101000860 a project report on fundamental analysis of mahindra amp mahindra company

7/27/2019 101000860 a Project Report on Fundamental Analysis of Mahindra Amp Mahindra Company

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FUNDAMENTAL ANALYSIS OF MAHINDRA&MAHINDRA

vehicles (LCVs). The company later expanded its

operations from automobiles and tractors to secure a

significant presence in many more important sectors. The

company has, over the years, transformed itself into a

Group that caters to the Indian and overseas markets

with a presence in vehicles, farm equipment, information

technology, trade and finance related services, and

infrastructure development. Mahindra & Mahindra Ltd

(M&M) is a leading player in the Indian utility vehicles andtractors segment with market shares of 49.5% in Jeeps /

MUVs, 30.9% in 3-wheelers, and market share of 25.9% in

Tractors in the FY2005.

This study tries to cover the industry related data

and in depth company study and an overview of the

economy, evaluates the company on various valuation

models.

Babasabpatilfreepptmba.com 2


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THEORETICAL BACKGROUND

FUNDAMENTAL ANALYSIS:

Fundamental analysis is the examination of the

underlying forces that affect the well being of the

economy, industry groups, and companies. As with most

analysis, the goal is to derive a forecast and profit from

future price movements. At the company level,

fundamental analysis may involve examination of financialdata, management, business concept and competition. At

the industry level, there might be an examination of supply

and demand forces for the products offered. For the

national economy, fundamental analysis might focus on

economic data to assess the present and future growth of

the economy. To forecast future stock prices, fundamental

analysis combines economic, industry, and company

analysis to derive a stock's current fair value and forecast

future value. If fair value is not equal to the current stock

price, fundamental analysts believe that the stock is either

over or under valued and the market price will ultimately

gravitate towards fair value. Fundamentalists do not heed

the advice of the random walkers and believe that markets

are weak form efficient. By believing that prices do not



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accurately reflect all available information, fundamental

analysts look to capitalize on perceived price

discrepancies.

STRENGTHS AND WEAKNESS OF FUNDAMENTAL

ANALYSIS

Long-term Trends:

Fundamental analysis is good for long-term

investments based on long-term trends, very long-term.

The ability to identify and predict long-term economic,

demographic, technological or consumer trends can

benefit patient investors who pick the right industry groups

or companies.

Value Spotting:

Sound fundamental analysis will help identify

companies that represent good value. Some of the most

legendary investors think long-term and value. Graham

and Dodd, Warren Buffett and John Neff are seen as the

champions of value investing. Fundamental analysis can

help uncover companies with valuable assets, a strong

balance sheet, stable earnings and staying power.



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Business Acumen:

One of the most obvious, but less tangible, rewards of

fundamental analysis is the development of a thorough

understanding of the business. After such painstaking

research and analysis, an investor will be familiar with the

key revenue and profit drivers behind a company. Earnings

and earnings expectations can be potent drivers of equityprices. Even some technicians will agree to that. A good

understanding can help investors avoid companies that are

prone to shortfalls and identify those that continue to

deliver. In addition to understanding the business,

fundamental analysis allows investors to develop an

understanding of the key value drivers and companies

within an industry. Its industry group heavily influences a

stocks price. By studying these groups, investors can

better position themselves to identify opportunities that

are high-risk (tech), low-risk (utilities), growth oriented

(computer), value driven (oil), non-cyclical (consumer

staples), cyclical (transportation) or income oriented (high

yield).



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Knowing Who's Who:

Stocks move as a group. By understanding a

company's business, investors can better position

themselves to categorize stocks within their relevant

industry group. Business can change rapidly and with it the

revenue mix of a company. This happened to many of the

pure internet retailers, which were not really internet

companies, but plain retailers. Knowing a company'sbusiness and being able to place it in a group can make a

huge difference in relative valuations.

WEAKNESS

Time Constraints:

Fundamental analysis may offer excellent insights, but

it can be extraordinarily time consuming. Time-consuming



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models often produce valuations that are contradictory to

the current price.

Industry/Company Specific:

Valuation techniques vary depending on the industry

group and specifics of each company. For this reason, a

different technique and model is required for different

industries and different companies. This can get quite timeconsuming and limit the amount of research that can be

performed.

Subjectivity:

Fair value is based on assumptions. Any changes to

growth or multiplier assumptions can greatly alter the

ultimate valuation. Fundamental analysts are generally

aware of this and use sensitivity analysis to present a

base-case valuation, a best-case valuation and a worst-

case valuation. However, even on a worst case, most

models are almost always bullish, the only question is how

much so.



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Analyst Bias:

The majority of the information that goes into the

analysis comes from the company itself. Companies

employ investor relations managers specifically to handle

the analyst community and release information.

Introduction to Investment Valuation

Every asset, financial as well as real, has value. The

key to successfully investing in and managing these assets

lies in understanding not only what the value is, but the

sources of the value. Any asset can be valued, but some

assets are easier to value than others, and the details of

valuation will vary from case to case. Thus, the valuation

of a share of a real estate property will require different

information and follow a different format from the

valuation of a publicly traded stock. What is surprising;

however, is not the difference in valuation techniques

across assets, but the degree of similarity in basic

principles. There is undeniably uncertainty associated with

valuation. Often that uncertainty comes from the asset



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being valued, although the valuation model may add to

that uncertainty.

A PHILOSOPHICAL BASIS FOR VALUATION

A surprising number of investors subscribe to the

bigger fool theory of investing, which argues that the

value of an asset is irrelevant as long as there is a bigger

fool around who is willing to buy the asset from them.

While this may provide a basis for some profits, it is a

dangerous game to play, since there is no guarantee that

such an investor will still be around when the time to sell

comes.

A postulate of sound investing is that an investor does

not pay more for an asset than its worth. This statement

may seem logic and obvious, but it is forgotten and

rediscovered at some time in every generation and in

every market. There are those who are disingenuous



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enough to argue that value is in the eyes of the beholder,

and that any price can be justified if there are other

investors willing to pay that price. That is patently absurd.

Perceptions may be all that matter when the asset is a

painting or a sculpture, but investors do not (and should

not) buy most assets for aesthetic or emotional reasons;

financial assets are acquired for the cash flows expected

from owning them. Consequently, perceptions of value

have to be backed up by reality, which implies that theprice that is paid for any asset should reflect the cash

flows it is expected to generate. The models of valuation

described in this book attempt to relate value to the level

and expected growth of these cash flows.

There are many areas in valuation where there is

room for disagreement, including how to estimate true

value and how long it will take for prices to adjust to true

value. But there is one point on which there can be no

disagreement. Asset prices cannot be justified merely by

using the argument that there will be other investors

around willing to pay a higher price in the future.

THE ROLE OF VALUATION



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Valuation is useful in a wide range of tasks. The role it

plays, however, is different in different arenas. The

following section lays out the relevance in portfolio

management, in acquisition analysis, and in corporate

finance.

Valuation and Portfolio Management

The role that valuation plays in portfoliomanagement is determined in large part by the

investment philosophy of the investor. Valuation plays a

minimal role in portfolio management for a passive

investor, whereas it plays a larger role for an active

investor. Even among active investors, the nature and role

of valuation are different for different types of active

investors can be categorized as either market timers, who

trust in their abilities to foresee the direction of the overall

stock or bond markets, on security selection who believe

that their skills lie in funding under or over valued

securities. Market timers use valuation much less than do

investors who pick stocks, and the focus is on market

valuation rather than on firm specific valuation. Among

security selectors, valuation plays a central role in portfolio



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management for fundamental analysts and a peripheral

role for technical analysis.

The following subsections describe, in broad terms.

Different philosophies and the role played by valuation in

each.

Fundamental Analysts

The underlying theme in fundamental analysis is that

the true value of the firm can be related to its financial

characteristics- its growth prospects, prospects, riskprofile, and cash flows. Any deviation from this true value

is a sign that a stock is under or overvalued. It is a long-

term investment strategy and the assumptions underlying

it are that:

(a) The relationship between value and the underlying

financial factors can be measured.

(b) The relationship is stable over time.

( c ) Deviations from the relationship are corrected in a

reasonable time period.

Valuation is the central focus in fundamental analysis.

Some analysts usediscounted cash flow models to value

firms, while others use multiples such as price/earnings

and price/book value ratios. Since investors using this

approach hold a large number of "undervalued' stocks in



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their portfolios, their hope is that, on average, these

portfolios will do better than the market.

Franchise Buyers

The philosophy of a franchise buyer is best expressed

by an investor who has been very successful at it -Warren

Buffet. We try to stick to businesses we believe we.

Understand, Mr.Buffett writes. That means they must be

relatively simple and stable in character. If a business iscomplex and subject to constant change, we're not smart

enough to predict future cash flows. Franchise buyers

concentrate on a few businesses they understand well and

attempt to acquire undervalued firms. Often, as in the case

of Mr. Buffet, franchise buyers wield influence on the

management of these firms and can change financial and

investment policy. As a long-term strategy, the

underselling assumptions are that:

(a) Investors who understand a business well are in a

better position to value it correctly.

(b) These undervalued businesses can be acquired without

driving the price above the true value.



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Valuation plays a key role in this philosophy, since

franchise buyers arc attracted to a particular business

because they believe it is undervalued. They are also

interested in how much additional value they can create

by restructuring the business and running it right.

Chartists

Chartists believe that prices are driven as much by

investor psychology as by any underlying financialvariables. The information available from trading - price

movements, trading volume, short sales, and so forth -

gives an indication of investor psychology and future price

movements. The assumptions here are that prices move in

predictable patterns, that there are not enough marginal

investors taking advantage of these patterns to eliminate

them, and that the average investor in the market is

driven more by emotion than by rational analysis.

While valuation does not play much of a role in

charting, there are ways in which an enterprising chartist

can incorporate it into analysis. For instance valuation can

be used to determine support and resistance lines4 on

price chart.



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Information Traders

Prices move on information about the firm.

Information traders attempt to trade in advance of new

information or shortly after it is revealed to financial

markets, buying on good news and selling on bad. The

underlying assumption is that these traders can anticipate

information announcements and gauge the market

reaction to them better than the average investor in themarket.

For information trader the focus is on the relationship

between information and changes in value, rather than on

value per se. Thus an information trader may buy an

overvalued firm if he or she believes that the next

information announcement is going to cause the price to

go up because it contains better-than-expected news. If

there is a relationship between how undervalue or

overvalued a company is and how its stock price reacts to

new information then valuation could play a role in

investing for an information trader.

Market Timers



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Market timers note, with some legitimacy, that the

payoff to calling turns in markets is much greater than the

returns from stock picking. They argue that it is easier to

predict market movements than to select stocks and that

these predictions can be based upon factors that are

observable.

While valuation of individual stocks may not be of any use

to a market timer, market timing strategies can use

valuation in at least two ways:(a) The overall market itself can be valued and compared

to the current level.

(b) A valuation model can be used to value all stocks, and

the results from the cross-section can be used to

determine whether the market is over or undervalued. For

example, as the numbers of stocks that are overvalued

using the dividend discount model increases relative to the

numbers that are undervalued, there may be reason to

believe that the market is overvalued.

Efficient Marketer



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Efficient marketers believe that the market price at

any point in time represents the best estimate of the true

value of the firm and that any attempt to exploit perceived

market efficiencies will cost more than it will make in

excess profits. They assume that markets aggregate

information quickly and accurately, that marginal investors

promptly exploit any inefficiencies, and that any

inefficiencies in the market are caused by friction, such as

transaction costs, and cannot be arbitraged away.For efficient marketers, valuation is a useful exercise

to determine why, stock sells for the price it does. Since

the underlying assumption is that the market price is the

best estimate of the true value of the company, the

objective becomes determining what assumptions about

growth and risk are implied in this market price, rather

than on finding under- or overvalued firms.

Valuation in Acquisition Analysis

Valuation should play a central part in acquisition

analysis. The bidding firm or individual has to decide on a

fair value for the target firm before making a bid, and the



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target firm has to determine a reasonable value for itself

before deciding to accept or reject the offer.

There are also special factors to consider in takeover

valuation. First, the effects of synergy on the combined

value of the two firms (target plus bidding firm) have to be

considered before a decision is made on the bid. Those

who suggest that synergy is impossible to value and

should not be considered impossible to value should not be

considered in quantitative terms are wrong. Second, theeffects on value of changing management and

restructuring the target firm will have to be taken into

account in deciding on a fair price. This is of particular

concern in hostile takeovers.

Finally, there is a significant problem with bias in

takeover valuations. Target firms may be overly optimistic

in estimating value, especially when the takeover is hostile

and they are trying to convince their stockholders that the

offer price is too low. Similarly, if the bidding firm has

decided, for strategic reasons, to do an acquisition, there

may be strong pressure on the analyst to come up with an

estimate of value that backs up the acquisition decision.



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Valuation in Corporate Finance

The objective in corporate finance is the maximization

of firm value, and then the relationship between financial

decisions, corporate strategy, and firm value has to be

delineated. In recent years, management-consulting firms

have started offering companies advice on how to increase

value. Their suggestions have often provided the basis for

the restructuring of these firms.The value of a firm can be directly related to decisions

that it makes-on that projects it takes, on how it finances

them, and on its dividend policy. Understanding this

relationship is key to making value-increasing decisions

and to sensible financial restructuring.

Equity represents a residual cash flow rather than a

promised cash flow.

You can value equity in one of two ways:

By discounting cash flows to equity at the cost of equity

to arrive at the value of equity directly.

By discounting cash flows to the firm at the cost of

capital to arrive at the value of the business. Subtracting

out the firms outstanding debt should yield the value of

equity.



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Two Measures of Cash Flows

Cash flows to Equity: These are the cash flows

generated by the asset after all expenses and taxes, and

also after payments due on the debt. This cash flow, which

is after debt payments, operating expenses and taxes, is

called the cash flow to equity investors.

Cash flow to Firm: There is also a broader definition of

cash flow that we can use, where we look at not just the

equity investor in the asset, but at the total cash flows

generated by the asset for both the equity investor and

the lender. This cash flow, which is before debt payments

but after operating expenses and taxes, is called the cash

flow to the firm.

Two Measures of Discount Rates

Cost of Equity: This is the rate of return required by

equity investors on an investment. It will incorporate a

premium for equity risk the greater the risk, the greater

the premium.



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Cost of capital: This is a composite cost of all of the

capital invested in an asset or business. It will be a

weighted average of the cost of equity and the after-tax

cost of borrowing.

FREE CASH FLOWS TO THE FIRM

The best things in life are free, and the same holdstrue for cash flow. Smart investors love companies that

produce plenty of free cash flow (FCF). It signals a

company's ability to pay debt, pay dividends, buy back

stock and facilitate the growth of business - all important

undertakings from an investor's perspective. However,

while free cash flow is a great gauge of corporate health, it

does have its limits and is not immune to accounting

trickery.

What Is Free Cash Flow?

By establishing how much cash a company has after

paying its bills for ongoing activities and growth, FCF is a

measure that aims to cut through the arbitrariness and

"guesstimations" involved in reported earnings. Regardless



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of whether a cash outlay is counted as an expense in the

calculation of income or turned into an asset on the

balance sheet, free cash flow tracks the money.

To calculate FCF, make a beeline for the company's cash

flow statement and balance sheet. There you will find the

item cash flow from operations (also referred to as

"operating cash"). From this number subtract estimated

capital expenditure required for current operations:

- Cash Flow from Operations (Operating Cash)- Capital Expenditure

To do it another way, grab the income statement and

balance sheet. Start with net income and add back

charges for depreciation and amortization. Make an

additional adjustment for changes in working capital,

which is done by subtracting current liabilities from current

assets. Then subtract capital expenditure, or spending on

plants and equipment:

- Net income

+ Depreciation/Amortization

- Change in Working Capital

- Capital Expenditure

It might seem odd to add back

depreciation/amortization since it accounts for capital



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spending. The reasoning behind the adjustment, however,

is that free cash flow is meant to measure money being

spent right now, not transactions that happened in the

past. This makes FCF a useful instrument for identifying

growing companies with high up-front costs, which may

eat into earnings now but have the potential to pay off

later.

What Does Free Cash Flow Indicate?

Growing free cash flows are frequently a prelude to

increased earnings. Companies that experience surging

FCF - due to revenue growth, efficiency improvements,

cost reductions, share buy backs, dividend distributions or

debt elimination - can reward investors tomorrow. That is

why many in the investment community cherish FCF as a

measure of value. When a firm's share price is low and free

cash flow is on the rise, the odds are good that earnings

and share value will soon be on the up.

By contrast, shrinking FCF signals trouble ahead. In

the absence of decent free cash flow, companies are

unable to sustain earnings growth. An insufficient FCF for

earnings growth can force a company to boost its debt



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levels. Even worse, a company without enough FCF may

not have the liquidity to stay in business.

RESEARCH DESIGN OF THE STUDY

INTRODUCTION:

Every stock available in the markets has a value

called market price, which is the indicator of the

companys performance. According to fundamental

analysis we will try to find the intrinsic value of a particular

stock, which is the true value of the stock, based on which

investment arguments take place.

STATEMENT OF PROBLEM:



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Every asset, financial as well as real, has value. The

key to successfully investing in and managing these assets

lies in understanding not only what the value is, but the

sources of the value. Any asset at can be valued but some

assets are easier to value than others, and the details of

the valuation will vary from case to case. Thus, the

valuation of a share of a real estate property will require

different information and follow a different format from the

valuation of a publicly traded stock. What is surprising;however, is not the difference in valuation techniques

across assets, but the degree of similarity in basic

principles. There is undeniably uncertainty associated with

valuation. Often the uncertainty comes from the asset

being valued, although the valuation model may add to

that ascertained.

A postulate of sound investing is that an investor does

not pay more for asset than its worth. This statement may

seem logical and obvious as financial assets are acquired

for the cash flows expected from owning them, which

implies that the price that is paid for any asset should

reflect the cash flows it is expected to generate.

The problem in valuation is not that there are not

enough models to value an asset; it is that there are too



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many. Choosing the right model to use in valuation is as

critical to arriving at a reasonable value as understanding

how to use the model. Analysts use a wide variety of

models from simple to the sophisticated. These models

often make different assumptions about pricing, but they

do share some common characteristics so in the study we

tried to use price-earning multiples and discounted cash

flow models of valuation.

OBJECTIVES OF THE STUDY:

To understand the macroeconomic variables those will

an impact on the company progress.



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To study the various trends, opportunities, challenges

of the industry in which the company operates.

To understand the various policies of the company

those have impact on the financial performance of the

company.

To understand the various investment valuation

models that can be used.

To select the appropriate model that suits the stock.

Find the intrinsic value of the stock and compare with

market value of the study.

To recommend whether to buy, hold or sell the stock

based on the analysis.

SCOPE OF THE STUDY:

The study basically tries to identify the intrinsic value

of the company by using the published financial details of

the company. The study is restricted to one particular

company in the sector. The study also includes testing

the intrinsic value of the company.



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RESEARCH METHODOLOGY:

Type of research:

Research design is the conceptual structure within

which research is conducted. It constitutes the blue print

for the collection, measurement, and analysis of data. The

type of research adopted for the study is descriptive

research as the research does not require any

manipulation of variables and does not establish causalrelationship between events; it just simply describes the

variables.

Sources of data:

Primary data

Those are the data that are obtained by a study

specially designed to fulfill the data needs of the problem.

Meeting the company professionals personally collected

the information necessary for the study.

Secondary data

Data, which are not originally collected but rather

obtained from published or unpublished sources, are

known as secondary data. In this research secondary data



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was collected through sources like Internet, research

reports, magazines, and company journals.

Sampling plan:

Type of sampling : Non-probabilistic judgment

sampling.

Sample size : One company from automobilesector.

RESEARCH INSTRUMENTS:

Financial calculations: - This was done to find the

various valuation ratios and necessary calculations to find

the intrinsic value of the company.

Z Test: - This test was used to test the hypothesis.

PLAN OF ANALYSIS:

After having collected the financial data related to the

entities i.e., the sample selected from the selected sector.

Calculate the various valuation ratios and other financial



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A measure of a security's or portfolio's volatility, or

systematic risk, in comparison to the market as a whole. It

is also known as "beta coefficient."

2) CAPEX:

Funds used by a company to acquire or upgrade

physical assets such as property, industrial buildings, or

equipment.

3) CAGR:

The year over year growth rate of an investment overa specified periodoftime.

Calculated by taking the nth root of the total percentage

growth rate where n is the number of years in the period

being considered.

This can be written as:

4) COST OF EQUITY:

The return that stockholders require for a company for

the capital invested. The traditional formula is the dividend

capitalization model:



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5) DEBT/EQUITY RATIO:

A measure of a company's financial leverage

calculated by dividing long-term debt by shareholders

equity. It indicates what proportion of equity and debt the

company is using to finance its assets.

Note: Sometimes investors only use interest bearing long-

term debt instead of total liabilities.

6) DEPRECIATION:

An expense recorded to reduce the value of a long-

term tangible asset. Since it is a non-cash expense, it

increases free cash flow while decreasing reportedearnings.

7) DIVIDEND PAYOUT RATIO:

The percentage of earnings paid to shareholders in

dividends.

9) DUPONT ANALYSIS:



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A method of performance measurement that was

started by the DuPont Corporation in the 1920s, and has

been used by them ever since. With this method, assets

are measured at their gross book value rather than at net

book value in order to produce a higher ROI.

10) EPS:

The portion of a company's profit allocated to each

outstanding share of common stock. Calculated as:

11) EFFECTIVE TAX RATE:

The portion of a company's profit allocated to each

outstanding share of common stock. Calculated as:

12) EQUITY MULTIPLIER:

A measure of financial leverage calculated as:

Total Assets divided by Total Stockholders' Equity.

Like all debt management ratios, the equity multiplier

is a way of examining how a company uses debt to finance



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its assets. It is also known as the financial leverage ratio or

leverage ratio.

13) ASSET TURN OVER RATIO:

The amount of sales generated for every dollar's

worth of assets. It is calculated by dividing sales in rupees

by assets in rupees.

Formula:

14) FUNDMENTAL ANALYSIS:

The amount of sales generated for every dollar's

worth of assets. It is calculated by dividing sales in rupees

by assets in rupees.

Formula:

15) MARKET CAPITALISATION:

It is the total value of all outstanding shares of

particular company, which is represented in the market.

It's calculated by multiplying the number of shares times



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the current market price. This term is often referred to as

market cap.

16) PE (PRICE EARNING MULTIPLES):

A valuation ratio of a company's current share price

compared to its per-share earnings. A valuation ratio of a

company's current share price compared to its per-share

earnings.

Calculated as:

17) PEG (PRICE EARNING TO GROWTH):

A valuation ratio of a company's current share price

compared to its per-share earnings.

18) ROE:

A measure of a corporation's profitability, calculated as:



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19) WACC: A calculation of a firm's cost of capital that

weight each category of capital proportionately. Included

in the WACC calculations are all capital sources, including

common stock, preferred stock, bonds, and any other long-

term debt.

WACC is calculated by multiplying the cost of each capital

component by its proportional weighting and then

summing:



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CHAPTER SCHEME

Chapter: 1 THEORITICAL BACKGROUND OF THE

STUDY

This chapter mainly deals with secondary data

collected to support the study and the reasons to problem

of study.

Chapter: 2 RESEARCH DESIGN

A research design serves as a bridge between what

has been done in the conduct of study to realize the

specified objectives. It is an outline of the projects working.

Chapter: 3 PROFILES

This chapter includes the profile of the industry as well

as the company in which the study is conducted. This is

also tries to deal with trends and prospects in the industry

as well as the company.



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Chapter: 4 ANALYSES AND INTERPRETATION

In this chapter using the analyzed data we have tried

to find out the intrinsic value of the company. Hypothesis

test is done to find whether the value of the company is

under or over valued.

Chapter: 5 SUMMARY OF FINDINGS, CONCLUSIONS

AND SUGGESTIONS

In this chapter we will actually include all that we have

analyzed and what has been found. Finally concludechecking whether the objective of the study has been

achieved or not.

ECONOMIC ANALYSIS

Economic Outlook:

During the fiscal year 2003-04, Indias GDP which

grew by 8.10% was principally on account of a strong

recovery in the agriculture sector and accelerated growth

in the industry and services sectors. A growth rate higher

than 8% has been achieved in the past in only three years

- 1967-68, 1975-76 and 1988-89. Exports have grown by

17.1% in 2003-04 in USD terms. While the rupee



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appreciated against USD in 2003-04, it depreciated against

the currencies of major non dollar-trading partners.

Foreign exchange reserves crossed the levels of USD 100

billion mark on December 2003 and stood at USD 199.3

billion as on 31st March 2004. Foreign Institutional

Investors (FIIs) investments saw a sharp rise during the

year, which amounted to USD 10 billion. Overall economic

conditions look positive and expected to post a GDP

growth of 6-6.5% during FY05.

GRAPH 1: ACCELERATING GROWTH OF GDP



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TABLE 1: INDIA - ECONOMIC PARAMETERS

F 04 F 05

GDP Growth

(%)

8.1 6.0 -

6.5 Fiscal Deficit

(%)

4.8 4.4

Interest Rate Decline

d

Hardeni

ng Inflation

(Average) %

5.3 6.5

Rupee - US

Dollar

Apprecia

ted

Steady

(Source: RBI, CMI)



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The Real Gross Domestic Product (GDP) is estimated

to have grown by 8.10% in 2003-04, buoyed by a strong

agricultural recovery. While the agricultural sector grew by

9.1% during the FY04, the industry and services sectors

have also maintained their momentum with the GDP

growth by achieving a growth rate of 6.5% and 8.4%

respectively during the year. The growth GDP has grown

by 7.4% during April-June 2004 period, lower than the

8.2% growth registered in January-March 2004 and 10.5%in October-December 2003 quarter. Inflation is also inching

up higher, driven by increases in fuel and commodity

prices. Non food credit has increased by 11.5% during the

April-September 2004 period as against previous

corresponding years 6% indicating the progressive

economic activities. But the global crude oil shock will

definitely have an adverse affect on the growth during

fiscal 2005.

GRAPH 3: INFLATION



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The average inflation during fiscal year 2003-04 was

around 5.5% as against the previous corresponding fiscalsaverage of 3.4%, the prime movers being sugar, edible

oils, textiles, leather and leather products, basic metals,

alloys, iron and steel. With the increase of few commodity

prices mainly the crude oil prices have increased the

global inflation levels from June 2004, India being no

exception to this. The domestic fuel prices have risen by

more than 10% during the fiscal 2004-05 over last years.

The inflation during the fiscal year 2004-05 touched three

and a half years high of 8.33% for the week ended August

28th 2004 from 5.55% for the week ended June 5th 2004

due to the excess money supply in the economy. Thereasons for the high inflation are both domestic and

international. The domestic reasons include excess

liquidity in the market and delay in monsoon that



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increased the prices of essential commodities. M3, the

measure of money supply grew by 15.5 per cent in July

2004, compared to 11.25 per cent in July 2003. The

international causes are inexorable rise in oil prices, global

increase in the prices of commodities, supply side shock

and growth in chinas demand for goods. This is cost-push

inflation wherein the supply problems in a few important

commodities push up prices of commodities. Since crude

oil import constitute almost one third of the total exports,we can say that the present situation is on account of

imported inflation. To check the rising prices, government

took some measures like duty cuts on steel and oil

products. Reserve Bank of India raised the Cash Reserve

Ratio to 5% from 4.5% in two tranches of 25 basis points

and has also cut the rate of interest payable on eligible

cash balances maintained with it by banks by 250 basis

points to 3.5 percent. In fact, the gradual reduction in the

CRR over the past few years in successive credit policies

had been one of the major contributors for the sustained

reduction in the interest rates on auto loans. These moves

were expected to draw out around Rs.8000 crore from the

banking system. Later, the inflation was reduced to 7.20%

in the last week of September. With the increase in the



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GRAPH 4: GDP AND AUTO SALES

GDP and Auto sales

1100

1150

1200

1250

1300

1350

1400

1450

1999-

00

2000-

01

2001-

02

2002-

03

2003-

04

RealGDP

(Rs.

'00

At1993-

94price

404550556065707580

No

ofunits(in

GDP No of units (in lakhs)

(Source: www.indiabudget.nic.in)

Rubber Prices:

With the increase in rural activities, the commercial

vehicles are expected to grow. Sports Utility Vehicles (SUV)

after being a very big hit in the domestic market, the

players now are planning to introduce them to the

domestic market. But the increase in the input prices like

steel and rubber has a negative impact on the industry

profitability. The truckers strike has affected the auto

players production and distribution to certain extent.



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GRAPH 5: SHOWING RUBBER PRICES

Interntional & Domestic Rubber Price

400

600

800

1000

1200

1400

1600

Mar-

01

Jul-01 Nov-

01

Apr-

02

Aug-

02

Dec-

02

Apr-

03

Aug-

03

Dec-

03

Apr-

04

USD

/Ton

0

10,000

20,00030,000

40,000

50,000

60,000

70,000

Rs/Ton

USD/Ton Rs/Ton

Source: indiainfolineA combination of internal and external factors has

contributed to the price volatility in the rubber market.

Since the domestic prices of rubber are less than the

global prices, the tyre manufacturers in other countries,

sourcing natural rubber from India which has led to the

increase in the exports thereby reducing the domestic

stock levels to less than sixty days of consumption of the

rubber users sector. Also, the subsidy given by the



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government for exports of rubber has resulted in an

increase in the exports.

The steel prices

GRAPH 6: SHOWING STEEL PRICES

Steel Prices

20,000

30,000

40,000

Apr-02

Jul-02

Oct-02

Jan-03

Apr-03

Jul-03

Oct-03

Jan-04

Apr-04

Jul-04

Oct-04

Rs/Tonn

GC sheets

Source: indiainfoline

The steel prices are on rise following a sharp increase

in the prices of raw materials like iron ore, coke, coal,

power, gas and scrap. While the cost of iron ore went up

by 75% during the period June2003 to July 2004, the scrap

prices jumped up by 91%. Cokes prices saw an increase of

50% during the same period. There are no signs of decline

in the prices of steel products following a strong demand



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from the housing and infrastructure sectors, with

additional growth potential in the auto and consumer

durables sectors too. With China taking steps to cool down

its overheated economy, demand from that country is

expected to slow down. But any shortfall in demand from

China may be offset by growth in demand in the US,

Europe and Japan as economic recovery gathers

momentum leaving no scope for the steel price declines in

the near short term.

Competition and Market

In the Automotive Sector the continuing convergence

between the car and the UV markets is a positive

development. High-end MUV sales accounted for 51% of

mid-size car sales in India in F-04, as compared to 16% in

F-00. The Co also believes that as the car market expands

in India, MUVs will continue to take an increasing share of

this market. After the success of the Scorpio and Bolero,

Reduced interest rates with the maturing of the vehicle

financing market will also add an impetus to vehicle sales

growth. Increased penetration of such financing products

in rural and semi-urban markets will directly benefit the



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Company given its strong presence in these markets. M&M

has the additional advantage that its subsidiary, MMFSL

has a wide rural network. The ongoing WTO & Free Trade

Area negotiations with Thailand, ASEAN, SAARC countries

and the Mercosur countries are likely to lead to lowered

tariffs across many of our target export markets. This

could provide the Co with a significant opportunity to

generate larger volumes from export sales.

Being an agrarian economy Indias GDP growth ismuch dependent on the fortunes of the agro sector. Given

this backdrop the Tractor industry assumes significance.

The Indian Tractor industry is the largest in the world in

terms of production and sales. However in terms of per

capita usage it still scores low against comparable

developing nations. This provides for ample scope of

growth for the industry in future. With liberalization

restrictions on capacities and production were removed.

Today anybody can walk in and put up a plant and start

operations.



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COMPANY PROFILE:

Mahindra & Mahindra Limited (M&M) is the flagship

company of around US $ 2.5 billion Mahindra Group, which

has a significant presence in key sectors of the Indian



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economy. A consistently high performer, M&M is one of the

most respected companies in the country.

Set up in 1945 to make general-purpose utility

vehicles for the Indian market, M&M soon branched out

into manufacturing agricultural tractors and light

commercial vehicles (LCVs). The company later expanded

its operations from automobiles and tractors to secure a

significant presence in many more important sectors. The

Company has, over the years, transformed itself into aGroup that caters to the Indian and overseas markets with

a presence in vehicles, farm equipment, information

technology, trade and finance related services, and

infrastructure development.

M&M has two main operating divisions:

1) The Automotive Division manufactures utility vehicles,

light commercial vehicles and three wheelers.

2) The Tractor (Farm Equipment) Division makes

agricultural tractors and implements that are used in

conjunction with tractors, and has also ventured into

manufacturing of industrial engines. The Tractor Division

has won the coveted Deming Application Prize 2003,

making it the only tractor manufacturing company in the

world to secure this prize.



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The resurgence of the automotive industry and M&M's

success in exploiting it, has created an opportunity to

strengthen the company through an entry into the Auto

Components business, the growth of which is being fueled

by both, domestic and export demand.

M&M employs around 11,500 people and has six

state-of-the-art manufacturing facilities spread over

500,000 square meters. M&M has also set up two satellite

plants for tractor assembly. It has 49 sales offices that aresupported by a network of over 780 dealers across the

country. This network is connected to the Company's sales

departments by an extensive IT infrastructure.

M&M's outstanding manufacturing and engineering

skills allow it to constantly innovate and launch new

products for the Indian market. The Company's significant

recent product launch, the "Scorpio", resulted in the

Company winning the National Award for outstanding in-

house research and development from the Department of

Science and Industry of the Government in 2003. The

Company has launched India's first tractor with turbo

technology - the Mahindra Sarpanch 595 DI Super Turbo.



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The Company's commitment to technology-driven

innovation is reflected in Company's plans of setting up of

the Mahindra Research Valley, a facility that will house the

Company's engineering research and product development

wings, under one roof.

The M&M philosophy of growth is centered on its

belief in people. As a result, the company has put in place

initiatives that seek to reward and retain the best talent in

the industry. M&M is also known for its progressive labourmanagement practices. In the community development

sphere, the company has implemented several programs

that have benefited the people and institutions in its areas

of operations.

Mahindra and Mahindra continues to be a solid

company

Company has registered a 28 % rise in its total vehicle

sales at 11,484 units for August 2004 as against 8,946

units in the corresponding period previous fiscal.

Mahindra City was granted special economic zone (SEZ)

which includes 100% tax holiday for the next 5 years

and a 50% tax holiday for the next five years, exemption

from customs duty, central excise, service tax,



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education cess, central sales tax, and all local taxes

levied by the state.

Company has set up four overseas operations in Uruguay,

Italy, Dubai and South Africa for sale of Scorpio and

Bolero models in these markets.

Enters in to segments such as retailing agri-inputs, under

its own brand, manage corn and soya as collateral for

banks, export fruit to European supermarkets.

The Farm Equipment Sector is the first Tractor Company

in the world to win the Deming Prize. Also, it is the fourth

company in India and the 10th in the world, outside

Japan, to win this prize.

Launched India's first tractor with turbo technology in

Patna, it is now eyeing to capture the tractor market inthe Bihar state in a big way.

Regained dominance as a leader in both utility vehicles

and tractors acquiring 50% market share.

Recent Developments &Future plans:

The companys long-term focus will continue to be

MUVs. With the difference between the passenger car and

the MUV segments fast disappearing, as the market for

MUVs is likely to see a spurt in the near future. The



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company plans to be the worlds biggest tractor maker by

2006, intends to overcome lack of similar size in utility

vehicles (UV) manufacture by being a niche player. Their

tractors were selling well in the US, giving M&M a

handsome market share in the 40-60 hp ranges in Texas.

M&M`s main US markets are in the South and South West.

The company is growing at rate of 80 per cent in the US.

Apart from US it also plans to market its tractors in Europe

through a sister-trading firm after rescheduling plans to setup a subsidiary in the region. The company will also launch

85-horse power (HP) and 100HP models within the next 18

months to meet the specific demand for high-powered

tractors in the European and US markets. On the cards are

a number of improvements on the Maxx, based on

customer feedback. The company also plans to expand its

appeal with new variants. For the low-end personal

segment, M&M has introduced the Marshal Royale.

Marketing competencies:

Flanking its strategy to become a global player, M&M

is banking on its key brand attributes which essentially

signify three basic things: trust, reliability, and value-for-



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money. The overall marketing game plan involves a

strategy around creating strong brands, Customer Touch

Build a database of Customers for targeted marketing,

Providing a unique customer experience - Unique

showrooms which give an entirely new buying experience

are being planned and 40 dealerships would be converted

into such modern showrooms during the current year and

Improve Operational Efficiencies through outsourcing

wherever required, value engineering and strategicsourcing.

M&M has identified its 3 Weapons for the UV market.

Each brand will be positioned uniquely targeting various

spectrum of the market, the three brands - Scorpio, Bolero

and Maxx. These are the three brands, which will be

M&Ms future brand platform. Bolero will be one hub, while

Scorpio will be one up market hub. The tractor segment

where the company has 26% market share mainly

depends on the distribution channels of the company.

Production and distribution:

The Companys manufacturing facilities are located at

Kandivli, Nashik, Igatpuri, Nagpur, Zaheerabad, Jaipur and

Rudrapur. Company has two main tractor manufacturing



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plants located at Mumbai and Nagpur in Maharashtra.

Apart from these two main manufacturing units, the Farm

Equipment Sector has satellite plants located at Rudrapur

in Uttaranchal and Jaipur in Rajasthan. The Company has a

strong and extensive dealer network of over 450 dealers

for sales and service of tractors and spare parts. 28 area

offices, situated in all the major cities and covering all the

principal states, manage this dealer network.

Employee Relations

Employee relations have been generally cordial at all

plants of the company. They have recently introduced two

new schemes, which are in the pipeline for its top-level

managers in order to bring balance in their work and

personal life. Under this scheme, company has changed its

leave policy wherein it has introduced a compulsory 15-

day leave for its middle and top-level officials. Besides this,

the company also proposes to implement a compulsory

early day-off at 5 pm at least once a week. They want their

employees to spend value time with their family at home.

They are trying to follow ergonomic rules for providing

efficient working atmosphere, which is being effectively



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implemented by companies abroad. The company is also

focusing on training and development programmers for the

career mapping of its employees and provides them with a

meaningful professional career ahead. In addition, the

company also plans to implement various development

plans for training different level of employees. These

measures will surely help in retaining its efficient

contributors.

Board of directors:

Mr. Anand G Mahindra Vice-Chairman &Managing

Director and the four Executive Directors of the Company

manage the Company. The Board reviews and approves

strategy and oversees the actions and results of

management to ensure that the long-term objectives of

enhancing stakeholder value are met. The Company

presently has seventeen Directors. The Vice-Chairman &

Managing Director and the four Executive Directors are

Whole-time Directors. Reimbursement of expenses

incurred in the discharge of their duties, the remuneration



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that these Directors would be entitled to under the

Companies Act, 1956 as Non-Executive Directors. The

Company has not entered into any materially significant

transactions with its Promoters, Directors or the

Management or relatives, etc. that may have potential

conflict with the interests of the Company at large.

Dividend policy:

The Directors have recommended a dividend at 90%(Rs.9 per share). The dividend, together with the tax on

distributed profit, will absorb a sum of Rs.117.79 crores

(previous year Rs.71.98 crores) and will be paid to those

shareholders whose names stand registered in the books

of the Company as on the book closure date.

INDUSTRY PROFILE:

The Indian automobile sector can be divided into

several segments: 2 & 3 wheelers, passenger cars,

commercial vehicles (Heavy CVs/ Medium CVs/Light CVs),

utility vehicles (UVs) and tractors. The industry is highly

capital intensive in nature. Though three-wheelers and



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Passenger cars : 17%

Utility vehicles : 23%

Light commercial vehicles : 12%

Heavy and multi commercial vehicles : 23%

3 wheelers : 8%

PORTER FIVE FORCES MODEL:

Supply: The Indian automobile market is plagued withexcess capacity.

Demand: Is largely cyclical in nature and dependent upon

economic growth and per capita income. Seasonality is

also a vital factor.

Barriers to entry: High capital costs, technology,

distribution network, and availability of auto components.

Bargaining power of suppliers: Low, due to stiff

competition and its fragmented nature.

Bargaining power of customers: Very high due to

availability of options.

Competition: Except for heavy commercial vehicles

segment, competition is stiff. The competition is expected

to increase even further.



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PROSPECT IN THE SECTOR:

The government spending on infrastructure in roads

and airports and higher GDP growth in the future

could benefit the auto sector in general. This

combined with a softer interest rate environment will

play a vital role in providing a fillip to demand. Utility

vehicle segment is expected to grow at around 8% in

FY05.

Though the market size is expected to grow by 12%

-15%, competitive pressure could keep prices and

margins under control.

After three years in the wilderness, tractor industry

seems to have finally come out of the trough as it

grew by 10% during FY05. While good monsoon is a

positive for the sector, given the fact that the country

has had erratic rainfall in the past, volumes may not

recover sharply. But the longer-term picture is



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impressive in light of poor mechanization levels in the

country.

With an estimated 39% of CVs plying on the roads 10

years old, demand for HCVs is expected to grow by

8% in FY05. Also adding the positives are higher crop

output, industrial sector growth and favorable interest

rate environment. While the industry is cyclical in

nature, we expect this factor to weaken in the

medium term arising out of structural changes in the

industry. The privatization of select state transport

undertakings and hiking of bus fares bodes well for

the bus segment as well.

The reduction in peak customs duty from 30% to 25%

in the budget will result in savings on the raw material

front as well. Since raw material costs account for

almost 50% of revenues of auto companies in general,

this is a positive. Also, steel prices have shown some

signs of softening and this is likely to have a positive

impact on the margins of the players.

We expect Indian auto majors to increase capital

expenditure budget at an average of 4%-5% of

revenues in FY05 as against around 2%-3%



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historically. This would be towards product

development and complying with new environmental

regulations. With MNCs willing to sacrifice profitability

for growth in the short-term, it has become imperative

for domestic players to spruce up R&D efforts. At the

same time, cash flow position is much stronger now

given that most manufacturers have reduced working

capital and debt. This would mean financing bulk of

incremental capex from internal accruals.

Product Pricing:

The Indian automobiles are slowly shifting away from

the price sensitiveness towards the value addition concept.

Besides, even the SIAM has changed the norms of

classification from the previously followed Price basis to

the size/ length of the vehicle. Previously, the industry was

highly price sensitive and the sales were dependent on

price brackets. But the Indian customers perception is

slowly changing and moving towards the value additions

such as the size of the car, the style, the comfort, the level

of service offered by the manufacturers, the variants

available in the category etc. Even though the perception

is changing, it is true that still price plays an important role



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in the industry. The role of price may be very negligible in

some segments, but in the other segments they are very

much reactive to the price fluctuations. Thus, the some

players in segments concentrate on the value addition to

achieve competitive advantage, while the other players in

the segments use price as weapon along with their core

service. These players also offer discounts during festival

season to boost the sales.

GrowthDrivers:

1.Economic growth: There is a direct co-relationship

between the per capita income of the people and the

demand for automobiles. Due to the increased business

activity, the economy supports the industry growth as

well as generates employment. The demand for

automobile is expected to grow with the improved

standard of living. Even though the economic growth

rate during the year was 8.056 percent, the future

average growth rate is expected to be around 6.5

percent without any economic reforms.

2.Income level: The level of income has got a direct

impact on the sales of the automobile. The rise in



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people. Along with this, even other industries

performance will boost up. Thus, the demand mainly for

utility vehicles increases with the better performance of

the rural sector.

4.Used car Segment: The industry saw a growth of

around 30 percent in the used car segment during fiscal

year. The profile of an Indian Car buyer has been

changing due to the increasing purchasing power.Besides, the used cars are becoming affordable due to

the reduced Equated Monthly Installments (EMI) and

increased repayment period. A more active lifestyle,

rising disposable income and lower cost of replacement

are guiding the customers to change their cars once

every three years now. Even though this market is

unorganized to a large extent, the organized used car

segment is slowly growing in India. With the

manufacturers only coming forward to buy back their

models, has in turn helped the sales of new vehicles.

5.Availability of finance for both new and used

vehicles: With the ease in the availability of finance

both the new and used auto market segment has been



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witnessing a growth. Previously, loans were provided

only for the new vehicles, but now the financial

institutions have come forward to offer the loans for

used vehicles too. With the increasing competition

among the finance providers, they are reducing the

rates day by day. Along with this, even some companies

go beyond the industry benchmark by financing up to

seven year old vehicles, thereby helping the growth of

the used auto segment. The interest rate has almosthalved in comparison to the rates during 1998 and has

touched as low as 6.5 percent per annum. Auto

manufacturers are using this as a tool to increase the

sales. They are having tie-ups with the finance providers

or floating their own finance companies.

6.Infrastructure: Due to the increased investment in

infrastructural projects especially in the development

and improvement of road projects, the overall transport

business activities and the tourism is expected to grow,

which in turn creates a good demand for the utility

vehicles.Traffic on roads is growing at a rate of 7 to

10% per annum while the vehicle population growth for

the past few years is of the order of 12% per annum. So



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there is a need for the development of good

infrastructural roads for the growth of the automobile

industry. On the other side, poor road infrastructure and

traffic congestion can be a bottleneck in the growth of

vehicle industry.

7.Exports: With the global players looking at developing

vehicles that can be launched in multiple markets to

reduce their developmental cost and to reduce their

development costs, India is expected to increase itsexports. These giants are planning to use their Indian

facilities as hub for their worldwide operations. With this

move, General motors and Daimler Chrysler both have

their R & D center in Bangalore, which will have an

important role in International product development.

Toyota has plans to turn India into its lowest cost-

manufacturing center. MUL is also becoming a hub for

small cars for Suzuki Motor Corporation. The countrys

car sales and exports is expected to register around 8.5

lakh units by the fiscal 2006-07, which will mainly be

driven by compact and mid size car segment.

TABLE 2: COST ANALYSIS

As % of net sales FY05 FY04

Raw Material 69.4 67.8



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Staff Cost 5.0 5.9

Other expenditure 13.1 13.4

Source: India Infoline Research

Raw material cost pressures was faced by most of the

companies in the sector. For instance, raw material cost as

a percentage of net sales increased by 5.7 percentage

points for Punjab Tractors, 5.2 percentage points for BAL,

2.8 percentage points for ALL and 2.5 percentage points

for Tata Motors.Staff cost declined by 66bps and other expenditure

increased 41bps as a percentage of net sales. Punjab

Tractors and M&M enjoyed the benefit of a reduced staff

cost by 370bps and 230bps as a percentage of net sales.

Punjab Tractors maintained its margins in spite of a high

rise in raw material cost due to savings in staff cost and

other expenditure.

Major competitors and Market position:

Prior to 1980, Premier Automobiles Limited (PAL) andHindustan Motors (HM) had dominated the Indian

passenger car market. With the entry of Maruti Udyog

Limited (MUL) in 1980, the former players faced a tough



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competition. Even though they were able to maintain their

volumes, their market share drastically reduced. MUL

dominated the passenger car market and faced no

competition till early 1990s. After the liberalization took

place, with the entry of foreign players, the problems

began for MUL. MUL started loosing its market share

slowly. During the initial stages of liberalization, since MUL

had depreciated its plant already by then, no player in the

industry was able to match MULs Maruti 800s entry price.But still, MUL faced tough time in the upper segment. With

the launch of the models like Indica, Santro and Matiz by

Tata, Hyundai and Daewoo respectively, in the price range

of 3- 4.5 lakhs, MULs market share fell down sharply. But,

however MUL is still the market leader in the passenger

car segment, and was able to maintain its market share

with its successful models like Maruti 800, Esteem, Zen,

Wagon R and Alto. The overall market share of MUL fell

from 70.2 percent in 1995-96 to 58.1 percent during 1999-

00, which further declined to 51 percent as on February

2004. This can be attributed to the increased competition

from Hyundai, Tata motors, Fiat, General motors,

Hindustan motors and Honda Siel.



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In the A segment, MUL hold the monopoly position

with its 800 model and no other player has been able to

enter this segment. This model alone accounts for about

25 percent of the total sales of the passenger cars. In the

lower B segment, MUL holds the leadership position with

its three models in the segments viz Zen, Alto and Wagon

R, followed by Hyundai. But, model wise Santro tops the

segment with its 37 percent share in this segment. There

are three players in the upper B segment, with Tata in theNo.1 position. Its model Indica accounts to 86 percent of

the total sales in the segment. MULs Esteem lost its

leadership position to Tatas Indigo, which has dominated

the market with 31 percent share. This ahs been followed

by Hyundais percent and 22 percent respectively. Honda

Siel occupies the dominant position with its City model.

Toyotas Corolla and Hondas Accord are dominant in the D

& E segments respectively Accent and Ford Ikon, whose

market shares are 27. With the launch of new models in

MUVs and SUVs, the utility vehicles sales are in an upward

trend. In the utilities segment Mahindra & Mahindra has

been able to maintain its leader position, followed by MUL,

which manufactures the models like omni and versa. The

launch of Qualis model has given a new look to the



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industry. Even, it grabbed some share of passenger car

industry, since the customers perceived it as a big car,

which is even easy to drive, unlike other utility vehicles.

The launch of Mahindras SUV Scorpio also moved along

the lines of Qualis, dragging the passenger car customers.

Watching the Scorpios success a new range of SUVs were

launched by other players in the industry. The new SUV

models, which are launched, recently are Marutis Jimny,

Fords Endeavour, Suzukis Vitara, Chevrolets Forester andHyundais Terracan. With this move by the players, the red

line between the utilities and the passenger car is slowly

vanishing.



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GRAPH 8: SHARE OF PLAYERS IN THE UTILITIES

SEGMENT AS ON FEB2004-05

Uti l it ies m arket s

3%

34%

31 %

15%

161%

Baja j Tem po

M a h & m a hMarut i Udyog

Telco

Toyota K i rlos

Others

Suppliers:

The Indian Auto component industry was started with

an aim of reducing the imports and being self-sufficient.

But, over a period of time this industry has achieved its

objective along with being a good foreign exchange

earner. The auto component industry maintained a low but

positive growth rate mainly due to its export performance.



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This industry has maintained a 10 percent to 12 percent

share of exports in its total production. Indias automotive

component industry manufactures the entire range of

parts required by the domestic automobile industry and

currently employs about 250,000 persons. Auto

component manufacturers supply to two kinds of

customers original equipment manufacturers (OEM) and

the replacement market. The replacement market is

characterized by the presence of several small-scalesuppliers who score over the organized players in terms of

excise duty exemptions and lower overheads. The demand

from the OEM market, on the other hand, is dependent on

the demand for new vehicles. The strict reform by the

Government with respect to the indigenization programme

has led the OEMs to increase their indignation over the

years. In India, the auto component manufacturers are

found working close in proximity with the vehicle

manufacturers ensuring the just in time deliveries. The

trend of the auto component industry is to outsource

manufacturing assembly to component suppliers while the

OEM imperative is to cut costs, improve customer

responsiveness and build to order, which helps them to

build their own competitive advantage.



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Government Regulations:

Even though the auto sector has been deregularised,

the government still vests the powers with itself to

influence the industry, in terms of controlling the import,

excise and customs duties and emission norms. After the

lifting of licensing in 1993, 16 ventures came up to

manufacture cars. The governments auto policy has

restricted import of cars and automotive vehicles incompletely built (CBU) form or in completely knocked

down (CKD) or in Semi knocked down (SKD) condition. And

the car manufacturers were issued licenses to import

components in CKD or SKD form only after execution of the

Memorandum of Understanding (MOU) with the Director

General Foreign trade (DGFT). 11 companies signed MOU

and they have agreed to bring in minimum foreign equity

of US $ 50 mn, if a joint venture is involved in majority

foreign equity ownership. Along with this, they have also

agreed to indigenize components up to a minimum of 50

percent in the third year and 70 percent in the fifth year.

The government has permitted for 100% foreign equity

investments for the manufacturing of automobiles and

components. The Government will review the automotive



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tariff structure periodically to encourage demand, promote

the growth of the industry and prevent India from

becoming a dumping ground for international rejects. The

incidence of import tariff will be fixed in a manner so as to

facilitate development of manufacturing capabilities as

opposed to mere assembly without giving undue

protection, to ensure balanced transition to open trade, to

promote increased competition in the market and enlarge

purchase options to the Indian customer. Appropriatemeasures including anti dumping duties will be put in

place to check dumping and unfair trade practices. The

conditions for import of new Completely Built Units (CBUs)

will be as per Public Notice issued by the Director General

Foreign Trade (DGFT) having regard to environment and

safety regulations. Used vehicles imported into the country

would have to meet CMVR, environmental requirements as

per Public Notice issued by DGFT laying down specific

standards and other criteria for such imports. The

governments policy allows weighted tax deduction for the

sponsored research and in-house R&D expenditure and

also excise duty rebate of 1% of the gross turnover. The

government is also encouraging auto design firms by

providing them tax breaks and concessional duty. The



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101000860 a project report on fundamental analysis of mahindra amp mahindra company

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