July 4, 2016

HDFC Bank Investment Advisory Group

Indian Automobile Industry

Sector Update

The Indian automobile industry is one of the largest in the world with an annual sales of 23.37 mn
vehicles (including exports) in FY15, following a growth of 8.7% over the last year. The automobile
industry is closely linked to India’s Gross Domestic Product (GDP) growth and accounts for 7.1% of
the GDP. As the Indian economy was struggling during the period of FY11-FY14 with the GDP
growth coming down from 8.9% in FY11 to sub 5% growth in two consecutive years to 4.7% in
FY14, the Automobile industry also got impacted severely. The industry had seen a strong CAGR
of 21.3% over a period of FY09-FY12; however between FY12-FY16, the growth rate slumped to
4.2% (CAGR). The prolonged slowdown in industry was due to high interest rate, increased excise
duty rates, rise in fuel prices and slowdown in infrastructure activity. However, some sign of
improvement was seen in the last two years in FY15 and FY16 with overall industry registering a
growth of 5.2% YoY and 5.6% YoY, respectively. The auto industry sold over ~24 mn vehicles in
FY16, including passenger vehicles (PV), commercial vehicles (CV), three wheelers (3W) and two
wheelers (2W). The 2W segment with ~80% contribution (in volume terms) is the leader of the
domestic Automobile market owing to a growing middle class and a young population. The
improvement (although gradual) in the industry growth was also reflected in the stock market
performance of S&P BSE Auto index. The index outperformed S&P BSE Sensex by generating
absolute return of 36% over the period of FY14-FY16 as compared to 13% return by S&P BSE
Sensex.
160
Indian Automobile sale in FY16 in volume terms S&P BSE Auto Index outperforming S&P BSE Sensex
150

140
(Indexed to 100)

130
2W
80.4% 120
Exports Domestic
15% 110
85% CV
3% 100
PV
13.6% 90
Mar-14

May-14

Sep-14
Jul-14

Nov-14

Jan-15

Mar-15

May-15

Sep-15
Jul-15

Nov-15

Jan-16

Mar-16
3W
2.6%

Source: Bloomberg
BSE Auto Index BSE_SENSEX
Source: Capitaline

The improvement in the automobile sales in the domestic market continued with the growth rate of
14.8% YoY during the period of Apr-May 2016. However, exports sales continued to get impacted
due to global macro conditions, depreciating currency and geo-political concerns. The exports
declined by 9.6% YoY during the same period.

Segmental Performance for FY16 and for the month of May 2016
Passenger Vehicle (PV) sales picking up gradually
The overall PV grew by 7.3% YoY in FY16 as compared to 3.7% YoY in FY15. The growth in
overall PV was driven by 7.9% YoY growth in Passenger cars. While the sales of Multi-purpose
vehicle (MPV) grew by 3.7% YoY, the sales of Utility Vehicle (UV) grew by 6.4% YoY in FY16. The
growth in UVs was driven by strong growth in H2FY16 on the back of numerous big-ticket launches
including Hyundai Creta, Mahindra TUV300, Maruti Suzuki S-Cross and Vitara Brezza. The UVs
grew by 15.1% YoY in H2FY16.
20.0
Trend in Passenger Vehicles (PV) PV volume growth moderated in May 2016
15.0 300 24.5
Thousands

10.0
250 19.5
5.0
0.0 200
14.5
(%)

-5.0 150
-10.0 9.5
100
-15.0
50 4.5
-20.0
-25.0 0 -0.6
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16

-30.0
H1FY14 H2FY14 H1FY15 H2FY15 H1FY16 H2FY16
Passenger Cars MPVs Uvs Total PV Passenger Vehicles units Growth YoY % (RHS)
Source: Bloomberg Source: Bloomberg
 July 4, 2016

After a growing for ~11% YoY in the month of April 2016, growth in overall PV sales moderated to
~6.3% YoY in May 2016 majorly due to preponement of marriage season, ongoing stress in rural
demand and regulatory uncertainties on diesel vehicles. The Passenger Car segment continued to
be a drag for overall PV as it declined by ~0.8% YoY while UVs continued its strong growth
momentum by registering ~36% YoY growth in the month of May 2016. The growth was once again
driven by recently launched vehicles like Baleno, Brezza, KUV100 and TUV300. Overall PV sales
growth for Apr-May 2016 period stood at ~9% YoY as compared to 10% YoY in same period last
year. According to Society of Indian Automotive Manufactures (SIAM), the segment is now
expected to grow between 6% and 8% in FY17 from the earlier projection for 12% due to higher
taxes and a ban on the sale of large diesel cars in Delhi as the main reasons.
Strong growth momentum continued in Commercial Vehicles (CV)
The domestic CV industry gradually came out of the down cycle during FY15 and reported a
double digit growth in FY16 after two years of demand contraction. The overall CV sales grew by
11.4% YoY in FY16 as compared to decline of 2.9% in FY15 and 20.2% YoY in FY14. Within CV
segment, Medium and Heavy Commercial Vehicles (MHCV) segment recorded a growth of 15.7%
YoY and 30.4% YoY in FY15 and FY16, respectively, primarily led by sharp uptick in replacement
demand for Heavy Commercial Vehicles (HCVs) and gradual improvement in operating
environment for fleet operators, expectations of pick-up in investments in infrastructure as well as
manufacturing space along with renewal of mining activities. While the MHCV segment reported
strong growth in past two years, demand for the Light Commercial Vehicle (LCV) segment
continued to be subdued in past two years. The LCV segment has declined by 13.9% YoY in FY16
and 11.6% YoY in FY15.
40.0 Strong growth momentum continued in CVs
Strong growth momentum in CV
30.0 45000 25.0
40000
20.0 35000 20.0
30000
10.0 15.0
25000
0.0 20000 10.0
15000
-10.0 10000 5.0
5000
-20.0 0 0.0
Apr-15

May-15

Dec-15
Jun-15

Jul-15

Aug-15

Sep-15

Oct-15

Nov-15

Jan-16

Feb-16

Mar-16

Apr-16

May-16
-30.0
H1FY14 H2FY14 H1FY15 H2FY15 H1FY16 H2FY16

LCV MHCV Total CV LCV MHCV CV growth (YoY %)

Source: Bloomberg Source: Bloomberg

The CV industry continued to grow strongly at 16.9% YoY, during the month of May 2016. The
MHCV segment grew by 21% YoY while the LCV segment grew by 13.9% YoY. The CVs grew by
17.1% YoY during April-May 2016. In its outlook for FY17, the SIAM predicts that in the passenger
carrier segment, MCVs is likely to see moderate growth over a high base with the opening up of
roads for private participation to remain a key parameter.
Three Wheelers (3Ws) on the rise for past two quarters
The domestic 3W industry was in a sweet 60 3W sales on the rise from past 2 quarters 40.0
Thousands

spot during the FY15, registering a growth of

50 30.0
10.8% in contrast to de-growth of 10.8%
40 20.0
witnessed during FY14. The improvement in
(%)

demand during FY15 was primarily led by 30 10.0

pick-up in the passenger carrier segment, 20 0.0

which had benefited by fresh permit 10 -10.0
issuances across various cities. During the 0 -20.0
year, three-wheeler exports, which contribute
Jan-16
Mar-15

Jun-15
Apr-15
May-15

Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15

Feb-16
Mar-16
Apr-16
May-16

almost 43% to industry sales, have also

grown by a healthy 15.4% over the previous 3W 3W growth (YoY %)
year primarily on account of higher demand Source: Bloomberg

from South-East Asian and African markets. However, after showing a growth in FY15, the demand
for 3Ws slowed down and 3W sales grew by 1.2% YoY in FY16. In first half of the FY16, 3W
segment de-grew by 8.4% YoY while it grew by 8.9% YoY in H2FY16, resulting in a marginal
growth in overall FY16. The subdued growth in 3W was mainly because of the lack of fresh permits
 July 4, 2016

being issued by various Road Transports Authorities unlike in FY15 when various states like
Maharashtra, Delhi, Chandigarh, etc. has issued the permits. The growth momentum which started
in H2FY16 continued in the first two months of FY17 with a growth of 36.7% YoY and 27.3% YoY
growth in April and May 2016, respectively. Total 3W sales grew by 31.8% YoY during the period of
April-June 2016 as against a decline of 6.4% YoY during the same period last year. The growth
was driven by the opening of fresh permits in Maharashtra and on a lower base.
Tractor sales on track with expectations of better monsoon
Tractor sales have been on a declining trend for
Total Sales(Including Exports)Growth YoY (%)
past two years and recorded a fall of about 13%
60
YoY and 10% YoY in FY15 and FY16,
50
respectively, in the domestic market. The fall in
40
domestic market was mainly due to below
average monsoon rainfall for two consecutive 30
20
years in FY15-FY16. However, the industry has
10
improving towards the H2FY16 where it
0
registered a modest growth of 2% as compared

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15
Aug-10
Dec-10

Aug-11
Dec-11

Aug-12
Dec-12

Aug-13
Dec-13

Aug-14
Dec-14

Aug-15
Dec-15
-10
to 20% fall in H1FY16. The rise in demand as
-20
mainly on account of lower base, improvement in
-30
infrastructure activity and expectation of better
-40
monsoon. In the month of April 2016 and May Source: Tractor Manufacturers Associations

2016, M&M reported strong growth of over 20% in its domestic tractors sales and Escorts reported
growth of over 10%. With the growth momentum seen in two major tractor manufacturers, M&M
and Escorts, the tractor industry seems to be on track. The management on both the companies
believes that the demand for tractors is likely to be strong on the back of low base, expectation of
better monsoon and increased government focus. They expect domestic tractor industry is likely to
grow in the range of 8-10% in FY17.

Two Wheelers (2Ws) – Scooter continue to outpace Motorcycle

The 2W is a major contributor to overall
volume for industry, contributing almost 2W - Scooter continue to outpace Motorcycle
80% of the domestic sales. Within 2W 50.0

segment, Motorcycle contributes almost 40.0

30.0
65% of the total 2W volumes and is
20.0
dependent majorly on rural areas.
10.0
Motorcycles has been struggling due to 0.0
stress in rural economy on account of -10.0
sluggish wage rates, untimely rains and -20.0
limited increase in minimum support prices
Mar-14

May-14

Jul-14

Sep-14

Nov-14

Jan-15

Mar-15

May-15

Nov-15
Jul-15

Sep-15

Jan-16

Mar-16

May-16

of crops. While the sales of Motorcycles

grew marginally by 2.3% YoY in FY15, it Growth in Scooter (YoY %) Growth in Motor Cycles (YoY %)
declined in FY16 marginally by 0.2% YoY. Source: Bloomberg

On the other hand, Scooters, which are sold primarily in urban areas, are growing continuously in
double digit. Scooters grew by over 20% in FY14 and FY15 each and 11.8% YoY in FY16. The
contribution from Scooters to total 2W volumes has increased from ~18% in FY13 to ~30% in FY16
and is likely to grow further in future as some of the OEMs have indicated that the demand for
Scooters are also rising in rural areas which is dominated by Motorcycles till now. Scooters growth
continued to outpace the growth in Motorcycle in the first two months of FY17. The Scooter sales
grew by 36% YoY in April and 25% YoY in May while sales of Motorcycle also grew but albeit at a
slower pace. The Motorcycle grew by 3.3% YoY in the month of May after three consecutive month
of double digit growth (due to new product launches). Going forward the SIAM expects motorcycle
sales to grow at 0—3% as against a decline of 0.24% in sales during FY16. For scooters, the
expected growth rate is in the range of 17-19% as against 11.8% in the last fiscal.
 July 4, 2016

Factors determining the growth of the Automobile Industry

The Indian Automobile industry is on the cusp of strong revival with some of the segment has
started to contribute in a big way while others are on the verge of firing and are currently showing
gradual signs of improvement. There are host of factors that are likely to determine the demand
growth for automobiles going forward. Some of the factors are mentioned below.
Government Initiatives to boost the growth
The various initiatives taken by the government of India are likely to be one of the key drivers for
industry growth over the long term. Among the key initiatives one of the major initiative take by the
government was allowing foreign direct investment (FDI) in the automobile industry through 100%
FDI under the automatic route. Some of the other major initiatives taken by the Government of
India are:
 Planning to set up a separate independent Department for Transport, comprising of experts
from the automobile industry to resolve issues such as those related to fuel technology,
motor body specifications and fuel emissions, apart from exports.
 Planning to promote eco-friendly cars in the country i.e. CNG based vehicle, hybrid vehicle,
and electric vehicle and also made mandatory of 5% ethanol blending in petrol.
 Formulated a Scheme for Faster Adoption and Manufacturing of Electric and Hybrid
Vehicles in India, under the National Electric Mobility Mission 2020 to encourage the
progressive induction of reliable, affordable and efficient electric and hybrid vehicles in the
country.
The government had also designed the Automobile Mission Plan (AMP) for the period 2006–2016,
which was aimed at accelerating and sustaining growth in this industry. In its new AMP 2016-26,
the government of India is aiming to make automobiles manufacturing the main driver of ‘Make in
India’ initiative, as it expects passenger vehicles market to triple to 9.4 mn units by 2026.
Make in India – driving the investment in Automobile industry
According to data released by Department of Industrial Policy and Promotion (DIPP), the
Automobile industry attracted foreign direct investment (FDI) worth $14.32 bn during the period Apr
2000 to Dec 2015 period. In order to make India a production hub in the world, the government is
taking various reforms and announcing various schemes to bring further FDI in the country. Being
the seventh largest producer of automobiles in the world, the Indian automobile industry is likely to
be the key beneficiary of Make in India program. Over the past few months, many global
automobile companies have intensified their investment activity in India in particularly in this
industry not only to meet the growing domestic demand but also to get the low cost manufacturing
advantage. Some of the major investments and developments in the automobile industry in India
are as follows:
 Japanese 2W manufacturer Honda Motorcycle and Scooter India (HMSI) has opened its
fourth and world’s largest scooter plant in Gujarat, set up to initially produce 600,000
scooters per annum to be scaled up to 1.2 mn scooters per annum by mid-2016.
 American car maker Ford has unveiled its iconic Ford Mustang in India and will make its
debut in 2016.
 Nissan Motor Co. Ltd is in discussion with government of India to bring electric and hybrid
technologies to India as the government plans to reduce air pollution caused by vehicles.
 Global auto major Ford plans to manufacture in India two families of engines by 2017, a
2.2 litre diesel engine codenamed Panther, and a 1.2 litre petrol engine codenamed
Dragon, which are expected to power 270,000 Ford vehicles globally.
Implementation of Scrappage policy to increase the demand for new vehicles
According to media reports, the government is ready with the new scrappage policy which involves
recycling and scrapping of old vehicle. The policy is not only aimed at controlling the pollution level
in the country but also to provide impetus for a crawling industry. SIAM has suggested a cash
incentive of Rs.4,500 for two-wheelers, Rs.13,000 for three-wheelers, Rs.80,000 for a passenger
vehicle and Rs.90,000 for a commercial vehicle. The incentive is to be offered on the purchase of
 July 4, 2016

the next vehicle. However under the proposed scrapping policy, people would get an incentive of
up to Rs.30,000 for discarding small vehicles like cars, while total benefits after taking into account
the tax exemptions could be up to Rs.1.5 lakh for big vehicles like trucks. The draft policy also
considering to provide ~50% rebate in excise duty on new vehicles for buyers who surrender their
polluting old ones. The new policy is likely to be valid for over-ten-year-old vehicles across the
country. The policy also plans to set up 8-10 industrial units near ports like Kandla which will give
certificates for accepting old vehicles and also recycle vehicles from India and abroad, thus giving a
boost to employment and economy.
As per Union Minister Nitin Gadkari, automobile industry’s turnover, which is about Rs.4.5 trillion at
present, will touch Rs 20 trillion in the next five years with this policy and India can be the “number
one country to export the world’s best cars”. Source: Economic Times
Above normal monsoon likely to revive the rural demand
The Indian agricultural production has been impacted for two consecutive years (FY14 and FY15)
due to weak monsoons which had not only impacted the overall economy but also the automobile
sales in the country during this time. The sales of Tractors are closely related to growth in rural
income which in turn is dependent on rainfall. For the last two consecutive years the tractor sales
were narrowed down because of the shortage of rainfall. Not just tractors but a growth in sales of
LCV's, 2W and 3Ws are also dependent on the rural markets and had impacted during this time.
However, there are expectations that the current weather phenomenon will swiftly transform into a
La Nina — which tends to bring rainfall in Southeast Asia and Australia. As per India Meteorological
Department (IMD), the monsoon seasonal rainfall in 2016 is likely to be 106% of the Long Period
Average (LPA) with a model error of ± 5%. Good monsoon rain in India along with the steady hike
in MSPs is likely to help in improving farm incomes and pick up in Rural economy. The above
normal rainfall which is expected to improve the farm output and thereby rural income is likely to
drive the demand for automobile in particularly in tractors and 2W.
Rural focused government’s schemes to increase demand in rural areas
The government is focused on rural development in order to bring the incremental growth for Indian
economy. In line with the announcement in the Union Budget, the Rural development ministry has
rolled out a proposal for the rural area to encourage entrepreneurship targeting the improvement in
the villages connectivity. The road transport ministry will provide training to drivers with the help of
rural development department. Such actions will promote local employment and in turn will likely to
increase demand for automobiles. The rural development ministry is proposing to provide
substantial grant to the rural entrepreneurs for buying vehicles, which have seating capacity for 8-
10 persons. The selection of such operators will be selected through local self-help groups
including women, dalits, and tribals belonging to Below Poverty Line (BPL). While the monsoon is
likely to drive the demand in rural areas, the government’s rural focused schemes are also likely to
boost the automobile demand in rural areas.
Regulatory concerns may haunt the industry in near term
Off late Indian automobile industry has witnessed an increase in the regulatory requirements which
has impacted the industry performance in recent past. In December 2015, India’s Supreme Court
banned the registration of diesel vehicles with engine capacity of 2 liters or more in the Delhi, and
extended the moratorium. The prohibition has dented sales for automakers as ~10,000 cars have
been affected by this decision of Supreme Court and prompted the introduction of gasoline-engine
options or smaller diesel engines. Many major OEM like Mahindra & Mahindra, Toyota and Tata
Motors got impacted due to this ban. While OEMs were working to minimize the impact of ban of
diesel vehicle in Delhi, the National Green Tribunal ordered a similar ban on diesel cars in the state
of Kerala which is likely to increase the problems for domestic OEMs. One of the major concerns
which Indian Automobile industry is likely to face will be implementation of such ban in other states.
However, the Ministry of Heavy Industries and Public Enterprises has requested the green panel
not to apply any restrictions on "sale and registration" of new vehicles in any city, which are
complying with the statutory emission norms irrespective of fuel used. The OEMs have also taken
the note of this ban and is working on developing models with smaller engine capacity and or
developing models with Petrol version. M&M is one the major companies which was impacted due
to such ban in Delhi, however, it was the first company to react to such ban and launched the petrol
versions of SUVs. M&M has launched KUV100 and TUV300 which has been receiving strong
 July 4, 2016

response from the customers and has been the key drivers for strong growth for M&M’s UV product
portfolio.
Overall View: While Indian automobile industry is one of the largest in the world, in the
recent past the industry has registered a subdued growth owing to weak demand in
domestic market due to suboptimal rainfall for two consecutive years (FY14 and FY15),
economic slowdown, high fuel cost and interest rates. However, some of the sub-segments
(CV, UV, Scooters) of the industry have seen some signs of revival while others gearing up
to drive the next leg of growth in industry. As per the Automotive Mission Plan 2016-26
prepared jointly by the SIAM and government, the Indian automobile industry has the
potential to generate up to US$ 300 bn in annual revenue by 2026, create 65 million
additional jobs and contribute over 12% to India’s GDP. This indicates the huge growth
opportunity for the industry along with government initiative to bring FDI, revive rural
demand; implementation of scrappage policy and above normal monsoon would augur well
for the long term growth for the industry despite some near term concerns. We remain
positive on the Indian Automobile industry on the back of pickup in infrastructure activity,
lower interest rate, increase in discretionary spending post the implementation of One Rank
One Pension and Seventh Pay commission and expected above normal monsoon which will
drive the demand for automobile industry going forward. In our model portfolio, we have
M&M, Escorts, Bajaj Auto and Tata Motors which are likely to be the beneficiaries of
upcoming growth opportunity arising in the industry. We remain positive on these stocks
from 12-18 months perspective and recommend a Buy on these stocks except for Escorts
which is on Hold rating.
 July 4, 2016

Bajaj Auto Ltd. CMP*: Rs.2669

Background
Bajaj Auto Ltd. is an India-based manufacturer of motorcycles, three-wheelers and parts. The
Company's business segments include Automotive, Investments and Others. The Company's two
wheelers include Pulsar, Avenger, Discover, Platina and Ninja. The Company's services include
troubleshooting, maintenance chart and service centers. The Company has manufacturing plants
at Waluj, Chakan and Pantnagar. The Company's subsidiaries include PT. Bajaj Auto Indonesia
and Bajaj Auto International Holdings BV.

Key Details Shareholding Pattern (%) on 31 March 2016

52 week H/L(Rs) 2719/2133 Promoter 49.30
Book Value (Rs) YTD 496 Institutions 25.97
FV (Rs) 10 Public 24.73
PE (X) (TTM) 21.1 Total 100.00
Dividend Yield (%) 2.1

Valuations and Chart

PE (X) 3000 Daily closing price for last 3 years of Bajaj Auto Ltd

FY16 FY17E FY18E 2500

21.1 18.3 16.3 2000

1500

1000

500

0
Jul-13
Sep-13
Nov-13
Jan-14

Jul-14
Sep-14

Jan-15

Jul-15
Sep-15

Jan-16

Jul-16
Mar-14
May-14

Nov-14

Mar-15
May-15

Nov-15

Mar-16
May-16
Source: Bloomberg

View: Bajaj Auto’s domestic Motorcycle business continued to reap benefits owing to
change in its strategy to expand “Price” segment and strengthening its presence in
“Premium” and “Luxury” segments. Bajaj’s market share is expected to improve further on
the back of recent new launches. We maintain our positive stance on Bajaj Auto considering
its focus on increasing market share in domestic market by focusing on the “Premium,
Price and Super Sports” segment, enhancing its overseas market, strong R&D capabilities,
huge cash and cash equivalent of Rs.90.9 bn (FY16) and strong return ratios with ROE of
30% and ROCE of 44%. We have rolled over our earnings to FY18 and continue to
recommend a BUY on the stock with the revised target price of Rs.2991 at 18x (maintaining
earlier multiple) FY18E EPS of Rs.163.4 adding Rs.50 per share for 48% stake in KTM AG of
Austria (at 30% holding company discount). Any earning/target price revision would depend
on the performance of new launches, improvement in domestic market shares in Motorcycle
segment, rollover to next financials and changes in general business momentum.
*CMP as on 1 July 2016
 July 4, 2016

Escorts Ltd. CMP*: Rs.223

Background
Escorts Ltd. (Escorts) is operating in the sectors of agri-machinery, construction & material
handling equipment, railway equipment and auto components. The Company offers a range of
tractors, more than approximately 45 variants starting from 25 to 80 HP. Its brands of tractors
include Escort, Farmtrac and Powertrac. It also manufactures diverse range of equipment like
cranes, loaders, vibratory rollers and forklifts. The Company’s Jai Kisan Series comes in five new
categories – ValueMaxx, LoadMaxx, AgMaxx, InfraMaxx and SuperMaxx. Product categories
include Agri Machinery; Construction Equipment; Auto Products such as shock absorbers, struts
and telescopic front; and Railway Products.

Key Details Shareholding Pattern (%) on 31 March 2016

52 week H/L(Rs) 228/113 Promoter 43.01
Book Value (Rs) YTD 151 Institutions 11.81
FV (Rs) 10.0 Public 45.18
PE (X) (TTM) 29.8 Total 100.00
Dividend Yield (%) 0.5

Valuations and Chart

PE (X) 250 Daily closing price for last 3 years of Escorts Ltd
FY16 FY17E FY18E
200
29.8 19.4 14.0
150

100

50

0
Nov-13

Nov-14

Nov-15
Jul-13
Sep-13

Jan-14
Mar-14

Jul-14
Sep-14

Jan-15
Mar-15

Jul-15
Sep-15

Jan-16
Mar-16

Jul-16
May-14

May-15

May-16
Source: Bloomberg

View: Escorts’ Agri machinery segment had witnessed subdued growth in FY16 due to
decline in volumes because of deficient monsoon. However, with most of weather
predicting agencies expecting above normal monsoon and increased focus of the
government on agriculture and infrastructure sector, the tractor industry is likely to see 8-
10% volume growth in FY17. In order to grab this opportunity, the company plans to
increase market share through more focus on new product launches and improving dealer
footprint in weaker markets. The Company has been focusing on improving margins with
the help of product portfolio rationalization, enhancing presence in higher HP segment
(above 45-50HP) and other cost cutting initiatives. We are positive on the company from
long-term perspective due to expected improvement in tractor penetration on the back of
labour shortage, expected improvement in monsoon in 2016 post two consecutive years of
El-NiNo and expected revival in infrastructure activity with improved government focus. We
have rolled over our earnings for FY18. The stock has seen sharp rally in recent past and
hence we recommend a Hold on the stock with the target price of Rs.191 at 12x (~20%
discount to three year average multiple) at FY18E EPS of Rs.15.9. Any earning/target price
revision would depend on the performance of new launches, improvement in market share,
rollover of earnings to next year and changes in general business momentum.
*CMP as on 1 July 2016
 July 4, 2016

Mahindra & Mahindra Ltd CMP*: Rs.1461

Background
Mahindra and Mahindra Ltd (M&M) is having operations in multiple industries that include
aerospace, aftermarket, agribusiness, automotive, components, construction equipment, consulting
services, defense, energy, farm equipment, finance and insurance, industrial equipment,
information technology, leisure and hospitality, logistics. The Company’s business segments
include Automotive Segment that comprises of sale of automobiles, spare parts and related
services and Farm Equipment Segment, which includes sale of tractors, spare parts and related
services. Its subsidiaries include Tech Mahindra Ltd., Mahindra & Mahindra Financial Services Ltd.,
Mahindra Investments (India) Private Ltd. and Mahindra Investments (International) Private Ltd.
etc.

Key Details Shareholding Pattern (%) on 31 March 2016

52 week H/L(Rs) 1475/1092 Promoter 26.93
Book Value (Rs) YTD 361 Institutions 58.59
FV (Rs) 5.0 Public 14.48
PE (X) (TTM) 26.3 Total 100.00
Dividend Yield (%) 0.8

Valuations and Chart

PE (X) 1600 Daily closing price for last 3 years of M & M
FY16 FY17E FY18E 1400
1200
26.3 23.0 18.7
1000
800
600
400
200
0
Jul-13
Sep-13

May-14
Jul-14
Sep-14

May-15
Jul-15
Sep-15

May-16
Jul-16
Nov-13
Jan-14

Jan-15
Mar-14

Nov-14

Mar-15

Nov-15
Jan-16
Mar-16

Source: Bloomberg

View: M&M continues to be a leader in the domestic Tractor and Utility Vehicle (UV) industry
with ~41% and ~38% market share, respectively. The domestic tractor industry declined by
10% YoY in FY16 in volume terms, however, the management expects 10% volume growth
in Q1FY17 and industry may see a higher growth if monsoon is normal in FY17. With series
of launches during the FY16, M&M has filled the gap in its product portfolio in UV segment
and is now focusing on boosting the volumes to drive the volume growth and thereby
revenue. We believe M&M has geared up itself to take on the competition and to grab the
opportunity arising from expected recovery in auto industry, low base effect and normal to
above normal monsoon. Further, introducing existing vehicle in lower capacity and in petrol
versions, M&M is also gradually fading away the impact of regulatory concerns over
pollution norms. We remain positive on the stock on the back of new product launches
which is likely to drive revenue growth for the company and based on good return ratios of
over 20%. We have rolled over our earnings to FY18 and continue to recommend a Buy on
the stock with the revised target price of Rs.1638 at 16x (maintaining earlier multiple) FY18E
EPS of Rs.78.1 adding Rs.388 as value of subsidiaries at 30% holding company discount.
Any earning/target price revision would depend on the performance of new launches,
improvement in market share, any regulatory changes, rollover to next financial year and
changes in general business momentum.
*CMP as on 1 July 2016
Tata Motors Ltd. CMP*: Rs.458
Background
Tata Motors Ltd. (TTMT) is India's largest automobile company. TTMT has operations in the United
Kingdom (UK), South Korea, Thailand, South Africa and Indonesia through subsidiaries and
associate companies. The Company’s Jaguar Land Rover (JLR) business has significant presence
in the UK, North America, continental Europe and China as well as sales operations in many major
countries across the globe. It also has an industrial joint venture with Fiat in India. Tata Motors is
the country's market leader in commercial vehicles and among the top in passenger vehicles with
over 8mn Tata vehicles plying in India.

Key Details Shareholding Pattern (%) on 31 March 2016

52 week H/L(Rs) 489/266 Promoter 33.01
Book Value (Rs) YTD 218 Institutions 41.23
FV (Rs) 2.0 Public 25.76
PE (X) (TTM) 14.1 Total 100.00
Dividend Yield (%) 0.0

Valuations and Chart

PE (X) 700 Daily closing price for last 3 years of Tata Motors

FY16 FY17E FY18E 600

500
14.1 9.8 8.1
400

300

200

100

0
Jul-13
Sep-13
Nov-13
Jan-14

Jul-14
Sep-14

Jan-15

Jul-15
Sep-15

Jan-16

Jul-16
Mar-14
May-14

Nov-14

Mar-15
May-15

Nov-15

Mar-16
May-16

Source: Bloomberg

View: TTMT is India's largest automobile company, with consolidated revenues of Rs.2.75
trillion in FY16. TTMT has strong presence in domestic CV industry (market share of 52% in
MHCV) and holds renowned international luxury car brands like Jaguar and Land Rover. In
the last one year TTMT’s JLR business faced issues in China which impacted its overall
performance in FY16. However, over past two quarters JLR has been reporting strong
volume growth in the US and Europe market with growth getting normalizing in China
market. TTMT’s consolidated margin has also started improving as domestic business
improved significantly during the quarter. We remain positive on the stock on the back of
well diversified global presence, expected new launches in both domestic and JLR
business, recovery in domestic CV industry, long term structural drivers and on good return
ratios of over 20%. We continue to recommend a BUY on the stock with the target price of
Rs.568 based on the Sum of the parts (SOTP) valuation (JLR (Rs.512/share) + Standalone
business (Rs.46/Share) + other subsidiaries (Rs.30/Share) - net automotive debt
(Rs.20/Share)). Any earning/target price revision would depend on the performance of new
launches, improvement in market share and changes in general business momentum.
*CMP as on 1 July 2016
 Rating Interpretation
Rating Expected to
Buy Appreciate more than 10% over a 12 to 15 month period
Hold Appreciate below 10% over a 12 to 15 month period
Under Review Rating under review
Exit Exited out of the Model Portfolio
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