Off the Autobahn

8/4/2019 Off the Autobahn

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1 Edelweiss Securities Limited

Executive Summary

While several macro headwinds persist, we see silver lining around dark clouds. In our view,

commodity prices have peaked out while interest rates should peak out in H1FY12 and

liquidity crunch should ease off in H2FY12. While FY12 is likely to be slow year for car and

commercial vehicle’s demand perspective, tractor and two wheeler demand should report

robust growth on the back of strong rural income and government thrust on rura

development in FY12.

We expect volume growth estimates for cars and trucks to be 10% and 8%, while for two

wheelers and tractors at 15% each, respectively, for FY12. We build in 100-200bps decline in

EBITDA margins due to input cost inflation, which could reduce earnings by 10-15%.

We expect consensus to downgrade earnings for cars and trucks as the full blown impact of

sharp increase in interest rates and fuel prices are felt in the FY12 sales and rising incentives

and interest costs eats into the profitability. We are 7-11% lower than consensus on FY12E

earnings for Maruti Suzuki and Ashok Leyland.

On valuation, the stocks are trading at a reasonable 7-15xFY12E EPS (upto 50% discounts to

Sensex which is inline with discounts observed during earlier down-cycle). However, the

negative triggers outweigh positive triggers in the short term. Our analysis suggests the auto

sector is likely to underperform the benchmark Sensex in the next two quarters till interest

rates peak out and the underperformance should start narrowing Q4FY12 onwards.

In such a tough operating scenario, we like companies which have revenue visibility in FY12

and as well are available at reasonable valuation. We advise investors to prefer companies

with: (1) high exposure to rural sales; (2) greater contribution from exports; (3) low

dependency on bank credit to push sales; (4) have low competitive intensity; (5) have high

replacement demand; and (6) are available at reasonable valuation.

We maintain ‘BUY’ on Bajaj Auto, Tata Motors and Mahindra & Mahindra while we

recommend ‘REDUCE’ on Maruti Suzuki and Ashok Leyland. We have a ‘HOLD’ rating on

Hero Honda.

Table 1: Operating matrix and our pick

Source: Edelweiss research

Interest rate

sensitive

demand

Sales on

bank

credit

Contribution

of rural

demand

Exports

contribution

Pricing

power

Replacement

demand

Competitive

intensity Valuation

Our

recommen‐

dation

Ashok Leyland Yes High Low Low Weak Low Moderate Low REDUCE

Bajaj Auto No Low High High High High Moderate Reasonable BUY

Hero Honda No Low High Low High High Moderate High HOLD

Mah. & Mah. No High High Low High High Moderate Reasonable BUYMaruti Suzuki Yes High Low Low Weak Low High Reasonable REDUCE

Tata Motors Yes High Low High Weak Low Moderate to high Reasonable BUY

Automobile




Automobiles

Contents

Summarized investment thesis .......................................................................................... 3

At a glance .......................................................................................................................... 4

Cars – Rolling Resistance Up .............................................................................................. 5

No More Hunky Lorry ....................................................................................................... 10

Two Wheelers, Tractors‐ Soft Landing on Cards .......................................................... 15

Softening Input Costs, Low Valuation a Respite............................................................... 20

Companies

Ashok Leyland ........................................................................................................... 23

Bajaj Auto ................................................................................................................. 37

Hero Honda .............................................................................................................. 51

Mahindra and Mahindra........................................................................................... 63

Maruti Suzuki India ................................................................................................... 79

Tata Motors .............................................................................................................. 95








Automobile

Cars – Rolling Resistance Up

Car demand starts to lose tempo

After racing at 28% for the past two years, car sales are likely to slow down to 10% in FY12

owing to macro headwinds. In our report, ‘Cars: First sign of slowdown has emerged’, dated

29th March 2011, we had pointed out a slump in retail demand in the previous two months.In this report, we forecast the pace of slowdown to accentuate in FY12. First, let us evaluate

the impact of various negative macro factors on car demand.

Liquidity: Lead demand indicator still negative

Historically, growth in car sales has exhibited a strong correlation with liquidity in the

banking system as it depends on: (1) availability of bank financing; (2) cost of borrowing and

(3) economic growth to spur sales. We have observed car sales either slow down or pick up

following a liquidity tightening or easing respectively with a lag of a quarter or two.

Currently, the slow offtake in deposit growth versus credit growth has induced a liquidity

deficit in the system. Our economics team believes that given the prevailing high inflation

and RBI’s efforts to cool it off, liquidity tightening will continue deterring car sales.

Chart 1: Liquidity tightening to slow down car sales in FY12

Source: CMIE, SIAM, Edelweiss research

Lower GCF growth dents demand

Slowdown in Gross Capital Formation (GCF) is likely to be a big negative for car demand in

FY12. GCF highlights the investment activity and also the future job outlook. Acceleration in

GCF leads to strong car sales growth and vice-versa. Whenever, GCF growth rate drops by5% or more, it has led to car sales decelerating to low single digit. Currently, GCF growth

rate has declined to 2% (change in actual growth rate at 26%) and given the macro

headwinds, the situation is unlikely to improve in the near future. Thus, it clouds the sales

outlook for car demand.

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Net repo Car sales (RHS)

Liquidity and GCF, the lead

indicators of demand, are

negative




Automobiles

Chart 2: Poor growth in GCF deters car demand


High interest rates sustain negative correlation with demand

Rising interest rates have already started dampening buyer sentiments and we perceive it as a

big negative for car demand outlook for FY12. Even though a 1% increase in interest rate leads

to a mere 1.3% rise in EMI, we believe the following impact: (1) directly hurts buyer sentiments

hence derails demand momentum and (2) damages economic growth by indirectly hitting the

demand. Limited availability of interest rate data makes it difficult to study the negative

correlation between interest rates and car demand but we have used the spread between 5-

year government bonds and 5-year BBB Securities as a proxy for car interest rates (auto loans

are typically for 3-5 year duration). Whenever the spread increases, it implies car loan interest

rates are rising which in turn would hit the demand (as is evident from the chart below).

Already, we have seen car interest rates rising by more than 250bps in the past one year to11.5%. Our economy team believes that RBI may raise interest rates by another 50bps

which will put further strain on auto interest rates thus adversely affecting the demand.

Chart 3: Rising spread between 5‐year BBB bonds and G Sec negative for car demand

Source: Bloomberg, SIAM, Edelweiss research

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BBB less 5 Yr GSec yield spread Car (RHS)

Rising interest rates to hurt

buyer’s sentiments




Automobile

Chart 4: Mounting interest rates crippled car sales in the past

Source: Crisil, SIAM

Steep rise in petrol prices may derail demand

Despite the partial deregulation and a tempered hike (much lower than the global crude) of

petrol prices in India, rise in fuel prices has historically affected car sales. A sharp surge of

20% or so in petrol prices has led to car sales growth slowing down to low single digits with

a lag of 2-3 quarters.

After recently hiking petrol prices by INR 5/litre, we do not rule out the government

increasing it further, thus derailing the car demand.

Chart 5: Sharp spurt in petrol prices likely to adversely affect car demand

Source: IOC, SIAM

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Interest rate Car sales (RHS)

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Car sales (RHS) Petrol prices




Automobiles

Declining GDP indicates slowdown ahead

GDP growth, another lead indicator for car demand, is also turning negative implying a

slowdown in car sales in FY12. In fact, demand for cars is directly correlated to the economic

growth as historically, peaking GDP growth or the bottoming out of it has always coincided

with similar movements in car demand. An exception to this trend was, however, observed

in H2FY03 and H2FY05 for a quarter or so when car sales did not follow the dip in economic

growth rate. This was primarily owing to funding push by SBI and an 8% excise duty cut for

FY03. In FY05, a slowdown in GDP was largely driven by its agricultural component. Car sales

were unaffected since growth in urban India was high (rural sales accounted for less than

5% of car sales then). In the existing scenario, banks are still lending while the economic

slowdown is driven by manufacturing and service sector.

Consensus has downgraded economic growth estimates for FY12 by 50bps to 100bps,

pointing to limp car sales for FY12.

Chart 6: Economic slowdown to adversely affect car demand


Overcapacity risk looms large

Maruti has always been ahead of industry as far as capacity utlilisation is concerned.

However success of competitive launches in last few years and aggressive capacity

expansion by Maruti has led to narrowing the gap. Sharp decline in capacity utilisation

coupled with high competitive intensity should immense pressure on Industry margins.

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Change in GDP Car growth (RHS)

Decline in GDP to induce

downgrades in consensus car

growth estimates




Automobile

Chart 7: Drop in capacity utilisation poses risks to margins

Source: Crisil, SIAM, Edelweiss research

Forecast 10% growth for industry

Our GDP-based forecasting model hints at a 10% growth in car sales for FY12 although we

expect growth to be back ended. Historically, car sales as a factor of GDP (ex-agriculture)

ranges from +5x to -5x where the bottom car sales growth coincides with bottom GDP (ex-

agriculture) growth rate and vice versa. The last 10-year average has been 1.2x. Applying

this to our economic growth expectation of 8.7% implies a sales growth of 10% for FY12. We

expect Maruti Suzuki (MSIL) to grow faster than the industry in H1FY12 but lose market

share in H2FY12 when competition starts launching new products. For the full FY12, we

expect MSIL to post a 10.7% growth domestic passenger cars.

Chart 8: Car demand likely to sharply slow down in FY12

Source: SIAM, CMIE, Edelweiss research

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Industry - Ex Maruti Maruti

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GDP ex agri Car/GDP ex agri (RHS) Linear (Car/GDP ex agri (RHS))

Weak industrial and services GDP

growth should lead to slowdown

in car demand




Automobiles

No More Hunky Lorry

An imminent slowdown in the economy, slackening road building and construction

activities, tightening liquidity and a rising inflation are likely slow down the commercial

vehicle demand in FY12.

Tightening liquidity signals imminent slowdown

Tightening liquidity is a key negative for commercial vehicles in FY12 since demand for

trucks and liquidity in the banking system go hand in hand. In our view, this could be due to

(1) high dependency on bank funding for truck financing (almost 98%) and (2) business

viability of small and medium enterprises, major consumers of freight transport. The only

exception to this was FY07 when ban on overloading led to a strong demand for heavy

trucks despite the liquidity being under pressure. As discussed in the car segment, the

liquidity tightening is likely to continue in FY12 thus weakening the outlook for commercial

vehicle demand.

Chart 9: Liquidity deficit ‐ A major risk for commercial vehicle demand


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Net repo Trucks (RHS)

Liquidity squeeze is negative for

freight availability




Automobile

Chart 10: Truck sales heavily dependent on bank loans

Source: Crisil, Edelweiss research

Drop in IIP growth points to a looming slowdown

Decelerating Index of industrial production (IIP) growth indicates that the truck demand

might slow down in FY12. Historically seen, growth in truck sales is highly correlated to

growth in IIP (80% correlation observed during July 2002-July 2010). Given the high

inflation-high interest rate scenario, our economy team believes that the IIP growth is likely

to stay subdued in the near term.

Chart 11: Slowdown in IIP growth alludes to looming decline in M&HCV demand


Weakness in GCF – Another negative for CV demand

Another negative element, a delicate GCF points to a slowdown in the freight availability

going ahead. It equally implies a sluggish demand for both heavy and light commercial

vehicles, including three wheelers.

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Change in IIP growth MHCV (RHS)

Drop in IIP growth implies low

freight availability




Automobiles

Chart 12: Weak GCF growth downbeat for CV demand


Soaring interest rates keep a negative correlation with demand

Rising interest rates also affect demand for commercial vehicles (CVs) due to an increase in the

cost of truck financing. Rising interest rates also up the cost of capital directly affecting freight

availability and in turn, the CV demand. We expect FY12 to witness full impact of this trend.

Chart 13: Rising interest rate may adversely affect FY12 CV demand

Source: Bloomberg, SIAM, Edelweiss research

Inflation slams brakes on truck demand

Mounting inflation explicitly affects consumption and therefore the freight availability and

demand for CVs. Historically, we have seen this negative correlation at work barring two

occasions: (1) FY07 when ban on overloading led to a huge surge in truck demand despite a

stubborn inflation while in subsequent year, sales slumped due to overcapacity as inflation

waned and (2) FY09 when both inflation and truck demand cooled off due to global crisis

and subsequently recovered.

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Slowing GCF, higher interest rates

and inflation other negative

triggers




Automobile

Our economy team believes that RBI is struggling to tame inflation. In the next two quarters,

inflation is likely to stay ahead of RBI’s budgeted inflation. Thus, it poses a risk to CV

demand for FY12.

Chart 14: Inflation hurts CV demand

Source: Bloomberg, Edelweiss research

Freight rates‐truck demand correlation: A lag indicator

Bulls argue that freight rates continue to be robust, sustaining the healthy profitability of

truck operators hence the truck demand is likely to stay steady. However, our historica

analysis suggests that the demand for trucks acts as a lead indicator of freight rate and not

vice versa. Barring FY07 when overloading was banned, truck sales have patently peaked

before truck freight rates.

Chart 15: Truck freight rates act as lag indicator to truck demand

Source: Crisil, SIAM, Edelweiss research

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Truck sales growth (Y-o-Y) % growth in Freight (RHS)

Freight rates are lag indicators to

gauge the demand




Automobiles

Growth in car sales ‐ A lead indicator for truck demand

Growth in car sales has a high correlation of 78% with truck sales with the former often

working as a lead indicator to the latter. This, in our view, could be due to the fact that car

purchases (car being a consumer discretionary product) get first cut down by buyers. The

eventual effect of it should be felt on overall freight availability with a pause. With retail car

demand already slowing down, it is a matter of time before such slowdown is felt on

demand for CVs as well.

Chart 16: Car demand indicates to truck demand trends

Source: SIAM, Edelweiss research

Forecast 8%/15% growth for M&HCV trucks in FY12/FY13E

Based on our proprietary truck demand forecasting model, we expect medium and heavy

trucks to grow at 8% in FY12 and 15% in FY13E. Our model drives truck demand based on

total freight availability, total capacity in the system and roads market share. Freight

availability is a factor of IIP growth. Total tonnage capacity in the system accounts for total

population of trucks, its respective tonnage profile and scrappage.

Table 2: Proprietary model for truck growth forecast

Source: SIAM, Industry, Edelweiss research

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Cars (Y-o-Y) MHCV trucks (Y-o-Y) - RHS

Particulars FY09 FY10 FY11 FY12E FY13E

Trucks sold (nos) 147,451 201,538 275,237 296,917 340,607

Y ‐o‐Y change (%) (37.1) 36.7 36.6 7.9 14.7

Net annual tonnage sold (btkm) 101 142 200 215 247

Y ‐o‐Y change (%) (40.8) 40.4 40.9 7.9 14.7

Tonne/vehicle 11.4 11.7 12.1 12.1 12.1

Total trucks (Nos) 2,066,757 2,206,293 2,415,341 2,639,797 2,901,211

Capacity growth (%) 4.5 6.8 9.5 9.3 9.9

Distance travelled km p.a. 90,000 90,000 90,000 90,000 90,000 Road Capacity btkm 1,395 1,495 1,650 1,816 2,008

Road traffic growth (%) 4.6 7.2 10.4 10.1 10.6

Share of road (%) 72 72 73 74 75

Expect trucks to grow by 8% in

FY12E and growth should be back

ended




Automobile

Two Wheelers, Tractors ‐ Soft Landing on Cards

Over the past decade or so, two wheelers and tractors have witnessed structural changes in

the underlying demand. While in the past four years, two wheeler sales have largely been

driven by rural demand, tractors rode the full benefit of strong farm income and rural

construction activities. Now, even if the overall economy slows down, rural income isexpected to remain buoyant on steady farm income and the government thrust on rural

development. Thus, we expect a soft landing for two wheelers and tractors for whom the

major negative at the moment would the high base effect.

Demand getting decoupled with liquidity

Tractor demand does not show any integral correlation with liquidity as the primary

demand comes from rural areas. As normal monsoon, good crop and adequate support

prices act as primary demand drivers, liquidity tightening does not influence tractor demand

much.

To understand the two-wheeler demand, we divide the last decade into the pre-2007 phase

and post-2007 phase. Pre-2007 saw a strong urban demand for two wheelers, aided by

aggressive bank funding at lower rates when demand corresponded to liquidity. However,

since then, demand has largely been driven by rural regions and the number of two

wheelers sold on bank financing has gone down significantly. Thus, we do not expect a

significant impact on two-wheeler demand due to liquidity tightening.

Chart 17: Two‐wheeler and tractors demand getting decoupled with liquidity

Source: CMIE, Edelweiss research

(18.0)

(4.5)

9.0

22.5

36.0

49.5

(1,250)

(750)

(250)

250

750

1,250

M a r - 0 0

M a r - 0 1

M a r - 0 2

M a r - 0 3

M a r - 0 4

M a r - 0 5

M a r - 0 6

M a r - 0 7

M a r - 0 8

M a r - 0 9

M a r - 1 0

M a r - 1 1

( Y - o - Y % )

( I N R b

n )

Net repo Two wheeler (RHS)

(40.0)

(20.0)

0.0

20.0

40.0

60.0

(1,250)

(750)

(250)

250

750

1,250

M a r - 0 0

M a r - 0 1

M a r - 0 2

M a r - 0 3

M a r - 0 4

M a r - 0 5

M a r - 0 6

M a r - 0 7

M a r - 0 8

M a r - 0 9

M a r - 1 0

M a r - 1 1

( Y - o - Y , % )

( I N R b n

)

Net repo Tractor (RHS)

Least affected from liquidity

tightening




Automobiles

Chart 18: Two‐wheeler sales less dependent on bank credit


Getting correlated to rural demand

Demand for both two-wheelers and tractors is getting more correlated with rural economic

activities. Rural income is rising due to: (1) good crop, (2) rising support prices for key crops

and (3) increased government spending through various employment generation schemes

This has led to a more vibrant rural economy, which, in turn, has led to a high demand for

both segments. This is evident from the chart below that shows a linkage between sales of

two wheelers and tractors and rural credit growth. Given the fact that rural credit is priority

sector lending, the credit tap is unlikely to get affected due to the tightening of liquidity.

Chart 19: Rural activity driving two‐wheeler and tractor demand

Source: RBI, SIAM

12.0

15.0

18.0

21.0

24.0

27.0

25.0

35.0

45.0

55.0

65.0

75.0

2 0 0 3 - 0 4

2 0 0 4 - 0 5

2 0 0 5 - 0 6

2 0 0 6 - 0 7

2 0 0 7 - 0 8

2 0 0 8 - 0 9

2 0 0 9 - 1 0

2 0 1 0 - 1 1

(

)

( % )

% sold on credit Interest rates (RHS)

(28.0)

(14.0)

0.0

14.0

28.0

42.0

(32.0)

(16.0)

0.0

16.0

32.0

48.0

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

( % )

( % )

Prior ity sector credit growth (Y-o-Y)

Two wheeler (Y-o-Y) - RHS

(18.0)

0.0

18.0

36.0

54.0

72.0

(36.0)

(18.0)

0.0

18.0

36.0

54.0

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

( % )

( % )

Prior ity sector credit growth (Y-o-Y)

Tractor sales (Y-o-Y) -RHS

Thrust on rural activity to drive

growth




Automobile

Food inflation boosting demand

Contrary to the popular belief that food inflation is likely to affect consumption, our analysis

suggests that it is boosting the demand for both two wheelers and tractors as rural folks are

the direct beneficiaries of food inflation.

Our economy team opines that food prices are on a structural upswing, making demand

outlook positive for two wheelers and tractors.

Chart 20: Food inflation positive for two‐wheelers and tractors demand


Replacement needs to provide demand stability

There is a large pool of two wheelers and tractors, older than ten years or more. In two

wheelers, the first bike exchanges hand in three years on an average in urban India (Source:

Companies), implying a 33% of the demand from urban segment to be from replacement. In

tractors, due to the higher haulage use, life of a tractor has come down from ten years to

four years (Source: Industry), providing better visibility in demand.

Chart 21: Two‐wheelers profile: Nearly 50% older than 10 years

Source: ICRA

(28.0)

(14.0)

0.0

14.0

28.0

42.0

(6.0)

0.0

6.0

12.0

18.0

24.0

M a r - 0 0

M a r - 0 1

M a r - 0 2

M a r - 0 3

M a r - 0 4

M a r - 0 5

M a r - 0 6

M a r - 0 7

M a r - 0 8

M a r - 0 9

M a r - 1 0

M a r - 1 1

( Y - o - Y % )

( Y - o - Y % )

WPI of pr imary articles Two wheeler (RHS)

0.0

12.0

24.0

36.0

48.0

60.0

0-5 years 6-10 years > 10 years

( % )

Age profile

(40.0)

(20.0)

0.0

20.0

40.0

60.0

(6.0)

0.0

6.0

12.0

18.0

24.0

M a r - 0 0

M a r - 0 1

M a r - 0 2

M a r - 0 3

M a r - 0 4

M a r - 0 5

M a r - 0 6

M a r - 0 7

M a r - 0 8

M a r - 0 9

M a r - 1 0

M a r - 1 1

( % )

( % )

WPI of primary articles Tractor sales (Y-o-Y) -RHS




Automobiles

Expecting 15% growth in FY12 motorcycle sales

Given the evolving nature of demand for two wheelers, it is difficult to model demand. For

example, till FY07, urban demand was the primary driver. When banks pulled out of the

sector soon, demand tilted towards rural areas. Therefore we consider aspects like the

industry growth forecast, demand patterns during the last eight years and factors that help

derive demand to forecast if it would be above trend rate or below trend rate.

Average growth for motorcycle in the last eight years has been at ~13%. Growth has fallen

below this trend rate when the demand drivers have turned negative e.g. banks pull out

from motorcycle financing in 2007 and global crisis in H2FY09. Similarly, growth rate tends

to be higher than trend rate when demand drivers are in place.

Society for Indian Automobile Manufacturer (SIAM) expects a growth of 11-13% motorcycle

demand while leading motorcycle manufacturers believe that the growth should be around

12-15% in FY12E. In our view, the growth should be higher at 15% due to (1) higher rura

contribution of 50% vs 30% about five years back, (2) 30% of urban demand being

replacement demand and (3) dependency on bank funding being low at 30% vs 70%

observed during FY04-07.

Chart 22: We expect motorcycle demand to grow at 15% in FY12E


Tractor sales set to grow at 15% in FY12E

Demand for tractors has a strong correlation to the agriculture GDP; high growth in

agriculture GDP is followed by high demand for tractors with a lag of 1-2 quarters and vice-

versa. In the last ten years, FY10 has been the only year when this correlation has not

adhered to as a fall in agricultural GDP output due to the drought was compensated by anincreased government spending in rural areas hence tractor demand did not suffer. We

have witnessed a very high agricultural growth of ~5% in FY11E and our economics team

expects a growth of 3% for FY12E. This augurs well for the tractor demand.

(30.0)

(14.0)

2.0

18.0

34.0

50.0

M a r - 0 3

S e p - 0 3

M a r - 0 4

S e p - 0 4

M a r - 0 5

S e p - 0 5

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

S e p - 1 1

M a r - 1 2

S e p - 1 2

M a r - 1 3

( % )

% Motorcycle Growth Linear (% Motorcycle Growth)

Expect two wheelers and tractors

to grow by 15% each in FY12E




Automobile

Chart 23: Strong agri GDP growth in FY11 augurs well for tractor demand

Source: CMIE, Crisil, Edelweiss research

The average growth in tractor demand for the past eight years has been 14% whilecompanies like M&M and Escorts expect this to grow at 12-15% in FY12. We believe that the

growth should be at the upper end of expected band due to (1) strong rural income growth

especially when IMD expects a normal monsoon, (2) continuous thrust of the government

towards rural spending through various Central government schemes, (3) keenness of banks

to lend to this priority sector due to high yield in the business. (interest rates charged are at

around 18-21%), (4) shortening of replacement cycle from ten years to five years due to an

increase in rough haulage application and (5) a shortage of farm labour leading to higher

farm mechanization.

High capacity utilisation augurs well for two wheelers, tractors

While the demand has been robust for two wheeler and tractors, the OEMs have been

disciplined in adding the capacity. As a result of which the capacity utilisation has

reached beyond 90%. This lowers the risk of price war and augurs well for profitability.

Chart 24: Capacity utilisation for two wheelers and tractors at historical high


(40.0)

(20.0)

0.0

20.0

40.0

60.0

(16.0)

(8.0)

0.0

8.0

16.0

24.0

S e p - 0 1

M a r - 0 2

S e p - 0 2

M a r - 0 3

S e p - 0 3

M a r - 0 4

S e p - 0 4

M a r - 0 5

S e p - 0 5

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

S e p - 1 1

M a r - 1 2

( %

)

( %

)

Agri GDP (Y-o-Y) Tractor growth (Y-o-Y) - RHS

60.0

67.0

74.0

81.0

88.0

95.0


( t w o

w h e e l e r s % )

50.0

60.0

70.0

80.0

90.0

100.0


(

t r a c t o r s % )

Strong agri GDP growth of FY11

should support tractor demand in

FY12E




Automobiles

Softening Input Costs, Low Valuation a Respite

Automobile stocks have corrected by 10-30% over the last six months. Thus part of the

macro concerns are in the price. At the same time, commodity prices have started to

correct, giving headroom for a margin improvement. Auto stocks are trading at 8-13xFY12

PE (upto 50% discount to Sensex) hence valuations are reasonable. In our view, this gives usan opportunity to pick automakers that have both demand visibility and pricing power.

Cooling metal costs to ease off margin pressure from H2FY12

Metal prices have started to correct from their peaks. Our metal team believes that

commodity prices have peaked in the short to medium term. Metal price correction

should ease off margin pressure for the automobile companies from H2FY12e onwards.

Chart 25: Metal prices have started to soften barring Rubber


Chart 26: Input cost softening should ease margin pressure from 2HFY12

Source: Bloomberg, Companies, Edelweiss research

Note: Raw material index assumes 50:30:20 weight for steel, rubber and aluminum respectively

(60.0)

(30.0)

0.0

30.0

60.0

90.0

(60.0)

(30.0)

0.0

30.0

60.0

90.0

S e p - 0 4

M a r - 0 5

S e p - 0 5

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

( 3 m t h Q t l y Y - o - Y %

)

( 3 m t h Q t l y Y - 0 - Y % )

Aluminium Steel - RHS

5.0

7.0

9.0

11.0

13.0

15.0

(30.0)

(10.0)

10.0

30.0

50.0

70.0

M a r - 0 4

S e p - 0 4

M a r - 0 5

S e p - 0 5

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

( % ) ( %

)

Raw material index (Y-o-Y) Volume (Y-o-Y) EBITDA Margin (RHS)

(80.0)

(40.0)

0.0

40.0

80.0

120.0

(120.0)

(60.0)

0.0

60.0

120.0

180.0

S e p - 0 4

M a r - 0 5

S e p - 0 5

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

( 3 m t h Q t l y Y - o - Y % )

( 3 m t h Q t l y Y - 0 - Y %

)

Nickel Rubber - RHS

Commodity prices peak out

and reasonable valuation

provides an opportunity




Automobile

Easing input costs to provide earnings multiple comfort

Historically, rising input cost has led to downward revision in auto companies earnings

multiple and vice versa. The only exception has been period of FY09-FY10 since in this

period global crisis led to crash in commodity prices along with decline in automobile

sales. Recovery in automobile demand was soon followed by the recovery in commodity

prices in FY10.

In our view, softening input costs should ease off margin pressure, leading to multiple

expansion in 2HFY12.

Chart 27: Rising input costs historically pull down earnings multiple and vice‐versa


Under performance to continue in short run despite recent correction

Historically, BSE Auto has underperformed the Sensex in a rising interest rate regime and

vice-versa. Our economic team believes that interest rates should peak out in 1HFY12 only

to fall in FY13E. Hence we believe in the short term, auto stocks may continue to

underperform the Sensex. We expect under performance to narrow from Q4FY12E.

Chart 28: In rising interest rate scenario, BSE Auto underperforms Sensex


0.0

6.0

12.0

18.0

24.0

30.0

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

(40.0)

(20.0)

0.0

20.0

40.0

60.0

( % )

( x )

Raw Material Price index (% y-o-y) PE 12 m fwd (BSE Auto RHS)

(100.0)

(50.0)

0.0

50.0

100.0

150.0

(4.5)

(3.0)

(1.5)

0.0

1.5

3.0

M a r - 0 0

S e p - 0 0

M a r - 0 1

S e p - 0 1

M a r - 0 2

S e p - 0 2

M a r - 0 3

S e p - 0 3

M a r - 0 4

S e p - 0 4

M a r - 0 5

S e p - 0 5

M a r - 0 6

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

( % )

( % )

Change in interest rates 1 year BSE Auto return less Sensex return - RHS

Till macro headwinds persist, BSE

Auto will underperform Sensex




Automobiles

Post the correction, automobile stocks are trading at a 10-50% discount to Sensex on FY12E

Thus, they capture, part of the macro risk. Thus, valuations are reasonable. In our

economics teams’ opinion the interest rates are likely to peak out in H1FY12 implying, that

going in FY13 when the outlook for automobile stocks should start to improve, the multiple

should catch up with Sensex multiple and discounts narrow. However, in the short term the

multiples should stay under pressure.

Chart 29: Discount to Sensex is moving towards historical highs


We prefer companies with higher pricing power, high rural, high exports exposure, low

dependency on finance, low competitive intensity and high replacement demand

In such tough operating scenario, we prefer companies which have high pricing power

(implying low competitive intensity and high brand recall); high rural exposure and high

exports contribution to sales. Thus, we prefer Bajaj Auto (high exports and two wheeler as a

product has high contribution from Rural India for sales); Tata Motors (more than 2/3rd

contribution from JLR); and M&M (tractor - a rural product and low competition on both

tractor and UV).

Table 3: Operating indicators and our pick


5.0

10.0

15.0

20.0

25.0

30.0

S e p - 0 6

M a r - 0 7

S e p - 0 7

M a r - 0 8

S e p - 0 8

M a r - 0 9

S e p - 0 9

M a r - 1 0

S e p - 1 0

M a r - 1 1

( x )

Sensex PE ratio BSEAuto PE ratio

Interest rate

sensitive

demand

Sales on

bank

credit

Contribution

of rural

demand

Exports

contribution

Pricing

power

Replacement

demand

Competitive

intensity Valuation

Our

recommen‐

dation

Ashok Leyland Yes High Low Low Weak Low Moderate Low REDUCE

Bajaj Auto No Low High High High High Moderate Reasonable BUY

Hero Honda No Low High Low High High Moderate High HOLD

Mah. & Mah. No High High Low High High Moderate Reasonable BUY

Maruti Suzuki Yes High Low Low Weak Low High Reasonable REDUCETata Motors Yes High Low High Weak Low Moderate to high Reasonable BUY

Discount to Sensex indicate part

of concerns are in price




Automobile

Amidst slowdown, Ashok Leyland (AL) is likely to lose market share due to

high exposure to heavy commercial vehicles. It implies, the company may

miss its sales growth guidance of 15% and it could jeopardize the

production ramp up plan at tax‐free Pantnagar plant. Rising interest cost

is also likely to dent profitability. We are 7% below consensus on

FY12EPS. Maintain ‘REDUCE’ with target price of INR 44.

Likely to miss sales guidance for FY12; May derail Pantnagar plan

Amidst slow down, AL is likely to lose market share to 23.4% in FY12E from the high of

24.4% in Q4FY12 due to high exposure to heavy trucks. This puts management guidance

of 15% sales volume growth in FY12 and production ramp up at tax free Pantnagar to

36,000 units at risk. We have built in 10% volume growth for FY12. Our sensitivity

suggests that 26,000 units production (instead of 36,000) from the plant, could lower

our FY12E EPS by 10%.

Several headwinds to margins

AL has guided that U‐Truck (lower margin product) contribution to total sales is likely to

increase from 1.5% to 25% in FY12E. This could be a drag on the margin alongwith rising

discounts amidst slowing sales. We are 7% below consensus on FY12E EPS of INR 5.2.

High capex implies high debt, higher leverage

AL has earmarked INR 19.5 bn for capex and investments in FY12/FY13. This should

increase total debt to INR 32.6 bn (INR 25.7 bn in FY11), leading to higher interest

burden of INR 2.1 bn and thus, further dent profitability.

Outlook and valuations: Weak outlook; maintain ‘REDUCE’

Rising interest rate, slowing manufacturing growth and expected hike in fuel prices

have made the outlook bleak for M&HCVs. Weak sales and quarterly earnings, hike in

diesel prices and interest rates are likely negative catalysts. Our target price of INR 44

implies 4.5x FY13E EV/EBITDA. Currently, the stock is trading at 6.5x FY12E EV/EBITDA.

We maintain our ‘REDUCE/Sector Underperformer’ recommendation/rating.

Sachin Gupta

+91 22 6623 3472

[email protected]

Chetan Vora

+91 22 6620 3101

[email protected]

June 20, 2011

Edelweiss Research is also available on www.edelresearch.com,

Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.Edelweiss Securities Limited

ASHOK LEYLAND Road blocks ahead

COMPANY UPDATE

India Equity Research | Automobiles

Absolute Rating REDUCE

Rating Relative to Sector Underperformer

Risk Rating Relative to Sector High

Sector Relative to market Equalweight

MARKET DATA (R: ASOK. BO, B: AL IN)

CMP : INR 51

Target Price : INR 44

52-week range (INR) : 81 / 45

Share in issue (mn) : 1,330.3

M cap (INR bn/USD mn) : 67 / 1,503

Avg. Daily Vol. BSE/NSE (‘000) : 5,336.9

SHARE HOLDING PATTERN (%)

* Promoters pledged shares : 17.8

(% of share in issue)

PRICE PERFORMANCE (%)

Stock Nifty EW Auto

Index

1 month 5.4 (1.0) (5.2)

3 months (4.1) (0.2) (3.1)

12 months (17.6) 8.0 9.6

EDELWEISS 4D RATING

Promoters*

38.6%

MFs, FIs &

Banks

16.9%

FIIs

13.2%

Others

31.3%

Financials

Year to March FY10 FY11 FY12E FY13E

Revenues (INR mn) 72,813 111,177 127,941 148,798

Rev. growth (%) 20.9 52.7 15.1 16.3

EBITDA (INR mn) 8,008 12,436 12,839 15,410

Net profit (INR mn) 4,237 6,313 6,413 8,391

Shares outstanding (mn) 1,330 1,330 1,330 1,330

Diluted EPS (INR) 3.1 4.9 4.8 6.3

EPS growth (%) 193.6 58.2 (2.4) 30.8

Diluted P/E (x) 16.3 10.3 10.6 8.1

EV/EBITDA (x) 10.2 6.4 6.3 5.1

ROAE (%) 11.7 17.2 15.4 18.0




Automobiles

Investment Rationale

With the economy slowing down, near term demand outlook for medium and heavy trucks

is deteriorating. Bus demand, which had been fuelled by the government-led JNNURM

scheme, is also tapering off. The worsening macro outlook will hit ALL the most as it derives

over 90% of revenue from M&HCVs. This slowdown further puts the company’s plan ofshifting incremental production to the new tax-free Pantnagar plan at risk. Rising interest

rate also poses a risk to the company’s profitability as interest cost is 33% of FY12E PAT.

Slowdown in truck demand to hit hard

Historically, while AL has lost market share during economic downturns, it has gained the

same during upturns. This is because of its high exposure to heavy trucks, demand for which

is linked to economic activity. In our view, the company is likely to be the worst affected

amongst commercial vehicle makers as truck demand moderates. We have assumed growth

rate of 10% and 16% for FY12E and FY13E, respectively.

Chart 1: Sales dependent on trucks, which are more volatile


No bus to rescue

ALL derives 20% of its volume from buses. Bus demand for the past three years has been

driven by the government-led JNNURM scheme, and has started to taper off since on lower

orders from JNNURM and the private sector. Moreover, since bus is a low-margin business,

it cannot compensate for a down cycle in trucks.

M&HCV

slowdown

could

derail

profit

maximisation

plan

in

FY12

Slow down could derail its profit maximization plan, which AL was contemplating by

increasing production at the tax-free Pantnagar plant. This could further enhance margin

compression in FY12 and lead to EPS downgrades. We have built in production of 36,000

units from Pantnagar plant (as guided by the management). Our sensitivity suggests that

10,000 lower production from Pantnagar, while keeping overall volume sales, could lower

EBITDA margin by 30bps and increase effective tax rate by 320bps. Thus, it is a downside

risk to our numbers.

0.0

3.0

6.0

9.0

12.0

15.0

(52.0)

(26.0)

0.0

26.0

52.0

78.0

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

( % )

( Y - o - Y % )

AL's trucks Ind's trucks Y-o-Y (RHS) IIP growth rate (RHS)




Automobile

Table 1: Sensitivity of production from Pantnagar on FY12E EPS

Source: Company, Edelweiss research

Interest cost to eat into cash

As of FY11, the company has INR 25.7 bn debt, which is likely to surge to INR 32.6 bn (up INR

7.2 bn) in FY12E on sales slowing down, stretching working capital needs and also, the

company would be spending INR 11 bn on product development and JVs. With high gearing,

interest cost (as a percentage to PAT) will soar from 27% in FY10 to 33% in FY12E, which wil

dent PAT, a risk not built in Street estimates.

Chart 2: Interest coverage ratio to stay under pressure in near term


FY12E earnings 7% lower than consensus estimates

Currently, our EPS of INR 4.8 for FY12 is 7% below consensus EPS of INR 5.2. We are more

bearish than street in margins due to a) high incentive levels and b) rising interest costs. In

the context of last few months weak sales performance and high inventory risk is skewed

more to downside to our FY12E sales assumption.

Table 2: Earnings 7% lower than consensus estimates in FY12


Worst case Base case Best case

Production at tax free Pantnagar plant (nos) 26,000 36,000 46,000

EPS (INR) 4.3 4.8 5.4

0.0

1.8

3.6

5.4

7.2

9.0

FY08 FY09 FY10 FY11 FY12E FY13E

( x )

Interest coverage ratio (x)

Edel Consensus (%) Edel Consensus (%)

Sales (INR mn) 127,941 125,585 1.9 148,798 140,950 5.6

EBITDA (INR mn) 12,839 13,174 (2.5) 15,410 14,884 3.5

EBITDA (%) 10.0 10.5 (4.3) 10.4 10.6 (1.9)

EPS (INR) 4.8 5.2 (6.5) 6.3 6.0 4.6

FY12E FY13E




Automobiles

Outlook & valuations: Multiple negative triggers; maintain ‘REDUCE’

Weak sales and announcement related to rise in interest rates and fuel prices should be key

negative triggers.

We maintain our recommendation/rating on the stock at ‘REDUCE/Sector Underperformer

with a target price of INR 44. ALL is currently trading at 6.3x FY12E EV/EBITDA. In our view,

as the consensus downgrades earnings, the multiple should come under pressure. Our

target price implies 4.5x FY13E EV/EBITDA.

Historically, ALL has traded in the 4-6x one-year forward EV/EBITDA band during down

cycles. However, current RoE, at 17%, is much lower than 22% observed historically. Hence,

in our view, it should trade at the lower band of 4-5x. Our target price implies mid-point of

4.5x FY13E EV/EBITDA.

Chart 3: RoAE lower compared to high historical


Chart 4: Trading at 10x one year forward earnings Chart 5: Trading at 2.7x one year forward adjusted* P/BV


Note: Adjusted* ‐ Revaluation reserve excluded from book value

0.0

6.0

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F Y 1 3 E

( % )

ROAE (%)

4.0

7.0

10.0

13.0

16.0

19.0

M a y - 0 2

N o v - 0 2

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( x )

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( x )




Automobile

Chart 6: Traded at 4‐6x one year forward EV/EBITDA during down cycles


3.0

4.4

5.8

7.2

8.6

10.0

M a y - 0 2

N o v - 0 2

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M a y - 1 0

N o v - 1 0

M a y 1 1

( x )




Automobiles

Key Risks

Govt thrust to construction activity

In the wake slowdown in industrial activity, the government may choose to push

construction and mining activity. This may lead to demand surge for commercial vehicles,

posing risks to our volume estimates.

Table 3: Sensitivity of volume growth to FY12E EPS


Investments in JVs fructifying earlier than expected

If AL’s ventures into LCV and construction segments via JVs with Nissan and John Deere,

respectively, start to meaningfully contribute to profitability, it could be a risk to our

earnings estimate.


Volume growth (%) - 10.0 20.6

EPS (INR) 4.0 4.8 5.7




Automobile

Annual Trends

Chart 7: FY12E truck mkt share to be lower than Q4FY11 Chart 8: AL's volume to be in line with industry


Chart 9: Revenue mix to remain tilted towards vehicle sales Chart 10: Pantnagar capacity ramp up in FY12, FY13


0.0

12.0

24.0

36.0

48.0

60.0

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20,000

40,000

60,000

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F Y 1 3 E

( % )

( N o s . )

Trucks Buses

Trucks mkt share (RHS) Buses mkt share (RHS)

0.0

5.0

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Vehicle sales Engines (RHS)

Spare parts (RHS)

0.0

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175,000

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( % )

( n o s )

Installed capacity (nos) Capacity utilised (RHS)

(16.0)

0.0

16.0

32.0

48.0

64.0

(54.0)

(27.0)

0.0

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( % )

( % )

AL's trucks Y-o-Y Ind's trucks Y-o-Y

AL's buses (RHS) Ind's buses (RHS)






Automobile

Chart 14: EPS to remain flat in FY12 Chart 15: Returns to remain subdued


Chart 16: R&D expenses continuously rising


0.0

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( I N R / s h a r e )

( I N R / s h

a r e )

EPS Book value (RHS)

0.0

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8,000

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( )

( I N R m n )

R&D As % of net sales (RHS)

0.0

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F Y 1 3 E

( % ) ( % )

EBITDA margin RoACE (RHS) RoAE (RHS)




Automobiles

Quarterly Trends

Chart 17: Per vehicle matrix Chart 18: Costs as a % to net sales


* Gross profit = Realisation – Cost of Raw materials

Chart 19: Mkt share in Q4FY11 surged to 27.1% Chart 20: Outperformed industry growth rate in FY11


0

40,000

80,000

120,000

160,000

200,000

0

300,000

600,000

900,000

1,200,000

1,500,000

Q 1 F Y 0 8

Q 3 F Y 0 8

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Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1

( I N R / v e h i c l e )

( I N R / v e h i c l e

)

Realisation RM costs

Gross profit* Operating profit (RHS)

15.0

18.5

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25.5

29.0

32.5

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10,000

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30,000

Q 1 F Y 0 8

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Q 3 F Y 0 9

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Q 1 F Y 1 1

Q 3 F Y 1 1

( % )

( N o s )

AL's MHCV sales Market share (RHS)

0.0

4.0

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16.0

20.0

65.0

67.5

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77.5

Q 1 F Y 0 8

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Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1

( % )

( % )

Raw material

Employee costs (RHS)

Other operating costs (RHS)

EBITDA margin (RHS)

(100.0)

(50.0)

0.0

50.0

100.0

150.0

(100.0)

(40.0)

20.0

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Q 1 F Y 0 9

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Q 1 F Y 1 1

Q 2 F Y 1 1

Q 3 F Y 1 1

Q 4 F Y 1 1

( % )

( % )

AL's Y-o-Y growth Industry Y-o-Y growth (RHS)




Automobile

Company Description

AL is the second-largest commercial vehicle manufacturer in India. The Hinduja Group holds

51% stake in the company through holding company Hinduja Automotive (UK). The

company has six manufacturing plants at four locations in India—Ennore (Tamil Nadu),

Hosur (Tamil Nadu), Alwar (Rajasthan), Bhandara (Maharashtra) and Pantnagar(Uttaranchal). It focuses on the M&HCV segment and has a significant presence in the bus

segment.




Automobiles

Financial Statements

Income statement (INR mn)

Year to March FY09 FY10 FY11 FY12E FY13E

Total volume (nos) 54,431 64,045 93,720 103,019 119,410

% Growth (34.7) 17.7 46.3 9.9 15.9

Income from operations 60,240 72,813 111,177 127,941 148,798

Materials costs 44,954 52,559 81,212 94,626 109,681

Manufacturing expenses 1,553 1,745 2,668 3,199 3,571

Staff costs 5,663 6,716 9,337 10,619 12,201

S G & A expenses 3,862 3,937 5,775 6,909 8,184

Less: Expenses capitalised 82 153 250 250 250

Total operating expenses 55,949 64,805 98,741 115,102 133,388

EBITDA 4,291 8,008 12,436 12,839 15,410

Depreciation and amortisation 1,784 2,041 2,674 3,070 3,226

EBIT 2,507 5,967 9,762 9,769 12,184

Interest 1,603 1,019 1,989 2,085 2,369

Non-Operational income 696 417 505 343 398

Profit before tax 1,600 5,365 8,278 8,027 10,213 Provision for tax 185 1,211 1,705 1,614 1,822

Core profit 1,415 4,154 6,573 6,413 8,391

Extraordinary income/ (loss) 485 82 (260) - -

Profit after tax 1,900 4,237 6,313 6,413 8,391

Shares outstanding 1,330 1,330 1,330 1,330 1,330

Earnings per share (EPS) 1.1 3.1 4.9 4.8 6.3

Diluted shares outstanding 1,330 1,330 1,330 1,330 1,330

Diluted EPS 1.1 3.1 4.9 4.8 6.3

Cash EPS 2.5 5.6 7.4 7.1 8.7

Dividend per share 1.0 1.5 2.0 1.5 1.5

Dividend payout (%) 70.0 47.1 42.1 31.1 23.8

Common size metrics‐ as % of net revenues


Operating expenses 92.9 89.0 88.8 90.0 89.6

Materials costs 74.6 72.2 73.0 74.0 73.7

Staff costs 9.4 9.2 8.4 8.3 8.2

S G & A expenses 6.4 5.4 5.2 5.4 5.5

Depreciation 3.0 2.8 2.4 2.4 2.2

Interest expenditure 2.7 1.4 1.8 1.6 1.6

EBITDA margins 7.1 11.0 11.2 10.0 10.4

Net profit margins 2.3 5.7 5.9 5.0 5.6

Growth metrics (%)


Revenues (22.7) 20.9 52.7 15.1 16.3

EBITDA (22.7) 16.9 54.5 16.5 15.9

PBT (18.9) 12.4 52.9 19.9 11.6

Net profit (67.9) 193.6 58.2 (2.4) 30.8

EPS (67.9) 193.6 58.2 (2.4) 30.8




Automobile

Balance sheet (INR mn)

As on 31st March FY09 FY10 FY11 FY12E FY13E

Equity capital 1,330 1,330 1,330 1,330 1,330

Reserves & surplus 33,409 35,357 38,299 42,386 48,450

Shareholders funds 34,739 36,688 39,630 43,716 49,780

Secured loans 3,044 7,116 7,116 7,116 7,116

Unsecured loans 16,576 14,799 18,567 25,457 26,539Borrowings 19,620 21,914 25,683 32,573 33,655

Deferred tax (Net) 2,634 3,845 4,439 4,439 4,439

Sources of funds 56,993 63,213 70,651 81,627 88,774

Gross block 48,971 59,377 63,858 69,858 75,858

Depreciation 15,542 17,691 20,365 23,435 26,661

Net block 33,430 41,686 43,493 46,424 49,198

Capital work in progress 9,983 5,615 5,615 5,615 5,615

Intangibles /Technical know-how 562 809 809 809 809

Investments 2,636 3,262 12,300 17,300 19,800

Inventories 13,300 16,382 22,089 24,299 28,275

Sundry debtors 9,580 10,221 11,852 13,885 16,157

Cash and bank balance 881 5,189 1,795 2,559 2,976

Loans and advances 7,895 9,605 7,936 8,226 8,544

Total current assets 31,656 41,397 43,672 48,968 55,952

Sundry creditors 17,713 23,317 27,776 31,241 36,353

Others current liabilities 976 2,604 2,604 2,604 2,604

Provisions 2,681 3,687 4,902 3,687 3,687

Total current liab. & provisions 21,369 29,608 35,282 37,532 42,644

Net current assets 10,287 11,789 8,390 11,436 13,308

Misc expenditure 97 52 43 43 43

Uses of funds 56,993 63,213 70,651 81,627 88,774

Book value per share (BV) (INR) 26 28 30 33 37

Free cash flow (INR mn)

Year to March FY09 FY10 FY11 FY12E FY13ENet profit 1,900 4,237 6,313 6,413 8,391

Depreciation 1,784 2,041 2,674 3,070 3,226

Deferred tax 125 1,211 594 0 0

Gross cash flow 3,809 7,489 9,580 9,483 11,617

Less: Changes in WC 6,980 (2,080) 762 1,507 1,456

Operating cash flow (3,171) 9,569 8,818 7,976 10,162

Less: Capex 25,210 6,177 4,481 6,000 6,000

Free cash flow (28,381) 3,392 4,337 1,976 4,162

Cash flow metrics


Operating cash flow (3,171) 9,569 8,818 7,976 10,162

Financing cash flow 21,285 1,542 1,307 3,787 (1,244)

Investing cash flow (21,747) (6,803) (13,520) (11,000) (8,500)

Net cash flow (3,633) 4,308 (3,394) 764 417

Capex (25,210) (6,177) (4,481) (6,000) (6,000)

Dividend paid (2,337) (1,556) (2,327) (3,102) (2,327)




Automobiles

Profitability & liquidity ratios


ROAE (%) 5.1 11.7 17.2 15.4 18.0

ROACE (%) 6.2 10.4 16.5 15.9 18.3

Inventory days 104 103 86 89 87

Debtors days 40 50 36 37 37

Payble days 142 142 115 114 112Cash conversion cycle (days) 2 10 8 12 12

Current ratio 1.5 1.4 1.2 1.3 1.3

Debt/EBITDA 4.6 2.7 2.1 2.5 2.2

Fixed asset turnover (x) 1.5 1.3 1.8 1.9 2.0

Debt/Equity 0.6 0.6 0.6 0.7 0.7

Adjusted debt/equity 0.6 0.6 0.6 0.7 0.7

Net debt/Equity 0.5 0.4 0.3 0.3 0.2

Operating ratios


Total asset turnover 1.3 1.2 1.7 1.7 1.7

Fixed asset turnover 1.5 1.3 1.8 1.9 2.0

Equity turnover 2.1 2.0 2.9 3.1 3.2

Du pont analysis


NP margin (%) 2.3 5.7 5.9 5.0 5.6

Total assets turnover 1.3 1.2 1.7 1.7 1.7

Leverage multiplier 1.6 1.7 1.8 1.8 1.8

ROAE (%) 5.1 11.7 17.2 15.4 18.0

Valuation parameters


EPS (INR) 1.1 3.1 4.9 4.8 6.3

Y ‐o‐Y growth (%) (67.9) 193.6 58.2 (2.4) 30.8CEPS (INR) 2.5 5.6 7.4 7.1 8.7

P/E (x) 47.9 16.3 10.3 10.6 8.1

Price/BV (x) 2.0 1.8 1.7 1.6 1.4

EV/Sales (x) 1.4 1.1 0.7 0.6 0.5

EV/EBITDA (x) 19.6 10.2 6.4 6.3 5.1

Dividend yield (%) 2.0 2.9 3.9 2.9 2.9




Automobile

Bajaj Auto’s (BAL) strategy of building brand and focusing on

differentiating product is paying off. In our view, Boxer 150cc is likely to

be step in this direction. The company is firmly on track to meet its

guidance of 20% volume growth and 20+% EBITDA margin in FY12. We

raise our FY12/13 EPS estimates by 6/11% as clarity emerges on export

incentives. We are 7/13% above consensus on FY12/FY13 earnings. We

maintain ‘BUY’ and raise TP to INR 1,730.

Brand building & product diversification strategy to fuel sales spurt

BAL is focusing on building brand and offering products with different feature at unique

price points. Company wants to tap rural sales through Boxer 150cc to be launched

inQ2FY12. We believe this strategy should help BAL gain market share (28.3% in FY12E

versus 26.8% in FY11) and achieve its sales guidance of 20% growth in FY12E.

Capacity ramp up at tax‐free Pantnagar key margin lever

Margin levers include (1) ramp up at tax free Pantnagar plant, (2) improvement in

product mix with less of Platina and (3)softening of input cost in H2FY12. We have built

in 19.4% E BITDA margin for FY12 vs company guidance of 20+%.

Raise FY12/13EPS by 6/11% on clarity on exports incentives

DEPB scheme has been extended by one quarter and is likely to be replaced with other

schemes. We have assumed the new scheme to retain half the benefit of existing

scheme. As a result, our FY12/13 EPS has increased by 6/11% to INR108/130. We are

7% and 13%, respectively, above consensus.

Outlook and valuations: Reasonable valuation; maintain ‘BUY’

Positive industry growth outlook, driven by rising rural incomes and slew of new

launches by BAL, has improved the company’s sales outlook. We maintain our

recommendation on the stock at ‘BUY/Sector Outperformer’ and raise target price to

INR 1,730 (based on 13x FY13E core EPS of INR 118 + 0.8x PV of FY13E cash/share of

INR 195). Currently, the stock at 11x FY13E is trading at 20% discount to peers.

Sachin Gupta

+91 22 6623 3472

[email protected]

Chetan Vora

+91 22 6620 3101

[email protected]

June 20, 2011



BAJAJ AUTO All eyes on Boxer

COMPANY UPDATE


Absolute Rating BUY

Rating Relative to Sector Outperformer

Risk Rating Relative to Sector Medium Sector Relative to market Equalweight

MARKET DATA (R: BAJA. BO, B: BJAUT IN)

CMP : INR 1,370

Target Price : INR 1,730

52-week range (INR) : 1,664 / 1,127

Share in issue (mn) : 289.4


Avg. Daily Vol. BSE/NSE (‘000) : 604.5



(% of share in issue)

PRICE PERFORMANCE (%)

Stock Nifty EW Auto

Index

1 month 1.1 (1.0) (5.2)

3 months (5.4) (0.2) (3.1)

12 months 20.2 8.0 9.6

EDELWEISS 4D RATING

Promoters*

50.0%

MFs, FIs &

Banks

7.9%

FIIs

16.0%

Others

26.1%

Financials


Revenues (INR mn) 118,098 164,078 200,923 234,967

Rev. growth (%) 35.8 38.9 22.5 16.9 EBITDA (INR mn) 24,814 31,838 38,978 47,232

Adjusted net profit (INR mn) 18,643 26,152 31,356 37,531

Shares outstanding (mn) 289 289 289 289

Adjusted diluted EPS (INR) 64.4 90.4 108.4 129.7

EPS growth (%) 116.5 40.3 19.9 19.7 Adjusted diluted P/E (x) 21.3 15.2 12.6 10.6

EV/EBITDA (x) 14.9 10.9 8.6 6.5

ROAE (%) 80.8 66.7 54.1 48.6




Automobiles


On the back of strong rural outlook, buoyant exports and new launches ( Boxer and ramp up

of Discover 125cc), we expect BAL to register volume growth of 20% Y-o-Y to 4.6 mn units,

aided further by increasing dealers’ network by over 130 in rural and semi urban India to tap

rural demand. We believe the two-wheeler industry to be the least affected by the currentmacro headwinds. In addition, ramp at tax-free Pantnagar plant should help the company

sustain margin against rising commodity costs.

Focus on building brand and differentiated products

Bajaj Auto (BAL), despite similar reach, had lost out to Hero Honda in rural sales due to lack

of differentiated products. With Discover , the company has got its strategy right where now

the focus is on building brand and offering products with different features at various price

points through Discover and Pulsar brands. Going ahead, it plans to establish the new Boxer

brand for rural customers who prefer motorcycles for personal as well as commercial use.

Chart 1: Product differentiation through price and features Chart 2: Distribution reach is comparable with leader**

Source: Overdrive magazine, Crisil, Edelweiss research

Note: Boxer* ‐ to be launched in Q2FY12

** Distribution network is as of August 2010

Boxer to boost volume

To target cost-sensitive rural India, BAL intends to launch Boxer 150cc in Q2FY12, priced at

INR 40,000. The company has added 135 new dealers (28% addition to total dealership) in

the past one year in rural and semi urban areas.

Thus, the company now has two-wheeler products across various price points—Boxer

targeted at the lowest end, Discover for the middle class, and Pulsar for both middle and

upper middle classes. We have built in 20,000 units monthly run rate for Boxer .

30,000

40,000

50,000

60,000

70,000

80,000

P

l a t i n a 1 0 0

P l a t i n a 1 2 5 D T S i

B o x e r *

D i s c o v e

r 1 0 0 D T S i

D i s c o v e

r 1 2 5 D T S i

D i s c o v e r 1 5 0

P u l s a r 1 3 5 L S

P u l s a r 1 5 0 D T S i


A v e n g e

r 2 2 0 D T S i

P u l s a r 2 2 0 S


( I N R )

Bajaj

Auto

Hero

Honda

TVS M&M HMSI Suzuki100

220

340

460

580

700

( N o s . )




Automobile

Chart 3: Boxer to contribute 6% in FY12E and 9% in FY13E


Discover 125cc sales volume likely to zoom Discover 125cc is expected to do sales of nearly 25,000 units per month, as per the

management. We expect sales to ramp up in Q1FY12 during the wedding season and have,

accordingly, built in monthly sales of 15,000 units.

Margin respite from ramp up of production at Pantnagar plant

Currently, the tax-free Pantnagar plant is operating at half its capacity. Largely, Platina (low

value product) is rolled out from here. With overall ramp up in sales, we expect more

Discover production to be shifted to this plant, which should be beneficial from overall

profitability. Accordingly, ramp up at Pantnagar plant will enhance capacity utilisation from

the existing ~50% to 100%.

Raise FY12/13EPS by 6/11% on clarity on exports incentives

DEPB scheme has been extended by one quarter and is likely to be replaced with other

schemes. We have assumed the new scheme to retain half the benefit of existing scheme

As a result, our FY12/13 EPS has increased by 6/11% to INR108/130. We are 7% and 13%

respectively, above consensus.

Table 1: EPS estimates revised up 6/11% for FY12/13E


0.0

2.0

4.0

6.0

8.0

10.0

0

70,000

140,000

210,000

280,000

350,000

FY12 FY13

( % t o d o m e s t i c s a l e s )

( n o s )

Boxer sales (nos) % contributed to domestic sales (RHS)

Earlier Revised % change Earlier Revised % changeTotal volumes (nos) 4,603,306 4,603,306 ‐ 5,194,596 5,194,596 ‐

Net sales (INR mn) 197,088 200,923 1.9 228,616 234,967 2.8

EBITDA (INR mn) 36,613 38,978 6.5 41,264 47,232 14.5

Net profit (INR mn) 29,579 31,356 6.0 33,733 37,531 11.3

EPS (INR) 102.2 108.4 6.0 116.6 129.7 11.3

FY12E FY13E




Automobiles

Table 2: Our EPS estimates are 7/13% above consensus estimates


Outlook and valuations: Trading at discount; maintain ‘BUY’

Positive industry growth outlook, driven by rising rural incomes and slew of new launches by

BAL, have improved the company’s sales outlook, while likely softening in commodity costs

will improve its margins. We expect the company’s earnings to post 20% CAGR over FY11-

13E.

At INR 1,370, the stock is currently trading at 12x core auto FY12E EPS of INR 100 (excluding

0.8x cash/share). We also expect consensus to upgrade earnings; we foresee BAL’s current

discount of 20% to peers narrowing. We have raised our target price from INR 1,560 to INR1,730 on account of increase in earnings estimates. We have valued it on 13x FY13E core

EPS of INR 118 + 0.8x PV of FY13E cash/share of INR 195. Our target price implies return of

26%. We maintain ‘BUY/Sector Outperformer’ recommendation/rating on the stock.

Chart 4: One year forward consensus P/E

Source: Bloomberg


Sales (INR mn) 200,923 194,835 3.1 234,967 223,117 5.3

EBITDA (INR mn) 38,978 37,495 4.0 47,232 42,056 12.3

EBITDA (%) 19.4 19.2 0.8 20.1 18.8 6.6

EPS (INR) 108.4 101.7 6.6 129.7 115.2 12.6

FY12E FY13E

6.0

9.0

12.0

15.0

18.0

21.0

J u n - 0 8

A u g - 0 8

O c t - 0 8

D e c - 0 8

F e b - 0 9

A p r - 0 9

J u n - 0 9

A u g - 0 9

O c t - 0 9

D e c - 0 9

F e b - 1 0

A p r - 1 0

J u n - 1 0

A u g - 1 0

O c t - 1 0

D e c - 1 0

F e b - 1 1

A p r - 1 1

( x )

BJAUT one year forward




Automobile

Key Risks

Increasing competition

Intense competition could hit profitability; though such a scenario is unlikely, given the

current tight demand and supply scenario.

Weak monsoon

So far, the forecast for monsoon is normal, which augurs well for rural demand. However,

any shortfall in monsoon could adversely affect rural demand and, hence, our earnings

estimates.



Adverse currency movement

The company has hedged ~95% of its exports exposure at USD INR 46.7. Hence, FY12

earnings are safe. However, one sided appreciation of INR vis-à-vis USD could affect

profitability in FY13.

Table 4: Sensitivity of USD/INR movement to FY13E EPS


Lower than expected export incentive

Export incentive withdrawal could take off FY13 earnings by 10%, if the burden is not passed

on. However, in our view, BAL has established its brand in the African exports market,

where it enjoys a premium over Chinese products, and thus has considerable pricing power.

Also, even if DEBP is withdrawn, we expect it to be replaced by some other exports

incentive given the government’s increased thrust on exports.


Volume growth (%) 12.2 20.4 27.6

EPS (INR) 100.4 108.4 115.9


USD/INR 40.5 45.0 49.5

EPS (INR) 112.6 129.7 146.8




Automobiles

Annual Trends

Chart 5: Regaining lost ground in motorcycles Chart 6: 2W exports contributing over 35%

Source: SIAM, Company, Edelweiss research

Chart 7: 3W exports outweighing domestic sales Chart 8: 3W share declines on competition

Source: SIAM, Company, Edelweiss research

0.0

14.0

28.0

42.0

56.0

70.0

0

700,000

1,400,000

2,100,000

2,800,000

3,500,000

F Y 0 1

F Y 0 3

F Y 0 5

F Y 0 7

F Y 0 9

F Y 1 1

F Y 1 3 E

( % )

( N o s . )

Mcycle Scooters

Mcyc le mkt shr (RHS) Scooters mkt shr (RHS)

0

70,000

140,000

210,000

280,000

350,000

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( N o s . )

Domestic Exports

80.0

84.0

88.0

92.0

96.0

100.0

38.0

45.0

52.0

59.0

66.0

73.0

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

( % )

( % )

Domestic mkt share (%) Exports mkt share (RHS)

0.0

14.0

28.0

42.0

56.0

70.0

0

300,000

600,000

900,000

1,200,000

1,500,000

F Y 0 1

F Y 0 3

F Y 0 5

F Y 0 7

F Y 0 9

F Y 1 1

F Y 1 3 E

( % )

( N o s . )

Two wheeler exports Y-o-Y (RHS)




Automobile

Chart 9: Exports ‐ Africa and South East Asia, key geographies


Chart 10: Two wheeler capacity utilisation at optimum level

Source: Cris Infac, Company, Edelweiss research

0.0

20.0

40.0

60.0

80.0

100.0

FY07 FY08 FY09 FY10

( % )

South Asia South East Asia Africa and M.E. South America

50.0

64.0

78.0

92.0

106.0

120.0

1,000,000

1,900,000

2,800,000

3,700,000

4,600,000

5,500,000

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2

F Y 1 3

( % ) ( %

)

Installed capacity (nos) Capacity utilised (RHS)




Automobiles

Chart 11: Motorcycles dominating product mix Chart 12: 3W & others contribute 25% to revenue


Chart 13: Avg realisation higher on better product mix Chart 14: Commodity inflation could dent margin


0.0

20.0

40.0

60.0

80.0

100.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % t o s a

l e s )

Motorcycle Scooter Three wheelers

25,000

29,000

33,000

37,000

41,000

45,000

0

20,000

40,000

60,000

80,000

100,000

F Y 0 1

F Y 0 3

F Y 0 5

F Y 0 7

F Y 0 9

F Y 1 1

F Y 1 3

E



Motorcycle Scooter

Three wheelers Avg realisation (RHS)

0.0

20.0

40.0

60.0

80.0

100.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % t o s

a l e s )

Motorcycle Scooter

Three wheelers Other operating income

55.0

60.0

65.0

70.0

75.0

80.0

0.0

5.0

10.0

15.0

20.0

25.0

F Y 0

1

F Y 0

2

F Y 0

3

F Y 0

4

F Y 0

5

F Y 0

6

F Y 0

7

F Y 0

8

F Y 0

9

F Y 1

0

F Y 1

1

F Y 1 2

E

F Y 1 3

E

( % t o s a l e s )

( % t o s a l e s )

Employee costs Other operating costs

EBITDA margin Raw material (RHS)




Automobile

Chart 15: Operating profit swings in line with growth in gross profit

Source:Company, Edelweiss research

Note: *Gross profit = net revenue – raw material costs

Chart 16: R&D as % to sales


(40.0)

0.0

40.0

80.0

120.0

160.0

(20.0)

0.0

20.0

40.0

60.0

80.0

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

(

)

( % )

Net revenue Gross profit* Operating profit (RHS)

1.0

1.1

1.2

1.2

1.3

1.4

0

300

600

900

1,200

1,500

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

( % )

( I N R m n )





Automobiles

Chart 17: Earnings CAGR of 20% over FY11‐FY13E Chart 18: Return ratios to dip on lower yields on higher cash


Quarterly Trends

Chart 19: Gross profit incrementally lower vis‐a‐vis realisation Chart 20: Margin maintained on cost reduction initiatives


Note: *Gross profit = net revenue – raw material costs

0.0

60.0

120.0

180.0

240.0

300.0

0.0

30.0

60.0

90.0

120.0

150.0

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( I N R / s h a r e )

( I N R / s h a r e )

EPS Free cash flow Book value (RHS)

35,000

37,000

39,000

41,000

43,000

45,000

0

3,500

7,000

10,500

14,000

17,500

Q 1 F Y 0 8

Q 3 F Y 0 8

Q 1 F Y 0 9

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1



Gross profit* Operating profit

Realisation (RHS)

0.0

5.0

10.0

15.0

20.0

25.0

60.0

64.0

68.0

72.0

76.0

80.0

Q 1 F Y 0 8

Q 3 F Y 0 8

Q 1 F Y 0 9

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1

( % )

( % )

Raw materialEmployee costs (RHS)Other operating costs (RHS)EBITDA (RHS)

10.0

12.5

15.0

17.5

20.0

22.5

35.0

44.0

53.0

62.0

71.0

80.0

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % ) ( % )

RoACE RoAE EBITDA (RHS)




Automobile

Company Description

BAL is the second largest two-wheeler manufacturer in India with a domestic market share

of 28%. It offers products in all motorcycle segments—Platina (entry), Discover (executive)

and Pulsar (premium). It is also the largest three-wheeler manufacturer in India. Post the

demerger in May 2008, the company has been solely focused on the automobile business.In the past few years, it has posted strong growth in exports which now contribute nearly

35% to total volume.




Automobiles

Financial Statements Income statement (INR mn)


Total volume (nos) 2,194,108 2,852,610 3,823,924 4,603,306 5,194,596

% Growth (10.5) 30.0 34.1 20.4 12.8


Materials costs 64,635 80,704 117,988 144,876 169,698


Staff costs 3,544 3,995 4,768 5,222 5,694

S G & A expenses 6,226 6,605 6,799 8,474 8,427



EBITDA 10,776 24,814 31,838 38,978 47,232


EBIT 9,478 23,449 30,610 37,398 45,555

Interest 210 60 17 13 13

Non-operational income 2,360 2,329 5,670 5,864 7,320

Profit before tax 11,628 25,718 36,263 43,249 52,861

Provision for tax 3,016 7,075 10,110 11,894 15,330Adjusted profit 8,612 18,643 26,152 31,356 37,531

Prior period adjustments (net) (20) (9) 0 0 0

Extraordinary income/ (loss) (2,051) (1,641) 7,246 0 0

Reported Profit after tax 6,542 16,993 33,398 31,356 37,531

Shares outstanding 289 289 289 289 289

Adjusted earnings per share (EPS) 29.8 64.4 90.4 108.4 129.7

Diluted shares outstanding 289 289 289 289 289

Adjusted diluted EPS 29.8 64.4 90.4 108.4 129.7

Cash EPS 34.0 69.0 94.6 113.8 135.5


Dividend payout (%) 48.7 34.1 34.7 36.9 38.6




Materials costs 74.3 68.3 71.9 72.1 72.2

Staff costs 4.1 3.4 2.9 2.6 2.4

S G & A expenses 7.2 5.6 4.1 4.2 3.6

Depreciation 1.5 1.2 0.7 0.8 0.7


EBITDA margins 12.4 21.0 19.4 19.4 20.1


Growth metrics (%)

Year to March FY09 FY10 FY11 FY12E FY13ERevenues (1.5) 35.8 38.9 22.5 16.9

EBITDA 0.3 130.3 28.3 22.4 21.2

PBT (5.9) 121.2 41.0 19.3 22.2

Adjusted Net profit 0.6 116.5 40.3 19.9 19.7

Adjusted EPS 0.6 116.5 40.3 19.9 19.7




Automobile



Equity capital 1,447 1,447 2,894 2,894 2,894



Secured loans 0 130 130 130 130


Deferred tax (Net) 42 17 297 297 297

Sources of funds 34,439 42,686 52,651 70,464 91,067

Gross block 33,502 33,793 35,751 37,751 40,251

Depreciation 18,079 18,997 20,225 21,805 23,482

Net block 15,423 14,796 15,526 15,945 16,768

Capital work in progress 221 415 0 0 0

Investments 18,085 40,215 47,952 58,506 83,418

Inventories 3,388 4,462 5,473 7,559 9,532

Sundry debtors 3,587 2,728 3,628 7,019 9,532

Cash and bank balance 1,369 1,014 5,565 6,684 7,867




Others current liabilities 4,134 4,551 4,551 4,551 4,551

Provisions 12,242 22,487 25,397 27,180 34,002


Net current assets (1,123) (12,740) (10,827) (3,986) (9,120)

Misc expenditure 1,833 0 0 0 0

Uses of funds 34,439 42,686 52,651 70,464 91,067


Free cash flow


Net profit 6,542 16,993 33,398 31,356 37,531Depreciation 1,298 1,365 1,228 1,580 1,677

Deferred tax (68) (51) 0 0 0

Others 68 51 0 0 0

Gross cash flow 7,839 18,357 34,626 32,936 39,208

Less: Changes in WC 684 (8,238) 4,157 5,720 (2,929)

Operating cash flow 7,155 26,595 30,470 27,216 42,138

Less: Capex 3,908 933 1,543 2,000 2,500

Free cash flow 3,247 25,663 28,927 25,216 39,638

Cash flow metrics



Financing cash flow (1,028) (6,038) (16,883) (13,543) (13,543)


Net cash flow 2,705 (2,505) 4,308 1,119 1,183

Capex (3,908) (933) (1,543) (2,000) (2,500)

Dividend paid (3,386) (3,724) (6,749) (13,543) (13,543)




Automobiles



ROAE (%) 52.6 80.8 66.7 54.1 48.6

ROACE (%) 34.4 60.4 68.9 61.4 65.5



Payble days 38 61 54 43 46Cash conversion cycle (days) (4) (33) (29) (11) (15)

Current ratio 1.0 0.7 0.8 0.9 0.9

Debt/EBITDA 1.5 0.5 0.1 0.1 0.1


Debt/Equity 0.8 0.5 0.1 0.0 0.0

Operating ratios





Du pont analysis


NP margin (%) 9.9 15.8 15.9 15.6 16.0



ROAE (%) 52.6 80.8 66.7 54.1 48.6



Adjusted EPS (INR) 29.8 64.4 90.4 108.4 129.7

Y ‐o‐Y growth (%) 0.6 116.5 40.3 19.9 19.7

CEPS (INR) 34.0 69.0 94.6 113.8 135.5

Adjusted P/E (x) 46.0 21.3 15.2 12.6 10.6Price/BV (x) 23.5 13.5 8.1 5.9 4.5

EV/Sales (x) 4.5 3.1 2.1 1.7 1.3

EV/EBITDA (x) 36.4 14.9 10.9 8.6 6.5

Dividend yield (%) 0.8 1.5 2.9 2.9 3.6




Automobile

While Hero Honda’s (HH) volume growth is likely to stay strong, margins are likely to stay under pressure due to costs pertaining to R&D set up, brand building, exports push and deteriorating production mix. We maintain our ‘Hold’ recommendation and target price of INR 1,600 In fast lane on robust rural demand; positive surprise on sales likely Robust rural demand for motorcycles continues to fuel Hero Honda (HH) and in our

view its sales growth could surprise the Street positively as the company has overcome

production constraints. Hence, we expect volume to surge to 6.2 mn units in FY12E (up

14% Y-o-Y).

R&D expenses, deteriorating product mix could derail margin We expect HH’s EBIT margin to stay under pressure due to: (1) R&D set up cost

(incremental 60bps negative for EBIT margin in FY12E); (2) deteriorating exports

product mix; and (3) decline in contribution from tax-free Haridwar plant beginning

FY13 (this could raise tax rate by 1% and lower EBITDA 60bps in FY13E). In our view,

these risks are not built in consensus numbers. We are 5% below on consensus EBIT in

FY12, however we are largely in line with consensus on EPS.

Risk–reward is balanced In our view, risk reward is balanced. Sales growth should continue to be strong but

quarterly earnings could disappoint on poor margins. Low beta of 0.63, healthy balance

sheet and 5% dividend yield compensate for execution risk pertaining to life without

Honda.

Outlook and valuations: Balanced; maintain ‘HOLD’ While sales outlook is strong on rising rural income, margin headwinds are likely to

persist, keeping margins under pressure. We maintain our target price of INR 1,600

(valued on 12x FY13E core EPS of INR 117 + 0.8x PV of FY13E cash per share of INR 195).

Given limited return, we recommend ‘HOLD/Sector Performer’ recommendation rating

on the stock.

Sachin Gupta +91 22 6623 3472

[email protected]

Chetan Vora +91 22 6620 3101

[email protected]

June 20, 2011



HERO HONDA Execution risk puts spanner in works

COMPANY UPDATE


Absolute Rating HOLD Rating Relative to Sector Performer


MARKET DATA (R: HROH. BO, B: HH IN) CMP : INR 1,747


52-week range (INR) : 2,074 / 1,377






(% of share in issue) PRICE PERFORMANCE (%)

Stock Nifty EW Auto Index

1 month 0.6 (1.0) (5.2)

3 months 16.8 (0.2) (3.1)

12 months (9.1) 8.0 9.6

EDELWEISS 4D RATING

Promoters*

52.2%

MFs, FIs &

Banks

5.2%

FIIs

32.8%

Others

9.8%

Financials


Revenues (INR mn) 157,582 192,450 228,270 260,107

Rev. growth (%) 27.9 22.1 18.6 13.9

EBITDA (INR mn) 26,622 24,607 32,968 36,651

Net profit (INR mn) 22,320 19,282 23,033 25,761


Diluted EPS (INR) 111.8 99.8 115.3 129.0

EPS growth (%) 74.3 (10.8) 15.6 11.8

Diluted P/E (x) 15.6 17.5 15.1 13.5

EV/EBITDA (x) 10.9 12.1 9.1 8.1

ROAE (%) 61.4 62.0 75.4 77.3




Automobiles


Volume growth is likely to stay strong in FY12E at 14% Y-o-Y (6.2mn units) benefitting from

strong rural demand. However on the flip side, margins are likely to stay under pressure due

to costs pertaining to R&D set up, brand building, exports push and deteriorating production

mix

Outlook for sales growth remains upbeat

HH’s volume sales in recent months have been strong enabling the company to partially

regain the lost market share. Recent performances have also been aided by strong

north indian wedding season demand. We believe the volume growth could surprise

the street positively.

Chart 1: Strong sales performance


R&D ramp up likely to shave off 60bps from EBIT margin

R&D ramp up is likely to shave off 60bps from HH’s EBIT margin as the company builds R&D

capabilities post split with Honda while royalty payment continues till June 2014. In our view

the R&D expenditure is likely to stay high at 1% of sales in the initial couple of years, before

stabilising at 60bps from the current ~25bps. The R&D efforts will be targeted at developing

new products, new technologies and new higher emission norms-compliant products.

50.0

52.2

54.4

56.6

58.8

61.0

(12.0)

0.0

12.0

24.0

36.0

48.0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

J a n - 1 1

F e b - 1 1

M a r - 1 1

A p r - 1 1

M a y - 1 1

( % )

( % )

Market share (RHS) Volume growth




Automobile

Chart 2: HH will have to ramp up R&D base

Source: Cline, Edelweiss research

Tax rate should rise post FY13

HH’s Haridwar plant will lose its 100% tax-exempt status in FY13; from FY14, the fiscal

incentive will be limited to 50%, raising the company’s effective tax rate by 6%. A part of this

should be offset by tax benefit on R&D. However, it will still dent margin and restrict EPS

growth.

We are 5/4% below consensus on EBIT

Contrary to the Street’s bullish argument that margins have bottomed out and should

improve hereon, we believe margin pressure is likely to continue as HH ramps up

expenditure pertaining to R&D and rebranding of products. Setting up an exports

distribution network is also likely to be a drag on margin as the benefit should take at least

three years to flow in. Hence, we expect the company’s EBIT margin to dip 60bps in FY12Eover FY11 versus consensus expectation of flat margin. Our FY12E and FY13E EPS of INR 115

and INR 129 are 3% and 2%, respectively, above consensus.

Table 1: Earnings estimates of Hero Honda as per Edel vis‐à‐vis Consensus


Outlook and valuations: Balanced; maintain ‘HOLD’

While sales outlook is strong on rising rural incomes, margin headwinds are likely to persist,

keeping HH’s margin under pressure. We arrive at a target price to INR 1,600 valued on 12x

FY13E core EPS of INR 117 + 0.8x PV of FY13E cash per share of INR 195). For calculating

one-year present value of FY13 cash, we discount it using cost of capital of 14%. Historically

during low earnings growth period, the stock has traded in a 10-14x band. Our target

0.0

0.6

1.2

1.8

2.4

3.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

( % t o s a l e s )

Bajaj's R&D HH's R&D TVS's R&D


Sales (INR mn) 228,270 223,671 2.1 260,107 253,653 2.5

EBIT 23,626 24,938 (5.3) 27,090 28,360.0 (4.5)

EBIT (%) 10.4 11.1 10.4 11.2

EPS (INR) 115.3 112.3 2.7 129.0 126.8 1.7

FY12E FY13E




Automobiles

multiple implies mid-point of this band. We maintain our ‘HOLD/Performer’ rating on the

stock.

Chart 3: 1 year forward P/E swings between 10x and 14x during low earnings growth


5.0

8.5

12.0

15.5

19.0

22.5

M a y - 0 4

N o v - 0 4

M a y - 0 5

N o v - 0 5

M a y - 0 6

N o v - 0 6

M a y - 0 7

N o v - 0 7

M a y - 0 8

N o v - 0 8

M a y - 0 9

N o v - 0 9

M a y - 1 0

N o v - 1 0

M a y - 1 1

( x )




Automobile

Key Risks

Higher–than‐expected sales

We are positive as far as HH‘s sales in the next two years are concerned due to our strong

positive view on rural demand for motorcycles. We expect 6.2 mn units sales in FY12E.

However, sales stronger than our expectation pose an upside risk.



Other risks

• Include below/above estimated metal cost inflation

• Rapid/slow ramp up in exports are key upside/downside risk respectively.


Volume growth (%) 5.4 14.4 24.5

EPS (INR) 99.7 115.3 132.9




Automobiles

Annual Trends

Chart 4: To loose market share on newer launches Chart 5: Growth to be below industry growth rate


Chart 6: Gross profit per vehicle to cede over higher RM costs Chart 7: Royalty and promotional exp to weigh down EBIT


45.0

48.0

51.0

54.0

57.0

60.0

2,000,000

2,900,000

3,800,000

4,700,000

5,600,000

6,500,000

F Y 0 1

F Y 0 3

F Y 0 5

F Y 0 7

F Y 0 9

F Y 1 1

F Y 1 3 E

( % )

( N o s )

Domestic Mcyc le sales Market share (RHS)

7,500

8,200

8,900

9,600

10,300

11,000

0

8,000

16,000

24,000

32,000

40,000

F Y 0 1

F Y 0 3

F Y 0 5

F Y 0 7

F Y 0 9

F Y 1 1

F Y 1 3 E



Realisation RM costs Gross profit (RHS)

(28.0)

(14.0)

0.0

14.0

28.0

42.0

(12.0)

0.0

12.0

24.0

36.0

48.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % )

( % )

Mcycle sales Y-o-Y growth

Industry Y-o-Y growth (RHS)

64.4

66.7

69.0

71.3

73.6

75.9

0.0

4.0

8.0

12.0

16.0

20.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % )

( % )


EBIT margin Raw material (RHS)




Automobile

Chart 8: Lower sales and higher commodity cost restricting earnings growth

Chart 9: EPS to post 14% CAGR over FY11‐13E Chart 10: Returns to improve on higher dividend payout

Chart 11: R&D to increase by 100bps going ahead Chart 12: Royalty of INR 23.8bn to be paid in 14 EMI


(22.0)

0.0

22.0

44.0

66.0

88.0

0.0

10.0

20.0

30.0

40.0

50.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

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F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

(

)

( %

)

Net revenue RM costs EBIT (RHS)

0.0

40.0

80.0

120.0

160.0

200.0

0.0

28.0

56.0

84.0

112.0

140.0

F

Y 0 1

F

Y 0 2

F

Y 0 3

F

Y 0 4

F

Y 0 5

F

Y 0 6

F

Y 0 7

F

Y 0 8

F

Y 0 9

F

Y 1 0

F

Y 1 1

F Y

1 2 E

F Y

1 3 E

( I N R / s h a r e )

( I N R / s h a r e )


0.00

0.08

0.16

0.24

0.32

0.40

0

90

180

270

360

450

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

( % )

( I N R m n )


0.0

0.7

1.4

2.1

2.8

3.5

0

1,500

3,000

4,500

6,000

7,500

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % )

( I N R m n )

Royalty As a % to net sales (RHS)

0.0

20.0

40.0

60.0

80.0

100.0

0.0

4.0

8.0

12.0

16.0

20.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % )

( % )

EBIT margin RoACE (RHS) RoAE (RHS)




Automobiles

Quarterly Trends

Chart 13: Cost push not able to pass on completely Chart 14: EBIT margins down on cost push


7,500

8,400

9,300

10,200

11,100

12,000

10,000

16,000

22,000

28,000

34,000

40,000

Q 1 F Y 0 8

Q 3 F Y 0 8

Q 1 F Y 0 9

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1



Realisation RM costs Gross profit (RHS)

0.0

4.0

8.0

12.0

16.0

20.0

62.5

65.0

67.5

70.0

72.5

75.0

Q 1 F Y 0 8

Q 3 F Y 0 8

Q 1 F Y 0 9

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1

( % )

( % )

Raw material



EBIT margin (RHS)




Automobile

Company Description

HH is the world’s largest two-wheeler company (in volume terms). It has a production

capacity of 5.5 mn two wheelers at its two manufacturing facilities at Gurgaon and

Dharuhera in Haryana and one at Uttaranchal. The company offers motorcycles in all the

three major segments—CD

Dawn and CD

Deluxe in entry; Splendour , Passion, and Glamourin executive; and Hunk, Achiever , CBZ and Karizma in premium. It also sells Pleasure in the

ungeared scooter segment.




Automobiles




Total volume (nos) 3,722,000 4,600,130 5,402,444 6,182,739 6,940,405

% Growth 11.5 23.6 17.4 14.4 12.3


Materials costs 87,420 107,364 141,111 166,983 193,444


Staff costs 4,487 5,603 6,190 7,427 7,797

S G & A expenses 12,571 15,748 17,944 18,075 19,340


EBITDA 16,844 26,622 24,607 32,968 36,651


EBIT 15,037 24,707 20,584 23,626 27,090

Interest 25 21 14 65 120



Provision for tax 4,998 5,999 4,928 5,758 6,640

Core profit 12,809 22,320 19,921 23,033 25,761

Profit after tax 12,809 22,320 19,282 23,033 25,761




Diluted EPS 64.1 111.8 99.8 115.3 129.0

Cash EPS 74.1 121.8 119.9 162.1 176.9


Dividend payout (%) 31.2 98.4 108.7 78.0 73.6


Year to March FY09 FY10 FY11 FY12E FY13EOperating expenses 86.3 83.1 87.2 85.6 85.9

Materials costs 71.0 68.1 73.3 73.2 74.4

Staff costs 3.6 3.6 3.2 3.3 3.0

S G & A expenses 10.2 10.0 9.3 7.9 7.4

Depreciation 1.5 1.2 2.1 4.1 3.7

EBITDA margins 13.7 16.9 12.8 14.4 14.1


Growth metrics (%)


Revenues 19.2 27.9 22.1 18.6 13.9

EBITDA 24.8 58.1 (7.6) 34.0 11.2PBT 26.3 59.0 (12.3) 15.9 12.5

Net profit 32.3 74.3 (10.8) 15.6 11.8

EPS 32.3 74.3 (10.8) 15.6 11.8




Automobile



Equity capital 399 399 399 399 399



Unsecured loans 785 660 327 4,154 4,154

Borrowings 785 660 327 4,154 4,154Deferred payment credit 0 0 14,585 7,785 985

Deferred tax (Net) 1,444 1,528 2,468 2,468 2,468

Sources of funds 40,237 36,838 46,940 45,970 42,735

Gross block 25,163 27,510 56,519 61,019 65,519

Depreciation 9,426 10,922 14,946 24,288 33,849

Net block 15,737 16,588 41,573 36,731 31,670

Capital work in progress 1,205 481 481 481 481

Investments 33,688 39,257 51,288 51,288 54,749

Inventories 3,268 4,364 5,249 6,056 6,901

Sundry debtors 1,499 1,084 1,306 2,778 3,166

Cash and bank balance 2,196 19,072 715 848 966

Loans and advances 3,172 4,306 7,775 7,775 7,775Total current assets 10,135 28,826 15,046 17,457 18,808


Provisions 5,270 26,239 28,334 24,830 25,998



Uses of funds 40,237 36,838 46,940 45,970 42,735


Free cash flow


Net profit 12,809 22,320 19,282 23,033 25,761

Depreciation 1,807 1,915 4,024 9,342 9,562

Deferred tax 191 83 0 0 0

Others (191) (83) 0 0 (0)

Gross cash flow 14,616 24,235 23,306 32,374 35,323

Less: Changes in WC (2,165) (5,268) (9,399) 235 (585)


Less: Capex 3,102 2,041 29,009 4,500 4,500

Free cash flow 13,679 27,462 3,696 27,639 31,408

Cash flow metrics



Financing cash flow (4,775) (5,016) (10,023) (27,506) (27,828)


Net cash flow 885 16,876 (18,358) 133 118

Capex (3,102) (2,041) (29,009) (4,500) (4,500)

Dividend paid (4,439) (4,973) (25,376) (24,533) (21,028)




Automobiles



ROAE (%) 37.7 61.4 62.0 75.4 77.3

ROACE (%) 49.1 73.5 59.4 62.1 73.3




Current ratio 0.5 0.6 0.2 0.3 0.3

Debt/EBITDA 0.0 0.0 0.0 0.1 0.1

Gross Fixed asset turnover (x) 5.5 6.0 4.6 3.9 4.1

Operating ratios



Net Fixed asset turnover 9.0 9.7 6.6 5.8 7.6


Du

pont

analysisYear to March FY09 FY10 FY11 FY12E FY13E

NP margin (%) 10.4 14.2 10.4 10.1 9.9



ROAE (%) 37.7 61.4 62.0 75.4 77.3



EPS (INR) 64.1 111.8 99.8 115.3 129.0

Y ‐o‐Y growth (%) 32.3 74.3 (10.8) 15.6 11.8

CEPS (INR) 74.1 121.8 119.9 162.1 176.9

Diluted adjusted P/E (x) 27.2 15.6 17.5 15.1 13.5

Price/BV (x) 9.2 10.1 11.8 11.1 9.9

EV/Sales (x) 2.5 1.8 1.5 1.3 1.1

EV/EBITDA (x) 18.6 10.9 12.1 9.1 8.1

Dividend yield (%) 1.1 6.3 6.0 5.2 5.4




Automobile

Strong tractor demand and new launches in UV makes for strong sales growth outlook. Low competition gives pricing power. We are 7% above consensus on FY12 EPS. Valuation is attractive at 12x FY13E core EPS, thus ignores value of subsidiaries. We maintain our BUY with target price of INR 814. In a sweet spot on strong demand and low competitive intensity Surging rural incomes and government’s thrust on rural development implies strong

demand for tractors and utility vehicles. Ergo, we are building in 15% volume surge in

Mahindra & Mahindra’s (M&M) tractor segment, due to favourable macro factors. With

respect to automotive sales, we are estimating a growth of 12% (in line with management

guidance) accounting for new global SUV and compact Xylo launch in H2FY12.

Margin levers are in place In our view, M&M has multiple margin levers in the form of: (a) pricing power due to low

competitive intensity in the segment it operates in; (b) tax benefits and operating

leverage from new Chakan facility; and (c) softening of input cost in H2FY12.

Valuations are attractive At CMP INR 665, stock is trading at 14x and 12x FY12E and FY13E core EPS (5% discount

to Sensex), thus market is assigning no value to its subsidiaries. Historically, after

factoring in value of subsidiaries post 30% discount, the stock has traded an average of

10x one year forward core earnings. Applying similar method the stock is currently

trading at 6x FY13E core earnings (adjusted for treasury shares). We believe that

volume visibility, RoE profile and balance sheet strength is much better now. Thus,

does not justify such high discount .

Outlook and valuations: Sowing seeds of growth; maintain ‘BUY’ The favourable outlook for tractors and rural consumption remaining intact augur

particularly well for M&M. We maintain our ‘BUY/Sector Outperformer’

recommendation on the stock with a SOTP target price at INR 814.

Sachin Gupta +91 22 6623 3472

[email protected]

Chetan Vora +91 22 6620 3101

[email protected]

June 20, 2011



MAHINDRA & MAHINDRAThe rural story

COMPANY UPDATE


Absolute Rating BUY Rating Relative to Sector Outperformer


MARKET DATA (R: MAHM. BO, B: MM IN) CMP : INR 665

Target Price : INR 814

52-week range (INR) : 826 / 550





* Promoters pledged shares : NIL



1 month (5.3) (1.0) (5.2)

3 months (1.2) (0.2) (3.1)

12 months 13.4 8.0 9.6

EDELWEISS 4D RATING

Promoters*

24.9%

MFs, FIs &

Banks

23.7%

FIIs

22.9%

Others

28.5%

Financials


Revenues (INR mn) 185,296 234,210 273,992 313,340

Rev. growth (%) 41.5 26.4 17.0 14.4

EBITDA (INR mn) 29,941 34,095 40,088 46,935

Net profit (INR mn) 20,878 26,621 29,331 33,909


Diluted adjusted EPS (INR) 34.5 41.6 48.5 56.1

EPS growth (%) 65.1 20.5 16.7 15.6

Diluted P/E (x) 19.3 16.0 13.7 11.9

EV/EBITDA (x) 11.1 9.2 7.8 6.3

ROAE (%) 31.5 27.7 25.8 24.7




Automobiles


M&M is in a sweet spot as demand for tractors and utility vehicles is benefitting from

rising rural incomes and government’s increased rural thrust. At the same time, with a

dominant market share and low competition in the segment, the company enjoys

pricing power.

Tractor demand could surprise positively, Yuvraaj an added advantage

Management has guided to 12% volume growth in FY12. We believe, industry growth

could be higher at 15% given that strong demand drivers are in place—strong farm

income, availability of rural credit, government-led construction activity in rural areas,

and unavailability of rural work force. These drivers, in our view, are sufficient to

ensure above trend growth.

In our view, M&M’s added advantage is launch of Yuvraaj, which is likely to be ramped

up pan-India in FY12. Through this 15HP tractor, the company is targeting the marginal

farmer with less than 3 acres of land.

Chart 1: Maintaining leadership position in tractor segment

Source: Company, Crisil, Edelweiss research

New launches and low competition in entry level UV to drive growth

Management has guided for 11-13% growth for utility vehicles in FY12. We believe this

growth is likely to be driven by strong rural demand for Bolero and another booster is likely

to be the global SUV and compact Xylo which are likely to be launched in H2FY12. For FY12E

we expect UVs to grow by 12% driven by 10% organic growth and 2% by the new launches.

25.0

29.0

33.0

37.0

41.0

45.0

35,000

85,000

135,000

185,000

235,000

285,000

F Y 0 0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( N o s . )

Domestic tractor sales Market share (RHS)




Automobile

Chart 2: Dominant leadership in UV


Production ramp up in Chakan facility could be margin lever

M&M is likely to ramp up production from its Chakan factory from H2FY12. Management

has indicated that in FY12 production from this facility will be 25% of total sales. It is likely to

produce a global SUV, variant of Gio and Maxximo, and products from the Navistar JV from

here (M&HCV vehicles). In our view, this could add to margins in two ways – a) sales tax

refund from the state government and b) operating leverage benefit.

Mahindra Vehicle Manufactures Ltd (MVML) is 100% subsidiary of M&M. MVML would be

doing contract manufacturing for MNAL (Mahindra Navistar Automotive Ltd) and M&M.

Chart 3: Production ramp up at MVML is margin accretive


Note: MVML is Mahindra Vehicle Manufacturers Ltd (100% subsidiary of M&M)

40.0

44.0

48.0

52.0

56.0

60.0

0

40,000

80,000

120,000

160,000

200,000

FY05 FY06 FY07 FY08 FY09 FY10 FY11

( N o s . )

M&M's UV sales Mkt share (RHS)

0.0

0.6

1.2

1.8

2.4

3.0

10.0

11.2

12.4

13.6

14.8

16.0

Q1FY11 Q2FY11 Q3FY11 Q4FY11

( % )

( % )

EBIT (Auto) EBIT (Auto + MVML) MVML sales as % to auto sales (RHS)




Automobiles

Ssangyong could be a medium term value driver

The company acquired Ssangyong in FY11 and is in the process of restructuring the

latter’s business. M&M is focusing on investing in R&D (to spend USD 180 mn) and

ramping up distribution network (spending USD 36 mn towards brand development).

Ssangyong’s sales have already improved (up 130% in CY10) and it has broken even

operationally in CY10. M&M is planning to launch Ssangyong products in India and is

looking at exploring the option of joint sourcing of components and/or sourcing from

low cost destinations. Currently we value stake in Ssangyong at quoted price after

giving 30% holding company discount.

Chart 4: Ssangyong’s sales trending upward post restructuring


Chart 5: Ssangyong posted negative EBITDA in Q1CY11 after takeover by M&M


We are 7% and 5% above consensus on FY12E and FY13E earnings

We are bullish on both sales and margins for M&M. In our view weakness in Q4FY11

margins was more seasonal in nature given that year end provisioning that company

does. We expect margins to improve from Q1FY12.

0

2,500

5,000

7,500

10,000

12,500

A u g - 0 8

O c t - 0 8

D e c - 0 8

F e b - 0 9

A p r - 0 9

J u n - 0 9

A u g - 0 9

O c t - 0 9

D e c - 0 9

F e b - 1 0

A p r - 1 0

J u n - 1 0

A u g - 1 0

O c t - 1 0

D e c - 1 0

F e b - 1 1

A p r - 1 1

( N o s . )

Domestic Export Assembly kit

(72.0)

(48.0)

(24.0)

0.0

24.0

48.0

0

160

320

480

640

800

Q 1

C Y 0 8

Q 2

C Y 0 8

Q 3

C Y 0 8

Q 4

C Y 0 8

Q 1

C Y 0 9

Q 2

C Y 0 9

Q 3

C Y 0 9

Q 4

C Y 0 9

Q 1

C Y 1 0

Q 2

C Y 1 0

Q 3

C Y 1 0

Q 4

C Y 1 0

Q 1

C Y 1 1

( U S D m n )

Sales (USD mn) EBITDA (RHS)




Automobile

Table 1: Earnings estimates of M&M as per Edel vis‐à‐vis Consensus


Outlook and valuations: Positive; maintain ‘BUY’

The favourable outlook for tractors and rural demand for UV augur particularly well for

M&M. At CMP 665, stock is trading at 14x and 12x FY12E and FY13E core EPS (5%

discount to Sensex), thus market is assigning no value to its subsidiaries and valuation

are attractive. We maintain ‘BUY/Sector Outperformer’ recommendation/rating on

the stock. We value the stock on SOTP basis at INR 814 as under:

Historically after factoring in value of subsidiaries post 30% discount, the stock has

traded an average of 10x one year forward core earnings. Applying similar method thestock is currently trading at 6x FY13 core earnings (adjusted for treasury shares). We

believe that volume visibility, RoE profile and balance sheet strength is much better

now. Thus does not justify such high discount.

For standalone business we assign a multiple of 10 to FY13E core auto earnings (in line

with the past five year average) to arrive at a value of INR 594. We have valued

subsidiaries on book value (for unlisted companies) and considered current market

price for listed subsidiaries after giving a holding company discount of 30% to arrive at

a value of INR 221 (earlier was INR224). Thus we arrive at TP of INR814 (was 817 earlier,

lower due to change in listed subsidiaries price) which implies 23% upside from the

current price of INR 665.

Table 2: Sum of the parts valuation implies 23% upside



Sales (INR mn) 273,992 271,471 0.9 313,340 310,101 1.0

EBITDA (INR mn) 40,088 37,659 6.5 46,935 43,172 8.7

EBITDA (%) 14.6 13.9 5.5 15.0 13.9 7.6

Net profit (INR mn 29,331 27,511 6.6 33,909 32,163 5.4

FY12E FY13E

Value/Mcap M&M holding Parameter Value/share

(INR mn) (%) (CMP) (INR)

Investment in listed companies

Tech Mahindra CMP (INR) 41,755 48.3 688 76

Mahindra and Mahindra Financial Services CMP (INR) 35,877 60.1 616 65

Mahindra Lifespace Developers NAV 10,548 51.2 506 19

Mahindra Holidays and Resorts DCF 23,795 83.1 340 43

Mahindra Ugine Steel CMP (INR) 823 50.7 50 1

Mahindra Forgings CMP (INR) 3,206 50.7 72 6

Swaraj Engines CMP (INR) 1,754 33.2 425 3

Ssangyong CMP (INR) 28,675 70.0 336 52

Investment in unlisted companies

Other investments Book value 27,815 - 50

Sub-total 315

Investments valued at 30% discount 221

Core auto business 10x FY13E core earnings 594

Target price (INR) 814

Basis of

valuation




Automobiles

Chart 6: Lower D/E ratio plus higher RoAE augurs well for company


Chart 7: One year forward core P/E (Excluding subsidiary valuation)


0.2

0.4

0.5

0.7

0.8

1.0

5.0

11.0

17.0

23.0

29.0

35.0

F Y 0 1

F Y 0 2

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F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( x ) ( % )

RoAE Debt: Equity (RHS)

0.0

3.6

7.2

10.8

14.4

18.0

M a y - 0 5

N o v - 0 5

M a y - 0 6

N o v - 0 6

M a y - 0 7

N o v - 0 7

M a y - 0 8

N o v - 0 8

M a y - 0 9

N o v - 0 9

M a y - 1 0

N o v - 1 0

M a y - 1 1

( x )




Automobile

Key Risks

Managing a complex group structure

M&M is a conglomerate with interests in automotive, farm equipment, real estate, tech

services, and hospitality, among others. Managing such a complex structure could

divert focus away from the core business and could pose execution risk.

Weak performance of subsidiaries

Poor performance of subsidiaries can be a drag on the overall stock performance. M&M

drives its valuation through core operations and subsidiaries. Any weak performance by

any of its subsidiaries can drag down its overall business performance.

Hike in fuel price

Diesel price so far has remained insulated from any substantial rise. Any

announcements with respect to hike in diesel price could affect M&M’s operations

given the high dependency on diesel vehicle sales to overall vehicle sales.

Vagaries

of

monsoon

So far the Indian Meteorological Department (IMD) has forecast a normal monsoon

which augurs well for tractors and UV sales (especially Bolero). Any deviation on the

negative side could be a risk to farm incomes and thus tractor demand.




Volume growth (%) 3.9 13.9 23.9

EPS (INR) 42.9 48.5 54.0




Automobiles

Annual Trends

Chart 8: UVs and tractor constitute over 70% of volumes Chart 9: Tractors and LCV to grow highest @ 15% in FY12E


Chart 10: Pricing power would lead to operating profit Chart 11: Cost inflation push to get offset by cost reduction


0

30,000

60,000

90,000

120,000

150,000

0

60,000

120,000

180,000

240,000

300,000

F Y 0 1

F Y 0 3

F Y 0 5

F Y 0 7

F Y 0 9

F Y 1 1

F Y 1 3 E

( N o s . )

( N o s . )

Utility vehicles Tractors

LCVs (RHS) Three wheelers (RHS)

0

15,000

30,000

45,000

60,000

75,000

0

120,000

240,000

360,000

480,000

600,000

F Y 0 1

F Y 0 3

F Y 0 5

F Y 0 7

F Y 0 9

F Y 1 1

F Y 1 3 E



Automotive Three wheelers

Tractors Operating profit (RHS)

(50.0)

0.0

50.0

100.0

150.0

200.0

(40.0)

(20.0)

0.0

20.0

40.0

60.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % )

( % )

UV's Y-o-Y growth

Tractors Y-o-Y growth

LCVs Y-o-Y growth (RHS)

Three wheelers Y-o-Y growth (RHS)

60.0

62.5

65.0

67.5

70.0

72.5

0.0

4.0

8.0

12.0

16.0

20.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % )

( % )






Automobile

Chart 12: Operating profit to grow in line with net revenue growth


Chart 13: Automotive division yields ~13% EBIT margin Chart 14: Farm equipment yields ~18% EBIT margin


(90.0)

(45.0)

0.0

45.0

90.0

135.0

(13.0)

0.0

13.0

26.0

39.0

52.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( ) ( % )

Net revenue RM costs Operating profit (RHS)

5.0

7.0

9.0

11.0

13.0

15.0

(15,000)

10,000

35,000

60,000

85,000

110,000

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

( % )

( I N R m n )

Sales EBIT EBIT margin (RHS)

6.0

9.0

12.0

15.0

18.0

21.0

0

22,000

44,000

66,000

88,000

110,000

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

( % )

( I N R m n )





Automobiles

Chart 15: EPS to post 16% CAGR over FY11‐13E Chart 16: Sustainable EBITDA margins and return ratios


Chart 17: Operating profit to grow in line with net revenue growth


0

60

120

180

240

300

(35.0)

0.0

35.0

70.0

105.0

140.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

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F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( I N R / s h a

r e )

( I N R / s h a

r e )


0.0

0.9

1.8

2.7

3.6

4.5

0

1,400

2,800

4,200

5,600

7,000

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

( % )

( I N R m n )

R&D as % of net sales (RHS)

0.0

7.0

14.0

21.0

28.0

35.0

0.0

4.0

8.0

12.0

16.0

20.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % ) ( % )

EBITDA margin RoACE (RHS) RoAE (RHS)




Automobile

Quarterly Trends

Chart 18: Realisation improved, however, operating profit declined Chart 19: EBITDA margin declined in Q4FY11 on cost push


Chart 20: Automotive segment’s quarterly matrix Chart 21: Farm equipment segment’s quarterly matrix


30,000

40,000

50,000

60,000

70,000

80,000

200,000

270,000

340,000

410,000

480,000

550,000

Q 1 F Y 0 8

Q 3 F Y 0 8

Q 1 F Y 0 9

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1

( I N R / v e h i c l e

)


Automotive realisation

Farm equipment realisation

RM costs

Operating profit (RHS)

(5.0)

0.0

5.0

10.0

15.0

20.0

(12,000)

0

12,000

24,000

36,000

48,000

Q 1 F Y 0 8

Q 3 F Y 0 8

Q 1 F Y 0 9

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1

( % )

( N o s . )


0.0

4.0

8.0

12.0

16.0

20.0

56.0

60.0

64.0

68.0

72.0

76.0

Q 1 F Y 0 8

Q 3 F Y 0 8

Q 1 F Y 0 9

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1

( % )

( % )

Raw material



EBITDA margin (RHS)

10.0

12.5

15.0

17.5

20.0

22.5

0

6,000

12,000

18,000

24,000

30,000

Q 1 F Y 0 8

Q 3 F Y 0 8

Q 1 F Y 0 9

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1

( % )

( N o s . )





Automobiles

Company Description

M&M operates in nine segments—automotive, which involves sales of automobiles, spare

parts and related services; farm equipment, which involves tractors, spare parts and related

services; financial services, which consists of services relating to financing, leasing and hire

purchase of automobiles and tractors; steel

trading

&

processing, which consists of tradingand processing of steel; infrastructure, which consists of operating of commercia

complexes, project management and development; hospitality, which involves sale of

timeshare; IT services, which involves services rendered for information technology (IT) and

telecom; Systech, which consists of automotive components and other related products and

services, and Others, which consists of logistics, after-market, two wheelers and investment.

The company has ventured into the M&HCV space through a JV with Navistar International,

US. It also acquired majority (70%) stake in Korea-based Ssangyong Motors Company in

FY11 to become a global SUV company.




Automobile




Total volume (nos) 325,946 451,927 563,944 642,504 726,958

% Growth 11.0 38.7 24.8 13.9 13.1


Materials costs 92,419 123,462 162,639 189,928 216,976


Staff costs 10,246 11,971 14,196 16,303 18,336

S G & A expenses 10,760 16,568 19,324 23,252 26,282



EBITDA 14,704 29,941 34,095 40,088 46,935


EBIT 11,788 26,233 29,956 35,112 40,909

Interest 1,341 1,569 709 1,121 1,340


Profit before tax 14,039 27,948 33,554 39,108 45,212Provision for tax 1,997 7,348 8,421 9,777 11,303

Core profit 12,042 20,600 25,134 29,331 33,909

Extraordinary income/ (loss) (3,263) 278 1,487 0 0

Profit after tax 8,779 20,878 26,621 29,331 33,909


Diluted EPS 20.9 34.5 41.6 48.5 56.1

Diluted core business EPS 18.2 32.9 40.2 46.9 54.3

Cash EPS 29.4 42.2 49.8 58.4 68.0


Dividend payout (%) 35.5 29.9 30.2 27.6 23.9

Common size metrics‐ as % of net revenuesYear to March FY09 FY10 FY11 FY12E FY13E


Materials costs 70.6 66.6 69.4 69.3 69.2

Staff costs 7.8 6.5 6.1 6.0 5.9

S G & A expenses 8.2 8.9 8.3 8.5 8.4

Depreciation 2.2 2.0 1.8 1.8 1.9


EBITDA margins 11.2 16.2 14.6 14.6 15.0


Growth metrics (%)


Revenues 13.5 41.5 26.4 17.0 14.4

EBITDA 7.2 103.6 13.9 17.6 17.1

PBT 14.1 99.1 20.1 16.5 15.6

Net profit 29.8 71.1 22.0 16.7 15.6

EPS 12.8 65.1 20.5 16.7 15.6




Automobiles



Equity capital 2,788 2,892 2,936 2,936 2,936



Secured loans 9,810 6,025 6,025 6,025 6,025


Deferred tax (Net) (364) 2,438 3,544 3,544 3,544

Sources of funds 92,785 109,507 130,731 163,644 189,449

Gross block 48,939 52,763 63,593 78,593 93,593

Depreciation 23,263 25,378 29,516 34,493 40,519

Net block 25,676 27,385 34,076 44,100 53,073


Investments 57,864 63,980 93,253 100,753 114,623

Inventories 10,607 11,888 16,942 18,767 21,462

Sundry debtors 10,437 12,581 13,547 22,520 25,754



Other current assets 16 509 1,067 1,067 1,067



Others current liabilities 771 327 327 327 327

Provisions 12,776 17,965 20,059 20,136 20,136


Net current assets 2,652 8,459 (6,241) 9,149 12,110


Uses of funds 92,785 109,507 130,731 163,644 189,449




Net profit 8,779 20,878 26,621 29,331 33,909

Depreciation 2,915 3,708 4,139 4,976 6,026

Deferred tax 1,412 97 0 0 0

Others (1,412) (97) 0 0 (0)

Gross cash flow 11,694 24,586 30,759 34,307 39,935

Less: Changes in WC (8,534) 4,034 (3,454) 7,837 994


Less: Capex 11,449 8,592 10,830 15,000 15,000

Free cash flow 8,778 11,960 23,384 11,471 23,942

Cash flow metrics

Year to March FY09 FY10 FY11 FY12E FY13EOperating cash flow 20,228 20,551 34,214 26,471 38,942

Financing cash flow 14,067 (4,155) (5,397) 3,583 (8,104)


Net cash flow 7,132 1,688 (11,286) 7,553 1,967

Capex (11,449) (8,592) (10,830) (15,000) (15,000)

Dividend paid (3,121) (6,238) (8,026) (8,104) (8,104)

Share issuance/(buyback) 361 118 366 0 0




Automobile



ROAE (%) 25.1 31.5 27.7 25.8 24.7

ROACE (%) 18.9 29.2 28.5 27.3 26.4




Current ratio 1.1 1.2 0.9 1.1 1.2

Debt/EBITDA 2.8 1.0 0.7 0.9 0.8


Debt/Equity 0.8 0.4 0.2 0.3 0.2


Operating ratios





Du pont analysis


NP margin (%) 9.2 11.1 10.7 10.7 10.8



ROAE (%) 25.1 31.5 27.7 25.8 24.7



EPS (INR) 20.9 34.5 41.6 48.5 56.1

Y ‐o‐Y growth (%) 12.8 65.1 20.5 16.7 15.6

Diluted EPS (INR) 20.9 34.5 41.6 48.5 56.1

CEPS (INR) 29.4 42.2 49.8 58.4 68.0

P/E (x) 31.8 19.3 16.0 13.7 11.9

Diluted P/E (x) 31.8 19.3 16.0 13.7 11.9

Price/BV (x) 7.1 4.9 3.8 3.1 2.6

EV/Sales (x) 2.6 1.8 1.3 1.1 0.9

EV/EBITDA (x) 23.0 11.1 9.2 7.8 6.3

Dividend yield (%) 0.8 1.4 1.8 1.8 1.8




Automobiles

THIS PAGE IS INTENTIONALLY LEFT BLANK




Automobile

High competition intensity in H2FY12, slowing sales, base effect mars both sales and margin outlook. We are 11/14% below consensus on FY12/FY13 earnings. We maintain ‘REDUCE’ with target price of INR 1,150 Slowing sales, base effect and competition to deflate FY12 growth Maruti Suzuki India’s (MSIL) 28% growth and market share gain in FY11 was being

largely driven by new Alto, EECO and Dzire. However, we believe post Q1FY12, the base

effect could catch up and arrest growth, leading to 150bps loss of market share in FY12.

Also, another headwind in H2FY12 could be new launches from competition in both

petrol as well as diesel segments (Honda’s Brio, GM’s Beat diesel, Hyundai’s new Santro

and Toyota’s Liva). The company’s exports have been declining. We expect MSIL’s total

sales to grow 10% to 1.4 mn units in FY12E.

Rise in discounts, inflation, weakening pricing power to dent margin We believe MSIL will continue to face margin pressure due to: (1) rise in discounts; (2)

appreciating JPY; and (3) growth led by entry-level cars where customers are cost

conscious, thus, further weakening pricing power. We expect EBITDA margin to dip

50bps in FY12E over FY11 versus consensus expectation of 80bps increase. Our FY12E

and FY13E EPS of INR 82 and INR 92 is 11% and 14% below consensus, respectively.

New launches from competition, weak earnings negative triggers Negative triggers include: (1) weak monthly sales numbers; (2) weak earnings triggering

consensus earnings downgrade starting Q1FY12; and (3) new launches from

competition in H2FY12.

Outlook and valuations: Deteriorating; maintain ‘REDUCE’ The multiple headwinds have worsened both sales and margin outlook. Currently, the

stock is trading at 15x FY12E core EPS of INR 72 (after adjusting for 0.8x FY12E cash per

share). We expect the earnings multiple to contract to 10 (downcycle average multiple)

which gives us a target price of INR 1,150 (10x FY13E EPS of INR 92 + FY13E cash/share

of INR 225). We maintain ‘REDUCE/Sector Underperformer’ recommendation/rating .

Sachin Gupta +91 22 6623 3472

[email protected]

Chetan Vora +91 22 6620 3101

[email protected]

June 20, 2011



MARUTI SUZUKI INDIABumpy ride

COMPANY UPDATE


Absolute Rating REDUCE Rating Relative to Sector Underperformer


MARKET DATA (R: MRTI. BO, B: MSIL IN) CMP : INR 1,210


52-week range (INR) : 1,599 / 1,125








1 month (1.2) (1.0) (5.2)

3 months (3.5) (0.2) (3.1)

12 months (8.9) 8.0 9.6

EDELWEISS 4D RATING

Promoters*

54.3%

MFs, FIs &

Banks

17.9%

FIIs

19.2%

Others

8.6%

Financials


Revenues (INR mn) 294,143 366,867 424,885 481,194


Net profit (INR mn) 24,975 22,887 23,723 26,573


Diluted EPS (INR) 86.4 79.2 82.1 92.0

EPS growth (%) 104.9 (8.4) 3.7 12.0 Diluted P/E (x) 14.0 15.3 14.7 13.2

EV/EBITDA (x) 7.6 8.4 7.8 6.2

ROAE (%) 23.7 17.6 15.9 15.5




Automobiles


Given the deteriorating macro situation, industry sales growth is likely to slow down, which

could further weaken the pricing power of car makers. Additionally, MSIL’s growth was

being driven by the newly launched Alto K ‐10 and Eeco. Since these models are aimed at

price-sensitive customers, price hikes are difficult. Even though demand for Swift and Dzirecontinues to be strong, their waiting period has started to come off, as the company has

resolved capacity issues. Thus, margin and sales growth levers at the company’s disposal are

limited, which makes the investment outlook negative.

Stiff competition, margin pressure puts MSIL on backfoot

Despite stiff competition, MSIL has been able to hold on to its market share in FY11.

However, it came at the cost of margin, which continued to be under pressure. Given the

deteriorating macro situation, industry sales growth is likely to slow down, further

weakening the pricing power of car makers.

Growth driven by low value products: Alto and Eeco

Additionally, the company’s growth is being driven by the newly launched Alto (up 47% in

FY11) and EECO (up 7x in FY11). Both the models are hitting the base effect from Q2FY12.

Thus, the high growth should settle for low trajectory Q2 onwards. Also, these models are

targeted at price conscious customers, thus making price hikes to mitigate costs pressures

impossible. Though Swift and Dzire demand continues to be firm, the waiting period for

them has started to dwindle as the company has resolved capacity issues. Thus, margin and

sales growth levers at the company’s disposal are limited, clouding the investment outlook.

Chart 1: Price hikes largely Swift family centric suggesting weak pricing power

Source: Company, Overdrive

0

1,500

3,000

4,500

6,000

7,500

0.0%

0.4%

0.8%

1.2%

1.6%

2.0%

Alto Wagon

R

Ritz

petrol

Swift

petrol

Swift

diesel

Dzire

petrol

Dzire

diesel

EECO

(

/

h

l )

( % )

Price hike (INR) As a % of price




Automobile

Table 1: FY11 growth driven by Alto and Eeco


Chart 2: Utilisation to decline on moderating sales outlook


Consensus disregarding margin pressure

In our view, the consensus has not factored in the margin risk emanating from: (1)

rising incentives level; (2) appreciating JPY; (3) deteriorating product mix with

contribution of Alto rising, where the company does not have pricing power; and (4) a

slew of launches from competition in H2FY12.

Our earnings expectations of INR 82 and INR 92 for FY12E and FY13E are lower than

consensus estimates by 11% and 14% for FY12E and FY13E, respectively. We have

lowered our EBITDA margin 50bps to 8.5% to factor in the above concerns, whereas

according to consensus EBITDA margin will expand 80bps to 9.8% in FY12E.

FY10 FY11 Y‐o‐Y (%) Competition launchesM800 33,028 26,485 (19.8)

Alto 235,212 346,840 47.5 new Santro

Wagon R 144,898 163,019 12.5

Estillo 41,624 52,188 25.4

A-Star 32,186 36,894 14.6

Ritz 63,096 68,749 9.0

Beat diesel; higher capacity

for figo

Swift 116,174 140,862 21.3 Brio

Dzire 83,601 107,955 29.1 Fabia Sedan

Sx4 15,714 23,327 48.4

Eeco 8,601 68,329 694.4 Mahindra Van

Omni 92,673 92,297 (0.4)

Others 3,983 5,794 45.5

Total 870,790 1,132,739 30.1

0.0

40.0

80.0

120.0

160.0

200.0

0

400,000

800,000

1,200,000

1,600,000

2,000,000

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( )

( N o s . )

Capacity installed (nos) Utilised (RHS)




Automobiles

Table 2: Earnings estimates of MSIL as per Edel vis‐à‐vis Consensus


Chart 3: Incentive levels have started to rise

Source: Industry, Edelweiss research

Chart 4: Alto+ Eeco contribution driving FY11 sales



Sales (INR mn) 424,885 427,713 (0.7) 481,194 493,901 (2.6)

EBITDA (INR mn) 36,301 41,744 (13.0) 42,551 49,261 (13.6)

EBITDA (%) 8.5 9.8 (12.5) 8.8 10.0 (11.3)

EPS (INR) 82.1 92.2 (11.0) 92.0 107.5 (14.4)

FY12E FY13E

0

6,000

12,000

18,000

24,000

30,000

Wagon R Ritz Alto Alto k10

( I N R / V e h i c l e )

Dec'10 April'11

10.0

13.0

16.0

19.0

22.0

25.0

35.0

38.0

41.0

44.0

47.0

50.0

F Y 2 0 0 6

F Y 2 0 0 7

F Y 2 0 0 8

F Y 2 0 0 9

F Y 2 0 1 0

F Y 2 0 1 1

F Y 2 0 1 2 E

F Y 2 0 1 3 E

( % t t t l l

)

( % t o t o t a l v o l u m e s )

Alto+Eeco Swift+Dzire (RHS)




Automobile

Outlook and valuations: Deteriorating; maintain ‘REDUCE’

The multiple headwinds have worsened both sales and margin outlook. Currently, the stock

is trading at 15x FY12E core EPS of INR 72 (after adjusting for 0.8x PV FY12E cash per share).

We expect the earnings multiple to contract to 10 (downcycle average), which gives us a

target price of INR 1,150 (10x FY13E EPS of INR 93 + PV next year of FY13E cash/share of INR

215). For arriving at current value of cash we have discounted future cash using cost of

capital of 14%.

Historically, MSIL has traded at a discount to the Sensex P/E when earnings growth starts to

slow down. The discount band ranges from 10-40%. Our target price implies 25% discount

to Sensex earnings multiple. We maintain ‘REDUCE/Sector Underperformer

recommendation/rating on the stock.

Chart 5: Discount to Sensex widens during earnings uncertainty period

Source:

Bloomberg,

Edelweiss

research

Chart 6: One‐year forward P/E

Source: Bloomberg

(25.0)

0.0

25.0

50.0

75.0

100.0

(60.0)

(40.0)

(20.0)

0.0

20.0

40.0

D e c - 0 6

M a r - 0 7

J u n - 0 7

S e p - 0 7

D e c - 0 7

M a r - 0 8

J u n - 0 8

S e p - 0 8

D e c - 0 8

M a r - 0 9

J u n - 0 9

S e p - 0 9

D e c - 0 9

M a r - 1 0

J u n - 1 0

S e p - 1 0

D e c - 1 0

M a r - 1 1

( % )

( % )

MSIL vs Sensex (LHS) Consensus 1 yr fwd growth Trailing 1 yr growth

5.0

9.0

13.0

17.0

21.0

25.0

O c t - 0 3

A p r - 0 4

O c t - 0 4

A p r - 0 5

O c t - 0 5

A p r - 0 6

O c t - 0 6

A p r - 0 7

O c t - 0 7

A p r - 0 8

O c t - 0 8

A p r - 0 9

O c t - 0 9

A p r - 1 0

O c t - 1 0

A p r - 1 1

( x )




Automobiles

Key Risks

Strong performance from new launches, Swift and RIII, could be an upside risk

MSIL is likely to launch the new Swift in Q2FY12 and the concept crossover between cars

and utility vehicles in FY13. We have built in 13,000 average monthly units sales volume for

Swift in FY12 and 2,500 units for RIII in FY13. Sales performance, higher than this, posesupside risk to our numbers.



Depreciating JPY could pose upside risk

The company has significant exposure to JPY, in which, it imports raw material (~22% of

sales) and pays royalty. While exports are Euro (~40%) and USD (~60%) denominated.

Table 4: Sensitivity of currency movement to FY12E EPS


Alliance with VW could throw up cost saving opportunities

Suzuki (Parent company of MSIL) has tied up with VW and, according to media reports,

together they are exploring various opportunities in the field of joint sourcing,

manufacturing and product development. Any such opportunity could lead to cost savings

and, thus, is a potential upside risk.


Volume growth (%) 0.2 10.2 20.2

EPS (INR) 61.0 82.1 103.3

USD/ INR EUR/INR JPY/INR

+10% +10% +10%

USD/ INR ‐10% 0% -5% -25%

EUR/INR ‐10% 5% 0% -20%

JPY/INR ‐10% 25% 20% 0%

USD/ INR +10% 8% 12% -8%

EUR/INR +10% 12% 4% -13%

JPY/INR +10% -8% -13% -17%




Automobile

Annual Trends

Chart 7: A2 & A3, the two growth engines Chart 8: Outperformed industry on newer/variants models


Chart 9: Exports to dip as demand from Europe wanes Chart 10: Capacity utilisation to dip on moderating demand


0.0

15.0

30.0

45.0

60.0

75.0

0

220,000

440,000

660,000

880,000

1,100,000

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % )

( N o s . )

A2 segment

A3 segment

A2 segment mkt share (RHS)

A2 segment mkt share (RHS)

(38.0)

0.0

38.0

76.0

114.0

152.0

0

35,000

70,000

105,000

140,000

175,000

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % )

( N o s . )

Exports Exports Y-o-Y (RHS)

Mkt share (RHS)

(30.0)

0.0

30.0

60.0

90.0

120.0

0.0

12.0

24.0

36.0

48.0

60.0

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % )

( % )

MSIL's A2 Y-o-Y (%) Industry's A2 Y-o-Y (%)

MSIL 's A3 Y-o-Y (RHS) Industry's A3 Y-o-Y (RHS)

0.0

40.0

80.0

120.0

160.0

200.0

0

400,000

800,000

1,200,000

1,600,000

2,000,000

F Y 0 1

F Y 0 3

F Y 0 5

F Y 0 7

F Y 0 9

F Y 1 1

F Y 1 3 E

( % )

( N o s . )

Installed capacity Capacity utilised (RHS)




Automobiles

Chart 11: Hatchback (A2) backbone of company Chart 12: A2 premium segment (Swift + Ritz), the minters

Chart 13: Executive and Premium segment to be competitive Chart 14: MSIL’s share in premium segment declining

Chart 15: Alto driving growth in Economy segment Chart 16: Underperforming in Executive segment growth

Source: Cris Infac, Edelweiss research

0.0

20.0

40.0

60.0

80.0

100.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % t o s a

l e s )

A1 - Mini A2 - Compact A3 - Sedan

0.0

20.0

40.0

60.0

80.0

100.0

F Y 0

5

F Y 0

6

F Y 0

7

F Y 0

8

F Y 0

9

F Y 1

0

F Y 1

1

( % t o s a l e s )

Economy Executive Premium

(30.0)

(15.0)

0.0

15.0

30.0

45.0

0.0

15.0

30.0

45.0

60.0

75.0

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

( % )

( % )

MSIL Industry (RHS)

0.0

20.0

40.0

60.0

80.0

100.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % t o

s a l e s )

Economy: M-800 + Alto

Executive: Wagon R+A-star+Estilo

Premium: Ritz + Swift

0.0

20.0

40.0

60.0

80.0

100.0

F Y 0

4

F Y 0

5

F Y 0

6

F Y 0

7

F Y 0

8

F Y 0

9

F Y 1

0

F Y 1

1

( % )

Economy Executive Premium

(30.0)

(15.0)

0.0

15.0

30.0

45.0

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

( % )

MSIL Industry




Automobile

Chart 17: Swift and Ritz losing steam in Premium segment

Source: Cris Infac, Edelweiss research

Chart 18: Operating costs outweigh RM pressure Chart 19: Margins subdued on cost pressures


Note: * Gross profit = Net sales – Raw material costs

0.0

22.0

44.0

66.0

88.0

110.0

0.0

16.0

32.0

48.0

64.0

80.0

FY07 FY08 FY09 FY10 FY11

( % )

( % )

MSIL Industry (RHS)

(10,000)

0

10,000

20,000

30,000

40,000

0

80,000

160,000

240,000

320,000

400,000

F Y 0 1

F Y 0 3

F Y 0 5

F Y 0 7

F Y 0 9

F Y 1 1

F Y 1 3

E



Average realisation Gross profit*


65.0

70.0

75.0

80.0

85.0

90.0

(5.0)

0.0

5.0

10.0

15.0

20.0

F Y 0

1

F Y 0

3

F Y 0

5

F Y 0

7

F Y 0

9

F Y 1

1

F Y 1 3 E

( % t o s a l e s )

( % t o s a l e s )






Automobiles

Chart 20: High operating expenses, raw material inflation restrict EBITDA growth

Chart 21: EPS CAGR of 8%; FCF to be negative in FY12 Chart 22: Return ratios to dip on lower margins

Chart 23: Lower spend on R&D offset by.. Chart 24: ...higher royalty payout


(50.0)

0.0

50.0

100.0

150.0

200.0

(12.0)

0.0

12.0

24.0

36.0

48.0

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( ) ( % )

Net revenue RM costs Operating profit (RHS)

0

150

300

450

600

750

(65.6)

(32.8)

0.0

32.8

65.6

98.4

F Y 0

1

F Y 0

2

F Y 0

3

F Y 0

4

F Y 0

5

F Y 0

6

F Y 0

7

F Y 0

8

F Y 0

9

F Y 1

0

F Y 1

1

F Y 1 2 E

F Y 1 3 E

( I N R / s h a r e )

( I N R / s h a r e )


0.00

0.15

0.30

0.45

0.60

0.75

0

400

800

1,200

1,600

2,000

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

( % )

( I N R m n )

R&D as % of net sales (RHS)

(5.0)

0.0

5.0

10.0

15.0

20.0

(12.0)

0.0

12.0

24.0

36.0

48.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1

2 E

F Y 1

3 E

( % )

( % )

EBITDA margin (RHS) RoACE RoAE

0.00

0.80

1.60

2.40

3.20

4.00

0

2,500

5,000

7,500

10,000

12,500

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

( % )

( I N R m n )

Royalty Royalty as % to sales (RHS)






Automobiles

Company Description

MSIL is India’s largest passenger vehicle manufacturer with more than 50% market share. It

is a key player in the compact car segment with a dominant market share. Suzuki Motor

Corporation (Suzuki) of Japan holds 54% stake in the company. MSIL offers the widest

product range in passenger cars (10 models), with special focus on the compact car segment(five models). As of March 2011, the company has an installed production capacity of 1.4 mn

units per annum, which would be scaled further to 1.9 mn units by FY13E.




Automobile




Total volume (nos) 792,167 1,018,365 1,271,005 1,400,149 1,585,645

%

Growth 3.6

28.6

24.8

10.2

13.2


Materials costs 162,650 224,430 287,942 335,439 379,878

Manufacturing and other expenses 21,002 26,656 38,992 45,194 49,760

Staff costs 4,711 5,456 7,036 7,951 9,004


EBITDA 18,855 37,601 32,896 36,301 42,551


EBIT 11,790 29,350 22,761 23,880 27,847

Interest 510 335 244 244 244



Provision for tax 4,571 10,949 8,201 8,335 9,336 Core profit 14,030 25,110 22,673 23,723 26,573

Extraordinary income/ (loss) 1,842 135 (214) - -

Profit after tax 12,188 24,975 22,887 23,723 26,573




Diluted EPS 48.6 86.9 78.5 82.1 92.0

Cash EPS 73.0 115.5 113.6 125.1 142.9


Dividend payout (%) 10.3 6.9 9.6 9.7 8.7

Common

size

metrics‐

as

%

of

net

revenuesYear to March FY09 FY10 FY11 FY12E FY13E


Materials costs 78.5 76.3 78.5 78.9 78.9

Staff costs 2.3 1.9 1.9 1.9 1.9

S G & A expenses 10.1 9.1 10.6 10.6 10.3

Depreciation 3.4 2.8 2.8 2.9 3.1


EBITDA margins 9.1 12.8 9.0 8.5 8.8


Growth metrics (%)

Year

to

March FY09 FY10 FY11 FY12E FY13ERevenues 13.7 41.9 24.7 15.8 13.3

EBITDA (27.0) 99.4 (12.5) 10.4 17.2

PBT (25.7) 93.9 (14.4) 3.8 12.0

Net profit (18.9) 79.0 (9.7) 4.6 12.0

EPS (18.9) 79.0 (9.7) 4.6 12.0




Automobiles



Equity capital 1,445 1,445 1,445 1,445 1,445



Secured loans 1 265 265 265 265

Unsecured loans 6,988 7,949 2,828 2,828 2,828 Borrowings 6,989 8,214 3,093 3,093 3,093

Deferred tax (Net) 1,551 1,370 1,370 1,370 1,370

Sources of funds 101,989 127,935 143,412 164,431 188,300

Gross block 87,206 104,067 129,659 169,659 184,659

Depreciation 46,498 53,820 63,955 76,377 91,081

Net block 40,708 50,247 65,704 93,282 93,578


Investments 31,733 71,766 51,067 56,067 81,067

Inventories 9,023 12,088 14,150 17,305 19,371

Sundry debtors 9,378 8,099 8,933 11,529 14,507

Cash and bank balance 19,390 982 25,085 14,662 7,555





Provisions 3,807 6,284 5,258 5,461 5,711


Net current assets 20,935 2,046 22,765 11,205 9,778

Uses of funds 101,989 127,935 143,412 164,431 188,300


Free cash flow


Net profit 12,188 24,975 22,887 23,723 26,573

Depreciation 7,065 8,250 10,135 12,422 14,704 Others 261 3,246 (1,540) 34 250

Gross cash flow 19,514 36,472 31,481 36,178 41,528

Less: Changes in WC 1,966 3,784 (4,410) (934) 5,930


Less: Capex 15,603 12,124 25,592 40,000 15,000

Free cash flow 1,945 20,564 10,299 (2,888) 20,597

Cash flow metrics



Financing cash flow (5,414) 1,990 (6,896) (2,535) (2,704)

Investing cash flow 4,016 (53,085) (4,893) (45,000) (40,000)

Net cash flow 16,150 (18,408) 24,103 (10,423) (7,107)

Capex (15,603) (12,124) (25,592) (40,000) (15,000)

Dividend paid (1,691) (1,183) (2,021) (2,535) (2,704)




Automobile



ROAE (%) 15.8 23.7 17.6 15.9 15.5

ROACE (%) 20.8 46.4 30.7 23.8 25.8




Current ratio 1.6 1.1 1.6 1.2 1.2

Debt/EBITDA 0.4 0.2 0.1 0.1 0.1


Debt/Equity 0.1 0.1 0.0 0.0 0.0


Operating ratios





Du pont analysis


NP margin (%) 6.8 8.5 6.2 5.6 5.5



ROAE (%) 15.8 23.7 17.6 15.9 15.5

Valuation parameters 100.9%


EPS (INR) 48.6 86.9 78.5 82.1 92.0

Y ‐o‐Y growth (%) (18.9) 79.0 (9.7) 4.6 12.0

CEPS (INR) 73.0 115.5 113.6 125.1 142.9

PE (x) 24.9 13.9 15.4 14.7 13.2

Price/BV (x) 3.7 3.0 2.5 2.2 1.9

EV/Sales (x) 1.5 1.0 0.8 0.7 0.5

EV/EBITDA (x) 16.2 7.6 8.4 7.8 6.2

Dividend yield (%) 0.4 0.5 0.6 0.7 0.7




Automobiles

THIS PAGE IS INTENTIONALLY LEFT BLANK




Automobile

Strong SUV demand across the globe and new launch Evoque have brightened business prospects for JLR. Weakness in domestic business should persist, but its contribution to total PAT is steadily declining. We maintain ‘BUY’ with target price of INR 1,403. Uncertainty surrounding European economy is the key risk. Riding Land Rover expressway to growth In our view Land Rover is likely to drive growth for JLR business. After refreshing the

Jaguar portfolio, Tata Motors (TTMT) is likely to have new launches from Land Rover

stable starting with Evoque in Q2FY12. We have built in sales of 280,000 units vs

company guidance of 300,000. Margin (~16% in FY11) is likely to stabilise or improve

primarily on: (a) favourable product mix (rise in Land Rover contribution); (b) better

geography (emerging market) mix wherein JLR will have more pricing power;

Evoque launch and Q2FY12 earnings to be key positive triggers Evoque is likely to be launched in Q2FY12 at a price point starting GBP 28,000. We

expect it to contribute 8% to FY12E JLR sales. This should augur well for profitability as

the contribution of low- margin Jaguar to total sales should decline in FY13E by 700bps

to 15% vis-à-vis FY11.

Rising JLR contribution to offset weak domestic operations JLR contribution to total PAT is consistently rising and should reach 80% by FY13. Thus

the business model has got more linked with global economic performance and less on

Indian economy. We have built in 8%/13% growth in truck demand and 6% decline/

10% growth in passenger vehicle ex Nano demand for FY12/13 respectively.

Outlook & valuations: Positives outweigh negatives; maintain ‘BUY’ Strong demand for SUV across globe and new launch Evoque has brightened both sales

and margin outlook for JLR. Given the low contribution from weak domestic operation,

risk-reward is tilted in favour of the latter. We maintain ‘BUY/ Sector Outperformer’ recommendation/rating on the stock with a SOTP-based target price of INR 1,403.

Sachin Gupta +91 22 6623 3472

[email protected]

Chetan Vora +91 22 6620 3101

[email protected]

June 20, 2011



TATA MOTORS JLR: Growth engine

COMPANY UPDATE


Absolute Rating BUY Rating Relative to Sector Outperformer


MARKET DATA (R: TAMO. BO, B: TTMT IN) CMP : INR 994


52-week range (INR) : 1,381 / 748


M cap (INR bn/USD mn) : 594 / 13,288






1 month (14.0) (1.0) (5.2)

3 months (12.5) (0.2) (3.1)

12 months 36.5 8.0 9.6

EDELWEISS 4D RATING

Promoters*

34.8%

MFs, FIs &

Banks

12.9%

FIIs

23.6%

Others

28.6%

Financials (Consolidated)


Revenues (INR mn) 925,193 1,231,333 1,443,035 1,625,691


Adj net profit (INR mn) 10,787 90,426 99,100 120,713


Diluted adj EPS - (INR) 18.0 141.1 154.6 188.3

EPS growth (%) (132.0) 685.4 9.6 21.8 Diluted P/E - (x) 55.3 7.0 6.4 5.3

EV/EBITDA (x) 9.4 4.7 4.0 3.2

ROAE (%) 13.8 65.3 41.7 36.1




Automobiles


Strong global demand for luxury SUVs is fuelling JLR volumes (~75% of sales from Land

Rover stable). Profitability is on the uptrend as it is being driven not only by an improving

product mix (higher margin), but also from a better geography mix (leading to higher

realisation on better pricing power). Performance of JLR should get further fillip with thelaunch of Evoque, probably in Q2FY12. The near-term macro impacting domestic business

(commercial vehicles and passenger vehicles) will be offset by higher earnings growth in the

JLR business (17% CAGR over FY11-13E).

Evoque launch in Q2FY12 to be key trigger

After refurbishing the Jaguar portfolio in FY10-11, we expect new launches from the Land

Rover stable. Of that, Evoque is likely to be launched in Q2FY12 with an expected price point

in the GBP 28,000-42,000 range. This, in our view, should boost JLR sales. We expect

average monthly sales of 2,500 units of Evoque and 280,000 units for JLR in FY12E, implying

15% volume growth for FY12E.

Evoque is the smallest ever Range Rover and is targeted at the BMW X1 and forthcoming

Audi Q3. The company expects substantial prospective Evoque customers will be first time

buyers of a Land Rover product. It is targeted at younger and more urban customers. So far,

the car has received good reviews from different automobile magazines.

Fig 1: Evoque—Likely to set cash registers ringing

Source: Company




Automobile

Chart 1: US luxury car market on uptrend Chart 2: Europe sales have remained fairly stable

Source: Company, Bloomberg, Edelweiss research

Chart 3: JLR quarterly wholesale sales, maintaining momentum


0

70,000

140,000

210,000

280,000

350,000

Q 1 C Y 0 8

Q 2 C Y 0 8

Q 3 C Y 0 8

Q 4 C Y 0 8

Q 1 C Y 0 9

Q 2 C Y 0 9

Q 3 C Y 0 9

Q 4 C Y 0 9

Q 1 C Y 1 0

Q 2 C Y 1 0

Q 3 C Y 1 0

Q 4 C Y 1 0

Q 1 C Y 1 1

( N

o s . )

Toyota Lexus Ford Volvo Audi

BMW BMW Mini Mercedes

Daimler Smart LandRover Jaguar

0

13,000

26,000

39,000

52,000

65,000

Q 1 F Y 1 0

Q 2 F Y 1 0

Q 3 F Y 1 0

Q 4 F Y 1 0

Q 1 F Y 1 1

Q 2 F Y 1 1

Q 3 F Y 1 1

Q 4 F Y 1 1

( N o s . )

Jaguar Land Rover

0

150,000

300,000

450,000

600,000

750,000

Q 1 C Y 0 8

Q 2 C Y 0 8

Q 3 C Y 0 8

Q 4 C Y 0 8

Q 1 C Y 0 9

Q 2 C Y 0 9

Q 3 C Y 0 9

Q 4 C Y 0 9

Q 1 C Y 1 0

Q 2 C Y 1 0

Q 3 C Y 1 0

Q 4 C Y 1 0

Q 1 C Y 1 1

( N

o s . )

Aston Martin BMW BMW Mini

Mercedes Porsche Lexus

Audi Jaguar LandRover




Automobiles

Chart 4: US vehicle discounts ‐ Declining for premium vehicles

Source: Edmunds

Chart 5: Manheim index continues to show strong growth in replacement value

Source: Manheim

Product mix likely to improve

With the launch of Evoque, we expect Land Rover’s contribution in the overall JLR portfolio

to surge (from 78% in FY11 to 83% and 85% in FY12 and FY13, respectively), thereby

improving the overall product mix in favour of Land Rover as it is highly profitable and

operates in an industry wherein the competitive intensity is relatively low vis-à-vis Jaguar.

8.0%

9.2%

10.4%

11.6%

12.8%

14.0%

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

J a n - 1 1

F e b - 1 1

M a r - 1 1

A p r - 1 1

M a y - 1 1

Luxury Car Luxury SUV

(16.0)

(8.0)

0.0

8.0

16.0

24.0

(60.0)

(40.0)

(20.0)

0.0

20.0

40.0

J u n - 0 1

J a n - 0 2

A u g - 0 2

M a r - 0 3

O c t - 0 3

M a y - 0 4

D e c - 0 4

J u l - 0 5

F e b - 0 6

S e p - 0 6

A p r - 0 7

N o v - 0 7

J u n - 0 8

J a n - 0 9

A u g - 0 9

M a r - 1 0

O c t - 1 0

M a y - 1 1

( % )

( % )

US Retail light vehicle sales (Y-o-Y) Manheim index (Y-o-Y) - RHS




Automobile

Chart 6: Land Rover contribution to increase in JLR on launch of Evoque


Long‐term cost restructuring in place

TTMT is on track in its long-term cost rationalisation programme, which includes: (a)

lowering the total number of platforms to 8 from 12; (b) increasing sourcing from low-cost

destinations; and (3) setting up plants in low-cost destinations which will help maintain

margin ~16% in the context of volatile commodity prices.

Near‐term weakness in domestic operations offset by rising JLR

contribution

The company is one of the most diversified plays amongst the Indian commercial vehicle

(CV) makers, with ~57% market share in the less volatile light commercial vehicles (LCVs)

which we expect to grow 11% and 14% in FY12E and FY13E, respectively. We expect

medium and heavy trucks (M&HCV) demand to slow down to 8% in FY12E and 13% in

FY13E. Similarly, we expect passenger vehicle sales (excluding Nano) to decline by 6% in

FY12E and grow 10% in FY13E, respectively. Moderating volumes and commodity inflation

should keep margins of standalone business under pressure. However, contribution of low-

margin Indian operations is declining in the overall consolidated profit and that of JLR is

rising (to contribute ~80 to FY12E consolidated profit), further de-risking the business

model.

0.0

20.0

40.0

60.0

80.0

100.0

FY11E FY12E FY13E

( % )

Jaguar LandRover Evoque




Automobiles

Chart 7: JLR contribution towards consolidated EBITDA to rise from 35% in FY10 to ~66% in FY13E


10% above consensus on FY13E earnings

We are in line consensus earnings with respect to FY12E whilst we are 10% above consensus

earnings on FY13E.

Table 1: Earnings estimates as per Edelweiss vis‐à‐vis consensus


Outlook and valuations: JLR driving valuation; maintain ‘BUY’

Given the positive outlook on JLR and robust earnings growth, we maintain our ‘BUY’

recommendation on the stock, negating domestic concerns. We believe that risk-reward is

tilted in favour of the latter, given the new launch Evoque planned in Q2FY12. Hence, we

maintain our ‘BUY/Sector Outperformer’ recommendation/rating on the stock with a target

price of INR 1,403. We value domestic business at 5x FY13E EV/EBITDA (in line with

historical downcycle valuation). For JLR, we have used 4x FY13E EV/EBITDA (in line with

global peers, factoring in moderating growth). Our earlier target price was INR 1,410; the

revision is due to replacement of JLR’s FY11 balance sheet estimates with actual numbers.

TTMT

50%

JLR

35%

Subsidiari

es

15%

FY10


Sales (INR mn) 1,443,020 1,426,327 1.2 1,625,673 1,603,509 1.4

EBITDA (INR mn) 201,265 192,690 4.5 233,671 214,710 8.8

EBITDA (%) 13.9 13.5 3.2 14.4 13.4 7.3

EPS (INR) 155.4 155.2 0.1 189.3 172.4 9.8

FY12E FY13E

TTMT

24%

JLR

66%

Subsidiari

es

10%

FY13E




Automobile

Table 2: SOTP valuation at INR 1.403

Valuation of subsidiaries


Particulars Value (INR) Methodology

Tata Motors standalone 301 5x FY13E EV/EBITDA

JLR 996 4x FY13E EV/EBITDA

Tata Motors subsidiaries 106 Valuation of top 6 subsidiaries

Net value 1,403

Tata Motors standalone Value (INR) Methodology

FY13E EBITDA 58,104 Estimated EBITDA margin of 9.7% in FY13E

Multiple (x) 5.0 Inli ne with historical valuations

EV 290,520

Net debt 97,435 Excluding debt for vehicle financing

Equity value 193,085

Value per share 301

JLR Value (INR) Methodology

FY13E EBITDA 156,039 Without any charge for R&D amortisation

Less: R&D expenses capitalised (17,250) GBP 250mn R&D expenses ca pital is ed every year

Adjusted EBITDA 138,789 Multiple (x) 4.0 Inline with global peers

EV 555,154

Net debt (83,085) Consol idated net debt less TTMT standalone

Equity value 638,240

Value per share 996

Subsidiaries Basis of valuation Value (INR mn) % holding Value per share (INR)

Tata Daewoo 12x FY12 earnings 15,210 100.0 24

Tata Technologies 12x FY12 earnings 14,987 81.5 19

HVAL 12x FY12 earnings 11,589 85.0 15

HVTL 12x FY12 earnings 9,563 85.0 13 Vehicle Financing 1x P/BV 16,250 100.0 25

Telcon Implied valuation of stake sale 59,195 40.0 37

Total 67,598 133

Holding company discount 20.0 27

Value of subsidiaries 106




Automobiles

Key Risks

Global liquidity crisis

Weakness in global economy, leading to drying up of bank funding for premium SUV

business, could be a key risk to our sales growth and margin assumption for JLR.

Adverse currency movements

JLR has EUR and USD exposure as its non-Europe sales are in USD (~50% of sales) while

Europe sales and certain input cost expenditures are in EUR. Hence, a weakening USD and

an appreciating EUR are negatives. Company undertakes forex hedges details of which are

not disclosed. It also has pricing power given its sales in premium segment. Hence impact of

adverse/favourable movement could be muted compared to the result exhibited in the

table given below.

Table 3: JLR’s currency sensitivity to FY12E consolidated EPS


Slowdown in Indian economy

Worse–than-expected economic deterioration which could lead to higher–than-expected

sales slowdown could drag both our domestic sales and margin assumption. This could be a

key risk to our earnings assumption.

Table

4:

Volume

sensitivity

on

FY12

consolidated

EPS


GBP/Euro 1.77 1.61 1.45

1.25 -24.5% 13.9% 52.2%

1.14 -38.4% 0.0% 38.4%

1.02 -52.2% -13.9% 24.5%

GBP/USD


JLR's volume growth (%) 4.0 14.9 25.8

Impact on consolidated EPS -23.6% 0.0% 23.6%

Standalone volume growth (%) 0.8 10.8 20.8

Impact on consolidated EPS -7.2% 0.0% 7.2%






Automobiles

Chart 12: Capacity utilisation below par


Chart 13: CVs and PVs contribute equally to volumes Chart 14: M&HCV contributes ~45% to total revenue


0.0

20.0

40.0

60.0

80.0

100.0

0

300,000

600,000

900,000

1,200,000

1,500,000

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

( % ) ( N o s . )

Installed capacity Capacity utilised (RHS)

0.0

20.0

40.0

60.0

80.0

100.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % t o s a l e s )

MHCV LCV UV Passenger cars (Exc Nano) Nano

0.0

20.0

40.0

60.0

80.0

100.0

F Y

0 2

F Y

0 3

F Y

0 4

F Y

0 5

F Y

0 6

F Y

0 7

F Y

0 8

F Y

0 9

F Y

1 0

F Y

1 1

F Y 1

2 E

F Y 1

3 E

( % t o s a l e s )

MHCV LCV

UV Passenger cars

Other operating income




Automobile

Chart 15: Realisation per vehicle for various segments Chart 16: Margins to be subdued on RM pressures

Chart 17: Capacity utilisation below par Chart 18: R&D as % to sales

Chart 19: FCF to decline on higher capex Chart 20: Returns low on profitability, equity dilution


550,000

700,000

850,000

1,000,000

1,150,000

1,300,000

0

150,000

300,000

450,000

600,000

750,000

F Y 0 1

F Y 0 3

F Y 0 5

F Y 0 7

F Y 0 9

F Y 1 1

F Y 1 3 E

( I N R / v e h

i c l e )

( I N R / v e h

i c l e )

LCV UVs Passenger cars MHCV (RHS)

(65.0)

0.0

65.0

130.0

195.0

260.0

(24.0)

0.0

24.0

48.0

72.0

96.0

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % )

( % )

Net revenue Gross profit


0

80

160

240

320

400

(120.0)

(80.0)

(40.0)

0.0

40.0

80.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( I N R / s h a r e )

( I N R / s h a r e )


56.0

60.0

64.0

68.0

72.0

76.0

0.0

4.0

8.0

12.0

16.0

20.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % t o s a l e s )

( % t o s a l e s )



0.0

1.5

3.0

4.5

6.0

7.5

0

3,500

7,000

10,500

14,000

17,500

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

( % )

( I N R m n )


0.0

3.0

6.0

9.0

12.0

15.0

(30.0)

(15.0)

0.0

15.0

30.0

45.0

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

F Y 1 2 E

F Y 1 3 E

( % )

( % )

RoACE RoAE EBITDA margin (RHS)




Automobiles

Quarterly Trends ‐ Standalone

Chart 21: RM costs push weighing down operating profit Chart 22: Quarterly cost matrix


Note: *Gross profit = net sales – raw material costs

400,000

450,000

500,000

550,000

600,000

650,000

0

40,000

80,000

120,000

160,000

200,000

Q 1 F Y 0 8

Q 3 F Y 0 8

Q 1 F Y 0 9

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1

( I N R / V e h i c l e )


Gross profit* Operating profit

Realisation (RHS)

64.0

66.5

69.0

71.5

74.0

76.5

0.0

4.0

8.0

12.0

16.0

20.0

Q 1 F Y 0 8

Q 3 F Y 0 8

Q 1 F Y 0 9

Q 3 F Y 0 9

Q 1 F Y 1 0

Q 3 F Y 1 0

Q 1 F Y 1 1

Q 3 F Y 1 1

( % )

( % )

Raw material - RHS Employee costs

Other operating costs EBITDA margin




Automobile

Company Description

TTMT is India's largest automobile company with presence in commercial and passenger

vehicles. It is the leader in nearly all commercial vehicle segments and the third largest in

the passenger vehicles market, with products in the compact and mid size car, and utility

vehicle segments. Through subsidiaries and associate companies, the company hasoperations in the UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover,

the business comprising the two iconic British brands. It also has an industrial joint venture

with Fiat in India. It is also the world's fourth largest truck manufacturer and the second

largest bus manufacturer. TTMT cars, buses and trucks are being marketed in severa

countries in Europe, Africa, the Middle East, South Asia, South East Asia and South America.




Automobiles

Income Statements ‐ JLR

Income statement (GBP mn)


Total volume (nos) 167,300 193,982 243,620 279,883 320,352

% Growth 0.0 15.9 25.6 14.9 14.5Income from operations 4,974 6,554 9,905 11,682 13,112

Materials costs 3,296 4,439 6,339 7,628 8,523

Manufacturing expenses 85 112 125 152 170

Staff costs 569 730 857 923 1,010

S G & A expenses 1,068 881 965 1,016 1,180


EBITDA (44) 392 1,619 1,963 2,229

Depreciation & amortisation 209 369 500 617 752

EBIT (253) 23 1,119 1,346 1,477

Interest 59 49 22 123 51

Non-Operational Income 0 0 2 11 21

Profit before tax (312) (26) 1,099 1,234 1,447Provision for tax 25 29 83 100 109

Current taxes 25 29 83 100 109

Core profit (337) (54) 1,016 1,134 1,339

Extraordinary income/ (loss) 0 39 27 0 0

Profit after tax (337) (15) 1,043 1,134 1,339




Materials costs 66.3 67.7 64.0 65.3 65.0

Staff costs 11.4 11.1 8.7 7.9 7.7

S G & A expenses 21.5 13.4 9.7 8.7 9.0

Depreciation 4.2 5.6 5.0 5.3 5.7


EBITDA margins (0.9) 6.0 16.3 16.8 17.0

Net profit margins (6.8) (0.8) 10.3 9.7 10.2

Growth metrics (%)


Revenues - 31.8 51.1 17.9 12.2

EBITDA - (992.5) 313.0 21.3 13.6

PBT - (91.8) (4,383.9) 12.3 17.3

Net profit - (83.8) (1,964.7) 11.6 18.1

EPS - (86.1) (1,847.0) 11.6 18.1




Automobile

Financial Statements ‐ Standalone



Total volume (nos) 497,687 642,467 803,436 890,042 1,011,777

% Growth (14.4) 29.1 25.1 10.8 13.7


Materials costs 186,060 242,992 340,674 382,400 427,037


Staff costs 15,514 18,361 22,940 25,421 29,861

S G & A expenses 25,369 32,312 40,893 48,194 53,153

Less: Expenses capitalised 8,851 7,405 8,177 10,923 12,226


EBITDA 16,136 41,783 47,712 47,998 58,104


EBIT 6,879 30,004 33,043 30,641 38,502

Interest 8,109 12,462 15,317 14,012 14,156

Non-operational Income 5,429 1,947 5,710 5,973 6,068


Provision for tax 125 5,895 3,847 5,876 7,908

Core profit 4,074 13,594 19,589 16,725 22,506

Extraordinary income/ (loss) 5,939 8,807 (1,471) 0 0

Profit after tax 10,013 22,401 18,118 16,725 22,506

Profit after minority interest 10,013 22,401 18,118 16,725 22,506

Basic shares outstanding 514 571 638 638 638

Basic earnings per share (EPS) 7.9 23.8 30.7 26.2 35.3


Diluted adj EPS 7.9 22.6 30.6 26.1 35.1

Cash EPS 25.9 54.8 53.7 53.4 66.0


Dividend payout (%) 34.5 44.3 82.4 66.9 66.3




Materials costs 73.0 68.3 70.9 71.7 71.0

Staff costs 6.1 5.2 4.8 4.8 5.0

S G & A expenses 10.0 9.1 8.5 9.0 8.8

Depreciation 3.6 3.3 3.1 3.3 3.3


EBITDA margins 6.3 11.7 9.9 9.0 9.7


Growth metrics (%)


Revenues (10.8) 39.6 35.0 11.1 12.7

EBITDA (42.1) 158.9 14.2 0.6 21.1

PBT (80.0) 364.1 20.3 (3.6) 34.6

Net profit (74.4) 233.7 44.1 (14.6) 34.6

EPS (78.7) 185.6 35.0 (14.6) 34.6




Automobiles



Equity capital 5,141 5,706 6,377 6,377 6,377



Secured loans 54,158 75,809 70,155 70,155 70,155


Deferred tax (Net) 8,658 15,086 20,232 20,232 20,232

Sources of funds 264,255 329,382 379,352 388,518 396,104

Gross block 139,052 184,168 218,171 251,171 284,171

Depreciation 62,599 72,129 85,737 101,695 119,896

Net block 76,453 112,039 132,434 149,477 164,275


Investments 129,681 223,369 226,243 208,743 213,511

Inventories 22,298 29,356 38,914 50,786 49,089

Sundry debtors 12,055 23,919 26,029 31,923 35,998


Loans and advances 49,630 44,571 51,674 54,349 57,091Total current assets 95,401 115,379 140,906 158,402 166,243



Provisions 20,790 27,634 32,227 28,497 32,227




Uses of funds 264,255 329,382 379,352 388,519 396,106




Net profit 10,013 22,401 18,118 16,725 22,507

Depreciation 8,745 10,339 13,608 15,958 18,202

Deferred tax (25) 5,895 - - -

Others (5,914) (14,701) 1,471 - -

Gross cash flow 12,819 23,933 33,197 32,683 40,709

Less: Changes in WC 735 (46,652) 34,947 6,839 (12,973)

Operating cash flow 12,084 70,584 (1,750) 25,844 53,682

Less: Capex 50,144 28,778 24,003 35,000 35,000

Free cash flow (38,060) 41,807 (25,753) (9,156) 18,682

Cash flow metrics


Operating cash flow 12,084 70,584 (1,750) 25,844 53,682

Financing cash flow 99,492 48,493 36,855 (11,289) (11,192)


Net cash flow (12,555) 6,115 6,132 (2,945) 2,721

Capex (50,144) (28,778) (24,003) (35,000) (35,000)

Dividend paid (6,597) (3,457) (9,919) (14,922) (11,192)

Share issuance/(buyback) 1,285 566 671 - -




Automobile



ROAE (%) 4.1 10.0 11.2 8.2 10.7

ROACE (%) 5.8 24.9 25.5 18.4 21.3



Payable days 148 136 107 94 97Cash conversion cycle (days) (90) (83) (55) (36) (37)

Current ratio 0.9 0.7 0.9 0.9 0.9

Debt/EBITDA 8.3 3.9 3.3 3.4 2.8


Debt/Equity 1.1 1.1 0.8 0.8 0.8

Operating ratios





Du pont analysis


NP margin (%) 1.6 3.8 4.1 3.1 3.7



ROAE (%) 4.1 10.0 11.2 8.2 10.7



Diluted Adj EPS (INR) 7.9 22.6 30.6 26.1 35.1

YoY growth (%) (78.7) 185.6 35.0 (14.6) 34.6

CEPS (INR) 25.9 54.8 53.7 53.4 66.0

Diluted PE (x) 125.4 43.9 32.5 38.1 28.3

Price/BV (x) 4.2 3.8 3.2 3.1 3.0

EV/Sales (x) 2.0 1.4 1.1 1.1 0.9

EV/EBITDA (x) 31.2 11.7 11.4 11.8 9.6

Dividend yield (%) 0.6 1.5 2.0 1.5 2.0




Automobiles

Financial Statements ‐ Consolidated



Income from operations 708,810 925,193 1,231,333 1,443,035 1,625,691

Materials costs 480,246 614,954 790,084 963,139 1,077,087


Staff costs 72,974 87,518 93,427 104,505 116,639

S G & A expenses 135,936 129,890 181,622 133,068 151,872

Less:Expenses capitalised 46,388 45,925 57,413 10,923 12,226

Total operating expenses 686,849 839,055 1,053,533 1,241,762 1,392,025

EBITDA 21,960 86,137 177,800 201,273 233,666


EBIT (6,585) 42,284 121,620 135,093 155,664

Interest 21,706 24,653 28,965 31,936 28,416

Non-Operational Income 3,237 2,672 9,407 10,898 11,694

Profit before tax (25,054) 20,303 102,062 114,054 138,942

Provision for tax 3,358 10,058 12,164 15,373 18,493

Adj net profit before minority interest (28,412) 10,245 89,898 98,681 120,449Minority interest (403) 542 528 419 264

Adjusted profit after minority interest (28,814) 10,787 90,426 99,100 120,713

Extraordinary income/ (loss) 3,757 14,919 2,310.1 0.0 0.0

Reported profit (25,057) 25,706 92,736 99,100 120,713

Basic shares outstanding 514 571 638 638 638

Earnings per share (EPS) (56.1) 18.9 141.8 155.4 189.3


Adj diluted EPS (56.1) 18.0 141.1 154.6 188.3



Operating expenses 96.9 90.7 85.6 86.1 85.6Materials costs 67.8 66.5 64.2 66.7 66.3

Staff costs 10.3 9.5 7.6 7.2 7.2

S G & A expenses 12.6 9.1 10.1 8.5 8.6

Depreciation 4.0 4.7 4.6 4.6 4.8


EBITDA margins 3.1 9.3 14.4 13.9 14.4

Net profit margins (4.0) 1.1 7.3 6.8 7.4

Growth metrics (%)


Revenues 98.8 30.5 33.1 17.2 12.7

EBITDA (48.3) 292.2 106.4 13.2 16.1

PBT (185.6) (181.0) 402.7 11.8 21.8

Adj Net profit (237.0) (136.1) 777.5 9.8 22.1

EPS (219.6) (132.0) 685.4 9.6 21.8




Automobile



Equity capital 5,141 5,706 6,377 6,377 6,377



Secured loans 130,690 214,812 170,469 208,969 194,969


Minority Interest 4,030 2,135 2,466 1,871 1,122

Deferred tax (Net) 6,802 11,536 14,638 14,638 14,638

Sources of funds 413,613 449,571 536,733 676,363 783,294

Goodwill on consolidation 37,187 34,229 35,848 35,848 35,848

Gross block 584,694 648,518 744,941 884,941 1,024,941

Depreciation 332,691 344,135 390,690 456,870 534,872

Net block 252,003 304,383 354,251 428,071 490,069


Investments 12,574 22,191 25,443 148,528 192,460

Inventories 109,506 113,120 140,705 117,819 132,872

Sundry debtors 47,949 71,912 68,774 49,408 55,721



Other current assets 26 24 19 19 19




Provisions 81,400 76,435 98,692 94,962 98,692


Net current assets 5,658 8,088 40,511 (16,764) (15,763)


Uses of funds 413,613 449,571 536,733 676,363 783,294


Free cash flow


Net profit (28,814) 10,787 90,426 99,100 120,713

Depreciation 25,068 38,871 46,555 66,180 78,001

Deferred tax (1,221) 4,340 0 0 0

Others 1,624 (4,881) (528) (419) (264)

Gross cash flow (3,344) 49,116 136,453 164,861 198,451

Less: Changes in WC (52,660) (39,176) 14,540 (5,517) (6,306)


Less: Capex 285,292 63,644 98,042 140,000 140,000

Free Cash Flow (235,975) 24,649 23,871 30,379 64,756

Cash flow metricsYear to March FY09 FY10 FY11 FY12E FY13E


Financing cash flow 217,623 17,113 (884) 40,949 (13,518)


Net Cash Flow 2,881 46,220 22,046 (51,758) 7,306

Capex (285,292) (63,644) (98,042) (140,000) (140,000)

Dividend paid (5,893) (3,292) (9,919) (14,922) (11,192)

Share issuance/(buyback) 1,285 565 671 0 0




Automobiles



ROAE (%) (38.5) 13.8 65.3 41.7 36.1

ROACE (%) (2.2) 10.2 25.9 26.0 27.8




Current ratio 1.0 1.0 1.1 1.0 1.0

Debt/EBITDA 15.6 4.1 1.8 1.9 1.6


Debt/Equity 5.8 4.3 1.7 1.4 1.0


Operating ratios




Equity turnover 9.7 13.1 9.0 6.1 4.9

Du Pont Analysis


NP margin (%) (4.0) 1.0 7.3 6.8 7.4



ROAE (%) (38.5) 13.8 65.3 41.7 36.1



Adj Diluted EPS (INR) (56.1) 18.0 141.1 154.6 188.3

CEPS (INR) (2.1) 102.4 229.1 258.5 311.2

Diluted PE (x) (17.7) 55.3 7.0 6.4 5.3Price/BV (x) 8.7 6.9 3.3 2.3 1.6

EV/Sales (x) 1.1 0.9 0.7 0.6 0.5

EV/EBITDA (x) 36.5 9.4 4.7 4.0 3.2

Dividend yield (%) 0.6 1.5 2.0 1.5 2.0




Automobile

Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Ashok Leyland REDUCE SU M Bajaj Auto BUY SO H

Exide Industries BUY SO L Hero Honda Motors Ltd HOLD SP L

Mahindra & Mahindra Ltd BUY SO M Maruti Suzuki India Ltd REDUCE SU L

Tata Motors Ltd BUY SO H

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe

within the sector

RELATIVE RISK RATING

Ratings Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return




Automobiles

Buy

BuyBuy

150

350

550

750

950

1,150

J u l - 0 8

A u g - 0

8

S e p -

0 8

O c t - 0 8

N o v - 0

8

D e c -

0 8

J a n - 0

9

F e b - 0

9

M a r - 0 9

A p r - 0 9

M a y - 0

9

J u n - 0

9

J u l - 0 9

( I N R )

Edelweiss Securities Limited, Edelweiss house, off C.S.T. Road, Kalina, Mumbai – 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Head Research [email protected] +91 22 6623 3411

Coverage group(s)

of

stocks

by

primary

analyst(s):

Automobiles

Ashok Leyland, Bajaj Auto, Exide Industries, Hero Honda, Mahindra & Mahindra, Maruti Suzuki, Tata Motors

Recent Research

07-Jun-11 MarutiSuzuki

Labouring the point;Flash Note

1,232 Reduce

01-Jun-11 Automobiles Moderation continues;Sales Update

31-May-11 AmarRaja

A battery of prospects;Result Update

204 NotRated

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 118 51 17 189

* 3 stocks under review

Market Cap (INR) 111 61 17

> 50bn Between 10bn and 50 bn < 10bn

Date Company Title Price (INR) Recos

Buy H old Reduce Total

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Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce de reciate more than 5% over a 12-month eriod

Rating Expected to



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