Jinesh Gandhi (Jinesh@MotilalOswal.com); +91 22 3982 5416

Accelerating ahead

Eicher Motors

Update |30 December 2015Sector: Automobiles

Eicher Motors

30 December 2015 2

Contents: Accelerating ahead

Summary ............................................................................................................. 3

RE: Focus shifts from production to market expansion .......................................... 5

RE: Just scratched the surface, with large headroom to grow ................................ 9

RE Exports - The next frontier ............................................................................. 12

VECV: To benefit from cyclical recovery and new products .................................. 14

Valuations attractive for iconic yet accessible brand ........................................... 16

Financials and valuations .................................................................................... 20

Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Eicher Motors

30 December 2015 3

BSE SENSEX S&P CNX CMP: INR16,527 TP: INR21,196 (+28%) Buy 25,960 7,896

Stock Info Bloomberg EIM IN Equity Shares (m) 27.0 52-Week Range (INR) 21,618/13,930 1, 6, 12 Rel. Per (%) 0/-15/13 M.Cap. (INR b) 446.2 M.Cap. (USD b) 6.8 12M Avg Val (INR M) 1,668 Free float (%) 45.1 Financials Snapshot (INR b) Y/E Dec 2015E 2016E 2017E Net Sales 117.1 162.9 200.6 EBITDA 17.3 27.6 37.3 PAT 9.0 14.7 20.2 EPS (INR) 334 542 746 Gr. (%) 47.0 62.4 37.7 BV/Sh (INR) 1,105 1,585 2,262 RoE (%) 32.8 40.3 38.8 RoCE (%) 34.8 46.2 47.3 P/E (x) 49.5 30.5 22.1 P/BV (x) 15.0 10.4 7.3 Shareholding pattern (%)

As On Sep-15 Jun-15 Sep-14

Promoter 54.9 54.9 55.0

DII 27.1 27.5 20.1

FII 4.3 4.6 4.4

Others 13.8 13.0 20.5

FII Includes depository receipts

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Accelerating ahead Growth remains strong, with more legs to it

With confidence in managing capacities, management’s focus has shifted to products and market expansion.

It has strengthened its management team with focus to improve brand/marketing, products and develop international business

Our triangulation of multiple proxies suggests that RE’s current penetration of addressable market realistically is 1-2%, which we estimate to go up to 3-5% by 2020.

RE’s has started groundwork to own the nascent middle weight motorcycle segment globally, but ramp-up would be gradual over next 2-3 years.

Valuations attractive for 5-year ~30% EPS CAGR. Buy with 1 year TP of ~INR21,196.

Royal Enfield: Focus shifts from production to market expansion With confidence in managing capacities, management’s focus has shifted to

products, markets and marketing process. It is now focusing on expanding addressable market through new products,

expanding dealership (in sync with capacity expansion) and new markets, in turn improving visibility of sustenance of strong growth.

It has strengthened its management team with focus to improve brand/marketing, products and develop international business.

Our analysis of RE’s dealer network and volumes suggests significant scope to ramp-up dealer network in select top-50 cities and beyond.

RE: Large headroom to grow in India; Estimate 22% CAGR over 5 years RE currently has ~4% volume share, ~8% revenue share and 16% EBITDA share

of the 2w Industry in India. However, RE accounts for just ~0.9% of the motorcycle population.

RE's visibility is growing, so is access to the brand-especially in tier 2 markets. More importantly, residual value of RE is growing.

RE’s customer profile is changing for good, with younger age profile, rising cult and increasing attraction of accessories.

Our triangulation of multiple proxies suggests that RE’s current penetration of addressable market is 1-2%, which we estimate to go up to 3-5% by 2020.

We estimate RE's domestic volumes to grow ~32% CAGR over CY15-17E, and conservatively estimate ~22% CAGR over CY15-20E.

RE Exports: Opportunity to develop and own middle weight segment RE is targeting the 250cc-750cc segment, priced at USD3k-7k. This segment is

currently ~0.6m units globally (ex India). Exports from India for premium segment (Ex RE, >150cc) stand at over 0.5m

annually. However, RE’s exports are just ~9,000 units—restricted due to capacity constraints and limited relevant product portfolio for export markets.

It has started executing its export strategy based on experiential marketing similar to what it has done in India and is opening exclusive stores in key cities of targeted markets like Columbia, Indonesia, UK, France, Spain etc.

We believe that export market can be a meaningful contributor to volumes in the next five years—given the huge opportunity size and differentiated positioning of Royal Enfield.

30 December 2015

Update | Sector: Automobiles

Eicher Motors

Eicher Motors

30 December 2015 4

VECV: To benefit from cyclical recovery and new products Cyclical recovery coupled with new products (i.e. Pro series) to aid volume growth,

leading to market share gains. Further, Pro series will help to ramp-up exports over next 2 years, with focus on

Africa, Middle East and Asia. It plans to introduce new generation products in CY16.

It is targeting CV volumes of over 100,000 (v/s ~46,700 units in CY15E), with over 10% of volumes coming from exports over next 3-4 years.

We estimate VECV’s volumes to grow ~23% (CY15-17E) and 17.5% CAGR (CY15-20E).

We estimate VECV’s sales to grow ~27% CAGR (CY15-17E), driving EBITDA margins improvement of 410bp to ~11.5% by CY17E driving 82% CAGR (CY15-17E).

Valuation and View: Structural story gets stronger We lower our EPS estimates by 2-4%% for CY15E-17E to CY17 to factor in for a)

volume cut for RE for CY15/CY16/17 due to Chennai floods and capacity constraint in CY16 and b) VECV’s lower EBITDA margin due to slower than estimated ramp-up in Pro series.

Consolidated EPS is estimated to grow at ~30% CAGR over CY15-20, with RoIC improving from ~35% in CY15 to ~65% in CY17 and 81% by CY20. EIM trades at 30.6x/22.2x CY16E/17E EPS.

Our one-year target price is ~INR21,196 (28% upside, valuing RE at 30x CY17E EPS) and three-year target price is INR30,013 (~22% CAGR, valuing RE at 30x CY19E EPS). Maintain Buy.

Exhibit 1: Comparative valuations CMP Rating TP P/E (x) EV/EBITDA (x) RoE (%) Auto OEM's (INR)* (INR) FY16E FY17E FY16E FY17E FY16E FY17E Bajaj Auto 2,516 Buy 2,923 20.4 16.1 12.8 10.6 31.4 34.8 Hero MotoCorp 2,712 Buy 3,050 16.9 14.2 10.8 9.2 43.9 42.3 TVS Motor 290 Buy 326 29.4 18.1 17.7 11.6 25.8 33.2 M&M 1,262 Neutral 1,263 20.0 15.9 15.3 13.3 15.7 15.7 Maruti Suzuki 4,588 Buy 5,428 26.9 20.4 13.2 10.8 18.4 20.8 Tata Motors 394 Buy 473 11.1 8.6 3.9 3.2 18.2 18.8 Ashok Leyland 90 Buy 99 24.7 13.0 11.8 7.3 18.9 30.1 Eicher Motors# 16,527 Buy 21,196 49.5 30.5 27.0 17.3 32.8 40.3 Auto Ancillaries Bharat Forge 896 Buy 1,033 25.1 19.5 13.3 11.1 22.2 24.3 Exide Industries 147 Buy 183 20.4 16.2 12.2 10.0 13.7 15.4 Amara Raja Batteries 865 Buy 1,032 28.9 21.0 17.2 12.9 25.3 25.3 BOSCH 18,566 Buy 22,115 48.0 34.7 31.7 23.7 15.6 18.8

Source: MOSL

Stock Performance (1-year)

Eicher Motors

30 December 2015 5

RE: Focus shifts from production to market expansion Expanding managerial bandwidth and plugging skill set gaps Focus to expand the addressable market With confidence in managing capacities, management’s focus has shifted to

products, markets and marketing process. It is now focusing on expanding addressable market through new products,

expanding dealership (in sync with capacity expansion) and new markets, in turn improving visibility of sustenance of strong growth.

RE is taking several initiatives to expand the addressable market; some of the initiatives are: Product quality improvement New product launches Expansion of managerial bandwidth and plugging skill set gaps Dealer expansion beyond tier-1 cities

Exhibit 2: Product quality improvement

Phase Year Initiative Target area Remarks

1 2009 UCE engine Engine quality

UCE engine replaced decades old cast iron engine, improving reliability, performance, mileage (by ~30%) and maintenance requirement

2 2013 New Oragadam plant Fit & Finish

Reducing manual work, new plant improved efficiency of production and consistency/finish of the product with higher automation

3 2016 & beyond

Acquisition of Harris Performance Products & technical centers at Chennai and the UK

Ride & Handling

With inputs from Harris Performance and newly hired senior executives, RE's engineering and product design is expected to step up

Source: Company, MOSL Exhibit 3: New product launches

Year Product 2009 Thunderbird Twinspark 350 2009 Classic 350 2009 Classic 500 2010 New Bullet 350 2012 New Thunderbird 350 2012 New Thunderbird 500 2013 New Bullet 500 2013 Continental GT 2016 Himalayan (New platform) 2017 New platform (New platform)

Source: Company, MOSL

"You can expect one big product every year, in the

next 3- 5 years. The last new product that we

launched was in 2013 and the next one will be

probably 2016. In three years we will launch a full

new product.” Siddharth Lal

Eicher Motors

30 December 2015 6

Exhibit 4: RE’s product range is evolving to address newer customers

Source: Company, MOSL

Exhibit 5: Expanding managerial bandwidth and plugging skill set gaps

Name Profile Past Experience Brief Profile

Rudratej Singh President - Royal Enfield

Unilever - VP, South Asia

Prior to joining RE, Mr. Singh was based out of Singapore with Unilever as VP South Asia, HPC & Foods Marketing Operations. He has successfully led brands and business in gaining market share—both by challenging competition as well as expanding the market globally. He will be responsible for building thought leadership for the brand and leading the commercial business; this will include global sales and after sales, brand and marketing, new product strategy and creating and growing new business such as apparels, accessories and other adjacencies.

Pierre Terblanche Head - Designer Ducati - Design Director

Mr. Terblanche was Design Director for Ducati (1997-2006), post which he worked as an independent design consultant. In Nov-14, he joined RE where he will be working as Design Director based out of England.

Simon Warburton Head - Product Development

Triumph - Product Manager

Mr. Warburton spent more than 18 years at Triumph Motorcycles as a Design and Project Engineer on powertrain and whole motorcycle project. He comes with extensive experience and understanding of the motorcycle market and the needs of the motorcycle consumer, especially in Europe and the US.

Mark Wells Head - Global Product Strategy

Founder Xenophya Design

At Xenophya Design, Mr. Wells worked with a range of brands including Fischer, Yamaha YEC, Aprilia, Derbi, Rieju, Bajaj Commercial, Triumph and Trident Powersports. He has previously worked with RE and has provided inputs on the design of one of the most popular products - Classic and the Continental GT.

Ian Wride Head - Industrial Design (P Platform)

Director Xenophya Design

Xenophya Design provided product planning, concept design and model making for the motorcycle industry in Europe, Asia and the US.

James Young Head - Engines Triumph - Chief Engineer (Powertrain)

During his career in the motorcycle, recreational and off-road vehicle industries, he has gained extensive knowledge of the entire engine system and transmission design requirements from initial concept through to final production. This has included not only hands-on design detail, setting out development and test requirements, but also management of team personnel, project planning and timing.

Rod Copes President - North America Business

Harley Davidson - Head (Sales & Customer Service)

In his current role as the President, North America for Royal Enfield, Mr. Copes will be driving brand growth in the US and Canada. He holds a Master of Science in Mechanical Engineering and Master of Science in Management (MBA) from the Massachusetts Institute of Technology.

Source: Company, MOSL

Eicher Motors

30 December 2015 7

Exhibit 6: Dealer expansion to continue in tier-2 cities and beyond, as tier 1 cities now has good coverage

Source: Company, MOSL

Exhibit 7: RE has scope to further expand dealership in few Top-50 Cities and beyond City State # of RE

Dealers City State # of RE

Dealers

New Delhi Delhi 15 Coimbatore Tamil Nadu 2

Pune Maharashtra 13 Agra Uttar Pradesh 2

Bangalore Karnataka 12 Faridabad Haryana 2

Chennai Tamil Nadu 12 Rajkot Gujarat 2

Hyderabad Telangana 11 Varanasi Uttar Pradesh 2

Mumbai Maharashtra 7 Aurangabad Maharashtra 2

Kolkata West Bengal 6 Allahabad Uttar Pradesh 2

Ahmedabad Gujarat 5 Ranchi Jharkhand 2

Thane Maharashtra 5 Vijayawada Andhra Pradesh 2

Ludhiana Punjab 4 Mysore Karnataka 2

Gurgaon Haryana 4 Kanpur Uttar Pradesh 1

Lucknow Uttar Pradesh 3 Meerut Uttar Pradesh 1

Nagpur Maharashtra 3 Srinagar Jammu and Kashmir 1

Visakhapatnam Andhra Pradesh 3 Dhanbad Jharkhand 1

Madurai Tamil Nadu 3 Amritsar Punjab 1

Nashik Maharashtra 3 Navi Mumbai Maharashtra 1

Raipur Chhattisgarh 3 Jabalpur Madhya Pradesh 1

Chandigarh Chandigarh 3 Gwalior Madhya Pradesh 1

Surat Gujarat 2 Jodhpur Rajasthan 1

Jaipur Rajasthan 2 Kota Rajasthan 1

Indore Madhya Pradesh 2 Guwahati Assam 1

Bhopal Madhya Pradesh 2 Tiruchirappalli Tamil Nadu 1

Patna Bihar 2 Bareilly Uttar Pradesh 1

Vadodara Gujarat 2 Moradabad Uttar Pradesh 1

Ghaziabad Uttar Pradesh 2 Tiruppur Tamil Nadu 1

Source: Company, MOSL

165 190

249 300

400

500 560

CY10 CY11 CY12 CY13 CY14 CY15E CY16E

# of RE Dealers

Eicher Motors

30 December 2015 8

Exhibit 8: RE has scope to expand distribution in some big states % of Volumes # of RE Dealers RE M/C Industry Uttar Pradesh 42 5.6 16.6 Maharashtra 30 15.6 9.3 Rajasthan 18 2.6 7.4 Gujarat 24 4.8 6.3 Tamil Nadu 38 8.2 6.2 Karnataka 27 9.7 5.7 Bihar 20 2.8 5.6 Madhya Pradesh 14 1.9 5.6 Andhra Pradesh 19 3.3 5.4 West Bengal 17 3.0 5.3 Punjab 35 6.7 3.4 Haryana 21 2.8 3.3 Orissa 9 1.5 3.1 Telangana 20 4.2 3.0 Jharkhand 9 1.6 2.6 Chattisgarh 11 1.2 2.4 Kerala 24 10.8 2.3 Delhi 15 6.5 2.1 Assam 7 1.6 1.6 Uttarakhand 8 1.5 0.9

Source: Company, SIAM, MOSL

Exhibit 9: RE’s new retail identity is based on the idea of ‘Pure Motorcycling’, truly engaging a motorcycling enthusiast…

Source: MOSL

Exhibit 10: …by driving paradigm shift in customer experience, which seamlessly integrates motorcycle displays, accessories, and customer interaction spaces along with art/installations telling the brand story

Source: MOSL

Eicher Motors

30 December 2015 9

RE: Just scratched the surface, with large headroom to grow Estimate 32% CAGR over CY15-17E and 22% CAGR over next 5 years Royal Enfield (RE) is positioned as a trade-up/step-up brand and not a

premium/luxury brand. It is targeting consumers from the commuter segment who are looking to trade-up.

RE’s visibility is growing, so is access to the brand—especially in tier 2 markets. More importantly, residual value of RE is growing.

RE currently has ~4% volume share, ~8% revenue share and 16% EBITDA share of the 2w Industry in India. However, RE accounts for just ~0.9% of the motorcycle population.

RE demand estimation has always been difficult as market has never been in fully supply mode due to capacity constraints, resulting in high waiting periods and restricted network expansion.

However, we triangulate headroom to grow for RE in India using 3-4 different approaches viz a) estimating addressable household, b) based on RE’s penetration of domestic motorcycle, c) based on RE’s penetration of premium motorcycle (>150cc, ex RE), and d) based on penetration of cars (compact cars costing ~INR0.6m and above).

Method 1 - Based on addressable households: For getting 2W loan of ~INR0.1m, minimum monthly income required is ~INR13,000. Based on this requirement, we estimate current addressable households at ~58m having annual income above ~INR0.2m, which is estimated to grow to ~104m households by FY20. This implies RE’s current penetration of addressable households at ~1.9%, which will increase to ~4.6% by FY20E.

Method 2 - Based on penetration of overall motorcycles: RE is positioned as an upgrade from commuter motorcycle. RE’s market share of domestic motorcycle (M/C) is ~4.2%. However, RE’s population is only ~1% of domestic M/C population, which we estimate to increase to ~2.8% by FY20.

Method 3 - Based on penetration of premium motorcycles: If we look at the premium segment (>150cc & above, ex RE), RE volumes account for ~28% of the segment’s volumes but only 9% of the population. By FY20E, we estimate RE’s penetration of premium segment to be ~25% of the segment’s population.

Method 4 - Based on penetration of compact cars and above (priced above ~INR0.6m): PVs priced above ~INR0.6m has annual sales of ~1.5m and population of ~7.9m units. More importantly, this is the fastest growing segment in the PV industry with ~17% growth.

We estimate RE’s domestic volumes to grow ~32% CAGR over CY15-17E, and conservatively estimate ~22% CAGR over CY15-20E.

Eicher Motors

30 December 2015 10

Exhibit 11: Income-based segmentation indicates target of ~104m households by FY20…

Source: Company, MOSL

Exhibit 12: …implying RE penetration of <5% of target audience

Source: Company, MOSL

Exhibit 13: Based on minimum annual income of ~INR156k, we assume addressable household income threshold of >INR200k

Loan Amount (INR) Tenure (Years) EMI (INR) Required Monthly

Income (INR) 100,000 2 4,638 18,552 100,000 3 3,250 13,000 100,000 5 2,149 8,596

Source: MOSL

Exhibit 14: RE volumes just constitute 4.5% of the domestic M/C volumes ….

Source: Company, MOSL

Exhibit 15: … and only ~1% of the domestic M/C population

Source: Company, MOSL

Exhibit 16: RE volumes account for ~28% of the premium (ex RE) segment volumes…

Source: Company, MOSL

Exhibit 17: …but only ~9% of the premium (ex RE) segment population

Source: Company, MOSL

135.4 114.4 92.6 45.6

41.3 75.3 100.8 134.9

10.7 28.4 50.1 88.2 0.8 3.8 7.6

15.4

FY02 FY10 FY15E FY20E

<90 90-200 200-1000 >1000 Addressable segment for RE

1.3 1.9 4.6

11.3 14.3

31.3

FY10 FY15E FY20E

Penetration of >INR200k householdPenetration of >INR1000k household

451

10,300

RE volumes Dom. M/C volumes (ex RE)

Annual ('000 units)

CY15 Vols

FY15 Vols

22x

1,096

106,893

RE popultaion Dom. M/C popultaion (ex RE)

Population ('000 Units)

97x

442

1,598

RE Premium Ex RE

Annual ('000 units)

3.6x

CY15 FY15 Vols 1,096

11,642

RE Premium Ex RE

Population ('000 units)

11.6x

Eicher Motors

30 December 2015 11

Exhibit 18: Car priced above ~INR600k has over ~7.8m population and sells ~1.5m annually

Source: Company, MOSL

Exhibit 19: RE volumes are estimated to grow at ~22% CAGR

Source: Company, MOSL

RE customer profile is changing for good Customer profile is getting younger, as customers from all age groups (i.e., 25 and

above) are now looking to buy RE (v/s earlier 30 and above earlier). 40% customers prefer all-cash payment; 60% prefer finance (financing is not done

through any preferred financier, customer can get the vehicle financed from the financer of their choice)

Accessories sales are increasing, especially since the new retail format. The highest selling accessories are helmet and gloves; however, customers who go cruising over weekend are increasingly also buying jacket, shoes and knee guards). The entire package would cost ~INR20,000. Accessories sales contribution to RE is negligible compared with ~17% for Harley Davidson.

Royal Enfield’s cult is rising, with ‘Rider Mania 2015’ at Goa—the largest ever gathering of Royal Enfield enthusiasts—from 20-22 November had over 5,000 riders from all parts of India!

Exhibit 20: RE is attracting more and more young people

Source: Company, MOSL

1,500

7,858

Annual Vols Population

53

75

113

178

303 46

6 647 81

0 933

1,07

5

1,23

8

CY10

CY11

CY12

CY13

CY14

CY15

E

CY16

E

CY17

E

CY18

E

CY19

E

CY20

E

CAGR ~55%

CAGR ~22%

Eicher Motors

30 December 2015 12

RE Exports - The next frontier Groundwork underway to own the nascent segment, but ramp-up to take time RE is targeting the 250cc-750cc segment, priced at USD3k-7k. This segment is

currently ~0.6m units globally (ex India). India exports 0.5m units of premium motorcycle per annum, of which ~42%

contribution is from Bajaj Pulsar. Thus, there is significant scope for RE to export premium motorcycles.

RE currently exports a very small portion of its annual volumes due to capacity constraint and lack of relevant products.

However, export is a lucrative opportunity—with better product mix driving better realization (INR147k per unit v/s INR101k per unit in the domestic market).

Exhibit 21: RE’s challenge is to develop nascent ‘Middle Weight’ market globally, but also has an opportunity to own it

Source: Company, MOSL

Exhibit 22: RE targeting 250cc-750cc segment, priced at USD3,000-7,000

Source: Company, MOSL

Exhibit 23: India exports over 0.5m units of premium (Ex RE) segment

Source: Company, MOSL

220 218 250

184 222 334

403 440

584

FY13 FY14 FY15

Other Premium (Ex RE) Pulsar

Total Premium Exports (Ex RE)

“When I look at it personally, I have spent 15

years in the first phase and I say I have a maximum of 15

years left now for phase II. So, phase II is a longer-term idea of making Royal Enfield a global brand. That’s what we want to do,” Siddharth

Lal

Eicher Motors

30 December 2015 13

Exhibit 24: Exports currently very small due to capacity constraints and limited relevant products

Source: Company, MOSL

Exhibit 25: Exports lucrative opportunity with rich product mix

Source: Company, MOSL

1,95

3

2,63

0

3,20

0

3,53

2

4,59

2

6,22

1

9,33

2

13,0

64

16,9

83

3.8

5.0

4.3

3.1 2.6

2.1 2.0 2.0 2.1

CY09 CY10 CY11 CY12 CY13 CY14 CY15E CY16E CY17E

Exports Exports (% of total volumes)

93 98 101

151 150 147

CY12 CY13 CY14

Realizations (INR '000) Domestic Exports

Eicher Motors

30 December 2015 14

VECV: To benefit from cyclical recovery and new products MDEP ramp-up and operating leverage to drive profitability Cyclical recovery coupled with new products (i.e. Pro series) to aid volume growth,

leading to market share gains. While Pro series launch of LMD and HD range (big upgrade of existing platform) is largely done, we believe acceptance of new range would happen gradually.

Further, Pro series will help to ramp-up exports over next 2 years, with focus on Africa, Middle East and Asia. It plans to introduce new generation products in CY16.

It is targeting CV volumes of over 100,000 (v/s ~46,700 units in CY15E), with over 10% of volumes coming from exports over next 3-4 years.

We estimate VECV’s volumes to grow ~23% (CY15-17E) and 17.5% CAGR (CY15-20E).

MDEP engines (5 and 8 ltr Euro 6 compliant engines) production has ramped-up to ~1,500 units/month. Volvo has already started ramp-down with Deutz (current supplier), though further ramp-up with VECV is slow due to weak demand in key markets of Volvo. It is targeting MDEP engine volumes of over 100,000 units (v/s ~18,500 units in CY15E).

VECV has highest gross margins among peers (AL and TTMT). However, new product launch expense and negative operating leverage is resulting in lower EBITDA margins vis-à-vis Ashok Leyland.

We estimate VECV’s EBITDA margins to improve by 410bp to ~11.5% by CY17E, driven by ~130bp improvement in gross margins (led by reduction in discounts) and ~280bp improvement due to operating leverage. We estimate VECV’s sales/PAT to post 27%/82% CAGR (CY15-17E). We estimate VECV’s contribution to consolidated EPS to improve from 14% in CY15E to ~25% by CY20E.

Exhibit 26: EIM HD market share loss due to transition to new generation product roll-out

Source: Company, MOSL

Exhibit 27: EIM LMD market share gains in last couple of years driven by Pro series

Source: Company, MOSL

1.1

2

3.1

4 4.4

3.6 3.5

CY09 CY10 CY11 CY12 CY13 CY14 YTDSep'15

HD (> 16 ton)

26.7

30.5 30.5 31.4 30.4

32.6 32.7

CY09 CY10 CY11 CY12 CY13 CY14 YTDSep'15

LMD (5-15 ton)

Eicher Motors

30 December 2015 15

Exhibit 28: EIM Buses market share at ~15%

Source: Company, MOSL

Exhibit 29: VECV’s overall market share at ~12%

Source: Company, MOSL

Exhibit 30: Ramp-up in MDEP volumes to aid VECV top-line growth

Source: Company, MOSL

Exhibit 31: In CY14, MDEP revenue contribution at 6% and has significant scope of ramping up

Source: Company, MOSL

Exhibit 32: Gross margins better than peers

Source: Company, MOSL

Exhibit 33: Significant scope for EBITDA margin expansion with ramp up in volumes

Source: Company, MOSL

Exhibit 34: VECV’s contribution to consolidated EBITDA and EPS to improve…

Source: Company, MOSL

Exhibit 35: …reflecting in increase in SOTP contribution of VECV

Source: Company, MOSL

5.7 6.7 9.7

11.9 13.5

14.9 15.4

CY09 CY10 CY11 CY12 CY13 CY14 YTDSep'15

Buses

9.3 9.7 11

12.4 13.9 13 12

CY09 CY10 CY11 CY12 CY13 CY14 YTD Sep'15

VECV (incl. Exports)

2,529 2,600 3,200

3,800

2,600

3,900 4,353

4,800

CY13

1QCY

14

2QCY

14

3QCY

14

4QCY

14

1QCY

15

2QCY

15

3QCY

15MDEP Volumes

2,529 12,200

911

2,494

CY13 CY14

MDEP Volumes Revenues

24 26 27 30 30 30 31 32

27 27 27

24

27

30 30 29

29 26 26 24 25 29 31 31

CY10 CY11 CY12 CY13 CY14 CY15E CY16E CY17E

VECV AL TTMT

8.4 10.1 7.5 7.7 6.7 7.3 9.6 11.5

10.9 10.2

7.0

1.7

7.6

11.5 13.3 13.4

9.9 7.0 4.2

(1.4) (2.2)

6.3 9.0 9.6

CY10 CY11 CY12 CY13 CY14 CY15E CY16E CY17E

VECV AL TTMT

39.9

22.1 18.5 21.2 22.6

39.7

16.7 14.1 18.6 20.9

CY13 CY14 CY15E CY16E CY17E

EBITDA EPS

8.4 9.6

11.8

CY15E CY16E CY17E

SOTP

Eicher Motors

30 December 2015 16

Valuations attractive for iconic yet accessible brand Over ~50% PAT CAGR (CY15-17E) and ~39% RoE Royal Enfield – unique combination of Iconic yet accessible brand: RE offers

unique combination of iconic and aspirational brand which is accessible, enjoying virtual monopoly by reframing the segment and growing over 20% CAGR over next 5 years. Initiatives taken by the management viz product focus, retail revamp, senior managerial hiring and export strategy gives us confidence and visibility in sustenance of strong volume and earnings growth for RE.

VECV ramp-up to support consolidated growth: While VECV is expected to benefit from pick-up in Indian CV industry, Volvo’s parentage will make VECV key beneficiary from evolution of the Indian CV industry and explore international markets of MENA and Asia. We estimate VECV’s contribution to consolidated EPS to improve from 14% in CY15E to ~25% by CY20E.

Lowering EPS by 2-4%: We lower our EPS estimates by 2-4%% for CY15E-17E to CY17 to factor in for a) volume cut for RE for CY15/CY16/17 due to Chennai floods and capacity constraint in CY16 and b) VECV’s lower EBITDA margin due to slower than estimated ramp-up in Pro series.

Structural story gets stronger: Consolidated EPS is estimated to grow at ~30% CAGR over CY15-20, with RoIC improving from ~35% in CY15 to ~65% in CY17 and 81% by CY20. EIM trades at 30.6x/22.2x CY16E/17E EPS. Our one-year target price is ~INR21,196 (33% upside, valuing RE at 30x CY17E EPS) and three-year target price is INR30,013 (~22% CAGR, valuing RE at 30x CY19E EPS). Maintain Buy.

Exhibit 36: Revised estimates (INR M) CY15E CY16E CY17E Rev Old Chg (%) Rev Old Chg (%) Rev Old Chg (%) Standalone (RE)

Volumes (units) 450,923 465,741 (3.2) 631,292 647,474 (2.5) 789,768 809,995 (2.5) Net Sales 46,410 48,011 (3.3) 67,207 69,073 (2.7) 86,703 89,105 (2.7) EBITDA 12,317 12,882 (4.4) 18,671 19,253 (3.0) 24,460 25,197 (2.9) EBITDA (%) 26.5 26.8 -30bp 27.8 27.9 -10bp 28.2 28.3 -10bp Core Profit 7,702 8,092 (4.8) 11,793 12,194 (3.3) 15,426 15,935 (3.2) Net Profit 8,369 8,758 (4.4) 12,690 13,091 (3.1) 16,876 17,384 (2.9) EPS (INR) 308.8 323.2 (4.4) 468.3 483.1 (3.1) 622.7 641.5 (2.9) VECV Volumes (units) 46,709 46,341 0.8 61,116 61,608 (0.8) 71,103 71,651 (0.8) Net Sales 70,851 70,111 1.1 95,973 96,445 (0.5) 114,220 114,762 (0.5) EBITDA 5,156 5,358 (3.8) 9,219 10,996 (16.2) 13,127 14,053 (6.6) EBITDA (%) 7.3 7.6 -40bp 9.6 11.4 -180bp 11.5 12.2 -80bp Core Profit 2,036 2,176 (6.4) 4,591 5,888 (22.0) 7,117 7,727 (7.9) EPS (INR) 47.1 49.9 (5.6) 100.7 130.0 (22.5) 155.8 175.2 (11.1) Consolidated

Net Sales 117,072 118,670 (1.3) 162,916 164,779 (1.1) 200,598 202,996 (1.2) EBITDA (%) 14.8 15.0 -30bp 17.0 17.1 -20bp 18.6 18.7 -10bp Net Profit 9,047 9,434 (4.1) 14,692 15,091 (2.6) 20,229 20,733 (2.4) EPS (INR) 333.8 348.1 (4.1) 542.2 556.9 (2.6) 746.4 765.1 (2.4)

Source: Company, MOSL

Eicher Motors

30 December 2015 17

Exhibit 37: SOTP Valuations (INR m) INR M CY17E CY18E CY19E CY20E Royal Enfield PE (x) 30 30 30 30

Core PAT (ex div & fin income) 15,426 17,553 20,546 24,052 Core Equity Value PE based 462,777 526,578 616,378 721,571 Net Debt -41,925 -59,559 -81,260 -107,149 Equity Value 504,702 586,137 697,637 828,720

VECV (@ 54.4% Economic interest) EBITDA 7,141 9,653 11,220 12,867 EV @ 9x EV/EBITDA 64,270 86,873 100,982 115,804 Net Debt -5,448 -9,779 -14,742 -21,204 Equity Value 69,718 96,652 115,724 137,009

Total Equity Value 574,420 682,789 813,361 965,729 Target Price (INR/Sh) 21,196 25,195 30,013 35,636

Upside (%) 28% 52% 81% 115%

Source: Company, MOSL

Eicher Motors

30 December 2015 18

Operating metrics

Exhibit 38: Snapshot of Revenue Model 000 units CY11 CY12 CY13 CY14 CY15E CY16E CY17E ROYAL ENFIELD (S/A) Total 2W (units) 75 113 178 303 451 631 790

Growth (%) 41.9 52.0 57.0 69.9 49.0 40.0 25.1 Net realn (INR'000/unit) 89 92 95 100 102 106 109

Growth (%) 7.1 3.0 2.7 5.4 2.8 3.3 3.1 RE Revenues (INR b) 50 53 51 58 71 96 114

Growth (%) 26.8 5.9 -4.1 12.3 23.0 35.5 19.0 VECV Dom - LMD 37 36 31 28 31 39 45

Growth (%) 19.9 -3.9 -13.3 -11.2 14.0 25.0 13.6 % of CV Vols 77.1 75.3 76.1 69.1 69.1 66.3 64.7

Dom - HCV 8 9 7 6 9 13 16 Growth (%) 81.9 14.8 -27.4 -2.4 31.4 47.6 23.9 % of CV Vols 16.5 19.2 16.3 16.3 18.7 21.2 22.6

Total Dom. 45 45 38 34 40 52 60 Growth (%) 27.5 -0.6 -16.1 -9.6 17.3 29.8 16.1 % of CV Vols 93.6 94.5 92.3 85.4 87.8 87.5 87.3

Exports 3 3 3 6 6 7 9 Growth (%) 14.4 -16.3 20.1 86.5 -5.0 34.1 18.2

% of CV Vols 6.4 5.5 7.7 14.6 12.2 12.5 12.7 Total CV vols 48 48 41 40 46 59 69

Growth (%) 26.6 -1.6 -14.1 -2.3 14.1 30.3 16.4 MDEP Vols ('000 Ex captive) 3 12 19 25 28 Net realn (INR'000/unit) 1,029 1,111 1,236 1,412 1,517 1,570 1,606 Growth (%) 2 8 11 14 7 4 2 VECV Revenues (INR b) 50 53 51 58 71 96 114

Growth (%) 26.8 5.9 -4.1 12.3 23.0 35.5 19.0

Net Consol sales (INR b) 57 64 68 87 117 163 201

Growth (%) 29.5 11.6 6.6 28.3 34.0 39.2 23.1

Source: Company, MOSL

Eicher Motors

30 December 2015 19

Eicher Motors| Story in charts: Multiple growth drivers

Exhibit 39: Capacity addition and healthy demand to drive RE volumes…

Source: Company, MOSL

Exhibit 40: …together with efficiencies of new plant to drive RE margins

Source: Company, MOSL

Exhibit 41: VECV recovery expected to get stronger in CY15/16

Source: Company, MOSL

Exhibit 42: Improved demand, lower discounts to drive VECV margins

Source: Company, MOSL

Exhibit 43: Consolidated FCF conversion to improve due to low capex requirement

Source: Company, MOSL

Exhibit 44: Robust growth to drive RoE and RoCE

Source: Company, MOSL

178,

118

302,

591

450,

923

626,

876

784,

248

57.0

69.9

49.0 39.0

25.1

CY13 CY14 CY15E CY16E CY17E

Volumes (units) Growth (%)

3,25

0

7,33

6

12,3

87

18,5

42

24,2

82

19.0

24.2 26.6 27.6 28.1

CY13 CY14 CY15E CY16E CY17E

(INR

m)

EBITDA EBITDA Margins (%)

40,8

17

39,8

92

45,5

06

59,3

12

69,0

28

(14.1)

(2.3) 14.1

30.3

16.4

CY13 CY14 CY15E CY16E CY17E

VECV (units) Growth YoY %

3,9

71

3,8

31

5,1

56

9,2

19

13,

127

7.7 6.7 7.3

9.6 11.5

CY13 CY14 CY15E CY16E CY17E

EBITDA (INR m) EBITDA (%)

11 88 88 90 93 94 98

11.3

7.7 6.2 5.7 4.9 4.9 4.3

CY11 CY12 CY13 CY14 CY15E CY16E CY17E

FCF Conversion (FCF as % of PAT) Capex (% of sales)

20.7

26.9 33.0

40.1 38.7

21.8 27.6

34.9

46.0 47.1

2013 2014 2015E 2016E 2017E

RoE RoCE

Eicher Motors

30 December 2015 20

Financials and valuations

Income Statement (Consolidated)

(INR Million) Y/E December 2010 2011 2012 2013 2014 2015E 2016E 2017E Net Sales 43,971 56,775 63,299 66,858 85,987 115,267 160,301 197,447 Change (%) 49.6 29.1 11.5 5.6 28.6 34.1 39.1 23.2 EBITDA 3,811 6,037 5,490 7,137 11,148 17,284 27,626 37,261

EBITDA Margin (%) 8.6 10.5 8.6 10.5 12.8 14.8 17.0 18.6 Depreciation 573 640 822 1,300 2,198 3,346 4,243 5,197 Interest cost 95 77 38 79 98 84 84 84 Other Income 1,034 1,281 1,366 953 1,074 685 1,055 1,958 PBT 4,177 6,602 5,997 6,711 9,926 14,539 24,353 33,937 Tax 1,108 1,628 1,249 1,452 2,909 4,422 7,373 10,169 Effective Rate (%) 26.5 24.7 20.8 21.6 29.3 30.4 30.3 30.0 PAT 3,068 4,974 4,749 5,259 7,017 10,117 16,980 23,768 Change (%) 137.0 62.1 -4.5 10.8 33.4 44.2 67.8 40.0 Less: Minority Interest 1,179.3 1,886.3 1,505.9 1,314.4 863.8 1,069.6 2,287.5 3,539.5 Adj. PAT 1,889 3,088 3,243 3,945 6,154 9,047 14,692 20,229

Change (%) 126.6 63.4 5.0 21.7 56.0 47.0 62.4 37.7

Balance Sheet (Consolidated)

(INR Million) Y/E December 2010 2011 2012 2013 2014 2015E 2016E 2017E Share Capital 269 270 270 270 271 271 271 271 Net Worth 12,321 14,931 17,549 20,554 25,159 29,933 42,940 61,299 Minority Interest 6,774 8,377 9,485 10,397 10,851 11,920 14,208 17,747 Deferred Tax 249 645 1,232 1,805 2,394 2,605 2,990 3,545 Loans 956 504 384 839 584 584 584 584 Capital Employed 20,301 24,456 28,649 33,595 38,986 45,042 60,721 83,175 Application of Funds

Gross Fixed Assets 8,113 9,887 15,260 22,993 31,374 43,243 53,243 64,493 Less: Depreciation 4,269 4,843 5,342 6,431 8,280 11,627 15,870 21,067 Net Fixed Assets 3,844 5,044 9,918 16,561 23,093 31,616 37,373 43,426 Capital WIP 703 4,128 5,044 4,636 4,188 1,250 1,250 1,250 - of which Goodwill 223 223 223 223 223 223 223 223 Investments 4,586 5,126 6,385 8,255 10,777 9,171 9,171 9,171 Curr.Assets, L & Adv. 20,500 23,501 23,368 23,914 26,018 31,896 52,861 78,580 Inventory 3,265 4,280 4,888 5,268 6,455 8,517 11,834 14,544 Sundry Debtors 2,609 3,434 4,459 5,125 5,622 5,074 6,902 8,261 Cash & Bank Balances 12,457 11,973 8,035 6,826 4,806 10,917 24,026 43,352 Loans & Advances 1,814 3,391 5,503 6,163 8,578 6,552 8,941 11,009 Others 355 424 483 532 557 837 1,157 1,414 Current Liab. & Prov. 9,332 13,343 16,066 19,771 25,089 28,892 39,934 49,252 Sundry Creditors 7,596 11,238 14,356 17,612 21,876 21,136 29,428 36,256 Other Liabilities 346 608 6 0 0 4,457 6,418 8,227 Provisions 1,391 1,497 1,704 2,159 3,213 3,298 4,088 4,769 Net Current Assets 11,168 10,157 7,302 4,143 928 3,005 12,927 29,328 Application of Funds 20,301 24,456 28,649 33,595 38,987 45,042 60,721 83,175 E: MOSL Estimates

Eicher Motors

30 December 2015 21

Financials and valuations

Ratios (Consolidated)

Y/E December 2010 2011 2012 2013 2014 2015E 2016E 2017E Basic (INR)

EPS 70.1 114.4 120.1 145.9 227.1 333.8 542.2 746.4 EPS Growth (%) 6.5 63.1 5.0 21.5 55.6 47.0 62.4 37.7 Cash EPS 91.4 138.1 150.5 194.0 308.2 457.3 698.7 938.2 Book Value per Share 457.4 553.2 650.0 760.1 928.4 1,104.5 1,584.5 2,262.0 DPS 11.0 16.0 20.0 30.0 35.0 40.0 45.0 50.0 Payout (Incl. Div. Tax) % 18.3 16.3 19.5 24.1 27.5 14.0 9.7 7.8 Valuation (x)

P/E 236.4 144.9 138.0 113.6 73.0 49.6 30.6 22.2 Cash P/E 181.4 120.0 110.1 85.4 53.8 36.2 23.7 17.7 EV/EBITDA 191.0 121.6 120.4 80.7 46.5 28.5 17.7 12.7 EV/Sales 16.7 12.8 11.0 9.7 7.1 5.1 3.5 2.7 Price to Book Value 36.2 30.0 25.5 21.8 17.9 15.0 10.5 7.3 Dividend Yield (%) 0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.3 Profitability Ratios (%)

RoE 16.4 22.7 20.0 20.7 26.9 32.8 40.3 38.8 RoCE 22.4 29.8 22.7 21.8 27.6 34.8 46.2 47.3 RoIC 35.0 40.0 20.0 19.5 25.7 35.4 53.2 64.8 Turnover Ratios

Debtors (Days) 22 22 25 27 23 16 15 15 Inventory (Days) 27 27 28 28 27 27 27 26 Creditors (Days) 63 72 82 94 91 66 66 66 Working Capital (Days) -14 -22 -29 -39 -41 -24 -24 -24 Asset Turnover (x) 2.2 2.3 2.2 2.0 2.2 2.6 2.6 2.4 Fixed Asset Turnover

Leverage Ratio

Debt/Equity (x) 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cash Flow Statement (Consolidated)

(INR Million) Y/E December 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before Tax 4,177 6,602 5,997 6,706 9,926 14,539 24,353 33,937 Depreciation & Amort. 573 640 822 1,300 2,198 3,346 4,243 5,197 Direct Taxes Paid -831 -1,668 -1,077 -1,504 -2,810 -4,210 -6,989 -9,614 (Inc)/Dec in Working Capital 374 -234 391 1,491 2,020 -2,254 3,145 2,760 Interest/Div. Received 1,039 1,316 1,351 1,023 950 685 1,055 1,958 Other Items -933 -1,305 -1,308 -819 -1,809 5,688 -930 -1,708 CF from Oper. Activity 4,399 5,351 6,177 8,197 10,475 17,794 24,878 32,530 (Inc)/Dec in FA+CWIP -1,315 -4,173 -7,820 -7,054 -9,682 -8,932 -10,000 -11,250 Free Cash Flow 3,084 1,178 -1,644 1,143 793 8,862 14,878 21,280 (Pur)/Sale of Invest. -1,645 -540 -1,263 -1,879 -1,190 1,606 0 0 CF from Inv. Activity -2,960 -4,713 -9,083 -8,933 -10,872 -7,326 -10,000 -11,250 Issue of Shares 88 24 4 17 79 -3,005 -258 -284 Inc/(Dec) in Debt -307 -453 -43 610 -255 0 0 0 Interest Paid -118 -84 -40 -80 -98 -84 -84 -84 Dividends Paid -351 -609 -895 -1,020 -1,348 -1,268 -1,427 -1,585 CF from Fin. Activity -689 -1,122 -974 -474 -1,622 -4,357 -1,769 -1,954 Inc/(Dec) in Cash 750 -484 -3,880 -1,209 -2,020 6,111 13,109 19,326 Add: Beginning Balance 11,707 12,457 11,915 8,035 6,826 4,806 10,917 24,026 Closing Balance 12,457 11,973 8,035 6,826 4,806 10,917 24,026 43,352 E: MOSL Estimates

0 0 0 0 0 0 0

Eicher Motors

30 December 2015 22

N O T E S

EICHER MOTORS

COMPANIES

SECTOR UPDATES

EICHER MOTORS GALLERY

Eicher Motors

30 December 2015 24

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