India Equity Research Automobiles January 28, 2021

MAHINDRA & MAHINDRA COMPANY UPDATE

KEY DATA Rating BUY About (mis)perceptions and misfires Sector relative Outperformer Price (INR) 765 12 month price target (INR) 1,009 A few misfirings (ROIC drags) led to Mahindra & Mahindra (M&M) Market cap (INR bn/USD bn) 951/13.0 trading at steep discount to Maruti Suzuki (MSIL) post FY16 (at par till Free float/Foreign ownership (%) 81.1/33.4 What’s Changed then). As these get rectified, we expect the gap to bridge with Target Price  Rating/Risk Rating ⚊ recognition that: 1) tractors and LCVs not only outgrow PVs, but also demand cyclicality for tractors is similar to PVs; 2) M&M’s tractor and INVESTMENT METRICS LCV franchise is as good as MSIL in PVs; and 3) ROIC drags–UVs and 275 unlisted subsidiaries–get a huge negative value (36% of our TP). 205 135 As these ROIC drags get addressed, we expect re-rating. Factoring that 65 -5 and EPS upgrade, we revise our TP to INR1,009 (earlier INR721). Sales Growth EPS Growth RoE PE (%) (%) (%) (x) Maintain ‘BUY’. Also, the ROIC drags can be value creators, given the Automobiles MM IN Equity huge negative value ascribed to them, once the restructuring is over.

FINANCIALS (INR mn) Year to March FY20A FY21E FY22E FY23E Revenue 4,48,655 4,48,164 5,53,278 6,06,007 Business concerns: Some genuine, but plenty of misperceptions EBITDA 63,506 69,465 78,012 86,659 A few misperceptions are primary culprits for the steep valuation discount between Adjusted profit 43,534 42,245 49,227 55,684 Diluted EPS (INR) 36.5 35.5 41.3 46.7 M&M and MSIL. 1) MSIL’s franchise is superior: Market share mapping indicates EPS growth (%) (19.7) (3.0) 16.5 13.1 M&M’s tractor and LCV franchise is at par with MSIL; UVs is a weak link, but its RoAE (%) 10.2 11.6 12.2 12.3 minuscule contribution to profits does not warrant such sharp discount. 2) PV P/E (x) 20.9 21.6 18.5 16.4 outpacing tractors; less cyclical: In reality, not only tractors but also LCVs have EV/EBITDA (x) 14.8 13.0 11.0 9.4 outgrown PVs. Importantly, cyclicality in tractor demand is similar to PVs as demand Dividend yield (%) 0.5 0.5 0.6 0.6 is linked to reservoir levels, agri GDP and infra activities, not just monsoon. 3) UVs struggling: The worst is behind with BSVI transition. Also, M&M has shifted focus from market share to launches where it can command a premium. PRICE PERFORMANCE Does conglomerate warrant lower valuation? 850 50,000 730 45,000 M&M was trading at similar valuations as MSIL till FY16 and it was a conglomerate 610 40,000 even then. However, post FY16, efficacy of investments turned adverse, reflected in 490 35,000 mounting subsidiary losses and capex in UVs not yielding desired results. This led to 370 30,000 250 25,000 ROIC plunge--primary reason for the sharp de-rating. Renewed unwavering focus on Jan-20 Apr-20 Jul-20 Oct-20 returns from new and existing investments (18% RoE hurdle rate) will help M&M MM IN Equity Sensex bridge the valuation gap. We expect a delta swing of INR29/share in consolidated EPS alone from decisions already executed on this front.

Explore: Outlook and valuations: In a sweet spot: maintain ‘BUY’ M&M is in a sweet spot as its key franchises tractors and LCVs are set for growth driven by high reservoir levels and cyclical recovery, respectively. Moreover, worst is behind for UVs with receding capital intensity over the next three years and end Financial model Podcast of sharp market share loss phase. Given the trend of preference for UVs and the company’s lineage, M&M can make a comeback – Tata Motors a case in point. Also, M&M is walking the talk with respect to its new capital allocation strategy. Hence, we raise our FY22 and FY23 core EPS by 19% and 15% respectively. We raise Corporate access Video our SOTP-based TP to INR1,009 (earlier INR721), ascribe 20x PER (earlier 16x) to June 2022E core EPS of INR33, maintain 30% holdco discount for its listed subsidiaries and cash per share of INR111. Our target PER implies a negative value to its UV business and unlisted subsidiaries (36% of our TP). We maintain ‘BUY/SO’. Chirag Shah Jay Mehta +91 (22) 6623 3367 +91 (22) 4088 6072 [email protected] [email protected] m Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

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Financial Statements

Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 4,48,655 4,48,164 5,53,278 6,06,007 Share capital 5,965 5,965 5,965 5,965 Gross profit 1,49,988 1,46,102 1,74,282 1,90,892 Reserves 3,40,326 3,77,038 4,20,455 4,70,039 Employee costs 32,237 31,820 37,070 40,602 Shareholders funds 3,46,291 3,83,003 4,26,420 4,76,004 Other expenses 54,245 44,816 59,201 63,631 Minority interest 0 0 0 0 EBITDA 63,506 69,465 78,012 86,659 Borrowings 31,530 31,530 31,530 31,530 Depreciation 23,631 23,457 24,197 25,662 Trade payables 72,006 83,494 1,03,076 1,12,900 Less: Interest expense 1,245 3,500 3,000 3,000 Other liabs & prov 51,305 52,784 61,630 66,067 Add: Other income 15,391 13,445 14,385 15,756 Total liabilities 5,18,179 5,68,710 6,41,450 7,06,235 Profit before tax 54,021 55,954 65,201 73,753 Net block 1,69,093 1,60,637 1,66,440 1,70,778 Prov for tax 18,513 13,709 15,974 18,070 Intangible assets 0 0 0 0 Less: Other adj (28,112) 0 0 0 Capital WIP 0 0 0 0 Reported profit 35,509 42,245 49,227 55,684 Total fixed assets 1,69,093 1,60,637 1,66,440 1,70,778 Less: Excp.item (net) (8,026) 0 0 0 Non current inv 1,53,433 1,68,433 1,76,433 1,84,433 Adjusted profit 43,534 42,245 49,227 55,684 Cash/cash equivalent 45,132 81,302 1,21,609 1,64,586 Diluted shares o/s 1,192 1,192 1,192 1,192 Sundry debtors 29,012 33,529 41,393 45,338 Adjusted diluted EPS 36.5 35.5 41.3 46.7 Loans & advances 6,511 6,055 6,313 6,469 DPS (INR) 3.8 4.0 4.2 4.5 Other assets 79,069 82,825 93,333 98,702 Tax rate (%) 34.3 24.5 24.5 24.5 Total assets 5,18,179 5,68,710 6,41,450 7,06,235

Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Gross profit margin (%) 33.4 32.6 31.5 31.5 Reported profit 35,509 42,245 49,227 55,684 Staff cost % sales 7.2 7.1 6.7 6.7 Add: Depreciation 23,631 23,457 24,197 25,662 Other expenses % sales 12.1 10.0 10.7 10.5 Interest (net of tax) 355 2,643 2,265 2,265 EBITDA margin (%) 14.2 15.5 14.1 14.3 Others (5,287) (12,587) (13,650) (15,021) Net profit margin (%) 9.7 9.4 8.9 9.2 Less: Changes in WC (14,749) 6,001 10,694 5,731 Revenue growth (% YoY) (15.1) (0.1) 23.5 9.5 Operating cash flow 39,458 61,758 72,732 74,321 EBITDA growth (% YoY) (15.7) 9.4 12.3 11.1 Less: Capex (47,755) (15,000) (30,000) (30,000) Adj. profit growth (%) (19.7) (3.0) 16.5 13.1 Free cash flow (8,297) 46,758 42,732 44,321

Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY %) 4.8 (6.0) 7.0 6.0 RoE (%) 10.2 11.6 12.2 12.3 Repo rate (%) 4.4 3.5 3.5 4.0 RoCE (%) 14.6 15.0 15.6 15.9 USD/INR (average) 70.7 75.0 73.0 72.0 Inventory days 54 51 47 50 Tractor - dom. vol. (% (7.0) 14.0 8.0 5.0 Receivable days 27 25 25 26 YoY) Payable days 107 94 90 95 UV - dom. vol. (% YoY) (12.0) 8.0 8.0 8.0 Working cap (% sales) 1.4 0.3 (1.6) (2.2) LCV - dom. vol. (% YoY) (25.0) (20.0) 15.0 15.0 Gross debt/equity (x) 0.1 0.1 0.1 0.1 M&M Total vol (nos) 7,77,953.0 7,21,174.3 8,99,495.9 9,80,836.8 Net debt/equity (x) 0 (0.1) (0.2) (0.3) % Growth (17.2) (7.3) 24.7 9.0 Interest coverage (x) 32.0 13.1 17.9 20.3 EBITDA/vehicle 81,631.7 96,322.7 86,728.7 88,352.1 Valuation Drivers Valuation Metrics Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E EPS growth (%) (19.7) (3.0) 16.5 13.1 Diluted P/E (x) 20.9 21.6 18.5 16.4 RoE (%) 10.2 11.6 12.2 12.3 Price/BV (x) 2.6 2.4 2.1 1.9 EBITDA growth (%) (15.7) 9.4 12.3 11.1 EV/EBITDA (x) 14.8 13.0 11.0 9.4 Payout ratio (%) 12.9 11.4 10.3 9.5 Dividend yield (%) 0.5 0.5 0.6 0.6 Source: Company and Edelweiss estimates

2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

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M&M versus MSIL – Rising valuation gap

Currently, M&M trades at a significant discount to MSIL. A peek into the past, indicates that the discount has widened significantly since FY17. Partly the reasons are justified. However, some of the reasons are more perceptions rather than reality. We highlight them below.

MSIL versus M&M+MVML: Sharp divergence in PE ratio

50

40

30 (x) 20

10

0

Mar-05 Mar-07 Mar-04 Mar-06 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

MSIL - PE MM - Adj PE

Source: Company, Bloomberg, Edelweiss Research; *M&M’s PE is adjusted for stake in listed subsidiaries valuing them at 30% discount to listed price. Valuations are based on actual earnings. Valuations updated till 27 Jan 2021 Perception 1: MSIL is a superior franchise compared to M&M Fact: M&M’s franchise equally strong in tractors and LCVs, but ROIC plunged while that of MSIL accelerated

Mapping of market share of MSIL versus M&M indicates that the M&M franchise in tractors as well as LCV is as good as MSIL’s. UVs is the only space where M&M’s franchise is weak. However, the contribution of M&M’s UV portfolio to profitability is so minuscule that such a sharp discount in valuations is unwarranted (discussed in detail later).

Market share trend - M&M versus MSIL*

FY00 FY05 FY10 FY15 FY20 9MFY21 M&M Tractor market share 26.4 26.6 41.1 39.9 41.2 38.4 M&M LCV market share 10.7 33.0 30.0 39.1 39.1 42.7 M&M PV market share 9.2 7.5 8.0 8.6 6.7 5.9 MSIL PV market share 53.1 46.0 44.6 45.0 51.0 48.6 Source: Company, SIAM, Edelweiss Research; *Jump in M&M’s tractor market share in FY10 is due to acquisition of Punjab Tractors in FY07

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The fact is that MSIL’s ROIC has jumped over FY15-19, benefiting from a strong product cycle as well as the manufacturing arrangement with Suzuki Motor Gujarat (SMG). FY15-19 was a dream run for it as a strong product cycle (with launches including Baleno, Brezza, S-Cross among others) enabled volume as well as value market share gain, leading to superior ROIC. During the same period, M&M’s ROIC struggled due to investments in the UV business for new launches (which unfortunately failed to click) and transition to BSVI norms (development of gasoline engines). For details of the performance of its UV launches refer to Exhibit 15.

ROIC trend -- M&M versus MSIL* 195.0

160.0

125.0 (%) 90.0

55.0

20.0

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19 FY20

MSIL - RoIC M&M - RoIC

Source: Company, Bloomberg, Edelweiss Research; *For M&M – ROIC is calculated for the standalone business till FY11. MM+MVML since then FY15-18: MSIL’s value migration cycle MSIL’s outperformance over FY15–19 CAGR 24.0 FY10-15 FY15-19 Industry volume 5.9 6.7 18.0 Industry volume (ex MSIL) 7.0 3.5 MSIL Volume 4.9 9.6 12.0 MSIL Vehicle revenue 10.5 11.1 (%) EBIT 7.3 14.1 6.0 Source: SIAM, Company, Edelweiss research 0.0

-6.0 FY14 FY15 FY16 FY17 FY18 FY19

Volume growth Value growth

Source: SIAM, Company, Edelweiss research

4 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

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Perception 2: PV growth is higher than tractors and less cyclical Fact: Tractors have outgrown PVs; cyclicality is similar to PVs

As can be seen in the Exhibits below, tractors and light commercial vehicles (LCVs) have outgrown PVs on CAGR basis compared to the perception that PVs have outgrown tractors. We expect the trend to sustain (discussed later in detail). More importantly, cyclicality in tractor demand is similar to that in PVs.

Tractors and LCVs outperformance versus PVs Volume CAGR (%) FY05-10 FY10-15 FY15-20 9MFY21 Tractors 12.2 6.5 5.1 17.4 LCVs 19.1 5.8 5.2 -29.6 PVs 13.0 5.9 1.3 -16.1 Source: Crisil, SIAM, Edelweiss research

Cyclicality of tractors and PVs is largely similar

60.0

40.0

20.0 (%) 0.0

-20.0

-40.0

FY01 FY06 FY14 FY19 FY02 FY03 FY04 FY05 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY15 FY16 FY17 FY18 FY20 FY21

PV volume growth Tractor volume growth LCV volume growth

Source: SIAM, Crisil, Edelweiss Research; FY21 is till December 2020.

The sharp deviation in tractor demand versus PVs was primarily in FY02-03 and FY15- 16. Both these periods were marked by a confluence of negatives driven by reducing reservoir levels and a weak agri economy.

Tractors is a commercial and rural product with demand linked to reservoir levels and crop prices. Hence, offering higher discounts in a weak monsoon or crop cycle is unlikely to boost demand. On the other hand, PV demand is more urban centric. Also, being an aspirational product, OEMs leverage the higher discount bait to boost volumes during a weak demand environment.

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Tractor sales closely linked to reservoir levels… …and agri GDP*

55.0 850 42.0 24.0

47.0 700 28.0 18.0

39.0 550 14.0 12.0

(%) (%) 31.0 400 (%)

(in 000 units) 000 units) (in 0.0 6.0 23.0 250 -14.0 0.0 15.0 100

-28.0 -6.0

FY02

FY04

FY06

FY08

FY10

FY12

FY14

FY16

FY18

FY20

FY01

FY03

FY05

FY07

FY09

FY11

FY13

FY15

FY17 FY19 Tractor Volumes (RHS) FY21 Current storage as % full reservoir level Tractor (% YoY) Nominal agri GDP growth (RHS)

Source: CMIE, Crisil, Edelweiss Research Source: CMIE, Crisil, Edelweiss Research: *FY21 tractor volumes are till December; FY21 nominal agri GDP is government forecast

6 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

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Perception 3: M&M deserves a discount as it is a conglomerate Fact: It has always been a conglomerate; FY14-20 subsidiary losses zoomed

M&M was a conglomerate even during the period when it was trading at similar valuations as MSIL’s. As can be seen from Exhibit below, strategic investments as a percent of net worth was always high for the company. While there has been an increase in investments in recent times, the key difference has been the efficacy of investments as well as profitability of subsidiaries.

For instance, during FY04-14, most investments went towards profitable businesses, many of which were also monetised (IPO of Mahindra Finance, Tech Mahindra, Mahindra Holiday and Resorts, etc). Similarly, the two large inorganic activities during 2005-10 were acquisition of Satyam (merged into Tech Mahindra) and Punjab Tractors (merged in to M&M). Both these acquisitions have turned out to be value creators.

Strategic investments as % of net-worth is lower currently versus history*

Source: Company, Edelweiss Research; *Strategic investments = Subsidiary + JV; Networth = Standalone till FY10, Standalone+MVML from then

Stagnating subsidiary performance*

20000 20.0

13000 14.0 8.0 6000

2.0 (%) (INRmn) -1000 -4.0

-8000 -10.0

-15000 -16.0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Subsidiary PAT % of consolidated PAT (RHS)

Source: Company, Edelweiss Research; M&M reported a consolidated loss in FY20. Subsidiary losses were ~330% (or 3.3x) of the consolidated loss.

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However, there was a change in strategy and approach towards nurturing new businesses during the current decade. Unfortunately, it did not yield the desired results. In our view, the two most important differentiators were: 1) M&M pursued aggressive inorganic route; and 2) in most of the businesses, it did not have a clear advantage as well as it was not the leading business or these businesses needed higher-than-expected seed capital (M&HCVs, two-wheelers, SYMC, EVs, etc). As a result, losses kept mounting and management’s reluctance to take corrective action led to sharp de-rating of the stock.

Rising losses from SYMC and unlisted subs weighed on consolidated profitability*

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

in INR mn Standalone / MM+MVML 20,878 26,870 29,970 36,344 39,051 34,233 32,978 38,889 46,232 54,012 7,397 Domestic Listed Subs 6,731 7,358 7,650 9,436 14,129 12,767 13,682 11,872 19,067 22,330 16,629 SsangYong - -735 -3,327 -3,499 -94 -2,161 -2,570 2,438 -2,746 -2,870 -15,400 Unlisted Subs -2,822 -2,697 -3,027 -1,289 -6,417 -13,464 -8,545 -12,694 17,025 -13,303 -11,836 Consolidated reported 24,786 30,797 31,267 40,992 46,669 31,375 35,545 40,505 79,578 60,169 -3,210

Contribution (%) Standalone / MM+MVML 84.2 87.2 95.9 88.7 83.7 109.1 92.8 96.0 58.1 89.8 NC Domestic Listed Subs 27.2 23.9 24.5 23.0 30.3 40.7 38.5 29.3 24.0 37.1 NC SsangYong - -2.4 -10.6 -8.5 -0.2 -6.9 -7.2 6.0 -3.5 -4.8 NC Unlisted Subs -11.4 -8.8 -9.7 -3.1 -13.7 -42.9 -24.0 -31.3 21.4 -22.1 NC Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, ACE Equity, CapitalLIne, Edelweiss Research;* FY20 contribution % is not calculable; We have assumed proportionate profitability of domestic listed subsidiaries/Unlisted subs and SYMC. Actual number could be slightly different due to inter-company transactions. SYMC reports on a CY basis (CY12=FY13); Mahindra CIE shifted to CY reporting from 2017. FY16 numbers for CIE are only for 9 months

The key contributors to losses in recent times are indicated below. Of these, losses in Mahindra USA (MUSA) SYMC, Gippsaero and Mahindra Aerospace among others are already taken care of. Hence, subsidiary losses are likely to be far lower henceforward than past trend. If we eliminate losses of these businesses, FY20 subsidiary losses reduce by INR29 per share.

Financials of select subsidiaries where M&M has already taken the hard decisions (in INR mn)* Subsidiary FY2019 FY2020

Revenue Equity Interest PAT (proportionate Revenue (@ Equity Interest PAT (proportionate (@ 100%) (%) interest) 100%) (%) interest) Gippsaero Pty Ltd. 618 88.9 -872 526 89.8 -960 Mahindra Aerospace Pvt Ltd. 24 88.9 -1,597 2 89.8 -2,867 Mahindra Tractor Assembly Inc 1,145 100.0 -2,430 523 100.0 -2,216 Mahindra USA Inc 23,181 100.0 -5,493 25,768 100.0 -5,071 Mahindra Automotive North 4,209 100.0 -1,571 4,135 100.0 -3,139 America Peugeot Motocycles SAS 8,358 51.0 -1,438 8,165 100.0 -2,444 Ssangyong Motor Company 2,30,320 74.7 -2,870 2,19,004 74.7 -15,400

Sub total -16,271 -32,097

Loss per share (INR) -14.7 -29.0

Consolidated reported PAT 60,169 -3,210

Reported EPS (INR) 54.3 -2.9

Conso. EPS ex subs losses 69.0 26.1 Source: Company, ACE Equity, CapitalLIne, Edelweiss Research; *We have assumed proportionate profitability of these subsidiaries. Actual number could be slightly different due to inter-company transactions. SsangYong reports on a CY basis. CY19=FY20

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Perception 4: UV business is struggling; franchise weakening Fact: Worst is behind; excessive harping on a small piece in overall scheme

We concede that M&M’s UV franchise has weakened considerably over the past decade due to a variety of reasons–change in consumer preference, regulation changes leading to marginalising the diesel–petrol arbitrage, inability to launch products that appease customers consistently. Its new launches failed to excite consumers, as a result, its market share has dipped sharply.

M&M's PV share – a full circle

20.0 60.0

16.0 55.0

12.0 50.0

(%) (%) 8.0 45.0

4.0 40.0

0.0 35.0

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 M&M PV market share Hyundai PV market share MSIL PV market share (RHS) Source: Company, SIAM, Edelweiss Research; FY21 is still December 2020

M&M – modelwise UV market share trend – new launches failed to click

Model FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 9MFY21 Alturas G4 NA NA NA NA NA NA 0.1 0.1 0.0 Bolero / Plus / Power Plus 20.1 20.4 18.2 13.9 9.1 9.3 9.0 6.3 5.8 KUV100 NA NA NA 2.4 4.7 2.8 1.3 0.2 0.0 Marazzo NA NA NA NA NA NA 2.6 1.3 0.4 Quanto 3.3 1.4 0.4 0.3 0.3 0.0 0.0 - - Rexton 0.3 0.4 0.2 0.0 0.0 0.0 0.0 - - Scorpio 9.4 9.7 9.3 8.2 6.5 5.9 5.1 4.1 3.6 Thar 1.3 1.5 1.6 1.5 0.8 0.8 0.7 0.2 0.7 TUV300 / Plus NA NA NA 4.1 3.5 3.2 2.1 1.2 - XUV300 NA NA NA NA NA NA 1.0 4.0 3.8 XUV500 8.6 5.7 6.2 6.2 3.5 2.8 2.8 1.3 0.8 Xylo 4.5 2.7 1.5 1.2 0.9 0.8 0.6 0.2 - M&M UV market share 47.7 41.8 37.5 37.9 29.3 25.4 25.2 19.0 15.2 UVs as % of domestic PV sales 20.7 21.0 21.2 21.0 25.0 28.0 27.8 34.0 38.1 Source: Company, SIAM, Edelweiss Research

At the same time, M&M was in investment mode as the company had to develop its own gasoline engines (traditionally, M&M was a diesel engine player). As a result, its capex/R&D spends kept rising.

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Trend in R&D expense - M&M versus select peers*

FY15 FY16 FY17 FY18 FY19 FY20 CAGR (%) Maruti Suzuki** in INR mn 33,134 38,378 44,884 48,668 52,111 45,812 6.7 % of sales 6.7 6.7 6.6 6.1 6.1 6.1

M&M in INR mn 15,337 18,859 20,758 19,919 26,419 29,750 14.2 % of sales 3.7 4.2 4.3 4.0 4.8 6.3

Tata Motors (S) in INR mn 22,043 22,171 21,002 23,975 29,653 30,972 7.0 % of sales 6.1 5.2 4.4 4.2 4.3 7.1

Ashok Leyland in INR mn 1,967 2,797 3,849 4,525 6,581 6,734 27.9 % of sales 1.4 1.4 1.8 1.7 2.3 3.9 Source: Company, Edelweiss Research; *R&D expense = Capitalised + Expensed spend; **R&D spend is also inclusive of royalty to Suzuki Corp

However, we believe the worst is behind with BSVI transition. Also, M&M has changed its strategy (rather going back to that of 2000-10) from gaining market share to launching products where it can command a premium. Thar is the first of the many products lined up in pursuit of the renewed strategy.

Also, as discussed in Outlook and Valuation section, in the SOTP we are assigning a negative value of 36% of our TP to the UV business and its loss making subsidiaries. Hence, the risks are adequately factored in. More importantly, despite the EBIT loss (excluding of spare business) in UV business, M&M continues to generate FCF. As the UV business profitably gains market share, it will be an added lever for stock price performance.

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The way ahead

Volume outlook - Expect across the board improvement

FY18 FY19 FY20 FY21E FY22E FY23E Total Sales 8,66,521 9,39,032 7,77,953 7,21,174 8,99,496 9,80,837 % YoY 10.7 8.4 (17.2) (7.3) 24.7 9.0 PVs 2,48,859 2,54,377 1,86,972 1,59,339 2,29,178 2,54,034 % YoY 1.5 2.2 (26.5) (14.8) 43.8 10.8 CVs 2,17,448 2,48,925 1,99,136 1,77,167 2,38,134 2,66,710 % YoY 17.4 14.5 (20.0) (11.0) 34.4 12.0 3 Wheeler 54,625 66,699 62,187 21,765 32,648 36,566 % YoY 4.4 22.1 (6.8) (65.0) 50.0 12.0 Tractors 3,01,934 3,16,742 2,91,901 3,32,767 3,59,389 3,77,358 % YoY 21.5 4.9 (7.8) 14.0 8.0 5.0 Exports 43,655 52,289 37,757 30,135 40,147 46,169 % YoY (15.8) 19.8 (27.8) (20.2) 33.2 15.0 Source: Company, Edelweiss Research

Tractors

While the best of the current tractor cycle (in terms of YoY growth) is behind, demand outlook remains stable. We base on premise on strong linkages of demand with reservoir levels, stable crop prices and revival in infrastructure activities. Hence, the outlook remains positive. We are factoring 8%/5% volume growth in FY22/23.

Trend in PV and Tractor volume growth

45.0

30.0

15.0 (%) 0.0

-15.0

-30.0

FY07 FY12 FY20 FY01 FY02 FY03 FY04 FY05 FY06 FY08 FY09 FY10 FY11 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY21

PV volume growth Tractor volume growth

Source: SIAM, Crisil, Edelweiss Research; FY21 is till December 2020

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Tractor sales closely linked to reservoir levels… …and agri GDP*

55.0 850 42.0 24.0

47.0 700 28.0 18.0

39.0 550 14.0 12.0

(%) (%) 31.0 400 (%)

(in 000 units) 000 units) (in 0.0 6.0 23.0 250 -14.0 0.0 15.0 100

-28.0 -6.0

FY02

FY04

FY06

FY08

FY10

FY12

FY14

FY16

FY18

FY20

FY01

FY03

FY05

FY07

FY09

FY11

FY13

FY15

FY17 FY19 Tractor Volumes (RHS) FY21 Current storage as % full reservoir level Tractor (% YoY) Nominal agri GDP growth (RHS)

Source: CMIE, Crisil, Edelweiss Research Source: CMIE, Crisil, Edelweiss Research: FY21 tractor volumes are till December; FY21 nominal agri GDP is government forecast LCVs

LCV revival generally lags MHCV by a few quarters. However, the pace of revival is largely similar to M&HCV. In the current covid-induced scenario, there seems be certain structural shift in consumer behaviour leading to faster penetration of hub and spoke model. This can spur faster revival in LCVs compared to past trend. We estimate 34%/12% volume growth in FY22/23.

LCV versus M&HCV volume growth trend

50.0

25.0

0.0 (%) -25.0

-50.0

-75.0

FY02 FY04 FY01 FY03 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

LCV M&HCV

Source: SIAM, Company, Edelweiss research; FY21 is till December 2020

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More importantly, M&M has been able to hold its turf in the 2.0-3.5t segment, whose share has been on the rise. Post the covid-induced consumer behaviour change, we expect the trend to sustain.

M&M’s LCV market share (goods carriers) – holding onto its turf

Particulars FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 9MFY21 M&M’s LCV truck market share (%) upto 2 tonne 22.9 21.5 16.1 17.5 11.6 22.8 22.1 20.2 22.6 20.3 20.8 - 2 - 3.5T 74.3 66.4 54.0 63.9 73.3 69.1 65.9 61.9 62.7 65.3 60.4 - 3.5-6T - - - - 10.7 11.8 12.4 10.9 14.1 12.7 6.7 - 6-7.5 T ------0.0 Total market share 32.8 30.9 30.0 39.1 43.6 46.8 46.0 41.8 41.3 42.6 42.4 Industry mix (%) upto 2 tonne 60.6 61.0 51.9 42.9 39.0 34.5 32.1 35.4 41.7 40.1 35.5 - 2 - 3.5T 25.5 26.8 39.9 49.6 52.5 55.1 57.8 54.7 49.6 51.8 57.6 - 3.5-6T 10.9 9.3 5.8 5.0 5.6 6.7 6.7 6.6 5.7 5.2 3.5 - 6-7.5 T 3.0 3.0 2.3 2.5 2.9 3.6 3.4 3.3 3.1 2.9 3.4 Source: SIAM, Company, Edelweiss Research

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UVs

After persistent market share loss and lacklustre new product performance, we believe M&M is focusing on absolute volumes rather than market share. Its focus now is on launching right products where it can command brand recall and pricing power. The final objective being gaining market share by pull rather than push demand. Having said that, the competitive intensity in the UV segment is likely to stay elevated, reflected in a series of new launches as well as upgrades.

Select upcoming UV launches*

Expected # OEM UV name Launch period Price (INR 000s)

1 Honda New Jazz Q4FY21 800 -1,200 2 Skoda Kodiaq (Petrol) Q4FY21 3,300-3,600 3 Tata Safari Q4FY21 1,800-2,000 4 Force Gurkha Q4FY21 800-1,200 5 M&M New TUV300 Q4FY21 600 - 900 6 M&M XUV500 (W601) Q4FY21 1,300-2,000 7 M&M XUV400 (S204) Q4FY21 1,100-1,400 8 Maruti Jimny Q4FY21 700-1,100 9 MG ZS Q4FY21 1,000-1,700 10 Renault Kiger Q4FY21 600-800 11 VW Taigun Q4FY21 1,000-1,600 12 Kia Sportage Q1FY22 2,200-2,700 13 Citroen C5 Aircross Q1FY22 2,500-3,200 14 Haval H6 Q1FY22 1,500-2,000 15 M&M New Scorpio (Z101) Q1FY22 1,000-1,400 16 Skoda Kamiq Q1FY22 1,500-2,000 17 Hyundai Creta (7 seater) Q1FY22 1500-1800 18 Skoda Kushaq Q1FY22 1,000-1,500 19 Tata HBX Q1FY22 500-800 20 Kia Sorento Q2FY22 2,200-2,600 21 Maruti Grand Vitara Q2FY22 2,100-2,400 Source: Media articles, Edelweiss Research; * Collated from media articles and not necessarily confirmed by OEMs. Actual launch date/price may wary

Worth noting is that PV demand has failed to track per capita GDP growth in the last decade. We do recognise that on annual basis the demand is cyclical.

GDP per capita and PV volume growth - 5 year CAGR trend

CAGR (%) FY00-05 FY05-10 FY10-15 FY15-20 GDP per capita 8.1 13.2 12.6 9.0 Domestic PV volumes 6.7 13.0 5.9 1.3 Source: SIAM, CMIE, Edelweiss Research

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GDP per capita and PV volume growth* 24.5 36.0

18.0 18.0

11.5

0.0

(%) (%) 5.0

-18.0 -1.5

-8.0 -36.0

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 GDP per capita growth PV volume growth (RHS)

Source: CMIE, SIAM, Edelweiss Research; *FY21 volumes are still December 2020; FY21 GDP per capita is based on government forecast for FY21 GDP

What works in favour of M&M is sustained demand shift towards UVs. Given its lineage in the UV space, the company has the chance to come back. The precedent of transition and a strong comeback has already been set by Tata Motors.

UV market share in the PVs on the rise 1000 45.0

800 38.0

600 31.0 (%)

400 24.0 (Units 000s) in (Units

200 17.0

0 10.0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

Domestic UV sales UV market share (RHS)

Source: SIAM, Edelweiss Research; FY21 is till December 2020

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TML’s resurgent volume growth…. …coupled with profitability provides a precedent

75000 5.0 10.0 5.0

60000 -1.0 8.0 -1.0

45000 -7.0 6.0 -7.0

(%)

(%) (%) (units) 30000 -13.0 4.0 -13.0

15000 -19.0 2.0 -19.0

0 -25.0 0.0 -25.0

Q1FY20

Q2FY20

Q3FY20

Q4FY20

Q1FY21

Q2FY21

Q1 FY19 Q1

Q2 FY19 Q2

Q3 FY19 Q3

Q4 FY19 Q4

Q1FY20

Q2FY20

Q3FY20

Q4FY20

Q1FY21

Q2FY21

Q1 FY19 Q1

Q2 FY19 Q2

Q3 FY19 Q3 Q4 FY19 Q4 TML volumes PV market share Standalone EBITDA margin - PV segment (RHS) Standalone EBITDA margin - PV segment (RHS) Source: Company, Edelweiss Research, Bloomberg Source: Company, Edelweiss Research, Bloomberg

Capex and capital allocation

With a large proportion of transitional capex (BSVI) behind, we expect capex intensity to slowdown. Hereon, capex will more likely be towards new product development. Compared to earlier guidance of INR120bn over three years, M&M has already scaled down capex guidance to INR90bn over three years; we expect actual figure to be even lower than this. The new capex is marginally higher than its depreciation charge.

On the investment front, M&M’s approach towards 18% RoE hurdle rate as well as classification of entire investment book in Category A, B, and C and impairment of existing investments are now well known. More importantly, we are enthused by some of the recent decisions taken by the management of not pursuing a few opportunities as they failed to meet the company’s hurdle rate.

Capital allocation decisions – walking the talk Period Company Activity FY20 PAT (INRmn) Q4FY21 Mahindra Automotive North America (MANA) In USA cut more than half of the workforce due to Covid-19 pandemic -3,139 Q3FY21 Pininfarina Engineering Liquidated the company citing strategic irrelevance -1,296 Q2FY21 Gippsaero Exited Gippsaero and took an impairment of INR11bn -1,069 Q1FY21 MANA Decided not to invest in USA Postal Service business -3,139 Q4FY20 SsangYong Motors Impairment of ~INR21bn taken at SsangYong. Decided to stop further -20,630 investments Q4FY20 GenZe* Impairment of ~INR6bn taken GenZe. Decided to shut down GenZe. -2,216 Source: Company, media reports, Edelweiss Research; *Reported loss of the subsidiary

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While M&M is yet to indicate the outlay towards investments, we expect it to be largely funded by investment income (dividend plus capital receipt from monetisation of assets). We expect overall annual investment outlay to be restricted to INR10bn per annum. Also, M&M has identified certain businesses where it will focus on creating value.

Asset monetisation – rising contribution to support future investment activities

FY15 FY16 FY17 FY18 FY19 FY20 Subsidiary Dividend 2,727 4,170 5,994 4,862 8,890 10,071 Subsidiary disposal / stake reduction 940 248 1,058 11,606 7,085 1,084 Total 3,667 4,418 7,052 16,468 15,975 11,155 % of total Assets 1.0 1.1 1.7 3.3 2.9 2.2 Source: Company, Edelweiss Research

Identified potential value creators for the current decade

Company Industry / segment FY2020 Revenue (INR mn) PAT (INR mn) Mahindra Susten Pvt Ltd. Clean Energy 22,310 200 Mahindra Rural Housing Finance Rural & Financial Services 15,280 1490 Agri Sector (includes Mahindra Shubhlabh Services) Rural & Financial Services 12,770 -510 Powerol Infra & Technology 15,170 1020 Accelo Group Infra & Technology 13,610 260 Bristlecone Group Infra & Technology 7,010 400 Aftermarket Group (includes Mahindra First Choice) Mobility 4,910 -390 Classic Legends Mobility 4,110 -60 Electric Mobility 2,790 -550 Shared mobility Mobility 5,060 -140 Sub total 1,03,020 1,720 M&M Consolidated 9,51,791 -3,210 % of total 10.8 NA Source: Company, Edelweiss Research

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Outlook and valuation

With management’s various restructuring efforts, we expect losses in unlisted subsidiaries to reduce significantly. For instance, if we eliminate losses of SYMC, MUSA, Gippsaero and MANA (among others) from FY20, subsidiary losses reduce by INR29/share. With efforts to improve profitability across subsidiaries, losses can be completely wiped off by FY24.

Financials of select subsidiaries (in INR mn)* Subsidiary FY2019 FY2020

Revenue (@ Equity Interest PAT (proportionate Revenue (@ Equity Interest PAT (proportionate 100%) (%) interest) 100%) (%) interest) Gippsaero Pty Ltd. 618 88.9 -872 526 89.8 -960 Mahindra Aerospace Pvt Ltd. 24 88.9 -1,597 2 89.8 -2,867 Mahindra Tractor Assembly Inc 1,145 100.0 -2,430 523 100.0 -2,216 Mahindra USA Inc 23,181 100.0 -5,493 25,768 100.0 -5,071 Mahindra Automotive North 4,209 100.0 -1,571 4,135 100.0 -3,139 America Peugeot Motocycles SAS 8,358 51.0 -1,438 8,165 100.0 -2,444 Ssangyong Motor Company 2,30,320 74.7 -2,870 2,19,004 74.7 -15,400

Sub total -16,271 -32,097

Loss per share (INR) -14.7 -29.0

Consolidated reported PAT 60,169 -3,210

Reported EPS (INR) 54.3 -2.9

Conso. EPS ex subs losses 69.0 26.1 Source: Company, ACE Equity, CapitalLIne, Edelweiss Research; * Subsidiaries considered are those where M&M has already announced plans to restructure or shutter them. We have assumed proportionate profitability of these subsidiaries. Actual number could be slightly different due to inter-company transactions. SsangYong reports on a CY basis. CY19=FY20

As a result, we expect true value of its tractor and CV franchises to be recognised by investors. Given its strong tractor franchise (comparable to MSIL’s PV franchise) and current demand cycle, we believe it should trade at similar valuation as MSIL. However, we are giving ~15% discount to our MSIL core PE multiple of 36x. Similarly, its LCV franchise’s valuation is comparable to Ashok Leyland (AL). However, we ascribe ~20% discount to AL’s PER. The primary reason of the discounts being relatively inefficient use of FCF of these businesses for nurturing the UV business.

We are ascribing a negative value (~36% of TP) to M&M’s UV franchise/ unlisted subsidiaries due to their sub-par ROIC, thereby adequately factoring in risks. There is a potential of positive surprise as these two ROIC drags start contributing.

We maintain our holdco discount for listed subsidiaries at 30%.

Hence, we revise up our current target PER from 16x to 20x as raise our FY22E and FY23E core EPS 18% and 15% respectively. We maintain ‘BUY/SO’ with a revised TP of INR1,009 (earlier INR721).

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Implicit 36% discount to fair value due to subpar UV business and unlisted subsidiaries*

June Revenue EBITDA EBITDA Core PAT Core 2022E Particulars (June 2022E) (INR mn) margin (INR mn) (INR mn) EPS PER Value Comment Tractors 2,06,798 21.0 43,428 27,070 22.7 30 682 At 15% discount to MSIL LCVs 1,35,702 13.5 18,320 9,643 8.1 25 202 At 20% discount to AL UVs 1,96,693 4.9 9,567 (4,742) -4.0 0 - ROIC drag Spares and others 35,437 25.0 8,859 6,627 5.6 25 139 - Total (A) 5,74,629 14.0 80,174 39,353 33.0 31 1,023 Business value as per franchise benchmarking

Value at target PE of 20x (B) 661 Discount for UV/unlisted subsidiaries (INR) (C= B-A) (362) RoIC drag, hence ascribing a negative value Discount for UV/unlisted subsidiaries (%) (C/A-1) -35.9 Source: Edelweiss research; *In-order to maintain like to like comparison with valuation methodology, financials of business segments have also been pro-rated to three quarters of FY22 and one quarter of FY23

SoTP valuation - revise multiple from 16x to 20x Value/Mcap M&M holding CMP Value/share Basis of valuation (INR mn) (%) (INR) on CMP (INR) Investment in listed companies Tech Mahindra CMP 2,55,480 26.7 997 231 MMFSL CMP 54,072 51.2 171 49 Mahindra Lifespace Developers CMP 10,312 51.1 390 9 Mahindra Holidays and Resorts CMP 18,607 67.5 207 17 Mahindra CIE CMP 10,966 17.3 168 10 Swaraj Engines CMP 5,291 33.2 1,310 5 Mahindra Logistics CMP 20,864 58.8 499 19 Sub-total 339 Investments valued at 30% discount 237 Core EPS (Jun2022E) 33.0 P/E 20 Core business 661 Cash per share 111 Target price (INR) 1,009 Source: Company, Edelweiss Research

Change in earnings estimate

New Old Change (%) Comment FY21E FY22E FY23E FY21E FY22E FY23E FY21E FY22E FY23E Total volumes 7,21,174 8,99,496 9,80,837 7,50,288 8,94,401 9,76,623 -3.9 0.6 0.4 YoY(%) (7.3) 24.7 9.0 (3.6) 19.2 9.2 Revenue (INR mn) 4,48,164 5,53,278 6,06,007 4,41,052 5,11,714 5,60,844 1.6 8.1 8.1 Better mix and pricing EBITDA 69,465 78,012 86,659 64,835 70,105 79,640 7.1 11.3 8.8 Margin improvement driven by better revenues as well as strong cost focus EBITDA margin 15.5 14.1 14.3 14.7 13.7 14.2 PAT 42,245 49,227 55,684 39,343 43,675 50,561 7.4 12.7 10.1 Core PAT 31,758 38,006 43,394 29,022 32,100 37,874 9.4 18.4 14.6 Source: Edelweiss Research

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Company Description Mahindra & Mahindra (M&M) operates through various segments—automotive (sales of UVs/CVs and 3Ws, spare parts and related services); farm equipment (tractors, spare parts and related services); financial services (services related to financing, leasing and hire purchase of automobiles and tractors); steel trading & processing; infrastructure; hospitality, IT services and telecom

It also acquired majority (~75%) stake in Korea-based Ssangyong Motors Company in FY11 to become a global SUV company. Investment Theme Key reasons for M&M losing market share in UVs in recent years are: (a) failure to cash in on the strong demand for compact SUVs & crossovers; and (b) subdued volume performance of it launches. However, we expect this business to get back on track given the company's strong focus on addressing product gaps and refreshes & petrol variants launch across its portfolio. Moreover, the tractor business is in a sweet spot and well placed to benefit from robust industry demand and sustain market share gains, riding new launches and network expansion.

Finally, M&M has also started to consistently deliver on reducing its subsidiary losses – a key ROIC drag. As these losses come down, we expect valuations to receive a further boost Key Risks Losses in unlisted subsidiaries: M&M has ventured into businesses like 2Ws, etc., and is incurring losses at operational level. In the event of failure to turn around the business, the company might have to infuse more capital in drag performance of its core business.

Managing a complex group structure: M&M is a conglomerate with interests in automotive, farm equipment, real estate, tech services, and hospitality, among others. Managing this complex structure could divert focus from the core business and could pose execution risks.

UV market share: M&M needs to realign itself with the changing customer profile. With limited success of its recent launches – Marazzo, Alturas G4, it become critical for M&M to get its new launches right and start gaining market share.

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Additional Data Management Holdings – Top 10* Chairman Anand Mahindra % Holding % Holding MD & CEO Dr Pawan Goenka LIC 8.68 Kuwait Invst 1.39 First State 3.68 Govt Pension 1.38 Dep MD & CFO Dr Anish Shah SBI Funds 2.89 NPS Trust 1.28 Other ICICI Pru 2.41 Republic of Sin 1.16 Auditor E&Y ICICI Pru Life 1.54 SBI Life 1.13

*Latest public data

Recent Company Research Recent Sector Research Date Title Price Reco Date Name of Co./Sector Title Continues to take tough calls ; Weak product cycle takes a toll; 01-Jan-21 721 Buy 28-Jan-21 Maruti Suzuki Company Update Result Update Stellar performance; walking the Weak product cycle takes a toll; 09-Nov-20 620 Buy 28-Jan-21 Maruti Suzuki talk ; Result Update Result Update Sharpening RoE focus; Company Demand energising, margins 17-Aug-20 623 Hold 18-Dec-20 Exide Industries Update charging up; Company Update

Rating Interpretation Daily Volume

TP 40 1000 919 TP 873 32 850 TP 721 TP 700 617 TP 24 (INR) 559

550 (Mn) 16

400 8 250 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 0 MM IN Equity Buy Hold Reduce Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20

Source: Bloomberg, Edelweiss research Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage Rating Rationale

Buy Hold Reduce Total Rating Expected absolute returns over 12 months

Rating Distribution* 163 64 14 241 Buy: >15%

>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%

Market Cap (INR) 185 59 7 251 Reduce: <-5% * stocks under review

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Participants in foreign exchange transactions may incur risks arising from several factors, including the following: ( i) exchange rates can be volatile and are subject to large fluctuations; ( ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government imposed exchange controls which could affect the value of the currency. Investors in securities such as ADRs and Currency Derivatives, whose values are affected by the currency of an underlying security, effectively assume currency risk. Research analyst has served as an officer, director or employee of subject Company: No ESL has financial interest in the subject companies: No ESL’s Associates may have actual / beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report. Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No ESL has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No Subject company may have been client during twelve months preceding the date of distribution of the research report. There were no instances of non-compliance by ESL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years except that ESL had submitted an offer of settlement with Securities and Exchange commission, USA (SEC) and the same has been accepted by SEC without admitting or denying the findings in relation to their charges of non registration as a broker dealer. A graph of daily closing prices of the securities is also available at www.nseindia.com Analyst Certification: The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

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MAHINDRA & MAHINDRA

Additional Disclaimers

Disclaimer for U.S. Persons This research report is a product of Edelweiss Securities Limited, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by Edelweiss Securities Limited only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, Edelweiss Securities Limited has entered into an agreement with a U.S. registered broker-dealer, Edelweiss Financial Services Inc. ("EFSI"). Transactions in securities discussed in this research report should be effected through Edelweiss Financial Services Inc.

Disclaimer for U.K. Persons The contents of this research report have not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000 ("FSMA").

In the United Kingdom, this research report is being distributed only to and is directed only at (a) persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA (Financial Promotion) Order 2005 (the “Order”); (b) persons falling within Article 49(2)(a) to (d) of the Order (including high net worth companies and unincorporated associations); and (c) any other persons to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”).

This research report must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this research report relates is available only to relevant persons and will be engaged in only with relevant persons. Any person who is not a relevant person should not act or rely on this research report or any of its contents. This research report must not be distributed, published, reproduced or disclosed (in whole or in part) by recipients to any other person.

Disclaimer for Canadian Persons This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research analysts' business or relationship with a subject company or trading of securities by a research analyst.

This report is intended for distribution by ESL only to "Permitted Clients" (as defined in National Instrument 31-103 ("NI 31-103")) who are resident in the Province of Ontario, Canada (an "Ontario Permitted Client"). If the recipient of this report is not an Ontario Permitted Client, as specified above, then the recipient should not act upon this report and should return the report to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any Canadian person.

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Disclaimer for Hong Kong persons This report is distributed in Hong Kong by Edelweiss Securities (Hong Kong) Private Limited (ESHK), a licensed corporation (BOM -874) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to Section 116(1) of the Securities and Futures Ordinance “SFO”. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The report also does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual recipients. The Indian Analyst(s) who compile this report is/are not located in Hong Kong and is/are not licensed to carry on regulated activities in Hong Kong and does not / do not hold themselves out as being able to do so.

Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved.

Aditya Narain Head of Research [email protected]

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