Finance Project Mahindra and Mahindra
Finance Project Mahindra and Mahindra
Finance Project Mahindra and Mahindra
FINANCE PROJECT
MAHINDRA & MAHINDRA LTD.
GROUP 9 SECTION D
3/28/2010
TABLE OF CONTENTS...........................................................................................2
....................................................................................3
STOCKHOLDER ANALYSIS....................................................................................7
WACC.............................................................................................................12
BENEFIT OF DEBT...........................................................................................15
RELATIVE ANALYSIS.......................................................................................23
2
REGRESSION OF MARKET VALUE OF FIRM WITH MACROECONOMIC FACTORS
....................................................................................................................... 26
DIVIDEND POLICY.............................................................................................27
.......................................................................................................................... 33
VALUATION....................................................................................................... 33
3
CORPORATE GOVERNANCE ANALYSIS
Is this a company where there is a separation between management and ownership? If so how
responsive management is to ownership?
No there is not separation between ownership and management of the company. The
control of the firm is in the hands of Mahindra family. Keshabh Mahindra the current chairman of
the company has been the Chairman since 1963. The company itself was founded by his Father K.C.
Mahindra in 1945. K.C Mahindra grandson, Anand Mahindra has also joined Mahindra group after
management education at Harvard Business School. He is presently managing director of Mahindra
and Mahindra ltd and also the vice chairman of the company. The company board of director
consists of the following people.
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1 K
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2 M
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Fig 1: Board of Directors 1
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Although the ownership of the company is in the hands of family, clearly they have
strong/impartial board of Directors in place. Out of the 13 board of Directors many are from
different industries and many people have their independent reputation which lends credibility to the
board. For example Deepak Parekh has been chairman of HDFC pvt. Ltd. He has also been member
of various committee set up by government of India. Nadir B Godrej has been director of several
Godrej companies since 1977. A.S Ganguly has been Chairman of Hindustan Unilever Ltd. from
1980 to 1990.
How committed management can also be seen from compensation given to Board of
Directors. Mahindra and Mahindra has separate remuneration committee. The committee considers
the performance of the company, the current trends in the industry, the qualification of the
appointee, their experience, past performance and other relevant factors while deciding the
remuneration of the directors. It also keeps track of market trends in terms of compensation level
and practices in relevant industries through participation in structured surveys.
How firm interact with financial markets? How do markets get information on the firm?
The firm is listed in BSE 30 index of Bombay stock exchange. So there is lot of financial analysts
following the firm.
MeansofCommunication
• The half‐yearly/quarterly results are published in the newspapers (Mumbai edition) and
arebeingsenttoeachhouseholdofshareholders.
•Theresultsareusuallypublishedinthefollowingnewspapers:
i. The Economic Times
ii. Navbharat Times
iii. The Financial Express
iv. Business Standard
v. The Hindu Business Line
vi. Mint
• The annual/half‐yearly/quarterly results, other official news releases and presentations
aredisplayedonthewebsiteoftheCompany‐www.mahindra.com
•TheManagementDiscussionandAnalysisReportformspartoftheDirectors’Report.
How does the firm view it social obligations and manage its impact in society?
Mahindra and Mahindra ltd is one of the oldest companies of India. It was founded in 1945
before the partition. The firm enjoys a particularly good reputation as a corporate citizen. It has
acquired its reputation over the years by several initiatives that it takes in the following areas :
1 Health, Safety and Environmental Concern: Company has demonstrated strong commitment
and responsibility towards safety, occupational health and environment of the company which stems
from the vision of the company to sustain business growth with deep commitment towards safety,
occupational health and environment. The company has well established safety, health &
5
Environmental Policy (SH&E) which is revised under EMS & OHSMS Standard for all the
locations of the Automotive Sector. The SH&E Policy inter alia ensures safety of public,
employees, plant, equipment and business associates, ensuring compliance with all statutory rules
and regulations on a monthly basis, imparting training to its employees and business associates as
per the Training Calendar. All Plants of the
automotive sector have been certified with the amended standard for Environmental Management
System ISO 14001: 2004. Keeping Safety as a key factor, the Central Safety Committee of the
Mahindra Group was formed by the Mahindra Group Management Board. Mahindra Manufacturing
Excellence Award for Safety, Health & Environmental activities for the year 2008-09 has been
assessed by an external agency to confirm the rating of each Plant and the Company’s best safety
practices and systems are shared and implemented for horizontal deployment.
2) Corporate Social Responsibility: Keeping with the Company’s core value of Good Corporate
Citizenship, the Mahindra Group continues to display its social responsibility by directing 1% of
its profit after tax (“PAT”) to Corporate Social Responsibility (“CSR”) initiatives which would
benefit the socially and economically disadvantaged sections of society. Following are some of
major of corporate social responsibility initiatives of the company.
a) Mahindra Pride School: The Mahindra Pride School at Chinchwad near Pune, within plant
premises provides livelihood and skills training to youth from socially disadvantaged communities
(comprising mainly of Scheduled Caste/Scheduled Tribe youth). Since its establishment on 23rd
March, 2007, 1,202 students have been imparted with “employable” skills through a training course
of 3 months duration. The School provides training in four faculties i.e. Hospitality Craft, Customer
Relationship urban, rural and tribal parts of India by providing academic Management, Hardware
and Networking and Call Centre Training.
b) Mid Day Meal Kitchen: Company has established Mid Day Meal Kitchen at Govindgarh Block,
Jaipur District, and Rajasthan under a unique tripartite agreement between the Company,
Government of Rajasthan and Naandi Foundation with the prime objective being “to fight hunger in
Schools”. This centralised Mid Day Meal Kitchen ensures that high quality, hygienically prepared
Mid Day Meals containing a minimum of 450 calories are served to the children. The Company has
spent Rs.1 crore, for setting lower up of this central kitchen, which today feeds over 25,000 school
children from Class 1 to 5, covering 314 schools in two blocks of Chomu and Govindgarh, thereby
schooling and learning a complete experience.
c) Mahindra All India Talent Scholarships (MAITS): During the year 510 students all over India
were awarded were awarded the MAITS which enabled them to pursue job oriented diplomas at a
recognized government polytechnic in India. The scholarship is awarded for 3 year period. Till date
4260 students have been awarded the MAITS with majority of them belonging to very poor families
where average income of the families ranges from Rs 1500 to Rs 2000 per month.
3) Sustainability initiatives: In Oct 2008 first Mahindra group sustainability report was released
setting out its triple bottom line performance i.e performance towards the environmental, social as
well as economic aspects towards creating sustainable value towards all its stakeholders. This was
6
in accordance with latest guidelines of internationally accepted global reporting initiatives. The
report was essentially the first step which will take the company on a sustainability journey and
enabling it to make conscious plans, to reduce GHG emissions and waste as well as conserve water,
biodiversity and natural resources, as a part of its growth strategy.
STOCKHOLDER ANALYSIS
Shareholding Pattern of Mahindra and Mahindra
Other investors
Private Corporate Bodies 21273737 7.6
NRI's/OCB's/Foreign Others 1645395 0.59
Govt 221416 0.08
Others 16060852 5.74
Sub total 39201200 14.01
Majority of the stock is held by institutional investors i.e Banks Fin Inst and Foreign Institutional
Investors. So Institutional investors are the marginal investors of the firm, they are also the average
investor of the Firm.
7
Calculation of top down beta
We have done regression of daily return of Mahindra stock price against daily return of BSE index.
Then we have determined the slope and coefficient of regression coefficient. The slope of the
regression line gives the beta of the stock. We have also determined arithmetic mean of daily
returns of Mahindra stock and stock of Mahindra counterparts.
Then using the formula given below we have determined r square of the regression. R-square of the
regression tells us how much variation of dependent variable can be explained by variation of
independent variables. In our case since independent variable is BSE 100 index return while
dependent variable is stock return of Mahindra, r square gives the portion of systematic risk in the
stock compared to total risk of the stock, while the rest is unsystematic risk of the stock. We have
used the following formulas for calculations
y = β0 + β1 x
R-square = 1 – SSE/SSyy
Proceeding in this way we have found systematic risk and unsystematic risk of Mahindra and its
peers.
M&M Tata Motors Force Motors Eicher Motors Swaraj BSE 100
Mazda
Return (Average) 2.14% 1.93% 1.30% 1.83% 0.43% 1.95%
Risk (SD) 14.04% 15.84% 17.43% 13.92% 14.29% 9.44%
Sharpe Ratio 0.15237072 0.121964303 0.074396613 0.13142186 0.02989 0.20624
(Avg / SD)
Beta 0.93612631 1.337041402 1.036020498 0.873926498 0.53220 1
8
Rsquare 39.57% 63.48% 31.48% 35.11% 12.36% 100.00%
Systematic Risk 5.56% 10.05% 5.49% 4.89% 1.77% 9.44%
Unsystematic 8.49% 5.78% 11.94% 9.03% 12.52% 0.00%
Risk
Annual Returns 28.93% 25.81% 16.72% 24.30% 5.25% 26.03%
TOP DOWN BETA CALCULATION 1
9
Bottom up beta is found by taking weighted average of beta of firms sectors. Whereas top down
beta is found by regressing firm’s stock return against market index. Hence bottom up beta is better
measure of the risk of the firm as it takes into account difference in risks in different business of the
firm.
After calculating top down beta and systematic and unsystematic risk for Mahindra we have found
bottom up beta for Mahindra and Mahindra and Mahindra. For calculating bottom up beta we have
identified the sectors in which Mahindra and Mahindra operates. Then we have identified the firms
in those sectors. Regression of their stock return was done against market return to find top down
beta for the stocks. Then using Debt to equity ratio of these stocks we have found unlevered beta for
the firms. Then using revenues of these firms we have found weighted unlevered beta for both the
sectors.
10
Utility Vehicles: 0.805913123 0.883942496 7,646.72 0.63827
After getting weighted unlevered beta for both the sectors of Mahindra and Mahindra we found
bottom up beta for Mahindra using its sales in both the sectors as weights. So finally we found
bottom up beta of Mahindra as 0.86.158. We used bottom up beta in our later calculations instead of
using bottom up beta because it is deemed to be more correct.
Interst Coverage
>12.5
9.5 to 12.5
Yield on 20 year government bonds
Credit rating of the firm
Default spread
Calculating cost of debt
8.27%
AA
1%
7.5 to 9.5
Pre tax cost of debt for the firm 9.27%
Marginal tax rate 26%
11
Post tax cost of debt 6.9%
COST OF DEBT
We used credit rating given by Crisil for Mahindra as credit rating of Mahindra. CRISIL has
recently rated Mahindra as AA. Then we used the above table given by Ashwath Damodaran for
determining debt spread for this rating. Then for risk free rate we have taken yield on 20 year Indian
government bonds. This gives cost of debt of Mahindra as 9.27%.
WACC
Value %
M&M Debt 4,052.76 11.6%
M&M Equity (Market Value) 30,975.10 88.4%
Preferrence Capital 0 0%
Preferrence Capital 0% 0% 0% 0%
After-tax cost of debt 6.9% 6.9% 6.9% 6.9%
Cost of equity 23.6% 23.1% 24.9% 24.7%
Weighted average cost of capital 21.64% 21.3% 22.81% 22.6%
WACC
We have determined here cost of capital both for short term using both bottom up beta. For long
term we have taken yield on 20 year government bonds as risk free rate. And for short term we have
taken average yield on 364 days treasury bills
12
NOPAT
Total Shareholders Fu
Firm’s current return on capital employed is well below cost of capital employed for the firm. And
Equity EVA
its current return on equity is also well below the cost of equity. As a result firm has negative
economic value added presently.
Do you think accounting return is a fair measure of returns that a firm is making on existing
projects? If not how would you modify the return to make it a fairer measure?
Capital Invested
can use market value of debt and equity.
EVA
EVA as %of Capital
ROE 13
We have plotted bar graph of ROC and ROE of the firm over 7 years. On the basis of that we have
predicted Return on capital employed for future years. The trend line for return on capital is
Y = -0.025x + 0.301
This shows that return on capital of the firm is decreasing with time
The trend line for return on equity is Y = -0.026x + 0.337
This shows that return on equity is decreasing with time.
14
Then we have also drawn the bar graph for equity EVA as % of equity and EVA as % of capital
versus timeline. We can see that firm equity EVA was positive 2 years back consistently for 5
years but now it has turned negative, whereas firm EVA as % of capital has been consistently
negative over the years. The trend line for equity EVA as % of equity is
Y = -0.025x + 0.085
Y = 0.018x +0.013
Firm EVA as % of capital is improving over time, but firm equity EVA as % of equity is worsening
over time. This is happening because ratio of book value of equity to book value of debt has
changed in this period.
Why might a comparison based upon economic value added lead you to different conclusions
than one based upon the return differences in the earlier section?
Economic value added also takes into account cost of capital employed. For equity EVA we use
cost of equity and for EVA for capital we use cost of capital. Both cost of equity and cost of capital
are very different from each other. So comparison of ROC and ROE with EVA can yield contrasting
results.
Mahindra and Mahindra has 3 times more unsecured loans compared to secured loans.
1) Firm has depreciation by book value ratio of 0.06 which means there is less depreciation to
reduce tax bite.
3) Provision for current tax, fringe benefit tax and deferred tax for the current year as
percentage of profit before tax has been lower due to higher tax free income
4) Increased profit in new plant eligible for deduction under section 80ic of Income Tax Act,
1961
15
MARGINAL TAX STRUCTURE
Mahindra and Mahindra faces marginal tax rate of 26 % which is high compared to other firms in
the industry so it gets more tax advantage from debt
COST OF DEBT
Market Value of Equity 30975.10
MarginalTax Rate 0.26
Book Value of Firm 5245.84
Debt/Equity Ratio 0.13
CurrentDepreciation 292.00
CurrentDepreciation/BVofFirm 0.06
EBITDA 1383.00
MarketValueof Debt 4026.00
MarketValueofFirm 35001.10
EBITDA/MVofFirm 0.04
FreeCashFlow 940.41
ICR 9.76
Ratio of EBITDA to Market Value of firm is also very low which reduces the capability of the firm
to handle debt
16
NWC 347.64 1062.74 550.67 375.83 -7.55
Change in -715.1 512.07 174.84 383.38 -349.14
NWC
FCFF 940.414 601.2914 866.566 590.385 1029.0914
FCFF
FCFF Diagram
17
Fig: Free Cash Flow Diagram
INTANGIBLE ASSET
1) Technical knowhow: The expenditure incurred is amortised over the estimated period of
benefit, not exceeding six years commencing with the year of purchase of the technology.
3) Software expenditure: The expenditure incurred is amortised over three financial years
equally commencing from the year in which the expenditure is incurred.
So the company has much less proportion of intangible assets as compared to tangible assets in its
books. As Mahindra owns most of its expertise in process rather than huge technical niche,
bondholders can easily observe what equity investors are doing.
OPERATING INCOME
Firms operating income have been very volatile in last 5 years. This increases the cost of debt for
the firm.
Mahindra and Mahindra Mahindra and Mahindra Mahindra group is Mahindra and Mahindra
is part of very large owned by family. So ltd. is the flagship
conglomerate Mahindra increase in debt will company of Mahindra
group which has ensure that firm is not group. It is presently in
operations in large making negative NPV automotive industry is
number of businesses. decisions. cut throat. Lot of foreign
Hence bankruptcy risk companies are
is small introducing new models
in new future. So M
18
&M ltd. needs
flexibility to make
future investments.
19
0.9000 0.35275 1.402707 CCC 0.1827 0.156953 26099.9
0.9500 0.611703 1.328881 CCC 0.1827 0.159023 25760.16
We have plotted WACC, Ke and Kd against debt ratio. Both cost of debt and cost of equity
increases with debt ratio. While WACC initially decreases with increase in debt to equity ratio then
it starts decreasing. Lowest WACC is attained at D/E ratio of 0.5385 or debt to value ratio of 0.35.
Optimal WACC is 11.41%.
WACC VS D/V
20
Then we have found what will happen to firm value when firm moves to the optimal with the help
of following formula
New Value of firm = Old value of firm *( 1 + ( Old WACC- New WACC)/Old WACC)
Then we have plotted the firm value against debt to value ratio. Optimal firm value comes out to be
35877.03 crores.
21
Market Value of equity 23320.62938
No. of Shares 279,821,265.00
Share price 833.4116201
Using this normalized operating income for the firm we get the following result for the capital
structure of the firm
22
Nor of shares 279,821,265.0
0
Share Price 775.1738859
RELATIVE ANALYSIS
We have found debt and equity of firms in the same sector as Mahindra and Mahindra and find the
values of factors affecting debt capacity of the firm for them and Mahindra and Mahindra and
Mahindra
Then we have done regression with ratio of debt to market value of firm as dependent variable. And
we have taken effective tax rate of the firms, their mean operating income, standard deviation of
their operating income and ebitda to market value of the firm as independent variables.
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.86484
R Square 0.74794
Adjusted R -0.2603
Square
Standard Error 0.29007
Observations 6
ANOVA
df SS MS F Significance
F
Regression 4.000 0.250 0.062 0.742 0.690
Residual 1.000 0.084 0.084
Total 5.000 0.334
23
Std (OI) 0.00 0.00 -0.62 0.65 -0.03 0.03 -0.03 0.03
EBITDA/MV -0.01 3.22 0.00 1.00 -40.95 40.93 -40.95 40.93
Predicted Value of Debt/Market Value of Mahindra and Mahindra by this regression is 0.34
whereas present debt to market value ratio of company is 0.11. Hence Mahindra and Mahindra is
underleveraged compared to industry.
In Mahindra and Mahindra ltd. insider holdings is quite small which makes it a take over target.
And its price to earnings ratio at 15.52 is not large compared to its peer group. But its market value
of 35027 crores act as deterrent against hostile takeover.
24
Mahindra has been paying dividend regularly over the last 10 years. So its shareholders consist of
clientele of investors who have come to expect dividends.
At present the dividend distribution tax is 15%, according to the Union Budget 2007,
India.As per existing tax provisions, income from dividends is tax free in the hands of the investor.
However, this is not to say that there is no tax levied at all. On the contrary, there is a levy of 15%
of the dividend declared as distribution tax. This tax is paid out of the profits/reserves of the
company declaring the dividend.
But is there is a choice between paying dividends or stock buybacks to return cash to share
holders. Then we will prefer dividends, because Mahindra cash flows have been stable but its not
25
cash balance is not large enough to return enough cash that is required to move towards optimal
capital structure.
Regression Statistics
Multiple R 0.760050532
R Square 0.552525268
Adjusted R Square 0.594345288
Standard Error 8603.22811
Observations 60
ANOVA
df SS MS F Significance
F
Regression 4 271507330 6787683 3.9170 0.890647222
3 6
Residual 55 4070854366 7401553
4
Total 59 4342361696
SUMMARY
26
OUTPUT
Regression Statistics
Multiple R 0.86
R Square 0.67
Adjusted R Square 0.79
Standard Error 8603.23
Observations 60.00
ANOVA
df SS MS F Significance F
Regression 4.00 271507330.25 67876832.5 4.92 0.94
6
Residual 55.00 4070854365.5 74015533.9
1 2
Total 59.00 4342361695.7
6
After doing multiple regression of firm’s market value and operating income against
macroeconomic variables. We find that variation in operating income of the firm is explained by
macro economic variables. Its multiple r square is 0.86 which shows that 86 % of variation is
explained. Predictability of market value of firm by macroeconomic variables is also good.
Multiple r square of the model is 0.76 which means 76 % of variation in market value of firm is
explained by the model.
DIVIDEND POLICY
27
2006-03 243.97 100 1.59
2005-03 150.81 130 5.23
2004-03 104.41 90 3.87
2003-03 63.81 55 11.06
2002-03 56.21 50 8.8
2001-03 60.77 55 9.15
2000-03 60.77 55 3.42
Firm has been consistently paying dividends since several years. Firm reduced its dividend in last
year.
Dividend yield of Mahindra and Mahindra reached its peak in 2003. Then it started falling. But in
last year it improved it a little bit.
Year Dividend Dividend(%) Div Stock Net Cash to EPS Payout Reported
End Yield(%) Buyback Shareholders (annualised) (%) Net Profit
(Unit Curr)
28
2005-03 150.81 130 5.23 0 150.81 44.02 30.68 512.67
Average 4.885
Dividend Payout is near 30% from last 5 years.Net increase in dividend from last 5 years (2005) is
Rs. 138 Cr which is increase of 92% from last 5 years. Mahindra and Mahindra net profit decreased
last year.
29
Year 2009 Dividen Dividen Dividend
d(Rs in d% Yield(%)
Crores)
M&M 278.83 100 2.61
Tata Motors 311.61 60 3.33
Force Motors 0 0 0
Eicher Motors 0 0 0
Swaraj Mazda 1.57 15 1.37
1.462
Many competitors are not paying dividend
30
No of Shares % Share Share
Holding Holder
Foreign (Promoter & Group) 7,127,304.00 2.5471 2
Indian (Promoter & Group) 69,063,784.0 24.6814 58
0
Total of Promoter 76191088 27.2285 60
Non Promoter (Institution) 140130069 50.0784 715
Non Promoter (Non-Institution) 47665482 17.0343 138374
Total Non Promoter 187795551 67.1127 139089
Total Promoter & Non Promoter 263986639 94.3412 139149
Custodians(Against Depository Receipts) 15834626 5.6588 3
Grand Total 279821265 100 139152
Year Mar 09(12) Mar 08(12) Mar 07(12) Mar 06(12) Mar
05(12)
31
Dividend 278.83 282.61 282.23 243.97 150.81
FCFF 940.414 601.2914 866.566 590.385 1029.091
Total Debt 4,052.76 2,587.06 1,636.00 883.38 1,052.62
Change in Debt 1,465.70 951.06 752.62 -169.24 322.81
FCFE 2,406.11 1,552.35 1,619.19 421.15 1,351.90
Div/FCFE 0.115883952 0.182052852 0.174303632 0.579301666 0.111554
FCFE-Dividend 2,127.28 1,269.74 1,336.96 177.18 1,201.09
Cash and Bank 1,574.43 861.23 1,326.07 730.31 623.98
They have enough money to give dividend but they need money to reinvest. Recently they are going
for scooter segment and so they need money to invest in other high potential projects. Despite the
recession firm has been consistently distributing cash among the shareholders in the form of
dividends
32
Here we can see that the firm had increasing ROE from 2003 to 2006 and started decreasing after
that. Firm is having a very high ROE, this implies that they have been making good investments in
the recent past. So, the company can think of retaining the earnings with themselves and can invest
in some good projects rather than paying the payout almost equal to ROE. In this case investors can
earn a decent return on their invested capital.
VALUATION
33
Price per share 1010.172
Terminal Value 40800.21
PV Terminal Value 23469.08
34