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.