Company Update | Automobile

May 9, 2018

Mahindra & Mahindra

BUY

M ahindra & Mahindra Ltd (M&M) is an India-based company, operating in

CMP

`860

nine segments: automotive, farm equipment, IT services, financial services,

Target Price

`990

steel trading & processing, infrastructure, hospitality, Systech (comprising

Investment Period

12 Months

automotive components and other related products & services), and Others

(comprising logistics, after-market, two wheelers and investment).

Stock Info

Sector

Automobile

Automotive segment likely to pick up growth: Over the last few years, M&M

Market Cap (` cr)

1,06,921

has been losing market share in Utility segment (down from 38.2% in FY16 to

Net Debt (` cr)

(2,575)

26.1% in FY18) due to lack of petrol variants and absence in the fast-growing

Beta

0.8

52 Week High / Low

888/612

midsize SUV segment comprising Vitara Brezza, Tata Nexon, Ford Ecosport,

Avg. Daily Volume

93,271

Renault Duster etc. Currently M&M is looking to regain market share in the

Face Value (`)

UV space on the back of new launches with petrol variants (high volume

BSE Sensex

35,319

Nifty

10,742

segment) and facelift of other existing variants. During FY19, the company

Reuters Code

MAHM.BO

expects

2 new launches including Mahindra S201 (competing against

Bloomberg Code

MM.IN

Hyundai Creta, Maruti Suzuki S-Cross and Renault Captur) & Mahindra U321

Shareholding Pattern (%)

(against Maruti Ertiga, Innova Crysta, and Renault Lodgy) which should boost

Promoters

21.7

the overall revenues for the company.

MF / Banks / Indian Fls

9.7

FII / NRIs / OCBs

33.2

Better monsoon to trigger further growth in tractor segment: The company

Indian Public / Others

35.4

has reported strong tractor growth number in FY17 (~23% yoy growth) and

Abs.(%)

1yr

3yr

FY18 (~14% yoy growth) due to strong monsoons which resulted in overall

Sensex

2.3

17.7

30.0

improvement in rural markets. IMD & Skymet have predicted normal

M&M

14.8

26.7

46.5

monsoon for FY19 for the third consecutive year which should be a strong

trigger for tractor sales growth. In our view, strong growth in tractor industry

would benefit M&M the most due to strong brand recall and leadership

position in farm tractor.

Outlook and Valuation: We expect Mahindra & Mahindra (M&M) to report

net revenue CAGR of ~15% to ~`62,218cr over FY2018-20E mainly due to

3-year price chart

healthy growth in automobile segment like Utility Vehicles (on the back of new

1000

launches and facelift of some models) and strong growth in Tractors segment

900

800

driven by strong brand recall and improvement in rural sentiment. Further on

700

600

the bottom-line front, we expect CAGR of ~15% to `4771cr over the same

500

400

period on the back of margin improvement. Thus, we recommend BUY rating

300

200

on the stock with target price of `990.

100

Key Financials

Y/E March (` cr)

FY2017

FY2018E

FY2019E

FY2020E

Net sales

44,054

47,316

54,297

62,218

% chg

7.8

7.4

14.8

14.6

Source: Company, Angel Research

A dj. Net profit

3,220

3,614

4,143

4,771

% chg

0.4

12.2

14.6

15.2

EBITDA margin (%)

10.2

11.3

11.8

11.9

EPS (`)

27.1

30.4

34.8

40.1

P/E (x)

31.8

28.3

24.7

21.4

P/BV (x)

4.0

3.6

3.2

2.9

Amarjeet S Maurya

RoE (%)

12.5

12.7

13.1

13.5

022-39357800 Ext: 6831

RoCE (%)

10.5

11.6

13.3

14.3

[email protected]

EV/Sales (x)

1.9

1.8

1.5

1.3

EV/EBITDA (x)

18.9

15.8

12.9

10.8

Source: Company, Angel Research Note: CMP as of May 09, 2018

Please refer to important disclosures at the end of this report

Mahindra & Mahindra Ltd

Key investment arguments

Automotive segment likely to pick up growth: Over the last few years, M&M

has been losing market share in Utility segment (down from 38.2% in FY16 to

26.1% in FY18) due to lack of petrol variants and absence in the fast-growing

midsize SUV segment comprising Vitara Brezza, Tata Nexon, Ford Ecosport,

Renault Duster etc. Currently M&M is looking to regain market share in the UV

space on the back of new launches with petrol variants (high volume segment)

and facelift of other existing variants. During FY19, the company expects 2

new launches including Mahindra S201 (competing against Hyundai Creta,

Maruti Suzuki S-Cross and Renault Captur) & Mahindra U321 (against Maruti

Ertiga, Innova Crysta, and Renault Lodgy) which should boost the overall

revenues for the company.

Exhibit 1: Mahindra’s market share gains from new launches (historical)

Product launched during the years

FY12

FY13

FY14

FY15

FY16

XUV5oo

3.8%

Thar

1.4%

1.5%

Quanto

3.0%

TUV300

4.1%

KUV100

2.4%

Source: Company, Angel Research

Better monsoon to trigger further growth in tractor segment: The company has

reported strong tractor growth number in FY17 (~23% yoy growth) and FY18

(~14% yoy growth) due to strong monsoons which resulted in overall

improvement in rural markets. IMD & Skymet have predicted normal monsoon

for FY19 for the third consecutive year which should be a strong trigger for

tractor sales growth. In our view, strong growth in tractor industry would

benefit M&M the most due to strong brand recall and leadership position in

farm tractor.

May 9, 2018

Mahindra & Mahindra Ltd

Outlook & Valuation: We expect Mahindra & Mahindra (M&M) to report net

revenue CAGR of ~15% to ~`62,218cr over FY2018-20E mainly due to healthy

growth in automobile segment like Utility Vehicles (on the back of new launches

and facelift of some models) and strong growth in Tractors segment driven by

strong brand recall and improvement in rural sentiment. Further on the bottom-

line front, we expect CAGR of ~15% to `4,771cr over the same period on the

back of margin improvement. Thus, we recommend BUY rating on the stock with

target price of `990.

Exhibit 2: STOP Valuation for M&M

Inve stme nt in liste d companie s

Value/Mcap (` cr)

M&M holding (%)

Value ( ` cr)

Tech Mahindra

64,393

26.7

17,193

MMFSL

30,873

51.2

15,807

Mahindra Lifespace Developers

2,387

51.1

1,220

Mahindra Holidays and Re sorts

4,496

67.5

3,035

Mahindra CIE

9,076

17.3

1,570

CIE Automotive Spain

32,420

7.3

2,367

Swaraj Engines

2,498

33.2

829

Mahindra Logistic

3,904

58.8

2,296

Ssangyong

4,239

73.2

3,103

Sub-total

47,419

Investments valued at 25% discount

35,564

Core Busine ss M&M (20PE*EPS FY20 - Excluding divided Income)

82,205

Total Equity Value

1,17,769

No of share

119

Value Per Share

990

CMP

860

Upside s

15%

Source: Company, Angel Research

May 9, 2018

Mahindra & Mahindra Ltd

Downside risks to our estimates

 Strong launches from competitors like Maruti Suzuki, Hyundai Motors and

Ford can grab the market share from M&M

 Poor monsoons can impact the overall earning growth (47% EBIT contribution

from tractors segment)

 Lower growth and profitability of subsidiaries company can be limit upside

Company Background

Mahindra & Mahindra Ltd (M&M) is an India-based company. The company

operates in nine segments: automotive segment comprises sales of

automobiles, spare parts and related services; farm equipment segment

comprises sales of tractors, spare parts and related services; information

technology (IT) services comprises services rendered for IT and telecom;

financial services comprises services relating to financing, leasing and hire

purchase of automobiles and tractors; steel trading and processing;

infrastructure comprising operating of commercial complexes, project

management and development; hospitality segment comprises sale of

timeshare; Systech segment comprises automotive components and other

related products and services, and others segment comprise s logistics, after-

market, two wheelers and investment.

May 9, 2018

Mahindra & Mahindra Ltd

Standalone Profit & Loss Statement

Y/E March (` cr)

FY2016

FY2017

FY2018E

FY2019E

FY2020E

Total operating income

40,875

44,054

47,316

54,297

62,218

% chg

6.3

7.8

7.4

14.8

14.6

Total Expenditure

36,255

39,539

41,969

47,890

54,814

Raw Material

29,516

32,082

33,784

38,442

44,112

Personnel

2,349

2,714

2,981

3,475

3,982

Others Expenses

4,390

4,742

5,205

5,973

6,720

EBITDA

4,620

4,515

5,347

6,407

7,404

% chg

10.7

(2.3)

18.4

19.8

15.6

(% of Net Sales)

11.3

10.2

11.3

11.8

11.9

Depreciation& Amortization

1,068

1,526

1,698

1,808

1,918

EBIT

3,552

2,988

3,649

4,599

5,486

% chg

11.0

(15.9)

22.1

26.0

19.3

(% of Net Sales)

8.7

6.8

7.7

8.5

8.8

Interest & other Charges

186

160

129

145

Other Income

919

1,894

1,500

1,300

(% of PBT)

21.4

40.1

29.9

22.6

19.6

Share in profit of Associ ates

Recurring PBT

4,284

4,723

5,020

5,754

6,641

% chg

2.8

10.2

6.3

14.6

15.4

Tax

1,080

1,079

1,406

1,611

1,870

(% of PBT)

25.2

22.9

28.0

28.2

PAT (reported)

3,205

3,643

3,614

4,143

4,771

Extraordinary Items

(4)

423

ADJ. PAT

3,208

3,220

3,614

4,143

4,771

% chg

5.1

0.4

12.2

14.6

15.2

(% of Net Sales)

7.8

7.3

7.6

7.7

Basic EPS (`)

27.0

27.1

30.4

34.8

40.1

Fully Diluted EPS (`)

27.0

27.1

30.4

34.8

40.1

% chg

5.1

0.4

12.2

14.6

15.2

May 9, 2018

Mahindra & Mahindra Ltd

Standalone Balance Sheet

Y/E March (` cr)

FY2016

FY2017

FY2018E FY2019E

FY2020E

SOURCES OF FUNDS

Equity Share Capital

296

297

Reserves& Surplus

22,127

25,373

28,192

31,423

35,145

Shareholders Funds

22,423

25,670

28,489

31,720

35,441

Total Loans

2,917

2,816

2,900

Deferred Tax Liability

1,440

1,637

Total Liabilities

26,780

30,122

33,026

36,257

39,979

APPLICATION OF FUNDS

Gross Block

13,799

14,938

15,938

16,938

17,938

Less: Acc. De preciation

6,203

7,303

9,001

10,809

12,727

Net Block

7,596

7,635

6,937

6,128

5,210

Capital Work-in-Progress

1,562

2,038

Investments

13,547

17,902

Current Assets

12,794

11,764

14,597

19,388

25,304

Inventories

2,688

2,716

3,111

3,719

4,432

Sundry De btors

2,512

2,918

3,370

4,165

5,114

Cash

2,287

1,687

2,674

4,445

7,048

Loans & Advances

1,763

1,528

2,129

2,715

3,422

Other Assets

3,544

2,914

3,312

4,344

5,289

Current liabilities

9,699

10,158

9,390

10,141

11,418

Net Current Assets

3,095

1,605

5,207

9,247

13,886

Deferred Tax Asset

980

942

Mis. Exp. not written off

Total Assets

26,780

30,122

33,026

36,257

39,979

May 9, 2018

Mahindra & Mahindra Ltd

Standalone Cashflow Statement

Y/E March (` cr)

FY2016

FY2017

FY2018E FY2019E FY2020E

Profit before tax

4216

4639

5020

5754

6641

Depreciation

1068

1327

1698

1808

1918

Change in Working Capital

1412

(31)

(2615)

(2269)

(2037)

Interest / Dividend (Net)

(493)

(834)

Direct taxes paid

(1406)

(1611)

(1870)

Others

196

(138)

C ash Flow from Operati ons

6398

4964

2697

3682

4652

(Inc.)/ Dec. i n Fixed Assets

(2152)

(2060)

(1000)

(Inc.)/ Dec. i n Inve stments

(1387)

(1160)

C ash Flow from Inve sting

(3538)

(3221)

(1000)

Issue of Equity

Inc./(Dec.) in loans

Dividend Paid (Incl. T ax)

(846)

(839)

(795)

(911)

(1050)

Interest / Divide nd (Net)

(1161)

(59)

C ash Flow from Financing

(2007)

(898)

(711)

(911)

(1050)

Inc./(Dec.) in Cash

853

845

987

1771

2603

O pening Cash balance s

917

842

1687

2674

4445

Closing Cash balances

1770

1687

2674

4445

7048

May 9, 2018

Mahindra & Mahindra Ltd

Key Ratios

Y/E March

FY2016

FY2017

FY2018E FY2019E FY2020E

Valuati on Ratio (x)

P/E (on FDEPS)

31.9

31.8

28.3

24.7

21.4

P/CEPS

23.9

19.8

19.3

17.2

15.3

P/BV

4.6

4.0

3.6

3.2

2.9

Dividend yield (%)

0.7

0.8

0.9

1.0

EV/Sales

2.2

1.9

1.8

1.5

1.3

EV/EBITDA

19.3

18.9

15.8

12.9

10.8

EV / Total Assets

3.3

2.8

2.6

2.3

2.0

Per Share Data (`)

EPS (Basic)

27.0

27.1

30.4

34.8

40.1

EPS (fully diluted)

27.0

27.1

30.4

34.8

40.1

Cash EPS

35.9

43.5

44.7

50.0

56.2

DPS

5.9

6.0

6.7

7.7

8.8

Book Value

188.5

215.8

239.5

266.7

298.0

Returns (%)

ROCE

14.0

10.5

11.6

13.3

14.3

Angel ROIC (Pre-tax)

37.4

33.6

33.7

37.5

41.0

ROE

14.3

12.5

12.7

13.1

13.5

Turnover rati os (x)

Asset Turnover (Gross Block)

3.0

2.9

3.0

3.2

3.5

Inventory / S ales (days)

Receivables (days)

Payables (days)

Working capital cycle (ex-cash) (days)

(7)

Source: Company, Angel Research

May 9, 2018

Mahindra & Mahindra Ltd

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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Disclosure of Interest Statement

Mahindra & Mahindra

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

Reduce (-5% to -15%)

Sell (< -15%)

May 9, 2018