anand rathi -india autos - valuations no longer compelling

Anand Rathi Share and Stock Brokers Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1

Anand Rathi Research India Equities

India I Equities Automobiles

Sector Report

Rohan Korde+9122 6626 6733

[email protected]

Nirav Bhatt +9122 6626 6505

[email protected]

9 April 2012

India Autos

Valuations no longer compelling

Neutral Sensex: 17486

Nifty: 5323

Anand Rathi Share and Stock Brokers Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities

Rohan Korde+9122 6626 6733

[email protected]

Nirav Bhatt +9122 6626 6505

[email protected]

Automobiles

Sector ReportIndia I Equities

Key data – FY13 Ashok Leyland Bajaj Auto Hero Moto Corp M&M* Maruti Suzuki Tata Motors* TVS Eicher Motors VST Tillers

Rating Sell Buy Sell Buy Buy Hold Hold Buy Buy

Price (`) 30 1,654 2,055 697 1,349 276 41 1,983 454

Target price (`) 30 1,939 2,087 833 1,581 301 50 2,601 585

Market cap (US$bn) 1.6 9.4 8.1 8.4 7.8 15.9 0.4 1.0 0.0

EPS (`) 2.5 127.2 139.8 61.0 90.3 39.7 5.7 129.8 73.2

PE (x) 12.2 13.0 14.7 11.4 14.9 6.9 7.1 15.1 6.2

EV/EBITDA (x) 6.6 8.4 8.6 7.9 7.4 3.7 3.1 4.8 3.8

EV/sales (x) 0.7 1.8 1.4 0.9 0.7 0.5 0.2 0.5 0.5

RoE (%) 20.6 42.9 83.8 20.5 14.8 33.2 19.9 17.7 24.6

RoCE (%) 15.2 57.4 79.0 21.7 19.2 24.5 19.6 26.2 34.2Source: Companies, Anand Rathi Research * Note: P/E and EPS are on a consolidated basis in the case of M&M and Tata Motors

9 April 2012

India Autos


The headwinds of slower-than-expected economic growth and higher cost of ownership have not been completely offset by the tailwinds of stable commodity prices and new launches. In addition, most auto companies are quoting at fair valuations. Hence, we lower our sector stance from Overweight to Neutral. We prefer non-frontliners like VST Tillers and Eicher Motors and initiate coverage with Buy ratings. Top picks among frontline auto companies: Bajaj Auto & Maruti Suzuki.

Slower volume growth ahead. In the past three years, auto companies have seen healthy ~22% volume growth. We expect lower CAGR of 8-10% over FY12-14 in the four-wheeler segment, constrained by macro-economic headwinds and a higher base. In two-wheelers, lower growth is likely, at 10-12%, fuelled chiefly by exports. We expect the drivers for PV growth to be increasing dieselization (away from petrol vehicles), new launches, exports and rising rural penetration. The last three factors should also help sustain two-wheeler demand over the medium-term.

Cost of ownership rises. The increase in excise duty in Budget 2012 was negative for the auto sector, particularly for UVs and CVs. ‘Dieselization’ is expected to continue, since the cost of running a diesel vehicle is ~15% cheaper vs. petrol. Some demand postponement could happen ahead.

Valuations not compelling. The recent rally has seen auto companies trade at above or near fair valuations, based on one-year forward multiples. With lower volume growth expected, significant upsides are unlikely. Recommendations. We initiate coverage on VST Tillers and Eicher Motors with Buy ratings. Of frontline auto companies, we prefer Bajaj Auto & Maruti Suzuki. We retain a Buy on M&M and put a Hold on TVS. We downgrade Ashok Leyland to a Sell on a negative CV outlook and retain a Sell on Hero Moto. We also downgrade Tata Motors to a Hold based on fair valuations. Risks. Rising commodity prices, adverse currency movement.

Neutral Sensex: 17486

Nifty: 5323

9 April 2012 India Autos – Valuations no longer compelling

Anand Rathi Research 2

India Autos


Investment Argument and Valuation .................................................................3

Relatively slower volume growth.......................................................................6

Cost of ownership rises...................................................................................11

Valuations not compelling any longer .............................................................13

Company section ............................................................................................15

Ashok Leyland..........................................................................................16

Bajaj Auto .................................................................................................23

Hero Moto Corp........................................................................................30

M&M......................................................................................................... 37

Maruti Suzuki............................................................................................ 44

Tata Motors .............................................................................................. 51

TVS .......................................................................................................... 61

Eicher Motors ........................................................................................... 68

VST Tillers................................................................................................ 84

Annexures....................................................................................................... 99



Investment Argument and Valuation The headwinds of slower-than-expected economic growth and higher cost of ownership have not been completely offset by the tailwinds of stable-to-lower commodity prices. While most companies are registering fair valuations, we prefer non-frontline companies, VST Tillers and Eicher Motors. We initiate coverage of these stocks with Buy ratings. Among frontline companies, our top picks are Bajaj Auto and Maruti Suzuki.

Relatively slower volume growth

In the past three years, auto companies have registered healthy ~22% volume growth. We expect steady 8-10% CAGR over FY11-14 in the four-wheeler segment, constrained by macro-economic headwinds and a higher base. In the two-wheeler segment, growth is likely to be 10-12%, driven mainly by exports.

Fig 1 – Volume growth estimates

-15

0

15

30

45

Asho

kLe

ylan

d

Baja

j Aut

o

Her

oM

otoc

orp

M&M

Mar

uti

Suzu

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Tata

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ors

(Sta

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JLR

TVS

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or

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erM

otor

s (C

Yen

d)

VST

Tille

rs

FY12e FY13e

(%)

Source: Anand Rathi Research

Cost of ownership rises, also hit by Budget 2012

With the increase in excise duty, Budget 2012 is negative for the auto sector. The impact was even greater on UVs and CVs. There were a few positives from the benefits to R&D and alternative fuels. Dieselization is expected to continue, since the cost of running a diesel vehicle is ~15% cheaper vs. petrol. We could see some demand postponement on persisting overhangs of higher fuel prices, inflation and higher cost of ownership.

Fig 2 – Impact of Budget 2012 on the sector and stocks Budget announcements Impact on sector Companies

Excise duty hiked 2% Negative All companies in the sector

Higher duty on CV chasses Negative Ashok Leyland, Eicher Motors, Tata Motors

Widening of tax slabs Positive Potential for higher consumer discretionary spending would benefit Maruti and two-wheeler companies, partially set off by the rise in service-tax rates

Extension for weighted R&D deduction for another five years and focus on alternative fuel technologies

Positive M&M, Tata Motors

Source: Government of India, Anand Rathi Research



Valuations not compelling any longer

The recent rally in the auto sector has led to most companies trading at above or near their fair valuations, based on one-year forward multiples.

With volume growth expected to be slower, going forward, we expect CV companies, tractor companies and two-wheeler companies to obtain low-growth-stage PE multiples, lower than their past averages.

Our stock picks are companies with strong cash flows, healthy return ratios, dominant/improving market share, steady earnings CAGR ahead and with likely benefits of operating leverage accruing from existing capacities:

Maruti Suzuki: The company is likely to register significant recovery in volume growth on normalized production in FY13 (following the strike that hampered operations for a significant part of 2Q and 3Q FY12).

VST Tillers: Its range comprises subsidized low-HP tractors, which should continue to register strong demand.

Eicher Motors: The company has huge cash and investments, good demand for premium motorcycles, and a qualitative improvement in its CV range.

Though Bajaj Auto is likely to witness slower volume growth in the next two years (as compared to the past three years, it is one of our preferred buys in the sector. We believe over the long-term it should outperform its competitors – Hero Moto and TVS Motors – and gain market share in motorcycles. Its export-focused strategy is likely to help it grow at a faster pace than the domestic motorcycle industry. Hence, we consider it to be a long-term strategic Buy.

Valuation

We initiate coverage of VST Tillers and Eicher Motors with Buy ratings. Of the frontline auto companies, we prefer Bajaj Auto and Maruti Suzuki. We retain a Buy on M&M and have Hold rating on TVS. Due to the negative outlook for the CV sector in the next few quarters, we downgrade Ashok Leyland to a Sell. We also retain a Sell on Hero Motocorp and downgrade Tata Motors to a Hold due to its fair valuation. Risks. Increase in commodity prices and adverse currency movements.

Company valuations

Ashok Leyland

We lower our price target to `30, based on a target PE multiple of 12x (on par to its past average). At our target price, the stock trades at 6.6x FY13e EV/EBITDA, a premium to its seven-year average multiple of 5.75x. We downgrade to a Sell. Risks. Better-than-expected economic growth, rise in freight rates, greater profitability of new LCVs.

Bajaj Auto

We raise our price target to `1,939 (from `1,846) based on 15x core earnings for Mar ’13, and `226 as value of cash and investments). We reiterate a Buy. Risks. Keen competition leading to destructive price wars, adverse forex movement and a steep rise in commodity prices, export demand hit by increased duties in Sri Lanka.



Hero Moto Corp

We raise our price target to `2,087 (from `1,751) based on 15x core earnings for Mar ’13, and `199 as the value of cash and investments). We maintain a Sell on HMCL. Risks. Rupee appreciation that could reduce royalty outflow, better-than-expected volumes.

M&M

Our price target is `833, based on the 12-month-forward core business PE of 12.5x (`550), the value of listed subsidiaries (incl. Ssangyong) and associates at `173 and the value of other investments at `110. The stock trades at 11.4x FY13e consolidated earnings. We maintain a Buy. Risks. Higher interest rates, less credit available, poor monsoons and lower economic growth in India, delay in turnaround at Ssangyong.

Maruti Suzuki

We value the stock at `1,581, based on a target PE of 17.5x (on par with its early-cycle multiple, a 14% premium to its past five-year average). We re-iterate a Buy. Risks. Increase in fuel price, adverse forex movement, labour strife and rise in commodity prices.

Tata Motors

Our target is `301, based on 12-month-forward core standalone PE of 12x amounting to `56, `33 as value of investment in non-JLR subsidiaries and associates, and `213 as value of JLR (on a forward multiple of 6x). On fair valuations, we downgrade the stock to Hold. Risks. Downside: currency fluctuation, double dip in European recovery. Upside: better-than-expected CV demand, surprises by JLR.

TVS Motors

We raise our price target to `50 (from `47) based on 7x core earnings (a ~50% discount to listed peers) for FY13, and `10 as value of cash and investments). At our target price, the stock would trade at a PE of 8.8x (lower than its average of ~10.5x). We upgrade to a Hold. Risks. Downside: competition leading to price wars, steep rise in commodity prices; Upside: better-than-expected demand and operating performance.

Eicher Motors

We initiate coverage with a Buy, and a price target of `2,601, based on the value of the two-wheeler business (`838, 15x PE), the value of the CV business (`973, 12x target PE) and cash at `790. Risks. Drop in freight rates, commodity price rises, capex and product launch delays.

VST Tillers

We value the stock at 8x Mar ’13 PE (~20% premium to its past three-year one-year-forward average, and a 36% discount to the target P/E for M&M). This translates to FY13e EV/EBITDA of 5x (~10% lower than the past three-year average). Our target price is `585. Risks: Higher interest rates, commodity price rise, poor monsoons, increase in competition.



Relatively slower volume growth In the past three years, auto companies have registered a healthy ~25% volume growth. Ahead, we expect lower volumes with 8-12% CAGR over FY12-14 in the four-wheeler segment, constrained by macro-economic headwinds and a higher base. In the two-wheeler segment, growth is expected at 8-10%, driven mainly by exports. New launches and shifting preferences to diesel vehicles should help arrest a decline in growth in PVs and CVs.

In FY12, the four-wheeler segment saw passenger vehicle sales under pressure, while CVs surprised positively. We expect M&H CV sales to grow 5.9% yoy in FY13, following 8.3% yoy growth in FY12 ytd. We expect LCVs to register FY13 growth of >19.5%.

April-Feb FY12 in PVs, Maruti, Tata Motors and Honda lost ~649bps, ~36bps and ~50bps, of market-share respectively, vs. end of FY11. Maruti’s share fell on production losses/maintenance shutdowns in June FY12 as well as July FY12, strikes and sentiment hit demand (on fuel price hikes and high interest rates). Yet, its volumes are improving post new launches. Tata Motors had seen a few slack months, but is minimizing market share loss as volumes get better.

In M&H CVs, Ashok Leyland’s share loss has been Eicher’s gain on the latter’s better product mix.

In the two-wheeler segment, growth is estimated at 8-10%, driven mainly by exports. Bajaj Auto has maintained its ground, while Hero Moto gained at the expense of TVS Motors.

We expect two-wheeler domestic demand in India to be steady. Two-wheeler export volume growth is likely to be driven by the foray into new regions globally, particularly in regions with low per-capita penetration. We expect four-wheeler manufacturers to grow at a steady 8-12% yoy ahead. Deeper penetration in non-traditional markets, cost arbitrage and steady demand improvement should help sustain exports.

Fig 3 – Auto volumes to register slower growth

0

5,000

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15,000

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30,000

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FY05

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(%)

Source: SIAM, Anand Rathi Research

Two-wheeler exports to be driven by the foray into new and low per-

capita penetration regions. Four-wheeler sales growth is likely to be

pinned down by macro-economic and high-base concerns. CVs have surprised positively in FY12



Market share movements

In FY12 ytd, Maruti Suzuki shed a small lump of its market share due to strikes and weak demand. This is now being offset by its launches (Swift and Dzire). Despite yoy market share loss, Tata Motors recovered slightly with decent volumes in 4Q ytd in cars; CVs continue to hold relatively decent volume levels with minimal damage. Ashok Leyland’s market share fell as Eicher gained on an improving product mix. In motorcycles, Bajaj maintained its market share (driven by exports) and Hero gained on refreshed launches. In UVs, M&M gained over 300bps due to the very positive response to models such as XUV-500.

Fig 4 – Quarterly yoy change in four-wheeler volumes

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Y12

Ashok Leyland (S) Tata Motors (S) Eicher Motors (Sub)Maruti Suzuki (S) Mahindra & Mahindra (S)

(%)

Source: Companies

Fig 5 – Quarterly yoy change in two-wheeler volumes

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Bajaj Auto (S) Hero Honda TVS Motor (S) Eicher Motors (S)

(%)

Source: Companies



Fig 6 – Market share movement Market share (%) Jan'12 Feb'11 Feb'12 FY10 FY11 Apr-Feb ytd

FY11Apr-Feb ytd

FY12 Change yoy

(bps)Change from

FY11 (bps)PCs Fiat 0.9 0.8 0.7 1.3 0.9 0.9 0.7 (22.7) (20.7)Ford 4.3 4.5 4.2 1.8 4.4 4.4 4.6 22.7 22.0 GM 2.7 3.3 2.8 3.6 3.6 3.7 3.5 (15.2) (7.9)Honda 0.7 2.1 3.6 3.1 2.4 2.6 1.9 (63.1) (50.1)Hyundai 20.5 22.5 21.0 30.5 24.4 24.7 25.3 54.3 92.7 MSIL 42.2 42.5 42.8 46.3 45.4 45.9 38.9 (704.1) (648.9)TTMT 12.0 11.7 11.7 10.5 10.8 11.1 10.5 (58.2) (36.4)Toyota 4.0 1.6 3.7 0.5 0.8 0.7 3.6 292.8 282.6 VW 2.4 3.1 2.7 0.2 2.1 2.0 3.1 112.1 100.4 Skoda 1.2 1.0 1.5 0.9 0.9 0.9 1.2 36.6 34.7 Nissan 8.0 6.2 4.3 0.0 2.8 2.0 5.2 322.8 242.6 Others 1.1 0.6 1.0 1.2 1.5 1.1 1.3 22.1 (11.2) UVs M&M 53.3 52.5 53.9 55.4 52.7 53.9 55.8 190.1 303.6 GM 5.1 6.1 5.5 6.0 6.1 6.4 6.4 (1.4) 26.6 Tata Motors 15.3 15.8 15.4 13.1 13.7 13.1 12.8 (26.7) (87.5)Toyota 22.0 20.0 21.2 19.5 19.8 20.6 18.4 (217.0) (134.9)Others 4.4 5.5 4.0 6.0 7.7 6.0 6.6 55.0 (107.7) M&HCVs Tata Motors 58.9 56.7 57.8 63.3 59.5 59.6 59.3 (22.4) (17.5)Ashok Leyland 26.6 29.1 26.5 23.7 26.5 26.3 24.3 (199.4) (214.9)Eicher 8.5 9.0 9.6 8.6 9.0 9.1 10.1 107.0 113.1 Others 5.9 5.2 6.1 4.4 5.0 5.0 6.2 114.8 119.3 LCVs Tata Motors 57.1 58.7 60.0 58.7 58.3 57.6 58.2 58.4 (9.7)M&M 32.5 30.2 28.1 30.0 31.4 31.1 30.5 (59.1) (86.9)Force 4.1 4.9 4.5 3.8 4.2 5.3 4.7 (64.9) 47.0 Eicher 1.8 2.4 2.1 2.1 2.3 2.2 2.2 (6.4) (19.0)Others 4.5 3.9 5.4 5.3 3.8 3.8 4.5 72.0 68.5 Motorcycles Bajaj Auto 30.4 31.7 30.7 29.7 32.3 32.6 32.3 (36.6) (0.2)Hero Motocorp 49.5 48.3 49.0 51.9 48.0 47.8 48.3 51.5 32.8 HMSI 7.9 7.3 8.5 6.2 7.1 7.2 7.1 (1.7) 0.8 India Yamaha Motors 4.1 3.6 4.1 3.4 3.6 3.5 4.0 58.5 49.1 Suzuki Motorcycles 0.5 0.6 0.5 0.6 0.5 0.5 0.5 0.4 (0.7)TVS Motors 6.8 7.9 6.4 7.6 8.0 7.9 7.1 (85.8) (89.2)Others 0.7 0.6 0.8 0.6 0.6 0.5 0.7 13.6 7.5 Three-wheelers Bajaj Auto 59.6 54.4 59.1 55.6 54.9 55.3 59.1 375.1 421.0 Piaggio 22.5 27.6 23.2 30.3 27.7 27.6 23.2 (446.0) (454.5)TVS Motors 3.3 5.7 4.3 2.5 5.0 4.9 4.6 (24.9) (39.7)Mahindra & Mahindra 8.9 8.0 7.3 7.4 8.1 8.1 8.1 3.7 (4.3)Others 5.8 4.4 6.0 4.3 4.2 4.1 5.0 92.1 77.5 Scooterettes Hero Motocorp 17.9 18.3 17.4 14.4 17.0 16.9 17.2 34.4 23.5 HMSI 48.3 41.8 50.6 50.3 42.7 43.1 46.3 314.9 360.3 Suzuki 12.8 12.0 13.3 9.5 10.9 10.9 10.8 (13.4) (6.5)TVS Motors 17.8 21.1 15.1 20.7 21.9 21.4 20.5 (86.8) (142.4)Others 3.2 6.7 3.6 5.1 7.5 7.7 5.2 (249.1) (234.9)

Source: SIAM



Key growth drivers ahead:

Passenger vehicles: We expect lower 10.9% CAGR for PVs over the next two years. The growth would be driven by:

New launches – as witnessed from the XUV500 from M&M, the good response to the New Swift and the New Dzire, as well as expected positive response for Maruti’s Ertiga. New launches/ refreshed launches are expected from all the major OEMs.

Dieselization – the demand for diesel vehicles is likely to remain strong, as long as the differential between diesel and petrol prices in India sustains. Petrol vehicle sales are expected to stagnate, while diesel vehicle growth would continue, subject to capacity constraints.

Exports – launches of export-oriented models are expected to increase. Hence, overall production for PVs is likely to register a higher growth rate than domestic demand.

Constraining factors – high fuel prices, higher cost of ownership, high penetration in urban regions and postponement of purchases due to poor economic conditions are factors that are responsible for the lowering of the growth rate.

Two wheelers: We estimate lower CAGR of 11.16% for two wheelers over the next two years. The growth is expected to be driven by:

New launches – as witnessed from the good growth of Hero Motocorp’s monthly volumes in 2H FY12 on refreshed launches (Glamour, Karizma, Passion Pro) will also be helped by the new Impulse, Maestro (scooter) and Ignitor, going forward. Bajaj’s upcoming New Pulsar and New Discover should help improve its volume growth rates and market share.

Exports – likely to be driven by the foray into new regions globally, particularly in regions with low per-capita penetration.

Commercial vehicles: We expect lower CAGR of 12.4% for commercial vehicles, mainly driven by good LCV volume growth over the next two years. The growth in CVs would be driven by:

Road infra projects – The National Highway Authority of India’s (NHAI) FY12 target is the awarding of 7,300km. Till Feb ’12 FY12 ytd, ~4,382km had been awarded (ytd ~`410bn). Some of this will spill over, providing some visibility. Demand for CVs from road-building and infrastructure activities is a crucial component currently, considering the mining ban in Karnataka and Goa as well as the general economic activity slowdown and delayed capex programs.

Exports – Export orders are expected to be steady on the ongoing fleet renewal in Europe.

New launches and entry of new players – an improved product mix has helped Eicher’s market share, the New Prima has generated increasing sales for Tata Motors and ‘The Dost’ has helped Ashok Leyland’s volumes markedly. Dealers expect players like MAN, Scania and Bharat Forge to make their presence felt, going forward.

Tractors: We expect tractors to grow at a CAGR of 5% over the next two years. This growth would be driven by:

Labour shortage – shortage of cheap labour is a key factor expected to drive farm mechanization and is expected to arise mainly from a



choice of alternative professions due to higher rural income from non-agricultural sources.

Increased availability of power – availability of adequate farm power is crucial for timely farm operations, as well as to increase productivity. Hence, the government has increased its emphasis to enhance food production through higher minimum support prices for crops, higher allocation of power for farm purposes, productivity-awareness programmes and farm subsidies.

Additional usages – increased use of tractors for haulage and non-agricultural applications.

Better finance penetration – tractor financing attracts lower interest rates and higher bank participation, as it continues to enjoy priority lending status.



Cost of ownership rises ‘Dieselization’ is expected to continue, since the cost of running a diesel vehicle is ~15% cheaper vs. petrol. We expect some demand postponement on the persisting overhangs of higher fuel prices, inflation and higher cost of ownership. With the increase in excise duty, Budget 2012 is negative for the auto sector, particularly with regard to UVs and CVs. A few minor positives include benefits for R&D and alternative fuels.

The mix of diesel-petrol cars still remains more skewed towards diesel (70:30) in the models where a diesel variant is available and is expected to remain so. This ‘dieselization’ factor is also expected to continue, since the cost of running a diesel vehicle is ~15% cheaper vs. petrol. Dealers also maintain that in urban India, customers are directly sensitive to interest rates, fuel prices and inflation. Rural customers are more sensitive to cost of ownership (on farm income), resale value and the hardiness of the vehicle. Following the uncertain macro economic environment, some postponement of demand is possible, mildly offset by rural demand.

According to two-wheeler dealers of Bajaj Auto and Hero Moto Corp, they have inventory of ~5 weeks i.e more than a month. This has been rising since Jan ’12. The dealers state this is due to various reasons such as: stocking up inventory in anticipation of Budget pre-buying demand. While this demand was good, it is slower yoy due to inflation as well as higher base catching up. Despite the concerns, rural consumer confidence is still growing.

Excise duty hikes in the Union Budget (on expected lines), should be passed on through price hikes. This

may impact demand due to an increase in the cost of acquisition

Fig 7 – Cost of ownership: cars Passenger vehicles (petrol)

(`) FY11 YTD FY12 FY13e

Average cost of a passenger car 407,301 419,520 432,106

% Financed 80.0 80.0 80.0

Loan amount 325,841 335,616 345,685

Interest rate (%) 12.0 12.0 12.5

Duration (months) 60 60 60

Monthly EMI 7,248 7,466 7,777

Per day usage (km) 30 30 30

Fuel efficiency (km/lt) 12 12 12

Petrol price (per lt) 62 71 75

Fuel cost per month 4,658 5,325 5,625

Monthly maintenance cost 1,332 1,465 1,612

PV ownership cost (per month) 13,238 14,256 15,014

% YoY increase 3.7 7.7 5.3

Passenger vehicles (diesel)


Average cost of a passenger car 407,301 419,520 462,106

% Financed 80.0 80.0 80.0

Loan amount 325,841 335,616 369,685

Interest rate (%) 12.0 12.5 13.5


Monthly EMI 7,248 7,551 8,506



Diesel price (per lt) 43 46 46



PV ownership cost (per month) 11,567 12,228 13,393

% YoY increase 3.7 5.7 9.5 Source: Anand Rathi Research



No additional tax on diesel vehicles is a sentiment positive. The hike in excise duties, on expected lines, is a negative and is likely to be passed on to consumers in the form of price hikes. This may curb demand, as the cost of acquisition would rise. The focus on agriculture should have a positive impact on demand for tractors, two wheelers and small cars.

Benefits for hybrid technologies and spending on R&D are positives for companies that have invested in these areas. Two wheeler and small car demand should benefit from the upward revision in the personal income-tax slab, due to the greater availability of funds for consumer discretionary products.

However, the greatest increase in duties for companies in the listed space would be in M&M’s UV portfolio, which has entirely diesel offerings.

The focus on rural-centric development schemes and the deduction under agri-extension services is expected to improve rural incomes and increase mechanization. Similarly, the expanded income-tax slabs for individuals should result in additional disposable income for consumers.

This is likely to benefit M&M’s tractor division, Maruti Suzuki and two wheeler companies. The lower duties for batteries of hybrid vehicles and for R&D spending is likely to benefit Tata Motors and M&M, which are working on alternative fuel technology vehicles and have products in this space.

Fig 9 – Impact of the Budget on sector and stocks Budget announcements Impact on sector Companies

Excise duty hiked 2% Negative All companies in the sector

Higher duty on CV chasses Negative Ashok Leyland, Eicher Motors, Tata Motors

Widening of tax slabs Positive Potential for higher consumer discretionary spending to benefit Maruti and two-wheeler companies, partially set off by the rise in service-tax rates

Extension for weighted R&D deduction for five years more and focus on alternative fuel technologies

Positive M&M, Tata Motors

Source: Government of India, Anand Rathi Research

Fig 8 – Cost of ownership: TWs and CVs Two wheelers


Average cost of two wheelers 45,193 47,453 49,825

% Finance 70.0 70.0 70.0

Loan amount 31,635 33,217 34,878

Interest rate (%) 16.0 18.0 19.0


Monthly EMI 1,112 1,201 1,278



Petrol price (per lt) 63 71 75


Monthly maintenance cost 499 514 565

Two wheeler ownership cost (per month) 3,123 3,419 3,644

yoy % increase 2.7 9.5 6.6

Commercial vehicles


Average cost of commercial vehicle 1,180,419 1,239,440 1,301,412

% Financed 90.0 90.0 90.0

Loan amount 1,062,377 1,115,496 1,171,271

Interest rate (%) 14.5 15.0 16.0


Monthly EMI 16,816 17,997 19,620



Diesel price (per lt) 43 46 48



CV ownership cost (per month) 123,016 131,673 137,250

% YoY increase 1.0 7.0 4.2 Source: Anand Rathi Research



Valuations not compelling The recent rally in the auto sector has led to most companies trading at above or near their fair valuations based on one-year-forward multiples. Our stock picks are companies with strong cash flows, healthy return ratios, dominant/improving market share, steady earnings CAGR, going forward, and benefits of operating leverage from existing capacities.

Focus on cash flow and market dominance

Since the turn of the year, the auto sector has outperformed the markets, boosted by attractive valuations and decent financial results.

However, with volume growth expected to be slower, going forward, we expect CV companies, tractor companies and two-wheeler companies to obtain low-growth-stage PE multiples, lower than their past averages.

This would be applicable to Ashok Leyland, Tata Motors, TVS Motors, Hero Moto Corp, Bajaj Auto and M&M.

With stabilized inflation, we believe the probability of a further interest rate hike is bleak. As a result, we should see lower interest rates over the next 6 months. This scenario should slightly help interest rate sensitive stocks like Maruti Suzuki, M&M and Bajaj Auto.

Fig 10 – FCF/share: Bajaj Auto, VST Tillers, Eicher Motors, Maruti Suzuki

-40

-20

0

20

40

60

80

100

120

140

Baja

j Aut

o

Mar

uti

Suzu

ki

Eich

erM

otor

s

VST

Tille

rs

FY11 FY12e FY13e

(`)

Source: Companies, Anand Rathi Research

Currency movement is a jack-in-the-box

While Maruti Suzuki is likely to benefit from recent currency movements, an adverse impact is likely for Tata Motors. Further unexpected currency movements could wreak the hedging strategies of companies.



Fig 11 – Currency movements vs the Rupee

60

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US$ - Re GBP - Re EUR - Re JPY - Re Source: Bloomberg

Fig 12 – Currency movements: JPY and EUR vs USD

70

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US$ - JPY EUR - US $ Source: Bloomberg

We recommend companies with strong cash flows, healthy return ratios, dominant market share, steady earnings CAGR ahead and with likely benefits of operating leverage accruing from existing capacities. We expect their operating performance to benefit from: (1) higher operating leverage, (2) commodity rationalization, (3) cost reduction (4) productivity improvement, and (5) price increases.

Maruti Suzuki: The company is likely to register significant recovery in volume growth on normalized production in FY13 (following the strike that hampered operations for a significant part of 2Q and 3Q FY12).

VST Tillers: Its range comprises subsidised low-HP tractors, which continue to register strong demand.

Eicher Motors: The company has huge cash and investments, good demand for premium motorcycles, and a qualitative improvement in its CV range.

Though Bajaj Auto is likely to witness slower volume growth in the short-term, it is one of our preferred bets in the sector, as we believe it should outperform its competitors – Hero Moto and TVS Motors – and gain market share in motorcycles. Its export-focused strategy is likely to help it grow at a faster pace than the domestic motorcycle industry. We consider Bajaj Auto to be a long-term strategic Buy.



Company section


Rohan Korde+9122 66266733

[email protected]

Nirav Bhatt +9122 6626505

[email protected]

India I Equities

Key financials (YE Mar) FY10 FY11 FY12e FY13e FY14e

Sales (`m) 72,447 111,177 126,896 142,449 159,331

Net profit (`m) 3,821 6,313 6,373 6,596 7,356

EPS (`) 1.4 2.4 2.4 2.5 2.8

Growth (%) 120.0 65.2 0.9 3.5 11.5

EV/EBITDA (x) 7.1 4.3 7.3 6.6 5.9

PE (x) 21.1 12.8 12.7 12.2 11.0

PBV (x) 1.7 1.5 2.7 2.5 2.3

RoE (%) 16.4 24.0 21.4 20.6 21.4

RoCE (%) 12.0 17.3 14.6 15.2 16.1

Dividend yield (%) 5.0 6.6 4.0 4.6 5.3

Net gearing (%) 61.1 66.7 68.3 69.2 68.9

Source: Company, Anand Rathi Research

Autos

Update 2

9 April 2012

Ashok Leyland

Sluggish M&HCV growth outlook; downgrade to Sell

Following sputtering demand for heavy commercial vehicles as a result of sluggish economic activity and a mining ban, we expect Ashok Leyland to coast on within the same price band for the next few quarters. With the outlook unlikely to improve in the near future and the current fair valuations, we downgrade the stock to a Sell and lower the price target to `30.

Sluggish growth. Ashok Leyland has recorded flattish M&HCV volumes in FY12. Growth was mainly due to the LCV sales ramp-up and new launches. Continuing sluggish economic activity may also lead to further volume downgrades in FY13. We further expect 3.5% compounded growth for passenger HCVs and a mere 5.2% CAGR for goods CVs over FY12-14.

Operating performance lacklustre. We expect stable EBITDA margin of 10-11% over FY12-14, measures such as cash & carry, relatively benign input costs and focus on working capital management. However, operating profit per vehicle from 2HFY12 is likely to be weaker due to the mounting contribution of LCVs (lower margin vs M&HCVs) to total sales and delays in price hikes.

Lower estimates. We lower our FY13 earnings estimate by 14.5% to factor in the lower HCV growth. We expect 7.4% earnings CAGR over FY12-14, compared to 13% over FY08-11.

Valuation. We lower our price target to `30, based on a target PE multiple of 12x (on par to its past average). At our target price, the stock trades at 6.6x FY13e EV/EBITDA, a premium to its seven-year average multiple of 5.75x. We downgrade to a Sell. Risks. Better-than-expected economic growth, rise in freight rates, greater profitability of new LCVs.

Rating: Sell Target Price: `30 Share Price: `30

Relative price performance

AL

Sensex

20

23

26

29

32

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data ALIN / AL.BO52-week high / low `33/ `20Sensex / Nifty 17486 / 53233-m average volume US$4.1m Market cap `80.6bn / US$1.6bnShares outstanding 2,661m

Shareholding pattern (%) Dec ’11 Sep ’11 Jun ’11

Promoters 38.61 38.61 38.61 - of which, pledged 7.05 7.05 14.11Free float 61.39 61.39 61.39 - Foreign institutions 15.57 16.18 13.53 - Domestic institutions 15.84 15.40 16.58 - Public 29.98 29.81 31.28

Estimates revision (%) FY12e FY13e FY14e

Sales 4.1 4.5 7.1EBITDA -0.2 -3.9 -4.7EPS -0.2 -14.5 -13.6Target multiple (x) - 12.0 -

Change in Estimates Target Reco

9 April 2012 Ashok Leyland – Sluggish M&HCV growth outlook; downgrade to Sell


Quick Glance – Financials and ValuationsFig 1 – Income statement (`m)

Year-end: Mar FY10 FY11 FY12e FY13e FY14e

Net revenues 72,447 111,177 126,896 142,449 159,331Revenue growth (%) 21.1 53.5 14.1 12.3 11.9- Op. expenses 64,819 99,002 113,445 127,777 143,318EBIDTA 7,628 12,176 13,451 14,672 16,013EBITDA margins (%) 10.5 11.0 10.6 10.3 10.1- Interest 1,019 1,889 2,566 2,861 2,861- Depreciation 2,041 2,674 3,532 4,012 4,215+ Other income 417 406 394 446 495- Extraordinaries & others -462 0 510 0 0- Tax 1,211 1,705 1,375 1,649 2,075Effective tax rate (%) 22.2 21.3 19.0 20.0 22.0Reported PAT 4,237 6,313 5,863 6,596 7,356Adjusted PAT 3,821 6,313 6,373 6,596 7,356PAT growth (%) 120.0 65.2 0.9 3.5 11.5Adj. FDEPS (`/share) 1.4 2.4 2.4 2.5 2.8Adj. FDEPS growth (%) 120.0 65.2 0.9 3.5 11.5Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e

PAT 4,237 6,313 5,863 6,596 7,356+ Non-cash items 2,041 2,674 3,532 4,012 4,215Cash profit 6,278 8,987 9,395 10,608 11,571- Incr./(decr.) in WC -2,806 -6 3,446 2,019 2,106Operating cash-flow 9,084 8,993 5,949 8,589 9,465- Capex 6,494 4,482 10,000 4,000 3,000Free cash-flow 2,589 4,511 -4,051 4,589 6,465- Dividend 1,996 2,661 3,193 3,725 4,257+ Equity raised 0 0 1,330 0 0+ Debt raised 2,457 3,644 9,000 0 0- Investments 626 9,038 3,000 2,000 2,000- Misc. items -1,883 -150 -42 44 131Net cash-flow 4,308 -3,394 128 -1,180 77+ Op. cash & bank bal. 881 5,189 1,795 1,924 743Cl. Cash & bank bal. 5,189 1,795 1,924 743 821Source: Company, Anand Rathi Research

Fig 5 – P/E band

Ashok Leyland

5x

9x

13x

17x

21x

25x

0

15

30

45

60

75

Jun-

05

Mar

-06

Dec

-06

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07

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08

Mar

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Dec

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10

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Source: Bloomberg, Anand Rathi Research

Fig 2 – Balance sheet (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e

Share capital 1,330 1,330 2,661 2,661 2,661Reserves & surplus 22,025 24,968 27,119 29,386 31,795Net worth 23,356 26,298 29,780 32,047 34,456Total debt 22,039 25,683 34,683 34,683 34,683Def. tax liab. (net) 4,435 5,295 5,855 6,415 6,975Capital employed 49,829 57,276 70,318 73,145 76,113Net fixed assets 34,779 36,586 43,054 43,042 41,827Investments 3,262 12,300 15,300 17,300 19,300Working capital 6,600 6,594 10,040 12,059 14,165Cash 5,189 1,795 1,924 743 821Capital deployed 49,829 57,276 70,318 73,145 76,113Net debt 13,588 11,587 17,459 16,639 14,562No. of shares (m) 1,330 1,330 2,661 2,661 2,661Net debt/equity 0.6 0.4 0.6 0.5 0.4W C turn (days) 17 23 24 24 24Book value (`/sh) 17.6 19.8 11.2 12.0 12.9Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `30 Year-end: Mar FY10 FY11 FY12e FY13e FY14e

P/E (x) 21.1 12.8 12.7 12.2 11.0P/B (x) 1.7 1.5 2.7 2.5 2.3EV/EBITDA (x) 7.1 4.3 7.3 6.6 5.9RoE (%) 16.4 24.0 21.4 20.6 21.4RoCE (%) 12.0 17.3 14.6 15.2 16.1Dividend yield 5.0 6.6 4.0 4.6 5.3Dividend payout (%) 52.2 42.1 50.1 56.5 57.9Debt to equity 0.9 1.0 1.2 1.1 1.0Core P/E (x) 23.0 13.4 13.3 12.9 11.5Cash P/E 6.9 4.5 8.1 7.6 7.0EV/sales 0.7 0.5 0.8 0.7 0.6Inventory days 83 73 70 70 70Receivables days 51 39 39 39 39Payables days 117 89 85 85 85Fixed asset T/O 1.4 1.9 1.8 1.9 2.1Source: Company, Anand Rathi Research

Fig 6 – Sales break-up by product

36.2 28.9 26.8 24.6 20.9 19.9

61.3 69.4 72.367.6

58.4 56.5

0.8 0.8

19.9 22.80.90.91.72.5 6.9

0

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e

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Passenger M&HCVs Goods M&HCVs Passenger LCVs Goods LCVs (Dost)

(%)




Sluggish growth We expect Ashok Leyland (AL) to report 21.6% volume growth for FY13, mainly on account of the LCV sales ramp-up on new launches. We estimate low 3.5% compounded growth over FY12-14 for passenger HCVs and a mere 5.2% CAGR for goods CVs.

Fig 7 – Volume growth trend: M&H CVs

0

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Ashok Leyland total M&HCVs yoy growth (RHS)

(units) (%)


Ashok Leyland is likely to report M&H CV CAGR of 4.8% over FY12-14, compared to 6.5% CAGR estimated for the industry. In the goods M&H CV space, we expect AL’s growth to be at 5.2% vs the industry’s expected 6.4% growth rate over the same period.

Fig 8 – Market share trend: M&H CVs & goods M&HCVs

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Ashok Leyland M&HCV Market shareAshok Leyland Goods M&HCV Market shareAshok Leyland M&HCV Passenger Market share

(%)


We expect slower-than-industry M&H CV CAGR of 4.8% over

FY12-14



Fig 9 – Volume growth trend LCVs: ‘Dost’ to drive volumes

0

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(units) (%)


Fig 10 – Market share trend: Overall LCVs and passenger LCVs

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(%)


While AL has recorded flattish volumes in FY12, we expect 21.6% growth in FY13e, mainly on account of the LCV sales ramp-up on new launches. However, continued sluggish activity may lead to further downgrades.



Operating performance lacklustre EBITDA margin is likely to be stable at 10-11% over FY12-14. We estimate operating profit per vehicle in 4QFY12 to be 13.7% weaker yoy, due to higher LCV contribution. Margins are likely to be helped slightly by measures such as cash & carry, Mission Gemba (a strategy involving the running of business units as independent entities), benign input costs and working capital management.

We expect a stable EBITDA margin of 10-11% over FY12-14. Overall stability in margins would be helped by measures such as cash & carry, Mission Gemba (running business units as independent entities), relatively benign input costs and focus on working-capital management. However, increasing LCV share is likely to lead to deteriorating margins.

Fig 11 – Realisation trend: Higher share of LCVs to lower realisations

30,000

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Realisation / unit yoy change (RHS)

(`/unit) (%)


Fig 12 – Contribution trend: weaker in FY13e…

8,000

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Contribution / unit yoy change (RHS)

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Fig 13 – ….. EBITDA / vehicle to fall, going forward

4,000

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Fig 14 – Profit per unit: to decline

-60,000

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Lowering estimates We lower our price target to `30, based on the target PE multiple of 12x (at par to the past average). At our target price, the stock would trade at 6.6x FY13e EV/EBITDA, a premium to its seven-year average multiple of 5.75x. We downgrade the stock to a Sell.

We lower our FY13 earnings estimates 14.5% to factor in the lower HCV growth. We expect 7.4% earnings CAGR over FY12-14, compared to 13% over FY08-11.

We lower our price target to `30, based on the target PE multiple of 12x (at par to the past average). At our price target, the stock would trade at 6.6x FY13e EV/EBITDA, a premium to its seven-year average multiple of 5.75x. We downgrade the stock to a Sell.

Risks

Better-than-expected economic growth, increase in freight rates, higher-than-expected profitability of new LCVs.

Fig 15 – EV/EBITDA band

2

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07

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08

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-09

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10

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11

Mar

-12




[email protected]


[email protected]

India I Equities


Sales (`m) 119,210 166,089 199,496 231,220 266,561

Net profit (`m) 18,156 26,152 32,140 36,816 42,460

EPS (`) 62.7 90.4 111.1 127.2 146.7

Growth (%) 127.1 44.0 22.9 14.5 15.3

EV/EBITDA (x) 8.2 12.7 10.3 8.4 7.0

PE (x) 26.4 18.3 14.9 13.0 11.3

PBV (x) 8.2 9.7 7.4 5.6 4.3

RoE (%) 62.0 53.3 49.5 42.9 38.3

RoCE (%) 60.4 68.9 63.5 57.4 51.5

Dividend yield (%) 2.4 2.4 3.0 3.3 3.6

Net gearing (%) 51.9 28.9 24.2 22.5 20.6


Autos

Update

9 April 2012

Bajaj Auto

Potential for positive surprises, valuations reasonable; Buy

With a strong compounded earnings growth rate of nearly 60% since fiscal 2009, Bajaj Auto has been one of the best performing auto companies. Going forward, the growth rate is likely to be a more normalised ~15%. Yet, the company has potential for positive surprises from higher export growth and a better-than-expected response in four-wheelers. We retain a Buy and raise the price target to `1,939.

Two wheelers maintain steady growth. Bajaj Auto is better placed than its peers to capitalize on strong demand from the high-growth export markets and steady domestic demand. As a result of this combination, we estimate a ~100bps increase in its motorcycle market share to 33% in the next two years at the expense of its listed peers.

Stable operating performance likely. While raw material contracts are now likely to be re-negotiated at lower rates (due to beneficial exchange rates and steady-to-lower commodity prices) the “range-forward” contracts for exports have also been booked at a higher price band. A strong focus on profitability, including reverse engineering products to maintain its operating performance, should help sustain EBITDA margins at ~20% from FY12-14.

Raising estimates. We raise FY13e earnings 7.1% to `127.2 (a 14.5% yoy growth) expecting a better operating performance (increase in margin expectation of 90bps to 20.4%) and a slightly higher volume outlook.

Valuation. We raise our price target to `1,939 (from `1,846) based on 15x core earnings for Mar’13, and `226 as value of cash and investments). We reiterate a Buy. Risks. Keen competition leading to destructive price wars, adverse forex movement and a steep rise in commodity prices, export demand hit by increased duties in Sri Lanka.

Rating: Buy Target Price: `1,939 Share Price: `1,654


BJAUT

Sensex1,000

1,300

1,600

1,900

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data BJAUT IN / BAJA.BO52-week high / low `1,839/ `1,260Sensex / Nifty 17486 / 53233-m average volume US$19.3m Market cap `478.5bn / US$9.4bnShares outstanding 289m




Sales 0.3 1.6 1.6EBITDA 4.6 6.5 3.2EPS 6.1 7.1 10.4Target multiple (x) - 15.2 -


9 April 2012 Bajaj Auto – Potential for positive surprises, valuations reasonable; Buy




Net revenues 119,210 166,089 199,496 231,220 266,561Revenue growth (%) 35.8 39.3 20.1 15.9 15.3- Op. expenses 93,284 132,240 159,271 184,052 213,336EBIDTA 25,926 33,849 40,225 47,168 53,225EBITDA margin (%) 21.7 20.4 20.2 20.4 20.0- Interest expenses 60 17 5 4 4- Depreciation 1,365 1,228 1,278 1,435 1,489+ Other income 1,225 3,658 3,572 4,702 6,432- Extraordinaries 1,650 -7,246 1,833 0 0- Tax 7,075 10,110 10,374 13,617 15,705Effective tax rate (%) 29.4 23.2 25.5 27.0 27.0Reported PAT 17,001 33,397 30,308 36,816 42,460Adjusted PAT 18,156 26,152 32,140 36,816 42,460Adjusted PAT growth 127.1 44.0 22.9 14.5 15.3Adj. FDEPS (`/share) 62.7 90.4 111.1 127.2 146.7Adj. FDEPS growth (%) 127.1 44.0 22.9 14.5 15.3Source: Company, Anand Rathi Research


PAT 17,001 33,397 30,308 36,816 42,460+ Non-cash items 1,365 1,228 1,278 1,435 1,489Cash profit 18,366 34,626 31,586 38,250 43,949- Incr./(decr.) in WC -11,263 -2,638 2,041 1,462 1,203Operating cash-flow 29,629 37,263 29,545 36,789 42,747- Capex 932 1,543 2,000 3,000 3,000Free cash-flow 28,696 35,720 27,545 33,789 39,747- Dividend 6,655 13,311 16,639 18,303 19,967+ Equity raised 0 1,447 0 0 0+ Debt raised -2,314 -10,134 -1,500 0 0- Investments 22,130 7,737 10,000 18,000 22,000- Misc. items -2,049 1,434 -2,170 -2,387 -2,604Net cash-flow -354 4,551 1,576 -127 384+ Op. cash & bank bal. 1,369 1,014 5,565 7,141 7,015Cl. cash & bank bal. 1,014 5,565 7,141 7,015 7,399Source: Company, Anand Rathi Research

Fig 5 – P/E band

Bajaj Auto 3x

6x

9x

12x

15x

0

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-12

18x



Share capital 1,447 2,894 2,894 2,894 2,894Reserves & surplus 27,837 46,209 62,048 82,948 108,046Net worth 29,283 49,102 64,941 85,842 110,940Total debt 13,386 3,252 1,752 1,752 1,752Def. tax liab. (net) 17 297 297 297 297Capital employed 42,686 52,651 66,990 87,890 112,988Net fixed assets 15,211 15,526 16,248 17,813 19,324Investments 40,215 47,952 57,952 75,952 97,952Working capital -13,754 -16,392 -14,351 -12,890 -11,687Cash 1,014 5,565 7,141 7,015 7,399Capital deployed 42,686 52,651 66,990 87,890 112,988No. of shares (m) 145 289 289 289 289Net debt -27,844 -50,265 -63,342 -81,217 -103,602Net debt/equity -1.0 -1.0 -1.0 -0.9 -0.9W C turn (days) -27 -24 -24 -24 -24Book value (`/sh) 202.4 169.7 224.4 296.6 383.4Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `1,654 Year-end: Mar FY10 FY11 FY12e FY13e FY14e

P/E (x) 26.4 18.3 14.9 13.0 11.3P/B (x) 8.2 9.7 7.4 5.6 4.3EV/EBITDA (x) 8.2 12.7 10.3 8.4 7.0RoE (%) 62.0 53.3 49.5 42.9 38.3RoCE (%) 60.4 68.9 63.5 57.4 51.5Dividend yield 2.4 2.4 3.0 3.3 3.6Dividend payout (%) 39.1 39.9 54.9 49.7 47.0Debt to equity (%) 0.5 0.1 0.0 0.0 0.0Core P/E (x) 14.7 15.6 17.3 14.4 12.7Cash P/E 12.3 17.5 14.3 12.5 10.9EV/sales 1.8 2.7 2.2 1.8 1.5Inventory days 14 12 10 10 10Receivables days 50 44 44 44 44Payables days 9 8 10 10 10Fixed asset T/O 2.7 3.0 2.9 2.5 2.3Source: Company, Anand Rathi Research

Fig 6 – Volume break up

35.2 31.2 31.5 36.3 38.8 41.0

64.8 68.8 68.5 63.7 61.2 59.0

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Two wheelers: steady volume growth Bajaj Auto is likely to see 11.5% CAGR in motorcycle volumes over FY12-14, vs. that of the sector’s 10.2%, mainly driven by launches and an enhanced image on the addition of KTM’s naked bike line-up in its range. Its fast-growing export presence in two- and three-wheelers is likely to help it retain its dominance in three wheelers and ride out uncertainties regarding regulations and permits.

We expect Bajaj Auto to report improved motorcycle volumes, at 11.5% CAGR, compared to a sector CAGR of 10.2% over FY12-14, driven mainly by launches such as the New Pulsar NS (in both 150cc and 200cc) and the New Discover (in the 125cc segment) in executive bikes.

Fig 7 – Volume-growth trend: two wheelers

0

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Steady export growth should help sustain the higher-than-domestic sector growth rate. The KTM franchise is expected to further enhance its image, product mix, technological platforms and market share. This would give it the dual benefits of boosting exports (through the Duke 125) and a new high-end product in India.

Fig 8 – Market share trend: two wheelers (2wh) and motorcycles (M.c)

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(%)

Source: Company, SIAM, Anand Rathi Research



Fig 9 – Volume growth trend: three wheelers

0

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Fig 10 – Market share trend: Overall and passenger three wheelers

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(%)


Bajaj Auto’s fast-growing exports in three wheelers should help it retain its dominance in three wheelers, and ride out the vagaries of the regulated, permit-driven domestic passenger three wheeler segment. We expect a 13.7% CAGR in three wheeler volumes during FY12-14, compared to 11.9% in the sector. Innovation in products, with new models such as ‘the RE 60’, is likely to create a new sub-segment and throw up potential for positive surprises.

We expect Bajaj Auto to see market-share gains of more than 1%

in two wheelers and more than 50bps in three wheelers in FY12-14



Steady operating performance likely The strong focus on profitability, including reverse engineering products to maintain the present operating performance, is expected to sustain the EBITDA margin at ~20% during FY12-14e.

The company is re-negotiating raw material contracts, which are now likely to be lower as a result of beneficial forex rates and steady-to-lower commodity prices. The “range-forward” contracts for export have also been booked at higher price bands. We believe the strong focus on profitability, including reverse engineering products to maintain the present operating performance, would help sustain the EBITDA margin at ~20%, even after factoring overhangs of additional duties in export markets (like Sri Lanka).

Fig 11 – Realization trend: steady on favourable currency movement and a better product-mix

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Fig 12 – Contribution trend: impact of commodities appears to be abating…

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We expect Bajaj Auto to register 3.4% CAGR in realisations over FY12-14, and 2.9% CAGR in EBITDA per vehicle. Over the same period, we expect 2.8% CAGR in profit.

Fig 13 – … . resulting in improved EBITDA/vehicle

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Fig 14 – Profit per unit: improvement continues

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Financials We raise FY13e earnings 7.1% to `127.2 (14.5% yoy growth) on the expected improved operating performance (increase in margins by 90bps to 20.4%) and slightly higher volume outlook. We reiterate a Buy, raising our target price to `1,939 (from `1,846) based on 15x core earnings for Mar’13, and `226 as value of cash.

Fig 15 – Sum-of-parts table (`) Mar ‘13

Core EPS 114.2

Multiple (x) 15

Value 1,713

Cash per share 201

Price 1,913

Inv in KTM Power Sports AG and PT BAI 26

Target price (`) 1,939

Upside (%) 17.2


We raise our FY13e earnings estimate 7.1% to `127.2 (14.5% yoy rise) on the expected improved operating performance (increase in margin expectation by 90bps to 20.4%) and a slightly higher volume outlook.

We raise our target price to `1,939 (from `1,846) based on 15x core earnings for Mar ’13, and `226 as the value of cash and investments). We re-iterate a Buy.

Risks

Keen competition leading to destructive price wars, adverse forex movement and a steep rise in commodity prices, export demand hit by increased duties in Sri Lanka.


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[email protected]


[email protected]

India I Equities


Sales (`m) 158,312 194,012 235,848 267,917 306,487

Net profit (`m) 22,318 20,269 23,779 27,926 30,762

EPS (`) 111.8 101.5 119.1 139.8 154.0

Growth (%) 74.1 -9.2 17.3 17.4 10.2

EV/EBITDA (x) 12.9 14.3 10.3 8.6 7.2

P/E (x) 18.4 20.2 17.3 14.7 13.3

PBV (x) 11.8 13.9 13.5 12.3 11.4

RoE (%) 64.4 68.6 78.3 83.8 85.1

RoCE (%) 76.1 52.8 62.6 79.0 99.1

Dividend yield (%) 5.4 5.1 5.6 6.1 6.8

Net gearing (%) 28.3 69.0 69.4 65.4 62.5


Autos

Update

9 April 2012

Hero Moto Corp

New strategy a positive; but we maintain a Sell on fair valuations

We retain Hero Moto Corp (HMCL) as a Sell since it is trading at fair valuations. And while we are positive on the company's new strategy of expanding into premium products and territories, at the CMP HMCL's upside potential appears limited. We maintain a Sell with a price target of `2,087.

Two-wheeler growth rate to sustain. HMCL’s scooter range is expected to boost its two-wheeler growth rate. However, we expect the company to lose motorcycle market-share to Bajaj Auto (on higher exports) and to Honda Motorcycle and Scooters (on increased capacity leading to clearance of their long waiting lists).

Aggressive new expansion strategy. HMCL’s new strategy focuses on stronger exports, adopting of new technology via JVs and acquisitions, and new launches in the premium <150cc segment. However, there is the possibility of glitches with regard to ramp-up of exports and disappointing new model launches. In addition, fluctuating currency movements could render HMCL vulnerable to higher payouts on royalty.

Raising estimates. We raise our FY13e earnings estimate 8.3%, to `139.8 (17.4% yoy growth) on expectation of improved operating performance (increase in margin expectation by 110bps to 15.8%) and slightly higher volume outlook.

Valuation. We raise our price target to `2,087 (from `1,751) based on 15x core earnings for Mar ’13, and `199 as the value of cash and investments). We maintain a Sell on HMCL. Risks. Upside: Rupee appreciation that could reduce royalty outflow, better-than-expected volumes.

Rating: Sell Target Price: `2,087 Share Price: `2,055


HMCL

Sensex1,200

1,400

1,600

1,800

2,000

2,200

2,400

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data HMCL IN / HROM.BO52-week high / low `2,248/ `1482Sensex / Nifty 17486 / 53233-m average volume US$22.0m Market cap `410.4bn / US$8.1bnShares outstanding 200m






9 April 2012 Hero Moto Corp – New strategy a positive; but we maintain a Sell on fair valuations




Net revenues 158,312 194,012 235,848 267,917 306,487Revenue growth (%) 27.9 22.1 21.6 13.6 14.4- Op. expenses 130,962 167,848 199,569 225,545 257,656EBIDTA 27,350 26,164 36,279 42,372 48,831EBITDA margin (%) 17.3 13.5 15.4 15.8 15.9- Interest expenses -206 -19 -173 -209 -221- Depreciation 1,915 4,024 11,309 11,926 12,313+ Other income 2,676 2,688 3,166 3,401 3,738- Extraordinaries & others 0 1,148 0 0 0- Tax 5,999 4,419 4,529 6,130 9,714Effective tax rate (%) 21.2 18.6 16.0 18.0 24.0Reported PAT 22,318 19,279 23,779 27,926 30,762Adjusted PAT 22,318 20,269 23,779 27,926 30,762Adjusted PAT growth 74.1 -9.2 17.3 17.4 10.2Adj. FDEPS (`/share) 111.8 101.5 119.1 139.8 154.0Adj. FDEPS growth (%) 74.1 -9.2 17.3 17.4 10.2Source: Company, Anand Rathi Research


PAT 22,318 19,279 23,779 27,926 30,762+ Non-cash items 1,915 4,024 11,309 11,926 12,313Cash profit 24,233 23,303 35,088 39,852 43,075- Incr./(decr.) in WC -25,971 -8,557 -1,189 364 -1,160Operating cash-flow 50,204 31,859 36,277 39,487 44,235- Capex 2,041 29,009 14,000 5,000 5,000Free cash-flow 48,163 2,851 22,277 34,487 39,235- Dividend 21,966 20,967 22,966 24,963 27,958+ Equity raised 0 0 0 0 0+ Debt raised -125 14,251 -2,881 -5,042 -5,042- Investments 5,570 12,030 -3,000 4,000 6,000- Misc. items 3,627 2,461 0 0 0Net cash-flow 16,876 -18,357 -569 483 236+ Op. cash & bank bal. 2,196 19,072 715 146 629Cl. Cash & bank bal. 19,072 715 146 629 865Source: Company, Anand Rathi Research

Fig 5 – P/E band

Hero Moto Corp

7.5x

10.0x

12.5x

15.0x

17.5x

20.0x

0

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(`)



Share capital 399 399 399 399 399Reserves & surplus 34,251 29,161 29,974 32,938 35,742Net worth 34,650 29,561 30,374 33,337 36,141Total debt 660 14,912 12,030 6,989 1,947Def. tax liab. (net) 1,528 2,468 2,468 2,468 2,468Capital employed 36,838 46,940 44,872 42,794 40,556Net fixed assets 17,069 42,054 44,745 37,819 30,506Investments 39,257 51,288 48,288 52,288 58,288Working capital -38,560 -47,117 -48,306 -47,942 -49,102Cash 19,072 715 146 629 865Capital deployed 36,838 46,940 44,872 42,794 40,556Net debt -57,669 -37,091 -36,403 -45,928 -57,205No. of shares (m) 200 200 200 200 200Net debt/equity - - - - -W C turn (days) -13 -15 -14 -12 -12Book value (`/sh) 173.5 148.0 152.1 166.9 181.0Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ ` 2,055 Year-end: Mar FY10 FY11 FY12e FY13e FY14e

P/E (x) 18.4 20.2 17.3 14.7 13.3P/B (x) 11.8 13.9 13.5 12.3 11.4EV/EBITDA (x) 12.9 14.3 10.3 8.6 7.2RoE (%) 64.4 68.6 78.3 83.8 85.1RoCE (%) 76.1 52.8 62.6 79.0 99.1Dividend yield 5.4 5.1 5.6 6.1 6.8Dividend payout (%) 115.0 126.4 113.0 104.6 106.3Debt to equity (%) 0.0 0.5 0.4 0.2 0.1Core P/E (x) 20.1 22.3 19.0 16.1 14.6Cash P/E 16.9 16.9 11.7 10.3 9.5EV/sales 2.2 1.9 1.6 1.4 1.2Inventory days 10 10 10 9 9Receivables days 3 2 5 5 5Payables days 26 27 29 26 26Asset T/O 9.8 6.8 5.5 6.5 9.0Source: Company, Anand Rathi Research

Fig 6 – Product wise volume split

91.3 90.1 90.0 86.8 87.2 86.9 86.8

4.2 4.7 6.7 7.2 7.4 7.6

5.65.65.76.55.45.75.63.1

0

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75cc - 125cc Motorcycles 125cc - 250cc Motorcycles Scooters

(%)




Two-wheeler growth to just be stable Hero Moto Corp (HMCL) is likely to report stable two-wheeler volume CAGR of 10.2% over FY12-14, vs. that of the sector at 11.2%. However, we expect the company to lose market share in motorcycles to Bajaj Auto and Honda as a result of lower visibility on key launches.

We expect HMCL to report stable two-wheeler volume CAGR of 10.2% over FY12-14, compared to the sector’s 11.2%. HMCL’s two-wheeler growth rate is likely to be boosted by its scooter range.

Fig 7 – Volume growth trend: two-wheelers

0

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Hero Motocorp 2wh volume yoy growth (RHS)

(units) (%)


However, we expect the company to lose market share in motorcycles to Bajaj Auto (due to the latter’s higher exports), Honda Motorcycle & Scooters (increased capacity to cater to the large unmet demand) and as a result of lower visibility on key launches.

Fig 8 – HMCL’s market-share trend: two-wheelers and 75-125cc motorcycles

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HMCL 2wh Market share HMCL 75-125cc mc Market share

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We expect Hero Moto Corp’s motorcycle volumes to register 10% CAGR over FY12-14, compared

to that of the sector at 10.2%



Fig 9 – Volume-growth trend: HMC scooters

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Fig 10 – Market-share trend: scooters

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Hero's scooters Market share Scooters as a % of total two wheelers

(%)


Due to stiff competition from Honda, HMCL would lose its scooter market share, registering

13% CAGR to the sector’s 16.5%



Challenges of a New Strategy Volatile forex situations could impact HMCL’s vulnerability due to higher royalty payouts. There could also be execution challenges on the new expansion strategy being implemented.

A fluctuating currency could render HMC continually vulnerable to higher royalty payouts. Additionally, since a new strategy is being implemented, there can be glitches (such as delay in ramp-up of exports and new model launches not meeting expectations). HMCL’s new strategy focuses on stronger exports, adopting of new technology via JVs and acquisitions, and new launches in the premium <150cc segment.

Fig 11 – Realization trend to be acceptable but short-term strategy glitches cannot be ruled out

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Fig 12 – Contribution trend: Impact of commodities lower…

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9 April 2012 Hero Moto Corp – New strategy; but maintain sell on fair valuations


We expect Hero Moto Corp to register 3.4% realisation CAGR over FY12-14, 4.3% contribution CAGR, and a higher 5.3% CAGR in its EBITDA per vehicle. We expect the profit CAGR to be 3.2%.

Fig 14 – Profit per unit

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Fig 13 – EBITDA/vehicle

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Valuation We raise our FY13e earnings estimates by 8.3% to `139.8 (17.4% yoy growth) on the increase in margin expectation by 110bps to 15.8%) and better volume outlook. We raise our price target to `2,087 (from `1,751) but retain a Sell.

We raise FY13e earnings estimate 8.3% to `139.8 (17.4% yoy growth) on our expectation of improved operating performance (increase in margin estimates by 110bps to 15.8%) and slightly higher volume outlook.

We raise our price target for HMCL to `2,087 (from `1,751) based on 15x core earnings for Mar ’13, and `199 as value of cash and investments). We retain a Sell.

Risks

Upside Risks. Rupee appreciation, lowering royalty outflow, better-than-expected volumes.


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[email protected]


[email protected]

India I Equities

Key financials (standalone YE: Mar) FY10 FY11 FY12e FY13e FY14e

Sales (`m) 185,296 234,211 307,827 366,809 415,969

Net profit (`m) 19,893 24,961 25,696 28,584 31,486

EPS (`) 32.4 40.7 41.9 46.6 51.3

Consol.EPS (`) 37.5 47.4 50.7 61.0 71.2

Consol PE (x) 18.6 14.7 13.7 11.4 9.8

PBV (x) 5.0 4.0 3.5 3.0 2.6

RoE (%) 25.4 24.2 21.3 20.5 19.6

RoCE (%) 25.0 25.1 21.9 21.7 21.4

Dividend yield (%) 1.4 1.7 1.9 2.0 2.2

Net gearing (%) 33.3 38.7 41.2 42.5 41.1


Autos

Update

9 April 2012

Mahindra & Mahindra

Short-term pressures; long-term outlook good; Buy

Following steady volumes and sustained stable operating performance, we have a positive stance on Mahindra & Mahindra (M&M). Its reach across the automotive spectrum and its attractive valuations are dual positives. We maintain a Buy, with a price target of `833.

Structural factors to fuel steady tractor demand. Short-term pressures on the tractor sector are likely to continue till the monsoons, following which volume growth should return to a steady 5-8%. Key reasons: further scope for tractor penetration in India, labour shortages (due to high rural-to-urban migration) and the need to improve productivity. The significant shortening of the replacement cycle is an added growth driver. The 15-HP Yuvraj has influenced smaller farmers to opt for tractors.

Launches drive UVs. The upgraded Bolero, the upgraded Xylo and the XUV500 are examples of new models that help sustain UV growth. Pick-ups too have registered good growth. We expect the UV platform to register 14.5% CAGR over FY12-14.

Reducing estimates. We lower our FY13 standalone estimates by 11.1% to `46.6 (11.2% yoy growth). In its consolidated operations, a swift turnaround at Ssangyong has the potential to indicate upgrades.

Valuation. Our price target is `833, based on the 12-month-forward core business PE of 12.5x (`550), the value of listed subsidiaries (incl. Ssangyong) and associates at `173 and the value of other investments at `110. The stock trades at 11.4x FY13e consolidated earnings. We maintain a Buy. Risks. Higher interest rates, less credit available, poor monsoons and lower economic growth in India, delay in turnaround at Ssangyong.

Rating: Buy Target Price: `833 Share Price: `697

Key data MM IN / MAHM.BO52-week high / low `875 / `617Sensex / Nifty 17486 / 53233-m average volume US$38.5m Market cap `428bn / US$8.4bnShares outstanding 614m

Shareholding pattern (%) Dec ’11 Sep ’11 Jun ’11Promoters 25.34 25.18 24.86 - of which, pledged 6.55 5.20 7.88Free float 74.66 74.82 75.14 - Foreign institutions 26.30 26.39 23.59 - Domestic institutions 20.31 20.64 22.63 - Public 28.05 27.79 28.92


MM

Sensex500

600

700

800

900

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg


Sales 8.6 13.0 13.9EBITDA -2.6 -6.4 -9.1EPS -7.4 -11.1 -13.2Target multiple (x) - 13.7 -


9 April 2012 Mahindra & Mahindra – Short-term pressures; long-term outlook good; Buy




Net revenues 185,296 234,211 307,827 366,809 415,969Revenue growth (%) 42.1 26.4 31.4 19.2 13.4- Op. expenses 156,179 200,375 271,302 325,768 370,536EBIDTA 29,117 33,836 36,524 41,041 45,433EBITDA margins (%) 15.7 14.4 11.9 11.2 10.9- Interest 278 -503 145 170 170- Depreciation 3,708 4,139 5,408 6,540 7,585+ Other income 1,994 3,095 3,520 4,038 4,586- Extraordinaries -1,343 -1,901 -79 0 0- Tax 7,590 8,576 8,815 9,784 10,777Effective tax rate (%) 26.7 24.4 25.5 25.5 25.5Reported PAT 20,878 26,621 25,755 28,584 31,486Adjusted PAT 19,893 24,961 25,696 28,584 31,486PAT growth (%) 115.8 25.5 2.9 11.2 10.2Adj. FDEPS (`/share) 32.4 40.7 41.9 46.6 51.3Adj. FDEPS growth (%) 115.8 25.5 2.9 11.2 10.2Source: Company, Anand Rathi Research


PAT 20,878 26,621 25,755 28,584 31,486+ Non-cash items 3,708 4,139 5,408 6,540 7,585Cash profit 24,585 30,759 31,163 35,125 39,072- Incr./(Decr.) in WC 4,119 -3,413 5,995 -224 315Operating cash-flow 20,467 34,172 25,168 35,349 38,757- Capex 8,592 10,830 15,000 10,000 8,000Free cash-flow 11,875 23,343 10,168 25,349 30,757- Dividend 5,495 7,061 7,780 8,379 8,977+ Equity raised 103 107 56 0 0+ Debt raised -11,726 -11,726 -4,749 10,000 0- Investments 6,116 29,273 10,000 20,000 20,000- Misc. items -13,047 -13,324 -14,283 11,148 1,230Net cash-flow 1,688 -11,286 1,978 -4,178 550+ Op. cash & bank bal. 15,744 17,432 6,146 8,124 3,946Cl. cash & bank bal. 17,432 6,146 8,124 3,946 4,496Source: Company, Anand Rathi Research

Fig 5 – Consolidated P/E band

M&M

4x

7x

10x

13x

16x

19x

0

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900

1,200

Jun-

05

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Share capital 2,830 2,936 2,992 2,992 2,992Reserves & surplus 75,438 100,198 117,707 136,764 158,044Net worth 78,268 103,134 120,699 139,757 161,036Total debt 28,802 24,053 34,053 34,053 34,053Def. tax liab. (net) 2,397 3,544 3,544 3,544 3,544Capital employed 109,466 130,731 158,296 177,353 198,633Net fixed assets 37,027 43,719 53,311 56,770 57,185Investments 63,980 93,253 103,253 123,253 143,253Working capital -8,974 -12,387 -6,393 -6,616 -6,302Cash 17,432 6,146 8,124 3,946 4,496Capital deployed 109,466 130,731 158,296 177,353 198,633Net debt -52,611 -75,346 -77,324 -93,146 -113,696No. of shares (m) 566 587 598 598 598Net debt/equity -0.7 -0.7 -0.6 -0.7 -0.7W C turn (days) -36 -16 -25 -20 -20Book value (`/sh) 138 176 202 234 269Source: Company, Anand Rathi Research


Consol P/E (x) 18.6 14.7 13.7 11.4 9.8 P/B (x) 5.0 4.0 3.5 3.0 2.6 EV/EBITDA (x) 11.7 9.9 9.3 7.9 6.7 RoE (%) 25.4 24.2 21.3 20.5 19.6 RoCE (%) 25.0 25.1 21.9 21.7 21.4 Dividend yield 1.4 1.7 1.9 2.0 2.2 Dividend payout (%) 31.9 32.5 34.5 33.3 32.4 Debt to equity 0.4 0.2 0.3 0.2 0.2 Standalone P/E (x) 21.5 17.1 16.7 15.0 13.6 Cash P/E 17.6 14.3 13.3 11.8 10.6 EV/sales 1.9 1.5 1.1 0.9 0.7 Inventory days 24 27 28 28 28 Receivables days 25 22 24 24 24 Payables days 66 74 72 72 72 Fixed Asset T/O 1.6 1.7 1.9 2.0 2.1 Source: Company, Anand Rathi Research

Fig 6 – Sales volume split

33.7 36.8 38.7 37.7 34.5 32.4 31.4

54.7 49.5 51.3 50.9 55.6 58.3 59.7

9.9 9.3 8.911.410.013.711.6

0

20

40

60

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100

FY08

FY09

FY10

FY11

FY12

e

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e

FY14

e

Tractors UV's Three-wheelers

(%)




UVs to drive growth, tractors to slow We estimate 14.5% volume CAGR in M&M’s UVs in FY12-14, driven mainly by launches (such as the upgraded Xylo) the roaring successes of models (such as the XUV-500) and the continuing good volume trend of its pick-up range. Over FY12-14, we expect a lower CAGR of 5.5% in M&M’s tractor segment, due to the overall slowdown in tractor growth.

Fig 7 – Volume growth trend: Passenger UVs

0

50,000

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300,000

FY04

FY05

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FY08

FY09

FY10

FY11

FY12

e

FY13

e

FY14

e

(5.0)0.05.010.015.020.025.030.035.040.045.0

M&M UV volumes yoy growth (RHS)

(units) (%)


Over FY12-14, we estimate 12.5% volume CAGR in Passenger UVs (compared to 8% by the industry) and robust 17.5% in goods LCVs (vs an industry growth rate of 11.9%). UV growth is expected to be driven by launches such as the upgraded Xylo as well as successful models such as the XUV-500, the strong volume trend of mainstay models such as the Scorpio and Bolero and the addition of Ssangyong’s products. Pick-ups too have registered strong growth. We expect the company to continue to gain market share, driven by a strong product mix as well as a variety of offerings.

Fig 8 – Market-share trend: M&M to continue dominating Passenger UVs#

40

45

50

55

60

65

70

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

e

FY13

e

FY14

e

M&M UV Market share

(%)

Source: SIAM, Anand Rathi Research # excluding impact of ‘Maruti Suzuki Ertiga’



In FY12 (till Nov ’11), growth in tractor volumes was good, following favourable cyclical and structural demand drivers. However, the home tractor market is showing short-term signs of weakness, due to concerns regarding farm earnings (especially from the rabi crop), NPAs on tractor loans with public-sector banks, and demand fatigue.

In tractors, we expect M&M’s growth at 5.5% vs a similar industry growth rate during FY12-14, due to the overall slowdown in tractor growth. Weak tractor volumes are likely to cap margin expansion for M&M, since it commands higher EBIT margins of ~17% vs. auto EBIT margins of ~11%.

Fig 9 – Tractor: market share trend and volumes

0

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150,000

200,000

250,000

300,000FY

04

FY05

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e

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e

FY14

e

(10.0)

0.0

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40.0

50.0

M&M Tractor volumes yoy growth (RHS)

(units) (%)

25.0

30.0

35.0

40.0

45.0

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

e

FY13

e

FY14

e

(%)




Operating performance to dip With decelerating sales of higher-margin tractors and the impact of VAT payment at Chakan, we expect M&M’s margins to come under pressure in the near term. However, consolidated margins are likely to be higher, as we expect improvement at its Korean acquisition, Ssangyong.

With decelerating sales of higher-margin tractors, we expect M&M’s margins to come under pressure in the near term. The MVML structure would also mean that standalone profitability would also get impacted.

Fig 10 – Realization trend

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

1QFY

07

3QFY

07

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3QFY

09

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3QFY

12

Realisation / unit

(`/unit)

200,000

250,000

300,000

350,000

400,000

450,000

500,000

FY08

FY09

FY10

FY11

FY12

e

FY13

e

FY14

e

-

1.5

3.0

4.5

6.0

7.5

9.0


(%)(`/unit)


Fig 11 – Contribution trend… to grow slowly in FY13

50,000

75,000

100,000

125,000

150,000

1QFY

07

3QFY

07

1QFY

08

3QFY

08

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09

3QFY

09

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10

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10

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11

3QFY

11

1QFY

12

3QFY

12

Contribution / unit

(`/unit)

110,000

115,000

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135,000

140,000

FY08

FY09

FY10

FY11

FY12

e

FY13

e

FY14

e

(10.0)

(5.0)

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10.0

15.0

20.0


(%)(`/unit)




We lower our FY13 standalone estimates by 11.1% to `46.6 (11.2% yoy growth). In its consolidated operations, a swift turnaround at Ssangyong has the potential to indicate upgrades.

Fig 12 – EBITDA / vehicle…to remain flattish

25,000

35,000

45,000

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65,000

75,000

1QFY

07

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07

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09

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10

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12

EBITDA / unit

(`/unit)

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FY08

FY09

FY10

FY11

FY12

e

FY13

e

FY14

e

(20.0)

0.0

20.0

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80.0


(%)(`/unit)


Fig 13 – Growth in profit per unit...is lacklustre

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

1QFY

07

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07

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09

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10

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Adj. PBT / unit

(`/unit)

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35,000

45,000

55,000

FY08

FY09

FY10

FY11

FY12

e

FY13

e

FY14

e

(20.0)

0.0

20.0

40.0

60.0


(%)(`/unit)




Valuation Our target for M&M is `833, based on its 12-month-forward core business PE of 12.5x (`550), the value of its listed subsidiaries and associates at `173 and the value of its other investments at `110. We maintain a Buy.

Our price target for M&M is `833, based on its 12-month-forward core business PE of 12.5x (`550), the value of its listed subsidiaries and associates at `173 and the value of its other investments at `100. The stock trades at 11.4x FY13e consolidated earnings. We maintain a Buy.

Fig 14 – Sum-of-parts table ` Mar ‘13

Core EPS 43.9

Multiple (x) 12.5

Value 550

Value of listed subsidiaries (incl. Ssangyong) 173

Price 723

Investments 100

Target price (`) 833

Upside (%) 19.5


Risks

Higher interest rates, lower credit availability, change in diesel-vehicle policy in the Budget, and lower economic growth in India.


M&M

0

3

6

9

12

15

18

21

24

Jun-

05

Mar

-06

Dec

-06

Sep-

07

Jun-

08

Mar

-09

Dec

-09

Sep-

10

Jun-

11

Mar

-12




[email protected]


[email protected]

India I Equities


Sales (`m) 296,230 370,401 355,938 429,653 493,426Net profit (`m) 24,976 23,342 16,095 26,103 29,956EPS (`) 86.4 80.8 55.7 90.3 103.7Growth (%) 61.2 -6.5 -31.0 62.2 14.8EV/EBITDA (x) 8.3 8.6 11.8 7.4 5.9PE (x) 15.6 16.7 24.2 14.9 13.0PBV (x) 3.3 2.8 2.6 2.2 1.9RoE (%) 21.1 16.5 10.5 14.8 14.7RoCE (%) 28.3 22.3 13.7 19.2 19.2Dividend yield (%) 0.4 0.6 0.6 0.6 0.7Net gearing (%) 24.2 8.5 12.4 14.9 14.2


Autos

Update

9 April 2012

Maruti Suzuki, India

Better prospects on the heels of a woeful year; we retain a Buy

From 4QFY12, we expect a recovery in Maruti Suzuki’s performance following enhanced diesel engine capacity in 4QFY12 and uninterrupted production at plants. While storm clouds of higher costs of ownership and adverse forex volatility have not yet dissipated; yet the outlook is improving. We retain a Buy, with a target of `1,581.

Volume growth outlook decent. We expect Maruti to register 18% volume growth in FY13, to 1.34m units. This would be 5.3% more than the previous peak of 1.27m units in FY11. Our growth assumption is based on: (1) uninterrupted production of better-selling models; hence recovery of the three months of lost production due to strikes; (2) ramp-up of diesel capacity by 60,000 units internally and additional sourcing of up to 100,000 units from Fiat, thereby clearing out a 3-5 month waiting period, and margins benefiting from dieselization with no discount for models; (3) 10.9% export volume growth, driven by downward trading; and (4) ‘Ertiga’ cracking open a new niche for MSIL.

…but pressures persist. Higher costs of ownership and operation, the possibility of stagnating-to-lower disposable incomes of potential buyers, the threat of a change in policy pertaining to diesel cars, and currency volatility are challenges that are likely to be carried on to the next fiscal.

Lower estimates. We raise FY13 estimates by 3.5% to `90.3 (62.2% yoy growth). We expect an improved performance from 4QFY12, especially due to normalized operations.

Valuation. We value the stock at `1,581, based on a target PE of 17.5x (on par with its early-cycle multiple, a 14% premium to its past five-year average). We re-iterate a Buy. Risks. Increase in fuel price, adverse forex movement, labour strife and rise in commodity prices.



MM

Sensex500

600

700

800

900

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data MSIL IN / MRTI.BO52-week high / low `1,428 / `906Sensex / Nifty 17486 / 53233-m average volume US$21.3m Market cap `389.9bn / US$7.8bnShares outstanding 289m




Sales n.m -1.5 2.7EBITDA n.m -0.4 3.8EPS n.m 3.5 5.1Target multiple (x) - 17.5 -


9 April 2012 Maruti Suzuki – Better prospects on the heels of a woeful year; we retain a Buy




Net revenues 296,230 370,401 355,938 429,653 493,426Revenue growth (%) 41.7 25.0 -3.9 20.7 14.8- Op. expenses 256,984 333,362 328,530 387,977 445,070EBIDTA 39,246 37,038 27,407 41,676 48,356EBITDA margin (%) 13.2 10.0 7.7 9.7 9.8- Interest expenses 335 244 486 578 578- Depreciation 8,250 10,135 11,222 12,733 14,533+ Other income 4,969 4,823 5,647 6,389 6,667- Extraordinaries & others -296 395 -79 -283 -297- Tax 10,949 8,201 5,464 8,935 10,253Effective tax rate (%) 30.5 26.4 25.5 25.5 25.5Reported PAT 24,976 22,886 15,962 26,103 29,956Adjusted PAT 24,976 23,342 16,095 26,103 29,956Adjusted PAT growth 61.2 -6.5 -31.0 62.2 14.8Adj. FDEPS (`/share) 86.4 80.8 55.7 90.3 103.7Adj. FDEPS growth (%) 61.2 -6.5 -31.0 62.2 14.8Source: Company, Anand Rathi Research


PAT 24,976 22,886 15,962 26,103 29,956+ Non-cash items 8,250 10,135 11,222 12,733 14,533Cash profit 33,227 33,021 27,184 38,836 44,489- Incr./(decr.) in WC -481 -3,384 6,629 -404 -349Operating cash-flow 33,708 36,405 20,555 39,240 44,838- Capex 13,052 25,592 25,000 20,000 20,000Free cash-flow 20,655 10,813 -4,445 19,240 24,838- Dividend 1,733 2,167 2,168 2,457 2,601+ Equity raised 0 0 0 0 0+ Debt raised 1,225 -5,121 4,610 0 0- Investments 40,033 -20,699 2,864 20,000 20,000- Misc. items -1,478 121 0 0 0Net cash-flow -18,408 24,103 -4,866 -3,216 2,237+ Op. cash & bank bal. 19,390 982 25,085 20,219 17,002Cl. cash & bank bal. 982 25,085 20,219 17,002 19,240Source: Company, Anand Rathi Research

Fig 5 – P/E band

Maruti Suzuki 6x

9x

12x

15x

18x

21x

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Share capital 1,445 1,445 1,445 1,445 1,445Reserves & surplus 116,906 137,230 151,025 174,671 202,026Net worth 118,351 138,675 152,470 176,116 203,471Total debt 8,214 3,093 7,703 7,703 7,703Def. tax liab. (net) 1,370 1,644 1,644 1,644 1,644Capital employed 127,935 143,412 161,817 185,463 212,818Net fixed assets 54,123 69,580 83,358 90,625 96,092Investments 71,766 51,067 53,931 73,931 93,931Working capital 1,064 -2,320 4,308 3,904 3,555Cash 982 25,085 20,219 17,002 19,240Capital deployed 127,935 143,412 161,817 185,463 212,818Net debt -64,534 -73,059 -66,447 -83,231 -105,468No. of shares (m) 289 289 289 289 289Net debt/equity -0.5 -0.5 -0.4 -0.5 -0.5W C turn (days) -4 -6 -2 -2 -2Book value (`/sh) 3.3 2.8 2.6 2.2 1.9Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `1,349 Year-end: Mar FY10 FY11 FY12e FY13e FY14e

P/E (x) 15.6 16.7 24.2 14.9 13.0P/B (x) 3.3 2.8 2.6 2.2 1.9EV/EBITDA (x) 8.3 8.6 11.8 7.4 5.9RoE (%) 21.1 16.5 10.5 14.8 14.7RoCE (%) 28.3 22.3 13.7 19.2 19.2Dividend yield 0.4 0.6 0.6 0.6 0.7Dividend payout (%) 6.9 9.3 13.5 9.4 8.7Debt to equity (%) 0.1 0.0 0.1 0.0 0.0Core P/E (x) 18.1 19.5 32.1 18.0 15.4Cash P/E 11.7 11.6 14.3 10.0 8.8EV/sales 1.1 0.9 0.9 0.7 0.6Inventory days 15 14 18 18 18Receivables days 10 9 10 10 10Payables days 29 29 30 30 30Asset T/O 2.3 2.5 2.1 2.3 2.3Source: Company, Anand Rathi Research

Fig 6 – Product wise volume split

11.3 8.1 3.8 3.1 3.2 2.8 2.5

9.6 9.8 10.4 11.3 11.1 11.5

11.9 10.0 10.1 12.8 12.9 12.6 12.4

2.9 3.3

70.270.571.873.375.971.469.8

6.5

0.60.50.40.5 1.0

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A1 segment A2 segment A3 segment MPV UV

(%)




Volume recovery We expect Maruti Suzuki to report higher-than-sector passenger vehicle CAGR of 14.8% over FY12-14, with robust growth in small cars and hatchbacks combined. This growth is expected to be driven by uninterrupted production, a ramp-up of diesel capacity by 60,000 units internally and additional sourcing from Fiat (thereby clearing out the waiting period), good export volume growth and the addition of a new sub-segment by ‘Ertiga’.

Fig 7 – Volume growth trend: passenger cars

200,000

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e

FY13

e

FY14

e

(15.0)(10.0)(5.0)0.05.010.015.020.025.030.035.040.0

MSIL Passenger Car yoy growth (RHS)

(%)(units)

Source : Company, Anand Rathi Research

We expect Maruti Suzuki to report higher-than-sector passenger car CAGR of 13.3% over FY12-14, compared to the sector’s 10.9%. This would be mainly driven by launches and the good response to current models such as the new Swift and the New Dzire as well launches such as the New Ertiga. The company will continue to gain market share, driven by its strong product mix and varied offerings (with variants in different fuel types such as the WagonR and SX4 CNG apart from petrol and diesel).

Fig 8 – Market share to improve slightly despite competition

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e

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e

MSIL PC Market share MSIL small cars and hatchbacks Market share

(%)


Fig 9 – Volume growth: PVs to surge on new launches

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MSIL PV volume (units) yoy growth (RHS)

(%)(units)


We expect Maruti Suzuki to report higher-than-industry passenger car

CAGR of 14.8% over FY12-14, vs the industry CAGR of 10.9%



We expect Maruti to register 18% volume growth in FY13, to 1.34m units. This would be marginally higher than the previous peak of 1.27m units in FY11.

The basis for our growth assumption includes:

1. Uninterrupted production of better selling models, hence recovery of the three months’ lost production during strikes;

2. Ramp-up of diesel capacity by 60,000 units internally, additional sourcing of up to 100,000 units from Fiat (thereby clearing out a 3-5 month waiting period) and margins benefiting from dieselization with no discount for models;

3. Export volume growth of 10.9%, driven by downward trading;

4. Addition of a new sub-segment for the company driven by the Ertiga launch.

In the home (Indian) market, price-sensitive customers have rarely paid a premium for any product in the mass-market category that isn’t value-for-money. Despite stiff competition from the likes of Hyundai, Tata Motors, VW, Ford and the recent Renault-Nissan, we believe Maruti has so far got its product-mix spot on, marketing the right products at the right price but only in the mass market segment. It’s downright difficult for a customer (from small to mid-size segment cars) not to be taken up by Maruti’s extensive product range. Moreover, the new Ertiga is expected to crack open a new segment for the company.

In small cars and hatchbacks Maruti Suzuki’s growth is estimated at 13.3%, vs the industry’s 10.9%. This is likely to be mainly driven by new launches and the good response

to current models



Operating leverage benefits Maruti is likely to benefit from greater operating leverage, as it maximizes utilization at its plants for the full year. A favourable currency movement would also aid its EBITDA margin recovery.

Challenges resulting from the higher costs of ownership and operation, the possibility of stagnating-to-lower disposable incomes of potential buyers, the threat from a change in policy pertaining to diesel cars, and currency volatility would be carried forward to the next fiscal.

However, Maruti would benefit from greater operating leverage, as it maximizes its plants for the full year. A favourable movement in currency would also aid its EBITDA-margin recovery.

Fig 10 – Realization trend: slow improvement

30,000

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Fig 11 – Contribution trend: big jump in FY13…

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We expect Maruti Suzuki to register 2.6% realization CAGR over FY12-14 and a 5.6% contribution per vehicle CAGR. Adj profit per vehicle CAGR is expected to be 18.9% over the same period.

New plant coming up

Maruti is to set up a diesel engine manufacturing plant at Gurgaon at an investment of `17bn. The initial capacity of 150,000 units would be at an investment of `9.5bn and is to go on stream in mid-2013. The second phase would double capacity by 2014, with investment of a further `8.5bn.

The long-term strategy appears to lay more emphasis on engine manufacturing at Gurgaon, especially with a new line at Manesar coming up and a new plant planned in Gujarat. This would ease the logistical problems of transportation from the Gurgaon plant, as well as enable the company to meet its engine requirements and achieve its targeted 1.7m capacity in two years.

However, the nature of the ramp-up would mean that the waiting period for its diesel vehicles would not decrease significantly in the near term. Maruti will also invest an additional `9bn at Rohtak, Haryana, to beef up its R&D facilities. Of its competitors, Hyundai is planning to set up a 150,000 diesel engine capacity unit in Chennai.

Fig 12 – …. EBITDA / vehicle

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(30.0)

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(`) (%)


Fig 13 – Profit per vehicle

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(`) (%)




Valuation We value Maruti at `1,581, based on a target PE of 17.5x (on par with its early-cycle multiple, a 14% premium to its past five-year average), and reiterate a Buy.

We raise our FY13 estimates 3.5% to `90.3 (62.2% yoy growth). We expect Maruti’s performance to improve from 4QFY12, especially on its normalized operations.

We value the stock at `1,581, based on a target PE of 17.5x (on par with its early-cycle multiple, a 14% premium to its past five-year average). We iterate our Buy rating.

Risks

Change in diesel-vehicle policy in the Budget, lower economic growth in India, adverse forex movements.


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[email protected]


[email protected]

India I Equities


Sales (`m) 925,193 1,231,333 1,635,313 1,893,064 2,148,851

Net profit (`m) 11,791 90,426 113,863 131,881 147,647

Consol EPS (`) 3.5 27.2 34.3 39.7 44.4

Growth (%) -140.9 666.9 25.9 15.8 12.0

EV/EBITDA (x) 11.8 6.0 4.4 3.7 3.0

PE (x) 77.7 10.1 8.0 6.9 6.2

PBV (x) 9.6 4.6 3.1 2.2 1.7

RoE (%) 30.7 48.1 38.0 33.2 28.1

RoCE (%) 10.9 24.6 24.2 24.5 24.4

Dividend yield (%) 1.1 1.4 1.5 1.6 1.8

Net gearing (%) 76.7 64.2 56.8 49.6 42.9


Autos

Update

9 April 2012

Tata Motors

Further positive surprises unlikely; Hold

Robust Jaguar Land Rover (JLR) sales and strong operating performance had resulted in a series of reratings of Tata Motors. However, following the high base in FY12, we now expect a slowdown of JLR’s volume growth rate in fast-growing areas, China and Russia. In addition, the poor operating performance at home is likely to continue. With no further positive surprises likely, we believe the stock is fairly valued and downgrade it to a Hold, with a price target of `301.

Further positive surprises unlikely from JLR. Greater volumes, better cost control and favourable currency movements were the key drivers for JLR’s recent 20% volume growth rate and the peak 20% EBITDA margin in 3QFY12. However, it is unlikely to offer further positive surprises, as we expect a slower growth rate in China and Russia.

Sluggish CV growth ahead. Tata Motors has done better than its peers in the CV sector by virtue of its dominance in the well-performing LCV space and strong market share in M&H CVs. However, slowing economic activity and lower profitability on LCVs have led to Tata Motor’s poor performance in its standalone India operations.

Raising estimates. We raise our FY13 estimates to factor in better-than-expected volumes and improved operating performance at JLR, driven partly by the strong volume growth of its Evoque model.

Valuation. Our target is `301, based on 12-month-forward core standalone PE of 12x amounting to `56, `33 as value of investment in non-JLR subsidiaries and associates, and `213 as value of JLR (on a forward multiple of 6x). On fair valuations, we downgrade the stock to Hold. Risks. Downside: currency fluctuation, double dip in European recovery. Upside: better-than-expected CV demand, surprises by JLR.

Rating: Hold Target Price: `301 Share Price: `276


TTMT

Sensex

100

150

200

250

300

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data TTMT IN / TAMO.BO52-week high / low `297/ `138Sensex / Nifty 17486 / 53233-m average volume US$80.6m Market cap `814bn / US$15.9bnShares outstanding 3,174m






9 April 2012 Tata Motors – Further positive surprises unlikely; Hold




Net revenues 925,193 1,231,333 1,635,313 1,893,064 2,148,851Revenue growth (%) 30.4 33.1 32.8 15.8 13.5- Op. expenses 838,051 1,053,533 1,396,362 1,630,610 1,857,585EBIDTA 87,142 177,800 238,952 262,454 291,266EBITDA margins (%) 9.4 14.4 14.6 13.9 13.6- Interest 22,397 20,454 24,136 23,533 22,944- Depreciation 43,853 56,180 70,371 76,990 83,200+ Other income 416 896 1,927 2,119 2,225- Extraordinaries & others -13,919 -2,310 6,603 0 0- Tax 10,058 12,164 31,912 31,484 38,961Effective tax rate (%) 28.6 11.7 22.8 19.2 20.8Reported PAT 25,711 92,736 107,260 131,881 147,647Adjusted PAT 11,791 90,426 113,863 131,881 147,647PAT growth (%) -140.9 666.9 25.9 15.8 12.0Cons. EPS (`/share) 3.5 27.2 34.3 39.7 44.4Cons. EPS growth (%) -140.9 666.9 25.9 15.8 12.0Source: Company, Anand Rathi Research


PAT 25,711 92,736 107,260 131,881 147,647+ Non-cash items 43,853 56,180 70,371 76,990 83,200Cash profit 69,564 148,916 177,632 208,872 230,847- Incr./(decr.) in WC 63,826 -22,443 -1,724 -37,708 -30,188Operating cash-flow 5,737 171,359 179,355 246,580 261,035- Capex 77,835 92,892 160,000 60,000 90,000Free cash-flow -72,098 78,467 19,355 186,580 171,035- Dividend 10,051 14,908 14,934 16,799 18,664+ Equity raised 7,540 32,350 -596 -685 -739+ Debt raised 2,185 -24,010 130,000 -40,000 -20,000- Investments 9,617 3,251 25,000 10,000 10,000- Misc. items -128,260 46,602 -10,354 74,732 59,637Net cash-flow 46,219 22,046 119,180 44,364 61,995+ Op. cash & bank bal. 41,213 87,433 109,479 228,659 273,023Cl. cash & bank bal. 87,433 109,479 228,659 273,023 335,018Source: Company, Anand Rathi Research

Fig 5 – P/E band

Tata Motors

30x35x40x45x50x

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Share capital 5,706 6,377 6,377 6,377 6,377Reserves & surplus 76,359 185,338 277,664 392,746 521,729Net worth 82,065 191,715 284,041 399,124 528,106Total debt 351,924 327,914 457,914 417,914 397,914Def. tax liab. (net) 15,583 17,104 17,104 17,104 17,104Capital employed 449,571 536,733 759,059 834,142 943,124Net fixed assets 419,292 470,779 573,749 573,297 599,521Investments 22,191 25,443 50,443 60,443 70,443Working capital -79,345 -68,968 -93,792 -72,622 -61,857Cash 87,433 109,479 228,659 273,023 335,018Capital deployed 449,571 536,733 759,059 834,142 943,124Net debt 264,490 218,435 229,255 144,891 62,897No. of shares (m) 571 638 638 638 638Net debt/equity 3.2 1.1 0.8 0.4 0.1W C turn (days) -67 -29 -31 -31 -31Book value (`/sh) 28.8 60.1 89.1 125.2 165.6Source: Company, Anand Rathi Research


P/E (x) 77.7 10.1 8.0 6.9 6.2 P/B (x) 9.6 4.6 3.1 2.2 1.7 EV/EBITDA (x) 11.8 6.0 4.4 3.7 3.0 RoE (%) 30.7 48.1 38.0 33.2 28.1 RoCE (%) 10.9 24.6 24.2 24.5 24.4 Dividend yield 1.1 1.4 1.5 1.6 1.8 Dividend payout (%) 39.1 16.1 13.9 12.7 12.6 Debt to equity (%) 4.3 1.7 1.6 1.0 0.8 Core P/E (x) 80.6 10.2 8.2 7.1 6.3 Cash P/E 12.3 6.3 5.3 4.6 4.1 EV/sales 1.1 0.9 0.6 0.5 0.4 Inventory days 30 30 30 30 30 Receivables days 25 20 18 18 18 Payables days 121 79 79 79 79 Asset T/O 2.1 2.3 2.1 2.3 2.3 Source: Company, Anand Rathi Research

Fig 6 – JLR sales breakdown (9MFY12)

23 22 19 22 19

24 24 28 2419

30 27 23 2222

6 94 5

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4 510 11

16

13 13 16 16 18

0

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YTD

FY1

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North America UK Europe (excl.UK & Russia) Russia China RoW

(%)

Source: Company



Normalizing ahead for JLR JLR volumes are expected to slow down as a high base effect catches up in the high-growth areas of China and Russia and due to over-reliance on the ‘Evoque’. Further, Tata Motors has outperformed the sector by virtue of its dominance in LCVs and M&H CVs. However, slowing economic activity and lower profitability in LCVs have led to poor performance at home.

JLR: moderation ahead

We expect JLR volumes to register 11.9% CAGR over FY12-14, mainly driven by robust Land Rover (LR) volume CAGR. This growth has so far been driven mainly by newer markets such as China and Russia. On the product front, the Evoque continues its strong run for LR, while new models of Jaguar are helping it hold on to a decent monthly volume run rate so far.

JLR has been enthusiastic regarding the growth momentum in China; it is setting up a new plant in collaboration with a local partner. The company looks to significantly ramp up its dealership in 2013 and enter into a JV with local manufacturer Chery. According to the China Association of Automobile Manufacturers (CAAM), high-end cars will not grow at the same explosive pace, but they will still grow.

However, we note that Beijing and Shanghai, which have so far driven luxury-vehicle growth, have begun becoming increasingly congested. This could turn out to be a demand dampener. CAAM expects yoy volume growth in CY12 to come at ~10%. We anticipate JLR volume growth to slow down as the higher base catches up in China and Russia. According to recent media reports, luxury carmakers in China are offering high discounts and such incentives are likely to get even bigger.

JLR plans to invest £1.5bn p.a. for the next five years and launch ~40 models. Ahead, it looks to invest in power train, hybrid technology and small-capacity engines, especially for the Jaguar as it looks to compete with BMW in the 3 Series, and with Daimler in the C class segment. In the past, JLR has sourced engines from its parent; it plans to invest in an engine plant in the UK and, according to media reports, has already begun recruiting. We are positive on these investments and the resultant strategic thrust.

However, we do not rule out execution challenges and decelerating volume growth as the higher base catches up especially in China. Further, the Evoque has driven JLR’s overall volumes 28% ytd, while volume growth ex-Evoque has been lacklustre. This overdependence on the Evoque could raise diversification risks till new models are launched.

Fig 7 – JLR volume assumptions FY10 FY11 FY12e FY13e FY14e CAGR (FY12-14e)

Land Rover 146,496 188,578 258,171 294,315 331,104 13.2%

yoy change (%) 1.5 28.7 36.9 14.0 12.5

Jaguar 47,408 52,993 53,128 55,784 58,574 5.0%

yoy change (%) -15.9 11.8 0.3 5.0 5.0

Total volume 193,904 241,571 311,299 350,099 389,678 11.9%

yoy change (%) -3.4 24.6 28.9 12.5 11.3




Domestic operations – sluggish CV growth

We expect Tata Motors to slightly lose market share to competition, reporting volume CAGR over FY12-14 slightly lower than the industry.

Fig 12 – Volume growth trend: M&H CVs & goods M&H CVs

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TTMT Goods M&HCV volume yoy growth (RHS)

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Fig 8 – Jaguar model-wise volume split

4,067 3,727

13,308 11,706

25,48524,470

0

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45,000

9M F

Y11

9M F

Y12

XK XJ XF Others

(units)42,952

39,921-7%

Source: Company

Fig 9 – Land Rover model-wise volume split

40,376 33,930

13,045 14,466

18,128 22,076

28,326 33,241

34,663 40,727-

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Freelander Defender Range RoverDiscovery Range Rover Sport Range Rover Evoque

(units)

134,538

176,491

+31%

Source: Company

Fig 10 – Geographical volume split (9MFY12)

North America19%

China16%

Europe (excl. Russia)

23%

Russia5%

RoW18%

UK19%

Source: Company

Fig 11 – 9M FY12 yoy volume growth

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Fig 13 – Market share: competition to intensify

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TTMT M&HCV Market share TTMT Goods M&HCV Market shareTTMT M&HCV Passenger Market share

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We expect Tata Motors to report lower-than-industry CAGR over FY12-14 in LCVs.

TM has outperformed the CV sector by virtue of its dominance in the well-performing LCV space and strong market share in M&H CVs. The slowing down of economic activity and lower profitability on the LCV platform (due to the ending of tax benefits) have led to the poor performance in standalone India operations.

Fig 14 – Volume growth trend and market share: LCVs

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TTMT LCV Market share TTMT goods LCV Market share Source: Company, SIAM, Anand Rathi Research

Over FY12-14, we expect Tata Motors to report more than 5%

CAGR in M&H CVs, compared to the sector’s ~6.5%



The market share position is significantly weaker in the passenger car segment and its products are generally at a discount to competition. The company’s profitability in passenger vehicles is also significantly weaker than in CVs. A recent uptick in diesel vehicles has benefited the company in 4QFY12, but a long-term strengthening of present products appears unlikely.

Fig 16 – Market share trend: overall UVs and PCs

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Fig 15 – UV volumes to improve on new launches and PC volumes to be steady

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Over FY12-14, we expect Tata Motors to report 9% CAGR in

UVs, compared to the sector’s 10.1%



Operating performance has peaked Unfavourable currency movements would lead to subdued JLR margins ahead. Slowing CV sales and a larger share of passenger vehicles are expected to drag on Tata Motors’ realizations and profitability.

At end-FY11, JLR had pension liabilities of £467m (£420m at end-9M FY12). The lower returns on pension-fund assets due to market conditions, adverse interest as well as inflation rates may impact the company’s pension liabilities, consequently increasing funding. The company has been bumping up cash to reduce cash-flow uncertainty and finance capex plans.

In the standalone business, the company’s profitability in passenger vehicles is significantly weaker than in CVs. Slowing CV sales are expected to be a drag on overall realizations and profits.

Fig 17 – Realization/vehicle for JLR (Indian GAAP)

30,000

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Fig 18 – EBITDA/vehicle for JLR (Indian GAAP)

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Shoring up cash to reduce cash-flow uncertainty to finance capex plans. The overhang of pensions continues



Fig 20 – Standalone realization trend – slow improvement

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Fig 21 – Standalone contribution trend – to be weaker in FY13…

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Contribution / unit yoy change (%)

(`/unit) (%)


Fig 19 – Profit/vehicle for JLR (Indian GAAP)

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Fig 22 – …. Standalone EBITDA/vehicle

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Fig 23 – Standalone profit per unit – declines over FY11-14

0

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Financials We raise our FY13 estimates to factor in better-than-expected JLR volumes due to the Evoque and the resultant improved operating performance. Our target is `301, based on 12-month-forward core standalone PE of 12x amounting to `56, `33 as value of investment in non-JLR subsidiaries and associates, and `213 as value of JLR (on a forward multiple of 6x). On fair valuations, we downgrade the stock to a Hold.

We raise our FY13 estimates to factor in better-than-expected JLR volumes due to the Evoque and the resultant improved operating performance.

Our target is `301, based on 12-month-forward core standalone PE of 12x amounting to `56, `33 as value of investment in non-JLR subsidiaries and associates, and `213 as value of JLR (on a forward multiple of 6x). On fair valuations, we downgrade the stock to a Hold.

Risks

Downside risks: currency fluctuation, double dip in European recovery.

Upside risks: better-than-expected CV demand, further surprises from JLR.



[email protected]


[email protected]

India I Equities


Sales (`m) 44,310 62,874 72,221 78,490 85,745

Net profit (`m) 1,294 1,973 2,453 2,730 3,113

EPS (`) 2.7 4.2 5.2 5.7 6.6

Growth (%) 294.0 52.4 24.4 11.3 14.0

EV/EBITDA (x) 3.3 4.4 3.8 3.1 2.5

PE (x) 15.0 9.9 7.9 7.1 6.3

PBV (x) 1.1 1.9 1.7 1.4 1.2

RoE (%) 15.0 19.7 20.8 19.9 19.6

RoCE (%) 12.4 19.3 18.7 19.6 20.5

Dividend yield (%) 2.9 2.7 3.4 4.1 4.9

Net gearing (%) 63.5 63.6 62.9 59.6 57.0


Autos

Update

9 April 2012

TVS Motors

Competitive pressures to continue; valuations inexpensive; Hold

Niche mopeds and small scooters have kept TVS Motors’ growth in sync with that of industry leaders. However, it continues to suffer from a weak motorcycle portfolio. Recent competitive pressures have led to a correction in its share price, which, in our view, is far more exaggerated than its fundamentals indicate. Hence, we upgrade the stock to a Hold, with a price target of `50.

Niche products to continue to do well. We expect the company to be vulnerable to market share loss in the short-term due to sustained competitive pressures, a high volume base for these products and a stuttering motorcycle range. However, niche products such as mopeds are likely to do well, going forward.

Constant delay in operating performance improvement. Of the three listed peer companies, TVS sustains the weakest EBITDA margin (64% lower than Bajaj Auto; 55% lower than Hero Moto Corp). Despite continuous efforts, the company has not managed to narrow this gap. While management has optimistic targets on this front, we are cautious given its track record.

Lowering estimates. We lower our FY13e earnings estimate 11.6% to `5.7 (11.3% yoy growth) on lower-than-expected motorcycle volumes, and curtail the margin outlook (by 30bps to 7.6%).

Valuation. We raise our price target to `50 (from `47) based on 7x core earnings (a ~50% discount to listed peers) for FY13, and `10 as value of cash and investments). At our target price, the stock would trade at a PE of 8.8x (lower than its average of ~10.5x). We upgrade to a Hold. Risks. Downside: competition leading to price wars, steep rise in commodity prices; Upside: better-than-expected demand and operating performance.

Rating: Hold Target Price: `50 Share Price: `41


TVSL

Sensex

30

40

50

60

70

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-1

2

Source: Bloomberg

Key data TVSL IN / TVSM.BO52-week high / low `70/ `37Sensex / Nifty 17486 / 53233-m average volume US$2.7m Market cap `19.7bn / US$385mShares outstanding 475m





Sales -4.5 -9.8 -12.9EBITDA -9.1 -13.4 -15.1EPS -2.6 -11.6 -16.0Target multiple (x) - 8.8 -

9 April 2012 TVS Motors – Competitive pressures to continue; valuations inexpensive; Hold




Net revenues 44,310 62,874 72,221 78,490 85,745Revenue growth (%) 18.9 41.6 14.6 8.6 9.2- Op. expenses 40,895 58,168 67,061 72,647 79,146EBIDTA 3,416 4,706 5,160 5,844 6,599EBITDA margin (%) 7.8 7.6 7.3 7.6 7.9- Interest expenses 628 470 459 487 487- Depreciation 1,640 1,709 1,474 1,663 1,836+ Other income 74 -12 44 46 48- Extraordinaries & others 461 34 0 0 0- Tax -118 535 818 1,010 1,211Effective tax rate (%) -15.6 21.6 25.0 27.0 28.0Reported PAT 880 1,946 2,453 2,730 3,113Adjusted PAT 1,294 1,973 2,453 2,730 3,113Adjusted PAT growth 294.0 52.4 24.4 11.3 14.0Adj. FDEPS (`/share) 2.7 4.2 5.2 5.7 6.6Adj. FDEPS growth (%) 294.0 52.4 24.4 11.3 14.0Source: Company, Anand Rathi Research


PAT 880 1,946 2,453 2,730 3,113+ Non-cash items 1,640 1,709 1,474 1,663 1,836Cash profit 2,520 3,655 3,927 4,393 4,949- Incr./(decr.) in WC -1,057 883 -104 -83 -97 Operating cash-flow 3,577 2,772 4,031 4,476 5,045- Capex -487 -1,195 -2,000 -2,000 -1,500Free cash-flow 4,064 3,967 6,031 6,476 6,545- Dividend -285 -523 -665 -808 -950+ Equity raised 3 4 5 5 5+ Debt raised 973 -2,179 1,000 0 0- Investments -2,616 781 -2,000 -1,000 -2,000- Misc. items 7,351 2,484 9,654 8,002 9,364Net cash-flow 590 -950 47 287 137+ Op. cash & bank bal. 421 1,010 60 107 394Cl. Cash & bank bal. 1,010 60 107 394 530Source: Company, Anand Rathi Research

Fig 5 – P/E band

TVS Motors

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Share capital 238 475 475 475 475Reserves & surplus 8,416 9,519 11,307 13,229 15,392Net worth 8,653 9,994 11,782 13,704 15,867Total debt 10,033 7,854 8,854 8,854 8,854Def. tax liab. (net) 846 957 957 957 957Capital employed 19,532 18,805 21,593 23,515 25,678Net fixed assets 9,828 9,950 10,794 11,513 11,635Investments 7,393 6,611 8,611 9,611 11,611Working capital 1,301 2,184 2,080 1,997 1,900Cash 1,010 60 107 394 530Capital deployed 19,532 18,805 21,593 23,515 25,678Net debt 9,023 7,794 8,747 8,461 8,324No. of shares (m) 238 475 475 475 475Net debt/equity 1.0 0.8 0.7 0.6 0.5W C turn (days) -13 -5 -5 -5 -5Book value (`/sh) 36 21 25 29 33Source: Company, Anand Rathi Research


P/E (x) 15.0 9.9 7.9 7.1 6.3P/B (x) 1.1 1.9 1.7 1.4 1.2EV/EBITDA (x) 3.3 4.4 3.8 3.1 2.5RoE (%) 15.0 19.7 20.8 19.9 19.6RoCE (%) 12.4 19.3 18.7 19.6 20.5Dividend yield 2.9 2.7 3.4 4.1 4.9Dividend payout (%) 37.3 30.9 31.2 34.0 35.1Debt to equity (%) 1.2 0.8 0.8 0.6 0.6Core P/E (x) 16.0 9.8 8.1 7.3 6.4Cash P/E 4.2 6.4 5.4 4.9 4.3EV/sales 0.3 0.3 0.3 0.2 0.2Inventory days 24.2 31.2 25.0 25.0 25.0Receivables days 18.4 16.0 24.0 24.0 24.0Payables days 55.8 52.3 54.0 54.0 54.0Asset T/O 4.5 6.6 7.2 7.0 7.4Source: Company, Anand Rathi Research

Fig 6 – Product-wise volume split

32.0 32.5 37.3 34.5 35.8 36.8 36.9

47.8 47.9 41.6 40.8 38.4 37.3 36.7

20.2 19.3 20.2 22.8 24.1 24.1 24.4

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Mopeds Motorcycles Scooters (inclusive of electric 2-wheelers) 3 wheelers

(%)




Vulnerable to market share loss TVS’ niche product range has helped it face competitive pressures far better than was earlier expected. However, the high sales volume base of these products and a hesitant performance by its motorcycle product range render it vulnerable to short-term market share dips.

A niche product range has helped TVS withstand competitive pressures far better than seemed likely not so long ago. However, the high base of products such as scooters and mopeds, as well as a stuttering motorcycle range, render the company vulnerable to short-term market-share losses.

Fig 7 – Two-wheelers volume-growth to be subdued

0

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In motorcycles, we expect the company to lose market share to Bajaj Auto (due to more exports) and to Honda Motorcycle & Scooters (increased capacity in FY13, new launches).

We expect TVS’ motorcycle volumes to register a weak 3% volume CAGR over FY12-14, compared to the industry’s 10.2%.

Fig 8 – Market share trend: two-wheelers and motorcycles

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TVS 2wh Market share TVS mc Market share

(%)


We expect TVS’ two-wheeler volumes to register a weak 5.2% volume CAGR over FY12-14,

compared to the industry’s 11.2%



Fig 9 – Volume-growth trend: scooters

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Fig 10 – Market-share trend in scooters

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Strong competition exists in scooters with the presence of Honda and Hero Moto Corp. However, we

expect TVS’ range to do decently, registering 6% volume CAGR in

FY12-14.

With Honda recording strong growth, TVS could see some market

share loss.



Operating performance unimproved TVS continues to sustain the weakest EBITDA margin (64% lower than Bajaj Auto; 55% lower than Hero Moto Corp) of its listed peers. Despite its continuous efforts, this gap has not narrowed.

Of the three listed peer companies, TVS continues to sustain the weakest EBITDA margin (64% lower than Bajaj Auto; 55% lower than Hero Moto Corp). Despite its continuous efforts, a narrowing of this gap keeps getting delayed. While management has optimistic targets on this front, we are cautious given its track record.

Fig 11 – Realization trend: growth to slow

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Fig 12 – Contribution trend: sluggish increase…

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As a result of the very low base, we expect TVS to register 3.4% realisation CAGR, 4.6% contribution CAGR and higher EBITDA CAGR of 7.4% per vehicle over FY12-14. We estimate profit CAGR of 7.1% over the same period.

Fig 13 – … EBITDA / vehicle shows very low improvement

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Fig 14 – … profit per vehicle growth to be higher than realization growth

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Financials We lower our FY13e earnings estimate 11.6% to `5.7 (11.3% yoy growth) on lower-than-expected volumes and a curtailed margin outlook (by 30bps to 7.6%). We increase our Mar ’13 target to `50 (from `47), based on 7x core earnings and `10 as value of cash and investments), and upgrade our rating to a Hold based on inexpensive valuations.

We lower our FY13e earnings estimate 11.6% to `5.7 (11.3% yoy growth) on lower-than-expected volumes and a curtailed margin outlook (by 30bps to 7.6%).

We raise our Mar ’13 price target to `50 (from `47), based on 7x core earnings (a ~50% discount to listed peers), and `10 as value of cash and investments). We upgrade the stock to a Hold.

Risks

Downside risks: competition leading to destructive price wars, steep rise in commodity prices.

Upside risks: better-than-expected demand and operating performance.


3.5

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Key financials (YE: Dec) CY09 CY10 CY11 CY12e CY13e

Sales (`m) 29,582 44,213 57,160 64,715 75,964

Net profit (`m) 834 1,889 3,088 3,538 4,217

EPS (`) 30.6 69.3 113.3 129.8 154.8

Growth (%) 258.7 126.5 63.4 14.6 19.2

PE (x) 63.5 28.3 17.3 15.1 12.7

PBV (x) 5.0 4.3 3.6 2.7 2.1

RoE (%) 7.8 15.3 20.7 17.7 16.2

RoCE (%) 11.0 21.0 27.3 26.2 25.7

Dividend yield (%) 0.4 0.6 0.8 0.9 1.0

Net gearing (%) -23.7 -15.4 3.7 -8.5 -6.5


Autos

Initiating CoverageIndia I Equities

Nirav Bhatt+9122 66266505

[email protected]

Rohan Korde +9122 66266733

[email protected]

9 April 2012

Eicher Motors

Market share to improve with better-value product offerings; Buy

The outlook for Eicher Motors is strong on expected CV market-share gains from the structural shift to better-value products and continuing strong motorcycle sales. Widening dealer network and ample cash balance further enhance its profile. We initiate coverage with a Buy and a price target of `2,601.

Long-term M&H CV market-share gains expected. Eicher Motors (EM) has seen Apr-Feb FY12 volume growth of over 23% yoy, higher than the CV sector’s ~19% yoy growth, continuing the trend seen recently. The company aims at 15% market share by CY15, driven by new launches. We expect its CV market share across sub-segments to improve on: qualitative improvement in the product range and a wider network.

Iconic motorcycle brand; capacity and dealership constraints ease. The encouraging fan base of the iconic Royal Enfield brand is clear from the long waiting period (6-10 months) for Classic and Thunderbird. EM added 24 full-fledged outlets in CY10, easing dealership constraints slightly. Following expansion, production ramp-up and new-unit commissioning in 1QCY13 (doubling capacity), we see good growth as bookings exceed home and overseas demand.

Operating performance trajectory improves. On the formation of VECV, EM now sustains a robust consolidated operating performance. We expect this trajectory to be decent on improved operating leverage and price increases benefiting margins, expected to touch 11.1%.

Valuation. We initiate coverage with a Buy, and a price target of `2,601, based on the value of the two-wheeler business (`838, 15x PE), the value of the CV business (`973, 12x target PE) and cash at `790. Risks. Drop in freight rates, commodity price rises, capex and product launch delays.


EIM

Sensex

1,000

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2,200

Apr-1

1

Jun-

11

Aug-

11

Oct

-11

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-11

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12

Apr-1

2

Source: Bloomberg

Key data EIM IN / EICH.BO52-week high / low `2,260 / `1,038Sensex / Nifty 17486 / 53233-m average volume US$1m Market cap `57.4bn / US$1.0bnShares outstanding 27m


Promoters 55.21 55.23 55.26 - of which, pledged - - -Free float 44.79 44.77 44.74 - Foreign institutions 6.18 5.96 6.64 - Domestic institutions 18.42 17.36 16.52 - Public 20.19 21.45 21.58


9 April 2012 Eicher Motors – Market share to improve with better-value product offerings; Buy



Year-end: Dec CY09 CY10 CY11 CY12e CY13e

Net revenues 29,582 44,213 57,160 64,715 75,964Revenue growth (%) 71.2 49.5 29.3 13.2 17.4- Op. expenses 27,942 40,402 51,225 57,754 67,628EBIDTA 1,640 3,811 5,935 6,961 8,336EBITDA margins (%) 5.5 8.6 10.4 10.8 11.0- Interest 87 95 77 77 77- Depreciation 539 573 640 742 861+ Other income 858 1,034 1,383 1,521 1,674- Extraordinaries /others 0 0 0 0 0- Tax 578 1,108 1,628 2,029 2,395Effective tax rate (%) 30.9 26.5 24.7 26.5 26.4Reported PAT 1,295 3,069 4,974 5,634 6,676Rep. PAT after MI 834 1,889 3,088 3,538 4,217Adjusted PAT 834 1,889 3,088 3,538 4,217PAT growth (%) 258.7 126.5 63.4 14.6 19.2Adj. FDEPS (`/share) 30.6 69.3 113.3 129.8 154.8Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m) Year-end: Dec CY09 CY10 CY11 CY12e CY13e

PAT 1,295 3,069 4,974 5,634 6,676+ Non-cash items 539 573 640 742 861Cash profit 1,834 3,642 5,614 6,376 7,538- Incr./(decr.) in WC -2,100 -297 -420 2,167 1,087Operating cash-flow 3,934 3,939 6,033 4,210 6,450- Capex 487 1,363 5,265 -128 4,000Free cash-flow 3,448 2,576 768 4,338 2,450- Dividend 187 296 432 475 523+ Equity raised -154 143 1 0 0+ Debt raised -392 -307 -453 0 0- Investments -2,879 -1,645 -540 0 -500- Misc. items 6,204 3,010 909 79 1,087Net cash-flow -611 750 -484 3,784 1,340+ Op. cash & bank bal. 12,318 11,707 12,457 11,973 15,757Cl. cash & bank bal. 11,707 12,457 11,972 15,757 17,097Source: Company, Anand Rathi Research

Fig 5 – P/E band

Eicher Motors

8x

9.5x

11x

12.5x

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Fig 2 – Balance sheet (`m) Year-end: Dec CY09 CY10 CY11 CY12e CY13e

Share capital 267 269 270 270 270Reserves & surplus 10,424 12,052 14,661 19,742 25,809Net worth 10,690 12,321 14,931 20,012 26,079Minority interest Total debt 1,264 956 504 504 504Def. tax liab. (net) 5,888 7,023 9,021 9,021 9,021Capital employed 17,842 20,301 24,456 29,537 35,604Net fixed assets 3,758 4,547 9,173 8,302 11,441Investments 2,941 4,586 5,126 5,126 5,626Net working capital -563 -1,289 -1,815 352 1,439Cash and bank balance 11,707 12,457 11,973 15,757 17,097Capital deployed 17,842 20,301 24,456 29,537 35,604No. of shares (m) 272 27 27 27 27Net debt/equity -13,384 -1.3 -1.1 -1.0 -0.9WC days -1.3 -1 -7 0 0Book value (`/sh) -3 457 553 741 966Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `1,983 Year-end: Dec CY09 CY10 CY11 CY12e CY13e

P/E (x) 63.5 28.3 17.3 15.1 12.7P/B (x) 5.0 4.3 3.6 2.7 2.1EV/EBITDA (x) 7.1 9.8 6.2 4.8 3.8RoE (%) 7.8 15.3 20.7 17.7 16.2RoCE (%) 11.0 21.0 27.3 26.2 25.7Dividend yield 0.4 0.6 0.8 0.9 1.0Dividend payout (%) 26.2 18.3 16.3 15.7 14.4Debt to equity (%) 0.1 0.1 0.0 0.0 0.0Core P/E (x) n.m 63.2 31.7 26.8 21.2Cash P/E 28.9 14.7 9.5 8.4 7.1EV/sales 0.4 0.8 0.7 0.5 0.4Inventory days 27.2 27.1 27.5 27.5 27.5Receivables days 28.9 21.7 22.1 22.1 22.1Payables days 59.1 50.1 56.9 50.0 50.0Fixed Asset T/O 4.0 5.4 5.7 4.6 4.2Source: Company, Anand Rathi Research

Fig 6 – CY11 PAT breakdown

Standalone40%

Subsidiary60%

Source: Company



Investment Argument and Valuation The sluggish trend in commercial vehicle demand witnessed in CY11 is continuing in CY12 ytd. This, along with qualitative product improvement, eased capacity constraints, strong motorcycle sales, expected long-term market share gains in CVs and ample cash balance, constitutes a positive outlook for Eicher Motors. We initiate coverage of the stock, with a Buy rating and a price target of `2,601.

Long-term M&H CV market-share gains expected

Decent exports, a qualitative improvement in the product range and improvements in customer channels are strong positives for Eicher Motors.

The company has registered Apr-Feb ’12 volume growth of over ~23% yoy, mainly on account of 19% yoy growth in CV sales volumes. While its M&H CV market share is steady at ~10%, we anticipate long-term market-share gains ahead, mainly in the 16-40-ton sub-segment on: (1) the qualitative improvement in its product range and, (2) an increase in its dealership network (which has been a constraint) good after-sales service and spare-parts business growth. The company has a network of 226 dealers, and plans to add 10-12 more in 1H CY2012. Of the 226, ~155 are fully-equipped sales, spares and services entities. Volvo Eicher Commercial Vehicles (VECV) dealerships cover ~140 outlets, which is about two-thirds of Ashok Leyland’s network.

Other catalysts that are likely to drive Eicher’s CV sales include expansion into new regions (strong traction from the north and in new pockets such as coastal regions), focus on single/smaller truck-owner customers (currently ~90% of its sales are to large fleet owners) and after-market reach on important routes.

Capacity constraints for motorcycles removed

Royal Enfield is an iconic brand with a loyal and huge fan base, as is evident from the current long waiting periods for key models. This has been further enhanced by the launches of the new Thunderbird and Café Racer announced at the Auto Expo FY12. With the addition of 24 full-fledged outlets in CY10, capacity expansion, production ramp-up and the new unit to be commissioned in 1QCY13, we expect good growth for this business both at home as well as overseas. Based on its current order backlog, Enfield should see good sales continuing as demand outstrips supply.

Operating-performance trajectory has improved

Following the formation of VECV in CY08, EM now maintains a robust consolidated operating performance. We expect this improved trajectory to be sustained due to increased operating leverage.

Improved product offerings have given the company the leverage to hike prices, which it has been doing regularly. Operating leverage, lower costs and normalised operations have all resulted in a strong operating performance, leading to a much-improved trajectory in the past six months. We expect margins to touch ~11% as a result.

The company has a network of 226 dealers, and plans to add 10-12

more in 1H of CY 2012. VECV dealerships cover ~140 outlets,

which is about two-thirds of Ashok Leyland’s network



Valuation

With Eicher’s CV volumes growing slightly ahead of industry volume growth, qualitative improvement in its product range, wider dealership, and easing capacity constraints, its CV segment is likely to see robust growth. Following its capacity expansion, we also see good growth prospects in motorcycles.

We initiate coverage with a Buy, and a price target of `2,601, based on the value of the two-wheeler business (`838, 15x PE), the value of the CV business (`973, 12x target PE) and cash at `790.

Risks

Drop in freight rates, commodity price rises, capex and product launch delays.

Fig 7 – Sum-of-parts valuation ` Mar‘13Value of motorcycle business 838Multiple (x) 15Value of CV business 973Multiple (x) 12Value 1,811Cash per share 790

Target price (`) 2,601



0

1

2

3

4

5

6

Nov

-09

Mar

-10

Jul-1

0

Nov

-10

Mar

-11

Jul-1

1

Nov

-11

Mar

-12

Source: Bloomberg, Anand Rathi Research\



CV segment to see market-share gain Growth on a small base, decent exports, qualitative improvement in product range and improvements in dealer and distribution networks are likely to drive market share gains for Eicher Motors.

Higher-than-industry growth aided by planned outlays

Eicher Motors has registered Apr-Feb’12 volume growth of over 23% yoy, mainly on account of steady CV growth in the first half of the year. While its M&H CV market share is steady at ~10%, we anticipate long-term market share gains ahead, on (1) a qualitative improvement in its product range and (2) an increase in its dealership network (which had been a constraint). The company has 226 dealers and plans to add 10-12 more in early 2012. Of the 226, more than 155 have sales, spares and after-sales service.

Eicher’s ytd volume growth of over 23% in Apr-Feb’12 (more than the CV sector’s 19%) is a trend seen in CY10 as well. The company aims at 15% market share by CY15, driven by the 16-40-tonne space.

The company is seeing robust growth in tippers, driven by its 16-tonne tipper sub-segment. It plans to introduce the new 25-tonne tipper, which it expects to be the next growth driver in this sub-segment in the next few quarters.

The National Highway Authority of India (NHAI) plans to increase the outlay on road-building to `477bn in FY12, 65% higher yoy. It plans to award highway-widening projects worth `70,000cr during the next Five-Year Plan, converting 20,000km of single lanes into double lanes through the EPC model during the Plan period.

In Sep-Oct ’11 the NHAI resumed project awards after a brief lull, awarding nine projects of 1,064km in Nov ’11. Till Feb ’12 FY12 ytd, ~4,382km had been awarded (ytd ~`410bn), with a FY12 target of awarding 7,300km. A part of this is expected to spill over to the next fiscal. While the Golden Quadrilateral has been nearly completed, the North-South and East-West corridors are only 60% complete. Hence, further demand from these is expected.

Over the long run, all these activities to an extent lent decent demand visibility. Demand for CVs from road-building and infrastructure activities is a crucial component currently, considering the mining ban in Karnataka and Goa as well as the general economic activity slowdown and delayed capex programs.

Other triggers for CV growth

The Cabinet Committee on Infrastructure has approved 15 projects for highway construction of ~1,814km at an estimated `157bn.

The company has an order to supply 20 low-floor buses to the Gujarat STU. Bus demand from private operators and state transport units is finally materialising with a higher trajectory.

Projected growth rates for industrial production and agriculture, though subdued, are decent. These are freight-carrying portions of GDP growth, which typically boost CV demand.

Export orders are expected to be steady on the ongoing fleet renewal in Europe.

NHAI resumed project awards after a lull in Sep-Oct ’11, awarding nine

projects of 1,064km in Nov ’11; 4,382km in ytd FY12 of the

targeted 7,300km in FY12



Synergies from the Volvo merger, a further positive

Eicher’s previous foray into HCVs wasn’t a huge success. However, following the merger with Volvo 2008, the product range and mix have improved. In FY12 ytd Eicher gained market share in all sub-segments (except for the 7.5-12 ton) at the cost of Ashok Leyland. Going forward, we expect further benefit from the synergies, leading to better performance, scale, reliability and products. Outsourcing is another huge opportunity for VECV as Volvo could make VECV its global manufacturing base for engines as well as of other manufacturing processes.

Fig 9 – YTD M&HCV market share

M&H CVs FY10 FY11 Apr-Feb ytdFY11

Apr-Feb ytd FY12

Change yoy (bps)

Change from FY11 (bps)

Tata Motors 63.3 59.5 59.6 59.3 (22.4) (17.5)

Ashok Leyland 23.7 26.5 26.3 24.3 (199.4) (214.9)

Eicher 8.6 9.0 9.1 10.1 107.0 113.1

Others 4.4 5.0 5.0 6.2 114.8 119.3


We estimate Eicher’s M&H CV volume CAGR at 12.5%, double that of the industry’s 6.5% over FY12-14. Estimated growth over FY12-14: goods M&H CV at 12.5% CAGR, mainly driven by the improved product mix; goods LCVs at 8.6% CAGR; motorcycles at ~25%.

Fig 10 – Volume growth trend: M&H CVs

10,000

20,000

30,000

40,000

50,000

60,000

CY0

8

CY0

9

CY1

0

CY1

1

CY1

2e

CY1

3e

CY1

4e

0.0

15.0

30.0

45.0

60.0

75.0

EICHER total M&HCVs yoy growth (RHS)

(units) (%)


Fig 11 – Market share trend: M&H CVs & Goods M&H CVs

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

CY0

8

CY09

CY10

CY11

CY1

2e

CY1

3e

CY1

4e

EICHER M&HCV Market share EICHER Goods M&HCV Market share

(%)




Fig 14 – Monthly overall volume growth

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Feb-

09

May

-09

Aug-

09

Nov-

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Feb-

10

May

-10

Aug-

10

Nov-

10

Feb-

11

May

-11

Aug-

11

Nov-

11

Feb-

12

-75.0

-25.0

25.0

75.0

125.0

175.0

225.0

275.0

Volume Yoy growth (RHS)

(%)(Units)


Fig 15 – Yearly overall volume growth

0

50,000

100,000

150,000

200,000

250,000

CY0

8

CY0

9

CY1

0

CY1

1

CY1

2e

CY1

3e

CY1

4e

Volume

(Units)


Fig 12 – Volume growth trend: LCVs

0

3,000

6,000

9,000

12,000

15,000

18,000

CY0

8

CY09

CY10

CY11

CY1

2e

CY1

3e

CY14

e

5.0

15.0

25.0

35.0

45.0

55.0

EICHER LCV volume yoy growth (RHS)

(units) (%)


Fig 13 – Volume growth trend: two wheelers

20,000

40,000

60,000

80,000

100,000

120,000

CY08

CY09

CY1

0

CY1

1

CY12

e

CY1

3e

CY1

4e

0.0

10.0

20.0

30.0

40.0

50.0

EICHER Two wheeler volume yoy growth (RHS)

(units) (%)




Capacity constraints eased The Royal Enfield is an iconic brand with a loyal and strong fan following. On the capacity expansion, production ramp-up and the commissioning of a new unit in 1QCY13, further growth in motorcycles is indicated, both at home and overseas.

The Eicher Group acquired the ailing Enfield India Co. in March 1994 and subsequently changed the name to Royal Enfield Motors. Management had initially planned to transfer the loss-making motorcycle business to a 100% subsidiary. However, they changed this plan, following the improved financial performance of the motorcycle business from 4QFY07.

The iconic Royal Enfield brand has an encouraging fan base, as is indicated by the long waiting periods (6-10 months) for the Classic and Thunderbird models. The company added 24 full-fledged outlets in CY10, to ease dealership constraints. With capacity expansion, production ramp-up and unit commissioning in 1QCY13 (doubling capacity to 150,000 units), good growth is visible as bookings exceed home as well as overseas demand. Based on the present order backlog, Enfield should sell as many as it can make in the next two years.

Fig 16 – Royal Enfield Product range Product Engine Price (`)

Current Classic Desert Storm 500cc 160,000Classic Chrome 500cc 170,000Classic 500 500cc 150,000Bullet 500 500cc 125,000Classic 350 350cc 110,000Thunderbird Twinspark 350cc 105,000Bullet Electra Twinspark 350cc 110,000Bullet 350 Twinspark 350cc 100,000Bullet Electra EFI 350cc 104,000Bullet Electra Deluxe 350cc 100,000Upcoming Thunderbird 500 500cc TBC


The company’s manufacturing base is in Chennai and its models cater to a niche segment, where it has very little domestic competition. Competition arises predominantly from imported brands such as Harley Davidson. These offer world-class cult products and come at a much higher premium to Royal Enfield offerings. This places it in a sweet spot. Other direct competition comes from the likes of Yamaha and Bajaj Auto through products such as the Avenger. However, the Royal Enfield has managed to hold its own as a result of its cult products and has put up a strong performance since 1HFY08. Going forward, the company aims to sell 100,000 units/annually in the next 4 to 5 years.

Royal Enfield undertakes tours around the country every year; this helps cultivate culture and build goodwill, which helps in marketing its unique position.

Royal Enfield is synonymous with leisure biking, a lifestyle still at a nascent stage in India. It also caters to the “practical” leisure biking sub-segment that at the moment uses the premium higher-CC segment (150-200cc) bike, but would eventually upgrade to a bigger/more comfortable model. The budding stage at which these products are at the moment, lends a unique thrust to potential growth.

Present order backlog indicates, Enfield will fall short in meeting its

orders till the next two years

Royal Enfield’s cult niche brand comes at a much lower premium

than the likes of Harley Davidson. Competitors Bajaj and Yamaha, with cheaper products, offer weak competition as their quality and

branding do not match up



Currently, EM faces constraints due to its inadequate capacity to meet demand. Post-capacity expansion, further growth in motorcycles is indicated, both at home as well as overseas.

Fig 17 – Trends in the monthly volume growth of Royal Enfield

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Feb-

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May

-10

Aug-

10

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-10

Feb-

11

May

-11

Aug-

11

Nov

-11

Feb-

12

-22.0

-2.0

18.0

38.0

58.0

78.0

Motorcycle volumes Yoy growth (RHS)

(%)(Units

Source: Company

Increased capacity is coming on-stream with expansion and the

commissioning of a new plant



Operating performance to improve Eicher Motors’ consolidated operating performance is currently at its highest, following the formation of VECV. We expect the company to sustain this improved trajectory and improve on further operating leverage.

Operating leverage, lower costs, and normalisation of operations have all resulted in Eicher Motors’ operating performance, moving to a higher trajectory in the past six months. Going forward, we expect the company to sustain at least margins of ~11%.

Cash and investments on books add value

Eicher has more than ~`20bn in cash and only `0.5bn in debt. Some of this cash pile is expected to be used in the planned capex of ~`8bn. However, with an FCF-generating ability of more than ~`2bn, we would watch and see how the company deploys its cash. In CY11, it announced a dividend of ~`16/share, a pay out ratio of 16.3%.

Fig 20 – Trend in EBITDA/unit

45,000

46,000

47,000

48,000

49,000

50,000

CY11

CY1

2e

CY1

3e

-4.0

0.0

4.0

8.0

12.0

16.0


(units) (%)


Fig 21 – Trend in PAT/unit

5,000

10,000

15,000

20,000

25,000

30,000

CY09

CY10

CY1

1

CY1

2e

CY1

3e

(8.0)

22.0

52.0

82.0

112.0

142.0

172.0


(units) (%)


Fig 18 – Trend in realisation/unit

350,000

400,000

450,000

500,000

CY09

CY1

0

CY11

CY12

e

CY1

3e

(10.0)

0.0

10.0

20.0

30.0


(units) (%)


Fig 19 – Trend in contribution/unit

50,000

70,000

90,000

110,000

130,000

150,000

CY09

CY1

0

CY11

CY12

e

CY1

3e

(10.0)

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0


(units) (%)




Financials Till CY15, Eicher Motors plans investment of ~`5bn in CVs, ~`4bn in engines and ~`1.5bn on the two-wheeler business. Over CY11-13, we expect consolidated revenues at 15.3% CAGR from `57.2bn to `76bn and consolidated PAT at a healthy 17% CAGR, from `3.1bn to `4.2bn. We expect stable return ratios ahead, with ~17% RoE and ~26% RoCE in CY12 and CY13.

Capex plans

Eicher has indicated its intention to invest ~`5bn into VECV till CY15. Of this, `3bn would be allocated for the medium-duty engine project, `1.2bn for the bus plant and the balance for a paint shop as well as capacity enhancement. Nearly `1.5bn-2bn of the planned capex would be for the new two-wheeler plant to come on-stream from CY13.

Financials

We expect consolidated revenues to register 15.3% CAGR over CY11-13, from `57.2bn to `76bn. Consolidated PAT is expected to register a very healthy 17% CAGR, from `3.1bn to `4.2bn. We expect the company’s consolidated margins to improve to ~11% in CY12 and in CY13. Standalone PAT is expected to register 18.8% CAGR, to `1.8bn, on the rising share of the standalone business (motorcycles) in overall operations.

We expect stable return ratios ahead, with ~17% RoE and ~26% RoCE in CY12 and CY13.

Consolidated 4QCY11 performance recap

In 4QCY11, Eicher Motors’ consolidated revenues increased 26.8% yoy (8.6% qoq) to `15.8bn as volumes grew by a robust 27% yoy and realization improved 12.5% qoq (flat yoy). EBITDA margin was subdued at 9.8% (flat yoy, and down 65bps qoq) as EBITDA grew 27.7% yoy to `1.5bn. The raw material to sales ratio fell 72bps yoy (up 96bps qoq), to 73.5%.

EM’s standalone business reported lower sales of two wheelers, due to the annual maintenance shutdown, causing the consolidated EBITDA margin to drop.

4Q CY11 performance was good

Fig 22 – Trend in quarterly consolidated EBITDA margin

9.8

10.49.7

11.7

2.8

7.2

6.85.1

8.88.2

7.6

9.7

-450

300

1,050

1,800

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

CY09 CY10 CY11 -3

1

5

9

13

EBITDA As a % of Sales (RHS)

(`m) (%)


Fig 23 – Trend in quarterly consolidated RM/sales

72.5

73.573.373.4

74.2

75.5

75.1

75.2

75.0

75.7

71.6

74.9

4,000

8,000

12,000

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

CY09 CY10 CY11

71

73

75

77

Raw Material As a % of Sales (RHS)

(`m) (%)


The company plans to invest ~`5bn in CVs, ~`3bn in engines and

~`1.5bn on the two-wheeler business till CY15



Fig 24 – Per-unit operating parameters sustain improvement

Per-unit realisation

200,000

250,000

300,000

350,000

400,000

450,000

500,000

550,000

2QC

Y08

4QC

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Y10

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4QC

Y11

Realisation / unit

(units)


Per-unit contribution

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Y08

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Y11

Contribution / unit

(units)


Per-unit EBITDA

(15,000)

0

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Y11

EBITDA / unit

(units)


Per-unit PAT

2,000

7,000

12,000

17,000

22,000

27,000

32,0002Q

CY0

8

4QC

Y08

2QC

Y09

4QC

Y09

2QC

Y10

4QC

Y10

2QC

Y11

4QC

Y11

Adj. profit / unit

(units)




Fig 25 – Consolidated Income statement (`m) Year-end: Dec CY09 CY10 CY11 CY12e CY13eTotal income 29,582 44,213 57,160 64,715 75,964Revenue growth (%) 71.2 49.5 29.3 13.2 17.4Expenditure 27,942 40,402 51,225 57,754 67,628Raw material 21,992 33,147 41,818 47,243 55,377Employee cost 2,152 2,631 3,461 3,900 4,520R&D expenses 306 269 229 324 380Manufacturing expenses 742 974 1,432 1,743 2,076Administrative expenses 919 1,007 1,474 1,564 1,849Selling & distribution exp 1,832 2,374 2,809 2,981 3,427EBITDA 1,640 3,811 5,935 6,961 8,336 Change (%) n.m 132.3 55.7 17.3 19.7 % of Net Sales 5.5 8.6 10.4 10.8 11.0Depreciation 539 573 640 742 861EBIT 1,102 3,238 5,296 6,219 7,474Interest & finance charges 87 95 77 77 77Other income 858 1,034 1,383 1,521 1,674PBT 1,873 4,177 6,602 7,664 9,071Tax 578 1,108 1,628 2,029 2,395 Effective rate (%) 30.9 26.5 24.7 26.5 26.4Rep. PAT 1,295 3,069 4,974 5,634 6,676 Change (%) 92.4 137.0 62.1 13.3 18.5Minority interest 461 1,179 1,886 2,097 2,459 MinorityiInterest (%) 35.6 38.4 37.9 37.2 36.8 Rep. PAT after MI 834 1,889 3,088 3,538 4,217 Change (%) 33.2 126.5 63.4 14.6 19.2Adj. PAT 834 1,889 3,088 3,538 4,217 Change (%) 258.7 126.5 63.4 14.6 19.2


Fig 26 – Balance sheet (`m) Year-end: Dec CY09 CY10 CY11 CY12e CY13eSources of funds Share capital 267 269 270 270 270Reserves 10,424 12,052 14,661 19,742 25,809Net worth 10,690 12,321 14,931 20,012 26,079Net deferred tax 142 249 645 645 645Total loans 1,264 956 504 504 504Minority interest 5,747 6,774 8,377 8,377 8,377Capital employed 17,842 20,301 24,456 29,537 35,604Application of funds Net fixed assets 3,635 3,844 5,044 8,302 11,441Capital WIP 122 703 4,128 0 0Total net fixed assets 3,758 4,547 9,173 8,302 11,441Investments 2,941 4,586 5,126 5,126 5,626Curr. assets, L & adv. 18,121 20,500 23,501 29,403 33,364Inventory 2,190 3,265 4,280 4,845 5,688Sundry debtors 2,325 2,609 3,434 3,888 4,565Cash & bank balances 11,707 12,457 11,973 15,757 17,097Loans & advances 1,540 1,814 3,391 4,391 5,391Others 360 355 423 523 623Current liab. & prov. 6,978 9,332 13,343 13,295 14,827Sundry creditors 4,760 6,032 8,853 8,805 10,337Other liabilities 1,256 1,910 2,993 2,993 2,993Provisions 962 1,391 1,497 1,497 1,497Net current assets 11,144 11,168 10,157 16,108 18,537Application of funds 17,842 20,301 24,456 29,537 35,604




Fig 27 – Cash flow statement (`m) Year-end: Dec CY09 CY10 CY11 CY12e CY13e

OP/(Loss) before tax 1,102 3,238 5,296 6,219 7,474

Interest/div. received 858 1,034 1,383 1,521 1,674

Depreciation & amort. 539 573 640 742 861

Direct taxes paid -289 -1,001 -1,233 -2,029 -2,395

(Inc)/dec in working capital 2,224 726 527 -2,167 -1,087

Other items -827 -207 -260 0 0

CF from oper. activity 3,606 4,363 6,352 4,286 6,527

Extra-ordinary items 0 0 0 0 0

Other items 0 0 0 0 0

CF after EO items 3,606 4,363 6,352 4,286 6,527

(Inc)/dec in FA+CWIP -487 -1,363 -5,265 128 -4,000

(Pur)/sale of invest. -2,879 -1,645 -540 0 -500

CF from inv. activity -3,365 -3,007 -5,805 -3,872 -4,500

Issue of shares -154 143 1 0 0

Inc/(dec) in debt -392 -307 -453 0 0

Interest paid -87 -95 -77 -77 -77

Dividends paid -219 -346 -502 -554 -609

CF from fin. activity -852 -605 -1,031 -631 -686

Inc/(dec) in cash -611 750 -484 3,784 1,341

Add: beginning balance 12,318 11,707 12,457 11,973 15,757

Closing balance 11,707 12,457 11,973 15,757 17,097


Fig 28 – Ratio analysis @ `1,983 Year-end: Dec CY09 CY10 CY11 CY12e CY13eBasic (`) Current EPS 31.2 70.1 114.4 131.1 156.2EPS growth (%) 277.5 124.4 63.1 14.6 19.2Diluted EPS 30.6 69.3 113.3 129.8 154.8EPS growth (%) 258.7 126.5 63.4 14.6 19.2Cash EPS 68.7 135.2 208.0 236.3 279.3Book value per share 400.5 457.4 553.2 741.5 966.2DPS 7.0 11.0 16.0 17.6 19.4Payout (incl. div. tax) % 26.2 18.3 16.3 15.7 14.4Core EPS -0.9 69.3 113.3 129.8 154.8Valuation (x) P/E 63.5 28.3 17.3 15.1 12.7Cash P/E 28.9 14.7 9.5 8.4 7.1EV/EBITDA 7.1 9.8 6.2 4.8 3.8EV/sales 0.4 0.8 0.7 0.5 0.4Price to book value 5.0 4.3 3.6 2.7 2.1Dividend yield (%) 0.4 0.6 0.8 0.9 1.0Core P/E n.m. 28.6 17.5 15.3 12.8Turnover ratios Inventory days 27.2 27.1 27.5 27.5 27.5Debtor days 28.9 21.7 22.1 22.1 22.1Creditor days 59.1 50.1 56.9 50.0 50.0Net curent asset days 138.4 92.7 65.3 91.5 89.7Asset turnover (x) 1.6 2.2 2.3 2.2 2.1Fixed asset turnover (x) 4.0 5.4 5.7 4.6 4.2Profitability ratios (%) RoE 7.8 15.3 20.7 17.7 16.2RoCE 11.0 21.0 27.3 26.2 25.7Leverage ratio (x) Debt/equity 0.1 0.1 0.0 0.0 0.0




Company Background & Management Primarily manufacturing commercial vehicles and motorcycles, Eicher Motors has its main manufacturing plant in Pithampur and a motorcycle manufacturing plant at Chennai. It is the third-largest domestic player in the CV market and the second-largest in LCVs. Its two main divisions are VE Commercial Vehicles and Royal Enfield Motorcycles.

VE Commercial Vehicles is a JV of the Volvo Group and Eicher Motors. After a difficult FY04-FY08, particularly in the high-ton segment, the company entered into a JV with Volvo, with a 54.4% stake. Eicher’s CV business was then spun off as a subsidiary.

Since Jul ’08, VECV comprises five business verticals: Eicher Trucks and Buses, Volvo Trucks India, Eicher Engineering Components and VE Powertrain. VECV offers a complete range of Eicher’s commercial vehicles, components and engineering designs as well as sales and distribution of Volvo trucks. Each of the business units is well established and enjoys a decent customer base.

Royal Enfield Motorcycles was incorporated in India in 1955. The company offers niche lifestyle motorcycles that have a huge fan base. It entered into a strategic alliance with Eicher and eventually became a part of the Eicher Group in 1994. Royal Enfield exports motorcycles to over 25 countries, including developed countries such as the US, Japan, the UK and several European countries. It has ISO 9001 and ISO 14001 certifications for quality and environmental systems, respectively.

Management S. Sandilya is the non-executive chairman of the Board

An economics graduate from St Stephens, Delhi University (1994), Siddhartha Lal worked with MAN Nutzfahrzeugen and Royal Enfield. On completing a post-graduate diploma in mechanical engineering from Cranfield University, UK, and a Masters in automotive engineering at the University of Leeds, UK, in 1996-98, he re-joined the Eicher Group in 1999. He has since worked in various capacities in the marketing division of Eicher Tractors Business Unit, becoming the CEO of Royal Enfield in 2000, and group CEO in 2006.

CFO Lalit Malik is a CA and MBA and was previously employed with MAX India.

Manufacturing facilities at Pithampur and Chennai



Brief information regarding key VECV businesses

Eicher Trucks and Buses (ETB) operates mainly in trucks and buses of capacity ranging from 5 tons to 40 tons. It is also into 21- to 69-seater buses. It has more than 35% share in the light/medium duty 7-ton to 12-ton category. The company is further strengthening its position in the 16-ton sub-segment.

Eicher Engineering Components (EEC) was formed through strategic backward integration but also has customers besides Eicher Motors. It assembles and outsources components such as gearbox assemblies.

Eicher Engineering Solutions (EES) has two key business areas: EES Inc. (US) and EES Gurgaon (Delhi) and is into design as well as CAE services. Customers: Toyota, Kia Motors, Daimler, Navistar, Nissan, Harley Davidson, Navistar and Siemens.

Volvo Trucks, India is into sales and after-sales support of Volvo trucks in India.

VE PowerTrain (VEPT) is based on the group’s decision to make VECV’s Pithampur plant the base for its futuristic medium-duty engine global platform with an initial investment of `2.9bn. The five-litre and eight-litre engines will be produced and assembled in India. The annual manufacturing capacity of the Pithampur plant, starting 2013, would be 85,000 medium-duty base engines. These will cater to the Volvo group’s global requirement of Euro-3, Euro-4 and Euro-5 engines and the Euro-6 base engines, as well as VECV’s engine requirements for Eicher’s heavy-duty commercial vehicles.


Nirav Bhatt+9122 66266505

[email protected]

Rohan Korde +9122 66266733

[email protected]


Sales (`m) 3,445 4,253 5,277 6,425 7,516

Net profit (`m) 422 462 512 633 747

EPS (`) 48.9 53.5 59.2 73.2 86.5

Growth (%) 46.3 9.3 10.8 23.6 18.1

PE (x) 9.3 8.5 7.7 6.2 5.2

PBV (x) 3.1 2.4 1.9 1.5 1.2

RoE (%) 33.3 28.2 24.9 24.6 23.3

RoCE (%) 44.9 40.6 34.2 34.2 32.9

Dividend yield (%) 1.7 2.0 2.2 2.4 2.6

Net gearing (%) 14.3 13.5 21.9 20.3 16.5


Autos

Initiating CoverageIndia I Equities

9 April 2012

VST Tillers Tractors

Well-placed to benefit from steady rural economic growth; Buy

We expect VST Tillers to continue to benefit from the steady growth in the rural economy and the robust growth in low ticket agri-mechanisation equipment. Despite five years of improvement in the agricultural economy, there remains tremendous potential for further farm mechanisation in India, particularly in the wake of the labour shortage and the need to increase productivity. This is a strong positive for VST. We initiate coverage with a Buy and a price target of `585.

A well-carved niche. A key player with a settled niche, VST has a dominant (>45%) market share in power tillers. Key competitors are Chinese-manufactured tillers and Kerala Agro Machinery Corp. VST is also present in the <20HP tractor sub-segment, which has seen robust growth, and is currently faced with capacity constraints.

Benefits from the government’s rural focus. Easily available loans, benefits from the government’s subsidy program (~`35,000 per tiller/tractor), and development programme outlays are benefiting demand. In addition, urbanization has led to less farm labour, giving a further impetus to mechanization.

Healthy financials. VST is close to being debt-free, with steady free-cash-flow generation (excl-FY12). Over FY12-14, we expect 19.4% revenue CAGR, with steady EBITDA margin and 20.8% profit CAGR.

Valuation. We value the stock at 8x Mar ’13 PE (~20% premium to its past three-year one-year-forward average, and a 36% discount to the target P/E for M&M). This translates to FY13e EV/EBITDA of 5x (~10% lower than the past three-year average). Our target price is `585. Risks: Higher interest rates, commodity price rise, poor monsoons, increase in competition.


VSTT

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Rating: Buy Target Price: `585 Share Price: `454

Key data VST IN / VST.BO52-week high / low `580 / `405Sensex / Nifty 17486 / 53233-m average volume US$0.04m Market cap `4.03bn / US$79mShares outstanding 8.6m


Promoters 53.85 53.91 53.91 - of which, pledged - - -Free float 46.15 46.09 46.09 - Foreign institutions 3.88 3.90 3.67 - Domestic institutions 4.69 4.55 4.36 - Public 37.58 37.64 38.06

9 April 2012 VST Tillers – Well-placed to benefit from steady rural economic growth; Buy




Net revenues 3,445 4,253 5,277 6,425 7,516Revenue growth (%) 25.7 23.4 24.1 21.7 17.0- Op. expenses 2,823 3,573 4,552 5,512 6,423EBIDTA 622 681 725 913 1,093EBITDA margin (%) 18.1 16.0 13.7 14.2 14.5- Interest expenses 7 7 9 11 11- Depreciation 26 23 38 50 65+ Other income 28 60 75 78 82- Tax 195 249 241 298 352Effective tax rate (%) 31.6 35.0 32.0 32.0 32.0Reported PAT 423 462 512 633 747Adjusted PAT 422 462 512 633 747+/- Minority interest n.a n.a n.a n.a n.aAdjusted PAT growth 46.3 9.3 10.8 23.6 18.1Adj. FDEPS (`/share) 48.9 53.5 59.2 73.2 86.5Adj. FDEPS growth (%) 46.3 9.3 10.8 23.6 18.1Source: Company, Anand Rathi Research


PAT 423 462 512 633 747+ Non-cash items 26 23 38 50 65Cash profit 449 485 550 682 812- Incr./(decr.) in WC 300 -30 242 207 193Operating cash-flow 149 514 308 475 619- Capex 167 58 200 350 400Free cash-flow -18 457 108 125 219- Dividend 65 78 86 95 104+ Equity raised 29 0 0 0 0+ Debt raised 37 -9 50 50 -100- Investments -6 325 150 0 0- Misc. items 27 -12 92 65 -83Net cash-flow -37 57 -171 15 98+ Op. cash & bank bal. 187 150 208 37 52Cl. cash & bank bal. 150 208 37 52 150Source: Company, Anand Rathi Research

Fig 5 – P/E band

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Share capital 86 86 86 86 86Reserves & surplus 1,182 1,554 1,965 2,488 3,114Net worth 1,269 1,640 2,052 2,574 3,201Total debt 108 99 149 149 149Def. tax liab. (net) 13 28 28 28 28Capital employed 1,390 1,768 2,229 2,751 3,378Net fixed assets 528 563 724 1,025 1,360Investments 44 368 518 518 518Working capital 669 629 949 1,156 1,350Cash 150 208 37 52 150Capital deployed 1,390 1,767 2,229 2,751 3,378Net debt -85 -476 -406 -421 -519No. of shares (m) 8.6 8.6 8.6 8.6 8.6Net debt/equity -3.3 -6.6 5.5 3.8 0.0W C turn (days) 90 69 74 74 74Book value (`/sh) 147 190 237 298 370Source: Company, Anand Rathi Research


P/E (x) 9.3 8.5 7.7 6.2 5.2P/B (x) 3.1 2.4 1.9 1.5 1.2EV/EBITDA (x) 6.2 5.1 4.8 3.8 3.1RoE (%) 33.3 28.2 24.9 24.6 23.3RoCE (%) 44.9 40.6 34.2 34.2 32.9Dividend yield 1.7 2.0 2.2 2.4 2.6Dividend payout (%) 15.3 16.8 16.9 15.0 13.9Debt to equity (%) 0.1 0.1 0.1 0.1 0.0Core P/E (x) 9.9 9.8 9.0 7.1 5.9Cash P/E 8.7 8.1 7.1 5.7 4.8EV/sales 1.1 0.8 0.7 0.5 0.5Inventory days 47 47 47 47 47Receivables days 71 53 58 58 58Payables days 28 32 31 31 31Fixed asset T/O 2.5 2.4 2.4 2.3 2.2Source: Company, Anand Rathi Research

Fig 6 – Volume Split

62.4 65.0 61.5 62.8 58.9 56.7 55.4

18.1 32.8

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0.91.01.11.33.72.40.5

2.92.82.6

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Power Tillers Tractors Rice transplanters Precision components Others

(%)




Investment Argument and Valuation We expect VST Tillers to continue to benefit from the steady growth in the rural economy and the robust growth in low ticket agri-mechanization equipment. Despite the ongoing improvement in the agricultural economy in the past five years, there is still tremendous potential for further farm mechanization in India, particularly in the wake of the labour shortage and the need to increase productivity. We initiate coverage with a Buy, and a price target of `585.

Niche but affordable agri products

VST has little competition in tractors (from Mahindra & Mahindra’s Yuvraj model) and in tillers, where the key competition comes from Chinese manufacturers, (VST commands 48-50% share). As an organized player VST has better after-sales service as well as a better network than Chinese competitors in power tillers. Most of its products are priced below `2.5 lakh and are directly under government subsidy (~`35,000/unit), which renders them affordable and ideal for small farmers with land holdings of 2-10 acres.

Farm-mechanization scenario good

Nearly 40-42% of cultivated land in India is less than two hectares per farmer; the operational size of holdings has doubled, increasing the scope and need for farm mechanization. Higher minimum support prices for food grain, better realizations for farmers, continuation of the National Rural Employment Guarantee Act (NREGA), higher outlays for the Bharat Nirman Yojana (`580bn; previously `480bn) and the Rashtriya Krishi Vikas Yojana (`78.6bn; previously `67.6bn) as well as labour shortage are spurring the demand for farm machinery. With a dominant market share in key agricultural regions, VST is expected to benefit from this trend.

Strong financials

VST is close to being debt free, with healthy cash-flow generation (excl. FY12 due to capex requirements) and good earnings growth visibility. We expect 19.4% CAGR in revenue, with a steady EBITDA margin of over ~14%. We expect 20.8% CAGR in profit over FY12-14.

Valuations

We value the stock at 8x Mar ’13 PE (~20% premium to its past three-year one-year-forward average, and a 36% discount to the target P/E for M&M). This translates to FY13e EV/EBITDA of 5x (10% lower than the past three-year average). Our target price is `585.

Risks

Higher interest rates, commodity price rise, poor monsoons, increase in competition.

Despite competition in tractors from M&M (through Yuvraj); and in

tillers from Chinese manufacturers. VST commands a 48-50% share in

tillers



Fig 7 - EV/EBITDA band

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Niche, Affordable Agri Products VST has little competition in tractors (mainly from Mahindra & Mahindra’s Yuvraj model) and in tillers, where key competition comes from Chinese manufacturers, and where it commands 48-50% market share. VST has the advantage of a better network and better after-sales service than its Chinese competitors in power tillers. Most of VST’s products are priced below `250,000, and therefore qualify for government subsidies, rendering them affordable for small farmers.

Well-carved niche

VST operates mainly in tillers, where it has a market share of 48-50%. Power tillers are used for seed-bed preparation (sowing), inter-culture, plant protection, harvesting, threshing and irrigation. It faces competition from Chinese tillers that are making their presence felt in the domestic market. However, VST has better after-sales service as well as a better network than its Chinese competition. In <20HP tractors, VST is adopting appropriate marketing strategies to counter M&M’s Yuvraj model as well as Chinese tractors.

As agriculture continues to be a priority sector, continuous government support helps maintain the rural growth momentum. All these factors continue to benefit original equipment manufacturers (OEMs) such as VST Tillers.

Fig 8 – Power tiller volumes: growth trajectory

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Value-for-money products

The Central government provides a subsidy of ~`35,000 per unit for power tillers. Some states such as Karnataka and Orissa provide a larger subsidy.

Most of VST’s products are priced below `250,000, and thus fall within the government subsidy programme. This makes VST’s products ideal for farmers holding 2-10 acres of land. Easily available loans under various rural development and agricultural schemes help farmers keep monthly instalments of financed tractors and tillers below `1,000 per month.

According to the Ministry of Agriculture, 40-42% of land under cultivation in India is less than two hectares per farmer. We believe that fragmented land holdings, the government’s stance on encouraging agriculture, low

Most of VST’s products are priced below `250,000, and are thus within the government subsidy

programme



mechanization levels and continuing substantial reliance on agriculture in the overall economy continue to drive the agricultural equipment segment in India.

VST, being the market leader, stands to benefit from this trend. In addition, its lower horsepower tractors and power tillers are increasingly popular among smaller landowners due to their affordability and convenience.



Prospects in Farm Mechanization The average size of land holdings in India is below two hectares; the operational size of holdings has doubled, increasing the scope and need for farm mechanization. Higher support prices for food grain, better realization for farmers, continuation of the NREGA, higher outlays under the Bharat Nirman and Rashtriya Krishi Vikas Yojana `580bn (previously `480bn) and `78.6bn (previously `67.6bn), respectively, spur the demand for farm machinery. With its dominant market share in key regions, VST is expected to benefit.

Smaller land holdings

The Indian Council of Agricultural Research (ICAR) confirms that the average size of India’s landholdings is far below two hectares and the absolute number of operational holdings has doubled in the last 20 years to more than 150mn. The ICAR anticipates that, at this rate, by 2030 average holdings would be less than half a hectare. ICAR’s Vision 2030 emphasizes the use of mechanization in agriculture for greater productivity.

Lower penetration of farm mechanization

In the FY12 Union Budget, project allocation under the Bharat Nirman and Rashtriya Krishi Vikas Yojana is increased to `580bn (previously `480bn) and `78.6bn (previously `67.6bn), respectively. The target for agriculture credit has also been set at `4,750bn (up from `3,750bn). Higher support prices for food grain, better realization for farmers, continuation of the NREGA, and larger outlays under the Bharat Nirman and Rashtriya Krishi Vikas Yojana have given a shot in the arm to demand for farm machinery.

In India, the use of power for agriculture, at ~2HP per hectare, is way below peers such as China (6.6 HP), Thailand (4.4 HP) and South Korea (4.2 HP). As a result of this lower penetration, the scope of mechanization is huge.

The power tiller sub-sector in India is evolving, growing at ~20% p.a. However, it largely depends on government subsidies. The Indian tractor sector (the largest in the world) is expected to register 6-7% CAGR by 2014-15.

VST Tillers has a dominant market share in Maharashtra, Gujarat and Tamil Nadu in the <20-HP tractor sub-segment. Sales are expected to increase in other states.

Higher MSPs act as catalysts to boost demand

During 2011-2012, the agriculture sector is slated to register growth of around 4%. This would largely depend on a normal monsoon as well as government policies promoting farm mechanization.

The Union Government recently announced a hike in minimum support prices (MSP), from 15% to 38% for rabi crops such as wheat (up 15% to `1,285 a quintal), mustard and gram.

Ever since the UPA government came to power in 2004, the MSP for wheat has more than doubled. Besides wheat, the Centre's focus this time has been on oilseeds, the MSP of which has been hiked by 35-38%, now averaging `2,500 a quintal.

The average size of landholdings in India is way below two hectares. By 2030, average holdings are likely to

fall to less than half a hectare

The Union Government is to hike MSPs for rabi crops from 15% to 38%. Since the UPA government came to power in 2004, the MSP for wheat has more than doubled



Labour scarcity

Availability of adequate farm power is crucial for timely farm operations, as well as to increase productivity. Hence, the government has increased its emphasis on farm mechanization to enhance food production through measures such as minimum support prices for crops, productivity-awareness programmes and farm subsidies under various programmes.

Labour shortage is a key factor expected to drive farm mechanization and is expected to arise mainly from a choice of alternative professions due to higher rural income from non-agricultural sources. All these factors augur well for increased farm mechanization.



Capacity expansion to add reach VST is expanding its tractor production capacity three times by end-CY12. This would give it adequate capacity to broaden its reach and penetration all over India.

Tiller capex complete, tractor capex on the anvil

VST plans to set up a plant in Hosur, Tamil Nadu, to manufacture 18.5 HP tractors. The plant would have an installed capacity of 30,000 tractors and is expected to go on stream in 3QFY13. The company aims to spend ~`660m on this. The project would provide the company with the chance to introduce more tractor models in the future.

At the precision components division, infrastructure is being upgraded in the required areas to cater to more captive consumption. Management expects export demand to be flat as it aims to concentrate on in-house supplies.

Manufacturing capacity is now 30,000 power tillers, 32,000 engines and 5,000 tractors.

Realizations to rise with better product mix

VST is seeing a slightly increased share in higher-margin tractors. This is likely to offset input cost pressures, helping realizations grow in FY13. We expect operating trends to improve as the focus on profitability increases.

Manufacturing capacity is now 30,000 power tillers, 33,000

engines and 5,000 tractors.

Fig 9 – Realization trend to get better on an improving mix

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Fig 10 – Contribution trend input cost pressure being felt…

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Fig 11 – …..resulting in weak EBITDA per vehicle in the short term

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Financials VST is a near-debt-free company, with healthy cash-flow generation (excl. FY12 due to capex requirements) and good earnings growth.

Healthy financial profile

VST is a near-debt free company, with healthy cash-flow generation (excl. FY12 due to capex requirements) and good earnings growth. We expect 19.4% revenue growth CAGR, with steady EBITDA margin of over ~14%. We expect 20.8% profit CAGR over FY11-14.

Fig 13 – FCF generation better FY13 onwards

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3Q margins better qoq, improved trajectory ahead

VST Tillers’ 3Q FY12 revenues saw good yoy growth, up 28.6% yoy to `1.23bn. EBIDTA grew to `162m (up 3.4% yoy), while the EBIDTA margin was up 32bps qoq (-320 bps yoy) to 13.2%. The slight qoq margin improvement came from the sharp fall in key raw material prices. The RM-to-sales ratio was up 404bps yoy, but down 285bps qoq, to 67.4%. PAT grew 15.2% yoy to `118m.

Going forward, management expects input costs to be high due to the rise in transportation expenses from higher fuel prices. However, it expects good volume growth to help maintain EBITDA margins at ~13.5%. It also cited continuing constraints in sourcing components from its vendors as having hit margins.

We expect 19.4% revenue CAGR, 20.8% profit CAGR and a steady

EBITDA margin of ~14%



Fig 14 – Income statement (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14eTotal income 3,445 4,253 5,277 6,425 7,516Expenditure 2,823 3,573 4,552 5,512 6,423Raw material 2,257 2,871 3,751 4,530 5,282Employee cost 207 251 279 333 383Other mfg. expenses 56 61 74 103 120Selling & distribution 303 390 448 545 638EBITDA 622 681 725 913 1,093 Change (%) 45.9 9.4 6.6 25.9 19.7 % of net sales 18.1 16.0 13.7 14.2 14.5Depreciation 26 23 38 50 65EBIT 596 658 687 863 1,028Interest & fin. charges 7 7 9 11 11Other income 28 60 75 78 82PBT before extraordinaries 617 710 753 930 1,099PBT 618 710 753 930 1,099Tax 195 249 241 298 352 Effective rate (%) 31.5 35.0 32.0 32.0 32.0Rep. PAT (after. EO) 423 462 512 633 747 Change (%) 46.4 9.1 10.8 23.6 18.1Adj. PAT 422 462 512 633 747 Change (%) 46.3 9.3 10.8 23.6 18.1 % of net sales 12.3 10.9 9.7 9.8 9.9



Sources of funds

Share capital 86 86 86 86 86

Reserves 1,182 1,554 1,965 2,488 3,114

Net worth 1,269 1,640 2,052 2,574 3,201

Loans 108 99 149 149 149

Deferred tax liability 13 28 28 28 28

Capital employed 1,390 1,768 2,229 2,751 3,378

Application of funds

Gross fixed assets 794 839 1,067 1,417 1,817

Less: depreciation 284 305 343 393 457

Net fixed assets 511 535 724 1,025 1,360

Capital WIP 17 28 - - -

Investments 44 368 518 518 518

Curr. assets, L & adv. 1,365 1,547 1,721 2,066 2,478

Inventory 445 549 678 826 966

Sundry debtors 674 622 837 1,019 1,192

Cash & bank balances 150 208 37 52 150

Loans & advances 96 169 169 169 169

Current liab. & prov. 546 711 735 858 978

Sundry creditors 266 368 447 545 637

Other liabilities 179 231 254 279 307

Provisions 101 112 34 34 34

Net current assets 819 837 986 1,208 1,500

Application of Funds 1,390 1,767 2,229 2,751 3,378




Fig 16 – Cash flow statement (`m) Year-end: Mar FY10 FY11 FY12e FY13e FY14e

OP/(loss) before tax 596 658 687 863 1,028

Interest/dividends received 28 60 75 78 82

Depreciation & amortization 26 23 38 50 65

Direct taxes paid -216 -234 -241 -298 -352

(Inc)/dec in working capital -266 40 -320 -207 -193

Other items -40 -13 -14 -15 -17

CF from oper. activity 128 534 225 471 613

Extra-ordinary items 1 0 0 0 0

CF after EO items 129 534 225 471 613

(Inc)/dec in FA+CWIP -167 -58 -200 -350 -400

(Pur)/sale of invest. 6 -325 -150 0 0

CF from inv. activity -161 -382 -350 -350 -400

Issue of shares 29 0 0 0 0

Inc/(dec) in debt 37 -9 50 0 0

Interest rec./(paid) -7 -7 -9 -11 -11

Dividends paid -65 -78 -86 -95 -104

CF from fin. activity -6 -93 -46 -106 -115

Inc/(dec) in cash -38 58 -170 15 98

Add: beginning balance 187 150 208 37 52

Closing balance 150 208 37 52 150



Basic (`)

EPS 48.9 53.5 59.2 73.2 86.5

EPS fully diluted 48.9 53.5 59.2 73.2 86.5

Cash EPS 51.9 56.1 63.6 79.0 94.0

EPS growth (%) 46.3 9.3 10.8 23.6 18.1

Book value per share 146.9 189.9 237.5 297.9 370.5

DPS 7.5 9.0 10.0 11.0 12.0

Core EPS 45.7 46.6 50.6 64.2 77.0

Valuation (x)

P/E 9.3 8.5 7.7 6.2 5.2

Cash P/E 8.7 8.1 7.1 5.7 4.8

EV/EBITDA 6.2 5.1 4.8 3.8 3.1

EV/sales 1.1 0.8 0.7 0.5 0.5

Price to book value 3.1 2.4 1.9 1.5 1.2

Dividend yield (%) 1.7 2.0 2.2 2.4 2.6

Core P/E 9.9 9.8 9.0 7.1 5.9

Profitability ratios (%)

RoE 33.3 28.2 24.9 24.6 23.3

RoCE 44.9 40.6 34.2 34.2 32.9

Turnover ratios

Debtors (days) 71 53 58 58 58

Inventory (days) 47 47 47 47 47

Creditors (days) 28 32 31 31 31

Core working capital (days) 90 69 74 74 74

Asset turnover (x) 2.5 2.4 2.4 2.3 2.2

Leverage ratio (x)

Debt/equity 0.1 0.1 0.1 0.1 0.0




Company Background & Management Incorporated in 1967 in Bangalore, India, V.S.T. Tillers Tractors was promoted by the V.S.T. Group, a well-known business house in south India, in technical collaboration and a joint venture with Mitsubishi Heavy Industries and Mitsubishi Corp., Japan, to manufacture power tillers and diesel engines. The plant went into production in 1970. In 1984, the company entered into an additional technical and financial collaboration with Mitsubishi Agricultural Machinery, Japan, to manufacture 18.5 HP, four-wheel tractors.

The main manufacturing plant is located at the Whitefield industrial area near Bangalore. Manufacturing capacity is 25,000 power tillers, 32,000 engines and 5,000 tractors.

VST has an in-house design and development section to upgrade the level of technology in line with current requirements. It also upgrades existing products and develops new products demanded by the market from time to time. VST has had ISO-9001 certification for Quality Management Systems since Jan ’98.It follows the ISO 9001-2008 Quality System requirements.

Tractors are exported to the Middle East, Russia and Turkey. Component parts are exported to Europe, Korea and Thailand.

The company’s product range includes:

Power tillers

VST-Shakti 130 DI power tillers

VST-Shakti VWH 120 power tillers

Tractors

EuroTrac-VST 180D tractors

VST-Shakti MT180D tractors with rotary diesel engines

Paddy transplanters

VST-Shakti Yanji rice transplanters

Engines

VST-Shakti K3C engines

VST-Shakti 130DI engines

VST-Shakti VWH 120 engines

Divisions:

The Bangalore division manufacturers Mitsubishi-Shakti power tillers, tractors and diesel engines

The Hosur division manufacturers Mitsubishi-Shakti power tillers and diesel engines

The precision components division at Mysore manufactures diesel-engine components and precision custom-made auto-components



Management

Chairman V.K. Surendra

Managing Director and CEO V.P. Mahendra

Deputy Managing Director V.V. Pravindra

Executive Director B.C.S. Iyengar

VP-Finance and CFO R. Thiyagarajan



Annexures



Annexure 1

Dealer Channel Check Our channel checks with dealers indicate that discounts have increased slightly vs Mar ’11 in four wheelers. Dealers are feeling the pinch of high inventory which is compelling them to offer increasingly higher discounts.

The mix of diesel-petrol cars still remains more skewed towards diesel (70:30) in the models where a diesel variant is available and is expected to remain so. Manufacturers that do not offer a diesel variant have actually seen their market share erode, the biggest example being Honda. The ‘dieselization’ factor continues to help manufacturers in cases where models have no discount, which positively influences margins – as a result of better mileage volumes are continuing to increase at a rapid pace.

Car exchange has generated a whole new revenue stream for the dealers and Maruti and Hyundai products gain here on better resale value and better terms for both the parties.

Among CVs, though Tata Motors continues to dominate by significant margins; competitive pressure is being increasingly felt by Tata Motors dealers from Eicher models. However, Ashok Leyland has not seen increased competitive pressure. Bharat Benz is seen as the next big threat. CV sales did well so far in FY12, with phasing out of old models.

Price-effective launches continue to drive sales for OEMs and open up new segments as seen in the case of Liva and Etios for Toyota and Polo and Vento for VW.

An increasing number of car buyers now prefer fuel-efficient cheaper cheaper models. They prefer ‘entry-level sedans’ and ‘premium hatches’. This suggests attractive design, roomy interiors/comfort have given way to quality, brand reputation, and fuel efficiency due to the ongoing uncertain macro-economic environment.

Further, in two-wheelers, premium segment bikes (150cc and above) are seeing slowing sales. However, dealers expect growth rates to remain positive as customers continue to give preference to newer technology.

Various two-wheeler dealers of Bajaj Auto and Hero Motocorop said they have inventory of ~5 weeks, i.e more than a month, which has been going up since Jan ’12. The reasons for the same: the dealers were building up inventory in anticipation of Union Budget pre-buying, slow growth rates on a higher base and lower rural consumer confidence than last year.



Annexure 2 – Mar ’12 key observations Hyundai Maruti Suzuki Tata Motors (CVs and

Cars) Bajaj Auto Hero Honda M&M Tractors

Total average monthly sales per outlet (all models)

Month till date 280 units

Month till date 250-300 units slower than ~350-400 it did last year. Footfall growth slow impacting hit (conversion) ratios

Month till date 250 units Month till date 750 units (last year 900)

Month till date 750 units (last year 7000)

This year the dealers sell ~30-35 tractors a month which is slower than ~40-45 last year. ~350 will be sold this year

Lean Months April, June, July, August, January

April, June, July, August, January April, June, July, August, January

April, June, August, January

April, June, August, January

January, February, September, October, December

Key Cash Discounts

i10: ~`15,000 (includes insurance), i20: ~`5,000, Verna: ~`12,000, Santa Fe: ~`20,000

Swift: Nil, Eeco: Nil, SX4 `28,000 Dzire: Nil, Wagon-R `30,000, Alto K10 ` 20,000, Alto `26,000, A star ` 25,000, Omni `23,000, Ritz `21,000, Estilo: `40,000

Manza: `10,000, Nano: `6,000, Indica Vista `15,000, Indigo `20,000, Aria `16,000, Tata Ace `10,000 (only in some cases), rest CVs average ~`25,000

A few accessories `1,500 discount on buying two bikes and few accessories

Around `30,000-40,000 per vehicle is the average discount

Higher fuel price impact

No significant impact

Demand sentiment gets hit, demand deferral happens

Demand deferrals increase

Does dent demand sentiment, executive segment and higher engine bikes are less preferred that are purchased with finance

Does impact sentiment

Fuel price hike does impact demand leading to demand deferrals, post budget the hike of ~22,000 due to excise will also be adverse

Waiting period All models in common colours (white, silver, red, aqua blue, black) are readily available within a week

Response for the new Dzire has been tremendous, there is a 2 weeks waiting for Petrol DZire and a 7 to 12 week waiting for the Diesel (depending on the colour). The dealership on an average keeps 1.5-2 month of inventory per showroom

All models in common colours (white, silver, red, aqua blue, black) readily available in a week

All models are readily available

All models are readily available

One to two weeks

Largest Selling in ascending order

i20, i10, Verna, Santro Xing, Santa Fe, Sonata, Elantra

Swift, Dzire, WagonR, Eeco, Alto K10, SX4, Alto, Ritz, Estilo, Omni, A-star, Maruti 800, Grand Vitara, Gypsy

Indica Vista, Indigo Manza, Nano, Indigo (CS and XL), Tata Aria, Sumo Victa, Safari. In CVs Ace is doing really well, in Rest of the CVs, The Prima range as a result of price point is seeing tepid sales, while rest of LCVs, along with tippers are doing well.

Pulsar 150 DTS-i, Discover 100cc, Pulsar 180 DTS-i, Pulsar 135LS, Discover 150cc, Platina 100cc, Pulsar 220 DTS-I, Platina 125cc, Avenger 220 DTS-i, Ninja 250R

Splendour (all variants), Passion (all variants), Hunk, CBZ extreme, Achiever, Glamour, Karizma, CD Dawn, Impulse, Karizma ZMR, Pleasure

Bhoomiputra, Arjun, Yuvraj Yuvraj sales are stronger in the North and in Maharashtra but weak in Gujarat

Other Key comments

Sales break up roughly: 40%:- i20s; 30%:- i10s; 15%:- Verna and 8%:- Santro Xing, rest: - Santa Fe, Elantra and Sonata.

Mix of diesel- petrol cars remains more skewed towards Diesel (70:30 to 75:25) and is expected to remain so. Car exchange has generated a whole new revenue stream for the dealers and Maruti products gain here on better resale value and better terms for both the parties

Response for the new Safari Storme and the refreshed Nano is good. Competitive pressures being felt increasingly from Eicher, Ashok Leyland competition intact and Bharat Benz is seen as the next threat

Response for the New Pulsar and KTM Duke 200 is very encouraging. Customers are waiting for it to go on sale

Honda and Bajaj still remain benchmarks for urban buyers but customers increasingly feel the new look Hero has started to bridge the gap a bit

~50% of sales in Western India and ~35% sales in North India are on cash basis. Exchange market is big and helps dealers to maintain commissions

Source: Anand Rathi Research *Month till date: 23 days of March’12

Appendix 1 Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below.

Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >20% 5-20% <5% Mid/Small Caps (<US$1bn) >30% 10-30% <10%

Anand Rathi Research Ratings Distribution (as of 18 February 2012) Buy Hold Sell Anand Rathi Research stock coverage (138) 76% 12% 12% % who are investment banking clients 6% 6% 0% Other Disclosures This report has been issued by Anand Rathi Share & Stock Brokers Limited (ARSSBL), which is regulated by SEBI.

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