Global Research

1 September 2016

 

Mahindra & Mahindra

Auto business to surprise market expectations

Reiterate Buy: limited downside; high potential for earnings growth

We believe the market is underestimating the margin and growth outlook for Mahindra & Mahindra’s (M&M) auto business. We expect its auto-business margins to improve from H2 FY17, following the launch of the Scorpio mild-hybrid and a smaller Bolero. We expect utility vehicle (UV) growth to accelerate further, with a couple of new model launches in FY18. The highly profitable tractor business should see further margin expansion with strong volume growth in FY17E and FY18E. We expect a 21% EPS CAGR for the core businesses (M&M and Mahindra Vehicle Manufacturers Limited [MVML]) over the FY16-18 period. Valuation for the core business at 12x FY18 PE looks relatively undemanding. Our downside scenario implies c9% share price downside – implying that a lot of the negatives are already factored in.

Auto-business margin and growth to recover strongly in FY18E

We expect the introduction of the Scorpio mild-hybrid and a smaller Bolero (lower excise duty) variant to boost the auto business’s gross profit by Rs 5bn, offsetting the negative impact of the loss of the Haridwar plant’s excise duty exemption. This is despite assuming a 10% cut in the Bolero’s price, which should also address current demand weakness faced by the brand. We expect SUV growth to accelerate, from 10%YoY in FY17 to 20% in FY18, supported by the introduction a new MPV (replacing the Xylo) and a new mid-size SUV from the Ssangyong range. We raise our FY18-19E EPS by 8-10% on an improving auto business and a strong growth outlook for tractors.

Tractor outperformance to continue; 2W business plan under review

We expect M&M to gain share in the tractor market, driven by stronger growth in regions in which it has a high market share (South, East & West). Significant 2W losses have been a key concern for the market (FY16 loss was equal to 19% of PAT for M&M and MVML). M&M management has acknowledged that its strategy has not worked and that it is restructuring the business plan to significantly reduce losses. The success of management's new 2w strategy remains to be seen, and we believe, among a range of options, an exit from 2W by FY18 could be considered.

Valuation: raise price target from Rs1,430.00 to Rs1,700.00

Our PT increases on the back of our revised earnings estimates. We continue to value the M&M parent (including MVML and the 2W 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.

Equities

India

Automobile Manufacturers

12-month ratingBuy

12m price targetRs1,700.00

Prior: Rs1,430.00

PriceRs1,438.00

RIC:  MAHM.BO BBG:  MM IB

Trading data and key metrics

52-wk rangeRs1,497.40-1,111.40

Market cap.Rs852bn/US$12.7bn

Shares o/s593m (ORD)

Free float75%

Avg. daily volume ('000)1,135

Avg. daily value (m)Rs1,614.6

Common s/h equity (03/17E)Rs370bn

P/BV (03/17E)2.3x

Net debt / EBITDA (03/17E)4.2x

EPS (UBS, diluted) (Rs)

From

To

% ch

Cons.

03/17E

73.55

74.12

1

73.07

03/18E

89.66

97.12

8

85.95

03/19E

104.25

114.21

10

104.26

Sonal Gupta

Analyst

sonal.gupta@ubs.com

+91-22-6155 6063

Highlights (Rsm)

03/14

03/15

03/16

03/17E

03/18E

03/19E

03/20E

03/21E

Revenues

725,507

700,553

763,301

857,273

984,264

1,113,309

1,243,612

1,389,391

EBIT (UBS)

65,003

47,762

53,802

81,868

108,505

130,591

154,628

181,068

Net earnings (UBS)

43,491

28,626

32,062

43,924

57,558

67,420

77,288

88,239

EPS (UBS, diluted) (Rs)

73.67

48.49

54.10

74.12

97.12

114.21

130.93

149.48

DPS (Rs)

14.61

12.60

12.58

18.00

18.00

18.00

18.00

18.00

Net (debt) / cash

(286,440)

(329,996)

(390,632)

(463,858)

(541,613)

(656,372)

(715,039)

(772,602)

Profitability/valuation

03/14

03/15

03/16

03/17E

03/18E

03/19E

03/20E

03/21E

EBIT margin %

9.0

6.8

7.0

9.5

11.0

11.7

12.4

13.0

ROIC (EBIT) %

11.9

8.0

8.1

11.0

12.8

13.1

13.4

14.1

EV/EBITDA (core) x

8.4

13.7

11.7

9.5

7.5

8.0

7.3

6.3

P/E (UBS, diluted) x

12.3

25.4

23.0

19.4

14.8

12.6

11.0

9.6

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

Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of Rs1,438.00 on 31 Aug 2016 22:39 HKT

 

Mahindra & Mahindra

Buy (Price target Rs1,700.00)

UBS Research THESIS MAP

a guide to our thinking and what's where in this report

PIVOTAL QUESTIONS

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.

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.

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.

UBS VIEW

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.

EVIDENCE

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.

WHAT'S PRICED IN?

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.

UPSIDE / DOWNSIDE SPECTRUM

Picture 8

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

COMPANY DESCRIPTION

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...

OUR THESIS IN PICTURES

Chart 19

We expect auto sales to grow at a 15% CAGR over FY16-18 driven by Bolero recovery and new model introductions

Chart 291

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

Chart 25

We expect EBITDA margin to improve 150bps over FY16-18 driven by improvement in auto margins and strong growth in tractors

Chart 296

In our view, valuations do not discount the strong earnings growth outlook

Sources for exhibits above: Company data, UBS Research


PIVOTAL QUESTIONS

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.


Auto margins to improve because of product interventions

According 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

Chart 27

 

Chart 28

Source: Company data

 

Source: Company data, UBS estimates

Scorpio mild-hybrid to improve gross margins by Rs68,000 per unit

On 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 margins

We 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 margins

As 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

Chart 298

 

Chart 294

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

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 sharply

Competitive 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

Chart 288

 

Chart 30

Source: SIAM

 

Source: SIAM

 

A cheaper Bolero could arrest the volume decline

According 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

Chart 290

 

Chart 289

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 likely

Several 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

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

Chart 15

 

Chart 21

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

Chart 23

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

Chart 20

 

Chart 22

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

Chart 14

 

Chart 16

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

Chart 3

 

Chart 293

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)

Chart 9

 

Chart 10

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)

Chart 11

 

Chart 12

Source: Agmarknet, Ministry of Agriculture

 

Source: Agmarknet, Ministry of Agriculture

 

Figure 28: YoY trend in average crop MSPs

Chart 13

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)

Picture 2

 

Chart 29

Source: Labour Ministry, TMA, UBS

 

Source: Government budget documents

 

 

 


WHAT'S PRICED IN?

Chart 18

We think M&M's valuation remains compelling, given a strong earnings growth outlook

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 end

While 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

Chart 31

 

Chart 299

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 CAGR

While 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

 

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

Chart 300

 

Chart 26

Source: Company Data

 

Source: Bloomberg, UBS Estimates

 

2W business under consideration

While 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

Picture 17

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

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 (%)

Chart 24

Source: Company data

Mahindra & Mahindra (MAHM.BO)

Income statement (Rsm)

03/14

03/15

03/16

03/17E

% ch

03/18E

% ch

03/19E

03/20E

03/21E

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

Per share (Rs)

03/14

03/15

03/16

03/17E

% ch

03/18E

% ch

03/19E

03/20E

03/21E

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)1

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

Balance sheet (Rsm)

03/14

03/15

03/16

03/17E

% ch

03/18E

% ch

03/19E

03/20E

03/21E

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

Cash flow (Rsm)

03/14

03/15

03/16

03/17E

% ch

03/18E

% ch

03/19E

03/20E

03/21E

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.1Cash EPS (UBS, diluted) is calculated using UBS net income adding back depreciation and amortization.

Mahindra & Mahindra (MAHM.BO)

Valuation (x)

03/14

03/15

03/16

03/17E

03/18E

03/19E

03/20E

03/21E

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

Enterprise value (Rsm)

03/14

03/15

03/16

03/17E

03/18E

03/19E

03/20E

03/21E

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

Growth (%)

03/14

03/15

03/16

03/17E

03/18E

03/19E

03/20E

03/21E

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

Margins & Profitability (%)

03/14

03/15

03/16

03/17E

03/18E

03/19E

03/20E

03/21E

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

Capital structure & Coverage (x)

03/14

03/15

03/16

03/17E

03/18E

03/19E

03/20E

03/21E

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

Revenues by division (Rsm)

03/14

03/15

03/16

03/17E

03/18E

03/19E

03/20E

03/21E

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

EBIT (UBS) by division (Rsm)

03/14

03/15

03/16

03/17E

03/18E

03/19E

03/20E

03/21E

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

Coverage1

IB Services2

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

Coverage3

IB Services4

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.

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