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AUTO SECTOR
Cruising through barriersSeptember, 2011
Despite outperformance of the
sector, valuations are stilleasonable
Adequate near term and long termriggers in place
See more value in four wheelers ascompared to two wheelers
Chirag ShahSenior Research [email protected]+91 22 66121252
Siddhartha BeraResearch [email protected]+91 22 66242494
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Emkay Research 7 September, 2011
Auto Sector
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Contents
Sector
Synopsis .........................................................................................................................................................................3
Sector view
We have been overweight on the sector post 3QFY11, despite obvious near term concerns ....................................... 4
Near term concerns are yet to play out fully; 3QFY12 to witness maximum impact ................................................... 6
Near term positives ....................................................................................................................................................8
Long term view ......................................................................................................................................................... 10
Commercial vehicles ........................................................................................................................................... 10
Tractors .............................................................................................................................................................. 16
Passenger vehicles ............................................................................................................................................. 19
Two wheelers ...................................................................................................................................................... 22
Companies
Ashok Leyland .............................................................................................................................................................. 26
Bajaj Auto ..................................................................................................................................................................... 29
Eicher Motors ............................................................................................................................................................... 32
Hero MotoCorp .............................................................................................................................................................. 35
Mahindra & Mahindra .................................................................................................................................................... 38
Maruti Suzuki India ....................................................................................................................................................... 41
Tata Motors ................................................................................................................................................................... 44
TVS Motor..................................................................................................................................................................... 47
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Auto Sector
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Synopsis
We have been overweight on the automobile sector post 3QFY11 with ~88% of the
stocks having a positive view as compared to only ~43% in the preceding quarter. This
was despite the near term concerns like higher interest rate/inflation, base effect, etc.
Our view was primarily based on (1) Valuations (especially relative valuations), whichwere trading at a significant discount due to excessive focus on near term concerns
(2) Strong cash flow generation and high ROIC business (3) Our FY11-FY13E estimates
factoring in the slowdown impact.
Our automobile universe has since then outperformed the broader market indices
significantly with some stocks even posting absolute returns. Despite the strong
relative outperformance, we still find the current valuations reasonable as our analysis
reveals adequate near term positives as well as long term triggers. The near term
positives emerge from (1) High base effect of inflation/interest rate (2) Favorable base
effect for IIP (3) Good monsoon and (4) Easing of raw material cost pressures.
Similarly, our long term analysis reveals ample growth potential across segments,which are enumerated below..
M&HCVs The positives emerge from (1) High multiplier effect (2) Strong demand
during weak IIP but strong agri GDP (3) Diminishing lag impact of IIP and (4) No
impact of higher fuel prices on demand. Also, availability of finance is more important
than interest rates
Tractors The positives emerge from (1) High multiplier effect (2) Higher farm
income and land prices (3) Increasing reach of formal financing channels (4) Labour
shortage and (5) Industry consolidation
Passenger vehicles The positives emerge from (1) Low penetration levels (income
and geographical) (2) High multiplier effect (3) Significant correlation with wealth
creation & employment and (4) availability of finance rather than interest rates
Two wheelers The positives emerge from (1) Low penetration levels (income and
geographical) (2) Rising rural income vis--vis urban income (3) Low reliance on
finance (stable demand) and (4) Improving multiplier effect (since FY08)
However, we would like to caution that the near term concerns are yet to play out fully
and expect 3QFY12 to witness maximum impact of the same. The impact will be
different across segments. We expect maximum impact on PVs/M&HCVs. The recent
strong outperformance of the stocks can result in a subdued performance of the
sector in the near term. We believe 3QFY12 provides a solid opportunity to re-enter
auto stocks.
We retain our overweight position on the sector. However, from here on, maximum
value is in four wheelers mainly due to upgrade in valuations as well as earnings over
next 4 quarters. From hereon, two wheeler stocks will track earnings/dividend yield
with limited scope for valuation re-rating. Also, we are changing our recommendations.
We have downgraded our rating for two wheeler stocks a notch lower. We downgrade
Bajaj Auto from BUY to ACCUMULATE, Hero Honda from HOLD to REDUCE and TVS
Motor from ACCUMULATE to HOLD. We retain BUY on M&M, Tata Motors and Eicher
Motors. Despite attractive valuations, we retain our ACCUMULATE on Ashok Leyland
and Maruti, due to company specific issues. Key concerns arise from a slump in
economic activity and /or a sharp jump in metal prices.
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Auto Sector
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0%
20%
40%
60%
80%
100%
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Sep-11
90
100
110
120
130
140
% Positive Outlook Stock Perf. Nifty Perf.
Perf . (Indexed to 100)Rel to Nifty Index (%)
Company Name 1d 1 w 1m 3 m 6 m 12m
Ashok Leyland 3.3 5.3 11.9 15.3 13.0 -20.8
Bajaj Auto -0.3 3.1 20.4 33.3 29.8 21.0
Eicher Motors -0.3 1.3 4.0 12.3 39.6 19.3
Hero MotoCorp -1.4 7.0 22.7 27.7 50.4 38.1
Mah & Mah -1.4 5.9 23.3 29.8 28.4 38.2
Maruti Suzuki India -1.3 -0.2 -6.3 -3.7 -6.7 -8.5
Tata Motors -1.8 1.8 -13.3 -19.7 -28.0 -20.0
TVS Motor 0.6 7.4 16.8 19.4 22.2 -11.9
We have been overweight on the sector post 3QFY11, despiteobvious near term concerns
As can be seen from the graph below, we have been significantly overweight on the
sector, post 3QFY11 results with positive outlook on 88% of the stocks under our coverage
as compared to 43% in the preceding quarter. This was despite obvious near term
concerns like lower IIP/GDP, higher interest rates/inflation, expected diesel price hikeand the high base effect of the last two years.
Source: Emkay Research
Changing view on the sector, post the result season
Our overweight view on the sector stands vindicated as is reflected by the strong relative
performance of most auto stocks, with select stocks delivering absolute performance
(refer graphs below).
Source: Emkay Research
Our view on sector and sector performance
Source: Bloomberg, Emkay Research
Stock performance (relative to nifty)
Our view was based on valuations, especially relativevaluationsthough some catch up has happened since then
Relative valuations were the most important factor for our overweight view on the sector.
Relative valuations of most auto companies were at a discount to that of broader indices
implying that the street was (1) excessively focusing on near term earnings and (2)
ignoring the strong balance sheet and cash flow generation. Since then, the valuation
gap has been bridged to some extent, owing to the recent outperformance of most auto
stocks.
Despite the recent run up, valuations still leave room forupsides
40%
50%
60%
70%
80%
90%
Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Sep-11
% Reco w ith Positive Outlook
Our overweight view post 3QFY11
earnings was driven by valuations,
esp. relative valuations
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5
-40%
40%
120%
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
0
5
10
15
20
25
Rel.Stck.Perf. (% LHS) Consensus (PE)Ac tual (PE)
PE
-20%
-10%
0%
10%
20%
30%
40%
50%
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
-20%
-10%
0%
10%
20%
30%
40%
50%
Prem/Disc vs Sensex Volumes (RHS)
-50%
0%
50%
100%
150%
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
0
5
10
15
20
25
30
Rel. Stck Perf. (% LHS) Consensus (PE)
Actual(PE)
PE
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
-40%
-20%
0%
20%
40%
60%
Prem/Disc Vs Sensex Volumes(RHS)
-50%
0%
50%
100%
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
0
5
10
15
20
25
Rel.Stck.Perf. (% LHS) Consensus (PE)
Ac tual (PE)
PE
-40%
-20%
0%
20%
40%
60%
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
-40%
-20%
0%
20%
40%
60%
Prem/Disc vs Sensex Volumes (RHS)
-50%
0%
50%
100%
150%
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
0
5
1015
20
25
30
Rel. Stck.Perf. (% LHS) Consensus (PE)
Ac tual (PE)
PE
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
-100%-80%
-60%-40%-20%0%20%
40%60%80%
100%120%
Prem/Disc vs Sensex Volumes (RHS)
Source: Bloomberg, Emkay Research
AL - Volumes and Relative valuation (PE)
Source: Bloomberg, Emkay Research
AL - Relative perf. and valuations 1 year forward
Source: Bloomberg, Emkay Research
MSIL - Volumes and Relative valuation (PE)
Source: Bloomberg, Emkay Research
MSIL- Relative perf and valuations 1 year forward
Source: Bloomberg, Emkay Research
MM - Volumes and Relative valuation (PE)
Source: Bloomberg, Emkay Research
MM - Relative perf and valuations 1 year forward
Source: Bloomberg, Emkay Research
HMCL - Volumes and Relative valuation (PE)
Source: Bloomberg, Emkay Research
HMCL - Relative perf and valuations 1 year forward
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-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Prem/Disc vs Sensex Volumes (RHS)
-80%
-30%
20%
70%
120%
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
-10
0
10
20
30
40
Rel.Stck.Perf.(% LHS) Consensus Actual
PE
Source: Bloomberg, Emkay Research
TVSL - Volumes and Relative valuation (PE)
Source: Bloomberg, Emkay Research
TVSL - Relative perf and valuations 1 year forward
Near term concerns are yet to play out fully; 3QFY12 to witness maximumimpact
The impact of slowdown is yet to be fully visible. We expect 3QFY12 to reflect the fullimpact of higher interest rate, inflation, etc. The recent outperformance of the stocks can
result in a period of stock underperformance. However, the impact will be diverse across
segments and across players. We expect maximum impact on PV/M&HCVs. We expect
lower impact on two wheelers/UVs/tractors. We believe that 3QFY12 will provide a good
opportunity to re-enter the auto stocks as there are near term as well as long term positives
(discussed separately), which are likely to drive stock performance.
Source: CMIE, Emkay Research
Subdued GDP/IIP growth
Source: CMIE, Emkay Research
Interest rates - at historic highs
PLR (%)
10
11
12
13
14
O
ct-02
F
eb-03
J
un-03
O
ct-03
F
eb-04
J
un-04
O
ct-04
F
eb-05
J
un-05
O
ct-05
F
eb-06
J
un-06
O
ct-06
F
eb-07
J
un-07
O
ct-07
F
eb-08
J
un-08
O
ct-08
F
eb-09
J
un-09
O
ct-09
F
eb-10
J
un-10
O
ct-10
F
eb-11
J
un-11
0%
4%
8%
12%
16%
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
0%
2%
4%
6%
8%10%
12%
IIP (% YoY) GDP (% YoY RHS)
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(100)
(50)
-
50
100
Sep-02
Mar-03
Sep-03
Mar-04
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
-40%
-30%
-20%
-10%0%
10%
20%
30%
40%
Change in PLR (QoQ) Cars (% YoY)
(bps)
-100
-75
-50
-25
0
25
50
75
100
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Apr-11
-150%
-100%
-50%
0%
50%
100%
150%
Change in PLR (QoQ) Trucks (% YoY)
(bps)
Source: SIAM, CMIE, Emkay Research
M&HCV Truck demand in rising interest rate scenario
Source: SIAM, Emkay Research
Cyclicality of demand resulting in moderation in growth
As can be seen from the graphs below, increase in interest rates seem to result in slower
demand growth. A pertinent point to note is that a sustained increase in interest rates
generally follows a strong demand environment. The auto industry is inherently cyclical in
the short term, resulting in periods of above average growth and below average growth.
More importantly, higher interest rates have not resulted in decline in demand, except
for 2008 period. The decline in two wheelers during FY07-FY08 was also due to systemic
issues, resulting in sharp fall in penetration of finance.
Source: SIAM, CMIE, Emkay Research
Car demand in rising interest rate scenario
Source: SIAM, CMIE, Emkay Research
Two wheeler demand in rising interest rate scenario
-20%
-10%
0%
10%20%
30%
40%
50%
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
-100%
-50%
0%
50%
100%
150%
Motorcycles PVs M&HCVs (RHS)
-100
-75
-50
-250
25
50
75
100
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
-40%
-30%
-20%
-10%0%
10%
20%
30%
40%
Change in PLR (QoQ) 2 Wheelers (% YoY)
(bps)
Higher interest rates results in
slowdown but not decline in demand
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8
0%
4%
8%
12%
16%
20%
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Our FY11-13 estimates factor in above concerns
Our volume estimates across segments factor in the above concerns and are still below
the historical growth rates. What we have not factored in is a drop in demand in case of
a slump in economic activity. Also, between FY12 and FY13, the growth is back ended.
CAGR (% YoY) FY97- FY99- FY01- FY03- FY05- FY07- FY09- FY11-
Domestic FY99 FY01 FY03 FY05 FY07 FY09 FY11 FY13E
Cars 1.4 21.6 (2.3) 23.1 14.6 6.4 27.5 10.0
UVs (9.3) 6.1 (3.8) 24.6 11.8 1.2 19.8 11.4
M&HCV trucks (30.5) 0.6 29.3 34.4 19.5 (22.4) 36.1 9.0
M&HCV bus (6.5) 5.0 (10.2) 13.4 5.8 10.2 19.1 8.5
Two wheelers 7.9 4.9 12.8 14.3 12.7 (3.7) 26.0 13.3
Tractors 5.5 (3.0) (18.2) 19.3 17.9 (1.5) 25.8 12.5
GDP 5.5 5.4 4.8 8.0 9.5 8.0 8.3
Agri 1.8 1.2 -0.7 4.9 4.9 3.2 2.8
IIP 5.4 5.8 4.2 9.3 9.9 5.9 9.2
Source: CMIE, SIAM, Emkay Research
Dom. % YoY FY10 FY11 FY12E FY13E
Cars 25.2 29.9 5.0 15.0
UVs 20.8 18.9 8.0 15.0
M&HCV trucks 36.2 36.0 6.0 12.0
M&HCV bus 23.4 15.0 5.0 10.0
Two wheelers 26.2 25.8 12.6 14.0
Tractors 32.2 19.8 11.0 14.0
Source: SIAM, Emkay Research
Near term positives
Base effect of IIP/inflation and good monsoon are the sentimental positives
Over the next two quarters, positive base effect will be the first sentimental positive
towards auto stocks. As can be seen from the graph below, IIP has been subdued since
August 2010. Similarly, inflation has been on the higher side for a long time now. The
only uncertain area is high oil prices as it can delay the base effect benefit from coming
into play. The monsoon season (till date) this year has been good not only in terms of
quantity (1% below average) but also in terms of spread (only 4 areas with scant rainfall
and rain dependent region receiving above average rainfall)
Source: CMIE, Emkay Research
IIP growth bottoming out
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Source: CMIE, Emkay Research
Base effect should result in lower inflation
Monsoon - good spread will ensure a decent agri GDP despite a high base
Particulars FY08 FY09 FY10 FY11 FY12*
% Deviation
Well Irrigated areas -65.3 15.2 -39.2 -9.2 -8.6
Adequately Rain-fed areas 9.5 -9.7 -19.8 -2.1 -5.6
Rain Dependent Areas 13.5 -1.0 -18.8 3.9 6.8
No of divisions
Excess rainfall 13 1 3 13 8
Normal rainfall 17 32 10 18 24
Deficient/Scanty rainfall 6 3 23 5 4
Note: * - Indicates year till date
Source: CMIE, Emkay Research
Raw material costs - the wild card
Our analysis indicates that metals account for ~22% to 45% of sales. It is lowest for two
wheelers and highest for M&HCVs. Given below is the sensitivity of auto companies'
margins to changes in metal prices.
RM cost impact
EBITDA Margin (%) Change in EBITDA margins (bps)
Change in metal prices FY12E 5% 7.5% 10%
Ashok Leyland 10.6 158 237 316
Bajaj Auto 18 94 141 188
Hero MotoCorp 11.3 119 178 237
M&M 12.8 101 151 201
MSIL 9.2 101 151 201
TVS Motor 6.4 103 154 205
Source:Company, Emkay Research
We believe that metal prices can be the wild card, providing positive surprises in the
near term, We have built in a normal inflationary pressure of 7% per annum in our
estimates for FY12 and FY13. HR steel and aluminum prices are trading at its historic
highs (except for the CY09 period). Our interaction with various industry players indicate
that they do not expect metal prices to increase in the same manner as in FY11. In the
event of metal prices cooling off or stabilizing at the current levels, there can be positive
margin surprises.
-5
0
5
10
15
20
Jul-94
Jul-95
Jul-96
Jul-97
Jul-98
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Monsoons have been good both in
terms of quantity and spread
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0
200
400600
800
1000
1200
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Source: Bloomberg, Emkay Research
Steel prices (USD/ton)
Source: Bloomberg, Emkay Research
Aluminum prices (USD/ton)
Long term view
We believe that the near term concerns provide an excellent opportunity to become
overweight on auto, given the long term view. Based on analysis of each segment
(commercial vehicles, tractors, passenger vehicle and two wheelers), we believe that
the long term story in each segment is still intact and that demand will bounce back with
a vigor. This has happened in the past and we expect the same to repeat. The biggest
risk that we foresee to this is non availability of finance (rather than higher interest rate),
lack of employment generation (due to slowdown in core economy) and slower wealth
generation (reflected by Sensex/real estate prices). Given below is our analysis of growth
prospects for each of the segments, which give a clear view on the structural strength of
demand.
Commercial vehicles
Multiplier effect
Our analysis of historical data indicates that the elasticity/multiplier effect on demand
has increased over a period of time. We have calculated the multiplier effect as M&HCV
trucks volume growth/IIP and volume growth/industry growth (based on constant prices).
We have used 5/3 year rolling CAGR, as analysis on annualized basis is inherently
cyclical and misleading. As can be seen from the graph below, both on 5 year and 3 year
CAGR, the trend line has been inching up. For instance, the multiplier based on IIP has
increased from 0.5x in FY87 to ~1.5x in FY11. This basically indicates that with growing
economic activity, the freight generation in the system is increasing at a higher rate thanthe broader economic growth.
0
500
1000
1500
2000
2500
3000
3500
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Multiplier effect is one of the most
important driver for volumes
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11
(2)
(1)
-
1
2
3
4
FY87
FY89
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
Vols/Industry Vols/IIP
Trendline (Vols/Ind) Trendline (Vols/IIP)
(6)
(4)
(2)
-
2
4
6
FY86
FY88
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
Vols/Industry Vols/IIP
Trendline (Vols/Ind) Trendline (Vols/IIP)
0%
2%
4%
6%
8%
10%
12%
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Share of road transport
-
50
100
150
200
250
300
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
34
36
38
40
42
44
Truck Vols Agri+Ind. GDP/truck tonnage(RHS)
(Rs mn/ton)The drop is due to ban on
overloading
In '000 units
Source: SIAM, CMIE, Emkay Research
5 Yr Multiplier effect of M&HCV trucks demand
Source: SIAM, CMIE, Emkay Research
3 Yr Multiplier effect of M&HCV trucks demand
Higher share of agricultural commodities in road transport has also aidedthe multiplier
Over the years, there has been an increase in the movement of agricultural commodities
through road. As can be seen from the graph below, the share of road transport, which
was at 3% in FY94, has increased to 11% in FY11. This has resulted in higher freight
generation in the system, as corroborated by rising capacity utilization over the years
(indicated by Industry+Agri GDP/ tonnage). This fact is also supported by the strong
growth in M&HCV during weak IIP period especially when agri economy has done well
as explained below.The sharp drop in the ratio during FY05-06 is due to implementation
of ban on overloading, which resulted in structurally lower utilization of trucks.
Source: SIAM, CMIE, Emkay Research
Rising agri transport aiding multiplier effect
Source: FCI, Emkay Research
Increasing share of road transport in food grains
M&HCV demand has been strong during weak IIP but strongagricultural growth period
As can be seen from the graphs on next page, strong agricultural growth has resulted in
robust volume growth despite a weak IIP. The only deviation has been FY99. The tables
below highlight only those periods where IIP has been subdued and agriculture GDP
has done well. In a strong IIP year, the performance of agriculture gets hidden. We also
undertook a quarterly analysis to look at the data closely. We came up with the same
conclusion (see table on next page).
Movement of agri commodities by
road has increased from ~3% to ~11%
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Source: SIAM, CMIE, Emkay Research
Strong agri supporting M&HCV truck volumes during periods of weak IIP
Growth (%) FY97 FY99 FY00 FY02 FY04 FY11
Agri GDP 9.9 6.3 2.7 6.3 10.0 6.3
IIP 6.1 4.1 6.6 2.7 7.0 8.2
M&HCV trucks 25.2 (7.1) 44.8 27.7 42.3 36.6
Source: SIAM, CMIE, Emkay Research
Growth (%) Jun-01 Sep-01 Dec-01 Mar-02 Sep-03 Dec-03 Mar-04 Dec-10
Agri GDP 3.2 5.7 6.6 8.8 7.2 19.6 10.3 8.9
IIP 2.2 2.5 2.9 3.1 6.6 7.3 8.1 5.9
M&HCV trucks 18.7 39.7 48.0 12.3 54.0 53.1 39.0 21.0
Source: SIAM, CMIE, Emkay Research
Freight rates - Ground check reveals strengthThe widely tracked TCI freight index has been indicating a subdued freight rate scenario.
This has resulted in expectations of pressure on profitability of freight operators due to
increase in capital cost, interest rate and fuel cost. However, our interaction with freight
operators and verification of freight rates on trunk routes indicates that there is a divergence
in the data captured by TCI index. As can be seen from the graphs below, since Dec08,
there is a divergence in the TCI index and freight rates on trunk routes. Our interaction with
freight operators indicates that freight rates have indeed gone up, which has enabled
them to protect the cash flow generation despite strong inflationary pressure. Also, there
is adequate availability of freight and hence, there are no major concerns with respect to
under utilization of fleet.
Source: CMIE, TCI, Emkay Research
TCI freight index and trunk route freight rates
Source: CMIE, TCI, Emkay Research
Divergence in the data in last two years
-10%
-5%
0%
5%
10%
15%
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
-40%
-20%
0%
20%
40%
60%
Agri GDP (LHS) IIP (LHS) Trucks (RHS)
-10%
0%
10%
20%
30%
40%
Apr-05
Jun-05
Aug-05
Oct-05
Dec-05
Feb-06
Apr-06
Jun-06
Aug-06
Oct-06
Dec-06
Feb-07
Apr-07
Jun-07
Aug-07
Oct-07
Dec-07
TCI Delhi Mumbai Kolkata Chennai
(YoY Chg.)
-30%
-20%
-10%
0%
10%
20%
30%
40%
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
TCI Delhi Mumbai Kolkata Chennai
(YoY Chg.)
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-50%
0%
50%
100%
150%
200%
250%
300%
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
-4%
0%
4%
8%
12%
16%
20%
24%
IIP (% YoY RHS) Trucks (% YoY)
IIP favourable base effect to kick inmore importantly the lag effect hasbeen slowly reducing
We expect a favorable base effect to kick in from Aug'11. More importantly, the lag impact
of weaker IIP and demand slowdown has been reducing over the years . As indicated
earlier, this can be attributed to our thesis of higher freight generation in a growing economy.
Source: CMIE, Emkay Research
IIP favorable base effect to kick in
Source: CMIE, Emkay Research
Reducing lag impact of IIP on truck volumes
-8%
-6%-4%
-2%
0%
2%
4%
6%
8%
M
ar-91
M
ar-93
M
ar-95
M
ar-97
M
ar-99
M
ar-01
M
ar-03
M
ar-05
M
ar-07
M
ar-09
M
ar-11
-50%
-30%
-10%
10%
30%
50%
Change in IIP Grow th ( % points) Truck Sales (% YoY RHS)
Lag impact of IIP on truck volumes is
not visible currently
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4%
6%
8%10%
12%
14%
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
-60%
-40%
-20%
0%
20%
40%
60%
1 yr deposit (LHS) Trucks (YoY)
5%
7%
9%
11%
13%
15%
20
04
-05
2005
-06
2006
-07
2007
-08
2008
-09
20
09
-10
20
10
-11
93
94
95
96
97
98
99
Finance Penetration (% RHS) Avg Loan Rate (%)
5%
7%
9%
11%
13%
15%
200
4-
05
200
5-
06
2006
-07
2007
-0
8
200
8-
09
200
9-
10
2010
-11
100
150
200
250
300
Volumes (in '000 units RHS) Avg Loan Rate (%)
Source: CRISIL, Industry, Emkay Research
Rising volumes despite higher interest rates
Source: CRISIL, Industry, Emkay Research
Finance penetration impacting volumes
Source: CMIE, Industry, Emkay Research
Correlation between interest rates and demand since 1994 - no major correlation
Demand and interest rate relationshipavailability of finance is important
Contrary to perception, higher interest rates per se are not an impediment for demand
growth from a long term perspective. It has a sentimental impact for a quarter or two. More
important is the availability of finance and freight rates. As can be seen from the graphs
below, despite rising interest rates during FY05-FY08, the penetration of finance has
been stable resulting in volume growth over the period. Given the fact that agri economy isexpected to report a strong kharif season (third consecutive season of good crops), we
expect concerns with respect to freight and M&HCV volumes to abate.
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15
05
10152025303540
Oct-02
Fe
b-03
Ju
n-03
Oct-03
Fe
b-04
Ju
n-04
Oct-04
Fe
b-05
Ju
n-05
Oct-05
Fe
b-06
Ju
n-06
Oct-06
Fe
b-07
Ju
n-07
Oct-07
Fe
b-08
Ju
n-08
Oct-08
Fe
b-09
Ju
n-09
Oct-09
Fe
b-10
Ju
n-10
Oct-10
Fe
b-11
Ju
n-11
20
25
30
35
40
45
50
Truck Vols ( '000 units) Diesel Price (RHS)
Demand and diesel price relationship
Interestingly, we did not come across an inverse relationship between truck sales and
diesel prices. The first graph indicates movement of diesel prices and truck volumes. The
second graph shows the relationship between change in diesel prices (MoM) and demand
for trucks (YoY). In fact, we came across certain instances (FY08 and FY09) when reduction
in diesel prices was accompanied by decline in demand.
Source: IOCL, Emkay Research
Inverse relationship in diesel price and truck volumes - Insignificant evidence
Source: IOCL, Emkay Research
Sustained diesel price hikes moderate volume growth for 1-2 quarters at best
-2
-1
0
1
2
3
Oct-03
Feb-04
Jun-04
Oct-04
Feb-05
Jun-05
Oct-05
Feb-06
Jun-06
Oct-06
Feb-07
Jun-07
Oct-07
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Oct-09
Feb-10
Jun-10
Oct-10
Feb-11
Jun-11
-50%
-30%
-10%
10%
30%
50%
70%
Change in diesel pr ice (Rs MoM) Truck Sales (%YoY RHS)
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(4)
(2)
-
2
4
6
8
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Vols/GDP Vols/Agri
Trendline (V ols/GDP) Trendline (V ols /Agri)
-
0.5
1.0
1.5
2.0
2.5
3.0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Vols/GDP Vols/Agri Trendline (Vols/GDP) Trendline (Vols/Agri)
Tractors
Strong multiplier impact with agriculture but not so strong with GDP
As can be seen from the graphs below, there is a clear multiplier impact visible for tractors
vis--vis agriculture. However, when compared to GDP, the multiplier impact is not really
visible. This can be attributed to declining share of agriculture in the overall economy.
Also, increasing use of tractors for non agri purpose will have some impact on the multiplier
effect when co-related to GDP going ahead. We believe that this is sustainable and
tractor demand can explode, going forward.
Source: CRISIL, CMIE, Emkay Research
10 yr multiplier effect on tractor demand
Source: CRISIL, CMIE, Emkay Research
5 yr multiplier effect on tractor demand
Source: CRISIL, CMIE, Emkay Research
3 yr multiplier effect on tractor demand
(8)
(6)
(4)
(2)
-2
4
6
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Vols/GDP Vols/Agri
Trendline (Vols/GDP) Trendline (Vols/Agr i)
Higher non-agri use to have positive
impact on multiplier effect
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-10%
-5%
0%
5%
10%
15%
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Tractors (%YoY) Farm Income (%YoY)
-30%
-20%
-10%
0%
10%
20%
30%
40%
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
Tractors % YoY ATOT (RHS)
10
20
30
40
50
60
FY07 FY08 FY09 FY10 FY11
50
60
70
80
90
100
110
Households (in mn) Wage Rate (Rs/day RHS)
100
200
300
400
500
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
1400
1500
1600
1700
1800
1900
2000
Tractor Vols. Foodgrains Yield (RHS)
In '000 units Kg/hect
Sharp increase in farm income
There has been sharp increase in the farm income due to increased focus of the
government on rural economy and MSP. Also, the yield has been improving over the years.
More importantly, there is a direct correlation between demand for tractors and farm
income. Rising farm income is the output of improving yield and higher MSP. The farmer's
yield can further improve, given the increasing access to information and use of technology.The key reason for this is the role played by various fertilizer, FMCG and other rural
economy related companies. Another important reason is rising wealth due to appreciation
of land prices.
Source: CMIE, Emkay Research
Higher mechanization and awareness improving yields
Source: CMIE, Emkay Research
Tractor demand & farm income - 5 yr CAGR
Labour shortage - Key demand driver
Labour shortage is one of the most important structural change that will drive farm
mechanization. It is important to note that not only is there an increase in the number of
households covered under the NREGA scheme, but also there is a sharp upward revision
in minimum wages. Rising popularity of NREGA and other schemes, increasing penetrationas well focus of the government to curb leakages can further accentuate the labour
shortage problem.
Source: NREGA, Emkay Research
Employments added under NREGA
Note: ATOT is ratio of WPI food & non-food / WPI fuel & manufactured products
Source: CMIE, Emkay Research
Higher real income levels in hands of farmer
Increasing reach of formal financing channels - to lower cost of borrowing
Another important factor according to us, is the increasing focus of the RBI to raise the
penetration of finance in the rural economy. This is clearly indicated by rising rural credit
and more importantly, increase in bank's rural network. Another interesting point to note is
that the increase in coverage is driven by reduction in branches and increase in mobileunits. This indicates focus on low cost/profitable business model. This makes us believe
in the sustenance and increase in rural penetration of banks.
Direct correlation of farm income and
tractor demand
Higher focus on low cost models to
increase finance penetration
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-
5
10
15
20
25
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
> 2K >5K >10K
per 1000 people
-
20
40
60
80
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
> 10K > 50K > 100K
per 1000 people
0
50
100
150200
250
300
350
FY95 FY00 FY05 FY10 FY11 FY15
Rural Pentration Urban Penetrat ion Total
(per 1000 people)Penetration still below FY05 levels
despite strong vol. CAGR of ~15%
Passenger vehicles
Penetration levels continue to remain low
Penetration levels based on income or geography continue to remain low. More importantly,
penetration in the key income group (> Rs 200,000) is below FY05 levels. This is despite
a strong 15% CAGR growth during FY05-FY11 period. We attribute this to a much faster
increase in the population of key income group due to higher earnings. This is one of the
key reasons why we believe that the Indian passenger vehicle industry can be 4.9mn
units by 2015. (Refer to report Acceleration begins dated Jun10). Our analysis of
geographical spread also confirms our view that the envisaged demand explosion is yet
to occur owing to the inability of the OEMs to reach the interiors of the country.
Source: Census, Emkay Research
PV penetration for income group >Rs 0.2mn
Note: >10K constitutes ~97%, 50K to 100K- ~10% and >100K- ~69% of total
urban populationSource: Census, Emkay Research
Penetration - Urban - based on town size
Note: >2K constitutes ~54%, 5K to 10K- ~13% and >10K- ~49% of total rural
populationSource: Census, Emkay Research
Penetration - Rural - based on village size
Multiplier effect
Our analysis of historical data indicates that the elasticity/multiplier effect on demand has
increased over a period of time. We have used 5 year rolling CAGR to GDP and GDP (ex
Agri). Just as was the case with M&HCVs and tractors, both the 5 year as well as 3 year
multiplier for PVs has been on an uptrend. We attribute this to higher income generation
in rural/semi urban areas over the last 5 years. This fact is corroborated by our analysis on
penetration (> 200,000 income group) as well as geographical spread, as mentioned
above.
Growth in key income group has
outpaced car demand in the past 5years
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(1.0)
(0.5)
-
0.51.0
1.5
2.0
2.5
3.0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Vols/GDP Vols/GDP(ex-Agri)Trend(Vols/GDP) Trend(Vols/GDPex-Agri)
0.5
1.0
1.5
2.0
2.5
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Vols/GDP Vols./GDP(ex-agri)
Trend(Vols/GDP) Trend(Vols/GDPex-Agri)
4%
6%
8%
10%12%
14%
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
-20%-10%0%10%20%30%40%50%
60%70%
1 yr deposit (LHS) Cars (YoY)
5%6%7%
8%9%
10%11%12%13%
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
20
09
-10
20
10
-11
60
65
70
75
80
85
90
Finance Penetration (% RHS) Avg Loan Rate (%)
5%7%
9%
11%
13%
15%
200
4-
05
200
5-
06
2006
-07
2007
-08
2008
-0
9
2009
-1
0
201
0-
11
0.00.5
1.0
1.5
2.0
2.5
Units (mn RHS) Avg Loan Rate (%)
Source: SIAM, CMIE, Emkay Research
5 Yr multiplier effect on car demand
Source: SIAM, CMIE, Emkay Research
3 Yr multiplier effect on car demand
Correlation with interest rate
Historically, there has been little correlation between rising interest rate and its impact on
demand. During FY09, we saw a sharp slowdown in demand due to higher interest rates.
However, this period coincided with the global recession. More importantly, the demand
bounced back with a vigor from mid FY10. It also pertinent to note that during FY09,
penetration of finance had reduced, which also affected the demand, given the fact that
there was ~65% penetration of finance during FY09.
Source: Industry, Emkay Research
Limited impact of rising interest rates
Source: Industry, Emkay Research
Finance availability playing a larger role
Source: Industry, Emkay Research
Correlation between interest rates and demand since 1994 - no major correlation
Penetration of finance reduced to
~65% in FY09
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21
Fuel price and demand
Contrary to perception, rise in fuel prices have failed to impact demand for cars. As can be
seen from the graphs below, both petrol and diesel prices have been on the rise and so
has been the demand for vehicles, as reflected by YoY change in monthly car sales.
Source: IOCL, Emkay Research
Petrol price impact on car volumes
Source: IOCL, Emkay Research
Diesel price impact on car volumes
More important is the correlation with wealth creation
There is a direct correlation between change in equity markets/real estate markets and
demand for cars. This is despite a steady income generation amongst the target audience.
We attribute this to psychological issues as people tend to postpone discretionary spends
during periods of crisis. Given India's high savings rate, demand generally bounces back
with vigor.
Source: Emkay Research
Wealth creation sentimentally affects demand
Source: Bloomberg, Emkay Research
Strong correlation between performance of Sensex and demand
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
30
40
50
60
70
80
Cars (% YoY) Petrol Pr ice (RHS)
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
20
25
30
35
40
45
50
Cars (% YoY) Diesel Pr ice (RHS)
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
Real estate index (MMR) Cars volumes Sensex
-60%
-40%
-20%
0%
20%
40%
60%
80%
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Car Vols (% YoY) Sensex (% YoY)
Wealth creation more important than
interest rates
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50
100
150
200
250
300
FY95 FY00 FY05 FY10 FY11 FY15
Rural Urban Total
Per 1000 persons
0
50
100
150
200
250
FY95 FY00 FY05 FY10 FY11 FY15
Rural Urban Total
Per 1000 persons
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11E
0%
5%
10%
15%
20%
25%
30%
35%
% Chng in Employment (bps) Car Vols (% YoY RHS)
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11E
0%
5%
10%
15%
20%
25%
30%
35%
% Employment (YoY) Car Vols (% YoY RHS)
.and employment generation
As can be seen from the graph below, there exists a direct correlation between employment
generation and demand (especially growth rate). More importantly, we have not seen
growth rate going below 10% in the years, when there is employment generation.
Source: Ma Foi Survey, Emkay Research
Employment generation strongly affects demand
Source: Ma Foi Survey, Emkay Research
Improvement in employment growth drives demand
Two wheelers
Penetration continues to remain low
The penetration of two wheelers continues to remain low. More importantly, the
geographical reach of OEMs is also very low. This is evident from the wide disparity in
penetration of two wheelers in rural areas with population of > 2000 (200 per 1000) and >
than 5000 (500 per 1000). Similarly, the penetration in the urban areas is also hovering at
~200 per 1000 or below. This indicates the opportunity size of the demand for two wheelers.
The villages in the range of 2000 to 5000 people account for ~32% of rural population.
Note: >10K constitutes ~97% and 10K to 50K- ~19% of total urban populationSource: Census, Emkay Research
Penetration - Urban - based on town size
Note: >2K constitutes ~54% and 2K to 5K- ~32% of total rural populationSource: Census, Emkay Research
Penetration - Rural - based on village size
Penetration per 1000 persons Penetration for people earning > Rs 90,000 p.a.
-
50
100
150
200
250
F
Y95
F
Y97
F
Y99
F
Y01
F
Y03
F
Y05
F
Y07
F
Y09
F
Y11
>10K >50K Total
-
100
200
300
400
500
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
>2k >5K Total
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0.5
1.0
1.5
2.0
2.5
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Vols/GDP Vols/GDP(ex-Agri)
Trend (Vols/GDP) Trend (Vols/GDP exAgri)
0.5
1.0
1.5
2.0
2.5
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Vols/GDP Vols/GDP(ex-Agri)
Trend (Vols/GDP) Trend (Vols/GDPexAgri)
10%12%
14%16%18%20%
22%24%
200
4-
05
2005
-06
2006
-07
200
7-
08
2008
-09
2009
-10
201
0-
11
20%
24%
28%
32%
36%
40%
Finance Penetration (% RHS) Avg Loan Rate (%)
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
2004
-05
2005
-06
2006
-07
20
07
-0
8
2008
-09
2009
-10
2010
-11
10%
12%
14%
16%
18%
20%
22%
24%
Volumes (% YoY) Avg Loan Rate (% RHS)
Multiplier
Unlike four wheelers, the multiplier impact has been constant to declining over the years.
However, we believe that its future growth has the potential to surpass historical trends
due to a number of factors like - increased government focus of on rural/agri economy
(given the penetration of two wheelers in rural economy is similar to that of urban economy),
lower dependence on finance and rising women population owning a two wheeler. Also,the long term trends are subdued due to their disappointing performance during FY06-
FY08 period, where industry was passing through a tough phase due to systemic issues
of bad debts.
Source: SIAM, CMIE, Emkay Research
5 Yr multiplier effect on two wheeler demand
Source: SIAM, CMIE, Emkay Research
3 Yr multiplier effect on two wheeler demand
Interest rate and availability of finance
This is one of the structural reasons that make us believe that demand for two wheelers
can be higher than the historical long term averages. The fact that reliance on finance to
buy two wheelers is at its lowest, gives us the confidence that there is real strength in
demand (demand pull). Good improvement in the income of the target populations gives
us further confidence.
Source: Industry, Emkay Research
Demand strong despite highest loan rates .
Source: Industry, Emkay Research
and lowest finance penetration amongst segments
Rural income fast catching up
High rural demand for two wheeler (35% to 50% of total sales), faster increase in rural per
capita GDP and low penetration are other important factors that will drive two wheeler
demand faster than the historical trend line. Also, increasing awareness/exposure to
various trends, higher young working age population, increasing women consumers and
higher rural income will provide support to demand.
Lower penetration of finance indicates
structural demand
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Auto Sector
24
0
200
400
600
800
1000
1200
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
MSP Rice (Rs per Quin) MSP Wheat (Rs per Quin)
Source: Emkay Research
Rural income catching up with urban levels
Source: CMIE, Emkay Research
Higher MSP of crops aiding income growth
Wealth effect is not so clear
Unlike passenger vehicles, there is no clear relationship between two wheeler demand
and real estate prices or movement in Sensex. This can be attributed to low ticket size and
also the rural population's limited exposure to stock markets/real estate markets.
Source: Blooberg, Liases Foras, Emkay Research
Wealth effect not so pronounced
Source: Bloomberg, Emkay Research
Demand not strongly correlated with Sensex
2.5
3
3.5
FY94 FY00 FY06 FY09 FY10
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Jan-05
M
ay-05
S
ep-05
Jan-06
M
ay-06
S
ep-06
Jan-07
M
ay-07
S
ep-07
Jan-08
M
ay-08
S
ep-08
Jan-09
M
ay-09
S
ep-09
Jan-10
M
ay-10
S
ep-10
Jan-11
Real estate index (MMR) 2 Whlr Vols Sensex
-60%
-40%
-20%
0%
20%
40%
60%
80%
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
2 w h V ols (% Y oY ) Sensex (% Y oY)
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Auto Sector
25
Companies
Ashok Leyland
Bajaj Auto
Eicher Motors
Hero MotoCorp
Mahindra & Mahindra
Maruti Suzuki India
Tata Motors
TVS Motor
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Y/E, Mar Net EBIDTA EBIDTA APAT EPS EPS RoE P/E EV / P/BV
(Rs mn) Sales (Core) (%) (Rs) % chg (%) (x) EBITDA (x)
FY10 72,447 7,628 10.5 3,889 1.5 112.9 17.6 17.6 10.8 3.0
FY11 111,177 12,436 11.2 6,573 2.5 69.0 26.4 10.4 6.4 2.6
FY12E 122,040 12,965 10.6 6,058 2.3 (7.8) 21.6 11.3 5.8 2.3
FY13E 138,777 14,868 10.7 7,544 2.8 24.5 23.9 9.1 4.8 2.0
Source: Emkay Research
Financial Snapshot
Emkayour success is our success
Ashok Leyland
Negatives factored in
Com
panyUpdate
mkay Global Financial Services Ltd.
eco Previous Recoccumulate Accumulate
MP Target Prices26 Rs29
PS change FY12E/13E (%) -
rget price change (%) -
fty 5,017
ensex 16,862
rice Performance
%) 1M 3M 6M 12M
bsolute 6 2 2 -30
el. to Nifty 8 11 9 -24
ource: Bloomberg
elative price chart
September, 2011
ource: Bloomberg
tock detailsector Automobiles
oomberg AL IB
quity Capital (Rs mn) 2,661
ace Value(Rs) 1
o of shares o/s (mn) 2,661
Week H/L 41/ 23
arket Cap (Rs bn/USD mn) 67/ 1,447
aily Avg Volume (No of sh) 8,265,926
aily Avg Turnover (US$mn) 4.5
hareholding Pattern (%)
Jun11 Mar11 Dec10omoters 38.6 38.6 38.6
/NRI 27.0 26.6 28.3
stitutions 16.6 16.9 16.5
ivate Corp 5.9 6.8 5.7
ublic 12.0 11.1 10.9
ource: Capitaline
Volumes - worst is behind; Expect sequential improvement in
market share as 1QFY12 was affected by regional issues
Exports have been gaining traction. Expect export volumes to
surprise positively. Ramp up in Pantnagar production tocushion margins
Contribution from various JVs to be visible in FY13. Nissan JV
to be margin accretive
Valuation attractive as focus has shifted to near term
earnings. Retain Accumulate
Volume growth to pick up
AL witnessed a sharp drop in volumes in 1QFY12 due to ongoing elections in certain
southern states and sluggish mining activities. Overall industry reported 7% volume
growth for 1QFY12. Management expects pick up in mining activities and positive industrygrowth despite a high base (emission norms impact). We believe that the worst is over for
Ashok Leyland and expect it to benefit from up tick in industry demand leading to ~9%
CAGR during FY11-13E.
Exports- can be the next big volume driver
Over the years, exports for the company have been gaining traction. It should be noted that
the company intends to be amongst the top 10 global M&HCV manufacturers (FY11
Annual report). We believe that exports can provide the required cushion to market share
pressures in the domestic market and lead to ~8% volume CAGR over FY11-13E.
Focus on diversifying the revenue stream
We believe that management has realized the potential risk of higher competition in theM&HCV space. As a result, it is taking steps to reduce its dependence on the cyclical
M&HCV business by diversifying the revenue stream to encompass (1) exports (2) entry in
to LCVs (3) defense and engine sales. We expect the company to benefit from these in the
long term. AL plans to commence LCV manufacturing activity at its Hosur plant which will
be margin accretive in our view.
Higher Pantnagar contribution to cushion margins
Management has guided for a production target of 36,000-40,000 units in FY12 at the tax
free Pantnagar plant. Considering the Q1FY12 production from Pantnagar at 6,000 units,
we expect the annual production for FY12 at ~30,000 units.
ValuationsAt Rs 26, the stock trades at FY13E PER/EV-EBIDTA of 9.1x/4.8x. We view AL as a cyclical
stock and believe the earnings based valuations are misleading due to inability to forecast
the cycles (upturn/downturn). We prefer to focus on other lead indicators like P/BV, which
we find attractive. For AL, we found dividend yield as the most important lead indicator
(refer to our note titled - 'Focus on lead indicators'). We retain our ACCUMULATE rating on
the stock.
p-10 Nov-10 Jan-11 Mar-11 May- 11 Jul- 11
Rs
-40
-32
-24
-16
-8
0%
Asho k Leyla nd (LHS) R el to Ni fty (RHS)
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Auto Sector
27
0
5
10
15
20
25
30
35
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
0%
2%
4%
6%
8%
10%
12%
14%
Overall vols. ('000 units) EBITDA Margin (% RHS)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
F
Y06
F
Y07
F
Y08
F
Y09
F
Y10
F
Y11
FY
12E
FY
13E
30%
40%
50%
60%
70%
80%
DPS Div. Payout (RHS)
012345678
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
6%
11%
16%
21%
26%
31%
36%
Pantnagar prod. ('000 units) % of sales (RHS)
4
6
8
10
12
14
FY06
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
6%
7%
8%
9%
10%
11%
12%
13%
Exports ( '000 units) % of total vols (RHS)
20
40
60
80
100
120
FY06
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
-60%
-40%
-20%
0%
20%
40%
60%
Trucks ('000 units) Bus ('000 units)
Trucks % YoY (RHS) Bus % YoY (RHS)
0%
10%20%
30%
40%
50%
60%
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Trucks Bus
Source: Company, Emkay Research
Dividend yield at ~4% acts as inflexion point for the stock
Source: Company, Emkay Research
DPS has remained stable/increased even during slowdown
Source: SIAM, Emkay Research
M&HCVs - domestic market share
Source: SIAM, Emkay Research
Overall M&HCV market share bottoming out
Source: SIAM, Emkay Research
Product mix - Trucks to drive volumes
Source: SIAM, Emkay Research
Exports - on an uptick
Source: Company, Emkay Research
Pantnagar - higher output to support margins
Source: Company, Emkay Research
Margins - high sensitivity to volumes
0
510
15
20
25
30
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
6%
11%16%
21%
26%
31%
36%
Domestic M&HCV ('000 units) Mkt Share (% RHS)
Ashok Leyland
0
2
4
6
8
10
Nov-05
Mar-06
Jul-06
Nov-06
Mar-07
Jul-07
Nov-07
Mar-08
Jul-08
Nov-08
Mar-09
Jul-09
Nov-09
Mar-10
Jul-10
Nov-10
Mar-11
Jul-11
0
10
20
30
40
Div. Y ield (%) Share Price (RHS)
Div. Yield (%)
recessionary period
(Rs)
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Emkay Research 7 September, 2011
Auto Sector
28
Key Financials
Income Statement (Rs. Mn)
Y/E Mar (Rsmn) FY10 FY11 FY12E FY13E
Net Sales 72,447 111,177 122,040 138,777
Growth (%) 21.1 53.5 9.8 13.7
Expenditure 64,819 98,742 109,075 123,908Materials Consumed 52,193 81,235 88,948 101,094
Employee Cost 6,716 9,486 11,012 12,488
Other Exp 5,909 8,021 9,114 10,326
EBITDA 7,628 12,436 12,965 14,868
Growth (%) 62.5 63.0 4.3 14.7
EBITDA margin (%) 10.5 11.2 10.6 10.7
Depreciation 2,041 2,674 3,411 3,591
EBIT 5,587 9,761 9,554 11,277
EBIT margin (%) 7.7 8.8 7.8 8.1
Other Income 209 153 277 364
Interest expenses 811 1,637 2,063 1,843
PBT 4,985 8,278 7,767 9,797
Tax 1,097 1,705 1,709 2,253Effective tax rate (%) 22.0 20.6 22.0 23.0
Adjusted PAT 3,889 6,573 6,058 7,544
Growth (%) 112.9 69.0 (7.8) 24.5
Net Margin (%) 5.4 5.9 5.0 5.4
(Profit)/loss from JVs/Ass/MI - - - -
Adj. PAT After JVs/Ass/MI 3,889 6,573 6,058 7,544
E/O items 348 (260) - -
Reported PAT 4,237 6,313 6,058 7,544
Growth (%) 123.0 49.0 (4.0) 24.5
Balance Sheet (Rs. Mn)
Y/E Mar (Rsmn) FY10 FY11 FY12E FY13E
Equity share capital 1,330 1,330 1,330 1,330
Reserves & surplus 35,233 38,299 41,390 45,239
Net worth 36,563 39,630 42,720 46,569Minority Interest
Secured Loans 7,116 11,823 9,423 8,023
Unsecured Loans 14,923 13,860 17,660 17,460
Loan Funds 22,039 25,683 27,083 25,483
Net deferred tax liability 4,611 5,338 5,338 5,338
Total Liabilities 63,213 70,650 75,141 77,390
Gross Block
Less: Depreciation 60,186 66,919 69,919 72,919
Net block 17,691 20,581 23,992 27,584
Capital work in progress 42,496 46,338 45,927 45,335
Investment 5,615 3,580 3,580 3,580
Current Assets 3,262 12,300 17,800 19,200
Inventories 41,397 43,672 43,777 50,118Sundry debtors 16,382 22,089 18,171 20,664
Cash & bank balance 10,221 11,852 10,176 11,572
Loans & advances 5,189 1,795 2,165 2,799
Other current assets 9,605 7,936 13,265 15,084
Current lia & Prov 29,608 35,283 35,985 40,886
Current liabilities 25,921 30,379 29,883 33,947
Provisions 3,687 4,903 6,102 6,939
Net current assets 11,789 8,390 7,792 9,232
Misc. exp 51.7 43.1 43.1 43.1
Total Assets 63,213 70,650 75,141 77,390
Key Ratios
Y/E Mar FY10 FY11 FY12E FY13E
Profitability (%)
EBITDA Margin 10.5 11.2 10.6 10.7
Net Margin 5.4 5.9 5.0 5.4
ROCE* 12.5 18.5 16.4 18.4
ROE* 17.6 26.4 21.6 23.9
RoIC* 17.1 25.8 24.4 29.2
Per Share Data (Rs)
EPS 1.5 2.5 2.3 2.8
CEPS 2.2 3.5 3.6 4.2
BVPS* 8.7 10.0 11.1 12.6DPS 0.7 1.0 1.0 1.2
Valuations (x)
PER 17.6 10.4 11.3 9.1
P/CEPS 11.6 7.4 7.2 6.2
P/BV* 3.0 2.6 2.3 2.0
EV / Sales 1.1 0.7 0.6 0.5
EV / EBITDA 10.8 6.4 5.8 4.8
Dividend Yield (%) 2.9 3.9 3.7 4.6
Gearing Ratio (x)
Net Debt/ Equity* 0.7 0.9 0.8 0.6
Net Debt/EBIDTA 2.1 1.8 1.8 1.4
Working Cap Cycle (days) 3.4 11.7 (4.6) (4.5)
Cash Flow (Rs. Mn)
Y/E Mar (Rsmn) FY10 FY11 FY12E FY13E
PBT (Ex-Other income) 4,776 8,125 7,490 9,434
Depreciation 2,041 2,674 3,411 3,591
Interest Provided 811 1,637 2,063 1,843
Other Non-Cash items 1,564 (4,822) - -
Chg in working cap 2,806 6 967 (806)
Tax paid (1,097) (1,705) (1,709) (2,253)
Operating Cashflow 10,902 5,914 12,224 11,809
Capital expenditure (6,429) (4,697) (3,000) (3,000)
Free Cash Flow 4,473 1,216 9,224 8,809
Other income 209 153 277 364Investments (1,612) (4,633) (5,500) (1,400)
Investing Cashflow (1,403) (4,480) (5,223) (1,036)
Equity Capital Raised - - - -
Loans Taken / (Repaid) 2,457 3,644 1,400 (1,600)
Interest Paid (811) (1,637) (2,063) (1,843)
Dividend paid (incl tax) (2,327) (3,092) (2,968) (3,695)
Income from investments
Others 1,914 949
Financing Cashflow 1,233 (136) (3,631) (7,139)
Net chg in cash 4,303 (3,400) 369 634
Opening cash position 851 5,189 1,795 2,165
Closing cash position 5,155 1,789 2,165 2,799
Source: Company, Emkay Research
Ashok Leyland
* ex revaluation reserve
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Y/E, Mar Net EBIDTA EBIDTA APAT EPS EPS RoE P/E EV / P/BV
(Rs mn) Sales (Core) (%) (Rs) % chg (%) (x) EBITDA (x)
FY10 118,637 25,353 21.4 18,651 64.5 116.5 73.8 25.5 17.7 16.3
FY11 165,148 33,178 20.1 26,422 91.3 41.7 85.2 18.0 12.8 9.7
FY12E 195,075 35,857 18.4 28,674 99.1 8.5 51.3 16.6 11.4 7.6
FY13E 225,573 41,164 18.2 33,184 114.7 15.7 46.9 14.3 9.6 6.1
Source: Emkay Research
Financial Snapshot
Emkayour success is our success
Bajaj Auto
New launches, exports to drive growth
Com
panyUpdate
mkay Global Financial Services Ltd.
eco Previous Recoccumulate Buy
MP Target Prices1,668 Rs1,950
PS change FY12E/13E (%) 2.4%/2.3%
rget price change (%) 16%
fty 5,017
ensex 16,862
rice Performance
%) 1M 3M 6M 12M
bsolute 17 21 20 9
el. to Nifty 19 32 29 20
ource: Bloomberg
elative price chart
September, 2011 Focus on demand pull to ensure market share gains with
strong profitability. 1QFY12 domestic motorcycle market share
at ~25% is below its FY07 peak of ~32%
Factored DEPB withdrawal in our estimates. Extension of thescheme to result in EPS upgrade of ~7%. Expect exports to
remain the key growth driver irrespective of DEPB
Raised our FY12/FY13 EPS est. by 2.4% /2.3% to Rs 99/Rs 115.
Raise TP to Rs 1,950 valuing the company at 17x FY13 PE
(earlier 15x) due to high FCF, return ratios and dividend
However, lower our rating to ACCUMULATE from BUY. We
believe there is limited scope for valuation rerating from
hereon. Stock performance will be driven by earnings
Traction in volumes with focus on profitability
We expect Bajaj Auto to register volume growth of 15.5% CAGR over FY11-13E to 5mn
units driven by (1) launch of new products/variants within its umbrella brands (Discover
and Pulsar) (2) introduction of Boxer in the domestic market (3) sustained momentum in
domestic 3-wheelers at ~12% CAGR to 0.26mn units and (4) ~19% CAGR in exports to
1.7mn units (with an upward bias).
Market share assumptions for motorcycles leave room for upsides
We are not factoring in market share gain for the company during FY11-FY13E post the
500bps increase over the last two years to 27% (FY11). We would like to highlight that
company has not yet regained its peak motorcycle market share of 32% (FY07). Given the
absolute focus on two mother brands (Discover and Pulsar) and pull demand, there exist
upsides to our market share estimates. We would prefer to see the traction in recent/
expected launches and addition of 130 dealers before factoring in the same.
Focus on profitability to aid market share gain in the long term
A clear shift in strategy towards profitability/margins vis--vis market share should actually
aid BJAUT gain market share in the domestic two wheeler industry in the long term. This
is on account of the company focusing on all aspects of product success - customer
preference, maintenance cost, after sales, quality of dealership and customer satisfaction.
Factoring in DEPB withdrawal but upside from currency exists
Post 4QFY11 earnings, we have lowered the export incentives for the company from ~10%
to 5% of exports to factor in the risk of withdrawal of the scheme. Any extension in the
scheme will result in an EPS upgrade by ~7%. Exports will continue to be key growth
driver, irrespective of DEPB benefits.
Valuation and view
We expect earnings to register a ~12% CAGR during FY11-FY13E, with a strong case for
upward bias. We have revised our FY12/FY13 EPS estimates by 2.4%/2.3% to Rs 99/Rs
115 driven by volumes. We have raised our TP to Rs 1,950 valuing the company at FY13
PER/EV-EBIDTA of 17x/11.7x, given the high FCF, return ratios and dividend. However, we
lower our rating to ACCUMUATE from BUY. From here, we believe that there is limited
scope for rerating of valuations. Stock performance will be driven by volumes/earnings.
00
95
90
85
80
75
Sep-10 Nov -10 Jan-11 Mar -11 May -11 Jul-11
Rs
-20
-10
0
10
20
30%
Bajaj Auto (LHS) Relto Nifty (RHS)
ource: Bloomberg
tock detailsector Automobiles
oomberg BJAUT IB
quity Capital (Rs mn) 2,894
ace Value(Rs) 10
o of shares o/s (mn) 289
Week H/L 1,665/ 1,190
arket Cap (Rs bn/USD mn) 455/ 9,869
aily Avg Volume (No of sh) 428.700
aily Avg Turnover (US$mn) 13.5
hareholding Pattern (%)
Jun11 Mar11 Dec10omoters 50.0 50.0 49.7
/NRI 15.9 16.1 17.9
stitutions 8.1 7.9 6.3
ivate Corp 8.7 8.6 8.7
ublic 17.4 17.4 17.6
ource: Capitaline
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Emkay Research 7 September, 2011
Auto Sector
31
Key Financials
Income Statement (Rs. Mn)
Y/E Mar (Rsmn) FY10 FY11 FY12E FY13E
Net Sales 118,637 165,148 195,075 225,573
Growth (%) 35.5 39.2 18.1 15.6
Expenditure 93,284 131,970 159,217 184,409Materials Consumed 80,704 117,988 142,359 164,999
Employee Cost 3,995 4,648 5,584 6,596
Other Exp 8,585 9,334 11,275 12,815
EBITDA 25,353 33,178 35,857 41,164
Growth (%) 122.9 30.9 8.1 14.8
EBITDA margin (%) 21.4 20.1 18.4 18.2
Depreciation 1,365 1,228 1,363 1,410
EBIT 23,989 31,950 34,495 39,753
EBIT margin (%) 20.2 19.3 17.7 17.6
Other Income 1,798 4,599 4,522 6,275
Interest expenses 60 17 5 3
PBT 25,726 36,532 39,012 46,025
Tax 7,075 10,110 10,338 12,841Effective tax rate (%) 27.5 27.7 26.5 27.9
Adjusted PAT 18,651 26,422 28,674 33,184
Growth (%) 116.5 41.7 8.5 15.7
Net Margin (%) 15.7 16.0 14.7 14.7
(Profit)/loss from JVs/Ass/MI - - - -
Adj PAT After JVs/Ass/MI 18,651 26,422 28,674 33,184
E/O items (1,615) 6,976 - -
Reported PAT 17,036 33,397 28,674 33,184
Growth (%) 159.5 96.0 (14.1) 15.7
Balance Sheet (Rs. Mn)
Y/E Mar (Rsmn) FY10 FY11 FY12E FY13E
Equity share capital 1,447 2,894 2,894 2,894
Reserves & surplus 27,837 46,209 59,886 75,714
Net worth 29,283 49,102 62,779 78,608Minority Interest - - - -
Secured Loans 130 235 235 235
Unsecured Loans 13,256 3,016 2,252 1,252
Loan Funds 13,386 3,252 2,487 1,487
Net deferred tax liability 17 297 297 297
Total Liabilities 42,686 52,651 65,563 80,392
Gross Block 33,793 33,952 35,902 38,158
Less: Depreciation 18,997 19,125 20,487 21,897
Net block 14,796 14,827 15,415 16,261
Capital work in progress 415 699 699 699
Investment 40,215 47,952 61,952 76,952
Current Assets 15,838 28,726 36,312 40,403
Inventories 4,462 5,473 6,578 7,587Sundry debtors 2,728 3,628 4,360 5,029
Cash & bank balance 1,014 5,565 6,927 6,845
Loans & advances 6,574 11,896 16,282 18,778
Other current assets 1,060 2,164 2,164 2,164
Current lia & Prov 28,579 39,553 48,815 53,922
Current liabilities 20,263 24,267 30,535 32,840
Provisions 8,316 15,286 18,280 21,082
Net current assets (12,740) (10,827) (12,502) (13,519)
Misc. exp - - - -
Total Assets 42,686 52,651 65,563 80,392
Key Ratios
Y/E Mar FY10 FY11 FY12E FY13E
Profitability (%)
EBITDA Margin 21.4 20.1 18.4 18.2
Net Margin 15.7 16.0 14.7 14.7
ROCE 68.5 76.7 66.0 63.1
ROE 73.8 85.2 51.3 46.9
RoIC 343.4(12,215.6) (1,236.5) (979.4)
Per Share Data (Rs)
EPS 64.5 91.3 99.1 114.7
CEPS 69.2 95.6 103.8 119.6
BVPS 101.2 169.7 217.0 271.7DPS 20.0 40.0 44.6 51.6
Valuations (x)
PER 25.5 18.0 16.6 14.3
P/CEPS 23.8 17.2 15.8 13.8
P/BV 16.3 9.7 7.6 6.1
EV / Sales 4.0 2.8 2.3 1.9
EV / EBITDA 17.7 12.8 11.4 9.6
Dividend Yield (%) 1.2 2.4 2.7 3.1
Gearing Ratio (x)
Net Debt/ Equity (0.7) (0.8) (0.9) (0.9)
Net Debt/EBIDTA 0.0 (0.4) (1.0) (1.0)
Working Cap Cycle (days) (40.2) (33.5) (36.7) (32.7)
Cash Flow (Rs. Mn)
Y/E Mar (Rsmn) FY10 FY11 FY12E FY13E
PBT (Ex-Other income) 23,929 31,933 34,490 39,750
Depreciation 1,365 1,228 1,363 1,410
Interest Provided 60 17 5 3
Other Non-Cash items (2,170) (5,568) - -
Chg in working cap 11,263 2,638 3,038 934
Tax paid (7,075) (10,110) (10,338) (12,841)
Operating Cashflow 27,371 20,137 28,557 29,257
Capital expenditure (485) (443) (1,951) (2,256)
Free Cash Flow 26,886 19,695 26,607 27,001
Other income 1,798 4,599 4,522 6,275Investments (22,949) (15,123) (14,000) (15,000)
Investing Cashflow (21,151) (10,524) (9,478) (8,725)
Equity Capital Raised - 1,447 - -
Loans Taken / (Repaid) (2,314) (10,134) (765) (1,000)
Interest Paid (60) (17) (5) (3)
Dividend paid (incl tax) (6,749) (13,452) (14,996) (17,355)
Income from investments
Others 3,033 13,537
Financing Cashflow (6,090) (8,620) (15,766) (18,358)
Net chg in cash (355) 551 1,363 (82)
Opening cash position 1,369 1,014 5,565 6,927
Closing cash position 1,014 1,565 6,927 6,845
Source: Company, Emkay Research
Bajaj Auto
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Y/E, Mar Net EBIDTA EBIDTA APAT EPS EPS RoE P/E EV / P/BV
(Rs mn) Sales (Core) (%) (Rs) % chg (%) (x) EBITDA (x)
CY09 29,386 1,455 4.9 844 31.3 (746.0) 7.8 43.4 18.0 3.4
CY10 43,971 3,578 8.1 1,899 70.5 124.9 16.5 19.3 12.4 3.0
CY11E 53,341 5,189 9.7 2,792 103.7 47.1 20.9 13.1 7.9 2.5
CY12E 64,821 6,388 9.9 3,255 120.8 16.6 20.8 11.3 5.9 2.2
Source: Emkay Research
Financial Snapshot (Consolidated)
Emkayour success is our success
Eicher Motors
Market share gain to continue, Retain BUY
Com
panyUpdate
mkay Global Financial Services Ltd.
eco Previous Recouy Buy
MP Target Prices1,362 Rs1,700
PS change FY12E/13E (%) -
rget price change (%) -
fty 5,017
ensex 16,862
rice Performance
%) 1M 3M 6M 12M
bsolute 2 3 29 8
el. to Nifty 3 12 39 19
ource: Bloomberg
elative price chart
September, 2011
ource: Bloomberg
tock detailsector Automobiles
oomberg EIM@IN
quity Capital (Rs mn) 270
ace Value(Rs) 10
o of shares o/s (mn) 27
Week H/L 1,450/975
arket Cap (Rs bn/USD mn) 36/813
ai ly Avg Volume (No of sh) 18,414
aily Avg Turnover (US$mn) 0.5
hareholding Pattern (%)
Jun-11 Mar-11 Dec-10omoters 55.3 55.3 55.3
/NRI 15.1 14.4 18.2
stitutions 16.5 16.6 12.7
ivate Corp 2.1 2.3 2.4
ublic 11.1 11.4 11.5
ource: Capitaline
CV volumes to surprise positively driven by higher demand for
7.5-12ton segment during a slowdown and its success in 12-
16ton segment (highest ever market share)
Well poised to deliver strong growth in higher tonnagesegment due to support from Volvo and strong balance sheet
Motorcycle business in a sweet spot as demand remains
strong; Clear focus to ensure swift capacity expansion and
higher profitability
Retain BUY with a TP of Rs 1,700 on SOTP basis. Valued
existing business at Rs 1,547 and engine business at Rs 153.
Key risk - sharp downturn in CV demand
7.5 to 12 ton M&HCVs outperform during slowdown, EIM-thebeneficiary
During a cyclical slowdown, ICVs tend to gain market share and during a cyclical upturn,
HCVs gain market share. This is a normal phenomenon as during slowdown there are
concerns of asset utilization and hence, preference shifts to ICVs. This is one of the key
reasons for our positive view towards Eicher (EIM), as 7.5 to 12 ton accounts for ~65% of
EIM's truck volumes.
12 to 16 ton - market share has crossed the previous peak of 6%
EIM's market share in the 12 to 16 ton segment has crossed the previous peak of ~6%. It
currently stands at ~7%. Also, this segment now accounts for 11% of EIM's truck volumes
and ~8% of EIM's total CV volumes. More importantly, EIM is focusing on creating brand
awareness for its 25 ton and 31 ton vehicles, so that it can participate when the demand
enters the cyclical upturn phase.
Two wheeler business - should benefit from clear focus
EIM's two wheeler (Royal Enfield) business is an underutilized business with lower
capacities and margins of ~13% despite the strong brand equity. Clear focus on the
business will ensure swift capacity additions and higher margins.
Engine business - a strong outsourcing opportunity and a stablebusiness
Engine manufacturing to commence from CY13 will not only provide support to EIM's
existing business but will also ensure a stable outsourcing business to Volvo. Initial
capacity planned is for 85,000 units that will manufacture engine from Euro II to Euro VII
and meet the requirements of EIM as well as Volvo (India/Japan/Europe)
Valuation & View
At CMP of Rs 1,361, the stock trades at PER of 13.1x/11.3x and EV/EBIDTA of 7.9x / 5.9x our
CY11 and CY12 estimates respectively. We retain BUY rating on the stock with a target
price of Rs 1,700 based on SOTP. We value the current business at Rs 1,547 and NPV of
engine business at Rs 153.
00
85
70
55
40
25
Sep -1 0 No v- 10 Ja n- 11 Ma r- 11 M ay-11 Jul-1 1
Rs
-20
-10
0
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Eic her Moto rs (LHS) Rel to Ni fty(RHS)
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Emkay Research 7 September, 2011
Auto Sector
33
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5-7.5Ton 7.5 - 12 ton
Product Mix
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