Institutional
Equity
Research
Eicher Motors Ltd
Automobile | India   EIM.IN; EICH.BO September 3, 2014

SBICAP Securities Ltd (SSL)

Mafatlal Chambers, A-Wing
Dharmesh Shah 2nd Floor, N.M. Joshi Marg
Senior Research Analyst Lower Parel, Mumbai - 400013
+91 22 4227 3398 + 91-22-4227 3300/01
dharmesh.shah@sbicapsec.com sbicapresearch@sbicapsec.com
 
 
SBICAP Research on Bloomberg SBICAP <GO>, www.securities.com Please refer to our disclaimer given at the last page.
Eicher Motors Ltd SBICAP Securities Ltd

Contents

Investment rationale ................................................................................................................................. 4

Key risk to our investment rationale.......................................................................................................... 9

Financial analysis ................................................................................................................................... 10

Valuations ............................................................................................................................................... 12

Company background ............................................................................................................................ 13

Financials ............................................................................................................................................... 14

dharmesh.shah@sbicapsec.com September 3, 2014 | 2

 Eicher Motors Ltd SBICAP Securities Ltd

Initiating Coverage BUY In a Sweet spot

Eicher Motors Ltd (EIM), with two select businesses that enjoy tremendous
Current price (3 Sep) Rs 11,102 brand pull, is set to gain from a leisure-biking-besotted motorcycle
Target price Rs 13,150
Upside/(downside) % 18 premiumisation and a firm economic-recovery-propped Commercial Vehicle
(CV) upturn. We foresee EIM garner a revenue growth momentum of 31.3%
CAGR during C13–16e, driven by its ‘Royal Enfield’ (RE) motorcycle revenues
Market data
growing at a 58.7% CAGR pace and CV business (Volvo-Eicher Commercial
Mkt capitalisation Rs bn 300.9
Vehicles, VECV) at 19% CAGR pace. Understandably, earnings will grow at a
Average daily vol '000 50.5
52-week H/L Rs 11445 / 3110 CAGR of 57.8% making us arrive at a Sum-of-the-parts (SOTP) target price of
Shares O/S mn 27.1 Rs13,150. We initiate coverage on EIM with a BUY rating.
Free float mn 12.2
Promotor holding % 55.0
Leisure biking business RE in a sweet spot…: EIM’s RE business is in a sweet
Foreign holding % 19.9
Face value Rs 10.0 spot as it rides a first mover advantage in leisure biking. We believe increasing per
capita income, rising aspirations and favorable demographics are key drivers of this
premiumisation. We believe RE can accelerate its revenue growth to a 58.7% CAGR
Price performance (%)
over C13-16e. Our estimates bank upon drivers like brand appeal, strong product
1m 3m 6m 1yr
Nifty (abs) 6.7 9.4 30.4 51.9
pipeline, expanding dealer network and relatively lower penetration in Tier II/III cities.
Stock (abs) 32.0 53.6 114.0 249.0
Relative to Index 25.3 44.1 83.6 197.1 …while CV business well placed to ride the cyclical upturn: EIM’s CV business –
VECV – is well placed to ride the domestic cyclical upturn being heralded as GDP
growth improves. VECV measures upto the task from a tie-up with AB Volvo group – a
Performance   partnership that gives it the technological strength and improves its R&D capabilities –
12000 180
(Rs) (%) and from a deep understanding of the local domestic market. The partnership also
9000 130
allows EIM to be a low-cost manufacturing hub for Volvo’s global network that
provides huge export opportunities in the long run. Meanwhile, it has modernised its
6000 80 products by launching ‘PRO’ series of trucks. We expect VECV’s revenue to grow at
CAGR of 19% over C13-16e and consequently expanding its EBIDTA margins from
3000 30 7.3% in C13 to 9.0% in C16e by better capacity utilisation driven operating leverage.

0 (20) Earnings to grow at 57.8% CAGR over C13–16e…: We expect EIM’s earnings to
Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 grow at 57.8% CAGR over C13-16e driven by its motorcycle business earnings
Eicher (LHS) Rel. to BSEAUTO (RHS) growing at a 66% CAGR aided by a 51% volume growth and 740bps EBIDTA margin
 
Source: Bloomberg, SSLe improvement. We expect its commercial business earnings to pace 23.9% CAGR
growth on the back of a cyclical upturn in CV sales aligned to the ongoing economic
  recovery.

…leads to better valuations; initiate with BUY; TP Rs13,150: We initiate coverage

on EIM with BUY rating and a target price of Rs13,150. We value EIM on SOTP basis
(26x C16e P/E for RE and commercial business EV at 10x C16e EBIDTA). Stock
trades at the implied P/E of 23x at our target price.

Key risk to our call stems from slower-than-anticipated economic recovery and
premiumisation trend softening induced by competitive launches.

Financial Summary
Y/E Dec (Rs mn) C12 C13 C14e C15e C16e
Net sales 63,899 68,098 84,778 111,730 154,177
growth (%) 12.4 6.6 24.5 31.8 38.0
EBITDA margin (%) 8.6 10.5 12.8 14.8 16.4
Adjusted net profit 3,243 3,939 6,550 10,129 15,489
EPS (Rs) 120.1 145.7 242.2 374.6 572.8
growth (%) 5.0 21.3 66.3 54.6 52.9
P/E (x) 80.8 66.6 40.0 25.9 19.4
EV/EBITDA (x) 49.1 37.6 24.5 16.3 12.6
Dividend yield (%) 0.2 0.3 0.5 0.6 0.6
RoE (%) 20.0 20.7 28.3 33.9 38.0
Dharmesh Shah
RoCE (%) 17.5 18.7 23.7 31.7 38.6
+91 22 4227 3398
dharmesh.shaht@sbicapsec.com Source: Company, SSLe

dharmesh.shah@sbicapsec.com September 3, 2014 | 3

Eicher Motors Ltd SBICAP Securities Ltd

Investment rationale
Revenue to grow at 31.3% CAGR during C13–16e…: We expect EIM’s revenue to
grow at a CAGR of 31.3% during C13–16e, driven by its RE motorcycle business. We
expect RE’s revenue to grow at 58.7% CAGR driven by 51.1% CAGR volume growth.
We expect EIM’s commercial vehicle business (VECV) revenue to grow at 19% CAGR
driven by 13.8% CAGR volume growth. EIM’s revenue mix would undergo a change
as RE’s higher pace of revenue growth would increase its contribution from 25% in
C13 to 44% in C16e.

Revenue to grow at a CAGR of 31.3% over C13–16e, RE’s contribution to increase from 25% in C13 to 44% in C16e
Exhibit 1: Revenue growth Exhibit 2: Revenue mix
100%
154,177
C16e 68,013
86,164

111,730
C15e 46,267
65,463
75%
59 56
C14e 54,389
84,778 64
30,389 75
68,098 87 88 84
C13 89
(Units)

51,074
17,025 50%
63,899
C12 10,493
53,406

56,283
C11 6,660
49,623
25%
43,847 41 44
C10 4,673
39,174 36
25
28,983 16
C09 3,751
25,232 13 11 12
0%
0 40,000 80,000 120,000 160,000 C09 C10 C11 C12 C13 C14e C15e C16e
Total Revenue VECV RE RE VECV
Source: Company, SSLe

…on the back of RE growing at 58.7% CAGR…: EIM’s motorcycle business is in a

sweet spot as it is banking upon a first mover advantage in leisure biking. from a crop
of emerging generation enthusiasts who have taken to leisure biking in droves. That is
driving up a premiumisation in Indian motorcycle segment. It also is being played up
by increasing per capita income, rising aspiration and favorable demographic trends
that have been gaining recent prominence. We believe RE can capitalise on this rising
trend and expect its revenue to grow at 58.7% CAGR over C13-16e. Our growth
assumptions pencil-in such drivers as a huge brand recall, strong product pipeline,
increasing dealer network and relatively lower penetration in Tier II/III cities. We also
note an average waiting period (five months) for its products as providing a near term
demand visibility.

RE volume to grow at 51% CAGR over C13-16e, market share doubled in last two years and to further consolidate
Exhibit 3: RE Volume growth Exhibit 4: RE market share in two wheeler & motorcycle segment
600,000 80
70 3.0 2.7

57 2.3 1.9
450,000 52 60

45
(%)

42 1.5 1.2 1.9

(Rs mn)

40
(%)

300,000 40 0.8
0.7 0.7 1.4
0.6
0.8
0.9
150,000 20 0.6 0.5 0.6
0.5
0.0
Apr-July-14
F09

F10

F11

F12

F13

F14

1
0 0
C09 C10 C11 C12 C13 C14e C15e C16e
RE Growth Two Wheeler Motorcycle
Source: Company, SIAM, SSLe

dharmesh.shah@sbicapsec.com September 3, 2014 | 4

Eicher Motors Ltd SBICAP Securities Ltd

Premium motorcycle segment to grow at faster clip, RE to increase its market

share: Premium motorcycle currently constitutes ~3.0% of total motorcycle volume
sales in the country. Historically premium motorcycles had seen at substantially higher
growth rate as against moderate growth of motorcycle segment. However,
deceleration in GDP growth leading to weak demand and increasing fuel cost has
impacted the growth rate in recent past. Nonetheless, we now expect premium
motorcycles to grow at faster pace during F14-17e as these factors recede. We
believe RE would be biggest beneficiary of this premiumisation in motorcycle segment.

RE volume growth trajectory improved significantly

Exhibit 5: Monthly volume ramp-up Exhibit 6: Leisure biking (>250cc) market share (%) in total motorcycles
30,000 95 100 30,000 3.60

3.3
86
86
22,500 75 22,500 2.70
83
83

2.9
80
77
75
75

2.6
2.6

2.6
70

2.4
67
(Units)

(Units)

2.4
62

(%)

(%)
2.2
61

2.1
15,000 50 15,000 1.80

2.0
1.9
1.9
51
49

1.7
1.7
46
43

1.5
42

1.5
1.5
1.4
1.3
34

7,500 25 7,500 0.90

0 0 0 0.00
Nov-13

Nov-13
Jan-13

Jan-14

Jan-13

Jan-14
Jul-13

Jul-14

Jul-13

Jul-14
May-13

May-14

May-13

May-14
Mar-13

Mar-14

Mar-13

Mar-14
Sep-13

Sep-13
Total Volume (LHS) YoY growth (RHS) Leisure Biking (LHS) Market share (RHS)

Source: Company, SIAM, SSLe

Expanding its distribution network: EIM is rapidly expanding its dealer network to
penetrate into tier II/III cities. For RE it is adding 5-6 dealers every month. It added ~80
dealers in C13 and will add 70-80 dealers in C14. Half of these are additions in smaller
towns/cities. It currently has 340 dealers. RE would also launch a new range of
clothing and accessories to further help in building viability of dealerships as well as
improve brand appeal and aspiration. Top 10 cities contribute ~50% of RE’s sales.
Bangalore, Mumbai, Delhi are its top 3 markets followed by Chennai, Hyderabad,
Pune, Kolkata. To increase its international presence it is in the process of setting up a
distribution network for its RE brand.

CV business revenue to grow at 19% CAGR: EIM’s CV business is a 50:50 joint

venture with AB Volvo and housed separately in an entity called Volvo Eicher
Commercial Vehicles (VECV). The JV is well placed to ride the domestic cyclical
upturn as GDP growth improves. The tie-up with AB Volvo gives it the technological
strength and improves its R&D capabilities. Alongside EIM’s domestic market
understanding, the technological prowess works out to be an ideal mix to ride the
cyclical upturn. The partnership with Volvo also allows Eicher to be a low-cost
manufacturing hub for Volvo’s global network and provides huge export opportunities
in the long run. Meanwhile, it has recently modernised its products by launching ‘PRO’
series of trucks that have offerings across different segments. These compliment its
already dominant presence in Light-to-Medium duty truck segment (7.5-12 tonnes).
We expect VECV’s revenue to grow at CAGR of 19% over C13-16e driven by 13.8%
volume growth. We expect its EBIDTA margins to improve from 7.3% in C13 to 9.0%
in C16 on the back of better capacity utilization driven operating leverage.

dharmesh.shah@sbicapsec.com September 3, 2014 | 5

Eicher Motors Ltd SBICAP Securities Ltd

VECV volume to grow at 13.8% CAGR

Exhibit 7: Volume growth Exhibit 8: 25% Market share in LMD segment

60,000 80
5,000 32

56
45,000 55 3,750 24

(Units)
2,500 16
(Rs mn)

(%)
(%)
30,000 25 23 30
15 1,250 8
4
15,000 (0) 5
0 0

Apr-11

Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Jan-11

Jan-12

Jan-13

Jan-14
Jul-11

Jul-12

Jul-13

Jul-14
(16)

0 (20)
C09 C10 C11 C12 C13 C14e C15e C16e Total Volume (LHS)
Total market share (RHS)
VECV Growth Market share 7.5 to 16.2 tn (RHS)

Source: Company, SIAM, SSLe

EIM plans to go the distance through strategic partnerships with Volvo: EIM &
AB Volvo entered into a 50:50 JV in India in 2008. As a part of that partnership, EIM
transferred its existing CV manufacturing facility and Volvo demerged its truck
distribution network to constitute Volvo Eicher commercial Vehicle Ltd (VECV) housed
as a step-down subsidiary of EIM. The tie-up with AB Volvo gave EIM the much
needed technological knowhow on engine development and helped in improving its
manufacturing quality. It also helped EIM build technologically advanced and cost
effective vehicle platforms to be enmeshed with Volvo’s global distribution network in
emerging markets. From Volvo’s perspective EIM brought competence in frugal
engineering & speed-to-market capability as VECV acted as a distributor for its truck
business. EIM, meanwhile, is engaged in developing a medium duty engine for Volvo’s
global production facilities and contribute to Volvo’s cost-optimisation imperatives as it
offers a low cost manufacturing base alongside.

Engine manufacturing in association with Volvo for its global facilities to be

another catalyst…VECV has set up an engine manufacturing plant in a technical tie-
up with Volvo. The current engine manufacturing capacity of 25,000 units per annum
will be scaled up to 1,00,000 by next year. It is supplying Euro 5 & 6 compliant engines
to Volvo’s French facilities. To beef-up the manufacturing quality it has imported
machining workstations from Germany for engine components. The total capex to set
up engine plant was Rs. 3.75bn.
VECV distributor for Volvo Trucks in India: VECV is the distributor for Volvo’s
Indian truck operations. Volvo’s products are heavy duty trucks mainly used in mining
and infrastructure sectors. Volvo pays marketing/distribution margins of 3-4% to Eicher
for marketing of trucks. However, Volvo trucks constitutes 1.8% of the total volume of
VECV.
Upgraded truck portfolio, Launched ‘PRO’ series trucks: EIM has been working
on upgrading its truck portfolio to prepare itself to compete better and ride the cyclical
upturn as economic growth improves. The company has recently launched a new
product range incorporating Volvo’s R&D expertise called Eicher Pro 1000/3000/6000
and 8000 series of trucks which are expected to increase its market share.
VECV operates primarily in Light-to-Medium duty (LMD) truck segment comprising of
7.5-to-12 tonnes GVW rated vehicles. It has a market share of 25% in 7.5-to-12 tonne
market, 8% in the 12-to-16.2 tonne market which combined make it a 25% market
share holder in the 7.5-to16.2 tonne LMD segment. It’s market share in heavy duty
segment (16-to-49 tonne) is a meager 4.3%. EIM is planning to launch more offerings
in this range (Pro 8000) which may improve upon this low market presence. We,
however, assume near stable share across tonnage sub-segments although expect
the mix to be enriched by better bus sales.

dharmesh.shah@sbicapsec.com September 3, 2014 | 6

Eicher Motors Ltd SBICAP Securities Ltd

Eicher’s volume mix to remain largely same

Exhibit 9: VECV- CV segmental volume mix Exhibit 10: Truck/Bus volume mix
100% 100%
8
14 19 15 14 14
21 20 20 20 20 19 22 23 23 23

75% 75%

50% 50%
92
86 81 85 86 86
79 80 80 80 80 81 78 77 77 77

25% 25%

0% 0%
C09 C10 C11 C12 C13 C14e C15e C16e C09 C10 C11 C12 C13 C14e C15e C16e
5-14 Tonnes 16-49 Tonnes Trucks Buses
Source: Company, SSLe

Expanding VECV Dealer network: EIM has been improving its VECV dealer &
service network significantly. It has almost doubled its dealer network in the last three
years from 135 to 265 in 1HC14.
Exhibit 11: Doubled dealer network

300
275

240

225
(Units)

156
150 134 135 135

75

0
C09 C10 C11 C12 C13 C14

Source: Company, SSLe

Exports remain one of the biggest catalysts…: EIM has gradually assimilated the
requisite building blocks for its export business with an aim to ramp it up significantly.
For starters, it has identified ASEAN & African countries to build up its export business
upon. The company has initiated the process of identifying other geographies to ramp
up its export business and set-up a distribution network. Recently, the company has
appointed an industry veteran, Mr. Rod Copes, as President North America. He has
worked with ‘Harley Davidson’ for twenty years. Though exports remain an
unchartered territory for EIM, we believe it can surprise positively. It has already
launched ‘Continental GT’ in UK/US. Also, it has recently appointed a distributor in
Columbia for marketing distributing, reselling and servicing RE products.
For its CV business, we expect the company to bank upon Volvo’s global network
especially that in emerging markets. Volvo has clearly acknowledged EIM as an
emerging market brand and endeavors to export EIM’s trucks in key markets like
South Asia, West Asia and Africa. In 1HC14, export volumes have nearly tripled to
3,100 units and we believe exports can emerge as a key volume driver going ahead. It
has presence in 22 countries and it uses distributor’s assembly operations in Egypt,
Kenya, Bangladesh & Mauritius. For local bus-building operations it uses distributor’s
facilities in Egypt, Turkey, Mauritius, Nepal and Bangladesh.

dharmesh.shah@sbicapsec.com September 3, 2014 | 7

Eicher Motors Ltd SBICAP Securities Ltd

Though exports remain an unchartered territory, we believe it can surprise positively

Exhibit 12: RE’s Geography mix Exhibit 13: VECV Geography mix
100% 4 1 3 2 2 2 2 100% 5
7 11 7 6 8 11 13 14

75% 75%

50% 96 99 97 98 98 98 98 50% 95
93 89 93 94 92 89 87 86

25% 25%

0% 0%
C09 C10 C11 C12 C13 C14e C15e C16e C09 C10 C11 C12 C13 C14e C15e C16e
Domestic Exports Domestic Exports
Source: Company, SSLe

Capacity expansion on top gear in C14–16e: EIM is embarking on a significantly

high capex of Rs17bn over C14e/C16e, largely to enhance further capacity of
motorcycle business and new products/platforms for VECV. It will spend Rs6bn over
C14e/C15e for RE capacity ramp up and the rest for increasing capacity in VECV. EIM
had announced a cumulative investment plan of Rs25bn out of which Rs18bn is
already spent. The balance Rs7bn from this plan and our estimate of another Rs5bn
for C16e makes it’s a total Rs30bn spend that we believe EIM is headed to. The
existing capacity of 45,000 units per annum VECV capacity would be ramped up to
1,00,000 units in the next couple of years.

Capex to ease out by C17e generating significant FCF thereafter

Exhibit 14: Capex Plan
C09 C10 C11 C12 C13 C14e C15e C16e
0
(120)
(590)

(205)

(652)

(1,075)
(1,143)

(1,392)

(2,000)

(2,000)
(Rs mn)

(3,000)

(3,000)

(4,000) (3,000)
(3,535)

(4,000)

(6,000)
(5,731)
(6,780)

(7,000)

(8,000)
RE VECV

Source: Company, SSLe

dharmesh.shah@sbicapsec.com September 3, 2014 | 8

Eicher Motors Ltd SBICAP Securities Ltd

Key risk to our investment rationale

Weak demand for premium motorcycles

RE is a play on premium motorcycles that come with more-than 250 cc capacity. We
expect demand acceleration from a revving economic activity in this segment.
Weaker-than-anticipated demand can pose a major threat to our estimates.

Delay in recovery in M&HCVs

We expect removal of mining ban and improvement in industrial activity to lead to a
gradual recovery in M&HCV demand. However, any unscheduled slow-down in
economy could delay recovery and is a major risk to our assumption.

Margin could be at risk

We expect EIM EBIDTA margin to be at a substantial risk in the event of intensified
competition especially in the CV business that witnesses steep discounts in a
downcycle. Our current assumption of 590bps expansion over C13-16e for the
consolidated business may therefore have to be tempered.

dharmesh.shah@sbicapsec.com September 3, 2014 | 9

Eicher Motors Ltd SBICAP Securities Ltd

Financial analysis
EBIDTA margin would expand 590bps over C13–16e: EIM’s EBIDTA margins
would see an improvement from 10.5% in C13 to 16.4% in C16e. This margin
expansion would be driven by its motorcycle business growing from 18.4% in C13 to
25.8% in C16e. CV business EBIDTA margins would also expand from 6.5% in 1HC14
to 9.0% in C16e.

RE EBIDTA Margin has multiple levers: The motorcycle business has many levers
for margins expansion which are a) operating leverage play induced by higher
capacity utilisation of the new plant, b) RE’s favourable pricing power due to brand
equity, leadership and low competition, c) RE’s substantial cost saving accruals from
consolidation of three engine platforms into one called UCE (Unit construction
Engines) it is also working on new platform to be readied by C15e and d)
strengthening sale of spare parts and accessories to drive EBIDTA margin expansion

VECV is much cost efficient: We expect CV business to also see EBIDTA margin
expansion from 6.5% in 1HC14 to 9.1% in C16e. This would be largely driven by
better capacity utilization. It may be noted that if demand improves substantially and
product discounts narrow significantly then margins have an upside risk. VECV has
low breakeven point even that, at 45% of capacity utilization, can recover its fixed cost.
Its cost structure is very competitive due to key manufacturing functions like stamping,
forging & casting being outsourced allowing the company to focus on key areas like
R&D, Marketing & Distribution.  

EBIDTA margin to improve by 590 bps over C13–F16e

Exhibit 15: EBIDTAM (%) Exhibit 16: EBIDTA growth rate (%)
170
30.0
25.8 132.5
24.9 160.2
24.0
115.7
22.5 120
18.4
16.4 79.3 82.7
14.8
(%)

13.9 62.6
(%)

15.0 12.0 12.8 70 58.0

52.3
9.5 9.8 10.1
8.1 8.4 51.8
7.3 55.9
7.5 5.1 9.6 40.7
9.0 20
8.0 7.4 7.3 7.6 (5.7)
6.5 (4.6)
4.8
(17.2)
0.0 C09 C10 C11 C12 C13 C14e C15e C16e
C09 C10 C11 C12 C13 C14e C15e C16e (30)
RE VECV Console RE EBIDTA Growth VECV EBIDTA Growth
Source: Company, SSLe

dharmesh.shah@sbicapsec.com September 3, 2014 | 10

Eicher Motors Ltd SBICAP Securities Ltd

Earnings to grow at 57.8% CAGR over C13–16e…: We expect EIM’s earnings to

grow at 57.8% CAGR over C13-16e primarily led by a 740bps EBIDTA margin
expansion of its motorcycle business. We expect RE earnings to grow at a CAGR of
66% over CY13-16e. We expect its commercial business earning to grow at 23.9% on
the back of a cyclical upturn in CV cycle driven by better economic growth.

Earnings to grow at 57.8% over C13-16e, driven by motorcycle business

Exhibit 17: Net margins (%) (EML Consol), RE, VECV
16,000 12.0 12,000 20 4,800 10
10.0 18.6 18.2 18.7 8.3
9.1 17.1
12,000 9.0 9,000 17.9 17 3,600 6.6 8
7.7
6.1 5.9
16.4
(Rs mn) 5.2

(Rs mn)
(Rs mn)

4.8
5.4 5.1 5.8

(%)

(%)
(%)

8,000 6.0 6,000 14 2,400 5

4.3 3.8 3.7
13.8
2.8
4,000 3.0 3,000 11 1,200 3

9.9
0 0.0 0 8 0 0
C09
C10
C11
C12
C13
C14e
C15e
C16e

C09
C10
C11
C12
C13
C14e
C15e
C16e
C09
C10
C11
C12
C13
C14e
C15e
C16e

EML PAT [consol] LHS) EML NPM (RHS) RE PAT (LHS) NPM (RHS) VECV- PAT (LHS) NPM (RHS)

Source: Company, SSLe

Working capital cycle to remain negative: EIM has a negative cash conversion
cycle of 17 days. It has effectively controlled the receivables and inventories enabling
it to operate on negative working capital.

Debt-free company …: EIM is a debt-free company and incurs no borrowing costs.

Finance costs include interest on account of advances from dealers and other
transactional costs.

…enables high dividend payout: EIM generates high cash flow, which enables the
company pay high dividend to the shareholders on a consistent basis.

Consistent dividend paying track record

Exhibit 18: Dividend payout ratio Exhibit 19: Dividend per share
26 65
68
22.4 55
22 20.6
51
(Rs per share)

45
18.6
(%)

18 16.7
15.7 34 30
14.7
14.0 20
14 16
17 15
11.3 11

10
C09 C10 C11 C12 C13 C14e C15e C16e 0
C09 C10 C11 C12 C13 C14e C15e C16e
Dividend Payout Ratio
Source: Company, SSLe

dharmesh.shah@sbicapsec.com September 3, 2014 | 11

Eicher Motors Ltd SBICAP Securities Ltd

Return ratios to improve substantially

Exhibit 20: RoE & RoCE (consol) Exhibit 21: FCF to improve substantially
38.0 18,000
40
14,602
33.9
38.6
28.3 12,000
30
31.7
22.7

(Rs mn)
20.0 20.7 5,685
(%)

20 23.4 23.7 6,000

16.4
18.7 920 1,440
16.4 17.5 670
10 7.7 0
(736)
(1,797)
6.6 (2,771)
0 (6,000)

C09

C10

C11

C12

C13

C14e

C15e

C16e
C09 C10 C11 C12 C13 C14e C15e C16e
ROE ROCE
Source: Company, SSLe

Valuations
…leads to better valuations; initiate with BUY; TP Rs13,150: We initiate coverage
on EIM with BUY rating with a price target of Rs13,150 (rounded off). We value EIM
on SOTP basis (26x C16e P/E for RE and commercial business EV at 10x C16e
EBIDTA). At our target price the stock would trade at implied P/E of 23x CY16 EPS
(consol).

Exhibit 22: Valuation (SOTP)

Particulars (Rs mn) CY16e
Royal Enfield Core PAT 12,136
Multiple (X) 26
Equity Value 315,531
Net Debt (19,685)
RE-Enterprise value 295,846
VECV EBIDTA (54.4% economic Interest) 4,219
Multiple (X) 10
VECV-Enterprise value 42,186
Net Debt (2,318)
VECV-Equity Value 39,867
Total Equity value 355,399
No of shares 27
Target Price per share 13,143
Rounded Target Price 13,150
CMP 11,102
Upside (%) 18
Source: SSLe

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Eicher Motors Ltd SBICAP Securities Ltd

At our Target Price the stock would trade at an implied P/E of 23x on C16 EPS
Exhibit 23: P/E Exhibit 24: EV/EBIDTA
12,000 12,000

9,000 9,000

6,000 6,000

3,000 3,000

0 0
Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14
May-09

May-10

May-11

May-12

May-13

May-14
Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-09

Sep-13
Sep-10

Sep-11

Sep-12

Sep-14
Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14
May-09

May-10

May-11

May-12

May-13

May-14
Close Price 15x 18x 21x 27x 30x Price 8x 11x 14x 17x
Source: Company, SSLe

Exhibit 25: Assumptions

C14e C15e C16e
Total Motorcycle Growth (%) 70.0 45.0 40.0
Motorcycle - Domestic 70.2 44.9 39.9
Motorcycle - Export 60.0 50.0 45.0
Realisation Rs. 100,358 105,376 110,645
Total Commercial Vehicles Growth (%) 4.4 14.6 23.0
Commercial Vehicle - Domestic 0.4 12.7 22.0
Commercial Vehicle - Exports 50.0 30.0 30.0
Passenger Carrier - Domestic 2.0 15.0 22.0
Passenger Carrier - Exports 50.0 30.0 30.0
Realisation Rs. 1,262,878 1,326,022 1,418,843
RM cost as % Net revenue 72.5 71.8 71.5
Source: SSLe

Company background

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).

Exhibit 26: Key management personnel

S Sandiliya Non executive chairman
M. Siddarthalal Managing Director
R.L Ravichandran Whole Time Director
Priya Brat Independent Director
M J Subbaiah Independent Director
Prateek Jalan Independent Director
Source: Company, SSLe

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Eicher Motors Ltd SBICAP Securities Ltd

Financials
Income Statement Balance Sheet
Y/E Dec (Rs mn) C12 C13 C14e C15e C16e Y/E Dec (Rs mn) C12 C13 C14e C15e C16e
Net sales 63,899 68,098 84,778 111,730 154,177 Cash & Bank balances 8,035 6,826 3,502 7,358 19,828
growth (%) 12.4 6.6 24.5 31.8 38.0 Other Current assets 15,333 17,088 20,972 27,470 37,703
Operating expenses 58,409 60,966 73,950 95,234 128,875 Investments 6,385 8,255 9,849 11,326 13,025
EBITDA 5,490 7,132 10,829 16,496 25,302
growth (%) -6.8 29.9 51.8 52.3 53.4 Net fixed assets 14,962 21,197 29,085 33,760 35,675
Depreciation & amortisation 822 1,300 2,112 2,325 3,085 Goodwill & intangible assets 0 0 0 0 0
EBIT 4,669 5,832 8,716 14,171 22,217 Other non-current assets 0 0 0 0 0
Other income 1,366 953 1,598 1,930 2,470 Total assets 44,715 53,365 63,408 79,913 106,231
Interest paid 38 79 112 101 89
Extraordinary/Exceptional items 0 0 0 0 0 Current liabilities 16,043 19,634 23,619 30,285 40,848
PBT 5,997 6,706 10,203 16,000 24,598 Borrowings 406 975 975 975 975
Tax 1,249 1,452 2,731 4,432 6,800 Other non-current liabilities 1,232 1,805 1,805 1,805 1,805
Effective tax rate (%) 20.8 21.7 26.8 27.7 27.6 Total liabilities 17,681 22,414 26,399 33,065 43,628
Net profit 4,749 5,254 7,471 11,567 17,797
Minority interest 1,506 1,314 922 1,438 2,308 Share capital 270 270 270 270 270
Reported Net profit 3,243 3,939 6,550 10,129 15,489 Reserves & surplus 17,279 20,284 25,420 33,820 47,267
Non-recurring items 0 0 0 0 0 Shareholders' funds 17,549 20,554 25,690 34,091 47,538
Adjusted Net profit 3,243 3,939 6,550 10,129 15,489 Minority interest 9,485 10,398 11,319 12,757 15,065
growth (%) 5.0 21.5 66.3 54.6 52.9 Total equity & liabilities 44,715 53,365 63,408 79,913 106,231

Key Financials ratios Cash Flow Statement

Y/E Dec (Rs mn) C12 C13 C14e C15e C16e Y/E Dec (Rs mn) C12 C13 C14e C15e C16e
Profitability and return ratios (%) Pre-tax profit 5,997 6,706 10,203 16,000 24,598
EBITDAM 8.6 10.5 12.8 14.8 16.4 Depreciation 822 1,300 2,112 2,325 3,085
EBITM 7.3 8.6 10.3 12.7 14.4 Chg in working capital 526 1,491 101 168 329
NPM 5.1 5.8 7.7 9.1 10.0 Total tax paid (1,077) (1,504) (2,731) (4,432) (6,800)
RoE 20.0 20.7 28.3 33.9 38.0 Other operating activities (1,308) (819) (1,486) (1,829) (2,381)
RoCE 17.5 18.7 23.7 31.7 38.6 Operating CF 4,960 7,174 8,198 12,232 18,831
RoIC 22.0 23.1 26.5 33.2 38.5
Capital expenditure (7,855) (7,123) (10,000) (7,000) (5,000)
Per share data (Rs) Chg in investments 0 0 (1,594) (1,477) (1,699)
O/s shares (mn) 27.0 27.0 27.0 27.0 27.0 Other investing activities 123 -787 1,598 1,930 2,470
EPS 120.1 145.7 242.2 374.6 572.8 Investing CF (7,732) (7,910) (9,996) (6,547) (4,229)
FDEPS 120.1 145.7 242.2 374.6 572.8 FCF (2,771) (736) (1,797) 5,685 14,602
CEPS 150.5 193.8 320.3 460.6 686.9
BV 650.0 760.1 950.1 1260.8 1758.1 Equity raised/(repaid) 4 17 0 0 0
DPS 20 30 45 55 65 Debt raised/(repaid) (61) (6) 0 0 0
Dividend (incl. tax) (770) (877) (1,217) (1,487) (1,758)
Valuation ratios (x) Other financing activities
PE 80.8 66.6 40.0 25.9 19.4 Financing CF (827) (866) (1,217) (1,487) (1,758)
P/BV 14.9 12.8 10.2 7.7 6.3
EV/EBITDA 49.1 37.6 24.5 16.3 12.6 Net chg in cash & bank bal. 11,915 8,035 6,826 3,502 7,358
EV/Sales 4.2 3.9 3.1 2.4 2.1 Closing cash & bank bal 8,035 6,826 3,502 7,358 19,828

Other key ratios

D/E (x) 0.0 0.1 0.0 0.0 0.0
DSO (days) 25.5 27.5 27.0 27.0 27.0

Du Pont Analysis - RoE

NPM (%) 5.1 5.8 7.7 9.1 10.0
Asset turnover (x) 2.2 2.2 2.6 2.8 2.6
Equity Multiplier (x) 1.8 1.6 1.4 1.3 1.4
RoE (%) 20.0 20.7 28.3 33.9 38.0
Source: Company, SSLe

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Eicher Motors Ltd SBICAP Securities Ltd

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