ABSTRACT

A comprehensive study on Eicher Motors India and

stock recommendations based on the same.

Shirsendu Bikash Das

Shubhradeep Paul
Deepanshu Bhanot
Sriram Sundararajan
RESEARCH REPORT Suhag Patel
 BSE Sensex: 31524.68 NSE Nifty: 9837.40

CMP: 31454.20 TP: 35000 Buy

Valuation
Summary
FY16 FY17 FY18E FY19E Stock Info
P/E(x) 50.3 37.4 30.7 25.6 Equity shares (m) 27.21
Adj.EV/E (x) 212.3 146.2 82.7 36.7 52 week range (INR) 30,617/ 22,467.15
tgt.Adj.EV/E(x) 173.3 119.4 67.6 30 M.Cap (INR b) 843
P/BV(x) 18.5 13.6 10.3 7.8 M.Cap (USD b) 13.1
RoNW (%) 36.9 36.4 33.5 30.6 Free Float (%) 49.12
RoCE (%) 42.4 40.2 40.5 38.6 Face Value 10

Shareholding Pattern

Shareholding Pattern
As on Jun-17 Dec-16 Jun-16
Promoter 50.58% 50.59% 50.67%
DII 4.12% 3.68% 3.63%
FII 31.87% 32.52% 32.37%
Others 13.43% 13.21% 13.33%

Stock Performance
Focus on strong domestic growth, Building similar markets abroad

There is a substantial assurance in the growth opportunity of Eicher Motors. The management has
been very effective in putting a road map in place with respect to corporate governance, expanding
product portfolio, production capacity and market expansion.

Key highlights

Royal Enfield as a brand has a very sharp focus on 250-750cc segment. The approach of less
is more has enabled the brand to do the things well without compromising on the
traditional feel of the cruiser bike.
The target customer segment is the step-up segment, wherein people trade up from
existing choices. This target market is the ideal target market with the growing affluent
middle class who typically dominate this customer segment. Royal Enfield doesnt categorize
itself as a premium/luxury brand but still maintains exclusivity and aspirational value.
Royal Enfield has attained considerable market growth, with demand outpacing supply
consistently over the last few years.
The new store format has upgraded look and feel, change of heart would happen through
this new program which would improve in-store and in-use experience.
Royal Enfields export is a 10 years story In recent times their exports also went up by 36% as
the company exported 1578 units as on April 2017.
The company also announced direct operations in Brazil last month to strengthen its
presence in Latin America, one of the many new developments in strengthening their
foreign markets.
Playing to disrupt global motorcycle industry by creating new segment. Like India, RE has
opportunity to create and own middle segment in global markets.
Manufacturing is sorted out and is now well-oiled machine, freeing up bandwidth for
distribution and retail.
VECV is targeting substantial volume growth with a CAGR of 27% over the course of the next
5 years with a target volume of 100,000 units.
10% of the expected volume growth is expected to be export oriented growth.

Things to expect: Extreme focus and perseverance. Continued product innovation. Brand led growth.
Not moving towards diversification in the short term (Polaris JV was already started in an earlier
period).

Things not to expect: Linear outcome. Replication existing growth models.

Maintain Buy with target price of ~ INR 35,000.
Eicher Motors Limited

Industry: Motor vehicles manufacturing, Motor vehicles part manufacturing

Brands: Royal Enfield motorcyles, Eicher Trucks and Buses, Volvo Trucks India, Eicher Engineering
Components, VE Powertrain

EIC Analysis

Economy

Real GDP expected to grow at 7.5-8% in the period 2017-2021

Strong 2-wheeler sales growth expected due to rising income
Increased infrastructure activity to boost CV demand

Industry

2-wheeler companies posted significant growth in volumes in Q1FY2017-2018 after BSIV

rollout and as the economy started to recover from demonetization.
LCV sales expected to gain momentum with increasing development of hub and spoke
model for development. Demand of MCV and HCVs are expected to slump because prices
rose by 8-10% to comply with new emission standards.
Voluntary Scrappage Scheme, which incentivises scrapping of CVs older than 15 years
through tax rebates, will ensure steady demand.

Company

Royal Enfield reported volume growth of 25% YoY in Q1 FY2017-2018. Sales volume CAGR in
FY2016-2017 is 41.9%
Eicher to invest 800 crore in the Royal Enfield brand.
Manufacturing capacity to be 8.25 lakh units from Aug 2017.
Waiting period of highest selling model is 2 months, for other models 1 month
A network of 700 dealers, mostly in metro cities. Royal Enfield to penetrate Tier-2 cities to
boost sales
EBITDA margins to improve in view of superior bargaining power over suppliers and efforts
to reduce employee costs.
Royal Enfields market share in 2017 in 2-wheelers is 5.9%, in motorcycles above 150cc is
24%, and in motorcycles above 250cc is 95.3%.
Eicher to invest 450 crores in VECV towards new product development and capacity
enhancement
Eicher Polaris Multix is the first of its kind personal vehicle, which suits the lifestyle of the
developing nations.
FIVE FORCES ANALYSIS

Existing competition: The automobile manufacturing industry is a very competitive industry and
requires considerable investment in R&D activities to be able to sustain in the market. The market
share of Royal Enfield in the middleweight segment has declined by 2 percentage points. Overall,
Royal Enfield has managed to increase its market share in the domestic motorcycles market.

VECV is expected to gain the most from the expected growth in demand of CVs in the medium term.
Currently, VECV has

Threat of substitutes: Low price passenger cars, city motorcycles like KTM, Pulsar that has a
different value proposition. In addition, the development of public transport infrastructure can be
seen as a substitute. In the CV segment, competitor products are substitutes of Eicher Motor
products.

Bargaining power of suppliers: Bargaining power of suppliers are low in the light that Eicher motors
has been consolidating vendors to reduce costs.

Bargaining power of consumers: is high due to availability of a variety of substitutes

Threat of new entrant: Low-medium. Although the industry is capital intensive and a niche target
audience, foreign players have been eyeing Indian market due to high growth prospects.

Royal Enfield - Aspirational and affordable, iconic brand of the segment.

Royal Enfield has sustained its image as an iconic brand in the 250 CC above segment in the
two wheeler market. It offers a option to the aspirational buyer which fits his budget. There
is significant focus on maintaining that momentum and image in India and create similar
market segment abroad. Strategically overcoming barriers such as product quality and cost
of ownership and creating consumer triggers such as building a good operational ecosystem
and improving customer retail experience.
Sustain position as a leading middle level motorcycle and expand market size through
targeted trading up of the commuter segment.
Driver by a strong team built over the last few years, Royal Enfield is launching market
relevant products and following a differentiated marketing strategy in strengthening the
market segment in India and building market segments abroad. The focussed approach is
epitomized by their philosophy of Less is more.

Significant growth opportunities in the domestic market

Royal Enfield will continue to retain enormous market share .RE currently has 5.9% volume
share and 95% volume share .
By creating an iconic brand image with aspirational value for the increasing number of
affluent middle class, theyve created and captured the cruiser bike market segment in India.
Theyve positioned it as a trade up from the existing choices available to the consumer
segment at little extra price. They are also focussed on creating similar market segments
abroad.
Increasing brand visibility and consumer access in Tier-2 markets while strengthening prime
markets across India, through increasing number of retail outlets
 Royal Enfield has focussed on enhancing customer retail and sales experience considerably.
They have launched a updated look and feel to their stores, in not just in change of design
but also change of heart when it comes to enhancing in-store and inuse experience.

Expanding exports and building global markets.

Royal Enfield is disrupting the global motorcycle market by creating a new segment by
creating a product that identifies itself as an upscale yet affordable commuter choice in the
developing markets and as a pure biking experience in developed markets.
In next 10-15 years, it is focusing on building RE as a new age brand relevant for the current
generation, which is still grounded to its heritage.
There are not many product options in the market in the middle weight motorcycle
segment, especially a product like Royal Enfield which has created an own identity for itself.
There are not many bikes that have been able to emulate the image of modern in
technology and fell, but still maintaining the old school charm.
International expansion is focussed on developing in certain urban pockets where the
product is well positioned to compete and not on a pan-nation strategy. The plan is to
entrench the brand in the cultural fabric of all target markets across continents.

Manufacturing well in control and planned execution of expansion of production capacity

Royal Enfield is increasing production capacity aggressively and the company promises to
decrease the waiting periods further. Now the waiting period has come down from 6
months to 3 months. So the management is confident of managing production capacity.

Eicher motors has invested in a third manufacturing facility in Chennai which takes the
production capacity to 8.25 lakh units from August 2017. It has also invested 450 crores for
product development and capacity enhancement.

VALUATION

The momentum to shift from production to products and marketing: Owing to its position as
a market leader and having built a strong brand identity the strategic direction is focussed to cash in
on the economic recovery and bullish market sentiment. The brand also faces minimal competition
allowing enough breathing room for structured and planned growth without engaging in a price war.
With sustainable capacity addition the focus is now towards innovative products and enhancing
marketing. Identifying the emergence of markets in places where previously there wasnt much
demand, they have increased consumer access through opening more dealerships and more product
offerings. They maintain their aspirational at the same time affordable image capitalize on the brand
ethos.
In Feb 2016, Eicher launched Himalayan, an adventure variant of Royal Enfield. In 2017, they
launched the Classic 350 Redditch Edition inspired by the paint scheme of the 1950s era of Royal
Enfield motorcycles. VECV developed the Pro 5000 which was launched in April 2017, and will soon
launch Skyline Pro buses.
Exports will scale up in the near future, as it has just starting work on its focus on Latin America and
Asia. It added 150 dealers since 2015 which takes the total number of dealers in india to 700. We
estimate 35%/30% EBITDA/PAT CAGR over CY17-19E.

Volvo Eicher Commercial Vehicles (VECV) has recorded 8.5 percent year-on-year growth in sales
for the month of March 2017 and stood at 7.327 units. This includes 7088 units of Eicher brand and
239 units of Volvo brand.In the domestic commercial vehicle market, Eicher branded trucks & buses
have recorded sales of 6410 units in March 2017 as compared to 5944 units in March 2016,
representing a growth of 7.7 percent. On the exports front, Eicher branded trucks & buses have
recorded highest ever sales in a financial year with 8035 units in 2017 as compared to 6512 in 2016,
March 2017 recorded sales of 678 units as compared to 689 units in March 2016. Volvo trucks have
recorded sales of 239 units in March 2017 as compared to 120 units in March 2016, representing a
growth of 99.2 percent. There is strong growth both domestic and abroad and despite the lull after
demonetisation sales have picked up considerably thereafter and the forecasted demand looks
good. We estimate VECVs sales/PAT to post 15%/20% CAGR (CY17-19E)

MDEP: An opportunity to be part of Volvos global supply chain: MDEP holds strategic importance
for both the Volvo Group (low cost source of Euro 5/6 medium-duty engines) and VECV (improve
VECV's positioning in HCVs with headstart on futuristic technology). It provides an opportunity to be
part of Volvos global supply chain & tap other such opportunities.

Strong structural Growth: Consol EPS is estimated to grow ~25% CAGR over CY16-19E, with RoIC
improving from ~28% in FY17 to ~31% in FY19. Our 1 year target price is ~INR35000 (30% upside,
and 3 year target price is INR 38000. Maintain Buy.
Appendices

EBITDA & EBITDA margin

45,000 35
40,000 30
35,000
25
30,000
25,000 20
20,000 15
15,000
10
10,000
5,000 5
- -
2012 2013 2014 2016 2017 2018E 2019E
(15M)

Series1 Series2

VECV sales and sales growth rate

70000 30.0%

60000 25.0%
20.0%
50000
15.0%
40000
10.0%
30000
5.0%
20000
0.0%
10000 -5.0%
0 -10.0%
2012 2013 2014 2016 2017 2018E 2019E

Series1 Series2

ROE & ROCE

45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
2013 2014 2016 2017 2018E 2019E

ROE ROCE
Finacials & Valuations

P&L Account
Perticulars 2012 2013 2014 2016 (15M) 2017 2018E 2019E
Net sales 63,299 66,858 85,987 1,56,887 70,334 92,380 1,34,030
Change (%) 12 6 29 82 35 31 45
EBITDA 5,490 7,137 11,148 24,472 21,740 29,773 39,777
EBITDA Margin (%) 9 11 13 16 31 32 30
Depreciation 822 1,300 2,198 4,517 1,538 2,264 2,624
Interest Cost 38 79 98 90 36 30 33
Other Income 1,366 953 1,074 1,120 2,273 2,955 3,103
PBT 5,997 6,711 9,926 20,985 23,873 30,434 40,223
Tax 1,249 1,452 2,909 6,466 7,203 9,435 12,469
Effective Rate (%) 21 22 29 31 30 31 31
PAT 4,749 5,259 7,017 14,519 16,671 21,000 27,754
Change (%) (5) 11 33 107 15 26 32

Balance Sheet
Particulars 2012 2013 2014 2016 (15M) 2017 2018E 2019E
Share Capital 270 270 271 272 272 272 272
Shareholder's Funds 17,549 20,554 25,159 34,643 40,713 62,343 81,589
Minority Interest 9,485 10,397 10,851 11,569 13,373 17,054 2,174
Deffered Tax 1,232 1,805 2,394 3,382 4,377 4,877 5,377
Loans 384 839 584 859 1,059 1,259 1,459
Capital Employed 28,649 33,595 38,986 50,452 59,522 85,533 90,599
Application of Funds
Gross Fixed assets 15,260 22,933 31,374 36,103 42,603 49,103 55,603
Less: Depriciation 5,342 6,431 8,280 10,626 14,054 18,048 22,608
Net Fixed Assets 9,918 16,502 23,094 25,477 28,549 31,055 32,995
Capital WIP 5,044 4,636 4,188 2,363 2,363 2,363 2,363
goodwill 223 223 223 223 223 223 223
Investments 6,385 8,255 10,777 16,383 21,383 30,383 39,383
Current Assets 23,638 23,914 26,018 29,063 32,952 46,393 63,134
Inventory 4,888 5,268 6,455 10,143 7,495 14,072 15,804
Sundry Debtors 4,459 5,125 5,622 8,336 8,819 11,862 14,938
Cash and Bank balances 8,035 6,826 4,806 5,857 12,472 13,721 25,046
Loans and Advances 5,503 6,163 8,578 4,757 4,166 6,744 7,347
others 483 532 557 - - - -
Current Lib. And Prov. 16,066 19,771 25,089 21,639 22,928 28,035 30,393
Sundry Creditors 14,346 17,612 21,876 20,809 22,048 26,959 29,227
Other Lib. 6 - - - - - -
Provisions 1,704 2,159 3,213 830 880 1,076 1,166
Net Current Assets 7,302 4,143 928 7,424 10,025 18,364 32,742
Application of Funds 28,649 33,595 38,987 52,473 67,345 87,055 1,11,693
Cash flow Statement(Consolidated)
As on CY12 CY13 CY14 16(15M) FY17 FY18E FY19E
Profit Before Tax 5,997 6,711 9,926 20,985 23,873 30,434 40,223
Depreciation and Ammortization 822 1,300 2,198 4,517 1,538 2,264 2,624
Taxes Paid (1,249) (1,452) (2,909) (6,466) (7,203) (9,435) (12,469)
Inc/Dec in Working Capital 391 (2,220) (1,194) 5,444 (4,015) 7,085 3,058
Interest/Div. Received (1,049) (485) (342) (65) (40) 15 19
Other Items 48 3,308 2,796 (9,784) 2,935 (10,171) (10,052)
CF from Oper. activity 4960.40 7162.00 10474.70 14630.80 17089.20 20192.20 23402.10
Inc/Dec in Fixed Assets+CWIP (7,820.0) (7,265.0) (7,993.0) (2,904.0) (6,500.0) (6,500.0) (6,500.0)
Free Cash Flow (2,859.6) (103.0) 2,481.7 11,726.8 10,589.2 13,692.2 16,902.1
Purc/sale of investment (1,258.8) (1,869.6) (1,809.3) (6,069.3) (12,105.3) (15,045.4) (13,045.0)
CF from inv. Activity (7,731.8) (7,897.9) (12,144.8) (10,014.0) (17,518.7) (21,909.0) (18,997.1)
Issue of Shares 3.9 16.5 78.6 48.1 57.4 46.4 30.1
Inc/Dec in Debt (63.0) 455.0 (255.0) 275.0 200.0 200.0 200.0
Interest Paid (39.5) (79.8) (97.8) (21.2) (32.4) (32.4) (32.4)
Dividends Paid (769.6) (876.8) (1,151.6) (4,071.3) - - -
CF from Fin. Activity (1,108.7) (473.5) (1,622.3) (4,655.2) 469.1 567.1 657.0
Inc/Dec in Cash 750.0 (1,209.0) (2,020.0) 1,051.0 6,615.0 1,249.0 11,325.0
Add Beginning Balance 11,915.1 8,035.0 6,825.6 3,533.2 132.8 172.4 271.7
Closing Balance 8,035.0 6,825.6 3,533.2 132.8 172.4 271.7 16,658.7

Financial Ratio
As on CY12 CY13 CY14 16(15M) FY17 FY18E FY19E
Basic(INR)
EPS 175.89 194.78 258.93 471.50 633.40 772.30 927.40
EPS Growth 5.79 10.74% 32.94% 82.10% 34.34% 21.93% 20.08%
Book Value per share 649.96 761.26 928.38 1,275.51 1,496.80 2,292.02 2,999.60
Cash EPS 183.72 265.26 386.52 538.69 628.28 742.36 860.37

Valuation(x)
P/E 54.15 48.3 73.23 50.3 37.4 30.7 25.6
Cash P/E 51.84 35.47 49.06 44.03 37.70 31.94 27.59
EV/EBITDA 47.18 36.21 46.69 26.59 29.73 21.81 15.70
EV/Sales 4.09 3.87 6.05 4.15 9.19 7.03 4.66
Price To Book Value 14.65 12.36 20.42 18.5 13.6 10.3 7.8

Profitability Ratio
RoE 27.06% 25.59% 27.89% 41.91% 40.95% 33.68% 34.02%
RoCE 26.48% 24.58% 27.26% 40.90% 39.91% 33.02% 33.42%

Turnover Ratios
Debtors Day 25.71 27.98 23.86 19.39 45.77 46.87 40.68
Inventory Days 30.86 32.20 31.48 27.96 56.30 82.04 61.20
Creditor Days 90.58 107.64 106.69 57.36 165.61 157.17 113.18
Asset Turnover 1.40 1.25 1.34 2.13 0.82 0.84 0.97

Leverage Ratio
Debit/Equity 0.02 0.04 0.02 0.02 0.03 0.02 0.02