INSTITUTIONAL EQUITY RESEARCH Automobile: Tractorsbackoffice.phillipcapital.in/.../PC_-_Tractor... · tractor sales in India – whenever a below-10% monsoon year is followed by a

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

Automobile: Tractors

God + government support = Tractor market revival

INDIA | AUTOMOBILE | Sector Update

28 March 2016

We expect the tractor industry to make a recovery in FY17 with 10% growth based on likely normal monsoon. Our historical analysis suggests that whenever a deficient monsoon year is followed by normal monsoons, average industry growth has been 13%. The industry is still on a structurally strong footing when we compare the growth cycle in the US with India, look at state-wise penetration, and potential growth outlook. Both M&M and Escorts should benefit from a recovery while competitive pressure and discounting should cool off. We initiate coverage on Escorts with a BUY rating and a TP of Rs 190 – we believe it will be the biggest beneficiary of a rural recovery. We continue to rate M&M Neutral – its struggle in the UV business will lead to margin pressures.

Industry to make a recovery The Indian tractor industry has seen robust 8% CAGR in volumes over the last 43 years with two strong bouts of 10% CAGR in 1973-2000 (27 years) and 2003-2014 (11 years). However, unlike many other consumption stories in India, the growth path for tractors has not been linear. In the 43 years of sales data that we have analysed (1973-TD), the industry has posted a decline in 10. If history is to be believed, India has never seen three consecutive years of deficient rainfall in the last four decades. Also, fading El-Nino implies a very high probability of rainfall being normal in FY17. Our analysis suggests a very high correlation between monsoon and tractor sales in India; moreover, whenever a deficient monsoon year is followed by a normal monsoon year, growth in tractor sales has seen a sharp rebound (up 13% on an average), as better sentiment and low base helped. We see tractor industry growing 10% in FY17 and 13% in FY18.

MSP matters more than just monsoons While normal monsoon is a good-enough trigger for a recovery in rural and tractor demand, a sustained recovery primarily comes from an increase in farm incomes, which (in India) is highly dependent on minimum support prices (MSPs). Our analysis suggests that in periods following more than 10% MSP hikes, tractor demand has grown in double digits. However, when MSP hikes have been weak, this demand has remained weak (even in good monsoon years). While we do not expect 10% MSP hikes this year, we believe they will be better than the anaemic hikes of the last two years.

Structurally, enough room for growth Our analysis of historical trends of agri revolution, usage of tractors, and farm mechanisation in the USA shows the following: (1) US took over 40 years to shift from horses/mules to tractors for their farm power needs, (2) 84% of farmers in the USA didn’t own a tractor in 1920 – this number in India is 94% currently. While one could argue that penetration in India looks low due to highly fragmented land holdings, we believe that even after excluding marginal farmers, there is a huge scope of penetration growth (discussed in detail later).

Competitive scenario changing – Rise of Sonalika While M&M remains the undisputed leader and has largely maintained its market share, competition is heating up. During our recent channel checks (click here and here) we saw ample evidence of this – with Sonalika, Escorts, and TAFE aggressively launching new products or pricing products competitively. Our checks suggested that Sonalika (International Tractors) was the most aggressive player, pricing its products 10-15% below competition. It has recently doubled its capacity to 200,000 units and is eyeing ~20% market share in 2-3 years (tall task). While competitive activity is heightened currently; as demand picks up, it will cool off somewhat.

Initiate coverage on Escorts with a BUY; reiterate NEUTRAL on M&M Escorts: We initiate coverage with a BUY rating and a TP of Rs 190 – it will be the biggest

beneficiary of a tractor industry revival. M&M: Reiterate our Neutral view – its struggle in the UV business would lead to margin

pressures.

Companies Escorts Ltd.

Reco BUY

CMP, Rs Rs140

Target Price, Rs Rs190

Mahindra and Mahindra

Reco NEUTRAL

CMP, Rs Rs1249

Target Price, Rs Rs1350

Dhawal Doshi (+ 9122 6667 9769) [email protected] Nitesh Sharma, CFA (+ 9122 6667 9965) [email protected]

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_GV_Annual_Edition_-_Dec_2015_20151222181803.pdf

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_GV_Nov_15_issue_20151126074753.pdf


TRACTORS SECTOR UPDATE

Table of Contents

Industry to make a recovery… ·········································································· 3

Can recovery be sharp? ··················································································· 4

Structurally, enough room for growth still ······················································ 7

Competitive scenario changing – Rise of Sonalika ·········································· 11

Shift to higher HP continues ············································································ 12

Companies

Escorts Ltd ········································································································ 14

Mahindra & Mahindra ····················································································· 30



Industry to make a recovery… The Indian tractor industry has seen a robust 8% CAGR in volumes over the last 43 years with two strong bouts of 10% CAGR during 1973-2000 and 2003-2014. However, this growth path has not been linear – which has been the case with many other consumption stories in India. In the 43 years (1973-TD) of sales data that we analysed, the industry has posted a decline in 10 years. Of this, it has seen a severe fall in 2001-2003 and more recently in 2015-16. Historically, most of the demand slowdown was led by either poor monsoon or low MSP hikes – the two worst periods (including the recent slowdown) saw a combination of both weak rainfall and low MSP hikes.

Two bouts of strong growth… …but, recent trends have been worrying…

Source: Company, PhillipCapital India Research

…led by two years of weak monsoon and lower MSPs


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Rainfall (vs. normal) MSP Growth (Paddy) 45 yr avg MSP hike



Can recovery be sharp? India has never seen three consecutive years of deficient rainfall (in recorded history). Additionally, receding El-Nino implies a very high probability of rainfall being normal in FY17. Our analysis suggests a very high correlation between monsoon and tractor sales in India – whenever a below-10% monsoon year is followed by a normal monsoon year, growth in tractor sales has seen a sharp rebound – growing by an average 13.5% (average of seven instances – see chart below) mainly due to better sentiment and low base. In the last four decades, we have seen nine years of deficient monsoon (10% below normal), which led to declining tractor sales in eight of those years. A normal monsoon followed in seven proceeding years, all of which saw strong double-digit tractor growth. Based on early expectations of a normal monsoon, we see industry growth of 10% in FY17 – lower than historical averages. There is an upside risk to our estimates if demand recovery is sharp. We expect the industry to grow by 13% in FY18.

Tractor sales see a sharp rebound in the years following deficient monsoon


Likelihood of a normal monsoon is higher Strong El-Nino occurrence in the past two years was the principal cause for India receiving sub-normal (below 10%) monsoon in FY15-16. However, latest data from various agencies points at El Nino weakening by June 2016 (click here to read more in our rural note).

El Nino is likely to fall to the neutral zone by June 2016

Source: Australian Bureau of Meteorology, PhillipCapital India Research

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40% Tractor Growth Rainfall (vs. normal)

We expect tractor industry growth of 10% in FY17 and 13% in FY18

Very low probability of El-Nino in FY17

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Rural_Resurgence_-_Feb_2016_final_20160302163843.pdf



Forecasts suggest significant El Nino weakening by June

Source: CPC/IRI-USA, PhillipCapital India Research

As seen from the charts above, El Nino is expected to fall in the neutral zone from June 2016, which is indicative of a normal monsoon in India. This will support stronger tractor volume growth, majorly from H2FY17.

MSPs matters more than just monsoons While normal monsoon is a good enough trigger for a recovery in rural and tractor demand, a sustained recovery mainly comes from an increase in farm incomes, which is highly depended on minimum support prices (MSPs) in India. Analysis of data suggests that in periods with more than 10% MSP hikes, tractors have grown in double digits. However, when MSP hikes have been weak, tractor demand has remained weak, even in good monsoon years. We conclude that MSP growth is extremely critical for a sustained demand pull-back.

MSP growth more important for sustained high tractor growth (than monsoon)


MSP hikes could be better Minimum support prices have seen an average hike of ~10% from 1980s; however, FY14-16 saw anaemic growth of just 3%. This, coupled with two consecutive bad monsoons dealt a big blow to rural consumption and tractor sales. Our talks with various industry participants highlighted that in order to boost an otherwise dull rural economy, MSP hikes could be better than in recent history. This, along with normal monsoons augurs well for a sustained recovery in tractor sales. Government’s thrust on improving farm incomes through measures other than MSP will also play a strong role in the longer term industry growth.

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Tractor Growth MSP Growth (Paddy)

MSP growth is extremely critical for a sustained pull-back in tractor demand

Our discussion with industry participants highlighted that MSP growth can be better than in recent history – which will boost rural economy



MSP hikes have been very low recently


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Structurally, enough room for growth still India is the largest tractor market globally (by volumes). However don’t get carried away by this data – we are still way below the world average when it comes to penetration of tractors in terms of land holdings or power by area. Despite being a gigantic economy with high dependence on agriculture and rural economy, farm mechanisation still has a long way to go. This low penetration, coupled with the government’s focused endeavours to improve yields, leaves immense scope for tractors growth. Below, we look at (1) how US agri-economy transitioned from being dependent on horses/mules to tractors for farming needs, (2) how tractors help improve yields, and (3) key growth states ahead.

India is the largest market for tractors (FY14)... …yet it has the lowest penetration (per 1,000 ha.)

Source: Industry, PhillipCapital India Research

USA took 50 years to fully shift to tractors; India long way yet Our analysis of historical trends of the agri revolution, usage of tractors, and farm mechanisation in the USA suggest the following: (1) the US took over 40 years to totally shift from horses/mules to tractors for their farm power needs, and (2) 84% of farmers in USA didn’t own a tractor in 1920 – this number in India is 94%.

USA: % of tractors versus horses/mules used on farms

Source: University of California, PhillipCapital India Research

While it could be argued that penetration in India looks low due to highly fragmented land holdings, our counter-view is that even after excluding marginal farmers (having less than two hectares of land), there is huge scope for penetration growth (current penetration at 25%).

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Tractors Horses or Mules

India has one of lowest tractor penetrations in the world



India has a long way to go…

Source: Central Institute of Agricultural Engineering, PhillipCapital India Research

India has one of the lowest agricultural yields in the world currently, and increased mechanisation is one of the key ways to improve yields. As seen from the chart below, average yields in India are 30% lower than the world average. India’s yields are also inferior to most of its neighbouring countries.

India has one of the lowest yields in the world...

Source: FAI, Industry, PhillipCapital India Research

Analysis of state-wise data suggests that states with higher farm-power usage (kw/ha) – i.e., higher penetration of tractors, enjoy better and improving yields. As seen from the chart below, Punjab and Haryana have significantly higher yields compared with the rest of India. While irrigation has a major role to play in this, states like West Bengal, Uttar Pradesh, Andhra Pradesh, and Tamil Nadu have higher yields due to relatively higher tractor penetration.

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1972 1976 1982 1986 1992 1996 2001 2006 2015

Tractors (RHS) Draught animal

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Tractors and mechanisation: One way out (per 1,000 ha.)


Enough scope for increased penetration Penetration of tractors to total number of farm holdings remains very low at ~6%, and some would argue that these levels look low because of small and marginal farm holdings. However, our analysis suggests that penetration of tractors, even after removing marginal farm holdings (<2Ha), leaves huge scope for growth (only 25% of medium-sized farmers own a tractor). After some more digging into state-wise data, we conclude that western and southern states will take up the baton of growth, given lower penetration in these states.

Southern and western states to lead long-term growth

Source: Crisil, PhillipCapital India Research

As seen in the chart above, states which benefitted from the green revolution and the government’s push (Punjab, Haryana, Bihar, UP) have more or less matured with over 40% penetration (in non-marginal). Replacement demand will be a key driver of growth in these regions. With enough latent demand, matured regions should see strong growth in the near term as well.

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Tractor penetration (ex-marginal farmers) stand at 25%



Replacement demand will drive matured states… … which have started recovering of late


The contribution of northern and western states to industry volumes is large – Uttar Pradesh, Rajasthan, MP, Maharashtra, and Gujarat form over 57% of industry volumes. Our analysis suggests that northern states of Bihar, Haryana, UP, Punjab are well penetrated with (40-60% of farmers holding >2 ha of land). We expect growth in these states to be replacement-led. Southern and western states (Gujarat, Rajasthan, Karnataka, Maharashtra) have ample room for growth – with penetration at sub 20%.

Northern states are a large contributor to industry volumes


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Northern and western states form the bulk of tractor sales



Competitive scenario changing – Rise of Sonalika While M&M remains the undisputed leader and has largely maintained its market share, competition is heating up. During our recent channel checks (click here and here ) we found ample evidence of this with Sonalika, TAFE, and Escorts launching new products aggressively or pricing their products competitively. As seen from the charts below, Sonalika and TAFE have gained market share at the cost of smaller and marginal players while M&M has been able to hold the fort with stable market share over the last few years. Competitive activity is currently heightened as the market is weak – but as demand picks up, we expect the intensity to cool off.

M&M has largely maintained market share However, Sonalika and TAFE is a big threat


Sonalika: Currently a threat, but needs to realign strategy for sustainable growth Our checks suggest that Sonalika (International Tractors) is the most aggressive player – pricing its products 10-15% below competition. Despite such high competitive pricing, it continues to earn significantly higher margins vs. peers as seen from the chart below.

Sonalika makes highest EBIT margins, despite being very competitive


Innovative marketing strategies like tractor exchange (which Sonalika pioneered) and credit to farmers helped the company see a sharp jump in its market share over the past few years. However, most of this growth has come at the cost of lower dealer profitability. Our checks suggest that the average age of Sonalika’s dealers is 3-4 years, but this is not a sustainable trend over the longer term. With Sonalika recently doubling its capacity to 200,000 units, it should soon start focusing on dealer profitability in order to sustain volumes. It is targeting ~20% market share in two years from 12% currently (tall task).

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Escorts Force HMT Intl. Tractors

Johndeere Mahindra New Holland SAME DEUTZ

TAFE VST

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Escorts M&M Sonalika

Sonalika sells its tractors at 10-15% discount to competition

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_GV_Annual_Edition_-_Dec_2015_20151222181803.pdf

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_GV_Nov_15_issue_20151126074753.pdf



Shift to higher HP continues Preference for higher horsepower continues, with farmers preferring 41-50hp tractors given their versatility (farms and haulage). The segment has doubled its share to 46% in FY15 from 23% in FY10. Moreover, companies have been focusing on technology improvement with players launching 4WD tractors and anti-lift tractors – this is a new trend in India’s tractor history.

Market shifting towards 41-50HP...

Source: CRISIL, PhillipCapital India Research

Competition heating up in higher segments While M&M is a clear leader across segments, competition has been heating up in the higher HP segments. In the 51+ HP segment, M&M’s market share has halved to 26% from 61% between FY12-15. In the 31-40HP segment, it has lost 7% market share. M&M has been able to maintain its market share mainly because it has gained a large 13% share in the 41-50HP segment (only growing segment since FY10), which now forms over 46% of the market. This has helped the company maintain its share even with increasing competitive intensity. However, with most players focusing on introducing new products in 40+HP segments (our channel checks suggest), M&M is likely to face stiff competition.

Market share up to 30 HP Market share 31-40 HP


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Escorts Force HMT Sonalika Mahindra TAFE VST

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Escorts Sonalika Johndeere Mahindra New Holland TAFE

M&M has lost substantial market share in 51+HP and 31-40HP segments. However a 13% market share gain in the largest 41-50HP has helped it to increase its overall share



Market share 41-50 HP Market share 51 HP and above


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Escorts Sonalika Johndeere Mahindra New Holland SAME DEUTZ TAFE



Escorts Ltd. (ESC IN)

From legacy to growth

INDIA | AUTOMOBILES| Initiating Coverage

28 March 2016

We initiate on Escorts with a BUY rating and a TP of Rs 190, as we believe the company is now leaner, meaner, cleaner, and geared up to be a big beneficiary of a revival in tractor demand. Our thesis is based on: (1) recovery in tractor demand after two dull years (we see industry volume growth of 10%/13% in FY17/18), (2) totally revamped product portfolio with 15 new launches/refresh in the last two years, (3) focus on weak markets and marketing rejig, (4) cost-cutting initiatives bearing fruits, and (5) strong traction in its railways business. Escorts will double its profits between FY16-18, led by 12% revenue CAGR and 200bps margin expansion. We value the company at 10x FY18 earnings (adjusted for treasury stock). Tractor industry to bounce back We estimate tractors to mark a revival in FY16 (see 10%/13% industry growth in FY17/18). We estimate escorts to maintain its market share at 10.4% in FY18, despite strong competition led by: (1) strong new product launches/refresh (15 new products over the last two years), (2) focus on non-core southern regions to improve market share, (3) revamping distribution network (replacing dormant dealers with ones with deep-pockets), and (4) new branding and supply strategy with separate distribution from Powertrac and Farmtrac brands. We see 12% revenue CAGR in FY16-18. Leaner and meaner Escorts has lagged peers in terms of margins, mainly due to legacy costs. However, it has been taking consistent measures to control costs: (1) gave 350 blue-collar employees VRS in FY15, reducing headcount to 2,500 in FY15, (2) white-collar employees reduced to 1,700 from 2,200, (3) replaced permanent employees with contract workers, and (4) renegotiation of RM contracts, reduction in vendor base, and design changes to reduce costs – leading to over 300bps cost savings in its tractor division. This led to margins improving to 4.5% in FY16 from 4% in FY15, despite 15% fall in volumes. These cost-cutting measures, a revival in the market, and positive operating leverage should lead to margins improving further to 6.3% in FY18. Railways could be a sizeable opportunity Escorts is a leading player in rail braking systems, dempers and couplers; its key products include conventional and bogie-mounted brakes for freight coaches and conventional and axle-mounted brakes for passenger coaches. We expect Escorts to be a key beneficiary of the government’s thrust on railways and see its rolling stock rising 4-5x in the next 15 years. Historically, it has supplied conventional products such as brake blocks. Its technological breakthrough came in high-value and advanced products such as Bogie mounted brake system, axle-mounted brakes through in-house R&D, and technological tie-ups, which augurs well for our thesis. Valuations We expect Escorts to be the biggest beneficiary of a recovery in rural spends and the tractor industry. With new product launches, improved marketing effort, and better cost control, the company will double its earnings between FY16 and FY18. We initiate coverage with a BUY rating and a TP of Rs 190 (adjusted for treasury stock). We value the company at a 35% discount to M&M at 10x FY18 earnings and would consider rerating it if its efforts culminate into strong volume growth. Key risks include delayed recovery in tractor sales, and heavy bleeding in the construction and auto segment.

BUY (Maintain) CMP RS 140

TARGET RS 190 (+36%) COMPANY DATA

O/S SHARES (MN) : 123

MARKET CAP (RSBN) : 17

MARKET CAP (USDBN) : 0.3

52 - WK HI/LO (RS) : 189 / 102

LIQUIDITY 3M (USDMN) : 1.2

PAR VALUE (RS) : 10

SHARE HOLDING PATTERN, %

Dec 15 Sep 15 Jun 15

PROMOTERS : 43.0 43.0 43.0

FII / NRI : 8.5 8.3 7.6

FI / MF : 3.8 3.4 1.6

NON PRO : 18.4 19.9 18.2

PUBLIC & OTHERS : 26.4 25.4 29.6

PRICE PERFORMANCE, %

1MTH 3MTH 1YR

ABS 11.7 -16.1 6.7

REL TO BSE 3.5 -14.1 16.8

PRICE VS. SENSEX

Source: Phillip Capital India Research

KEY FINANCIALS

Rs mn FY16E FY17E FY18E

Net Sales 34,793 37,874 43,957

EBIDTA 1,512 1,947 2,750

Net Profit 872 1,200 1,714

EPS, Rs 7.3 10.1 14.4

PER, x 19.1 13.9 9.7

EV/EBIDTA, x 11.9 8.8 5.8

P/BV, x 0.9 0.8 0.8

ROE, % 4.7 6.1 8.1

Debt/Equity (%) 21.9 20.3 17.9

Source: PhillipCapital India Research Est.

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Escorts BSE Sensex


ESCORTS LTD. INITIATING COVERAGE

Tractor industry to bounce back As highlighted in the sections above, we estimate the tractor industry to make a revival in FY16 (see 10%/13% industry growth in FY17/18). We estimate Escorts to lose marginal market share at 10.1% in FY17, given that its strong markets are yet to turnaround meaningfully. However, it will regain 25bps share in FY18, driven by the recovery in the northern states. Its volumes will be aided by: (1) strong new product launches/refresh (15 new products over the last two years), (2) focus on non-core southern and western regions to improve market share, (3) revamping of distribution network (it is replacing dormant dealers with ones with deep pockets), and (4) new branding and supply strategy with separate distribution from Powertrac (PT) and Farmtrac (FT) brands.

Tractor industry volume and growth

Source: Crisil, PhillipCapital India Research Estimates

Sells majorly under two brands Escorts has two marquee brands Farmtrac (FT) and Powertrac (PT) with the former positioned as a premium product (5-10% vs. competition) with better features. Our checks suggest that FT enjoys a strong brand image and an extremely strong customer base. Powertrac products are more focused on fuel efficiency and cost of ownership; the company claims that its PT products deliver 10% better mileage (our checks with dealers corroborate this). Escorts also has other smaller brands namely Heritage (exports market), Ferrari Tractors (sub-30hp premium tractors for personal gardening), and Steeltrac Tractors (14HP tractor for row crops). FT and PT brands have separate strongholds – Farmtrac is extremely strong in matured states of Punjab, Haryana, Rajasthan and Western UP. Powertrac has a strong brand image in MP, UP, and Bihar. Our checks suggest that the company has been allocating separate dealerships for FT and PT brands in these markets. The entire southern market mostly remains un-catered by the company, where it is revamping its marketing strategy along with focus on new launches (highlighted in the section below).

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Escorts has two marquee brands Farmtrac and Powertrac with the former positioned as a premium product with better features and also priced at 5-10% premium vs. competition.

We expect Escorts to post a 12% CAGR in volumes over FY16-18



The company’s positioning is weak in over 40% of the market


Increasing thrust on R&D helped revamp product portfolio A strong focus on R&D, majorly from FY13, has helped the company to completely revamp its product portfolio over the past couple of years. It has not only refreshed its existing products, it also launched new products with advanced technologies – partly filling its product gaps. R&D as a % of sales has increased to 2.2% in FY15 from 1% in FY12.

Consistently increased focus on R&D


Last two years have seen the company launch 15 new products / refresh, revamping almost its entire product portfolio. These new products currently account for 66% of its total volumes sold – this number is likely to improve as the tractor market recovery gathers pace. Product refreshes have seen older models making way for newer and lighter tractors, while retaining most features. This has benefitted the company with improving gross margins. Among new products, Escorts has launched some in a new category such as anti-lift tractors – focused on haulage customers and 4x4 tractors. Our checks with dealers showed that product quality and features are better than competition in most cases; fuel efficiency is also up to 10% more than peers. While the current ALT line up is in

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R&D as a % of sales has increased from 1% in FY12 to 2.2% in FY15

Last two years have seen the company launch 15 new products / refreshes – thereby revamping almost its entire product portfolio



the 31-40HP segment, the company has started test marketing its 41-50HP ALT. Nationwide launch is seen in the coming 2-3 months. This will significantly bolster volumes, given that the 41-50HP segment is the largest and fastest growing.

Recent product launches (new + refreshed) from Escorts’ stable


We believe this total revamp will not only help Escorts to save its turf, but also garner market share as market revives and word of mouth publicity helps. It expects to increase its market share to 18-20% in the next five years (10% currently); however, we believe this will be a tall task. Marketing strategy revamped in strong states – to help in competitive markets Escorts is a strong player in the northern region with five northern states contributing to 72% of its volumes vs. 48% for the industry. Escorts dominates with over 15% market share in these states (vs. its nationwide share of 10%). Within the northern region, its FT brand has a strong presence the north-western states, and PT in north-eastern states. In order to bolster both brands, it has started creating separate distribution channels in the northern region (increasing the service area of an existing dealer (for let’s say PT brand) and appointing another dealer (let’s say FT brand), which the existing dealer was not able to push).

Escorts’ volume contribution and MS in its strong states


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Escorts is a strong player in the northern region with five northern states contributing over 72% of its volumes vs. 48% for the industry



Focused marketing and rejig could drive incremental share in weaker states Escorts has a weak positioning in key high-growth western and southern states of Andhra, Gujarat, Karnataka, and Maharashtra. The company has an anaemic market share of sub 3% in these states – as seen from the chart below. Our checks highlight that the key reason for its weak positioning is old small dealers who are weak, unable to invest money in the business, do not indulge in on-the-ground marketing and awareness activities, and are demotivated due to lower ROI’s.

Escorts’ volume contribution and MS in its weak states


To address the issue, Escorts has undertaken a focused marketing approach and rejigging of its distributors by: (1) reducing the number of dealers and giving them larger service area to make their business models viable and more profitable, (2) weeding out dealers who were unable to ramp-up sales, lack aggression, and are unwilling to invest much into the business and identifying ones with stronger balance sheets, (3) focusing on one state at a time, on-the-ground rural marketing, and trying to reach every village and farmer in the state to increase brand image and accessibility, (4) entry with specialised marketing campaigns in seeding villages where the company has not sold even a single product, and (5) keeping a small marketing team of Escorts at dealerships with low market share for 2-3 months. Escorts has aggressively started replacing dormant dealers in Andhra Pradesh and Maharashtra. We believe that these are steps in the right direction, but it will take time for material benefits to be visible. The chart below shows marginal improvement in Andhra Pradesh market share, but no tangible results are visible in Maharashtra yet.

Escorts’ market share (3-month rolling average): Andhra Pradesh


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Escorts Industry Escorts MS (RHS)

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Leaner and meaner – cost cutting to benefit Escorts has lagged peers in terms of margins (seen in chart below) mainly due to: (1) legacy costs with blue-collar salaries at 5-6x vs. competition, (2) raw material contracts being priced at a premium to competition, and (3) heavier product leading to higher RM costs.

Tractor EBIT margins – Escorts vs. M&M


Escorts has lagged peers in terms of margins, mainly due to legacy costs. However, it has been taking consistent measures to control costs: (1) gave 350 blue-collar employees VRS in FY15, reducing headcount to 2500, (2) white-collar employees reduced to 1700 from 2200, (3) replaced permanent employees with contract workers, and (4) renegotiation of RM contracts, reduction in vendor base, and design changes to reduce costs – leading to over 300bps gross-margin expansion (partly aided by lower commodity prices). This has led to margins improving to 4.5% from 4% over FY15-16, despite pressure on revenue and a 13% drop in tractor segment volumes. The management expects the product-redesigning project to be complete by September 2015; this has the potential to add another 120bps to margins. We estimate these cost-cutting measures combined with a revival in market and positive operating leverage to lead to operating margins improving to 6.3% in FY18 from ~4% currently. Raw material costs trending down, various initiatives helped The company has been spending more on raw material; its RM spends have been historically ~500bps higher than competition. In FY15, Sonalika’s RM cost stood at 66% of revenues whereas Escorts’ was at over 72%.

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M&M Tractor EBIT Margins Escorts Tractor EBIT Margins

Escorts has lagged peers in terms of margins mainly due to legacy costs



Raw material cost as a % of sales

Source: Company, MCA, PhillipCapital India Research

Escorts has taken multiple initiatives to correct the RM anomaly, and has seen tangible results with improving gross margins. Design changes after the product portfolio revamp, consolidating vendor base (to 300 vendors from 500), plant rationalisation, and increased outsourcing has helped it to reduce overall costs. It has started outsourcing crankshafts and hydraulics, thereby vacating one plant, which it will use for the expansion of its railways division. The results of these efforts were visible in its quarterly performance – gross margins improved to 31% in 3QFY16 from 28% in 1QFY14, partially helped by lower RM prices and cost-control initiatives.

Escorts’ gross margins improved consistently on a quarterly basis


Employee costs – the biggest drag on margins A key reason for Escorts’ suppressed margins vs. peers is its high employee costs. Since it is a five-decade old company, it has the disadvantage of bearing legacy costs – the average age of its blue-collared employees is 50+. Aged employees and aggressive labour laws in India mean that the average salary of a permanent worker at the company is over Rs 70,000/month (closer to India’s Annual GDP per capita of Rs 99,000). Our analysis shows that Escorts’ employee costs (at 11% of sales) are three times Sonalika’s and twice M&M’s – competition has a healthy mix of contractual workers.

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Escorts Sonalika

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Salary of a permanent worker at Escorts is over Rs 70,000/month – closer to India’s annual GDP per capita of Rs 99,000!



Employee cost (% of revenue) – Escorts vs. M&M vs. Sonalika

Source: Company, MCA, PhillipCapital India Research

In a bid to control employee costs and bring it in line with competition, Escorts has been offering VRS to its permanent employees and replacing them with contractual workers. In the last two years, it has successfully retired over 1000 employees (500 blue collared, 500 white collared). Another round of VRS would be offered in H2FY17/FY18, once market conditions improve.

Employee cost slowly falling


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Cut its overall headcount by 1,000 employees over the last two years



Railways: Government/new product to drive growth Railways is Escorts’ most profitable and fastest growing segment. While it is one of the key beneficiaries of increased spending by Indian railways, the new management team (four-years old) has significantly developed capabilities in product upgrades, new products, and new segments. Escorts has used a blend of in-house R&D and technological tie-ups to scale up its new product offerings, which will be a key growth enabler ahead. While the segment contributes only 6% to revenues (9MFY16), its target is to more than double these revenues over the next three years. Despite its low revenue share, this division contributes to 14% of profits (up from 9% in FY15).

Railway segment: Revenues and profitability


Benefits significantly from the government’s thrust on railways We expect Escorts to be a key beneficiary of the government’s thrust on railways, with rolling stock expected to grow 4-5x in the next 15 years.

Investment by Indian Railways Rolling Stock Category Current Holding (FY14) Incremental requirement by 2032 Growth

Freight Wagons 2,45,266 11,00,000 4.5x

Electric Locomotives 4,823 28,000 5.8x

Diesel Locomotives 5,633 15,000 2.7x

EMU/MEMU/DMU’s 9,371 30,000 3.2x

Coaches 50,229 2,10,000 4.2x


Increased spending by Indian railways has seen a consistent increase in the company’s order book, which has grown at a CQGR of 6.5% over the last 10 quarters –to Rs 600mn in Q3FY16 from Rs 340mn in Q2FY14.

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The new management team has significantly developed capabilities in the railways segment



Railways’ order book consistently rising


While most of the increase has come from conventional products, we expect new products to be a major growth driver ahead – the benefits of this are expected to start from H1FY17. Conventional products include air brakes, EP brakes, brake pads, couplers, and dempers – which have an annual market size of Rs 2.5bn, with Escorts holding over 50%.

New products: Opportunities galore with high entry barriers Braking systems form a large chunk of Escorts’ railways division revenues. Historically, it has been a supplier of conventional products such as brake blocks and brake pads; however, technological breakthroughs (in-house and technology tie up) have opened up significant opportunities in a space dominated by a select few multinational companies. It has already executed the development order for bogie-mounted brake systems (BMBS), for which it expects commercial orders shortly. It is executing the development order for axle-mounted braking systems (AMBS, likely by H2FY17). While these two will drive revenues in the coming 1-2 years, Escorts has also developed braking systems for locomotives, for which it is awaiting a final approval from Indian railways. BMBS: So far, Knorr Bremse has a monopoly in this segment – it is the only player supplying BMBS systems to the Indian Railways. Escorts will enter into the fray soon. All new wagons ordered by Indian Railways will be equipped by superior quality and safer BMBS (replacing axle-mounted disc brakes). Indian Railways’ recent tender to procure 15,000 wagons opens up a ~Rs 4bn opportunity for BMBS. Assuming 10% share for Escorts from this order, its order book will rise significantly. While this represents a near-term opportunity, replacement demand on existing wagons and fresh ordering by Indian Railways opens up a significant opportunity for Escorts. AMBS: A segment currently dominated by Faiveley and Knorr Bremse, it has a market size of ~Rs 2bn, which is likely to grow 4x with the railways increasing manufacturing of Linke Hofmann Busch (LHB) coaches/year to 4000 coaches by FY18 from 1000 currently. Escorts recently entered this segment via a technology-transfer agreement with a European company – Dako, and are already supplying development order to the railways for AMBS (to be executed by H2FY17), after which it will start bidding for commercial orders. Locomotive brakes: The highest value proposition in braking systems, where Escorts is yet to receive final approval. The segment (current market size of Rs 2.4bn) will be a long-term driver.

Metros: The segment currently is negligible for Escorts, but holds a lot of potential with the company entering technological tie-ups. It had recently tied up with Bode

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New rail products open up a Rs 16bn market for Escorts

Increased at a CQGR of 6.5% over the last 10 quarters



(USA) to gain access to pneumatic door systems for metros. It is also evaluating 4-5 new product segments and is on the verge of a tie-up to gain technology access in HVAC and brakes for metros – this will enhance the revenue potential of this division further.

Escorts’ offerings in railways by wagon/product types

LHB Coach BMBS Wagon EMU/ DMU Diesel Loco Electric Loco Metro

Brakes YES YES YES UD UD PLAN

Couplers YES N/A YES YES YES PLAN

Shockers UD N/A YES YES YES N/A

Source: Company, PhillipCapital India Research *UD: Under Development

New products to increase potential market size Products Market potential

Existing Products Air Brakes, EP Brakes Couplers, Brake Pads, Suspension Rs 2.5bn

New Products Bogey Mounted Brake System

Axle Mounted Brake System

~Rs 6bn

Under Consideration Evaluating 4-5 new products >Rs16bn


The company had recently tied up with Bode (USA) to gain access to pneumatic door systems for metros



Other businesses to remain a drag Escorts has an exposure to construction equipment (12% of revenues) and non-core auto components segment (3% of revenues). However, both segments have been loss-making and are struggling with no near-term respite in sight.

EBIT margins – construction equipment and auto products


Construction equipment The company is a leading player in the cranes segment with a market share of over 47% and has a small presence in compactor and backhoe loaders. Given sluggish economic and construction activity, volumes from this segment have been under pressure – posting losses from FY12. We do not expect any material change in the performance of the construction division. While compactors has picked up, given the traction in roads construction, the backhoe loaders, and cranes segment continues to remain sluggish.

Construction equipment revenue split Escorts’ market share by product


We estimate the construction equipment segment to remain largely flattish and loss-making until FY18; therefore, we would look at concrete signs of a pick up in construction activity before turning positive on this segment. However, the company continues to make efforts to reduce breakeven levels (currently at 750 units/quarter of sales down from 1050 units earlier). Platform rationalisation and realignment of sales and marketing channels have helped it to reduce its breakeven levels.

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Cranes 57%

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Compactors 10%

Spares 14%

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Reduced breakeven levels of its construction equipment segment to 750units/quarter of sales down from 1050 units earlier



Construction equipment – volumes remain under pressure


Auto components The company has a small presence in the two-wheeler and three-wheeler shock-absorbers segment, which contributes to 2% of its revenues. This segment is marred by legacy disadvantages of high cost and ageing blue-collar labour and has been loss-making (in recent memory). The management has realised that this non-core segment is a drag and is looking at strategically selling off this segment failing which it could look at completely shutting it down. Losses from this segment account for 16%/11% of our FY17/18 net profit estimates.

Automotive division revenue split Automotive division loss-making in recent memory


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The company is evaluating selling off its auto products business, failing which it would consider shutting it down by the end of FY17



Valuations We expect Escorts to be the biggest beneficiary of a recovery in rural spends and in the tractor industry. With new product launches, improved marketing effort, and better cost control, we estimate it to almost double its earnings between FY16 and FY18. We initiate coverage on Escorts with a BUY rating and a TP of Rs 190 (adjusted for treasury stock amounting to 30.43% of equity). We value the company at a 35% discount to M&M at 10x FY18 earnings and would contemplate rerating it if its efforts culminate into strong volume growth. Key risks include delayed recovery in tractor sales and heavy bleeding in the construction and auto segments.

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Company snapshot Escorts is a leading player in the agri-machinery segment and has a presence in construction and material handling equipment, railway equipment, and auto components. It offers a comprehensive range of tractors – more than 45 variants starting from 25HP to 80 HP. Escort, Farmtrac, and Powertrac are widely accepted and preferred brands in tractors. In the railways business, it offers brakes, couplers, shock absorbers, rail fastening systems, composite brake blocks, and vulcanized rubber parts. Its tractor capacity stands at 100,000 units with plants located in Faridabad (Haryana, India).

Escorts’ revenue has seen 12% CAGR over FY07-15 Escorts’ segment margins


Key assumptions (Rs Mn) FY14 FY15 FY16E FY17E FY18E

Revenues

Agri Machinery 35,216 32,108 27,433 29,888 34,933

Construction Equipment 4,668 5,158 4,643 4,924 5,470

Railways Products 1,825 1,837 2,021 2,425 3,032

EBIT

Agri Machinery 4,941 2,293 1,975 2,316 2,969

Construction Equipment (322) (248) (302) (295) (274)

Railways Products 146 175 273 346 455


Key risks (1) Slower than expected pickup in tractor demand (2) Volatile RM prices (3) Further deterioration in construction equipment business (4) Railways business not ramping up as estimated

SWOT analysis Strengths Weaknesses

Robust brand name in northern parts of the

country

Quality products claimed to provide better

efficiency and output vs. competition

Totally revamped product portfolio and strong

R&D

Weak brand image, except in the northern

regions

Small player in the extremely competitive

construction equipment market

Automotive segment a big drag

Opportunities Threats

Focus in southern and western parts of the

country

New segments in railway products

Increasing competitive intensity

Raw material prices and currency volatility


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Financials Consolidated Income Statement Y/E Mar, Rs mn FY15 FY16e FY17e FY18e

Net sales 39,858 34,793 37,874 43,957

Growth, % -37 -13 9 16

Other income 0 0 0 0

Total income 39,858 34,793 37,874 43,957

Raw material expenses -28,480 -24,007 -26,133 -30,330

Employee expenses -4,318 -4,318 -4,534 -4,988

Other Operating expenses -5,464 -4,956 -5,259 -5,889

EBITDA (Core) 1,597 1,512 1,947 2,750

Growth, % (58.1) (5.3) 28.8 41.2

Margin, % 4.0 4.3 5.1 6.3

Depreciation -661 -633 -649 -667

EBIT 936 878 1,299 2,083

Growth, % (68.6) (6.2) 47.8 60.4

Margin, % 2.3 2.5 3.4 4.7

Interest paid -571 -477 -477 -477

Other Non-Operating Income 132 145 159 175

Non-recurring Items -306 0 0 0

Pre-tax profit 683 918 1,371 2,212

Tax provided 65 -46 -171 -498

Profit after tax 747 872 1,200 1,714

Others (Minorities, Associates) 0 0 0 0

Net Profit 747 872 1,200 1,714

Growth, % (56.3) (17.2) 37.5 42.9

Net Profit (adjusted) 1,053 872 1,200 1,714

Unadj. shares (m) 119 119 119 119

Wtd avg shares (m) 119 119 119 119

Balance Sheet Y/E Mar, Rs mn FY15 FY16e FY17e FY18e

Cash & bank 2,364 2,779 3,523 4,607

Debtors 3,971 3,466 3,773 4,379

Inventory 4,159 3,506 3,817 4,429

Loans & advances 2,332 2,332 2,332 2,332

Other current assets 121 121 121 121

Total current assets 12,947 12,204 13,565 15,868

Investments 3,835 4,315 4,315 4,315

Gross fixed assets 24,100 24,600 25,300 26,000

Less: Depreciation -8,270 -8,903 -9,552 -10,219

Add: Capital WIP 555 555 555 555

Net fixed assets 16,384 16,251 16,302 16,336

Non-current assets 227 227 227 227

Total assets 33,393 32,997 34,409 36,746

Current liabilities 9,464 8,364 8,887 9,919

Provisions 879 879 879 879

Total current liabilities 10,343 9,243 9,766 10,798

Non-current liabilities 5,087 5,087 4,987 4,787

Total liabilities 15,430 14,330 14,753 15,585

Paid-up capital 1,193 1,193 1,193 1,193

Reserves & surplus 16,770 17,474 18,463 19,967

Shareholders’ equity 17,963 18,667 19,656 21,160

Total equity & liabilities 33,392 32,996 34,409 36,745

Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY15 FY16e FY17e FY18e

Pre-tax profit 683 918 1,371 2,212

Depreciation 661 633 649 667

Chg in working capital -1,082 57 -94 -186

Total tax paid -191 -46 -171 -498

Other operating activities 27 105 87 46

Cash flow from operating activities 98 1,668 1,841 2,241

Capital expenditure -517 -500 -700 0

Other investing activities 272 -108 390 431

Cash flow from investing activities -246 -608 -310 431

Dividend (incl. tax) -64 -168 -210 -210

Other financing activities -493 -477 -477 -477

Cash flow from financing activities -1,074 -645 -787 -887

Net chg in cash -1,222 415 744 1,785

Valuation Ratios

FY15 FY16e FY17e FY18e

Per Share data

EPS (INR) 8.8 7.3 10.1 14.4

Growth, % (56.4) (17.2) 37.5 42.9

Book NAV/share (INR) 150.5 156.4 164.7 177.3

FDEPS (INR) 8.8 7.3 10.1 14.4

CEPS (INR) 16.9 12.6 15.5 20.0

CFPS (INR) 1.0 11.9 13.4 16.9

DPS (INR) 0.5 1.4 1.8 1.8

Return ratios

Return on assets (%) 3.3 3.5 4.5 5.6

Return on equity (%) 5.9 4.7 6.1 8.1

Return on capital employed (%) 4.6 4.8 6.0 7.7

Turnover ratios

Asset turnover (x) 2.5 2.1 2.3 2.7

Sales/Total assets (x) 1.2 1.0 1.1 1.2

Sales/Net FA (x) 2.4 2.1 2.3 2.7

Receivable days 36.4 36.4 36.4 36.4

Inventory days 38.1 36.8 36.8 36.8

Payable days 66.8 64.8 65.3 66.1

Working capital days 10.2 11.1 11.1 11.1

Liquidity ratios

Current ratio (x) 1.4 1.5 1.5 1.6

Quick ratio (x) 0.9 1.0 1.1 1.2

Total debt/Equity (%) 22.7 21.9 20.3 17.9

Net debt/Equity (%) 9.6 7.0 2.3 (3.9)

Valuation

PER (x) 15.8 19.1 13.9 9.7

PEG (x) - y-o-y growth (0.3) (1.1) 0.4 0.2

Price/Book (x) 0.9 0.9 0.8 0.8

Yield (%) 0.4 1.0 1.0 1.0

EV/Net sales (x) 0.5 0.5 0.5 0.4

EV/EBITDA (x) 11.5 11.9 8.8 5.8



Mahindra & Mahindra (MM IN)

Win some, lose some

INDIA | AUTOMOBILES | Company Update

28 March 2016

We revisit our thesis on M&M and retain our Neutral stance incorporating the following changes: 1) Expect M&M to benefit from a revival in tractor demand and increase our estimates

to 10% volume growth in FY17 from 7.5% earlier 2) 100bps margin impact, as Haridwar fiscal benefits expire 3) Infrastructure cess to marginally impact UV demand 4) Automotive market share under threat. Maruti launched its first SUV at a very cut-

throat price. Fresh entry in the compact SUV segment by other OEMs 5) New launch momentum fading out.

We reduce our estimates by 11%, roll over valuations to FY18, and change our TP to Rs 1,350 (Rs 1,320 previously) Tractors to revive, but… We expect tractor industry to grow at 10%/13% in FY17/18 and expect M&M to maintain its market share (despite increasing competitive intensity as other producers gear up with launches) in its mainstay 41-50HP. While discounting is currently high, we expect these pressures to dissipate as markets improve. UV business: Headwinds persist UV business is likely to see headwinds with incremental pressures by states and the central government’s focus towards dissuading diesel vehicles. With petrol engines still a distant reality (in overall mix), negative sentiment is likely to impact growth. Further, with new launch momentum fading out, especially for TUV 300, competitive pressures should increase with competition lining up a slew of launches in the UV space. While we continue to build in 18% volume growth in FY17 for M&M’s automotive segment (mainly driven by the recently launched KUV100) we limit revenue assumption to 9% (given that incremental volumes are driven by lower-ticket-size products). Fiscal benefits fading to pressure margins The company’s management recently highlighted that fiscal benefits from its Haridwar plant, which manufactures Scorpio, Bolero, and three-wheelers (100,000 units/annum), expired in Q3FY16. The company was reaping benefits of no excise and 50% income tax waiver on the output from this plant. With these benefits behind, the management expects operating margins to take a hit of over 100bps. Moreover, infrastructure cess (will be majorly passed on) and low-margin products such as KUV100 and TUV300 increase margin pressure. To add to negative sentiment, increasing commodity prices could impact profitability further. We reduce our FY17 EBITDA margin estimates by 100bps to factor in pressure in the automotive business and higher RM prices – the fall would be partly offset by improving FES margins driven by positive operating leverage. Maintain Neutral While there are some positives in terms of the tractor segment expected to do well, headwinds in the automotive segment keep us worried. We reduce our FY18 estimates by 11%, roll-over valuation to FY18, and maintain Neutral with an SOTP‐based target price of Rs 1,350. We value the standalone business at Rs 1,000 (15x FY18 earnings) and subsidiaries and listed investments at Rs 350.

NEUTRAL (Maintain) CMP RS 1249

TARGET RS 1350 (+8%) COMPANY DATA

O/S SHARES (MN) : 621

MARKET CAP (RSBN) : 776

MARKET CAP (USDBN) : 11.6

52 - WK HI/LO (RS) : 1441 / 1092

LIQUIDITY 3M (USDMN) : 15.8

PAR VALUE (RS) : 5

SHARE HOLDING PATTERN, %

Dec 15 Sep 15 Jul 15

PROMOTERS : 27.1 25.6 25.6

FII / NRI : 39.4 41.3 41.8

FI / MF : 19.8 19.2 18.2

NON PRO : 7.1 2.7 2.4

PUBLIC & OTHERS : 6.6 11.1 10.7

PRICE PERFORMANCE, %

1MTH 3MTH 1YR

ABS 3.1 -0.3 5.6

REL TO BSE -5.2 1.7 15.7

PRICE VS. SENSEX

Source: Phillip Capital India Research

KEY FINANCIALS

Rs mn FY16E FY17E FY18E

Net Sales 386,319 424,339 476,447

EBIDTA 51,960 53,679 61,223

Net Profit 33,194 34,645 39,442

EPS, Rs 56.1 58.6 66.7

PER, x 22.3 21.3 18.7

EV/EBIDTA, x 14.4 13.8 11.9

P/BV, x 3.3 3.0 2.7

ROE, % 15.0 14.1 14.4

Debt/Equity (%) 9.6 7.3 5.6

Source: PhillipCapital India Research Est.

50

80

110

140

170

Apr-14 Oct-14 Apr-15 Oct-15

M&M BSE Sensex


MAHINDRA & MAHINDRA COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY15 FY16e FY17e FY18e

Net sales 374,683 386,319 424,339 476,447

Growth, % (3) 3 10 12

Other Operating income 0 0 0 0

Total income 374,683 386,319 424,339 476,447

Raw material expenses -257,269 -263,663 -291,733 -327,557

Employee expenses -24,936 -27,042 -30,128 -33,351

Other Operating expenses -46,445 -43,654 -48,799 -54,315

EBITDA (Core) 46,033 51,960 53,679 61,223

Growth, % (12.3) 12.9 3.3 14.1

Margin, % 12.3 13.5 12.7 12.9

Depreciation (10,980) (12,400) (13,225) (13,975)

EBIT 35,053 39,560 40,454 47,249

Growth, % (20.1) 12.9 2.3 16.8

Margin, % 9.4 10.2 9.5 9.9

Other Non-Operating Income 8,201 7,791 8,570 8,827

Pre-tax profit 43,572 45,223 47,200 54,403

Tax provided -9,339 -12,029 -12,555 -14,961

Profit after tax 34,233 33,194 34,645 39,442

Others (Minorities, Associates) 0 0 0 0

Net Profit 34,233 33,194 34,645 39,442

Growth, % (25.1) 7.5 4.4 13.8

Net Profit (adjusted) 30,876 33,194 34,645 39,442

Unadj. shares (m) 592 592 592 592

Wtd avg shares (m) 592 592 592 592

Balance Sheet Y/E Mar, Rs mn FY15 FY16e FY17e FY18e

Cash & bank 21,053 11,421 17,084 28,595

Debtors 24,241 24,994 27,453 30,825

Inventory 28,152 29,026 31,883 35,798

Loans & advances 0 0 0 0

Total current assets 88,503 82,003 94,639 115,258

Investments 161,159 169,216 177,677 186,561

Gross fixed assets 165,414 195,414 220,414 245,414

Less: Depreciation -64,607 -77,007 -90,232 -104,207

Net fixed assets 100,807 118,407 130,182 141,207

Total assets 350,468 369,627 402,498 443,026

Current liabilities 97,117 100,369 110,247 123,785

Non-current liabilities 54,581 47,252 45,994 45,374

Total liabilities 151,698 147,621 156,241 169,159

Paid-up capital 2,958 2,958 2,958 2,958

Reserves & surplus 195,812 219,048 243,300 270,909

Shareholders’ equity 198,770 222,006 246,257 273,867

Total equity & liabilities 350,468 369,627 402,498 443,026

Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY15 FY16e FY17e FY18e

Pre-tax profit 40,215 45,223 47,200 54,403

Depreciation 10,980 12,400 13,225 13,975

Chg in working capital 6,960 120 2,905 4,430

Total tax paid -8,342 -12,029 -12,555 -14,961

Other operating activities -1,805 -5,663 -6,746 -7,155

Cash flow from operating activities 48,008 40,050 44,029 50,692

Capital expenditure -21,232 -30,000 -25,000 -25,000

Other investing activities -11,718 1,518 2,041 2,035

Cash flow from investing activities -32,950 -28,482 -22,959 -22,965

Free cash flow 15,058 11,568 21,070 27,727

Debt raised/(repaid) -12,696 -9,115 -3,190 -2,712

Other financing activities -11,726 -12,086 -12,217 -13,505

Cash flow from financing activities -24,422 -21,200 -15,407 -16,216

Net chg in cash -9,363 -9,632 5,663 11,511

Valuation Ratios

FY15 FY16e FY17e FY18e

Per Share data

EPS (INR) 52.2 56.1 58.6 66.7

Growth, % (25.2) 7.5 4.4 13.8

Book NAV/share (INR) 336.0 375.3 416.3 463.0

FDEPS (INR) 52.2 56.1 58.6 66.7

CEPS (INR) 65.1 77.1 80.9 90.3

CFPS (INR) 78.1 65.2 72.5 84.1

DPS (INR) (17.4) (16.8) (17.6) (20.0)

Return ratios

Return on assets (%) 10.0 9.2 9.0 9.3

Return on equity (%) 15.5 15.0 14.1 14.4

Return on capital employed (%) 13.9 12.7 12.3 12.9

Turnover ratios

Asset turnover (x) 6.5 5.8 5.3 5.5

Sales/Total assets (x) 1.1 1.1 1.1 1.1

Sales/Net FA (x) 3.9 3.5 3.4 3.5

Working capital/Sales (x) (0.1) (0.1) (0.1) (0.1)

Fixed capital/Sales (x) 0.4 0.5 0.5 0.5

Receivable days 23.6 23.6 23.6 23.6

Inventory days 27.4 27.4 27.4 27.4

Payable days 64.8 65.7 65.1 65.2

Working capital days (28.9) (28.1) (28.1) (28.4)

Liquidity ratios

Current ratio (x) 0.9 0.8 0.9 0.9

Quick ratio (x) 0.6 0.5 0.6 0.6

Interest cover (x) 11.5 18.6 22.2 28.3

Total debt/Equity (%) 15.3 9.6 7.3 5.6

Net debt/Equity (%) 4.7 4.4 0.4 (4.8)

Valuation

PER (x) 23.9 22.3 21.3 18.7

PEG (x) - y-o-y growth (0.9) 3.0 4.9 1.4

Price/Book (x) 3.7 3.3 3.0 2.7

Yield (%) (1.4) (1.3) (1.4) (1.6)

EV/Net sales (x) 2.0 1.9 1.7 1.5

EV/EBITDA (x) 16.3 14.4 13.8 11.9

EV/EBIT (x) 21.3 18.9 18.3 15.4


AUTOMOBILE SECTOR UPDATE

Stock Price, Price Target and Rating History (Mahindra & Mahindra)

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year.

Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%

SELL <= -15% Target price is less than or equal to -15%.

B (TP 981)

B (TP 1072)

B (TP 1034) B (TP 1094)

B (TP 1310)

B (TP 1500) B (TP 1500)

B (TP 1500)

B (TP 1550)

B (TP 1452) N (TP 1320)

500

700

900

1100

1300

1500

M-13 A-13 J-13 J-13 A-13 O-13 N-13 J-14 F-14 A-14 M-14 J-14 A-14 S-14 N-14 J-15 F-15 M-15 M-15 J-15 A-15 S-15 N-15 D-15 F-16



Contact Information (Regional Member Companies)

SINGAPORE: Phillip Securities Pte Ltd

250 North Bridge Road, #06-00 Raffles City Tower,

Singapore 179101

Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA: Phillip Capital Management Sdn Bhd

B-3-6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur

Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG: Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong

Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN: Phillip Securities Japan, Ltd

4-2 Nihonbashi Kabutocho, Chuo-ku

Tokyo 103-0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141

www.phillip.co.jp

INDONESIA: PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A,

Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809

www.phillip.co.id

CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318

Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940

www.phillip.com.cn

THAILAND: Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road,

Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921

www.phillip.co.th

FRANCE: King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance

75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017

www.kingandshaxson.com

UNITED KINGDOM: King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street

London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835

www.kingandshaxson.com

UNITED STATES: Phillip Futures Inc.

141 W Jackson Blvd Ste 3050

The Chicago Board of Trade Building

Chicago, IL 60604 USA

Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA: PhillipCapital Australia

Level 37, 530 Collins Street

Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309

www.phillipcapital.com.au

SRI LANKA: Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha,

Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199

www.ashaphillip.net/home.htm

INDIA: PhillipCapital (India) Private Limited

No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

Management(91 22) 2483 1919

Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946

(91 22) 6667 9735

Research Infrastructure & IT Services Strategy

Dhawal Doshi (9122) 6667 9769 Vibhor Singhal (9122) 6667 9949 Naveen Kulkarni, CFA, FRM (9122) 6667 9947

Nitesh Sharma, CFA (9122) 6667 9965 Logistics, Transportation & Midcap Anindya Bhowmik (9122) 6667 9764

Agri Inputs Vikram Suryavanshi (9122) 6667 9951 Telecom

Gauri Anand (9122) 6667 9943 Media Naveen Kulkarni, CFA, FRM (9122) 6667 9947

Banking, NBFCs Manoj Behera (9122) 6667 9973 Manoj Behera (9122) 6667 9973

Manish Agarwalla (9122) 6667 9962 Metals Technicals

Pradeep Agrawal (9122) 6667 9953 Dhawal Doshi (9122) 6667 9769 Subodh Gupta, CMT (9122) 6667 9762

Paresh Jain (9122) 6667 9948 Yash Doshi (9122) 6667 9987 Production Manager

Consumer Midcap Ganesh Deorukhkar (9122) 6667 9966

Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Amol Rao (9122) 6667 9952 Editor

Jubil Jain (9122) 6667 9766 Oil & Gas Roshan Sony 98199 72726

Cement Sabri Hazarika (9122) 6667 9756 Sr. Manager – Equities Support

Vaibhav Agarwal (9122) 6667 9967 Pharma & Speciality Chem Rosie Ferns (9122) 6667 9971

Economics Surya Patra (9122) 6667 9768

Anjali Verma (9122) 6667 9969 Mehul Sheth (9122) 6667 9996

Engineering, Capital Goods Mid-Caps & Database Manager

Jonas Bhutta (9122) 6667 9759 Deepak Agarwal (9122) 6667 9944

Hrishikesh Bhagat (9122) 6667 9986

Sales & Distribution Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976

Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747

Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745

Bhavin Shah (9122) 6667 9974 Execution

Ashka Mehta Gulati (9122) 6667 9934 Mayur Shah (9122) 6667 9945

Corporate Communications

Vineet Bhatnagar (Managing Director)

Jignesh Shah (Head – Equity Derivatives)

Automobiles

http://www.phillip.com.sg/

http://www.poems.com.my/

http://www.phillip.com.hk/

http://www.phillip.co.jp/

http://www.phillip.co.id/

http://www.phillip.com.cn/

http://www.phillip.co.th/

http://www.kingandshaxson.com/

http://www.kingandshaxson.com/

http://www.phillipcapital.com.au/

http://www.ashaphillip.net/home.htm

http://www.phillipcapital.in/



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Sr. no. Particulars Yes/No

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No

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No

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