COMPANYUPDATE

EICHERMOTORS
Motorcyclestheneartermgrowthdriver
IndiaEquityResearch|Automobiles

WemetthemanagementofEicherMotors(Eicher)togetthecompanys
latest business update. Waiting period for Royal Enfiehld motorcycle
continues, with the company not being able to meet demand.
Thunderbird 500 launch is due in Q3CY12. Additional capacity is coming
on stream in Q1CY13. On the truck side, the company is still gaining
marketshare,althoughdemandhassloweddown.Increaseindiscounts
couldposemarginriskinnearterm.MaintainBUYwithTPofINR2,807.

RatingRelativetoSector

Outperformer

RiskRatingRelativetoSector

Medium

SectorRelativetoMarket

Equalweight

MARKETDATA(R:EICH.BO,B:EIMIN)
CMP
TargetPrice

:INR2,807

Royal Enfield demand has not been affected by the ongoing economic downturn.
Waiting period ranges from 29 months on different models. Also, new Thunderbird
500ccislikelytobelaunchedinQ3CY12andcouldactasapositivetrigger.Additional
capacityislikelytocomeonstreaminQ1CY13(wehavebuiltinQ2CY13).

52weekrange(INR)

:2,390/1,170

Shareinissue(mn)

:27.0

Mcap(INRbn/USDmn)

:54/954

:INR1,991

Avg.DailyVol.BSE/NSE(000) :23.1
SHAREHOLDINGPATTERN(%)

Others
19.8%

The company has been gaining market share in the heavyduty truck business even
though demand is shrinking. The concern is increasing discounts. Intermediate
commercial vehicles and bus demand still exists. Bank funding is available in
abundance.Delinquenciesremainverylow.

FIIs
7.1%

Commercial production is likely to start from Q2CY13. Further, trucks with new
platformsandenginesarelikelytobelaunchedbyQ4CY13.

MFs,FIs&
Banks
17.9%

Outlookandvaluations:Favourable;maintainBUY

BUY

Motorcyclebusinessintact

Truckbusinessamixedbag

AbsoluteRating

EDELWEISS4DRATINGS

Adiversifiedbusinessmodel,strongbalancesheet,robustdemandformotorcycleand
strengthening CV business make outlook favourable. We maintain BUY with SoTP
basedtargetpriceofINR2,807.Keyrisksincludeincreasingdiscountsintruckbusiness
andweakeconomicgrowthaffectingtruckdemand.

Financials
YeartoDecember
Revenues(INRmn)
Rev.growth(%)
EBITDA(INRmn)
Adjustednetprofit(INRmn)
Sharesoutstanding(mn)
AdjusteddilutedEPS(INR)
EPSgrowth(%)
AdjusteddilutedP/E(x)
EV/EBITDA(x)
EV/EBITDAadjustedforVolvoshare(x)
ROAE(%)

CY10
44,214
49.6
3,821
3,078
27
70.5
122.8
28.3

9.8
18.7
16.5

CY11
57,160
29.3
5,945
4,983
27
114.7

62.8
17.4
6.2
11.8
22.9

EdelweissResearchisalsoavailableonwww.edelresearch.com,
BloombergEDEL<GO>,ThomsonFirstCall,ReutersandFactset.

CY12E
CY13E
69,369 94,440
21.4 36.1
7,882 10,961
6,157 8,153
27 27
141.6 189.6
23.4 34.0
14.1 10.5
4.4 2.4
8.4 5.1
23.4 25.6

Promoters*
55.2%

*Promoterspledgedshares
(%ofshareinissue)

NIL

PRICEPERFORMANCE(%)
Stock

Nifty

EWAuto
Index

1month

(5.5)

3.5

(2.1)

3months

4.1

(4.8)

(9.1)

12months

63.2

(5.6)

15.3

SachinGupta
+912266233472
sachin.gupta@edelcap.com

AshishPoddar
+912266203099
ashish.poddar@edelcap.com

June22,2012
EdelweissSecuritiesLimited

Automobiles

Motorcycledemandstaysstrong
Despite slowdown in the twowheeler segment, demand for Royal Enfield motorcycle has
stayedstrong.Inourview,thenichesegment,lowbaseandrelativelyaffluentbuyerprofile
aremainreasonsbehinditsstrongdemand.Mostofthemodelshaveuptoninemonthsof
waiting period. New Thunderbird 500cc, to be launched in Q3CY12, is likely to act as a
positivetrigger.Also,additionalcapacityof50,000units(33%addition)isexpectedtocome
on stream in Q1CY13. We have built in production getting operational in Q2CY13. Thus,
timelyexecutioncouldposeupsiderisk(upto4%ofCY13consolidatedEPS).

Table1:Waitingperiodexistsonmostofthemodels
Model
Waitingperiod
Classic350
Sixtoninemonths
Bullet
Twotofourmonths
Thunderbird350
Threetofourmonths

Source:Company

Chart1:RoyalEnfieldsalestofurtherincreasewithcapacityadditioninQ1CY13
10,000

(Nos.)

8,800
7,600
6,400
5,200

May12

Apr12

Mar12

Feb12

Jan12

Dec11

Nov11

Oct11

Sep11

Aug11

Jul11

4,000

Source:Company

Fig.1:Thunderbird500cclaunchdueinQ3CY12

Source:Company

EdelweissSecuritiesLimited

EicherMotors

Commercialvehiclebusiness:Amixedbag
VECV, Eichers CV venture with Volvo, continues to gain market share in the medium and
heavycommercialvehiclesegment.Thedealeradditionprogramandlaunchinnewerarea
isaidingmarketsharegains.Also,busdemandisverystrong.Thecompanyexpectstobag
purchaseorderthroughJNNURMinH2CY13.Bankfundingisverystrongwithdelinquencies
below 1%. However, demand weakness has been seen the light commercial vehicle
segment. However, increasing discounts in heavy commercial vehicle segment could pose
marginsriskforVECVbusiness.Oursensitivitysuggests5%dropintotalsales;doublingof
incentivescouldlowerconsolidatedEPSby6%inCY12.

Chart2:EichercontinuestogainmarketshareinMHCVsegment

5.6

960

4.2

720

2.8

480

1.4

240

0.0

0
May12

Apr12

Mar12

Feb12

Jan12

Dec11

Nov11

Oct11

Sep11

Aug11

Jul11

Jun11

May11

Apr11

MHCVmarketshare

(Nos)

1,200

(%)

7.0

MHCVsalesvolume(RHS)
Source:SIAM,Edelweissresearch

EnginebusinessofVECVisontrack.Commercialproductionofengineislikelytostartfrom
Q2CY13. The company is likely to launch new range of trucks on new platform and new
enginesbyendofCY13.

Outlookandvaluations:Favourable;maintainBUY
Despite nearterm margin concern on the CV segment, business outlook stays favourable
driven by diversified product mix, strong balance sheet, credible management, strong
demandformotorcycleandhighermarketshareintheCVbusiness.WemaintainBUYwith
SoTP based target price of INR2,807. Key risks include increasing competition in truck
businessanddoublediprecession.

Table2:Enginebusinessvaluation
INRmn
Sales(Volume)
AverageRealization(INR)
Sales(INRm)
EBITDA(%)
EBITDA(INRm)
EBITDAshareofEML
TargettedMultple
EngineEV(Discountedusing13%WACC)

CY13E
20,000
275,000
5,500
4%
220
120
6,382

CY14E
65,000
283,250
18,411
12%
2,209
1,202
6.0
7,211

Source:Edelweissresearch
3

EdelweissSecuritiesLimited

Automobiles

Table3:Summaryvaluation
Summaryvaluations
INRmn
Sales
VECV(Exengine)
Standalone
Total
EBIDTA
VECV(ExEngine)
Standalone
Total
Targetmultiple(EV/EBIDTA)
VECV(Truck)
Standalone
TargetEV(INRmn)
VECV(Truck)
Standalone
EngineBusiness
Total

CY12E

CY13E

CY14E

59,562
9,285
68,847

75,732
12,539
88,271

96,541
15,686
112,227

6,711
1,251
7,962

8,942
1,956
10,898

11,389
2,749
14,138

8.5
10.2

30,943
12,721
43,663

7.5
9.0

36,484
17,607
6,382
60,472

6.6
8.0

41,120
21,893
7,211
70,225

Less.NetDebt(INRmn)*

(12,279) (15,344) (21,227)

TargetMarketCap(INRmn)
ShareCap.(Nosmn)

55,943
27.0

75,816
27.0

91,452
27.0

Valuepershare(INR)

2,071

2,807

3,386

Source:Edelweissresearch

Table4:Keyassumptions
Salesvolume
MHCV
LCV
TwoWheelers
Volvo

CY12E
CY13E
CY14E
157,052 199,199 241,774
43,610 52,705 64,475
12,769 16,072 20,274
100,108 129,574 155,923
565 847 1,101
Source:Edelweissresearch

EdelweissSecuritiesLimited

EicherMotors

Chart3:OneyearforwardEV/EBITDA
12.0
9.6

(x)

7.2
4.8
2.4

EV/EBITDA

Jun12

Sep11

Dec10

Mar10

Jul09

Oct08

Jan08

May07

Aug06

Nov05

Mar05

0.0

EV/EBITDAavg

Chart4:OneyearforwardP/E
EicherMotors1yearforwardP/Eband
55.5
45.0

(x)

34.5
24.0
13.5

Jun12

Sep11

Dec10

Apr10

Jul09

Oct08

Jan08

May07

Aug06

Nov05

Mar05

3.0

Chart5:OneyearforwardP/BV
4.0
EicherMotors1yearforwardP/BVband
3.2

(x)

2.4
1.6
0.8

Jun12

Sep11

Dec10

Apr10

Jul09

Oct08

Jan08

May07

Aug06

Nov05

Mar05

0.0

Source:Capitaline,Edelweissresearch
5

EdelweissSecuritiesLimited

Automobiles

CompanyDescription
Incorporated in 1982, Eicher is the flagship company of the Eicher Group in India and a
leading player in the Indian motorcycle and commercial vehicle (CV) segments. Eicher
manufacturesandmarketsthemotorcycleundertheiconicbrandnameRoyalEnfield.The
CVsegmentoperatesunderaJVcalledVECommercialVehicles(VECV).

InvestmentTheme
Companyoffersstrongestvolumeandearningsgrowthvisibilityintheautosector.Market
share gain in commercial vehicle business, engine supply to Volvo and strong demand for
nichemotorcycledivisionprovides20%CAGRvolumegrowthvisibilityovernextthreeyear.
While scale should aid margin expansion. Strong balance sheet with INR432 cash/share
providesadditionalcomfort.

Keyrisks
Executionrisk
Majorexecutionriskinvolvesstartofproductionasperscheduleandacceptabilityofnew
products in new geographies. In our view, we have built at least one quarter delay in our
numbers. Moreover, we expect gradual acceptance of new products as reflected in our
marketshareassumptioninheavydutytruckcategory.

Royaltytermsinenginebusiness
ThetermsofsupplyofenginetoVolvoarenotknown.ItleavesapossibilityofVECVoffering
royalty to Volvo for technical knowhow which could result in lower than expected
profitability.

Our view: Management has guided that profitability will not be lower than existing
business.Peercomparisonshowsthatothercompaniesaremaking1520%EBITDAmargin
while we have considered 12% EBITDA margins for engine business in CY14. Moreover,
manufacturinginIndiaisatleast15%cheaperversusmanufacturinginEurope.Given50%
ownership in VECV, Volvo is anyway getting half of the benefit. Deutz, from whom Volvo
was earlier sourcing engine, makes 11% EBITDA margin. Hence, in our view, this risk
adequatelybuiltinournumbers.

Increasingcompetitionamidstslowingsalesoftrucks
Whilesalesareslowingraisingthefearthathighdiscountscouldaffectmargins.

Ourview:Pricewarislikelytobelimitedtoheavydutymarket.Diversifiedbusinessmodel
should mean that 100 bps margins could b e at risk. However, lower sales of heavy duty
truckcouldimproveproductmix,sincethesearelowmarginproducts.Therefore,itshould
limittheimpactofhighdiscounts.

EdelweissSecuritiesLimited

EicherMotors

FinancialStatements

Incomestatement
YeartoDecember
Incomefromoperations
Materialscosts
Employeecosts
TotalSG&Aexpenses
Totaloperatingexpenses
EBITDA
Depreciationandamortisation
EBIT
NonoperationalIncome
Interestexpenses
Profitbeforetax
Provisionfortax
Coreprofit
Extraordinaryincome/(loss)
Profitaftertax
Minorityinterest
Profitafterminorityinterest
Basicsharesoutstanding(mn)
AdjustedbasicEPS(INR)
Dilutedequityshares(mn)
DilutedEPS(INR)
CEPS(INR)
Dividendpershare(INR)
Dividendpayout(%)

Commonsizemetricsas%ofnetrevenues
YeartoDecember
Operatingexpenses
Materialscosts
Employeeexpenses
SG&Aexpenses
Depreciation
Interestexpenditure
EBITDAmargins
Adj.netprofitmargins

Growthratios(%)
YeartoDecember
Revenues
EBITDA
PBT
Adj.netprofit
EPS

CY10
44,214
33,147
2,631
4,624
40,402
3,821
573
3,248
1,033
95
4,186
1,108
3,078
(9)
3,069
1,179
1,889
27
70.5
27
70.5
83.7
11.0
15.7

CY10
91.4
75.0
6.0
10.5
1.3
0.2
8.6
7.0

CY10
49.6
136.5
122.3
135.8
122.8

CY11
57,160
41,818
3,461
5,945
51,225
5,945
640
5,305
1,383
77
6,611
1,628
4,983
(9)
4,974
1,886
3,088
27
114.7
27
114.7
129.6
16.0
14.0

CY11
89.6
73.2
6.1
10.4
1.1
0.1
10.4
8.7

CY11
29.3
55.6
57.9
61.9
62.8

CY12E
69,369
50,244
4,076
7,167
61,487
7,882
918
6,964
1,518
44
8,437
2,280
6,157

6,157
2,336
3,821
27
141.6
27
141.6
163.3
21.2
15.0

CY12E
88.6
72.4
5.9
10.3
1.3
0.1
11.4
8.9

CY12E
21.4
32.6
27.6
23.6
23.4

CY13E
94,440
69,475
5,063
8,941
83,479
10,961
1,288
9,673
1,526
48
11,151
2,998
8,153

8,153
3,035
5,118
27
189.6
27
189.6
220.0
28.4
15.0

CY13E
88.4
73.6
5.4
9.5
1.4
0.1
11.6
8.6

CY13E
36.1
39.1
32.2
32.4
34.0

(INRmn)
CY14E
131,577
97,424
6,534
11,566
115,523
16,053
1,503
14,550
1,982
46
16,486
4,470
12,016

12,016
4,557
7,458
27
276.3
27
276.3
311.6
41.5
15.0

CY14E
87.8
74.0
5.0
8.8
1.1

12.2
9.1

CY14E
39.3
46.5
47.8
47.4
45.7

EdelweissSecuritiesLimited

Automobiles
Balancesheet
Ason31stDecember
Equitycapital
Reserves&surplus
Shareholdersfunds
Minorityinterest(BS)
Securedloans
Unsecuredloans
Borrowings
Deferredtax(net)
Sourcesoffunds
Grossblock
Depreciation
Netblock
Capitalworkinprogress
Investments
Inventories
Sundrydebtors
Cashandequivalents
Loansandadvances
Othercurrentassets
Totalcurrentassets
Sundrycreditorsandothers
Provisions
Totalcurrentliabilities&provisions
Netcurrentassets
Miscellaneousexpenditure
Usesoffunds
Bookvaluepershare(INR)

Freecashflow
YeartoDecember
Netprofit
Depreciation
Others
Grosscashflow
Less:ChangesinWC
Operatingcashflow
Less:Capex
Freecashflow

Cashflowmetrics
YeartoDecember
Operatingcashflow
Investingcashflow
Financingcashflow
Netcashflow
Capex
Dividendspaid

CY10
269
12,052
12,321
6,774
865
91
956
250
20,302
8,113
4,269
3,844
669
4,586
3,265
2,609
12,457
1,814
355
20,500
7,942
1,391
9,332
11,168
35
20,302
456.1

CY10
1,889
573
1,623
4,086
726
3,360
1,328
2,031

CY10
3,360
(1,921)
(689)
750
(1,328)
(346)

CY11
270
14,661
14,931
8,377
354
150
504
645
24,456
9,887
4,843
5,044
3,947
5,126
4,280
3,434
11,973
3,391
423
23,501
11,846
1,497
13,343
10,157
182
24,456
546.5

CY11
3,088
640
834
4,561
527
4,035
5,118
(1,083)

CY11
4,035
(3,397)
(1,122)
(484)
(5,118)
(502)

CY12E
270
17,816
18,086
10,713
360
150
510
645
29,954
16,387
5,761
10,626
3,000
5,326
5,309
4,553
14,254
3,481
870
28,466
14,607
3,039
17,646
10,820
182
29,954
663.4

CY12E
3,821
918
4,101
8,841
1,619
7,221
5,553
1,668

CY12E
7,221
(4,236)
(704)
2,282
(5,553)
(666)

CY13E
270
22,042
22,312
13,748
360
150
510
645
37,214
19,887
7,049
12,838
1,050
6,326
7,298
6,267
21,759
4,325
1,194
40,841
20,051
3,972
24,023
16,818
182
37,214
819.9

CY13E
5,118
1,288
4,570
10,975
1,506
9,469
1,550
7,919

CY13E
9,469
(1,024)
(940)
7,505
(1,550)
(892)

(INRmn)
CY14E
270
28,200
28,470
18,305
360
150
510
645
47,930
22,387
8,552
13,835
550
7,526
10,284
10,652
30,720
5,957
1,665
59,278
27,993
5,449
33,442
25,836
182
47,930
1,048.1

(INRmn)
CY14E
7,458
1,503
2,508
11,469
(57)
11,526
2,000
9,526

CY14E
11,526
(1,218)
(1,347)
8,961
(2,000)
(1,300)

EdelweissSecuritiesLimited

EicherMotors

Profitability&efficiencyratios
YeartoDecember
ROAE(%)
ROACE(%)
Inventoryday
Debtorsdays
Payabledays
Cashconversioncycle(days)
Currentratio
Debt/EBITDA
Fixedassetturnover(x)
Debt/Equity

Operatingratios
YeartoDecember
Totalassetturnover
Fixedassetturnover
Equityturnover

Dupontanalysis
YeartoDecember
NPmargin(%)
Totalassetsturnover
Leveragemultiplier
ROAE(%)

Valuationparameters
YeartoDecember
DilutedEPS(INR)
YoYgrowth(%)
CEPS(INR)
DilutedPE(x)
Price/BV(x)
EV/Sales(x)
EV/SalesadjustedforVolvoshare(x)
EV/EBITDA(x)
EV/EBITDAadjustedforVolvoshare(x)
Dividendyield(%)

CY10
16.5
22.4
30
20
77
(26)
2.2
0.3
5.7
0.1

CY11
22.9
29.9
33
19
86
(34)
1.8
0.1
6.4

CY10
2.3
11.8
3.8

CY13E
2.8
8.0
4.7

CY12E
5.5
2.5
1.7
23.4

CY11
114.7
62.8
138.4
17.4
3.6
0.6
0.8
6.2
11.8
0.8

CY13E
25.6
33.3
33
21
91
(37)
1.7

5.2

CY12E
2.5
8.9
4.2

CY11
5.4
2.6
1.7
22.9

CY10
70.5
122.8
91.7
28.3
4.4
0.8
1.1
9.8
18.7
0.6

CY12E
23.4
31.2
35
21
96
(40)
1.6
0.1
5.3

CY11
2.6
12.9
4.2

CY10
4.3
2.3
1.7
16.5

CY13E
5.4
2.8
1.7
25.6

CY12E
141.6
23.4
175.6
14.1
3.0
0.5
0.7
4.4
8.4
1.1

CY13E
189.6
34.0
237.3
10.5
2.4
0.3
0.5
2.4
5.1
1.4

CY14E
29.6
38.8
33
23
90
(34)
1.8

6.2

CY14E
3.1
9.9
5.2

CY14E
5.7
3.1
1.7
29.6

CY14E
276.3
45.7
332.0
7.2
1.9
0.1
0.3
1.0
2.8
2.1

EdelweissSecuritiesLimited

RATING&INTERPRETATION

Company

Absolute

Relative

Relative

reco

reco

risk

AshokLeyland

BUY

SP

BajajAuto

EicherMotors

BUY

SO

ExideIndustries

REDUCE

SU

BUY

SO

HeroMotoCorp
MarutiSuzukiIndiaLtd

Company

Absolute

Relative

Relative

reco

reco

Risk

BUY

SO

HOLD

SP

Mahindra&MahindraLtd

BUY

SO

TataMotorsLtd

BUY

SP

ABSOLUTERATING
Ratings

Expected absolute returns over 12 months

Buy

More than 15%

Hold

Between 15% and - 5%

Reduce

Less than -5%

RELATIVERETURNSRATING
Ratings

Criteria

Sector Outperformer (SO)

Stock return > 1.25 x Sector return

Sector Performer (SP)

Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return

Sector Underperformer (SU)

Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe
within the sector

RELATIVERISKRATING
Ratings

Criteria

Low (L)

Bottom 1/3rd percentile in the sector

Medium (M)

Middle 1/3rd percentile in the sector

High (H)

Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTORRATING
Ratings

Criteria

Overweight (OW)

Sector return > 1.25 x Nifty return

Equalweight (EW)

Sector return > 0.75 x Nifty return

Underweight (UW)

Sector return < 0.75 x Nifty return

Sector return < 1.25 x Nifty return

10

EdelweissSecuritiesLimited

EicherMotors

EdelweissSecuritiesLimited,EdelweissHouse,offC.S.T.Road,Kalina,Mumbai400098.
Board:(9122)40094400,Email:research@edelcap.com

VikasKhemani

HeadInstitutionalEquities

vikas.khemani@edelcap.com

+912222864206

NischalMaheshwari

CoHeadInstitutionalEquities&HeadResearch

nischal.maheshwari@edelcap.com

+912240635476

NiravSheth

HeadSales

nirav.sheth@edelcap.com

+912240407499

Coveragegroup(s)ofstocksbyprimaryanalyst(s):Automobiles
AshokLeyland,BajajAuto,EicherMotors,ExideIndustries,HeroMotoCorp,Mahindra&MahindraLtd,MarutiSuzukiIndiaLtd,TataMotorsLtd

RecentResearch
Date

Company

Title

Price(INR)

12Jun12

Maruti
Suzuki

SPILacquisition:Arightmove; 1,145
EdelFlash

06Jun12

Bharat
Gears

Cautiouslyoptimistic;
VisitNote

06Jun12

75

Recos
Buy
Not
Rated

Automobiles Raisingexcisedutynota
solution;EdelFlash

DistributionofRatings/MarketCap
RatingInterpretation

EdelweissResearchCoverageUniverse

RatingDistribution*

Buy

Hold

Reduce

104

50

18

Total
183

*1stocksunderreview

>50bn

Between10bnand50bn

<10bn

MarketCap(INR)

114

58

11

11

Rating

Expectedto

Buy

appreciatemorethan15%overa12monthperiod

Hold

appreciateupto15%overa12monthperiod

Reduce

depreciatemorethan5%overa12monthperiod

EdelweissSecuritiesLimited

 Automobiles
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