sector update

FY14E
17%
th
row
g
les
a
s
ck
tru
FY13E
11%
FY12
9%
Sachin Gupta
+91 22 6623 3472
sachin.gupta@edelcap.com
Ashish Poddar
+91 22 6620 3099
ashish.poddar@edelcap.com
ic
est
m
o
D
Edelweiss Securities Limited
Automobiles
Executive Summary Demand for medium and heavy commercial vehicles (MHCVs) has been on a structural upswing in India since liberalization, driven by changes like rising trading activity, market share gains from railways and improving profitability of truck operators. Our analysis suggests that the MHCV industry is at the bottom of the cycle and demand could surprise positively in the medium term. The correlation of MHCV truck sales growth with various economic lead indicators validates the bottoming out of the cycle while our channel check confirms the early uptick in truck demand. We believe that inflation and interest rates have peaked and would start easing from H1FY13. Increasing trading activity will create demand for transportation as roadways would gain the most due to capacity constraints of railways. Our forecasting model suggests that truck sales would grow by 11% in FY13E and 17% in FY14E. Higher trading activity, market share gains from Railways spur growth Over the past three decades, demand for MHCV trucks has undergone a sea change largely due to higher trading activity in the economy. The share of trade GDP, less volatile than agricultural or industry GDP, in the overall freight has consistently risen, especially in the last twenty years, leading to longer upcycles. Also, Indian Railways has started focusing less on non‐bulk cargoes and market share gains thereof owing to capacity constraints, partly due to a delay in major freight corridor projects as well as lack of wagons. Our analysis suggests that a 1% decline in rail freight growth leads to a 4% growth in truck volume. Indicators point to demand bottoming out, recovery seen in H2FY13 Our study of five lead indicators (IIP, interest rate, manufacturing inflation, gross capital formation and liquidity with banks) suggests that the present slowdown in truck demand has hit the bottom. Our economists believe that interest rates and inflation have peaked and should reverse in H1FY13. Our perception that ‐ a turnaround in truck demand is around the corner and the recovery would be seen in H2FY13 ‐ is also duly confirmed by our channel checks. Besides, encouraged by a better road network since 1990s, the turnaround time has shortened, leading to a greater demand for higher tonnage vehicles that offer superior profitability. This has improved the profitability of operators. Upgrade Ashok Leyland, Tata Motors; initiating Eicher Motors with ‘BUY’ Companies with right products and wide distribution networks will be the key beneficiaries of the imminent upswing in the cycle. Also, increasing demand for higher tonnage vehicles will help leading companies expand their EBITDA margins and RoE profile (mainly due to high operating leverage and debt deleverage). We have revised earnings estimates upwards for Ashok Leyland and Tata Motors on higher sales volume and margins. Our FY13E/14E EPS for Ashok Leyland, Eicher Motors (CY12E/CY13E) and Tata Motors are 15%/37%, 8%/21% and 4%/3% ahead of the Bloomberg consensus. We have upgraded Ashok Leyland and Tata Motors to 'BUY' from 'HOLD' with target prices of INR39 and INR334 respectively. We also initiate coverage on Eicher Motors with a ‘BUY’ rating and a target price of INR2,807. 1 Edelweiss Securities Limited Automobiles Contents Executive Summary ............................................................................................................ 1 At a Glance ......................................................................................................................... 2 MHCVs: Riding the growth train ........................................................................................ 4 MHCV slowdown to be fleeting, recovery to be sharper ................................................... 5 Rly’s bulk cargo focus, capacity curbs lift road sector ....................................................... 7 Use of high tonnage trucks improves operator margins.................................................... 9 Current trends.................................................................................................................. 11 Slowdown in truck demand bottoming out ..................................................................... 13 We forecast 11%, 17% demand growth for FY13, FY14 ................................................... 15 Competition risks hyped as price, service remain key ..................................................... 16 Key Risks ........................................................................................................................... 18 Companies Ashok Leyland ........................................................................................................... 21 Eicher Motors ........................................................................................................... 33 Tata Motors .............................................................................................................. 57 2 Edelweiss Securities Limited Tata Motors
2,172
Eicher Motors
300 2,692
27
29 2,661
Shares O/S (mn nos) Ashok Leyland
Price (INR)
808,561
58,630
77,825
Mkt cap (INR mn)
BUY
BUY
BUY
Reco
3 177,800
1,231,333
1,622,218
1,925,422
2,164,302
FY11
FY12E
FY13E
FY14E
317,973
281,047
224,050
86,137
925,193
16,053
10,961
7,882
5,945
146,661
134,837
113,375
90,427
10,787
7,458
5,118
3,821
3,088
1,889
43.9
40.4
34.0
27.1
3.6
276.3
189.6
141.6
114.7
70.5
2.2
12.4
18.7
31.7
33.1
30.5
39.3
36.1
21.4
29.3
49.6
22.4
16.9
15.7
53.4
20.9
13.1
25.4
26.0
106.4
292.2
46.5
39.1
32.6
55.6
136.5
22.6
17.5
16.7
55.5
16.9
8.9
19.1
25.8
777.5
(136.1)
47.4
32.4
23.6
61.9
135.8
41.6
36.4
(11.1)
58.2
193.6
EBITDA Net profit
Growth (%)
8.8
18.9
25.4
654.0
(132.0)
45.7
34.0
23.4
62.8
122.8
41.6
36.4
(11.1)
58.2
193.6
EPS
3.4
4.0
5.5
6.2
12.3
1.3
2.8
5.0
7.1
11.1
5.1
7.3
9.3
7.2
11.4
EV / EBITDA (x)
6.8
7.4
8.8
10.5
79.3
7.9
11.5
15.4
18.9
30.8
9.2
13.0
17.8
11.9
25.0
31.6
39.1
47.2
65.3
13.8
29.6
25.6
23.4
22.9
16.5
21.7
17.5
14.1
17.2
11.7
14.7
14.6
13.8
14.4
9.3
12.2
11.6
11.4
10.4
8.6
10.5
10.3
9.9
11.1
11.0
EBITDA margins (%)
Source: Edelweiss research
* CMP as on 16‐Apr‐12
1.8
2.4
3.3
5.0
10.4
2.1
2.7
3.3
4.0
4.8
1.8
2.2
2.4
2.0
2.1
P/E (x) P/B (x) ROE (%)
Valuations
FY10
94,440
131,577
CY14E
69,369
CY12E
CY13E
57,160
CY11
4.2
3,821
19,359 11,286
44,214
FY14E 184,960
CY10
3.0
7,969
15,534
FY13E 151,066
5,841
12,787
FY12E 129,172
2.5
6,572
1.6
4,154
EPS Revenue
(INR)
12,436
Net profit
FY10 72,813 8,008
EBITDA
FY11 111,692
Revenue
Financials (INR mn)
Company
AT A GLANCE
Automobiles
Edelweiss Securities Limited Automobiles MHCVs: Riding the growth train Demand for medium and heavy commercial trucks could surprise positively, driven by structural changes like rising trading activities, continuous gain of market share from railways and improving profitability of truck operators. Lead indicators suggest that demand decline has bottomed out while our channel checks confirm the improvement in truck demand. Our forecasting model suggests that truck sales will grow 11% and 17% in FY13 and FY14, respectively. Key beneficiaries will be companies with right products and wide distribution networks. We upgrade recommendation on Ashok Leyland and Tata Motors to ‘BUY’. We initiate coverage on Eicher Motor with ‘BUY’. Structural changes like rising trading activities, continuous gain of market share from railways and improving profitability of truck operators driving truck demand
Truck demand on structural upswing Structurally, demand for trucks has been on an upswing with the growth rate over the past 10 years surpassing that of cars and two wheelers. Essential growth drivers have been: (1) increased trading activity, implying less volatility in truck demand and longer cycles; (2) continuous market share gain from Indian Railways, (we believe for every 1% decline in rail freight growth, truck demand jumps 4%); (3) improving profitability of transport operators due to shift to higher tonnage vehicles; and (4) rising long‐term contracts in organised freight movement that boosts freight visibility and condition of younger fleet triggers a replacement chain. Lead indicators allude to strong upturn in demand in H2FY13 Our study of five lead indicators (i.e., manufacturing inflation, IIP, interest rates, GCF and liquidity) indicates that truck demand is at its bottom. Our economist believes that interest rates and inflation have peaked and are likely to reverse in H1FY13; hence, we expect a strong recovery in H2FY13. Our channel check suggests improvement in demand scenario for trucks in haulage segment (80% of truck market) over FY12. Our demand forecasting model hints at a truck demand growth of 11% and 17% in FY13 and FY14, respectively. Our demand forecasting model hints at truck demand growth of 11% and 17% in FY13 and FY14, respectively
Profitability to improve with operating leverage, debt deleverage We expect an EBITDA margin and ROE to expand by 1%‐2% and 4%‐7% respectively across the sector over the next two years, driven by operating leverage and debt deleveraging. We upgrade Ashok Leyland and Tata Motors to ‘BUY’ from ‘HOLD’and initiate coverage on Eicher Motors with a ‘BUY’ rating. Table 1: Companies under coverage BB code
Ashok Leyland
Eicher Motor *
Tata Motor
AL IN
EIM IN
TTMT IN
Rating
TP (INR)
EVEBITDA (x)
EPS CAGR New
Old
New Old (FY11‐FY14E) FY13E/CY12E FY14E/CY13E
Buy
Hold 39 30 19.8
7.3 5.1
Buy
IC
2,807 IC 34.0
9.4 5.8
Buy
Hold 334 272 17.5
5.5 4.0
RoE (%)
FY13E/CY12E FY14E/CY13E
17.5
21.7
23.4
25.6
47.2
39.1 IC: Initiating coverage * Adjusted to Volvo's stake Source: Edelweiss research 4 Edelweiss Securities Limited Automobiles
MHCV slowdown to be fleeting, recovery to be sharper Medium and heavy truck demand is on a structural upswing with demand accelerating over the past 10 years. The accelerated growth has been driven by structural changes like rising trading activities, gain of market share from railways and improving profitability of truck operators. Our study of lead indicators suggests that the cyclical downturn is nearing the end. Dealer checks confirm that the demand has improved. We expect MHCV trucks to grow 11% and 17% in FY13E and FY14E, respectively. Our study of lead indicators suggests the cyclical downturn is near end. Dealer checks confirm this as well
Chart 1: MHCV sales growth surpassed that of cars and two wheelers 15.0 13.0 (%)
11.0 9.0 7.0 5.0 1993‐2002
Cars
2002‐2012
2 Wh
Trucks
Source: CMIE Till mid 1990s agriculture and industry were main drivers of freight movement. Slowdown in these segments usually led to decline in MHCV demand in subsequent years. However, post liberalization, MHCV sales started to get delinked from agri GDP even as services sector began playing an important role. (discussed in the following section). Chart 2: Agri GDP started losing relevance post liberalization 20.0 50.0 Agri started losing relevance post liberalisation
4.0 10.0 (4.0)
(10.0)
(12.0)
(30.0)
(20.0)
(50.0)
MHCV Truck growth (RHS)
5 Change in Agri GDP FY00
FY99
FY98
FY97
FY96
FY95
FY94
FY93
FY92
FY91
FY90
FY89
FY88
FY87
FY86
FY85
FY84
(%)
30.0 (%)
MHCV sales started delinking from agri GDP post liberalization
12.0 Change in Ind GDP
Source: CMIE, SIAM, Edelweiss research Edelweiss Securities Limited Automobiles Higher contribution from trade leads to lower demand volatility The share of trade GDP in overall freight has consistently risen over the past two decades. Trade GDP as a percentage of agricultural and industrial GDP has doubled to 37%, beginning with a sharp jump in mid‐1990s, soon after liberalization. Trade GDP is also less volatile compared to agricultural or industry GDP. It tracks services GDP, though overshoots in the period of recovery and vice‐versa. As a result, up‐cycles have been longer. This phenomenon is also captured through increasing correlation of industrial and trade GDP with truck demand over the past two decades. Chart 3: Rising contribution of trade lessens volatility in truck demand 40.0 50.0 30.0 30.0 10.0 MHCV Truck growth (RHS)
FY13E
FY11
FY09
FY07
FY05
FY03
FY01
FY99
FY97
(50.0)
FY95
15.0 FY93
(30.0)
FY91
20.0 FY89
(10.0)
FY87
25.0 FY85
Truck demand is becoming less volatile on rising share of trade GDP (%)
(%)
35.0 Trade GDP/(Agri+Ind) GDP
Source: CMIE, SIAM, Edelweiss research Chart 4: Increasing correlation of trade + industry GDP with MHCV sales 60.0 7.0 No correlation
Correlation builds as share of trade GDP increases
36.0 12.0 (%)
1.0 Change in Trade + Ind GDP
FY13E
FY11
FY09
FY07
FY05
FY03
FY01
FY99
FY97
FY95
(60.0)
FY93
(8.0)
FY91
(36.0)
FY89
(5.0)
FY87
(12.0)
FY85
(2.0)
FY83
(%)
4.0 MHCV Truck growth (RHS)
Source: CMIE, SIAM, Edelweiss research 6 Edelweiss Securities Limited Automobiles
Rly’s bulk cargo focus, capacity curbs lift road sector Indian Railway began to tighten its focus on the bulk cargo segment in the 1980s as loading through railways was favoured for bulk cargo given the longer distance involved and the nature of products. Trucks were generally used for shorter distances. Consequently, railways gained and retained the market share across categories of bulk cargoes. It, however, ceded a part of its share in the movement of oil products to pipelines.
Chart 5: Railway so far has defended market share in bulk 85.0 (%)
68.0 Railway has been preferred mode of transportation for bulk commodities… 51.0 34.0 Coal
Iron ore
Cement
Food grain
Fertilizers
2009‐10
2008‐09
2007‐08
2006‐07
2005‐06
2004‐05
2003‐04
2002‐03
2001‐02
2000‐01
1999‐00
0.0 1998‐99
17.0 POL Products
Source: Indian Railway Conversely, railways started losing focus on non‐bulk cargoes and the market share thereof. Roadways had enough capacity to provide door–to‐door services at an average speed of 40km/hr, double that of railways. Chart 6: Railway is consistently losing market share to road in overall freight 100.0 9
11
34
80.0 46
61
60.0 (%)
…though road has consistently gained market share from railway in no‐bulk segment 40.0 89
65
53
20.0 0.0 30
1950‐51
Rail
1978‐79
Road
1986‐87
2007‐08
Others
Note: Others include Airways and pipe Source: Indian Railway, Planning Commission 7 Edelweiss Securities Limited Automobiles Indian Railway has been plagued with capacity constraints, partly due to a delay in major freight corridor projects as well as lack of wagons. Dilly‐dallying on policies, involving private players, aggravated the situation. In the recent past, freight growth of Indian Railways has been significantly lower compared to economic growth, implying a sizeable loss of market share even in bulk categories. In fact, it pegs the growth target for freight in FY13 at a modest 6%. Chart 7: However, it is set to lose bulk market share due to capacity constraints 12.5 10.0 7.5 (%)
Capacity constraint at railway has been a key behind loss of market share 5.0 Growth in freight carried by train
FY13E
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
0.0 FY03
2.5 GDP Growth
Source: Indian Railway, CMIE We estimate that for every 1% decline in rail freight growth rate, truck demand surges
4%.
Chart 8: Sensitivity of rail freight growth vs truck volume growth 5.6 4.0 4.2 2.8 (%)
1% decline in rail freight growth rate increases truck demand 4%
1.4 0.0 (1.4)
(1.0)
Change in Rail freight growth
Change in Truck volume growth
Source: Edelweiss research 8 Edelweiss Securities Limited Automobiles
Use of high tonnage trucks improves operator margins With the considerable improvement of road network since 1990s through various highway development programmes, the turnaround time has shortened. This has led to a natural progression to higher tonnage vehicles. The previous decade saw a distinct shift from 16T vehicles to 25T. Currently, it is moving from 25T to 31T. Higher tonnage vehicles offer better profitability since they carry superior load even as fixed costs remain unchanged. Chart 9: Demand shifting towards higher tonnage 130.0 (%)
100.0 70.0 40.0 10.0 (20.0)
7.5‐10 T
10‐12T
16‐25T
>25T
FY12 (Y‐o‐Y Growth) for different segment of trucks
Source: SIAM Table 2: 31T truck is more profitable than 25T Cost of truck
Freight capacity (T)
Rate/T (Del‐Mum‐Del)
Freight per trip
Annual trip
Total revenue (INRm)
Mileage (KM/L)
Distance (Mum‐Del‐Mum)
Annual Fuel consumption (L)
Diesel rate (INR/L)
Annual Fuel bill (INR)
Tyre cost (INR Per pair)
Total tyre consumption
Maintencance
Driver Salary
Misc
Intrest cost (6% simple interest)
Capital cost repayment (in 4 years)
Office expenses
Profit
Profit margin (%)
Operators prefer higher tonnage trucks for higher profitability 25T truck
31T truck
1,864,800
2,307,200
18
24
3,333
3,333
60,000
80,000
44
44
2,640,000
3,520,000
5.0
4.0
2,800
2,800
24,640
30,554
44.8
44.8
1,103,872
1,368,801
33,000
33,000
165,000
198,000
5,000
5,000
54,000
54,000
21,000
21,000
111,888
138,432
466,200
576,800
5,500
5,500
707,540
1,152,467
26.8 32.7 Source: Industry 9 Edelweiss Securities Limited Automobiles Long‐term contracts in overall freight promote replacement cycle The organized manufacturing sector is increasingly moving towards cost plus contracts for engaging transporters, ensuring that any increase in costs will be taken care of by the freight provider. It also lends stability to freight availability and optimises fleet utilization. However, one of the restrictions, increasingly being imposed in contracts, is on the age of vehicles—that it should not be more than 5‐7 years old. Chart 10: Long term contracts provide stability 35.0 Long term contract/total organized road freight
28.0 21.0 (%)
Share of long‐term contracts to rise to 30% by 2015 14.0 7.0 0.0 FY95
FY05
FY15E
Source: IFTRT Chart 11: Age wise profile of MHCV truck population >15 years
27%
Truck age profile: >15 years: Implementation of scrappage norm can trigger huge demand 7‐10 years: Contracts demand newer fleet, thus boosting replacement demand
11‐15 years
10%
<3 Year Old
25%
4‐6 years
20%
7‐10 years
18%
Source: SIAM, Edelweiss research 10 Edelweiss Securities Limited Automobiles
Current trends Haulage segment to lead growth A sustained rise in interest rates and a slowdown in capex activity have led to a depression in the overall economic activity, predominantly affecting availability of freight. It has affected the demand for long route haulage segment of trucks. However, a plenteous agri‐produce and acceleration in road activity have ensured robust growth in ICV and tipper segments, respectively. Hence, despite being a tough year, truck demand still grew 10% in FY12. Going into FY13, we expect a recovery in demand for the haulage segment as RBI starts reversing its monetary tightening stance. ICV demand should also remain resilient. Haulage segment to be primary growth driver Chart 12: Demand recovery is expected to be led by haulage segment 120.0 80.0 (%)
40.0 0.0 ICV
Tipper
Trailer
Other Haulage
FY14E
FY13E
FY12E
FY11
FY10
FY09
FY07
(80.0)
FY08
(40.0)
Total
Source: SIAM, Crisil, Edelweiss research Note: ICV ‐ Intermediate commercial vehicle Table 3: MHCV truck profile Sales contribution (%)
ICV
22.4
Usage
Prime driver
Popular models
short route haulage
Agricultral produce, trading activity within state and neighbouring state
Mining activity, both government and private construction activity
Viable in long route. Used mainly for container traffic on trunk t
Inter‐state and Pan India haulage movement
Tata LPT 1109, Eicher 10.9, 11.1
Tipper
19.3
Trailer
9.6
Construction and mining
Long route haulage
Other Haulage 48.6
Long route haulage
Note: Sales mix is for FY12 Tata LPK 2516, ALL 2518XP
ALL 3518, Tata LPS 3516, Tata LPS 4018
ALL Comet, Tata LPT 2515, Tata LPS 3516
Source: Companies, Edelweiss research 11 Edelweiss Securities Limited Automobiles Banks still willing to lend as transporters stay financially sound In a down‐cycle, defaults routinely begin to creep up in the pool of loans extended to transporters which forces banks to tighten funding to the sector. As a result, demand gets affected severely. However, this down‐cycle, banks continue to and are willing to lend which talks about the sound health of transport operators. This, in fact, has lessened the fear of a hard landing. (%)
75.0 140,000
55.0 120,000
35.0 100,000
15.0 80,000
(5.0)
60,000
(INR mn)
Chart 13: Bank lending to CVs still growing at a healthy pace Transporters are in good health; banks see no risk in lending to them 40,000
(25.0)
Q311
Q411
IndusInd (AUM), RHS
Q112
Q212
HDFCB (AUM), RHS
Q312
IndusInd (%)
HDFCB (%)
Source: Company 12 Edelweiss Securities Limited Automobiles
Slowdown in truck demand bottoming out Lead indicators signal bottoming out of slowdown Our study of five lead indicators of truck demand (IIP, interest rate, manufacturing inflation, gross capital formation and liquidity with banks) suggests that the slowdown in truck demand has hit the bottom. Our economists believe that interest rates and inflation have peaked and should reverse in H1FY13. Barring 1950s and 1980s, we have never experienced multiple years of declining GCF. We expect strong recovery in truck demand in H2FY13. Dealers hint at an improvement in demand Our interactions with dealers confirm that the demand environment has improved. While tipper demand continues to stay in low teens, haulage segment is seeing recovery. They are hopeful of lowering of discounts in FY13. Our dealer check confirms improvement in demand Chart 14: Bottoming of IIP slowdown is a good sign for truck demand 32.7 150.0 21.8 100.0 R = 74%
0.0 0.0 (%)
50.0 (%)
10.9 Change in IIP
Q4 2013
Q1 2013
Q2 2012
Q3 2011
Q4 2010
Q1 2010
Q2 2009
Q3 2008
Q4 2007
Q1 2007
Q2 2006
Lead economic indicators signal bottoming out of slowdown in truck demand cycle Q3 2005
(100.0)
Q4 2004
(21.8)
Q1 2004
(50.0)
Q2 2003
(10.9)
MHCV (YoY), RHS
Chart 15: Gross capital formation seems to be at its bottom 150.0 48.0 100.0 32.0 R = 65% with 1 Q Lead
0.0 0.0 (%)
16.0 (%)
50.0 MHCV (YoY), RHS
Q4 2013
Q1 2013
Q2 2012
Q3 2011
Q4 2010
Q1 2010
Q2 2009
Q3 2008
Q4 2007
Q1 2007
Q2 2006
Q3 2005
(32.0)
Q4 2004
(100.0)
Q1 2004
(16.0)
Q2 2003
(50.0)
Change in GCF
Source: SIAM, CMIE, Edelweiss research 13 Edelweiss Securities Limited Automobiles Chart 16: Peaking of inflation is a positive for CV industry 9.0 R = ‐70% with 3 Q Lead
7.2 50.0 5.4 0.0 3.6 (50.0)
1.8 (100.0)
0.0 MHCV (YoY), RHS
MFG Inflation
Chart 17: Liquidity situation to improve once RBI reverses stance 92,000 150.0 R = 62% with 2 Q Lead
46,000 100.0 0 50.0 (%)
(INR bn)
Q4 2013
Q1 2013
Q2 2012
Q3 2011
Q4 2010
Q1 2010
Q2 2009
Q3 2008
Q4 2007
Q1 2007
Q2 2006
Q3 2005
Q4 2004
Q1 2004
Q2 2003
(%)
100.0 (%)
150.0 Liquidity (INRb)
Q4 2013
Q1 2013
Q2 2012
Q3 2011
Q4 2010
Q1 2010
Q2 2009
Q3 2008
Q4 2007
Q1 2007
(100.0)
Q2 2006
(138,000)
Q3 2005
(50.0)
Q4 2004
(92,000)
Q1 2004
0.0 Q2 2003
(46,000)
MHCV (YoY), RHS
Source: SIAM, CMIE, Edelweiss research Chart 18: Interest rates have peaked 4.2 2.8 150.0 100.0 R = ‐55% with 1 Q Lead
0.0 0.0 (%)
50.0 (%)
1.4 (50.0)
(2.8)
(100.0)
Q2 2003
Q4 2003
Q2 2004
Q4 2004
Q2 2005
Q4 2005
Q2 2006
Q4 2006
Q2 2007
Q4 2007
Q2 2008
Q4 2008
Q2 2009
Q4 2009
Q2 2010
Q4 2010
Q2 2011
Q4 2011
Q2 2012
Q4 2012
Q2 2013
Q4 2013
(1.4)
Change in Interest rate
MHCV (YoY), RHS
Source: SIAM, CMIE, Edelweiss research 14 Edelweiss Securities Limited Automobiles
We forecast 11%, 17% demand growth for FY13, FY14 We expect demand for trucks to grow positively in FY13. However, growth should be stronger in FY14 as the lagged impact of interest rates cut will help improve freight availability. Roadways should also continue to gain market share at the expense of railways. Our proprietary model based on industry freight, rail market share, truck tonnage growth and truck population suggests 11% and 17% growth, respectively, for FY13 and FY14. Table 4: Truck demand forecasting model Road traffic growth
Truck demand growth to rebound, as per our forecasting model FY12E
10
FY13E
10
FY14E
13
Share of road
63
64
65
67
Distance travelled KM (p.a.)
64,687 64,687
64,687
64,687
Overloading (x)
1.2
1.2 1.2
1.2
Capacity (BTKM)
1,927.9 2,075.6
2,305.1
2,602.9
Capacity (No.)
2,434,980
2,600,171 2,856,846
3,189,854
Capacity growth (%)
10.4
6.8 9.9
11.7
Net annual tonnage sold ('000MT)
3,349.5 3,601.0
3,988.1
4,687.0
Growth (%)
Trucks sold (No)
40.2
274,793
10.7
333,022
17.5
387,900
Y‐o‐Y growth
FY11
9
36.3
7.5
299,574
9.0 11.2
16.5 Source: Edelweiss research 15 Edelweiss Securities Limited Automobiles Competition risks hyped as price, service remain key With the showcasing of Bharat Benz trucks, fears of intense competition have finally come true. However, unlike sophisticated cars, MHCVs are used for business purposes hence buyers are more concerned about the low cost of acquisition and spares, and serviceability. In short, India is still not ready for the concept of total cost of ownership. • Chinese experience shows why it is tough to uproot local players The Indian truck market has an uncanny resemblance to the Chinese market where foreign truck makers have been unable to make any major inroads. Salient features of these markets are: Truck market dominated by local players •
Both dominated by local players. •
Transporters prefer low cost of acquisition over total cost of ownership. •
Extensive service coverage essential for survival. •
Road is continuously gaining market share from railways. •
Local trucks are designed to cope with overloading. Table 5: Characteristics of different market elements in the emerging truck markets Emerging Markets
China
India
Russia
Market Structure & Development
Role of domestic manufacturers in the commerical vehicle market
Impact of market cyclicality on domestic truck market sales and production
Competitive Environment Degree of market consolidation
Market characteristics
Globalisation Strategies
Competitive abilities of domestic vs. foreign truck manufacturers
Customer demand for more sophisticated commercial vehicles
Influence of total cost of ownership on truck customer's purchase decision
Demand for added‐value services (e.g. car maintenance, repair services)
Importance of fleet management solutions and telematics services
Interest of global OEMs entering the domestic market
Competitive abilities of emerging OEMs to succeed on the global truck market
Key: no impact very low/weak
16 low/weak
high/strong
Source: KPMG very high/strong Edelweiss Securities Limited Automobiles
•
Even in developed world, commercial vehicles have been a local business Truck has been a local business. Even in Europe, we observe that Japanese and US truck makers found it difficult to penetrate the truck market. Chart 19: New registrations in Europe (EU27 + EFTA) 100%
14.7
15.7
16.7
80%
60%
40%
85.3
84.3
83.3
2002
2007
2011
20%
0%
Local manufacturers
Others *
Source: www.acea.bb * Others include DAF (a division of Paccar, US), China, Japan and others 17 Edelweiss Securities Limited Automobiles Key Risks High competition from new entrants affecting margins Till now, the commercial vehicle market has been a duopoly with top two players accounting for three fourth of the market. However, competition is increasing with the entry of players like Volvo, Daimler, MAN, Navistar and Isuzu. Hence, fear is high that competition may dent market share and affect margins. Our view: As discussed above, no doubt competition has been and will keep rising. Other than Volvo, which partners Eicher (having built up a network with known brands in ICV and MCV space), every other player has struggled to make a dent in the CV market. Moreover, the USP of the incumbent is highly affordable offerings which new players cannot match. Hence, they are unlikely to play the pricing game. Instead, they would try and establish better quality at a price proposition and service network which is likely to consume time. Ergo, it is a low risk environment at the moment, in our view. Difficult for new players to match offerings of incumbents Freight rates still stay weak Freight rates have been good indicators of the overall demand supply situation for freight and trucks. They are a decent indicator of the truck demand with lead of three months. However, the only exception has been the credit crisis when tightening of bank funding led to the derailment of demand even as freight rates stayed put. Currently, freight rates remain weak across regions, posing a key risk to recovery. In our view, freight rates should start recovering as RBI cuts interest rates and overall freight availability improves. Freight rates at low levels across regions Chart 20: Freight rate ‐ a lead indicator for truck demand 33.0 240.0 Chart 21: Freight rates still weak across regions 40.0 24.0 11.0 80.0 8.0 0.0 0.0 (%)
(%)
160.0 (%)
22.0 (8.0)
(80.0)
(24.0)
(22.0)
(160.0)
(40.0)
Freight (y‐o‐y) Truck (RHS)
Oct‐02
Jun‐03
Feb‐04
Oct‐04
Jun‐05
Feb‐06
Oct‐06
Jun‐07
Feb‐08
Oct‐08
Jun‐09
Feb‐10
Oct‐10
Jun‐11
Feb‐12
Oct‐02
Jun‐03
Feb‐04
Oct‐04
Jun‐05
Feb‐06
Oct‐06
Jun‐07
Feb‐08
Oct‐08
Jun‐09
Feb‐10
Oct‐10
Jun‐11
Feb‐12
(11.0)
Chennai
Kolkata
Mumbai
Delhi
Source: CMIE Prolonged slow‐down affecting recovery The government’s high borrowing programme has crowded out the private sector, resulting in low gross capital formation. If this situation persists, it could affect recovery in freight availability in FY14 and could pose downside risks to our numbers. 18 Edelweiss Securities Limited Automobiles
Our view: We are hopeful that the monetary action from RBI will be matched by government action, yielding higher economic growth in FY14 than FY13. Slow growth over the past two years should lead to a stronger recovery in truck volume. Banks may curb lending Currently, banks are lending to the commercial vehicle space. Given the robust profitability of transport operators, banks have not seen NPAs rising on their CV portfolio. However, in the event of crowding out, banks may chose to curtail lending to this space, affecting demand. Our view: Given the slow‐down in credit growth, commercial vehicles space is one of the most profitable avenues for banks. Hence, the risk of banks lowering exposure to this sector is low especially since NPAs are not high. Global recession may halt exports Given the global uncertainty, the fear of double dip recession still exists. This could slow down the overall economic growth as well as exports. As a result, tractor‐trailer demand could take a further beating. 19 Edelweiss Securities Limited Automobiles THIS PAGE IS INTENTIONALLY LEFT BLANK 20 Edelweiss Securities Limited COMPANY UPDATE Automobiles
ASHOK LEYLAND Set to gain from demand recovery
India Equity Research | Automobiles Ashok Leyland (AL) is a high operating and financial leverage play. Due to the high exposure to heavy commercial vehicles, it generally outperforms the industry during a typical growth phase. As its major capex phase is over, the debt burden should reduce. We increase FY13E/14E EPS by 3%/13%, respectively. We estimate ROE to improve from 14% in FY12 to 22% in FY14. We upgrade recommendation to ‘BUY’ from ‘HOLD’ and raise target price to INR39 (7.4x FY13E EV/EBITDA – avg. of last 9 years). Poised to outperform industry growth, gain market share in FY14 Due to high exposure to heavy commercial vehicles, AL generally outperforms the industry in a growth phase and vice‐versa. In FY12, its performance was affected by weak demand from South India, its major market. We expect the trend to reverse as demand recovers. It should gain 140bps market share by FY14E in MHCV segment. High operating leverage to sustain margins EDELWEISS 4D RATING Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to market MARKET DATA (R: ASOK. BO, B: AL IN) CMP : INR 29 Target Price : INR 39 52‐week range (INR) : 32 / 20 Share in issue (mn) : 2,660.7 M cap (INR bn/USD mn) : 78 / 1,507 Avg. Daily Vol. BSE/NSE (‘000) : 7,821.5 SHARE HOLDING PATTERN (%) By and large, a 1% swing in sales volume leads to a 3% change in EPS since the company has high fixed costs. Currently, it is operating at two thirds capacity utilization whereas the tax‐free Pantnagar plant is operating at ~55%. Thus, a ramp up in sales leaves huge scope for margin improvement which could more than offset lower margins from LCV Dost. We expect the net profit margin to improve from 4.5% in FY12E to 6.1% by FY14E. Others
30.4%
Promoters*
38.6%
FIIs
16.2%
MFs, FIs & Banks
14.7%
Major capex over, to turn FCF positive in FY13 As the major capex phase is over, we expect AL to turn FCF positive in FY13, which should help it lower debt burden. This will lower interest costs by 27% during FY12‐14E. Outlook and valuations: On an upswing; upgrade to ‘BUY’ We raise our FY13E/14E EPS (on account of higher sales and margin expectations) which are 15%/37% ahead of consensus. We expect EPS to post 40% CAGR over FY12‐
14E and ROE to improve from 14% to 22% during this period. The stock is currently trading at 5.6x EV/EBITDA on FY13E. We assign a target multiple of 7.4x (average of last nine years) and get a TP of INR39. Upgrade recommendation to ‘BUY’ from ‘HOLD’. Financials
Year to March
Revenues (INR mn)
Rev. growth (%)
EBITDA (INR mn)
Diluted EPS (INR)
EPS growth (%)
Diluted P/E (x)
EV/EBITDA (x)
ROAE (%)
FY11
111,692
53.4
12,436
2.5
58.2
11.9
7.2
17.2
FY12E
129,172
15.7
12,787
2.2
(11.1)
13.4
7.3
14.1
Edelweiss Research is also available on www.edelresearch.com, 21 Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. BUY Performer High Equalweight FY13E
151,066
16.9
15,534
3.0
36.4
9.8
5.6
17.5
FY14E
184,960
22.4
19,359
4.2
41.6
6.9
3.8
21.7
* Promoters pledged shares
(% of share in issue) :
8.91
PRICE PERFORMANCE (%) Stock 1 month 9.1 3 months 31.9 12 months 9.7 Nifty (0.7) 12.1 (9.9) Sachin Gupta +91 22 6623 3472 sachin.gupta@edelcap.com Ashish Poddar +91 22 6620 3099 ashish.poddar@edelcap.com
April 16, 2012 Edelweiss Securities Limited Edelweiss Securities Limited EW Auto Index
1.1 24.6 11.1 Automobiles Outperforms industry during growth phase Due to high exposure to heavy commercial vehicles, AL underperforms the industry during a slowdown and outperforms during a growth phase. Primary reason for the same is the lower availability of freight for long haul, leading to lower sales of high tonnage vehicles and vice‐versa. This trend can be observed in charts given below. Chart 1: Sales more tilted towards HCVs 90,000 (Nos.)
72,000 54,000 36,000 18,000 ICV:7‐12T
MCV:12‐16T
HCV: 16‐25T
HCV:>25T
FY14E
FY 13E
FY 12
FY 11
FY 10
FY 09
FY 08
FY 07
FY 06
FY 05
FY 04
FY 03
FY 02
0 HCV: Tractor trailer
Source: SIAM Chart 2: Market share vis‐à‐vis industry growth 28.0 50.0 23.2 12.0 20.8 (7.0)
18.4 (26.0)
16.0 (45.0)
AL's market share
FY14E
FY 13E
FY 12
FY 11
FY 10
FY 09
FY 08
FY 07
FY 06
FY 05
FY 04
FY 03
FY 02
(%)
31.0 (%)
25.6 MHCV Industry growth (RHS)
Source: SIAM Operating leverage, Pantnagar plant ramp up to rev up margins AL has a high fixed cost structure as can be seen from the low average (net fixed asset to ratio of 3.9x). Our analysis suggests that a 1% change in sales volume affects EPS by 3%. 22 Edelweiss Securities Limited Automobiles
Chart 3: Sensitivity of volume with EPS (shows high operating leverage) 3.0 (%)
2.4 1.8 1.2 0.6 0.0 Change in sales volume
Change in EBITDA
Change in EPS
Source: Edelweiss research A pickup in demand should also help the company ramp up production at Pantnagar plant where it enjoys tax holiday of 100% for the first five years and 30% for the next five years. It also enjoys an excise duty waiver for 10 years. Table 1: Pantnagar plant dynamics Sales
Hosur
Capacity utilisation (%)
Pantnagar
Capacity utilisation (%)
Average Realization
Sales value
Localisation (%)
Localisation (INR)
Excise duty @10/12%
Excise/vehicle (INR)
Savings per vehicle
Incremental costs/vehicle (INR)
Savings as % of sales
FY12E
94,719
67,719
67.4
27,000
54.0
1,845,072
49,817
50.0
24,908
2,491
92,254
40,000
52,254
0.8
FY13E
103,431
67,431
67.1
36,000
72.0
1,783,454
64,204
50.0
32,102
3,852
107,007
50,000
57,007
1.2
FY14E
122,035
67,035
66.7
55,000
110.0
1,707,640
93,920
50.0
46,960
5,635
102,458
60,000
42,458
1.8 Source: Company, Edelweiss research While the Pantnagar plant and operating leverage are likely to provide a 100bps boost each to margins, a weak product mix in the form of Dost (where it makes only manufacturing and marketing margins), is likely to dent margins 130bps. 23 Edelweiss Securities Limited Automobiles Chart 4: EBITDA run down chart (FY14 over FY12) 1.0
12.0
1.0 10.6
9.9 9.6
(1.3)
(%)
7.2
4.8
2.4
0.0
FY12E EBITDA
Production from Pantnagar
Operating leverage
Weak product FY14 EBITDA mix
Margin
Source: Company, Edelweiss research Capex over, margins set to look up AL had been in a major capex mode, spread across three verticals: (1) new plant at Pantnangar; (2) development of a new truck platform and Neptune engine; and (3) investment in different subsidiaries. Since the major capex phase is over, as we consider, it would now incur a capex for maintenance and R&D. Chart 5: Capex schedule FY14E
FY13E
FY12E
FY11
FY10
0 2,000 4,000 Investments (b)
6,000 8,000 10,000 Capex (a)
Source: Company, Edelweiss research 24 Edelweiss Securities Limited Automobiles
Table 2: Summary of investments Particulars
% stake 2010
Ashok Leyland Nissan Vehicles Ltd
49.1 360
(INR mn) Additional Remarks investment
1,688 1,328 Manufacture of Light commercial vehicles (LCV)
2011
Nissan Ashok Leyland Powertrain 48.6 133
544
412
Manufacture of powertrain for LCV vehicles
Nissan Ashok Leyland Technologies
49.0 255
255
‐
Development of related automotive technology
Ashok Leyland John Deere Construction Equipment Pvt Ltd
Hinduja Leyland Finance Ltd
50.0 292
424
131
Manufacture of construction equipment
72
1,092
1,020
Financing vehicles
Avia Ashok Leyland 48.3 0
1,307
1,307
Ashley Holdings
47
1,435
1,388
During the year stake increased by 8.3% by converting advances into equities
Investment company
Ashley Investments
46
1,446
1,400
Investment company
Albonair GmbH
1
596
596
503
503
230
Optare plc, UK
26.0 ‐
Defiance Technologies
84
314
IndusInd Bank
716
921
205
50.0 50
158
108
Automotive Infotronics Pvt Ltd
Ashok Leyland (UAE) LLC
12
117
105
50.0 250
350
100
Ashley Bio‐Fuels
0
75
75
Ashley Alteams India Ltd
Hinduja Foundaries
143
242
99
Total
2,462
11,467
9,005
Others (B.F.)
860
893
33
Total Gross investment
3,322
12,360
9,038
Source: Annual Report Chart 6: Free cash flow to turn positive in FY13E 18,000 Free cash flow+Investment
13,092 (INR mn )
12,000 6,465 6,000 2,766 0 (6,000)
(4,691)
(5,156)
(12,000)
FY10
FY11
FY12E
FY13E
FY14E
Source: Company, Edelweiss research 25 Edelweiss Securities Limited Automobiles Chart 7: Interest costs to lower going forward 3,000 Interest cost
2,594 (INR mn)
2,400 2,429 1,915 1,889 1,800 1,603 1,200 1,019 763 600 0 FY08
FY09
FY10
FY11
FY12E
FY13E
FY14E
Source: Company, Edelweiss research Chart 8: RoE to improve 25.0 ROE
22.1 21.7 20.0 17.5 17.2 15.0 (% )
14.1 11.7 10.0 5.0 5.1 0.0 FY08
FY09
FY10
FY11
FY12E
FY13E
FY14E
Source: Company, Edelweiss research Nissan product meets with good response Through the Nissan JV, AL has launched light commercial vehicles, competing against Tata Ace. Our channel check suggests a good acceptability of the same. As per the JV, products sold in Tamil Nadu (25‐30%) are directly through the JV route to avail VAT benefits. Products sold outside Tamil Nadu are booked in AL’s account where the company makes a marketing margin, lower than the existing business margin. After the JV was launched in July last year, the company has so far sold 7,593 units in FY12. It expects to sell 30,000‐45000 units in FY13E (we have assumed 30,000 units in FY13 and 40,500 units in FY14). During FY13, the company is expected to launch many variants of LCV. It also expects to breakeven in FY13, but will need a new plant whenever sale crosses 50,000 units p.a. 26 Edelweiss Securities Limited Automobiles
Revised estimates We have increased our sales volume estimate for FY13E/14E by 6%/9% respectively which has resulted in the upward revision of EPS estimates by 3%/13% respectively. Table 3: Revised estimates Particulars
Volumes (nos)
Dost (nos)
Total Volumes
Net sales
EBITDA
Net profit
EPS (INR)
EBITDA (%)
Earlier
93,396
6700
100,096
127,898
12,842
5,833
2.2
10.0
FY12E
Revised
94,690
7,593
102,283
129,172
12,787
5,841
2.2
9.9
% change
Earlier
1.4 98,739
30000
1.4 128,739
1.0 147,229
(0.4) 15,178
0.1 7,759
0.2 2.9
10.3
FY13E
Revised
104,317
30,000
134,317
151,066
15,534
7,969
3.0
10.3
FY14E
Revised
122,468
40,500
162,968
184,960
19,359
11,286
4.2
10.5
% change
Earlier
5.6 112,390
37,500
5.6 149,890
2.6 167,686
2.3 17,807
2.7 10,010
2.6 3.8
10.6
% change
9.0
9.0
10.3
8.7
12.8
12.8
Source: Edelweiss research Outlook and valuations: On an upswing; upgrade to ‘BUY’ AL is the only pure play Indian commercial vehicle maker. Strong earnings growth, improving profitability, steady dividend history and inexpensive valuation are key positive arguments in favour of the company. We believe as volume visibility builds, the trading multiple should start reverting to the historical average of 7.4x EV/EBITDA which implies a target price of INR39. Hence, we upgrade our recommendation to ‘BUY’ from ‘HOLD’ and maintain ‘Sector Performer’ rating. Table 4: Key assumptions FY11
93,229
63,050
20,425
9,754
865
‐
MHCV ‐ total
MHCV ‐ truck
MHCV ‐ bus
MHCV ‐ exports
LCV ‐ total
Dost
(Nos) FY12E
FY13E
FY14E
93,518 102,797 120,811
60,745 68,514 82,110
20,638 20,328 21,955
12,135 13,955 16,746
1,172 1,519 1,658
7,593 30,000 40,500 Source: Edelweiss research Table 5: Edelweiss vs Bloomberg consensus Particulars
Sales (INR mn)
EBITDA (INR mn)
EBITDA (%)
EPS (INR)
Edel
151,066
15,534
10.3
3.0
FY13E
Consenses
142,354
14,497
10.2
2.6
% var
6.1
7.2
Edel
184,960
19,359
10.5
15.2 4.2
FY14E
Consenses
162,826
16,488
10.1
3.1
36.8 Source: Bloomberg, Edelweiss research 27 % var
13.6
17.4
Edelweiss Securities Limited Automobiles Chart 9: Historical valuation chart EV/EBITDA band
13.0 11.0 (x)
9.0 7.0 7.0 5.0 3.0 May‐03
Aug‐04
Nov‐05
Feb‐07
May‐08
Aug‐09
Nov‐10
Feb‐12
180%
16.0 120%
12.0 60%
8.0 0%
4.0 ‐60%
0.0 ‐120%
PE Multiple
Jan‐12
Jan‐11
Jan‐10
Jan‐09
Jan‐08
Jan‐07
Jan‐06
Jan‐05
Jan‐04
Jan‐03
Jan‐02
Jan‐01
(x)
20.0 AL EPS y‐o‐y (RHS)
P/B band
3.0 2.4 (x)
1.8 1.2 0.6 0.0 Apr‐09
Sep‐09
Feb‐10
Jul‐10
Dec‐10
May‐11
Oct‐11
Mar‐1
Source: Factset, Edelweiss research 28 Edelweiss Securities Limited Automobiles
Company Description 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 India—Ennore (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. Investment theme AL is likely to benefit from sales pick up in truck segment. High operating leverage and financial leverage will ensure margins expansion, high EPS growth and improvement in profitability ratios. This should lead to consensus increasing its estimates and multiples to get re‐rated. Key Risks Large acquisitions may lead to de‐rating Various media reports, from time to time, have quoted the company stating that it wants to grow overseas through acquisitions. So far, AL has made small acquisitions to grow its business. However, any large acquisition could further burden the company with debt and could halt the debt‐deleveraging, leading to a de‐rating of multiple. JV performance to be a drag on consolidated sheet When AL switches to IFRS in the next two years, it has to consolidate financials of various JVs which are mostly in incubation stage or struggling to turnaround (where profitability is much lower than the standalone business). Whenever the company has to compulsorily consolidate, it could bring down profitability. (We are not able to quantify the impact given the numbers are not available in public domain). The only solace is that in the next two years, two major JVs—Nissan and John Deree—should break even. 29 Edelweiss Securities Limited Automobiles Financial Statements Income statement
Year to March
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
Extraordinary income/ (loss)
Profit after tax
Shares outstanding
Earnings per share (EPS)
Diluted shares outstanding
Diluted EPS
Cash EPS
Dividend per share
Dividend payout (%)
FY10
64,045
17.7
72,813
52,559
1,745
6,716
3,937
153
64,805
8,008
2,041
5,967
1,019
417
5,365
1,211
4,154
82
4,237
2,661
1.6
2,661
1.6
2.8
0.8
47.1
FY11
94,094
46.9
111,692
81,749
2,825
9,486
5,437
241
99,256
12,436
2,674
9,761
1,889
405
8,277
1,705
6,572
(260)
6,312
2,661
2.5
2,661
2.5
3.7
1.0
42.2
FY12E
94,690
0.6
129,172
95,419
3,249
10,558
7,409
250
116,385
12,787
3,465
9,322
2,594
484
7,212
1,370
5,841
‐
5,841
2,661
2.2
2,661
2.2
3.5
0.8
34.2
FY13E
104,317
10.2
151,066
112,125
3,411
11,761
8,484
250
135,531
15,534
3,723
11,811
2,429
579
9,961
1,992
7,969
‐
7,969
2,661
3.0
2,661
3.0
4.4
1.0
33.4
(INR mn)
FY14E
122,468
17.4
184,960
137,414
3,923
13,946
10,570
250
165,601
19,359
3,921
15,437
1,915
586
14,108
2,822
11,286
‐
11,286
2,661
4.2
2,661
4.2
5.7
1.0
23.6
Common size metrics‐ as % of net revenues
Year to March
Operating expenses
Materials costs
Staff costs
S G & A expenses
Depreciation
Interest expenditure EBITDA margins
Net profit margins
FY10
89.0
72.2
9.2
5.4
2.8
1.4
11.0
5.7
FY11
88.9
73.2
8.5
4.9
2.4
1.7
11.1
5.9
FY12E
90.1
73.9
8.2
5.7
2.7
2.0
9.9
4.5
FY13E
89.7
74.2
7.8
5.6
2.5
1.6
10.3
5.3
FY14E
89.5
74.3
7.5
5.7
2.1
1.0
10.5
6.1
Growth metrics (%)
Year to March
Revenues
EBITDA PBT
Net profit
EPS
FY10
20.9
16.9
12.4
193.6
193.6
FY11
53.4
55.5
61.9
58.2
58.2
FY12E
15.7
16.7
15.0
(11.1)
(11.1)
FY13E
16.9
17.5
5.0
36.4
36.4
FY14E
22.4
22.6
15.0
41.6
41.6 30 Edelweiss Securities Limited Automobiles
Balance sheet
As on 31st March
Equity capital
Reserves & surplus
Shareholders funds
Secured loans
Unsecured loans
Borrowings Deferred tax (Net)
Sources of funds
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
Uses of funds
Book value per share (BV) (INR)
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
14
626
FY11
1,330
38,299
39,630
11,823
13,860
25,683
4,439
70,650
63,705
20,581
43,124
3,580
3,214
12,300
22,089
11,852
1,795
7,936
43,672
27,074
3,305
4,903
35,283
8,390
43
70,650
15
9,038
FY12E
2,661
40,491
43,152
17,823
16,896
34,719
4,439
83,209
69,705
24,045
45,660
3,580
3,214
17,300
27,397
14,050
2,583
8,430
52,460
31,612
3,305
4,130
39,047
13,413
43
83,209
16
5,000
FY13E
2,661
45,368
48,028
11,823
18,792
30,615
4,439
83,981
72,705
27,769
44,936
3,580
3,214
18,550
30,807
16,430
2,625
8,973
58,835
36,968
3,305
4,903
45,177
13,658
43
83,981
18
1,250
Free cash flow Year to March
Net profit
Depreciation
Deferred tax
Gross cash flow
Less: Changes in WC
Operating cash flow
Less: Capex
Free cash flow
FY10
4,237
2,041
1,211
7,489
(2,080)
9,569
6,177
3,392
FY11
6,312
2,674
594
9,580
751
8,828
4,482
4,347
FY12E
5,841
3,465
0
9,306
3,462
5,844
6,000
(156)
FY13E
7,969
3,723
0
11,692
978
10,715
3,000
7,715
(INR mn)
FY14E
2,661
53,562
56,222
1,823
18,792
20,615
4,439
82,175
75,705
31,690
44,015
3,580
3,214
22,307
30,180
17,605
2,822
9,571
60,177
42,755
3,305
4,903
50,963
9,214
43
82,175
21
3,757
(INR mn)
FY14E
11,286
3,921
0
15,208
(4,641)
19,849
3,000
16,849
Cash flow metrics
Year to March
Operating cash flow
Financing cash flow
Investing cash flow
Net cash flow
Capex
Dividend paid
FY10
9,569
1,542
(6,803)
4,308
(6,177)
(1,556)
FY11
8,828
1,298
(13,520)
(3,394)
(4,482)
(2,327)
FY12E
5,844
5,944
(11,000)
788
(6,000)
(3,092)
FY13E
10,715
(6,423)
(4,250)
41
(3,000)
(2,319)
FY14E
19,849
(13,092)
(6,757)
0
(3,000)
(3,092) 31 Edelweiss Securities Limited Automobiles Profitability & liquidity ratios
Year to March
ROAE (%)
ROACE (%)
Inventory days
Debtors days
Payble days
Cash conversion cycle (days)
Current ratio
Debt/EBITDA
Fixed asset turnover (x)
Debt/Equity
FY10
11.7
10.6
103
50
142
10
1.4
2.7
1.3
0.6
1.9
FY11
17.2
15.2
86
36
112
9
1.2
2.1
1.8
0.6
2.6
FY12E
14.1
12.7
95
37
112
19
1.3
2.7
1.9
0.8
FY13E
17.5
14.8
95
37
112
20
1.3
2.0
2.1
0.6
FY14E
21.7
19.3
81
34
106
9
1.2
1.1
2.5
0.4
Operating ratios
Year to March
Total asset turnover
Fixed asset turnover
Equity turnover
FY10
1.2
1.3
2.0
FY11
1.7
1.8
2.9
FY12E
1.7
1.9
3.1
FY13E
1.8
2.1
3.3
FY14E
2.2
2.5
3.5
Du pont analysis
Year to March
NP margin (%)
Total assets turnover
Leverage multiplier
ROAE (%)
FY10
5.7
1.2
1.7
11.7
FY11
5.9
1.7
1.8
17.2
FY12E
4.5
1.7
1.9
14.1
FY13E
5.3
1.8
1.8
17.5
FY14E
6.1
2.2
1.6
21.7
Valuation parameters
Year to March
EPS (INR)
Y‐o‐Y growth (%)
CEPS (INR)
P/E (x)
Price/BV (x)
EV/Sales (x)
EV/EBITDA (x)
Dividend yield (%)
FY10
1.6
193.6
2.8
18.8
2.1
1.3
11.4
2.6
FY11
2.5
58.2
3.7
11.9
2.0
0.8
7.2
3.4
FY12E
2.2
(11.1)
3.5
13.4
1.8
0.7
7.3
2.6
FY13E
3.0
36.4
4.4
9.8
1.6
0.6
5.6
3.4
FY14E
4.2
41.6
5.7
6.9
1.4
0.4
3.8
3.4 32 Edelweiss Securities Limited INITIATING COVERAGE Automobiles
EICHER MOTORS Emerging leader
India Equity Research | Automobiles Eicher Motors (Eicher) offers a distinctive growth combination with multiple currents of earnings from new launches across product segments along with capacity and margin expansion. Its JV for commercial vehicles with Volvo, VECV, is a vital cog in Volvo’s emerging market plan which is to grab 15% share of the Indian HD truck by CY15. It also aims to make VECV a hub for sourcing 5‐8 litre engines. Among products, Royal Enfield is a cult motorcycle with literally no competition and over six‐months waiting period. A debt‐free balance sheet with INR432 cash/share is another positive. We forecast 33% EPS CAGR during CY11‐14. RoE/RoCE is expected to improve from 23%/30% in CY11 to 30%/39% in CY14E. Initiate coverage with a ‘BUY’ recommendation and a TP of INR2,807. EDELWEISS 4D RATING Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to market BUY Outperformer Medium Equalweight MARKET DATA (R: EICH.BO, B: EIM IN) CMP : INR 2,172 Target Price : INR 2,807 52‐week range (INR) : 2,260 / 1,119 Share in issue (mn) : 27.0 M cap (INR bn/USD mn) : 59 / 1,135 Avg. Daily Vol. BSE/NSE (‘000) : 26.0 Royal Enfield, India’s Harley Davidson, sustains vanguard position Royal Enfield has a cult status in India where it is being perceived as the local version of the legendary Harley Davidson bikes. New plant in CY13 will add 50% capacity. EBITDA margins are set to improve from 11.5% in CY11 to 17.0% in CY14, aided by scale and output efficiencies from new plant. We expect 39% EPS CAGR over CY11‐14E. SHARE HOLDING PATTERN (%) JV with Volvo gains appeal, margin to improve Others
20.2%
FIIs
6.2%
Promoters*
55.2%
Our channel check suggests that the acceptability for Eicher trucks has risen post the VE series launch. Near‐term focus is to expand geographically while the next push will come from products with the new engine being jointly developed. We expect EBITDA margin to improve by 170bps to 11.2% by CY14E, leading to 35% EPS CAGR. ROE and ROCE are set to improve from 26%/33% in CY11 to 33/44% in CY14E, respectively. MFs, FIs & Banks
18.4%
* Promoters pledged shares
(% of share in issue) PRICE PERFORMANCE (%) Outlook and valuations: High rider; initiate with ‘BUY’ 1 month 3 months 12 months We initiate coverage on Eicher with ‘BUY/ Sector Outperformer’ recommendation/ rating with a TP of INR2,807. Our sum‐of‐the‐parts valuation implies 9.0x CY13E EV/EBITDA for motorcycle business, 7.5x CY13E for VECV truck business and discounted value of 6x CY14E EV/EBITDA on engine business. Stock 30.1 44.9 69.4 :
Nifty (0.7) 12.1 (9.9) Financials
Year to December
Revenues (INR mn)
Rev. growth (%)
EBITDA (INR mn)
Adjusted net profit (INR mn)
Shares outstanding (mn)
Adjusted diluted EPS (INR)
EPS growth (%)
Adjusted diluted P/E (x)
EV/EBITDA (x)
ROAE (%)
CY10
44,214
49.6
3,821
3,078
27
70.5
122.8
30.8
11.1
16.5
CY11
57,160
29.3
5,945
4,983
27
114.7
62.8
18.9
7.1
22.9
CY12E
69,369
21.4
7,882
6,157
27
141.6
23.4
15.4
5.0
23.4
Edelweiss Research is also available on www.edelresearch.com, 33 Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. CY13E
94,440
36.1
10,961
8,153
27
189.6
34.0
11.5
2.8
25.6
Sachin Gupta +91 22 6623 3472 sachin.gupta@edelcap.com Ashish Poddar +91 22 6620 3099 ashish.poddar@edelcap.com
April 16, 2012 Edelweiss Securities Limited Edelweiss Securities Limited NIL
EW Auto Index 1.1 24.6 11.1 Automobiles Investment Rationale Royal Enfield gains cult status Eicher acquired the business of Royal Enfield motorcycles, known as leisure bikes with a vintage styling, in 1991. Having acquired a cult status in India, Enfield bikes are being perceived as the Indian version of the legendary Harley Davidson. In niche segment with no direct competition Royal Enfield operates in the niche leisure travel segment. As seen from the table below, it faces little competition here as other bike makers are focused on sports and general categories. Sports bikes focus on power and seating position (tilted towards front wheel) while leisure bikes provide a more relaxed seating position with a high torque, but not necessarily more power. Royal Enfield enjoys leadership position in leisure segment with strong brand royalty Table 1: Comparison snapshot Makers
Model
Royal Enfield
Bullet 350
Thunderbird Twinspark
Classic 350
Classic 500
Bajaj Auto
Pulsar 220F
Avenger 220
Kawasaki Ninja 250R
Harley
883 Superlow
Hero Motocorp
Karizma ZMR
Honda CBR 250R
Yamaha
FZ1
Category
Leisure
Leisure
Leisure
Leisure
Sports
Leisure
Sports
Leisure
Sports
Sports
Sports
Price (INR, on road Delhi))
93,800
109,800
114,000
143,100
83,600
77,500
303,100
619,500
95,900
156,900
956,700
Engine (cc)
346
346
346
499
220
220
249
883
223
249
998
Power (hp)
20
20
20
27
21
19
33
50
18
26
150 Source:Company Enfield enjoys strong brand loyalty Royal Enfield has a history of over six decades in India where it began operations with supplies to defence. Buyers associate the bikes with the unique bullet beat and vintage styling. There are clubs for Bullet (a key brand) owners all over the country which speak volumes of the brand loyalty. Promotion activities are done through blogs, bike magazines and organized road tours. Fig. 1:Royal Enfield trip ad Fig. 2:Royal Enfield trip ad Source:Company 34 Edelweiss Securities Limited Automobiles
Table 2: Bike clubs for Royal Enfield Clubname
For
Hopongurls
Women owning Bullet
Royal Knights
Royal Enfield bikes
Inddiethumpers
Bullet
Indiabullriders Royal Enfield and vintage bikes
Punebulls
Royal Enfield
City
Bangalore
Bangalore
Mumbai
Delhi
Pune
Source: Company Demand continues to outstrip supply Royal Enfield bikes have a waiting period of up to six months since production has not been able to keep pace with demand. The company is currently operating above the rated capacity by working overtime and outsourcing paint work etc. Over the past five years, demand has posted 18% CAGR. In fact, Royal Enfield motorcycle sales grew in double digit even during the credit crisis period, though 2010 was an exception when production suffered due to platform upgrade to unit construction engine. Plants run at above 100% capacity utilization as demand outstrips supply 140.0 140,000 112.0 105,000 84.0 70,000 56.0 35,000 28.0 (%)
(Nos.)
Chart 1: Supply lags demand by far 175,000 0 Capacity utilization (%, RHS)
Sales (Units)
CY14E
CY13E
CY12E
CY11
CY10
CY09
FY08
FY07
FY06
0.0 Sales Growth (YoY, RHS)
Source: Company, Edelweiss research New launches, fresh production capacity to boost demand Eicher will launch Thunderbird 500cc in Q2CY12 and Café Racer in Q1CY13. Both bikes were showcased at the recent Auto Expo. Café Racer has a retro styling of 1960’s with an elongated fuel tank, small humped single seat, low and narrow handle bars and rear set foot pegs. We expect sales volume to double in the next three years from 75k units in CY11. 35 Edelweiss Securities Limited Automobiles Fig. 3:Thunderbird 500cc Fig. 4:Café Racer Source: Company New factory in Chennai will be operational from Q3CY13 and will bolster capacity 50% to 150,000 units. It should not only help the company meet domestic demand, but also exports. Currently, it exports to 30 markets while neighboring countries account for half of the exports. Chart 2: Sales split 100.0 96.0 (%)
92.0 88.0 84.0 Domestic
Exports
CY14E
CY13E
CY12E
CY11E
CY10E
CY09
CY08(9M)
FY08
FY07
FY06
80.0 Source: Company, Edelweiss research Strong volume growth to aid margin expansion Economy of scale to aid margin expansion Despite higher gross margins, Eicher has 4‐9% lower EBITDA margin in the motorcycle business compared to Hero and Bajaj Auto. The biggest difference is in employee costs and other manufacturing and marketing overheads, which in our view, is due to lack of scale. The new plant is also expected to bring in production efficiencies. We expect EBITDA margin to improve from 12.1% in CY11 to 17.5% in CY14E. This should drive the core EPS CAGR of 40%, leading the core ROE (excluding investments, cash and other income) to go up from 47% to 71% by CY14E. 36 Edelweiss Securities Limited Automobiles
Chart 3: Royal Enfield performance 98.0 19.2 80.0 16.4 62.0 13.6 44.0 10.8 (%)
22.0 (%)
116.0 26.0 8.0 CY10
EBITDA (%, RHS)
CY11
CY12E
Adjusted ROE
CY13E
CY14E
Core EPS Growth
Source: Company, Edelweiss research Risks Execution delay: Delay in commissioning the new plant could hamper the company’s business plan, thus posing a downside risk. Competition: Launch of lesser cc bikes by Harley could be a competitive risk. However, given the lack of such products globally and manufacturing bases in India lowers this risk. 37 Edelweiss Securities Limited Automobiles JV with Volvo to be a vital cog Thrust on emerging markets to drive Volvo Eicher JV In 2008, Volvo and Eicher formed a JV, VECV where Volvo directly (46%) and indirectly holds 50% stake. Before the JV, Volvo struggled to penetrate the Indian CV market given the high pricing and poor distribution network, whereas Eicher’s entry into heavy commercial vehicles had failed given the poor product quality. Chart 4: Volvo wants to increase sales contribution from emerging markets 100%
80%
Volvo’s thrust for India market to propel VECV to high growth phase 60%
40%
20%
0%
2,007 2,008 Europe
North America
2,009 2,010 South America
Asia
2,011 Others
Source: Company Eicher, a leader in ICVs, lacks technology for HCVs EML was No. 2 in the 7.5‐12T category of trucks with nearly a one third market share. It had a pan‐India presence through more than 200 dealers and service outlets. The presence was stronger in Southern, Central and Eastern India. However, its efforts to move up to medium and heavy commercial vehicle space in 2007‐08 failed due to poor product quality. Hence, it needed a sound technological partner. Chart 5: Eicher’s market share across categories 4.5 46.0 Eicher’s efforts to upgrade to MHCV segment failed in 2008 3.6 2.7 (%)
28.0 ICV
FY12E
0.0 FY 11
1.0 FY 10
0.9 FY 09
10.0 FY 08
1.8 FY 07
19.0 FY 06
(%)
37.0 MHCV (RHS)
Source: SIAM, Edelweiss research 38 Edelweiss Securities Limited Automobiles
Chart 6: Eicher has a moderate dealer network 1,000
(Nos)
800
600
400
200
0
Ashok Leyland
Tata Motors
Dealers/Service outlets network
Eicher
Source: Crisil Launch of VE series improves Eicher’s image Our interaction with fleet owners and dealers suggest that there has been a marked improvement in the perception about the mid‐heavy commercial vehicles from Eicher post the JV with Volvo. It is also being reflected in the gradual market share gain by the company. Chart 7: Eicher gains market share post VE series launch 11.0 9.7 (%)
9.0 Launch of VE series helped Eicher gain market share 7.0 6.2 5.2 5.0 3.0 1.0 4.5 2.8 3.1 1.9 1.7 2009
4x2 Truck market share
2.0 2010
2011
4x2 Tipper market share
HD market share
Source: Company Focus now on geographical expansion 2010 and 2011 saw the company focusing on quality improvement and new launches. The targeted geography was routes where the company had strong distribution network. It also targeted large fleet operators looking for total cost of ownership and not initial acquisition cost. However, with no major launch in sight until late 2013, Eicher is likely to focus on expanding geographical coverage. It is also likely to target mid‐sized fleet owners. Late 2013, the company is likely to launch HD products with new range of engines once the engine plant gets operational. 39 Edelweiss Securities Limited Automobiles Targets 15% market share in HD market by 2015 VECV is targeting 15% share of the heavy duty (HD) truck market by 2015 as against 3% in 2011. Commercial vehicle business has a longer gestation period and unlike cars, the company has to win trust of fleet operators and increase its acceptability by providing round the clock service support. Once it succeeds in the initial phase with the right product and marketing strategy, gaining market share would be easy and quick. This is precisely what VECV is betting on by expecting a sharp jump in the market share to 15% from 3% in 2011. We have built in a 4.7% market share for the heavy duty segment for VECV by 2015. Fig. 5: VECV’s targets for 2015 VECV targeting 15%/35% market share in HD/L‐MD segments by 2015 Source: Company VE Powertrain to be another growth area To lower the cost of production and take advantage of Indian frugal engineering, Volvo plans to make VECV its sourcing hub for medium duty engines of 5‐8 litres for its global operations. VECV will manufacture Euro III and IV compliant engines and Euro V and VI base engines. It has incurred a capex of INR3.25bn to build the plant while another INR1.25bn has been spent on R&D. The plant will have capacity of 100,000 units per annum and production will start from Q3CY13. The investment gives the Volvo Group a complete facility in India for processing and assembling new medium‐duty engines which will be introduced in trucks and buses globally in the next few years. Through this investment, it will be possible for the Volvo Group to locate most of its medium duty engine production to VECV’s plant at Pithampur. Plans to make VECV its sourcing hub for MD engines Margins from engines to be higher than existing businesses 40 We have built in annual sales of 25,000 and 80,000 units, respectively, for CY13 and CY14. Out of this, 5,000 and 15,000 units are for captive consumption while the balance will be utillised by Volvo. Though the company has not given any margin guidance, it has mentioned that margin will not be lower than existing business. Peers like Cummins, Swaraj Engine and Greaves Cotton are making EBITDA margins in the 15‐20% range. Therefore, we have built in the engine business to post EBITDA margin of 12% in the second year of operation. Edelweiss Securities Limited Automobiles
Chart 8: Profitability comparison of other engine makers 50.0 45.2 44.2 39.3 5.1 4.3 30.0 3.6 3.8 (%)
Engine business to be more profitable than other business segments 4.8 (x)
40.0 6.0 2.4 20.0 19.8 17.5 13.7 10.0 1.2 0.0 0.0 Cummins
Swaraj
Fixed Assets TO Ratio (RHS)
Greaves Cotton
EBITDA Margin
ROCE Source: Capitaline Margin expansion at 11.2% on scale, operating leverage Scale will be the prime driver of margin expansion for the CV business of VECV. It not only provides the benefit of operating leverage but also gives more bargaining power for component sourcing, lowering the need for high discounts in sales. In our view, all elements will ensure an EBITDA margin expansion of 170bps over the next three years to 11.2%. Chart 9: Scale to drive margin expansion 11.5 9.2 (%)
Economy of scale will help improve margins 6.9 4.6 2.3 0.0 CY11
Wages/Sales
CY12E
Other exp/Sales
CY13E
CY14E
EBITDA margin
Source: Company, Edelweiss research Profitability set to perk up on better margin, lower capex Major part of capex phase will be over by CY12 when VECV incurs INR5bn on engine development and a new bus body building plant. Low capex coupled with the margin improvement should lead to an improvement in return ratio by 7‐10% over the next three years. 41 Edelweiss Securities Limited Automobiles Chart 10: Return ratios continue to improve 52.0 43.0 (%)
34.0 25.0 16.0 7.0 CY09
CY10
AROE
CY11E
CY12E
CY13E
CY14E
AROCE
Source: Company, Edelweiss research 42 Edelweiss Securities Limited Automobiles
Valuation Initiating with a ‘BUY’ and target price of INR2,807 Given the sea change the business profile of Eicher underwent in 2008, historical valuation multiple has lost relevance for the company. Hence, we value the company on sum–of‐the‐
parts basis where VECV truck business contributes 60% of value, standalone motorcycle business contributes 30% and balance 11% is contributed by engine business. We value VECV truck business on the basis of EV/EBITDA and assign a premium to the multiples that we have assigned to Ashok Leyland given the stronger growth visibility, stronger balance sheet, superior return, better disclosure and association of a strong partner Volvo. We assign target multiple of 7.5x on CY13E EV/EBITDA. In two wheeler business, Royal Enfield is a marquee name with little competition and strong brand. It offers the strongest growth potential driven by both sales growth and margins expansion. Like Hero and Bajaj, it also has no debt on books. We assign the same multiple of 9x as Bajaj and Hero trades at on CY13E. Engine business has wide variation in multiples depending on size of the company. Hence, on one hand, Cummins India trades at 13x FY14E EV/EBITDA while the smaller Cotton Greaves and Swaraj Engine trade at 5.5x despite having similar return profile. Given the assured business from Volvo, VECV engine business should trade in line with Cummins. However, given the fact real pick up in business is likely from CY14, we assign it EV/EVITDA multiple of 6x on CY14E EBITDA and discount at 13% WACC to arrive at the EV of engine business. Table 3: Engine business valuation INR mn
Sales (Volume)
Average Realization (INR)
Sales(INRm)
EBITDA (%)
EBITDA (INRm)
EBITDA share of EML
Targetted Multple
Engine EV (Discounted using 13% WACC)
CY13E
CY14E
20,000 65,000
275,000 283,250
5,500 18,411
4.0 12.0
220 2,209
120 1,202
6.0
6,382 7,211 Source: Company, Edelweiss research 43 Edelweiss Securities Limited Automobiles Summary valuations
INR mn
Sales
VECV (Ex‐engine)
Standalone
Total
EBIDTA
VECV (Ex‐ Engine)
Standalone
Total
CY12E
CY13E
59,562
9,285
68,847
75,732
12,539
88,271
96,541
15,686
112,227
6,711
1,251
7,962
8,942
1,956
10,898
11,389
2,749
14,138
Target multiple (EV/EBIDTA)
VECV (Truck)
Standalone
8.5
10.2
Target EV (INR mn)
VECV (Truck)
Standalone
Engine Business
Total
Less. Net debt (INR mn)*
Target market cap (INR mn)
Share cap. (Nos mn)
Value per share (INR)
CY14E
7.5
9.0
30,943
12,721
36,484
17,607
6,382
43,663 60,472
(12,279) (15,344)
55,943 75,816
27.0 27.0
2,071 2,807
6.6
8.0
41,120
21,893
7,211
70,225
(21,227)
91,452
27.0
3,386 Source: Company, Edelweiss research Note: * For Net Debt, Only Eicher’s share in VECV is considered Table 4: Key assumptions CY10
Sales volume
91,369
MHCV
29,607
LCV
8,574
Two Wheelers 52,074
Volvo
1,114
CY11
123,684
37,297
11,040
74,641
706
CY12E
CY13E
CY14E
157,052 199,199 241,774
43,610 52,705 64,475
12,769 16,072 20,274
100,108 129,574 155,923
565 847 1,101 Source: Company, Edelweiss research Table 5: Peer valuation Mcap (USDm)
Two wheeler
Bajaj Auto
Hero Honda
Eicher Motor
Commercial vehicles
Ashok Leyland
SML Isuzu
VECV Engine
Cummins
Cotton Greaves
Swaraj Engine
EV/EBITDA
ROE (%)
FY13/CY12 FY14/CY13 FY13/CY12 FY14/CY13
P/B
FY13/CY12 FY14/CY13
Net debt/Equity
FY13/CY12 FY14/CY13
EPS CAGR (%)
FY12‐14/CY11‐13
9,180
7,649
1,114
10.4
10.5
9.3
9.1
45.5
68.0
17.6
41.0
61.0
21.3
5.7
8.7
4.6 (2.9) (4.5) 11.4
7.7 (1.9) (2.6) 11.1
(0.8) (0.9) 41.1
1,498
110
5.3
6.7
4.6
17.0
21.6
26.2
19.0
1.8
2
1.6 24.1
28.0
27.9
29.6
29.0
5.6
2.7
2.2
4.8 (1.7) (1.8) 16.2
(0.5) (4.3) 21.2
22.0
2,557
399
110
*Edelweiss estimates, CY 16.1
6.6
5.0
13.1
5.5
16.3 19.1
23.3
(0.6) (0.7) 36.8
27.6
Source: Bloomberg 44 Edelweiss Securities Limited Automobiles
Chart 11: Historical valuation multiple band charts 11.5 9.2 8.2 (x)
6.9 4.8 4.6 2.3 0.0 Jan‐05
Jan‐06
Jan‐07
Jan‐08
EV/EBITDA
Jan‐09
Jan‐10
Jan‐11
Jan‐12
EV/EBITDA‐avg
Eicher Motors 1‐year forward P/E band
25.0 20.0 (x)
15.0 10.0 5.0 0.0 Jan‐05
Jan‐06
Jan‐07
Jan‐08
Jan‐09
Jan‐10
Jan‐11
Jan‐12
Eicher Motors 1‐year forward P/BV band
4.0
3.0
3.2
(x)
2.4
1.6
0.8
0.0
Jan‐05
Jan‐06
Jan‐07
Jan‐08
Jan‐09
Jan‐10
Jan‐11
Jan‐12
Source: Capitaline, Edelweiss research 45 Edelweiss Securities Limited Automobiles Edelweiss versus Bloomberg consensus Eicher is not a widely covered stock. Hence, consensus numbers may not be reflecting the true expectations of investors. However, compared to the available consensus numbers, we are 8%/21% ahead of CY12E/CY13E earnings respectively. The difference is driven by both higher sales and margins expectations. Table 6: Edelweiss vs Bloomberg consensus CY12E CY13E Particulars
Edel Consenses % var Edel Consenses % var Sales (INR mn)
69,369 65,760 5.5 94,440 81,135 16.4
EBITDA (INR mn) 7,882 7,157 10.1 10,961 8,970 22.2
EBITDA (%)
11.4 10.9
11.6 11.1
EPS (INR)
141.6 131.6 7.6 189.6 157.0 20.8 Source: Bloomberg, Edelweiss research 46 Edelweiss Securities Limited Automobiles
Key Risks Execution risk Major execution risk involves start of production as per schedule and acceptability of new products in new geographies. In our view, we have built at least one quarter delay in our numbers. Moreover, we expect gradual acceptance of new products as reflected in our market share assumption in heavy duty truck category. Royalty terms in engine business The terms of supply of engine to Volvo are not known. It leaves a possibility of VECV offering royalty to Volvo for technical know‐how which could result in lower than expected profitability. Our view: Management has guided that profitability will not be lower than existing business. Peer comparison shows that other companies are making 15‐20% EBITDA margin while we have considered 12% EBITDA margins for engine business in CY14. Moreover, manufacturing in India is at least 15% cheaper versus manufacturing in Europe. Given 50% ownership in VECV, Volvo is anyway getting half of the benefit. Deutz, from whom Volvo was earlier sourcing engine, makes 11% EBITDA margin. Hence, in our view, this risk adequately built in our numbers. 47 Edelweiss Securities Limited Automobiles Financial Statements Income statement
Year to December
Income from operations
Materials costs
Staff costs
S G & A expenses
Total operating expenses
EBITDA
Depreciation and amortisation
EBIT
Interest
Non‐operational income
Profit before tax
Provision for tax
Adjusted profit
Extraordinary income/ (loss)
Reported Profit before minority interest
Minority interest
Profit for the period
Shares outstanding
Adjusted EPS
Diluted shares outstanding
Adjusted diluted EPS
Cash EPS
Dividend per share
Dividend payout (%)
CY10
44,214
33,147
2,631
4,624
40,402
3,821
573
3,248
95
1,033
4,186
1,108
3,078
(9)
3,069
1,179
1,889
26.9
70.5
26.9
70.5
83.7
11.0
15.7
CY11
57,160
41,818
3,461
5,945
51,225
5,945
640
5,305
77
1,383
6,611
1,628
4,983
(9)
4,974
1,886
3,088
27.0
114.7
27.0
114.7
129.6
16.0
14.0
CY12E
69,369
50,244
4,076
7,167
61,487
7,882
918
6,964
44
1,518
8,437
2,280
6,157
0
6,157
2,336
3,821
27.0
141.6
27.0
141.6
163.3
21.2
15.0
CY13E
94,440
69,475
5,063
8,941
83,479
10,961
1,288
9,673
48
1,526
11,151
2,998
8,153
0
8,153
3,035
5,118
27.0
189.6
27.0
189.6
220.0
28.4
15.0
(INR mn)
CY14E
131,577
97,424
6,534
11,566
115,523
16,053
1,503
14,550
46
1,982
16,486
4,470
12,016
0
12,016
4,557
7,458
27.0
276.3
27
276.3
311.6
41.5
15.0
Common size metrics‐ as % of net revenues
Year to December
Operating expenses
Materials costs
Staff costs
S G & A expenses
Depreciation
Interest expenditure EBITDA margins
Adj. Net profit margins
CY10
91.4
75.0
6.0
10.5
1.3
0.2
8.6
7.0
CY11
89.6
73.2
6.1
10.4
1.1
0.1
10.4
8.7
CY12E
88.6
72.4
5.9
10.3
1.3
0.1
11.4
8.9
CY13E
88.4
73.6
5.4
9.5
1.4
0.1
11.6
8.6
CY14E
87.8
74.0
5.0
8.8
1.1
0.0
12.2
9.1
Growth metrics (%)
Year to December
Revenues
EBITDA PBT
Adjusted Net profit
Adj. diluted EPS
CY10
49.6
136.5
122.3
135.8
122.8
CY11
29.3
55.6
57.9
61.9
62.8
CY12E
21.4
32.6
27.6
23.6
23.4
CY13E
36.1
39.1
32.2
32.4
34.0
CY14E
39.3
46.5
47.8
47.4
45.7
48 Edelweiss Securities Limited Automobiles
Balance sheet
As on 31st December
Equity capital
Reserves & surplus
Shareholders funds
Secured loans
Unsecured loans
Borrowings Deferred tax liability (net)
Minority interest
Sources of funds
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
Current Liabilities
Provisions
Total current liab. & provisions
Net current assets
Misc expenditure
Uses of funds
Book value per share (BV) (INR)
CY10
269
12,052
12,321
865
91
956
250
6,774
20,302
8,113
4,269
3,844
669
4,586
3,265
2,609
12,457
1,814
355
20,500
7,942
1,391
9,332
11,168
35
20,302
456
CY11
270
14,661
14,931
354
150
504
645
8,377
24,456
9,887
4,843
5,044
3,947
5,126
4,280
3,434
11,973
3,391
423
23,501
11,846
1,497
13,343
10,157
182
24,456
546
CY12E
270
17,816
18,086
360
150
510
645
10,713
29,954
16,387
5,761
10,626
3,000
5,326
5,309
4,553
14,254
3,481
870
28,466
14,607
3,039
17,646
10,820
182
29,954
663
CY13E
270
22,042
22,312
360
150
510
645
13,748
37,214
19,887
7,049
12,838
1,050
6,326
7,298
6,267
21,759
4,325
1,194
40,841
20,051
3,972
24,023
16,818
182
37,214
820
(INR mn)
CY14E
270
28,200
28,470
360
150
510
645
18,305
47,930
22,387
8,552
13,835
550
7,526
10,284
10,652
30,720
5,957
1,665
59,278
27,993
5,449
33,442
25,836
182
47,930
1,048
Free cash flow
Year to December
Net profit
Depreciation
Others Gross cash flow
Less: Changes in WC
Operating cash flow
Less: Capex
Free cash flow
CY10
1,889
573
1,623
4,086
726
3,360
1,328
2,031
CY11
3,088
640
834
4,561
527
4,035
5,118
(1,083)
CY12E
3,821
918
4,101
8,841
1,619
7,221
5,553
1,668
CY13E
5,118
1,288
4,570
10,975
1,506
9,469
1,550
7,919
CY14E
7,458
1,503
2,508
11,469
(57)
11,526
2,000
9,526
Cash flow metrics
Year to December
Operating cash flow
Financing cash flow
Investing cash flow
Net cash flow
Capex
Dividend paid
CY10
3,360
(689)
(1,921)
750
(1,328)
(346)
CY11
4,035
(1,122)
(3,397)
(484)
(5,118)
(502)
CY12E
7,221
(704)
(4,236)
2,282
(5,553)
(666)
CY13E
9,469
(940)
(1,024)
7,505
(1,550)
(892)
CY14E
11,526
(1,347)
(1,218)
8,961
(2,000)
(1,300)
49 Edelweiss Securities Limited Automobiles Profitability & liquidity ratios
Year to December
ROAE (%)
ROACE (%)
Inventory days
Debtors days
Payble days
Cash conversion cycle (days)
Current ratio
Debt/EBITDA
Fixed asset turnover (x)
Debt/Equity
CY10
16.5
22.4
30
20
77
(26)
2.2
0.3
5.7
0.1
CY11
22.9
29.9
33
19
86
(34)
1.8
0.1
6.4
0.0
CY12E
23.4
31.2
35
21
96
(40)
1.6
0.1
5.3
0.0
CY13E
25.6
33.3
33
21
91
(37)
1.7
0.0
5.2
0.0
CY14E
29.6
38.8
33
23
90
(34)
1.8
0.0
6.2
0.0
Operating ratios
Year to December
Total asset turnover
Fixed asset turnover
Equity turnover
CY10
2.3
11.8
3.8
CY11
2.6
12.9
4.2
CY12E
2.5
8.9
4.2
CY13E
2.8
8.0
4.7
CY14E
3.1
9.9
5.2
Du pont analysis
Year to December
NP margin (%)
Total assets turnover
Leverage multiplier
ROAE (%)
CY10
4.3
2.3
1.7
16.5
CY11
5.4
2.6
1.7
22.9
CY12E
5.5
2.5
1.7
23.4
CY13E
5.4
2.8
1.7
25.6
CY14E
5.7
3.1
1.7
29.6
CY10
70.5
122.8
91.7
30.8
4.8
1.0
1.1
11.1
20.8
0.5
CY11
114.7
62.8
138.4
18.9
4.0
0.7
0.8
7.1
13.1
0.7
CY12E
141.6
23.4
175.6
15.4
3.3
0.6
0.7
5.0
9.5
1.0
CY13E
189.6
34.0
237.3
11.5
2.7
0.3
0.5
2.8
5.8
1.3
CY14E
276.3
45.7
332.0
7.9
2.1
0.2
0.3
1.3
3.3
1.9 Valuation parameters
Year to December
Adjusted diluted EPS (INR)
Y‐o‐Y growth (%)
CEPS (INR)
Adjusted P/E (x)
Price/BV (x)
EV/Sales (x)
EV/Sales adjusted for Volvo share(x)
EV/EBITDA (x)
EV/EBITDA adjusted for Volvo share(x)
Dividend yield (%)
50 Edelweiss Securities Limited Automobiles
Annexure Company Description Incorporated in 1982, Eicher is the flagship company of the Eicher Group in India and a leading player in the Indian motorcycle and commercial vehicle (CV) segments. Eicher manufactures and markets the motorcycle under the iconic brand name ‘Royal Enfield’. The CV segment operates under a JV called VE Commercial Vehicles (VECV). Fig. 1: Key milestones India’s first tractor rolls out of Eicher factory in Faridabad
1959
Royal Enfield
motorcycles
acquired
1984
1991
Enters HD trucks
segment
1993
JV with Mitsubishi ended,
enter MD bus
segment
JV with
Mitsubishi
motors to make ‘Canter’ trucks
Forms JV with AB
Volvo of Sweden;
transfers CV
business to the JV
2002
2005
2008
Divests tractor
and allied
businesses to
focus on CV and
motorcycle
businesses
Source: Company Royal Enfield Royal Enfield motorcycles were being sold in India ever since 1949. In 1955, the Redditch Company partnered with Madras Motors in India to form 'Enfield India' to assemble the 350cc Bullet motorcycle under licence in erstwhile madras (Now called Chennai). As per their agreement Madras Motors owned the majority (over 50%) of shares in the company. In 1990, Enfield India entered into a strategic alliance with the Eicher Group and later merged with it in 1994 and the name of the entity was changed to Royal Enfield. The entity has manufacturing plant at Tiruvottiyur in Chennai. Royal Enfield bikes are positioned as a leisure bike and targets the upper end and less price sensitive segment. VE Commercial Vehicles (VECV) VECV is a 50:50 joint venture between the Volvo Group (Volvo) and EML. The JV was formed in July 2008 with five business verticals ‐ Eicher Trucks and Buses, Volvo Trucks India, Eicher Engineering Components, Eicher Engineering Solutions and VE Powertrain. VECV includes the complete range of Eicher’s commercial vehicles, components and engineering design businesses as well as the sales and distribution of Volvo trucks. The company exports its trucks and buses to South Asian markets of Bangladesh, Nepal and Sri Lanka and plans to tap the distribution network and the international requirements in South East Asia, Middle 51 Edelweiss Securities Limited Automobiles East and Africa as well. The division has over 3000 employees across its different divisions in India. Eicher Trucks and Buses (ETB) manufacturers a range of Haulage (5T‐31T), Tipper (8T – 25T), Articulated Tractor (40T) and special application trucks. It is amongst the leader in the light and medium duty (L/MD) segment (5T‐12T). The firm has also entered into the heavy‐duty (HD) truck segment (16T‐40T) with their “VE” series of Fuel Efficient heavy‐duty trucks. The division rolled out the first Eicher truck twenty‐five years ago from its manufacturing plant in Pithampur, Madhya Pradesh in 1986. With annual production capacity of 48,000 units, the company plans to upgrade it to 100,000 units. It also has wide portfolio in its Bus segment under Skyline and Starline brands with capacity of 16‐65 seats. The products target all the customer segments i.e. school bus, staff bus, city bus etc. It also offers wide range of chassis on customised orders. Volvo Trucks India is well known in the mining and the construction industries for its product reliability and robust performance and high productivity. Over the years, Volvo trucks has established a strong customer base with over 100 vehicles in their fleet operating at various mining sites across India. Eicher Engineering Components (EEC) is the automotive component division of VECV. The division came into existence in 1992 in a take‐over from Ramon & Demm, Thane. The unit manufactures Power‐train components (Differential Gears, Transmission Gears & Shafts) and Gear Boxes for a worldwide clientele both in OEMs and spare part market. In recent years, the group has continually invested in innovation, technology and capacity expansion. Eicher Engineering Solutions (EES) helps VECV in design, development and consulting expertise in the field of engineering services. This division was set up in 1997. It has two main business areas – EES Inc. (US) and EES Gurgaon (Delhi). VE Powertrain was formed in 2010 for the production and final assembly of the Volvo Group’s product. The company plans to investment INR 2,880mn in its Pithampur plant to build engines. Volvo‐Eicher agreement details On Jun 26, 2008, the Eicher Group signed a final agreement with the Volvo Group of Sweden to establish an Indian joint‐venture company called ‘VE Commercial Vehicles Ltd’ (‘VECV’). As per the agreement, Eicher’s entire truck and bus operations along with the related components and design services business and the Volvo Group’s Indian truck sales operations and service networks of trucks and buses got transferred into a new step‐down unlisted subsidiary, VECV. The JV would had exclusive distribution rights in India for all present and future Volvo trucks. Eicher’s business was valued at an enterprise value of USD 506 million. In addition, Volvo invested a total of USD 350 million into the JV (USD 275 million in cash, and USD 75 million as their contribution of the India truck distribution) taking the equity value of the JV company to USD 768 million. Also, Volvo took direct ownership of 45.6% of the JV and also acquired 8.1% of Eicher Motors Ltd. thus gained a direct and indirect ownership interest of 50% in the JV. 52 Edelweiss Securities Limited Automobiles
Shareholding pattern Effectively AB Volvo and EML holds 50% stake each in VECV. Retail
Investors
Institutional investors
22.4%
13.8%
Promoter Group
Volvo A.B.
55.3%
8.5%
45.6%
EML
54.4%
Vo lvo
E
Com m ic he r
e rcia l
Ve hi
c les
Royal Enfield
Source: Company Key management personnel Board of Directors Mr. S. Sandilya (Chairman) is a Commerce Graduate from the Chennai University and an MBA from the Indian Institute of Management, Ahmedabad (1969). He started his career in 1969 and worked with DCM group of companies and Union Carbide before joining Eicher in 1975. At Eicher, he started with the tractor business and subsequently took over as the Chief Executive and Managing Director along with in charge of Group Finance, Strategic Planning, Audit and Information Technology of Eicher Motors Ltd. He was appointed Vice Chairman of Eicher Group in October 1999 and subsequently Group Chairman and CEO in April 2000. Mr Sandilya is the current President of Society of Indian Automobile Manufacturers (SIAM), He is a national Council member of the Confederation of Indian Industries (CII). 53 Edelweiss Securities Limited Automobiles Siddhartha Lal (MD & CEO) holds a Masters degree in Automotive Engineering from University of Leeds and is a Cranfield University qualified mechanical engineer. He served as the CEO of Royal Enfield during 2000‐04. He also took charge as the CEO of VE Commercial Vehicles (VECV) during July 2008 to July 2010. Siddhartha has been nominated as a part of the World Economic Forum’s Global Agenda Council for Transportation. He is also a part of the newly formed Next Generation Leaders Board at Indian School of Business. M. J. Subbaiah (Independent and Non‐Executive Director) holds a Master`s degree in economics from the University of Mysore and is a fellow of the Indian Institute of Bankers. With over 30 years of experience in financial services industry, he is on the board of Eicher Motors since April, 2009. He is the chairman of the Audit Committee of the board. He was a nominee director (independent and non‐executive) of ICICI Bank during 2002‐09 on the company`s board. He also served as a nominee director of ICICI Bank on the board of Eicher Ltd. Mr. Subbaiah is serving as an independent Trustee on L & T Mutual Fund Trustee Company. He is an Independent Director on the board of Jaypee Infratech Ltd. and is Chairman of the Audit Committee of that company`s board. Priya Brat (Independent Director and Non‐Executive Director) is on the Board of Eicher Motors Ltd. w.e.f. July 23, 2001. He is M.Sc. (Hons) in Physics from Punjab University, Diploma in Banking, Finance and Accountancy from the Indian Institute of Bankers, Mumbai and Diploma in International Finance from the Development Management Institute, Geneva. Since 1959 he was associated with State Bank of India (SBI) in various capacities and retired as Dy. Managing Director of SBI in 1995. Subsequent to his retirement, he served as President (Finance) at Indo Rama Synthetics (India) (1995‐1999). Currently he is a member of the Audit Committee and Compensation Committee of Eicher Motors Ltd. (EML) and is also on the board of Dhampur Sugar Mills and Dhanuka Agritech. R. L. Ravichandran (Executive Director) is a graduated from Madras University and holds Post Graduate Diploma in Business Management. He started his career with British Multinational ‐ W&T Averys and subsequently worked with USHA International, TVS Suzuki, Bajaj Auto etc. In 2005, he took up the responsibility as CEO of Royal Enfield. From January 2011, he has been elevated to the rank of E.D. and he will also be in the Board of EML with the specific task of guiding RE into the Global Arena in terms of Brand and business strategy. Prateek Jalan (Independent Director) is a law graduate from Trinity College, University of Cambridge and Master of Laws from the University of Michigan School of Law, Ann Arbor, U.S.A. Since 1994, he has been engaged in law practice at various courts, tribunals and commissions including the Supreme Court of India. Mr. Jalan is professionally associated with Supreme Court Bar Association, New Delhi, Calcutta High Court and others. He is also a member of the Oxford and Cambridge Society of India, New Delhi and a fellow of the Cambridge Commonwealth Trust, Cambridge. He is serving as a Director on the Board of Eicher Motors Ltd. (EML), VE Commercial Vehicles Ltd. and Associated Advisory Services Private Ltd. He is also a member of the Audit Committee of EML. 54 Edelweiss Securities Limited Automobiles
Other senior management Dr. Venki Padmanabhan (CEO, Royal Enfield) is received his Ph.D. in Industrial Engineering from the University of Pittsburgh in 1991, and holds a M.S. in Engineering Management from the University of Pittsburgh and a B.S. in Mechanical (Automotive) Engineering from the Birla Institute of Technology in Ranchi, India. Prior to join Eicher Group in 2008, he was the Managing Director of Chrysler’s South East Asia Global Sourcing Office based in Chennai. Started career at General Motors in 1989, Dr. Padmanabhan worked in several divisions at GM, DaimlerChrysler Corporation and Mercedes in US and Europe. Lalit Malik (CFO & Head Business Development) holds a PG diploma in Management from IIM, Bangalore and is a qualified Chartered Accountant. Prior to join Eicher in 2010, Lalit worked at Max India as Vice President‐ Corporate Development, AIG as Head of Business Strategy, Business Development, Insurance (cross sell) for the Consumer Finance Group of AIG in India, Ernst & Young as an Associate Director responsible for Business Development/ Sales of all the EY’s offering to the existing and potential clients, GE Capital International Services in various capacities and Escorts Tractors Ltd in the Finance function. Ravi Sikka (Director Group Affairs and Taxation) is a qualified Chartered Accountant (1978) and holds a B.Com (H) degree from Delhi University. Ravi has been associated with Eicher Group from the very beginning of his career in 1978. He specializes in Taxation (Direct & Indirect), Company Law, Mergers & Acquisitions, all Legal and Secretarial functions. He has been part of most of the major milestones that have shaped the group till date including the incorporation of Eicher Motors Ltd. Company secretary Shaila Aggarwal Tel No. 011 ‐ 41437600 E‐mail: saggarwal1@eicher.in Auditors Deloitte Haskins & Sells, Chartered Accountants Bankers HDFC Bank Limited; Indian Overseas Bank; ICICI Bank Limited; State Bank of India Registered Office Eicher House 12, Commercial Complex, Greater Kailash II (Masjid Moth) New Delhi ‐ 110 048 Tel: 011 – 41437600 Plant Location: Two Wheelers Royal Enfield Thiruvottiyur, Chennai 600 019, (Tamil Nadu) Commercial Vehicles (VECV) Pithampur, Madhya Pradesh 55 Edelweiss Securities Limited Automobiles THIS PAGE IS INTENTIONALLY LEFT BLANK 56 Edelweiss Securities Limited COMPANY UPDATE
Automobiles
TATA MOTORS Trucks chase JLR’s success
India Equity Research | Automobiles Tata Motor (TTMT), leader in CV segment, is likely to benefit from upswing in the CV cycle. Margins are likely to advance due to lowering of discounts in passenger vehicles and operating leverage. JLR business continues to grow strongly on back of success of Evoque. Demand scenario for premium cars stays strong in China while has improved considerably in the US. Late CY12 will see the launch of new Range Rover and the variant on the new PLA architecture. Given the improving business visibility, we raise our consolidated EBITDA estimates by 1%/21% for FY12E/FY13E, respectively. Upgrade to ‘BUY’ with TP INR334 Domestic performance set to improve TTMT should benefit from demand recovery in the commercial vehicle. EBITDA margins have also bottomed and are set to improve from 7.3% in FY12 to 9.3% by FY14E driven by operating leverage, lower discounts and improvement in product mix. We expect standalone earnings to post 28% CAGR over the next two years. EDELWEISS 4D RATING Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to market MARKET DATA (R: TAMO. BO, B: TTMT IN) CMP : INR 300 Target Price : INR 334 52‐week range (INR) : 301 / 137 Share in issue (mn) : 2,691.6 M cap (INR bn/USD mn) : 809 / 15,655 Avg. Daily Vol. BSE/NSE (‘000) : 15,578.7 SHARE HOLDING PATTERN (%) Others
26.0%
Outlook for JLR much better now Premium car business outlook is much better now than it was last year, driven by strong performance of US economy, China, Russia and Middle‐East. Europe and UK market is still struggling, but double dip recession fears have receded. Evoque performance has also been stronger than our initial anticipation. Given the strong Evoque sales, JLR should turn FCF positive. * Promoters pledged shares
(% of share in issue) Outlook and valuations: Zooming ahead; upgrade to ‘BUY’ Strong recovery in US, continuing demand of premium car in Chinese market and new launches have perked up outlook for JLR while domestic environment for CV is likely to improve on easing liquidity and interest rates. We upgrade recommendation to ‘BUY’ from ‘HOLD’ and raise target price from INR272 to INR334. We value JLR business on 5x FY13E EV/EBITDA and standalone business at 8x FY13E EV/EBITDA. Financials (Consolidated)
Year to March
Revenues (INR mn)
Rev. growth (%)
EBITDA (INR mn)
Adj net profit (INR mn)
Shares outstanding (mn)
Diluted adj EPS ‐ (INR)
EPS growth (%)
Diluted P/E ‐ (x)
EV/EBITDA (x)
ROAE (%)
FY11
FY12E
FY13E
FY14E
1,231,333 1,622,218 1,925,422 2,164,302
33.1 31.7 18.7 12.4
177,800 224,050 281,047 317,973
90,427 113,375 134,837 146,661
3,339 3,339 3,339 3,339
27.1 34.0 40.4 43.9
654.0 25.4 18.9 8.8
11.1 8.8 7.4 6.8
6.5 5.5 4.0 3.4
65.3 47.2 39.1 31.6
Edelweiss Research is also available on www.edelresearch.com, 57 Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. BUY Performer High Equalweight Promoters*
35.0%
FIIs
24.1%
MFs, FIs & Banks
14.8%
:
2.92
PRICE PERFORMANCE (%) Stock Nifty EW Auto Index 1 month 4.0 3 months 38.4 12 months 13.0 (0.7) 12.1 (9.9) 1.1 24.6 11.1 Sachin Gupta +91 22 6623 3472 sachin.gupta@edelcap.com Ashish Poddar +91 22 6620 3099 ashish.poddar@edelcap.com
April 16, 2012 Edelweiss Securities Limited Edelweiss Securities Limited Automobiles Likely to gain from CV cycle rebound TTMT is the leader in the commercial vehicle space with ~60% market share in the MHCV truck market. Hence, it is likely to be key beneficiary of revival in truck demand. We expect MHCV truck sales to grow 10% and 14% in FY13E and FY14E, respectively. Chart 1: Tata Motor: MHCV truck sales trend Source: Company, Edelweiss research Capacity ramp up to benefit LCV sales Light commercial vehicle demand has grown strongly and has surprised with a growth of 27% in FY12. The company has increased capacity at its Uttaranchal plant for the Ace family of products from 300,000 units to 450,000 units. Passenger variants have hit the permit hurdle. However, goods segment benefit from increasing use of hub and spoke model. 600,000
44.0 480,000
33.0 360,000
22.0 240,000
11.0 120,000
0.0 0
FY08
FY09
FY10
Y‐o‐Y growth (RHS)
FY11
FY12E
FY13E
FY14E
(%)
(Nos.)
Chart 2: Tata Motors: LCV growth trend (11.0)
LCV sales volume
Source: Company, Edelweiss research 58 Edelweiss Securities Limited Automobiles
Margins from domestic business to look up from hereon Margins in domestic business suffered primarily due to sharp drop in sales of passenger cars leading to fall in capacity utilization below 50% and increase in discounts across categories. In Q4, car sales recovered and discounts situation has also improved. The factors should help margin recovery. We expect EBITDA margin to recover from the low of 7.3% in FY12 to 9.6% in FY14E. Chart 3: Poor performance in passenger vehicles drags down margins 38.0 29.6 (%)
21.2 12.8 4.4 (4.0)
FY10
FY11
FY12E
PV revenue growth (YoY)
FY13E
FY14E
EBITDA margin (standalone)
JLR business outlook better now JLR sales have been much higher than our expectation, thus lowering the risk of significant margin erosion. Favourable currency movement is also helping JLR profitability. Discounts are also low. Management is targeting sales volume of upward of 380‐400k in FY13 versus our expectation of 347k. Growth is likely t o be driven by Evoque (management expects sales volume of 80‐100k units). Guidance from other premium car makers like BMW and Daimler has also been encouraging. Chart 4: JLR: Sales trend 250,000 (Nos.)
200,000 150,000 100,000 50,000 0 FY09
Jaguar
FY10
FY11E
Land Rover
FY12E
FY13E
FY14E
Evoque
Source: Company, Edelweiss research 59 Edelweiss Securities Limited Automobiles Chart 5: BMW, Daimler sales volume trend 25.0
20.0
(%)
15.0
10.0
5.0
0.0
Q1CY11
Q2CY11
Q3CY11
BMW
Q4CY11
Q1CY12
DAIMLER
Source: Company Raising estimates on improving sales outlook We raise our sales forecast for both standalone and JLR business. We also increase our margins expectation on account of improving sales and lowering of discounts. Accordingly, our consolidated FY13E/14E EBITDA has increased by 21%/16%. However, given the high financial leverage, the impact on EPS has been much higher. Table 1: JLR revised estimates Year to March
Earlier
Volumes
307,976
Net sales
13,283
EBITDA
2,263
Adjusted net profit 1,218
EBITDA margin (%) 17.0
(GBP mn) FY12E
FY13E
FY14E
Revised
% change
Earlier
310,104
0.7
333,964
347,060
3.9
369,648
376,862
2.0
13,328
0.3
14,354
14,784
3.0
15,817
16,241
2.7
2,290
1.2
2,224
2,463
10.7
2,481
2,702
8.9
1,292
6.1
911
1,253
37.6
918
1,329
44.7
15.5
16.7
15.7
16.6
17.2
Revised % change
Earlier
Revised % change
Source: Edelweiss research Table 2: Standalone revised estimates Year to March
Volumes
Net sales
EBITDA
Ad. net profit
Diluted EPS
EBITDA margin
Earlier
880,287
531,536
38,585
13,211
4.0
7.3
(INR mn) FY12E
Revised
907,004
542,507
39,780
14,717
4.4
7.3
% change
3.0
2.1
3.1
11.4
10.2
Earlier
975,090
576,355
49,147
15,780
4.7
8.5
FY13E
Revised
1,014,714
609,124
52,825
18,969
5.7
8.7
% change
4.1
5.7
7.5
20.2
20.9
FY14E
Earlier
1,161,563
699,472
67,494
25,210
7.6
9.6
Revised % change
1,156,187 (0.5)
708,479 1.3
65,969 (2.3)
24,154 (4.2)
7.2 (4.8)
9.3
Source: Edelweiss research 60 Edelweiss Securities Limited Automobiles
Table 3: Consolidated revised estimates Year to March
Net sales
EBITDA
Adj. net profit (after min. int)
Diluted EPS
EBITDA margin
(INR mn) FY12E
FY13E
FY14E
Earlier
Revised % change
Earlier
Revised % change
Earlier
Revised % change
1,615,008 1,622,218 0.4 1,756,638 1,925,422 9.6 2,002,618 2,164,302 8.1
221,209 224,050 1.3 232,840 281,047 20.7 274,360 317,973 15.9
106,656 113,375 6.3 87,952 134,837 53.3 99,445 146,661 47.5
30.8 32.8 6.6 26.3 40.4
13.7 13.8
13.3 14.6
53.6
29.8 43.9
13.7 14.7
47.4
Source: Edelweiss research Outlook and valuations: Upgrading to ‘BUY’ with TP of INR334 We upgrade recommendation on the stock to ‘BUY’ and raise target price to INR334 from INR272. The increase in share price is driven by increase in earnings estimates. We derive our target price using sum‐ of‐the‐parts method where we value JLR business on EV/EBITDA and assign 5x (comparable to peer BMW and Daimler). Domestic business is valued giving 8x EV/EBITDA (in line with historical average and premium to Ashok Leyland). Table 4: Valuation FY 13 EBITDA
JLR
136,361
Tata Motor Standalone
54,424
Total EV
Total Debt
Cash and Investment
Automotive net debt
Net Debt adjusted for NBFC subsidiary debt
Mcap
Implied value per share
Value of other subsidiaries
Total vlaue per share
Target Implied EV
multiple
5 681,807
8 435,392
1,117,199
446,336
282,091
107,531
56,715
1,060,484
318
16
334 Source: Edelweiss research Table 5: Valuation of subsidiaries Subsidiaries
Basis of valuation
Tata Daewoo
8x FY13 earnings
706
Earnings
8
P/E Value (INR mn) % holding Value per share (INR)
5,647
100.0
2
Tata Technologies
10x FY13 earnings
1,783
10
17,825
81.5
4
TML Drivelines Ltd
7x FY13 earnings
2,696
7
18,875
85.0
5
HVAL
12x FY12 earnings
1,409
7
9,864
85.0
3
HVTL
12x FY12 earnings
1,287
7
9,010
85.0
2
Tata Motors Finance
1x P/BV
18,580
1
18,580
100.0
6
Telcon
Implied valuation of stake sale
59,195
40.0
7
Total
26,461
Holding company discount
79,802
24
30.0
Value of subsidiaries
7
16 Source: Edelweiss research 61 Edelweiss Securities Limited Automobiles Table 6: Key assumptions JLR
Sales volume
Jaguar
Land Rover (ex‐Evoque)
Evoque
EBITDA Margin (%)
Tata Motors (Standalone)
Sales volume
MHCV
LCV
PV
EBITDA margin (%)
FY12E
51,648
201,236
57,220
17.2
FY13E
52,430
210,630
84,000
16.7
FY12E
221,202
364,410
321,392
7.3
FY14E
55,149
225,113
96,600
16.6
FY13E
241,318
436,318
339,390
8.9
FY14E
274,113
512,547
372,448
9.6 Source: Edelweiss research Edelweiss versus Bloomberg consensus We are 4/3% ahead of consensus largely due to higher sales and consequently, higher margins expectations. TTMT’s earnings has been volatile, thus, in our view, directionally, earnings upgrade momentum assumes higher significance than the absolute value of difference. In our view, earnings upgrade cycle should continue for the company driven by improvement in domestic business and continuation of good performance of JLR. Table 7: Edelweiss Vs Bloomberg consensus FY13E
Particulars
Edel Consenses % var
Sales
1,925,422 1,832,426
5.1
EBITDA
281,047 251,913
11.6
EBITDA (%) 14.6 13.7
EPS (INR)
40.4 39.0
3.6
(INR mn) Edel
2,164,302
317,973
14.7
43.9
FY14E
Consenses
2,033,502
283,987
14.0
42.7
% var
6.4
12.0
2.9 Source: Bloomberg, Edelweiss research 62 Edelweiss Securities Limited Automobiles
Chart 6: Historical valuation multiple band charts Tata Motors ‐ EV/EBITDA band
17.0 14.0 (x)
11.0 8.0 5.0 2.0 May‐03
Aug‐04
Nov‐05
Feb‐07
May‐08
Aug‐09
Nov‐10
Feb‐12
Tata Motors ‐ P/B band
5.0 4.0 (x)
3.0 2.0 1.0 0.0 Apr‐09
Sep‐09
Feb‐10
Jul‐10
Dec‐10
May‐11
Oct‐11
Mar‐12
400%
20.0 300%
15.0 200%
10.0 100%
(x)
25.0 Multiple
Mar‐12
Jun‐10
Sep‐08
Dec‐06
Mar‐05
‐100%
Jun‐03
0.0 Sep‐01
0%
Dec‐99
5.0 TTMT EPS y‐o‐y (RHS)
Source: Factset, Edelweiss research 63 Edelweiss Securities Limited Automobiles Company Description TTMT is India's largest automobile company with a 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 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. Investment rationale TTMT is now likely to benefit from improvement in standalone business as well while JLR business continues to do well due to success of Evoque. We expect standalone operations to post margin improvement due to increase in capacity utilization in passenger vehicles business and lowering of discounts. Low discounts and favourable forex continues to benefit JLR margins. Key Risks Contagion credit risk Any event affecting credit availability could derail premium car market demand and be a substantial risk to our earnings assumption. Execution risk Execution risks pertain to new model launch as well as foray into China. However, given the history of successful turning around business, give us comfort that Tata’s should be able to successfully foray into China. 64 Edelweiss Securities Limited Automobiles
Financial Statements Income statement
Year to March
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
FY10
FY11
925,193
1,231,333
614,954
790,084
52,619
62,493
87,518
93,427
129,890
164,942
45,925
57,413
839,055
1,053,533
86,137
177,800
43,853
56,180
42,284
121,620
24,653
23,853
2,672
4,295
20,303
102,062
10,058
12,164
10,245
89,898
542
528
10,787
90,427
14,919 2,310
25,706
92,737
2,853
3,189
3.8
28.4
3,003
3,339
3.6
27.1
Common size metrics‐ as % of net revenues
Year to March
Operating expenses
Materials costs
Staff costs
S G & A expenses
Depreciation
Interest expenditure EBITDA margins
Net profit margins
Growth metrics (%)
Year to March
Revenues
EBITDA PBT
Adj Net profit
EPS
65 FY12E
FY13E
1,622,218
1,925,422
1,072,847
1,252,804
72,604
78,362
126,217
149,743
208,320
253,227
81,819
89,761
1,398,168
1,644,374
224,050
281,047
69,183
86,473
154,867
194,575
27,895
35,671
10,529
11,474
137,500
170,377
24,401
35,678
113,100
134,700
275
137
113,375
134,837
(3,750.0) 0.0
109,625
134,837
3,189
3,189
35.6
42.3
3,339
3,339
34.0
40.4
(INR mn)
FY14E
2,164,302
1,416,294
86,587
169,273
280,529
106,352
1,846,329
317,973
100,149
217,825
43,719
13,000
187,106
40,420
146,686
(25)
146,661
0.0
146,661
3,189
46.0
3,339
43.9
FY10
90.7
66.5
9.5
9.1
4.7
2.7
9.3
1.1
FY11
85.6
64.2
7.6
8.7
4.6
1.9
14.4
7.3
FY12E
86.2
66.1
7.8
7.8
4.3
1.7
13.8
7.0
FY13E
85.4
65.1
7.8
8.5
4.5
1.9
14.6
7.0
FY14E
85.3
65.4
7.8
8.0
4.6
2.0
14.7
6.8
FY10
30.5
292.2
(181.0)
(136.1)
(132.0)
FY11
33.1
106.4
402.7
777.5
654.0
FY12E
31.7
26.0
34.7
25.8
25.4
FY13E
18.7
25.4
23.9
19.1
18.9
FY14E
12.4
13.1
9.8
8.9
8.8 Edelweiss Securities Limited Automobiles Balance sheet
As on 31st March
Equity capital
Reserves & surplus
Shareholders funds
Secured loans
Unsecured loans
Borrowings Minority Interest
Deferred tax (Net)
Sources of funds
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
Uses of funds
Book value per share (BV) (INR)
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
449,571
29
FY11
6,377
185,338
191,715
199,271
128,643
327,914
2,466
14,638
536,733
35,848
714,629
396,987
317,643
117,289
25,443
140,705
68,774
109,479
191,391
0
510,349
320,738
50,408
98,692
469,838
40,511
536,733
60
FY12E
6,377
280,041
286,418
240,521
146,033
386,555
1,728
14,638
689,338
35,848
862,129
466,170
395,960
117,289
57,858
254,983
76,495
64,889
216,067
19
612,453
385,911
50,408
93,750
530,070
82,383
689,338
90
FY13E
6,377
396,225
402,602
281,521
164,815
446,336
852
14,638
864,428
35,848
1,028,329
552,642
475,687
117,289
203,711
251,651
90,594
77,017
246,936
19
666,218
486,438
50,408
97,481
634,328
31,889
864,428
126
(INR mn)
FY14E
6,377
520,503
526,880
281,521
195,596
477,118
(187)
14,638
1,018,448
35,848
1,202,729
652,791
549,938
117,289
256,854
283,787
102,163
86,572
308,673
19
781,215
571,085
50,408
101,211
722,705
58,511
1,018,448
165
Free cash flow Year to March
Net profit
Depreciation
Deferred tax
Others Gross cash flow
Less: Changes in WC
Operating cash flow
Less: Capex
Free Cash Flow
FY10
10,787
38,871
4,340
(4,881)
49,116
(39,176)
88,292
63,644
24,649
FY11
90,427
46,555
1,852
(2,380)
136,453
14,529
121,925
98,042
23,883
FY12E
113,375
69,183
0
(4,025)
178,533
86,475
92,058
147,500
(55,442)
FY13E
134,837
86,473
0
(137)
221,173
(59,433)
280,606
166,200
114,406
FY14E
146,661
100,149
0
25
246,835
20,254
226,581
174,400
52,181
Cash flow metrics
Year to March
Operating cash flow
Financing cash flow
Investing cash flow
Net Cash Flow
Capex
Dividend paid
Share issuance/(buyback)
FY10
88,292
17,113
(59,186)
46,220
(63,644)
(3,356)
565
FY11
121,925
1,415
(101,294)
22,047
(98,042)
(9,913)
672
FY12E
92,058
43,108
(179,916)
(44,750)
(147,500)
(14,794)
0
FY13E
280,606
43,983
(312,053)
12,536
(166,200)
(14,922)
0
FY14E
226,581
11,090
(227,543)
10,127
(174,400)
(18,653)
0 66 Edelweiss Securities Limited Automobiles
Profitability & liquidity ratios
Year to March
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
FY10
13.8
10.2
61
24
143
(58)
1.0
4.1
3.3
4.3
4.3
FY11
65.3
25.9
54
21
132
(56)
1.1
1.8
4.0
1.7
1.7
FY12E
47.2
27.1
63
16
113
(33)
1.2
1.7
4.5
1.3
1.3
FY13E
39.1
30.1
69
16
120
(34)
1.1
1.6
4.4
1.1
1.1
FY14E
31.6
30.6
65
16
128
(47)
1.1
1.5
4.2
0.9
0.9
Operating ratios
Year to March
Total asset turnover
Fixed asset turnover
Equity turnover
FY10
2.1
3.3
13.1
FY11
2.5
4.0
9.0
FY12E
2.6
4.5
6.8
FY13E
2.5
4.4
5.6
FY14E
2.3
4.2
4.7
Du Pont Analysis
Year to March
NP margin (%)
Total assets turnover
Leverage multiplier
ROAE (%)
FY10
1.0
2.1
6.1
13.8
FY11
7.3
2.5
3.6
65.3
FY12E
7.0
2.6
2.6
47.2
FY13E
7.0
2.5
2.3
39.1
FY14E
6.8
2.3
2.0
31.6
Valuation parameters
Year to March
Adj Diluted EPS (INR)
CEPS (INR)
Diluted PE (x)
Price/BV (x)
EV/Sales (x)
EV/EBITDA (x)
Dividend yield (%)
FY10
3.6
20.5
83.6
10.4
1.2
12.8
1.0
FY11
27.1
46.4
11.1
5.0
0.9
6.5
1.3
FY12E
34.0
57.2
8.8
3.3
0.8
5.5
1.3
FY13E
40.4
69.4
7.4
2.4
0.6
4.0
1.7
FY14E
43.9
77.4
6.8
1.8
0.5
3.4
2.0 67 Edelweiss Securities Limited Automobiles NOTES: 68 Edelweiss Securities Limited Automobiles
NOTES: 69 Edelweiss Securities Limited Automobiles NOTES: 70 Edelweiss Securities Limited Automobiles
RATING & INTERPRETATION
Company Absolute Relative
Relative
reco
reco
risk Ashok Leyland HOLD SP H Bajaj Auto Exide Industries HOLD SP L Hero MotoCorp BUY SO M Maruti Suzuki India Ltd HOLD SP H Escorts Mahindra & Mahindra Ltd Tata Motors Ltd Company
Absolute Relative
Relative
reco reco Risk BUY SO H HOLD SP L BUY SO H HOLD ‐ ‐ ABSOLUTE RATING
Ratings
Expected absolute returns over 12 months
Buy
More than 15%
Hold
Between 15% and - 5%
Reduce
Less than -5%
RELATIVE RETURNS RATING
Ratings
Criteria
Sector Outperformer (SO)
Stock return > 1.25 x Sector return
Sector Performer (SP)
Stock return > 0.75 x Sector return
Sector Underperformer (SU)
Stock return < 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING
Ratings
Criteria
Low (L)
Bottom 1/3rd percentile in the sector
Medium (M)
Middle 1/3rd percentile in the sector
High (H)
Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings
Criteria
Overweight (OW)
Sector return > 1.25 x Nifty return
Equalweight (EW)
Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW)
Sector return < 0.75 x Nifty return
71 Edelweiss Securities Limited Automobiles Edelweiss Securities Limited, Edelweiss Hcouse, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91‐22) 4009 4400, Email: research@edelcap.com Vikas Khemani Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206 Nischal Maheshwari Co‐Head Institutional Equities & Head Research nischal.maheshwari@edelcap.com +91 22 6623 3411 Coverage group(s) of stocks by primary analyst(s): Auto & Auto Components Auto: Ashok Leyland, Bajaj Auto Ltd, Escorts, Exide India, Hero MotoCorp, Mahindra & Mahindra, Maruti Suzuki, Tata Motors
Recent Research Date 02‐Apr‐12 1,150
950
750
(INR)
Company
Buy
Title
Price (INR)
Recos
Automobiles Cars, LCV maintain growth momentum; Sector Update 16‐Mar‐12 Automobiles Budget: Neutral to marginal negative; Sector Update 550
14‐Mar‐12 350
BMW
Buy
AG Buy
Going’s good so far; Result Update Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
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150
Distribution of Ratings / Market Cap Rating Interpretation Edelweiss Research Coverage Universe Buy
Hold
Reduce
Rating
Total
Expected to
Rating Distribution* * 1 stocks under review 104 > 50bn
Market Cap (INR) 114 60 18 183
Between 10bn and 50 bn
< 10bn
58 11
Buy appreciate more than 15% over a 12‐month period Hold appreciate up to 15% over a 12‐month period Reduce
depreciate more than 5% over a 12‐month period
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