eicher motors

Eicher Motors Ltd Volvo’s play on India Story

Eicher Motors (EM) is a play on Volvo’s India story. It is capturing

MHCV market share through stronger growth despite unfavorable

macro environment on the back of Volvo’s superior technology,

enhanced fuel efficiency and lower maintenance requirement. We

believe EM is the best long term play within the Indian CV industry.

VOLVO-EICHER COMMERCIAL VEHICLES ~ AT INFLECTION POINT

Volvo-Eicher Commercial Vehicles (VECV) JV is the fastest growing CV company in

India. VECV aims to capture 15% of the MHCV (>12T) market by 2015. Given VECV’s

current low market share of 3.6%, there exists significant headroom for growth. Given

company’s focus on strengthening aftermarket and improvement in product offering

using Volvo’s proven technology, we believe EM is well poised to clock a 15% volume

CAGR over CY11-15E. However given the near term concerns of a slowdown in

industrial growth and high interest rates we have built in considerable moderation in

CY12E volume growth at 13%. (Our CY12E growth for the CV industry stands at 7%).

ROYAL ENFIELD ~ RETURN OF THE JEDI

Royal Enfield has completely switched over to an upgraded platform which has

increased fuel efficiency from 30-35 km/l to 40-45 km/l. The gears and brakes have

been shifted to the conventional left hand side of the bike. Production capacity will

increase from 84,000 units to 1,50,000 units. The above points combined will lead to

sustained sales and provide for visibility in the coming years.

STRONG FINANCIAL POSITION

EM has a consistent track record of generating positive free cash flow which is

expected to continue going forward. EM has an upper hand over both the incumbents

in terms of its financial ratios – ROCE, asset turnover and debt/equity.

STRONG REVENUE GROWTH OVER THE NEXT 5 YEARS

EM is expected to witness robust growth rates over the next five years on the back of

(a) Increase in VECV’s market share in the MHCV industry (it was just 3.6% in CY11)

(b) Doubling of capacity for Royal Enfield bikes to meet the ever growing demand

(c) Engine project under VECV JV will give a further fillip to the JV’s revenue growth

and help it emerge as a potential candidate for future components outsourcing

opportunities from Volvo.

Summary Financials

Rating BUY

Date 23rd FEB 2012

CMP INR 1716

T.P (Dec 2012) INR 2118

Upside 23%

COMPANY DATA

Industry Auto

Equity (INR mn) 269

Face Value 10

KEY MARKET DATA

BSE Code 505200

BSE Group B

NSE Code EICHERMOT

Bloomberg Code EIM IN

Mkt Cap. (INR Bn.) 40.5

52 Week high/low 1762 / 975

Monthly Turnover 11 mn

SHARE HOLDING PATTERN (Dec 11)

Promoters 55%

MF’s, FI’s, Banks 18%

FII’s 6%

Others 21%

PRICE PERFORMANCE

Returns (%) Abs Rel.*

3 Month 7 -5

6 Month 27 16

12 Month 63 64

* Benchmark Sensex

Analyst Jehan Bhadha

Contact No 022 43022128

Email [email protected]

INR Mn. Sales YoY EBIDTA Margin PAT Margin EPS YoY RoE P/E P/BV

CY10 43,971 71% 3811 8.7% 1889 4.3% 70 21% 15% - -

CY11 56,775 29% 5935 10.5% 3103 5.5% 115 64% 18% 24.5 3.8

CY12E 66,595 17% 7040 10.6% 3449 5.2% 128 11% 16% 14.9 2.8

CY13E 84,892 27% 8813 10.4% 4196 4.9% 156 22% 15% 13.4 2.1

CY14E 106,536 25% 11596 10.9% 5472 5.1% 203 30% 15% 11.0 1.7


COMPANY BACKGROUND

Eicher Motors (EM) primarily manufactures commercial vehicles (CVs) and motorcycles. It operates out of its main

manufacturing facility in Pithampur (central India). EM is the second largest domestic player in ICVs (7.6T-12.5T) and the

third largest player in the overall CV industry. EM is promoted by Delhi-based Vikram Lal. Currently, it is managed by the

second generation promoter - Siddhartha Lal, who took over charge as group CEO since January 2004. Mr Siddhartha has

been associated with the company in different roles since 1999.

Key Milestones

1948 Eicher begins to sell imported tractors

1959 India’s first tractor rolled out of Eicher’s factory

1984 JV with Mitsubishi motors to make trucks

1991 Acquired Royal Enfield motorcycles

1993 Ended JV with Mitsubishi and entered CVs

2005 Divested tractor business to focus on CVs & motorcycles

2008 Formed JV with Volvo of Sweden, transferred CV business to the JV

EICHER MOTORS – GROUP STRUCTURE

Source: Darashaw

Top Management

Siddhartha Lal MD

Vinod Aggarwal CEO – VECV

Venki Padmanabhan CEO – Two Wheelers

Eicher Motors

Royal Enfield

VECV (Volvo Eicher CV) – 54.4%

VECV - Segments

Eicher Trucks & Buses

Volvo Trucks India

(Sales & Aftermarket)

Eicher Engineering

Solutions

Eicher Engineering

Components

Volvo-Eicher Powertrain


Revenue Mix CY10 Revenue: INR 44 bn

Royal Enfield10%

VECV90%

PAT Mix CY10 Revenue: INR 1.9 bn

VECV60%

Royal Enfield40%

Source: Darashaw Source: Darashaw

EM has a 54% stake in VECV JV and thus proportionate share of profits of the JV are transferred to the associate company

(Volvo). Hence although VECV contributes 90% to the revenues of the consolidated entity, its contribution to PAT is lower at

60%. This is to highlight the significance of Royal Enfield and not get influenced by its lower share in revenues.

INVESTMENT RATIONALE

BUSINESS RESTRUCTURING EXERCISES (FY04-08)

FY04 Tractor, two wheeler, gear businesses de-merged from Eicher Ltd and merged into EM

FY06 Sold tractor business in June 2005 to TAFE

FY06 Acquired DIE (Design Intent Engineering) USA for USD 2.5 mn

FY07 Acquired Hoff & Associates USA for USD 3.5 mn

FY08 Hoff merged with DIE and renamed as EES (Eicher Engineering Solutions)

CY08 Formed JV company with Volvo for CV business having a stake of 54.4%

CY08 EES transferred to VECV in July 2008

CY08 Standalone company has only two wheeler business and investment in VECV

CY08 Volvo acquires 8.1% stake in EM from promoters

CY09 Buyback from minority investors for 1.41 mn shares (5% of equity)

ADVENT OF “VECV” JV

EM attempted to enter HCV goods segment over FY05-08, however it was unsuccessful. Truck operators are highly sensitive to

break-downs and the sensitivity increases with increase in tonnage. Hence EM needed a strong technology partner to ensure

quality and garner acceptance for their product. Volvo had occupied a niche in Indian CV market for 10 years and wanted to

get into the mass market pie, but knew they needed a partner who understood the mass market. Volvo went with EM because

of EM’s established presence in the domestic CV industry. Over the past two years the JV has led to emergence of a stronger

Eicher brand, with improved technology and quality and increased product acceptance significantly outperforming the industry

over 2009-till date. Given high sensitivity of customer to breakdowns, EM is strongly focusing on strengthening aftermarket

support. That is where Tata Motors derives its strength in the North and Ashok Leyland in the South.

VECV Deal Structure

Eicher’s CV and related components business was transferred to the JV company – VECV

Volvo acquired a 45.6% stake in VECV for USD 350 mn. USD 275 mn as cash and USD 75 mn for Volvo Trucks India

(distribution & sales of Volvo trucks + distribution & sales and aftermarket of Volvo buses)

Post this JV, Eicher has a non-compete clause with Volvo within commercial vehicles.

All future projects of Volvo in India will be routed through the JV.

VECV will be jointly managed by Volvo and EM with equal representation on the board.

Volvo acquired 8.1% stake in EM at INR 691.7 per share. As a reslt, the direct and indirect holding of Volvo will be

50% in the JV.


VECV TARGETS 15% OF MHCV MARKET (>12T) BY CY15/FY16; INITIAL SUCCESS SIGNS VISIBLE

We believe EM’s JV (VECV) with Volvo, the world’s second largest truck company (after Diamler), is a defining moment as this

association gives EM the technology and financial muscle required to grow its presence in the domestic MHCV industry. VECV

aims to capture 15% of the MHCV market by 2015. Given VECV’s current low market share of 3.6%, there exists significant

headroom for growth.

MHCV M.S FY12E

67%

23%

3.6%6%

TAMOALEicherOthers

MHCV Market Share

3.6%

15%

7.5%

0%

3%

6%

9%

12%

15%

CY11 CY15E (Target) CY15E (Our Estimate)

Source: CMIE Source: Company, Darashaw

EM - MHCV M.S - Initial success signs visible

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

FY07 FY08 CY09 CY10 CY11

Shift in Product Mix towards MHCV

16% 21% 24%

71% 64% 62%

13% 15% 14%

CY10 CY12E CY15E

Buses<12TMHCV (>12T)


Given company’s focus on strengthening aftermarket and improvement in product offering using Volvo’s proven technology,

we believe EM is well poised to clock a 15% volume CAGR over CY11-15E. However given the near term concerns of a

slowdown in industrial growth and high interest rates, we have built in considerable moderation in CY12E volume growth at

7%. (Our CY12E growth for the CV industry stands at 2%)

VECV - CV Volume Growth Forecast

30000400005000060000700008000090000

CY11 CY12E CY13E CY14E CY15E0%5%10%15%20%25%30%

Volumes Growth


Capacity Timeline

Per Month Per Annum

By Jan 2012 4,500 54,000

By Jan 2013 5,500 66,000

By Jan 2014 7,000 84,000

By Jan 2015 8,300 100,000


VECV has following segments –

Eicher Trucks and Buses (ETB)

The core activities of the JV come under this segment. The segment manufactures trucks and buses of capacities ranging from

5-40T. However, it has a strong presence in the Light/Medium Duty segment in 7T-12T category. The company is further

strengthening its presence in 16T and higher segments.

Eicher Engineering Components (EEC)

Eicher Engineering Components is the outcome of strategic backward integration. The manufacturing facility not only meets

the internal demand, but also has a large market share. EEC manufactures some components (In-house Products), assembles

a part of the portfolio (Gearbox Assemblies), and outsources some components (Outsourced Products), to provide end-to-end

solution to its customer base.

Eicher Engineering Solutions (EES)

The company is into design and CAE (computer aided engineering) services. It has two main business areas – EES Inc. (US)

and EES Gurgaon (Delhi). Its customers include Toyota, Nissan, Harley Davidson, Navistar, Siemens etc.

Volvo Trucks India

Engages in sales and distribution of Volvo trucks in India. VECV is also engaged into sales & distribution and aftermarket

(servicing) of Volvo buses. This being a trading business, margins here are substantially lower.

Volvo Eicher Powertrain (VEPT) – Engine Project

As a strategic measure, the project Volvo Eicher Powertrain (VEPT) is based on Volvo Group’s decision to make VECV the base

for its futuristic Medium Duty Engine global platform.

VOLVO-EICHER POWERTRAIN – VEPT (ENGINE PROJECT) ~ MAJOR LONG TERM GROWTH DRIVER

Volvo Group’s decision to make VECV its base for its future Medium Duty Engine global platform demonstrates Volvo’s trust in

VECV’s manufacturing capabilities. The project will be a major long term growth driver for the JV.

VECV will invest INR 4.8 bn into a new plant to manufacture Medium Duty Engines (5-8 liter engines) for Volvo’s

global requirements.

Most countries in Europe will witness a change in emission norms which will upgrade from Euro – 3/4 to Euro 5/6.

Given the low cost base in VECV, Volvo will source its Medium Duty engine requirement from this JV.

Deutz currently supplies 4–8 litre engines to Volvo for CV and Construction Equipment. Apart from Volvo it supplies

engines to Renault Trucks and Buses. Volvo accounts for 30% of Deutz total revenues. Volvo sources its Heavy Duty

engines from Cummins, US.

Volvo holds 6.7% in Deutz, Germany (INR 2 bn) in comparison to 46% economic stake in VECV (INR 11 bn), which we

believe could be one more reason for Volvo selecting VECV for its Medium Duty Engine Project.

This will also bring in a huge advantage to Eicher trucks when India advances to Euro 5 and Euro 6 emission

standards. Currently India is in the Euro 3 stage.

VECV’s Medium Duty Engine Project for Volvo’s global requirements brings potential for similar large component

sourcing projects for Volvo’s global requirements within the CV space.

VECV is already producing about 50,000 engines per year in its existing Pithampur plant. The new investment in Pithampur

will result in an annual production capacity of an additional 85,000 engines; starting 2013. Of these 85,000 engines, a

significant number (30,000-40,000 base engines) could be sent to Volvo’s plant in Venissieux, France where these base

engines will be assembled for its Euro 5 and Euro 6 requirements, starting 2013.


ROYAL ENFIELD – RETURN OF THE JEDI

The brand “Royal Enfield” is associated with adjectives such as ‘rough & tough’, ‘cult’ and ‘distinctive’. This brand is targeted

towards well built class of people. Rising income coupled with favorable demographics, entry of global players like Harley

Davidson has further promoted this culture. The bikes of global players are too expensive and EM faces minimal competition in

its 350+ cc bikes. Thus Royal Enfield is well positioned to capitalize on the strong and growing demand for its products (6-8

months waiting period).

From October 2010, Royal Enfield has completely switched over from the old cast iron to the new all aluminum unit

construction engine (UCE) platform. The UCE platform has an integrated assembly for the engine, gear box and clutch and this

reduces the friction between the movable parts, resulting in lower transmission losses and higher fuel efficiency (from 30-35

km/l to 40-45 km/l). The company also moved gears and brake to conventional left hand side of the bike. Going forward, the

company will use this platform to introduce an entire new range of high end bikes. EM has completed planning of its new plant

of Royal Enfield and expects it be up and running from Q1CY13E. Production capacity will increase from the current 84,000

units to 1,50,000 units. The run rate for Royal Enfield has increased to ~7,000 units per month from ~4500 units per month

in 2010. We believe that new model introduction, restyling of products and addressing capacity concerns are likely to result in

strong volumes for the company going forward.

Royal Enfield - Volumes & Sales Growth

0

30000

60000

90000

120000

FY05 FY06 FY07 FY08 CY09 CY10 CY11 CY12E CY13E0%

10%

20%

30%

40%

50%

Volumes Growth

Source: Darashaw

CAPEX PLANS

EM’s capital expenditure for the next three years amounts to INR 11.3 bn. It plans to expand its Royal Enfield capacity to 150k

units by 2012-end with capex of INR 1.5 bn. CV capacity is also being expanded from annual 50k units to 100k units by 2015

end with capex of INR 5 bn. For the medium duty engine project VECV plans to invest INR 4.8 bn for additional capacity of

85k units.

Amount in INR bn Current

Capacity

Expanded

Capacity

Completion

Date CY12 CY13 CY14 Cumulative

CV 50,000 100,000 Dec’15 1.6 1.7 1.7 5.0

Engine Project 50,000 135,000 Dec’12 3.8 1.0 0.0 4.8

2 Wheeler 84,000 150,000 Dec’12 1.2 0.3 0.0 1.5

6.6 3.0 1.7 11.3

Source: Darashaw

We expect a 23% CAGR for Royal Enfield

volumes between CY11-13E driven by

strong demand and expanded capacity.


CASH RICH COMPANY

Total cash in subsidiary (VECV) is at INR 1.2 bn and INR 5 bn of cash is in the standalone business thus the total cash

amounts to INR 1.7 bn at the end of Q3CY11. Cash per share comes to INR 389 after adjusting for Volvo’s share in the JV.

STRONG FREE CASH FLOW GENERATION

EM is the best MHCV play in terms of free cash flow generation. The company has generated positive free cash flow every year

over last 5 years.

Eicher - Free Cash Flows (INR bn)

-2

-1

0

1

2

3

4

FY07 FY08 CY08 CY09 CY10 CY11E CY12E CY13E

Source: Company, Darashaw

TAMO (SA) - Free Cash Flows (INR bn)

-100

-75

-50

-25

0FY07 FY08 FY09 FY10 FY11

AL - Free Cash Flows (INR bn)

-12

-8

-4

0

4

FY07 FY08 FY09 FY10 FY11

Source: Company, Darashaw Source: Company, Darashaw

A perspective on quality of earnings vis-a-vis peers

TAMO (SA) AL EM

Figs. In INR bn FY08 FY09 FY10 FY11 FY08 FY09 FY10 FY11 FY08 CY08 CY09 CY10

Operating Cash Flow 56 7 90 112 10.7 (5.3) 10.9 5.9 0.8 (0.9) 3.7 3.4

Investing Cash Flow (54) (184) (77) (68) (8.1) (6.6) (7.8) (9.2) (0.6) 2.7 (2.7) (1.9)

Free Cash Flow 2 (177) 13 44 2.6 (11.9) 3.1 (3.3) 0.2 1.8 1.0 1.5

ROCE 21% 7% 11% 11% 26% 10% 15% 20% 15% 3% 11% 23%

Asset Turnover (x) 2.0 1.0 1.1 1.3 2.5 1.1 1.2 1.7 3.5 1.0 1.7 2.2

Debt / Equity (x) 0.7 1.0 1.1 0.9 0.4 0.7 1.0 1.0 0.5 0.2 0.1 0.1

Source: Darashaw

Negative FCF as large capex

incurred on the engine project


ROCE

0%

5%

10%

15%

20%

25%

30%

FY08 FY09 FY10 FY11TAMO AL Eicher

Source: Darashaw

Asset Turnover (x)

0.5

1.0

1.5

2.0

2.5

3.0

3.5


Source: Darashaw

Debt / Equity (x)

0.0

0.2

0.4

0.6

0.8

1.0

1.2


Source: Darashaw

EM - M&HCV (>12T)Market Share Movement

0%

1%

2%

3%

4%

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

H1FY

12

Source: Darashaw

AL - M&HCV (>12T)Market Share Movement

22%

24%

26%

28%

30%

32%

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

H1FY

12

Source: Darashaw

TAMO - M&HCV (>12T)Market Share Movement

65%

67%

69%

71%

73%

75%

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

H1FY

12

Source: Darashaw


STRONG REVENUE GROWTH FOR THE NEXT FIVE YEARS

EM is expected to witness robust growth rates over the next five years on the back of –

(a) Increase in VECV’s market share in the MHCV industry (it was just 3.6% in CY11)

(b) Increase in capacity from 84k to 150k for Royal Enfield bikes to meet the ever growing demand.

(c) Medium Duty engine project under VECV JV will give a further fillip to the JV’s revenue growth and help it emerge as a

potential candidate for further outsourcing opportunities of components to Volvo.

Summary of revenue forecast

Royal Enfield CY09 CY10 CY11 CY12E CY13E CY14E Volume 51,955 54,380 72,835 86,980 108,000 124,200 Growth 5% 34% 19% 24% 15% ASP 72,195 80,631 91,501 96,153 101,041 106,178 Growth 12% 13% 5% 5% 5% Revenue 3,751 4,385 6,665 8,363 10,912 13,187 Growth 17% 52% 25% 30% 21% VECV (T&B) CY09 CY10 CY11 CY12E CY13E CY14E Volume 25,192 39,285 49,043 55,502 64,932 78,005 Growth 56% 25% 13% 17% 20% ASP 717,517 735,227 825,206 866,466 909,789 955,279 Growth 2% 12% 5% 5% 5% Revenue 18,076 28,883 40,471 48,091 59,075 74,516 Growth 60% 40% 19% 23% 26% Engine Project CY09 CY10 CY11 CY12E CY13E CY14E Volume 0 0 0 0 25,000 43,750 Growth 75% ASP 150,000 150,000 Growth 0% Revenue 3,750 6,563 Growth 75% Trading CY09 CY10 CY11 CY12E CY13E CY14E Revenue 7,560 10,703 9,219 10,141 11,155 12,270 Growth 42% -14% 10% 10% 10% Consolidated CY09 CY10 CY11 CY12E CY13E CY14E Revenue 29,386 43,971 56,354 66,595 84,892 106,536 Growth 50% 28% 18% 27% 25%

Source: Darashaw

Segment-wise revenue break-up

13% 10% 12% 13% 13%

62% 66% 72% 72% 70% 70%

4% 6%26% 24% 16% 15% 13% 12%

12%

CY09 CY10 CY11 CY12E CY13E CY14E

Royal Enfield VECV (T&B) Engine Project Trading Source: Darashaw


MARGINS TO STABILISE AT CURRENT LEVELS

Improved value proposition through better technology and higher acceptance of products is leading to reduction in expenses

related to warranties and incentives which has resulted in margin expansion across all product segments. We believe the low

hanging fruits have already been picked in terms of reducing the expenses relating to warranties and incentives and we do not

expect further margin expansion. TAMO’s expense on warranty and incentives as percent of revenue have risen in recent

years as the incumbent tries to protect its turf in the light of increasing competition. The figure stood at 5.1% for EM in FY08.

EM has already reduced this figure to 2.6% which is as low as TAMO’s 2.5%, therefore we do not see a significant reduction

from here on.

EM

2.6%

5.5%

10.5%

5.1%3.5%

5.1%8.7%

FY08 CY09 CY10 CY11

Warranty + Incentives as % of Revenue EBITDA Margins

TAMO (SA) Warranty + Incentives as % of Revenue

2.1%2.0%

2.5%

2.7%

1.9%1.7%

1.7%

2.5%

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Source: Company, Darashaw Source: Company, Darashaw

Reduction in proportion of revenues from low margin trading business of Volvo branded trucks and buses has also contributed

to the margin expansion in CY11E. We believe trading business which caters to truck demand within mining will grow at a

slower rate than the manufactured business, where VECV is growing faster and capturing market share. Hence the current

expanded margins in VECV are sustainable.

VECV’s low cost structure will provide substantial opportunity for Volvo to source its medium duty engine requirements at

reduced costs. Given lower employee costs in India, VECV has potential to beat Deutz, Germany which has 9.5% EBITDA

margins. Cummins India which is the leader in engine manufacturing in India and Greaves Cotton, both companies make 21%

EBITDA margins. We have not modeled higher margins for the engine segment and have kept them at the company level. As

the outsourcing project commences, we would revise our margins accordingly. Hence, higher margins from the engine project

segment provides for upside risks to our estimates.

Comparative cost structure

Deutz (CY2010)

66%

21%

5%8%

Cummins India (FY11)

65%6%

7%

21%

RM Employees Other Costs EBITDA

Greaves Cotton (FY11)

63%

7%

3%

21%

* For Greaves Cotton: Only Engine segment is taken into consideration. Source: Darashaw


CONCERNS

CYCLICAL NATURE OF THE INDUSTRY

The CV industry is cyclical in nature characterized by a steep rise and fall in demand growth. Moderation in the economic

activity, high interest rates and rising fuel prices are pressurizing the profitability of fleet operators which could consequently

lead to lower CV demand for FY13E, after two years of strong growth. We expect the domestic CV industry to register just 9%

CAGR over FY12-14E vs 33% over FY09-11. We have assumed the industry’s domestic volume growth at just 7% in FY13E

and at 10% in FY14E in the light of economic uncertainties especially on the industrial growth front.

Cyclicity of CV Industry

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

FY16E

Source: Darashaw

INCREASE IN RAW MATERIAL PRICES

Escalation in steel prices under weak demand environment will result in inability to increase vehicle prices affecting margins.

Steel, aluminum and rubber are the primary raw materials for EM. Sharp increase in commodity prices could hurt margins.

Domestic prices of commodities have largely remained stagnant in recent months inspite of a correction in international prices

owing to the depreciating rupee which has negated the benefits of lower commodity prices.

Steel CR Coils 1 mm: Delhi (INR/Kg)

20

25

30

35

40

45

50

55

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Aluminum Wire Rod : Mumbai (INR/Kg)

60

80

100

120

140

160

180

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: Darashaw Source: Darashaw


COMPETITION

The influx of global giants in CV industry (Daimler, Navistar, MAN and Scania) is all set to change the dynamics of the CV

industry, from being largely duopolistic in nature till now. However, VECV (backed by Volvo) together with a strong balance

sheet (unlike its peers) is better placed to withstand competitive pressures, in our view.

Incumbents loosing market share in MHCV (>12T)

6.4%4.6%4.9%4.2%

2.1%

8.8%

FY07 FY08 FY09 FY10 FY11 H1FY12

Others TAMO+AL

Source: Darashaw

LACK OF A FINANCING ARM

As most of the CV purchases are financed (around 95%), an in-house financing arm improves the acceptance of products.

Both the leading players – Tata Motors and Ashok Leyland have a captive financing arm. EM has tie-ups with various financing

institutions for financing its trucks but in our view, self financing arm would have been an added advantage for the company.


VALUATION

We believe EM has taken right steps in the right direction and the initial success signs are visible. Considering the robust

earnings growth and strong balance sheet, we believe EM’s growth story will manifest over the next five to six years. We see

significant potential upsides in the stock over the long run.

Our one year out fair value for EM is at INR 2,118 based on SOTP value comprising –

1. VECV JV core EPS valued at 11.3x CY13E P/E, which is AL’s (Ashok Leyland’s) historical mean multiple. We have been

conservative and not given premium valuations to EM vis-à-vis AL although one could argue that EM deserves on the

back of its fast improving competitive position, stronger balance sheet and better cash flows as compared to AL (INR

1,164/share)

2. Two wheelers core EPS valued at 12.6x CY13E P/E, a 10% discount to industry leader HMCL’s historical mean

multiple of 14.0x, on comparatively lower efficiency of Royal Enfield (INR 663)

3. Net Cash and equivalents of INR 16 bn taken at a 25% discount (INR 292). (Excluding Volvo’s 46% stake)

SOTP Valuation – One year out (Dec 2012)

Method Multiple CY13 EPS Value / Share Contribution

VECV JV P/E 11.3 103 1,164 55%

Two Wheelers P/E 12.6 53 663 31%

Net Cash P/B 0.75 292 14%

Fair Value SOTP 2,118 100%

Long term outlook ~ Stock can double in 3 years

We believe EM can double over the next three years. We have assumed the following key (conservative) parameters for

arriving at our fair value –

Domestic CV industry growth rate of 11% for the 3 year period FY12E-15E v/s 15% for the period FY04-11.

EM’s MHCV (>12T) market share to reach 7.5% by FY16E v/s Management’s guidance of 15%. (Stood at 3.6% as on

CY11 end)

Valued VECV at AL’s Mean P/E ratio of 11.3x. Valued Royal Enfield at 10% discount to HMCL’s Mean P/E ratio of 14.0x.

Ignored any likely margin benefits from the higher margin engine project which commences operations in CY13.

SOTP Valuation – Three years out (Dec 2014)

Method Multiple CY15 EPS Value / Share Contribution

VECV JV P/E 11.3 195 2,200 65%

Two Wheelers P/E 12.6 69 871 26%

Net Cash P/B 0.75 292 292 9%

Value 3,362 100%

Eicher Motors Ltd

Profit & Loss CY10 CY11 CY12E CY13E CY14E Balance Sheet CY10 CY11 CY12E CY13E CY14E

Net Sales 43971 56775 66595 84892 106536

Change in stock 0 0 0 0 0 Equity 269 269 269 269 269

VoP 43971 56775 66595 84892 106536 Reserves & Surplus 12052 16536 21384 27325 35252

Other operating inc 1,276 1,769 1,828 2,199 2,757 Networth 12321 16806 21654 27594 35522

Income 45247 58545 68423 87091 109293

Debt 956 0 0 0 0

Expenditure 40402 51227 59921 76546 95526 Minority Interest

Raw Materials 33147 41859 48933 62539 77948 Sources of Funds 20052 25466 32345 40893 52430

Employee 2631 3397 3985 5080 6375

Other Exp 4624 5970 7003 8927 11203 Application of Funds 20052 25466 32345 40893 52430

EBIDTA 4845 7318 8502 10545 13767 Gross Fixed Assets 8113 10241 16888 20776 22789

Less Acc. Depreciation 4269 4904 5951 7239 8652

Depreciation 573 635 1047 1288 1413 Net Fixed Assets 3844 5337 10937 13537 14137

EBIT 4272 6683 7455 9257 12354 Capital WIP 703 0 0 0 0

Interest 95

77

-

-

-

Investments 4586 5503 6053 6659 7325

Non-Operating income 0 0 0 0 0

Extra-ordinary income 0 0 0 0 0 Inventories 3265 4188 4896 6215 7775

Extra-ordinary exp 0 0 0 0 0 Debtors 2609 2902 3040 3642 4571

Cash 12457 16322 17253 23085 34009

PBT 4,177 6,606 7,455 9,257 12,354 Loans & Advances 1814 2197 2490 3038 3686

Current Assets 20500 26001 28109 36453 50561

Tax 1,108 1,617 1,976 2,453 3,274

Current Liabilities 7942 9446 10583 13110 16375

PAT 3069 4989 5479 6804 9080 Provisions 1391 1746 2063 2622 3296

Minority Interest 1179 1886 2031 2608 3609 Current Liabilities & Prov 9332 11192 12645 15733 19671

PAT 1889 3103 3449 4196 5472

Adj. EPS 70 115 128 156 203 Non-Current Liabilities 249 182 109 23 (79)

Eicher Motors Ltd

Ratios CY10 CY11 CY12E CY13E CY14E FCFF CY10 CY11 CY12E CY13E CY14E

Sales Growth 50% 29% 17% 27% 25% EBIT 4272 6683 7455 9257 12354

Income Growth 49% 29% 17% 27% 25% Less Adj. Taxes 1133 1636 1976 2453 3274

EBIDTA Growth 94% 51% 16% 24% 31% NOPLAT 3138 5047 5479 6804 9080

Adj. PAT Growth 150% 64% 11% 22% 30% Inc / (Dec) in WC 466 187 74 115 58

EPS Growth 150% 64% 11% 22% 30% Operating Cash Flow 2672 4861 5406 6689 9022

Raw Materials 75% 74% 73% 74% 73% Inc / Dec in other op assets (108) 67 73 86 102

Employee 6% 6% 6% 6% 6% Net Capex 682 857 5673 2686 702

Other Exp 11% 11% 11% 11% 11% Net Investment 1148 1043 5747 2801 760

EBITDA Margin 8.7% 10.5% 10.6% 10.4% 0.0%

Depreciation rate 7% 6% 6% 6% 6% Free Cash Flow to Firm 1990 4004 (268) 4003 8320

EBIT margin 9% 11% 11% 11% 11%

Non-Operating cash flow 0 0 0 0 0

Other income to PBT 31% 27% 25% 24% 22%

Tax Rate 27% 24% 27% 27% 27% Cash flow to investors 1990 4004 (268) 4003 8320

PAT Margin 4% 5% 5% 5% 5%

Finaning Cash Flow 1990 4004 (268) 4003 8320

PAT / Sales 4% 5% 5% 5% 5% Dividend (adj for inc/dec in prov) 200 383 505 631 864

Sales / Assets 2.2 2.2 2.1 2.1 2.0 Equity buyback/(issue) (88) 0 0 0 0

Avg. Net Assets / Avg. Equity 1.6 1.5 1.5 1.5 1.5 After-tax Interest 70 58 0 0 0

Dupont RoE 15% 18% 16% 15% 15% Debt Repayment/(issue) 307 956 0 0 0

Inc/(Dec) in Non-op Investments 1645 917 550 605 666

RoE 15% 18% 16% 15% 15% Inc/(Dec) in Excess Cash 932 3576 707 5375 10399

RoCE 21% 26% 23% 23% 24% Inc/(Dec) in Non-op L&A (49) 0 0 0 0

Eicher Motors Ltd

Important Disclosure

This material has been prepared by Darashaw & Co Pvt Ltd, Mumbai, India (www.darashaw.com).

The views expressed herein correctly reflect our views. The company, its directors, and clients hold long position in the

stock of the company as on the date of the report.

The information contained herein is confidential and is intended solely for the addressee(s). Any unauthorized access,

use, reproduction, disclosure or dissemination is prohibited. This information does not constitute or form part of and

should not be construed as, any offer for sale or subscription of or any invitation to offer to buy or subscribe for any

securities. The information and opinions on which this communication is based have been complied or arrived at from

sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to

their accuracy, correctness and are subject to change without notice. © Darashaw & Co. Pvt. Ltd., 2012

eicher motors

Documents

exists significant headroom

eicher engineering solutions

strong balance sheet

high interest rates

volvos proven technology

free cash flows

vecvs market share

market share movement