cv industry- initiating coverage

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Chapter heading (1St

heading)

We initiate on the domestic CV industry with an OVERWEIGHT rating and we are modeling in

a demand CAGR of 15.5% and 16.5% for the domestic M&HCV and LCV segments,

respectively, during FY11-13E. Given that CV demand stagnation in the past six months was

primarily led by the lack of a freight hike increase, we believe that growth momentum will

pick up again on the back of a 4-5% freight rate hike in 4Q FY11. We also do not expect

peaking of the current CV cycle in the second year of its uptrend on account of a 8.8% GDP

CAGR along with a 10% gross fixed capital formation CAGR during FY11-13E as per quant

Economist Jayprakash Sinha. As the current capex cycle is almost over for CV manufacturers,

revenue growth supported by stable margins will likely lead to debt repayment, thereby

improving capital efficiency incrementally. Within the CV sector, we initiate on two

companies — Tata Motors (BUY, PT: Rs1,453) and Ashok Leyland (BUY, PT: Rs87).

We expect road freight rates to move up by 4-5% in 4Q FY11E: We expect road freight rates

across major routes in the country to increase by 4-5% in 4Q FY11E on the back of rising capital

costs and an expected hike in diesel prices, thereby maintaining capital efficiency of road freight

operators to pre-monsoon levels. Since July 2010, the lack of freight rate hikes led by an

extended monsoon season and the transition to BS-3 norms has shrunk profitability of CVoperators, affecting demand for new CVs. Given that the freight rate hike is lumpy and seasonal

in nature, we believe CV operators can take care of the recent rise in expenses through a single

hike, thereby helping CV demand momentum to continue in FY12E.

Macro indicators do not suggest peaking of the current CV cycle: As per our trend analysis of

growth patterns of industrial GDP, transportation expenditure and private final consumption

expenditure (PFCE), we do not expect peaking of the current CV cycle before FY13E. On the back

of our estimate of a 12% CAGR in road freight in billion-tonne-km (BTKM) during FY11-13E led

by strong capex plans across freight-intensive industries like steel, cement and autos, we

believe the current stagnation in demand is temporary, led by a delay in passing on the hike in

operating costs.

Highway addition set to move up gradually on the base of 2,600km in FY11E: We expect

highway addition to pick up in the next few years against current levels of 2,600km annually,

leading to improved connectivity across major domestic industrial hubs for the road freightindustry. We believe improved road infrastructure and the acceptance of the hub & spoke

model will augur well for higher tonnage CVs along with 1MT GVW small commercial vehicles

(SCV), leading to volume shrinkage in the 7-12MT segment. As per our analysis, profitability of a

16MT+ GVW goods CV is superior to lower-end M&HCVs, justifying an expected

outperformance of the higher GVW CV segments.

Initiate coverage of TTMT and AL with BUY ratings: We initiate on TTMT and AL with BUY

ratings and 12-month PTs of Rs1,453 and Rs87, respectively. We believe the current

underperformance of core CV stocks like AL and Eicher Motors (EICM) in the past three months

led by concerns of rising operational costs for fleet owners is not justified as domestic road

freight demand is strong enough to weather these storms. Given the capex cycle of CV

manufacturers is almost over, we do not see any reason for the companies to trade at a

discount to five-year average valuation multiple levels, especially with free cashflow generation

yet to enter the higher growth phase.

Risks: 1) Spiraling effect of a rise in fuel prices over inflation, in turn higher lending rates leading

to a slowdown in industrial capex, 2) lower rate of annual highway addition on the back of

bottlenecks like land acquisition, 3) an increment al spike in prices in steel and other essential

commodities like aluminum, copper and rubber in the short term would be tough for the

industry to pass on after a series of price hikes based on the transition to BS-3 norms along with

a rise in input prices.

OVERWEIGHT

Basudeb Banerjee

[email protected]

+91 22 3954 1480

Price performance

1M 3M 6M

Tata Motors (5.6) 6.6 52.9

Ashok Leyland (14.2) (18.5) (13.3)

Eicher Motors (6.9) (11.9) 18.8

BSE Sensex (1.5) (5.1) 7.8

BSE Auto index (8.3) (3.6) 14.6

Source: Bloomberg

Coverage summary

Company Ticker Rating LTP (Rs) PT (Rs)

Tata Motors TTMT IN BUY 1,177 1,453

Ashok Leyland AL IN BUY 60 87

Note: Pricing as on 10 January 2011

Source: Quant Global research estimates

India Equity Research I Auto & Auto Ancillaries January 11, 2011 Initiating Coverage

Entering a stable growth phase in the cycle

Commercial vehicle industry

Exhibit 1. Financials and valuation summary

Note: pricing as of 10 January 201 1; Source: Company data, Quant Global research estimates

Company BB Ticker Rating CMP PT

F Y10 F Y11E F Y12E F Y10 F Y11E F Y12E F Y11E F Y12E F Y11E

Ta ta Motors TTMT IN BUY 1,177 1,453 30.6 41.1 35.3 9.8 20.8 21.8 9.9 8.4 6.3

As hok Le yl a nd AL IN BUY 60 87 17.9 21.7 24.2 12.7 18.9 21.8 13.3 9.5 9.0

RoAE (%) RoACE (%) P/E (x) EV/EBITDA

We acknowled e the efforts of Mr. Achint Bha at Mana ement trainee Quant Brokin for his efforts in makin of this re ort



Commercial vehicle industry: Entering a stable growth phase in the cycle

January 11, 2011 2

Table of Contents

Investment summary

Near-term concerns giving opportunities to enter the current CV cycle

Trend analysis of macro indicators do not suggest peaking of CV cycle

Highway addition to move up gradually on base of 2,600km in FY11E

We expect CV demand CAGR of 15.5-16.5% during FY11-13E

Annexure

Company section

Ashok Leyland (AL IN, CMP: Rs60, PT: 87, BUY): Moving up the CV cycle

Tata Motors (TTMT IN, CMP: Rs1,177, PT: Rs1,453, BUY): Diversity exemplified




January 11, 2011 3

Investment summary

Near-term concerns giving opportunities to enter the current CV cyc

We expect a 4-5% freight rate hike in 4Q FY11E

We expect a hike of at least 4-5% in the road freight rate in 4Q FY11E on the back of a rise in cap

costs of CVs and fuel price increases in the past six months. We believe the lack of adequate fre

rate hikes in the past six months has led to a decline in profitability of freight operators, resultin

demand stagnation. Freight rate hikes across major routes are seasonal and lumpy in nature, w

September and January being the months when a majority of the hikes take place. On the back

rise in capital costs from October 2010 on account of the transition to BS-3 norms, we believe

pass on has not happened immediately. Hence, our analysis suggests that a 4-5% hike in the r

freight rate from January 2011 will improve profitability levels, leading to a revival in growth.

Exhibit 2: Lack of any major freight rate hike in the past six months Exhibit 3: Lumpiness and seasonality of a freight rate hike

1,000

1,200

1,400

1,600

1,8002,000

2,200

2,400

2,600

2,800

3,000

0

5

10

15

2025

30

35

40

45

A p r - 0 2

A u g - 0 2

D e c - 0 2

A p r - 0 3

A u g - 0 3

D e c - 0 3

A p r - 0 4

A u g - 0 4

D e c - 0 4

A p r - 0 5

A u g - 0 5

D e c - 0 5

A p r - 0 6

A u g - 0 6

D e c - 0 6

A p r - 0 7

A u g - 0 7

D e c - 0 7

A p r - 0 8

A u g - 0 8

D e c - 0 8

A p r - 0 9

A u g - 0 9

D e c - 0 9

A p r - 1 0

A u g - 1 0

D e c - 1 0

Diesel rates Mumbai (Rs/lt) Mumbai-Delhi freight rate 9T (Rs/MT) (RHS)

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

J a n - 0 4

M a y - 0 4

S e p - 0 4

J a n - 0 5

M a y - 0 5

S e p - 0 5

J a n - 0 6

M a y - 0 6

S e p - 0 6

J a n - 0 7

M a y - 0 7

S e p - 0 7

J a n - 0 8

M a y - 0 8

S e p - 0 8

J a n - 0 9

M a y - 0 9

S e p - 0 9

J a n - 1 0

M a y - 1 0

S e p - 1 0

% change in freight rate

Source: Capitaline, Quant Global Research Source: Capitaline, Quant Global Research

Trend analysis of macro indicators do not suggest peaking of CV cycl

We expect the current cycle to move up until FY13E

On the back of a CAGR of 8.8% in real GDP and a 10-11% in GFCF during FY11-13E as per our qu

Economist Jayprakash Sinha, we believe the current stagnation in volume demand is temporary

by compressed profitability for an extended period of time.

Led by strong capex plans in the freight-intensive sectors like cement, steel and autos, we expe

demand CAGR of 12% in road freight during FY11-13E. Based on our projection of an 18% CAG

the passenger transportation industry in terms of billion-passengers-km (BPKM), we exp

passenger bus demand to grow at a similar pace during FY11-13E. Transportation expenditure in

country has been on an uptrend as % of GDP in the past three years, touching 6% in FY10. With

prospects of GST getting implemented leading to uniformity in taxation across states, industries

no longer need local warehousing, reducing need in fixed asset requirements across sectors.

Exhibit 4: Freight demand set to grow at a CAGR of 12% in FY11-13E Exhibit 5: Transportation expenditure/GDP moving up the cycle

515 545 595646 659

766830 880

985

1123

1258

1409

0

2

4

6

8

10

12

14

16

18

200

400

600

800

1000

1200

1400

1600

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

F Y 1 3 E

Road freight carried (BTKM) Growth (%) (RHS)

4.8

5.1

5.3 5.45.2 5.2

5.1

5.5

5.9

6.26.3

6.4

6.0

5.6

4.0

4.5

5.0

5.5

6.0

6.5

7.0

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

Transportation expenditure/GDP (%)

Source: MORTH, Quant Global Research estimates Source: MORTH, Quant Global Research estimates

We expect a hike of at least 4-5%

n the road freight rate in 4Q

Y11E on the back of a rise inapital costs of CVs and fuel price

ncreases in the past six months




January 10, 2011 4

Exhibit 6: Road-based passenger transportation demand on an uptrend Exhibit 7: Cement demand growth expected to move up after FY11E

24132815 3070

3469 4252

50515961

66317540

8747

10321

12179

4

6

8

10

12

14

16

18

20

22

24

1000

3000

5000

7000

9000

11000

13000

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

F Y 1 3 E

Ro ad t ran sp ort (BPKM) G ro wt h (% ) (R HS )

50

100

150

200

250

300

350

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

Ce me nt despat ch (mn MT) Gr owt h (%)

Source: MORTH, Quant Global Research estimates Source: CMA, Quant Global Research estimates

Highway addition to move up gradually on base of 2,600km in FY11E

We believe the execution of 8km per day is adequate to drive CV demand

Given the annual highway addition of more than 2,500km against sub-2,000km levels until FY08

believe the CV industry will be a prime beneficiary, with an ability to handle higher GVW vehicle

the road. National highways in India constitute only 2% of overall road network but carry aro

40% of total road traffic, according to NHAI. Hence, with around 1% of highway addition annua

we believe the scope for incremental higher-end CV volume demand is immense. On the bac

improving road infrastructure and prospect of GST implementation, we believe localised wareho

will be replaced by centralised hubs with an efficient distribution mechanism, leading to

acceptance of the hub & spoke model. Thus, we expect outperformance to continue for the 16

GVW+ CV and 1MT SCV segments. As a result, growth in CV industry revenue and road fre

demand would be prime indicators of industry growth rather than industry volume growth.

On the back of an estimated 18% CAGR in BPKM, we expect 21% CAGR in the passenger

segment, given improving road connectivity, government initiatives like JNNURM and the need

mass transportation are the major drivers.

Exhibit 8: Highway addition expected to remain above 2,500km pa Exhibit 9: 16MT+ GVW vehicles set to maintain their outperforman

480 391

1318

2351

753635

1682

22052405

26002800

29003000

3100

100

500

900

1300

1700

2100

2500

2900

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

Highway completion (km)

0%

10%

20%

30%

40%

50%

60%

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

7.5-12 12-16.2 16.2-26.4 26.4-35.2 >=35.2

Source: MORTH, Quant Global Research estimates Source: SIAM, Quant Global Research

Exhibit 10: State Transport Undertaking (STU) bus addition trend

City STU CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09E CAGR % (CY00-0

Mumba i BEST 3,269 3,155 3,075 3,074 3,069 3,075 3,081 3,081 3,081 3200 -0

De l hi DTC 4,916 4,330 4,466 2,496 2,905 3,010 3,143 2,814 2,800 3000 -5

Che nna i CHI 2,353 2,314 2,211 2,270 2,251 2,187 2,176 2,087 2,090 2300 -0

Kol ka ta CSTC 814 821 856 800 769 707 659 635 635 700 -1

Ahme da ba d AMTS 752 729 630 410 382 371 545 727 750 800 0

Ba nga l ore BMTC 2,110 2,250 2,446 2,656 3,062 3,533 3,802 3,967 4,000 4100 7

Source: MORTH, Quant Global Research estimates

e expect outperformance to

ntinue for the 16MT GVW+ CV

d 1MT SCV segments




January 10, 2011 5

Exhibit 11: Scope for improvement in usage of CVs with improving roads Exhibit 12: 16MT+ GVW vehicles set to maintain their outperformanc

64 6371 68

73 75

95

110 112

0

20

40

60

80

100

120

C h i n a

H u n g a r y

N i g e r i a

C o l u m b i a

I n d i a

I n d o n e s i a

K e n y a

P a k i s t a n

S o u t h A f r i c a

Average truck usage pa (km, ' 000)

Source: Quant Global Research Source: Quant Global Research

Exhibit 13: Comparative study of operational efficiency of M&HCVs across GVW-based segments

M&HCV operational efficiency comparison 9-T M&HCV 16-T M&HCV 25-T H

Parameters

Ca pi ta l cos t of CV (Rs ) 900,000 1,100,000 1,700,0

LTV (%) 90 90

Inte re s t ra te (%) 14 13

Loa n tenure (ye a rs ) 5 5

Down pa yme nt (Rs ) 90,000 110,000 170,0

Ave ra ge fre i ght ra te (Rs /TKm) 3.2 2.6 2

Ave ra ge di s ta nce pe r tri p (Km) (Mumba i -NCR) 3,000 3,000 3,0

Trips per annu m 70 65

Tonna ge ca rri e d 7 14

Re ve nue pe r a nnum (Rs ) 2,940,000 4,258,800 5,227,2

Fue l e ffici e ncy (Kmpl of di s e l ) (Rs /l t) 7.0 5.0 4

Pri ce of di e s e l (Rs /l t) 42 42

Annual fuel cost (Rs) 2,016,000 2,948,400 3,402,0 Maintenance cost per annum (Rs) 30,000 33,000 35,0

Tyre repla cement cost (Rs) 48,000 98,000 134,4

Manpower cost (Rs) 120,000 180,000 200,0

Ins urance, toll , loadi ng charge, tax etc (Rs) 300,000 360,000 380,0

Total revenue expendi ture (Rs) 2,514,000 3,619,400 4,151,4

EBITDA (Rs) 426,000 639,400 1,075,8

EMI on loa n (Rs) 18,847 22,526 34,0

Interest outgo per annum (Rs ) 226,164 270,312 408,4

Depreciation (as sumi ng 5 yrs life for SLM) 180,000 220,000 340,0

PBT (Rs) 19,836 149,088 327,3

Tax (Rs) 5,951 44,726 98,2

PAT (Rs ) 13,885 104,362 229,1

Cash profit per annu m (Rs) 193,885 324,362 569,1

Pay back period (Yea rs) 4.6 3.4 3

EBITDA margin (%) 14.5 15.0 20

ROCE (%) 27.3 38.1 43

Source: Quant Global Research estimates




January 10, 2011 6

We expect CV demand CAGR of 15.5-16.5% during FY11-13E

We are modeling in a 15.5% volume CAGR in the domestic M&HCV market during FY11-13E an

16.5% volume CAGR in the domestic LCV market during the same period. We expect the dome

goods M&HCV segment to grow at a CAGR of 14.5% along with domestic passenger M&HCV gro

of 20.7% during FY11-13E. In the domestic LCV segment, we expect a CAGR of 16.5% during FY

13E, primarily led by the 1MT SCV segment in the form of brands like ACE and Maxximo.

Exhibit 14: We expect domestic goods M&HCV uptrend in cycle tocontinue until FY13E

-50

-40

-30

-20

-10

0

10

20

30

40

50

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

Domestic goods M&HCV volume M&HCV domestic volume growth (%) (RHS)

Exhibit 15: We expect domestic goods M&HCV market share structuremain stable

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Tata Motors MS (%) Ashok Leyland MS (%) VECV MS (%)

Source: SIAM, Quant Global Research estimates Source: SIAM, Quant Global Research estimates

Both goods and passenger segments to drive M&HCV demand growth

In the domestic goods M&HCV space, we expect TTMT’s market share to stabilise around 60%

66% in FY10, and AL’s around 23% vs 20% in FY10 and VECV’s around 10% vs 8.5% in CY09. In

domestic passenger M&HCV segment, we are modeling in a 44% market share for TTMT, 41% fo

and the rest distributed evenly between Swaraj Mazda and VECV.

Exhibit 16: Domestic passenger M&HCV volume trend

-15

-10

-5

0

5

10

15

20

25

30

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

Dom est ic passenger M&HCV vo lum e G rowth (% ) (RHS)

Exhibit 17: Passenger M&HCV market share to stabilise

0

10

20

30

40

50

60

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

TTMT ALL VECV Swaraj Mazda


LCV demand to grow at a CAGR of 16.5% during FY11-13E

In the domestic LCV space, we expect TTMT to maintain its dominance in the goods and passen

segments with a share of 56% and 48%, respectively, in FY12E, followed by M&M in both segme

We do not expect any major change in market share for Nissan-AL in the domestic LCV ma

before FY13E as we believe the company will take at least a year to establish its credentials

competitive market. Given the dominance of three-wheelers in the lower-end passen

transportation market in India, the LCV market is dominated by the goods segment, contribu

around 88-90% of overall domestic demand.




January 10, 2011 7

Exhibit 18: We expect domestic LCV demand to remain strong Exhibit 19: Goods LCV broader market share structure to remain

unchanged

5

10

15

20

25

30

35

40

50,000

150,000

250,000

350,000

450,000

550,000

650,000

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

D ome st ic LCV vo lume Growt h (%) (RHS)

46.6

52.2 51.6

62.667.6

64.261.1

58.956.5 55.5

34.8 33.336.2

28.2 25.6 26.5 29.232.1

35.5 37.

0

10

20

30

40

50

60

70

80

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

TTMT M&M Force Motors VECV


We believe a majority of capex is over for the CV industry; we expect debt reduction to start of

We believe a majority of capex for the CV industry is over, and, during FY12-13E, we expect

industry to improve capacity utilisation and use operating cashflow to repay debt or increase cchest on books to prepare for the next leg of capex. There is no major capex on the cards for

M&HCV industry currently, except for VECV which is planning to raise capacity to 60,000 against

current 48,000. A 50,000-capacity Uttarakhand plant for AL is already operational, and we exp

almost 65% utilisation in FY12E. In the LCV segment, TTMT is planning a greenfield facility in So

India in the next couple of years to expand ACE family capacity beyond the Pantnagar facility.

Exhibit 20: CV capacity in place to meet demand potential in FY12-13E

64%

75% 72%

94% 95%

61%

70%

88%

93%

40%

50%

60%

70%

80%

90%

100%

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Industry capacity utilisation

Exhibit 21: M&HCV exports set to revive in FY12E

-

10,000

20,000

30,000

40,000

50,000

60,000

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

Ex por ts M& HCV vol ume Gr owth (%) (RHS)

Source: Company data, Quant Global Research estimates Source: SIAM, Quant Global Research estimates




January 10, 2011 8

Annexure

Exhibit 22: CV industry growth/GDP growth trend in the US (x)

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1 9 6 5

1 9 6 7

1 9 6 9

1 9 7 1

1 9 7 3

1 9 7 5

1 9 7 7

1 9 7 9

1 9 8 1

1 9 8 3

1 9 8 5

1 9 8 7

1 9 8 9

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

2 0 0 1

2 0 0 3

2 0 0 5

2 0 0 7

2 0 0 9

US CV sale s change/GDP change Average

Exhibit 23: US CV industry growth/US GFCF growth trend (x)

(3.00)

(2.00)

(1.00)

-

1.00

2.00

3.00

4.00

1 9 6 5

1 9 6 7

1 9 6 9

1 9 7 1

1 9 7 3

1 9 7 5

1 9 7 7

1 9 7 9

1 9 8 1

1 9 8 3

1 9 8 5

1 9 8 7

1 9 8 9

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

2 0 0 1

2 0 0 3

2 0 0 5

2 0 0 7

2 0 0 9

Fi xe d asse t c han ge/C V c hange Ave rage

Source: Bloomberg, Wards Auto Source: : Bloomberg, Wards Auto

Exhibit 24: CV demand trend in US; recovery in process

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8

2 0 1 0 E

2 0 1 2 E

2 0 1 4 E

US CV producti on (mn units)

Exhibit 25: CV demand trend in Western EU

0.00

0.50

1.00

1.50

2.00

2.50

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8

2 0 1 0 E

2 0 1 2 E

Western Europe CV output (mn units)

Source: CRU Source: CRU

Exhibit 26: Chinese CV market defying cyclicality

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8

2 0 1 0 E

2 0 1 2 E

2 0 1 4 E

China CV out put (mn units)

Exhibit 27: GFCF addition trend not disturbed by rise in PLR rates

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

1 Q C Y 0 4

3 Q C Y 0 4

1 Q C Y 0 5

3 Q C Y 0 5

1 Q C Y 0 6

3 Q C Y 0 6

1 Q C Y 0 7

3 Q C Y 0 7

1 Q C Y 0 8

3 Q C Y 0 8

1 Q C Y 0 9

3 Q C Y 0 9

1 Q C Y 1 0

3 Q C Y 1 0

1 Q C Y 1 1

GFCF (Rs mn) P LR HD FC Bank (%) (RHS)

Source: CRU Source: CEIC




January 10, 2011 9

Exhibit 28: Regression analysis of freight rates with diesel rates (y-axis

denotes freight rates and x-axis denotes diesel rates)

y = 0.020x + 1206.

R² = 0.540

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

0 10,000 20,000 30,000 40,000 50,000

Exhibit 29: Road freight industry is improving its share gradually

60.7 60.761.0

61.3

60.0

61.3 61.3

63.0

58.0

59.0

60.0

61.0

62.0

63.0

64.0

65.0

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

% of total frei ght carried on road

Source: Capitaline, Quant Global research Source: Ministry of Railways

Exhibit 30: CV industry revenue trend against transportation expenditure

10.110.8

13.2

14.815.2

17.6

16.6

11.5

12.6

14.1 14.5 14.814

12

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

CV industry revenue/transportation expenditure (%)

Exhibit 31: Goods M&HCV 16.2-26.4 MT GVW category share (%)

-10

0

10

20

30

40

50

60

70

80

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y

1 1 Y T D

Ashok Leyland Eicher Motors Tata Motors Asia Motor Works

Source: CEIC, Company data, Quant Global Research estimates Source: : SIAM, Quant Global Research

Exhibit 32: Margin set to stabilise at current levels; cushioning elements

like improving product mix and excise benefit to prevent

erosion

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

TTMT OPM tre nd (%) AL L OPM tre nd (%)

Exhibit 33: CV demand cycle against industrial GDP trend

3.64.4

5.7

2.5

0.4

3.0

-0.5

-9.5

3.83.3

1.61.8

-0.5 -1.5

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

F Y 1 3 E

F Y 1 4 E

F Y 1 5 E

M&HCV change/Industrial GDP change (x)

Source: Company data, Quant Global Research estimates Source: CEIC, Quant Global Research estimates




January 10, 2011 10

Company Section



Chapter heading (1St heading)

We believe Ashok Leyland (AL), the second-largest CV manufacturer in India, ispoised to benefit from the potential uptick in the CV cycle along with creating new

export opportunities led by a stronger product portfolio. Given the addition of 16-

49MT GVW Unitruck Series CVs powered by 250-380HP engines in the next 12months, ALL is gearing up to improve its market share in the high growth domestic

HCV market (0.11 mn in FY10) along with tapping new developed export markets.

We expect margin to get some cushioning (tax incentives) from the Pantnagarfacility, which will be fully operational from next year, along with the scope for

improvement in economies of scale, thereby partially insulating AL from adverse

input material movements. We expect capex of Rs11.5 bn and investment of Rs9 bn

during FY11-12E to get funded by an operating cashflow of Rs23.4 bn, leading to

contraction in the net debt-to-equity ratio to 0.5x from 0.6x in FY10 by FY12E. We

initiate coverage of AL with a BUY rating and a 12-month price target of Rs87 basedon a core business value of Rs81 at 9.1x FY12E EV/EBITDA and an Rs6 per share

discounted value for investment in JVs/subsidiaries.

Better product mix, new service-related initiatives boost growth: Led by better ROA

for fleet owners and improving road infrastructure, we expect AL to benefit the mostin the high growth 16MT+ segment, especially with the inclusion of the high powerUnitruck Series in its portfolio in second half of FY12E. We expect more than 70% of

volume from the 16MT+ segment against 67% in FY10, leading to a rise in the mix of superior EBITDA per vehicle models. AL’s ability to meet rising competition in the

domestic market while also tapping new export markets would improve its product

portfolio, in our view. We are modeling in a 34% revenue CAGR during FY10-12E.

Higher Pantnagar production, improving economies of scale to cushion OPM: We

expect the Pantnagar facility to contribute around 29% of AL’s production in FY12E.

Thus, after factoring in a 50% localization of input components along with savings in

logistics costs to cater to the North India market from this facility, AL can potentiallycushion its margin by 150-200bp against rising input material prices. Given that we

expect capacity utilisation to reach 77% by FY12E on higher capacity against 54% in

FY10, AL is likely to benefit based on improved economies of scale. We expect AL

operating margin to remain range-bound (10-11%) in FY11-12E. We believe, the fact

the AL was able to raise prices by 6% to pass on the rise in input costs in 3QFY11,

signifies the absorbing power of the market currently along with the acceptability of AL products.

Initiate coverage of AL with a BUY rating and a 12-month price target of Rs87: We

initiate on AL with a BUY rating and a 12-month price target of Rs87 based on our

SOTP valuation. AL has traded at a mean one-year forward EV/EBITDA of 8.3x in thepast five years against a mean ROCE of 20.4%. We assign a target multiple of 9.1x

forward EV/EBITDA (at a 10% premium to the five-year mean of 8.3x) to the core

business to arrive at our price target. We have factored in the investments in

JVs/subsidiaries at 0.75x book.

Key risks: Slowdown in industrial activity leading to lower freight demand, an inabilityof AL to garner incremental market share and a rise in input prices beyond pricing

power and a likely diesel price hike are key risks to the core business and our

estimates.

BUY R

Reuters: ASOK.BO Bloomberg

12-month price target

Basudeb Banerjee

[email protected]

+91 22 3954 1480

Market cap Rs79.9 bn (US$1

52 week high/low: R

Share o/s: 1,3

Share o/s (fully diluted): 1,3

Avg daily trading vol (3m): 4,885

Avg daily trading vol (3m): Rs349 mn (US$7

Quant vs Consensus

PT EPS (FY

Mean 84 5.9

High 105 7.0

Low 49 4.0

Quant 87 6.3

Buy(s) Hold(s) Se

Nos 31 11 0

Source: Bloomberg

Shareholding pattern

Sep10 Jun09 Promoter 38.6 38.6

FIIs 15.1 13.6 MFs/FIs/Banks 31.2 32.9

Others 15.1 14.9

Source: BSE

Relative price performance

Source: Bloomberg

0

10

20

30

40

50

60

70

80

90

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

AL Sensex (RHS)


Moving up the CV cycle

Ashok Leyland

Exhibit 1: AL – financials and valuation summary

Note: pricing as on 10 January 2011; Source: Company data, Quant Global Research estimates

Y/E March EPS ROaE ROaCE PE EV/

(Rs mn) (% growth) (Rs mn) (% growth) (Rs mn) (% growth) (Rs/share) (%) (%) (x)

2009 59,811 (22.6) 4,591 (42.8) 1,932 (59.9) 1.5 8.0 9.2 41.4

2010 72,447 21.1 7,476 62.8 4,117 113.1 3.1 12.7 17.9 19.4

2011E 106,245 46.7 10,925 46.1 6,031 46.5 4.5 18.9 21.7 13.3

2012E 130,183 22.5 14,374 31.6 8,396 39.2 6.3 21.8 24.2 9.5

Net revenue EBITDA Adjusted net income



Ashok Leyland: Moving up the CV cycle

January 10, 2011 12

Investment summary

Opportunity to enter current CV cycle through core CV manufacture

Portfolio to strengthen with the inclusion of 250HP+ Unitruck Series CVs

We believe Ashok Leyland is poised to benefit from the potential uptrend in the CV cycle along w

creating new export opportunities led by a stronger product portfolio. Led by the launch of 16-49

GVW Unitruck Series CVs powered by 250-380HP engines in 2H FY12, AL is gearing up to improve

market share in the high growth domestic HCV market (0.11 mn in FY10) along with tapp

developed export markets. We expect overall volume to reach 92,789 and 109,184, respectively

FY11E and FY12E, against 63,933 in FY10, after factoring in a volume CAGR of 31% during FY10-1

With a richer product portfolio, we expect the company to regain a market share of 23-24% in

domestic goods M&HCV market against the lows of 20% in FY09-10. In our view, based on a ramp

up production capacity of 150,000 vehicles annually, AL is nearing the end of the current capex cy

thereby giving us visibility of lower capex requirement to tap the demand uptrend in the curren

cycle for the next 2-3 years.

AL is set to tap the higher end of the M&HCV market (16MT+ segment) with a better prod

portfolio in the form of Unitruck Series powered by 250HP and Neptune series of engines. T

we expect AL to benefit from the growth opportunity in the 16MT+ GVW models thro

improving highway connectivity and overall road infrastructure along with better profitabilit

truck owners.

We expect AL to regain a market share of 23-24% in the domestic goods M&HCV market, led

a richer product portfolio with the launch of higher power Unitruck Series CVs against the l

of 20% in FY09-10. We are modeling in a 32% volume CAGR during FY10-12E in this segm

with FY12E segmental volume expected to touch 70,863.

In the bus segment, we expect a 21% industry volume CAGR and a 300-bp improvement in A

market share to 41%, resulting in a volume CAGR of 26% for AL during FY10-12E. AL is likel

touch passenger bus volume figure of 25,946 in FY12E against 16,405 in FY10.

On the exports front, we are modeling in a 39% volume CAGR in FY10-12E, with expec

volume of 11,480 in FY12E. We expect higher power-to-weight ratio vehicles through

Unitruck Series to help AL access newer export markets, thereby helping it grow exp

volume.

We expect LCV production from the Nissan-AL JV to start from mid-CY11, using excess capa

at the Hosur plant. AL is planning to launch four models within the 1.25-4.00MT segm

initially and start production from the greenfield facility in Tamil Nadu by FY12-end. We h

not factored in the impact of the JV business into our earnings estimates.

We expect engine sales volume to remain muted led by lower demand from the telecom sec

at around 13,000 in FY12E against 19,000 in FY10.

Exhibit 2: AL – volume set to move up along with CV cycle uptrend Exhibit 3: AL – rising exports volume to add to overall volume grow

54,76961,626

83,059 83,308

54,433

63,933

92,789

109,184

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000100,000

110,000

120,000

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

AL CV volume YoY growth

6,812

4,879

6,025

7,2856,815

5,979

9,566

11,480

-4

-3

-2

-1

0%

10

20

30

40

50

60

70

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Export volume YoY growth


We expect overall volume to reach

2,789 and 109,184, respectively,

n FY11E and FY12E, against 63,933 in FY10, after factoring in a

olume CAGR of 31% during FY10-

2E




January 10, 2011 13

Better product mix visibility via Unitruck Series launch

We are modeling in a 31% volume CAGR during FY10-12E

Given the favorable business dynamics of operating a higher GVW CV, we believe AL is set

improve its product mix toward higher-end trucks. We expect more than 70% of volume to co

from the 16MT+ segment against 67% in FY10. Beyond the EBITDA break-even volume level of

50% of capacity, we believe this segment will deliver superior marginal profitability led by be

pricing power than incumbent players like TTMT and VECV.

Exhibit 4: AL – share of 16MT+ segment on the rise in product mix (%) Exhibit 5: AL – market share on the rise in the 16.0-26.4MT segmen

0

10

20

30

40

50

60

70

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

7.5 - 12 T 12 - 16.2 T 16.2-26.4T 26.4- 35.2T >35.2T

-10

0

10

20

30

40

50

60

70

80

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1

Y T D

Ashok Leyland Eicher Motors Tata Motors Asia Motor Works

Source: SIAM, Quant Global Research estimates Source: SIAM, Quant Global Research

Passenger bus segment an important part of the portfolio contributing around 24% by volume

Demand in the passenger segment is set to grow from the government’s thrust on ur

infrastructure, led by initiatives like the Jawaharlal Nehru National Urban Renewal Mis

(JNNURM) and improving highway connectivity across major towns and cities in the country.

expect the passenger M&HCV domestic market to grow at a CAGR of 20-21% in the next five ye

AL is likely to benefit the most, led by this demand potential, and it is likely to improve its ma

share from 38% in FY10 to 41% by FY12E, thereby growing at a volume CAGR of 26% during the s

period to around 26,000.

In the State Transport Undertakings (STU) space, AL is the market leader with a share of around

50%, and we believe annual increment to STU’s fleet size contributes to around 30-40% of A

passenger M&HCV volume. For private bus operators, who are expanding business ac

new/existing routes from an affordability point of view, capital cost of a higher-end AL bus would

at a ~60% discount over capital cost of a Volvo bus. Hence, we believe value growth proposition

players like AL and TTMT will be higher in the bus segment, primarily due to affordable pri

leading to a greater size of target audience.

Exhibit 6: AL – bus segment volume moves up after FY09 Exhibit 7: AL – M&HCV bus market share dominated by AL and TTMT

(%)

10,506

13,40911,676

17,57516,026 16,405

20,817

25,946

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

5,000

10,000

15,000

20,000

25,000

30,000

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

M& HCV Passe nge r se gment YoY growt h

0

10

20

30

40

50

60

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E






January 10, 2011 14

We expect a CV realisation CAGR of 5.7% during FY10-12E

Blended net realisation/vehicle (NRV) muted led by lower engine volume

Lower volume from the engine business has led to muted growth in the blended realisation

vehicle figure whereas core CV realisation is set to grow at a CAGR of 5.7% during FY10-12E, in

view, led by a series of price hikes to combat incremental costs caused by a rise in input mate

prices and the transition to BS-3 compliant engine. We believe muted growth in the engine busin

was primarily led by demand saturation from the telecom tower sector.

Exhibit 8: AL – NRV growth looks muted due to lower engine volume Exhibit 9: AL – engine volume set to stabilise around current levels

697,641

763,552

851,533863,022

927,777

1,098,796

1,133,1721,145,018

1,192,326

600,000

700,000

800,000

900,000

1,000,000

1,100,000

1,200,000

1,300,000

F Y 0

4

F Y 0

5

F Y 0

6

F Y 0

7

F Y 0

8

F Y 0

9

F Y 1

0

F Y 1 1

E

F Y 1 2

E

Realisation per vehicle (Rs)

6,2547,171

8,202

11,757

21,447

19,050

11,430

12,802

5,000

8,000

11,000

14,000

17,000

20,000

23,000

F Y 0

5

F Y 0

6

F Y 0

7

F Y 0

8

F Y 0

9

F Y 1

0

F Y 1 1

E

F Y 1 2

E

Engine volume

Source: Company data, Quant Global Research estimates Source: Company data, Quant Global Research estimates

Pantnagar production to pick up momentum from FY12

We expect the 50,000-unit Pantnagar assembly facility to help AL improve its market share in No

India along with overall margins. Set up with an investment of around Rs11 bn, the facility is enti

to a 100% excise exemption for the first 10 years (subject to the level of localization) and a 100%

exemption for the first 10 years (and ~30% tax exemption for the subsequent five years).

company is planning to assemble higher-end CVs fitted with the Neptune series engine along w

regular tippers and tractor trailers dedicated for the North India market from this facility. Hence,

expect AL to save in terms of excise duty and logistics costs to the extent of 2.0-2.5% of NRV onaverage after FY11, assuming a steady capacity utilisation level of 80%. Management has guided

an annual tax benefit of Rs1.75 bn after the plant starts running at full capacity, thereby cushion

the bottom line. We expect the Pantnagar facility to contribute around 29% of overall volum

FY12E, with an output of 32,000 against 15,000 in FY11E. We expect operating margin to get a bo

after FY12E, with utilisation levels set to touch over 90%, giving AL the opportunity to t

advantage of the improving economies of scale.

Exhibit 10: AL – The South continues to dominate regional mix; there is

scope for improvement in North India’s market share

Exhibit 11: AL – revenue breakdown business-wise

42%

26%

22%

16%

6%

32%

26% 26%

13%

2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

S o u t h

N o r t h

W e s t

E a s t

C e n t r a l

MS % of AL vol ume

63.5

18.7

0.4 9.0

1.7

6.2

M&HCV goods M&HCV passenger LCV Exports Engines Spare parts

Source: Company data, Quant Global Research Source: Company data, Quant Global Research




January 10, 2011 15

Improving service network, spare parts availability to boost volume

With the gradual improvement of road infrastructure in India led by the highway additio

approximately 2,500km annually in the Golden Quadrilateral and NSEW Corridor (source: NHAI),

availability of superior service network for CV manufacturers would help reduction in vehicle do

time, in our view. Led by an increase in the mix of higher tonnage CVs in the overall CV segment,

believe the reduction in vehicle down-time is a critical factor for profitability as revenue per veh

is increasing with higher GVW. AL has recently introduced the emergency response scheme ca

Tatkal where the company is responding to customer issues within four hours anywhere on Golden Quadrilateral through a dedicated helpline and bringing the off-road vehicle on-road wi

48 hours, or else pay a penalty of Rs1,000 for every day of delay. To date, AL has 180 dealers

along with 150 authorised service centers, and it is increasing the number by 20 dealers annually

Exhibit 12: AL – new initiative to boost service-related customer

satisfaction

Exhibit 13: AL – scope to improve market share beyond 30% led by b

service network, proximity of the Pantnagar plant to the

hub and new CV launches

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

M a y - 0

9

J u n - 0

9

J u l - 0 9

A u g - 0

9

S e p - 0

9

O c t - 0 9

N o v - 0

9

D e c - 0

9

J a n - 1

0

F e b - 1

0

M a r - 1 0

A p r - 1 0

M a y - 1

0

J u n - 1

0

J u l - 1 0

A u g - 1

0

S e p - 1

0

O c t - 1 0

Tata Motors Ashok Leyland Volvo-Eicher CV

Source: Company presentation Source: SIAM

With NHAI projects awarded during FY09-11E expected to touch Rs620 bn, we expect South Indi

receive a Rs200-bn order, thereby boosting AL’s prospects of improving market share, as 32%

volume is from that region. We estimate a net revenue CAGR of 34% during FY10-12 to Rs133 bnFY12, led by a volume CAGR of 31% during the same period.

Exhibit 14: AL – we expect revenue to touch Rs133 bn in FY12E Exhibit 15: AL – higher production from Pantnagar to reduce duty fu

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

20,000

40,000

60,000

80,000

100,000

120,000

140,000

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Ne t re ve nu e (Rs m n) YoY G rowt h(% ) (RHS)

13.3%13.7%

12.0%

13.6%13.1% 13.3%

13.7% 13.5%

10.3%

8.0%8.4%

7.1

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Excise Duty

Source: Company data, Quant global research estimates Source: Company data, Quant global research estimates




January 10, 2011 16

Higher Pantnagar production, improving economies of scale to

stabilise OPM in the range of 10-11%

We expect AL’s operating margin to stabilise in the range of 10-11%, primarily led by the opportu

to improve economies of scale, improving product mix along with increasing production out of

tax-free Pantnagar facility. Although we expect the upside risk to margin to remain capped w

rising input material prices and increasing competition (the entry of Mahindra Navistar , Merce

Benz, higher-end model launches by VECV and TATA Global Truck ), we believe positive driver

improving operating leverage and rising production out of Pantnagar facility are significant enoto cushion AL from any major margin erosion from 10% levels.

We expect production from the Pantnagar facility to touch 32,000 in FY12E, thereby contribu

around 21% of total volume sold. After assuming 50% localisation of input ancillaries, AL can ben

to the extent of 1.5-2.0% of NRV, which broadly turns out to be around Rs15,000-Rs20,000

vehicle. Hence, Rs40,000 cost incurred per vehicle to meet BS-3/4 norms is expected to be mitiga

along with a 6% price hike initiative taken by management effective October 3, 2010 (3% fo

vehicles + 3% additionally for BS-3 vehicles getting upgraded from BS-2).

Exhibit 16: AL – operating margin to get cushion from Pantnagar volume

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

140,000

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

EB ITD A/Ve hi cl e (R s) EB ITD A m ar gi n (RH S)

Exhibit 17: AL – capacity utilisation set to improve further

69.5

78.282.2

101.3 101.6

54.4

63.968.7

72.8

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Capacity ut ilisation (%)


Exhibit 18: AL – operating margin set to stabilise during FY11-12E Exhibit 19: AL – steel price consolidates around US$600/tonne

8.5%7.9%

10.2%

11.3%

9.5%9.7%9.2%

11.5%

6.2%

8.2%

4.8%

9.4%

1.3%

10.5%11.4%

12.9%

10.0%

11.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Q 1 F Y 0 7

Q 2 F Y 0 7

Q 3 F Y 0 7

Q 4 F Y 0 7

Q 1 F Y 0 8

Q 2 F Y 0 8

Q 3 F Y 0 8

Q 4 F Y 0 8

Q 1 F Y 0 9

Q 2 F Y 0 9

Q 3 F Y 0 9

Q 4 F Y 0 9

1 Q F Y 1 0

2 Q F Y 1 0

3 Q F Y 1 0

4 Q F Y 1 0

1 Q F Y 1 1

2 Q F Y 1 1

OPM

200

300

400

500

600

700

800

900

1,000

1,100

J u n - 0

7

S e p - 0

7

D e c - 0

7

M a r - 0 8

J u n - 0

8

S e p - 0

8

D e c - 0

8

M a r - 0 9

J u n - 0

9

S e p - 0

9

D e c - 0

9

M a r - 1 0

J u n - 1

0

S e p - 1

0

China HRC FOB (US$/MT)

Source: Company data, Quant Global Research Source: Bloomberg, Quant Global Research




January 10, 2011 17

Financial analysisWe believe AL is set to benefit in terms of improvement in ROCE during FY10-12E, led by the en

the capex cycle with the growth phase in the CV cycle. A 31% CAGR in CV volume on higher capa

of 150,000 units would lead to an improvement in asset turnover of 2.1x by FY12E against the l

of 1.4-1.6x in FY09-10, as per our analysis. In addition to this, the play on operating leverage and

rise in production from the Pantnagar facility would boost margin from 8-10% levels in FY09-10

10-11% levels in the upcoming quarters, partially cushioning against risks associated with a ris

commodity prices and competition shrinking the pricing power of players. Hence, we expect ovecapital efficiency of AL to reach 22-23% by FY12E against 13% in FY10.

We expect working capital/sales to stabilise around 4% in FY11-12E against a peak of 16% in FY

led by the company shifting to the “cash-and-carry” model with dealers since last year along w

the implementation of efficient inventory management practices.

AL underwent a major shift in its capital structure after it hiked its loan book from Rs9 bn in FY0

Rs19.6 bn in FY09, primarily led by funding requirements for the Pantnagar facility. Post that in FY

FY10, the downturn in the market caused a significant rise in working capital, resulting in anot

round of debt-raising, with debt on book touching Rs22 bn. In FY11-12E, we expect AL to generat

cumulative operating cashflow of Rs23.4 bn against capex and investment plans of Rs20 bn, resu

in a debt repayment cycle getting initiated from FY12 with no major incremental capex requirem

According to management, capex of Rs12 bn in FY11-12 would be invested to set up a new ca

facility for Unitruck Series vehicles, and building up capacity of Neptune series engine along w

product development-related expenses. Under the planned investment of Rs8 bn, we expect A

invest in JVs/subsidiaries like Nissan LCV JV, JV with John-Deere for the construction equipm

business along with investment in subsidiaries like ALTEAMS, Optare and Hinduja Finance.

Exhibit 20: AL – ROCE on an improving trend post the bottoming in FY09 led by the capex cycle coinciding with demand slowdown

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY1

Asset turn (x) 1.5 1.7 2.1 2.1 1.4 1.6 2.1 2

EBIT margin (%) 7.5 7.9 7.7 8.1 4.7 7.5 8.4 9

ROCE (%) 22.5 26.9 28.0 24.5 8.0 12.7 18.9 21

Net debt/equity (x) 0.0 0.0 0.1 0.2 0.8 0.6 0.6 0

ROE (%) 20.5 21.6 24.0 22.4 9.2 17.9 21.7 24

BVPS 9.8 11.9 14.2 16.2 15.8 17.3 20.9 26WC/sales (%) 4.7 4.2 7.1 2.0 15.7 9.1 4.7 4

Source: Company data, Quant Global Research estimates

Exhibit 21: AL – end of the capex cycle to help in debt reduction from

FY12E

Exhibit 22: AL – operating cashflow to comfort debt repayment from

FY12E

-

5,000

10,000

15,000

20,000

25,000

30,000

F Y 0 1

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Cap ex for the year (Rs m n) Net Curen t Assets (R s m n)

Borrowings (Rs mn)

4,581 4,2923,474

11,246

(2,777)

11,139 11,23112,128

(4,000)

(2,000)

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Operating cash flow (Rs mn)


A 31% CAGR in CV volume on

igher capacity of 150,000 units

would lead to an improvement in

asset turnover of 2.1x by FY12E

against the lows of 1.4-1.6x in

Y09-10, as per our analysis




January 10, 2011 18

ValuationWe initiate coverage of AL with a 12-month price target of Rs87 based on our SOTP valuation.

have arrived at our core business value using 9.1x FY12E EV/EBITDA of Rs81 and an Rs6 as per sh

value of investments in JVs and subsidiaries at 0.75x investment book. In the past five years,

company has traded at a mean one-year forward EV/EBITDA of 8.3x against a mean ROCE of 20

Currently, AL is trading near at a significant discount to the five-year mean of 8.3x at around 7x.

by the uptrend in the CV cycle coinciding with the end of capex cycle, we are assigning a tar

multiple of 9.1x one-year forward EV/EBITDA, giving it a premium of 10% over the five-year meAL has traded at a one-year forward mean P/E of 12.3x in the past five years, factoring in a balan

figure for the business across one complete CV cycle. During FY10-12E, we expect an earnings CA

of 43%; hence, at our price target of Rs87, AL would be trading around the five-year mean forw

P/E of 12.3x.

Exhibit 23: AL – trading near the five-year average one-year forward

P/E(x)

Exhibit 24: AL – one-year forward EV/EBITDA (x); debt repayment

cushioning ahead

0

3

6

9

12

15

1821

24

27

30

A p r - 0 5

J u l - 0 5

O c t - 0 5

J a n - 0

6

A p r - 0 6

J u l - 0 6

O c t - 0 6

J a n - 0

7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0

8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0

9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1

0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1

1

2

4

6

8

10

12

14

16

18

A p r - 0 5

J u l - 0 5

O c t - 0 5

J a n - 0

6

A p r - 0 6

J u l - 0 6

O c t - 0 6

J a n - 0

7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0

8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0

9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1

0

A p r - 1 0

J u l - 1 0

O c t - 1 0

Source: Bloomberg, Quant Global Research estimates Source: Bloomberg, Quant Global Research estimates

n the past five years, the

company has traded at a mean

one-year forward EV/EBITDA of

8.3x against a mean ROCE of

20.4%




January 11, 2011 19

Risks

• A sharp rise in input materials incrementally over current cost escalations would lead to

inability to pass on costs, thus hurting margins in turn, although they can be partially prote

by the higher production from the Pantnagar facility.

• Hurdles to road infrastructure development in the form of land acquisition and margin risk

private players to develop road projects.

• Crude making new highs would lead to the preponement of another round of the diesel

hike, which can hurt profitability of the road freight industry again.

• Entry of new players with proven technological expertise in the form of Navistar, Volvo

Daimler can add to the competition in a big way against the current duopolistic goods

market structure.

Company description

Ashok Leyland is a focused commercial vehicle manufacturer with a strong presence in the

segment and is the second largest player in India. The company has recently commenced its

facility at Uttarakhand which would enjoy tax benefits for next 10 years with a capacity of 50,0

taking its overall CV capacity to 150,000. The company has recently introduced a highly sophistica

range of commercial vehicles on the Unitruck platform. Ashok Leyland earns significant revenue f

the sale of engines and spare parts. With the view to expand its product portfolio, the company

entered into joint venture for manufacture and sale of LCV’s and Construction Equipment wNissan and John Deere respectively. Mr. R Seshasayee is the MD of AL with Mr. Sridharan as the C

AL is a Hinduja group promoted entity with Mr. Dheeraj Hinduja as its current chairman.




January 10, 2011 20

Financial summary

Exhibit 25: AL – Financial statements, YE March

Income Statement (Rs mn) 2009 2010 2011E 2012E Balance Sheet (Rs mn) 2009 2010 2011E 201

Net revenue 59,811 72,447 106,245 130,183 Equity capita l 1,330 1,330 1,330 1,3

Expenditure 55,219 64,971 95,320 115,809 Reserves and s urplus 19,688 21,637 26,486 33,3

Raw materials 44,848 52,534 78,533 94,719 Deferred tax l iabi l i ty (net) 2,634 4,611 4,611 4,6

Employee expenses 5,663 6,716 8,712 10,675 Total equity 23,652 27,578 32,427 39,2

Other expenditure 4,708 5,721 8,075 10,415 Secured loans 3,044 7,116 10,116 8,1

EBITDA 4,591 7,476 10,925 14,374 Unsecured loans 16,537 14,923 14,923 14,9

Non-operating income 496 704 250 300 Minority interest — — —

Depreciati on 1,784 2,041 1,989 2,496 Total borrowings 19,581 22,039 25,039 23,0

EBIT 2,807 5,435 8,937 11,878 Current l iabi l i ties 21,369 29,608 33,630 40,6

Net interes t expense 1,187 811 1,648 1,683 Total liabilities 64,603 79,225 91,097 102,9

Adjusted pre-tax profi t 1,620 4,623 7,289 10,195

Unusual or infrequent i tems — — — — Cash 881 5,189 5,714 3,1

Reported pre-tax profit 2,117 5,328 7,539 10,495 Inventory 13,300 16,382 16,010 19,2

Less: taxes 185 1,211 1,508 2,099 Debtors 9,580 10,221 11,061 12,8

Reported net profit 1,932 4,117 6,031 8,396 Other current assets 7,895 9,605 11,597 14,0

Add: extraordinary i tems (post-tax bas i — — — — Total current assets 31,656 41,397 44,382 49,2

Less: minority/associate earnings — — — — Gross block 35,813 46,466 52,966 57,9

Reported net profit for shareholders 1,932 4,117 6,031 8,396 D&A (15,542) (17,691) (19,679) (22,17

Adjusted net profit for shareholders 1,932 4,117 6,031 8,396 Add: capita l work-in-process 9,983 5,615 5,615 5,6

Total fixed assets 30,254 34,390 38,902 41,4

EPS (Rs), based on wtd avg shares 1.5 3.1 4.5 6.3 Investments 2,636 3,262 7,762 12,2

EPS (Rs), based on fully diluted shares 1.5 3.1 4.5 6.3 of which, l iquid investment 169 881 900 1,0

Year-end shares outstanding (mn) 1,330 1,330 1,330 1,330 Other assets — — —

Weighted a verage shares outstanding 1,330 1,330 1,330 1,330 Total assets 64,643 79,100 91,097 102,9

Ful ly di luted shares outstanding (mn) 1,330 1,330 1,330 1,330 Net working capital 15,648 19,163 20,029 19,8

Growth ratio (%) Cash flow statement (Rs mn) 2009 2010 2011E 201

Net revenue (22.6) 21.1 46.7 22.5 Operating cashflow

EBITDA (42.8) 62.8 46.1 31.6 Pre-tax income 2,198 5,480 7,539 10,4

Adjusted net profi t (59.9) 113.1 46.5 39.2 Add: D&A 1,784 2,041 1,989 2,4

Less: interest expense (net) 1,187 811 1,648 1,6

Ratios (%) 2009 2010 2011E 2012E Less: other adjustments — — —

Effective tax rate 8.7 22.7 20 20 Less: taxes pa id -60 — -1,508 -2,0

EBITDA margin 7.7 10.3 10.3 11 Add: working capital changes (7,886) 2,806 1,563 -4

Adjusted net income margin 3.2 5.7 5.7 6.4 Total operating cashflow (3,964) 10,327.30 9,583.00 10,445.

Net debt/equity 0.8 0.6 0.6 0.5

ROaCE 8 12.7 18.9 21.8 Investing cashflow

ROaE 9.2 17.9 21.7 24.2 Capita l expenditure (11,079) (6,285) (6,500) (5,00

Tota l asset turnover ratio (x) 1.4 1.6 2.1 2.1 Investments 3,463 (626) (4,500) (4,50

Inventory turnover ratio (x) 81.2 82.5 55 54 Others — — —

Debtors turnover ratio (x) 58.5 51.5 38 36 Total investing cashflow -7,615 -6,911 -11,000 -9,5

Per share numbers (Rs) 2009 2010 2011E 2012E Financing cashflow

Di luted earnings 1.5 3.1 4.5 6.3 Share issuances — — —

Cash earnings 2.8 4.6 6 8.2 Loans 8,315 1,637 1,837 -3,6

Free cash -11.3 3 2.3 4.1 Less: others (1,556) (1,556) (1,543) (1,54

Book va lue 15.8 17.3 20.9 26.1 Total financing cashflow 6,759 81 294 (5,22

Valuations (x) 2009 2010 2011E 2012E Net change in cash (3,633) 4,308 524 (2,59

Price to di luted earnings 41.4 19.4 13.3 9.5 Opening cash 4,514 881 5,189 5,7

EV/EBITDA 21.5 12.8 9.0 6.9 Add: other adjustments — — —

Price to book 3.8 3.5 2.9 2.3 Closing cash 881 5,189 5,714 3,1

Note: pricing as of 10 January 2011; Source: Company data, Quant Global Research estimates



Chapter heading (1St heading)

We believe Tata Motors (TTMT) is no longer primarily exposed to the cyclicalities of domestic

CV dynamics, as we expect JLR to contribute 56% and 59% of consolidated revenue and

EBITDA in FY12E, respectively. We are modeling in a 24.4% revenue CAGR for JLR during FY10-

12E, led by a 12.5% volume CAGR to 0.25 mn in FY12E. On the domestic CV front, we expect a

16% volume CAGR during FY10-12E to 0.47 mn, with growth led equally by M&HCV and LCV.

We expect the Nano to reach its EBITDA-neutral volume of 0.15 mn in FY12E, contributing 2%

of consolidated revenue of Rs1,350 bn in FY12E. We expect operating margin (OPM) to be

around 12-13% against current levels of 14%, led by the improvement in standalone OPM due

to a rise in ACE and Nano volumes and normalization of JLR OPM to 13%. We expect JLR to

fund its annual capex and product development expenses as long as it operates above 10%

OPM. At our estimated 12.7% consolidated OPM in FY12, we expect the net debt-to-equity

ratio to be lower than 1x. We initiate coverage of TTMT with a BUY rating and a 12-month

price target of Rs1,453 based on our SOTP valuation factoring in 6x, 10x and 12x FY12E

EV/EBITDA of JLR, standalone TTMT and other subsidiaries, respectively.

Global car market reviving; factoring in a 12.5% volume CAGR for JLR during FY10-12E: We are

modeling in a 12.5% volume CAGR for JLR over FY10-12E, led by the recovery in the global PVmarket on the back of improving consumer confidence and a reviving global economy. Led by a

combination of growth and contraction in emerging and developed markets, in the past two

years the global PV market has grown at a CAGR of 1.5%. We expect growth to move up to 4-5%

in 2H of the current cycle, thus benefitting JLR dually, exposing it to higher growth in emerging

markets and the revival of PV demand on low base in developed markets. We believe new

launches in the form of the trimmed version of the Range Rover named Evoque will help JLR

expand its geographical base across high growth markets.

CV cycle in the middle of growth path; ACE and Nano key drivers in LCV and PV segments:

Concerns over rising operating costs of CVs and no freight rate hike in the past six months has

become a serious threat to CV owner profitability in the near term. But, on the basis of strong

macro indicators like a 10% gross fixed capital formation CAGR and strong capex cycle across

major asset-intensive manufacturing industries, we believe the CV cycle is intact. Growthsegments in the form of ACE and Nano is likely to drive margin recovery ahead led by improving

operating leverage.

Strong cashflow to reduce net debt-to-equity ratio to sub 1x; core ROCE to touch 28% in

FY12E: Given a strong operating cashflow generation along with efficient debt management

through dilution, a stake sale in subsidiaries and conversion of convertibles, we believe the net

debt-to-equity ratio to be lower than 1x in FY12E for TTMT. We expect core ROCE to be in the

range of 25-28% during FY11-12E, led by improving margins and capacity utilisation. A stake sale

in subsidiaries like HVTL, HVAL, TMFL and associate like Telcon would further help TMMT to

reduce debt on books in years to come.

Valuation: We initiate coverage of TTMT with a BUY rating and a 12-month PT of Rs1,453 based

on our SOTP valuation, consisting of 10x, 6x and 12x FY12E EV/EBITDA of the standalone

business of TTMT, JLR and other subsidiaries, respectively.

Risks: Unprecedented contraction in global PV demand, an abrupt rise in input costs, a shorter-

than-expected domestic CV cycle, continued lukewarm response to Nano and adverse forex

movements in the form of a stronger GBP against the USD for JLR are key risks to our call.

BUY Rs1,

Reuters: TAMO.BO Bloomberg: T

12-month price target Rs

Basudeb Banerjee

[email protected]

91 22 3954 1480

Market cap Rs732.2 bn (US$1

52 week high/low: Rs1,3

Share o/s:

Share o/s (fully diluted):

Avg daily trading vol (3m): 3,70

Avg daily trading val (3m): Rs4,648 mn (US$102

Quant vs Consensus

PT EPS (FY

Mean 1,474 149.

High 1,774 187.

Low 1,286 120.

Quant 1,453 139.

Buy(s) Hold(s) Se

Nos 42 4

Source: Bloomberg

Shareholding pattern

Sep 10 Jun 10

Promoters 54.2 54.2

FIIs 21.1 22.8 MF/s/FIs/Banks 16.7 16.3

Others 8.0 6.7

Source: BSE

Price movement

500

600

700

800

900

1000

1100

1200

1300

1400

1500

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

TTMT Sensex (RHS)

Source: Bloomberg


Diversity exemplified

Tata Motors

Exhibit 1. TTMT – consolidated financials and valuation summary

Note: Pricing as of 10 January 2011; Source: Company data, Quant Global research estimates

EPS RoACE RoAE P/E EV/E

(Rs mn) Growth(%) (Rs mn) Growth(%) (Rs mn) Growth(%) (Rs/share) (%) (%) (x)

2009 708,810 98.8 18,488 (56.1) (25052) (220.9) (41.0) (2.1) (47.2) (28.7)

2010 925,193 30.5 81,160 339 25,711 (202.6) 41.3 9.8 30.6 28.5

2011E 1,132,136 22.4 147,336 81.5 74,151 188.4 119.2 20.8 41.1 9.9

2012E 1,350,320 19.3 171,005 16.1 86,926 17.2 139.7 21.8 35.3 8.4

Adjusted net incomeRevenue EBITDA



Tata Motors: Diversity exemplified

January 10, 2011 22

Investment summary

Tapping the global village with a diversified portfolio

Benefitting from diversity in terms of products and geographies

We believe the global PV market is set to move up the demand cycle in FY12-13E after languishing at

2% growth levels for the past two years, as growth was primarily driven by emerging markets like In

and China without major participation from developed markets. Given that JLR is expanding its sales b

across new markets along with the planned launch of a trimmed UV Evoque, we believe TTMT is poise

benefit from the next leg of PV demand upsurge.

On the CV front, we believe that with stability in the current CV cycle, TTMT will benefit the most thro

the diversified SCV portfolio under the ACE umbrella along with the 16T-plus HCV portfolio, leading t

overall CV volume CAGR of 16% during FY10-12E. We do not expect the domestic PV business to ad

consolidated earnings in a big way during FY11-12E as revenue contribution of 12-13% would

mitigated by lower margins from newly launched models like Manza and Vista Drivetech due to hi

marketing expenses, along with higher fixed cost from the Sanand plant.

On a consolidated basis, we expect a revenue CAGR of 21% during FY10-12E to Rs1,350 bn, led by a 24

revenue CAGR in JLR. We expect OPM to stabilise in the range of 12-14% in the upcoming quart

leading to a cumulative operating cashflow of Rs285 bn. This should facilitate the reduction in gross d

by Rs65 bn after factoring in cumulative capex of Rs160 bn during FY11-12E. Post the JLR acquisit

TTMT has efficiently managed its debt reduction programme through dilution and a stake salsubsidiaries, and we expect its net debt-to-equity ratio to contract to 0.6x by FY12E against a peak of 5

FY09. We expect an adjusted ROCE on a consolidated basis to improve to 28% in FY12E, after contrac

to 2% in FY09.

We initiate coverage of TTMT with a BUY rating and a 12-month price target of Rs1,453 based on

SOTP valuation using 10x, 6x and 12x FY12E EV/EBITDA of the standalone business of TTMT, JLR and o

subsidiaries, respectively.

Primary drivers of growth for TTMT

The global PV market has grown at a slower pace of sub-2% in the past two years, primarily le

superior growth from emerging markets like India and China, although this was mitigated by

decline in demand in developed markets. Given the demand revival in the developed mar

gradually catching up, in addition to the favourable demographic structure leading to

continuation of a demand surge in the emerging markets, we believe JLR volume is poised to grow

a 10%-plus CAGR during FY11-13E.

We believe strong macro indicators in the form of 9% GDP, a 10-11% gross fixed capital forma

growth and the improvement in highway addition will augur well for domestic CV demand aga

adversities like increasing crude oil rates, higher capital costs of CVs led by the implementation of

3 norms and the threat of rising lending rates. We are modeling in a 15.4% domestic M&HCV ma

volume growth during FY11-13E, with increasing competition led by the entry of new players

Mahindra Navistar , Daimler, Volvo-Eicher and AMW. We do not expect any significant impact of

World Truck launch from TDCV Korea to overall CV sale volume. We are modeling in a market sh

of 57% and 53% in FY12E in the M&HCV and LCV segments, respectively.

We expect a TTMT PV volume CAGR of 31% during FY10-12E to 0.44 mn, primarily led by a rise in

estimated Nano volume of 144,000 in FY12E, along with a 38% volume CAGR for the Indigo, le

the success of the Manza against a muted, estimated CAGR of the Indica at 3%. We expect a 13volume CAGR in the UV segment during FY10-12E, led by a low FY10 base and modest acceptanc

the Safari Dicor . We do not expect the recently launched Aria to be a game-changer for UV segm

growth of TAMO looking at the price proposition disparity with product proposition.

We expect consolidated OPM to stabilise around 12-13%, led by the improvement in standa

margins through rising Nano and ACE volumes, along with the normalization in JLR margin to 13%

by higher input costs. We believe an above 10% OPM of JLR will be in a position to finance its o

capex and product development expenses to the tune of £800 mn in FY12E, thus not constraining

overall debt reduction plan.

We initiate coverage of TTMT with

BUY rating and a 12-month price

arget of Rs1,453 based on our

OTP valuation using 10x, 6x and

2x FY12E EV/EBITDA of thetandalone business of TTMT, JLR

nd other subsidiaries,

espectively




January 10, 2011 23

Modeling in a JLR volume CAGR of 12.5% in FY10-12E

We believe the global PV market, after consolidating at sub-2% growth levels since CY08 led by

recession in developed markets, is recovering gradually and is set to move up the PV cycle in

upcoming years, led by a combination of revival in developed economies and the continuatio

consumption-led demand in emerging markets like India and China. Hence, we expect JLR to gro

a CAGR of 12-15% during FY11-12E by tapping into high growth emerging markets like China,

Middle East and Asia. Through the introduction of a trimmed version of the Range Rover nam

Evoque, JLR is getting prepared to target growth opportunities in emerging markets like the Bnations, after factoring in lower affordability of higher-end vehicles in these markets.

Exhibit 2: Global PV market set for a 4-5% growth opportunity in the

next cycle after bottoming out in 2009

Exhibit 3: Western Europe PV demand expected to recover from CY

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

J a n - 9 3

J a n - 9 4

J a n - 9 5

J a n - 9 6

J a n - 9 7

J a n - 9 8

J a n - 9 9

J a n - 0 0

J a n - 0 1

J a n - 0 2

J a n - 0 3

J a n - 0 4

J a n - 0 5

J a n - 0 6

J a n - 0 7

J a n - 0 8

J a n - 0 9

Worl d PV marke t ('0 00 ) Gro wth (%)

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

14.00

15.00

16.00

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

2 0 0 6

2 0 0 8

2 0 1 0 E

2 0 1 2 E

2 0 1 4 E

Western Europe car output (mn units)

Source: Bloomberg, Quant Global Research Source: CRU

Exhibit 4: TTMT – JLR monthly volume trend intact in the past eight

months despite European economic uncertainties and a

stagnant PV market

Exhibit 5: US PV market on a consolidation mode since April 2009

1626917197

23538

1790919053

2018919386

16220

19528 18845

22957

0

5000

10000

15000

20000

25000

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

Jaguar Land Rove r To tal

500,000

700,000

900,000

1,100,000

1,300,000

1,500,000

A p r - 0 8

J u n - 0 8

A u g - 0 8

O c t - 0 8

D e c - 0 8

F e b - 0 9

A p r - 0 9

J u n - 0 9

A u g - 0 9

O c t - 0 9

D e c - 0 9

F e b - 1 0

A p r - 1 0

J u n - 1 0

A u g - 1 0

US PV volume

Source: Company data, Quant Global Research Source: Ward’s Auto Data

From a geographic sales breakdown perspective for JLR in FY12E, the UK will contribute around

30% of total sales, followed by Europe and North America at 20% and 25%, respectively. High gro

markets like China (~12%), Russia (~5%) and the rest of the world combined will contribute aro

~12%, partially insulating JLR against economic uncertainties in developed economies. Net realisa

value per vehicle (NRV) for JLR has improved in the past five quarters, led by an improving prod

mix through the addition of the Jaguar XJ (2,000 per month and favourable currency moveme

along with the reduction in discounts at the wholesale level). We are modeling in a 12.5% volu

CAGR and a 24% revenue CAGR during FY10-12E, leading to a volume estimate of 245,521 units

a revenue estimate of Rs767.5 bn in FY12E.




January 10, 2011 24

Exhibit 6: TTMT – much scope left to retest peak volume of CY07 Exhibit 7: TTMT – JLR geographic retail volume breakdown for FY12

skewness toward the EU set to reduce

108489

8674471006

5589067394

54,100 60,000 66,000

163329

187870 192108

232654

163495154,100

167,334179,521

20,000

70,000

120,000

170,000

220,000

270,000

C Y 0 4

C Y 0 5

C Y 0 6

C Y 0 7

C Y 0 8

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Jaguar Land Rover

20%

25%

25%

6%

13%

12%

North America UK Europe ( Excldg Russia) Russia China Rest of World

Source: Company data, Quant Global research estimates Source: Quant Global research estimates

Exhibit 8: TTMT – NRV moving up for five consecutive quarters, led by

an improving product mix and favourable currency

movements

Exhibit 9: TTMT – weakening GBP against the USD helped NRV to m

up further

31,33732,054

34,586

35,884

38,209

40,759

30,000

32,000

34,000

36,000

38,000

40,000

42,000

1 Q F Y 1 0

2 Q F Y 1 0

3 Q F Y 1 0

4 Q F Y 1 0

1 Q F Y 1 1

2 Q F Y 1 1

Net realisation per vehicle (NRV)(GBP)

1.30

1.35

1.40

1.45

1.50

1.55

1.60

1.65

1.70

1.75

A p r - 0 9

M a y - 0 9

J u n - 0 9

J u l - 0 9

A u g - 0 9

S e p - 0 9

O c t - 0 9

N o v - 0 9

D e c - 0 9

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

GBP-US$

Source: Company data, Quant Global Research Source: Bloomberg, Quant Global Research

Exhibit 10: TTMT – revival in US consumer confidence to drive demand

growth

Exhibit 11: TTMT – we expect JLR revenue to cross £10 bn in FY12E

40

50

60

70

80

90

100

110

N o v - 7 9

N o v - 8 0

N o v - 8 1

N o v - 8 2

N o v - 8 3

N o v - 8 4

N o v - 8 5

N o v - 8 6

N o v - 8 7

N o v - 8 8

N o v - 8 9

N o v - 9 0

N o v - 9 1

N o v - 9 2

N o v - 9 3

N o v - 9 4

N o v - 9 5

N o v - 9 6

N o v - 9 7

N o v - 9 8

N o v - 9 9

N o v - 0 0

N o v - 0 1

N o v - 0 2

N o v - 0 3

N o v - 0 4

N o v - 0 5

N o v - 0 6

N o v - 0 7

N o v - 0 8

N o v - 0 9

N o v - 1 0

US Consumer confidence index

70477468

4974

6,554

9,139

10,660

2,000

4,000

6,000

8,000

10,000

12,000

C Y 0 6

C Y 0 7

F Y 0 9 ( 1 0 m o n t h s )

F Y 1 0

F Y 1 1 E

F Y 1 2 E

JLR reven ue (GBP mn)

Source: Bloomberg, Quant Global Research Note: Change in accounting period from FY10; Source: Company data, Quant research estim




January 10, 2011 25

Domestic CV cycle on the growth path

M&HCV revenue to grow at a CAGR of 23% to Rs243 bn by FY12E

We believe TTMT is poised to become one of the prime gainers from the current uptrend in

domestic CV cycle, with proven leadership across product segments starting from 16MT GVW

above HCV segments to the SCV segment in the form of the ACE family. Led by rising competi

across segments in the domestic CV market through the entry of new players like Mahindra Navis

Daimler and Volvo-Eicher, we expect the market share in the domestic goods M&HCV market

TTMT to stabilise around 60%, from FY10 levels of 66%, leading to volume of 0.19 mn in FY12E.

Exhibit 12: TTMT – domestic goods M&HCV market share trend

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Tata Motors MS (%) Ashok Leyland MS (%) VECV MS (%)

Exhibit 13: TTMT – we expect goods M&HCV segment to grow at a C

of 18% during FY10-12E

48216

63849

90789

115950 116354

159630149099

98990

133036

165926

1848

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

TTMT domestic goods M&HCV volume


Exhibit 14: TTMT – stable market share in the bus segment (%)

0

10

20

30

40

50

60

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E


Exhibit 15: TTMT – average GRV has grown at a CAGR of 7.4% in the

five years

623,438

673,091712,536

797,904

860,603902,087

960,058

1,028,5251,074,

500,000

600,000

700,000

800,000

900,000

1,000,000

1,100,000

1,200,000

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Average reali sation M&HCV (Rs)

Source: SIAM, Quant Global Research estimates Source: SIAM, Company data, Quant Global Research estimates

From the above exhibit, we analyse that in the past five years TTMT has been able to grow its grealisation per vehicle at a CAGR of 7.4% i.e. above inflationary rates, signifying the grad

improvement in product mix toward higher tonnage CVs along with strong pricing power. Given

higher tonnage trucks will be the order of the day with improving road infrastructure, we bel

revenue CAGR in the M&HCV segment for TTMT will be the key parameter to watch for rather t

volume CAGR.

Growth segments in the form of

ACE and Nano are likely to be key

drivers in LCV and PV segments




January 10, 2011 26

ACE to expand TTMT base in the LCV market across new segments

Market share under threat with new entrants flooding the market

In the LCV segment, we expect a 15.3% volume CAGR for TTMT, led by 17% domestic SCV ma

growth during FY10-12E. We believe, TTMT is set to expand its base in the domestic SCV ma

through a portfolio of six models within the next two quarters, with three each in the passenger

goods segments. In the passenger segment, TTMT would have a SCV portfolio in the form of 1

Venture, 0.75MT Magic and 0.5MT Magic Iris and 1MT Super ACE , 0.75MT ACE and 0.5MT Zip on

goods SCV side. Currently, TTMT is manufacturing SCVs from the 0.225-mn capacity Uttaranplant from where it has plans to expand capacity to 0.4 mn by FY12-end. In addition to this, TTM

planning a greenfield SCV facility in South India by FY14 to cater to potential demand from

segment. We believe replacement demand for ACE will start from FY12-13, assuming the average

of an ACE is around 5-7 years, thus adding to demand potential. We expect TTMT’s market shar

the domestic LCV segment to decline to 53% by FY12E against 60% levels until FY10, led by the e

of new players in the form of M&M and Nissan-Ashok Leyland.

Exhibit 16: TTMT – post launch of the ACE, TTMT is redefining the LCV

space

Exhibit 17: TTMT – post the portfolio restructuring in the LCV segme

steady rise in GRV signifies strong pricing power in this

segment for TTMT

55,094

74,112

108,119

149,263

173,434

137,244

184,505

213,124

245,103

50,000

100,000

150,000

200,000

250,000

300,000

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

LCV volume

396,734404,364

388,137

363,181371,285

392,350

405,181

425,828

437,8

300,000

320,000

340,000

360,000

380,000

400,000

420,000

440,000

460,000

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Avg. GRV LCV (Rs)

Source: Company data, Quant Global research estimates Source: Company data, Quant Global research estimates

Exhibit 18: TTMT – market share to stabilise ~55% in FY12E versus peers

(%)

Exhibit 19: TTMT – revenue trend in the LCV segment

46.6

52.2 51.6

62.667.6

64.261.1

58.956.5 55.5

34.8 33.336.2

28.2 25.6 26.5 29.232.1

35.5 37.0

0

10

20

30

40

50

60

70

80

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

TAMO M&M Force Motors VECV

21,859

29,971

41,797

54,196

64,393

47,342

74,758

90,754

107,3

10,000

30,000

50,000

70,000

90,000

110,000

130,000

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

LCV revenue (Rs mn)

Source: Company data, Quant Global research estimates Source: Company data, Quant Global research estimates

ACE to expand TTMT base in the

CV market across new segments




January 10, 2011 27

Nano expectation from the PV segment

We expect a 14.3% volume CAGR for TTMT in the PC (ex-Nano) segment between FY10-

primarily led by the success of the Manza. Led by rising competition in the domestic PC market w

a plethora of new launches, we expect TTMT to suffer the most among the larger incumbent play

in the Indica and the Indigo segments. We expect volume CAGR in the Indica segment to shrin

3% during FY10-12E, leading to almost a 300-bp erosion in market share to 7-8%. After the in

success of the Manza, we believe, led by the entry of sedans in the form of Volkswagen’s Vento

the recently launched Toyota Etios, TTMT can see major erosion in its share from current 20% levWe expect Nano volume to reach the crucial EBITDA breakeven of 60% utilisation level of 0.14 m

FY12E, likely leading to a monthly volume of 12,000.

In the UV segment, we are modeling in a 13% volume CAGR with an estimated FY12E volume

46,600 along with a stable market share of around 14%, against the peak level market share of

22% pre-FY08. Overall, we estimate the PC segment revenue CAGR of 29% during FY10-12 to Rs

bn, led by the Manza and Nano. We also expect the UV segment to grow at a revenue CAGR of

during FY10-12E to Rs26 bn by FY12E.

Exhibit 20: TTMT – overall PC (ex-Nano) market share set to erode

further

50.9%46.7% 46.6% 45.8% 46.0% 46.1% 46.0% 46.5%

44.7% 44.5%42.7%

13.3% 14.8% 15.5% 16.8% 16.5% 16.4%14.7% 14.9% 14.6% 13.3% 12.7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

MSIL (%) H yundai (%) Tata Motors (ex-Nano) (%)

Exhibit 21: TTMT’s A2 segment market share trend is not encouragin

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

A p r - 0 8

J u n - 0 8

A u g - 0 8

O c t - 0 8

D e c - 0 8

F e b - 0 9

A p r - 0 9

J u n - 0 9

A u g - 0 9

O c t - 0 9

D e c - 0 9

F e b - 1 0

A p r - 1 0

J u n - 1 0

A u g - 1 0

MSIL (%) Hyundai(%) Tata Motors (%)

Source: SIAM, Quant Global Research estimates Source: SIAM, Quant Global Research

Exhibit 22: TTMT – after the initial success of the Manza, TTMT market

share in the A3 segment is under threat

0.0

5.010.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

A p r - 0 8

J u n - 0 8

A u g - 0 8

O c t - 0 8

D e c - 0 8

F e b - 0 9

A p r - 0 9

J u n - 0 9

A u g - 0 9

O c t - 0 9

D e c - 0 9

F e b - 1 0

A p r - 1 0

J u n - 1 0

A u g - 1 0

O c t - 1 0

MSIL (%) Tata Motors (%) Hyundai(%)

Exhibit 23: TTMT – lack of competitive products in the growing UV

segment is leading to continued erosion in TTMT’s marke

share

23.8%

21.9% 21.5%

19.2% 19.3%

21.7%

20.2%

18.5%

12.7%

14.4% 14.

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

TTMT UV market share (%)

Source: SIAM, Quant Global Research Source: SIAM, Quant Global Research estimates

We expect Nano volume to reach

he crucial EBITDA breakeven of

0% utilisation level of 0.14 mn in

Y12E, likely leading to a monthly

olume of 12,000




January 10, 2011 28

Exhibit 24: TTMT – Nano: we do not expect it to turn cash profit positive before FY14E, but the extent of loss is set to become small by FY13E

Year (Rs mn) FY10E FY11E FY12E FY13E FY14E FY1

Monthly sa le s 2,528 5,250 12,000 15,000 18,000 20,70

Growth 108% 129% 25% 20% 1

Annual sales volume 30,341 63,000 144,000 180,000 216,000 248,40

NRV (Rs.) 142,000 152,000 162,640 174,025 186,207 199,24

Realization growth 7% 7% 7% 7%

Net Sales 4,308 9,576 23,420 31,324 40,221 49,49

Raw material cost 3,188 6,895 16,394 21,301 27,350 33,65

% of Net Sales 74% 72% 70% 68% 68% 6

Employee Cost 65 134 304 376 442 49

% of Net Sales 1.5% 1.4% 1.3% 1.2% 1.1% 1.

Other expenditure 12,780 12,160 11,385 10,441 11,172 11,95

% of Net Sales 9.0% 8.0% 7.0% 6.0% 6.0% 6.

EBITDA (11,724) (9,613) (4,663) (794) 1,256 3,38

EBITDA margin NA -100.4% -19.9% -2.5% 3.1% 6.

Less: Interest Exp 600 600 600 600 570 5

Cost of borrowing 6.0% 6.0% 6.0% 6.0% 6.0% 6.

Depreciation 1,080 1,080 1,080 1,080 1,080 1,08

PBT (13,404) (11,293) (6,343) (2,474) (394) 1,79

PAT (13,404) (11,293) (6,343) (2,474) (394) 1,79

Accumulated PAT (13,404) (24,697) (31,040) (33,514) (33,908) (32,11

Cash profit (12,324) (10,213) (5,263) (1,394) 686 2,87

Period - 1 2 3 4

Source: Company data, Quant Global research estimates

xhibit 25: TTMT – key assumptions of the Nano project

Key Assumptions

Project cost (US$ mn) 435

Re/$ 46.0

Project cost (Rs m) 20,000

Debt/equity 50.0%

Cost of debt 6.00%

Cost of equity 12.0%

BIDTA margin 7.0%

Depreciation/GB (x) 6.0%

Retai l price of car (Rs) 175,000

Exhibit 26: TTMT – we expect EVA-neutral volume only by FY16E

Key Assumptions (Rs

A.Required EBIT (Project cost*Target ROIC) 1

B.Depreciation ( 6%*Gross block) 1

Required EBITDA (A+B) 2

Assumed EBITDA margin

Net Sales 41

NRV (0.85*retail price) (Rs) 148

Required annual sales of Nano to become EVA neutral 276

Monthly sales required 23

ource: Quant Global Research estimates Source: Quant Global Research estimates

As per our analysis on the Nano, we do not expect it to turn cash profit positive before FY14E

expect it to turn EVA-neutral only by FY16E. But, on the other side, the magnitude of expected lo

to the consolidated book is not enough to affect overall fundamentals, prime movers of the ove

bottomline being JLR and the CV business.




January 10, 2011 29

Consolidated revenue to grow at a CAGR of 20% during FY10-12E

On a consolidated basis, we expect a revenue CAGR of 20% to Rs1,350 bn in FY12E, led by JLR

the domestic CV business. We do not expect the Nano to contribute more than 1.5-2.0%

consolidated revenue, thus confirming negligible impact on TTMT revenue due to product des

related issues. On a broader basis, given the global PV market is set to move up the demand cy

led by a gradual revival in developed economies and JLR contributing almost 55% of TTM

consolidated revenue, we believe JLR will be the prime driver of revenue growth.

xhibit 27: TTMT – consolidated revenue set to undergo 20% CAGR over

FY10-12E

77,570

194,401

320,996

708,810

925,193

1,132,136

1,350,320

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Net Sales (Rs mn)

Exhibit 28: TTMT – JLR to constitute 55% of revenue in FY12E; Nano i

barely 2%

55%

17%

8%

7%

2%

2% 2%

7%

JLR M&HCV LCV PC (ex-Nano) Nano UV MPVs Other subsidiaries

ource: Company data, Quant Global Research estimates Source: Quant Global Research estimates

xhibit 29: TTMT –Other subsidiary revenue set to grow at a CAGR of 13%

between FY10-12E

76,760

70,020

75,752

85,600

97,108

50,000

55,000

60,000

65,000

70,000

75,000

80,000

85,000

90,000

95,000

100,000

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Other subsidiary revenue (Rs mn)

Exhibit 30: TTMT – standalone revenue to be primarily driven by the

business

75,027

128,797

206,535

274,443256,297

355,931

403,163

485,7

0

100,000

200,000

300,000

400,000

500,000

600,000

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F Y 1 1 E

F Y 1 2 E

Standalone revenue (Rs mn)

ource: Company data, Quant Global Research estimates Source: Company data, Quant Global Research estimates




January 10, 2011 30

We expect OPM to stabilise around 12-13% We believe the current level of 14% consolidated margin reported by TTMT in the past two quar

is not sustainable in the longer run and should stabilise 100-150bp lower around 13% in

upcoming quarters. As per management, annual renewal of input material contracts for JLR ta

place in 3Q of the fiscal, signifying higher input costs from the upcoming quarters, as input metal

rubber prices have increased significantly in the past 12 months. Moreover, favourable fo

movements in the past couple of quarters contributed an additional 200-250bp to JLR’s margin,

by the GBP weakening against the USD (40% of revenue as exports in USD terms) and the eweakening against the GBP (net 20% of revenue importer in euro terms), which may not sustain

the positive side, although Evoque is strategically targeted for emerging markets with lo

consumer affordability, management would price it in accordance to maintain its EBITDA margi

line with the rest of the portfolio, thus driving operating profit on an absolute level.

On the domestic front, we believe lower volume from the Sanand plant, which manufactures

Nano, will act as a negative catalyst to standalone operating margin, as capacity utilisation in

250,000-unit facility is expected to reach EBITDA-neutral levels of 60% only by FY12-end. On

positive side, we expect a 15% demand CAGR in the higher margin ACE family with increme

production coming out of excise-free Uttaranchal facility to cushion standalone margin.

xhibit 31: TTMT – consolidated operating margin to stabilise around

12-13%

6.2%

12.7%

13.7%

12.0% 12.1%11.5% 11.8%

2.6%

8.8%

13.0% 12.7%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

F Y 0 2

F Y 0 3

F Y 0 4

F Y 0 5

F Y 0 6

F Y 0 7

F Y 0 8

F Y 0 9

F Y 1 0

F

Y 1 1 E

F

Y 1 2 E

Conso. EBITDA Margin (%)

Exhibit 32: TTMT – JLR operating margin making new highs; we expe

to stabilise in the range of 13-14% vs 16% plus currently

-3.1%

2.9%

9.8%

11.4%

15.5%16.6%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

1 Q

F Y 1 0

2 Q

F Y 1 0

3 Q

F Y 1 0

4 Q

F Y 1 0

1 Q

F Y 1 1

2 Q

F Y 1 1

JLR OPM (%)

ource: Company data, Quant Global Research estimates Source: Company data, Quant Global Research

xhibit 33: TTMT – stronger USD to cushion JLR margin in 2H FY11

1.2

1.3

1.4

1.5

1.6

1.7

1.8

J a n - 0 9

F e b - 0 9

M a r - 0 9

A p r - 0 9

M a y - 0 9

J u n - 0 9

J u l - 0 9

A u g - 0 9

S e p - 0 9

O c t - 0 9

N o v - 0 9

D e c - 0 9

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

Exhibit 34: TTMT – the euro weakening against the GBP to help JLR

maintain superior margins against rising material costs

0.70

0.75

0.80

0.85

0.90

0.95

1.00

J a n - 0 9

F e b - 0 9

M a r - 0 9

A p r - 0 9

M a y - 0 9

J u n - 0 9

J u l - 0 9

A u g - 0 9

S e p - 0 9

O c t - 0 9

N o v - 0 9

D e c - 0 9

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

ource: Bloomberg, Quant Global Research Source: Bloomberg, Quant Global Research

We believe the current level of

4% consolidated margin reported

y TTMT in the past two quarters

not sustainable in the longer run

nd should stabilise 100-150bp

ower around 13% in the

pcoming quarters




January 10, 2011 31

xhibit 35: TTMT – stable steel rates (US$/tonne)in the past 12 months,

factoring in a 2,500bp rise in RM/sales due to the renewal of

RM contracts from September

400

450

500

550

600

650

700

750

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

Exhibit 36: TTMT – rubber prices (Rs/quintal) making new highs led b

unseasonal rains

5000

7000

9000

11000

13000

15000

17000

19000

21000

23000

J a n - 0 9

F e b - 0 9

M a r - 0 9

A p r - 0 9

M a y - 0 9

J u n - 0 9

J u l - 0 9

A u g - 0 9

S e p - 0 9

O c t - 0 9

N o v - 0 9

D e c - 0 9

J a n - 1 0

F e b - 1 0

M a r - 1 0

A p r - 1 0

M a y - 1 0

J u n - 1 0

J u l - 1 0

A u g - 1 0

S e p - 1 0

O c t - 1 0

N o v - 1 0

D e c - 1 0

ource: Bloomberg, Quant Global Research Source: Bloomberg, Quant Global Research

xhibit 37: TTMT – capacity utilisation set to improve on standalone book,

led by the gradual improvement in Nano volume from Sanandfacility

85% 86%

75%

57%

49%

56%

63%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

F

Y 0 6

F

Y 0 7

F

Y 0 8

F

Y 0 9

F

Y 1 0

F Y

1 1 E

F Y

1 2 E

Capacity utilisation standalone

Exhibit 38: TTMT – standalone margin set to improve on the basis of

price hikes and a rise in Nano volume in FY12E

8.7% 8.9%

11.1%

8.6%

7.5%8.0%

1.6%

0.5%

11.2%

13.2%12.6%

9.3%

11.1%

9

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Q 1 F Y 0 8

Q 2 F Y 0 8

Q 3 F Y 0 8

Q 4 F Y 0 8

Q 1 F Y 0 9

Q 2 F Y 0 9

Q 3 F Y 0 9

Q 4 F Y 0 9

1 Q

F Y 1 0

2 Q

F Y 1 0

3 Q

F Y 1 0

4 Q

F Y 1 0

1 Q

F Y 1 1

Standalone operating margin

ource: Company data, Quant Global Research estimates Source: Bloomberg, Quant Global Research

xhibit 39: TTMT – staff cost at the consolidated level declining

significantly after trimming manpower at JLR; Other expenses

also reducing

8% 8% 8%7%

13%11%

9%7% 8% 8%

11%12% 11%

13%

22%

21%

13%

17%

15% 14%

0%

5%

10%

15%

20%

25%

1 Q F Y 0 9

2 Q F Y 0 9

3 Q F Y 0 9

4 Q F Y 0 9

1 Q F Y 1 0

2 Q F Y 1 0

3 Q F Y 1 0

4 Q F Y 1 0

1 Q F Y 1 1

2 Q F Y 1 1

Staff cost/Sales Other expenditure/sales

Exhibit 40: TTMT – gross profit per vehicle at JLR level on an uptrend

22,674 22,28023,598 22,778 23,530

25,376

31,337 32,054

34,58635,884

38,209

8,6639,774

10,98813,106

14,679 15,

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1 Q F Y 1 0

2 Q F Y 1 0

3 Q F Y 1 0

4 Q F Y 1 0

1 Q F Y 1 1

2 Q F Y 1 1

Raw material per vehicle (GBP) NRV (GBP) Gross profit per vehicle (GBP)

ource: Company data, Quant Global Research Source: Bloomberg, Quant Global Research




January 10, 2011 32

Financial analysis

We expect JLR’s operating margin to contract to 13-14% levels against the current 16%-plus le

with a simultaneous recovery in standalone margin from 10.3% in FY11E to 11.5% in FY12E, led

the rise in Sanand plant capacity utlisation. We estimate a cumulative operating cashflow genera

of Rs275 bn during FY11-12E, which we believe is enough to finance capex requirements of Rs160

and for partial debt repayment by Rs65 bn, taking the consolidated net debt-to-equity ratio to

by FY12E. We believe selling stakes in subsidiaries like Tata Motors Finance (TMFL) and Telcon

raising funds through IPOs of HVTL and HVAL can lead to lower net debt position for TTMT, whichhave not factored in into our estimates.

We believe the operating margin level of JLR is the crucial factor for the cashflow generating ab

on a consolidated level for TTMT. As per our analysis, operating margin of around 10-11% is

threshold level for the JLR business to finance its own capex requirement of £800 mn in FY12E a

factoring in volume of 0.25 mn units. Thus, we believe with an estimated operating margin of 13

in FY12E, JLR will be contributing to the debt repayment programme on a consolidated basis.

Exhibit 41: TTMT – balance sheet health set to improve with cashflow generation and led by the revival in JLR

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Asset turn (x) 1.6 1.7 1.9 1.8 2.4 2.5 2.5 2.3

EBIT margin (%) 9.3 9.4 9.4 9.6 -0.9 4.6 9.0 8.7

ROCE (%) 26.3 24.5 22.8 18.1 -2.1 9.8 20.8 21.8

Core ROCE (%) 38.4 27.9 21.6 20.3 -1.8 11.9 25.8 28.3ROE (%) 31.6 28.2 27.7 23.8 -47.2 30.6 41.1 35.3

BVPS 113.8 152.2 189.6 169.2 86.8 135.0 290.1 395.3

WC/sa les (%) -6% 8% 18% 5% -5% -9% -7% -7%


Exhibit 42: TTMT – debt to reduce gradually after peaking in FY09-10 post the JLR acquisition; the net debt-to-equity ratio to fall below 1x by FY1

(Rs mn) FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Gross debt 27,142 33,791 73,019 115,849 349,739 351,924 336,924 286,924

Net interes t outgo 1,697 2,460 4,058 7,431 19,309 22,397 20,000 18,092

Operating cash flow 21,547 2,879 876 74,338 42,497 101,209 121,235 163,804

Net debt/equity (x) (0.1) 0.1 0.6 0.7 5.0 2.7 1.0 0.6


Exhibit 43: TTMT – we expect dilution in equity capital to Rs6.22 bn until FY11E; further 3-4% potential dilution in FY12E from existing convertible

Conversion Instrument Amount Currency Rs mn Conversion Shares on %

Oct-09 GDS 375 USD 17,663 591 29.9 100%

Mar-10 0% FCCN* 11,760 JPY 4,500 533 7.8 93%

Mar-10 1% FCCN* 300 USD 13,155 533 18.8 76%

Oct-10 QIP 200 USD 8,936 1,074 8.3 100%

Nov-10 QIP (DVR) 550 USD 24,574 764 32.2 100%

Dec-10 FCCN* 375 USD 17,663 613 28.8 40%

Jul -12 0% CARS 490 USD 19,927 908 21.9 0%

Note: *marked instruments can lead to incremental dilution in FY12E, which we are not factoring in now in our est imates; Source: Company data, Quant Global Research estimates

Exhibit 44: TTMT – JLR to contribute almost 60% of operating profit by FY12E

Gross revenue (Rs mn) FY08E FY09E FY10E FY11E FY12E % FY08E FY09E FY10E FY11E FY

M&HCV 154,863 111,585 160,583 203,887 242,821 M&HCV 38.4 15.4 17.2 17.5 17

LCV 64,393 47,342 74,758 90,754 107,317 LCV 16.0 6.5 8.0 7.8 7

PC 58,594 68,984 86,914 114,323 144,187 PC 14.5 9.5 9.3 9.8 10 UV 24,138 21,753 18,239 22,518 25,888 UV 6.0 3.0 1.9 1.9 1

JLR 405,336 496,334 643,373 767,486 JLR - 55.9 53.0 55.1 55

Others 101,419 70,020 99,283 92,295 104,383 Others 25.1 9.7 10.6 7.9 7

Total 403,408 725,021 936,112 1,167,150 1,392,082 Total 100.0 100.0 100.0 100.0 100

Operating profit (Rs mn) FY08E FY09E FY10E FY11E FY12E % FY08E FY09E FY10E FY11E FY

M&HCV 18,584 8,369 20,394 21,726 29,139 M&HCV 44.2 45.3 25.1 14.7 17

LCV 6,761 4,355 10,092 10,890 13,415 LCV 16.1 23.6 12.4 7.4 7

PC 4,981 4,829 8,691 8,003 11,535 PC 11.8 26.1 10.7 5.4 6

UV 2,127 1,740 2,189 1,801 2,589 UV 5.1 9.4 2.7 1.2 1

JLR - (3,047) 32,715 93,721 100,580 JLR - (16.5) 40.3 63.6 58

Others 9,620 2,240 7,106 11,194 13,746 Others 22.9 12.1 8.8 7.6 8

Total 42,073 18,488 81,160 147,336 171,005 Total 100.0 100.0 100.0 100.0 100


As per our analysis, operating

margin of around 10-11% is the

hreshold level for the JLR business

o finance its own capex

equirement of £800 mn in FY12E

fter factoring in volume of 0.25

mn units




January 10, 2011 33

ValuationWe initiate TTMT with a BUY rating and a 12-month PT of Rs1,453 based on our SOTP valuation.

have valued the standalone business, JLR and other subsidiaries at 10x, 6x and 12x FY12E EV/EBIT

respectively. Based on historical trends before the JLR acquisition, TTMT used to trade at a m

forward EV/EBITDA of 11-12x against a mean core ROCE of 24-25%. Hence, we take a 15% disco

to the historical mean of TTMT to arrive at our target multiple for the standalone business at 10x

Peers like Volkswagen, Toyota and BMW are trading within a forward EV/EBITDA in the range o12x. Hence, given our estimated operating margin of JLR of around 13% along with the busin

transforming into a free cashflow generating entity, we assign a conservative target multiple o

FY12E adjusted EBITDA (with 60% of R&D expensed).

TTMT hived off 20% stake in the construction equipment JV with Hitachi called Telcon for US$

mn, implying a forward EV/EBITDA valuation of 20x for Telcon. With stake divestment in HVTL

HVAL planned by management (both being a 50%-plus OPM businesses), we believe our ta

multiple of 12x for other subsidiaries cumulatively is justified.

Exhibit 45: JLR – global peer valuation

Company name BB Ticker M Cap

(US$ bn) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E

Asia ex-India

Toyota Motor Corp 7203 JP 143.4 4.5 6.4 23.8 16.5 14.4 12.2 1.0 1

Honda Motor Co Ltd 7267 JP 71.0 12.5 11.0 11.0 9.5 8.0 7.0 1.2 1

Nissan Motor 7201 JP 46.8 10.8 10.7 11.9 10.7 7.7 7.1 1.2 1

Hyundai Motor* 005380 KS 38.5 19.0 19.0 10.0 8.6 7.3 6.2 1.8 1

Kia Motors* 000270 KS 20.9 27.2 24.8 10.2 8.8 9.8 8.1 2.4 2

Suzuki Motor 7269 JP 14.5 5.1 5.9 23.9 19.7 4.3 3.9 1.2 1

Asia ex-India average 13.2 13.0 15.1 12.3 8.6 7.4 1.5 1

Europe

Volkswagen* VOW GR 71.9 11.1 11.4 11.1 9.6 7.2 6.7 1.2 1

BMW* BMW GR 48.8 12.7 14.8 13.4 10.9 8.6 7.8 1.7 1

Daimler* DAI GR 75.1 14.4 14.8 12.2 10.6 9.6 8.7 1.6 1

European average 12.7 13.7 12.2 10.4 8.5 7.7 1.5 1

Valuation multiples

ROE (%) P/E (x) EV/EBITDA (x) P/B (x)

Note: *denominated companies are CY ending; pricing as of 7 January 2011; Source: Bloomberg estimates for not rated companies, Quant Global Research estimates

Exhibit 46: TTMT – EV/EBITDA pre-JLR acquisition used to be around

10-12x

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

A p r - 0 5

J u l - 0 5

O c t - 0 5

J a n - 0 6

A p r - 0 6

J u l - 0 6

O c t - 0 6

J a n - 0 7

A p r - 0 7

J u l - 0 7

O c t - 0 7

J a n - 0 8

A p r - 0 8

J u l - 0 8

O c t - 0 8

J a n - 0 9

A p r - 0 9

J u l - 0 9

O c t - 0 9

J a n - 1 0

A p r - 1 0

J u l - 1 0

O c t - 1 0

J a n - 1 1

Rol ling forward EV/EBITDA (x) Mean EV/EBITDA (x)

Exhibit 47: TTMT – SOTP valuation

(Rs mn) (FY12E) EBITDA Target EV/EBITDA (x) Target

Standa lone EBITDA 55,625 10.0 556,2

Adjusted JLR EBITDA (60% R&D expensed) 66,020 6.0 396,1

Oth er su bs EBI TD A a djusti ng for s ta ke 10,215 12.0 122,5

Cumulative EV 1,074,9

Consolidated net debt 170,7

Consolidated equity value 904,1

Diluted equity shares (mn) 6

Price target per share (Rs) 1,4

Source: Bloomberg, Quant Global Research Source: Quant Global Research estimates




January 10, 2011 34

Risks

Slower-than-expected demand growth in developed PV markets like the US and the EU lead

to lower-than-estimated growth for JLR volume, although it is partially insulated by gro

potential in emerging markets.

Adverse forex movement in the form of a strengthening GBP against the USD (a 40%

exporter in USD terms) and a strengthening euro against the GBP (a 20% net importer in e

terms) would lead to incremental margin erosion for JLR. Also, rising steel and rubber pricesa matter of concern for the next round of contract renewal for JLR.

As JLR is spending a majority of its capex on product development to upgrade Land Ro

engines to meet emission norms requirements; we believe a slowdown in demand for L

Rover can erode capital efficiency significantly.

For the standalone business, we believe the lack of a price hike for an extended period

combat rising operating costs through a combination of diesel price hike, lending rate hike a

price hike of CV has led to lower profitability. Thus, any further delay in the freight rate hike

lead to lower-than-estimated FY11 volume for the CV segment, in our view.

From the Nano front, we do not expect any major revival in volume in the near term, affec

standalone margin because of higher fixed costs. In our view, the extension of poor volume f

the Nano in FY12 can lead to a weaker standalone margin for an extended period, posing a

to our FY12E margin.

Company description

TTMT manufactures CVs, UVs, and PCs in India. It is the dominant player in the domestic comme

vehicles space, with close to a 60% market share in the M&HCV and LCV markets in India. TT

entered the passenger car market in 1998 with the Indica. In 2003, it released the mid-size sed

Indigo, followed by the Nano in 2009. In June 2008, TTMT acquired Jaguar and Land Rover f

Ford. The Tata Group owns a 35% stake in Tata Motors. It has stakes in other subsidiaries in the f

of Tata Motors Finance, Tata Technologies, Tata Daewoo CV, HVTL, HVAL and Telcon. Mr. Telan

currently the head of India operations with Mr. Foster heading TTMT globally. Mr. Ratan Tata is

Chairman of the overall entity.




January 10, 2011 35

Financial summary

Exhibit 48: TTMT – financial statements, YE March

2009 2010 2011E 2012E Balance Sheet (Rs mn) 2009 2010 2011E 20

Net revenue 708810 925193 1132136 1350320 Equity capital 5141 5706 6221 62

Expenditure 690322 844033 984800 1179315 Reserves and surplus 47901 78270 174253 2396

Raw materials 479660 615823 730228 884460 Deferred tax li abil ity (net) 6802 12536 12536 125

Employee expenses 72974 87518 90571 106675 Total equity 59844 96512 193010 2584

Other expenditure 137688 140691 164001 188181 Secured l oans 137055 212900 197900 1479

EBITDA 18488 81160 147336 171005 Unsecured loa ns 212684 139023 139023 1390

Non-operating income 7990 17931 1500 1800 Minority interest 4030 2135 2485 28

Depreciation 25068 38871 45141 53035 Total borrowings 353769 354059 339409 2898

EBIT (6580) 42289 102195 117969 Current liabilities 321202 417208 513546 6125

Net interest expense 19309 22397 20000 18092 Total liabilities 734814 867779 1045965 11607

Adjusted pre-tax profit (25889) 19892 82195 99878 Cash 41213 87433 127778 1195

Unusual or infrequent i tems (3393) (2596) — — Inventory 109506 113120 143895 1754

Reported pre-tax profit (21292) 35227 83695 101678 Debtors 47949 71912 89535 1067

Less: taxes 3358 10058 10043 15252 Other current ass ets 128192 152831 198416 2366

Reported net profit (24650) 25169 73651 86426 Total current assets 326860 425296 559623 6384

Add: extraordinary items (post-tax basis) — — — — Gross block 621880 682747 773427 8584

Less: minority/associate earnings (402) 542 500 500 Less: depn. and amortn. (332691) (344135) (389277) (4423

Reported net profit for shareholders (25454) 26253 74651 87426 Add: capital work-in-process 105330 80680 70000 650

Adjusted net profit for shareholders (25052) 25711 74151 86926 Total fixed assets 394520 419292 454151 4811

Investments 12574 22191 31191 401

EPS (Rs), based on wtd avg shares (41.0) 41.3 119.2 139.7 of which, liquid i nvestment 7000 7000 9000 120

EPS (Rs), based on fully diluted shares (41.0) 41.3 119.2 139.7 Other as sets — — —

Year-end shares outstanding (mn) 514.1 570.6 622.1 622.1 Total assets 734814 867780 1045965 11607

Weighted average shares outstanding (mn) 514.1 570.6 622.1 622.1 Net working capital 168458 160958 232821 2486

Ful ly di luted shares outstanding (mn) 514.1 570.6 622.1 622.1

Growth ratio (%) Cash flow statement (Rs mn) 2009 2010 2011E 20

Net revenue 98.8 30.5 22.4 19.3 Operating cashflow

EBITDA (56.1) 339.0 81.5 16.1 Pre-tax income (21292) 35227 83695 1016

Adjusted net profit (220.9) (202.6) 188.4 17.2 Add: depreciation and amortisation 25068 38871 45141 530

Less: interest expense (net) (19309) (22397) (20000) (180

Ratios (%) 2009 2010 2011E 2012E Less: other adjustments — — —

Effective tax rate (15.8) 28.6 12.0 15.0 Less: taxes paid 4579 5718 10043 152

EBITDA margin 2.6 8.8 13.0 12.7 Add: working capital changes 53452 43790 2355 119

Adjusted net income margin (3.5) 2.8 6.5 6.4 Total operating cashflow 61806 123606 141235 1818

Net debt/equity 5.0 2.7 1.0 0.6

ROaCE (2.1) 9.8 20.8 21.8 Investing cashflow

ROaE (47.2) 30.6 41.1 35.3 Capital expenditure (532309) (36217) (80000) (800

Total asset turnover ratio (x) 2.4 2.5 2.5 2.3 Investments 14084 (9617) (9000) (90

Inventory turnover ratio (x) 56.4 44.6 46.4 47.4 Others 210945 (14634) 763 (115

Debtors turnover ratio (x) 24.7 28.4 28.9 28.9 Total investing cashflow (307280) (60468) (88237) (1005

Per share numbers (Rs) 2009 2010 2011E 2012E Financing cashflow

Diluted earnings (41.0) 41.3 119.2 139.7 Share i ssuances 45598 19048 40249

Cash earnings 0.0 103.8 191.8 225.0 Loans 233890 2185 (15000) (500

Free cash (770.1) 140.5 98.4 163.8 Less: Dividend and others (11823) (15754) (17902) (214

Book value 86.8 135.0 290.1 395.3 Total financing cashflow 267664 5479 7346 (714

Valuations (x) 2009 2010 2011E 2012E Net change in cash 2881 46220 40344 (81

Price to di luted ea rnings (28.7) 28.5 9.9 8.4 Opening cash 38332 41213 87433 1277

EV/EBITDA 55.4 12.2 6.3 5.2 Add: other adjustments — — —

Price to boo k 13.6 8.7 4.1 3.0 Closing cash 41213 87433 127778 1195

Note: Pricing as on 10 January 2011; Source: Company data, Quant Global research estimates




January 10, 2011 36

Ratings and other definitions

Stock rating system

BUY. We expect the stock to deliver >15% absolute returns.

ACCUMULATE. We expect the stock to deliver 6-15% absolute returns.

REDUCE. We expect the stock to deliver +5% to -5% absolute returns.

SELL. We expect the stock to deliver negative absolute returns of >5%.

Not Rated (NR). We have no investment opinion on the stock.

Sector rating system

Overweight. We expect the sector to relatively outperform the Sensex.

Underweight. We expect the sector to relatively underperform the Sensex.

Neutral. We expect the sector to relatively perform in line with the Sensex.

“I, Basudeb Banerjee, hereby certify that all of the views expressed in this report accurately reflect my personal views ab

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