Mahindra & Mahindra - - Security Analysis (SLA) - 2010 - January - April

Mahindra & Mahindra

Mahindra embarked on its journey in 1945 by assembling the Willys Jeep in India and is now a US $6.3 billion Indian multinational. It employs over 1,00,000 people across the globe and enjoys a leadership position in utility vehicles, tractors and information technology, with a significant and growing presence in financial services, tourism, infrastructure development, trade and logistics. The Mahindra Group today is an embodiment of global excellence and enjoys a strong corporate brand image.

Mahindra is the only Indian company among the top tractor brands in the world and has made an entry in the two-wheeler segment, which will see the company emerge as a full-range player with a presence in almost every segment of the automobile industry.

The Mahindra Group expanded its IT portfolio when Tech Mahindra acquired the leading global business and information technology services company, Satyam Computer Services. The company is now known as Mahindra Satyam.

Mahindra's Farm Equipment Sector is the proud recipient of the Japan Quality Medal, the only tractor company worldwide to be bestowed this honour. It also holds the distinction of being the only tractor company worldwide to win the Deming Prize. The US based Reputation Institute recently ranked Mahindra among the top 10 Indian companies in its Global 200: The World's Best Corporate Reputations list.

Mahindra is also one of the few Indian companies to receive an A+ GRI checked rating for its first Sustainability Report for the year 2007-08.

Mahindra and Mahindra
Balance Sheet	In Rs Crores
	Mar '00	Mar '01	Mar '02	Mar '03	Mar '04	Mar '05	Mar '06	Mar '07	Mar '08	Mar '09
Sources Of Funds
Total Share Capital	110.48	110.48	116.01	116.01	116.01	116.01	233.4	238.03	239.07	272.62
Equity Share Capital	110.48	110.48	116.01	116.01	116.01	116.01	233.4	238.03	239.07	272.62
Share Application Money	0	0	0	0	0	0	0	0	0	0
Preference Share Capital	0	0	0	0	0	0	0	0	0	0
Reserves	1,888.63	1,941.59	1,371.89	1,438.31	1,644.15	1,881.93	2,662.14	3,302.01	4,098.53	4,959.26
Revaluation Reserves	17.99	16.74	16.12	15.51	14.88	14.32	13.33	12.86	12.47	12.09
Networth	2,017.10	2,068.81	1,504.02	1,569.83	1,775.04	2,012.26	2,908.87	3,552.90	4,350.07	5,243.97
Secured Loans	836.76	891.77	1,155.10	924.15	485.23	336.82	216.68	106.65	617.26	981
Unsecured Loans	116.91	242.14	221.97	215.69	244.58	715.8	666.71	1,529.35	1,969.80	3,071.76
Total Debt	953.67	1,133.91	1,377.07	1,139.84	729.81	1,052.62	883.39	1,636.00	2,587.06	4,052.76
Total Liabilities	2,970.77	3,202.72	2,881.09	2,709.67	2,504.85	3,064.88	3,792.26	5,188.90	6,937.13	9,296.73
Application Of Funds
Gross Block	1,696.11	1,958.67	2,068.04	2,436.82	2,499.56	2,676.51	2,859.25	3,180.57	3,552.64	4,893.89
Less: Accum. Depreciation	626.93	748.97	879.55	1,023.04	1,165.83	1,335.56	1,510.27	1,639.12	1,841.68	2,326.29
Net Block	1,069.18	1,209.70	1,188.49	1,413.78	1,333.73	1,340.95	1,348.98	1,541.45	1,710.96	2,567.60
Capital Work in Progress	162.81	272.81	348.73	52.31	57.86	133.93	205.46	329.72	649.94	646.73
Investments	822.99	710	800.13	862.27	1,111.15	1,189.79	1,669.09	2,237.46	4,215.06	5,786.41
Inventories	515.54	552.53	469.04	456.75	499.7	759.83	878.74	878.48	1,084.11	1,060.67
Sundry Debtors	461.58	632.01	647.78	517.08	400.48	511.53	637.97	700.89	1,004.88	1,043.65
Cash and Bank Balance	147.19	138.66	153.82	173.67	191.53	198.07	258.39	415.89	310.58	635.61
Total Current Assets	1,124.31	1,323.20	1,270.64	1,147.50	1,091.71	1,469.43	1,775.10	1,995.26	2,399.57	2,739.93
Loans and Advances	418.33	384.5	500.72	459.08	398.56	461.07	558.02	1,011.50	866.19	1,402.45
Fixed Deposits	118.21	5.94	36.77	67.2	41.78	425.91	471.92	910.18	550.65	938.82
Total CA, Loans & Advances	1,660.85	1,713.64	1,808.13	1,673.78	1,532.05	2,356.41	2,805.04	3,916.94	3,816.41	5,081.20
Deffered Credit	0	0	0	0	0	0	0	0	0	0
Current Liabilities	758.29	798.95	1,047.16	1,128.89	1,242.60	1,480.87	1,711.23	2,138.77	2,525.31	3,520.20
Provisions	141.92	128.09	217.24	203.3	297	499.71	543.14	715.43	943.46	1,277.56
Total CL & Provisions	900.21	927.04	1,264.40	1,332.19	1,539.60	1,980.58	2,254.37	2,854.20	3,468.77	4,797.76
Net Current Assets	760.64	786.6	543.73	341.59	-7.55	375.83	550.67	1,062.74	347.64	283.44
Miscellaneous Expenses	155.16	223.61	0	39.72	9.64	24.38	18.05	17.55	13.53	12.55
Total Assets	2,970.78	3,202.72	2,881.08	2,709.67	2,504.83	3,064.88	3,792.25	5,188.92	6,937.13	9,296.73
Contingent Liabilities	621.94	572.35	484.9	408.97	528.62	758.14	946.36	1,008.27	985.35	1,220.39
Book Value (Rs)	180.94	185.73	128.26	133.98	151.73	178.95	124.06	148.72	181.43	191.91

P & L Account
	Mar '00	Mar '01	Mar '02	Mar '03	Mar '04	Mar '05	Mar '06	Mar '07	Mar '08	Mar '09
Income
Sales Turnover	4,319.09	4,276.17	3,934.54	4,498.25	5,887.10	7,649.51	9,273.09	11,231.99	12,894.94	14,713.03
Excise Duty	773.24	755.37	676.44	785.01	955.43	1,054.82	1,136.50	1,310.65	1,584.57	1,587.05
Net Sales	3,545.85	3,520.80	3,258.10	3,713.24	4,931.67	6,594.69	8,136.59	9,921.34	11,310.37	13,125.98
Other Income	154.5	109.96	74.56	178.31	175.9	209.74	455.2	531.17	575.96	369.85
Stock Adjustments	87.12	24.1	-64.41	-23.58	21.43	174.05	103.2	6.41	149.11	-156.29
Total Income	3,787.47	3,654.86	3,268.25	3,867.97	5,129.00	6,978.48	8,694.99	10,458.92	12,035.44	13,339.54
Expenditure
Raw Materials	2,285.17	2,431.61	2,084.55	2,516.03	3,417.52	4,829.29	5,885.21	6,937.16	7,963.82	9,208.71
Power & Fuel Cost	43.31	47.2	40.83	44.01	45.64	52.64	57.46	65.19	91.33	98.69
Employee Cost	398.89	394.17	369.91	381.29	417.45	464.25	551.78	666.15	853.65	1,024.61
Other Manufacturing Expenses	93	35.15	32.74	32.19	40.59	48.01	54.44	68.8	73.35	75.36
Selling and Admin Expenses	167.78	279.76	307.23	339.75	431.03	545.57	667.99	891.29	1,108.33	954.83
Miscellaneous Expenses	199.51	94.87	105.61	90.63	100.15	141.95	177.89	210.03	257.84	558.07
Preoperative Exp Capitalised	-26.74	-26.44	-17.49	-19.17	-15.78	-31.84	-26.53	-47.1	-46.49	-42.83
Total Expenses	3,160.92	3,256.32	2,923.38	3,384.73	4,436.60	6,049.87	7,368.24	8,791.52	10,301.83	11,877.44
Operating Profit	472.05	288.58	270.31	304.93	516.5	718.87	871.55	1,136.23	1,157.65	1,092.25
PBDIT	626.55	398.54	344.87	483.24	692.4	928.61	1,326.75	1,667.40	1,733.61	1,462.10
Interest	141.45	112.73	115.64	115.9	76.93	30.24	26.96	19.8	87.59	134.12
PBDT	485.1	285.81	229.23	367.34	615.47	898.37	1,299.79	1,647.60	1,646.02	1,327.98
Depreciation	123.27	140.09	139.38	165.44	165.2	184.05	200.01	209.59	238.66	291.51
Other Written Off	11.33	17.17	10.71	4.87	12.06	0.15	0.28	0.33	0.59	0
Profit Before Tax	350.5	128.55	79.14	197.03	438.21	714.17	1,099.50	1,437.68	1,406.77	1,036.47
Extra-ordinary items	0	0	-3.83	0	0	0	0	-19.19	0	4.07
PBT (Post Extra-ord Items)	350.5	128.55	75.31	197.03	438.21	714.17	1,099.50	1,418.49	1,406.77	1,040.54
Tax	87	8	-21.6	51.5	89.65	201.5	242.4	350.1	303.4	199.69
Reported Net Profit	263.48	120.56	119.98	145.53	348.54	512.67	857.1	1,068.39	1,103.37	836.78
Total Value Addition	875.75	824.72	838.82	868.7	1,019.09	1,220.58	1,483.04	1,854.37	2,338.01	2,668.73
Preference Dividend	0	0	0	0	0	0	0	0	0	0
Equity Dividend	60.77	60.77	56.22	63.81	104.41	150.81	243.97	282.23	282.61	278.83
Corporate Dividend Tax	6.68	6.2	0	8.18	13.38	21.15	34.22	42.5	38.48	33.23
Per share data (annualised)
Shares in issue (lakhs)	1,104.84	1,104.84	1,160.09	1,160.09	1,160.09	1,116.48	2,334.00	2,380.33	2,390.73	2,726.16
Earning Per Share (Rs)	23.85	10.91	10.34	12.55	30.04	45.92	36.72	44.88	46.15	30.69
Equity Dividend (%)	55	55	50	55	90	130	100	115	115	100
Book Value (Rs)	180.94	185.73	128.26	133.98	151.73	178.95	124.06	148.72	181.43	191.91

Cash Flow Statement
	Mar '00	Mar '01	Mar '02	Mar '03	Mar '04	Mar '05	Mar '06	Mar '07	Mar '08	Mar '09
Net Profit Before Tax	346.9	128.56	98.38	139.38	408.71	700.62	889.49	1315.69	1241.57	1026.2
Net Cash From Operating Activities	521.53	76.09	91.44	543.78	740.9	379.21	686.9	1168.95	825.83	1631.3
Net Cash (used in)/from Investing Activities	-155.23	-182.13	-144.04	-54.59	-107.36	-174.3	-502.66	-950.39	-2075.08	-1941
Net Cash (used in)/from Financing Activities	-411.67	-12.92	99.75	-438.39	-643.93	192.45	-89.78	418.08	811.34	696.91
Net (decrease)/increase In Cash and Cash Equivalents	-45.37	-118.96	47.15	50.8	-10.39	397.36	94.47	636.64	-437.91	387.21
Opening Cash & Cash Equivalents	306.56	261.19	142.23	189.74	243.72	233.33	630.69	725.15	1361.79	1174.62
Closing Cash & Cash Equivalents	261.19	142.23	189.38	240.54	233.33	630.69	725.15	1361.79	923.88	1561.83

Piotroski Method

Test	Parameter	March	March	Score	Comments
		2007 -08	2008 - 09
Test 1	Positive Net Income		836.78	1	Positive  Net Income
	(Fig in Rs. Core)
Test 2	Positive Cash Flow		387.21	1	Positive Cash Flow
	(Fig in Rs. Crore)	278.89
Test 3	Earnings Quality	282.24		1	The cash flow from operating activity is more than net income
	(Fig in Rs. Crore)	282.32
	CFO < Net Income	230.63
	Net income	150.81	1631.3
	Decreasing Debt	104.21	836.78
Test 4	(Fig in times)	63.81		0	Debt - Total Asset Ratio Increased  by 0.07
	Debts	56.32
	Total Assets	60.77	4052.76
	Debt- Total Assets Ratio	60.77	9296.73
Test 5	Increase in Working Capital	0.86	0.9	1	Increased by 0.04
	(Current Ratio Fig in times)
Test 6	Increase in asset Turnover	836.78	1.41	0	Decreased by 0.22
	(Fig in times)	1103.37
	Sales Revenue	1068.39	13125.98
	Total Assets	857.1	9296.73
Test 7	Growth in Profitability	512.67	0.09	0	Decreased by 0.07
	(Fig in times)	348.54
	Gross profit margin	145.53
	Net income	119.98	836.78
	Total Assets	120.56	9296.73
Test 8	No Issue of  Stock	263.48	2726.16	0	Issued stock
	(Fig in number)
Test 9	Competitive position	20.58	20.71	1	Increased  by 0.13
	(Fig in %)
	Sales Revenue	11310.37	13125.98
	COGS	8982.15	10407.37
	Return on Assets
			TOTAL	5
			SCORE

Technical Analysis

Dividend Discount Model:

Equity dividend	March 06	March 07	March 08	March 09	March 10
In crores Rs	243.97	282.83	282.61	278.83	549.52

 

To find the growth rate –

         G = 5^th root of ( D5/D1 – 1)

G = 5^TH root of (549.52/243.97 – 1)

G= 1.048

K (expected rate of return) = Risk free rate + beta (risk premium)

Taking the risk premium as 7 %

Also the RFR is 5.5 % for Indian economy.

Beta value for M&M is 1.29 (as of  august 2010)

Therefore k = 5.5 + 1.29 (7)

                   K = 14.53

From dividend discount model- D (1 + G)/K-G

= 549.63( 1+ 0.1048)/0.1453-0.1048

=14993 crores

 Shares outstanding is 2726  lakhs

Therefore price per share = 551 Rs .

Currently the share is trading at close to 700 Rs. Hence from the dividend discount model it is advised that the share should not be purchased.

Target Pricing Model

P/E Calculations:

                                   

Mar '06	Mar '07	Mar '08	Mar '09	Mar '10
Earnings per share = 36.72	44.88	46.15	30.69	36.89

Earnings per share for the year 2010 IS 36.89

Now to estimate the share price, we will see the P/E ratios of Mahindra and Mahindra and its competitors.

Mahindra P/E -20.2

Tata Motors P/E – 10.5

Maruti Suzuki P/E -17

Taking the average the P/E ratio is around 16

Multiplying this by the average earnings per share for the last five years i.e 39

We get that the price = 39*16 = 624

The current share price is 702 and hence it would be recommended not to buy the stock.

 

Term Paper :

Fees for portfolio Management:

PORTFOLIO MANAGEMENT FEES:

ASSETS OR PROFITS BASED COMPENSATION?

 Paper summary:

This is an attempt to compare assets-based portfolio management fees to profits-based fees. Whilst both forms of compensation can provide appropriate risk incentives, fund managers´ limited liability induces more excess risk-taking under a profits-based fee contract. On the other hand, an assets-based fee is more costly to investors. In Spain, where the law explicitly permits both forms of retribution, assets-based fees are observed far more frequently. Under this type of compensation, the paper provides some insights into how management fees should be determined in order to solve the principal´s trade-off between providing better risk incentivesand incurring a lower cost of compensation.

 

Performance-based fee contracts

Consider the following simple performance-based fee:

 

F = k (Rp ¡ Q)

 

where F is the fraction of the portfolio’s value at the beginning of the period that the management company charges to investors, Rp is determined as the gross return of the managed fund in the evaluation period and k and Q are constants.

 

Assuming that no further contributions are made to the managed portfolio, if Q = 0, then the management company’s compensation equals kW, where W denotes the total value of assets under management at the end of the period. On the other hand, if Q = 1; then the fund manager’s retribution equals k(W¡W0), where W0 denotes the total value of assets under management at the beginning of the period. Note that (W ¡ W0) can be positive or negative, so this type of contract admits the possibility of penalizing the manager for underperformance.

 

The profits-based fee is however a much cheaper way of compensating the manager: it increases the principal’s certainty equivalent by k¤W0: Think of a mutual fund with one hundred million euros in assets. If 2% is the value of k that ensures that the manager will take the level of risk that the investor desires, an assets-based compensation contract decreases the investor’s wealth by two million euros. More generally, the value of Q does not affect the variable part of the agent’s compensation, kW, and hence the agent’s risk choice for a given k. It does however decrease the compensation to the manager by kQW0: So if the principal could choose, she would select k¤ and a negative value of Q only bounded by the agent’s participation constraint. A profits-based compensation mechanism hence dominates an assets-based one.

 

In a very simple model that a profits based fee is arguably a less efficient compensation mechanism in terms of risk sharing consistently.

 

However, even though the incremental cost of an assets-based fee to the investor can be significantly larger, a profitst-based fee does not generally induce the agent to take an unbounded position in the risky asset.

Since assets-based fees appear to be a more popular means of retribution, the paper studies how the value of these expense ratios should be determined as a function of some portfolio characteristics such as fund size or the manager’s forecasting ability. In this context, it is no longer obvious that the resulting expense ratio must be monotonic in the manager’s forecasting precision. This perspective can thus be seen as a new look at the negative relationship between managerial performance and expense ratios found in the mutual fund industry

 

Posted by:
Sanket Kulkarni
PGDIE - 39 Sec B
Roll no: 75

Original Knol - http://knol.google.com/k/narayana-rao/mahindra-mahindra-security-analysis-sla/2utb2lsm2k7a/ 2315