Ashok Leyland ASOK.NS AL IN

EQUITY: AUTOS & AUTO PARTS

Downgrade to Neutral with TP of INR93

Truck recovery set to continue, but priced in now

Action: Downgrade to Neutral; TP revised up to INR93

Global Markets Research 1 September 2015

Rating Down from Buy NeutralTarget price Increased from 77 INR 93

Closing price 28 August 2015 INR 92

Potential upside +0.9%

Anchor themesWe see a multi-year upcycle in the commercial vehicle industry, with a volume CAGR of 22% over FY15-19F. Ashok Leyland, a pure play on the CV cycle, stands to be a key beneficiary of the recovery.

Nomura vs consensusOur TP is largely in line with consensus.

Research analysts

India Autos & Auto Parts

Kapil Singh - NFASL kapil.singh@nomura.com +91 22 4037 4199

Ashok Leyland (AL) has outperformed the Sensex by 78% YTD and 34% over the past two months. Structurally, we continue to like the medium and heavy commercial vehicles (MHCV) industry and expect a 22% CAGR over FY15-19F (see Anchor Report: India autos - Start of a multi-year CV upcycle). However, we think the recent outperformance largely prices-in the expected positives from operating leverage, lower discounting and weak commodities. We already factor in 30% MHCV volume growth in FY16F (up from 25% earlier) and 15% volume growth in FY17F. We also estimate FY16/17F EBITDA margins will move up to 11.7%/12.8%, from 7.6% in FY15. Near-term volume momentum could remain strong, driven by pre-buying ahead of ABS becoming mandatory for trucks from 1 Oct 2015. However, with the stock trading near the upper end of its expected trading band at ~10x FY17F EV/EBITDA, we think the positives are already largely priced in. Thus, we would look for a better entry price. We think our other Buy-rated wheeler stocks like Maruti Suzuki (MSIL IN), Mahindra and Mahindra (MM IN) and Tata Motors (TTMT IN) offer better value at these levels.

Catalysts: Scrappage incentives from GoI could be positive; reversal in commodity costs and slower industry growth could be negative

Valuation: SOTP-based TP of INR93 offers 1% potential upside We maintain our target EV/EBITDA multiple at 9x FY18F, which is in the middle of its expected trading range of 8-10x during up-cycles. We discount the value to Aug-16 @ 12% cost of equity. We also add INR7/share as value of investments.

Year-end 31 Mar FY15

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

FY16F FY17F FY18F

Currency (INR) Actual Old New Old New Old New

Revenue (mn) 135,622 171,716 176,629 205,802 210,113 243,028

Reported net profit (mn) 3,348 10,009 10,807 16,041 15,862 18,582

Normalised net profit (mn) 2,339 10,009 10,807 16,041 15,862 18,582

FD normalised EPS 82.18c 3.52 3.80 5.64 5.57 6.53

FD norm. EPS growth (%) na 328.0 362.1 60.3 46.8 17.1

FD normalised P/E (x) 112.1 N/A 24.3 N/A 16.5 N/A 14.1

EV/EBITDA (x) 28.0 N/A 13.5 N/A 10.0 N/A 8.6

Price/book (x) 5.1 N/A 4.6 N/A 3.9 N/A 3.4

Dividend yield (%) 0.5 N/A 1.4 N/A 2.1 N/A 2.5

ROE (%) 7.0 18.5 19.9 25.7 25.6 25.8

Net debt/equity (%) 50.0 32.2 29.9 12.6 10.4 net cash

Source: Company data, Nomura estimates

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

Nomura | Ashok Leyland 1 September 2015

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Key data on Ashok Leyland Relative performance chart

Source: Thomson Reuters, Nomura research

Notes:

Performance (%) 1M 3M 12MAbsolute (INR) 10.6 30.7 152.8 M cap (USDmn) 3,965.3Absolute (USD) 6.9 26.2 131.5 Free float (%) 47.0Rel to MSCI India 16.6 36.5 155.9 3-mth ADT (USDmn) 18.9 Income statement (INRmn) Year-end 31 Mar FY14 FY15 FY16F FY17F FY18FRevenue 99,434 135,622 176,629 210,113 243,028Cost of goods sold -79,800 -103,815 -127,804 -150,263 -174,440Gross profit 19,634 31,806 48,826 59,850 68,588SG&A -11,742 -13,863 -17,966 -21,110 -24,321Employee share expense -9,997 -11,840 -14,318 -15,980 -18,597Operating profit -2,105 6,103 16,542 22,761 25,671EBITDA 1,666 10,266 20,705 26,995 29,991Depreciation -3,770 -4,163 -4,163 -4,234 -4,320Amortisation 0 0 0 0 0EBIT -2,105 6,103 16,542 22,761 25,671Net interest expense -4,529 -3,935 -2,473 -1,218 -254Associates & JCEs

Other income 665 1,245 1,370 1,117 1,129Earnings before tax -5,969 3,413 15,439 22,660 26,546Income tax 1,206 -1,074 -4,632 -6,798 -7,964Net profit after tax -4,763 2,339 10,807 15,862 18,582Minority interests

Other items

Preferred dividends

Normalised NPAT -4,763 2,339 10,807 15,862 18,582Extraordinary items 5,057 1,009 0 0Reported NPAT 294 3,348 10,807 15,862 18,582Dividends 0 -1,281 -3,782 -5,552 -6,504Transfer to reserves 294 2,067 7,025 10,310 12,078Valuations and ratios

Reported P/E (x) 834.5 78.3 24.3 16.5 14.1Normalised P/E (x) -51.5 112.1 24.3 16.5 14.1FD normalised P/E (x) na 112.1 24.3 16.5 14.1Dividend yield (%) na 0.5 1.4 2.1 2.5Price/cashflow (x) 37.6 16.5 16.4 13.2 12.3Price/book (x) 5.5 5.1 4.6 3.9 3.4EV/EBITDA (x) 185.3 28.0 13.5 10.0 8.6EV/EBIT (x) na 47.2 16.9 11.8 10.0Gross margin (%) 19.7 23.5 27.6 28.5 28.2EBITDA margin (%) 1.7 7.6 11.7 12.8 12.3EBIT margin (%) -2.1 4.5 9.4 10.8 10.6Net margin (%) 0.3 2.5 6.1 7.5 7.6Effective tax rate (%) na 31.5 30.0 30.0 30.0Dividend payout (%) 0.0 38.3 35.0 35.0 35.0ROE (%) 0.7 7.0 19.9 25.6 25.8ROA (pretax %) -1.6 4.8 12.7 16.3 17.4Growth (%)

Revenue -20.3 36.4 30.2 19.0 15.7EBITDA -81.0 516.4 101.7 30.4 11.1Normalised EPS -430.4 na 362.1 46.8 17.1Normalised FDEPS -430.4 na 362.1 46.8 17.1Source: Company data, Nomura estimates

Cashflow statement (INRmn) Year-end 31 Mar FY14 FY15 FY16F FY17F FY18FEBITDA 1,666 10,266 20,705 26,995 29,991Change in working capital 3,375 9,855 1,002 -156 -1,518Other operating cashflow 1,488 -4,216 -5,735 -6,899 -7,089Cashflow from operations 6,528 15,905 15,972 19,940 21,385Capital expenditure -1,736 1,784 -1,500 -1,500 -2,100Free cashflow 4,792 17,689 14,472 18,440 19,285Reduction in investments -5,120 1,409 -1,500 -1,500 0Net acquisitions 0Dec in other LT assets -2,141 -2,966 0 0 0Inc in other LT liabilities -1,307 1,139 0 0 0Adjustments -183 -1,490CF after investing acts -3,959 15,781 12,972 16,940 19,285Cash dividends 0 -1,498 -4,550 -6,679 -7,824Equity issue -12 6,519 0 0 0Debt issue 3,349 -13,406 -14,934 -10,061 -11,361Convertible debt issue 0 0 0 0 0Others 0 0 0 0 0CF from financial acts 3,337 -8,385 -19,485 -16,740 -19,185Net cashflow -621 7,395 -6,513 200 100Beginning cash 1,140 518 7,914 1,401 1,601Ending cash 518 7,914 1,401 1,601 1,701Ending net debt 46,385 25,583 17,162 6,900 -4,560 Balance sheet (INRmn) As at 31 Mar FY14 FY15 FY16F FY17F FY18FCash & equivalents 518 7,914 1,401 1,601 1,701Marketable securities Accounts receivable 12,990 12,577 19,357 23,026 26,633Inventories 11,887 13,985 18,214 21,667 25,061Other current assets 9,717 8,770 9,749 11,895 13,275Total current assets 35,112 43,247 48,721 58,189 66,671LT investments 27,496 26,087 27,587 29,087 29,087Fixed assets 58,414 53,757 51,094 48,360 46,140Goodwill Other intangible assets 0 0 0 0 0Other LT assets 7,059 10,024 10,024 10,024 10,024Total assets 128,080 133,115 137,427 145,660 151,922Short-term debt Accounts payable 22,142 28,283 36,835 43,818 50,682Other current liabilities 9,786 14,238 18,676 20,804 20,804Total current liabilities 31,928 42,521 55,511 64,622 71,486Long-term debt 46,903 33,497 18,563 8,502 -2,859Convertible debt Other LT liabilities 4,770 5,909 5,909 5,909 5,909Total liabilities 83,601 81,928 79,983 79,033 74,536Minority interest Preferred stock Common stock 2,661 2,846 2,846 2,846 2,846Retained earnings 41,818 48,341 54,598 63,781 74,539Proposed dividends Other equity and reserves Total shareholders' equity 44,479 51,187 57,444 66,627 77,385Total equity & liabilities 128,080 133,115 137,427 145,660 151,921

Liquidity (x)Current ratio 1.10 1.02 0.88 0.90 0.93Interest cover -0.5 1.6 6.7 18.7 101.1LeverageNet debt/EBITDA (x) 27.85 2.49 0.83 0.26 net cashNet debt/equity (%) 104.3 50.0 29.9 10.4 net cash

Per shareReported EPS (INR) 11.04c 1.18 3.80 5.57 6.53Norm EPS (INR) -1.79 82.18c 3.80 5.57 6.53FD norm EPS (INR) -1.79 82.18c 3.80 5.57 6.53BVPS (INR) 16.72 17.99 20.18 23.41 27.19DPS (INR) 0.00 0.45 1.33 1.95 2.29Activity (days)Days receivable 49.9 34.4 33.1 36.8 37.3Days inventory 70.5 45.5 46.1 48.4 48.9Days payable 107.5 88.6 93.2 98.0 98.9Cash cycle 13.0 -8.8 -14.1 -12.7 -12.7Source: Company data, Nomura estimates

Nomura | Ashok Leyland 1 September 2015

3

We continue to look for 22% CAGR in MHCV volumes over FY15-19F

In our previous report Anchor Report: India autos - Start of a multi-year CV upcycle we estimated that the MHCV segment was in a structural upcycle and could continue at 22% CAGR over FY15-19F. This was based on 1) strong support from the replacement cycle and 2) expected upswing in industrial growth. FYTD (Apr-July15), industry volume growth has been ~25% y-y – supported by the replacement cycle. We expect this rate to sustain as industrial growth picks up from H2FY16.

Fig. 1: MHCV Industry domestic SAAR

Source: SIAM, Nomura Research

AL has outgrown industry due to market share gains

AL’s MHCV volumes were up 47% over April-July15. Consequently AL’s domestic market share has improved to ~31%FYTD from 28.5% in FY15. This is the highest market share that the company has had in more than the past 10 years. The company has benefitted from higher growth in higher tonnage segments, where its market share is higher. We estimate that volumes will increase at 26% CAGR over FY15-18F to ~133,000 units by FY18F

Fig. 2: Market share of the domestic MHCV industry (%)

Source: Society of India Automobile Manufacturers (SIAM), Nomura estimates

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Nomura | Ashok Leyland 1 September 2015

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Fig. 3: AL’s MHCV volumes

Source: Company data, Nomura Estimates

Re-rating of stock linked to divestment of non-core assets to deleverage Over the past two years, AL has focused on deleveraging by limiting capex and divestment of non-core assets. This has also helped drive the re-rating of the stock. However, one risk that could emerge in the future is that its R&D investments have come down sharply as a % of sales, which could hurt the next phase of the new product cycle.

Fig. 4: Net Debt and Net Debt / Equity

Source: Company data, Nomura Estimates

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Nomura | Ashok Leyland 1 September 2015

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Fig. 5: R&D as a % of sales – coming off for AL

Source: Company data

Margins already above mean level, may come down by 150-200bps after FY19F AL’s long term margins in the past upcycles have been ~ 10-11%. We build in higher margins in this cycle supported by 1) benign cost environment and 2) 100% excise duty benefits for its plant in Pantnagar. The latter add ~150-200bps to margins in our view. However, these incentives would expire in FY19. Thus, we would be cautious in assigning a higher EV/EBITDA multiple than historical range of 8x-10x

Fig. 6: EBITDA margin over the last 10 years has been ~ 10-11% in upcycles

Source: Company Data, Nomura estimates

Fine-tuning FY16/17F earnings

We fine-tune our volume estimates to factor in lower commodity prices and higher market share for AL. Overall, we continue to expect strong recovery in MHCV volumes and expect 30% volume growth in FY16F vs 25% earlier. We estimate FY16F/17F EBITDA margins to improve to 11.7%/12.8% up from 10.4%/12.2% previously. This is to build in higher-than-previously expected benefit on account of commodities. We lift our FY16/17F PAT by 9.8%/ 0.7%. Our tax rate estimates have increased to ~30% for both FY16/17F from 21/24% earlier as guided by management. According to management, it will not be spending much on R&D over the next couple of years and thus tax benefits would be lower in FY16-17F.

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Nomura | Ashok Leyland 1 September 2015

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Our FY16-17 PAT estimates are ~15-9% ahead of consensus.

Fig. 7: Revisions to our estimates

Source: Company data, Nomura estimates

Fig. 8: Nomura vs. consensus

Source: Bloomberg, Nomura estimates

Downgrade to Neutral; TP revised upwards to INR93

We continue to use SOTP methodology (unchanged) to arrive at our TP of INR93. We value the standalone business at ~INR86.5/sh based on 9x FY18F EBITDA which is rolled back to Aug-16 at 12% cost of equity. We value the company’s investments at INR6.9/sh.

Fig. 9: AL – Target price calculation

Source: Bloomberg, Nomura estimates

FY15 FY16F FY17F FY16F FY17F FY16F FY17FMHCVs 77,656 100,953 116,096 97,994 112,693 3.0 3.0 YoY grow th (%) 28.8 30.0 15.0 25.0 15.0 LCVs 25,223 27,745 36,069 29,475 38,318 (5.9) (5.9) Total Volumes 102,879 128,698 152,165 127,469 151,011 1.0 0.8 Revenues (INR m) 135,622 176,629 210,113 175,993 210,694 0.4 (0.3) EBITDA (INR m) 10,266 20,705 26,995 18,327 25,601 13.0 5.4 Margins (%) 7.6 11.7 12.8 10.4 12.2 1.3 0.7 Adj EPS (INR) 0.9 3.8 5.6 3.5 5.5 9.8 0.7

Old % differenceNew

(INR m)FY16F FY17F FY18F FY16F FY17F FY18F FY16F FY17F FY18F

Sales 176,629 210,113 243,028 176,606 217,993 253,059 0.0 (3.6) (4.0) EBITDA 20,705 26,995 29,991 19,040 25,454 29,543 8.7 6.1 1.5 EBITDA margin (%) 11.7 12.8 12.3 10.8 11.7 11.7 0.9 1.2 0.7 Adj PAT 10,807 15,862 18,582 9,411 14,529 17,387 14.8 9.2 6.9 EPS 3.8 5.6 6.5 3.3 5.1 6.1 14.8 9.2 6.9

Nomura Consensus Difference(%)

New Valuation

Standalone business INR mn

FY18F EBITDA 29,991

EV at 9x FY18F EBITDA 269,916

Net debt - FY17F 6,900

Equity value 263,015

Equity value/sh of the core business 92.4

Discounted back to Aug-16 (@ 12% Ke) - A 86.5

Investments - B 6.7

Holding in IndusInd Bank 1.4

Hinduja Leyland Finance (@ 1.5x FY15 book) 2.8

Hinduja Energy (BV INR 1.87bn) 0.7

Optare (BV INR 1.5bn) 0.5

Albonair (BV of INR 3.9bn) 1.4

Target Price - A+B 93.0

Old Valuation

Standalone business INR mn

FY17F EBITDA 24,791

EV at 9x FY17F EBITDA 223,121

Net debt - FY16F 18,387

Equity value 204,735

Equity value/sh of the core business 71.9

Investments - B 5

Holding in IndusInd Bank - B 1.4

Hinduja Leyland Finance (@ 1.5x FY14 book) - C 2.8

Hinduja Energy (BV INR 1.87bn) 0.7

Optare (BV INR 1.5bn) 0.5

Target Price - A+B 77.0

Nomura | Ashok Leyland 1 September 2015

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Fig. 10: AL EV/EBITDA chart

Source: Company, Nomura Research

Fig. 11: AL EV/Sales chart

Source: Company, Nomura Research

Fig. 12: Average EV/EBITDA over the years

Source: Nomura Research

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EV/EBITDA (avg)

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growth(%)FY06 5.3 12.6 10.7 32.7FY07 7.2 34.8 9.7 23.7FY08 8.7 0.3 10.3 14.2FY09 7.2 -34.7 7.4 -44FY10 7.1 17.4 10.4 69.7FY11 8.6 47.2 10.9 61.1FY12 9.0 0.3 9.7 3.5FY13 24.2 1.3 7 -30.2FY14 18.4 2.3 1.7 -81FY15 9.9 3.3 7.6 516FY16F 10.8 4.3 11.7 101.7

Nomura | Ashok Leyland 1 September 2015

8

Fig. 13: India Autos comp sheet

Source: Nomura Estimates, Pricing date 28th Aug 2015, * EPS and P/E adjusted for subsidiary values

Fig. 14: Price performance of Indian Auto sector coverage stocks

Source: Bloomberg, Pricing date 28th Aug 2015

Key risks Weaker-than-expected MHCV industry volumes: We expect a strong revival in domestic MHCV volumes over the next two years. However, if volumes are weaker than expected, there could be downside risks to our estimates.

Lower-than-expected margin improvement: We expect profitability to improve going forward led by 1) lower discounts, 2) operating leverage benefits, and 3) positive impact of higher mix from Pantnagar plant. If margins do not improve, there could be downside risks to our estimates.

Consolidated performance subsidiary performance impacted by Nissan-JV

Ashok Leyland’s consolidated performance was hit as it had to book a one-time loss of INR6.08bn in the Nissan JV due to discontinuation of Evalia and Stile models. The company should be able to bring down these losses as the LCV segment growth picks up next year and commodity costs come off.

Mkt Cap Price EPS CAGRCompany Ticker ($mn) Rating INR FY15-17F FY16F FY17F FY16F FY17F FY16F FY17F FY16F FY17F FY16F FY17F FY16F FY17FAshok Leyland AL IN 3,964 Neutral 92 160% 3.8 5.6 24.3 16.5 13.5 10.0 19.9 25.6 11.7% 12.8% 4.9% 6.5%Bajaj Auto BJAUT IN 9,970 Neutral 2,280 16% 128.5 145.4 17.7 15.7 11.2 9.7 32.1 31.2 21.0% 20.8% 6.4% 6.7%Hero MotoCorp HMCL IN 7,239 Buy 2,399 15% 148.6 169.0 16.1 14.2 10.8 9.2 40.7 38.1 14.7% 15.1% 3.7% 5.7%M&M* MM IN 11,584 Buy 1,234 21% 61.9 74.6 12.7 10.6 8.0 6.4 18.8 19.5 13.6% 14.1% 5.2% 7.7%Maruti Suzuki MSIL IN 19,203 Buy 4,206 36% 177.4 228.9 23.7 18.4 11.4 8.7 20.0 21.8 16.5% 17.0% 4.9% 6.2%Tata Motors TTMT IN 16,726 Buy 340 8% 42.8 51.2 7.9 6.6 3.5 3.0 21.7 20.3 14.6% 14.8% -5.1% 2.0%Exide EXID IN 1,980 Neutral 154 15% 7.6 8.6 17.5 15.4 12.0 10.4 15.1 15.4 14.4% 14.4% 1.4% 3.4%Bharat Forge BHFC IN 4,161 Neutral 1,183 36% 44.0 57.5 26.9 20.6 14.9 11.7 26.9 28.8 22.8% 23.1% 1.8% 3.8%Amara Raja AMRJ IN 2,639 Buy 1,022 18% 28.7 34.4 35.6 29.7 20.3 16.7 25.6 24.9 16.9% 17.1% 2.4% 3.1%Eicher Motors EIM IN 7,761 Buy 18,919 69% 496.8 646.0 38.1 29.3 20.3 15.3 26.8 44.3 12.7% 15.5% 0.8% 2.0%

FCF YieldRoEEPS P/E EV/EBITDA EBITDA margin

Company B'berg Ticker Rating Price (INR) 1M 2M 3M 6M YTD 1YBSE SENSEX SENSEX 26,392 (4.2) (5.0) (5.2) (9.7) (5.4) (0.9)

Tata Motors TTMT IN Buy 340 (9.7) (21.7) (29.4) (40.2) (32.8) (34.5)

Ashok Leyland AL IN Neutral 92 8.5 27.0 29.0 37.7 73.8 152.8

Maruti Suzuki MSIL IN Buy 4,206 (1.6) 4.5 11.1 16.7 25.9 51.0

Bajaj Auto BJAUT IN Neutral 2,280 (8.7) (10.3) (1.6) 6.0 (5.2) 0.9

Mahindra & Mahindra MM IN Buy 1,234 (6.2) (3.8) (1.9) (3.6) 1.7 (12.3)

Hero MotoCorp HMCL IN Buy 2,399 (6.7) (4.9) (11.1) (10.3) (21.7) (7.9)

Exide Industries EXID IN Neutral 154 7.9 3.9 0.3 (14.6) (16.1) (5.4)

Bharat Forge BHFC IN Neutral 1,183 6.9 11.2 (4.0) (5.3) 26.2 49.4

Amara Raja AMRJ IN Buy 1,022 15.2 15.7 15.4 15.2 27.2 85.1

Eicher EIM IN Buy 18,919 (1.7) (3.4) 0.1 19.7 25.8 93.9

Stock performance (%)

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Fig. 15: Performance of Nissan JV

Source: Company, Nomura Research

(INR mn) FY14 FY15Net Revenue 10331 10098Material Cost 9596 8706% of Sales 93% 86%Emp Cost 110 175% of Sales 1% 2%Other Expenses 1309 1686% of Sales 13% 17%Total Cost 11015 10566EBITDA -684 -468margin (%) -6.6% -4.6%Interest 389 519Depreciation 863 1041Other Income/ (Expense) 191 -5883PBT -1745 -7911

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Appendix A-1

Analyst Certification

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

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

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Ashok Leyland AL IN INR 92 28-Aug-2015 Neutral N/A Mahindra and Mahindra MM IN INR 1234 28-Aug-2015 Buy N/A Maruti Suzuki MSIL IN INR 4206 28-Aug-2015 Buy N/A Tata Motors TTMT IN INR 340 28-Aug-2015 Buy N/A

Ashok Leyland (AL IN) INR 92 (28-Aug-2015) Rating and target price chart (three year history)

Neutral (Sector rating: N/A)

Date Rating Target price Closing price 02-Feb-15 77.00 66.05 10-Nov-14 56.00 49.35 27-May-14 Buy 31.80 27-May-14 38.00 31.80 23-Jan-14 Reduce 17.70 23-Jan-14 13.00 17.70 18-Jul-13 16.00 15.35 14-May-13 22.00 22.15 09-Nov-12 27.00 25.70

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We continue to use SOTP methodology (unchanged) to arrive at our TP of INR93. We value the standalone business at ~INR 86.5/share based on 9x FY18F EBITDA which is rolled back to Aug-16 at 12% cost of equity. We value company’s investments at INR 6.9/sh. The benchmark index for this stock is MSCI India. Risks that may impede the achievement of the target price Weaker-than-expected MHCV industry volumes: We expect a strong revival in domestic MHCV volumes over the next two years. However, if volumes are weaker than expected, there could be downside risks to our estimates. Lower-than-expected margin improvement: We expect profitability to improve going forward led by 1) lower discounts; 2) operating leverage benefits and 3) positive impact of higher mix from Pantnagar plant. If margins do not improve we expect, there could be downside risks to our estimates.

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Mahindra and Mahindra (MM IN) INR 1234 (28-Aug-2015) Rating and target price chart (three year history)

Buy (Sector rating: N/A)

Date Rating Target price Closing price 07-Aug-15 1,618.00 1,390.30 01-Jun-15 1,371.00 1,258.10 13-Feb-15 1,397.00 1,192.55 01-Nov-14 1,456.00 1,306.20 09-Aug-14 1,457.00 1,229.35 02-Jun-14 1,460.00 1,238.742 14-Feb-14 1,261.00 904.029 14-Nov-13 1,189.00 924.771 14-Aug-13 1,067.00 873.092 30-May-13 1,171.00 1,004.238 11-Feb-13 1,125.00 882.138 25-Oct-12 1,054.00 857.548

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We value M&M based on a sum-of-the-parts (SOTP) methodology to arrive at our TP of INR 1,618. We value the core M&M + MVML business at INR 1,172/share, based on 15x FY17F EPS (ex-subsidiary dividends) of ~INR 75 which is rolled forward by 5 months to Aug-15 at 12% cost of equity. We value its investments in other listed subsidiaries at INR 445/share – at the current market price after applying a 20% holding discount. The benchmark index for this stock is MSCI India. Risks that may impede the achievement of the target price • Slower-than-expected revival of the UV segment: Going ahead, we expect volume recovery for M&M in the UV segment led by new launches and improvement in industry growth. If the industry remains slow or company’s models are note as successful as expected, there could be downside risks to our estimates. • Continued weakness in the Tractors segment: We expect tractor industry volumes to improve from current levels and expect 3% growth in FY16F and 12% in FY17F. If industry growth remains weak, then there could be downside risks to our estimates.

Maruti Suzuki (MSIL IN) INR 4206 (28-Aug-2015) Rating and target price chart (three year history)

Buy (Sector rating: N/A)

Date Rating Target price Closing price 29-Jul-15 5,034.00 4,273.70 28-Apr-15 4,450.00 3,822.60 27-Jan-15 4,580.00 3,687.90 19-Jan-15 4,210.00 3,626.25 31-Oct-14 3,660.00 3,337.25 21-Jul-14 3,025.00 2,541.35 25-Apr-14 2,286.00 1,956.20 15-Apr-14 2,295.00 1,927.20 29-Jan-14 2,135.00 1,673.85 28-Oct-13 1,960.00 1,513.35 25-Jul-13 1,805.00 1,414.00 29-Apr-13 2,259.00 1,683.50 25-Jan-13 1,937.00 1,599.45 31-Oct-12 Buy 1,437.90 31-Oct-12 1,617.00 1,437.90

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We value the stock at 20x FY17F consolidated core EPS of ~INR 214. We roll forward our target price by 4 months @ 12% cost of equity to Jul-16 to arrive at the core business valuation of INR 4,439/sh. We add Fy16F cash per share of INR 596/sh to arrive at our target price of INR 5,034. The benchmark index for the stock is MSCI India. Risks that may impede the achievement of the target price • Slower-than-expected recovery in industry growth: We build in ~16% volume growth in domestic volumes in FY16-17F. If industry volumes remain weak, there could be downside risk to our

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earnings estimates. • JPY appreciation against the INR: If the JPY appreciates from current levels, there could be a downside risk to our estimates. Every 1% JPY appreciation could negatively affect our EBITDA margin estimates by ~15 bps and PAT estimates by ~1.5%, according to our calculations. Our current estimate for JPY: INR rate is ~0.52. • Significant increase in raw material costs: If commodity costs increase significantly from current levels, there could be downside risks to our EBITDA margin estimates.

Tata Motors (TTMT IN) INR 340 (28-Aug-2015) Rating and target price chart (three year history)

Buy (Sector rating: N/A)

Date Rating Target price Closing price 10-Aug-15 502.00 385.70 17-Jun-15 581.00 433.70 27-May-15 623.00 471.75 06-Feb-15 652.00 553.663 17-Nov-14 606.00 539.465 12-Aug-14 600.00 468.971 30-May-14 482.00 410.646 11-Feb-14 Buy 370.527 11-Feb-14 433.00 370.527 11-Nov-13 Neutral 373.099 11-Nov-13 410.00 373.099 25-Sep-13 391.00 340.449 08-Aug-13 Buy 275.842 08-Aug-13 327.00 275.842 30-May-13 323.00 313.686 15-Feb-13 304.00 301.22 08-Nov-12 284.00 280.937

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We value TTMT on a sum-of-the-parts methodology to arrive at our TP of INR502. We value JLR at INR 414/share, based on 4x FY17F normalized EBITDA of ~INR 322bn. In this, we explicitly value JLR’s stake in the China JV at INR 22/share, based on 2x book value. We deduct the value of the unfunded pension liability of GBP880mn (~INR27/share) to arrive at JLR’s valuation. We value the standalone business at ~INR 36/share, based on 9x FY17F EBITDA of ~INR 36bn. We value other investments at ~INR51/share. The benchmark for this stock is the MSCI India. Risks that may impede the achievement of the target price Weaker-than-expected growth in China: We expect volume growth to gradually recover in China over the next 1 year. Further, given our view that China is the most profitable market for JLR, any disappointment from China due to regulatory concerns, demand slowdown, etc, could lead to downside risks to our earnings estimates. Global growth slowdown: If economic growth in developed economies is weaker than our expectations, there may be downside risks to our earnings estimates. Adverse currency movements: JLR is a net exporter in USD and net importer in EUR; therefore USD appreciation and EUR depreciation vs the GBP are positive for JLR’s profitability. Any adverse currency movements can lead to downside to our margin estimates.

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47% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 42% of companies with this rating are investment banking clients of the Nomura Group*. 42% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 55% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 21% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 June 2015. *The Nomura Group as defined in the Disclaimer section at the end of this report. 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