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Sector: Automobile Sector view: Neutral
Sensex: 20,612
52 Week h/l (Rs): 5,295/ 2,512
Market cap (Rscr) : 12,932
6m Avg vol (‘000Nos): 30
Bloomberg code: EIM IB
BSE code: 505200
NSE code: EICHERMOT
FV (Rs): 10
Price as on Dec 17, 2013
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash Flow
B/S Strength
Valuation appeal
Risk
Share price trend
70
120
170
220
Dec‐12 Apr‐13 Aug‐13 Dec‐13
Eicher Sensex
Share holding pattern
0%
20%
40%
60%
80%
100%
Dec‐12 Mar‐13 Jun‐13 Sep‐13
Promoter Institutions Others
Rating: BUY Target (9‐12 months): Rs5,729
CMP: Rs4,777
Upside: 19.9%
Company ReportDecember 18, 2013
Research Analyst:
Prayesh Jain [email protected]
Initiating Coverage
Eicher Motors Ltd
Galloping ahead Royal Enfield: Firing all cylinders With a cult brand being created by the ‘Bullet’ brand and management re‐designing the bike to give a modern touch (while retaining the marquee features), Royal Enfield has seen waiting periods extending to 6 months for few of its models. With demand for leisure biking set to grow in India on back of rising incomes and demographic dividend and capacity expansion in place, Royal Enfield is all set to see 36.4% CAGR in volumes during CY13E‐15E. VECV: Outperforming industry While the CV demand in India is at its nadir, VECV has seen an industry beating performance in terms of its volumes. We expect the recovery in industry demand to happen in H2 CY14. Given Volvo’s expertise in technology, Eicher’s understanding of the Indian markets and well acclaimed product portfolio, we expect VECV to see a continued outperformance vis‐à‐vis the industry. Engines: The new growth trigger VECV’s engine business is a critical segment for Volvo’s global strategy. Over the next few years, Volvo groups global demand for Euro 5 and Euro 6 engines would be met by VECV. Furthermore, it will provide superior technology engines for the local markets as well, improving its positioning when compared with competition. This will also provide stability to Eicher Motors consolidated performance. Valuations: Deserves a premium Eicher is currently trading at premium valuations of 21.2x CY14E earnings. We believe, the stock deserves the premium given the robust earnings growth prospects. During CY13E‐15E, we expect revenue CAGR of 30.7%, OPM expansion of 430bps and PAT CAGR of 48.9%. RoE and RoCE, during the same period are expected to see a jump of 9.1ppts and 12.6ppts respectively. We value the stock on SOTP basis whereby we arrive at a target price of Rs5,729. We initiate coverage with a BUY rating.
Financial summary Y/e 31 Dec (Rs m) CY12 CY13E CY14E CY15E
Revenues 63,899 70,380 88,800 120,212
yoy growth (%) 12.4 10.1 26.2 35.4
Operating profit 5,490 6,502 10,253 16,245
OPM (%) 8.6 9.2 11.5 13.5
Reported PAT 3,243 4,119 6,070 9,132
yoy growth (%) 5.0 27.0 47.4 50.4
EPS (Rs) 120.1 152.5 224.8 338.2
P/E (x) 39.8 31.3 21.2 14.1
Price/Book (x) 7.3 6.2 5.0 3.8
EV/EBITDA (x) 21.5 18.5 11.6 6.9
Debt/Equity (x) 0.0 0.0 0.0 0.0
RoE (%) 20.0 21.5 26.0 30.6
RoCE (%) 22.6 23.3 29.1 35.9 Source: Company, India Infoline Research
Eicher Motors Ltd
2
Premium motorcycle demand in India – a structural story >250cc motorcycles form premium luxury motorcycle market for India. The segment has been growing at a much faster pace when compared with the overall domestic motorcycle market. Over the last ten years (FY04‐13), >250cc motorcycle sales registered a CAGR of 18.6% v/s 10.3% for the overall motorcycle demand. The outperformance was steeper in the past five years when >250cc motorcycles registered a demand growth of 31% compared to 14.6% for overall motorcycle demand. This robust growth has led to surge in contribution of >250cc motorcycle to the total motorcycle domestic sales from 0.5% in FY07 to 1.2% in FY13. The performance in YTD FY14 has been even better with total motorcycle sales growth at just 3.9% compared to 57.7% surge for >250cc motorcycles. The contribution of >250cc motorcycles to total motorcycles stood at 1.7% for YTD FY14. The astounding surge has been on the back of 1) entry of global players such as Harley Davidson, Triumph, etc in the domestic markets, 2) rising income levels, 3) rising urbanization trend and 3) replacement demand. These trends are likely to sustain over the medium term keeping the demand for luxury motorcycles very strong.
Over the last ten years (FY04‐13), >250cc motorcycle sales registered a CAGR of 18.6% v/s 10.3% for the overall motorcycle demand
The outperformance was steeper in the past five years when >250cc motorcycles registered a demand growth of 31% compared to 14.6% for overall motorcycle demand
Growth in Royal Enfield sales volumes Royal Enfield market share
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Nos
88%
90%
92%
94%
96%
98%
100%
102%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
YTD FY14
Source: SIAM, India Infoline Research Source: SIAM, India Infoline Research
> 250cc motorcycles volume growth has outperformed total motorcycles in past three years
Contribution of >250cc motorcycles to total domestic motorcycles has increased rapidly
‐20%
‐10%
0%
10%
20%
30%
40%
50%
60%
70%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
YTD FY14
Total Mcycle >250cc
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
YTD FY14
Source: SIAM, India Infoline Research Source: SIAM, India Infoline Research
Eicher Motors Ltd
3
1) Entry of global players in the domestic leisure motorcycle markets While Japanese brands such as Honda, Kawasaki, Suzuki and Yamaha have been existent in the Indian leisure motorcycle market for quite some time, they have not been able to garner substantial market share. Royal Enfield continues to dominate the market with near monopoly like share of 96%. However, recently, launch of Harley Davidson bikes and entry of Triumph in the Indian markets have created a new excitement.
Recent and forthcoming launches in the premium motorcycles segment
0
200
400
600
800
1,000
1,200
1,400
1,600
0
5
10
15
20
25
RE Continental
Triumph Bonneville
Triumph Rocket III
Roadster
Suzuki Inazuma
Kaw
asaki N
inja
ZX14
Bajaj Pulsar 375
Honda CBR X/R/F
KTM
Duke
390
Harley Davidson
Street 750
Price Engine capacityRs Lakhs CC
Source: Industry, India Infoline Research 2) Rising income levels in the country
India’s income pyramid has typically had a wide base of “struggler” households and increasingly smaller layers as incomes rise. This pyramid is quickly becoming a diamond, as household incomes grow. More than one‐third of the population is likely to reach the aspirer class by 2020, compared to 20% in 2010 and 9 percent in 2000. At the same time, the share of households classified as strugglers – earnings less than $3,300 today will likely fall from 51% in 2010 to 28% by 2020.
Average household income in India to surge
Source: BCG, India Infoline Research
Royal Enfield continues to dominate the market with near monopoly like share of 96%. However, recently, launch of Harley Davidson bikes and entry of Triumph in the Indian markets have created a new excitement More than one‐third of the population is likely to reach the aspirer class by 2020, compared to 20% in 2010 and 9 percent in 2000
Eicher Motors Ltd
4
3) Rising urbanization trend In 2010 31% of India’s population lived in cities. By 2020 that percentage will rise to 35%. As people move from rural areas to cities, they tend both to increase their purchases and to spend on different items. Urban dwellers have better access to goods and are exposed to greater consumerism. For example 80% of the urban households own a television, while only 39% of rural households do.
Urbanization trend in India
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Tamil Nadu
Gujarat
Maharashtra
Karnataka
Punjab
Haryana
West Bengal
Kerala
Andhra Pradesh
Madhya …
Jharkhand
Rajasthan
Chhattisgarh
Uttar Pradesh
Orissa
Him
achal …
Bihar
2008 (LHS) 2013 (LHS) CAGR (RHS)
Source: Mckinsey, India Infoline Research 4) Rising proportion of younger population
Aspiration demand for leisure motorcycle is a trait of the younger generation. India’s demographic dividend is well known and is estimated that the median age of an Indian will be 32 years in 2030, much younger than US with a median age of 39 years, UK (42), Japan (52), and even China (43) and Brazil (35). This means India will have the largest youth workforce in two decades. If all bodes well, this can translate into a much faster GDP growth rate over the next many years resulting in higher per capita income. This would also translate into increased demand for leisure products such as premium motorcycles.
In 2010 31% of India’s population lived in cities. By 2020 that percentage will rise to 35%
The median age of an Indian will be 32 years in 2030, much younger than US with a median age of 39 years, UK (42), Japan (52), and even China (43) and Brazil (35)
India’s demographic dividend India’s median age to be much lower than China
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2000 2005 2010 2015 2020 2025
0‐14 yrs 15‐65 yrs > 65 yrs
'000s
0
5
10
15
20
25
30
35
40
45
50
2000 2005 2010 2030
India China
yrs
Source: UN Population data, India Infoline Research Source: UN Population data, India Infoline Research
Eicher Motors Ltd
5
Eicher Motors well placed to play this momentum Biting the bullet – The turnaround at Royal Enfield
The tough times… More than a decade back, Royal Enfield was on the verge of being shut down completely or being sold off by the promoters, Eicher Motors. In spite of a well built reputation through its iconic Bullet motorcycles. The sales had plummeted to ~2,000 units a month vis‐à‐vis a manufacturing capacity of 6,000 units a month. This was below breakeven levels leading to accumulation of huge losses. While the bikes had ardent fans, there were dissatisfaction concerns from the owners. There were complaints with regards to engine, accelerator & clutch cables, electrical failures and oil leakages. With constant such complaints the maintenance costs were rising. For new riders, heaviness of the motorcycle along with issues such as bothersome positioning of the gear lever and an uncomfortable kick‐start were deterrents.
The awakening… To revive the prospects of the brand the owners had to attract new customers to the brand which meant the company had to re‐design the iconic model. However, maintaining the followership of the brand was equally critical and followers were against major changes then required. The company had to strike a balance between modernizing the bike and retaining its vintage touch making it more acceptable. The bike already possessed a discernible build and high aspiration value. With Siddhartha Lal at the helm, who was a die‐hard Bullet fan, and R L Ravichandran being hired as the CEO (who earlier worked with TVS Motor and Bajaj Auto), the company headed on a path of a recovery. The balancing act… Decisions now had to extremely well‐thought as it was a make or break situation. A wrong move could have tarnished the brand which was built over decades. The most important step that the company took was not to head in the commuter category and strengthen its position in the leisure biking segment. With regards to the design, the company maintained its hard‐wearing look which was created by its overall build, the shape of headlamp and its huge petrol tank. However, changes regarding engine and position of gears were imperative. A modern aluminium engine would eliminate these problems, but it would lack the old engine's pronounced vibrations and beat ‐ which Royal Enfield customers loved. While there were examples in the past whereby change in engines proved to be detrimental for few auto brands, Eicher went ahead with both changing the engine and re‐positioning the gear (much‐closer to the rider’s foot). Many features such as the long stroke, the single cylinder and high capacity with push rod mechanism of the old engines were held on to. The sound beat of the old engine was still missing. With inputs from international consultants, the new engine was able to produce up to 70% of the original amplitude. The new engine had fewer parts and produced more power than the old, with better fuel efficiency. By 2010, all Royal Enfield models had begun to use the new engine.
More than a decade back, the sales of Bullet motorcycles had plummeted to ~2,000 units a month vis‐à‐vis a manufacturing capacity of 6,000 units a month To revive the prospects of the brand the owners had to attract new customers The company had to strike a balance between modernizing the bike and retaining its vintage touch making it more acceptable The company maintained its hard‐wearing look which was created by its overall build, the shape of headlamp and its huge petrol tank Eicher went ahead with both changing the engine and re‐positioning the gear
With inputs from international consultants, the new engine was able to produce up to 70% of the original amplitude
Eicher Motors Ltd
6
Creation of a strong base… Now the company had to focus on quality issues and improving the sales experience. Through few basic steps such as fine tuning the shop floor process and motivating suppliers to improve quality levels the gap between customer expectations and delivery was narrowed substantially. With consistent improvement in quality and lesser warranty claims and the new design, word‐of‐mouth marketing improved. The company cashed in on this through raising its capacity, launching new models and expanding dealer networks. The fast drive… Post the implementation of the aforementioned measures, Eicher over the past three years has seen tremendous growth in volumes. During FY11‐13, it registered a CAGR of 48% in its volumes in comparison to 13.2% CAGR in the preceding three years. YTD FY14, it has seen a volume growth of 56.5% yoy indicating further strength. Steady volumes during 2001‐2006, pick up in volumes from 2007….
‐
1,000
2,000
3,000
4,000
5,000
6,000
Apr‐01
Sep‐01
Feb‐02
Jul‐02
Dec‐02
May‐03
Oct‐03
Mar‐04
Aug‐04
Jan‐05
Jun‐05
Nov‐05
Apr‐06
Sep‐06
Feb‐07
Jul‐07
Dec‐07
May‐08
Oct‐08
Mar‐09
Aug‐09
Jan‐10
Jun‐10
Nov‐10
Nos
Source: SIAM, India Infoline Research …. Surge in volumes from 2012
‐
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
Jan‐10
Mar‐10
May‐10
Jul‐10
Sep‐10
Nov‐10
Jan‐11
Mar‐11
May‐11
Jul‐11
Sep‐11
Nov‐11
Jan‐12
Mar‐12
May‐12
Jul‐12
Sep‐12
Nov‐12
Jan‐13
Mar‐13
May‐13
Jul‐13
Sep‐13
Nos
Source: SIAM, India Infoline Research
Through few basic steps such as fine tuning the shop floor process and motivating suppliers to improve quality levels the gap between customer expectations and delivery was narrowed substantially During FY11‐13, it registered a CAGR of 48% in its volumes in comparison to 13.2% CAGR in the preceding three years
Eicher Motors Ltd
7
Waiting period for existing models For most part of CY12, Classic and Thunderbird models saw waiting periods in excess of 9 months. The current order book of the company, as per our estimates would be in the order of about ~65,000‐70,000 units. The wait list is about 4‐5 months in spite of the fact the production has surged from an average of 12,600 units per month in FY13 to 15,280 units in YTD FY14. In fact the production was at 18,004 units in the month of October 2013. Long waiting periods have been a deterrent for a few customers. These customers are expected to return with production on a rising trend leading to lower waiting periods. Widening network to drive domestic growth While there has been a strong demand for Royal Enfield bikes at the existing dealerships, new dealerships in new cities are helping them get good order inflow. The company is expected to continue with its dealership expansion program and is likely to end the current year with about 300 dealers from 249 at the end of 2012. We expect 15‐20% CAGR in dealerships over the next couple of years. Most of these would be in the tier‐2 and tier‐3 cities, thus bringing new customers into the fold. Exports growth to pick up Exports currently account for less than 3% of Royal Enfield volumes. Over 30 countries are being served as of now, majority of them in the developed world. The company has plans to expand its presence by entering new markets especially so in the emerging markets. The focus in the near term would be Latin American and South‐East Asian markets. Indian players such as Bajaj Auto and TVS Motors have established strong presence in these markets albeit in the entry level and executive level segments. The premium and leisure biking segment still remains under served. The presence of Indian players will help building quality image for the products coming from the country. Recently the company launched Continental GT in the European markets. The product has received good reviews from customers and experts. While the opportunity is immense in the international markets, the company is short of supply in the domestic market. In the near term we believe the focus would remain on serving the domestic market while exports might see increased attention once the full scale capacity commences operations.
The wait list is about 4‐5 months in spite of the fact the production has surged from an average of 12,600 units per month in FY13 to 15,280 units in YTD FY14
The company is expected to continue with its dealership expansion program and is likely to end the current year with about 300 dealers from 249 at the end of 2012
The company has plans to expand its presence by entering new markets especially so in the emerging markets
Recently the company launched Continental GT in the European markets. The product has received good reviews from customers and experts
Eicher Motors Ltd
8
VECV – Gaining market share in beaten down industry Excess capacity in the CV industry In spite of the economic headwinds, domestic CV industry displayed a resilient performance in FY12. Total industry volumes registered a growth of 19.4% yoy in FY12 as compared to 38.7% and 27.5% in FY10 and FY11 respectively. This performance, we believe, led to over capacity in the system, which has been reflected in the weakening of freight rates. As per Indian Foundation of Transport Research and Training (IFTRT), an independent tariff determining agency, truck rentals have gone up by 6‐8% reflecting only the increase in diesel prices. Media reports also suggest that trucks have been waiting for 3‐4 days to pick load for their return trips. Furthermore, the scenario has worsened in FY13 and FY14 so far with no revival in infrastructure investments or mining activity. CV goods volumes declining with weak industrial activity in the country
‐30%
‐20%
‐10%
0%
10%
20%
30%
40%
50%
0%
2%
4%
6%
8%
10%
12%
14%
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
India Industry GDP (LHS) CV Goods (RHS)
Source: SIAM, Government of India, India Infoline Research Even if economic growth improves, CV demand recovery will lag In a bull case scenario ie economy recovers faster than street expectations, two factors will ensure that the demand recovery for CVs will lag the economic recovery 1) overcapacity exists in the system in terms of available tonnage capacity and 2) the age profile of the country’s fleet has got younger with share of trucks within 0‐5 years category has risen from 29% in FY02 to 42% in FY12. These factors, we believe, will also translate into a weak replacement demand in the years to come. Financing of CVs getting tough More than 90% of the CVs are sold via the financing route in the domestic markets which results in high sensitivity of demand to various financing norms. Interest rate is a key factor here and the rates have been rising in the recent past. With freight rates weakening, cash‐flows for fleet operators are under stress causing the financiers to tighten lending norms. Loan to value has also been reduced by key financiers. While NPAs in the sector have not shown alarming increase, recovery in some pockets such as mining is getting difficult and will only see further stress in the near future.
In spite of the difficult environment in FY12, CV demand remained resilient, which led to excess capacity in the system. This has resulted in lower freight rate
Given the under utilization of existing fleet and a young profile of country’s fleet CV demand recovery will lag economic recovery
With freight rates weakening, cash‐flows for fleet operators are under stress causing the financiers to tighten lending norms
Eicher Motors Ltd
9
Rising NPA trend for Shriram Transport Finance Company (leading CV financier)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
FY10 FY11 FY12 FY13 Q1 FY14 Q2 FY14
Gross NPA Net NPA
Source: Company, India Infoline Research Further diesel price hikes will hurt more Diesel prices have been rising steadily over the past few months in accordance with the government’s policy of bringing the diesel prices to the market determined level. With oil marketing companies and the government suffering huge burden of the under‐recoveries on diesel, these price hikes are likely to continue. If prices are raised further, fleet operators, who are already reeling under the pressure of under‐utilization will find it difficult to pass on the impact leading to worsening of their profitability and cash flows, eventually hitting the demand for M&HCVs.
Any increase in diesel prices will only add to the woes of fleet operators
Diesel prices raised at a steady rate… … but under recovery still at Rs9/litre
42
44
46
48
50
52
54
56
1‐Jan
‐13
1‐Feb‐13
1‐M
ar‐13
1‐Apr‐13
1‐M
ay‐13
1‐Jun‐13
1‐Jul‐13
1‐Aug‐13
1‐Sep‐13
1‐Oct‐13
1‐Nov‐13
1‐Dec‐13
Rs/Litre
0
2
4
6
8
10
12
14
16
1‐Jan
‐13
1‐Feb‐13
1‐M
ar‐13
1‐Apr‐13
1‐M
ay‐13
1‐Jun‐13
1‐Jul‐13
1‐Aug‐13
1‐Sep‐13
1‐Oct‐13
1‐Nov‐13
1‐Dec‐13
Rs/Litre
Source: IOC, India Infoline Research Source: PPAC, India Infoline Research
Eicher Motors Ltd
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VECV: Market share gains VECV has been a strong player in 7.5‐12 tonne category (38% market share in MHCV goods carrier), but has a minimal share in the 25‐49 tonne category. Of late we have seen the company gaining traction in HCV segment and as per media reports the JV announced plans to break into the HCV segment of trucks with capex of Rs10bn in next few years. The trucks are expected to be based on Volvo’s UD platform and would be priced at 10% premium to its peers. With a long presence in Indian market, the JV has the advantage of better understanding of Indian market dynamics.
VECV market share in the domestic CV business
8%
9%
10%
11%
12%
13%
14%
15%
FY10 FY11 FY12 FY13 YTD FY14
Source: SIAM, Company, India Infoline Research
Market share across segments for VECV
YTD FY14 VECV Market Share YTD FY13 VECV Market Share YTD Segment growth
> 7.5 & < 10 tons > 10 & < 12 tons > 12 & < 16.2 tons > 16.2 tons & < 25 tons
44% 48%
‐35%‐40%
‐30%
‐20%
‐10%
0%
10%
20%
30%
40%
50%
60%
37%
32%
‐14%‐20%
‐10%
0%
10%
20%
30%
40%
8% 8%
‐36%‐40%
‐35%
‐30%
‐25%
‐20%
‐15%
‐10%
‐5%
0%
5%
10%
3% 4%
‐25%‐30%
‐25%
‐20%
‐15%
‐10%
‐5%
0%
5%
10%
Rigid > 25 tons Haulage > 26.4 & < 35.2 tons Haulage > 35.2 & < 40.2 tons Haulage > 49 tons
5% 5%
‐30%‐35%
‐30%
‐25%
‐20%
‐15%
‐10%
‐5%
0%
5%
10%
0% 1%
‐61%‐70%
‐60%
‐50%
‐40%
‐30%
‐20%
‐10%
0%
10%
24%
5%
65%
0%
10%
20%
30%
40%
50%
60%
70%
7%
2%
‐21%‐25%
‐20%
‐15%
‐10%
‐5%
0%
5%
10%
Source: SIAM, India Infoline Research
Eicher Motors Ltd
11
Taking product experience to the next level Recently VECV launched its new range of future generation trucks and buses called the ‘Pro Series’. In all 11 new products were displayed which included buses and trucks covering the entire 5 to 49 ton range. This marks the entry of VECV into the premium segment which requires higher power and torque combination with a greater degree of refinement and sophistication. These products will try to focus on improved fuel efficiency, higher loading capacity, superior uptime and overall vehicle life time profitability. The new heavy duty range of trucks will be powered by new generation engines adapted from Volvo Group technology with power capacity of 180‐280 hp. The company over the past five years has invested heavily in R&D to evolve this product series under the aegis of Volvo group’s world class technological capability and frugal cost management of Eicher group. The Eicher Pro series range will be launched in a phased manner starting February, 2014.
11 new products from Pro Series include buses and trucks covering the entire 5 to 49 ton range
These products will try to focus on improved fuel efficiency, higher loading capacity, superior uptime and overall vehicle life time profitability
The Eicher Pro series range will be launched in a phased manner starting February, 2014
The 4‐cylinder VEDX 5 engine that powers the Pro 1000 ‐ 3000. The new block has 4‐valves per cylinder, capable of producing upto 210 bhp.
The new engine management system provides various error codes including gear‐shift indication and a warning to limit over‐acceleration.
Source: Team BHP, India Infoline Research Source: Team BHP, India Infoline Research
The buses get a better looking interior
The optional pack: Eicher telematics and stereo system.
Source: Team BHP, India Infoline Research Source: Team BHP, India Infoline Research
Eicher Motors Ltd
12
VECV aims to double market share in the M&HCV space Currently, VECV has a 30%+ market share in LMD segment but commands only a 5% segment in the heavy vehicles segment. The company aims to double its market share in the heavy vehicles segment over the next couple of years, especially with hopes pinned on success of the ‘Pro Series’. The company is expected to launch the new Pro Series LMD in H1 CY14 and follow it up with HCV launches from end of CY14. We are hopeful of revival in the CV market by then and these launches will help VECV garner incremental market share. In terms of capacity, the current manufacturing capability of the Pithampur plant is about 66,000 units per annum. The company can raise it further to 100,000 units per annum with minimal investments and within a short period. VECV over the past five years has invested Rs18bn towards capacity expansion, product development and engines. The company has plans to invest further Rs7bn by end of CY14. Relative focus on exports to improve Exports accounted for 6.6% in 9m CY13 for VECV. In this, the company exported models made for India in countries where demand existed for similar products. With new models, the company is now making export specific variants. The focus markets would be Africa, West Asia, South Asia and South East Asia. Strong operational metrics in comparison to peers While the acute slowdown currently being seen in the CV industry has hit the industry leaders ie Tata Motors and Ashok Leyland severely in terms of profitability and return ratios, VECV has been able to deliver much better on these counts. The key reason for this outperformance has been its frugal cost structure and better pricing discipline. This will keep the company in good stead in good times. Strong operating margins when compared with competitors
0%
2%
4%
6%
8%
10%
12%
14%
Q1 CY10
Q2 CY10
Q3 CY10
Q4 CY10
Q1 CY11
Q2 CY11
Q3 CY11
Q4 CY11
Q1 CY12
Q2 CY12
Q3 CY12
Q4 CY12
Q1 CY13
Q2 CY13
Q3 CY13
Tata Motors SA Ashok Leyland VECV
Source: Company, India Infoline Research
The company aims to double its market share in the heavy vehicles segment over the next couple of years, especially with hopes pinned on success of the ‘Pro Series’
In terms of capacity, the current manufacturing capability of the Pithampur plant is about 66,000 units per annum. The company can raise it further to 100,000 units per annum with minimal investments With its frugal cost structure and better pricing discipline, VECV has outperformed Tata Motors and Ashok Leyland in terms of profitability measures
Eicher Motors Ltd
13
VECV Engines: a feather in the cap VECV under its company VE Powertrain, has set up a new engine plant with an investment of Rs3.75bn and has an initial capacity of 25,000 engines annually. The capacity can be raised further to 100,000 units per annum with a minimal investment of Rs1.25bn. The company will take a call on the expansion considering the demand scenario in the future. The plant will act as a global hub for Volvo’s range of 5 to 8‐litre engines which would cater to an array of products from Volvo and Eicher. The base engines will be supplied to Volvo’s plant in Venissieux, France, where the Euro 6 peripherals will be assembled for compliance to local norms. For Asia, the engines will be configured as per BS3/BS4 norms depending on the markets. The power outputs of the engines made at the facility range from 180hp to 350hp. With the new powertrain plant, Volvo will take advantage of the low costs of manufacturing while Eicher will be able to offer Volvo’s engine technology in its Indian products. VECV Engine business estimates
Unit CY13E CY14E CY15E
Engine sales Nos 10,000 30,000 69,000
% growth % 200% 130%
Sales to VECV Nos ‐ 6,000 9,000
% growth % 50.0%
Exports to Volvo (Euro 3 & 4) Nos 10,000 14,000 35,000
% growth % 40% 150.0%
Exports to Volvo (Euro 5 & 6) Nos 10,000 25,000
% growth % 150.0%
Total value Rs mn 3,000 9,991 24,135
% growth % 233.0% 141.6%
Blended realizations Rs/vehicle 300,000 333,033 349,789
% growth % 11.0% 5.0%
EBIDTA Margin % 6% 12% 13.50%
EBIDTA Rs mn 180 1,199 3,258
% growth % 566.1% 171.8%
Source: Company, India Infoline Research
The plant has an initial capacity of 25,000 engines annually. The capacity can be raised further to 100,000 units per annum with a minimal investment of Rs1.25bn The power outputs of the engines made at the facility range from 180hp to 350hp With the new powertrain plant, Volvo will take advantage of the low costs of manufacturing while Eicher will be able to offer Volvo’s engine technology in its Indian products
Eicher Motors Ltd
14
Financials: Strength to strength Volume growth – RE & Engines strong, CVs better than industry We expect Eicher to report volume growth across all segments albeit at different pace. For Royal Enfield we expect strong CAGR of 36.4% between CY13E and CY15E driven by new capacity commencing operations. Exports although small in absolute terms but will see a very robust growth. VECV will see a decline in CY13 followed by a modest 5% growth in CY14 and a strong bounce in CY15 of 12%. Engines business will start slowly in CY13 and then pick rapid strides in CY14 and CY15.
Realizations to improve on favorable product mix across segments In the Royal Enfield business the mix is changing towards higher priced variants in existing models. Additionally, the new launch Continental GT, sales of which will gather momentum now, is priced dearer than the existing blended realizations. In the VECV business, the launch of pro series model will shore up realizations as the new series will be relatively more expensive than the existing set of models. In terms of engine business as and when the 6 and 8 litre models start getting exported product mix will be favorable for realizations. Operating margins to rise across the board We expect Eicher to report strong margin profile across the segments during CY13E‐15E. Royal Enfield is likely see around 320bps expansion on the back of operating leverage and better product mix. CV business will see about 220bps surge as recovery in the business will reduce pressure from fixed costs. As engines business is likely to see huge volume spurts in both CY14E and CY15E we see margins expanding from about 6.5% in CY13E to 13% in CY15E. At the consolidated level we expect the margins to improve from 9.2% in CY13E to 13.5% in CY15E.
Volume growth seen across segments albeit at different pace
Product mix to drive realizations for all segments At the consolidated level we expect the margins to improve from 9.2% in CY13E to 13.5% in CY15E.
Volume growth across segments RE Domestic RE Exports VECV – Total Engines
49,862
49,946
71,358
109,900
169,246
236,944
315,136
CY09
CY10
CY11
CY12
CY13E
CY14E
CY15E
2,093
2,630
3,268
3,532
4,238 5,722
7,724
CY09
CY10
CY11
CY12
CY13E
CY14E
CY15E
25,164
39,275 49,042
48,831
42,971
45,120
50,534
CY09
CY10
CY11
CY12
CY13E
CY14E
CY15E
10,000
30,000
69,000
CY13E
CY14E
CY15E
Source: Company, India Infoline Research
Eicher Motors Ltd
15
Operating margins to grow across the segments
0%
5%
10%
15%
20%
25%
RE VECV ‐CV VECV Engines Consolidated
CY12 CY13E CY14E CY15E
Source: Company, India Infoline Research Cash flows and balance sheet to improve further At consolidated we expect Eicher to see strong operating cash flow generation on the back of strong growth in revenues and operating profits. Over the past couple of years, the company has been investing heavily in expanding manufacturing capacities and R&D activities constraining cash flows. However, with majority of the capital expenditure now behind, free‐cash flows should start growing at a very fast pace. During CY13E‐15E, we expect Eicher to generate Rs17bn of free cash flows. Return ratios will continue to rise After witnessing steady increase in RoE and RoCE between CY09 and CY11, these ratios witnessed 270bps and 740bps yoy respectively in CY12. This was mainly on account of the capital expenditure spent in CY12. With strong profitability and limited capital expenditure plans during CY13E‐15E, we expect RoE and RoCE to increase by 910bps and 1,260bps yoy respectively. Trend in RoE and RoCE
0%
5%
10%
15%
20%
25%
30%
35%
40%
CY09 CY10 CY11 CY12 CY13E CY14E CY15E
RoE RoCE
Source: Company, India Infoline Research
During CY13E‐15E, we expect Eicher to generate Rs17bn of free cash flows With strong profitability and limited capital expenditure plans during CY13E‐15E, we expect RoE and RoCE to increase by 910bps and 1,260bps yoy respectively
Eicher Motors Ltd
16
Valuations – Deserves a premium Eicher is currently trading at premium valuations of 21.2x CY14E earnings. We believe, the stock deserves the premium given the robust earnings growth prospects. We value the stock on SOTP basis whereby we arrive at a target price of Rs5,729. We initiate coverage with a BUY rating. SOTP Valuation
CY15E EPS (Rs) P/E (x) Value (Rs)
Royal Enfield 209 20 4,177
VECV 129 12 1,552
Total 5,729
CMP 4,777
Upside 19.9%
Source: Company, India Infoline Research
Trading at higher end, but premium justified
0
1,000
2,000
3,000
4,000
5,000
6,000
31‐Dec‐08 31‐Dec‐09 31‐Dec‐10 31‐Dec‐11 31‐Dec‐12 31‐Dec‐13
CMP 4.5x 9.2x 14x 18.7x 23.5x
Rs
Source: Company, India Infoline Research
Eicher Motors Ltd
17
Company background Eicher Motors Limited, incorporated in 1982, is the flagship company of the Eicher Group in India and a leading player in the Indian automobile industry. Its 50‐50 joint venture with the Volvo group, VE Commercial Vehicles Limited, designs, manufactures and markets reliable, fuel‐efficient commercial vehicles of high quality and modern technology, engineering components and provides engineering design solutions. Eicher Motors manufactures and markets the iconic Royal Enfield motorcycles. Royal Enfield Incorporated in India in 1955, Royal Enfield has been manufacturing motorcycles that offer a true motorcycling experience. The company entered into a strategic alliance with Eicher and eventually became a part of the Eicher Group in 1994. Royal Enfield exports its bikes to over 25 countries including developed countries such as USA, Japan, UK and several European countries. VECV VE Commercial Vehicles Ltd. is a 50:50 joint venture between the Volvo Group (Volvo) and Eicher Motors Limited (EML). Operational since July 2008, VE Commercial Vehicles Ltd. (VECV) comprises of five business verticals – Eicher Trucks and Buses, Volvo Trucks India, Eicher Engineering Components and VE Powertrain. VECV includes the complete range of Eicher’s commercial vehicles, components and engineering design businesses as well as the sales and distribution of Volvo trucks. Each of its business units is already well established and backed by a sizable customer base. Key milestones
Year Milestone
1948 Goodearth Company set up to sell and service imported tractors
1952‐57 Goodearth Company imported and sold about 1500 tractors in India
1958 Eicher Tractor Corporation of India Ltd. incorporated
1959 First indigenous Eicher tractor built
1960 Eicher changed name from Eicher Tractor Corporation of India Pvt. Ltd. to Eicher Tractors India Ltd.
1965‐75 100% indigenization achieved in Eicher Tractors
1980 Eicher Goodearth Ltd. name given to Eicher
1982 Collaboration agreement with Mitsubishi for the manufacture of Light Commercial Vehicles signed in Tokyo
1982 Incorporation of Eicher Motors Ltd.
1985 Silver Jubilee Year for Eicher
1986 Eicher Motors Ltd. springs into operation
1987 Eicher Tractors went public
1996 Eicher Tractors Ltd. amalgamated with Royal Enfield Motors to form Eicher Ltd.
2005 Eicher Motors Ltd. has disinvested the businesses of tractors and engines to TAFE Motors & Tractors Ltd. (TMTL)
2008 Volvo Group and Eicher Motors Ltd. established VE Commercial Vehicles Limited (VECV)
2010 The company launched the VE‐series of Heavy Duty trucks
Source: Company
18
Eicher Motors Ltd
Financials Income statement Y/e 31 Dec (Rs m) CY12 CY13E CY14E CY15E
Revenue 63,899 70,380 88,800 120,212
Operating profit 5,490 6,502 10,253 16,245
Depreciation (822) (1,279) (1,719) (2,049)
Interest expense (38) (55) (55) (55)
Other income 1,366 2,050 2,250 2,450
Profit before tax 5,997 7,218 10,729 16,590
Taxes (1,249) (1,660) (2,574) (3,966)
Minorities and other (1,506) (1,439) (2,085) (3,493)
Net profit 3,243 4,119 6,070 9,132
Balance sheet Y/e 31 Dec (Rs m) CY12 CY13E CY14E CY15E
Equity capital 270 270 270 270
Reserves 17,279 20,544 25,589 33,525
Net worth 17,549 20,814 25,859 33,795
Minority interest 9,485 10,923 13,009 16,501
Debt 560 560 560 560
Deferred tax liab (net) 1,232 1,232 1,232 1,232
Total liabilities 28,825 33,529 40,659 52,088
Fixed assets 14,962 19,139 23,919 27,870
Investments 6,385 8,885 11,385 13,885
Net working capital (3,923) (4,062) (5,220) (7,474)
Inventories 4,888 5,384 6,793 9,196
Sundry debtors 4,459 4,911 6,196 8,388
Other current assets 2,619 3,143 3,772 4,526
Sundry creditors (9,547) (10,515) (13,267) (17,961)
Other current liab (6,343) (6,985) (8,714) (11,624)
Cash 11,402 9,568 10,575 17,807
Total assets 28,825 33,529 40,659 52,088
Cash flow statement Y/e 31 Dec (Rs m) CY12 CY13E CY14E CY15E
Profit before tax 5,997 7,218 10,729 16,590
Depreciation 822 1,279 1,719 2,049
Tax paid (1,249) (1,660) (2,574) (3,966)
Working capital ∆ 368 139 1,157 2,254
Operating cashflow 5,938 6,976 11,032 16,927
Capital expenditure (7,216) (5,456) (6,500) (6,000)
Free cash flow (1,279) 1,519 4,532 10,927
Equity raised 58 ‐ ‐ ‐
Investments (1,259) (2,500) (2,500) (2,500)
Debt financing/ disposal
(88) ‐ ‐ ‐
Dividends paid (683) (854) (1,025) (1,195)
Other items 190 ‐ ‐ ‐
Net ∆ in cash (3,061) (1,834) 1,007 7,232
Key ratios Y/e 31 Dec CY12 CY13E CY14E CY15E
Growth matrix (%)
Revenue growth 12.4 10.1 26.2 35.4
Op profit growth (6.8) 18.4 57.7 58.4
EBIT growth (9.6) 20.5 48.3 54.3
Net profit growth 5.0 27.0 47.4 50.4
Profitability ratios (%)
OPM 8.6 9.2 11.5 13.5
EBIT margin 9.4 10.3 12.1 13.8
Net profit margin 5.1 5.9 6.8 7.6
RoCE 22.6 23.3 29.1 35.9
RoNW 20.0 21.5 26.0 30.6
RoA 7.8 8.6 10.7 12.7
Per share ratios (Rs)
EPS 120.1 152.5 224.8 338.2
Dividend per share 20.0 25.0 30.0 35.0
Cash EPS 150.5 199.9 288.5 414.1
Book value per share 650.0 770.9 957.7 1,251.7
Valuation ratios (x)
P/E 39.8 31.3 21.2 14.1
P/CEPS 31.7 23.9 16.6 11.5
P/B 7.3 6.2 5.0 3.8
EV/EBIDTA 21.5 18.5 11.6 6.9
Payout (%)
Dividend payout 21.1 20.7 16.9 13.1
Tax payout 20.8 23.0 24.0 23.9
Liquidity ratios
Debtor days 25 25 25 25
Inventory days 28 28 28 28
Creditor days 55 55 55 55
Leverage ratios (x)
Interest coverage 159.2 132.2 196.1 302.6
Net debt / equity (0.6) (0.4) (0.4) (0.5)
Net debt / op. profit (2.0) (1.4) (1.0) (1.1)
Du‐Pont Analysis Y/e 31 Dec CY12 CY13E CY14E CY15E
Tax burden (x) 0.54 0.57 0.57 0.55
Interest burden (x) 0.99 0.99 0.99 1.00
EBIT margin (x) 0.09 0.10 0.12 0.14
Asset turnover (x) 1.55 1.47 1.56 1.67
Financial leverage (x) 2.54 2.50 2.44 2.42
RoE (%) 20.0 21.5 26.0 30.6
Recommendation parameters for fundamental reports:
Buy – Absolute return of over +10%
Market Performer – Absolute return between ‐10% to +10%
Sell – Absolute return below ‐10%
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