Date of Research – 19 January 2016
Price – Rs. 1162.00
About the Company
Mahindra & Mahindra Limited (“Mahindra & Mahindra” or the “Company”) is a major automobile manufacturer of utility vehicles, passenger cars, pickup trucks, commercial vehicles, and two wheelers.
STRENGTHS
Leadership Position in Indian Tractor Industry
The tractor industry in India is dominated by 3 players viz. M&M, TAFE and Escorts who together control 70% of the overall tractor market. M&M is the market leader with ~42% market share. M&M has maintained its market share in domestic tractor industry since acquisition of Swaraj Tractors in FY 2009. The company plans to launch six new tractors in the next three years, three each under its Mahindra and Swaraj brands.
New Product Launches
The company is planning to regain its share in the sports utility vehicle (SUV) segment. The management is planning to aggressively launch new products in this segment, which it has begun with the launch of new XUV500 in Q1FY2016.
CHALLENGES
Increasing Competition
There is moderate to high competition in the automobile sector in domestic market. The company faces stiff competition in the SUV market and has lost its share to Renault (Duster) and Ford Motor Company (EcoSport). The competition is going to increase in future as Maruti Suzuki and Hyundai Motor are planning to launch their vehicles in this segment.
High dependence on Monsoon & Government policies
Tractors sales are highly correlated with monsoons. Weak monsoons can adversely affect tractor demand, thereby affecting the future prospects of the company.
Key Financial Figures
| Consolidated | (Rs. Cr) | ||||
|---|---|---|---|---|---|
| Particulars | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 |
| Total Income from Operations | 68,735.66 | 74,000.93 | 71,948.59 | 78,015.60 | 88,983.03 |
| Expenses | 59,619.87 | 63,880.77 | 63,155.30 | 68,368.21 | 78,251.81 |
| Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) | 9,115.79 | 10,120.16 | 8,793.29 | 9,647.39 | 10,731.22 |
| Depreciation | 2,079.86 | 2,169.57 | 2,123.83 | 2,581.64 | 2,809.11 |
| Finance Costs | 2,297.00 | 2,953.93 | 3,156.69 | 3,372.94 | 3,648.46 |
| Other income | 388.94 | 505.09 | 525.03 | 541.00 | 730.10 |
| Exceptional items | (452.50) | (317.85) | (274.90) | (5.03) | (447.11) |
| PBT | 5,580.37 | 5,819.60 | 4,312.70 | 4,238.84 | 5,450.86 |
| Tax | 1,934.63 | 1,496.22 | 1,720.02 | 1,863.65 | 2,299.73 |
| Extraordinary items | – | – | – | – | – |
| PAT (before Minority Interest and share of Associates) | 3,645.74 | 4,323.38 | 2,592.68 | 2,375.19 | 3,151.13 |
| Profit/ (loss) attributable to Minority Interest | 29.95 | 486.87 | 243.91 | 139.86 | – |
| Share of profit / (loss) of Associates | (483.41) | (830.42) | (788.70) | (975.93) | (899.40) |
| Consolidated Profit / (Loss) for the year | 4,099.20 | 4,666.93 | 3,137.47 | 3,211.26 | 4,050.53 |
Profitability Analysis
| Consolidated | (%) | ||||
|---|---|---|---|---|---|
| Particulars | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 |
| Operating Profit Margin Ratio | 13.26 | 13.68 | 12.22 | 12.37 | 12.06 |
| Net Profit Margin Ratio | 5.30 | 5.84 | 3.60 | 3.04 | 3.54 |
Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.
Key Balance Sheet Figures
| Sources of Funds / Liabilities | (Rs. Cr) | ||||
|---|---|---|---|---|---|
| Particulars | FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 |
| Share Capital | 294.52 | 295.16 | 295.16 | 295.70 | 296.32 |
| Reserves & Surplus | 16,475.69 | 19,665.54 | 23,011.70 | 25,560.68 | 28,323.32 |
| Employee Stock Option Outstanding | – | – | – | – | – |
| Net worth (shareholders funds) | 16,770.21 | 19,960.70 | 23,306.86 | 25,856.30 | 28,619.64 |
| Minority Interest | 4,525.16 | 5,296.97 | 5,733.10 | 5,892.23 | 6,327.03 |
| Long term borrowings | 16,039.86 | 19,860.26 | 25,491.75 | 22,327.03 | 25,096.30 |
| Current liabilities | 21,908.65 | 26,103.33 | 27,558.36 | 33,732.80 | 40,057.12 |
| Other long term liabilities and provisions | 3,902.68 | 4,355.03 | 4,978.22 | 5,748.71 | 6,570.77 |
| Deferred Tax Liabilities | 722.62 | 893.50 | 1,201.97 | 1,286.83 | 1,552.03 |
| Total Liabilities | 63,869.18 | 76,469.79 | 88,270.26 | 94,843.98 | 1,08,222.89 |
| Application of Funds / Assets | (Rs. Cr) | ||||
|---|---|---|---|---|---|
| Particulars | FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 |
| Fixed Assets | 18,692.38 | 17,941.20 | 19,228.02 | 21,314.61 | 24,185.94 |
| Noncurrent Investments | 3,426.64 | 4,626.20 | 5,852.37 | 7,898.99 | 8,744.17 |
| Current assets | 29,010.64 | 34,020.10 | 39,594.43 | 39,750.11 | 46,544.99 |
| Long term advances and other noncurrent assets | 12,401.36 | 17,546.59 | 21,869.78 | 24,648.23 | 27,259.19 |
| Deferred Tax Assets | 338.16 | 338.36 | 381.67 | 467.77 | 709.14 |
| Goodwill on consolidation (net) | – | 1,997.34 | 1,343.99 | 764.27 | 779.46 |
| Total assets | 63,869.18 | 76,469.79 | 88,270.26 | 94,843.98 | 1,08,222.89 |
Efficiency Analysis
| Particulars | FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 |
| ROCE | 19.81 | 20.20 | 18.56 | 16.26 | 16.07 |
| ROE / RONW | 14.68 | 20.54 | 20.02 | 12.13 | 8.30 |
Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.
Valuation Analysis
| Consolidated | |||||
|---|---|---|---|---|---|
| Particulars | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 |
| Total Income from Operations (Rs. Cr.) | 68,735.66 | 74,000.93 | 71,948.59 | 78,015.60 | 88,983.03 |
| Growth (%) | 15.68 % | 7.66 % | (2.77 %) | 8.43 % | 14.06 % |
| PAT (Rs. Cr.) | 3,645.74 | 4,323.38 | 2,592.68 | 2,375.19 | 3,151.13 |
| Growth (%) | 31.33 % | 18.59 % | (40.03 %) | (8.39 %) | 32.67 % |
| Earnings Per Share – Basic (Rs. ) | 69.51 | 79.06 | 53.12 | 54.25 | 68.33 |
| Earning Per Share – Diluted (Rs. ) | 66.76 | 75.83 | 50.69 | 51.70 | 67.95 |
| Price to Earnings | 12.90 | 16.23 | 24.86 | 23.40 | 20.86 |
Dividend History
The Company has maintained an average dividend yield of 1.39 % over the last 5 financial years.
Liquidity and Credit Analysis
Current Ratio
Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. MNM’s average current ratio over the last 5 financial years has been 1.31 times which indicates that the Company is comfortably placed to pay for its short term obligations.
Long Term Debt to Equity Ratio
Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.
MNM’s average long term debt to equity ratio over the last 5 financial years has been 0.75 times which indicates that the Company operates with manageable level of debt and will be able to ride out bad economic cycles even if the Company’s profitability margins declines temporarily.
Interest Coverage ratio
Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.
Since MNM operates with very low levels of debt, its average interest coverage ratio over the last 5 financial years has been 4.10 times which indicates that the Company will be able to meet its debt obligations in the regular course of business.
Ownership pattern
In its latest stock exchange filing dated 31 March 2017, Mahindra & Mahindra reported a promoter holding of 26.69%.
At the same time, institutional holding in the Company stood at 54.91 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.