A

PROJECT REPORT
ON

“EQUITY RESEARCH ON AUTOMOBILE SECTOR”

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR MASTER
OF MANAGEMENT STUDIES
BATCH 2017-2019
Submitted By:

KISHAN KANISHKA
MMS (FINANCE)
ROLL NO: 17

ALKESH DINESH MODY INSTITUTE FOR FINANCIAL &

MANAGEMENT STUDIES
UINVERSITY OF MUMBAI
 INDEX
SR PARTICULAR PAGE
NO. NO.
1 Introduction - Research Background 1

2 Equity Research 2-12

3 Sector Analysis of Automobile Sector 13

3.1 Introduction 13

3.2 Market Dynamics 14

3.3 Government Initiatives 14

3.4 Road Ahead 15

3.5 Prospects 15-16

3.6 Investments 16

3.7 Porters Five Force Analysis 17-19

3.8 SWOT Analysis of Automobile Industry 19-21

3.9 PEST Analysis of Automobile Industry 22-23

3.10 Future Outlook 23

4 Company Analysis 24

4.1 Maruti Suzuki India Ltd 25-31

4.2 Mahindra and Mahindra Limited (M&M) 32-36

4.3 Comparision OF Maruti Suzuki(MSIL) &Mahindra(M&M) 37

5 Conclusion 38

6 Bibliography 39
 1: INTRODUCTION
*Research Background*

The Automobile industry plays an important role. The liberalization process which was started by
our late Prime Minister Rajeev Gandhi, had given a fillip to the Automobile industry in India. No
other industry had taken the advantage of this liberalization process than the Automobile
industry. Every world famous automotive manufacturer is in the process of setting up a
manufacturing base in India. The first two companies namely General Motors and Ford Motor
Co. are already in the process of establishing their manufacturing activities in India. Other world
famous manufacturers have already located Indian partners and established manufacturing
facilities in India. These include Mercedes Benz of Germany, Daewoo of Korea, and Suzuki of
Japan etc. The liberalization process in India coincided with the establishment of Maruti Udyog
Ltd. which has changed the entire industrial scenario in general, and the Automotive industry
scenario in particular, in India.

That’s why there is huge scope of development of automobile industry in India. Today the per
capita income has also increased, people are ready to spend more and more. People dream of
luxurious product so they are ready to pay anything. And the demand for cars is also increasing
year by year. The automobile sector also provides lot of employment and also builds
infrastructure of the country.

The growth of automobile industry also indicates growth of GDP. Because of 100% FDI lots
MNCs are planning setup their manufacturing plants in India, according to my survey 72.7%
people thinks that there is a growth in automobile industry in near future.

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2: EQUITY RESEARCH

Financial markets sustain on information. Here, information is the prized asset. The desire for
information availability and consumption spurned a whole new industry, popularly known as
Equity Research. Well, to start with, equity research is the study of equities or stocks for the
purpose of investments. Equity research is what an equity research analyst does. In simpler terms,
equity research is the act of gathering information:

(1) Information that helps investors to decide where to put in their money;

(2) Information that traders require to understand whether to enter or exit a market position;

(3) Information that financiers (bankers and firms) need to evaluate companies.

Equities or common stock comprises a big chunk in any company’s capital and
shareholders need to know whether to stay invested in the company or sell the shares and
come out. Both the buy-side and the sell-side companies invest in maintaining an equity
research division. This research may also include bonds and commodities. The function
of the equity researcher is to present a detailed analysis of a company, enabling investors
to make an informed decision. The research report is used by investment banks and
private equity firms to evaluate the company for IPO, LBO, mergers and others.

For an investment bank, the equity research segment produces revenue as buy-side firms pay the
equity research team to delve into its records and analyse information.

As an individual, it is time consuming to do equity research, that is, to study the company, its
financial statements, products, management and take a decision about investment. Exactly for the
same reason, there are people working in research companies whose job is to do equity research
and recommend companies for investment.

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2.1: Purpose of Equity Research

As stated before, the purpose of equity research is to study companies, analyze financials and
look at quantitative and qualitative aspects, helping investors of varying degrees to make an
informed decision. As the name suggests, ‘research’ plays the most important role here.

Over the years, research methods have changed but the sole intention of research remains the
same. The number of investors is booming and so is the need for exploring the nature of
investments.

Investors wish to take calculated and informed decisions, and this is where the role of equity
research begins.

The purpose of equity research and the researcher is manifold. To begin with, one gathers and
analyses industry data and financial models of a specific company or an industry. It also involves
understanding current market trends, both from the perspectives of macro economy and micro
economy, and report findings. Since the equity research targets a specific audience, it is
necessary to tailor the findings to the audience demand.

Further, adequate stress is laid on the accuracy of information. If investors take actions based on
any kind of misinformation or misrepresentation, losses are tremendous and harmful to both the
investor and the company. Therefore, equity analysts spend a considerable amount of time
analyzing stocks and valuating estimates.

3
FUNDAMENTAL ANALYSIS

Fundamental analysis is a method of forecasting the future price movements of afinancial

instrument based on economic, political, environmental and other relevantfactors and statistics that
will affect the basic supply and demand of whatever underliesthe financial instrument. It is the
study of economic, industry and company conditionsin an effort to determine the value of a
company’s stock. Fundamental analysistypically focuses on key statistics in company’s financial
statements to determine if thestock price is correctly valued. The term simply refers to the analysis
of the economicwell-being of a financial entity as opposed to only its price
movements.Fundamental analysis is the cornerstone of investing. The basic philosophy
underlyingthe fundamental analysis is that if an investor invests in buying a share of acompany,
how much expected returns from this investment he has.The fundamental analysis is to appraise the
intrinsic value of a security. It insists thatno one should purchase or sell a share on the basis of tips
and rumors. The fundamentalapproach calls upon the investors to make his buy or sell decision on
the basis of adetailed analysis of the information about the company, about the industry, and
theeconomy. It is also known as “top-down approach”. This approach attempts to study
theeconomic scenario, industry position and the company expectations and is also knownas
“economic-industry-company approach (EIC approach)”
Thus the EIC approach involves three steps:
1. Economic analysis
2. Industry analysis 1.ECONOMIC ANALYSIS
3. Company analysis
2.INDUSTRY ANALYSIS

3.COMPANY
ANALYSIS

4
1. ECONOMIC ANALYSIS
The level of economic activity has an impact on investment in many ways. If theeconomy grows
rapidly, the industry can also be expected to show rapid growth andvice versa. When the level of
economic activity is low, stock prices are low, and whenthe level of economic activity is high, stock
prices are high reflecting the prosperousoutlook for sales and profits of the firms. The analysis of
macro economic environmentis essential to understand the behavior of the stock prices.

The commonly analyzed macro economic factors are as follows:

1. Gross Domestic Product (GDP): GDP indicates the rate of growth of the economy.
Itrepresents the aggregate value of the goods and services produced in the economy.
Itconsists of personal consumption expenditure, gross private domestic investment
andgovernment expenditure on goods and services and net exports of goods and
services.The growth rate of economy points out the prospects for the industrial sector and
thereturn investors can expect from investment in shares. The higher growth rate is
morefavorable to the stock market.
2. Savings and investment: It is obvious that growth requires investment which in
turnrequires substantial amount of domestic savings. Stock market is a channel
throughwhich the savings are made available to the corporate bodies. Savings are
distributedover various assets like equity shares, deposits, mutual funds, real estate and
bullion.The savings and investment patterns of the public affect the stock to a great extent.
3. Inflation: Along with the growth of GDP, if the inflation rate also increases, then thereal
growth would be very little. The effects of inflation on capital markets arenumerous. An
increase in the expected rate of inflation is expected to cause a nominalrise in interest rates.
Also, it increases uncertainty of future business and investmentdecisions. As inflation
increases, it results in extra costs to businesses, therebysqueezing their profit margins and
leading to real declines in profitability.
4. Interest rates: The interest rate affects the cost of financing to the firms. A decrease
ininterest rate implies lower cost of finance for firms and more profitability. More moneyis
available at a lower interest rate for the brokers who are doing business withborrowed
money. Availability of cheap funds encourages speculation and rise in theprice of shares.
5. Tax structure: Every year in March, the business community eagerly awaits
theGovernment’s announcement regarding the tax policy. Concessions and incentivesgiven
to a certain industry encourage investment in that particular industry. Tax relief’sgiven to

5
 savings encourage savings. The type of tax exemption has impact on theprofitability of the
industries.
6. Infrastructure facilities: Infrastructure facilities are essential for the growth ofindustrial
and agricultural sector. A wide network of communication system is a mustfor the growth of
the economy. Regular supply of power without any power cut wouldboost the production.
Banking and financial sectors also should be sound enough toprovide adequate support to
the industry. Good infrastructure facilities affect the stockmarket favorably.

2. INDUSTRY ANALYSIS
An industry is a group of firms that have similar technological structure of productionand produce
similar products and Industry analysis is a type of business research thatfocuses on the status of an
industry or an industrial sector (a broad industryclassification, like "manufacturing"). Irrespective of
specific economic situations, someindustries might be expected to perform better, and share prices
in these industries maynot decline as much as in other industries. This identification of economic
and industryspecific factors influencing share prices will help investors to identify the shares that
fitindividual expectations.
Industry Life Cycle:The industry life cycle theory is generally attributed to JuliusGrodensky.
The life cycle of the industry is separated into four well defined stages.

I. Pioneering stage: The prospective demand for the product is promising in thisstage and the
technology of the product is low. The demand for the product attractsmany producers to
produce the particular product. There would be severe competitionand only fittest
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 companies survive this stage. The producers try to develop brand name,differentiate the
product and create a product image. In this situation, it is difficult toselect companies for
investment because the survival rate is unknown.
II. Rapid growth stage: This stage starts with the appearance of surviving firmsfrom the
pioneering stage. The companies that have withstood the competition growstrongly in
market share and financial performance. The technology of the productionwould have
improved resulting in low cost of production and good quality products.The companies have
stable growth rate in this stage and they declare dividend to theshareholders. It is advisable
to invest in the shares of these companies.
III. Maturity and stabilization stage: the growth rate tends to moderate and the rateof growth
would be more or less equal to the industrial growth rate or the grossdomestic product
growth rate. Symptoms of obsolescence may appear in thetechnology. To keep going,
technological innovations in the production process andproducts should be introduced. The
investors have to closely monitor the events thattake place in the maturity stage of the
industry.
IV. Decline stage: demand for the particular product and the earnings of thecompanies in the
industry decline. It is better to avoid investing in the shares of the lowgrowth industry even
in the boom period. Investment in the shares of these types ofcompanies leads to erosion of
capital.

Growth of the industry: The historical performance of the industry in terms of growthand
profitability should be analyzed. The past variability in return and growth inreaction to macro
economic factors provide an insight into the future.

Nature of competition:Nature of competition is an essential factor that determines thedemand

for the particular product, its profitability and the price of the concernedcompany scrips. The
companies' ability to withstand the local as well as themultinational competition counts much. If too
many firms are present in the organizedsector, the competition would be severe. The competition
would lead to a decline in theprice of the product. The investor before investing in the scrip of a
company shouldanalyze the market share of the particular company's product and should compare
itwith the top five companies.

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SWOT analysis:SWOT analysis represents the strength, weakness, opportunity andthreat for an
industry. Every investor should carry out a SWOT analysis for the chosenindustry. Take for
instance, increase in demand for the industry’s product becomes itsstrength, presence of numerous
players in the market, i.e. competition becomes thethreat to a particular company. The progress in R
& D in that industry is an opportunityand entry of multinationals in the industry is a threat. In this
way the factors are to bearranged and analyzed.

3. COMPANY ANALYSIS
In the company analysis the investor assimilates the several bits of information relatedto the
company and evaluates the present and future values of the stock. The risk andreturn associated
with the purchase of the stock is analyzed to take better investmentdecisions. The present and future
values are affected by a number of factors.
A. Competitive edge of the company:Major industries in India are composed ofhundreds of
individual companies. Though the number of companies is large, only fewcompanies control
the major market share. The competitiveness of the company can bestudied with the help of
the following.
B. Market share: The market share of the annual sales helps to determine acompany’s relative
competitive position within the industry. If the market shareis high, the company would be
able to meet the competition successfully. Thecompanies in the market should be compared
with like product groupsotherwise, the results will be misleading.
C. Growth of sales: The rapid growth in sales would keep the shareholder in abetter position
than one with stagnant growth rate. Investors generally prefersize and growth in sales
because the larger size companies may be able towithstand the business cycle rather than the
company of smaller size.
D. Stability of sales: If a firm has stable sales revenue, it will have more stableearnings. The
fall in the market share indicates the declining trend of company,even if the sales are stable.
Hence the stability of sales should be compared withits market share and the competitor’s
market share.
E. Earnings of the company: Sales alone do not increase the earnings but the costs
andexpenses of the company also influence the earnings. Further, earnings do not
alwaysincrease with increase in sales. The company’s sales might have increased but
itsearnings per share may decline due to rise in costs. Hence, the investor should not
onlydepend on the sales, but should analyze the earnings of the company.

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Financial analysis:
The best source of financial information about a company is itsown financial statements. This is a
primary source of information for evaluating theinvestment prospects in the particular company’s
stock. Financial statement analysis isthe study of a company’s financial statement from various
viewpoints. The statementgives the historical and current information about the company’s
operations. Historicalfinancial statement helps to predict the future and the current information aids
toanalyze the present status of the company. The two main statements used in the analysisare
Balance sheet and Profit and Loss Account.
The balance sheet is one of the financial statements that companies prepare every yearfor their
shareholders. It is like a financial snapshot, the company's financial situation ata moment in time. It
is prepared at the year end, listing the company's current assets andliabilities. It helps to study the
capital structure of the company. It is better for theinvestor to avoid a company with excessive debt
component in its capital structure.From the balance sheet, liquidity position of the company can also
be assessed with theinformation on current assets and current liabilities.

Ratio analysis:Ratio is a relationship between two figures expressed mathematically.Financial

ratios provide numerical relationship between two relevant financial data.Financial ratios are
calculated from the balance sheet and profit and loss account. Therelationship can be either
expressed as a percent or as a quotient. Ratios summarize thedata for easy understanding,
comparison and interpretations.
Ratios for investment purposes can be classified into profitability ratios, turnover ratios,and
leverage ratios. Profitability ratios are the most popular ratios since investors preferto measure the
present profit performance and use this information to forecast the futurestrength of the company.
The most often used profitability ratios are return on assets,price earnings multiplier, price to book
value, price to cash flow, and price to sales,dividend yield, return on equity, present value of cash
flows, and profit margins.

a) Return on Assets (ROA)

ROA is computed as the product of the net profit margin and the total asset turnoverratios.
ROA = (Net Profit/Total income) x (Total income/Total Assets)
This ratio indicates the firm's strategic success. Companies can have one of twostrategies: cost
leadership, or product differentiation. ROA should be rising or keepingpace with the company's

9
competitors if the company is successfully pursuing either ofthese strategies, but how ROA rises
will depend on the company's strategy. ROAshould rise with a successful cost leadership strategy
because the company’s increasingoperating efficiency. An example is an increasing, total asset,
turnover ratio as thecompany expands into new markets, increasing its market share. The company
mayachieve leadership by using its assets more efficiently. With a successful productdifferentiation
strategy, ROA will rise because of a rising profit margin.

b) Return on Investment (ROI)

ROI is the return on capital invested in business, i.e., if an investment Rs 1 crore inmen, machines,
land and material is made to generate Rs. 25 lakhs of net profit, thenthe ROI is 25%. The
computation of return on investment is as follows:
Return on Investment (ROI) = (Net profit/Equity investments) x 100
As this ratio reveals how well the resources of a firm are being used, higher the ratio,better are the
results. The return on shareholder’s investment should be compared withthe return of other similar
firms in the same industry. The inert-firm comparison of thisratio determines whether the
investments in the firm are attractive or not as theinvestors would like to invest only where the
return is higher.

c) Return on Equity
Return on equity measures how much an equity shareholder's investment is actuallyearning. The
return on equity tells the investor how much the invested rupee is earningfrom the company. The
higher the number, the better is the performance of thecompany and suggests the usefulness of the
projects the company has invested in.The computation of return on equity is as follows:
Return on equity = (Net profit to owners/value of the specific owner's
Contribution to the business) x 100
The ratio is more meaningful to the equity shareholders who are invested to knowprofits earned by
the company and those profits which can be made available to paydividend to them.

d) Earnings per Share (EPS)

This ratio determines what the company is earning for every share. For many investors,earnings are
the most important tool. EPS is calculated by dividing the earnings (netprofit) by the total number
of equity shares.The computation of EPS is as follows:
Earnings per share = Net profit/Number of shares outstanding

10
The EPS is a good measure of profitability and when compared with EPS of similarother
companies, it gives a view of the comparative earnings or earnings power of afirm. EPS calculated
for a number of years indicates whether or not earning power ofthe company has increased.

e) Dividend per Share (DPS)

The extent of payment of dividend to the shareholders is measured in the form ofdividend per share.
The dividend per share gives the amount of cash flow from thecompany to the owners and is
calculated as follows:
Dividend per share = Total dividend payment / Number of shares outstanding
The payment of dividend can have several interpretations to the shareholder. Thedistribution of
dividend could be thought of as the distribution of excessprofits/abnormal profits by the company.
On the other hand, it could also be negativelyinterpreted as lack of investment opportunities. In all,
dividend payout gives the extentof inflows to the shareholders from the company.

f) Dividend Payout Ratio

From the profits of each company a cash flow called dividend is distributed among itsshareholders.
This is the continuous stream of cash flow to the owners of shares, apartfrom the price differentials
(capital gains) in the market. The return to the shareholders,in the form of dividend, out of the
company's profit is measured through the payoutratio. The payout ratio is computed as follows:
Payout Ratio = (Dividend per share / Earnings per share) * 100
The percentage of payout ratio can also be used to compute the percentage of retainedearnings. The
profits available for distribution are either paid as dividends or retainedinternally for business
growth opportunities. Hence, when dividends are not declared,the entire profit is ploughed back into
the business for its future investments.

g) Dividend Yield
Dividend yield is computed by relating the dividend per share to the market price of theshare. The
market place provides opportunities for the investor to buy the company'sshare at any point of time.
The price at which the share has been bought from themarket is the actual cost of the investment to
the shareholder. The market price is to betaken as the cum-dividend price. Dividend yield relates
the actual cost to the cash flowsreceived from the company. The computation of dividend yield is as
follows
Dividend yield = (Dividend per share / Market price per share) * 100

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High dividend yield ratios are usually interpreted as undervalued companies in themarket. The
market price is a measure of future discounted values, while the dividendper share is the present
return from the investment. Hence, a high dividend yieldimplies that the share has been under
priced in the market. On the other hand a lowdividend yield need not be interpreted as
overvaluation of shares. A company that doesnot pay out dividends will not have a dividend yield
and the real measure of the marketprice will be in terms of earnings per share and not through the
dividend payments.

h) Price/Earnings Ratio (P/E)

The P/E multiplier or the price earnings ratio relates the current market price of theshare to the
earnings per share. This is computed as follows:
Price/earnings ratio = Current market price / Earnings per share
This ratio is calculated to make an estimate of appreciation in the value of a share of acompany and
is widely used by investors to decide whether or not to buy shares in aparticular company. Many
investors prefer to buy the company's shares at a low P/Eratio since the general interpretation is that
the market is undervaluing the share andthere will be a correction in the market price sooner or
later. A very high P/E ratio onthe other hand implies that the company's shares are overvalued and
the investor canbenefit by selling the shares at this high market price.

i) Debt-to-Equity Ratio
Debt-Equity ratio is used to measure the claims of outsiders and the owners against thefirm’s assets.
Debt-to-equity ratio = Outsiders Funds / Shareholders Funds
The debt-equity ratio is calculated to measure the extent to which debt financing hasbeen used in a
business. It indicates the proportionate claims of owners and theoutsiders against the firm’s assets.
The purpose is to get an idea of the cushion availableto outsiders on the liquidation of the firm.

12
SECTOR ANALYSIS OF AUTOMOBILE SECTOR

3.1: INTRODUCTION

The Indian auto industry became the 4th largest in the world with sales increasing 9.5 per cent
year-on-year to 4.02 million units (excluding two wheelers). It was the 7th largest manufacturer
of commercial vehicles.

The Indian automobile market can be divided into several segments viz., two-wheelers
(motorcycles, geared and ungeared scooters and mopeds), three wheelers, commercial vehicles
(light, medium and heavy), passenger cars, utility vehicles (UVs) and tractors.

Demand is linked to economic growth and rise in income levels. Further, it is inversely related to
the interest rates and fuel prices as 85% of the total vehicles are bought on credit. Per capita
penetration at around eighteen cars per thousand people is among the lowest in the world
(including other developing economies like Pakistan in segments like cars).

While the industry is highly capital intensive in nature in case of four-wheelers, capital intensity
is a lot less for two-wheelers. Costs involved in branding, distribution network and spare parts
availability increase entry barriers. With the Indian market moving towards complying with
global standards, capital expenditure will rise to take into account future safety regulations.

As compared to their global counterparts, both the two-wheeler as well as four wheeler segments
are relatively lesser fragmented. As a result, pricing power is likely to diminish going forward.

Automobile majors increase profitability by selling more units. As number of units sold
increases, average cost of selling an incremental unit comes down. This is because the industry
has a high fixed cost component. This is the key reason why operating efficiency through
increased localization of components and maximizing output per employee is of significance.

Overall automobile exports from India grew at 6.86 per cent CAGR between FY13-18. In
addition, several initiatives by the Government of India and the major automobile players in the
Indian market are expected to make India a leader in the two wheeler and four wheeler market in
the world by 2020.

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3.2: MARKET DYNAMICS

Overall domestic automobiles sales increased at 7.01 per cent CAGR between FY13-18 with
24.97 million vehicles getting sold in FY18.

The auto industry is set to witness major changes in the form of electric vehicles (EVs), shared
mobility, Bharat Stage-VI emission and safety norms. Electric cars in India are expected to get
new green number plates and may also get free parking for three years along with toll waivers@.
Sales of electric two-wheelers are estimated to have crossed 55,000 vehicles in 2017-18.
Premium motorbike sales in India crossed one million units in FY18.

3.3: GOVERNMENT INITIATIVES

The Government of India encourages foreign investment in the automobile sector and allows 100
per cent FDI under the automatic route.

Some of the recent initiatives taken by the Government of India are -

 The Government of Karnataka is going to obtain electric vehicles under FAME Scheme and
set up charging infrastructure across Bengaluru, according to Mr R V Deshpande, Minister
for Large and Medium Industries of Karnataka.

 The Ministry of Heavy Industries, Government of India has shortlisted 11 cities in the
country for introduction of electric vehicles (EVs) in their public transport systems under the
FAME (Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles in India)
scheme. The government will also set up incubation centre for startups working in electric
vehicles space.

 Energy Efficiency Services Limited (EESL), under Ministry for Power and New and
Renewable Energy, Government of India, is planning to procure 10,000 e-vehicles via
demand aggregation, and has already awarded contracts to Tata Motors Ltd for 250 e-cars
and to Mahindra and Mahindra for 150 e-cars.

 The government is planning to set up a committee to develop an institutional framework on

large-scale adoption of electric vehicles in India as a viable clean energy mode, especially for

14
 shared mass transport, to help bring down pollution level in major cities.

3.4: ROAD AHEAD

The automobile industry is supported by various factors such as availability of skilled labour at
low cost, robust R&D centres and low cost steel production.

The industry also provides great opportunities for investment and direct and indirect employment
to skilled and unskilled labour.

Indian automotive industry (including component manufacturing) is expected to reach Rs 16.16-

18.18 trillion (US$ 251.4-282.8 billion) by 2026. Two-wheelers are expected to grow 9 per cent
in 2018.

3.5: PROSPECTS

 The current government has been trying to revive the economy and has been very
aggressive in terms of infrastructure spending. The spending on constructing roads, airports
and expected high GDP growth will benefit auto sector in general. In fact, the lower interest
regime also bodes well the for the sector as more than 80% of the vehicles in India are
financed.

 Historically, the Indian Passenger car market has been skewed towards small passenger cars.
However, there is a structural change taking place in the industry with demand for UVs
taking over the passenger car. This shift is paving a way towards new avenues of the growth
and will result in a more profitable growth for the sector.

 In the 2-wheeler segment, motorcycles are expected to witness a flurry of new model
launches. Though the market size is expected to grow by 10% to 12%, competitive pressure
could keep prices and margins under control. TVS, Honda and Hero Motocorp will continue
to benefit from higher demand for ungeared scooters in the urban and rural markets. In the
last four years, scooters have grown at a faster clip than motorcycles and this trend is
expected to continue going forward. The 3 wheeler industry, where Bajaj Auto is the market
leader, is also poised for growth on the back of new permits and increase in exports.

 While good monsoon is a positive for the tractor sector, assuming that non-farm incomes
climb up, volumes should hold up well in the longer run despite a year or two of poor
15
 monsoons. The longer-term picture is healthy in light of poor mechanization levels in the
country’s farm sector and the thrust of the government on improving rural infrastructure.

 Demand for HCVs is expected to grow by 7% to 8% over the long term. The privatization of
select state transport undertakings bodes well for the bus segment.

 Auto industry has witnessed multiple tailwinds in last two to three years like multi-year low
interest rates, subdued metal prices (major raw material), low oil prices (translating to lower
petrol prices), however, we see many of these factors showing early signs of reversal. This
can result pressure on both the volumes and profitability.

 The government of India has shown an increased interest towards electric vehicles and has set
for an ambitious target of all electric cars by 2030. There is an increasing buzz for e-mobility
and all the companies in the sector are preparing themselves for the future. However, this is
easier said than done, the necessary infrastructure (charging stations) for e-vehicles will be a
major roadblock for government’s ambitious target.

3.6: INVESTMENTS

In order to keep up with the growing demand, several auto makers have started investing heavily
in various segments of the industry during the last few months. The industry has attracted Foreign
Direct Investment (FDI) worth US$ 18.413 billion during the period April 2000 to December
2017, according to data released by Department of Industrial Policy and Promotion (DIPP). The
maximum annual growth in FDI in Automobile Industry of $ 151.65 million was recorded in the
year 2007-08 during the period under consideration. The maximum annual growth in percentage
terms in FDI in Automobile Industry of 151.65% was recorded in the year 2007-08 during the
period under consideration. The maximum share of FDI in Automobile Industry in total FDI in
India of 15.53% was recorded in the year 2002-03 during the period under consideration. Leading
global players like ISUZU Motors, Ford Motors, Tata Motors, Honda, and Suzuki Motors have
already invested heavily in the manufacturing sector resulting in the establishment of new
assembly lines, manufacturing, and greenfield units, thereby boosting the automotive
manufacturing ecosystem in India.

Some of the recent/planned investments and developments in the automobile sector in India are
as follows:

 Ashok Leyland has planned a capital expenditure of Rs 1,000 crore (US$ 155.20 million) to
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 launch 20-25 new models across various commercial vehicle categories in 2018-19.

 Mahindra & Mahindra (M & M) is planning to make an additional investment of Rs 500 crore
(US$ 77.23 million) for expanding the capacity for electric vehicles in its plant in Chakan.

3.7: PORTERS FIVE FORCE ANALYSIS

A. Competitive Rivalry

The rivalry in India is high and yet, the industry has not yet reached its phase of shake out and it
is still making struggles to measure up to leaders in the automobile industry. This is translated to:

 Product differentiation

 Low costs of storage

 Limitations by the government to curb competition

 Large size industry

17
 Fast growth rate in the industry

 Entry of few competitors

B. Threats Of New Entrants

In majority of markets, the expertise and capital required to setup parts or auto manufacturing
facilities would be a huge entry barrier. What this means is that new entrants would have a hard
time setting up. However, this is not the case in India given its incredible forecasts on growth,
infrastructure progress as well as ever increasing financing options. All these aspects make the
industry attractive. This translates to:

 High capital requirement

 High sunk costs that limit competition

 Requirement of advanced technologies

 Patent limit for new competition

 Economies of scale

 Need to brand names that are strong

C. Threat of Substitute Products

India is well known for 2-wheelers (mopeds and bikes) and 3 wheelers which are real and
obvious threats to manufacturers of automobiles. This means:

 There is a high threat in terms of making a switch to substitutes

 The substitutes are limited

D. Bargaining Power of Suppliers

It is very likely that manufactures have high bargaining power. This means they cannot be held at
ransom by one manufacturer because they can easily market their products in India. This translates to:

 High level of competition among suppliers

18
 Low suppliers concentration

 Critical inputs production

 Critical volume to supplier

E. Bargaining Power of Customers

When it comes to choice, buyers in India have numerous options to choose from. There are over
twenty foreign manufacturers in the country and this includes high end manufacturers like
Lamborghini and Rolls-Royce. What is more, they also have a large number of cheap options to
choose from such as the well-known Tata Nano. Because of this:

 The buyer price sensitivity is low

 There is a low distributors dependency

 The number of customers is large

3.8: SWOT ANALYSIS OF AUTOMOBILE INDUSTRY

A. STRENGTHS

 Evolving Industry: Automobiles represent freedom and economic growth. Automobiles

allow people to live, work and travel in ways that were unimaginable a century ago.
Automobiles provide access to markets, to doctors, to jobs. Nearly every automobile trip ends
with either an economic transaction or some other benefit to the quality of life.

 Continuous product innovation & technological advancement : With the advent of E-

vehicles & alternative fuel such as Shell gas, CNG and others, Automobile Companies are
increasing R & D expenditure to drive the next phase of growth through use of renewable
sources of energy which may be solar, wind etc.

 Growth shifting to Asian markets: Although American & European market is the pulse of
this Industry, but the focus is shifting to developing markets like China, India & other Asian
nations because of the rise in disposable income, changing lifestyle & stable economic
conditions.

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 Increasing demand of VFM vehicles: Intense competition in the matured/developed
markets has forced automobile manufacturers to target developing economies. But these
developing economies have high demand for VFM products (value for money). In the
automobile industry, VFM products would be fuel efficient, high mileage vehicles because
majority of customers in these nations prefer vehicles for commuting. On the other hand,
developed nations need is of vehicles for interstate travelling and high speed vehicles suitable
for long route with high engine power.

 Increase in demand of luxury commercial vehicles: Companies like VOLVO,

Daimler/Chrysler, Bharat Benz are betting high & are targeting the developing nations due to
increase in demand of Luxury public transportation system.

 Manufacturing facilities in Asian nations to control cost : In order to control cost & to
manage shrinking margins automobile companies like Harley, Volvo, Bharat benz etc. are
building their manufacturing facilities in developing nations like India, China because these
nations have cheap workforce, are high in resources & are nearer to developed economies.
These are classic conditions of an emerging market.

B. WEAKNESSES

 Cars recalled: Controversies relating to recalling vehicles on account of some technical dis-
functionality or non-abidance to govt. led rules is becoming very common.

 Bargaining power of consumers: Over the last 3-4 decades the automobile market has
shifted from demand to supply market. Availability of large number of variants, Stiff
competition between them, and long list of alternatives to choose from has given power to
customers to choose whatever they like.

 Growth Rate: Growth rate of Automobile industry is the in the hands of the government due
to regulations like excise duty, no entry of outside vehicles in the state, decreasing number of
validity of registration period & volatility in the fuel prices. These factors always affect the
growth of the industry.

C. OPPORTUNITIES

 Introducing fuel-efficient vehicles: Optimization of fuel-driven combustion engines and

cost efficiency programs are good opportunities for the automobile market. Emerging markets

20
 will be the main growth drivers for a long time to come, and hence fuel efficient cars are the
need of the hour.

 Strategic Alliances: Making strategic alliances can be a smart strategy for Automobile
companies. By using specialized capabilities & partnering with other companies, they
can differentiate their offerings.

 Changing lifestyle & customer groups: Three powerful forces are rolling the auto
industry. Shift in consumer demand, expanded regulatory requirements for safety and fuel
economy, and the increased availability of data and information. Also with the increase in
nuclear families there has been increase in demand of two-wheelers & compact cars and this
will grow further.

 Market expansion: Entering new markets like Asian & BRIC nations will result in upsurge
in demand of vehicles. After these markets, other markets are likely to emerge soon.

 OEM priorities: Given the increase in electronic content, OEMs need to collaborate with
suppliers and experts outside the traditional auto industry. Accomplishing this will require
changes in the way OEMs function. OEMs will be looking to their top suppliers to co-invest
in new global platforms & this will be the driving force in the future.

D. THREATS

 Intense Competition: Presence of such a large number of players in the Automobile industry
results into extensive competition, every company eating into others share leaving little scope
for new players.

 Volatility in the fuel Prices: At least for the passenger segment fluctuations in the fuel prices
remains the determining factor for its growth. Also government regulations relating the use of
alternative fuels like CNG. Shell gas is also affecting the inventories.

 Sluggish Economy: Macroeconomic uncertainty, Recession, un-employment etc. are the

economic factors which will daunt the automobile industry for a long period of time.

 High fixed cost and investment in R & D: Due to the fact that mature markets are already
overcrowded, industry is shifting towards emerging markets by building facilities, R & D
centres in these markets. But the ROI out of these decisions is yet to be capitalized.

21
3.9: PEST ANALYSIS OF AUTOMOBILE INDUSTRY

A. Political factors

The Indian automobile industry has attracted many investors. All these are pooled in three main
regions despite the expansive size of the country. This is due to the fact that these areas are more
developed as compared to other regions. The government has a hand in this because it has
invested in the development of these regions.

Politically speaking, the automobile industry has greatly benefited from the government of India.
The government has set up bodies which help the automobile industry in carrying out research
and development. These bodies also maintain a monitoring system for the automobile industry

B. Economic factors

India has also been experiencing economic growth at an average 6% and the automobile industry
contributes 22% to the GDP of the country. This makes it a very important income generating
activity for the country. This growth has rippled its way to create consumers as there is a huge
growing middle class in India. This class of people is increasingly purchasing automobiles and
this is evident in the increased sales of certain vehicles in the past decade.

Without economic growth, India would not be able to attract as many foreign investors in the
automobile industry. It is thus important for the country to sustain this upward growth as it will
affect all its manufacturing industries.

Additionally, the price of certain crucial commodities has also influenced the automobile. Crude
oil and petroleum products always affect the automobile industries. Rise in the world market
price of these products makes things expensive and this trickles down to automobile manufacture
as well as maintenance.

C. Social factors

India is fast becoming an automobile industry hub because of its large population. This forms a
bustling market for the manufacturers. The tastes of the populations may vary but manufacturers
always take note of the fast selling automobiles and create appropriate designs. For instance, in
the past three years, there has been a surge of two-wheeler vehicles because of their convenience
in the country. Many automobile industries have created these vehicles for domestic consumers.

22
 D. Technological factors

The automobile industry has grown because there are several technological inventions. These are
used not only in manufacture of the vehicles but also to reduce expenses for the vehicle buyers.
The government is also helping in research and development to ensure that both producers and
consumers are happy and encouraged to invest in the automobile industry.

3.10: FUTURE OUTLOOK

 The Indian automobile market is tipped to become the third largest in the world by 2020
according to estimates by Ernst & Young.

 While many of the global OEMs are increasing their designing focus in the Indian market,
most of the new launches in the Indian market are global successful mode.

 Automobile sector has been opened up for FDI long back. Daimler BMW etc. are all 100%
subsidiary of their parent companies with no local partners.

 The global automotive game will be pretty much decided by twin forces for China and India.

 India automotive industry is going through the transformation phase. Political stability, new
regulations, increasing competition and rising consumer expectations will shape the way auto
manufacturers or suppliers do their business in India.

 The long-term outlook remains positive for strong fundamental reasons such as high GDP
growth, adequate financing availability, higher per capita GDP, decreasing unemployment,
increasing disposable incomes, favourable demographics, and rising consumer expectations.

 The new government’s efforts to implement a GST, build smart cities, and revive key sectors
such as mining and infrastructure should boost job creation. Other key factors for substantial
growth are higher spending on infrastructure and the government’s focus on rural areas.

 In fact, we expect the India automotive sales to exceed the US market by mid 2030s.

 The engineering R&D services market is expected to be on a roll with increasing interest by
the global companies to set up their captive R&D centre in the country.

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4:COMPANY ANALYSIS

Company analysis consists of measuring its performance and ascertaining the cause of this
performance. When some companies have done well irrespective of economic or industry
failures, it implies that there are certain unique characteristics for this particular company that
had made it a success. The identification of these characteristics whether quantitative or
qualitative, is referred to as company analysis

Quantitative indicators of company analysis are the financial indicators and operational
efficiency indicators. Financial indicators are the profitability indicators and financial position
indicators, analyzed through the income and balance sheet statement of the company.

Qualitative factors are the management reputation, name of the company, operational plans of the
company for the future and so on as revealed in the director’s /auditor's reports and also the
information revealed by the management to the media.

Comparable company analysis starts with establishing a peer group consisting of similar
companies of similar size in the same industry and region. Investors are then able to use online
resources to compare a particular company to its competitors. This information can be used to
determine a company's enterprise value and to calculate other ratios used to compare a company
to those in its peers.

24
4.1-MARUTI SUZUKI LIMITED

A. About Company

Maruti Suzuki India Ltd (MSIL), commonly referred to as Maruti and formerly known as Maruti
Udyog Ltd, is an automobile manufacturer in India. The company is engaged in the business of
manufacture, purchase and sale of motor vehicles, automobile components and spare parts
(automobiles).

At present, the company is sitting on a capacity to make almost 1.5 million cars a year and it is in
the process of adding capacity for another 250,000 cars. The company also pledged to invest in
new, cost-effective technologies that bring down greenhouse gas emissions of its facilities. The
Company is actively supporting the government, in laying down a robust policy framework to
promote electric and hybrid vehicles in the country. It is also part of government efforts to
introduce corporate fleet emission norms for 2015 and 2020.

Key Highlights :-

 While the industry grew by 4.8% during the quarter, company grew by 14.3% implying gain
in the market share.

 Nexa contributes ~20% of MSIL’s business.

 Total discounts during the quarter were at `16,600 vs. 15,194 in 4QFY17 and `16,800 in
1QFY17.

 Company has indicated that demand scenario remains strong and company will bring more
efficiency through cost reduction programs.

 During the quarter, company has felt the impact of higher raw material prices, however
expects the steady state of the commodity prices going ahead.

25
 The higher promotional expenses (30bps) and compensation due to the GST (50bps)
contributed in decline in the margins.

 The royalty of the new models is still in discussion with Suzuki and company has not given
any clarity at this time.

 Company has indicated that the retail sales in June were higher and in the first ten days of
July, there was slowdown in retail sales and demand has seen pick up now.

 Company expects ~1.5mn vehicles from the existing two plants and 150,000 vehicles from
the Gujarat plant in FY18. It also expects to add second line at Gujarat plant in 2019.

 Company has indicated of ~125,000 export volumes in FY18.  MSIL has guided FY18E full
year capex of `4,500cr of which `900cr has been spend by 1QFY18.

 While all vendors have not moved to Gujarat, company expects the same to change in next
three years will all vendors moving to the Gujarat for all the models that MSIL will assemble
at the this plant.

 Company has said that Baleno/Dzire /Brezza have 16/16/20 weeks of waiting period

 Maruti Suzuki Launches first premium urban compact vehicle named Ignis for millennials

 Setup New production plant in Gujarat

 Vitara Brezza becomes Car of the Year 2017 and emerges as India’s top 10 selling Models.

B. Investments Highlights

 MSIL outperforming the industry: MSIL is the largest passenger car manufacturer in the
country and enjoys a leadership position. MSIL has been outperforming the industry PV
growth. While the industry in volume terms grew by 3.4% from FY13-FY17, MSIL’s
domestic sales grew by 8.3%. Owing to this, its market share has also grown from ~39% in
FY13 to ~50% in early FY18. With the well timed model launches, entry in premium
vehicles, and nationwide reach, MSIL has achieved this superior growth record. This theme is
likely to continue in our opinion with MSIL maintaining more than 50% market share.

 MSIL expected to gain market share: MSIL’s major product portfolio is more towards the
petrol cars where it enjoys highest market shares among its peers. The lower petrol prices as
well as have benefitted the company and continued weakness in crude prices is expected to
26
 benefit the company by keeping petrol prices at lower levels. Strong dealership network and
improved product mix is expected to benefit the company in gaining further market share. We
also expect the passenger vehicle penetration to go up in the country which will help MSIL as
it already covers most part of the country through its robust dealership network.

 Easing capacity constraints: MSIL has started production at its Gujarat facility which
currently has a capacity of 150k vehicles per annum. The plant produced ~24,000 units in the
quarter and company expects to increase this numbers going ahead. It also has plans to add
another line at this plant which will be operational in 2019.

 Expansion of Nexa: MSIL launched NEXA a few years ago in order to sales the premium
cars like S-Cross, Baleno, Ciaz, etc. The Nexa dealership has since grown to 266 outlets and
company expects to increase Nexa dealerships to 300. The new cars launched by the
company are offered through the Nexa and the ramp of the same is expected to be positive on
its business.

C. Increase in Outlets:

Maruti Suzuki India (MSI) has recently crossed the 2000 sales outlet mark in India. This includes
the company's total sales network - Maruti Suzuki dealerships, Nexa showrooms, and Maruti
Suzuki True Value. The company has consciously ramped up its sales network in the last five
years to grow from 1100 outlets to 2000, thereby nearly doubling its sales network in the country.
This means that the company has introduced around 200 sales outlets every fiscal year in the last
five years in India. In comparison, rival Hyundai has 475 dealerships and more than 1,226 service
points across India, whereas home-grown automaker Tata Motors 597 sales outlets across India,
while when you factor in the company's overall sales and service outlets (including commercial
vehicles) the figures goes above 6,600 outlets.

In the past five years, Maruti Suzuki India has strengthened its footprint in the country from 800
cities to 1643 cities, doubling its reach to customers from different tiers. This means in the past
five years, the company has been expanding its reach to 100 to 150 cities on an average per year.
Moreover, the company has announced that it is on course to meet its target of 4000 outlets by
2020. This expansion includes, existing Maruti Suzuki channel, Nexa, Commercial and True
Value outlets. In fact, this target is in line with the company's strategy to sell 20 lakh (2 million)
units by the year 2020.

27
In addition, the company's premium retail chain Nexa, which sells the S-Cross, Baleno, Ignisand
now the Baleno RS as well, is set to grow to 250 outlets by the end of this fiscal from 127 last
year. The company had 222 Nexa outlets in India by February 2017 and is currently present in
136 cities.

Talking about the sales network expansion a company spokesperson said, "In recent years just as
the company has introduced new models in new segments, the company has also consciously
expanded its sales outlets, introduced new channel to reach out to new set of customers through
NEXA. Marching towards its medium-term goal of attaining 2 million units in 2020, the
company will take the total network tally to 4000 by 2020. This includes a 360-degree expansion
across all formats, existing channel, NEXA, Commercial and True Value. Our aim will be to be
closer to customers."

D. Production aligning with demand, major concern on the verge of getting

resolved

Management mentioned that the company witnessed a double digit growth in the recently
concluded festive season. With its recent launches of the new Dzire, Baleno, Brezza& Ignis and
the waiting period associated with them, success of its existing models like Ertiga, Ciaz, Celerio
etc we expect MSIL to attract a good demand in the rest of FY18E and FY19E, possibly quite
stronger than FY17 on the back of new low base and two variants Swift (to be launched in Q4)
and Dzire (launched recently). Benign competition, wide distribution network, continuous
demand from the cab aggregators, good monsoon leading to rural demand (YTD 19% growth as
compared to overall growth of ~15% YTD) and the positive impact of Seventh Pay Commission
trickling in (government employees contributed 20% of volumes in Q3), we expect robust
demand for MSIL to continue.

With the Phase I of Gujarat plant having commissioned from Q4 FY17, it is expected to add 2.5
lakh units as exit capacity of FY18 which would cater to the additional pickup in demand and
ease up with the waiting periods of the new launches. MSIL produced 36,000 units (v/s 24,000 in
Q2) from this plant in Q3 while they expect to produce 150,000 units in FY18, which would
move up to 250,000 units by FY19 end.

28
 E. Financials & Valuation:
(Rs. In Million)
Income & Expenditure of Maruti Suzuki Limited
Particulars FY2017 FY2018E FY2019E FY2020E CAGR(%)
Total Revenues 680,348 783,178 1,027,608 1,171,869 14.56
Raw Material Cost 467,316 520,440 660,654 747,009 12.44
Employee Cost 23,310 26,238 34,511 44,270 17.39
EBITDA 103,530 121,615 169,685 203,100 18.35
EBITDA Margin (%) 15.5 15.9 16.8 17.6 3.22
Other Income 22,798 18,000 15,000 15,000 -9.94
Depreciation 26,021 18,332 23,460 25,254 -0.76
EBIT 100,307 121,283 161,225 192,846 17.76
EBIT Margin (%) 15 15.8 16 16.7 2.72
Interest 894 1000 1000 1200 7.64
PBT 99,413 120,283 160,225 191,646 17.83
PBT Margin (%) 11 11.1 11.1 11.6 1.33
Tax 26,036 34,882 48,068 57,494 21.90
PAT 73,377 85,401 112,158 134,152 16.28
PAT Margin (%) 11 11.1 11.1 11.6 1.33

(Rs. In Million)
Balance Sheet of Maruti Suzuki Limited
Particulars FY2017 FY2018E FY2019E FY2020E
Net worth 361,711 395,649 491,207 608,759
Total Debt 0 0 0 0
Deferred Tax 4640 4640 4640 4640
Other Long Term Liabilities 11,269 11,669 14,169 16,169
Current Liabilities 132,313 151,124 177,348 197,072
Total Liabilities 5,09,933 5,63,082 6,87,364 8,26,640
Fixed Assets 145,415 164,083 193,623 229,369
Investments 278,419 300,679 367,678 434,678
Current Assets 86,099 98,320 126,063 162,593
Total Assets 5,09,933 5,63,082 6,87,364 8,26,640

29
 Key Ratios
Particulars FY2017 FY2018E FY2019E FY2020E
Per Share Data(Rs.)
Adj. EPS 243 282.8 371.4 444.2
CEPS 329.1 343.5 449.1 527.8
BVPS 1197.7 1310.1 1626.5 2015.8
Growth Rate(%)
Total Revenues 18.5 14.7 31.6 14.1
EBITDA 16.5 17.5 39.5 19.7
PAT 36.8 16.4 31.3 19.6
EPS Growth 36.8 16.4 31.3 19.6
Valuation Ratio(X)
PE 38.2 32.8 25.0 20.9
P/CEPS 28.2 27.0 20.7 17.6
P/BV 7.7 7.1 5.7 4.6
EV/Sales 4.1 3.6 2.7 2.4
EV/EBITDA 27.1 23.0 16.5 13.8
Operating Ratio(Days)
Inventory Days 25.5 27.0 28.5 32.0
Receivable Days 8.6 8.0 9.5 12.0
Payable Day 2.6 2.5 2.0 1.9
Net Debt/Equity 0.01 0.01 0.01 0.01
Profitability Ratios(%)
ROCE 14.5 20.7 25.7 25.9
ROE 20.3 21.6 22.8 22.0
Dividend Payout 16.5 14.2 10.8 9.0
Dividend Yield 0.4 0.4 0.4 0.4

30
 F. Conclusion and Recommendation:
MSIL posted a robust show in Q4FY18 on strong volumes and healthy margins. With
expectations of economic revival continuing in the ensuing years along with recent and upcoming
launches from the company, we believe the strength in volumes which has come back well post
DeMon and GST will continue to remain so.

Implementation of 7th Pay Commission will continue over next 1-2 years thus keeping the
demand for passenger vehicles from that pocket buoyant. With all of its plants running at ~100%
capacity utilization rates, Gujarat plant ramp up of Phase I by FY18E and FY 19E may pour
volumes thus eliminating the current capacity constraints.

Furthermore, flexibility of production plants to accommodate high demand products will also aid
to resolve capacity issues. Margins may face a bit of pressure in the remainder of FY18E and
FY19E on the back of increasing metal prices, Gujarat plant ramp up and higher launch costs.
However, gradual operating leverage, favourable product mix, higher localization, price and
reduction in discounts will almost take care of the aforementioned concerns. We have slightly
reduced our FY18E/19E estimates to accommodate hike in RM costs, while we have introduced
FY20E estimates, thus maintaining BUY with a target price of ₹10,217.

G. Share Price Trend of Maruti Suzuki:

Maruti Suzuki Share Price has increased from Rs. 1,375 to 6,518 in five years at an compounded
annual growth rate of 48.20%.

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4.2: MAHINDRA & MAHINDRA LIMITED

A. About Company

Mahindra and Mahindra Limited (M&M) is an

Indian multinational car manufacturing corporation headquartered in Mumbai, Maharashtra,
India. It is one of the largest vehicle manufacturers by production in India and the largest
manufacturer of tractors in the world. It is a part of the Mahindra Group, an Indian conglomerate.
It was ranked 21st on a list of top companies in India by Fortune India 500 in 2011. Its major
competitors in the Indian market include Maruti Suzuki, Tata Motors and Ashok Leyland.

Founded in 1945 as a steel trading company, Mahindra and Mahindra (M&M) entered
automotive manufacturing in 1947 to bring the iconic Willys Jeep to Indian roads. Over the
years, the company diversified into many new businesses in order to better meet the needs of the
customers.

With over 65 years of operations, M&M is still India's premier utility vehicle (UV) company. In
addition to making groundbreaking UVs like the Scorpio and Bolero, Mahindra offers cars,
electric vehicles, pickups, and commercial vehicles that are rugged, reliable, environment
friendly, and fuel-efficient.

Mahindra maintains its vast customer base through the construction of excellent components,
provision of spares, and commitment to superior service. The company also successfully caters to
customers’ transportation needs through its expert design, top-class manufacturing, and top-of-
the-line service.

32
 B. Key Highlights :-

 In recent years, the main reasons for the loss of M&M’s market share in UVs are: a) failure to
exploit the strong demand for compact SUVs and crossovers; and b) subdued volume
performance of new launches (TUV3OO and KUV1OO). However, we expect the business to
get back on track given the company's strong focus on addressing product gaps (a new MPV
and Tivoli-based SUV), as well as launching refreshed versions and petrol variants across its
portfolio. Moreover, the tractor business is in a sweet spot to benefit from robust industry
demand and sustain market share gains on the back of launches and network expansion.

 At the recent Farm Equipment Segment (FES) investor day, M&M management: (1) shed
light on its ambition in the global agri-machinery space; 2) made a commitment to improve
EBIT margin of the global FES business from -1% to 5% over the medium term (this would
add 3–5% to consolidated profit in our view); 3) indicated strong underlying demand in the
domestic market with tractor penetration at only 40% of the peak potential of 16.2m tractors;
and 4) showcased digitization initiatives to facilitate customer experience. This vindicates our
thesis that M&M is on track to address the two key investor concerns — UV and profitability
of subsidiaries

 Empirical data indicates that despite two strong years of growth, tractor industry can continue
to grow driven by normal monsoon, expected improvement in ATOT and support from infra
related demand (especially in a pre-election year).

C. Investments Highlights

 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.

33
 D. Financials & Valuation:

(Rs. In Cr.)
Income & Expenditure of Mahindra & Mahindra Limited
Particulars FY2017 FY2018E FY2019E FY2020E CAGR(%)
Total Revenues 44,054 47,316 54,297 62,218 9.01
Raw Material Cost 32,082 33,784 38,442 44,112 8.29
Employee Cost 2,714 2,981 3,475 3,982 10.06
Other Expenses 4,742 5,205 5,973 6,720 9.10
EBITDA 4,515 5,347 6,407 7,404 13.16
Other Income 1,894 1,500 1,300 1,300 -8.98
Depreciation 1,526 1,698 1,808 1,918 5.88
EBIT 4,883 5,149 5,899 6,786 8.58
Interest 160 129 145 145 -2.43
PBT 4,723 5,020 5,754 6,641 8.89
Tax 1,079 1,406 1,611 1,870 14.73
PAT 3,644 3,614 4,142 4,771 6.97

(Rs. In Million)
Balance Sheet of Mahindra & Mahindra Limited
Particulars FY2017 FY2018E FY2019E FY2020E
Net worth 25,670 28,489 31,720 35,441
Total Debt 2,816 2,900 2,900 2,900
Deferred Tax 1,637 1,637 1,637 1,637
Total Liabilities 30,123 33,026 36,257 39,979
Fixed Assets 9,673 8,975 8,166 7,248
Investments 17,902 17,902 17,902 17,902
Current Assets 1,605 5,207 9,247 13,886
Deferred Tax Asset 942 942 942 942
Total Assets 30,122 33,026 36,257 39,979

34
 Key Ratios
Particulars FY2017 FY2018E FY2019E FY2020E
Per Share Data(Rs.)
Adj. EPS 27.1 30.4 34.8 40.1
CEPS 43.5 44.7 50.0 56.2
BVPS 215.8 239.5 266.7 298
Valuation Ratio(X)
PE 31.8 28.3 24.7 21.4
P/CEPS 19.8 19.3 17.2 15.3
P/BV 4.0 3.6 3.2 2.9
EV/Sales 1.9 1.8 1.5 1.3
EV/EBITDA 18.9 15.8 12.9 10.8
Operating Ratio(Days)
Inventory Days 22 24 25 26
Receivable Days 24 26 28 30
Payable Day 53 49 45 44
Net Debt/Equity 0.11 0.11 0.09 0.08
Profitability Ratios(%)
ROCE 10.5 11.6 13.3 14.3
ROE 12.5 12.7 13.1 13.5
Dividend Yield 0.7 0.8 0.9 1.0

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 E. Conclusion and Recommendation:

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 bottomline
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.

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 3 COMPARISION OF Maruti Suzuki(MSIL) &Mahindra(M&M)

Ratio Formula Parameter MSIL M&M Remarks

Price to = Stock Price/ Higher the 7.7 4.1 MSIL is
Book Value Total Asset-Intangible Asset & Better better than
Liabilities M&M
EV to Sales (Market cap + Debt- Lower the 4.1 1.9 M&M is
cash)/Annual sales Better better than
MSIL
EV to (Market cap + Debt- Lower the 27.1 18.9 M&M is
EBITDA cash)/EBITDA Better better than
MSIL
Price to Market Price per Lower the 34.55 25.87 M&M is
Earnings Share/Earnings Per Share Better better than
Ratio MSIL
Book Value Higher the 1453.02 243.89 MSIL is
Better better than
M&M
Dividend Divided/Share Capital Higher the 1600 150 MSIL is
(%) Better better than
M&M
Earnings Per Profit Attributable to Higher the 269.49 35.17 MSIL is
Share Shareholder/No. of Better better than
Outstanding Share M&M

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5. CONCLUSION

From the comparison table, it is very evident that the Maruti Suzuki Ltd. is performing better
than Mahindra & Mahindra Ltd.

Maruti Suzuki has emerged has a trusted brand in Indian Market. Maruti Suzuki grabbed 50%
market share in the passenger vehicles segment for the first time ever in 2017-18 as its utility
vehicle sales outpaced that of rivals. Maruti, India’s biggest car maker also sold more than 1.5
million units for the first time in its over-three decade history. At 1.65 million, Maruti’s sales
were 14% more than the year before, and almost twice the pace of the passenger vehicles
industry. Nexa has taken off well; Suzuki investing in Gujarat has freed up resources. These
decisions were initially met with hesitation, but we understand the market well. It has all paid
off.”

Therefore, it can be concluded that Maruti Suzuki is better buy than M&M.

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6-BIBLIOGRAPHY

A. Website:

 https://www.equitymaster.com/

 Official Website of Companies

 https://tradingeconomics.com/

 https://www.ibef.org/industry/india-automobiles.aspx

 https://www.marutisuzuki.com/

 https://www.nexaexperience.com/

 http://marutisuzukicommercial.com/

 http://www.mahindra.com/business/automotive

 https://www.moneycontrol.com/

B. Newspaper:

 Business Standard

 Economic Times

 Financial Times

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