14
August 2, 2016 ICICI Securities Ltd | Retail Equity Research Result Update Outperformance on margin front continues... Eicher Motors reported its Q1FY17 numbers in which standalone numbers (Royal Enfield business) were above our estimates. Post adoption of Ind AS, VECV, considered as a subsidiary under Indian GAAP is now a joint controlled entity. Hence, it was consolidated under equity method (line by line consolidation has been replaced by single line item of profit from joint venture in consolidated P&L) Standalone revenues (RE-Royal Enfield) for Q1FY17 came in at | 1557 crore (up 42.1% YoY, 1% QoQ), almost in line with our estimates of | 1564 crore. ASP grew 1.3% QoQ (our estimate: 1.5%) to | 1,18,736. VECV revenues came in at | 2139 crore (up 20% YoY, down 1.1% QoQ) lower than our estimates of | 2252 crore, with the miss attributable to lower than estimated ASPs The RE (standalone) business reported strong margins of 30.8% (up 474 bps YoY, 116 bps QoQ) above our estimate of 28.3% mainly on account of gross margin expansion of 409 bps YoY, 120 bps QoQ & other expenses to sales down 79 bps QoQ. The VECV business EBITDA grew 33% YoY, 9% QoQ to 194 crore (our estimate: | 173 crore) with strong margins of 9.1% (our estimate: 7.5%) Consequently, standalone PAT grew 69.6% YoY, down 15.2% QoQ to | 337 crore vs. our estimate of | 304 crore. Consolidated PAT grew 58.6% YoY, 4.6% QoQ to | 376 crore vs. our estimate of | 331 crore RE business going from strength to strength! RE has a multi-pronged strategy to continue its growth momentum. 1) Capacity expansion:-EML has maintained its production guidance of 675,000 for FY17 and the third plant at Vallam Vadagal will take total capacity to 900,000 units in CY18, 2) Dealer expansion:- With the dealership in smaller towns turning viable, the company continues to increase its dealer network. EML plans to add 100 dealers in FY17E. 3) New launch - EML has added a niche product (The Himalayan-an LS 411 cc tailored for mountain motorcycling) to its product portfolio, 4) EML is looking to capture the under-penetrated 250-750 cc market globally and has already opened exclusive stores in Colombia, two in UK, one each in UAE, France, Spain and Indonesia. VECV to benefit from impending growth in distribution vehicles In FY14-16, the growth in the domestic MHCV industry has been driven by the heavy duty multi-axle vehicle (MAV) and tractor trailer segment. VECV has underperformed industry growth mainly due to concentration of VECV’s product portfolio towards intermediate commercial vehicle (ICV-7.5-12 tonne), which are mainly used as distribution vehicles. ICV forms ~39% of VECV’s product portfolio. Going ahead, we expect the next phase of growth in MHCV to come from medium duty vehicles due to the trickle-down effect, which will benefit VECV the most as it is a market leader in the ICV segment. Strong growth & high margins demand rich valuations EML has justifiably commanded a premium over other auto OEs as RE’s business is in full throttle and VECV reaps the benefits of an economic revival. We maintain peer valuation parameters (relative valuation vis-à- vis HOG’s high growth phase) and ascribe a multiple of 32xFY18E EPS for RE, VECV at 11x FY17E EV/EBITDA, respectively, to arrive at an SOTP target price of | 25000. We have a BUY recommendation on the stock with an upside potential of ~12%. Rating matrix Rating : Buy Target : | 25000 Target Period : 12 months Potential Upside : 12% What’s Changed? Target Changed from | 22500 to | 25000 EPS FY17E Changed from | 608.2 to 661.4 EPS FY18E Changed from | 733.2 to 813.2 Rating Unchanged Quarterly Performance Q1FY17 Q2FY16 YoY (%) Q5FY16 QoQ (%) Revenue 1,557.0 1,096.0 42.1 1,545.0 0.8 EBITDA 480.0 286.0 67.8 458.0 4.8 EBITDA (%) 30.8 26.1 474 bps 29.6 116 bps PAT 337.0 199.0 69.3 398.0 -15.3 Change in accounting year, FY16E is a 15 month period Key Financials | Crore CY14 FY16 FY17E FY18E Net Sales 8,599 15,429 16,796 20,229 EBITDA 1,115 2,447 3,121 3,820 Net Profit 615 1,278 1,787 2,196 EPS (|) 227.1 471.5 661.4 813.2 * Change in accounting year, FY16E is a 15 month period Valuation summary CY14 FY16 FY17E FY18E P/E (x) 98.2 47.3 33.7 27.4 Adj. EV/E (x) 182.9 126.0 71.3 31.6 Tgt.Adj.EV/E(x) 162.9 112.3 63.6 28.2 P/BV (x) 24.0 17.4 12.6 9.4 RoNW (%) 24.5 36.9 37.4 34.2 RoCE (%) 24.5 42.4 42.5 39.7 * Change in accounting year, FY16E is a 15 month period Stock data Particular Amount Market Capitalization | 60232.3 Crore Total Debt (FY16) | 85.9 Crore Cash and Investments (FY16) | 582.7 Crore EV (FY16) | 59735.4 Crore 52 week H/L (|) 22854 / 14800 Equity capital (| crore) | 27 Crore Face value (|) | 10 Price performance (%) 1M 3M 6M 12M Eicher Motors Ltd 16.5 11.4 30.8 17.1 Tata Motors Ltd 11.0 24.5 50.1 32.4 M&M Ltd 0.5 10.5 19.9 7.8 Eicher Motors (EICMOT) | 22300 Research Analyst Nishit Zota [email protected] Vidrum Mehta [email protected]

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Page 1: Eicher Motors (EICMOT) - ICICI Directcontent.icicidirect.com/mailimages/IDirect_EicherMotors_Q1FY17.pdf · • Eicher Motors reported its Q1FY17 numbers in which standalone numbers

August 2, 2016

ICICI Securities Ltd | Retail Equity Research

Result Update

Outperformance on margin front continues... • Eicher Motors reported its Q1FY17 numbers in which standalone

numbers (Royal Enfield business) were above our estimates. Post adoption of Ind AS, VECV, considered as a subsidiary under Indian GAAP is now a joint controlled entity. Hence, it was consolidated under equity method (line by line consolidation has been replaced by single line item of profit from joint venture in consolidated P&L)

• Standalone revenues (RE-Royal Enfield) for Q1FY17 came in at | 1557 crore (up 42.1% YoY, 1% QoQ), almost in line with our estimates of | 1564 crore. ASP grew 1.3% QoQ (our estimate: 1.5%) to | 1,18,736. VECV revenues came in at | 2139 crore (up 20% YoY, down 1.1% QoQ) lower than our estimates of | 2252 crore, with the miss attributable to lower than estimated ASPs

• The RE (standalone) business reported strong margins of 30.8% (up 474 bps YoY, 116 bps QoQ) above our estimate of 28.3% mainly on account of gross margin expansion of 409 bps YoY, 120 bps QoQ & other expenses to sales down 79 bps QoQ. The VECV business EBITDA grew 33% YoY, 9% QoQ to 194 crore (our estimate: | 173 crore) with strong margins of 9.1% (our estimate: 7.5%)

• Consequently, standalone PAT grew 69.6% YoY, down 15.2% QoQ to | 337 crore vs. our estimate of | 304 crore. Consolidated PAT grew 58.6% YoY, 4.6% QoQ to | 376 crore vs. our estimate of | 331 crore

RE business going from strength to strength! RE has a multi-pronged strategy to continue its growth momentum. 1) Capacity expansion:-EML has maintained its production guidance of 675,000 for FY17 and the third plant at Vallam Vadagal will take total capacity to 900,000 units in CY18, 2) Dealer expansion:- With the dealership in smaller towns turning viable, the company continues to increase its dealer network. EML plans to add 100 dealers in FY17E. 3) New launch - EML has added a niche product (The Himalayan-an LS 411 cc tailored for mountain motorcycling) to its product portfolio, 4) EML is looking to capture the under-penetrated 250-750 cc market globally and has already opened exclusive stores in Colombia, two in UK, one each in UAE, France, Spain and Indonesia. VECV to benefit from impending growth in distribution vehicles In FY14-16, the growth in the domestic MHCV industry has been driven by the heavy duty multi-axle vehicle (MAV) and tractor trailer segment. VECV has underperformed industry growth mainly due to concentration of VECV’s product portfolio towards intermediate commercial vehicle (ICV-7.5-12 tonne), which are mainly used as distribution vehicles. ICV forms ~39% of VECV’s product portfolio. Going ahead, we expect the next phase of growth in MHCV to come from medium duty vehicles due to the trickle-down effect, which will benefit VECV the most as it is a market leader in the ICV segment. Strong growth & high margins demand rich valuations EML has justifiably commanded a premium over other auto OEs as RE’s business is in full throttle and VECV reaps the benefits of an economic revival. We maintain peer valuation parameters (relative valuation vis-à-vis HOG’s high growth phase) and ascribe a multiple of 32xFY18E EPS for RE, VECV at 11x FY17E EV/EBITDA, respectively, to arrive at an SOTP target price of | 25000. We have a BUY recommendation on the stock with an upside potential of ~12%.

Rating matrix Rating : BuyTarget : | 25000Target Period : 12 monthsPotential Upside : 12%

What’s Changed?

Target Changed from | 22500 to | 25000EPS FY17E Changed from | 608.2 to 661.4EPS FY18E Changed from | 733.2 to 813.2Rating Unchanged

Quarterly Performance

Q1FY17 Q2FY16 YoY (%) Q5FY16 QoQ (%)Revenue 1,557.0 1,096.0 42.1 1,545.0 0.8EBITDA 480.0 286.0 67.8 458.0 4.8EBITDA (%) 30.8 26.1 474 bps 29.6 116 bpsPAT 337.0 199.0 69.3 398.0 -15.3

Change in accounting year, FY16E is a 15 month period Key Financials | Crore CY14 FY16 FY17E FY18ENet Sales 8,599 15,429 16,796 20,229 EBITDA 1,115 2,447 3,121 3,820 Net Profit 615 1,278 1,787 2,196 EPS (|) 227.1 471.5 661.4 813.2

* Change in accounting year, FY16E is a 15 month period Valuation summary

CY14 FY16 FY17E FY18EP/E (x) 98.2 47.3 33.7 27.4 Adj. EV/E (x) 182.9 126.0 71.3 31.6 Tgt.Adj.EV/E(x) 162.9 112.3 63.6 28.2 P/BV (x) 24.0 17.4 12.6 9.4 RoNW (%) 24.5 36.9 37.4 34.2 RoCE (%) 24.5 42.4 42.5 39.7

* Change in accounting year, FY16E is a 15 month period Stock data Particular AmountMarket Capitalization | 60232.3 CroreTotal Debt (FY16) | 85.9 CroreCash and Investments (FY16) | 582.7 CroreEV (FY16) | 59735.4 Crore52 week H/L (|) 22854 / 14800Equity capital (| crore) | 27 CroreFace value (|) | 10

Price performance (%)

1M 3M 6M 12MEicher Motors Ltd 16.5 11.4 30.8 17.1Tata Motors Ltd 11.0 24.5 50.1 32.4M&M Ltd 0.5 10.5 19.9 7.8

Eicher Motors (EICMOT) | 22300

Research Analyst

Nishit Zota

[email protected]

Vidrum Mehta

[email protected]

Page 2: Eicher Motors (EICMOT) - ICICI Directcontent.icicidirect.com/mailimages/IDirect_EicherMotors_Q1FY17.pdf · • Eicher Motors reported its Q1FY17 numbers in which standalone numbers

ICICI Securities Ltd | Retail Equity Research Page 2

Variance analysis (standalone) Q1FY17 Q1FY17E Q2FY16 YoY (%) Q5FY16 QoQ (%) Comments

Total Operating Income 1,557 1,564 1,096 42.1 1,545 0.8 Marginal miss on estimates due to lower than estimated ASPRaw Material Expenses 810 847 614 31.8 822 -1.5Purchase of traded goods 21 2 13 68.9 20 5.3Employee Expenses 87 86 65 32.9 74 16.6Other expenses 161 188 118 35.8 171 -6.1

EBITDA 480 442 286 67.9 458 4.8EBITDA Margin (%) 30.8 28.3 26.1 474 bps 29.6 116 bps Higher than estimates on account of gross margin expansion of 409 bps YoY, 120 bps

QoQ & other expense to sales lower by 79 bps QoQOther Income 47 26 26 79.0 127 -63.0Depreciation 39 33 22 75.5 37 5.1Interest 1 1 0 140.7 1 14.0Total Tax 150 130 90 65.4 149 0.4PAT 337 304 199 69.6 398 -15.2 PAT came in higher than estimates due to margin expansionKey MetricsRoyal Enfield ASP(|) 118,736 119,016 115,589 2.7 117,257 1.3VECV ASP (| lakhs) 13.3 14.0 14.7 -9.2 13.7 -2.9 Lower than estimates due to poor product mix

Source: Company, ICICIdirect.com Research Change in estimates (consolidated)

(| Crore) Old New % Change Old New % Change CommentsRevenue 16,674 16,796 0.7 20021 20,229 1.0 Topline estimates revised marginallyEBITDA 2,955 3,121 5.6 3570 3,820 7.0EBITDA Margin (%) 17.7 18.6 86 bps 17.8 18.9 105 bps Upward revision of margins as we have revised our RE margins upwards. We have also

revised our VECV margins upwards on account of high capacity utilisation and as we expect strong growth in the ICV segment

PAT 1,643 1,787 8.7 1980 2,196 10.9 Estimates revised as we have increased our margin estimatesEPS (|) 608 661 8.8 733 813 10.9

FY17E FY18E

Source: Company, ICICIdirect.com Research * Change in accounting year, FY16E is a 15 month period Assumptions

Current Earlier CommentsCY14 FY16E* FY17E FY18E FY17E FY18E

Royal Enfield volumes 302601 600175 665620 769027 675016 779650 Volume estimates revised post Q1FY17 volume numbersRoyal Enfield ASP/unit (|) 109,177 115,923 120,939 125,892 120,599 125,530VECV volumes 40,978 63,104 66,240 75,643 64,361 74,008 We expect strong growth in ICV segment, where VECV is a market leaderVECV ASP/unit (| lakh) 13.5 14.5 14.4 15.2 14.5 15.1

Source: Company, ICICIdirect.com Research * Change in accounting year, FY16E is a 15 month period

Page 3: Eicher Motors (EICMOT) - ICICI Directcontent.icicidirect.com/mailimages/IDirect_EicherMotors_Q1FY17.pdf · • Eicher Motors reported its Q1FY17 numbers in which standalone numbers

ICICI Securities Ltd | Retail Equity Research Page 3

Key conference call takeaways • Eicher Motor’s (EML) ‘Royal Enfield’ (RE) volumes for Q1FY17 grew

38.3% YoY to 147,483 units • The phase II of the Oragadam facility has become operational and

work on third plant at Vallam Vadagal has started. The company has retained its production guidance of 675,000 for FY17E and 900,000 for CY18, FY19E

• On an average, the waiting period of the RE is about three months.

Same store sales growth was ~15% YoY • The company is expanding its dealership network with the current

dealer count at 566 dealers pan India. • MDEP engine volumes stood at 4622 units (6.2% YoY) • The new 400 cc Himalayan motorcycle has been launched pan-India

with a monthly run rate of >1000 units • The last price hike in RE was taken in January 2016 (no price hike in

Q1FY17) • For FY17E, VECV would be investing | 400 crore towards product

development and capacity expansion • At present, EML has a network of ~60 dealers having presence across

eight states for its product Multix • For Q1FY17, VECV volumes grew 32.5% YoY to 16070 units

According to the management, VECV has reported strong volume growth and witnessed significant improvement in market share across segments

Page 4: Eicher Motors (EICMOT) - ICICI Directcontent.icicidirect.com/mailimages/IDirect_EicherMotors_Q1FY17.pdf · • Eicher Motors reported its Q1FY17 numbers in which standalone numbers

ICICI Securities Ltd | Retail Equity Research Page 4

Company Analysis Our demographic analysis reveals that in the coming decade (2021) we could witness the share of the 15-40 years age population declining to 60% from 64% of total driveable population (>15<70 years). We observe that the first generation Splendor (Launched 1994) driving population (15>) would have been born <1980s. The same generation in 2014 would be aged ~ 34+ highlighting that as we move into 2021 the same class of buyers would be >42+. We assume that a bulk of 2-W drivers would be young (15-40 years). Thus, we interpret the fact that as we move into the next decade bulk of the young population i.e. (>15<30 years- Gen Z) would have been born in nineties and beyond, thereby having vastly different purchase habits and priorities (e.g. mileage/affordability vs. brand perception/comfort to their fathers (born <1980’s- Gen Y). Royal Enfield (RE), the world’s oldest active motorcycle brand, with its uniquely classical and powerful bikes, was always a cult among bike lovers. However, in the recent past, the new India emerging higher middle class have taken to it with few comparables. Exhibit 1: Young India to be big buyer class in next decade

30 24 20

2728

27

1415

15

18 21 22

5 5 6

5 7 9

0%

20%

40%

60%

80%

100%

2011 2016 20210 year> 15 year> 30 year> 40 year> 60 year> 70 year>

Source: Company, CIA World Fact book, ICICIdirect.com Research Assumed 1.25% CAGR population growth

Exhibit 2: Shift in popular products preferences from Gen Y to Gen Z

Source: Company, ICICIdirect.com Research

Page 5: Eicher Motors (EICMOT) - ICICI Directcontent.icicidirect.com/mailimages/IDirect_EicherMotors_Q1FY17.pdf · • Eicher Motors reported its Q1FY17 numbers in which standalone numbers

ICICI Securities Ltd | Retail Equity Research Page 5

Strong performance from “cult” RE, as volumes grow exponentially…

Acquired by the Eicher group in 1993, the company has made investments to build state-of-the-art manufacturing and product development facilities, a wide marketing network and develop a riding culture centred around leisure and adventure, thereby becoming the market leader in the premium motorcycle segment in India. RE’s volume CAGR over CY09-FY16 has been an astonishing 48%, albeit on a small base. However, large unfulfilled demand for RE products, especially in the 350 cc segments, makes us positive on the sustenance of growth as capacity expands. With newer product launches and export markets likely to be tapped, demand is likely to outstrip supply even with expanded capacity (~9 lakh units in CY18E). With a strong brand presence and long waiting periods, RE’s pricing power coupled with economies of scale have ensured that margins have remained on an uptrend. Going ahead, we expect margins to stabilise upwards of ~30% in FY17E, FY18E.

VECV contribution to profit to remain meaningful Eicher and Volvo entered into a 50:50 JV in 2008 to which Eicher moved its truck & bus business. Also, Volvo invested | 1082 crore in the JV and added its HD trucks distribution business for a 45.6% stake. In the ensuing five years, the JV, VECV trucks outpaced industry growth, increasing market share to ~13% from 9% in FY08. In the bus segment (>5 T), VECV has doubled its market share to ~12%. On the financial front, VECV’s performance has been best in the industry with margins declining to ~5% when margins of its peers dropped to the negative territory (down ~5% for Ashok Leyland and Tata Motors). VECV now has a strong distribution network comparable with incumbents – Tata Motors, Ashok Leyland. The VECV brand name has established itself among fleet owners while the launch of the new state-of the art Pro-series trucks would catalyse market share gains in coming years. Going ahead, we build in improvement in margins from current levels to ~9.5%, 10% in FY17E, FY18E, respectively, on the back of a better product mix and higher utilisation levels.

Exhibit 3: Royal Enfield growth trajectory

636

746

671 3,

031

961

1,09

7

1,30

1

1,54

5

6,18

8

7,17

0 8,62

6

643

741

728 3,

026

920

1,06

6

1,27

6

1,25

7

6,00

2

6,65

6

7,69

0

1,04

91,

134

23.124.9

12.1

24.226.4 27.7 28.6 28.0

30.4 30.4

13.9

26.1

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Q1CY14 Q3CY14 CY14 Q2FY16 Q4FY16 FY17E

Reve

nue

(| c

rore

) / V

olum

e (1

00s)

-

5

10

15

20

25

30

35

(%)

Total Operating Income Volume ('100s) EBITDA Margin (%)

* Change in accounting year, FY16E is a 15 month period Source: Company press release, ICICIdirect.com Research

Page 6: Eicher Motors (EICMOT) - ICICI Directcontent.icicidirect.com/mailimages/IDirect_EicherMotors_Q1FY17.pdf · • Eicher Motors reported its Q1FY17 numbers in which standalone numbers

ICICI Securities Ltd | Retail Equity Research Page 6

Strong overall financial performance

With an increase in competitive intensity amid cyclical weakness in the ICV segment of M&HCV, VECV’s performance has dropped off in the past two years. However, RE’s strong performance has offset the weakness in the truck & bus segment. In our view, VECV’s performance is likely to improve with the recovery in the domestic M&HCV industry. We expect the topline to grow at ~14.5% CAGR in FY16-18E (FY16E is a 15 month fiscal) while PAT is likely to grow at ~31.1% CAGR in FY16-FY18E as margins improve from 15.9% in FY16 to 18.9% in FY18E. Exhibit 5: Overall financial summary

6,39

0

6,81

0

8,73

8

15,6

89

17,1

16

20,5

71

324

394

615 1,27

8

1,78

7

2,19

68.6

10.5

12.8

15.6

18.2 18.6

0

3000

6000

9000

12000

15000

18000

21000

24000

CY12 CY13 CY14 FY16 FY17E FY18E

(| c

rore

)

0

2

4

6

8

10

12

14

16

18

20

(%)

Total Operating Income PAT EBITDA Margin

* Change in accounting year, FY16E is a 15 month period Source: Company, ICICIdirect.com Research

Exhibit 4: VECV volumes, contribution to overall EBITDA

49

41 41

76

63.1

66

73.5

56.0

34.229.3 30.2 31.3

-

10

20

30

40

50

60

70

80

CY12E CY13 CY14 FY16E FY17E FY18E(0

00's)

-

10

20

30

40

50

60

70

80

(%)

VECV volumes(000's) Contribution to overall EBITDA

* Change in accounting year, FY16E is a 15 month period Source: Company press release, ICICIdirect.com Research

Page 7: Eicher Motors (EICMOT) - ICICI Directcontent.icicidirect.com/mailimages/IDirect_EicherMotors_Q1FY17.pdf · • Eicher Motors reported its Q1FY17 numbers in which standalone numbers

ICICI Securities Ltd | Retail Equity Research Page 7

Return ratios remain on uptrend margins, profitability improve

With Royal Enfield’s strong franchisee driving profitability, the overall business has been able to maintain decent return ratios despite the weakness in the VECV side of the business, which had seen a sharp drop in capacity utilisation levels. Going ahead, as RE volumes ramp up in the new facility, coupled with a better performance from VECV on a revival in industrial activity levels, return ratios are likely to remain on the uptrend.

Exhibit 6: Operating margin; raw material cost trends

12.856.0

5

7

9

11

13

15

17

19

21

Q1CY

13

Q2CY

13

Q3CY

13

Q4CY

13

Q1CY

14

Q2CY

14

Q3CY

14

Q4CY

14

CY14

FY16

E

FY17

E

FY18

E

(%)

45

47

49

51

53

55

57

59

61

63

65

(%)

OPM (LHS) RM/Net Sales Contribution

* Change in accounting year, FY16E is a 15 month period Source: Company press release, ICICIdirect.com Research

Exhibit 7: Return ratio profile

17.0

18.5

18.3

24.5

42.4 42.539.7

19.2

24.5

36.9 37.434.2

12

17

22

27

32

37

42

47

CY12 CY13 CY14 FY16 FY17E FY18E

(%)

RoCE RoE

* Change in accounting year, FY16E is a 15 month period Source: Company press release, ICICIdirect.com Research

Page 8: Eicher Motors (EICMOT) - ICICI Directcontent.icicidirect.com/mailimages/IDirect_EicherMotors_Q1FY17.pdf · • Eicher Motors reported its Q1FY17 numbers in which standalone numbers

ICICI Securities Ltd | Retail Equity Research Page 8

Outlook and valuation Eicher’s business performance has been strong with Royal Enfield seeming unfazed by the slowdown in the Indian economy. With Indians lapping up cruiser bikes from Royal Enfield and witnessing huge waiting periods, RE has now enhanced its capacity and looks set to make hay as the proverbial sun continues to shine. We believe RE is set to trace a similar path to Harley-Davidson’s (HOG) high growth phase (1998-2003). During this period where topline, bottomline grew ~2.5x, ~3.5x with EBITDA margins expanding from ~19% to ~27% and RoEs improved from 23% to 29%, respectively, HOG’s average valuations were >30x on one-year forward basis/PEG for two-year forward averaged ~0.6x (1998-2003). Prior to this high growth phase, HOG was able to grow its topline only by 2x in the preceding 10 years and exploded in the next five years. All these valuations need to be digested with the mature market multiples the US market would typically enjoy. In case of RE, in the last five years, revenue growth was ~14x. However, till FY18E, we expect profitability at 23% CAGR. We believe with similar financials panning out for RE, its valuations are likely to replicate HOG’s journey. Exhibit 8: Brief on Harley Davidson’s financials during growth phase (mn USD) CY 95 CY 96 CY 97 CY 98 CY 99 CY 0 CY 01 CY 02 CY 03 CY 04Revenue 1350 1531 1763 2064 2453 3083 3588 4302 4904 5320Growth(%) 13 15 17 19 26 16 20 14 8EBITDA margins (%) 16.3 18.0 18.6 19.4 20.5 21.0 22.7 24.6 27.5 29.6Net Income 112 166 174 214 267 348 438 580 761 890Growth(%) 48 5 23 25 30 26 33 31 17ROE (%) 24 29 23 23 24 27 28 29 29 29PE-1year forward (x) 17 17 19 27 28 31 28 19 20 18PEG-2year forward (x) 0.4 1.0 0.6 0.6 0.6 0.6 0.7 0.6 0.9 0.7

Source: Company, ICICIdirect.com Research

EML has justifiably commanded a premium over other auto OEs as RE’s business is on full throttle, VECV reaps the benefits of the economic revival. We maintain peer valuation parameters (relative valuation vis-à-vis HOG’s high growth phase) and ascribe a multiple of 32xFY17E EPS for RE, VECV at 11x FY17E EV/EBITDA, respectively. Considering Royal Enfield caters to the second largest two-wheeler market in the world with dominant market share positioning and superior financials vis-à-vis HOG (during 1998-2003), we believe RE could trade at a premium to HOG’s multiple considering the mature market nature of developed economies. Furthermore, on the VECV front, we value it at domestic CV manufacturers’ average multiple at 11x FY17E EV/EBITDA, respectively, to arrive at an SOTP target price of | 25,000. We have a BUY recommendation on the stock.

Page 9: Eicher Motors (EICMOT) - ICICI Directcontent.icicidirect.com/mailimages/IDirect_EicherMotors_Q1FY17.pdf · • Eicher Motors reported its Q1FY17 numbers in which standalone numbers

ICICI Securities Ltd | Retail Equity Research Page 9

Exhibit 9: SOTP valuation FY17E Remarks

Two-wheeler business-Royal EnfieldEPS (|) 688 Target PE multiple(x) 32 Comparable to up-cycle multiples for Harley Davidson during the 1995-2004 phase.

Per share value (|) 22,163

Target market cap (| crore) 59,863

CV business-VECV`EBITDA 1,196 Target EV/EBITDA multiple(x) 11.0 In-line with current average industry multiple*Target EV 13,151 Net Debt VECV * (| crore) (945) Target market cap (| crore) 14,096 Contribution towards EML 0.54 EML has 54.4% stake in VECVTarget market cap towards EML (| crore) 7,668 Per share value-VECV Eicher (|) 2,839 Total target market cap (| crore) 67,531 Per share value (| ) 25,000

Source: Company, Bloomberg,ICICIdirect.com Research

Exhibit 10: Valuation

Net Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE (| cr) (%) (|) (%) (x) (x) (%) (%)

CY14 8598.7 5.6 227.1 21.4 98.2 53.7 24.5 24.5FY16 15428.8 79.4 471.5 107.7 47.3 24.4 36.9 42.4FY17E 16796.3 8.9 661.4 40.3 33.7 18.9 37.4 42.5FY18E 20229.1 20.4 813.2 22.9 27.4 15.3 34.2 39.7

* Change in accounting year, FY16E is a 15 month period Source: Company, ICICIdirect.com Research

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ICICI Securities Ltd | Retail Equity Research Page 10

Recommended history vs. Consensus chart

0

5,000

10,000

15,000

20,000

25,000

Jul-16May-16Feb-16Dec-15Sep-15Jul-15Apr-15Feb-15Dec-14Sep-14Jun-14

(|)

0.010.020.030.040.050.060.070.080.090.0100.0

(%)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICIdirect.com Research

Key events Date EventOct-08 Approves buyback for 14 lakh shares at ~| 692/ shareJun-09 Announces launch of two new products on the all new electric technology, to raise capacity to 60,000 unitsJun-10 Volvo-Eicher plans a joint engine plant in Pithampur, which is going to be used by Volvo in its vehicles globallyNov-10 Outlines plans for investments of ~| 800 crore for engine facility, new capacities for Royal Enfield and VECVMay-12 Reports record profit of~ | 109 crore in its history on the back of the strong margin performance of both Royal Enfield & VECVApr-13 Commences production from the Oragadam facility. Plans stage-I to raise capacity to 250,000 units with stage-II at 500,000 unitsJul-13 Engine facility gets commissioned at Pithampur. Volvo says initial capacity of 25,000 units to be raised to 100,000 unitsSep-13 Royal Enfield launches the classic "Continental GT". Product receives rave global reviews. Export potential strongNov-13 Reports above expectations results driven by life-time high EBITDA margins of 19.3% in Q3CY13. Further re-rating takes placeSep-14 VECV launches the Pro-series family of trucksMay-15 Eicher acquires UK based Harris perfrommance products, which is basically into chassis developmentMay-15 Eicher overtakes Hero MotoCorp on market capitalisationJun-15 Volvo sells its remaining 3.7% stake in Eicher Motors but it has no impact on its JV named VECVJun-15 Eicher Polaris JV, launches its first personal utility vehicle called Multix

Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern R ank Nam e atest F iling D ate % O /S P osition (m )C hange (m )1 S im ran S iddhartha T ara Benefit T rust 31-Mar-16 0.25 6.8 0.002 E icher G oodearth T rust 13-May-16 0.1 2.7 -0.543 L a l (Anita ) 13-May-16 0.091 2.5 -0.544 C artica C apita l, L td. 31-Mar-16 0.036 1.0 0.885 Brinda L a l T rust 31-Mar-16 0.018 0.5 0.006 T he V anguard G roup, Inc. 30-Jun-16 0.013 0.3 0.007 L a l (S im ran) 31-Mar-16 0.012 0.3 0.008 L a l (T ara ) 31-Mar-16 0.012 0.3 0.009 Joshi (R ukm ani) 13-May-16 0.011 0.3 -0.0510 T IAA G loba l Asse t Managem ent 30-Jun-16 0.011 0.3 0.00

(in %) Jun-15 Sep-15 Dec-15 Mar-16 Jun-16Promoter 54.9 54.9 54.9 54.9 56.2FII 27.5 28.3 26.6 30.1 23.6DII 4.6 4.3 4.9 3.2 13.6Others 13.0 12.6 13.6 11.9 11.9

Source: Reuters, ICICIdirect.com Research

Recent Activity

Investor nam e V a lue S hares Investor nam e V a lue S haresC artica C apita l, L td. 254.6 0.9 E icher G oodearth T rust -149.4 -0.5S B I F unds Managem ent P vt. L td. 15.7 0.1 L a l (Anita ) -149.4 -0.5Norges Bank Investm ent Managem ent (NB IM) 11.9 0.0 Joshi (R ukm ani) -14.9 -0.1William B la ir & C om pany, L .L .C . 10.1 0.0 G oldm an S achs Asset Managem ent Inte rnationa l -10.0 0.0C apita l World Investors 4.3 0.0 AP G Asset Managem ent -5.2 0.0

Buys S e lls

Source: Reuters, ICICIdirect.com Research

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ICICI Securities Ltd | Retail Equity Research Page 11

.

Financial summary

Profit and loss statement | Crore (Year-end March) CY14 FY16 FY17E FY18E

Total operating Income 8,738.3 15,688.7 17,115.6 20,570.7

Growth (%) 28.3 79.5 9.1 20.2

Raw Material Expenses 4,819.6 8,273.4 9,022.1 10,805.9

Employee Expenses 659.6 1,057.5 1,018.5 1,216.2

Other Expenses 1,197.9 2,062.7 2,001.3 2,393.7

Total Operating Expenditure 7,623.5 13,241.5 13,994.2 16,750.4

EBITDA 1,114.8 2,447.2 3,121.4 3,820.3

Growth (%) 56.3 119.5 27.6 22.4

Depreciation 219.8 451.7 436.7 496.7

Interest 9.8 9.0 12.1 15.1

Other Income 107.4 112.0 187.5 280.5

PBT 992.6 2,098.5 2,860.1 3,589.0

Others 0.0 0.0 0.0 0.0

Total Tax 290.9 646.6 801.1 1,004.9

PAT 615.4 1,277.9 1,786.5 2,196.5

Growth (%) 56.2 107.7 39.8 22.9EPS (|) 227.1 471.5 661.4 813.2

* Change in accounting year, FY16E is a 15 month period Source: Company, ICICIdirect.com Research

Cash flow statement | Crore(Year-end March) CY14 FY16 FY17E FY18E

Profit after Tax 615.4 1,277.9 1,786.5 2,196.5

Add: Depreciation 219.8 451.7 436.7 496.7

(Inc)/dec in Current Assets -232.2 -697.4 77.4 -1,042.4

Inc/(dec) in CL and Provisions 515.5 862.0 -137.2 508.6

CF from operating activities 1,118.6 1,894.2 2,163.4 2,159.4

(Inc)/dec in Investments -91.7 207.3 -100.0 -100.0

(Inc)/dec in Fixed Assets -828.2 -1,046.1 -650.0 -650.0

Others -220.2 -651.6 -130.4 -529.9

CF from investing activities -1,140.1 -1,490.4 -880.4 -1,279.9

Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0

Inc/(dec) in loan funds -25.5 27.5 20.0 20.0

Dividend paid & dividend tax 0.0 0.0 0.0 0.0

Others -154.6 -329.5 -474.0 -553.0

CF from financing activities -180.1 -301.9 -454.0 -533.0

Net Cash flow -201.6 101.8 828.9 346.5

Opening Cash 682.6 480.9 582.7 1,411.7Closing Cash 480.9 582.7 1,411.7 1,758.1

* Change in accounting year, FY16E is a 15 month period Source: Company, ICICIdirect.com Research

Balance sheet | Crore (Year-end March) CY14 FY16 FY17E FY18E

Liabilities

Equity Capital 27.1 27.2 27.2 27.2

Reserve and Surplus 2,489.1 3,437.5 4,749.9 6,393.4

Total Shareholders funds 2,516.2 3,464.6 4,777.1 6,420.5

Total Debt 58.4 85.9 105.9 125.9

Deferred Tax Liability 324.3 387.7 437.7 487.7

Minority Interest 1085.1 1156.9 1429.4 1817.0

Total Liabilities 4,073.6 5,247.3 6,902.3 9,003.4

Assets

Gross Block 2,670.7 3,610.3 4,260.3 4,910.3

Less: Acc Depreciation 689.6 1,062.6 1,425.9 1,849.2

Net Block 1,981.1 2,547.7 2,834.4 3,061.2

Capital WIP 236.3 236.3 236.3 236.3

Total Fixed Assets 2,217.4 2,784.0 3,070.8 3,297.5

Intangibles 510.7 538.6 465.2 391.8

Investments 1,077.7 1,638.3 2,138.3 3,038.3

Inventory 645.5 1,014.3 826.4 1,390.5

Debtors 562.2 833.6 920.3 1,219.3

Loans and Advances 379.7 475.7 455.5 666.0

Cash 480.9 582.7 1,411.7 1,758.1

Total Current Assets 2,068.3 2,906.3 3,613.9 5,033.9

Creditors 1,571.5 2,080.9 2,300.9 2,771.1

Provisions 248.5 83.0 91.8 110.6

Total Current Liabilities 1,820.0 2,163.9 2,392.7 2,881.7

Net Current Assets 248.3 742.4 1,221.3 2,152.3

Misc expenses not w/o 0.0 0.0 0.0 0.0Application of Funds 4,073.6 5,247.4 6,902.3 9,003.4

* Change in accounting year, FY16E is a 15 month period Source: Company, ICICIdirect.com Research

Key ratios (Year-end March) CY14 FY16 FY17E FY18E

Per share data (|)

EPS 227.1 471.5 661.4 813.2

Cash EPS 308.2 638.2 823.1 997.1

BV 928.5 1,278.5 1,768.6 2,377.1

DPS 49.9 100.2 150.0 175.0

Cash Per Share 177.5 215.0 522.6 650.9

Operating Ratios (%)

EBITDA Margin 13.0 15.9 18.6 18.9

PBT / Net sales 11.5 13.6 17.0 17.7

PAT Margin 5.4 5.1 5.8 7.2

Inventory days 24.9 19.6 20.0 20.0

Debtor days 23.9 19.7 20.0 22.0

Creditor days 66.7 49.2 50.0 50.0

Return Ratios (%)

RoE 24.5 36.9 37.4 34.2

RoCE 24.5 42.4 42.5 39.7

RoIC 45.7 65.8 70.2 62.6

Valuation Ratios (x)

P/E 98.2 47.3 33.7 27.4

EV / EBITDA 53.7 24.4 18.9 15.3

EV / Net Sales 7.0 3.9 3.5 2.9

Market Cap / Sales 7.0 3.9 3.6 3.0

Price to Book Value 24.0 17.4 12.6 9.4

Solvency Ratios

Debt/Equity 0.0 0.0 0.0 0.0

Current Ratio 0.9 0.9 1.2 1.4Quick Ratio 0.7 0.7 0.7 0.9

* Change in accounting year, FY16E is a 15 month period Source: Company, ICICIdirect.com Research

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ICICI Securities Ltd | Retail Equity Research Page 12

ICICIdirect.com coverage universe (Auto & Auto Ancillary) C MP M C ap

(|) T P (|) R ating (| C r) F Y 16 F Y 17E F Y 18E F Y 16F Y 17EF Y 18E F Y 16F Y 17EF Y 18E F Y 16 F Y 17E F Y 18E F Y 16 F Y 17E F Y 18EAm ara R a ja (AMAR AJ) 940 900 H old 16053 28.0 31.4 38.9 33.5 30.0 24.1 17.6 16.1 13.1 31.1 28.4 29.0 22.8 21.2 21.7Apollo T yre (AP O T Y R ) 164 160 H old 8272 22.0 18.9 19.7 7.4 8.7 8.3 4.4 5.7 5.5 20.9 14.6 13.6 18.1 14.3 13.2Ashok L eyland (AS H L E Y ) 90 110 H old 25298 2.5 5.8 6.8 35.3 15.5 13.1 12.9 9.8 8.1 23.0 28.1 29.2 13.1 24.3 23.6Ba ja j Auto (BAAU T O ) 2660 2950 Buy 79953 126.2 148.3 175.4 21.1 17.9 15.2 15.7 13.6 11.1 35.9 34.4 34.9 29.7 29.8 30.0Ba lkrishna Ind. (BAL IND ) 729 675 H old 7043 55.7 45.1 56.3 12.6 15.5 12.5 7.2 8.1 6.5 18.7 15.9 18.9 19.3 15.9 18.9Bharat F orge (BH AF O R ) 755 790 H old 17590 28.0 33.0 40.2 27.0 22.9 18.8 12.9 11.9 10.5 16.4 18.1 18.0 18.2 18.6 19.3Bosch (MIC O ) 24709 24000 Buy 77586 398.7 498.5 649.8 54.6 43.7 33.5 35.6 29.7 23.1 15.1 16.6 18.7 17.8 19.0 21.6E icher Motors (E IC MO T ) 22294 25000 Buy 60216 471.5 661.4 813.2 47.3 33.7 27.4 24.4 18.9 15.3 42.4 42.5 39.7 36.9 37.4 34.2E xide Industries (E X IIND ) 178 195 Buy 15122 7.3 8.6 10.0 24.3 20.7 17.8 13.8 11.6 9.5 18.7 19.8 21.4 14.0 14.8 15.4H ero Mototcorp 3270 2880 H old 65303 119.5 156.9 168.5 27.4 20.8 19.4 12.1 11.5 10.0 45.9 50.4 43.8 36.5 39.4 35.9JK T yre & Ind (JK IND ) 90 90 H old 2036 20.4 20.5 22.4 4.4 4.4 4.0 3.9 3.6 3.0 21.4 20.6 21.9 26.5 21.2 19.3M&M (MAH MAH ) 1481 1500 Buy 87450 48.3 59.7 64.9 30.6 24.8 22.8 16.6 9.6 8.5 14.6 16.5 16.7 14.5 14.4 13.9Mahindra C IE (MAH AU T ) 185 225 Buy 5966 2.7 8.9 11.6 68.4 20.7 16.0 17.9 10.9 9.0 7.5 12.9 14.3 7.4 13.3 15.6Maruti S uz uki (MAR U T I) 4980 5095 Buy 150503 151.3 204.1 242.6 32.9 24.4 20.5 15.0 13.1 10.9 22.7 22.5 22.9 16.9 19.4 19.5Motherson (MO T S U M) 348 260 H old 46054 9.6 13.7 18.2 36.2 25.4 19.1 11.0 9.2 7.5 22.3 26.9 32.2 30.0 37.2 41.2T ata Motors (T E L C O ) 455 540 Buy 140361 37.2 48.5 58.8 12.2 9.4 7.7 3.8 3.1 2.5 17.0 17.1 18.4 15.3 15.3 15.7Wabco India (WABT V S ) 6267 6400 H old 11907 107.9 144.2 182.4 58.1 43.5 34.3 40.0 30.1 24.5 19.4 20.9 21.3 22.5 24.4 23.8

S ector / C om panyR oE (% )E P S (|) P /E (x) E V /E B IT D A (x) R oC E (% )

Source: Company, ICICIdirect.com Research

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ICICI Securities Ltd | Retail Equity Research Page 13

RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]

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ICICI Securities Ltd | Retail Equity Research Page 14

ANALYST CERTIFICATION We /I, Nishit Zota, MBA & Vidrum Mehta, MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

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