Eicher Motors Ltd

Volvos play on India Story

Rating Date CMP T.P (Dec 2012) Upside BUY 23rd FEB 2012 INR 1716 INR 2118 23%

Eicher Motors (EM) is a play on Volvos India story. It is capturing MHCV market share through stronger growth despite unfavorable macro environment on the back of Volvos superior technology, enhanced fuel efficiency and lower maintenance requirement. We believe EM is the best long term play within the Indian CV industry.

COMPANY DATA Industry Equity (INR mn) Face Value Auto 269 10

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 VECVs current low market share of 3.6%, there exists significant headroom for growth. Given companys focus on strengthening aftermarket and improvement in product offering

KEY MARKET DATA BSE Code BSE Group NSE Code Bloomberg Code Mkt Cap. (INR Bn.) 52 Week high/low Monthly Turnover 505200 B EICHERMOT EIM IN 40.5 1762 / 975 11 mn

using Volvos 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

SHARE HOLDING PATTERN (Dec 11)

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.

Promoters MFs, FIs, Banks FIIs Others

55% 18% 6% 21%

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

PRICE PERFORMANCE Returns (%) 3 Month 6 Month 12 Month * Benchmark Abs 7 27 63 Rel.* -5 16 64 Sensex

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 VECVs 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

Analyst Contact No Email

Jehan Bhadha 022 43022128

(c) Engine project under VECV JV will give a further fillip to the JVs revenue growth and help it emerge as a potential candidate for future components outsourcing opportunities from Volvo.

jehan-bhadha@darashaw.com

Summary Financials INR Mn. CY10 CY11 CY12E CY13E CY14E Sales 43,971 56,775 66,595 84,892 106,536 YoY 71% 29% 17% 27% 25% EBIDTA 3811 5935 7040 8813 11596 Margin 8.7% 10.5% 10.6% 10.4% 10.9% PAT 1889 3103 3449 4196 5472 Margin 4.3% 5.5% 5.2% 4.9% 5.1% EPS 70 115 128 156 203 YoY 21% 64% 11% 22% 30% RoE 15% 18% 16% 15% 15% P/E 24.5 14.9 13.4 11.0 P/BV 3.8 2.8 2.1 1.7

Eicher Motors Ltd

Volvos play on India Story
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 1959 1984 1991 1993 2005 2008 Eicher begins to sell imported tractors Indias first tractor rolled out of Eichers factory JV with Mitsubishi motors to make trucks Acquired Royal Enfield motorcycles Ended JV with Mitsubishi and entered CVs Divested tractor business to focus on CVs & motorcycles Formed JV with Volvo of Sweden, transferred CV business to the JV Top Management Siddhartha Lal Vinod Aggarwal Venki Padmanabhan MD CEO VECV CEO Two Wheelers

EICHER MOTORS GROUP STRUCTURE

Eicher Motors

Royal Enfield

VECV (Volvo Eicher CV) 54.4%

VECV - Segments

Eicher Trucks & Buses

Eicher Engineering Solutions

Volvo-Eicher Powertrain

Volvo Trucks India (Sales & Aftermarket)

Eicher Engineering Components

Source: Darashaw

Eicher Motors Ltd

Volvos play on India Story
Revenue Mix CY10 Revenue: INR 44 bn Royal Enfield 10%

PAT Mix CY 10 Revenue: INR 1.9 bn

VECV 60% Royal Enfield 40%

VECV 90%

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 FY06 FY06 FY07 FY08 CY08 CY08 CY08 CY08 CY09 Tractor, two wheeler, gear businesses de-merged from Eicher Ltd and merged into EM Sold tractor business in June 2005 to TAFE Acquired DIE (Design Intent Engineering) USA for USD 2.5 mn Acquired Hoff & Associates USA for USD 3.5 mn Hoff merged with DIE and renamed as EES (Eicher Engineering Solutions) Formed JV company with Volvo for CV business having a stake of 54.4% EES transferred to VECV in July 2008 Standalone company has only two wheeler business and investment in VECV Volvo acquires 8.1% stake in EM from promoters 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 EMs 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 Eichers 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.

Eicher Motors Ltd

Volvos play on India Story

VECV TARGETS 15% OF MHCV MARKET (>12T) BY CY15/FY16; INITIAL SUCCESS SIGNS VISIBLE We believe EMs JV (VECV) with Volvo, the worlds 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 VECVs current low market share of 3.6%, there exists significant headroom for growth.
6% MHCV M.S FY12E

3.6%

MHCV Market Share

15% 15%

23%

TAMO AL Eicher Others

12% 9% 6% 3% 3.6% 7.5%

67%

0%
C Y11 C Y15E (Target) C Y15E (Our Estimate)

Source: CMIE

Source: Company, Darashaw

EM - MHCV M.S - Initial success signs visible 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% FY07 FY08 CY09 CY10 CY11
16% C Y10 71% 13%

Shift in Product Mix towards MHCV

15% 14%

64%

62%

Buses <12T MHC V (>12T)

21% C Y12E

24% C Y15E

Source: Darashaw

Source: Darashaw

Given companys focus on strengthening aftermarket and improvement in product offering using Volvos 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 Volumes 90000 80000 70000 60000 50000 40000 30000 CY11 CY12E CY13E CY14E CY15E
Source: Darashaw

Grow th 30% 25% 20% 15% 10% 5% 0%

Timeline By Jan 2012 By Jan 2013 By Jan 2014 By Jan 2015

Capacity Per Month 4,500 5,500 7,000 8,300 Per Annum 54,000 66,000 84,000 100,000

Source: Darashaw

Eicher Motors Ltd

Volvos play on India Story

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 Groups 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 Groups decision to make VECV its base for its future Medium Duty Engine global platform demonstrates Volvos trust in VECVs 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 Volvos 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 48 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. VECVs Medium Duty Engine Project for Volvos global requirements brings potential for similar large component sourcing projects for Volvos 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 Volvos plant in Venissieux, France where these base engines will be assembled for its Euro 5 and Euro 6 requirements, starting 2013.

Eicher Motors Ltd

Volvos play on India Story

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 Volumes 120000 90000 60000 30000 0
FY05 FY06 FY07 FY08 C Y09 C Y10 C Y11 C Y12E C Y13E

Grow th 50% 40% 30% 20% 10% 0%

We expect a 23% CAGR for Royal Enfield volumes between CY11-13E driven by strong demand and expanded capacity.

Source: Darashaw

CAPEX PLANS EMs 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. Current Capacity CV Engine Project 2 Wheeler 50,000 50,000 84,000 Expanded Capacity 100,000 135,000 150,000 Completion Date Dec15 Dec12 Dec12 CY12 1.6 3.8 1.2 6.6 Amount in INR bn CY13 1.7 1.0 0.3 3.0 CY14 1.7 0.0 0.0 1.7 Cumulative 5.0 4.8 1.5 11.3

Source: Darashaw

Eicher Motors Ltd

Volvos play on India Story

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 Volvos 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)

4 3 2 1 0 -1 -2
FY07 FY08 C Y08 C Y09 C Y10 C Y11E C Y12E C Y13E

Negative FCF as large capex incurred on the engine project Source: Company, Darashaw

TAMO (SA) - Free Cash Flows (INR bn) 0 -25 -50 -75 -100
Source: Company, Darashaw

AL - Free Cash Flows (INR bn) 4 0 FY07 -4 -8 -12

Source: Company, Darashaw

FY07

FY08

FY09

FY10

FY11

FY08

FY09

FY10

FY11

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

TAMO (SA) AL FY11 FY08 FY09 FY10 FY11 FY08 CY08 EM CY09 CY10

Figs. In INR bn
Operating Cash Flow Investing Cash Flow Free Cash Flow

FY08

FY09

FY10

56 (54) 2

7 (184) (177)

90 (77) 13

112 (68) 44

10.7 (8.1) 2.6

(5.3) (6.6) (11.9)

10.9 (7.8) 3.1

5.9 (9.2) (3.3)

0.8 (0.6) 0.2

(0.9) 2.7 1.8

3.7 (2.7) 1.0

3.4 (1.9) 1.5

ROCE Asset Turnover (x) Debt / Equity (x)

21% 2.0 0.7

7% 1.0 1.0

11% 1.1 1.1

11% 1.3 0.9

26% 2.5 0.4

10% 1.1 0.7

15% 1.2 1.0

20% 1.7 1.0

15% 3.5 0.5

3% 1.0 0.2

11% 1.7 0.1

23% 2.2 0.1

Source: Darashaw

Eicher Motors Ltd

Volvos play on India Story

ROCE 30% 25% 20% 15% 10% 5% 0% FY08 FY09 TAMO AL FY10 Eicher FY11

4% 3% 2% 1% 0% FY02 FY03

EM - M&HCV (>12T) Ma rke t Sha re Mov e me nt

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Source: Darashaw

Source: Darashaw

Asset Turnover (x)

3.5 3.0 2.5 2.0 1.5 1.0 0.5 FY08 FY09 TAMO AL FY10 Eicher FY11

32% 30% 28% 26% 24% 22% FY02 FY03

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

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11
FY11

Source: Darashaw Source: Darashaw

Debt / Equity (x)

1.2 1.0 0.8 0.6 0.4 0.2 0.0 FY08 FY09 TAMO FY10 AL Eicher
Source: Darashaw
75% 73% 71% 69% 67% 65% FY02 FY03

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

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Source: Darashaw

H1FY12

H1FY12

H1FY12

Eicher Motors Ltd

Volvos play on India Story

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 VECVs 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 JVs revenue growth and help it emerge as a potential candidate for further outsourcing opportunities of components to Volvo. Summary of revenue forecast Royal Enfield Volume Growth ASP Growth Revenue Growth VECV (T&B) Volume Growth ASP Growth Revenue Growth Engine Project Volume Growth ASP Growth Revenue Growth Trading Revenue Growth Consolidated Revenue Growth CY09 51,955 72,195 3,751 CY10 54,380 5% 80,631 12% 4,385 17% CY10 39,285 56% 735,227 2% 28,883 60% CY10 0 CY11 72,835 34% 91,501 13% 6,665 52% CY11 49,043 25% 825,206 12% 40,471 40% CY11 0 CY12E 86,980 19% 96,153 5% 8,363 25% CY12E 55,502 13% 866,466 5% 48,091 19% CY12E 0 CY13E 108,000 24% 101,041 5% 10,912 30% CY13E 64,932 17% 909,789 5% 59,075 23% CY13E 25,000 150,000 3,750 CY14E 124,200 15% 106,178 5% 13,187 21% CY14E 78,005 20% 955,279 5% 74,516 26% CY14E 43,750 75% 150,000 0% 6,563 75% CY14E 12,270 10% CY14E 106,536 25% Source: Darashaw

CY09 25,192 717,517 18,076

CY09 0

CY09 7,560

CY10 10,703 42% CY10 43,971 50%

CY11 9,219 -14% CY11 56,354 28%

CY12E 10,141 10% CY12E 66,595 18%

CY13E 11,155 10% CY13E 84,892 27%

CY09 29,386

Segment-wise revenue break-up

26%

24%

16%

15%

13% 4%

12% 6%

62%

66%

72%

72%

70%

70%

13% C Y09

10% C Y10 Royal Enfield

12% C Y11 VEC V (T&B)

13% C Y12E

13% C Y13E Trading

12% C Y14E

Engine Project

Source: Darashaw

Eicher Motors Ltd

Volvos play on India Story

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. TAMOs 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 TAMOs 2.5%, therefore we do not see a significant reduction from here on.

EM
Warranty + Incentives as % of Revenue EBITDA Margins 10.5% 8.7% 5.5% 3.5%
2.1%

TAMO (SA) Warranty + Incentives as % of Revenue 2.7% 2.5% 2.5% 2.0% 1.7% 1.9%

5.1% 5.1%

2.6%

1.7%

FY08

C Y09

C Y10

C Y11

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. VECVs 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) 5% 8%

Cummins India (FY11) 21%

Greaves Cotton (FY11)

21%

21%

7% 6%

3%
65%

66%

7% 63%

RM

Employees

Other Costs

EBITDA

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

Source: Darashaw

Eicher Motors Ltd

Volvos play on India Story

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 industrys 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% FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E -10% -20% -30% -40% FY16E
Jan-10

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) 55 50 45 40 35 30 25 20 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
180 160 140 120 100 80 60 Jan-05

Aluminum Wire Rod : Mumbai (INR/Kg)

Jan-06

Jan-07

Jan-08

Jan-09

Jan-11

Jan-12

Source: Darashaw

Source: Darashaw

Eicher Motors Ltd

Volvos play on India Story

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) Others TAMO+AL

8.8% 2.1% FY07 4.2% 4.9% 4.6% 6.4%

FY08

FY09

FY10

FY11

H1FY12

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.

Eicher Motors Ltd

Volvos play on India Story

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 EMs 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 ALs (Ashok Leylands) historical mean multiple. We have been conservative and not given premium valuations to EM vis--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 HMCLs 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 Volvos 46% stake)

SOTP Valuation One year out (Dec 2012) Method VECV JV Two Wheelers Net Cash Fair Value P/E P/E P/B SOTP Multiple 11.3 12.6 0.75 CY13 EPS 103 53 Value / Share 1,164 663 292 2,118 Contribution 55% 31% 14% 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. EMs MHCV (>12T) market share to reach 7.5% by FY16E v/s Managements guidance of 15%. (Stood at 3.6% as on CY11 end) Valued VECV at ALs Mean P/E ratio of 11.3x. Valued Royal Enfield at 10% discount to HMCLs 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 VECV JV Two Wheelers Net Cash Value P/E P/E P/B Multiple 11.3 12.6 0.75 CY15 EPS 195 69 292 Value / Share 2,200 871 292 3,362 Contribution 65% 26% 9% 100%

Eicher Motors Ltd

Profit & Loss Net Sales Change in stock VoP Other operating inc Income CY10 43971 0 43971 1,276 45247 CY11 56775 0 56775 1,769 58545 CY12E 66595 0 66595 1,828 68423 CY13E 84892 0 84892 2,199 87091 CY14E 106536 0 106536 2,757 109293 Debt Expenditure Raw Materials Employee Other Exp 40402 33147 2631 4624 51227 41859 3397 5970 59921 48933 3985 7003 76546 62539 5080 8927 95526 77948 6375 11203 Application of Funds 20052 25466 32345 40893 52430 Minority Interest Sources of Funds 20052 25466 32345 40893 52430 956 0 0 0 0 Equity Reserves & Surplus Networth 269 12052 12321 269 16536 16806 269 21384 21654 269 27325 27594 269 35252 35522 Balance Sheet CY10 CY11 CY12E CY13E CY14E

EBIDTA

4845

7318

8502

10545

13767

Gross Fixed Assets Less Acc. Depreciation

8113 4269 3844

10241 4904 5337

16888 5951 10937

20776 7239 13537

22789 8652 14137

Depreciation

573

635

1047

1288

1413

Net Fixed Assets

EBIT

4272

6683

7455

9257

12354

Capital WIP

703

Interest Non-Operating income Extra-ordinary income Extra-ordinary exp

95 0 0 0

77 0 0 0

0 0 0

0 0 0

0 0 0

Investments

4586

5503

6053

6659

7325

Inventories Debtors Cash

3265 2609 12457 1814 20500

4188 2902 16322 2197 26001

4896 3040 17253 2490 28109

6215 3642 23085 3038 36453

7775 4571 34009 3686 50561

PBT

4,177

6,606

7,455

9,257

12,354

Loans & Advances Current Assets

Tax

1,108

1,617

1,976

2,453

3,274 Current Liabilities 7942 1391 9332 9446 1746 11192 10583 2063 12645 13110 2622 15733 16375 3296 19671 Provisions Current Liabilities & Prov

PAT Minority Interest PAT Adj. EPS

3069 1179 1889 70

4989 1886 3103 115

5479 2031 3449 128

6804 2608 4196 156

9080 3609 5472 203

Non-Current Liabilities

249

182

109

23

(79)

Eicher Motors Ltd

Ratios SalesGrowth IncomeGrowth EBIDTAGrowth Adj.PATGrowth EPSGrowth RawMaterials Employee OtherExp EBITDAMargin Depreciationrate EBITmargin OtherincometoPBT TaxRate PATMargin PAT/Sales Sales/Assets Avg.NetAssets/Avg.Equity DupontRoE RoE RoCE
15% 21% 18% 26% 16% 23% 15% 23% 15% 24% 4% 2.2 1.6 15% 5% 2.2 1.5 18% 5% 2.1 1.5 16% 5% 2.1 1.5 15% 5% 2.0 1.5 15% 31% 27% 4% 27% 24% 5% 25% 27% 5% 24% 27% 5% 22% 27% 5% Finaning Cash Flow Dividend (adj for inc/dec in prov) Equity buyback/(issue) After-tax Interest Debt Repayment/(issue) Inc/(Dec) in Non-op Investments Inc/(Dec) in Excess Cash Inc/(Dec) in Non-op L&A 1990 200 (88) 70 307 1645 932 (49) 4004 383 0 58 956 917 3576 0 (268) 505 0 0 0 550 707 0 4003 631 0 0 0 605 5375 0 8320 864 0 0 0 666 10399 0 Cash flow to investors 1990 4004 (268) 4003 8320 75% 6% 11% 8.7% 7% 9% 74% 6% 11% 10.5% 6% 11% 73% 6% 11% 10.6% 6% 11% 74% 6% 11% 10.4% 6% 11% 73% 6% 11% 0.0% 6% 11% Non-Operating cash flow 0 0 0 0 0 Free Cash Flow to Firm 1990 4004 (268) 4003 8320 Inc / Dec in other op assets Net Capex Net Investment (108) 682 1148 67 857 1043 73 5673 5747 86 2686 2801 102 702 760 CY10 CY11 CY12E CY13E CY14E FCFF CY10 CY11 CY12E CY13E CY14E

50% 49% 94% 150% 150%

29% 29% 51% 64% 64%

17% 17% 16% 11% 11%

27% 27% 24% 22% 22%

25% 25% 31% 30% 30% EBIT Less Adj. Taxes NOPLAT Inc / (Dec) in WC Operating Cash Flow 4272 1133 3138 466 2672 6683 1636 5047 187 4861 7455 1976 5479 74 5406 9257 2453 6804 115 6689 12354 3274 9080 58 9022

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