3QFY2016 Result Update | Automobile

November 13, 2015

Eicher Motors

BUY

CMP

`15,877

Performance Highlights

Target Price

`19,036

Y/E December (` cr)

3QFY16* 3QCY14

% chg (yoy) 2QFY16*

% chg (qoq)

Investment Period

12 Months

Net Sales

3,123

2,275

37.3

2,917

7.1

EBITDA

493

305

61.4

432

14.1

Stock Info

EBITDA Margin (%)

15.8

13.4

240 bp

14.8

100 bp

Sector

Automobile

Adj. PAT

255

165

54.8

222

15.2

Market Cap (` cr)

43,093

Source: Company, Angel Research; * FY16 is a 15month period

Net Debt (` cr)

(422)

Beta

1.1

Results in line with estimates: Eicher Motors Ltd (EML)’s 3QFY2016 results

52 Week High / Low

21,618/12,630

(company has changed accounting year from December to March) have come in

line with our estimates.

Avg. Daily Volume

9,491

Face Value (`)

EML’s consolidated revenues grew 37% yoy to `3,123cr (in line with our estimate

BSE Sensex

25,743

of `3,105cr). The growth was led by Royal Enfield (robust growth of 59% yoy to

Nifty

7,783

`1,301cr). The commercial vehicle segment’s (VE Commercial Vehicles [VECV])

Reuters Code

EICH.BO

revenues grew 25% yoy to `1,821cr, led by recovery in volumes and increase in

Bloomberg Code

EIM IN

engine supplies to Volvo. Operating margin, at 15.8%, improved 240bp yoy,

coming in line with our estimates of 16.1%. Royal Enfield’s margin, at 27.7%,

improved sharply by 270bp yoy led by strong operating leverage and price hikes.

Shareholding Pattern (%)

VECV margins grew marginally by 40bp yoy to 7.3%, due to volume surge and

Promoters

54.9

soft commodity prices. Given the robust operating performance, the net profit, at

MF / Banks / Indian Fls

6.4

`255cr, grew strongly by 55% yoy, coming broadly in line with our estimates of

FII / NRIs / OCBs

28.3

`271cr.

Indian Public / Others

10.4

Outlook and Valuation: The demand for Royal Enfield continues to remain strong

on increasing acceptance of leisure biking trend in India. However, Royal Enfield’s

growth rate is likely to slow down given the high base and the time required by

Abs. (%)

3m 1yr

3yr

company and the ancillary suppliers to ramp capacity. Going ahead, the growth

Sensex

(8.4)

(7.6)

37.9

rate is likely to normalize to 30% levels as against 60% rates achieved earlier.

Eicher Motors

(22.2)

24.6

516.0

Given the growth moderation, we have lowered our earnings and target multiple

for Royal Enfield. We maintain Buy recommendation on the stock with a revised

3-year price chart

SOTP based target price of `19,036.

25,000

20,000

Key financials (Consolidated)

15,000

Y/E December (` cr)

CY2013

CY2014

15MFY2016E

FY2017E

10,000

Net Sales

6,810

8,738

15,379

16,498

5,000

% chg

6.6

28.3

47.6

28.8

Net Profit

394

615

1,284

1,560

% chg

21.2

55.9

80.2

43.2

EBITDA (%)

10.5

12.8

15.6

16.6

Source: Company, Angel Research

EPS (`)

145.6

227.1

473.2

574.8

P/E (x)

109.0

69.9

33.5

27.6

P/BV (x)

21.2

17.3

12.4

9.2

RoE (%)

19.2

24.5

36.7

33.2

RoCE (%)

19.8

25.1

39.8

38.0

Bharat Gianani

EV/Sales (x)

6.1

4.7

2.7

2.5

022-3935 7800 Ext: 6817

EV/EBITDA (x)

58.2

37.2

17.3

15.0

[email protected]

Source: Company, Angel Research; Note: CMP as of November 10, 2015

Please refer to important disclosures at the end of this report

Eicher Motors | 3QFY2016 Result Update

Exhibit 1: Quarterly financial performance (Consolidated)

Y/E December (` cr)

3QFY16* 3QCY14

% chg (yoy) 2QFY16*

% chg (qoq)

9MFY16*

9MCY14

% chg (yoy)

Net Sales

3,123

2,275

37.3

2,917

7.1

8,607

6,445

33.6

Consumption of RM

2,017

1,494

35.0

1,907

5.8

5,577

4,273

30.5

(% of Sales)

64.6

65.7

65.4

64.8

66.3

Staff Costs

214

169

26.6

203

5.7

602

493

22.3

(% of Sales)

6.9

7.4

7.0

7.6

Other Expenses

398

306

30.1

376

6.0

1,138

867

31.2

(% of Sales)

12.8

13.5

12.9

13.2

13.5

Total Expenditure

2,630

1,970

33.5

2,485

5.8

7,317

5,633

29.9

Operating Profit

493

305

61.4

432

14.1

1,290

812

59.0

OPM (%)

15.8

13.4

14.8

15.0

12.6

Interest

214.1

68.0

(25.4)

Depreciation

55.9

10.6

244

160

52.7

Other Income

(34.2)

86.2

(42.5)

PBT (excl. Extr. Items)

415

267

55.2

357

16.0

1,094

736

48.5

Extr. Income/(Expense)

PBT (incl. Extr. Items)

415

267

55.2

357

16.0

1,094

736

48.5

(% of Sales)

13.3

11.7

12.2

12.7

11.4

Provision for Taxation

129

58.8

101

28.1

335

216

55.2

(% of PBT)

31.1

30.4

28.2

30.6

29.3

PAT before MI

286

186

53.6

257

11.3

759

521

45.7

Minority Interest

44.2

(13.0)

45.7

Net Profit after MI

255

165

54.8

222

15.2

673

462

45.7

PATM

8.2

7.3

7.6

7.8

7.2

Equity capital (cr)

Reported EPS (`)

94.1

60.9

54.6

81.7

15.2

248

170

45.4

Source: Company, Angel Research; * FY16 is a 15month period

Exhibit 2: 3QFY2016 - Actual vs Angel estimates

Y/E December (` cr)

Actual

Estimates

Variation (%)

Net Sales

3,123

3,105

0.6

EBITDA

493

500

(1.4)

EBITDA margin (%)

15.8

16.1

(30 bp)

Adj. PAT

255

271

(5.7)

Source: Company, Angel Research

 Royal Enfield continued with its robust double-digit volume growth, led by

capacity expansion as demand continues to outstrip supply. In 3QFY2016,

volumes grew 56% yoy. The current order backlog for Royal Enfield stands at

1-4 months.

 VECV volumes continued to recover, led by improvement in LMD and HD

volumes. VECV reported a sixth consecutive quarter of volume growth during

3QFY2016, witnessing a growth of 19%.

November 13, 2015

Eicher Motors | 3QFY2016 Result Update

Exhibit 3: Royal Enfield growth trend

Exhibit 4: VECV growth trend

140,000

100

14,000

120,000

12,000

100,000

10,000

80,000

8,000

60,000

6,000

(10)

40,000

4,000

(20)

20,000

2,000

(30)

(40)

Royal Enfield Volumes

Growth yoy (%)

VECV volumes

Growth yoy (%)

Source: Company, Angel Research

 Royal Enfield’s margins are in a constant uptrend, buoyed by a sharp jump in

volumes, tremendous pricing power and benign commodity prices. In

3QFY2016, Royal Enfield posted record margins of 28%.

 VECV margins at 7.3% improved marginally by 40bp on a yoy basis.

Exhibit 5: Royal Enfield margins at record high

Exhibit 6: VECV margins improve marginally

400

150

120

300

200

100

EBIDTA (` cr)

Margin (%)

EBIDTA (` cr)

Marign (%)

Source: Company, Angel Research

Conference call - Key highlights

 The demand for Royal Enfield bikes continues to remain strong with the

company taking more orders every month as compared to sales volumes.

However, given the huge capacity increase, the waiting period for bikes has

reduced from 4-6 months earlier to 1-4 months currently.

 EML has received a board approval for commencing its third manufacturing

plant for Royal Enfield, given the strong demand. Royal Enfield is targeting to

have a total capacity of 9 lakh units by CY2018, given the ramp up at the

second plant and commencement of the third unit. EML has given production

guidance of 620 thousand for CY2016 and 780 thousand for CY2017.

 Royal Enfield has been expanding its dealer network in tier 2 and tier 3 cities.

It plans to increase the dealership strength from 400 dealers in CY2014 to

500 dealers in CY2015. Royal Enfield plans to have more than 550 dealers by

CY2016.

November 13, 2015

Eicher Motors | 3QFY2016 Result Update

 EML is targeting export markets as a new growth driver for Royal Enfield. It is

eyeing potential in South East Asia and Latin American markets which have a

huge commuter bike base to boost exports.

 To broaden product portfolio, Royal Enfield is targeting to introduce two new

platforms (one platform would be ready in CY2016 and other would rollout in

CY2017).

 VECV volumes continued to improve given the uptick in the MHCV industry on

account of better freight availability and improved fleet operator sentiments

due to subdued diesel prices.

 VECV lost some market share in the MHCV space due to high discounting in

the industry. The discounting per vehicle in MHCV has moved up from `1.5

lakh levels in CY2014 to `2 lakh currently. VECV market share slipped

marginally from 11.7% in CY2014 to 10.1% in 9MCY2015.

 Engine supplies to Volvo have been ramping up. In 3QFY2016, VECV shipped

about 4,800 units as against 3,800 units in the corresponding quarter last

year.

 Royal Enfield undertook a price increase of about 1.2% in the middle of

3QCY2015.

 Eicher-Polaris JV for all terrain vehicles has been progressing as per plans.

Eicher is expanding the distribution of its recently introduced “Multix” vehicle.

So far Multix has sold 231 units in the seven states it has been introduced.

Investment arguments

 Royal Enfield demand to remain strong; ramping capacity to meet demand:

EML’s two-wheeler business (Royal Enfield) is in a demand sweet spot and is

expected to report a healthy 30% CAGR in volume over the next two years.

Royal Enfield is the direct beneficiary of pick up in the leisure biking trend.

Customers are increasingly opting for leisure bikes as an upgrade. Currently,

the segment just accounts for about 3% of the motorcycle industry and has

tremendous demand potential. EML enjoys virtual monopoly in the space

commanding a market share of 95% on back of strong brand image and

appropriate pricing which is very difficult to replicate. EML has an order backlog

of about 5 months and continues to ramp capacity to meet demand. Recently,

EML has acquired land for another plant in Chennai to boost production.

 CV volumes to recover on back of improving demand cycle and new product

launches: After three consecutive years of downturn, the commercial vehicle

segment is poised to recover over the next two to three years. Better economic

growth and improvement in fleet utilization is expected to boost volumes.

Further, VECV aims to gain market share in the HCV space on back of new

product launches in technological tie up with Volvo. Also the discounting levels which

are currently at record highs are likely to recede given the recovery in volumes.

November 13, 2015

Eicher Motors | 3QFY2016 Result Update

Outlook and valuation

The demand for Royal Enfield continues to remain strong on increasing acceptance

of leisure biking trend in India. However, Royal Enfield’s growth rate is likely to

slow down given the high base and the time required by company and the

ancillary suppliers to ramp capacity. Going ahead, the growth rate is likely to

normalize to 30% levels as against 60% rates achieved earlier. Given the growth

moderation, we have lowered our earnings and target multiple for Royal Enfield.

We maintain Buy recommendation on the stock with a revised SOTP based target

price of `19,036.

Exhibit 7: SOTP valuation

Particulars

Value/share

Remarks

Royal Enfield

17,136

At 35x FY17 earnings

VECV

1,900

At 12x FY17 EV/EBIDTA

Target Price

19,036

Source: Company, Angel Research

Company background

Eicher Motors Ltd (EML) manufactures commercial vehicles in collaboration with

global giant Volvo (through the subsidiary VECV) and manufactures two-wheelers

(Royal Enfield). VECV is one of the leading commercial vehicle manufacturers,

commanding a market share of about 7%. Apart from commercial vehicles, VECV

also manufactures engines for captive usage and supplies to Volvo for their global

range of trucks. VECV’s manufacturing plant is located in Pithampur, Madhya

Pradesh. Royal Enfield is the market leader in the leisure biking space, having a

market share in excess of 95%. Two-wheelers are currently manufactured at the

Chennai plant.

November 13, 2015

Eicher Motors | 3QFY2016 Result Update

Profit and loss statement (Consolidated)

Y/E December (` cr)

CY2011

CY2012

CY2013

CY2014 15MFY2016E

FY2017E

Total operating income

5,700

6,390

6,810

8,738

15,379

16,498

% chg

28.9

12.1

6.6

28.3

47.6

28.8

Total expenditure

5,110

5,841

6,097

7,624

12,973

13,763

Net raw material costs

4,135

4,585

4,639

5,766

9,931

10,735

Employee expenses

346

457

533

660

1,039

993

Other

629

798

925

1,198

2,002

2,035

EBITDA

590

549

713

1,115

2,406

2,734

% chg

54.7

(6.9)

29.9

56.3

87.8

34.0

(% of total op. income)

10.3

8.6

10.5

12.8

15.6

16.6

Depreciation & amort.

130

220

432

428

EBIT

666

603

678

1,002

2,042

2,484

% chg

55.9

(9.3)

12.4

47.8

78.5

44.5

(% of total op. income)

11.7

9.4

10.0

11.5

13.3

15.1

Interest and other charges

Other income

140

137

107

178

Recurring PBT

658

600

671

993

2,030

2,472

% chg

57.6

(8.9)

11.8

48.0

79.5

44.7

Extraordinary items

PBT (reported)

658

600

671

993

2,030

2,472

Tax

163

125

145

291

594

680

(% of PBT)

24.7

20.8

21.7

29.3

27.5

PAT before MI

496

475

525

702

1,436

1,792

% chg

61.9

1.6

10.6

33.6

74.5

46.9

(% of total op. income)

8.7

7.4

7.7

8.0

9.3

10.9

Minority Interest

189

151

131

152

232

Profit after MI

307

324

394

615

1,284

1,560

Basic EPS (`)

103.3

120.1

145.6

227.1

473.2

574.8

Adj. EPS (`)

103.3

120.1

145.6

227.1

473.2

574.8

% chg

46.6

16.3

21.2

55.9

80.2

43.2

November 13, 2015

Eicher Motors | 3QFY2016 Result Update

Balance sheet statement

Y/E December (` cr)

CY2011 CY2012 CY2013 CY2014 15MFY2016E FY2017E

SOURCES OF FUNDS

Equity share capital

Reserves & surplus

1,466

1,728

2,028

2,489

3,473

4,668

Shareholders’ Funds

1,493

1,755

2,055

2,516

3,500

4,695

Total loans

Minority Interest

838

948

1,040

1,085

1,237

1,431

Deferred tax liability

123

180

239

Other long term liabilities

Long term provisions

Total Liabilities

2,510

2,923

3,433

3,988

5,131

6,530

APPLICATION OF FUNDS

Gross block

989

1,526

2,299

3,137

4,337

5,337

Less: Acc. depreciation

484

534

643

828

1,260

1,688

Net Block

504

992

1,656

2,309

3,077

3,650

Capital work-in-progress

352

504

464

419

Investments

513

639

825

1,078

1,278

Long term loans and adv.

249

330

298

478

692

742

Other noncurrent assets

Current assets

2,169

2,000

2,086

2,116

3,312

4,164

Cash

1,192

804

683

481

201

816

Loans & advances

163

220

318

380

758

814

Other

815

977

1,085

1,256

2,353

2,534

Current liabilities

1,284

1,548

1,904

2,419

3,454

3,730

Net current assets

886

452

182

(303)

(143)

434

Total Assets

2,510

2,923

3,433

3,988

5,131

6,530

November 13, 2015

Eicher Motors | 3QFY2016 Result Update

Cash flow statement

Y/E December (` cr)

CY2011 CY2012 CY2013 CY2014 15MFY2016E FY2017E

Profit before tax

660

600

671

993

2,030

2,472

Depreciation

109

185

432

428

Change in working capital

177

149

283

(441)

Others

(196)

(58)

(145)

(207)

(79)

Direct taxes paid

(163)

(125)

(145)

(291)

(594)

(680)

Cash Flow from Operations

536

513

824

1,025

1,221

2,180

(Inc.)/Dec. in fixed assets

(463)

(689)

(733)

(793)

(1,200)

(1,000)

(Inc.)/Dec. in investments

(54)

(126)

(187)

(252)

(200)

Cash Flow from Investing

(517)

(815)

(919)

(1,046)

(1,200)

Issue of equity

Inc./(Dec.) in loans

(52)

(21)

(26)

Dividend paid (Incl. Tax)

(43)

(54)

(81)

(159)

(301)

(365)

Others

(10)

(5)

Cash Flow from Financing

(73)

(86)

(25)

(181)

(301)

(365)

Inc./(Dec.) in cash

(54)

(388)

(121)

(202)

(280)

615

Opening Cash balances

1,246

1,192

803

683

480

201

Closing Cash balances

1,192

803

683

480

201

816

November 13, 2015

Eicher Motors | 3QFY2016 Result Update

Key ratios

Y/E December

CY11

CY12

CY13

CY14

15MFY16E FY17E

Valuation Ratio (x)

P/E (on FDEPS)

153.7

132.2

109.0

69.9

33.5

27.6

P/CEPS

114.9

105.4

82.0

51.5

25.1

21.7

P/BV

29.2

24.8

21.2

17.3

12.4

9.2

Dividend yield (%)

0.1

0.2

0.3

0.6

0.7

EV/Sales

7.3

6.5

6.1

4.7

2.7

2.5

EV/EBITDA

70.1

75.6

58.2

37.2

17.3

15.0

EV / Total Assets

16.5

14.2

12.1

10.4

8.1

6.3

Per Share Data (`)

EPS (Basic)

103.3

120.1

145.6

227.1

473.2

574.8

EPS (fully diluted)

103.3

120.1

145.6

227.1

473.2

574.8

Cash EPS

138.2

150.6

193.7

308.2

632.4

732.3

DPS

16.0

20.0

30.0

50.0

94.6

115.0

Book Value

543.4

640.2

749.9

918.4

1,279.5

1,719.8

Dupont Analysis

EBIT margin

11.7

9.4

10.0

11.5

13.3

15.1

Tax retention ratio

0.8

0.7

Asset turnover (x)

4.3

3.0

2.5

3.1

2.9

ROIC (Post-tax)

38.0

22.5

19.3

20.2

29.3

31.5

Cost of Debt (Post Tax)

13.1

7.4

11.8

15.0

15.5

Leverage (x)

(0.8)

(0.4)

(0.3)

(0.2)

(0.0)

(0.2)

Operating ROE

18.9

18.3

15.8

18.8

28.7

28.9

Returns (%)

ROCE (Pre-tax)

26.5

20.6

19.8

25.1

39.8

38.0

Angel ROIC (Pre-tax)

50.5

28.5

24.7

28.6

41.4

43.5

ROE

20.6

18.5

19.2

24.5

36.7

33.2

Turnover ratios (x)

Asset Turnover (Gross Block)

5.8

4.2

3.0

2.8

3.5

3.1

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

(26)

(29)

(38)

(40)

(17)

Solvency ratios (x)

Net debt to equity

(0.8)

(0.4)

(0.3)

(0.2)

(0.0)

(0.2)

Net debt to EBITDA

(1.9)

(1.4)

(0.8)

(0.4)

(0.1)

(0.3)

Interest Coverage (EBIT / Int.)

86.8

159.2

86.1

102.5

165.5

198.8

November 13, 2015

Eicher Motors | 3QFY2016 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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or in connection with the use of this information.

Note: Please refer to the important ‘Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the

latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may

have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement

Eicher Motors

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

November 13, 2015