Q4FY2011 Update Sector: Auto BSE Sensex: 18,503

RESEARCH

MAHINDRA & MAHINDRA

SUBSIDIARY SHARING HURTS PROFIT
Mahindra & Mahindras (M&M) Q4FY11 results were 10% below our estimate with disappointing margins. Despite record volumes, margins slumped 320bps YoY to 12.7% as against our estimate of 14.8%. The decline in margin was attributable to increased purchase from 100% subsidiary MVML as well as a 22.6% sequential increase in employee costs. Net profit at Rs6.1bn was below our estimate of Rs6.7bn. On a volume high: The automotive division volumes during the quarter surpassed the 100k mark. Strong demand for Scorpio and Bolero led to a 12.6% growth in UVs to 47k units. Incremental volumes of Maxximmo were instrumental in a 14.9% growth in Pickup and SCV segment. Three wheeler volumes too were higher by 42%. Tractor volumes surged 26.5% to 59k units to round off an excellent year for the segment. Revenues, up 27.8% YoY, at Rs67.8bn were inline with estimates. The MVML effect on margins: Increased purchase of finished products from manufacturing subsidiary, MVML and higher employee expenses led to 300bps YoY decline in margins. On a proforma basis, consolidation of MVML with M&M standalone results would have boosted margins by 100bps. Employee expenses were higher due to ESOP amortisation of Rs260mn and higher provisioning for employee benefits. Net profits were higher 6.4% YoY at Rs6.1bn. Outlook: We have marginally increased our volume estimate for FY12 by 1%. We expect a volume growth of ~12% in FY12 for the automotive and tractor divisions. The growth in tractor division would be primarily driven by low power Yuvraj range of tractors. Going forward, part of the profitability of the automotive division will flow to MVML. Additionally, the change in stance on VAT by Maharashtra government would depress margins. We have scaled down our margin estimates by 220bps. FY12E earnings are lower by 13.3% at Rs41.6. We introduce FY13E earnings of Rs48. We have assigned a value of Rs34 to MVML. VALUATIONS AND RECOMMENDATION We rollover valuations to FY13. We reiterate our 'BUY' rating on the stock with a revised target price of Rs836 (earlier Rs910) based on the Sum of the Parts (SOTP) valuation.
PERFORMANCE (%)
1M Absolute Relative (10.8) (7.5)
Vineet Hetamasaria, CFA vineet.hetamasaria@pinc.co.in Nikhil Deshpande nikhil.deshpande@pinc.co.in Tasmai Anil Merchant tasmai.merchant@pinc.co.in

BUY CMP Rs672 TP Rs836

31 May 2011 +91-22-6618 6388

+91-22-6618 6339

+91-22-6618 6377

QUARTERLY SNAPSHOT

(Rs mn)

Quarter Ended

Sep-10 Dec-10 Mar-11 Net Sales YoY Gr. (%) EBITDA EBITDA mar. (%) Adj. Net Profit YoY Gr. (%) 53,617 19.5 8,482 15.8 7,293 24.6 61,211 36.1 9,238 15.1 6,172 49.2 67,782 27.8 8,619 12.7 6,066 6.4

Result Review

STOCK DATA
Market Cap Book Value per share Eq Shares O/S (F.V. Rs5) Free Float Avg Traded Value (6 mnths) 52 w eek High/Low Bloomberg Code Reuters Code Rs380bn Rs179.2 566mn 75.1% Rs1.4bn Rs826/535 MM IN MAHM.BO

3M 1.0 0.7

12M 17.4 8.2

KEY FINANCIALS (STANDALONE)

FY09 Net Sales YoY Gr.(%) EBITDA EBITDA Marg.(%) Adjusted Net Profit YoY Gr.(%) Dil. EPS (Rs) ROCE (%) RoE (%) PER (x) EV/Net sales (x) EV/EBDITA (x) 126,491 17.1 10,923 8.3 8,287 (11.7) 16.2 13.8 17.3 41.5 3.2 37.1 FY10 180,381 42.6 29,758 16.0 20,181 143.5 36.3 28.0 30.9 18.5 2.2 13.2 FY11P 227,553 26.2 34,562 14.7 25,447 26.1 44.3 28.5 28.0 15.2 1.8 11.6 FY12E 256,491 12.7 33,665 12.8 24,318 (4.4) 41.6 23.8 21.7 16.1 1.5 11.7

(Rs mn)

FY13E 289,810 13.0 38,576 13.0 28,053 15.4 48.0 24.2 21.4 14.0 1.3 9.8
1

RELATIVE PERFORMANCE
850 750 650 550 450 May -10 MM BSE

KEY RATIOS (STANDALONE)

Aug-10

Nov -10

Feb-11

May -11

PINC Research reports are also available on Reuters, Thomson Publishers and Bloomberg PINV <GO>

RESEARCH

Mahindra & Mahindra

Q4FY11 Performance Highlights Scorpio and Bolero continued to drive the volumes for M&M in the Utility Vehicle (UV) segment. Scorpio volumes were higher by 30% while Bolero grew by 22%. UV segment volumes were higher by 12.6% at 47k units. Incremental volumes from Maxximmo and Gio led to 14.9% growth in the pickup and SCV segments. Logan which is rebranded as Verito doubled its volumes to 3.3k units during Q4FY11. Three wheelers continued to do well, growing 42.1% YoY to 17.7k units. Auto exports were higher by 31.5%. The tractor division helped by good monsoons and increase in crop prices had an impressive growth of 26.5% to 59.4k units during the quarter. Automotive segment realisations were flat sequentially at Rs390k/unit. Automotive division revenues increased 27% YoY to Rs40bn. Blended realisations for the farm equipment segment were higher sequentially due to higher contribution from non-tractor business. The revenues for the segment increased 28% YoY to Rs28bn. Overall revenues at Rs68bn were inline with estimates. MVML Effect on Margins: The manufacturing of Maxximmo and Gio for M&M is done through 100% subsidiary Mahindra Vehicle Manufacturing (MVML), Chakan. MVML also contract manufactures MHCVs and LCVs for M&Ms JV with Navistar. Purchase of finished goods by M&M from MVML had a dilutive effect of 100bps on margins during the quarter. In FY11, the efffect on margins was 60bps. As per management, in FY12, MVML would account for ~25% of the total automotive production for M&M. We have considered the impact of MVML on standalone margins. Additionally we have valued MVML at 4x FY12 EV/EBITDA and assigned a value of Rs34 per share in M&M SOTP. Ssangyong Update: During the quarter M&M completed the acquisition of Ssangyong Korea. The company had a revenue of USD2bn in CY10. The management has guided for a revenue of USD3bn in CY11. However, the company is not expected to breakeven in the current year. Capex: Capex for the year was Rs13.5bn. Over the next three years, M&M is planning for a capex of Rs50bn and an investment of Rs20bn in group companies.

SOTP Valuation Table

Company name Mahindra & Mahindra (Standalone) Mahindra Vehicle Mfg. (MVML) Tech Mahindra Mahindra Holiday & Resorts M&M Financial Services Mahindra Lifespace Developers Mahindra & Mahindra (Treasury Stocks) Swaraj Engines Mahindra Forgings Mahindra Ugine Steel Mahindra Composites Mahindra Navistar SOTP Value (Rs) Source: PINC Research Valuation Method P/E EV/EBITDA CMP CMP CMP CMP CMP CMP CMP CMP CMP P/BV Per share (Rs) 44.8 8.6 70.5 43.0 64.2 13.2 59.6 2.9 5.8 1.4 1.3 6.8 Multiple 13 4.0 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 0.8 1.5 Value (Rs) 582 34 56 34 51 11 48 2 5 1 1 10 836 Remarks Core EPS for FY13E 4x EV/EBITDA Discount of 20% to CMP Discount of 20% to CMP Discount of 20% to CMP Discount of 20% to CMP Discount of 20% to CMP Discount of 20% to CMP Discount of 20% to CMP Discount of 20% to CMP Discount of 20% to CMP Book Value on 31st March 2010

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nikhil.deshpande@pinc.co.in

RESEARCH

Mahindra & Mahindra

Financial Table
(Rs m n) Net Sales EBIDTA EBIDTA margins % Other Income Interest Depreciation PBT Tax % PBT PAT Extra-ordinary Items (Net) Reported PAT Adjusted EPS (Rs) Mar-11 67,782 8,619 12.7 474 (158) 1,171 8,081 2,015 24.9 6,066 0 6,066 10.3 Mar-10 53,046 8,456 15.9 181 9 947 7,681 1,978 25.8 5,703 5,703 10.1 6.4 2.5 YoY(%) 27.8 1.9 -320bps 161.6 (1858.9) 23.6 5.2 1.9 -80bps 6.4 Dec-10 61,211 9,238 15.1 419 -27 1,022 8,662 2,490 28.7 6,172 1,175 7,347 10.5 (17.4) (1.7) QoQ(%) 10.7 (6.7) -240bps 13.2 484.1 14.6 (6.7) (19.1) -380bps (1.7) FY11 234,210 34,094 14.6 3,095 -503 4,139 33,554 8,400 25.0 25,154 1,467 26,621 42.8 FY10 185,296 29,926 16.2 895 278 3,708 26,835 7,133 26.6 19,702 1,175 20,878 36.0 27.5 19.0 YoY(%) 26.4 13.9 -160bps 245.9 (280.8) 11.6 25.0 17.8 -150bps 27.7

Vehicle Sales
(Unit) Autom otive Division Scorpio Xylo Other UVs UVs SCVs LCV MHCV Logan 3 Wheelers Dom estic Sales Exports Total Sales FES Division Domestic Sales Exports Total Tractors 56,293 3,095 59,388 44,104 2,859 46,963 27.6 8.3 26.5 55,488 3,120 58,608 1.5 (0.8) 1.3 201,786 11,868 213,654 165,346 9,160 * 174,506 22.0 29.6 22.4 12,372 7,666 26,640 46,678 31,616 2,254 548 3,289 17,671 102,056 5,562 107,618 9,512 7,543 24,418 41,473 27,521 2,641 0 1,443 12,434 85,512 4,229 89,741 30.1 1.6 9.1 12.6 14.9 (14.7) 127.9 42.1 19.3 31.5 19.9 11,900 7,831 22,329 42,060 27,137 2,143 196 2,851 15,806 90,193 5,020 95,213 4.0 (2.1) 19.3 11.0 16.5 5.2 179.6 15.4 11.8 13.2 10.8 13.0 43,439 32,057 93,670 169,166 105,626 10,273 795 10,009 62,142 358,011 19,042 377,053 36,426 28,032 86,169 150,627 76,581 9,828 0 5,332 44,344 286,712 11,565 298,277 19.3 14.4 8.7 12.3 37.9 4.5 87.7 40.1 24.9 64.7 26.4 Mar-11 Mar-10 YoY(%) Dec-10 QoQ(%) FY11 FY10 YoY(%)

(%) of Sales
% Material cost Staff cost Other Expenses EBITDA Mar-11 70.6 6.3 10.4 12.7 Mar-10 67.6 5.0 11.5 15.9 YoY (bps) 310 130 (110) (320) Dec-10 69.2 5.7 10.0 15.1 QoQ (bps) 140 60 30 (240) FY11 69.4 6.1 9.9 14.6 FY10 66.6 6.5 10.8 16.2 YoY (bps) 290 (40) (90) (160)

Per Vehicle
(Rs) Auto Realisations FES Realisations Blended Realisations Material cost Employee cost Other Expenses EBITDA
vineet.hetamasaria@pinc.co.in

Mar-11 390,022 471,418 421,227 297,565 26,479 42,031 55,152

Mar-10 363,535 463,416 399,987 270,286 20,066 46,129 63,506

YoY(%) 7.3 1.7 5.3 10.1 32.0 (8.9) (13.2)

Dec-10 385,634 450,157 411,831 284,987 23,382 39,917 63,545

QoQ(%) 1.1 4.7 2.3 4.4 13.2 5.3 (13.2)

FY11 380,991 458,535 411,162 285,518 24,922 39,411 61,311

FY10 372,380 454,720 404,910 269,500 26,189 46,284 62,938

YoY(%) 2.3 0.8 1.5 5.9 (4.8) (14.8) (2.6)

3

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RESEARCH

Mahindra & Mahindra

Segmental Performance
(Rs m n) Revenue Automotive Farm Equipment Others Total Less: Inter Segment Rev. Net Revenue EBIT Automotive Farm Equipment Others Total Less: Interest Less: Other unalloc.exp. Profit Before Tax EBIT Margin % Automotive Farm Equipment Others Total CAPITAL EMPLOYED Automotive Farm Equipment Others Total 27,548 10,315 296 38,159 20,755 11,147 362 32,263 32.7 (7.5) (18.0) 18.3 28,856 11,324 274 40,454 (4.5) (8.9) 8.1 (5.7) 27,548 10,315 296 38,159 20,755 11,147 362 32,263 32.7 (7.5) (18.0) 18.3 10.6 17.0 20.6 13.3 13.1 20.0 26.5 16.0 -250 bps -300 bps -580 bps -270 bps 12.3 18.5 2.9 14.9 -170 bps -150 bps 1780 bps -170 bps 12.1 17.7 9.7 14.4 12.0 18.9 16.6 15.0 10 bps -120 bps -690 bps -50 bps 4,182 4,756 60 8,997 (158) 1,075 8,080 4,065 4,358 53 8,476 9 786 7,681 2.9 9.1 12.1 6.1 (1858.9) 36.7 5.2 4,266 4,872 6 9,143 (27) (666) 9,836 (2.0) (2.4) 891.7 (1.6) 484.1 (261.3) (17.9) 16,441 17,342 95 33,879 (503) (348) 34,729 12,663 15,009 139 27,811 278 (210) 27,743 29.8 15.5 (31.5) 21.8 (280.8) 65.9 25.2 39,598 27,997 289 67,883 101 67,782 31,139 21,763 201 53,103 57 53,046 27.2 28.6 43.8 27.8 77.4 27.8 34,716 26,383 210 61,308 97 61,211 14.1 6.1 37.7 10.7 4.0 10.7 135,624 97,968 983 234,575 365 234,210 105,427 79,351 841 185,619 323 185,296 28.6 23.5 17.0 26.4 13.0 26.4 Mar-11 Mar-10 YoY(%) Dec-10 QoQ(%) FY11 FY10 YoY(%)

Revenue Mix Segmentwise

Automotiv e 100% Farm Equipment

Profit Mix Segmentwise (EBIT)

Automotiv e 100% Farm Equipment

75%

47

42

43

41

44

39

43

41

75%

52

55

52

53

46

53

53

50%

50%

25%

53

58

57

59

56

61

57

59

25%

48

45

48

47

54

47

47

0% Dec-09 Dec-10 Sep-09 Sep-10 Mar-10 Mar-11 Jun-09 Jun-10

0% Dec-09 Dec-10 Sep-09 Sep-10 Mar-10 Mar-11

4

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nikhil.deshpande@pinc.co.in

Jun-10

RESEARCH

Mahindra & Mahindra

Passenger Vehicle Sales

Scorpio + Xy lo 60 45 Units ('000s) 30 15 0 Dec-09 Dec-10 Sep-09 Sep-10 Mar-10 Mar-11 Jun-09 Jun-10 Other UVs Logan Grow th (%) 80 55 30 5 (20)

Commercial Vehicle Sales

Pick-up & SCVs 60 45 Units ('000s) (%) 30 15 0 Dec-09 Dec-10 Sep-09 Sep-10 Mar-10 Mar-11 Jun-09 Jun-10 LCV 3 Wheelers Grow th (%) 80 55 (%)
(%)
5

30 5

(20)

Tractor Sales
Tractor Volume 60 50 Units ('000s) 40 30 20 Dec-09 Dec-10 Sep-09 Sep-10 Mar-10 Mar-11 Jun-09 Jun-10 Grow th (%) 70 50 30 10 (10)

Revenue Trend
Net Sales (LHS) 80,000 60,000 Rs mn (%) 40,000 20,000 0 Dec-09 Dec-10 Sep-09 Sep-10 Mar-10 Mar-11 Jun-09 Jun-10 Sales grow th (RHS) 60 45 30 15 0

Operating Profit and Net Profit Trend

Op. profit (LHS) 10,000 7,500 Rs mn 5,000 2,500 0 Dec-09 Dec-10 Sep-09 Sep-10 Mar-10 Mar-11 Jun-09 Jun-10 PAT (LHS) Op. profit gr. (RHS) 180 135 90 45 0 (%)

Profitability Trend
OPM 18 NPM

15 12

(%)

9 6 Dec-09 Dec-10 Sep-09 Sep-10 Mar-10 Mar-11 Jun-09 Jun-10

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nikhil.deshpande@pinc.co.in

RESEARCH

Mahindra & Mahindra

Year Ended March (Figures in Rs mn)

Income Statem ent Net sales Growth (%) Operating profit Other operating income EBITDA Growth (%) Depreciation Other income EBIT Interest paid PBT (before E/o items) Tax prov ision E/o Income / (loss) Net profit Adjusted net profit Growth (%) Diluted EPS (Rs) Diluted EPS Growth (%)

FY09 126,491 17.1 6,476 4,446 10,923 (20.6) (2,915) 3,596 11,603 (1,341) 10,262 (1,975) 388 8,675 8,287 (11.7) 16.2 (17.6)

FY10 180,381 42.6 24,118 5,641 29,758 172.4 (3,708) 3,078 29,129 (1,569) 27,560 (7,379) 697 20,878 20,181 143.5 36.3 124.3

FY11P 227,553 26.2 27,178 7,384 34,562 16.1 (4,139) 4,307 34,730 (708) 34,022 (8,575) 1,175 26,622 25,447 26.1 44.3 21.8

FY12E 256,491 12.7 27,083 6,582 33,665 (2.6) (4,799) 4,759 33,625 (1,200) 32,425 (8,106) 24,318 24,318 (4.4) 41.6 (5.9)

FY13E 289,810 13.0 31,628 6,947 38,576 14.6 (5,424) 5,452 38,604 (1,200) 37,404 (9,351) 28,053 28,053 15.4 48.0 15.4

Cash Flow Statem ent Pre-tax profit Depreciation Total tax paid Chg in w orking capital Other operating activ ities Cash flow from oper. (a) Capital ex penditure Chg in inv estments Other inv esting activ ities Cash flow from inv. (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Chg in Minorities int. Div idend (incl. tax ) Other financing activ ities Cash flow from fin. (c) Net chg in cash (a+b+c)

FY09 10,650 4,846 (3,295) 9,185 21,386 (13,380) (15,714) (7,708) (0) 14,657 (3,211) 3,395 14,841 7,132

FY10 28,257 2,115 (4,578) (7,451) 18,343

FY11P 35,197 4,139 (8,165) 1,449 32,620

FY12E 32,425 4,799 (5,782) (527) 30,915 (5,314) 13,373 0 (798) (7,860) (8,657) 4,716

FY13E 37,404 5,424 (8,900) 1,046 34,974 (8,850) (5,000) 21,124 0 (2,000) (6,834) (8,834) 12,289

(6,999) (10,830) (12,228) (6,116) (29,273) 5,228 7,509 (11,726) (3,121) 3,798 (3,540) 1,688 (7,483) 6,167 (4,749) (6,238) (4,820) (12,302)

(29,094) (13,115) (40,103) (17,542) (13,850)

Balance Sheet Equity capital Reserves & surplus Shareholders' funds Preference Share Capital Total Debt Capital Employed Net fix ed assets Cash & Cash Eq. Net other Current Assets Inv estments Net Deferred Tax Assets Total assets

FY09 2,792 49,829 52,314 40,528 92,842 32,143 15,744 (13,093) 57,864 183 92,842

FY10 2,910 75,358 78,261 28,802 107,063 37,027 17,432 (8,974) 63,980 (2,403) 107,063

FY11P 3,260 99,936 103,190 24,053 127,243 43,719 5,130 (11,315) 93,253 (3,544) 127,243

FY12E 3,260 117,421 120,674 23,255 143,929 51,147 9,846 (11,677) 98,567 (3,954) 143,929

FY13E 3,260 138,639 141,893 21,255 163,148 54,574 22,135 (12,723) 103,567 (4,405) 163,148

Key Ratios EBITDA Mar. (%) Net margin (%) Div idend y ield (%) Net debt/Equity (x ) Net Working Capital (day s) Asset turnov er (x ) ROCE (%) RoE (%) EV/Net sales (x ) EV/EBITDA (x ) PER (x ) Price/Book (x )

FY09 8.3 6.6 0.8 0.5 (44) 1.0 13.8 17.3 3.2 37.1 41.5 6.6

FY10 16.0 11.2 1.5 0.1 (29) 1.2 28.0 30.9 2.2 13.2 18.5 4.8

FY11P 14.7 11.2 1.7 0.2 (35) 1.3 28.5 28.0 1.8 11.6 15.2 3.7

FY12E 12.8 9.5 1.5 0.1 (30) 1.2 23.8 21.7 1.5 11.7 16.1 3.3

FY13E 13.0 9.7 1.5 (0.0) (30) 1.2 24.2 21.4 1.3 9.8 14.0 2.8

P/E Band

EV/EBIDTA

1,250 1,000 750 500

10X

600,000
14X 11X

22X 18X 14X

450,000

300,000

8X 5X 2X

250 0 May -07

6X

150,000

May -08

May -09

May -10

May -11

0 May -07

May -08

May -09

May -10

May -11

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RESEARCH

T E A M
EQUITY DESK
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RESEARCH
Vineet Hetamasaria, CFA Nikhil Deshpande Tasmai Merchant Vinod Nair Ankit Babel Hitul Gutka Subramaniam Yadav Madhura Joshi Satish Mishra Urvashi Biyani Naveen Trivedi Rohit Kumar Anand Ronak Bakshi Namrata Sharma Sakshee Chhabra Bikash Bhalotia Harleen Babber Dipti Vijaywargi Sushant Dalmia, CFA Suman Memani Abhishek Kumar C Krishnamurthy
Head of Research, Auto, Cement Auto, Auto Ancillary, Cement Auto, Auto Ancillary, Cement Construction, Power, Capital Goods Capital Goods Power Construction Power Fertiliser, Natural Gas, Engineering Fertiliser, Natural Gas, Engineering FMCG IT Services IT Services Media Media Metals, Mining Metals, Mining Metals, Mining Pharma Real Estate, Mid caps Real Estate, Mid caps Technical Analyst

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SALES
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SINGAPORE DESK
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DIRECTORS
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