>MAHINDRA & MAHINDRA (FIRST GLOBAL)

Improvement in macro economic scenario & easing of liquidity constraints to drive
overall industry volumes…

Lower input costs to aid margin improvement…rich product mix to help revenue
growth

Reasons for Upgrade

■ M&M delivered a above expectation performance in Q4 FY09, as the company managed to record an improvement in its net profit as well as margins, despite adverse market conditions in the quarter

■ Going forward, the improvement in the macro economic scenario, coupled with the easing of liquidity constraints, will help drive the overall volumes of the auto industry

■ We believe that lower input costs will aid the improvement in M&M’s margins, while its rich product mix will help the company on the revenues front

■ We expect the full impact of the softening in commodity prices to become evident in FY10 and estimate the company’s margins to improve by 50-100 bps

■ M&M’s manufacturing facility at Rudrapur provides tax benefits, as a result of which, we expects the company to benefit in the form of a lower tax rate in FY10, which will help partly drive the growth in profitability in the coming quarters

■ We expect M&M’s UV segment to record a remarkable growth, as the company is quickly gaining market share in the segment with the success of its newly launched ‘Xylo’

The Story

Mahindra & Mahindra Limited (MM.IN) (MAHM.BO) delivered above expected performance in Q4 FY09, as the company managed to record an improvement in its net profit as well as margins, despite adverse market conditions in the quarter. M&M’s net revenues grew 16.1% Y-o-Y to Rs.36.5 bn, aided by the merger of Punjab Tractor Limited’s (PTL) financials with the company. Total volumes grew 3.7% Y-o-Y to 93,112 units in the quarter. As M&M has adopted the new accounting standard by suspending ‘AS11’, based on which, the company adjusted its forex loss amounting to Rs.1.4 bn in its balance sheet, while its profit increased by a similar amount. In Q4 FY09, the Proforma net profit (excluding gain from write back of forex losses) stood at Rs.2.8 bn, up 32.5% Y-o-Y, while the EPS for the quarter came in at Rs.10 as against our estimates of Rs 7.5, up 16.4% Y-o-Y. Raw material/Sales declined 70 bps Y-o-Y and 170 bps sequentially to 69.8% in the quarter, on account of lower commodity prices. At the PBITA level, M&M’s Automotive segment reported a profit of Rs.1.75 bn, while the Farm & Equipment segment recorded a profit of Rs.160 bn in Q4 FY09.

Going forward, the improvement in the macro economic scenario, coupled with the easing of liquidity constraints, is expected to help drive the overall volumes of the auto industry. We believe that lower input costs will aid the improvement in M&M’s margins, while its rich product mix will help the company on the revenues front. We expect the full impact of the softening in commodity prices to become evident in FY10 and estimate the company’s margins to improve by 50-100 bps. We expect M&M’s UV segment to record a remarkable growth, as the company is quickly gaining market share in the segment with the launch of ‘Xylo’. The company’s market share in the UV segment stood at 63% in April 2009, up from 47% in FY09. We are making an upward revision to our estimates. For FY10, we now estimate an EPS of Rs.43.90 on revenues of Rs.163.8 bn, as against our previous estimated EPS of Rs.27.1 on revenues of Rs.130.4 bn. We expect the company’s net revenues to increase by 25.7% Y-o-Y to Rs.41.4 bn and the EPS to come in at Rs.11 for Q1 FY10. We estimate net revenues of Rs.194.6 bn and an EPS of Rs.49.6 for FY11. The stock currently trades at a P/E multiple of 14.6x FY10 earnings. In view of the expected increase in the company’s volumes, margins, and market share, we now upgrade M&M from Moderate Underperform to Marketperform.

Price Target
Price targets (if any) are derived from a subjective and/or quantitative analysis of financial and nonfinancial data of the concerned company using a combination of P/E, P/Sales, earnings growth, discounted cash flow (DCF) and its stock price history.

The risks that may impede achievement of the price target/investment thesis are -

• Change in regulatory environment affecting the policies of the government towards auto emission norms.

• Lower than expected decrease in raw material prices, for instance, steel, rubber, etc. may impact the margins of the company.

• Shift of demand due to unanticipated price cuts/discounts/special offers made by competitors.

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