Motilal Oswal Financial Services

20 July 2020

Annual Report Update | Sector: Automobile

Mahindra and Mahindra

BSE SENSEX

37,419

S&P CNX

11,022

CMP: INR594

TP: INR695 (+17%)

Buy

Revisiting capital allocation

Current crisis a catalyst to reboot, reinvent and reignite value creation

Mahindra and Mahindra’s (M&M) FY20 Annual Report highlights the company’s

recalibration of capital allocation to reduce losses and increase accountability of

its various businesses. Besides listing out priority areas for the auto and FES

businesses, it also explains future growth areas for farm mechanization and

shared mobility/logistics. Key insights from the Annual Report highlighted below:



M&M is focused on using the current crisis (in the form of substantial losses

in global businesses) to reboot (streamline capital allocation policy and bring

accountability), reinvent (realize the potential of few unlisted businesses) and

reignite value creation for all its stakeholders.



Positive sentiment in the rural economy should drive faster recovery for

tractors/Auto sector. Besides potential demand-side challenges (lower

incomes, job uncertainties, financing issues), supply-side bottlenecks (labor

availability, limited working hours, social distancing norms) are also expected.



It has identified priority areas for its core businesses such as strengthening of

the core business, aggressive cost optimization, reorientation of capex and

turnaround in global subsidiaries.



M&M is taking appropriate steps to strengthen its UV portfolio through new

product launches, introduction of petrol engines and leveraging the Ford JV.



The tractor business saw green-shoots during Dec’19 to Feb’20 with ~9.7%

volume growth, before the Covid-19 related lockdown hurt demand.

Consistent growth in horticulture is also driving growth for tractors.



M&M is continuing its focus on farm mechanization to address concerns of

farm productivity and labor shortage. It has an active presence in the farm

mechanization space and offers efficient and affordable mechanization

solutions across the spectrum of farming operations.



It has launched a unique delivery model – Farming-as-a-Service (FaaS) under

the brand name

Krish-e

– to support farmers across the crop cycle.

Krish-e

aims to provide an integrated agronomy advisory, mechanized services and

high-tech digital solutions to small farmers to reduce their cost of cultivation,

enhance productivity and improve farming outcomes.



M&M is also focusing on the shared logistics segment for both personal

mobility as well as cargo logistics. It further expanded its presence in this

segment by acquiring stake in

Meru

(shared personal mobility). This is in

addition to its stake in

Zoomcar,

which it had acquired in FY19 (~16.1% stake).



Mahindra Electric (subidiary focused on EVs) achieved EBITDA break-even in

FY20. e-3Ws offer good growth potential due to better operating economics

and easy deployment for first/last mile connectivity (incl. at metro stations).



Valuation and view:

Implied Core P/E for M&M is ~12.8x FY22E S/A EPS and

1.3x Core P/BV. Our Jun’22E-based SOTP TP is ~INR695/share – an upside of

~17%. At our TP, implied Core P/E is ~15.2x (v/s 5-year average core P/E of

~15.9x and 10-year average of ~14.3x). Maintain

Buy.

Motilal Oswal values your support in

the Asiamoney Brokers Poll 2020 for

India Research, Sales and Trading

team. We

request your ballot.

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

12M Avg Val (INR M)

Free float (%)

MM IN

1,209

737.9 / 9.8

621 / 246

11/15/6

2583

81.1

Financials & Valuations (INR b)

Y/E MARCH

2020 2021E 2022E

Sales

455

417

490

EBITDA

58.0

51.9

65.6

Adj. PAT*

35.8

30.9

40.9

Adj. EPS (INR)

30.0

25.9

34.3

EPS Gr. (%)

-30.3 -13.7

32.4

BV/Sh. (INR)

290

310

336

Ratios

RoE (%)

9.7

8.2

10.1

RoCE (%)

5.9

7.5

9.3

Payout (%)

Valuations

P/E (x)

19.8

22.9

17.3

P/BV (x)

2.0

1.9

1.8

Div. Yield (%)

0.4

0.8

1.3

FCF Yield*

0.2

3.7

6.6

*(incl MVML)

Jinesh Gandhi - Research analyst

(Jinesh@MotilalOswal.com)

Vipul Agrawal - Research analyst

(Vipul.Agrawal@MotilalOswal.com)

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on

www.motilaloswal.com/Institutional-Equities,

Bloomberg, Thomson Reuters, Factset and S&P Capital.

3 September 2019

Mahindra and Mahindra

Shareholding pattern (%)

As On

Mar-20 Dec-19 Mar-19

Promoter

18.9

20.4

DII

26.9

23.2

22.5

FII

41.3

41.4

39.2

Others

12.9

16.6

17.9

FII Includes depository receipts

Stock Performance (1-year)

Recalibrating capital allocation to reignite value creation



Over the last two years, M&M’s performance has been impacted by increasing

losses in some of its international subsidiaries, which has worsened recently due

to the COVID-19 pandemic and the consequent lockdowns.

The company’s main challenge lies in its global subsidiaries, some of which are

making signiﬁcant losses. However, it intends to use the crisis to rise and reach

new heights by rebooting, reinventing and reigniting value creation.

As part of its ‘reboot’ strategy, M&M has streamlined its capital allocation policy

to maximize value creation for all stakeholders. It has not only clearly laid out

criteria to allocate capital to existing businesses, but has also increased focus on

improving the accountability of businesses to ensure that the outcome is in line

with its plans.

As part of its ‘reinvent’ strategy, the company has identiﬁed a set of unlisted

businesses that hold promise and could become value creators over the next

few years. M&M would focus on allocating the right resources to ensure that

these businesses get the required inputs and capital to realize their true

potential.

With the revamped and stringent capital allocation process (rebooting), coupled

with a strategy to identify and scale up value creators (reinventing), the

company is aiming higher and maximizing value creation for all its stakeholders

(reigniting).

Exhibit 1: Loss-making businesses/entities to be closely scrutinized and classiﬁed into 3 categories, viz. A, B and C

Category

Criteria

Entities with clear path to 18% RoE

Delayed or unclear path to proﬁtability

but quantiﬁable strategic impact

Continue

Unclear path to proﬁtability and no

quantiﬁable strategic impact

Exit (Explore partnership) alliance or

shut-down)

Source: Company

Action

Continue

M&M delivered on project ‘3-2-3’

initiated after 2002 crisis

INR b

Revenues

EBITDA

PAT

FY02

32.1

2.9

1.3

FY05

66.6

7.7

5.0

Gr (x)

2.1

2.7

3.8

Reigniting Value Creation 2002 – The turning point

In 2002, M&M's share price hit an all-time low. Concerned by this drop, the group

made shareholder value creation one of its prime focus areas. It launched a project

called '3-2-3' to increase proﬁts by 3x and the top line by 2x over a period of 3 years.

Believed to be an impossible task, the company eventually achieved this target for

most of its group businesses.

Outlook: Rural to recover faster; risks to both demand and supply



Sentiment for the rural economy is encouraging, driven by good Rabi output,

robust reservoir levels and normal monsoon forecast by the IMD. This augurs

well for Kharif crops as well as demand for tractors and farm machinery.

Hence, M&M expects faster recovery in rural India. Moreover, rural demand

should improve sales momentum for Auto sector while urban centers are

expected to take a little longer to return to normalcy.

Factors such as lower household incomes, employment uncertainties, higher

cost of finance and difficulty in procuring finance as a result of the potential rise

20 July 2020

Mahindra and Mahindra



in NPAs (in the Financial Sector) could result in demand constraints for

discretionary items such as automobiles.

M&M’s loss of sales due to COVID-19 in Mar’20 is estimated at 23,400/

vehicles/14,700 tractors, while for 1QFY21, it is estimated at 87,000 vehicles/

30,000 tractors. While it is difficult to estimate the definite impact of COVID-19

on the business beyond 1QFY21, the economy should see demand constraints

for discretionary items.

On the supply side, short-to-medium term risks exist. This is because many

suppliers are facing working capital issues in addition to labor availability

challenges, limited working hours and adherence to COVID-19 safety norms.

Production at the suppliers' end is resuming gradually and almost 100% are now

operational.

Areas of priority for core businesses



For the Auto business, M&M’s future direction would involve (a) the launch of

the new

Thar,

(b) redeﬁning the dealer business model, (c) strategic re-

prioritization of capital expenditure, (d) aggressive cost optimization, (e) synergy

projects with Ford JV, (f) building a distinctive SUV brand, (g) launching new

models, (h) leveraging LCV and EV portfolio, and (i) creating a path to

proﬁtability for its global subsidiaries.

In FES, key priorities include (a) strengthening the domestic core business, (b)

building farm machinery business in India, (c) turning around the global

business, (d) leveraging its unique farming solutions delivery model 'Farming as

a Service (FaaS), and (e) launching its lightweight compact tractor platform 'K2'.

The key elements of the strategy for its Automotive segment includes (a)

strengthening the product portfolio, (b) refreshing and updating existing

products, (c) strengthening research and development (R&D), and (d)

technology capabilities.

Farm sector's strategy is aligned to improve the state of farming through

democratizing technology, especially for marginal farmers with small land

holdings. It continues to invest in modern technologies for tractors to offer

tractors with ﬁrst-in-class features. M&M also offers matching implements with

crop-speciﬁc mechanization solutions.

Auto business



The UV segment’s growth is driven by increased customer preference for UV-

styled vehicles and a shift from compact cars to compact UVs (less than 4m

length). All OEMs are now actively growing their UV portfolio by launching

competitive products at attractive price points.

Over the last two years (FY19-20), there were 13 new launches in the UV

segment. In FY20, the new launches accounted for 34% of UV volumes. Compact

UVs accounted for 45% of UV volumes during the last fiscal year.

M&M’s market share has been declining due to (a) higher competition in the UV

segment over the past five years (all OEMs launched products in this segment),

and (b) increased customer preference for compact 5-seater cars akin to UVs.

M&M has taken appropriate steps toward strengthening its UV portfolio by

working on new product platforms and launching new models. In FY19, it

launched the

Marazzo, Alturas G4

and

XUV300.

20 July 2020

Mahindra and Mahindra



It has developed BS6 diesel engines at highly competitive cost, thus, meeting

aggressive time and cost targets. Also, it introduced a new range of BS6 gasoline

engines, powered by the advanced TGDi technology, offering the same drive

experience as diesel engines.

M&M’s rank has improved to #2 (from #3) in the JD Power India Sales

Satisfaction Index (Mass Market) study for CY19.

M&M and Ford Motor Company have entered into a joint venture (with M&M

owning 51% stake) to develop, market and distribute (a) Ford vehicles in India,

and (b) Ford and Mahindra vehicles in emerging markets globally.

Tractor business



The tractor business saw green-shoots during Dec’19 to Feb’20 with ~9.7%

volume growth. This was due to (a) good Rabi outlook supported by robust

reservoir levels, (b) increased Government spending in rural areas, and (c)

improved liquidity conditions in the market. However, this recovery trend came

to a grinding halt following the outbreak of the COVID-19 pandemic.

While over 80% of tractor sales comes from the 31-50HP segment, over the past

10 years, the company has witnessed good growth in the >50 HP and <20HP

segments. Growth in the >50HP segment is driven by the need for tractor

versatility and evolution of farming practices, especially in case of farmers with

large land holdings. Growth in the <20HP segment is a result of increased

affordability amongst farmers with small-medium land holdings and the growing

need for mechanization.

Further, horticulture is a consistently growing segment in the agri economy over

the last few years. Farmers are increasingly cultivating horticulture crops as it

ensures better returns and diversifies their source of income. This has led to

growing need for tractor and mechanization solutions suitable for orchards,

vineyards and other horticulture crops.

Continues to invest and strengthen presence in farm mechanization space



Indian agriculture is characterized by high degree of manual work and low

productivity. Moreover, demand for farm labor is cyclic and there is shortage of

labor in the peak season. Given these circumstances, the key to raising farm

productivity is to increase the level of mechanization and improve farming

practices. This, coupled with the government’s focus to improve the state of

agriculture in the country, is generating multiple opportunities in the space of

farm mechanization, dissipation of agri know-how and crop specific solutions.

M&M remains focused on farm mechanization as the space is an important

enabler to address the concerns of farm productivity and labor shortage. It has

active presence in the farm mechanization space and offers efficient and

affordable mechanization solutions across the spectrum of farming operations.

These include rotary tillers, cultivators, harvesters, balers, and rice trans-

planters, amongst others.

To strengthen its presence in the fast growing horticulture segment, M&M has

increased its stake in M.I.T.R.A Agro Equipment to 40% (from 27%) for INR71m.

This subsidiary offers specialized sprayers and caters to the need of horticulture

farmers.

20 July 2020

Mahindra and Mahindra



The company has also acquired 11.25% stake in Gamaya, a Switzerland-based

agri-technology ﬁrm, for INR302m. Gamaya SA is a start-up focused on precision

agriculture solutions.

M&M continues to leverage its acquisitions/partnerships to build its farm

machinery portfolio for global markets and to get modern farm mechanization

technologies to India. These technologies are developed in global centers of

excellence – Japan (through Mahindra Mitsubishi for the rice value chain),

Finland (Sampo Rosenlew for combine harvester) and Turkey (Hisarlar and

Erkunt).

Further, it has launched a unique delivery model, Farming-as-a-Service (FaaS),

under the brand name

Krish-e

to support farmers across their full crop cycle.

Krish-e

aims to provide integrated agronomy advisory, mechanization services

(tractors and crop specific mechanization rental) and high-tech digital solutions

(precision farming) to small farmers to reduce the cost of cultivation, enhance

productivity and improve farming outcomes.

Exhibit 2: M&M’s centers of excellence for its farm mechanization businesses

Source: Company

Mahindra Electric achieves EBITDA break-even



Mahindra Electric (subsidiary focused on EVs) achieved EBITDA break-even in

FY20. It sold 14,602 EVs (966 4Ws and 13,636 3Ws) in FY20 as against 10,276

EVs (1,811 4Ws and 8,465 3Ws) in FY19.

e-3Ws offer good growth potential due to improving operating economics and

easy deployment for first/last mile connectivity, including at metro stations. Its

e-3Ws constituted 2.7% of the Passenger 3W industry.

It is investing over INR5b in its EV Project under the new EV Policy of the

Government of Maharashtra. This investment will be utilized toward product

development and capacity enhancement for EVs and related components.

Focus on shared logistics



M&M is focusing on the shared logistics segment for both personal mobility as

well as cargo logistics. It further expanded its presence in this segment by

acquiring stake in

Meru

(shared personal mobility). This is in addition to the

stake it had acquired in

Zoomcar

in FY19 (~16.1% stake).

Meru

acquisition to increase M&M’s presence in shared mobility:

In Dec’19,

M&M acquired 36.63% stake in

Meru,

which operates in the ‘ride hail’ segment

and has presence in the corporate transportation space. M&M is committed to

enhance its stake in

Meru

by up to 55% (by investing up to INR2.02b). The

20 July 2020

Mahindra and Mahindra



company has a ‘call’ option to acquire shares from certain existing investors of

Meru.

In turn, these existing investors of

Meru

have a ‘put’ option to sell shares

to M&M. Investment in

Meru

would enable M&M to increase its presence in the

corporate shared mobility segment, which is an area of strategic interest to the

company.

Merger of subsidiary with Porter:

M&M is keen to grow its presence in the

shared mobility logistics solutions’ space, which is an area of strategic interest.

M&M had merged a step-down subsidiary named Orizonte Business Solutions

(load exchange marketplace) with Smartshift Logistics Solutions (Porter). As a

result, the Mahindra group owned 40.2% stake in Porter. Subsequently, post the

additional fund raise from existing and new investors, Mahindra group’s stake

has now reduced to 33.5%.

Analysis of FY20 financials



M&M’s FY20 standalone revenues (incl. MVML) declined 15% to ~INR448.8b,

impacted by 17% decline in volumes (23% decline in UVs and 9% decline in

tractors). Blended realizations improved 2.5% YoY, driven by price increase and

mix.

Gross margins improved ~140bp to 33.3%, helped by better mix (higher tractor

contribution) and benign commodity prices. However, operating deleverage

offset this benefit and led to stable EBITDA margins at 14.2%. Lower other

income and higher depreciation led to adj. PAT decline of 30% to ~INR35.6b.

In FY20, it impaired its investments in Ssangyong and Genje (Mahindra Tractor

Assembly Inc.), resulting in provision of ~INR33.8b.

CFO declined 27% YoY to ~INR39.5b, impacted by weak operating performance

as well as further increase in working capital. This coupled with capex of

~INR45.4b (v/s INR32.1b in FY19) resulted in negative FCFF of ~INR6b (v/s

positive FCFF of ~INR21.8b in FY19).

Further, it invested INR23b in subsidiaries/JVs/Associates in FY20 (v/s INR28.9b

in FY19). Key areas of investments were (a) Holding company of Peugeot

(INR6.3b), (b) Holding company of Pininfarina (INR5.1b), (c) Holding company of

Erkunt, Hisarlar, North American Technical Center and US Auto business

(INR4.1b), (d) Holding company of used car business, renewable energy and IT

Services (INR3.94b).

Consolidated performance remains impacted by significant losses at global

subsidiaries. Net contribution from subsidiaries was a loss of ~INR17.9b to adj.

PAT (v/s INR0.4b in FY19), resulting in consolidated adj. PAT declining 68% to

~INR17.9b.

Valuation and view



M&M is witnessing a generational shift – both in its core business (led by agri

reforms) and in its leadership. M&M should see faster recovery (v/s auto peers)

led by higher rural exposure. Also, the company enjoys strong positioning in two

of its three core businesses, resulting in robust profitability.

Despite M&M’s recent outperformance, valuations are still at substantial

discount to its 5-year average (which captures both pain point of deterioration

in UV market share and subsidiaries’ performance).

20 July 2020

Mahindra and Mahindra



We believe M&M’s valuations reflect (a) challenges of the Passenger UV

business, and (b) lack of major changes on its capital allocation policy. Any

positive surprise in the SUV business, positive evolution of the Ford India JV or

correction of capital allocation by the new CEO should act as re-rating triggers.

Implied Core P/E for M&M is ~12.8x FY22E S/A EPS (incl. MVML) and 1.3x Core

P/BV, which implies ~20% discount to 5-year average P/E and ~31% discount to

5-year average P/B.

Our Jun’22E-based SOTP TP is ~INR695/share – an upside of ~17%. At our TP,

implied Core P/E is ~15.2x (v/s 5-year average core P/E of ~15.9x and 10-year

average of ~14.3x). Maintain

Buy.

Exhibit 3: On aggregate basis, subsidiaries have been a drag on consol. PAT (INR b) and RoEs (%)

Adj. MM+MVML PAT

Adj. Cons. PAT

7.3

Profit contbn from subs

17.0

15.5

-3.0

-1.3

-2.4

-0.4

14.1

15.1

15.7

MM+MVML

Consol

RoE (%)

10.3

50.5

28.6

32.1

32.7

50.9

11.6

-17.9

12.2

11.6

15.2

13.3

31.6

FY15

33.4

FY16

35.1

FY17

43.2

FY18

51.3

FY19

35.8

17.9

FY20

FY15

FY16

FY17

FY18

FY19

4.5

FY20

Source: Company, MOFSL

Exhibit 4: FCFF post investments in capex and subsidiaries/JVs/associates

S/A - INR m

CFO pre Work Cap

Work Cap Changes

CFO

Capex

Invest. In subs/JVs/Assoc.

FCFF

FY16

40,392

14,393

54,785

-21,597

-34,142

-953

FY17

37,608

-508

37,100

-20,743

-33,388

-17,030

FY18

52,468

17,803

70,271

-26,688

-25,490

18,093

FY19

54,299

-5,060

49,239

-30,316

-2,794

16,129

FY20

50,038

-13,260

36,778

-39,437

-2,308

-4,966

Source: Company, MOFSL

20 July 2020

Mahindra and Mahindra

Exhibit 5: Headline financials of key core subsidiaries

INR M

FY20

Name of Subsidiary

Gross Sales

PAT

Mahindra eMarket Limited

402

NBS International Limited

1,931

-79

Mahindra Automobile Distributor

291

Mahindra Heavy Engines Limited

10,076

391

Mahindra Trucks and Buses Limited

2,236

321

Mahindra Graphic Research Design

S.r.l.

Mahindra North American Technical

3,568

-365

Center, Inc.

Mahindra Racing UK Limited

1,643

-142

Automobili Pininfarina GmbH

404

-1,296

Mahindra and Mahindra South Africa

6,926

-107

(Proprietary)

Mahindra Automotive Australia Pty.

730

-26

Limited

Mahindra Automotive North America

1,229

-663

Inc.

Mahindra Europe S.r.l.

1,448

-4

Mahindra Vehicle Sales and Service

2,906

-2,476

Inc.

SsangYong Australia Pty Limited $

1,734

-297

Ssangyong European Parts Center

1,260

B.V.

Ssangyong Motor Company

225,961

-21,082

SY Auto Capital Co.

1,277

323

Mahindra MSTC Recycling Private

-54

Limited

Mahindra First Choice Services

1,098

-311

Limited

Mahindra First Choice Wheels Ltd

3,758

-70

Mahindra Electric Mobility Limited

2,789

-552

Total Autos

271,752

-26,397

Meru Mobility Tech Private Limited

1,160

-106

Meru Travel Solutions Private Limited

-103

Zoomcar Inc

-446

Smartshift Logistics Solutions (Porter)

-431

Total Mobility/Logistic as service

1,160

-1,086

Erkunt Sanayi A.S.

5,328

295

Erkunt Traktor Sanayii A.S.

3,219

-401

Gromax Agri Equipment Limited

1,397

-22

Hisarlar İthalat İhracat Pazarlama

1,445

-7

Anonim Şirketi

Hisarlar Makina Sanayi ve Ticaret

2,212

-750

Anonim

Mahindra do Brasil Industrial Ltda

716

-508

Mahindra Mexico S. de. R. L

304

-447

Mahindra USA Inc.

25,768

-5,071

Trringo.com Limited

Swaraj Engines

247

Mitsubishi Mahindra Agricultural

-1,491

Machinery

Sampo Rosenlew Oy

-265

M.I.T.R.A Agro Equipments Private

Limited

Total FES

40,402

-8,404

FY19

Gross Sales

PAT

147

1,673

-75

485

10,792

526

2,003

165

3,494

1,348

6,236

888

838

1,579

3,370

200

1,150

226,000

2,364

1,136

2,280

2,513

268,685

-96

-80

-79

-1,009

-218

-53

-302

-24

-1,269

-148

-3,797

187

-58

-355

-146

-530

-7,482

FY18

Gross Sales

PAT

454

6,364

213,202

926

1,426

1,294

223,738

-907

-17

-258

-5,484

-404

-319

-1,290

-8,678

Business



Auto - Dealership



Auto - Dealership



Autos



Autos



Autos



38,467

-7,470

46,079

-2,294



Autos - Engineering

Autos - Overseas

Autos - Recycling

Used car dealers

Autos (EV)

Autos

Mobility as service

Logistics as service

Autos

FES - Implements

FES - Tractors

FES - Implements

FES - Tractors

FES - Tractors USA

FES - Others

FES - Tractors

FES - Implements

FES

5,787

3,434

1,477

1,178

2,517

532

342

23,181

-263

-104

-367

485

-468

-7

-782

-259

-219

-5,493

-77

275

-363

-574

6,459

1,483

474

288

37,376

-732

-1,616

-128

-41

224

Note: Above financials are not on pro-rata basis and not adjusted for inter-segment; Source: Company, MOFSL

20 July 2020

Mahindra and Mahindra

Exhibit 6: Headline financials for key non-core subsidiaries

INR Mn

Name of Subsidiary

Mahindra Two Wheelers Limited

Classic Legends Private Limited

BSA Company Limited

Total 2Ws - Domestic

Peugeot Motocycles S.A.S.

Peugeot Motocycles Deutschland

GmbH

Mahindra Tractor Assembly Inc.

(Genze)

Peugeot Motocycles Italia S.p.A.

PMTC Engineering SpA

Mahindra Two Wheelers Europe

Holdings

Total 2Ws – Overseas

Mahindra Aerostructures Private

Limited

Gippsaero Pty Limited

Mahindra Aerospace Private Limited

Mahindra Aerospace Australia Pty

Mahindra Airways Limited

Total Aerospace

Total Agri

M&MFSL

Mahindra Rural Housing Finance

Limited

Mahindra Insurance Brokers Limited

Mahindra Asset Management

Company

Mahindra–BT Investment Company

(Mauritius)

Total BFSI

Total Defence

Total Hospitality

Total Logistics

Total Real Estate

Total Retail

Total Steel Processing

Total Renewable Energy

FY20

Gross Sales

259

4,114

4,377

8,165

1,413

523

333

10,484

921

526

1,487

13,052

102,451

15,276

3,369

170

121,298

3,907

24,087

35,130

13,430

1,474

13,949

24,596

PAT

-61

-2

-56

-2,444

-2,216

-118

-30

-2,306

-7,110

-86

-1,069

-3,194

-2,685

-8

-7,042

-267

9,064

1,486

534

-379

10,732

120

-1,100

555

-3,926

-214

274

315

333

8,358

1,244

677

506

102

10,888

714

618

1,357

11,422

88,098

13,840

3,234

281

105,481

3,382

22,389

39,132

14,400

1,641

19,985

29,001

FY19

Gross Sales

PAT

-188

-2

-181

-2,820

-1,387

-24

-2,025

-6,250

-196

-982

-1,798

-896

-8

-3,880

-944

15,571

2,505

715

-395

18,415

169

773

812

1,518

-227

731

729

1,038

245

1,284

489

533

1,060

4,387

234

1,365

FY18

Gross Sales

PAT

-12

-1,723

-1,345

-3

-3,071

-524

-1,008

-1,331

-837

-3,700

-633

-381

-395

Business



2W - Domestic

2W - Overseas

Aerospace

Agri

BFSI

Note: Above financials are not on pro-rata basis and not adjusted for inter-segment; Source: Company, MOFSL

20 July 2020

Mahindra and Mahindra

Exhibit 7: Capex in Tractor business is low, but rose in FY20

FES (INR b)

% of FES sales

4.0

Exhibit 8: FY20 capex high for Auto business on BS6 and

upcoming product launches

Auto (INR b)

% of Auto sales

11.9

3.1

2.2

2.3

2.7

7.2

7.0

7.4

3.4

FY16

2.8

FY17

3.7

FY18

4.5

FY19

6.2

FY20

18.8

FY16

19.0

FY17

21.4

FY18

25.6

FY19

33.0

FY20

Source: Company, MOFSL

Exhibit 9: R&D investments have increased in FY20

R&D Expensed (INR b)

R&D Capex (INR b)

% of sales

6.6%

Exhibit 10: Trend in grant of patents

Number of patents granted

4.8%

5.0%

4.2%

12.0

8.7

FY17

5.0%

21.7

9.1

FY19

8.1

FY20

FY18

FY19

FY20

Source: Company, MOFSL

17.3

10.9

9.0

FY18

10.9

8.0

FY16

Source: Company, MOFSL

Exhibit 11: Domestic tractor industry HP-wise profile

<20

20-30

30-40

40-50

>50

Total

Industry Share

3.4%

6.5%

33.3%

48.7%

8.0%

100%

Growth

-15.70%

-0.40%

-15.90%

-7.20%

-3.80%

-9.90%

Source: Company, MOFSL

20 July 2020

Mahindra and Mahindra

Exhibit 12: Domestic tractor industry state-wise profile

Rank

States

Uttar Pradesh

Madhya Pradesh

Rajasthan

Maharashtra

Gujarat

Bihar

Telangana

Karnataka

Haryana

Punjab

Chattisgarh

Tamil Nadu

West Bengal

Andhra Pradesh

Odisha

Jharkhand

Assam

All India

F20

Industry Share

17.4%

12.4%

9.7%

8.7%

7.8%

6.1%

5.9%

5.7%

5.5%

3.9%

3.6%

3.3%

2.9%

2.6%

2.2%

1.2%

1.3%

Growth

-10.9%

1.5%

5.1%

-2.9%

-0.5%

-25.3%

11.2%

-3.5%

-5.5%

1.3%

12.2%

-15.3%

-23.1%

-57.8%

-25.7%

-42.2%

-44.4%

-9.90%

Source: Company, MOFSL

Exhibit 13: M&M – Sum-of-parts (INR/share)

INR/sh

Tractors

Autos

Others

Value of Core Business

Value of subs post hold-co

- Tech Mahindra

- M&MFSL

- Mah. Lifespaces

- Mah. Holidays

- SYMC

- Mah. Logistics

- Others

Fair Value (INR/sh)

Target P/E (x)

12.5

40% Discount

FY21E

331

403

157

559

FY22E

393

521

157

678

FY23E

438

591

157

747

Source: MOFSL

20 July 2020

Mahindra and Mahindra

Operating metrics

Exhibit 14: Snapshot of Revenue model

000 units

Tractors

Growth (%)

% of total volumes

Autos

Pick-up/LCVs (<3.5t)

Growth (%)

SUVs

Growth (%)

3-Ws

Growth (%)

LCVs (>3.5t)

Growth (%)

M&HCVs (MTBL)

Growth (%)

Others & Exports

Growth (%)

Total Autos

Growth (%)

% of total volumes

Total volumes ('000 units)

Growth (%)

ASP (INR '000/Unit)

Growth (%)

Net Sales (INR b)

Growth (%)

FY16

214

-8.7

30.3

156

6.7

233

-41.4

-3.2

20.6

63.1

0.1

492

6.1

69.7

705

1.3

571

5.2

404

6.6

FY17

263

23.1

34.3

168

7.7

223

-4.4

-4.9

18.7

17.7

0.0

504

2.5

65.7

767

8.8

572

0.3

441

9.1

FY18

320

21.5

36.8

200

19.1

235

5.7

4.4

1.6

41.2

0.0

549

8.9

63.2

869

12.9

560

-2.1

487

10.5

FY19

330

3.4

35.2

229

14.9

237

0.9

22.1

8.6

14.3

0.0

609

10.8

64.8

939

8.1

571

1.9

536

10.1

FY20

302

-8.6

38.8

188

-18.1

179

-24.4

-6.8

-26.5

-53.0

0.0

476

-21.8

61.2

778

-17.2

580

1.5

451

-15.9

FY21E

312

3.5

45.5

160

-15.0

146

-18.5

-37.0

-40.0

-45.0

0.0

374

-21.5

54.5

686

-11.8

608

4.0

417

-8.3

FY22E

352

12.5

44.5

200

25.0

163

11.6

10.0

30.0

25.0

0.0

439

17.3

55.5

790

15.1

620

2.0

490

17.4

Source: Company, MOFSL

20 July 2020

Mahindra and Mahindra

Story in charts

Exhibit 15: Trend in tractor volumes

Tractor volumes (units)

Growth (%)

Exhibit 16: New product launches to drive UV sales

UVs (incl pick-ups)

6.7

(8.9)

(7.2)

9.1

9.5

(23.0) (18.5)

Growth (%)

18.0

3.1

Source: Company, MOFSL

Exhibit 17: Realization trend

Net realizations (INR/unit)

Exhibit 18: Trend in EBITDA margins

EBITDA (incl. MVML) (%)

14.8

14.2

13.5

12.5

13.5

14.2

13.8

13.1

Source: Company, MOFSL

Exhibit 19: Trend in return profile

RoE (%)

RoIC (%)

Exhibit 20: FCF to improve despite high capex plans (INR b)

CFO

74.5

58.5

41.9

(10)

(20)

(22)

36.6

Capex

FCF

76.4

54.3

(27)

(30)

61.4

41.2

44.0

(21)

(39)

(35)

(30)

Source: Company, MOFSL

20 July 2020

Mahindra and Mahindra

Financials and Valuations

Income Statement

Y/E March

Net Op. Income

Change (%)

Total Expenditure

EBITDA

Margins (%)

Margins (%, incl MVML)

Depreciation

EBIT

Deferred Revenue Exp.

Int. & Finance Charges

Other Income

Non-recurring Income

Profit before Tax

Eff. Tax Rate (%)

Profit after Tax

Adj. Profit after Tax

Change (%)

Adj. PAT (incl MVML)

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Deferred tax

Loans

Capital Employed

Application of Funds

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Investments

Curr.Assets, L & Adv.

Inventory

Sundry Debtors

Cash & Bank Bal.

Loans & Advances

Others

Current Liab. & Prov.

Sundry Creditors

Other Liabilities

Provisions

Net Current Assets

Application of Funds

E: MOFSL Estimates

2016

408,751

6.3

362,551

46,199

11.3

13.5

10,681

35,518

1,861

8,499

687

42,845

25.2

32,046

31,532

(1.2)

33,394

2017

440,535

7.8

395,388

45,147

10.2

13.1

15,264

29,883

1,596

13,455

5,485

47,226

22.9

36,434

31,130

(1.3)

35,133

2018

486,856

10.5

424,615

62,240

12.8

14.8

14,794

47,446

1,122

10,364

4,336

61,024

28.6

43,560

39,220

26.0

43,202

2019

536,140

10.1

469,744

66,396

12.4

14.2

18,604

47,792

1,134

16,890

-297

63,250

24.2

47,960

48,260

23.0

51,288

2020

454,878

-15.2

396,897

57,981

12.7

14.2

22,226

35,754

1,132

16,678

-20,140

31,160

57.3

13,306

33,450

(30.7)

35,770

2021E

417,320

-8.3

365,390

51,930

12.4

13.8

25,624

26,306

1,381

13,953

38,878

25.0

29,159

(12.8)

30,880

(INR M)

2022E

490,080

17.4

424,468

65,612

13.4

14.8

29,769

35,843

1,247

16,569

51,165

25.0

38,374

31.6

40,878

(INR M)

2022E

5,965

388,917

394,882

14,082

28,680

437,644

338,571

199,923

138,648

15,000

219,029

191,492

35,094

32,224

65,377

10,070

48,726

126,525

80,561

32,537

13,427

64,967

437,644

2016

2,963

221,269

224,232

-54

18,436

242,614

139,386

63,426

75,960

15,622

135,474

123,286

26,879

25,116

22,870

17,103

31,317

107,728

66,780

30,300

10,648

15,558

242,614

2017

2,968

264,888

267,856

2,548

27,729

298,134

154,778

77,068

77,710

20,404

179,084

125,034

27,580

29,388

16,875

5,406

45,784

104,098

68,811

21,388

13,899

20,935

298,134

2018

5,950

296,991

302,941

2,772

28,644

334,357

182,295

103,700

78,594

31,287

205,830

158,457

27,017

31,730

28,937

10,182

60,591

139,811

86,034

38,485

15,292

18,646

334,357

-0

2019

5,958

336,135

342,093

6,341

25,713

374,147

223,122

122,304

100,818

24,198

220,160

181,795

38,393

39,463

37,317

7,110

59,513

152,824

96,782

40,326

15,716

28,971

374,147

-0

2020

5,965

338,713

344,679

14,082

30,680

389,440

248,477

144,531

103,946

40,095

199,381

161,599

34,009

29,990

42,365

6,509

48,726

115,581

67,858

32,537

15,185

46,018

389,440

2021E

5,965

360,940

366,906

14,082

30,680

411,667

308,571

170,155

138,416

15,000

207,029

163,793

29,884

27,440

49,168

8,575

48,726

112,571

68,601

32,537

11,433

51,222

411,667

20 July 2020

Mahindra and Mahindra

Financials and Valuations

Ratios

Y/E March

Basic (INR)

Fully diluted EPS

FD EPS (incl MVML)

Cash EPS

Book Value per Share

DPS

Payout (Incl. Div. Tax) %

Valuation (x)

P/E

Cash P/E

EV/EBITDA

EV/Sales

Price to Book Value

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

ROIC

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors (Days)

Working Capital (Days)

Asset Turnover (x)

Leverage Ratio

Net Debt/Equity (x)

Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Int./Dividends Received

Depreciation & Amort.

Direct Taxes Paid

(Inc)/Dec in Wkg. Capital

Other Items

CF from Oper.Activity

(Inc)/Dec in FA+CWIP

Free Cash Flow

(Pur)/Sale of Invest.

CF from Inv. Activity

Change in Net Worth

Inc/(Dec) in Debt

Interest Paid

Dividends Paid

CF from Fin. Activity

Inc/(Dec) in Cash

Add: Beginning Balance

Closing Balance

E: MOFSL Estimates

2016

26.6

28.2

35.6

189.2

6.0

26.3

21.1

16.7

7.0

0.8

3.0

1.0

15.1

13.4

37.0

1.7

-0.1

2017

26.2

29.6

39.1

225.6

6.5

12.3

20.1

15.2

7.2

0.7

2.6

1.1

12.7

12.4

30.7

1.5

-0.1

2018

33.0

36.3

45.4

254.6

7.5

23.8

16.3

13.1

10.7

1.4

2.3

1.3

13.7

13.0

45.1

1.5

-0.1

2019

40.5

43.0

56.1

293.7

8.5

24.5

13.8

10.6

10.0

1.2

2.0

1.4

15.0

13.8

45.1

1.4

-0.1

2020

28.0

30.0

46.7

290.3

2.4

24.5

19.8

12.7

11.5

1.5

2.0

0.4

9.7

5.9

15.3

1.2

-0.1

2021E

24.4

25.9

45.9

310.3

5.0

23.8

22.9

12.9

12.8

1.6

1.9

0.8

8.2

7.5

15.9

1.0

-0.1

2022E

32.2

34.3

57.1

335.9

7.5

27.1

17.3

10.4

9.9

1.3

1.8

1.3

10.1

9.3

19.3

1.1

-0.2

(INR M)

2022E

35,843

16,569

29,769

-12,791

2,464

71,853

-30,000

41,853

-12,000

-42,000

-2,000

-1,247

-9,116

-12,362

17,491

49,168

66,659

2016

41,612

-3,027

11,086

-9,279

14,393

54,785

-21,597

33,189

-13,865

-35,461

-9,500

-2,110

-8,461

-20,071

-747

20,648

20,069

2017

41,742

-9,800

15,264

-9,929

-508

332

37,100

-20,743

16,358

-7,076

-27,818

-1,742

-1,482

-8,391

-11,615

-2,333

22,870

20,705

2018

56,688

-8,084

14,794

-12,887

17,803

1,957

70,271

-26,688

43,583

-24,416

-51,104

592

-1,695

-9,230

-10,333

8,834

16,875

25,876

2019

63,547

-13,184

18,604

-14,341

-5,060

-327

49,239

-30,316

18,923

4,826

-25,490

-3,725

-1,710

-10,117

-15,552

8,196

14,180

22,376

2020

51,300

-14,327

22,226

-10,823

-13,260

1,662

36,778

-39,437

-2,658

13,672

-25,764

3,289

-1,570

-11,874

-10,155

859

22,376

23,235

2021E

26,306

13,953

25,624

-9,720

1,599

57,762

-35,000

22,762

-7,648

-42,648

-1,381

-6,133

-7,514

7,601

42,365

49,966

20 July 2020

Mahindra and Mahindra

NOTES

20 July 2020

Mahindra and Mahindra

Explanation of Investment Rating

Investment Rating

Expected return (over 12-month)

BUY

>=15%

SELL

< - 10%

NEUTRAL

< - 10 % to 15%

UNDER REVIEW

Rating may undergo a change

NOT RATED

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within

following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.

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Specific Disclosures

1 MOFSL, Research Analyst and/or his relatives does not have financial interest in the subject company, as they do not have equity holdings in the subject company.

2 MOFSL, Research Analyst and/or his relatives do not have actual/beneficial ownership of 1% or more securities in the subject company

3 MOFSL, Research Analyst and/or his relatives have not received compensation/other benefits from the subject company in the past 12 months

4 MOFSL, Research Analyst and/or his relatives do not have material conflict of interest in the subject company at the time of publication of research report

5 Research Analyst has not served as director/officer/employee in the subject company

6 MOFSL has not acted as a manager or co-manager of public offering of securities of the subject company in past 12 months

7 MOFSL has not received compensation for investment banking/ merchant banking/brokerage services from the subject company in the past 12 months

8 MOFSL has not received compensation for other than investment banking/merchant banking/brokerage services from the subject company in the past 12 months

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Mahindra and Mahindra

9 MOFSL has not received any compensation or other benefits from third party in connection with the research report

10 MOFSL has not engaged in market making activity for the subject company

The associates of MOFSL may have:

financial interest in the subject company

actual/beneficial ownership of 1% or more securities in the subject company

received compensation/other benefits from the subject company in the past 12 months

other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on

the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the associates of MOFSL

even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report.

acted as a manager or co-manager of public offering of securities of the subject company in past 12 months

be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the

company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies)

received compensation from the subject company in the past 12 months for investment banking / merchant banking / brokerage services or from other than said services.

The associates of MOFSL has not received any compensation or other benefits from third party in connection with the research report

Above disclosures include beneficial holdings lying in demat account of MOFSL which are opened for proprietary investments only. While calculating beneficial holdings, It does not

consider demat accounts which are opened in name of MOFSL for other purposes (i.e holding client securities, collaterals, error trades etc.). MOFSL also earns DP income from

clients which are not considered in above disclosures.

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The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the

research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.

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instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. MOFSL will not treat recipients as

customers by virtue of their receiving this report.

Disclaimer:

The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or

distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for

informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing

in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances.

The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment

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document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this

document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views

expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade

securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of

the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and

should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make

modifications and alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their directors and the employees may from

time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to

perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a

separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of

information that is already available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or

may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on,

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Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost

revenue or lost profits that may arise from or in connection with the use of the information.

The person accessing this information specifically agrees to exempt MOFSL or any of its

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misuse and further agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses, costs, damages,

expenses that may be suffered by the person

accessing this information due to any errors and delays.

Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263;

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Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst:

INH000000412. AMFI: ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579;PMS:INP000006712. Motilal Oswal Asset Management Company

Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth

Management Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is

a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt.

Ltd. which is a group company of MOFSL. Private Equity is offered through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL.

Research & Advisory services is backed by proper research. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no

assurance or guarantee of the returns. Investment in securities market is subject to market risk, read all the related documents carefully before investing. Details of Compliance

Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.

* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National

Company Law Tribunal, Mumbai Bench.

20 July 2020