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Automobile: Tractors God + government support = Tractor market revival INDIA | AUTOMOBILE | Sector Update

28 March 2016

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

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

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

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

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

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

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

pressures.

Companies Escorts Ltd. Reco BUY CMP, Rs Rs140 Target Price, Rs Rs190 Mahindra and Mahindra Reco NEUTRAL CMP, Rs Rs1249 Target Price, Rs Rs1350 Dhawal Doshi (+ 9122 6667 9769) [email protected] Nitesh Sharma, CFA (+ 9122 6667 9965) [email protected]

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

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

TRACTORS SECTOR UPDATE

Table of Contents

Industry to make a recovery… ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 3

Can recovery be sharp? ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 4

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

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

Shift to higher HP continues ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 12

Companies

Escorts Ltd ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 14

Mahindra & Mahindra ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 30



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

‐

100

200

300

400

500

600

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

India has one of lowest tractor penetrations in the world

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

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

0%

10%

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30%

40%

50%

60%

70%

80%

90%

1920 1925 1930 1935 1940 1945 1950 1954 1959 1964 1969

Tractors Horses or Mules

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



India has a long way to go…

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Tractors (RHS) Draught animal

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

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


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

0%

20%

40%

60%

80%

100%

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Escorts Force HMT Intl. TractorsJohndeere Mahindra New Holland SAME DEUTZTAFE VST

15%

20%

25%

30%

35%

40%

45%

0%

5%

10%

15%

20%

FY2011 FY2012 FY2013 FY2014 FY2015 H1FY2016

Intl. Tractors Escorts Others

M&M TAFE


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

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

0%

5%

10%

15%

20%

25%

FY12 FY13 FY14 FY15

Escorts M&M Sonalika

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


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

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



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

Source: CRISIL, PhillipCapital India Research Competition heating up in higher segments While M&M is a clear leader across segments, competition has been heating up in the higher HP segments. In the 51+ HP segment, M&M’s market share has halved to 26% from 61% between FY12‐15. In the 31‐40HP segment, it has lost 7% market share. M&M has been able to maintain its market share mainly because it has gained a large 13% share in the 41‐50HP segment (only growing segment since FY10), which now forms over 46% of the market. This has helped the company maintain its share even with increasing competitive intensity. However, with most players focusing on introducing new products in 40+HP segments (our channel checks suggest), M&M is likely to face stiff competition. Market share up to 30 HP Market share 31‐40 HP


0%

20%

40%

60%

80%

100%


Upto 30 hp 31‐40 hp 41‐50 hp 51 hp and above

15% 13% 12% 11% 3% 1% 1% 2%

7% 5% 2% 2%5% 6% 10% 10%

43% 47% 50% 50%38%

54% 51% 52%

29% 29% 28% 27%40%

26% 22% 17%

4% 5% 7% 8% 11% 10% 11% 13%

0%

20%

40%

60%

80%

100%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16TD

Escorts Force HMT Sonalika Mahindra TAFE VST

8% 9% 9% 8% 11% 14% 14% 13%9% 9% 9% 9%

9%12% 13% 12%

44% 43% 43% 40% 37%37% 36% 39%

31% 32% 32% 37% 35% 30% 30% 30%

0%

20%

40%

60%

80%

100%


Escorts Sonalika Johndeere Mahindra New Holland TAFE

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



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

29% 28% 25% 24%16% 11% 10% 10%

9% 9% 9% 9%8%

7% 9% 10%

29% 28% 31% 30%45%

43% 43% 44%

7% 7% 7% 9% 14%23% 23% 22%

0%

20%

40%

60%

80%

100%


Escorts Sonalika Johndeere Mahindra New Holland TAFE

0% 0% 0% 0% 4% 6% 10% 6%10% 13% 14% 14%

27%36% 31%

25%30% 28% 26% 22%

15%

18% 16%25%

58% 56% 57% 61% 43%24% 26% 29%

1% 2% 2% 1% 1% 2% 3% 4%

0%

20%

40%

60%

80%

100%


Escorts Sonalika Johndeere MahindraNew Holland SAME DEUTZ TAFE




Escorts Ltd. (ESC IN) From legacy to growth INDIA | AUTOMOBILES| Initiating Coverage

28 March 2016

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

BUY (Maintain) CMP RS 140 TARGET RS 190 (+36%) COMPANY DATA O/S SHARES (MN) : 123MARKET CAP (RSBN) : 17MARKET CAP (USDBN) : 0.352 ‐ WK HI/LO (RS) : 189 / 102LIQUIDITY 3M (USDMN) : 1.2PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % Dec 15 Sep 15 Jun 15PROMOTERS : 43.0 43.0 43.0FII / NRI : 8.5 8.3 7.6FI / MF : 3.8 3.4 1.6NON PRO : 18.4 19.9 18.2PUBLIC & OTHERS : 26.4 25.4 29.6 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 11.7 ‐16.1 6.7REL TO BSE 3.5 ‐14.1 16.8 PRICE VS. SENSEX

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Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY16E FY17E FY18ENet Sales 34,793 37,874 43,957EBIDTA 1,512 1,947 2,750Net Profit 872 1,200 1,714EPS, Rs 7.3 10.1 14.4PER, x 19.1 13.9 9.7EV/EBIDTA, x 11.9 8.8 5.8P/BV, x 0.9 0.8 0.8ROE, % 4.7 6.1 8.1Debt/Equity (%) 21.9 20.3 17.9

Source: PhillipCapital India Research Est.

ESCORTS LTD. INITIATING COVERAGE

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

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

Tractor industry volume and growth

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Source: Crisil, PhillipCapital India Research Estimates Sells majorly under two brands Escorts has two marquee brands Farmtrac (FT) and Powertrac (PT) with the former positioned as a premium product (5‐10% vs. competition) with better features. Our checks suggest that FT enjoys a strong brand image and an extremely strong customer base. Powertrac products are more focused on fuel efficiency and cost of ownership; the company claims that its PT products deliver 10% better mileage (our checks with dealers corroborate this). Escorts also has other smaller brands namely Heritage (exports market), Ferrari Tractors (sub‐30hp premium tractors for personal gardening), and Steeltrac Tractors (14HP tractor for row crops).

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

FT and PT brands have separate strongholds – Farmtrac is extremely strong in matured states of Punjab, Haryana, Rajasthan and Western UP. Powertrac has a strong brand image in MP, UP, and Bihar. Our checks suggest that the company has been allocating separate dealerships for FT and PT brands in these markets. The entire southern market mostly remains un‐catered by the company, where it is revamping its marketing strategy along with focus on new launches (highlighted in the section below).



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

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

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

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Source: Company, PhillipCapital India Research Last two years have seen the company launch 15 new products / refresh, revamping almost its entire product portfolio. These new products currently account for 66% of its total volumes sold – this number is likely to improve as the tractor market recovery gathers pace. Product refreshes have seen older models making way for newer and lighter tractors, while retaining most features. This has benefitted the company with improving gross margins.

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

Among new products, Escorts has launched some in a new category such as anti‐lift tractors – focused on haulage customers and 4x4 tractors. Our checks with dealers showed that product quality and features are better than competition in most cases; fuel efficiency is also up to 10% more than peers. While the current ALT line up is in



the 31‐40HP segment, the company has started test marketing its 41‐50HP ALT. Nationwide launch is seen in the coming 2‐3 months. This will significantly bolster volumes, given that the 41‐50HP segment is the largest and fastest growing. Recent product launches (new + refreshed) from Escorts’ stable

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

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

Escorts’ volume contribution and MS in its strong states

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

Escorts’ volume contribution and MS in its weak states

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

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

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

Tractor EBIT margins – Escorts vs. M&M

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M&M Tractor EBIT Margins Escorts Tractor EBIT Margins


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



Raw material cost as a % of sales

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Escorts Sonalika

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

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

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



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

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Escorts M&M Sonalika

Source: Company, MCA, PhillipCapital India Research

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

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




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

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

Railway segment: Revenues and profitability

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Source: Company, PhillipCapital India Research Benefits significantly from the government’s thrust on railways We expect Escorts to be a key beneficiary of the government’s thrust on railways, with rolling stock expected to grow 4‐5x in the next 15 years. Investment by Indian Railways Rolling Stock Category Current Holding (FY14) Incremental requirement by 2032 GrowthFreight Wagons 2,45,266 11,00,000 4.5xElectric Locomotives 4,823 28,000 5.8xDiesel Locomotives 5,633 15,000 2.7xEMU/MEMU/DMU’s 9,371 30,000 3.2xCoaches 50,229 2,10,000 4.2x


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



Railways’ order book consistently rising

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Source: Company, PhillipCapital India Research While most of the increase has come from conventional products, we expect new products to be a major growth driver ahead – the benefits of this are expected to start from H1FY17. Conventional products include air brakes, EP brakes, brake pads, couplers, and dempers – which have an annual market size of Rs 2.5bn, with Escorts holding over 50%. New products: Opportunities galore with high entry barriers Braking systems form a large chunk of Escorts’ railways division revenues. Historically, it has been a supplier of conventional products such as brake blocks and brake pads; however, technological breakthroughs (in‐house and technology tie up) have opened up significant opportunities in a space dominated by a select few multinational companies. It has already executed the development order for bogie‐mounted brake systems (BMBS), for which it expects commercial orders shortly. It is executing the development order for axle‐mounted braking systems (AMBS, likely by H2FY17). While these two will drive revenues in the coming 1‐2 years, Escorts has also developed braking systems for locomotives, for which it is awaiting a final approval from Indian railways.

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

BMBS: So far, Knorr Bremse has a monopoly in this segment – it is the only player supplying BMBS systems to the Indian Railways. Escorts will enter into the fray soon. All new wagons ordered by Indian Railways will be equipped by superior quality and safer BMBS (replacing axle‐mounted disc brakes). Indian Railways’ recent tender to procure 15,000 wagons opens up a ~Rs 4bn opportunity for BMBS. Assuming 10% share for Escorts from this order, its order book will rise significantly. While this represents a near‐term opportunity, replacement demand on existing wagons and fresh ordering by Indian Railways opens up a significant opportunity for Escorts. AMBS: A segment currently dominated by Faiveley and Knorr Bremse, it has a market size of ~Rs 2bn, which is likely to grow 4x with the railways increasing manufacturing of Linke Hofmann Busch (LHB) coaches/year to 4000 coaches by FY18 from 1000 currently. Escorts recently entered this segment via a technology‐transfer agreement with a European company – Dako, and are already supplying development order to the railways for AMBS (to be executed by H2FY17), after which it will start bidding for commercial orders. Locomotive brakes: The highest value proposition in braking systems, where Escorts is yet to receive final approval. The segment (current market size of Rs 2.4bn) will be a long‐term driver. Metros: The segment currently is negligible for Escorts, but holds a lot of potential with the company entering technological tie‐ups. It had recently tied up with Bode



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

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

Brakes YES YES YES UD UD PLAN

Couplers YES N/A YES YES YES PLAN

Shockers UD N/A YES YES YES N/A

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

Source: Company, PhillipCapital India Research *UD: Under Development New products to increase potential market size Products Market potential Existing Products Air Brakes, EP Brakes Couplers, Brake Pads, Suspension Rs 2.5bn New Products Bogey Mounted Brake System

Axle Mounted Brake System ~Rs 6bn

Under Consideration Evaluating 4‐5 new products >Rs16bn



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

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Company snapshot Escorts is a leading player in the agri‐machinery segment and has a presence in construction and material handling equipment, railway equipment, and auto components. It offers a comprehensive range of tractors – more than 45 variants starting from 25HP to 80 HP. Escort, Farmtrac, and Powertrac are widely accepted and preferred brands in tractors. In the railways business, it offers brakes, couplers, shock absorbers, rail fastening systems, composite brake blocks, and vulcanized rubber parts. Its tractor capacity stands at 100,000 units with plants located in Faridabad (Haryana, India). Escorts’ revenue has seen 12% CAGR over FY07‐15 Escorts’ segment margins

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30,000

35,000

40,000

45,000

50,000

Agri Machinery Construction Equipment

Railways Products Auto Products

% yoy (RHS)

‐30%

‐20%

‐10%

0%

10%

20%

30%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16EFY17EFY18E

Agri Machinery Construction EquipmentRailways Products Auto Products

Source: Company, PhillipCapital India Research Key assumptions (Rs Mn) FY14 FY15 FY16E FY17E FY18ERevenues Agri Machinery 35,216 32,108 27,433 29,888 34,933Construction Equipment 4,668 5,158 4,643 4,924 5,470Railways Products 1,825 1,837 2,021 2,425 3,032EBIT Agri Machinery 4,941 2,293 1,975 2,316 2,969Construction Equipment (322) (248) (302) (295) (274)Railways Products 146 175 273 346 455

Source: Company, PhillipCapital India Research Key risks (1) Slower than expected pickup in tractor demand (2) Volatile RM prices (3) Further deterioration in construction equipment business (4) Railways business not ramping up as estimated SWOT analysis Strengths Weaknesses • Robust brand name in northern parts of the

country • Quality products claimed to provide better

efficiency and output vs. competition • Totally revamped product portfolio and strong

R&D

• Weak brand image, except in the northern regions

• Small player in the extremely competitive construction equipment market

• Automotive segment a big drag

Opportunities Threats • Focus in southern and western parts of the

country • New segments in railway products

• Increasing competitive intensity • Raw material prices and currency volatility





Financials Consolidated Income Statement Y/E Mar, Rs mn FY15 FY16e FY17e FY18eNet sales 39,858 34,793 37,874 43,957Growth, % ‐37 ‐13 9 16Other income 0 0 0 0Total income 39,858 34,793 37,874 43,957Raw material expenses ‐28,480 ‐24,007 ‐26,133 ‐30,330Employee expenses ‐4,318 ‐4,318 ‐4,534 ‐4,988Other Operating expenses ‐5,464 ‐4,956 ‐5,259 ‐5,889EBITDA (Core) 1,597 1,512 1,947 2,750Growth, % (58.1) (5.3) 28.8 41.2Margin, % 4.0 4.3 5.1 6.3Depreciation ‐661 ‐633 ‐649 ‐667EBIT 936 878 1,299 2,083Growth, % (68.6) (6.2) 47.8 60.4Margin, % 2.3 2.5 3.4 4.7Interest paid ‐571 ‐477 ‐477 ‐477Other Non‐Operating Income 132 145 159 175Non‐recurring Items ‐306 0 0 0Pre‐tax profit 683 918 1,371 2,212Tax provided 65 ‐46 ‐171 ‐498Profit after tax 747 872 1,200 1,714Others (Minorities, Associates) 0 0 0 0Net Profit 747 872 1,200 1,714Growth, % (56.3) (17.2) 37.5 42.9Net Profit (adjusted) 1,053 872 1,200 1,714Unadj. shares (m) 119 119 119 119Wtd avg shares (m) 119 119 119 119 Balance Sheet Y/E Mar, Rs mn FY15 FY16e FY17e FY18eCash & bank 2,364 2,779 3,523 4,607Debtors 3,971 3,466 3,773 4,379Inventory 4,159 3,506 3,817 4,429Loans & advances 2,332 2,332 2,332 2,332Other current assets 121 121 121 121Total current assets 12,947 12,204 13,565 15,868Investments 3,835 4,315 4,315 4,315Gross fixed assets 24,100 24,600 25,300 26,000Less: Depreciation ‐8,270 ‐8,903 ‐9,552 ‐10,219Add: Capital WIP 555 555 555 555Net fixed assets 16,384 16,251 16,302 16,336Non‐current assets 227 227 227 227Total assets 33,393 32,997 34,409 36,746Current liabilities 9,464 8,364 8,887 9,919Provisions 879 879 879 879Total current liabilities 10,343 9,243 9,766 10,798Non‐current liabilities 5,087 5,087 4,987 4,787Total liabilities 15,430 14,330 14,753 15,585Paid‐up capital 1,193 1,193 1,193 1,193Reserves & surplus 16,770 17,474 18,463 19,967Shareholders’ equity 17,963 18,667 19,656 21,160Total equity & liabilities 33,392 32,996 34,409 36,745 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY15 FY16e FY17e FY18ePre‐tax profit 683 918 1,371 2,212Depreciation 661 633 649 667Chg in working capital ‐1,082 57 ‐94 ‐186Total tax paid ‐191 ‐46 ‐171 ‐498Other operating activities 994 105 87 46Cash flow from operating activities 1,065 1,668 1,841 2,241Capital expenditure ‐517 ‐500 ‐700 ‐700Other investing activities 272 ‐108 390 431Cash flow from investing activities ‐246 ‐608 ‐310 ‐269Dividend (incl. tax) ‐64 ‐168 ‐210 ‐210Other financing activities ‐493 ‐477 ‐477 ‐477Cash flow from financing activities ‐1,074 ‐645 ‐787 ‐887Net chg in cash ‐255 415 744 1,085 Valuation Ratios

FY15 FY16e FY17e FY18ePer Share data EPS (INR) 8.8 7.3 10.1 14.4Growth, % (56.4) (17.2) 37.5 42.9Book NAV/share (INR) 150.5 156.4 164.7 177.3FDEPS (INR) 8.8 7.3 10.1 14.4CEPS (INR) 16.9 12.6 15.5 20.0CFPS (INR) 1.0 11.9 13.4 16.9DPS (INR) 0.5 1.4 1.8 1.8Return ratios Return on assets (%) 3.3 3.5 4.5 5.6Return on equity (%) 5.9 4.7 6.1 8.1Return on capital employed (%) 4.6 4.8 6.0 7.7Turnover ratios Asset turnover (x) 2.5 2.1 2.3 2.7Sales/Total assets (x) 1.2 1.0 1.1 1.2Sales/Net FA (x) 2.4 2.1 2.3 2.7Receivable days 36.4 36.4 36.4 36.4Inventory days 38.1 36.8 36.8 36.8Payable days 66.8 64.8 65.3 66.1Working capital days 10.2 11.1 11.1 11.1Liquidity ratios Current ratio (x) 1.4 1.5 1.5 1.6Quick ratio (x) 0.9 1.0 1.1 1.2Total debt/Equity (%) 22.7 21.9 20.3 17.9Net debt/Equity (%) 9.6 7.0 2.3 (3.9)Valuation PER (x) 15.8 19.1 13.9 9.7PEG (x) ‐ y‐o‐y growth (0.3) (1.1) 0.4 0.2Price/Book (x) 0.9 0.9 0.8 0.8Yield (%) 0.4 1.0 1.0 1.0EV/Net sales (x) 0.5 0.5 0.5 0.4EV/EBITDA (x) 11.5 11.9 8.8 5.8



Mahindra & Mahindra (MM IN)

Win some, lose some INDIA | AUTOMOBILES | Company Update

28 March 2016

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

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

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

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

NEUTRAL (Maintain) CMP RS 1249 TARGET RS 1350 (+8%) COMPANY DATA O/S SHARES (MN) : 621MARKET CAP (RSBN) : 776MARKET CAP (USDBN) : 11.652 ‐ WK HI/LO (RS) : 1441 / 1092LIQUIDITY 3M (USDMN) : 15.8PAR VALUE (RS) : 5 SHARE HOLDING PATTERN, % Dec 15 Sep 15 Jul 15PROMOTERS : 27.1 25.6 25.6FII / NRI : 39.4 41.3 41.8FI / MF : 19.8 19.2 18.2NON PRO : 7.1 2.7 2.4PUBLIC & OTHERS : 6.6 11.1 10.7 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 3.1 ‐0.3 5.6REL TO BSE ‐5.2 1.7 15.7 PRICE VS. SENSEX

50

80

110

140

170

Apr‐14 Oct‐14 Apr‐15 Oct‐15M&M BSE Sensex

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY16E FY17E FY18ENet Sales 386,319 424,339 476,447EBIDTA 51,960 53,679 61,223Net Profit 33,194 34,645 39,442EPS, Rs 56.1 58.6 66.7PER, x 22.3 21.3 18.7EV/EBIDTA, x 14.4 13.8 11.9P/BV, x 3.3 3.0 2.7ROE, % 15.0 14.1 14.4Debt/Equity (%) 9.6 7.3 5.6

Source: PhillipCapital India Research Est.

MAHINDRA & MAHINDRA COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY15 FY16e FY17e FY18eNet sales 374,683 386,319 424,339 476,447Growth, % (3) 3 10 12Other Operating income 0 0 0 0Total income 374,683 386,319 424,339 476,447Raw material expenses ‐257,269 ‐263,663 ‐291,733 ‐327,557Employee expenses ‐24,936 ‐27,042 ‐30,128 ‐33,351Other Operating expenses ‐46,445 ‐43,654 ‐48,799 ‐54,315EBITDA (Core) 46,033 51,960 53,679 61,223Growth, % (12.3) 12.9 3.3 14.1Margin, % 12.3 13.5 12.7 12.9Depreciation (10,980) (12,400) (13,225) (13,975)EBIT 35,053 39,560 40,454 47,249Growth, % (20.1) 12.9 2.3 16.8Margin, % 9.4 10.2 9.5 9.9Other Non‐Operating Income 8,201 7,791 8,570 8,827Pre‐tax profit 43,572 45,223 47,200 54,403Tax provided ‐9,339 ‐12,029 ‐12,555 ‐14,961Profit after tax 34,233 33,194 34,645 39,442Others (Minorities, Associates) 0 0 0 0Net Profit 34,233 33,194 34,645 39,442Growth, % (25.1) 7.5 4.4 13.8Net Profit (adjusted) 30,876 33,194 34,645 39,442Unadj. shares (m) 592 592 592 592Wtd avg shares (m) 592 592 592 592 Balance Sheet Y/E Mar, Rs mn FY15 FY16e FY17e FY18eCash & bank 21,053 11,421 17,084 28,595Debtors 24,241 24,994 27,453 30,825Inventory 28,152 29,026 31,883 35,798Loans & advances 0 0 0 0Total current assets 88,503 82,003 94,639 115,258Investments 161,159 169,216 177,677 186,561Gross fixed assets 165,414 195,414 220,414 245,414Less: Depreciation ‐64,607 ‐77,007 ‐90,232 ‐104,207Net fixed assets 100,807 118,407 130,182 141,207Total assets 350,468 369,627 402,498 443,026Current liabilities 97,117 100,369 110,247 123,785Non‐current liabilities 54,581 47,252 45,994 45,374Total liabilities 151,698 147,621 156,241 169,159Paid‐up capital 2,958 2,958 2,958 2,958Reserves & surplus 195,812 219,048 243,300 270,909Shareholders’ equity 198,770 222,006 246,257 273,867Total equity & liabilities 350,468 369,627 402,498 443,026 Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY15 FY16e FY17e FY18ePre‐tax profit 40,215 45,223 47,200 54,403Depreciation 10,980 12,400 13,225 13,975Chg in working capital 6,960 120 2,905 4,430Total tax paid ‐8,342 ‐12,029 ‐12,555 ‐14,961Other operating activities ‐1,805 ‐5,663 ‐6,746 ‐7,155Cash flow from operating activities 48,008 40,050 44,029 50,692Capital expenditure ‐21,232 ‐30,000 ‐25,000 ‐25,000Other investing activities ‐11,718 1,518 2,041 2,035Cash flow from investing activities ‐32,950 ‐28,482 ‐22,959 ‐22,965Free cash flow 15,058 11,568 21,070 27,727Debt raised/(repaid) ‐12,696 ‐9,115 ‐3,190 ‐2,712Other financing activities ‐11,726 ‐12,086 ‐12,217 ‐13,505Cash flow from financing activities ‐24,422 ‐21,200 ‐15,407 ‐16,216Net chg in cash ‐9,363 ‐9,632 5,663 11,511 Valuation Ratios

FY15 FY16e FY17e FY18ePer Share data EPS (INR) 52.2 56.1 58.6 66.7Growth, % (25.2) 7.5 4.4 13.8Book NAV/share (INR) 336.0 375.3 416.3 463.0FDEPS (INR) 52.2 56.1 58.6 66.7CEPS (INR) 65.1 77.1 80.9 90.3CFPS (INR) 78.1 65.2 72.5 84.1DPS (INR) (17.4) (16.8) (17.6) (20.0)Return ratios Return on assets (%) 10.0 9.2 9.0 9.3Return on equity (%) 15.5 15.0 14.1 14.4Return on capital employed (%) 13.9 12.7 12.3 12.9Turnover ratios Asset turnover (x) 6.5 5.8 5.3 5.5Sales/Total assets (x) 1.1 1.1 1.1 1.1Sales/Net FA (x) 3.9 3.5 3.4 3.5Working capital/Sales (x) (0.1) (0.1) (0.1) (0.1)Fixed capital/Sales (x) 0.4 0.5 0.5 0.5Receivable days 23.6 23.6 23.6 23.6Inventory days 27.4 27.4 27.4 27.4Payable days 64.8 65.7 65.1 65.2Working capital days (28.9) (28.1) (28.1) (28.4)Liquidity ratios Current ratio (x) 0.9 0.8 0.9 0.9Quick ratio (x) 0.6 0.5 0.6 0.6Interest cover (x) 11.5 18.6 22.2 28.3Total debt/Equity (%) 15.3 9.6 7.3 5.6Net debt/Equity (%) 4.7 4.4 0.4 (4.8)Valuation PER (x) 23.9 22.3 21.3 18.7PEG (x) ‐ y‐o‐y growth (0.9) 3.0 4.9 1.4Price/Book (x) 3.7 3.3 3.0 2.7Yield (%) (1.4) (1.3) (1.4) (1.6)EV/Net sales (x) 2.0 1.9 1.7 1.5EV/EBITDA (x) 16.3 14.4 13.8 11.9EV/EBIT (x) 21.3 18.9 18.3 15.4


AUTOMOBILE SECTOR UPDATE

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

B (TP 981)

B (TP 1072)

B (TP 1034)B (TP 1094)

B (TP 1310)

B (TP 1500)B (TP 1500)

B (TP 1500)

B (TP 1550)

B (TP 1452)N (TP 1320)

500

700

900

1100

1300

1500

M‐13

A‐13 J‐13 J‐13 A‐13 O‐13 N‐13 J‐14 F‐14 A‐14 M‐14

J‐14 A‐14 S‐14 N‐14 J‐15 F‐15 M‐15

M‐15

J‐15 A‐15 S‐15 N‐15 D‐15 F‐16

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

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

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

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




Contact Information (Regional Member Companies)

SINGAPORE: Phillip Securities Pte Ltd 250 North Bridge Road, #06‐00 Raffles City Tower,

Singapore 179101 Tel : (65) 6533 6001 Fax: (65) 6535 3834

www.phillip.com.sg

MALAYSIA: Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG: Phillip Securities (HK) Ltd 11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN: Phillip Securities Japan, Ltd 4‐2 Nihonbashi Kabutocho, Chuo‐ku

Tokyo 103‐0026 Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141

www.phillip.co.jp

INDONESIA: PT Phillip Securities Indonesia ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A,

Jakarta 10220, Indonesia Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809

www.phillip.co.id

CHINA: Phillip Financial Advisory (Shanghai) Co. Ltd. No 550 Yan An East Road, Ocean Tower Unit 2318

Shanghai 200 001 Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940

www.phillip.com.cn

THAILAND: Phillip Securities (Thailand) Public Co. Ltd. 15th Floor, Vorawat Building, 849 Silom Road,

Silom, Bangrak, Bangkok 10500 Thailand Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921

www.phillip.co.th

FRANCE: King & Shaxson Capital Ltd. 3rd Floor, 35 Rue de la Bienfaisance

75008 Paris France Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017

www.kingandshaxson.com

UNITED KINGDOM: King & Shaxson Ltd. 6th Floor, Candlewick House, 120 Cannon Street

London, EC4N 6AS Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835

www.kingandshaxson.com

UNITED STATES: Phillip Futures Inc. 141 W Jackson Blvd Ste 3050

The Chicago Board of Trade Building Chicago, IL 60604 USA

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

AUSTRALIA: PhillipCapital Australia Level 37, 530 Collins Street

Melbourne, Victoria 3000, Australia Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309

www.phillipcapital.com.au

SRI LANKA: Asha Phillip Securities Limited Level 4, Millennium House, 46/58 Navam Mawatha,

Colombo 2, Sri Lanka Tel: (94) 11 2429 100 Fax: (94) 11 2429 199

www.ashaphillip.net/home.htm

INDIA: PhillipCapital (India) Private Limited No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

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

Management(91 22) 2483 1919

Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946(91 22) 6667 9735

Research Infrastructure & IT Services Strategy

Dhawal Doshi (9122) 6667 9769 Vibhor Singhal (9122) 6667 9949 Naveen Kulkarni, CFA, FRM (9122) 6667 9947Nitesh Sharma, CFA (9122) 6667 9965 Logistics, Transportation & Midcap Anindya Bhowmik (9122) 6667 9764Agri Inputs Vikram Suryavanshi (9122) 6667 9951 TelecomGauri Anand (9122) 6667 9943 Media Naveen Kulkarni, CFA, FRM (9122) 6667 9947Banking, NBFCs Manoj Behera (9122) 6667 9973 Manoj Behera (9122) 6667 9973Manish Agarwalla (9122) 6667 9962 Metals TechnicalsPradeep Agrawal (9122) 6667 9953 Dhawal Doshi (9122) 6667 9769 Subodh Gupta, CMT (9122) 6667 9762Paresh Jain (9122) 6667 9948 Yash Doshi (9122) 6667 9987 Production ManagerConsumer Midcap Ganesh Deorukhkar (9122) 6667 9966Naveen Kulkarni, CFA, FRM (9122) 6667 9947 Amol Rao (9122) 6667 9952 EditorJubil Jain (9122) 6667 9766 Oil & Gas Roshan Sony 98199 72726Cement Sabri Hazarika (9122) 6667 9756 Sr. Manager – Equities SupportVaibhav Agarwal (9122) 6667 9967 Pharma & Speciality Chem Rosie Ferns (9122) 6667 9971Economics Surya Patra (9122) 6667 9768Anjali Verma (9122) 6667 9969 Mehul Sheth (9122) 6667 9996Engineering, Capital Goods Mid‐Caps & Database ManagerJonas Bhutta (9122) 6667 9759 Deepak Agarwal (9122) 6667 9944Hrishikesh Bhagat (9122) 6667 9986Sales & Distribution Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747 Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745Bhavin Shah (9122) 6667 9974 ExecutionAshka Mehta Gulati (9122) 6667 9934 Mayur Shah (9122) 6667 9945

Corporate Communications

Vineet Bhatnagar (Managing Director)

Jignesh Shah (Head – Equity Derivatives)

Automobiles

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

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

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

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

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

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

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

http://www.kingandshaxson.com/

http://www.kingandshaxson.com/

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

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

http://www.phillipcapital.in/


Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.

Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co‐managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report: Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of thecompany(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No4 PCIL or its affiliates have managed or co‐managed in the previous twelve months a private or public offering of securities for the

company(ies) covered in the Research report No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.




Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.

Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. The recipient should carefully consider whether trading/investment is appropriate for the recipient in light of the recipient’s experience, objectives, financial resources and other relevant circumstances. PCIPL and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by the recipient. The recipient is further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek trading/investment advice before investing. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PCIPL and any of its employees, directors, associates, group entities, affiliates are not inducing the recipient for trading/investing in the financial market(s). Trading/Investment decision is the sole responsibility of the recipient.

For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S.‐regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances, and trading securities held by a research analyst account.

This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by the U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated, and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor.

In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Decker & Co, LLC. Transactions in securities discussed in this research report should be effected through Decker & Co, LLC or another U.S. registered broker dealer PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

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