Eicher Motors - Myirisbreport.myiris.com/NFASIPL/EICMOTOR_20150218.pdf · Eicher Motors is the manufacturer of Royal Enfield (RE) motorcycles and Eicher brand commercial ... We project

Rating Starts at BuyTarget price Starts at INR 19915

Closing price 13 February 2015 INR 16267

Potential upside +22.4%

Anchor themesEicher is a play on the premium motorcycle industry where we see strong long-term growth prospects. The company's CV business is poised for massive recovery, led by a multi-year upcycle in the domestic CV industry and success of new launches.

Nomura vs consensusOur TP is ~19% above consensus, which we believe has yet to fully factor in the potential pick-up in Eicher's CV business over the next 2-3 years.

Research analysts

India Autos & Auto Parts

Kapil Singh - NFASL [email protected] +91 22 4037 4199

Nishit Jalan - NFASL [email protected] +91 22 4037 4362

Key company data: See page 2 for company data and detailed price/index chart

Eicher Motors EICH.NS EIM IN

EQUITY: AUTOS & AUTO PARTS

Initiate with Buy and TP of INR19,915

High growth in RE to sustain; VECV poised for strong recovery on CV upcycle Action: Initiating at Buy with TP of INR19,915, implying 22% upside Eicher Motors is the manufacturer of Royal Enfield (RE) motorcycles and Eicher brand commercial vehicles (in a JV with Volvo – Volvo Eicher Commercial Vehicles [VECV]). RE contributed ~84% of CY14F net profits, while the commercial vehicle (CV) business accounted for the rest. RE has a strong domestic brand and unique positioning as a leisure bike in the premium segment in India, akin to Harley Davidson globally. This segment still seems to be in a nascent stage (~2% of the industry) and poised for structural long-term growth, driven by growing aspirations and rising disposable incomes in India. We project a 43% volume CAGR in RE volumes over FY14-17F, led by an order backlog of ~five months and expansion into new Tier-2/3 cites.

The CV business is also at an inflexion point. The company spent heavily on product development during the CV downturn. The benefits of this are likely to flow through now as the CV cycle recovers and Eicher launches its new range of Pro-Series trucks based on new engines. This should help Eicher to gain share in the higher-tonnage segments where its market share is currently very low. We estimate its volumes to rise at a 27% CAGR over FY14-17F.

Catalysts: Strong growth for RE; volume and margin recovery in VECV

Valuation: SOTP-based TP of INR19,915 represent 22% upside potential We value RE at INR16,694/sh, based on 35x FY17F EPS of INR477. We back this with our DCF model, which captures the long-term growth potential of RE and implies a P/E of 35.8x FY17F. We value VECV at INR3,220/sh, based on 10x FY18F EV/EBITDA, which is rolled back by 12 months. In our view, FY18F is a better year to base our valuation on as it reflects the true potential of Eicher’s new launches in the higher-tonnage segments. We expect premium valuations to sustain on a 65% EPS CAGR over FY14-17F and ROE to improve to ~40% in FY17F, from ~27% in FY14. Note that EIM’s FY16F financial year will be 15 months from Jan-15 to Mar-16.

Year-end 31 Dec FY14 FY16F FY17F FY18F

Currency (INR) Actual Old New Old New Old New

Revenue (mn) 87,383 N/A 153,321 N/A 167,368 N/A 211,576

Reported net profit (mn) 6,154 N/A 14,007 N/A 16,842 N/A 22,463

Normalised net profit (mn) 6,154 N/A 14,007 N/A 16,842 N/A 22,463

FD normalised EPS 227.03 N/A 516.76 N/A 621.38 N/A 828.75

FD norm. EPS growth (%) 55.8 N/A 127.6 N/A 20.2 N/A 33.4

FD normalised P/E (x) 71.7 N/A 31.5 N/A 26.2 N/A 19.6

EV/EBITDA (x) 39.3 N/A 17.5 N/A 14.1 N/A 10.1

Price/book (x) 17.5 N/A 12.2 N/A 9.0 N/A 6.8

Dividend yield (%) 0.3 N/A 0.6 N/A 1.0 N/A 1.2

ROE (%) 26.9 N/A 45.6 N/A 39.7 N/A 39.5

Net debt/equity (%) net cash N/A net cash N/A net cash N/A net cash

Source: Company data, Nomura estimates

Global Markets Research 18 February 2015

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Also published on 18 February 2015 as part of our Anchor Report: India autos – Start of a multi-year CV upcycle.

Nomura | Eicher Motors 18 February 2015

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Key data on Eicher Motors Relative performance chart

Source: Thomson Reuters, Nomura research

Notes:

Performance (%) 1M 3M 12MAbsolute (INR) 9.9 23.3 237.6 M cap (USDmn) 7,091.2Absolute (USD) 9.8 22.1 238.5 Free float (%) 32.5Rel to MSCI India 9.9 21.1 201.2 3-mth ADT (USDmn) 14.3 Income statement (INRmn) Year-end 31 Dec FY13 FY14 FY16F FY17F FY18FRevenue 68,098 87,383 153,321 167,368 211,576Cost of goods sold -47,701 -59,858 -101,774 -110,092 -138,809Gross profit 20,397 27,525 51,547 57,276 72,767SG&A -9,232 -11,979 -19,462 -20,086 -23,953Employee share expense -5,333 -6,596 -10,543 -11,103 -13,324Operating profit 5,832 8,950 21,543 26,087 35,490EBITDA 7,132 11,148 24,533 29,598 39,567Depreciation -1,300 -2,198 -2,991 -3,511 -4,077Amortisation

EBIT 5,832 8,950 21,543 26,087 35,490Net interest expense -79 -98 0 0 0Associates & JCEs

Other income 953 1,074 1,349 2,085 3,422Earnings before tax 6,706 9,926 22,892 28,172 38,912Income tax -1,452 -2,909 -6,688 -8,049 -11,005Net profit after tax 5,254 7,017 16,204 20,123 27,906Minority interests -1,314 -864 -2,197 -3,281 -5,443Other items

Preferred dividends

Normalised NPAT 3,939 6,154 14,007 16,842 22,463Extraordinary items 0 0 0 0 0Reported NPAT 3,939 6,154 14,007 16,842 22,463Dividends -811 -1,355 -2,710 -4,172 -5,278Transfer to reserves 3,128 4,798 11,296 12,670 17,185Valuations and ratios

Reported P/E (x) 111.7 71.7 31.5 26.2 19.6Normalised P/E (x) 111.7 71.7 31.5 26.2 19.6FD normalised P/E (x) 111.7 71.7 31.5 26.2 19.6Dividend yield (%) 0.2 0.3 0.6 1.0 1.2Price/cashflow (x) 51.1 36.6 19.4 16.7 12.8Price/book (x) 21.4 17.5 12.2 9.0 6.8EV/EBITDA (x) 61.3 39.3 17.5 14.1 10.1EV/EBIT (x) 74.9 49.0 19.9 16.0 11.3Gross margin (%) 30.0 31.5 33.6 34.2 34.4EBITDA margin (%) 10.5 12.8 16.0 17.7 18.7EBIT margin (%) 8.6 10.2 14.1 15.6 16.8Net margin (%) 5.8 7.0 9.1 10.1 10.6Effective tax rate (%) 21.7 29.3 29.2 28.6 28.3Dividend payout (%) 20.6 22.0 19.4 24.8 23.5ROE (%) 20.7 26.9 45.6 39.7 39.5ROA (pretax %) 17.0 20.3 39.1 39.5 46.7Growth (%)

Revenue 6.6 28.3 75.5 9.2 26.4EBITDA 29.9 56.3 120.1 20.6 33.7Normalised EPS 21.3 55.8 127.6 20.2 33.4Normalised FDEPS 21.3 55.8 127.6 20.2 33.4Source: Company data, Nomura estimates

Cashflow statement (INRmn) Year-end 31 Dec FY13 FY14 FY16F FY17F FY18FEBITDA 7,132 11,148 24,533 29,598 39,567Change in working capital 1,482 2,834 3,587 2,820 2,591Other operating cashflow -5 -1,932 -5,339 -5,964 -7,583Cashflow from operations 8,609 12,049 22,782 26,455 34,575Capital expenditure -7,536 -8,282 -8,865 -7,000 -7,000Free cashflow 1,073 3,767 13,916 19,455 27,575Reduction in investments 0 -1,606 0 0 0Net acquisitions Dec in other LT assets 311 -1,802 0 0 0Inc in other LT liabilities 569 752 0 0 0Adjustments -573 -589 0 0 0CF after investing acts 1,381 523 13,916 19,455 27,575Cash dividends -880 -1,470 -2,940 -4,525 -5,724Equity issue Debt issue 616 -255 -584 0 0Convertible debt issue Others -456 100CF from financial acts -720 -1,626 -3,523 -4,525 -5,724Net cashflow 660 -1,103 10,393 14,930 21,851Beginning cash 14,420 15,080 13,977 24,370 39,299Ending cash 15,080 13,977 24,370 39,299 61,150Ending net debt -14,241 -13,393 -24,370 -39,299 -61,150 Balance sheet (INRmn) As at 31 Dec FY13 FY14 FY16F FY17F FY18FCash & equivalents 15,080 13,977 24,370 39,299 61,150Marketable securities Accounts receivable 5,125 5,622 6,631 9,476 11,434Inventories 5,268 6,455 8,485 11,870 13,877Other current assets 3,640 4,277 5,359 7,409 8,722Total current assets 29,113 30,331 44,844 68,054 95,183LT investments 1 1,606 1,606 1,606 1,606Fixed assets 21,197 27,281 33,156 36,645 39,568Goodwill Other intangible assets Other LT assets 3,056 4,857 4,857 4,857 4,857Total assets 53,366 64,076 84,464 111,162 141,214Short-term debt Accounts payable 11,914 15,127 20,884 29,575 34,849Other current liabilities 7,124 9,066 11,016 13,425 16,021Total current liabilities 19,037 24,192 31,900 43,000 50,870Long-term debt 839 584 0 0 0Convertible debt Other LT liabilities 2,538 3,291 3,291 3,291 3,291Total liabilities 22,415 28,067 35,190 46,291 54,161Minority interest 10,397 10,851 13,048 16,328 21,772Preferred stock Common stock 270 271 271 271 271Retained earnings 20,284 24,888 35,955 48,272 65,011Proposed dividends Other equity and reserves Total shareholders' equity 20,554 25,159 36,226 48,543 65,282Total equity & liabilities 53,366 64,076 84,464 111,162 141,214

Liquidity (x)Current ratio 1.53 1.25 1.41 1.58 1.87Interest cover 74.0 91.5 na na naLeverageNet debt/EBITDA (x) net cash net cash net cash net cash net cashNet debt/equity (%) net cash net cash net cash net cash net cash

Per shareReported EPS (INR) 145.69 227.03 516.76 621.38 828.75Norm EPS (INR) 145.69 227.03 516.76 621.38 828.75FD norm EPS (INR) 145.69 227.03 516.76 621.38 828.75BVPS (INR) 760.14 928.20 1,336.51 1,798.33 2,408.51DPS (INR) 30.00 50.00 100.00 154.56 194.72Activity (days)Days receivable 25.7 22.4 18.2 17.6 18.0Days inventory 38.9 35.7 33.5 33.7 33.9Days payable 82.1 82.4 80.7 83.6 84.7Cash cycle -17.6 -24.3 -29.0 -32.3 -32.8Source: Company data, Nomura estimates


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Contents

Executive summary ................................................................................. 5

Royal Enfield: Strong growth visibility over the next two years ....................... 5

Higher addressable base and increased demand for aspirational products to

support RE’s demand over long term .............................................................. 5

CV business at inflexion point: to benefit from recovery in MHCV industry and

new launches ................................................................................................... 5

Premium valuations to sustain on high growth prospects; Initiate at Buy with

TP of INR19,915 .............................................................................................. 6

Key investment risks ................................................................................ 7

Lower-than-expected volume growth in Royal Enfield volumes ...................... 7

Slower-than-expected CV cycle recovery ........................................................ 7

Lower margin expansion .................................................................................. 7

Company overview .................................................................................. 8

Royal Enfield: Strong volume growth likely over the next 2 years ........... 9

Strong pick-up in volume growth after CY10 ................................................... 9

Improvement in product quality has led to lower warranty costs ................... 10

Customer profile has changed drastically over the last five years supporting

higher volume growth .................................................................................... 11

The cost of owning a RE bike is higher by INR2,200-3,200/month vs other

commuter bikes .............................................................................................. 11

Increase in disposable income to improve spending power .......................... 12

High growth visibility over the next two years; 43% volume CAGR over FY14-

17F ................................................................................................................. 12

Long-term growth to be driven by rising income levels and some increase in

penetration ..................................................................................................... 14

Global OEMs to launch more products at lower prices, but still unlikely to be

volume players ............................................................................................... 15

Higher volumes, accessories mix and low inventory should result in better

dealer profitability ........................................................................................... 16

Strong pricing power and volume growth has led to margin improvement ... 16

Strong cashflow generation likely over next two to three years .................... 18

Spares - Strong growth likely over the next few years as overall RE bikes on

the road increases ......................................................................................... 19

Exports could be potential long-term opportunity but unlikely to be a growth

driver over the next two to three years .......................................................... 20

Volvo Eicher Commercial Vehicles (VECV) .......................................... 22

VECV – Strong market share in 7.5-12 ton segments but limited share in

higher tonnage segments .............................................................................. 22


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Pro series engine could lead to market share gains...................................... 23

VECV to deliver 27% volume CAGR over CY14-17F .................................... 24

Medium-duty engine business – Potential high RoCE opportunity ............... 25

Margins have held up well in downturn; strong upside possible with recovery

....................................................................................................................... 26

Capex phase over; expect strong FCF generation and return ratios going

forward ........................................................................................................... 27

Eicher Polaris JV: Not much clarity as of now ............................................... 28

Valuation: Quality comes at a price ....................................................... 29

SOTP based TP of INR19,915 offers 22% implied upside from current levels

....................................................................................................................... 29

Royal Enfield: DCF implies valuation of INR17,087 per share ...................... 29

Basis for our valuation of VECV business ..................................................... 31

Valuation charts ............................................................................................. 31

Appendix A-1 ......................................................................................... 33


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Executive summary In our view, Eicher's two-wheeler business remains on strong footing with strong near-term visibility led by order backlog (waiting period of ~five months) and robust incremental demand from expansion into new Tier-2 and Tier-3 cites. Rising disposable income and the aspirations of India’s middle class should continue to drive demand over the long term. Exports and higher growth in the spare parts business might present another significant potential long-term opportunity for the company. Further, the CV business is poised for a significant recovery led by a multi-year upcycle in the domestic MHCV industry and potential success of its new launches. Overall, we expect Eicher to deliver a 65% EPS CAGR over FY14-17F; return ratios and cashflow generation should also improve significantly over the next three years. We initiate coverage at Buy with a TP of INR19,915, which offers 22% upside potential from the current level.

Royal Enfield: Strong growth visibility over the next two years

The company has increased production by almost 6x to ~300,000 units in CY14 from ~50,000 units in CY10; despite this, order backlog increased to ~140,000 in CY14 from 35,000 units in CY10. In our view, the successful launch of classic models, introduction of technologically superior and more reliable unit construction engines (UCE) in all models, and increasing awareness of leisure biking with the entry of foreign original equipment manufacturers (OEMs) like Harley, Triumph, etc, have been key growth drivers. In CY14, demand increased by ~88% y-y to ~357,000 units, as per our calculations. In our view, higher waiting periods would have put off some buyers; otherwise demand may have been higher. We believe that once the product is readily available there could be a decent pick-up in demand – historically, we have seen this with Honda Activa as well as Maruti Swift and D’zire models. Overall, we believe that there is a high volume growth visibility over the next two years - we expect a 43% volume CAGR over FY14-17F. If demand remains strong and the waiting period remains long over the next year or so, there is a possibility of stronger-than-expected volumes in FY17F (current estimate ~621,000), we believe.

Higher addressable base and increased demand for aspirational products to support RE’s demand over long term

The number of middle-income households in India (disposable income >USD7,500) is expected to increase to ~95mn in CY18F, from ~65mn in CY13, a 7.6% CAGR over CY13-18F, as per Euromonitor data. This coupled with some increase in the company’s target male population (23-39 years) could lead to a 50% increase in RE's addressable customer base to 65mn in CY18F, from 44mn currently. Further, rising disposable income and the aspirations of India’s middle class and already-high bike penetration levels augur well for premium bike manufacturers like RE over the long term, we believe. On our estimates, RE will account for only ~3% of total two-wheeler industry volumes in FY18F; so there is scope for further increase in share of industry volumes, we believe. Going forward, growth should continue to be driven by an increased mix of first-time buyers as well as upgrade from current premium motorcycle owners (>150cc).

CV business at inflexion point: to benefit from recovery in MHCV industry and new launches

During the downturn, the company invested heavily in the business (CY12-14F capex of INR 18-19bn) on product development (Pro series), the engine business as well as capacity expansion. In our view, the benefit of this will flow through over the next few years with the up cycle in domestic MHCV industry led by revival in industrial capex and strong pick-up in replacement demand. After the launch of Pro series 6000 and 8000 models, we expect gradual market share gains in higher tonnage segments (>16 tons) – the company’s MHCV market share will likely increase to ~14% from ~12% currently. Strong growth in exports will also likely sustain after Pro series model launches, in our


6

view. Overall, we expect VECV to deliver 27% volume CAGR over FY14-17F. EBITDA margins have held up really well in downturn – VECV has reported 5-6% margins even in the worst quarters of CY13-14 as compared to losses reported by AL and TTMT’s domestic business. We expect margins to expand to ~13% levels in CY17F (~7% in 4QCY14) led by operating leverage benefits, lower discounting levels and benign commodity prices leading to a 97% earnings CAGR over FY14-17F.

Premium valuations to sustain on high growth prospects; Initiate at Buy with TP of INR19,915

We expect premium valuations to sustain on the back of superior growth profile over the next three years. We look for Eicher to deliver a 65% EPS CAGR over FY14-17F with ROE improving to ~40% in CY17F we estimate the company will generate FCF of INR57bn over the next three years.

We use SOTP valuation methodology to arrive at our March 2016 TP of INR19,915. We value the Royal Enfield business (standalone) at INR16,694 per share, based on 35x FY17F EPS of INR477. We back this with our DCF model – this captures the long-term growth potential of the RE business and implies a P/E multiple of 35.8x FY17F. We also highlight that Harley Davidson traded at average P/E multiple of 28x 1-year forward EPS during its high-growth phase of CY99-03 (13% volume CAGR and 30% PAT CAGR). We expect RE to deliver a higher 43% volume CAGR and 58% EPS CAGR over FY14-16F, which we believe justifies our target multiple. We value the VECV business at INR3,220 per share based on 10x FY18F EV/EBITDA which is rolled back by 12 months at 11.5% cost of equity. With the launch of Pro series models, we expect VECV to gain market share primarily in FY17-18F – we assume 52% EBITDA growth in FY18F, thus we believe that FY18F is a better year to base the valuation multiple as it fully captures the true potential of the business. Given the company’s strong balance sheet and lower earnings volatility, we value VECV at higher-end to AL’s historical 1-yr forward trading multiple of 8-10x EV/EBITDA.


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Key investment risks

Lower-than-expected volume growth in Royal Enfield volumes

We expect a 43% volume CAGR for Royal Enfield over FY14-17F. In the near term, volumes are unlikely to disappoint as the company has an order backlog of ~five months. However, any moderation in incremental demand or increased competitive intensity due to the launch of lower-priced models by existing luxury motorcycle OEMs like Harley Davidson or entry of newer players in the leisure bike segment (BMW-TVS, BJAUT, etc) at attractive price points could lead to downside risks to our earnings estimates. In such a scenario, there could be some valuation de-rating as well; this business currently commands premium valuations due to superior growth profile.

Slower-than-expected CV cycle recovery

We expect a strong pick-up in domestic MHCV cycle over the next two to three years led by pick-up in economic activity, revival in capex cycle and higher replacement demand from fleet operators. We look for 30% volume growth for the industry in FY16F and 20% in FY17F. If the recovery is weaker than expected, there could be downside risks to our estimates.

Lower margin expansion

We project consolidated EBITDA margins to improve to 17.7% in FY17F, from 12.8% currently, led by operating leverage benefits, benign commodity prices as well as lower discounting levels (only in VECV business). Any disappointment on this front due to slower volume growth or increased competitive pressures could lead to downside risks to our estimates.


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Company overview Eicher Motors primarily has two businesses: 1) Royal Enfield represents the standalone business and 2) the CV business through VECV JV where Eicher has a direct stake of 54.4%. Under the Royal Enfield business, the company manufactures premium motorcycles (350cc+); key models of the company are Classic 350cc and 500cc, Bullet 350cc and 500c, Thunderbird 350cc and 500cc and Continental GT (535cc). This business is likely to account for 35% of revenues and 84% of PAT in CY14.

In the CV business, Eicher has a joint venture (JV) with Sweden’s Volvo Group. Volvo Group has an effective 50% stake in VECV; 45.6% direct stake and 4.4% through its 8.1% holding in Eicher Motors. In CVs, VECV manufactures trucks & buses ranging from 5-49 tons. It also has a medium-duty engine plant capable of manufacturing Euro three to six engines which will be exported to Volvo Group globally as well as used in its higher tonnage vehicles.

Fig. 1: Eicher Motors: Corporate structure

Source: Company data, Nomura research

Fig. 2: Eicher Motors: Consolidated revenue mix


Fig. 3: Eicher Motors: Consolidated PAT mix


Promoter Group

55.0%

VECV JV (CV business) Royal Enfield (Business Unit of Eicher) Polaris Joint Venture

Volvo A.B.

8.4%

54.4%45.6%

Polaris Industries

50%50%

Eicher Motors

17%25%

35%41% 40% 38%

83%75%

65%59% 60% 62%

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Royal Enfield VECV

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Royal Enfield VECV


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Royal Enfield: Strong volume growth likely over the next 2 years

Strong pick-up in volume growth after CY10

Royal Enfield’s volumes saw a sharp uptick in growth from CY11 onwards – volumes have increased at a 55% CAGR over CY10-14 vs an 8% CAGR over the previous 10 years (CY00-10). In our view, such a strong pick-up in demand was primarily triggered by: 1) the successful launch of Classic 350cc and 500cc models in November 2009 with improved styling and more efficient and reliable technologies like Unit Construction Engine (UCE) and electronic fuel injection (EFI); 2) transitioning of all older models (Bullet, Thunderbird, etc) into UCE from old iron cast engine by October 2010 and 3) entry of foreign OEMs like Harley Davidson, KTM, etc in CY11-12 also led to rising awareness about leisure biking in India, we believe.

Prior to 2010, while RE bikes enjoyed customer loyalty due to its cult brand status, the old cast iron engine (used prior to UCE) was not fuel efficient, required more frequent servicing and had reliability issues given problems related to oil leaks, seized engines, etc. The new UCE engine is much more reliable, more powerful and has better fuel efficiency. As per industry experts, UCE engine generates 10-20% more power and yet is 20% more fuel efficient than the older cast iron engine. Overall, new UCE engine boosted acceleration, performance, mileage and reliability, and also led to lower emissions vs the old iron cast engine. In our view, this led to a big change in Royal Enfield’s reputation and product perception over the past few years. Note that Classic models of the company currently account for almost half of RE’s domestic volumes.

Fig. 4: Strong turnaround in Royal Enfield volumes after CY10


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Fig. 5: Classic 350 model was launched in Nov-09

Source: Nomura research

Fig. 6: Classic 500 model

Source: Nomura research

Fig. 7: Entry of Global OEMs have also helped in expanding higher cc segment volumes


Improvement in product quality has led to lower warranty costs

With the introduction of the UCE engine and improvement in product quality, warranty claims on RE products have fallen significantly over the last five years. Warranty costs have declined to 0.7% of sales in CY13 compared to 2.7% of sales in CY09.

Fig. 8: Royal Enfield – Warranty costs have come down over the last few years


Entry in

Bikes volumes >250cc India CY11 CY12 CY13 CY14 CY12 CY13 CY14Royal Enfield 69,550 109,900 173,865 296,380 58% 58% 70%

350cc models 99,433 155,361 264,400 56% 70%500cc models 10,467 18,233 28,968 74% 59%Continental GT - 271 3,012

KTM Feb-12 - - 2,878 5,613 95%Harley Davidson Jul-11 424 1,101 1,813 4,080 160% 65% 125%Triumph Nov-13 - - 35 1,300 Kawasaki/Bajaj (Ninja model) Aug-12 127 244 956 933 92% 292% -2%Others 104 240 258 308 131% 8% 19%Total 70,205 111,485 179,805 308,614 59% 61% 72%Rotal Enfield's Market Share 99.1% 98.6% 96.7% 96.0%

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(INRmn) Warranty costs (LHS)

Warranty costs as % of sales (RHS)


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Customer profile has changed drastically over the last five years supporting higher volume growth

Royal Enfield has always been a niche player and its bikes have largely appealed to enthusiastic bikers interested in leisure biking and were not very popular among commuters. In CY09, the average age of a Royal Enfield Buyer was ~45 years and there were hardly any first-time buyers. However, with the launch of Classic 350, there has been a big increase in first-time buyers of RE bikes and this segment now comprises ~15% of overall volumes. The average age of an RE customer has come down to ~26 years now. As per our dealer checks and discussions with the company, employed professionals with three to four years’ work experience and young self-employed individuals (owners of small businesses) currently account for the bulk of RE volumes. In our view, the increase in young buyers and greater use of RE bikes for commuting (regularly commuting to and from the office) have been the key reasons for strong volume growth of the brand over the past three to four years. Given the increasingly young population, higher disposable income and higher aspiration levels, we believe these factors will likely remain key growth drivers going forward.

Fig. 9: Average age of a Royal Enfield buyer


Fig. 10: Royal Enfield bikes: Buyer mix (CY14)


The cost of owning a RE bike is higher by INR2,200-3,200/month vs other commuter bikes

We compare the cost of ownership of the RE Classic 350 with other commuter bikes: Hero Splendor and Bajaj Pulsar 150. As per our calculations, monthly cost of ownership of Classic 350 is ~INR6,000 vs INR2,750 for Splendor and INR3,750 for Pulsar 150. Thus, owning a Classic 350 entails a higher cash outlay of INR2,200/3,200 per month (INR27,000/38,000 pa) as compared to Pulsar and Splendor models. Around 75-80% of the higher ownership cost is due to higher EMI (equated monthly instalments) while the remaining 20-25% is due to higher running costs (fuel + maintenance+ insurance). The difference between running cost between Classic 350 and Splendor/Pulsar is ~INR500-800/month. Assuming disposable annual income of INR500,000 of a typical RE buyer, the decision to buy a Classic 350 (vs Splendor/Pulsar) the higher outlay implies 5-8% of income.

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12

Fig. 11: Current cost of ownership of RE vs Other Commuter Bikes


Increase in disposable income to improve spending power

We estimate disposable per-capita income in India to grow at ~10% CAGR over the next five years while we estimate ~2% increase in bike prices. Higher growth in income levels is likely to improve consumers’ spending power, which would reduce the percentage difference in the cost of ownership difference between RE and commuter bikes as percentage of buyer income. This is positive for premium bike manufacturers like Royal Enfield, in our view.

Fig. 12: Disposable per-capita income in India to increase at ~10% CAGR over the next five years

Source: Government of India, Nomura estimates

High growth visibility over the next two years; 43% volume CAGR over FY14-17F

The company has increased production by almost 6x to slightly more than 300,000 units in CY14 from ~50,000 units in CY10. However, due to strong demand, the order backlog has increased over the years. In CY14, in particular, the company increased production by almost 70% y-y but the waiting period has remained ~five months – this implies that demand has grown at ~88% y-y to ~357,000 units in CY14. Higher waiting periods would have put off some buyers; otherwise demand could have been even higher as well, in our view. We believe that once the product is readily available there could be a decent

INR Splendor Pulsar Classic 350On Road price 52,000 75,000 130,000

Loan Amout (LTV of 80%) 41,600 60,000 104,000Interest Rate (%) 24.0% 24.0% 24.0%Term (Years) 3.0 3.0 3.0EMI 1,632 2,354 4,080Annual Loan Payment - A 19,585 28,248 48,963Petrol price 56.5 56.5 56.5Fuel Efficiency (kmpl) 60.0 50.0 40.0Annual fuel cost (assuming 30Km/day) - B 10,311 12,374 15,467Annual Maintenance Cost - C 1,040 1,500 2,600Annual Insurance - D 1,560 2,250 3,900Annual Recurring Cost - E (B+C+D) 12,911 16,124 21,967

Actual cost of ownership - A+E 32,496 44,371 70,929Cost of Ownership/Month 2,708 3,698 5,911

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13

pick-up in demand – historically we have seen this with Honda Activa has well as Maruti Swift and D’zire models.

Given the above factors, we believe that there is high volume growth visibility at least over the next two years. If demand continues to remain strong and the waiting period remains high over the next year or so, there is a possibility of stronger volume growth in CY17F as well, we believe. As per management, with constant ramp-up in capacity at its Oragadam plant, the company should be able to increase production to 430,000-450,000 units in CY15F. We expect overall volumes to more than double to ~620,000 units in FY17F, from ~302,000 units in FY14. The growth will be driven by an increase in the mix of first-time buyers as well as upgrade from current premium motorcycle owners (>150cc), in our view.

Fig. 13: Order backlog at ~5 months despite steep production increase


Fig. 14: Royal Enfield – Actual demand increased by ~88% y-y in CY14


Fig. 15: Royal Enfield – Domestic volume growth to remain strong in CY15-16F


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Units Production (Months) Backlog Demand y-o-yCY10 52,752 6-7 35,000 CY11 76,000 9 45,000 86,000 CY12 115,626 7-8 80,000 150,626 75%CY13 180,371 4-5 90,000 190,371 26%CY14 307,002 5 140,000 357,002 88%

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14

Long-term growth to be driven by rising income levels and some increase in penetration

After two years of strong volume growth, we assume growth for RE bikes will normalise and expect 15% growth in domestic volumes in FY18F to ~717,000 units. Thereafter, we expect volume growth to gradually come down to ~10% levels over the next four to five years which is largely in line with our growth estimates for domestic two-wheeler industry volumes. Overall, we estimate RE’s domestic volumes to reach ~903,000 units in FY20F and overall volumes (incl. exports) to be ~950,000 units. On our assumptions, the share of RE volumes in overall domestic two-wheeler industry volumes will increase from ~2% in CY14 to ~3% in FY18F and 3.2% in FY22F. In our view, growth assumptions are not aggressive especially given expectations of rising disposable income and aspirational levels of India’s middle class. Note that our growth assumptions imply an increase in penetration of premium bikes to ~33% in FY19F, from ~28% in CY13, largely in line with the penetration levels of overall motorcycle industry.

Number of middle-income households to increase at an 8% CAGR over CY14-18F The number of middle-income households in India (Disposable income >USD 7,500) are expected to increase from 27.5% of total households in CY14 to ~35% in CY18F, as per Euromonitor data. This implies an increase in the number of middle-income households to ~95mn in CY18F, from ~70mn currently, an 7.6% CAGR over CY14-18F.

Fig. 16: Number of households with disposable income >USD7,500

Source: Euromonitor, Bloomberg, Nomura estimates

Penetration of premium motorcycles at ~28% currently Assuming that the 23-39 year old male population is the target market segment for RE bikes; then overall addressable market size is 171mn (as of end-CY13) which will likely increase to 183mn in CY18F, as per our calculations. If we assume similar income distribution as highlighted above (ie, 27.5% of households will have disposable income >USD7,500), then actual addressable population who can afford premium bikes (>150cc) is 44mn as of CY13 which will increase to 65mn by CY18F. As per our calculations, assuming 12-year life of a bike, there were 12mn premium motorcycles on the road as of end-CY13. This implies penetration levels of 28%; on our assumptions, penetration levels will increase to ~33% in CY18F. This is largely in line with penetration levels of the overall motorcycle industry in India.

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(mn) No. of Households (LHS)

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CY14-18 CAGR: 7.6%


15

Fig. 17: India’s population breakdown and bike penetration levels

Source: Government of India, Nomura estimates

Global OEMs to launch more products at lower prices, but still unlikely to be volume players

In the leisure motorcycle segment, global OEMs like Harley and Triumph have entered into Indian markets over the last three to four years. However, currently, due to big pricing gap, Royal Enfield does not face much competition from products of these OEMs. Going forward, Harley in particular has plans to increase localization and launch more models at lower price points. The company launched Street 750 at INR410,000 in Feb-14, cheapest bike in its product portfolio and there is also a possibility of the launch of Street 500 at expected pricing of INR325,000-350,000, as per media reports. However, even at this price point, Street 500 will be twice as expensive as RE’s most expensive Continental GT and will cost ~3x the Classic 350. Therefore, we believe that Harley will continue to cater to a very niche luxury leisure bike segment and is unlikely to be a big competitor to RE. In our view, expansion of product portfolio of foreign OEMs can in fact increase awareness for leisure biking and help in expansion of industry volumes.

Going forward, RE will launch two completely new product platforms starting end-CY15F. In our view, there could be four to five new bikes that could be launched from one platform. Note that, currently all four existing RE models are based on one engine platform. As per media reports, the company is working on new 400cc and 600cc engines to expand its product offerings.

Fig. 18: Royal Enfield – Key product offerings and pricing vs Competition


Population breakdown (mn)

Age Group No. of Males % of Total No. of Males % of Total 0-19 248 20.3% 230 17.6%20-24 57 4.6% 61 4.7%25-29 53 4.3% 57 4.3%30-34 49 4.0% 53 4.1%35-39 46 3.7% 49 3.8%40+ 181 14.8% 227 17.4%Addressable market for RE (23-39 Years) 171 183 % Households with Disposable Income >US7,500 25.9% 35.2%Addressable Population (assuming similar income distribution) (mn) 44 65 Premium Motorcycles on Road (150cc and above) (mn) 12 21 % Penetration of Premium Motorcycles 27.9% 33.2%

Royal Enfield's Penetration 1.5% 5.0%

20-59 Years of Male Population 334 371 Total Bikes on Road 84 123 % Penetration of Total Motorcycles 25.1% 33.1%

2013 2018F

Royal Enfield Engine size (cc) Pricing (INR) Other OEMs Engine size (cc) Pricing (INR)Bullet 350 346 99,000 Bajaj Avenger 220 81,500 Bullet Electra 346 111,000 Honda CBR 250 250 155,000 Bullet 500 499 142,000 KTM 390 373 185,000 Classic 350 346 118,000 Suzuki Inazuma 250 310,000 Classic 500 499 151,000 Ninja 300 300 350,000 Classic Desert Storm 499 153,000 Harley Street 750 749 410,000 Classic Chrome 499 160,000 Ninja 650 649 520,000 Thunderbird 350 346 128,000 Triumph Bonnelville 865 599,000 Thunderbird 500 499 163,000 Ducati Monster M795 803 599,000 Continental GT 535 185,000 Harley Superlow 883 631,000

Harley Sportster Iron 883 883 721,000

Key Upcoming modelsHarley Street 500 500 325,000-350,000Honda CBR400R 400 275,000-300,000Pulsar 400 400 NA


16

Higher volumes, accessories mix and low inventory should result in better dealer profitability

The company has expanded its dealer network by almost 3x over the last four years – it has ~400 dealers as of end-CY14 vs 145 dealers in CY10. Eicher plans to add seven to eight dealers per month in CY15F as it expands further in Tier 2 and Tier 3 cities. With even stronger volume growth, sales per dealer for Eicher have increased to 62 bikes/month in CY14 as compared to 29 bikes/month in CY10.

As per the management, top ten cities comprise ~50% of overall volumes – Bangalore, Mumbai, Delhi, Chennai, Hyderabad, Pune, Kolkata, etc, are its key markets. Demand has not saturated in these metros and the company is still seeing ~ 25% y-y volume growth, which is quite encouraging, in our view. Increasingly, growth is moving towards Tier 2 and Tier 3 cities for the company with newer cities like Patna, Indore, etc. producing volumes of ~400-500 units/month, as per management demand was negligible five to seven years ago. With higher volumes, it has become much easier for Eicher to open dealerships in smaller towns/cities. Further, due to lower inventory levels (as demand exceeds supply), capital requirements to set up a dealership are lower, which makes it more profitable for an individual to open a RE dealership, in our view.

Overall, over the years, growth for the company has become more broad-based with presence in almost all states in India while five to seven years ago, demand was quite concentrated as volumes were largely driven by two or three states such as Punjab, Kerala, etc. This provides us with more comfort regarding the long-term sustainability of the volume growth of the company.

Fig. 19: Royal Enfield – Significant dealer network expansion over the last 3-4 years


Strong pricing power and volume growth has led to margin improvement

Due to niche product offerings, strong brand loyalty and limited competition, the company has strong pricing power and thus, it has been able to take regular price increases in its product portfolio. RE’s net realisations have increased at ~8% CAGR over the last five years (CY09-14F) – 5% is driven by price increases and the remaining ~3% by product mix, as per our estimates. For example – the company launched Classic 350 at ex-showroom Delhi price of ~INR98,000 in November 2009; the price of this model was ~INR118,000 in December 2014 which implies ~5% price CAGR. Price increases coupled with strong volume growth (42% CAGR over CY09-14) have led to improvement in EBITDA margins to ~24.2% in CY14, from ~7.4% in CY09.

Going forward, given the higher volume base and increasing mix of first-time buyers and upgrades from commuter bikes, we are assuming only 2% ASP increase annually over FY16-17F. We project EBITDA margins to improve to 26.5% in FY16F and 27.1% in

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FY17F. We expect the margin expansion to be led by operating leverage benefits and benign raw material prices.

Fig. 20: Royal Enfield – Strong pricing power has led to improved ASPs and margins


Despite price increases, gross margin declined in CY10 due to commodity cost pressures and possibly also due to the production impact of the shift to UCE engines (from Iron cast engine) for its entire product portfolio. Gross margins have seen big improvements in CY12 onwards – in our view, there are several factors which have led to this 1) increased volumes led to better pricing and greater bargaining power with vendors; 2) platform consolidation into one engine platform as compared to three engine platforms earlier and 3) increased production from new and more modern Oragadam plant. We expect marginal benefit in gross margins over the next two years (~110bps) from current levels due to benign commodity prices, price increases and higher mix of production from Oragadam plant.

With strong volume growth, other operating expenses have declined from ~30% of sales in CY9 to ~16% in CY14. Demand pull has led to a reduction in marketing spend (Ad spend + Incentives) to ~0.5% in CY13 from ~2% in CY09. Over the next two years, we expect more margin benefit due top operating leverage.

Fig. 21: Gross margins have improved by 7pp over the past 3 years


Fig. 22: Other expenses/Sales have declined on strong volume growth


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RE’s profitability not significantly higher than Harley Davidson While RE is much more profitable than other domestic OEMs – both two-wheelers and four-wheelers, its margins are not significantly higher than that of Harley Davidson’s, a US-based manufacturer of heavyweight and luxury touring motorcycles. Harley’s gross margins have averaged around 36-37% over the last five to six years while its CY13 EBITDA margins were ~24%.

Fig. 23: Harley Davidson – gross and EBITDA margins

Source: Bloomberg, Nomura research

Strong cashflow generation likely over next two to three years

We assume capex of ~INR6.8bn over FY16-17F as the company will have to expand its production capacity beyond 500,000 units at its Oragadam plant, based on our observations. With robust volume growth and improved profitability, we expect strong cashflow generation over the next three years. The company will likely generate FCF of INR28bn over FY16-17F, on our estimates.

Fig. 24: Royal Enfield – capex and cashflow generation (INR mn)


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Spares - Strong growth likely over the next few years as overall RE bikes on the road increases

Spares and other revenues stood at INR1.5bn in CY13; up 47% y-y and accounted for ~8% of RE’s overall revenues. In CY14F, revenue mix from spares will likely decline to ~6% due to ~70% volume growth of RE motorcycles. Going forward, with the growing population of RE motorcycles and the company’s initiatives to increase revenues from merchandise and accessories, we look for ~50% revenue CAGR over the next three years. This segment will contribute ~9% of RE’s overall revenues in FY18F, as per our estimates. Note that for Harley Davidson, Parts, Accessories and Merchandise businesses contributed ~23% of overall revenues of USD 5.3bn in CY13.

Key points to note:

• As per the company, the parts market is underserved currently and availability will likely catch up over the next two to three years.

• Accessories could present a reasonably big opportunity – as per our interaction with customers and dealers, a customer normally spends more than ~INR5,000 on accessories for their bikes. Currently, accessories are largely supplied directly by vendors and dealers. In 2HCY14, RE opened up its first new retail format store in Chandigarh where it primarily plans to retail biking apparel and accessories. Going forward, there are plans to open many such stores. The company also plans to launch a new line of accessories and apparel later this year.

Fig. 25: Royal Enfield – Share of spares revenues to increase over the next few years


Fig. 26: Harley Davidson – Breakdown of CY13 revenues


Fig. 27: Spares as % of overall revenues (FY14) for other domestic OEMs


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AL BJAUT MSIL TTMT Standalone HMCL M&M


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Exports could be potential long-term opportunity but unlikely to be a growth driver over the next two to three years

Royal Enfield exported ~5,800 units in CY14 (up ~35% y-y) to more than 40 countries – however, currently, its key export markets are developed countries like the US, the UK, Europe, Japan and Australia. Exports comprised only ~2% of total volumes in CY14; we are building in 35-40% y-y volume growth on this low base over the next 2-3 years.

As per management, the global mid-sized motorcycle market (250cc-650cc) is ~1mn units while market for heavy duty segment (650cc and above) is also ~1mn units. In our view, developed markets like Europe (including the UK) and the US will account for 40-45% of industry volumes in these segments. Management believes that the mid-sized motorcycle market globally is quite under-served as European and US manufacturers focus on bigger bikes, while most Japanese and emerging market manufacturers focus on smaller bikes. The company believes that it can expand in the mid-sized bike market globally and has a long-term target to become the global leader in the segment.

Note that Colombia is the first major emerging market which RE entered in late CY14 in its plans to expand presence in the overseas markets. RE has partnered with Coberta Group, which will open exclusive stores to retail RE motorcycles in Colombia. The Coberta Group has interests in various business segments such as retail, wholesale, assembly, automotive, textiles and distribution of various products in Colombia. It has been present in the Colombian market for more than 70 years. As per the company, "Colombia is a strategic market for Royal Enfield, given the potential of its motorcycle industry and the fabulous riding terrain.” As per our understanding, annual motorcycle industry volumes in Colombia are around 0.5-0.6 mn units and BJAUT is the market leader with ~44% market share.

Over the next few years, depending on the success in Colombia, we believe that RE will expand into other big motorcycle markets like Brazil (market size: 1.5mn units) and Indonesia (market size: 7mn units +). In our view, if RE is able to penetrate emerging markets like Latin America, South-East Asia, successfully then exports could be a big growth opportunity for the company over the long-term (next five to seven years).

Fig. 28: Royal Enfield export volumes to increase at 38% CAGR over CY14-17F


Fig. 29: Motorcycle industry volumes (>250 cc) in select global markets

Source: Nomura estimates

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Fig. 30: Royal Enfield: Key details and assumptions


(INR mn) CY10 CY11 CY12 CY13 CY14 FY16F FY17F FY18F FY14-18 CAGRVolumes (Units)Domestic 49,944 69,550 109,900 173,865 296,380 592,000 610,000 701,500 33.3%Exports 2,630 3,285 3,532 4,256 5,766 10,000 11,000 15,400 38.7%Total Volumes 52,574 72,835 113,432 178,121 302,146 602,000 621,000 716,900 33.4%

YoY (%)Domestic 39.3 58.0 58.2 70.5 99.7 3.0 15.0 Exports 24.9 7.5 20.5 35.5 73.4 10.0 40.0 Total Volumes 38.5 55.7 57.0 69.6 99.2 3.2 15.4

Key Financials (INR mn)Net Sales 4,423 6,715 10,493 17,025 30,312 62,417 67,293 80,818 38.7%YoY 51.8 56.3 62.3 78.0 105.9 7.8 20.1 ASPs (INR) 82,396 91,007 94,651 98,981 102,555 106,963 109,175 111,611 2.9%YoY 10.5 4.0 4.6 3.6 4.3 2.1 2.2 Margin (%) 10.3% 11.9% 13.9% 18.4% 24.2% 26.5% 27.1% 27.6%EBITDA 454 801 1,454 3,137 7,336 16,534 18,241 22,314 44.9%YoY 76.4 81.6 115.7 133.8 125.4 10.3 22.3 PAT (ex-subs dividend) 482 838 1,448 2,378 5,181 11,815 12,928 15,969 45.5%EPS (ex-subs dividend) 18 31 54 88 191 436 477 589 45.5%YoY 73.3 72.8 64.0 117.3 128.0 9.4 23.5

Capex 201 547 987 1,456 2,970 3,865 3,000 3,000 Free Cashflow 777 1,200 2,172 3,096 3,119 12,624 15,552 18,813 Net Cash 4,696 5,156 6,420 8,441 9,601 19,285 30,312 43,401 RoE 11.2% 16.8% 24.8% 32.8% 50.4% 69.3% 48.9% 43.1%


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Volvo Eicher Commercial Vehicles (VECV) VECV is joint-venture between Eicher Motors and Volvo Group – Eicher owns 54.4% while Volvo owns the remaining 45.6% stake in VECV. Both these companies entered into the JV in July, 2008 – Eicher transferred its CV, components and engineering solutions businesses into VECV for a consideration of INR2bn. In addition, Eicher received non-compete fees of ~INR0.4bn; total cash inflow to Eicher from the JV was INR 2.4bn. While Volvo invested INR10.8bn in cash and also transferred its Indian Trucks distribution & service network to the JV to gain direct 45.6% stake in JV. Volvo also acquired 8.1% stake in Eicher Motors from the promoters for INR1.6bn at INR691 per share (>100% premium to market price). Thus, including the indirect stake, Volvo has 50% stake in VECV.

Fig. 31: Joint Venture agreement between Eicher and Volvo


VECV – Strong market share in 7.5-12 ton segments but limited share in higher tonnage segments

Overall, VECV currently has ~12% market share in the domestic medium and heavy commercial vehicles (MHCV) segment. In the bus segment (passenger carriers), Eicher currently has 11% market share. Within, the goods carrier segment, Eicher has had a strong niche in the medium duty segment (7.5-12 tons) with market share of 38-41% over the past four to five years. The company has a strong brand recognition in this segment and commands more than 5% pricing premium over its competitors. In 12-16 ton segment, VECV has 7-8% market share. However, in the heavy truck segment (>16 tons), the company has market share of only 3.5% in 9MFY15. This is partly due to some product gap in haulage tractors and tippers segment as well, in our view. Management has aggressive plans to increase its market share to 15% in the higher tonnage segment


23

over the next few years particularly through the launch of its Pro series models (Pro 6,000 and Pro 8,000).

Fig. 32: VECV segmental market share

Source: SIAM Auto, Nomura estimates

Pro series engine could lead to market share gains

Eicher Volvo JV was formed in 2008 to develop a range of commercial vehicles which suited India’s situation. The company has started to launch a range of Eicher pro branded trucks which will be based on an adaptation of Volvo technology. Under the Pro series range, the company will launch 11 new models covering the entire 5-49 tons segments with haulage, mining and other applications. The focus of these trucks will be higher power, torque, fuel efficiency and refinement. The JV has invested INR25bn in these facilities (including INR7bn in 2014). These trucks have been developed keeping in mind the export potential to regions like Africa, Middle East, South Asia and South East Asia. The price points or product specifications will be complimentary to Volvo's current range. Thus, VECV will be able to take advantage of Volvo's reach and distribution network in these markets. Volvo is present in 192 countries around the world and sells ~200,000 trucks globally. The present capacity for VECV is 66,000 trucks which can be scaled up to 100,000 units.

In CY14, the company launched Pro 1000, 3000 and Skyline Pro models which covers the light- and medium-duty truck and bus segments. In January 2015, the company unveiled its Pro 6000 series models which will cater to higher tonnage segments and it will launch Pro 8000 models by mid-CY15. As per our interaction with dealers, Pro series models in medium-duty segments have received a good response from customers as these are technologically superior, more powerful and more fuel-efficient vehicles. In our view, with the roll out of higher tonnage segments, VECV can gain some market share in these segments over the next two to three years.

Fig. 33: Pro Series models and launch timeline


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Segment Gross Vehicle Weight (Tons) Engine Power (HP) Torque (NM) Launch plansPro 1000 5-14 tons trucks E483, 4 Cylinder 95-115 285-400 Feb-14Pro 3000 9-14 tons trucks E494, 4 Cylinder 120-150 400-450 Jul-14Pro 6000 16-40 tons trucks VEDX5/VEDX8, 4/6 Cylinder 210-220 825-850 Jan-15Pro 8000 25-49 tons trucks VEDX8, 6 Cylinder 250-280 950-1050 Mid-CY15Skyline Pro Buses E483, 4 Cylinder 107 320 Nov-14


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VECV to deliver 27% volume CAGR over CY14-17F

We expect 27% volume CAGR for VECV over CY14-17F; this should be driven by: 1) our view of strong recovery in MHCV industry volumes over the next three years and 2) gradual market share gains in the higher tonnage segments (>16 tons) after the launch of Pro series models. We expect MHCV industry volumes to grow by 30% y-y in FY16F (YE end Mar-16) and 20% in FY17F. VECV’s market share has been around ~12% in 9MFY15 so far – we expect a gradual increase to ~14% by CY15F. The company has an ambitious target to achieve 15% market share in higher tonnage vehicles over the next few years from 3.5% currently. However, on our estimates, VECV’s market share in this segment will increase to ~8% by CY17F.

As per our interaction with fleet operators, trucks of MNC manufacturers like VECV and Bharat Benz are technologically superior, more powerful, more fuel efficient and offer comfortable driving, however, these vehicles are 5-10% more expensive compared to those produced by local OEMs. In our view, implementation of certain government policies like GST, better quality road infrastructure, etc, could lead to higher demand for premium vehicles.

Fig. 34: VECV – Volume growth assumptions

Source: Company Data, Nomura Estimates

Strong growth in exports to sustain after Pro series model launches The company exports its products to 22 countries across Africa and the Middle East with knock-down assembly operations in Egypt, Kenya, Bangladesh & Mauritius. VECV also has local bus body building facilities in Egypt, Turkey, Mauritius, Nepal & Bangladesh. VECV’s export volumes increased by 77% y-y to 5,814 units in CY14 – LCV exports more than doubled to 2,137 units while MHCV exports grew by 60% y-y. Currently, exports comprise largely of buses and light & medium duty trucks. After the launch of heavy duty Pro series models, we look for exports in this segment to pick up quite strongly over the next two to three years.

(INR mn) CY11 CY12 CY13 CY14F FY16F FY17F FY18FVolumes (Units)Domestic 45,935 46,330 37,951 34,948 56,744 57,621 73,068

LCVs 9,321 9,388 9,545 9,863 13,561 14,104 16,220 MHCVs 35,908 36,373 27,705 24,194 41,735 42,069 55,110 Volvo 706 569 701 891 1,448 1,448 1,738

Exports 3,108 2,501 3,300 5,824 8,008 8,008 10,010 Total Volumes 49,043 48,831 41,251 40,772 64,751 65,629 83,078

YoY (%)Domestic 25.6 0.9 (18.1) (7.9) 62.4 1.5 26.8

LCVs 28.7 0.7 1.7 3.3 37.5 4.0 15.0 MHCVs 27.2 1.3 (23.8) (12.7) 72.5 0.8 31.0 Volvo (35.5) (19.4) 23.2 27.1 62.5 0.0 20.0

Exports 14.4 (19.5) 31.9 76.5 37.5 0.0 25.0 Total Volumes 24.9 (0.4) (15.5) (1.2) 58.8 1.4 26.6


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Fig. 35: VECV – Export volumes and y-y growth


Medium-duty engine business – Potential high RoCE opportunity

Medium-term duty engine project started in 2010 to produce 5-litre and 8- litre engines with power ratings ranging from 180-330 HP. The plant was commissioned in April 2013 and is capable of producing engines compliant from Euro 3 to Euro 6 norms. The plant will cater to 1) Euro-6 engine requirement from Volvo Group largely for medium-duty vehicles in developed markets; 2) Euro-3 and Euro-4 engine requirement from Volvo Group for sale in emerging Asian and African markets and 3) BS-3 and BS-4 engine requirement for Eicher branded trucks to be sold in India as well as exports. The company has invested capex of INR3.8bn for capacity of 25,000 units; as all the land & building and some of the machinery is already in place, capacity can be expanded to 100,000 units with minimal capex of INR1.5bn.

On our estimates, the company will export 13,600 long blocks of engines in CY14F and this segment will account for ~10% of VECV’s revenues compared to 3% in CY13. We expect engine volumes to increase by 50% y-y to ~20,000 in FY16F; thereafter, we expect volumes to grow by 25% y-y annually to ~32,000 units by FY18F. Assuming realization INR400,000/engine and 10% EBITDA margins, phase 1 capacity would imply pre-tax RoCE of 22%. After full capacity expansion, pre-tax RoCE of the project will be ~52% at 80% utilization, as per our estimates. Fig. 36: VECV – Revenue split


Fig. 37: Medium-duty Engine Business


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Margins have held up well in downturn; strong upside possible with recovery

VECV’s EBITDA margins have held up quite well during the downturn compared to its competitors – VECV has reported 5-6% margins even in the worst quarters of CY13-14 compared to losses reported by AL and TTMT’s domestic business. In our view, this has been possible due to: 1) strong pricing power in 7.5-12 ton segments where the company is market leader (along with TTMT) with ~40% market share; 2) lower discounting levels vis-a-vis competitors; 3) strong growth in export volumes – 53% CAGR over CY12-14 and 4) start of reasonably profitable medium-duty engine business which is now contributing almost 10% of revenues. Going forward, with the pick-up in volume growth, lower discounting levels and benign commodity prices, we expect VECV’s margin to increase to 11.3% in FY17F and 13.2% in FY18F, from ~7% in 4QCY14. We estimate gross margins to expand by ~200bps to 32.5% in CY16-17F and operating leverage benefits to yield around 400bps margin expansion over the next three years from current levels.

Fig. 38: EBITDA margins to improve ~13% levels in FY17F


Fig. 39: 200bps improvement in gross margins likely over next 2 years


Fig. 40: Operating leverage benefits likely with strong volume growth


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Capex phase over; expect strong FCF generation and return ratios going forward

The company has incurred capex of ~INR25bn over the past five years to expand capacity and develop superior products particularly Pro series models. Going forward, we expect annual capex of ~INR4bn over CY15-17F. Given our view for a robust volume growth outlook and improved profitability, we estimate VECV to generate FCF of INR~20bn over FY16-18F. On our estimates, RoE will improve to 33% by FY18F from 8% in CY14F.

Fig. 41: VECV – Capex and Cashflow generation (INR mn)


Fig. 42: VECV – Key details and assumptions


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(INR mn) CY11 CY12 CY13 CY14F FY16F FY17F FY18F FY14-18 CAGRVolumes (Units)Domestic 45,935 46,330 37,951 34,948 56,744 57,621 73,068 27.9%

LCVs 9,321 9,388 9,545 9,863 13,561 14,104 16,220 MHCVs 35,908 36,373 27,705 24,194 41,735 42,069 55,110 Volvo 706 569 701 891 1,448 1,448 1,738

Exports 3,108 2,501 3,300 5,824 8,008 8,008 10,010 19.8%Total Volumes 49,043 48,831 41,251 40,772 64,751 65,629 83,078 26.8%

YoY (%)Domestic 25.6 0.9 (18.1) (7.9) 62.4 1.5 26.8

LCVs 28.7 0.7 1.7 3.3 37.5 4.0 15.0 MHCVs 27.2 1.3 (23.8) (12.7) 72.5 0.8 31.0 Volvo (35.5) (19.4) 23.2 27.1 62.5 0.0 20.0

Exports 14.4 (19.5) 31.9 76.5 37.5 0.0 25.0 Total Volumes 24.9 (0.4) (15.5) (1.2) 58.8 1.4 26.6

Key Financials (INR mn)Net Sales 49,642 52,976 50,697 57,069 90,903 100,075 130,757 31.8%YoY 26.0 6.7 (4.3) 12.6 59.3 10.1 30.7 ASPs (INR) 914,550 991,636 1,041,303 1,077,749 1,153,191 1,216,617 1,283,531 6.0%YoY 4.7 8.4 5.0 3.5 7.0 5.5 5.5 Margin (%) 10.2% 7.6% 7.8% 6.7% 8.8% 11.3% 13.2%EBITDA 5,048 4,036 3,966 3,810 8,000 11,358 17,253 65.4%YoY 50.8 (20.0) (1.7) (3.9) 110.0 42.0 51.9 PAT 4,141 3,367 2,891 1,849 4,818 7,195 11,937 86.2%VECV's sharePAT 2,253 1,831 1,573 1,006 2,621 3,914 6,494 EPS 83 68 58 37 97 144 240 86.2%YoY 59.6 (18.7) (14.1) (36.0) 160.6 49.3 65.9

Capex 4,600 5,710 5,802 7,013 5,000 4,000 4,000 Free Cashflow 914 (813) (1,551) (3,381) 2,233 5,852 11,773


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Fig. 43: Other businesses of VECV

Source: Company data

Eicher Polaris JV: Not much clarity as of now

In CY12, Eicher formed a 50:50 JV with US-based Polaris Industries to develop a product in the personal vehicle space for the Indian market. Management has not disclosed any details about the product but has mentioned that the intention is to create a completely new segment. The production facility is being set up in Jaipur; Eicher’s overall investment in this project will only be INR 2.5bn and the project will be commissioned in CY15.

Polaris is a leader in the power sport segments in the US. The company designs, engineers, and manufactures off-road and on-road vehicles. It produces vehicles including snowmobiles, all-terrain vehicles, and motorcycles. In the motorcycle segment, the company manufactures Touring, Cruiser and Bagger motorcycles with prices ranging from USD 13,000 to USD 25,000-30,000 a bike. The company’s products are largely sold in the US, Canada and Europe. CY14 revenues were ~USD4.4bn and it has market capitalization of ~USD 10bn.

Fig. 44: Polaris Indian Motorcycles


Fig. 45: Polaris Victory Motorcycles


Company Details CY13 revenues (INRmn)Eicher Engineeering Components (EEC)

This is the supplier of drive lines to Eicher Trucks and Buses with ambition to supply to Volvo Group in future. It has three facilities in Thane, Dewas and Pithampur

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Eicher Engineering Solutions (EES)

Comprehensive product development services - Class A surfacing, CAD, CAE, prototyping, Supplying to Global Clients such as JCB, TEREX, Navistar, GM, Nissan etc besides in-house Eicher requirements

N/A

VE Powertrain (VEPT) Manufactures Euro 6 engines for medium duty trucks of Volvo Group globally. The same platform has been adapted to Euro 3 and 4 engine BS3/BS4) technologies to meet VECV requirements and other Volvo Group requirements for this type of engines in Asia.

N/A


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Valuation: Quality comes at a price

SOTP based TP of INR19,915 offers 22% implied upside from current levels

We use an SOTP valuation methodology to arrive at our Mar-16 TP of INR19,915. We value the Royal Enfield business (standalone) at INR16,694 per share, based on 35x FY17F EPS of INR477. We value the VECV business at INR3,220 per share, based on 10x FY18F EV/EBITDA, which is rolled back by 12 months at 11.5% cost of equity.

Fig. 46: Eicher Motors – Target price calculation


Royal Enfield: DCF implies valuation of INR17,087 per share

We believe that Eicher’s premium valuations (compared to other domestic OEMs) are largely due to continued strong performance of the RE business. We expect RE to deliver a 65% EPS CAGR over FY14-17F on a 43% volume CAGR and some margin expansion largely due to operating leverage benefits. Given our view of sustained strong growth in Royal Enfield over the next 2-3 years, we expect the current valuation multiples to sustain going ahead as well.

Our DCF based valuation which captures the long-term growth potential of the RE business implies a P/E multiple of 35.8x FY17F. Key assumptions of our model are: 1) 11.5% cost of equity – Risk free rate of 7.5% Risk premium of 5% and Beta of 0.8 and 2) terminal growth rate of 6% (see following figure).

After our forecast period (FY14-19F), we expect domestic volume growth to gradually taper to ~10% which is largely in-line with our long-term growth expectations for the overall domestic two-wheeler industry. Our long-term estimates imply that RE will account for ~3% of total two-wheeler industry volumes in India which is fair, in our view. Exports will likely grow at a much faster rate due to lower base and the company’s expansion into emerging markets in Latin America, South East Asia, Middle East, etc. Our EBITDA margin assumptions are largely in line with our FY17-18F estimates.

Royal EnfieldFY17F EPS (ex-subs dividend) 477 P/E multiple 35 Equity Value - March-16 - A 16,694

VECV ValuationINR mnFY18F EBITDA 17,253 EV/EBITDA 10.0EV 172,528 Net Cash/(Debt) - FY17F 6,373 Equity Value March-17 178,901 Equity Value Rolled back to Mar-16 160,449 Eicher's share (54.4% stake) 87,284 No. of Shares 27 Value/sh - B 3,220

Target Price - A+B 19,915


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Fig. 47: DCF-based valuation of Royal Enfield business to arrive at value of INR 17,087 per share


Harley Davidson has also traded at higher P/E multiples during strong earnings growth phase We also look at Harley Davidson’s historical trading multiples, particularly during its higher growth phase. During CY99-2003, Harley’s volumes increased at 13% CAGR while net profit expanded at 30% CAGR. In terms of valuations, the stock traded at an average P/E of ~28x 1-year forward earnings over that period.

Fig. 48: Harley Davidson – 1-yr forward P/E


(INR mn) CY13 CY14F FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F TerminalDomestic Volumes 173,865 296,380 592,000 610,000 701,500 806,725 903,532 1,011,956 1,113,151 1,224,467 1,346,913 1,481,605 YoY 58% 70% 100% 3% 15% 15% 12% 12% 10% 10% 10% 10%Exports 4,256 5,766 10,000 11,000 15,400 30,800 46,200 69,300 86,625 108,281 129,938 155,925 YoY 20% 35% 73% 10% 40% 100% 50% 50% 25% 25% 20% 20%Total Volumes 178,121 302,146 602,000 621,000 716,900 837,525 949,732 1,081,256 1,199,776 1,332,748 1,476,851 1,637,530 YoY 57% 70% 99% 3% 15% 17% 13% 14% 11% 11% 11% 11%ASPs 98,981 102,555 106,963 109,175 111,611 114,101 116,647 119,250 121,911 124,632 127,413 130,256 YoY 5% 4% 4% 2% 2% 2% 2% 2% 2% 2% 2% 2%Net Sales 16,954 30,167 62,091 66,954 80,416 96,687 112,910 132,082 150,745 171,997 195,561 222,171 YoY 62% 78% 106% 8% 20% 20% 17% 17% 14% 14% 14% 14%Margin (%) 18.5% 24.3% 26.6% 27.2% 27.7% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0%EBITDA 3,137 7,336 16,534 18,241 22,314 26,106 30,486 35,662 40,701 46,439 52,801 59,986 YoY 116% 134% 125% 10% 22% 17% 17% 17% 14% 14% 14% 14%PAT (ex- Other Income) 10,797 11,715 14,190 16,563 19,331 22,630 25,824 29,482 33,551 38,167 YoY 9% 21% 17% 17% 17% 14% 14% 14% 14%

Operating Cashflow ex WC 2,394 5,178 11,700 12,840 15,614 18,285 21,359 24,978 28,509 32,520 36,960 41,966 Capex (1,456) (2,970) (3,865) (3,000) (3,000) (3,000) (3,150) (3,308) (3,473) (3,647) (3,829) (4,020) Change in Working Capital 1,598 2,403 5,245 3,521 2,795 1,115 3,245 3,834 3,733 4,250 4,713 5,322 FCFF 2,537 4,612 13,079 13,360 15,410 16,401 21,453 25,505 28,768 33,124 37,844 43,268 Debt ChangeFCFE 2,537 4,612 13,079 13,360 15,410 16,401 21,453 25,505 28,768 33,124 37,844 43,268 833,887 YoY 39% 82% 184% 2% 15% 6% 31% 19% 13% 15% 14% 14%Terminal Grow th (g) 6%Retention ratio 24.0%

Time factor - 1 2 3 4 5 6 7 8 9 Discount rate 1.00 0.90 0.80 0.72 0.65 0.58 0.52 0.47 0.42 0.38

NPV of FCFE 453,549 No. of Shares (mn) 27 Price/Share - March-16 16,733 Cash/share (CY14F) 354 Total Value/sh 17,087 Target Price - Mar-16 17,087

Cost of EquityRisk Free Rate (RF) 7.5%Risk permium 5.0%Beta 0.8Cost of Equity (Ke) 11.5%

Key Balance Sheet ItemsGross Fixed Assets 4,149 6,101 9,851 12,851 15,851 18,851 22,001 25,308 28,781 32,427 36,256 40,277 Net Block 3,132 5,599 8,562 10,438 12,013 13,291 14,413 15,373 16,161 16,769 17,189 17,411 Net Worth 8,213 12,337 21,739 31,121 42,989 55,129 69,461 86,484 106,249 129,153 155,593 186,067 Net Working Capital (4,258) (6,662) (11,906) (15,427) (18,222) (19,337) (22,582) (26,416) (30,149) (34,399) (39,112) (44,434) -

Cash & Cash Equivalents 8,441 9,601 19,285 30,312 43,401 55,378 71,833 91,730 114,440 140,986 171,719 207,293

Key RatiosCapex/sales 8.6% 9.8% 6.2% 4.5% 3.7% 3.1% 2.8% 2.5% 2.3% 2.1% 2.0% 1.8%Asset Turnover 5.3 5.9 7.8 5.9 5.6 5.6 5.5 5.6 5.6 5.6 5.7 5.8 Spares as % of Revenues 7.7% 6.3% 5.4% 7.6% 9.2% 9.8% 10.5% 10.9% 11.5% 11.9% 12.2% 12.4%Working Capital as % of Sales -25% -22% -19% -23% -23% -20% -20% -20% -20% -20% -20% -20%Other Income as % Cash 6.1% 8.7% 15.3% 9.2% 8.6% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%RoE (Including Cash) 33% 50% 69% 49% 43% 39% 36% 34% 32% 30% 29% 28%

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Basis for our valuation of VECV business

• Why do we base our valuation on FY18F and not FY17F?: Eicher will launch higher-tonnage Pro series models over the next two quarters, which we believe should help the company improve its share of the heavy duty trucks market (>16 tons) from ~3.5% currently. In our view, market share gain will primarily take place in FY17-18F as it will take a company two to three years to gain customer confidence for its differentiated products. We expect 42% EBITDA growth in FY17F and 52% FY18F for the VECV business. Thus, we believe that FY18F is a better year to base our valuation multiple on as it fully captures the true potential of the business.

• Reasons for higher target multiple vs AL: Our target multiple is towards the higher end of Ashok Leyland’s historical one-year forward EV/EBITDA trading multiple range of 8-10x. We value AL at 9x FY17F EV/EBITDA. We believe that this is justified given: 1) VECV had a better balance sheet with net cash of INR1.5bn as of CY14F vs net debt of INR35.3bn (FY15F) at Ashok Leyland; 2) lower margin volatility in the business due to its medium-duty engine business and exports; and 3) our view of strong volume growth in the VECV business due to market-share gains over the next three years.

Valuation charts Fig. 49: Consolidated 1-yr forward P/E chart

Source: DataStream, Nomura research

Fig. 50: Consolidated 1-yr forward EV/EBITDA chart


Fig. 51: India autos – Comp sheet

Note: * For M&M + MVML business, P/E is adjusted for subsidiary values. For Eicher, FY15F financials represent CY14F financials. EV/EBITDA based on previous year’s debt. Pricing as of 13 February 2015 close.

Source: Bloomberg, Nomura estimates

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Mkt Cap Price EPS CAGRCompany Ticker ($mn) Rating INR FY15-17F FY15F FY16F FY17F FY16F FY17F FY16F FY17F FY16F FY17F FY16F FY17F FY16F FY17FAshok Leyland AL IN 3,066 Buy 67.0 118% 1.2 3.5 5.5 19.4 12.1 11.8 8.2 16.3 22.0 10.4% 12.2% 4.6% 5.5%Bajaj Auto BJAUT IN 10,518 Neutral 2,260.8 15% 115.4 131.4 151.7 17.2 14.9 10.2 8.7 31.3 31.1 21.3% 21.3% 6.0% 7.0%Hero MotoCorp HMCL IN 9,160 Buy 2,852.9 21% 133.2 168.5 195.8 16.9 14.6 11.3 9.6 52.1 50.6 15.1% 15.3% 5.7% 6.9%M&M* MM IN 11,909 Buy 1,192.6 16% 50.7 53.3 68.0 12.7 10.0 7.4 5.7 16.8 18.5 12.2% 13.0% 5.1% 8.5%Maruti Suzuki MSIL IN 17,567 Buy 3,617.0 42% 126.9 184.6 254.4 19.6 14.2 10.6 7.5 20.3 23.4 14.7% 16.0% 5.3% 7.6%Tata Motors TTMT IN 27,177 Buy 565.6 8% 56.3 58.4 65.7 9.7 8.6 4.4 3.8 20.4 19.0 15.4% 15.9% 0.7% 5.0%Exide EXID IN 2,410 Neutral 176.4 23% 6.8 8.6 10.2 18.4 15.5 12.3 10.4 16.9 18.0 14.7% 14.9% 3.9% 3.7%Bharat Forge BHFC IN 4,447 Buy 1,188.2 31% 32.2 40.6 55.5 29.3 21.4 15.8 12.0 26.6 29.7 20.5% 21.6% 2.2% 3.6%Amara Raja AMRJ IN 2,435 Buy 886.5 18% 24.6 28.7 34.4 30.9 25.8 17.5 14.3 25.6 24.9 16.9% 17.1% 2.8% 3.6%

Eicher Motors EIM IN 7,089 Buy 16,267.4 65% 227.0 516.8 621.4 31.5 26.2 13.6 9.6 45.6 39.7 16.0% 17.7% 3.2% 4.4%

EPS P/E EV/EBITDA EBITDA margin FCF YieldRoE


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33

Appendix A-1

Analyst Certification

We, Kapil Singh and Nishit Jalan, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Eicher Motors EIM IN INR 16051 16-Feb-2015 Buy N/A

Eicher Motors (EIM IN) INR 16051 (16-Feb-2015)

Buy (Sector rating: N/A) Chart Not Available

Valuation Methodology We use an SOTP valuation methodology to arrive at our Mar-16 TP of INR19,915. We value the Royal Enfield business (standalone) at INR16,694 per share, based on 35x FY17F EPS of INR477. We value the VECV business at INR3,220 per share, based on 10x FY18F EV/EBITDA, which is rolled back by 12 months at 11.5% cost of equity. The benchmark index for this stock is MSCI India. Risks that may impede the achievement of the target price 1) Lower-than-expected volume growth in Royal Enfield volumes. 2) Slower-than-expected CV cycle recovery. 3) Lower margin expansion.

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The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current price)/current price. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. 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SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned. Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. 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