society of Indian Automobile Manufacturers Domestic Market Share for 2009-10| Passenger Vehicles| 15. 86| Commercial Vehicles| 4. 32| Three Wheelers| 3. 58| Two Wheelers| 76. 23| Source: Society of Indian Automobile Manufacturers

Within the overall Automobile Industry, the performance of different segments varied significantly during the year. The passenger car segment, which comprises of 78% of personal vehicles, reported a healthy growth of 25. 2%, led by the A2 segment which grew 27. 4%. The A4, A5 and A6 segments grew in average of 36-68% indicating the rising income levels, wealth and aspirations of the Indian consumers. The Utility Vehicle (“UV”) segment, in which the Company participates as a significant player, registered a growth of 21% as compared to a decline of 7. 6% in Financial Year 2009.

This growth was driven by increasing prosperity, development of infrastructure and growth in road travel. Interestingly, over 40% of the growth in UV industry volumes was contributed by Mahindra Xylo. The commercial vehicle industry registered a growth of 38. 8% during the year. The LCV market showed an increase of 42. 7% during the year. This was primarily driven by the small commercial vehicle segment (of less than 1 tonne payload), which grew by 47% (Source: M&M analysis). Medium and Heavy commercial vehicle (M&HCV) segment growth was 34. 4%.

Most of the growth in M&HCV sales came in the second half of the fiscal, partly due to a sharp rebound in industrial growth and partly due to a very low base in the corresponding period of the previous year. Indian Tractor Industry The Indian Tractor Industry, the world’s largest, grew by 31. 7% this year to touch 400,203 Tractors, compared with 303,921 Tractors sold in the corresponding period last year. This growth, despite a weak monsoon and a badly-affected Kharif crop this year, is because the dynamics of the rural economy has undergone some fundamental changes in recent times.

The Government has enhanced its support for the Agriculture Sector with increased levels of credit and better minimum support prices. Increased rural outlays including those under initiatives like the National Rural Employment Guarantee Scheme (“NREGS”) have helped improve rural incomes. New employment avenues have emerged and on an average, farm incomes now contribute to less than half of rural incomes. All this has resulted in higher rural liquidity, ensuring strong demand, despite the poor monsoon. Opportunities and threats

The Automotive Sector The current low level of vehicle ownership in India is 14 per 1,000 people as compared with the world average of 120 per 1,000 which implies a huge opportunity for growth of the Automobile Industry. India’s Automotive Sector is expected to be one of the fastest growing in the world over the next several years. However, the Company faces increasing competition from the presence of a large number of automotive companies in the country. The Automobile Industry is also a key contributor in economic growth.

The Indian Government’s Automotive Mission Plan 2016 (AMP 2016) envisages a doubling of Automotive Industry’s share of the Indian economy by 2016. However, stricter emission norms and an increased focus on public transportation may discourage use of automobiles as a means of personal transport. The increased investments in infrastructure and the consequent growth in industrial activity will lead to increased goods movement, resulting in a growing demand for commercial vehicles. The Company’s subsidiary, MNAL is set to launch a range of medium and heavy commercial vehicles over the next few years.

This will ensure the Company’s participation in this large and important segment of the Indian Automotive Industry. The Farm Equipment Sector The improvement in rural liquidity and increase in non-agriculture component of rural income is a strong positive since demand will have lesser sensitivity to a single deficient monsoon as compared to earlier periods. Food security and rural development remain high on the Government agenda with the Union Budget for 2010-2011 showing an increase in agriculture credit outlay by 15% to Rs. . 75 lakh crores; interest subvention on crop loans and various initiatives for rural development also have enhanced outlays. This, coupled with significantly low levels of mechanisation in Indian farms compared to the global average, indicates that there is significant growth potential for agricultural mechanisation in the country. M&M is well poised to leverage this opportunity. The Company may face increased competition from other tractor manufacturers.

Amongst the Company’s newly launched products, the Yuvraj 215 has the potential to grow significant volumes in the upcoming period by creating an entirely new category and catering to a large group of customers who had no affordable option thus far. M;M will use every opportunity to leverage synergy both within the Sector as well as with other Mahindra companies to create and improve channel efficiencies, develop cutting edge technologies and introduce a continuous pipeline of product up-gradations and new product introductions.

The Company’s strategy to make use of low cost manufacturing and sourcing bases in India and abroad will enhance its cost competitiveness. M&M has the will to achieve and go where no other has gone before, to travel the road less travelled and create its own pathways on its continued journey to success and excellence. COMPANY ANALYSIS Overview – Automotive Sector The Mahindra Group’s Automotive Sector is in the business of manufacturing and marketing utility vehicles and light commercial vehicles, including three-wheelers.

It is the market leader in utility vehicles in India since inception, and currently accounts for about half of India’s market for utility vehicles. Over the years, the Group has developed a large product portfolio catering to a diverse customer base spanning rural and semi-urban customers, defence requirements and luxurious urban utility vehicles. The Group exports its products to several countries in Europe, Africa, South America, South Asia and the Middle East.

The Automotive Sector continues to be a leader in the utility vehicle segment with a diverse portfolio that includes mass transport as well as new generation vehicles like Scorpio, Bolero and the recently launched Xylo. Overview – FES Farm Equipment Sector (FES) is a part of US $6. 3 billion Mahindra group, which is amongst the top 10 industrial houses in India. The group has a leading presence in key sectors of the Indian economy, including the financial services, trade, retail and logistics, automotive components, after-market, information technology and infrastructure development.

Mahindra has recently made an entry in the two-wheeler segment. FES has a subsidiary agricultural tractor manufacturing company in India known as Mahindra Gujarat Tractor Limited (MGTL). Corporate Governance M&M is committed to transparency in all its dealings and places high emphasis on business ethics. It has received the Best Governed Company 2009 Award from the Indian Merchants Chamber and the Asian Centre for Corporate Governance and Sustainability. During the year, CRISIL has re-affirmed the highest level rating, (Level 1) for Governance and Value Creation for the fourth year in a row.

This rating indicates that the capability of the Company with respect to wealth creation for all its stakeholders while adopting strong Corporate Governance practices is the highest. Finances M&M follows a prudent financial policy and aims to maintain optimum financial gearing at all times. The Company’s total Debt to Equity Ratio was 0. 37 as at 31stMarch, 2010. It has been rated by CRISIL, ICRA Limited (ICRA) and Credit Analysis ;Research Limited (CARE) for its banking facilities under Basel II norms.

During the year, CRISIL reaffirmed its rating of “AA” and revised its rating outlook to “AA/Stable” from “AA/Negative” for M;M’s Long Term Facilities under Basel II. During the year, ICRA also reaffirmed its rating of “LAA+” and also revised its rating outlook from “LAA+/ Negative” to” LAA+/Stable” and CARE has maintained a Long Term Rating of “CARE AA+”. CRISIL, ICRA and CARE have all reaffirmed the highest rating for M&M’s Short Term facilities. The Company’s Bankers continue to rate it as a prime customer and extend facilities/services at prime rates.

Automotive Sector-Mahindra & Mahindra In spite of the global financial crisis, India’s economic growth is steadily gaining momentum, led by a very encouraging re-bound in industrial activity during the year. The sharp increase in consumer durables and capital goods production this fiscal is particularly heartening as it indicates strengthening consumer and business confidence in the country. Agricultural GDP however, witnessed a decline this year due to the severe drought experienced during the kharif season.

Food prices as a consequence, rose alarmingly and food inflation in India has leapfrogged to challenging levels. In these challenging times, the Automotive and Farm Divisions of M;M have clocked one of their best performances reflecting in substantial growth in the net income of the Company by 40. 7% to Rs. 18,801 crores in the year under review from Rs. 13,364 crores in the Financial Year 2009. Consequent to this commendable performance, the PAT of the Company for the current year was Rs. 2,088 crores as against Rs. 37 crores for the previous year. Despite prolonged global challenges, the Indian economy showed signs of recovery in most of the Sectors in the Financial Year 2009-10. The risk appetite returned to financial markets as equities and debt raising gained momentum on the back of abundant liquidity. Even though things looked to be on an upswing, Corporates still faced the task of sustaining growth amidst volatilities as well as surging inflation. During the year, keeping in mind the volatile times, M;M continued to focus on managing cash efficiently.

Even while financing its ongoing modernisation and growth initiatives, it was ensured that the Company had abundant liquidity and did not need to tap the capital market and in fact used its strong liquidity at its disposal to repay foreign currency loans aggregating USD 94. 5 million without the need for refinancing. F10 M;M Outperformance Relative to Industry ; Source: SIAM and Industry Data Risks and Concerns: * Competition Given that the Indian Automobile Industry is expected to be one of the fastest growing markets in the world, many global players are significantly expanding their presence in India.

There is a concern that this will result in an ever increasing level of competition and intense pressure on the profit margins of all participants. Increased competition will lead to more frequent product launches in all industry segments and raise customer expectations in terms of performance, quality and technology, leading to higher costs. The Company views all of this as an opportunity and a challenge. * Regulations Stringent regulatory norms are being introduced to safeguard the environment, especially in the area of emissions.

Many of these measures are likely to result in an increase in costs which cannot always be passed on to customers through price increases in highly competitive market environment. In India, there is a large differential in taxes levied on small cars and larger vehicles. With the resulting lower price tag for small cars, many customers may opt to postpone large car purchases or buy a small car, which could impact the growth of UVs and the large car segment. * Fuel prices and alternate fuels Fuel prices are an important element of the overall cost of ownership for vehicles and tractors.

Almost all of the Company’s UV models are diesel powered. Diesel is priced lower than petrol. Any reduction in the price differential between petrol and diesel may increase the demand for petrol UVs at the expense of diesel UVs and will be disadvantageous to the Company. There is also a growing customer trend, as well as promotion by the Government, for vehicles powered by CNG, LPG and electric batteries, as well as hybrid power trains. To mitigate this risk, the Company has developed products powered by alternate energy such as CNG and electricity to provide lower polluting products.

The Company has also developed prototypes of a hybrid Scorpio and hydrogen powered three-wheeler as well as a bio-diesel powered Scorpio and Bolero, bio-diesel tractors and Gensets. * Alternate modes of transportation While the thrust by the Government on development of urban infrastructure would lead to overall economic development and improve living standards, it is also likely to provide alternate modes of transport for daily commuting such as Bus Rapid Transit System (“BRTS”), Metrorail, monorails, etc.

Also, growing urbanisation and vehicle population is leading to growing pollution, congestion and shortage of parking spaces in cities. These trends would likely discourage the use of automobiles as a means of personal transport, though, given the aspirations of Indian consumers, it may not have a significant impact on the demand for personal vehicles. * Financial market conditions Availability of credit and affordable interest rates are important facilitators for automobile and tractor sales. Any adverse change in these factors would impact demand.

However, several strategic tie-ups with multiple banks and financing companies alleviate this concern to some extent. For overseas operations, which are a key thrust area for the Company, rupee appreciation could be a risk for both the Sectors. However, M&M, as a practice, is taking appropriate steps to hedge currency exposure, thus limiting the impact of risk. * New projects To maintain and extend its competitive advantage, the Company has created significant new capacity at its new manufacturing plant at Chakan and is simultaneously investing in an aggressive new product development programme.

Success of the new product launches and attaining optimal and planned capacity utilisation of the new facility would have an important bearing on the future profitability. To mitigate the associated risks, The Company is taking great care in building new products around the customers’ needs and plans to bring in the incremental capacity from this new plant in phases. Farm Equipment Sector-Mahindra ; Mahindra Risks and Concerns: * Competition

The Indian domestic tractor market, the world’s largest, has seen a round of consolidation in the last few years, which includes the coming together of TAFE and Eicher and the acquisition of Punjab Tractors Limited by the Company. Having recorded a significant growth of over 30% in this financial year, the market is expected to see more competition among the existing domestic and international players. Increased competition will lead to more frequent product launches in all industry segments and raise customer expectations in terms of performance, quality and technology, leading to higher costs.

The Company views all of this as an opportunity and a challenge. * Regulations and alternative fuels Stringent regulatory norms are being introduced to safeguard the environment, especially in the areas of emissions. The Company is ahead of the curve, in terms of technology readiness, to meet the changes in norms. In addition, in the area of alternative fuels, The Company’s products both in tractors and gensets are compatible with bio-fuels, ensuring the customer can use such fuels, whenever their commercial availability improves. * Raw Materials

After a year of decline in raw material prices, Financial Year 2011 is expected to see a firming of prices in the international market. While this is an area of concern and will put pressure on margins, the Company will continue to focus on cost re-engineering to minimise the impact of this development. ASSUMPTIONS 1. Net sales revenue expected to grow at 16% each year The above chart shows the forecast by Society of Indian Automobile Manufacturers for the year 2010-2011. Statistical methods are used for forecasting, considering all the relevant demand drivers for each segment.

Models are prepared after considering an exhaustive list of relevant variables: – Macro-economic variables like GDP components, industrial production, inflation, interest rates, stock indices – Sector variables like Model launches, vehicle price, and inter-segment competition – Enablers/barriers like Finance availability and road connectivity etc. We think M;M will excel into this business through their latest products Gio and Maxximo and also through their JV with Navistar in the M;HCV segment.

The absence of product launches from competitors over the next one year coupled with new launches from M;M provides us confidence about the company maintaining, if not increasing, its market share. Government’s emphasis on the rural/agricultural sector, rise in MSPs, PTL merger and new launches in the domestic as well as exports markets will help M&M increase its market share too. 2. Operating expenses will increase by 17% and 15% respectively Margin growth will see some setback in 2010-11 as raw material prices have stiffened. This will be reflected by a rise of operating expenses by 17%.

However, with steel prices stabilizing over last few months, we feel there will be no further declines by 2012. Furthermore, the company renews raw material contracts on quarterly basis which enables the company to take advantage of the current situation of the commodity prices. Expansion of capacities at the company’s Chakan plant will offer operating leverage. Besides this, M;M has pricing power since the company is the market leader in its business. These factors will provide a positive touch to the margins, and the operating expenses will be restricted to increase at a 2% reduced rate.

We expect a fall in EBITDA margins in 2010-11 (from 15. 89% to 15. 16%), which will move up in 2011-12 (15. 89%) as commodity prices softens and capacity utilization rates improve with surge in sales demand. 3. Depreciation will increase by 10% The depreciation will see some increase due to the expansion of operations with the 2nd phase of Chakan manufacturing facility in Pune and New Research Valley at Chennai on cards. Apart from this due to the acquisition of Ssangyong the company is planning to set up a stand-alone assemble line in its recently inaugurated Chakan plant that will be dedicated for the manufacturing of Ssangyong models. . Other income will reduce by 10% Other income fell by 26% in the FY10 due to lower dividend income from subsidiaries and lower profit from the sale of the investment in the current year. This pattern is expected to be followed as M;M has been increasing its investments more and more in its own subsidiaries like its Australian subsidy GippsAero ($17. 6 mn). 5. Interest paid will increase by 45% The Interest paid is expected to increase due to extra borrowings to finance the capital expenditure in the first year. This may be attributed to acquiring of the South Korean firm Ssangyong and Restructuring of MRPL.

The price of the Ssangyong deal has been pegged by unconfirmed reports $ 480 million, and interest will decline 20% in the next year due to part-payback of borrowings. 6. Taxes will increase by 16% Assuming the tax rates remain the same the value of taxes paid would increase proportionate to revenue that is 16% 7. Interest received will decrease by 75% In the current financial year M;M’s investment in its own subsidiaries stood at 35 times of that in the other companies. Due to further plans of increased investment in subsidiaries, the interest received is expected to decrease further substantially. . Capital Expenditure to increase by 20% and reduce to half the next year M&M is planning to incur huge capital expenditure to the tune of Rs 70 billion over the next three years, which also includes investments towards JVs and subsidiaries (Rs 45 billion mainly at Chakan plant and Rs 25 billion for investments). In spite of such a huge capital expenditure, M&M will have free cash flows to the tune of Rs 10 – 20 billion and the company will have more than Rs 17 billion in cash and liquid investments. 9. WC change will increase positively due to more CA and reduced CL

The company has to increase its distribution networks, owing to the higher product portfolio of the company. This is only possible by introduction of new dealers, who may find it difficult to raise the needed inventory finance, which will lead to increased receivables in the company. 10. Investments to increase by 8% The investments of M&M would increase due to restructuring of the subsidiary Mahindra Renault Private Limited (MRPL). The restructuring of MRPL, envisages making it a wholly owned subsidiary of M&M. For this purpose it needs to buy 49% stake in MRPL. 1. The perpetual growth is equal to 10% The perpetual growth is taken equal to 10% that is equal to the economic growth of India in 2013, as projected by Morgan Stanley. 12. The period 2010-11 and 2011 – 12 are periods of high growth and then perpetual growth is assumed. 13. Cost of Debt The cost of debt has been calculated based on weighted average of debts O/S by assuming the rates pertaining to different classes of debt. (Please refer annexure) Company Valuation Based On Discounted Cash Flow Method Particulars| 2006-07| 2007-08| 2008-09| 2009-10| EPS| 22. 58| 23. 2| 15. 92| 37. 97| Debt/Equity| 0. 46| 0. 59| 0. 77| 0. 36| Dividend per share| 11. 5| 11. 5| 10| 9. 50| Dividend Payout| 0. 51| 0. 50| 0. 63| 0. 25| Price to Book Value| 1. 90| 1. 89| 1. 14| 1. 93| Price to Sales| 0. 56| 0. 58| 0. 37| 0. 47| Price to Cash Flow| -| 6. 11| 4. 78| 8. 57| P/E Ratio| 18. 1| 15. 6| 12. 5| 15. 3| The company’s outlook seems brighter with a steady growth in the ratios calculated. A higher EPS and lowering Debt equity ratio is encouraging signs for the company. Amount in Rs. (million)| | Particulars| | 2007-08| 2008-09| 2009-10| Expected 010-11 | Expected 2011-12| | Net Sales Revenue| | 1,15,384| 1,30,937| 1,86,021| 2,15,784| 2,50,310| Less| Operating Expenses| | 1,01,668| 1,20,011| 1,56,469| 1,83,069| 2,10,529| | EBDITA| | 13,716| 10,926| 29,552| 32,716| 39,781| Less| Depreciation ; Amortization| | 2,387| 2,915| 3,708| 4,079| 4,487| Add| Other Income| | 1,682| 2,704| 1,995| 1,796| 1,616| | EBIT| | 13,011| 10,715| 27,839| 30,432| 36,910| Less| Interest| | 242| 453| 278| 403| 322| | PBT| | 12,769| 10,262| 27,561| 30,029| 36,588| Less| Actual Tax CF| | 2,841| 1,800| 7,042| 8,141| 9,488| Add| Interest| | 242| 453| 278| 403| 322| NOPLAT| | 10,170| 8,915| 20,797| 22,291| 27,422| Add| Depreciation ; Amortization| | 2,387| 2,915| 3,708| 4,079| 4,487| | Cash Flow| | 12,557| 11,830| 24,505| 26,370| 31,909| Less| Capital Expenditure| | -7,171| -9,152| -9,607| -11,528| -5,764| Less| Change in Working Capital| | -2,472| 5,918| -45| 1,400| 4,300| Less| Change in Investments| | | -9,229| -5,312| -5,737| -6,196| Less| Other Investing activities| | | -1,030| 1,465| 0| 0| Less| Operating Activities| | | -3,233| -2,374| 0| 0| | Free Cash Flow| | 2,914| -4,896| 8,632| 10,504| 24,248|

PV of the firm for next 2 years| 8,789| | | 17,591| | | 26,379| Total| | | | Perpetual Value of the firm | 3,23,415| | | | | Total Value of the Firm| 3,49,794| | | | | COMPANY VALUATION BY DIVIDEND GROWTH MODEL | 2007| 2008| 2009| 2010| 2011| 2012| 2013| Dividend| 11. 50| 11. 50| 10. 00| 9. 50| 11. 02| 12. 8| 14. 32| Div Approx| 11. 50| 11. 50| 10. 00| 9. 50| 11| 13| 15. 00| Ke| 21| | | | | | | | | | | | | | | Value of the future dividend| | | | | 220| 250| 136. 36| PV of the future dividend| | | | | 181. 82| 170. 75| 76. 97| Share Price 429. 453| Market Capitalization – MCAP of Mahindra ; Mahindra Ltd No of Shares Outstanding (Million): 578. 43 Market Price/Share: Rs 627. 2/Share as on 2nd September 2010 MCAP (Million): Rs 3,62,331. 31 | | | | RESULTS COMPANY VALUATION BY Cash Flow Method: Share Price as per FCF : Rs. 618 Dividend Growth Model: Share price as per DGM: Rs. 430 Market Price of the firm: Rs. 627. 2 The discrepancy in the price of the Dividend Growth Model and Cash Flow Method can be attributed to the following – * Over or Understatement of Growth Rate * Misinterpreting the Penetration of the Market Area Income and Expense Forecasting Errors * Misrepresenting the investment period * Mid-year or beginning of the year discounting OTHER KEY CONCERNS The following risks and areas of concerns were identified by the group that could affect the valuations: Monsoon shortfall could impact volumes M;M derives ~25-26% of its revenues from Farm Equipment segment. Revenue in this segment comes from the rural areas, which is highly dependent upon monsoons. Lower-than-expected monsoons and poor agricultural production could adversely impact M;M’s volumes. Tractor demand has been low in FY10.

Too many businesses M&M group has diversified business and this requires strong management system. With more than 300 subsidiaries under its kitty, it becomes difficult for the management to keep abreast with the development in each of the subsidiaries. Intense competition in LCV Segment M&M faces competition in the LCV segment from Tata Motors’ Magic Iris and Ace, and LCVs manufactured through Ashok Leyland-Nissan JV. While M;M plans to counter competition with its newly launched Gio and Maxximo, competition in the segment could be higher than expected.

Slowdown in demand on tightening of credit policy and higher excise duty Increase of interest rates by the central bank could slowdown the growth of vehicle and tractor sales. The interest rate environment in India has been favourable for M;M since September 2008 and has resulted in robust growth in top-line in FY10. Any significant tightening of credit policy by the RBI to contain the inflation could have an adverse impact on the demand for vehicles and tractors. The recent 2% hike in excise duty on vehicles, with vehicle prices expected to increase by Rs. ,000-30,000 (depending upon model), could lead to the slowing down of auto demand in India. Pressure on margins expected on account of rising commodity prices Significant rise in commodity prices (steel, rubber, crude oil, etc) could lead to lower profitability. In FY09, rise in commodity prices coupled resulted in M;M’s margins reducing from 6. 4% in FY08 to 5. 2%. On the other hand, increase in crude oil prices could adversely impact the demand for M&M’s products as UVs typically have lower fuel efficiency. Key Triggers Leadership in UVs and new product launches to further improve growth in the segment – Doubling Chakan capacity to enable higher volumes – Turnaround in subsidiaries and new acquisitions Key Risks – Deficient monsoon, slowdown in demand and intense competition (in LCV segment) could affect volumes – Difficult to manage M;M’s complex structure as it has too many businesses – Lack of transparency in case of financial implication of Mahindra Satyam’s takeover could affect valuation of M;M. CONCLUSION M;M enjoys market leadership in the segments it operates in i. . UV’s (market share 55%+) and tractors (market share 40%+). It has a broad based product portfolio. The group has a presence in multiple business segments, providing it with a diversified revenue base. It is also present in high growth segments of the Indian economy such as IT, real estate, and financial services. These avenues could provide significant growth opportunities over the next few years. New launches are expected in the domestic and export market over the next 2 years in the UV segment with the help of Mahindra Navistar JV (sub 1 tonne category).

New acquisitions like REVA also could expand its product portfolio and increase its revenues. The Farm Equipment segment is also expected to grow driven by the continuance of pro-farmer policies by the government and low penetration of tractors in India. However, it has a limited presence in the fast growing passenger car segment as Utility Vehicles account for under 15% of total car sales. The company is present in several unrelated business segments. While these provide growth opportunities, excess diversification may pose longer-term challenges. Also rising commodity prices could hamper its profitability.

Lull in demand, deficit monsoon and intense competition (in LCV segment) could affect volumes. Despite these negatives, M&M is a good pick in the Auto space given the capacity expansion and new initiatives undertaken the company. It has a strong brand visibility, wide sales and service network and aggressive pricing strategy. Easy availability of financing and strong liquidity in the rural market could be the key drivers for future growth. ANNEXURE 1: COST OF EQUITY CALCULATION Cost of Equity is Calculated by the formula: Ke= Rf+ Beta(Rm-Rf) Rm| 20. 01| Rf| 7. 6| Beta| 1. 079966| | | | Cost of Equity| 21. 00238| ANNEXURE 2: COST OF DEBT CALCULATION Loan Funds| Rates(%)| Amount(Wt)in Rs Crores| Rates*Amt| Debentures/Bonds| 9| 600. 01| 5400. 09| Loans & Advances on Cash credit A/C from banks| 7. 5| 2. 44| 18. 3| Fixed Deposits| 8| 166. 22| 1329. 76| From Financial Institutions| 7. 5| 730. 35| 5477. 625| Foreign Currency loans from banks | 5| 501. 35| 2506. 75| Zero Coupon Convertible Bonds| 5| 850. 85| 4254. 25| Others| 6. 5| 28. 93| 188. 045| | | | 19174. 82| | | | | | | Weighted Average Kd| 6. 657577| ANNEXURE 3: WACC CALCULATION WACC=Ke*E +Kd*D(1-T)/E+D

Ke| 21| Kd | 6. 66| Kd (1-T)| 5. 2614| Equity| 7826. 27| Debt| 2880. 15| WACC| 0. 167661358| WACC= 16. 7% ANNEXURE 4: CALCULATION OF TAX | | 2007-08| 2008-09| 2009-10| Expected 2010-11 | Expected 2011-12| PBT| | 12769| 10262| 27561| 30029. 23| 36587. 61| Tax| | 2896| 1883| 7114| 8252. 24| 9572. 598| Tax Rate | | 22. 67993| 18. 34925| 25. 81184| 27. 48069| 26. 1635| Interest| | 242| 453| 278| 403| 322| tax on Interest| | 54. 88543| 83. 1221| 71. 7569| 110. 7747| 84. 37205| Approx Tax Paid| | 55| 83| 72| 111| 84| Tax considered in FCF statement| | 2841| 1800| 7042| 8141| 9488|

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