| | | | | Buy (Price target Rs1,700.00) | | UBS Research THESIS MAP | a guide to our thinking and what's where in this report | OUR THESIS IN PICTURES→ | | Q: Will M&M EBITDA margin improve in FY17 despite loss of excise duty exemption? Yes. We expect auto business margins to improve with introduction of Scorpio mild hybrid and Bolero (under 4m) which will benefit from lower excise duty. Tractor business margins should also improve given the strong growth in tractor market. Thus, we expect M&M EBITDA margins to improve from 13.4% in FY16E to 13.7% in FY17E and 14.9% in FY18E. more→ Q: Can M&M UV sales grow at a 15% CAGR over FY16-18 despite recent weak Bolero sales? Yes, we expect Bolero's decline to be arrested driven by price cut. We expect vol. growth to improve to 20%yoy in FY18 with new model launches. We expect the M&M to launch a new MPV to replace the Xylo and a mid-size SUV from Ssangyong portfolio to drive strong SUV volume growth in FY18. more→ Q: Can M&M gain market share as the tractor industry recovers in FY17 and FY18? Yes. We expect M&M tractor sales to grow faster than the industry driven by stronger recovery in Southern, Eastern and Western regions where M&M holds higher market share. We remain positive on tractor industry growth in FY17/18 and expect a strong rebound after a sharp decline in last 2 years. The upside from potential government policy support in FY18 remains. more→ | | We regard M&M as compelling, as we think the market underestimates the potential for a recovery in margins and growth in the auto business. We expect a 21% EPS CAGR for the core business over FY16-18. The risk-reward appears favourable and we assume only 9% decline in our downside case. | | Our analysis suggests gross profit benefit from the introduction of a mild-hybrid Scorpio and the under-four-metre Bolero (despite an assumed 10% price cut for the Bolero) should offset the impact of the Haridwar plant’s loss of excise duty. Thus we expect auto margins to improve from H2 FY17. | | While volume growth in all key segments has turned positive since Q4 FY16, the market remains concerned about the growth of and the margin outlook for the SUV business. We believe significant negatives are priced in and downside is limited. We are 8% ahead of consensus EPS for FY18E. more→ | | 
Value drivers | Domestic UV vol. growth in FY18 | Domestic tractor vol. growth in FY18 | EBITDA margin in FY18 | Rs1,950 upside | 30% | 20% | 15.6% | Rs1,700 base case | 20% | 12% | 14.9% | Rs1,300 downside | 0% | 0% | 13.0% | Source: UBS | | | |
more→ | | Mahindra & Mahindra (M&M) manufactures utility vehicles (UVs), tractors, commercial vehicles (CVs), three-wheelers and gensets. It is the market leader in UVs and tractors. The... more → |
| | | OUR THESIS IN PICTURES | return ↑ | 
| We expect auto sales to grow at a 15% CAGR over FY16-18 driven by Bolero recovery and new model introductions | 
| We expect M&M to outperform tractor industry growth over FY17-18 period, driven by stronger recovery in regions where M&M has higher market share, e.g., South and West | 
| We expect EBITDA margin to improve 150bps over FY16-18 driven by improvement in auto margins and strong growth in tractors | 
| In our view, valuations do not discount the strong earnings growth outlook | Sources for exhibits above: Company data, UBS Research |
| | | PIVOTAL QUESTIONS | return ↑ | Q: Will M&M EBITDA margin improve in FY17 despite loss of excise duty exemption? UBS VIEW Yes. We expect auto-business margins to improve with the introduction of the Scorpio mild-hybrid and an under-four-metre version of the Bolero, which should benefit from lower excise duty. Tractor business margins look likely to improve given strong growth in the tractor market; as a result we expect M&M’s EBITDA margins to improve from 13.4% in FY16E to 13.7% in FY17E and to 14.9% in FY18E. EVIDENCE Our analysis suggests Scorpio realisations should improve by 18% while the gross margin will improve by 900bps as a result of the introduction of a mild-hybrid version. We also estimate that, despite a 10% price cut, Bolero gross margins will improve 500bps with the introduction of an under-four-metre version. WHAT'S PRICED IN? We believe the market remains concerned about the weak profitability of the auto business and an improvement in margins would likely be a re-rating trigger for the stock. |
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Auto margins to improve because of product interventionsAccording to management, the impact of loss of excise duty exemption at its Haridwar auto plant was 100bps of EBITDA margin implying about Rs5bn (on a trailing four-quarter basis until Q3 FY16). We estimate this impact could be completely offset by FY18, once the full benefit of the Scorpio mild-hybrid and the under-four-metre version of the Bolero comes in. We therefore expect auto-business margins to improve from H2 FY17. We also expect tractor margins (FES) to improve along with strong volume growth in the tractor segment. Overall, therefore we expect EBITDA margins to improve from 13.4% in FY16 to 13.7% in FY17 and to 14.9% in FY18. Figure 1: Quarterly EBITDA margin, PBIT margins for Auto and FES | | Figure 2: Annual EBITDA and EBITDA margin for M&M and MVML | 
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| Source: Company data | | Source: Company data, UBS estimates |
Scorpio mild-hybrid to improve gross margins by Rs68,000 per unitOn 20 July 2016, M&M launched a mild-hybrid version of the Scorpio. There has been a negligible change in the price while the excise duty for M&M will come down significantly, from 31% (including cess) to 12.5%. As a result, we estimate an 18% increase in net-realisations for M&M from the Scorpio. We estimate the cost of the mild-hybrid system at US$750 (we believe this is conservative), thus we estimate that the Scorpio’s gross profit per unit could improve by Rs68,000. Under-four-metre version of the Bolero should help improve marginsWe also expect the introduction of under an under-four-metre version of the Bolero. Its introduction with a diesel engine of less than 1.5 litres capacity will reduce excise duty on the model from 30% to 12.5% allowing M&M to cut the price significantly without impacting margins. We expect M&M to cut the price by 10% for the new shorter Bolero. We believe this should also help arrest the current sharp decline in Bolero volumes and support better gross margins on it. Figure 3: Impact of Scorpio and Bolero product changes on M&M and MVML gross profits | | Scorpio S4 Plus | Bolero SLE | | | Normal | Hybrid | Change | Normal | under 4m | Change | Total | Ex-showroom (Rs) | 1,061,086 | 1,062,787 | | 785,218 | 706,696* | -10% | | Excise duty rate | 27.00% | 12.50% | | 30.00% | 12.50% | | | Cess (0%-4%) | 4.00% | 0.00% | | 4.00% | 2.50% | | | Dealer & other cost | 6% | 6% | | 6% | 6% | | | VAT | 12.50% | 12.50% | | 12.50% | 12.50% | | | | | | | | | | | Est. Net ASP (Rs) | 673,682 | 792,201 | 18% | 487,029 | 513,923 | 6% | | Increase in ASP (Rs) | | 118,519 | | | 26,894 | | | Cost of mild-hybrid system (Rs) | - | 50,000 | | | | | | Gross profit improvement (Rs) | | 68,518 | | | 26,894 | | | Gross profit improvement/ASP | | 9% | | | 5% | | | Scorpio vols (FY17E) | | 48,000 | | | 65,247 | | | | | | | | | | | Gross profit addition (Rs m) | | 3,289 | | | 1,755 | | 5,044 |
| Note: * We have assumed a 10% price cut for the under-four-metre Bolero. Source: UBS estimates |
Strong growth in tractors should continue to aid marginsAs shown in Figure 4, the farm equipment sector (FES) margins, while higher than those for autos, have been subdued over the past two years due to a slowdown in the tractor market. Now, with expectation of a strong recovery in FY17 and FY18, we expect tractor margins to improve further driven by operating leverage. We expect tractor volumes to grow 18%/12% in FY17/18. Overall, therefore, we expect EBITDA margins to improve from 13.4% in FY16 to 13.7% in FY17 and to 14.9% in FY18. Figure 4: M&M FES PBIT margins and tractor volumes | | Figure 5: Tractor industry volume growth | 
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| Source: Company data, UBS estimates | | Source: Crisil, UBS estimates |
Figure 6: M&M+MVML - Income statement | (Rs m) | FY12 | FY13 | FY14 | FY15 | FY16 | FY17E | FY18E | FY19E | Revenue | 313,811 | 383,566 | 388,171 | 369,677 | 388,566 | 445,205 | 519,914 | 587,319 | Raw material | 223,947 | 273,971 | 269,199 | 257,269 | 265,115 | 306,320 | 357,062 | 406,393 | Staff cost | 17,946 | 19,977 | 23,108 | 24,936 | 25,647 | 28,212 | 31,033 | 33,633 | Other exp | 30,306 | 36,326 | 43,383 | 41,440 | 45,817 | 49,486 | 54,434 | 59,878 | Total Expenses | 272,199 | 330,274 | 335,691 | 323,646 | 336,580 | 384,018 | 442,529 | 499,904 | EBITDA | 41,612 | 53,292 | 52,480 | 46,032 | 51,987 | 61,188 | 77,384 | 87,415 | EBITDA margin | 13.3% | 13.9% | 13.5% | 12.5% | 13.4% | 13.7% | 14.9% | 14.9% | Depreciation | 6,699 | 8,178 | 9,760 | 10,980 | 12,484 | 14,887 | 17,014 | 20,181 | Other Income | 4,735 | 5,697 | 6,648 | 8,201 | 7,910 | 8,052 | 8,708 | 9,421 | EBIT | 39,648 | 50,811 | 49,368 | 43,253 | 47,413 | 54,352 | 69,078 | 76,655 | Interest (net) | 2,874 | 2,964 | 3,611 | 3,039 | 2,329 | 2,000 | 1,000 | 1,000 | Extraordinary income | 1,083 | 906 | 528 | 3,357 | 60 | | | | PBT | 37,857 | 48,754 | 46,285 | 43,571 | 45,144 | 52,352 | 68,078 | 75,655 | Tax | 7,887 | 12,410 | 7,235 | 9,339 | 12,166 | 14,135 | 19,743 | 21,940 | Net Profit | 29,970 | 36,343 | 39,050 | 34,232 | 32,978 | 38,217 | 48,336 | 53,715 |
| Source: Company data, UBS estimates |
| | | PIVOTAL QUESTIONS | return ↑ | Q: Can M&M UV sales grow at a 15% CAGR over FY16-18 despite recent weak Bolero sales? UBS VIEW Yes, we expect Bolero's decline in sales to be arrested as a result of a price cut. We expect volume growth to improve further to 20% YoY in FY18 with new model introductions. We expect M&M to launch a new MPV to replace the Xylo and a new mid-size SUV from the Ssangyong range to drive strong SUV volume growth in FY18. EVIDENCE We would assume an under-four-metre Bolero is likely to be at least 10% cheaper than its nearest rival, thus likely supporting demand. WHAT'S PRICED IN? We believe consensus is concerned about the growth outlook for the auto business given the look of M&M’s market share in SUVs. We believe growth driven by new product launches in FY18 has not been taken into account. | |
Competition has increased in UVs…M&M has lost market share despite new launches, as Bolero volumes have declined sharplyCompetitive pressure has clearly increased in the UV segment, with the entry of companies such as Hyundai and Maruti. As a result, M&M's market share has declined steadily since FY13. New model launches remain the key driver of industry growth. While new launches such as the TUV3OO and the KUV1OO have helped, these have been partly muted by the sharp decline in Bolero volumes. Figure 7: M&M – domestic UV volume trend annual | | Figure 8: Trend in annual UV market share | 
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| Source: SIAM | | Source: SIAM |
A cheaper Bolero could arrest the volume declineAccording to M&M management, the decline in Bolero sales has been due to competitive pressure given several new launches. Also, the TUV3OO has also gained volume from cannibalising the sales of the Bolero; hence TUV volumes should be looked at along with those of the Bolero. We believe a move to an under-four-metre model, along with a 10% price reduction (helped by a reduction in the excise duty), would likely make the Bolero more competitive in its segment and arrest the acute decline in its sales. As discussed in the previous section, this move is likely to be margin-accretive for the company. M&M management, in its Q1 FY17 conference call, indicated that the new product would be launched in the next four-to-six weeks. Figure 9: Bolero volumes have declined sharply | | Figure 10: M&M UV volume mix, by model– FY16 | 
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| Source: SIAM | | Source: SIAM, UBS |
Figure 11: Comparison of Bolero with other small SUVs/MPVs Model | Auto OEM | Reference model | Engine displacement | Price (ex-showroom) (Rs) | Bolero (<4m) | Mahindra | SLE (10% price cut) | <1500cc | 708,326 | Bolero | Mahindra | SLE BS4 | 2523cc | 787,029 | Vitara Brezza | Maruti | VDI | 1248cc | 789,182 | TUV300 | Mahindra | T6 | 1493cc | 815,189 | EcoSport | Ford | 1.5L Diesel Trend MT | 1498cc | 831,512 | Ertiga | Maruti | VDI | 1248cc | 843,049 |
Source: Company data More new products are likelySeveral new launches expected in FY18 and FY19 According to the Economic Times, M&M, under its 'Promise19' programme, has set an internal target of becoming the second-largest auto vehicle manufacturer in the country by FY19 and plans to launch 18 new vehicles over the FY16-FY19 period. The company reportedly plans to launch new SUVs based on Ssangyong's Tivoli platform and plans to develop a new monocoque UV at its North America technical centre. IHS data show that a new MPV (we believe one to replace the Xylo) and the Korando (a mid-size crossover), both to be launched in FY18, should boost FY18 growth. Figure 12: Recent and expected launches by key OEMs in India | 
| Source: IHS, company data, UBS estimates |
Figure 13: M&M (standalone) – volumes by segment | FY12 | FY13 | FY14 | FY15 | FY16 | FY17E | FY18E | FY19E | UVs | | | | | | | | | Domestic | 203,507 | 263,926 | 219,421 | 206,837 | 222,324 | 244,556 | 293,468 | 337,488 | YoY growth | 20% | 30% | -17% | -6% | 7% | 10% | 20% | 15% | Exports | 4,225 | 6,086 | 7,511 | 5,330 | 5,591 | 6,709 | 8,051 | 9,661 | YoY growth | 55% | 44% | 23% | -29% | 5% | 20% | 20% | 20% | Total UVs | 207,732 | 270,012 | 226,932 | 212,167 | 227,915 | 251,266 | 301,519 | 347,149 | YoY growth | 20% | 30% | -16% | -7% | 7% | 10% | 20% | 15% | | | | | | | | | | Vans | 25,607 | 31,525 | 25,191 | 14,300 | 12,087 | 14,504 | 17,405 | 20,886 | YoY growth | 2780% | 23% | -20% | -43% | -15% | 20% | 20% | 20% | | | | | | | | | | LCVs | | | | | | | | | Domestic | 125,776 | 142,796 | 152,398 | 145,010 | 154,653 | 178,469 | 207,187 | 232,582 | YoY growth | 21% | 14% | 7% | -5% | 7% | 15% | 16% | 12% | Exports | 21,180 | 23,849 | 19,706 | 20,899 | 26,374 | 29,011 | 31,913 | 35,104 | YoY growth | 85% | 13% | -17% | 6% | 26% | 10% | 10% | 10% | Total | 146,956 | 166,645 | 172,104 | 165,909 | 181,027 | 207,480 | 239,100 | 267,686 | YoY growth | 28% | 13% | 3% | -4% | 9% | 15% | 15% | 12% | | | | | | | | | | 3 wheelers | | | | | | | | | Domestic | 67,440 | 65,510 | 62,614 | 57,569 | 54,975 | 54,975 | 54,975 | 54,975 | YoY growth | 9% | -3% | -4% | -8% | -5% | 0% | 0% | 0% | Exports | 3,632 | 2,393 | 2,078 | 2,640 | 1,210 | 1,452 | 1,742 | 2,091 | YoY growth | 74% | -34% | -13% | 27% | -54% | 20% | 20% | 20% | Total | 71,072 | 67,903 | 64,692 | 60,209 | 56,185 | 56,427 | 56,717 | 57,066 | YoY growth | 11% | -4% | -5% | -7% | -7% | 0% | 1% | 1% |
| Source: Company data, UBS estimates |
| | | PIVOTAL QUESTIONS | return ↑ | Q: Can M&M gain market share as the tractor industry recovers in FY17 and FY18? UBS VIEW Yes. We expect M&M tractor sales to grow faster than the industry, driven by stronger recovery in the southern, eastern and western regions, where M&M holds higher market shares. We remain positive on tractor industry growth in FY17/18 and expect a strong rebound after a sharp decline over the past two years. The upside from potential government policy support in FY18 remains. EVIDENCE Domestic tractor industry sales have rebounded 13% YoY YTD in FY17, while M&M continues to outperform industry growth, with 20% YoY growth. Strong growth in the south India market (up 54% YTD), where M&M holds about a 50% market share, and improving demand in western India, are supporting M&M's outperformance. WHAT'S PRICED IN? We do not believe the market is building in any significant market-share gain for M&M tractors | |
Southern market share contracted significantly over FY08-14 India’s southern region, which constituted 26% of the domestic market in FY08 significantly underperformed India’s tractor industry over the FY08-14 period. While industry volume more than doubled during this period, the southern market grew a mere 8%. As a result, the share of the southern region had declined sharply to 13% by FY14. The slowdown in the southern states, where M&M has a nearly 50% market share, restricted the potential growth for the company. Figure 14: Annual tractor sales trend by region | | Figure 15: Domestic tractors market vol. split by region | 
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| Source: Company data , Crisil | | Source: Company data , Crisil |
Southern region, where M&M holds about a 50% share, is recovering strongly Over the course of the past two years, tractor sales in the southern states have rebounded strongly, albeit from a low base. The region is regaining share quickly as sales grew 15%/54% YoY in FY16/YTD FY17 due to better rainfalls in Tamil Nadu; and a pick-up in commercial and sowing activity in the erstwhile Andhra Pradesh (now AP and Telangana) as a result of government support. Figure 16: YoY tractor growth trend by region | 
| Source: Crisil, Company data |
Eastern and western regions are also showing signs of recovery Apart from the southern states, major contributing states, such as Maharashtra, Madhya Pradesh, Gujarat and Bihar, have shown positive growth momentum in the past few months. The eastern and western regions, where M&M again has dominant market shares of 52% and 44%, respectively, have also recovered 21% and 12% so far in FY17. Maharashtra (50% market share), Gujarat (44%) and Bihar (49%) together contributed about 24% of the industry’s volumes. Sustained growth momentum in these states should help M&M consolidate its market shares further. Figure 17: Tractor volume trend across major states | | Figure 18: M&M's market shares in major states | 
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| Source: Crisil | | Source: Crisil |
M&M gaining market share across regions in FY17 M&M's domestic market share has improved to 44% (an all-time high) YTD in FY17 as the company has gained sizeable market shares across the regions. M&M launched a new range of Yuvo tractors in April 2016, and this has also helped M&M increase its volumes in the mainstream 35- to 50-horsepower segment, in our view; in addition to the regional recoveries (except for in the north). Figure 19: M&M domestic market share by region | | Figure 20: Trend in domestic tractor market share | 
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| Source: Crisil, Company data | | Source: Crisil, Company data |
Figure 21: M&M tractor sales | | FY12 | FY13 | FY14 | FY15 | FY16 | FY17E | FY18E | Domestic | 221,730 | 211,596 | 257,270 | 220,157 | 202,046 | 238,414 | 267,024 | YoY | 10% | -5% | 22% | -14% | -8% | 18% | 12% | Exports | 13,645 | 12,286 | 10,364 | 13,868 | 11,545 | 12,700 | 13,969 | YoY | 15% | -10% | -16% | 34% | -17% | 10% | 10% | Total | 235,375 | 223,882 | 267,634 | 234,025 | 213,591 | 251,114 | 280,993 | YoY growth | 10% | -5% | 20% | -13% | -9% | 18% | 12% |
| Source: Company data, UBS estimates |
Remain positive on tractor industry growth We expect industry tractor volumes to grow 15%/10% in FY17/FY18 due to a low-base (22% below the FY14 peak) after two consecutive years of below-normal rainfall, good pent-up demand and the forecast of better monsoon rainfall in 2016. According to the Indian Meteorological Department (IMD) forecast, rainfall during the current south-west monsoon season (June-September) is likely to be 106%±4% of the long-period average (LPA). So far the monsoon is progressing reasonably well and is well distributed across the country. Tractor sales have increased 13% YoY YTD in FY17. Figure 22: Tractor volume growth vs. monsoon departure from long period average | | Figure 23: Domestic tractor industry volumes and YoY growth | 
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| Source: IMD, Crisil, UBS | | Source: Company data, Crisil |
Some uptick in crop prices Domestic prices of major agricultural commodities have started to improve gradually over the past few months. Although there has been no significant increase in the prices of key crops, such as wheat and rice, for the past two years, selected crops, such as cotton and pulses (Arhar), have seen strong surges in prices. This should support demand for tractors. Steadily improving crop prices are positive for farmers' incomes and thus a key demand driver for tractors. Figure 24: Wheat price and MSP trend (Rs/100 kg) | | Figure 25: Paddy price and MSP trend (Rs/100 kg) | 
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| Source: Agmarknet, Ministry of Agriculture | | Source: Agmarknet, Ministry of Agriculture |
Figure 26: Cotton price and MSP trend (Rs/100 kg) | | Figure 27: Arhar dal price and MSP trend (Rs/100 kg) | 
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| Source: Agmarknet, Ministry of Agriculture | | Source: Agmarknet, Ministry of Agriculture |
Figure 28: YoY trend in average crop MSPs | 
| Source: Commission for Agricultural Costs & Prices, UBS |
More government support likely in coming years Rural wage growth has been weak. While central government spending on rural programmes is growing at a robust pace, it is not similar to the degree of stimulus during the FY08 – FY11 period. However, in March 2016 the government announced its intention to double farmer incomes in six years, by FY22. While this is a very challenging target in our view, we believe government support for farming and the rural economy could significantly increase in coming years to support this goal. Improvement in farmer income and farm productivity looks likely to lead to more demand for farm machinery, including tractors. Figure 29: Rural wage growth remains weak | | Figure 30: Trend in government spending on key rural programs (in Rs bn) | 
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| Source: Labour Ministry, TMA, UBS | | Source: Government budget documents |
| | | WHAT'S PRICED IN? | return ↑ | 
| We think M&M's valuation remains compelling, given a strong earnings growth outlook
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While volume growth in all key segments has turned positive since Q4 FY16, we believe the market remains concerned about the growth and margin outlook for the SUV business. We believe significant negatives are priced in and that downside is limited. On our revised estimates, we are 8% ahead of consensus EPS for FY18E. Earnings downgrade cycle coming to an endWhile M&M has not performed over the past two years due to continuous earnings downgrades on the back of a decline in tractor sales and weak demand in the auto segment (UVs and light commercial vehicles [LCV]). Margins have also declined to due to lower volumes and increased discounting pressure in the UV segment. Volume growth in all key segments has turned positive since Q4 FY16. We expect the momentum of the recovery to continue with double-digit growth in all segments in FY17 and FY18, which should drive EBITDA margin improvement as well. We are 8% ahead of consensus at the PAT level (Parent and MVML). We believe improvement in Bolero demand post the introduction of an under-four-metre version and improved auto-business margins should be key re-rating triggers for the stock. Figure 31: Changes in consensus EPS estimates (parent) | | Figure 32: M&M quarterly YoY volume growth trend | 
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| Source: Bloomberg | | Source: Company data |
Figure 33: M&M parent (and MVML) – UBSe vs consensus | FY17E | FY18E | FY19E | (Rs m) | UBS | Consensus | Diff. | UBS | Consensus | Diff. | UBS | Consensus | Diff. | Net Sales | 445,205 | 466,386 | -5% | 519,914 | 525,816 | -1% | 587,319 | 579,685 | 1% | EBITDA | 61,188 | 55,484 | 10% | 77,384 | 64,973 | 19% | 87,415 | 69,762 | 25% | EBITDA margin | 13.7% | 11.9% | 185 bps | 14.9% | 12.4% | 253 bps | 14.9% | 12.0% | 285 bps | Net profit | 38,217 | 37,611 | 2% | 48,336 | 44,647 | 8% | 53,715 | 48,044 | 12% |
Source: Bloomberg, UBS estimates Valuations look undemanding for a 21% core business EPS CAGRWhile M&M is unlikely to trade in line with other domestic auto peers, given its conglomerate nature, we believe the valuation is attractive in light of an expected strong 21% EPS CAGR for the core business (M&M+MVML) over FY16-18E. While M&M and MVML valuations (ex-listed subs) are at the higher end of the historical range, this is similar to the re-rating experienced by other domestic OEMs. Figure 34: Indian OEM valuations | | Price target | Price (LC) | Mcap | PE | EV/EBITDA | Company | Rating | (LC) | 31-Aug-16 | US$m | FY16 | FY17E | FY18E | FY16 | FY17E | FY18E | Bajaj Auto | Sell | 2,370 | 2,981 | 12,880 | 21.2 | 20.1 | 18.9 | 11.9 | 15.0 | 14.3 | Eicher Motors | Neutral | 23,000 | 22,733 | 9,201 | 48.3 | 35.7 | 27.8 | 25.0 | 28.5 | 21.7 | Hero MotoCorp | Sell | 2,500 | 3,548 | 10,578 | 22.6 | 20.7 | 19.1 | 14.9 | 13.7 | 12.5 | Maruti Suzuki India | Buy | 6,000 | 5,053 | 22,791 | 27.8 | 24.4 | 20.3 | 11.6 | 13.8 | 11.5 | Mahindra & Mahindra | Buy | 1,700 | 1,438 | 12,725 | 26.5 | 19.4 | 14.8 | 11.7 | 9.5 | 7.5 | Tata Motors Ltd. | Suspended | N/A | 537 | 27,251 | 14.2 | 10.9 | 11.2 | 4.2 | 4.7 | 4.6 | Ashok Leyland | Sell | 71 | 87.7 | 3,727 | 34.6 | 18.7 | 18.6 | 11.1 | 10.2 | 9.9 |
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Source: UBS estimates. Figure 35: Mahindra 2W PAT losses as percentage of M&M and MVML PAT | | Figure 36: M&M and MVML (ex listed subs) implied PE | 
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| Source: Company Data | | Source: Bloomberg, UBS Estimates |
2W business under considerationWhile the 2W business is not a part of the parent business, rising 2W business losses has also been a key concern for investors as the parent has been infusing capital into the subsidiary. 2W losses (ex-Peugeot scooter stake) were as high as 15%/19% of M&M (parent and MVML) profits in FY15/16. This may also have raised questions on capital allocation by the group. Management has now indicated that it will completely change strategy in the 2W business to bring down the losses significantly. Reduction in losses for the 2W business should also support the stock. Among a range of options, we believe M&M could consider exiting the 2W business by FY18.
| | | UPSIDE / DOWNSIDE SPECTRUM | return ↑ | 
Value drivers | Domestic UV vol. growth in FY18 | Domestic tractor vol. growth in FY18 | EBITDA margin in FY18 | Rs1,950 upside | 30% | 20% | 15.6% | Rs1,700 base case | 20% | 12% | 14.9% | Rs1,300 downside | 0% | 0% | 13.0% | Source: UBS | | | |
| M&M is trading at Rs1,438.00 (as of 31 August). |
Risk to the current share price is heavily skewed (4:1) to the upside M&M is trading at Rs1,438.00 (as of 31 August). Upside scenario (Rs1,950.00): Our upside scenario assumes the government's emphasis on the rural economy increases as it improves spending on rural programmes and makes sharper increases in minimum support prices for crops, which should boost tractor demand in FY18. It assumes tractor sales increase 20% YoY in FY18, compared with our base-case estimate of 12% YoY growth; and that UV volume increases 30% YoY (compared with our base-case estimate of 20% YoY) in FY18 on the back of a stronger recovery in economic growth and higher car demand as the industry passes on part of the GST benefits to consumers via price cuts. We expect EBITDA margin of 15.6%, compared with our base-case estimate of 14.9%; driven by higher operating leverage and partial retention of GST benefit. In this scenario, we value the M&M+MVML businesses at 9x FY18 EV/EBITDA, implying fair value of Rs1,950.00. Base case (Rs1,700.00): We find M&M a compelling buy as the stock has not re-rated along with other domestic peers. We believe market is underestimating the potential for a recovery in margins and the growth of the auto business. We are 8% ahead of consensus EPS (parent) for FY18E. We expect only a 9% decline in the stock even if there is no growth in tractors or UVs in FY18. Reduction in losses for the two-wheeler business should also support the stock. We expect a significant decline in two-wheeler losses in FY17 and believe M&M could potentially look to exit the business by FY18 (among other options). We believe the improvement in demand for the Bolero after the introduction of the under-four-metre version and improved auto-business margins could be key re-rating triggers for the stock. We value the M&M parent (including MVML and the two-wheeler business) based on 8x one-year forward EV/EBITDA at Rs1,250.00/share. We value the key listed subsidiaries at a 20% discount to the market price (Rs450.00).
Figure 37: Price target derivation for M&M | FY15 | FY16 | FY17E | FY18E | FY19E | EBITDA - Auto + FES + 2Ws | 41,296 | 47,046 | 60,642 | 77,952 | 88,002 | EBITDA multiple | 8 | 8 | 8 | 8 | 8 | Implied EV | 330,366 | 376,368 | 485,132 | 623,617 | 704,014 | Avg. Net Debt (incl. MVML) | (6,511) | (15,487) | (22,728) | (34,357) | (56,599) | Equity value | 336,877 | 391,855 | 507,860 | 657,974 | 760,613 | Equity value per share (Adj. for treasury) | 624 | 726 | 941 | 1,219 | 1,410 | Subsidiary value (per share) | 455 | 450 | 450 | 450 | 450 | Equity value per share | 1,079 | 1,176 | 1,391 | 1,669 | 1,860 | Price target | | | | Rs1,700 | |
Source: UBS estimates Downside scenario (Rs1,300.00): Our downside scenario assumes below-normal rainfall in FY18 and continued weak rural spending by government. As a result, we assume a flattish outlook for tractor sales in FY18 (compared with our base-case estimate of 12% YoY growth). This scenario also assumes new UV launches do not perform well, with heightened competition in the UV space. Thus, we assume UV sales would remain flattish in FY18. We expect the EBITDA margin to drop to 13.0%, compared with our base-case estimate of 14.9% due to lower operating leverage and higher discounting amid competitive pressure. In this scenario, we value the M&M+MVML businesses at 7x FY18 EV/EBITDA; implying fair value of Rs1,300.00. We would like to thank Suraj Chheda, our support service professional, for assistance in preparing this research report.
| | | COMPANY DESCRIPTION | return ↑ | Market Cap | US$12.7bn | Shares Outstanding | 593m (COM) | Industry | Automobiles | Region | India | Website | www.mahindra.com |
Mahindra & Mahindra (M&M) manufactures utility vehicles (UVs), tractors, commercial vehicles (CVs), three-wheelers and gensets. It is the market leader in UVs and tractors. The auto and farm equipment divisions contributed 81% to M&M's consolidated revenue in FY16. M&M has subsidiaries and associates in IT services (Tech Mahindra), financial services (M&M Financial Services), infrastructure development (Mahindra Lifespace Developers), hospitality (Mahindra Holidays & Resorts) and auto components. Industry outlook We expect slightly weaker passenger-vehicle (PV) growth (7% YoY) in FY17 due to consumers’ potentially delaying purchase decisions ahead of GST implementation in FY18. However, we expect growth of 18% YoY in FY18, driven by a boost from implementation of the Seventh Pay Commission and the potential transfer of demand from FY17 to FY18 due to GST. We are structurally positive on India's long-term PV industry growth potential given the low penetration levels, strong medium-term GDP growth outlook and favourable demographics. We estimate the market will grow at a 14% volume CAGR over FY16-23. We expect domestic tractor volumes. to increase 15% YoY/10% YoY in FY17E/FY18E due from a low base amid two consecutive years of monsoon deficits, good pent-up demand and the forecast of a better monsoon in 2016. We believe that the demand outlook for LCVs has bottomed out after three years of weak sales and expect 15% YoY/14% YoY growth in FY17/FY18. | Revenues by segment FY16 (%) 
Source: Company data | | | | | Mahindra & Mahindra (MAHM.BO) | | | | | | | | | | | Revenues | 725,507 | 700,553 | 763,301 | 857,273 | 12.3 | 984,264 | 14.8 | 1,113,309 | 1,243,612 | 1,389,391 | Gross profit | 304,713 | 294,232 | 320,586 | 360,055 | 12.3 | 413,391 | 14.8 | 467,590 | 522,317 | 583,544 | EBITDA (UBS) | 86,699 | 69,000 | 79,619 | 109,983 | 38.1 | 140,312 | 27.6 | 167,328 | 195,769 | 227,173 | Depreciation & amortisation | (21,696) | (21,238) | (25,816) | (28,115) | 8.9 | (31,807) | 13.1 | (36,737) | (41,141) | (46,105) | EBIT (UBS) | 65,003 | 47,762 | 53,802 | 81,868 | 52.2 | 108,505 | 32.5 | 130,591 | 154,628 | 181,068 | Associates & investment income | 19,554 | 24,183 | 22,265 | 21,378 | -4.0 | 23,346 | 9.2 | 25,516 | 27,863 | 30,444 | Other non-operating income | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net interest | (29,539) | (31,567) | (33,729) | (40,270) | -19.4 | (45,477) | -12.9 | (52,015) | (58,987) | (66,470) | Exceptionals (incl goodwill) | 3,179 | 2,749 | 50 | 0 | - | 0 | - | 0 | 0 | 0 | Profit before tax | 58,196 | 43,127 | 42,388 | 62,975 | 48.6 | 86,374 | 37.2 | 104,092 | 123,503 | 145,041 | Tax | (14,962) | (17,200) | (18,636) | (27,688) | -48.6 | (37,975) | -37.2 | (45,765) | (54,299) | (63,769) | Profit after tax | 43,234 | 25,927 | 23,752 | 35,288 | 48.6 | 48,399 | 37.2 | 58,327 | 69,204 | 81,272 | Preference dividends | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Minorities | 3,436 | 5,448 | 8,361 | 8,637 | 3.3 | 9,159 | 6.1 | 9,093 | 8,084 | 6,967 | Extraordinary items | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net earnings (local GAAP) | 46,669 | 31,375 | 32,113 | 43,924 | 36.8 | 57,558 | 31.0 | 67,420 | 77,288 | 88,239 | Net earnings (UBS) | 43,491 | 28,626 | 32,062 | 43,924 | 37.0 | 57,558 | 31.0 | 67,420 | 77,288 | 88,239 | Tax rate (%) | 25.7 | 39.9 | 44.0 | 44.0 | 0.0 | 44.0 | 0.0 | 44.0 | 44.0 | 44.0 |
| | | | | | | | | | | EPS (UBS, diluted) | 73.67 | 48.49 | 54.10 | 74.12 | 37.0 | 97.12 | 31.0 | 114.21 | 130.93 | 149.48 | EPS (local GAAP, diluted) | 79.06 | 53.15 | 54.19 | 74.12 | 36.8 | 97.12 | 31.0 | 114.21 | 130.93 | 149.48 | EPS (UBS, basic) | 73.67 | 48.49 | 54.10 | 74.12 | 37.0 | 97.12 | 31.0 | 114.21 | 130.93 | 149.48 | Net DPS (Rs) | 14.61 | 12.60 | 12.58 | 18.00 | 43.1 | 18.00 | 0.0 | 18.00 | 18.00 | 18.00 | Cash EPS (UBS, diluted) | 110.43 | 84.47 | 97.66 | 121.56 | 24.5 | 150.79 | 24.1 | 176.44 | 200.62 | 227.58 | Book value per share | 510.68 | 549.60 | 611.41 | 624.50 | 2.1 | 699.84 | 12.1 | 794.94 | 904.00 | 1,031.61 | Average shares (diluted) | 590.32 | 590.32 | 592.63 | 592.64 | 0.0 | 592.64 | 0.0 | 590.32 | 590.32 | 590.32 |
| | | | | | | | | | | Cash and equivalents | 65,228 | 49,118 | 49,065 | 63,778 | 30.0 | 91,552 | 43.5 | 103,425 | 120,738 | 146,752 | Other current assets | 522,061 | 567,766 | 648,099 | 726,402 | 12.1 | 861,751 | 18.6 | 1,051,052 | 1,200,515 | 1,371,488 | Total current assets | 587,289 | 616,884 | 697,164 | 790,180 | 13.3 | 953,302 | 20.6 | 1,154,477 | 1,321,253 | 1,518,240 | Net tangible fixed assets | 254,079 | 266,599 | 302,495 | 338,225 | 11.8 | 370,262 | 9.5 | 397,370 | 420,074 | 437,814 | Net intangible fixed assets | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Investments / other assets | 73,831 | 92,877 | 113,389 | 112,835 | -0.5 | 112,076 | -0.7 | 111,161 | 110,075 | 108,799 | Total assets | 915,198 | 976,360 | 1,113,048 | 1,241,240 | 11.5 | 1,435,641 | 15.7 | 1,663,008 | 1,851,402 | 2,064,853 | Trade payables & other ST liabilities | 204,734 | 213,883 | 247,740 | 278,240 | 12.3 | 319,457 | 14.8 | 361,340 | 403,632 | 450,947 | Short term debt | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total current liabilities | 204,734 | 213,883 | 247,740 | 278,240 | 12.3 | 319,457 | 14.8 | 361,340 | 403,632 | 450,947 | Long term debt | 351,668 | 379,115 | 439,697 | 527,637 | 20.0 | 633,164 | 20.0 | 759,797 | 835,777 | 919,354 | Other long term liabilities | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Preferred shares | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total liabilities (incl pref shares) | 556,402 | 592,998 | 687,438 | 805,877 | 17.2 | 952,621 | 18.2 | 1,121,137 | 1,239,409 | 1,370,301 | Common s/h equity | 301,465 | 324,440 | 362,340 | 370,104 | 2.1 | 414,755 | 12.1 | 469,267 | 533,647 | 608,978 | Minority interests | 57,331 | 58,922 | 63,270 | 65,259 | 3.1 | 68,265 | 4.6 | 72,604 | 78,346 | 85,574 | Total liabilities & equity | 915,198 | 976,360 | 1,113,048 | 1,241,240 | 11.5 | 1,435,641 | 15.7 | 1,663,008 | 1,851,402 | 2,064,853 |
| | | | | | | | | | | Net income (before pref divs) | 46,669 | 31,375 | 32,113 | 43,924 | 36.8 | 57,558 | 31.0 | 67,420 | 77,288 | 88,239 | Depreciation & amortisation | 21,696 | 21,238 | 25,816 | 28,115 | 8.9 | 31,807 | 13.1 | 36,737 | 41,141 | 46,105 | Net change in working capital | (68,185) | (36,557) | (46,476) | (47,803) | -2.9 | (94,133) | -96.9 | (147,418) | (107,171) | (123,658) | Other operating | (8,364) | 236 | 16,334 | 2,542 | -84.4 | 3,766 | 48.1 | 5,254 | 6,828 | 8,503 | Operating cash flow | (8,184) | 16,293 | 27,788 | 26,780 | -3.6 | (1,002) | - | (38,007) | 18,086 | 19,189 | Tangible capital expenditure | (9,806) | (33,758) | (61,713) | (63,845) | -3.5 | (63,845) | 0.0 | (63,845) | (63,845) | (63,845) | Intangible capital expenditure | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net (acquisitions) / disposals | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other investing | (16,419) | (19,448) | (21,497) | 0 | - | 0 | - | 0 | 0 | 0 | Investing cash flow | (26,226) | (53,206) | (83,210) | (63,845) | 23.3 | (63,845) | 0.0 | (63,845) | (63,845) | (63,845) | Equity dividends paid | (9,658) | (8,469) | (8,469) | (8,417) | 0.6 | (12,908) | -53.4 | (12,908) | (12,908) | (12,908) | Share issues / (buybacks) | (3,357) | 2,496 | 2,777 | 0 | - | 0 | - | 0 | 0 | 0 | Other financing | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Change in debt & pref shares | 64,557 | 27,447 | 60,583 | 87,939 | 45.16 | 105,527 | 20.00 | 126,633 | - | - | Financing cash flow | 51,542 | 21,474 | 54,891 | 79,523 | 44.9 | 92,620 | 16.5 | 113,725 | - | - | Cash flow inc/(dec) in cash | 17,132 | (15,439) | (531) | 42,457 | - | 27,773 | -34.6 | 11,873 | - | - | FX / non cash items | 494 | (671) | 478 | (27,744) | - | 0 | - | 0 | - | - | Balance sheet inc/(dec) in cash | 17,626 | (16,110) | (53) | 14,713 | - | 27,773 | 88.8 | 11,873 | 17,313 | 26,014 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.Cash EPS (UBS, diluted) is calculated using UBS net income adding back depreciation and amortization.
Mahindra & Mahindra (MAHM.BO) | | | | | | | | | P/E (local GAAP, diluted) | 11.5 | 23.1 | 23.0 | 19.4 | 14.8 | 12.6 | 11.0 | 9.6 | P/E (UBS, diluted) | 12.3 | 25.4 | 23.0 | 19.4 | 14.8 | 12.6 | 11.0 | 9.6 | P/CEPS | 8.2 | 14.6 | 12.8 | 11.8 | 9.5 | 8.2 | 7.2 | 6.3 | Equity FCF (UBS) yield % | (3.4) | (2.4) | (4.6) | (4.3) | (7.6) | (12.0) | (5.4) | (5.2) | Net dividend yield (%) | 1.6 | 1.0 | 1.0 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | P/BV x | 1.8 | 2.2 | 2.0 | 2.3 | 2.1 | 1.8 | 1.6 | 1.4 | EV/revenues (core) | 1.0 | 1.3 | 1.2 | 1.2 | 1.1 | 1.2 | 1.1 | 1.0 | EV/EBITDA (core) | 8.4 | 13.7 | 11.7 | 9.5 | 7.5 | 8.0 | 7.3 | 6.3 | EV/EBIT (core) | 11.2 | 19.7 | 17.3 | 12.8 | 9.7 | 10.3 | 9.2 | 7.9 | EV/OpFCF (core) | 11.2 | 19.7 | 17.3 | 12.8 | 9.7 | 10.3 | 9.2 | 7.9 | EV/op. invested capital | 1.3 | 1.6 | 1.4 | 1.4 | 1.2 | 1.3 | 1.2 | 1.1 |
| | | | | | | | | Market cap. | 536,444 | 725,799 | 735,617 | 852,207 | 852,207 | 852,207 | 852,207 | 852,207 | Net debt (cash) | 262,974 | 308,218 | 308,218 | 308,218 | 308,218 | 598,992 | 685,705 | 685,705 | Buy out of minorities | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Pension provisions/other | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Total enterprise value | 799,418 | 1,034,017 | 1,043,836 | 1,160,426 | 1,160,426 | 1,451,200 | 1,537,913 | 1,537,913 | Non core assets | (72,620) | (92,081) | (113,340) | (112,786) | (112,026) | (111,111) | (110,025) | (108,750) | Core enterprise value | 726,798 | 941,936 | 930,496 | 1,047,640 | 1,048,399 | 1,340,089 | 1,427,888 | 1,429,163 |
| | | | | | | | | Revenue | 7.8 | -3.4 | 9.0 | 12.3 | 14.8 | 13.1 | 11.7 | 11.7 | EBITDA (UBS) | 13.1 | -20.4 | 15.4 | 38.1 | 27.6 | 19.3 | 17.0 | 16.0 | EBIT (UBS) | 16.3 | -26.5 | 12.6 | 52.2 | 32.5 | 20.4 | 18.4 | 17.1 | EPS (UBS, diluted) | 24.1 | -34.2 | 11.6 | 37.0 | 31.0 | 17.6 | 14.6 | 14.2 | Net DPS | 8.0 | -13.7 | -0.2 | 43.1 | 0.0 | 0.0 | 0.0 | 0.0 |
| | | | | | | | | Gross profit margin | 42.0 | 42.0 | 42.0 | 42.0 | 42.0 | 42.0 | 42.0 | 42.0 | EBITDA margin | 12.0 | 9.8 | 10.4 | 12.8 | 14.3 | 15.0 | 15.7 | 16.4 | EBIT margin | 9.0 | 6.8 | 7.0 | 9.5 | 11.0 | 11.7 | 12.4 | 13.0 | Net earnings (UBS) margin | 6.0 | 4.1 | 4.2 | 5.1 | 5.8 | 6.1 | 6.2 | 6.4 | ROIC (EBIT) | 11.9 | 8.0 | 8.1 | 11.0 | 12.8 | 13.1 | 13.4 | 14.1 | ROIC post tax | 6.9 | NM | 0.6 | 3.7 | 5.1 | 5.5 | 5.8 | 6.2 | ROE (UBS) | 14.9 | 9.1 | 9.3 | 12.0 | 14.7 | 15.3 | 15.4 | 15.4 |
| | | | | | | | | Net debt / EBITDA | 3.3 | 4.8 | 4.9 | 4.2 | 3.9 | 3.9 | 3.7 | 3.4 | Net debt / total equity % | 79.8 | 86.1 | 91.8 | 106.5 | 112.1 | 121.1 | 116.8 | 111.2 | Net debt / (net debt + total equity) % | 44.4 | 46.3 | 47.9 | 51.6 | 52.9 | 54.8 | 53.9 | 52.7 | Net debt/EV % | 39.4 | 35.0 | 42.0 | 44.3 | 51.7 | 49.0 | 50.1 | 54.1 | Capex / depreciation % | 45.2 | 158.9 | NM | NM | NM | 173.8 | 155.2 | 138.5 | Capex / revenue % | 1.4 | 4.8 | 8.1 | 7.4 | 6.5 | 5.7 | 5.1 | 4.6 | EBIT / net interest | 2.2 | 1.5 | 1.6 | 2.0 | 2.4 | 2.5 | 2.6 | 2.7 | Dividend cover (UBS) | 5.0 | 3.8 | 4.3 | 4.1 | 5.4 | 6.3 | 7.3 | 8.3 | Div. payout ratio (UBS) % | 19.8 | 26.0 | 23.2 | 24.3 | 18.5 | 15.8 | 13.7 | 12.0 |
| | | | | | | | | Others | 725,507 | 700,553 | 763,301 | 857,273 | 984,264 | 1,113,309 | 1,243,612 | 1,389,391 | Total | 725,507 | 700,553 | 763,301 | 857,273 | 984,264 | 1,113,309 | 1,243,612 | 1,389,391 |
| | | | | | | | | Others | 65,003 | 47,762 | 53,802 | 81,868 | 108,505 | 130,591 | 154,628 | 181,068 | Total | 65,003 | 47,762 | 53,802 | 81,868 | 108,505 | 130,591 | 154,628 | 181,068 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts. | | | | | Forecast returns | Forecast price appreciation+18.2% | Forecast dividend yield1.3% | Forecast stock return+19.5% | Market return assumption12.4% | Forecast excess return+7.1% | | Valuation Method and Risk Statement We value the M&M parent (incl. Mahindra Vehicle Manufacturers Limited (MVML), and two wheelers business) based on 1yr forward EV/EBITDA and value the key listed subsidiaries at a 20% discount to market price. Principal risk to M&M’s earnings estimates arise from fluctuation in vehicle sales volumes and fluctuation in raw material cost. Other businesses in the M&M group, viz. IT, Infrastructure, financing etc. are exposed to interest rate risk, currency risk etc. Required Disclosures This report has been prepared by UBS Securities India Private Ltd, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 01 September 2016 01:12 PM GMT. Analyst Certification: Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS Investment Research: Global Equity Rating Definitions 12-Month Rating | Definition | Coverage | IB Services | Buy | FSR is > 6% above the MRA. | 47% | 32% | Neutral | FSR is between -6% and 6% of the MRA. | 38% | 25% | Sell | FSR is > 6% below the MRA. | 15% | 21% | Short-Term Rating | Definition | Coverage | IB Services | Buy | Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% | Sell | Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% |
Source: UBS. Rating allocations are as of 30 June 2016. 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. KEY DEFINITIONS: Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES: UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Securities India Private Ltd: Sonal Gupta. Company Disclosures Company Name | Reuters | 12-month rating | Short-term rating | Price | Price date | Mahindra & Mahindra | MAHM.BO | Suspended | N/A | Rs1,438.00 | 31 Aug 2016 |
Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research. Mahindra & Mahindra (Rs) 
Source: UBS; as of 31 Aug 2016 |
Additional Prices: Bajaj Auto, Rs2,980.95 (31 Aug 2016); Eicher Motors Limited, Rs22,732.70 (31 Aug 2016); Hero MotoCorp, Rs3,547.50 (31 Aug 2016); Maruti Suzuki India, Rs5,052.65 (31 Aug 2016); Tata Motors Ltd., Rs537.45 (31 Aug 2016); Ashok Leyland, Rs87.70 (31 Aug 2016); Source: UBS. All prices as of local market close. | Global Disclaimer This document has been prepared by UBS Securities India Private Ltd, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. Global Research is provided to our clients through UBS Neo and, in certain instances, UBS.com (each a "System"). It may also be made available through third party vendors and distributed by UBS and/or third parties via e-mail or alternative electronic means. 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