Indian Automobile Sector 31 March, 2016 - Systematix...

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Indian Automobile Sector

A tale of two kingdoms

Decoding forgotten domestic CV OEMs – expect Tata Motors to bounce back

We are trying to decode two forgotten domestic CV OEMs (Tata Motors and Eicher Motors)

under the weight/scale/outperformance of their premium cousins (JLR and Royal Enfield). We

believe while the performance of JLR and RE will continue, focus needs to shift to their

forgotten past hero, “CV Business”. After a careful study of their business strength and

company specific drivers, keeping in mind the evolving CV market dynamics, we believe Tata

Motors is the most preferred bet. Company-specific micro factors point that Tata Motors is

most likely to outperform the industry in FY17/18. Our confidence on outperformance by

these players within their respective segments are based on the strategic steps taken by Tata

Motors’ management and changing industry dynamics: 1) focus on models to fill product

white spaces and new launches with extensive testing/market seeding (avoid past approach),

2) improve competitiveness in PV with new launches (modular platform with eight launches

based on Nexon) and reach earlier market share, 3) strengthen distribution network in the

competitor stronghold (South for HCV), 4) sharp focus on leaner cost structure and vendor

rationalisation and 5) bottom-up forecasting with management decentralisation for

better/swift market responses.

Bullish on Indian CVs – expect upcyle to continue till FY20 with marginal blip in FY18

CV segment stands to benefit immensely on the emerging economic milieu – improved

operator profitability with balance sheet improvement (2/3rd of the fleet out of financing

obligations), government’s focus to improve infrastructure and mining (start of the tipper

uptrend), regulatory changes (BSIV/BSVI, body/safety code, transportation overhaul) and

large shift to tractor trailers and high tonnage MAVs (expected launch of 40T rigid by Tata and

AL). We expect tractor trailers, tippers and buses to be the key growth driver over the next

few years, and strong players in the segment are likely to benefit the most.

M&HCV dynamics – tonnage upgrade and new peak in sight

We estimate M&HCV (goods) volume and tonnage CAGR of 15% over the next four years due

to infrastructure spending push, better freighter profitability, reefer trucks, obsolescence of

old trucks due to rising entry restrictions in major cities and customer-driven switch to a

younger fleet. We also expect buses volume CAGR of 18% on renewed focus on urban

transportation, smart cities and structural reform (removal of STU monopoly) in many routes.

We believe Tata Motors and AL will emerge as the key beneficiary of M&HCV trends due to

a) superior product and higher market share in new emerging/growing categories and b)

scale/cost advantage.

Initiate coverage on Tata Motors (Buy, 41% upside) and Eicher (Hold, 3% upside)

Our positive stance on Tata Motors is also guided by LCV/SCV recovery, distribution rejig to

plug the weak spots, strong PV product line-up, margin expansion and dramatic improvement

in standalone earnings. We are also optimistic on JLR growth with realistic margin assumption

(15%) and signs of resolution of China bump, post JV structure changeover.

Our neutral stance on Eicher Motors is guided by unrealistic Royal Enfield (RE) growth

assumption by the street (>30% volume CAGR with continuous margin expansion) and

resultant stock valuations. We expect a gradual step-up in VECV business (maintaining LMD

truck and buses stronghold), with major improvement in HD segment (both domestic and

exports) from FY18/19. Although we like the business and management for its strong

execution and business passion, we believe investors should opt for better entry point as

most positives are factored, while risks (growth maturity in RE, cash burning at Polaris JV,

slower Pro series and powertrain volume ramp-up) are ignored.

Systematix

Institutional Equities

31 March, 2016

CV SECTOR REPORT

Industry Automobiles

CNX Auto v/s Sensex

Source: Systematix Institutional Research

Key picks

CMP TP Upside Reco. (Rs) (Rs) (%)

TTMT 389 550 41 Buy

EIM 18,709 19,250 3 Hold


Priya Ranjan [email protected] +91 22 6704 8067

Bibhishan Jagtap [email protected] +91 22 6704 8058

31 March, 2016

2 Systematix Research is also available on Bloomberg SSSL <Go>, Thomson & Reuters Systematix Shares & Stocks (I) Ltd.


Contents

Charting the story ................................................................................................................................................................ 3

The jewels in domestic CV industry crown ............................................................................................................................. 4

Tata Motors – on the cusp of renaissance ............................................................................................................................... 6

CV OEMs: Strengths and ability to outscore ............................................................................................................................ 7

Commercial vehicles: Regaining the mojo ............................................................................................................................... 8

Companies Section ............................................................................................................................................................. 13

Tata Motors ....................................................................................................................................................................... 14

Eicher Motors .................................................................................................................................................................... 31

31 March, 2016



Charting the story

Chart 1: CV industry volume growth assumption Chart 2: M&HCV industry growth to remain strong in FY17e

Source: SIAM, Systematix Institutional Research Source: SIAM, Systematix Institutional Research

Chart 3: Auto CV OEMs: AL and Tata Motors stand out on key operating benchmarks and overall score


Chart 4: Mix of HD trucks volume mix Chart 5: EBITDA margins of Tata, AL & VECV

Source: Company, Systematix Institutional Research Source: Company, Systematix Institutional Research

31 March, 2016



The jewels in domestic CV industry crown

Prefer incumbent leaders - TTMT should start outgrowing the market

We expect auto industry’s volume growth to pick up meaningfully in FY17, backed by a) decline in ownership cost (fuel price decline and interest cost reduction), b) benign inflation, c) pick-up in economic activities and d) big thrust on infrastructure investment. We estimate these factors to drive domestic passenger vehicle and commercial vehicle volume CAGR of 14% and 19% respectively over the next three years. However, we would prefer players with product/distribution advantage, diversified portfolio in the segment, better chances of outperforming market growth rate, leaner cost structure and meaningful scale (top two players). Based on the above parameters, we prefer Tata Motors and initiate coverage on both Tata Motors and Eicher Motors.

Table 1: Tata Motors (Standalone): Key operating metrics

Tata Motors FY12 FY13 FY14 FY15 FY16e FY17e FY18e

Volume 906,255 809,112 566,960 526,045 509,647 609,942 705,534

Yoy (%) 13.1 (10.7) (29.9) (7.2) (3.1) 19.7 15.7

Revenue 540,055 443,739 339,070 358,905 407,954 504,295 585,311

EBITDA 44,119 21,446 (4,668) (8,000) 28,554 53,134 65,444

Adj. PAT 14,766 7,284 7,633 (43,015) 9,470 29,766 42,035

Source: Company, Systematix Institutional Research

Table 2: Tata Motors (JLR): Key operating metrics

JLR (GBP mn) FY12 FY13 FY14 FY15 FY16e FY17e FY18e

Volume 314,415 372,061 429,661 470,500 531,046 606,663 673,761

Yoy (%) 29.1 18.3 15.5 9.5 12.9 14.2 11.1

Revenue 13,512 15,784 19,386 21,866 21,965 25,595 28,994

EBITDA 2,027 2,339 3,393 3,758 3,216 3,939 4,382

Adj. PAT 1,468 1,261 1,742 2,038 1,358 1,975 2,349


Table 3: Eicher Motors (VECV): Key operating metrics

Eicher Motors - VECV CY12 CY13 CY14 CY15e FY16e FY17e FY18e

Volume 48,262 40,550 39,892 46,270 49,854 60,944 62,820

Yoy (%) 17.9 (16.0) (1.6) 16.0 7.7 22.2 3.1

Revenue 52,933 50,127 56,350 72,327 78,156 96,609 107,411

EBITDA 3,998 3,971 3,831 5,736 6,408 9,394 9,337

Adj. PAT 3,303 2,883 1,894 2,991 3,294 5,322 5,152


Table 4: Eicher Motors (RE): Key operating metrics

Eicher Motors - RE CY12 CY13 CY14 CY15e FY16e FY17e FY18e

Volume 113,432 178,121 302,592 452,069 506,700 620,000 745,000

Yoy (%) 52.0 57.0 69.9 49.4 12.1 22.4 20.2

Revenue 10,438 16,954 30,147 46,237 53,129 69,490 89,372

EBITDA 1,454 3,137 7,336 12,684 14,802 20,848 27,156

Adj. PAT 1,448 2,786 5,589 8,705 10,045 14,236 18,993


31 March, 2016



Table 5: Domestic OEMs valuation

Company Bloomberg Reco TP PER (x) EV/EBITDA (x)

FY17e FY18e FY17e FY18e

M&M MM IN Buy 1,635 18.0 14.8 13.2 10.8

Maruti Suzuki MSIL IN Buy 4,800 14.8 12.1 8.3 6.7

Ashok Leyland AL IN Buy 125 13.2 9.3 10.2 7.8

Tata Motors TTMT IN Buy 550 7.3 6.2 3.6 3.1

Hero MotoCorp HMCL IN NR NA 16.9 15.2 11.6 10.5

Bajaj Auto BJAUT IN NR NA 16.5 14.4 12.1 10.8

Eicher Motors EIM IN Hold 19,250 28.1 22.2 15.0 12.1

TVS Motor TVSL IN NR NA 22.6 17.8 14.4 11.8

Source: Bloomberg, Systematix Institutional Research ; Note: NR companies forward ratios based on Bloomberg consensus.

31 March, 2016



Tata Motors – on the cusp of renaissance

We believe the key concerns on Tata Motors -- margin/profitability issue in domestic business and China/global growth and margin issues in JLR -- are likely to get addressed in the next 6-12 months at both company and market level. Our confidence is driven by:

Emerging visibility of domestic HD trucks market share bounce-back (higher market growth expectation in its superior product segment like tractor trailer and tippers), revival visibility of its key SCV segment, product launches in PV space (Nexon platform can be a potential game changer).

Return of SUV launch cycle in JLR (F-pace with very strong booking), revival of Chinese volume growth with Discovery Sports and XE launch expansion.

JLR margin moving to more realistic level (~15%) along with improvement in Chinese JV profitability post volume ramp-up. Return of domestic operating margin to 10%+ on LCV ramp-up beyond 20k/month.

Wipe-out of annual losses (~Rs15-16bn) in PV business post 20k+ monthly volume.

We initiate coverage on Tata Motors with a Buy rating and SOTP-based target price of Rs550.

Eicher Motors – Best in price while risks are ignored

Although near-term growth is robust, we will be cautious on its future and continuous occurrence probability. We believe export market development will be a long-term process (highlighted by company MD), with sustained brand building exercise, and we expect export market to reach 4% of total volume in FY20e, from 2% currently.

We estimate VECV HD truck segment CAGR of ~10% due to slow ramp-up of Pro6000 series and initial market seeding efforts. We have assumed flat-to-marginal dip in volume for FY18 due to pre-buying effect in FY17 arising from the emission norm change in FY18. Volvo’s 25% stake acquisition in Deutz (engine supply was supposed to be transferred from Deutz to VECV engine facility) has limited the engine volume opportunities too.

Market potential for a premium bike has the limitation of ~60-70k/month in India -- seen in the case of earlier premium Bajaj Pulsar (volume restricted to ~70k at peak) -- as brand fatigue and too much visibility seeps in. Although dealership expansion and market penetration (smaller towns and rural areas) opportunities exist, we believe this will also coincide with market share loss to HD, Triumph and UM’s mid-range bikes in bigger cities. We have seen this in the case of limited success of Continental GT or products with prices above Rs150k.

Expect VECV’s volume to post a CAGR of ~14% over FY16e-20e and growth to be driven by 14% and 17% LMD truck and buses volume growth respectively. We estimate HD truck segment CAGR of ~10% due to slow ramp-up of Pro6000 series and initial market seeding efforts. We have assumed flat-to-marginal dip in volume for FY18 due to the pre-buying effect in FY17 on emission norm changes.

We believe competitive and market share improvement pressures along with ROI linked engine supply orders (higher engine volume with lower engine margins) can keep margins below double digit in the medium term for VECV.

We initiate coverage on Eicher Motors with a Hold rating and a SOTP-based target price of Rs19,250 (implied 23.5x FY18e EPS).

31 March, 2016



CV OEMs: Strengths and ability to outscore

Players with India-centric model launches to outgrow the market in PV space

Since 2HFY15, CV cycle recovery started with HCV segment and aided by improved freighters’ profitability and balance sheet. Other CV segments like ICV too has started seeing improvement in early FY16 and LCV/SCV segment too joined the party at the fag end of FY16. We believe a revival of CV cycle will continue till FY20, with a moderate blip in FY18 on large pre-buying in FY17, before the BSIV emission norms kick in. Buses segment is likely to see 15% CAGR over many years on the government’s focus on public transport and reforms in public road transport sector in the current union budget. We believe LCV/SCV segment will see a major upswing in the coming years due to last mile connectivity requirement and penetration of hub/spoke model. While initial growth was led by MAVs, we have started to see large growth coming from tipper and tractor trailer segment. While AL was the clear winner in MAV segment growth, we highlight that Tata Motors will recover the partial market share loss with superior performance in both tipper and tractor trailer segment due to product advantage. New players like M&M and Eicher to remain on the fringe for the time being, given the distribution/resale value and product breadth across segments.

Chart 6: Auto CV OEMs: Tata Motors and AL stand out on key benchmarks and overall score


Leaders with matching abilities tend to defend or outgrow the market over medium to long-term. Here, we try to map out key domestic CV players’ strength and their ability to outscore on these factors coupled with their probability of success in new segment/product territory. Our above analysis suggests that players like Tata Motors and AL are best placed to maintain leadership in the respective segments.

31 March, 2016



Commercial vehicles: Regaining the mojo

Commercial vehicle industry – LCV/SCV to join M&HCV party in FY17

Our study of M&HCV tonnage capacity in the system along with mining sector headwinds and related tipper demand crash indicate a correction of haulage overcapacity and gradual recovery in tipper segment, which augurs well for the M&HCV segment. A meaningful recovery is also underway in <=16t haulage trucks, which are more dependent on an uptick in economic activity like agri goods and basic manufacturing. Average fleet utilisation (~75%) and freighter profitability have improved meaningfully in the last 12 months. The current shift to tractor trailer and high tonnage MAVs is expected to continue on poor operating economics of old trucks and compression of replacement cycle. Replacement demand is also aided by the restriction imposed by large customers, enforcement of entry norms in New Delhi (population of 60k trucks) on vehicle age and of trailer body code in Haryana. Also, ~75% of the existing fleet has moved out of the financing cycle at the first owner level and thus helping an operator to go for replacement cycle on improved balance sheet.

The government’s ambitious 30km/day road construction and revival of stalled projects are reigniting tipper demand in a major way. Sagar Mala/border road project, Namami Gange, will alone create >15k of annual truck demand, as per our calculation.

The government’s initiative to start coal mining in areas without rail links too is reviving tipper demand.

Expect BSIV implementation-led pre-buying surge to happen in FY17 before the emission norms are enforced.

Early signs of revival in SCV segment are visible and growth bounce-back in the category is expected to benefit OEMs like Tata Motors and M&M immensely.

Chart 7: M&HCV (goods) sales growth rate on upswing Chart 8: M&HCV (passenger) sales volume growth to pick up


31 March, 2016



Chart 9: M&HCV goods break-up by segment Chart 10: Market-share in 7.5-10t segment


Chart 11: Market-share in 10-12t Chart 12: Market-share in 12-16.2t


Chart 13: Market-share in 16.2-25t rigid segment Chart 14: Market-share in >25t rigid segment


31 March, 2016



Chart 15: Market-share in 26.4<35.2t haulage segment Chart 16: Market-share in the tractor/trailer segment


Big push to infrastructure projects – a key demand driver going forward

Truck demand from the Infrastructure sector has a multiplier effect as one truck in an infrastructure project generates demand for two to three additional trucks for allied activities and material supply. Also, a truck’s lifecycle in infrastructure is shorter (four to five years) due to excessive and abusive use of trucks. Since the government is pushing for major infrastructure projects’ implementation like the annual highway building of >10,000km, Sagar Mala, border road projects of ~5,000km, Namami Gange, we expect a massive demand surge from the segment in the coming years.

M&HCV tonnage growth to outpace volume growth

We view the shift towards higher tonnage vehicle is permanent and is a logical progression due to better operating economics, driver shortage and consolidation of freight industry. Our interactions with OEM officials and channel partner suggest a freight industry consolidation and single truck operators getting attached to large fleet owners for business. We believe aggregation of fleet volume on truck route is the way forward to improve profitability. Apprehension related to system overcapacity creation on account of a shift to higher tonnage vehicle is a fallacy, given the current fleet tonnage capacity is barely 15-20% higher than the actual road freight volume.

Expected implementation of GST will have a positive impact on higher tonnage vehicle as it will improve the average turnaround time by 10-15% for an operator. Also, the current practice of setting up warehousing to beat multiplicity of taxes will get rationalised in the GST era, which will be a kicker for the higher tonnage vehicle demand as warehousing-on-the-wheel concept can kick in.

31 March, 2016



Driver availability constraint – an enabler for higher tonnage vehicle

Driver shortage is a major issue for most fleet operators across the country. Improving education standards, rising alternate employment opportunity, social taboo as well as qualitative and quantitative family life are the key factors for driver shortage. Driver shortages are forcing fleet operators to rejig their business model with variable compensation structures and shift to high tonnage vehicles. Thus, a shift towards higher tonnage vehicle is permanent.

Return of tipper demand and acceleration in RMC truck demand

Tipper segment, after a 50% fall from ~60k units during 2011-14, has started to recover as demand from coal and bauxite are the key driver compared to iron ore in the previous cycle. Although key iron ore markets like Karnataka and Goa remain subdued, the government’s decision to start coal mines without rail connectivity has buoyed tipper demand.

We are witnessing good tipper demand traction from construction companies and mining segment. We believe tipper will be the key driver in the medium-to-long term as recovery is still at a nascent stage. Similarly, RMC (ready mix concrete) truck demand has risen significantly in the recent past and has considerable room for growth as RMC penetration is still ~6% in India, compared to 70% in developed markets and 35% global average. As construction is getting organised, we expect RMC truck market to explode in the coming years, from ~6-8k units per annum currently.

9-16t segment – recovery visible and Reefer trucks are the way forward

Agriculture segment (foodgrains and seasonal vegetables) is the backbone of 9-16t truck demand. Given agri production has started inching up after the weather issues since last two years, we expect the segment to witness robust growth, which will be largely replacement-led and industrial activity-led. However, we expect refrigerated trucks (Reefer) demand to improve significantly in the medium term due to government’s focus on wastage minimisation (15-30% wastage of horticulture crops during transportation) to tackle inflation.

Chart 17: Total foodgrain production in India Chart 18: Horticulture production growth in India

Source: Ministry of Agriculture, Systematix Institutional Research Source: Ministry of Agriculture, Systematix Institutional Research

31 March, 2016



Since horticulture production is growing at a much faster pace than foodgrain, we believe the refrigerated truck market has a huge potential from the current fleet size of ~10-15k units (current total industry volume), with annual volume of ~2k trucks. Based on our calculation, we expect the annual Reefer truck volume to reach ~10k units in the next two to three years as the government’s subsidy for Reefer trucks (Rs1.5lac) and ~40-50% shortfall in domestic cold storage capacity will play a major role. Further, the government’s push for a common and integrated national agriculture and horticulture market will be a key growth enabler.

Regulatory changes to bring major technological shift in CV industry

The CV industry will undergo a major transformation in the next few years with the government’s decision to advance BSVI to 2020 and skip BSV completely. With additional efforts to enforce bus body and truck body code, we may see the share of fully built vehicles jump significantly, from less than 10% currently. Although new players or global OEMs (Bharat Benz and VECV) believe these will be beneficial for them, in our view, the impact of these will be only felt after 2020 (if at all it happens) due to lack of preparatory timing for domestic OEMs. However, we believe the domestic OEMs will still manage to overcome this challenge due to their scale of operation.

31 March, 2016



COMPANIES SECTION



14

Tata Motors

Domestic business to transform while JLR stands tall

We initiate coverage on Tata Motors (TTMT), a niche global luxury car manufacturer and the dominant Indian commercial vehicle player, with a Buy rating and a target price of Rs550. We believe the company’s forgotten hero “domestic business” is on the cusp of a sharp turnaround after almost two years of underperformance, with pointed steps on distribution, product superiority in upcoming HCV drivers (tipper and tractor trailers), revival of LCV/SCV segment with all the financing write-downs behind us and a promising passenger vehicle line-up (particularly Nexon platform). We believe the company’s standalone business will get back to double-digit margins by FY18, while the hiccups in JLR will subside with a shift to SUV launch cycle along with China JV (CJLR) ramp-up gathering momentum. We also expect JLR margins to stabilise near sustainable 15%+ along with meaningful profit contribution from CJLR over the next two years.

Domestic business – fabulous rebound on cards: We believe the domestic business will see a major positive shift from FY17 onwards with all the key segments – HCV, LCV and passenger vehicle regaining their mojo in terms of volume and profitability. We highlight that while the M&HCV business has regained double digit margin in the current upcycle, volume and financing write-down pressure on LCV/SCV, sharp transitory losses in PV business (Rs15-18bn annually) and top leadership vacuum for long is camouflaging TTMT’s domestic business strength. We believe 20k+ LCV/SCV and 15k+ PV monthly volumes are the key monitorables which can sharply shoot up domestic profitability.

Expect 200bps market share gain in HCV in FY17e on tipper/TT product lead (weakness in rigid MAV), distribution amplification (South region) and decision decentralisation.

Estimate double-digit margin by FY18e on convergence of the corrective steps in key business and focus on costs/profitability under the new leadership.

JLR business – return of SUV launch cycle and CJLR back on track: We expect the concern on JLR growth and slow ramp-up of Chinese JV to get addressed with the launch of F-Pace (Jag SUV)/new Discovery (2016/2017)/sub-Evoque SUV (2018)/Defender family (2018/19) and quicker/thoughtful product roll-out in CJLR after initial Evoque pricing debacle. JLR launch focus on sedans (XE, XF) in 2015 was also primarily responsible for the intermediate volume weakness due to brand weakness and lack of 2ltr gasoline engine, which is expected to reverse with F-Pace and new Discovery launch due to its existing strong SUV brand equity. We also believe XE’s launch along with a ramp-up of Discovery Sports can change CJLR’s profitability fortune and improve overall JLR meaningfully.

Estimate 10% and 15% standalone and JLR margins by FY18e: We estimate consolidated sales/EBITDA/PAT CAGR of 16%/24%/31% respectively during FY16e-18e, driven by 20% CAGR of standalone business (17%, 18% and 19% volume growth in M&HCV, LCV and PV business and 450bps margin expansion to 10.3%) and 13% volume growth for JLR with 15% margin (+100bps range; conservative as better margins in new SUVs on variant mix/pricing/discounts). We believe the company is in a sweet spot for standalone margin, with many levers to catapult to the earlier peak, and our JLR margin assumption being very conservative despite SUV launch (core strength) cycle.

Initiate coverage with Buy: At CMP, the stock trades at 7/6x FY17e/18e EPS. Our SOTP-based valuation comes to Rs550 (assigning 4x EV/EBITDA to consolidated EBITDA; implied 8.5x FY18e consol EPS). We are fairly confident on strong domestic business turnaround and change in JLR growth fortune post SUV launches, which are likely to increase earnings to 75% by FY18e. Key risks to our assumptions are a) sharp slowdown in global and Chinese luxury car demand, b) lack of product acceptability in domestic PV business and c) maintaining cost advantage in CV business post BSVI.

Systematix


31 March, 2016



INITIATING COVERAGE

Sector: Auto Rating: Buy

CMP: Rs389 Target Price: Rs550

Stock Info

Sensex/Nifty 25,339/ 7,735

Bloomberg TTMT IN

Equity shares 3,396 mn

52-wk High/Low Rs573/ 266

Face value Rs2

M-Cap Rs1,242bn/ $19bn

3-m Avg volume $54.6mn

Financial Snapshot (Rs mn)

Y/E March FY16e FY17e FY18e

Net sales 2,705,274 3,178,992 3,616,168

EBITDA 389,714 503,778 586,469

PBT 154,408 227,483 266,102

Net Profit 122,572 180,915 211,680

EPS (Rs) 36.1 53.3 62.3

P/E (x) 10.8 7.3 6.2

EV/EBIDTA (x) 4.5 3.6 3.1

P/B (x) 1.6 1.3 1.1

RoE % 15.3 18.5 17.8

RoCE (%) 9.5 11.5 11.6

Shareholding pattern (%)

Dec ’15 Sep ’15 Jun’15

Promoter 33.0 33.0 34.3

–Pledged - - -

FII 41.9 41.7 42.2

DII 17.3 17.2 16.3

Others 7.8 8.1 7.2

Stock Performance (1-year)

31 March, 2016


Tata Motors

FINANCIALS (CONSOLIDATED)

Profit & Loss Statement

YE: Mar (Rs mn) FY14 FY15 FY16e FY17e FY18e

Net sales 2,306,771 2,607,343 2,705,274 3,178,992 3,616,168

Growth % 23 13 4 18 14

Other income 21,566 20,620 21,220 21,432 21,655

Total income 2,328,337 2,627,963 2,726,493 3,200,424 3,637,822

Growth % 23 13 4 17 14

Raw material expenses (1,435,864) (1,599,200) (1,665,887) (1,920,254) (2,182,693)

Employee expenses (215,564) (255,490) (272,649) (316,842) (360,144)

Other Operating expenses (302,879) (352,135) (398,243) (459,550) (508,516)

EBITDA (Core) 374,029 421,138 389,714 503,778 586,469

Growth, % 40.8 12.6 (7.5) 29.3 16.4

Margin, % 16.2 16.2 14.4 15.8 16.2

Depreciation (110,782) (133,886) (166,921) (203,496) (242,446)

EBIT 263,248 287,252 222,793 300,281 344,022

Growth, % 38.6 9.1 (22.4) 34.8 14.6

Margin, % 11.4 11.0 8.2 9.4 9.5

Interest paid (47,338) (48,615) (46,644) (50,464) (55,014)

Other Income 8,286 8,987 9,886 10,875 11,962

Pre-tax profit 198,544 218,873 154,408 227,483 266,102

Tax provided (47,648) (76,429) (30,882) (45,497) (53,220)

Profit after tax 150,896 142,444 123,526 181,987 212,881

Others (Minorities, Associates) (595) (868) (1,088) (1,206) (1,335)

Net Profit 149,764 141,710 122,572 180,915 211,680

Growth, % 41.4 - (12.4) 47.6 17.0

Net Profit (adjusted) 139,910 139,863 122,572 180,915 211,680


Balance Sheet


Cash & bank 297,118 321,158 310,467 291,013 354,153

Debtors 105,742 125,792 133,411 156,772 178,332

Inventory 272,709 292,723 296,468 348,383 396,292

Loans & advances 217,548 208,384 230,900 257,019 287,317

Other current assets 152,987 86,578 86,578 86,578 86,578

Total current assets 1,046,103 1,034,635 1,057,824 1,139,765 1,302,672

Investments 106,867 153,623 203,623 253,623 303,623

Gross fixed assets 1,379,071 1,629,036 1,979,036 2,399,036 2,799,036

Less: Depreciation (688,154) (744,241) (911,162) (1,114,658) (1,357,104)

Add: Capital WIP 332,626 286,401 286,401 286,401 286,401

Net fixed assets 1,023,542 1,171,196 1,354,275 1,570,778 1,728,332

Total assets 2,176,512 2,359,454 2,615,722 2,964,167 3,334,627

Current liabilities 715,986 858,389 877,253 981,081 1,076,901

Provisions 201,610 211,703 210,939 211,449 211,090

Total current liabilities 917,596 1,070,091 1,088,192 1,192,531 1,287,990

Non-current liabilities 604,414 679,933 727,476 797,476 867,476

Total liabilities 1,522,010 1,750,025 1,815,668 1,990,007 2,155,466

Paid-up capital 6,438 6,438 6,792 6,792 6,792

Reserves & surplus 643,858 598,658 787,840 960,741 1,164,406

Shareholders’ equity 654,502 609,429 800,054 974,160 1,179,161

Total equity & liabilities 2,176,512 2,359,454 2,615,722 2,964,167 3,334,627


Cash Flow


Pre-tax profit 198,544 218,873 154,408 227,483 266,102

Depreciation 110,782 133,886 166,921 203,496 242,446

Chg in working capital 22,944 188,004 (15,780) 2,944 (4,307)

Total tax paid (47,648) (76,429) (30,882) (45,497) (53,220)

CFO 284,621 464,334 274,668 388,427 451,020

Capital expenditure (398,464) (281,540) (350,000) (420,000) (400,000)

Chg in investments (16,290) (46,757) (50,000) (50,000) (50,000)

CFI (414,754) (328,296) (400,000) (470,000) (450,000)

Free cash flow (130,132) 136,037 (125,332) (81,573) 1,020

Equity raised/(repaid) 128,556 (192,916) 65,582 (7,981) (7,471)

Debt raised/(repaid) 80,509 80,754 47,543 70,000 70,000

Dividend (incl. tax) 73 (12) 1,517 100 (410)

CFF 206,270 (113,845) 114,642 62,119 62,119

Net chg in cash 76,137 22,193 (10,691) (19,454) 63,139

Opening cash balance 211,127 297,118 321,158 310,467 291,013

Closing cash balance 297,118 321,158 310,467 291,013 354,153


Ratios

YE: Mar FY14 FY15 FY16e FY17e FY18e

EPS (Rs) 43.5 43.5 36.1 53.3 62.3

P/E (x) 8.9 9.0 10.8 7.3 6.2

P/B (x) 1.9 2.1 1.6 1.3 1.1

EV/EBITDA (x) 4.2 3.9 4.5 3.6 3.1

EV/EBIT (x) 6.0 5.7 7.8 6.1 5.3

EV/Net sales (x) 0.7 0.6 0.6 0.6 0.5

RoE (%) 21.5 23.1 15.3 18.5 17.8

RoCE (%) 14.7 11.8 9.5 11.5 11.6

Fixed Asset turnover (x) 2.6 2.5 2.4 2.4 2.4

Debtors (days) 16.7 17.6 18.0 18.0 18.0

WC (days) 1.8 (21.5) (18.6) (16.2) (13.8)

Net D/E ratio (%) 48.4 61.6 53.0 51.8 42.7

Revenue Growth (%) 23.3 12.9 3.7 17.4 13.7

EBIDTA Growth (%) 40.8 12.6 (7.5) 29.3 16.4

PAT Growth (%) 41.4 - (12.4) 47.6 17.0

EPS Growth (%) 40.2 - (16.9) 47.6 17.0


31 March, 2016


Tata Motors

Charting the story

Chart 1: JLR volume growth to gather pace on SUV launches Chart 2: Domestic M&HCV and LCV growth chart


Chart 3: JLR average realisation to improve after blip in FY16e Chart 4: Standalone and JLR EBITDA margin trends


Chart 5: Earnings to accelerate on domestic turnaround Chart 6: Free cash flow trend of JLR


31 March, 2016


Tata Motors

Domestic business – return of golden goose

We believe TTMT’s domestic business is expected to return to its old glory as the key building blocks of all major businesses are either put in-place or weaknesses are getting addressed. Sharp focus on right/competitive/superior product launches in each segments (M&HCV, LCV, PV) along with improved customer focus and management decentralisation will improve market agility/responsiveness while avoiding the earlier mistake of hurried launches and bureaucratic/philanthropic market approach. TTMT has also embarked on a cost/vendor rationalisation drive to become more leaner and cost competitive under the new management, with some of the market share loss being deliberate to avoid SCV KYC scheme-like fiasco.

Chart 7: M&HCV business volume growth Chart 8: LCV business volume growth


Chart 9: PV business volume growth to accelerate


31 March, 2016


Tata Motors

The company has also recalibrated its distribution strategy to focus on the weak spots (Southern market for CV business) and rural market for SCV to diversify its business concentration and improve competitive challenges. Part of its recent market share loss in M&HCV has been attributed to product weakness in rigid MAVs and failure of its 37t vehicle on misplaced lift axle. We believe while the company is addressing product issues, a sharp growth upturn expected in tipper and TT segments bodes well for TTMT due to its product superiority versus major competitors. Signs of LCV/SCV segment recovery and impressive PV line-up (modular Nexon platform with eight models and Kite S) are expected to improve its volume and market share in both the segments significantly. We expect M&HCV, LCV and PV to register a volume growth of 17%/18%/19% during FY16e-18e.

New product launch – focus on design/reliability/exhaustive trials

We believe one of the key problems for TTMT has been its hurried product launches, lack of major pointed/regular investments on new products and lack of regular refreshes/refinements despite being a pioneer in many segments (MAVs, SCV, diesel, rural SUV), while customer impression being performance improvements only post launch. We believe the company has changed this approach in the last one to two years, with new launches only after extensive trails and new generation features aligned to customer tastes.

Chart 10: Nexon, Kite S, Signa trucks/1518 ICV

Source: Company

Nexon Kite S

1518 ICV Signa trucks

31 March, 2016


Tata Motors

Distribution reach – focus on qualitative increase and customer experience

We believe further quantitative distribution expansion-led growth will be limited for TTMT, given its strong nation-wide reach. However, a qualitative approach to weak geographies such as South (15 new dealerships in 2015), SCV rural outlets and similar opportunistic as well as targeted distribution reach can fetch a better yield. Also, an approach to train and penetrate/tie-up with secondary service providers along with mobile repair vans for shorter CV downtime will better its market/revenue share gains and improve vehicle resale value, given it has the maximum weightage on the purchase decision of CVs (TTMT has the highest resale value in industry). Secondary network tie-up improves genuine parts sales and penetration for OEMs, which is a highly profitable business.

Chart 11: Distribution network of Tata, AL, BB, VECV


Duopoly may still exist; eye on BSVI preparedness

We believe the duopoly structure of HCV (TTMT and AL) and ICV (TTMT and VECV) industry to remain prevalent up to 2020, when the industry shifts to BSVI. However, lack of sufficient timeframe to prepare for BSVI norms will have to be watched carefully due to shortage of technology finalisation at the domestic players end. While global OEMs are slightly better prepared due to existing technology roadmap at their parent level, slackness at the end of domestic players can change the domestic duopoly structure significantly and can open the door for global OEMs in India.

Chart 12: HCV sales and market share Chart 13: LCV sales and market share


31 March, 2016


Tata Motors

Expect 20% revenue CAGR of domestic business in FY16e-18e

We expect the overall standalone business revenue to post a CAGR of ~20% over FY16e-18e and growth to be driven by both higher volume (18% CAGR) and realisation growth (2%). Our volume growth assumption for M&HCV, LCV and PV are 17%/18%/19% respectively.

Chart 14: Domestic volume and volume growth Chart 15: Domestic revenue and revenue growth


Expect standalone EBITDA margin to bounce back to double digit

We believe TTMT’s standalone margin is likely to bounce back to 10%+ by FY17e-end or early FY18e, given the improvement in operating leverage on higher M&HCV and LCV volumes. Sharp capacity increase at LCV plants like Dharwad/Pantnagar among others will have significant operating leverage benefits. Cost and vendor rationalisation efforts to have positive margin impact too. We estimate domestic EBITDA margin to increase to 9.6%/10.3% in FY17e/18e from 5.8% in FY16e. We believe TTMT’s margin will recover to the earlier peak double digit level. Reduction in PV business losses and increase in LCV profitability on higher volume can scale up the margin significantly in the long term.

Chart 16: Domestic gross and EBITDA margin inch up Chart 17: Domestic business – EBITDA margin (FY18)


31 March, 2016


Tata Motors

Profitability to improve significantly

We expect TTMT’s standalone earnings to improve significantly to Rs38bn in FY18e from a reported loss in FY16. Key drivers for our earnings growth assumptions are 1) 17% volume CAGR respectively, 2) operating leverage on LCV and PV businesses and 3) 450bps margin expansion. We believe a robust profitability will also improve its already robust return ratios in the next couple of years.

Chart 18: PAT and PAT growth Chart 19: PAT margin trend


31 March, 2016


Tata Motors

JLR business – falling in place after a year of hiccups

We believe JLR business will be back on track after a year of turbulence starting with the delay in engine plant and 2ltr diesel engine launch, product pricing issue of Evoque in China, slow ramp-up of CJLR amid working style difference between partners and staggered XE launch. We believe the delay in 2ltr gasoline engine launch has delayed XE launch in a key market like the US. Focus on sedan launches too had a bearing on overall volume growth due to the weakness in sedan brand equity.

Upcoming launches shifting to SUV segment (F-Pace, Discovery, Defender family, Sub-Evoque and so on) provide more volume comfort for JLR, given its strong brand equity in SUVs. Also, better acceptability of Discovery Sports in China along with ramp-up issue resolution in the Chinese JV and geographical spread of XE launch have improved growth and profitability visibility.

Chart 20: Jaguar volume growth Chart 21: Land Rover volume growth


SUV – key growth and most profitable segment

SUV remains the mainstay for JLR business and profitability as matching the sedan’s prowess to German peers is difficult to achieve. Global consumer shift towards SUV vehicle bodes well for JLR, being the most profitable product segment for the company. Also, gradual downscaling of vehicle engine options to in-house developed 2ltr engine (along with existing high power engine) will increase its addressable market significantly due to maximum volume being in the lower engine size. According to various studies, the global SUV market share in PV is expected to rise to 50% over the next few years, with higher SUV tilt in the luxury segment. JLR being the market leader in the high-end SUV segment, can easily encash on market opportunity by spreading to mid-luxury SUV segment on consumer preference.

Focus on development of engines above 2ltr

Post the 2ltr engine development, TTMT is planning to develop 3ltr engine and gasoline engines internally to reduce the dependence on Ford and meet future emission/fuel standards. The company is expanding its UK engine plant facility to increase in-house engine production and manufacture a wide variety of engines at its plant. We expect the gasoline 2ltr engine to be available from 2016, after a slight delay.

31 March, 2016


Tata Motors

JLR – expect 13% volume and 15% revenue CAGR by FY18e

We expect JLR’s volume to post a CAGR of ~13% over FY16e-18e and growth to be driven by 32% in Jaguar and 8% in Land Rover volume growth respectively. In Jaguar too, the major growth contributor will be F-Pace. We believe our LR growth assumption is conservative and factors a major drop in Evoque to ~93k in FY18e, from FY15 peak of 123k units. We estimate 15% revenue CAGR during FY16e-18e, largely driven by volume. Partial business shift to Chinese JV and introduction of lower-priced model has impacted its overall revenue growth in FY16.

Chart 22: JLR’s volume and volume growth Chart 23: JLR’s revenue and revenue growth


Conservative on margin – expect ~15% sustainable level

We believe JLR’s margin will stabilise ~15% in FY17e/18e on higher volume, superior mix of new launches in upcoming SUVs and higher parts supply to Chinese JV on business ramp-up and higher Chinese volume of imported models. However, we believe our margin assumption is conservative and it can reach ~16%+ on meaningful uptick in positive variant mix of upcoming launches, favourable currency and higher share of profitable geographies. We estimate 17% EBITDA CAGR during FY16e-18e on account of revenue growth and 50bps+ margin expansion.

Chart 24: JLR’s EBITDA margin Chart 25: JLR’s EBITDA/car


31 March, 2016


Tata Motors

Chart 26: JLR’s EBITDA and EBITDA growth assumption


Profitability set to improve significantly

We expect JLR’s earnings to register 32% CAGR over FY16e-18e. Key drivers for our earnings growth assumptions are 1) 15% revenue CAGR, 2) 50bps+ margin expansion over FY16e-18e and 3) sharp improvement in CJLR profitability (GBP250mn by FY18e).



CJLR (Chinese JV) – expect sharp jump in profitability

We expect a significant ramp-up of JV business with the launch of XE and strong traction of Discovery Sports volume in China. With the JV team cohesion issue now behind us, we expect significant improvement in CJLR profitability in FY17/18.

31 March, 2016


Tata Motors

Chart 29: CJLR profitability


31 March, 2016


Tata Motors

Consolidated financial analysis

Expect 16% revenue CAGR between FY16e-18e

We expect consolidated revenue to post a CAGR of ~16% over FY16e-18e, driven by 20% growth in domestic business and 15% growth in JLR business. 18% and 13% volume CAGR in domestic and JLR will be the key revenue driver for each of the segment. We believe our revenue growth assumption is conservative for both domestic and JLR business.

Chart 30: Standalone and JLR volume growth assumption Chart 31: Consolidated revenue and revenue growth


Chart 32: Consolidated sales break-up by business Chart 33: Consolidated profit break-up by business (FY18)


31 March, 2016


Tata Motors

We build consolidated margin of ~15% in FY17e/18e v/s 13% now

We believe margin is likely to go up to ~14.7%/15.2% in FY17e/18e on account of margin expansion in both domestic and JLR businesses. However, we believe our margin assumption is conservative due to potential surprise in JLR on superior mix and favourable currency. Also, revenue and margin assumption of domestic business is realistic in our view, which will significantly swing the profitability needle in the next two years. We expect consolidated EBITDA CAGR of 24% during FY16e-18e.

Chart 34: Consolidated gross margin Chart 35: Domestic and JLR EBITDA margin


Chart 36: Consolidated EBITDA and EBITDA margin assumption


31 March, 2016


Tata Motors

Earnings set to improve significantly – 31% CAGR in FY16e-18e

We expect consolidated earnings to register 31% CAGR over FY16e-18e. Key drivers for our earnings growth assumptions are 1) sharp jump in domestic profitability from loss and JLR and JLR earnings CAGR of 32% and 2) 200bps consolidated margin expansion over FY16e-18e. We believe a sharp improvement in domestic/consolidated profitability will also improve its already robust return ratios in the next two years. We estimate consolidated RoE to improve to 18% by FY18e.



Chart 39: Consolidated RoE trend


31 March, 2016


Tata Motors

Valuation and view

We expect TTMT’s consolidated sales, EBITDA and PAT CAGR of 16%, 24% and 31% respectively over FY16e/18e. At CMP, the stock trades at 7x/6x FY17e/18e EPS and 3.4x and 2.9x FY17e/18e EV/EBITDA. We believe the current valuation does not capture the upcoming positive earnings catalyst and factors too many business risks. Our SOTP-based valuation comes to Rs550 (implied 4x FY18e EV/EBITDA and 8.5x FY18e consol EPS). We believe a discount to global peers is unjustified and it fully ignores the domestic earnings kicker.

Table 2: Global auto peer valuation snapshot – TTMT is at a discount to global luxury peers

Company Price (LCY) Market Cap

($ bn)

P/E P/B EV/EBITDA RoE

FY16e FY17e FY18e FY16e FY17e FY18e FY16e FY17e FY18e FY16e FY17e FY18e

BMW EUR 82 60 8.5 8.2 8.2 1.2 1.1 1.0 6.9 6.6 6.5 14.7 13.7 12.8

Daimler EUR 67 82 7.9 7.7 7.7 1.3 1.2 1.1 2.5 2.4 2.4 17.6 16.2 14.1

Tata Motors Rs389 19 10.8 7.3 6.2 1.6 1.3 1.1 4.5 3.6 3.1 15.3 18.5 17.8

Average

8.9 7.6 7.3 1.0 0.9 0.9 4.3 3.5 3.0 15.9 16.2 15.0 Source: Bloomberg, Company, Systematix Institutional Research

31 March, 2016


Tata Motors

Company background

Tata Motors is a part of the US$100bn Tata group founded by Jamsetji Tata in 1868. Tata Motors is a leading global automobile manufacturer, with a portfolio that covers a wide range of cars, sports vehicles, buses, trucks and defence vehicles. Tata Motors has auto manufacturing and assembly plants in Jamshedpur, Pantnagar, Lucknow, Sanand, Dharwad and Pune in India, as well as in Argentina, South Africa, Thailand and the United Kingdom. It has research and development centres in Pune, Jamshedpur, Lucknow and Dharwad, India and in South Korea, Spain and the United Kingdom. The company has built a strong global network of subsidiaries and associate companies, including Jaguar Land Rover in the UK and Tata Daewoo in South Korea.

Table 3: Key management team

Name Designation Profile

Cyrus P Mistry Non-Executive Director and Chairman

He is a graduate of civil engineering from the Imperial College London (1990) and has an MSc in Management from the London Business School (1997). Mistry was appointed as a Director of Tata Motors with effect from May 29, 2012, and as deputy chairman of the company with effect from Nov 7, 2012. He was earlier managing director of the Shapoorji Pallonji group and was also responsible for building the infrastructure development vertical in Shapoorji Pallonji group.

Guenter Butschek CEO and Managing Director (Tata Motors)

He is a graduate in Business Administration and Economics, with a diploma from the University of Cooperative Education Stuttgart, Germany. He was previously associated with the Airbus group, where he served as COO of Airbus and a member of the Group Executive Committee. Prior to Airbus, he worked at Daimler AG, where he gained more than 25 years of experience in international automotive management, holding functions like production, industrialisation and procurement. Butschek was appointed as an Additional Director of Tata Motors with effect from Feb 15, 2016.

C Ramakrishnan President and Group Chief Financial Officer

He holds a Bachelor's degree in Commerce and is a Chartered Accountant and a Cost Accountant. He has been the Group Chief Financial Officer at Tata Motors since Sept 18, 2007 and serves as its President and Compliance Officer. Ramakrishnan is responsible for Finance, Accounts, Taxation, Business Planning, Investor Relations, Treasury, CRM & DMS and IT. He served as Vice-President of Chairman's office and Executive Director of Finance of Tata Motors.

Ralf Speth Non-Executive Director (CEO, JLR)

He has done his engineering from Rosenheim University, Germany and is a Doctorate of Engineering in Mechanical Engineering and Business Administration from Warwick University. Speth was appointed to the post of Chief Executive Officer at Jaguar Land Rover on Feb 18, 2010. He served BMW for 20 years, and was with Ford Motor Company’s Premier Automotive Group as Director of Production, Quality and Product Planning.

Ravindra Pisharody Executive Director (Commercial Vehicles)

He is an alumnus of IIT, Kharagpur and IIM, Kolkata. He is the Executive Director (Commercial Vehicles) since June 21, 2012, having joined Tata Motors as Vice-President Commercial Vehicles (Sales & Marketing), in 2007. Before joining Tata Motors he worked with Castrol Ltd, a subsidiary of BP, and with Philips India, a subsidiary of the Dutch company in various roles.

Mayank Pareek President (Passenger Vehicle Business Unit)

He is a Post Graduate Diploma in Business Management from IIM, Bangalore and a Bachelor of Engineering Degree from IIT, BHU. He has been President of Passenger Vehicle Business Unit at Tata Motors since October 2014. He began his career in 1982 with BHEL and worked in the manufacturing function and joined Maruti Udyog in 1991. Pareek served as the Chief Operating Officer and Managing Executive Officer of Marketing & Sales at Maruti Suzuki until May 2, 2014.

Source: Company



31

Eicher Motors

Strong business with high valuation and limited upside

We initiate coverage on Eicher Motors (EIM), a cult cruiser bike manufacturer and a key Indian commercial vehicle player (VECV; JV with Volvo group) with a Hold rating and a target price of Rs19,250. Renaissance of the cult “Royal Enfield” brand in India in the last five years, with product interventions/quality improvement is commendable. We believe the company’s relatively less-talked hero in recent times “VECV” will be the key mid-term driver as all the success recipe is in place – diminution of CV pricing gaps on industry’s technology shift, fortification of back-end (sales/service/parts set-up) and accessibility of high HP engine (legacy issue). We believe EIM’s resolve to replicate the Indian success in global mid-size bike market will be arduous and time consuming as domestic RE market is hitting near-term capacity and relative market maturity bumps.

Payoff time for VECV – all inputs are perfectly placed: We believe the VECV business will see major positive shift in the next three years, with both HCV and exports business are on a take-off stage, while maintaining the strength of LMD and Bus segments. In our view, higher HP engine availability with domestic plant (Volvo technology and key issues in EIM’s legacy HD range), reduction of pricing gaps with incumbents on diminution of technology gaps (BSIV in Apr-17/BSVI in Apr-20) and other regulatory interventions (on-board-diagnostic and inconformity compliance) and sales/service/parts network expansion will provide impetus to VECV HCV business from FY18. Recalibration of exports focus with products developed for local market needs (Indonesia/South Africa among others) and using Volvo group’s distribution network (UD, Renault, Mack) is expected to start contributing from 2018 onwards.

Expect LMD market share to remain ~35% due to customer traction, while the Bus and HCV market share to improve 25% and 6% respectively on filling of product gaps

Estimate LMD/Bus/HCV CAGR of 14%/17%/10% over the next four years

Royal Enfield (RE) – focus on repeating Indian success elsewhere: We expect the domestic RE growth rate to normalise (16% CAGR) over the next five years, from a hyper growth phase (54% CAGR during CY10-15), despite lots of penetration opportunity. We believe RE will focus initially on commonwealth countries (brand legacy) and countries with biking culture like Spain with product launches suitable to these markets. The export market development will be a long-term process (highlighted by MD), with sustained brand building exercise, and we expect the export market to reach 4% of total volume in FY20e, from 2% currently. We believe the low hanging fruits have been plucked in the domestic market and an incremental pull will require further cult design (not impossible, but tough). The management’s focus shift to overseas market partly reaffirms our view.

Estimate 35% and 32% standalone and consolidated earnings CAGR: We estimate consolidated sales/EBITDA/PAT CAGR of 21%/26%/32% respectively over the next four years, driven by 14% and 16% volume growth in CV and RE business. We expect RE business sales/EBITDA/PAT CAGR of 25%/28%/30% on 16% volume CAGR and 300bps margin expansion. We believe the company is in a sweet spot for RE margin, with many levers to grow it further. VECV margins to rebound to earlier levels of 9% as volume/pricing of Pro series improves on BSIV.

Initiate coverage with Hold: At CMP, the stock trades at 28x/22x FY17e/18e EPS. Our SOTP-based valuation comes to Rs19,250 (assigning 25x and 15x PER to RE and VECV respectively; implied 23x FY18e consolidated EPS). Although near-term growth is robust, we are cautious on its future occurrence probability. Key risks to our assumptions are a) lack of export take-off in RE, b) lack of product acceptability in CV business and c) product performance issue in RE, post BSVI implementation in 2Ws.

Systematix


31 March, 2016



INITIATING COVERAGE

Sector: Auto Rating: Hold

CMP: Rs18,709 Target Price: Rs19,250

Stock Info

Sensex/Nifty 25,339/ 7,735

Bloomberg EIM IN

Equity shares 27 mn

52-wk High/Low Rs21,618/ 13,930

Face value Rs10

M-Cap Rs507bn/ $8bn

3-m Avg volume $18mn

Financial Snapshot (Rs mn)

Y/E March FY16e FY17e FY18e Net Sales 130,723 165,509 196,164

EBIDTA 21,599 31,713 37,935

PBT 18,570 28,268 33,951

Net Profit 11,401 17,642 22,277

EPS (Rs) 419.9 649.8 820.5

P/E (x) 43.4 28.1 22.2

EV/EBIDTA (x) 22.5 15.0 12.1

P/B (x) 11.8 9.1 7.2

RoE (%) 27.2 32.3 32.4

RoCE (%) 22.9 29.5 29.3

Shareholding pattern (%)

Dec ’15 Sep ’15 Jun ’15

Promoter 54.8 54.9 54.9

–Pledged - - -

FII 26.6 27.2 27.1

DII 5.0 4.2 5.0

Others 13.6 13.7 13.0

Stock Performance (1-year)

31 March, 2016


Eicher Motors

FINANCIALS (CONSOLIDATED)

Profit & Loss Statement

YE: Mar (Rs mn) CY14 CY15 FY16e FY17e FY18e

Net sales 85,987 117,268 130,723 165,509 196,164

Growth, % 29 36 11 27 19

Other income 1,396 1,970 2,169 2,383 2,628

Total income 87,383 119,238 132,892 167,892 198,792

RM expenses (57,660) (77,082) (84,888) (104,395) (123,515)

Employee expenses (6,596) (8,302) (9,134) (11,382) (13,447)

Other expenses (76,235) (101,165) (111,293) (136,179) (160,857)

EBITDA (Core) 11,148 18,073 21,599 31,713 37,935

Growth, % 56.3 62.1 19.5 46.8 19.6

Margin, % 13.0 15.4 16.5 19.2 19.3

Depreciation (2,198.2) (3,430.9) (4,011.4) (4,545.2) (5,179.2)

EBIT 8,950 14,642 17,587 27,168 32,756

Growth, % 53.5 63.6 20.1 54.5 20.6

Margin, % 10.4 12.5 13.5 16.4 16.7

Interest paid (97.8) (80.6) (60.0) (60.0) (60.0)

Other Income 1,074.4 838.7 1,042.4 1,160.0 1,255.0

Pre-tax profit 9,926 15,401 18,570 28,268 33,951

Tax provided (2,909) (4,706) (5,666) (8,198) (9,325)

PAT (Reported) 7,017 10,695 12,903 20,069 24,626

Growth, % 56.2 53.3 20.9 54.7 26.3

Net Profit (adjusted) 6,154 9,434 11,401 17,642 22,277


Balance Sheet


Cash & bank 4,806 5,691 8,486 21,222 35,602

Debtors 5,622 7,834 8,091 10,018 11,193

Inventory 6,455 8,848 9,522 11,865 14,064

Loans & advances 8,578 9,756 11,152 13,944 16,010

Other current assets 557 1,063 802 802 802

Total current assets 26,018 33,192 38,052 57,852 77,672

Investments 10,777 16,114 20,042 18,605 20,398

Gross fixed assets 31,374 41,419 44,258 51,758 59,258

Less: Depreciation (8,280) (11,592) (15,103) (19,148) (23,828)

Add: Capital WIP 4,188 2,728 5,000 5,000 5,000

Net fixed assets 27,281 32,555 34,155 37,610 40,430

Total assets 64,076 81,862 92,248 114,066 138,501

Current liabilities 21,708 29,155 27,982 33,293 38,181

Provisions 3,213 2,052 5,774 7,553 11,072

Total current liabilities 24,921 31,206 33,756 40,846 49,253

Non-current liabilities 3,146 4,356 3,816 3,816 3,816

Total liabilities 28,067 35,563 37,572 44,662 53,069

Paid-up capital 271 272 272 272 272

Reserves & surplus 24,888 34,289 41,618 54,374 68,506

Shareholders’ equity 36,009 46,299 54,676 69,405 85,432

Total equity & liabilities 64,076 81,862 92,248 114,066 138,501


Cash Flow


Pre-tax profit 9,926 15,401 18,570 28,268 33,951

Depreciation 2,198 3,431 4,011 4,545 5,179

Chg in working capital 475 1,540 (2,959) (1,222) (128)

Total tax paid (2,320) (3,922) (5,666) (8,198) (9,325)

CFO 10,280 16,450 13,956 23,392 29,678

Capital expenditure (8,282) (8,705) (5,611) (8,000) (8,000)

Chg in investments (2,522) (5,337) (3,927) 1,437 (1,793)

CFI (10,805) (14,042) (9,539) (6,563) (9,793)

Free cash flow (525) 2,408 4,418 16,829 19,884

Equity raised/(repaid) (4,995) (9,910) (9,510) (15,997) (17,839)

Debt raised/(repaid) (223) 427 (540) - -

Dividend (incl. tax) (857) (1,545) (424) (3,394) (4,642)

CFF (6,485) (11,401) (10,928) (19,844) (22,934)

Net chg in cash (7,010) (8,993) (6,511) (3,015) (3,050)

Opening cash balance 6,826 4,806 5,691 8,486 21,222

Closing cash balance 4,806 5,691 8,486 21,222 35,602


Ratios

YE: Mar CY14 CY15 FY16e FY17e FY18e

EPS (Rs) 227.1 347.5 419.9 649.8 820.5

P/E (x) 80.3 53.8 43.4 28.1 22.2

P/B (x) 20.2 14.7 11.8 9.1 7.2

EV/EBITDA (x) 45.1 27.9 22.5 15.0 12.1

EV/Net sales (x) 5.8 4.3 3.7 2.9 2.3

RoE (%) 24.5 27.3 27.2 32.3 32.4

RoCE (%) 18.8 23.1 22.9 29.5 29.3

Fixed Asset turnover (x) 3.6 4.1 3.9 4.3 4.6

Dividend Yield (%) 0.3 - 0.7 0.8 1.3

Debtors days 23.9 24.4 22.6 22.1 20.8

WC days (9.3) (5.6) (5.6) (3.3) (7.5)

Revenue Growth (%) 28.3 36.5 11.5 26.3 18.4

EBIDTA Growth (%) 56.3 62.1 19.5 46.8 19.6

PAT Growth (%) 56.2 53.3 20.9 54.7 26.3

EPS Growth (%) 56.2 53.0 20.9 54.7 26.3


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Eicher Motors

Charting the story

Chart 1: VECV’s volume growth to gather momentum Chart 2: RE’s volume growth to taper from earlier levels


Chart 3: RE average realisation growth Chart 4: EBITDA margin and gross margin expands


Chart 5: Earnings to accelerate on volume growth Chart 6: Free cash flow and free cash flow as % of EBITDA


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RE – domestic hyper growth phase over; search for new growth catalysts

We believe Royal Enfield’s (RE) multi-year hyper growth phase is almost over, with domestic demand growth being more secular and steady. So far, the company has been successful in widening its appeal to the new young and mobility-driven customers, without diluting its core brand equity among enthusiasts. The domestic low hanging fruits have been plucked by bringing the brand to mainstream premium bike segment, with much easier riding experience and improved after sales service. Although demographics indicate immense growth potential, we believe the market potential for a premium bike has volume limitation of ~60-70k/month as we have seen in the case of earlier premium Bajaj Pulsar (volume restricted to ~70k at peak), as brand fatigue and too much visibility seeps in.

Chart 7: Volume growth to normalise Chart 8: Revenue and revenue growth to normalise too


Chart 9: RE model wise sales mix – Classic 350 is the key driver


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Eicher Motors

Though dealership expansion and market penetration (smaller towns and rural areas) opportunities exist, we believe this will also coincide with market share loss to HD, Triumph and UM’s mid-range bikes in bigger cities. We have seen this in the case of limited success of Continental GT, where the products are positioned against global biggies such as Triumph or HD with 500cc+ engine. We believe competition will emerge in the mid-range bike segment with UM’s entry and a very attractive price range of Rs150-200k. We expect RE to register a volume growth of 16% during FY16e-20e, with growth being more front-ended (22% and 20% in FY17e and FY18e respectively). We believe the current monthly order intake of ~35-40 days of shipment would suffice the 700-750k annual volume, and demand visibility beyond that is limited.

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Eicher Motors

Customer tilt moving towards more commuters

Over the past few years, RE has considerably widened the customer base to leisure weekend/fortnightly bikers (100km usage per week) and young daily commuters, with entry level salary in the range of Rs50k+ without any financial/family liabilities. We believe this commuter tilt (partially promoted by company too with a disguised focus on improving the fuel economy of its engine) may help expand its catchment area initially but may restrict its halo effect in the long term as few of these users may not come back to buy another bike or may simply upgrade to more premium global brands like HD and Triumph when needed.

Two key segments driving RE’s strong growth

Weekend leisure driver (age group 35-45 years): We note these customers are typically an established professional whose daily transport mode is primarily a car, but uses RE for weekend long drives to nearby weekend gateways by using better and improved highways. This customer segment will have limited use and the replacement cycle will be very high, with few users unlikely to buy another bike.

Daily commuter (age group 21-30 years): These young and mobile customer segments using the bike on a daily basis for their commuting requirements. Typically, they have upgraded from an entry level sports motorcycle (Bajaj Pulsar, TVS Apache) to the cruiser segment after entry into workforce as a fresher. These users have a higher disposable income due to limited financial liabilities. We believe EIM is working on this segment, with improved fuel economy in its new 400cc and 600cc engines.

New product introduction – not every bike can add volume significantly

We believe the new launches such as Himalaya and Continental GT are unlikely to be the key future volume drivers like Classic, as these will be specialist enthusiast bikes, rather than the mass premium volume brand. We have seen a volume decline at Continental GT after the initial euphoria, which is a case in point. We believe the company is working on many new models for the export market to suit and penetrate these markets and is working on BSIV upgrade for its domestic models. We also note that RE bikes costing more than Rs150k (Thunderbird and Continental GT) have lesser appeal or sales traction than the sub-Rs150k units like Classic 350 or Bullet.

Chart 10: Continental GT Chart 11: Himalayan

Source: Company

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Eicher Motors

Exports market – unlikely to swing needle by FY20 in a major way

We believe exports volume contribution is unlikely to move beyond 4% of the overall volume by FY20e despite a lot of management bandwidth on export market distribution expansion, with a focus on geographies like Europe, South East Asia and South America. However, penetrating these markets will be a tough challenge as brand building and product acceptability roadmap will be arduous. Replicating the domestic market success to exports too would be challenging, in our view. Export market will be a tough nut to crack in the initial phase, with limited brand appeal in non-commonwealth countries.

Chart 12: Export sale volume movement


Accessories opportunity – growth potential, but recreating HD magic is tough

Harley Davidson (HD) derives ~22% of its revenue from spare parts (15%) and accessories (7%) sales. We believe the share of this business in RE to rise too over a period of time, but recreating HD magic in India would be difficult due to the rising share of commuter users. We believe as the company’s vehicle base increases, parts sales can be a significant chunk of business over the period (~5% currently). In merchandise segment, RE has started selling body gear such as helmets, gloves and shoes at select outlets and has the potential to generate additional revenue.

Chart 13: Harley spare parts and merchandise sales (% of revenue) Chart 14: RE spare parts sales and share (%) of revenue


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Eicher Motors

Distribution reach – well spread and comparable to mass 2W players

We believe a further distribution expansion-led growth will be limited in India as the company’s reach is now well spread with 500+ dealership across the country. We believe the scope for further volume jump due to incremental dealership reach will be difficult as the new stores will broadly cannibalise existing ones and we rarely find any major area (~100km catchment) without a dealership. We also believe the dealership is now comparable to the No. 2 mass market 2W brand, Bajaj Auto.

Chart 15: Hero, Honda, Bajaj and RE dealership Chart 16: Growth of RE dealership


Competition to emerge from UMM Lohia and Triumph

So far, RE has been facing no competition in the mid-size motorcycle segment, which we believe will change in the next couple of years after UMM’s aggressively priced bike launch and expectation of mid-size bike launch from Triumph too. Also, HD is trying to lower its price points to gain a market foothold. Street 500 with ~Rs400k price has been an effort in that direction. We believe the segment’s competition will grow and future growth will get subdivided among the new entrants too, than the earlier 100% gain for RE.

Chart 17: Market share of 200cc+ segment in motorcycle industry Chart 18: RE market share in 200cc+


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Exhibit 19: UMM-Lohia two-wheeler launches – possible competition to RE on both design and pricing

Source: Company

Expect 16% volume CAGR, 25% revenue CAGR by FY20e

We expect RE’s revenue to post a CAGR of ~25% over FY16e-20e and growth to be driven by both higher volume (16% CAGR), realisation growth (6.5%) and higher spare parts/accessories (3% addition to revenue from 5% currently). We believe our realisation and accessories growth assumptions are too optimistic given the past increase (3% realisation CAGR for last four years and decline in spare sales as a percentage of revenue from 10%). Our volume growth assumption is ~5% lower than consensus street expectations.

Chart 20: RE’s volume and volume growth Chart 21: RE’s revenue and revenue growth


Capacity expansion to 0.9mn by 2018 – enough to cater to demand by FY20

As stated by the company, RE’s capacity is expected to reach 0.9mn units in 2018 (FY19), which we believe will be enough to cater to its demand by FY20. Given the shrinkage of current waiting list to 30-45 days maximum on supply increase, we believe the volume growth will taper to sub 20% in the medium term, from the earlier >50% CAGR. Recent order intake too has been ~60k/month, which points to some semblance of growth tapering. In our view, the high hopes on RE export in the next three to four years will be slightly unrealistic, given the product acceptability challenges and brand building exercise.

UM – Commando - ~Rs169K UM – Renegade - ~Rs159K

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Chart 22: RE’s capacity timeline


Estimate EBITDA margin to be sustainable ~30%

We believe the EBITDA margin is likely to remain strong and can breach 30% in FY17e on gross margin improvements. Although the company can expand its EBITDA margin by 2-3% easily, we believe it will avoid playing the pricing/margin card too much and would rather focus on volume growth. Our EBITDA/bike assumption of Rs34k/Rs36k in FY17e/18e, from ~Rs28k currently, is not conservative given the lack of major realisation jump in the last two years. Operating leverage too can fetch a point and a price increase just to improve margin is not expected from a prudent management team like EIM.

Chart 23: RE’s EBITDA and gross margin Chart 24: RE’s EBITDA/bike


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Eicher Motors

Chart 25: RE EBITDA and EBITDA margin assumption


Profitability to remain strong

We estimate EIM’s earnings to register 35% CAGR over FY16e-20e. Key drivers for the earnings growth assumptions are 1) 16% volume CAGR respectively, 2) 300bps margin expansion and 3) lower corporate tax rate roadmap as announced by the government. We believe a robust profitability will also improve its already robust return ratios in the next five years.



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CV business – should start firing on all cylinders

We believe VECV business (JV between Volvo and Eicher Trucks and Buses) to see major positive shift in the next three years, with both HCV and exports business on a take-off stage, while maintaining strength of LMD and Bus segments. We believe higher HP engine availability with domestic plant (Volvo technology and key issues in Eicher’s legacy HD range), reduction of pricing gaps with incumbents on diminution of technology gaps (BSIV in Apr-17/BSVI in Apr-20) and other regulatory interventions (on-board-diagnostic and inconformity compliance) and sales/service/parts network expansion will provide impetus to VECV HCV business from FY18.

Recalibration of exports focus with products developed for local market needs (Indonesia/South Africa and so on) and using Volvo group’s distribution network (UD, Renault, Mack) is expected to start contributing from 2018 onwards.

Chart 28: Overall CV business volume growth Chart 29: CV business volume growth by LMD trucks


Chart 30: CV business volume growth by HD Truck Chart 31: CV business volume growth by LMD Bus


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LMD truck and bus segment – key growth and most profitable segment

VECV has gained 600bps increase in VECV’s ICV market share since the start of the JV with Volvo in 2008. While LMD truck market share has improved from 27% in 2008 to ~34% in 2015, LMD bus market share has improved from 11% to 21%, with major gains in staff and school transport segment. We believe while the company may maintain LMD truck market share of ~34% by FY18e, with +/-2% range, LMD bus market share is likely to improve to 25%+ on better product acceptability and closing the gap of regional market share disparity (very low market share in Eastern India).

Chart 32: Market share of LMD Bus Chart 33: Market share of LMD trucks


HD truck segment – all major ingredients are in place

For VECV, HCV segment has been difficult so far due to the earlier lack of powerful engines, lack of in-house financing arm and legacy complaints/issues with EIM’s low powered HCV trucks. With the new Volvo technology engine in place, EIM has started seeding the market with Pro6000 and Pro8000 series with decent market acceptability. The company has been moving slowly in the space to avoid past mistakes. We believe closure of technology gaps between incumbents and new players like VECV, after BSVI implementation in 2020, will help bridge the pricing gaps. Refurbishment of products along with reduction in pricing gaps with incumbents will help VECV gain market share in HD segment. We estimate the segment’s market share will reach 6-7% by FY18e, from <4% currently.

Chart 34: Market share of HD Truck


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Eicher Motors

Engine plant – export volume pick-up slow on lower demand from Volvo group

Unavailability of an owned powerful engine was the key drag for VECV in the HCV segment due to sub-par performance of 130HP engines along with frequent breakdowns. Volvo’s decision to bring the engine plant within the JV provided a lifeline to VECV’s HD truck volume aspirations in India. With an initial capacity of 25k units (scalable to 100k units), VECV’s major handicap has been overcome. Although EIM has been able to deliver ~1,500 engines per month now, the earlier expectation of a sharp increase to ~5,000/month has been difficult to achieve due to a lack of pick-up of Volvo group’s medium duty segment and Volvo’s 25% stake acquisition in Deutz (engine supply was to be transferred from Deutz to VECV engine facility).

Chart 35: VE Powertrain engine volume


Volvo’s support has improved the technological prowess of the JV company, as new emission-compliant technologies are easily available off-the-shelf for VECV, while other Indian players are struggling to firm-up crucial technologies for BSVI norms.

VECV – expect 14% volume and 18% revenue CAGR by FY20e

We expect VECV’s volume to post a CAGR of ~14% over FY16e-20e and growth to be driven by 14% and 17% LMD truck and buses volume growth respectively. We estimate HD truck segment CAGR of ~10% due to slow ramp-up of Pro6000 series and initial market seeding efforts. We have assumed flat-to-marginal dip in volume for FY18 due to the pre-buying effect in FY17, arising from the emission norms change in FY18. We estimate 18% revenue CAGR during FY16e-20e, largely driven by volume and realisations.

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Chart 36: VECV’s volume and volume growth Chart 37: VECV’s revenue and revenue growth


Conservative on margin – expect ~9% sustainable margin

We believe VECV’s margin will peak ~9.6% in FY17e on higher volume. However, we expect volume growth to stabilise at ~9% due to higher low-margin Pro series volume. We believe our margin assumption is conservative and it can reach the double digit of ~10% on a meaningful uptick in LMD and buses volumes. In our view, competitive and market share improvement pressures along with ROI linked engine supply orders (higher engine volume with lower margins) can keep the margin under double digit. We estimate 18% EBITDA CAGR during FY16e-20e on account of revenue growth and 100bps margin expansion.

Chart 38: VECV’s EBITDA margin Chart 39: VECV’s EBITDA and EBITDA growth assumption


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Profitability set to improve significantly

We expect VECV’s earnings to register 34% CAGR over FY16e-20e. Key drivers for our earnings growth assumptions are 1) 18% revenue CAGR, 2) 100bps margin expansion over FY16e-20e and 3) lower tax rate.



Eicher Polaris business – expect cash burn in medium-term

In 2012, EIM signed a strategic 50:50 JV with Polaris Industries (US), with a total investment of Rs3.5bn to design, develop and manufacture a full new range of personal vehicles suitable for Indian small business owners. The JV has set up its manufacturing plant in Kukas, Rajasthan with an annual capacity of 60,000 units, which can be further scaled up to 120,000 units on demand. The JV launched its first product “Multix” priced between Rs232,000 and Rs272,000 (ex-showroom Delhi), offered in two variants, with a seating capacity of five and luggage space of 1,918ltrs. The product is being positioned in a new category as a personal and small business utility vehicle. It is powered by a 600cc diesel engine, which will deliver fuel mileage of 28.5kmpl. It can also act as a generator and produce up to 3kw of power, which can be used to power professional equipments such as water pumps, drilling machines and even light small homes. The vehicle would initially be offered only in 30 cities. We believe an under-powered engine has resulted into low product acceptance. We may see a cash drain due to this business in the overall consolidated results, going forward.

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Eicher Motors

Consolidated financial analysis

Expect 21% revenue CAGR during FY16e-20e

We expect the company’s consolidated revenue to post a CAGR of ~21% over FY16e-20e, driven by 25% growth in RE business and 18% growth in VECV business. 16% and 14% volume CAGR in RE and VECV will be the key revenue driver for each of the segment. We believe our revenue growth assumption is optimistic for RE but conservative for VECV.

Chart 42: RE and VECV’s volume growth assumption Chart 43: Consolidated revenue and revenue growth


Chart 44: Consolidated sales break-up by business Chart 45: Consolidated profit break-up by business


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Eicher Motors

We build optimistic consolidated margin of ~19.5% in FY17e/18e v/s 16.5% now

We estimate the margin is likely to increase ~19.2%/19.3% in FY17e/18e on account of margin expansion in both RE and VECV. However, we believe our margin assumption is optimistic as it does not consider the losses at Eicher Polaris due to lack of financial details. Also, the revenue and margin assumption of RE is optimistic, in our view. Even a positive swing in VECV margin is unlikely to swing the needle.

Chart 46: Consolidated gross margin Chart 47: RE and VECV gross margin


Chart 48: Consolidated EBITDA and EBITDA margin assumption


Earnings set to improve significantly – 32% CAGR by FY20e

We expect EIM’s consolidated earnings to post 32% CAGR over FY16e-20e. Key drivers for our earnings growth assumptions are 1) 30%/34% earnings CAGR of RE/VECV, 2) 300bps consolidated margin expansion over FY16e-20e and 3) lower tax rate. We believe a sharp improvement in profitability will also improve its already robust return ratios in the next five years. We estimate consolidated RoE and RoCE to improve to 32% and 29% respectively by FY18e.

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Chart 51: RoE and RoCE trend


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Eicher Motors

Robust balance sheet and FCF – dividend payout set to increase

EIM is a debt-free company and all the capex will be funded through internal accruals. Strong free cash flow, controlled/disciplined working capital and healthy balance sheet provide the much-needed comfort on management’s fiscal discipline. Also, we expect the dividend payout ratio to increase to =>35%, given significant free cash flow generation. We believe capacity augmentation and R&D expenses will be funded through internal accruals too.

Chart 52: Expect high dividend payout ratio to continue Chart 53: Consistent improvement in working capital cycle


Chart 54: Positive free cash flow & FCF as % of EBITDA Chart 55: Improving fixed asset turnover ratio


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Eicher Motors

Valuation and view

We expect EIM’s consolidated sales, EBITDA and PAT CAGR of 21%, 26% and 32% respectively over FY16e/20e, driven by 30%/34% earnings CAGR of RE/VECV. At CMP, the stock trades at 28x/22x FY17e/18e EPS. During FY13-15, the stock traded at 20-30x one-year forward PER multiple. We believe the current valuation captures all the positives and avoids any inherent risks in the business. Our SOTP-based valuation comes to Rs19,250 (assigning 25x and 15x PER to RE and VECV respectively; implied 23x FY18e consolidated EPS).

Chart 56: 1-year forward PE

Source: Bloomberg, Company, Systematix Institutional Research

Table 1: Domestic auto peers valuation snapshot – EIM commands premium

Company Price (Rs) Market Cap

(Rs bn)

P/E P/B EV/EBITDA RoE

FY16e FY17e FY18e FY16e FY17e FY18e FY16e FY17e FY18e FY16e FY17e FY18e

Bajaj Auto 2,429 700 18.9 16.6 14.5 5.6 4.9 4.2 13.6 12.2 10.9 31.3 30.8 30.6

Hero MotoCorp 2,953 583 19.0 17.1 15.4 7.5 6.3 5.4 12.8 11.6 10.5 42.0 39.0 36.9

TVS Motors 324 152 34.0 22.8 18.0 7.8 6.3 5.0 20.0 14.4 11.8 24.9 30.1 30.2

Maruti Suzuki 3,740 1,129 23.1 17.1 13.9 4.2 3.5 3.0 12.1 9.7 7.9 18.0 20.8 21.8

Mahindra & Mahindra 1,220 748 22.6 18.0 14.8 3.5 3.0 2.6 16.4 13.2 10.8 15.3 16.8 17.6

Tata Motors 389 1,252 10.8 7.3 6.2 1.6 1.3 1.1 4.5 3.6 3.1 15.3 18.5 17.8

Eicher Motors 18,709 507 43.4 28.1 22.2 11.8 9.1 7.2 22.5 15.0 12.1 27.2 32.3 32.4

Average 24.5 18.1 15.0 5.8 4.8 4.0 14.5 11.4 9.6 24.9 26.9 26.8

Source: Bloomberg, Company, Systematix Institutional Research; * CY

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Eicher Motors

Company background

Eicher Motors Ltd is the flagship company of the Eicher group, which is one of India's leading automotive groups with diversified interests in the manufacturing of tractors, commercial vehicles, automotive gears, exports, garments, management consultancy and motorcycles.

Royal Enfield

The Enfield Cycle Company made motorcycles, bicycles, lawnmowers and stationary engines under the name Royal Enfield out of its works based at Redditch, Worcestershire. Royal Enfield made its first motorcycle in 1901. In 1990, Enfield India entered into a strategic alliance with the Eicher group and later merged with it in 1994. It was during this merger that the name Enfield India changed to Royal Enfield.

VE Commercial Vehicles Ltd

VE Commercial Vehicles Ltd is a 50:50 joint venture between the Volvo group (Volvo) and Eicher Motors Ltd. Operational since July 2008, VE Commercial comprises of five business verticals – Eicher Trucks and Buses, Volvo Trucks India, Eicher Engineering Components and VE Powertrain.

Eicher Polaris Pvt Ltd

In 2012, Eicher Motors signed a strategic 50:50 joint venture agreement with the US-based Polaris Industries Inc to design, develop, manufacture and sell a full new range of personal vehicles suitable for India and other emerging markets.

Table 2: Key management team

Name Designation Profile

Siddhartha Lal Managing Director & CEO

He holds a Masters Degree in Automotive Engineering from the University of Leeds and is a Cranfield University qualified mechanical engineer. He is also an Economics graduate from St. Stephens College in Delhi and an alumnus of The Doon School. During 2000-04, in his tenure as CEO of motorcycle manufacturer Royal Enfield, he revived the company's fortunes.

S Sandhilya Chairman

He has over 44 years of experience. He started his career in 1969 with the DCM group of companies at their group headquarters. He joined Eicher in 1975. He was the Managing Director of Eicher Motors, the Commercial Vehicles Manufacturing business unit of the group till 1998, before moving to the group office to assume the responsibility of Group Finance and Strategic Planning in addition to being the MD of Eicher Motors. He was appointed Group Chairman and CEO in April 2000.

Lalit Malik CFO & Head - Business Development

He holds a PG diploma in Management from IIM, Bangalore. He is a qualified Chartered Accountant from the Institute of Chartered Accounts of India. Prior to joining Eicher Motors, Lalit worked at Max India as Vice President-Corporate Development, AIG as Head of Business Strategy, GE Money as the Financial Controller, Escorts Tractors Ltd.

Rudratej Singh President of Royal Enfield

Rudratej ‘Rudy’ Singh is the President at Royal Enfield. He joined the company in January 2015 and has over 18 years of experience in leading the Brand and Marketing mandate for well-known companies in India and across the globe. He is responsible for building thought leadership for the brand and leading the commercial business.

Vinod Aggarwal CEO, VE Commercial

He is a commerce graduate and a Punjab University topper. Aggarwal started his career with a one-year training stint in Hindustan Lever and later worked in the Internal Audit department of Escorts before moving to Eicher in 1983. Within Eicher, he handled various assignments across the tractor, trucks, buses, gears and engines businesses. He became the CEO of VE Commercial Vehicles Ltd in July 2010.

Source: Company

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Eicher Motors

Nikhil Khandelwal Managing Director +91-22-6704 8001 [email protected]

Equity Research

Analysts Industry Sectors Desk-Phone E-mail

Jaspreet Singh Arora - Head of Research Cement, Building Material, Construction +91-22-6704 8062 [email protected]

Rahul Jain IT, E-commerce +91-22-6704 8025 [email protected]

Priya Ranjan Auto & Auto Ancs +91-22-6704 8067 [email protected]

Salil Utagi Capital Goods, Engineering, Consumer Durables +91-22-6704 8064 [email protected]

T. Ranvir Singh Pharma, Healthcare, Agrochem +91-22-6704 8016 [email protected]

Ajit Agrawal BFSI +91-22-6704 8066 [email protected]

Ankit Gor Mid Caps +91-22-6704 8028 [email protected]

Divyata Dalal Construction, Infra +91-22-6704 8059 [email protected]

Gurpreet Kaur Cement, Building Material +91-22-6704 8049 [email protected]

Bibhishan Jagtap Auto & Auto Ancs +91-22-6704 8068 [email protected]

Rahul Khandelwal Mid Caps +91-22-6704 8003 [email protected]

Birendrakumar Singh Technical Research +91-22-6704 8024 [email protected]

Equity Sales & Trading

Name Desk-Phone E-mail

Pankaj Karde Head - Institutional Sales & Sales Trading +91-22-6704 8061 [email protected]

Jitendra Marchino, CFA Asia Sales +91-22-6704 8085 [email protected]

Dhanesh Padhya Sales +91-22-6704 8090 [email protected]

Dinesh Bajaj Sales +91-22-6704 8065 [email protected]

Jigar Kamdar Sales +91-22-6704 8060 [email protected]

Bhavik Shah Sales Trading +91-22-6704 8053 [email protected]

Vinod Bhuwad Sales Trading +91-22-6704 8051 [email protected]

Amit Sawant Dealer +91-22-6704 8054 [email protected]

Vahila Thoomu Assistant Manager +91-22-6704 8055 [email protected]

Sugandha Rane Assistant Manager +91-22-6704 8056 [email protected]

Corporate Access

Shaheen Chamadia Manager +91-22-6704 8091 [email protected]

Production

Ramesh Nair Editor +91-22-6704 8071 [email protected]

Mrunali Pagdhare Production +91-22-6704 8057 [email protected]

Institutional Equities Team

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Eicher Motors

DISCLOSURES/ APPENDIX

I. ANALYST CERTIFICATION

I, Priya Ranjan, Bibhishan Jagtap; hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report, (2) No part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report by Systematix Shares & Stocks (I) Limited or its Group/associates companies. (3) has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

Disclosure of Interest Statement Update

Analyst holding in the stock No

Served as an officer, director or employee No

II. ISSUER SPECIFIC REGULATORY DISCLOSURES, Unless specifically mentioned in Point No. 9 below:

1. The Research Analyst(s), Systematix Shares & Stocks(I) Limited (SSSIL), Associate of Analyst or his relative does not have any financial interest in the company(ies) covered in this report.

2. The Research Analyst, SSSIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the company (ies) covered in this report as of the end of the month immediately preceding the distribution of the research report.

3. The Research Analyst, his associate, his relative and SSSIL do not have any other material conflict of interest at the time of publication of this research report.

4. The Research Analyst, SSSIL and its associates have not received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in this report, in the past twelve months.

5. The Research Analyst, SSSIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for the company (ies) covered in this report.

6. SSSIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in connection with the research report.

7. The Research Analyst has not served as an Officer, Director or employee of the company (ies) covered in the Research report.

8. The Research Analyst and SSSIL has not been engaged in market making activity for the company(ies) covered in the Research report.

9. Details SSSIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

Sr. No.

Particulars Yes / No.

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by SSSIL

No

2 Whether Research Analyst, SSSIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by SSSIL or its associates from the company(ies) covered in the Research report No

4

SSSIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the Research report No

5 Research Analyst, his associate, SSSIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve month

No

10. There are no material disciplinary action that been taken by any regulatory authority impacting equity research analysis activities.

STOCK RATINGS

BUY (B): The stock's total return is expected to exceed 20% over the next 12 months. ACCUMULATE (A): The stock's total return is expected to be within 10-20% over the next 12 months. HOLD (H): The stock's total return is expected to be within 0-10% over the next 12 months. SELL (S): The stock's total return is expected to give negative returns over the next 12 months. NOT RATED (NR): The analyst has no recommendation on the stock under review.

INDUSTRY VIEWS

ATTRACTIVE (AT): Fundamentals/Valuations of the sector are expected to be attractive over the next 12-18 months. NEUTRAL (NL): Fundamentals/Valuations of the sector are expected to neither improve nor deteriorate over the next 12-18 months. CAUTIOUS (CS): Fundamentals/Valuations of the sector are expected to deteriorate over the next 12-18 months.

III. DISCLAIMER

The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy completeness or correctness.

This document is for information purposes only. This report is based on information that we consider reliable, but we do not represent that it is accurate or complete, and one should exercise due caution while acting on it. Descriptions of any company or companies or their securities mentioned herein are not complete and this document is not, and should not be construed as an offer or solicitation of an offer to buy or sell any securities or other financial instruments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. All opinions, projections and estimates constitute the judgment of the author as on the date of the report and these, plus any other

31 March, 2016


Eicher Motors

information contained in the report, are subject to change without notice. Prices and availability of financial instruments also are subject to change without notice. This report is intended for distribution to institutional investors.

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Systematix Shares & Stocks (I) Ltd. CIN : U65993MH1995PLC268414 BSE SEBI Reg. No.: INB/F011132736 (Member Code: 182) | NSE SEBI Reg. No.: INB/F/E231132730 (Member Code: 11327) | MCX-SX SEBI Reg. No.: INB/F261132733 (Member Code: 17560) | Depository Participant: IN-DP-CDSL-246-2004 (DP Id: 34600) | PMS : INP000002692 | AMFI : ARN - 64917|Research Analyst : INH200000840 Regd. office address: 2nd floor, J. K. Somani Bldg, British Hotel Lane, Fort, Mumbai - 400001 Corporate office address: A 603-606 , The Capital, BKC, Bandra (E), Mumbai, India - 400051

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