The ICFAI University

2006-32

Mahindra & Mahindra Limited

To Strive further than the farthest, to set new standards in
performance and then break them to reach for the heights and then
seek a new summit. Its about winning and beyond.1
Keshub Mahindra, Chairman.
Anand Mahindra, Vice Chairman and Managing Director of auto major Mahindra & Mahindra Ltd.
(M&M) was in Nanchang, China in July 2005 to launch a 30 HP tractor, a product of Mahindra
(China) Tractor Company. He addressed the first board meeting of Mahindra (China) Tractor
Company during this visit. Mahindra (China) Tractor Company is an 80:20 joint venture with
Jiangling Motor Corporation Group (JMCG). This meeting was held after the company acquired the
tractor manufacturing assets of JMCGs subsidiary Jiangling Tractor Company (JTC).
M&M agreed for a joint venture with the Chinese automaker JMCG mainly with the objective of
having an access to one of the worlds most potential tractor markets the Chinese tractor market
is nearly 5 times the size of the Indian market. In a notice sent to the Mumbai Stock Exchange
(BSE), M&M said that with this acquisition it would gain an advantage in China by gaining a
strong manufacturing base, an existing distribution network besides having a complementary
product range.
Analysts believe that with this acquisition M&M would move closer to its ambition of emerging as
the worlds largest tractor maker. The Chinese unit has the capacity to produce 12,000 tractors
per annum. They also felt that this acquisition would not only enhance the global presence of
M&M, but also reduce the companys exposure to a volatile domestic market.
As he moved on from Nanchang to Phuket, Thailand, Anand Mahindra spoke about his dreams
of turning M&M, the Rs.110 billion M&M group into a complete auto enterprise comprising twowheelers, cars, tractors, multi-utility vehicles, light commercial vehicles and heavy commercial
vehicles.

COMMERCIAL VEHICLES INDUSTRY A PROFILE

The Indian automobile industry crossed a significant landmark during the year 2003-04. Exhibit 1
provides information regarding sales growth of all commercial vehicles. The commercial vehicles
are classified under: Medium, Heavy and Light commercial vehicles categories. All passenger
vehicles are represented under commercial vehicles segment. The total sales (domestic plus
exports) of all passenger vehicles cars, utility vehicles and MUVs touched the one million
mark. Of the total sales, domestic sales accounted for 900,752 units and 129,316 units were
exported. The growth rate of vehicles remained quite high in 2003-04 it was 36.5 percent for
commercial vehicles; it was 39.5 percent for the medium and heavy vehicles, and it was 32 percent
for the light commercial vehicles. The two-wheeler industry of India is the largest in the world and
is also expected to show high growth rate in the near future. Exhibit 2 provides the information
regarding total investment in the commercial vehicles segment, which is crucial for high growth
rate achieved during 2003-04.

Annual General Report 2003-04.

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2006-32
Exhibit 1: Commercial Vehicles Sales Growth (%)

Source: Indian Industry: A Monthly Review, Center for Monitoring Indian Economy, December 2005.
There was a discernible change in the rate of growth in the sales of the commercial vehicles for the
quarter ended June 2005. The growth rate fell to 11.9 percent for this quarter. Industry experts felt
that the 8.5 percent growth recorded by Tata Motors was a major factor for this slide. At the
industry level, the profits however increased by 14.6 percent, with Ashok Leyland, Swaraj Mazda
and Tata Motors reporting healthy increases in PBDIT. All these companies registered around
19 to 20 percent increases. Ashok Leyland planned to sell around 68,000 commercial vehicles
during 2005-06, besides other plans to launch 20 new models, in both the passenger and goods
segments. In the case of Tata Motors, despite higher profits, there was a 17.8 percent decline in
sales volumes of its Medium and Heavy Commercial Vehicles. In the passenger car segment, the
sales volumes were much lower in comparison with the earlier years figures. Among the major
players, Eicher Motors alone recorded a decline in profits. Exhibit 4 provides further information
regarding quarterly financials for the period ending September 2005, of a few players in the
commercial vehicles category.
Exhibit 2: Investment Statistics: Commercial Vehicles
Project UnderImplementation

Period

New Projects
(No.s)

(Rs. Million)

Total Investment

(No.s)

(Rs. Million)

Oct., 2002

1,800.0

1,800.0

Jan., 2003

1,800.0

2,300.0

Apr., 2003

1,800.0

2,300.0

Jul., 2003

1,800.0

2,300.0

Oct., 2003

1,100.0

1,600.0

Jan., 2004

1,100.0

3,000.0

Apr., 2004

1,100.0

8,400.0

Jul., 2004

1,100.0

8,400.0

Oct., 2004

2,500.0

9,600.0

Jan., 2005

2,900.0

9,600.0

Apr., 2005

2,900.0

9,600.0

Jul., 2005

6,500.0

8,200.0

Oct., 2005

6,500.0

15,202.0

1,400.0

1,200.0

5,000.0

(No.s)

(Rs. Million)

Source: Indian Industry: A Monthly Review, Center for Monitoring Indian Economy, December 2005.
The growth of the Indian commercial vehicles industry during the last decade brought about
changes in the industry. These changes occurred both in terms of size and usage of sophisticated
technologies. When the sector was thrown open to foreign direct investment in 1996, some global
majors felt that it was the appropriate time to move into the country. In less than six years, by the
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end of the year 2002, General Motors, Ford, Honda, Hyundai, Mitsubishi and Toyota had
established their manufacturing bases in India. The period has seen the launch of indigenous and
foreign models of cars, Multi-Utility Vehicles (MUVs), commercial vehicles and also twowheelers. New launches of vehicles in the higher end of the truck segment are expected within the
next 1 to 2 years. Two Actros truck models are to be launched by Daimler Chrysler India during
this year. These trucks would have payload capacities of 33 tonnes and 40 tonnes. Similarly, other
companies: Hyundai Motors, and Toyota Motors are keen to introduce their products covering
commercial vehicles segment. In the Indian market, Tata Motors is an important player. Its Indigo
is the leader in the popular customer category while its Indica runs close to Hyundais Santro for
the top position in the B category. In this scenario, M&Ms Scorpio has emerged as the major
challenger to Toyotas Qualis and leads the MUV/SUV segment. Industry circles feel that Ashok
Leyland, Bajaj Auto, Piaggio and TVS Motors are observing the market and are waiting to launch
their products. Exhibit 3 gives information regarding production, sales and exports of commercial
vehicles for the period October 2004 to October 2005.
Exhibit 3: Production, Sales and Exports of Commercial Vehicles between Oct. 04-Oct.05
Period

Production
(No.s)

Production Sales (No.s)

(% chg.)

Sales
(% chg.)

Exports
(No.s)

Exports
(% chg.)

Oct., 2004

28,306

24.82

28,588

21.83

1,943

33.63

Nov., 2004

29,318

14.81

28,801

23.19

2,257

53.54

Dec., 2004

33,358

31.06

32,656

23.74

3,170

73.32

Jan., 2005

32,792

17.41

32,932

22.97

3,302

103.08

Feb., 2005

31,852

15.53

32,597

16.97

3,190

56.22

Mar., 2005

37,592

27.43

39,618

17.89

3,520

47.84

Apr., 2005

22,523

19,125

9.17

2,246

76.57

May, 2005

29,382

10.43

26,191

4.53

2,645

63.98

June, 2005

28,965

10.91

29,610

14.38

2,575

13.04

July, 2005

32,087

15.05

27,283

8.96

3,452

60.11

Aug., 2005

31,409

25.10

31,117

19.75

3,614

33.26

Sep., 2005

33,418

21.76

35,430

16.74

3,693

42.97

Oct., 2005

36,726

29.75

35,054

22.62

3,391

74.52

Year

Apr-Oct

Apr-Oct

Apr-Oct

Apr-Oct

Apr-Oct

Apr-Oct

2004-05

18,5102

33.12

1,81,807

30.31

14,557

80.07

2005-06

21,4510

15.89

2,03,841

12.12

21,635

48.62

Year

Apr-Mar

Apr-Mar

Apr-Mar

Apr-Mar

Apr-Mar

Apr-Mar

3,50,033

27.27

3,48,387

25.52

29,949

71.80

2004-05

5.36

Note: Sales include Exports

Source: Indian Industry: A Monthly Review, Center for Monitoring Indian Economy, December 2005.
For the customer, the increased demand coincided with improved quality of products offered at
competitive prices. According to industry experts this changing automobile scene not only
provided an element of success, but also infused a sense of confidence in the Indian commercial
vehicle industry. They also believe that industry is geared to take up challenge posed by
international auto majors. This air of optimism has encouraged carmakers to draw up plans to
increase production capacities by as much as 44 percent over the next couple of years.
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Exhibit 4: Commercial Vehicles: Quarterly Financials (September 2005)
Sales

Company

PBDIT

PAT

PBDIT/Sales

PAT/Total
Income

(Rs. (G%) (Rs. (G%)

(Rs.
Million)
Million)
Million)

(G%)

Sep., Sep., Sep., Sep.,

04 (%) 05 (%) 04 (%) 05 (%)

47813.1 15.34 5702.3 13.09

3378.7

9.27

12.16 11.93

7.33

6.98

Ashok Leyland 12500.9 36.66 1162.4 55.32

750.0

74.15

8.18

9.30

4.64

5.92

Eicher Motors 3529.5 20.85 18.9

76.1

6.89

0.54

2.30

2.12

12.82 0.69

7.14

1.47

4.66

3.70

Tata Motors

Force Motors

2442.3 72.28

Swaraj Mazda 1485.0

6.68

93.85

16.9
105.0

37.5
8.70

55.0

15.38

8.26

7.07

G% = Growth Percentage: Growth is not calculated when figures are negative.

Source: Indian Industry: A Monthly Review, Center for Monitoring Indian Economy, December, 2005.
Major players in the commercial vehicle segment have drawn up plans for the future. Maruti
Udyog Limited (MUL) intends to increase its capacity by installing a new plant. Tata Motors,
Hyundai, Ford and Toyota are planning to expand their capacities. Toyota Motor Corporation of
Japan has tied-up with mini-vehicle producer Daihatsu Motor Company and announced its plans to
set-up a factory in India with a production target of 100,000 small cars effective from 2007. The
project envisages investment of about 10 billion yen ($89 million). In India, Toyota already
operates through a joint venture with the Kirloskar group. They have announced plans to build
another plant near its present location at Bangalore. The German auto-maker Volkswagon AG,
though embroiled in certain controversies, is still keen to enter India. At the same time, another
two multi-national car majors Suzuki of Japan and Hyundai of Korea have drawn up schemes
to utilize their manufacturing bases in India as a global source for small cars. Despite Indias
emergence as the fastest growing passenger car market in the world, analysts observe that
significantly, the output levels of the Indian automobile industry appear less prominent on the
global scene.

The Auto Component Sector

Along with the growth in the commercial vehicles industry, the Indian auto components industry
has also registered rapid growth to achieve global competitiveness. Analysts observe that while the
automobile market will grow at a steady pace, the auto components industry is poised for a take-off.
This is one among the handful of industries in which India clearly has a competitive advantage. In
fact when international companies such as Ford, GM, Hyundai, and Toyota set-up their bases in
India in the 1990s, they successfully persuaded a few of their overseas component suppliers to setup their manufacturing facilities in India. In the tooling segment, despite stiff international
competition, the domestic industry grabbed the order for Toyota Kirloskar transmission plant.
Amongst the Indian companies, TVS, for instance, spent $100,000 to rework on the engine
developed by them instead of spending $1.5 million to import the engine from abroad. Sundaram
Fasteners has successfully executed the task of supplying radiator caps to General Motors. As a
result, the value of cumulative output of the auto components industry witnessed a sharp increase
from just Rs.114.75 billion in 1996-97 to Rs.306.40 billion in 2003-04. Delphi in 1995, and
Visteon in 1998 proved that there is a 30% reduction in costs for manufacturing their components
in India. These companies exported back to their global factories such low-cost, high-quality
components. This resulted in a sharp four-fold jump in exports from Rs.10.33 billion in 1996-97 to
Rs.48 billion in 2003-04.
The figures revealed by the Automotive Component Manufacturers Association of India (ACMAI)
indicate that investments by auto component manufacturers are expected to be around Rs.100 billion
over the next five years. To reconfirm this point auto majors such as Hyundai, Maruti Udyog, and
Toyota, have finalized plans to invest in the critical auto components sector also.
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Analysts conclude that going by these trends, next success story in India could be the auto
component industry. This is substantiated by the fact that the size of the global auto component
industry is roughly at $1 trillion and poised for further growth. McKinseys report about the
industrys exports in 2003-04 opines that this sector has the potential to increase exports from a
level of $1.1 billion in 2004 to touch the level of $25 billion by 2015.
The Government of India recognized the importance of this sector and has designated the auto
component sector as a Thrust Sector under its Exim Policy. The Department of Commerce is
geared up to promote exports of auto components devising a specific sectoral strategy.
Significantly, outsourcing of auto components from countries like India has gathered momentum.
Consequently, the estimates are that over the next 10 years the value of such exports would touch
the US$ 225 billion mark. The Indian industry is optimistic of securing a market share of 10%.
Effectively, it would work out to an export target of US$ 25 billion by 2015. Out of this amount,
the share of the forging industry is expected to be about US$ 3 billion.
Auto components industry would have to set apart at least US$15 billion as incremental
investment to meet the demands of both domestic and international customers, and by the year
2015, this investment is expected to generate additional direct employment of 7,50,000 while
providing indirect employment to 1.8 million people. Hence, the industry experts believe that the
Indian auto component industry along with the forging industry is set to be positioned in the top
slot internationally while it would emerge as a major driver of growth and employment within the
country.

The Forging Industry

The forging industry a component of the automobile industry, was in the grip of recession, which
ended as slow recovery, started in October 2002. Due to recession, capacity utilization in the
forging industry was only 40 to 50 percent, and it improved to 65-70 percent as recovery started.
The production increased by 22% to reach approximately 550,000 tonnes for the year. The year
2003-04 proved to be good for the industry. The situation improved further as MNCs entered the
domestic automobile market during the post-liberalization era in the 1990s. This also meant better
business opportunities for the forging industry. The industry accounts for exports worth US$180 million.
The growth of exports is impressive as growth rate of 30% over the previous year was registered.
China, Europe and the US have emerged as major markets. Analysts observe that with the prospects
of further growth in the industry, achieving higher export targets in future are realistic.

Some Constraints
The automobile industry needs to carefully watch out with regard to certain crucial inputs. The
average international prices of Steel are expected to increase during the next year. Similarly, the
prices of non-ferrous metals are also expected to go up. In the power sector, the call to review the
Electricity Act, 2003, has created an element of uncertainty. Uncertainty in the price levels of oil
and gas could create conditions of instability.

THE COMPANY
The year 2005 marked the 60th anniversary of M&M; and M&M looks upon this momentous
milestone as significant as per Indian tradition. The multi-sector business conglomerate that the
Mahindra Group is today had a humble beginning. It began as a 2-man partnership in the year
1945. The company that began its operations as a small jeep assembly unit developed into a
manufacturing giant by the year 2003. At the same time, the company initiated plans to become a
competitive player in the global market.
Today, M&M is ready to take on the world. It is reaching out to China, Europe, the Middle East,
USA, South America, Africa, and South Asia. Analysts say that this is the essence of the M&M
spirit faith in our abilities and the belief that all things are possible.
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Automotive Sector
The Automotive Sector of M&M remains as a dominant player in the Multi-Utility Vehicles (MUV)
segment. The company also entered the three-wheelers category. By the year 2005, the company
witnessed expansion into new export markets. Malaysia, South Africa, UAE, and Uruguay
emerged as new destinations. Keeping an eye on the growing passenger car segment, the company
has inked a joint venture project with Renault, a famous French company, to introduce their new
car, Logan, in India.

Farm Equipment Sector

The company achieved a major milestone in the year 2004, as it rolled out its 1 millionth tractor on
9th November 2004. A few factors such as better credit facilities, lower interest rates, and the
Government of Indias favorable policies towards the agricultural sector contributed to the growth
of the tractor industry reversing the negative trend of the earlier 2-3 years.
The FY 2004-05 remains significant for the company during which period it launched two new
tractors viz., 235 DI and 245 DI tractors. The unique feature of these models is that they are in the
low HP segment, which improves the performance prospects of the company in this area. The year
is also significant for the reason that the company maintained its market leadership for a
phenomenally high consecutive period of 22 years. During March 2005, all the Farm Equipment
Sector (FES) plants of the Company were awarded TS 16949 certification by Rheinisch
Westfalischer Technischer Uberwachungsverein (RWTUV), Germany. TS 16949 certificate
provides the specifications for quality system requirements of automotive related products with
respect to their designing, development, production, installation and servicing. The year also
marked the launching of an indigenously designed 75-HP model (7520) in June 2004. This
World Tractor was targeted towards the US market. Another model 6520 was also launched in
the United States. With these tractors, the company hopes to open a new customer segment and
designed specially for the overseas market.
Apart from the companys major export markets the United States and the SAARC countries:
Nepal, Bangladesh and Sri Lanka the company entered into new markets in Australia, China, and
Serbia. As already mentioned earlier, the foray into China was marked by a joint venture with
Jiangling Motors Co. aimed at making a faster entry into that growing market. The companys
international operations in Australia were launched through the opening of a branch office and
assembly operations unit at Brisbane.

Subsidiaries and Joint Venture

During this year, Bristlecone Inc., Bristlecone Limited, Mahindra Engineering Design &
Development Company Limited, Mahindra Industrial Park Limited, Mahindra Insurance Brokers
Limited, Cayman Islands, Mahindra Middle East Electrical Steel Service Center (FZE), Mahindra
& Mahindra South Africa (Proprietary) Limited, Mahindra Overseas Investment Company
(Mauritius) Limited, and Mahindra SAR Transmission Private Limited became subsidiaries of the
company. Mahindra Consulting Inc., ceased to be a subsidiary of the Company after it was merged
with Bristlecone Inc.
Additional subsidiaries added after the year-end period were: Mahindra Automotive Steels Private
Limited, Mahindra-BT Investment Company (Mauritius) Limited, Mahindra (China) Tractor
Company Limited and Mahindra Europe s.r.l..
Mahindra Ford India Limited, was initially a 50:50 joint venture with Ford Motor Company, USA
(Ford). After the year 1998, this venture was renamed as Ford India Private Limited (FIPL), since
M&Ms stake was diluted to 15.88% consequent to induction of more capital by Ford in FIPL.
During the year under review, M&M divested its 15.88% stake in FIPL, for a consideration of
Rs.1.35 billion.

COMPANYS INITIATIVES
On the products front, M&Ms indigenously developed and built SUV Scorpio is its flagship in
both the domestic and international markets. Since its launch in 2002, around 2,400 Scorpios are
sold per month in the Indian market with an additional 250-300 units sold in the global markets of
Malaysia, the Middle East, Greece, Italy, and South Africa. Auto analysts say that Anand Mahindra
is well aware of the fact that if he wants to capitalize on the momentum created by Scorpio, then his
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brand buffet has to be enlarged to include a wider fare. As per plans made in year 2005, Scorpio
could well be manufactured at Renaults Dacia plant in Romania. Scorpio could then enter the
developing European pockets utilizing Renaults distribution network. Analysts say that as a majority
stakeholder, M&M stands to gain in both the ventures. This is in stark contrast to its movement in the
reverse gear during mid-90s when it entered into a joint venture with Ford Motors.
M&M has plans to manufacture medium and heavy commercial vehicles by the year 2008.
M&Ms brands like Armada, Bolero, and Scorpio have positioned it as a market leader in the
utility vehicle segment of passenger cars. Currently, M&M manufactures mini trucks, under the
brand name Loadking, having a carrying capacity ranging between 3.5-6 tonnes. The company is
also finalizing a modified variant of Loadking that will have a carrying capacity of upto 7.5 tonnes. In
the passenger-bus coaches segment, the company manufactures coaches under the brand name
Tourister.
Industry analysts feel that Anand Mahindra, struck deals across the world in different areas such as
manufacturing, marketing, and outsourcing, keeping an eye on auto-component units. According
to Anand Mahindra, their aspiration is to build a global household brand which is rugged, reliable
and people-centric. Pawan Goenka, President of M&Ms automotive sector echoed this sentiment
when he said, We cant remain competitive without a global presence. The company aims to
become the Land Rover of the Sports Utility Vehicle (SUV) market. The company is pumping
in Rs.12 billion for building extra capacities and rolling out new products. The plans are to make
M&M a global juggernaut. The revenues are slated to touch $5 billion within the next three years
ending 2008. The share of exports is expected to go up from the current 8 percent to 30 percent.
M&M announced two high-profile joint ventures during the year 2005, and analysts said this
reflected the companys quest for portraying it as a global venture. Firstly, it decided to enter into
51:49 percent joint venture with Renault of France. Their plans are to introduce Logan, the midsized car into the Indian market by mid-2007. This project with a capacity to produce 50,000 cars
per annum is estimated to cost Rs.7 billion. A new plant would be set-up in Nashik, Maharashtra
where Logan would be manufactured. These cars shall sport Mahindra-Renault brand name.
Secondly, M&M entered into an agreement with International Truck and Engine Corporation of
the US to facilitate its entry into commercial vehicles manufacture having a higher cargo carrying
capacity. For this diversification program, M&M is expected to invest about Rs.4 billion. (Refer
Exhibit 5 for financial information). This 51:49 percent joint venture company, named, Mahindra
International Private Limited would increase the current commercial vehicles capacity of 10,00015,000 units to 50,000 with this tie-up. According to the company sources, the necessary Research and
Development (R&D) work for the project has already been initiated. The companys plans are to
achieve 90 percent indigenous status. While, M&M manufactures its LCVs at its Zaheerabad plant in
Andhra Pradesh, the company plans to set-up a new factory for the manufacture of medium and
heavy commercial vehicles. Along with an upgraded version of its LCV Loadking, the company
expects to launch more products after 2005. The future looks bullish as more stretches of roads
along the golden quadrilateral are expected to increase the market for higher tonnage vehicles.
Exhibit 5: Financial Position at a Glance
(Rupees in Million)
Particulars
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
Gross Fixed Assets
281044 255927 248913 241677 223148 185992 161464 142653 114642 81314
Net Fixed Assets
147488 139160 146609 153723 148252 123199 109961 101741 81011 53835
Investments
118979 111115
86227
80013 71000 82299
81030 65596 60934 41444
Inventories
75983 49970
45675
46904 55253 51554
43697 51485 44716 38298
Debtors
51153 40048
51708
64778 63201 46158
59207 51657 20805 15550
Other Current Assets
104602 62476
63964
61554 52911 68373
80381 72998 72926 42624
Misc. Expenditure not written off
2438
964
3972
22361 15516
9684
5988
3623 1819
Long-term
94140 65203 107190 119180 79088 84481 133457 115147 95847 16809
Borrowings
Short-term
11122
7778
6794
18526 34304 10886
13162 18363
6924 20976
Current Liabilities and Provisions
175180 132924 109478 105074 92704 90021
87027 81623 71559 61070
Deferred Tax Liability (Net)
18975 20325
17710
13790

Equity Capital
11601 11601
11601
11601 11049 11049
10337 10337 10179 10179
Reserves
189625 165902 145380 138801 195833 190662 139877 123995 99506 84536
Net worth
201226 177503 156983 150402 206882 201711 150214 134332 109685 94715
Book Value Per Share (Rupees)
168.35 149.15
130.56 128.26 165.50 166.90 134.14 122.29 102.20 *89.19
* Book value per share is shown after giving effect to a 2:3 bonus issues in February, 1996.
Book value per share is calculated after reducing intangible assets, miscellaneous expenditure not written off and revaluation reserve from
net worth.

Source: M&M Annual Report 2005.

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Dividend
The company announced dividend consistently from the year 2002 onwards. As the Exhibit 6
given below shows, the percentage has shown an upward trend. For the year, 2005, it has
announced a dividend of 100% and a special dividend of 30% that aggregates to Rs.13 per share.
This dividend would be paid to all the registered shareholders existing in the books of the
company as on the date of book closure.
Exhibit 6
Year
Dividend Rate (%)

2002
50

2003
55

2004
90

2005
130

Source: M&M Annual Reports, 2001-02,03,04,05.

INTERNATIONAL SCENE
Mahindra (China) Tractor Company was set up in July 2005 as a joint venture between Mahindra
Overseas Investment Company (Mauritius) Limited and Jiangling Motor Corporation Group.
M&M took an 80% stake in the joint venture and agreed to contribute its share of $8 million out of
the $10 million required for purchasing Jianglings tractor unit: Jiangling Tractor Company, while
the remaining 20% would be held by Jiangling Motor Corporation. It has indicated that the
purchase of Jiangling Tractor Company is subject to regulatory approvals and based on some
undisclosed conditions. M&M, believed that this China deal would help the company to tap the
tractor market in China, and also facilitate sourcing parts at competitive rates for its Indian and
overseas manufacturing units.
In its bid for the state-owned Romanian tractor company Tractorul SA, the largest tractor
manufacturer in Romania, M&M found itself short-listed. The Romanian conglomerate MYO
who is also the bidder for Tractorul, is the competitor for M&M. It was originally planned that
Tractorul would be auctioned after the failure of protracted negotiations with Landini the Italian
company. As per indications, the Romanian government would negotiate directly with bidders for
selling its 80 percent stake in Tractorul. While M&M is reported to have placed its formal bid with
AVAS, (the government agency in charge of the privatization process in Romania), significantly
another Indian company, the Tata group also evinced interest in a possible deal.
Tractorul has the capacity to produce 18,000 tractors per year in the 26-100 HP category. Its unit
in Brasov manufactures 24,000 diesel engines for tractors. The unit has a castings and forging
capacity of 35,000 tonnes and 20,000 tonnes respectively. Currently, over 700,000 Tractorul
machines are being used in Egypt, Iran, and Turkey. As compared to the Romanian tractor market,
which sells only around 6,000 units per year, the Indian market appears attractive as 190,000
tractors were sold in India during the year 2003-04.

Finance
During the FY 2005, the company bought back debentures aggregating Rs.450 million and prepaid
Sales Tax loan amounting to Rs.350 million and secured the benefits of an attractive discount rate.
As a measure aimed at reducing its interest cost on the debt portfolio, the company utilized
derivative instruments. Attempts were made to follow a prudent financial policy, aimed at
improving the capital structure and debt protection levels.
CRISIL Limited (CRISIL) upgraded the credit rating from AA to AA+ to the 6 outstanding
debentures of the company. Fitch Ratings India Private Limited (FITCH) which revised the rating
outlook from AA+ stable to AA+ positive also did a similar upgradation to the companys
outstanding debentures. The bankers consortium treats the company as a prime customer and
facilities at prime pricing are also offered to the company.
The year also marked the implementation of CFM-SAP financial module for loans and
borrowings. This was aimed at ensuring integration in financial transactions, improving process
efficiencies and providing value addition in MIS for decision-making.

714

M&M

2006-32

It was a scenario of an appreciating rupee and low interest rates in the international markets for the
most part of the year. In response, the company utilized a combination of financial instruments
aimed at protecting and maximizing export realizations. In May 2004, the company offered US$ 100
million FCCB to international investors. The bond was issued as a Zero Coupon instrument having
a maturity of five years. Its redemption price of 117.5% would yield 3.25% till maturity. The
prevailing share price at the time of the bond issue was Rs.472.30 and the conversion price was
fixed at Rs.647.05. The funds raised from the bond issue are being used for capital expenditure
projects, acquisitions outside the country and for other purposes.

Stock Options
The trustees of the Mahindra & Mahindra Employees Stock Option Trust granted 88,855 stock
options to eligible employees during the year 2004-05. The decision to grant stock options was
taken by the Remuneration/Compensation Committee, and communicated to the Mahindra &
Mahindra Employees Stock Option Trust. The stock options were priced at a discount of 5.13%
against the average of the daily high and low of the quotations for the companys shares on the
Mumbai Stock Exchange. The period considered for this purpose was fifteen days prior to the date
of recommendation for granting options to all eligible employees. The number of options granted
as at the end of March 2005 was 2,182,751. A total of 1,163,547 options were exercised and an
amount of Rs.68,649,273 was received by the Trust. The number of options still in force is
875,647. The company management says that the personnel cost as a percentage of sales drops
from 8.40% to 6.97% primarily due to the increase in productivity and activity levels.

RISKS AND CONCERNS

A demand was made on the company for payment of differential excise duty (including penalty) of
Rs.30.41 billion. This order was passed on 30th March, 2005 by the Commissioner of Central
Excise (Adjudication), Navi Mumbai. This pertained to an earlier demand during the years 19911996 with regard to the classification of the companys Commander range of vehicles. The matter
is under legal scrutiny.
It is expected that more stringent legislation on pollution and emission requirements will enhance
production costs for the Automotive Sector. There would be a conflict of choice between
maintaining the price line and increasing the prices. The Farm Equipment Sector foresees risk due
to a weakening of the dollar. M&M is expected to take appropriate steps to mitigate this risk.
The banking sector provides loans to 90% of the total tractors purchased. There is a threat that any
pressure on banks on the Non-Performing Assets (NPA) front could affect the credit availability
for tractors. Further, in comparison to the interest rates for housing and car loans, the interest rates
on tractors are not competitive. Any further increase of interest rates could affect the farmers.
Other issues of concern are the rising input costs and an uncertain monsoon.

NEW PRODUCTS
M&M launched three-wheeler Champion Alfa model in the 0.5 tonne-payload segment in the
month of August 2004. It was priced around Rs.110,000. M&M also announced the launch of pick-up,
the Maxx Pik Up Flat Bed. It targets the commercial and entrepreneur segments.
There is a view from industry experts that M&M is seeking to traverse the safe path. Critics say
that Anand Mahindra is a safe player, while the route followed by him is more strategic than
patriotic. The example of Tatas, who produced an indigenous car, is mentioned while at the same
time it is also mentioned that M&M seeks to fulfill its ambition to become a full-fledged auto-maker by
piggybacking on foreign tie-ups. The threat perceived by such critics is that India would then be
turned into a launch-pad for foreign entrants. This could well mean that such foreign players could
even sound death-knell for M&M itself. M&M did indeed consider the option of making its own
car, which however was dropped for certain reasons. M&M is however in no mood to replicate the
Tata model for cars. Instead, Anand Mahindra believes that his group is a niche player. As a
result, the company retains the ability to be nimble, agile and focussed in building a global
brand DNA.

715

M&M

2006-32

A SUBSIDIARY
M&M floated the subsidiary, Mahindra Automotive Steels Private Limited (MASPL) for auto
components business. MASPL, acquired the Chakan unit of Amforge Industries Limited. As per
the terms of agreement, the merger of Amforge Industries forging unit in Chakan with MASPL
was done in April 2005 at a swap ratio of 1:1. The Amforge shareholders were entitled to get one
share of Mahindra Automotive for every share held. The swap ratio for the merger was approved
by the Board of Directors of both Mahindra Automotive and Amforge Industries Limited.
Exhibit 7

Source: M&M Annual Report 2005.

Further, the shareholders of Amforge were also entitled to receive one 4 percent non-cumulative,
redeemable non-convertible preference share of Mahindra Automotive for every share held. The
face value of each preference shares was at Rs.31. In the post-merger scenario, Amforge
shareholders were entitled to hold 52.89 percent of the equity of Mahindra Automotive, while
M&M would control the remaining 47.11 percent. The auto ancillary unit of M&M would be
listed on the stock exchanges. The Mahindra Automotive shares are expected to be listed on those
stock exchanges where Amforge is also listed. Exhibit 7 provides information about the movement
of M&M scrip on Bombay Stock Exchange (BSE). Information regarding the movement of the
scrip in BSE, National Stock Exchange (NSE) and Luxembourg Stock Exchange are given in
Exhibit 8 below.
Exhibit 8
Equity Shares
The Stock
Exchange, Mumbai
High Rs. Low Rs.
April, 2004
497.00
May, 2004
497.75
June, 2004
460.00
July, 2004
525.95
September, 2004
463.60
October, 2004
464.90
November, 2004
498.00
December, 2004
558.00
January, 2005
565.00
February, 2005
573.80
March, 2005
560.00
Source: M&M Annual Report 2005.
716

457.25
360.00
409.50
429.15
405.50
410.00
435.00
483.00
471.25
525.10
467.05

GDRs

National Stock
Exchange
High Rs.
Low Rs.
497.00
497.50
457.40
525.00
471.50
468.00
495.00
553.40
563.00
573.50
562.00

457.25
405.90
405.90
429.25
405.60
410.20
426.25
484.20
471.80
458.60
463.85

Luxembourg Stock
Exchange
High US$ Low US$
11.00
10.70
9.70
11.20
9.50
9.88
10.41
12.50
11.45
12.65
12.15

10.80
10.03
9.40
9.97
8.85
9.25
10.04
11.00
11.45
12.11
11.68

M&M

2006-32

After the merger, and as per the terms of the merger agreement, M&M infused Rs.1.28 billion into
its auto ancillary subsidiary as equity. The plans are that the auto ancillary subsidiary will grow
into an integrated forging and machining unit.
MASPL would manufacture gears, sheet metal and composites, and a machining unit too was
proposed to be set-up. The forging business of the Chakan unit that manufactures crankshafts and
connector rods, could perhaps establish it as one of the largest integrated forging companies in India.
M&M also formed Mahindra Systems and Automotive Technologies (MSAT), a company for
manufacturing auto components. This company has acquired on the domestic front, a
51 percent stake in the Rajkot-based SAR Transmission Private Limited for a consideration of
Rs.14 billion. This joint venture called STPL would be engaged in the production of automobile
gears and transmissions. This acquisition aimed at strengthening M&Ms presence in the gear
components business.
After MSAT had acquired the 36000 tonne Chakan unit of Amforge in April there were reports
that it is likely to buy Ramakrishna Forgings, which is a Rs.84 billion, Kolkata based forging
company, which has a 25,000 tonne capacity plant in Jamshedpur. Ramakrishna Forgings,
reportedly, were scouting for a strategic partner. This company is a family-owned business. The
control of the Jalan family is to the extent of 55% with the rest held by the public and financial
institutions. The turnover of the company for the year ending March 2005 was Rs.85 billion. The
company earned a net profit of Rs.50 million during this period. As per the projections, the sales
and net profit are expected to go up to Rs.1.4 billion and Rs.12 billion, respectively, by the end of
FY 2006.
Speculation about the possible deal with M&M was fueled after noticing a rising trend in the share
price of Ramakrishna Forgings. The share price of Ramakrishna Forgings rose markedly by 37%,
from Rs.67 to Rs.91.65 on a single day (intra-day it went up to Rs.95). M&M showed an increase
by 2.12 percent as it moved to Rs.692.30. The company had also shown good performance in
increased tractor sales. The scrip was in great demand in the market following the publication of
the companys first quarter results ending June 2005.
Answering to queries an M&M official said, We do not comment on speculative reports while
an official of Ramakrishna Forgings said, As of now, nothing is happening.
Press reported that the talks failed between Ramakrishna Forgings and M&M. The negotiations
were apparently stalled due to differences in valuation between what the promoters of
Ramakrishna Forgings expected and what M&M offered to pay. M&M desired that it needs a 51%
controlling interest to enable the consolidation of the companies with the parent.
In this scenario, M&M remains aggressive as it looks around for buyouts both in India and abroad.
As part of this exercise, it remains active as it conducts talks with auto component manufacturers
particularly in India, China, and Germany. The question then is whether it is sustainable? Anand
Mahindra sounds positive and states that he is rather building an off-shoring business. His
confidence is reflected in his belief I am not the M&M of the 1990s.

717

M&M

2006-32

ANNEXURE I
Profit & Loss Account: Summary
Mahindra & Mahindra Ltd.
Rs. Million (Non-Annualized)

Mar. 2000

Mar. 2001
12 mths

Mar. 2002

Mar. 2003

Mar. 2004

Mar. 2005

12 mths

12 mths

12 mths

12 mths

12 mths

Income
Sales

43190.8

42761.8

39345.4

44982.5

58870.9

76495.2

Other income

1258

1133.3

900.9

1210.2

1342.7

1895.4

Change in stocks

871.1

365.3

597.2

-333

90.1

1620.4

375

293.2

375

899.2

695.1

459.7

22851.6

23626.5

20159.2

23942.6

32758.8

46127.1

3975.7

4098.1

3726.4

3845.8

4254.5

4687.8

433.1

472

408.3

440.1

456.4

526.4

7873.2

7696.6

6914.9

8017.5

9745.6

10735.8

613.8

1060

1214.1

1178.7

1739.7

2016.8

Non-recurring income
Expenditure
Raw materials, stores, etc.
Wages & salaries
Energy (power & fuel)
Indirect taxes (excise, etc.)
Advertising & marketing expenses
Distribution expenses

460.3

531

784.1

775.2

1148.4

1680.4

3371.8

3434.5

3277.9

3662

4002.2

5583.9

Less: Expenses capitalized

267.4

264.4

174.9

196.1

167.3

352.9

Non-recurring expenses

230.8

85.6

158.8

305

328

105.2

9360.2

Others

Profits/ Losses
PBDIT
Financial charges (incl. lease rent)
PBDT
Depreciation
PBT
Tax provision
PAT

6152

3813.7

3555.3

4788.1

6732.5

1414.5

1127.2

1156.4

1159

769.3

302.4

4737.5

2686.5

2398.9

3629.1

5963.2

9057.8

1232.7

1400.9

1393.8

1658.8

1661.5

1846.8

3504.8

1285.6

1005.1

1970.3

4301.7

7211

870

80

36

515

896.5

2150

2634.8

1205.6

969.1

1455.3

3405.2

5061

674.5

669.7

562.1

719.8

1177.9

1719.6

1960.3

535.9

407

735.5

2227.3

3341.4

Appropriation of profits
Dividends
Retained earnings

Source: CMIE.

718

M&M

2006-32

ANNEXURE II
Liabilities
Liabilities: mfg. cos.
Mahindra & Mahindra Ltd.
Rs. Million (Non-Annualized)

Mar. 2000
12 mths

Mar. 2001
12 mths

Mar. 2002
12 mths

Mar. 2003
12 mths

Mar. 2004
12 mths

Mar. 2005
12 mths

Net worth

20171.1

20688.1

15040.1

15698.3

17750.4

20122.6

1750

1750

1750

1750

1750

1750

Issued equity capital

Authorized capital

1104.8

1104.8

1160.1

1160.1

1160.1

1160.1

Paid-up equity capital

1104.8

1104.8

1160.1

1160.1

1160.1

1160.1

546

546

546

546

546

546

Buyback amount

Buyback shares (nos.)

19066.3

19583.3

13880

14538.2

16590.3

18962.5

17344.4

17762.8

11651.8

12616.6

15157.5

17886.8

Share premium reserves

8154.8

8148.5

3612.9

3518.9

2520.8

1714.5

Other free reserves

Preference capital
Bonus equity capital

Reserves & surplus

Free reserves

9189.6

9614.3

8038.9

9097.7

12636.7

16172.3

Specific reserves

1542

1653.1

2067

1766.5

1284

932.5

Revaluation reserves

179.9

167.4

161.2

155.1

148.8

143.2

9536.4

11338.9

13770.5

11398.3

7297.8

10525.9

744.5

2152

3180.5

2409.1

3299.5

2349

744.5

2152

1388.4

229.6

1477.6

1084.3

Accumulated losses
Borrowings
Bank borrowings
Short-term bank borrowings
Long-term bank borrowings
Financial institutional borrowings
Govt./sales tax deferral borrowings
Debentures/bonds
Fixed deposits
Foreign borrowings
Borrowings from corporate bodies
Group/associate cos.

1792.1

2179.5

1821.9

1264.7

3120

2198

1415.3

1776.7

2003.4

2478.5

5313.1

6700.1

8704.1

6760.3

1575.1

1055.1

242.1

211.3

332.2

422.9

395.4

247.7

4374

102

67

32

27

24

21.3

Borrowings from promoters/directors

Commercial paper

100

Other borrowings

14.7

10.5

6.4

2.3

0.4

0.3

Secured borrowings

8367.5

8917.7

11551

9241.6

4852.3

3368.2

Unsecured borrowings

1169.1

2421.4

2219.7

2156.9

2445.7

7157.9

Current portion of long-term debt

216.3

606

1031.1

1275.6

1782.3

920.7

Total foreign currency borrowings

1792.1

2179.5

2941.2

5879.8

Deferred tax liabilities

Current liabilities & provisions
Current liabilities
Sundry creditors
Interest accrued/due

2136.6

2374

2327.3

2287.8

9002.6

9292.1

10509.4

10948

13041.7

17359.4

7583.1

7989.7

8335.2

8915

10098.9

12521.1

7394.6

7611.3

7851

8516.8

9347.2

11865

169.1

153.5

462

368.4

159.2

129

719

M&M

2006-32

Liabilities: mfg. cos.

Mahindra & Mahindra Ltd.
Rs. Million (Non-Annualized)
Creditors for capital goods

Mar. 2000
12 mths

Mar. 2001
12 mths

Mar. 2002
12 mths

Mar. 2003
12 mths

Mar. 2004
12 mths

Mar. 2005
12 mths

19.4

224.9

22.2

29.8

592.5

527.1

Share application money

Advance against WIP

1419.5

1302.4

2174.2

2033

2942.8

4838.3

Other current liabilities

Provisions
Tax provision
Dividend provision

223.7

373.2

607.7

607.7

562.1

638.1

1044.1

1508.1

Dividend tax provision

66.8

62

81.7

133.8

211.5

Other provisions

745

632.7

1612.1

1313.2

1541.2

2745.5

38710.1

41319.1

41456.6

40418.6

40417.2

50295.7

Bills discounted

163.3

443.4

891.3

577.7

1127.5

1224

Disputed taxes

1083.5

1201.3

455.3

464.9

5649

5199.2

Letters of credit

1213.2

1846.6

1004.2

455

729.8

478.4

9.5

35.6

26.5

14.5

3.1

3049.9

1781.6

589.1

390.8

639.6

908.6

Total liabilities
Contingent liabilities

Total guarantees
Future lease rent payable
Liabilities on capital account

Source: CMIE.

720

M&M

2006-32

ANNEXURE III
Assets
Assets: mfg. Cos.
Mahindra & Mahindra Ltd.
Rs. Million (Non-Annualized)

Mar. 2000
12 mths

Mar. 2001
12 mths

Mar. 2002
12 mths

Mar. 2003
12 mths

Mar. 2004
12 mths

Mar. 2005
12 mths

Gross fixed assets

18589.3

22332.8

24170.7

24909.7

25391.8

27828.3

Land & building

2741.8

3142.7

3437.2

3784.9

3834.5

3993.9

13490.7

15599.6

16348.6

19638.7

20154.7

21422.3
1289.4

Plant & machinery

Other fixed assets

728.7

847.4

897.6

947.6

1003.1

Capital WIP

1628.1

2743.1

3487.3

538.5

399.5

1122.7

Less: Cummulative depreciation

6269.3

7489.7

8795.5

10230.4

11658.2

13268.4

Net fixed assets

12320

14843.1

15375.2

14679.3

13733.6

14559.9

Revalued assets

179.9

167.4

161.2

155.1

148.8

143.2

8230.1

7121.3

8003.1

8622.7

11111.5

12322.5

4542.3

4831.7

5755.7

5724.2

8144.1

9182.5

112.6

356.3

320.1

634.9

1662.9

Other investments

3687.8

2177

1891.1

2578.4

2332.5

1477.1

Marketable investment

2729.5

1194

1371.2

48.8

1393.1

2449.1

637.3

637.3

634.4

672.1

672.1

Quoted investment

2729.5

1831.3

1014.9

48.8

758.2

786.2

Market value of quoted investment

2272.6

646.6

406.1

12.1

351.8

1718.4

Investments
In group/associate cos.
In mutual funds

In group/associate cos.

Deferred tax assets

757.6

603

294.8

390.3

Inventories

5155.5

5525.4

4690.4

4567.4

4997

7598.3

Raw materials and stores

1981.3

1985.8

1740.2

1950.2

2276.9

3257.8

1613.9

1627.6

1431.2

1670.4

2013.1

2953.7

367.4

358.2

309

279.8

263.8

304.1

2883

3124.2

2487.8

2251.9

2479.1

4219.6

2525.1

2830.9

2261.6

2016.5

2145.8

3746.6

357.9

293.3

226.2

235.4

333.3

473

291.2

352.2

399.2

Stock real estate

63.2

63.2

365.3

241

120.9

Stock of shares/securities

Other stock

8799

10147.1

10724.3

9140.3

7648.4

8735.5

4615.8

6320.1

6477.8

5170.8

3993.9

5112.8

477.4

670

722.1

710.3

813.1

585.3

64.8

48.2

29.9

28.6

37.7

22

762.9

747.7

770.3

1142.2

853.4

415.7

762.9

747.7

770.3

718.1

283.6

256

424.1

569.8

159.7

Raw materials
Stores and spares
Finished and semi-finished goods
Finished goods
Semi-finished goods
Incomplete construction contracts

Receivables
Sundry debtors
Debtors exceeding six months
Accrued income
Advances/loans to corporate bodies
Group/associate cos.
Other cos.
Deposits with govt./agencies

28.6

14.9

29.6

5.2

4.7

3.1

188.8

499

643.8

673.6

982.7

1065.3

Other receivables

3138.1

2517.2

2772.9

2119.9

1776

2116.6

Cash & bank balance

2653.9

1446.1

1906

2408.7

2333.1

6239.8

Cash-in-hand

1189.8

1062.3

1224.2

1269.3

1423.4

1623.4

Bank balance

1464.1

383.8

681.8

1139.4

909.7

4616.4

1551.6

2236.1

397.2

298.8

449.4

202.3

205.6

1551.6

2236.1

397.2

96.5

243.8

381.1

423.9

193

92.8

210.7

Advance payment of tax

Intangible/DRE not written off

Intangible assets (goodwill, etc.)
DRE not written off
Share issue expenses not written off
VRS expenses not written off
Other misc. expenses not written off
Total assets

1170.5

1812.2

204.2

3.7

33.1

38710.1

41319.1

41456.6

40418.6

40417.2

50295.7

Source: CMIE.
721

M&M

2006-32

ANNEXURE IV
Cash Flow
Cash flow: mfg. cos.
Mahindra & Mahindra Ltd.
Rs. Million (Non-Annualized)
Net profit before tax & extra ord. items
Add: Depreciation
Interest payable
Gain or loss on forex transactions
Write offs/amortization
Profit on sale of investments
Profit on sale of assets
Interest income
Dividend income
Other income/provision adjustments
Cash flow before working cap. changes
Trade receivables

Mar. 2000
12 mths

Mar. 2001
12 mths

Mar. 2002
12 mths

Mar. 2003
12 mths

Mar. 2004
12 mths

Mar. 2005
12 mths

3469

1437.8

983.8

1393.8

4087.1

7006.2

1232.7

1400.9

1393.8

1654.4

1652

1840.5

1414.5

1127.3

1156.4

1159

769.3

302.4

10.2

18.3

65.6

77

65.7

-9.9

273.4

206.6

132.9

87.2

30.3

17.7

204.4

79.1

31.4

65.1

52.1

8.4

60

39.4

13.9

36.3

40.3

15.7

-638

555.9

754.9

877.3

829.8

1104.7

2.3

19.5

30

0.5

7.9

5701.8

3317.5

3057.5

3495.3

5763.3

8051.6

1099.6

1761.7

164.8

1646.6

1138.8

1829.2

1033.1

369.9

842.7

122.9

393.2

2601.3

985.6

49

158.5

1019.2

1598.5

2490.2

6753.9

1234.9

3576.9

6284

8107.4

6111.3

Direct taxes paid

742.9

390.2

175.1

152.8

720.5

2083.1

Dividend tax paid

66.8

62

81.8

133.8

6011

777.9

3339.8

6131.2

7305.1

3894.4

795.8

951.8

2487.4

693.4

8.3

236.2

Cash flow from operating activities

5215.2

173.9

852.4

5437.8

7296.8

3658.2

Net cash used in investing activities

1552.3

953.4

1440.5

545.9

1011.4

1743

2550

3639.1

1950.4

1160.1

932.2

2692.7

Sale of fixed assets

41

37.1

50.1

183.7

59.9

61.5

Acquisition/merger of cos.

85

76.8

13179.2

5758.6

7922.3

14647.2

29907.5

35763.2

Inventories
Trade payables
Others
Cash flow from operations

Cash flow before extra ord. items

Extraordinary items

Purchase of fixed assets

Purchase of investments
Sale of investments

13483.4

6967.6

8059.2

14448.6

28765

35143.6

Project expenses

Loan to group/subsidiary cos.

679.6

Loan to other cos.

342.3

200

122.5

487.7

Interest received

249.7

510.8

357

241.9

274.7

315

Dividend received

317.8

249.2

308.2

587.2

529.4

705.1

Other investing activities

Net cash used in financing activities
Proceeds from share issues
Proceeds from long-term borrowings
Proceeds from short-term borrowings

4116.6

62.3

1059.6

4383.9

6357.5

2058.4

325.9

302.7

4015.3

6504.5

2745.9

1853.6

5593.7

Repayment of long-term borrowings

2243.6

2217.9

4132.4

5283.5

6592.5

2160.8

Repayment of short-term borrowings

Share issue expenses

Interest paid

1546

1255.7

1033.5

1286.7

982

332.5

Dividend paid

629.7

604

604.9

559.6

636.6

1042

Net cash flow

453.7

1189.6

471.5

508

-72.1

3973.6

Opening cash balance

3065.6

2611.9

1422.3

1897.4

2405.4

2333.3

Closing cash balance

2611.9

1422.3

1893.8

2405.4

2333.3

6306.9

Other financing activities

Source: CMIE.
722

M&M

2006-32

ANNEXURE V
Key Ratios
Profitability Ratios:
Mahindra & Mahindra Ltd.
March 2002 March 2003 March 2004 March 2005
Percent (Non-Annualized)
12 mths
12 mths
12 mths
12 mths
Margins ratios (%)
As % of gross sales
PBIT (NNRT)
4.94
5.64
7.99
9.36
PBT (NNRT)
2.01
3.06
6.68
8.96
PAT (NNRT)
1.91
1.91
5.16
6.15
Operating cash flow
9.09
13.97
13.77
7.99
As % of net sales
PBIT (NNRT)
6
6.86
9.58
10.89
PBT (NNRT)
2.43
3.72
8.01
10.43
PAT (NNRT)
2.32
2.33
6.18
7.16
Operating cash flow
11.03
17
16.5
9.29
Corporate tax as percent of PBT
3.58
6.24
14.76
29.82
Returns ratios (%)
As % of total assets
PBIT (NNRT)
4.92
6.35
12
16.26
PAT (NNRT)
1.9
2.16
7.75
10.69
As % of net worth
PBIT (NNRT)
11.73
16.89
28.81
38.45
PAT (NNRT)
4.54
5.74
18.61
25.28
As % of capital employed
PBDIT (NNRT)
12.22
15.69
25.65
34.31
PBDT (NNRT)
7.99
11.35
22.55
33.15
PBIT (NNRT)
7.12
9.48
18.95
27.27
Appropriation of profits (as % of PAT)
Dividends
58
49.46
34.59
33.98
Equity dividends
58
49.46
34.59
33.98
Preference dividends
0
0
0
0
Retained profits
42
50.54
65.41
66.02
Dividends/net worth
3.39
4.79
7.22
9.24
Equity dividends/equity capital
49.64
62.05
101.53
148.23
Equity dividends/equity cap. & sh. prem.
8.01
15.23
28.18
52.46
NNRT: Net of Non-recurring Transactions
Source: CMIE.

723

M&M

2006-32

ANNEXURE VI
Option Price of M&M as on 6.01.2006
Instrument
Underlying
Type
OPTSTK

M&M

OPTSTK

M&M

OPTSTK

M&M

Expiry Date

25 JAN. 2006
25 JAN. 2006
25 JAN. 2006

Number
Turnover
Underlying
Option Strike Last
of
in
Type Price Price Contracts
Value
Rs. lakh
Traded
CA

520.00 13.70

11

73.44

512.55

CA

500.00 24.30

11

71.88

512.55

CA

540.00

41.14

512.55

8.00

The closing price of M&M as on 6th February was Rs.212.00.

Source: www.nseindia.com

724

M&M

2006-32

ANNEXURE VII
Weekly Movement of M&M Share Price and Nifty
Date

M&M
Closing Price

Nifty
Closing

5-Apr-04

472.55

1856.6

12-Apr-04

472.95

1838.2

19-Apr-04

466.5

1844.05

27-Apr-04

463.65

1817.25

3-May-04

451.65

1766.7

10-May-04

490.25

1769.1

17-May-04

393.8

1388.75

24-May-04

475.4

1608.85

31-May-04

423.05

1483.6

7-Jun-04

444

1542.55

14-Jun-04

439.55

1481.35

21-Jun-04

432.15

1482

28-Jun-04

436.7

1514.35

5-Jul-04

458.85

1526.85

12-Jul-04

501.35

1556.95

19-Jul-04

465.05

1571.6

26-Jul-04

446.6

1618

2-Aug-04

447.1

1639.05

9-Aug-04

446.2

1642.6

16-Aug-04

426.15

1599.15

23-Aug-04

411.7

1578.2

30-Aug-04

424.5

1628.45

6-Sep-04

444.75

1644

13-Sep-04

439.85

1675.2

20-Sep-04

449.2

1728.8

27-Sep-04

436.3

1717.5

4-Oct-04

452

1805.65

11-Oct-04

444.1

1807.75

18-Oct-04

424.4

1786

25-Oct-04

418.55

1757.25

1-Nov-04

448.05

1797.75

8-Nov-04

451.3

1862.8

16-Nov-04

470

1879

22-Nov-04

468.5

1873.35

29-Nov-04

492.2

1939.65

6-Dec-04

501.6

1993.15

13-Dec-04

509.45

1985.35
725

M&M

2006-32

Date

M&M
Closing Price

20-Dec-04

525.5

2026.85

27-Dec-04

546.2

2062.6

3-Jan-05

556.45

2115

10-Jan-05

518

1982

17-Jan-05

489.45

1932.9

24-Jan-05

481.6

1909

31-Jan-05

540.1

2057.6

7-Feb-05

539.45

2055.1

14-Feb-05

562.05

2098.25

21-Feb-05

531.75

2043.2

28-Feb-05

537.2

2103.25

7-Mar-05

557.3

2160.1

14-Mar-05

531.35

2146.35

21-Mar-05

509.15

2096.6

28-Mar-05

479.5

2029.45

Source: www.nseindia.com

726

Nifty
Closing

M&M

2006-32

Reference
1.

Center for Monitoring Indian Economy (CMIE).

2.

www.indiainfo.com

3.

www.domain.com

4.

www.mahindra.com

727

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2006-32

Model Question Paper

Read the case carefully and answer the following questions:
1.

Perform Michel Porter Industry Analysis of the Indian automobile industry.

2.

Perform the SWOT Analysis of Mahindra and Mahindra Limited (M&M Ltd.).

3.

Based on the financial statements provided in the Annexures, perform ROA analysis for
M&M Ltd. for the past four years and comment on the same.

4.

Analyze the factors affecting the demand and supply of the Automobile Industry. How the
Automobile Industry performed in 2004-05 and what is the future outlook for the Industry?

5.

What is difference between Strategic alliance and a Joint Venture? What is the rationale
behind joint venture between M&M Ltd. and Jiangling Motor Corporation? Based on the
Task-related criteria, do you think Jiangling is a right partner for M&M Ltd.?

6.

What do you mean by Bankruptcy Cost? Calculate the Altmans Z score for M&M for the
financial year 2005 and interpret the same. Assume the market price of M&M share is Rs.502
and the outstanding number of shares is 235.5 million.

7.

What does an Optimal Capital Structure mean? According to you, what is the main reason for
changes in the capital structure of M&M in 2004-05? Comment on the companys
profitability, flexibility, control and solvency in relation to the Capital Structure.

8.

What are the features of International Quasi-instruments and describe the types of
international bonds? What factors, according to you, support M&Ms decision to access
International Capital Markets through FCCBs?

9.

Describe the Gordon Model and its assumptions. Is the share price movement of M&M Ltd.
in the right direction taking implications drawn from the Gordon Model into consideration?

10. Describe and relate Efficiency Theories of mergers and acquisitions. How can you relate the
Pure Diversification theory and Synergy theory to M&Ms merger and acquisition activity?
11. What are the different types of Employee Stock Option Plans (ESOP)? Under which category
does the M&Ms Ltd. ESOP falls and why? Calculate the number of options lapsed. Discuss
the advantages and disadvantages for M&M Ltd. by using ESOP.
12. Suppose an Investor is interested to invest in options market; he believes that in the next six
months, market will not move significantly in either direction. He wants to create an option
strategy to get the benefits from his view and at the same time he wants to minimize his
potential loss in case of market moving against his expectations. Using the information from
the pay-off table given, you are required to suggest a suitable option strategy and prepare the
payoff table for the strategy and find the maximum profit/loss and breakeven point(s) for such a
strategy.

728

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2006-32

13. Calculate the intrinsic value of the equity of M&M Ltd. as on 01.04.2005 as per the details
given below and in Annexure VII. The growth rate in the dividends will be 10% for the next
5 years and 8% thereafter. The face value of M& M share is Rs.10 and risk free rate is 5.5%.
The market price as on 01-04-2005 is Rs.505.75. And the book value per share as on 31st
March, 2005 is Rs.168.35.

729

M&M

2006-32

Suggested Answers
1.

Michael Porter Analysis of Indian Automobile Industry

Threat of Entry

There is no evidence that the existing players are enjoying considerable economies of
scale in the industry.

Though some players are differentiating with product differentiation, it should not be a
major entry barrier as the industry is open to global players who have fantastic technical
know-how.

This is a capital intensive industry. Huge capital is required to enter into the industry.

Access to distribution channels may be a barrier to entry. However, the new entrants are
handling this problem through joint ventures.

Overall, the entry barriers in the industry may be moderate for a domestic company.
However, it may be concluded that these barriers are low if any global players intend to enter.
Intensity of Rivalry among Existing Players
With the size and use of sophisticated technologies and the increasing demand, the intensity
of competition among the existing players in the industry is high. As a result of this, the
quality of the products is improving and the margins are coming down.
Bargaining Power of Buyers
The entry of global majors in Indian Automobile industry and the improvement of domestic
players on the technology development front enable the launch of several indigenous and
foreign models of cars, Multi-Utility Vehicles (MUVs), commercial vehicles and also two-wheelers
With many players and models available in the market, the bargaining power of buyers
ranges from moderate to high in different segments.
Bargaining Power of Suppliers
Auto component sector and forging industry have taken off in India and many players are
entering into this sector to take advantage of Indias competitive advantage in terms of low
cost auto components. Simultaneously, demand for auto components is also increasing.
Hence, the bargaining power of suppliers is low to moderate.
Threat of Substitute Products
Though the industry is offering various models at fairly attractive prices, rising oil and gas
prices may force the public look for alternatives such as traveling by public transport,
railways and other means.
2.

SWOT Analysis for M&M Ltd.

Strengths

730

The companys ability to make the products with world-class quality setting up
benchmarks for its counterparts.

Being a dominant player in MUV segment and the leader in farm equipment sector in
the domestic market, M&M is able to access these segments of potential world markets
through joint ventures, and mergers and acquisitions.

Usage of sophisticated technologies resulted in the ability of the company to develop

special products that could tap some overseas markets.

Procurement of auto components at competitive rates for all its manufacturing plants.

The company can raise funds from capital markets, both domestic and international,
with relative ease.

Top management with strategic view.

M&M

2006-32

Weaknesses

Over dependence on the buyers of tractors on bank loans and the unimpressive interest
rates may affect the companys tractor sales.

The inexperience of the company and strong competition from major players in the
medium and heavy commercials segment and heavy trucks.

The deals struck by the company across the world in different areas to exploit both scale
and synergies in auto components may get affected if any regulatory changes take place
in those countries.

Any increase in the import duty on auto components will increase the cost of the same
for the company affecting the cost advantage.

Opportunities

The high growth potential of automobiles, auto component business and forging
business create lot of business opportunities.

The existing small portion of output levels of the Indian Automobile Industry, when
compared to the global industry, creates opportunities for the industry to prove its worth.

Threats

3.

Globalization attracts large investments and technologies into the industry leading to
economies of scale and product differentiation. This is a threat to small and medium
players in the industry.

With recent surge in international crude oil prices, people are looking at the alternative
means of travel such as trains, etc. This may adversely affect the road transportation and
in turn commercial vehicles segment.

DU PONT Analysis
It is important to examine a firms rate of Return on Assets (ROA) in terms of profit margin
and asset turnover. The profit margin measures the profit earned per Rupee of gross revenue,
but does not consider the amount of assets used for generating revenue margin ratio.

Return on assets =

Net profit/sales
Total assets/sales

= Net profit margin x Total asset turnover

When analyzing a change in return on assets, the analyst could look into the above equation
to see changes in its components: net profit margin and total assets turnover.
PAT (Rs.cr.)
Sales (Rs.cr.)
Total Assets (Rs.cr.)
Net Profit margin (%)
Total assets turnover ratio
Return on Assets (%)

March 2002
96.91
3934.54
4145.66
2.46
0.949
2.33

March 2003
145.53
4498.25
4041.86
3.24
1.113
3.61

March 2004
340.52
5887.09
4041.72
5.78
1.457
8.42

March 2005
506.1
7649.52
5029.57
6.62
1.521
10.07

Both net profit margin and total assets turnover contributed to the increase in ROA from
2002 to 2005.
ROA calculation keeping NPM constant:
2002
2.33%

2003
2.74%

2004
3.58%

2005
3.74%

ROA calculation keeping Assets Turnover constant:

2002
2.33%

2003
3.07%

2004
5.49%

2005
6.28%

Hence, M&Ms ability to turnover the assets contributed more to an increase in the Return on
Assets.
731

M&M
4.

2006-32

Fundamental Analysis
Factors Affecting the Demand

Availability of number of models of passenger cars, commercial vehicles, Multi Utility

Vehicles and two-wheelers.

Use of sophisticated technology to improve the quality of the products to meet the fast
changing requirements of the customers.

Fairly reasonable prices.

Increase in the prices of oil and gas.

Factors Affecting the Supply

Entry of global majors into the industry after globalization.

Availability of low-cost auto components.

Changes in the international prices of steel, non-ferrous metals.

Intensity of competition and profit margins in the industry.

Performance of the Industry in the FY 2004-05

The industry has recorded an impressive growth with commercial vehicles posting a
growth of 25.5% over 2003-04. However, this growth is below the growth recorded in
2003-04(36.7%).

There is great activity in auto component sector as there are huge investments in this
sector. Also, the forging industry achieved fantastic improvement in capacity utilization.

The exports of commercial vehicles in 2004-05 surged 72%. However, the profit margins
are not that great with some of the players recording low or negative growth in profit after
tax.

Future Outlook

5.

The capital expenditure increased in the industry, which is a good sign of development in
the industry. It indicates that the players in the industry are optimistic about the future
growth.

With its fascinating cost advantage, Indias auto component sector is attracting huge
investments into the industry. This is an indication that India, in no time, may become the
global hub for automobile manufacturing.

Imminent increase in the international steel prices and non-ferrous metals prices, the cost
of production may go up forcing the companies either to increase the prices of the
products or to sacrifice the bottomline.

This will lead to enhanced competition among the players and price wars may be
expected. Ultimately, the consumers will be benefited out of this. However, the demand
may be affected with uncertainty in the prices of oil and gas.

Strategic Alliance and a Joint Venture

A strategic alliance is simply a business-to-business collaboration where two or more

corporates share resources, capabilities or distinctive competencies to achieve some
business purpose.

On the other hand, in a joint venture, two or more organizations set-up a separate,
independent organization for strategic purposes. Such partnerships are normally focused
on a specific market objective.

An organizational entity usually is not created with a strategic alliance, whereas it often is in
a joint venture.
Rationale behind the JV with Jiangling Motor Corp.

732

M&Ms JV with Jiangling enables M&M to enter into one of the worlds most potential
markets for tractors, China.

M&M

2006-32

It is apparent that M&Ms share in technology and production facilities (M&M agreed
to pay $8 million to acquire tractor manufacturing assets of the company) are substantial
while Jiangling shares its distribution channels in China.

M&Ms manufacturing units will have access to parts at competitive rates as a result of
this joint venture.

M&Ms cost of production will come down.

This JV achieves diversification of risks from the volatile domestic market.

The organizational learning will improve and will form the basis for new partnerships
and collaborations in the future.

Right Partner

Apparently, M&Ms strategic goal in the farm equipment is to emerge as the worlds largest
tractor maker. In pursuing this ambition, it is spreading its wings across different export markets.
In this regard, Jiangling may be a right partner for the following reasons, M&M will have

6.

i.

Access to the Jianglings production capacity of 12,000 tractors per annum.

ii.

Access to local market knowledge.

iii.

The advantage of the marketing/distribution channels of Jiangling.

iv.

Access to parts at competitive prices.

v.

Access to regulatory knowledge of China, etc.

Meaning of Bankruptcy

A firm is said to be bankrupt if it is unable to meet its current obligations to the creditors.
Bankruptcy may occur because of a number of external and internal factors.
Calculation of Altmans Z-score:

1.2X1 + 1.4 X2 + 3.3X3 + 0.6X4 + 1.0X5

Discriminant Score

X1

Working Capital/Total assets =

X2

Retained earnings/Total assets = 1896.25/5029.57 = 0.377

X3

EBIT/Total assets = 751.34/5029.57 = 0.1494

X4

Market value of equity/Book value of debt = 11822.1/1052.59 = 11.23

X5

Sales/Total assets = 7649.52/5029.57 = 1.521

Where,
2541.3 1735.94
= 0.1601
5029.57

Interpretation of Z-score:

If Z-score for a firm is less than 1.81, the firm is likely to go bankrupt. If Z-score is more
than 2.99, it is regarded as a healthy company. The range between 1.81 and 2.99 is treated as
an area of ignorance.
As the Z-score is more than 2.99, M&M is healthy.
Note:

i.

Working Capital = Current Assets Current Liabilities.

ii.

Current assets include marketable investments, deferred taxes, inventories, receivables

and cash balances.

iii.

Current liabilities include provisions.

iv.

Book value of debt is borrowings.

v.

Retained earnings are cumulative reserves and surplus.

Z = (1.2 x 0.1601) + (1.4 x 0.377) + (3.3 x 0.1494) + (0.6 x 11.23) + (1.0 x 1.521) = 9.47

733

M&M
7.

2006-32

Optimal Capital Structure

The objective of any company is to mix the permanent sources of funds used by it in a manner
that will maximize the companys market price. In other words, companies seek to minimize
their cost of capital. This proper mix of funds is referred to as the Optimal Capital Structure.
Main Reason for Changes in Capital Structure of M&M: Buyback of high cost
debentures and issuing of FCCB. As FCCBs are issued as Zero coupon bonds, these are
generally not included in debt for the purpose of calculating debt-equity ratio.

Effects of the Decrease in the Capital Structure in this Case are:

8.

The companys degree of leverage has been low. It can improve the profitability if it
increases the debt portion in the capital structure.

M&Ms capital structure looks flexible, as the company has been able to raise funds and
retire debts whenever it becomes costly.

The control of the company will not be diluted much with changes in the capital
structure, as the equity portion is more in the capital structure.

M&Ms solvency is healthy with its ability to meet its obligation in terms of principal
and interest payments of debt.

Quasi-instruments

These instruments are considered as debt instruments for a time frame and are converted into
equity at the option of the investor (or at companys option) after the expiry of that particular
time frame.
The examples of these are: Warrants, Foreign Currency Convertible Bonds (FCCBs), etc.
International Bonds are Classified broadly under Two Categories:
i.

Foreign Bonds: These are the bonds floated in the domestic market denominated in
domestic currency by non-resident entities. For example, Dollar denominated bonds
issued in the US domestic markets by non-US companies are known as Yankee Bonds.

ii.

Euro Bonds: The bonds issued and sold outside the home country of the currency. For
example, a dollar denominated bond issued in the UK is a Euro (dollar) bond; similarly,
a Yen denominated bond issued in the US is a Euro (Yen) bond.

Supporting Factors for Issuing FCCBs in Case of M&M:

734

Currency Requirements: The Company was in the need of foreign currency for capital
imports and overseas acquisitions.

Pricing: The low interest rates prevailing in the international market and Indian stock
market performance could have encouraged the company for issuing FCCBs at low
interest rates and reasonable conversion premium.

Investment: The company had plans for expansion and acquisition. Also, the
companys financials in terms of capital structure changes in the preceding years
support its decision.

Depth of International Market: Relatively larger issues can be floated, marketed and
absorbed in international markets more easily in the domestic markets.

International Positioning: This FCCB issue will position M&M with higher visibility
and exposure in the international markets to achieve its ambition of becoming worlds
largest tractor maker.

Investment Climate: International investors are looking at India as their destination

with country risk coming down. This also could have encouraged M&Ms decision of
issuing FCCBs.

M&M
9.

2006-32

Gordon Model and its Assumptions

The Gordon Model values the share by capitalizing its future stream of dividends. This model
maintains that the growth rate of a firm is a product of its retention ratio and the return on its
investments. The assumptions of the model are:

The firm is a going concern and has a perpetual life span.

The only source of finance available to the firm is retained earnings. The firm does not
have any alternative means of financing.

The cost of equity and the return on investment are constant throughout the life of the
firm.

The cost of equity is greater than its growth rate.

Applying Gordon Model to M&M

Cost of equity (k) = (D1/P0) + g

Arithmetic average growth of dividends for the preceding years = 39.35%
Next expected dividend (D1) = D0 (1 + 0.3935) = 13 + 1.3935 = Rs.18.12
Retention ratio (b) = Retained earnings/Total earnings = 334.14/506.1 = 0.66
Return on investments = EBIT/Total assets = 751.34/5029.57 = 14.95%
Growth rate (g) = Retention ratio x Return on investments = 0.66 x 14.95 = 9.87%
Therefore, cost of equity = (18.12/502) + 0.0987 = 13.50%
The following implications can be drawn from the Gordon Model:
i.

When the cost of equity exceeds the return on investment, the pay-out ratio should rise
to increase the market price.

ii.

When the cost equity equals the return on investment, the changes in the pay-out ratio
will have no impact on the market price.

iii.

When the cost of equity is less than the return on investment, the pay-out ratio should be
reduced to increase the market price.

The pay-out ratio of M&M:

Year
Pay-out Ratio (%)

2002
58.00

2003
49.50

2004
34.60

2005
33.98

In M&Ms case, the cost of equity is less than the return on investment and the company has
been reducing the pay-out ratio. The company is doing right on the basis of Gordon Model.
10. Efficiency theories of mergers suggest that Mergers and Acquisitions (M&As) provide a
mechanism by which capital can be used more efficiently and that the productivity of the
firm can be increased through economies of scale. These theories are:

i.

Differential Efficiency: If the management of firm A is more efficient than the

management of firm B, and if firm A acquires firm B, the efficiency of firm B is
likely to be brought up to the level of firm A. As per the theory, this increased
efficiency of firm B is attributed to the merger.

ii.

Inefficient Management: The management of one company simply is not performing

up to its potential. Another control group is in a position to manage the assets of the
firm more effectively. Inefficient management simply represents management that is
incompetent in the complete sense.

iii.

Synergy: In mergers, this means the ability of a combination of two firms to be more
profitable than the two firms individually.

a.

Financial Synergy: The impact of a corporate merger or acquisition on the costs of

capital to the acquiring or the combining firm refers to financial synergy.

735

M&M

2006-32

b.

Operating Synergy: The operating synergy theory of mergers state that economies
of scale and economies of scope exist in an industry and that before a merger takes
place, the levels of activity at which the two firms operate are insufficient to
exploit these economies. Operating economies of scale are achieved through
horizontal, vertical and conglomerate mergers. For instance, expensive equipment
in manufacturing firms should be utilized at optimum levels to decrease the cost
per unit of output.

iv.

Pure Diversification: Diversification through mergers is commonly preferred to

diversification through internal growth, given that the firm may lack internal resources
or capabilities required.

v.

Costs and Benefits of Merger: When a company say A acquires, another company
say B, then it is a capital investment decision for company A and it is a capital
disinvestments decision for company B. Thus, both the companies need to calculate
the Net Present Value of their decisions.

vi.

Strategic Realignment to Changing Environments: The strategic realignment theory

suggests that firms use the strategy of M&As as ways to rapidly adjust to changes in
their external environments. Strategic planning as studied earlier is concerned with the
firms environment and its constituencies, and is not just an operating decision.

M&Ms Pure Diversification Strategy:

M&M, through its mergers and acquisitions in India, particularly in the auto component and
forging sectors, looks like diversifying through mergers.
We can relate pure diversification theory and synergy theory to M&Ms M&A activity. The
company acquired Amforge Industries Ltd. and SAR Transmission for achieving economies
of scale in the auto parts sector. These acquisitions will also enable M&M to manufacture a
wide range of auto components with possible economies of scale, which means the company
is following pure diversification theory.
11. Employee Stock Ownership Plans can be divided into two categories:

i.

Leveraged

In a leveraged ESOP, companies borrow to purchase their own shares and then make a
contribution to the ESOP that is used to pay the principal and interest on the loan.
Leveraged ESOPs are of more interest as a vehicle for Leveraged Buy-outs (LBOs).
In a leveraged ESOP, the ESOP or its corporate sponsor borrows money from a bank or
other qualified lender. The company usually gives the lender a guarantee that it will
make contributions to the trust and this enables to amortize the loan on schedule; or, if
the lender prefers, the company may borrow directly and make a loan back to the ESOP.
If the leveraging is meant to provide new capital for expansion or capital improvements,
the company will use the cash to buy new shares of stock in the company. If the
leveraging is being used to buy-out the stock of a retiring owner, the ESOP will acquire
those existing shares. If the leveraging is being used for divesting a division, the ESOP
will buy the shares of a newly created shell company, which in turn will purchase the
division and its assets. ESOP financing can also be used to make acquisitions, buy-back
publicly traded stock, or for any other corporate purpose.
ii.

Unleveraged

On the other hand, unleveraged ESOPs do not borrow. The firm contributes stock or
cash to the ESOP Trust every year. Employees receive stock or cash when they retire or
leave the firm, according to a vesting schedule. The employees pay nothing. ESOP
holds stock for employees and periodically notifies them on how much they own and
how much it is worth.
Based on the above, it can be said that M&Ms ESOP is an unleveraged ESOP.
736

M&M

2006-32

Number of options granted (A)

= 21,82,751

Number of options exercised (B)

= 11,63,547

Number of options in force (C)

= 8,75,647

Therefore number of options lapsed

= A B C = 1,43,557.

Advantages of ESOPs for M&M

The company is apparently using ESOPs for increasing productivity levels and has
successfully been achieving by reducing the personnel cost as percentage of sales with
improved performance of the company.

The company, however, will receive the tax benefits from ESOPs.

Though the company has received around Rs.7 crore from ESOP, apparently the
companys main purpose of issuing ESOP is not for raising finance, as the company is
capable of raising huge amounts of capital from the capital markets.

Disadvantages of ESOPs for M&M

ESOP implementation is expensive and time-consuming.

If the trustees of the ESOP are also the business owners, they may occasionally face a
conflict of interest between their duties to act in the best interests of the ESOP and their
duties as directors and/or officers of the company.

12. Current stock price = Rs.512.55

The appropriate strategy is long butterfly spread. We could create a long butterfly spread by
buying one call option each at strike prices Rs.500 and Rs.540 and selling two call options at
the intermediate strike price Rs.520.
Initial investment = 24.30 + 8 (2 13.70) = 4.9
Pay-off Table

Stock Price

Long Call
(Rs.500)

Long Call
(Rs.540)

Short Calls
(Rs.520)

Initial
Outflow

Net Pay-off

480

4.9

4.9

490

4.9

4.9

500

4.9

4.9

510

10

4.9

5.1

520

20

4.9

15.1

530

30

20

4.9

5.1

540

40

40

4.9

4.9

550

50

10

60

4.9

4.9

560

60

20

80

4.9

4.9

570

70

30

100

4.9

4.9

580

80

40

120

4.9

4.9

Therefore maximum possible profit = Rs.15.1

Maximum possible loss

= Rs.4.9

Break-even points are Rs.504.9 and Rs.535.5

737

M&M

2006-32

13.

Nifty
Closing

M&M

Nifty

5-Apr-04

472.55

1856.6

XY

X2

12-Apr-04

472.95

1838.2

0.085

0.991

0.084

0.982

19-Apr-04

466.5

1844.05

1.364

0.318

0.434

0.101

27-Apr-04

463.65

1817.25

0.611

1.453

0.888

2.112

3-May-04

451.65

1766.7

2.588

2.782

7.199

7.738

10-May-04

490.25

1769.1

8.546

0.136

1.161

0.018

17-May-04

393.8

1388.75

19.674

21.500

422.976

462.234

24-May-04

475.4

1608.85

20.721

15.849

328.405

251.184

31-May-04

423.05

1483.6

11.012

7.785

85.727

60.607

444

1542.55

4.952

3.973

19.677

15.788

14-Jun-04

439.55

1481.35

1.002

3.967

3.976

15.741

21-Jun-04

432.15

1482

1.684

0.044

0.074

0.002

28-Jun-04

436.7

1514.35

1.053

2.183

2.298

4.765

5-Jul-04

458.85

1526.85

5.072

0.825

4.187

0.681

12-Jul-04

501.35

1556.95

9.262

1.971

18.259

3.886

19-Jul-04

465.05

1571.6

7.240

0.941

6.813

0.885

26-Jul-04

446.6

1618

3.967

2.952

11.713

8.717

2-Aug-04

447.1

1639.05

0.112

1.301

0.146

1.693

9-Aug-04

446.2

1642.6

0.201

0.217

-0.044

0.047

16-Aug-04

426.15

1599.15

4.494

2.645

11.886

6.997

23-Aug-04

411.7

1578.2

3.391

1.310

4.442

1.716

30-Aug-04

424.5

1628.45

3.109

3.184

9.899

10.138

6-Sep-04

444.75

1644

4.770

0.955

4.555

0.912

13-Sep-04

439.85

1675.2

1.102

1.898

2.091

3.602

20-Sep-04

449.2

1728.8

2.126

3.200

6.802

10.238

27-Sep-04

436.3

1717.5

2.872

0.654

1.877

0.427

452

1805.65

3.598

5.132

18.469

26.342

11-Oct-04

444.1

1807.75

1.748

0.116

0.203

0.014

18-Oct-04

424.4

1786

4.436

1.203

5.337

1.448

25-Oct-04

418.55

1757.25

1.378

1.610

2.219

2.591

1-Nov-04

448.05

1797.75

7.048

2.305

16.244

5.312

8-Nov-04

451.3

1862.8

0.725

3.618

2.625

13.093

Date

7-Jun-04

4-Oct-04

738

Weekly Returns

M&M
Closing Price

M&M

2006-32

Date

M&M
Closing Price

Weekly Returns

Nifty
Closing

M&M

Nifty

16-Nov-04

470

1879

4.144

0.870

3.604

0.756

22-Nov-04

468.5

1873.35

0.319

0.301

0.096

0.090

29-Nov-04

492.2

1939.65

5.059

3.539

17.903

12.525

6-Dec-04

501.6

1993.15

1.910

2.758

5.268

7.608

13-Dec-04

509.45

1985.35

1.565

0.391

0.612

0.153

20-Dec-04

525.5

2026.85

3.150

2.090

6.585

4.369

27-Dec-04

546.2

2062.6

3.939

1.764

6.948

3.111

556.45

2115

1.877

2.540

4.767

6.454

10-Jan-05

518

1982

6.910

6.288

43.452

39.544

17-Jan-05

489.45

1932.9

5.512

2.477

13.654

6.137

24-Jan-05

481.6

1909

1.604

1.236

1.983

1.529

31-Jan-05

540.1

2057.6

12.147

7.784

94.555

60.593

7-Feb-05

539.45

2055.1

0.120

0.122

0.015

0.015

14-Feb-05

562.05

2098.25

4.189

2.100

8.796

4.409

21-Feb-05

531.75

2043.2

5.391

2.624

14.144

6.883

28-Feb-05

537.2

2103.25

1.025

2.939

3.012

8.638

7-Mar-05

557.3

2160.1

3.742

2.703

10.113

7.306

14-Mar-05

531.35

2146.35

4.656

0.637

2.964

0.405

21-Mar-05

509.15

2096.6

4.178

2.318

9.684

5.373

28-Mar-05

479.5

2029.45

5.823

3.203

18.651

10.258

0.205

0.283

1223.383

1106.168

3-Jan-05

X and Y are dependent and independent variables.

In this case,

Y = M&M share price,

X = Nifty, and
n = number of observations which is taken as 52.

The regression equation is:

Y= a + bX
We will get Beta value by calculating the value of b
b=

XY nXY
X2 n X2

Substituting the values that are calculated above in the formula:

b = 1.11 and hence of M&M

= 1.11

Cost of equity can be calculated

= 11.23%
739

M&M

2006-32

Dividend Discount Model:

Dividend calculation using the expected growth rate

Year ending March

2006

2007

2008

2009

2010

Beyond 2010

Dividend (Rs.)

14.30

15.73

17.30

19.03

20.94

22.62

14.30
15.73
17.30
19.03
20.94
22.62
+
+
+
+
+
(1 1123) (1 1123) 2 (1 1123)3 (1 1123)4 (1 1123)5 (0 1123 0 08) (1 1123)5
= 12.86 + 12.71 + 12.57 + 12.43 + 12.3 + 411.32
Price as per DDM = Rs.474.19
P0

0.65 PDDM + 0.20 Pbook value + 0.15 X Pmp

Where,
PDDM

Price as per the DDM

Pbook value =

Price as per the book value

Pmp

Market Price.

The Pbookvalue and Pmp are given as Rs.168.35 and Rs.505.75 respectively.
Applying the above formula, P0 = Rs.417.75
The intrinsic value of equity of M&M is Rs.417.75 per share.

740

M&M

2006-32

NOTES

741

M&M

NOTES

742

2006-32

M&M

2006-32

NOTES

743

M&M

NOTES

744

2006-32