auto sector report

8/8/2019 Auto Sector Report

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Service Truly Personalized

November 13, 2007 For Private Circulation Only - Sebi Registration No : INB 010996539 1

Page No.

Industry

Investment Case 4

Commercial Vehicles 6

Passenger Vehicles 9

Two wheelers 14

Company

Maruti Suzuki 20

Mahindra & Mahindra 25

Tata Motors 31

Bajaj Auto 37

Ashok Leyland 43

Hero Honda 49

TVS Motors 54

TABLE OF CONTENTS


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Industry


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Investment Case

The Automobile sector has been facing challenging times in FY2008 post registering highgrowth in FY2007. The Auto companies are reeling under the pressure of high input costs andInterest rates (albeit on a high investment base), which are impacting volumes. Optimal utilisationof new capacity and intensifying competition remain the major constraining factors for the autocompanies. Nonetheless, the key demand drivers remain intact. Against this backdrop, weexpect the Indian Auto sector to consolidate following strong domestic demand, reasonableinterest rates and sustained business confidence. We expect the Auto stocks to perform drivenby good Volumes and decent Earnings post underperforming in the last 10 months.

Commercial Vehicles:Infrastructure development, Regulatory policies, model shift to road andeconomic growth are the likely major factors that would shape up the commercial vehicle (CV)industry over the next four-five years. CV volume growth is typically linked to freight demand,which is directly linked to industrial growth. Hence, sustainability in GDP growth at around 8%over the next four-five years would help CV sales to remain strong. Overall, emerging sectorslike Retail and continued demand of heavy load transport (on the back of infrastructuredevelopment) will continue to augment CV demand in the country.

Passenger Vehicles:Increasing affordability on account of reduction in Entry level prices, lowpenetration, increasing disposable income and diminishing average age profile of car buyerswill continue to be the demand drivers for the passenger vehicles (PV) segment over the nextfour-five years.The PV segment is expected to clock a CAGR growth of 15-17% over 2007-11E.We believe the PV segment has clear visibility of growth and would mainly be driven by thesmall cars. The government and industry majors are also laying emphasis on making India asmall car manufacturing hub. At present, competition in the small car segment is low with onlyfive players in the dominant compact segment. However, going ahead by 2011, competition in

the segment is expected to heat up. On the export front too, there exists enormous opportunityto capitalise on particularly with India being a low-cost car manufacturer.

Two Wheelers:The two-wheeler segment has been facing rough weather in recent times. Highdouble-digit motorcycle sales came to a screeching halt, and began to decline in FY2008.Trends in the domestic market has not been very rosy as Margins were already under pressuredue to spiraling raw material costs, while intensifying competition resulted in leaders launchingnew products at aggressive price points. The scenario worsened on account of inflationarypressures and high Interest rates, which made finance companies cut down loandisbursements to the industry. As competition further intensifies, performance of the playerswill continue to depend on their new technological and promotional offerings. The segment isexpected to grow at a CAGR of 11% over FY2007-11E on the back of inadequate publictransport, increasing job opportunities in BPOs, Retail, etc., and additional demand from the

rural and replacement markets.

We see the current turmoil inthe Auto sector as a goodBuying opportunity; Weexpect the Auto stocks toperform driven by goodVolumes and decent Earningspost underperforming in thelast 10 months

Emerging sectors like Retail

and continued demand ofheavy load transport willcontinue to augment CVdemand in the country

The government and industrymajors are also laying

emphasis on making India asmall car manufacturing hub

As competition furtherintensifies, performance of theplayers will continue todepend on their newtechnological and

promotional offerings

Exhibit 1: Valuation summary

CMP MCap EBITDA (Rs cr) EPS (Rs) P/EPS (x) EV/EBITDA (x) RoCE(%)

Company Recos (Rs) (Rs cr) Target FY07 FY08E FY09E FY07 FY08E FY09E FY07 FY08E FY09E FY07 FY08E FY09E FY07 FY08E FY09E

Maruti Suzuki Buy 1,004 29,003 1,260 1,990 2,463 3,002 54.0 60.7 72.6 18.6 16.5 13.8 14.2 11.4 9.3 22.5 22.0 22.9

M & M Buy 708 17,391 952 1,126 1,245 1,448 40.6 39.3 43.2 17.5 18.0 16.4 14.7 14.9 11.9 17.6 15.1 16.1

Tata Motors Buy 693 26,706 880 2,830 3,233 3,628 49.6 51.5 55.5 14.0 13.5 12.5 10.0 8.8 7.8 19.3 17.4 16.0

Bajaj Auto Buy 2,336 23,638 2,746 1,437 1,654 1,968 129.1 137.8 159.0 18.1 17.0 14.7 18.6 16.2 13.5 17.2 17.9 19.0

Ashok Leyland Hold 37 4,975 42 703 792 894 3.3 3.7 4.1 11.2 10.2 9.2 7.3 6.5 5.8 23.3 22.2 21.5

Hero Honda Neutral 661 13,194 - 1,153 1,236 1,356 38.9 43.7 48.9 17.0 15.1 13.5 11.6 10.8 9.7 36.7 33.1 30.9

TVS Motors Neutral 56 1,326 - 135 132 168 2.5 2.2 3.0 22.1 25.3 18.7 13.9 14.3 11.1 3.0 1.4 2.9

Source: Company, Angel Research, CMP as on November 13, 2007.


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On the bourses too, the BSE Auto Index has underperformed the benchmark sensitive index,

the BSE, over the last one year. However, the Auto majors turned in a better relativeperformance towards end of the September 2007 quarter on the back of better valuation vis--visthe broader markets. Sentiment for the Auto stocks has also turned positive with concerns overInterest rates easing and players expected to register better volumes going ahead. A goodSeptember 2007 quarter has pushed back the worrying trend and the players are entering thesecond half of FY2008 with a lot of optimism. Over the next three-four years, the Auto sector isestimated to witness investments to the tune of Rs300bn. Buoyed by rising domestic demandplayers have embarked on an expansion spree. Companies are increasing capacities to meetboth the domestic and global demand and avail of the fiscal sops in states like Uttarakhand.

Pertinently, improving affordability is resulting in higher volumes in the four-wheeler segmentcompared to two-wheelers. In sum, we see the current turmoil in the sector as a good Buyingopportunity. Our preferred bets in the sector includeMaruti Suzuki, Tata Motors, Bajaj AutoandMahindra & Mahindra.

Source: Capitaline, Angel Research

Exhibit 2: Auto Index v/s Sensex

A good September 2007

quarter has pushed back theworrying trend and theplayers are entering thesecond half of FY2008 with alot of optimism

Price (Rs) Absolute Returns (%) Relative Returns (%)

Stock (13/11/2007) 3 month 6 month 1 year 3 month 6 month 1 year

Maruti 1,004 14.4 26.2 9.6 (11.6) (21.4) (30.3)

M&M 708 5.3 (1.8) (15.8) (20.8) (30.6) (55.7)

Tata Motors 693 3.4 (3.2) (16.9) (22.6) (32.4) (56.8)

Bajaj Auto 2,336 0.7 (14.1) (10.0) (25.3) (35.1) (49.9)

Ashok Leyland 37 2.4 0.4 (19.8) (23.6) (33.4) (59.7)

Hero Honda 661 0.2 (6.3) (7.6) (25.9) (35.7) (47.5)

TVS Motor 56 (0.1) (11.1) (44.3) (26.1) (35.9) (84.2)

Exhibi 3: Relative Performance

Source: Capitaline, Angel Research

Underperforming broder market


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Commercial Vehicles: Impending recovery

Infrastructure development, Regulatory policies, model shift to road and economic growth arethe major factors that are expected to shape up the commercial vehicle (CV) industry over thenext 4-5 years. CV volume growth is typically linked to freight demand, which is directly linkedto industrial growth. In most developing countries, freight demand has increased at1.2-1.7x GDP given that CV demand is derived from economic activity. Hence, sustainability inGDP growth at around 8% over the next 4-5 years would help CV sales to remain strong.Overall, emerging sectors like Retail and continued demand of heavy load transport like steeland cement (on the back of infrastructure development) will continue to augment CV demand inthe country. In the CV space, our preferred bet is leader Tata Motors, which has a diversified CVportfolio.

Demand drivers intact

Profitability of truck operators improved post the Supreme Court (SC) ban on overloading oftrucks. Freight rates increased by 12.3% between November 2005 - October 2007 even as thediesel prices declined simultaneously by 3.3%, which resulted in improvement in truckoperators profitability. Truck operator profitability remains sensitive to the fluctuation in dieselprices and interest rates. Pertinently, banks have once again started looking at truck operatorsto sell CV loans. The finance rates have also declined in the last 2-3 months from 13% to 10%.We believe that the CV segment sales would start improving by end of FY2008.

Source: TCI, IOCL, Cris Infac, Angel Research

Exhibit 5: Freight rate movement

Sustainability in GDP growthat around 8% over the next4-5 years would help CV salesto remain strong

We believe that the CVsegment sales would startimproving by end of FY2008

Source: Cris Infac, Angel Research

Exhibit 4: Goods CV sales volume v/s GDP growth


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Improving Road infrastructure to overtake Railways

Road infrastructure on the move - slowly but steadilyRenewed thrust by the government on road infrastructure in the last 10 years is expected tocontinue and further support demand as there is a strong correlation between development ofthe road network and per unit volume growth. Analysing a trend in road freight movement overthe last 35 years clearly indicates a visible moderate shift towards road transport. In fact, roadscarry 61% of the total freight traffic and 85% of the total passenger traffic.

The development of roads has been leading the road transport industry to adopt ahub-and-spokemodel. Thus, heavy CVs (HCVs), intermediate CVs (ICVs) and small CVs(SCVs) are expected to capture high proportion of demand in the long run, which is visible fromthe growth that these segments registered in FY2007. However, regulation may continue todampen growth in bus demand. Nonetheless, on the back of lower penetration and improvinginfrastructure, we believe passenger CV (bus) segment will clock moderate growth of 5-6%.

Regulatory Policy, Emission norms to elevate Replacement demand

Regulation against overloading and usage of vehicle above certain age are in place. However,these measures have been partially implemented. Fortunes of the CV industry could changedramatically post proper implementation of such Regulatory norms.

The government has barred vehicles over 15 years from plying in the National Capital Region(NCR) along with barring vehicles above eight years from plying in Mumbai. This measurehowever, remains partially implemented. As per industry sources, 35% of the present CV fleetis above 10 years old. Hence, if this Regulation is strictly implemented and all vehicles over 15years replaced, then 1,90,000 vehicles would have to be replaced in 2007-08, which couldincrease to 2,80,000 vehicles in 2011-12. This would substantially add to the demand potential

of commercial vehicles. The new Emission norms, which are expected to come into force overthe next few years, would also help fuel demand for the CVs.

Renewed thrust by thegovernment on roadinfrastructure in the last 10years is expected to continueand further support demand

The government has set anambitious target in theXI Five-Year Plan andproposes to achieve 1,100mtfreight load and 8.4bnpassengers in 2012 as against726mt load and 6.2bnpassengers at present

The new Emission norms,which are expected to comeinto force over the next fewyears, would also help fueldemand for the CVs


Exhibit 6: Increasing Road Freight movement

Renewed vigour in reviving Indian RailwaysThe Railway Budget 2007-08 laid emphasis on renewing focus on reducing per unit cost byincreasing efficiency. Indian Railways (IR) is targeting 50% reduction in the per unit cost overthe next five years. The government has set an ambitious target in the XI Five-Year Plan andproposes to achieve 1,100mt freight load and 8.4bn passengers in 2012 as against 726mt loadand 6.2bn passengers at present. This could prove to be a challenge for road transportationgrowth. However, Railways compares unfavourably vis--vis Roadways on most evaluationcriteria particularly ease of payments, connectivity, negotiability and claim-processing time,which is much lower for Roadways. Also, the large projects planned by IR could well take a

fairly longer period of time before it becomes fully operational.


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Utilisation levels likely to taper off as fresh capacities get added

Capacity of CVs has grown at a CAGR of 16% over FY2003-06. Capacity addition was led bymarket leader, Tata Motors, and a large part of the increase was due to additions to the productportfolio, particularly in the LCV segment. Robust sales growth on the back of pick up in theinvestment cycle and strong growth in the Index of Industrial Production (IIP) resulted incapacity utilisation levels spiking sharply to above 90% during 2006-07.

As per the current plans, installed capacity of the CV industry is expected to grow at a CAGRof over 28% over 2007-10E. Capacity addition will be led by the LCV segment in 2007-08 and bythe HCV segment in 2009-10.

Key Concerns

Cyclical pressure to restrain growth.

Hardening Interest rates.

Significant correction in freight rates or increase in fuel prices.

Dedicated Railway freight corridors and dynamic freight pricing policies by Railways.

High capacity build up and competition.

Input cost hikes.

2006-07 2007-08E 2008-09E 2009-10E Investment and Remarks

Tata Motors 295,000 420,000 485,000 550,000 To invest around Rs12,000cr over

the next three-four years towards

expansion of CV and PV capacities.

Ashok Leyland 84,000 110,000 140,000 160,000 Planned Rs4,000cr capex over the

next four years including Rs1,000cr

in FY2008.

Eicher Motors 38,000 38,000 38,000 38,000 -

Swaraj Mazda 18,000 18,000 24,000 36,000 -

Mahindra Intl 20,000 20,000 20,000 120,000 To invest around Rs. 400 cr.

Force Motors-Man 15,000 39,000 39,000 39,000 -

Others 17,200 53,800 68,400 93,400 -

Total (Units) 4,87,200 6,98,800 8,14,400 10,36,400 Capacity addition at a CAGR of over 28%

Exhibit 8: Planned capacity and Investment announcementsCompany

Source: Industry, Company, Angel Research

Robust sales growth on theback of pick up in theinvestment cycle and stronggrowth in the IIP resulted incapacity utilisation levelsspiking sharply to above 90%during 2006-07

Source: Cris Infac, Angel Research, Note: 35% of the present CV fleet is above 10 years old

Exhibit 7: Replacement demand


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Passenger Vehicles: Joy ride to continue

Increasing affordability on account of reduction in Entry level prices, low penetration, increasingdisposable income and diminishing average age profile of car buyers will continue to be thedemand drivers for the passenger vehicles segment over the next four-five years.

The PV segment is expected to clock a CAGR growth of 15-17% over 2007-11E. We believe thePV segment has clear visibility of growth and would mainly be driven by the small cars. Thegovernment and industry majors are also laying emphasis on making India a small carmanufacturing hub. At present, competition in the small car segment is low with only fiveplayers in the dominant compact segment. However, going ahead by 2011, competition in thesegment is expected to heat up. On the export front too, there exists enormous opportunity tocapitalise on particularly with India being a low-cost car manufacturer. We remain positive onMaruti Udyog, which we believe will continue to dominate the small car segment over the nexttwo years.

Favourable demographics and low penetration levels

Robust volumes clocked by PVs over the last three-four years were driven by favourabledemographic changes and low penetration levels. The PV segment is getting to be more andmore affordable following the increase in per capita income levels. The relatively faster growth inincome levels in lower age brackets has also been diluting the average age profile of the carbuyers. Growing number of households in higher salary brackets coupled with increasingaffordability, 65% of the population is below 35 years of age of which half are below 25 years.This trend is expected to continue over the next four-five years given the low penetration levels.

Overall, a younger population earning higher income augurs well for rising demand for PVs.Hence, rising disposable income is expected to be one of the key growth drivers for thePV segment.

2001-02 2005-2006 2009-10E

Annual No. of Ownership per Car

household households household penetration No. of households

income (Rs'000) (mn) (mn) (%) (mn)

Upto 90 135.4 0 0 132.2 114.4

90 to 200 41.3 0.04 0.10 53.3 75.3

201 to 1,000 10.7 0.32 2.99 16.4 28.5

Above 1,000 0.8 0.83 103.75 1.7 3.8

Total 188.2 0.03 0.02 203.6 222

Exhibit 10: Rise in size of Great Indian Middle Class


We believe the PV segmenthas clear visibility of growthand would mainly be drivenby the small cars

A younger population earninghigher income augurs well forrising demand for PVs

Source: SIAM, ACMA, Cris Infac, IMF, Angel Research

Exhibit 9: PV sales volume v/s Per capita GDP (US $)


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High selling Small car segment

Good things in small packagesSmall car is currently the highest selling segment accounting for 77% of total annual car salesin 2006-07. The small car market in India is supported by favourable demographics. The smallcar buyers are usually first time car buyers below the age of 30. The average median age isaround 25 years and increasing per capita income assures incremental growth in the segment.

PV penetration in India is abysmally low at 8-10 vehicles per 1,000 households compared to

some other under developed/developed countries.


Exhibit 11: Car density of Developing and Developed countries

PV penetration in India is

abysmally low at 8-10 vehiclesper 1,000 householdscompared to some otherunder developed/developedcountries

Small car is currently thehighest selling segmentaccounting for 77% of totalannual car sales in 2006-07

Source: Cris Infac, NCAER, Angel Research

Exhibit 12: Rapid expansion in addressable households

Low penetration and rising income levels at younger age are increasing the number of first timecar buyers who usually prefer to go for small cars. Going ahead, we expect higher demand forPVs to emerge from the small cities and towns, which prefer compact cars with low cost andmaintenance. Hence, players are expanding their network and providing easy access toservice centres in the small cities and towns. In this respect, Tatas Rs1lakh car is expected toplay a significant role in expanding the small car market going ahead. This is becausereduction in Entry level prices in the addressable market will be much faster leading to higherpenetration. However, we do not expect Tatas Rs1lakh car to cannibalise marketshare of theexisting mini / A2 segment cars as there is a significant difference in the ownership cost of theproduct.

We expect higher demand forPVs to emerge from the smallcities and towns, which prefercompact cars with low costand maintenance


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Tatas 1lakh car to create a new segment in PV marketWe expect Tatas Rs1lakh car to expand the passenger car market significantly. It is expectedto bridge the affordability gap between motorcycles and passenger cars. This is becauseownership cost of the Tata car will be 35% lower than the average ownership cost of acompact/small car currently available in the market. The product will most likely compete withthe Executive motorcycle segment and public passenger three wheelers transport system.In fact, the Tata car will add a new segment in the PV market and is not expected to cannibalisemarketshare from the existing players due to the extensive price difference.

Attractive scenario adding capacities amidst escalating competition

Robust sales growth at a CAGR of 18% over FY2003-07 along with relatively sedate capacityaddition of around 10% over the same period led to high capacity utilisation - almost 80% inFY2007. Going ahead, the PV segment is expected to witness maximum investments and

capacity is expected to be added by more than 92% over FY2007-10E compared to around48% in FY2003-07. Competition is also expected to intensify mainly due to the entry of new players.

12 months back At present Rs. 100,000 car

Average on road price of car (Rs) 250000 275000 110000

% of Finance 80 80 80Interest Rate (%) 9 13.5 13.5Tenor (Yr) 5 5 5Amount of Loan (Rs) 200000 220000 88000EMI (Rs) 4,152 5,062 2,025Usage per day (km) 20 20 20Milage (km per liter) 12 12 12Average fuel price (Rs) 50 48 48Fuel cost per month (Rs) 2500 2400 2400Annual maintenance cost (Rs) 12000 12000 12000Monthly maintenance cost(Rs) 1000 1000 1000Ownership cost per month (Rs) 7,652 8,462 5,425

Exhibit 14: Ownership costs

Source: Industry, Angel Research

Ownership cost

Easy availability of financing, low maintenance costs and increasing fuel efficiency due tobetter technological offering by the PV companies has given a fillip to PV sales volumes in thelast five years. Car finance rates have declined from 17% in 2000-2001 to 11% in 2005-06 andaveraged 13.5% in 2006-07. Easy financing and a better distribution network also increased thetarget population in turn pushing up PV sales. Reduction in duty further reduced the car pricesand increased affordability.


Exhibit 13: Passenger Cars- Segment-wise % contribution to Total Sales

Easy availability of financing,low maintenance costs andincreasing fuel efficiency hasgiven a fillip to PV salesvolumes in the last five years

Tatas 1lakh car will mostlikely compete with theExecutive motorcyclesegment and public passengerthree wheelers transportsystem


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At present, three players account for 86% of the car market and 75% of the total PV market inIndia. In anticipation of moving up the value chain, new launches over the past four-five yearshave taken place in the Sedan and utility vehicle (UV) segments. However, this is set to changein the near future, as the global OEMs are focusing on Indias small car market, a strategydemanded by the attractive market scenario and a differential duty structure that favours smallcars. A challenge going ahead for the existing players, especially Maruti Udyog, Hyundai andTata Motors would be to maintain marketshare in a competitive scenario. However, we do notexpect a significant dent in the marketshare of large players like Maruti and Hyundai in thepassenger car segment at least for the next couple of years as most of the global OEM areexpected to launch their product in FY2009.

Company (Units) FY2007 FY2008E FY2009E FY2010E Investment Remarks

Maruti 6,50,000 7,50,000 9,50,000 10,00,000 Rs4,500-5,000cr To increase presence in diesel

segment and enhance export base

Hyundai 3,00,000 5,50,000 6,00,000 6,50,000 Rs4,000cr To make India a sourcing base for

small cars

Tata Motors 2,70,000 3,00,000 3,00,000 3,00,000

Tata Motors -Small Car 0 0 0 3,00,000 Rs8,000-8,500cr To address market by reducing

Tata Motors -UV 60,000 75,000 75,000 90,000 (Rs4,000 -Fiat price and increasing affordability

Fiat 60,000 1,00,000 1,00,000 1,00,000 JV)

Ford 65,000 1,00,000 1,00,000 1,00,000

GM 85,000 85,000 2,25,000 2,25,000 Rs1,500cr To meet domestic demand for

Chevrolet Spark

Honda 60,000 1,00,000 1,25,000 1,50,000 Rs2,000cr To cater to the growing demand of

existing models

Toyota 50,000 75,000 1,00,000 1,50,000 - New launch in small car segmentby 2009-10

M&M, Renault, Nissan 0 30,000 50,000 2,50,000 Rs4,000cr Manufacture cars for Renault and

M&M UV 1,80,000 2,00,000 2,50,000 2,50,000 in next 3 years Nissan to sel l in domestic and

export market

Hindustan Motors 45,000 45,000 45,000 45,000

Skoda 30,000 50,000 50,000 50,000

Volkswagen 0 0 0 1,10,000 Rs2,500cr To launch new small car by 2009-10

Daimler Chrysler 2,250 4,500 4,500 4,500

BMW 1,700 1,700 1,700 1,700

Force Motors 35,000 35,000 35,000 35,000

Others 30,000 30,000 30,000 30,000

Installed Capacity 19,58,950 25,31,200 30,41,200 38,41,200

% growth 16.5 27.3 20.1 26.3

Exhibit 16: Company-wise planned capacity and investment announcements



Exhibit 15: Growing capacities with moderate utilisation levelsThe PV segment is expected

to witness maximuminvestments and capacity isexpected to be added by morethan 92% over FY2007-10Ecompared to around 48% inFY2003-07

We do not expect a significant

dent in the marketshare oflarge players like Maruti andHyundai in the passenger carsegment at least for the nextcouple of years


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Exports and Outsourcing - Key to additional growth

Indianpassenger car exports have been growing at a CAGR of 30.2% in the last five years.However, due to supply side constraints and higher domestic demand, growth in the last twoyears had slowed down to around 8.5% levels. Industry players also shifted and shiftingproduction base to low-cost countries (for instance, Maruti shifted Swiftsproduction base fromEurope to Hungary). Going ahead, the share of exports from domestic production is expectedto go up to around 20% by 2011-12 is from the current 13.3%. Also, India enjoys a less than 1%share in the global passenger car export volumes.


Exhibit 17: Export volume and growth

Industry is targeting passenger car exports to cross the 7,00,000 units mark by 2011-12growing at a CAGR of 28-30% in the mentioned period. Maruti, Hyundai, Tata Motors and

M&M-Renault are players with dedicated export targets, and would contribute 80-85% to totalvolumes over the next five years. Top-five players Toyota, GM, Volkswagen, Ford and Hondahave already entered the Indian markets and plan to set up manufacturing facilities in India oradd to existing capacities. These global OEMs are also making their intention clear to set upsmall car plants in India, and expect commercial production to commence in 2009-10.However, production and additional capacity being set up by these players over the nextfour-five years will continue to cater to domestic demand. Thus, there exists vast exportopportunity for the three domestic players viz., Maruti, Hyundai and Tata Motors throughenhanced capacity additions.

Key Concerns

Hardening Interest rates.

Increase in raw material prices. Dearer fuel price and hike in road tax.

High competition.

Going ahead, the share ofexports from domesticproduction is expected to goup to around 20% by 2011-12is from the current 13.3%

Global OEMs are also makingtheir intention clear to set up

small car plants in India, andexpect commercialproduction to commence in2009-10


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Two Wheelers: Riding on rugged terrain

The two-wheeler industry has been facing rough weather in recent times. High double-digitmotorcycle sales came to a screeching halt, and began to decline in FY2008. It has becomevery difficult for investors to pick winners and shun losers in the two-wheeler segment. Trends inthe domestic market has not been very rosy as margins were already under pressure due tospiraling raw material costs, while intensifying competition resulted in leaders launching newproducts at aggressive price points. The scenario worsened on account of inflationarypressures and high interest rates, which made finance companies, cut down loandisbursements to the industry. Going ahead, as competition further intensifies, performance ofthe players will continue to depend on their new technological and promotional offerings. Weexpect the industry to be dominated by the top-three players who will continue to struggle tomaintain/increase their marketshare. The segment is expected to grow at a CAGR of 11% overFY2007-11E on the back of inadequate public transport, increasing job opportunities in BPOs,Retail, etc., and additional demand from the rural and replacement markets.

Going ahead, as competitionfurther intensifies,performance of the players willcontinue to depend on theirnew technological andpromotional offerings

Amidst intensifying competition players in a major rush to grab marketshare

Players are in scuttle to gain marketshare through new products launches, which are comingwith better technology and at aggressive price points. Further, though the companies werefacing Margin pressure due to an increase in input costs, players have not fully passed on theprices to the customers. As a result, Margins have declined in turn impacting Profitability ofthese companies. In the near term, we expect the industry to continue to face pressure inBottom-line, as competition is expected to further heat up in the most dominant Executivesegment. Hence, almost all players have launched or announced new products in the highersegments. Success of the new launches would determine their position in the market.


Exhibit 18: Two-wheeler Sales volume and Growth trend

Source: Industry, Cris Infac, Angel Research

Exhibit 19: Changing customer preferences in Motorcycle segment

In the near term, we expect theindustry to continue to facepressure in Bottom-line, ascompetition is expected tofurther heat up in the mostdominant Executive segment


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Nonetheless, players are keeping an eye on the basic needs of the Indian customer viz.,

affordability and mileage. There could well be a shift to better mileage and on-road performanceby motorcycles and increasing affordability. However, high competition has led to strong pricingpressure, higher advertising costs and promotional expenses and consequently lower margins.

Segment % Contribution Key Players % Marketshare Models

Economy Hero Honda 65 CD Dawn, CD Deluxe

(Rs30,000 to 35,000) 35 Bajaj Auto 20 CT-100, Platina

TVS Motor 11 Star City

Executive Hero Honda 70 Splendor Plus, Passion Plus,

(Rs40,000 to 50,000) 45 Super Splendor, Splendor NXG,

Glamour, Glamour FI

Bajaj Auto 20 Discover, Exceeds

TVS Motor 5 Victor, Victor GLX

Premium Bajaj Auto 70 Pulsar 150, Pulsar 180,

(Rs50,000 & above) 20 Pulsar 200, Pulsar 220, Avenger

Hero Honda 4 CBZ Extreme, Achiever, Karizma

TVS Motor 20 Apache, Apache TR

Exhibit 20: Key players and marketshare


The top-three players, viz., Hero Honda, Bajaj Auto and TVS Motor command more than 90%marketshare in the domestic motorcycle industry. This implies that gain of one player can be aloss for another. Further, intensifying competition has narrowed the price differentialbetween the Economy and higher segments, which are raising issues regards the Economysegment holding volumes in the medium to long run.

Motorcycles dominate two-wheeler market; top three players in commanding position

Motorcycles have been dominating the two-wheeler segment with over 75% marketshare overthe last five years, and is currently hovering at around 80% levels. Falling price differentialbetween scooters and motorcycles and change in consumer preference to fuel-efficient andstylish models have resulted in motorcycles growing at a CAGR of 19.3% over 2001-02 to2006-07. Thus, overall demand in the two-wheeler segment would continue to be driven byaccelerated growth in motorcycle sales.


Exhibit 21: Segment-wise % contribution to Motorcycle Sales volume

Overall demand in thetwo-wheeler segment wouldcontinue to be driven byaccelerated growth inmotorcycle sales

The top-three players, viz.,Hero Honda, Bajaj Auto andTVS Motor command morethan 90% marketshare in thedomestic motorcycle industry


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Exports to drive better growth

Two-wheeler exports grew at a CAGR of 43.1% to 6,19,138 units in 2006-07. This was onaccount of rising demand for Indian motorcycles primarily from countries such as Sri Lanka,Colombia, Iran and Philippines. Growth in two-wheeler exports was primarily driven by growth inmotorcycle exports. However, two-wheeler exports accounted for a mere 7.3% of total sales in2006-07. Two-wheeler exports are however, gradually picking up. Exports in the first five monthsof FY2008 clocked decent growth of 35.5% as against a 14.3% de-growth witnessed in thedomestic market. Going ahead, exports are expected to look up as companies are layingemphasis on exports in their bid to reduce domestic market risks.

Exports 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08E 2008-09E CAGR (%) CAGR (%)

(Units) 2001-07 2007-09E

Motorcycle 56,880 1,26,122 1,87,287 2,77,100 3,86,202 5,45,887 6,55,064 7,86,077 57.2 20.0 Moped 17,928 23,330 24,234 28,858 43,181 37,566 45,079 54,095 15.9 20.0

Scooter 28,329 30,116 53,148 60,766 83,873 35,685 42,822 51,386 4.7 20.0

Total 1,03,137 1,79,568 2,64,669 3,66,724 5,13,256 6,19,138 7,42,966 8,91,559 43.1 20.0

Exhibit 23: Export trend

Source: SIAM, Cris Infac, Angel Research

Long-term domestic demand drivers intact

The two-wheeler industry will continue to register positive growth on account of rising incomelevels and the young population perking up demand. Two-wheeler penetration levels in Indiaestimated at around 22% in 2005-06 are also reasonable compared to other developingcountries. Nevertheless, the rural markets continue to remain under-penetrated and a shrinkingreplacement cycle is expected to support and result in incremental growth in the two-wheelersegment over the next 4-5 years. The rapid rise in income levels along with low penetration isexpected to fuel demand for means of transportation.

The Indian players have been able to sell their products to new export destinations on accountof being competitive in terms of design and costs. Although companies are mainly exporting tothe South Asian countries at present, expansion to new geographies is expected to sustain thegrowth in exports over the next five years. Both Bajaj and TVS plan to increase their presencein South and Central America, where motorcycles dominate two-wheeler demand. We expecttwo-wheeler sales to grow at a CAGR of 20% over the next four-five years and contribute 12%to revenues.

Exhibit 22: Two-wheelers - Penetration, ownership/demand pattern in India

Ownership pattern across occupational groups

(per '000 household)

Urban Rural

2001-02 2009-10 2001-02 2009-10Salary Earner 495 834 286 755

Professional 859 1,539 521 1,354

Source: Cris Infac, NCAER, Angel Research

Rural Demand will increase its importance

Rural Demand 1995-96 2001-02 2009-10

(% of All India)

Scooters 33.1 39.4 39.9

Motorcycles 47.3 39.8 48.3

Mopeds 52.7 58.2 57.7

The rural markets continue toremain under-penetrated anda shrinking replacement cycleis expected to support andresult in incremental growth inthe two-wheeler segment overthe next 4-5 years

Exports in the first five monthsof FY2008 clocked decentgrowth of 35.5% as against a14.3% de-growth witnessed inthe domestic market


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Utilisation rate expected to be stable

Two-wheeler companies are augmenting capacities driven by the lure of fiscal sops beingoffered by the special zones. However, additional capacity is expected to shore up marginsalong with catering to the new target markets and increasing marketshare. Consequently,utilisation levels are expected to remain stable at about 70% levels in this segment unlike thePV and CV segments where a sharp fall is expected, albeit from much higher levels.

(in '000) 2006-07 2007-08E 2008-09E 2009-10E Investment and Remarks

Hero Honda 3,950 4,450 4,950 5,450 Total investments together with

investment from suppliers will eventually

touch Rs1,900cr by 2010

Bajaj Auto 3,000 4,000 4,100 4,600 To spend Rs150cr towards

expansion of plant at Pantnagar

in FY2008TVS Motor 2,000 2,400 2,400 2,600 New plant in Himachal Pradesh with an

annual production capacity of 4,00,000

units scalable to 6,00,000 units at an

initial investment of Rs120cr

HMSI 1,200 1,500 1,750 2,000 -

*Others 1,987 2,069 2,094 2,230 -

Total 12,137 14,419 15,294 16,880 Total capacity growing at a CAGR of

11.6% over the next three years

Exhibit 24: Player-wise Capacity addition and Investment plans

Source: Industry, Company, Angel Research; Note: *Others include idle capacities of LML and Kinetic Motors

Key Concerns

Rise in Interest rate and Inflation.

Rising Income levels lowering affordability cost of four wheelers. Intensifying competition.

Increase in input cost.

Utilisation levels are expectedto remain stable at about 70%levels in this segment unlikethe PV and CV segments wherea sharp fall is expected, albeitfrom much higher levels


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Automobile

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THIS PAGE IS INTENTIONALLY LEFT BLANK


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Company


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Textile Sector

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CMP: Rs1,004Buy

Maruti Suzuki

Good things in small packages

Maruti has been playing a significant role in the motorisation of India. However, thekey concern is volume growth after a slew of competitive car launches in 2009.Nevertheless, in view of having the strongest and preferred brand image in the domesticmarket, we believe that Maruti will continue to be a dominant player in the PV segment.Over and above this, completion of capacity addition will provide it additional supportto expand in the overseas market and increase its exports. We expect Maruti's valuation

to be largely determined by its ability to maintain marketshare amidst the intensifyingcompetition. At the CMP of Rs1,004, the stock is trading at 16.5x FY2008E and13.8x FY2009E EPS. We maintain a Buy on the stock, with a Target Price of

Rs1,260.

Strongly Positioned: We expect Maruti to clock a CAGR growth of 15% indomestic volumes over FY2007-09E. Growth will be mainly driven by Maruti'snewly launched products in the A2 and A3 segments. Its timely placed diversifiedfuel options by way of diesel-Swiftand LPG - WagonR-DUO, SX4and Omniwith an improved technology are already catching attention. We believe thatMaruti will maintain its marketshare of over 50% at least over the next 2-3 years.

Export story to unfold: We expect the company's exports to grow at a CAGRof around 40% over FY2007-09E, and exports' contribution to total sales is

expected to double from 5.8% in FY2007 to 12% by FY2010 Suzuki is increasingproduction in India to become the largest manufacturing base by 2009. Marutihas plans to export 50,000 units of a new small car model in FY2009 to Nissan,and another 50,000 units of the same car to Europe in FY2010.

Vast and well-entrenched domestic dealership network: Maruti has a vastdealership network of 500 outlets covering 312 cities and a service network of2,445 covering 1,172 cities. For the new players it would be a formidable task toput in place such a huge network. This gives Maruti a competitive edge overother players.

Vaishali Jajoo

Tel: 022 - 4040 3800 Ext: 344

E-mail:[email protected]

Source: Company, Angel Research

Key Financials

Y/E March (Rs cr) FY2006 FY2007 FY2008E FY2009E

Net Sales 12,058 14,654 18,058 21,753

% chg 10.0 21.5 23.2 20.5

Net Profit 1,189 1,562 1,754 2,099

% chg 39.3 31.4 12.3 19.7

OPM (%) 13.5 13.6 13.6 13.8

EPS (Rs) 41.1 54.0 60.7 72.6

P/E (x) 24.4 18.6 16.5 13.8

P/CEPS (x) 19.7 15.8 13.3 11.4

P/BV (x) 5.3 4.2 3.4 2.8

RoE (%) 21.8 22.8 20.7 20.2

RoCE (%) 23.9 22.5 22.0 22.9

EV/Sales (x) 2.3 1.9 1.6 1.3

EV/EBITDA (x) 17.0 14.2 11.4 9.3

Sector Automobile

Market Cap (Rs cr) 29,003

Beta 1.03

52 Week High / Low 1252/713

Avg Daily Volume 222377

Face Value (Rs) 5

BSE Sensex 19,035

Nifty 5,695

BSE Code 532500

NSE Code MARUTI

Reuters Code MRTI.BO

Bloomberg Code MUL IN

Shareholding Pattern (%)

Promoters 54.2

MF / Banks / Indian FIs 28.9

FII / NRIs / OCBs 14.2

Indian Public / Others 2.7

Stock Info

Target Price: Rs1,260(12 Months)


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Maruti has been playing a significant role in the motorisation of India. However, the key concern

is volume growth after a slew of competitive car launches in 2009. Nevertheless, in view ofhaving the strongest and preferred brand image in the domestic market, we believe that Marutiwill continue to be a dominant player in the PV segment. The company is well-positioned in acompetitive scenario having successfully launched new products in the last two years. Over andabove this, due completion of capacity addition will provide it additional support to expand in theoverseas market and increase its exports. We remain positive on Maruti.

Strongly Positioned: We expect Maruti to clock a CAGR growth of 15% in domestic volumesover FY2007-09E. This is in line with our industry growth estimates. Growth will be mainly drivenby Marutis newly launched products in the A2 and A3 segments. Its timely placed diversifiedfuel options in terms of diesel-Swiftand LPG - WagonR-DUOand Omniwith an improved tech-nology is already catching attention and enjoys sizable position in the market. Moving up theladder, the company is now positioning itself in the mid size segment with the recent launch ofSX4. We believe that Maruti will maintain its marketshare of over 50% at least over the next2-3 years.

Product FY2005 FY2006 FY2007 FY2008E FY2009E CAGR(%)

A1 : Maruti 800 1,16,262 89,223 79,245 70,000 67,000 (12.9)

C: Omni, Versa 65,019 66,366 83,091 8,9,738 91,533 8.9

A2: Alto, WagonR, Zen, Swift 2,71,280 3,35,136 4,40,375 5,06,431 5,82,396 21.0

A3 : SX4, Esteem 29,637 31,939 29,697 3,8,606 50,188 14.1

Total Passenger cars 4,82,198 5,22,664 6,32,408 7,04,776 7,91,117 13.2

MUV: Gypsy, Vitara 5,204 4,374 3,221 3,000 3,000 (12.9)

Domestic 4,87,402 5,27,038 6,35,629 7,07,776 7,94,117 13.0

Export 4,8,899 34,781 3,9,295 53,048 84,877 14.8

Total Sales 5,36,301 5,61,819 6,74,924 7,60,824 8,78,994 13.1

Exhibit 2: Product volumes


Exhibit 1: Volume and Marketshare

Maruti will launch two new compact segment cars in second half of FY2009. These will includethe recently unveiled small car Splashand a new small car called A Star. The A Staris the newsmall car that has been designed for the export market. The A Starwill also be launched inIndia. These launches together with the expected launch of the Swiftsedan will drive volumegrowth for Maruti in FY2009-10.

The company is well-placed in

a competitive scenario havingsuccessfully launched newproducts in the last two years

Moving up the ladder, thecompany is now positioningitself in the mid size segmentwith the recent launch of SX4


Maruti Suzuki


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Maruti Suzuki

India Research


TM

Maruti plans to export 1,00,000 units of its newly built export model annually. Maruti plans toexport 50,000 units of a new small car model in FY2009 to Nissan, and another 50,000 units ofthe same car to Europe on its own in 2010. It is also targeting to export an additional 1,00,000units to the non-European countries in FY2010.

Building up capacities: Maruti has been operating at over 100% capacity utilisation since thepast eight years. Visible domestic growth, overseas supply order of 50,000 units from Nissanand expanding footprint in the export market with the help of the parent, has resulted in Maruti

ramping up capacity from 6,50,000 units pa., to 1,000,000 units by FY2010. Maruti along withSuzuki plan to invest around Rs9,000cr over the next 3-4 years. This will ultimately expandinfrastructure and capability at a breath taking place.

Vast and well-entrenched domestic dealership network: Maruti has a vast dealershipnetwork of 500 outlets covering 312 cities and a service network of 2,445 covering 1,172 cities.For the new players it would be a formidable task to put in place such a huge network. Thisgives Maruti a competitive edge over other players. The Sales Satisfaction Survey conductedby J D Power Asia Pacific has rated Maruti as first three years in a row, which indicates itenjoys the preferred and strong brand image at least in the domestic market. Marutis efforts tocome closer to its customers and meet all their needs will reinforce the trust in Brand Maruti.

Concerns

Currency fluctuation could adversely impact the company as going ahead export's contribution

is expected to increase. Delay in capacity ramp up could exert pressure on supplies.

Competition is intensifying as the global OEMs have plans to enter the Indian market, morespecifically the small car segment.

Financial Performance

We estimate Maruti to clock a CAGR growth of 22% in revenues over FY2007-09E on the backof an estimated CAGR growth of 15% in volumes over the same period. We expect an 8% dropin M800volumes and a 15% and 30% CAGR growth in the volumes of both the A2 and A3segment offerings. Overall, better realisations and an improving product mix are the primaryreasons why we expect Maruti's revenues to outpace volumes. We expect the company toclock a 22% CAGR growth in Operating Profit over FY2007-09E. We expect OPM to improve

from 13.6% in FY2007 to around 13.8% by FY2009E. Maruit's OPM is expected to improve onthe back of enhanced localisation and increased productivity. However, an increase in exports,as a percentage of sales, could restrict further improvement in OPM.

We expect Maruti's EPS and Cash EPS to increase to Rs72.6 and Rs88.2 in FY2009 fromRs54 and Rs63.4 in FY2007 respectively, despite aggressive capex undertaken by thecompany. Maruti plans to fund capex through internal accruals in the next two years. Thisentails no change to the existing capital structure and RoCE also remains unchanged at 23%during FY2007-09E. We estimate Maruti's free cash flow generation to dip marginally in FY2008and FY2009 to Rs169.4cr and Rs262.8cr, as the company would be incuring capex towardscapacity expansion (brownfield and greenfield ) and in the Suzuki Power train JV.

Maruti along with Suzukiplans to invest aroundRs9,000cr over the next 3-4

years

Overall, better realisations andan improving product mix arethe primary reasons why weexpect Maruti's revenues tooutpace volumes

Export story to unfold: We expect Marutis exports to grow at a CAGR of 40% overFY2007-09E, and exports contribution to Total Sales is expected to nearly double from 5.8% in

FY2007 to 12% in FY2010 Suzuki is increasing production in India to become the largestmanufacturing base by 2010. Hence, with Maruti having one of the most competitivemanufacturing bases ensures continued and increasing focus by parent, which is among the topplayers globally. Also, Suzuki is in the process of shifting production from Hungary to India.Going ahead, Maruti is expected to play a significant role in Suzukis global plans as well.

Maruti having one of the mostcompetitive manufacturing

bases ensures continued andincreasing focus by parent


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Maruti Suzuki

India Research


TM

Outlook and Valuation

We expect Maruti's valuation to be largely determined by its ability to maintain marketshareamidst an uncertain interest rate regime and intensifying competition. At the CMP of Rs1,004,the stock is available at 16.5x FY2008E and 13.8x FY2009E Earnings. We maintain a Buyon the stock with Target Price of Rs1,260.

Exhibit 3: RoE, RoCE, Free Cash Flow and Capital expenditure


Source: C-line, Angel Research

Exhibit 4: P/E Band


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Profit & Loss Statement Rs crore

Cash Flow Statement Rs crore

Balance Sheet Rs crore

Key Ratios

Y/E March FY2006 FY2007 FY2008E FY2009E

Profit before tax 1,750.0 2,279.8 2,579.0 3,086.5

Depreciation 285.4 271.4 430.0 450.0

(Inc)/Dec in Working Capital (399.8) 419.4 (53.2) (286.0)

Interest (Net) - - - -

Direct taxes paid 560.9 717.9 825.3 987.7

Others 147.93 -224.74 - -

Cash F low f rom Operations 1222.6 2028.0 2130.5 2262.8

Inc./ (Dec.) in Fixed Assets -48.6 1339.1 1961.1 2000.0

Free Cash Flow 1271.2 688.9 169.4 262.8

(Inc)/Dec in Investments (534.6) (1,358.0) (176.7) (116.5)

Issue of Equity - - - -

Inc./(Dec.) in loans (235.9) 559.1 - -

Dividend Paid (Incl. Tax) 101.1 130.0 149.1 188.9

Others (17.3) (0.9) - -

Cash Flow from Financing (319.7) 430.0 (149.1) (188.9)

Others (44.7) 260.3 230.2 348.7

Inc./(Dec.) in Cash 372.2 21.2 73.8 306.1

Opening Cash balances 1,029.4 1,401.6 1,422.8 1,496.6

Closing Cash balances 1,401.6 1,422.8 1,496.6 1,802.8


Net Sales 12,058.2 14,653.9 18,057.9 21,753.2

% chg 10.0 21.5 23.2 20.5

Total Expenditure 10,431.6 12,663.5 15,594.8 18,751.6

EBIDTA 1,626.6 1,990.4 2,463.1 3,001.6

(% of Net Sales) 13.5 13.6 13.6 13.8

Other Income 429.2 598.4 600.0 600.0

Depreciation& Amortisation 285.4 271.4 430.0 450.0

Interest 20.39 37.63 54.02 65.11

PBT 1,750.0 2,279.8 2,579.0 3,086.5

(% of Net Sales) 14.5 15.6 14.3 14.2

Extraordinary Expense/(Inc.) - - - -

Tax 560.9 717.9 825.3 987.7

(% of PBT) 32.1 31.5 32.0 32.0

PAT 1,189.1 1,562.0 1,753.7 2,098.8

% chg 39.3 31.4 12.3 19.7


SOURCES OF FUNDS

Equity Share Capital 144.5 144.5 144.5 144.5

Reserves& Surplus 5308.1 6709.4 8314.1 10224.0

Shareholders Funds 5,452.6 6,853.9 8,458.6 10,368.5

Total Loans 71.7 630.8 630.8 630.8

Deffered Tax Liability (Net) 77.9 167.5 167.5 167.5

Total Liabilities 5,602.2 7,652.2 9,256.9 11,166.8

APPLICATION OF FUNDS

Gross Block 4,955 6,147 8,147 10,147

Less: Acc. Depreciation 3,259 3,487 4,073 4,566

Net Block 1,695.2 2,659.7 4,073.4 5,580.7

Capital Work-in-Progress 92.0 238.9 200.0 200.0

Investments 2,051.2 3,409.2 3,585.9 3,702.4

Current Assets 3,740.9 3,845.9 4,514.5 5,438.3

Current liabilities 1,977.1 2,501.5 3,116.8 3,754.7

Net Current Assets 1,763.8 1,344.4 1,397.6 1,683.6

Total Assets 5,602.2 7,652.2 9,256.9 11,166.8


Per Share Data (Rs)

EPS 41.1 54.0 60.7 72.6

Cash EPS 51.0 63.4 75.6 88.2

DPS 3.5 4.5 5.2 6.5

Book Value 188.7 237.2 292.7 358.8

Operating Ratio (%)

Inventory (days) 26.7 17.8 18.0 18.0

Debtors (days) 19.6 18.6 19.0 19.0

Creditors (days) 45.6 50.1 50.0 50.0

Returns (%)

ROE 21.8 22.8 20.7 20.2

ROCE 23.9 22.5 22.0 22.9

Dividend Payout 8.5 8.3 8.5 9.0

Valuation Ratio (x)

P/E 24.4 18.6 16.5 13.8

P/E (Cash EPS) 19.7 15.8 13.3 11.4

P/BV 5.3 4.2 3.4 2.8

EV / Sales 2.3 1.9 1.6 1.3

EV / EBITDA 17.0 14.2 11.4 9.3

Maruti Suzuki


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Textile Sector

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CMP: Rs708

BuyMahindra & Mahindra

Vaishali Jajoo

Tel: 022 - 4040 3800 Ext: 344

E-mail: [email protected]

Target Price: Rs952(12 Months)

Sector Automobile


Beta 0.97



Face Value (Rs) 10

BSE Sensex 19,035

Nifty 5,695

BSE Code 500520

NSE Code M&M

Reuters Code MAHM.BO

Bloomberg Code MM IN


Promoters 22.7




Stock Info


Key Financials


Net Sales 7,989 9,628 11,146 12,481

% chg 22.3 20.5 15.8 12.0

Net Profit 647 966 966 1,059

% chg 29.6 49.2 (0.0) 9.7

OPM (%) 11.1 11.7 11.2 11.6

EPS (Rs) 27.7 40.6 39.3 43.2

P/E (x) 25.5 17.5 18.0 16.4

P/CEPS (x) 15.6 13.2 13.5 12.4

RoE (%) 22.2 27.2 22.6 20.8

RoCE (%) 17.4 17.6 15.1 16.1

P/BV (x) 5.7 4.7 4.1 3.4

EV/Sales (x) 2.1 1.7 1.7 1.4

EV/EBITDA (x) 19.1 14.7 14.9 11.9

Value the groupMahindra & Mahindras (M&M) ambitious strategies are at the verge of take off andcould give back recurring benefits. A view on the potential investments in itssubsidiaries and joint ventures is important while evaluating investment in the M&Mstock as its core business analysis. We maintain a Buy on the stock with a long-termoutlook on its core business, diversifying product portfolio to reduce risks and valueof its investment in subsidiaries. This multi-coherent model will keep the stock atlower downside risks despite a decline in tractor volumes and UV sales. Our SOTPTarget Price for M&M works out to Rs952, wherein its core business fetchesRs586 and subsidiaries Rs366 per share. Leader in core business: M&M is a leader in tractors with a marketshare of

around 40% (post acquisition of Punjab Tractors). Increasing infrastructureactivities has stepped up tractor sales in India in the last three-four years. Clearly,M&M is the leader in the domestic utility vehicle (UV) market with a 30%marketshare. We expect M&M to outperform the UV segment clocking aCAGR growth of 10-11% over the next two-three years.

Exports to contribute significantly: YTD, export volume contribution toTotal Sales has risen to 14.4% in FY2007 as against around 5.5% in FY2006.We expect M&M's exports to grow at a better CAGR of around 16%over FY2007-09E on the back of its aggressive move to have a presence in newgeographies like Europe, Australia, New Zealand, South Africa, Middle East,China, CIS, Latin America and Spain, going ahead.

Diversifying product portfolio with potential JVs: M&M has entered into ajoint venture (JV) with International Truck & Engine Corporation (ITEC) and Renaultfor the manufacture of CVs and PVsin India. These JVs will start contributingpositively and substantially to M&M's consolidated EPS in FY2009E.

Auto Ancillary business to unfold: M&M's Auto Parts Division, MahindraSystems & Technologies (MSAT), targets to grow its revenues to $1bn byFY2010E from the current $830mn. MSAT has done few acquisitions to expandits operations over the last two years and is scouting around for more acquisitions,which could add value, provide technology and customer access.


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M&Ms ambitious strategies are on the verge of take off and give back recurring benefits. A view

on the potential investments in its subsidiaries and joint ventures is important whileevaluating an investment in the M&M stock as is core business analysis. It is no more a tractoror UV manufacturing company but its diversified different arms have the potential to grow at amuch faster pace and can be valued at a better price than its core business. But, being a leaderin tractors in the UV market should be the first investment rationale to be taken into consider-ation, and we believe that M&M will benefit from relatively low penetration levels and thegovernments thrust on increasing rural and agricultural contribution to the total GDP of India.

Leader in core business

Tractors: M&M is a leader in tractors with a marketshare of around 40% (post acquisition ofPunjab Tractors, improving irrigation facilities, nearly normal monsoons, good ground waterlevels, easy availability of credit, increased player thrust and rising income from custom-hiring- non-farm income). Increasing infrastructure activities has stepped up tractor sales in India in

the last three-four years. In view of these factors, we conservatively estimate around 6% CAGRgrowth in tractor volumes over FY2007-09E for M&M. Domestic sales have declined in the lasttwo quarters on the back of tightening in credit by financial institutions. However, long-termdrivers remain intact and would keep volume growth intact. Even in the near term, volumes areexpected to pick up on the back of normal monsoons and higher Kharifminimum supportprices (MSPs) announced. Crop production is expected to be 2.6% yoy higher in FY2008.

Industry growth driver:Even though tractor penetration in India was estimated at around 20units per 1,000 hectares of the net sown area as compared with the world average of around 21units per 1,000 hectares, adjusting for the average global hp (which is significantly higher thanthe average Indian hp of 35), penetration in India seems to be fairly lower, which provides amplepotential for the Indian tractor players to increase their sales.

Utility vehicles: M&M is a clear leader in the domestic utility vehicle (UV) market with 30%marketshare. We expect the company to outperform the UV segment clocking a CAGR growthof 10-11% over the next two-three years. We believe that the companys strong product portfoliocaters to the different user segments including taxis, rural, urban and the semi-urban

Source: Industry, Cris Infac, Angel Research, Note: Marketshare in Tractor segment for the period of Jan 07 to

Oct 07 is an average market share for the period as monthly data is not available

Exhibit 1: Volume and Marketshare

segments, which is taking care of its ability to outperform industry growth. Further, post thesuccess of Scorpioand Bolero keeping pace with the changes in requirements and scenario,M&M is also expected to launch an all new platform called Ingenioin FY2008, which will help itretain its leadership position in the UV segment.

Industry growth driver:UV industry sales are likely to grow on the back of growth in the

M&Ms ambitious strategies

are on the verge of take off andgive back recurringbenefits

M&Ms ambitious strategiesare on the verge of take off andgive back recurringbenefits

Post the success of Scorpioand Bolero keeping pace withthe changes in requirementsand scenario, M&M is alsoexpected to launch an all newplatform called Ingenio inFY2008


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Mahindra & Mahindra

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TM

commercial segment from tour operators and BPOs. Personal vehicle segment growth is ex-

pected to be in line with growth in the mid-size and large car segments, aided by new launches.Three-wheeler segment: We believe that the competitive pressure in three-wheeler segmentwill be limited as a large number of players have entered or are planning to enter the segmentin the near future. We conservatively estimate M&Ms three-wheeler segment to clock a CAGRgrowth of 6-7% over FY2007-09E.

Exports to contribute significantly: M&M has been recording strong growth in exports inboth tractors and UVs during FY2008. YTD the companys export volume contribution to totalsales has risen 14.4% in FY2007 as against around 5.5% in FY2006. We expect the companysexports to grow at a better CAGR of around 16% over FY2007-09E on the back of its aggressivemove to have a presence in new geographies like Europe, Australia, New Zealand, South Africa,Middle East, China, CIS, Latin America and Spain.

CompanyM&M Holding Investment (Rs cr) Remark

ITEC 51% 400 * Become a full-line CV company in India.

* Become a full service provider of Engineering Services.

* Establish Contract Sourcing business.

* Selling & Distribution in India through existing M&M

dealers and new JV dealers.

* Products to be branded as Mahindra International.

Renault 51% 700 * Capacity 500,000 units.

* Localisation 50%.* Production is expected to begin in mid 2009.

* JV will manufacture Renault products to address the

Indian market.

* Renault will bring in its engineering skills while M&M will

contribute with its large supplier base and its sales

network.

Exhibit 3: JVs and Alliances

Diversifying product portfolio with potential JVs: M&M has entered into a joint venture (JV)with International Truck & Engine Corporation (ITEC) and Renualt for the manufacture of CVsand PVs in India. These JVs will start contributing positively to M&Ms consolidated earnings in

FY2009E and the potential upside is expected to be substantial. Thus, M&M is looking atde-risking its product portfolio through segment diversification.


Auto 12,2,071 1,24,997 1,35,707 1,62,848 1,82,390 10.6

Tractor 62,727 81,556 99,797 1,02,791 1,13,070 15.9

Three Wheelers 22,953 22,419 33,718 36,415 38,965 14.1

Total Volume 2,07,751 2,28,972 2,69,222 3,02,055 3,34,425 12.6

Exhibit 2: Product Volume



Aggressive move to have apresence in new geographieslike Europe, Australia, NewZealand, South Africa, MiddleEast, China, CIS, LatinAmerica and Spain

M&M is looking at de-riskingits product portfolio throughsegment diversification.


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The M&M-Renault JV has launched its first car the Loganin India. The Loganis a low-frills car

platform that Renault has developed specifically for emerging economies. It is currently beingsold in 51 countries around the world. We believe that the localisation content of Logan is 55%due to which profitability in FY2008 will be relatively muted. The company proposes to take the

localisation content up to 70% by FY2009E. Success of the Loganis crucial for M&M given itsaspirations in the passenger vehicle market. A successful launch will translate into greatertraction for M&Ms second joint venture in cars with Renault and Nissan, which is expected tocommence production in 2009.

Auto Ancillary business to unfold: M&M's Auto Parts Division, Mahindra Systems &Technologies (MSAT), targets to improve its revenues to $1bn by FY2010E from the current$800mn. The company is looking at product development through acquisitions in forging,design and engineering software solutions to add value to its offering. The company has madestrong headway in positioning MSAT, a fully equipped auto component entity. MSAT has done

few acquisitions to expand the Division in the last two years and is scouting around for moreacquisitions, which could add value, provide technology and customer access.

Potential investment in subsidiaries: M&M has substantial investments on its Booksincluding in some of its key subsidiaries, some of which are performing much better than theparent. The company has invested in other Mahindra group companies too. We believe thatM&M's Non-Automotive subsidiaries like Tech Mahindra, Mahindra Financial Services (MMFSL)and Mahindra Gesco will not only add significantly to its consolidated financials, but willenhance valuations too. The company has already announced listing of its highly profitablesubsidiary Mahindra Holidays in the next 2-3 months. We expect M&M's stock to do welldespite weakening UVs and tractor sales if the overall market is strong. In this case, theincrease in value of its investments will restrict the downturn of the stock on the bourses.

Concerns

Too many diversified projects could reduce the hold on core business.

Adverse changes in the Interest Rate scenario and credit flow.

Competition.

Financial Performance

We estimate M&M to clock around 13% CAGR growth in revenues over FY2007-09E on theback of an estimated 11.5% CAGR growth in volumes over the mentioned period. We estimatethe company's Auto, Tractor and Three-wheeler segments to clock a CAGR growth of 16%,6.4% and 7.5% respectively, in volumes over FY2007-09E. We estimate M&M to register a12.6% CAGR growth in Operating Profits over FY2007-09E. We expect OPMs to be stable at11.6% in FY2009E. The company's OPM is expected to improve thereafter on the back ofincreased localisation and higher productivity. However, increasing exports, as a percentage of

sales, could restrict further improvement in OPM.

For FY2007, the company's consolidated revenues stood at Rs17,617cr (Rs12,335cr), an increaseof 42.8%. Consolidated PAT was at Rs1,582cr (Rs1,070cr), a growth of 48%. M&M reportedconsolidated EPS of Rs63.3 for FY2007.

We expect M&M's EPS and Cash EPS to improve to Rs43.2 and Rs57.3 in FY2009 fromRs40.6 and Rs53.7 in FY2007, respectively. This is despite the aggressive capex programundertaken by the company. However, the significant capital expenditure is resulting in M&M'sRoE and RoCE declining in FY2008E. However, capacity expansions are crucial to tap theupcoming opportunities in the medium to long term. We estimate M&M's free cash flow generationto dip in FY2008 and FY2009 as the company would be investing in brownfield and greenfield

capacity expansion, viz., joint venture with ITEC and Renault-Nissan.

MSAT has done fewacquisitions to expand theDivision in the last two years ,which could add value,provide technology and

customer access

The increase in value of itsinvestments will restrict thedownturn of the stock on thebourses

M&M's Auto, Tractor andThree-wheeler segments toclock a CAGR growth of 16%,6.4% and 7.5% respectively, involumes over FY2007-09E


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Valuation

High growth potential of M&Ms subsidiaries is expected to unlock actual value of the stock.Our SOTP Target Price for M&M works out to Rs952 wherein its core business fetches

Rs586 and subsidiaries Rs366.We maintain a Buy on the stock.

Exhibit 4: RoE, RoCE, Free Cash Flow and Capital expenditure



Exhibit 6: P/E Band

Key Subsidiaries No. of Shares held (cr) CMP (Rs) Value (Rs cr)

Mahindra Financial Services 5.8 240 1,398

Mahindra GESCO 1.3 567 712

Tech Mahindra 5.8 1,234 7,108

Other major subsidiaries at BV 1,144

Total Value 10,362

No of share o/s of M&M (cr) 24

Per share value of Investments 366

Intrinsic value of M&M 586

M&M's Target Price with investments in subsidiaries (Rs) 952

Exhibit 5: SOTP Valuation



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Profit & Loss Statement Rs crore

Cash Flow Statement Rs crore

Balance Sheet Rs crore

Key Ratios


Profit before tax 1,099.5 1,418.5 1,347.6 1,525.8

Depreciation 200.0 209.6 270.0 297.0

Interest(1-T) 483.0 1,727.4 579.6 649.0

(Inc)/Dec in Working Capital 51.2 (210.7) 1,733.5 2,536.4

Direct taxes paid 242.4 350.1 357.1 391.7

Cash Flow from Operations 1,488.9 3,216.0 106.6 (456.2)

Inc./ (Dec.) in Fixed Assets 254.3 445.6 679.4 328.7

Free Cash Flow 1,234.6 2,770.4 (572.8) (784.9)

(Inc)/Dec in Investments 479.3 568.4 207.5 (2,233.5)

Issue of Equity 121.8 4.6 7.3 -

Inc./(Dec.) in loans (169.2) 752.6 504.7 (102.3)

Dividend Paid (Incl. Tax) 278.2 324.7 294.5 294.5

Cash Flow from Financing 710.0 1,650.4 1,014.0 (2,041.3)

Inc./(Dec.) in Cash 524.7 1,120.1 (1,586.8) 1,256.4

Opening Cash balances 337.8 862.4 1,982.5 395.7

Closing Cash balances 862.4 1,982.5 395.7 1,652.2


Net Sales 7,988.8 9,627.7 11,145.9 12,481.1

% chg 22.3 20.5 15.8 12.0

Total Expenditure 7,255.4 8,787.4 9,975.6 11,108.2

EBIDTA 885.7 1,125.9 1,245.3 1,447.9

(% of Net Sales) 11.1 11.7 11.2 11.6

Other Income 185.4 331.9 300.0 300.0

Depreciation& Amortisation 200.0 209.6 270.0 297.0

Interest (18.40) (67.45) (22.29) (24.96)

PBT 889.5 1,315.7 1,297.6 1,475.8

(% of Net Sales) 11.1 13.7 11.6 11.8

Extraordinary Expense/(Inc.) 210.0 102.8 50.0 50.0

Tax 242.4 350.1 357.1 391.7

(% of PBT) 27.3 26.6 27.5 26.5

Adj. PAT 647.1 965.6 965.5 1,059.1

% chg 29.6 49.2 0.0 9.7


SOURCES OF FUNDS

Equity Share Capital 233.4 238.0 245.4 245.4

Reserves& Surplus 2,675.5 3,314.9 4,035.9 4,850.6

Shareholders Funds 2,908.9 3,552.9 4,281.3 5,096.0

Total Loans 883.4 1,636.0 2140.7 2,038.4

Deffered Tax Liability (net) 146.8 19.8 19.8 19.8

Total Liabilities 3,939.0 5,208.7 6,441.8 7,154.1

APPLICATION OF FUNDS

Gross Block 2,885.5 3,229.7 4,029.7 4,368.4

Less: Acc. Depreciation 1,510.3 1,639.1 2,045.1 2,217.0Net Block 1,375.3 1,590.6 1,984.6 2,151.4

Capital Work-in-Progress 179.2 280.6 160.0 150.0

Investments 1,669.1 2,237.5 2,445.0 211.5

Current Assets 2,761.4 3,748.2 4,564.2 7,604.4

Current liabilities 2,064.0 2,665.7 2,732.0 2,988.1

Net Current Assets 697.4 1,082.5 1,832.2 4,616.3

Misc Expenditure 18.1 17.6 20.0 25.0

Total Assets 3,939.0 5,208.7 6,441.8 7,154.1


Per Share Data (Rs)

EPS 27.7 40.6 39.3 43.2

Cash EPS 45.3 53.7 52.4 57.3

DPS 10.0 14.0 12.0 12.0

Book Value 124.6 149.3 174.5 207.7

Operating Ratio (%)

Inventory (days) (6.7) (0.4) (1.0) (2.0)

Debtors (days) 29.1 26.6 27.0 28.0

Creditors (days) 69.5 73.9 70.0 70.0

Returns (%)

RoE 22.2 27.2 22.6 20.8

RoCE 17.4 17.6 15.1 16.1

Dividend Payout 27.2 31.2 29.0 26.5

Valuation Ratio (x)

P/E 25.5 17.5 18.0 16.4

P/E (Cash EPS) 15.6 13.2 13.5 12.4

P/BV 5.7 4.7 4.1 3.4

EV / Sales 2.1 1.7 1.7 1.4

EV / EBITDA 19.1 14.7 14.9 11.9

Mahindra & Mahindra


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CMP: Rs693BuyTata Motors

Giant on the move

Tata Motors is gearing up for the next league of CVs and PVs and has beenprogressively beefing up its competitive positioning through acquisitions and JVs.Short-term cyclical pressures in the CV segment are exerting pressure on the cashflow. We believe Tata's next generation product will have a big impact on industry andwill help it re-define itself from being a CV manufacturer to becoming an automobilemanufacturer. In the long term, investments in subsidiaries would unlock real value

for the stock. Based on SOTP valuation, we have arrived at a Target Price of Rs880for the stock. We have valued the core business at Rs620 or 7x FY2009EEV/EBITDA equivalent to 11x FY2009E P/E. Value of the subsidiaries and embeddedvalue works out to Rs260 per share. The current weakness in the stock due tonear-term growth concerns is an excellent opportunity to Buy the stock, with along-term perspective.

Advantageously positioned: The company has six new plat forms acrosssegments, which are expected to be launched in the next couple of yearsat regular intervals. This is expected to help the company renew its productportfolio, have segment and technological diversification and arrest marketsharedeclines. A real-time example is its successful product ACE. Successful launchof its Rs 1 lakh car could set a benchmark in the PV industry.

Tying up for technology and market: Successful tie ups with MNCs across

segments have given a sense of the company's aggressive capex plans ofRs.12,000cr. These JVs are long-term positives for Tata Motors and are expectedto significantly improve its competitive position in the domestic market. TataMotors expects its export contribution to increase from the current 18% to 25%by FY2011 on the back of its global launches.

Investment Portfolio: Tata Motors has strategic investments in severalsubsidiaries, which have attained maturity in their respective businesses andhave clocked robust performance. Management has also shown interest inunlocking value in subsidiaries. Investment value along with subsidiary companiesaccounts for almost one-fourth of Tata Motors current valuation.

Vaishali Jajoo

Tel: 022 - 4040 3800 Ext: 344

E-mail:[email protected]

Sector Automobile


Beta 0.99



Face Value (Rs) 10

BSE Sensex 19,035

Nifty 5,695

BSE Code 500570

NSE Code TATAMOTORS

Reuters Code TAMO.BO

Bloomberg Code TTMT IN


Promoters 33.4




Stock Info


Key Financials


Net Sales 20,293 27,062 30,213 34,556

% chg 17.7 33.4 11.6 14.4

Net Profit 1,529 1,914 1,985 2,138

% chg 23.6 25.2 3.8 7.7

OPM (%) 10.7 10.5 10.7 10.5

EPS (Rs) 39.9 49.6 51.5 55.5

P/E (x) 17.4 14.0 13.5 12.5

P/CEPS(x) 12.9 10.7 10.3 9.3

P/BV (x) 4.8 3.9 3.3 2.9

RoE (%) 27.7 28.0 24.6 22.8

RoCE (%) 18.2 19.3 17.4 16.0

EV/Sales (x) 1.2 0.9 0.8 0.7

EV/EBITDA (x) 13.0 10.0 8.8 7.8

Target Price: Rs880(12 Months)


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Tata Motors is gearing up for the next league of commercial and passenger vehicles, and has

been progressively beefing up its competitive positioning through acquisitions and JVs.Short term cyclical pressures in the CV segment is surely exerting pressure on the companyscash flows. However, the giant is on the move slowly but steadily. The company is not onlyexpanding capacities but is also broadening its focus on the global market. We believe Tatasnext generation product will have a big impact on industry and will help it re-define itself frombeing a CV manufacturer to becoming an automobile manufacturer as well. In the long term,investments in subsidiaries would unlock real value for the stock.

Advantageously positioned: Tata Motors has initiated some strategic measures to beef upits competitive positioning in the market. The company has six-seven new platforms acrosssegments, which are expected to be launched in the next couple of years at regular intervals.This is expected to help the company renew its product portfolio, have segment andtechnological diversification and arrest marketshare declines in the short term. A real time

example is its successful product, ACE. The company has also grabbed attention of the globalmajors with the announcement of its Rs1lakh car. Successful launch of this could well set abenchmark in the PV industry.

Ambitious expansion plans: The company plans to invest Rs12,000cr towards capacityaddition and new product launches over the next three-four years. This will help the company toopen up new markets in the long run. To fund this capex, Tata Motors recently issued zerocoupon foreign currency convertible alternative reference securities (CARS) of US $450mn,convertible at Rs960.96 per share where outstanding CARS would be redeemable at 31.8%premium on maturity.


M&HCV 1,35,337 1,36,850 1,83,592 1,85,428 1,96,554 9.8

LCV 74,253 1,08,104 1,45,763 1,67,627 1,92,772 26.9

Total CVs 2,09,590 2,44,954 3,29,355 3,53,055 3,89,325 16.7

UVs 37,032 39,783 48,599 52,487 58,785 12.2

Cars 1,52,943 1,69,101 1,91,934 207,289 2,38,382 11.7Total PVs 1,89,975 2,08,884 2,40,533 2,59,776 2,97,167 11.8

Total Volume 3,99,565 4,53,838 5,69,888 6,12,831 6,86,493 14.5

Exports (Inc above ) 30,496 50,151 49,018 61,283 75,514 25.4

Exhibit 2: Product volumes


We believe Tatas next

generation product will havea big impact on industry andwill help it re-define itself frombeing a CV manufacturer tobecoming an automobilemanufacturer as well

Tata Motors plans to investRs12,000cr towards capacityaddition and new productlaunches over the nextthree-four years


Exhibit 1: Truck and Bus Volumes and Marketshare

The company has six-sevennew platforms acrosssegments, which are expectedto be launched in the nextcouple of years at regular

intervals


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Investment Portfolio: Tata Motors has strategic investments in several subsidiaries, whichhave attained maturity in their respective businesses and have clocked robust performance.Management has also shown interest in unlocking value in subsidiaries either throughinduction of a strategic partner or through public listing of the same going ahead when these

businesses are able to garner more value. Management intends to commence theprocess of de-merging its subsidiaries by end FY2008 with HV Transmissions and HV Axlesbeing the businesses to be initially listed. Investment value along with subsidiary companiesaccounts almost one-fourth of Tata Motors current valuation.

Concerns

Lack of moderate demand will impact earnings negatively as the company has chalked outsignificant capex.

Fluctuation in Interest and Freight rates.

Aggressive move by the Railways and new competitors.

Joint Tata Motors' Product/Segment Focus Remarks

Venture share

FIAT 50% Fiat and Tata vehicles and * 1,00,000 cars and 2,00,000 engines

the Fiat branded cars * Distribution through the Tata-Fiat dealer network

* Investment of Rs4,000cr

IVECO MoU Commercial Vehicle * To analyse feasibility of co-operation in

engineering, manufacturing, sourcing

* Distribution of products in the CVspace across markets

Morcopolo 51% Buses and Coaches * Initial capacity of 7,000 units annually

* Investment of Rs150-200cr

* Targeting Domestic and Export market

Thonburi Automotive * Focus on Thailand and nearby country

Company of Thailand 70% Low tonne pick-up trucks * Assembly Plant at an investment of Rs120cr

Exhibit 4: Joint Ventures and Alliances


Exhibit 3: Capital expenditure

Capex Rs8,000cr on new product development and Rs4,000cr on capacity expansionSegment Passenger Vehicle Commercial Vehicle

Current capacity 2,25,000 cars + 60,000 UV 2,65,000

Capacity after addition 3,00,000 +2,50,000 small car+ 90,000 UV 5,11,000 including 200,000 ACE

Products New Indicaplatform ACEPassenger Variant

Rs1,000,00 car Global Truck

New product range jointly with Fiat Global Pick-up


Tying up for technology and market: Successful tie ups with MNCs across segments havegiven a sense of the companys aggressive capex plans. These JVs are long-term positives forTata Motor and are expected to significantly improve its competitive position in the domestic

market. It will also pave the way for better access to new products and technology for TataMotors and give it access to the global markets. Tata Motors expects its exportcontribution to increase from the current 18% to 25% by 2010on the back of its global launches.

Successful tie ups with MNCsacross segments have given asense of the companys

aggressive capex plans

Management intends tocommence the process ofde-merging its subsidiaries byend FY2008


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