Off The Autobahn

Automobiles
ExecutiveSummary
While several macro headwinds persist, we see silver lining around dark clouds. In our view, commodity prices have peaked out while interest rates should peak out in H1FY12 and liquidity crunch should ease off in H2FY12. While FY12 is likely to be slow year for car and commercial vehicles demand perspective, tractor and two wheeler demand should report robust growth on the back of strong rural income and government thrust on rural development in FY12. We expect volume growth estimates for cars and trucks to be 10% and 8%, while for two wheelers and tractors at 15% each, respectively, for FY12. We build in 100-200bps decline in EBITDA margins due to input cost inflation, which could reduce earnings by 10-15%. We expect consensus to downgrade earnings for cars and trucks as the full blown impact of sharp increase in interest rates and fuel prices are felt in the FY12 sales and rising incentives and interest costs eats into the profitability. We are 7-11% lower than consensus on FY12E earnings for Maruti Suzuki and Ashok Leyland. On valuation, the stocks are trading at a reasonable 7-15xFY12E EPS (upto 50% discounts to Sensex which is inline with discounts observed during earlier down-cycle). However, the negative triggers outweigh positive triggers in the short term. Our analysis suggests the auto sector is likely to underperform the benchmark Sensex in the next two quarters till interest rates peak out and the underperformance should start narrowing Q4FY12 onwards. In such a tough operating scenario, we like companies which have revenue visibility in FY12 and as well are available at reasonable valuation. We advise investors to prefer companies with: (1) high exposure to rural sales; (2) greater contribution from exports; (3) low dependency on bank credit to push sales; (4) have low competitive intensity; (5) have high replacement demand; and (6) are available at reasonable valuation. We maintain BUY on Bajaj Auto, Tata Motors and Mahindra & Mahindra while we recommend REDUCE on Maruti Suzuki and Ashok Leyland. We have a HOLD rating on Hero Honda.
Table1:Operatingmatrixandourpick
Interestrate Saleson sensitive bank demand credit Ashok Leyland Yes High Bajaj Auto No Low Hero Honda No Low Mah. & Mah. No High Maruti Suzuki Yes High Tata Motors Yes High Contribution ofrural demand Low High High High Low Low Exports contribution Low High Low Low Low High Pricing power Weak High High High Weak Weak Replacement demand Low High High High Low Low Competitive intensity Moderate Moderate Moderate Moderate High Moderate to high Our recommen dation REDUCE BUY HOLD BUY REDUCE BUY
Valuation Low Reasonable High Reasonable Reasonable Reasonable
Source:Edelweissresearch
Edelweiss Securities Limited
Automobiles
Contents
Summarized investment thesis .......................................................................................... 3 At a glance.......................................................................................................................... 4 Cars Rolling Resistance Up .............................................................................................. 5 No More Hunky Lorry....................................................................................................... 10 Two Wheelers, Tractors Soft Landing on Cards .......................................................... 15 Softening Input Costs, Low Valuation a Respite............................................................... 20
Companies Ashok Leyland ........................................................................................................... 23 Bajaj Auto ................................................................................................................. 37 Hero Honda .............................................................................................................. 51 Mahindra and Mahindra........................................................................................... 63 Maruti Suzuki India ................................................................................................... 79 Tata Motors .............................................................................................................. 95

CMP (INR) Investmenttheme 1. Likely to lose market share and should be the most affected amongst commercial vehicle maker on current macro headwinds of slowing IIP, rise in interest rates and fuel prices. 2. This slow down could derail the profit maximization plan which company was contemplating by increasing production from tax free Pantnagar plant, further leading to margin compression in FY12 and EPS downgrades (a downside risk to our expectations) 3. Increased debt and rising interest rate should further affect profitability Triggers: Weak sales & quarterly earnings, increase in interest rates and diesel prices are key triggers Risks: Higher than expected ramp up from Pantnagar plant and higher than expected sales performance particularly from exports and subsidiaries Triggers/Keyrisks 51 44 TP (INR) 1,370 1,730
Summarisedinvestmentthesis
Stock
Recomm endation
Ashok Leyland (AL IN)
REDUCE
Bajaj Auto (BJAUT IN)
BUY
3
1,747 1,600 1. Hero Honda (HH) continues to benefit from the strong rural demand for motorcycle and in our view could surprise street positively on the sales growth. We expect 14% Y-o-Y volume growth in FY12E. 2. However, margins should disappoint over next two years on account of R&D set up, exports push, promotion costs and lower contribution from tax free Haridwar plant 1. Strong rural income and continuing government thrust on rural development implies another strong year for tractors and utility vehicles demand. 2. Company has multiple margin levers in the form of (a) pricing power amidst low competition, (b) fiscal as well as operating leverage benefit from new Chakan plant and (c) improving product mix in favour of farm equipment division. 665 814 1,210 1,150 1. Macro headwinds, base effect of last years launches and slew of new launches from competition are likely to keep MSIL's sales growth and market share under pressure. 2. Margin pressure is likely to continue driven by interest rate subvention, rise in discounts and weak pricing power. 994 1,403 1. Land Rover is likely to drive the growth for JLR business. After refreshing the Jaguar portfolio, the company is likely to have new launches from Land Rover stable starting with Evoque in Q2FY12. We have built in 280k units sales in FY12E vs company guidance of 300k. We expect EBITDA margins to stay in the range of 16-17% 2. Despite weakness in domestic business, In our view, risk - rewards is skewed towards reward given the high contribution from JLR operation.
1. New launches (Boxer, Discover 125cc and KTM bikes) should aid company achieve its guidance of 4.6m sales. 2. With high oil prices, economic prospects of key export destination Nigeria has brightened. Clarity on export incentive schemes augur well for export margins. 3. The company has margin levers in the form of higher contribution from tax free Pantnagar plant (28% in FY12 vs 17% in FY11)
Trigger: Launch of Boxer 150cc in August 2011 is key positive trigger. Risks: (1) lower than expected export incentives under the new scheme, (2) lower than expected performance from new launches, (3) higher than expected competitive intensity.
Hero Honda (HH IN)
HOLD
Trigger: positive trigger include strong monthly sales numbers while negative triggers include weak quarterly earnings Risks: Higher/lower than expected domestic sales performance, below/above estimated metal cost inflation and rapid/slow ramp up in exports are key upside/downside risk respectively. Triggers: (1) launch of new global UV and compact Xylo in H2FY12, and (2) strong monthly volume growth and quarterly earnings. Risks: Reduction in investor risk appetite due to global macro headwind punishing the stock for being conglomerate remains the biggest risk to earnings multiple of the stock. Other risk include liquidity sqeeze rendering bank funding unavailable to buyer of tractor and UV thus posing risk to our sales estimates.
Mahindra & Mahindra (MM IN)
BUY
Maruti Suzuki (MSIL IN)
REDUCE
Triggers: (1) weak volume growth, (2) new launches from Hyundai's small car, Honda's Brio, Toyota's Liva, GM's Beat diesel, (3) weak quarterly earnings, (4) increase in fuel prices, (5) increase in interest rates. Risks: (1) Higher than expected sales from new Swift which is likely to be launched in Q2FY12 (2) Exports revival (3) Upside from colloboration with Volkswagen (4) Depreciation in JPY to which the company has significant exposure. Triggers: (1) launch of Evoue from Land Rover stable in Q2FY12, (2) strong monthly sales numbers and quarterly earnings from JLR Risks: (1) weaker than expected performance from domestic business, (2) weaker than expected economic growth in the developed world leading affecting premium car demand
Tata Motors (TTMT IN)
BUY
Automobiles
ATAGLANCE Financials(INRmn) Rating FY09 FY10 FY11 FY12E 15.1 16.3 (1.5) 35.8 38.9 22.5 16.9 19.2 27.9 22.1 18.6 13.9 13.5 41.5 26.4 17.0 14.4 13.7 86.9 78.5 23,723 26,573 (28,814) 86,137 177,800 201,273 233,666 10,787 90,426 99,100 120,713 82.1 92.0 (44.9) 16.8 141.1 154.6 188.3 41.9 24.7 15.8 13.3 98.6 30.5 33.1 17.2 12.7 7.2 103.6 13.9 17.6 17.1 (27.0) 99.4 (12.5) 10.4 17.2 (59.3) 292.2 106.4 13.2 16.1 11.2 34.0 (7.6) (10.8) 15.6 11.8 29.8 71.1 22.0 16.7 15.6 (18.9) 79.0 (9.7) 4.6 12.0 (243.5) (137.4) 738.3 9.6 21.8 58.1 74.3 24.8 32.3 32.3 74.3 (10.8) 15.6 11.8 12.8 71.1 22.0 16.7 15.6 (18.9) 79.0 (9.7) 4.6 12.0 (219.5) (137.4) 738.3 9.6 21.8 21.2 19.7 19.7 22.4 19.9 19.9 8.6 6.5 18.6 10.9 12.1 9.1 8.1 23.0 11.1 9.2 7.8 6.3 16.2 7.6 8.4 7.8 6.2 36.5 9.4 4.7 4.0 3.2 28.3 40.3 40.3 10.9 130.3 116.5 116.5 14.9 21.3 15.2 12.6 10.6 27.2 15.6 17.5 15.1 13.5 33.4 19.5 16.0 13.7 11.9 24.9 13.9 15.4 14.7 13.2 (22.1) 59.1 7.0 6.4 5.3 0.2 0.4 0.4 36.4 46.0 23.5 13.5 8.1 5.9 4.5 9.2 10.1 11.8 11.1 9.9 7.1 4.9 3.8 3.1 2.6 3.7 3.0 2.5 2.2 1.9 8.7 6.9 3.3 2.3 1.6 20.0 30.8 30.8 5.1 8.1 1.4 3.2 (2.4) (2.4) 6.3 10.6 1.6 FY13E 8,869 FY10 FY11 FY12E FY13E 7,805 FY10 FY11 FY12E FY13E 8,998 FY10 FY11 FY12E FY13E 7,821 REDUCE FY10 FY11 FY12E FY13E 14,256 FY10 FY11 FY12E FY13E 1,231,333 1,443,035 1,625,691 925,193 BUY FY09 708,810 21,960 481,194 42,551 424,885 36,301 366,867 32,896 294,143 37,601 25,110 22,673 FY09 207,218 18,855 14,030 48.6 313,340 46,935 33,909 56.1 273,992 40,088 29,331 48.5 234,210 34,095 25,134 41.6 185,296 29,941 20,600 34.1 BUY FY09 130,937 14,704 12,042 19.9 260,107 36,651 25,761 129.0 228,270 32,968 23,033 115.3 192,450 24,607 19,921 99.8 157,582 26,622 22,320 111.8 HOLD FY09 123,191 16,844 12,809 64.1 234,967 47,232 37,531 129.7 200,923 38,978 31,356 108.4 164,078 31,838 26,152 90.4 118,098 24,814 18,643 64.4 BUY FY09 86,959 10,776 8,612 29.8 148,798 15,410 8,391 6.3 127,941 12,839 6,413 4.8 111,177 12,436 6,573 4.9 52.7 55.3 58.2 58.2 6.4 10.3 1.7 16.5 15.9 18.3 34.4 60.4 68.9 61.4 65.5 49.1 73.5 59.4 62.1 73.3 18.9 29.2 28.5 27.3 26.4 20.8 46.4 30.7 23.8 25.8 (2.2) 10.2 25.9 26.0 27.8 72,813 8,008 4,154 3.1 20.9 86.6 193.6 193.6 10.2 16.3 1.8 10.4 60,240 4,291 1,415 1.1 (22.7) (46.1) (67.9) (67.9) 19.6 47.9 2.0 6.2 5.1 11.7 17.2 15.4 18.0 52.6 80.8 66.7 54.1 48.6 37.7 61.4 62.0 75.4 77.3 25.1 31.5 27.7 25.8 24.7 15.8 23.7 17.6 15.9 15.5 (38.5) 13.8 65.3 41.7 36.1 Revenue EBITDA Netprofit EPS Revenue (INR) EBITDA Netprofit EV/ EPS EBITDA P/E(x) P/B(x) (INR) (x) ROCE (%) EBITDA ROAE margins (%) (%) 7.1 11.0 11.2 10.0 10.4 Growth(%) Valuations
Company 1,518 REDUCE
Price* Mktcap (INR) (USDmn)
Automobiles
Ashok Leyland
51
Bajaj Auto
1,370
12.4
21.0 19.4 19.4 20.1 13.7 16.9 12.8 14.4 14.1 11.2 16.2 14.6 14.6 15.0 9.1 12.8 9.0 8.5 8.8 3.1 9.3 14.4 13.9 14.4
*CMPason15thJune,2011
Hero Honda**
1,747
M&M
665
(Standalone)
Maruti Suzuki
1,210
Tata Motors
994
(Consolidated)
Note:**MarginexpandsinFY12/FY13duetoreclassificationofaccountingforroyaltypaymentasdepreciation(amortisation)
Automobiles
CarsRollingResistanceUp
Cardemandstartstolosetempo
After racing at 28% for the past two years, car sales are likely to slow down to 10% in FY12 owing to macro headwinds. In our report, Cars:Firstsignofslowdownhasemerged, dated 29th March 2011, we had pointed out a slump in retail demand in the previous two months. In this report, we forecast the pace of slowdown to accentuate in FY12. First, let us evaluate the impact of various negative macro factors on car demand.
Liquidity:Leaddemandindicatorstillnegative
Historically, growth in car sales has exhibited a strong correlation with liquidity in the banking system as it depends on: (1) availability of bank financing; (2) cost of borrowing and (3) economic growth to spur sales. We have observed car sales either slow down or pick up following a liquidity tightening or easing respectively with a lag of a quarter or two. Currently, the slow offtake in deposit growth versus credit growth has induced a liquidity deficit in the system. Our economics team believes that given the prevailing high inflation and RBIs efforts to cool it off, liquidity tightening will continue deterring car sales.
Chart1:LiquiditytighteningtoslowdowncarsalesinFY12 Liquidity and GCF, the lead indicators of demand, are negative
(INR bn)
1,250 750 250 (250) (750) (1,250) 60.0 40.0 20.0 0.0 (20.0) (40.0)
LowerGCFgrowthdentsdemand
Slowdown in Gross Capital Formation (GCF) is likely to be a big negative for car demand in FY12. GCF highlights the investment activity and also the future job outlook. Acceleration in GCF leads to strong car sales growth and vice-versa. Whenever, GCF growth rate drops by 5% or more, it has led to car sales decelerating to low single digit. Currently, GCF growth rate has declined to 2% (change in actual growth rate at 26%) and given the macro headwinds, the situation is unlikely to improve in the near future. Thus, it clouds the sales outlook for car demand.
Sep-00 Mar-01 Sep-01 Mar-02 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
Net repo
Car sales (RHS)

Source:CMIE,SIAM,Edelweissresearch
(Y-o-Y %)
Automobiles
Chart2:PoorgrowthinGCFdeterscardemand 48.0
32.0 78.0 52.0 26.0 0.0 (26.0) (52.0)
(Yo-Y, %)
16.0 0.0 (16.0) (32.0)
Highinterestratessustainnegativecorrelationwithdemand
Rising interest rates to hurt buyers sentiments
Rising interest rates have already started dampening buyer sentiments and we perceive it as a big negative for car demand outlook for FY12. Even though a 1% increase in interest rate leads to a mere 1.3% rise in EMI, we believe the following impact: (1) directly hurts buyer sentiments hence derails demand momentum and (2) damages economic growth by indirectly hitting the demand. Limited availability of interest rate data makes it difficult to study the negative correlation between interest rates and car demand but we have used the spread between 5year government bonds and 5-year BBB Securities as a proxy for car interest rates (auto loans are typically for 3-5 year duration). Whenever the spread increases, it implies car loan interest rates are rising which in turn would hit the demand (as is evident from the chart below). Already, we have seen car interest rates rising by more than 250bps in the past one year to 11.5%. Our economy team believes that RBI may raise interest rates by another 50bps which will put further strain on auto interest rates thus adversely affecting the demand.
Chart3:Risingspreadbetween5yearBBBbondsandGSecnegativeforcardemand 6.5 60.0

(Growth, Y-o-Y %)
5.7 44.0 28.0 12.0 (4.0) (20.0)
(Spread, %)
4.9 4.1 3.3 2.5
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Sep-10
BBB less 5 Yr GSec yield spread
Car (RHS)
Source:Bloomberg,SIAM,Edelweissresearch
Mar-11
Change in GCF growth
Car growth (RHS)

(Y-o-Y, %)
Automobiles
Chart4:Mountinginterestratescrippledcarsalesinthepast 13.0
12.0 11.0 35.0 28.0
10.0 9.0 8.0 2006-07 2007-08 Interest rate 2008-09 2009-10 2010-11 Car sales (RHS)
14.0 7.0 0.0
Source:Crisil,SIAM
Steepriseinpetrolpricesmayderaildemand
Despite the partial deregulation and a tempered hike (much lower than the global crude) of petrol prices in India, rise in fuel prices has historically affected car sales. A sharp surge of 20% or so in petrol prices has led to car sales growth slowing down to low single digits with a lag of 2-3 quarters. After recently hiking petrol prices by INR 5/litre, we do not rule out the government increasing it further, thus derailing the car demand.
Chart5:Sharpspurtinpetrolpriceslikelytoadverselyaffectcardemand 30.0
18.0
40.0 26.0
(Y-o-Y %)
(6.0)
(2.0) (16.0) (30.0)
(18.0) (30.0)
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Car sales (RHS)
Petrol prices
Source:IOC,SIAM
Apr-11
Oct-03
Oct-04
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
(Y-o-Y %)
6.0
12.0
(Y-o-Y, %)
21.0
(%)
Automobiles
DecliningGDPindicatesslowdownahead
GDP growth, another lead indicator for car demand, is also turning negative implying a slowdown in car sales in FY12. In fact, demand for cars is directly correlated to the economic growth as historically, peaking GDP growth or the bottoming out of it has always coincided with similar movements in car demand. An exception to this trend was, however, observed in H2FY03 and H2FY05 for a quarter or so when car sales did not follow the dip in economic growth rate. This was primarily owing to funding push by SBI and an 8% excise duty cut for FY03. In FY05, a slowdown in GDP was largely driven by its agricultural component. Car sales were unaffected since growth in urban India was high (rural sales accounted for less than 5% of car sales then). In the existing scenario, banks are still lending while the economic slowdown is driven by manufacturing and service sector. Consensus has downgraded economic growth estimates for FY12 by 50bps to 100bps, pointing to limp car sales for FY12.
Decline in GDP to induce downgrades in consensus car growth estimates
Chart6:Economicslowdowntoadverselyaffectcardemand 6.0
4.0
60.0 40.0 20.0 0.0 (20.0) (40.0)
(Y-o-Y %)
2.0 0.0 (2.0) (4.0)
Change in GDP
Car growth (RHS)

(Y-o-Y %)
Overcapacityriskloomslarge
Maruti has always been ahead of industry as far as capacity utlilisation is concerned. However success of competitive launches in last few years and aggressive capacity expansion by Maruti has led to narrowing the gap. Sharp decline in capacity utilisation coupled with high competitive intensity should immense pressure on Industry margins.
Automobiles
Chart7:Dropincapacityutilisationposesriskstomargins 125.0
110.0 95.0
(%)
80.0 65.0 50.0 FY06 FY07 FY08 FY09 FY10 FY11 Maruti
Source:Crisil,SIAM,Edelweissresearch
FY12E
Industry - Ex Maruti
Forecast10%growthforindustry
Our GDP-based forecasting model hints at a 10% growth in car sales for FY12 although we expect growth to be back ended. Historically, car sales as a factor of GDP (ex-agriculture) ranges from +5x to -5x where the bottom car sales growth coincides with bottom GDP (exagriculture) growth rate and vice versa. The last 10-year average has been 1.2x. Applying this to our economic growth expectation of 8.7% implies a sales growth of 10% for FY12. We expect Maruti Suzuki (MSIL) to grow faster than the industry in H1FY12 but lose market share in H2FY12 when competition starts launching new products. For the full FY12, we expect MSIL to post a 10.7% growth domestic passenger cars.
Weak industrial and services GDP growth should lead to slowdown in car demand
Chart8:CardemandlikelytosharplyslowdowninFY12 12.0
9.6
7.7 5.1 2.6 0.0 (2.6) (5.1)
(Y-o-Y %)
7.2 4.8 2.4 0.0
Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 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 Sep-11 Mar-12 Sep-12 Mar-13
GDP ex agri Car/GDP ex agri (RHS) Linear (Car/GDP ex agri (RHS))
Source:SIAM,CMIE,Edelweissresearch
(x)
Automobiles
NoMoreHunkyLorry
An imminent slowdown in the economy, slackening road building and construction activities, tightening liquidity and a rising inflation are likely slow down the commercial vehicle demand in FY12.
Tighteningliquiditysignalsimminentslowdown
Tightening liquidity is a key negative for commercial vehicles in FY12 since demand for trucks and liquidity in the banking system go hand in hand. In our view, this could be due to: (1) high dependency on bank funding for truck financing (almost 98%) and (2) business viability of small and medium enterprises, major consumers of freight transport. The only exception to this was FY07 when ban on overloading led to a strong demand for heavy trucks despite the liquidity being under pressure. As discussed in the car segment, the liquidity tightening is likely to continue in FY12 thus weakening the outlook for commercial vehicle demand.
Liquidity squeeze is negative for freight availability
Chart9:LiquiditydeficitAmajorriskforcommercialvehicledemand 1,500
900
80.0 48.0
(INR bn)
(300) (900)
(16.0) (48.0) (80.0)
(1,500)
10
Net repo
Trucks (RHS)
(%)
300
16.0
Automobiles
Chart10:Trucksalesheavilydependentonbankloans 98.5
97.8 97.1 82.0 80.2 78.4 76.6 74.8 73.0
(%)
96.4 95.7 95.0
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Truck sold on credit
Loan to value ratio (RHS)

Source:Crisil,Edelweissresearch
DropinIIPgrowthpointstoaloomingslowdown
Drop in IIP growth implies low freight availability
Decelerating Index of industrial production (IIP) growth indicates that the truck demand might slow down in FY12. Historically seen, growth in truck sales is highly correlated to growth in IIP (80% correlation observed during July 2002-July 2010). Given the high inflation-high interest rate scenario, our economy team believes that the IIP growth is likely to stay subdued in the near term.
Chart11:SlowdowninIIPgrowthalludestoloomingdeclineinM&HCVdemand 19.5 150.0

13.0 100.0 50.0 0.0 (50.0) (100.0)
2010-11
(%)
6.5 0.0 (6.5) (13.0)
WeaknessinGCFAnothernegativeforCVdemand
Another negative element, a delicate GCF points to a slowdown in the freight availability going ahead. It equally implies a sluggish demand for both heavy and light commercial vehicles, including three wheelers.
11
Change in IIP growth
MHCV (RHS)
(Y-o-Y %)
(%)
Automobiles
Chart12:WeakGCFgrowthdownbeatforCVdemand 48.0
32.0 16.0 150.0 100.0
(%)
0.0 (16.0) (32.0)
0.0 (50.0) (100.0)
Slowing GCF, higher interest rates and inflation other negative triggers
Soaringinterestrateskeepanegativecorrelationwithdemand
Rising interest rates also affect demand for commercial vehicles (CVs) due to an increase in the cost of truck financing. Rising interest rates also up the cost of capital directly affecting freight availability and in turn, the CV demand. We expect FY12 to witness full impact of this trend.
Chart13:RisinginterestratemayadverselyaffectFY12CVdemand 7.0
5.6 4.2
Change in GCF growth
MHCV (RHS)
70.0 40.0 10.0 (20.0) (50.0) (80.0)
(%)
2.8 1.4 0.0
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Sep-10
BBB less 5 Yr GSec yield spread
Trucks (Y-o-Y) - RHS

Source:Bloomberg,SIAM,Edelweissresearch
Inflationslamsbrakesontruckdemand
Mounting inflation explicitly affects consumption and therefore the freight availability and demand for CVs. Historically, we have seen this negative correlation at work barring two occasions: (1) FY07 when ban on overloading led to a huge surge in truck demand despite a stubborn inflation while in subsequent year, sales slumped due to overcapacity as inflation waned and (2) FY09 when both inflation and truck demand cooled off due to global crisis and subsequently recovered.
12
Mar-11
(%)
(%)
50.0
Automobiles
Our economy team believes that RBI is struggling to tame inflation. In the next two quarters, inflation is likely to stay ahead of RBIs budgeted inflation. Thus, it poses a risk to CV demand for FY12.
Chart14:InflationhurtsCVdemand 20.0
16.0 12.0 70.0 40.0
(%)
8.0 4.0 0.0
(20.0) (50.0) (80.0)
Aug-03
Dec-05
Nov-01
May-05
Nov-08
Mar-04
Aug-10
Apr-01
Oct-04
Apr-08
Jan-03
Sep-00
Feb-07
Sep-07
Jan-10
WPI (Y-o-Y)
MHCV (RHS)
Source:Bloomberg,Edelweissresearch
Freightratestruckdemandcorrelation:Alagindicator
Freight rates are lag indicators to gauge the demand
Bulls argue that freight rates continue to be robust, sustaining the healthy profitability of truck operators hence the truck demand is likely to stay steady. However, our historical analysis suggests that the demand for trucks acts as a lead indicator of freight rate and not vice versa. Barring FY07 when overloading was banned, truck sales have patently peaked before truck freight rates.
Chart15:Truckfreightratesactaslagindicatortotruckdemand 240.0
160.0 80.0
(%)
Mar-11
36.0 27.0 18.0 9.0 0.0 (9.0)
(%) May-11
Jun-02
0.0 (80.0)
(160.0)
Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 May-04 May-05 May-06 May-07 May-08 May-09 May-10 Nov-10
Truck sales growth (Y-o-Y)
% growth in Freight (RHS)

Source:Crisil,SIAM,Edelweissresearch
13
Jun-09
Jul-06
(%)
10.0
Automobiles
GrowthincarsalesAleadindicatorfortruckdemand
Growth in car sales has a high correlation of 78% with truck sales with the former often working as a lead indicator to the latter. This, in our view, could be due to the fact that car purchases (car being a consumer discretionary product) get first cut down by buyers. The eventual effect of it should be felt on overall freight availability with a pause. With retail car demand already slowing down, it is a matter of time before such slowdown is felt on demand for CVs as well.
Chart16:Cardemandindicatestotruckdemandtrends
60.0 40.0 20.0 70.0 40.0 10.0 (20.0) (50.0) (80.0)
Expect trucks to grow by 8% in FY12E and growth should be back ended
(%)
0.0 (20.0) (40.0)
Sep-00
Sep-01
Mar-02 Sep-02
Sep-03
Sep-04 Mar-05
Sep-05
Sep-06
Mar-07 Sep-07
Sep-08
Sep-09 Mar-10
Sep-10
Mar-01
Mar-03
Mar-04
Mar-06
Mar-08
Mar-09
Cars (Y-o-Y)
MHCV trucks (Y-o-Y) - RHS
Source:SIAM,Edelweissresearch
Forecast8%/15%growthforM&HCVtrucksinFY12/FY13E
Based on our proprietary truck demand forecasting model, we expect medium and heavy trucks to grow at 8% in FY12 and 15% in FY13E. Our model drives truck demand based on total freight availability, total capacity in the system and roads market share. Freight availability is a factor of IIP growth. Total tonnage capacity in the system accounts for total population of trucks, its respective tonnage profile and scrappage.
Table2:Proprietarymodelfortruckgrowthforecast
Particulars Trucks sold (nos) YoYchange(%) Net annual tonnage sold (btkm) YoYchange(%) Tonne/vehicle Total trucks (Nos) Capacitygrowth(%) Distance travelled km p.a. Road Capacity btkm Roadtrafficgrowth(%) Share of road (%) FY09 147,451 (37.1) 101 (40.8) 11.4 2,066,757 4.5 90,000 1,395 4.6 72 FY10 FY11 FY12E FY13E 201,538 275,237 296,917 340,607 36.7 36.6 7.9 14.7 142 200 215 247 40.4 40.9 7.9 14.7 11.7 12.1 12.1 12.1 2,206,293 2,415,341 2,639,797 2,901,211 6.8 9.5 9.3 9.9 90,000 90,000 90,000 90,000 1,495 1,650 1,816 2,008 7.2 10.4 10.1 10.6 72 73 74 75
Source:SIAM,Industry,Edelweissresearch
14
Mar-11
(%)
Automobiles
TwoWheelers,TractorsSoftLandingonCards
Over the past decade or so, two wheelers and tractors have witnessed structural changes in the underlying demand. While in the past four years, two wheeler sales have largely been driven by rural demand, tractors rode the full benefit of strong farm income and rural construction activities. Now, even if the overall economy slows down, rural income is expected to remain buoyant on steady farm income and the government thrust on rural development. Thus, we expect a soft landing for two wheelers and tractors for whom the major negative at the moment would the high base effect.
Demandgettingdecoupledwithliquidity
Least affected from liquidity tightening
Tractor demand does not show any integral correlation with liquidity as the primary demand comes from rural areas. As normal monsoon, good crop and adequate support prices act as primary demand drivers, liquidity tightening does not influence tractor demand much. To understand the two-wheeler demand, we divide the last decade into the pre-2007 phase and post-2007 phase. Pre-2007 saw a strong urban demand for two wheelers, aided by aggressive bank funding at lower rates when demand corresponded to liquidity. However, since then, demand has largely been driven by rural regions and the number of two wheelers sold on bank financing has gone down significantly. Thus, we do not expect a significant impact on two-wheeler demand due to liquidity tightening.
Chart17:Twowheelerandtractorsdemandgettingdecoupledwithliquidity 1,250 1,250 49.5

750 36.0 750
60.0 40.0
(Y-o-Y, %)
(INR bn)
(Y-o-Y %)
(250) (750)
9.0 (4.5)
(INR bn)
250
22.5
250 (250) (750)
20.0 0.0 (20.0) (40.0)

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
(1,250)
(18.0)
(1,250)
Net repo Two wheeler (RHS)
Net repo
Tractor (RHS)
Source:CMIE,Edelweissresearch
15
Automobiles
Chart18:Twowheelersaleslessdependentonbankcredit 75.0
65.0
(%)
27.0 24.0
(%)
55.0 45.0 35.0 25.0

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
21.0 18.0 15.0 12.0
% sold on credit
Interest rates (RHS)

Gettingcorrelatedtoruraldemand
Thrust on rural activity to drive growth
Demand for both two-wheelers and tractors is getting more correlated with rural economic activities. Rural income is rising due to: (1) good crop, (2) rising support prices for key crops and (3) increased government spending through various employment generation schemes. This has led to a more vibrant rural economy, which, in turn, has led to a high demand for both segments. This is evident from the chart below that shows a linkage between sales of two wheelers and tractors and rural credit growth. Given the fact that rural credit is priority sector lending, the credit tap is unlikely to get affected due to the tightening of liquidity.
Chart19:Ruralactivitydrivingtwowheelerandtractordemand 48.0 42.0

32.0 16.0 28.0
(%)
54.0 36.0 18.0
72.0 54.0
(%)
14.0
36.0 18.0 0.0
(%)
(%)
0.0 (16.0) (32.0)
0.0 (14.0) (28.0)
0.0 (18.0) (36.0)

Sep-06 Sep-07 Sep-08 Sep-09 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Sep-10 Mar-11
(18.0)
Sep-06
Sep-07
Sep-08
Sep-09
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Sep-10
Mar-11
Priority sector credit growth (Y-o-Y) Two wheeler (Y-o-Y) - RHS
Priority sector credit growth (Y-o-Y) Tractor sales (Y-o-Y) - RHS

Source:RBI,SIAM
16
Automobiles
Foodinflationboostingdemand
Contrary to the popular belief that food inflation is likely to affect consumption, our analysis suggests that it is boosting the demand for both two wheelers and tractors as rural folks are the direct beneficiaries of food inflation. Our economy team opines that food prices are on a structural upswing, making demand outlook positive for two wheelers and tractors.
Chart20:Foodinflationpositivefortwowheelersandtractorsdemand 24.0 42.0 24.0

18.0 28.0
60.0 40.0 20.0 0.0 (20.0) (40.0)

Source:ICRA
18.0
(Y-o-Y %)
(Y-o-Y %)
12.0 6.0 0.0 (6.0)
14.0 0.0 (14.0) (28.0)
12.0
(%)
6.0 0.0 (6.0)
WPI of primary articles
Two wheeler (RHS)
WPI of primary articles
Tractor sales (Y-o-Y) - RHS
Replacementneedstoprovidedemandstability
There is a large pool of two wheelers and tractors, older than ten years or more. In two wheelers, the first bike exchanges hand in three years on an average in urban India (Source: Companies), implying a 33% of the demand from urban segment to be from replacement. In tractors, due to the higher haulage use, life of a tractor has come down from ten years to four years (Source: Industry), providing better visibility in demand.
Chart21:Twowheelersprofile:Nearly50%olderthan10years 60.0
48.0 36.0
(%)
24.0 12.0 0.0 0-5 years 6-10 years Age profile > 10 years
17
(%)
Automobiles
Expecting15%growthinFY12motorcyclesales
Given the evolving nature of demand for two wheelers, it is difficult to model demand. For example, till FY07, urban demand was the primary driver. When banks pulled out of the sector soon, demand tilted towards rural areas. Therefore we consider aspects like the industry growth forecast, demand patterns during the last eight years and factors that help derive demand to forecast if it would be above trend rate or below trend rate. Average growth for motorcycle in the last eight years has been at ~13%. Growth has fallen below this trend rate when the demand drivers have turned negative e.g. banks pull out from motorcycle financing in 2007 and global crisis in H2FY09. Similarly, growth rate tends to be higher than trend rate when demand drivers are in place. Society for Indian Automobile Manufacturer (SIAM) expects a growth of 11-13% motorcycle demand while leading motorcycle manufacturers believe that the growth should be around 12-15% in FY12E. In our view, the growth should be higher at 15% due to (1) higher rural contribution of 50% vs 30% about five years back, (2) 30% of urban demand being replacement demand and (3) dependency on bank funding being low at 30% vs 70% observed during FY04-07.
Expect two wheelers and tractors to grow by 15% each in FY12E
Chart22:Weexpectmotorcycledemandtogrowat15%inFY12E 50.0
34.0 18.0
(%)
2.0 (14.0) (30.0)

Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Sep-12 Mar-13
% Motorcycle Growth
Linear (% Motorcycle Growth)

Tractorsalessettogrowat15%inFY12E
Demand for tractors has a strong correlation to the agriculture GDP; high growth in agriculture GDP is followed by high demand for tractors with a lag of 1-2 quarters and viceversa. In the last ten years, FY10 has been the only year when this correlation has not adhered to as a fall in agricultural GDP output due to the drought was compensated by an increased government spending in rural areas hence tractor demand did not suffer. We have witnessed a very high agricultural growth of ~5% in FY11E and our economics team expects a growth of 3% for FY12E. This augurs well for the tractor demand.
18
Automobiles
Chart23:StrongagriGDPgrowthinFY11augurswellfortractordemand 24.0
16.0 8.0
(%)
60.0 40.0 20.0 0.0 (20.0) (40.0)

(%)
Strong agri GDP growth of FY11 should support tractor demand in FY12E
0.0 (8.0) (16.0)

Agri GDP (Y-o-Y)
Tractor growth (Y-o-Y) - RHS

Source:CMIE,Crisil,Edelweissresearch
The average growth in tractor demand for the past eight years has been 14% while companies like M&M and Escorts expect this to grow at 12-15% in FY12. We believe that the growth should be at the upper end of expected band due to (1) strong rural income growth especially when IMD expects a normal monsoon, (2) continuous thrust of the government towards rural spending through various Central government schemes, (3) keenness of banks to lend to this priority sector due to high yield in the business. (interest rates charged are at around 18-21%), (4) shortening of replacement cycle from ten years to five years due to an increase in rough haulage application and (5) a shortage of farm labour leading to higher farm mechanization.
Highcapacityutilisationaugurswellfortwowheelers,tractors
While the demand has been robust for two wheeler and tractors, the OEMs have been disciplined in adding the capacity. As a result of which the capacity utilisation has reached beyond 90%. This lowers the risk of price war and augurs well for profitability.
Chart24:Capacityutilisationfortwowheelersandtractorsathistoricalhigh 95.0 100.0

88.0
90.0
(two wheelers %)
(tractors %)
81.0 74.0 67.0
80.0 70.0 60.0 50.0
60.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E
FY06 FY07 FY08 FY09 FY10 FY11 FY12E
19
Automobiles
SofteningInputCosts,LowValuationaRespite
Automobile stocks have corrected by 10-30% over the last six months. Thus part of the macro concerns are in the price. At the same time, commodity prices have started to correct, giving headroom for a margin improvement. Auto stocks are trading at 8-13xFY12 PE (upto 50% discount to Sensex) hence valuations are reasonable. In our view, this gives us an opportunity to pick automakers that have both demand visibility and pricing power.
CoolingmetalcoststoeaseoffmarginpressurefromH2FY12
Commodity prices peak out and reasonable valuation provides an opportunity Metal prices have started to correct from their peaks. Our metal team believes that commodity prices have peaked in the short to medium term. Metal price correction should ease off margin pressure for the automobile companies from H2FY12e onwards.
Chart25:MetalpriceshavestartedtosoftenbarringRubber 90.0 90.0

(3mth Qtly Y-0-Y %)
(3mth Qtly Y-0-Y %)
180.0 120.0 60.0 0.0 (60.0) (120.0)
120.0 80.0 40.0 0.0 (40.0) (80.0)
(3 mth Qtly Y-o-Y %)
60.0 30.0 0.0 (30.0) (60.0)
60.0 30.0 0.0 (30.0) (60.0)
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
Aluminium
Steel - RHS
Chart26:Inputcostsofteningshouldeasemarginpressurefrom2HFY12 70.0
50.0 30.0
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
Nickel
Rubber - RHS
15.0 13.0 11.0 9.0 7.0 5.0
(%)
10.0 (10.0) (30.0)
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Sep-10
Raw material index (Y-o-Y)
Volume (Y-o-Y)
EBITDA Margin (RHS)
Source:Bloomberg,Companies,Edelweissresearch Note:Rawmaterialindexassumes50:30:20weightforsteel,rubberandaluminumrespectively
20
Mar-11
(%)
(3 mth Qtly Y-o-Y %)
Automobiles
Easinginputcoststoprovideearningsmultiplecomfort
Historically, rising input cost has led to downward revision in auto companies earnings multiple and vice versa. The only exception has been period of FY09-FY10 since in this period global crisis led to crash in commodity prices along with decline in automobile sales. Recovery in automobile demand was soon followed by the recovery in commodity prices in FY10. In our view, softening input costs should ease off margin pressure, leading to multiple expansion in 2HFY12.
Chart27:Risinginputcostshistoricallypulldownearningsmultipleandviceversa
30.0 24.0 60.0 40.0 20.0 0.0 (20.0) (40.0)
(%)
12.0 6.0 0.0
Sep-06
Sep-07
Sep-08
Sep-09
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Sep-10
Raw Material Price index (% y-o-y)
PE 12 m fwd (BSE Auto RHS)

Underperformancetocontinueinshortrundespiterecentcorrection
Historically, BSE Auto has underperformed the Sensex in a rising interest rate regime and vice-versa. Our economic team believes that interest rates should peak out in 1HFY12 only to fall in FY13E. Hence we believe in the short term, auto stocks may continue to underperform the Sensex. We expect under performance to narrow from Q4FY12E.
Chart28:Inrisinginterestratescenario,BSEAutounderperformsSensex
3.0 1.5 0.0 (1.5) (3.0) (4.5) 150.0 100.0 50.0 0.0 (50.0) (100.0)
(%)
Mar-11
Change in interest rates
21
Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 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
1 year BSE Auto return less Sensex return - RHS
(%)
(x)
Till macro headwinds persist, BSE Auto will underperform Sensex
18.0
Automobiles
Post the correction, automobile stocks are trading at a 10-50% discount to Sensex on FY12E. Thus, they capture, part of the macro risk. Thus, valuations are reasonable. In our economics teams opinion the interest rates are likely to peak out in H1FY12 implying, that going in FY13 when the outlook for automobile stocks should start to improve, the multiple should catch up with Sensex multiple and discounts narrow. However, in the short term the multiples should stay under pressure.
Chart29:DiscounttoSensexismovingtowardshistoricalhighs
30.0
Discount to Sensex indicate part of concerns are in price

(x)
25.0 20.0 15.0 10.0 5.0
Sep-06
Sep-07
Sep-08
Sep-09
Mar-07
Mar-08
Mar-09
Mar-10
Sep-10
Sensex PE ratio
BSEAuto PE ratio
We prefer companies with higher pricing power, high rural, high exports exposure, low dependencyonfinance,lowcompetitiveintensityandhighreplacementdemand In such tough operating scenario, we prefer companies which have high pricing power (implying low competitive intensity and high brand recall); high rural exposure and high exports contribution to sales. Thus, we prefer Bajaj Auto (high exports and two wheeler as a product has high contribution from Rural India for sales); Tata Motors (more than 2/3rd contribution from JLR); and M&M (tractor - a rural product and low competition on both tractor and UV).
Table3:Operatingindicatorsandourpick
Interestrate Saleson bank sensitive credit demand Ashok Leyland Yes High Bajaj Auto No Low Hero Honda No Low Mah. & Mah. No High Maruti Suzuki Yes High Tata Motors Yes High Contribution ofrural demand Low High High High Low Low Exports contribution Low High Low Low Low High Pricing power Weak High High High Weak Weak Replacement demand Low High High High Low Low Competitive intensity Moderate Moderate Moderate Moderate High Moderate to high Our recommen dation REDUCE BUY HOLD BUY REDUCE BUY
Valuation Low Reasonable High Reasonable Reasonable Reasonable
22
Mar-11
COMPANY UPDATE
Automobiles
ASHOKLEYLAND
Roadblocksahead
India Equity Research | Automobiles
Amidstslowdown,AshokLeyland(AL)islikelytolosemarketsharedueto highexposuretoheavycommercialvehicles.Itimplies,thecompanymay miss its sales growth guidance of 15% and it could jeopardize the productionrampupplanattaxfreePantnagarplant.Risinginterestcost is also likely to dent profitability. We are 7% below consensus on FY12EPS.MaintainREDUCEwithtargetpriceofINR44.
EDELWEISS4DRATING AbsoluteRating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to market MARKETDATA(R:ASOK.BO,B:ALIN) CMP : INR 51 Target Price : INR 44 52-week range (INR) : 81 / 45 Share in issue (mn) : 1,330.3 M cap (INR bn/USD mn) : 67 / 1,503 Avg. Daily Vol. BSE/NSE (000) : 5,336.9 REDUCE Underperformer High Equalweight
LikelytomisssalesguidanceforFY12;MayderailPantnagarplan
Amidst slow down, AL is likely to lose market share to 23.4% in FY12E from the high of 24.4% in Q4FY12 due to high exposure to heavy trucks. This puts management guidance of 15% sales volume growth in FY12 and production ramp up at tax free Pantnagar to 36,000 units at risk. We have built in 10% volume growth for FY12. Our sensitivity suggests that 26,000 units production (instead of 36,000) from the plant, could lower our FY12E EPS by 10%.
SHAREHOLDINGPATTERN(%)
Severalheadwindstomargins
AL has guided that UTruck (lower margin product) contribution to total sales is likely to increase from 1.5% to 25% in FY12E. This could be a drag on the margin alongwith rising discounts amidst slowing sales. We are 7% below consensus on FY12E EPS of INR 5.2.

Others 31.3% Promoters* 38.6% FIIs 13.2% MFs, FIs & Banks 16.9%
: 17.8
Highcapeximplieshighdebt,higherleverage
AL has earmarked INR 19.5 bn for capex and investments in FY12/FY13. This should increase total debt to INR 32.6 bn (INR 25.7 bn in FY11), leading to higher interest burden of INR 2.1 bn and thus, further dent profitability.
Outlookandvaluations:Weakoutlook;maintainREDUCE
Rising interest rate, slowing manufacturing growth and expected hike in fuel prices have made the outlook bleak for M&HCVs. Weak sales and quarterly earnings, hike in diesel prices and interest rates are likely negative catalysts. Our target price of INR 44 implies 4.5x FY13E EV/EBITDA. Currently, the stock is trading at 6.5x FY12E EV/EBITDA. We maintain our REDUCE/SectorUnderperformerrecommendation/rating.
* Promoters pledged shares (% of share in issue)
PRICEPERFORMANCE(%) Stock 1 month 5.4 3 months (4.1) 12 months (17.6) SachinGupta

+91 22 6623 3472 sachin.gupta@edelcap.com
Nifty (1.0) (0.2) 8.0
EWAuto Index (5.2) (3.1) 9.6
Financials YeartoMarch Revenues (INR mn) Rev.growth(%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) EPSgrowth(%) Diluted P/E (x) EV/EBITDA (x) ROAE (%)
FY10 72,813 20.9 8,008 4,237 1,330 3.1 193.6 16.3 10.2 11.7
FY11 111,177 52.7 12,436 6,313 1,330 4.9 58.2 10.3 6.4 17.2
FY12E 127,941 15.1 12,839 6,413 1,330 4.8 (2.4) 10.6 6.3 15.4
FY13E 148,798 16.3 15,410 8,391 1,330 6.3 30.8 8.1 5.1 18.0
ChetanVora
+91 22 6620 3101 chetan.vora@edelcap.com
June 20, 2011 Edelweiss Securities Limited Edelweiss Securities Limited
Edelweiss Research is also available on www.edelresearch.com, 23 Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Automobiles
InvestmentRationale
With the economy slowing down, near term demand outlook for medium and heavy trucks is deteriorating. Bus demand, which had been fuelled by the government-led JNNURM scheme, is also tapering off. The worsening macro outlook will hit ALL the most as it derives over 90% of revenue from M&HCVs. This slowdown further puts the companys plan of shifting incremental production to the new tax-free Pantnagar plan at risk. Rising interest rate also poses a risk to the companys profitability as interest cost is 33% of FY12E PAT.
Slowdownintruckdemandtohithard
Historically, while AL has lost market share during economic downturns, it has gained the same during upturns. This is because of its high exposure to heavy trucks, demand for which is linked to economic activity. In our view, the company is likely to be the worst affected amongst commercial vehicle makers as truck demand moderates. We have assumed growth rate of 10% and 16% for FY12E and FY13E, respectively.
Chart1:Salesdependentontrucks,whicharemorevolatile 78.0
52.0
15.0 12.0 9.0 6.0 3.0 0.0
(Y-o-Y %)
26.0 0.0
(26.0) (52.0)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
AL's trucks
Ind's trucks Y-o-Y (RHS)
IIP growth rate (RHS)

Nobustorescue
ALL derives 20% of its volume from buses. Bus demand for the past three years has been driven by the government-led JNNURM scheme, and has started to taper off since on lower orders from JNNURM and the private sector. Moreover, since bus is a low-margin business, it cannot compensate for a down cycle in trucks.
M&HCVslowdowncouldderailprofitmaximisationplaninFY12
Slow down could derail its profit maximization plan, which AL was contemplating by increasing production at the tax-free Pantnagar plant. This could further enhance margin compression in FY12 and lead to EPS downgrades. We have built in production of 36,000 units from Pantnagar plant (as guided by the management). Our sensitivity suggests that 10,000 lower production from Pantnagar, while keeping overall volume sales, could lower EBITDA margin by 30bps and increase effective tax rate by 320bps. Thus, it is a downside risk to our numbers.
24 Edelweiss Securities Limited
FY11
(%)
Automobiles
Table1:SensitivityofproductionfromPantnagaronFY12EEPS Worstcase Production at tax free Pantnagar plant (nos) 26,000 EPS (INR) 4.3
Basecase 36,000 4.8
Bestcase 46,000 5.4
Source:Company,Edelweissresearch
Interestcosttoeatintocash
As of FY11, the company has INR 25.7 bn debt, which is likely to surge to INR 32.6 bn (up INR 7.2 bn) in FY12E on sales slowing down, stretching working capital needs and also, the company would be spending INR 11 bn on product development and JVs. With high gearing, interest cost (as a percentage to PAT) will soar from 27% in FY10 to 33% in FY12E, which will dent PAT, a risk not built in Street estimates.
Chart2:Interestcoverageratiotostayunderpressureinnearterm 9.0
7.2 5.4
(x)
3.6 1.8 0.0 FY08 FY09 FY10 FY11 Interest coverage ratio (x) FY12E FY13E
FY12Eearnings7%lowerthanconsensusestimates
Currently, our EPS of INR 4.8 for FY12 is 7% below consensus EPS of INR 5.2. We are more bearish than street in margins due to a) high incentive levels and b) rising interest costs. In the context of last few months weak sales performance and high inventory risk is skewed more to downside to our FY12E sales assumption. Table2:Earnings7%lowerthanconsensusestimatesinFY12 FY12E FY13E Edel Consensus (%) Edel Consensus (%) Sales (INR mn) 127,941 125,585 1.9 148,798 140,950 5.6 EBITDA (INR mn) 12,839 13,174 (2.5) 15,410 14,884 3.5 EBITDA (%) 10.0 10.5 (4.3) 10.4 10.6 (1.9) EPS (INR) 4.8 5.2 (6.5) 6.3 6.0 4.6
25
Automobiles
Outlook&valuations:Multiplenegativetriggers;maintainREDUCE
Weak sales and announcement related to rise in interest rates and fuel prices should be key negative triggers. We maintain our recommendation/rating on the stock at REDUCE/SectorUnderperformer, with a target price of INR 44. ALL is currently trading at 6.3x FY12E EV/EBITDA. In our view, as the consensus downgrades earnings, the multiple should come under pressure. Our target price implies 4.5x FY13E EV/EBITDA. Historically, ALL has traded in the 4-6x one-year forward EV/EBITDA band during down cycles. However, current RoE, at 17%, is much lower than 22% observed historically. Hence, in our view, it should trade at the lower band of 4-5x. Our target price implies mid-point of 4.5x FY13E EV/EBITDA.
Chart3:RoAElowercomparedtohighhistorical 30.0
24.0 18.0 12.0 6.0 0.0
(%)
FY12E Nov-09 May-10
ROAE (%)
Chart4:Tradingat10xoneyearforwardearnings 19.0
16.0 13.0
Chart5:Tradingat2.7xoneyearforwardadjusted*P/BV 4.0
3.2 2.4
(x)
10.0 7.0 4.0
May-02 Nov-02 May-03 Nov-03 May-04 Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11
(x)
1.6 0.8 0.0
May-04 Nov-04 May-05
Nov-05 May-06
Nov-06 May-07
Nov-07 May-08
Nov-08 May-09
Source:Bloomberg,Edelweissresearch Note:Adjusted*Revaluationreserveexcludedfrombookvalue

Nov-10 May-11
FY13E
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Automobiles
Chart6:Tradedat46xoneyearforwardEV/EBITDAduringdowncycles 10.0
8.6 7.2
(x)
5.8 4.4 3.0
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
May-02
May-03
May-04
May-05
May-06
May-07
May-08
May-09
May-10
Nov-10
May-11
27
Automobiles
KeyRisks
Govtthrusttoconstructionactivity
In the wake slowdown in industrial activity, the government may choose to push construction and mining activity. This may lead to demand surge for commercial vehicles, posing risks to our volume estimates. Table3:SensitivityofvolumegrowthtoFY12EEPS Worstcase Basecase Bestcase Volume growth (%) 10.0 20.6 EPS (INR) 4.0 4.8 5.7
InvestmentsinJVsfructifyingearlierthanexpected
If ALs ventures into LCV and construction segments via JVs with Nissan and John Deere, respectively, start to meaningfully contribute to profitability, it could be a risk to our earnings estimate.
28
Automobiles
AnnualTrends
Chart7:FY12EtruckmktsharetobelowerthanQ4FY11 60.0 100,000

80,000 48.0 36.0
Chart8:AL'svolumetobeinlinewithindustry 81.0
54.0 27.0
64.0 48.0 32.0 16.0 0.0 (16.0)
(Nos.)
60,000 40,000 20,000 0
(%)
24.0 12.0 0.0
(%)
0.0 (27.0) (54.0)
Trucks Trucks mkt share (RHS)
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Buses Buses mkt share (RHS)
AL's trucks Y-o-Y AL's buses (RHS)
Chart9:Revenuemixtoremaintiltedtowardsvehiclesales 100.0 25.0

80.0 20.0 15.0
Chart10:PantnagarcapacityrampupinFY12,FY13 175,000 100.0

140,000 105,000 70,000 35,000 0 80.0 60.0 40.0 20.0 0.0
(% to sales)
60.0 40.0 20.0 0.0
(nos)
(%)
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Ind's trucks Y-o-Y Ind's buses (RHS)

10.0 5.0 0.0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Vehicle sales Spare parts (RHS)

Engines (RHS)
Installed capacity (nos)
Capacity utilised (RHS)
29
FY13E
FY01
FY03
FY05
FY07
FY09
FY11
(%)
(%)
Automobiles
Chart11:GrossprofittodeclineinFY12 1,500,000
1,200,000 140,000 124,000
Chart12:EBITDAmargintodipinFY12onlowervolume 80.0 15.0

12.0 76.0 72.0 68.0 64.0 60.0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E (% to sales)
(INR/vehicle)
(INR/vehicle)
900,000 600,000 300,000 0
108,000 92,000 76,000 60,000
(% to sales)
9.0 6.0 3.0 0.0
Average realisation Operating profit (RHS)
Gross profit*
FY13E
FY01
FY03
FY05
FY07
FY09
FY11
Employee costs EBITDA margin
Other operating costs Raw material (RHS)
Source:Company,Edelweissresearch Note:*Grossprofit=netsalescostofrawmaterials
Chart13:Growthinoperatingprofittobebackended(FY13) 60.0
40.0 20.0
96.0 64.0 32.0 0.0 (32.0) (64.0)
(%)
0.0 (20.0) (40.0)
FY12E
Net revenue

RM costs
Operating profit (RHS)

FY13E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
(%)

30
Automobiles
Chart14:EPStoremainflatinFY12 7.0
5.6
(INR/share)
40.0 32.0 24.0 16.0 8.0 0.0

(INR/share)
Chart15:Returnstoremainsubdued 15.0
12.0 9.0
30.0 24.0 18.0 12.0 6.0 0.0
4.2 2.8 1.4 0.0

(%)
6.0 3.0 0.0
EPS
Book value (RHS)
EBITDA margin
Chart16:R&Dexpensescontinuouslyrising 8,000
6,400
RoACE (RHS)
RoAE (RHS)
5.0 4.0 3.0 2.0 1.0 0.0
(INR mn)
3,200 1,600 0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
R&D
As % of net sales (RHS)

FY10
(%)
4,800
31
(%)
Automobiles
QuarterlyTrends
Chart17:Pervehiclematrix 1,500,000
(INR/vehicle)
1,200,000 900,000 600,000 300,000 0
200,000 160,000
Chart18:Costsasa%tonetsales 77.5
75.0
20.0 16.0
(INR/vehicle)
(%)
70.0 67.5 65.0
8.0 4.0 0.0
80,000 40,000 0
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q3FY11
Realisation Gross profit*
RM costs Operating profit (RHS)
Raw material Employee costs (RHS) Other operating costs (RHS) EBITDA margin (RHS)
Source:Company,Edelweissresearch *Grossprofit=RealisationCostofRawmaterials
Chart19:MktshareinQ4FY11surgedto27.1% 30,000
25,000
32.5 29.0
Chart20:OutperformedindustrygrowthrateinFY11 150.0 200.0

140.0 100.0
Q3FY11
(Nos)
(%)
(%)
15,000 10,000 5,000
22.0 18.5 15.0
20.0 (40.0) (100.0)
0.0 (50.0) (100.0)
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q3FY11
AL's MHCV sales
Market share (RHS)

AL's Y-o-Y growth
32
Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11
Industry Y-o-Y growth (RHS)

(%)
20,000
25.5
80.0
50.0
(%)
120,000
72.5
12.0
Automobiles
CompanyDescription
AL is the second-largest commercial vehicle manufacturer in India. The Hinduja Group holds 51% stake in the company through holding company Hinduja Automotive (UK). The company has six manufacturing plants at four locations in IndiaEnnore (Tamil Nadu), Hosur (Tamil Nadu), Alwar (Rajasthan), Bhandara (Maharashtra) and Pantnagar (Uttaranchal). It focuses on the M&HCV segment and has a significant presence in the bus segment.
33
Automobiles
FinancialStatements
Incomestatement YeartoMarch Total volume (nos) %Growth Income from operations Materials costs Manufacturing expenses Staff costs S G & A expenses Less: Expenses capitalised Total operating expenses EBITDA Depreciation and amortisation EBIT Interest Non-Operational income Profit before tax Provision for tax Core profit Extraordinary income/ (loss) Profit after tax Shares outstanding Earnings per share (EPS) Diluted shares outstanding Diluted EPS Cash EPS Dividend per share Dividend payout (%) Commonsizemetricsas%ofnetrevenues YeartoMarch Operating expenses Materials costs Staff costs S G & A expenses Depreciation Interest expenditure EBITDA margins Net profit margins Growthmetrics(%) YeartoMarch Revenues EBITDA PBT Net profit EPS FY09 FY10 54,431 64,045 (34.7) 17.7 60,240 72,813 44,954 52,559 1,553 1,745 5,663 6,716 3,862 3,937 82 153 55,949 64,805 4,291 8,008 1,784 2,041 2,507 5,967 1,603 1,019 696 417 1,600 5,365 185 1,211 1,415 4,154 485 82 1,900 4,237 1,330 1,330 1.1 3.1 1,330 1,330 1.1 3.1 2.5 5.6 1.0 1.5 70.0 47.1 FY11 FY12E 93,720 103,019 46.3 9.9 111,177 127,941 81,212 94,626 2,668 3,199 9,337 10,619 5,775 6,909 250 250 98,741 115,102 12,436 12,839 2,674 3,070 9,762 9,769 1,989 2,085 505 343 8,278 8,027 1,705 1,614 6,573 6,413 (260) 6,313 6,413 1,330 1,330 4.9 4.8 1,330 1,330 4.9 4.8 7.4 7.1 2.0 1.5 42.1 31.1 (INRmn) FY13E 119,410 15.9 148,798 109,681 3,571 12,201 8,184 250 133,388 15,410 3,226 12,184 2,369 398 10,213 1,822 8,391 8,391 1,330 6.3 1,330 6.3 8.7 1.5 23.8
FY09 92.9 74.6 9.4 6.4 3.0 2.7 7.1 2.3
FY10 89.0 72.2 9.2 5.4 2.8 1.4 11.0 5.7
FY11 88.8 73.0 8.4 5.2 2.4 1.8 11.2 5.9
FY12E 90.0 74.0 8.3 5.4 2.4 1.6 10.0 5.0
FY13E 89.6 73.7 8.2 5.5 2.2 1.6 10.4 5.6
FY09 (22.7) (22.7) (18.9) (67.9) (67.9)
FY10 20.9 16.9 12.4 193.6 193.6
FY11 52.7 54.5 52.9 58.2 58.2
FY12E 15.1 16.5 19.9 (2.4) (2.4)
FY13E 16.3 15.9 11.6 30.8 30.8
34
Automobiles
Balancesheet Ason31stMarch Equity capital Reserves & surplus Shareholders funds Secured loans Unsecured loans Borrowings Deferred tax (Net) Sourcesoffunds Gross block Depreciation Net block Capital work in progress Intangibles /Technical know-how Investments Inventories Sundry debtors Cash and bank balance Loans and advances Total current assets Sundry creditors Others current liabilities Provisions Total current liab. & provisions Net current assets Misc expenditure Usesoffunds Book value per share (BV) (INR) Freecashflow YeartoMarch Net profit Depreciation Deferred tax Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Freecashflow Cashflowmetrics YeartoMarch Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividend paid FY09 1,330 33,409 34,739 3,044 16,576 19,620 2,634 56,993 48,971 15,542 33,430 9,983 562 2,636 13,300 9,580 881 7,895 31,656 17,713 976 2,681 21,369 10,287 97 56,993 26 FY10 1,330 35,357 36,688 7,116 14,799 21,914 3,845 63,213 59,377 17,691 41,686 5,615 809 3,262 16,382 10,221 5,189 9,605 41,397 23,317 2,604 3,687 29,608 11,789 52 63,213 28 FY11 1,330 38,299 39,630 7,116 18,567 25,683 4,439 70,651 63,858 20,365 43,493 5,615 809 12,300 22,089 11,852 1,795 7,936 43,672 27,776 2,604 4,902 35,282 8,390 43 70,651 30 FY12E 1,330 42,386 43,716 7,116 25,457 32,573 4,439 81,627 69,858 23,435 46,424 5,615 809 17,300 24,299 13,885 2,559 8,226 48,968 31,241 2,604 3,687 37,532 11,436 43 81,627 33 (INRmn) FY13E 1,330 48,450 49,780 7,116 26,539 33,655 4,439 88,774 75,858 26,661 49,198 5,615 809 19,800 28,275 16,157 2,976 8,544 55,952 36,353 2,604 3,687 42,644 13,308 43 88,774 37 (INRmn) FY13E 8,391 3,226 0 11,617 1,456 10,162 6,000 4,162
FY09 1,900 1,784 125 3,809 6,980 (3,171) 25,210 (28,381)
FY10 4,237 2,041 1,211 7,489 (2,080) 9,569 6,177 3,392
FY11 6,313 2,674 594 9,580 762 8,818 4,481 4,337
FY12E 6,413 3,070 0 9,483 1,507 7,976 6,000 1,976
FY09 (3,171) 21,285 (21,747) (3,633) (25,210) (2,337)
FY10 9,569 1,542 (6,803) 4,308 (6,177) (1,556)
FY11 8,818 1,307 (13,520) (3,394) (4,481) (2,327)
FY12E 7,976 3,787 (11,000) 764 (6,000) (3,102)
FY12E 10,162 (1,244) (8,500) 417 (6,000) (2,327)
35
Automobiles
Profitability&liquidityratios YeartoMarch ROAE (%) ROACE (%) Inventory days Debtors days Payble days Cash conversion cycle (days) Current ratio Debt/EBITDA Fixed asset turnover (x) Debt/Equity Adjusted debt/equity Net debt/Equity Operatingratios YeartoMarch Total asset turnover Fixed asset turnover Equity turnover Dupontanalysis YeartoMarch NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuationparameters YeartoMarch EPS (INR) YoYgrowth(%) CEPS (INR) P/E (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) FY09 5.1 6.2 104 40 142 2 1.5 4.6 1.5 0.6 0.6 0.5 FY10 11.7 10.4 103 50 142 10 1.4 2.7 1.3 0.6 0.6 0.4 FY11 17.2 16.5 86 36 115 8 1.2 2.1 1.8 0.6 0.6 0.3 FY12E 15.4 15.9 89 37 114 12 1.3 2.5 1.9 0.7 0.7 0.3 FY13E 18.0 18.3 87 37 112 12 1.3 2.2 2.0 0.7 0.7 0.2
FY09 1.3 1.5 2.1
FY10 1.2 1.3 2.0
FY11 1.7 1.8 2.9
FY12E 1.7 1.9 3.1
FY13E 1.7 2.0 3.2
FY09 2.3 1.3 1.6 5.1
FY10 5.7 1.2 1.7 11.7
FY11 5.9 1.7 1.8 17.2
FY12E 5.0 1.7 1.8 15.4
FY13E 5.6 1.7 1.8 18.0
FY09 1.1 (67.9) 2.5 47.9 2.0 1.4 19.6 2.0
FY10 3.1 193.6 5.6 16.3 1.8 1.1 10.2 2.9
FY11 4.9 58.2 7.4 10.3 1.7 0.7 6.4 3.9
FY12E 4.8 (2.4) 7.1 10.6 1.6 0.6 6.3 2.9
FY13E 6.3 30.8 8.7 8.1 1.4 0.5 5.1 2.9
36
COMPANY UPDATE
Automobiles
BAJAJAUTO
AlleyesonBoxer
Bajaj Autos (BAL) strategy of building brand and focusing on differentiatingproductispayingoff.Inourview,Boxer150ccislikelyto be step in this direction. The company is firmly on track to meet its guidance of 20% volume growth and 20+% EBITDA margin in FY12. We raise our FY12/13 EPS estimates by 6/11% as clarity emerges on export incentives. We are 7/13% above consensus on FY12/FY13 earnings. We maintainBUYandraiseTPtoINR1,730.
EDELWEISS4DRATING AbsoluteRating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to market MARKETDATA(R:BAJA.BO,B:BJAUTIN) CMP : INR 1,370 Target Price : INR 1,730 52-week range (INR) : 1,664 / 1,127 Share in issue (mn) : 289.4 M cap (INR bn/USD mn) : 396 / 8,865 Avg. Daily Vol. BSE/NSE (000) : 604.5 BUY Outperformer Medium Equalweight
Brandbuilding&productdiversificationstrategytofuelsalesspurt
BAL is focusing on building brand and offering products with different feature at unique price points. Company wants to tap rural sales through Boxer 150cc to be launched inQ2FY12. We believe this strategy should help BAL gain market share (28.3% in FY12E versus 26.8% in FY11) and achieve its sales guidance of 20% growth in FY12E.
CapacityrampupattaxfreePantnagarkeymarginlever
Margin levers include (1) ramp up at tax free Pantnagar plant, (2) improvement in product mix with less of Platina and (3)softening of input cost in H2FY12. We have built in 19.4% E BITDA margin for FY12 vs company guidance of 20+%.
Others 26.1%

RaiseFY12/13EPSby6/11%onclarityonexportsincentives
DEPB scheme has been extended by one quarter and is likely to be replaced with other schemes. We have assumed the new scheme to retain half the benefit of existing scheme. As a result, our FY12/13 EPS has increased by 6/11% to INR108/130. We are 7% and 13%, respectively, above consensus.
FIIs 16.0%
Promoters* 50.0%
MFs, FIs & Banks 7.9%

: 0.2
Outlookandvaluations:Reasonablevaluation;maintainBUY
Positive industry growth outlook, driven by rising rural incomes and slew of new launches by BAL, has improved the companys sales outlook. We maintain our recommendation on the stock at BUY/SectorOutperformer and raise target price to INR 1,730 (based on 13x FY13E core EPS of INR 118 + 0.8x PV of FY13E cash/share of INR 195). Currently, the stock at 11x FY13E is trading at 20% discount to peers.
PRICEPERFORMANCE(%) Stock 1 month 1.1 3 months (5.4) 12 months 20.2 SachinGupta

Nifty (1.0) (0.2) 8.0
EWAuto Index (5.2) (3.1) 9.6
Financials YeartoMarch Revenues (INR mn) Rev.growth(%) EBITDA (INR mn) Adjusted net profit (INR mn) Shares outstanding (mn) Adjusted diluted EPS (INR) EPSgrowth(%) Adjusted diluted P/E (x) EV/EBITDA (x) ROAE (%)
FY10 FY11 FY12E 118,098 164,078 200,923 35.8 38.9 22.5 24,814 31,838 38,978 18,643 26,152 31,356 289 289 289 64.4 90.4 108.4 116.5 40.3 19.9 21.3 15.2 12.6 14.9 10.9 8.6 80.8 66.7 54.1
FY13E 234,967 16.9 47,232 37,531 289 129.7 19.7 10.6 6.5 48.6
ChetanVora
Automobiles
InvestmentRationale
On the back of strong rural outlook, buoyant exports and new launches (Boxerand ramp up of Discover125cc),we expect BAL to register volume growth of 20% Y-o-Y to 4.6 mn units, aided further by increasing dealers network by over 130 in rural and semi urban India to tap rural demand. We believe the two-wheeler industry to be the least affected by the current macro headwinds. In addition, ramp at tax-free Pantnagar plant should help the company sustain margin against rising commodity costs.
Focusonbuildingbrandanddifferentiatedproducts
Bajaj Auto (BAL), despite similar reach, had lost out to Hero Honda in rural sales due to lack of differentiated products. With Discover, the company has got its strategy right where now the focus is on building brand and offering products with different features at various price points through Discover and Pulsar brands. Going ahead, it plans to establish the new Boxer brand for rural customers who prefer motorcycles for personal as well as commercial use.
Chart1:Productdifferentiationthroughpriceandfeatures 80,000
70,000
Chart2:Distributionreachiscomparablewithleader** 700
580 460 340 220 100 Bajaj Auto Hero Honda TVS M&M HMSI Suzuki
(INR)
60,000
40,000 30,000
Discover 150
Avenger 220DTSi
Boxer*
Pulsar 150 DTSi
Pulsar 180 DTSi
Discover 100 DTSi
Discover 125 DTSi
Platina 125DTSi
Pulsar 220 DTSi
Pulsar 135 LS
Pulsar 220S
Platina 100
(Nos.)
50,000
Source:Overdrivemagazine,Crisil,Edelweissresearch Note:Boxer*tobelaunchedinQ2FY12 **DistributionnetworkisasofAugust2010
Boxertoboostvolume
To target cost-sensitive rural India, BAL intends to launch Boxer 150cc in Q2FY12, priced at INR 40,000. The company has added 135 new dealers (28% addition to total dealership) in the past one year in rural and semi urban areas. Thus, the company now has two-wheeler products across various price pointsBoxer targeted at the lowest end, Discover for the middle class, and Pulsar for both middle and upper middle classes. We have built in 20,000 units monthly run rate for Boxer.
38
Automobiles
Chart3:Boxertocontribute6%inFY12Eand9%inFY13E 350,000
280,000 210,000 140,000 70,000 0 FY12 Boxer sales (nos) 10.0 8.0 6.0 4.0 2.0 0.0 FY13 % contributed to domestic sales (RHS)
(% to domestic sales)
Discover125ccsalesvolumelikelytozoom
Discover 125cc is expected to do sales of nearly 25,000 units per month, as per the management. We expect sales to ramp up in Q1FY12 during the wedding season and have, accordingly, built in monthly sales of 15,000 units.
MarginrespitefromrampupofproductionatPantnagarplant
Currently, the tax-free Pantnagar plant is operating at half its capacity. Largely, Platina (low value product) is rolled out from here. With overall ramp up in sales, we expect more Discover production to be shifted to this plant, which should be beneficial from overall profitability. Accordingly, ramp up at Pantnagar plant will enhance capacity utilisation from the existing ~50% to 100%.
RaiseFY12/13EPSby6/11%onclarityonexportsincentives
DEPB scheme has been extended by one quarter and is likely to be replaced with other schemes. We have assumed the new scheme to retain half the benefit of existing scheme. As a result, our FY12/13 EPS has increased by 6/11% to INR108/130. We are 7% and 13%, respectively, above consensus.
Table1:EPSestimatesrevisedup6/11%forFY12/13E
Earlier 4,603,306 197,088 36,613 29,579 102.2 FY12E Revised 4,603,306 200,923 38,978 31,356 108.4 %change 1.9 6.5 6.0 6.0 Earlier 5,194,596 228,616 41,264 33,733 116.6 FY13E Revised %change 5,194,596 234,967 2.8 47,232 14.5 37,531 11.3 129.7 11.3 Source:Edelweissresearch
Total volumes (nos) Net sales (INR mn) EBITDA (INR mn) Net profit (INR mn) EPS (INR)
(nos)
39
Automobiles
Table2:OurEPSestimatesare7/13%aboveconsensusestimates
Edel 200,923 38,978 19.4 108.4 FY12E Consensus 194,835 37,495 19.2 101.7 (%) 3.1 4.0 0.8 6.6 Edel 234,967 47,232 20.1 129.7 FY13E Consensus 223,117 42,056 18.8 115.2 (%) 5.3 12.3 6.6 12.6
Sales (INR mn) EBITDA (INR mn) EBITDA (%) EPS (INR)
Outlookandvaluations:Tradingatdiscount;maintainBUY
Positive industry growth outlook, driven by rising rural incomes and slew of new launches by BAL, have improved the companys sales outlook, while likely softening in commodity costs will improve its margins. We expect the companys earnings to post 20% CAGR over FY1113E. At INR 1,370, the stock is currently trading at 12x core auto FY12E EPS of INR 100 (excluding 0.8x cash/share). We also expect consensus to upgrade earnings; we foresee BALs current discount of 20% to peers narrowing. We have raised our target price from INR 1,560 to INR 1,730 on account of increase in earnings estimates. We have valued it on 13x FY13E core EPS of INR 118 + 0.8x PV of FY13E cash/share of INR 195. Our target price implies return of 26%. We maintain BUY/SectorOutperformerrecommendation/rating on the stock.
Chart4:OneyearforwardconsensusP/E 21.0
18.0 15.0
(x)
12.0 9.0 6.0

Dec-08 Dec-09 Aug-08 Aug-09 Aug-10 Dec-10 Oct-08 Oct-09 Apr-09 Apr-10 Oct-10 Feb-09 Feb-10 Feb-11 Apr-11 Jun-08 Jun-09 Jun-10
BJAUT one year forward

Source:Bloomberg
40
Automobiles
KeyRisks
Increasingcompetition
Intense competition could hit profitability; though such a scenario is unlikely, given the current tight demand and supply scenario.
Weakmonsoon
So far, the forecast for monsoon is normal, which augurs well for rural demand. However, any shortfall in monsoon could adversely affect rural demand and, hence, our earnings estimates.
Table3:SensitivityofvolumegrowthtoFY12EEPS Worstcase Volume growth (%) 12.2 EPS (INR) 100.4
Basecase Bestcase 20.4 27.6 108.4 115.9 Source:Edelweissresearch
Adversecurrencymovement
The company has hedged ~95% of its exports exposure at USD INR 46.7. Hence, FY12 earnings are safe. However, one sided appreciation of INR vis--vis USD could affect profitability in FY13.
Table4:SensitivityofUSD/INRmovementtoFY13EEPS Worstcase USD/INR 40.5 EPS (INR) 112.6
Lowerthanexpectedexportincentive
Export incentive withdrawal could take off FY13 earnings by 10%, if the burden is not passed on. However, in our view, BAL has established its brand in the African exports market, where it enjoys a premium over Chinese products, and thus has considerable pricing power. Also, even if DEBP is withdrawn, we expect it to be replaced by some other exports incentive given the governments increased thrust on exports.
41
Automobiles
AnnualTrends
Chart5:Regaininglostgroundinmotorcycles 3,500,000
2,800,000
(Nos.)
70.0 56.0 42.0

(%)
Chart6:2Wexportscontributingover35% 1,500,000
1,200,000
70.0 56.0 42.0 28.0 14.0 0.0
(Nos.)
2,100,000 1,400,000 700,000 0

FY13E FY01 FY03 FY05 FY07 FY09 FY11
900,000 600,000 300,000
28.0 14.0 0.0
Mcycle Mcycle mkt shr (RHS)
Scooters Scooters mkt shr (RHS)
Two wheeler exports
Y-o-Y (RHS)
Source:SIAM,Company,Edelweissresearch
Chart7:3Wexportsoutweighingdomesticsales 350,000
280,000
(Nos.)
Chart8:3Wsharedeclinesoncompetition 73.0
66.0 59.0 52.0 45.0
FY13E
FY01
FY03
FY05
FY07
FY09
FY11
100.0 96.0 92.0 88.0 84.0 80.0
210,000
(%)
140,000 70,000 0
38.0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Domestic
Exports
Domestic mkt share (%)
Exports mkt share (RHS)
Source:SIAM,Company,Edelweissresearch
42
FY11
(%)
(%)
Automobiles
Chart9:ExportsAfricaandSouthEastAsia,keygeographies 100.0
80.0 60.0
(%)
40.0 20.0 0.0 FY07 South Asia
FY08 South East Asia
FY09 Africa and M.E.
FY10 South America
Chart10:Twowheelercapacityutilisationatoptimumlevel 5,500,000
4,600,000 3,700,000 2,800,000 1,900,000 1,000,000
120.0 106.0 92.0 78.0 64.0 50.0
(%)
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Installed capacity (nos)


Source:CrisInfac,Company,Edelweissresearch
FY13
(%)

43
Automobiles
Chart11:Motorcyclesdominatingproductmix 100.0
80.0
Chart12:3W&otherscontribute25%torevenue 100.0
80.0
(% to sales)
(% to sales)
60.0 40.0 20.0 0.0
60.0 40.0 20.0 0.0
FY12E
FY12E
FY13E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Motorcycle
Scooter
Three wheelers
Motorcycle Three wheelers
Scooter Other operating income

Chart13:Avgrealisationhigheronbetterproductmix 45,000 100,000

80,000 41,000
Chart14:Commodityinflationcoulddentmargin 25.0 80.0

20.0 75.0 70.0 65.0 60.0 55.0
(INR/vehicle)
(INR/vehicle)
(% to sales)
60,000 40,000 20,000 0
37,000 33,000 29,000 25,000
15.0 10.0 5.0 0.0
Motorcycle Three wheelers
Scooter Avg realisation (RHS)
FY13E
44
FY01
FY03
FY05
FY07
FY09
FY11

(% to sales)
FY13E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Automobiles
Chart15:Operatingprofitswingsinlinewithgrowthingrossprofit 80.0
60.0 40.0 160.0 120.0 80.0 40.0 0.0 (40.0)
(%)
20.0 0.0 (20.0)
FY12E
Net revenue
Gross profit*
FY13E
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
(%)
Source:Company,Edelweissresearch Note:*Grossprofit=netrevenuerawmaterialcosts
Chart16:R&Das%tosales 1,500
1,200
1.4 1.3 1.2 1.2 1.1 1.0
(INR mn)
600 300 0
FY04
FY05
FY06
FY07
FY08
FY09
R&D

45
FY10
(%)
900
Automobiles
Chart17:EarningsCAGRof20%overFY11FY13E 150.0 300.0
120.0 240.0 180.0 120.0 60.0 0.0
Chart18:Returnratiostodiponloweryieldsonhighercash 80.0 22.5

71.0 20.0 17.5 15.0 12.5 10.0
(INR/share)
90.0 60.0 30.0 0.0
(INR/share)
62.0
(%)
53.0 44.0 35.0
FY12E
FY13E
FY08
FY09
FY10
FY11
FY12E
EPS
Free cash flow
Book value (RHS)
RoACE
RoAE
EBITDA (RHS)
QuarterlyTrends
Chart19:Grossprofitincrementallylowervisavisrealisation 17,500 45,000
14,000 43,000
Chart20:Marginmaintainedoncostreductioninitiatives 80.0 25.0

76.0 20.0
(INR/vehicle)
(INR/vehicle)
(%)
68.0 64.0 60.0
10.0 5.0 0.0
7,000 3,500 0
39,000 37,000 35,000
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q3FY11
Gross profit* Realisation (RHS)
Operating profit
Raw material Employee costs (RHS) Other operating costs (RHS) EBITDA (RHS)
Source:Company,Edelweissresearch Note:*Grossprofit=netrevenuerawmaterialcosts
46
Q3FY11
(%)
10,500
41,000
72.0
FY13E
FY09
FY10
FY11
15.0
(%)
Automobiles
CompanyDescription
BAL is the second largest two-wheeler manufacturer in India with a domestic market share of 28%. It offers products in all motorcycle segmentsPlatina (entry), Discover (executive) and Pulsar (premium). It is also the largest three-wheeler manufacturer in India. Post the demerger in May 2008, the company has been solely focused on the automobile business. In the past few years, it has posted strong growth in exports which now contribute nearly 35% to total volume.
47
Automobiles
FinancialStatements
Incomestatement YeartoMarch Total volume (nos) %Growth Income from operations Materials costs Manufacturing expenses Staff costs S G & A expenses Less: Expenses capitalised Total operating expenses EBITDA Depreciation and amortisation EBIT Interest Non-operational income Profit before tax Provision for tax Adjusted profit Prior period adjustments (net) Extraordinary income/ (loss) Reported Profit after tax Shares outstanding Adjusted earnings per share (EPS) Diluted shares outstanding Adjusted diluted EPS Cash EPS Dividend per share Dividend payout (%) Commonsizemetricsas%ofnetrevenues YeartoMarch Operating expenses Materials costs Staff costs S G & A expenses Depreciation Interest expenditure EBITDA margins Net profit margins Growthmetrics(%) YeartoMarch Revenues EBITDA PBT Adjusted Net profit Adjusted EPS FY09 2,194,108 (10.5) 86,959 64,635 1,922 3,544 6,226 144 76,183 10,776 1,298 9,478 210 2,360 11,628 3,016 8,612 (20) (2,051) 6,542 289 29.8 289 29.8 34.0 11.0 48.7 FY10 2,852,610 30.0 118,098 80,704 2,137 3,995 6,605 157 93,284 24,814 1,365 23,449 60 2,329 25,718 7,075 18,643 (9) (1,641) 16,993 289 64.4 289 64.4 69.0 20.0 34.1 FY11 3,823,924 34.1 164,078 117,988 2,852 4,768 6,799 167 132,240 31,838 1,228 30,610 17 5,670 36,263 10,110 26,152 0 7,246 33,398 289 90.4 289 90.4 94.6 40.0 34.7 FY12E 4,603,306 20.4 200,923 144,876 3,547 5,222 8,474 175 161,945 38,978 1,580 37,398 13 5,864 43,249 11,894 31,356 0 0 31,356 289 108.4 289 108.4 113.8 40.0 36.9 (INRmn) FY13E 5,194,596 12.8 234,967 169,698 4,100 5,694 8,427 184 187,735 47,232 1,677 45,555 13 7,320 52,861 15,330 37,531 0 0 37,531 289 129.7 289 129.7 135.5 50.0 38.6
FY09 87.6 74.3 4.1 7.2 1.5 0.2 12.4 9.9
FY10 79.0 68.3 3.4 5.6 1.2 0.1 21.0 15.8
FY11 80.6 71.9 2.9 4.1 0.7 0.0 19.4 15.9
FY12E 80.6 72.1 2.6 4.2 0.8 0.0 19.4 15.6
FY13E 79.9 72.2 2.4 3.6 0.7 0.0 20.1 16.0
FY09 (1.5) 0.3 (5.9) 0.6 0.6
FY10 35.8 130.3 121.2 116.5 116.5
FY11 38.9 28.3 41.0 40.3 40.3
FY12E 22.5 22.4 19.3 19.9 19.9
FY13E 16.9 21.2 22.2 19.7 19.7
48
Automobiles
Balancesheet Ason31stMarch Equity capital Reserves & surplus Shareholders funds Secured loans Unsecured loans Borrowings Deferred tax (Net) Sourcesoffunds Gross block Depreciation Net block Capital work in progress Investments Inventories Sundry debtors Cash and bank balance Loans and advances Total current assets Sundry creditors Others current liabilities Provisions Total current liab. & provisions Net current assets Misc expenditure Usesoffunds Book value per share (BV) (INR) Freecashflow YeartoMarch Net profit Depreciation Deferred tax Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Freecashflow Cashflowmetrics YeartoMarch Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividend paid FY09 1,447 17,250 18,697 0 15,700 15,700 42 34,439 33,502 18,079 15,423 221 18,085 3,388 3,587 1,369 14,909 23,253 8,000 4,134 12,242 24,376 (1,123) 1,833 34,439 58 FY10 1,447 27,837 29,283 130 13,256 13,386 17 42,686 33,793 18,997 14,796 415 40,215 4,462 2,728 1,014 21,805 30,009 15,712 4,551 22,487 42,750 (12,740) 0 42,686 101 FY11 2,894 46,209 49,102 130 3,122 3,252 297 52,651 35,751 20,225 15,526 0 47,952 5,473 3,628 5,565 24,171 38,836 19,716 4,551 25,397 49,663 (10,827) 0 52,651 170 FY12E 2,894 64,022 66,915 130 3,122 3,252 297 70,464 37,751 21,805 15,945 0 58,506 7,559 7,019 6,684 25,379 46,642 18,897 4,551 27,180 50,628 (3,986) 0 70,464 231 (INRmn) FY13E 2,894 84,625 87,519 130 3,122 3,252 297 91,067 40,251 23,482 16,768 0 83,418 9,532 9,532 7,867 26,648 53,579 24,147 4,551 34,002 62,699 (9,120) 0 91,067 302
FY09 6,542 1,298 (68) 68 7,839 684 7,155 3,908 3,247
FY10 16,993 1,365 (51) 51 18,357 (8,238) 26,595 933 25,663
FY11 33,398 1,228 0 0 34,626 4,157 30,470 1,543 28,927
FY12E 31,356 1,580 0 0 32,936 5,720 27,216 2,000 25,216
FY13E 37,531 1,677 0 0 39,208 (2,929) 42,138 2,500 39,638
FY09 7,155 (1,028) (3,422) 2,705 (3,908) (3,386)
FY10 26,595 (6,038) (23,063) (2,505) (933) (3,724)
FY11 30,470 (16,883) (9,279) 4,308 (1,543) (6,749)
FY12E 27,216 (13,543) (12,554) 1,119 (2,000) (13,543)
FY13E 42,138 (13,543) (27,413) 1,183 (2,500) (13,543)
49
Automobiles
Profitability&liquidityratios YeartoMarch ROAE (%) ROACE (%) Inventory days Debtors days Payble days Cash conversion cycle (days) Current ratio Debt/EBITDA Fixed asset turnover (x) Debt/Equity Operatingratios YeartoMarch Total asset turnover Fixed asset turnover Equity turnover Dupontanalysis YeartoMarch NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuationparameters YeartoMarch Adjusted EPS (INR) YoYgrowth(%) CEPS (INR) Adjusted P/E (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) FY09 52.6 34.4 19 15 38 (4) 1.0 1.5 2.6 0.8 FY10 80.8 60.4 20 8 61 (33) 0.7 0.5 3.5 0.5 FY11 66.7 68.9 17 8 54 (29) 0.8 0.1 4.6 0.1 FY12E 54.1 61.4 19 13 43 (11) 0.9 0.1 5.3 0.0 FY13E 48.6 65.5 18 13 46 (15) 0.9 0.1 6.0 0.0
FY09 2.7 6.2 5.0
FY10 3.1 7.8 4.9
FY11 3.4 10.8 4.2
FY12E 3.3 12.8 3.5
FY13E 2.9 14.4 3.0
FY09 9.9 2.7 1.9 52.6
FY10 15.8 3.1 1.7 80.8
FY11 15.9 3.4 1.2 66.7
FY12E 15.6 3.3 1.1 54.1
FY13E 16.0 2.9 1.0 48.6
FY09 29.8 0.6 34.0 46.0 23.5 4.5 36.4 0.8
FY10 64.4 116.5 69.0 21.3 13.5 3.1 14.9 1.5
FY11 90.4 40.3 94.6 15.2 8.1 2.1 10.9 2.9
FY12E 108.4 19.9 113.8 12.6 5.9 1.7 8.6 2.9
FY13E 129.7 19.7 135.5 10.6 4.5 1.3 6.5 3.6
50
COMPANY UPDATE
Automobiles
HEROHONDA
Executionriskputsspannerinworks
WhileHeroHondas(HH)volumegrowthislikelytostaystrong,margins are likely to stay under pressure due to costs pertaining to R&D set up, brand building, exports push and deteriorating production mix. We maintainourHoldrecommendationandtargetpriceofINR1,600
EDELWEISS4DRATING AbsoluteRating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to market MARKETDATA(R:HROH.BO,B:HHIN) CMP : INR 1,747 Target Price : INR 1,600 52-week range (INR) : 2,074 / 1,377 Share in issue (mn) : 199.7 M cap (INR bn/USD mn) : 349 / 7,802 Avg. Daily Vol. BSE/NSE (000) : 635.8 HOLD Performer Medium Equalweight
Infastlaneonrobustruraldemand;positivesurpriseonsaleslikely
Robust rural demand for motorcycles continues to fuel Hero Honda (HH) and in our view its sales growth could surprise the Street positively as the company has overcome production constraints. Hence, we expect volume to surge to 6.2 mn units in FY12E (up 14% Y-o-Y).
R&Dexpenses,deterioratingproductmixcouldderailmargin
We expect HHs EBIT margin to stay under pressure due to: (1) R&D set up cost (incremental 60bps negative for EBIT margin in FY12E); (2) deteriorating exports product mix; and (3) decline in contribution from tax-free Haridwar plant beginning FY13 (this could raise tax rate by 1% and lower EBITDA 60bps in FY13E). In our view, these risks are not built in consensus numbers. We are 5% below on consensus EBIT in FY12, however we are largely in line with consensus on EPS.
Others 9.8%

FIIs 32.8%
Promoters* 52.2%
Riskrewardisbalanced
In our view, risk reward is balanced. Sales growth should continue to be strong but quarterly earnings could disappoint on poor margins. Low beta of 0.63, healthy balance sheet and 5% dividend yield compensate for execution risk pertaining to life without Honda.

: 22.2
Outlookandvaluations:Balanced;maintainHOLD
While sales outlook is strong on rising rural income, margin headwinds are likely to persist, keeping margins under pressure. We maintain our target price of INR 1,600 (valued on 12x FY13E core EPS of INR 117 + 0.8x PV of FY13E cash per share of INR 195). Given limited return, we recommend HOLD/SectorPerformer recommendation rating on the stock.
Financials YeartoMarch Revenues (INR mn) Rev.growth(%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) EPSgrowth(%) Diluted P/E (x) EV/EBITDA (x) ROAE (%) FY10 157,582 27.9 26,622 22,320 200 111.8 74.3 15.6 10.9 61.4 FY11 192,450 22.1 24,607 19,282 200 99.8 (10.8) 17.5 12.1 62.0 FY12E 228,270 18.6 32,968 23,033 200 115.3 15.6 15.1 9.1 75.4 FY13E 260,107 13.9 36,651 25,761 200 129.0 11.8 13.5 8.1 77.3
PRICEPERFORMANCE(%) Stock 1 month 0.6 3 months 16.8 12 months (9.1) SachinGupta
Nifty (1.0) (0.2) 8.0
EWAuto Index (5.2) (3.1) 9.6
ChetanVora
Automobiles
InvestmentRationale
Volume growth is likely to stay strong in FY12E at 14% Y-o-Y (6.2mn units) benefitting from strong rural demand. However on the flip side, margins are likely to stay under pressure due to costs pertaining to R&D set up, brand building, exports push and deteriorating production mix
Outlookforsalesgrowthremainsupbeat
HHs volume sales in recent months have been strong enabling the company to partially regain the lost market share. Recent performances have also been aided by strong north indian wedding season demand. We believe the volume growth could surprise the street positively. Chart1:Strongsalesperformance 48.0
61.0 58.8 56.6 54.4 52.2 50.0

(%)
36.0 24.0
(%)
12.0 0.0 (12.0)

Aug-10 Dec-10 Apr-10 Oct-10 May-10 Nov-10 Apr-11 May-11 Sep-10 Jan-11 Feb-11 Mar-11 Jun-10 Jul-10
Market share (RHS)
Volume growth
R&Drampuplikelytoshaveoff60bpsfromEBITmargin
R&D ramp up is likely to shave off 60bps from HHs EBIT margin as the company builds R&D capabilities post split with Honda while royalty payment continues till June 2014. In our view, the R&D expenditure is likely to stay high at 1% of sales in the initial couple of years, before stabilising at 60bps from the current ~25bps. The R&D efforts will be targeted at developing new products, new technologies and new higher emission norms-compliant products.
52
Automobiles
Chart2:HHwillhavetorampupR&Dbase 3.0
2.4
(% to sales)
1.8 1.2 0.6 0.0

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Bajaj's R&D
HH's R&D
TVS's R&D
Source:Cline,Edelweissresearch
TaxrateshouldrisepostFY13
HHs Haridwar plant will lose its 100% tax-exempt status in FY13; from FY14, the fiscal incentive will be limited to 50%, raising the companys effective tax rate by 6%. A part of this should be offset by tax benefit on R&D. However, it will still dent margin and restrict EPS growth.
Weare5/4%belowconsensusonEBIT
Contrary to the Streets bullish argument that margins have bottomed out and should improve hereon, we believe margin pressure is likely to continue as HH ramps up expenditure pertaining to R&D and rebranding of products. Setting up an exports distribution network is also likely to be a drag on margin as the benefit should take at least three years to flow in. Hence, we expect the companys EBIT margin to dip 60bps in FY12E over FY11 versus consensus expectation of flat margin. Our FY12E and FY13E EPS of INR 115 and INR 129 are 3% and 2%, respectively, above consensus.
Table1:EarningsestimatesofHeroHondaasperEdelvisvisConsensus
Edel 228,270 23,626 10.4 115.3 FY12E Consensus 223,671 24,938 11.1 112.3 (%) 2.1 (5.3) FY13E Edel Consensus (%) 260,107 253,653 2.5 27,090 28,360.0 (4.5) 10.4 11.2 2.7 129.0 126.8 1.7 Source:Bloomberg,Edelweissresearch
Sales (INR mn) EBIT EBIT (%) EPS (INR)
Outlookandvaluations:Balanced;maintainHOLD
While sales outlook is strong on rising rural incomes, margin headwinds are likely to persist, keeping HHs margin under pressure. We arrive at a target price to INR 1,600 valued on 12x FY13E core EPS of INR 117 + 0.8x PV of FY13E cash per share of INR 195). For calculating one-year present value of FY13 cash, we discount it using cost of capital of 14%. Historically, during low earnings growth period, the stock has traded in a 10-14x band. Our target
53
Automobiles
multiple implies mid-point of this band. We maintain our HOLD/Performer rating on the stock.
Chart3:1yearforwardP/Eswingsbetween10xand14xduringlowearningsgrowth
22.5 19.0 15.5
(x)
12.0 8.5 5.0

Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 May-04 May-05 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11
54
Automobiles
KeyRisks
Higherthanexpectedsales
We are positive as far as HHs sales in the next two years are concerned due to our strong positive view on rural demand for motorcycles. We expect 6.2 mn units sales in FY12E. However, sales stronger than our expectation pose an upside risk.
Otherrisks
Include below/above estimated metal cost inflation Rapid/slow ramp up in exports are key upside/downside risk respectively.
55
Automobiles
AnnualTrends
Chart4:Toloosemarketshareonnewerlaunches 6,500,000 60.0
5,600,000
(Nos)
Chart5:Growthtobebelowindustrygrowthrate 48.0 42.0

36.0 24.0 12.0 0.0 (12.0) 28.0 14.0 0.0 (14.0) (28.0)
57.0
(%)
3,800,000 2,900,000 2,000,000

51.0 48.0 45.0
(%)
Mcycle sales Y-o-Y growth Industry Y-o-Y growth (RHS)

Domestic Mcycle sales
Market share (RHS)
Chart6:GrossprofitpervehicletocedeoverhigherRMcosts 40,000 11,000

32,000
(INR/vehicle)
Chart7:RoyaltyandpromotionalexptoweighdownEBIT 75.9 20.0

16.0 73.6 71.3 69.0 66.7 64.4
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E (%)
10,300
(INR/vehicle)
24,000 16,000 8,000 0

9,600 8,900 8,200 7,500
12.0
(%)
8.0 4.0 0.0
Realisation
RM costs
Gross profit (RHS)
Employee costs EBIT margin

56
(%)
4,700,000
54.0
Automobiles
Chart8:Lowersalesandhighercommoditycostrestrictingearningsgrowth
50.0 40.0 30.0 20.0 10.0 0.0 88.0 66.0 44.0 22.0 0.0 (22.0)
(%)
FY12E
Net revenue
RM costs
EBIT (RHS)
Chart9:EPStopost14%CAGRoverFY1113E 140.0
112.0
(INR/share)
200.0 160.0 120.0 80.0 40.0 0.0

(INR/share)
Chart10:Returnstoimproveonhigherdividendpayout 100.0 20.0

16.0 12.0
(%)
FY13E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
80.0 60.0 40.0 20.0 0.0

84.0 56.0 28.0 0.0

8.0 4.0 0.0
EPS
Free cash flow
Book value (RHS)
Chart11:R&Dtoincreaseby100bpsgoingahead 450 0.40

360
(INR mn)
EBIT margin
RoACE (RHS)
RoAE (RHS)
Chart12:RoyaltyofINR23.8bntobepaidin14EMI 3.5 7,500

6,000
(INR mn)
0.32 0.24 0.16 0.08 0.00

2.8 2.1 1.4 0.7 0.0

(%)
270 180 90 0
4,500 3,000 1,500 0
R&D
Royalty
As a % to net sales (RHS)

57
(%)
Automobiles
QuarterlyTrends
Chart13:Costpushnotabletopassoncompletely 12,000 40,000
34,000
(INR/vehicle)
Chart14:EBITmarginsdownoncostpush 75.0
72.5
(INR/vehicle) (%)
20.0 16.0
(%)
11,100 10,200 9,300 8,400 7,500

Q1FY08 Q3FY08 Q1FY09 Q3FY09 Q1FY10 Q3FY10 Q1FY11 Q3FY11
70.0 67.5 65.0 62.5

12.0 8.0 4.0 0.0
28,000 22,000 16,000 10,000
Realisation
RM costs
Gross profit (RHS)
Raw material Employee costs (RHS) Other operating costs (RHS) EBIT margin (RHS)
58
Automobiles
CompanyDescription
HH is the worlds largest two-wheeler company (in volume terms). It has a production capacity of 5.5 mn two wheelers at its two manufacturing facilities at Gurgaon and Dharuhera in Haryana and one at Uttaranchal. The company offers motorcycles in all the three major segmentsCDDawn and CDDeluxe in entry; Splendour, Passion, and Glamour in executive; and Hunk,Achiever, CBZand Karizmain premium. It also sells Pleasure in the ungeared scooter segment.
59
Automobiles
FinancialStatements
Incomestatement YeartoMarch Total volume (nos) %Growth Income from operations Materials costs Manufacturing expenses Staff costs S G & A expenses Total operating expenses EBITDA Depreciation and amortisation EBIT Interest Non-operational income Profit before tax Provision for tax Core profit Profit after tax Shares outstanding Earnings per share (EPS) Diluted shares outstanding Diluted EPS Cash EPS Dividend per share Dividend payout (%) Commonsizemetricsas%ofnetrevenues YeartoMarch Operating expenses Materials costs Staff costs S G & A expenses Depreciation EBITDA margins Net profit margins Growthmetrics(%) YeartoMarch Revenues EBITDA PBT Net profit EPS

FY09 3,722,000 11.5 123,191 87,420 1,870 4,487 12,571 106,348 16,844 1,807 15,037 25 2,796 17,807 4,998 12,809 12,809 200 64.1 200 64.1 74.1 20.0 31.2
FY10 4,600,130 23.6 157,582 107,364 2,245 5,603 15,748 130,960 26,622 1,915 24,707 21 3,633 28,319 5,999 22,320 22,320 200 111.8 200 111.8 121.8 110.0 98.4
FY11 5,402,444 17.4 192,450 141,111 2,598 6,190 17,944 167,843 24,607 4,024 20,584 14 4,280 24,849 4,928 19,921 19,282 200 99.8 200 99.8 119.9 105.0 108.7
FY12E 6,182,739 14.4 228,270 166,983 2,817 7,427 18,075 195,302 32,968 9,342 23,626 65 5,229 28,791 5,758 23,033 23,033 200 115.3 200 115.3 162.1 90.0 78.0
(INRmn) FY13E 6,940,405 12.3 260,107 193,444 2,875 7,797 19,340 223,456 36,651 9,562 27,090 120 5,432 32,402 6,640 25,761 25,761 200 129.0 200 129.0 176.9 95.0 73.6
FY09 86.3 71.0 3.6 10.2 1.5 13.7 10.4
FY10 83.1 68.1 3.6 10.0 1.2 16.9 14.2
FY11 87.2 73.3 3.2 9.3 2.1 12.8 10.4
FY12E 85.6 73.2 3.3 7.9 4.1 14.4 10.1
FY13E 85.9 74.4 3.0 7.4 3.7 14.1 9.9
FY09 19.2 24.8 26.3 32.3 32.3
FY10 27.9 58.1 59.0 74.3 74.3
FY11 22.1 (7.6) (12.3) (10.8) (10.8)
FY12E 18.6 34.0 15.9 15.6 15.6
FY13E 13.9 11.2 12.5 11.8 11.8
60
Automobiles
Balancesheet Ason31stMarch Equity capital Reserves & surplus Shareholders funds Unsecured loans Borrowings Deferred payment credit Deferred tax (Net) Sourcesoffunds Gross block Depreciation Net block Capital work in progress Investments Inventories Sundry debtors Cash and bank balance Loans and advances Total current assets Sundry creditors Provisions Total current liab. & provisions Net current assets Usesoffunds Book value per share (BV) (INR) Freecashflow YeartoMarch Net profit Depreciation Deferred tax Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Freecashflow Cashflowmetrics YeartoMarch Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividend paid FY09 399 37,608 38,008 785 785 0 1,444 40,237 25,163 9,426 15,737 1,205 33,688 3,268 1,499 2,196 3,172 10,135 15,259 5,270 20,528 (10,393) 40,237 190 FY10 399 34,251 34,650 660 660 0 1,528 36,838 27,510 10,922 16,588 481 39,257 4,364 1,084 19,072 4,306 28,826 22,076 26,239 48,314 (19,488) 36,838 174 FY11 399 29,161 29,560 327 327 14,585 2,468 46,940 56,519 14,946 41,573 481 51,288 5,249 1,306 715 7,775 15,046 33,113 28,334 61,448 (46,402) 46,940 148 FY12E 399 31,165 31,564 4,154 4,154 7,785 2,468 45,970 61,019 24,288 36,731 481 51,288 6,056 2,778 848 7,775 17,457 35,157 24,830 59,987 (42,530) 45,970 158 (INRmn) FY13E 399 34,730 35,129 4,154 4,154 985 2,468 42,735 65,519 33,849 31,670 481 54,749 6,901 3,166 966 7,775 18,808 36,974 25,998 62,972 (44,164) 42,735 176
FY09 12,809 1,807 191 (191) 14,616 (2,165) 16,781 3,102 13,679
FY10 22,320 1,915 83 (83) 24,235 (5,268) 29,503 2,041 27,462
FY11 19,282 4,024 0 0 23,306 (9,399) 32,705 29,009 3,696
FY12E 23,033 9,342 0 0 32,374 235 32,139 4,500 27,639
FY13E 25,761 9,562 0 (0) 35,323 (585) 35,908 4,500 31,408
FY09 16,781 (4,775) (11,121) 885 (3,102) (4,439)
FY10 29,503 (5,016) (7,611) 16,876 (2,041) (4,973)
FY11 32,705 (10,023) (41,039) (18,358) (29,009) (25,376)
FY12E 32,139 (27,506) (4,500) 133 (4,500) (24,533)
FY13E 35,908 (27,828) (7,961) 118 (4,500) (21,028)
61
Automobiles
Profitability&liquidityratios YeartoMarch ROAE (%) ROACE (%) Inventory days Debtors days Payble days Cash conversion cycle (days) Current ratio Debt/EBITDA Gross Fixed asset turnover (x) Operatingratios YeartoMarch Total asset turnover Net Fixed asset turnover Equity turnover Dupontanalysis YeartoMarch NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuationparameters YeartoMarch EPS (INR) YoYgrowth(%) CEPS (INR) Diluted adjusted P/E (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) FY09 37.7 49.1 13 7 60 (39) 0.5 0.0 5.5 FY10 61.4 73.5 13 3 63 (47) 0.6 0.0 6.0 FY11 62.0 59.4 12 2 71 (57) 0.2 0.0 4.6 FY12E 75.4 62.1 12 3 75 (59) 0.3 0.1 3.9 FY13E 77.3 73.3 12 4 68 (52) 0.3 0.1 4.1
FY09 3.4 9.0 3.6
FY10 4.1 9.7 4.3
FY11 4.6 6.6 6.0
FY12E 4.9 5.8 7.5
FY13E 5.9 7.6 7.8
FY09 10.4 3.4 1.1 37.7
FY10 14.2 4.1 1.1 61.4
FY11 10.4 4.6 1.3 62.0
FY12E 10.1 4.9 1.5 75.4
FY13E 9.9 5.9 1.3 77.3
FY09 64.1 32.3 74.1 27.2 9.2 2.5 18.6 1.1
FY10 111.8 74.3 121.8 15.6 10.1 1.8 10.9 6.3
FY11 99.8 (10.8) 119.9 17.5 11.8 1.5 12.1 6.0
FY12E 115.3 15.6 162.1 15.1 11.1 1.3 9.1 5.2
FY13E 129.0 11.8 176.9 13.5 9.9 1.1 8.1 5.4
62
COMPANY UPDATE
Automobiles
MAHINDRA&MAHINDRA
Theruralstory
StrongtractordemandandnewlaunchesinUVmakesforstrongsales growth outlook. Low competition gives pricing power. We are 7% aboveconsensusonFY12EPS.Valuationisattractiveat12xFY13Ecore EPS, thus ignores value of subsidiaries. We maintain our BUY with targetpriceofINR814.
EDELWEISS4DRATING AbsoluteRating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to market MARKETDATA(R:MAHM.BO,B:MMIN) CMP : INR 665 Target Price : INR 814 52-week range (INR) : 826 / 550 Share in issue (mn) : 613.9 M cap (INR bn/USD mn) : 408 / 9,129 Avg. Daily Vol. BSE/NSE (000) : 1,983.4 BUY Outperformer Medium Equalweight
Inasweetspotonstrongdemandandlowcompetitiveintensity
Surging rural incomes and governments thrust on rural development implies strong demand for tractors and utility vehicles. Ergo, we are building in 15% volume surge in Mahindra & Mahindras (M&M) tractor segment, due to favourable macro factors. With respect to automotive sales, we are estimating a growth of 12% (in line with management guidance) accounting for new global SUV and compact Xylo launch in H2FY12.
Marginleversareinplace
In our view, M&M has multiple margin levers in the form of: (a) pricing power due to low competitive intensity in the segment it operates in; (b) tax benefits and operating leverage from new Chakan facility; and (c) softening of input cost in H2FY12.
Others 28.5%

Promoters* 24.9% FIIs 22.9% MFs, FIs & Banks 23.7%
Valuationsareattractive
At CMP INR 665, stock is trading at 14x and 12x FY12E and FY13E core EPS (5% discount to Sensex), thus market is assigning no value to its subsidiaries. Historically, after factoring in value of subsidiaries post 30% discount, the stock has traded an average of 10x one year forward core earnings. Applying similar method the stock is currently trading at 6x FY13E core earnings (adjusted for treasury shares). We believe that volume visibility, RoE profile and balance sheet strength is much better now. Thus, does not justify such high discount .
NIL
PRICEPERFORMANCE(%)
Outlookandvaluations:Sowingseedsofgrowth;maintainBUY
The favourable outlook for tractors and rural consumption remaining intact augur particularly well for M&M. We maintain our BUY/Sector Outperformer recommendation on the stock with a SOTP target price at INR 814.
Stock 1 month (5.3) 3 months (1.2) 12 months 13.4 SachinGupta

Nifty (1.0) (0.2) 8.0
EWAuto Index (5.2) (3.1) 9.6
Financials YeartoMarch Revenues (INR mn) Rev.growth(%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted adjusted EPS (INR) EPSgrowth(%) Diluted P/E (x) EV/EBITDA (x) ROAE (%)
FY10 185,296 41.5 29,941 20,878 597 34.5 65.1 19.3 11.1 31.5
FY11 234,210 26.4 34,095 26,621 605 41.6 20.5 16.0 9.2 27.7
FY12E 273,992 17.0 40,088 29,331 605 48.5 16.7 13.7 7.8 25.8
FY13E 313,340 14.4 46,935 33,909 605 56.1 15.6 11.9 6.3 24.7
ChetanVora
Automobiles
InvestmentRationale
M&M is in a sweet spot as demand for tractors and utility vehicles is benefitting from rising rural incomes and governments increased rural thrust. At the same time, with a dominant market share and low competition in the segment, the company enjoys pricing power.
Tractordemandcouldsurprisepositively,Yuvraajanaddedadvantage
Management has guided to 12% volume growth in FY12. We believe, industry growth could be higher at 15% given that strong demand drivers are in placestrong farm income, availability of rural credit, government-led construction activity in rural areas, and unavailability of rural work force. These drivers, in our view, are sufficient to ensure above trend growth. In our view, M&Ms added advantage is launch of Yuvraaj, which is likely to be ramped up pan-India in FY12. Through this 15HP tractor, the company is targeting the marginal farmer with less than 3 acres of land.
Chart1:Maintainingleadershippositionintractorsegment 285,000
235,000
45.0 41.0 37.0 33.0 29.0 25.0
(Nos.)
185,000 135,000 85,000 35,000
FY12E
Domestic tractor sales
Market share (RHS)

Source:Company,Crisil,Edelweissresearch
NewlaunchesandlowcompetitioninentrylevelUVtodrivegrowth
Management has guided for 11-13% growth for utility vehicles in FY12. We believe this growth is likely to be driven by strong rural demand for Boleroand another booster is likely to be the global SUV and compact Xylowhich are likely to be launched in H2FY12. For FY12E we expect UVs to grow by 12% driven by 10% organic growth and 2% by the new launches.
64
FY13E
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
(%)
Automobiles
Chart2:DominantleadershipinUV 200,000
160,000 120,000 80,000 40,000 0 FY05 FY06 FY07 M&M's UV sales FY08 FY09 FY10 FY11 Mkt share (RHS)
60.0 56.0 52.0 48.0 44.0 40.0
(Nos.)
ProductionrampupinChakanfacilitycouldbemarginlever
M&M is likely to ramp up production from its Chakan factory from H2FY12. Management has indicated that in FY12 production from this facility will be 25% of total sales. It is likely to produce a global SUV, variant of Gio and Maxximo, and products from the Navistar JV from here (M&HCV vehicles). In our view, this could add to margins in two ways a) sales tax refund from the state government and b) operating leverage benefit. Mahindra Vehicle Manufactures Ltd (MVML) is 100% subsidiary of M&M. MVML would be doing contract manufacturing for MNAL (Mahindra Navistar Automotive Ltd) and M&M. Chart3:ProductionrampupatMVMLismarginaccretive 16.0 3.0
14.8 13.6
2.4 1.8 1.2 0.6 0.0 Q1FY11 Q2FY11 EBIT (Auto + MVML) Q3FY11 Q4FY11 MVML sales as % to auto sales (RHS)
(%)
12.4 11.2 10.0 EBIT (Auto)
Source:Company,Edelweissresearch Note:MVMLisMahindraVehicleManufacturersLtd(100%subsidiaryofM&M)
65
(%)
(%)
Automobiles
Ssangyongcouldbeamediumtermvaluedriver
The company acquired Ssangyong in FY11 and is in the process of restructuring the latters business. M&M is focusing on investing in R&D (to spend USD 180 mn) and ramping up distribution network (spending USD 36 mn towards brand development). Ssangyongs sales have already improved (up 130% in CY10) and it has broken even operationally in CY10. M&M is planning to launch Ssangyong products in India and is looking at exploring the option of joint sourcing of components and/or sourcing from low cost destinations. Currently we value stake in Ssangyong at quoted price after giving 30% holding company discount.
Chart4:Ssangyongssalestrendingupwardpostrestructuring 12,500
10,000
(Nos.)
7,500 5,000 2,500 0
Apr-09
Apr-10
Feb-09
Feb-10
Dec-08
Dec-09
Aug-08
Aug-09
Aug-10
Domestic
Export
Assembly kit
Chart5:SsangyongpostednegativeEBITDAinQ1CY11aftertakeoverbyM&M 800 48.0

640 24.0 0.0 (24.0) (48.0) (72.0)
(USD mn)
Dec-10
Feb-11
Apr-11 (USD mn)
Jun-09
Jun-10
480 320 160 0
Q1CY08
Q2CY08
Oct-08
Q3CY08
Q4CY08
Q1CY09
Q2CY09
Q3CY09
Oct-09
Q4CY09
Q1CY10
Q2CY10
Q3CY10
Q4CY10
Oct-10
Sales (USD mn)
EBITDA (RHS)
Weare7%and5%aboveconsensusonFY12EandFY13Eearnings
We are bullish on both sales and margins for M&M. In our view weakness in Q4FY11 margins was more seasonal in nature given that year end provisioning that company does. We expect margins to improve from Q1FY12.
Q1CY11
Automobiles
Table1:EarningsestimatesofM&MasperEdelvisvisConsensus
Edel 273,992 40,088 14.6 29,331 FY12E Consensus 271,471 37,659 13.9 27,511 (%) 0.9 6.5 5.5 6.6 Edel 313,340 46,935 15.0 33,909 FY13E Consensus 310,101 43,172 13.9 32,163 (%) 1.0 8.7 7.6 5.4
Sales (INR mn) EBITDA (INR mn) EBITDA (%) Net profit (INR mn
Outlookandvaluations:Positive;maintainBUY
The favourable outlook for tractors and rural demand for UV augur particularly well for M&M. At CMP 665, stock is trading at 14x and 12x FY12E and FY13E core EPS (5% discount to Sensex), thus market is assigning no value to its subsidiaries and valuation are attractive. We maintain BUY/Sector Outperformer recommendation/rating on the stock. We value the stock on SOTP basis at INR 814 as under: Historically after factoring in value of subsidiaries post 30% discount, the stock has traded an average of 10x one year forward core earnings. Applying similar method the stock is currently trading at 6x FY13 core earnings (adjusted for treasury shares). We believe that volume visibility, RoE profile and balance sheet strength is much better now. Thus does not justify such high discount. For standalone business we assign a multiple of 10 to FY13E core auto earnings (in line with the past five year average) to arrive at a value of INR 594. We have valued subsidiaries on book value (for unlisted companies) and considered current market price for listed subsidiaries after giving a holding company discount of 30% to arrive at a value of INR 221 (earlier was INR224). Thus we arrive at TP of INR814 (was 817 earlier, lower due to change in listed subsidiaries price) which implies 23% upside from the current price of INR 665.
Table2:Sumofthepartsvaluationimplies23%upside
Basisof valuation Investmentinlistedcompanies Tech Mahindra Mahindra and Mahindra Financial Services Mahindra Lifespace Developers Mahindra Holidays and Resorts Mahindra Ugine Steel Mahindra Forgings Swaraj Engines Ssangyong Investment in unlisted companies Other investments Sub-total Investments valued at 30% discount Core auto business Targetprice(INR) CMP (INR) CMP (INR) NAV DCF CMP (INR) CMP (INR) CMP (INR) CMP (INR) Book value Value/Mcap (INRmn) 41,755 35,877 10,548 23,795 823 3,206 1,754 28,675 27,815 M&Mholding (%) 48.3 60.1 51.2 83.1 50.7 50.7 33.2 70.0 Parameter (CMP) 688 616 506 340 50 72 425 336 Value/share (INR) 76 65 19 43 1 6 3 52 50 315 221 594 814
10x FY13E core earnings
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Automobiles
Chart6:LowerD/EratioplushigherRoAEaugurswellforcompany 35.0
29.0 23.0 1.0 0.8 0.7 0.5 0.4 0.2
(%)
17.0 11.0 5.0
FY12E
RoAE
Debt: Equity (RHS)

Chart7:OneyearforwardcoreP/E(Excludingsubsidiaryvaluation)
18.0 14.4 10.8
(x)
7.2 3.6 0.0
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
FY13E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
May-05
May-06
May-07
May-08
May-09
May-10
Nov-10
68
May-11
(x)
Automobiles
KeyRisks
Managingacomplexgroupstructure
M&M is a conglomerate with interests in automotive, farm equipment, real estate, tech services, and hospitality, among others. Managing such a complex structure could divert focus away from the core business and could pose execution risk.
Weakperformanceofsubsidiaries
Poor performance of subsidiaries can be a drag on the overall stock performance. M&M drives its valuation through core operations and subsidiaries. Any weak performance by any of its subsidiaries can drag down its overall business performance. Hike in fuel price Diesel price so far has remained insulated from any substantial rise. Any announcements with respect to hike in diesel price could affect M&Ms operations given the high dependency on diesel vehicle sales to overall vehicle sales.
Vagariesofmonsoon
So far the Indian Meteorological Department (IMD) has forecast a normal monsoon which augurs well for tractors and UV sales (especially Bolero). Any deviation on the negative side could be a risk to farm incomes and thus tractor demand.
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Automobiles
AnnualTrends
Chart8:UVsandtractorconstituteover70%ofvolumes 150,000 300,000

240,000 120,000
Chart9:TractorsandLCVtogrowhighest@15%inFY12E 200.0 60.0

40.0 150.0
(Nos.)
(Nos.)
0.0 (20.0) (40.0)
50.0 0.0 (50.0)
120,000 60,000 0
60,000 30,000 0
FY13E
FY01
FY03
FY05
FY07
FY09
FY11
Utility vehicles LCVs (RHS)
Tractors Three wheelers (RHS)
Chart10:Pricingpowerwouldleadtooperatingprofit 600,000 75,000

480,000 60,000
Chart11:Costinflationpushtogetoffsetbycostreduction 20.0 72.5

16.0 70.0
(INR/vehicle)
(INR/vehicle)
(%)
240,000 120,000 0
30,000 15,000 0
8.0 4.0 0.0
65.0 62.5 60.0
FY13E
FY01
FY03
FY05
FY07
FY09
FY11
Automotive Tractors
Three wheelers Operating profit (RHS)

70

(%)
360,000
45,000
12.0
UV's Y-o-Y growth Tractors Y-o-Y growth LCVs Y-o-Y growth (RHS) Three wheelers Y-o-Y growth (RHS)
67.5
(%)
180,000
90,000
(%)
20.0
100.0
Automobiles
Chart12:Operatingprofittogrowinlinewithnetrevenuegrowth 52.0
39.0 26.0 135.0 90.0 45.0 0.0 (45.0) (90.0)
(%)
13.0 0.0 (13.0)
FY12E
Net revenue
RM costs

FY13E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
(%)
Chart13:Automotivedivisionyields~13%EBITmargin 15.0 110,000

85,000 13.0
Chart14:Farmequipmentyields~18%EBITmargin 21.0 110,000

88,000 18.0 15.0 12.0 9.0 6.0
(INR mn)
(INR mn)
60,000 35,000 10,000 (15,000)
11.0
66,000 44,000 22,000 0
9.0 7.0 5.0
(%)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Sales
EBIT
EBIT margin (RHS)

Sales
EBIT
EBIT margin (RHS)
71
FY11
(%)
Automobiles
Chart15:EPStopost16%CAGRoverFY1113E 140.0
105.0 300 240
Chart16:SustainableEBITDAmarginsandreturnratios 35.0 20.0

16.0 28.0 21.0 14.0 7.0 0.0
(INR/share)
(INR/share)
(%)
70.0 35.0 0.0 (35.0)
180 120 60 0
12.0 8.0 4.0 0.0
EPS
Free cash flow
Book value (RHS)
EBITDA margin
Chart17:Operatingprofittogrowinlinewithnetrevenuegrowth 7,000
5,600
RoACE (RHS)
RoAE (RHS)
4.5 3.6 2.7 1.8 0.9 0.0
(INR mn)
4,200 2,800 1,400 0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
R&D

as % of net sales (RHS)

FY10
(%)
72
(%)
Automobiles
QuarterlyTrends
Chart18:Realisationimproved,however,operatingprofitdeclinedChart19:EBITDAmargindeclinedinQ4FY11oncostpush 76.0 550,000 20.0 80,000

(INR/vehicle)
480,000 410,000 340,000 270,000 200,000 70,000 72.0 16.0
(INR/vehicle)
(%)
50,000 40,000 30,000
64.0 60.0 56.0
8.0 4.0 0.0
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q3FY11
Automotive realisation Farm equipment realisation RM costs Operating profit (RHS)
Raw material Employee costs (RHS) Other operating costs (RHS) EBITDA margin (RHS)
Chart20:Automotivesegmentsquarterlymatrix 48,000 20.0

36,000 15.0
Chart21:Farmequipmentsegmentsquarterlymatrix 22.5 30,000

24,000 20.0
Q3FY11
(%)
(Nos.)
(Nos.)
12,000 0 (12,000)
5.0 0.0 (5.0)
12,000 6,000 0
15.0 12.5 10.0
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Sales
EBIT
EBIT margin (RHS)
Q3FY11
Sales
EBIT
EBIT margin (RHS)
73
Q3FY11
(%)
24,000
10.0
18,000
17.5
(%)
60,000
68.0
12.0
Automobiles
CompanyDescription
M&M operates in nine segmentsautomotive, which involves sales of automobiles, spare parts and related services; farmequipment, which involves tractors, spare parts and related services; financialservices, which consists of services relating to financing, leasing and hire purchase of automobiles and tractors; steeltrading&processing, which consists of trading and processing of steel; infrastructure, which consists of operating of commercial complexes, project management and development; hospitality, which involves sale of timeshare; ITservices, which involves services rendered for information technology (IT) and telecom; Systech, which consists of automotive components and other related products and services, and Others, which consists of logistics, after-market, two wheelers and investment. The company has ventured into the M&HCV space through a JV with Navistar International, US. It also acquired majority (70%) stake in Korea-based Ssangyong Motors Company in FY11 to become a global SUV company.
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Automobiles
FinancialStatements
Incomestatement YeartoMarch Total volume (nos) %Growth Income from operations Materials costs Manufacturing expenses Staff costs S G & A expenses Less: Expenses capitalised Total operating expenses EBITDA Depreciation and amortisation EBIT Interest Non-operational income Profit before tax Provision for tax Core profit Extraordinary income/ (loss) Profit after tax Diluted shares outstanding Diluted EPS Diluted core business EPS Cash EPS Dividend per share Dividend payout (%) Commonsizemetricsas%ofnetrevenues YeartoMarch Operating expenses Materials costs Staff costs S G & A expenses Depreciation Interest expenditure EBITDA margins Net profit margins Growthmetrics(%) YeartoMarch Revenues EBITDA PBT Net profit EPS FY09 325,946 11.0 130,937 92,419 3,237 10,246 10,760 428 116,234 14,704 2,915 11,788 1,341 3,592 14,039 1,997 12,042 (3,263) 8,779 577 20.9 18.2 29.4 5.0 35.5 FY10 451,927 38.7 185,296 123,462 3,950 11,971 16,568 596 155,356 29,941 3,708 26,233 1,569 3,284 27,948 7,348 20,600 278 20,878 597 34.5 32.9 42.2 9.5 29.9 FY11 563,944 24.8 234,210 162,639 4,582 14,196 19,324 626 200,116 34,095 4,139 29,956 709 4,307 33,554 8,421 25,134 1,487 26,621 605 41.6 40.2 49.8 11.9 30.2 FY12E 642,504 13.9 273,992 189,928 5,078 16,303 23,252 657 233,904 40,088 4,976 35,112 1,121 5,117 39,108 9,777 29,331 0 29,331 605 48.5 46.9 58.4 12.0 27.6 (INRmn) FY13E 726,958 13.1 313,340 216,976 5,501 18,336 26,282 690 266,405 46,935 6,026 40,909 1,340 5,643 45,212 11,303 33,909 0 33,909 605 56.1 54.3 68.0 12.0 23.9
FY09 88.8 70.6 7.8 8.2 2.2 1.0 11.2 9.2
FY10 83.8 66.6 6.5 8.9 2.0 0.8 16.2 11.1
FY11 85.4 69.4 6.1 8.3 1.8 0.3 14.6 10.7
FY12E 85.4 69.3 6.0 8.5 1.8 0.4 14.6 10.7
FY13E 85.0 69.2 5.9 8.4 1.9 0.4 15.0 10.8
FY09 13.5 7.2 14.1 29.8 12.8
FY10 41.5 103.6 99.1 71.1 65.1
FY11 26.4 13.9 20.1 22.0 20.5
FY12E 17.0 17.6 16.5 16.7 16.7
FY13E 14.4 17.1 15.6 15.6 15.6
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Automobiles
Balancesheet Ason31stMarch Equity capital Reserves & surplus Shareholders funds Secured loans Unsecured loans Borrowings Deferred tax (Net) Sourcesoffunds Gross block Depreciation Net block Capital work in progress Investments Inventories Sundry debtors Cash and bank balance Loans and advances Other current assets Total current assets Sundry creditors Others current liabilities Provisions Total current liab. & provisions Net current assets Misc expenditure Usesoffunds Book value per share (BV) (INR) Freecashflow YeartoMarch Net profit Depreciation Deferred tax Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Freecashflow Cashflowmetrics YeartoMarch Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividend paid Share issuance/(buyback) FY09 2,788 49,833 52,621 9,810 30,718 40,528 (364) 92,785 48,939 23,263 25,676 6,467 57,864 10,607 10,437 15,744 13,826 16 50,629 34,431 771 12,776 47,978 2,652 126 92,785 94 FY10 2,892 75,376 78,268 6,025 22,777 28,802 2,438 109,507 52,763 25,378 27,385 9,642 63,980 11,888 12,581 17,432 18,014 509 60,424 33,673 327 17,965 51,965 8,459 41 109,507 135 FY11 2,936 100,198 103,134 6,025 18,028 24,053 3,544 130,731 63,593 29,516 34,076 9,642 93,253 16,942 13,547 6,146 23,732 1,067 61,435 47,290 327 20,059 67,676 (6,241) 0 130,731 176 FY12E 2,936 121,425 124,361 6,025 29,715 35,739 3,544 163,644 78,593 34,493 44,100 9,642 100,753 18,767 22,520 13,700 26,105 1,067 82,159 52,547 327 20,136 73,009 9,149 0 163,644 212 (INRmn) FY13E 2,936 147,229 150,165 6,025 29,715 35,739 3,544 189,449 93,593 40,519 53,073 9,642 114,623 21,462 25,754 15,667 28,716 1,067 92,666 60,093 327 20,136 80,555 12,110 0 189,449 256 (INRmn) FY13E 33,909 6,026 0 (0) 39,935 994 38,942 15,000 23,942
FY09 8,779 2,915 1,412 (1,412) 11,694 (8,534) 20,228 11,449 8,778
FY10 20,878 3,708 97 (97) 24,586 4,034 20,551 8,592 11,960
FY11 26,621 4,139 0 0 30,759 (3,454) 34,214 10,830 23,384
FY12E 29,331 4,976 0 0 34,307 7,837 26,471 15,000 11,471
FY09 20,228 14,067 (27,163) 7,132 (11,449) (3,121) 361
FY10 20,551 (4,155) (14,708) 1,688 (8,592) (6,238) 118
FY11 34,214 (5,397) (40,102) (11,286) (10,830) (8,026) 366
FY12E 26,471 3,583 (22,500) 7,553 (15,000) (8,104) 0
FY13E 38,942 (8,104) (28,870) 1,967 (15,000) (8,104) 0
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Profitability&liquidityratios YeartoMarch ROAE (%) ROACE (%) Inventory days Debtors days Payble days Cash conversion cycle (days) Current ratio Debt/EBITDA Fixed asset turnover (x) Debt/Equity Adjusted debt/equity Operatingratios YeartoMarch Total asset turnover Fixed asset turnover Equity turnover Dupontanalysis YeartoMarch NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuationparameters YeartoMarch EPS (INR) YoYgrowth(%) Diluted EPS (INR) CEPS (INR) P/E (x) Diluted P/E (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) FY09 25.1 18.9 41 29 109 (40) 1.1 2.8 6.0 0.8 0.8 FY10 31.5 29.2 32 23 98 (43) 1.2 1.0 7.0 0.4 0.4 FY11 27.7 28.5 31 20 88 (37) 0.9 0.7 7.6 0.2 0.2 FY12E 25.8 27.3 33 24 93 (36) 1.1 0.9 7.0 0.3 0.3 FY13E 24.7 26.4 33 28 92 (31) 1.2 0.8 6.4 0.2 0.2
FY09 1.6 6.0 2.7
FY10 1.8 7.0 2.8
FY11 1.9 7.6 2.6
FY12E 1.9 7.0 2.4
FY13E 1.8 6.4 2.3
FY09 9.2 1.6 1.7 25.1
FY10 11.1 1.8 1.5 31.5
FY11 10.7 1.9 1.3 27.7
FY12E 10.7 1.9 1.3 25.8
FY13E 10.8 1.8 1.3 24.7
FY09 20.9 12.8 20.9 29.4 31.8 31.8 7.1 2.6 23.0 0.8
FY10 34.5 65.1 34.5 42.2 19.3 19.3 4.9 1.8 11.1 1.4
FY11 41.6 20.5 41.6 49.8 16.0 16.0 3.8 1.3 9.2 1.8
FY12E 48.5 16.7 48.5 58.4 13.7 13.7 3.1 1.1 7.8 1.8
FY13E 56.1 15.6 56.1 68.0 11.9 11.9 2.6 0.9 6.3 1.8
77
Automobiles
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78
COMPANY UPDATE
Automobiles
MARUTISUZUKIINDIA
Bumpyride
HighcompetitionintensityinH2FY12,slowingsales,baseeffectmarsboth salesandmarginoutlook.Weare11/14%belowconsensusonFY12/FY13 earnings.WemaintainREDUCEwithtargetpriceofINR1,150
EDELWEISS4DRATING AbsoluteRating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to market MARKETDATA(R:MRTI.BO,B:MSILIN) CMP : INR 1,210 Target Price : INR 1,150 52-week range (INR) : 1,599 / 1,125 Share in issue (mn) : 288.9 M cap (INR bn/USD mn) : 350 / 7,819 Avg. Daily Vol. BSE/NSE (000) : 522.0 REDUCE Underperformer Medium Equalweight
Slowingsales,baseeffectandcompetitiontodeflateFY12growth
Maruti Suzuki Indias (MSIL) 28% growth and market share gain in FY11 was being largely driven by new Alto, EECO and Dzire. However, we believe post Q1FY12, the base effect could catch up and arrest growth, leading to 150bps loss of market share in FY12. Also, another headwind in H2FY12 could be new launches from competition in both petrol as well as diesel segments (Hondas Brio, GMs Beat diesel, Hyundais new Santro and Toyotas Liva). The companys exports have been declining. We expect MSILs total sales to grow 10% to 1.4 mn units in FY12E.
Riseindiscounts,inflation,weakeningpricingpowertodentmargin
We believe MSIL will continue to face margin pressure due to: (1) rise in discounts; (2) appreciating JPY; and (3) growth led by entry-level cars where customers are cost conscious, thus, further weakening pricing power. We expect EBITDA margin to dip 50bps in FY12E over FY11 versus consensus expectation of 80bps increase. Our FY12E and FY13E EPS of INR 82 and INR 92 is 11% and 14% below consensus, respectively.
Others 8.6%

FIIs 19.2%
Promoters* 54.3%
Newlaunchesfromcompetition,weakearningsnegativetriggers
Negative triggers include: (1) weak monthly sales numbers; (2) weak earnings triggering consensus earnings downgrade starting Q1FY12; and (3) new launches from competition in H2FY12.

: NIL
Outlookandvaluations:Deteriorating;maintainREDUCE
The multiple headwinds have worsened both sales and margin outlook. Currently, the stock is trading at 15x FY12E core EPS of INR 72 (after adjusting for 0.8x FY12E cash per share). We expect the earnings multiple to contract to 10 (downcycle average multiple) which gives us a target price of INR 1,150 (10x FY13E EPS of INR 92 + FY13E cash/share of INR 225). We maintain REDUCE/SectorUnderperformerrecommendation/rating .
PRICEPERFORMANCE(%) Stock 1 month (1.2) 3 months (3.5) 12 months (8.9) SachinGupta

Nifty (1.0) (0.2) 8.0
EWAuto Index (5.2) (3.1) 9.6
Financials YeartoMarch Revenues (INR mn) Rev.growth(%) EBITDA (INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) EPSgrowth(%) Diluted P/E (x) EV/EBITDA (x) ROAE (%)
FY10 FY11 FY12E FY13E 294,143 366,867 424,885 481,194 41.9 24.7 15.8 13.3 37,601 32,896 36,301 42,551 24,975 22,887 23,723 26,573 289 289 289 289 86.4 79.2 82.1 92.0 104.9 (8.4) 3.7 12.0 14.0 15.3 14.7 13.2 7.6 8.4 7.8 6.2 23.7 17.6 15.9 15.5
ChetanVora
Automobiles
InvestmentRationale
Given the deteriorating macro situation, industry sales growth is likely to slow down, which could further weaken the pricing power of car makers. Additionally, MSILs growth was being driven by the newly launched Alto K10 and Eeco. Since these models are aimed at price-sensitive customers, price hikes are difficult. Even though demand for Swift and Dzire continues to be strong, their waiting period has started to come off, as the company has resolved capacity issues. Thus, margin and sales growth levers at the companys disposal are limited, which makes the investment outlook negative.
Stiffcompetition,marginpressureputsMSILonbackfoot
Despite stiff competition, MSIL has been able to hold on to its market share in FY11. However, it came at the cost of margin, which continued to be under pressure. Given the deteriorating macro situation, industry sales growth is likely to slow down, further weakening the pricing power of car makers.
Growthdrivenbylowvalueproducts:AltoandEeco
Additionally, the companys growth is being driven by the newly launched Alto (up 47% in FY11) and EECO(up 7x in FY11). Both the models are hitting the base effect from Q2FY12. Thus, the high growth should settle for low trajectory Q2 onwards. Also, these models are targeted at price conscious customers, thus making price hikes to mitigate costs pressures impossible. Though Swift and Dzire demand continues to be firm, the waiting period for them has started to dwindle as the company has resolved capacity issues. Thus, margin and sales growth levers at the companys disposal are limited, clouding the investment outlook.
Chart1:PricehikeslargelySwiftfamilycentricsuggestingweakpricingpower
2.0% 1.6% 1.2% 7,500 6,000 4,500 3,000 1,500 0 Alto Wagon Ritz Swift Swift Dzire Dzire R petrol petrol diesel petrol diesel Price hike (INR) As a % of price
Source:Company,Overdrive
0.8% 0.4% 0.0% EECO
80
(INR/Vehicle)
(%)
Automobiles
Table1:FY11growthdrivenbyAltoandEeco
M800 Alto Wagon R Estillo A-Star Ritz Swift Dzire Sx4 Eeco Omni Others Total FY10 FY11 YoY(%) 33,028 26,485 (19.8) 235,212 346,840 47.5 144,898 163,019 12.5 41,624 52,188 25.4 32,186 36,894 14.6 63,096 116,174 83,601 15,714 8,601 92,673 3,983 870,790 68,749 9.0 140,862 21.3 107,955 29.1 23,327 48.4 68,329 694.4 92,297 (0.4) 5,794 45.5 1,132,739 30.1 Competitionlaunches newSantro
Beatdiesel;highercapacity forfigo Brio FabiaSedan MahindraVan
Chart2:Utilisationtodeclineonmoderatingsalesoutlook 2,000,000
1,600,000
200.0 160.0 120.0 80.0 40.0 0.0
(Nos.)
1,200,000 800,000 400,000 0
FY12E
Capacity installed (nos)
Utilised (RHS)
Consensusdisregardingmarginpressure
In our view, the consensus has not factored in the margin risk emanating from: (1) rising incentives level; (2) appreciating JPY; (3) deteriorating product mix with contribution of Alto rising, where the company does not have pricing power; and (4) a slew of launches from competition in H2FY12. Our earnings expectations of INR 82 and INR 92 for FY12E and FY13E are lower than consensus estimates by 11% and 14% for FY12E and FY13E, respectively. We have lowered our EBITDA margin 50bps to 8.5% to factor in the above concerns, whereas according to consensus EBITDA margin will expand 80bps to 9.8% in FY12E.
81
FY13E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
(%)
Automobiles
Table2:EarningsestimatesofMSILasperEdelvisvisConsensus
Edel 424,885 36,301 8.5 82.1 FY12E Consensus 427,713 41,744 9.8 92.2 FY13E (%) Edel Consensus (%) (0.7) 481,194 493,901 (2.6) (13.0) 42,551 49,261 (13.6) (12.5) 8.8 10.0 (11.3) (11.0) 92.0 107.5 (14.4) Source:Bloomberg,Edelweissresearch
Sales (INR mn) EBITDA (INR mn) EBITDA (%) EPS (INR)
Chart3:Incentivelevelshavestartedtorise
30,000 24,000 18,000 12,000 6,000 0 Wagon R Ritz Dec'10 April'11
Source:Industry,Edelweissresearch
(INR/Vehicle)
Alto
Alto k10

Chart4:Alto+EecocontributiondrivingFY11sales 50.0
(% to total volumes)
47.0 44.0 41.0 38.0 35.0
25.0 22.0 19.0 16.0 13.0 10.0
FY 2012E
Alto+Eeco
Swift+Dzire (RHS)
FY 2013E
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
(% to total volumes)
82
Automobiles
Outlookandvaluations:Deteriorating;maintainREDUCE
The multiple headwinds have worsened both sales and margin outlook. Currently, the stock is trading at 15x FY12E core EPS of INR 72 (after adjusting for 0.8x PV FY12E cash per share). We expect the earnings multiple to contract to 10 (downcycle average), which gives us a target price of INR 1,150 (10x FY13E EPS of INR 93 + PV next year of FY13E cash/share of INR 215). For arriving at current value of cash we have discounted future cash using cost of capital of 14%. Historically, MSIL has traded at a discount to the Sensex P/E when earnings growth starts to slow down. The discount band ranges from 10-40%. Our target price implies 25% discount to Sensex earnings multiple. We maintain REDUCE/Sector Underperformer recommendation/rating on the stock.
Chart5:DiscounttoSensexwidensduringearningsuncertaintyperiod 40.0
20.0 0.0
100.0 75.0 50.0 25.0 0.0 (25.0)
(%)
(20.0) (40.0) (60.0)
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Sep-07
Sep-08
Sep-09
Sep-10
Mar-07
Mar-08
Mar-09
Mar-10
MSIL vs Sensex (LHS)
Consensus 1 yr fwd growth
Trailing 1 yr growth
Chart6:OneyearforwardP/E 25.0
21.0 17.0
(x)
13.0 9.0 5.0
Oct-03
Oct-04
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Mar-11
Jun-07
Jun-08
Jun-09
Jun-10
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Oct-10
Source:Bloomberg
83
Apr-11
(%)
Automobiles
KeyRisks
Strongperformancefromnewlaunches,SwiftandRIII,couldbeanupsiderisk
MSIL is likely to launch the new Swift in Q2FY12 and the concept crossover between cars and utility vehicles in FY13. We have built in 13,000 average monthly units sales volume for Swift in FY12 and 2,500 units for RIII in FY13. Sales performance, higher than this, poses upside risk to our numbers.
DepreciatingJPYcouldposeupsiderisk
The company has significant exposure to JPY, in which, it imports raw material (~22% of sales) and pays royalty. While exports are Euro (~40%) and USD (~60%) denominated.
Table4:SensitivityofcurrencymovementtoFY12EEPS
USD/ INR EUR/INR JPY/INR USD/ INR EUR/INR JPY/INR
10% 10% 10% +10% +10% +10%
USD/INR +10% 0% 5% 25% 8% 12% -8%
EUR/INR JPY/INR +10% +10% -5% -25% 0% -20% 20% 0% 12% -8% 4% -13% -13% -17% Source:Edelweissresearch
AlliancewithVWcouldthrowupcostsavingopportunities
Suzuki (Parent company of MSIL) has tied up with VW and, according to media reports, together they are exploring various opportunities in the field of joint sourcing, manufacturing and product development. Any such opportunity could lead to cost savings and, thus, is a potential upside risk.
84
Automobiles
AnnualTrends
Chart7:A2&A3,thetwogrowthengines 1,100,000
880,000 75.0 60.0
Chart8:Outperformedindustryonnewer/variantsmodels 120.0 60.0

48.0 90.0 60.0 30.0 0.0 (30.0)
(Nos.)
(%)
660,000 440,000 220,000 0
45.0 30.0 15.0 0.0
(%)
36.0 24.0 12.0 0.0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
A2 segment A3 segment A2 segment mkt share (RHS) A2 segment mkt share (RHS)
MSIL's A2 Y-o-Y (%) MSIL's A3 Y-o-Y (RHS)
Chart9:ExportstodipasdemandfromEuropewanes
175,000 140,000 152.0 114.0 76.0 38.0 0.0 (38.0)
Chart10:Capacityutilisationtodiponmoderatingdemand 2,000,000 200.0

1,600,000
(%)
Industry's A2 Y-o-Y (%) Industry's A3 Y-o-Y (RHS)

160.0 120.0 80.0 40.0 0.0
(Nos.)
105,000 70,000 35,000 0
(Nos.)
1,200,000 800,000 400,000 0
Exports Mkt share (RHS)
Exports Y-o-Y (RHS)
Installed capacity

85
FY13E
FY01
FY03
FY05
FY07
FY09
FY11
(%)
(%)
Automobiles
Chart11:Hatchback(A2)backboneofcompany 100.0
80.0
Chart12:A2premiumsegment(Swift+Ritz),theminters 100.0
80.0
(% to sales)
(% to sales)
60.0 40.0 20.0 0.0
60.0 40.0 20.0 0.0
FY12E
FY12E
FY13E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
A1 - Mini
A2 - Compact
A3 - Sedan
Economy: M-800 + Alto Executive: Wagon R+A-star+Estilo Premium: Ritz + Swift
Chart13:ExecutiveandPremiumsegmenttobecompetitive 100.0
80.0
Chart14:MSILsshareinpremiumsegmentdeclining 100.0
80.0 60.0 40.0 20.0 0.0
(% to sales)
40.0 20.0 0.0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
(% )
60.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Economy
Executive
Premium
Economy
Executive
Premium
Chart15:AltodrivinggrowthinEconomysegment 75.0 45.0

60.0 45.0 30.0 15.0
Chart16:UnderperforminginExecutivesegmentgrowth 45.0
30.0 15.0
(% )
(%)
30.0 15.0 0.0
0.0 (15.0) (30.0)
(%)
0.0 (15.0) (30.0)
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY05
FY06
FY07
FY08
FY09
FY10
MSIL
Industry (RHS)
MSIL
Industry
Source:CrisInfac,Edelweissresearch

FY11
FY11
FY13E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Automobiles
Chart17:SwiftandRitzlosingsteaminPremiumsegment 80.0
64.0 48.0 110.0 88.0 66.0 44.0 22.0 0.0 FY07 FY08 MSIL
(% )
32.0 16.0 0.0 FY09 FY10 FY11 Industry (RHS)
(%)
Source:CrisInfac,Edelweissresearch
Chart18:OperatingcostsoutweighRMpressure 40,000 400,000

320,000 30,000
Chart19:Marginssubduedoncostpressures 20.0
15.0
90.0 85.0 80.0 75.0 70.0 65.0
(INR/vehicle)
(INR/vehicle)
(% to sales)
240,000 160,000 80,000 0
20,000 10,000 0 (10,000)
10.0 5.0 0.0 (5.0)
FY13E
Average realisation Operating profit (RHS)
Gross profit*
Source:Company,Edelweissresearch Note:*Grossprofit=NetsalesRawmaterialcosts
87
FY13E
FY01
FY03
FY05
FY07
FY09
FY01
FY03
FY05
FY07
FY09
FY11
FY11
(% to sales)
Automobiles
Chart20:Highoperatingexpenses,rawmaterialinflationrestrictEBITDAgrowth 200.0 48.0
36.0 24.0 150.0 100.0 50.0 0.0 (50.0)
(%)
12.0 0.0 (12.0)
FY12E
Net revenue
RM costs
FY13E
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
(%)
Chart21:EPSCAGRof8%;FCFtobenegativeinFY12 98.4 750

65.6 600
Chart22:Returnratiostodiponlowermargins 48.0
36.0
20.0 15.0 10.0 5.0 0.0 (5.0)
(INR/share)
(INR/share)
32.8 0.0 (32.8) (65.6)
450 300 150 0
24.0
(%)
12.0 0.0 (12.0)
EPS
Free cash flow
Book value (RHS) 0.75 0.60
EBITDA margin (RHS)
RoACE
RoAE
Chart23:LowerspendonR&Doffsetby.. 2,000
1,600 1,200 800 400 0
Chart24:...higherroyaltypayout 12,500
10,000
4.00 3.20 2.40 1.60 0.80 0.00
(INR mn)
(INR mn)
0.45
7,500 5,000 2,500 0
0.30 0.15 0.00
(%)
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
R&D
as % of net sales (RHS)
Royalty
88
Royalty as % to sales (RHS)

(%)
(%)
Automobiles
QuarterlyTrends
Chart25:Declineinoperatingprofitoutpacesgrossprofitdecline Chart26:SwingingRMcostsdrivingEBITDAmargins 350,000 50,000 20.0 80.0

280,000 43,000 36,000 29,000 22,000 15,000 16.0 78.0 76.0 74.0 72.0 70.0
(INR/vehicle)
210,000 140,000 70,000 0
(INR/vehicle)
12.0
(%)
8.0 4.0 0.0
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q3FY11
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Realisation Gross profit*
RM costs Operating profit (RHS)
Raw material - RHS Other operating costs
Source:Company,Edelweissresearch Note:*Grossprofit=NetsalesRawmaterialcosts
89
Q3FY11
(%)
Automobiles
CompanyDescription
MSIL is Indias largest passenger vehicle manufacturer with more than 50% market share. It is a key player in the compact car segment with a dominant market share. Suzuki Motor Corporation (Suzuki) of Japan holds 54% stake in the company. MSIL offers the widest product range in passenger cars (10 models), with special focus on the compact car segment (five models). As of March 2011, the company has an installed production capacity of 1.4 mn units per annum, which would be scaled further to 1.9 mn units by FY13E.
90
Automobiles
FinancialStatements
Incomestatement YeartoMarch Total volume (nos) %Growth Income from operations Materials costs Manufacturing and other expenses Staff costs Total operating expenses EBITDA Depreciation and amortisation EBIT Interest Non-operational income Profit before tax Provision for tax Core profit Extraordinary income/ (loss) Profit after tax Shares outstanding Earnings per share (EPS) Diluted shares outstanding Diluted EPS Cash EPS Dividend per share Dividend payout (%) Commonsizemetricsas%ofnetrevenues YeartoMarch Operating expenses Materials costs Staff costs S G & A expenses Depreciation Interest expenditure EBITDA margins Net profit margins Growthmetrics(%) YeartoMarch Revenues EBITDA PBT Net profit EPS
(INRmn) FY09 FY10 FY11 FY12E FY13E 792,167 1,018,365 1,271,005 1,400,149 1,585,645 3.6 28.6 24.8 10.2 13.2 207,218 294,143 366,867 424,885 481,194 162,650 224,430 287,942 335,439 379,878 21,002 26,656 38,992 45,194 49,760 4,711 5,456 7,036 7,951 9,004 188,363 256,542 333,971 388,583 438,642 18,855 37,601 32,896 36,301 42,551 7,065 8,250 10,135 12,422 14,704 11,790 29,350 22,761 23,880 27,847 510 335 244 244 244 7,321 7,044 8,358 8,423 8,306 18,601 36,059 30,874 32,058 35,909 4,571 10,949 8,201 8,335 9,336 14,030 25,110 22,673 23,723 26,573 1,842 135 (214) 12,188 24,975 22,887 23,723 26,573 289 289 289 289 289 48.6 86.9 78.5 82.1 92.0 289 289 289 289 289 48.6 86.9 78.5 82.1 92.0 73.0 115.5 113.6 125.1 142.9 5.0 6.0 7.5 8.0 8.0 10.3 6.9 9.6 9.7 8.7
FY09 90.9 78.5 2.3 10.1 3.4 0.2 9.1 6.8
FY10 87.2 76.3 1.9 9.1 2.8 0.1 12.8 8.5
FY11 91.0 78.5 1.9 10.6 2.8 0.1 9.0 6.2
FY12E 91.5 78.9 1.9 10.6 2.9 0.1 8.5 5.6
FY13E 91.2 78.9 1.9 10.3 3.1 0.1 8.8 5.5
FY09 13.7 (27.0) (25.7) (18.9) (18.9)
FY10 41.9 99.4 93.9 79.0 79.0
FY11 24.7 (12.5) (14.4) (9.7) (9.7)
FY12E 15.8 10.4 3.8 4.6 4.6
FY13E 13.3 17.2 12.0 12.0 12.0
91
Automobiles
Balancesheet Ason31stMarch Equity capital Reserves & surplus Shareholders funds Secured loans Unsecured loans Borrowings Deferred tax (Net) Sourcesoffunds Gross block Depreciation Net block Capital work in progress Investments Inventories Sundry debtors Cash and bank balance Loans and advances Total current assets Sundry creditors Others current liabilities Provisions Total current liab. & provisions Net current assets Usesoffunds Book value per share (BV) (INR) Freecashflow YeartoMarch Net profit Depreciation Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow Cashflowmetrics YeartoMarch Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividend paid FY09 1,445 92,004 93,449 1 6,988 6,989 1,551 101,989 87,206 46,498 40,708 8,613 31,733 9,023 9,378 19,390 17,309 55,100 25,696 4,662 3,807 34,165 20,935 101,989 323 FY10 1,445 116,906 118,351 265 7,949 8,214 1,370 127,935 104,067 53,820 50,247 3,876 71,766 12,088 8,099 982 16,555 37,724 23,181 6,213 6,284 35,678 2,046 127,935 410 FY11 1,445 137,504 138,949 265 2,828 3,093 1,370 143,412 129,659 63,955 65,704 3,876 51,067 14,150 8,933 25,085 15,395 63,563 24,540 11,000 5,258 40,798 22,765 143,412 481 FY12E 1,445 158,523 159,968 265 2,828 3,093 1,370 164,431 169,659 76,377 93,282 3,876 56,067 17,305 11,529 14,662 16,195 59,691 32,025 11,000 5,461 48,485 11,205 164,431 554 (INRmn) FY13E 1,445 182,392 183,837 265 2,828 3,093 1,370 188,300 184,659 91,081 93,578 3,876 81,067 19,371 14,507 7,555 16,995 58,428 31,938 11,000 5,711 48,649 9,778 188,300 636
FY09 12,188 7,065 261 19,514 1,966 17,548 15,603 1,945
FY10 24,975 8,250 3,246 36,472 3,784 32,688 12,124 20,564
FY11 22,887 10,135 (1,540) 31,481 (4,410) 35,891 25,592 10,299
FY12E 23,723 12,422 34 36,178 (934) 37,112 40,000 (2,888)
FY13E 26,573 14,704 250 41,528 5,930 35,597 15,000 20,597
FY09 17,548 (5,414) 4,016 16,150 (15,603) (1,691)
FY10 32,688 1,990 (53,085) (18,408) (12,124) (1,183)
FY11 35,891 (6,896) (4,893) 24,103 (25,592) (2,021)
FY12E 37,112 (2,535) (45,000) (10,423) (40,000) (2,535)
FY13E 35,597 (2,704) (40,000) (7,107) (15,000) (2,704)
92
Automobiles
Profitability&liquidityratios YeartoMarch ROAE (%) ROACE (%) Inventory days Debtors days Payble days Cash conversion cycle (days) Current ratio Debt/EBITDA Fixed asset turnover (x) Debt/Equity Adjusted debt/equity Operatingratios YeartoMarch Total asset turnover Fixed asset turnover Equity turnover Dupontanalysis YeartoMarch NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuationparameters YeartoMarch EPS (INR) YoYgrowth(%) CEPS (INR) PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) FY09 15.8 20.8 19 14 34 (1) 1.6 0.4 5.6 0.1 0.1 FY10 23.7 46.4 15 11 36 (9) 1.1 0.2 6.5 0.1 0.1 FY11 17.6 30.7 15 8 27 (4) 1.6 0.1 6.3 0.0 0.0 FY12E 15.9 23.8 15 9 27 (3) 1.2 0.1 5.3 0.0 0.0 FY13E 15.5 25.8 16 10 27 (2) 1.2 0.1 5.2 0.0 0.0
FY09 2.1 5.6 2.3
FY10 2.6 6.5 2.8
FY11 2.7 6.3 2.9
FY12E 2.8 5.3 2.8
FY13E 2.7 5.2 2.8
FY09 6.8 2.1 1.1 15.8
FY10 8.5 2.6 1.1 23.7 100.9% FY10 86.9 79.0 115.5 13.9 3.0 1.0 7.6 0.5
FY11 6.2 2.7 1.1 17.6
FY12E 5.6 2.8 1.0 15.9
FY13E 5.5 2.7 1.0 15.5
FY09 48.6 (18.9) 73.0 24.9 3.7 1.5 16.2 0.4
FY11 78.5 (9.7) 113.6 15.4 2.5 0.8 8.4 0.6
FY12E 82.1 4.6 125.1 14.7 2.2 0.7 7.8 0.7
FY13E 92.0 12.0 142.9 13.2 1.9 0.5 6.2 0.7
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COMPANY UPDATE
Automobiles
TATAMOTORS
JLR:Growthengine
Strong SUV demand across the globe and new launch Evoque have brightened business prospects for JLR. Weakness in domestic business should persist, but its contribution to total PAT is steadily declining. We maintain BUY with target price of INR 1,403. Uncertainty surrounding Europeaneconomyisthekeyrisk.
EDELWEISS4DRATING AbsoluteRating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to market MARKETDATA(R:TAMO.BO,B:TTMTIN) CMP : INR 994 Target Price : INR 1,403 52-week range (INR) : 1,381 / 748 Share in issue (mn) : 637.7 M cap (INR bn/USD mn) : 594 / 13,288 Avg. Daily Vol. BSE/NSE (000) : 3,624.1 BUY Outperformer Medium Equalweight
RidingLandRoverexpresswaytogrowth
In our view Land Rover is likely to drive growth for JLR business. After refreshing the Jaguar portfolio, Tata Motors (TTMT) is likely to have new launches from Land Rover stable starting with Evoque in Q2FY12. We have built in sales of 280,000 units vs company guidance of 300,000. Margin (~16% in FY11) is likely to stabilise or improve primarily on: (a) favourable product mix (rise in Land Rover contribution); (b) better geography (emerging market) mix wherein JLR will have more pricing power;
EvoquelaunchandQ2FY12earningstobekeypositivetriggers
Evoque is likely to be launched in Q2FY12 at a price point starting GBP 28,000. We expect it to contribute 8% to FY12E JLR sales. This should augur well for profitability as the contribution of lowmargin Jaguar to total sales should decline in FY13E by 700bps to 15% vis--vis FY11.
Others 28.6%

Promoters* 34.8% FIIs 23.6% MFs, FIs & Banks 12.9%

: NIL
RisingJLRcontributiontooffsetweakdomesticoperations
JLR contribution to total PAT is consistently rising and should reach 80% by FY13. Thus the business model has got more linked with global economic performance and less on Indian economy. We have built in 8%/13% growth in truck demand and 6% decline/ 10% growth in passenger vehicle ex Nano demand for FY12/13 respectively.
Outlook&valuations:Positivesoutweighnegatives;maintainBUY
Strong demand for SUV across globe and new launch Evoque has brightened both sales and margin outlook for JLR. Given the low contribution from weak domestic operation, risk-reward is tilted in favour of the latter. We maintain BUY/ Sector Outperformer recommendation/rating on the stock with a SOTP-based target price of INR 1,403.
Financials(Consolidated) YeartoMarch Revenues (INR mn) Rev.growth(%) EBITDA (INR mn) Adj net profit (INR mn) Shares outstanding (mn) Diluted adj EPS - (INR) EPSgrowth(%) Diluted P/E - (x) EV/EBITDA (x) ROAE (%)
PRICEPERFORMANCE(%) Stock 1 month (14.0) 3 months (12.5) 12 months 36.5 SachinGupta

Nifty (1.0) (0.2) 8.0
EWAuto Index (5.2) (3.1) 9.6
FY10 FY11 FY12E 925,193 1,231,333 1,443,035 30.5 33.1 17.2 86,137 177,800 201,273 10,787 90,426 99,100 601 641 641 18.0 141.1 154.6 (132.0) 685.4 9.6 55.3 7.0 6.4 9.4 4.7 4.0 13.8 65.3 41.7
FY13E 1,625,691 12.7 233,666 120,713 641 188.3 21.8 5.3 3.2 36.1
ChetanVora
Automobiles
InvestmentRationale
Strong global demand for luxury SUVs is fuelling JLR volumes (~75% of sales from Land Rover stable). Profitability is on the uptrend as it is being driven not only by an improving product mix (higher margin), but also from a better geography mix (leading to higher realisation on better pricing power). Performance of JLR should get further fillip with the launch of Evoque, probably in Q2FY12. The near-term macro impacting domestic business (commercial vehicles and passenger vehicles) will be offset by higher earnings growth in the JLR business (17% CAGR over FY11-13E).
EvoquelaunchinQ2FY12tobekeytrigger
After refurbishing the Jaguar portfolio in FY10-11, we expect new launches from the Land Rover stable. Of that, Evoque is likely to be launched in Q2FY12 with an expected price point in the GBP 28,000-42,000 range. This, in our view, should boost JLR sales. We expect average monthly sales of 2,500 units of Evoque and 280,000 units for JLR in FY12E, implying 15% volume growth for FY12E. Evoque is the smallest ever Range Rover and is targeted at the BMW X1 and forthcoming Audi Q3. The company expects substantial prospective Evoque customers will be first time buyers of a Land Rover product. It is targeted at younger and more urban customers. So far, the car has received good reviews from different automobile magazines.
Fig1:EvoqueLikelytosetcashregistersringing
Source:Company
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Automobiles
Chart1:USluxurycarmarketonuptrend
350,000 280,000
(Nos.)
Chart2:Europesaleshaveremainedfairlystable
750,000 600,000 450,000 300,000 150,000 0
(Nos.)
210,000 140,000 70,000 0

Q1CY08 Q2CY08 Q3CY08 Q4CY08 Q1CY09 Q2CY09 Q3CY09 Q4CY09 Q1CY10 Q2CY10 Q3CY10 Q4CY10 Q1CY11
Q1CY08
Q2CY08
Q3CY08
Q4CY08
Q1CY09
Q2CY09
Q3CY09
Q4CY09
Q1CY10
Q2CY10
Q3CY10
Q4CY10
Toyota Lexus BMW Daimler Smart
Ford Volvo BMW Mini LandRover
Audi Mercedes Jaguar
Aston Martin Mercedes Audi
BMW Porsche Jaguar
BMW Mini Lexus LandRover
Source:Company,Bloomberg,Edelweissresearch
Chart3:JLRquarterlywholesalesales,maintainingmomentum 65,000
52,000
(Nos.)
39,000 26,000 13,000 0

Jaguar

Land Rover
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Q1CY11
Automobiles
Chart4:USvehiclediscountsDecliningforpremiumvehicles 14.0%
12.8% 11.6% 10.4% 9.2% 8.0%
Aug-10 Dec-10 Apr-10 Oct-10 May-10 Nov-10 Apr-11 May-11 (%) Feb-10 Sep-10 Jan-11 Mar-10 Feb-11 Mar-11 Oct-10 Jun-10 Jul-10
Luxury Car
Luxury SUV
Source:Edmunds
Chart5:Manheimindexcontinuestoshowstronggrowthinreplacementvalue 40.0 24.0

20.0 0.0
(%)
16.0 8.0 0.0 (8.0) (16.0)

Aug-02 Dec-04 Oct-03 May-04 Aug-09 Apr-07 May-11 Nov-07 Feb-06 Sep-06 Jan-02 Mar-03 Jan-09 Mar-10 Jun-01 Jun-08 Jul-05
(20.0) (40.0) (60.0)
US Retail light vehicle sales (Y-o-Y)
Manheim index (Y-o-Y) - RHS

Source:Manheim
Productmixlikelytoimprove
With the launch of Evoque, we expect Land Rovers contribution in the overall JLR portfolio to surge (from 78% in FY11 to 83% and 85% in FY12 and FY13, respectively), thereby improving the overall product mix in favour of Land Rover as it is highly profitable and operates in an industry wherein the competitive intensity is relatively low vis--vis Jaguar.
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Automobiles
Chart6:LandRovercontributiontoincreaseinJLRonlaunchofEvoque
100.0 80.0
(%)
60.0 40.0 20.0 0.0 FY11E Jaguar FY12E LandRover FY13E Evoque
Longtermcostrestructuringinplace
TTMT is on track in its long-term cost rationalisation programme, which includes: (a) lowering the total number of platforms to 8 from 12; (b) increasing sourcing from low-cost destinations; and (3) setting up plants in low-cost destinations which will help maintain margin ~16% in the context of volatile commodity prices.
Nearterm weakness in domestic operations offset by rising JLR contribution

The company is one of the most diversified plays amongst the Indian commercial vehicle (CV) makers, with ~57% market share in the less volatile light commercial vehicles (LCVs) which we expect to grow 11% and 14% in FY12E and FY13E, respectively. We expect medium and heavy trucks (M&HCV) demand to slow down to 8% in FY12E and 13% in FY13E. Similarly, we expect passenger vehicle sales (excluding Nano) to decline by 6% in FY12E and grow 10% in FY13E, respectively. Moderating volumes and commodity inflation should keep margins of standalone business under pressure. However, contribution of lowmargin Indian operations is declining in the overall consolidated profit and that of JLR is rising (to contribute ~80 to FY12E consolidated profit), further de-risking the business model.
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Automobiles
Chart7:JLRcontributiontowardsconsolidatedEBITDAtorisefrom35%inFY10to~66%inFY13E FY13E FY10 Subsidiari Subsidiari es es 15% 10%
TTMT 24%
TTMT 50% JLR 35% JLR 66%

10%aboveconsensusonFY13Eearnings
We are in line consensus earnings with respect to FY12E whilst we are 10% above consensus earnings on FY13E. Table1:EarningsestimatesasperEdelweissvisvisconsensus FY12E FY13E Edel Consensus (%) Edel Consensus (%) Sales (INR mn) 1,443,020 1,426,327 1.2 1,625,673 1,603,509 1.4 EBITDA (INR mn) 201,265 192,690 4.5 233,671 214,710 8.8 EBITDA (%) 13.9 13.5 3.2 14.4 13.4 7.3 EPS (INR) 155.4 155.2 0.1 189.3 172.4 9.8
Outlookandvaluations:JLRdrivingvaluation;maintainBUY
Given the positive outlook on JLR and robust earnings growth, we maintain our BUY recommendation on the stock, negating domestic concerns. We believe that risk-reward is tilted in favour of the latter, given the new launch Evoque planned in Q2FY12. Hence, we maintain our BUY/SectorOutperformer recommendation/rating on the stock with a target price of INR 1,403. We value domestic business at 5x FY13E EV/EBITDA (in line with historical downcycle valuation). For JLR, we have used 4x FY13E EV/EBITDA (in line with global peers, factoring in moderating growth). Our earlier target price was INR 1,410; the revision is due to replacement of JLRs FY11 balance sheet estimates with actual numbers.
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Table2:SOTPvaluationatINR1.403 Particulars Tata Motors standalone JLR Tata Motors subsidiaries Net value
TataMotorsstandalone FY13E EBITDA Multiple (x) EV Net debt Equity value Value per share JLR FY13E EBITDA Less: R&D expenses capitalised Adjusted EBITDA Multiple (x) EV Net debt Equity value Value per share Value(INR) 301 996 106 1,403 Value(INR) 58,104 5.0 290,520 97,435 193,085 301 Value(INR) 156,039 (17,250) 138,789 4.0 555,154 (83,085) 638,240 996 Methodology 5x FY13E EV/EBITDA 4x FY13E EV/EBITDA Valuation of top 6 subsidiaries
Methodology Estimated EBITDA margin of 9.7% in FY13E Inline with historical valuations Excluding debt for vehicle financing
Methodology Without any charge for R&D amortisation GBP 250mn R&D expenses capitalised every year Inline with global peers Consolidated net debt less TTMT standalone
Valuationofsubsidiaries
Subsidiaries Tata Daewoo Tata Technologies HVAL HVTL Vehicle Financing Telcon Total Holding company discount Value of subsidiaries
Basisofvaluation 12x FY12 earnings 12x FY12 earnings 12x FY12 earnings 12x FY12 earnings 1x P/BV Implied valuation of stake sale
Value(INRmn) 15,210 14,987 11,589 9,563 16,250 59,195 67,598
%holding 100.0 81.5 85.0 85.0 100.0 40.0
Valuepershare(INR) 24 19 15 13 25 37 133 20.0 27 106

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KeyRisks
Globalliquiditycrisis
Weakness in global economy, leading to drying up of bank funding for premium SUV business, could be a key risk to our sales growth and margin assumption for JLR.
Adversecurrencymovements
JLR has EUR and USD exposure as its non-Europe sales are in USD (~50% of sales) while Europe sales and certain input cost expenditures are in EUR. Hence, a weakening USD and an appreciating EUR are negatives. Company undertakes forex hedges details of which are not disclosed. It also has pricing power given its sales in premium segment. Hence impact of adverse/favourable movement could be muted compared to the result exhibited in the table given below.
Table3:JLRscurrencysensitivitytoFY12EconsolidatedEPS GBP/USD GBP/Euro 1.77 1.61 1.45 1.25 -24.5% 13.9% 52.2% 1.14 -38.4% 0.0% 38.4% 1.02 -52.2% -13.9% 24.5%
SlowdowninIndianeconomy
Worsethan-expected economic deterioration which could lead to higherthan-expected sales slowdown could drag both our domestic sales and margin assumption. This could be a key risk to our earnings assumption.
Table4:VolumesensitivityonFY12consolidatedEPS Worstcase JLR's volume growth (%) 4.0 Impact on consolidated EPS -23.6% Standalone volume growth (%) 0.8 Impact on consolidated EPS -7.2%

Basecase 14.9 0.0% 10.8 0.0%
Bestcase 25.8 23.6% 20.8 7.2%
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Automobiles
AnnualTrendsStandalone
Chart8:Growthhasbeenintandemwithindustry 66.0 58.0
44.0
(%)
Chart9:MktshareintrucksfellinFY11 250,000
200,000
(%) (Nos.)
70.0 62.0 54.0 46.0 38.0 30.0

(%)
43.5 29.0 14.5 0.0 (14.5)

FY12E FY13E FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
22.0 0.0 (22.0) (44.0)
150,000 100,000 50,000 0

TTMT's trucks Y-o-Y (%) Industry's trucks Y-o-Y (%) TTMT's buses Y-o-Y (RHS) Industry's buses Y-o-Y (RHS)
Trucks Trucks mkt share (RHS)
Buses Buses mkt share (RHS)
Chart10:CompactandUVsegmentloosingsheen 160,000
128,000
(Nos.)
Chart11:Sedansegmenthasbeenabletodefendshare 30.0
24.0 18.0
(%)
96,000 64,000
12.0 6.0
32,000 0
FY12E FY13E FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
0.0
FY12E FY13E FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
UV
Compact
Sedan
UV's mkt share (%) Compact's (A2) mkt share (%) Sedan's (A3) mkt share (%)
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Chart12:Capacityutilisationbelowpar 1,500,000
100.0 80.0 60.0 40.0 20.0 0.0

(%)
1,200,000
(Nos.)
900,000 600,000 300,000 0

Installed capacity

Chart13:CVsandPVscontributeequallytovolumes 100.0
80.0
(% to sales)
Chart14:M&HCVcontributes~45%tototalrevenue 100.0
80.0
(% to sales)
60.0 40.0 20.0
60.0 40.0 20.0 0.0

FY12E FY13E
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
0.0
FY12E FY13E FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
MHCV
LCV
UV
Passenger cars (Exc Nano)
Nano
MHCV UV Other operating income
LCV Passenger cars
104
FY11
Automobiles
Chart15:Realisationpervehicleforvarioussegments 1,300,000 750,000
600,000
(INR/vehicle)
Chart16:MarginstobesubduedonRMpressures 20.0 76.0

16.0
(INR/vehicle) (% to sales)
1,150,000 1,000,000 850,000 700,000
72.0 68.0 64.0 60.0 56.0

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E (% to sales) (%) (%)
450,000 300,000 150,000 0

12.0 8.0 4.0 0.0
550,000
LCV
UVs
Passenger cars
MHCV (RHS)
Chart17:Capacityutilisationbelowpar 96.0
72.0 48.0
(%)
260.0 195.0
Chart18:R&Das%tosales 17,500
14,000
(INR mn) (%)
7.5 6.0 4.5 3.0 1.5 0.0
130.0 65.0 0.0
10,500 7,000 3,500
24.0 0.0 (24.0)

(65.0) 0
FY04 FY05 FY06 FY07 FY08 FY09 FY10
Net revenue Operating profit (RHS)
Gross profit
R&D
Chart19:FCFtodeclineonhighercapex 80.0
40.0
(INR/share)
400 320 240 160 80 0

(INR/share)
Chart20:Returnslowonprofitability,equitydilution 15.0 45.0

30.0 15.0
(%)
12.0 9.0 6.0 3.0 0.0

0.0 (40.0) (80.0)
0.0 (15.0) (30.0)
(120.0)
EPS
Free cash flow
Book value (RHS)
RoACE
RoAE
EBITDA margin (RHS)
105
Automobiles
QuarterlyTrendsStandalone
Chart21:RMcostspushweighingdownoperatingprofit 200,000 650,000
160,000
(INR/vehicle)
Chart22:Quarterlycostmatrix 20.0
16.0
76.5 74.0 71.5 69.0 66.5 64.0

(%)
600,000 550,000 500,000 450,000 400,000

Q1FY08 Q3FY08 Q1FY09 Q3FY09 Q1FY10 Q3FY10 Q1FY11 Q3FY11 (INR/Vehicle)
120,000 80,000 40,000 0
12.0
(%)
8.0 4.0 0.0

Gross profit* Realisation (RHS)
Operating profit
Raw material - RHS Other operating costs
Source:Company,Edelweissresearch Note:*Grossprofit=netsalesrawmaterialcosts
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CompanyDescription
TTMT is India's largest automobile company with presence in commercial and passenger vehicles. It is the leader in nearly all commercial vehicle segments and the third largest in the passenger vehicles market, with products in the compact and mid size car, and utility vehicle segments. Through subsidiaries and associate companies, the company has operations in the UK, South Korea, Thailand and Spain. Among them is Jaguar Land Rover, the business comprising the two iconic British brands. It also has an industrial joint venture with Fiat in India. It is also the world's fourth largest truck manufacturer and the second largest bus manufacturer. TTMT cars, buses and trucks are being marketed in several countries in Europe, Africa, the Middle East, South Asia, South East Asia and South America.
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IncomeStatementsJLR
Incomestatement YeartoMarch Total volume (nos) %Growth Income from operations Materials costs Manufacturing expenses Staff costs S G & A expenses Total operating expenses EBITDA Depreciation & amortisation EBIT Interest Non-Operational Income Profit before tax Provision for tax Current taxes Core profit Extraordinary income/ (loss) Profit after tax Commonsizemetricsas%ofnetrevenues YeartoMarch Operating expenses Materials costs Staff costs S G & A expenses Depreciation Interest expenditure EBITDA margins Net profit margins Growthmetrics(%) YeartoMarch Revenues EBITDA PBT Net profit EPS FY09 167,300 0.0 4,974 3,296 85 569 1,068 5,018 (44) 209 (253) 59 0 (312) 25 25 (337) 0 (337) FY10 193,982 15.9 6,554 4,439 112 730 881 6,162 392 369 23 49 0 (26) 29 29 (54) 39 (15) FY11 243,620 25.6 9,905 6,339 125 857 965 8,287 1,619 500 1,119 22 2 1,099 83 83 1,016 27 1,043 FY12E 279,883 14.9 11,682 7,628 152 923 1,016 9,719 1,963 617 1,346 123 11 1,234 100 100 1,134 0 1,134 (GBPmn) FY13E 320,352 14.5 13,112 8,523 170 1,010 1,180 10,883 2,229 752 1,477 51 21 1,447 109 109 1,339 0 1,339
FY09 100.9 66.3 11.4 21.5 4.2 1.2 (0.9) (6.8)
FY10 94.0 67.7 11.1 13.4 5.6 0.7 6.0 (0.8)
FY11 83.7 64.0 8.7 9.7 5.0 0.2 16.3 10.3
FY12E 83.2 65.3 7.9 8.7 5.3 1.1 16.8 9.7
FY13E 83.0 65.0 7.7 9.0 5.7 0.4 17.0 10.2
FY09 -
FY10 31.8 (992.5) (91.8) (83.8) (86.1)
FY11 51.1 313.0 (4,383.9) (1,964.7) (1,847.0)
FY12E 17.9 21.3 12.3 11.6 11.6
FY13E 12.2 13.6 17.3 18.1 18.1
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FinancialStatementsStandalone
Incomestatement YeartoMarch Total volume (nos) %Growth Income from operations Materials costs Manufacturing expenses Staff costs S G & A expenses Less: Expenses capitalised Total operating expenses EBITDA Depreciation and amortisation EBIT Interest Non-operational Income Profit before tax Provision for tax Core profit Extraordinary income/ (loss) Profit after tax Profit after minority interest Basic shares outstanding Basic earnings per share (EPS) Diluted shares outstanding Diluted adj EPS Cash EPS Dividend per share Dividend payout (%) Commonsizemetricsas%ofnetrevenues YeartoMarch Operating expenses Materials costs Staff costs S G & A expenses Depreciation Interest expenditure EBITDA margins Net profit margins Growthmetrics(%) YeartoMarch Revenues EBITDA PBT Net profit EPS FY09 497,687 (14.4) 254,909 186,060 20,681 15,514 25,369 8,851 238,773 16,136 9,257 6,879 8,109 5,429 4,199 125 4,074 5,939 10,013 10,013 514 7.9 514 7.9 25.9 6.1 34.5 FY10 642,467 29.1 355,931 242,992 27,888 18,361 32,312 7,405 314,148 41,783 11,779 30,004 12,462 1,947 19,489 5,895 13,594 8,807 22,401 22,401 571 23.8 601 22.6 54.8 15.1 44.3 FY11 803,436 25.1 480,404 340,674 36,361 22,940 40,893 8,177 432,692 47,712 14,669 33,043 15,317 5,710 23,436 3,847 19,589 (1,471) 18,118 18,118 638 30.7 641 30.6 53.7 20.0 82.4 FY12E 890,042 10.8 533,606 382,400 40,515 25,421 48,194 10,923 485,608 47,998 17,358 30,641 14,012 5,973 22,602 5,876 16,725 0 16,725 16,725 638 26.2 641 26.1 53.4 15.0 66.9 (INRmn) FY13E 1,011,777 13.7 601,616 427,037 45,687 29,861 53,153 12,226 543,513 58,104 19,602 38,502 14,156 6,068 30,414 7,908 22,506 0 22,506 22,506 638 35.3 641 35.1 66.0 20.0 66.3
FY09 93.7 73.0 6.1 10.0 3.6 3.2 6.3 1.6
FY10 88.3 68.3 5.2 9.1 3.3 3.5 11.7 3.8
FY11 90.1 70.9 4.8 8.5 3.1 3.2 9.9 4.1
FY12E 91.0 71.7 4.8 9.0 3.3 2.6 9.0 3.1
FY13E 90.3 71.0 5.0 8.8 3.3 2.4 9.7 3.7
FY09 (10.8) (42.1) (80.0) (74.4) (78.7)
FY10 39.6 158.9 364.1 233.7 185.6
FY11 35.0 14.2 20.3 44.1 35.0
FY12E 11.1 0.6 (3.6) (14.6) (14.6)
FY13E 12.7 21.1 34.6 34.6 34.6
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Balancesheet Ason31stMarch Equity capital Reserves & surplus Shareholders funds Secured loans Unsecured loans Borrowings Deferred tax (Net) Sourcesoffunds Gross block Depreciation Net block Capital work in progress Investments Inventories Sundry debtors Cash and bank balance Loans and advances Total current assets Sundry creditors Others current liabilities Provisions Total current liab. & provisions Net current assets Misc expenditure Usesoffunds Book value per share (BV) (INR) Freecashflow YeartoMarch Net profit Depreciation Deferred tax Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Freecashflow Cashflowmetrics YeartoMarch Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividend paid Share issuance/(buyback) FY09 5,141 117,160 122,300 54,158 79,139 133,296 8,658 264,255 139,052 62,599 76,453 69,469 129,681 22,298 12,055 11,418 49,630 95,401 83,710 2,270 20,790 106,769 (11,368) 20 264,255 238 FY10 5,706 143,948 149,654 75,809 88,833 164,642 15,086 329,382 184,168 72,129 112,039 52,322 223,369 29,356 23,919 17,533 44,571 115,379 118,247 27,845 27,634 173,726 (58,347) 0 329,382 262 FY11 6,377 193,755 200,132 70,155 88,833 158,988 20,232 379,352 218,171 85,737 132,434 42,322 226,243 38,914 26,029 24,289 51,674 140,906 102,481 27,845 32,227 162,552 (21,646) 0 379,352 314 FY12E 6,377 199,288 205,665 70,155 92,466 162,621 20,232 388,518 251,171 101,695 149,477 44,322 208,743 50,786 31,923 21,344 54,349 158,402 116,082 27,845 28,497 172,424 (14,023) 0 388,519 323 (INRmn) FY13E 6,377 206,873 213,250 70,155 92,466 162,621 20,232 396,104 284,171 119,896 164,275 46,322 213,511 49,089 35,998 24,065 57,091 166,243 134,174 27,845 32,227 194,246 (28,003) 0 396,106 334 (INRmn) FY13E 22,507 18,202 40,709 (12,973) 53,682 35,000 18,682
FY09 FY10 FY11 10,013 22,401 18,118 8,745 10,339 13,608 (25) 5,895 (5,914) (14,701) 1,471 12,819 23,933 33,197 735 (46,652) 34,947 12,084 70,584 (1,750) 50,144 28,778 24,003 (38,060) 41,807 (25,753)
FY12E 16,725 15,958 32,683 6,839 25,844 35,000 (9,156)
FY09 FY10 FY11 12,084 70,584 (1,750) 99,492 48,493 36,855 (124,132) (112,963) (28,973) (12,555) 6,115 6,132 (50,144) (28,778) (24,003) (6,597) (3,457) (9,919) 1,285 566 671
FY12E 25,844 (11,289) (17,500) (2,945) (35,000) (14,922) -
FY13E 53,682 (11,192) (39,769) 2,721 (35,000) (11,192) -
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Profitability&liquidityratios YeartoMarch ROAE (%) ROACE (%) Inventory days Debtors days Payable days Cash conversion cycle (days) Current ratio Debt/EBITDA Fixed asset turnover (x) Debt/Equity Operatingratios YeartoMarch Total asset turnover Fixed asset turnover Equity turnover Dupontanalysis YeartoMarch NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuationparameters YeartoMarch Diluted Adj EPS (INR) YoYgrowth(%) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) FY09 4.1 5.8 41 17 148 (90) 0.9 8.3 3.9 1.1 FY10 10.0 24.9 35 18 136 (83) 0.7 3.9 3.8 1.1 FY11 11.2 25.5 33 19 107 (55) 0.9 3.3 3.9 0.8 FY12E 8.2 18.4 39 20 94 (36) 0.9 3.4 3.8 0.8 FY13E 10.7 21.3 39 21 97 (37) 0.9 2.8 3.8 0.8
FY09 1.2 3.9 2.5
FY10 1.2 3.8 2.6
FY11 1.4 3.9 2.7
FY12E 1.4 3.8 2.6
FY13E 1.5 3.8 2.9
FY09 1.6 1.2 2.1 4.1
FY10 3.8 1.2 2.2 10.0
FY11 4.1 1.4 2.0 11.2
FY12E 3.1 1.4 1.9 8.2
FY13E 3.7 1.5 1.9 10.7
FY09 7.9 (78.7) 25.9 125.4 4.2 2.0 31.2 0.6
FY10 22.6 185.6 54.8 43.9 3.8 1.4 11.7 1.5
FY11 30.6 35.0 53.7 32.5 3.2 1.1 11.4 2.0
FY12E 26.1 (14.6) 53.4 38.1 3.1 1.1 11.8 1.5
FY13E 35.1 34.6 66.0 28.3 3.0 0.9 9.6 2.0
111
Automobiles
FinancialStatementsConsolidated
Incomestatement YeartoMarch Income from operations Materials costs Manufacturing expenses Staff costs S G & A expenses Less:Expenses capitalised Total operating expenses EBITDA Depreciation and amortisation EBIT Interest Non-Operational Income Profit before tax Provision for tax Adj net profit before minority interest Minority interest Adjusted profit after minority interest Extraordinary income/ (loss) Reported profit Basic shares outstanding Earnings per share (EPS) Diluted shares outstanding Adj diluted EPS Commonsizemetricsas%ofnetrevenues YeartoMarch Operating expenses Materials costs Staff costs S G & A expenses Depreciation Interest expenditure EBITDA margins Net profit margins Growthmetrics(%) YeartoMarch Revenues EBITDA PBT Adj Net profit EPS FY09 708,810 480,246 44,081 72,974 135,936 46,388 686,849 21,960 28,545 (6,585) 21,706 3,237 (25,054) 3,358 (28,412) (403) (28,814) 3,757 (25,057) 514 (56.1) 514 (56.1) FY10 925,193 614,954 52,619 87,518 129,890 45,925 839,055 86,137 43,853 42,284 24,653 2,672 20,303 10,058 10,245 542 10,787 14,919 25,706 571 18.9 601 18.0 FY11 1,231,333 790,084 45,813 93,427 181,622 57,413 1,053,533 177,800 56,180 121,620 28,965 9,407 102,062 12,164 89,898 528 90,426 2,310.1 92,736 638 141.8 641 141.1 FY12E 1,443,035 963,139 51,974 104,505 133,068 10,923 1,241,762 201,273 66,180 135,093 31,936 10,898 114,054 15,373 98,681 419 99,100 0.0 99,100 638 155.4 641 154.6 (INRmn) FY13E 1,625,691 1,077,087 58,653 116,639 151,872 12,226 1,392,025 233,666 78,001 155,664 28,416 11,694 138,942 18,493 120,449 264 120,713 0.0 120,713 638 189.3 641 188.3
FY09 96.9 67.8 10.3 12.6 4.0 3.1 3.1 (4.0)
FY10 90.7 66.5 9.5 9.1 4.7 2.7 9.3 1.1
FY11 85.6 64.2 7.6 10.1 4.6 2.4 14.4 7.3
FY12E 86.1 66.7 7.2 8.5 4.6 2.2 13.9 6.8
FY13E 85.6 66.3 7.2 8.6 4.8 1.7 14.4 7.4
FY09 98.8 (48.3) (185.6) (237.0) (219.6)
FY10 30.5 292.2 (181.0) (136.1) (132.0)
FY11 33.1 106.4 402.7 777.5 685.4
FY12E 17.2 13.2 11.8 9.8 9.6
FY13E 12.7 16.1 21.8 22.1 21.8
112
Automobiles
Balancesheet Ason31stMarch Equity capital Reserves & surplus Shareholders funds Secured loans Unsecured loans Borrowings Minority Interest Deferred tax (Net) Sourcesoffunds Goodwill on consolidation Gross block Depreciation Net block Capital work in progress Investments Inventories Sundry debtors Cash and bank balance Loans and advances Other current assets Total current assets Sundry creditors Others current liabilities Provisions Total current liab. & provisions Net current assets Misc expenditure Usesoffunds Book value per share (BV) (INR) Freecashflow YeartoMarch Net profit Depreciation Deferred tax Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex FreeCashFlow Cashflowmetrics YeartoMarch Operating cash flow Financing cash flow Investing cash flow Net Cash Flow Capex Dividend paid Share issuance/(buyback)
113
FY09 5,141 54,266 59,406 130,690 212,684 343,374 4,030 6,802 413,613 37,187 584,694 332,691 252,003 105,330 12,574 109,506 47,949 41,213 128,166 26 326,860 227,586 12,216 81,400 321,202 5,658 861 413,613 114
FY10 5,706 76,359 82,064 214,812 139,023 353,835 2,135 11,536 449,571 34,229 648,518 344,135 304,383 80,680 22,191 113,120 71,912 87,433 152,807 24 425,296 293,718 47,055 76,435 417,208 8,088 0 449,571 144
FY11 6,377 185,338 191,714 170,469 157,446 327,915 2,466 14,638 536,733 35,848 744,941 390,690 354,251 80,680 25,443 140,705 68,774 109,479 191,372 19 510,349 324,092 47,055 98,692 469,838 40,511 0 536,733 301
FY12E 6,377 273,246 279,622 208,969 171,263 380,232 1,871 14,638 676,363 35,848 884,941 456,870 428,071 80,680 148,528 117,819 49,408 57,721 204,334 19 429,301 304,049 47,055 94,962 446,065 (16,764) 0 676,363 439
(INRmn) FY13E 6,377 379,037 385,414 194,969 187,152 382,121 1,122 14,638 783,294 35,848 1,024,941 534,872 490,069 80,680 192,460 132,872 55,721 65,028 219,240 19 472,880 342,897 47,055 98,692 488,643 (15,763) 0 783,294 604
FY09 (28,814) 25,068 (1,221) 1,624 (3,344) (52,660) 49,316 285,292 (235,975)
FY10 10,787 38,871 4,340 (4,881) 49,116 (39,176) 88,292 63,644 24,649
FY11 90,426 46,555 0 (528) 136,453 14,540 121,913 98,042 23,871
FY12E 99,100 66,180 0 (419) 164,861 (5,517) 170,379 140,000 30,379
FY13E 120,713 78,001 0 (264) 198,451 (6,306) 204,756 140,000 64,756
FY09 49,316 217,623 (264,058) 2,881 (285,292) (5,893) 1,285
FY10 88,292 17,113 (59,186) 46,220 (63,644) (3,292) 565
FY11 121,913 (884) (98,983) 22,046 (98,042) (9,919) 671
FY12E 170,379 40,949 (263,085) (51,758) (140,000) (14,922) 0
FY13E 204,756 (13,518) (183,932) 7,306 (140,000) (11,192) 0
Automobiles
Profitability&liquidityratios YeartoMarch ROAE (%) ROACE (%) Inventory days Debtors days Payble days Cash conversion cycle (days) Current ratio Debt/EBITDA Fixed asset turnover (x) Debt/Equity Adjusted debt/equity Operatingratios YeartoMarch Total asset turnover Fixed asset turnover Equity turnover DuPontAnalysis YeartoMarch NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuationparameters YeartoMarch Adj Diluted EPS (INR) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) FY09 (38.5) (2.2) 50 18 117 (50) 1.0 15.6 4.4 5.8 5.8 FY10 13.8 10.2 61 24 143 (58) 1.0 4.1 3.3 4.3 4.3 FY11 65.3 25.9 55 21 135 (59) 1.1 1.8 3.7 1.7 1.7 FY12E 41.7 26.0 46 15 113 (52) 1.0 1.9 3.7 1.4 1.4 FY13E 36.1 27.8 40 12 104 (52) 1.0 1.6 3.5 1.0 1.0
FY09 2.2 4.4 9.7
FY10 2.1 3.3 13.1
FY11 2.5 3.7 9.0
FY12E 2.4 3.7 6.1
FY13E 2.2 3.5 4.9
FY09 (4.0) 2.2 4.3 (38.5)
FY10 1.0 2.1 6.1 13.8
FY11 7.3 2.5 3.6 65.3
FY12E 6.8 2.4 2.6 41.7
FY13E 7.4 2.2 2.2 36.1
FY09 (56.1) (2.1) (17.7) 8.7 1.1 36.5 0.6
FY10 18.0 102.4 55.3 6.9 0.9 9.4 1.5
FY11 141.1 229.1 7.0 3.3 0.7 4.7 2.0
FY12E 154.6 258.5 6.4 2.3 0.6 4.0 1.5
FY13E 188.3 311.2 5.3 1.6 0.5 3.2 2.0
114
RATING & INTERPRETATION
Automobiles
Company Ashok Leyland Exide Industries Mahindra & Mahindra Ltd Tata Motors Ltd
Absolute reco REDUCE BUY BUY BUY
Relative reco SU SO SO SO
Relative risk M L M H
Company Bajaj Auto Hero Honda Motors Ltd Maruti Suzuki India Ltd
Absolute reco BUY HOLD REDUCE
Relative reco SO SP SU
Relative Risk H L L
ABSOLUTE RATING
Ratings Buy Hold Reduce Expected absolute returns over 12 months More than 15% Between 15% and - 5% Less than -5%
RELATIVE RETURNS RATING

Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING

Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return
115
Automobiles
EdelweissSecuritiesLimited,Edelweiss house, off C.S.T. Road, Kalina, Mumbai 400 098. Board: (91-22) 4009 4400,Email:research@edelcap.com
Vikas Khemani Nischal Maheshwari Head Institutional Equities Head Research vikas.khemani@edelcap.com nischal.maheshwari@edelcap.com +91 22 2286 4206 +91 22 6623 3411
Coveragegroup(s)ofstocksbyprimaryanalyst(s):Automobiles Ashok Leyland, Bajaj Auto, Exide Industries, Hero Honda, Mahindra & Mahindra, Maruti Suzuki, Tata Motors RecentResearch Date Company
Maruti Suzuki
Title
Price(INR)
1,232
Recos
Reduce
1,150 950 750 550 350 150 Buy
07-Jun-11
Labouring the point; Flash Note
(INR)
01-Jun-11 Automobiles Moderation continues; Sales Update 31-May-11 Amar Buy Raja Buy A battery of prospects; Result Update 204 Not Rated
DistributionofRatings/MarketCap
Buy
Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09
EdelweissResearchCoverageUniverse
Hold Reduce Total
RatingInterpretation Rating Buy Hold Reduce appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period
Expected to
Rating Distribution* * 3 stocks under review Market Cap (INR)

> 50bn
118
51
17
189
Between 10bn and 50 bn
< 10bn
111
61
17
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Automobiles

Valuation Low Reasonable High Reasonable Reasonable Reasonable

Edelweiss Securities Limited

Edelweiss Securities Limited

Ashok Leyland (AL IN)

Bajaj Auto (BJAUT IN)

Hero Honda (HH IN)

Mahindra & Mahindra (MM IN)

Maruti Suzuki (MSIL IN)

Edelweiss Securities Limited

Tata Motors (TTMT IN)

Company 1,518 REDUCE

Price* Mktcap (INR) (USDmn)

Edelweiss Securities Limited

Car sales (RHS)

Edelweiss Securities Limited

16.0 0.0 (16.0) (32.0)

Chart3:Risingspreadbetween5yearBBBbondsandGSecnegativeforcardemand 6.5 60.0

4.9 4.1 3.3 2.5

BBB less 5 Yr GSec yield spread

Edelweiss Securities Limited

Change in GCF growth

Car growth (RHS)

14.0 7.0 0.0

(2.0) (16.0) (30.0)

Car sales (RHS)

Edelweiss Securities Limited

Decline in GDP to induce downgrades in consensus car growth estimates

60.0 40.0 20.0 0.0 (20.0) (40.0)

2.0 0.0 (2.0) (4.0)

Car growth (RHS)

Edelweiss Securities Limited

7.7 5.1 2.6 0.0 (2.6) (5.1)

7.2 4.8 2.4 0.0

Liquidity squeeze is negative for freight availability

(16.0) (48.0) (80.0)

Edelweiss Securities Limited

96.4 95.7 95.0

Truck sold on credit

Loan to value ratio (RHS)

Chart11:SlowdowninIIPgrowthalludestoloomingdeclineinM&HCVdemand 19.5 150.0

6.5 0.0 (6.5) (13.0)

Change in IIP growth

Edelweiss Securities Limited

0.0 (16.0) (32.0)

0.0 (50.0) (100.0)

Change in GCF growth

70.0 40.0 10.0 (20.0) (50.0) (80.0)

2.8 1.4 0.0

BBB less 5 Yr GSec yield spread

Trucks (Y-o-Y) - RHS

Edelweiss Securities Limited

8.0 4.0 0.0

(20.0) (50.0) (80.0)

Truck sales growth (Y-o-Y)

% growth in Freight (RHS)

Edelweiss Securities Limited

Expect trucks to grow by 8% in FY12E and growth should be back ended

0.0 (20.0) (40.0)

MHCV trucks (Y-o-Y) - RHS

Edelweiss Securities Limited

Chart17:Twowheelerandtractorsdemandgettingdecoupledwithliquidity 1,250 1,250 49.5