Eicher Motors - Initiating Coverage 03-09-14

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September 3, 2014Automobile | India Eicher Motors Ltd EIM.IN; EICH.BO

SBICAP Securities Ltd (SSL)Mafatlal Chambers, A-Wing 2nd Floor, N.M. Joshi Marg Lower Parel, Mumbai - 400013 + 91-22-4227 3300/01 [email protected]

Dharmesh Shah Senior Research Analyst +91 22 4227 3398 [email protected]

Eicher Motors Ltd SBICAP Securities Ltd

[email protected] September 3, 2014 | 2

Contents

Investment rationale ................................................................................................................................. 4

Key risk to our investment rationale .......................................................................................................... 9

Financial analysis ................................................................................................................................... 10

Valuations ............................................................................................................................................... 12

Company background ............................................................................................................................ 13

Financials ............................................................................................................................................... 14



In a Sweet spot

Eicher Motors Ltd (EIM), with two select businesses that enjoy tremendous brand pull, is set to gain from a leisure-biking-besotted motorcycle premiumisation and a firm economic-recovery-propped Commercial Vehicle (CV) upturn. We foresee EIM garner a revenue growth momentum of 31.3% CAGR during C1316e, driven by its Royal Enfield (RE) motorcycle revenues growing at a 58.7% CAGR pace and CV business (Volvo-Eicher Commercial Vehicles, VECV) at 19% CAGR pace. Understandably, earnings will grow at a CAGR of 57.8% making us arrive at a Sum-of-the-parts (SOTP) target price of Rs13,150. We initiate coverage on EIM with a BUY rating.

Leisure biking business RE in a sweet spot: EIMs RE business is in a sweet spot as it rides a first mover advantage in leisure biking. We believe increasing per capita income, rising aspirations and favorable demographics are key drivers of this premiumisation. We believe RE can accelerate its revenue growth to a 58.7% CAGR over C13-16e. Our estimates bank upon drivers like brand appeal, strong product pipeline, expanding dealer network and relatively lower penetration in Tier II/III cities.

while CV business well placed to ride the cyclical upturn: EIMs CV business VECV is well placed to ride the domestic cyclical upturn being heralded as GDP growth improves. VECV measures upto the task from a tie-up with AB Volvo group a partnership that gives it the technological strength and improves its R&D capabilities and from a deep understanding of the local domestic market. The partnership also allows EIM to be a low-cost manufacturing hub for Volvos global network that provides huge export opportunities in the long run. Meanwhile, it has modernised its products by launching PRO series of trucks. We expect VECVs revenue to grow at CAGR of 19% over C13-16e and consequently expanding its EBIDTA margins from 7.3% in C13 to 9.0% in C16e by better capacity utilisation driven operating leverage.

Earnings to grow at 57.8% CAGR over C1316e: We expect EIMs earnings to grow at 57.8% CAGR over C13-16e driven by its motorcycle business earnings growing at a 66% CAGR aided by a 51% volume growth and 740bps EBIDTA margin improvement. We expect its commercial business earnings to pace 23.9% CAGR growth on the back of a cyclical upturn in CV sales aligned to the ongoing economic recovery.

leads to better valuations; initiate with BUY; TP Rs13,150: We initiate coverage on EIM with BUY rating and a target price of Rs13,150. We value EIM on SOTP basis (26x C16e P/E for RE and commercial business EV at 10x C16e EBIDTA). Stock trades at the implied P/E of 23x at our target price.

Key risk to our call stems from slower-than-anticipated economic recovery and premiumisation trend softening induced by competitive launches.

Financial SummaryY/E Dec (Rs mn) C12 C13 C14e C15e C16eNet sales 63,899 68,098 84,778 111,730 154,177growth (%) 12.4 6.6 24.5 31.8 38.0EBITDA margin (%) 8.6 10.5 12.8 14.8 16.4Adjusted net profit 3,243 3,939 6,550 10,129 15,489EPS (Rs) 120.1 145.7 242.2 374.6 572.8growth (%) 5.0 21.3 66.3 54.6 52.9P/E (x) 80.8 66.6 40.0 25.9 19.4EV/EBITDA (x) 49.1 37.6 24.5 16.3 12.6Dividend yield (%) 0.2 0.3 0.5 0.6 0.6RoE (%) 20.0 20.7 28.3 33.9 38.0RoCE (%) 17.5 18.7 23.7 31.7 38.6Source: Company, SSLe

Dharmesh Shah +91 22 4227 3398 [email protected]

Initiating Coverage BUY

Current price (3 Sep) RsTarget price RsUpside/(downside) % 18

Market dataMkt capitalisation Rs bn 300.9Average daily vol '000 50.552-week H/L Rs 11445 / 3110Shares O/S mn 27.1Free float mn 12.2Promotor holding % 55.0Foreign holding % 19.9Face value Rs 10.0

Price performance (%)1m 3m 6m 1yr

Nifty (abs) 6.7 9.4 30.4 51.9Stock (abs) 32.0 53.6 114.0 249.0Relative to Index 25.3 44.1 83.6 197.1

Performance

11,102 13,150

(20)

30

80

130

180

0

3000

6000

9000

12000

Sep-13 Dec-13 Mar-14 Jun-14 Sep-14

Eicher (LHS) Rel. to BSEAUTO (RHS)

(%)(Rs)

Source: Bloomberg, SSLe



Investment rationale Revenue to grow at 31.3% CAGR during C1316e: We expect EIMs revenue to grow at a CAGR of 31.3% during C1316e, driven by its RE motorcycle business. We expect REs revenue to grow at 58.7% CAGR driven by 51.1% CAGR volume growth. We expect EIMs commercial vehicle business (VECV) revenue to grow at 19% CAGR driven by 13.8% CAGR volume growth. EIMs revenue mix would undergo a change as REs higher pace of revenue growth would increase its contribution from 25% in C13 to 44% in C16e.

Revenue to grow at a CAGR of 31.3% over C1316e, REs contribution to increase from 25% in C13 to 44% in C16e

Exhibit 1: Revenue growth Exhibit 2: Revenue mix

3,751

4,673

6,660

10,493

17,025

30,389

46,267

68,013

25,232

39,174

49,623

53,406

51,074

54,389

65,463

86,164

28,983

43,847

56,283

63,899

68,098

84,778

111,730

154,177

0 40,000 80,000 120,000 160,000

C09

C10

C11

C12

C13

C14e

C15e

C16e

(Uni

ts)

Total Revenue VECV RE

13 11 12 1625

36 4144

87 89 88 8475

64 5956

0%

25%

50%

75%

100%

C09 C10 C11 C12 C13 C14e C15e C16e

RE VECV Source: Company, SSLe

on the back of RE growing at 58.7% CAGR: EIMs motorcycle business is in a sweet spot as it is banking upon a first mover advantage in leisure biking. from a crop of emerging generation enthusiasts who have taken to leisure biking in droves. That is driving up a premiumisation in Indian motorcycle segment. It also is being played up by increasing per capita income, rising aspiration and favorable demographic trends that have been gaining recent prominence. We believe RE can capitalise on this rising trend and expect its revenue to grow at 58.7% CAGR over C13-16e. Our growth assumptions pencil-in such drivers as a huge brand recall, strong product pipeline, increasing dealer network and relatively lower penetration in Tier II/III cities. We also note an average waiting period (five months) for its products as providing a near term demand visibility.

RE volume to grow at 51% CAGR over C13-16e, market share doubled in last two years and to further consolidate

Exhibit 3: RE Volume growth Exhibit 4: RE market share in two wheeler & motorcycle segment

1

42

5257

70

4540

0

20

40

60

80

0

150,000

300,000

450,000

600,000

C09 C10 C11 C12 C13 C14e C15e C16e

(%)

(Rs

mn)

RE Growth

0.6 0.5 0.5 0.6 0.9

1.4

1.9

0.7 0.7 0.6 0.8

1.2

1.9

2.7

0.0

0.8

1.5

2.3

3.0

F09

F10

F11

F12

F13

F14

Apr-

July

-14

(%)

Two Wheeler Motorcycle Source: Company, SIAM, SSLe



Premium motorcycle segment to grow at faster clip, RE to increase its market share: Premium motorcycle currently constitutes ~3.0% of total motorcycle volume sales in the country. Historically premium motorcycles had seen at substantially higher growth rate as against moderate growth of motorcycle segment. However, deceleration in GDP growth leading to weak demand and increasing fuel cost has impacted the growth rate in recent past. Nonetheless, we now expect premium motorcycles to grow at faster pace during F14-17e as these factors recede. We believe RE would be biggest beneficiary of this premiumisation in motorcycle segment.

RE volume growth trajectory improved significantly

Exhibit 5: Monthly volume ramp-up Exhibit 6: Leisure biking (>250cc) market share (%) in total motorcycles

6243

3442 4

6 49 51

6170 67

75 75 77 8

395

86 86 83 80

0

25

50

75

100

0

7,500

15,000

22,500

30,000

Jan-

13

Mar

-13

Ma y

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

(%)

(Uni

ts)

Total Volume (LHS) YoY growth (RHS)

1.3 1.4 1.

51.

51.

5 1.7 1.

9 2.0

1.9

1.7

2.1 2

.42.

2 2.4 2

.6 2.6

2.6 2

.93.

3

0.00

0.90

1.80

2.70

3.60

0

7,500

15,000

22,500

30,000

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

(%)

(Uni

ts)

Leisure Biking (LHS) Market share (RHS) Source: Company, SIAM, SSLe

Expanding its distribution network: EIM is rapidly expanding its dealer network to penetrate into tier II/III cities. For RE it is adding 5-6 dealers every month. It added ~80 dealers in C13 and will add 70-80 dealers in C14. Half of these are additions in smaller towns/cities. It currently has 340 dealers. RE would also launch a new range of clothing and accessories to further help in building viability of dealerships as well as improve brand appeal and aspiration. Top 10 cities contribute ~50% of REs sales. Bangalore, Mumbai, Delhi are its top 3 markets followed by Chennai, Hyderabad, Pune, Kolkata. To increase its international presence it is in the process of setting up a distribution network for its RE brand.

CV business revenue to grow at 19% CAGR: EIMs CV business is a 50:50 joint venture with AB Volvo and housed separately in an entity called Volvo Eicher Commercial Vehicles (VECV). The JV is well placed to ride the domestic cyclical upturn as GDP growth improves. The tie-up with AB Volvo gives it the technological strength and improves its R&D capabilities. Alongside EIMs domestic market understanding, the technological prowess works out to be an ideal mix to ride the cyclical upturn. The partnership with Volvo also allows Eicher to be a low-cost manufacturing hub for Volvos global network and provides huge export opportunities in the long run. Meanwhile, it has recently modernised its products by launching PRO series of trucks that have offerings across different segments. These compliment its already dominant presence in Light-to-Medium duty truck segment (7.5-12 tonnes). We expect VECVs revenue to grow at CAGR of 19% over C13-16e driven by 13.8% volume growth. We expect its EBIDTA margins to improve from 7.3% in C13 to 9.0% in C16 on the back of better capacity utilization driven operating leverage.



VECV volume to grow at 13.8% CAGR

Exhibit 7: Volume growth Exhibit 8: 25% Market share in LMD segment

56

25

(0)

(16)

4

15 23

(20)

5

30

55

80

0

15,000

30,000

45,000

60,000

C09 C10 C11 C12 C13 C14e C15e C16e

(%)

(Rs

mn)

VECV Growth

0

8

16

24

32

0

1,250

2,500

3,750

5,000

Jan-

11Ap

r-11

Jul-1

1O

ct-1

1Ja

n-12

A pr-

12Ju

l-12

Oct

-12

Jan-

13Ap

r-13

Jul-1

3O

ct-1

3Ja

n-14

Apr-

14Ju

l-14

(%)

(Uni

ts)

Total Volume (LHS)Total market share (RHS)Market share 7.5 to 16.2 tn (RHS)

Source: Company, SIAM, SSLe

EIM plans to go the distance through strategic partnerships with Volvo: EIM & AB Volvo entered into a 50:50 JV in India in 2008. As a part of that partnership, EIM transferred its existing CV manufacturing facility and Volvo demerged its truck distribution network to constitute Volvo Eicher commercial Vehicle Ltd (VECV) housed as a step-down subsidiary of EIM. The tie-up with AB Volvo gave EIM the much needed technological knowhow on engine development and helped in improving its manufacturing quality. It also helped EIM build technologically advanced and cost effective vehicle platforms to be enmeshed with Volvos global distribution network in emerging markets. From Volvos perspective EIM brought competence in frugal engineering & speed-to-market capability as VECV acted as a distributor for its truck business. EIM, meanwhile, is engaged in developing a medium duty engine for Volvos global production facilities and contribute to Volvos cost-optimisation imperatives as it offers a low cost manufacturing base alongside.

Engine manufacturing in association with Volvo for its global facilities to be another catalystVECV has set up an engine manufacturing plant in a technical tie-up with Volvo. The current engine manufacturing capacity of 25,000 units per annum will be scaled up to 1,00,000 by next year. It is supplying Euro 5 & 6 compliant engines to Volvos French facilities. To beef-up the manufacturing quality it has imported machining workstations from Germany for engine components. The total capex to set up engine plant was Rs. 3.75bn.

VECV distributor for Volvo Trucks in India: VECV is the distributor for Volvos Indian truck operations. Volvos products are heavy duty trucks mainly used in mining and infrastructure sectors. Volvo pays marketing/distribution margins of 3-4% to Eicher for marketing of trucks. However, Volvo trucks constitutes 1.8% of the total volume of VECV.

Upgraded truck portfolio, Launched PRO series trucks: EIM has been working on upgrading its truck portfolio to prepare itself to compete better and ride the cyclical upturn as economic growth improves. The company has recently launched a new product range incorporating Volvos R&D expertise called Eicher Pro 1000/3000/6000 and 8000 series of trucks which are expected to increase its market share.

VECV operates primarily in Light-to-Medium duty (LMD) truck segment comprising of 7.5-to-12 tonnes GVW rated vehicles. It has a market share of 25% in 7.5-to-12 tonne market, 8% in the 12-to-16.2 tonne market which combined make it a 25% market share holder in the 7.5-to16.2 tonne LMD segment. Its market share in heavy duty segment (16-to-49 tonne) is a meager 4.3%. EIM is planning to launch more offerings in this range (Pro 8000) which may improve upon this low market presence. We, however, assume near stable share across tonnage sub-segments although expect the mix to be enriched by better bus sales.



Eichers volume mix to remain largely same Exhibit 9: VECV- CV segmental volume mix Exhibit 10: Truck/Bus volume mix

92 86 81 79 80 80 80 80

8 14 19 21 20 20 20 20

0%

25%

50%

75%

100%

C09 C10 C11 C12 C13 C14e C15e C16e

5-14 Tonnes 16-49 Tonnes

85 86 86 81 78 77 77 77

15 14 14 19 22 23 23 23

0%

25%

50%

75%

100%

C09 C10 C11 C12 C13 C14e C15e C16e

Trucks Buses Source: Company, SSLe

Expanding VECV Dealer network: EIM has been improving its VECV dealer & service network significantly. It has almost doubled its dealer network in the last three years from 135 to 265 in 1HC14.

Exhibit 11: Doubled dealer network

134 135 135156

240

275

0

75

150

225

300

C09 C10 C11 C12 C13 C14

(Uni

ts)

Source: Company, SSLe

Exports remain one of the biggest catalysts: EIM has gradually assimilated the requisite building blocks for its export business with an aim to ramp it up significantly. For starters, it has identified ASEAN & African countries to build up its export business upon. The company has initiated the process of identifying other geographies to ramp up its export business and set-up a distribution network. Recently, the company has appointed an industry veteran, Mr. Rod Copes, as President North America. He has worked with Harley Davidson for twenty years. Though exports remain an unchartered territory for EIM, we believe it can surprise positively. It has already launched Continental GT in UK/US. Also, it has recently appointed a distributor in Columbia for marketing distributing, reselling and servicing RE products.

For its CV business, we expect the company to bank upon Volvos global network especially that in emerging markets. Volvo has clearly acknowledged EIM as an emerging market brand and endeavors to export EIMs trucks in key markets like South Asia, West Asia and Africa. In 1HC14, export volumes have nearly tripled to 3,100 units and we believe exports can emerge as a key volume driver going ahead. It has presence in 22 countries and it uses distributors assembly operations in Egypt, Kenya, Bangladesh & Mauritius. For local bus-building operations it uses distributors facilities in Egypt, Turkey, Mauritius, Nepal and Bangladesh.



Though exports remain an unchartered territory, we believe it can surprise positively Exhibit 12: REs Geography mix Exhibit 13: VECV Geography mix

96 99 93 97 98 98 98 98

4 1 7 3 2 2 2 2

0%

25%

50%

75%

100%

C09 C10 C11 C12 C13 C14e C15e C16e

Domestic Exports

89 93 94 95 92 89 87 86

11 7 6 5 8 11 13 14

0%

25%

50%

75%

100%

C09 C10 C11 C12 C13 C14e C15e C16e

Domestic Exports Source: Company, SSLe

Capacity expansion on top gear in C1416e: EIM is embarking on a significantly high capex of Rs17bn over C14e/C16e, largely to enhance further capacity of motorcycle business and new products/platforms for VECV. It will spend Rs6bn over C14e/C15e for RE capacity ramp up and the rest for increasing capacity in VECV. EIM had announced a cumulative investment plan of Rs25bn out of which Rs18bn is already spent. The balance Rs7bn from this plan and our estimate of another Rs5bn for C16e makes its a total Rs30bn spend that we believe EIM is headed to. The existing capacity of 45,000 units per annum VECV capacity would be ramped up to 1,00,000 units in the next couple of years. Capex to ease out by C17e generating significant FCF thereafter

Exhibit 14: Capex Plan

(120

)

(205

)

(652

)

(1,0

75)

(1,3

92)

(3,0

00)

(3,0

00)

(3,0

00)

(590

)

(1,1

43)

(3,5

35)

(6,7

80) (5

,731

)

(7,0

00)

(4,0

00)

(2,0

00)

(8,000)

(6,000)

(4,000)

(2,000)

0 C09 C10 C11 C12 C13 C14e C15e C16e

(Rs

mn)

RE VECV Source: Company, SSLe



Key risk to our investment rationale

Weak demand for premium motorcycles RE is a play on premium motorcycles that come with more-than 250 cc capacity. We expect demand acceleration from a revving economic activity in this segment. Weaker-than-anticipated demand can pose a major threat to our estimates.

Delay in recovery in M&HCVs We expect removal of mining ban and improvement in industrial activity to lead to a gradual recovery in M&HCV demand. However, any unscheduled slow-down in economy could delay recovery and is a major risk to our assumption.

Margin could be at risk We expect EIM EBIDTA margin to be at a substantial risk in the event of intensified competition especially in the CV business that witnesses steep discounts in a downcycle. Our current assumption of 590bps expansion over C13-16e for the consolidated business may therefore have to be tempered.



Financial analysis

EBIDTA margin would expand 590bps over C1316e: EIMs EBIDTA margins would see an improvement from 10.5% in C13 to 16.4% in C16e. This margin expansion would be driven by its motorcycle business growing from 18.4% in C13 to 25.8% in C16e. CV business EBIDTA margins would also expand from 6.5% in 1HC14 to 9.0% in C16e.

RE EBIDTA Margin has multiple levers: The motorcycle business has many levers for margins expansion which are a) operating leverage play induced by higher capacity utilisation of the new plant, b) REs favourable pricing power due to brand equity, leadership and low competition, c) REs substantial cost saving accruals from consolidation of three engine platforms into one called UCE (Unit construction Engines) it is also working on new platform to be readied by C15e and d) strengthening sale of spare parts and accessories to drive EBIDTA margin expansion

VECV is much cost efficient: We expect CV business to also see EBIDTA margin expansion from 6.5% in 1HC14 to 9.1% in C16e. This would be largely driven by better capacity utilization. It may be noted that if demand improves substantially and product discounts narrow significantly then margins have an upside risk. VECV has low breakeven point even that, at 45% of capacity utilization, can recover its fixed cost. Its cost structure is very competitive due to key manufacturing functions like stamping, forging & casting being outsourced allowing the company to focus on key areas like R&D, Marketing & Distribution.

EBIDTA margin to improve by 590 bps over C13F16e Exhibit 15: EBIDTAM (%) Exhibit 16: EBIDTA growth rate (%)

7.39.5

12.013.9

18.4

24.0 24.925.8

4.8

8.09.6

7.4 7.3 6.5 7.69.05.1

8.19.8

8.410.1

12.814.8

16.4

0.0

7.5

15.0

22.5

30.0

C09 C10 C11 C12 C13 C14e C15e C16e

(%)

RE VECV Console

62.679.3 82.7

115.7132.5

58.0 52.3

160.2

51.8

(17.2)

(4.6) (5.7)40.7

55.9

(30)

20

70

120

170

C09 C10 C11 C12 C13 C14e C15e C16e

(%)

RE EBIDTA Growth VECV EBIDTA Growth Source: Company, SSLe



Earnings to grow at 57.8% CAGR over C1316e: We expect EIMs earnings to grow at 57.8% CAGR over C13-16e primarily led by a 740bps EBIDTA margin expansion of its motorcycle business. We expect RE earnings to grow at a CAGR of 66% over CY13-16e. We expect its commercial business earning to grow at 23.9% on the back of a cyclical upturn in CV cycle driven by better economic growth.

Earnings to grow at 57.8% over C13-16e, driven by motorcycle business

Exhibit 17: Net margins (%) (EML Consol), RE, VECV

2.8

4.35.4 5.1

5.8

7.7

9.110.0

0.0

3.0

6.0

9.0

12.0

0

4,000

8,000

12,000

16,000

C09

C10

C11

C12

C13

C14

eC

15e

C16

e

(%)

(Rs

mn)

EML PAT [consol] LHS) EML NPM (RHS)

9.9

17.1

18.6

13.8

16.4

17.9

18.2 18.7

8

11

14

17

20

0

3,000

6,000

9,000

12,000

C09

C10

C11

C12

C13

C14

e

C15

e

C16

e

(%)

(Rs

mn)

RE PAT (LHS) NPM (RHS)

3.8

6.6

8.3

6.15.2

3.7

4.8

5.9

0

3

5

8

10

0

1,200

2,400

3,600

4,800

C09

C10

C11

C12

C13

C14

e

C15

e

C16

e

(%)

(Rs

mn)

VECV- PAT (LHS) NPM (RHS) Source: Company, SSLe

Working capital cycle to remain negative: EIM has a negative cash conversion cycle of 17 days. It has effectively controlled the receivables and inventories enabling it to operate on negative working capital.

Debt-free company : EIM is a debt-free company and incurs no borrowing costs. Finance costs include interest on account of advances from dealers and other transactional costs.

enables high dividend payout: EIM generates high cash flow, which enables the company pay high dividend to the shareholders on a consistent basis.

Consistent dividend paying track record

Exhibit 18: Dividend payout ratio Exhibit 19: Dividend per share

22.4

15.7

14.0

16.7

20.6

18.6

14.7

11.3

10

14

18

22

26

C09 C10 C11 C12 C13 C14e C15e C16e

(%)

Dividend Payout Ratio

1511

1620

30

45

55

65

0

17

34

51

68

C09 C10 C11 C12 C13 C14e C15e C16e

(Rs

per s

hare

)




Return ratios to improve substantially

Exhibit 20: RoE & RoCE (consol) Exhibit 21: FCF to improve substantially

7.7

16.4

22.720.0 20.7

28.3

33.9

38.0

6.6

16.4

23.4

17.5 18.7

23.7

31.7

38.6

0

10

20

30

40

C09 C10 C11 C12 C13 C14e C15e C16e

(%)

ROE ROCE

920 1,440 670

(2,771)(736)

(1,797)

5,685

14,602

(6,000)

0

6,000

12,000

18,000

C09

C10

C11

C12

C13

C14

e

C15

e

C16

e

(Rs

mn)


Valuations leads to better valuations; initiate with BUY; TP Rs13,150: We initiate coverage on EIM with BUY rating with a price target of Rs13,150 (rounded off). We value EIM on SOTP basis (26x C16e P/E for RE and commercial business EV at 10x C16e EBIDTA). At our target price the stock would trade at implied P/E of 23x CY16 EPS (consol). Exhibit 22: Valuation (SOTP) Particulars (Rs mn) CY16eRoyal Enfield Core PAT 12,136 Multiple (X) 26Equity Value 315,531 Net Debt (19,685)RE-Enterprise value 295,846 VECV EBIDTA (54.4% economic Interest) 4,219 Multiple (X) 10VECV-Enterprise value 42,186 Net Debt (2,318)VECV-Equity Value 39,867 Total Equity value 355,399 No of shares 27Target Price per share 13,143 Rounded Target Price 13,150 CMP 11,102 Upside (%) 18Source: SSLe



At our Target Price the stock would trade at an implied P/E of 23x on C16 EPS

Exhibit 23: P/E Exhibit 24: EV/EBIDTA

0

3,000

6,000

9,000

12,000

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

12M

ay-1

2Se

p-12

Jan-

13M

ay-1

3Se

p-13

Jan-

14M

a y-1

4Se

p-14

Close Price 15x 18x 21x 27x 30x

0

3,000

6,000

9,000

12,000

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

a y-1

1Se

p-11

Jan-

12M

a y-1

2Se

p-12

Jan-

13M

a y-1

3Se

p-13

Jan-

14M

ay-1

4Se

p-14

Price 8x 11x 14x 17x Source: Company, SSLe

Exhibit 25: AssumptionsC14e C15e C16e

Total Motorcycle Growth (%) 70.0 45.0 40.0Motorcycle - Domestic 70.2 44.9 39.9Motorcycle - Export 60.0 50.0 45.0Realisation Rs. 100,358 105,376 110,645

Total Commercial Vehicles Growth (%) 4.4 14.6 23.0Commercial Vehicle - Domestic 0.4 12.7 22.0Commercial Vehicle - Exports 50.0 30.0 30.0Passenger Carrier - Domestic 2.0 15.0 22.0Passenger Carrier - Exports 50.0 30.0 30.0Realisation Rs. 1,262,878 1,326,022 1,418,843

RM cost as % Net revenue 72.5 71.8 71.5Source: SSLe

Company background

Incorporated in 1982, Eicher is the flagship company of the Eicher Group in India and a leading player in the Indian motorcycle and commercial vehicle (CV) segments. Eicher manufactures and markets the motorcycle under the iconic brand name Royal Enfield. The CV segment operates under a JV called VE Commercial Vehicles (VECV). Exhibit 26: Key management personnelS Sandiliya Non executive chairman

M. Siddarthalal Managing Director

R.L Ravichandran Whole Time Director

Priya Brat Independent Director

M J Subbaiah Independent Director

Prateek Jalan Independent DirectorSource: Company, SSLe



Financials Income Statement Balance SheetY/E Dec (Rs mn) C12 C13 C14e C15e C16e Y/E Dec (Rs mn) C12 C13 C14e C15e C16eNet sales 63,899 68,098 84,778 111,730 154,177 Cash & Bank balances 8,035 6,826 3,502 7,358 19,828growth (%) 12.4 6.6 24.5 31.8 38.0 Other Current assets 15,333 17,088 20,972 27,470 37,703Operating expenses 58,409 60,966 73,950 95,234 128,875 Investments 6,385 8,255 9,849 11,326 13,025EBITDA 5,490 7,132 10,829 16,496 25,302growth (%) -6.8 29.9 51.8 52.3 53.4 Net fixed assets 14,962 21,197 29,085 33,760 35,675Depreciation & amortisation 822 1,300 2,112 2,325 3,085 Goodwill & intangible assets 0 0 0 0 0EBIT 4,669 5,832 8,716 14,171 22,217 Other non-current assets 0 0 0 0 0Other income 1,366 953 1,598 1,930 2,470 Total assets 44,715 53,365 63,408 79,913 106,231Interest paid 38 79 112 101 89Extraordinary/Exceptional items 0 0 0 0 0 Current liabilities 16,043 19,634 23,619 30,285 40,848PBT 5,997 6,706 10,203 16,000 24,598 Borrowings 406 975 975 975 975Tax 1,249 1,452 2,731 4,432 6,800 Other non-current liabilities 1,232 1,805 1,805 1,805 1,805Effective tax rate (%) 20.8 21.7 26.8 27.7 27.6 Total liabilities 17,681 22,414 26,399 33,065 43,628Net profit 4,749 5,254 7,471 11,567 17,797Minority interest 1,506 1,314 922 1,438 2,308 Share capital 270 270 270 270 270Reported Net profit 3,243 3,939 6,550 10,129 15,489 Reserves & surplus 17,279 20,284 25,420 33,820 47,267Non-recurring items 0 0 0 0 0 Shareholders' funds 17,549 20,554 25,690 34,091 47,538Adjusted Net profit 3,243 3,939 6,550 10,129 15,489 Minority interest 9,485 10,398 11,319 12,757 15,065growth (%) 5.0 21.5 66.3 54.6 52.9 Total equity & liabilities 44,715 53,365 63,408 79,913 106,231

Key Financials ratios Cash Flow StatementY/E Dec (Rs mn) C12 C13 C14e C15e C16e Y/E Dec (Rs mn) C12 C13 C14e C15e C16eProfitability and return ratios (%) Pre-tax profit 5,997 6,706 10,203 16,000 24,598EBITDAM 8.6 10.5 12.8 14.8 16.4 Depreciation 822 1,300 2,112 2,325 3,085EBITM 7.3 8.6 10.3 12.7 14.4 Chg in working capital 526 1,491 101 168 329NPM 5.1 5.8 7.7 9.1 10.0 Total tax paid (1,077) (1,504) (2,731) (4,432) (6,800)RoE 20.0 20.7 28.3 33.9 38.0 Other operating activities (1,308) (819) (1,486) (1,829) (2,381)RoCE 17.5 18.7 23.7 31.7 38.6 Operating CF 4,960 7,174 8,198 12,232 18,831RoIC 22.0 23.1 26.5 33.2 38.5

Capital expenditure (7,855) (7,123) (10,000) (7,000) (5,000)Per share data (Rs) Chg in investments 0 0 (1,594) (1,477) (1,699)O/s shares (mn) 27.0 27.0 27.0 27.0 27.0 Other investing activities 123 -787 1,598 1,930 2,470EPS 120.1 145.7 242.2 374.6 572.8 Investing CF (7,732) (7,910) (9,996) (6,547) (4,229)FDEPS 120.1 145.7 242.2 374.6 572.8 FCF (2,771) (736) (1,797) 5,685 14,602CEPS 150.5 193.8 320.3 460.6 686.9BV 650.0 760.1 950.1 1260.8 1758.1 Equity raised/(repaid) 4 17 0 0 0DPS 20 30 45 55 65 Debt raised/(repaid) (61) (6) 0 0 0

Dividend (incl. tax) (770) (877) (1,217) (1,487) (1,758)Valuation ratios (x) Other financing activitiesPE 80.8 66.6 40.0 25.9 19.4 Financing CF (827) (866) (1,217) (1,487) (1,758)P/BV 14.9 12.8 10.2 7.7 6.3EV/EBITDA 49.1 37.6 24.5 16.3 12.6 Net chg in cash & bank bal. 11,915 8,035 6,826 3,502 7,358EV/Sales 4.2 3.9 3.1 2.4 2.1 Closing cash & bank bal 8,035 6,826 3,502 7,358 19,828

Other key ratiosD/E (x) 0.0 0.1 0.0 0.0 0.0DSO (days) 25.5 27.5 27.0 27.0 27.0

Du Pont Analysis - RoENPM (%) 5.1 5.8 7.7 9.1 10.0Asset turnover (x) 2.2 2.2 2.6 2.8 2.6Equity Multiplier (x) 1.8 1.6 1.4 1.3 1.4RoE (%) 20.0 20.7 28.3 33.9 38.0Source: Company, SSLe



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Eicher Motors - Initiating Coverage 03-09-14