Auto Sector Report - Cruising Through Barriers

AUTO SECTOR
Cruising through barriers September, 2011

Despite outperformance of the
sector, valuations are still
reasonable
Adequate near term and long term
triggers in place
See more value in four wheelers as
compared to two wheelers
Chirag Shah
Senior Research Analyst
chirag.shah@emkayglobal.com
+91 22 66121252
Siddhartha Bera
Research Associate
siddhartha.bera@emkayglobal.com
+91 22 66242494
Emkay Research 7 September, 2011
Auto Sector
2
Contents
Sector
Synopsis......................................................................................................................................................................... 3
Sector view
We have been overweight on the sector post 3QFY11, despite obvious near term concerns ....................................... 4
Near term concerns are yet to play out fully; 3QFY12 to witness maximum impact ................................................... 6
Near term positives .................................................................................................................................................... 8
Long term view ......................................................................................................................................................... 10
Commercial vehicles ........................................................................................................................................... 10
Tractors .............................................................................................................................................................. 16
Passenger vehicles ............................................................................................................................................. 19
Two wheelers ...................................................................................................................................................... 22
Companies
Ashok Leyland .............................................................................................................................................................. 26
Bajaj Auto ..................................................................................................................................................................... 29
Eicher Motors ............................................................................................................................................................... 32
Hero MotoCorp .............................................................................................................................................................. 35
Mahindra & Mahindra .................................................................................................................................................... 38
Maruti Suzuki India ....................................................................................................................................................... 41
Tata Motors ................................................................................................................................................................... 44
TVS Motor..................................................................................................................................................................... 47
Auto Sector
3
Synopsis
We have been overweight on the automobile sector post 3QFY11 with ~88% of the
stocks having a positive view as compared to only ~43% in the preceding quarter. This
was despite the near term concerns like higher interest rate/inflation, base effect, etc.
Our view was primarily based on (1) Valuations (especially relative valuations), which
were trading at a significant discount due to excessive focus on near term concerns
(2) Strong cash flow generation and high ROIC business (3) Our FY11-FY13E estimates
factoring in the slowdown impact.
Our automobile universe has since then outperformed the broader market indices
significantly with some stocks even posting absolute returns. Despite the strong
relative outperformance, we still find the current valuations reasonable as our analysis
reveals adequate near term positives as well as long term triggers. The near term
positives emerge from (1) High base effect of inflation/interest rate (2) Favorable base
effect for IIP (3) Good monsoon and (4) Easing of raw material cost pressures.
Similarly, our long term analysis reveals ample growth potential across segments,
which are enumerated below..
M&HCVs The positives emerge from (1) High multiplier effect (2) Strong demand
during weak IIP but strong agri GDP (3) Diminishing lag impact of IIP and (4) No
impact of higher fuel prices on demand. Also, availability of finance is more important
than interest rates
Tractors The positives emerge from (1) High multiplier effect (2) Higher farm
income and land prices (3) Increasing reach of formal financing channels (4) Labour
shortage and (5) Industry consolidation
Passenger vehicles The positives emerge from (1) Low penetration levels (income
and geographical) (2) High multiplier effect (3) Significant correlation with wealth
creation & employment and (4) availability of finance rather than interest rates
Two wheelers The positives emerge from (1) Low penetration levels (income and
geographical) (2) Rising rural income vis--vis urban income (3) Low reliance on
finance (stable demand) and (4) Improving multiplier effect (since FY08)
However, we would like to caution that the near term concerns are yet to play out fully
and expect 3QFY12 to witness maximum impact of the same. The impact will be
different across segments. We expect maximum impact on PVs/M&HCVs. The recent
strong outperformance of the stocks can result in a subdued performance of the
sector in the near term. We believe 3QFY12 provides a solid opportunity to re-enter
auto stocks.
We retain our overweight position on the sector. However, from here on, maximum
value is in four wheelers mainly due to upgrade in valuations as well as earnings over
next 4 quarters. From hereon, two wheeler stocks will track earnings/dividend yield
with limited scope for valuation re-rating. Also, we are changing our recommendations.
We have downgraded our rating for two wheeler stocks a notch lower. We downgrade
Bajaj Auto from BUY to ACCUMULATE, Hero Honda from HOLD to REDUCE and TVS
Motor from ACCUMULATE to HOLD. We retain BUY on M&M, Tata Motors and Eicher
Motors. Despite attractive valuations, we retain our ACCUMULATE on Ashok Leyland
and Maruti, due to company specific issues. Key concerns arise from a slump in
economic activity and /or a sharp jump in metal prices.
Auto Sector
4
0%
20%
40%
60%
80%
100%
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
S
e
p
-
1
1
90
100
110
120
130
140
% Positive Outlook Stock Perf. Nifty Perf.
Perf . (Indexed to 100)
Rel to Nifty Index (%)
Company Name 1d 1w 1m 3m 6m 12m
Ashok Leyland 3.3 5.3 11.9 15.3 13.0 -20.8
Bajaj Auto -0.3 3.1 20.4 33.3 29.8 21.0
Eicher Motors -0.3 1.3 4.0 12.3 39.6 19.3
Hero MotoCorp -1.4 7.0 22.7 27.7 50.4 38.1
Mah & Mah -1.4 5.9 23.3 29.8 28.4 38.2
Maruti Suzuki India -1.3 -0.2 -6.3 -3.7 -6.7 -8.5
Tata Motors -1.8 1.8 -13.3 -19.7 -28.0 -20.0
TVS Motor 0.6 7.4 16.8 19.4 22.2 -11.9
We have been overweight on the sector post 3QFY11, despite
obvious near term concerns
As can be seen from the graph below, we have been significantly overweight on the
sector, post 3QFY11 results with positive outlook on 88% of the stocks under our coverage
as compared to 43% in the preceding quarter. This was despite obvious near term
concerns like lower IIP/GDP, higher interest rates/inflation, expected diesel price hike
and the high base effect of the last two years.
Source: Emkay Research
Changing view on the sector, post the result season
Our overweight view on the sector stands vindicated as is reflected by the strong relative
performance of most auto stocks, with select stocks delivering absolute performance
(refer graphs below).
Our view on sector and sector performance
Source: Bloomberg, Emkay Research
Stock performance (relative to nifty)
Our view was based on valuations, especially relative
valuationsthough some catch up has happened since then
Relative valuations were the most important factor for our overweight view on the sector.
Relative valuations of most auto companies were at a discount to that of broader indices
implying that the street was (1) excessively focusing on near term earnings and (2)
ignoring the strong balance sheet and cash flow generation. Since then, the valuation
gap has been bridged to some extent, owing to the recent outperformance of most auto
stocks.
Despite the recent run up, valuations still leave room for
upsides
40%
50%
60%
70%
80%
90%
Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Sep-11
% Reco with Positive Outlook
Our overweight view post 3QFY11
earnings was driven by valuations,
esp. relative valuations
Auto Sector
5
-40%
40%
120%
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
0
5
10
15
20
25
Rel.Stck.Perf. (% LHS) Consensus (PE)
Actual (PE)
PE
-20%
-10%
0%
10%
20%
30%
40%
50%
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
-20%
-10%
0%
10%
20%
30%
40%
50%
Prem/Disc vs Sensex Volumes (RHS)
-50%
0%
50%
100%
150%
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
0
5
10
15
20
25
30
Rel. Stck Perf. (% LHS) Consensus (PE)
Actual(PE)
PE
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
A
p
r
-
0
4
A
p
r
-
0
5
A
p
r
-
0
6
A
p
r
-
0
7
A
p
r
-
0
8
A
p
r
-
0
9
A
p
r
-
1
0
A
p
r
-
1
1
-40%
-20%
0%
20%
40%
60%
Prem/Disc Vs Sensex Volumes(RHS)
-50%
0%
50%
100%
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
0
5
10
15
20
25
Rel.Stck.Perf. (% LHS) Consensus (PE)
Actual (PE)
PE
-40%
-20%
0%
20%
40%
60%
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
-40%
-20%
0%
20%
40%
60%
-50%
0%
50%
100%
150%
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
0
5
10
15
20
25
30
Rel. Stck.Perf . (% LHS) Consensus (PE)
Actual (PE)
PE
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
AL - Volumes and Relative valuation (PE)
AL - Relative perf. and valuations 1 year forward
MSIL - Volumes and Relative valuation (PE)
MSIL- Relative perf and valuations 1 year forward
MM - Volumes and Relative valuation (PE)
MM - Relative perf and valuations 1 year forward
HMCL - Volumes and Relative valuation (PE)
HMCL - Relative perf and valuations 1 year forward
Auto Sector
6
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-80%
-30%
20%
70%
120%
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
-10
0
10
20
30
40
Rel.Stck.Perf.(% LHS) Consensus Actual
PE
TVSL - Volumes and Relative valuation (PE)
TVSL - Relative perf and valuations 1 year forward
Near term concerns are yet to play out fully; 3QFY12 to witness maximum
impact
The impact of slowdown is yet to be fully visible. We expect 3QFY12 to reflect the full
impact of higher interest rate, inflation, etc. The recent outperformance of the stocks can
result in a period of stock underperformance. However, the impact will be diverse across
segments and across players. We expect maximum impact on PV/M&HCVs. We expect
lower impact on two wheelers/UVs/tractors. We believe that 3QFY12 will provide a good
opportunity to re-enter the auto stocks as there are near term as well as long term positives
(discussed separately), which are likely to drive stock performance.
Source: CMIE, Emkay Research
Subdued GDP/IIP growth
Interest rates - at historic highs
PLR (%)
10
11
12
13
14
O
c
t
-
0
2
F
e
b
-
0
3
J
u
n
-
0
3
O
c
t
-
0
3
F
e
b
-
0
4
J
u
n
-
0
4
O
c
t
-
0
4
F
e
b
-
0
5
J
u
n
-
0
5
O
c
t
-
0
5
F
e
b
-
0
6
J
u
n
-
0
6
O
c
t
-
0
6
F
e
b
-
0
7
J
u
n
-
0
7
O
c
t
-
0
7
F
e
b
-
0
8
J
u
n
-
0
8
O
c
t
-
0
8
F
e
b
-
0
9
J
u
n
-
0
9
O
c
t
-
0
9
F
e
b
-
1
0
J
u
n
-
1
0
O
c
t
-
1
0
F
e
b
-
1
1
J
u
n
-
1
1
0%
4%
8%
12%
16%
J
u
n
-
0
0
D
e
c
-
0
0
J
u
n
-
0
1
D
e
c
-
0
1
J
u
n
-
0
2
D
e
c
-
0
2
J
u
n
-
0
3
D
e
c
-
0
3
J
u
n
-
0
4
D
e
c
-
0
4
J
u
n
-
0
5
D
e
c
-
0
5
J
u
n
-
0
6
D
e
c
-
0
6
J
u
n
-
0
7
D
e
c
-
0
7
J
u
n
-
0
8
D
e
c
-
0
8
J
u
n
-
0
9
D
e
c
-
0
9
J
u
n
-
1
0
D
e
c
-
1
0
J
u
n
-
1
1
0%
2%
4%
6%
8%
10%
12%
IIP (% YoY) GDP (% YoY RHS)
Auto Sector
7
(100)
(50)
-
50
100
S
e
p
-
0
2
M
a
r
-
0
3
S
e
p
-
0
3
M
a
r
-
0
4
S
e
p
-
0
4
M
a
r
-
0
5
S
e
p
-
0
5
M
a
r
-
0
6
S
e
p
-
0
6
M
a
r
-
0
7
S
e
p
-
0
7
M
a
r
-
0
8
S
e
p
-
0
8
M
a
r
-
0
9
S
e
p
-
0
9
M
a
r
-
1
0
S
e
p
-
1
0
M
a
r
-
1
1
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Change in PLR (QoQ) Cars (% YoY)
(bps)
-100
-75
-50
-25
0
25
50
75
100
D
e
c
-
0
1
A
p
r
-
0
2
A
u
g
-
0
2
D
e
c
-
0
2
A
p
r
-
0
3
A
u
g
-
0
3
D
e
c
-
0
3
A
p
r
-
0
4
A
u
g
-
0
4
D
e
c
-
0
4
A
p
r
-
0
5
A
u
g
-
0
5
D
e
c
-
0
5
A
p
r
-
0
6
A
u
g
-
0
6
D
e
c
-
0
6
A
p
r
-
0
7
A
u
g
-
0
7
D
e
c
-
0
7
A
p
r
-
0
8
A
u
g
-
0
8
D
e
c
-
0
8
A
p
r
-
0
9
A
u
g
-
0
9
D
e
c
-
0
9
A
p
r
-
1
0
A
u
g
-
1
0
D
e
c
-
1
0
A
p
r
-
1
1
-150%
-100%
-50%
0%
50%
100%
150%
Change in PLR (QoQ) Trucks (% YoY)
(bps)
Source: SIAM, CMIE, Emkay Research
M&HCV Truck demand in rising interest rate scenario
Source: SIAM, Emkay Research
Cyclicality of demand resulting in moderation in growth
As can be seen from the graphs below, increase in interest rates seem to result in slower
demand growth. A pertinent point to note is that a sustained increase in interest rates
generally follows a strong demand environment. The auto industry is inherently cyclical in
the short term, resulting in periods of above average growth and below average growth.
More importantly, higher interest rates have not resulted in decline in demand, except
for 2008 period. The decline in two wheelers during FY07-FY08 was also due to systemic
issues, resulting in sharp fall in penetration of finance.
Car demand in rising interest rate scenario
Two wheeler demand in rising interest rate scenario
-20%
-10%
0%
10%
20%
30%
40%
50%
S
e
p
-
0
2
D
e
c
-
0
2
M
a
r
-
0
3
J
u
n
-
0
3
S
e
p
-
0
3
D
e
c
-
0
3
M
a
r
-
0
4
J
u
n
-
0
4
S
e
p
-
0
4
D
e
c
-
0
4
M
a
r
-
0
5
J
u
n
-
0
5
S
e
p
-
0
5
D
e
c
-
0
5
M
a
r
-
0
6
J
u
n
-
0
6
S
e
p
-
0
6
D
e
c
-
0
6
M
a
r
-
0
7
J
u
n
-
0
7
S
e
p
-
0
7
D
e
c
-
0
7
M
a
r
-
0
8
J
u
n
-
0
8
S
e
p
-
0
8
D
e
c
-
0
8
M
a
r
-
0
9
J
u
n
-
0
9
S
e
p
-
0
9
D
e
c
-
0
9
M
a
r
-
1
0
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
-100%
-50%
0%
50%
100%
150%
Motorcycles PVs M&HCVs (RHS)
-100
-75
-50
-25
0
25
50
75
100
S
e
p
-
0
2
S
e
p
-
0
3
S
e
p
-
0
4
S
e
p
-
0
5
S
e
p
-
0
6
S
e
p
-
0
7
S
e
p
-
0
8
S
e
p
-
0
9
S
e
p
-
1
0
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Change in PLR (QoQ) 2 Wheelers (% YoY)
(bps)
Hi gher i nterest rates resul ts i n
slowdown but not decline in demand
Auto Sector
8
0%
4%
8%
12%
16%
20%
F
e
b
-
0
9
M
a
r
-
0
9
A
p
r
-
0
9
M
a
y
-
0
9
J
u
n
-
0
9
J
u
l
-
0
9
A
u
g
-
0
9
S
e
p
-
0
9
O
c
t
-
0
9
N
o
v
-
0
9
D
e
c
-
0
9
J
a
n
-
1
0
F
e
b
-
1
0
M
a
r
-
1
0
A
p
r
-
1
0
M
a
y
-
1
0
J
u
n
-
1
0
J
u
l
-
1
0
A
u
g
-
1
0
S
e
p
-
1
0
O
c
t
-
1
0
N
o
v
-
1
0
D
e
c
-
1
0
J
a
n
-
1
1
F
e
b
-
1
1
M
a
r
-
1
1
A
p
r
-
1
1
M
a
y
-
1
1
J
u
n
-
1
1
Our FY11-13 estimates factor in above concerns
Our volume estimates across segments factor in the above concerns and are still below
the historical growth rates. What we have not factored in is a drop in demand in case of
a slump in economic activity. Also, between FY12 and FY13, the growth is back ended.
CAGR (% YoY) FY97- FY99- FY01- FY03- FY05- FY07- FY09- FY11-
Domestic FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13E
Cars 1.4 21.6 (2.3) 23.1 14.6 6.4 27.5 10.0
UVs (9.3) 6.1 (3.8) 24.6 11.8 1.2 19.8 11.4
M&HCV trucks (30.5) 0.6 29.3 34.4 19.5 (22.4) 36.1 9.0
M&HCV bus (6.5) 5.0 (10.2) 13.4 5.8 10.2 19.1 8.5
Two wheelers 7.9 4.9 12.8 14.3 12.7 (3.7) 26.0 13.3
Tractors 5.5 (3.0) (18.2) 19.3 17.9 (1.5) 25.8 12.5
GDP 5.5 5.4 4.8 8.0 9.5 8.0 8.3
Agri 1.8 1.2 -0.7 4.9 4.9 3.2 2.8
IIP 5.4 5.8 4.2 9.3 9.9 5.9 9.2
Source: CMIE, SIAM, Emkay Research
Dom. % YoY FY10 FY11 FY12E FY13E
Cars 25.2 29.9 5.0 15.0
UVs 20.8 18.9 8.0 15.0
M&HCV trucks 36.2 36.0 6.0 12.0
M&HCV bus 23.4 15.0 5.0 10.0
Two wheelers 26.2 25.8 12.6 14.0
Tractors 32.2 19.8 11.0 14.0
Near term positives
Base effect of IIP/inflation and good monsoon are the sentimental positives
Over the next two quarters, positive base effect will be the first sentimental positive
towards auto stocks. As can be seen from the graph below, IIP has been subdued since
August 2010. Similarly, inflation has been on the higher side for a long time now. The
only uncertain area is high oil prices as it can delay the base effect benefit from coming
into play. The monsoon season (till date) this year has been good not only in terms of
quantity (1% below average) but also in terms of spread (only 4 areas with scant rainfall
and rain dependent region receiving above average rainfall)
IIP growth bottoming out
Auto Sector
9
Base effect should result in lower inflation
Monsoon - good spread will ensure a decent agri GDP despite a high base
Particulars FY08 FY09 FY10 FY11 FY12*
% Deviation
Well Irrigated areas -65.3 15.2 -39.2 -9.2 -8.6
Adequately Rain-fed areas 9.5 -9.7 -19.8 -2.1 -5.6
Rain Dependent Areas 13.5 -1.0 -18.8 3.9 6.8
No of divisions
Excess rainfall 13 1 3 13 8
Normal rainfall 17 32 10 18 24
Deficient/Scanty rainfall 6 3 23 5 4
Note: * - Indicates year till date
Raw material costs - the wild card
Our analysis indicates that metals account for ~22% to 45% of sales. It is lowest for two
wheelers and highest for M&HCVs. Given below is the sensitivity of auto companies'
margins to changes in metal prices.
RM cost impact
EBITDA Margin (%) Change in EBITDA margins (bps)
Change in metal prices FY12E 5% 7.5% 10%
Ashok Leyland 10.6 158 237 316
Bajaj Auto 18 94 141 188
Hero MotoCorp 11.3 119 178 237
M&M 12.8 101 151 201
MSIL 9.2 101 151 201
TVS Motor 6.4 103 154 205
Source:Company, Emkay Research
We believe that metal prices can be the wild card, providing positive surprises in the
near term, We have built in a normal inflationary pressure of 7% per annum in our
estimates for FY12 and FY13. HR steel and aluminum prices are trading at its historic
highs (except for the CY09 period). Our interaction with various industry players indicate
that they do not expect metal prices to increase in the same manner as in FY11. In the
event of metal prices cooling off or stabilizing at the current levels, there can be positive
margin surprises.
-5
0
5
10
15
20
J
u
l
-
9
4
J
u
l
-
9
5
J
u
l
-
9
6
J
u
l
-
9
7
J
u
l
-
9
8
J
u
l
-
9
9
J
u
l
-
0
0
J
u
l
-
0
1
J
u
l
-
0
2
J
u
l
-
0
3
J
u
l
-
0
4
J
u
l
-
0
5
J
u
l
-
0
6
J
u
l
-
0
7
J
u
l
-
0
8
J
u
l
-
0
9
J
u
l
-
1
0
J
u
l
-
1
1
Monsoons have been good both in
terms of quantity and spread
Auto Sector
10
0
200
400
600
800
1000
1200
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
Steel prices (USD/ton)
Aluminum prices (USD/ton)
Long term view
We believe that the near term concerns provide an excellent opportunity to become
overweight on auto, given the long term view. Based on analysis of each segment
(commercial vehicles, tractors, passenger vehicle and two wheelers), we believe that
the long term story in each segment is still intact and that demand will bounce back with
a vigor. This has happened in the past and we expect the same to repeat. The biggest
risk that we foresee to this is non availability of finance (rather than higher interest rate),
lack of employment generation (due to slowdown in core economy) and slower wealth
generation (reflected by Sensex/real estate prices). Given below is our analysis of growth
prospects for each of the segments, which give a clear view on the structural strength of
demand.
Commercial vehicles
Multiplier effect
Our analysis of historical data indicates that the elasticity/multiplier effect on demand
has increased over a period of time. We have calculated the multiplier effect as M&HCV
trucks volume growth/IIP and volume growth/industry growth (based on constant prices).
We have used 5/3 year rolling CAGR, as analysis on annualized basis is inherently
cyclical and misleading. As can be seen from the graph below, both on 5 year and 3 year
CAGR, the trend line has been inching up. For instance, the multiplier based on IIP has
increased from 0.5x in FY87 to ~1.5x in FY11. This basically indicates that with growing
economic activity, the freight generation in the system is increasing at a higher rate than
the broader economic growth.
0
500
1000
1500
2000
2500
3000
3500
J
a
n
-
0
1
J
a
n
-
0
2
J
a
n
-
0
3
J
a
n
-
0
4
J
a
n
-
0
5
J
a
n
-
0
6
J
a
n
-
0
7
J
a
n
-
0
8
J
a
n
-
0
9
J
a
n
-
1
0
J
a
n
-
1
1
Multiplier effect is one of the most
important driver for volumes
Auto Sector
11
(2)
(1)
-
1
2
3
4
F
Y
8
7
F
Y
8
9
F
Y
9
1
F
Y
9
3
F
Y
9
5
F
Y
9
7
F
Y
9
9
F
Y
0
1
F
Y
0
3
F
Y
0
5
F
Y
0
7
F
Y
0
9
F
Y
1
1
Vols/Industry Vols/IIP
Trendline (Vols/Ind) Trendline (Vols/IIP)
(6)
(4)
(2)
-
2
4
6
F
Y
8
6
F
Y
8
8
F
Y
9
0
F
Y
9
2
F
Y
9
4
F
Y
9
6
F
Y
9
8
F
Y
0
0
F
Y
0
2
F
Y
0
4
F
Y
0
6
F
Y
0
8
F
Y
1
0
Vols/Industry Vols/IIP
Trendline (Vols/Ind) Trendline (Vols/IIP)
0%
2%
4%
6%
8%
10%
12%
F
Y
9
4
F
Y
9
5
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
Share of road transport
-
50
100
150
200
250
300
F
Y
9
4
F
Y
9
5
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
34
36
38
40
42
44
Truck Vols Agri+Ind. GDP/truck tonnage(RHS)
(Rs mn/ton) The drop is due to ban on
overloading
In '000 units
5 Yr Multiplier effect of M&HCV trucks demand
3 Yr Multiplier effect of M&HCV trucks demand
Higher share of agricultural commodities in road transport has also aided
the multiplier
Over the years, there has been an increase in the movement of agricultural commodities
through road. As can be seen from the graph below, the share of road transport, which
was at 3% in FY94, has increased to 11% in FY11. This has resulted in higher freight
generation in the system, as corroborated by rising capacity utilization over the years
(indicated by Industry+Agri GDP/ tonnage). This fact is also supported by the strong
growth in M&HCV during weak IIP period especially when agri economy has done well
as explained below.The sharp drop in the ratio during FY05-06 is due to implementation
of ban on overloading, which resulted in structurally lower utilization of trucks.
Rising agri transport aiding multiplier effect
Source: FCI, Emkay Research
Increasing share of road transport in food grains
M&HCV demand has been strong during weak IIP but strong
agricultural growth period
As can be seen from the graphs on next page, strong agricultural growth has resulted in
robust volume growth despite a weak IIP. The only deviation has been FY99. The tables
below highlight only those periods where IIP has been subdued and agriculture GDP
has done well. In a strong IIP year, the performance of agriculture gets hidden. We also
undertook a quarterly analysis to look at the data closely. We came up with the same
conclusion (see table on next page).
Movement of agri commodities by
road has increased from ~3% to ~11%
Auto Sector
12
Strong agri supporting M&HCV truck volumes during periods of weak IIP
Growth (%) FY97 FY99 FY00 FY02 FY04 FY11
Agri GDP 9.9 6.3 2.7 6.3 10.0 6.3
IIP 6.1 4.1 6.6 2.7 7.0 8.2
M&HCV trucks 25.2 (7.1) 44.8 27.7 42.3 36.6
Growth (%) Jun-01 Sep-01 Dec-01 Mar-02 Sep-03 Dec-03 Mar-04 Dec-10
Agri GDP 3.2 5.7 6.6 8.8 7.2 19.6 10.3 8.9
IIP 2.2 2.5 2.9 3.1 6.6 7.3 8.1 5.9
M&HCV trucks 18.7 39.7 48.0 12.3 54.0 53.1 39.0 21.0
Freight rates - Ground check reveals strength
The widely tracked TCI freight index has been indicating a subdued freight rate scenario.
This has resulted in expectations of pressure on profitability of freight operators due to
increase in capital cost, interest rate and fuel cost. However, our interaction with freight
operators and verification of freight rates on trunk routes indicates that there is a divergence
in the data captured by TCI index. As can be seen from the graphs below, since Dec08,
there is a divergence in the TCI index and freight rates on trunk routes. Our interaction with
freight operators indicates that freight rates have indeed gone up, which has enabled
them to protect the cash flow generation despite strong inflationary pressure. Also, there
is adequate availability of freight and hence, there are no major concerns with respect to
under utilization of fleet.
Source: CMIE, TCI, Emkay Research
TCI freight index and trunk route freight rates
Source: CMIE, TCI, Emkay Research
Divergence in the data in last two years
-10%
-5%
0%
5%
10%
15%
F
Y
9
5
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
-40%
-20%
0%
20%
40%
60%
Agri GDP (LHS) IIP (LHS) Trucks (RHS)
-10%
0%
10%
20%
30%
40%
A
p
r
-
0
5
J
u
n
-
0
5
A
u
g
-
0
5
O
c
t
-
0
5
D
e
c
-
0
5
F
e
b
-
0
6
A
p
r
-
0
6
J
u
n
-
0
6
A
u
g
-
0
6
O
c
t
-
0
6
D
e
c
-
0
6
F
e
b
-
0
7
A
p
r
-
0
7
J
u
n
-
0
7
A
u
g
-
0
7
O
c
t
-
0
7
D
e
c
-
0
7
TCI Delhi Mumbai Kolkata Chennai
(YoY Chg.)
-30%
-20%
-10%
0%
10%
20%
30%
40%
D
e
c
-
0
8
M
a
r
-
0
9
J
u
n
-
0
9
S
e
p
-
0
9
D
e
c
-
0
9
M
a
r
-
1
0
J
u
n
-
1
0
S
e
p
-
1
0
D
e
c
-
1
0
M
a
r
-
1
1
J
u
n
-
1
1
TCI Delhi Mumbai Kolkata Chennai
(YoY Chg.)
Auto Sector
13
-50%
0%
50%
100%
150%
200%
250%
300%
F
e
b
-
0
9
A
p
r
-
0
9
J
u
n
-
0
9
A
u
g
-
0
9
O
c
t
-
0
9
D
e
c
-
0
9
F
e
b
-
1
0
A
p
r
-
1
0
J
u
n
-
1
0
A
u
g
-
1
0
O
c
t
-
1
0
D
e
c
-
1
0
F
e
b
-
1
1
A
p
r
-
1
1
J
u
n
-
1
1
-4%
0%
4%
8%
12%
16%
20%
24%
IIP (% YoY RHS) Trucks (% YoY)
IIP favourable base effect to kick inmore importantly the lag effect has
been slowly reducing
We expect a favorable base effect to kick in from Aug'11. More importantly, the lag impact
of weaker IIP and demand slowdown has been reducing over the years . As indicated
earlier, this can be attributed to our thesis of higher freight generation in a growing economy.
IIP favorable base effect to kick in
Reducing lag impact of IIP on truck volumes
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
M
a
r
-
9
1
M
a
r
-
9
3
M
a
r
-
9
5
M
a
r
-
9
7
M
a
r
-
9
9
M
a
r
-
0
1
M
a
r
-
0
3
M
a
r
-
0
5
M
a
r
-
0
7
M
a
r
-
0
9
M
a
r
-
1
1
-50%
-30%
-10%
10%
30%
50%
Change in IIP Growth ( % points) Truck Sales (% YoY RHS)
Lag impact of IIP on truck volumes is
not visible currently
Auto Sector
14
4%
6%
8%
10%
12%
14%
M
a
r
-
9
4
M
a
r
-
9
5
M
a
r
-
9
6
M
a
r
-
9
7
M
a
r
-
9
8
M
a
r
-
9
9
M
a
r
-
0
0
M
a
r
-
0
1
M
a
r
-
0
2
M
a
r
-
0
3
M
a
r
-
0
4
M
a
r
-
0
5
M
a
r
-
0
6
M
a
r
-
0
7
M
a
r
-
0
8
M
a
r
-
0
9
M
a
r
-
1
0
M
a
r
-
1
1
-60%
-40%
-20%
0%
20%
40%
60%
1 yr deposit (LHS) Trucks (YoY)
5%
7%
9%
11%
13%
15%
2
0
0
4
-
0
5
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
93
94
95
96
97
98
99
Finance Penetration (% RHS) Avg Loan Rate (%)
5%
7%
9%
11%
13%
15%
2
0
0
4
-
0
5
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
100
150
200
250
300
Volumes (in '000 units RHS) Avg Loan Rate (%)
Source: CRISIL, Industry, Emkay Research
Rising volumes despite higher interest rates
Source: CRISIL, Industry, Emkay Research
Finance penetration impacting volumes
Source: CMIE, Industry, Emkay Research
Correlation between interest rates and demand since 1994 - no major correlation
Demand and interest rate relationshipavailability of finance is important
Contrary to perception, higher interest rates per se are not an impediment for demand
growth from a long term perspective. It has a sentimental impact for a quarter or two. More
important is the availability of finance and freight rates. As can be seen from the graphs
below, despite rising interest rates during FY05-FY08, the penetration of finance has
been stable resulting in volume growth over the period. Given the fact that agri economy is
expected to report a strong kharif season (third consecutive season of good crops), we
expect concerns with respect to freight and M&HCV volumes to abate.
Auto Sector
15
0
5
10
15
20
25
30
35
40
O
c
t
-
0
2
F
e
b
-
0
3
J
u
n
-
0
3
O
c
t
-
0
3
F
e
b
-
0
4
J
u
n
-
0
4
O
c
t
-
0
4
F
e
b
-
0
5
J
u
n
-
0
5
O
c
t
-
0
5
F
e
b
-
0
6
J
u
n
-
0
6
O
c
t
-
0
6
F
e
b
-
0
7
J
u
n
-
0
7
O
c
t
-
0
7
F
e
b
-
0
8
J
u
n
-
0
8
O
c
t
-
0
8
F
e
b
-
0
9
J
u
n
-
0
9
O
c
t
-
0
9
F
e
b
-
1
0
J
u
n
-
1
0
O
c
t
-
1
0
F
e
b
-
1
1
J
u
n
-
1
1
20
25
30
35
40
45
50
Truck Vols ('000 units) Diesel Price (RHS)
Demand and diesel price relationship
Interestingly, we did not come across an inverse relationship between truck sales and
diesel prices. The first graph indicates movement of diesel prices and truck volumes. The
second graph shows the relationship between change in diesel prices (MoM) and demand
for trucks (YoY). In fact, we came across certain instances (FY08 and FY09) when reduction
in diesel prices was accompanied by decline in demand.
Source: IOCL, Emkay Research
Inverse relationship in diesel price and truck volumes - Insignificant evidence
Sustained diesel price hikes moderate volume growth for 1-2 quarters at best
-2
-1
0
1
2
3
O
c
t
-
0
3
F
e
b
-
0
4
J
u
n
-
0
4
O
c
t
-
0
4
F
e
b
-
0
5
J
u
n
-
0
5
O
c
t
-
0
5
F
e
b
-
0
6
J
u
n
-
0
6
O
c
t
-
0
6
F
e
b
-
0
7
J
u
n
-
0
7
O
c
t
-
0
7
F
e
b
-
0
8
J
u
n
-
0
8
O
c
t
-
0
8
F
e
b
-
0
9
J
u
n
-
0
9
O
c
t
-
0
9
F
e
b
-
1
0
J
u
n
-
1
0
O
c
t
-
1
0
F
e
b
-
1
1
J
u
n
-
1
1
-50%
-30%
-10%
10%
30%
50%
70%
Change in diesel price (Rs MoM) Truck Sales (%YoY RHS)
Auto Sector
16
(4)
(2)
-
2
4
6
8
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
Vols/GDP Vols/Agri
Trendline (Vols/GDP) Trendline (Vols/Agri)
-
0.5
1.0
1.5
2.0
2.5
3.0
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
Vols/GDP Vols/Agri Trendline (Vols/GDP) Trendline (Vols/Agri)
Tractors
Strong multiplier impact with agriculture but not so strong with GDP
As can be seen from the graphs below, there is a clear multiplier impact visible for tractors
vis--vis agriculture. However, when compared to GDP, the multiplier impact is not really
visible. This can be attributed to declining share of agriculture in the overall economy.
Also, increasing use of tractors for non agri purpose will have some impact on the multiplier
effect when co-related to GDP going ahead. We believe that this is sustainable and
tractor demand can explode, going forward.
Source: CRISIL, CMIE, Emkay Research
10 yr multiplier effect on tractor demand
(8)
(6)
(4)
(2)
-
2
4
6
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
Vols/GDP Vols/Agri
Trendline (Vols/GDP) Trendline (Vols/Agri)
Higher non-agri use to have positive
impact on multiplier effect
Auto Sector
17
-10%
-5%
0%
5%
10%
15%
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
Tractors (%YoY) Farm Income (%YoY)
-30%
-20%
-10%
0%
10%
20%
30%
40%
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
Tractors % YoY ATOT (RHS)
10
20
30
40
50
60
FY07 FY08 FY09 FY10 FY11
50
60
70
80
90
100
110
Households (in mn) Wage Rate (Rs/day RHS)
100
200
300
400
500
F
Y
9
3
F
Y
9
5
F
Y
9
7
F
Y
9
9
F
Y
0
1
F
Y
0
3
F
Y
0
5
F
Y
0
7
F
Y
0
9
F
Y
1
1
1400
1500
1600
1700
1800
1900
2000
Tractor Vols. Foodgrains Yield (RHS)
In '000 units Kg/hect
Sharp increase in farm income
There has been sharp increase in the farm income due to increased focus of the
government on rural economy and MSP. Also, the yield has been improving over the years.
More importantly, there is a direct correlation between demand for tractors and farm
income. Rising farm income is the output of improving yield and higher MSP. The farmer's
yield can further improve, given the increasing access to information and use of technology.
The key reason for this is the role played by various fertilizer, FMCG and other rural
economy related companies. Another important reason is rising wealth due to appreciation
of land prices.
Higher mechanization and awareness improving yields
Tractor demand & farm income - 5 yr CAGR
Labour shortage - Key demand driver
Labour shortage is one of the most important structural change that will drive farm
mechanization. It is important to note that not only is there an increase in the number of
households covered under the NREGA scheme, but also there is a sharp upward revision
in minimum wages. Rising popularity of NREGA and other schemes, increasing penetration
as well focus of the government to curb leakages can further accentuate the labour
shortage problem.
Source: NREGA, Emkay Research
Employments added under NREGA
Note: ATOT is ratio of WPI food & non-food / WPI fuel & manufactured products
Higher real income levels in hands of farmer
Increasing reach of formal financing channels - to lower cost of borrowing
Another important factor according to us, is the increasing focus of the RBI to raise the
penetration of finance in the rural economy. This is clearly indicated by rising rural credit
and more importantly, increase in bank's rural network. Another interesting point to note is
that the increase in coverage is driven by reduction in branches and increase in mobile
units. This indicates focus on low cost/profitable business model. This makes us believe
in the sustenance and increase in rural penetration of banks.
Direct correlation of farm income and
tractor demand
Higher focus on low cost models to
increase finance penetration
Auto Sector
18
0
10
20
30
40
50
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
Debtor Inventory
Source: RBI, Emkay Research
Rising finance reach
Source: RBI, Emkay Research
Increasing penetration driven by modes other than branches
Cyclicality to reduce due to change in industry behaviour
Historically, tractor demand has been cyclical with bouts of strong demand and sharp
drop in demand. We expect the cyclicality to reduce going forward due to the above
mentioned factors and also, improving industry dynamics driven by consolidation and
good supply chain management. As can be seen from the graphs below, there has been
a sharp reduction in debtor and inventory days. More importantly, there has been some
stability in terms of trends. We have considered the financials of Escorts, Sonalika and
Tafe for this analysis as they are pure tractor players. We have considered Punjab Tractors
only till FY08 as thereafter it was merged into M&M.
Source: Capitaline, Emkay Research
Debtor & Inv. Days - Industry (ex M&M)
Source: Capitaline, Emkay Research
Debtor & Inv. Days - Industry (ex M&M & PTL)
0
100
200
300
400
Mar-10 Mar-11 Mar-12e Mar-13e
Branches Other modes
(000s)
0
10
20
30
40
50
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
Debtor Inventory
0
100
200
300
400
Mar-10 Mar-11 Mar-12e Mar-13e
N
o
.

o
f

v
i
l
l
a
g
e
s

c
o
v
e
r
e
d
40%
60%
80%
100%
120%
140%
< 2000 ppl > 2000 ppl % YoY (RHS)
(000s)
Auto Sector
19
-
5
10
15
20
25
F
Y
9
5
F
Y
9
7
F
Y
9
9
F
Y
0
1
F
Y
0
3
F
Y
0
5
F
Y
0
7
F
Y
0
9
F
Y
1
1
> 2K >5K >10K
per 1000 people
-
20
40
60
80
F
Y
9
5
F
Y
9
7
F
Y
9
9
F
Y
0
1
F
Y
0
3
F
Y
0
5
F
Y
0
7
F
Y
0
9
F
Y
1
1
> 10K > 50K > 100K
per 1000 people
0
50
100
150
200
250
300
350
FY95 FY00 FY05 FY10 FY11 FY15
Rural Pentration Urban Penetration Total
(per 1000 people)
Penetration still below FY05 levels
despite strong vol. CAGR of ~15%
Passenger vehicles
Penetration levels continue to remain low
Penetration levels based on income or geography continue to remain low. More importantly,
penetration in the key income group (> Rs 200,000) is below FY05 levels. This is despite
a strong 15% CAGR growth during FY05-FY11 period. We attribute this to a much faster
increase in the population of key income group due to higher earnings. This is one of the
key reasons why we believe that the Indian passenger vehicle industry can be 4.9mn
units by 2015. (Refer to report Acceleration begins dated Jun10). Our analysis of
geographical spread also confirms our view that the envisaged demand explosion is yet
to occur owing to the inability of the OEMs to reach the interiors of the country.
Source: Census, Emkay Research
PV penetration for income group >Rs 0.2mn
Note: >10K constitutes ~97%, 50K to 100K- ~10% and >100K- ~69% of total
urban population
Penetration - Urban - based on town size
Note: >2K constitutes ~54%, 5K to 10K- ~13% and >10K- ~49% of total rural
population
Penetration - Rural - based on village size
Multiplier effect
Our analysis of historical data indicates that the elasticity/multiplier effect on demand has
increased over a period of time. We have used 5 year rolling CAGR to GDP and GDP (ex
Agri). Just as was the case with M&HCVs and tractors, both the 5 year as well as 3 year
multiplier for PVs has been on an uptrend. We attribute this to higher income generation
in rural/semi urban areas over the last 5 years. This fact is corroborated by our analysis on
penetration (> 200,000 income group) as well as geographical spread, as mentioned
above.
Growth in key income group has
outpaced car demand in the past 5
years
Auto Sector
20
(1.0)
(0.5)
-
0.5
1.0
1.5
2.0
2.5
3.0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
Vols/GDP Vols/GDP(ex-Agri)
Trend(Vols/GDP) Trend(Vols/GDPex-Agri)
0.5
1.0
1.5
2.0
2.5
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
Vols/GDP Vols./GDP(ex-agri)
Trend(Vols/GDP) Trend(Vols/GDPex-Agri)
4%
6%
8%
10%
12%
14%
M
a
r
-
9
4
M
a
r
-
9
5
M
a
r
-
9
6
M
a
r
-
9
7
M
a
r
-
9
8
M
a
r
-
9
9
M
a
r
-
0
0
M
a
r
-
0
1
M
a
r
-
0
2
M
a
r
-
0
3
M
a
r
-
0
4
M
a
r
-
0
5
M
a
r
-
0
6
M
a
r
-
0
7
M
a
r
-
0
8
M
a
r
-
0
9
M
a
r
-
1
0
M
a
r
-
1
1
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
1 yr deposit (LHS) Cars (YoY)
5%
6%
7%
8%
9%
10%
11%
12%
13%
2
0
0
4
-
0
5
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
60
65
70
75
80
85
90
5%
7%
9%
11%
13%
15%
2
0
0
4
-
0
5
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
0.0
0.5
1.0
1.5
2.0
2.5
Units (mn RHS) Avg Loan Rate (%)
5 Yr multiplier effect on car demand
3 Yr multiplier effect on car demand
Correlation with interest rate
Historically, there has been little correlation between rising interest rate and its impact on
demand. During FY09, we saw a sharp slowdown in demand due to higher interest rates.
However, this period coincided with the global recession. More importantly, the demand
bounced back with a vigor from mid FY10. It also pertinent to note that during FY09,
penetration of finance had reduced, which also affected the demand, given the fact that
there was ~65% penetration of finance during FY09.
Source: Industry, Emkay Research
Limited impact of rising interest rates
Finance availability playing a larger role
Correlation between interest rates and demand since 1994 - no major correlation
Penetration of finance reduced to
~65% in FY09
Auto Sector
21
Fuel price and demand
Contrary to perception, rise in fuel prices have failed to impact demand for cars. As can be
seen from the graphs below, both petrol and diesel prices have been on the rise and so
has been the demand for vehicles, as reflected by YoY change in monthly car sales.
Petrol price impact on car volumes
Diesel price impact on car volumes
More important is the correlation with wealth creation
There is a direct correlation between change in equity markets/real estate markets and
demand for cars. This is despite a steady income generation amongst the target audience.
We attribute this to psychological issues as people tend to postpone discretionary spends
during periods of crisis. Given India's high savings rate, demand generally bounces back
with vigor.
Wealth creation sentimentally affects demand
Strong correlation between performance of Sensex and demand
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
J
u
n
-
0
2
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
30
40
50
60
70
80
Cars (% YoY) Petrol Price (RHS)
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
J
u
n
-
0
2
J
u
n
-
0
3
J
u
n
-
0
4
J
u
n
-
0
5
J
u
n
-
0
6
J
u
n
-
0
7
J
u
n
-
0
8
J
u
n
-
0
9
J
u
n
-
1
0
J
u
n
-
1
1
20
25
30
35
40
45
50
Cars (% YoY) Diesel Price (RHS)
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
J
a
n
-
0
5
M
a
y
-
0
5
S
e
p
-
0
5
J
a
n
-
0
6
M
a
y
-
0
6
S
e
p
-
0
6
J
a
n
-
0
7
M
a
y
-
0
7
S
e
p
-
0
7
J
a
n
-
0
8
M
a
y
-
0
8
S
e
p
-
0
8
J
a
n
-
0
9
M
a
y
-
0
9
S
e
p
-
0
9
J
a
n
-
1
0
M
a
y
-
1
0
S
e
p
-
1
0
J
a
n
-
1
1
Real estate index (MMR) Cars volumes Sensex
-60%
-40%
-20%
0%
20%
40%
60%
80%
J
u
n
-
0
2
D
e
c
-
0
2
J
u
n
-
0
3
D
e
c
-
0
3
J
u
n
-
0
4
D
e
c
-
0
4
J
u
n
-
0
5
D
e
c
-
0
5
J
u
n
-
0
6
D
e
c
-
0
6
J
u
n
-
0
7
D
e
c
-
0
7
J
u
n
-
0
8
D
e
c
-
0
8
J
u
n
-
0
9
D
e
c
-
0
9
J
u
n
-
1
0
D
e
c
-
1
0
J
u
n
-
1
1
Car Vols (% YoY) Sensex (% YoY)
Wealth creation more important than
interest rates
Auto Sector
22
50
100
150
200
250
300
Rural Urban Total
Per 1000 persons
0
50
100
150
200
250
Rural Urban Total
Per 1000 persons
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
D
e
c
-
0
2
D
e
c
-
0
3
D
e
c
-
0
4
D
e
c
-
0
5
D
e
c
-
0
6
D
e
c
-
0
7
D
e
c
-
0
8
D
e
c
-
0
9
D
e
c
-
1
0
D
e
c
-
1
1
E
0%
5%
10%
15%
20%
25%
30%
35%
% Chng in Employment (bps) Car Vols (% YoY RHS)
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
D
e
c
-
0
2
D
e
c
-
0
3
D
e
c
-
0
4
D
e
c
-
0
5
D
e
c
-
0
6
D
e
c
-
0
7
D
e
c
-
0
8
D
e
c
-
0
9
D
e
c
-
1
0
D
e
c
-
1
1
E
0%
5%
10%
15%
20%
25%
30%
35%
% Employment (YoY) Car Vols (% YoY RHS)
.and employment generation
As can be seen from the graph below, there exists a direct correlation between employment
generation and demand (especially growth rate). More importantly, we have not seen
growth rate going below 10% in the years, when there is employment generation.
Source: Ma Foi Survey, Emkay Research
Employment generation strongly affects demand
Source: Ma Foi Survey, Emkay Research
Improvement in employment growth drives demand
Two wheelers
Penetration continues to remain low
The penetration of two wheelers continues to remain low. More importantly, the
geographical reach of OEMs is also very low. This is evident from the wide disparity in
penetration of two wheelers in rural areas with population of > 2000 (200 per 1000) and >
than 5000 (500 per 1000). Similarly, the penetration in the urban areas is also hovering at
~200 per 1000 or below. This indicates the opportunity size of the demand for two wheelers.
The villages in the range of 2000 to 5000 people account for ~32% of rural population.
Note: >10K constitutes ~97% and 10K to 50K- ~19% of total urban population
Penetration - Urban - based on town size
Note: >2K constitutes ~54% and 2K to 5K- ~32% of total rural population
Penetration - Rural - based on village size
Penetration per 1000 persons Penetration for people earning > Rs 90,000 p.a.
-
50
100
150
200
250
F
Y
9
5
F
Y
9
7
F
Y
9
9
F
Y
0
1
F
Y
0
3
F
Y
0
5
F
Y
0
7
F
Y
0
9
F
Y
1
1
>10K >50K Total
-
100
200
300
400
500
F
Y
9
5
F
Y
9
7
F
Y
9
9
F
Y
0
1
F
Y
0
3
F
Y
0
5
F
Y
0
7
F
Y
0
9
F
Y
1
1
>2k >5K Total
Auto Sector
23
0.5
1.0
1.5
2.0
2.5
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
Trend (Vols/GDP) Trend (Vols/GDP exAgri)
0.5
1.0
1.5
2.0
2.5
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
Trend (Vols/GDP) Trend (Vols/GDPexAgri)
10%
12%
14%
16%
18%
20%
22%
24%
2
0
0
4
-
0
5
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
20%
24%
28%
32%
36%
40%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
2
0
0
4
-
0
5
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
10%
12%
14%
16%
18%
20%
22%
24%
Volumes (% YoY) Avg Loan Rate (% RHS)
Multiplier
Unlike four wheelers, the multiplier impact has been constant to declining over the years.
However, we believe that its future growth has the potential to surpass historical trends
due to a number of factors like - increased government focus of on rural/agri economy
(given the penetration of two wheelers in rural economy is similar to that of urban economy),
lower dependence on finance and rising women population owning a two wheeler. Also,
the long term trends are subdued due to their disappointing performance during FY06-
FY08 period, where industry was passing through a tough phase due to systemic issues
of bad debts.
5 Yr multiplier effect on two wheeler demand
3 Yr multiplier effect on two wheeler demand
Interest rate and availability of finance
This is one of the structural reasons that make us believe that demand for two wheelers
can be higher than the historical long term averages. The fact that reliance on finance to
buy two wheelers is at its lowest, gives us the confidence that there is real strength in
demand (demand pull). Good improvement in the income of the target populations gives
us further confidence.
Demand strong despite highest loan rates .
and lowest finance penetration amongst segments
Rural income fast catching up
High rural demand for two wheeler (35% to 50% of total sales), faster increase in rural per
capita GDP and low penetration are other important factors that will drive two wheeler
demand faster than the historical trend line. Also, increasing awareness/exposure to
various trends, higher young working age population, increasing women consumers and
higher rural income will provide support to demand.
Lower penetration of finance indicates
structural demand
Auto Sector
24
0
200
400
600
800
1000
1200
F
Y
9
2
F
Y
9
4
F
Y
9
6
F
Y
9
8
F
Y
0
0
F
Y
0
2
F
Y
0
4
F
Y
0
6
F
Y
0
8
F
Y
1
0
F
Y
1
2
MSP Rice (Rs per Quin) MSP Wheat (Rs per Quin)
Rural income catching up with urban levels
Higher MSP of crops aiding income growth
Wealth effect is not so clear
Unlike passenger vehicles, there is no clear relationship between two wheeler demand
and real estate prices or movement in Sensex. This can be attributed to low ticket size and
also the rural population's limited exposure to stock markets/real estate markets.
Source: Blooberg, Liases Foras, Emkay Research
Wealth effect not so pronounced
Demand not strongly correlated with Sensex
2.5
3
3.5
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
J
a
n
-
0
5
M
a
y
-
0
5
S
e
p
-
0
5
J
a
n
-
0
6
M
a
y
-
0
6
S
e
p
-
0
6
J
a
n
-
0
7
M
a
y
-
0
7
S
e
p
-
0
7
J
a
n
-
0
8
M
a
y
-
0
8
S
e
p
-
0
8
J
a
n
-
0
9
M
a
y
-
0
9
S
e
p
-
0
9
J
a
n
-
1
0
M
a
y
-
1
0
S
e
p
-
1
0
J
a
n
-
1
1
Real estate index (MMR) 2 Whlr Vols Sensex
-60%
-40%
-20%
0%
20%
40%
60%
80%
J
u
n
-
0
2
D
e
c
-
0
2
J
u
n
-
0
3
D
e
c
-
0
3
J
u
n
-
0
4
D
e
c
-
0
4
J
u
n
-
0
5
D
e
c
-
0
5
J
u
n
-
0
6
D
e
c
-
0
6
J
u
n
-
0
7
D
e
c
-
0
7
J
u
n
-
0
8
D
e
c
-
0
8
J
u
n
-
0
9
D
e
c
-
0
9
J
u
n
-
1
0
D
e
c
-
1
0
J
u
n
-
1
1
2 wh Vols (% YoY) Sensex (% YoY)
Auto Sector
25
Companies
Ashok Leyland
Bajaj Auto
Eicher Motors
Hero MotoCorp
Mahindra & Mahindra
Maruti Suzuki India
Tata Motors
TVS Motor
Y/E, Mar Net EBIDTA EBIDTA APAT EPS EPS RoE P/E EV / P/BV
(Rs mn) Sales (Core) (%) (Rs) % chg (%) (x) EBITDA (x)
FY10 72,447 7,628 10.5 3,889 1.5 112.9 17.6 17.6 10.8 3.0
FY11 111,177 12,436 11.2 6,573 2.5 69.0 26.4 10.4 6.4 2.6
FY12E 122,040 12,965 10.6 6,058 2.3 (7.8) 21.6 11.3 5.8 2.3
FY13E 138,777 14,868 10.7 7,544 2.8 24.5 23.9 9.1 4.8 2.0
Financial Snapshot
Emkay
Your success is our success
Ashok Leyland
Negatives factored in
C
o
m
p
a
n
y

U
p
d
a
t
e
Emkay Global Financial Services Ltd.
Reco Previous Reco
Accumulate Accumulate
CMP Target Price
Rs26 Rs29
EPS change FY12E/13E (%) -
Target price change (%) -
Nifty 5,017
Sensex 16,862
Price Performance
(%) 1M 3M 6M 12M
Absolute 6 2 2 -30
Rel. to Nifty 8 11 9 -24
Source: Bloomberg
Relative price chart
7 September, 2011
Source: Bloomberg
Stock details
Sector Automobiles
Bloomberg AL IB
Equity Capital (Rs mn) 2,661
Face Value(Rs) 1
No of shares o/s (mn) 2,661
52 Week H/L 41/ 23
Market Cap (Rs bn/USD mn) 67/ 1,447
Daily Avg Volume (No of sh) 8,265,926
Daily Avg Turnover (US$mn) 4.5
Shareholding Pattern (%)
Jun11 Mar11 Dec10
Promoters 38.6 38.6 38.6
FII/NRI 27.0 26.6 28.3
Institutions 16.6 16.9 16.5
Private Corp 5.9 6.8 5.7
Public 12.0 11.1 10.9
Source: Capitaline
Volumes - worst is behind; Expect sequential improvement in
market share as 1QFY12 was affected by regional issues
Exports have been gaining traction. Expect export volumes to
surprise positively. Ramp up in Pantnagar production to
cushion margins
Contribution from various JVs to be visible in FY13. Nissan JV
to be margin accretive
Valuation attractive as focus has shifted to near term
earnings. Retain Accumulate
Volume growth to pick up
AL witnessed a sharp drop in volumes in 1QFY12 due to ongoing elections in certain
southern states and sluggish mining activities. Overall industry reported 7% volume
growth for 1QFY12. Management expects pick up in mining activities and positive industry
growth despite a high base (emission norms impact). We believe that the worst is over for
Ashok Leyland and expect it to benefit from up tick in industry demand leading to ~9%
CAGR during FY11-13E.
Exports- can be the next big volume driver
Over the years, exports for the company have been gaining traction. It should be noted that
the company intends to be amongst the top 10 global M&HCV manufacturers (FY11
Annual report). We believe that exports can provide the required cushion to market share
pressures in the domestic market and lead to ~8% volume CAGR over FY11-13E.
Focus on diversifying the revenue stream
We believe that management has realized the potential risk of higher competition in the
M&HCV space. As a result, it is taking steps to reduce its dependence on the cyclical
M&HCV business by diversifying the revenue stream to encompass (1) exports (2) entry in
to LCVs (3) defense and engine sales. We expect the company to benefit from these in the
long term. AL plans to commence LCV manufacturing activity at its Hosur plant which will
be margin accretive in our view.
Higher Pantnagar contribution to cushion margins
Management has guided for a production target of 36,000-40,000 units in FY12 at the tax
free Pantnagar plant. Considering the Q1FY12 production from Pantnagar at 6,000 units,
we expect the annual production for FY12 at ~30,000 units.
Valuations
At Rs 26, the stock trades at FY13E PER/EV-EBIDTA of 9.1x/4.8x. We view AL as a cyclical
stock and believe the earnings based valuations are misleading due to inability to forecast
the cycles (upturn/downturn). We prefer to focus on other lead indicators like P/BV, which
we find attractive. For AL, we found dividend yield as the most important lead indicator
(refer to our note titled - 'Focus on lead indicators'). We retain our ACCUMULATE rating on
the stock.

20
26
32
38
44
50
Sep- 10 Nov-10 Jan-11 Mar-11 May- 11 Jul- 11
Rs
-40
-32
-24
-16
-8
0 %
Asho k Leyla nd (LHS) Rel to Nifty (RHS)
Auto Sector
27
0
5
10
15
20
25
30
35
Q
1
F
Y
0
8
Q
2
F
Y
0
8
Q
3
F
Y
0
8
Q
4
F
Y
0
8
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
0%
2%
4%
6%
8%
10%
12%
14%
Overall vols. ('000 units) EBITDA Margin (% RHS)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
E
F
Y
1
3
E
30%
40%
50%
60%
70%
80%
DPS Div. Payout (RHS)
0
1
2
3
4
5
6
7
8
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
6%
11%
16%
21%
26%
31%
36%
Pantnagar prod. ('000 units) % of sales (RHS)
4
6
8
10
12
14
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
E
F
Y
1
3
E
6%
7%
8%
9%
10%
11%
12%
13%
Exports ('000 units) % of total vols (RHS)
20
40
60
80
100
120
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
E
F
Y
1
3
E
-60%
-40%
-20%
0%
20%
40%
60%
Trucks ('000 units) Bus ('000 units)
Trucks % YoY (RHS) Bus % YoY (RHS)
0%
10%
20%
30%
40%
50%
60%
Q
1
F
Y
0
8
Q
2
F
Y
0
8
Q
3
F
Y
0
8
Q
4
F
Y
0
8
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
Trucks Bus
Source: Company, Emkay Research
Dividend yield at ~4% acts as inflexion point for the stock
DPS has remained stable/increased even during slowdown
M&HCVs - domestic market share
Overall M&HCV market share bottoming out
Product mix - Trucks to drive volumes
Exports - on an uptick
Pantnagar - higher output to support margins
Margins - high sensitivity to volumes
0
5
10
15
20
25
30
Q
1
F
Y
0
8
Q
2
F
Y
0
8
Q
3
F
Y
0
8
Q
4
F
Y
0
8
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
6%
11%
16%
21%
26%
31%
36%
Domestic M&HCV ('000 units) Mkt Share (% RHS)
Ashok Leyland
0
2
4
6
8
10
N
o
v
-
0
5
M
a
r
-
0
6
J
u
l
-
0
6
N
o
v
-
0
6
M
a
r
-
0
7
J
u
l
-
0
7
N
o
v
-
0
7
M
a
r
-
0
8
J
u
l
-
0
8
N
o
v
-
0
8
M
a
r
-
0
9
J
u
l
-
0
9
N
o
v
-
0
9
M
a
r
-
1
0
J
u
l
-
1
0
N
o
v
-
1
0
M
a
r
-
1
1
J
u
l
-
1
1
0
10
20
30
40
Div. Yield (%) Share Price (RHS)
Div. Yield (%)
recessionary period
(Rs)
Auto Sector
28
Key Financials
Income Statement (Rs. Mn)
Y/E Mar (Rsmn) FY10 FY11 FY12E FY13E
Net Sales 72,447 111,177 122,040 138,777
Growth (%) 21.1 53.5 9.8 13.7
Expenditure 64,819 98,742 109,075 123,908
Materials Consumed 52,193 81,235 88,948 101,094
Employee Cost 6,716 9,486 11,012 12,488
Other Exp 5,909 8,021 9,114 10,326
EBITDA 7,628 12,436 12,965 14,868
Growth (%) 62.5 63.0 4.3 14.7
EBITDA margin (%) 10.5 11.2 10.6 10.7
Depreciation 2,041 2,674 3,411 3,591
EBIT 5,587 9,761 9,554 11,277
EBIT margin (%) 7.7 8.8 7.8 8.1
Other Income 209 153 277 364
Interest expenses 811 1,637 2,063 1,843
PBT 4,985 8,278 7,767 9,797
Tax 1,097 1,705 1,709 2,253
Effective tax rate (%) 22.0 20.6 22.0 23.0
Adjusted PAT 3,889 6,573 6,058 7,544
Growth (%) 112.9 69.0 (7.8) 24.5
Net Margin (%) 5.4 5.9 5.0 5.4
(Profit)/loss from JVs/Ass/MI - - - -
Adj. PAT After JVs/Ass/MI 3,889 6,573 6,058 7,544
E/O items 348 (260) - -
Reported PAT 4,237 6,313 6,058 7,544
Growth (%) 123.0 49.0 (4.0) 24.5
Balance Sheet (Rs. Mn)
Equity share capital 1,330 1,330 1,330 1,330
Reserves & surplus 35,233 38,299 41,390 45,239
Net worth 36,563 39,630 42,720 46,569
Minority Interest
Secured Loans 7,116 11,823 9,423 8,023
Unsecured Loans 14,923 13,860 17,660 17,460
Loan Funds 22,039 25,683 27,083 25,483
Net deferred tax liability 4,611 5,338 5,338 5,338
Total Liabilities 63,213 70,650 75,141 77,390
Gross Block
Less: Depreciation 60,186 66,919 69,919 72,919
Net block 17,691 20,581 23,992 27,584
Capital work in progress 42,496 46,338 45,927 45,335
Investment 5,615 3,580 3,580 3,580
Current Assets 3,262 12,300 17,800 19,200
Inventories 41,397 43,672 43,777 50,118
Sundry debtors 16,382 22,089 18,171 20,664
Cash & bank balance 10,221 11,852 10,176 11,572
Loans & advances 5,189 1,795 2,165 2,799
Other current assets 9,605 7,936 13,265 15,084
Current lia & Prov 29,608 35,283 35,985 40,886
Current liabilities 25,921 30,379 29,883 33,947
Provisions 3,687 4,903 6,102 6,939
Net current assets 11,789 8,390 7,792 9,232
Misc. exp 51.7 43.1 43.1 43.1
Total Assets 63,213 70,650 75,141 77,390
Key Ratios
Y/E Mar FY10 FY11 FY12E FY13E
Profitability (%)
EBITDA Margin 10.5 11.2 10.6 10.7
Net Margin 5.4 5.9 5.0 5.4
ROCE* 12.5 18.5 16.4 18.4
ROE* 17.6 26.4 21.6 23.9
RoIC* 17.1 25.8 24.4 29.2
Per Share Data (Rs)
EPS 1.5 2.5 2.3 2.8
CEPS 2.2 3.5 3.6 4.2
BVPS* 8.7 10.0 11.1 12.6
DPS 0.7 1.0 1.0 1.2
Valuations (x)
PER 17.6 10.4 11.3 9.1
P/CEPS 11.6 7.4 7.2 6.2
P/BV* 3.0 2.6 2.3 2.0
EV / Sales 1.1 0.7 0.6 0.5
EV / EBITDA 10.8 6.4 5.8 4.8
Dividend Yield (%) 2.9 3.9 3.7 4.6
Gearing Ratio (x)
Net Debt/ Equity* 0.7 0.9 0.8 0.6
Net Debt/EBIDTA 2.1 1.8 1.8 1.4
Working Cap Cycle (days) 3.4 11.7 (4.6) (4.5)
Cash Flow (Rs. Mn)
PBT (Ex-Other income) 4,776 8,125 7,490 9,434
Depreciation 2,041 2,674 3,411 3,591
Interest Provided 811 1,637 2,063 1,843
Other Non-Cash items 1,564 (4,822) - -
Chg in working cap 2,806 6 967 (806)
Tax paid (1,097) (1,705) (1,709) (2,253)
Operating Cashflow 10,902 5,914 12,224 11,809
Capital expenditure (6,429) (4,697) (3,000) (3,000)
Free Cash Flow 4,473 1,216 9,224 8,809
Other income 209 153 277 364
Investments (1,612) (4,633) (5,500) (1,400)
Investing Cashflow (1,403) (4,480) (5,223) (1,036)
Equity Capital Raised - - - -
Loans Taken / (Repaid) 2,457 3,644 1,400 (1,600)
Interest Paid (811) (1,637) (2,063) (1,843)
Dividend paid (incl tax) (2,327) (3,092) (2,968) (3,695)
Income from investments
Others 1,914 949
Financing Cashflow 1,233 (136) (3,631) (7,139)
Net chg in cash 4,303 (3,400) 369 634
Opening cash position 851 5,189 1,795 2,165
Closing cash position 5,155 1,789 2,165 2,799
Ashok Leyland
* ex revaluation reserve
FY10 118,637 25,353 21.4 18,651 64.5 116.5 73.8 25.5 17.7 16.3
FY11 165,148 33,178 20.1 26,422 91.3 41.7 85.2 18.0 12.8 9.7
FY12E 195,075 35,857 18.4 28,674 99.1 8.5 51.3 16.6 11.4 7.6
FY13E 225,573 41,164 18.2 33,184 114.7 15.7 46.9 14.3 9.6 6.1
Financial Snapshot
Emkay
Bajaj Auto
New launches, exports to drive growth
C
o
m
p
a
n
y

U
p
d
a
t
e
Reco Previous Reco
Accumulate Buy
CMP Target Price
Rs1,668 Rs1,950
EPS change FY12E/13E (%) 2.4%/2.3%
Target price change (%) 16%
Nifty 5,017
Sensex 16,862
Price Performance
(%) 1M 3M 6M 12M
Absolute 17 21 20 9
Rel. to Nifty 19 32 29 20
Source: Bloomberg
7 September, 2011
Focus on demand pull to ensure market share gains with
strong profitability. 1QFY12 domestic motorcycle market share
at ~25% is below its FY07 peak of ~32%
Factored DEPB withdrawal in our estimates. Extension of the
scheme to result in EPS upgrade of ~7%. Expect exports to
remain the key growth driver irrespective of DEPB
Raised our FY12/FY13 EPS est. by 2.4% /2.3% to Rs 99/Rs 115.
Raise TP to Rs 1,950 valuing the company at 17x FY13 PE
(earlier 15x) due to high FCF, return ratios and dividend
However, lower our rating to ACCUMULATE from BUY. We
believe there is limited scope for valuation rerating from
hereon. Stock performance will be driven by earnings
Traction in volumes with focus on profitability
We expect Bajaj Auto to register volume growth of 15.5% CAGR over FY11-13E to 5mn
units driven by (1) launch of new products/variants within its umbrella brands (Discover
and Pulsar) (2) introduction of Boxer in the domestic market (3) sustained momentum in
domestic 3-wheelers at ~12% CAGR to 0.26mn units and (4) ~19% CAGR in exports to
1.7mn units (with an upward bias).
Market share assumptions for motorcycles leave room for upsides
We are not factoring in market share gain for the company during FY11-FY13E post the
500bps increase over the last two years to 27% (FY11). We would like to highlight that
company has not yet regained its peak motorcycle market share of 32% (FY07). Given the
absolute focus on two mother brands (Discover and Pulsar) and pull demand, there exist
upsides to our market share estimates. We would prefer to see the traction in recent/
expected launches and addition of 130 dealers before factoring in the same.
Focus on profitability to aid market share gain in the long term
A clear shift in strategy towards profitability/margins vis--vis market share should actually
aid BJAUT gain market share in the domestic two wheeler industry in the long term. This
is on account of the company focusing on all aspects of product success - customer
preference, maintenance cost, after sales, quality of dealership and customer satisfaction.
Factoring in DEPB withdrawal but upside from currency exists
Post 4QFY11 earnings, we have lowered the export incentives for the company from ~10%
to 5% of exports to factor in the risk of withdrawal of the scheme. Any extension in the
scheme will result in an EPS upgrade by ~7%. Exports will continue to be key growth
driver, irrespective of DEPB benefits.
Valuation and view
We expect earnings to register a ~12% CAGR during FY11-FY13E, with a strong case for
upward bias. We have revised our FY12/FY13 EPS estimates by 2.4%/2.3% to Rs 99/Rs
115 driven by volumes. We have raised our TP to Rs 1,950 valuing the company at FY13
PER/EV-EBIDTA of 17x/11.7x, given the high FCF, return ratios and dividend. However, we
lower our rating to ACCUMUATE from BUY. From here, we believe that there is limited
scope for rerating of valuations. Stock performance will be driven by volumes/earnings.

1200
1295
1390
1485
1580
1675
Sep-10 Nov-10 Jan-11 Mar -11 May-11 Jul-11
Rs
-20
-10
0
10
20
30 %
Ba jaj Auto (LHS) Rel t o Nifty (RHS)
Source: Bloomberg
Stock details
Sector Automobiles
Bloomberg BJAUT IB
Face Value(Rs) 10
No of shares o/s (mn) 289
52 Week H/L 1,665/ 1,190
Daily Avg Volume (No of sh) 428.700
Jun11 Mar11 Dec10
Promoters 50.0 50.0 49.7
FII/NRI 15.9 16.1 17.9
Public 17.4 17.4 17.6
Source: Capitaline
Auto Sector
30
0%
5%
10%
15%
20%
FY09 FY10 FY11 FY12E FY13E
0%
20%
40%
60%
80%
100%
FCF (% Sales) ROCE(% RHS)
28%
17%
8%
47%
Africa & Middle East South Asia (incl India)
Latin America South East Asia
20%
22%
24%
26%
28%
30%
32%
34%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
0
10
20
30
40
50
60
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
Economy Executive Premium
%
Source: CRISIL, SIAM, Emkay Research
Motorcycle - market share trend in different segments
Domestic motorcycle market share still below its previous
peak
Factoring in lower DEPB benefits
Attractive return ratios, strong cash flows
Motorcycles - changing product mix
Exports to remain robust
Exports - Africa remains the key market (FY11 Annual report)
Lower promotions indicating pull demand
Bajaj Auto
100
150
200
250
300
350
400
450
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
20%
25%
30%
35%
40%
45%
Exports ('000 Units) % of total volumes (RHS)
1,000
1,200
1,400
1,600
1,800
2,000
2,200
FY08 FY09 FY10 FY11 FY12E FY13E
0.0%
0.5%
1.0%
1.5%
2.0%
Marketing & Adv. Spend (Rs mn) % of Sales (RHS)
0%
2%
4%
6%
8%
10%
12%
0
20
40
60
80
100
120
140
DEPB benefit (% exports) EPS
EPS
0%
20%
40%
60%
80%
100%
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
Economy Executive Premium
Auto Sector
31
Key Financials
Net Sales 118,637 165,148 195,075 225,573
Growth (%) 35.5 39.2 18.1 15.6
Expenditure 93,284 131,970 159,217 184,409
Employee Cost 3,995 4,648 5,584 6,596
Other Exp 8,585 9,334 11,275 12,815
EBITDA 25,353 33,178 35,857 41,164
Growth (%) 122.9 30.9 8.1 14.8
EBITDA margin (%) 21.4 20.1 18.4 18.2
Depreciation 1,365 1,228 1,363 1,410
EBIT 23,989 31,950 34,495 39,753
EBIT margin (%) 20.2 19.3 17.7 17.6
Other Income 1,798 4,599 4,522 6,275
Interest expenses 60 17 5 3
PBT 25,726 36,532 39,012 46,025
Tax 7,075 10,110 10,338 12,841
Adjusted PAT 18,651 26,422 28,674 33,184
Growth (%) 116.5 41.7 8.5 15.7
Net Margin (%) 15.7 16.0 14.7 14.7
Adj PAT After JVs/Ass/MI 18,651 26,422 28,674 33,184
E/O items (1,615) 6,976 - -
Reported PAT 17,036 33,397 28,674 33,184
Growth (%) 159.5 96.0 (14.1) 15.7
Net worth 29,283 49,102 62,779 78,608
Minority Interest - - - -
Secured Loans 130 235 235 235
Unsecured Loans 13,256 3,016 2,252 1,252
Loan Funds 13,386 3,252 2,487 1,487
Net deferred tax liability 17 297 297 297
Gross Block 33,793 33,952 35,902 38,158
Net block 14,796 14,827 15,415 16,261
Capital work in progress 415 699 699 699
Investment 40,215 47,952 61,952 76,952
Current Assets 15,838 28,726 36,312 40,403
Inventories 4,462 5,473 6,578 7,587
Sundry debtors 2,728 3,628 4,360 5,029
Loans & advances 6,574 11,896 16,282 18,778
Other current assets 1,060 2,164 2,164 2,164
Current lia & Prov 28,579 39,553 48,815 53,922
Provisions 8,316 15,286 18,280 21,082
Net current assets (12,740) (10,827) (12,502) (13,519)
Misc. exp - - - -
Total Assets 42,686 52,651 65,563 80,392
Key Ratios
Profitability (%)
EBITDA Margin 21.4 20.1 18.4 18.2
Net Margin 15.7 16.0 14.7 14.7
ROCE 68.5 76.7 66.0 63.1
ROE 73.8 85.2 51.3 46.9
RoIC 343.4(12,215.6) (1,236.5) (979.4)
Per Share Data (Rs)
EPS 64.5 91.3 99.1 114.7
CEPS 69.2 95.6 103.8 119.6
BVPS 101.2 169.7 217.0 271.7
DPS 20.0 40.0 44.6 51.6
Valuations (x)
PER 25.5 18.0 16.6 14.3
P/CEPS 23.8 17.2 15.8 13.8
P/BV 16.3 9.7 7.6 6.1
EV / Sales 4.0 2.8 2.3 1.9
EV / EBITDA 17.7 12.8 11.4 9.6
Dividend Yield (%) 1.2 2.4 2.7 3.1
Gearing Ratio (x)
Net Debt/ Equity (0.7) (0.8) (0.9) (0.9)
Net Debt/EBIDTA 0.0 (0.4) (1.0) (1.0)
Working Cap Cycle (days) (40.2) (33.5) (36.7) (32.7)
Cash Flow (Rs. Mn)
Depreciation 1,365 1,228 1,363 1,410
Interest Provided 60 17 5 3
Other Non-Cash items (2,170) (5,568) - -
Chg in working cap 11,263 2,638 3,038 934
Tax paid (7,075) (10,110) (10,338) (12,841)
Capital expenditure (485) (443) (1,951) (2,256)
Free Cash Flow 26,886 19,695 26,607 27,001
Other income 1,798 4,599 4,522 6,275
Investments (22,949) (15,123) (14,000) (15,000)
Equity Capital Raised - 1,447 - -
Loans Taken / (Repaid) (2,314) (10,134) (765) (1,000)
Interest Paid (60) (17) (5) (3)
Others 3,033 13,537
Financing Cashflow (6,090) (8,620) (15,766) (18,358)
Net chg in cash (355) 551 1,363 (82)
Opening cash position 1,369 1,014 5,565 6,927
Bajaj Auto
CY09 29,386 1,455 4.9 844 31.3 (746.0) 7.8 43.4 18.0 3.4
CY10 43,971 3,578 8.1 1,899 70.5 124.9 16.5 19.3 12.4 3.0
CY11E 53,341 5,189 9.7 2,792 103.7 47.1 20.9 13.1 7.9 2.5
CY12E 64,821 6,388 9.9 3,255 120.8 16.6 20.8 11.3 5.9 2.2
Financial Snapshot (Consolidated)
Emkay
Eicher Motors
Market share gain to continue, Retain BUY
C
o
m
p
a
n
y

U
p
d
a
t
e
Reco Previous Reco
Buy Buy
CMP Target Price
Rs1,362 Rs1,700
Nifty 5,017
Sensex 16,862
Price Performance
(%) 1M 3M 6M 12M
Absolute 2 3 29 8
Source: Bloomberg
7 September, 2011
Source: Bloomberg
Stock details
Sector Automobiles
Bloomberg EIM@IN
Equity Capital (Rs mn) 270
Face Value(Rs) 10
52 Week H/L 1,450/975
Market Cap (Rs bn/USD mn) 36/813
Daily Avg Volume (No of sh) 18,414
Jun-11 Mar-11 Dec-10
Promoters 55.3 55.3 55.3
FII/NRI 15.1 14.4 18.2
Public 11.1 11.4 11.5
Source: Capitaline
CV volumes to surprise positively driven by higher demand for
7.5-12ton segment during a slowdown and its success in 12-
16ton segment (highest ever market share)
Well poised to deliver strong growth in higher tonnage
segment due to support from Volvo and strong balance sheet
Motorcycle business in a sweet spot as demand remains
strong; Clear focus to ensure swift capacity expansion and
higher profitability
Retain BUY with a TP of Rs 1,700 on SOTP basis. Valued
existing business at Rs 1,547 and engine business at Rs 153.
Key risk - sharp downturn in CV demand
7.5 to 12 ton M&HCVs outperform during slowdown, EIM-the
beneficiary
During a cyclical slowdown, ICVs tend to gain market share and during a cyclical upturn,
HCVs gain market share. This is a normal phenomenon as during slowdown there are
concerns of asset utilization and hence, preference shifts to ICVs. This is one of the key
reasons for our positive view towards Eicher (EIM), as 7.5 to 12 ton accounts for ~65% of
EIM's truck volumes.
12 to 16 ton - market share has crossed the previous peak of 6%
EIM's market share in the 12 to 16 ton segment has crossed the previous peak of ~6%. It
currently stands at ~7%. Also, this segment now accounts for 11% of EIM's truck volumes
and ~8% of EIM's total CV volumes. More importantly, EIM is focusing on creating brand
awareness for its 25 ton and 31 ton vehicles, so that it can participate when the demand
enters the cyclical upturn phase.
Two wheeler business - should benefit from clear focus
EIM's two wheeler (Royal Enfield) business is an underutilized business with lower
capacities and margins of ~13% despite the strong brand equity. Clear focus on the
business will ensure swift capacity additions and higher margins.
Engine business - a strong outsourcing opportunity and a stable
business
Engine manufacturing to commence from CY13 will not only provide support to EIM's
existing business but will also ensure a stable outsourcing business to Volvo. Initial
capacity planned is for 85,000 units that will manufacture engine from Euro II to Euro VII
and meet the requirements of EIM as well as Volvo (India/Japan/Europe)
Valuation & View
At CMP of Rs 1,361, the stock trades at PER of 13.1x/11.3x and EV/EBIDTA of 7.9x / 5.9x our
CY11 and CY12 estimates respectively. We retain BUY rating on the stock with a target
price of Rs 1,700 based on SOTP. We value the current business at Rs 1,547 and NPV of
engine business at Rs 153.

10 00
10 85
11 70
12 55
13 40
14 25
Sep -1 0 No v- 10 Ja n- 11 Ma r- 11 May- 11 Jul-1 1
Rs
-2 0
-1 0
0
10
20
30 %
Eicher Moto rs (LHS) Rel to Nifty ( RHS)
Auto Sector
33
0
5
10
15
20
J
u
n
-
0
1
F
e
b
-
0
2
O
c
t
-
0
2
J
u
n
-
0
3
F
e
b
-
0
4
O
c
t
-
0
4
J
u
n
-
0
5
F
e
b
-
0
6
O
c
t
-
0
6
J
u
n
-
0
7
F
e
b
-
0
8
O
c
t
-
0
8
J
u
n
-
0
9
F
e
b
-
1
0
O
c
t
-
1
0
J
u
n
-
1
1
in '000
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
J
u
n
-
0
1
M
a
r
-
0
2
D
e
c
-
0
2
S
e
p
-
0
3
J
u
n
-
0
4
M
a
r
-
0
5
D
e
c
-
0
5
S
e
p
-
0
6
J
u
n
-
0
7
M
a
r
-
0
8
D
e
c
-
0
8
S
e
p
-
0
9
J
u
n
-
1
0
M
a
r
-
1
1
Mkt Share (%)
0%
20%
40%
60%
80%
J
u
n
-
0
1
M
a
r
-
0
2
D
e
c
-
0
2
S
e
p
-
0
3
J
u
n
-
0
4
M
a
r
-
0
5
D
e
c
-
0
5
S
e
p
-
0
6
J
u
n
-
0
7
M
a
r
-
0
8
D
e
c
-
0
8
S
e
p
-
0
9
J
u
n
-
1
0
M
a
r
-
1
1
5-7.5Ton 7.5 - 12 ton
Product Mix
(%)
0%
10%
20%
30%
40%
50%
60%
70%
J
u
n
-
0
1
M
a
r
-
0
2
D
e
c
-
0
2
S
e
p
-
0
3
J
u
n
-
0
4
M
a
r
-
0
5
D
e
c
-
0
5
S
e
p
-
0
6
J
u
n
-
0
7
M
a
r
-
0
8
D
e
c
-
0
8
S
e
p
-
0
9
J
u
n
-
1
0
M
a
r
-
1
1
5-7.5Ton 7.5 - 12 ton
Mkt Share (%)
-20%
0%
20%
40%
60%
80%
100%
J
u
l
-
1
0
A
u
g
-
1
0
S
e
p
-
1
0
O
c
t
-
1
0
N
o
v
-
1
0
D
e
c
-
1
0
J
a
n
-
1
1
F
e
b
-
1
1
M
a
r
-
1
1
A
p
r
-
1
1
M
a
y
-
1
1
J
u
n
-
1
1
J
u
l
-
1
1
Eicher LCV Trucks Industry LCV Trucks
% YoY
0%
20%
40%
60%
80%
J
u
l
-
1
0
A
u
g
-
1
0
S
e
p
-
1
0
O
c
t
-
1
0
N
o
v
-
1
0
D
e
c
-
1
0
J
a
n
-
1
1
F
e
b
-
1
1
M
a
r
-
1
1
A
p
r
-
1
1
M
a
y
-
1
1
J
u
n
-
1
1
J
u
l
-
1
1
Eicher M&HCV Trucks Industry M&HCV Trucks
% YoY
-50%
0%
50%
100%
J
u
n
-
0
2
M
a
r
-
0
3
D
e
c
-
0
3
S
e
p
-
0
4
J
u
n
-
0
5
M
a
r
-
0
6
D
e
c
-
0
6
S
e
p
-
0
7
J
u
n
-
0
8
M
a
r
-
0
9
D
e
c
-
0
9
S
e
p
-
1
0
J
u
n
-
1
1
7.5 - 12 ton 12- 16 ton 16ton and above
(% YoY)
EIM gaining market share in domestic M&HCV goods
EIM gaining market share in domestic LCV goods
EIM - Strengthening foothold in 12-16T segment
EIM - Two wheeler business in a sweet spot
Lower tonnage vehicles outperform during slowdown
Rising market share of 7.5 - 12t segment in M&HCVs
EIM - Key player in 7.5-12 ton segment
EIM - Product Mix (Trucks) - rising share of 7.5t - 12t
Eicher Motors
0%
10%
20%
30%
40%
50%
60%
J
u
n
-
0
1
M
a
r
-
0
2
D
e
c
-
0
2
S
e
p
-
0
3
J
u
n
-
0
4
M
a
r
-
0
5
D
e
c
-
0
5
S
e
p
-
0
6
J
u
n
-
0
7
M
a
r
-
0
8
D
e
c
-
0
8
S
e
p
-
0
9
J
u
n
-
1
0
M
a
r
-
1
1
7.5 - 12 ton 12- 16 ton 16ton and above
Industry Mix (%)
Auto Sector
34
Key Financials (Consolidated)
Y/E, Mar (Rs. mn) CY09 CY10 CY11E CY12E
Net Sales 29,386 43,971 53,341 64,821
Growth (%) 71.1 49.6 21.3 21.5
Expenditure 27,932 40,392 48,153 58,433
Employee Cost 2,152 2,631 3,308 3,671
Other Exp 3,788 4,614 5,520 6,600
EBITDA 1,455 3,578 5,189 6,388
Growth (%) 4,044.2 146.0 45.0 23.1
EBITDA margin (%) 4.9 8.1 9.7 9.9
Depreciation 539 573 686 872
EBIT 916 3,005 4,503 5,516
EBIT margin (%) 3.1 6.8 8.4 8.5
Other Income 1,054 1,276 1,517 1,554
PBT 1,884 4,186 5,908 6,958
Tax 578 1,108 1,556 1,885
Adjusted PAT 1,305 3,078 4,352 5,072
Growth (%) (1,657.6) 135.8 41.4 16.6
Net Margin (%) 4.4 7.0 8.2 7.8
(Profit)/loss from JV's/Ass/MI 461 1,179 1,559 1,817
Adj. PAT After JVs/Ass/MI 844 1,899 2,792 3,255
E/O items (10) (9) - -
Reported PAT 834 1,889 2,792 3,255
Growth (%) 258.7 126.5 47.8 16.6
Equity share capital 267 269 269 269
Net worth 10,690 12,287 14,455 16,857
Minority Interest 5,747 6,774 8,333 10,150
Unsecured Loans 529 91 91 91
Loan Funds 1,264 956 491 826
Net deferred tax liability 142 250 142 142
Gross Block 7,437 8,113 9,913 12,713
Net block 3,635 3,844 4,958 6,886
Capital work in progress 122 669 2,017 1,017
Investment 2,941 4,586 5,086 5,086
Current Assets 18,121 20,500 24,793 31,413
Inventories 2,190 3,265 4,080 4,942
Sundry debtors 2,325 2,609 4,284 5,149
Loans & advances 1,540 1,814 3,083 3,781
Other current assets 360 355 663 809
Current lia & Prov 6,978 9,332 13,432 16,426
Provisions 962 1,391 2,296 2,834
Misc. exp - - - -
Total Assets 17,842 20,267 23,421 27,976
Key Ratios
Y/E, Mar CY09 CY10 CY11E CY12E
Profitability (%)
EBITDA Margin 4.9 8.1 9.7 9.9
Net Margin 4.4 7.0 8.2 7.8
ROCE 11.0 22.5 27.6 27.5
ROE 7.8 16.5 20.9 20.8
RoIC 22.8 106.8 145.5 125.7
Per Share Data (Rs)
EPS 31.3 70.5 103.7 120.8
CEPS 42.8 83.9 119.9 141.6
BVPS 400.5 456.1 536.6 625.7
DPS 7.0 15.7 23.2 27.1
Valuations (x)
PER 43.4 19.3 13.1 11.3
P/CEPS 31.8 16.2 11.3 9.6
P/BV 3.4 3.0 2.5 2.2
EV / Sales 1.6 1.0 0.8 0.6
EV / EBITDA 18.0 12.4 7.9 5.9
Dividend Yield (%) 0.5 1.2 1.7 2.0
Gearing Ratio (x)
Net Debt/ Equity (1.0) (0.9) (0.8) (0.9)
Net Debt/EBIDTA (7.2) (3.2) (2.3) (2.5)
Cash Flow (Rs. Mn)
PBT (Ex-Other income) 829 2,910 4,391 5,404
Depreciation 539 573 686 872
Other Non-Cash items 585 163 - -
Chg in working cap 2,224 726 34 423
Tax paid (578) (1,108) (1,556) (1,885)
Capital expenditure (259) (1,222) (3,148) (1,800)
Free Cash Flow 3,426 2,137 518 3,125
Other income 373 947 1,517 1,554
Investments (2,879) (1,645) (500) -
Investing Cashflow -2,764 -1,921 1,017 1,554
Equity Capital Raised (14) 3 - -
Loans Taken / (Repaid) (392) (307) (465) 335
Interest Paid (87) (95) (112) (112)
Dividend paid (incl tax) (219) (346) (732) (853)
Income from investments - - - -
Others (929) 57 - -
Financing Cashflow (1,641) (689) (1,309) (630)
Net chg in cash (979) (472) 226 4,049
* The difference between the closing cash as per balance sheet and as per cash
flow is due to cash credit balances
Eicher Motors
FY10 157,702 26,620 16.9 22,318 111.8 74.0 61.4 19.4 14.1 12.5
FY11 193,085 23,476 12.2 21,132 105.8 (5.3) 65.8 20.5 16.3 14.7
FY12E 230,891 26,406 11.4 23,267 116.5 10.1 73.5 18.6 14.5 12.8
FY13E 264,013 32,062 12.1 27,604 138.2 18.6 77.8 15.7 11.8 11.6
Financial Snapshot
Emkay
Hero MotoCorp
Superb franchise, expensive valuations
C
o
m
p
a
n
y

U
p
d
a
t
e
Reco Previous Reco
Reduce Hold
CMP Target Price
Rs2,165 Rs2,140
EPS change FY12E/13E (%) 2.7%/5.2%
Target price change (%) 16
Nifty 5,017
Sensex 16,862
Price Performance
(%) 1M 3M 6M 12M
Absolute 21 18 41 26
Source: Bloomberg
7 September, 2011
Source: Bloomberg
Stock details
Sector Automobiles
Bloomberg HMCL@IN
Face Value (Rs) 2
52 Week H/L (Rs) 2,065/1,378
Market Cap (Rs bn/USD mn) 409/8,872
Daily Avg Vol (No of shares) 492,049
Daily Avg Turnover (US$ mn) 20
Jun-11 Mar-11 Dec-10
Promoters 52.2 52.2 52.2
FII/NRI 33.8 32.9 33.6
Public 7.8 7.8 7.9
Source: Capitaline
Valuations (except dividend yield) are ignoring long term
uncertainties with respect to R&D/technology, impact of new
brand identity and efforts required on exports
Not concerned with company's volumes in the medium term
given the strong franchise in rural markets and a good agri
season
Lower income tax benefits in FY14 for Haridwar plant (~30% of
volumes/40% of EBIDTA) to result in subdued EPS growth
despite a 15% volume growth and stable margins
Upgrade volume by 1.7%/3.3% and EPS by 2.7%/5.2% to Rs 117/
Rs 138 in FY12/FY13. However, given expensive valuations
downgrade rating to REDUCE with a TP of Rs 2,140
Valuations ignoring long term uncertainties
While we do not dispute the franchise of HMCL, we are not comfortable with valuations
given lack of clarity with respect to R&D/technology tie up, acceptance of models under a
new corporate name, recurring branding and promotion cost (at least for FY12 and FY13)
and investments required to set up exports (target 10% of sales for the next 3 to 5 years-
current exports - 3%). Except for expected higher DPS (Rs 100) on a recurring basis, even
dividend yield is on the higher side.
Volumes can surprise positively in the near term given the strong
franchise
Given the strong brand equity of Splendor and Passion (especially in the rural areas), we
believe that volumes can surprise positively as it happened during FY08. A decent monsoon
and strong agri GDP will further aid volumes. We have factored in 15%/12% volume
growth in FY12/FY13 to 6.2mn/7mn units.
Margins may continue to surprise negatively vis--vis expectation
Despite strong volume performance, the margins of the company have been on a
downward trend. While price hikes and decline in metal prices will aid sequential margin
improvement, we have already factored the same in our estimates.
EPS growth to remain subdued in FY14 - due to lower direct tax
benefits
HMCL's Haridwar plant (30% of volumes/40% of EBIDTA), will be eligible for income tax
benefits for only 30% of its profits from FY14. This will result in 5% to 7% increase in
effective tax rate for the company. Assuming a 15% volume growth and flat margins in
FY14 vis--vis FY13, EPS growth will be in the range of 6% to 8%. With the potential entry
of Honda, there could be further pressure on profitability, which is difficult to quantify.
Valuations
At CMP, the stock trades at a FY13E PER/EV-EBIDTA of 15.7x/11.8x. Current valuations are
ignoring the long term uncertainties with respect to R&D/technology/exports. We continue
to like the existing franchise of the company and expect company to report strong volumes
in medium term. However, we lower our rating to REDUCE from HOLD due to concerns
with valuations on long term basis.
13 50
15 15
16 80
18 45
20 10
21 75
Sep- 10 Nov -1 0 Jan -1 1 Mar -1 1 May -1 1 Jul- 11
Rs
-2 0
-6
8
22
36
50 %
Ho ndaMot oCorp (LHS) Rel t o Nif ty(RHS)
Auto Sector
36
50%
55%
60%
65%
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
0%
20%
40%
60%
80%
100%
Overall(LHS) Economy
Executive Premium
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
50
70
90
110
130
150
170
190
210
1.5%
1.7%
1.9%
2.1%
2.3%
2.5%
2.7%
2.9%
Exports ('000 units) Exports (% of total vols RHS)
0%
10%
20%
30%
40%
50%
60%
70%
80%
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
Pleasure (Scooter) Passion Splendor
Domestic motorcycle market share stabilizing after bottoming out
Product mix highly concentrated on 3 key models (>80% cont.)
Exports - the key area of focus going ahead
Higher R&D and add spends to restrict margins improvement
EBITDA margins for Hero MotoCorp vs Bajaj Auto
Attractive return ratios and strong cash flows
Hero MotoCorp
10%
12%
14%
16%
18%
20%
22%
24%
Q
1
F
Y
0
8
Q
3
F
Y
0
8
Q
1
F
Y
0
9
Q
3
F
Y
0
9
Q
1
F
Y
1
0
Q
3
F
Y
1
0
Q
1
F
Y
1
1
Q
3
F
Y
1
1
Q
1
F
Y
1
2
HMCL (%) Bajaj (%)
0%
5%
10%
15%
20%
25%
30%
0%
20%
40%
60%
80%
100%
FCF (% sales) ROCE(% RHS)
Auto Sector
37
Key Financials
Y/E, Mar (Rs. mn) FY10 FY11P FY12E FY13E
Net Sales 157,702 193,085 230,891 264,013
Growth (%) 27.9 22.4 19.6 14.3
Expenditure 131,082 169,609 204,485 231,951
Employee Cost 5,603 6,189 6,870 7,944
Other Exp 17,995 22,309 26,873 29,793
EBITDA 26,620 23,476 26,406 32,062
Growth (%) 55.7 (11.8) 12.5 21.4
EBITDA margin (%) 16.9 12.2 11.4 12.1
Depreciation 1,915 2,253 2,626 2,884
EBIT 24,705 21,223 23,780 29,178
EBIT margin (%) 15.7 11.0 10.3 11.1
Other Income 3,406 5,058 3,981 4,290
Interest expenses (206) (94) (171) (196)
PBT 28,317 26,375 27,932 33,664
Tax 5,999 5,243 4,665 6,059
Adjusted PAT 22,318 21,132 23,267 27,604
Growth (%) 74.1 (5.3) 10.1 18.6
Net Margin (%) 14.2 10.9 10.1 10.5
(Profit)/loss from JV's/Ass/MI - - - -
Adj. PAT after MI 22,318 21,132 23,267 27,604
E/O items - (798) - -
Reported PAT 22,318 20,333 23,267 27,604
Growth (%) 74.1 (5.3) 10.1 18.6
Y/E Mar (Rsmn) FY10 FY11P FY12E FY13E
Net worth 34,650 29,561 33,790 37,194
Secured Loans - - - -
Unsecured Loans 660 327 127 127
Loan Funds 660 327 127 127
Gross Block 27,510 30,510 37,510 39,510
Net block 16,588 17,335 21,709 20,825
Capital work in progress 481 3,050 3,050 3,050
Investment 39,257 51,287 48,287 49,287
Current Assets 28,826 15,046 25,292 33,830
Inventories 4,364 5,249 6,814 7,792
Sundry debtors 1,084 1,306 8,177 9,350
Cash & bank balance 19,072 716 1,529 6,666
Loans & advances 4,058 7,287 8,713 9,963
Current lia & Prov 48,314 54,363 61,954 67,203
Provisions 10,264 10,811 11,533 13,187
Net current assets (19,488) (39,317) (36,662) (33,374)
Misc. exp - - - -
Total Assets 36,838 32,355 36,384 39,789
Key Ratios
Y/E Mar FY10 FY11P FY12E FY13E
Profitability (%)
EBITDA Margin 16.9 12.2 11.4 12.1
Net Margin 14.2 10.9 10.1 10.5
ROCE 72.9 76.0 80.8 87.9
ROE 61.4 65.8 73.5 77.8
RoIC (262.5) (95.0) (121.4) (163.5)
Per Share Data (Rs)
EPS 111.8 105.8 116.5 138.2
CEPS 121.3 117.1 129.7 152.7
BVPS 173.5 148.0 169.2 186.3
DPS 110.0 135.0 81.6 103.7
Valuations (x)
PER 19.4 20.5 18.6 15.7
P/CEPS 17.9 18.5 16.7 14.2
P/BV 12.5 14.7 12.8 11.6
EV / Sales 2.4 2.0 1.7 1.4
EV / EBITDA 14.1 16.3 14.5 11.8
Dividend Yield (%) 5.1 6.2 3.8 4.8
Gearing Ratio (x)
Net Debt/ Equity (1.7) (1.7) (1.5) (1.5)
Net Debt/EBIDTA (2.2) (2.2) (1.9) (1.7)
Cash Flow (Rs. Mn)
Y/E, Mar (Rs. mn) FY10 FY11P FY12E FY13E
Depreciation 1,915 2,253 2,626 2,884
Interest Provided (206) (94) (171) (196)
Other Non-Cash items - 6,235 - -
Chg in working cap 25,971 1,472 (1,842) 1,849
Tax paid (5,999) (5,243) (4,665) (6,059)
Free Cash Flow 44,969 20,371 12,899 25,851
Other income 3,406 5,058 3,981 4,290
Investments (5,570) (12,030) 3,000 (1,000)
Investing Cashflow (2,164) (6,972) 6,981 3,290
Loans Taken / (Repaid) (125) (333) (200) -
Interest Paid 206 94 171 196
Others - - - -
Net chg in cash 17,212 (18,356) 813 5,137
Opening cash position 2,196 19,072 716 1,529
Closing cash position 19,407 716 1,529 6,666
Hero MotoCorp
FY10 185,296 28,828 15.6 19,459 31.7 145.3 29.8 25.1 15.1 6.2
FY11 233,119 33,003 14.2 23,887 38.9 22.8 26.3 20.4 12.5 4.7
FY12E 289,265 38,937 13.5 28,822 46.9 20.7 25.5 16.9 10.2 4.0
FY13E 335,205 43,746 13.1 32,807 53.4 13.8 24.4 14.9 8.5 3.3
Financial Snapshot (Standalone)
Emkay
Mahindra & Mahindra

Strong product portfolio
C
o
m
p
a
n
y

U
p
d
a
t
e
Reco Previous Reco
Buy Buy
CMP Target Price
Rs791 Rs930
EPS change FY12E/13E (%) 8.8%/3.2%
Target price change (%) 13
Nifty 5,017
Sensex 16,862
Price Performance
(%) 1M 3M 6M 12M
Absolute 22 20 20 26
Source: Bloomberg
7 September, 2011
Source: Bloomberg
Stock details
Sector Automobiles
Bloomberg MM IB
Face Value(Rs) 5
52 Week H/L 825/ 584
Daily Avg Volume (No of sh) 1,965,411
Jun11 Mar11 Dec10
Promoters 24.9 24.9 22.8
FII/NRI 33.8 32.7 35.0
Public 8.5 8.6 9.0
Source: Capitaline
Existing product portfolio enjoys strong brand equity and has
exposure to semi urban/rural areas
New launches to bring in volume momentum as MM has
entered into new segments
Expect value accretion from Ssangyong in FY13 once the
benefits of restructuring are visible
Retain Buy on the stock with a SOTP based TP of Rs 930.
Assign Rs 725 (8x EV/EBIDTA) to standalone business, Rs 160
to subsidiaries and Rs 45 to MVML (7.5x EV/EBIDTA)
Existing model portfolio - enjoys strong brand equity
MM continues to enjoy strong brand equity across product segments (Market share of
~53% in UVs and ~42% in tractors), which led to its above industry growth rates in Q1FY12.
We expect the current product portfolio to sustain volume momentum, driven by strong
non-urban demand. MM's tractor volumes will benefit from presence across India and
across HP segments (Yuvraj in low HP to Arjun in high HP).
New launches - the key volume driver in FY12/FY13
Recent launches (Maximmo, Genio, etc) have filled the gap in their product portfolio (no
presence or weak presence). More importantly, new launches have achieved reasonable
success. We understand there is a waiting period for some of its products. This, coupled
with potential new launches (New SUV, mini Xylo, etc), should ensure MM outperforming
the industry growth in FY12/FY13. We forecast volume CAGR of ~11% for FY11-13E in the
UV segment and ~22% CAGR in pick-up segments (including Gio and Maxximo) with an
upward bias.
Ssangyong - expect value accretion in FY13
We are enthused with the volume ramp up (+47% YoY to 51,995 units YTDFY12) and cash
flow generation by Ssangyong. MM has been able to meet the capex requirement through
internal accruals, post acquisition. Owing to higher cost structure on resuming normal
business operations, Ssangyong is not expected to break even in FY12. We expect value
accretion to happen in FY13 as the management streamlines operations and looks for
synergies.
Valuations
We have valued MM on SOTP basis, assigning a value of Rs 725 to its standalone
business and Rs 160 to listed subsidiaries and Tech Mahindra. We value MVML business
at Rs 45 per share on FY13 estimates. We believe there exists a strong potential for
higher value from MVML as and when product ramp up happens and earnings visibility
improves. Also, the value accretion from Ssangyong will be additional trigger in FY13.
Currently, we have not factored in any value accretion from Ssangyong.

550
605
660
715
770
825
Sep-10 Nov-10 Jan-11 Mar-11 May- 11 Jul-11
Rs
-10
0
10
20
30
40 %
Mah &Mah (LHS) Rel to Nifty (RHS)
Auto Sector
39
0%
5%
10%
15%
20%
25%
30%
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
E
F
Y
1
3
E
0%
2%
4%
6%
8%
10%
EBITDA Stand.(%) ROCE FCF (% of Sales)
FCF (% Sales)
0
20
40
60
80
100
F
Y
1
0
F
Y
1
1
F
Y
1
2
E
F
Y
1
3
E
0%
2%
4%
6%
8%
10%
12%
Uvs/LCVs Navistar trucks
Cons. Equip. % of total sales (RHS)
0
5
10
15
20
25
30
35
Q
1
F
Y
0
8
Q
2
F
Y
0
8
Q
3
F
Y
0
8
Q
4
F
Y
0
8
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
-50%
-40%
-30%
-20%
-10%
0%
10%
Volumes EBITDA Margin (% RHS)
-10%
0%
10%
20%
30%
40%
50%
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
E
F
Y
1
3
E
UV/LCV 3 Wheelers Tractors
% YoY
5%
10%
15%
20%
25%
Q
1
F
Y
0
8
Q
2
F
Y
0
8
Q
3
F
Y
0
8
Q
4
F
Y
0
8
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
Uvs Tractors
0%
20%
40%
60%
80%
100%
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
<30HP 31-40HP 41-50HP >50HP
-20%
0%
20%
40%
60%
80%
100%
Q
1
F
Y
0
8
Q
2
F
Y
0
8
Q
3
F
Y
0
8
Q
4
F
Y
0
8
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
UV LCV (<3.5t) Tractors
Volume growth in high double digits across segments
followed by improving market share
MM: Rising MVML production to lower standalone margins
Healthy cash flow generation and return ratios
Structurally higher EBIT margins of tractors led by..
Source: CRISIL, Emkay Research
shift towards higher HP segment
Volume growth momentum to sustain
Ssangyong: Value accretion from FY13
Mahindra & Mahindra
20%
30%
40%
50%
60%
Q
1
F
Y
0
8
Q
2
F
Y
0
8
Q
3
F
Y
0
8
Q
4
F
Y
0
8
Q
1
F
Y
0
9
Q
2
F
Y
0
9
Q
3
F
Y
0
9
Q
4
F
Y
0
9
Q
1
F
Y
1
0
Q
2
F
Y
1
0
Q
3
F
Y
1
0
Q
4
F
Y
1
0
Q
1
F
Y
1
1
Q
2
F
Y
1
1
Q
3
F
Y
1
1
Q
4
F
Y
1
1
Q
1
F
Y
1
2
UV LCV (<3.5t) Tractors
Auto Sector
40
Key Financials (Standalone)
Net Sales 185,296 233,119 289,265 335,205
Growth (%) 42.0 25.8 24.1 15.9
Expenditure 156,469 200,116 250,329 291,460
Employee Cost 11,985 14,197 17,038 18,453
Other Exp 21,022 23,287 26,397 30,250
EBITDA 28,828 33,003 38,937 43,746
Growth (%) 175.1 14.5 18.0 12.4
EBITDA margin (%) 15.6 14.2 13.5 13.1
Depreciation 3,708 4,139 4,616 5,138
EBIT 25,120 28,864 34,320 38,608
EBIT margin (%) 13.6 12.4 11.9 11.5
Other Income 1,994 3,095 3,412 4,279
Interest expenses 278 (503) (191) (280)
PBT 26,835 32,462 37,924 43,167
Tax 7,376 8,575 9,102 10,360
Adjusted PAT 19,459 23,887 28,822 32,807
Growth (%) 145.3 22.8 20.7 13.8
Net Margin (%) 10.5 10.2 10.0 9.8
E/O items 1,418 2,734 - -
Reported PAT 20,878 26,621 28,822 32,807
Growth (%) 149.5 27.5 8.3 13.8
Net worth 78,302 103,134 123,266 146,181
Secured Loans 6,025 4,072 4,072 4,072
Unsecured Loans 22,777 19,981 19,981 17,981
Loan Funds 28,802 24,053 24,053 22,053
Gross Block 52,763 62,277 73,277 80,277
Net block 27,385 33,860 40,243 42,106
Investment 63,980 93,253 109,253 127,253
Current Assets 60,424 61,435 74,826 89,258
Inventories 11,888 16,942 21,463 24,872
Sundry debtors 12,581 13,547 18,029 20,892
Loans & advances 18,014 23,732 28,437 32,954
Other current assets 509 1,067 1,067 1,067
Current lia & Prov 51,965 67,676 82,460 95,839
Provisions 17,965 20,059 31,022 35,950
Net current assets 8,458 (6,241) (7,634) (6,581)
Misc. exp 41 - - -
Total Assets 109,507 130,731 150,862 171,778
Key Ratios
Profitability (%)
EBITDA Margin 15.6 14.2 13.5 13.1
Net Margin 10.5 10.2 10.0 9.8
ROCE 26.8 26.6 26.8 26.6
ROE 29.8 26.3 25.5 24.4
RoIC 162.1 144.7 142.3 146.2
Per Share Data (Rs)
EPS 31.7 38.9 46.9 53.4
CEPS 37.7 45.6 54.5 61.8
BVPS 127.5 168.0 200.8 238.1
DPS 9.4 10.8 11.7 13.3
Valuations (x)
PER 25.1 20.4 16.9 14.9
P/CEPS 21.0 17.4 14.6 12.8
P/BV 6.2 4.7 4.0 3.3
EV / Sales 2.3 1.8 1.4 1.1
EV / EBITDA 15.1 12.5 10.2 8.5
Dividend Yield (%) 1.2 1.4 1.5 1.7
Gearing Ratio (x)
Net Debt/ Equity 0.00 0.09 0.01 (0.09)
Net Debt/EBIDTA 0.00 0.29 0.03 (0.29)
Cash Flow (Rs. Mn)
Depreciation 3,708 4,139 4,616 5,138
Interest Provided 278 (503) (191) (280)
Other Non-Cash items 6,032 1,956 -
Chg in working cap (4,119) 3,413 1,076 2,589
Tax paid (7,376) (8,575) (9,102) (10,360)
Free Cash Flow 16,366 20,067 20,770 28,975
Other income 1,994 5,829 3,412 4,279
Investments (8,449) (33,448) (16,000) (18,000)
Equity Capital Raised 118 366 - -
Loans Taken / (Repaid) (11,726) (4,749) (0) (2,000)
Interest Paid (278) 503 191 280
Others 10,103 8,173 - -
Net chg in cash 1,890 (11,286) (317) 3,643
Mahindra & Mahindra
FY10 293,253 36,695 12.5 25,106 86.9 116.9 23.7 12.7 6.9 2.7
FY11 365,747 31,478 8.6 22,374 77.4 (10.9) 17.4 14.2 7.8 2.3
FY12E 386,507 33,565 8.7 22,988 79.5 2.7 15.4 13.8 7.3 2.0
FY13E 467,618 36,834 7.9 24,905 86.2 8.3 14.6 12.8 6.3 1.7
Financial Snapshot
Emkay
Maruti Suzuki India

On a strong footing sans currency risk
C
o
m
p
a
n
y

U
p
d
a
t
e
Reco Previous Reco
Accumulate Accumulate
CMP Target Price
Rs1,100 Rs1,250
EPS change FY12E/13E (%) -10/-14
Target price change (%) -11
Nifty 5,017
Sensex 16,862
Price Performance
(%) 1M 3M 6M 12M
Absolute -8 -12 -13 -17
Rel. to Nifty -6 -4 -7 -9
Source: Bloomberg
7 September, 2011
Source: Bloomberg
Stock details
Sector Automobiles
Bloomberg MSIL IB
Face Value(Rs) 5
52 Week H/L 1,600/ 1,048
Daily Avg Volume (No of sh) 460,999
Jun11 Mar11 Dec10
Promoters 54.2 54.2 54.2
FII/NRI 18.8 19.3 21.1
Public 2.7 2.7 2.5
Source: Capitaline
Volume momentum to resume with the launch of the new Swift,
resolution of production constraints and increase in diesel
engine capacity by end FY12
Expanding reach/product portfolio to alleviate market share
concerns. Currency continues to be the biggest concern
Lowering our Yen/Rs rate for FY12E/FY13E by 1%/4% to 1.78/
1.7. Lower our FY12E/13E EPS by 10%/14%. Retain Accumulate,
lower our TP to Rs 1,250
Earnings based valuations not relevant due to lack of clarity
on currency risk. Stock is attractive on balance sheet
valuations given strong cash flow, sound return ratios
New launches to drive volumes. Expect ~10% CAGR over FY11-13E
MSIL to benefit from new launches (New Swift in Q2, R-III MUV in H2FY12) leading to
domestic volume CAGR of ~11% over FY11-13E. Capacity constraint issues will get
addressed with new capacity coming on stream (1.65mn units) from 2HFY12. Maruti still
commands the lowest cost of ownership and has the highest number of product offerings
in the sub Rs 0.5mn range, making its leadership undisputable for the next 1-2 years.
Diesel capacity expansion to support volumes
MSIL is strongly expanding its diesel engine capacity from 0.2mn currently to 0.3mn by
FY12 end. We believe MSIL is well poised to benefit from the strong momentum in diesel
sales (~24% in FY12 vs ~19% in FY11). Current volumes are hampered due to production
constraints (labour issues) at its Manesar plant. Expect strong volume momentum once
the issues are resolved and normal production resumes
Expanding reach to maintain competitive advantage
Maruti Suzuki has consistently strengthened its product profile with less reliance on few
models (contribution from top 5 models at 76% in FY11 vs 87% in FY06) and strong
distribution network (933 dealerships vs 289 for Hyundai, 230 for GM). Also, a strong base
of 5,400 resident dealer sales executives in rural regions strengthens its dominance in
rural markets. Currently, rural sales account for ~20% of MSIL's sales.
Currency a bigger risk
Currency continues to remain a major headwind given its significant exposure to JPY
(~22% of net sales) and unhedged position from 3QFY12. While company is taking steps
to reduce the import content as well as reliance on Yen, the impact will be visible over
medium term. The steps taken include indigenization at vendor level, alternative sources
of imports (Thailand/Europe), etc. We have lowered our Rs/Yen by 1%/4% for FY12E/
FY13E to 1.78/1.7 resulting in 3%/13% downgrade in EPS
Valuations
Given the near term concerns on volumes, the stock is currently trading at 13.8x/12.8x
PER and 7.3x/6.3x EV/EBITDA on our FY12/13 estimates. Given the uncertainty with respect
to Yen, valuing the stock on earnings is erroneous. We find stock attractive on balance
sheet valuations given the strong cash flows and sound return ratios. We retain
ACCUMULATE on the stock with a TP of Rs 1,250

1050
1155
1260
1365
1470
1575
Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11
Rs
-20
-12
-4
4
12
20 %
Marut iSuzu kiIndia (LHS) Rel to Nifty (RHS)
Auto Sector
42
-
1,000
2,000
3,000
4,000
5,000
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
Capital Revenue % of Net Sales (RHS)
Rs mn
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
5
7
9
11
13
EBITDA Margin (% RHS) Yen/INR
Yen/INR
-
0.5
1.0
1.5
I
n

m
n

u
n
i
t
s
0%
5%
10%
15%
20%
25%
30%
35%
A1 A2 A3
MPV UV YoY (RHS)
0%
20%
40%
60%
80%
100%
FY05 FY06 FY07 FY08 FY09 FY10 FY11
M
o
d
e
l

c
o
n
t
r
i
b
u
t
i
o
n

(
%
)
Alto M800 WagonR
Zen/Estillo Omni Swift
Versa/EECO Dzire Ritz
Diversified product portfolio
Few success stories of new launches (ex Maruti)
Volume growth to moderate, product mix to improve
Segment wise market share trend
EBITDA margins and Yen/INR trend
Strong focus on R&D to help maintain competitive advantage
Maruti Suzuki India
0%
5%
10%
15%
20%
25%
3
9
3
5
6
3
9
4
7
9
3
9
6
0
0
3
9
7
2
2
3
9
8
4
5
3
9
9
6
5
4
0
0
8
7
4
0
2
1
0
4
0
3
3
0
4
0
4
5
2
4
0
5
7
5
M
a
r
k
e
t

S
h
a
r
e

(
%
)
Nano Grande Punto Beat Jazz
i10 i20 Micra Polo
Etios Vento
0%
10%
20%
30%
40%
50%
60%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
A2 (Compact) A3 (Mid Size)
Auto Sector
43
Key Financials
Net Sales 293,253 365,747 386,507 467,618
Growth (%) 42.0 24.7 5.7 21.0
Expenditure 256,558 334,269 352,942 430,784
Employee Cost 5,456 7,036 8,182 9,513
Other Exp 29,104 42,331 41,876 50,993
EBITDA 36,695 31,478 33,565 36,834
Growth (%) 133.3 (14.2) 6.6 9.7
EBITDA margin (%) 12.5 8.6 8.7 7.9
Depreciation 8,250 10,135 10,802 12,272
EBIT 28,445 21,343 22,763 24,562
EBIT margin (%) 9.7 5.8 5.9 5.3
Other Income 7,945 9,477 9,027 9,854
PBT 36,055 30,576 31,490 34,116
Tax 10,949 8,202 8,502 9,211
Adjusted PAT 25,106 22,374 22,988 24,905
Growth (%) 116.9 (10.9) 2.7 8.3
Net Margin (%) 8.6 6.1 5.9 5.3
E/O items (130) (160) - -
Reported PAT 24,976 22,214 22,988 24,905
Growth (%) 116.9 (10.9) 2.7 8.3
Net worth - - - -
Unsecured Loans 7,949 2,781 2,781 2,781
Loan Funds 8,214 3,093 3,093 3,093
Gross Block 104,067 117,377 139,377 159,377
Net block 50,247 55,294 66,492 74,220
Investment 71,766 51,067 65,567 76,067
Current Assets 37,724 63,563 72,180 88,667
Inventories 12,088 14,150 16,026 19,413
Sundry debtors 8,099 8,933 16,026 19,413
Cash & bank balance 982 25,085 8,789 12,233
Loans & advances 15,707 13,722 29,666 35,935
Other current assets 848 1,673 1,673 1,673
Current lia & Prov 35,678 40,798 54,976 67,101
Provisions 6,284 5,258 5,564 6,792
Misc. exp - - - -
Total Assets 127,935 143,412 164,263 186,853
Key Ratios
Profitability (%)
Net Margin 8.6 6.1 5.9 5.3
ROCE 31.7 22.7 20.7 19.6
ROE 23.7 17.4 15.4 14.6
RoIC 60.8 40.9 35.6 31.0
Per Share Data (Rs)
EPS 86.9 77.4 79.5 86.2
CEPS 115.4 112.5 116.9 128.6
BVPS 409.5 479.8 552.0 630.2
DPS 6.0 7.5 6.4 6.9
Valuations (x)
PER 12.7 14.2 13.8 12.8
P/CEPS 9.5 9.8 9.4 8.6
P/BV 2.7 2.3 2.0 1.7
EV / Sales 0.9 0.7 0.6 0.5
EV / EBITDA 6.9 7.8 7.3 6.3
Dividend Yield (%) 0.5 0.7 0.6 0.6
Gearing Ratio (x)
Net Debt/ Equity (0.5) (0.4) (0.4) (0.4)
Net Debt/EBIDTA (1.7) (2.0) (2.0) (2.2)
Cash Flow (Rs. Mn)
Depreciation 8,250 10,135 10,802 12,272
Other Non-Cash items 2,647 3,843 - -
Chg in working cap 481 3,384 (10,735) (918)
Tax paid (10,949) (8,202) (8,502) (9,211)
Free Cash Flow 16,750 6,783 (8,386) 6,705
Other income 7,945 9,317 9,027 9,854
Investments (43,654) 15,137 (14,500) (10,500)
Investing Cashflow (35,709) 24,454 (5,473) (646)
Loans Taken / (Repaid) 1,225 (5,121) - -
Interest Paid (335) (244) (300) (300)
Others - - -
Financing Cashflow 551 (7,134) (2,437) (2,615)
Net chg in cash (18,408) 24,103 (16,296) 3,444
Opening cash position 19,390 982 25,085 8,789
Closing cash position 982 25,085 8,789 12,233
Maruti Suzuki India
FY10 924,130 74,183 8.0 10,751 16.3 (259.6) 15.8 47.0 10.1 6.0
FY11 1,230,719 166,941 13.6 89,192 135.1 729.6 64.7 5.7 4.2 2.6
FY12E 1,421,722 177,708 12.5 91,374 138.4 2.4 39.5 5.5 3.9 1.9
FY13E 1,606,448 199,807 12.4 102,149 154.8 11.8 32.5 4.9 3.4 1.4
Financial Snapshot (Standalone)
Emkay
Tata Motors
Favourable risk reward
C
o
m
p
a
n
y

U
p
d
a
t
e
Reco Previous Reco
Buy Buy
CMP Target Price
Rs763 Rs1,230
Nifty 5,017
Sensex 16,862
Price Performance
(%) 1M 3M 6M 12M
Absolute -15 -26 -33 -27
Rel. to Nifty -13 -20 -28 -20
Source: Bloomberg
7 September, 2011
Source: Bloomberg
Stock details
Sector Automobiles
Bloomberg TTMT@IN
Face Value (Rs) 10
52 Week H/L (Rs) 1,381/695
Market Cap (Rs bn/USD mn) 399/8,655
Daily Avg Vol (No of shares) 2,955,155
Daily Avg Turnover (US$ mn) 57.4
Jun11 Mar11 Dec10
Promoters 34.8 34.8 34.9
FII/NRI 43.1 44.7 43.2
Public 7.8 7.5 7.8
Source: Capitaline
Current valuations factor 63%/41% drop in JLR/conso EBIDTA,
implying JLR margins dropping by ~940 bps to 5.2%
Balance sheet in much better shape vis--vis FY09. JLR/Conso
Net Debt stands at Rs24bn/Rs139bn (FY09-Rs 132bn/Rs236bn).
Also, capex of GBP 1.5bn is not sacrosanct
More concerned with domestic PV business. Also, expect
competitive intensity to increase in 'ACE' segment. JLR to
report strong volumes in 2HFY12
Retain BUY with an SOTP based TP of Rs 1,230
Valuations - factoring in 63% / 41% drop in JLR/Consolidated EBIDTA
Stock price is implying a drop in JLR/ consolidated EBIDTA of 63%/41% in FY13. This
would result in JLR/consolidated EBIDTA margins declining by 940 bps/500 bps to 5.2%/
7.4%. Given a balanced regional mix of volumes and engine shortages, we do not expect
a sharp drop in margins.
Balance sheet in better shape (vs FY09), Capex is not sacrosanct
Current balance sheet of JLR/consolidated entity is in much better shape as compared to
FY09. Net Debt of JLR/consolidated (ex TMFSL) stands at Rs 24bn/Rs 139bn (FY09- Rs
132bn/Rs 236bn). Consolidated net DE (ex TMFSL) stands at 0.7x (FY09 - 4.5). Moreover,
we believe that GBP 1.5bn capex and product development spend is not sacrosanct. It will
be altered significantly, if the need arises.
JLR - 2HFY12 to report better volumes, address concerns
With the launch of Range Rover 'Evoque', XF 2012 model and 2.2 ltr XF, we expect JLR
volumes to surpass expectations. Also, we understand that in China, premium vehicles
are sold via down payment (the ratio ranges from 70% to 90% for different players). We
expect 2HFY12 to address concerns with respect to volumes.
Domestic PV business - a bigger area of concern
We believe that the domestic passenger vehicles business is a bigger problem for the
company. Our analysis indicates that company is making losses in the business. We are
concerned with the deteriorating franchise despite a significant step up in the quality of
the product. Also, we are concerned with the rising competitive intensity in 'ACE' segment
as competition is coming from players, who enjoy strong brand equity.
Valuation
Post the sharp correction in the stock price, we believe that valuations are factoring the
risk of sharp erosion in margins or volume decline in JLR. We believe, even in the event
of a repeat of 2008-09, TTMT is in much better shape this time in terms of product
portfolio, financials and brand recall. We retain our BUY rating on the stock with an SOTP
based TP of Rs 1,230.

650
795
940
1085
1230
1375
Sep-10 Nov-10 Jan-11 Mar -11 May-11 Jul-11
Rs
-30
-18
-6
6
18
30 %
Tat aMo tor s (LHS) Re lto Nifty( RHS)
Auto Sector
45
-
50
100
150
200
250
-
1
2
3
4
5
JLR TML (ex JLR & TMFSL)
Consolidated (ex TMFSL) Net debt/Equity (RHS)
Rs bn
-40%
-20%
0%
20%
40%
60%
80%
1
Q
F
Y
1
1
2
Q
F
Y
1
1
3
Q
F
Y
1
1
4
Q
F
Y
1
1
1
Q
F
Y
1
2
Jaguar Landrover
Valuations factoring in a 63%/41% drop in JLR/conso margins
Net DE JLR conso (ex TMFSL)
JLR Retail Sales - diversified regional mix
Jaguar and Land Rover quarterly growth (% YoY)
Nano: On a downhill
Volume growth: M&HCVs, LCVs and PVs (ex Nano)
Tata Motors
Rs mn FY13E FY13E
Market cap 504,915 504,915
Net Debt (automotive) 126,793 126,793
EV (ex TMFSL) 631,708 631,708
EV break up
Standalone (7.5x) 402,532 402,532
Others 59,083 59,083
JLR (bal) 170,093 170,093
JLR EBIDTA
Multiple 2.5x 3.5x
JLR EBIDTA (implied) 68,037 48,598
Drop in JLR EBIDTA -47.6% -62.6%
Drop in con EBIDTA -30.9% -40.6%
0%
20%
40%
60%
80%
100%
1
0
M
F
Y
0
9
1
Q
F
Y
1
0
2
Q
F
Y
1
0
3
Q
F
Y
1
0
4
Q
F
Y
1
0
1
Q
F
Y
1
1
2
Q
F
Y
1
1
3
Q
F
Y
1
1
4
Q
F
Y
1
1
1
Q
F
Y
1
2
US UK Europe Russia China ROW
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
1
Q
F
Y
0
8
2
Q
F
Y
0
8
3
Q
F
Y
0
8
4
Q
F
Y
0
8
1
Q
F
Y
0
9
2
Q
F
Y
0
9
3
Q
F
Y
0
9
4
Q
F
Y
0
9
1
Q
F
Y
1
0
2
Q
F
Y
1
0
3
Q
F
Y
1
0
4
Q
F
Y
1
0
1
Q
F
Y
1
1
2
Q
F
Y
1
1
3
Q
F
Y
1
1
4
Q
F
Y
1
1
1
Q
F
Y
1
2
PVs (ex Nano) M&HCVs LCVs
% YoY Nano ('000 units)
0
2
4
6
8
10
12
A
p
r
-
1
0
J
u
n
-
1
0
A
u
g
-
1
0
O
c
t
-
1
0
D
e
c
-
1
0
F
e
b
-
1
1
A
p
r
-
1
1
J
u
n
-
1
1
A
u
g
-
1
1
Auto Sector
46
Key Financials (Standalone)
Net Sales 924,130 1,230,719 1,421,722 1,606,448
Growth (%) 29.5 33.2 15.5 13.0
Expenditure 849,947 1,063,778 1,244,014 1,406,640
Materials Consumed 614,954 790,084 933,352 1,055,816
Employee Cost 87,518 93,427 101,337 115,506
Other Exp 147,475 180,268 209,324 235,318
EBITDA 74,183 166,941 177,708 199,807
Growth (%) 122.0 125.0 6.4 12.4
EBITDA margin (%) 8.0 13.6 12.5 12.4
Depreciation 38,871 46,555 49,695 57,527
EBIT 35,312 120,386 128,013 142,280
EBIT margin (%) 3.8 9.8 9.0 8.9
Other Income 7,352 896 2,672 2,699
Interest expenses 22,397 20,454 24,112 25,582
PBT 20,267 100,827 106,573 119,397
Tax 10,058 12,164 15,199 17,248
Adjusted PAT 10,209 88,664 91,374 102,149
Growth (%) (261.1) 768.5 3.1 11.8
Net Margin (%) 1.1 7.2 6.4 6.4
(Profit)/loss from JVs/Ass/MI (542) (528) - -
E/O items 4,381 3,544 - -
Reported PAT 15,131 92,736 91,374 102,149
Growth (%) (259.6) 729.6 2.4 11.8
Net worth 83,976 191,715 270,527 358,383
Secured Loans 212,900 199,271 189,271 179,271
Unsecured Loans 139,023 128,643 108,643 88,643
Loan Funds 351,924 327,914 297,914 267,914
Gross Block 682,747 750,477 891,108 1,020,935
Net block 338,612 353,491 444,426 516,726
Investment 22,191 25,443 24,639 24,639
Current Assets 425,296 510,349 527,329 593,414
Inventories 113,120 140,705 154,113 194,291
Sundry debtors 71,912 68,774 60,576 83,204
Loans & advances 152,807 191,372 224,987 254,043
Current lia & Prov 417,208 469,838 528,138 608,666
Provisions 76,435 98,692 117,260 132,749
Net current assets 8,088 40,511 (809) (15,252)
Misc. exp -
Total Assets 449,571 536,733 585,545 643,401
Key Ratios
Profitability (%)
EBITDA Margin 8.0 13.6 12.5 12.4
Net Margin 1.1 7.2 6.4 6.4
ROCE 9.9 24.6 23.3 23.6
ROE 15.8 64.7 39.5 32.5
RoIC 13.8 44.3 40.0 35.8
Per Share Data (Rs)
EPS 16.3 135.1 138.4 154.8
CEPS 75.2 205.7 213.7 241.9
BVPS 127.2 290.5 409.9 543.0
DPS 13.5 20.0 17.2 19.2
Valuations (x)
PER 47.0 5.7 5.5 4.9
P/CEPS 10.2 3.7 3.6 3.2
P/BV 6.0 2.6 1.9 1.4
EV / Sales 0.8 0.6 0.5 0.4
EV / EBITDA 10.1 4.2 3.9 3.4
Dividend Yield (%) 1.8 2.6 2.2 2.5
Gearing Ratio (x)
Net Debt/ Equity 3.0 1.0 0.7 0.5
Cash Flow (Rs. Mn)
Depreciation 38,871 46,555 49,695 57,527
Interest Provided 22,397 20,454 24,099 25,582
Other Non-Cash items (14,646) (31,999) - -
Chg in working cap 43,790 (10,377) 19,487 (11,333)
Tax paid (10,058) (12,164) (15,199) (17,248)
Free Cash Flow 57,052 8,063 41,353 41,399
Other income 7,352 896 2,672 2,699
Investments (46,466) 32,786 804 -
Equity Capital Raised 565 33,777 223 -
Loans Taken / (Repaid) 2,185 14,916 (30,000) (30,000)
Interest Paid (22,397) (20,454) (24,112) (25,582)
Others 54,784 - - -
Financing Cashflow 25,119 13,367 (66,674) (69,875)
Net chg in cash 43,058 55,111 (21,846) (25,776)
Tata Motors
FY10 44,301 2,650 6.0 1,171 2.5 254.0 14.9 24.0 13.1 3.4
FY11P 62,899 3,870 6.2 1,989 4.2 69.8 21.7 14.1 9.2 2.8
FY12E 75,007 4,773 6.4 2,503 5.3 25.9 22.9 11.2 7.1 2.4
FY13E 85,189 5,331 6.3 2,967 6.2 18.5 23.1 9.5 6.0 2.0
Financial Snapshot
Emkay
TVS Motor
Subsidiaries a concern, Downgrade to HOLD
C
o
m
p
a
n
y

U
p
d
a
t
e
Reco Previous Reco
Hold Accumulate
CMP Target Price
Rs59 Rs62
Nifty 5,017
Sensex 16,862
Price Performance
(%) 1M 3M 6M 12M
Absolute 13 8 13 -21
Rel. to Nifty 15 18 21 -13
Source: Bloomberg
7 September, 2011
Source: Bloomberg
Stock details
Sector Automobiles
Bloomberg TVSL@IN
Face Value (Rs) 1
52 Week H/L (Rs) 87/44
Market Cap (Rs bn/USD mn) 26/564
Daily Avg Vol (No of shares) 1,739,543
Daily Avg Turnover (US$ mn) 2.0
Jun11 Mar11 Dec10
Promoters 59.3 59.3 59.3
FII/NRI 4.0 5.1 7.6
Public 15.6 15.2 13.3
Source: Capitaline
Scooters, mopeds and exports - the key volume drivers.
Margins to improve on favorable product mix and absence of
prod. dev. expense
Domestic 3 wheelers (YoY decline since 4QFY11) and
motorcycles (limited volumes in executive and premium
segment) remain areas of concern
Retain our TP of Rs 62 valuing the company at 10x FY13
standalone estimates. Lower our rating to HOLD
Stock looks attractive on standalone basis. However, continue
to have concerns with consolidated balance sheet, low margin
profile and return ratios vis a vis its peers
Scooters, mopeds and exports - the key volume drivers
We expect scooters, mopeds and exports to continue to drive volumes. Domestic motorcycle
and three wheelers are an area of concern. Demand CAGR of ~13% over FY11-13e to get
strong traction from exports at ~18% CAGR while domestic demand should register
~12% growth. We expect scooter segment to continue to benefit from acceptance of Wego
pan India (100cc+ segment) and launch of Scooty variant (<100cc segment) to drive an
18% CAGR in volumes over FY11-13e.
Domestic three wheelers and motorcycles remain areas of concern
Domestic motorcycle and three wheelers remain areas of concern. TVSL' motorcycle
portfolio is driven by higher share of entry level products. It has not been able to scale up
its presence in the exectivie/premium segment. Domestic three wheelers have been
reporting disappointing number since 4QFY11. There has been a sharp drop in market
share of the company.
Standalone margins to report 50 bps increase
EBITDA margin should see improvement by 50 bps to 6.7% on (1) superior product mix -
higher contribution from Wego/Exports/Mopeds (2) absence of previous year's product
development expenditure amortization and (3) rising contribution from HP plant, where it
enjoys tax benefits.
Subsidiaries continue to be a concern, primarily Indonesia
PT TVS Motor Indonesia (capacity of 300,000 units p.a.) sold 20,000 units in FY11 as
compared to 15,000 last year. Also, TVS invested close to Rs 460mn during FY11 in
Indonesia for increasing dealerships, finance availability and new product development
to aid volumes. We are concerned with the losses at subsidiary level (Rs 1.4bn in FY10
Rs 670mn in FY11). Consolidated balance sheet continues to remain adverse.
Valuation
The stock currently trades at 11.2x/9.5x PER and 7.1x/6x EV/EBIDTA of our FY12/13
standalone estimates. We continue to have concerns with consolidated balance sheet
TVS further invested Rs 225mn / Rs 349mn in Indonesian/European subsidiary in Q1FY12.
We have valued the company at 10x standalone FY13 EPS and 6.1x EV/EBIDTA, which is
at significant discount to BJAUT/HMCL due to low margin profile and concerns with
subsidiaries. Retain our TP of Rs 62 but lower rating to HOLD.

40
50
60
70
80
90
Sep- 10 Nov-10 Jan-11 Mar-11 May- 11 Jul- 11
Rs
-40
-30
-20
-10
0
10 %
TVS Mo tor ( LHS) Relt o Nifty (RHS)
Auto Sector
48
0%
20%
40%
60%
80%
100%
TVS Bajaj HMCL
0
50
100
150
200
250
300
350
400
5%
7%
9%
11%
13%
15%
HP Production ('000 units) % of total volumes (RHS)
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Q
1
F
Y
0
9
Q
3
F
Y
0
9
Q
1
F
Y
1
0
Q
3
F
Y
1
0
Q
1
F
Y
1
1
Q
3
F
Y
1
1
Q
1
F
Y
1
2
-
2
4
6
8
Dom. 3 Whlrs (units) Market Share (% RHS)
%
0%
5%
10%
15%
20%
25%
30%
-20%
0%
20%
40%
60%
Scooters Exports
Scooters (% YoY RHS) Exports (% YoY RHS)
% of sales % YoY
0%
5%
10%
15%
20%
25%
30%
Q
1
F
Y
0
7
Q
3
F
Y
0
7
Q
1
F
Y
0
8
Q
3
F
Y
0
8
Q
1
F
Y
0
9
Q
3
F
Y
0
9
Q
1
F
Y
1
0
Q
3
F
Y
1
0
Q
1
F
Y
1
1
Q
3
F
Y
1
1
Q
1
F
Y
1
2
Dom. Motorcycles Economy
Executive Premium
Dom. motorcycles market share skewed to economy segment
Scooter/exports driving volume growth
Domestic 3 wheeler sales loosing momentum
Increasing share of HP production
Deteriorating conso. financials remains a key concern
Standalone ROE significantly lower than its peers
TVS Motor
FY11 FY10
Rs mn Consolidated Standalone Consolidated
Net profit 1,279 1,946 335
Net Worth 6,830 10,000 6,201
Debt 10,560 7,850 11,834
Fixed Assets 13,510 9,950 11,978
Investments 2,210 6,610 3,865
Cash 430 60 1,250
Net Debt 7,920 5,580 6,720
Ratios
Net Debt/Equity 1.16 0.56 1.08
P/BV 3.41 2.33 3.75
RONW (%) 18.73 19.46 5.41
Auto Sector
49
Key Financials
Net Sales 44,301 62,899 75,007 85,189
Growth (%) 18.5 42.0 19.2 13.6
Expenditure 41,652 59,029 70,234 79,857
Employee Cost 2,512 3,373 3,944 4,571
Other Exp 7,766 9,690 10,857 12,262
EBITDA 2,650 3,870 4,773 5,331
Growth (%) 41.6 46.1 23.3 11.7
EBITDA margin (%) 6.0 6.2 6.4 6.3
Depreciation 1,025 1,065 1,167 1,215
EBIT 1,625 2,805 3,606 4,116
EBIT margin (%) 3.7 4.5 4.8 4.8
Other Income 139 232 253 297
PBT 1,053 2,516 3,337 3,956
Tax -118 528 834 989
Effective tax rate (%) (11.2) 21.0 25.0 25.0
Adjusted PAT 1,171 1,989 2,503 2,967
Growth (%) 254.6 69.8 25.9 18.5
Net Margin (%) 2.6 3.2 3.3 3.5
(Profit)/loss from JVs/Ass/MI - 61.0 - -
E/O items 524 - - -
Reported PAT 1,695 1,928 2,503 2,967
Growth (%) 254.6 64.6 29.8 18.5
Net worth 8,654 10,058 11,828 13,927
Minority Interest - - -
Secured Loans 7,197 7,197 6,697 6,197
Unsecured Loans 2,836 653 653 653
Loan Funds 10,033 7,851 7,351 6,851
Net deferred tax liability 1,146 960 960 960
Gross Block 19,091 19,720 20,470 21,322
Net block 9,557 9,121 8,705 8,341
Capital work in progress 271 829 829 829
Investment 7,393 6,610 7,610 8,610
Current Assets 9,652 12,020 15,056 17,677
Inventories 2,897 5,280 6,343 7,239
Sundry debtors 2,203 2,710 3,255 3,715
Cash & bank balance 1,010 60 265 799
Loans & advances 3,520 3,950 5,173 5,903
Current lia & Prov 7,341 9,770 12,073 13,732
Provisions 669 920 1,105 1,261
Misc. exp 300.8 58.7 13.4 13.4
Total Assets 19,832 18,868 20,139 21,738
Key Ratios
Y/E Mar FY10 FY11P FY12E FY13E
Profitability (%)
Net Margin 2.6 3.2 3.3 3.5
ROCE 9.4 15.8 19.8 21.1
ROE 14.9 21.7 22.9 23.1
RoIC 14.0 25.3 31.7 35.9
Per Share Data (Rs)
EPS 2.5 4.2 5.3 6.2
CEPS 4.6 6.4 7.7 8.8
BVPS 17.6 21.1 24.9 29.3
DPS 1.2 1.0 1.3 1.6
Valuations (x)
PER 24.0 14.1 11.2 9.5
P/CEPS 12.8 9.2 7.7 6.7
P/BV 3.4 2.8 2.4 2.0
EV / Sales 0.8 0.6 0.5 0.4
EV / EBITDA 13.1 9.2 7.1 6.0
Dividend Yield (%) 1.9 1.8 2.2 2.6
Gearing Ratio (x)
Net Debt/ Equity 0.8 0.7 0.5 0.3
Cash Flow (Rs. Mn)
PBT (Ex-Other income) 914 2,284 3,084 3,659
Depreciation 1,025 1,065 1,167 1,215
Other Non-Cash items 190.7 - - -
Chg in working cap 1,057 -889 -528 -428
Tax paid 118 -528 -834 -989
Capital expenditure (304) (1,187) (750) (852)
Free Cash Flow 3,085 1,266 2,661 3,062
Other income 139 232 253 297
Investments (2,688) 1,025 -1,000 -1,000
Investing Cashflow -2,853 70 -1,497 -1,555
Equity Capital Raised 0 0 0 0
Loans Taken / (Repaid) 973 -2,183 -500 -500
Interest Paid -711 -710 -477 -456
Dividend paid (incl tax) (641) (581) (732) (868)
Others 424
Financing Cashflow 880 -3,473 -1,709 -1,824
Net chg in cash 1,417 -950 205 534
Opening cash position 421 1,010 60 265
Closing cash position 1,837 60 265 799
TVS Motor
Auto Sector
50
BUY Expected total return (%) (stock price appreciation and dividend yield) of over 25% within the next 12-18 months.
ACCUMULATE Expected total return (%) (stock price appreciation and dividend yield) of over 10% within the next 12-18 months.
HOLD Expected total return (%) (stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.
REDUCE Expected total return (%) (stock price depreciation) of upto (-)10% within the next 12-18 months.
SELL The stock is believed to under perform the broad market indices or its related universe within the next 12-18 months.
DISCLAIMER: This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to
any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States.
Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. This material is for the personal
information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of
an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. No person associated with Emkay Global Financial Services Ltd.
is obligated to call or initiate contact with you for the purposes of elaborating or following up on the information contained in this document. The material is based upon
information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon. Neither Emkay Global Financial Services
Ltd., nor any person connected with it, accepts any liability arising from the use of this document. The recipient of this material should rely on their own investigations
and take their own professional advice. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on
a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective
investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. We and our affiliates,
officers, directors, and employees world wide, including persons involved in the preparation or issuance of this material may; (a) from time to time, have long or short
positions in, and buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn
brokerage or other compensation or act as a market maker in the financial instruments of the company (ies) discussed herein or may perform or seek to perform
investment banking services for such company(ies)or act as advisor or lender / borrower to such company(ies) or have other potential conflict of interest with respect
to any recommendation and related information and opinions. The same persons may have acted upon the information contained here. No part of this material may
be duplicated in any form and/or redistributed without Emkay Global Financial Services Ltd.sprior written consent. No part of this document may be distributed in
Canada or used by private customers in the United Kingdom. In so far as this report includes current or historical information, it is believed to be reliable, although
its accuracy and completeness cannot be guaranteed.
Emkay Rating Distribution
EMKAYGLOBALFINANCIALSERVICESLIMITED
CorporateAdd: India.
Tel.: +912266121212 Web:www.emkayglobal.com
B-RubyMi l l sTower, 7 Floor,South EastWi ng,Senapati BapatMarg,Dadar(W),Mumbai -400028
th
l

Auto Sector Report - Cruising Through Barriers

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Auto Sector Report - Cruising Through Barriers

Enviado por

Direitos autorais:

Formatos disponíveis

AUTO SECTOR

Cruising through barriers September, 2011

Mahindra & Mahindra

Maruti Suzuki India

Você também pode gostar