Ambit Automobile Sector Update April 2011

April 18, 2011
Automobiles
SECTOR UPDATE
India Motors On
Given our expectations of healthy demand trends over FY11-13E, the muted impact of competition on market shares and the significant pricing power currently enjoyed by the sector, we believe the sector is poised to outperform the benchmark index over the medium term, particularly given current share prices. We continue to reiterate Tata Motors and Bajaj Auto as our preferred picks in the Auto sector. Positive macro-economic trends to drive higher-than-long-term average volumes: Continuing strong consumer sentiment and increasing penetration should drive healthy demand trends for motorcycles and cars. On the other hand, with freight rates continuing to hold up well, with the improved availability of finance at the retail level and with strong performance of the agricultural segment, there are demand drivers which should support higher-than long term average volumes for commercial vehicles. We forecast FY11-13E volume CAGR of 17%, 15%, 16% and 15% for domestic motorcycles, cars, three wheelers and other commercial vehicles respectively, higher than their respective long-term averages. Rising competition but market share losses to be calibrated: We expect competition to rise across all categories with new entrants/existing players aggressively pursuing market share. Whilst we expect market leaders to be particularly prone to rising competition, the strategies (introduction of new models and variants) adopted by them should help arrest the market share loss. Consequently, we expect the market share losses of Maruti Suzuki, Bajaj Auto and Tata Motors to be restricted to around 30-50bps over FY11-13E. Input costs to impact margins, but pricing power to restrict downside: Whilst key raw materials such as Steel, Aluminium and Natural Rubber have shown significant increases (about 8% to 12%) in the recent months, we expect healthy demand trends to enable companies take calibrated price increases limiting the impact of increase in input costs on the gross margin. Nevertheless, we factor in a gross margin decline of about 90-100bps in FY12 (from 3QFY11 levels) for our coverage universe (Ashok Leyland, Bajaj Auto, Hero Honda, Maruti Suzuki and Tata Motors). The sector appears attractively priced We expect healthy demand trends and capacity utilization levels, and stronger balance sheets to enable the sector to post EBITDA and net earnings CAGR of between 15-20% over FY11-13E even after considering the impact of increase in input costs on margins. Given this likely earnings profile, the current valuation of the sector at 12x FY12 EPS and 7x FY12 EBITDA appears attractive. After considering likely earnings/EBITDA growth and current valuation multiples, Ashok Leyland, Bajaj Auto, Maruti Suzuki, Tata Motors and TVS Motor appear cheaper compared to M&M and Hero Honda. We continue to reiterate Bajaj Auto and Tata Motors as our preferred picks in the sector (see individual company sections for more details).
Analyst contacts
Vijay Chugh
Tel: +91 22 3043 3054 vijaychugh@ambitcapital.com
Ashvin Shetty
Tel.: + +91 22 3043 3285 ashvinshetty@ambitcapital.com
Top Picks (BUY)

Tata Motors (TTMT IN, Market Cap $16.5 bn, CMP Rs1,249, Target price Rs1,600) Helped by positive momentum in Jaguar Land Rover and the domestic business and given its improving financial position, we expect Tata Motors to record earnings CAGR of 17% over FY11-13E. This together with its attractive valuations (forward valuation of 7.4x P/E and 4.6x EV/EBITDA which are at significant discounts to domestic and global peers as well as its long term historical averages) make us reiterate Tata Motors as one of our preferred picks in the auto sector.
Bajaj Auto (BJAUT IN, Market Cap $8.9 bn, CMP Rs1,399, Target price Rs1,750) Whilst favourable macro trends, new launches, dealer network expansion and strong export growth should help drive healthy volume trends and protect market share, improved product mix and pricing power should limit downside to margins on account of a rise in input costs. At a relatively inexpensive 13.0x FY12 earnings, we recommend BUY on the stock.
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to disclaimer section on the last page for further important disclaimer.
Automobiles
Positive macro trends to drive higher than long term average volumes for FY11-13E
Two wheelers and passenger cars Post the decline in growth seen in FY09, volumes have witnessed a sharp rebound with domestic volumes of motorcycles and passenger cars growing at the rate of 24% and 25% per annum respectively over FY09-11. The growth momentum, though moderating, has continued so far with 4QFY11 seeing strong YoY growth of 18% and 25% in both the motorcycle and passenger car segments respectively (exhibits 1 and 2).
Exhibit 1: Quarterly motorcycles
2,500,000 2,000,000 1,500,000 1,000,000 500,000 Q1 FY08 Q2 FY08 Q3 FY08 Q4 FY08 Q1 FY09 Q2 FY09 Q3 FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11
volume
trends
for
domestic
50% 40% 30% 20% 10% 0% -10% -20% -30%
Exhibit 2: Quarterly passenger cars

600,000 500,000 400,000 300,000 200,000 100,000 -
volume
trends
for
domestic
50% 40% 30% 20% 10% 0% -10% -20%
Motorcycles
Source: SIAM, Ambit Capital research
Motorcycles (domestic) YoY
Cars (domestic,ex-Nano)
Outlook: Going forward, whilst we expect volumes to moderate from FY09-11 levels, the continuing positive consumer sentiment, rising household income levels, strong aspirational pull and increasing penetration (in urban and rural households) could help the sector post higher-than-long-term average volume growth over FY11-13E in the domestic motorcycle and passenger car segments as the interest rate increases do not appear to have had a major impact on demand so far. We expect domestic sales of motorcycles and passenger cars to grow at the rate of 17% and 15% CAGR respectively over FY11-13E, which although lower than the growth rates seen in FY09-11, are ahead of the long term average seen by these segments over FY01-11 (see exhibit 3). Further, the growth witnessed by the industry in March FY11, when domestic motorcycles and passenger cars grew nearly 20% and 25% YoY respectively despite a high base in March 2010, gives us greater confidence in our belief.
Exhibit 3: Long-term growth trends across domestic motorcycles and cars
Long term growth trends (CAGR %) Motorcycles - domestic Passenger cars - domestic (ex Nano)
FY01-06 FY06-11 FY01-11 FY09-11 22.4 9.3 9.2 16.8 15.6 13.0 24.3 25.4
Q1 FY08 Q2 FY08 Q3 FY08 Q4 FY08 Q1 FY09 Q2 FY09 Q3 FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Cars (domestic,ex-Nano) YoY
FY11-13E 17.0 15.0
Commercial vehicles Given the highly cyclical nature of demand for commercial vehicles (CV), the decline in CV volumes seen in FY09 was more severe compared to the decline for passenger vehicles. However, CV volumes have bounced back sharply growing at the rate of 25% per annum over FY09-11.
Ambit Capital Pvt Ltd
Automobiles
Exhibit 4: Quarterly volumes and growth trends for medium and heavy commercial vehicles - goods
100,000 80,000 60,000 40,000 20,000 Q1 FY08 Q2 FY08 Q3 FY08 Q4 FY08 Q1 FY09 Q2 FY09 Q3 FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 160% 130% 100% 70% 40% 10% -20% -50% -80%
Exhibit 5: Quarterly volumes and growth trends for three wheelers

160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 Q1 FY08 Q2 FY08 Q3 FY08 Q4 FY08 Q1 FY09 Q2 FY09 Q3 FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 3W (domestic)
60% 50% 40% 30% 20% 10% 0% -10% -20%
MHCV Goods (domestic)

MHCV Goods (domestic) YoY
3W (domestic) YoY
Outlook: In the case of commercial vehicles, where again we expect the volumes to moderate from FY09-11 levels, we believe that strong underlying factors such as freight rates holding up well, improved availability of finance at the retail level and strong performance of the agricultural segment should support higher-thanlong-term average volume growth over FY11-13E for medium and heavy commercial vehicles (MHCV) goods, MHCV passengers, light commercial vehicles (LCV) passenger and three wheelers. Consequently, we expect MHCV goods, MHCV passenger, LCV passenger and three wheelers to grow at rates of 15%, 12%, 11% and 16% per annum respectively over FY11-13E, which are higher than their respective long term growth rates seen over FY03-11 (see exhibit 6). Only in the case of LCV goods, our expectations of volume growth of 15% per annum over FY11-13E is lower than the long term average growth since the category saw unprecedented expansion with the introduction of Tata Motors Ace in FY06.
Exhibit 6: Long-term growth trends across commercial vehicle segments
Long term growth trends (CAGR %) MHCV Goods - domestic MHCV Passenger - domestic LCV Goods - domestic LCV Passenger - domestic 3W domestic
FY03-07 26.2 9.5 30.8 8.0 15.9
FY07-11 FY03-11 FY09-11 FY11-13E 3.1 12.8 17.0 11.9 8.1 14.1 11.1 23.7 9.9 11.9 35.6 15.4 34.9 17.5 23.3 15.0 12.0 15.0 11.0 15.7
Automobiles
Rising competition but market share losses to be calibrated

We expect competition to increase across all categories viz. commercial vehicles, passenger car segments as well as motorcycles with new entrants/existing players aggressively pursuing market share through multiple launches (see exhibits 7, 8 and 9).
Exhibit 7: Some expected launches in FY12 in the 100-250cc motorcycle segments
Manufacturer Honda Motors Honda Motors Honda Motors Bajaj Auto Bajaj Auto Bajaj Auto Bajaj Auto Hero Honda Suzuki TVS Motor Yamaha Segment 100 cc 150cc 250cc 125 cc 125 cc 125 cc 125 cc 250 cc 100 cc 180 cc 250 cc Model name CB Twister CBR150R CBR 250R Discover 125 Stunt (KTM) Race (KTM) Duke (KTM) New Karizma N.A. Apache RTR 180 Variant Fazer (Variant) Expected launch in FY12 Q4 FY11 Q1 FY12 Q1 FY12 FY12 FY12 FY12 FY12 FY12 Q4 FY11 H1 FY12
Source: Crisil, press articles, Ambit Capital research
Exhibit 8: Some expected FY12 launches in the A2 and A3 passenger car segments
Manufacturer Honda Toyota Nissan Chevrolet Chevrolet Maruti Suzuki Maruti Suzuki Hyundai Motors Segment A2: Compact A2: Compact A3: Mid-size A2: Compact A2: Compact A3: Mid-size A2: Compact A3: Mid-size Model name Brio Etios Liva Sunny Sonic Diesel variant of Beat Diesel variants of SX4 New Swift New Verna Expected launch in Jun-11 Jun-11 Q4 FY12 Q4 FY12 Q1 FY12 Q4 FY11 Jul-11 Q1 FY12
Source: Press articles, Ambit Capital research
Exhibit 9: Some expected launches in FY12 in the commercial vehicle segments

Manufacturer Mahindra Navistar Daimler Segment MHCV - goods MHCV - goods Model name MN 25 (25 t), MN 31 (25 t) Bharat Benz (6-49 t) Dost (1.25 t), a Nissan LCV Prima platform Ace Zip Magic Iris Tata Divo Tavera (1 and sub 1 t) Expected launch in 1QFY12 FY12 FY12 FY12 4QFY11 4QFY11 4QFY11 FY12
Ashok Leyland - Nissan LCV - goods Tata Motors Tata Motors Tata Motors Tata Motors GM SAIC LCV - goods LCV goods LCV passenger MHCV passenger LCV - goods
Source: Press articles, Ambit Capital research
Whilst we expect market leaders to be particularly prone to competition, strategies adopted by them such as the introduction of new models and variants (see exhibits 7, 8 and 9 above) should help arrest the market share loss. Consequently we expect the domestic market losses of Maruti Suzuki, Bajaj Auto and Tata Motors to
Automobiles
be restricted to around 30-50bps over FY11-13E (see exhibit 10) and as a result largely track the industry growth rates. Only in the case of Hero Honda, we expect a higher domestic market share loss of around 200bps over FY11-13E on account of company specific transition challenges after separation from Honda with the latter likely to adopt a focused pursuit of Hero Hondas stronghold on the economy and executive motorcycle segments.
Exhibit 10: Market share trends
All numbers represent changes in market share (%) Motorcycle domestic Bajaj Auto Hero Honda Honda Motors TVS Motors Others Passenger cars domestic (ex Nano) Maruti Suzuki Hyundai Motors Tata Motors (ex Nano) Others Three wheeler domestic Bajaj Auto Piaggio Vehicles Pvt Ltd TVS Motor Mahindra & Mahindra Others MHCV Goods domestic Tata Motors Ashok Leyland Eicher Motors Others LCV Goods domestic Tata Motors M&M (inc Navistar) Others
FY03-07
FY07-11
FY03-11
FY09-11 FY11-13E
7.7 3.5 2.5 (5.8) (7.9)
(4.9) 6.6 4.7 (5.9) (0.5)
2.8 10.1 7.2 (11.7) (8.4)
5.0 (5.2) 1.0 (0.8) 0.0
(0.3) (2.0) 1.7 0.4 0.3
0.2 (1.0) 2.0 (1.2) (21.5) 19.2 4.0 (1.7) (2.8) 2.0 0.5 0.3 21.0 (9.1) (11.9)
(0.7) 0.6 (6.7) 6.8 (5.3) 2.9 4.3 3.4 (5.3) (1.8) (4.1) 3.1 2.8 (9.7) 9.0 0.7
(0.4) (0.4) (4.7) 5.6 (26.7) 22.0 4.3 7.4 (7.0) (4.6) (2.1) 3.7 3.1 11.3 (0.2) (11.2)
(1.8) (1.3) (3.2) 6.3 0.8 (2.8) 3.0 (1.0) 0.0 (4.0) 1.9 2.0 0.1 (3.2) 5.4 (2.1)
(0.4) (1.7) (0.9) 3.0 1.0 (1.5) 0.4 0.3 (0.1) (0.5) 0.3 0.0 0.2 (0.5) 0.2 0.3
Automobiles
Input costs to impact margins, but pricing power to restrict downside

The prices of key inputs such as steel, aluminium, LDPE and natural rubber have seen significant increases (about 8% to 12%) in recent months. This has also impacted the gross margins of automobile companies with the average reported gross margin for our coverage universe (Ashok Leyland, Bajaj Auto, Hero Honda, Maruti Suzuki and Tata Motors) in 3QFY11 seeing a decline of nearly 210bps compared with 4QFY10. Whilst some key raw materials such as steel and natural rubber have, after showing a significant rise in February seen somewhat softening trends in March, we nevertheless expect the gross margin of auto companies to show a further downward trend in FY12. However, at the same time, we expect the healthy demand trends to enable companies to take calibrated price increases (see exhibit 13 for pricing actions of some auto companies) which although not enough to fully offset the costs pressures, should somewhat limit the impact of the increase in input costs on the gross margin. Further, our discussions with industry sources indicate that most of the players are operating at almost full capacity utilization levels and are adopting a cautious approach to adding capacities. This should keep the demand-supply situation fairly healthy in the near-to-medium term. Our current estimates factor in a gross margin decline of about 90-100bps in FY12 from 3QFY11 levels for our coverage universe.
Exhibit 11: Raw material index shows upward trend Exhibit 12: Gross margin trends across auto companies
200 180 160 140 120 100 80 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11
32% 31% 30% 29% 28% 27% 26% 25% 24% Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 FY12E
6
2W blended
Source: Crisil, Ambit Capital research
Car blended
Source: Companies, Ambit Capital research
Exhibit 13: Recent pricing action of some companies

Manufacturer Tata Motors Announcement date Oct-10 Oct-10 Jan-11 Mar-11 Maruti Suzuki Jan-11 Apr-11
Source: Companies, Press articles
Price action Increase in the prices of all of its commercial vehicles (in the range of Rs1,500 to Rs30,000) and some passenger vehicles. Increase in the prices of Tata Nano by about Rs9,000. Increase in the prices of all of its commercial vehicles (in the range of Rs1,500 to Rs30,000) and some passenger vehicles. Increase in the prices of passenger vehicles ranging from Rs7,000 to Rs29,000. Hike in prices by upto Rs8,000. Hike in prices by up to Rs9,000.
Automobiles
The sector seems to be attractively priced

Over the last six months, most of the domestic auto stocks have underperformed the benchmark on concerns surrounding the moderation in demand, rising interest rates and contraction in margins (on account of increase in input costs).
Exhibit 14: Comparative share price performance
Mcap (US$ mn) India BSE Sensex BSE Auto Ashok Leyland Bajaj Auto Hero Honda Maruti Suzuki Tata Motors TVS Motor Eicher Motor M&M Global - Cars Toyota Hyundai Ford Volkswagen Renault BMW Daimler Global - CVs Navistar Volvo SCANIA PACCAR MAN 4,766 36,821 18,475 18,380 19,068 12.3 (7.8) (6.5) (6.9) 0.3 35.2 20.3 1.2 5.6 16.3 39.5 44.5 25.9 19.1 40.1 S&P 500 Stockholm Stockholm S&P 500 Germany 7.1 (7.1) (5.8) (11.3) (3.5) 18.1 13.6 (4.4) (7.7) 1.3 24.1 30.2 13.5 6.0 19.8 134,729 43,090 56,400 72,355 16,424 53,625 78,558 (3.3) 3.5 (15.0) (11.7) (15.9) (0.4) (3.8) 15.4 28.1 13.7 26.5 2.8 18.0 15.5 (9.5) 60.8 23.0 63.9 11.4 71.1 49.1 Tokyo Korea S&P 500 Germany Paris Germany Germany 5.0 1.5 (19.0) (15.0) (20.0) (4.2) (7.4) 13.5 14.2 (0.7) 10.2 (4.8) 2.8 0.6 4.6 31.0 9.4 40.1 9.1 46.2 27.5 1,662 8,896 7,785 8,297 16,539 628 772 10,056 (1.2) (0.9) (9.6) 7.6 (11.5) (6.5) 5.3 (6.7) 6.6 (1.5) (3.9) (3.1) (24.2) (8.4) (9.8) (16.3) 13.6 (20.6) 0.1 3.4 9.8 21.8 2.3 36.6 (14.3) (9.4) 61.1 39.6 85.6 39.3 Sensex Sensex Sensex Sensex Sensex Sensex Sensex Sensex Sensex 0.3 (8.5) 9.0 (10.4) (5.3) 6.6 (5.6) 7.9 (0.3) 0.8 (21.0) (4.7) (6.1) (12.8) 18.3 (17.4) 4.2 7.7 12.0 (6.9) 24.4 (21.9) (17.5) 46.7 27.1 69.0 26.9 Absolute performance (%) 3M 6M 1yr Benchmark Relative performance to benchmark (%) Index 3M 6M 1yr
Source: Bloomberg, Ambit Capital Research
Further on a cross cycle basis, most of the companies under our coverage are trading at or below their long term P/E and EV/EBITDA averages (exhibits 15 to 22).
Automobiles
Exhibit 15: Ashok Leyland P/E cycle
Exhibit 16: Bajaj Auto P/E cycle
29 24 P/E 19 14 9 4 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
20 15 P/E 10 5 0 May-08 May-09 May-10 Aug-08 Aug-09 Aug-10 Feb-09 Feb-10 Nov-08 Nov-09 Nov-10
Apr-10
Apr-10
P/E
6 year average
4 year average
P/E
Source: Company, Ambit Capital research
3 year avg
Exhibit 17: Hero Honda P/E cycle
Exhibit 18: Maruti Suzuki P/E cycle

23 20 17 P/E 14 11 8 5
22 19 P/E 16 13 10 7 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Feb-11
Apr-11
8
P/E
6 year avg
4 year avg
P/E
6 year avg
4 year avg
Exhibit 19: Ashok Leyland EV/EBITDA cycle

13 EV/EBITDA 10 7 4 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Exhibit 20: Hero Honda EV/EBITDA cycle

16 EV/EBITDA 13 10 7 4 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09
EV/EBITDA
6 year avg
4 year avg
EV/EBITDA
6 year avg
4 year avg
Apr-11
Automobiles
Exhibit 21: Maruti Suzuki EV/EBITDA cycle

12 EV/EBITDA 9 6 3 0 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Exhibit 22: Tata Motors EV/EBITDA cycle

18 16 14 12 10 8 6 4 2 0 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10
17 17 12 18 14 13 17 NM 6 15
EV/EBITDA
EV/EBITDA
6 year avg
4 year avg
EV/EBITDA
6 year avg
4 year avg
Exhibit 23: Net debt:equity

FY09 Ashok Leyland Bajaj Auto Hero Honda Maruti Suzuki Tata Motors 0.9 0.2 (0.9) (0.4) 5.2 FY11E 0.8 (0.9) (0.9) (0.3) 0.7
Going forward, we expect healthy demand trends and capacity utilization levels across the sector over FY11-13E. Further the increased profitability seen in the last two years has significantly improved the financial position of most of the auto companies (seen in the form of a reduction in net debt levels). This should also help most of the companies to post higher net earnings growth compared to EBITDA growth over FY11-13E. Overall, even after considering the impact of an increase in input costs on margins, we expect the sector to post EBITDA and net earnings CAGR of between 15-20% over FY11-13E. Given this likely earnings profile, the current valuation of the sector at a P/E of 11.7x FY12 EPS and 7.2x FY12 EBITDA looks attractive.
Exhibit 24: Comparative valuation

Company India Ashok Leyland Bajaj Auto Hero Honda Maruti Suzuki Tata Motors (as reported) Tata Motors (proforma see note below) TVS Motor Eicher Motor M&M Average 1,662 8,896 7,785 8,297 16,539 16,539 628 772 10,056 17.2 21.7 15.5 14.6 25.2 NA 83.8 18.1 16.2 13.2 15.6 16.9 16.3 9.0 11.2 14.7 14.9 15.8 10.5 13.0 15.9 13.5 7.4 9.0 10.3 12.6 13.5 9.0 11.2 13.5 11.7 6.5 8.1 9.0 NA 11.2 12.5 14.1 11.1 8.1 11.1 NA 27.5 7.2 9.6 8.8 10.9 12.6 8.6 5.3 6.0 8.3 5.5 9.6 8.4 7.4 9.2 11.6 7.2 4.6 5.2 6.6 4.5 8.4 7.2 6.5 8.0 10.0 6.2 4.1 4.7 6.1 NA 8.0 6.7 16 19 17 16 16 16 15 NM 13 16 21 18 12 18 17 18 28 NM 19 19 MCAP (US $mn) Sales growth EPS growth (%) EBITDA growth (FY11-13) (%) (FY11-13) FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13 (%) (FY11-13) P/E EV/EBITDA
26.5 14.2 11.7 10.0 12.6
Source: Bloomberg, Ambit Capital research, Company; Note: Ambit estimates for Ashok Leyland, Bajaj Auto, Hero Honda, Maruti Suzuki and Tata Motors, rest are Bloomberg consensus estimates Note: Proforma figures are arrived at by adjusting EBITDA/PAT for normalised R&D spends (by expensing 66% of R & D costs instead of current 25%).
Apr-11
9
Automobiles
Considering likely earnings/EBITDA growth and current valuation multiples, Ashok Leyland, Bajaj Auto, Maruti Suzuki, Tata Motors and TVS Motor appear cheaper compared to M&M and Hero Honda. Our top picks in the sector are Bajaj Auto and Tata Motors. In the case of Tata Motors, helped by positive momentum in Jaguar Land Rover and the domestic business and given its improving financial position, we expect earnings CAGR of 17% over FY11-13E. This together with its attractive valuations (forward valuation of 7.4x P/E and 4.6x EV/EBITDA, which are at significant discounts to domestic and global peers as well as long term historical averages) make us recommend Tata Motors as one of our preferred picks in the auto sector with a target price of Rs1,600, 28% upside. In the case of Bajaj Auto, whilst favourable macro trends, new launches, dealer network expansion and strong export growth should help the firm maintain healthy volume trends and protect market share, improved product mix and pricing power should limit the downside to margins on account of a rise in input costs. At a relatively inexpensive 13.0x FY12 earnings, we recommend a BUY on the stock with a target price of Rs1,750, 25% upside.
10
Automobiles
April 18, 2011
Tata Motors
Bloomberg: TTMT IN Equity Reuters: TAMO.BO
BUY
COMPANY UPDATE Analyst contacts

Vijay Chugh
A Marriage of Class and Mass

Helped by positive momentum in Jaguar Land Rover and in the domestic business and given its improving financial position, we expect Tata Motors to record an earnings CAGR of 17% over FY11-13E. This together with its attractive valuations (forward valuation of 7.4x P/E and 4.6x EV/EBITDA, which are at significant discounts to domestic and global peers as well as long term historical averages) make us reiterate Tata Motors as one of our preferred picks in the Auto sector. Jaguar Land Rover momentum to continue We expect positive momentum in JLR volumes to continue on the back of expected new launches in CY11 and healthy trends in the USA and in emerging Markets like China and Russia (JLRs March sales from the USA is up 16% YoY and its European counterparts have reported strong sales from China the same month). We expect JLR to post volume CAGR of 11% over FY11-13E. Further, we expect JLRs current margins to sustain as we expect the overall volume mix to improve from 2011 launches and there is scope for increasing the sourcing from low-cost countries from the current 20% to 30% levels. Despite stepping up our product development expense estimates, we expect JLR to post net earnings CAGR of 14% over FY11-13E. Positive macro trends to help standalone business Despite moderation, we expect the higher-than-long-term average growth in the CV segment over the next two years to be helped by strong freight rates, improved availability of finance at the retail level and strong demand from agriculture. Despite increasing competition, we believe the market share losses to be more calibrated at around 50bps over FY11-13E, which should enable the company to post volume CAGR of 14%, broadly in line with industry. Finally healthy demand trends should enable it to take calibrated price increases limiting EBITDA margin decline to ~50bps over FY11-13E. Improved financial position With the strong performance of JLR as well as the domestic CV business, we expect the company to generate significant free cash flows, which together with the recent fund raising and debt conversion should bring down the net debt/equity to 0.4x by FY12. This should enable the company to post higher earnings growth of 17% over FY11-13E compared to EBITDA growth of 14%. Valuation and recommendation We reiterate our BUY on the stock with an SOTP-based target price of Rs1,600 (upside of 28% from current levels), implying a P/E multiple of 8.4x FY13 earnings. The stock is currently trading at a discount of 34% and 41% to its domestic and global peers respectively on EV/EBITDA and also at a nearly 35% discount to its long-term average EV/EBITDA adding to its attractiveness.
Exhibit 1: Key financials (consolidated)
Year to March (Rs mn) Operating income EBITDA EBITDA (%) EPS (fully diluted) (Rs) RoE (%) RoCE (%) P/E (x) FY09 708,810 18,488 2.6% (45.1) (29.9%) (2.1%) NM FY10 FY11E FY12E FY13E 925,193 1,217,750 1,436,024 1,624,199 81,160 169,787 195,956 220,224 8.8% 14.0% 13.7% 13.6% 49.5 139.2 168.8 191.4 40.9% 60.7% 39.5% 31.5% 9.8% 25.1% 23.7% 22.0% 25.2 9.0 7.4 6.5
Ashvin Shetty
Tel: +91 22 3043 3285 ashvinshetty@ambitcapital.com
Recommendation
CMP: Target Price (one year): Previous TP: Upside (%) EPS (FY12):
Change from previous (%) Variance from consensus (%)
Rs1,249 Rs1,600 Rs1,600 28 Rs168.8

2 10
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: Rs738bn/US$16,539mn Rs1,382/670 Rs3,797mn/US$84mn 1.4x 19263 5786
Stock Performance (%)

1M Absolute Rel. to Sensex 4.9 -1.1 3M 5.3 5.0 12M 50.6 43.2 YTD -6.8 -0.7
Performance (%)
23,000 21 ,000 1 9,000 1 7,000 1 5,000 A pr-1 0 Jul-1 0 Sensex No v-1 0 Feb-1 1 Tata M o to rs 1 500 1 300 1 00 1 900 700 500
Source: Bloomberg, Ambit Capital research

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers at the end of this Report.
Tata Motors
Key assumptions and estimates

Exhibit 2: Key assumptions and estimates
FY10 Standalone Commercial Vehicle sales (inc exports) Volume growth YoY (%) Market share (%) Net sales (Rs mn) YoY growth (%) EBITDA (Rs mn) EBITDA margin (%) EBITDA YoY growth (%) Adjusted PAT (Rs mn) Adj PAT margin (%) PAT YoY growth (%) Fully diluted EPS (Rs) Fully diluted EPS growth (%) Net work cap days (ex cash) closing Net work cap days (ex cash) average Capex (Rs mn) Net debt (Rs mn) Net interest expenses (net of interest capitalised) (Rs mn) Jaguar Land Rover Volumes YoY growth (%) Average realisation (GBP) YoY growth (%) Revenues (GBP mn) YoY growth (%) EBITDA margin (before prod dev expenses) (GBP mn) (%) EBITDA (pre product dev exp growth YoY (%) EBITDA margin (post prod dev expenses) (GBP mn) (%) EBITDA (post product dev exp growth YoY) (%) PAT margin (%) PAT YoY growth (%) Work cap days (ex cash) closing Work cap days (ex cash) average Capex (GBP mn) FCF (Rs mn) Net debt (GBP mn)
603
FY11E
FY12E
FY13E
Comments
35.0 61.0 353,738 40 40,343 11.4 137 13,588 3.8 148 23.2 106 (45) (30) 23,102 143,471 11,038 193,982 16
33,787 NA 6,554 NA 6.6 NA 5.9 NM 0.0
25.7 58.9 467,693 32 46,975 10.0 16 18,910 4.0 39 28.5 22 (37) (35) 26,000 91,807 11,212 240,020 24
40,841 21 9,803 50 16.7 279 15.4 293 10.1 NM
14.8 58.5 544,139 16 51,849 9.5 10 22,935 4.2 21 34.5 21 (32) (32) 27,000 70,856 8,631 271,223 13
42,119 3 11,424 17 17.0 19 15.3 15 10.2 17 (18) (19) 1,000 603 (342)
13.7 58.5 623,232 15 59,222 9.5 14 27,575 4.4 20 41.5 20 (29) (29) 28,000 63,738 8,338 298,345 10
42,961 2 12,817 12 17.2 14 15.2 12 10.1 11 (13) (14) 1,279 469 (774)
Despite a high base, we expect the industry to post higher-than-long-term average growth over FY11-13 at about 15%. Due to increasing competition, we factor in a market share decline of around 40bps over FY11-13E resulting in volume CAGR of 14% over FY11-13E We expect a FY11-13 revenue CAGR of 15% largely arising from volume growth EBITDA growth to lag revenue growth on account of increase in input costs and a step up in product development expenses at JLR
Recent fund raising, debt conversion and improved profitability to bring down net debt, interest expenses leading to higher growth at the PBT/PAT/EPS level compared to EBITDA growth We conservatively factor in an increase in net working capital days. The average days in FY10 looks lower due to higher days in FY09 We factor in a moderate increase in capex every year Recent equity raisings, FCNR conversion and improved profitability to bring down the net debt and interest expenses Despite a high base, we expect JLR to record double-digit volume growth for FY12/13 on the back of healthy trends from USA and Emerging Markets like China and Russia We expect improvement in average realisation price due to improving mix We expect FY11-13 revenue CAGR of 14% largely arising from volume growth We expect JLR margins (before product development expenses) to sustain at FY11 levels Step up in product development expenses to bring down EBITDA margin marginally Increase in product development and amortisation expenses to stem PAT growth We conservatively factor in an increase in working capital days We expect capex to remain in the range of 9-10% of sales We expect significant FCF generation over FY11-13E (impacted to some extent by step up in product dev expenses) to improve the financial position substantially
(53) (50) 635
(23) (29) 671 424 225
12
Tata Motors Exhibit 3: Change in estimates

Consolidated (Rs mn) Net sales (Rs mn) EBITDA (Rs mn) EBITDA margin PBT (Rs mn) PAT (Rs mn) EPS (Rs) New estimates FY11E FY12E Old estimates FY11E FY12E Change (%) FY11E 4 2 1 1 1 FY12E 7 2 1 2 2 Comments Upgrades to revenues largely flow from better than expected volumes at JLR and recent price hikes announced in the domestic business Upgrades to the revenues does not fully flow to EBITDA owing to significant increase in input costs We have increased our forecasts for product development expenses/capex at JLR leading to higher charge to the P&L on account of amortisation expenses
1,211,457 1,429,538 1,169,628 1,338,465 169,787 14.0% 105,069 92,511 139.2 195,956 13.7% 127,124 112,167 168.8 166,030 14.2% 103,720 91,436 137.3 191,585 126,097 109,785 164.9
14.3% (18) bps (61) bps
Source: Ambit Capital research
Exhibit 4: Ambit v/s consensus

(Rs m) Revenues FY11E FY12E EBITDA FY11E FY12E PAT FY11E FY12E 92,511 112,167 89,332 101,600 4 10 The higher-than-consensus EBITDA is magnified at the PAT level due to the fixed nature of depreciation and interest expenses 169,787 195,956 165,942 185,145 2 6 The main source of our higher-thanconsensus margins for FY12 is on account of our higher-than-consensus expectations for JLR margins 1,211,457 1,429,538 1,204,392 1,395,230 1 2 Our revenue estimates are largely in line with consensus estimates Ambit Consensus % divg. Reasons for divergence
13
Tata Motors
Valuation
Relative valuation
Tata Motors trades currently at a discount of 42% to its Indian automobile peers on FY12 P/E and EV/EBITDA despite having nearly similar EBITDA and net earnings growth expectations over FY11-13E. It is also trading at a discount of 48% and 23% on FY12 EV/EBITDA and P/E respectively to global car companies despite having near similar net earnings and EBITDA growth expectations. Even after proforma adjusting Tata Motors EBITDA and net earnings for normalised R&D expenses (arriving at EBITDA and net earnings after deducting 66% of product development expenses instead of current levels of 25%), it trades at around 34% and 41% discount to Indian automobile peers and global car companies respectively on FY12 EV/EBITDA and 30% and 6% discount to Indian automobile peers and global car companies respectively on FY12 P/E.
Company India Ashok Leyland Bajaj Auto Hero Honda Maruti Suzuki Tata Motors (as reported) Tata Motors (proforma) see note below) TVS Motor Eicher Motor M&M Average (ex Tata Motors) Global - Cars Toyota Hyundai Ford Volkswagen Renault BMW Daimler Average Global - CVs Navistar Volvo SCANIA PACCAR MAN Average 4,766 36,821 29.3 NM 21.4 19.0 13.2 40.4 19.7 12.1 13.0 11.7 20.9 14.5 8.8 10.0 10.8 14.3 12.5 12.7 NM 28.7 40.2 19.3 10.6 9.9 9.2 21.0 10.0 8.2 7.9 8.6 13.3 7.9 9.2 6.6 6.7 8.0 9.7 7.3 7.7 15 14 11 30 9 16 56 38 10 68 25 39 27 22 7 47 17 24 1,662 8,896 7,785 8,297 17.2 21.7 15.5 14.6 13.2 15.6 16.9 16.3 9.0 10.5 13.0 15.9 13.5 7.4 9.0 10.3 12.6 13.5 9.0 11.2 13.5 11.7 12.5 14.1 11.1 8.1 8.8 10.9 12.6 8.6 5.3 6.0 8.3 5.5 9.6 9.2 7.4 9.2 11.6 7.2 4.6 5.2 6.6 4.5 8.4 7.9 6.5 8.0 10.0 6.2 4.1 4.7 6.1 NA 8.0 7.4 14 16 19 19 10 15 16 19 17 16 16 16 15 21 18 12 18 17 18 27 17 17 12 18 14 13 17 Mcap (US $mn) EBITDA Sales growth EPS growth growth (FY11FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13 (FY11-13E) (%) (FY11-13E) (%) 13E) (%) P/E EV/EBITDA
16,539 25.2 16,539 628 772 10,056
6.5 11.1 8.1 9.0 NA 11.2 NA 27.5 7.2 9.6
NA 11.2 83.8 18.1 16.2 14.7 14.9 15.8
26.7 15.3 12.8 10.1 12.9
134,729 43,090 56,400 72,355 16,424 78,558
84.8 20.5 NM 44.1 NM NM
20.7 11.3 7.2 10.0 7.2 12.9 11.2
15.5 9.8 8.2 8.1 5.6 10.0 9.6 9.6
11.1 9.2 7.7 7.1 4.1 8.7 8.2
16.9 11.7 37.9 10.8 16.3 16.6 33.7
14.1 8.6 11.2 6.9 8.0 8.6 9.3 9.5
13.0 7.8 9.6 6.2 8.3 7.9 8.3 8.7
10.2 7.4 8.6 5.7 7.5 7.4 7.5 7.8
5 5 9 7 4 7 8 6
37 11 -4 19 32 22 17 19
18 7 14 10 3 8 12 10
53,625 223.9
93.3 11.5
8.0 20.6
18,475 130.0 18,380 263.4 19,068 57.1
119.9 22.7 14.4 11.3 25.2 12.2
Source: Bloomberg, Ambit Capital research, Company Note: Proforma figures are arrived at by adjusting EBITDA/PAT for normalised R&D spends (by expensing 66% of R & D costs instead of current 25%).
14
Tata Motors
Cross cycle valuation

Whilst Tata Motors current one year forward P/B is in line with its historical long term averages, its current one year forward EV/EBITDA ratio is at a discount of nearly 35% to its six year and four year averages.
Exhibit 6: Tata Motors EV/EBITDA cycle
18 16 14 12 10 8 6 4 2 0 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Exhibit 7: Tata Motors P/B cycle
6 5 P/BV 4 3 2 1 0 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

15
EV/EBITDA
EV/EBITDA
6 year avg
4 year avg
P/B
6 year avg
4 year avg
Recommendation
We prefer to value the company on an SOTP basis. For the domestic business, our target FY13 EV/EBIDTA multiple of 7x is based on the average multiple commanded by the company over FY04-11. The growth rates in commercial vehicles estimated by us over FY11-13E largely mirrors the growth rate seen in the period FY04-11. Our target multiple of 7 is somewhat conservative compared to the multiple taken by consensus of around 8x. For the JLR operations, we arrive at a target FY13 EV/EBITDA of 6x, which is at a discount of 30% to global peers such as BMW and Daimler (exhibit 5). We believe JLRs valuation discount to some of the comparable luxury car makers such as BMW and Daimler is justified, given JLRs product portfolio is restricted to the premium segment and it has yet to display a consistent profitability track record. This multiple of 6x is also consistent with what we have been using in our earlier valuation estimates. Our current estimates factor in 25% of the product development expenses being charged to the profit and loss statement (the rest being capitalised). We have therefore proforma adjusted EBITDA to account for the normalised product development expenses charge to P&L by deducting 66% (in line with average of BMW, Daimler and Audi) of product development expenses from EBITDA for the purpose of valuing JLR. Within the key subsidiaries, we value each of the companies at average multiples accorded to similar sized peers in the respective industry and recent transaction multiples. Our SOTP valuation of Rs1,600 (see exhibit 8) implies an upside of 28% from current levels. We recommend BUY on the stock.
Tata Motors Exhibit 8: Tata Motors SOTP valuation table

Valuation methodology Standalone EBITDA Enterprise value Less: Net debt Equity value JLR EBITDA after normalised R&D Enterprise value Less:Net debt Equity value Other subs Tata Daewoo HVAL HVTL Tata Motors Finance Tata Technologies Tata Construction Equipment Other subs Fair value
Target EBITDA/PAT/ multiple (x) book value (Rs mn) (FY13) 59,222 7
Stake value (Rs mn)
Per share value (Rs)
FY13 EV/ EBITDA
414,555 91,807 322,748 486
111,250 6 667,498 16,350 651,148 980
FY13 P/E FY13 P/E FY13 P/E FY13 P/B FY13 P/E 50% discount to stake sale to Hitachi
10 10 10 1 10
1,470 1,165 982 18,457 1,592
14,702 11,651 9,817 18,457 15,919 18,440
22 18 15 28 24 28 134 1,600
16
Tata Motors Exhibit 9: Balance sheet (Consolidated)

Year to March (Rs mn) Shareholders' equity Reserves & surpluses Total networth Minority Interest Debt Deferred tax liability For. curr monetary item trans dif A/c Total liabilities Gross block Net block CWIP Goodwill on consolidation Investments Cash & equivalents Debtors Inventory Loans & advances Other current assets Total current assets Current liabilities Provisions Total current liabilities Net current assets Miscellaneous Total assets
FYO9 5,141 54,266 59,407 4,030 349,739 6,802 (6,365) 413,613 584,694 252,003 105,330 37,187 11,769 42,019 47,949 109,506 128,166 26 327,665 239,802 81,400 321,202 6,463 861 413,613
FY10 5,706 76,359 82,065 2,135 351,924 11,536 1,912 449,571 648,518 304,383 80,680 34,229 11,450 98,174 71,912 113,120 152,807 24 436,038 340,773 76,435 417,208 18,829 449,571
FY11E 6,336 216,508 222,844 2,135 307,616 11,284 (973) 542,906 742,234 349,533 59,502 34,229 11,450 145,327 100,008 151,350 187,854 9,611 594,150 421,031 84,927 505,959 88,191 542,906
FY12E 6,646 338,753 345,398 2,135 314,699 11,284 (973) 672,543 859,810 418,212 59,502 34,229 11,450 188,192 117,167 173,966 215,224 10,130 704,679 457,532 97,998 555,530 149,149 672,543
FY13E 6,646 455,391 462,037 2,135 326,131 11,284 (973) 800,614 981,334 484,417 59,502 34,229 11,450 228,006 132,792 194,547 243,847 10,702 809,894 489,352 109,526 598,878 211,015 800,614
Exhibit 10: Income statement (Consolidated)

Year to March (Rs mn) Net sales % growth Operating Income % growth Operating expenditure EBITDA (pre product dev expenses) % growth EBITDA (post product dev expenses) % growth Depreciation EBIT Interest expenditure (net) Non-operating income Adjusted PBT Tax Adjusted PAT/ Net profit after minority interest % growth Extraordinaries Reported PAT / Net profit after minority interest
FYO9 703,125 98.6% 708,810 98.8% 690,322 21,965 -48.6% 18,488 -56.1% 25,068 (6,580) 19,309 7,990 (17,900) 3,358 (21,660) -206.6% (3,393) (25,053)
FY10 30.7% 30.5% 844,033 86,142 292.2% 81,160 339.0% 38,871 42,288 22,397 17,931 37,822 10,058 28,307 NM (2,596) 25,711
FY11E 31.8% 31.6% 790,846 179,942 108.9% 169,787 109.2% 45,307 124,480 20,255 845 105,069 12,559 92,511 226.8% (326) 92,185
FY12E 18.0% 17.9% 211,477 17.5% 195,956 15.4% 51,658 144,298 18,019 845 127,124 14,957 112,167 21.2% 112,167
FY13E 13.1% 13.1% 239,968 13.5% 220,224 12.4% 58,080 162,143 18,637 845 144,351 17,168 127,183 13.4% 127,183
918,935 1,211,457 1,429,538 1,617,505 925,193 1,217,750 1,436,024 1,624,199 945,236 1,072,799
17
Tata Motors Exhibit 11: Cash flow statement (Consolidated)

Year to March (Rs mn) Profit after Tax Depreciation Net Interest Expenses and Others Tax (Incr) / decr in net working capital Cash flow from operations Capex Increase/ (Decrease) in Investments Others Cash flow from investments Issuance of equity Net borrowings Interest paid Dividend paid Others Cash flow from financing Net change in cash Closing cash balance Free cash flow
FYO9 (25,053) 25,023 26,965 (5,986) (13,450) 7,498 (98,959) (90,712) 2,883 (186,788) 41,100 168,002 (23,867) (7,595) (10) 177,632 (1,658) 41,213 (91,460)
FY10 25,711 38,826 7,171 (12,292) 33,854 93,269 (84,532) 11,220 (2,018) (75,331) 283,665 (225,529) (28,553) (3,496) (967) 25,119 43,058 87,433 8,737
FY11E 92,511 45,307 46,670 (12,811) (31,007) 140,669 (72,538) (72,538) 52,226 (44,308) (20,255) (10,019) (22,356) 45,776 134,586 68,131
FY12E 112,167 51,658 30,072 (14,957) (16,788) 162,152 (117,576) (117,576) 20,199 7,083 (18,019) (10,973) (1,711) 42,865 177,451 44,576
FY13E 127,183 58,080 32,765 (17,168) (20,807) 180,052 (121,524) (121,524) 11,432 (18,637) (11,510) (18,714) 39,814 217,265 58,529
Exhibit 12: Ratio analysis

Year to March (%) EBITDA margin (%) EBIT margin (%) Net profit margin (%) Dividend payout ratio (%) Net debt:equity (x) RoCE (pre-tax) RoIC (%) RoE
FYO9 2.6% -0.9% -3.0% NM 5.2 -2.1% -2.5% -29.9%
FY10 8.8% 4.6% 3.0% 33.4% 3.1 9.8% 7.2% 40.9%
FY11E 14.0% 10.3% 7.6% 10.3% 0.7 25.1% 22.1% 60.7%
FY12E 13.7% 10.1% 7.8% 8.9% 0.4 23.7% 21.0% 39.5%
FY13E 13.6% 10.0% 7.9% 7.8% 0.2 22.0% 19.4% 31.5%
Exhibit 13: Valuation parameters

Year to March (Rs mn) EPS (Rs) Diluted EPS (Rs) Book value per share (Rs) Dividend per share (Rs) P/E (x) P/BV (x) EV/ EBITDA (x) EV/ Sales (x)
FYO9 (49.7) (45.1) 115.6 6.1 NM 10.8 48.7 1.3
FY10 54.8 49.5 143.8 15.1 25.2 8.7 11.1 1.0
FY11E 146.0 139.2 351.7 15.0 9.0 3.6 5.3 0.7
FY12E 168.8 168.8 519.8 15.0 7.4 2.4 4.6 0.6
FY13E 191.4 191.4 695.3 15.0 6.5 1.8 4.1 0.6
18
Automobiles
April 18, 2011
Bajaj Auto
Bloomberg: BJAUT IN Equity Reuters: BAJA.BO
BUY
COMPANY UPDATE Analyst contacts

Vijay Chugh
Attractively Priced
Whilst favourable macro trends, new launches, dealer network expansion and strong export growth should help drive healthy volume trends and protect market share, improved product mix and pricing power should limit the downside to margins on account of a rise in input costs. At a relatively inexpensive 13x FY12 earnings, we reiterate our BUY on the stock with a target price of Rs1,750. Volume growth momentum to continue The demand for domestic motorcycles continues to be strong backed by superior consumer confidence, rising income levels, faster replacement cycle and aspirational pull. Together with the recent launch of Discover 125cc and the dealer network expansion (addition of nearly 25% to the existing strength), this should enable the company to post volume CAGR of 17% over FY11-13E in motorcycles. Similarly we expect three wheeler volumes to grow at a CAGR of 17% over FY11-13E fuelled by favourable domestic demand, improved availability of finance as well as a strong revival in the export markets. Competition to have a muted impact on market share We believe Bajajs stronghold premium segment to be less prone to competition compared to Hero Honda, which is a dominant player in the economy and executive segments. Together with launch of Discover 125cc and dealer network expansion, this should help Bajaj protect its market share. We have nevertheless conservatively factored in a market share decline of 30bps over FY11-13E in our estimates for domestic motorcycles volumes. Product mix and pricing power to help margins We expect the share of premium bikes (Pulsar and Discover) in the overall motorcycle portfolio to remain above 70% with an upward bias from the launch of Discover 125cc. This together with volume momentum sustaining in the higher margin three wheeler segment (where the company earns nearly 30% EBITDA margin) and pricing power flowing from healthy demand trends, should help negate the rise in input costs to a significant extent and enable the company to post EBITDA margin north of 20% in FY12 and FY13. Valuation and Recommendation We expect Bajaj Auto to post EBITDA and net earnings CAGR of 17% and 18% respectively over FY11-13E. At 13.0x FY12 earnings, the stock is trading at a 18% discount to Hero Honda despite the higher earnings expectations. We believe Bajaj Auto should trade closer to Hero Hondas multiples (compared to current levels). We reiterate our BUY on Bajaj Auto with a target price of Rs1,750 implying 14x FY13 EPS.
Exhibit 1: Key financials (standalone)
Year to March (Rs mn) Operating income EBITDA EBITDA (%) EPS (fully diluted) (Rs) RoE (%) RoCE (%) P/E (x)
Ashvin Shetty
Tel: +91 22 3043 3285 ashvinshetty@ambitcapital.com
Recommendation
CMP: Target Price (one year): Previous TP: Upside (%) EPS (FY12):
Change from previous (%) Variance from consensus (%)
Rs1,399 Rs1,750 R1,600 25 Rs107.7

2 6
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: Rs405bn/US$8,896mn Rs1,638/1009 Rs767mn/US$17mn 0.9x 19263 5786
Stock Performance (%)

1M Absolute Rel. to Sensex 0.6 -5.4 3M 5.9 5.5 12M 26.2 YTD -4.2 33.6 -10.3
Performance (%)
25,000 20,000 1 5,000 1 0,000 A pr-1 0 A ug-1 0 Sensex Jan-1 1 B ajaj A uto 2000 1 500 1 000 500
FY09 FY10 FY11E FY12E FY13E 88,102 119,197 166,136 205,070 236,725 11,920 25,912 33,698 39,840 45,982 14.1% 22.5% 21.0% 20.2% 20.1% 29.8 64.4 89.4 107.7 125.2 49.8% 77.7% 68.1% 54.5% 45.3% 38.5% 70.5% 65.2% 55.1% 47.3% 47.0 21.7 15.6 13.0 11.2
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers at the end of this Report.
Bajaj Auto
Key assumptions and estimates

Exhibit 2: Key assumptions and estimates
Standalone Motorcycles (domestic) Volume growth YoY (%) Market share (%) Motorcycles (exports ) Strong rebound in exports seen in FY11 to continue in FY12. Growth rate in FY12 will also be helped to some extent by around 25,000 units in transit as at the FY11 end, which would be accounted as sales in FY12. This however would negatively impact the growth rate of FY13 by around 238bps Three wheeler sales to remain strong in FY12. Growth rate in FY12 will also be helped to some extent by around 7,000 units in transit as at FY11 end, which would be accounted as sales in FY12. This however would negatively impact the growth rate of FY13 by around 150bps We expect revenue CAGR of 19% over FY11-13E, led largely by volume growth A significant increase in input costs to impact FY12 margins. However, we expect margins to remain above 20%, led by a healthy mix of premium bikes, exports and three wheelers
40 36 18 15
FY10
FY11E
FY12E
FY13E
Comments Healthy demand trends, new model launches and dealer network expansion to help the company protect erosion in market share and post 16% volume CAGR over FY11-13E
24.3
26.8
26.8
26.5
Volume growth YoY (%) Three wheelers (domestic + exports) Volume growth YoY (%)
15
33
26
13
24
28
21
12
Net sales (Rs mn) YoY growth (%) EBITDA (Rs mn) EBITDA margin (%) EBITDA YoY growth (%) Adjusted PAT (Rs mn) Adj PAT margin (%) PAT YoY growth (%) Fully diluted EPS (Rs) Wk cap days (ex cash) closing Work cap days (ex cash) average Capex (Rs mn) FCF (Rs mn) Net debt (Rs mn)
115,085 160,174 197,711

36 39 23
228,231 15 45,982 20.1 15 36,247 15.9 16 125.2 (20) (18) (2,500) 31,175 (89,271)
25,912 22.5
117
33,698 21.0
30
39,840 20.2
18
18,651 16.2
116
25,872 16.2
39
31,169 15.8
20
PBT/PAT/EPS to grow faster than EBITDA on account of a significant increase in other income
64.4 (22) (9) (1,078) 26,293
89.4 (19) (17) (800) 24,163
107.7 (19) (17) (2,500) 27,420
Working capital days maintained constant. Average for FY10 looks higher due to higher working capital days in FY09 Capex to be stepped up in FY12 for the four wheeler project High profitability amidst stable working capital to generate significant cash
(19,379) (38,678) (62,438)
Exhibit 3: Change in estimates

Standalone (Rs mn) New estimates FY11 FY12 Old estimates FY11 FY12 Change (%, bps) FY11 FY12 Comments Recent price hikes announced by the company together with the delay in shipment of around 32,000 units as at FY11 end are the main sources of upgrades to our FY12 revenue estimates Whilst we downgrade our FY12 margin estimates on account of an increase in the input costs, we maintain it at over 20% on account of healthy mix trends (premium bikes and three wheelers) We raise our estimates of other income which more than offsets the downgrade to EBITDA resulting in net upgrades at PBT/PAT/EPS level in FY12.
Net sales (Rs mn)
160,174 197,711
162,193 190,288
(1.2)
3.9
EBITDA (Rs mn) EBITDA margin PBT (Rs mn) PAT (Rs mn) EPS (Rs)
33,698 21.0% 35,934 25,872 89.4
39,840 20.2% 43,290 31,169 107.7
34,254 39,862 21.1% 20.9%
(1.6)
(0.1)
(8) bps (80) bps (0.5) (0.1) (0.1) 1.7 1.7 1.7
36,112 42,564 25,893 30,646 89.5 105.9
20
Bajaj Auto Exhibit 4: Ambit v/s consensus

(Rs m) Revenues FY11E FY12E EBITDA FY11E FY12E PAT FY11E FY12E 25,872 31,169 25,731 29,362 0.5 6.2 Higher than consensus revenues and EBITDA percolates to PAT 33,698 39,840 33,515 37,540 0.5 6.1 Higher than consensus revenue estimates are the main source of higher than consensus EBITDA 166,136 205,070 165,590 194,030 0.3 5.7 Our revenue estimates are ahead of consensus largely flowing from our higher than consensus volume assumptions Ambit Consensus % divg. Reasons for divergence
21
Bajaj Auto
Valuation and Recommendation

Relative valuation
On relative valuation, Bajaj Auto is currently trading at 21% and 18% discount to Hero Hondas FY12 EV/EBITDA and P/E respectively despite having higher EBITDA and net earnings expectations over FY11-13E.
Company India Ashok Leyland Bajaj Auto Hero Honda Maruti Suzuki Tata Motors TVS Motor Eicher Motor M&M Average (ex Bajaj) 1,662 7,785 8,297 16,539 628 772 10,056 17.2 15.5 14.6 25.2 83.8 18.1 16.2 13.2 16.9 16.3 9.0 14.7 14.9 15.8 10.5 15.9 13.5 7.4 10.3 12.6 13.5 9.0 13.5 11.7 6.5 9.0 NA 11.2 12.5 11.1 8.1 11.1 27.5 7.2 9.6 8.8 12.6 8.6 5.3 8.3 5.5 9.6 8.4 7.4 9.2 11.6 7.2 4.6 6.6 4.5 8.4 7.2 6.5 8.0 10.0 6.2 4.1 6.1 NA 8.0 6.8 16 19 17 16 16 15 NA 14 16 21 18 12 18 17 27 NA 19 19 17 17 12 18 14 17 NA 10 15 8,896 21.7 15.6 13.0 11.2 14.1 10.9 MCAP (US $mn) P/E EV/EBITDA Sales growth FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13 (FY11-13) (%) EPS growth EBITDA growth (FY11-13) (%) (FY11-13) (%)
27.2 14.4 12.0 10.2 12.4
Source: Bloomberg, Ambit Capital research, Company; Note: Ambit estimates for Ashok Leyland, Bajaj Auto, Hero Honda, Maruti Suzuki and Tata Motors, rest are Bloomberg consensus estimates
Cross cycle valuation

Bajaj Auto has historically traded at a discount to Hero Honda. Whilst its valuation gap with Hero Honda on (both P/E and EV/EBITDA) has come down significantly, the current P/E implies a still significant 18% discount to Hero Honda despite having higher earnings expectation (18% over FY11-13E compared to 12% for Hero Honda).
Exhibit 6: Bajaj Auto discount to Hero Honda on P/E
20% 10% 0% May-08 Sep-08 May-09 Sep-09 May-10 Sep-10 Jan-09 Jan-10 Jan-11 -10% -20% -30% -40% -50% -60% -70% Premium Discount to HH P/E
Exhibit 7: Bajaj Auto discount to Hero Honda on EV/EBITDA

20% 10% 0% Jan-09 Jan-10 Sep-08 Sep-09 May-08 May-09 -10% -20% -30% -40% -50% -60% -70% Premium Discount to HH EV/EBITDA May-10 Sep-10 Jan-11
22
Recommendation
We believe Bajaj Auto should trade closer to Hero Hondas multiples compared to current levels. We value Bajaj Auto using a target FY13 P/E multiple of 14x (long term median P/E) arriving at a target price of Rs1,750, 25% upside from the current levels.
Bajaj Auto
Exhibit 8: Balance sheet (standalone)

Year to March (Rs mn) Shareholders' equity Reserves & surpluses Total net worth Debt Deferred tax liability Total liabilities Gross block Net block CWIP Investments Cash & equivalents Debtors Inventory Loans & advances Other current assets Total current assets Current liabilities Provisions Total current liabilities Net current assets Miscellaneous Total assets
FY09 1,447 17,250 18,697 15,700 42 34,439 33,502 15,423 221 7,637 11,816 3,587 3,388 13,652 1,257 33,700 12,134 12,242 24,376 9,324 1,833 34,439
FY10 1,447 27,837 29,283 13,386 17 42,686 33,793 14,796 415 8,465 32,765 2,728 4,462 20,745 1,060 61,760 20,263 22,487 42,750 19,010 42,686
FY11E 2,894 43,826 46,720 13,386 17 60,123 34,593 14,331 415 10,080 52,064 3,797 6,210 28,873 1,060 92,004 26,330 30,377 56,707 35,297 60,123
FY12E 2,894 64,872 67,766 13,386 17 81,169 37,093 15,505 415 10,080 75,824 4,687 7,666 35,639 1,060 124,876 32,500 37,207 69,707 55,169 81,169
FY13E 2,894 89,310 92,203 13,386 17 105,606 39,593 16,586 415 10,080 102,656 5,411 8,849 41,141 1,060 159,117 37,517 43,074 80,592 78,525 105,606
Exhibit 9: Income statement (standalone)

Year to March (Rs mn) Net sales % growth Operating Income % growth Operating expenditure EBITDA % growth Depreciation EBIT Interest expenditure Non-operating income Adjusted PBT Tax Adjusted PAT/ Net profit % growth Extraordinaries Reported PAT/ Net profit
FY09 84,369 (2.6) 88,102 (2.0) 76,183 11,920 (3.4) 1,298 10,622 210 1,220 11,632 3,016 8,616 0.4 2,071 6,545
FY10 115,085 36.4 119,197 35.3 93,284 25,912 117.4 1,365 24,548 60 1,238 25,726 7,075 18,651 116.5 1,624 17,027
FY11E 160,174 39.2 166,136 39.4 132,437 33,698 30.0 1,265 32,433 20 3,520 35,934 10,061 25,872 38.7 25,872
FY12E 197,711 23.4 205,070 23.4 165,230 39,840 18.2 1,326 38,514 20 4,796 43,290 12,121 31,169 20.5 31,169
FY13E 228,231 15.4 236,725 15.4 190,744 45,982 15.4 1,419 44,563 20 5,801 50,343 14,096 36,247 16.3 36,247
23
Bajaj Auto
Exhibit 10: Cashflow statement

Year to March (Rs mn) PBT Depreciation Others Tax (Incr) / decr in net working capital Cash flow from operations Capex (Incr) / decr in investments Other income (expenditure) Cash flow from investments Net borrowings Issuance of equity Interest paid Dividend paid Others Cash flow from financing Net change in cash Closing cash balance Free cash flow
FY09 9,581 1,298 (901) (3,213) (2,650) 4,115 (3,861) 458 1,326 (2,077) 2,357 (210) (3,377) (1,230) 808 1,369 254
FY10 24,111 1,365 215 (6,999) 8,679 27,371 (1,078) (21,944) 1,386 (21,636) (2,355) (60) (3,716) 41 (6,090) (355) 1,014 26,293
FY11E 35,934 1,265 (3,500) (10,061) 1,326 24,963 (800) (1,615) 3,520 1,105 (20) (6,749) (6,769) 19,299 20,313 24,163
FY12E 43,290 1,326 (4,776) (12,121) 2,201 29,920 (2,500) 4,796 2,296 (20) (8,436) (8,456) 23,760 44,073 27,420
FY13E 50,343 1,419 (5,781) (14,096) 1,789 33,675 (2,500) 5,801 3,301 (20) (10,123) (10,143) 26,832 70,906 31,175
Exhibit 11: Ratio analysis

Year to March (%) EBITDA margin (%) EBIT margin (%) Net profit margin (%) Dividend payout ratio (%) Net debt: equity (x) RoCE (%) RoIC (%) RoE (%)
FYO9 14.1 12.6 10.2 48.6 0.2 38.5 28.5 49.8
FY10 22.5 21.3 16.2 34.0 (0.7) 70.5 51.1 77.7
FY11E 21.0 20.2 16.2 28.0 (0.8) 65.2 47.0 68.1
FY12E 20.2 19.5 15.8 27.9 (0.9) 55.1 39.7 54.5
FY13E 20.1 19.5 15.9 27.9 (1.0) 47.3 34.0 45.3
Exhibit 12: Valuation parameters

Year to March EPS (Rs) * Diluted EPS (Rs) * Book value per share (Rs) * Dividend per share (Rs) * P/E (x) P/BV (x) EV/EBITDA (x) EV/EBIT (x)
FYO9 29.8 29.8 64.6 11.0 47.0 21.6 30.7 34.5
FY10 64.4 64.4 101.2 20.0 21.7 13.8 14.1 14.9
FY11E 89.4 89.4 161.5 25.0 15.6 8.7 10.9 11.3
FY12E 107.7 107.7 234.2 30.0 13.0 6.0 9.2 9.5
FY13E 125.2 125.2 318.6 35.0 11.2 4.4 8.0 8.2
24
Bajaj Auto
Institutional Equities Team

Saurabh Mukherjea, CFA Research Analysts Amit K. Ahire Ankur Rudra, CFA Ashish Shroff Ashvin Shetty Bhargav Buddhadev Chandrani De, CFA Chhavi Agarwal Gaurav Mehta Krishnan ASV Nitin Bhasin Pankaj Agarwal, CFA Parikshit Kandpal Puneet Bambha Ritika Mankar Ritu Modi Shariq Merchant Subhashini Gurumurthy Vijay Chugh Sales Name Deepak Sawhney Dharmen Shah Dipti Mehta Pramod Gubbi, CFA Sarojini Ramachandran Designation VP VP Senior Manager VP Director, Sales Desk-Phone (022) 30433295 (022) 30433289 (022) 30433053 (022) 30433228 +44 (0) 20 7614 8374 E-mail deepaksawhney@ambitcapital.com dharmenshah@ambitcapital.com diptimehta@ambitcapital.com pramodgubbi@ambitcapital.com sarojini@panmure.com Industry Sectors Telecom / Media & Entertainment IT/Education Services Technical Analysis Consumer/Automobiles Power/Capital Goods Metals & Mining Infrastructure / Construction Derivatives Research Banking Infrastructure / Construction / Cement NBFCs Construction / Real estate Power/Capital Goods Economy Cement Consumer IT/Education Services Consumer (incl FMCG, Retail, Automobiles) Desk-Phone (022) 30433202 (022) 30433211 (022) 30433209/3221 (022) 30433285 (022) 30433252 (022) 30433210 (022) 30433203 (022) 30433255 (022) 30433205 (022) 30433241 (022) 30433206 (022) 30433201 (022) 30433259 (022) 30433175 (022) 30433292 (022) 30433246 (022) 30433264 (022) 30433054 E-mail amitahire@ambitcapital.com ankurrudra@ambitcapital.com ashishshroff@ambitcapital.com ashvinshetty@ambitcapital.com bhargavbuddhadev@ambitcapital.com chandranide@ambitcapital.com chhaviagarwal@ambitcapital.com gauravmehta@ambitcapital.com vkrishnan@ambitcapital.com nitinbhasin@ambitcapital.com pankajagarwal@ambitcapital.com parikshitkandpal@ambitcapital.com puneetbambha@ambitcapital.com ritikamankar@ambitcapital.com ritumodi@ambitcapital.com ritumodi@ambitcapital.com subhashinig@ambitcapital.com vijaychugh@ambitcapital.com Managing Director - Institutional Equities (022) 30433174 saurabhmukherjea@ambitcapital.com
25
Bajaj Auto
Explanation of Investment Rating

Investment Rating Expected return (over 12-month period from date of initial rating) >15% 5% to 15% <5%
Buy Hold Sell
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent ot Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and, in some cases, in printed form.
Additional information on recommended securities is available on request.

DISCLAIMER 1. AMBIT Capital Private Limited (AMBIT Capital) and its affiliates are a full service, integrated investment banking, investment advisory and brokerage group. AMBIT Capital is a Stock Broker, Portfolio Manager and Depository Participant registered with Securities and Exchange Board of India Limited (SEBI) and is regulated by SEBI 2. The recommendations, opinions and views contained in this Research Report reflect the views of the research analyst named on the Research Report and are based upon publicly available information and rates of taxation at the time of publication, which are subject to change from time to time without any prior notice. 3. AMBIT Capital makes best endeavours to ensure that the research analyst(s) use current, reliable, comprehensive information and obtain such information from sources which the analyst(s) believes to be reliable. However, such information has not been independently verified by AMBIT Capital and/or the analyst(s) and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties. The information or opinions are provided as at the date of this Research Report and are subject to change without notice. 4. If you are dissatisfied with the contents of this complimentary Research Report or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using this Research Report and AMBIT Capital shall not be responsible and/ or liable in any manner. 5. If this Research Report is received by any client of AMBIT Capital or its affiliate, the relationship of AMBIT Capital/its affiliate with such client will continue to be governed by the terms and conditions in place between AMBIT Capital/ such affiliate and the client. 6. This Research Report is issued for information only and should not be construed as an investment advice to any recipient to acquire, subscribe, purchase, sell, dispose of, retain any securities. Recipients should consider this Research Report as only a single factor in making any investment decisions. This Research Report is not an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment. 7. If 'Buy', 'Sell', or 'Hold' recommendation is made in this Research Report such recommendation or view or opinion expressed on investments in this Research Report is not intended to constitute investment advice and should not be intended or treated as a substitute for necessary review or validation or any professional advice. The views expressed in this Research Report are those of the research analyst which are subject to change and do not represent to be an authority on the subject. AMBIT Capital may or may not subscribe to any and/ or all the views expressed herein. 8. AMBIT Capital makes no guarantee, representation or warranty, express or implied; and accepts no responsibility or liability as to the accuracy or completeness or currentess of the information in this Research Report. AMBIT Capital or its affiliates do not accept any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of this Research Report. 9. Past performance is not necessarily a guide to evaluate future performance. 10. AMBIT Capital and/or its affiliates (as principal or on behalf of its/their clients) and their respective officers directors and employees may hold positions in any securities mentioned in this Research Report (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). Such positions in securities may be contrary to or inconsistent with this Research Report. 11. This Research Report should be read and relied upon at the sole discretion and risk of the recipient. 12. The value of any investment made at your discretion based on this Research Report or income therefrom may be affected by changes in economic, financial and/ or political factors and may go down as well as up and you may not get back the full or the expected amount invested. Some securities and/ or investments involve substantial risk and are not suitable for all investors. 13. This Research Report is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied in whole or in part, for any purpose. Neither this Research Report nor any copy of it may be taken or transmitted or distributed, directly or indirectly within India or into any other country including United States (to US Persons), Canada or Japan or to any resident thereof. The distribution of this Research Report in other jurisdictions may be strictly restricted and/ or prohibited by law or contract, and persons into whose possession this Research Report comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition. 14. Neither AMBIT Capital nor its affiliates or their respective directors, employees, agents or representatives, shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this Report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the Report or inability to use or access our service or this Research Report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this Research Report or inability to use or access our service or this Research Report. Conflict of Interests 15. In the normal course of AMBIT Capitals business circumstances may arise that could result in the interests of AMBIT Capital conflicting with the interests of clients or one clients interests conflicting with the interest of another client. AMBIT Capital makes best efforts to ensure that conflicts are identified and managed and that clients interests are protected. AMBIT Capital has policies and procedures in place to control the flow and use of non-public, price sensitive information and employees personal account trading. Where appropriate and reasonably achievable, AMBIT Capital segregates the activities of staff working in areas where conflicts of interest may arise. However, clients/potential clients of AMBIT Capital should be aware of these possible conflicts of interests and should make informed decisions in relation to AMBIT Capitals services. 16. AMBIT Capital and/or its affiliates may from time to time have investment banking, investment advisory and other business relationships with companies covered in this Research Report and may receive compensation for the same. Research analysts provide important inputs into AMBIT Capitals investment banking and other business selection processes. 17. AMBIT Capital and/or its affiliates may seek investment banking or other businesses from the companies covered in this Research Report and research analysts involved in preparing this Research Report may participate in the solicitation of such business. 18. In addition to the foregoing, the companies covered in this Research Report may be clients of AMBIT Capital where AMBIT Capital may be required, inter alia, to prepare and publish research reports covering such companies and AMBIT Capital may receive compensation from such companies in relation to such services. However, the views reflected in this Research Report are objective views, independent of AMBIT Capitals relationship with such company. 19. In addition, AMBIT Capital may also act as a market maker or risk arbitrator or liquidity provider or may have assumed an underwriting commitment in the securities of companies covered in this Research Report (or in related investments) and may also be represented in the supervisory board or on any other committee of those companies.
Copyright 2006 AMBIT Capital Private Limited. All rights reserved.
Ambit Capital Pvt. Ltd. Ambit House, 3rd Floor 449, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India. Phone : +91-22-3043 3000 Fax : +91-22-3043 3100 26

Ambit Automobile Sector Update April 2011

Încărcat de

Informații document

Descriere originală:

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Ambit Automobile Sector Update April 2011

Încărcat de

Drepturi de autor:

Formate disponibile

April 18, 2011

Top Picks (BUY)

Exhibit 2: Quarterly passenger cars

Motorcycles (domestic) YoY

FY11-13E 17.0 15.0

Ambit Capital Pvt Ltd

Exhibit 5: Quarterly volumes and growth trends for three wheelers

60% 50% 40% 30% 20% 10% 0% -10% -20%

MHCV Goods (domestic)

MHCV Goods (domestic) YoY

FY03-07 26.2 9.5 30.8 8.0 15.9

Ambit Capital Pvt Ltd

Rising competition but market share losses to be calibrated

Source: Crisil, press articles, Ambit Capital research

Source: Press articles, Ambit Capital research

Exhibit 9: Some expected launches in FY12 in the commercial vehicle segments

Source: Press articles, Ambit Capital research

Ambit Capital Pvt Ltd

7.7 3.5 2.5 (5.8) (7.9)

(4.9) 6.6 4.7 (5.9) (0.5)

2.8 10.1 7.2 (11.7) (8.4)

5.0 (5.2) 1.0 (0.8) 0.0

(0.3) (2.0) 1.7 0.4 0.3

Ambit Capital Pvt Ltd

Input costs to impact margins, but pricing power to restrict downside

Source: Companies, Ambit Capital research

Exhibit 13: Recent pricing action of some companies

Ambit Capital Pvt Ltd

The sector seems to be attractively priced

Source: Bloomberg, Ambit Capital Research

Ambit Capital Pvt Ltd

Exhibit 15: Ashok Leyland P/E cycle

Exhibit 16: Bajaj Auto P/E cycle

29 24 P/E 19 14 9 4 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

Source: Company, Ambit Capital research

Exhibit 17: Hero Honda P/E cycle

Exhibit 18: Maruti Suzuki P/E cycle

22 19 P/E 16 13 10 7 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 19: Ashok Leyland EV/EBITDA cycle

Exhibit 20: Hero Honda EV/EBITDA cycle

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd

Exhibit 21: Maruti Suzuki EV/EBITDA cycle

Exhibit 22: Tata Motors EV/EBITDA cycle

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 23: Net debt:equity

Source: Company, Ambit Capital research

Exhibit 24: Comparative valuation

26.5 14.2 11.7 10.0 12.6

Ambit Capital Pvt Ltd

Ambit Capital Pvt Ltd

April 18, 2011

COMPANY UPDATE Analyst contacts

A Marriage of Class and Mass

Rs1,249 Rs1,600 Rs1,600 28 Rs168.8

Stock Performance (%)

Source: Bloomberg, Ambit Capital research

Source: Company, Ambit Capital research

Please refer to the Disclaimers at the end of this Report.