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Transcript of 101000860 a Project Report on Fundamental Analysis of Mahindra Amp Mahindra Company
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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA
vehicles (LCVs). The company later expanded its
operations from automobiles and tractors to secure a
significant presence in many more important sectors. The
company has, over the years, transformed itself into a
Group that caters to the Indian and overseas markets
with a presence in vehicles, farm equipment, information
technology, trade and finance related services, and
infrastructure development. Mahindra & Mahindra Ltd
(M&M) is a leading player in the Indian utility vehicles andtractors segment with market shares of 49.5% in Jeeps /
MUVs, 30.9% in 3-wheelers, and market share of 25.9% in
Tractors in the FY2005.
This study tries to cover the industry related data
and in depth company study and an overview of the
economy, evaluates the company on various valuation
models.
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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA
THEORETICAL BACKGROUND
FUNDAMENTAL ANALYSIS:
Fundamental analysis is the examination of the
underlying forces that affect the well being of the
economy, industry groups, and companies. As with most
analysis, the goal is to derive a forecast and profit from
future price movements. At the company level,
fundamental analysis may involve examination of financialdata, management, business concept and competition. At
the industry level, there might be an examination of supply
and demand forces for the products offered. For the
national economy, fundamental analysis might focus on
economic data to assess the present and future growth of
the economy. To forecast future stock prices, fundamental
analysis combines economic, industry, and company
analysis to derive a stock's current fair value and forecast
future value. If fair value is not equal to the current stock
price, fundamental analysts believe that the stock is either
over or under valued and the market price will ultimately
gravitate towards fair value. Fundamentalists do not heed
the advice of the random walkers and believe that markets
are weak form efficient. By believing that prices do not
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accurately reflect all available information, fundamental
analysts look to capitalize on perceived price
discrepancies.
STRENGTHS AND WEAKNESS OF FUNDAMENTAL
ANALYSIS
Long-term Trends:
Fundamental analysis is good for long-term
investments based on long-term trends, very long-term.
The ability to identify and predict long-term economic,
demographic, technological or consumer trends can
benefit patient investors who pick the right industry groups
or companies.
Value Spotting:
Sound fundamental analysis will help identify
companies that represent good value. Some of the most
legendary investors think long-term and value. Graham
and Dodd, Warren Buffett and John Neff are seen as the
champions of value investing. Fundamental analysis can
help uncover companies with valuable assets, a strong
balance sheet, stable earnings and staying power.
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Business Acumen:
One of the most obvious, but less tangible, rewards of
fundamental analysis is the development of a thorough
understanding of the business. After such painstaking
research and analysis, an investor will be familiar with the
key revenue and profit drivers behind a company. Earnings
and earnings expectations can be potent drivers of equityprices. Even some technicians will agree to that. A good
understanding can help investors avoid companies that are
prone to shortfalls and identify those that continue to
deliver. In addition to understanding the business,
fundamental analysis allows investors to develop an
understanding of the key value drivers and companies
within an industry. Its industry group heavily influences a
stocks price. By studying these groups, investors can
better position themselves to identify opportunities that
are high-risk (tech), low-risk (utilities), growth oriented
(computer), value driven (oil), non-cyclical (consumer
staples), cyclical (transportation) or income oriented (high
yield).
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Knowing Who's Who:
Stocks move as a group. By understanding a
company's business, investors can better position
themselves to categorize stocks within their relevant
industry group. Business can change rapidly and with it the
revenue mix of a company. This happened to many of the
pure internet retailers, which were not really internet
companies, but plain retailers. Knowing a company'sbusiness and being able to place it in a group can make a
huge difference in relative valuations.
WEAKNESS
Time Constraints:
Fundamental analysis may offer excellent insights, but
it can be extraordinarily time consuming. Time-consuming
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models often produce valuations that are contradictory to
the current price.
Industry/Company Specific:
Valuation techniques vary depending on the industry
group and specifics of each company. For this reason, a
different technique and model is required for different
industries and different companies. This can get quite timeconsuming and limit the amount of research that can be
performed.
Subjectivity:
Fair value is based on assumptions. Any changes to
growth or multiplier assumptions can greatly alter the
ultimate valuation. Fundamental analysts are generally
aware of this and use sensitivity analysis to present a
base-case valuation, a best-case valuation and a worst-
case valuation. However, even on a worst case, most
models are almost always bullish, the only question is how
much so.
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Analyst Bias:
The majority of the information that goes into the
analysis comes from the company itself. Companies
employ investor relations managers specifically to handle
the analyst community and release information.
Introduction to Investment Valuation
Every asset, financial as well as real, has value. The
key to successfully investing in and managing these assets
lies in understanding not only what the value is, but the
sources of the value. Any asset can be valued, but some
assets are easier to value than others, and the details of
valuation will vary from case to case. Thus, the valuation
of a share of a real estate property will require different
information and follow a different format from the
valuation of a publicly traded stock. What is surprising;
however, is not the difference in valuation techniques
across assets, but the degree of similarity in basic
principles. There is undeniably uncertainty associated with
valuation. Often that uncertainty comes from the asset
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being valued, although the valuation model may add to
that uncertainty.
A PHILOSOPHICAL BASIS FOR VALUATION
A surprising number of investors subscribe to the
bigger fool theory of investing, which argues that the
value of an asset is irrelevant as long as there is a bigger
fool around who is willing to buy the asset from them.
While this may provide a basis for some profits, it is a
dangerous game to play, since there is no guarantee that
such an investor will still be around when the time to sell
comes.
A postulate of sound investing is that an investor does
not pay more for an asset than its worth. This statement
may seem logic and obvious, but it is forgotten and
rediscovered at some time in every generation and in
every market. There are those who are disingenuous
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enough to argue that value is in the eyes of the beholder,
and that any price can be justified if there are other
investors willing to pay that price. That is patently absurd.
Perceptions may be all that matter when the asset is a
painting or a sculpture, but investors do not (and should
not) buy most assets for aesthetic or emotional reasons;
financial assets are acquired for the cash flows expected
from owning them. Consequently, perceptions of value
have to be backed up by reality, which implies that theprice that is paid for any asset should reflect the cash
flows it is expected to generate. The models of valuation
described in this book attempt to relate value to the level
and expected growth of these cash flows.
There are many areas in valuation where there is
room for disagreement, including how to estimate true
value and how long it will take for prices to adjust to true
value. But there is one point on which there can be no
disagreement. Asset prices cannot be justified merely by
using the argument that there will be other investors
around willing to pay a higher price in the future.
THE ROLE OF VALUATION
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Valuation is useful in a wide range of tasks. The role it
plays, however, is different in different arenas. The
following section lays out the relevance in portfolio
management, in acquisition analysis, and in corporate
finance.
Valuation and Portfolio Management
The role that valuation plays in portfoliomanagement is determined in large part by the
investment philosophy of the investor. Valuation plays a
minimal role in portfolio management for a passive
investor, whereas it plays a larger role for an active
investor. Even among active investors, the nature and role
of valuation are different for different types of active
investors can be categorized as either market timers, who
trust in their abilities to foresee the direction of the overall
stock or bond markets, on security selection who believe
that their skills lie in funding under or over valued
securities. Market timers use valuation much less than do
investors who pick stocks, and the focus is on market
valuation rather than on firm specific valuation. Among
security selectors, valuation plays a central role in portfolio
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management for fundamental analysts and a peripheral
role for technical analysis.
The following subsections describe, in broad terms.
Different philosophies and the role played by valuation in
each.
Fundamental Analysts
The underlying theme in fundamental analysis is that
the true value of the firm can be related to its financial
characteristics- its growth prospects, prospects, riskprofile, and cash flows. Any deviation from this true value
is a sign that a stock is under or overvalued. It is a long-
term investment strategy and the assumptions underlying
it are that:
(a) The relationship between value and the underlying
financial factors can be measured.
(b) The relationship is stable over time.
( c ) Deviations from the relationship are corrected in a
reasonable time period.
Valuation is the central focus in fundamental analysis.
Some analysts usediscounted cash flow models to value
firms, while others use multiples such as price/earnings
and price/book value ratios. Since investors using this
approach hold a large number of "undervalued' stocks in
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their portfolios, their hope is that, on average, these
portfolios will do better than the market.
Franchise Buyers
The philosophy of a franchise buyer is best expressed
by an investor who has been very successful at it -Warren
Buffet. We try to stick to businesses we believe we.
Understand, Mr.Buffett writes. That means they must be
relatively simple and stable in character. If a business iscomplex and subject to constant change, we're not smart
enough to predict future cash flows. Franchise buyers
concentrate on a few businesses they understand well and
attempt to acquire undervalued firms. Often, as in the case
of Mr. Buffet, franchise buyers wield influence on the
management of these firms and can change financial and
investment policy. As a long-term strategy, the
underselling assumptions are that:
(a) Investors who understand a business well are in a
better position to value it correctly.
(b) These undervalued businesses can be acquired without
driving the price above the true value.
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Valuation plays a key role in this philosophy, since
franchise buyers arc attracted to a particular business
because they believe it is undervalued. They are also
interested in how much additional value they can create
by restructuring the business and running it right.
Chartists
Chartists believe that prices are driven as much by
investor psychology as by any underlying financialvariables. The information available from trading - price
movements, trading volume, short sales, and so forth -
gives an indication of investor psychology and future price
movements. The assumptions here are that prices move in
predictable patterns, that there are not enough marginal
investors taking advantage of these patterns to eliminate
them, and that the average investor in the market is
driven more by emotion than by rational analysis.
While valuation does not play much of a role in
charting, there are ways in which an enterprising chartist
can incorporate it into analysis. For instance valuation can
be used to determine support and resistance lines4 on
price chart.
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Information Traders
Prices move on information about the firm.
Information traders attempt to trade in advance of new
information or shortly after it is revealed to financial
markets, buying on good news and selling on bad. The
underlying assumption is that these traders can anticipate
information announcements and gauge the market
reaction to them better than the average investor in themarket.
For information trader the focus is on the relationship
between information and changes in value, rather than on
value per se. Thus an information trader may buy an
overvalued firm if he or she believes that the next
information announcement is going to cause the price to
go up because it contains better-than-expected news. If
there is a relationship between how undervalue or
overvalued a company is and how its stock price reacts to
new information then valuation could play a role in
investing for an information trader.
Market Timers
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Market timers note, with some legitimacy, that the
payoff to calling turns in markets is much greater than the
returns from stock picking. They argue that it is easier to
predict market movements than to select stocks and that
these predictions can be based upon factors that are
observable.
While valuation of individual stocks may not be of any use
to a market timer, market timing strategies can use
valuation in at least two ways:(a) The overall market itself can be valued and compared
to the current level.
(b) A valuation model can be used to value all stocks, and
the results from the cross-section can be used to
determine whether the market is over or undervalued. For
example, as the numbers of stocks that are overvalued
using the dividend discount model increases relative to the
numbers that are undervalued, there may be reason to
believe that the market is overvalued.
Efficient Marketer
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Efficient marketers believe that the market price at
any point in time represents the best estimate of the true
value of the firm and that any attempt to exploit perceived
market efficiencies will cost more than it will make in
excess profits. They assume that markets aggregate
information quickly and accurately, that marginal investors
promptly exploit any inefficiencies, and that any
inefficiencies in the market are caused by friction, such as
transaction costs, and cannot be arbitraged away.For efficient marketers, valuation is a useful exercise
to determine why, stock sells for the price it does. Since
the underlying assumption is that the market price is the
best estimate of the true value of the company, the
objective becomes determining what assumptions about
growth and risk are implied in this market price, rather
than on finding under- or overvalued firms.
Valuation in Acquisition Analysis
Valuation should play a central part in acquisition
analysis. The bidding firm or individual has to decide on a
fair value for the target firm before making a bid, and the
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target firm has to determine a reasonable value for itself
before deciding to accept or reject the offer.
There are also special factors to consider in takeover
valuation. First, the effects of synergy on the combined
value of the two firms (target plus bidding firm) have to be
considered before a decision is made on the bid. Those
who suggest that synergy is impossible to value and
should not be considered impossible to value should not be
considered in quantitative terms are wrong. Second, theeffects on value of changing management and
restructuring the target firm will have to be taken into
account in deciding on a fair price. This is of particular
concern in hostile takeovers.
Finally, there is a significant problem with bias in
takeover valuations. Target firms may be overly optimistic
in estimating value, especially when the takeover is hostile
and they are trying to convince their stockholders that the
offer price is too low. Similarly, if the bidding firm has
decided, for strategic reasons, to do an acquisition, there
may be strong pressure on the analyst to come up with an
estimate of value that backs up the acquisition decision.
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Valuation in Corporate Finance
The objective in corporate finance is the maximization
of firm value, and then the relationship between financial
decisions, corporate strategy, and firm value has to be
delineated. In recent years, management-consulting firms
have started offering companies advice on how to increase
value. Their suggestions have often provided the basis for
the restructuring of these firms.The value of a firm can be directly related to decisions
that it makes-on that projects it takes, on how it finances
them, and on its dividend policy. Understanding this
relationship is key to making value-increasing decisions
and to sensible financial restructuring.
Equity represents a residual cash flow rather than a
promised cash flow.
You can value equity in one of two ways:
By discounting cash flows to equity at the cost of equity
to arrive at the value of equity directly.
By discounting cash flows to the firm at the cost of
capital to arrive at the value of the business. Subtracting
out the firms outstanding debt should yield the value of
equity.
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Two Measures of Cash Flows
Cash flows to Equity: These are the cash flows
generated by the asset after all expenses and taxes, and
also after payments due on the debt. This cash flow, which
is after debt payments, operating expenses and taxes, is
called the cash flow to equity investors.
Cash flow to Firm: There is also a broader definition of
cash flow that we can use, where we look at not just the
equity investor in the asset, but at the total cash flows
generated by the asset for both the equity investor and
the lender. This cash flow, which is before debt payments
but after operating expenses and taxes, is called the cash
flow to the firm.
Two Measures of Discount Rates
Cost of Equity: This is the rate of return required by
equity investors on an investment. It will incorporate a
premium for equity risk the greater the risk, the greater
the premium.
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Cost of capital: This is a composite cost of all of the
capital invested in an asset or business. It will be a
weighted average of the cost of equity and the after-tax
cost of borrowing.
FREE CASH FLOWS TO THE FIRM
The best things in life are free, and the same holdstrue for cash flow. Smart investors love companies that
produce plenty of free cash flow (FCF). It signals a
company's ability to pay debt, pay dividends, buy back
stock and facilitate the growth of business - all important
undertakings from an investor's perspective. However,
while free cash flow is a great gauge of corporate health, it
does have its limits and is not immune to accounting
trickery.
What Is Free Cash Flow?
By establishing how much cash a company has after
paying its bills for ongoing activities and growth, FCF is a
measure that aims to cut through the arbitrariness and
"guesstimations" involved in reported earnings. Regardless
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of whether a cash outlay is counted as an expense in the
calculation of income or turned into an asset on the
balance sheet, free cash flow tracks the money.
To calculate FCF, make a beeline for the company's cash
flow statement and balance sheet. There you will find the
item cash flow from operations (also referred to as
"operating cash"). From this number subtract estimated
capital expenditure required for current operations:
- Cash Flow from Operations (Operating Cash)- Capital Expenditure
To do it another way, grab the income statement and
balance sheet. Start with net income and add back
charges for depreciation and amortization. Make an
additional adjustment for changes in working capital,
which is done by subtracting current liabilities from current
assets. Then subtract capital expenditure, or spending on
plants and equipment:
- Net income
+ Depreciation/Amortization
- Change in Working Capital
- Capital Expenditure
It might seem odd to add back
depreciation/amortization since it accounts for capital
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spending. The reasoning behind the adjustment, however,
is that free cash flow is meant to measure money being
spent right now, not transactions that happened in the
past. This makes FCF a useful instrument for identifying
growing companies with high up-front costs, which may
eat into earnings now but have the potential to pay off
later.
What Does Free Cash Flow Indicate?
Growing free cash flows are frequently a prelude to
increased earnings. Companies that experience surging
FCF - due to revenue growth, efficiency improvements,
cost reductions, share buy backs, dividend distributions or
debt elimination - can reward investors tomorrow. That is
why many in the investment community cherish FCF as a
measure of value. When a firm's share price is low and free
cash flow is on the rise, the odds are good that earnings
and share value will soon be on the up.
By contrast, shrinking FCF signals trouble ahead. In
the absence of decent free cash flow, companies are
unable to sustain earnings growth. An insufficient FCF for
earnings growth can force a company to boost its debt
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levels. Even worse, a company without enough FCF may
not have the liquidity to stay in business.
RESEARCH DESIGN OF THE STUDY
INTRODUCTION:
Every stock available in the markets has a value
called market price, which is the indicator of the
companys performance. According to fundamental
analysis we will try to find the intrinsic value of a particular
stock, which is the true value of the stock, based on which
investment arguments take place.
STATEMENT OF PROBLEM:
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Every asset, financial as well as real, has value. The
key to successfully investing in and managing these assets
lies in understanding not only what the value is, but the
sources of the value. Any asset at can be valued but some
assets are easier to value than others, and the details of
the valuation will vary from case to case. Thus, the
valuation of a share of a real estate property will require
different information and follow a different format from the
valuation of a publicly traded stock. What is surprising;however, is not the difference in valuation techniques
across assets, but the degree of similarity in basic
principles. There is undeniably uncertainty associated with
valuation. Often the uncertainty comes from the asset
being valued, although the valuation model may add to
that ascertained.
A postulate of sound investing is that an investor does
not pay more for asset than its worth. This statement may
seem logical and obvious as financial assets are acquired
for the cash flows expected from owning them, which
implies that the price that is paid for any asset should
reflect the cash flows it is expected to generate.
The problem in valuation is not that there are not
enough models to value an asset; it is that there are too
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many. Choosing the right model to use in valuation is as
critical to arriving at a reasonable value as understanding
how to use the model. Analysts use a wide variety of
models from simple to the sophisticated. These models
often make different assumptions about pricing, but they
do share some common characteristics so in the study we
tried to use price-earning multiples and discounted cash
flow models of valuation.
OBJECTIVES OF THE STUDY:
To understand the macroeconomic variables those will
an impact on the company progress.
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To study the various trends, opportunities, challenges
of the industry in which the company operates.
To understand the various policies of the company
those have impact on the financial performance of the
company.
To understand the various investment valuation
models that can be used.
To select the appropriate model that suits the stock.
Find the intrinsic value of the stock and compare with
market value of the study.
To recommend whether to buy, hold or sell the stock
based on the analysis.
SCOPE OF THE STUDY:
The study basically tries to identify the intrinsic value
of the company by using the published financial details of
the company. The study is restricted to one particular
company in the sector. The study also includes testing
the intrinsic value of the company.
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RESEARCH METHODOLOGY:
Type of research:
Research design is the conceptual structure within
which research is conducted. It constitutes the blue print
for the collection, measurement, and analysis of data. The
type of research adopted for the study is descriptive
research as the research does not require any
manipulation of variables and does not establish causalrelationship between events; it just simply describes the
variables.
Sources of data:
Primary data
Those are the data that are obtained by a study
specially designed to fulfill the data needs of the problem.
Meeting the company professionals personally collected
the information necessary for the study.
Secondary data
Data, which are not originally collected but rather
obtained from published or unpublished sources, are
known as secondary data. In this research secondary data
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was collected through sources like Internet, research
reports, magazines, and company journals.
Sampling plan:
Type of sampling : Non-probabilistic judgment
sampling.
Sample size : One company from automobilesector.
RESEARCH INSTRUMENTS:
Financial calculations: - This was done to find the
various valuation ratios and necessary calculations to find
the intrinsic value of the company.
Z Test: - This test was used to test the hypothesis.
PLAN OF ANALYSIS:
After having collected the financial data related to the
entities i.e., the sample selected from the selected sector.
Calculate the various valuation ratios and other financial
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A measure of a security's or portfolio's volatility, or
systematic risk, in comparison to the market as a whole. It
is also known as "beta coefficient."
2) CAPEX:
Funds used by a company to acquire or upgrade
physical assets such as property, industrial buildings, or
equipment.
3) CAGR:
The year over year growth rate of an investment overa specified periodoftime.
Calculated by taking the nth root of the total percentage
growth rate where n is the number of years in the period
being considered.
This can be written as:
4) COST OF EQUITY:
The return that stockholders require for a company for
the capital invested. The traditional formula is the dividend
capitalization model:
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5) DEBT/EQUITY RATIO:
A measure of a company's financial leverage
calculated by dividing long-term debt by shareholders
equity. It indicates what proportion of equity and debt the
company is using to finance its assets.
Note: Sometimes investors only use interest bearing long-
term debt instead of total liabilities.
6) DEPRECIATION:
An expense recorded to reduce the value of a long-
term tangible asset. Since it is a non-cash expense, it
increases free cash flow while decreasing reportedearnings.
7) DIVIDEND PAYOUT RATIO:
The percentage of earnings paid to shareholders in
dividends.
9) DUPONT ANALYSIS:
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A method of performance measurement that was
started by the DuPont Corporation in the 1920s, and has
been used by them ever since. With this method, assets
are measured at their gross book value rather than at net
book value in order to produce a higher ROI.
10) EPS:
The portion of a company's profit allocated to each
outstanding share of common stock. Calculated as:
11) EFFECTIVE TAX RATE:
The portion of a company's profit allocated to each
outstanding share of common stock. Calculated as:
12) EQUITY MULTIPLIER:
A measure of financial leverage calculated as:
Total Assets divided by Total Stockholders' Equity.
Like all debt management ratios, the equity multiplier
is a way of examining how a company uses debt to finance
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its assets. It is also known as the financial leverage ratio or
leverage ratio.
13) ASSET TURN OVER RATIO:
The amount of sales generated for every dollar's
worth of assets. It is calculated by dividing sales in rupees
by assets in rupees.
Formula:
14) FUNDMENTAL ANALYSIS:
The amount of sales generated for every dollar's
worth of assets. It is calculated by dividing sales in rupees
by assets in rupees.
Formula:
15) MARKET CAPITALISATION:
It is the total value of all outstanding shares of
particular company, which is represented in the market.
It's calculated by multiplying the number of shares times
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the current market price. This term is often referred to as
market cap.
16) PE (PRICE EARNING MULTIPLES):
A valuation ratio of a company's current share price
compared to its per-share earnings. A valuation ratio of a
company's current share price compared to its per-share
earnings.
Calculated as:
17) PEG (PRICE EARNING TO GROWTH):
A valuation ratio of a company's current share price
compared to its per-share earnings.
18) ROE:
A measure of a corporation's profitability, calculated as:
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19) WACC: A calculation of a firm's cost of capital that
weight each category of capital proportionately. Included
in the WACC calculations are all capital sources, including
common stock, preferred stock, bonds, and any other long-
term debt.
WACC is calculated by multiplying the cost of each capital
component by its proportional weighting and then
summing:
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CHAPTER SCHEME
Chapter: 1 THEORITICAL BACKGROUND OF THE
STUDY
This chapter mainly deals with secondary data
collected to support the study and the reasons to problem
of study.
Chapter: 2 RESEARCH DESIGN
A research design serves as a bridge between what
has been done in the conduct of study to realize the
specified objectives. It is an outline of the projects working.
Chapter: 3 PROFILES
This chapter includes the profile of the industry as well
as the company in which the study is conducted. This is
also tries to deal with trends and prospects in the industry
as well as the company.
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Chapter: 4 ANALYSES AND INTERPRETATION
In this chapter using the analyzed data we have tried
to find out the intrinsic value of the company. Hypothesis
test is done to find whether the value of the company is
under or over valued.
Chapter: 5 SUMMARY OF FINDINGS, CONCLUSIONS
AND SUGGESTIONS
In this chapter we will actually include all that we have
analyzed and what has been found. Finally concludechecking whether the objective of the study has been
achieved or not.
ECONOMIC ANALYSIS
Economic Outlook:
During the fiscal year 2003-04, Indias GDP which
grew by 8.10% was principally on account of a strong
recovery in the agriculture sector and accelerated growth
in the industry and services sectors. A growth rate higher
than 8% has been achieved in the past in only three years
- 1967-68, 1975-76 and 1988-89. Exports have grown by
17.1% in 2003-04 in USD terms. While the rupee
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appreciated against USD in 2003-04, it depreciated against
the currencies of major non dollar-trading partners.
Foreign exchange reserves crossed the levels of USD 100
billion mark on December 2003 and stood at USD 199.3
billion as on 31st March 2004. Foreign Institutional
Investors (FIIs) investments saw a sharp rise during the
year, which amounted to USD 10 billion. Overall economic
conditions look positive and expected to post a GDP
growth of 6-6.5% during FY05.
GRAPH 1: ACCELERATING GROWTH OF GDP
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TABLE 1: INDIA - ECONOMIC PARAMETERS
F 04 F 05
GDP Growth
(%)
8.1 6.0 -
6.5 Fiscal Deficit
(%)
4.8 4.4
Interest Rate Decline
d
Hardeni
ng Inflation
(Average) %
5.3 6.5
Rupee - US
Dollar
Apprecia
ted
Steady
(Source: RBI, CMI)
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The Real Gross Domestic Product (GDP) is estimated
to have grown by 8.10% in 2003-04, buoyed by a strong
agricultural recovery. While the agricultural sector grew by
9.1% during the FY04, the industry and services sectors
have also maintained their momentum with the GDP
growth by achieving a growth rate of 6.5% and 8.4%
respectively during the year. The growth GDP has grown
by 7.4% during April-June 2004 period, lower than the
8.2% growth registered in January-March 2004 and 10.5%in October-December 2003 quarter. Inflation is also inching
up higher, driven by increases in fuel and commodity
prices. Non food credit has increased by 11.5% during the
April-September 2004 period as against previous
corresponding years 6% indicating the progressive
economic activities. But the global crude oil shock will
definitely have an adverse affect on the growth during
fiscal 2005.
GRAPH 3: INFLATION
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The average inflation during fiscal year 2003-04 was
around 5.5% as against the previous corresponding fiscalsaverage of 3.4%, the prime movers being sugar, edible
oils, textiles, leather and leather products, basic metals,
alloys, iron and steel. With the increase of few commodity
prices mainly the crude oil prices have increased the
global inflation levels from June 2004, India being no
exception to this. The domestic fuel prices have risen by
more than 10% during the fiscal 2004-05 over last years.
The inflation during the fiscal year 2004-05 touched three
and a half years high of 8.33% for the week ended August
28th 2004 from 5.55% for the week ended June 5th 2004
due to the excess money supply in the economy. Thereasons for the high inflation are both domestic and
international. The domestic reasons include excess
liquidity in the market and delay in monsoon that
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increased the prices of essential commodities. M3, the
measure of money supply grew by 15.5 per cent in July
2004, compared to 11.25 per cent in July 2003. The
international causes are inexorable rise in oil prices, global
increase in the prices of commodities, supply side shock
and growth in chinas demand for goods. This is cost-push
inflation wherein the supply problems in a few important
commodities push up prices of commodities. Since crude
oil import constitute almost one third of the total exports,we can say that the present situation is on account of
imported inflation. To check the rising prices, government
took some measures like duty cuts on steel and oil
products. Reserve Bank of India raised the Cash Reserve
Ratio to 5% from 4.5% in two tranches of 25 basis points
and has also cut the rate of interest payable on eligible
cash balances maintained with it by banks by 250 basis
points to 3.5 percent. In fact, the gradual reduction in the
CRR over the past few years in successive credit policies
had been one of the major contributors for the sustained
reduction in the interest rates on auto loans. These moves
were expected to draw out around Rs.8000 crore from the
banking system. Later, the inflation was reduced to 7.20%
in the last week of September. With the increase in the
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GRAPH 4: GDP AND AUTO SALES
GDP and Auto sales
1100
1150
1200
1250
1300
1350
1400
1450
1999-
00
2000-
01
2001-
02
2002-
03
2003-
04
RealGDP
(Rs.
'00
At1993-
94price
404550556065707580
No
ofunits(in
GDP No of units (in lakhs)
(Source: www.indiabudget.nic.in)
Rubber Prices:
With the increase in rural activities, the commercial
vehicles are expected to grow. Sports Utility Vehicles (SUV)
after being a very big hit in the domestic market, the
players now are planning to introduce them to the
domestic market. But the increase in the input prices like
steel and rubber has a negative impact on the industry
profitability. The truckers strike has affected the auto
players production and distribution to certain extent.
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GRAPH 5: SHOWING RUBBER PRICES
Interntional & Domestic Rubber Price
400
600
800
1000
1200
1400
1600
Mar-
01
Jul-01 Nov-
01
Apr-
02
Aug-
02
Dec-
02
Apr-
03
Aug-
03
Dec-
03
Apr-
04
USD
/Ton
0
10,000
20,00030,000
40,000
50,000
60,000
70,000
Rs/Ton
USD/Ton Rs/Ton
Source: indiainfolineA combination of internal and external factors has
contributed to the price volatility in the rubber market.
Since the domestic prices of rubber are less than the
global prices, the tyre manufacturers in other countries,
sourcing natural rubber from India which has led to the
increase in the exports thereby reducing the domestic
stock levels to less than sixty days of consumption of the
rubber users sector. Also, the subsidy given by the
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government for exports of rubber has resulted in an
increase in the exports.
The steel prices
GRAPH 6: SHOWING STEEL PRICES
Steel Prices
20,000
30,000
40,000
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Rs/Tonn
GC sheets
Source: indiainfoline
The steel prices are on rise following a sharp increase
in the prices of raw materials like iron ore, coke, coal,
power, gas and scrap. While the cost of iron ore went up
by 75% during the period June2003 to July 2004, the scrap
prices jumped up by 91%. Cokes prices saw an increase of
50% during the same period. There are no signs of decline
in the prices of steel products following a strong demand
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from the housing and infrastructure sectors, with
additional growth potential in the auto and consumer
durables sectors too. With China taking steps to cool down
its overheated economy, demand from that country is
expected to slow down. But any shortfall in demand from
China may be offset by growth in demand in the US,
Europe and Japan as economic recovery gathers
momentum leaving no scope for the steel price declines in
the near short term.
Competition and Market
In the Automotive Sector the continuing convergence
between the car and the UV markets is a positive
development. High-end MUV sales accounted for 51% of
mid-size car sales in India in F-04, as compared to 16% in
F-00. The Co also believes that as the car market expands
in India, MUVs will continue to take an increasing share of
this market. After the success of the Scorpio and Bolero,
Reduced interest rates with the maturing of the vehicle
financing market will also add an impetus to vehicle sales
growth. Increased penetration of such financing products
in rural and semi-urban markets will directly benefit the
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Company given its strong presence in these markets. M&M
has the additional advantage that its subsidiary, MMFSL
has a wide rural network. The ongoing WTO & Free Trade
Area negotiations with Thailand, ASEAN, SAARC countries
and the Mercosur countries are likely to lead to lowered
tariffs across many of our target export markets. This
could provide the Co with a significant opportunity to
generate larger volumes from export sales.
Being an agrarian economy Indias GDP growth ismuch dependent on the fortunes of the agro sector. Given
this backdrop the Tractor industry assumes significance.
The Indian Tractor industry is the largest in the world in
terms of production and sales. However in terms of per
capita usage it still scores low against comparable
developing nations. This provides for ample scope of
growth for the industry in future. With liberalization
restrictions on capacities and production were removed.
Today anybody can walk in and put up a plant and start
operations.
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COMPANY PROFILE:
Mahindra & Mahindra Limited (M&M) is the flagship
company of around US $ 2.5 billion Mahindra Group, which
has a significant presence in key sectors of the Indian
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economy. A consistently high performer, M&M is one of the
most respected companies in the country.
Set up in 1945 to make general-purpose utility
vehicles for the Indian market, M&M soon branched out
into manufacturing agricultural tractors and light
commercial vehicles (LCVs). The company later expanded
its operations from automobiles and tractors to secure a
significant presence in many more important sectors. The
Company has, over the years, transformed itself into aGroup that caters to the Indian and overseas markets with
a presence in vehicles, farm equipment, information
technology, trade and finance related services, and
infrastructure development.
M&M has two main operating divisions:
1) The Automotive Division manufactures utility vehicles,
light commercial vehicles and three wheelers.
2) The Tractor (Farm Equipment) Division makes
agricultural tractors and implements that are used in
conjunction with tractors, and has also ventured into
manufacturing of industrial engines. The Tractor Division
has won the coveted Deming Application Prize 2003,
making it the only tractor manufacturing company in the
world to secure this prize.
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The resurgence of the automotive industry and M&M's
success in exploiting it, has created an opportunity to
strengthen the company through an entry into the Auto
Components business, the growth of which is being fueled
by both, domestic and export demand.
M&M employs around 11,500 people and has six
state-of-the-art manufacturing facilities spread over
500,000 square meters. M&M has also set up two satellite
plants for tractor assembly. It has 49 sales offices that aresupported by a network of over 780 dealers across the
country. This network is connected to the Company's sales
departments by an extensive IT infrastructure.
M&M's outstanding manufacturing and engineering
skills allow it to constantly innovate and launch new
products for the Indian market. The Company's significant
recent product launch, the "Scorpio", resulted in the
Company winning the National Award for outstanding in-
house research and development from the Department of
Science and Industry of the Government in 2003. The
Company has launched India's first tractor with turbo
technology - the Mahindra Sarpanch 595 DI Super Turbo.
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The Company's commitment to technology-driven
innovation is reflected in Company's plans of setting up of
the Mahindra Research Valley, a facility that will house the
Company's engineering research and product development
wings, under one roof.
The M&M philosophy of growth is centered on its
belief in people. As a result, the company has put in place
initiatives that seek to reward and retain the best talent in
the industry. M&M is also known for its progressive labourmanagement practices. In the community development
sphere, the company has implemented several programs
that have benefited the people and institutions in its areas
of operations.
Mahindra and Mahindra continues to be a solid
company
Company has registered a 28 % rise in its total vehicle
sales at 11,484 units for August 2004 as against 8,946
units in the corresponding period previous fiscal.
Mahindra City was granted special economic zone (SEZ)
which includes 100% tax holiday for the next 5 years
and a 50% tax holiday for the next five years, exemption
from customs duty, central excise, service tax,
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education cess, central sales tax, and all local taxes
levied by the state.
Company has set up four overseas operations in Uruguay,
Italy, Dubai and South Africa for sale of Scorpio and
Bolero models in these markets.
Enters in to segments such as retailing agri-inputs, under
its own brand, manage corn and soya as collateral for
banks, export fruit to European supermarkets.
The Farm Equipment Sector is the first Tractor Company
in the world to win the Deming Prize. Also, it is the fourth
company in India and the 10th in the world, outside
Japan, to win this prize.
Launched India's first tractor with turbo technology in
Patna, it is now eyeing to capture the tractor market inthe Bihar state in a big way.
Regained dominance as a leader in both utility vehicles
and tractors acquiring 50% market share.
Recent Developments &Future plans:
The companys long-term focus will continue to be
MUVs. With the difference between the passenger car and
the MUV segments fast disappearing, as the market for
MUVs is likely to see a spurt in the near future. The
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company plans to be the worlds biggest tractor maker by
2006, intends to overcome lack of similar size in utility
vehicles (UV) manufacture by being a niche player. Their
tractors were selling well in the US, giving M&M a
handsome market share in the 40-60 hp ranges in Texas.
M&M`s main US markets are in the South and South West.
The company is growing at rate of 80 per cent in the US.
Apart from US it also plans to market its tractors in Europe
through a sister-trading firm after rescheduling plans to setup a subsidiary in the region. The company will also launch
85-horse power (HP) and 100HP models within the next 18
months to meet the specific demand for high-powered
tractors in the European and US markets. On the cards are
a number of improvements on the Maxx, based on
customer feedback. The company also plans to expand its
appeal with new variants. For the low-end personal
segment, M&M has introduced the Marshal Royale.
Marketing competencies:
Flanking its strategy to become a global player, M&M
is banking on its key brand attributes which essentially
signify three basic things: trust, reliability, and value-for-
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money. The overall marketing game plan involves a
strategy around creating strong brands, Customer Touch
Build a database of Customers for targeted marketing,
Providing a unique customer experience - Unique
showrooms which give an entirely new buying experience
are being planned and 40 dealerships would be converted
into such modern showrooms during the current year and
Improve Operational Efficiencies through outsourcing
wherever required, value engineering and strategicsourcing.
M&M has identified its 3 Weapons for the UV market.
Each brand will be positioned uniquely targeting various
spectrum of the market, the three brands - Scorpio, Bolero
and Maxx. These are the three brands, which will be
M&Ms future brand platform. Bolero will be one hub, while
Scorpio will be one up market hub. The tractor segment
where the company has 26% market share mainly
depends on the distribution channels of the company.
Production and distribution:
The Companys manufacturing facilities are located at
Kandivli, Nashik, Igatpuri, Nagpur, Zaheerabad, Jaipur and
Rudrapur. Company has two main tractor manufacturing
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plants located at Mumbai and Nagpur in Maharashtra.
Apart from these two main manufacturing units, the Farm
Equipment Sector has satellite plants located at Rudrapur
in Uttaranchal and Jaipur in Rajasthan. The Company has a
strong and extensive dealer network of over 450 dealers
for sales and service of tractors and spare parts. 28 area
offices, situated in all the major cities and covering all the
principal states, manage this dealer network.
Employee Relations
Employee relations have been generally cordial at all
plants of the company. They have recently introduced two
new schemes, which are in the pipeline for its top-level
managers in order to bring balance in their work and
personal life. Under this scheme, company has changed its
leave policy wherein it has introduced a compulsory 15-
day leave for its middle and top-level officials. Besides this,
the company also proposes to implement a compulsory
early day-off at 5 pm at least once a week. They want their
employees to spend value time with their family at home.
They are trying to follow ergonomic rules for providing
efficient working atmosphere, which is being effectively
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implemented by companies abroad. The company is also
focusing on training and development programmers for the
career mapping of its employees and provides them with a
meaningful professional career ahead. In addition, the
company also plans to implement various development
plans for training different level of employees. These
measures will surely help in retaining its efficient
contributors.
Board of directors:
Mr. Anand G Mahindra Vice-Chairman &Managing
Director and the four Executive Directors of the Company
manage the Company. The Board reviews and approves
strategy and oversees the actions and results of
management to ensure that the long-term objectives of
enhancing stakeholder value are met. The Company
presently has seventeen Directors. The Vice-Chairman &
Managing Director and the four Executive Directors are
Whole-time Directors. Reimbursement of expenses
incurred in the discharge of their duties, the remuneration
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that these Directors would be entitled to under the
Companies Act, 1956 as Non-Executive Directors. The
Company has not entered into any materially significant
transactions with its Promoters, Directors or the
Management or relatives, etc. that may have potential
conflict with the interests of the Company at large.
Dividend policy:
The Directors have recommended a dividend at 90%(Rs.9 per share). The dividend, together with the tax on
distributed profit, will absorb a sum of Rs.117.79 crores
(previous year Rs.71.98 crores) and will be paid to those
shareholders whose names stand registered in the books
of the Company as on the book closure date.
INDUSTRY PROFILE:
The Indian automobile sector can be divided into
several segments: 2 & 3 wheelers, passenger cars,
commercial vehicles (Heavy CVs/ Medium CVs/Light CVs),
utility vehicles (UVs) and tractors. The industry is highly
capital intensive in nature. Though three-wheelers and
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Passenger cars : 17%
Utility vehicles : 23%
Light commercial vehicles : 12%
Heavy and multi commercial vehicles : 23%
3 wheelers : 8%
PORTER FIVE FORCES MODEL:
Supply: The Indian automobile market is plagued withexcess capacity.
Demand: Is largely cyclical in nature and dependent upon
economic growth and per capita income. Seasonality is
also a vital factor.
Barriers to entry: High capital costs, technology,
distribution network, and availability of auto components.
Bargaining power of suppliers: Low, due to stiff
competition and its fragmented nature.
Bargaining power of customers: Very high due to
availability of options.
Competition: Except for heavy commercial vehicles
segment, competition is stiff. The competition is expected
to increase even further.
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PROSPECT IN THE SECTOR:
The government spending on infrastructure in roads
and airports and higher GDP growth in the future
could benefit the auto sector in general. This
combined with a softer interest rate environment will
play a vital role in providing a fillip to demand. Utility
vehicle segment is expected to grow at around 8% in
FY05.
Though the market size is expected to grow by 12%
-15%, competitive pressure could keep prices and
margins under control.
After three years in the wilderness, tractor industry
seems to have finally come out of the trough as it
grew by 10% during FY05. While good monsoon is a
positive for the sector, given the fact that the country
has had erratic rainfall in the past, volumes may not
recover sharply. But the longer-term picture is
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impressive in light of poor mechanization levels in the
country.
With an estimated 39% of CVs plying on the roads 10
years old, demand for HCVs is expected to grow by
8% in FY05. Also adding the positives are higher crop
output, industrial sector growth and favorable interest
rate environment. While the industry is cyclical in
nature, we expect this factor to weaken in the
medium term arising out of structural changes in the
industry. The privatization of select state transport
undertakings and hiking of bus fares bodes well for
the bus segment as well.
The reduction in peak customs duty from 30% to 25%
in the budget will result in savings on the raw material
front as well. Since raw material costs account for
almost 50% of revenues of auto companies in general,
this is a positive. Also, steel prices have shown some
signs of softening and this is likely to have a positive
impact on the margins of the players.
We expect Indian auto majors to increase capital
expenditure budget at an average of 4%-5% of
revenues in FY05 as against around 2%-3%
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historically. This would be towards product
development and complying with new environmental
regulations. With MNCs willing to sacrifice profitability
for growth in the short-term, it has become imperative
for domestic players to spruce up R&D efforts. At the
same time, cash flow position is much stronger now
given that most manufacturers have reduced working
capital and debt. This would mean financing bulk of
incremental capex from internal accruals.
Product Pricing:
The Indian automobiles are slowly shifting away from
the price sensitiveness towards the value addition concept.
Besides, even the SIAM has changed the norms of
classification from the previously followed Price basis to
the size/ length of the vehicle. Previously, the industry was
highly price sensitive and the sales were dependent on
price brackets. But the Indian customers perception is
slowly changing and moving towards the value additions
such as the size of the car, the style, the comfort, the level
of service offered by the manufacturers, the variants
available in the category etc. Even though the perception
is changing, it is true that still price plays an important role
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in the industry. The role of price may be very negligible in
some segments, but in the other segments they are very
much reactive to the price fluctuations. Thus, the some
players in segments concentrate on the value addition to
achieve competitive advantage, while the other players in
the segments use price as weapon along with their core
service. These players also offer discounts during festival
season to boost the sales.
GrowthDrivers:
1.Economic growth: There is a direct co-relationship
between the per capita income of the people and the
demand for automobiles. Due to the increased business
activity, the economy supports the industry growth as
well as generates employment. The demand for
automobile is expected to grow with the improved
standard of living. Even though the economic growth
rate during the year was 8.056 percent, the future
average growth rate is expected to be around 6.5
percent without any economic reforms.
2.Income level: The level of income has got a direct
impact on the sales of the automobile. The rise in
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people. Along with this, even other industries
performance will boost up. Thus, the demand mainly for
utility vehicles increases with the better performance of
the rural sector.
4.Used car Segment: The industry saw a growth of
around 30 percent in the used car segment during fiscal
year. The profile of an Indian Car buyer has been
changing due to the increasing purchasing power.Besides, the used cars are becoming affordable due to
the reduced Equated Monthly Installments (EMI) and
increased repayment period. A more active lifestyle,
rising disposable income and lower cost of replacement
are guiding the customers to change their cars once
every three years now. Even though this market is
unorganized to a large extent, the organized used car
segment is slowly growing in India. With the
manufacturers only coming forward to buy back their
models, has in turn helped the sales of new vehicles.
5.Availability of finance for both new and used
vehicles: With the ease in the availability of finance
both the new and used auto market segment has been
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witnessing a growth. Previously, loans were provided
only for the new vehicles, but now the financial
institutions have come forward to offer the loans for
used vehicles too. With the increasing competition
among the finance providers, they are reducing the
rates day by day. Along with this, even some companies
go beyond the industry benchmark by financing up to
seven year old vehicles, thereby helping the growth of
the used auto segment. The interest rate has almosthalved in comparison to the rates during 1998 and has
touched as low as 6.5 percent per annum. Auto
manufacturers are using this as a tool to increase the
sales. They are having tie-ups with the finance providers
or floating their own finance companies.
6.Infrastructure: Due to the increased investment in
infrastructural projects especially in the development
and improvement of road projects, the overall transport
business activities and the tourism is expected to grow,
which in turn creates a good demand for the utility
vehicles.Traffic on roads is growing at a rate of 7 to
10% per annum while the vehicle population growth for
the past few years is of the order of 12% per annum. So
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there is a need for the development of good
infrastructural roads for the growth of the automobile
industry. On the other side, poor road infrastructure and
traffic congestion can be a bottleneck in the growth of
vehicle industry.
7.Exports: With the global players looking at developing
vehicles that can be launched in multiple markets to
reduce their developmental cost and to reduce their
development costs, India is expected to increase itsexports. These giants are planning to use their Indian
facilities as hub for their worldwide operations. With this
move, General motors and Daimler Chrysler both have
their R & D center in Bangalore, which will have an
important role in International product development.
Toyota has plans to turn India into its lowest cost-
manufacturing center. MUL is also becoming a hub for
small cars for Suzuki Motor Corporation. The countrys
car sales and exports is expected to register around 8.5
lakh units by the fiscal 2006-07, which will mainly be
driven by compact and mid size car segment.
TABLE 2: COST ANALYSIS
As % of net sales FY05 FY04
Raw Material 69.4 67.8
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Staff Cost 5.0 5.9
Other expenditure 13.1 13.4
Source: India Infoline Research
Raw material cost pressures was faced by most of the
companies in the sector. For instance, raw material cost as
a percentage of net sales increased by 5.7 percentage
points for Punjab Tractors, 5.2 percentage points for BAL,
2.8 percentage points for ALL and 2.5 percentage points
for Tata Motors.Staff cost declined by 66bps and other expenditure
increased 41bps as a percentage of net sales. Punjab
Tractors and M&M enjoyed the benefit of a reduced staff
cost by 370bps and 230bps as a percentage of net sales.
Punjab Tractors maintained its margins in spite of a high
rise in raw material cost due to savings in staff cost and
other expenditure.
Major competitors and Market position:
Prior to 1980, Premier Automobiles Limited (PAL) andHindustan Motors (HM) had dominated the Indian
passenger car market. With the entry of Maruti Udyog
Limited (MUL) in 1980, the former players faced a tough
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competition. Even though they were able to maintain their
volumes, their market share drastically reduced. MUL
dominated the passenger car market and faced no
competition till early 1990s. After the liberalization took
place, with the entry of foreign players, the problems
began for MUL. MUL started loosing its market share
slowly. During the initial stages of liberalization, since MUL
had depreciated its plant already by then, no player in the
industry was able to match MULs Maruti 800s entry price.But still, MUL faced tough time in the upper segment. With
the launch of the models like Indica, Santro and Matiz by
Tata, Hyundai and Daewoo respectively, in the price range
of 3- 4.5 lakhs, MULs market share fell down sharply. But,
however MUL is still the market leader in the passenger
car segment, and was able to maintain its market share
with its successful models like Maruti 800, Esteem, Zen,
Wagon R and Alto. The overall market share of MUL fell
from 70.2 percent in 1995-96 to 58.1 percent during 1999-
00, which further declined to 51 percent as on February
2004. This can be attributed to the increased competition
from Hyundai, Tata motors, Fiat, General motors,
Hindustan motors and Honda Siel.
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In the A segment, MUL hold the monopoly position
with its 800 model and no other player has been able to
enter this segment. This model alone accounts for about
25 percent of the total sales of the passenger cars. In the
lower B segment, MUL holds the leadership position with
its three models in the segments viz Zen, Alto and Wagon
R, followed by Hyundai. But, model wise Santro tops the
segment with its 37 percent share in this segment. There
are three players in the upper B segment, with Tata in theNo.1 position. Its model Indica accounts to 86 percent of
the total sales in the segment. MULs Esteem lost its
leadership position to Tatas Indigo, which has dominated
the market with 31 percent share. This ahs been followed
by Hyundais percent and 22 percent respectively. Honda
Siel occupies the dominant position with its City model.
Toyotas Corolla and Hondas Accord are dominant in the D
& E segments respectively Accent and Ford Ikon, whose
market shares are 27. With the launch of new models in
MUVs and SUVs, the utility vehicles sales are in an upward
trend. In the utilities segment Mahindra & Mahindra has
been able to maintain its leader position, followed by MUL,
which manufactures the models like omni and versa. The
launch of Qualis model has given a new look to the
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industry. Even, it grabbed some share of passenger car
industry, since the customers perceived it as a big car,
which is even easy to drive, unlike other utility vehicles.
The launch of Mahindras SUV Scorpio also moved along
the lines of Qualis, dragging the passenger car customers.
Watching the Scorpios success a new range of SUVs were
launched by other players in the industry. The new SUV
models, which are launched, recently are Marutis Jimny,
Fords Endeavour, Suzukis Vitara, Chevrolets Forester andHyundais Terracan. With this move by the players, the red
line between the utilities and the passenger car is slowly
vanishing.
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GRAPH 8: SHARE OF PLAYERS IN THE UTILITIES
SEGMENT AS ON FEB2004-05
Uti l it ies m arket s
3%
34%
31 %
15%
161%
Baja j Tem po
M a h & m a hMarut i Udyog
Telco
Toyota K i rlos
Others
Suppliers:
The Indian Auto component industry was started with
an aim of reducing the imports and being self-sufficient.
But, over a period of time this industry has achieved its
objective along with being a good foreign exchange
earner. The auto component industry maintained a low but
positive growth rate mainly due to its export performance.
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This industry has maintained a 10 percent to 12 percent
share of exports in its total production. Indias automotive
component industry manufactures the entire range of
parts required by the domestic automobile industry and
currently employs about 250,000 persons. Auto
component manufacturers supply to two kinds of
customers original equipment manufacturers (OEM) and
the replacement market. The replacement market is
characterized by the presence of several small-scalesuppliers who score over the organized players in terms of
excise duty exemptions and lower overheads. The demand
from the OEM market, on the other hand, is dependent on
the demand for new vehicles. The strict reform by the
Government with respect to the indigenization programme
has led the OEMs to increase their indignation over the
years. In India, the auto component manufacturers are
found working close in proximity with the vehicle
manufacturers ensuring the just in time deliveries. The
trend of the auto component industry is to outsource
manufacturing assembly to component suppliers while the
OEM imperative is to cut costs, improve customer
responsiveness and build to order, which helps them to
build their own competitive advantage.
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Government Regulations:
Even though the auto sector has been deregularised,
the government still vests the powers with itself to
influence the industry, in terms of controlling the import,
excise and customs duties and emission norms. After the
lifting of licensing in 1993, 16 ventures came up to
manufacture cars. The governments auto policy has
restricted import of cars and automotive vehicles incompletely built (CBU) form or in completely knocked
down (CKD) or in Semi knocked down (SKD) condition. And
the car manufacturers were issued licenses to import
components in CKD or SKD form only after execution of the
Memorandum of Understanding (MOU) with the Director
General Foreign trade (DGFT). 11 companies signed MOU
and they have agreed to bring in minimum foreign equity
of US $ 50 mn, if a joint venture is involved in majority
foreign equity ownership. Along with this, they have also
agreed to indigenize components up to a minimum of 50
percent in the third year and 70 percent in the fifth year.
The government has permitted for 100% foreign equity
investments for the manufacturing of automobiles and
components. The Government will review the automotive
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tariff structure periodically to encourage demand, promote
the growth of the industry and prevent India from
becoming a dumping ground for international rejects. The
incidence of import tariff will be fixed in a manner so as to
facilitate development of manufacturing capabilities as
opposed to mere assembly without giving undue
protection, to ensure balanced transition to open trade, to
promote increased competition in the market and enlarge
purchase options to the Indian customer. Appropriatemeasures including anti dumping duties will be put in
place to check dumping and unfair trade practices. The
conditions for import of new Completely Built Units (CBUs)
will be as per Public Notice issued by the Director General
Foreign Trade (DGFT) having regard to environment and
safety regulations. Used vehicles imported into the country
would have to meet CMVR, environmental requirements as
per Public Notice issued by DGFT laying down specific
standards and other criteria for such imports. The
governments policy allows weighted tax deduction for the
sponsored research and in-house R&D expenditure and
also excise duty rebate of 1% of the gross turnover. The
government is also encouraging auto design firms by
providing them tax breaks and concessional duty. The
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