Valuation Report

Valuation Report
May 2020
Mahindra & Mahindra – Overview and Summary
• Mahindra and Mahindra Limited (hereinafter refer as “M&M” or “the company” is the flagship of the large
Mahindra Group which is a conglomerate of over 14 different businesses. M&M is the world’s largest tractor
manufacturer and is one of the largest producers of commercial as well as passenger vehicle in India.
• Mahindra & Mahindra was founded as a steel trading company on October 2, 1945 in Ludhiana as Mahindra
& Muhammed Thereafter, the company changed its name to Mahindra & Mahindra in 1948. It eventually
saw a business opportunity in expanding into manufacturing and selling larger MUVs, starting with the
assembly under license of the Willy’s Jeep in India. Soon established as the Jeep manufacturers of India, the
company later commenced manufacturing light commercial vehicles (LCVs) and agricultural tractors.
• Over the past few years, the company has taken interest in new industries and in foreign markets. They
entered the two-wheeler industry by taking over Kinetic Motors in India. M&M also has a controlling stake
in the REVA Electric Car Company and launched first electric car under brand name ‘Verito’.
• Some of the competitive advantages that M&M enjoys are as follows:
o Strong Research & development

o Market leader in multiple automotive segments
o Excellent products complementing to Indian road conditions
o Low after sale maintenance cost
These are discussed in granular details as foundation of narrative in discounted cash flow valuation
• The objective of this report is to value equity share of M&M and provide recommendation thereon. The
results are summarized below:
Particulars DCF Valuation Comparables Market Regression

Model/Multiple used FCFF EV/Sales EV/Sales
Price per share/Multiple 393.10 1.19 1.19
Value per share/Predicted 626.27 1.01 1.80
Recommendation BUY SELL BUY
Final Recommendation BUY (based on DCF)
Discounted Cash Flow – Narrative
A two-stage free cash flow to firm model was used to value M&M with short term suffered growth due
to COVID-19 and high growth period from year 3 to year 6 which gradually decreases to the risk-free
rate of the Indian economy. Below is a discussion of M&M’s competitive advantages and how these
determine some of the assumptions underlying the valuation.
Being the largest tractor manufacturer in the world and first mover in launching electric cars in emerging
markets, M&M has focused on providing low cost and feature loaded cars and trucks catering demand
of its target customers while maintaining higher margins and return on capital than its peers. Some of
the competitive advantages which enable it to achieve these higher margins and returns are listed
below:
• Strong R&D: M&M tops the table in automotive industry in India when it comes to R&D. It spent INR
25,800 million in last year (27% of its operating profit). M&M has a highly focused R&D department
in 11 countries constantly focusing on developing new products and technologies. M&M majorly
focuses on Value addition and Value engineering (VAVE) approach, designing modularity, use of
alternate materials etc.
• Market leadership in multiple products: M&M has leading market share in tractors as well as in the
utility vehicles segment. Also, the company has strong market share in the commercial vehicle as
well as passenger vehicle segment. Strong market share provides a competitive advantage to the
company and allows the company to focus on innovation.
• Products complementing to Indian roads: M&M’s SUVs are suited perfectly to Indian road conditions
especially; Mahindra Scorpio has been an outstanding performer for many years. Further, in tractors,
M&M rules not only in numbers but also in durability which makes it preferred choice for the farmers
due to extended reinvestment in fleets.
• Low after sale maintenance cost: M&M has a competitive advantage on after sale cost since it is
significantly lower than the industry average and also have high availability of spare parts to even in
rural parts of the country makes it preferred choice as compared to its peers.
Key Assumptions regarding sustainability of its competitive advantage and its going onwards impact
on value drivers is listed below:
• Revenue growth: Due to contingencies around COVID-19 scenario, M&M could witness a dip in its
sales growth to -10% in year 2020. M&M’s valuation is substantially dependent on high revenue
growth in target international markets and its ability to launch durable, cost effective, and technology
laden cars and tractors in emerging markets which will grow its revenue by 15% compounded over
year 2 to 5 before gradually declining to risk free rate of the economy at year 10.
• Operating Margin: M&M’s operating margin is higher than global and Indian industry as M&M
leverage on economies of scale being largest tractor manufacturer in the world. Its average operating
margin over last 10 years is 13.37% which depicts benefits of scalable tractor production and
successful launch of few car models as compared to peers. Due to COVID-19 scenario, a fall in
operating margin in 2020 expected to 6% which will converge to its mean margin of 13% over next 3
years. As the company matures, and increase its operations globally, the operating margins will
converge towards industry averages, but considering the pricing power and low cost manufacturing
it will be placed well above 75th percentile of auto, truck, and tractor companies i.e. 11.36%.
• Return on Capital: Historically, M&M has earned return on its invested capital (7.97%) much
higher than industry (almost double!), however, as the company matures, it is expected that its
return on capital will converge with cost of capital of 7.5% which is well above 80th percentile of
industry
Discounted Cash Flow – Narrative to Numbers
All figures in INR million except share price
Relative Pricing- Comparable
A total of 47 companies were screened as using S&P capital IQ database after negating outliers. The shortlisting criteria are
listed below:
- Industry Classification: Auto, Tractors, Trucks, and Two wheeler manufacturers.

- Regions: Global
- Listing: All Major exchanges
- Market Capital: Greater than $1 bn
Multiple variables were assessed via correlation matrix, and following were following were selected due to relatively higher
correlation with EV/Sales Ratio.
• Revenue growth (Estimated- 2years)

• Return on Invested Capital
• Pre-tax Operating Margin
The regression equation and the relevant statistics are provided below:
The T-stat suggests that all three variables are significant in explaining the differences in EV/Sales ratio across manufacturers.
By plugging the numbers of M&M in the regression equation gives EV to Sales ratio of 1.01 as against actual EV to sales ratio
of 1.19 which signifies that M&M is overvalued. Recommendation: SELL
Relative Pricing- Market

A total of 49 Indian companies (excluding Banking and Financial services) with highest market capitalization were screened
using S&P capital IQ database after negating outliers.
Multiple variables were assessed via correlation matrix, and following were following were selected due to relatively higher
correlation with EV/Sales Ratio.
• Revenue growth (Estimated- 2years)

• Natural log of Debt Ratio
The regression equation and the relevant statistics are provided below:
By plugging the numbers of M&M in the regression equation gives EV to Sales ratio of 1.80 as against actual EV to sales ratio
of 1.19 which signifies that M&M is undervalued. Recommendation: BUY

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• Some of the competitive advantages that M&M enjoys are as follows:

o Strong Research & development

Particulars DCF Valuation Comparables Market Regression

- Industry Classification: Auto, Tractors, Trucks, and Two wheeler manufacturers.

• Revenue growth (Estimated- 2years)

Relative Pricing- Market

• Revenue growth (Estimated- 2years)

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