April 03, 2012

EVENT UPDATE

Commercial Engineers & Body Builders Company Ltd

Blessing in disguise
Sensex: 17478 CMP: INR 66 Target Price: INR 91 Engineering

In the Budget 2012-13, Excise duty on CVs has been enhanced to 12%+3% of chassis value per unit vis--vis 10%+INR 10,300 duty structure, charged earlier. We view this to be a positive development for integrated body builders' viz. CEBBCO and would in turn incentivize selling FBVs by OEMs.
Implications of the new regulation As the government has changed the ad valorem portion of INR 10,300 per vehicle to 3% of the chassis value per vehicle, it would give direct benefit to the customers who would buy a fully built vehicle after paying excise duty of 12% rather than buying a chassis after paying an excise duty of 15% of the chassis value. This is mainly because if the customer buys only a chassis from the manufacturer and gets the body built from the unorganized market, then the manufacturer of the vehicle cannot pass on the excise duty paid on the value added service. Hence, the additional 3% of chassis value per vehicle cannot be absorbed under the CENVAT scheme. Consequently, the effective duty would be 12% + 3% of the vehicle rather than flat INR 10,300 on any vehicle sold. This is better explained with an illustration as given below:Pre-Budget Scenario
If transporter buys only chassis INR Chassis Earlier Excise Duty Duty Total cost to the customer 11,10,300 2,00,000 13,10,300 If transporter buys FBV INR Chassis Body building by a body builder Total Cost of Vehicle (B) Earlier Excise Duty Duty Total cost to the customer 11,10,300 1,89,700 13,00,000 INR Chassis Body building by a body builder Total Cost of Vehicle (B) INR Chassis

Post-Budget Scenario
If transporter buys only chassis Earlier 10,00,000 Excise Duty Duty Total cost to the customer 11,50,000 2,00,000 13,50,000 If transporter buys FBV Earlier 10,00,000 2,00,000 Excise Duty Duty Total cost to the customer 11,50,000 1,70,000 13,20,000

10,00,000 10%+10,300 1,10,300 -

12%+3% 1,50,000 -

Body building from unorganised market 2,00,000 Total Cost of Vehicle (A)

Body building from unorganised market 2,00,000 Total Cost of Vehicle (A)

10,00,000 10%+10,300 1,10,300 2,00,000 -10,300

12%+3% 1,50,000 30,000

1. Difference in cost structure (A-B)

10,300

2. Difference in cost structure (A-B)

30,000

Change in regulation leading to additional benefit to the buyer if body building is done through an organized body builder viz. CEBBCO [2-1]
Source: Company, SPA Research

19,700

Note: As the cost of chassis moves higher on higher tonnage vehicles, the advantage would be even higher, this would eventually favor CEBBCO as the same is predominantly involved in making FBVs for M&HCVs. Expected beneficiary of the changing trend CEBBCO is the largest player in outsourced body building fabrication for CVs in India with 40% share of Tata Motors' CV portfolio and also a preferred vendor by all major OEMs viz. Ashok Leyland, Volvo Eicher, MAN, AMW etc. We expect CEBBCO to be the major beneficiary of the increasing demand of Fully Built Vehicles (FBVs) in India with the gradual shift in focus towards building FBV by CV manufacturers. The share of FBVs has risen to 20% in FY12 vis--vis 12% in FY10. We expect the share of FBVs to rise substantiality over the next decade, as in developed economies all vehicles are sold in FBVs only.
Neeraj Toshniwal
neeraj.toshniwal@spagroupindia.com Ph. No. 91 33 4011 4800 / 4012 6104

Capacity enhancement at opportune time CEBBCO is in the process to expand its body-building capacity by 50% to ~30000 units by Q1FY13E and is incurring a capex of INR 1 bn towards the same. We believe this capacity addition will enable CEBBCO in meeting the increased demand from OEMs for FBV and help it in maintaining its dominant position in the organized space. Outlook & Valuation We expect CEBBCO's topline & bottomline to register a CAGR of 80% & 208% respectively over FY11-FY13E on the back of increased focus on FBVs by OEMs, change in regulations in Budget 2012-13, incentivizing selling FBVs by OEMs coupled with lack of organized players in this space and foray into wagons manufacturing & power sector. We maintain our "BUY" recommendation and target price of INR 91 in 12 months at 6xFY13E EV/EBITDA.

Engineering

Financials
Income statement Year End March (INR mn) Net Sales Growth in Sales (%) Cost of goods sold Employees Cost Other Expenses Total Expenditure EBIDTA (without OI) % Growth EBITDA Margin % Depreciation/Amortization EBIT EBIT Margin % Interest Expense Other Income Exceptionals EBT Tax Expenses PAT APAT % Growth APAT Margin % Key Ratios Year End March Per Share Data (INR) Reported EPS Adj. EPS Growth (%) CEPS DPS BVPS Return Ratios (%) RoACE RoANW RoIC Liquidity Ratios Net Debt/Equity Interest Coverage Ratio Current Ratio Quick Ratio Efficiency Ratios Asset Turnover Ratio Inventory Days Debtor Days Creditor Days Valuation Ratios P/E (x) P/BV (x) P/CEPS (x) Dividend Yield (%) EV/Net Sales (x) EV/EBIDTA (x) FY10 4.73 3.70 1310.42% 4.36 0.00 16.59 35.48% 32.98% 24.06% 0.72 4.81 2.17 1.40 1.98 107 116 201 FY11 FY12E FY13E 9.81 9.81 41.01% 13.48 2.00 53.98 21.80% 19.53% 15.26% 0.55 4.09 2.22 1.25 1.63 103 56 145 6.72 1.22 4.89 3.03% 0.77 4.70 FY10 1829 63.20% 1088 58 318 1464 365 691.32% 19.95% 36 328 17.96% 68 48 (0) 308 105 203 203 1310.42% 11.11% FY11 2121 16.02% 1523 92 377 1992 130 6.11% 39 91 4.29% 93 74 73 16 57 57 2.69% FY12E 4233 99.55% 2840 144 608 3592 642 15.16% 52 590 13.93% 100 57 546 164 382 382 9.03% FY13E 6851 61.85% 4668 226 842 5736 1116 73.84% 16.28% 201 914 13.34% 223 79 770 231 539 539 41.01% 7.87% Application of funds Net Block Capital Work-in-Progress Investments Current Assets Current Liabilities Net Current Assets Misc. Exp not written off Net Deferred Tax Asset Total Assets Cash Flow Year End March (INR mn) EBT Less: Other Income/Exceptionals Add:Depreciation Add: Interest paid Direct taxes paid Change in Working Capital Others Cash Flow from operations (a) Change in Fixed Assets Change in CWIP Change in Investments Others Cash Flow from Investing (b) Change in Equity Debt Raised/(Repaid) Dividend paid Interest paid Others Cash Flow from Financing (c) Net Change in Cash (a+b+c) Opening Cash Closing Cash FY10 308 -48 36 68 -99 -552 0 -287 -33 -126 0 8 -150 79 476 0 -68 -52 434 -3 37 34 FY11 73 -74 39 93 -10 -36 0 83 -213 -565 -377 24 -1132 1404 -87 0 -93 49 1274 225 34 260 FY12E 546 -57 52 100 -164 -634 0 -157 -1347 573 376 27 -371 0 541 0 -100 30 471 -56 260 203 FY13E 770 -79 201 223 -231 -765 0 119 -770 96 0 29 -645 0 860 -110 -223 31 558 32 203 235 250 200 6 1502 693 809 0 -6 1259 427 765 384 1695 624 1071 0 -12 2634 1721 191 8 2850 1201 1649 0 -12 3557 2290 96 8 4448 2002 2446 0 -12 4827 Balance Sheet Year End March (INR mn) Sources of funds Share capital Reserves & Surplus Total Networth Secured Loan Unsecured Loan Total Debt Total Liabilities 429 283 712 545 3 548 1259 549 1624 2173 461 0 461 2634 549 2006 2555 1002 0 1002 3557 549 2416 2966 1862 0 1862 4827 FY10 FY11 FY12E FY13E

-64.47% 395.12%

-71.94% 570.64%

1.04 6.96 1.04 6.96 -71.94% 570.64% 1.74 7.91 0.00 0.00 39.55 46.51 4.68% 3.95% 4.03% 0.09 0.98 2.72 1.61 1.09 119 53 144 42.41 1.11 25.31 0.00% 1.23 20.21 19.05% 16.17% 13.33% 0.31 5.89 2.37 1.32 1.37 109 56 147 9.47 1.42 8.34 0.00% 1.04 6.89

Engineering

Sharad Avasthi

Dy Head - Equity Research

sharad.avasthi@spagroupindia.com

Tel.: +91-33-4011 4800

Ext.832

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