Auto Sector

April 2012

India ResearchAutomobiles

Strictly confidential

Auto Sector

Here comes the Sun!

Ashish Nigam+91 22 4031 [email protected]

Kunal Jhaveri+91 22 4031 [email protected]

Antique Stock Broking Limited 2

India Auto Sector April 2012

On every count, FY12 was an extremely difficult year for the Auto sector; thankfully it’s behind us! The breather in volumes does not perturb us too muchwhen you consider the previous two years of supernormal growth (little under 30%) coupled with the multiple macro headwinds (interest rates up~325bps, gasoline prices up ~40%, high inflation, commodity costs pressures, you name it...). Going into FY13-14, while there are still challengesaplenty (as always), we have reason to believe that they will not overwhelm the triggers this time around.

Our contrarian positive view on two-wheelers stays (hard to ignore the much superior business model which is a boon in any environment), but goodbusinesses seem to get their due credit only in tough times. Going ahead, based on what seems to be the fag-end of the rate tightening cycle, we expectthe auto companies with a higher sensitivity to an improving macro (cars/CVs) to outperform the safer havens (2Ws). Based on past cycles, any relief onthe macro side or an indication of rates having peaked-out, re-rates valuations for cars/CVs much before an actual uptick in volumes (which could beeven 2-3 quarters away).

With too many moving parts in our coverage universe, we are compelled to keep our stock approach a little more bottom-up. Among the large caps, ourpecking order is Tata Motors, Maruti Suzuki and Hero MotoCorp. While Hero’s presence in our pecking order contradicts our underlying theme, wecontinue to believe that this over-pessimism in the stock is a good thing (trying to differentiate earnings risk from stock risk). Outside the front-liners, wehave two very high conviction BUYs – Eicher Motors and Bosch.

Summary of Recommendations:FY13e

Company Mcap (INRbn) Reco CMP (INR) Target Price (INR) Return (%) EPS (INR) P/E (x) ROCE (%)Tata Motors 821 BUY 275 330 20 45.1 6.1 38Maruti Suzuki 387 BUY 1315 1552 18 93.2 14.1 24Hero MotoCorp 411 BUY 2010 2363 18 140.9 14.3 98Eicher Motors 57 BUY 2150 2410 12 139.7 15.4^ 35Bosch 256 BUY 8180 9002 10 427.6 19.1^ 29Mahindra & Mahindra 436 BUY 700 780 11 46.2 12.2* 25Bajaj Auto 479 BUY 1640 1858 13 121.5 13.5 66Ashok Leyland 82 HOLD 31 33 7 2.6 11.8 15Exide Industries 124 HOLD 146 157 8 8.2 16.8* 19Escorts 8 HOLD 75 78 4 9.1 8.2 5Source: Antique; * for M&M & Bosch - Core Auto P/E; ^ for Bosch & Eicher - December 2012; # for Escorts - September 2012

Industry overview...



Tata Motors: While the first leg of the stock’s rally (stock up >9x in 2 years - 2009/10) was driven by the delta in JLR margins (from -3% to +17%),the second leg should be driven by the delta in JLR volumes (from ~240k in FY11 to ~310k in FY12e and ~385k in FY13e). While there have beensignificant upgrades recently, we feel that the street is still under-estimating the Evoque’s full potential (which has apparently started eating into the shareof luxury sedans as well). Also, the fortunes of the domestic business (HCVs/cars) are very sensitive to any relief on the macro side. All of the abovewould trickle down to clean the company’s balance sheet (once and for all).

Maruti Suzuki: The company’s long-drawn downgrade cycle finally seems to have ended and normally, the subsequent upgrade cycle is equallylong. Past analysis indicates a higher likelihood of a “V” shaped recovery (rather than a “U” shaped one), and hence the company now seems to benearing the first stage of all its positive cycles - volumes, margins and consequently, multiples. Directionally, the stock seems to be one of the best FY13-14 plays in the sector. The only argument for the bear (competition & currency) is also fading - Maruti has thus far withheld peak of the competitivepressures extremely well and currency too has finally moved in the company’s favor.

Hero MotoCorp: Our call on Hero has always been less about the volume growth (longer term volume growth forecast is <10%) and more about themargin uptick (atleast 300bps from here). Also, in our view, multiples are driven less by the quantum of growth and more by its consistency, coupled withstrong free-cash generation and high return on capital. For Hero, with steady state RoCEs of >75%, an FCF/PAT of >1x (negative working capital) anddividend yield of ~5%, the stock (adjusting for non-recurring royalty), trading at <12x FY13e P/E, looks extremely attractive. Also, the street seems to beexpecting the moon from Honda and factored the company’s own guidance as the fortunes of the industry. In our view, the mere event of “capacityexpansion” affects the market dynamics of commodities, not brands. Extrapolating the lone success of the Activa brand as Honda’s ability to developstrong sub-brands in motorcycles (where they have had a very poor track record thus far) seems quite presumptuous.

Eicher Motors: Royal Enfield (one of the few “cult” brands in India) is the best proxy of this emerging leisure biking trend in the country. Based oncurrent demand/supply, Enfield should sell as many as they can make for at least the next 2 years. What the street seems to have missed is that thisdivision has high economic interest for an Eicher Motors (>60% of its consol FCF). For VECV (Volvo-Eicher JV), we are particularly optimistic about theengine division which makes Eicher a part of Volvo's global supply chain. More importantly, of the ~INR17bn cash hoard (~35% of market cap),INR4.5bn gets deployed into a high RoCE business like engines (reckon ~40% on full operations).

Bosch: The best proxy for rising dieselization of cars (which we believe is a structural phenomenon, irrespective of this petrol-diesel disparity). With highentry barriers in a segment where high growth looks sustainable, Bosch’s enviable business model justifies the premium valuation. A monopoly likeposition in critical engine equipment also gives it strong pricing power (stark contrast to most other ancillaries). Dependence on CVs is graduallyreducing making the business less cyclical and also more profitable.

Stocks we like…



FY12 has been an extremely challenging for the Auto sector. Multiplemacro headwinds in the form of higher interest rates (up 325bps), highgasoline prices (up ~40%) and high inflation (WPI inflation staying in the9% vicinity for most of FY12) led to quite a hard landing of the economy(FY12 GDP growth forecast hacked down to <7% from ~9% at the startof the year).

All these factors combined have taken its toll on most segments of the Autosector. However, taking a more holistic view, the long-term structural driversof the sector (conducive demographics, benign penetration, rising aspirationsof the middle-class consumer, under-developed public transport, etc.) rarelystay on the side-lines for too long. We believe that with an indication ofsome relief on the macro side, the fortunes of the sector (especially those ofthe beaten-down segments) would improve sooner than later.

FY12 – A year we’d like to forget!

Segment-wise volume growth

Source: SIAM, Antique

Cost pressures impacting freight operator profitability

Source: TCI, Bloomberg, Antique

Fuel price trend

Source: Bloomberg, Antique

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MHCVs LCVs Cars 2W



Seemingly fag-end of deteriorating macro…

Interest rates have increased by 375 bps in the last two years (325 bps inthe last year). With ~70% of cars in India sold on finance, domestic carsales growth (much more than domestic 2W sales growth) shows a verystrong negative co-relation with interest rates.

Analyzing the last decade, it’s safe to infer that the negative co-relationbetween car sales growth and interest rates is much more than that oftwo-wheeler sales growth and interest rates. This is attributable to severalfactors like financing penetration, ticket size, urban~rural mix, etc. Verysimplistically, this also makes us believe that as we reach the fag-end ofthe rate tightening cycle, and barring any extremely unfavourable movementin fuel prices (the second devil, which is dependent of multiple globalfactors), car sales growth should outpace that of two-wheelers over thenext two years.

Car sales growth: High negative co-relation with rate hikes


Two-wheelers: Almost oblivious to interest rates...


Repo rate (%)


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We compare SBI PLR and P/E multiples of Maruti Suzuki (for cars) andAshok Leyland (for CVs) over past interest rate cycles. Based on analysisof data spanning over a couple of cycles, we infer that any indication ofrates easing-off, re-rates multiples for cars/CVs, much before an actualuptick in volumes (which can even be 2-3 quarters away).

While there are always anomalies to these strong co-relations and quiteoften, multiples could be affected by several other factors besides rates(Maruti, for example, has been through many other de-rating catalysts -hyper competitive pressures, royalty increase by Suzuki, etc.) theexpectation of rates peaking or bottoming-out has been the most accuratemacro variable on chart. While the timing could be off by a couple ofquarters, we believe that these inferences cannot be ignored when takinga directional call which pans out over a two-year horizon.

Maruti Suzuki P/E: Strong negative co-relation with SBI PLR


Ashok Leyland P/E: Negative co-relation with SBI PLR is even stronger...


Cars~2Ws: Volume co-relation with previous rate hikes

Source: Antique

Time to play the bad boys?

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Indian Demographics (Quantity & Quality) - The perpetual saviour...

The demographic argument never gets old. Armed with one of the world’syoungest population with a median age of 25 years which coupled withthe population size above 1.2 billion and, more importantly, whosedependency ratio is on the downtrend, India’s demographics remainextremely conducive for long-term growth of all automotive segments.

70% of the population is still below the age of 35 years (target audience)which is expected to have brought over 150 million people to the workingpopulation in the last 6 years (between 2006 and 2012).

India stands out in the BRIC nations when compared with China (medianage 34 years), Russia (median age 38 years) and Brazil (median age 29years).

Dependency Ratio - A data point that is hard to ignore...

Source: United Nations, Antique

Indian Demographics - Extremely conducive for long-term Auto growth...


India currently has a higher total dependency ratio compared to othereconomies. This is on account of child dependency the benefits of whichwill accrue over the next 2 decades.

A data point that is extremely difficult to ignore is the downward trend inIndia’s dependency ratio. India along with Indonesia and Brazil are theonly 3 major economies whose dependency ratio will decline over thenext 2 decades (India’s from 56% in 2010 to 45% in 2030).

All the developed economies along with China and Russia from the BRICnations will see significant increase in dependency ratio owing to oldage dependency.

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Decreasing dependency over next 2 decades



Vehicular penetration (per 1,000 people)

Source: IMF, Antique

The headroom for growth!

Vehicular penetration levels in India are still extremely low, at ~13 vehiclesper 1,000 people as against ~36 per 1,000 in China (~800 per 1,000in the United States). Rural vehicular penetration in India is even lower at3 per 1,000 people. While one can argue about the variances in percapita income and multi macro variables, we’d just like to highlight theheadroom for automobile companies to grow over the long-term, whichhas caught the attention of Auto OEMs across the globe.

Low penetration levels, rapidly growing middle class, increasing purchasepower, local availability of almost all the raw materials (at a competitivecost), well-developed credit/financing facilities, and availability of trainedmanpower at a low cost are combined the best catalysts for the long-termgrowth of the automobile sector.

Per capita GDP (USD)


Car penetration v/s Per capita GDP


45,98941,050 40,670 39,738

35,162 35,08331,774

8,684 8,121

3,7441,134

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Can India go the China way?

China’s passenger vehicle sales saw a strong growth over the last decadewhich we assume was aided by increased consumption spending,favorable demographics and rising middle class. This also coincidesperfectly with its per capita GDP crossing the $1,000 mark.

While attributing this high growth only to the per capita GDP crossing the$1,000 mark would be presumptuous, most OEMs strongly believe thatthis was the inflection point for China which spurred automobile demandin the years ahead. What is more important is that India seems to beexactly where China was 8 years back in terms of per capita income.Even in terms of passenger vehicle sales, India currently lags China by 8years. If this does turn out to be India’s inflection point as well, with allother macro variables remaining conducive, the Indian car industry couldbe entering a phase of high growth in the years to come.

Car Sales: India lags China by 8 years

Source: China Bureau of Statistics, Bloomberg, Antique

China: Car sales v/s per capita GDP

Source: China Bureau of Statistics, Antique

India: Car sales v/s per capita GDP


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Cars sales zoom as per capita GDP crosses the inflection point of $1000

Per capita GDP = $1000

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Is this India's inflection po int? Per capita GDP = $1000

Antique Stock Broking Limited 1 0


India~China - Similar past... Could the future be similar too?

More analysis of China’s past reveals a strong co-relation of per capitaGDP and the corresponding growth in car sales. This also bears anuncanny resemblance to how India’s car sales growth has trended at thesame stage of per capita income (especially when it was below thecoveted $1,000 mark).

In 1994, China’s per capita GDP crossed $500 and doubled in 7 yearsto cross $1000 in 2001. During the same period, its passenger vehiclesales doubled. Comparing this to India, its per capita GDP reached$500 in 2002 which doubled to $1,000 in 2007. During the sameperiod, auto sales in India also doubled.

For China, since then, its per capita GDP has grown 4x, touching $4,100in 2010. During the same period Chinese automobile sales have grownby a staggering 10x to cross the 14 million mark in 2010 (~17 millioncurrently).

Increasing urbanization, growth in rural China, a government with a pro-consumption mandate, etc. might have been some other factors that ledto this “J curve” in Chinese auto sales, but one cannot rule out the $1,000per capita GDP mark being the inflection point.

Passenger vehicle sales in India and China were similar during the periodwhen their per capita GDP doubled from $500 to $1000. China haswitnessed a consumption boom since its per capita GDP crossed $1,000with passenger vehicle sales growing 10x in the last decade.

India seems to be at the exact same stage (with probably a much betterdemographic dividend) as China was 8 years back (at the early stagesof its auto boom).

China: Car sales v/s per capita GDP

Source: China Bureau of Statistics, Antique

India: Car sales v/s per capita GDP


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Cars – War of the hatchbacks!

The fringe players in A2 segment have gained 680bps and 480bpsmarket share in FY11 and FY12 from the top 3 players (Maruti Suzuki,Hyundai, Tata Motors).

Maruti has done a commendable job of withstanding this onslaught inFY11 losing only 80bps market share to the fringe players. In FY12however, it has lost 540bps. This has had more to do lack of dieselcapacity coupled with the strike at its Manesar plant (impact of ~100,000units) and less to do with incremental competitive pressures.

Tata Motors have gained (or re-gained) 100bps market share in FY12,primarily on account of being the only player with sufficient diesel capacity(with its Fiat JV).

New entrants nibble market share from all the top 3 players...

Source: CRISIL, Antique

A2 segment - Maruti has regained market share lost in 2Q & 3Q (strike)


A2 segment - Market dynamics


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New Entrants Tata Motors Hyundai Maruti Suzuki

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Maruti Suzuki Hyundai Tata Motors New Entrants

Alto

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Cars - Those without diesel variants have suffered...

Hatchback (A2 segment) market share(%) 1Q 2Q 3Q 4Q FY10 1Q 2Q 3Q 4Q FY11 1Q 2Q 3Q 4Q FY12A-Star 3.5 2.5 2.7 2.9 2.9 2.8 2.4 2.4 2.6 2.6 1.3 1.1 0.7 1.1 1.0Estilo 2.9 2.5 4.5 4.7 3.7 4.8 3.3 3.5 3.1 3.6 1.9 1.5 0.8 1.1 1.3Ritz 6.0 6.5 4.8 5.4 5.7 4.6 5.0 5.0 4.4 4.8 5.1 6.9 3.0 3.8 4.7Alto 23.4 22.1 21.9 17.8 21.1 20.3 24.5 24.9 25.6 24.0 22.7 22.7 19.9 23.0 22.0Swift 9.5 10.5 10.5 11.0 10.4 10.8 10.0 10.0 8.4 9.7 10.1 6.3 12.9 13.8 10.7Wagon R 14.1 13.1 14.0 11.2 13.0 10.3 11.4 12.7 10.6 11.3 11.4 11.4 10.0 9.7 10.6Maruti Suzuki 59.4 57.2 58.5 53.0 56.8 53.7 56.6 58.6 54.7 55.9 52.5 49.9 47.3 52.5 50.5i10 13.7 12.7 13.9 13.2 13.4 12.0 10.6 11.0 11.3 11.2 10.7 9.1 9.3 7.4 9.2i20 2.8 4.0 4.0 4.1 3.8 5.1 6.1 5.6 5.0 5.4 6.9 5.9 6.1 3.8 5.8Santro 7.2 7.9 8.0 7.8 7.7 6.1 5.7 6.1 5.1 5.7 6.7 6.1 4.1 3.8 5.2Eon 2.2 7.0 2.2Hyundai 23.8 24.6 25.9 25.1 24.9 23.3 22.4 22.7 21.4 22.4 24.4 21.2 21.8 21.9 22.3Indica 11.7 10.5 8.4 10.6 10.3 8.3 6.4 5.8 6.8 6.8 5.5 7.6 9.7 7.7 7.6Tata Motors 11.7 10.5 8.4 10.6 10.3 8.3 6.4 5.8 6.8 6.8 5.5 7.6 9.7 7.7 7.6Jazz 0.8 1.0 0.6 0.4 0.7 0.3 0.5 0.3 0.3 0.3 0.2 0.5 0.4 0.1 0.3Punto 0.6 1.9 1.1 1.1 1.2 1.0 0.9 0.6 0.8 0.8 1.1 0.8 0.5 1.0 0.9Spark 3.4 4.2 4.6 3.1 3.8 2.9 2.0 2.4 2.3 2.4 3.1 1.4 1.3 0.9 1.7Fabia 0.7 0.6 0.7 0.6 0.5 0.3 1.0 1.1 0.8 1.4 1.2 1.3 0.7 1.1Beat 3.6 1.1 3.0 2.0 2.2 2.3 2.4 1.9 5.0 4.6 3.2 3.6Figo 2.2 0.7 5.8 5.6 3.9 6.2 5.4 5.3 5.1 5.0 4.9 5.1Polo 1.2 2.4 1.8 2.5 2.0 3.0 3.0 2.9 2.5 2.9Micra 0.9 0.9 1.4 0.9 1.3 1.4 1.3 1.4 1.4Liva 2.7 3.5 2.6 2.2Brio 0.6 0.7 0.3Others 4.8 7.8 6.9 11.1 8.0 14.7 14.7 12.9 17.1 14.9 17.5 21.2 21.3 18.0 19.6Source: CRISIL, Antique

Maruti Suzuki lost market sharedue to insufficient dieselcapacity. A-star and Estillocombined resulted in ~390bpsof market share loss for Maruti

The much feared Hyundai Eonhas failed to impact Alto sales.In fact, it has cannibalized theHyundai Santro and i10

Tata Motors gained ~80bpsmarket share primarily due tobeing the only player withsufficient diesel capacity

Among the new entrants,Toyota and Chevrolet havegained market share, primarilyon their diesel models. ToyotaLiva (~70% dieselized) gained220bps and Chevrolet Beat(~50% dieselized) gained120bps market share



India Inc is hiring!

With the economy still holding up (we see even ~7% growth as the glassbeing 3/4th full) and most companies expanding their operations, thejob market too is picking up. A survey conducted by Naukri.com (India’sNo. 1 job site, servicing over 34,000 corporate clients) among recruitersacross India reveals a positive hiring outlook.

Overall, 76% of recruiters expect new jobs to be added in 2012 asagainst the downturn of 2009, where only 45% of the recruiters predictedthe creation of new jobs.

Increments have also improved over last year - 63% of companies gaveincrements in range of 10-20% vis-à-vis 41% last year while incrementsabove 20% were given by 15% of companies vis-à-vis 9% last year.

Hiring index at highest level since introduction

Source: Naukri, Antique

Findings from hiring outlook survey


Higher range of increments over last year


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Hiring Index Hiring Trend

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Dec 2008 Jan 2009 Jan 2010 Aug 2011 Feb 2012

New jobs w ill be created Replacement hiring w ill take place No hiring Layoffs w ill continue

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<5% 5 - 10% 10 - 20% >20%



Consumer sentiment – Biggest driver of high discretionary purchases...

Over a longer term, we reckon that the favorable macro-economic factors,rising aspirations of the Indian consumer and their burgeoning need tocommute will keep growth rates in the auto sector very healthy.

Commodity prices too seem to have stabilized, which coupled with thepossibility of interest rates easing and the customer having had enoughtime to have made his peace with high fuel prices, we believe that thegood news would outweigh the bad news going ahead.

However, the mother of all drivers for high discretionary spending (especiallyfor aspirational products like automobiles) remains sentiment andaffordability, both of which are showing signs of improvement.

One factor that has boosted income levels (and also sentiment) is thealteration in personal income tax levels. This has made the average urbanmiddle-class tax payer (with an annual income of over USD8,500) 4-8%richer.

Annual Income (INR) Post-tax income Inc in post-tax incomeBudget ‘09 Budget ‘12 Annual Monthly

100,000 100,000 100,000 0 0200,000 196,000 200,000 4,000 333300,000 286,000 290,000 4,000 333400,000 366,000 380,000 14,000 1,167500,000 446,000 470,000 24,000 2,000600,000 516,000 550,000 34,000 2,833700,000 586,000 630,000 44,000 3,667800,000 656,000 710,000 54,000 4,500900,000 726,000 790,000 64,000 5,3331,000,000 796,000 870,000 74,000 6,167Source: GOI, Antique

Reducing dependency ratio


Alteration in income tax slabs, coupled with a buoyant job market andreducing dependency ratio will continue to increase income andaffordability levels.

We believe that this is more than enough to absorb the marginal increasein EMIs on account of higher vehicle prices (post budget) and increase inmonthly running bill due to high fuel prices.

Favourable Alteration in Individual Income Tax Slabs Budget 2010 Budget 2011 Budget 2012Upto 1.6 lacs 0% Upto 1.8 lacs 0% Upto 2 lacs 0%1.6 lacs - 5 lacs 10% 1.8 lacs - 5 lacs 10% 2 lacs - 5 lacs 10%5 lacs - 8 lacs 20% 5 lacs - 8 lacs 20% 5 lacs - 10 lacs 20%8 lacs + 30% 8 lacs + 30% 10 lacs + 30%Source: GOI, Antique

65.1%62.0%

56.0%

49%

1997 2000 2010 2020e



Waiting for GST...

Moving towards GST, while the road-map is still a little sketchy, there areindications that when implemented, it could be positive for the Auto sector,simply from a tax structure point of view.

Given the current complex tax structure {from the time the vehicle leavesa factory (situated in one region of the country) and reaches multipleshowrooms (spread across the country)}, as per our calculation, theuniformity of the tax structure itself could make an average vehicle ~7%cheaper. This could be the precursor to the much anticipated auto boom,which would support the inherent drivers of auto consumption in India.

Auto OEM revenues (as a % of GDP)

Source: Antique

Manufacturer to Dealer VAT GSTPrice of vehicle (ex-factory) 100.0 100.0 + central excise (12%) 12.0 0.0 + central sales tax (2%) 2.0 0.0 + VAT (12.5%) 12.5 0.0 + Central GST (9%) 0.0 9.0 + State GST (9%) 0.0 9.0Price of vehicle (ex-showroom) 126.5 118.0

-6.72%Source: Antique

4.2%

5.3%

6.5% 6.9%7.6%

8.3%9.0%

9.9%

3.0%3.6%

4.1% 4.2%4.8% 4.7%

0%

2%

4%

6%

8%

10%

12%

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12e

FY

13e

FY

14e

FY

15e

FY

16e

We see a higher likelihood of this tax saving as the government too isbetting big on the automobile sector for driving growth and expects theindustry to account for ~10% of the GDP by 2016 (from ~6.5% currently)and 30-35% of the manufacturing sector (from 18% currently).

Should this play out, it would imply that the auto industry is expected togrow at a 14% CAGR from FY11-16e (assuming a GDP growth of 7.0%for FY12e and 7.5% for FY13e and 8% thereafter). This is also expectedto provide additional employment to 25 million people.

From a global perspective, this also makes India a favourable investmentdestination for most global auto makers. The government expects theindustry as a whole (including component makers) to attract investmentsworth USD30bn over the next 5 years.



High multiplier effect!

Driven by extremely deep forward and backward linkages with severalkey segments of the economy, the automobile industry provides directand indirect employment to approximately ~15 million people andcontributes ~18% to the country’s indirect tax kitty.

More importantly, an uptick in the automobile sector has a very strongmultiplier effect. It is estimated, that every car, CV, 2-wheeler and 3-wheeler produced, generates direct and indirect employment of 5.3,13.3, 0.5 and 3.9 units respectively, which translates into an additionalemployment of ~25 million people by 2016.

This makes the automobile sector one of the key drivers for economicgrowth and leads us to believe that no government will deter the industrygrowth rate by way of an unfavorable tax regime as it has a directbearing on the economy.

GDP Growth (%)

Source: CMIE, Antique

Current excise duty structure(after budget '08) (specific duty) (1st Stimulus) (after budget '09) (after budget '10) (after budget '11) (after budget '12)

Current excise duty structure Feb, 2008 June, 2008 Dec, 2008 July, 2009 Feb, 2010 Feb, 2011 Mar, 20122 Wheelers 12% 12% 8% 8% 10% 10% 12%3 Wheelers 12% 12% 8% 8% 10% 10% 12%Passenger Vehicles (Cars & UVs) <4m length + petrol engine <1,200cc; diesel <1,500cc 12% 12% 8% 8% 10% 10% 12% >4m length + petrol engine <1,200cc; diesel <1,500cc 24% 24% 20% 20% 22% 22% 24% >4m length + petrol engine >1,200cc; diesel >1,500cc 24% 24% + INR15k 20% + INR15k 20% + INR15k 22% + INR15k 22% + INR15k 27%Commercial Vehicles - Goods (FBV) 14% 14% 10% 8% 10% 10% 12%Commercial Vehicles - Passenger 12% 12% 8% 8% 10% 10% 12%Source: GOI, Antique

5.3%

1.4%

5.7%

6.4%

7.3%

8.0%

4.3%

6.7%

4.4%

5.8%

3.8%

8.5%

7.5%

9.0%

6.7%

7.4%

8.4%

6.9%7.4%

9.7%9.5%

6.4%

5.4%

FY91 FY93 FY95 FY97 FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13e



Existing players enjoy first-mover advantage!

While it’s clear that the high competitive intensity for the domestic playerscan only increase going ahead, they have so far held their ground bytheir higher localization levels, widespread distribution networks and first-mover advantage. However, these factors alone would not help sustaincompetitiveness over a longer period.

Therefore, the need of the hour is greater emphasis on the development offactors which would ensure competitiveness on a long-term basis, whichis why ramp-up in investments in R&D and new product design has becomecritical and can help the domestic players retain their competitiveness inthe industry. Another key area is the development of strong linkages withmaterial/component suppliers, dealers, financers, etc. For many foreignplayers, the biggest challenge to being cost competitive in India isdeveloping a strong local vendor base.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Maruti Suzuki Hero Honda Tata Motors (consol)

Mahindra & Mahindra Bajaj Auto Ashok Leyland

JLR acquisition debt coupled w ith netw orth erosion (loss at

consolidated level)

Divestment + bond conversion + GDS

Further issuances &

JLR becoming FCF+

Company-wise Gross Leverage

Source: Company, Antique

FY13e RoCE vs. P/E


Population by Income Class

Source: McKinsey

83%72%

37%

18%8%

9%17%

47%

55%

39%

6% 7%

15%

33%

2% 4%6%

8%

3% 6% 12%9%4%

1985 1995 2005 2015e 2025e

Annual In

com

e (

in 1

000s)

Deprived (<90) Aspirers (90-200) Seekers (200-500) Strivers (500-1000) Global (>1000)

0

5

10

15

20

25

0 20 40 60 80 100

5-year average ROCE (%)

FY

13e

P/E

Ashley Bajaj Auto Bosch Exide Escorts Tata Motors M&M Maruti Hero MotoCorp

P/E of ~12x excluding non-recurring royalty



Indian dieselization – It’s just the beginning!

Diesel car sales are clearly defying the general car industry trends at the moment. The share of diesel passenger vehicles has risen from ~20% in FY08to ~36% currently (global average >60%). This implies that over the last 4 years, diesel passenger vehicles have grown at a ~37% CAGR as against~9% CAGR for petrol passenger vehicles.

Demand for diesel cars and UVs is expected to increase by a CAGR of 20% over the next 5 years to reach about 2.2 million vehicles in 2015-16, fromabout 0.9 million vehicles in 2010-11. This would take the share of diesel models to 46% of total passenger vehicles sales over the next 5 years from thecurrent 36%.

Rate of dieselization will be higher in the car segment with diesel expected to account for 38-40% of domestic car sales by 2015-16 from 27% atpresent. In the UV segment, the share of diesel vehicles is expected to remain constant at around 95-97%, while in the MPV segment, it is expected toincrease marginally to 26% from 24% in 2010-11.

The recent increase in the petrol~diesel disparity has accentuated demand for diesel vehicles recently. Fearing an additional excise hike, most OEMswere tentative expanding diesel capacity, but post the budget, with an absence of a specific diesel excise hike, OEMs have fast-tracked their dieselcapacity expansion plans.

Dieselization - Small cars expected to outpace sedans


Passenger vehicles - fuel mix


67%58%

46%

33%36%

46%

6% 8%

0%

20%

40%

60%

80%

100%

2005-06 2010-11 2015-16e

Petrol Diesel CNG

16%21%

35%31%

51%

60%

0%

10%

20%

30%

40%

50%

60%

70%

2005-06 2010-11 2015-16e

Small Cars Sedans



Fuel price trend


Expect dieselization to continue increasing (irrespective of the petrol~diesel disparity)

Diesel car sales have been extremely buoyant post the fuel price de-regulation (June 2010).Post that, petrol prices have risen by 32% (andwere de-controlled) whereas diesel prices have risen by only 15% (andwere not de-controlled).

This has been the primary driver for the surge in diesel car sales andsluggishness in petrol car sales in the last couple of years. We believethat diesel car sales will continue to outpace petrol car sales going ahead.While it’s irrational to extrapolate this huge petrol ~ diesel disparity overa longer period, the inherent economics of a diesel vehicle (~25% morefuel efficient than its petrol counterpart) makes us structurally positive ondieselization of the Indian car industry going ahead.

26th June 2010 Apr 2012Average Running Cost Diesel Petrol Diesel PetrolDaily running (km) 40 40 40 40Mileage (km/litre) 15 11 15 11Cost/litre (INR, Mumbai) 39.88 52.20 45.99 71.47No. of Days 25 25 25 25Monthly running (km) 1,000 1,000 1,000 1,000Monthly fuel consumption (ltrs) 67 91 67 91Monthly fuel cost (INR) 2,659 4,745 3,066 6,497Saving in monthly fuel cost due to diesel (%) 44.0% 52.8%Saving in monthly fuel cost due to diesel (INR) 2,087 3,431Source: Antique

Petrol ~ Diesel disparity at its peak


20

30

40

50

60

70

80

Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

INR

/Litr

e

Petrol Prices Diesel Prices20%

30%

40%

50%

60%

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12



Diesel capacity (as % of total volumes)

Source: Antique

Higher fuel efficiency - Key driver of long-term growth of diesel cars...

Diesel vehicles – Almost 25% more fuel efficient than its petrol counterpartVehicle Model/Variant Kerb weight Engine cc Emission Fuel type Mileage

(Km/l)Small Gasoline 1,035 1,197 BSIV Gasoline 17.9Small Diesel 1,105 1,248 BSIV Diesel 21.7Entry Level Gasoline 1,095 1,193 BSIV Gasoline 15.6Entry Level Diesel 1,101 1,396 BSIV Diesel 23.0Utility Vehicle Gasoline 1,565 1,998 BSIV Gasoline 10.4Utility Vehicle Diesel 1,655 2,494 BSIII Diesel 13.7Luxury Vehicle Gasoline 2,195 3,498 BSIV Gasoline 8.2Luxury Vehicle Diesel 2,285 2,987 BSIV Diesel 10.2Source: SIAM, Antique

Diesel vehicles (as a % of total)


Private diesel vehicles account for only 5% of total diesel consumptionVehicle type Distance Fuel Diesel Diesel %

covered efficiency vehicles consumed Consumption per year (Km/l) sales in FY10 (liters)

Trucks and Buses 75,000 3.7 531,395 10,771,520,270 92.2%Cars (Taxi) 75,000 16 21,388 100,256,250 0.9%UV (Taxi) 7500 13 40,455 233,394,231 2.0%Cars (Private) 15,000 16 335,095 314,151,563 2.7%UV (Private) 15,000 13 229,245 264,513,462 2.3%

11,683,835,775 100%Source: SIAM, Antique

98%

56%

33%

19%

49%

75%

0%

20%

40%

60%

80%

100%

120%

0 50 100 150 200 250 300 350 400 450 500

FY13 Diesel Capacity (000's)

Maruti Hyundai TTMT Toyota GM Volksw agen

79% 77%72%

69%

51%44%

Belgium France Norw ay Spain Italy Germany



CVs have held up surprisingly well...CVs - Strong co-relation with IIP growth


Cost structure of a freight operator (excl EMI)

Source: Industry, Antique

Diesel60%

Toll Charges10%

Maintenance13%

Others5%

Driver Charges12%

The CV industry implicitly reflects the industrial growth in the economyand has a very strong co-relation with the IIP (more for MHCVs, less forLCVs).

LCVs (especially SCVs) continue to buck the trend at the moment, on theback of the growing popularity of the hub-and-spoke distribution modelcoupled with the rising importance of the small transporters' role in theroad freight process.

Growth in FY12 was driven by LCVs, but over the last decade or so, bothLCVs and MHCVs segments have grown at similar rates (with the growthin MHCVs being much more volatile). This is primarily due to lumpycapacity addition by freight operators when times are good and sharpcutback in capacity additions when times are tough.

Apart from how buoyant industrial activity is, the long-term demand driversfor the industry are also linked to freight operator profitability, which hasbeen under pressure over last year.

Freight rates have been firm, but not moved up commensurately with therecent cost pressures (diesel, driver, maintenance, tyres, etc.), suggestingthat transporter profitability has been under pressure.

Hence, capacity additions have been tentative this year. That said, MHCVshave held up surprisingly well in the current year (10% growth) despitethe weaker macro and sluggish IIP.

Now, as we reach the fag-end of the rate tightening cycle and directionallya better economic/capex cycle, we reckon that the fortunes of the MHCVsegment can only improve from here on.

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Dec-11Dec-10Dec-09Dec-08Dec-07Dec-06

-120%

-80%

-40%

0%

40%

80%

120%

160%

200%

240%

280%

IIP Grow th (05-06 base) (RHS) YoY LCV Grow th (LHS) YoY MHCV Grow th (LHS)



CVs – Long-term drivers intact…Investment in roadways (INRbn)


Freight movement - Road vs. Rail (billion tonnes per kilometer)


The long term demand drivers of the CV segment remain intact - roads arethe most preferred mode of transport (approximately 85% of passengermovement and 65% of goods movement in the country happens via road).

There are also other multiple volume triggers like a more stringentimplementation of the overloading ban (which will result in the need foraddition of capacities). along with the gradual uptick in replacementdemand (currently around 50% of the trucks population is over 10 yearsold and 30% is over 15 years old).

The development of newer highways will be another trigger which willboost the demand for higher horsepower trucks as it will enable higherturnaround time.

Government is strongly focusing on infrastructure development, with roadsbeing an area of great focus. It is estimated that investments in the Roadsector will grow at 16% CAGR from FY11 to FY14. Investments wouldbe made across the spectrum with highways, rural and state roads allregistering growth in investments.

This investment in roadways, besides boding well for the turnaround timeof CVs, would also result in an uptick in demand for CVs used in thebuilding of these roads. It is estimated that to build one kilometer of roaditself would require 15-20 trucks.

Road connectivity clearly plays a key role in India’s economic growth. Inthe past decade, a clear trend has emerged where share of roads infreight traffic has increased at the cost of railways. With better last mileconnectivity, the share of roads in freight movement is expected toincreasing, which bodes well for CV segment in the long term.

187 183288 344

492645 648251 292

290338

355

373 422

106152

225260

301

341387

0

250

500

750

1,000

1,250

1,500

1,750

FY08 FY09 FY10 FY11e FY12e FY13e FY14e

Highw ay State Rural

CAGR 16%

379422

456

562621

693765

799853

906

312 333 353 381 407440

481521 538

572 591

508

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Road Railw ay



Two-wheelers – Boon in any environment…

Post a ~40% increase in gasoline prices and 300bps increase in interestrates, two-wheelers sales have bucked the trend in this high inflationaryscenario as running costs are approximately 74% lower (compared to apetrol 4W).

Additionally, two-wheelers are less competitive a segment. The top 4players command a 97% market share and the balance 3% comprises ofonly 4 players.

Cars on the other hand a much more competitive (more so in the last 4years). Top 3 players comprise for 73% of the market at the moment(from 85% in FY09). The balance 27% comprises of a staggering 12players.

Cars - Market share trend

Source:SIAM, Antique

Running Cost Car 2WRunning per month (Kms) 600 600Fuel effiency (Kms) 15 60Fuel consumed (per month) 40 10Fuel cost/litre (Rs) 71 71Monthly fuel cost (INR) 2,859 715Monthly miscelleneous cost 1,000 300Monthly running cost 3,859 1,015Annual running cost 46,306 12,1762W Advantage (INR) 34,1292W Advantage (%) 74%Source: Antique

Motorcycles - Market share trend


51% 52% 50% 49% 42%

18% 20% 21% 18%20%

14% 13% 13%13%

13%

17% 15% 16% 20% 25%

FY08 FY09 FY10 FY11 YTDFY12

Maruti Hyundai Tata Motors Others

55% 60% 58% 55% 56%

29% 22% 24% 27% 26%

9% 8% 7% 7% 6%

4% 6% 6% 7% 8%4% 4% 4% 4% 5%

FY08 FY09 FY10 FY11 YTDFY12

Hero Motocorp Bajaj Auto TVS Honda Others



2W penetration – Still some headroom for growth!

Our positive view on 2Ws is more due to the consistency of growth andless due to the quantum. Also, the asset light/profitable business model isa boon in any environment.

Recent penetration fears seem overdone. Despite being the second largesttwo-wheeler market (China being the leader), penetration levels are stillcomfortable (6%) when compared to other developing markets like Taiwan(62%), Vietnam (30%) and Indonesia (21%).

While we do expect 2W volume growth to underperform cars/CV volumegrowth ahead, we see no threat to the recent industry 12-15% CAGR.

2W addressable household (In millions)


Two-wheeler penetration (per 100 people)

Source: Yamaha, Antique

Financing penetration is getting deeper. Two-wheeler financing companieshave come out with schemes like DCC (direct cash collection) wherecash is collected every month going door-to-door and loans are given topeople who do not have formal mode of payment options like a bankaccount.

Hence the addressable households in the rural regions is also on the rise.Rising rural incomes, supported by higher minimum support prices (MSPs)and stable crop output is expected to drive rural demand.

6 8 7

21

3025

62

India Brazil China Indonesia Vietnam Thailand Taiwan

40

67

81

37

91

133

0

20

40

60

80

100

120

140

FY05 FY10 FY15e

Urban Rural



2W Exports – Small contribution, big potential!

In the last 8 years exports have grown at a 30% CAGR. Bajaj and TVSderive 29% and 11% of their volumes from exports and will be primarybeneficiaries in the medium term.

4 major markets comprising China (16m), India (11m), ASEAN (13m)and Latin America (4m) form 89% of global 2W sales. Africa (Nigeria~1.2m) is also emerging as an important 2W market.

Over the last few years, Hero has missed out on export opportunities,which Bajaj was able to capitalize on. Post the split, we expect Hero tofocus on big export markets like Africa, South America and Indonesia.Over a much longer period (5-7 years), we see no reason why Herocan’t replicate the success that Bajaj Auto enjoys in exports.

2W market share - ASEAN markets

Source: Yamaha

Global 2W demand distribution (2010)

Source: Yamaha

2W Global market share (2010)

Source: Yamaha

Honda, 53%Yamaha, 37%

Suzuki, 8%

Others, 2%

32%

22%

8%4%

4% 2% 1%

27%

China India LatAM Rest of Asia Europe Nigeria America ASEAN

23%

14%

11%7% 5% 2% 1% 1%

36%

2010 2W Global Market Share

Honda Yamaha HeroMoto Corp Bajaj Auto Suzuki

TVS Kawasaki Piaggio Others



2Ws ~ consumer staples – Similar return ratios…

Fixed Asset Turnover (x)


Free Cash Flow / PAT (%)


ROCE (%)


FY13e P/E

Source: Antique

6

3

7

4

-

1

2

3

4

5

6

7

8

9

HUL ITC HMCL Bajaj Auto

5 Yr - Average Fixed asset turnover

73% 75%

86%

116%

0%

20%

40%

60%

80%

100%

120%

140%


4 Yr - Average FCF/PAT

88%

35%

62%

52%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


5 Yr - Average ROCE

28

25

1514

5

10

15

20

25

30


1 year forw ard PE



Tata MotorsThis time it’s volumes!

Reco : BUYCMP : INR275Target Price : INR330

Market dataSector : AutomobilesMarket Cap (INRbn) : 826Market Cap (USDbn) : 16O/S Shares : 2,692Free Float (m) : 1,54552-wk HI/LO (INR) : 298/138Avg Daily Vol ('000) : 8,901Bloomberg : TTMT INSource: Bloomberg

Price performance vs Nifty

Source: Bloomberg

Shareholding patternPromoters : 35%FII : 25%DII : 14%Others : 26%Source: BSE

Key financials (consolidated)YE 31 Mar (INRm) FY11 FY12e FY13eRevenues 1,231,333 1,615,869 1,998,976EBITDA 168,175 220,550 283,902EBITDA Margin (%) 13.7 13.6 14.2Adjusted PAT 89,413 114,012 143,913Adjusted EPS (INR) 28.0 35.8 45.1P/E (x) 9.8 7.7 6.1EV/EBITDA (x) 6.1 4.7 3.6RoE (%) 9.8 7.1 10.1RoCE (%) 10.9 8.2 10.7Div Yield (%) 1.5 1.5 1.5


JLR - Less about the geography, more about the product!

The success of the Evoque has taken everyone by surprise! While this has led to significant volume upgrades, webelieve that the street is still under-estimating the Evoque’s full potential (which we understand is also eating intothe share of luxury sedans). Currently at around ~8k per month, we expect this traction in Evoque volumes tocontinue as it expands its presence in other geographies, with minimal cannibalization of existing Land Rovers.Post an incredible initial response (order backlog of ~3 months even after the ramp-up in volumes), the company isgearing up for total production of ~34k per month (~410k per year). We estimate JLR volumes at 385k units inFY13e (up 25% YoY), assuming Evoque volumes of 120k (implying only a 1% growth for the existing models).

Currency tailwinds!

Besides the INR depreciation against the GBP (which results in strong translation gains when translating JLR's GBPprofits back to INR), even operationally, currency has been extremely favourable for JLR over the last couple ofquarters (the benefits of which are yet to fully accrue) - the USD has appreciated against the GBP {all JLR salesoutside Europe (~50% of volumes) are USD denominated} and the EUR has depreciated against the GBP (~45%of components/materials purchased are EUR denominated, which would off-set the negative impact of the ~25%of revenues that are EUR denominated). Excluding the currency aspect, the fact that the fastest growing market(China) is also the most profitable bodes well for future margins.

Domestic business can’t do much worse!

MHCV/cars are very sensitive to any improvement on the macro front. While the mini-truck segment (Ace)continues to perform extremely well, as we reach the fag-end of the rate-tightening cycle, we expect the laggardsin the domestic business (MHCV/cars) to improve going ahead.

BUY!

We reiterate BUY with a target price of INR330 - valuing the domestic business at INR82 per share (8x FY13eEV/EBIDTA), JLR at INR226 per share (4x FY13e Adj. EV/EBIDTA) and other subs at INR22 per share.

30

60

90

120

150

Apr-11 Aug-11 Dec-11 Apr-12

Tata Motor NIFTY



Favourable currency tailwinds!

Weak INR (to GBP) results in translational gains for Tata Motors


Weak EUR (to GBP): Positive for JLR as ~45% of purchases are in EUR


Strong USD (to GBP): Positive for JLR as >50% of sales are in USD


China and other emerging markets to lead JLR’s volume growth


0.74

0.76

0.78

0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

01-Jan-11 01-Apr-11 01-Jul-11 01-Oct-11 01-Jan-12 01-Apr-12

4QFY11 2QFY12 3QFY12

Average EUR/GBP

0.854

Average EUR/GBP

0.857

1QFY12 4QFY12

Average EUR/GBP

0.835

0.54

0.56

0.58

0.60

0.62

0.64

0.66

0.68

0.70

0.72


Average USD/GBP

0.636

Average USD/GBP

0.624

4QFY11 2QFY12 3QFY121QFY12 4QFY12

Average USD/GBP

0.636

65.00

70.00

75.00

80.00

85.00

90.00

95.00


Average GBP/INR

80.1

Average GBP/INR

72.5

4QFY11 2QFY12 3QFY121QFY12

Average GBP/INR

79

4QFY12

23% 22% 19% 22% 18% 17%

24% 24% 28% 24%19% 17%

30% 27% 23% 22%

22%20%

6% 9%4% 5%

5%5%

4% 5%10% 11%

17%20%

15% 13% 15% 16% 18% 21%

FY08 FY09 FY10 FY11 FY12e FY13e

North America United Kingdom Europe (excluding UK and Russia) Russia China Rest of the World



Peer Comparison

Region MCap EV/EBIDTA P/E P/B ROE ReturnCompany (USDbn) CY11 CY12 CY11 CY12 CY11 CY12 CY11 CY12 1 month 3 month 6 month 12 monthUSAFORD MOTOR CO 48 9.7 8.5 8.2 7.2 6.0 2.4 86.8 33.1 (2) 11 24 (20)GENERAL MOTORS C 39 2.4 2.2 6.7 5.5 1.0 1.0 21.5 20.9 (5) 19 17Average 6.0 5.3 7.5 6.3 3.5 1.7 54.1 27.0EUROPEBAYER MOTOREN WK 56 7.8 7.6 8.5 8.2 1.6 1.4 20.0 17.3 (5) 19 48 10VOLKSWAGEN AG 74 6.4 5.8 6.1 5.5 0.9 0.8 21.4 13.8 (10) 8 37 6DAIMLER AG 63 8.8 7.8 8.6 7.5 1.2 1.1 13.8 13.4 (3) 23 44 (13)FIAT SPA 7 NA NA 6.0 4.0 0.5 0.4 6.1 8.6 (11) 10 13 (36)PEUGEOT SA 4 NA NA 7.7 3.6 0.2 0.2 5.3 3.3 (15) (5) (16) (56)PORSCHE AUTO-PRF 17 NA NA 4.7 4.0 0.6 0.6 7.2 12.3 (10) 5 33 (6)VOLVO AB-B 30 7.6 6.7 11.5 9.4 2.3 2.0 22.3 18.5 (3) 17 44 (16)Average 7.7 7.0 7.6 6.0 1.0 0.9 13.7 12.5KOREAHYUNDAI MOTOR 49 4.3 4.0 7.6 7.0 1.9 1.6 23.1 19.9 15 13 29 24KIA MOTORS CORP 28 7.7 7.2 9.6 9.0 2.4 1.9 31.0 26.6 9 14 17 12Average 6.0 5.6 8.6 8.0 2.2 1.7 27.1 23.3CHINASAIC MOTOR-A 26 3.5 3.1 6.9 6.1 1.8 1.4 23.3 21.3 (7) 3 (7) (20)CHONGQING CHAN-A 3 NA NA 17.0 13.0 NA NA 8.4 10.7 (13) 14 2 (17)FAW CAR CO LTD-A 3 8.6 7.1 35.0 29.2 2.1 1.9 6.2 10.0 (6) 19 (8) (38)BEIJING SIFANG-A 1 NA NA 29.3 21.1 NA NA NA NA (11) 4DONGFENG AUTO-A 1 11.7 9.2 11.7 7.7 1.1 1.0 5.7 9.0 (14) 8 (9) (36)GUANGZHOU AUTO-H 8 6.7 5.5 9.1 7.6 1.4 1.3 14.5 14.7 (8) 19 15Average 8.5 13.4 17.3 13.2 1.5 1.3 10.6 12.5JAPANSUZUKI MOTOR 13 4.2 3.7 18.2 13.9 1.1 1.0 5 6 3 23 19 10NISSAN MOTOR CO 48 5.1 4.2 10.1 8.3 1.1 1.0 10 11 8 27 33 23HONDA MOTOR CO 68 8.7 5.0 21.2 10.7 1.1 1.1 12 5 2 26 41 6TOYOTA MOTOR 146 10.0 6.2 36.0 14.9 0.9 1.0 4 3 5 32 38 7MAZDA MOTOR 5 24.0 7.8 NA NA 0.5 0.7 1 (16) 9 2 (1) (21)MITSUBISHI HEAVY 16 9.7 8.7 35.8 18.9 0.9 0.9 2 3 1 15 27 4Average 10.3 5.9 24.2 13.3 0.9 1.0 5.8 1.9Source: Bloomberg, Antique



BUY!

Standalone (INRm) FY09 FY10 FY11 FY12e FY13eRevenues 256,297 355,930 480,405 544,096 628,547EBITDA 17,013 40,342 46,651 38,004 47,373EBITDA Margin (%) 6.6 11.3 9.7 7.0 7.5PAT 10,013 22,401 18,118 10,186 20,269EPS 19.5 39.3 28.4 3.2 6.4Adjusted EPS 2.1 4.8 6.1 4.4 6.4Source: Company, Antique

JLR Financials (INRm) 10MFY09 FY10 FY11 FY12e FY13eJaguar volumes 47,000 47,424 51,818 54,411 56,911LandRover volumes 120,300 146,506 189,087 252,598 328,929Total volumes 167,300 193,930 240,905 307,009 385,839Revenues 397,840 491,442 710,712 1,008,633 1,300,975EBITDA (3,360) 31,285 116,539 174,493 227,671EBITDA Margin (%) (0.8) 6.4 16.4 17.3 17.5PAT (24,480) (1,899) 72,216 99,667 123,070Source: Company, Antique

SOTP Methodology Value per shareTata Motors Standalone A 8x FY13e EV/EBIDTA 82Jaguar Land Rover B 4x FY13e EV/Adj EBIDTA 226Value of Key Subsidiaries & Investments: (pro-rated) StakeTelco Construction & Equipment 40% Based on latest stake sale 7Tata Daewoo 100% 10x FY13e EPS 2TML Drivelines 85% 10x FY13e EPS 7Tata Motors Finance 100% 1x Book 5Tata Technologies 82% 10x FY13e EPS 5Listed Investments (Tata Steel, Auto Corp of Goa) Market Value 1Total value of Key Subsidiaries & Investments 28Holding company discount 20% 6Net Value of Key Subsidiaries & Investments C 22SOTP Value of Tata Motors A + B + C 330Source: Antique

DVR - Always the better way to play Tata Motors...


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Profit and loss account (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenues 709,389 925,193 1,231,333 1,615,869 1,998,976Expenses 690,901 844,033 1,063,158 1,395,319 1,715,074EBITDA 18,488 81,160 168,175 220,550 283,902Depreciation & amortisation 25,068 38,871 46,555 60,376 75,192EBIT (6,580) 42,288 121,620 160,175 208,710Interest expense (net) 19,309 22,397 20,454 20,703 21,569Other Income 841 464 896 2,262 2,534Exceptional Items 3,239 15,717 3,324 (6,350) 253Profit before tax (21,810) 36,071 105,385 135,384 189,928Tax (incl deferred) 3,358 10,058 12,164 27,139 45,121Profit after tax (25,053) 25,711 92,736 107,663 144,167Adjusted profit after tax (28,291) 9,994 89,413 114,012 143,913Adjusted EPS (INR) (11.0) 3.5 28.0 35.8 45.1

Balance sheet (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eShare Capital 5,141 5,706 6,377 6,377 6,377Reserves & Surplus 54,266 76,359 185,338 281,260 410,891Networth 59,406 82,065 191,715 287,637 417,268Debt 349,739 353,835 327,914 305,403 296,236Other Liabilities 4,030 2,135 2,466 2,466 2,466Capital Employed 413,175 438,035 522,095 595,506 715,970Gross Fixed Assets 621,880 682,747 714,629 833,229 963,069Accumulated Depreciation 332,691 344,135 396,987 444,070 498,799Capital work in progress 105,330 80,680 117,289 145,689 170,649Net Assets 394,520 419,292 434,931 534,848 634,919Investments 12,574 22,191 25,443 25,443 29,967Current Assets, Loans & AdvancesInventory 109,506 113,120 140,705 190,048 237,669Debtors 47,949 71,912 68,774 88,541 109,533Cash & Bank balance 41,213 87,433 109,479 135,270 195,743Loans & advances and others 134,557 152,831 227,239 244,795 264,107Current Liabilities & ProvisionsLiabilities 239,802 340,773 371,147 499,595 620,483Provisions 81,400 76,435 98,692 109,205 120,848Net Current Assets 12,023 8,088 76,359 49,853 65,721Deferred tax (assets)/liabilities 6,802 11,536 14,638 14,638 14,638Misc.Expenses 861 - - - -Application of Funds 413,175 438,035 522,095 595,506 715,970

Cash flow statement (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eEBIT (6,580) 42,288 121,620 160,175 208,710Depreciation & amortisation 25,068 38,871 46,555 60,376 75,192Interest expense 19,309 22,397 20,454 20,703 21,569(Inc)/Dec in working capital (47,087) (50,154) 46,225 (52,297) (44,605)Tax paid 3,358 10,058 12,164 27,139 45,121CF from operating activities 42,908 98,859 89,332 225,005 261,817Capital expenditure 532,309 36,217 68,491 147,000 154,800Inc/(Dec) in investments (14,084) 9,617 3,251 - 4,525Income from investments 841 464 896 2,262 2,534CF from investing activities (517,385) (45,371) (70,846) (144,738) (156,791)Inc/(Dec) in share capital 1,285 566 671 - -Inc/(Dec) in debt 233,890 4,097 (25,921) (22,511) (9,167)Others (4,454) (5,513) 16,573 (11,741) (14,535)CF from financing activities 230,721 (851) (8,676) (34,252) (23,703)Net cash flow 2,882 46,220 22,046 25,791 60,473Opening balance 38,332 41,213 87,433 109,479 135,270Closing balance 41,213 87,433 109,479 135,270 195,743

Growth indicators (%)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenue 99.0 30.4 33.1 31.2 23.7EBITDA (56.0) 339.0 107.2 31.1 28.7PAT (215.6) 202.6 260.7 16.1 33.9EPS (201.2) 131.8 700.5 27.5 26.2Adj PAT (234.9) 135.3 794.7 27.5 26.2

Valuation (x)Year ended 31st Mar 2009 2010 2011 2012e 2013eP/E (25.0) 78.5 9.8 7.7 6.1P/BV 11.9 9.6 4.6 3.0 2.1EV/EBITDA 55.5 12.7 6.1 4.7 3.6EV/Sales 1.4 1.1 0.8 0.6 0.5Dividend Yield (%) 0.4 1.1 1.5 1.5 1.5

Financial ratiosYear ended 31st Mar 2009 2010 2011 2012e 2013eRoE (%) (47.6) 12.2 46.6 39.6 34.5RoCE (%) (2.1) 11.8 30.0 35.6 38.3Net Debt/Equity (x) 5.9 4.3 1.7 0.6 0.2Interest Coverage (x) (0.3) 1.9 5.9 7.7 9.7



Maruti SuzukiEnd of downgrade cycle!

Reco : BUYCMP : INR1,315Target Price : INR1,552

Market dataSector : AutomobilesMarket Cap (INRbn) : 380Market Cap (USDbn) : 7O/S Shares : 289Free Float (m) : 10352-wk HI/LO (INR) : 1429/900Avg Daily Vol ('000) : 664Bloomberg : MSIL INSource: Bloomberg


Source: Bloomberg


Pain is in the past… Positive cycle approaches!

We believe that we are nearing the fag-end of Maruti’s long-drawn downgrade cycle with less scope of incrementalnegative news flows from hereon. Normally, the subsequent upgrade cycle is equally long. We expect the ramp-up in diesel capacity (with recent Fiat tie-up) coupled with new launches (Ertiga/new Dzire) to drive the volumegrowth in FY13.

This should enable sharp improvement in margins as well. We forecast margins improving from ~7.1% in FY12e to~9.6% in FY13e, driven by positive operating leverage, better product mix (higher share of lower discount dieselvariants/Swift family), coupled favourable currency movement.

Market share argument fading!

We have to make our peace with high competition in small cars, but the extent of market share loss for Maruti(which has been de-rating catalyst in the past) has been much lesser than earlier anticipated. Maruti has withheldcompetitive pressures (peak, in our view) extremely well thus far. Competitor focus shifting from small cars toSUVs, coupled with tepid performance to some of the existing competitor models is another positive. Also, theErtiga increases Maruti’s presence in a fast growing/relatively untapped segment which could offset any probablemarket share losses in small cars.

The Maruti advantage…

High localisation levels and economies of scale, keeps the cost of spares, servicing, etc. extremely economical.Consequently the ownership cost of a Maruti Suzuki vehicle remains relatively lower than the competition (anenviable advantage in the cost-conscious Indian market) and resale value remains relatively higher. The serviceand distribution network (especially in the Tier 2 & 3 cities) remains unmatched. We expect market share gains inthe more price-conscious/under-penetrated Tier 2 & 3 cities to offset market share losses in the more brand-conscious Tier 1 cities.

BUY!

Maruti seems to be nearing the first stage of all its positive cycles - volumes, margins and consequently, multiples.Directionally, the stock seems to be one of the best FY13-14 plays in the sector. Reiterate BUY with a target priceof INR1,552 (11x FY13e Cash EPS + INR50 for the subsidiaries).

Key financials (standalone)YE 31 Mar (INRm) FY11 FY12e FY13eRevenues 369,199 357,209 442,014EBITDA 35,442 25,347 42,543EBITDA Margin (%) 9.6 7.1 9.6Adjusted PAT 22,886 14,439 26,941Adjusted EPS (INR) 79.2 50.0 93.2P/E (X) 16.6 26.3 14.1EV/EBITDA (X) 8.7 12.2 7.3RoE (%) 16.5 9.5 15.4RoCE (%) 24.6 14.9 24.1Div Yield (%) 5.7 3.8 7.1


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Currency finally moves favourably...

YEN (to INR) - Recent downward trend to aid margin expansion in FY13e


Discounts (INR/vehicle) - Expect downward trend post diesel ramp-up


Dealer network remains miles ahead of competition...

Source: Industry, Antique

Maruti’s direct and indirect JPY exposure (including royalty), accounts for~23% of revenues. The company has been tentative taking long-termhedges as parent Suzuki believed that the JPY would depreciate goingforward. While this decision impacted margins in FY12, it has finallypaid off with the recent downward trend in the JPY (depreciated by ~10%against the INR). The company has just begun taking fresh hedges for1HFY13 and we expect margins to be positively impacted by ~80 bps.

Besides the currency benefits, there are levers for margins to improve.Positive operating leverage from ~20% volume growth expected in FY13e(higher than industry as they make up for lost production on account ofthe strike) and better product mix (higher share of lower discount dieselvariants/Swift family), should result in margins improving from ~7.1% inFY12e to ~9.6% in FY13e.

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Profit and loss account (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenues 208,525 296,231 369,199 357,209 442,014Expenses 188,363 256,688 333,757 331,862 399,470EBITDA 20,162 39,543 35,442 25,347 42,543Depreciation & amortisation 7,065 8,250 10,135 11,252 12,527EBIT 13,097 31,293 25,307 14,095 30,016Interest expense 510 335 244 408 369Other income 6,013 4,967 6,025 6,093 7,007Profit before tax 18,600 35,925 31,088 19,780 36,655Taxes incl deferred taxation 4,571 10,949 8,202 5,341 9,713Profit after tax 12,187 24,976 22,886 14,439 26,941Adjusted profit after tax 14,029 24,976 22,886 14,439 26,941EPS (INR) 42.2 86.4 79.2 50.0 93.2

Balance sheet (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eShare Capital 1,445 1,445 1,445 1,445 1,445Reserves & Surplus 92,004 116,906 137,230 149,980 173,769Networth 93,449 118,351 138,675 151,425 175,214Debt 6,989 8,214 3,093 3,155 2,423Capital Employed 100,438 126,565 141,768 154,580 177,636Gross Fixed Assets 87,206 104,067 117,377 137,377 157,377Accumulated Depreciation 46,498 53,820 62,083 73,335 85,862Capital work in progress 8,613 3,876 14,286 19,286 24,286Net Assets 49,321 54,123 69,580 83,328 95,801Investments 31,733 71,766 51,067 51,067 53,620Current Assets, Loans & AdvancesInventory 9,023 12,088 14,150 13,701 16,954Debtors 9,378 8,099 8,933 8,808 10,899Cash & Bank balance 19,390 982 25,085 25,338 35,336Loans & advances and others 17,309 16,555 15,395 15,703 15,703Current Liabilities & ProvisionsLiabilities 30,358 29,394 35,540 35,903 42,389Provisions 3,807 6,284 5,258 5,521 5,797Net Current Assets 20,935 2,046 22,765 22,126 30,706Deferred tax (assets)/liabilities 1,551 1,370 1,644 1,941 2,491Application of Funds 100,438 126,565 141,768 154,580 177,636

Cash flow statement (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eEBIT 13,097 31,293 25,307 14,095 30,016Depreciation & amortisation 7,065 8,250 10,135 11,252 12,527Interest expense 510 335 244 408 369(Inc)/Dec in working capital 2,128 (481) (3,384) (892) (1,419)Tax paid 4,721 11,130 7,928 5,044 9,164Cash flow from operating activities 12,803 28,559 30,654 20,786 34,429Capital expenditure 15,603 12,124 23,720 25,000 25,000Inc/(Dec) in investments (20,074) 40,033 (20,699) - 2,553Income from investments 6,013 4,967 6,025 6,093 7,007Cash flow from investing activities 10,484 (47,190) 3,004 (18,907) (20,546)Inc/(Dec) in share capital - - - - -Inc/(Dec) in debt (2,013) 1,225 (5,121) 62 (733)Dividends paid (2,892) (74) (2,562) (1,689) (3,152)Cash flow from financing activities (4,905) 1,151 (7,683) (1,627) (3,885)Net cash flow 16,085 (18,408) 24,103 253 9,998Opening balance 3,305 19,390 982 25,085 25,338Closing balance 19,390 982 25,085 25,338 35,336

Growth indicators (%)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenue 13.7 42.1 24.6 (3.2) 23.7EBITDA (25.4) 96.1 (10.4) (28.5) 67.8PAT (18.9) 78.0 (8.4) (36.9) 86.6EPS (29.6) 104.9 (8.4) (36.9) 86.6

Valuation (x)Year ended 31st Mar 2009 2010 2011 2012e 2013eP/E 31.2 15.2 16.6 26.3 14.1Cash P/E 19.7 11.4 11.5 14.8 9.6P/BV 4.1 3.2 2.7 2.5 2.2EV/EBITDA 15.4 7.8 8.7 12.2 7.3EV/Sales 1.5 1.0 0.8 0.9 0.7Dividend Yield (%) 0.3 0.5 0.6 0.4 0.7

Financial ratiosYear ended 31st Mar 2009 2010 2011 2012e 2013eRoE 15.0 21.1 16.5 9.5 15.4RoCE 20.8 29.6 24.6 14.9 24.1Debt/Equity (x) 0.1 0.1 0.0 0.0 0.0EBIT/Interest (x) 25.7 93.4 103.7 34.5 81.3



Hero MotoCorpMargin levers still intact!


Market dataSector : AutomobilesMarket Cap (INRbn) : 402Market Cap (USDbn) : 8O/S Shares : 200Free Float (m) : 9352-wk HI/LO (INR) : 2250/1482Avg Daily Vol ('000) : 491Bloomberg : HMCL INSource: Bloomberg


Source: Bloomberg


Margins can only improve… Royalty savings to exceed R&D spends!

Our positive view on Hero is less about the volume growth and more about the margin uptick. Royalty savings(360bps at this JPY rate) should more than offset R&D and royalty on new models (combined should not exceed1.5% of sales). This also more than offsets Hero’s Haridwar tax benefits expiring in FY14.

Honda – Capacity expansion & aggressive targets might not be enough!

We believe that Honda’s recent market share gains in the domestic 2W market was more to do with clearing-off ahuge order backlog in scooters and less to do with incremental market share gains (which we feel would be a tallorder). In our view, the mere event of “capacity expansion” affects the market dynamics of commodities, notbrands. The street seems to have extrapolated the lone success of the Activa brand as Honda’s ability to developstrong sub-brands in motorcycles (where they have had a very poor track record thus far).

We differ from street on concerns regarding technology

We do not share the same skepticism that the street does on Hero’s solo R&D ramp-up. While we factor in higherR&D spend, we feel that the actual need for technological improvement in a 2W is less. Unlike cars, 2Ws withina segment are very similar to each other in terms of technology and the only differentiating aspect (besides thebrand) is the styling. Hence even model churn is low and upgrades of existing models only involve minor stylingchanges (not a very steep mountain to climb).

No more Japanese leash… Opportunities post Honda split

Over the last few years, Hero has missed out on export opportunities. Post the split, we expect Hero to focus on bigexport markets like Africa, South America and Indonesia. Over a much longer period (5-7 years), we see noreason why Hero can’t replicate the success that Bajaj Auto enjoys in exports.

BUY!

The sharp margin uptick post 1QFY15 warrants looking at the DCF as well, which throws up a value of INR2,363.Separately, the generous dividend (yield >5%) is not only a great cushion to the stock but also improves returnratios which were previously suppressed by the huge cash hoard (currently ~10% of market cap). BUY!

Key financials (standalone)YE 31 Mar (INRm) FY11 FY12e FY13eRevenues 192,450 232,244 262,266EBITDA 22,833 25,939 30,847EBITDA Margin (%) 11.9 11.2 11.8Adjusted PAT 20,077 23,480 28,134Adjusted EPS (INR) 100.5 117.6 140.9P/E (x) 20.0 17.1 14.3EV/EBITDA (x) 15.8 13.7 11.2RoE (%) 67.9 79.1 81.7RoCE (%) 83.1 94.9 97.6Div Yield (%) 5.2 5.0 5.0


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R&D Expense (INRm)


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R&D expense (as % of net sales)


We feel that R&D is not a steep mountain to climb in 2Ws as the actualneed for technological improvement in a 2W is less. Comparing 2Ws tohow they were 5-7 years back, they have not evolved much technologicallyand the only improvements have been in the styling department.

Technology in 2Ws seems to have hit a glass ceiling with limitedrequirement to improve the output of a motorcycle already delivering180 miles/gallon. This is a stark contrast to how things are in cars andcommercial vehicles.

Bajaj Auto expenses INR1.3bn R&D p.a. We await details regardingHero’s R&D road-map and in the interim assume R&D spends to the tuneof INR3bn p.a. Assuming that 60% is expensed, the margin impact wouldbe ~80bps as against the royalty saving of ~360bps.

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Profit and loss account (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenues 123,191 157,582 192,450 232,244 262,266Expenses 106,348 130,962 169,618 206,305 231,419EBITDA 16,844 26,620 22,833 25,939 30,847Depreciation & amortisation 1,807 1,915 2,254 2,723 2,949EBIT 15,037 24,705 20,579 23,216 27,898Interest expense (317) (206) (19) (135) (155)Other income 2,461 3,406 4,249 5,097 5,709Extraordinary Items - - (798) - -Profit before tax 17,815 28,317 24,048 28,448 33,762Taxes incl deferred taxation 4,997 5,999 4,769 4,968 5,627Profit after tax 12,818 22,318 19,279 23,480 28,134Adjusted PAT 12,818 22,318 20,077 23,480 28,134Recurring EPS (INR) 64.2 111.8 100.5 117.6 140.9

Balance sheet (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eShare Capital 399 399 399 399 399Reserves & Surplus 37,608 34,251 29,161 29,276 34,046Networth 38,008 34,650 29,561 29,676 34,445Debt 785 660 327 164 -Capital Employed 38,792 35,311 29,888 29,839 34,445Gross Fixed Assets 25,163 27,510 29,866 34,866 38,866Accumulated Depreciation 9,426 10,922 14,582 17,304 20,254Capital work in progress 1,205 481 1,251 4,251 6,251Net Assets 16,943 17,069 16,536 21,813 24,864Investments 33,688 39,257 51,288 51,288 58,981Current Assets, Loans & Advances 7,939 9,754 14,331 16,096 17,219Inventory 3,268 4,364 5,249 6,363 7,185Debtors 1,499 1,084 1,306 1,909 2,156Cash & Bank balance 2,196 19,072 715 4,085 10,087Loans & advances and others 3,172 4,306 7,775 7,824 7,878Current Liabilities & ProvisionsLiabilities 15,259 38,051 50,637 56,007 59,961Provisions 5,270 10,264 10,811 10,183 10,692Net Current Assets (10,393) (19,488) (46,402) (46,009) (43,347)Deferred expenses 1,444 1,528 17,052 17,052 17,052Misc.Expenses - - 25,518 19,800 11,000Application of Funds 38,792 35,311 29,888 29,839 34,445

Cash flow statement (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eEBIT 15,037 24,705 20,579 23,216 27,898Depreciation & amortisation 1,807 1,915 2,254 2,723 2,949Interest expense (317) (206) (19) (135) (155)(Inc)/Dec in working capital (2,399) (25,971) (8,557) (2,977) (3,340)Tax paid 4,646 5,916 (10,756) 4,968 5,627Cash flow from operating activities 14,913 46,882 42,164 24,083 28,714Capital expenditure 3,056 1,623 3,126 8,000 6,000Inc/(Dec) in investments 8,019 5,570 12,030 - 7,693Income from investments 2,461 3,406 4,249 5,097 5,709Cash flow from investing activities (8,614) (3,787) (10,908) (2,903) (7,984)Inc/(Dec) in share capital - - - - -Inc/(Dec) in debt (535) (125) (333) (164) (164)Dividends paid (4,673) (25,676) (24,369) (23,365) (23,365)Cash flow from financing activities (5,208) (25,800) (24,702) (23,528) (23,528)Net cash flow 885 16,876 (18,357) 3,370 6,002Opening balance 1,311 2,196 19,072 715 4,085Closing balance 2,196 19,072 715 4,085 10,087

Growth indicators (%)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenue 19.2 27.9 22.1 20.7 12.9EBITDA 24.8 58.0 (14.2) 13.6 18.9PAT 32.4 74.1 (10.0) 16.9 19.8EPS 32.4 74.1 (10.0) 16.9 19.8

Valuation (x)Year ended 31st Mar 2009 2010 2011 2012e 2013eP/E 31.3 18.0 20.0 17.1 14.3Cash P/E 27.4 16.6 18.0 15.3 12.9P/BV 10.6 11.6 13.6 13.5 11.7EV/EBITDA 22.1 13.2 15.8 13.7 11.2EV/Sales 3.0 2.2 1.9 1.5 1.3Dividend Yield (%) 1.0 4.0 5.2 5.0 5.0

Financial ratiosYear ended 31st Mar 2009 2010 2011 2012e 2013eRoE 33.7 64.4 67.9 79.1 81.7RoCE 46.6 80.7 83.1 94.9 97.6EBIT/Interest (x) (47.5) (119.8) (1,112.4) (171.9) (180.3)



Eicher MotorsSet to go Places!


Market dataSector : AutomobilesMarket Cap (INRbn) : 59Market Cap (USDbn) : 1O/S Shares : 27Free Float (m) : 1052-wk HI/LO (INR) : 2214/1114Avg Daily Vol ('000) : 61Bloomberg : EIM INSource: Bloomberg


Source: Bloomberg


Royal Enfield – High economic interest for Eicher shareholder!

Royal Enfield (one of the few “cult” brands in India) is the biggest beneficiary of this emerging leisure biking trendin the country. The loyalists swear by the brand and this brand loyalty is now becoming infectious (evident from the8-12 month waiting period, despite a 75% production ramp-up). Based on current demand/supply, Enfield shouldsell as many as they can make for at least the next 2 years. We forecast volumes of 98k units in CY12 (up 32%YoY), and 138k units in CY13 (up 40% YoY). There are enough levers to improve margins (not factored into ourestimates). Going ahead, we expect the company to capitalize on the strong pricing power and reduce itsdependence on costlier outsourcing jobs.

Fortunately, this division has high economic interest for an Eicher - Enfield accounts for only ~12% of consolrevenues, but since its profits aren’t shared with Volvo, it accounts for ~40% of consol PAT, and >60% of consolFCF (function of 2W businesses being relatively asset light).

Volvo~Eicher alliance (VECV) – A great marriage!

VECV has multiple synergies for both partners. For Volvo, it gives them a strong foot-print in India (high prioritymarket for any OEM). For Eicher, Volvo’s support is bearing fruits in Eicher’s re-entry into the relatively HD segment(>12T). Efforts here are channeled towards reducing overall cost of ownership (focus on fuel efficiency, superiortechnology, easier access to spares, in a bid to ultimately improve resale). The management expects their HDtruck market share to increase from 3% currently to 15% in CY15e. While there are some low hanging fruits (interms of untapped geographies/segments), this target seems a little too aggressive to us, and hence, have notassumed it in our estimates.

Engine division – Entering the big league!

The engine business (5-8 litres/Euro 3-6 compliant) makes VECV a part of Volvo’s global supply chain and providesEicher a huge technological leap on their own CVs. More importantly, of the ~INR17bn cash hoard (~35% ofmarket cap), INR4.5bn gets deployed into a high RoCE business like engines (reckon ~40% on full operations).

BUY!

Our SOTP target price of INR2,410, values Royal Enfield at INR818 (9x CY13e EV/EBIDTA), VECV at INR1,389(7x CY13e EV/EBIDTA) and engine business at INR203 (NPV). BUY!

Key financials (consolidated)YE 31 Dec (INRm) FY11 FY12e FY13eRevenues 57,160 68,806 84,335EBITDA 5,935 7,324 9,352EBITDA Margin (%) 10.4 10.6 11.1Adj PAT 3,088 3,771 4,810Adjusted EPS (INR) 114.4 139.7 178.2P/E (x) 18.8 15.4 12.1EV/EBITDA (prorated) (x)13.0 10.1 7.3RoE (%) 21 21 22RoCE (%) 34 37 37Div Yield (%) 0.7 1.1 1.5


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Eicher Motors NIFTY



Royal Enfield – High economic interest for Eicher Motors!

Revenues


Adjusted PAT (pro-rated)


FCF (pro-rated)


Royal Enfield - Volume estimate


59%

40% 40% 42% 42%

41%

60% 60% 58% 54%

4%

CY09 CY10 CY11e CY12e CY13e

Enfield VECV Engines

17%

42%

81%66%

79%

83%

58%

19%34%

21%


Enfield VECV

13% 10% 12% 13% 14%

87% 90% 88% 87%77%

9%


Enfield VECV Engines

4352 52

75

99

138

0

20

40

60

80

100

120

140

160

CY08 CY09 CY10 CY11 CY12e CY13e

Tho

usan

ds



VECV - A superior business to Ashok Leyland

Fixed asset turns (x)


ROE (%) - VECV’s is superior despite huge cash hoard (~40% of Mcap)


ROCE (%)


VECV - Management’s optimism on HD segment is comforting...

Source: Company

4,81917,500

26,425

36,4004,219

44,000

-

20,000

40,000

60,000

80,000

100,000

CY10 CY15

Buses LD/MD HD

Expected Market Share

(2015)

15%

35%

16%

1.2 1.21.7 1.8 2.0

4.3

6.1 6.1 6.0 5.9

0

2

4

6

8

2009 2010 2011 2012e 2013e

Ashok Leyland (March ending) VECV (Dec ending)

5.5

11.5

15.9

13.214.8

6.9

14.6

19.318.4 18.1

0

4

8

12

16

20

24

2009 2010 2011 2012e 2013e


7.7

11.8

15.6

12.214.0

10.2

23.0

35.236.5

35.1

0

8

16

24

32

40

2009 2010 2011 2012e 2013e




Royal Enfield: High return ratios backed by asset light business model...


VECV: High asset turns for a CV business...


Peer ComparisonMkt Share Industry Segment Eicher Motors Tata Motors Ashok LeylandAnalysis Vol (YTD) Contribution YTD FY11 FY10 YTD FY11 FY10 YTD FY11 FY10TrucksUpto 3.5 tonnes 251,410 50% 58.5% 56.1% 57.2%3.5 - 7.5 tonnes 36,191 7% 12.5% 12.0% 9.6% 70.1% 69.4% 68.7%7.5 - 12 tonnes 47,208 9% 38.3% 40.8% 39.1% 48.6% 46.1% 48.6% 5.9% 5.1% 3.4%12 - 16.2 tonnes 44,041 9% 7.7% 5.7% 2.5% 64.7% 66.9% 73.0% 27.6% 27.4% 24.5%16.2 - 25 tonnes 56,662 11% 1.5% 0.9% 0.7% 64.0% 65.1% 70.8% 21.7% 26.5% 24.5%Above 25 tonnes 63,221 13% 1.8% 1.1% 1.2% 71.3% 67.5% 66.9% 22.6% 28.0% 26.0%BusesUpto 5 tonnes 21,350 28% 29.5% 32.7% 38.1% 1.7% 3.7% 3.9%5 - 7.5 tonnes 18,143 23% 13.8% 11.7% 8.6% 58.2% 60.6% 67.2% 5.0% 4.0% 4.7%7.5 - 12 tonnes 11,348 15% 21.5% 18.1% 17.4% 41.5% 44.5% 53.0% 16.3% 12.4% 11.2%Above 12 tonnes 26,563 34% 4.7% 2.4% 3.0% 42.8% 43.3% 50.8% 52.5% 54.3% 46.2%Source: SIAM, Antique

VECV - Market share gains in the HD segments

0.0

1.0

2.0

3.0

4.0

5.0

6.0


0%

5%

10%

15%

20%

25%

30%

35%

40%

Asset Sw eating (x) (LHS) ROE (RHS) ROCE (RHS)

0

1

2

3

4

5

6

7

CY08 CY09 CY10 CY11e CY12e CY13e

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Asset Sw eating (x) (LHS) ROE (RHS) ROCE (RHS)



BUY!

We value Eicher Motors on SOTP considering different segments underone company. Prefer valuing the 2W and CV businesses on EV/EBIDTAdue to the high cash on the books (~35% of market cap).

We value Royal Enfield on an EV/EBIDTA basis, assigning a target multipleof 9x to CY13 EBIDTA, justified by several factors - high visibility onvolumes, minimal competition, cult brand positioning, strong pricing power,lean operations and 2Ws generally being a superior business model. 9xis still a ~10% discount to Hero/Bajaj

We value the CV business on an EV/EBIDTA multiple of 7x CY13, whichseems reasonable considering superior return ratios, margin profile, fixedasset turns when compared to Ashok Leyland (which currently trades atan EV/EBIDTA of 8x FY13e).

We value the Engine business on an NPV basis, on an assumption ofCY13 volumes at 35,000 units (gradually ramped up to full capacity,i.e. 100,000 only in CY16e), realisations of INR250k per engine, steadystate margins of 14% from CY15 onwards, terminal growth of 1% anddiscount rate of 15%. We thereby arrive at an NPV of INR203 for theengine business. We see upside risk to this number...

Standalone (INRm) CY09 CY10 CY11 CY12e CY13eVolumes (Nos) 51,955 52,274 74,641 98,854 138,396Net Realisations (INR) 72,757 84,683 89,890 92,257 93,765Revenues 3,780 4,427 6,709 9,120 12,977EBITDA 396 458 810 1,187 1,723EBITDA Margin (%) 10.5 10.3 12.1 13.0 13.3Adjusted PAT 492 754 1,245 1,598 2,122Adjusted EPS (INR) 18.3 28.0 46.1 59.2 78.6RoE (%) 12.7 16.5 23.1 25.6 28.8RoCE (%) 14.7 18.9 27.5 32.8 36.3Source: Company, Antique

VECV (INRm) CY09 CY10 CY11 CY12e CY13eVolumes (Nos) 25,733 39,853 49,705 57,135 66,339Net Realisations (INR) 1,001,395 998,316 1,014,998 1,044,638 1,075,669Revenues 25,769 39,786 50,450 59,686 71,359EBITDA 1,211 3,353 5,125 6,136 7,629EBITDA Margin (%) 4.7 8.4 10.2 10.3 10.7Adj PAT (after minority int) 459 1,135 1,842 2,173 2,688Adjusted EPS (INR) 17.2 42.1 68.3 80.5 99.6RoE (%) 7 15 19 19 19RoCE (%) 10 23 36 38 37Source: Company, Antique

SOTP (INRm) Methodology Equity Eicher's Attributable Value per Value Stake share

Royal Enfield 9x CY13e EV/EBIDTA 22,067 100% 22,067 818VECV 6x CY13e EV/EBIDTA 68,915 54.4% 37,490 1,389Engine Business NPV 10,072 54.4% 5,479 203SOTP Value of Eicher Motors 2,410Source: Antique

SOTP sensitivity to EV/EBIDTA multiplesEV/EBIDTA Royal Enfield

Multiple 7.0 8.0 9.0 10.0 11.05.0 1,974 2,038 2,102 2,166 2,2306.0 2,128 2,192 2,256 2,320 2,3847.0 2,282 2,346 2,410 2,473 2,5378.0 2,436 2,500 2,563 2,627 2,6919.0 2,589 2,653 2,717 2,781 2,845

Source: Antique

VEC

V



Profit and loss account (INRm)Year ended 31st Dec 2009 2010 2011 2012e 2013eRevenues 29,549 44,213 57,160 68,806 84,335Expenses 27,942 40,402 51,225 61,482 74,984EBITDA 1,607 3,811 5,935 7,324 9,352Depreciation & amortisation 539 573 640 752 900EBIT 1,068 3,238 5,296 6,572 8,451Interest expense (net) 87 95 77 58 64Other income 892 1,034 1,383 1,575 1,790PBT 1,873 4,177 6,602 8,089 10,177Taxes incl deferred taxation 578 1,108 1,628 2,145 2,679PAT 1,295 3,069 4,974 5,944 7,498Minority Interest (461) (1,179) (1,886) (2,173) (2,688)Adj PAT (after minority interest) 834 1,889 3,088 3,771 4,810Adj EPS (INR) 31.2 70.1 114.4 139.7 178.2

Balance sheet (INRm)Year ended 31st Dec 2009 2010 2011 2012e 2013eShare Capital 267 269 270 270 270Reserves & Surplus 10,424 12,052 14,661 17,685 21,502Networth 10,690 12,321 14,931 17,954 21,772Debt 1,264 956 504 554 608Other Liabilities 5,747 6,774 8,377 10,550 13,238Capital Employed 17,701 20,052 23,812 29,058 35,618Gross Fixed Assets 7,437 8,113 10,213 12,113 14,613Accumulated Depreciation 3,802 4,269 4,909 5,660 6,561Capital work in progress 122 669 3,937 6,987 7,987Net Assets 3,758 4,513 9,241 13,439 16,039Investments 2,941 4,586 5,126 5,650 6,452Current Assets, Loans & AdvancesInventory 2,190 3,265 4,280 5,134 6,434Debtors 2,325 2,609 3,434 4,163 5,199Cash & Bank balance 11,707 12,457 11,723 12,755 16,232Loans & advances and others 1,900 2,169 3,814 4,265 4,773Current Liabilities & ProvisionsLiabilities 6,016 7,942 11,846 13,875 16,659Provisions 962 1,391 1,497 1,705 1,930Net Current Assets 11,144 11,168 9,907 10,738 14,049Deferred tax (assets)/liabilities 142 249 645 769 922Misc.Expenses - 35 182 - -Application of Funds 17,701 20,052 23,812 29,058 35,618

Cash flow statement (INRm)Year ended 31st Dec 2009 2010 2011 2012e 2013eEBIT 1,068 3,238 5,296 6,572 8,451Depreciation & amortisation 539 573 640 752 900Interest expense 87 95 77 58 64(Inc)/Dec in working capital (2,224) (726) (527) (203) (165)Tax paid 578 1,108 1,628 2,145 2,679Cash flow from operating activities 3,166 3,334 4,757 5,323 6,774Capital expenditure 259 1,222 5,368 4,950 3,500Inc/(Dec) in investments 2,879 1,645 540 523 803Income from investments 892 1,034 1,383 1,575 1,790Cash flow from investing activities (2,246) (1,833) (4,525) (3,899) (2,513)Inc/(Dec) in share capital (154) 143 1 0 0Inc/(Dec) in debt (392) (307) (453) 50 55Others 109 2,656 4,212 5,196 6,505Cash flow from financing activities (438) 2,491 3,760 5,246 6,560Net cash flow (612) 750 (734) 1,033 3,476Opening balance 12,318 11,707 12,457 11,723 12,755Closing balance 11,707 12,457 11,723 12,755 16,232

Growth indicators (%)Year ended 31st Dec 2009 2010 2011 2012e 2013eRevenue na 50 29 20 23EBITDA na 137 56 23 28PAT na 137 62 20 26EPS na 124 63 22 28Adj PAT na 127 63 22 28

Valuation (x)Year ended 31st Dec 2009 2010 2011 2012e 2013eP/E 68.8 30.7 18.8 15.4 12.1P/B 5.4 4.7 3.9 3.2 2.7EV/EBITDA (pro-rated) 46.4 20.7 13.0 10.1 7.3EV/Sales (pro-rated) 2.7 1.8 1.4 1.1 0.8Dividend Yield (%) 0.3 0.5 0.7 1.1 1.5

Financial ratiosYear ended 31st Dec 2009 2010 2011 2012e 2013eRoE 8 15 21 21 22RoCE 11 22 34 37 37Debt/Equity (x) 0.1 0.1 0.0 0.0 0.0Interest Coverage (x) 12.3 34.1 69.0 113.5 132.8



Bosch IndiaLast man standing!


Market dataSector : AutomobilesMarket Cap (INRbn) : 257Market Cap (USDbn) : 5O/S Shares : 31Free Float (m) : 952-wk HI/LO (INR) : 9000/6174Avg Daily Vol ('000) : 9Bloomberg : BOS INSource: Bloomberg


Source: Bloomberg


Dieselization of Indian cars - It's just the beginning!

Diesel car sales have been on steroids over the last year and no excise hike announced specifically on diesel vehiclesis a positive surprise. However, we expect this buoyancy in diesel cars to continue, irrespective of the diesel tax(which could always pop-up in the future). Even now, diesel cars account for only ~27% of total cars (~36% if weinclude UVs) which is way below the global average of >60%. While it's irrational to extrapolate this hugepetrol~diesel disparity over a longer period, the inherent economics of a diesel vehicle (~25% more fuel efficientthan its petrol counterpart) makes us structurally positive on dieselization of the Indian car industry going ahead.

Business getting less cyclical and more profitable!

The company shies away from disclosing segment-wise details, but with buoyancy in the more profitable CRDisegment, we estimate that Bosch's dependence on CVs is on the decline - from 53% of revenues in CY07e to 41%in CY13e. Also, based on our analysis, ~1/3rd of CV segment sales is to the aftermarket. This not only makes thebusiness less cyclical, but also more profitable. Post the next emission norm change (2014), most CVs willbecome eligible for CRDi as well, which is another long-term margin catalyst.

Near monopoly in fuel injection systems (FIS) to keep margins firm

Besides this structural uptrend in margins, Bosch’s almost monopolistic position in fuel injection equipment gives itstrong pricing power (stark contrast to other ancillaries!). Being a highly consolidated industry, with few playershaving the required technology, the fuel injection industry has very high entry barriers. While new players canenter when new models are being introduced, the probability of OEMs moving towards new entrants for suchcritical engine equipment is low. OEMs involve the FIS player right from the R&D stage (much before the commercialproduction begins) and once a FIS system is developed for a vehicle, the OEM generally sticks to that player/system for the entire lifecycle of the vehicle.

BUY!

Given the enviable business model, i.e. huge entry barriers in a segment where high growth looks sustainable,current valuations of 16.4x CY13e P/E (13.5x Cash P/E) look attractive. BUY!

Key financials (standalone)YE 31 Dec (INRm) FY11 FY12e FY13eRevenues 66,991 80,179 95,643EBITDA 10,704 13,705 16,608EBITDA Margin (%) 16.0 17.1 17.4Adjusted PAT 8,589 11,226 13,426Adjusted EPS (INR) 273.5 357.5 427.6P/E (x) 29.9 22.9 19.1EV/EBITDA (x) 21.9 17.4 11.5RoE (%) 23.7 23.0 22.0RoCE (%) 29.9 29.3 28.6Div Yield (%) 0.5 1.6 0.8


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Bosch NIFTY



BUY!

Total revenue break-up

Source: Antique

Co-relation between CV growth and Bosch revenue growth… Depen-dence on CVs is on the gradual decline, making the business less cyclical


Estimated segment-wise FIS break-up (~80% of total revenues)

Source: Antique

EBIDTA margin trend


20.2

%

20.6

%

20.4

%

11.4

%

19.1

%

20.7

%

18.9

%

10.2

%

19.3

%

16.8

%

15.6

%

10.6

%

8.9%

15.8

%

19.3

%

8.6%

18.3

%

16.6

% 19.6

%

10.3

%

18.4

%

17.0

%

18.4

%

13.7

%

Mar (Q1) Jun (Q2) Sep (Q3) Dec (Q4)

CY06 CY07 CY08 CY09 CY10 CY11

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

CY

02

CY

03

CY

04

CY

05

CY

06

CY

07

CY

08

CY

09

CY

10

CY

11

Bosch Revenue Grow th CV Grow th

65% 62% 58% 59% 60% 60% 61%

14% 15% 20% 21% 21% 21% 21%

11% 12% 11% 10% 9% 9% 9%

10% 12% 11% 10% 10% 10% 9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CY07e CY08e CY09e CY10e CY11e CY12e CY13e

FIS OEM FIS Aftermarket Other Automotive Non Automotive

53% 48% 42% 37% 36% 34% 33%

14%15%

19%18% 18% 17% 17%

19%20% 22%

26% 27% 30% 31%

2% 3% 5% 7% 7% 7% 8%10% 12% 10% 11% 11% 10% 10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CY07e CY08e CY09e CY10e CY11e CY12e CY13e

CVs - OEM CVs - Aftermarket PV - OEMPV - Aftermarket Tractors - OEM Tractors - Aftermarket



Profit and loss account (INRm)Year ended 31st Dec 2009 2010 2011 2012e 2013eRevenues 48,224 66,991 80,179 95,643 111,601Expenses 41,825 56,287 66,474 79,035 91,928EBITDA 6,399 10,704 13,705 16,608 19,672Depreciation & amortisation 3,036 2,540 2,578 3,038 3,366EBIT 3,362 8,165 11,127 13,570 16,306Interest expense (1,306) (1,144) (1,843) (2,127) (2,345)Other income 3,266 2,719 2,770 2,951 3,159Profit before tax 7,934 12,028 15,740 18,648 21,810Taxes incl deferred taxation 2,028 3,439 4,514 5,221 6,107Profit after tax 5,907 8,589 11,226 13,426 15,703Adjusted profit after tax 5,907 8,589 11,226 13,426 15,703Adjusted EPS (INR) 188.1 273.5 357.5 427.6 500.1

Balance sheet (INRm)Year ended 31st Dec 2009 2010 2011 2012e 2013eShare Capital 314 314 314 314 314Reserves & Surplus 33,538 40,666 46,970 58,101 71,119Networth 33,852 40,980 47,284 58,415 71,433Debt 2,843 2,764 3,071 3,217 3,373Capital Employed 36,695 43,744 50,356 61,631 74,806Gross Fixed Assets 28,712 30,238 35,238 40,238 45,238Accumulated Depreciation 23,579 25,878 28,456 31,494 34,860Capital work in progress 997 2,242 3,826 5,326 6,826Net Assets 6,129 6,602 10,608 14,070 17,204Investments 14,176 16,073 16,064 18,473 21,244Current Assets, Loans & AdvancesInventory 5,512 8,093 11,831 13,102 15,288Debtors 5,833 7,210 9,492 11,005 12,842Cash & Bank balance 10,678 13,259 9,514 13,679 18,491Loans & advances and others 5,556 8,960 11,525 12,924 14,492Current Liabilities & ProvisionsLiabilities 8,545 13,371 15,271 17,548 19,919Provisions 4,658 5,263 5,683 6,535 7,515Net Current Assets 14,376 18,887 21,409 26,626 33,678Deferred tax (assets)/liabilities (2,014) (2,182) (2,276) (2,462) (2,681)Application of Funds 36,695 43,744 50,356 61,631 74,806

Cash flow statement (INRm)Year ended 31st Dec 2009 2010 2011 2012e 2013eEBIT 3,362 8,165 11,127 13,570 16,306Depreciation & amortisation 3,036 2,540 2,578 3,038 3,366Interest expense (1,306) (1,144) (1,843) (2,127) (2,345)(Inc)/Dec in working capital (1,072) 1,930 6,266 1,053 2,239Tax paid 2,344 3,607 4,608 5,408 6,325Cash flow from operating activities 6,432 6,311 4,674 12,273 13,453Capital expenditure 752 2,772 6,584 6,500 6,500Inc/(Dec) in investments 5,511 1,897 (9) 2,410 2,771Income from investments 3,266 2,719 2,770 2,951 3,159Cash flow from investing activities (2,996) (1,950) (3,804) (5,958) (6,112)Inc/(Dec) in share capital (6) - - - -Inc/(Dec) in debt 199 (79) 308 145 157Others (3,003) (1,461) (4,922) (2,296) (2,685)Cash flow from financing activities (2,809) (1,540) (4,614) (2,151) (2,529)Net cash flow (30) 2,581 (3,744) 4,164 4,812Opening balance 10,708 10,678 13,259 9,514 13,679Closing balance 10,678 13,259 9,514 13,679 18,491

Growth indicators (%)Year ended 31st Dec 2009 2010 2011 2012e 2013eRevenue 4.4 38.9 19.7 19.3 17%EBITDA (12.5) 67.3 28.0 21.2 18%PAT (6.8) 45.4 30.7 19.6 17%EPS (5.0) 45.4 30.7 19.6 17%

Valuation (x)Year ended 31st Dec 2009 2010 2011 2012e 2013eP/E 43.5 29.9 22.9 19.1 16.4P/BV 7.6 6.3 5.4 4.4 3.6EV/EBITDA 37.3 21.9 17.4 14.0 11.5EV/Sales 4.9 3.5 3.0 2.4 2.0Dividend Yield (%) 0.4 0.5 1.6 0.8 0.9%

Financial ratiosYear ended 31st Dec 2009 2010 2011 2012e 2013eRoE 17.4 21.0 23.7 23.0 22.0RoCE 18.6 26.2 29.9 29.3 28.6Debt/Equity (x) 0.1 0.1 0.1 0.1 0.0EBIT/Interest (x) (2.6) (7.1) (6.0) (6.4) (7.0)



Mahindra & MahindraStreet discounting bear-case!

Reco : BUYCMP : INR700Target Price : INR780

Market dataSector : AutomobilesMarket Cap (INRbn) : 428Market Cap (USDbn) : 8O/S Shares : 614Free Float (m) : 37052-wk HI/LO (INR) : 877/616Avg Daily Vol ('000) : 1,472Bloomberg : MM INSource: Bloomberg


Source: Bloomberg


Budget: Absence of specific diesel vehicle excise – Huge relief!

An excise hike specifically on diesel vehicles looked inevitable. Absence of the same was a huge relief for M&M(street was building in that additional amount to range between INR20k-80k/vehicle).

Tractors – Was the street in denial?

Till 5 months ago, tractor volumes were defying the industry (even after 3 years of high growth, M&M's April-Nov'11 tractor dispatches were up 25% YoY). The street (including us) was justifying this by citing "structural"changes like farm labour shortage/ higher commercial usage of tractors. This was casually being extrapolated forthe future as well.

Weak tractor sales over the last 5 months (down 8% YoY; 16% YoY in Feb/March) came as rude shock andthankfully, it has discouraged the street from taking these “structural” drivers for granted. As a result, after theextremely frantic downgrades, for the first time in the last 3 years, the street is much below the conservativemanagement’s guidance (i.e. 8-10% growth in FY13). From a stock perspective, this pessimism is a good thing as ithas finally provided scope for tractor volumes positively surprising again. Dealer inventory has now been corrected(from ~5 weeks to ~3 weeks). Fag-end of the rate-tightening cycle can’t hurt (80% of tractors are financed).

Rural king takes on the urban boys!

M&M continues to defy the competitive landscape in the auto industry and the XUV5oo (a continuum of theexisting product range) has strengthened the UV portfolio. The phenomenal response in the more brand-consciousmetro cities is testimony to the success of the XUV (more so since the parent brand is better associated-with in ruralregions). We reckon that the next (and bigger) leg of XUV’s success would come when the product is opened upto Tier 2 & 3 cities where only the “Mahindra” name is enough to sell a product. We forecast XUV volumes of 12kin FY12e and 42k in FY13e.

Stock looks oversold… BUY!

We model in a 5% tractor volume decline in FY13e. This change in product mix alone should result in margindowngrades of ~30bps (we downgrade ours by ~60bps). Still, core auto business trades at 12.2x FY13e P/E -attractive given that a massive overhang (diesel vehicle excise) is behind us. BUY!

Key financials (standalone)YE 31 Mar (INRm) FY11 FY12e FY13eRevenues 234,937 289,979 334,290EBITDA 34,562 40,172 44,337EBITDA Margin (%) 14.7 13.9 13.3Adjusted PAT 25,446 27,266 30,249Adjusted EPS (INR) 38.8 41.6 46.2Core Auto P/E (x) 14.4 13.5 12.2Core EV/EBIDTA (x) 10.6 9.6 8.7RoE (%) 25 22 21RoCE (%) 29 25 25Div Yield (%) 1.5 1.5 1.6


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M&M NIFTY



Stock looks oversold... BUY!

UV volumes growth to be aided by XUV5oo and 4W pick-ups (Maxximo)


EBIDTA margins to trend downwards due to weak tractor sales...


11.4% 11.9%

9.8%

15.9%14.7%

13.4% 12.8%

64%

66%

68%

70%

72%

74%

FY07 FY08 FY09 FY10 FY11 FY12e FY13e

0%

6%

12%

18%

24%

RM to sales (%) (LHS) Staff cost to sales (%) (RHS)

Other exp to sales (%) (RHS) EBIDTA margins (%) (RHS)

45.5% 45.1% 44.0% 48.1% 46.7% 49.3% 54.3%

36.5%29.9% 34.5%

37.0% 36.3% 33.1% 27.9%

12.0% 10.3% 12.8% 9.4% 10.6% 9.5% 9.2%

FY07 FY08 FY09 FY10 FY11 FY12e FY13e

Uvs (incl Gio & Maxximo) Tractors LCVs Logan Exports 3W

SOTP Methodology Value (INRm) Value per shareCore Auto Business (M&M + MVML) A 14x FY13e EPS 401,331 613Value of Key Subsidiaries & Investments: (pro-rated) StakeSsangyong 70% Market Value 28,350 43Tech Mahindra 48% Market Value 37,012 56Mahindra Forgings 53% Market Value 3,418 5M&M Financial Services 58% Market Value 42,687 65Mahindra Lifespaces 51% Market Value 6,671 10Mahindra Holidays & Resorts 83% Market Value 18,895 29Total value of Key Subsidiaries & Investments 137,032 209

DiscountHolding company discount 20% 27,406 42Net Value of Key Subsidiaries & Investments B 109,626 167SOTP Value of Mahindra & Mahindra Ltd A + B 510,957 780Source: Antique



Profit and loss account (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenues 130,488 186,021 234,937 299,499 345,212Expenses 117,639 156,469 200,375 259,327 300,875EBITDA 12,849 29,552 34,562 40,172 44,337Depreciation & amortisation 2,915 3,708 4,139 6,039 7,054EBIT 9,934 25,845 30,423 34,132 37,283Interest expense 453 278 (503) 1,283 1,144Other income 2,703 1,994 3,095 3,505 3,926Extraordinary Items (1,513) 908 1,175 - -Profit before tax 10,672 28,468 35,196 36,354 40,064Taxes incl deferred taxation 1,997 7,590 8,575 9,089 9,816Profit after tax 8,675 20,878 26,621 27,266 30,249Adjusted profit after tax 10,188 19,970 25,446 27,266 30,249EPS (INR) 31.1 35.9 40.6 41.6 46.2

Balance sheet (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eShare Capital 2,792 2,910 3,276 3,276 3,276Reserves & Surplus 49,829 75,358 99,858 119,148 140,550Networth 52,621 78,268 103,134 122,424 143,826Debt 40,528 28,802 24,053 42,922 42,897Capital Employed 93,148 107,069 127,187 165,347 186,723Gross Fixed Assets 48,939 52,763 62,277 94,277 107,277Accumulated Depreciation 23,263 25,378 28,417 34,457 41,511Capital work in progress 6,467 9,642 9,859 12,859 19,859Net Assets 32,143 37,027 43,719 72,679 85,625Investments 57,864 63,980 93,253 104,443 116,976Current Assets, Loans & AdvancesInventory 10,607 11,888 16,942 20,514 23,645Debtors 10,437 12,581 13,547 17,231 19,862Cash & Bank balance 15,744 17,432 6,146 5,578 6,504Loans & advances and others 14,023 18,523 24,799 26,783 28,926Current Liabilities & ProvisionsLiabilities 35,202 34,000 47,617 54,362 63,032Provisions 12,776 17,965 20,059 23,068 26,528Net Current Assets 2,833 8,458 (6,241) (7,323) (10,624)Deferred tax (assets)/liabilities (183) 2,403 3,544 4,453 5,254Misc.Expenses 126 7 - - -Application of Funds 93,148 107,069 127,187 165,347 186,723

Cash flow statement (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eEBIT 9,934 25,845 30,423 34,132 37,283Depreciation & amortisation 2,915 3,708 4,139 6,039 7,054Interest expense 453 278 (503) 1,283 1,144(Inc)/Dec in working capital (8,343) 3,938 (3,413) (514) (4,227)Tax paid 585 7,493 7,617 8,180 9,014Cash flow from operating activities 20,154 17,843 30,861 31,223 38,406Capital expenditure 13,380 6,999 9,731 35,000 20,000Inc/(Dec) in investments 15,714 6,116 29,273 11,190 12,533Income from investments 2,703 1,994 3,095 3,505 3,926Cash flow from investing activities (26,391) (11,121) (35,908) (42,685) (28,608)Inc/(Dec) in share capital 361 118 366 - -Inc/(Dec) in debt 14,657 (11,726) (4,749) 18,869 (26)Others 84 4,652 (2,121) (7,975) (8,847)Cash flow from financing activities 15,102 (6,957) (6,503) 10,894 (8,872)Net cash flow 7,132 1,688 (11,286) (569) 926Opening balance 8,612 15,744 17,432 6,146 5,578Closing balance 15,744 17,432 6,146 5,578 6,504

Growth indicators (%)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenue 14.0 42.6 26.3 27.5 15.3EBITDA (6.0) 130.0 17.0 16.2 10.4PAT (21.4) 140.7 27.5 2.4 10.9EPS (31.5) 15.5 13.3 2.4 10.9

Valuation (x)Year ended 31st Mar 2009 2010 2011 2012e 2013eP/E 22.5 19.5 17.2 16.8 15.2P/BV 3.7 5.2 4.4 3.7 3.2Dividend Yield (%) 1.4 1.3 1.5 1.5 1.6Core Auto P/E (incl MVML) 16.8 16.2 14.4 13.5 12.2Core Auto EV/EBIDTA 29.1 12.2 10.6 9.6 8.7Core Auto EV/Sales 2.9 1.9 1.6 1.3 1.1

Financial ratiosYear ended 31st Mar 2009 2010 2011 2012e 2013eRoE 19.4 25.5 24.7 22.3 21.0RoCE 14.6 28.6 28.6 24.7 24.7Debt/Equity (x) 0.8 0.4 0.2 0.4 0.3EBIT/Interest (x) 21.9 92.9 (60.5) 26.6 32.6



Bajaj AutoSticking to the basics!


Market dataSector : AutomobilesMarket Cap (INRbn) : 473Market Cap (USDbn) : 9O/S Shares : 289Free Float (m) : 12552-wk HI/LO (INR) : 1843/1260Avg Daily Vol ('000) : 342Bloomberg : BJAUT INSource: Bloomberg


Source: Bloomberg


Domestic 2Ws – Banking on new product launches!

Bajaj Auto has lost ~140bps market share in the domestic motorcycle segment primarily on account of weaknessin Discover 100 volumes and poor response to the Boxer 150. We are now banking on the upgrade of the entirePulsar and Discover range over the next two quarters. If the initial response of the recently launched Pulsar 200NSis anything to go by (the design of which would flow down to all Pulsars), the company seems to be on-track toregain some of the lost market share in the domestic motorcycle segment.

Exports the sole savior… But margins have peaked!

Exports continue to remain in high growth trajectory primarily due to buoyancy in Africa volumes (~50% of totalexports). While we model a 20% export growth in FY13e, its comforting that the management expects tomaintain the ~30% export growth. However, export margins are at the mercy of the INR~USD currency movement,which is slightly unnerving.

RE60 – A very proactive product launch!

With the rising popularity of mini-trucks, the 3W goods-carrier segment is a dying one. There is always a fear ofthe same happening to the 3W passenger-carrier segment as well. This is a cause for worry for Bajaj Auto, as 3W(passenger-carriers) account for ~30% of the company’s EBIDTA. Hence, the RE60 is a very proactive productlaunch as it targets the existing 3W customers who might want to upgrade to a 4W in the future. RE60’s marginsare expected to remain as astronomical as those of 3Ws (~30%) which should protect the company’s coveted~20% margins as well.

Valuations are comfortable… BUY!

In our view, the Hero and Honda split warrants looking at Bajaj Auto differently. It’s clearly two-years ahead ofHero on parameters like branding, technology, and export initiatives. However, we turn down our optimism asmidge, as the company’s Pantnagar tax benefits expire next year which leads to a dismal PAT growth of 10% inFY13e (on a PBT growth of 18%). Post correction, valuations are still comfortable (FY13e P/E of 13.5x) andhence we maintain BUY. Target price - INR1,858 (15x FY13e EPS + INR35 for the company’s stake in KTM).

Key financials (standalone)YE 31 Mar (INRm) FY11 FY12e FY13eRevenues 166,089 202,142 233,689EBITDA 33,849 40,962 47,870EBITDA Margin (%) 20.4 20.3 20.5Adjusted PAT 26,152 31,970 35,158Adjusted EPS (INR) 90.4 110.5 121.5P/E (X) 18.1 14.8 13.5EV/EBITDA (X) 12.8 10.3 8.5RoE (%) 53.3 50.7 45.1RoCE (%) 70.2 68.1 65.9Div Yield (%) 2.4 3.0 3.7


708090

100110120130


Bajaj Auto NIFTY



Valuations are comfortable... BUY!

Return ratios remain healthy… Marginal dip going ahead due to hugecash hoard and conservative dividend payout


Limited scope for Bajaj’s margins to expand from here, which is why weprefer Hero MotoCorp (where we expect margins to expand by ~300bp)


Tax benefits from Pantnagar plant expire next year, which leads to adismal PAT growth of 10% in FY13e (on a PBT growth of 18%)


14.3% 13.6%

21.7%20.4% 20.3% 20.5%

66%

68%

70%

72%

74%

76%


0%

4%

8%

12%

16%

20%

24%

28%

RM to sales (%) (LHS) Staff cost to sales (%) (RHS)

Other exp to sales (%) (LHS) EBIDTA margins (%) (RHS)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0


0%

10%

20%

30%

40%

50%

60%

70%

80%

Asset Sw eating (x) (LHS) ROCE (RHS) ROE (RHS)

33.38%30.78% 29.61%

27.88%25.74%

30.82%

10.6%

6.8%5.0% 5.5% 4.9% 4.6%

FY08 FY09 FY10 FY11 FY12e FY13eTax Rate Excise duty

INR/USD: Currency tailwinds (difficult to extrapolate)


40.00

43.00

46.00

49.00

52.00

55.00



Average INR/USD

45.3

1QFY12

Average INR/USD

50.3

Average INR/USD

51

4QFY12



Profit and loss account (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenues 88,104 119,210 166,089 202,142 233,689Expenses 76,080 93,284 132,240 161,180 185,820EBITDA 12,023 25,926 33,849 40,962 47,870Depreciation & amortisation 1,298 1,365 1,228 1,350 1,421EBIT 10,725 24,561 32,621 39,612 46,449Interest expense 210 60 17 219 15Other income 1,117 1,225 3,658 3,658 4,390Extraordinary Items (2,071) (1,650) 7,246 (1,063) -Profit before tax 9,561 24,076 43,508 41,988 50,823Taxes incl deferred taxation 3,016 7,075 10,110 11,081 15,665Profit after tax 6,545 17,001 33,397 30,907 35,158Adjusted profit after tax 8,052 18,109 26,152 31,970 35,158EPS (INR) 45.2 117.5 115.4 106.8 121.5Adjusted EPS (INR) 27.8 62.6 90.4 110.5 121.5

Balance sheet (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eShare Capital 1,447 1,447 2,894 2,894 2,894Reserves & Surplus 17,250 27,837 46,209 60,187 75,032Networth 18,697 29,283 49,102 63,081 77,926Debt 15,700 13,386 3,252 1,684 889Capital Employed 34,397 42,669 52,354 64,765 78,814Gross Fixed Assets 33,339 33,793 33,909 35,909 37,909Accumulated Depreciation 18,079 18,997 19,125 20,475 21,896Capital work in progress 221 415 699 1,199 1,699Net Assets 15,481 15,211 15,483 16,632 17,712Investments 18,085 40,215 47,952 58,981 72,547Current Assets, Loans & AdvancesInventory 3,388 4,462 5,473 6,646 7,683Debtors 3,587 2,728 3,628 5,538 6,402Cash & Bank balance 1,369 1,014 5,565 6,849 7,909Loans & advances and others 14,909 21,805 14,061 16,927 19,466Current Liabilities & ProvisionsLiabilities 12,134 20,263 24,267 29,805 34,219Provisions 12,242 22,487 15,286 16,815 18,496Net Current Assets (1,123) (12,740) (10,827) (10,660) (11,255)Deferred tax (assets)/liabilities 42 17 297 297 297Misc.Expenses 1,996 - 43 109 109Application of Funds 34,397 42,669 52,354 64,765 78,814

Cash flow statement (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eEBIT 10,725 24,561 32,621 39,612 46,449Depreciation & amortisation 1,298 1,365 1,228 1,350 1,421Interest expense 210 60 17 219 15(Inc)/Dec in working capital 345 (11,263) (2,638) (1,117) (1,655)Tax paid 3,084 7,126 9,830 11,081 15,665Cash flow from operating activities 8,384 30,002 26,640 30,779 33,845Capital expenditure 3,371 648 400 2,500 2,500Inc/(Dec) in investments (486) 22,130 7,737 11,029 13,566Income from investments 1,117 1,225 3,658 3,658 4,390Cash flow from investing activities (1,768) (21,553) (4,478) (9,871) (11,676)Inc/(Dec) in share capital - - 1,447 - -Inc/(Dec) in debt 2,357 (2,314) (10,134) (1,567) (795)Others (3,724) (6,415) (15,025) (16,928) (20,314)Cash flow from financing activities (1,367) (8,729) (23,713) (18,495) (21,109)Net cash flow 808 (355) 4,551 1,284 1,060Opening balance 561 1,369 1,014 5,565 6,849Closing balance 1,369 1,014 5,565 6,849 7,909

Growth indicators (%)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenue (2.6) 35.3 39.3 21.7 15.6EBITDA (7.1) 115.6 30.6 21.0 16.9Adj PAT (2.3) 124.9 44.4 22.2 10.0Adj EPS (2.3) 124.9 44.4 22.2 10.0

Valuation (x)Year ended 31st Mar 2009 2010 2011 2012e 2013eP/E (Adj) 58.9 26.2 18.1 14.8 13.5P/BV 25.4 16.2 9.7 7.5 6.1EV/EBITDA 39.8 17.6 12.8 10.3 8.5EV/Sales 5.4 3.8 2.6 2.1 1.8Dividend Yield (%) 0.7 1.2 2.4 3.0 3.7

Financial ratiosYear ended 31st Mar 2009 2010 2011 2012e 2013eRoE (%) 43.1 61.8 53.3 50.7 45.1RoCE (%) 34.6 61.0 70.2 68.1 65.9Debt/Equity (x) 0.8 0.5 0.1 0.0 0.0EBIT/Interest (x) 51 411 1,930 181 3,012



Ashok LeylandFavourable tailwinds approach!

Reco : HOLDCMP : INR31Target Price : INR33

Market dataSector : AutomobilesMarket Cap (INRbn) : 83Market Cap (USDbn) : 2O/S Shares : 2,661Free Float (m) : 28752-wk HI/LO (INR) : 33/20Avg Daily Vol ('000) : 8,475Bloomberg : AL INSource: Bloomberg


Source: Bloomberg


High sensitivity to any relief on the macro side…

The CV segment (MHCVs in particular) are very sensitive to any relief on the macro side. While freight rateshaven’t moved up commensurately with the recent cost pressures (diesel, driver, maintenance, tyres, etc.), suggestingthat transporter profitability is under pressure, as we reach the seemingly fag-end of the deteriorating macro,Ashok Leyland (with its predominantly heavy CV portfolio) appears to be nearing its positive cycle.

Long term demand drivers for the CV segment remain intact. There are multiple volume triggers – A) A morestringent implementation of the overloading ban which will result in the need for addition of capacities. B) Gradualuptick in replacement demand – currently around 50% of the trucks population is over 10 years old and 30% isover 15 years old. C) The development of newer highways which will boost the demand for higher horsepowertrucks as it will enable higher turnaround time.

Rising contribution of Dost to offset Pantnagar benefits!

The contribution of Dost (their SCV) would increase from 6% in FY12e to 28% in FY13e of total volumes, onwhich the company earns marketing margins (reckon 6-7%). Hence, while there are favourable tailwinds on amacro level, the company’s margins are structurally on a downtrend, which would offset the benefit of risingcontribution of Pantnagar volumes (from 13.6% in FY11 to ~33% in FY12e; ~40% in FY13e).

Digression from core competencies could keep ROEs suppressed…

While the company’s JV with Nissan has kicked-off with a decent product launch in the SCV segment (Dost), weare concerned about their foray into the small car space through this JV. The other JVs - with ALTEAMS and JohnDeere (construction equipment) are other instances where the company is digressing from its core competencies,which we believe would keep the blended ROEs suppressed.

HOLD… Prefer VECV in the CV space!

For the stock, there are some cushions, i.e. the seemingly fag-end of the worsening macro, comfortable valuations(11.8x FY13e P/E) and high dividend yield (~3%). However, we maintain HOLD (target price of INR33 - 12xFY13e EPS + INR1.6 per share for the company’s investment in IndusInd Bank) and believe that Eicher Motors isa better play on the CV cycle due to the much superior return ratios, fixed asset turns, and margin profile.

Key financials (standalone)YE 31 Mar (INRm) FY11 FY12e FY13eRevenues 111,177 129,871 152,025EBITDA 12,176 12,301 14,527EBITDA Margin (%) 11.0 9.5 9.6Adjusted PAT 6,313 5,687 6,964Adjusted EPS (INR) 2.4 2.1 2.6P/E (x) 13.1 14.7 11.8EV/EBITDA (x) 8.7 9.3 7.9RoE (%) 16 13 15RoCE (%) 16 12 14Div Yield (%) 3.2 2.4 3.0


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Ashok Leyland NIFTY



HOLD... Prefer VECV in the CV space!

Strong margin~volume co-relation would weaken post Dost launch


Volumes 2009 2010 2011 2012e 2013eMHCV (Passengers) - Total 19,981 18,481 25,226 24,793 26,551MHCV (Goods) - Total 33,071 44,345 68,009 71,583 77,757LCVs - Total 1,379 1,100 871 1,038 1,115Exports 6,812 5,979 10,306 12,099 13,914Dost - - - 6,000 40,000Total Volumes (incl-Dost) 54,431 63,926 94,106 103,414 145,424Growth (%) MHCV (Passengers) - Total (10) (8) 36 (2) 7MHCV (Goods) - Total (45) 34 53 5 9LCVs - Total 68 (20) (21) 19 7Exports (6) (12) 72 17 15Total Volumes (incl-Dost) (35) 17 47 10 41Source: Company, Antique

MHCV Goods Carrier - Market share trend...


MHCV Passenger Carrier - Market share trend...


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

0%

2%

4%

6%

8%

10%

12%

14%

16%

Volumes (In Nos) (LHS) EBIDTA margins (RHS)

0%

15%

30%

45%

60%

75%

Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12

Tata Motors Ashok Leyland Eicher Motors Others

0%

20%

40%

60%

80%

Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12

Tata Motors Ashok Leyland Eicher Motors Others



Profit and loss account (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenues 59,811 72,447 111,177 129,871 152,025Expenses 55,116 64,819 99,002 117,571 137,499EBITDA 4,694 7,628 12,176 12,301 14,527Depreciation & amortisation 1,784 2,041 2,674 3,481 3,732EBIT 2,910 5,587 9,501 8,819 10,795Interest expense 1,187 811 1,637 2,239 2,698Other income 496 704 153 199 219Extraordinary Items (135) (33) - 95 -Profit before tax 2,084 5,448 8,018 6,874 8,316Taxes incl deferred taxation 185 1,211 1,705 1,187 1,352Profit after tax 1,900 4,237 6,313 5,687 6,964Adjusted profit after tax 1,900 4,237 6,313 5,687 6,964EPS (INR) 0.76 1.60 2.37 2.10 2.62

Balance sheet (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eShare Capital 1,330 1,330 1,330 2,661 2,661Reserves & Surplus 33,409 35,357 38,299 40,327 44,440Networth 34,739 36,688 39,630 42,988 47,100Debt 19,581 22,039 25,683 34,340 35,181Capital Employed 54,320 58,726 65,312 77,328 82,281Gross Fixed Assets 49,533 60,186 66,919 72,419 77,419Accumulated Depreciation 15,542 17,691 20,581 24,062 27,794Capital work in progress 9,983 5,615 3,580 3,580 3,580Net Assets 43,974 48,110 49,918 51,936 53,204Investments 2,636 3,262 12,300 18,450 20,295Current Assets, Loans & AdvancesInventory 13,300 16,382 22,089 25,618 28,739Debtors 9,580 10,221 11,852 13,521 15,411Cash & Bank balance 881 5,189 1,795 2,524 3,269Loans & advances and others 7,895 9,605 7,936 9,126 10,222Current Liabilities & ProvisionsLiabilities 18,689 25,921 30,379 33,381 37,825Provisions 2,681 3,687 4,903 5,148 5,663Net Current Assets 10,287 11,789 8,390 12,261 14,153Deferred tax (assets)/liabilities 2,634 4,611 5,338 5,384 5,436Misc.Expenses 58 176 43 65 65Application of Funds 54,320 58,726 65,312 77,328 82,281

Cash flow statement (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eEBIT 2,910 5,587 9,501 8,819 10,795Depreciation & amortisation 1,784 2,041 2,674 3,481 3,732Interest expense 1,187 811 1,637 2,239 2,698(Inc)/Dec in working capital 7,886 (2,806) (6) 3,142 1,147Tax paid 60 - 1,112 1,142 1,300Cash flow from operating activities (4,439) 9,623 9,433 5,778 9,382Capital expenditure 24,799 6,285 4,698 5,500 5,000Inc/(Dec) in investments (3,463) 626 9,038 6,150 1,845Income from investments 496 704 153 199 219Cash flow from investing act (20,839) (6,207) (13,583) (11,451) (6,626)Inc/(Dec) in share capital 0 - - 1,330 -Inc/(Dec) in debt 10,706 2,457 3,644 8,657 841Others 11,349 (2,288) (3,371) (3,659) (2,852)Cash flow from financing activities 22,056 169 273 6,328 (2,011)Net cash flow (3,633) 4,308 (3,394) 729 745Opening balance 4,514 881 5,189 1,795 2,524Closing balance 881 5,189 1,795 2,524 3,269

Growth indicators (%)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenue (23) 21 53 17 17EBITDA (43) 63 60 1 18PAT (60) 123 49 (10) 22EPS (58) 110 48 (11) 25

Valuation (x)Year ended 31st Mar 2009 2010 2011 2012e 2013eP/E 40.5 19.3 13.1 14.7 11.8P/BV 2.4 2.2 2.1 1.9 1.8EV/EBITDA 21.6 13.0 8.7 9.3 7.9EV/Sales 1.7 1.4 1.0 0.9 0.8Dividend Yield (%) 1.6 2.4 3.2 2.4 3.0

Financial ratiosYear ended 31st Mar 2009 2010 2011 2012e 2013eRoE (%) 5.5 11.5 15.9 13.2 14.8RoCE (%) 7.7 11.8 15.6 12.2 14.0Debt/Equity (x) 0.6 0.6 0.6 0.8 0.7EBIT/Interest (x) 2.5 6.9 5.8 3.9 4.0



Exide IndustriesOperating metrics finally improve!


Market dataSector : AutomobilesMarket Cap (INRbn) : 124Market Cap (USDbn) : 2O/S Shares : 850Free Float (m) : 41952-wk HI/LO (INR) : 188/99Avg Daily Vol ('000) : 1,364Bloomberg : EXID INSource: Bloomberg


Source: Bloomberg


3Q results – Last year’s dreams come true!

After continuously disappointing the street for the last 4 quarters, Exide’s operating metrics finally improved last quarter.Sequentially margins improved on the back of: A) Improvement in product mix: replacement/OEM ratio for 4Wimproved to 1.24x (0.84x QoQ), for 2Ws it improved to 0.38x (0.32x QoQ) and B) Positive operating leverage:stemming from higher capacity utilization (industrial capacity utilization @ 74% as against 62% QoQ; automotivecapacity utilization @82% as against 70% QoQ). For 4Ws, blended margins improved to 14.8% from 9.2% QoQ –a function of a better mix coupled with the full benefit of price hikes taken in the OEM segment last quarter.

Getting its act together…

Exide’s performance over the last year wasn’t the fairy tale it was supposed to be. With the lull in OEM sales andcapacities coming on stream, the sales mix was expected to improve towards the more profitable replacementsegment and the resultant margin swing was expected to be huge. Exide seems to have finally gotten its acttogether with the much-awaited improvement in the replacement/OEM mix. The management expects theperformance to continue improving from here on as it further improves its product mix and finally exhausts its highcost lead inventory, built over the last 2 quarters. However, we see less room for any meaningful product miximprovement as OEM sales could witness an uptick in volumes going ahead.

Astronomical replacement margins don’t look sustainable!

Market share erosion in the replacement market (both auto and industrial) coupled with limited pricing powerraises questions about the premium that Exide has always commanded for its “brand”. By the management’s ownadmission, competition in the aftermarkets is on the rise, which coupled with the limited entry barriers in the batterybusiness, makes us structurally negative on the company’s astronomical margins in the replacement segment.

Bull-case target provides less upside… HOLD!

Core battery business trades at a P/E of ~17x our fairly optimistic estimates, and hence, our target price ofINR157 (18x FY13e EPS + INR10 for the company’s stake in ING) provides less room for any meaningful upsidefrom current levels. HOLD!

Key financials (standalone)YE 31 Mar (INRm) FY11 FY12e FY13eRevenues 45,536 50,201 59,287EBITDA 8,788 6,788 10,092EBITDA Margin (%) 19.3 13.5 17.0Adjusted PAT 6,194 4,637 6,965Adjusted EPS (INR) 7.3 5.5 8.2Core P/E (x) 18.7 25.0 16.6EV/EBITDA (x) 13.6 17.6 11.7RoE (%) 22.6 14.9 18.8RoCE (%) 33.6 21.6 27.2Div Yield (%) 1.0 0.7 0.7


60

80

100

120


Exide NIFTY



Bull-case target price provides less upside... HOLD!

4W battery OEM/aftermarket mix - Improves on account of lower off-take by OEMs and higher off-take replacement (post price cuts)


Estimated revenue breakup


Captive smelters to account for 70% of lead procurement...


15% 15% 15% 17% 18%

26% 27% 27% 27% 27% 29%

12% 11% 10% 12% 13% 12%6% 7% 8% 6% 7% 7%

20% 21% 22% 20% 19% 18%

12% 11% 8% 6% 5% 4%

8% 8% 10% 11% 12% 12%

18%

2008e 2009e 2010e 2011e 2012e 2013e4W OEM 4W Replacement 2W OEM 2W Replacement UPS & Inverter Telecom Infrastructure

50%37%

23% 20% 15%

15%28%

42% 45% 50% 53%70%

35% 35% 35% 35% 35% 35% 30%

12%

Dec 08 June 09 March 10 Sep 10 Mar 11 Dec 11 FY13e

Imported Captive Domestic

High cost lead inventory built up in 1Q impacted margins in 2Q...


1250

1500

1750

2000

2250

2500

2750

3000

3250

3500


4QFY11 1QFY12

Average Price

$2602/t

Average Price

$1992.5/t


Average Price

$2092/t

1.51

1.39 1.371.29 1.33

1.271.17

1.11 1.13

0.84

1.24

1QF

Y10

2QF

Y10

3QF

Y10

4QF

Y10

1QF

Y11

2QF

Y11

3QF

Y11

4QF

Y11

1QF

Y12

2QF

Y12

3QF

Y12

OEM / Replacement M ix



Profit and loss account (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenues 33,930 37,940 45,536 50,201 59,287Expenses 28,483 29,046 36,748 43,413 49,195EBITDA 5,448 8,894 8,788 6,788 10,092Depreciation & amortisation 679 807 835 1,001 1,168EBIT 4,768 8,088 7,953 5,787 8,924Interest expense 479 103 57 88 72Other income 65 121 1,038 832 957Extraordinary Items - - 469 - -Profit before tax 4,354 8,106 9,404 6,531 9,809Taxes incl deferred taxation 1,510 2,735 2,740 1,894 2,845Profit after tax 2,844 5,371 6,664 4,637 6,965Adjusted profit after tax 2,844 5,371 6,194 4,637 6,965Adjusted EPS (INR) 3.55 6.32 7.29 5.46 8.19

Balance sheet (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eShare Capital 800 850 850 850 850Reserves & Surplus 11,704 21,348 26,575 30,217 36,187Networth 12,504 22,198 27,425 31,067 37,037Debt 3,172 900 22 1,000 500Capital Employed 15,675 23,098 27,446 32,067 37,537Gross Fixed Assets 12,567 13,365 15,612 18,612 21,312Accumulated Depreciation 5,887 6,598 7,253 8,254 9,422Capital work in progress 173 378 660 1,410 1,210Net Assets 6,853 7,144 9,018 11,767 13,099Investments 6,682 13,354 13,780 14,469 17,362Current Assets, Loans & AdvancesInventory 4,385 6,068 8,590 9,628 11,370Debtors 2,310 2,546 3,665 4,126 4,873Cash & Bank balance 337 29 148 1,040 813Loans & advances and others 387 476 885 973 1,071Current Liabilities & ProvisionsLiabilities 3,807 4,943 6,603 7,765 8,712Provisions 1,059 985 1,362 1,430 1,501Net Current Assets 2,552 3,190 5,323 6,571 7,914Deferred tax (assets)/liabilities 412 590 675 740 838Application of Funds 15,675 23,098 27,446 32,067 37,537

Cash flow statement (INRm)Year ended 31st Mar 2009 2010 2011 2012e 2013eEBIT 4,768 8,088 7,953 5,787 8,924Depreciation & amortisation 679 807 835 1,001 1,168Interest expense 479 103 57 88 72(Inc)/Dec in working capital (808) 945 2,015 356 1,569Tax paid 1,577 2,557 2,655 1,829 2,747CF from operating activities 4,200 5,289 4,061 4,515 5,705Capital expenditure 1,299 1,002 2,529 3,750 2,500Inc/(Dec) in investments 1,499 6,672 426 689 2,894Income from investments 65 121 1,038 832 957CF from investing activities (2,733) (7,553) (1,917) (3,607) (4,437)Inc/(Dec) in share capital - 50 - - -Inc/(Dec) in debt (326) (2,272) (878) 979 (500)Others (604) 4,273 (1,437) (995) (995)CF from financing activities (930) 2,051 (2,315) (16) (1,495)Net cash flow 320 (308) 119 892 (227)Opening balance 17 337 29 148 1,040Closing balance 337 29 148 1,040 813

Growth indicators (%)Year ended 31st Mar 2009 2010 2011 2012e 2013eRevenue 19% 12% 20% 10% 18%EBITDA 16% 63% -1% -23% 49%PAT 14% 89% 24% -30% 50%EPS 14% 78% 15% -25% 50%

Valuation (x)Year ended 31st Mar 2009 2010 2011 2012e 2013eP/E 41.1 23.1 20.0 26.8 17.8Core Battery P/E 38.4 21.6 18.7 25.0 16.6P/BV 9.3 5.6 4.5 4.0 3.4EV/EBITDA 22.9 13.6 13.6 17.6 11.7EV/Sales 3.7 3.2 2.6 2.4 2.0Dividend Yield (%) 0.4% 0.7% 1.0% 0.7% 0.7%

Financial ratiosYear ended 31st Mar 2009 2010 2011 2012e 2013eRoE 23% 24% 23% 15% 19%RoCE 31% 36% 34% 22% 27%Debt/Equity (x) 0.3 0.0 0.0 0.0 0.0EBIT/Interest (x) 10.0 78.6 138.8 65.5 124.3



Escorts Ltd.When will the sun shine?


Market dataSector : AutomobilesMarket Cap (INRbn) : 8Market Cap (USDbn) : 0O/S Shares : 106Free Float (m) : 9052-wk HI/LO (INR) : 149/63Avg Daily Vol ('000) : 2,063Bloomberg : ESC INSource: Bloomberg


Source: Bloomberg


Recent performance – Disappointment becoming a habit!

Adjusted standalone PAT at INR127m (down 49% YoY; 77% QoQ) was 47% below our estimate of INR240m(consensus – INR250m). Revenues (down 1% YoY; up 7% QoQ) were 8% below our estimates. EBIDTA marginsat 4% (down 121bps YoY, 99bps QoQ) were lower than our estimate of 5.4%. Disappointment stemmed from asudden loss in the railway equipment division (EBIT loss of INR6m) and continual losses in the auto ancillarydivision (EBIT loss of INR50m).

Multiple margin levers ahead… But it might test your patience!

Profitability of the other businesses couldn’t get much worse from here, in our view:1. Escorts’ tractor margins at 5.8% remain a staggering ~1,000bps lower than those of M&M’s and hence there

is enough headroom for catch-up once utilisation levels increase from the current ~65%.2. For the auto ancillary division, the management had guided that the segment would have broken even this

year, but the losses continue to increase. Whenever (or if ever) the same does happen, it will provide a ~50bpsblended margin kicker.

3. For the construction equipment division, we expected a stronger margin improvement. Historically, this hasbeen a 7-8% margin business and scale up to that level remains an additional margin kicker.

Hence, multiple margin levers remain. However, we must warn that we have been waiting for these levers to panout for the past 7 quarters now and have continuously been disappointed.

HOLD on wishful thinking…

Hopes galore - there are multiple margin levers if the company manages to deliver. At a FY13e (Sep year-end) P/E of 8.2x, EV/EBIDTA of 4.1x, EV/Sales of 0.2x and P/B of 0.4x, valuations don’t seem uncomfortable at all.But sluggishness in all business segments coupled with a cyclical slowdown in the core tractor industry itselfprovides limited re-rating triggers for the company in the near-term.

Maintain HOLD on some wishful think and a presumption that earnings can’t get much worse from here. Targetprice - INR78 (5x consol Sep ‘12 EV/EBIDTA).

Key financials (consolidated)YE 30 Sep (INRm) FY11 FY12e FY13eRevenues 41,234 46,270 52,062EBITDA 2,035 1,944 2,369EBITDA Margin (%) 4.9 4.2 4.6Adjusted PAT 1,349 654 936Adjusted EPS (INR) 13.2 6.4 9.1PE (X) 5.7 11.7 8.2EV/EBITDA (X) 4.6 5.2 41.4RoE (%) 8 4 5RoCE (%) 7 6 7Div Yield (%) 2.3 1.0 1.3


40

60

80

100

120


Escorts NIFTY



HOLD on wishful thinking!

Construction equipment - Expected to account for 25% of consol revenues


Escorts group - Revenue break-up


M&M vs. Escorts: Agri equipment division EBIT margins - huge gapprovides some headroom for catch-up...


Segmental Margins - Disappointment stemmed from sudden loss in rail-ways... Tractor margins remain steady; Auto-ancs continue to bleed...


-34%

-26%

-18%

-10%

-2%

6%

14%

22%

Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11

Agri Machinery Products Auto Ancilliary ProductsRailw ay Equipments

54%37%

47% 48%

70% 75% 69% 72% 73% 72%

4%

9%5% 4%

4%3%

3% 3% 3% 3%

3%

5%5% 5%

4%4%

5%7% 6% 5%

4%15% 7% 9%

12%16% 21% 16% 17% 20%

34% 34% 36% 34%

10%

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Agri Machinery Products Auto Ancillary Products Railw ay Equipments

Construction Equipments Others (Telecom, Healthcare)

4.0%

8.0%

12.0%

16.0%

20.0%

Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11

M&M Escorts

Huge gap betw een M&M and Escorts tractor margins

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12e FY13e

0%

5%

10%

15%

20%

25%

30%

Construction equipment division revenues (LHS) Contribution to Consol Revenues (RHS)



Profit and loss account (INRm)Year ended 30th Sep 2009 2010 2011 2012e 2013eRevenues 26,617 33,783 41,234 46,270 52,062Expenses 24,392 31,333 39,199 44,326 49,693EBITDA 2,224 2,450 2,035 1,944 2,369Depreciation & amortisation 595 532 487 560 579EBIT 1,629 1,918 1,549 1,384 1,790Interest expense (net) 717 181 372 546 576Other Income 23 19 19 21 23Exceptional Items (359) 57 (99) (18) -Profit before tax 576 1,813 1,097 841 1,238Taxes incl deferred taxation 290 490 (153) 205 302Profit after tax 286 1,323 1,251 635 936Adjusted profit after tax 645 1,266 1,349 654 936Adjusted EPS (INR) 7.1 12.4 13.2 6.4 9.1

Balance sheet (INRm)Year ended 30th Sep 2009 2010 2011 2012e 2013eShare Capital 907 1,023 1,023 1,023 1,023Reserves & Surplus 13,446 15,939 16,916 17,468 18,287Networth 14,353 16,962 17,939 18,491 19,311Debt 4,020 4,053 4,893 5,377 5,300Other Liabilities 401 84 91 91 91Capital Employed 18,773 21,099 22,923 23,958 24,701Gross Fixed Assets 21,949 22,937 23,339 23,989 24,639Accumulated Depreciation 6,352 6,855 7,342 7,902 8,480Capital work in progress 123 203 766 766 766Net Assets 15,720 16,285 16,763 16,853 16,925Investments 1,169 1,177 1,187 1,370 1,370Current Assets, Loans & AdvancesInventory 3,292 4,365 4,991 5,966 6,780Debtors 4,261 4,501 5,403 6,750 7,673Cash & Bank balance 1,964 2,117 3,191 2,881 3,159Loans & advances and others 2,198 3,037 3,369 3,841 4,381Current Liabilities & ProvisionsLiabilities 8,818 9,108 11,344 12,974 14,778Provisions 1,370 1,338 790 869 955Net Current Assets 1,527 3,575 4,820 5,596 6,259Deferred tax (assets)/liabilities (302) (40) (132) (139) (147)Misc.Expenses 57 21 21 - -Application of Funds 18,773 21,099 22,923 23,958 24,701

Cash flow statement (INRm)Year ended 30th Sep 2009 2010 2011 2012e 2013eEBIT 1,629 1,918 1,549 1,384 1,790Depreciation & amortisation 595 532 487 560 579Interest expense 717 181 372 546 576(Inc)/Dec in working capital (4,502) 1,895 171 1,086 386Tax paid 290 490 (153) 205 302Cash flow from operating activities 5,720 (116) 1,646 107 1,105Capital expenditure 5,724 1,069 964 650 650Inc/(Dec) in investments (1,315) 8 10 183 -Income from investments 23 19 19 21 23Cash flow from investing activities (4,386) (1,058) (955) (812) (627)Inc/(Dec) in share capital - 116 0 - -Inc/(Dec) in debt (4,382) 34 840 483 (76)Others 4,624 853 (266) (84) (116)Cash flow from financing activities 242 1,002 574 399 (192)Net cash flow 540 153 1,074 (310) 277Opening balance 1,423 1,964 2,117 3,191 2,881Closing balance 1,964 2,117 3,191 2,881 3,159

Growth indicators (%)Year ended 30th Sep 2009 2010 2011 2012e 2013eRevenue (3.8) 26.9 22.1 12.2 13%EBITDA 65.0 10.1 (16.9) (4.5) 22%PAT (176.1) 362.6 (5.5) (49.2) 47%EPS (581.8) 74.0 6.5 (51.5) 43%Adj PAT (581.8) 96.1 6.6 (51.5) 43%

Valuation (x)Year ended 30th Sep 2009 2010 2011 2012e 2013eP/E 10.5 6.1 5.7 11.7 8.2P/BV 0.5 0.5 0.4 0.4 0.4EV/EBITDA 4.4 3.9 4.6 5.2 4.1EV/Sales 0.4 0.3 0.2 0.2 0.2Dividend Yield (%) 1.3 2.1 2.3 1.0 1.3

Financial ratiosYear ended 30th Sep 2009 2010 2011 2012e 2013eRoE (%) 4.5 7.5 7.5 3.5 5%RoCE (%) 8.7 9.2 7.0 6.0 7%Debt/Equity (x) 0.3 0.2 0.3 0.3 0.3Interest Coverage (x) 2.3 10.6 4.2 2.5 3.1



Important Disclaimer:This report is prepared and published on behalf of the research team of Antique Stock Broking Limited (ASBL). This is intended for private circulation and should not be taken as recommendation to trade in the securities mentioned or any legal or taxation advice. We have exerciseddue diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in thematerial and may be subject to change from time to time without any notice. ASBL or any persons connected with it do not solicit any action based on this report and do not accept any liability arising from the use of this document. The recipients of this material should rely on theirown judgment and take their own professional advice before acting on this information. The research reports are not, and are not to be construed as, an offer to sell or solicitation of an offer to buy any securities. Unless otherwise noted, all research reports provide information ofa general nature and do not address the circumstances of any particular investor. ASBL or any of its connected persons including its directors or subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from anyinadvertent error in the information contained, views and opinions expressed in this publication. ASBL, its affiliates, directors, officers or employees may, from time to time, deal in the securities mentioned herein, as principal or agent. ASBL or its affiliates may have acted as an InvestmentAdvisor or Merchant Banker for some of the companies (or its connected persons) mentioned in this report. The research reports and all the information opinions and conclusions contained in them are proprietary information of ASBL and the same may not be reproduced or distributedin whole or in part without express consent of ASBL.

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