Anand Rathi - India Autos - Valuations No Longer Compelling

Automobiles
India I Equities
Sector Report
9 April 2012
India Autos
Valuations no longer compelling
Neutral Sensex: 17486 Nifty: 5323
Rohan Korde
+9122 6626 6733 rohankorde@rathi.com
Nirav Bhatt
+9122 6626 6505 niravbhatt@rathi.com
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
Automobiles
India I Equities
Sector Report
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.
Neutral Sensex: 17486 Nifty: 5323
Slower volume growth ahead. In the past three years, auto companies have seen healthy ~22% volume growth. We expect lower CAGR of 810% over FY12-14 in the four-wheeler segment, constrained by macroeconomic 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.
Ashok Leyland Bajaj Auto Hero Moto Corp M&M* Maruti Suzuki Tata Motors* TVS
Rohan Korde
+9122 6626 6733 rohankorde@rathi.com
Nirav Bhatt
+9122 6626 6505 niravbhatt@rathi.com
Key data FY13
Eicher Motors
VST Tillers
Rating Price (`) Target price (`) Market cap (US$bn) EPS (`) PE (x) EV/EBITDA (x) EV/sales (x) RoE (%) RoCE (%)
Source: Companies, Anand Rathi Research
Sell 30 30 1.6 2.5 12.2 6.6 0.7 20.6 15.2
Buy 1,654 1,939 9.4 127.2 13.0 8.4 1.8 42.9 57.4
Sell 2,055 2,087 8.1 139.8 14.7 8.6 1.4 83.8 79.0
Buy 697 833 8.4 61.0 11.4 7.9 0.9 20.5 21.7
Buy 1,349 1,581 7.8 90.3 14.9 7.4 0.7 14.8 19.2
Hold 276 301 15.9 39.7 6.9 3.7 0.5 33.2 24.5
Hold 41 50 0.4 5.7 7.1 3.1 0.2 19.9 19.6
Buy 1,983 2,601 1.0 129.8 15.1 4.8 0.5 17.7 26.2
Buy 454 585 0.0 73.2 6.2 3.8 0.5 24.6 34.2
* Note: P/E and EPS are on a consolidated basis in the case of M&M and Tata Motors
9 April 2012
India Autos Valuations no longer compelling
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
Anand Rathi Research
9 April 2012
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
(%) 45 30 15 0 -15 Hero Motocorp Ashok Leyland Maruti Suzuki M&M TVS Motor Tata Motors (Standalone) Eicher Motors (CY end) VST Tillers Bajaj Auto JLR
FY12e
Source: Anand Rathi Research
FY13e
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% Higher duty on CV chasses Widening of tax slabs
Negative Negative Positive
Extension for weighted R&D deduction for another five years and focus on alternative fuel technologies
Source: Government of India, Anand Rathi Research
Positive
All companies in the sector Ashok Leyland, Eicher Motors, Tata Motors Potential for higher consumer discretionary spending would benefit Maruti and two-wheeler companies, partially set off by the rise in servicetax rates M&M, Tata Motors
9 April 2012
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 lowgrowth-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.
9 April 2012
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-thanexpected 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 threeyear 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.
9 April 2012
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%. Two-wheeler exports to be driven by the foray into new and low percapita penetration regions. Fourwheeler sales growth is likely to be pinned down by macro-economic and high-base concerns. CVs have surprised positively in FY12 April-Feb FY12 in PVs, Maruti, Tata Motors and Honda lost ~649bps, ~36bps and ~50bps, of market-share respectively, vs. end of FY11. Marutis 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 Leylands share loss has been Eichers gain on the latters 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. Twowheeler 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
('000) 30,000 25,000 20,000 15,000 10.0 10,000 5,000 0 FY12e FY13e FY14e FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 5.0 0.0 -5.0 (%) 30.0 25.0 20.0 15.0
Total Auto volumes

Source: SIAM, Anand Rathi Research
yoy change (%)
9 April 2012
Fig 4 Quarterly yoy change in four-wheeler volumes

(%)
Fig 5 Quarterly yoy change in two-wheeler volumes

(%) 100
80 60 40 20 0 -20
200 150 100 50 0 -50 -100 1Q FY10 2Q FY10 3Q FY10 4Q FY10 1Q FY11 2Q FY11 3Q FY11 4Q FY11 1Q FY12 2Q FY12 3Q FY12
-40 1Q FY10 2Q FY10 3Q FY10 4Q FY10 1Q FY11 2Q FY11 3Q FY11 4Q FY11 1Q FY12 2Q FY12 3Q FY12
Ashok Leyland (S) Maruti Suzuki (S)

Source: Companies
Tata Motors (S) Mahindra & Mahindra (S)
Eicher Motors (Sub) Bajaj Auto (S)

Source: Companies
Hero Honda
TVS Motor (S)
Eicher Motors (S)
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 Leylands 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.
9 April 2012
Fig 6 Market share movement

Market share (%)
Jan'12
Feb'11
Feb'12
FY10
FY11
Apr-Feb ytd FY11 0.9 4.4 3.7 2.6 24.7 45.9 11.1 0.7 2.0 0.9 2.0 1.1
Apr-Feb ytd Change yoy Change from FY12 (bps) FY11 (bps) 0.7 4.6 3.5 1.9 25.3 38.9 10.5 3.6 3.1 1.2 5.2 1.3 (22.7) 22.7 (15.2) (63.1) 54.3 (704.1) (58.2) 292.8 112.1 36.6 322.8 22.1 (20.7) 22.0 (7.9) (50.1) 92.7 (648.9) (36.4) 282.6 100.4 34.7 242.6 (11.2)
PCs Fiat Ford GM Honda Hyundai MSIL TTMT Toyota VW Skoda Nissan Others UVs M&M GM Tata Motors Toyota Others M&HCVs Tata Motors Ashok Leyland Eicher Others LCVs Tata Motors M&M Force Eicher Others Motorcycles Bajaj Auto Hero Motocorp HMSI India Yamaha Motors Suzuki Motorcycles TVS Motors Others Three-wheelers Bajaj Auto Piaggio TVS Motors Mahindra & Mahindra Others Scooterettes Hero Motocorp HMSI Suzuki TVS Motors Others
Source: SIAM
0.9 4.3 2.7 0.7 20.5 42.2 12.0 4.0 2.4 1.2 8.0 1.1
0.8 4.5 3.3 2.1 22.5 42.5 11.7 1.6 3.1 1.0 6.2 0.6
0.7 4.2 2.8 3.6 21.0 42.8 11.7 3.7 2.7 1.5 4.3 1.0
1.3 1.8 3.6 3.1 30.5 46.3 10.5 0.5 0.2 0.9 0.0 1.2
0.9 4.4 3.6 2.4 24.4 45.4 10.8 0.8 2.1 0.9 2.8 1.5
53.3 5.1 15.3 22.0 4.4
52.5 6.1 15.8 20.0 5.5
53.9 5.5 15.4 21.2 4.0
55.4 6.0 13.1 19.5 6.0
52.7 6.1 13.7 19.8 7.7
53.9 6.4 13.1 20.6 6.0
55.8 6.4 12.8 18.4 6.6
190.1 (1.4) (26.7) (217.0) 55.0
303.6 26.6 (87.5) (134.9) (107.7)
58.9 26.6 8.5 5.9
56.7 29.1 9.0 5.2
57.8 26.5 9.6 6.1
63.3 23.7 8.6 4.4
59.5 26.5 9.0 5.0
59.6 26.3 9.1 5.0
59.3 24.3 10.1 6.2
(22.4) (199.4) 107.0 114.8
(17.5) (214.9) 113.1 119.3
57.1 32.5 4.1 1.8 4.5
58.7 30.2 4.9 2.4 3.9
60.0 28.1 4.5 2.1 5.4
58.7 30.0 3.8 2.1 5.3
58.3 31.4 4.2 2.3 3.8
57.6 31.1 5.3 2.2 3.8
58.2 30.5 4.7 2.2 4.5
58.4 (59.1) (64.9) (6.4) 72.0
(9.7) (86.9) 47.0 (19.0) 68.5
30.4 49.5 7.9 4.1 0.5 6.8 0.7
31.7 48.3 7.3 3.6 0.6 7.9 0.6
30.7 49.0 8.5 4.1 0.5 6.4 0.8
29.7 51.9 6.2 3.4 0.6 7.6 0.6
32.3 48.0 7.1 3.6 0.5 8.0 0.6
32.6 47.8 7.2 3.5 0.5 7.9 0.5
32.3 48.3 7.1 4.0 0.5 7.1 0.7
(36.6) 51.5 (1.7) 58.5 0.4 (85.8) 13.6
(0.2) 32.8 0.8 49.1 (0.7) (89.2) 7.5
59.6 22.5 3.3 8.9 5.8
54.4 27.6 5.7 8.0 4.4
59.1 23.2 4.3 7.3 6.0
55.6 30.3 2.5 7.4 4.3
54.9 27.7 5.0 8.1 4.2
55.3 27.6 4.9 8.1 4.1
59.1 23.2 4.6 8.1 5.0
375.1 (446.0) (24.9) 3.7 92.1
421.0 (454.5) (39.7) (4.3) 77.5
17.9 48.3 12.8 17.8 3.2
18.3 41.8 12.0 21.1 6.7
17.4 50.6 13.3 15.1 3.6
14.4 50.3 9.5 20.7 5.1
17.0 42.7 10.9 21.9 7.5
16.9 43.1 10.9 21.4 7.7
17.2 46.3 10.8 20.5 5.2
34.4 314.9 (13.4) (86.8) (249.1)
23.5 360.3 (6.5) (142.4) (234.9)
9 April 2012
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 Marutis 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 Motocorps 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. Bajajs 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 Indias (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 roadbuilding 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 Eichers market share, the New Prima has generated increasing sales for Tata Motors and The Dost has helped Ashok Leylands 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
9
9 April 2012
choice of alternative professions due to higher rural income from nonagricultural 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 nonagricultural applications. Better finance penetration tractor financing attracts lower interest rates and higher bank participation, as it continues to enjoy priority lending status.
10
9 April 2012
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.
Fig 7 Cost of ownership: cars
Passenger vehicles (petrol) (`) FY11 YTD FY12 FY13e Passenger vehicles (diesel) (`) FY11 YTD FY12 FY13e
Average cost of a passenger car % Financed Loan amount Interest rate (%) Duration (months) Monthly EMI Per day usage (km) Fuel efficiency (km/lt) Petrol price (per lt) Fuel cost per month Monthly maintenance cost PV ownership cost (per month) % YoY increase
407,301 80.0 325,841 12.0 60 7,248 30 12 62 4,658 1,332 13,238 3.7
419,520 80.0 335,616 12.0 60 7,466 30 12 71 5,325 1,465 14,256 7.7
432,106 80.0 345,685 12.5 60 7,777 30 12 75 5,625 1,612 15,014 5.3
Average cost of a passenger car % Financed Loan amount Interest rate (%) Duration (months) Monthly EMI Per day usage (km) Fuel efficiency (km/lt) Diesel price (per lt) Fuel cost per month Monthly maintenance cost PV ownership cost (per month) % YoY increase
407,301 80.0 325,841 12.0 60 7,248 30 16 43 2,419 1,900 11,567 3.7
419,520 80.0 335,616 12.5 60 7,551 30 16 46 2,588 2,090 12,228 5.7
462,106 80.0 369,685 13.5 60 8,506 30 16 46 2,588 2,299 13,393 9.5
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
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.
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9 April 2012
Fig 8 Cost of ownership: TWs and CVs

Two wheelers (`) FY11 YTD FY12 FY13e Commercial vehicles (`) FY11 YTD FY12 FY13e
Average cost of two wheelers % Finance Loan amount Interest rate (%) Duration (months) Monthly EMI Per day usage (km) Fuel efficiency (km/lt) Petrol price (per lt) Fuel cost per month Monthly maintenance cost Two wheeler ownership cost (per month) yoy % increase
45,193 70.0 31,635 16.0 36 1,112 40 50 63 1,512 499 3,123 2.7
47,453 70.0 33,217 18.0 36 1,201 40 50 71 1,704 514 3,419 9.5
49,825 70.0 34,878 19.0 36 1,278 40 50 75 1,800 565 3,644 6.6
Average cost of commercial vehicle % Financed Loan amount Interest rate (%) Duration (months) Monthly EMI Per day usage (km) Fuel efficiency (km/lt) Diesel price (per lt) Fuel cost per month Monthly maintenance cost CV ownership cost (per month) % YoY increase
1,180,419 90.0 1,062,377 14.5 120 16,816 320 4 43 103,200 3,000 123,016 1.0
1,239,440 1,301,412 90.0 15.0 120 17,997 320 4 46 110,376 3,300 131,673 7.0 90.0 16.0 120 19,620 320 4 48 114,000 3,630 137,250 4.2 1,115,496 1,171,271
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 incometax 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&Ms 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&Ms 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% Higher duty on CV chasses Widening of tax slabs
Negative Negative Positive
Extension for weighted R&D deduction for five years more and focus on alternative fuel technologies
Source: Government of India, Anand Rathi Research
Positive
All companies in the sector Ashok Leyland, Eicher Motors, Tata Motors Potential for higher consumer discretionary spending to benefit Maruti and two-wheeler companies, partially set off by the rise in servicetax rates M&M, Tata Motors
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9 April 2012
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
( `) 140 120 100 80 60 40 20 0 -20 -40
Bajaj Auto Maruti Suzuki Eicher Motors VST Tillers
FY11
Source: Companies, Anand Rathi Research
FY12e
FY13e
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.
13
9 April 2012
Fig 11 Currency movements vs the Rupee

180 160 140 120 100 80 60
1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12
3QFY12
US$ - Re
Source: Bloomberg
GBP - Re
EUR - Re
JPY - Re
Fig 12 Currency movements: JPY and EUR vs USD

110
100
90
80
70 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 4QFY12
US$ - JPY
Source: Bloomberg
EUR - US $
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 shortterm, 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.
4QFY12
14
9 April 2012
Company section
15
Autos
India I Equities
Update
Change in Estimates Target Reco
9 2April 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.
Key data
Rating: Sell Target Price: `30 Share Price: `30

ALIN / AL.BO
52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding
Shareholding pattern (%)
`33/ `20 17486 / 5323 US$4.1m `80.6bn / US$1.6bn 2,661m

Dec 11 Sep 11 Jun 11
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.
FY10 FY11 FY12e FY13e FY14e
Promoters - of which, pledged Free float - Foreign institutions - Domestic institutions - Public
Estimates revision (%)
38.61 7.05 61.39 15.57 15.84 29.98

FY12e
38.61 7.05 61.39 16.18 15.40 29.81

FY13e
38.61 14.11 61.39 13.53 16.58 31.28

FY14e
Sales EBITDA EPS Target multiple (x) Relative price performance

32 29 26
4.1 -0.2 -0.2 -
4.5 -3.9 -14.5 12.0
7.1 -4.7 -13.6 -
AL
23 20 Aug-11
Sensex
Dec-11
Jun-11
Feb-12
Apr-11
Source: Bloomberg
Key financials (YE Mar)
Sales (`m) Net profit (`m) EPS (`) Growth (%) EV/EBITDA (x) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
Source: Company, Anand Rathi Research
72,447 3,821 1.4 120.0 7.1 21.1 1.7 16.4 12.0 5.0 61.1
111,177 6,313 2.4 65.2 4.3 12.8 1.5 24.0 17.3 6.6 66.7
126,896 6,373 2.4 0.9 7.3 12.7 2.7 21.4 14.6 4.0 68.3
142,449 6,596 2.5 3.5 6.6 12.2 2.5 20.6 15.2 4.6 69.2
159,331 7,356 2.8 11.5 5.9 11.0 2.3 21.4 16.1 5.3 68.9
Rohan Korde
+9122 66266733 rohankorde@rathi.com
Nirav Bhatt
+9122 6626505 niravbhatt@rathi.com
Apr-12
Oct-11
9 April 2012
Ashok Leyland Sluggish M&HCV growth outlook; downgrade to Sell
Quick Glance Financials and Valuations

Fig 1 Income statement (`m)
Year-end: Mar FY10 FY11 FY12e FY13e FY14e
Fig 2 Balance sheet (`m)

Net revenues Revenue growth (%) - Op. expenses EBIDTA EBITDA margins (%) - Interest - Depreciation + Other income - Extraordinaries & others - Tax Effective tax rate (%) Reported PAT Adjusted PAT PAT growth (%) Adj. FDEPS (`/share) Adj. FDEPS growth (%)
72,447 21.1 64,819 7,628 10.5 1,019 2,041 417 -462 1,211 22.2 4,237 3,821 120.0 1.4 120.0
111,177 53.5 99,002 12,176 11.0 1,889 2,674 406 0 1,705 21.3 6,313 6,313 65.2 2.4 65.2
126,896 14.1 113,445 13,451 10.6 2,566 3,532 394 510 1,375 19.0 5,863 6,373 0.9 2.4 0.9
142,449 12.3 127,777 14,672 10.3 2,861 4,012 446 0 1,649 20.0 6,596 6,596 3.5 2.5 3.5
159,331 11.9 143,318 16,013 10.1 2,861 4,215 495 0 2,075 22.0 7,356 7,356 11.5 2.8 11.5
Share capital Reserves & surplus Net worth Total debt Def. tax liab. (net) Capital employed Net fixed assets Investments Working capital Cash Capital deployed Net debt No. of shares (m) Net debt/equity W C turn (days) Book value (`/sh)
1,330 22,025 23,356 22,039 4,435 49,829 34,779 3,262 6,600 5,189 49,829 13,588 1,330 0.6 17 17.6
1,330 24,968 26,298 25,683 5,295 57,276 36,586 12,300 6,594 1,795 57,276 11,587 1,330 0.4 23 19.8
2,661 27,119 29,780 34,683 5,855 70,318 43,054 15,300 10,040 1,924 70,318 17,459 2,661 0.6 24 11.2
2,661 29,386 32,047 34,683 6,415 73,145 43,042 17,300 12,059 743 73,145 16,639 2,661 0.5 24 12.0
2,661 31,795 34,456 34,683 6,975 76,113 41,827 19,300 14,165 821 76,113 14,562 2,661 0.4 24 12.9
Fig 3 Cash-flow statement (`m)

Fig 4 Ratio analysis @ `30

PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. Cash & bank bal.
4,237 2,041 6,278 -2,806 9,084 6,494 2,589 1,996 0 2,457 626 -1,883 4,308 881 5,189
6,313 2,674 8,987 -6 8,993 4,482 4,511 2,661 0 3,644 9,038 -150 -3,394 5,189 1,795
5,863 3,532 9,395 3,446 5,949 10,000 -4,051 3,193 1,330 9,000 3,000 -42 128 1,795 1,924
6,596 4,012 10,608 2,019 8,589 4,000 4,589 3,725 0 0 2,000 44 -1,180 1,924 743
7,356 4,215 11,571 2,106 9,465 3,000 6,465 4,257 0 0 2,000 131 77 743 821
P/E (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Dividend yield Dividend payout (%) Debt to equity Core P/E (x) Cash P/E EV/sales Inventory days Receivables days Payables days Fixed asset T/O
21.1 1.7 7.1 16.4 12.0 5.0 52.2 0.9 23.0 6.9 0.7 83 51 117 1.4
12.8 1.5 4.3 24.0 17.3 6.6 42.1 1.0 13.4 4.5 0.5 73 39 89 1.9
12.7 2.7 7.3 21.4 14.6 4.0 50.1 1.2 13.3 8.1 0.8 70 39 85 1.8
12.2 2.5 6.6 20.6 15.2 4.6 56.5 1.1 12.9 7.6 0.7 70 39 85 1.9
11.0 2.3 5.9 21.4 16.1 5.3 57.9 1.0 11.5 7.0 0.6 70 39 85 2.1
Fig 5 P/E band

75 25x
Fig 6 Sales break-up by product

(%) 100 80
21x
2.5
1.7
0.9
6.9 0.9
19.9 0.8
60
22.8 0.8
61.3 60 40 20 0 FY09
45 Ashok Leyland 30
69.4
72.3
17x 13x 9x
67.6 58.4 56.5
15
36.2
28.9 FY10
26.8 FY11
5x
24.6 FY12e
20.9 FY13e
19.9 FY14e Goods LCVs (Dost)
0 Dec-06 Dec-09 Sep-10 Jun-11 Sep-07 Mar-06 Mar-09 Mar-12 Jun-05 Jun-08
Passenger M&HCVs
Goods M&HCVs
Passenger LCVs
Source: Bloomberg, Anand Rathi Research
17
9 April 2012
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
(units) 120,000 100,000 80,000 60,000 40,000 20,000 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e FY13e FY14e (%) 50 35 20 5 -10 -25 -40
Ashok Leyland total M&HCVs

yoy growth (RHS)
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 ALs growth to be at 5.2% vs the industrys expected 6.4% growth rate over the same period.
Fig 8 Market share trend: M&H CVs & goods M&HCVs
(%) 50
We expect slower-than-industry M&H CV CAGR of 4.8% over FY12-14
45 40 35 30 25 20 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e
Ashok Leyland M&HCV Market share Ashok Leyland Goods M&HCV Market share Ashok Leyland M&HCV Passenger Market share
18
9 April 2012
Fig 9 Volume growth trend LCVs: Dost to drive volumes

(units) 35,000 28,000 21,000 400 14,000 200 7,000 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e 0 -200 (%) 1,000 800 600
Ashok Leyland LCV volume

yoy growth (RHS)
Fig 10 Market share trend: Overall LCVs and passenger LCVs

(%) 6 5 4 3 2 1 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
Ashok Leyland LCV Market share

LCV goods Market share
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.
19
9 April 2012
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
(` /unit) 1,430,000 1,230,000 1,040,000 1,030,000 830,000 630,000 430,000 230,000 30,000 1QFY12 3QFY12 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11 1QFY07 3QFY07 1QFY08 3QFY08 3QFY11 260,000 0 FY11 FY14e (%) 25 20 15 10 5 0 -5 -10 FY10 FY11 FY12e FY13e FY08 FY09 FY14e FY10 FY13e FY08 FY09 FY12e 780,000 6 520,000 0 -6 -12 (` /unit) 1,300,000 (%) 24 18 12
Realisation / unit
Realisation / unit
yoy change (RHS)
Fig 12 Contribution trend: weaker in FY13e

(`/unit) 408,000 358,000 308,000 258,000 208,000 158,000 108,000 58,000 8,000 3QFY07 1QFY08 3QFY10 1QFY12 3QFY08 1QFY10 3QFY11 1QFY07 3QFY09 1QFY11 3QFY12 1QFY09 200,000 150,000 100,000 50,000 0 (`/unit) 350,000 300,000 250,000
Contribution / unit
Contribution / unit
yoy change (RHS)
20
9 April 2012
Fig 13 .. EBITDA / vehicle to fall, going forward

(`/unit) 184,000 164,000 144,000 124,000 104,000 84,000 64,000 44,000 24,000 4,000 1QFY07 3QFY07 1QFY08 3QFY09 3QFY10 1QFY11 1QFY12 3QFY12 3QFY08 1QFY10 3QFY11 1QFY09 40,000 20,000 0 FY13e FY08 FY09 FY10 FY11 FY12e FY14e 0 -10 -20 100,000 80,000 60,000 30 20 10 (`/unit) 140,000 120,000 (%) 50 40
EBITDA / unit
EBITDA / unit
yoy change (RHS)
Fig 14 Profit per unit: to decline

( `/unit) 120,000 100,000 80,000 60,000 40,000 20,000 0 -20,000 -40,000 -60,000 3QFY08 1QFY10 3QFY11 3QFY07 1QFY08 3QFY10 1QFY12 1QFY07 3QFY09 1QFY11 3QFY12 1QFY09 (`/unit) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 FY09 FY10 FY08 FY11 FY12e FY13e FY14e (%) 100 80 60 40 20 0 -20 -40 -60
Adj. profit / unit

Adj. profit / unit
yoy change (RHS)
21
9 April 2012
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

11
2 Jun-02 Sep-04 Jun-05 Sep-07 Mar-03 Jun-08 Sep-10 Dec-03 Mar-06 Dec-06 Mar-09 Jun-11 Dec-09 Mar-12
22
Autos
India I Equities
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 fourwheelers. We retain a Buy and raise the price target to `1,939.
Key data
Rating: Buy Target Price: `1,939 Share Price: `1,654

BJAUT IN / BAJA.BO
`1,839/ `1,260 17486 / 5323 US$19.3m `478.5bn / US$9.4bn 289m

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 Mar13, 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.
50.02 0.16 49.98 16.07 8.48 25.43

FY12e
50.02 0.30 49.98 15.93 8.32 25.73

FY13e
50.02 0.44 49.98 15.80 8.10 26.08

FY14e

1,900
0.3 4.6 6.1 -
1.6 6.5 7.1 15.2
1.6 3.2 10.4 -
BJAUT 1,600 1,300 Sensex 1,000 Aug-11 Dec-11 Jun-11 Feb-12 Apr-11 Apr-12 Oct-11
Source: Bloomberg
119,210 18,156 62.7 127.1 8.2 26.4 8.2 62.0 60.4 2.4 51.9
166,089 26,152 90.4 44.0 12.7 18.3 9.7 53.3 68.9 2.4 28.9
199,496 32,140 111.1 22.9 10.3 14.9 7.4 49.5 63.5 3.0 24.2
231,220 36,816 127.2 14.5 8.4 13.0 5.6 42.9 57.4 3.3 22.5
266,561 42,460 146.7 15.3 7.0 11.3 4.3 38.3 51.5 3.6 20.6
Rohan Korde
Nirav Bhatt
9 April 2012
Bajaj Auto Potential for positive surprises, valuations reasonable; Buy


Net revenues Revenue growth (%) - Op. expenses EBIDTA EBITDA margin (%) - Interest expenses - Depreciation + Other income - Extraordinaries - Tax Effective tax rate (%) Reported PAT Adjusted PAT Adjusted PAT growth Adj. FDEPS (`/share) Adj. FDEPS growth (%)
119,210 35.8 93,284 25,926 21.7 60 1,365 1,225 1,650 7,075 29.4 17,001 18,156 127.1 62.7 127.1
166,089 39.3 132,240 33,849 20.4 17 1,228 3,658 -7,246 10,110 23.2 33,397 26,152 44.0 90.4 44.0
199,496 20.1 159,271 40,225 20.2 5 1,278 3,572 1,833 10,374 25.5 30,308 32,140 22.9 111.1 22.9
231,220 15.9 184,052 47,168 20.4 4 1,435 4,702 0 13,617 27.0 36,816 36,816 14.5 127.2 14.5
266,561 15.3 213,336 53,225 20.0 4 1,489 6,432 0 15,705 27.0 42,460 42,460 15.3 146.7 15.3
Share capital Reserves & surplus Net worth Total debt Def. tax liab. (net) Capital employed Net fixed assets Investments Working capital Cash Capital deployed No. of shares (m) Net debt Net debt/equity W C turn (days) Book value (`/sh)
1,447 27,837 29,283 13,386 17 42,686 15,211 40,215 -13,754 1,014 42,686 145 -27,844 -1.0 -27 202.4
2,894 46,209 49,102 3,252 297 52,651 15,526 47,952 -16,392 5,565 52,651 289 -50,265 -1.0 -24 169.7
2,894 62,048 64,941 1,752 297 66,990 16,248 57,952 -14,351 7,141 66,990 289 -63,342 -1.0 -24 224.4
2,894 82,948 85,842 1,752 297 87,890 17,813 75,952 -12,890 7,015 87,890 289 -81,217 -0.9 -24 296.6
2,894 108,046 110,940 1,752 297 112,988 19,324 97,952 -11,687 7,399 112,988 289 -103,602 -0.9 -24 383.4

Fig 4 Ratio analysis @ `1,654

PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. cash & bank bal.
17,001 1,365 18,366 -11,263 29,629 932 28,696 6,655 0 -2,314 22,130 -2,049 -354 1,369 1,014
33,397 1,228 34,626 -2,638 37,263 1,543 35,720 13,311 1,447 -10,134 7,737 1,434 4,551 1,014 5,565
30,308 1,278 31,586 2,041 29,545 2,000 27,545 16,639 0 -1,500 10,000 -2,170 1,576 5,565 7,141
36,816 1,435 38,250 1,462 36,789 3,000 33,789 18,303 0 0 18,000 -2,387 -127 7,141 7,015
42,460 1,489 43,949 1,203 42,747 3,000 39,747 19,967 0 0 22,000 -2,604 384 7,015 7,399
P/E (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Dividend yield Dividend payout (%) Debt to equity (%) Core P/E (x) Cash P/E EV/sales Inventory days Receivables days Payables days Fixed asset T/O
26.4 8.2 8.2 62.0 60.4 2.4 39.1 0.5 14.7 12.3 1.8 14 50 9 2.7
18.3 9.7 12.7 53.3 68.9 2.4 39.9 0.1 15.6 17.5 2.7 12 44 8 3.0
14.9 7.4 10.3 49.5 63.5 3.0 54.9 0.0 17.3 14.3 2.2 10 44 10 2.9
13.0 5.6 8.4 42.9 57.4 3.3 49.7 0.0 14.4 12.5 1.8 10 44 10 2.5
11.3 4.3 7.0 38.3 51.5 3.6 47.0 0.0 12.7 10.9 1.5 10 44 10 2.3
Fig 5 P/E band

2,500 18x 2,000 15x 12x 9x 6x
Fig 6 Volume break up

(%) 100 80 64.8 60 40 20 36.3 38.8 41.0 68.8 68.5 63.7 61.2 59.0
1,500
1,000
500
35.2
Bajaj Auto
31.2
31.5
3x
0 FY09 FY10 FY11 FY12e FY13e FY14e
0 Mar-09 Mar-10 Mar-11 Sep-08 Sep-09 Sep-10 Sep-11 Dec-08 Dec-09 Dec-10 Dec-11 Mar-12 Jun-08 Jun-09 Jun-10 Jun-11
Exports Volume (units)
Domestic volume (units)
24
9 April 2012
Two wheelers: steady volume growth

Bajaj Auto is likely to see 11.5% CAGR in motorcycle volumes over FY12-14, vs. that of the sectors 10.2%, mainly driven by launches and an enhanced image on the addition of KTMs naked bike lineup in its range. Its fast-growing export presence in two- and threewheelers 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
(units) 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 FY12e FY13e FY14e FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 (%) 40 30 20 10 0 -10 -20
Bajaj Auto 2wh volume

yoy growth (RHS)
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)
(%) 34 32 30 28 26 24 22 20 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
2wh Market share

Source: Company, SIAM, Anand Rathi Research
M.c. Market share
25
9 April 2012
Fig 9 Volume growth trend: three wheelers

(units) 700,000 560,000 420,000 280,000 140,000 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e FY13e FY14e (%) 35 25 15 5 -5 -15
Bajaj Auto 3wh volume

yoy growth (RHS)
Fig 10 Market share trend: Overall and passenger three wheelers

(%)
90
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
80
70
60
50 FY12e FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
3wh Market share

Bajaj 3 Wheeler P.C. Market share
Bajaj Autos 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.
26
9 April 2012
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
(`/unit) 48,000 45,000 42,000 30,000 39,000 20,000 36,000 33,000 30,000 3QFY11 1QFY08 3QFY08 1QFY10 3QFY10 1QFY09 1QFY11 1QFY07 3QFY07 1QFY12 3QFY12 3QFY09 10,000 0 FY08 FY09 FY10 FY11 FY12e FY14e
(%) 30 25 20 15 10 5 0 -5 -10 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
(`/unit) 50,000 40,000
(%) 9.5 8.0 6.5 5.0 3.5 2.0 FY13e
Realisation / unit
Realisation / unit
yoy change (RHS)
Fig 12 Contribution trend: impact of commodities appears to be abating

(`/unit) 15,000 14,000 13,000 12,000 11,000 10,000 9,000 8,000 1QFY07 3QFY07 1QFY08 3QFY08 1QFY10 3QFY10 1QFY12 3QFY12 3QFY11 1QFY09 1QFY11 3QFY09 (`/unit) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
Contribution / unit
Contribution / unit
yoy change (RHS)
27
9 April 2012
Fig 13 . resulting in improved EBITDA/vehicle

(`/unit) 10,000 9,000 8,000 6,000 7,000 6,000 5,000 4,000 1QFY07 3QFY07 1QFY08 3QFY08 1QFY10 3QFY10 1QFY12 3QFY12 1QFY09 1QFY11 3QFY11 3QFY09 4,000 2,000 0 FY12e FY08 FY09 FY10 FY11 FY13e FY14e
(%) 90 60 30 4,000 2,000 0 FY08 FY09 FY10 FY11 FY12e FY13e FY14e 0 -30
(`/unit) 10,000 8,000
(%) 80 60 40 20 0 -20
EBITDA / unit
EBITDA / unit
yoy change (RHS)
We expect Bajaj Auto to register 3.4% CAGR in realisations over FY1214, and 2.9% CAGR in EBITDA per vehicle. Over the same period, we expect 2.8% CAGR in profit.
Fig 14 Profit per unit: improvement continues
(`/unit) 8,000 7,000 6,000 6,000 5,000 4,000 3,000 2,000 1QFY07 3QFY07 1QFY08 3QFY08 1QFY09 1QFY11 1QFY12 3QFY12 3QFY09 1QFY10 3QFY10 3QFY11 (`/unit) 10,000 8,000
Adj. profit / unit
Adj. profit / unit
yoy change (RHS)
28
9 April 2012
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 Mar13, and `226 as value of cash.
Fig 15 Sum-of-parts table
(`) Mar 13
Core EPS Multiple (x) Value Cash per share Price Inv in KTM Power Sports AG and PT BAI Target price (`) Upside (%)
114.2 15 1,713 201 1,913 26 1,939 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.

15
12
0 Jun-11 Sep-11 Mar-11 Sep-10 Sep-09 Sep-08 Dec-08 Dec-09 Dec-10 Dec-11 Mar-09 Mar-10 Mar-12 Jun-08 Jun-09 Jun-10
29
Autos
India I Equities
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.
Key data
Rating: Sell Target Price: `2,087 Share Price: `2,055

HMCL IN / HROM.BO
`2,248/ `1482 17486 / 5323 US$22.0m `410.4bn / US$8.1bn 200m

Two-wheeler growth rate to sustain. HMCLs 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. HMCLs 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.
52.21 3.07 47.79 33.77 5.36 8.66

FY12e
52.21 14.23 47.79 34.80 4.23 8.76

FY13e
52.21 14.23 47.79 33.67 4.56 9.56

FY14e

2,400 2,200 2,000 1,800 1,600 1,400 1,200 Aug-11 HMCL
0.2 0.9 5.1 -
0.5 3.3 8.3 14.9
0.5 2.6 6.1 -
Sensex Dec-11 Jun-11 Feb-12 Apr-11 Apr-12 Oct-11
Source: Bloomberg Key financials (YE Mar)
Sales (`m) Net profit (`m) EPS (`) Growth (%) EV/EBITDA (x) P/E (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
158,312 22,318 111.8 74.1 12.9 18.4 11.8 64.4 76.1 5.4 28.3
194,012 20,269 101.5 -9.2 14.3 20.2 13.9 68.6 52.8 5.1 69.0
235,848 23,779 119.1 17.3 10.3 17.3 13.5 78.3 62.6 5.6 69.4
267,917 27,926 139.8 17.4 8.6 14.7 12.3 83.8 79.0 6.1 65.4
306,487 30,762 154.0 10.2 7.2 13.3 11.4 85.1 99.1 6.8 62.5
Rohan Korde
Nirav Bhatt
9 April 2012
Hero Moto Corp New strategy a positive; but we maintain a Sell on fair valuations


Net revenues Revenue growth (%) - Op. expenses EBIDTA EBITDA margin (%) - Interest expenses - Depreciation + Other income - Extraordinaries & others - Tax Effective tax rate (%) Reported PAT Adjusted PAT Adjusted PAT growth Adj. FDEPS (`/share) Adj. FDEPS growth (%)
158,312 27.9 130,962 27,350 17.3 -206 1,915 2,676 0 5,999 21.2 22,318 22,318 74.1 111.8 74.1
194,012 22.1 167,848 26,164 13.5 -19 4,024 2,688 1,148 4,419 18.6 19,279 20,269 -9.2 101.5 -9.2
235,848 21.6 199,569 36,279 15.4 -173 11,309 3,166 0 4,529 16.0 23,779 23,779 17.3 119.1 17.3
267,917 13.6 225,545 42,372 15.8 -209 11,926 3,401 0 6,130 18.0 27,926 27,926 17.4 139.8 17.4
306,487 14.4 257,656 48,831 15.9 -221 12,313 3,738 0 9,714 24.0 30,762 30,762 10.2 154.0 10.2
399 34,251 34,650 660 1,528 36,838 17,069 39,257 -38,560 19,072 36,838 -57,669 200 -13 173.5
399 29,161 29,561 14,912 2,468 46,940 42,054 51,288 -47,117 715 46,940 -37,091 200 -15 148.0
399 29,974 30,374 12,030 2,468 44,872 44,745 48,288 -48,306 146 44,872 -36,403 200 -14 152.1
399 399 32,938 35,742 33,337 36,141 6,989 1,947 2,468 2,468 42,794 40,556 37,819 30,506 52,288 58,288 -47,942 -49,102 629 865 42,794 40,556 -45,928 -57,205 200 200 -12 -12 166.9 181.0

Fig 4 Ratio analysis @ ` 2,055

22,318 1,915 24,233 -25,971 50,204 2,041 48,163 21,966 0 -125 5,570 3,627 16,876 2,196 19,072
19,279 4,024 23,303 -8,557 31,859 29,009 2,851 20,967 0 14,251 12,030 2,461 -18,357 19,072 715
23,779 11,309 35,088 -1,189 36,277 14,000 22,277 22,966 0 -2,881 -3,000 0 -569 715 146
27,926 11,926 39,852 364 39,487 5,000 34,487 24,963 0 -5,042 4,000 0 483 146 629
30,762 12,313 43,075 -1,160 44,235 5,000 39,235 27,958 0 -5,042 6,000 0 236 629 865
P/E (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Dividend yield Dividend payout (%) Debt to equity (%) Core P/E (x) Cash P/E EV/sales Inventory days Receivables days Payables days Asset T/O
18.4 11.8 12.9 64.4 76.1 5.4 115.0 0.0 20.1 16.9 2.2 10 3 26 9.8
20.2 13.9 14.3 68.6 52.8 5.1 126.4 0.5 22.3 16.9 1.9 10 2 27 6.8
17.3 13.5 10.3 78.3 62.6 5.6 113.0 0.4 19.0 11.7 1.6 10 5 29 5.5
14.7 12.3 8.6 83.8 79.0 6.1 104.6 0.2 16.1 10.3 1.4 9 5 26 6.5
13.3 11.4 7.2 85.1 99.1 6.8 106.3 0.1 14.6 9.5 1.2 9 5 26 9.0
Fig 5 P/E band

( `) 3,000 20.0x 2,400 17.5x 15.0x 1,800 12.5x 10.0x 1,200 7.5x
Fig 6 Product wise volume split

(%) 100 80 60 40 20 91.3 90.1 90.0 86.8 87.2 86.9 86.8
3.1 5.6
4.2 5.7
4.7 5.4
6.7 6.5
7.2 5.7
7.4 5.6
7.6 5.6
600
Hero Moto Corp

0 FY08 FY09 FY10 FY11 FY12e FY13e FY14e Scooters
0 Mar-06 Mar-09 Jun-05 Dec-06 Sep-07 Dec-09 Sep-10 Mar-12 Jun-08 Jun-11
75cc - 125cc Motorcycles
125cc - 250cc Motorcycles
31
9 April 2012
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 sectors 11.2%. HMCLs two-wheeler growth rate is likely to be boosted by its scooter range.
Fig 7 Volume growth trend: two-wheelers
(units) 8,000,000 (%) 28
We expect Hero Moto Corps motorcycle volumes to register 10% CAGR over FY12-14, compared to that of the sector at 10.2%
6,000,000
21
4,000,000
14
2,000,000
0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
FY14e
-1
Hero Motocorp 2wh volume

yoy growth (RHS)
However, we expect the company to lose market share in motorcycles to Bajaj Auto (due to the latters 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 HMCLs market-share trend: two-wheelers and 75-125cc motorcycles
(%) 75 70 65 60 55 50 45 40 35 FY12e FY13e FY07 FY08 FY09 FY10 FY11
HMCL 2wh Market share

HMCL 75-125cc mc Market share
32
9 April 2012
Fig 9 Volume-growth trend: HMC scooters
Due to stiff competition from Honda, HMCL would lose its scooter market share, registering 13% CAGR to the sectors 16.5%
(units) 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 FY12e FY13e FY14e FY13e FY14e FY08 FY09 FY10 FY11
(%) 77 66 55 44 33 22 11 0
Hero Motocorp scooters

yoy growth (RHS)
Fig 10 Market-share trend: scooters

(%) 20 17 14 11 8 5 2 FY06 FY07 FY08 FY09 FY10 FY11 FY12e
Hero's scooters Market share

Scooters as a % of total two wheelers
33
9 April 2012
Challenges of a New Strategy

Volatile forex situations could impact HMCLs 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). HMCLs 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
(`/unit) 40,000
(`/unit) 42,000 35,000
(%) 7 6 5 4 3 2 1 FY13e FY14e (%) 18 13 8 3 -2 -7 -12 FY08 FY09 FY10 FY11 FY12e FY13e FY14e FY10 FY11 FY12e FY08 FY09
30,000
28,000
20,000
21,000 14,000
10,000
7,000
0 1QFY07 3QFY07 1QFY08 3QFY08 1QFY10 3QFY10 1QFY12 3QFY12 3QFY11 1QFY09 1QFY11 3QFY09
Realisation / unit
Realisation / unit
yoy change (RHS)
Fig 12 Contribution trend: Impact of commodities lower

(`/unit) 12,000
(`/unit) 12,000 10,000
9,000
8,000
6,000
6,000 4,000
3,000
2,000
0 1QFY08 3QFY08 1QFY10 3QFY10 3QFY11 1QFY07 3QFY07 1QFY09 1QFY11 1QFY12 3QFY12 3QFY09
Contribution / unit
Contribution / unit
yoy change (RHS)
34
9 April 2012
Hero Moto Corp New strategy; but maintain sell on fair valuations
Fig 13 EBITDA/vehicle
(`/unit) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 3QFY10 3QFY11 3QFY09 1QFY10 1QFY07 3QFY07 1QFY08 3QFY08 1QFY09 1QFY11 1QFY12 3QFY12
(`/unit) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 FY14e
(%) 45 31 17 3 -11 -25 FY09 FY10 FY08 FY11 FY14e FY12e FY13e
(%) 29 22 15 8 1 -6 -13 -20 FY09 FY10 FY12e FY13e FY08 FY11
EBITDA / unit
EBITDA / unit
yoy change (RHS)
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
(`/unit) 5,500 5,000 4,500 4,000 3,500 3,000 1,000 2,500 2,000 1QFY07 3QFY07 1QFY08 3QFY08 1QFY09 1QFY11 1QFY12 3QFY12 3QFY10 3QFY11 3QFY09 1QFY10 0 3,000 2,000 (`/unit) 5,000 4,000
Adj. profit / unit
Adj. profit / unit
yoy change (RHS)
35
9 April 2012
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, betterthan-expected volumes.

15
12
3 Mar-08 Dec-08 Mar-09 Mar-10 Dec-10 Mar-11 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Dec-07 Dec-09 Dec-11 Mar-12 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11
36
Autos
India I Equities
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.
Key data
Rating: Buy Target Price: `833 Share Price: `697

MM IN / MAHM.BO
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. Pickups 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.
`875 / `617 17486 / 5323 US$38.5m `428bn / US$8.4bn 614m
Shareholding pattern (%) Dec 11 Sep 11 Jun 11 Promoters 25.34 25.18 24.86 - of which, pledged 6.55 5.20 7.88 Free 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 Estimates revision (%) Sales EBITDA EPS Target multiple (x) FY12e FY13e FY14e 8.6 13.0 13.9 -2.6 -6.4 -9.1 -7.4 -11.1 -13.2 13.7 -
Relative price performance
900 MM 800 700 600 Sensex 500 Jun-11 Aug-11 Oct-11 Apr-11 Dec-11 Feb-12 Apr-12
Source: Bloomberg Key financials (standalone YE: Mar) FY10 FY11 FY12e FY13e FY14e
Sales (`m) Net profit (`m) EPS (`) Consol.EPS (`) Consol PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
185,296 19,893 32.4 37.5 18.6 5.0 25.4 25.0 1.4 33.3
234,211 24,961 40.7 47.4 14.7 4.0 24.2 25.1 1.7 38.7
307,827 25,696 41.9 50.7 13.7 3.5 21.3 21.9 1.9 41.2
366,809 28,584 46.6 61.0 11.4 3.0 20.5 21.7 2.0 42.5
415,969 31,486 51.3 71.2 9.8 2.6 19.6 21.4 2.2 41.1
Rohan Korde
Nirav Bhatt
9 April 2012
Mahindra & Mahindra Short-term pressures; long-term outlook good; Buy


Net revenues Revenue growth (%) - Op. expenses EBIDTA EBITDA margins (%) - Interest - Depreciation + Other income - Extraordinaries - Tax Effective tax rate (%) Reported PAT Adjusted PAT PAT growth (%) Adj. FDEPS (`/share) Adj. FDEPS growth (%)
185,296 42.1 156,179 29,117 15.7 278 3,708 1,994 -1,343 7,590 26.7 20,878 19,893 115.8 32.4 115.8
234,211 26.4 200,375 33,836 14.4 -503 4,139 3,095 -1,901 8,576 24.4 26,621 24,961 25.5 40.7 25.5
307,827 31.4 271,302 36,524 11.9 145 5,408 3,520 -79 8,815 25.5 25,755 25,696 2.9 41.9 2.9
366,809 19.2 325,768 41,041 11.2 170 6,540 4,038 0 9,784 25.5 28,584 28,584 11.2 46.6 11.2
415,969 13.4 370,536 45,433 10.9 170 7,585 4,586 0 10,777 25.5 31,486 31,486 10.2 51.3 10.2
2,830 75,438 78,268 28,802 2,397 109,466 37,027 63,980 -8,974 17,432 109,466 -52,611 566 -0.7 -36 138
2,936 100,198 103,134 24,053 3,544 130,731 43,719 93,253 -12,387 6,146 130,731 -75,346 587 -0.7 -16 176
2,992 117,707 120,699 34,053 3,544 158,296 53,311 103,253 -6,393 8,124 158,296 -77,324 598 -0.6 -25 202
2,992 2,992 136,764 158,044 139,757 161,036 34,053 34,053 3,544 3,544 177,353 198,633 56,770 57,185 123,253 143,253 -6,616 -6,302 3,946 4,496 177,353 198,633 -93,146 -113,696 598 598 -0.7 -0.7 -20 -20 234 269


PAT + Non-cash items Cash profit - Incr./(Decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. cash & bank bal.
20,878 3,708 24,585 4,119 20,467 8,592 11,875 5,495 103 -11,726 6,116 -13,047 1,688 15,744 17,432
26,621 4,139 30,759 -3,413 34,172 10,830 23,343 7,061 107 -11,726 29,273 -13,324 -11,286 17,432 6,146
25,755 5,408 31,163 5,995 25,168 15,000 10,168 7,780 56 -4,749 10,000 -14,283 1,978 6,146 8,124
28,584 6,540 35,125 -224 35,349 10,000 25,349 8,379 0 10,000 20,000 11,148 -4,178 8,124 3,946
31,486 7,585 39,072 315 38,757 8,000 30,757 8,977 0 0 20,000 1,230 550 3,946 4,496
Consol P/E (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Dividend yield Dividend payout (%) Debt to equity Standalone P/E (x) Cash P/E EV/sales Inventory days Receivables days Payables days Fixed Asset T/O
18.6 5.0 11.7 25.4 25.0 1.4 31.9 0.4 21.5 17.6 1.9 24 25 66 1.6
14.7 4.0 9.9 24.2 25.1 1.7 32.5 0.2 17.1 14.3 1.5 27 22 74 1.7
13.7 3.5 9.3 21.3 21.9 1.9 34.5 0.3 16.7 13.3 1.1 28 24 72 1.9
11.4 3.0 7.9 20.5 21.7 2.0 33.3 0.2 15.0 11.8 0.9 28 24 72 2.0
9.8 2.6 6.7 19.6 21.4 2.2 32.4 0.2 13.6 10.6 0.7 28 24 72 2.1
Fig 5 Consolidated P/E band

1,200 19x 16x 900 13x
Fig 6 Sales volume split

(%) 100 11.6 80 60 54.7 49.5 51.3 50.9 55.6 58.3 59.7 13.7
10.0
11.4
9.9
9.3
8.9
600 M&M
10x
40
7x 300
20
4x
0
33.7
36.8
38.7
37.7
34.5
32.4
31.4
FY08
FY09
FY10
FY11
FY12e
FY13e
0 Mar-06 Mar-09 Sep-07 Sep-10 Dec-06 Dec-09 Mar-12 Jun-05 Jun-08 Jun-11
Tractors
UV's
Three-wheelers
FY14e
38
9 April 2012
UVs to drive growth, tractors to slow

We estimate 14.5% volume CAGR in M&Ms 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&Ms tractor segment, due to the overall slowdown in tractor growth.
Fig 7 Volume growth trend: Passenger UVs
(units) 300,000 250,000 200,000 150,000 100,000 50,000 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
FY13e FY14e
(%) 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 (5.0)
M&M UV volumes
yoy growth (RHS)
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 Ssangyongs 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#
(%) 70 65 60 55 50 45 40 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e
M&M UV Market share

Source: SIAM, Anand Rathi Research # excluding impact of Maruti Suzuki Ertiga
39
9 April 2012
Fig 9 Tractor: market share trend and volumes

(units) 300,000 250,000 200,000 150,000 100,000 50,000 0 FY12e FY13e FY14e FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 (%) 50.0 40.0 30.0 20.0 35.0 10.0 0.0 (10.0) 25.0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e 30.0 40.0 (%) 45.0
M&M Tractor volumes

yoy growth (RHS)
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&Ms 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%.
40
9 April 2012
Operating performance to dip

With decelerating sales of higher-margin tractors and the impact of VAT payment at Chakan, we expect M&Ms 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&Ms 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
(`/unit) 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 3QFY07 1QFY08 1QFY10 1QFY12 3QFY12 3QFY08 3QFY10 3QFY09 1QFY07 1QFY09 1QFY11 3QFY11 300,000 250,000 200,000 FY14e FY08 FY11 FY12e FY09 FY10 FY13e 3.0 1.5 (`/unit) 500,000 450,000 400,000 350,000 (%) 9.0 7.5 6.0 4.5
Realisation / unit
Realisation / unit
yoy change (RHS)
Fig 11 Contribution trend to grow slowly in FY13

(`/unit) 150,000 125,000 100,000 75,000 50,000 3QFY07 1QFY08 1QFY10 1QFY12 3QFY12 1QFY07 3QFY08 1QFY09 3QFY10 1QFY11 3QFY11 3QFY09 (`/unit) 140,000 135,000 130,000 125,000 120,000 115,000 110,000 FY08 FY10 FY13e FY09 FY11 FY12e FY14e (%) 20.0 15.0 10.0 5.0 0.0 (5.0) (10.0)
Contribution / unit
Contribution / unit
yoy change (RHS)
41
9 April 2012
Fig 12 EBITDA / vehicle to remain flattish

(`/unit) 75,000 65,000 55,000 45,000 35,000 25,000 1QFY08 1QFY09 1QFY10 1QFY11 3QFY11 1QFY12 3QFY12 1QFY07 3QFY07 3QFY08 3QFY09 3QFY10 (`/unit) 70,000 60,000 50,000 40,000 30,000 20,000 FY11 FY13e FY12e FY14e
(%) 60.0 40.0 20.0 0.0 (20.0) FY11 FY13e FY08 FY09 FY10 FY12e FY14e
(%) 80.0 60.0 40.0 20.0 0.0 (20.0) FY09 FY08 FY10
EBITDA / unit
EBITDA / unit
yoy change (RHS)
Fig 13 Growth in profit per unit...is lacklustre

(`/unit) 75,000 70,000 65,000 60,000 55,000 50,000 45,000 40,000 35,000 30,000 1QFY07 3QFY07 1QFY08 3QFY08 1QFY09 3QFY09 1QFY10 3QFY10 1QFY11 3QFY11 1QFY12 3QFY12
(`/unit) 55,000
45,000
35,000
25,000
15,000
Adj. profit / unit
yoy change (RHS)
Adj. PBT / 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.
42
9 April 2012
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
` Core EPS Multiple (x) Value Value of listed subsidiaries (incl. Ssangyong) Price Investments Target price (`) Upside (%)
Mar 13 43.9 12.5 550 173 723 100 833 19.5
Risks
Higher interest rates, lower credit availability, change in diesel-vehicle policy in the Budget, and lower economic growth in India.

24 21 18 15 12 9 6 3 0 Mar-06 Mar-09 Dec-06 Sep-07 Dec-09 Sep-10 Mar-12 Jun-05 Jun-08 Jun-11 M&M
43
Autos
India I Equities
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 Suzukis 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.
Key data
Rating: Buy Target Price: `1,581 Share Price: `1,349

MSIL IN / MRTI.BO
`1,428 / `906 17486 / 5323 US$21.3m `389.9bn / US$7.8bn 289m

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) rampup 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.
54.21 0.00 45.79 19.35 17.38 9.06

FY12e
54.21 0.00 45.79 19.24 17.70 8.85

FY13e
54.21 0.00 45.79 18.71 18.01 9.07

FY14e

900
n.m n.m n.m -
-1.5 -0.4 3.5 17.5
2.7 3.8 5.1 -
MM 800 700 600 Sensex 500 Aug-11 Dec-11 Jun-11 Feb-12 Apr-11 Apr-12 Oct-11
Source: Bloomberg
296,230 24,976 86.4 61.2 8.3 15.6 3.3 21.1 28.3 0.4 24.2
370,401 23,342 80.8 -6.5 8.6 16.7 2.8 16.5 22.3 0.6 8.5
355,938 16,095 55.7 -31.0 11.8 24.2 2.6 10.5 13.7 0.6 12.4
429,653 26,103 90.3 62.2 7.4 14.9 2.2 14.8 19.2 0.6 14.9
493,426 29,956 103.7 14.8 5.9 13.0 1.9 14.7 19.2 0.7 14.2
Rohan Korde
Nirav Bhatt
9 April 2012
Maruti Suzuki Better prospects on the heels of a woeful year; we retain a Buy


296,230 41.7 256,984 39,246 13.2 335 8,250 4,969 -296 10,949 30.5 24,976 24,976 61.2 86.4 61.2
370,401 25.0 333,362 37,038 10.0 244 10,135 4,823 395 8,201 26.4 22,886 23,342 -6.5 80.8 -6.5
355,938 -3.9 328,530 27,407 7.7 486 11,222 5,647 -79 5,464 25.5 15,962 16,095 -31.0 55.7 -31.0
429,653 20.7 387,977 41,676 9.7 578 12,733 6,389 -283 8,935 25.5 26,103 26,103 62.2 90.3 62.2
493,426 14.8 445,070 48,356 9.8 578 14,533 6,667 -297 10,253 25.5 29,956 29,956 14.8 103.7 14.8
1,445 116,906 118,351 8,214 1,370 127,935 54,123 71,766 1,064 982 127,935 -64,534 289 -0.5 -4 3.3
1,445 137,230 138,675 3,093 1,644 143,412 69,580 51,067 -2,320 25,085 143,412 -73,059 289 -0.5 -6 2.8
1,445 151,025 152,470 7,703 1,644 161,817 83,358 53,931 4,308 20,219 161,817 -66,447 289 -0.4 -2 2.6
1,445 174,671 176,116 7,703 1,644 185,463 90,625 73,931 3,904 17,002 185,463 -83,231 289 -0.5 -2 2.2
1,445 202,026 203,471 7,703 1,644 212,818 96,092 93,931 3,555 19,240 212,818 -105,468 289 -0.5 -2 1.9


24,976 8,250 33,227 -481 33,708 13,052 20,655 1,733 0 1,225 40,033 -1,478 -18,408 19,390 982
22,886 10,135 33,021 -3,384 36,405 25,592 10,813 2,167 0 -5,121 -20,699 121 24,103 982 25,085
15,962 11,222 27,184 6,629 20,555 25,000 -4,445 2,168 0 4,610 2,864 0 -4,866 25,085 20,219
26,103 12,733 38,836 -404 39,240 20,000 19,240 2,457 0 0 20,000 0 -3,216 20,219 17,002
29,956 14,533 44,489 -349 44,838 20,000 24,838 2,601 0 0 20,000 0 2,237 17,002 19,240
15.6 3.3 8.3 21.1 28.3 0.4 6.9 0.1 18.1 11.7 1.1 15 10 29 2.3
16.7 2.8 8.6 16.5 22.3 0.6 9.3 0.0 19.5 11.6 0.9 14 9 29 2.5
24.2 2.6 11.8 10.5 13.7 0.6 13.5 0.1 32.1 14.3 0.9 18 10 30 2.1
14.9 2.2 7.4 14.8 19.2 0.6 9.4 0.0 18.0 10.0 0.7 18 10 30 2.3
13.0 1.9 5.9 14.7 19.2 0.7 8.7 0.0 15.4 8.8 0.6 18 10 30 2.3
Fig 5 P/E band

2,200 21x
Fig 6 Product wise volume split

(%) 100 80 18x 60 40 20 69.8 71.4 75.9 71.8 0.5 11.9 6.5 1.0 10.0 9.6 0.4 10.1 9.8 0.5 12.8 10.4 0.6 12.9 11.3 2.9 12.6 11.1 3.3 12.4 11.5
1,800
1,400
15x 12x 9x
1,000
73.3
70.5
70.2
600
Maruti Suzuki
6x 0
11.3 FY08
8.1 FY09
3.8 FY10
3.1 FY11
3.2 FY12e
2.8 FY13e
2.5 FY14e UV
200 Mar-06 Mar-09 Sep-07 Sep-10 Dec-06 Dec-09 Mar-12 Jun-05 Jun-08 Jun-11
A1 segment
A2 segment
A3 segment
MPV
45
9 April 2012
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
(units) 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e (%) 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 (5.0) (10.0) (15.0)
MSIL Passenger Car

Source : Company, Anand Rathi Research
yoy growth (RHS)
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 Suzuki to report higher-than-sector passenger car CAGR of 13.3% over FY12-14, compared to the sectors 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 9 Volume growth: PVs to surge on new launches
(units) 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 FY13e FY03 FY04 FY07 FY10 FY05 FY06 FY09 FY08 FY11 FY12e
FY12e FY13e FY14e
Fig 8 Market share to improve slightly despite competition

(%) 70.0 65.0 60.0 55.0 50.0 45.0 40.0 35.0 FY06 FY09 FY07 FY08 FY10 FY11
(%) 35.0 28.0 21.0 14.0 7.0 0.0 (7.0) (14.0) FY14e
MSIL PC Market share
MSIL small cars and hatchbacks Market share
MSIL PV volume (units)

yoy growth (RHS)
46
9 April 2012
In small cars and hatchbacks Maruti Suzukis growth is estimated at 13.3%, vs the industrys 10.9%. This is likely to be mainly driven by new launches and the good response to current models
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. 2.
Uninterrupted production of better selling models, hence recovery of the three months lost production during strikes; 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; Export volume growth of 10.9%, driven by downward trading; Addition of a new sub-segment for the company driven by the Ertiga launch.
3. 4.
In the home (Indian) market, price-sensitive customers have rarely paid a premium for any product in the mass-market category that isnt value-formoney. 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. Its downright difficult for a customer (from small to mid-size segment cars) not to be taken up by Marutis extensive product range. Moreover, the new Ertiga is expected to crack open a new segment for the company.
47
9 April 2012
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
(` ) 380,000 330,000 280,000 230,000 180,000 130,000 80,000 30,000 3QFY07 1QFY08 1QFY10 1QFY12 3QFY12 1QFY07 3QFY08 1QFY09 3QFY10 1QFY11 3QFY11 3QFY09 (`) 340,000 320,000 300,000 280,000 6.0 260,000 240,000 220,000 200,000 FY13e FY10 FY11 FY12e FY14e
(%) 15.0 10.0 5.0 0.0 (5.0) (10.0) FY11 FY12e FY14e FY08 FY10 FY09 FY13e
(%) 12.0 10.0 8.0
4.0 2.0 0.0 FY08 FY09
Realisation / unit
Realisation / unit
yoy change (RHS)
Fig 11 Contribution trend: big jump in FY13

(`) 78,000 68,000 58,000 48,000 38,000 28,000 18,000 8,000 1QFY08 1QFY09 1QFY10 1QFY11 3QFY11 1QFY12 3QFY12 1QFY07 3QFY07 3QFY08 3QFY09 3QFY10 60,000 55,000 75,000 70,000 65,000 (`) 80,000
Contribution / unit
Contribution / unit
yoy change (RHS)
48
9 April 2012
Fig 12 . EBITDA / vehicle

(` ) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 1QFY08 1QFY09 1QFY10 1QFY11 3QFY11 1QFY12 3QFY12 3QFY07 3QFY08 3QFY09 3QFY10 1QFY07 20,000 FY11 FY12e FY14e FY13e FY09 FY08 FY10 25,000 30,000 35,000 (` ) 40,000 30.0 15.0 0.0 (15.0) (30.0) (%)
EBITDA / unit
EBITDA / unit
yoy change (RHS)
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.
Fig 13 Profit per vehicle
(`) 30,000 25,000 20,000 15,000 10,000 5,000 1QFY08 1QFY09 1QFY10 1QFY11 3QFY11 1QFY12 3QFY12 1QFY07 3QFY07 3QFY08 3QFY09 3QFY10 (` ) 25,000 20,000 15,000 10,000 5,000 0 FY11 FY09 FY08 FY10 FY12e FY14e FY13e (%) 50.0 40.0 30.0 20.0 10.0 0.0 (10.0) (20.0) (30.0)
Adj. profit / unit

Adj. profit / unit
yoy change (RHS)
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.
49
9 April 2012
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 Marutis 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.

14
11
2 Jun-05 Sep-07 Jun-08 Sep-10 Mar-06 Dec-06 Mar-09 Dec-09 Jun-11 Mar-12
50
Autos
India I Equities
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 JLRs 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.
Key data
Rating: Hold Target Price: `301 Share Price: `276

TTMT IN / TAMO.BO
`297/ `138 17486 / 5323 US$80.6m `814bn / US$15.9bn 3,174m

Further positive surprises unlikely from JLR. Greater volumes, better cost control and favourable currency movements were the key drivers for JLRs 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 Motors poor performance in its standalone India operations. Raising estimates. We raise our FY13 estimates to factor in better-thanexpected 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.
35.04 8.32 64.96 24.53 14.38 26.05

FY12e
35.05 8.32 64.95 22.24 15.07 27.64

FY13e
34.84 20.26 65.16 23.23 13.77 28.16

FY14e

300 250 200 150 100 Aug-11
16.0 36.5 29.8 -
18.2 31.5 30.9 7.6
18.0 27.1 31.4 -
TTMT Sensex
Dec-11
Jun-11
Feb-12
Apr-11
Source: Bloomberg
Sales (`m) Net profit (`m) Consol EPS (`) Growth (%) EV/EBITDA (x) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
925,193 11,791 3.5 -140.9 11.8 77.7 9.6 30.7 10.9 1.1 76.7
1,231,333 90,426 27.2 666.9 6.0 10.1 4.6 48.1 24.6 1.4 64.2
1,635,313 113,863 34.3 25.9 4.4 8.0 3.1 38.0 24.2 1.5 56.8
1,893,064 131,881 39.7 15.8 3.7 6.9 2.2 33.2 24.5 1.6 49.6
2,148,851 147,647 44.4 12.0 3.0 6.2 1.7 28.1 24.4 1.8 42.9
Rohan Korde
Nirav Bhatt
Apr-12
Oct-11
9 April 2012
Tata Motors Further positive surprises unlikely; Hold


Net revenues 925,193 1,231,333 1,635,313 1,893,064 2,148,851 Revenue growth (%) 30.4 33.1 32.8 15.8 13.5 - Op. expenses 838,051 1,053,533 1,396,362 1,630,610 1,857,585 EBIDTA 87,142 177,800 238,952 262,454 291,266 EBITDA 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 38,961 Effective tax rate (%) 28.6 11.7 22.8 19.2 20.8 Reported PAT 25,711 92,736 107,260 131,881 147,647 Adjusted PAT 11,791 90,426 113,863 131,881 147,647 PAT growth (%) -140.9 666.9 25.9 15.8 12.0 Cons. EPS (`/share) 3.5 27.2 34.3 39.7 44.4 Cons. EPS growth (%) -140.9 666.9 25.9 15.8 12.0
5,706 76,359 82,065 351,924 15,583 449,571 419,292 22,191 -79,345 87,433 449,571 264,490 571 3.2 -67 28.8
6,377 185,338 191,715 327,914 17,104 536,733 470,779 25,443 -68,968 109,479 536,733 218,435 638 1.1 -29 60.1
6,377 277,664 284,041 457,914 17,104 759,059 573,749 50,443 -93,792 228,659 759,059 229,255 638 0.8 -31 89.1
6,377 392,746 399,124 417,914 17,104 834,142 573,297 60,443 -72,622 273,023 834,142 144,891 638 0.4 -31 125.2
6,377 521,729 528,106 397,914 17,104 943,124 599,521 70,443 -61,857 335,018 943,124 62,897 638 0.1 -31 165.6


25,711 43,853 69,564 63,826 5,737 77,835 -72,098 10,051 7,540 2,185 9,617 -128,260 46,219 41,213 87,433
92,736 56,180 148,916 -22,443 171,359 92,892 78,467 14,908 32,350 -24,010 3,251 46,602 22,046 87,433 109,479
107,260 70,371 177,632 -1,724 179,355 160,000 19,355 14,934 -596 130,000 25,000 -10,354 119,180 109,479 228,659
131,881 76,990 208,872 -37,708 246,580 60,000 186,580 16,799 -685 -40,000 10,000 74,732 44,364 228,659 273,023
147,647 83,200 230,847 -30,188 261,035 90,000 171,035 18,664 -739 -20,000 10,000 59,637 61,995 273,023 335,018
77.7 9.6 11.8 30.7 10.9 1.1 39.1 4.3 80.6 12.3 1.1 30 25 121 2.1
10.1 4.6 6.0 48.1 24.6 1.4 16.1 1.7 10.2 6.3 0.9 30 20 79 2.3
8.0 3.1 4.4 38.0 24.2 1.5 13.9 1.6 8.2 5.3 0.6 30 18 79 2.1
6.9 2.2 3.7 33.2 24.5 1.6 12.7 1.0 7.1 4.6 0.5 30 18 79 2.3
6.2 1.7 3.0 28.1 24.4 1.8 12.6 0.8 6.3 4.1 0.4 30 18 79 2.3
Fig 5 P/E band

350 300
Fig 6 JLR sales breakdown (9MFY12)

(%) 100
80 13 4 6 30 13 5 9 27 16 10 4 23 16 11 5 22 18 16 5 22 40 20 23 FY08 22 FY09 19 FY10 22 FY11 19 YTD FY12 0 24 24 28 24 19
250 200 150 100 50 0 Mar-06 Mar-09 Sep-07 Sep-10 Dec-06 Dec-09 Mar-12 Jun-05 Jun-08 Jun-11 Tata Motors
50x 45x 40x 35x 30x
60
North America Source: Company
UK
Europe (excl.UK & Russia)
Russia
China
RoW
52
9 April 2012
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 JLRs 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 yoy change (%) Jaguar yoy change (%) Total volume yoy change (%)
146,496 1.5 47,408 -15.9 193,904 -3.4
188,578 28.7 52,993 11.8 241,571 24.6
258,171 36.9 53,128 0.3 311,299 28.9
294,315 14.0 55,784 5.0 350,099 12.5
331,104 12.5 58,574 5.0 389,678 11.3
13.2% 5.0% 11.9%
53
9 April 2012
Fig 8 Jaguar model-wise volume split

(units) 45,000 42,952 -7% 39,921
Fig 9 Land Rover model-wise volume split

(units) 180,000 +31% 150,000 120,000 24,470 90,000 60,000 28,326 18,128 13,045 40,376 9M FY11 33,241 22,076 14,466 33,930 9M FY12 Defender Range Rover Sport Range Rover Range Rover Evoque 134,538 34,663 176,491 32,051 40,727
30,000
25,485
15,000 13,308 4,067 9M FY11 11,706 3,727 9M FY12 30,000 0
XK
Source: Company
XJ
XF
Others
Freelander Discovery
Source: Company
Fig 10 Geographical volume split (9MFY12)

UK 19% North America 19%
Fig 11 9M FY12 yoy volume growth

(%) 100 88 80 60
RoW 18%
China 16%
40 20
36 30 20 2 0 North America
(%) 60 40 20 0 -20 -40 FY11 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY12e FY13e FY14e
Source: Company
Source: Company
Domestic operations sluggish CV growth

Fig 12 Volume growth trend: M&H CVs & goods M&H CVs
(units) 250,000 200,000 150,000 100,000 50,000 0 FY13e FY14e FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e (%) 60 40 20 0 -20 -40 (units) 250,000 200,000 150,000 100,000 50,000 0
TTMT total M&HCVs
yoy growth (RHS)
TTMT Goods M&HCV volume
We expect Tata Motors to slightly lose market share to competition, reporting volume CAGR over FY12-14 slightly lower than the industry.
Europe (excl.UK & Russia)
ROW
Russia
China
yoy growth (RHS)
UK
Russia 5%
Europe (excl. Russia) 23%
54
9 April 2012
Fig 13 Market share: competition to intensify
Over FY12-14, we expect Tata Motors to report more than 5% CAGR in M&H CVs, compared to the sectors ~6.5%
(%) 70 65 60 55 50 45 40 35 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
FY13e
TTMT M&HCV Market share TTMT M&HCV Passenger Market share

TTMT Goods M&HCV Market share
Fig 14 Volume growth trend and market share: LCVs

(units) 450,000 360,000 270,000 180,000 90,000 0 FY13e FY14e FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e (%) 60 45 70 30 65 15 0 -15 60 55 50 FY14e FY12e FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 80 75
TTMT LCV volume
yoy growth (RHS)
TTMT LCV Market share
TTMT goods LCV Market share
We expect Tata Motors to report lower-than-industry CAGR over FY1214 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.
55
9 April 2012
Fig 15 UV volumes to improve on new launches and PC volumes to be steady

(units) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 FY12e FY13e FY14e FY05 FY06 FY07 FY08 FY09 FY10 FY11 (%) 31 23 15 7 -1 -9 -17 -25 70,000 0 FY12e FY13e FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY14e -5 -15 210,000 140,000 15 5 (units) 350,000 280,000 (%) 35 25
TTMT UV volumes
yoy growth (RHS)
TTMT PC volumes
yoy growth (RHS)
The market share position is significantly weaker in the passenger car segment and its products are generally at a discount to competition. The companys 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. Over FY12-14, we expect Tata Motors to report 9% CAGR in UVs, compared to the sectors 10.1%
Fig 16 Market share trend: overall UVs and PCs
(%) 25 22 19 16 13 10 7 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
TTMT UV Market share
TTMT PC Market share
56
9 April 2012
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 companys 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 companys 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)
(/unit) 44,000 42,000 40,000 38,000 36,000 34,000 32,000 30,000 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12
10,000 0 FY10 FY11 FY14e FY12e FY13e 5 0 40,000 30,000 20,000 20 15 10 (/unit) 50,000 (%) 25
Shoring up cash to reduce cash-flow uncertainty to finance capex plans. The overhang of pensions continues
Realisation / unit
Realisation / unit
yoy change (RHS)
Fig 18 EBITDA/vehicle for JLR (Indian GAAP)

(/unit) 10,000 8,000 6,000 4,000 2,000
2,000 -400 6,000 100 (/unit) 8,000 (%) 350
4,000
-150
0 -2,000 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12
0 FY11 FY13e FY10 FY12e FY14e -650
EBITDA / unit
EBITDA / unit
yoy change (RHS)
57
9 April 2012
Fig 19 Profit/vehicle for JLR (Indian GAAP)

(/unit) 5,000 4,000 3,000 2,000 1,000 0 -1,000 -2,000 4QFY10 1QFY11 2QFY11 3QFY11 2QFY12 1QFY10 2QFY10 3QFY10 4QFY11 1QFY12 3QFY12 (/unit) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 -500 FY12e FY14e FY10 FY11 FY13e -3,000 -4,000 -5,000 -6,000 (%) 1,000 0 -1,000 -2,000
Adj. profit / unit
Adj. profit / unit
yoy change (RHS)
Fig 20 Standalone realization trend slow improvement

(`/unit) 590,000 510,000 430,000 350,000 270,000 190,000 110,000 30,000 2QFY11 1QFY12 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 3QFY11 4QFY11 2QFY12 3QFY12 4QFY12e 0 FY10 FY11 FY13e FY12e FY14e -1 630,000 540,000 450,000 360,000 270,000 180,000 90,000 2 5 8 (` /unit) (%) 11
Realisation / unit
Realisation / unit
yoy change (%)
Fig 21 Standalone contribution trend to be weaker in FY13

(`/unit) 180,000 150,000 120,000 90,000 60,000 30,000 0 1QFY10 4QFY10 1QFY11 3QFY11 2QFY12 2QFY11 1QFY12 2QFY10 3QFY10 4QFY11 3QFY12 4QFY12e (`/unit) 180,000 2 150,000 0 120,000 90,000 60,000 30,000 0 FY11 FY10 FY12e FY14e FY13e -2 -4 -6 -8 (%) 4
Contribution / unit
Contribution / unit
yoy change (%)
58
9 April 2012
Fig 22 . Standalone EBITDA/vehicle

(`/unit) 84,000 74,000 64,000 54,000 44,000 34,000 24,000 14,000 4,000 1QFY10 2QFY10 2QFY11 3QFY11 2QFY12 3QFY12 4QFY10 1QFY11 1QFY12 3QFY10 4QFY11 4QFY12e 10,000 0 FY10 FY12e FY14e FY11 FY13e (`/unit) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 -18 -24 -30 (%) 6 0 -6 -12
EBITDA / unit
EBITDA / unit
yoy change (%)
Fig 23 Standalone profit per unit declines over FY11-14

(`/unit) 30,000 25,000 20,000 15,000 15,000 10,000 5,000 0 1QFY11 1QFY10 2QFY10 2QFY11 3QFY11 2QFY12 3QFY12 4QFY10 1QFY12 3QFY10 4QFY11 4QFY12e 10,000 5,000 0 FY11 FY13e FY10 FY12e FY14e (`/unit) 25,000 20,000 (%) 6 0 -6 -12 -18 -24 -30 -36 -42
Adj. profit / unit
Adj. profit / unit
yoy change (%)
59
9 April 2012
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.
60
Autos
India I Equities
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.
Key data
Rating: Hold Target Price: `50 Share Price: `41

TVSL IN / TVSM.BO
`70/ `37 17486 / 5323 US$2.7m `19.7bn / US$385m 475m

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.
59.31 0.00 40.69 4.68 16.32 19.69

FY12e
59.31 0.00 40.69 4.67 16.48 19.54

FY13e
59.31 0.00 40.69 3.46 14.66 22.57

FY14e

70 60 50 40 30 Aug-11 Sensex
-4.5 -9.1 -2.6 -
-9.8 -13.4 -11.6 8.8
-12.9 -15.1 -16.0 -
TVSL
Dec-11
Jun-11
Feb-12
Apr-11
Source: Bloomberg
44,310 1,294 2.7 294.0 3.3 15.0 1.1 15.0 12.4 2.9 63.5
62,874 1,973 4.2 52.4 4.4 9.9 1.9 19.7 19.3 2.7 63.6
72,221 2,453 5.2 24.4 3.8 7.9 1.7 20.8 18.7 3.4 62.9
78,490 2,730 5.7 11.3 3.1 7.1 1.4 19.9 19.6 4.1 59.6
85,745 3,113 6.6 14.0 2.5 6.3 1.2 19.6 20.5 4.9 57.0
Rohan Korde
Nirav Bhatt
Apr-12
Oct-11
9 April 2012
TVS Motors Competitive pressures to continue; valuations inexpensive; Hold


44,310 18.9 40,895 3,416 7.8 628 1,640 74 461 -118 -15.6 880 1,294 294.0 2.7 294.0
62,874 41.6 58,168 4,706 7.6 470 1,709 -12 34 535 21.6 1,946 1,973 52.4 4.2 52.4
72,221 14.6 67,061 5,160 7.3 459 1,474 44 0 818 25.0 2,453 2,453 24.4 5.2 24.4
78,490 8.6 72,647 5,844 7.6 487 1,663 46 0 1,010 27.0 2,730 2,730 11.3 5.7 11.3
85,745 9.2 79,146 6,599 7.9 487 1,836 48 0 1,211 28.0 3,113 3,113 14.0 6.6 14.0
238 8,416 8,653 10,033 846 19,532 9,828 7,393 1,301 1,010 19,532 9,023 238 1.0 -13 36
475 9,519 9,994 7,854 957 18,805 9,950 6,611 2,184 60 18,805 7,794 475 0.8 -5 21
475 11,307 11,782 8,854 957 21,593 10,794 8,611 2,080 107 21,593 8,747 475 0.7 -5 25
475 13,229 13,704 8,854 957 23,515 11,513 9,611 1,997 394 23,515 8,461 475 0.6 -5 29
475 15,392 15,867 8,854 957 25,678 11,635 11,611 1,900 530 25,678 8,324 475 0.5 -5 33


880 1,640 2,520 -1,057 3,577 -487 4,064 -285 3 973 -2,616 7,351 590 421 1,010
1,946 1,709 3,655 883 2,772 -1,195 3,967 -523 4 -2,179 781 2,484 -950 1,010 60
2,453 1,474 3,927 -104 4,031 -2,000 6,031 -665 5 1,000 -2,000 9,654 47 60 107
2,730 1,663 4,393 -83 4,476 -2,000 6,476 -808 5 0 -1,000 8,002 287 107 394
3,113 1,836 4,949 -97 5,045 -1,500 6,545 -950 5 0 -2,000 9,364 137 394 530
15.0 1.1 3.3 15.0 12.4 2.9 37.3 1.2 16.0 4.2 0.3 24.2 18.4 55.8 4.5
9.9 1.9 4.4 19.7 19.3 2.7 30.9 0.8 9.8 6.4 0.3 31.2 16.0 52.3 6.6
7.9 1.7 3.8 20.8 18.7 3.4 31.2 0.8 8.1 5.4 0.3 25.0 24.0 54.0 7.2
7.1 1.4 3.1 19.9 19.6 4.1 34.0 0.6 7.3 4.9 0.2 25.0 24.0 54.0 7.0
6.3 1.2 2.5 19.6 20.5 4.9 35.1 0.6 6.4 4.3 0.2 25.0 24.0 54.0 7.4
Fig 5 P/E band

120 18x 15x 80 12x TVS Motors 40 9x 6x 3x
Fig 6 Product-wise volume split

(%) 100 80 60 40 20 0 FY08 FY09 FY10 FY11 FY12e FY13e 37.3 36.8 36.9 0.0 20.2 0.3 19.3 1.0 20.2 1.9 22.8 1.8 24.1 1.9 24.1 1.9 24.4
47.8
47.9
41.6
40.8
38.4
37.3
36.7
32.0
32.5
34.5
35.8
0 Dec-06 Dec-09 Sep-10 Jun-11 Sep-07 Mar-06 Mar-09 Mar-12 Jun-05 Jun-08
Mopeds
Motorcycles
Scooters (inclusive of electric 2-wheelers)
3 wheelers
FY14e
62
9 April 2012
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
(units) 3,000,000 2,500,000 2,000,000 (%) 40 30 20 10 0 -10 -20 FY12e FY13e FY14e FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
We expect TVS two-wheeler volumes to register a weak 5.2% volume CAGR over FY12-14, compared to the industrys 11.2%
1,500,000 1,000,000 500,000 0
TVS 2wh volume

yoy growth (RHS)
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 industrys 10.2%.
Fig 8 Market share trend: two-wheelers and motorcycles
(%) 23 20 17 14 11 8 5 FY12e FY13e FY14e FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
TVS 2wh Market share

TVS mc Market share
63
9 April 2012
Fig 9 Volume-growth trend: scooters
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.
(units) 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 FY12e FY13e FY14e FY08 FY09 FY10 FY11
(%) 60 50 40 30 20 10 0 -10
TVS scooters
yoy growth (RHS)
Fig 10 Market-share trend in scooters
With Honda recording strong growth, TVS could see some market share loss.
(%) 30
25
20
15 FY12e FY13e FY14e FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
TVS' scooters Market share

64
9 April 2012
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
(`/unit) 34,000 32,000 32,000 30,000 7 28,000 26,000 24,000 22,000 20,000 1QFY09 1QFY11 3QFY11 1QFY07 3QFY07 1QFY12 3QFY12 1QFY08 3QFY08 1QFY10 3QFY10 3QFY09 8,000 0 FY08 FY09 FY10 FY11 FY14e (%) 24 18 12 6 0 -6 FY14e FY08 FY09 FY10 FY11 FY12e FY13e FY12e FY13e 24,000 5 16,000 3 1 -1 (`/unit) 40,000 (%) 11 9
Realisation / unit
Realisation / unit
yoy change (RHS)
Fig 12 Contribution trend: sluggish increase

(`/unit) 9,500 8,500 7,500 6,500 5,500 4,500 3QFY09 1QFY10 1QFY11 1QFY12 3QFY12 3QFY10 3QFY11 1QFY07 3QFY07 1QFY08 3QFY08 1QFY09 (`/unit) 10,000 8,000 6,000 4,000 2,000 0
Contribution / unit
Contribution / unit
yoy change (RHS)
65
9 April 2012
Fig 13 EBITDA / vehicle shows very low improvement

(`/unit) 2,500 2,000 1,500 1,000 1,000 500 500 0 1QFY11 1QFY12 3QFY12 3QFY09 1QFY10 3QFY10 3QFY11 1QFY07 3QFY07 1QFY08 3QFY08 1QFY09 0 FY09 FY12e FY13e FY08 FY10 FY11 FY14e (%) 275 225 175 125 75 25 -25 -75 FY09 FY12e FY13e FY08 FY10 FY11 FY14e 0 -50 50 (`/unit) 3,000 2,500 2,000 1,500 (%) 250 200 150 100
EBITDA / unit
EBITDA / unit
yoy change (RHS)
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 14 profit per vehicle growth to be higher than realization growth
(`/unit) 1,400 1,200 1,000 800 600 400 200 0 3QFY09 1QFY10 1QFY11 1QFY12 3QFY12 3QFY10 3QFY11 1QFY07 3QFY07 1QFY08 3QFY08 1QFY09 (`/unit) 1,400 1,200 1,000 800 600 400 200 0
Adj. profit / unit
Adj. profit / unit
yoy change (RHS)
66
9 April 2012
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.

9.5 8.5 7.5 6.5 5.5 4.5 3.5 Dec-09 Sep-10 Jun-08 Jun-11 Mar-09 Mar-12
67
Autos
India I Equities
Initiating Coverage
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.
Rating: Buy Target Price: `2,601

Share Price: `1,983
Key data
EIM IN / EICH.BO
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 sectors ~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.
CY09 CY10 CY11 CY12e CY13e
`2,260 / `1,038 17486 / 5323 US$1m `57.4bn / US$1.0bn 27m
55.21 44.79 6.18 18.42 20.19
55.23 44.77 5.96 17.36 21.45
55.26 44.74 6.64 16.52 21.58

2,200 2,000 1,800 1,600 1,400 1,200 1,000 Aug-11 Dec-11 Jun-11 Feb-12 Apr-11 Apr-12 Oct-11 Sensex EIM
Source: Bloomberg
Key financials (YE: Dec)
Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
29,582 834 30.6 258.7 63.5 5.0 7.8 11.0 0.4 -23.7
44,213 1,889 69.3 126.5 28.3 4.3 15.3 21.0 0.6 -15.4
57,160 3,088 113.3 63.4 17.3 3.6 20.7 27.3 0.8 3.7
64,715 3,538 129.8 14.6 15.1 2.7 17.7 26.2 0.9 -8.5
75,964 4,217 154.8 19.2 12.7 2.1 16.2 25.7 1.0 -6.5
Nirav Bhatt
Rohan Korde
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 Revenue growth (%) - Op. expenses EBIDTA EBITDA margins (%) - Interest - Depreciation + Other income - Extraordinaries /others - Tax Effective tax rate (%) Reported PAT Rep. PAT after MI Adjusted PAT PAT growth (%) Adj. FDEPS (`/share)
29,582 71.2 27,942 1,640 5.5 87 539 858 0 578 30.9 1,295 834 834 258.7 30.6
44,213 49.5 40,402 3,811 8.6 95 573 1,034 0 1,108 26.5 3,069 1,889 1,889 126.5 69.3
57,160 29.3 51,225 5,935 10.4 77 640 1,383 0 1,628 24.7 4,974 3,088 3,088 63.4 113.3
64,715 13.2 57,754 6,961 10.8 77 742 1,521 0 2,029 26.5 5,634 3,538 3,538 14.6 129.8
75,964 17.4 67,628 8,336 11.0 77 861 1,674 0 2,395 26.4 6,676 4,217 4,217 19.2 154.8
Share capital Reserves & surplus Net worth Minority interest Total debt Def. tax liab. (net) Capital employed Net fixed assets Investments Net working capital Cash and bank balance Capital deployed No. of shares (m) Net debt/equity WC days Book value (`/sh)
267 10,424 10,690 1,264 5,888 17,842 3,758 2,941 -563 11,707 17,842 272 -13,384 -1.3 -3
269 12,052 12,321 956 7,023 20,301 4,547 4,586 -1,289 12,457 20,301 27 -1.3 -1 457
270 14,661 14,931 504 9,021 24,456 9,173 5,126 -1,815 11,973 24,456 27 -1.1 -7 553
270 19,742 20,012 504 9,021 29,537 8,302 5,126 352 15,757 29,537 27 -1.0 0 741
270 25,809 26,079 504 9,021 35,604 11,441 5,626 1,439 17,097 35,604 27 -0.9 0 966


1,295 539 1,834 -2,100 3,934 487 3,448 187 -154 -392 -2,879 6,204 -611 12,318 11,707
3,069 573 3,642 -297 3,939 1,363 2,576 296 143 -307 -1,645 3,010 750 11,707 12,457
4,974 640 5,614 -420 6,033 5,265 768 432 1 -453 -540 909 -484 12,457 11,972
5,634 742 6,376 2,167 4,210 -128 4,338 475 0 0 0 79 3,784 11,973 15,757
6,676 861 7,538 1,087 6,450 4,000 2,450 523 0 0 -500 1,087 1,340 15,757 17,097
P/E (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Dividend yield Dividend payout (%) Debt to equity (%) Core P/E (x) Cash P/E EV/sales Inventory days Receivables days Payables days Fixed Asset T/O
63.5 5.0 7.1 7.8 11.0 0.4 26.2 0.1 n.m 28.9 0.4 27.2 28.9 59.1 4.0
28.3 4.3 9.8 15.3 21.0 0.6 18.3 0.1 63.2 14.7 0.8 27.1 21.7 50.1 5.4
17.3 3.6 6.2 20.7 27.3 0.8 16.3 0.0 31.7 9.5 0.7 27.5 22.1 56.9 5.7
15.1 2.7 4.8 17.7 26.2 0.9 15.7 0.0 26.8 8.4 0.5 27.5 22.1 50.0 4.6
12.7 2.1 3.8 16.2 25.7 1.0 14.4 0.0 21.2 7.1 0.4 27.5 22.1 50.0 4.2
Fig 5 P/E band

2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Sep-08 Sep-09 Sep-10 Sep-11 Jun-08 Mar-09 Jun-09 Mar-10 Jun-10 Mar-11 Jun-11 Dec-08 Dec-09 Dec-10 Dec-11 Mar-12 Eicher Motors 15.5x 14x 12.5x 11x 9.5x 8x
Fig 6 CY11 PAT breakdown
Standalone 40%
Subsidiary 60%
Source: Company
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9 April 2012

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 marketshare 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 twothirds of Ashok Leylands network. Other catalysts that are likely to drive Eichers 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 Caf Racer announced at the Auto Expo FY12. With the addition of 24 fullfledged 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 Leylands network
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Valuation With Eichers 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.
Mar13 838 15 973 12 1,811 790 2,601
Fig 7 Sum-of-parts valuation

` Value of motorcycle business Multiple (x) Value of CV business Multiple (x) Value Cash per share Target price (`)

6 5 4 3 2 1 0 Mar-10 Mar-11 Nov-09 Nov-10 Nov-11 Mar-12 Jul-10 Jul-11
Source: Bloomberg, Anand Rathi Research\
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9 April 2012
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-Feb12 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. Eichers ytd volume growth of over 23% in Apr-Feb12 (more than the CV sectors 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 FiveYear 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 NorthSouth 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

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
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.
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9 April 2012
Synergies from the Volvo merger, a further positive Eichers previous foray into HCVs wasnt 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 ytd FY11 Apr-Feb ytd FY12 Change yoy (bps) Change from FY11 (bps)
Tata Motors Ashok Leyland Eicher Others
63.3 23.7 8.6 4.4
59.5 26.5 9.0 5.0
59.6 26.3 9.1 5.0
59.3 24.3 10.1 6.2
(22.4) (199.4) 107.0 114.8
(17.5) (214.9) 113.1 119.3
Fig 10 Volume growth trend: M&H CVs

(units) 60,000 50,000 40,000 30,000 20,000 10,000 CY12e CY13e CY08 CY09 CY10 CY11 CY14e (%) 75.0 60.0 45.0 30.0 15.0 0.0
Fig 11 Market share trend: M&H CVs & Goods M&H CVs
(%) 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 CY08 CY14e CY12e CY13e CY09 CY10 CY11
EICHER total M&HCVs

yoy growth (RHS)
EICHER M&HCV Market share

EICHER Goods M&HCV Market share
We estimate Eichers M&H CV volume CAGR at 12.5%, double that of the industrys 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%.
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Fig 12 Volume growth trend: LCVs

(units) 18,000 15,000 12,000 9,000 6,000 3,000 0 CY12e CY13e CY08 CY14e CY09 CY10 CY11 25.0 15.0 5.0 (%) 55.0 45.0 35.0
Fig 13 Volume growth trend: two wheelers

(units) 120,000 100,000 80,000 60,000 40,000 20,000 CY13e CY10 CY14e CY13e CY14e CY11 CY12e CY08 CY09 (%) 50.0 40.0 30.0 20.0 10.0 0.0
EICHER LCV volume

yoy growth (RHS)
EICHER Two wheeler volume

yoy growth (RHS)
Fig 14 Monthly overall volume growth

(Units) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Feb-09 May-09 May-10 Feb-11 May-11 Nov-09 Nov-10 Aug-10 Aug-11 Nov-11 Aug-09 Feb-12 Feb-10 (%) 275.0 225.0 175.0 125.0 75.0 25.0 -25.0 -75.0
Fig 15 Yearly overall volume growth

(Units) 250,000 200,000 150,000 100,000 50,000 0 CY12e CY09 CY08 CY10 CY11 Volume
Volume
Yoy growth (RHS)
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9 April 2012
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 (`)
Present order backlog indicates, Enfield will fall short in meeting its orders till the next two years
Current Classic Desert Storm Classic Chrome Classic 500 Bullet 500 Classic 350 Thunderbird Twinspark Bullet Electra Twinspark Bullet 350 Twinspark Bullet Electra EFI Bullet Electra Deluxe Upcoming Thunderbird 500
500cc 500cc 500cc 500cc 350cc 350cc 350cc 350cc 350cc 350cc 500cc
160,000 170,000 150,000 125,000 110,000 105,000 110,000 100,000 104,000 100,000 TBC
Royal Enfields 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
The companys 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.
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9 April 2012
Increased capacity is coming onstream with expansion and the commissioning of a new plant
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
(Units 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 May-10 May-11 Aug-10 Aug-11 Nov-10 Nov-11 Feb-10 Feb-11 Feb-12 -22.0 (%) 78.0 58.0 38.0 18.0 -2.0
Motorcycle volumes
Source: Company
Yoy growth (RHS)
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9 April 2012
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%.
Fig 18 Trend in realisation/unit

(units) 500,000 (%) 30.0 20.0 450,000 10.0
Fig 19 Trend in contribution/unit

(units) 150,000 130,000 110,000 90,000 (%) 25.0 20.0 15.0 10.0 5.0 0.0 70,000 50,000 CY10 CY12e CY09 CY11 CY13e (5.0) (10.0)
400,000 0.0 350,000 CY10 CY12e CY09 CY11 CY13e (10.0)
Realisation / unit
yoy change (RHS)
Contribution / unit
yoy change (RHS)
Fig 20 Trend in EBITDA/unit

(units) 50,000 49,000 48,000 47,000 46,000 45,000 CY13e CY11 CY12e (%) 16.0 12.0 8.0 4.0 0.0 -4.0
Fig 21 Trend in PAT/unit

(units) 30,000 25,000 20,000 15,000 10,000 5,000 CY13e CY11 CY09 CY10 CY12e (%) 172.0 142.0 112.0 82.0 52.0 22.0 (8.0)
EBITDA / unit
yoy change (RHS)
Adj. profit / unit

yoy change (RHS)
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%.
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9 April 2012
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 The company plans to invest ~`5bn in CVs, ~`3bn in engines and ~`1.5bn on the two-wheeler business till CY15 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 companys 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 4Q CY11 performance was good 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%. EMs standalone business reported lower sales of two wheelers, due to the annual maintenance shutdown, causing the consolidated EBITDA margin to drop.
Fig 22 Trend in quarterly consolidated EBITDA margin
(`m) 1,800 8.8 1,050 7.2 6.8 300 2.8 1 1Q -450 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q -3 4,000 1Q 71.6 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 5.1 5 9.7 8.2 7.6 11.7 9.7 10.4 9.8 9 8,000 74.9 75.0 (%) 13
Fig 23 Trend in quarterly consolidated RM/sales

(`m) 12,000 75.7 75.2 75.1 75.5 74.2 73.4 73.3 72.5 71 75 73.5 73 (%) 77
CY09 EBITDA
CY10 As a % of Sales (RHS)
CY11
CY09 Raw Material

CY10
CY11
As a % of Sales (RHS)
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9 April 2012
Fig 24 Per-unit operating parameters sustain improvement Per-unit realisation

(units) 550,000 500,000 450,000 400,000 350,000 300,000 250,000 200,000 2QCY08 4QCY08 2QCY09 4QCY09 2QCY10 4QCY10 2QCY11 4QCY11 (units) 150,000 130,000 110,000 90,000 70,000 50,000 30,000 10,000 2QCY08 4QCY08
Per-unit contribution
2QCY09
4QCY09
2QCY10
4QCY10
2QCY11
Realisation / unit
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research
Contribution / unit
Per-unit EBITDA
(units) 60,000 45,000 30,000 17,000 15,000 0 (15,000) 2QCY08 4QCY08 2QCY09 4QCY09 2QCY10 4QCY10 2QCY11 4QCY11 12,000 7,000 2,000 2QCY08 4QCY08 (units) 32,000 27,000 22,000
Per-unit PAT
2QCY09
4QCY09
2QCY10
4QCY10
2QCY11
EBITDA / unit
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research
Adj. profit / unit
4QCY11
4QCY11
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9 April 2012
Fig 25 Consolidated Income statement (`m)

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

Sources of funds Share capital Reserves Net worth Net deferred tax Total loans Minority interest Capital employed Application of funds Net fixed assets Capital WIP Total net fixed assets Investments Curr. assets, L & adv. Inventory Sundry debtors Cash & bank balances Loans & advances Others Current liab. & prov. Sundry creditors Other liabilities Provisions Net current assets Application of funds
267 10,424 10,690 142 1,264 5,747 17,842 3,635 122 3,758 2,941 18,121 2,190 2,325 11,707 1,540 360 6,978 4,760 1,256 962 11,144 17,842
269 12,052 12,321 249 956 6,774 20,301 3,844 703 4,547 4,586 20,500 3,265 2,609 12,457 1,814 355 9,332 6,032 1,910 1,391 11,168 20,301
270 14,661 14,931 645 504 8,377 24,456 5,044 4,128 9,173 5,126 23,501 4,280 3,434 11,973 3,391 423 13,343 8,853 2,993 1,497 10,157 24,456
270 19,742 20,012 645 504 8,377 29,537 8,302 0 8,302 5,126 29,403 4,845 3,888 15,757 4,391 523 13,295 8,805 2,993 1,497 16,108 29,537
270 25,809 26,079 645 504 8,377 35,604 11,441 0 11,441 5,626 33,364 5,688 4,565 17,097 5,391 623 14,827 10,337 2,993 1,497 18,537 35,604
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9 April 2012
Fig 27 Cash flow statement (`m)

OP/(Loss) before tax Interest/div. received Depreciation & amort. Direct taxes paid (Inc)/dec in working capital Other items CF from oper. activity Extra-ordinary items Other items CF after EO items (Inc)/dec in FA+CWIP (Pur)/sale of invest. CF from inv. activity Issue of shares Inc/(dec) in debt Interest paid Dividends paid CF from fin. activity Inc/(dec) in cash Add: beginning balance Closing balance
1,102 858 539 -289 2,224 -827 3,606 0 0 3,606 -487 -2,879 -3,365 -154 -392 -87 -219 -852 -611 12,318 11,707
3,238 1,034 573 -1,001 726 -207 4,363 0 0 4,363 -1,363 -1,645 -3,007 143 -307 -95 -346 -605 750 11,707 12,457
5,296 1,383 640 -1,233 527 -260 6,352 0 0 6,352 -5,265 -540 -5,805 1 -453 -77 -502 -1,031 -484 12,457 11,973
6,219 1,521 742 -2,029 -2,167 0 4,286 0 0 4,286 128 0 -3,872 0 0 -77 -554 -631 3,784 11,973 15,757
7,474 1,674 861 -2,395 -1,087 0 6,527 0 0 6,527 -4,000 -500 -4,500 0 0 -77 -609 -686 1,341 15,757 17,097

Basic (`) Current EPS EPS growth (%) Diluted EPS EPS growth (%) Cash EPS Book value per share DPS Payout (incl. div. tax) % Core EPS Valuation (x) P/E Cash P/E EV/EBITDA EV/sales Price to book value Dividend yield (%) Core P/E Turnover ratios Inventory days Debtor days Creditor days Net curent asset days Asset turnover (x) Fixed asset turnover (x) Profitability ratios (%) RoE RoCE Leverage ratio (x) Debt/equity
31.2 277.5 30.6 258.7 68.7 400.5 7.0 26.2 -0.9 63.5 28.9 7.1 0.4 5.0 0.4 n.m. 27.2 28.9 59.1 138.4 1.6 4.0 7.8 11.0 0.1
70.1 124.4 69.3 126.5 135.2 457.4 11.0 18.3 69.3 28.3 14.7 9.8 0.8 4.3 0.6 28.6 27.1 21.7 50.1 92.7 2.2 5.4 15.3 21.0 0.1
114.4 63.1 113.3 63.4 208.0 553.2 16.0 16.3 113.3 17.3 9.5 6.2 0.7 3.6 0.8 17.5 27.5 22.1 56.9 65.3 2.3 5.7 20.7 27.3 0.0
131.1 14.6 129.8 14.6 236.3 741.5 17.6 15.7 129.8 15.1 8.4 4.8 0.5 2.7 0.9 15.3 27.5 22.1 50.0 91.5 2.2 4.6 17.7 26.2 0.0
156.2 19.2 154.8 19.2 279.3 966.2 19.4 14.4 154.8 12.7 7.1 3.8 0.4 2.1 1.0 12.8 27.5 22.1 50.0 89.7 2.1 4.2 16.2 25.7 0.0
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9 April 2012
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. Manufacturing facilities at Pithampur and Chennai 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. Eichers 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 Eichers 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.
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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 12ton category. The company is further strengthening its position in the 16ton 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 groups decision to make VECVs 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 groups global requirement of Euro-3, Euro-4 and Euro-5 engines and the Euro-6 base engines, as well as VECVs engine requirements for Eichers heavyduty commercial vehicles.
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Autos
India I Equities
Initiating Coverage
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 agrimechanisation 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.
Key data
Rating: Buy Target Price: `585 Share Price: `454

VST IN / VST.BO
`580 / `405 17486 / 5323 US$0.04m `4.03bn / US$79m 8.6m
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 governments rural focus. Easily available loans, benefits from the governments 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 freecash-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.
53.85 46.15 3.88 4.69 37.58
53.91 46.09 3.90 4.55 37.64
53.91 46.09 3.67 4.36 38.06

600 VSTT 500 400 Sensex 300 Aug-11 Dec-11 Jun-11 Feb-12 Apr-11 Apr-12 Oct-11
Source: Bloomberg Key financials (YE Mar)
Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
3,445 422 48.9 46.3 9.3 3.1 33.3 44.9 1.7 14.3
4,253 462 53.5 9.3 8.5 2.4 28.2 40.6 2.0 13.5
5,277 512 59.2 10.8 7.7 1.9 24.9 34.2 2.2 21.9
6,425 633 73.2 23.6 6.2 1.5 24.6 34.2 2.4 20.3
7,516 747 86.5 18.1 5.2 1.2 23.3 32.9 2.6 16.5
Nirav Bhatt
Rohan Korde
9 April 2012
VST Tillers Well-placed to benefit from steady rural economic growth; Buy


Net revenues Revenue growth (%) - Op. expenses EBIDTA EBITDA margin (%) - Interest expenses - Depreciation + Other income - Tax Effective tax rate (%) Reported PAT Adjusted PAT +/- Minority interest Adjusted PAT growth Adj. FDEPS (`/share) Adj. FDEPS growth (%)
3,445 25.7 2,823 622 18.1 7 26 28 195 31.6 423 422 n.a 46.3 48.9 46.3
4,253 23.4 3,573 681 16.0 7 23 60 249 35.0 462 462 n.a 9.3 53.5 9.3
5,277 24.1 4,552 725 13.7 9 38 75 241 32.0 512 512 n.a 10.8 59.2 10.8
6,425 21.7 5,512 913 14.2 11 50 78 298 32.0 633 633 n.a 23.6 73.2 23.6
7,516 17.0 6,423 1,093 14.5 11 65 82 352 32.0 747 747 n.a 18.1 86.5 18.1
86 1,182 1,269 108 13 1,390 528 44 669 150 1,390 -85 8.6 -3.3 90 147
86 1,554 1,640 99 28 1,768 563 368 629 208 1,767 -476 8.6 -6.6 69 190
86 1,965 2,052 149 28 2,229 724 518 949 37 2,229 -406 8.6 5.5 74 237
86 2,488 2,574 149 28 2,751 1,025 518 1,156 52 2,751 -421 8.6 3.8 74 298
86 3,114 3,201 149 28 3,378 1,360 518 1,350 150 3,378 -519 8.6 0.0 74 370


423 26 449 300 149 167 -18 65 29 37 -6 27 -37 187 150
462 23 485 -30 514 58 457 78 0 -9 325 -12 57 150 208
512 38 550 242 308 200 108 86 0 50 150 92 -171 208 37
633 50 682 207 475 350 125 95 0 50 0 65 15 37 52
747 65 812 193 619 400 219 104 0 -100 0 -83 98 52 150
P/E (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Dividend yield Dividend payout (%) Debt to equity (%) Core P/E (x) Cash P/E EV/sales Inventory days Receivables days Payables days Fixed asset T/O
9.3 3.1 6.2 33.3 44.9 1.7 15.3 0.1 9.9 8.7 1.1 47 71 28 2.5
8.5 2.4 5.1 28.2 40.6 2.0 16.8 0.1 9.8 8.1 0.8 47 53 32 2.4
7.7 1.9 4.8 24.9 34.2 2.2 16.9 0.1 9.0 7.1 0.7 47 58 31 2.4
6.2 1.5 3.8 24.6 34.2 2.4 15.0 0.1 7.1 5.7 0.5 47 58 31 2.3
5.2 1.2 3.1 23.3 32.9 2.6 13.9 0.0 5.9 4.8 0.5 47 58 31 2.2
Fig 5 P/E band

900 11x 750 9x 600 7x 450 5x 300 3x 150 VST Tillers 0 Mar-10 Mar-08 Nov-08 Nov-10 Mar-12 Jul-07 Jul-09 Jul-11 1x
Fig 6 Volume Split

(%) 100 80 60 40 62.4 20 0 FY08 FY09 FY10 FY11 FY12e FY13e FY14e Others 65.0 61.5 62.8 58.9 56.7 55.4 12.6 6.5 0.5 17.9 9.6 4.9 2.4 18.1 9.4 1.8 3.7 23.5 9.2 2.1 1.3 24.6 8.6 2.6 1.1 28.8 8.1 2.8 1.0 31.4 8.0 2.9 0.9 32.8
Power Tillers
Tractors
Rice transplanters
Precision components
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9 April 2012

We expect VST Tillers to continue to benefit from the steady growth in the rural economy and the robust growth in low ticket agrimechanization 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 & Mahindras 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 threeyear 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
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Fig 7 - EV/EBITDA band

8
0 Jun-08 Dec-08 Sep-08 Jun-09 Dec-09 Sep-09 Jun-10 Dec-10 Mar-09 Sep-10 Dec-11 Mar-10 Jun-11 Sep-11 Mar-11 Mar-12
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Niche, Affordable Agri Products

VST has little competition in tractors (mainly from Mahindra & Mahindras 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 VSTs 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&Ms 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
(units) 35,000 30,000 25,000 20,000 15,000 38.0% 34.0% 30.0% 26.0% 22.0% 18.0% 14.0% 10.0% FY08 FY09 FY10 FY11 FY12e FY13e FY14e
Most of VSTs products are priced below `250,000, and are thus within the government subsidy programme
10,000 5,000 0
Sales
Volume growth (RHS)
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 VSTs products are priced below `250,000, and thus fall within the government subsidy programme. This makes VSTs 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 governments stance on encouraging agriculture, low
Anand Rathi Research 88
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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.
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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 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 Indian Council of Agricultural Research (ICAR) confirms that the average size of Indias 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. ICARs 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.
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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
9 April 2012
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, productivityawareness 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.
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Capacity expansion to add reach

VST is expanding its tractor production capacity three times by endCY12. 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, 33,000 engines and 5,000 tractors. 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.
Fig 9 Realization trend to get better on an improving mix
(units) 160,000 155,000 150,000 145,000 130,000 140,000 1QFY11 3QFY11 1QFY12 3QFY12 2QFY11 4QFY11 2QFY12 120,000 FY12e FY11 FY13e FY08 FY09 FY10 FY14e 0.0 (2.0) (units) 170,000 160,000 150,000 140,000 (%) 8.0 6.0 4.0 2.0
Realisation / unit
Realisation / unit
yoy change (RHS)
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Fig 10 Contribution trend input cost pressure being felt

(units) 78,000 68,000 58,000 48,000 38,000 28,000 18,000 8,000 2QFY11 3QFY12 4QFY11 1QFY11 3QFY11 1QFY12 2QFY12 48,000 46,000 44,000 42,000 FY12e FY14e (%) 40.0 30.0 20.0 10.0 0.0 (10.0) (20.0) FY11 FY12e FY14e FY08 FY10 FY09 FY13e FY09 FY13e FY08 FY10 FY11 0.0 (3.0) (6.0) (9.0) (units) 54,000 52,000 50,000 (%) 9.0 6.0 3.0
Contribution / unit
Contribution / unit
yoy change (RHS)
Fig 11 ..resulting in weak EBITDA per vehicle in the short term

(units) 29,000 24,000 19,000 14,000 9,000 5,000 4,000 2QFY11 3QFY12 4QFY11 1QFY11 3QFY11 1QFY12 2QFY12 0 (units) 30,000 25,000 20,000 15,000 10,000
EBITDA / unit
EBITDA / unit
yoy change (RHS)
We expect VST to register 3.0% realization CAGR over FY12-14, but higher 5.9% CAGR in EBITDA per vehicle. We expect PAT/vehicle CAGR at 4.3%.
Fig 12 Profit per unit: improvement in FY13
(units) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 2QFY11 3QFY12 4QFY11 1QFY11 3QFY11 1QFY12 2QFY12 (units) 21,000 18,000 15,000 12,000 9,000 6,000 3,000 0 FY11 FY12e FY14e FY13e FY09 FY08 FY10 (%) 50.0 40.0 30.0 20.0 10.0 0.0 (10.0) (20.0)
Adj. profit / unit

Adj. profit / unit
yoy change (RHS)
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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
(`) 500 400 300 200
We expect 19.4% revenue CAGR, 20.8% profit CAGR and a steady EBITDA margin of ~14%
100 0 -100 FY12e FY13e FY08 FY09 FY10 FY11
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.
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Total income Expenditure Raw material Employee cost Other mfg. expenses Selling & distribution EBITDA Change (%) % of net sales Depreciation EBIT Interest & fin. charges Other income PBT before extraordinaries PBT Tax Effective rate (%) Rep. PAT (after. EO) Change (%) Adj. PAT Change (%) % of net sales
3,445 2,823 2,257 207 56 303 622 45.9 18.1 26 596 7 28 617 618 195 31.5 423 46.4 422 46.3 12.3
4,253 3,573 2,871 251 61 390 681 9.4 16.0 23 658 7 60 710 710 249 35.0 462 9.1 462 9.3 10.9
5,277 4,552 3,751 279 74 448 725 6.6 13.7 38 687 9 75 753 753 241 32.0 512 10.8 512 10.8 9.7
6,425 5,512 4,530 333 103 545 913 25.9 14.2 50 863 11 78 930 930 298 32.0 633 23.6 633 23.6 9.8
7,516 6,423 5,282 383 120 638 1,093 19.7 14.5 65 1,028 11 82 1,099 1,099 352 32.0 747 18.1 747 18.1 9.9

Sources of funds Share capital Reserves Net worth Loans Deferred tax liability Capital employed Application of funds Gross fixed assets Less: depreciation Net fixed assets Capital WIP Investments Curr. assets, L & adv. Inventory Sundry debtors Cash & bank balances Loans & advances Current liab. & prov. Sundry creditors Other liabilities Provisions Net current assets Application of Funds
86 1,182 1,269 108 13 1,390 794 284 511 17 44 1,365 445 674 150 96 546 266 179 101 819 1,390
86 1,554 1,640 99 28 1,768 839 305 535 28 368 1,547 549 622 208 169 711 368 231 112 837 1,767
86 1,965 2,052 149 28 2,229 1,067 343 724 518 1,721 678 837 37 169 735 447 254 34 986 2,229
86 2,488 2,574 149 28 2,751 1,417 393 1,025 518 2,066 826 1,019 52 169 858 545 279 34 1,208 2,751
86 3,114 3,201 149 28 3,378 1,817 457 1,360 518 2,478 966 1,192 150 169 978 637 307 34 1,500 3,378
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Fig 16 Cash flow statement (`m)

OP/(loss) before tax Interest/dividends received Depreciation & amortization Direct taxes paid (Inc)/dec in working capital Other items CF from oper. activity Extra-ordinary items CF after EO items (Inc)/dec in FA+CWIP (Pur)/sale of invest. CF from inv. activity Issue of shares Inc/(dec) in debt Interest rec./(paid) Dividends paid CF from fin. activity Inc/(dec) in cash Add: beginning balance Closing balance
596 28 26 -216 -266 -40 128 1 129 -167 6 -161 29 37 -7 -65 -6 -38 187 150
658 60 23 -234 40 -13 534 0 534 -58 -325 -382 0 -9 -7 -78 -93 58 150 208
687 75 38 -241 -320 -14 225 0 225 -200 -150 -350 0 50 -9 -86 -46 -170 208 37
863 78 50 -298 -207 -15 471 0 471 -350 0 -350 0 0 -11 -95 -106 15 37 52
1,028 82 65 -352 -193 -17 613 0 613 -400 0 -400 0 0 -11 -104 -115 98 52 150

Basic (`) EPS EPS fully diluted Cash EPS EPS growth (%) Book value per share DPS Core EPS Valuation (x) P/E Cash P/E EV/EBITDA EV/sales Price to book value Dividend yield (%) Core P/E Profitability ratios (%) RoE RoCE Turnover ratios Debtors (days) Inventory (days) Creditors (days) Core working capital (days) Asset turnover (x) Leverage ratio (x) Debt/equity
48.9 48.9 51.9 46.3 146.9 7.5 45.7 9.3 8.7 6.2 1.1 3.1 1.7 9.9 33.3 44.9 71 47 28 90 2.5 0.1
53.5 53.5 56.1 9.3 189.9 9.0 46.6 8.5 8.1 5.1 0.8 2.4 2.0 9.8 28.2 40.6 53 47 32 69 2.4 0.1
59.2 59.2 63.6 10.8 237.5 10.0 50.6 7.7 7.1 4.8 0.7 1.9 2.2 9.0 24.9 34.2 58 47 31 74 2.4 0.1
73.2 73.2 79.0 23.6 297.9 11.0 64.2 6.2 5.7 3.8 0.5 1.5 2.4 7.1 24.6 34.2 58 47 31 74 2.3 0.1
86.5 86.5 94.0 18.1 370.5 12.0 77.0 5.2 4.8 3.1 0.5 1.2 2.6 5.9 23.3 32.9 58 47 31 74 2.2 0.0
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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 companys product range includes:
Power tillers
VST-Shakti 130 DI power tillers VST-Shakti VWH 120 power tillers EuroTrac-VST 180D tractors VST-Shakti MT180D tractors with rotary diesel engines VST-Shakti Yanji rice transplanters VST-Shakti K3C engines VST-Shakti 130DI engines VST-Shakti VWH 120 engines 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 dieselengine components and precision custom-made auto-components
Tractors
Paddy transplanters
Engines
Divisions:
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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
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Annexures
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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.
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Annexure 2 Mar 12 key observations

Hyundai Total average Month till date 280 monthly sales units per outlet (all models) Tata Motors (CVs and Cars) Month till date 250-300 units slower Month till date 250 units than ~350-400 it did last year. Footfall growth slow impacting hit (conversion) ratios Maruti Suzuki Bajaj Auto Month till date 750 units (last year 900) Hero Honda Month till date 750 units (last year 7000) M&M Tractors This year the dealers sell ~3035 tractors a month which is slower than ~4045 last year. ~350 will be sold this year April, June, January, August, January February, September, October, December `1,500 discount Around `30,000on buying two 40,000 per bikes and few vehicle is the accessories average discount
Lean Months
April, June, July, August, January
April, June, August, January
Key Cash Discounts
i10: ~`15,000 (includes insurance), i20: ~`5,000, Verna: ~`12,000, Santa Fe: ~`20,000 No significant impact
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
Higher fuel price impact
Demand sentiment gets hit, demand deferral happens
A few accessories 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 Demand deferrals Does dent demand increase sentiment, executive segment and higher engine bikes are less preferred that are purchased with finance
Does impact sentiment
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 Largest Selling i20, i10, Verna, Swift, Dzire, WagonR, Eeco, Alto in ascending Santro Xing, Santa K10, SX4, Alto, Ritz, Estilo, Omni, order Fe, Sonata, Elantra A-star, Maruti 800, Grand Vitara, Gypsy
All models in common All models are readily colours (white, silver, red, available aqua blue, black) readily available in a week
Fuel price hike does impact demand leading to demand deferrals, post budget the hike of ~22,000 due to excise will also be adverse All models are One to two readily available weeks
Other Key comments
Pulsar 150 DTS-i, Discover 100cc, Pulsar 180 DTS-i, Pulsar 135LS, Discover 150cc, Platina 100cc, Pulsar 220 DTS-I, In CVs Ace is doing really Platina 125cc, Avenger well, in Rest of the CVs, 220 DTS-i, Ninja 250R The Prima range as a result of price point is seeing tepid sales, while rest of LCVs, along with tippers are doing well. Mix of diesel- petrol cars remains Response for the new Response for the New Sales break up Pulsar and KTM Duke 200 roughly: 40%:- i20s; more skewed towards Diesel (70:30 Safari Storme and the 30%:- i10s; 15%:- to 75:25) and is expected to remain refreshed Nano is good. is very encouraging. so. Car exchange has generated a Competitive pressures Customers are waiting for Verna and 8%:it to go on sale Santro Xing, rest: - whole new revenue stream for the being felt increasingly dealers and Maruti products gain from Eicher, Ashok Santa Fe, Elantra here on better resale value and Leyland competition intact and Sonata. better terms for both the parties and Bharat Benz is seen as the next threat Indica Vista, Indigo Manza, Nano, Indigo (CS and XL), Tata Aria, Sumo Victa, Safari.
Splendour (all variants), Passion (all variants), Hunk, CBZ extreme, Achiever, Glamour, Karizma, CD Dawn, Impulse, Karizma ZMR, Pleasure 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
Bhoomiputra, Arjun, Yuvraj Yuvraj sales are stronger in the North and in Maharashtra but weak in Gujarat
~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 March12
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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 Large Caps (>US$1bn) Mid/Small Caps (<US$1bn) Buy >20% >30% Hold 5-20% 10-30% Sell <5% <10%
Anand Rathi Research Ratings Distribution (as of 18 February 2012) Buy Anand Rathi Research stock coverage (138) 76% % who are investment banking clients 6%
Hold 12% 6%
Sell 12% 0%
Other Disclosures This report has been issued by Anand Rathi Share & Stock Brokers Limited (ARSSBL), which is regulated by SEBI. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). ARFSL and its affiliates may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. ARSSBL, its affiliates, directors, officers, and employees may have a long or short position in any securities of this issuer(s) or in related investments. ARSSBL or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. This document is intended only for professional investors as defined under the relevant laws of Hong Kong and is not intended for the public in Hong Kong. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. No action has been taken in Hong Kong to permit the distribution of this document. This document is distributed on a confidential basis. This document may not be reproduced in any form or transmitted to any person other than the person to whom it is addressed. If this report is made available in Hong Kong by, or on behalf of, Anand Rathi Financial Services (HK) Limited., it is attributable to Anand Rathi Financial Services (HK) Limited., Unit 1211, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong. Anand Rathi Financial Services (HK) Limited. is regulated by the Hong Kong Securities and Futures Commission. Anand Rathi Financial Services Limited and Anand Rathi Share & Stock Brokers Limited are members of The Stock Exchange, Mumbai, and the National Stock Exchange of India. 2012 Anand Rathi Share & Stock Brokers Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Anand Rathi Financial Services Limited. Additional information on recommended securities/instruments is available on request.

Anand Rathi - India Autos - Valuations No Longer Compelling

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Anand Rathi - India Autos - Valuations No Longer Compelling

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Automobiles

Neutral Sensex: 17486 Nifty: 5323

Neutral Sensex: 17486 Nifty: 5323

Key data FY13

Sell 30 30 1.6 2.5 12.2 6.6 0.7 20.6 15.2

Hold 41 50 0.4 5.7 7.1 3.1 0.2 19.9 19.6

India Autos Valuations no longer compelling

Anand Rathi Research

India Autos Valuations no longer compelling

Investment Argument and Valuation

Excise duty hiked 2% Higher duty on CV chasses Widening of tax slabs

Negative Negative Positive

Anand Rathi Research

India Autos Valuations no longer compelling

Anand Rathi Research

India Autos Valuations no longer compelling

Hero Moto Corp

Anand Rathi Research

India Autos Valuations no longer compelling

Relatively slower volume growth

Total Auto volumes

yoy change (%)

Anand Rathi Research

India Autos Valuations no longer compelling

Fig 4 Quarterly yoy change in four-wheeler volumes

Fig 5 Quarterly yoy change in two-wheeler volumes

Ashok Leyland (S) Maruti Suzuki (S)

Tata Motors (S) Mahindra & Mahindra (S)

Eicher Motors (Sub) Bajaj Auto (S)

TVS Motor (S)

Eicher Motors (S)

Anand Rathi Research

India Autos Valuations no longer compelling

Fig 6 Market share movement

53.3 5.1 15.3 22.0 4.4

52.5 6.1 15.8 20.0 5.5

53.9 5.5 15.4 21.2 4.0

55.4 6.0 13.1 19.5 6.0

52.7 6.1 13.7 19.8 7.7

53.9 6.4 13.1 20.6 6.0

55.8 6.4 12.8 18.4 6.6

190.1 (1.4) (26.7) (217.0) 55.0

303.6 26.6 (87.5) (134.9) (107.7)

58.9 26.6 8.5 5.9

56.7 29.1 9.0 5.2

57.8 26.5 9.6 6.1

63.3 23.7 8.6 4.4

59.5 26.5 9.0 5.0

59.6 26.3 9.1 5.0

59.3 24.3 10.1 6.2

(22.4) (199.4) 107.0 114.8

(17.5) (214.9) 113.1 119.3

57.1 32.5 4.1 1.8 4.5

58.7 30.2 4.9 2.4 3.9

60.0 28.1 4.5 2.1 5.4

58.7 30.0 3.8 2.1 5.3

58.3 31.4 4.2 2.3 3.8

57.6 31.1 5.3 2.2 3.8

58.2 30.5 4.7 2.2 4.5

58.4 (59.1) (64.9) (6.4) 72.0

(9.7) (86.9) 47.0 (19.0) 68.5

30.4 49.5 7.9 4.1 0.5 6.8 0.7

31.7 48.3 7.3 3.6 0.6 7.9 0.6