IDBICapital Auto Sep2010

Indian Autos
Strong momentum on; valuation not far behind

Analyst: Bhaumik Bhatia +91224322 1189 bhaumik.bhatia@idbicapital.com
September 2010
1
Table of contents
1. 2. 3. 4. 5. 6. Quarter gone by: Volume traction on; low taxes arrest pressure on profitability3 Outlook: India structurally set for strong demand.8 Concerns: Largely macroeconomic 13 Valuation: M&M, TVS attractive14 Segment outlook: Blessed by India demographics; competition intense16 Company Section
1. 2. 3. 4. 5. 6. 7. Ashok Leyland: Positives priced in HOLD.24 Bajaj Auto: Rediscovering glory HOLD 30 Hero Honda: Honda split concerns overdone HOLD 38 Maruti Suzuki: Royalty, competitionBane for now HOLD44 Mahindra & Mahindra: Safe play on robust rural economy BUY........................50 Tata Motors: Cruising on JLR turnaround ACCUMULATE.58 TVS Motor: New launches set to Jive BUY ..66
Quarter gone by
Strong volume momentum

Volume momentum strong with 31% growth YoY and 6% growth QoQ for our auto universe. QoQ growth was led by two wheelers, while four wheelers, especially commercial vehicles declined.
Volume (units) Hero Honda Bajaj Auto TVS Motor Maruti Suzuki M&M Tata Motors Ashok Leyland Aggregate Q1FY11 1,234,038 928,336 463,840 283,324 132,243 181,715 21,402 3,244,898 Q1FY10 1,118,987 547,662 349,386 226,729 106,129 123,110 7,698 2,479,701 YoY % 10.3 69.5 32.8 25.0 24.6 47.6 178.0 30.9 Q4FY10 1,186,536 808,929 419,245 287,422 136,704 210,057 25,807 3,074,700 QoQ % Comments 4.0 Steady growth on positive industry dynamics, however losing 14.8 10.6 (1.4) (3.3) (13.5) (17.1) 5.5
market share to more aggressive competition Successful launches and consumer uptrading Positive initial response to new launches Positive industry dynamics, however losing market share to new launches by peers and capacity constraints Industry leadership and strong rural economy leading to strong volumes Healthy freight environment and strong passenger vehicle demand Healthy freight environment and pick up in Southern market
Source: Company, IDBI Capital Research
Margin pressure seen on higher RMC

EBITDA margin (excl. TTMT) down 2.5% QoQ on higher RMC/sales at 73.4%, (up 210bps QoQ), though partially compensated by strong pricing power (35% prices hikes across players in the last 12 months). TTMT margin up QoQ on high oneoff expenditure in Q4FY10.
EBITDA margin (%) Hero Honda Bajaj Auto TVS Motor Maruti Suzuki M&M Tata Motors Ashok Leyland Aggregate Aggregate excl. TTMT
Q1FY11 14.0 20.0 6.4 9.6 15.0 11.1 10.0 12.4 12.9
Q1FY10 17.0 19.5 6.3 12.2 14.4 11.2 1.3 13.1 13.7
YoY % (3.0) 0.5 0.1 (2.6) 0.7 (0.1) 8.7 (0.7) (0.8)
Q4FY10 17.3 22.9 7.1 13.2 15.9 9.3 12.9 13.4 15.4
QoQ % (3.2) (2.9) (0.6) (3.6) (0.9) 1.8 (2.8) (1.0) (2.5)
Tax rates trending lower

Increasing production at tax havens (Uttarakhand and Himachal Pradesh) and higher R&D spends enable lower tax rates (effective tax rate at 24.5% vs. 27.5% in Q4FY10 and 25.6% in Q1FY10).
Effective tax rate (%) Hero Honda Bajaj Auto TVS Motor Maruti Suzuki M&M Tata Motors Ashok Leyland Aggregate
Q1FY11 19.4 28.6 20.1 27.6 22.0 26.4 16.6 24.5
Q1FY10 23.4 29.6 9.6 27.7 25.5 15.0 11.1 25.6
YoY % 3.9 1.0 (10.5) 0.1 3.5 (11.4) (5.5) 1.0
Q4FY10 18.8 26.5 2.4 31.2 25.8 39.9 25.6 27.5
QoQ % (0.7) (2.0) (17.7) 3.6 3.7 13.5 9.0 3.0
Earnings traction led by lower tax rate and higher other income
PAT up 36% YoY on strong demand traction, lower tax rate and higher other income. However, down sequentially on lower other income.
PAT Hero Honda Bajaj Auto TVS Motor Maruti Suzuki M&M Tata Motors Ashok Leyland Aggregate
Q1FY11 4,917 5,902 402 4,654 5,624 3,957 1,226 26,682
Q1FY10 5,001 3,096 181 5,835 4,009 1,949 (427) 19,644
YoY % (1.7) 90.6 122.0 (20.3) 40.3 103.1 (387.3) 35.8
Q4FY10 5,988 5,771 508 6,566 5,703 3,356 2,231 30,122
QoQ % (17.9) 2.3 (20.8) (29.1) (1.4) 17.9 (45.0) (11.4)
Outlook
India structurally set for strong demand
Capex plans indicate strong demand expectations

Most players in the auto industry are operating at >80% utilization and have earmarked significant capex over FY1113E. Based on our interactions with various industry participants and news reports, we estimate total capex to be in the range of Rs250300 bn over FY1113 across players, accounting for ~25% additional capacity. This reflects auto manufacturers belief in the sustainability of strong demand momentum. This is further vindicated by similar capacity expansion plans across auto ancilliary players. Capacity expansion plans
(Units) Maruti Suzuki Tata Motors M&M Honda Ford Toyota Bajaj Auto Hero Honda Eicher Ashok Leyland TVS Motor HMSI Total
Current capacity 1,200,000 1,260,000 597,000 120,000 100,000 70,000 4,200,000 5,400,000 50,000 100,000 2,400,000 1,200,000 16,697,000
Capacity expansion 500,000 n.a. n.a. 60,000 100,000 100,000 1,000,000 1,000,000 50,000 50,000 400,000 1,000,000 4,260,000
Capex (Rs bn) 60.0 80.0 45.0 10.0 15.0 20.0 2.5 3.0 5.0 12.0 1.3 3.0 256.8
Time period FY1113 FY1113 FY1113 FY11 n.a. n.a. FY11 FY11 FY1113 FY1112 FY11 n.a.
Volume CAGR for coverage universe at 1217% over FY1012E

We believe structural demand drivers for all segments of Indian auto industry are in place to continue strong growth trajectory over the next 510 years. However, with more global players entering the Indian auto market, we believe competitive intensity is likely to rise in the foreseeable future, as more players fight to get their share of the Auto pie. We see passenger cars being most intensely competitive over the next few years and utility vehicles and tractors to be the least competitive. Within the passenger car segment, we believe volume growth will be driven by small and compact segments led by drop in entry level prices, rising affordability, new launches and strong exports. Utility vehicles growth will be driven by growth in the commercial UV segment with rising demand from tour operators, BPOs and financial services. Two wheeler growth will be driven by >100 cc segment as buyers look for improved bike performance at affordable prices and high fuel efficiency. Three wheeler growth will be driven by passenger segment, while commercial vehicles growth will be driven at lower end by smaller LCVs, and at higher end by multiaxles, tippers and trailers. We expect volumes for companies under our coverage to register 1217% CAGR over FY1012E.
Segment Passenger vehicles Commercial vehicles Two wheelers Tractors
Source: IDBI Capital Research
CAGR over FY1012E 12% 17% 16% 12%
10
however, input costs beginning to impact margin

Most of the raw materials like steel, aluminium, rubber, among others have risen by ~25% over the past 1215 months.
2500 2300 2100 1900 1700 1500 Oct09 Aug09 Nov09 Mar10 Apr10 May10 Jun09 Jul09 Sep09 Dec09 Jan10 Feb10 Jun10 Jul10 300
Aluminium up 28%, steel up 24%
600 Rubber RSS4 (Rs/kg) 500 400
200 180 160 140 120 100 80 Aug09 Oct09 Nov09 Mar10 Apr10 May10 Jul09 Sep09 Dec09 Jun09 Jan10 Feb10 Jun10 Jul10
AL
Rubber up 85%
Al umi ni um LME ($/tonne)

Source: Bloomberg, IDBI Capital Research
Steel Bi l l ets LME ($/tonne) (RHS)
Source: Rubber Board, IDBI Capital Research
This has started impacting raw material costs as % of sales of auto OEMs from Q4FY10 onwards and the impact is likely to continue till Q2FY11/Q3FY11, beyond which prices are expected to stabilize/marginally soften.
RM/sales trend (%) 79 77 75 73 71 69 67 65 Dec09 HH BJAUT TVS Mar10 MSIL MM Jun10 TTMT AL
EBITDA margin trend (%) 26 22 18 14 10
Rising RMC; declining margin
6 Dec09 HH BJAUT TVS Mar10 MSIL MM TTMT Jun10
11
margin to contract marginally in FY11; stabilize in FY12

We expect EBITDA margin for auto OEMs to contract only marginally in FY11 and stabilize in FY12, led by operating leverage benefits and price hikes taken across categories (35% in the last 12 months). Moreover, fiscal benefits from tax haven plants should partially aid in arresting margin decline. EBITDA margin trend
24
19 EBITDA margin (%)
14
4 FY09 HH
FY10 BJAUT TVS MSIL
FY11E MM TTMT
FY12E AL
12
Concerns: Largely macroeconomic

Interest rates inching up; however, history suggests low correlation with demand.
50 40 30 20 10 0 (10) (20) (30) 10yr Gsec (%)
Source: Bloomberg, SIAM, IDBI Capital Research
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Growth in CVs (%)
Growth in PVs (%)
Growth in 2w (%)
Rising commodity prices could impact margin; but largely factored in for FY11E. Economic slowdown could result in credit crunch and impact infrastructure spending, thereby slowing down growth.
13
Valuation matrix M&M, TVS attractively placed

20 18 16 14 12 10 8 0 10 20 30 40 50 60 70 Ea rni ngs CAGR over FY1012E (%) Hero Honda M&M
Auto earnings CAGR of ~17% Low growth, high PEG ratio
High growth, high PEG ratio
5yr median Auto PER of ~16x
High growth, low PEG ratio
Ba ja j Auto Ta ta Motors
TVS Motor As hok Leyl a nd
Ma ruti Suzuki
Most auto companies (barring TVS and M&M) are currently trading close to or above historical median PER and we believe that we are close to the peak on the valuation curve. Nonetheless, we find significant value in TVS and M&M and are positive on Tata Motors, considering expected strong earnings traction. We like TVS led by expectation of 94% earnings CAGR over FY1012E, on positive response to new launches, improving product mix, operating leverage benefits and reduced losses in Indonesian operations. We expect this to aid in narrowing valuation discount versus Bajaj Auto and Hero Honda. We like M&M led by robust business model and market leadership in two of the least competitive auto segments UVs and tractors. Moreover, most of its subsidiaries have exhibited strong operating performance over the past 12 months, which further strengthens its business profile.
14
Peer valuation
Indian peer comparison
Rs mn Hero Honda Bajaj Auto TVS Motor Maruti Suzuki M&M* Tata Motors* Ashok Leyland
* Standalone Financials
CMP (Rs) 1,722 1,470 77 1,423 670 1,054 76
Reco HOLD HOLD BUY HOLD BUY ACCUMULATE HOLD
Mkt cap (Rs bn) 344 425 36 411 388 584 92
Target price (Rs) 1,856 1,402 98 1,309 848 1,148 79
Revenue FY11E FY12E 183,107 208,793 151,869 177,539 59,429 71,553 346,896 392,776 219,045 416,765 100,571 263,309 510,802 119,370
EPS (Rs) FY11E FY12E 116.0 132.6 78.9 93.4 4.8 7.0 81.7 93.5 42.2 42.3 4.4 49.7 49.3 5.6
P/E (x) FY11E FY12E 14.8 13.0 18.6 15.7 16.1 11.0 16.8 14.6 15.9 24.9 17.4 13.5 21.4 13.5
EV/EBITDA (x) FY11E FY12E 10.5 8.6 13.0 10.9 9.3 6.1 9.3 6.5 10.5 13.0 10.2 8.5 10.5 8.3
Global peer comparison

Revenue CY10E / CY11E / FY11E FY12E 73,451 118,674 30,638 110,148 232,824 113,926 68,883 77,530 126,486 32,436 117,595 244,727 122,838 73,978 EPS ($) CY10E / CY11E / FY11E FY12E 5.0 4.7 0.9 3.3 1.8 1.8 0.3 6.2 5.7 1.2 3.4 2.7 1.8 1.1 P/E (x) CY10E / CY11E / FY11E FY12E 12.3 12.2 22.8 10.6 19.4 6.7 44.9 9.9 10.0 18.0 10.1 13.3 6.4 12.4 EV/EBITDA (x) CY10E / CY11E / FY11E FY12E 2.6 4.3 3.9 6.9 12.5 5.0 3.7 2.4 3.9 3.5 6.1 10.4 4.5 3.2
US$ mn BMW AG Daimler AG Suzuki Motor Honda Motor Toyota Motor Ford Motor Fiat SpA
Source: Bloomberg
CMP (US$) 61 57 21 35 36 12 13
Mkt Cap (US$ mn) 39,097 60,672 11,943 62,611 123,205 40,825 15,877
Indian universe valuation matrix suggests Toyota like investment case.
15
Segment outlook
Blessed by India demographics; competition intense and rising
16
Two wheelers: Demography, exports drive 16% volume CAGR

Demand drivers Rising per capita income levels Penetration levels still very low (55/1,000 people) Strong rural growth rural sales growing faster than urban sales; rural sales estimated at 4550% of total twowheeler sales Shortening vehicle life cycles, replacement demand expected at 4550% of sales New launches Discover, Twister, Unicorn Dazzler, Jive, Pulsar targeted towards consumer uptrading to executive and premium segments. 2w pie moving more and more towards these segments and away from entry segment Foray into markets like Africa, Indonesia, Thailand, Iran, Latin America and deeper penetration in existing SAARC markets Risks With nearly 4550% demand from rural areas, monsoon vagaries remain a concern. High interest rate sensitivity of entry level bikes Economic slowdown, rising input costs and higher retail fuel prices
Low penetration implies strong growth potential
Lowest penetration among emerging economies 700 600 500 400 300 200 100 0 Ta i wa n Thai l a nd Vietna m Indones i a Chi na Brazi l Indi a 253 236 148 64 59 55 595
Source: Company
Share of entry segment on a decline

Industry mix (%)
70 60 50 40 30 20 10 0 2 FY02 6 FY03 Entry 8 FY04 8 FY05 9 FY06 10 FY07 12 FY08 44 36 33 55 59 59 49 43 48 44 52 38 31 25 14 FY09 56 61
64
19 17
FY10
Executi ve
Premi um
Source: Company
17
Passenger vehicles: Income multiplier the demand driver

Demand drivers Favourable macro economic environment and rising per capita income levels Favourable demographics with >50% population below the age of 25 years and Indias burgeoning middle class and working population to go up to 68% in 2020 from 63% in FY08 Increased affordability through reduction in entrylevel prices Strong demand from semiurban and rural markets, forming ~15% of overall demand, up from ~8% in FY07 New offerings, shrinking replacement cycle and strong export demand especially from neighboring countries, Africa and Latin America Low penetration signifies growth potential Car penetration level India becoming the hub for small car manufacturing with Suzuki, Nissan, Hyundai among other global majors 250 202 intending to source cars from their Indian operations 186 200 Low penetration levels 8 per thousand 120 150
100 91 46 9 Mexico Korea Brazil Malaysia Thailand Phillipines 8 India 6 China 3 Indonesia
Risks Rising competitive intensity could lead to shrinking pricing power and impact margin Economic slowdown, rising input costs and higher interest rates and fuel prices
50 0
Source: Company
18
Boosted by favourable demographics

Rising affordability
Increasing per capita income ($) 1200 1029 1000 800 600 600 400 200 0 FY07 FY08 FY09 FY10 FY11E FY12E 935 850 773 687
Burgeoning middle class

India population (mn) 755 1 100% 6 80% 60% 40% 20% 0% 1985 1995 2005E 2015F 2025F Deprived (<2250) Aspirers (2,2505,000) Seekers (5,00012,500) Strivers (12,50025,000) Globals (>25,000) Annual household income brackets (US$) 93 80 54 35 928 2 18 1,107 1 4 41 43 36 22 1,278 1 2 19 1,429 2 9 32
~12% CAGR
Source: Company
Source: Company
Rising share of working population

1,600 1,200 800 400 0 2000 < 15 years
Source: Company
68 66 64 62 60 2005 1564 years 2010 > 64 years 2015 2020 % working population
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Commercial vehicles: Robust industrial activity driving freight movement

Strong IIP growth (%)
Demand drivers Buoyant industrial activity Governments continued thrust on road development
Projected investment in roads and bridges during XIth Plan
Roads & Bridges Centre States Private Total
Source: Planning Commission
20 15 10 5 0 5 Apr Ma y Jun Jul Aug Sep Oct Nov Dec Ja n Feb Ma r 200809 200910
Total XIth Plan spend (Rs bn) 1,074 1,000 1,068 3,142
% share 34.2 31.8 34.0 100.0

200708
Strong correlation between freight rates and CV sales

300 200 100 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 CV Index FY10
Correlation of 0.93
Healthy freight environment and firm freight rates supporting truck operator profitability and in turn CV sales, as there is strong correlation between freight rates and CV sales (r = 0.93) Structural changes with emergence of hubnspoke transportation model, especially boosting LCV demand Risks Increase in interest rates and financing constraints Economic slowdown, rising input costs and higher fuel prices
Roa d frei ght i ndex
Hubnspoke model
Town
City A
City B
Village Rural Inter City Intra City Long distance
Source: Company, Bloomberg, TCI, IDBI Capital Research
20
Three wheelers: Trending towards passenger segment

Three wheeler industry is getting more polarised towards passenger segment, as cargo segment has been significantly impacted post the launch of Tata Ace and the situation is likely to continue going forward. Cargo segment declined by 0.4% CAGR over FY0710, while passenger segment grew 17.2% over the same period, thereby increasing its share in the 3wheeler pie to 64% in FY10 from 52% in FY07.
3wheeler passenger segment pie growing
100% 80% 60% 40% 20% 0% FY04 FY05 FY06 Ca rgo (l a cs )
2.5
2.5
3.0
3.3
3.5
4.0
5.4
1.4
2.0
2.3
3.1
2.9
2.3
3.0 FY10
Tata Ace impact
FY07
FY08 Pa s s enger (l a cs )
FY09
We believe passenger 3wheeler industry will continue to drive this segment and clock ~10% CAGR over FY1012 led by the following demand drivers:
Strong GDP growth and rising need for mobility In city passenger movement Poor public transport Economic mode of transportation Replacement demand triggered by availability of alternate fuel like diesel and CNG State governments releasing more / doing away with permits
21
Tractors: Rural policy thrust keeps engine running

Demand drivers Strong rural economy led by governments thrust on agriculture Rising MSPs NREGA scheme Everincreasing agri credit Farm loan waiver Risks Monsoon vagaries Rising input costs and higher interest rates
Rising MSPs increasing affordability
MSP index 160 140 120 100 80 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11
Everincreasing agricultural credit (Rs bn)

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 Nov05 Mar06 Nov06 Mar07 Nov07 Mar08 Nov08 Mar09 Nov09 Mar10 Jul06 Jul07 Jul08 Jul09
24% CAGR
Ri ce Ma i ze
Whea t Ba rl ey
Jowa r Pul s es
Ba jra Suga rca ne
22
Company Section
23
Ashok Leyland (AL IN)

CMP: Rs76 Mkt cap: Rs92 bn
HOLD
TP: Rs79
Positives priced in
Financial snapshot
Rs mn FY09 FY10 FY11E FY12E Revenue 59,586 72,090 100,571 119,370 EBITDA 4,559 7,552 10,872 13,306 EBITDA (%) 7.3 10.0 10.3 10.6 Adjusted net profit 1,900 4,194 5,815 7,473 EPS (Rs) 1.4 3.2 4.4 5.6 P/E (x) 24.1 17.4 13.5 EV/EBITDA (x) 14.5 10.2 8.3
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Robust domestic CV outlook

Ashok Leyland to benefit from structural shift to higher tonnage commercial vehicles like tractor trailers, multiaxle vehicles and tippers, along with buoyant industrial activity In Q4FY10, tractor trailers and MAVs grew by 62% and 51% respectively over Q3FY10 as against CV growth of 45% QoQ. Pantnagar plant ramp up expected Q2FY11 onwards, with management guidance of production of 8k units in H1FY11 and 12k units in H2FY11. We expect 15k units from Pantnagar in FY11 and expect this plant to expand reach, improve logistics and provide tax benefits. Hinduja Leyland Finance (ALs finance arm) has received RBI approval and commenced operations in March 2010. It plans to finance 4k vehicles and disburse Rs 8.5 bn in the first year of operations. We believe this should provide fillip to sales volume. JV with Nissan for LCV to start operations from mid CY11 and JV with John Deere for construction equipments to start operations towards end of CY10. We have not factored in these two JVs in our estimates.
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Valuation higher than 5yr median

Ashok Leyland 12m fwd PER (x) 100 80 60 40 20 0 Apr02 Sep02 Feb03 Jul03 Dec03 May04 Oct04 Mar05 Aug05 Jan06 Jun06 Nov06 Apr07 Sep07 Feb08 Jul08 Dec08 May09 Oct09 Mar10 Aug10 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Apr02 Sep02 Feb03 Jul03 Dec03 May04 Oct04 Mar05 Aug05 Jan06 Jun06 Nov06 Apr07 Sep07 Feb08 Jul08 Dec08 May09 Oct09 Mar10 Aug10 Ashok Leyland 12m EV/Ebitda (x) 80 60 40 20 0 Apr02 Sep02 Feb03 Jul03 Dec03 May04 Oct04 Mar05 Aug05 Jan06 Jun06 Nov06 Apr07 Sep07 Feb08 Jul08 Dec08 May09 Oct09 Mar10 Aug10 Pri ce 0.8x 1.5x 2.8x 2.8x Ashok Leyland 12m fwd PBR (x)
Pri ce
5.5x
6.9x
11.9x
16.9x
EV
3x
4x
7x
10x
AL is trading higher than last 5yr valuation on most parameters. Last 5yr median PER is 12.8x, while it currently trades at ~16x 1yr forward earnings. Similarly its 5yr median EV/EBITDA is 7.9x, while it trades at ~10x. We believe valuation should expand for AL, considering strong domestic CV outlook and pick up in the Southern market. However, valuation at 17.4x FY11E and 13.5x FY12E is not cheap. Initiate with HOLD and price target of Rs79 (14x FY12E), as we see limited upside from these levels.
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Assumptions
(Units) Total Sales Growth % MDV Passenger Growth % MDV Goods Growth % LCV Growth % Realisation (Rs) Growth % EBITDA margin (%)
FY10 63,933 17.4 18,452 (6.6) 44,384 33.0 1,097 (18.7) 1,133,172 3.2 10.4
FY11E 86,911 35.9 22,550 22.2 63,446 42.9 914 (16.7) 1,162,516 2.6 11.0
FY12E 99,534 14.5 25,551 13.3 72,963 15.0 1,020 11.6 1,205,350 3.7 11.2
Strong earnings growth led by robust CV outlook

140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 120.8 140 120 100 80 60 40 20 0
(Rs mn)
38.6 10.5 FY10 Net sales EBITDA 10.8 FY11E Adj. PAT EBITDA margin (%)
28.5 11.1 FY12E PAT growth (%)
(%)
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Financials
Income Statement
Y/E 31 Mar (Rs mn) FY09 59,586 22.9 55,251 4,559 43.6 1,784 2,775 1,603 695 1,867 185 9 1,900 1,900 59.5 1,330.3 FY10 72,090 21.0 64,895 7,552 65.6 2,041 5,511 1,019 377 4,869 1,210 22 4,194 4,194 120.8 1,330.3 FY11E 100,571 39.5 90,163 10,872 44.0 2,602 8,270 1,409 407 7,268 1,454 20 5,815 5,815 38.6 1,330.3 FY12E 119,370 18.7 106,668 13,306 22.4 2,885 10,421 1,525 445 9,341 1,868 20 7,473 7,473 28.5 1,330.3
Balance Sheet
Y/E 31 Mar (Rs mn) FY09 43,975 2,635 0 31,656 13,300 9,580 881 7,895 78,266 FY10 48,110 3,262 0 41,397 16,382 10,221 5,189 9,605 92,769 FY11E 54,093 5,886 0 39,109 12,456 14,254 1,729 10,670 99,089 FY12E 55,009 8,187 0 46,443 14,791 16,925 2,813 11,914 109,639
Net sales growth (%) Operating expenses EBITDA growth (%) Depreciation EBIT Interest paid Other income Pretax profit Tax Effective tax rate (%) Net profit Adjusted net profit growth (%) Shares o/s (mn nos)
Net fixed assets Investments Other noncurr assets Current assets Inventories Sundry Debtors Cash and Bank Loans and advances Total assets Shareholders' funds Share capital Reserves & surplus Total Debt Secured loans Unsecured loans Other liabilities Curr Liab & prov Current liabilities Provisions Total liabilities Total equity & liabilities Book Value (Rs)
34,681 1,330 33,447 19,581 129 19,453 22,216 21,369 21,369 0 43,585 78,266 16
36,511 1,330 35,233 22,039 466 21,573 26,650 29,608 29,608 0 56,257 92,769 17
39,989 1,330 38,713 20,520 71 20,449 25,131 33,969 33,969 0 59,100 99,089 20
45,130 1,330 43,851 20,739 71 20,668 25,350 39,160 39,160 0 64,509 109,639 24
28
Financials
Cash Flow Statement
Y/E 31 Mar (Rs mn) FY09 2,084 1,372 76 7,118 0 3,738 24,799 187 16,595 8,391 127 10,706 2,337 0 8,496 3,633 FY10 5,404 2,150 753 2,049 0 10,355 6,285 626 0 6,912 45 2,457 1,556 81 865 4,309 11,598 8,585 2,625 0 11,210 3 1,519 2,327 0 3,848 3,460 FY11E 7,268 2,602 1,454 3,181 FY12E 9,341 2,885 1,868 1,060 0 9,298 3,800 2,301 0 6,101 3 219 2,335 0 2,113 1,084
Financial Ratios
Y/E 31 Mar (Rs mn) FY09 1.4 59.5 7.3 3.5 6.8 7.7 FY10 3.2 120.8 10.0 7.5 11.8 9.8 FY11E 4.4 38.6 10.3 7.2 15.2 13.5 FY12E 5.6 28.5 10.6 7.8 17.6 16.0
Pretax profit Depreciation Tax paid Chg in working capital Other operating activities Cash flow from operations (a) Capital expenditure Chg in investments Other investing activities Cash flow from investing (b) Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Other financing activities Cash flow from financing (c) Net chg in cash (a+b+c)
Adj EPS (Rs) Adj EPS growth (%) EBITDA margin (%) Pretax margin (%) ROE (%) ROCE (%) Turnover & Leverage ratios (x) Asset turnover (x) Leverage factor (x) Net margin (%) Net Debt/Equity (x) Working Capital & Liquidity ratio Inventory days Receivable days Payable days
0.9 2.4 3.2 0.5
0.8 2.4 5.8 0.5
1.0 2.5 5.8 0.5
1.1 2.5 6.3 0.4
81.5 58.7 117.0
82.9 51.7 131.1
45.2 51.7 112.1
45.2 51.8 112.5
Valuation
PER (x) Price/Book value (x) PCE (x) EV/Net sales (x) EV/EBITDA (x) Dividend Yield (%)
29
Bajaj Auto (BJAUT IN)

CMP: Rs1,470 Mkt cap: Rs425 bn
HOLD
TP: Rs1,402
Rediscovering glory
Financial snapshot
30
Play on consumer uptrading

Play on urban consumption, rising aspirations and consumer uptrading (consumers increasing preference for bikes with better performance and style), with two brand strategy and focus on commuter Deluxe (Discover range) and sports (Pulsar range) segments. Getting its act together with right products (Discover 100, 150, Pulsar 135, 220) at right price points in right segments (strong presence in high growth segments like Commuter deluxe and sports)
Segment mix (industry) Commuter standard (monthly average) Commuter deluxe (monthly average)
70 60 50 40 30 20 10 0
55 44
59
59 49 48 43 44 9 FY06
52 56 38 10 FY07 31 12 FY08
61
64
65
250000 200000 150000
45 40 35 30 25 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
500000 400000 300000 200000 100000 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
25 20 15 10 5
36 33 2 FY02 6 FY03 8 FY04
8 FY05
25 14 FY09
19 17 FY11E FY10
19 16
100000 50000 0
Commuter Standard Sports
Commuter Deluxe
Industry
Bajaj Auto
Market share (%) (RHS)
Industry
Bajaj Auto

Rising share of high growth segments
Sports (monthly average)
Improving motorcycle mix
120000 100000 80000 60000 40000 20000 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
100 90 80 70 60 50 40 30 20
80% 60% 40% 20% 0% FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Mix shifting towards higher margin products
Industry
Bajaj Auto
Discover + Pulsar
Platina + CT100
31
Exports traction on
BJAUTs exports have shown strong traction led by volumes from neighbouring countries like Sri Lanka, Bangladesh, South East Asia, and increasing focus on Africa and Latin America. The company has recently entered Uganda and is looking at deepening penetration in existing markets through establishing exclusive sales network. Moreover, it is also looking at entering Brazil and China over the next two years, which should provide significant boost to export volumes. Management has recently upped its exports guidance to 1.1 mn units from 1 mn units at the start of FY11, which reflects its confidence on the expected exports traction. The management expects export volumes to double every five years.
Geography mix
100% 80% 60% 40% 20% 0% FY07 FY08 FY09 FY10 FY11E FY12E Domestic Exports 15% Africa and Middle East South Asia Latin America South East Asia Boxer 8% Discover 12% Pulsar M/c (Others) 84 75 65 69 71 70 16 25 35 31 29 30 38% 25% 51% 23%
Exports mix (FY10)

9%
Product mix (FY10)

19%
Source: Company, IDBI Capital Market Services
32
3wheelers: Passenger exports to drive growth

We expect passenger segment to drive three wheeler growth for BJAUT led by focus on people movement in both incity and rural segments in the domestic market, and tapping newer export markets and enhancing penetration in existing ones (Sri Lanka, Nigeria and Egypt have been driving exports growth). Moreover, with few states releasing new permits (for instance, Tamil Nadu has recently issued ~8,000 new permits), domestic three wheeler passenger growth should get a boost. We expect exports share in 3wheeler volume to go up to 55.5% in FY12 from 48.4% in FY10.
Exports to drive growth
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
(Units)
139,056 164,909 214,382 246,539
135,470
176,027
188,349
197,766
FY09
FY10 Domes ti c
FY11E Exports
FY12E
33
Strong product mix leading to superior profitability; Indonesia to remain in red

We expect BJAUT to remain the most profitable auto OEM with favourable product mix (higher share of high margin segments like 3wheelers, exports, Pulsar, spare parts), lower spending on promotions and discounts and increasing share of production at Pantnagar.
Our estimates Segment Exports Domestic 3w Pulsar Spare parts Discover 100 + 150 Others (Platina, etc.)
Revenue share (%) 31 6 22 7 26 8
Margin (%) 23 >30 >20 >30 1213 <10
Management estimate 2 years CAGR (%) 20 10 35 25 30 flat
We expect Indonesian operations to take at least two years to break even as we believe Indonesia is a tough market with presence of established players like Honda, Yamaha and Suzuki and hence BJAUTs volume traction will only be gradual. We are positive on BJAUTs growth prospects led by market share gains and strong earnings visibility. However, with valuation at 15.7x FY12E, we believe most positives are priced in and we initiate coverage with HOLD and target price of Rs1,402 (15x FY12E).
34
Assumptions
(Units) Total volumes Growth (%) Motorcycles Growth (%) Scooters Growth (%) 3wheelers Growth (%) Realisation Growth (%) EBITDA margin (%)
FY10 2,852,632 30.0 2,506,845 31.4 4,851 (58.8) 340,936 24.2 41,767 4.0 22.5
FY11E 3,805,429 33.4 3,400,818 35.7 1,880 (61.3) 402,731 18.1 41,220 (1.3) 21.1
FY12E 4,306,861 13.2 3,861,052 13.5 1,504 (20.0) 444,305 10.3 42,577 3.3 21.3
Successful launches, superior mix lend strong earnings visibility

200,000 (Rs mn) 150,000 100,000 50,000 0 FY10 Net sales
150 125.3 100 26.5 21.1 FY11E EBITDA Adj. PAT EBITDA margin (%) 18.5 21.3 FY12E PAT growth (%) 50 0 (%) 22.5
35
Financials
Income Statement
Y/E 31 Mar (Rs mn) FY09 84,369 2.6 76,075 12,006 7.5 1,298 10,708 210 1,134 11,632 3,621 36 6,545 8,011 3.3 289.4 FY10 115,085 36.4 93,250 25,895 106.6 1,365 24,531 60 1,255 25,726 7,680 31 17,027 18,046 125.3 289.4 FY11E 151,869 32.0 124,853 32,006 22.8 1,443 30,563 60 1,331 31,833 9,011 28 22,822 22,822 26.5 289.4 FY12E 177,539 16.9 145,551 37,824 17.9 1,542 36,283 60 1,490 37,713 10,677 28 27,036 27,036 18.5 289.4
Balance Sheet
Y/E 31 Mar (Rs mn) FY09 15,644 14,694 1,606 19,444 3,388 3,587 4,760 6,453 51,388 FY10 15,211 39,665 1,901 16,361 4,462 2,728 1,564 6,547 73,139 FY11E 15,948 47,767 1,344 25,675 6,446 4,297 6,239 6,613 90,734 FY12E 16,586 65,990 1,065 31,421 7,536 5,024 9,791 6,686 115,061
16,864 2,894 15,803 15,700 13,215 2,485 17,348 17,176 15,704 1,473 34,524 51,388 63
29,283 2,894 26,390 13,386 13,256 130 15,304 28,551 26,984 1,568 43,855 73,139 106
45,142 2,894 42,249 14,049 13,919 130 15,967 29,624 27,837 1,787 45,591 90,734 161
65,157 2,894 62,264 14,745 14,615 130 16,663 33,241 31,203 2,038 49,904 115,061 230
36
Financials
Cash Flow Statement
Y/E 31 Mar (Rs mn) FY09 10,166 818 3,817 555 0 6,612 3,428 4,165 3,679 2,942 1,833 2,357 3,385 0 2,862 808 FY10 24,707 918 7,578 8,111 308 26,466 485 24,143 2,013 22,615 1,833 2,315 3,724 0 4,206 355 FY11E 31,833 1,443 8,454 3,565 214 21,044 2,180 5,202 2,983 10,365 0 663 6,749 0 6,086 4,593 FY12E 37,713 1,542 10,398 1,401 251 30,007 2,180 17,223 1,095 20,497 0 696 6,748 0 6,052 3,457
Financial Ratios
1.7 3.0 9.5 0.8
1.8 2.7 15.7 0.4
1.9 2.2 15.0 0.2
1.7 1.9 15.2 0.1
14.7 15.5 38.4
14.2 8.7 61.5
15.5 10.3 55.1
15.5 10.3 55.1
Valuation
37
Hero Honda (HH IN)

HOLD
TP: Rs1,856
Honda split concerns overdone

Financial snapshot
38
Low earnings expectations

Strong demand momentum
Play on Indias rural growth story with ~45% volume coming from the fast growing rural and semiurban markets. Continue to ride on strong brand equity of Splendor and Passion, with two models contributing ~75% of FY10 volume. Leadership position to sustain with wide product portfolio and expected 56 new models/variants over the next 12 months. Haridwar plant ramp up to bring in tax benefits and help maintain healthy margin the plant currently operates at 75% capacity and HH aims to reach full capacity by FY11 end. Strong on the ground demand (dealer inventories reasonable at ~30 days) Less dependence on financing 15% vs. 2530% for the industry. Threat of market share loss remains as competitors products show strong volume traction (Q1FY11 domestic motorcycle market share at 57.4% vs. 64.8% in Q1FY10) Exports upsides limited with restricted access to larger South East Asian markets, where parent Honda is already present. Uncertainty over the future of JV with Honda Group is a major concern, especially as Hero Group lacks in house R&D capabilities. Nonetheless, we believe these concerns are overdone, considering HHs strong distribution network, well entrenched brands, profitable leadership and the fact that HH would have gained significant technical knowhow from its over two decades long association with Honda.
however
39
Valuation close to 5yr median

Hero Honda 12m fwd PER (x) 2,500 2,000 1,500 1,000 500 0
Apr02 Sep02 Feb03 Jul03 Dec03 May04 Oct04 Mar05 Aug05 Jan06 Jun06 Nov06 Apr07 Sep07 Feb08 Jul08 Dec08 May09 Oct09 Mar10 Aug10
Hero Honda 12m fwd EV/Ebitda(x) 400,000 300,000 200,000 100,000 0

Hero Honda 12m fwd PBR (x) 2,500 2,000 1,500 1,000 500 0
Pri ce
5x
9x
12x
16x
EV
Mi n
s d
Avg
+s d
Pri ce
3x
4x
6x
7x
HH is trading close to last 5yr valuation on most parameters. Last 5yr median PER is 13.9x, while it currently trades at ~14x 1yr forward earnings. Similarly its 5yr median EV/EBITDA is 5.4x, while it trades at 5.5x. Valuation at 14.8x FY11E and 13x FY12E is not cheap considering expected lower earnings CAGR of 9% over FY1012E. Initiate with HOLD and price target of Rs1,856 (14x FY12E). We believe that current valuation reflects the split led concerns partly (HH has corrected more than 15% from its recent peak). Any further correction in our view, would provide an opportunity for investors to take advantage of these overdone concerns. At this juncture, the risk reward is favourably shifting towards HH.
40
Assumptions
(Units) Total volumes Growth (%) Motorcycles Growth (%) Scooters Growth (%) Realisation Growth (%) EBITDA margin (%)
FY10 4,600,130 23.6 4,385,858 23.0 214,272 37.2 31,947 3.4 17.3
FY11E 5,157,570 12.1 4,868,302 11.0 289,267 35.0 32,889 2.9 15.5
FY12E 5,687,790 10.3 5,355,133 10.0 332,657 15.0 33,871 3.0 15.6
Steady state to continue

250,000 200,000 (Rs mn) 150,000 100,000 50,000 0 FY10 Net sales
74.1
17.3
15.5 3.8 FY11E EBITDA Adj. PAT EBITDA margin (%)
15.6 14.3 FY12E PAT growth (%)
80 70 60 50 40 30 20 10 0 10
(%)
41
Financials
Income Statement
Y/E 31 Mar (Rs mn) FY09 123,191
19.2
Balance Sheet
FY10 158,220
28.4
FY11E 183,107
15.7
FY12E 208,793
14.0
Y/E 31 Mar (Rs mn)
FY09 16,942 33,688 87 10,024 3,268 1,499 2,196 3,060 60,740
FY10 17,068 39,258 79 28,645 4,364 1,084 19,072 4,124 85,049
FY11E 17,593 43,746 79 25,667 5,496 1,254 16,811 2,105 87,084
FY12E 16,882 43,746 79 48,652 6,267 1,430 38,846 2,108 109,358
Net sales
growth (%)
Operating expenses EBITDA

growth (%)
105,901 17,291
24.9
130,900 27,319
54.0
154,806 28,301
3.3
176,233 32,560
14.0
Depreciation EBIT Interest paid Other income Pretax profit Tax Effective tax rate (%) Net profit Adjusted net profit
growth (%) Shares o/s (mn nos)
1,807 15,484 25 2,356 17,815 4,997 28 12,818 12,818

32.6 199.7
1,915 25,405 21 2,933 28,317 5,999 21 22,318 22,318

74.1 199.7
2,275 26,025 21 2,954 28,958 5,792 20 23,166 23,166

3.8 199.7
2,511 30,049 21 3,064 33,092 6,618 20 26,474 26,474

14.3 199.7
38,008 399 37,608 785 785 2,316 20,417 19,900 517 22,732 60,740 190
34,650 399 34,251 660 660 2,267 48,132 47,714 418 50,399 85,049 174
50,808 399 50,408 660 660 2,350 33,926 33,493 433 36,276 87,084 254
70,272 399 69,873 660 660 2,433 36,652 36,154 498 39,085 109,358 352
42
Financials
Cash Flow Statement
Y/E 31 Mar (Rs mn) FY09 17,815 1,601 4,866 2,384 0 16,934 3,056 8,019 0 11,075 0 535 4,439 0 4,974 885 FY10 28,317 1,496 5,622 4,975 0 29,166 1,623 5,570 1 7,192 0 125 4,973 0 5,097 16,877 FY11E 28,958 2,275 5,971 5,140 0 30,403 2,800 4,488 0 7,288 0 0 25,376 0 25,376 2,261 FY12E 33,092 2,511 6,536 1,777 0 30,844 1,800 0 0 1,800 0 0 7,009 0 7,009 22,035
Financial Ratios
2.2 1.6 10.4 0.0
2.2 2.0 14.1 0.5
2.1 2.0 12.7 0.3
2.1 1.6 12.7 0.5
9.7 4.4 24.2
10.1 2.5 31.0
11.0 2.5 35.3
11.0 2.5 35.4
Valuation
PER (x) Price/Book value (x) PCE (x) EV/Net sales (x) EV/EBITDA (x)
Dividend Yield (%)
43
Maruti Suzuki (MSIL IN)

HOLD
TP: Rs1,309
Royalty, competitionBane for now

Financial snapshot
44
Royalty blues worsen margin profile

Well placed to maintain dominance in the domestic market Incumbent advantage difficult to dislodge given immense customer goodwill, unmatched reach and strong product pipeline Strong track record of successful launches like Swift, Dzire, Ritz, Eeco, among others Key beneficiary of strong demand momentum across car segments, with significant presence in most passenger vehicle segments Indian operations gaining prominence for parent Suzuki Increasing R&D focus in India with made in India models being launched Marutis profitability was double that of Suzuki consolidated in FY10 Supplier of Pixo (Astar) to Nissan for European markets Plans to reduce exports dependence on Euro zone by adding geographies such as Australia, South Africa, Chile, Saudi Arabia and Africa, among others however margin pressures likely to continue Increasing competitive intensity especially in compact car segment to reduce pricing power and hence impact margin. We expect structural downward shift in profitability of most car players. Structural hike in royalty outgo (~5% of revenue vs. 3.5% earlier) to worsen margin profile further. Exports profitability to be lower on strengthening INR and drop in exports to Europe, where it had better realisation.
45
Valuation higher than 5yr median; however outlook weak

Maruti 12m fwd PER (x) 2,000 1,500 1,000 500 0
Jul03 Dec03 May04 Oct04 Mar05 Aug05 Jan06 Jun06 Nov06 Apr07 Sep07 Feb08 Jul08 Dec08 May09 Oct09 Mar10 Aug10
Maruti 12m fwd EV/Ebitda (x) 500,000 400,000 300,000 200,000 100,000 0
Maruti 12m fwd PBR (x) 2,000 1,500 1,000 500 0

Pri ce
6.5x
10.2x
13.8x
17.3x
EV
2.4x
4.8x
7.2x
9.6x
Pri ce
1.3x
2x
2.6x
3.2x
MSIL is trading close to last 5yr valuation on most parameters. Last 5yr median PER is 14.9x, while it currently trades at ~16x 1yr forward earnings. Similarly its 5yr median EV/EBITDA is 8.3x, while it trades at ~8x. However, we believe MSIL deserves lower valuation considering margin concerns and structural hike in royalty outgo. Valuation at 16.8x FY11E and 14.6x FY12E. Initiate with HOLD and price target of Rs1,309 (14x FY12E).
46
Assumptions
(Units) Total volumes Growth (%) Domestic Growth (%) Exports Growth (%) Realisation Growth (%) EBITDA margin (%)
FY10 1,018,365 28.5 870,790 20.6 147575 109.6 288,337 10.5 12.7
FY11E 1,164,786 14.4 1,021,638 17.3 143148 (3.0) 301,031 4.4 10.4
FY12E 1,280,913 10.0 1,130,608 10.7 150305 5.0 309,840 2.9 10.5
Margin pressures to keep earnings growth subdued

500,000 (Rs mn) 400,000 300,000 200,000 100,000 FY10 Net sales
150 104.9 12.7 10.4 (5.5) FY11E EBITDA Adj. PAT EBITDA margin (%) 10.5 14.4 FY12E PAT growth (%) 100 50 0 50 (%)
47
Financials
Income Statement
Y/E 31 Mar (Rs mn) FY09 206,838 14.0 188,238 18,600 23.5 7,065 11,535 510 5,733 16,758 4,571 27 12,187 12,187 31.6 288.9 FY10 293,632 42.0 256,445 37,187 82.9 8,250 28,937 335 7,323 35,925 10,949 30 24,976 24,976 104.9 288.9 FY11E 350,636 19.4 314,340 36,297 2.4 9,368 26,929 333 7,137 33,733 10,120 30 23,613 23,613 5.5 288.9 FY12E 396,878 13.2 355,333 41,545 13.1 10,219 31,326 308 7,587 38,604 11,581 30 27,023 27,023 14.4 288.9
Balance Sheet
Y/E 31 Mar (Rs mn) FY09 49,321 120 789 86,524 9,023 9,189 51,003 17,309 136,754 FY10 54,123 120 836 109,370 12,088 8,099 72,628 16,555 164,449 FY11E 72,379 120 836 117,844 14,288 9,677 76,540 17,340 191,179 FY12E 78,660 120 836 140,575 16,174 10,954 96,100 17,347 220,191
93,449 1,445 92,004 6,989 1 6,988 11,117 32,188 32,188 0 43,305 136,754 323
118,351 1,445 116,906 8,214 265 7,949 12,724 33,374 33,374 0 46,098 164,449 410
139,934 1,445 138,490 7,179 265 6,914 11,910 39,335 39,335 0 51,245 191,179 484
164,929 1,445 163,485 6,115 265 5,850 10,847 44,415 44,415 0 55,262 220,191 571
48
Financials
Cash Flow Statement
Y/E 31 Mar (Rs mn) FY09 16,758 6,610 4,310 2,031 0 17,027 15,603 0 20,074 4,471 0 2,013 1,691 1,709 5,414 16,085 FY10 35,925 7,322 10,007 1,480 0 31,760 12,124 0 40,033 52,157 0 1,225 1,183 1,947 1,989 18,408 FY11E 33,733 9,368 11,067 2,560 0 34,593 27,624 0 7,930 19,694 0 1,035 2,021 1 3,057 11,842 FY12E 38,604 10,219 11,435 1,764 0 39,152 16,500 0 0 16,500 0 1,065 2,028 0 3,093 19,560
Financial Ratios
1.6 1.5 5.9 0.1
1.9 1.4 8.5 0.1
2.0 1.4 6.7 0.0
1.9 1.3 6.8 0.5
15.9 16.2 49.8
15.0 10.1 33.0
14.9 10.1 35.0
14.9 10.1 35.0
Valuation
49
Mahindra & Mahindra (MM IN)

BUY
TP: Rs848
Safe play on robust rural economy

Financial snapshot
50
Robust core business

Farm Equipment Play on buoyant rural economy and pro agri. government initiatives like farm loan waiver, rising MSPs, NREGA scheme, among others, with domestic tractor business expected to grow at 11% CAGR over FY1012E. Exports boost likely on gradual global recovery and strong focus on growing international business in US, China, Australia and Iran. Inventory at normal levels of three weeks led by strong ontheground demand. Automotive Strong sales momentum from Xylo and the refreshed version of Scorpio and steady sales from Bolero, increasing presence in CV space through positive initial response to new launches like Gio and Maximo in LCV space and expected volume traction from MHCVs coming out of MMNavistar stable. US foray in the UV space by 2010 end to boost reach and export potential for MM.
51
Most resilient 4w player

Market leadership in least competitive auto segments like UVs and tractors, with strong pricing power, has aided in maintaining healthy profitability.
MM most profitable and least impacted by RMC pressures
18 16 14 12 10 8 6 4 2 0 Jun09 MM Sep09 Dec09 TTMT Ma r10 MSIL Jun10 AL
Strong performance from subsidiaries and joint ventures

Subsidiaries Tech Mahindra Mahindra Lifespace Developers M&M Financial Services Mahindra Holiday & Resorts Swaraj Engines
Revenue (Rs mn) FY08 FY09 37,661 44,647 1,787 3,315 7,900 9,002 3,527 3,932 1,253 2,063
FY10 46,254 4,129 11,026 4,735 2,824
EBITDA/Net Interest Income (Rs mn) FY08 FY09 FY10 8,426 13,110 11,639 131 664 1,119 6,648 7,123 9,356 1,196 1,045 1,544 237 319 496
FY08 3,299 664 1,811 840 144
PAT (Rs mn) FY09 10,145 656 2,197 797 213
FY10 7,005 785 3,558 1,171 374
52
Ssangyong acquisition: Long term positive

Ssangyong is South Koreas 4th largest automaker with market share of 2% and has presence in premium SUV and sedan segments. Due to lack of fund availability, economic downturn and hence slumping demand for new vehicles, rising competition in the domestic market over the last two years and lack of focus from SAIC, the company went into courtled restructuring since early 2009 and is looking for a buyer to stay afloat with fresh capital. However, Ssangyong sales have improved in the past few months led by new launches and economic recovery. With planned expansion in newer markets such as Vietnam and Russia and through the launch of a new SUV slated later (Korando C) in 2010, it hopes to double its sales in CY10 to 85,000 units. This would be ultimately scaled up to 183,000 by 2013. We believe these are signs of improving business environment for Ssangyong. MM has emerged as top bidder for Ssangyong and the deal is likely to close by November 2010 end. The acquisition price is yet to be announced but market sources have indicated deal size to be US$300500 mn. We believe this deal to be a good fit for MM in the medium to long term, as it is likely to gain from Ssangyongs superior auto manufacturing and marketing processes, strong R&D set up and a formidable SUV product portfolio. Moreover, SMC has reasonably good global presence, with exports to Russia, China, Europe, MiddleEast, Africa, north and south America and AsiaPacific. This augurs well for MM, which plans to launch a pickup truck in US towards CY10 end/early CY11 and aims to introduce an SUV later. The deal, if and when it materializes will take MM one step closer to its long term ambition of becoming a leading global automaker, giving its both increased scale and scope. One significant caveat to this deal would be the consideration that MM pays to acquire SMC and the associated liabilities that come on its books.
53
Top pick in auto

Sumoftheparts valuation
Company Mahindra &Mahindra (Standalone) Mahindra Holiday & Resorts Swaraj Engines Tech Mahindra Mahindra Lifespace Developers M&M Financial Services Mahindra Forgings Mahindra Ugine Steel SOTP
Valuation Method P/E CMP CMP CMP CMP CMP CMP CMP
Per share (Rs) Multiple 48 14.0 60 0.8 3 0.8 68 0.8 16 0.8 66 0.8 8 0.8 2 0.8
Value (Rs) 669 48 2 54 13 53 6 2 848
Remarks Core EPS for FY12E 20% discount 20% discount 20% discount 20% discount 20% discount 20% discount 20% discount
Valuation at 12.1x FY11E and 10.3x FY12E (adjusted for subsidiary valuation). Initiate with BUY and target price of Rs848, led by leadership position in two of the least competitive auto segments, strong performance from most subsidiaries and favourable risk reward. MM is our top pick in the auto space.
54
Assumptions
(Units) Total volumes Growth (%) Utility vehicles Growth (%) LCVs Growth (%) 3wheelers Growth (%) Tractors Growth (%) Realisation Growth (%) EBITDA margin (%)
FY10 451,927 38.7 231,703 43.7 45,360 1.2 174,864.0 45.8 397,289 2.0 15.7
FY11E 560,965 24.1 253,764 9.5 65,310 42,144 (7.1) 199,747.2 14.2 383,096 (3.6) 15.3
FY12E 642,676 14.6 303,360 19.5 78,372 20.0 40,037 (5.0) 220,907.2 10.6 402,264 5.0 15.4
Pricing power and robust business environment to boost earnings

300,000 250,000 (Rs mn) 200,000 150,000 100,000 50,000 0 FY10 Net sales
140.3
150 100 50 19.7 15.4 FY12E EBITDA margin (%) PAT growth (%) 0 (%)
15.7 15.3
21.6
FY11E EBITDA Adj. PAT
55
Financials (Standalone)
Income Statement
Y/E 31 Mar (Rs mn) FY09 130,532
14.0
Balance Sheet
FY10 185,296
42.0
FY11E 219,045
18.2
FY12E 263,309
20.2
Y/E 31 Mar (Rs mn)
FY09 32,143 49,559 4,117 56,718 10,607 10,437 24,049 11,610 142,536
FY10 37,027 55,848 1,822 65,636 11,888 12,581 25,564 15,094 160,333
FY11E 48,203 71,474 1,499 65,535 14,053 14,872 20,540 16,041 186,711
FY12E 58,363 83,475 1,499 76,460 16,893 17,878 24,576 17,082 219,797
Net sales
growth (%)
Net fixed assets Investments Other noncurr assets
Operating expenses
120,014 10,518
6.7
156,263 29,033
125.5
185,566 33,479
14.7
222,822 40,487
19.6
EBITDA
growth (%)
Current assets
Inventories Sundry Debtors Cash and Bank Loans and advances
Depreciation
2,915 7,603 1,341 4,044 10,306 1,997 19 8,719 8,309

10.7 563.9
3,708 25,325 1,569 3,803 27,560 7,590 27 20,878 19,970

140.3 584.5
4,244 29,235 1,042 4,185 32,378 8,095 25 24,284 24,284

21.6 584.5
5,260 35,227 1,042 4,563 38,748 9,687 25 29,061 29,061

19.7 584.5
EBIT
Interest paid Other income
Total assets Shareholders' funds

Share capital Reserves & surplus
Pretax profit
Tax Effective tax rate (%)
52,314 2,792 49,829 40,528 37,161 3,367 53,299 36,924 36,924 0 90,222 142,537 102
78,261 2,910 75,358 28,802 28,777 24 43,018 39,053 39,053 0 82,072 160,333 141
105,629 2,963 102,673 20,004 19,979 24 35,509 45,573 45,573 0 81,082 186,711 183
129,219 2,963 126,263 20,004 19,979 24 36,961 53,617 53,617 0 90,578 219,797 221
Net profit Adjusted net profit

Total Debt
Secured loans Unsecured loans Other liabilities
Curr Liab & prov

Current liabilities Provisions
Total liabilities Total equity & liabilities Book Value (Rs)

56
Cash Flow Statement
Y/E 31 Mar (Rs mn) FY09 10,716 4,846 3,318 9,185 0 21,429 13,380 13,884 1,829 29,094 132 14,657 3,303 3,575 14,797 7,132 FY10 28,468 2,115 4,789 7,451 0 18,343 6,999 4,165 1,951 13,115 7,509 11,726 3,121 3,798 3,540 1,688 FY11E 32,378 4,244 6,292 2,170 0 32,501 15,420 0 15,626 31,046 8,555 8,798 6,238 0 6,480 5,025 FY12E 38,748 5,260 9,361 2,281 0 36,928 15,420 0 12,001 27,421 0 0 5,471 0 5,471 4,036
Financial Ratios
Pretax profit Depreciation Tax paid Chg in working capital Other operating activities
Adj EPS (Rs) Adj EPS growth (%) EBITDA margin (%) Pretax margin (%) ROE (%) ROCE (%)
Cash flow from operations (a)

Capital expenditure Chg in investments Other investing activities
Turnover & Leverage ratios (x)

Asset turnover (x) Leverage factor (x) Net margin (%) Net Debt/Equity (x)
1.1 2.6 6.4 0.5 1.2 2.3 10.8 0.1 1.3 1.9 11.1 0.1 1.3 1.7 11.0 0.0
Cash flow from investing (b)

Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Other financing activities
Working Capital & Liquidity ratio

Inventory days Receivable days Payable days
29.7 29.2 104.7 23.4 24.8 78.7 23.4 24.8 78.3 23.4 24.8 78.4
Cash flow from financing (c) Net chg in cash (a+b+c)
Valuation
Dividend Yield (%)
57
Tata Motors (TTMT IN)

ACCUMULATE
TP: Rs1,148
Cruising on JLR turnaround

Financial snapshot
58
Turnaround sustainable
We expect TTMT to be key beneficiary of strong domestic CV demand expected over next 23 years, led by strong IIP growth, healthy freight movement, market leadership and pricing power. Passenger vehicles demand to be boosted by Nano and expected launch of new MPV Aria. JLR has seen strong volume recovery in the non European markets, especially US, UK and China and improved profitability led by operating leverage, better cost management, improved product and geography mix, and favourable currency movement. We expect this improved operating performance to sustain over FY10 12E.
Particulars Volume (Units) Jaguar Land Rover Realisation (GBP/vehicle) * June 2008 to March 2009
Segment wise volume trend

350,000 300,000 250,000 (Units) 200,000 100 150,000 100,000 50,000 FY09 FY10 FY11E FY12E 50 (50) 250 200 150 (%)
MHCV MUV Na no LCV growth Ca rs (excl . Na no) growth

LCV Ca rs (excl . Na no) MHCV growth MUV growth Na no growth
FY09* 167,300 47,000 120,300 29,583
FY10 193,982 47,418 146,564 33,787
FY11E 228,151 64,955 163,196 37,500
FY12E 250,966 71,451 179,516 37,875
Comments Positive response to new launches Positive response to new launches Improved product and geographic mix
59
Improving balance sheet profile

Balance sheet profile has improved considerably with consolidated net D/E coming down to 2x as on June 2010 from 4.3x in December 2009 and 6x in September 2009
Standalone financials
Rs mn Debt Cash Networth Net D/E (x) Free cash flow
FY09 131,656 11,458 123,921 1.0 (113,839)
FY10 166,259 22,828 148,038 1.0 (38,758)
FY11E 156,178 18,538 164,156 0.9 13,682
FY12E 138,178 43,114 200,369 0.5 34,846
Improving balance sheet profile
Upside risks Better than expected traction in JLR volumes and sustainable improvement in its profitability Strong operational cash flows leading to improved balance sheet profile, with gearing inching towards 1x Downside risks CV cyclicality, product fatigue in car segment, looming European crisis resulting in negative impact on JLR Forex exposure, input costs, pension liability at JLR
60
Tata Motors: JLR the determining factor

Based on FY12E Tata Motors standalone JLR Tata Daewoo CV Telcon (40%) Tata Technologies HV Transmission (85%) HV Axles (85%) Tata Motors Finance SOTP value
Method P/E EV/EBITDA P/E P/E P/E P/E P/E P/B
Multiple (x) 14.0 4.0 12.0 12.0 12.0 10.0 10.0 1.0
Discount (%)
20 20 20 20 20 20
Value per share (Rs) 641 422 19 6 19 10 11 19 1,148
TTMT trades at 13.2x FY11E and 11.4x FY12E (adjusted for subsidiary). We believe TTMTs fate is largely dependent on JLRs fortunes, with domestic CV space likely to grow at a stable rate. TTMT is our preferred pick after MM in the 4wheeler space and we initiate coverage with ACCUMULATE and price target of Rs1,148.
61
Assumptions
Units Total Vehicles Growth % Commercial Vehicles Growth % MHCV Growth % LCV Growth % MUV Growth % Cars (excl. Nano) Growth % Nano Growth % Realisation (Rs) Growth % EBITDA margin (%)
FY10 642,686 29.0 401,371 37.7 167,707 36.4 233,664 38.7 34,181 (14.5) 176,784 6.0 30,350 554,088 6.8 10.8
FY11E 812,031 26.3 471,481 17.5 201,248 20.0 270,232 15.6 44,203 29.3 194,348 9.9 102,000 236.1 513,237 (7.4) 11.7
FY12E 1,013,625 24.8 543,152 15.2 231,436 15.0 311,716 15.4 58,589 32.5 195,884 0.8 216,000 111.8 503,936 (1.8) 11.6
Beneficiary of robust CV outlook

600,000 (Rs mn) 400,000 200,000 0 FY10 Net sales
497.1 10.8 35.0 11.7 FY11E EBITDA Adj. PAT EBITDA margin (%) 19.1 11.6 FY12E PAT growth (%)
600 400 200 0 200
(%)
62
JLR Financials: Improved operational performance

(mn GBP) Revenues RM Employee Expenses Other expenditure Total expenditure % of sales EBITDA % of sales Prd dev exp Depreciation EBIT % of sales Interest PBT (preexceptional) Exceptional item PBT % of sales Taxes % of PBT PAT % of sales
FY10E 6,554 4,439 730 953 6,122 93.4 432 6.6 48 310 74 1.1 53 21 10 31 0.5 29 95.1 2 0.0
FY11E 8,556 5,482 800 1,264 7,546 88.2 1,010 11.8 60 310 640 7.5 65 575 575 6.7 86 15.0 488 5.7
FY12E 9,505 6,151 840 1,390 8,381 88.2 1,124 11.8 55 315 754 7.9 65 689 689 7.2 103 15.0 586 6.2
Sustained volume momentum and healthy mix; 6570% of consolidated revenue
Favourable mix, cost efficiencies and scale benefits
Turning profitable and contributing to cashflows; 65 70% of consolidated earnings
63
Income Statement
Y/E 31 Mar (Rs mn) FY09 258,404
9.1
Balance Sheet
FY10 356,105
37.8
FY11E 416,765
17.0
FY12E 510,802
22.6
Y/E 31 Mar (Rs mn)
FY09 145,993 129,642 11,449 96,955 22,298 15,552 11,458 47,648 384,039
FY10 164,360 218,074 7,915 120,675 29,356 23,919 22,828 44,571 511,024
FY11E 181,054 217,938 7,915 125,357 34,255 27,994 18,538 44,571 532,264
FY12E 196,145 217,829 7,915 163,979 41,984 34,310 43,114 44,571 585,868
Net sales
growth (%)
Net fixed assets Investments Other noncurr assets
Operating expenses
239,595 18,809
41.7
317,678 38,427
141.3
367,908 48,856
19.6
451,682 59,120
15.8
EBITDA
growth (%)
Current assets
Inventories Sundry Debtors Cash and Bank Loans and advances
Depreciation
8,745 10,064 10,731 519 148 530 6 10,013 3,004

82.8 562.1
10,339 28,088 14,835 8,206 21,459 5,895 22 20,311 17,937

497.1 624.1
12,598 36,259 13,698 6,913 29,474 7,627 24 24,220 24,220

35.0 624.1
14,200 44,920 13,698 5,436 36,658 10,177 26 28,854 28,854

19.1 624.1
EBIT
Interest paid Other income
Total assets Shareholders' funds

Share capital Reserves & surplus
Pretax profit
Tax Effective tax rate (%)
123,921 5,140 118,801 131,656 60,634 71,021 167,078 93,040 93,040 0 260,118 384,039 282
148,038 5,706 142,332 166,259 117,353 48,906 204,977 158,009 158,009 0 362,986 511,024 273
164,156 5,751 158,405 156,178 107,272 48,906 193,384 174,724 174,724 0 368,108 532,264 287
200,369 5,963 194,406 138,178 89,272 48,906 175,386 210,114 210,114 0 385,500 585,868 342
Net profit Adjusted net profit

Total Debt
Secured loans Unsecured loans Other liabilities
Curr Liab & prov

Current liabilities Provisions
Total liabilities Total equity & liabilities Book Value (Rs)
64
Cash Flow Statement
Y/E 31 Mar (Rs mn) FY09 9,482 8,164 569 704 0 16,373 49,634 62,658 17,921 130,213 39,616 68,850 6,597 585 101,284 12,555 FY10 26,205 9,530 2,532 44,561 0 82,828 27,898 22,647 116,335 121,585 14,069 34,604 3,457 343 44,872 6,115 FY11E 31,847 12,598 9,625 8,018 0 42,837 29,291 0 136 29,155 3,367 10,081 9,919 1,339 17,972 4,290 FY12E 39,031 14,200 10,177 20,975 0 64,029 29,291 0 109 29,182 19,199 18,000 10,130 1,339 10,270 24,576
Financial Ratios
Pretax profit Depreciation Tax paid Chg in working capital Other operating activities
Adj EPS (Rs) Adj EPS growth (%) EBITDA margin (%) Pretax margin (%) ROE (%) ROCE (%)
Cash flow from operations (a)

Capital expenditure Chg in investments Other investing activities
Turnover & Leverage ratios (x)

Asset turnover (x) Leverage factor (x) Net margin (%) Net Debt/Equity (x)
0.8 3.2 1.2 1.0 0.8 3.3 5.0 1.0 0.8 3.3 5.8 0.9 0.9 3.1 5.6 0.5
Cash flow from investing (b)

Equity raised/(repaid) Debt raised/(repaid) Dividend (incl. tax) Other financing activities
Working Capital & Liquidity ratio

Inventory days Receivable days Payable days
31.5 22.0 133.0 30.1 24.5 155.9 30.0 24.5 153.0 30.0 24.5 152.9
Cash flow from financing (c) Net chg in cash (a+b+c)
Valuation
65
TVS Motor (TVSL IN)

BUY
TP: Rs98
New launches set to Jive

Financial snapshot
Rs mn FY09 FY10 FY11E FY12E Revenue 37,367 44,311 59,429 71,553 EBITDA 1,868 2,773 4,657 6,114 EBITDA (%) 5.0 6.3 7.8 8.5 Adjusted net profit 296 879 2,269 3,320 EPS (Rs) 0.6 1.9 4.8 7.0 P/E (x) 41.4 16.1 11.0 EV/EBITDA (x) 17.8 9.3 6.1
66
New launches on a rollmargin expansion in store

Better positioning with new launches not targeted at segments dominated by BJAUT and HH Jive is a clutch less bike and Wego is an ungeared scooter Gaps in product portfolio have been filled through new launches Margin expansion in store on better operating leverage (as volumes increase led by new launches) and improving product mix ((i) within the 2w segment and (ii) with increasing share of more profitable 3w segment) and increased share of tax haven Himachal plant
Margin expansion on improved mix and operating leverage
EBITDA margin (%)
Apache Series Flame SR 125 Wego Streak Scooty Pep Jive Star Series
Filling gaps in product portfolio

Exshowroom price Bangalore (June 2010) 60,000 50,000 40,000 30,000 20,000 10,000 Mopeds
Source: Company, IDBI Capital Research XL Super/Heavy duty
9.0 8.5 8.0 7.0 6.0 5.0 4.9 4.0 6.3 7.8
Ungea red s cooters
Motorcycl es
FY09
FY10
FY11E
FY12E
67
top pick in twowheeler space

Indonesian operations expected to reduce losses over FY11 12 on improved volumes (management expects Indonesia to break even by FY11 end). Exports to gain momentum with 25% CAGR over FY1012E as new markets like Brazil, Africa, other South American markets get added and traction improves in existing geographies Expect dominance in moped segment with steady growth and 100% market share. Risks Poor response to new launches and higher than anticipated losses in Indonesian subsidiary If the 2 wheeler industry loses demand momentum, we believe TVS would be impacted first among top 3 players
Shrinking Indonesian losses
Indonesian losses (Rs mn)
1,000 800 600 400 200 0 FY09 FY10 FY11E FY12E

1/9th of FY09 loss
68
Valuation compares favourably with 5yr median

TVS 12m fwd PER (x) 500 400 300 200 100 0
TVS 12m fwd EV/EBITDA (x) 100,000 80,000 60,000 40,000 20,000 0
TVS 12m fwd PBR (x) 200 150 100 50 0

Pri ce
3.8x
4.8x
21.5x
38.1x
EV
3.2x
7.7x
10.9x
18.2x
Pri ce
0.4x
1.4x
2.3x
3.3x
TVSL is trading at lower than last 5yr valuation on most parameters. Last 5yr median PER is 25x, while it currently trades at ~14x 1yr forward earnings. Similarly its 5yr median EV/EBITDA is 10x, while it trades at ~9x. We believe that TVSL deserves better valuation considering its 94% earnings CAGR over FY1012E and improving product mix. Valuation at 16.1x FY11E and 11x FY12 standalone earnings is cheap. Initiate coverage with BUY and target price of Rs98 (14x FY12E). TVSL is our top pick in the twowheeler space.
69
Assumptions
Units Total Sales Growth % Motorcycle Growth % Scooters Growth % Mopeds Growth % Three Wheelers Growth % Electric Vehicles Growth % Realisation Growth % EBITDA margin (%)
FY10 1,537,361 15.0 640,801 0.8 309,436 24.6 571,489 30.0 15,116 227.7 519 (94.1) 28,822 3.2 6.1
FY11E 1,921,309 25.0 786,231 22.7 435,224 40.7 659,629 15.4 39,707 162.7 519 30,932 7.3 7.8
FY12E 2,215,878 15.3 904,165 15.0 522,268 20.0 738,577 12.0 50,348 26.8 519 32,291 4.4 8.4
New launches lead margin expansion

80,000 (Rs mn) 60,000 40,000 20,000 0 Net sales
197.6 158.1 46.3 8.5 FY12E EBITDA margin (%) PAT growth (%)
250 200 150 100 50 0 (%)
6.3 FY10E EBITDA
7.8 FY11E Adj. PAT
70
Financials
Income Statement
Y/E 31 Mar (Rs mn) FY09 37,367
14.3
Balance Sheet
FY10 44,311
18.6
FY11E 59,429
34.1
FY12E 71,553
20.4
Y/E 31 Mar (Rs mn)
FY09 10,355 3,941 0 9,631 3,206 1,816 1,257 3,353 23,927
FY10 9,828 4,401 0 12,636 2,897 2,203 4,002 3,534 26,865
FY11E 10,010 5,101 0 15,628 3,886 2,955 4,660 4,128 30,739
FY12E 9,795 5,402 0 20,411 4,679 3,558 8,043 4,132 35,608
Net sales
growth (%)
Operating expenses EBITDA

growth (%)
35,499 1,868
38.8
41,538 2,773
28.6
54,773 4,657
87.7
65,439 6,114
30.9
Depreciation EBIT Interest paid Other income Pretax profit Tax Effective tax rate (%) Net profit Adjusted net profit
1,049 820 646 122 296 0 0 310 296

7.0 475.0
1,045 1,728 754 214 761 118 16 880 879

197.6 475.0
1,288 3,369 754 146 2,762 492 20 1,969 2,269

158.1 475.0
1,385 4,729 754 176 4,151 830 20 3,320 3,320

46.3 475.0
7,370 475 7,648 9,060 4,387 4,673 10,982 5,576 5,576 0 16,557 23,927 16
8,353 475 8,179 10,033 8,300 1,733 11,713 6,799 6,799 0 18,512 26,865 18
9,986 475 9,815 10,033 8,300 1,733 11,786 8,968 8,968 0 20,753 30,739 22
12,973 475 12,802 10,033 8,300 1,733 11,842 10,793 10,793 0 22,635 35,608 28
71
Financials
Cash Flow Statement
Y/E 31 Mar (Rs mn) FY09 311 958 49 432 0 886 882 141 1,528 2,270 226 2,396 195 209 1,767 383 FY10 762 831 101 1,002 0 2,493 304 703 3,319 2,920 452 973 389 20 1,016 590 FY11E 2,462 1,288 652 37 0 3,060 1,470 0 700 2,170 3 0 230 0 232 658 FY12E 4,151 1,385 777 429 0 5,188 1,170 0 301 1,471 0 0 333 0 333 3,383
Financial Ratios
1.6 3.0 0.8 1.2
1.7 3.2 2.0 1.1
2.1 3.1 3.8 0.8
2.2 2.9 4.6 0.2
31.3 17.7 56.6
23.9 18.1 58.6
23.9 18.1 59.6
23.9 18.1 60.1
Valuation
Dividend Yield (%)
72
Disclaimer
This material is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other persons. Persons into whose possession this material may come are required to observe these restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy ant security in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of the clients of IDBI Capital Market Services Limited (hereinafter referred to as IDBI Capital) and neither constitutes a personal recommendation nor does it take into account the particular investment objectives, financial situations or needs of individual clients. The information furnished in this material is on the basis of publicly available information, internal data and other reliable sources which are generally believed to be true and are for general guidance only. While every effort is made to ensure the accuracy and completeness of information contained in this material, neither IDBI Capital nor any of its employees take any responsibility and/or assumes any liability arising from the use of this material. Opinions expressed herein are our current opinion only as of the date appearing on this material. While we endeavor to update on a regular basis the information appearing in this material, there may be regulatory, compliance or other reasons which may prevent IDBI Capital or its affiliates from doing so. Clients and others in whose possession this material may come are cautioned that any forward looking statements appearing in this material are not predictions and may be subject to change without notice. Our proprietary trading desks and investment businesses may make such investment decisions as may be inconsistent with the recommendations expressed herein. The recipients of this material should rely on their own investigations and take their own professional advice. The price and value of the investments referred to in this material may go up or down. Past performance is neither a guide/indicator nor a guarantee for future performance. Certain transactions including those involving futures, options and other derivatives as well as noninvestment grade securities involve substantial risk and may not be suitable for all investors. Reports and material based on technical analysis centers on studying the charts of a stock's price and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report based on the company's fundamentals. IDBI Capital and its affiliates, officers, directors, employees and outsourced consultants (including the analyst who issued this material) may, on the date of this report and from time to time, (a) have long or short positions in, and buy or sell the securities of the companies mentioned in this material and/or (b) engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to the companies mentioned herein and/or inconsistent with any recommendation and related information and opinion expressed herein.
Vikrant Oak Head Institutional Equities Sonam H. Udasi Head Research Dealing
(9122) 4322 1385 (9122) 4322 1375 (9122) 4322 1150
vikrant.oak@idbicapital.com sonam.udasi@idbicapital.com dealing@idbicapital.com
Key to Ratings Stocks: Buy: Absolute return of 15% and above; Accumulate: 5% to 15%; Hold: Upto 5%; Reduce: 5% to 15%; Sell: 15% and below. IDBI Capital Market Services Ltd. (A wholly owned subsidiary of IDBI Ltd.) Registered Office: 5th floor, Mafatlal Centre, Nariman Point, Mumbai 400 021. Phones: (9122) 4322 1212 Fax: (9122) 2285 0785 Email: info@idbicapital.com
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IDBICapital Auto Sep2010

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Indian Autos

Strong momentum on; valuation not far behind

Strong volume momentum

Source: Company, IDBI Capital Research

Margin pressure seen on higher RMC

Tax rates trending lower

Q1FY11 19.4 28.6 20.1 27.6 22.0 26.4 16.6 24.5

Q1FY10 23.4 29.6 9.6 27.7 25.5 15.0 11.1 25.6

YoY % 3.9 1.0 (10.5) 0.1 3.5 (11.4) (5.5) 1.0

Q4FY10 18.8 26.5 2.4 31.2 25.8 39.9 25.6 27.5

QoQ % (0.7) (2.0) (17.7) 3.6 3.7 13.5 9.0 3.0

Q1FY11 4,917 5,902 402 4,654 5,624 3,957 1,226 26,682

Q1FY10 5,001 3,096 181 5,835 4,009 1,949 (427) 19,644

YoY % (1.7) 90.6 122.0 (20.3) 40.3 103.1 (387.3) 35.8

Q4FY10 5,988 5,771 508 6,566 5,703 3,356 2,231 30,122

QoQ % (17.9) 2.3 (20.8) (29.1) (1.4) 17.9 (45.0) (11.4)

Capex plans indicate strong demand expectations

Volume CAGR for coverage universe at 1217% over FY1012E

CAGR over FY1012E 12% 17% 16% 12%

however, input costs beginning to impact margin

600 Rubber RSS4 (Rs/kg) 500 400

Al umi ni um LME ($/tonne)

Steel Bi l l ets LME ($/tonne) (RHS)

Source: Rubber Board, IDBI Capital Research

EBITDA margin trend (%) 26 22 18 14 10

Rising RMC; declining margin

6 Dec09 HH BJAUT TVS Mar10 MSIL MM TTMT Jun10

Source: Company, IDBI Capital Research

Source: Company, IDBI Capital Research

margin to contract marginally in FY11; stabilize in FY12

19 EBITDA margin (%)

FY10 BJAUT TVS MSIL

Concerns: Largely macroeconomic

Growth in CVs (%)

Growth in PVs (%)

Valuation matrix M&M, TVS attractively placed

Auto earnings CAGR of ~17% Low growth, high PEG ratio

High growth, high PEG ratio

5yr median Auto PER of ~16x

High growth, low PEG ratio

TVS Motor As hok Leyl a nd

CMP (Rs) 1,722 1,470 77 1,423 670 1,054 76

Reco HOLD HOLD BUY HOLD BUY ACCUMULATE HOLD

Mkt cap (Rs bn) 344 425 36 411 388 584 92

Target price (Rs) 1,856 1,402 98 1,309 848 1,148 79

Source: IDBI Capital Research

Global peer comparison

Indian universe valuation matrix suggests Toyota like investment case.

Two wheelers: Demography, exports drive 16% volume CAGR

Share of entry segment on a decline

70 60 50 40 30 20 10 0 2 FY02 6 FY03 Entry 8 FY04 8 FY05 9 FY06 10 FY07 12 FY08 44 36 33 55 59 59 49 43 48 44 52 38 31 25 14 FY09 56 61

Passenger vehicles: Income multiplier the demand driver

Boosted by favourable demographics

Burgeoning middle class

Rising share of working population

Commercial vehicles: Robust industrial activity driving freight movement

% share 34.2 31.8 34.0 100.0

Strong correlation between freight rates and CV sales

Roa d frei ght i ndex

Village Rural Inter City Intra City Long distance

Source: Company, Bloomberg, TCI, IDBI Capital Research

Three wheelers: Trending towards passenger segment

Tata Ace impact