Daiwa India - Auto Sector - Initiation

Automobiles & components / India
19 April 2011
Initiation: start your engines India Auto Sector
• Macro factors support medium/long-term demand, though near-

term headwinds persist
• Positive demand environment likely to give auto manufacturers
greater pricing power
• Current PER discounts of up to 20% to mid-cycle valuations give
risk-reward comfort How do we justify our view?
drive share-price performances over Land Rover (JLR). Meanwhile, we

the next 6-12 months. initiate coverage of Bajaj Auto with a
3 (Hold) rating and Hero Honda with
We see the market’s concerns about a 4 (Underperform) rating, due
rising interest rates as overdone, mainly to what we see as their weak
Ambrish Mishra and believe the availability of earnings outlook, little room for
(91) 22 6622 1060
ambrish.mishra@in.daiwacm.com finance is more important. multiple expansion, and uncertainty
Interestingly, India’s GDP per capita over the competitive intensity after
Navin Matta in FY10 is similar to that of China in the split between the Hero group and
(91) 22 6622 8411
navin.matta@in.daiwacm.com 2003, when its motorisation started Honda Motors (7267 JP, ¥1,534, 2).
to gain significant momentum. M&M and Ashok Leyland are our top
picks.
What's new We see auto fuel-price inflation as
Over the past few months, auto the key risk for the sector’s sales- How we differ
stocks have been hit hard by volume growth, mainly for CVs, due On average, our target prices are
concerns about the potential impact to the high sensitivity of their about 6% below those of the
of rising inflation, interest rates and customers’ profitability to Bloomberg consensus, while our
commodity prices on auto companies. fluctuating diesel prices. We believe FY12/FY13 earnings forecasts are
In this report, we explain why we the impact would be less severe for about 3-5% lower. We differ from
believe these concerns are overdone, PVs. Auto-finance tightening and the consensus mainly in the cases of
and identify those stocks that we larger-than-expected jumps in Tata Motors and Ashok Leyland,
believe are likely to be the biggest commodity prices (we have already which we believe could be due to our
gainers in the event of a rebound. factored in 15-20% YoY rises for more conservative outlook for their
FY12 for steel and aluminium) operating-profit margins.
What's the impact represent risks to our view.
Key stock calls
We believe the market is too
pessimistic, and that the recent What we recommend New Prev.
stock-price corrections are excessive. We initiate coverage of the India Ashok Leyland (AL IN)
We believe the demand factors are Auto Sector with a Positive rating. Rating Buy
We prefer the four-wheeler (to the Target price Rs66.20
in place that would trigger a 15% Up/downside S 20.3%
CAGR in passenger-vehicle (PV) two-wheeler) players, due to what we
Mahindra & Mahindra (MM IN)
sales volume and a 13% CAGR in see as their superior sales-volume-
Rating Buy
commercial-vehicle (CV) sales growth potential, better earnings- Target price Rs813.80
volume over the FY11-13 period. growth outlook, and relatively more Up/downside S 12.3%
With no excise-duty rollback in the attractive valuations. We initiate Hero Honda Motors (HH IN)
2011 Union Budget, we see the coverage of Mahindra and Mahindra Rating Underperform
prospect of a less intense pricing (M&M) and Ashok Leyland with 1 Target price Rs1,573.00
(Buy) ratings, as we regard their Up/downside T (14.1)%
environment in FY12. We expect this,
together with what we regard as the valuations as attractive and earnings Source: Daiwa forecasts
Note: Please refer to page 3 for details.
sector’s fairly attractive valuations outlook as solid. We initiate coverage
(FY12E PERs of 9-13x, up to 20% of Tata Motors with a 2 (Outperform)
discounts to their mid-cycle levels), to rating as its valuations still have
room for upside, even with our low
EBITDA-margin forecasts for Jaguar
Important disclosures, including any required research certifications, are provided on the last two pages of this report.
India Auto Sector
19 April 2011
How do we justify our view?

Growth outlook
Valuation
Earnings revisions
Growth outlook Domestic sales-volume growth
We believe the India Auto Sector is poised to record a 1,200,000 3,500,000

significant pick-up in sales volume over the next 3-5
CV - 16% CAGR 3,000,000
years, due to rising affordability, increased 1,000,000 PV - 17% CAGR
urbanisation, and improving auto-financing conditions. 2,500,000
800,000
We forecast the strongest sales-volume growth for PVs 2,000,000
(a 15% CAGR over the FY11-13 period), followed by the 600,000 1,500,000
CV - 13% CAGR
CV and two-wheeler segments (CAGRs of 13% and 12%, PV - 15% CAGR 1,000,000
respectively). Although we expect competition to remain 400,000
500,000
intense in all segments, we believe the impact would be
200,000 0
greatest on two-wheelers and least in the case of CVs. In FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E
the CV space, we forecast sales for the light-CV segment
CVs (LHS) PVs (RHS)
to rise at the fastest clip (15%+ CAGR), and scooters to
report a higher 17% CAGR in the two-wheeler space. Source: Crisil, Daiwa forecasts
Valuation Peer-valuation comparison
The auto stocks that we cover are trading currently at Share PER (x) EV/EBITDA (x)
valuation (PBR and PER) discounts of up to 20% to Rating price (Rs) FY12E FY13E FY12E FY13E
Bajaj Auto Hold 1,420 14.0 13.0 11.3 10.7
their past mid-cycle levels. For instance, M&M, Maruti Hero Honda Underperform 1,832 16.3 14.3 13.4 11.3
Suzuki and Ashok Leyland trade at one-year-forward Ashok Leyland Buy 55 10.8 8.5 7.1 5.9
PBRs of 2.5x, 2.2x and 1.7x, respectively, compared with Tata Motors Outperform 1,236 8.9 8.4 4.9 4.4
average PBRs of 2.9x, 2.8x and 2x, respectively, at the Mahindra and Mahindra Buy 724 10.0 8.8 7.3 6.1
Maruti Suzuki Outperform 1,257 13.4 11.2 8.9 7.1
mid points of the two previous cycles. We believe these
Source: Bloomberg, Daiwa forecasts
levels offer us comfort with regards to its valuation. Note: share prices as at the close on 15 April 2011
Earnings revisions Daiwa vs. consensus FY12/FY13 EPS variance
Our FY12/FY13 earnings forecasts are lower than those 10%

of the Bloomberg consensus in most cases. Given the
near-term headwinds the sector faces, such as high oil 5%
prices, interest-rate hikes and commodity-cost pressure, 0%
we have assumed lower-than-consensus sales-volume
(5%)
growth, but higher margin contraction for most
companies, except for Maruti Suzuki, which we believe (10%)
would be less affected by competition than the market (15%)
expects.
(20%)
TTMT AL HH BJAUT MM MSIL
Variance from consensus - FY12 Variance from consensus - FY13

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India Auto Sector
19 April 2011
Executive summary
Initiation: start your engines

We initiate coverage of the India Auto Sector with a Positive rating; M&M and Ashok
Leyland are our preferred picks
Investment thesis
Despite rising interest rates, we expect the India Auto Sector to record Upside surprise for sales
reasonably strong sales-volume growth over the next 3-5 years. Higher
growth, coupled with a better-than-expected pricing environment in FY12
volume or pricing action
would be positive surprises for the market. However, the auto stocks may could lead to a sector
face headwinds in the near term due to higher inflation and the uncertainty rerating over the next 6-12
surrounding the impact of the Japan earthquake on component supplies.
However, we would see any resulting share-price weakness as a buying
months
opportunity. Any upside surprises in terms of sales volume or pricing
action should lead to a rerating of the sector over the next 6-12 months,
given the contraction in valuations to what we see as more reasonable
levels after the sharp underperformance against the benchmark BSE
SENSEX over the past few months.
Valuation
The auto stocks that we cover have retreated by about 10-30% from their
52-week highs, compared with the benchmark BSE SENSEX’s 8%
correction from its 52-week high in November 2010. We attribute this
significant underperformance primarily to concerns in the market about
the impact of rising interest rates, higher inflation, and increases in crude
oil/commodity prices. Although we would not dismiss these concerns
completely, we believe sales-volume and pricing gains, particularly for
PVs, would lead to the sector being rerated close to its past mid-cycle
valuation levels. Auto stocks are trading currently at discounts of up to
about 20% to their mid-cycle valuations.
Profit outlook
Given our forecasts of healthy sales-volume growth and increases in ASPs,
we forecast FY12 revenue for our auto universe to increase by 16% YoY.
However, we expect input-cost pressure and intense competition to keep
margins in check, resulting in lower net-profit growth of 15% YoY for
FY12. We expect Maruti Suzuki and Ashok Leyland to lead the pack in
terms of earnings growth (16% YoY and 21% YoY, respectively).
Key stock calls

EPS (local curr.)
Rating Target price (local curr.) FY11 FY12
Company Name Stock code New Prev. New Prev. % chg New Prev. % chg New Prev. % chg
Tata Motors TTMT IN Outperform 1,374.00 - 31.523 - 39.443 -
Ashok Leyland AL IN Buy 66.20 - 4.232 - 5.120 -
Hero Honda Motors HH IN Underperform 1,573.00 - 101 - 112 -
Bajaj Auto BJAUT IN Hold 1,422.00 - 90.375 - 102 -
Mahindra & Mahindra MM IN Buy 813.80 - 44.111 - 47.088 -
Maruti Suzuki India MSIL IN Outperform Outperform 1,365.00 1,365.00 0.0 80.544 80.544 0.0 93.608 93.608 0.0
Source: Bloomberg, Daiwa forecasts; note: March year end for all companies listed
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India Auto Sector
19 April 2011
Table of contents
Sector financial snapshot ................................................................................................................. 5

Macro fundamentals remain strong ................................................................................................ 6
Income levels are rising, while affordability is improving ....................................................... 6
Increasing urbanisation could support demand as well .......................................................... 6
Business fundamentals of fleet operators holding strong........................................................ 6
Auto-financing situation remains favourable .......................................................................... 6
China’s motorisation growth indicates an opportunity for the India Auto Sector .................. 6
Valuations and rating ....................................................................................................................... 7
Stocks trading at a discount to previous mid-cycle valuations ................................................ 7
Interest-rate cycle does have an impact on auto stocks’ performances................................... 7
Coverage initiated with a Positive rating..................................................................................8
Risks to our view ............................................................................................................................ 10
Oil-price inflation may hurt economic momentum and drive up auto-fuel prices ............... 10
Liquidity squeeze by banks: a near-term risk, may hit auto financing.................................. 10
Commodity prices may put pressure on margins .................................................................. 10
Post-earthquake disruptions to supply from Japan could hit production plans................... 10
Macro facilitators in place to support India’s motorisation story ..................................................11
Income levels are rising, together with affordability ..............................................................11
Increasing urbanisation and favourable demographics support demand............................. 12
Rural India; smaller towns hold strong potential .................................................................. 12
PVs: sales-volume-growth opportunity is appealing..................................................................... 14
India’s PV penetration rate of less than 20 per 1,000 people is extremely low .................... 14
We see China’s motorisation growth as a precedent for the scale of the opportunity in
India's PV space ...................................................................................................................... 14
We forecast PV demand to rise at a CAGR of 16% over the FY10-15 period ......................... 15
CVs: a good proxy to India’s GDP and infrastructure growth stories ........................................... 16
Business fundamentals of fleet operators holding strong.......................................................17
However, fleet operators’ profitability is very sensitive to diesel prices.................................17
LCV to grow at a faster clip than the CV industry due to Hub and Spoke model...................17
High-tonnage vehicle share increasing within the MHCV segment ...................................... 19
Two-wheelers: competitive landscape getting tougher, growth rates likely to moderate ............20
Auto financing: key sales-volume-growth enabler ........................................................................ 21
Auto-financing situation remains favourable ........................................................................ 21
... even if the liquidity situation is not-so-favourable ............................................................ 21
Company Section
Tata Motors.................................................................................................................................23
Ashok Leyland ............................................................................................................................34
Hero Honda Motors....................................................................................................................44
Bajaj Auto.................................................................................................................................... 53
Mahindra & Mahindra................................................................................................................64
Maruti Suzuki India.................................................................................................................... 74
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India Auto Sector
19 April 2011
Sector financial snapshot

Key performance parameters in profit-and-loss statement
Net revenue (Rs m) EBITDA (Rs m) Adj. PAT (Rs m) EPS (Rs) EBITDA margin ( %)
FY11E FY12E FY13E CAGR (%) FY11E FY12E FY13E CAGR (%) FY11E FY12E FY13E CAGR (%) FY11E FY12E FY13E CAGR (%) FY11E FY12E FY13E
Bajaj Auto 168,346 195,401 216,845 13.5 34,041 37,089 39,161 7.3 26,151 29,386 31,613 9.9 90.4 101.6 109.3 9.9 20.2 19.0 18.1
Hero Honda 190,221 217,957 238,477 12.0 22,994 25,534 29,369 13.0 20,174 22,434 25,543 12.5 101.0 112.3 127.9 12.5 12.1 11.7 12.3
Ashok Leyland 107,257 125,026 137,162 13.1 11,246 13,462 15,684 18.1 5,630 6,812 8,579 23.4 4.2 5.1 6.4 23.4 10.5 10.8 11.4
Tata Motors 471,118 545,942 606,757 13.5 50,261 59,068 66,621 15.1 19,672 24,615 29,947 23.4 31.5 39.4 48.0 23.4 10.7 10.8 11.0
Mahindra and Mahindra 234,414 279,133 321,075 17.0 35,664 39,527 44,992 12.3 26,664 28,463 32,433 10.3 44.1 47.1 53.7 10.3 15.2 14.2 14.0
Maruti Suzuki 364,246 410,491 491,223 16.4 34,901 41,142 50,511 20.0 23,277 27,053 32,544 18.3 80.5 93.6 112.6 18.2 9.6 10.0 10.3
Source: Companies, Daiwa forecasts
Key performance parameters from balance sheet

ROE (%) ROCE (%) Asset turnover (x) Net debt-to-equity ratio (x)
FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E
Bajaj Auto 70.1 54.4 43.5 46.6 38.9 32.5 1.7 1.6 1.5 0.2 0.2 0.1
Hero Honda 48.7 40.1 35.6 40.0 33.3 29.7 2.2 2.2 2.0 - - -
Ashok Leyland 14.7 16.3 18.6 10.8 12.1 14.2 1.1 1.1 1.1 0.5 0.5 0.4
Tata Motors 11.4 12.4 14.1 8.9 10.3 11.6 0.9 1.0 1.1 0.5 0.4 0.3
Mahindra and Mahindra 28.5 23.7 22.5 20.5 19.0 18.4 1.3 1.4 1.3 0.1 0.0 -
Maruti Suzuki 18.1 18.4 18.1 13.2 13.9 14.1 2.0 1.9 2.0 0.0 0.0 -
Source: Companies, Daiwa forecasts
-5-
India Auto Sector
19 April 2011
Auto-financing situation remains

favourable
The current auto-financing situation looks favourable,
and continues to support demand in the Auto Sector.
After experiencing some pressure during the Global
Macro fundamentals Financial Crisis (3Q FY09-1Q FY10), some of the key
players, like HDFC Bank (HDFCB IN, Rs2,206, 2) and
remain strong State Bank of India (SBIN IN, Rs2,642, 2) have
recorded consistent improvements in disbursals. Many
other public- and private-sector banks have also
Income levels are rising, while increased their presence in the auto-financing business
affordability is improving over the past few quarters. This has given buyers more
According to the National Council for Applied alternatives when selecting financing options at fairly
Economic Research (NCAER), income levels in India competitive borrowing rates.
have improved significantly, with the number of
middle-class households increasing from 5.7% in 2001- China’s motorisation growth indicates an
02 to 12.8% in 2009-10. Over the same period, the opportunity for the India Auto Sector
proportion of aspirers (with annual incomes of Around the start of the previous decade (2001-02), the
Rs91,000-200,000) of total households also increased automobile industries of China and India were not as
from 22% to 34%. We forecast India’s GDP per capita widely divided as they are today. In 2002, China’s PV
to improve from US$1,175 in FY10 to US$2,004 in market was 1.5x the size (5.6x in 2010) of India’s PV
FY13. Meanwhile, the average price of an entry-level market. Over the 2002-10 period, PV sales in China
PV has remained flat over the past 10 years, at about rose at a CAGR of 37%, compared with a 17% CAGR for
US$7,500, while that of an entry-level motorbike has India.
risen by about 1% annually to US$950.
We believe the key reasons for China’s automotive
Increasing urbanisation could support market’s expansion over the past decade has been its
demand as well strong economic growth (higher per-capita incomes),
The United Nations (UN) projects India’s urbanisation the government’s focus on the manufacturing sector,
level to increase by 5pp from about 30% in 2010 to and the urbanisation effect (currently at 45%+).
about 35% by 2020, which is encouraging when Notably, India’s GDP per capita in FY10 was similar to
compared with the 2.3pp rise over the past 10 years that of China in 2002, the year when its motorisation
(2001-10). Urbanisation, we believe, would play a started to gain momentum.
critical role in boosting income opportunities,
enhancing standards of living, and improving the
connectivity between cities/states.
Business fundamentals of fleet operators

holding strong
According to the truck-fleet operators that we have
spoken to, freight availability in the industry is healthy
at the moment, which should ensure that the
fundamental transportation business remains strong.
Over the past few years, fleet operators have been able
to pass on hikes in fuel prices to customers due to the
high capacity-utilisation rates of truck fleets. As a result,
fleet operators have been making greater profits
compared with the situation a few years back, when
generating cash profit after paying the equated
monthly instalment (EMI) on the vehicle loan was a
challenge.
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India Auto Sector
19 April 2011
PV three-month-moving-average sales volume

50%
40%
30%
Valuations and rating 20%

10%
0%
Since December 2010, the BSE Auto Index is down by (10%)
8.5%, compared with the BSE SENSEX’s drop of 2.5%.
(20%)
Individually, auto stocks have corrected by as high as
Apr-05
Apr-10
Jun-04
Nov-04
Sep-05
Feb-06
Jul-06
Dec-06
Oct-07
Mar-08
May-07
Aug-08
Jan-09
Jun-09
Nov-09
Sep-10
25% over the similar period. Furthermore, when
compared with their 52-week highs, auto stocks have
corrected by 10-30%, versus the 8% drop in the Source: Crisil, Daiwa compilation
SENSEX from its 52-week high set in November 2010.

This performance is after the rebound in auto stocks Interest-rate cycle does have an impact on
post the 2011 Union Budget, which drove up the Auto auto stocks’ performances
index since then by 14%+ against the BSE SENSEX’s Comparing the benchmark BSE Auto Index with the
gain of 9.5%. domestic interest rate (SBI Prime Lending Rate) shows
that auto stocks do react negatively in a rising interest-
Stocks trading at a discount to previous rate cycle. However, we also find that rising interest
mid-cycle valuations rates doesn’t necessarily affect volume every time, as
We looked at the two previous periods when the has been the case over the past few quarters (see
sector’s sales-volume growth moderated to single-digit following charts). This, in our view, is due to the
percentages (FY06 and FY08) to determine how extremely low motorisation levels in India and
reasonable current valuations appear. Compared with favourable auto-financing conditions.
mid-cycle valuations (ie, during the moderate growth
phase), current valuations in some cases imply We believe the auto stocks may come under pressure in
discounts of up to 20% for PBRs and up to 15% for the near future, as the noise about the likely impact of
PERs. For instance, currently M&M, Maruti Suzuki and higher interest rates, rising inflation and the after-
Ashok Leyland trade at one-year-forward PBRs of 2.5x, effects of Japan earthquake gets louder. However, in
2.2x and 1.7x, respectively, compared with average our view, any such share-price weakness should be
PBRs of 2.9x, 2.8x and 2x, respectively, at the mid seen as an opportunity to accumulate strong growth
points of the two previous cycles. In our view, this ideas in the sector (preferably four-wheelers). Any
offers reasonably good comfort to us on valuations. upside surprises in terms of sales volume or pricing
action could lead to a rerating of the sector over the
Medium-heavy CV (MHCV) 3MMA sales volume next 6-12 months, given the contraction in valuations
to what we see as more reasonable levels after the
100%
sharp underperformance against the benchmark
75% SENSEX over the past few months.
50%
25%
0%
(25%)
(50%)
Apr-05
Jun-04
Nov-04
Sep-05
Feb-06
Apr-10
Jul-06
Dec-06
Oct-07
Mar-08
May-07
Aug-08
Jan-09
Jun-09
Nov-09
Sep-10
Source: Crisil, Daiwa compilation
-7-
India Auto Sector
19 April 2011
Auto Index versus interest rates

(%)
9 12,000
10,000
10
8,000
11
6,000
12
4,000
13
2,000
14 0
Q4FY01
Q1FY02
Q2FY02
Q3FY02
Q4FY02
Q1FY03
Q2FY03
Q3FY03
Q4FY03
Q1FY04
Q2FY04
Q3FY04
Q4FY04
Q1FY05
Q2FY05
Q3FY05
Q4FY05
Q1FY06
Q2FY06
Q3FY06
Q4FY06
Q1FY07
Q2FY07
Q3FY07
Q4FY07
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
SBI PLR (LHS) Auto Index (RHS)
Source: Bloomberg, BSE India, Daiwa compilation
CV sales versus interest rates PV sales versus interest rates
(units) (units)
200,000 14 600,000 14
175,000
13 500,000 13
150,000
125,000 12 400,000 12
100,000 11 300,000 11
75,000
10 200,000 10
50,000
25,000 9 100,000 9
Q1FY04
Q3FY04
Q1FY05
Q3FY05
Q1FY06
Q3FY06
Q1FY07
Q3FY07
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q3FY11
Q1FY04
Q3FY04
Q1FY05
Q3FY05
Q1FY06
Q3FY06
Q1FY07
Q3FY07
Q1FY08
Q3FY08
Q1FY09
Q3FY09
Q1FY10
Q3FY10
Q1FY11
Q3FY11
CVs SBI PLR (RHS) PVs SBI PLR (RHS)
Source: Crisil, Bloomberg Source: Crisil, Bloomberg
Coverage initiated with a Positive rating and uncertainty over the competitive intensity after the
We initiate coverage of the India Auto Sector with a split between the Hero group and Honda Motor. M&M
Positive rating. We prefer the four-wheeler (to the and Ashok Leyland are our top picks.
two-wheeler) players, due to what we see as their
superior sales-volume growth potential, better We believe the recent share-price corrections have
earnings-growth outlook, and relatively more attractive factored in a good part of the risk to growth from
valuations. We initiate coverage of M&M and Ashok higher crude-oil and commodity prices. The current
Leyland with 1 (Buy) ratings, as we regard their PERs of 9-13x on our FY12 earnings forecasts for the
valuations as attractive and earnings outlook as solid. makers of four-wheelers are up to 20% below their
We initiate coverage of Tata Motors with a 2 past-five-year averages, which we believe look
(Outperform) rating as the valuations still offer room reasonably attractive for investors with medium-to-
for upside, even with our low EBITDA-margin forecasts long-term investment horizons.
for JLR. We initiate coverage of Bajaj Auto with a 3
(Hold) rating and Hero Honda with a 4 (Underperform)
rating, due mainly to what we see as their weak
earnings outlook, little room for multiple expansion,
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India Auto Sector
19 April 2011
Sector valuations, ratings and target prices

Share Target price Upside/downside PER (x) EV/EBIDTA (x)
Bloomberg code Rating price (Rs) (Rs) potential (%) FY12E FY13E FY12E FY13E
Bajaj Auto BJAUT IN Hold 1,420 1,422 0.2% 14.0 13.0 11.3 10.7
Hero Honda HH IN Underperform 1,832 1,573 -14.1% 16.3 14.3 13.4 11.3
Ashok Leyland AL IN Buy 55 66 20.3% 10.8 8.5 7.1 5.9
Tata Motors TTMT IN Outperform 1,236 1,374 11.2% 8.9 8.4 4.9 4.4
Mahindra and Mahindra MM IN Buy 724 814 12.3% 10.0 8.8 7.3 6.1
Maruti Suzuki MSIL IN Outperform 1,257 1,365 8.6% 13.4 11.2 8.9 7.1
Source: Daiwa estimates
Note: Share prices as at the close on 15 April 2011; PER and EV/EBITDA for Tata Motors and M&M based on consolidated results
On average our target prices are about 6% below those free zone). We apply a relatively lower valuation
of the Bloomberg consensus, while our FY12/FY13 multiples to arrive at our target prices for these two
earnings forecasts are about 3-5% lower. We differ stocks compared with market, and their historical
from the consensus mainly in the cases of Tata Motors averages as well, to factor in any possible negative
and Ashok Leyland, which we believe could be due to earnings surprise due to the current uncertainty over
our more conservative views on their operating-profit oil-price inflation. We expect downward revisions by
margins. We prefer to hold a relatively lower margin the market to EPS forecasts, bringing them closer to
outlook for Tata Motors’ Jaguar Land Rover (JLR) our forecasts, over the next few months. Having said
compared with the current 16-17% level due to the this, we do believe that some of this has been factored
uncertainty over forex movements (£ against € and into their share prices over the past few months, with
US$) and commodity-price inflation. In the case of the BSE Auto Index having underperformed the BSE
Ashok Leyland, we are relatively cautious about its SENSEX significantly since December 2010, shedding
potential for margin expansion resulting from the 8.5% against 2.5% drop in the BSE SENSEX.
ramp-up of production at the Uttaranchal plant (tax-
Daiwa versus the consensus: target prices and earnings forecasts
Target price (Rs) EPS FY12E (Rs) EPS FY13E (Rs)
Bloomberg code Rating Daiwa Consensus Diff, % Daiwa Consensus Diff, % Daiwa Consensus Diff, %
Bajaj Auto BJAUT IN Hold 1,422 1,578 (10) 102 100 2 109 111 (2)
Hero Honda HH IN Underperform 1,573 1,661 (5) 112 115 (2) 128 130 (1)
Ashok Leyland AL IN Buy 66 74 (11) 5.1 5.6 (9) 6.4 6.5 (1)
Tata Motors TTMT IN Outperform 1,374 1,476 (7) 138 160 (13) 147 176 (17)
Mahindra and Mahindra MM IN Buy 814 787 3 47 50 (6) 54 55 (2)
Maruti Suzuki MSIL IN Outperform 1,365 1,413 (3) 94 94 (1) 113 108 4
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India Auto Sector
19 April 2011
price inflation as risks to our estimates, as the pressure

on margins could be greater than expected.
Post-earthquake disruptions to supply

from Japan could hit production plans
Risks to our view The production plans of India’s auto manufacturers
may be affected by disruptions to supplies from Japan
over the near-to-medium term. After the recent
Oil-price inflation may hurt economic earthquake and tsunami, a large number of Japanese
momentum and drive up auto-fuel prices auto and component makers announced plant
We see the prospect of higher crude-oil prices and shutdowns, including big players, such as Suzuki Motor
inflation as the key areas of investor concern in the (7269 JP, ¥1,797, 3), Toyota Motor (7203 JP, ¥3,285,
India Auto Sector. This may, in fact, cap any significant 3), Nissan Motor (7201 JP, ¥716, 2), Honda, etc.
upside potential for stock prices in the near term. We Although some players, such as Suzuki, have restarted
also do not rule out completely the near-term some operations, the timeline for a return to normal
possibility of stocks shedding some gains made since remains uncertain.
the 2011 Union Budget was announced. Any sharp
increase in crude-oil prices, due to a worsening of the We understand that the availability of power remains a
political crises in Middle Eastern countries, could concern after the shutdown of various units at the
compel the government to allow diesel-price hikes to Fukushima power plant. As a result, the shortfall in
reduce the subsidy burden. This may lead to additional power supply may extend the uncertainty over the
pressure on the inflationary front, affecting the production plans of the auto and component makers in
economic-growth momentum. Japan, as well as those outside Japan that depend on
these companies. Among India’s auto makers, we
Liquidity squeeze by banks: a near-term understand that Maruti Suzuki has the highest
risk, may hit auto financing exposure to such imports from Japan (directly/
indirectly).
The India automotive industry’s dependence on
financing makes it very vulnerable to the availability of
auto financing. Although the drop in the liquidity
adjustment facility (liquidity indicator) over the past
few months has not had a negative impact on the
availability of auto financing, one cannot rule out this
coming under liquidity pressure over the next few
months. A slowdown in auto financing by banks may
have a negative effect on our sales-volume growth
forecasts. However, given the attractive business
proposition (higher yield) of auto financing, we would
not expect the banks to ignore the segment for long.
Even then, if there is liquidity pressure, we would not
expect it to last for too long (not more than 3-4
months).
Commodity prices may put pressure on

margins
Auto manufacturers have significant exposure to
commodities such as steel, aluminium, etc. Commodity
prices (especially steel) are up about 15% over the past
quarter. We expect steel prices to stabilise by 3Q12 and
soften thereafter, easing pressure on input costs. We
have factored in about 15-20% input-cost inflation for
FY12, but expect this to be negated partly by increased
economies of scale and the captive cost-efficiency
measures being taken by the manufacturers. However,
we see the prospect of much higher and prolonged
- 10 -
India Auto Sector
19 April 2011
India auto industry: sales-volume breakdown

MHCV Light CV
Three-wheelers 2.0%
3.6% 2.7%
PV
15.4%
Macro facilitators in
place to support India’s
motorisation story Two-wheelers
76.3%
The consistency of the country’s economic-growth
momentum over a large part of the past decade has Source: Crisil
supported investors’ faith in the outlook for the India

Auto Sector. The economy (real GDP) has expanded at Income levels are rising, together with
an average annual rate of 8.4% over the past eight affordability
years, while per-capita GDP (in US$) has risen at an According to the National Council for Applied
average annual rate of about 15.1% over the same Economic Research (NCAER), income levels in India
period. The emerging significance of India on the have improved significantly, with the number of
global automotive map is also mirrored in the plans for middle-class households increasing from 5.7% in 2001-
India announced by the global automotive players such 02 to 12.8% in 2009-10. Over the same period, the
as Toyota, Volkswagen (Not rated), Renault (Not rated), proportion of aspirers (with annual incomes of
Honda, and many others. We believe that the macro- Rs91,000-200,000) of total households also increased
economic and fundamental facilitators are in place to from 21.9% to 33.9%. We expect these indicators of
support India’s automotive industry’s growth over the economic progress to improve further, as the high
next decade. The opportunity, in our view, would be GDP-growth momentum remains intact, and
significantly greater in the PV and CV segments than urbanisation levels look set to rise from 30% currently
the two-wheeler segment, since we believe the former to 35% by 2020 (Source: United Nations).
are hugely underpenetrated when compared with
economies that are expanding at similar rates, such as
China. Two-wheelers account for around 76% of India’s
automobile market currently, while PVs and CVs make
up 15% and 5%, respectively.
India: household-income profile (2001-02) India: household-income profile (2009-10)
Middle class Middle class Rich

(Rs201,000- Rich
(Rs201,000- (>Rs1,000,000)
1,000,000) (>Rs1,000,000) 1,000,000) 1.7%
Aspirers 5.7% 0.4%
12.8%
(Rs91,000-
200,000)
21.9%
Aspirers
Deprived (Rs91,000- Deprived
(<Rs90,000) 200,000) (<Rs90,000)
71.9% 33.9% 51.6%
Source NCAER - Centre for Macro Consumer Research Source: NCAER - Centre for Macro Consumer Research
We forecast India’s per-capita GDP to improve from would enhance the purchasing power of India’s
US$1,175 in FY10 to US$ 2,004 in FY13. This translates consumers and lead to an increase in discretionary
into an average annual growth rate of 18%, which is spending that would benefit demand for PVs and two-
much higher than the average per-capita GDP growth wheelers in the future.
rate of 11.6% between FY06 and FY10. In our view,
such a healthy improvement in per-capita income
- 11 -
India Auto Sector
19 April 2011
We also observe that the affordability of automobiles as India: urbanisation rate

personal transportation, especially PVs, has increased (%)
significantly over the past decade. While prices of 50
entry-level PVs have remained flat (or, in fact, dropped) 45
over the past 10 years, at about US$7,500, those of
40
entry-level motorbikes have risen by around <1%
35
annually to about US$950. This has been possible due
primarily to reductions in duties and taxes over the 30
years, along with cost benefits derived by the 25
manufacturers from improving economies of scale that 20
have been passed on partially to customers.
15
1971 1981 1991 1995 2000 2001 2005 2010 2015 2020 2025 2030
Change in PV and motorbike prices
Ex-showroom price (Rs) 2000 2011 Source: UN
PV
Maruti Wagon-R (LX) BS4 349,000 337,600 Median age comparison
Hyundai Santro (Base) 299,000 279,800
(years)
Motorbike 50
Splendour+ 40,500 42,500
Pulsar 150 DTS-i 50,500 62,000 40
Source: Company, Daiwa compilation
30
India: GDP per capita (US$)
20
(US$)
2,100 10
1,800 0
1,500 Japan Germany UK France US China Brazil Mexico India South
Africa
1,200
900 Source: Company
600
300 Rural India; smaller towns hold strong
0
potential
In India, we see the potential for a volume-growth
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
contribution from the rural and semi-urban markets as

Source: Daiwa estimates extremely high. About 70% of all households in India
still reside in the rural/semi-urban areas, where
Increasing urbanisation and favourable penetration rates for automobiles are very low
demographics support demand (especially for PVs, where the rate is just 3%, according
to the NCAER). However, the government’s efforts
The UN projects India’s urbanisation level to increase
(such as higher Minimum Support Prices for
by 5pp from about 30% in 2010 to about 35% by 2020,
agricultural commodities, assured income through the
which is encouraging when compared with the 2.3pp
National Rural Employment Guarantee Scheme, etc)
cumulative rise over the past 10 years (2001-10).
have been putting more disposable income in the
Urbanisation, we believe, would play a critical role in
hands of rural consumers. Consequently, we have seen
boosting income opportunities, enhancing standards of
penetration rates improve for low-value consumer
living and improving the connectivity between
durable goods (costing <Rs50,000). We expect this
cities/states.
trend to accelerate further over the next few years, as
both the central and the state governments maintain
On the other hand, the average median age of <25
their thrust on the rural economy to drive economic
years provides reassurance about the strength of
growth.
India’s demographic profile. We believe increasing
urbanisation, coupled with a young population, could
drive strong demand for automobiles over the next
decade.
- 12 -
India Auto Sector
19 April 2011
India: breakdown of households by type India: consumer-goods penetration
Urban 80%
67%
29.9%
60% 55%
44%
40%
27% 24%
20% 14%
8%
3% 4% 1%
Rural 0%
70.1% Car Two-wheeler Colour TV Fridge Credit card
Urban Rural
Source: NCAER - Centre for Macro Consumer Research Source: NCAER - Centre for Macro Consumer Research
- 13 -
India Auto Sector
19 April 2011
the one over the past decade) as the country’s economic

prosperity reaches a wider section of the population
and due to increased urbanisation. We also see a few
other triggers for strong domestic PV demand, such as
poor public transportation, rising affordability,
PVs: sales-volume- expanding financing options, greater product choice
and a shrinking replacement cycle.
growth opportunity is India: penetration per 1000 people
appealing (per 1,000 people)

100
80
PV market shares 60
40
Ford Toyota Honda
2% Others 20
1% 4%
4%
GM 0
4% 2010E 2015E
Tata Motor vehicles Two-wheelers
Motors
12% Source: Crisil, Daiwa estimates
Maruti
Suzuki
54% We see China’s motorisation growth as a
Hyundai
precedent for the scale of the opportunity
19% in India's PV space
Source: Crisil
Around the start of the previous decade (2001-02), the
Note: Market share as at the end of FY10 (March year end) automobile industries of China and India were not as
widely divided as they are today. In 2002, China’s PV
India’s PV penetration rate of less than 20 market was 1.5x the size (5.6x in 2010) of India’s PV
per 1,000 people is extremely low market. However, over the past decade, demand for
vehicles in China has increased at a rapid pace,
The India automobile market has been the subject of
particularly for PVs, which saw their sales rise at a 37%
significant attention from the auto global players, with
CAGR over the 2002-10 period. This looks extremely
many of them targeting India as a manufacturing hub
high compared with India’s PV sales-volume CAGR of
for small cars. We are not surprised by such attention,
just 17% over the same period. China’s CV and
since we believe the opportunity this market offers is
motorbike sales volume, however, rose at CAGRs of
difficult to overlook. In our view, India holds
9.3% and 9.2%, compared with 18% and 12% for India,
significant potential because of its low-cost
respectively, over the period.
manufacturing advantage and the opportunity for
sales-volume growth (which may have slowed in their
We believe the key reasons for China’s automotive
respective home markets) offered by its domestic
market’s expansion over the past decade has been its
market over the next decade.
strong economic growth (higher per-capita incomes),
the government’s focus on the manufacturing sector,
The PV penetration rate in India of still less than 20
and the urbanisation effect (currently at 45%+).
per 1,000 people is extremely low when compared with
Notably, India’s GDP per capita in FY10 was similar to
the global average of about 300 per 1,000 people
that of China in 2002, the year when its motorisation
(World Bank data). While domestic demand for two-
started to gain momentum.
wheelers rose at a CAGR of around 10% over the
previous decade (FY00-10), domestic PV demand
expanded at an 11% CAGR over the same period,
resulting in the PV/two-wheeler sales ratio improving
from a little under 19% to 21% currently. We expect this
ratio to improve by 2pp by FY15 (a similar change to
- 14 -
India Auto Sector
19 April 2011
India and China – GDP per capita, US$ India and China – PV sales volume
(US$) 16,000,000
4,000 14,000,000
12,000,000
3,200
10,000,000
2,400 8,000,000
1,600 6,000,000
4,000,000
800
2,000,000
0 0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 2002 2003 2004 2005 2006 2007 2008 2009 2010
China India India-PV China-PV
Source: Daiwa Source: Crisil, Daiwa
Although we do not foresee a similar degree of

transformational automotive growth in terms of sales-
volume growth in India over the next decade, we
believe the opportunity is still significant, given the
current economic growth momentum, rising consumer
aspirations, and the lack of suitable public
transportation.
We forecast PV demand to rise at a CAGR

of 16% over the FY10-15 period
Daiwa’s economics team forecasts India’s GDP to
expand at an average annual rate of 8.6% over the
FY12-13 period, and for its GDP per capita to rise from
about US$1,175 in FY10 to US$2,004 by FY13. We
forecast this, coupled with an increase in penetration
rates, to help domestic PV demand to increase at a 16%
CAGR over the FY10-15 period to 4.03m units, up from
1.9m units for FY10. Within this, we forecast demand
in the passenger-car segment to rise at a CAGR of
16.6%, from 1.63m units in FY10 to 3.5m units in FY15,
supported by strong sales-volume contributions from
players like Toyota, Volkswagen, Honda, Ford, etc.
However, we are of the view that new model launches
by different players would only help to expand the
market size by reaching more customers beyond tier-
one cities, unlike over the past decade when the main
focus was on these cities. At the same time, we also
expect OEMs to face increasing challenges in the form
of rising customer expectations, a more competitive
pricing environment, greater investments being
required in product technology, and retaining/earning
customer loyalty.
- 15 -
India Auto Sector
19 April 2011
FY10 period. MHCV sales rose at a CAGR of 11.1% over

the FY01-10 period (1.5-1.6x GDP/IP growth). As we
forecast sales for the manufacturing sector (accounting
for 80% of the IIP) to rise by 10.5% annually over the
FY11-13 period, we forecast domestic CV sales volume
CVs: a good proxy to to increase at a 13.4% CAGR and MHCV volume at a
10.4% CAGR.
India’s GDP and In the 2011 Union Budget, the government was very
infrastructure growth vocal about increasing its focus on the manufacturing
sector, which accounts currently for around 16% of
stories GDP. The finance minister announced that the
government would introduce a dedicated
manufacturing policy very soon to ensure a roadmap
In India, demand for CVs is driven generally by GDP for the accelerated growth of the manufacturing sector.
growth, particularly industrial-production (IP) growth. With this, the government targets to increase the
Over the FY01-10 period, India’s GDP and IP growth manufacturing sector’s share of GDP to 25% over the
rose at CAGRs of 7.3% and 7%, respectively, driving a next decade. This, in our view, would play a critical role
domestic CV sales-volume CAGR of 14.8% (2x the in getting the focus back on manufacturing industries
GDP/IP growth rate) over the same period. There is a (including the auto industry), which we do not believe
fairly positive correlation of 0.66 between domestic CV have received the necessary consideration in the past.
sales-volume growth and the IP growth for the FY01-
MHCV market shares Light CV market shares
Others
Others Piaggio
7%
Eicher Motors 5% 3%
9%
M&M
26%
Ashok Leyland
23%
Tata Motors Tata Motors
63% 64%
Source: Crisi Source: Crisil

Note: Market share as at the end of FY10 Note: Market share as at the end of FY10
CV sales and GDP growth MHCV sales and IP growth
(%) (units) (%) (units)

12 1,200,000 16 500,000
14
10 1,000,000 400,000
12
8 800,000 10 300,000
6 600,000 8
6 200,000
4 400,000
4
2 200,000 100,000
2
0 0 0 0
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
CV GDP MHCV IP
Source: Crisil, Daiwa estimates Source: Crisil, Daiwa estimates

Note: using manufacturing growth as a proxy for IP growth as it constitutes about 80% of
IP
- 16 -
India Auto Sector
19 April 2011
Business fundamentals of fleet operators However, fleet operators’ profitability is

holding strong very sensitive to diesel prices
According to the truck-fleet operators that we have Having discussed the prevailing buoyancy of the
spoken to, freight availability in the industry is healthy transportation business, we also highlight what we see
at the moment, which should ensure that the as the possible key risk for operators’ profitability:
fundamental transportation business remains strong. rising fuel costs. Although diesel prices in India are
Over the past few years, fleet operators have been able regulated currently, rising crude-oil prices may force
to pass on hikes in fuel prices to customers due to the the government to allow oil marketing companies to
high capacity-utilisation rates of truck fleets. As a result, raise diesel prices to reduce the subsidy burden on the
fleet operators are making greater profits compared government. The fleet operators have passed on fuel-
with the situation a few years back, when generating price increases to customers in the recent past, and are
cash profit after paying the equated monthly fairly confident they can do so in the future, due to
instalment (EMI) on the vehicle loan was a challenge. healthy freight availability. As can been seen from the
This reflects the fact that the CV industry is still in an following sensitivity analysis, a diesel price hike of Rs1
upcycle, in our view. The following table shows the would lower operators’ profits by 18% in the absence of
profit and loss statement of the business generated any freight-rate hike to customers, while a diesel-price
from a 35-tonne car carrier, which appears very increase of Rs4 would lower their profits by as much as
encouraging to us. Importantly, the fleet operator, in 71% if it cannot be passed on to customers. Diesel-price
addition to the cash profit, is also able to enjoy the increases generally lead to inflation, due to the ripple
depreciation benefits on these trucks that keep the tax effect on the transportation of goods. Hence, we do not
liability negligible. Add to this, the residual value of the expect a sharp increase in diesel prices at a time when
truck (about 30-40% of the purchase price) after 5-6 the rate of inflation is already hovering at over 10%.
years is also earned by the truck owner.
Sensitivity of operator profitability to changes in diesel prices
Profit and loss statement for a 35-tonne carrier If diesel prices go up by
Rs % of income Comments Rs1 Rs2 Rs3 Rs4
Cost of a truck 2,800,000 Including the cost of body Revenue 235,000 235,000 235,000 235,000
Margin money 400,000 Own capital allocated by Operating cost (ex-fuel cost) 90,150 90,150 90,150 90,150
operator Fuel cost 78,833 80,667 82,500 84,333
Bank loan 2,400,000 @ 12% per annum Financial cost 57,555 57,555 57,555 57,555
Profit to operator 8,461 6,628 4,795 2,961
Operating days 20 Change in profit (1,833) (3,667) (5,500) (7,333)
Truck running/day (km) 250 Impact on operator profit, % (18) (36) (53) (71)
Truck running (km) 5,000 Source: Daiwa estimates
Dead mileage (km) 500 @ 10% of total running Note: Assumes 0% freight rate hike from fleet operator to customers
Actual running (km) 5,500
Rate/km charged to customers 47
Total revenue/month 235,000
LCV to grow at a faster clip than the CV
industry due to Hub and Spoke model
Operating costs
Between FY01 and FY10, sales for the light-CV (LCV)
Fuel cost 77,000 32.8 @ Rs42/l and 3 km/l
Toll, border expenses, etc 39,500 16.8
segment rose at an average annual rate of around 20%,
Driver and cleaner salaries 10,000 4.3 playing a vital role in CV-sales growth. This was due
Tyre cost 8,500 3.6 primarily to the establishment of a new segment of
Maintenance, Oil, Lubricants 10,400 4.4 small CVs (SCV), with a payload of <1 tonne (initiated
Permits, taxes, insurance, 8,750 3.7
contingencies by Tata Motors with the launch of the ACE in 2005).
Administrative expenses 13,000 5.5 Over the past few years, the number of SCV
Total operating cost 167,150 71.1 applications has expanded significantly, not only
within cities, but also in smaller towns and rural
Financial costs
Bank charges 250 0.1
markets.
Interest on working capital 4,457 1.9 @ 16% per annum
EMI 52,848 22.5 Equated monthly instalment Strong SCV sales-volume growth in fact is reflected in
on bank loan the change in the LCV mix since FY04. Within the LCV
Total financial cost 57,555 24.5
segment, the share of vehicles <5 tonnes increased
Total cost 224,705 95.6 from 52% for FY04 to 80% for FY09 and to 84% for the
first nine months of FY11. As a result, sales of LCVs
Profit to operator 10,295 4.4 (<7.5 tonnes) as a proportion of total CV volume
Source: Industry, Daiwa compilation
increased from a little under 38% in FY04 to 53% for
the first nine months of FY11.
- 17 -
India Auto Sector
19 April 2011
LCV sales-volume breakdown (FY04) LCV sales-volume breakdown (first nine months of FY11)
5-7.5 tonnes
15.5%
5-7.5 tonnes
47.5%
< 5 tonnes
52.5%
< 5 tonnes
84.5%
Source: Crisil Source: Crisil
Total CV sales-volume breakdown (FY04) Total CV volume breakdown (first nine months of FY11)
> 25 tonnes
> 25 tonnes < 5 tonnes 10.0%
15.3% 19.9% 16.2-25 tonnes
16.2-25 tonnes 13.0%
< 5 tonnes
7.5%
44.7%
5-7.5 tonnes
18.0%
7.5-16.2 tonnes 7.5-16.2 tonnes
39.2% 24.1%
5-7.5 tonnes
8.2%
After FY06, the increased preference for SCVs (due to point of a city, which thereafter get transported within
better business economics and safety features than the city by using smaller goods carriers. Consequently,
three-wheelers) resulted in a severe fall in cargo/goods the share of goods carriers of the total three-wheeler
three-wheeler demand. In addition, it also led to a market dropped from about 40% in FY04 to just 18%
rapid shift to adopt hub-and-spoke business models. for the first nine months of FY11.
Under the hub-and-spoke model, heavy trucks/trailers
carry various goods from diverse locations to the entry
Three-wheeler sales Cargo share of total three-wheeler market
500,000 50%
400,000 40%
300,000
30%
200,000
20%
100,000
10%
0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 9M FY11 0%
Goods Passenger FY04 FY05 FY06 FY07 FY08 FY09 FY10 9M FY11
- 18 -
India Auto Sector
19 April 2011
As we expect the penetration of hub-and-spoke model model in India. We also attribute this shift in the
to expand to more cities and towns over the next few vehicle mix to the developing infrastructure, which
years, we remain bullish about the outlook for LCV includes projects like the Golden Quadrilateral
sales growth in India. At the same time, manufacturers (connecting four metropolitan cities) and many other
like Tata Motors and M&M are consistently trying to National Highway Development Projects (NHDP). At
introduce SCVs with better economics (as explained the end of January 2011, the Golden Quadrilateral
below) through higher fuel efficiency, alternate fuel (5,846km) project was largely completed, while about
options (compressed natural gas [CNG]) and at 75% of the work on NHDP-I/II (7,300km) had been
competitive capital cost of purchasing the vehicle. We finished and around 16% is under implementation. We
forecast domestic LCV sales volumes to rise at a much believe the next phases of NHDP would lead to further
faster clip (a 15.6% CAGR over the FY11-13 period) improvements in the road infrastructure, although the
than the CV industry’s sales (CAGR of 13.4%), and its pace of implementation remains an area of concern to
share of total CV sales to increase to about 60% in FY13. us.
High-tonnage vehicle share increasing Progress of NHDP

within the MHCV segment NHDP, NHDP, NHDP, NHDP,
(km) GQ Ph-I/II Ph-III Ph-V Ph-VII
Similar to the increase in the SCV share of the LCV Total project length 5,846 7,300 12,109 6,500 700
segment, we observe that the share of high-tonnage Completed to date 5,817 5,494 2,048 467 -
vehicles (trucks) has also been rising within the MHCV % of total project 100% 75% 17% 7% 0%
segment. Vehicles of 7.5-16.2 tonnes have seen their Under implementation 29 1,385 5,362 1,833 41
Balance for award - 421 4,699 4,200 659
share of MHCV sales volume drop from 63% in FY04 to
Source: National Highways Authority of India (NHAI)
51% for the first nine months of FY11, which we Note: GQ = Golden Quadrilateral
attribute mainly to the shift to the hub-and-spoke
MHCV sales-volume breakdown (FY04) MHCV sales-volume breakdown (first nine months of FY11)
> 16.2 tonnes

36.8% > 16.2 tonnes
48.8%
7.5-16.2 tonnes
51.2%
7.5-16.2 tonnes
63.2%
- 19 -
India Auto Sector
19 April 2011
which is turning into a challenging segment. Hero

Honda had been able to maintain its leading position in
this segment for several years now, while Bajaj Auto,
TVS Motors (Not rated) and Honda Motorcycle and
Scooters India (HMSI) have been distant rivals due to
Two-wheelers: their lack of focus and limited success in the high-
volume 100cc (commuter) segment. However, Bajaj
competitive landscape Auto’s recent success with the Discover brand has
reduced the market-share gap with Hero Honda
getting tougher, growth somewhat. On the other hand, the split between Honda
Motor and the Hero group (partners for over 25 years)
rates likely to moderate could be a decisive moment for both HMSI and the
India two-wheeler industry from a long-term
perspective, in our view.
The India two-wheeler industry is dominated by
motorcycles (78% of total two-wheeler sales volume),
India: motorcycle market shares India: scooter market shares
70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
FY06 FY07 FY08 FY09 FY10 FY11E FY06 FY07 FY08 FY09 FY10 FY11E
HMSI TVS Motors HMSI Hero Honda
Bajaj Auto Hero Honda TVS Motors Others
Source: Crisil, Daiwa forecasts Source: Crisil, Daiwa forecasts

Note: HMSI – Honda Motorcycle and Scooters India
Driven by new launches and the strong macro to get tougher, on account of a more aggressive
fundamentals, we forecast sales for the domestic two- approach likely in terms of several product launches
wheeler industry to rise at a 12.2% CAGR over the and marketing efforts from the Hero group, HMSI (Not
FY11-13 period. We forecast domestic motorcycle sales Listed) and Bajaj Auto. This may lead to maintaining
to rise at an 11.2% CAGR and those of scooters to market share becoming a priority for most of them,
increase at a 16.6% CAGR over the same period. Over which could also undermine their pricing power.
the next 2-3 years, we expect the competitive landscape
India: motorcycles sales volume and growth India: scooter sales volume and growth
(units) (units)
12,000,000 50% 3,000,000
35%
10,000,000 40% 2,500,000
25%
8,000,000 2,000,000
30%
15%
6,000,000 1,500,000
5% 20%
4,000,000 1,000,000
(5%) 2,000,000 10% 500,000
(15%) 0 0% 0
FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY07 FY08 FY09 FY10 FY11E FY12E FY13E
Motorcycles Change YoY Scooters Change YoY
- 20 -
India Auto Sector
19 April 2011
Auto-financing situation remains

favourable
The current auto-financing situation is favourable, in
our view, and it continues to support demand in the
Auto Sector. After experiencing some pressure during
Auto financing: key the Global Financial Crisis (3Q FY09-1Q FY10), some
of the key players, like HDFC Bank (HDFCB IN,
sales-volume-growth Rs2,206, 2) and State Bank of India (SBIN IN, Rs2,642,
2) have recorded consistent improvements in
enabler disbursals. Many other public- and private-sector
banks have also increased their presence in the auto-
financing business over the past few quarters. This is
The India automobile industry is highly dependent on offering buyers more alternatives when selecting
financing from banks and non-banking financial financing options at fairly competitive borrowing rates.
institutions (NBFCs), especially for passenger cars and At the same time, we have also observed that financing
CVs. While only about 35-40% of motorbikes are sold institutions have been more cautious about customer
on finance, close to 70% passenger cars and almost risk assessment in the recent past compared with
100% commercial vehicles are financed. Hence, any before the global financial crisis. This, we believe
pressure on auto financing is potentially negative for should ensure lower default risk for their auto
sales-volume growth. An interest-rate hike alone would portfolios, and hence avoid an alarming situation
not have a significant impact on demand, since a 1-2pp. similar to the one in 2008-09.
hike in borrowing costs would have a marginal 2.2-
4.5% impact on customer’s EMI (see following table).
Interest-rate impact on EMI (passenger cars)

On-road Loan Borrowing Absolute Change in
Price tenure cost EMI EMI
Maruti Suzuki Swift VXI (Rs) (months) (%) (Rs) (Rs) (%)
Current (March 2011) 488,643 60 11.50 9,046
Borrowing cost up 1pp. 488,643 60 12.50 9,250 204 2.2
Borrowing cost up 2pp. 488,643 60 13.50 9,449 403 4.5
Source: Company, Daiwa compilation, Daiwa forecasts
Note: Assumed the car is 85% financed.
HDFC Bank: auto loan disbursals State Bank of India: auto loan disbursals
(Rs bn) (Rs bn)

450 48% 210 14%
400 190
350 46% 170 12%
150
300 44% 130 10%
250 110
200 42% 90 8%
150 70
40% 50 6%
100
30
50 38% 10 4%
1Q FY09
2Q FY09
3Q FY09
4Q FY09
1Q FY10
2Q FY10
3Q FY10
4Q FY10
1Q FY11
2Q FY11
3Q FY11
1Q FY09
2Q FY09
3Q FY09
4Q FY09
1Q FY10
2Q FY10
3Q FY10
4Q FY10
1Q FY11
2Q FY11
3Q FY11
Auto Portfolio Auto as % of total Retail Auto Portfolio Auto as % of total Retail
Source: Company, Daiwa compilation Source: Company, Daiwa compilation
... even if the liquidity situation is not-so- significant negative impact of auto loan disbursal
favourable volume (see following chart). In the future, however,
we see a healthy liquidity situation as essential for the
Interestingly, auto-financing disbursal growth has
auto industry’s sales growth to be sustained at higher
remained strong despite the not-so-favourable liquidity
than the average level over the past five years.
situation for the banking system. Even though the
average funds under the Reserve Bank of India’s
liquidity adjustment facility (LAF) window have been
dropping over the past few quarters, this has not had a
- 21 -
India Auto Sector
19 April 2011
Passenger-car sales and LAF CV sales and LAF trend
(Rs bn) (units) (Rs bn) (units)

2,100 600,000 2,100
210,000
1,700 1,700
1,300 500,000 1,300
900 170,000
900
500 400,000 500
100 100 130,000
300,000
(300) (300)
(700) 200,000 (700) 90,000
(1,100) (1,100)
(1,500) 100,000 (1,500) 50,000
2Q FY06
3Q FY06
4Q FY06
1Q FY07
2Q FY07
3Q FY07
4Q FY07
1Q FY08
2Q FY08
3Q FY08
4Q FY08
1Q FY09
2Q FY09
3Q FY09
4Q FY09
1Q FY10
2Q FY10
3Q FY10
4Q FY10
1Q FY11
2Q FY11
3Q FY11
2Q FY06
3Q FY06
4Q FY06
1Q FY07
2Q FY07
3Q FY07
4Q FY07
1Q FY08
2Q FY08
3Q FY08
4Q FY08
1Q FY09
2Q FY09
3Q FY09
4Q FY09
1Q FY10
2Q FY10
3Q FY10
4Q FY10
1Q FY11
2Q FY11
3Q FY11
Psgr Cars Avg. LAF CVs Avg. LAF
Source: Crisil, Bloomberg, Daiwa compilation Source: Crisil, Bloomberg, Daiwa compilation
Note: LAF = liquidity adjustment facility Note: LAF – liquidity adjustment facility
- 22 -
19 April 2011
Target price: Rs1,374.00

Tata Motors Up/downside: +11.2%
TTMT IN | TTM US Share price (15 Apr): Rs1,235.85
Initiation: poised to gain from

international, domestic demand
• JLR’s sales volume to rise by a CAGR of 11% from FY11-13 on the
back of new launches and healthy demand in key markets
• Strong freight demand and a likely increase in infrastructure
investment should support domestic CV demand
• The current valuations are attractive, despite factoring in margin
compression at JLR
FY11-13 based on the new-model material contract prices will be seen

launch pipeline, including the Land from FY12 onwards, in our view.
Rover Evoque and Jaguar XF
variant. In addition, we see demand Forecast revisions (%)
remaining strong in the company’s Year to 31 Mar 11E 12E 13E
Ambrish Mishra Revenue change n.a. n.a. n.a.
key markets, including North Net-profit change n.a. n.a. n.a.
(91) 22 6622 1060
ambrish.mishra@in.daiwacm.com America and China. EPS change n.a. n.a. n.a.
Source: Daiwa forecasts
Navin Matta What we recommend
(91) 22 6622 8411
navin.matta@in.daiwacm.com We initiate coverage with a 2 Share price performance
(Outperform) rating with an SOTP-
based six-month price target of
What's new Rs1,374. We value the domestic
The JLR business is entering into an business at Rs805/share based on
interesting phase of an improving an EV/EBITDA multiple of 8.5x on
geographical sales mix and a high our FY12 forecast and the JLR 12-month share price performance
margin base. In the domestic market, operation at Rs712/share based on BSE SENSEX 30 Index
freight demand remains solid, which an EV/ EBITDA (assuming

lends strength to the CV cycle. normalised R&D spending) of 5x on 12-month range 673.45-1,365.15
Demand should also receive a boost our FY12 earnings forecast. We Market cap (US$bn) 17.40
from increased investment in value the non-JLR subsidiaries at Average daily turnover (US$m) 83.47
infrastructure, as we move into the Rs98/share. Shares outstanding (m) 624
last year of the 11 Five-Year Plan
th Major shareholder Tata group (38.1%)
(2007-12). How we differ

Our consolidated-earnings forecasts Financial summary (Rs)
What's the impact for FY12-13 are 13-17% below those Year to 31 Mar 11E 12E 13E
of the Bloomberg consensus. We Revenue (m) 471,118 545,942 606,757
We believe Tata Motors’ passenger- Operating profit (m) 37,096 43,614 49,932
car segment remains vulnerable to forecast a 140bps decline in JLR’s
Net profit (m) 19,672 24,615 29,947
increased domestic competition. EBITDA margin over FY11-13 due to
Core EPS 31.523 39.443 47.986
However, we are not unduly a drop in the blended ASP and
EPS change (%) 23.7 25.1 21.7
concerned by this as we forecast the increased raw-material cost pressure. Daiwa vs Cons. EPS (%) 7 2.5 4.6
segment’s contribution to We believe that pricing for the PER (x) 39.2 31.3 25.8
consolidated revenue to be less than Evoque will be lower than the Dividend yield (%) 1.6 1.6 1.6
10% for FY11. average ASP for the company, as it is DPS 20.000 20.000 20.000
a compact SUV. Further, we expect PBR (x) 4.0 3.8 3.5
We forecast JLR’s sales volume to an increase in incentives, which ROE (%) 11.4 12.4 14.1
increase by a CAGR of 11% from could lower ASPs. Increase in raw- Source: Bloomberg, Daiwa forecasts
India Auto Sector
19 April 2011

Growth outlook
Valuation
Earnings revisions
Growth outlook Tata Motors: MHCV and LCV market shares
We expect the company to maintain its dominance in 66 65 65

the India CV space over the next few years, albeit with a 64
64 63
marginal drop in its market share. We forecast the 62
62 60 61
company’s LCV segment to see a strong sales volume 60
60 59
growth CAGR of 21% from FY11-13 on the back of new 58
58 57
launches in the passenger-carrier segment. 58
56
54
52
FY08 FY09 FY10 FY11E FY12E FY13E
MHCV mkt share (%) LCV mkt share (%)
Source: Company, Daiwa forecasts
Valuation Tata Motors: SOTP valuation
Our SOTP-based target price is Rs1,374. We value the Value Value/share

Particulars Valuation basis Multiple (Rs bn) (Rs)
domestic business at an EV/EBITDA multiple of 8.5x on Tata Motors (standalone basis) EV/EBITDA 8.5 502 805
our FY12 forecast, which is at a 15% discount to the JLR EV/EBITDA 5.0 444 712
average over the past five years. The discount is to Subsidiaries, associated
PER, PBR 61 98
reflect the moderation in domestic CV-demand growth companies & others
Total firm value 1,008 1,615
we expect for FY12 and FY13. Our target multiple for the (-) Net debt (150) (240)
JLR operation, an EV/EBITDA of 5x (assuming Equity fair value 858 1,374
normalised R&D spending) on our FY12 earnings
forecast, is at a substantial discount to those of the Source: Daiwa forecasts
leading auto companies internationally as there is a

absence of historical data on the unit’s EBITDA margin.
We value each of the key subsidiaries at the average
multiples accorded by the Bloomberg consensus to
similar-sized peers in their respective industries.
Earnings revisions Tata Motors: consensus earnings-forecast revisions
The EBITDA-margin improvements at the JLR 180

operation over the past four quarters have surprised the
market, leading to substantial upward earnings 160
revisions. However, we believe that there is little scope 140

for further margin improvement, as the product-mix 120
gains in terms of profitability have stabilised. Further,
100
we expect raw-material cost inflation and an increase in
incentives to exert some pressure on the EBITDA 80
margin. As a result, our earnings forecasts for FY12 and 60
FY13 are 13% and 17% lower, respectively, than those of
Apr-10
May-10
Jun-10
Oct-10
Jul-10
Aug-10
Sep-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
the Bloomberg consensus. We expect pressure on the

margin to be reflected in JLR’s 1Q FY12 results, after Bloomberg consensus - FY12E
which we expect the market to revise down their Source: Bloomberg
earnings forecasts.
- 24 -
India Auto Sector
19 April 2011
Financial summary
Key assumptions
Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Sales volume (units) 454,345 578,893 585,698 506,295 642,411 804,613 976,125 1,129,725
Average selling price (LC) 480,286 506,748 514,730 499,762 539,801 581,920 563,208 546,051
Profit and loss (Rs m)

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Commercial vehicle 118,304 173,748 181,388 149,262 231,455 310,669 363,825 399,750
Passenger vehicle 68,743 78,532 79,511 77,095 89,982 115,412 130,961 149,279
Others 19,632 22,421 24,502 28,862 34,494 45,037 51,156 57,727
Total revenue 206,679 274,700 285,401 255,220 355,931 471,118 545,942 606,757
Other income 0 0 0 0 0 0 0 0
COGS (140,070) (190,253) (202,307) (186,370) (242,992) (334,357) (388,675) (430,809)
SG&A (1,873) (2,515) (2,868) (3,213) (3,874) (5,105) (5,381) (6,283)
Other op. expenses (44,046) (55,324) (59,427) (58,246) (77,621) (94,559) (108,272) (119,733)
Operating profit 20,691 26,609 20,799 7,391 31,444 37,096 43,614 49,932
Net-interest inc./(exp.) (2,264) (3,131) (2,824) (6,737) (11,038) (12,393) (11,999) (10,864)
Assoc/forex/extraord./others 2,106 2,254 7,790 8,963 6,939 1,012 1,205 1,676
Pre-tax profit 20,534 25,732 25,765 9,617 27,345 25,715 32,820 40,744
Tax (5,245) (6,597) (5,476) 395 (4,944) (6,043) (8,205) (10,797)
Min. int./pref. div./others 0 0 0 0 0 0 0 0
Net profit (reported) 15,289 19,135 20,290 10,013 22,401 19,672 24,615 29,947
Net profit (adjusted) 13,790 18,483 15,301 4,594 14,544 19,672 24,615 29,947
EPS (reported) (Rs) 39.933 49.648 52.627 19.478 39.258 31.523 39.443 47.986
EPS (adjusted) (Rs) 36.017 47.956 39.687 8.938 25.490 31.523 39.443 47.986
EPS (adjusted fully-diluted) (Rs) 36.017 47.956 39.687 8.938 25.490 31.523 39.443 47.986
DPS (Rs) 13.005 14.999 15.003 6.062 15.055 20.000 20.000 20.000
EBIT 20,691 26,609 20,799 7,391 31,444 37,096 43,614 49,932
EBITDA 25,901 32,472 27,322 16,136 41,783 50,261 59,068 66,621
Cash flow (Rs m)

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Profit before tax 20,534 25,732 25,765 9,617 27,345 25,715 32,820 40,744
Depreciation and amortisation 5,209 5,863 6,523 8,745 10,339 13,166 15,453 16,689
Tax paid (5,245) (6,597) (5,476) 395 (4,944) (6,043) (8,205) (10,797)
Change in working capital (28,862) (5,308) 46,275 (3,845) 53,022 19,888 7,460 7,121
Other operational CF items 2,963 3,642 4,950 6,195 13,763 12,393 11,999 10,864
Cash flow from operations (5,400) 23,331 78,037 21,107 99,525 65,119 59,528 64,620
Capex (13,457) (24,596) (47,100) (50,216) (28,706) (22,137) (21,043) (21,990)
Net (acquisitions)/disposals 8,969 (4,619) (24,333) (80,579) (93,688) 0 0 0
Other investing CF items 0 561 0 0 0 0 0 0
Cash flow from investing (4,488) (28,654) (71,433) (130,794) (122,394) (22,137) (21,043) (21,990)
Change in debt 4,414 10,723 22,714 68,850 34,604 (40,119) (14,500) (14,500)
Net share issues/(repurchases) 3,759 1,102 (3,991) 39,576 14,048 39,922 0 0
Dividends paid (5,678) (6,764) (6,597) (3,457) (9,919) (14,416) (14,416) (14,417)
Other financing CF items (1,464) (2,666) (3,025) (7,838) (9,749) (12,393) (11,999) (10,864)
Cash flow from financing 1,032 2,396 9,102 97,132 28,983 (27,006) (40,915) (39,781)
Forex effect/others 1,500 652 4,989 5,418 7,856 (622) 0 0
Change in cash (7,356) (2,275) 20,695 (7,137) 13,970 15,354 (2,430) 2,850
Free cash flow (18,857) (1,265) 30,937 (29,108) 70,819 42,982 38,485 42,630
- 25 -
India Auto Sector
19 April 2011
Financial summary continued …
Balance sheet (Rs m)

As at 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Cash & short-term investment 11,194 8,268 23,973 11,418 17,533 32,886 30,456 33,306
Inventory 20,122 25,010 24,218 22,298 29,356 41,962 48,651 54,098
Accounts receivable 7,158 7,822 11,307 15,552 23,919 29,246 33,908 37,705
Other current assets 58,077 60,260 44,331 47,648 44,571 44,571 44,571 44,571
Total current assets 96,552 101,359 103,829 96,916 115,379 148,666 157,586 169,680
Fixed assets 45,212 63,946 104,523 145,993 164,360 173,332 178,922 184,223
Goodwill & intangibles 141 101 61 20 0 0 0 0
Other non-current assets 20,152 24,770 49,103 129,681 223,369 223,369 223,369 223,369
Total assets 162,057 190,176 257,515 372,610 503,108 545,367 559,877 577,271
Short-term debt 0 196 1,575 12,591 14,980 14,980 10,980 6,980
Accounts payable 55,359 57,135 83,917 87,313 118,247 148,993 166,654 181,869
Other current liabilities 15,795 16,443 22,649 21,042 55,479 62,554 63,704 64,854
Total current liabilities 71,154 73,774 108,141 120,946 188,706 226,528 241,338 253,703
Long-term debt 29,368 39,896 61,230 119,065 151,279 111,161 100,661 90,161
Other non-current liabilities 6,225 7,868 9,757 10,299 13,470 13,470 13,470 13,470
Total liabilities 106,747 121,537 179,129 250,310 353,455 351,158 355,468 357,333
Share capital 3,829 3,854 3,855 5,141 5,706 6,241 6,241 6,241
Reserves/R.E./others 51,542 64,843 74,540 117,161 143,949 187,970 198,169 213,699
Shareholders' equity 55,371 68,698 78,395 122,302 149,655 194,211 204,410 219,939
Minority interests 0 0 0 0 0 0 0 0
Total equity & liabilities 162,118 190,235 257,524 372,612 503,109 545,368 559,878 577,272
Net debt/(cash) 18,174 31,824 38,832 120,237 148,727 93,254 81,184 63,835
BVPS (Rs) 145 178 203 238 262 311 328 352
Key ratios (%)

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Sales (YoY) 18.7 32.9 3.9 (10.6) 39.5 32.4 15.9 11.1
EBITDA (YoY) 19.3 25.4 (15.9) (40.9) 158.9 20.3 17.5 12.8
Operating profit (YoY) 20.2 28.6 (21.8) (64.5) 325.5 18.0 17.6 14.5
Net profit (YoY) 11.5 34.0 (17.2) (70.0) 216.6 35.3 25.1 21.7
EPS (YoY) 5.3 33.1 (17.2) (77.5) 185.2 23.7 25.1 21.7
Gross-profit margin 32.2 30.7 29.1 27.0 31.7 29.0 28.8 29.0
EBITDA margin 12.5 11.8 9.6 6.3 11.7 10.7 10.8 11.0
Operating-profit margin 10.0 9.7 7.3 2.9 8.8 7.9 8.0 8.2
ROAE 28.6 29.8 20.8 4.6 10.7 11.4 12.4 14.1
ROAA 9.2 10.5 6.8 1.5 3.3 3.8 4.5 5.3
ROCE 27.4 27.5 16.6 3.7 11.0 11.7 13.7 15.8
ROIC 25.8 22.7 15.0 4.1 9.5 9.7 11.4 12.9
Net debt to equity 32.8 46.3 49.5 98.3 99.4 48.0 39.7 29.0
Effective tax rate 25.5 25.6 21.3 n.a. 18.1 23.5 25.0 26.5
Accounts receivable (days) 13.4 10.0 12.2 19.2 20.2 20.6 21.1 21.5
Payables (days) 93.2 74.7 90.2 122.4 105.4 103.5 105.5 104.8
Net interest cover (x) 9.1 8.5 7.4 1.1 2.8 3.0 3.6 4.6
Net dividend payout 32.6 30.2 28.5 31.1 38.3 63.4 50.7 41.7
Company profile
Tata Motors is India's largest automobile company with consolidated revenue of US$20bn for FY10. It is the leader in the
commercial-vehicle segment and the third-largest player in the passenger-car segment. Tata Motors also has a presence in South
Korea, Thailand and Spain.
- 26 -
India Auto Sector
19 April 2011
the Evoque in mid-2011 and the XF variant in 2012.

While currency movements remains imponderable, we
expect JLR’s margin trends to stabilise between the 15-
16% range as raw material cost pressure would shore
up from FY12 onwards.
Investment summary We initiate coverage of the stock with a 2 (Outperform)
rating and SOTP-based six-month target price of
Over the past 18 months, Tata Motors has seen strong Rs1,374. We value the domestic business at an
earnings growth on the back of a recovery in the EV/EBITDA multiple of 8.5x on our FY12, which is at a
domestic business as well as turnaround in the JLR 15% discount to the average multiple over the past five
operation. Although we expect earnings momentum to years. Our target multiple for the JLR operation, an
slow in both businesses, given the moderation in sales EV/EBITDA (assuming normalised R&D spending) of
volume growth in the domestic CV business and JLR’s 5x on our FY12 earnings forecast, is at a substantial
EBITDA margin having been peaked, we expect the discount to those of the leading auto companies based
company to generate strong free cash flow over the on the Bloomberg-consensus forecasts as there is a
next two years, thereby aiding in debt reduction. With absence of historical data on the unit’s EBITDA margin
more than 55% of consolidated revenue now derived We value each of the key subsidiaries at the average
from JLR, we see the company’s earnings being less multiples of similar sized peers in their respective
affected by the cyclical nature of the domestic CV industries.
business.
Key risks
We forecast sales volume growth in the domestic
MHCV space to moderate to a 9% CAGR from FY11-13 1. A deceleration in the growth rate of the Index of
from a CAGR of about 29-30% from FY09-11. We Industrial Production for a prolonged period would
expect the company to lose 150bps of its market share affect negatively domestic CV-sales-volume growth.
over the next two years, given the high level of 2. A slowdown in JLR’s key markets (the US, China,
competition among the incumbents. In the LCV and the EU) could adversely affect sales volume.
segment, we forecast sales volume momentum to see a
strong 21% CAGR from FY11-13, supported by a series 3. Adverse movements in currency rates (US Dollar
of model launches in the goods and passenger and Euro against the Pound) could affect JLR’s
segments. profitability.
4. Higher-than-expected product-development
amortisation could affect JLR’s earnings.
For the JLR operation, we forecast a sales-volume
CAGR of 11% from FY11-13 supported by the launch of
Tata Motors: SOTP valuation

Particulars Valuation basis Multiple Value (Rs bn) Value/share (Rs)
Tata Motors ( standalone basis) EV/EBITDA 8.5 502 805
JLR EV/EBITDA 5.0 444 712
Subsidiaries, associated companies & others PER, PBR 61 98
Total firm value 1,008 1,615
(-) Net debt (150) (240)
Equity fair value 858 1,374
JLR outlook: strong cash flow to drive market to drive sales-volume growth during our
balance-sheet improvement forecast period.
JLR’s operations have seen a remarkable recovery over
JLR’s two key launches in 2011 will be of the Evoque
the past four quarters on the back of strong sales-
compact SUV and a station-wagon version of the XF. In
volume growth and an improving ASP trend. Volume
addition to strengthening the JLR portfolio, the new
growth has been driven by the improving
launches will open up large target segment for its
macroeconomic environment in developed countries
vehicles. We forecast an 11% CAGR in sales volume
and the strong demand growth in emerging markets
from FY11-13, which should be supported by an easing
(especially China). In terms of the sales volume mix by
in the supply of engines from Ford from 4Q FY11
market, we expect the North America and China
onwards.
- 27 -
India Auto Sector
19 April 2011
JLR: quarterly wholesale sales volume mix JLR: geographic sales volume mix for 9M FY11
70,000
60,000 ROW North America
15.7% 22.3%
50,000
40,000 China
11.7%
30,000
20,000
10,000 Russia
5.1% Europe (ex UK &
0 Russia)
1Q FY10 2Q FY10 3Q FY10 4Q FY10 1Q FY11 2Q FY11 3Q FY11 UK 22.7%
Jaguar Land Rover 22.4%
Source: Company, Daiwa Source: Company, Daiwa
Margins have surprised quarter-on- raw-material contracts, as the indicative prices of two
quarter, but may have peaked key commodities, steel and aluminium, have increased
by more than 15% YoY over the past 12 months.
Over the past four quarters, we have seen increases in
Nevertheless, we believe that reductions in other
the sales volume of Land Rover, a rise in sales from
expenses/sales will offset the drop in the EBITDA
China, and currency gains driving an expansion in the
margin. We believe the company’s warranty
company’s ASP (up 17% YTD). From FY12-13, we
expenses/sales ratio of about 4-5% (2% for BMW [Not
expect a slight drop in the ASP as the product mix will
Rated]) is likely to decline gradually over the next 2-3
be weakened by an incremental sales volume
years as the company’s refreshed product range has
contribution from the Evoque, which we believe will
seen a significant improvement in quality, as reflected
sell at a level below the current ASP (about £28,000
in residual values.
according to media reports). We expect input-cost
pressure to rise following the renegotiation of annual
JLR: quarterly ASP JLR: quarterly raw material/sales and EBITDA margins
43,000 20 75
40,000 16 72
12 69
37,000
8 66
34,000
4 63
31,000
0 60
28,000 (4) 57
25,000 (8) 54
1Q FY10 2Q FY10 3Q FY10 4Q FY10 1Q FY11 2Q FY11 3Q FY11 1Q FY10 2Q FY10 3Q FY10 4Q FY10 1Q FY11 2Q FY11 3Q FY11
ASP (£) EBITDA (%) (LHS) RM/sales (%) (RHS)
Although we expect the JLR operation to see a decline JLR’s debt-to-equity ratio to decline to 0.1x by FY13. In
in earnings over our forecast period, we believe the addition, we see JLR’s free-cash flow supporting debt
free-cash-flow generation we forecast over FY12-13 to reduction at the consolidated level.
be used to reduce the company’s debt. We forecast
- 28 -
India Auto Sector
19 April 2011
JLR: financial summary (Rs m)

FY11E FY12E FY13E
Volume
Jaguar (units) 52,997 58,297 64,126
% chg 11.9 10.0 10.0
Land Rover (units) 186,992 213,171 230,225
% chg 27.6 14.0 8.0
Total JLR sales volume (units) 239,989 271,468 294,351
% chg 23.8 13.1 8.4
Blended ASP (Rs) 2,871,606 2,703,505 2,659,272
% chg 12.9 (5.9) (1.6)
Net sales 689,154 733,914 782,759

% chg 39.7 6.5 6.7
EBITDA 113,098 112,679 117,026
Margin (%) 16.4 15.4 15.0
Adjusted PAT 66,547 57,663 56,912
Margin (%) 9.7 7.9 7.3
Balance sheet
Net worth 170,971 228,634 285,546
Total debt 66,566 46,566 26,566
Sources of funds (including DTL) 235,505 273,168 310,079
Net fixed assets 244,707 269,639 293,273
Investments 24 24 24
Net current assets (9,226) 3,504 16,782
Application of funds (including miscellaneous expenses) 235,505 273,168 310,079
Cash-flow statement
Cash flow from operating activity 76,356 82,214 82,445
Capex (50,879) (51,656) (52,362)
Free cash flow 25,477 30,558 30,083
Cash flow from investing activity (50,879) (51,656) (52,362)
Cash flow from financing activity (30,000) (20,000) (20,000)
Note: Conversion rate of £:Rs 70.6
Domestic business to see a steady growth We forecast the truck segment’s market
We forecast domestic-business earnings to increase by share to fall by 150bps over FY11-13
23% CAGR from FY11-13. While we model for a We forecast sales of Tata Motors’ domestic MHCV
moderate MHCV sales-volume CAGR of 9% over the trucks to increase at a 9% CAGR from FY11-13. We also
same period, we forecast the LCV segment to see a forecast the company’s market share to fall by 150bps
sales-volume CAGR of 21%. In our view, the CV over the next two years, due mainly to its competitors
industry has shown an improvement in pricing having what we regard as stronger product offerings
discipline over the past 18 months, with price hikes of and a better domestic network. We believe sales in the
almost 7-8% for FY10 and another 5% for FY11, which high-tonnage category (more than 16 tonnes) will
are higher than the cumulative price hikes in five years continue to increase the fastest over FY11-13, which we
prior to FY10. Therefore, we do not envisage any believe is more favourable for Ashok Leyland.
significant increase in discounts over our forecast Nevertheless, we believe the dynamics could change in
period. We expect the company’s passenger-car favour of Tata Motors if the company manages to
business (ex-Nano) to continue to lose market share reduce the pricing of its World Truck range by
and therefore forecast a moderate sales-volume CAGR eliminating some of the sophisticated features.
of 8% from FY11-13.
- 29 -
India Auto Sector
19 April 2011
Tata Motors: domestic-truck segment market share

Segment FY08 FY09 FY10 FY11 YTD
7.5-12 tonnes
Tata Motors 4.3% 4.6% 3.4% 5.2%
Ashok Leyland 46.6% 49.2% 49.4% 44.9%
Eicher Motors 39.7% 37.7% 38.5% 41.7%
12-16 tonnes
Tata Motors 75.4% 76.7% 72.4% 67.4%
Ashok Leyland 20.6% 21.3% 25.1% 27.4%
Eicher Motors 4.0% 2.0% 2.6% 5.3%
16-25 tonnes
Tata Motors 65.0% 70.3% 70.8% 66.6%
Ashok Leyland 33.5% 25.7% 24.5% 25.7%
Eicher Motors 1.5% 0.7% 0.7% 0.9%
Above 25 tonnes
Tata Motors 2.4% 25.0% 72.8% 72.8%
Ashok Leyland 0.0% 36.1% 16.7% 22.0%
Eicher Motors 25.2% 4.3% 2.5% 1.5%
Tractor trailers
Tata Motors 64.8% 63.1% 44.7% 53.0%
Ashok Leyland 34.1% 30.5% 26.0% 24.9%
Eicher Motors 0.4% 0.3% 0.1% 0.2%
Total domestic trucks
Tata Motors 64.2% 66.6% 65.8% 63.5%
Ashok Leyland 24.9% 21.1% 20.2% 21.8%
Eicher Motors 8.9% 8.1% 9.5% 10.0%
Source: Bloomberg, Daiwa
We expect new launches to boost LCV- the next few months, could take market share in the
sales-volume growth three-wheeler passenger-carrier segment (in the long
term), once the issues regarding the granting of a
Tata Motors has been a dominant player in the LCV
permit by the authorities are resolved. Our sales-
segment over the past 6-7 years on the back of its Ace
volume CAGR forecast of 21% over FY11-13 comprises a
range of products. The company is launching a series of
15% CAGR in ACE sales volume, a 35% CAGR in
new/variants to expand its range, both in the goods
passenger-segment sales volume, and flat increases in
and passenger segments. Just as there has been a shift
other LCV sales volumes. The company plans to
in sales volume from three wheelers to four wheelers in
increase capacity in the LCV segment by setting up a
the goods segment over the past 3-4 years, we believe
greenfield facility in south India.
the Magic Iris, a new model due to be launched within
Tata Motors: LCV segment sales volume and YoY change Tata Motors: LCV segment market share
250 60 70
200 50
60
40
150
30 50
100
20
50 40
10
0 0 30
FY04 FY05 FY06 FY07 FY08 FY09 FY10 YTD FY04 FY05 FY06 FY07 FY08 FY09 FY10 YTD
FY11 FY11
LCV volume (’000) - LHS % YoY - RHS LCV goods market share (%) LCV passenger market share (%)
Source: Bloomberg, Daiwa Source: Bloomberg, Daiwa
- 30 -
India Auto Sector
19 April 2011
PV business continues to be sluggish Demand for the Nano has been affected by quality
In the passenger-car segment (ex-Nano), Tata Motors issues following several cases of the cars being
is likely to continue losing market share as competition destroyed by fire due to electrical short-circuits.
has intensified with the launch of several new models
and better offerings than in the past. In the company’s Apparently, the company has addressed these issues
Indica and Indigo ranges the non-taxi segment with some minor changes, and has offered a four-year
accounts for about 40-50% of sales volume currently, warranty and maintenance contracts at Rs99 a month.
and this is likely to see an adverse impact from While these efforts may boost sales-volume momentum
competitive new launches. We forecast this segment to from the current level, our assumptions factor in
expand at an 8% CAGR from FY11-13, which is lower average monthly sales volumes of 9,000 and 13,500
than our industry sales-volume-growth forecast of 14- vehicles for FY12 and FY13 respectively, but do not
16from FY11-FY13. include any sales volume from the launch of the diesel
variant or exports.
Tata Motors: passenger-car market share Tata Motors: UV-segment market share
20% 25
16% 20
12% 15
8% 10
4% 5
0% 0
Passenger cars (ex Nano) Passenger cars (incl Nano) UV market share (%)
Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts
In the UV segment, the launch of Aria could provide

some impetus to sales volume, although we believe
Tata Motors lacks the brand equity to achieve large
sales volumes, even though the product could match
the quality standards and features offered by its peers
in that price segment. In FY12, the company plans to
introduce vehicles from its new UV platform. However,
we have not factored in any incremental sales volumes
from these launches as details of the product launch
and pricing are not yet known. We forecast a 21%
CAGR increase in sales volume from FY11-13.
- 31 -
India Auto Sector
19 April 2011
We believe the ASP will be weakened by an increase in

the contribution from LCV and Nano sales in the CV
and PV segments, respectively. As a result, we forecast
an average ASP drop of 5% over the next two years. We
see the EBITDA margin remaining stable for FY12 and
Financial analysis FY13 as raw-material-cost increases should be offset
largely by operating-leverage gains. We expect interest
expenses to decline from FY11 onwards, as we assume
We forecast standalone net-profit to debt is reduced on the standalone balance sheet due to
increase at a 23% CAGR over FY11-13 the company seeing strong cash flow.
We forecast Tata Motors’ standalone profit to be driven
mainly by a sales-volume CAGR of 17.5% from FY11-13.
Tata Motors: CV segment sales volume Tata Motors: EBITDA margin and raw material/sales ratio
450 60 15 76
375 45
12 74
30
300
15 9 72
225
0
150 6 70
(15)
75 (30) 3 68
0 (45)
FY07 FY08 FY09 FY10 FY11E FY12E FY13E 0 66
FY07 FY08 FY09 FY10 FY11E FY12E FY13E
MHCV (’000) - LHS LCV (’000) - LHS
MHCV (% YoY) RHS LCV (% YoY) RHS EBITDA (%) RM/sales (%)
Leverage concerns waning Standalone balance sheet: reduced gearing

Tata Motors’ acquisition of JLR in June 2008 for a and improved return ratios
consideration of US$2.3bn resulted in a significant Over the past two years Tata Motors has implemented
increase in the company’s leverage. It funded the various measures to deleverage its balance sheet. We
acquisition through bridging loans with an 18-month forecast the standalone leverage level to decline to 0.3x
maturity period. Subsequently, we saw the company by FY13 and the consolidated debt level to fall to below
raising funds through several instruments. Its net 1x by then. Further, we forecast the company’s return
automotive debt/equity ratio fell from 4x for FY09 to ratios to improve significantly, with its ROIC rising to
0.9x as at the end of 3Q FY11, aided by the issue of 29.9% for FY13 from 18.2% for FY10.
equity-related instruments and internal-cash
generation.
Given our forecast of Rs120bn of free-cash-flow

generation cumulatively in the domestic and JLR
business over FY12 and FY13, we expect the company
to be in a net-cash position (excluding vehicle-
financing loans) by the end of FY13.
Tata Motors: funds raised through various instruments

Instruments Amount (Rs bn) Issue date
Rights issue 42 Sept 2008
Divestments 12 Oct-Mar 2009
NCD 42 May 2009
Foreign-currency loans 12 Oct 2009
GDS & notes 34 Oct 2009
QIP 33 Oct 2010
Total 174
Source: Company, Daiwa
- 32 -
India Auto Sector
19 April 2011
Tata Motors (standalone basis): deleveraging trend Tata Motors (standalone basis): improvement in return ratios
1.0 35
30
0.8
25
0.6 20
0.4 15
10
0.2
5
0.0 0
FY09 FY10 FY11E FY12E FY13E FY09 FY10 FY11E FY12E FY13E
Net debt/equity (x) ROE (%) ROIC (%)
- 33 -
19 April 2011
Target price: Rs66.20

Ashok Leyland Up/downside: +20.3%
AL IN Share price (15 Apr): Rs55.05
Initiation: pure domestic play on

CVs
• We expect healthy growth on the back of a strengthened product
range, improving regional volume mix and captive financing help
• Tax incentives from Pantnagar plant should add to margins
• Trading currently at a 20% discount to its past five-year average
PER; offers a favourable a risk-reward profile
FY12-13, of which we assume some Forecast revisions (%)

portion (50-100bps) would be Year to 31 Mar 11E 12E 13E
Revenue change n.a. n.a. n.a.
retained and added to the EBITDA Net-profit change n.a. n.a. n.a.
margin. We forecast the net profit to EPS change n.a. n.a. n.a.
rise at a CAGR of 23% from FY11-13, Source: Daiwa forecasts
Ambrish Mishra which is amongst the top-quartile
(91) 22 6622 1060
ambrish.mishra@in.daiwacm.com earnings growth in our coverage Share price performance
universe.
Navin Matta
(91) 22 6622 8411
navin.matta@in.daiwacm.com
What we recommend
We initiate coverage with a 1 (Buy)
rating and SOTP-based six-month
What's new target price of Rs66.20. We value
12-month share price performance
In the domestic market, freight the core business at a FY12E PER of BSE SENSEX 30 Index
demand continues to be solid, which 12x and the joint-venture
lends strength to CV cycle. Higher investments at a FY12E PBR of 1x. 12-month range 46.55-80.55
output from Pantnagar plant (tax Market cap (US$bn) 1.65
exempted) a trigger for margin We expect Ashok Leyland to be Average daily turnover (US$m) 7.32
expansion. rerated on the back of healthy sales- Shares outstanding (m) 1,330
volume growth, and lower volatility Major shareholder Promoters (38.6%)
What's the impact of volume growth compared with the
In our view, Ashok Leyland is very past 10 years due to its better Financial summary (Rs)
competitively placed in the current regional volume mix and operating- Year to 31 Mar 11E 12E 13E
upswing in the CV cycle with its U- profit-margin expansion with tax Revenue (m) 107,257 125,026 137,162
benefits flowing through. Operating profit (m) 8,656 10,308 12,131
truck range of vehicles, Neptune Net profit (m) 5,630 6,812 8,579
series engines and balanced regional Core EPS 4.232 5.120 6.449
volume mix. We forecast an 11% How we differ
EPS change (%) 45.2 21.0 25.9
sales-volume CAGR from FY11-13. Our FY12-13 EPS forecasts are 1-9% Daiwa vs Cons. EPS (%) (4) (9) (1)
lower than those of the Bloomberg PER (x) 13.0 10.8 8.5
With the Pantnagar plant ramping consensus. We assume a full Dividend yield (%) 2.7 3.6 4.1
up to 3,000 vehicles per month from capacity ramp-up at the company’s DPS 1.500 2.000 2.250
January 2011, the tax incentives Pantnagar facility by FY13, and PBR (x) 1.8 1.7 1.5
from this plant should now start to therefore expect higher interest ROE (%) 14.7 16.3 18.6
be reflected meaningfully in the (absence of capitalisation and Source: Bloomberg, Daiwa forecasts
financials. We forecast a 140-250bps increase in working capital) and

profit-margin expansion from the depreciation expenses than the
company’s Pantnagar facility over consensus.
India Auto Sector
19 April 2011

Growth outlook
Valuation
Earnings revisions
Growth outlook Ashok Leyland: FCF
With Ashok Leyland’s investments in capacity and joint 6

ventures likely to peak in FY12, we expect the company
to generate strong free cash flow in the ensuing period. 4
We forecast the company's net profit to increase at a
2
23% CAGR from FY11-13, driven by healthy sales-
volume growth and likely profit-margin expansion. 0
(2)
(4)
FCF (Rs bn)
Valuation Premium/discount to average forward PER (%)
The stock trades currently at an FY12E PER of 10.8x, 150

which is at a discount of about 20% to its past-five-year
average PER. We believe its current valuations are 100
attractive, given the likelihood that we see of strong
earnings growth and a further improvement in the 50
balance sheet.
0
(50)
(100)
Apr-06
Jul-06
Oct-06
Apr-07
Jan-07
Jul-07
Oct-07
Apr-08
Oct-08
Apr-09
Jan-08
Jul-08
Jul-09
Oct-09
Apr-10
Jan-09
Jan-10
Jul-10
Oct-10
Jan-11
Earnings revisions Consensus earnings-forecast revision trend
The consensus earnings forecasts have been on the 6.5

decline since the weak 3Q FY11 results. Our FY12 EPS
forecast is 9% lower than that of the consensus; however 6.0
our FY13 EPS forecast is more or less on a par. We
5.5
believe that in FY12, Ashok Leyland’s operating-profit
margin is likely to be affected slightly by a higher 5.0
volume contribution from the U-truck range, which is
4.5
less profitable at the current price range. We believe
Ashok Leyland would probably be looking to raise prices 4.0
for this range of vehicles once meaningful volumes start
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
kicking in (we assume in FY13).

Bloomberg consensus - FY12E
Source: Bloomberg
- 35 -
India Auto Sector
19 April 2011
Financial summary
Key assumptions
Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Sales volume (units) 61,655 83,094 83,307 54,431 63,926 92,693 103,816 113,678
Average selling price (LC) 981,771 999,436 1,073,997 1,224,787 1,231,517 1,278,964 1,318,754 1,337,346

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Commercial Vehicles 45,522 67,118 70,109 49,519 62,076 96,015 112,344 122,750
Engines 1,177 1,317 2,037 3,968 3,394 3,303 3,623 3,997
Others 5,778 3,247 5,279 6,324 6,977 7,939 9,059 10,415
Total revenue 52,477 71,682 77,426 59,811 72,447 107,257 125,026 137,162
Other income 0 0 0 0 0 0 0 0
COGS (37,690) (53,391) (56,018) (42,503) (49,744) (76,013) (89,177) (97,321)
SG&A (2,452) (3,250) (3,315) (3,143) (4,101) (5,947) (6,860) (7,512)
Net-interest inc./(exp.) (165) (53) (497) (1,187) (811) (1,613) (1,870) (1,743)
Assoc/forex/extraord./others 477 663 591 466 672 (35) 184 203
Pre-tax profit 4,523 6,045 6,411 2,084 5,448 7,008 8,622 10,591
Tax (1,250) (1,632) (1,688) (185) (1,211) (1,536) (1,811) (2,012)
EPS (reported) (Rs) 2.679 3.333 3.550 1.428 3.185 4.113 5.120 6.449
EPS (adjusted) (Rs) 2.592 3.358 3.373 1.300 2.914 4.232 5.120 6.449
DPS (Rs) 1.308 1.500 1.500 1.000 1.500 1.500 2.000 2.250
EBIT 4,210 5,435 6,318 2,805 5,587 8,656 10,308 12,131
EBITDA 5,470 6,941 8,092 4,589 7,628 11,246 13,462 15,684
Cash flow (Rs m)

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Tax paid (1,161) (1,460) (1,119) (88) 765 (490) (862) (1,112)
Change in working capital (1,358) (5,130) 7,721 1,717 1,029 (1,588) (1,123) (3,359)
Other operational CF items 156 (155) 576 1,374 1,274 1,410 1,870 1,743
Cash flow from operations 3,420 807 15,362 6,871 10,557 8,929 11,661 11,416
Capex (2,392) (6,249) (6,932) (11,490) (6,536) (5,233) (4,111) (2,771)
Net (acquisitions)/disposals (1,390) 1,471 (3,888) 3,463 (626) (4,000) (3,500) (1,750)
Other investing CF items 0 (259) (56) (740) 397 0 0 0
Change in debt (788) 1,755 (1,700) 1,142 4,072 3,500 (1,500) (1,500)
Net share issues/(repurchases) 1,121 3,000 215 126 45 0 0 0
Dividends paid (1,598) (1,986) (1,996) (1,330) (2,327) (2,335) (3,113) (3,502)
Other financing CF items (165) (263) (522) (1,488) (811) (1,613) (1,870) (1,743)
Cash flow from financing (1,429) 2,506 (4,002) (1,551) 978 (448) (6,483) (6,745)
Forex effect/others 0 0 0 0 0 0 0 0
Change in cash (1,790) (1,724) 484 (3,446) 4,770 (751) (2,433) 149
Free cash flow 1,029 (5,442) 8,430 (4,619) 4,021 3,697 7,550 8,644
- 36 -
India Auto Sector
19 April 2011

As at 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Inventory 9,026 10,703 12,239 13,300 16,382 24,188 25,483 27,205
Fixed assets 10,847 15,445 20,548 43,974 48,110 50,753 51,710 50,929
Other non-current assets 563 432 4,255 1,017 2,440 6,440 9,940 11,690
Total assets 36,926 44,878 55,622 78,363 92,820 111,324 117,733 122,969
Short-term debt 0 0 0 0 0 0 0 0
Long-term debt 6,919 6,404 8,875 19,581 22,039 26,539 24,897 21,276
Share capital 1,222 1,324 1,330 1,330 1,330 1,330 1,330 1,330
Net debt/(cash) (2,228) 276 2,517 17,082 16,028 21,077 21,868 18,098
BVPS (Rs) 11.562 14.311 16.154 26.113 27.578 29.936 32.716 36.532
Key ratios (%)

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Sales (YoY) 25.5 36.6 8.0 (22.8) 21.1 48.0 16.6 9.7
EBITDA (YoY) 28.7 26.9 16.6 (43.3) 66.2 47.4 19.7 16.5
Operating profit (YoY) 33.4 29.1 16.2 (55.6) 99.2 54.9 19.1 17.7
Net profit (YoY) 21.6 40.4 1.0 (61.5) 124.2 45.2 21.0 25.9
EPS (YoY) 18.4 29.5 0.5 (61.5) 124.2 45.2 21.0 25.9
EBITDA margin 10.4 9.7 10.5 7.7 10.5 10.5 10.8 11.4
ROAE 22.4 26.9 22.2 6.2 10.9 14.7 16.3 18.6
ROAA 8.6 10.9 8.9 2.6 4.5 5.5 5.9 7.1
ROCE 20.0 23.4 22.7 6.6 9.9 13.8 15.3 17.5
ROIC 25.6 25.5 21.5 6.7 8.3 11.9 12.9 14.9
Net debt to equity net cash 1.5 11.7 49.2 43.7 52.9 50.2 37.2
Effective tax rate 27.6 27.0 26.3 8.9 22.2 21.9 21.0 19.0
Payables (days) 72.8 63.1 74.7 107.0 103.4 94.6 97.0 93.4
Net interest cover (x) 25.6 101.9 12.7 2.4 6.9 5.4 5.5 7.0
Company profile
Ashok Leyland is the second-largest commercial vehicle manufacturer in India with a presence in trucks, buses and light
commercial-vehicle segments. The company also supplies gensets for telecom operations. It has two key manufacturing facilities
in India: Chennai (South) and Uttaranchal (North).
- 37 -
India Auto Sector
19 April 2011
Key risks
1. A sharp deceleration in the Index of Industrial
Production’s (IIP) growth rate for a prolonged
period would have a negative impact on domestic
truck volume growth.
Investment summary 2. Slower-than-expected ramp-up at the Pantnagar
facility could have an adverse impact on the
With India’s CV industry entering its third year of a company’s EBITDA margin.
typically four-year cycle, we believe demand trends
remain healthy. While the industry is faced with near-
term headwinds in terms of rising interest rates and
possible rises in diesel prices, we believe the strong
utilisation levels across fleet operators would enable
partial cost increases to be offset through freight-rate
hikes. After a 33% CAGR in domestic MHCV sales
volume from FY09-11E, we forecast industry volume
growth to moderate to 12% YoY for FY12.
Ashok Leyland’s share price has corrected by 17% YTD

on the back of weak volume numbers and a
disappointing financial performance for 3Q FY11. We
prefer to treat the recent performance as an aberration,
given the production constraints and supply-chain
issues faced by the company. We initiate coverage of
the stock with a 1 (Buy) rating and SOTP-based six-
month target price of Rs66.20. We value the core
business at a FY12E PER of 12x, which is a 10%
discount to the valuation commanded in the previous
up-cycle, and we value the investments in the joint
ventures at a FY12E 1x PBR.
Among our sector coverage, we forecast earnings to rise

at a CAGR of 23% for FY11-13, which is in the top
quartile of earnings growth for the companies we cover
in the sector. Our domestic MHCV volume-growth
assumption for FY12 at 11.5% YoY is conservative
compared with management’s guidance of 18% YoY.
Ashok Leyland’s product offering is likely to be

strengthened with the addition of a higher-power range
of MHCVs (U-truck platform) and the company’s foray
into smaller LCVs via its joint venture with Nissan.
Furthermore, with an improved regional volume mix
(market-share increase in North India from 17% in
March 2009 to 22% in November 2010) and higher
export-volume contribution (11% of total volume for
FY11, on our forecasts), Ashok Leyland’s volume
growth should witness less volatility. We see the
positive customer feedback to Ashok Leyland’s recently
launched U-truck range as potentially a key share-price
catalyst.
- 38 -
India Auto Sector
19 April 2011
Enhanced product portfolio and improved offers a greater degree of flexibility to customise
regional mix to support volume growth vehicles based on a customer’s requirement.
Ashok Leyland has strengthened its MHCV range by
We have conducted a comparative analysis of fleet
introducing 10 new models in its U-truck range of
operators’ profitability for Ashok Leyland’s
vehicles. Given that road infrastructure in the country
conventional truck range with the U-truck under two
is improving, the higher-power-to-weight range of
scenarios. 1) kilometres per hour (kmph) 5% higher
vehicles should see healthy demand as the cost
than conventional vehicles, and 2) kilometres per litre
economics tend to be favourable. The U-truck range
(kmpl) 5% better than conventional vehicles. We found
has enhanced Ashok Leyland’s offering with vehicles
that on an average freight, operators’ profit/per
having a higher power-to-weight ratio and additional
km/per tonne could improve by 3-8%.
features. The company believes the U-truck platform
U-truck range profitability

Scenario I Scenario II
Particulars Conventional U-truck U-truck
Model 2516 2518 2518
Assumptions
Indicative vehicle cost (incl. cabin) (Rs) 1,750,000 1,837,500 1,837,500
Avg. running per month (kms) 8,000 8,400 8,000
KMPL 3.5 3.5 3.7
Pay-load weight (tonnes) 16.0 16.0 16.0

Power/weight ratio (x) 6.4 7.2 7.2
Avg. freight rate/per km/per tonne 1.54 1.54 1.54
A. Fixed costs
1. Interest costs per month 8,750 9,188 9,188
2. Permit & taxes per month 3,750 3,750 3,750
3. Insurance costs per month 2,304 2,420 2,420
4. Depreciation 18,229 19,141 19,141
Total fixed costs (1 + 2 + 3+4) 33,034 34,498 34,498
Fixed cost per kilometre 4.1 4.1 4.3
B. Operational costs
a. Diesel cost (based on avg. cost of diesel at Rs.42/ltr) 96,000 100,800 91,429
b. Driver expenses 10,000 10,000 10,000
c. En-route expenses (barriers, toll etc.) 5,500 5,500 5,500
d. Spares & repairs exp. (including scheduled services) 5,500 5,500 5,500
e. Tyres - wear & tear 8,800 9,240 8,800
Total operational costs (a+b+c+d+e) 125800 131040 121229
Operational cost per kilometre 15.7 15.6 15.2
Total cost per kilometre (fixed + operational cost) 19.85 19.71 19.47
Operational cost per km/per tonne 1.24 1.23 1.22

Profit per km/per tonne 0.30 0.31 0.32
% increase 3 8
The company has already sold around 300 U-truck 16 tonnes) segment, which accounts for 67% of its
vehicles since being launched in November 2010. At domestic truck segment volume currently.
current pricing, Ashok Leyland faces under-recoveries Furthermore, current industry trends, characterised by
on the product range. However, following a successful a high level of fleet-operator utilisation levels and the
volume ramp-up, adequate pricing action is likely to be successful adoption of the hub-and-spoke model, tend
undertaken to align with the company’s profitability to suggest that growth in the higher-tonnage segment
objective. should remain strong.
We believe the U-truck range should reinforce Ashok

Leyland’s presence in the higher-tonnage (more than
- 39 -
India Auto Sector
19 April 2011
Domestic truck Industry: strong growth in higher-tonnage Ashok Leyland: tonnage split in domestic-truck segment
segment
70 100%
90%
60
80%
50 70%
40 60%
50%
30 40%
20 30%
20%
10 10%
0 0%
Haulage Tippers Tractors MAV ICV FY07 FY08 FY09 FY10 YTD FY11
YTD FY11 (% YoY) < 16T > 16T
Regional volume mix improving which management believes could increase to 10-15%
Ashok Leyland lost significant market share to Tata in the medium term.
Motors in FY09 and in the first half of FY10, as
industry freight demand recovered faster in the north Expansion in margins through operating
and east, wherein the latter has a strong foothold. leverage, tax incentives
Subsequently, Ashok Leyland has taken steps to reduce Based on our volume-growth forecasts, Ashok
its dependence on the South India market by focusing Leyland’s capacity utilisation should increase from 62%
on setting up its dealer/service network in other for FY11 to 76% for FY13. Further, Ashok Leyland’s
regions. Furthermore, the ramp-up of its Pantnagar existing capacities would be utilised for manufacturing
facility would enable the company to expand its LCVs on a contract basis for the joint venture with
presence in the North and East India markets. Over the Nissan. Therefore, despite a contraction in the
past 18 months, Ashok Leyland’s volume mix from the contribution margin, we expect operating-leverage
South India market has come down from 58% in FY09 benefits to support an EBITDA-margin improvement.
to 45% year-to-date in FY11, while the North India
volume mix has increased by 800bps to 25% over a Ashok Leyland’s Pantnagar facility has recently
similar period. ramped up production levels to about 3,000 vehicles
per month. Consequently, we expect tax incentives
Ashok Leyland: volume mix
from this facility to accrue meaningfully from FY12
70% onwards. We assume that the company will retain part
60% of the tax benefit, out of the potential EBITDA-margin
50% expansion of 140bps and 250bps for FY12 and FY13,
40%
respectively. Given the raw-material cost pressure, we
believe Ashok Leyland’s operating-profit margins
30%
should be cushioned by the tax incentives.
20%
10% Forecast tax benefits from Pantnagar facility
0% FY12E FY13E
South North West East Central Volume assumptions 31,000 40,000
ASP per vehicle (Rs lakh) 11.67 11.72
FY09 FY10 YTD FY11 Sales (Rs m) 36,183 46,916
Excise duty 10% 12%
Source: Company, Daiwa Ancillarisation level 50% 60%
Saving on excise duty (Rs m) 1,809 3,378
Credit support via captive financing arm Excise saving per vehicle 58,360 84,449
Forecast EBITDA-margin increase (%) 1.4 2.5
Given the much-needed financing support for CV sales, Source: Company, Daiwa forecasts
Hinduja Leyland Finance (HLF) has commenced with
initial capital of Rs1.25bn. We believe this would
partially alleviate concerns regarding financing
requirements for Ashok Leyland vehicles, especially in
periods of liquidity crunch in the system. Currently,
HLF finances around 5% of Ashok Leyland’s vehicles
- 40 -
India Auto Sector
19 April 2011
Key joint ventures should contribute

meaningfully from FY13 onwards
Ashok Leyland has entered into two joint ventures to
increase its share of non-cyclical revenue, while
maintaining synergies with the company’s existing line
of business. It plans to invest Rs8bn up to FY12, mainly
on its LCV joint venture with Nissan and construction-
equipment joint venture with John Deere.
With the LCV joint venture with Nissan likely to

commence from June 2011, we believe Ashok Leyland’s
capacity utilisation should increase, as part of the
manufacturing would be carried out of the company’s
Hosur facility. Furthermore, Ashok Leyland would
receive contract-manufacturing margins for the LCV
production. The joint venture would focus on creating a
new product segment in the 4-6 GVW category, which
is above the one-tonne small CV range and smaller
than the conventional LCV range of vehicles. Initially,
Ashok Leyland is looking for a 5% market share;
however, we have not factored in any contribution from
the joint venture, considering the limited details about
the product and the pricing strategy.
The construction-equipment joint venture with John

Deere is likely to be a low-profit-margin business with
a significant proportion of bought-out components.
The joint venture will focus on equipment used for road
construction, including backhoe loaders and excavators.
Management has indicated that the joint venture would
leverage on the existing dealer-distribution networks of
both the partners.
- 41 -
India Auto Sector
19 April 2011
volume contribution from the U-truck range and ramp-

up in the production level at the tax-exempt Pantnagar
plant.
Despite an increase in interest expenses, we believe the

Financial analysis above factors in addition to the operating leverage
benefits would enable the company to record strong
earnings growth over the next two years.
We forecast a 23% PAT CAGR from FY11-13
While our volume-growth forecast for FY11-13 remains
conservative at an 11% CAGR, we forecast a 90bp
expansion in the EBITDA margin for the next two years
as the ASP trends improve on the back of a higher
Ashok Leyland: volume and net sales trend Ashok Leyland: EBITDA and margin trend
120 60 16 12
50
100
40 12 10
80 30
20 8 8
60
10
40 0
4 6
(10)
20
(20)
0 (30) 0 4
Volume ('000) - LHS Net sales (% YoY) - RHS EBITDA (Rs bn) - LHS EBITDA (%) - RHS
Leverage and return ratios to improve as

large capex is behind us Despite the high level of investment activity, we do not
foresee a significant increase in debt levels. Rather, we
Ashok Leyland guides for an outlay of Rs20bn on capex
forecast the company to pare its gearing ratio to 0.4x
and investments until FY12. The company plans to
by FY13. Furthermore, we believe the company’s return
make further investments in its Neptune series engines
ratios are set to improve over the next two years.
and new-generation cabs. Significant investments in
the joint ventures are likely to be towards the Nissan
LCV joint venture.
Ashok Leyland: gearing ratio Ashok Leyland: return ratios
1.2 20
1.0
16
0.8
0.6 12
0.4
8
0.2
0.0 4
D/E (x) D/E (x) - (adjusted for reval reserves) ROACE (%) ROANW (%)
- 42 -
India Auto Sector
19 April 2011
3Q FY11 results were expectedly weak adjusted PAT at Rs636m was down by 40% YoY and
Ashok Leyland’s 3Q FY11 results were affected by a 62% QoQ.
sharp sequential drop in sales volume (down 25% QoQ)
as the company faced production constraints and We believe the company’s volume-growth performance
supply-chain issues. The EBITDA margin at 8.6% is likely to improve as production-constraint issues
(down 270bps YoY, down 260bps QoQ) was affected have been addressed. We expect the margins to
adversely by a rise in raw-material costs and a higher- improve, based on pricing action taken in January 2011,
than-proportionate increase in other expenses on higher operating leverage and increased tax incentives
account of U-truck-related marketing expenses. from the ramp-up of the Pantnagar plant to about
Interest costs increased by 193% YoY on account of 3,500 units per month from 4Q FY11.
higher working capital and the absence of interest-
capitalisation benefits from the Pantnagar plant. The
Ashok Leyland: quarterly sales-volume trend Ashok Leyland: EBITDA margin and cost trends
30,000 15 100
25,000 12
90
20,000
9
15,000 80
6
10,000
70
3
5,000
0 0 60
Volume (units) EBITDA (%) - LHS RM/sales - RHS Opex/sales - RHS
- 43 -
19 April 2011

Hero Honda Motors Up/downside: -14.1%
HH IN Share price (15 Apr): Rs1,831.75
Initiation: gearing up to rebuild

its core competency
• Its market share is likely to decline by 170bps over the next two
years as it focuses on developing its own product capability
• Export story will take quite some time to make a meaningful
contribution
• Current PER of 16.3x for FY12E is 15% above its past-five-year
trading average; stock appears expensive
incremental costs on account of Forecast revisions (%)

product development and Year to 31 Mar 11E 12E 13E
marketing/advertising expenses. Net-profit change n.a. n.a. n.a.
EPS change n.a. n.a. n.a.
What we recommend Source: Daiwa forecasts
Ambrish Mishra We initiate coverage with a 4
(91) 22 6622 1060
ambrish.mishra@in.daiwacm.com (Underperform) rating and six- Share price performance
month target price of Rs1,573, based
Navin Matta on a 14x FY12E PER, which is in line
(91) 22 6622 8411
navin.matta@in.daiwacm.com with the company’s average multiple
commanded over the past five years.
The recent sharp run-up in the share
What's new price has led to valuations turning
The two-wheeler industry’s expensive (a 16.3x FY12E PER) in BSE SENSEX 30 Index
dynamics are changing with the our view, without any significant
recent split between Hero group and change in the fundamentals or 12-month range 1,390.55-2,058.40
Honda Motors, especially when outlook for the company. Market cap (US$bn) 8.22
industry growth is heading for Average daily turnover (US$m) 22.67
moderation. With the uncertainty surrounding Shares outstanding (m) 200
Hero’s operational performance and Major shareholder Munjal Family (55.0%)
What's the impact the change in customer perception
We expect the transition period to following Honda Motor’s exit, we Financial summary (Rs)
be challenging for the Hero Honda expect investors to value the stock Year to 31 Mar 11E 12E 13E
on its short-term earnings potential, Revenue (m) 190,221 217,957 238,477
Motors (Hero), given the increasing Operating profit (m) 20,785 23,030 26,512
competitive intensity. However, rather than taking a medium-to-
Net profit (m) 20,174 22,434 25,543
without Honda, we believe there is a longer term view.
Core EPS 101 112 128
potential risk that the value of the EPS change (%) (9.6) 11.2 13.9
franchise will be diluted. We How we differ
Daiwa vs Cons. EPS (%) (1) (1) (1)
forecast the company’s market share Our FY12-13 EPS forecasts are 1% PER (x) 18.1 16.3 14.3
to decline by 170bps over FY11-13. lower than those of the Bloomberg Dividend yield (%) 1.4 1.6 2.2
As seen during the company’s consensus. We forecast a sales- DPS 25.000 30.000 40.000
performance for the first nine volume CAGR of 10.5% for FY11-13, PBR (x) 7.6 5.8 4.6
months of FY11, we believe that which is lower than the average ROE (%) 48.7 40.1 35.6
during our forecast period the industry growth rate, given the Source: Bloomberg, Daiwa forecasts
company will find it hard to take uncertainty regarding the company’s

adequate pricing action to offset future product pipeline and
commodity-cost pressure and increased competition.
India Auto Sector
19 April 2011

Growth outlook
Valuation
Earnings revisions
Growth outlook Hero: market share
We believe Hero’s market share is likely to remain (%)

under pressure as Honda Motorcycle and Scooter Ind
50
(HMSI) (Not listed) becomes more aggressive in the
domestic motorcycle segment. Furthermore, Bajaj Auto 48
is looking to increase its presence in rural markets, 46
which could pose a threat to Hero’s dominant position
44
in this market. Given our forecast of a 10% YoY decline
in FY11 earnings, we do not think our earnings CAGR 42
forecast of 12.5% for FY11-13 is particularly exciting. 40
38
Source: Company, Daiwa estimates
Hero: one-year-forward PER – average premium/(discount) to

Valuation its past-five-year trading average
The stock is trading currently at a FY12E PER of 16.3x, (%)

which is at a 15% premium to its past-five-year trading
60
average. Given the ongoing transition-related challenges
40
and higher level of competition, we expect the stock’s
performance to be driven by the market’s expectation of 20
its near-term earnings. Our target multiple of 14x on a 0

PER basis is in line with its past-five-year trading (20)
average, which we believe is fair, as the company’s (40)
balance-sheet strength and FCF generation would entail (60)
investors viewing the stock as a defensive play. 2/4/2006 2/4/2007 2/4/2008 2/4/2009 2/4/2010
Premium/(discount)
Earnings revisions Hero: Bloomberg-consensus EPS revisions
Concurrent declines in Hero’s market share and (Rs)

EBITDA margin have resulted in significant downward
150
earnings revisions by the Bloomberg consensus over the
past year. Hero group’s split with its joint-venture 140
partner, Honda Motor, has further added to concerns 130

over sales-volume sustainability. Our FY12-13 earnings 120
forecasts are 1% lower than those of the consensus, as
110
we see the company’s sales-volume growth being
affected by Honda’s aggressive ramp-up in the 100
Apr-10
Mar-11
Apr-11
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
motorcycle segment. Furthermore, we expect EBITDA-

margin pressure to persist, as we expect Hero to offer
higher discounts/incentives to customers), in addition
to higher transition-related expenses. Source: Bloomberg
- 45 -
India Auto Sector
19 April 2011
Financial summary
Key assumptions
Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Sales volume (units) 3,000,751 3,336,756 3,337,142 3,722,000 4,600,130 5,356,574 5,975,696 6,536,134

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
2 wheelers 82,976 93,605 97,439 115,702 147,607 177,356 202,520 220,295
Other revenues 4,164 5,395 5,879 7,489 9,975 12,865 15,437 18,182
Others 0 0 0 0 0 0 0 0
Total revenue 87,140 99,000 103,318 123,191 157,582 190,221 217,957 238,477
Other income 0 0 0 0 0 0 0 0
COGS (60,550) (71,787) (74,025) (87,420) (107,364) (139,052) (158,455) (172,419)
SG&A (4,045) (5,071) (5,036) (5,822) (7,604) (9,256) (11,371) (12,457)
Net-interest inc./(exp.) 167 336 486 537 558 591 670 763
Pre-tax profit 14,122 12,462 14,103 17,815 28,317 23,938 27,397 31,526
Tax (4,409) (3,882) (4,424) (4,997) (5,999) (4,563) (4,963) (5,982)
EPS (reported) (Rs) 48.640 42.962 48.467 64.185 112 97.023 112 128
EPS (adjusted) (Rs) 48.640 42.962 48.467 64.185 112 101 112 128
EPS (adjusted fully-diluted) (Rs) 48.640 42.962 48.467 64.185 112 101 112 128
DPS (Rs) 16.994 16.999 18.999 19.999 110 25.000 30.000 40.000
EBIT 12,498 10,333 11,891 15,428 24,705 20,785 23,030 26,512
EBITDA 13,645 11,731 13,494 17,235 26,620 22,994 25,534 29,369
Cash flow (Rs m)

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Tax paid (4,230) (3,788) (4,452) (4,806) (5,916) (4,453) (4,863) (5,832)
Change in working capital (792) (3,192) 3,842 1,863 25,847 (15,028) (103) 1,595
Other operational CF items (688) (680) (486) (537) (1,058) (1,390) (670) (763)
Cash flow from operations 9,558 6,199 14,610 16,141 49,106 5,277 24,265 29,382
Capex (3,929) (5,017) (3,696) (3,102) (2,041) (3,308) (5,588) (5,116)
Net (acquisitions)/disposals (352) 880 (5,930) (8,019) (5,570) (2,000) (3,500) (3,500)
Other investing CF items (489) (221) (970) (990) (1,100) 0 0 0
Change in debt 0 0 0 0 0 0 0 0
Net share issues/(repurchases) 1,000 900 892 1,290 2,250 0 0 0
Dividends paid (3,954) (3,972) (4,439) (4,673) (25,676) (5,841) (7,009) (9,346)
Other financing CF items (529) (106) 358 17 (444) 205 245 295
Cash flow from financing (3,483) (3,178) (3,189) (3,366) (23,869) (5,636) (6,764) (9,051)
Change in cash 1,306 (1,336) 825 665 16,525 (5,668) 8,413 11,716
Free cash flow 5,630 1,182 10,913 13,040 47,064 1,968 18,677 24,267
- 46 -
India Auto Sector
19 April 2011

As at 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Cash & short-term investment 1,587 358 1,311 2,196 19,072 14,589 23,427 35,610
Inventory 2,266 2,756 3,171 3,268 4,364 6,254 7,166 7,840
Fixed assets 9,936 13,555 15,648 16,943 17,069 18,169 21,253 23,511
Total assets 38,767 42,426 50,684 60,765 85,152 89,969 108,318 128,100
Long-term debt 1,858 1,652 1,320 785 660 660 660 660
Share capital 399 399 399 399 399 399 399 399
Net debt/(cash) 271 1,294 9 (1,411) (18,412) (13,929) (22,767) (34,950)
BVPS (Rs) 101 124 150 190 174 241 319 400
Key ratios (%)

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Sales (YoY) 17.4 13.6 4.4 19.2 27.9 20.7 14.6 9.4
EBITDA (YoY) 17.2 (14.0) 15.0 27.7 54.5 (13.6) 11.1 15.0
Operating profit (YoY) 16.2 (17.3) 15.1 29.8 60.1 (15.9) 10.8 15.1
Net profit (YoY) 19.8 (11.7) 12.8 32.4 74.1 (9.6) 11.2 13.9
EPS (YoY) 19.8 (11.7) 12.8 32.4 74.1 (9.6) 11.2 13.9
EBITDA margin 15.7 11.8 13.1 14.0 16.9 12.1 11.7 12.3
ROAE 55.5 38.3 35.5 37.8 61.4 48.7 40.1 35.6
ROAA 27.1 21.1 20.8 23.0 30.6 23.0 22.6 21.6
ROCE 64.3 42.8 41.3 44.1 66.7 49.4 40.7 36.6
ROIC 46.3 30.7 29.2 33.4 73.7 66.6 50.2 50.1
Net debt to equity 1.3 5.2 0.0 net cash net cash net cash net cash net cash
Payables (days) 43.7 39.0 41.8 42.2 61.7 67.8 56.0 53.3
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Company profile
Hero Honda is the largest two-wheeler company in India with a market share of 45% in FY10, and the largest two wheeler
manufacturer worldwide. Its best-selling brands include Splendor and Passion. With combined capacity of 5.4m units, the
company has plants in Dharuhera, Gurgaon and Uttaranchal.
- 47 -
India Auto Sector
19 April 2011
company’s average multiple commanded over the past

five years. The recent sharp run-up in the share price
has led to valuations turning expensive (a 16.3x FY12E
PER) in our view, without any significant change in the
fundamentals or outlook for the company.
Investment summary Risks
The recent split between the Hero group and Honda We see the following as risks to our target price and
Motor has altered the course of not only the company, rating.
but also the domestic two-wheeler industry. We expect 1. Delays in HMSI’s new model launches in the
a higher level of competitive intensity over the medium motorcycle segment and/or a lack of investment in
term, given that we expect HMSI to become more capacity creations, which could result in less
aggressive in the domestic motorcycle market. The competition than we expect currently.
contours of the new licensing agreement between the
2. The Hero group’s collaboration with another
erstwhile joint venture partners appear to favour the
strong technology partner, which could reduce lead
Hero group. The new agreement assures technology
times for introducing new models and reduce the
support for existing models and the right to use the
risks related to product failure.
Honda brand until 2014, without any change in the
royalty structure. Nevertheless, we believe that over the 3. A better-than-expected two-wheeler-industry
medium term, Hero will have to face the challenges of growth rate could result in improved pricing
engineering a successful transition without diluting its discipline, leading to a better EBIDTA margin
franchise value. outlook.
In the FY11 year-to-date, Hero’s share of the domestic

motorcycle segment has declined by 400bps, mainly
going to Bajaj and HMSI. We attribute this to the
success of Bajaj’s Discover range and lack of exciting
launches by Hero during this period. However, with the
recent launch of the Splendor Pro and new model
support from Honda over the next three years, we
forecast Hero’s share of the domestic motorcycle
market to stabilise at about 52% for FY13.
Although, the company now has the freedom to export

its products to any market, we believe the sales-volume
ramp-up will require a significant lead time, as was
seen in the case of Bajaj, which made its export market
foray in 2002-03. In markets where the company does
not have a presence currently, Hero will have to drop
the ‘Honda’ brand name, which will mean additional
investment and higher lead time as it builds up its
brand name.
In addition to commodity-cost pressure, we believe

Hero’s FY12-13 EBITDA margin is likely to be adversely
affected by incremental expenditure on: 1) rebranding,
2) R&D, and 3) developing export markets. Also, we do
not rule out higher incentives/commissions to dealers
to ensure they are retained during the transition period.
We forecast Hero’s EBITDA margin to remain about
250-300bps lower than its average past-10-year
EBITDA margin during our forecast period.
We initiate coverage of Hero with a 4 (Underperform)

rating and six-month target price of Rs1,573, based on
an FY12E PER of 14x, which is in line with the
- 48 -
India Auto Sector
19 April 2011
Uncertainty during the transition phase Delving into the medium-term issues, we see the
We believe the split between Hero group and Honda company being faced with a mix of challenges and
Motor has by and large been on amicable terms, as the opportunities. First, we think Hero’s ability to develop
new licensing agreement ensures that the company is successful R&D capability goes beyond investing in the
not faced with any near-term operational challenges. requisite infrastructure and hiring a team of engineers.
According to the new terms, Honda will continue to As seen in Bajaj’s case, it can take several attempts
provide technology support for the existing range of before a successful product is developed (see following
vehicles until 2014, along with the commitment to table). However, what goes in Hero’s favour is its deep
provide a few new models/model upgrades over the understanding of the needs of customers in India in
next three years. Furthermore, the company has been terms of product positioning, pricing, product
granted the right to continue using the Honda brand- specifications, and styling. Nevertheless, it is difficult
name until 2014, unless Hero makes any modification to gauge the timeframe required for Hero to develop a
to the existing models it is producing currently. Most successful in-house R&D capability.
importantly, the royalty structure has not changed.
Bajaj: bike launches over the past decade and how they have been received by the public
Customer reaction
Model Launch Good Moderate Poor
Eliminator Jan- 2001 *
Pulsar Nov 2001 *
Caliber Feb 2003 *
Wind Jul 2003 *
CT100 May 2004 *
Avenger Jun 2005 *
Discover 125 Dec 2005 *
Platina Apr 2006 *
XCD 125 Sept 2007 *
Discover 135 Jul 2008 *
XCD 135 Jan 2009 *
Discover 100 Jul 2009 *
Pulsar 135 Dec 2009 *
Discover 150 May 2010 *
Total 5 4 5
Note: Model ratings based on a combination of factors, including the duration for which the model was sold, sales-volume data reported in the media and views expressed by industry
experts
Without the Honda brand, customer Access to export markets: a big

loyalty is likely to be tested opportunity over the long term
The company places more importance on the brand According to the agreement, Hero will now get
equity of its products (the Splendor, Passion), rather unrestricted access to export its models in the
than on its mother (Hero Honda) brand, driving international markets. While this is a clear positive
customer choice. We believe this view, to a certain development for the company, developing export
extent, is endorsed by the strong sales-volume markets takes time. Understanding the dynamics of the
performance seen in the case of Bajaj, under its two- local market and getting the product fit requires
brand strategy. On the other hand, it would be significant ground work. Once again, we highlight that
erroneous to assume that the mother brand does not it took Bajaj several years to garner any meaningful
matter, especially when the company name includes sales-volume growth in the export markets.
Honda, which is synonymous in the market for quality Furthermore, the Hero group will need to establish its
and reliability. Furthermore, we do not rule out the brand in the respective markets as it does not have the
possibility of HMSI launching products similar to right to use the Honda brand-name in new export
Hero’s marquee models, in which case the latter’s markets.
brand equity is likely to be tested.
- 49 -
India Auto Sector
19 April 2011
Bajaj: two-wheeler export volume We forecast Hero’s share of the motorcycle

('000 units) market to decline by 170bps over FY11-13
800 In the FY11 year-to-date, Hero’s market share has
700 declined by almost 400bps, due mainly to a lack of
600 exciting new launches and an increasing acceptance in
500 the market of Bajaj’s Discover 100cc. In the future, we
400 believe the two-wheeler industry is likely to witness
300 more competition, as we think HMSI is likely to get
200 more aggressive in the mass-market segment and Bajaj
100 targets to increase its rural market presence. We
0 forecast Hero’s share of the domestic motorcycle
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 market to settle at about 52% for FY13, which
translates into a 170bp decline over the next two years.
Hero: two-wheeler sales volume and growth India Auto Sector: domestic motorcycle market shares
('000 units) 70%

7,000 25 60%
6,000 50%
20
5,000 40%
4,000 15
30%
3,000 10 20%
2,000
5 10%
1,000
0%
0 0
Volume YoY % Hero Bajaj TVS Motors HMSI
Operating margin likely to remain under less pricing action than its peers, Hero has continued to
pressure witness a decline in market share. The company has
therefore been unable to offset its cost pressures,
Hero’s EBITDA margin over the past three quarters has
especially emission-change-related expenses.
been weaker than the market expected. Despite taking
Hero: comparison of indexed gross EBITDA margin Hero: quarterly ASP and raw-material cost per vehicle
(%) (%)
140 16
130 12
120
8
110
4
100
0
90
80 (4)
1Q FY09
2Q FY09
3Q FY09
4Q FY09
1Q FY10
2Q FY10
3Q FY10
4Q FY10
1Q FY11
2Q FY11
3Q FY11
1Q FY09
2Q FY09
3Q FY09
4Q FY09
1Q FY10
2Q FY10
3Q FY10
4Q FY10
1Q FY11
2Q FY11
3Q FY11
Hero Bajaj Average ASP/vehicle (% YoY) Raw-material cost/vehicle (% YoY)
In the future, we believe Hero will need to scale up its by Hero to Honda, we believe this situation will
R&D capabilities, which will entail further cost increases. materialise after 2014, once royalty payments for
Other two-wheeler players, including Bajaj and TVS existing Honda products are discontinued. We also
Motors (Not rated), spend the equivalent of about 1-1.5% expect the company’s advertising expenditure to
and 2-3% of sales on R&D expenses annually, increase, given the challenge we see for the company to
respectively. While the increase in R&D expenses should maintain its brand equity without Honda by its side.
be offset partially by a decline in royalty expenses paid
- 50 -
India Auto Sector
19 April 2011
India Auto Sector: R&D/sales as a % for the major two-wheeler Hero: advertising expenses
companies
(%) (Rs m)
3.0 4,000 3.0
3,500
2.5
3,000 2.5
2.0 2,500
1.5 2,000 2.0
1,500
1.0
1,000 1.5
0.5 500
0.0 0 1.0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Bajaj TVS Motors Hero Adverstising spend - LHS As a % of sales - RHS
While the company believes component sourcing from

other than Honda-approved vendors could result in
cost savings, we do not see this happening over the
near term. We forecast the EBITDA margin to decline
by 250-300bps over our forecast period, compared
with the company’s past-10-year average EBITDA
margin.
- 51 -
India Auto Sector
19 April 2011
CAGR of 10.5% over FY11-13E, and marginal

improvement in ASPs, assuming a higher sales-volume
contribution by the recently launched Splendor Pro
(ASP 5% + compared with the Splendor Plus) in the
Splendor series. Despite a significant decline in the
Financial analysis FY11E EBITDA margin over FY10 (down 480bps YoY),
we expect EBITDA margin trends to remain subdued
during our forecast period, as the company will need to
Earnings CAGR of 12.5% for FY11-13 spend on developing its R&D capability, rebranding
initiatives and export development. With the Haridwar
In view of the ongoing transition-related efforts being
facility operating at near peak capacity (about 0.14m
made by the company amid a relatively competitive
units per month), we do not expect any incremental
environment, we expect to see moderate earnings
benefits from tax incentives in the FY12-13 period.
growth over FY11-13. Our revenue-growth forecast of a
12% CAGR over FY11-13 is driven by a sales-volume
Hero: sales-volume growth Hero: EPS and EBIDTA margin (Rs)
('000 units) (Rs) (%)

7,000 25 140 18
6,000 120 16
20
5,000 100 14
4,000 15 80 12
3,000 10 60 10
2,000 40 8
5
1,000 20 6
0 0 0 4
FY08 FY09 FY10 FY11E FY12E FY13E FY08 FY09 FY10 FY11E FY12E FY13E
Volume - LHS % YoY - RHS EPS - LHS EBITDA - RHS
Balance-sheet strength and FCF generation the company’s return ratios over the next two years, we
remain favourable forecast FCF generation of Rs37bn over FY11-13. Given
the company’s financial strength, acquisitions for
technology access cannot be ruled out.
We have refrained from comparing the Hero group’s
split from and Honda Motor with that of TVS Motors
and Suzuki Motors in 2004 as Hero’s relative financial
position is far superior. While we forecast a decline in
Hero: return ratios Hero: FCF generation remains healthy

(%) (Rs bn)
70 45
60 40
50 35
40 30
30 25
20
20
15
10
10
0
5
0
ROA NW ROA CE FY08 FY09 FY10 FY11E FY12E FY13E
Source: : Company, Daiwa forecasts Source: : Company, Daiwa forecasts
- 52 -
19 April 2011

Bajaj Auto Up/downside: +0.2%
BJAUT IN Share price (15 Apr): Rs1,419.65
Initiation: room for surprises

diminishing
• Weakening product mix and higher competitive intensity should
put pressure on margins
• Earnings growth to moderate from a super-normal 74% CAGR
from FY09-11 to about 10% from FY11-13
• Current valuations at about a 14x FY12E PER do not give enough
comfort; room for a further re-rating seems limited
comes from the non-domestic two- Forecast revisions (%)

wheeler segment. Year to 31 Mar 11E 12E 13E
Net-profit change n.a. n.a. n.a.
We forecast the EBITDA margin to EPS change n.a. n.a. n.a.
decline by 210bps between FY11 and Source: Daiwa forecasts
Ambrish Mishra FY13, based on a weakening product
(91) 22 6622 1060
ambrish.mishra@in.daiwacm.com mix (reduced contribution from Share price performance
three-wheelers), input-cost inflation,
Navin Matta adverse currency movements
(91) 22 6622 8411
navin.matta@in.daiwacm.com (US$:Rs exchange rate), and a rise
in marketing spending due to fiercer
competition.
What's new 12-month share price performance
There is a lack of visibility on three- What we recommend BSE SENSEX 30 Index
wheeler demand rising. The two- We initiate coverage with a 3 (Hold)
wheeler industry’s dynamics also rating and six-month target price of 12-month range 1,005.40-1,638.45
appear challenging after the recent Rs1,422, based on a target PER of Market cap (US$bn) 9.23
split between Hero group and 14x on our FY12 EPS forecast, in line Average daily turnover (US$m) 16.91
Honda Motors. with our valuation for Hero. Shares outstanding (m) 289
Major shareholder Bajaj Family (49.6%)
What's the impact How we differ
We forecast the domestic two- We expect Bajaj Auto’s domestic Financial summary (Rs)
wheeler segment sales-growth rate motorcycle market share to remain Year to 31 Mar 11E 12E 13E
at 27% for 2011 based on its new Revenue (m) 168,346 195,401 216,845
to moderate to a 12% CAGR from Operating profit (m) 32,778 35,606 37,544
FY11-13, from a 25% CAGR from product-launch pipeline, an
Net profit (m) 26,151 29,386 31,613
FY09-11, given the high base effect increased focus on rural markets,
Core EPS 90.375 102 109
and the tightened availability of and captive financing support.
EPS change (%) 40.2 12.4 7.6
credit. In the two-wheeler segment, Daiwa vs Cons. EPS (%) 3 2 (1)
we expect high sales-growth rates in We factor into our forecasts a PER (x) 15.7 14.0 13.0
the premium category, which will higher-than-the Bloomberg- Dividend yield (%) 2.1 2.5 2.5
benefit Bajaj Auto. consensus decline in the EBITDA DPS 30.000 35.000 35.000
margin over FY11-13 (210bps), due PBR (x) 9.1 6.5 5.0
While the two-wheeler segment is to the cost-inflation trend, a ROE (%) 70.1 54.4 43.5
likely to see increased competition, deterioration in the product mix, Source: Bloomberg, Daiwa forecasts
we expect Bajaj Auto to be less and limited pricing power among

affected than its peers, given that the industry players, given the
45% of the company’s revenue increased competition we expect in
the domestic market.
India Auto Sector
19 April 2011

Growth outlook
Valuation
Earnings revisions
Growth outlook Bajaj Auto: EBITDA margin trend
We forecast Bajaj Auto’s EBITDA to increase by a 25

modest 7% CAGR from FY11-13. We believe the current 21.1 20.2
margins are unsustainable as competitive intensity is 18.9 17.9
20
rising. Further, a worsening product mix and
commodity cost pressure would adversely impact the 15 12.6 12.3
company’s margins. We forecast the company’s earnings 10
to increase at a 10% CAGR from FY11-13, which is a
significant deceleration from the 74% earnings CAGR 5
for FY09-11.
0
EBITDA (%)
Valuation Bajaj Auto vs. Hero Honda: one-year forward PER band chart
Given the prospects of higher competition and margin 25

pressure on account of commodity-cost inflation, we
believe the two-wheeler sector is unlikely to witness a 20
re-rating from current levels. 15
Bajaj Auto trades currently at a 13.9x PER and a 11.3x 10

EV/EBIDTA multiple on our FY12 forecasts. Our target
5
PER for Bajaj Auto at 14x is in line with our multiple for
Hero Honda. Although we forecast earnings growth to 0
moderate to a 10% CAGR from FY11-13, we believe our
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
target multiple is justified, given the company’s strong Apr-11
balance sheet and free cash flow characteristics. BJAUT - One-year fwd PER HH - One-year forward PER
Source: Bloomberg
Earnings revisions Consensus earnings revision trend
Over the past few quarters, Bajaj Auto’s operating 110

margin performance has been ahead of the street’s
expectations, leading to upward earnings revisions. 100
Going forward, we do not see much scope for upward 90
revisions, as volume growth as well as margin trends are
likely to decline as competition is set to intensify and 80
most two-wheeler companies would find it difficult to 70
pass on the incremental raw-material cost inflation.
60
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
Source: Bloomberg
- 54 -
India Auto Sector
19 April 2011
Financial summary
Key assumptions
Year to 31 Mar 2008 2009 2010 2011E 2012E 2013E
Sales volume (units) 2,450,750 2,194,111 2,852,580 3,868,549 4,434,045 4,908,444
Average selling price (LC) 37,176 37,905 39,544 41,514 41,996 42,294

Year to 31 Mar 2008 2009 2010 2011E 2012E 2013E
2 wheeler 62,027 58,295 82,206 117,860 138,291 152,845
3 wheeler 18,613 18,543 24,553 33,449 37,694 41,998
Others 9,578 10,986 12,225 17,038 19,417 22,002
Total revenue 90,218 87,824 118,984 168,346 195,401 216,845
Other income 0 0 0 0 0 0
COGS (66,204) (64,635) (80,704) (119,926) (141,727) (159,073)
SG&A (3,148) (3,262) (3,638) (4,183) (5,134) (6,179)
Other op. expenses (9,914) (9,584) (10,306) (11,459) (12,935) (14,050)
Operating profit 10,952 10,343 24,335 32,778 35,606 37,544
Net-interest inc./(exp.) 1,227 836 755 2,528 3,120 3,520
Assoc/forex/extraord./others (833) (1,618) (988) 964 1,174 1,324
Pre-tax profit 11,346 9,561 24,102 36,271 39,900 42,389
Tax (3,788) (3,016) (7,075) (10,119) (10,514) (10,775)
Min. int./pref. div./others 0 0 0 0 0 0
Net profit (reported) 7,558 6,545 17,027 26,151 29,386 31,613
Net profit (adjusted) 8,583 8,616 18,651 26,151 29,386 31,613
EPS (reported) (Rs) 26.119 22.619 58.845 90.375 102 109
EPS (adjusted) (Rs) 29.662 29.775 64.457 90.375 102 109
EPS (adjusted fully-diluted) (Rs) 29.662 29.775 64.457 90.375 102 109
DPS (Rs) 10.000 11.000 20.000 30.000 35.000 35.000
EBIT 10,952 10,343 24,335 32,778 35,606 37,544
EBITDA 12,692 11,641 25,700 34,041 37,089 39,161
Cash flow (Rs m)

Year to 31 Mar 2008 2009 2010 2011E 2012E 2013E
Profit before tax 11,346 9,561 24,102 36,271 39,900 42,389
Depreciation and amortisation 1,740 1,298 1,365 1,263 1,483 1,617
Tax paid (4,420) (3,084) (7,100) (10,119) (10,514) (10,775)
Change in working capital (5,895) 248 10,652 (1,253) (1,926) (1,969)
Other operational CF items (2,252) (2,907) (2,379) (2,528) (3,120) (3,520)
Cash flow from operations 518 5,117 26,640 23,632 25,824 27,742
Capex (1,768) (3,908) (932) (2,804) (2,331) (2,366)
Net (acquisitions)/disposals 45,904 486 (22,130) (10,000) (17,000) (17,000)
Other investing CF items 0 0 (4) 0 0 0
Cash flow from investing 44,136 (3,422) (23,066) (12,804) (19,331) (19,366)
Change in debt (155) (70) 130 0 0 0
Net share issues/(repurchases) 1,700 0 334 0 0 0
Dividends paid (3,386) (3,724) (6,749) (10,157) (11,849) (11,849)
Other financing CF items 1,227 836 755 2,528 3,120 3,520
Cash flow from financing (614) (2,958) (5,530) (7,629) (8,729) (8,329)
Forex effect/others 0 0 0 0 0 0
Change in cash 44,040 (1,263) (1,956) 3,200 (2,237) 46
Free cash flow (1,250) 1,209 25,708 20,828 23,492 25,375
- 55 -
India Auto Sector
19 April 2011

As at 31 Mar 2008 2009 2010 2011E 2012E 2013E
Cash & short-term investment 561 1,369 1,014 4,214 1,977 2,023
Inventory 3,496 3,388 4,462 6,665 8,266 9,170
Accounts receivable 2,753 3,587 2,728 5,332 7,233 8,023
Other current assets 9,687 14,909 21,805 23,964 27,859 30,945
Total current assets 16,497 23,253 30,010 40,175 45,334 50,161
Fixed assets 13,034 15,644 15,211 16,752 17,600 18,350
Goodwill & intangibles 0 1,833 0 0 0 0
Other non-current assets 18,571 18,085 40,215 50,215 67,215 84,215
Total assets 48,102 58,814 85,436 107,142 130,150 152,726
Short-term debt 0 0 0 0 0 0
Accounts payable 10,433 12,134 20,263 25,757 30,361 31,642
Other current liabilities 8,340 12,242 22,487 22,705 23,571 25,102
Total current liabilities 18,773 24,376 42,750 48,462 53,932 56,744
Long-term debt 13,343 15,700 13,386 13,386 13,386 13,386
Other non-current liabilities 110 42 17 17 17 17
Total liabilities 32,226 40,118 56,152 61,865 67,335 70,147
Share capital 2,894 2,894 2,894 2,894 2,894 2,894
Reserves/R.E./others 12,982 15,803 26,390 42,384 59,921 79,686
Shareholders' equity 15,876 18,697 29,283 45,278 62,815 82,579
Minority interests 0 0 0 0 0 0
Total equity & liabilities 48,102 58,814 85,436 107,142 130,150 152,726
Net debt/(cash) 12,783 14,331 12,372 9,172 11,409 11,363
BVPS (Rs) 54.866 64.614 101 156 217 285
Key ratios (%)

Year to 31 Mar 2008 2009 2010 2011E 2012E 2013E
Sales (YoY) n.a. (2.7) 35.5 41.5 16.1 11.0
EBITDA (YoY) n.a. (8.3) 120.8 32.5 9.0 5.6
Operating profit (YoY) n.a. (5.6) 135.3 34.7 8.6 5.4
Net profit (YoY) n.a. 0.4 116.5 40.2 12.4 7.6
EPS (YoY) n.a. 0.4 116.5 40.2 12.4 7.6
Gross-profit margin 26.6 26.4 32.2 28.8 27.5 26.6
EBITDA margin 14.1 13.3 21.6 20.2 19.0 18.1
Operating-profit margin 12.1 11.8 20.5 19.5 18.2 17.3
ROAE 54.1 49.8 77.7 70.1 54.4 43.5
ROAA 17.8 16.1 25.9 27.2 24.8 22.4
ROCE 37.5 32.5 63.2 64.7 52.8 43.6
ROIC 25.5 23.0 46.0 49.2 40.8 33.3
Net debt to equity 80.5 76.7 42.2 20.3 18.2 13.8
Effective tax rate 33.4 31.5 29.4 27.9 26.4 25.4
Accounts receivable (days) 11.1 13.2 9.7 8.7 11.7 12.8
Payables (days) 42.2 46.9 49.7 49.9 52.4 52.2
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a.
Net dividend payout 38.3 48.6 34.0 33.2 34.5 32.0
Company profile
Bajaj Auto is the second-largest two-wheeler company in India and the largest three-wheeler player. The Bajaj brand is well-
established across several countries in Latin America, South East Asia, the Middle East and Africa. The company is the largest
exporter of two wheelers from India. It was founded by Jamnalal Bajaj in 1926.
- 56 -
India Auto Sector
19 April 2011
could prove to be a catalyst for share-price

outperformance.
Key risks
1. A significant increase in competitive intensity
Investment summary could have a larger-than-expected impact on
operating margins.
After a period of strong sales growth of 26% YoY for 2. A sharp rise in raw-material costs, on account of
FY10 and 27% YoY year-to-date in FY11, we expect the commodity-cost inflation or conversion costs,
domestic two-wheeler industry sales-growth rate to could affect margins further.
moderate to a 12% CAGR from FY11-13, given the high
base effect, credit availability becoming tighter and 3. A higher-than-expected two-wheeler-industry
potential cutback in discretionary spending on the back growth could lead to better-than-expected pricing
of high inflation in the economy. Within the two- discipline and therefore a lower-than-expected
wheeler industry, we expect higher growth rates in the decline in the company’s margins.
above 100cc segment, which would benefit Bajaj Auto. 4. The abolition of permit requirements in states,
such as happened in Tamil Nadu last year, could
We believe the split between the Hero group and result in higher-than-forecast sales volumes in the
Honda Motors is an adverse development for the company’s three-wheeler segment.
industry on the whole in the medium term. We see
HMSI turning more aggressive in the motorcycle
segment, which would result in the incumbents
responding through a higher level of discounts or
aggressive marketing efforts, both of which could be
margin dilutive. However, we note that since Bajaj
Auto derives about 45% of its revenue from the ex-
domestic two-wheeler segment, the impact of
competition is unlikely to be as great as for its peers.
Bajaj Auto has reversed most of its market-share losses

in the domestic motorcycle segment from a low of 15%
in January 2009 to 26% in January 2011. Despite a
higher level of competition, we expect the company to
hold on to its current domestic two-wheeler market
share based on: 1) new model/variant launches under
its established brands (Discover and Pulsar), 2) a focus
on expanding its presence in the relatively
underpenetrated rural markets, and 3) finance support
through its captive financing arm – Bajaj Finserv.
The outlook for Bajaj Auto’s export market continues to

remain robust, with strong growth momentum in the
African and LATAM markets. We do not foresee
incremental competition from Hero’s foray into the
export markets for at least the next 2-3 years, given the
time and efforts taken by Bajaj Auto to entrench itself
in the export markets. We forecast export volumes to
increase by a 14% CAGR from FY11-13.
We initiate coverage of Bajaj Auto with a 3 (Hold)

rating and six-month target price of Rs1,422 based on a
target PER of 14x on our FY12 EPS forecast. Our target
multiple is in line with the multiple we assign to Hero
Honda. Given the company’s strong balance sheet and
free cash flow generation, a higher dividend payout
- 57 -
India Auto Sector
19 April 2011
Motorcycle market share should remain expect higher competition in the industry and
intact despite higher competition especially in the motorcycle segment, as HMSI turns
more aggressive post its split with the Hero group.
We expect Bajaj Auto’s domestic two-wheeler volumes
However, we believe an increased focus on rural
to increase at a 12.5% CAGR from FY11-13. The
market penetration, introduction of new models in
company has regained more than 500bps in market
FY12 and captive financing support would enable Bajaj
share to 27% over the preceding two years on the back
Auto to defend its market share.
of its focus on the Discover and Pulsar brands. We
Bajaj Auto: monthly domestic motorcycle volumes and market-share trend

250,000 30
210,000 26
170,000 22
130,000 18
90,000 14
50,000 10
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Domestic motorcycle (units) - LHS Market share (%) - RHS
Source: Company, Crisil
As seen across all automotive segments, two-wheeler However, this time the company will piggy-back on its
customers are also migrating towards higher price established brands, Discover and Pulsar, to launch
points or away from the conventional commuter variants and refreshers. Bajaj Auto’s domestic
standard segment (price range from Rs30,000- motorcycle sales-volume mix has seen a major shift
40,000). Bajaj Auto’s previous attempt to move away away from low-end commuter standard bikes, which
from the commuter standard segment did not meet fell from 54% of the total for FY06 to 24% for FY10.
with much success, as it launched products under new
brand-names, such as the XCD, which was pitched
against strong competitor brands such as the Splendor.
Domestic motorcycle industry: volume mix Bajaj Auto: domestic motorcycle volume mix
100 100
80 80
60 60
40 40
20 20
0 0
FY06 FY07 FY08 FY09 FY10 FY06 FY07 FY08 FY09 FY10
Commuter std Commuter deluxe Sports Commuter std Commuter deluxe Sports
Source: Company, Crisil Source: Company, Daiwa

Note: Commuter Deluxe (price range Rs40,000-50,000) and Sport (price range above
Rs50,000)
- 58 -
India Auto Sector
19 April 2011
any presence earlier. We expect demand trends in the

rural markets to remain reasonably good, supported by
Bolstering its presence in rural markets
rising income levels and relatively lower two-wheeler
Bajaj Auto plans to increase its penetration in the rural penetration. In 2008, Bajaj Auto had a 22% market
markets by ramping up its dealer network. The share in the rural segment. With the success of the
company is likely to appoint 130 dealers in rural Discover range and its expanding reach, we expect the
markets by the end of April 2011, of which about 55- rural market share to increase.
60% would be in areas where the company did not have
Two wheeler: segmental penetration levels Two wheeler: addressable households
40 140
35
120
30
100
25
20 80
15 60
10 40
5
20
0
Rural areas Towns 1 - 10 lac Other 1 m+ Top 7 metros All India 0
cities cities FY05E FY10E FY15P
2006 2008 Urban (m) Rural (m)
Source: Company, Daiwa Note: 1-10 lac etc. refers to cities’ populations Source: Crisil, Daiwa
Credit sales in the two-wheeler industry at 30-35% are company, especially in urban markets. Currently, Bajaj
relatively lower than other automotive segments like Finserv (formerly Bajaj Auto Finance) lending accounts
passenger cars and CVs. In the present macroeconomic for 65% of organised finance industry in the two-
backdrop with credit availability drying up, we believe wheeler segment and it finances about 30% of Bajaj
Bajaj Auto’s captive financing arm could play an Auto’s domestic two wheelers.
important role in supporting demand growth for the
Bajaj Finserv: disbursements towards Bajaj Auto 2W Bajaj Finserv: increase in average ticket size
7,000 40,000
6,000
5,000 38,000
4,000
36,000
3,000
2,000 34,000
1,000
0 32,000
Disbursements (Rs m) Avg ticket size (Rs/vehicle)
Source: Bajaj Finserv presentation, Daiwa Source: Bajaj Finserv presentation, Daiwa
In the past, the resale value of Bajaj Auto’s vehicles was

at a significant discount to that of Hero Honda, which Domestic three-wheeler growth to
acted as a disincentive for customers and financiers. moderate to an 8% CAGR from FY11-13
Anecdotally, the resale value of Bajaj Auto vehicles was
Bajaj Auto’s passenger three-wheeler segment has seen
impacted by the frequent introduction and phasing out
volume growth 34% YoY in the financial year-to-date
of models, which may have led to inadequate services
on account of new permits being issued in some states,
and spares support. However, in the past two years,
de-licensing of permit requirements in states such as
Bajaj Auto’s product portfolio has witnessed a fair deal
Tamil Nadu, and replacement of three-wheeler petrol
of stability, with 70% of its domestic two-wheeler
vehicles with CNG or LPG vehicles. We forecast volume
volumes coming from the Discover and Pulsar range.
- 59 -
India Auto Sector
19 April 2011
growth to normalise to an 8% CAGR from FY11-13, four-wheeler passenger vehicles once permit issues are
factoring in small incremental volumes from possible addressed, given the latter’s better safety and comfort
new permit issues/decontrol in further states. As was features. Bajaj Auto is also working towards expanding
seen in the case with the cargo segment, we believe its range to the four-wheeler segment, which is likely to
passenger three-wheelers would face a challenge from be launched by the end of 2012.
Bajaj Auto – 3W passenger volume and market share Bajaj Auto – 3W cargo volume and market share
180 70 45 30
160 60 40
25
140 35
50
120 30 20
100 40 25
15
80 30 20
60 15 10
20
40 10
10 5
20 5
0 0 0 0
FY06 FY07 FY08 FY09 FY10 YTD FY11 FY06 FY07 FY08 FY09 FY10 YTD FY11
Volume sold ('000) - LHS % market share - RHS Volume sold ('000) - LHS % market share - RHS
Source: Bloomberg, Daiwa Source: Bloomberg, Daiwa
Export growth outlook remains buoyant plans to leverage on its tie-ups with KTM (Not rated),
Bajaj Auto’s exports guidance of 1m units for FY11 had in which it holds a 38% stake, and Kawasaki to cross-
been achieved by January 2011, and full-year volumes sell motorcycles across the international markets with
exceeded its guidance by 20%. The company has seen a Bajaj Auto’s range at the lower end, KTM products in
strong demand revival in the Latin America and Sri the mid range and Kawasaki motorcycles at the
Lanka markets, while Africa continues to show strong premium end. Bajaj Auto plans to increase its export
growth driven by a high level of under-penetration. revenue mix from 30% in FY11 to 60% in the next five
Going forward, in the two-wheeler segment, Bajaj Auto years.
Bajaj Auto: export volumes by market

100%
19% 15%
28% 25%
80%
25%
27%
60% 32%
43%
40%
43% 51%
30%
20% 22%
13% 11% 9%
7%
0%
FY07 FY08 FY09 FY10
South east Asia Africa & ME South Asia LATAM
We forecast overall exports, which include two- and locked into forex contracts; therefore ASPs could be
three-wheelers to increase at a 14% CAGR from FY11- vulnerable to currency risk in the event of the Rupee
13. The export ASP trend should be stable, given that appreciating against the US Dollar.
90-95% of its FY12 exports are hedged at an exchange
rate of US$:Rs46.5 which is at similar levels to its FY11
currency ASP. However, for FY13, Bajaj Auto has not
- 60 -
India Auto Sector
19 April 2011
Bajaj Auto: two-wheeler exports Bajaj Auto: three-wheeler exports
1,400 80 350 100
1,200 70 300 80
1,000 60 250
60
50
800 200
40 40
600 150
30 20
400 100
20
200 50 0
10
0 0 0 (20)
2W exports ('000 nos) - LHS % YoY - RHS 3W exports ('000 nos) - LHS % YoY - RHS
Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts
- 61 -
India Auto Sector
19 April 2011
years. We believe the ASP gains seen over the past two
years on account of a richer product mix may not be in
the offing, as the Discover and Pulsar brands already
account for 70% of total motorcycle volumes and
almost 83% of the domestic motorcycle portfolio.
Financial analysis Further, we expect higher competitive intensity in the
two-wheeler space to result in players finding it
difficult to raise prices apart from a possibility of doling
Net sales forecast to increase by a 13.5% out higher discounts/incentives trend.
CAGR from FY11-13
We expect Bajaj Auto’s net sales growth to trend in-line
with its overall volume CAGR of 13% over the next two
Bajaj Auto: net sales growth trend Bajaj Auto: Discover+Pulsar contribution to domestic sales
250 50 100
200 40 80
30
150 60
20
100 40
10
50 20
0
0 (10) 0
FY08 FY09 FY10 FY11E FY12E FY13E 1Q FY10 2Q FY10 3Q FY10 4Q FY10 1Q FY11 2Q FY11 3Q FY11
Net Sales (Rs bn) - LHS % YoY - RHS Discover+Pulsar as a % of domestic motorcycles
Source: Company, Daiwa forecasts Source: Crisil, Daiwa forecasts
EBITDA margin likely to decline from played out, we forecast a 210bps margin contraction
current levels over the next two years, as we see an increase in
commodity costs, which may not be offset through
Bajaj Auto has recorded an EBITDA margin in excess
price hikes, as the industry is likely to witness higher
of 20% in the past six quarters. In our view, a higher
competitive intensity. Further, we expect the highly
volume mix from the Discover and Pulsar range (see
profitable (c.30%+ EBITDA margin) three-wheeler
chart above), favourable currency movements, and
segment to witness slower growth in the domestic
operating-leverage gains have supported the margin
market.
trend. However, given that these factors have largely
Bajaj Auto: EBITDA margin trend Quarterly margins of Bajaj Auto and Hero Honda
25 25
21.6
20.2
19.0 22
20 18.1
14.1 19
15 13.3
16
10
13
5
10
0 1Q FY10 2Q FY10 3Q FY10 4Q FY10 1Q FY11 2Q FY11 3Q FY11
FY08 FY09 FY10 FY11E FY12E FY13E Bajaj Auto - EBITDA (%) Hero Honda - EBITDA (%)
Source: Company, Daiwa forecasts Source: : Company, Daiwa forecasts
- 62 -
India Auto Sector
19 April 2011
Quarterly performance boosted by non- commodity cost pressure. The EBITDA margin came in
core items at 20.3% on the back of operating-leverage gains. Other
income increased by almost 180% YoY on account of a
Bajaj Auto’s 3Q FY11 results were operationally in line
significant increase in the size of the investment book
with expectations. Net sales increased by 27% YoY to
to around Rs38bn. Lower tax rate at 27.3% (down
Rs41.7 bn. An improving product mix and recent
60bps YoY, down 90bps QoQ) boosted the net profit by
pricing action led to a net ASP increase of 8.3% YoY
28% YoY to Rs6.67bn.
and 1.7% QoQ. The raw material/sales ratio increased
by 290bps YoY and 70bps QoQ on account of
Bajaj Auto: quarterly volumes and growth trend Bajaj Auto: quarterly PAT and growth trend
1,200 100 7,500 400
1,000 80 6,000
300
800 60
4,500
600 40 200
3,000
400 20
100
200 0 1,500
0 (20) 0 0
Volume ('000) - LHS % YoY - RHS PAT (Rs m) - LHS % YoY - RHS
- 63 -
19 April 2011
Target price: Rs813.80

Mahindra & Mahindra Up/downside: +12.3%
MM IN Share price (15 Apr): Rs724.45
Initiation: riding the semi-urban

and rural prosperity story
• Key product segments likely to benefit from more prosperous
semi-urban and rural households
• Lower entry-level price points for new products in both segments
could be a strong sales-volume driver
• Ssangyong Motor’s turnaround could be a latent share-price
trigger
However, we forecast M&M’s Forecast revisions (%)

EBITDA margin to contract by Year to 31 Mar 11E 12E 13E
120bps over FY11-13, given Net-profit change n.a. n.a. n.a.
commodity-price inflation and the EPS change n.a. n.a. n.a.
company’s focus on maintaining its Source: Daiwa forecasts
Ambrish Mishra market share. This decline would
(91) 22 6622 1060
ambrish.mishra@in.daiwacm.com not be a concern to us, especially Share price performance
since M&M’s EBITDA margin has
Navin Matta risen by 400-500bps since FY10,
(91) 22 6622 8411
navin.matta@in.daiwacm.com compared with its past-five-year
trading average.
What's new The recently acquired Ssangyong

Labour shortages and expanding Motors (Ssangyong) (Not rated), BSE SENSEX 30 Index
applications are favouring tractor 70% owned by M&M, has recorded
demand increasingly. Rising improving sales and a positive 12-month range 502.85-813.65
urbanisation is adding to rising EBITDA margin over the past 2-3 Market cap (US$bn) 9.84
demand for utility vehicles. quarters. Average daily turnover (US$m) 34.91
Shares outstanding (m) 604
What's the impact What we recommend Major shareholder Promoters (27.2%)
In our view, M&M’s leading position We initiate coverage of M&M with a

in the less-competitive automotive 1 (Buy) rating and SOTP-based six- Financial summary (Rs)
segments (UVs and tractors) gives it month target price of Rs813.80. We Year to 31 Mar 11E 12E 13E
value M&M’s base business at Rs581 Revenue (m) 234,414 279,133 321,075
relatively better pricing power than Operating profit (m) 31,661 34,814 39,706
the other OEMs in their respective per share and the subsidiaries and
Net profit (m) 26,664 28,463 32,433
segments. associates at Rs232/share.
Core EPS 44.111 47.088 53.655
EPS change (%) 25.0 6.7 13.9
Based on M&M’s strong launch How we differ
Daiwa vs Cons. EPS (%) (0.65) (5.65) (1.86)
pipeline, including a compact SUV Our FY12/13 EPS forecasts are PER (x) 16.4 15.4 13.5
and models from its new SUV 6%/2% lower than Bloomberg Dividend yield (%) 1.1 1.2 1.4
platform, we forecast a UV sales- consensus, even though our sales- DPS 8.000 9.000 10.000
volume CAGR of 16% for FY11-13. volume growth assumptions are PBR (x) 4.0 3.3 2.8
We believe the company’s low-cost higher than those of the consensus. ROE (%) 28.5 23.7 22.5
tractor could be a potential game- We take a more conservative stance Source: Bloomberg, Daiwa forecasts
changer over the long term, given on margins as we see assume lower
the size of the target market, which profitability for some of the entry
is highly underpenetrated at present. level launches.
India Auto Sector
19 April 2011

Growth outlook
Valuation
Earnings revisions
Growth outlook M&M: auto and tractor segments sales-volume growth
We expect the company’s new launches to drive sales- 600 50

volume growth. M&M’s entry into products with lower
500
price points could be a strong sales-volume driver over 40
the next 2-3 years. However, we await further clarity 400
30
before building this assumption into our model. We 300
forecast sales-volume CAGRs for the auto and tractor 200
20
segments of 21% and 8%, respectively, from FY11-13. 10
100
Although we forecast a 120bp decline in the EBITDA 0 0

margin over the next two years, we forecast an EBITDA
CAGR of 12% over FY11-13. Auto ('000) - LHS Tractor ('000) - LHS
Auto (% YoY) - RHS Tractor (% YoY) - RHS
Valuation M&M: one-year-forward PER and PBR bands (x)
We believe M&M is one of India’s best-placed OEMs in 30 6

terms of its ability to undertake pricing action to
25 5
mitigate a sharp rise in input-cost pressure. We see the
successful turnaround of Ssangyong’s operations as a 20 4
latent share-price trigger that has not been discounted 15 3
in the company’s current valuations. The core business 10 2
(ex-subsidiaries) is trading currently at an attractive
5 1
10.9x FY12E PER. In our SOTP valuation, we have
assigned the core business a value of Rs581 per share, 0 0
Apr-02
Oct-02
Apr-03
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
based on a FY12E PER of 13x, and Rs232/share for the Oct-10
other key subsidiaries and associates, based on a 20%

holding discount to Daiwa’s/the Bloomberg-consensus PER (LHS) PBR (RHS)
target price for each of the respective listed subsidiaries. Source: Company, Daiwa estimates
Earnings revisions M&M: Bloomberg-consensus earnings revisions
M&M’s strong tractor sales-volume growth and 55

EBITDA-margin performance has led to several upward
earnings revisions by the consensus. Our FY12 and FY13 50
earnings forecasts are 6% and 2% lower than those of
45
the Bloomberg consensus, respectively, based on our
assumption that the company is likely to hold onto its 40
share in both of its operative markets (autos and
35
tractors) at the cost of its EBITDA margin. Furthermore,
we note that a higher sales-volume contribution from 30
lower-priced vehicles (the Yuvraj tractor and soon-to-
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
be-launched compact SUV) could lead to a decline in the

company’s blended ASP over the next 4-6 quarters.
Source: Bloomberg
- 65 -
India Auto Sector
19 April 2011
Financial summary
Key assumptions
Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Sales volume (units) 234,455 272,106 293,755 326,889 444,937 578,326 679,138 782,007

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Utilty Vehicles 43,706 52,852 64,367 67,872 104,378 121,082 145,446 167,801
3 wheelers 3,004 3,559 3,408 4,737 4,868 8,136 8,737 9,203
Others 34,701 42,722 46,709 57,878 76,050 105,196 124,950 144,071
Total revenue 81,412 99,133 114,484 130,488 185,296 234,414 279,133 321,075
Other income 0 0 0 0 0 0 0 0
COGS (57,138) (68,519) (77,259) (92,742) (123,329) (162,004) (195,541) (224,812)
SG&A (4,583) (6,351) (8,045) (5,753) (8,020) (9,794) (12,140) (14,279)
Net-interest inc./(exp.) 184 675 (242) (453) (278) 282 500 623
Pre-tax profit 10,995 14,185 14,068 11,435 28,468 36,589 38,464 43,828
Tax (2,424) (3,501) (3,034) (2,760) (7,590) (9,127) (10,001) (11,395)
EPS (reported) (Rs) 18.361 22.442 23.076 15.911 36.893 45.432 47.088 53.655
EPS (adjusted) (Rs) 13.862 19.755 19.464 17.407 35.289 44.111 47.088 53.655
DPS (Rs) 5.227 5.750 5.911 5.114 9.711 8.000 9.000 10.000
EBIT 6,865 9,163 10,350 9,934 25,120 31,661 34,814 39,706
EBITDA 8,865 11,259 12,737 12,849 28,828 35,664 39,527 44,992
Cash flow (Rs m)

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Tax paid (2,424) (3,657) (2,788) (1,348) (7,493) (8,053) (8,462) (9,642)
Change in working capital (512) 2,107 2,133 8,343 (3,903) (3,213) (4,475) (2,030)
Other operational CF items 1,916 (976) 1,970 (363) 1,186 516 (500) (623)
Capex (2,796) (5,263) (4,897) (8,534) (4,884) (10,816) (8,377) (9,658)
Net (acquisitions)/disposals (4,793) (5,684) (19,776) (15,714) (6,117) (23,834) (7,000) (5,000)
Other investing CF items (753) (289) (2,352) (1,515) 2,679 0 0 0
Change in debt (1,692) 7,526 9,511 14,657 (11,726) (13,009) 0 0
Net share issues/(repurchases) 4,695 (91) 277 14 7,194 8,808 0 0
Dividends paid (2,782) (3,093) (3,211) (3,121) (6,238) (5,561) (6,256) (6,951)
Other financing CF items 1,247 6,632 (4,891) 6,679 1,410 (14,804) 9,108 16,456
Cash flow from financing 1,467 10,975 1,686 18,229 (9,359) (24,566) 2,852 9,505
Change in cash 5,101 13,493 (7,570) 13,448 4,284 (29,375) 17,215 31,667
Free cash flow 9,179 8,491 12,872 12,447 17,081 19,025 21,364 27,162
- 66 -
India Auto Sector
19 April 2011

As at 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Inventory 8,789 8,785 10,841 10,607 11,888 15,650 22,384 27,470
Fixed assets 15,544 18,712 23,609 32,143 37,027 43,840 47,504 51,876
Total assets 60,030 78,743 102,339 140,943 161,438 187,674 220,910 256,735
Long-term debt 8,834 16,360 25,871 40,528 28,802 15,793 15,793 15,793
Other non-current liabilities 1,594 247 705 505 2,630 3,477 5,016 6,769
Share capital 2,334 2,380 2,391 2,726 2,830 3,022 3,022 3,022
Net debt/(cash) 1,531 3,099 17,258 24,783 11,369 13,447 4,840 (10,994)
BVPS (Rs) 62.315 74.631 90.979 96.509 138 180 217 259
Key ratios (%)

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Sales (YoY) 23.3 21.8 15.5 14.0 42.0 26.5 19.1 15.0
EBITDA (YoY) 24.6 27.0 13.1 0.9 124.4 23.7 10.8 13.8
Operating profit (YoY) 30.2 33.5 13.0 (4.0) 152.9 26.0 10.0 14.1
Net profit (YoY) 29.6 45.3 (1.0) 2.0 110.4 33.5 6.7 13.9
EPS (YoY) (38.0) 42.5 (1.5) (10.6) 102.7 25.0 6.7 13.9
EBITDA margin 10.9 11.4 11.1 9.8 15.6 15.2 14.2 14.0
ROAE 26.4 29.1 23.6 19.7 30.5 28.5 23.7 22.5
ROAA 11.8 13.6 10.3 7.8 13.2 15.3 13.9 13.6
ROCE 20.1 20.4 17.1 12.2 25.1 27.3 25.6 24.9
ROIC 19.5 19.9 16.3 10.9 22.1 22.4 19.9 20.9
Net debt to equity 5.3 8.7 39.7 47.1 14.5 12.3 3.7 net cash
Payables (days) 55.4 58.6 63.2 76.7 65.0 57.2 58.9 60.2
Net interest cover (x) n.a. n.a. 42.7 21.9 90.3 n.a. n.a. n.a.
Company profile
Mahindra and Mahindra (M&M) is a leader in India's UV and tractor segments. The company is a part of the diversified
Mahindra group, which has business interests in information technology, real estate, auto components, hotels and leisure, etc.
The company has entered the truck business through a joint venture with Navistar in the US. It recently acquired the South
Korea SUV maker Ssangyong Motors.
- 67 -
India Auto Sector
19 April 2011
pricing action as and when necessary. We forecast the

EBITDA margin to decline by 120bps over the next two
years as commodity-cost pressure is likely to remain
high and M&M’s main focus on maintaining market
share will remain a key priority. However, despite this,
Investment summary we expect the company’s EBITDA margin to be much
higher than its past 6-7 year trading average.
We initiate coverage with a 1 (Buy) rating and SOTP-

We believe M&M offers an ideal play on increasing based six-month target price of Rs813.80. We value
prosperity levels and labour-shortage issues in the M&M’s core business at Rs581 per share, based on a
rural markets and the ‘premiumisation trend’ (ie, the target FY12E PER of 13x, which we believe is justified
trend for consumers to opt for premium considering the 12% earnings CAGR we forecast for
products/services as a result of increases in their FY11-13. We have valued the other major listed
incomes) we have observed among urban consumers. subsidiaries and associates after assigning a 20%
M&M’s market leadership in both its key automotive holding company discount to Daiwa’s/the Bloomberg
segments should remain intact, as the company is consensus’ target prices, which aggregates to a
stepping up its product-launch momentum during cumulative value per share of Rs226. We value the
FY12-13. Furthermore, we expect less incremental Navistar joint venture conservatively at a 1x FY10 PBR,
competition in the UV and tractor segments than in as the MHCV operations commenced only recently.
other automotive segments. We believe M&M’s recent
foray into the MHCV segment and the sustained Key risks
turnaround in the profitability of recently acquired We would see the following as key risks to our rating
Ssangyong Motors are potential share-price triggers and target price for M&M:
that we have not factored into our earnings forecasts. 1. Delayed US entry beyond 2H FY12, which could
result in lower-than-expected export volumes.
Since the start of FY10, M&M has witnessed an upward
shift in its EBITDA margin of almost 400-500bps, 2. Monsoons are an inherent risk to the demand for
compared with the past five years. In addition to the tractors, a key sales-growth and profit centre for
company’s cost-reduction efforts and richer product M&M.
mix, we believe it has displayed an ability to undertake
M&M: SOTP valuation

Companies Multiple (x) Methodology Per-share value (for target price valuation) (Rs) Per share value (CMP* based) (Rs)
M&M – (standalone basis) 13 PER 581 581
Listed subsidiaries
Tech Mahindra 20% discount to Daiwa’s target price/CMP 75 52
Mahindra Finance 20% discount to Bloomberg-consensus target price/CMP 63 62
Mahindra Life 20% discount to consensus target price/CMP 13 11
Mahindra Holiday 20% discount to consensus target price/CMP 39 35
Mahindra Forging 20% discount to consensus target price/CMP 8 4
Ssangyong Motors 1 20% discount to 1x 2010 book value 28 28
Total subsidiaries’ value 226 192
Mahindra Navistar 1 FY10 - PBR 7 7
Total value 814 780
Note: CMP – Current market share price
- 68 -
India Auto Sector
19 April 2011
Auto segment – multiple growth drivers would cover price points starting from Rs0.5m up to
We believe M&M’s UV range enjoys a balanced volume around Rs2m. We believe the increasing affordability
share derived from the urban and rural segments. and declining entry-level price points in the segment
Based on the demand trends we have observed in some could lead to high sales growth for the UV segment in
of the developed markets, we believe the SUV culture in the medium term. M&M’s flagship rural offering – the
the urban Indian market will catch on with improving Bolero – continues to remain a key volume contributor
road infrastructure and increasing income levels. M&M (accounting for around 48% of sales in FY11 year-to-
plans to expand its offerings by launching a new model date) for M&M, given its versatility in terms of usage as
from its global SUV platform and a compact version of a personal and commercial transport vehicle.
the Xylo in FY12. With these launches, M&M’s range
M&M: domestic UV segment model mix M&M: domestic UV segment market share (ex MPVs)
100% 80%
80% 60%
60%
40%
40%
20%
20%
0%
0% FY05 FY06 FY07 FY08 FY09 FY10 YTD' FY11
FY05 FY06 FY07 FY08 FY09 FY10 YTD' FY11 M&M TKM Tata Motors
Bolero Scorpio Xylo Others GM Others
Source: Crisil, Daiwa Source: Crisil, Daiwa
We expect competition in the MPV segment to intensify relationships with the key fleet owners. Further, the
with model launches by Tata Motors, such as the incumbents have also beefed up their product ranges,
Venture, and Maruti’s expected launch of its R3 by the meaning it would be a challenge for M&M to make
end of FY12. We note that the contribution of MPVs quick inroads into this segment. We do not foresee
within the UV segment had risen from 27% in FY05 to M&M adopting any predatory pricing strategy to gain
40% for the April-December 2010 period. We expect market share, as its recent launches have been priced
the launch of a new version of M&M’s Maxximo in line with, or at a slight premium to, similar vehicle
passenger carrier in FY12 to enable the company to specifications of the incumbents.
participate in this high-growth segment.
LCV segment seeing strong volume growth
Long gestation period for HCV joint M&M’s foray into the small CV segment (payload of 1
venture tonne or below) with two models, the Maxximo and the
M&M has made a foray into the MHCV segment by Gio, has aided its market-share gains in the LCV
entering into a joint venture with Navistar in 2006. The segment. According to the company, the Maxximo has
company has outlined an investment of Rs25bn already garnered a 23-25% market share, despite being
towards setting up a greenfield facility in Chakan for a launched only in a few states. Given the favourable
0.3m unit per year capacity plant, of which 50,000 response to the new range of LCVs and likely foray into
units would be the initial MHCV capacity. The more states, we expect market-share gains to continue
company expects to reach full capacity over the next over the next two years. With the ramp-up of
three years. M&M plans to leverage its existing production levels at the Chakan facility, we expect the
distribution network and captive financing support to company to be in a position to match the strong
mark its presence in the domestic MHCV market. demand in the segment. We see this segment as M&M’s
key volume driver over our forecast period.
We believe that gaining market share from the
formidable incumbents would not be easy, given their
long operational history and well-entrenched
- 69 -
India Auto Sector
19 April 2011
M&M: LCV segment volume-growth trend LCV segment market share
100 60 100
50
80 80
40
60 30 60
40 20
40
10
20 20
0
0 (10)
0
FY06 FY07 FY08 FY09 FY10 YTD FY11
FY06 FY07 FY08 FY09 FY10 YTD FY11
LCV volume ('000) % YoY Tata Motors M&M Others
Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts
Ssangyong acquisition – a good strategic fit? performance has been encouraging, with the company
M&M has signed an agreement to acquire a 70% stake turning EBITDA-positive in 2010.
in this South Korean SUV maker for US$463m.
Ssangyong has been making losses since 2005, which Given Ssangyong’s future product pipeline and likely
we attribute to its lack of management focus, reduction in operating costs and interest burden, we
inadequate investments in product development and see the possibility of the company’s turnaround being
labour-related issues. The company recorded a sharp sustained over the next few years. Although, M&M’s
decline in volumes from about 160,000 units in 2002 and Ssangyong’s product portfolio could have some
to 57,000 units in 2009. However, the more recent synergies, it may be too early to assess the benefits that
could be derived. We await more clarity on Ssangyong’s
financials before factoring them into our forecasts.
Ssangyong: snapshot of financials (US$m)

2005 2006 2007 2008 2009 2010
Volumes (nos) 139,064 115,982 124,617 82,405 57,125 80,215
Net revenue 2,869 2,488 2,630 2,103 899 1,851

Cost of sales 2,364 2,012 2,135 1,843 846 1,458
Gross profit 505 476 495 260 54 393
Gross margins (%) 17.6 19.1 18.8 12.4 6.0 21.3
Other opex 494 405 424 410 272 378
EBITDA 12 71 71 (150) (218) 16
EBITDA margins (%) 0.4 2.9 2.7 (7.1) (24.3) 0.9
PBT (77) (49) 10 (598) (292) 7
Adj PAT (36) (158) (3) (72) (233) (90)
PAT margins (%) (1.2) (6.3) (0.1) (3.4) (25.9) (4.8)
Source: Bloomberg
Note: Conversion rate W/US$ at 1,118.4
Demand for tractors to remain healthy Farm-related income on the rise, boosting
We believe the demand dynamics of the tractor purchasing power in rural markets
industry have altered, with greater demand for non- Over the past five years, we have seen a positive trend
farm usage and the need for increased mechanisation in farm-related income on account of the average +10%
in the wake of the acute labour shortage. Social CAGR increase in minimum support prices (MSP)
schemes, such as the National Rural Employment across major crops and yields moving favourably.
Guarantee Act (NRRGA) and Pradhan Mantri Gram Although farm holdings are scattered, with 50% of
Sadak Yojana (PMGYS), are resulting in higher wage farmers owning less than 2.5 acres of land, we believe
income and non-farm applications for tractors. As per improved credit availability and higher farm earnings
the company, over the past 5-6 years, the replacement are enabling farmers to invest in mechanisation. The
cycle of tractors has gradually shrunk to about 5-7 recent Union Budget contained positive
years from about 15 years, given higher utilisation announcements for the farm sector, with credit flow to
levels for tractors during the non-peak season. We farmers being augmented by 27% to Rs4,750bn and
expect these structural changes to drive healthy tractor interest subventions on low-ticket farm loans raised to
demand. 3% from 2% earlier.
- 70 -
India Auto Sector
19 April 2011
MSP trend for major crops Yields across major crops

MSP data Five-year
(Rs/100kgs) FY05 FY06 FY07 FY08 FY09 FY10 CAGR 140
Rice 560 570 580 645 850 950 11 130
Wheat 640 650 750 1,000 1,080 1,100 11
Sugar cane 75 80 80 81 81 130 12 120
Bajra 515 525 540 600 840 840 10 110
Maize 525 540 540 620 840 840 10
100
90
80
2004-05 2005-06 2006-07 2007-08 2008-09
Rice Wheat Jowar
Bajra Maize Foodgrains
Source: Dept of Agriculture and Cooperation Source: Dept of Agriculture and Cooperation
Social schemes seem to have had a positive expenditure on account of the NREGA scheme. We
impact on tractor demand base our hypothesis on the fact that social schemes,
such as NREGA, may result in a labour shortage for
In conjunction with the above, we have also attempted
farm activities and raise the level of household
to analyse the impact of social schemes, such as the
disposable income, both of which augur well for tractor
NREGA, on demand for tractors. Although we
demand. The NREGA scheme has been further
recognise that this may not be the only variable at play,
sweetened with wages being indexed to inflation.
we found some positive correlation between the tractor
demand pattern and states that have seen significant
Summary of implementation of NREGA scheme across phases States accounting for more than 40% of NREGA expenditure
2006-07 2007-08 2008-09 2009-10 YTD-Dec'10
60%
Districts (nos) 200 330 615 619 625
Budget (Rs bn) 113 120 300 391 401 50%
Industry Avg
Total Exp. (Rs bn) 88 159 273 379 209 40%
Exp. on wages (%) 66 68 67 70 71 30%
Avg wage/day (Rs) 65 75 84 90 100 20%
10%
0%
Pradesh
Chhattisgarh
Pradesh
Jharkhand
Bengal
Bihar
Madya
West
Uttar
CAGR 08-10
Source: NREGA Source: CMIE, Daiwa
Non-farm usage driving a shift in volume facilitate the haulage of materials from point-to-point.
mix in favour of higher-powered tractors Given this alternate utility, farmers are in a position to
earn rentals on the tractors during non-peak seasons.
We believe the infrastructure development activity in
rural markets is driving demand growth for higher-
powered tractors. Predominantly, these tractors
- 71 -
India Auto Sector
19 April 2011
Segmental mix of tractor industry volumes

100%
80%
60%
40%
20%
0%
FY06 FY07 FY08 FY09 FY10 YTD Dec'10
Below 20 HP 21-30 HP 31-40 HP 41-50 HP Above 50 HP
Source: CMIE, Daiwa
Beneficiary of the buoyant tractor industry M&M: domestic tractor volume
In our view, M&M appears to be the key beneficiary in 250 50

the sector of the buoyancy in the tractor industry. Post 200 40
its acquisition of Punjab Tractors Limited (PTL) in
30
2007, the company’s product portfolio and distribution 150
reach has been enhanced considerably. We believe 20
100
M&M is best-placed in the sector to benefit from the 10
uptrend in tractor industry demand, given its brand 50 0
strength, distribution network and captive financing
support. We forecast its tractor volume to rise at a 0 (10)
CAGR of 8% from FY11-13. FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E
Domestic tractor volume ('000) - LHS % YoY - RHS

Yuvraj – low on cost, high on potential Source: Company, Daiwa forecasts
With the introduction of a low-cost tractor – the Yuvraj
– the company has expanded its target segment to
marginal farmers. According to the company, this
tractor is suitable for the 80% of total farms that are
below the size of five acres, of which 99% do not use
tractors presently. Further, the tractor has a 1.5-tonne
load-carrying capacity, which could be deployed for
haulage purposes. Based on the strong response with
its initial launch in Maharashtra and Gujarat, the
company plans to increase its capacity from 700
units/day to 1,500 units/day by 2H FY12. Our forecasts
build in modest volume ramp-up of 12,000 and 18,000
units per year in FY12 and FY13, respectively, as we
wait to gauge the response from this tractor’s pan-India
launch.
Thrust on expanding its geographic reach

M&M has entered into joint ventures with two China-
based tractor manufacturers, which the company plans
to eventually merge and develop into a base for exports.
Although the joint ventures registered losses in FY10,
management guides for a turnaround to be achieved by
FY12.
- 72 -
India Auto Sector
19 April 2011
compact SUV and models from M&M’s new global SUV

platform, to strengthen its product range. M&M’s LCV
volumes are likely to witness strong growth on the back
of the Maxximo’s success. We expect tractor-segment
sales growth to be driven by a ramp-up in volumes
Financial analysis from its low-cost Yuvraj tractor and high sales growth
in the higher-than-50hp tractor segment.
Net sales to increase at a 16.5% CAGR
We forecast M&M’s top-line growth to be led by a
sales-volume CAGR of 17% from FY11-13. In the UV
segment, we expect new launches, including the
M&M: volume-growth trend M&M: net sales-growth trend
1,000 40 350 50
300
800 40
30 250
600 200 30
20
400 150 20
10 100
200 10
50
0 0 0 0
Volume ('000) - LHS % YoY - RHS Net sales (Rs bn) - LHS % YoY - RHS
EBITDA margin set to decline, but remain M&M: EBITDA margin and cost trends
healthy 18 95
We note that M&M’s EBITDA margin has structurally 16 90

improved from the range of 9- 11% between FY05-09 to 14 85
14-15% levels in the ensuing period, driven by strong 12 80
pricing power, aggressive cost-reduction initiatives and 10 75
operating-leverage benefits. Despite launches in lower 8 70
price point segments, with the low-cost tractor and 6 65
compact SUV launch in the UV segment, management 4 60
has mentioned that, despite being low-priced, these FY09 FY10 FY11E FY12E FY13E
products would align with the company’s internal rate EBIDTA margin (%) - LHS RM/sales (%) - RHS
of return targets going forward. Opex/sales - RHS

We forecast M&M’s EBITDA margin to decline by
120bps over the next two years, due primarily to the
commodity-cost inflation trend and the company’s
focus on holding on to its market share. Nevertheless,
we estimate its EBITDA margin settling at the 14%
level, well above its past 6-7 year average.
- 73 -
19 April 2011
Target price: Rs1,365.00 → Rs1,365.00

Maruti Suzuki India Up/downside: +8.6%
MSIL IN Share price (15 Apr): Rs1,257.20
One of India's best consumption

themes
• Underlying domestic demand is robust, and the company’s
competitive edge remains intact
• EBITDA margin should stabilise, ensuring a strong 18%-plus
earnings CAGR from FY11-13E
• Trading currently at a discount of about 16% to its past five-year
average cash PER, which is attractive
to consolidate its foothold in the Forecast revisions (%)

domestic market. Year to 31 Mar 11E 12E 13E
Revenue change 0.0 0.0 0.0
Net-profit change 0.0 0.0 0.0
A ramp-up in Maruti’s R&D EPS change 0.0 0.0 0.0
capability would enable the Source: Daiwa forecasts
Ambrish Mishra company to respond quickly to a
(91) 22 6622 1060
ambrish.mishra@in.daiwacm.com dynamic market environment, Share price performance
accelerate its product-launch
Navin Matta programme, and strengthen its cost
(91) 22 6622 8411
navin.matta@in.daiwacm.com competitiveness.
What we recommend
What's new We reiterate our positive view on the 12-month share price performance
Recent monthly sales volumes for stock. Our six-month target price of BSE SENSEX 30 Index
the passenger-car industry and for Rs1,365 is based on a one-year-

Maruti in particular have been forward target cash PER of 10x. We 12-month range 1,128.20-1,566.80
encouraging. forecast an FY11-13 EPS CAGR of Market cap (US$bn) 8.20
18%, driven by a 14% sales-volume Average daily turnover (US$m) 12.78
What's the impact CAGR and operating-profit-margin Shares outstanding (m) 289
Maruti’s planned model launches over expansion. Trading currently at an Major shareholder Suzuki Motors Corp. (54.2%)
the next 12 months appear EV/EBITDA multiple of 8.9x and a

competitive to us, and we expect the cash PER of 9.4x on our FY12 Financial summary (Rs)
number of launches and price EBITDA and EPS forecasts, Year to 31 Mar 11E 12E 13E
respectively, we see Maruti’s Revenue (m) 364,246 410,491 491,223
segments in which it has a presence to Operating profit (m) 25,307 29,671 36,956
increase going forward. In addition, valuations as attractive,
Net profit (m) 23,277 27,053 32,544
we believe the expansion of the representing discounts of about 16%
Core EPS 80.544 93.608 113
compressed-natural-gas (CNG) to their past-five-year averages.
EPS change (%) (4.9) 16.2 20.3
network, from 70 cities currently to Daiwa vs Cons. EPS (%) 0.6 (0.5) 4.4
more than 200 by 2015, will play a How we differ PER (x) 15.6 13.4 11.2
vital role in boosting car penetration Our EPS forecast is in line with that of Dividend yield (%) 0.5 0.6 0.7
rates. the Bloomberg consensus for FY12, DPS 6.000 7.500 8.500
but 4% higher than that for FY13. We PBR (x) 2.6 2.2 1.9
We believe the company’s strategy of expect the market’s concerns about ROE (%) 18.1 17.9 18.3
increasing its focus on the competition and adverse foreign- Source: Bloomberg, Daiwa forecasts
entry/premium sedan segment and exchange movements to dissipate

the less-crowded multi-purpose- gradually over the next 2-3 quarters,
vehicle (MPV) segment will enable it resulting in the stock outperforming
the market over the next six months.
India Auto Sector
19 April 2011

Growth outlook
Valuation
Earnings revisions
Growth outlook Maruti Suzuki: sales volume and market share
Although we forecast the company’s market share to (’000) (%)

decline by about a 2pp over the next two years from 1,800 56
53.2% currently, we also forecast a healthy sales-volume 1,600 55
CAGR of about 14% over the FY11-13 period (an EPS 1,400
54
1,200
CAGR of 18%). 53
1,000
800 52
600
51
400
200 50
0 49
Volume (LHS) Market share % (RHS)
Source: company, Daiwa estimates
Maruti Suzuki: one-year forward cash PER bands –

Valuation premium/discount to five-year average
Trading currently at an 8.9x EV/EBITDA multiple and a 80

9.4x cash PER on our FY12 EBITDA and EPS forecasts, 60
respectively, we see Maruti’s valuations as attractive, 40
representing discounts of about 16% to its past-five-year
20
averages. Our target price of Rs1,365 is based on a one-
0
year-forward target cash PER of 10x, which is a 10%
(20)
discount to the past-five-year average, given that we
expect a marginal decline in the company’s market (40)
share. (60)
(80)
Apr-06
May-07
May-09
Jul-06
Oct-06
Feb-07
Sep-07
Dec-07
Apr-08
Jul-08
Nov-08
Feb-09
Sep-09
Dec-09
Apr-10
Jul-10
Nov-10
Feb-11
Source: Bloomberg, Daiwa estimates
Earnings revisions Maruti Suzuki: consensus earnings-forecast revisions
The Bloomberg-consensus FY12 earnings forecast has 115

been revised down sharply over the past year, due first
to the company’s royalty structure and then due to the 110
effects of adverse foreign-exchange movements. We
105
believe the downward earnings-revision cycle is over
and expect positive surprises on volume growth and the 100
EBITDA margin. Our EPS forecasts are in line with that
95
of the Bloomberg consensus for FY12, but 4% higher
than that for FY13. This is because we believe the impact 90
from competition will be less than the market expects,
Apr-10
Mar-11
Apr-11
May-10
Jun-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Jul-10
providing Maruti with the room to raise prices in order

to offset part of the cost increases. Favourable
movements of the Yen against the Rupee would support Source: Bloomberg
the EBITDA margin.
- 75 -
India Auto Sector
19 April 2011
Financial summary
Key assumptions
Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Sales volume (units) 561,820 674,924 764,848 792,168 1,018,365 1,271,005 1,388,209 1,633,496

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Passenger Vehicles 115,786 140,733 172,970 195,730 279,758 345,397 385,988 462,312
Other revenues 6,366 7,554 8,446 10,818 13,874 18,849 24,503 28,911
Others 0 0 0 0 0 0 0 0
Total revenue 122,151 148,287 181,416 206,548 293,632 364,246 410,491 491,223
Other income 0 0 0 0 0 0 0 0
COGS (92,250) (110,637) (136,666) (162,650) (224,430) (285,735) (320,220) (381,514)
SG&A (4,114) (5,907) (6,520) (7,446) (12,110) (12,679) (14,042) (17,065)
Net-interest inc./(exp.) 865 733 812 1,926 1,815 2,105 2,370 2,300
Pre-tax profit 17,500 22,797 25,004 16,484 35,925 31,650 37,704 45,528
Tax (5,609) (7,178) (7,722) (4,571) (10,949) (9,178) (10,651) (12,985)
EPS (reported) (Rs) 41.145 54.046 59.799 41.222 86.421 77.755 93.608 113
EPS (adjusted) (Rs) 40.958 52.458 56.841 39.910 84.652 80.544 93.608 113
EPS (adjusted fully-diluted) (Rs) 40.958 52.458 56.841 39.910 84.652 80.544 93.608 113
DPS (Rs) 3.498 4.498 5.000 3.500 6.000 6.000 7.500 8.500
EBIT 15,441 19,032 19,283 11,120 28,829 25,307 29,671 36,956
EBITDA 18,295 21,746 24,965 18,185 37,079 34,901 41,142 50,511
Cash flow (Rs m)

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Tax paid (5,609) (7,178) (7,722) (4,571) (10,949) (9,178) (10,651) (12,985)
Change in working capital (276) 4,406 (201) (2,128) 481 (706) (1,995) (1,794)
Other operational CF items (943) (274) 43 (1,547) (1,304) (2,911) (2,370) (2,300)
Capex (1,568) (13,828) (17,024) (16,058) (13,052) (25,898) (24,990) (24,742)
Net (acquisitions)/disposals (5,346) (13,580) (17,715) 20,074 (40,033) (2,500) (6,500) (6,200)
Other investing CF items (98) 380 52 104 (181) 0 0 0
Cash flow from investing (7,012) (27,028) (34,687) 4,120 (53,267) (28,398) (31,490) (30,942)
Change in debt (2,359) 5,591 2,694 (2,013) 1,225 (250) 0 0
Net share issues/(repurchases) 0 0 0 0 0 0 0 0
Dividends paid (1,153) (1,519) (1,693) (1,163) (2,020) (2,020) (2,525) (2,862)
Other financing CF items 774 1,162 812 217 3,762 2,105 2,370 2,300
Cash flow from financing (2,738) 5,234 1,813 (2,959) 2,967 (165) (155) (562)
Change in cash 3,776 671 (10,068) 16,464 (17,897) (115) 2,513 10,501
Free cash flow 11,958 8,637 5,782 (755) 19,351 2,550 9,169 17,263
- 76 -
India Auto Sector
19 April 2011

As at 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Cash & short-term investment 14,016 14,228 3,305 19,390 982 1,673 4,186 14,687
Inventory 8,812 7,132 10,380 9,023 12,088 17,806 20,064 24,017
Fixed assets 17,872 28,986 40,328 49,321 54,123 70,427 83,946 95,133
Total assets 75,793 101,537 123,114 135,965 163,613 198,636 229,986 269,790
Long-term debt 717 6,308 9,002 6,989 8,214 7,964 7,964 7,964
Other non-current liabilities 779 1,675 1,701 1,551 1,370 1,370 1,370 1,370
Share capital 1,445 1,445 1,445 1,445 1,445 1,445 1,445 1,445
Net debt/(cash) (13,299) (7,920) 5,697 (12,401) 7,232 6,291 3,778 (6,723)
BVPS (Rs) 189 237 291 323 410 480 565 668
Key ratios (%)

Year to 31 Mar 2006 2007 2008 2009 2010 2011E 2012E 2013E
Sales (YoY) 10.1 21.4 22.3 13.9 42.2 24.0 12.7 19.7
EBITDA (YoY) 19.2 18.9 14.8 (27.2) 103.9 (5.9) 17.9 22.8
Operating profit (YoY) 43.3 23.3 1.3 (42.3) 159.2 (12.2) 17.2 24.6
Net profit (YoY) 46.9 28.1 8.4 (29.8) 112.1 (4.9) 16.2 20.3
EPS (YoY) 46.9 28.1 8.4 (29.8) 112.1 (4.9) 16.2 20.3
EBITDA margin 15.0 14.7 13.8 8.8 12.6 9.6 10.0 10.3
ROAE 24.1 24.6 21.5 13.0 23.1 18.1 17.9 18.3
ROAA 16.9 17.1 14.6 8.9 16.3 12.9 12.6 13.0
ROCE 30.2 29.3 23.0 11.5 25.4 18.5 18.7 19.9
ROIC 27.0 25.6 17.7 9.4 19.4 13.3 13.6 14.9
Net debt to equity net cash net cash 6.8 net cash 6.1 4.5 2.3 net cash
Payables (days) 40.7 43.3 44.9 48.4 37.0 35.8 39.9 38.8
Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Company profile
Maruti Suzuki India is India's largest passenger-car manufacturer, with a market share of 53% for FY10. The company exports to
more than 80 countries, and has a wide distribution network, with close to 850 dealers and 3,000 service points. It operates
from its plants in Gurgaon and Manesar, which have a combined capacity of 1.4m units (as at the end of March 2011).
- 77 -
India Auto Sector
19 April 2011
EBITDA margin since a large part of its imports are

denominated in Yen.
2. The inflationary crude-oil-price trend could affect
customer sentiment and influence demand growth.
Investment summary We see not only Maruti losing share;

Hyundai, GM and Tata Motors also at risk
We believe Maruti is poised to benefit from the In our view, the concerns in the market about
significant potential in the domestic passenger-car increasing competition putting pressure on Maruti’s
market. Although we forecast the company’s market market share have been overdone. We have observed
share to decline by about a 2pp over the next two years that offering new products and/or extremely low
from 53.2% currently, we still forecast a healthy sales- pricing have not been any guarantee of success, as can
volume CAGR of about 14% over the FY11-13 period (an been seen later in this report (in the section, While
EPS CAGR of 18%). high-profile launches from the competition have
disappointed ...’, which details the performances of a
We believe that the company’s strategy of increasing its few recent launches), and we expect this to continue to
focus on the entry/premium sedan segment and the be the case over the next few years. Maruti may not be
less-crowded MPV segment will enable it to consolidate the only company to lose market share as a result of
its foothold in the domestic market. A ramp-up in rising competition. We see the risk for Hyundai Motor
Maruti’s R&D capability would enable the company to India (Hyundai Motor) (Not listed), General Motors
respond quickly to a dynamic market environment, India (GM) (Not listed), and Tata Motors as being
accelerate its product-launch programme, and similar, due to the entry of new players in the compact-
strengthen its cost competitiveness. We see the car segment. Having said that, we forecast the
company’s main strengths as: 1) a strong combined market share of the incumbents, ie, Maruti,
understanding of Indian customers, 2) a solid approach Hyundai Motor, and Tata Motors, to exceed 75% by
to converting customer knowledge into a relevant FY15, compared with about 85% currently. While we
product portfolio, 3) its quest to create ways to forecast Maruti’s market share to decline by about
facilitate customer purchases, and 4) unmatched 3.1pp between now and FY15, the combined market
market reach and cost efficiency. share of Hyundai Motor, GM, and Tata Motors is likely
to fall by about 5pp over the period.
At the current price, the stock is trading at an
EV/EBITDA multiple of 8.9x and a cash PER of 9.4x on Customer perception and network benefits
our FY12 forecasts, representing discounts of about are far greater than perceived
16% to their past-five-year averages. We believe these
valuations do not reflect fully Maruti’s potential in a Unlike many markets around the world, the India car
market that continues to attract significant market is dominated by compact cars, which accounted
international attention. We reiterate our 2 for more than 78% of domestic passenger-car sales for
(Outperform) rating and six-month target price of FY10. Many manufacturers, such as Toyota (7203 JP,
Rs1,365 for the stock, based on a one-year-forward ¥3,285, 3)and Honda (7267 JP, ¥2,957, 2), which
target cash PER of 10x. entered the India market more than a decade ago, are
now preparing to tap into this segment by launching
their first compact cars targeting the mass market.
Key risks
Meanwhile, new entrants such as Volkswagen (Not
1. A prolonged shortage of components from Japan rated) and Nissan (7201 JP, ¥716, 2), have already
(say more than 3-4 months) could affect FY12 sales launched compact cars, and see this segment as crucial
volume more than we currently expect. Yen for their success in the India market.
appreciation poses a threat to the company’s
- 78 -
India Auto Sector
19 April 2011
Maruti: number of Reach Advantage dealerships

1,000
900
800
700
600
500
400
300
200
100
0
Maruti Suzuki Player 2 Player 3 Player 4 Player 5 Player 6 Player 7 Player 8
No. of dealerships No. of cities covered
Source: Company, Industry, Daiwa Research
In our opinion, as demand from small towns (third- profitable, and this business is much more viable for its
and fourth-tier cities) and rural markets expands, the dealers than those of its competitors. Hence, we do not
number of sales and service outlets and brand expect the company to lose significant market share to
perception will be critical for sales-volume growth. its competitors over the next 3-4 years, by which time
Low-cost and convenient after-sales services (company its competitors should have built up their networks and
service outlets and local garages) will be critical factors expanded their product ranges/portfolios.
in the minds of customers when making buying
decisions. This is where we see Maruti as enjoying a Toyota Etios fails to impress us, Dzire
significant edge over its competitors. In our view, the likely to remain the most desirable entry-
brand perception and network benefits available to level sedan
Maruti in India are far greater than those perceived
generally by investors. In addition, we believe the The eagerly-awaited Toyota Etios was launched in
company has been ahead of curve in terms of not November 2010, but has failed to impress us. It seems
taking customers for granted, and it has continued to to us to be priced aggressively, at Rs0.57m for the base
strive to offer value at relatively attractive price points. model (ex-showroom Mumbai), although we regard the
In this regard, it continues to expand the number of base-model pricing as more of marketing tool to
sales and service points, introduce next-generation position it as a competitively-priced entry-level sedan.
technology, and focus on customer satisfaction. Most Compared its features with those of Maruti’s Dzire, we
importantly, given the huge number of Maruti cars on believe that the Etios will find it very challenging to put
India’s roads, its dealer franchise remains very a dent in Dzire sales volume.
Maruti Dzire and Toyota Etios price comparison Maruti: Dzire sales volume
(units)
Price (Rs m) Ex-show On-road
Etios 11,000
-G 0.571 0.643
- G (SP) 0.624 0.701 10,000
-V 0.669 0.751
- VX 0.717 0.803 9,000
Dzire
8,000
- LXI 0.515 0.571
- VXI 0.566 0.627
7,000
- ZXI 0.662 0.731
- LDI 0.602 0.668
6,000
- VDI 0.651 0.723
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
- ZDI 0.735 0.816
Source: Company, Daiwa compilation Source: Company
- 79 -
India Auto Sector
19 April 2011
We think that the exterior design of the Etios is Interestingly, sales of the Dzire have improved since
ordinary, and we are also not impressed with the the launch of the Etios. However, since the volume
interior, as the dashboard lacks the fresh look and feel pick-up is not due to any increase in supply, the waiting
of the Dzire, which we see as offering a better fit and period for delivery to customers remains 2-3 months.
finish. In terms of price, the top-of-the-range Etios VX Over the past 2-3 months, orders for the Dzire have
costs about 9% more than the top-of-the-range Dzire increased by 7.5%, which in our view is reassuring, as it
(based on Mumbai on-road pricing), and lacks features comes on top of the base that includes the festive
such as climate control. period from September-November 2010. We see this as
a demonstration of the strength of the Maruti’s brand,
The Etios has made news as customers have to wait and possibly a sign that customers are sticking with the
more than six months for delivery (seen as an Dzire after looking at the Etios and its value
indication of its success). However, we believe the proposition. We also believe Maruti’s capacity
outstanding orders of about 22,000 units primarily expansion will ease the pressure on delivery schedules,
reflect new-launch excitement, and do not necessarily which we see as another demand driver for the Dzire.
mirror customer recognition (cancellations cannot be
ruled out), while the low production rate of about While high-profile launches from the
2,000 units/month has exacerbated waiting times. We competition have disappointed ...
believe that once the company ramps up production
from April 2011 to 5,000 units/month, the waiting
Maruti appears to be doing well
period will decline significantly. The Etios Liva Over the past few years, the India car market has seen a
(hatchback) is due to be unveiled in April this year. large number of car launches, especially in the compact
segment.
Recent high-profile launches

Model Make Month Price (Rs m) Positioning
Beat Chevrolet Jan 2010 0.33 – 0.39 Mid compact, focus on price
Grande Punto Fiat Jun 2009 0.4 – 0.61 Premium compact, focus on price
Linea Fiat Jan 2009 0.6 -0.81 Entry sedan, focus on design, premium pricing
Figo Ford Mar 2010 0.35 -0.53 Mid compact, focus on price, space, design
Jazz Honda Jun 2009 0.69 – 0.73 Luxury compact, premium pricing
i20 Hyundai Apr 2010 0.45 – 0.53 Premium compact, focus on price, design
Micra Nissan Jul 2010 0.4 – 0.53 Mid compact, focus on comfort, design
Nano Tata Motors Mar 2009 0.12 – 0.17 New segment, targeting bottom of pyramid
Indigo Manza Tata Motors Oct 2009 0.48 -0.67 Entry sedan, focus on space, price
Etios Toyota Dec 2010 0.49 – 0.68 Entry sedan, focus on space, price
Polo Volkswagen Jan 2010 0.43 – 0.67 Premium compact, focus on design, price
Vento Volkswagen Sep 2010 0.81 Entry sedan, focus on design, premium pricing
Source: Industry, media reports, companies, compiled by Daiwa
While sales of many of the new models launched over Ford Figo has made an impact due to its smart
the past 1-1.5 years performed well initially, they failed positioning (gasoline and diesel versions launched
to maintain their sales numbers amid an increasingly simultaneously), competitive pricing and good
competitive environment. The Chevrolet Beat and performance, supported by a reasonably good network.
Spark, and Fiat’s (Not rated) Grande Punto are some Amid all this, Maruti has managed to deliver a strong
of the car launches that failed to sustain the initial performance by focusing on new products (Dzire, Ritz,
excitement. Some models, such as the Polo and Micra, A-Star), revamping its existing range (Alto K-10, New
started well and hold promise, but in our view may take Wagon-R and Estilo), and focusing on alternative fuel
some time to increase sales volumes to reasonable options (CNG option across several models). This has
levels due to the lack of dealership and after-sales been supported by a large sales and service network
service-point networks. Among the key launches, the that covers customers across the country.
- 80 -
India Auto Sector
19 April 2011
India: high-profile passenger-car launches in the pipeline

Model Make Month Price* Positioning
Fiesta Hatchback Ford n.a. 5 - 6.5 Premium compact
Brio Honda Jun 2011 4 - 5.5 Premium compact
Small Car Hyundai 2H11 n.a. Entry compact, placed below Santro
i10 (diesel) Hyundai 2H11 3.5 - 5.7 Mid compact
SX4 (diesel) Maruti Suzuki 11-Feb 8 - 9.5 Premium sedan
New Swift Maruti Suzuki n.a. n.a. Premium compact
Juke Crossover Nissan 4Q11 n.a. Mid-sized SUV
Prima Tata Motors End of 2011 11 - 14 Premium sedan
Etios Liva Toyota Mar 2011 4.1 - 5.5 Premium compact
Source: Industry, media reports, companies, compiled by Daiwa
Fiat Punto sales Ford Figo sales
(units) (units)
2,000 10,000
1,600 8,000
1,200 6,000
800 4,000
400 2,000
0 0
Apr-10
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Jun-10
Aug-10
Oct-10
Dec-10
Aug-10
Sep-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Oct-10
Nov-10
Dec-10
Jan-11
Chevrolet Beat sales Chevrolet Spark sales
(units) (units)
5,000 4,500
4,000 3,600
3,000 2,700
2,000 1,800
1,000 900
0 0
Mar-10
Dec-09
Apr-10
Jan-10
Feb-10
May-10
Jun-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Jul-10
Dec-09
Jan-10
Mar-10
Apr-10
May-10
Jun-10
Aug-10
Sep-10
Feb-10
Jul-10
Oct-10
Nov-10
Dec-10
Jan-11
Maruti appears able to compete, given its cars in India are from Maruti. We are confident about
strong launch line-up Maruti’s ability to meet the changing needs of
customers, as well as customers’ rising expectations,
We believe Maruti has demonstrated its strong
without affecting price competitiveness. Based on our
product-management capability, competitive approach,
feedback from industry sources, some of the key
and deep customer understanding over the past few
launches planned by Maruti in 2011 and early 2012
years. This has involved not only pricing discipline, but
include:
also the company having the courage to enter
unchartered areas to create new product segments. The • the SX4 diesel (launched in February 2011),
Swift (premium compact) and the Dzire (entry-level
sedan) are the best illustrations of this successful • the new Swift,
strategy. Over the past 5-6 years, it has launched • the R-III MPV (showcased at Auto Expo 2010), and
products at a brisk pace (eight new models and five
CNG-variant models) to meet changing customer tastes • a luxury car, the Kizashi (launched recently).
and expectations. Even now, five of the top-10-selling
- 81 -
India Auto Sector
19 April 2011
Low capital and increased efficiency Maruti (like other OEMs) underestimating the demand,
should drive capacity expansion coupled with insufficient capacity.
In the recent past, capacity constraints have been a key
However, the company has put its capacity-expansion
bottleneck for Maruti, although the company has
plans on the fast track, and targets to raise its capacity
managed to overcome the challenge through significant
to 1.9m units (from 1.3m units currently) in a phased
efficiency-enhancement efforts (it boosted annual
manner. While Maruti plans to raise its annual capacity
production by about 0.25m units in mid-FY11 at a
to 1.4m units from April 2011, 1.65m units by October
marginal capital cost of about Rs5bn). In fact, at one
2011, and 1.9m by mid-2012, it expects to do so at a
point, the waiting periods for Maruti’s frontline
lower capital cost than its competitors (see the
products, such as the Dzire and the Swift (diesel), were
following table), adding to its cost competitiveness.
as long as 6-8 months. We attribute this primarily to
Maruti: production capacity

m units FY08 FY09 FY10 FY11E FY12E FY13E
Gurgaon 0.5 0.6 0.7 1.05 1.05 1.05
Manesar 0.05 0.3 0.35 0.35 0.6 0.85
Total 0.55 0.9 1.05 1.4 1.65 1.9
Average utilisation rate 139% 109% 104% 103% 91% 92%
Capital investment comparison

Maruti Suzuki GM Volkswagen Ford Toyota Tata-Fiat
Car capacity (units) 500,000 140,000 110,000 100,000 100,000 160,000
Engine capacity (units 300,000 160,000 250,000 100,000 300,000
Investment (Rs bn) 43.8 26.7 38.0 23.0 32.5 40.0
Location Manesar Talegaon Chakan Chennai Bidadi Ranjangaon
Comments We believe this capacity The above investment Includes investment in
(as in the past) may may also include transmissions. Car
produce 25-30% higher to investment in engine and capacity can be increased
its capacity when needed transmission capacity. to 2 lakh ([200,000 in
with marginal investment. number]
Source: Company, Media Reports, Daiwa Research
R&D capabilities to help cut response times

Maruti is in the process of increasing its R&D efforts, Globally, car makers are focusing on improving fuel
with a greater focus on engine technology, design, and efficiency and reducing emissions. While multiple gas
product development. The company is on track to set discoveries in India by oil-exploration companies are
up an R&D centre and testing ground that are on a par likely to ensure significant gas supply in the domestic
with those of its parent company, Suzuki Motor market, we see the main challenge as creating the
Corporation (7269 JP, ¥1,964, 3). It is also gearing up infrastructure to carry the gas across the length and
to launch its first made-in-India car by 2013, which breadth of the country to maximise the utility. The
would help to reduce its response time to the changing availability of CNG through city-gas distribution is
market dynamics and allow for greater flexibility when limited currently to a few large cities/states such as
undertaking launch programmes. National Capital Region (NCR), Mumbai (and suburbs),
Gujarat, and Hyderabad. With the government
committed to expanding the city-gas-distribution
Maruti remains ahead in alternative-fuel
channels across major cities over the next 2-3 years, we
technology believe the opportunity for CNG-powered vehicles is
Fuel prices are a key concern for automobile industry enormous. Here too, Maruti has shown its leadership,
worldwide. Although the argument for huge long-term and is the only player to offer CNG options for many of
sales-growth potential due to low penetration rates its models.
remains, the pace of such growth could be affected
negatively by a sharp rise in crude-oil prices.
- 82 -
India Auto Sector
19 April 2011
India: gas off-take by industry India: gas off-take by industry
2005-06 2009-10
Others Others
18.2% City gas*
2.0%
14.5%
City gas*
5.1%
Power generation Captive use/LPG

53.9% shrinkage
Captive use/LPG 16.9%
shrinkage Power generation
22.9% 66.5%
Source: Ministry of Petroleum and Natural Gas (MOPNG, Daiwa Research Source: MOPNG, Daiwa Research
Note: *Sales of city-gas-distribution companies Note: *Sales of city-gas-distribution companies
Maruti’s new CNG vehicles offer fuel 65% which in our view is a strong incentive for
savings of more than 65% customers to move from petrol- to CNG-powered
vehicles. However, due to a lack of sufficient
Maruti offers its factory-fitted CNG engine technology
infrastructure for CNG distribution, this option has
(i-GPI) in five of its current models (the SX4, Estilo,
only been offered in some markets, where CNG-
Wagon-R, Alto and Eeco). According to the company
powered cars account for about 20% of model sales.
and based on our calculations, The use of CNG can cut
fuel costs for customers significantly (by more than
Cost comparison of different types of fuel

Old Wagon-R New Wagon-R Wagon-R DUO New Wagon-R
(K-series engine) (K-series engine) (K-series engine)
Fuel used Petrol Petrol LPG CNG
Monthly travel (km) 600 600 600 600
Mileage (km/l) 13.0 15.0 15.0 20.0
Fuel cost (Rs/l) 63.1 63.1 39.9 32.0
Fuel consumed (litres/month) 46 40 40 30
Monthly fuel bill (Rs) 2,912 2,524 1,596 960
Cost index 100 87 55 33
Source: Company, Daiwa estimates
- 83 -
India Auto Sector
19 April 2011
volume to rise at a 14% CAGR over the period, we

believe its exports will be relatively subdued, rising at a
CAGR of only 9%. We assume the R-III is launched by
the end of 4Q FY12, and that 36,000 unit are sold in
FY13. We expect an absence of foreign-exchange
Financial analysis fluctuations, a stable royalty payout, and various cost-
cutting efforts to help the company to achieve a 0.6pp
improvement in the EBITDA margin over FY11-13. We
We forecast an 18% EPS CAGR from FY11- believe that this, along with healthy revenue growth
13 and a low-base effect would ensure Maruti’s earnings
We forecast Maruti’s EPS to increase at a CAGR of rise at an 18% CAGR over the same period.
18.2% from FY11-13, on the back of 16.1% revenue
CAGR. While we forecast the company’s domestic sales
Maruti: PV sales Maruti: EPS and EBITDA margin
(units) 14% 120

1,600,000
100
1,200,000 11% 80
60
800,000
8% 40
400,000 20
0 5% 0
Domestic Exports EPS, Rs (RHS) EBITDA margin (LHS)
3Q FY11 results were better than the Maruti: quarterly costs and operating-profit margin
market expected 85%
14%
Maruti has been facing strong headwinds over the past 82%
several quarters, due to adverse foreign-exchange 12%
79%
fluctuations, along with an increase of about 2pp in the
royalty payments it had to make to its parent company 10%
76%
for 3Q FY11. As a result, its average operating-profit 8%
73%
margin has fallen by about 3pp over the past 5-6
quarters. However, its net profit for the quarter ended 70% 6%
1Q FY10
2Q FY10
3Q FY10
4Q FY10
1Q FY11
2Q FY11
3Q FY11
December 2010 of Rs6bn was higher than the

Bloomberg-consensus forecast. As we expect factors
such as foreign-exchange fluctuations and the product RM/sales (LHS) OE/sales (RHS) Operating margin (RHS)
mix to either stabilise at current levels, or improve, we
Source: Company, Daiwa Research
believe the EBITDA margin has bottomed out, and that
it should start to improve from hereon. We believe
blended discounts will also fall from the 3Q FY11 levels
as new products are launched in FY12.
- 84 -
Daiwa’s Asia Pacific Research Directory
Hong Kong
Regional Research Head; Pan Asia Research Nagahisa MIYABE (852) 2848 4971 nagahisa.miyabe@hk.daiwacm.com
Regional Research Co-head Christopher LOBELLO (852) 2848 4916 christopher.lobello@hk.daiwacm.com
Head of Product Management John HETHERINGTON (852) 2773 8787 john.hetherington@hk.daiwacm.com
Product Management Tathagata Guha ROY (852) 2773 8731 tathagata.guharoy@hk.daiwacm.com
Head of China Research; Chief Economist (Greater China) Mingchun SUN (852) 2773 8751 mingchun.sun@hk.daiwacm.com
Macro Economy (Hong Kong, China) Kevin LAI (852) 2848 4926 kevin.lai@hk.daiwacm.com
Strategy (Regional) Colin BRADBURY (Regional Chief Strategist) (852) 2848 4983 colin.bradbury@hk.daiwacm.com
Strategy (Regional) Mun Hon THAM (852) 2848 4426 munhon.tham@hk.daiwacm.com
Property Developers (Hong Kong) Jonas KAN (Head of Hong Kong Research; Regional (852) 2848 4439 jonas.kan@hk.daiwacm.com
Property
Co-ordinator; Co-head of Hong Kong and China
Property)
Banking (Hong Kong, China) Grace WU (Head of Hong Kong and China Banking) (852) 2532 4383 grace.wu@hk.daiwacm.com
Banking (Hong Kong, China) Sophia HUO (852) 2532 4380 sophia.huo@hk.daiwacm.com
Banking (Hong Kong, China) Queenie POON (852) 2532 4381 queenie.poon@hk.daiwacm.com
Insurance Jennifer LAW (852) 2773 8745 jennifer.law@hk.daiwacm.com
Capital Goods – Electrical Equipment and Machinery (China) Ole HUI (852) 2848 4468 ole.hui@hk.daiwacm.com
Consumer/Retail (Hong Kong, China) Peter CHU (852) 2848 4430 peter.chu@hk.daiwacm.com
Consumer/Retail (China) Nicolas WANG (852) 2848 4963 nicolas.wang@hk.daiwacm.com
Hotels, Restaurants and Leisure – Casinos and Gaming (Hong Gavin HO (852) 2532 4384 gavin.ho@hk.daiwacm.com
Kong); Capital Goods – Conglomerate (Hong Kong)
IT/Electronics – Semiconductor and Solar (Regional, Taiwan, Pranab Kumar SARMAH (852) 2848 4441 pranab.sarmah@hk.daiwacm.com
Singapore, Hong Kong and China) (Regional Head of IT/Electronics)
IT/Electronics – Semiconductor/IC Design (Regional) Eric CHEN (Co-head of Regional IT/Electronics) (852) 2773 8702 eric.chen@hk.daiwacm.com
IT/Electronics – Tech IT Services (Hong Kong, China) Joseph HO (852) 2848 4443 joseph.ho@hk.daiwacm.com
IT/Technology Hardware – PC Hardware (Taiwan) Calvin HUANG (852) 2773 8782 calvin.huang@hk.daiwacm.com
IT/Electronics - Semiconductor/IC Design (Taiwan) Ashley CHUNG (852) 2848 4431 ashley.chung@hk.daiwacm.com
Materials/Energy (Regional) Alexander LATZER (Regional Head of Materials) (852) 2848 4463 alexander.latzer@hk.daiwacm.com
Materials (China) Felix LAM (852) 2532 4341 felix.lam@hk.daiwacm.com
Oil & Gas (China, Korea) Andrew CHAN (852) 2848 4964 andrew.chan@hk.daiwacm.com
Pan Asia Research, Consumer, Pharmaceuticals and Healthcare (China) Hongxia ZHU (852) 2848 4460 hongxia.zhu@hk.daiwacm.com
Pan Asia Research Kenji SERIZAWA (852) 2532 4159 kenji.serizawa@hk.daiwacm.com
Property Developers (Hong Kong, China) Danny BAO (Head of Hong Kong and China Property) (852) 2773 8715 danny.bao@hk.daiwacm.com
Property (Hong Kong, China) Yannis KUO (852) 2773 8735 yannis.kuo@hk.daiwacm.com
Small/Medium Cap (Regional) Mark CHANG (Regional Head of Small/Medium Cap) (852) 2773 8729 mark.chang@hk.daiwacm.com
Small/Medium Cap (Regional) John CHOI (852) 2773 8730 john.choi@hk.daiwacm.com
Telecommunications (Regional, Greater China); Software (China) Marvin LO (Regional Head of Telecommunications) (852) 2848 4465 marvin.lo@hk.daiwacm.com
Transportation – Land/Marine (Regional); Jimmy LAM (852) 2848 4024 jimmy.lam@hk.daiwacm.com
Capital Goods – Infrastructure Construction (China)
Transportation – Aviation and Expressway Kelvin LAU (852) 2848 4467 kelvin.lau@hk.daiwacm.com
(Hong Kong, China, Singapore)
Transportation (Hong Kong, China) Edwin LEE (852) 2532 4349 edwin.lee@hk.daiwacm.com
Utilities; Power Equipment; Renewables (Hong Kong/China) Dave DAI (852) 2848 4068 dave.dai@hk.daiwacm.com
Custom Products Group Justin LAU (Head of Custom Products Group) (852) 2773 8741 justin.lau@hk.daiwacm.com
Custom Products Group Philip LO (852) 2773 8714 philip.lo@hk.daiwacm.com
Custom Products Group Jibo MA (852) 2848 4489 jibo.ma@hk.daiwacm.com
South Korea
Strategy; Banking/Finance Chang H LEE (Head of Research) (82) 2 787 9177 chlee@kr.daiwacm.com
Automobiles; Shipbuilding; Steel Sung Yop CHUNG (82) 2 787 9157 sychung@kr.daiwacm.com
Banking/Finance Anderson CHA (82) 2 787 9185 anderson.cha@kr.daiwacm.com
Capital Goods (Construction and Machinery) Mike OH (82) 2 787 9179 mike.oh@kr.daiwacm.com
Consumer/Retail Sang Hee PARK (82) 2 787 9165 sanghee.park@kr.daiwacm.com
IT/Electronics (Tech Hardware and Memory Chips) Jae H LEE (82) 2 787 9173 jhlee@kr.daiwacm.com
IT Electronics (Tech Hardware) Steve OH (82) 2 787 9195 steve.oh@kr.daiwacm.com
Materials (Chemicals) Daniel LEE (82) 2 787 9121 daniel.lee@kr.daiwacm.com
Pan Asia Research; Small/Medium Caps Yumi KIM (82) 2 787 9838 yumi.kim@kr.daiwacm.com
Telecommunications; Software (Internet/Online Games) Thomas Y KWON (82) 2 787 9181 yskwon@kr.daiwacm.com
- 85 -
Taiwan
Head of Taiwan Research; Pan Asia Research Hirokazu Mitsuda (886) 2 2758 8754 h.mitsuda@daiwacm-cathay.com.tw
Co-head of Research; Strategy Alex YANG (886) 2 2345 3660 alex.yang@daiwacm-cathay.com.tw
Banking/Diversified Financials Ling TANG (886) 2 8789 5158 ling.tang@daiwacm-cathay.com.tw
Consumer/Retail Yoshihiko KAWASHIMA (886) 2 8780 5987 y.kawashima@daiwacm-cathay.com.tw
IT/Technology Hardware (PC Hardware); Software Christine WANG (886) 2 8788 1531 christine.wang@daiwacm-cathay.com.tw
(Small/Medium Caps)
IT/Technology Hardware (Handsets and Components) Alex CHANG (886) 2 8788 1584 alex.chang@daiwacm-cathay.com.tw
IT/Technology Hardware (PC Hardware - Panels) Chris LIN (886) 2 8788 1614 chris.lin@daiwacm-cathay.com.tw
IT/Technology Hardware (PC Components) Jenny SHIH (886) 2 8780 1326 jenny.shih@daiwacm-cathay.com.tw
Materials; Conglomerates Albert HSU (886) 2 8786 2212 albert.hsu@daiwacm-cathay.com.tw
India
Head of India Equities Strategy Jaideep GOSWAMI (91) 22 6622 1010 jaideep.goswami@in.daiwacm.com
Strategy; Banking/Finance Punit SRIVASTAVA (Deputy Head of Research) (91) 22 6622 1013 punit.srivastava@in.daiwacm.com
All Industries; Pan Asia Research Fumio YOKOMICHI (91) 22 6622 1003 fumio.yokomichi@in.daiwacm.com
Automobiles Ambrish MISHRA (91) 22 6622 1060 ambrish.mishra@in.daiwacm.com
Capital Goods; Utilities Jonas BHUTTA (91) 22 6622 1008 jonas.bhutta@in.daiwacm.com
Materials Vishal CHANDAK (91) 22 6622 1006 vishal.chandak@in.daiwacm.com
Oil & Gas; Construction; Small/Medium Caps Atul RASTOGI (91) 22 6622 1020 atul.rastogi@in.daiwacm.com
Pharmaceuticals and Healthcare; Consumer Kartik A. MEHTA (91) 22 6622 1012 kartik.mehta@in.daiwacm.com
Real Estate Amit AGARWAL (91) 22 6622 1063 amit.agarwal@in.daiwacm.com
Software (Tech IT Services) R. RAVI (91) 22 6622 1014 ravi.r@in.daiwacm.com
Singapore
Head of Research; Pan Asia Research Tatsuya TORIKOSHI (65) 6321 3050 tatsuya.torikoshi@sg.daiwacm.com
Macro Economy (Regional) Prasenjit K BASU (Chief Economist, Asia Ex-JP) (65) 6321 3069 p-k.basu@sg.daiwacm.com
Quantitative Research Deep KAPUR (65) 6321 3079 deep.kapur@sg.daiwacm.com
(Global Director of Quantitative Research)
Quantitative Research Josh CHERIAN (65) 6499 6549 josh.cherian@sg.daiwacm.com
Quantitative Research Suzanne HO (65) 6499 6545 suzanne.ho@sg.daiwacm.com
Banking; Property and REITs David LUM (Regional Head of Banking/Finance) (65) 6329 2102 david.lum@sg.daiwacm.com
Banking (Southeast Asia) Srikanth VADLAMANI (65) 6499 6570 srikanth.vadlamani@sg.daiwacm.com
Conglomerates; Soft Commodities; Energy; Small/Medium Caps Chris SANDA (65) 6321 3085 chris.sanda@sg.daiwacm.com
Oil and Gas; Utilities (Southeast Asia) Adrian LOH (65) 6499 6548 adrian.loh@sg.daiwacm.com
Small/Medium Cap Pyari MENON (65) 6499 6566 pyari.menon@sg.daiwacm.com
Telecommunications (Southeast Asia & India) Ramakrishna MARUVADA (65) 6499 6543 ramakrishna.maruvada@sg.daiwacm.com
(Head of SE Asia & India Telecommunications)
Australia
Banking/Diversified Financials Johan VANDERLUGT (61) 3 9916 1335 johan.vanderlugt@au.daiwacm.com
Resources/Mining/Petroleum David BRENNAN (61) 3 9916 1323 david.brennan@au.daiwacm.com
Japan
Industrials (Regional); Pan Asia Research Taiki KAJI (81) 3 5555 7174 taiki.kaji@jp.daiwacm.com
Industrials (Regional); Pan Asia Research Daijiro HATA (81) 3 5555 7178 daijiro.hata@jp.daiwacm.com
- 86 -
Daiwa’s Office
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- 87 -
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Daiwa India - Auto Sector - Initiation

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Daiwa India - Auto Sector - Initiation

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Automobiles & components / India

Initiation: start your engines India Auto Sector

• Macro factors support medium/long-term demand, though near-

drive share-price performances over Land Rover (JLR). Meanwhile, we

How do we justify our view?

Growth outlook Domestic sales-volume growth

We believe the India Auto Sector is poised to record a 1,200,000 3,500,000

Valuation Peer-valuation comparison

Earnings revisions Daiwa vs. consensus FY12/FY13 EPS variance

Our FY12/FY13 earnings forecasts are lower than those 10%

Variance from consensus - FY12 Variance from consensus - FY13

Initiation: start your engines

Key stock calls

Sector financial snapshot ................................................................................................................. 5

Sector financial snapshot

Key performance parameters from balance sheet

Auto-financing situation remains

Business fundamentals of fleet operators

PV three-month-moving-average sales volume

Valuations and rating 20%

SENSEX from its 52-week high set in November 2010.

Source: Crisil, Daiwa compilation

Auto Index versus interest rates

Source: Bloomberg, BSE India, Daiwa compilation

CV sales versus interest rates PV sales versus interest rates

Source: Crisil, Bloomberg Source: Crisil, Bloomberg

Sector valuations, ratings and target prices

price inflation as risks to our estimates, as the pressure

Post-earthquake disruptions to supply

Commodity prices may put pressure on

India auto industry: sales-volume breakdown

supported investors’ faith in the outlook for the India

India: household-income profile (2001-02) India: household-income profile (2009-10)

Middle class Middle class Rich

We also observe that the affordability of automobiles as India: urbanisation rate

contribution from the rural and semi-urban markets as

India: breakdown of households by type India: consumer-goods penetration

the one over the past decade) as the country’s economic

appealing (per 1,000 people)

Source: Daiwa Source: Crisil, Daiwa

Although we do not foresee a similar degree of

We forecast PV demand to rise at a CAGR

FY10 period. MHCV sales rose at a CAGR of 11.1% over

MHCV market shares Light CV market shares

Source: Crisi Source: Crisil

CV sales and GDP growth MHCV sales and IP growth

(%) (units) (%) (units)

Source: Crisil, Daiwa estimates Source: Crisil, Daiwa estimates

Business fundamentals of fleet operators However, fleet operators’ profitability is

Source: Crisil Source: Crisil

Source: Crisil Source: Crisil

Three-wheeler sales Cargo share of total three-wheeler market

Source: Crisil Source: Crisil

High-tonnage vehicle share increasing Progress of NHDP

> 16.2 tonnes

Source: Crisil Source: Crisil

which is turning into a challenging segment. Hero

India: motorcycle market shares India: scooter market shares

Source: Crisil, Daiwa forecasts Source: Crisil, Daiwa forecasts

Source: Crisil, Daiwa forecasts Source: Crisil, Daiwa forecasts

Auto-financing situation remains

Interest-rate impact on EMI (passenger cars)

(Rs bn) (Rs bn)