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30 AUG 2013

Sector Update

AUTO: DEMAND UNCERTAINTY PERSISTS


CUT FY15 ESTIMATES TO FACTOR IN DEMAND SLOWDOWN
Weakness in macro environment owing to (1) high interest rate, (2) tight money supply, (3) depreciating rupee and (4) expected increase in fuel price will continueto put pressure on volume growthin FY14E/15E(refer exhibit 2 to4).However, we expect normal monsoon to drive demand in rural areas. We revise our INR estimates which adversely impacts Maruti and benefits Bajaj Auto. We reduce our volume estimates for stocks in our auto universe in the range of 1% to 12% for FY14/15(refer exhibit 1)to factor in low economic activity and subdued urban demand. Tata Motors, Bajaj Auto and Eicher Motors remain our top picks.

RELATIVE PERFORMANCE
140 Sensex 120 BS E Auto Index

100

80 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13

Source: Axis Capital

Maruti(refer exhibit 5): CutFY15earnings estimate by 7% to factor in lower volumes/product mix and revised INR estimate.We now factor in Rs 1.633/Yen and Rs 1.594/Yen (Rs 1.675/1.645earlier) for FY14E/15E. MaintainBUY with TP of Rs 1,419(6x FY15E EV/EBITDA).Currency volatility remains a key concern M&M(refer exhibit 6, 7):Lower UV and LCV volume growth assumptiondrives7% cut in our FY15E earnings. We maintain our stance that traditional UVs will witness higher decline in volumes vs. petrol cars as fuel price disparity reduces. Maintain HOLD with SoTP-based target price of Rs 800 Bajaj Auto(refer exhibit 8): Bajaj (2W) is a proxy for urban demand, which is expected to remain subdued. Revise downwards our exportgrowth assumption to factor in import curbs and socio-economic situation in its key markets.We now factor involume de-growth of 7% in FY14E vs. 4% growth earlier. We revise our INR/USD assumptionto Rs 60/64 for FY14/15 (Rs 58.5/62 earlier). Q1FY14 INR/USD realized rate was Rs 55.6/USD. Lower our FY14/FY15E earnings by 4%/5%. Maintain BUY with revised SOTP-based TP of Rs 2,112 (9.5x FY15E EV/EBIDTA + Rs 60 for investment in KTM) Hero (refer exhibit 9): Benefits from higher exposure to rural markets and general down trading during slowdown phase. We factor in volume growth of 3/7% (vs. 4/11% earlier) which leads to marginal ~3% earnings downgrade in our FY14E/15E earnings. Maintain HOLD with TP of Rs 1,835 (7.5x FY15E EV/EBIDTA) (Continued on page 2)

Sector summary
C o mp anies
Maruti Mah & Mah# Bajaj Auto Hero Eicher* Tata Motors* Ashok Leyland TVS Motor

CMP M c ap (R s ) (R s b n)
1,236 777 1,730 1,913 3,168 298 12 29 373 478 501 382 86 872 32 14

F DEPS (R s ) F Y14 E F Y15E


99 52 119 110 158 39 0 4 100 51 137 133 210 43 1 5

PE (x) F Y14 E FY15E


12.5 15.0 14.6 17.4 20.1 7.6 38.9 7.0 12.4 15.1 12.6 14.4 15.1 7.0 14.7 5.7

EV/ E (x) F Y14 E F Y15E


5.6 9.9 9.7 8.3 8.6 3.6 8.5 3.9 5.0 9.8 7.9 7.9 6.1 3.1 6.8 3.2

R o C E (% ) F Y14 E F Y15E
19 22 45 53 24 21 5 17 17 20 43 58 26 20 6 18

TP Up s ide (R s ) (% )
1,419 800 2,112 1,835 3,820 352 12 32 15 3 22 (4) 21 18 (1) 9

Source: Companies, Axis CapitalNote: * Consolidated; # earnings excluding subsidiary dividend; Prices as on August 28, 2013

01

30 AUG 2013

Sector Update

AUTOMOBILE
(Continued from page 1)

Eicher Motors(refer exhibit 10, 11): Lower CV volumes drives 4/7% cut in our CY13E/14E earnings. We remain confident on two wheeler (Royal Enfield) volume growth. Maintain BUY with SoTP-based TP of Rs 3,820 Tata Motors(refer exhibit 12, 13): Cut standaloneearnings for FY14E/15E to factor in lower CV and PV volumes. We conservatively maintain JLR volume forecast though strong volumes in July 2013 warrant an upgrade. Depreciating INR (translation gain at JLR) offsets impact of earnings downgrade in standalone operations. Maintain BUY with SoTP-based target price of Rs 352 Ashok Leyland(refer exhibit 14): We lower our volume estimates to factor in weak truck demand and slump in mining activitiesleading to 49/53% earnings downgrade in our FY14E/15E earnings. Sharp earnings downgrade is attributable to low utilization levels. Maintain HOLD with revised TP of Rs 12 (6x FY15E EV/EBIDTA +Rs 1.4 for Nissan/John Deere JV) vs. Rs 17 earlier TVS Motors(refer exhibit 15):Cut FY14E/15E earnings by 14/11% to factor in lower volumes. Maintain HOLD with revised TP of Rs 32 (4x FY15E EV/EBIDTA and negative value of Rs 4 per share for investment in Indonesia) vs. Rs 35 earlier

Exhibit 1: Revised volume growth estimates


(%)
Bajaj Auto Domestic Export Hero Maruti M&M Automotive Tractor Tata Motors India MHCV JLR Eicher Motors Royal Enfield CVs
Source: Axis Capital

FY14E Revised
(6) (7) 3 2

FY15E Previous
3 6 4 2

Revised
5 6 7 6

Previous
8 8 11 7

(7) 18

(3) 18

4 10

7 14

(3) (11) 10

(3) (7) 10

6 6 10

13 13 10

64 (9)

64 (6)

35 6

35 8

Note: For Eicher it is CY13E/14E

02

30 AUG 2013

Sector Update

AUTOMOBILE
Exhibit 2: Money supply (M1) more important than interest rate for volume recovery
Cars (LHS) 60 40 20 0 (20) (%) Money Supply (M1) PLR (%) 25 20 15 10 5

Jun-95

Jun-96

Jun-97

Jun-98

Jun-99

Jun-00

Jun-01

Jun-02

Jun-03

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Source: SIAM, CMIE, Axis Capital

Exhibit 3: Money supply (M1) has strong correlation with truck demand and GCF
60 Trucks (LHS) Money Supply (M1) GCF (%) 40 30 30 20 10 0 0 (10) (30)
Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13

Money supply continues to be below 10% (lowest seen in last decade). RBI measures for arresting INR depreciation will further put pressure on money supply

(20)

Source: SIAM,CMIE, Axis Capital

Exhibit 4: Fuel price hike in last 12 quarters


Inc/(dec) in petrol price 8 6 4 2 0 (2)
Mar-11 Mar-12 Mar-13 YTD FY14 Sep-10 Sep-11 Sep-12 Dec-10 Dec-11 Dec-12 Jun-11 Jun-12 Jun-13

Inc/(dec) in diesel price

(Rs/ltr)

Currently, we estimate under recovery in diesel to be~Rs 14/ltr. We expect OMCs to raise petrol prices ~Rs 3/ltr due to increase in crude oil price and INR depreciation of ~8% in Aug 13

Source: Axis Capital

03

30 AUG 2013

Sector Update

AUTOMOBILE
Change in estimates Exhibit 5: Maruti - Change in estimate
(Rs mn) Revised
Volumes (nos) Volume growth (%) Sales EBITDA EBITDA % PAT
Source: Axis Capital

FY14E Previous
2 457,236 53,935 11.8 30,402 (2) 0 (2)

FY15E % change
0

Revised
1,269,566 6 486,381 55,439 11.4 30,187

Previous
1,287,365 7 496,387 58,598 11.8 32,601

% change
(1) (2) (5) (7)

1,200,540 1,200,540 2 458,714 53,115 11.6 29,789

Factoring in adverse product mix and INR depreciation

Exhibit 6: M&M + MVML - Change in estimate


(Rs mn) Revised
Volumes Automotive Tractor Volume growth (%) Automotive Tractor Sales EBITDA APAT*
Source: Axis Capital

FY14E Previous
468,401 264,430 (3) 18 399,114 53,874 34,582 (2) (1) (1)

FY15E % change
(4) 0

Revised
466,026 289,398 4 10 415,918 55,352 34,582

Previous
500,036 302,335 7 14 441,940 58,812 37,266

% change
(7) (4)

448,664 264,430 (7) 18 391,173 53,392 34,123

(6) (6) (7)

Potential increase in diesel prices and reducing fuel price disparity will impact M&Ms UV portfolio. Lower FY15 volume assumption which leads to 6% earnings downgrade

* Excludes subsidiary dividend; MVML is Mahindra Vehicle Manufacturers Ltd

04

30 AUG 2013

Sector Update

AUTOMOBILE
Exhibit 7: M&M - SOTP valuation
Core business (Rs mn)
EBITDA FY14E (M&M+MVML) Target multiple (x) EV Less: Net debt Target Mcap Value for M&M per share - A Subsidiaries (Rs mn)

FY15E
55,352 6.5 359,790 8,472 351,318 568 M&M holding Equity value 119,603 163,381 17,069 5,536 2,956 18,109 Share of M&M 66,978 77,666 8,714 2,805 1,498 15,047 Per-share (Rs) 109 126 14 5 2 24 No of o/s shares 104 128 41 88 32 84

M&M Financial Services Tech Mahindra* Mahindra Lifespace Mahindra Forgings MUSCO Mahindra Holidays Total Non-core value @ 20% discount to market value - B* Ssangyong Motors Korea (70% holding) Per share value - C Total of Core and Non-core Business (A+B+C)
Source: Company, Axis Capital

56.00% 47.54% 51.05% 50.67% 50.69% 83.09% 280 211 12,056 20 800

Note: Listed subsidiaries valued on Market Cap basis. * Value of TechMahindra is based on our last

released report and holding company discount of 30%

Exhibit 8: Bajaj Auto - Change in estimate


(Rs mn) Revised
Volumes Domestic Export Volume growth (%) Domestic Export Sales EBITDA EBITDA % PAT
Source: Axis Capital

FY14E Previous % change


(9) (12)

FY15E Revised Previous % change


(11) (14)

2,525,347 2,769,859 1,436,082 1,640,474 (6) (7) 201,132 42,345 21.1 34,387 3 6 219,294 44,405 20.2 35,844

2,654,056 2,985,234 1,518,495 1,774,622 5 6 8 8 245,321 52,151 21.3 41,779

(8) (5) (4)

220,336 49,094 22.3 39,622

(10) (6) (5)

Higher petrol price can impact Bajajs domestic sales in current economic scenario. Product mix (higher share of 3W) and currency to drive profitability

05

30 AUG 2013

Sector Update

AUTOMOBILE
Exhibit 9: Hero - Change in estimate
(Rs mn) Revised
Volumes Volume growth (%) Sales EBITDA EBITDA % PAT
Source: Axis Capital

FY14E Previous
4 253,182 37,742 14.9 22,473 (2) (2) (2)

FY15E % change
(2)

Revised
6,670,792 7 268,443 37,849 14.1 26,542

Previous
7,030,575 11 283,865 39,055 13.8 27,427

% change
(5) (5) (3) (3)

6,259,342 6,357,072 3 249,322 37,010 14.8 21,937

Benefits from higher exposure to rural markets and general downtrading during slowdown phase

Exhibit 10: Eicher Motors - Change in estimate


(Rs mn) Revised
Volumes Royal Enfield CVs Volume growth (%) Royal Enfield CVs Sales EBITDA EBITDA % PAT
Source: Axis Capital

CY13E Previous
184,406 45,863 64 (6) 71,664 7,529 10.5 5,846 (4) (2) (4)

CY14E % change
0 (3)

Revised Previous
248,365 248,365 46,713 35 6 82,141 9,454 11.5 7,232 49,489 35 8 84,986 10,215 12.0 7,803

% change
0 (6)

184,406 44,266 64 (9) 70,075 7,245 10.3 5,633

(3) (7) (7)

Lower CV volumes drive earnings downgrade; weremain positive on Royal Enfield volumes

Exhibit 11: Eicher Motors - SoTP valuation (CY14E)


(Rs mn)
Standalone VECV (54.4% stake) Total Less: Net Debt Standalone VECV (54.4% stake) Market Cap No of shares (mn) Value per share (Rs) NPV of engine business Value per share (Rs)
Source: Axis Capital

EBIDTA
4,651 2,613 7,264

Multiple (x)
12.0 7.0

EV
55,810 18,290 74,100

(12,374) (8,527) 95,001 27 3,520 300 3,820

06

30 AUG 2013

Sector Update

AUTOMOBILE
Exhibit 12: Tata Motors - Change in estimate
(Rs mn) Revised
Volumes India MHCV LCV PV JLR Volume growth (%) India MHCV LCV PV JLR Sales EBITDA EBITDA Margin (%) Domestic JLR PAT 2.4 16.5 125,843 2.9 16.4 120,831 4 3.7 15.9 135,840 4.7 15.9 141,744 (4) (3) (11) 8 (17) 10 2,174,540 305,907 (3) (7) 8 0 10 2,127,653 296,002 2 3 6 6 6 7 10 2,522,738 347,535 13 13 17 0 10 2,520,562 349,064 0 (0) 757,908 127,749 397,354 182,683 406,626 764,368 132,902 398,661 182,683 406,626 (1) (4) (0) 0 0 804,975 135,831 421,211 195,036 447,314 865,790 149,706 466,022 195,036 447,314 (7) (9) (10) 0 0

FY14E Previous % change Revised

FY15E Previous % change

Cut standalone earnings for FY14E/15E to factor in lower CV and PV volumes while we maintain JLR volume assumption. There exists upside risk to our JLR volume assumption

Source: Company, Axis Capital

Exhibit 13: Tata Motors - SoTP Valuation


Financials (Rs mn)
A. Standalone EBITDA (Rs mn) Target Multiple (x) Enterprise Value (Rs mn) Per Share value (Rs) B. JLR EBITDA (Rs mn) Target Multiple (x) Enterprise Value (Rs mn) Per Share value (Rs) C. Finance Sub TMFL Net worth FY13 (Rs mn) P/BV (x) Value (Rs mn) Per Share (Rs) D. Subs (Rs mn) TDCV Tata Tech Tata Driveline Total Per Share (Rs) E. Net Debt Less: Automotive Debt (Rs mn) Per Share (Rs) Total Target Price (A+B+C+D-E)
Source: Axis Capital

FY15E
16,127 5.5 88,697 28 318,774 3.0 956,321 301 26,390 1.5 39,585 12 PAT FY14E 150 3,100 700 Multiple (x) 8 10 8 Value 1,200 31,000 5,600 TAMO's share 1,200 25,281 4,760 31,241 10 FY15E (2,171) (1) 352

07

30 AUG 2013

Sector Update

AUTOMOBILE
Exhibit 14: Ashok Leyland - Change in estimate
(Rs mn) Revised
Volumes (ex LCV) Volume growth (%) Sales EBITDA EBITDA % PAT
Source: Axis Capital

FY14E Previous
76,584 (4) 125,787 8,701 6.9 1,631 (49) (6) (11)

FY15E % change
(4)

Revised
77,454 5 125,627 9,242 7.4 2,197

Previous
89,791 17 151,214 12,609 8.3 4,626

% change
(14) (17) (27) (53)

73,621 (8) 118,664 7,724 6.5 829

Exhibit 15: TVS Motor - Change in estimate


(Rs mn) Revised
Volumes Volume growth (%) Sales EBITDA EBITDA % PAT
Source: Axis Capital

FY14E Previous % change


2,113,898 4 76,359 4,733 6.2 2,302 (14) (3) (9) (5)

FY15E Revised
6 79,924 4,807 6.0 2,446

Previous
8 84,320 5,196 6.2 2,746

% change
(6) (5) (7) (11)

2,017,508 (1) 74,106 4,291 5.8 1,983

2,141,594 2,286,987

Exhibit 16: Monthly car growth


30 20 10 0 (10) (20) (30) (%)

Exhibit 17: Monthly UV growth


100 80 60 40 20 0 (20) (40) (%)

May-13

Jul-12

Oct-12

Mar-13

Sep-12

Dec-12

Oct-12

Feb-13

Feb-13

May-13

Mar-13

Sep-12

Aug-12

Dec-12

Jan-13

Jun-13

Source: SIAM, Axis Capital

Nov-12

Source: SIAM, Axis Capital

Nov-12

Aug-12

Apr-13

Apr-13

Jan-13

Jun-13

Jul-12

Jul-13

Jul-13
08

30 AUG 2013

Sector Update

AUTOMOBILE
Exhibit 18: Monthly MHCV - goods growth
0 (10) (20) (30) (40) (%)

Exhibit 19: Monthly LCV growth


40 30 20 10 0 (10) (20) (%)

May-13

May-13

Jul-12

Oct-12

Oct-12

Mar-13

Mar-13

Sep-12

Sep-12

Dec-12

Dec-12

Feb-13

Feb-13

Aug-12

Aug-12

Jan-13

Jan-13

Source: SIAM, Axis Capital

Source: SIAM, Axis Capital

Exhibit 20: Monthly two wheeler growth


15 10 5 0 (5) (10) (15) (%)

Exhibit 21: Monthly tractor growth


40 30 20 10 0 (10) (20) (%)

May-13

Nov-12

Nov-12

Apr-13

Apr-13

May-13

Jul-12

Jul-13

Jul-12

Jun-13

Jun-13

Oct-12

Mar-13

Oct-12

Mar-13

Sep-12

Sep-12

Feb-13

Dec-12

Dec-12

Feb-13

Jun-13

Jan-13

Aug-12

Aug-12

Apr-13

Jan-13

Nov-12

Source: SIAM, Axis Capital

Source: TMA, Axis Capital

Nov-12

Apr-13

Jun-13

Jul-13
09

Jul-13

Jul-12

Jul-13

30 AUG 2013

Sector Update

AUTOMOBILE

This document has been prepared by AXIS Securities Ltd * Privileged Client Group. Affiliates of AXIS Securities Ltd * focused on Institutional Equities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating and target price of the Affiliates research report. The views expressed / recommendations made in this report are based on Technical Analysis techniques and could be at variance with the companys / groups views based on fundamental research. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. 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