My Valuation of the Shares of Bosch Ltd.

In this post I value the equity of Bosch Ltd. Bosch plays mainly in the field of automobile ancillaries. Hence its fortunes are linked to the growth of the automobile industry in addition to its own market share gains. As I said in my post on auto ancillaries and spare parts, while Bosch has been steadily increasing its sales, this increase is not keeping pace with the burgeoning market size and hence the market share is reducing. Bosch is expected to face market share challenges going ahead because global OEMs are increasingly sourcing from India, meaning that other global OEMs start encroaching into Bosch's turf in India.

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in crores of rupees, whereas the third is in percentage. 2017 onward, the numbers are forecasts. My data is taken from moneycontrol.com, since for this company, the website was not very helpful in getting the annual reports.

Let us analyze the growth trends in some important income statement and balance sheet items on a CAGR basis between 2012 and 2016. On the revenue side, total income from operations grew at 4.8%, in line with net sales, which was its biggest contributor, the other operating income making a much smaller contribution. The largest expense item, consumption of raw materials, decreased by a little over a percentage. Purchase of traded goods increased by around 13% and increase in stocks by around 28%. Employees cost and depreciation increased by 10% each. A huge increase in interest expense at 76% was more than made up for by other income which increased by over 45%, but growing from a larger base than the interest expense, more than covered for the growth of the latter. Consequently, profit before tax grew by 6.4%. The growth of tax at a lower rate of 5.9% led the profit after tax to grow by 6.6%.

On the liabilities side, although the net worth increased by around 15% due to the increase of reserves by as much, the decline in total debt by over 47%, led the total liabilities to grow at a lower rate of 13.7%. On the asset side, the growth of gross block by 11.8% and that of the depreciation at a lower rate of 10.4% led the net block to grow at over 17.7%. Total current assets grew by 9.4%, aided by the growth of sundry debtors at 10.1% and cash and bank balance at 17,8%. The growth of investments by 23% was a significant addition to the non-current assets. Another major contributor was loans and advances which grew at 8.2%.

Forecasts for the income statement and balance sheet items were based on a linear or growth trend as deemed fit for the individual items, keeping in mind their past growth rate.          

The Valuation

The FCFE increased to ₹2,374 crore in 2026 from ₹1689  crore in 2016. To find the value due to the FCFEs in the forecast period from 2016 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 1.33. Together, these yield a cost of equity of 16.33%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.

The Price

Together, this set of assumptions yields a valuation of ₹3,828 for the Bosch Ltd.'s share. Hence at over ₹21,905, the scrip seems hugely overpriced.

A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.

My Valuation of Eicher Motors' Shares

In this post, I provide a valuation of Eicher Motor's equity. As I had written in my post on the two-wheeler market share trends in India, Eicher Motors' Royal Enfield brand gained a 1.5 percentage point market share between 2014 and 2016. The more relevant metric is, however, the 80% market share it has among motorcycles priced between one and two lakh rupees, a niche that is expected to sell one million units in CY17. The company's spares and service sales too has been increasing at a rapid pace.

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in crores of rupees, whereas the third is in percentage. 2016 onward, the numbers are forecasts.

Let us analyze the growth trends in some important income statement and balance sheet items on a CAGR basis between 2011 and 2015. Revenue from operations net of excise duty increased by around 20%, and since it is the most important component of total revenue, the latter also increased by as much. Cost of materials consumed was the largest contributor at around 60% to the total expenses, and hence the growth of the former by around 16% limited the growth of the latter to around 19% despite the much higher rate of growth of its other constituents. The difference in the growth rates between the revenue and the expenses, combined with the low level of profit when compared to either of these, led the profit before tax to grow by around 24%. Although the tax expense increased by around 30%, the minority interest decreased by 10%, leading the profit after tax to grow by 32%. 

Coming to the liabilities side of the balance sheet, the increase in the reserves and surplus by around 16% increased the total shareholder's equity by around that much. The minority interest increased by 7.4%. Deferred tax assets and long-term provisions increased by 32% and 24% respectively, leading to an increase in the non-current assets by around 27%. Coming to current liabilities, which increased by 21.5%, trade payable and other current liabilities were its largest constituents, and increased by 24% and 18% respectively. 

On the asset side, fixed assets grew by around 22%, aided by the growth of tangible assets at around 27% and intangible assets at around 89%, but hindered by the reduction in capital work in progress at around 10%. High rates of growth of non-current investments and other non-current assets led the non-current assets to increase by approximately 27%. A nearly 17% reduction in cash and cash equivalents which constituted around 44% of current assets in 2011, kept the growth in current assets at a moderate 8.8%. 

Forecasts for the income statement and balance sheet items were based on a linear or growth trend as deemed fit for the individual items, keeping in mind their past growth rate.            

The Valuation

The FCFE increased to ₹2,177 crore in 2025 from ₹ 899 crore in 2015. To find the value due to the FCFEs in the forecast period from 2017 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 0.71. Together, these yield a cost of equity of 11.75%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.

The Price

The value finally arrived at is ₹7790, which is around 68% lower than the current price of around ₹24,750. Hence, the scrip seems highly over-priced. A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below. 

My Valuation of Hero Motocorp's Equity

In this post, I provide a valuation of Hero Motocorp's equity. As I have written in my earlier post on the two wheeler market in India, while Hero's market share in the two wheeler sub-segment was above 40% in CY14, it decreased to below 37% in Apr-Nov 2016. However, it can seen to be increasing its spares sales consistently over the past few years.  

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in crores of rupees, whereas the third is in percentage. 2017 onward, the numbers are, of course, forecasts.

Total revenue increased at a CAGR of 5% between 2012 and 2016, broadly in line with its largest contributor, gross sales of products. Total expenses on the other hand increased at a CAGR of only around 4%. Its largest contributor, cost of materials consumed grew at a CAGR of only 2.7%, but the second largest item, other expenses, grew at a CAGR of 16%. However, due to significant decreases in depreciation and changes in inventory, the growth in total expenses stayed moderate. Consequently, profit before tax grew at a healthy rate of over 11%. However, due to the high CAGR of the tax expenses at around 27%, the profit after tax grew at only 7.1%.

Coming to the balance sheet, reserves and surplus grew at a CAGR of around 17%, leading to the shareholder's equity growing by that much. Among the non-current liabilities, long-term liabilities decreased by 57% and long-term provisions increased by 22%, both on a CAGR basis. This caused the total non-current liabilities to reduce by around 27% on a CAGR basis. Among the current liabilities, the trade payables increased by 4.8% on a CAGR basis, but the other current liabilities and the short-term provisions decreased by 17% and 7% respectively, both on a CAGR basis, leading the total current liabilities to decrease by around 2%, also on a CAGR basis.

On the asset side, tangible assets and capital work in progress increased by 21% and 65% respectively, but intangible assets decreased by 51%, leading the fixed assets to grow at around 4%, all on a CAGR basis. When the double digit CAGR growth of long term investments, long term loans and advances, and other non-current assets gets added to this, the growth of total non-current assets becomes 6.3% on a CAGR basis. High growth rates of trade receivables, cash and cash equivalents and other current assets was kept in check by the moderate decline in current investments, which is the largest component of current assets, to keep the growth rate of current assets at 5.3% on a CAGR basis.           

Forecasts for the income statement and balance sheet items were based on a linear or growth trend as deemed fit for the individual items, keeping in mind their past growth rate.

The Valuation

The FCFE increased to ₹3,867 crore in 2026 from ₹2019 crore in 2016. To find the value due to the FCFEs in the forecast period from 2017 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 0.67. Together, these yield a cost of equity of 11.45%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.

The Price

The value finally arrived at is ₹2016, which is around 36% lower than the current price of around ₹3160. Hence, the scrip seems highly over-priced. A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.    

My Valuation of Mahindra and Mahindra's Equity

In this post I deal with Mahindra and Mahindra Limited's equity valuation. In the passenger vehicles sub-sector, despite the rapid growth of the SUV segment, where the company has market leadership, the erosion of its market share in that segment has led to a decrease in market share for the brand in the past two years. Coming to three wheelers, M&M has a market share of 10% marginally lower than the share the year before. In the two-wheeler sub-sector, Mahindra Two Wheelers Limited had a market share of 0.33% in the Apr-Nov 2016 period. It also lost some market share between 2014 and 2016. Coming to the commercial vehicles sub-sector, Mahindra and Mahindra dominates the LCV segment with a more than 50% market share in the load carrying LCV segment. In the commercial vehicles segment as a whole, the company had a market share of 26% in the time period April to November 2016, which was a percentage point less than CY 2015, possible because Tata Motors started reclaiming market share in the LCV segments with new launches around that time. Despite facing challenges in maintaining the market share in the sales of its vehicles, the company has increased its spares sales consistently over the past four years.

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in crores of rupees, whereas the third is in percentage. 2017 onward, the numbers are, of course, forecasts.

The data up to 2016 is taken from the annual reports and refers to the financial year data. Between 2012 and 2016, the total revenue grew 7.1%, helped by the growth in other income which increased by a whopping 127% on a CAGR basis. The revenue from operations too has been growing at a CAGR of 4.1% in that time period. Expenses grew by 7.5% on a CAGR basis, propelled by an 11% CAGR increase in other expenses which constitutes 24% of the expenses. While purchases, finance costs and depreciation grew by double digits, the slow growth of the cost of materials consumed kept the expense growth in check. However, since expenses grew faster then revenue, a trend that can be seen forecast in to the future, the profit before exceptional items and taxes grew only at a CAGR of 0.7%. When a high rate of decline of exceptional items is factored in, the profit before taxes grew only at 0.3% on a CAGR basis between 2012 and 2016. 

    

Coming to the liabilities side of the balance sheet, both current and non-current liabilities have shown a double digit increase. In the non-current liabilities, deferred tax assets was the fastest growing item with a CAGR of 21%. The largest contributor to non-current liabilities, long term borrowings, grew at around 12% on a CAGR basis. Coming to current liabilities, short term borrowing grew at a high CAGR of 30%, while the largest item, trade payables, grew at a moderate CAGR of around 8%. 

Moving on to non-current assets, fixed assets grew at a CAGR of 6.7%, due to the moderate growth of its largest component, tangible assets at a CAGR of 4.5%. The fastest growing item here was intangible assets under development which grew at a CAGR of 46.2%. Long term loans and advances was a large item within non-current assets and it grew at a CAGR of over 22%, and along with non-current investments which grew at a CAGR of over 26%, led to the non-current assets growing at a CAGR of 15.3% between 2012 and 2016. Current assets grew at a CAGR of 12.5% because current investments, inventories and short term loans and advances grew by double digit CAGRs.

Forecasts for the income statement and balance sheet items were based on a linear or growth trend as deemed fit for the individual items, keeping in mind their past growth rate.

The Valuation

The FCFE decreased to ₹2727 crore in 2026 from ₹4,955 crore in 2016. To find the value due to the FCFEs in the forecast period from 2017 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 0.87. Together, these yield a cost of equity of 12.93%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.

The Price

The value finally arrived at is ₹410, which is around 70% lower than the current price of around ₹1300. Hence, the scrip seems highly over-priced. A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.

My Valuation of Maruti Suzuki's Equity

In this post I deal with Maruti Suzuki's equity valuation. In the passenger vehicles sub-sector, Maruti Suzuki has been consistently gaining market share in the past three years, the only one in the top five by market share to do so. It has also grown its spare parts sales significantly. In the commercial vehicles sub-sector, Maruti Suzuki entered the LCV sub-segment in 2016, but has a negligible market share.

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. The first two are in millions of rupees, whereas the third is in percentage.

The data up to 2016 is taken from the annual reports and refers to the financial year data. In this time period, total revenue grew at a CAGR of 12.5%, while the total expenses grew at 10.8%, leading to an increase in profit before tax and profit after tax of 33% and 29% respectively. Within the total revenue, gross sale of products grew by 13%, but the excise tax on it grew by 18%, both on a CAGR basis. On the expense front, while cost of materials consumed, which is the largest expense item and constitutes 78% of the total expenses, grew only at a CAGR of 8%, employee benefits expenses and depreciation grew at high rates of 24% and 25% respectively. The rapidly increasing net income and depreciation contribute to a high FCFE (free cash flow to equity) growth rate, which is forecast to continue into the future.

Coming to the balance sheet, reserves and surplus constitutes 69% of the total liabilities. and has grown at a CAGR of 14% from 2012 to 2016. Though some other liability items have been growing at a much faster rate, their smaller contribution means that the total liabilities grows only at a CAGR of 16%. On the asset side, the largest components are tangible assets (31%) and non-current investments (43%), which have been growing at a CAGR of 21% and 62% respectively from 2012 to 2016. Almost all the non-current investments are in mutual funds. The high growth rate of these large components is balanced out by the significant decline in cash and bank balances from over 25 billion rupees in 2012 to under 500 million rupees in 2016, at a CAGR of 64%.

All forecasts have been done based on a linear trend.

The Valuation    

Finally, the FCFE grows to ₹179746 million in 2026 from ₹116058 million in 2016. To find the value due to the FCFEs in the forecast period from 2017 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta of the stock has been taken from an online source and is 0.81. Together, these yield a cost of equity of 12.49%. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.

          

The Price

The value finally arrived at is ₹4782, which is over 20% lower than the current price of around ₹6110. Hence, the scrip seems highly over-priced. A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.

My Valuation of Tata Motors' Equity

After the industry analysis of the automobile sector, I am moving on to the valuation of individual companies. To start with, we have the stock in the eye of a corporate governance controversy, Tata Motors. Tata Motors competes in the passenger and commercial sub-sectors of the automobile sector, giving three-wheelers and two-wheelers a miss. In the passenger vehicles segment,  Tata Motors has been steadily losing market share, struggling to stay above a 5% market share threshold. In the commercial vehicles market too, the company has witnessed declining market shares in all the categories. In the spare parts market, Tata Motors is the only automobile OEM which has not been growing its sales.

Historical and Forecasts

Let us consider the trends in the total revenue, total expenses and the net profit margin. 

The data up to 2016 is taken from the annual reports and refers to the financial year data. Revenues can be seen to be showing a healthy increase each year, although for 2016 the growth is slightly lower than the previous years. I have forecast it to continue to grow based on a linear trend based on the previous five years. Hence, total revenue from operations grow from around 2.8 lakh crores in 2016 to around 5.8 lakh crores by 2026. The average rate of excise duty was calculated based on the previous five years and this was applied to the 2017 revenue, and so on for every year the average excise duty rate of the past five years was assumed to apply to the total revenue from operations. This makes the excise duty forecast for 2026 around 10,000 crores. A linear trend when applied to the other income from 2012 to 2016 raises it from 982 crores in 2016 to 1636 crores in 2026. The net income and the depreciation have been taken from the income statement for the calculation of the free cash flow to equity (FCFE). Despite the slow growth of the net income, the significant increases in the depreciation lead to the FCFE having a healthy growth rate over the years.  

An analysis of the expenses shows that it has been increasing at a faster rate than the revenues. While the total revenues grew only at a CAGR of 14% from 2012 to 2016, certain items of the expenses grew at a much faster rate, bringing the profit margins down drastically. Notable among these were employee cost (24%), depreciation (32%), product development (26%) and exceptional items (26%). Together, these dragged the profit after tax down by a CAGR of 5% from 2012 to 2016. Since I have forecast the expenses to increase based on a linear trend, the net profit margin continues its downward trajectory in to the future, hitting 2.3% by 2026.

On the balance sheet too I forecast all items based on a linear trend, except the reserves, which are calculated as the difference between the total assets and the liabilities except the reserves. On the liabilities side, the largest contributors are long term borrowings, trade payables and reserves. The have shown increases of 17%, 15% and 25% respectively on a CAGR basis between 2012 and 2016. The total liabilities are forecast to increase from 2.7 lakh crores to 5.9 lakh crores from 2016 to 2016. On the asset side, there are no single large contributors, with each item contributing less than 20% of the total. From the balance sheet I obtain the change in working capital, net borrowing and capital expenditures to calculate the free cash flow to equity. Due to the linear trend forecast adopted, these cease to vary after a few years.       

The Valuation

Finally, the FCFE grows to 36365 crores in 2026 from 1888 crores in 2016. These are split between the ordinary shares and the DVRs ('A' Ordinary shares) based on the number of shares of each projected, again based on a linear trend. To find the value due to the FCFEs in the forecast period from 2017 to 2026, these are discounted based on the cost of equity calculated based on the CAPM model. A risk free rate of 6.5% based on the yield of the 10 year Government of India bond is taken. For the country risk premium, two values for India have been calculated by professor Aswath Damodaran of the New York University Stern School of Business. One of these (7.39%) is based on the Sovereign CDS and the other (8.82%) is based on the local currency sovereign rating provided by a rating agency. I find the former more palatable since the ratings agencies have taken flak for giving excellent ratings to the securitization products that brought the U.S. economy down in 2008. The beta for both types of shares have been taken from online sources. These are 1.41 for the ordinary shares and 1.75 for the DVRs. Together, these yield a cost of equity of 16.92% for the ordinary shares and 19.43% for the DVRs. The terminal growth rate for the FCFEs is assumed to be 5% since the economy is expected to change its growth rate from around 6% in 2016 to around 3% by 2060, but until 2035, grows at over 5%. The automobile sector's contribution to the economy is thus assumed not to change much since it keeps pace with the economic growth.  

The Price

Together, this set of assumptions yields a valuation of ₹ 440 for the ordinary share and ₹ 346 for the DVR. Hence at over ₹ 500, the TATAMOTORS scrip seems overpriced significantly, whereas the DVR at at around ₹ 320 seems fairly priced.

A sensitivity analysis based on slightly different values of the terminal growth rate (TG) and the equity risk premium (RP) can be found below.

It can be seen that in no instance does the ordinary share's price begin to approach its current price  of around  ₹ 510 and that the range of prices for the DVRs includes its current price of around ₹ 320.