18 April 2018 INDIA | AUTOMOBILES | COMPANY UPDATE MAHINDRA & MAHINDRA M&M 3.0: The NEW is coming At the cusp of a market Undisputed leadership 50% market share share recovery in PVs in tractors in SCVs 18 April 2018 INDIA | AUTOMOBILES | COMPANY UPDATE TABLE OF CONTENTS Introduction 3 Key charts 4 Industry Overview 5 - Snapshot: Passenger Vehicle Industry 5 - Snapshot: Utility Vehicles Segment 6 - New definition of 'success': 4K monthly sales! 7 New vehicles to be launched by M&M 8 Compact SUVs: ‘Highest Volume + Fastest Growing’ segment in SUVs 9 - S201/ Tivoli to be the backbone of Mahindra 3.0 10 - Positioning of M&M S201 11 Premium SUVs: ‘low volume but high value’ 12 - G4 Rexton 13 - Positioning of G4 Rexton 14 MPVs: Smart ‘Family’ UVs 15 - Positioning of M&M U321 16 New models to drive M&M's sales 17 - Model-wise volume projections 17 Market leader in SCV segment 18 Undisputed leader in the tractor segment 20 Financial Tables 21 RECENT REPORTS RURAL SAFARI VII INDIA REAL ESTATE INDIA CEMENT INDIA PHARMA INDIA SPECIALTY CHEMICALS JM Financial Institutional Securities Limited Page 2 18 April 2018 INDIA | AUTOMOBILES | COMPANY UPDATE Mahindra & Mahindra (MM IN) M&M 3.0: The NEW is coming M&M 3.0 is the most crucial and promising M&M 3.0: There have been phases for almost all PV players in India. Maruti revamp for M&M (UVs), for it has lost Suzuki (MSIL), for example, struggled with the ‘compact car player’ tag for long, significant market share in its core segment, making multiple unsuccessful attempts to establish itself in higher price brackets. However, in its new avatar, Maruti 2.0, it has shed that image and UVs. successfully emerged as a mid-size player. It is fair to say M&M already witnessed In FY12, M&M had the lion’s share of the 2.0 during the Scorpio and XUV500 launches and the subsequent years of their utility vehicle (UV) segment in India. Its success. Even today, these models are continuing with reasonable volumes and are due for a refresh. However, M&M 3.0 is not about incremental refreshes dominant position was a combination of but a transformational change in product design and addition of new legacy advantages and product innovation. products that carry a ‘soft’ appeal (attuned for urban customers). As per M&M has enjoyed a great run, from making management, the new models will be feature-loaded products, offering Commander (Jeep) to the overly successful exciting driving performance. The product offensive being readied by M&M is Bolero, and then playing the masterstroke similar to Maruti 2.0, both in terms of the number of new launches and with the Scorpio and XUV500. However, with seriousness (towards an ambition). some not-so-successful launches in between, What is important for success? Being an established home-grown player, M&M’s market share declined to 25% in M&M does not suffer from the traditional disadvantages faced by foreign OEMs FY18 (in UVs). in India, including a thinly spread network, concern on after-sales service, availability of spare parts, etc. Instead, it starts with multiple Nonetheless, the winds of change are visible (relative) advantages. Hence, its success solely depends on the product, price again. M&M is readying a portfolio of positioning and sales aggression. In this report, we have tried to study revamped existing models and multiple new competition, possible price positioning for M&M models (basis competition models to plough back market share in the and M&M’s product portfolio) and based on that, likely sales performance. Our fast-growing UV segment. New models and study indicates that each successful product has garnered 9-13% market share an upgrade of sales network; signal concerted in the UV segment, in the past. With high growth and base of UV sales, this efforts to provide an all-round customer range today stands at 5-8%. experience and gain traction in the urban Sweet timing of ‘urban’ launches with positive rural sentiment: The Government market. of India’s (GOI)’s rural impetus has put more money in the hands of the rural M&M is a sizeable no. 3 player in India. population. Also, the expectation of a normal monsoon has improved consumption sentiment. This is already visible in the sales of M&M’s existing, Although its ranking may not rise or fall, with new mainstay UV models, Bolero and Scorpio. General elections in 2019 are also likely products, it is on the road to recovery in the PV to provide a fillip to UV sales, as seen in the past. We reiterate BUY with a revised segment. TP of INR 960 (14x Mar’20 PER core business + INR 346 value of investment in subsidiaries/associates). Recommendation and Price Target Financial Summary (INR mn) Current Reco. BUY Y/E March FY16A FY17A FY18E FY19E FY20E Previous Reco. BUY Net Sales 4,08,754 4,37,853 4,83,196 5,67,634 6,60,887 Current Price Target (12M) 960 Sales growth (%) 7.3 7.1 10.4 17.5 16.4 Upside/(Downside) 18.6% EBITDA 46,202 47,693 60,806 74,662 88,293 Previous Price Target 840 EBITDA (%) 11.3 10.9 12.6 13.2 13.4 Adjusted net profit 31,361 34,072 38,737 47,438 56,391 Change 14.3% EPS (INR) 52.9 57.4 32.6 40.0 47.5 EPS growth (%) 14.4 8.5 -43.2 22.5 18.9 Key Data – MM IN ROIC (%) 0.0 29.3 33.6 38.4 40.9 Current Market Price INR809 ROE (%) 14.3 14.2 14.3 15.6 16.3 Market cap (bn) INR1,006.2/US$15.3 PE (x) 15.3 14.1 24.8 20.2 17.0 Price/Book Value (x) 2.1 1.9 3.4 3.0 2.6 Free Float 81% EV/EBITDA (x) 20.7 20.4 15.9 12.9 10.8 Shares in issue (mn) 1,187.2 Dividend Yield (%) 1.5 1.6 0.9 0.9 0.9 Diluted share (mn) 1,187.2 3-mon avg daily val (mn) INR1,892.7/US$28.8 Source: Company data, JM Financial. Note: Valuations as of 17/Apr/2018 52-week range 819/612 JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters S&P Capital Sensex/Nifty 34,395/10,549 IQ and FactSet INR/US$ 65.6 You can also access our portal: www.jmflresearch.com Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Price Performance Certification. % 1M 6M 12M Absolute 9.3 17.9 27.5 Vivek Kumar Vaikam Kumar We acknowledge the support Relative* 5.4 11.7 9.1 [email protected] [email protected] services of Jayesh Chandra Gupta in Tel: (91 22) 6630 3019 Tel: (91 22) 6630 3018 the preparation of this report. * To the BSE Sensex JM Financial Institutional Securities Limited Page 3 Mahindra & Mahindra 18 April 2018 Key Charts Exhibit 1. Passenger Vehicle Segment-wise share Exhibit 2. India’s UV to PV ratio is still below some other major markets 9% 9% 9% 8% 7% 6% 6% 6% 13% 14% 21% 21% 21% 21% 25% 28% 79% 77% 70% 71% 72% 73% 69% 66% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Cars UV Vans Source: JM Financial, SIAM Source: Company, JM Financial Exhibit 3. Rising share of SUVs within UVs Exhibit 4. Compact SUV most dominant sub-segment now 12% 11% 19% 19% 24% 9% 28% 11% 13% 34% 27% 35% 81% 76% 72% 46% 51% 32% FY16 FY17 FY18 FY16 FY17 FY18 SUVs MPVs CSUVs Mid SUVs Premium SUVs Bolero Source: JM Financial Source: JM Financial Exhibit 5. M&M volume estimate (domestic, ‘000 units) Exhibit 6. Domestic monthly sales of M&M PVs (‘000 units) 400 378 31.5 20 350 40 311 26.0 300 18 56 35 250 20.7 19.7 200 150 261 236 248 255 100 50 0 FY17 FY18 FY19E FY20E Existing Models S201 U321 New G4 FY17 FY18 FY19E FY20E Source: JM Financial,SIAM Source: JM Financial JM Financial Institutional Securities Limited Page 4 Mahindra & Mahindra 18 April 2018 Industry Overview Snapshot: Passenger Vehicle Industry The domestic passenger vehicle industry is divided into three segments: a) passenger cars, b) utility vehicles and c) vans. Passenger car segment (including hatchbacks and sedans) is the mainstay of the domestic auto industry, with a 2/3 share of the passenger vehicle market. In FY12, its share was close to 3/4, with a little over 20% held by utility vehicles and vans combined. In FY12, M&M, Toyota and Tata Motors commanded ~90% of the utility vehicles market with mid/full-size utility vehicles. Since FY13, the utility vehicles segment has been on an uptrend driven by the introduction and customer acceptance of compact utility vehicles, primarily led by MSIL (Ertiga) and Renault (Duster), followed by the launch of the highly successful Compact SUV Ford Ecosport. Exhibit 7. Segment wise growth in PVs Domestic PV Industry ('000 units) FY12 FY18 6yr-CAGR Remarks Passenger Cars – PCs (A) 2,030 2,173 1% UV segment has outperformed Utility Vehicles – UVs (B) 365 922 17% other segments by a wide margin. Vans (C) 235 192 -3% Passenger Vehicles 2,629 3,273 4% Source: JM Financial, SIAM Exhibit 8. Segment-wise share Exhibit 9. India’s UV to PV ratio is still below some other major markets 9% 9% 9% 8% 7% 6% 6% 6% 13% 14% 21% 21% 21% 21% 25% 28% 79% 77% 70% 71% 72% 73% 69% 66% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Cars UV Vans Source: JM Financial, SIAM Source: Company, JM Financial Although there has been a significant increase in the share of the utility vehicles in the domestic market, with respect to some of the major markets, India’s UV to PV ratio is still far behind.