Auto Sector Report

Automobile Sector
From deceleration
onto a gradual upward gradient.............
Vaishali Jajoo November 2007

TM
Angel Broking Automobile

Service Truly Personalized India Research
TABLE OF CONTENTS
Page No.
Industry
Investment Case 4
Commercial Vehicles 6
Passenger Vehicles 9
Two wheelers 14
Company
Maruti Suzuki 20
Mahindra & Mahindra 25
Tata Motors 31
Bajaj Auto 37
Ashok Leyland 43
Hero Honda 49
TVS Motors 54
November 13, 2007 For Private Circulation Only - Sebi Registration No : INB 010996539 1
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Industry
TM

Investment Case
We see the current turmoil in The Automobile sector has been facing challenging times in FY2008 post registering high
the Auto sector as a good growth in FY2007. The Auto companies are reeling under the pressure of high input costs and
Buying opportunity; We Interest rates (albeit on a high investment base), which are impacting volumes. Optimal utilisation
expect the Auto stocks to of new capacity and intensifying competition remain the major constraining factors for the auto
perform driven by good companies. Nonetheless, the key demand drivers remain intact. Against this backdrop, we
Volumes and decent Earnings expect the Indian Auto sector to consolidate following strong domestic demand, reasonable
post underperforming in the interest rates and sustained business confidence. We expect the Auto stocks to perform driven
last 10 months by good Volumes and decent Earnings post underperforming in the last 10 months.
Commercial Vehicles: Infrastructure development, Regulatory policies, model shift to road and
economic growth are the likely major factors that would shape up the commercial vehicle (CV)
Emerging sectors like Retail industry over the next four-five years. CV volume growth is typically linked to freight demand,
and continued demand of which is directly linked to industrial growth. Hence, sustainability in GDP growth at around 8%
heavy load transport will over the next four-five years would help CV sales to remain strong. Overall, emerging sectors
continue to augment CV like Retail and continued demand of heavy load transport (on the back of infrastructure
demand in the country development) will continue to augment CV demand in the country.
Passenger Vehicles: Increasing affordability on account of reduction in Entry level prices, low
penetration, increasing disposable income and diminishing average age profile of car buyers
will continue to be the demand drivers for the passenger vehicles (PV) segment over the next
four-five years.The PV segment is expected to clock a CAGR growth of 15-17% over 2007-11E.
We believe the PV segment has clear visibility of growth and would mainly be driven by the
small cars. The government and industry majors are also laying emphasis on making India a
The government and industry ‘small car manufacturing hub’. At present, competition in the small car segment is low with only
majors are also laying five players in the dominant compact segment. However, going ahead by 2011, competition in
emphasis on making India a the segment is expected to heat up. On the export front too, there exists enormous opportunity
‘small car manufacturing hub’ to capitalise on particularly with India being a low-cost car manufacturer.
Two Wheelers: The two-wheeler segment has been facing rough weather in recent times. High
double-digit motorcycle sales came to a screeching halt, and began to decline in FY2008.
Trends in the domestic market has not been very rosy as Margins were already under pressure
due to spiraling raw material costs, while intensifying competition resulted in leaders launching
new products at aggressive price points. The scenario worsened on account of inflationary
As competition further pressures and high Interest rates, which made finance companies cut down loan
intensifies, performance of the disbursements to the industry. As competition further intensifies, performance of the players
players will continue to will continue to depend on their new technological and promotional offerings. The segment is
depend on their new expected to grow at a CAGR of 11% over FY2007-11E on the back of inadequate public
technological and transport, increasing job opportunities in BPOs, Retail, etc., and additional demand from the
promotional offerings rural and replacement markets.
Exhibit 1: Valuation summary

CMP MCap EBITDA (Rs cr) EPS (Rs) P/EPS (x) EV/EBITDA (x) RoCE(%)
Company Recos (Rs) (Rs cr) Target FY07 FY08E FY09E FY07 FY08E FY09E FY07 FY08E FY09E FY07 FY08E FY09E FY07 FY08E FY09E
Maruti Suzuki Buy 1,004 29,003 1,260 1,990 2,463 3,002 54.0 60.7 72.6 18.6 16.5 13.8 14.2 11.4 9.3 22.5 22.0 22.9
M&M Buy 708 17,391 952 1,126 1,245 1,448 40.6 39.3 43.2 17.5 18.0 16.4 14.7 14.9 11.9 17.6 15.1 16.1
Tata Motors Buy 693 26,706 880 2,830 3,233 3,628 49.6 51.5 55.5 14.0 13.5 12.5 10.0 8.8 7.8 19.3 17.4 16.0
Bajaj Auto Buy 2,336 23,638 2,746 1,437 1,654 1,968 129.1 137.8 159.0 18.1 17.0 14.7 18.6 16.2 13.5 17.2 17.9 19.0
Ashok Leyland Hold 37 4,975 42 703 792 894 3.3 3.7 4.1 11.2 10.2 9.2 7.3 6.5 5.8 23.3 22.2 21.5
Hero Honda Neutral 661 13,194 - 1,153 1,236 1,356 38.9 43.7 48.9 17.0 15.1 13.5 11.6 10.8 9.7 36.7 33.1 30.9
TVS Motors Neutral 56 1,326 - 135 132 168 2.5 2.2 3.0 22.1 25.3 18.7 13.9 14.3 11.1 3.0 1.4 2.9
Source: Company, Angel Research, CMP as on November 13, 2007.
TM

A good September 2007 On the bourses too, the BSE Auto Index has underperformed the benchmark sensitive index,
quarter has pushed back the the BSE, over the last one year. However, the Auto majors turned in a better relative
worrying trend and the performance towards end of the September 2007 quarter on the back of better valuation vis-à-vis
players are entering the the broader markets. Sentiment for the Auto stocks has also turned positive with concerns over
second half of FY2008 with a Interest rates easing and players expected to register better volumes going ahead. A good
lot of optimism September 2007 quarter has pushed back the worrying trend and the players are entering the
second half of FY2008 with a lot of optimism. Over the next three-four years, the Auto sector is
estimated to witness investments to the tune of Rs300bn. Buoyed by rising domestic demand
players have embarked on an expansion spree. Companies are increasing capacities to meet
both the domestic and global demand and avail of the fiscal sops in states like Uttarakhand.
Exhibit 2: Auto Index v/s Sensex
Underperforming broder market
Source: Capitaline, Angel Research
Exhibi 3: Relative Performance

Price (Rs) Absolute Returns (%) Relative Returns (%)
Stock (13/11/2007) 3 month 6 month 1 year 3 month 6 month 1 year
Maruti 1,004 14.4 26.2 9.6 (11.6) (21.4) (30.3)
M&M 708 5.3 (1.8) (15.8) (20.8) (30.6) (55.7)
Tata Motors 693 3.4 (3.2) (16.9) (22.6) (32.4) (56.8)
Bajaj Auto 2,336 0.7 (14.1) (10.0) (25.3) (35.1) (49.9)
Ashok Leyland 37 2.4 0.4 (19.8) (23.6) (33.4) (59.7)
Hero Honda 661 0.2 (6.3) (7.6) (25.9) (35.7) (47.5)
TVS Motor 56 (0.1) (11.1) (44.3) (26.1) (35.9) (84.2)
Pertinently, improving affordability is resulting in higher volumes in the four-wheeler segment

compared to two-wheelers. In sum, we see the current turmoil in the sector as a good Buying
opportunity. Our preferred bets in the sector include Maruti Suzuki, Tata Motors, Bajaj Auto
and Mahindra & Mahindra.
TM

Commercial Vehicles: Impending recovery

Sustainability in GDP growth Infrastructure development, Regulatory policies, model shift to road and economic growth are
at around 8% over the next the major factors that are expected to shape up the commercial vehicle (CV) industry over the
4-5 years would help CV sales next 4-5 years. CV volume growth is typically linked to freight demand, which is directly linked
to remain strong to industrial growth. In most developing countries, freight demand has increased at
1.2-1.7x GDP given that CV demand is derived from economic activity. Hence, sustainability in
GDP growth at around 8% over the next 4-5 years would help CV sales to remain strong.
Overall, emerging sectors like Retail and continued demand of heavy load transport like steel
and cement (on the back of infrastructure development) will continue to augment CV demand in
the country. In the CV space, our preferred bet is leader Tata Motors, which has a diversified CV
portfolio.
Exhibit 4: Goods CV sales volume v/s GDP growth
Source: Cris Infac, Angel Research
Demand drivers intact

We believe that the CV Profitability of truck operators improved post the Supreme Court (SC) ban on overloading of
segment sales would start trucks. Freight rates increased by 12.3% between November 2005 - October 2007 even as the
improving by end of FY2008 diesel prices declined simultaneously by 3.3%, which resulted in improvement in truck
operators’ profitability. Truck operator profitability remains sensitive to the fluctuation in diesel
prices and interest rates. Pertinently, banks have once again started looking at truck operators
to sell CV loans. The finance rates have also declined in the last 2-3 months from 13% to 10%.
We believe that the CV segment sales would start improving by end of FY2008.
Exhibit 5: Freight rate movement
Source: TCI, IOCL, Cris Infac, Angel Research
TM

Improving Road infrastructure to overtake Railways

Renewed thrust by the Road infrastructure on the move - slowly but steadily
government on road Renewed thrust by the government on road infrastructure in the last 10 years is expected to
infrastructure in the last 10 continue and further support demand as there is a strong correlation between development of
years is expected to continue the road network and per unit volume growth. Analysing a trend in road freight movement over
and further support demand the last 35 years clearly indicates a visible moderate shift towards road transport. In fact, roads
carry 61% of the total freight traffic and 85% of the total passenger traffic.
The development of roads has been leading the road transport industry to adopt a
‘hub-and-spoke’ model. Thus, heavy CVs (HCVs), intermediate CVs (ICVs) and small CVs
(SCVs) are expected to capture high proportion of demand in the long run, which is visible from
the growth that these segments registered in FY2007. However, regulation may continue to
dampen growth in bus demand. Nonetheless, on the back of lower penetration and improving
infrastructure, we believe passenger CV (bus) segment will clock moderate growth of 5-6%.
Exhibit 6: Increasing Road Freight movement
Renewed vigour in reviving Indian Railways

The government has set an The Railway Budget 2007-08 laid emphasis on renewing focus on reducing per unit cost by
ambitious target in the increasing efficiency. Indian Railways (IR) is targeting 50% reduction in the per unit cost over
XI Five-Year Plan and the next five years. The government has set an ambitious target in the XI Five-Year Plan and
proposes to achieve 1,100mt proposes to achieve 1,100mt freight load and 8.4bn passengers in 2012 as against 726mt load
freight load and 8.4bn and 6.2bn passengers at present. This could prove to be a challenge for road transportation
passengers in 2012 as against growth. However, Railways compares unfavourably vis-à-vis Roadways on most evaluation
726mt load and 6.2bn criteria particularly ease of payments, connectivity, negotiability and claim-processing time,
passengers at present which is much lower for Roadways. Also, the large projects planned by IR could well take a
fairly longer period of time before it becomes fully operational.
Regulatory Policy, Emission norms to elevate Replacement demand

The new Emission norms, Regulation against overloading and usage of vehicle above certain age are in place. However,
which are expected to come these measures have been partially implemented. Fortunes of the CV industry could change
into force over the next few dramatically post proper implementation of such Regulatory norms.
years, would also help fuel The government has barred vehicles over 15 years from plying in the National Capital Region
demand for the CVs (NCR) along with barring vehicles above eight years from plying in Mumbai. This measure
however, remains partially implemented. As per industry sources, 35% of the present CV fleet
is above 10 years old. Hence, if this Regulation is strictly implemented and all vehicles over 15
years replaced, then 1,90,000 vehicles would have to be replaced in 2007-08, which could
increase to 2,80,000 vehicles in 2011-12. This would substantially add to the demand potential
of commercial vehicles. The new Emission norms, which are expected to come into force over
the next few years, would also help fuel demand for the CVs.
TM

Exhibit 7: Replacement demand
Source: Cris Infac, Angel Research, Note: 35% of the present CV fleet is above 10 years old
Utilisation levels likely to taper off as fresh capacities get added

Robust sales growth on the Capacity of CVs has grown at a CAGR of 16% over FY2003-06. Capacity addition was led by
back of pick up in the market leader, Tata Motors, and a large part of the increase was due to additions to the product
investment cycle and strong portfolio, particularly in the LCV segment. Robust sales growth on the back of pick up in the
growth in the IIP resulted in investment cycle and strong growth in the Index of Industrial Production (IIP) resulted in
capacity utilisation levels capacity utilisation levels spiking sharply to above 90% during 2006-07.
spiking sharply to above 90%
during 2006-07 Exhibit 8: Planned capacity and Investment announcements
Company 2006-07 2007-08E 2008-09E 2009-10E Investment and Remarks
Tata Motors 295,000 420,000 485,000 550,000 To invest around Rs12,000cr over
the next three-four years towards
expansion of CV and PV capacities.
Ashok Leyland 84,000 110,000 140,000 160,000 Planned Rs4,000cr capex over the
next four years including Rs1,000cr
in FY2008.
Eicher Motors 38,000 38,000 38,000 38,000 -
Swaraj Mazda 18,000 18,000 24,000 36,000 -
Mahindra Intl 20,000 20,000 20,000 120,000 To invest around Rs. 400 cr.
Force Motors-Man 15,000 39,000 39,000 39,000 -
Others 17,200 53,800 68,400 93,400 -
Total (Units) 4,87,200 6,98,800 8,14,400 10,36,400 Capacity addition at a CAGR of over 28%
Source: Industry, Company, Angel Research
As per the current plans, installed capacity of the CV industry is expected to grow at a CAGR
of over 28% over 2007-10E. Capacity addition will be led by the LCV segment in 2007-08 and by
the HCV segment in 2009-10.
Key Concerns
z Cyclical pressure to restrain growth.
z Hardening Interest rates.
z Significant correction in freight rates or increase in fuel prices.
z Dedicated Railway freight corridors and dynamic freight pricing policies by Railways.
z High capacity build up and competition.
z Input cost hikes.
TM

Passenger Vehicles: Joy ride to continue

We believe the PV segment Increasing affordability on account of reduction in Entry level prices, low penetration, increasing
has clear visibility of growth disposable income and diminishing average age profile of car buyers will continue to be the
and would mainly be driven demand drivers for the passenger vehicles segment over the next four-five years.
by the small cars The PV segment is expected to clock a CAGR growth of 15-17% over 2007-11E. We believe the
PV segment has clear visibility of growth and would mainly be driven by the small cars. The
government and industry majors are also laying emphasis on making India a ‘small car
manufacturing hub’. At present, competition in the small car segment is low with only five
players in the dominant compact segment. However, going ahead by 2011, competition in the
segment is expected to heat up. On the export front too, there exists enormous opportunity to
capitalise on particularly with India being a low-cost car manufacturer. We remain positive on
Maruti Udyog, which we believe will continue to dominate the small car segment over the next
two years.
Exhibit 9: PV sales volume v/s Per capita GDP (US $)
Source: SIAM, ACMA, Cris Infac, IMF, Angel Research
Favourable demographics and low penetration levels

A younger population earning Robust volumes clocked by PVs over the last three-four years were driven by favourable
higher income augurs well for demographic changes and low penetration levels. The PV segment is getting to be more and
rising demand for PVs more affordable following the increase in per capita income levels. The relatively faster growth in
income levels in lower age brackets has also been diluting the average age profile of the car
buyers. Growing number of households in higher salary brackets coupled with increasing
affordability, 65% of the population is below 35 years of age of which half are below 25 years.
This trend is expected to continue over the next four-five years given the low penetration levels.
Overall, a younger population earning higher income augurs well for rising demand for PVs.
Hence, rising disposable income is expected to be one of the key growth drivers for the
PV segment.
Exhibit 10: Rise in size of Great Indian Middle Class

2001-02 2005-2006 2009-10E
Annual No. of Ownership per Car
household households household penetration No. of households
income (Rs'000) (mn) (mn) (%) (mn)
Upto 90 135.4 0 0 132.2 114.4
90 to 200 41.3 0.04 0.10 53.3 75.3
201 to 1,000 10.7 0.32 2.99 16.4 28.5
Above 1,000 0.8 0.83 103.75 1.7 3.8
Total 188.2 0.03 0.02 203.6 222
TM

PV penetration in India is PV penetration in India is abysmally low at 8-10 vehicles per 1,000 households compared to
abysmally low at 8-10 vehicles some other under developed/developed countries.
per 1,000 households
compared to some other Exhibit 11: Car density of Developing and Developed countries
under developed/developed
countries
We expect higher demand for Low penetration and rising income levels at younger age are increasing the number of first time
PVs to emerge from the small car buyers who usually prefer to go for small cars. Going ahead, we expect higher demand for
cities and towns, which prefer PVs to emerge from the small cities and towns, which prefer compact cars with low cost and
compact cars with low cost maintenance. Hence, players are expanding their network and providing easy access to
and maintenance service centres in the small cities and towns. In this respect, Tata’s Rs1lakh car is expected to
play a significant role in expanding the small car market going ahead. This is because
reduction in Entry level prices in the addressable market will be much faster leading to higher
penetration. However, we do not expect Tata’s Rs1lakh car to cannibalise marketshare of the
existing mini / A2 segment cars as there is a significant difference in the ownership cost of the
product.
Exhibit 12: Rapid expansion in addressable households
Source: Cris Infac, NCAER, Angel Research
High selling Small car segment

Small car is currently the Good things in small packages
highest selling segment Small car is currently the highest selling segment accounting for 77% of total annual car sales
accounting for 77% of total in 2006-07. The small car market in India is supported by favourable demographics. The small
annual car sales in 2006-07 car buyers are usually first time car buyers below the age of 30. The average median age is
around 25 years and increasing per capita income assures incremental growth in the segment.
TM

Exhibit 13: Passenger Cars- Segment-wise % contribution to Total Sales

Ownership cost
Easy availability of financing, Easy availability of financing, low maintenance costs and increasing fuel efficiency due to
low maintenance costs and better technological offering by the PV companies has given a fillip to PV sales volumes in the
increasing fuel efficiency has last five years. Car finance rates have declined from 17% in 2000-2001 to 11% in 2005-06 and
given a fillip to PV sales averaged 13.5% in 2006-07. Easy financing and a better distribution network also increased the
volumes in the last five years target population in turn pushing up PV sales. Reduction in duty further reduced the car prices
and increased affordability.
Exhibit 14: Ownership costs

12 months back At present Rs. 100,000 car
Average on road price of car (Rs) 250000 275000 110000
% of Finance 80 80 80
Interest Rate (%) 9 13.5 13.5
Tenor (Yr) 5 5 5
Amount of Loan (Rs) 200000 220000 88000
EMI (Rs) 4,152 5,062 2,025
Usage per day (km) 20 20 20
Milage (km per liter) 12 12 12
Average fuel price (Rs) 50 48 48
Fuel cost per month (Rs) 2500 2400 2400
Annual maintenance cost (Rs) 12000 12000 12000
Monthly maintenance cost(Rs) 1000 1000 1000
Ownership cost per month (Rs) 7,652 8,462 5,425
Source: Industry, Angel Research
Tata’s 1lakh car to create a new segment in PV market
Tata’s 1lakh car will most We expect Tata’s Rs1lakh car to expand the passenger car market significantly. It is expected
likely compete with the to bridge the affordability gap between motorcycles and passenger cars. This is because
Executive motorcycle ownership cost of the Tata car will be 35% lower than the average ownership cost of a
segment and public passenger compact/small car currently available in the market. The product will most likely compete with
three wheelers transport the Executive motorcycle segment and public passenger three wheelers transport system.
system In fact, the Tata car will add a new segment in the PV market and is not expected to cannibalise
marketshare from the existing players due to the extensive price difference.
Attractive scenario adding capacities amidst escalating competition
Robust sales growth at a CAGR of 18% over FY2003-07 along with relatively sedate capacity
addition of around 10% over the same period led to high capacity utilisation - almost 80% in
FY2007. Going ahead, the PV segment is expected to witness maximum investments and
capacity is expected to be added by more than 92% over FY2007-10E compared to around
48% in FY2003-07. Competition is also expected to intensify mainly due to the entry of new players.
TM

The PV segment is expected Exhibit 15: Growing capacities with moderate utilisation levels
to witness maximum
investments and capacity is
expected to be added by more
than 92% over FY2007-10E
compared to around 48% in
FY2003-07

At present, three players account for 86% of the car market and 75% of the total PV market in
India. In anticipation of moving up the value chain, new launches over the past four-five years
have taken place in the Sedan and utility vehicle (UV) segments. However, this is set to change
in the near future, as the global OEMs are focusing on India’s small car market, a strategy
demanded by the attractive market scenario and a differential duty structure that favours small
cars. A challenge going ahead for the existing players, especially Maruti Udyog, Hyundai and
Tata Motors would be to maintain marketshare in a competitive scenario. However, we do not
expect a significant dent in the marketshare of large players like Maruti and Hyundai in the
passenger car segment at least for the next couple of years as most of the global OEM are
expected to launch their product in FY2009.
We do not expect a significant
Exhibit 16: Company-wise planned capacity and investment announcements
dent in the marketshare of
Company (Units) FY2007 FY2008E FY2009E FY2010E Investment Remarks
large players like Maruti and
Maruti 6,50,000 7,50,000 9,50,000 10,00,000 Rs4,500-5,000cr To increase presence in diesel
Hyundai in the passenger car
segment and enhance export base
segment at least for the next Hyundai 3,00,000 5,50,000 6,00,000 6,50,000 Rs4,000cr To make India a sourcing base for
couple of years small cars
Tata Motors 2,70,000 3,00,000 3,00,000 3,00,000
Tata Motors -Small Car 0 0 0 3,00,000 Rs8,000-8,500cr To address market by reducing
Tata Motors -UV 60,000 75,000 75,000 90,000 (Rs4,000 -Fiat price and increasing affordability
Fiat 60,000 1,00,000 1,00,000 1,00,000 JV)
Ford 65,000 1,00,000 1,00,000 1,00,000
GM 85,000 85,000 2,25,000 2,25,000 Rs1,500cr To meet domestic demand for
Chevrolet Spark
Honda 60,000 1,00,000 1,25,000 1,50,000 Rs2,000cr To cater to the growing demand of
existing models
Toyota 50,000 75,000 1,00,000 1,50,000 - New launch in small car segment
by 2009-10
M&M, Renault, Nissan 0 30,000 50,000 2,50,000 Rs4,000cr Manufacture cars for Renault and
M&M UV 1,80,000 2,00,000 2,50,000 2,50,000 in next 3 years Nissan to sell in domestic and
export market
Hindustan Motors 45,000 45,000 45,000 45,000
Skoda 30,000 50,000 50,000 50,000
Volkswagen 0 0 0 1,10,000 Rs2,500cr To launch new small car by 2009-10
Daimler Chrysler 2,250 4,500 4,500 4,500
BMW 1,700 1,700 1,700 1,700
Force Motors 35,000 35,000 35,000 35,000
Others 30,000 30,000 30,000 30,000
Installed Capacity 19,58,950 25,31,200 30,41,200 38,41,200
% growth 16.5 27.3 20.1 26.3
TM

Exports and Outsourcing - Key to additional growth

Going ahead, the share of Indian passenger car exports have been growing at a CAGR of 30.2% in the last five years.
exports from domestic However, due to supply side constraints and higher domestic demand, growth in the last two
production is expected to go years had slowed down to around 8.5% levels. Industry players also shifted and shifting
up to around 20% by 2011-12 production base to low-cost countries (for instance, Maruti shifted Swift’s production base from
is from the current 13.3% Europe to Hungary). Going ahead, the share of exports from domestic production is expected
to go up to around 20% by 2011-12 is from the current 13.3%. Also, India enjoys a less than 1%
share in the global passenger car export volumes.
Exhibit 17: Export volume and growth
Global OEMs are also making Industry is targeting passenger car exports to cross the 7,00,000 units mark by 2011-12
their intention clear to set up growing at a CAGR of 28-30% in the mentioned period. Maruti, Hyundai, Tata Motors and
small car plants in India, and M&M-Renault are players with dedicated export targets, and would contribute 80-85% to total
expect commercial volumes over the next five years. Top-five players Toyota, GM, Volkswagen, Ford and Honda
production to commence in have already entered the Indian markets and plan to set up manufacturing facilities in India or
2009-10 add to existing capacities. These global OEMs are also making their intention clear to set up
small car plants in India, and expect commercial production to commence in 2009-10.
However, production and additional capacity being set up by these players over the next
four-five years will continue to cater to domestic demand. Thus, there exists vast export
opportunity for the three domestic players viz., Maruti, Hyundai and Tata Motors through
enhanced capacity additions.
Key Concerns
z Hardening Interest rates.
z Increase in raw material prices.
z Dearer fuel price and hike in road tax.
z High competition.
TM

Two Wheelers: Riding on rugged terrain

Going ahead, as competition The two-wheeler industry has been facing rough weather in recent times. High double-digit
further intensifies, motorcycle sales came to a screeching halt, and began to decline in FY2008. It has become
performance of the players will very difficult for investors to pick winners and shun losers in the two-wheeler segment. Trends in
continue to depend on their the domestic market has not been very rosy as margins were already under pressure due to
new technological and spiraling raw material costs, while intensifying competition resulted in leaders launching new
promotional offerings products at aggressive price points. The scenario worsened on account of inflationary
pressures and high interest rates, which made finance companies, cut down loan
disbursements to the industry. Going ahead, as competition further intensifies, performance of
the players will continue to depend on their new technological and promotional offerings. We
expect the industry to be dominated by the top-three players who will continue to struggle to
maintain/increase their marketshare. The segment is expected to grow at a CAGR of 11% over
FY2007-11E on the back of inadequate public transport, increasing job opportunities in BPOs,
Retail, etc., and additional demand from the rural and replacement markets.
Exhibit 18: Two-wheeler Sales volume and Growth trend
Amidst intensifying competition players in a major rush to grab marketshare

In the near term, we expect the Players are in scuttle to gain marketshare through new products launches, which are coming
industry to continue to face with better technology and at aggressive price points. Further, though the companies were
pressure in Bottom-line, as facing Margin pressure due to an increase in input costs, players have not fully passed on the
competition is expected to prices to the customers. As a result, Margins have declined in turn impacting Profitability of
further heat up in the most these companies. In the near term, we expect the industry to continue to face pressure in
dominant Executive segment Bottom-line, as competition is expected to further heat up in the most dominant Executive
segment. Hence, almost all players have launched or announced new products in the higher
segments. Success of the new launches would determine their position in the market.
Exhibit 19: Changing customer preferences in Motorcycle segment
Source: Industry, Cris Infac, Angel Research
TM

Nonetheless, players are keeping an eye on the basic needs of the Indian customer viz.,
affordability and mileage. There could well be a shift to better mileage and on-road performance
by motorcycles and increasing affordability. However, high competition has led to strong pricing
pressure, higher advertising costs and promotional expenses and consequently lower margins.
Motorcycles dominate two-wheeler market; top three players in commanding position

Overall demand in the Motorcycles have been dominating the two-wheeler segment with over 75% marketshare over
two-wheeler segment would the last five years, and is currently hovering at around 80% levels. Falling price differential
continue to be driven by between scooters and motorcycles and change in consumer preference to fuel-efficient and
accelerated growth in stylish models have resulted in motorcycles growing at a CAGR of 19.3% over 2001-02 to
motorcycle sales 2006-07. Thus, overall demand in the two-wheeler segment would continue to be driven by
accelerated growth in motorcycle sales.
Exhibit 20: Key players and marketshare

Segment % Contribution Key Players % Marketshare Models
Economy Hero Honda 65 CD Dawn, CD Deluxe
(Rs30,000 to 35,000) 35 Bajaj Auto 20 CT-100, Platina
TVS Motor 11 Star City
Executive Hero Honda 70 Splendor Plus, Passion Plus,
(Rs40,000 to 50,000) 45 Super Splendor, Splendor NXG,
Glamour, Glamour FI
Bajaj Auto 20 Discover, Exceeds
TVS Motor 5 Victor, Victor GLX
Premium Bajaj Auto 70 Pulsar 150, Pulsar 180,
(Rs50,000 & above) 20 Pulsar 200, Pulsar 220, Avenger
Hero Honda 4 CBZ Extreme, Achiever, Karizma
TVS Motor 20 Apache, Apache TR
The top-three players, viz., The top-three players, viz., Hero Honda, Bajaj Auto and TVS Motor command more than 90%
Hero Honda, Bajaj Auto and marketshare in the domestic motorcycle industry. This implies that gain of one player can be a
TVS Motor command more loss for another. Further, intensifying competition has narrowed the price differential
than 90% marketshare in the between the Economy and higher segments, which are raising issues regards the Economy
domestic motorcycle industry segment holding volumes in the medium to long run.
Exhibit 21: Segment-wise % contribution to Motorcycle Sales volume
TM

Long-term domestic demand drivers intact

The rural markets continue to The two-wheeler industry will continue to register positive growth on account of rising income
remain under-penetrated and levels and the young population perking up demand. Two-wheeler penetration levels in India
a shrinking replacement cycle estimated at around 22% in 2005-06 are also reasonable compared to other developing
is expected to support and countries. Nevertheless, the rural markets continue to remain under-penetrated and a shrinking
result in incremental growth in replacement cycle is expected to support and result in incremental growth in the two-wheeler
the two-wheeler segment over segment over the next 4-5 years. The rapid rise in income levels along with low penetration is
the next 4-5 years expected to fuel demand for means of transportation.
Exhibit 22: Two-wheelers - Penetration, ownership/demand pattern in India

Ownership pattern across occupational groups
(per '000 household)
Urban Rural
2001-02 2009-10 2001-02 2009-10
Salary Earner 495 834 286 755
Professional 859 1,539 521 1,354
Rural Demand will increase its importance

Rural Demand 1995-96 2001-02 2009-10
(% of All India)
Scooters 33.1 39.4 39.9
Motorcycles 47.3 39.8 48.3
Mopeds 52.7 58.2 57.7
Source: Cris Infac, NCAER, Angel Research
Exports to drive better growth

Exports in the first five months Two-wheeler exports grew at a CAGR of 43.1% to 6,19,138 units in 2006-07. This was on
of FY2008 clocked decent account of rising demand for Indian motorcycles primarily from countries such as Sri Lanka,
growth of 35.5% as against a Colombia, Iran and Philippines. Growth in two-wheeler exports was primarily driven by growth in
14.3% de-growth witnessed in motorcycle exports. However, two-wheeler exports accounted for a mere 7.3% of total sales in
the domestic market 2006-07. Two-wheeler exports are however, gradually picking up. Exports in the first five months
of FY2008 clocked decent growth of 35.5% as against a 14.3% de-growth witnessed in the
domestic market. Going ahead, exports are expected to look up as companies are laying
emphasis on exports in their bid to reduce domestic market risks.
Exhibit 23: Export trend

Exports 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08E 2008-09E CAGR (%) CAGR (%)
(Units) 2001-07 2007-09E
Motorcycle 56,880 1,26,122 1,87,287 2,77,100 3,86,202 5,45,887 6,55,064 7,86,077 57.2 20.0
Moped 17,928 23,330 24,234 28,858 43,181 37,566 45,079 54,095 15.9 20.0
Scooter 28,329 30,116 53,148 60,766 83,873 35,685 42,822 51,386 4.7 20.0
Total 1,03,137 1,79,568 2,64,669 3,66,724 5,13,256 6,19,138 7,42,966 8,91,559 43.1 20.0
Source: SIAM, Cris Infac, Angel Research
The Indian players have been able to sell their products to new export destinations on account
of being competitive in terms of design and costs. Although companies are mainly exporting to
the South Asian countries at present, expansion to new geographies is expected to sustain the
growth in exports over the next five years. Both Bajaj and TVS plan to increase their presence
in South and Central America, where motorcycles dominate two-wheeler demand. We expect
two-wheeler sales to grow at a CAGR of 20% over the next four-five years and contribute 12%
to revenues.
TM

Utilisation rate expected to be stable

Utilisation levels are expected Two-wheeler companies are augmenting capacities driven by the lure of fiscal sops being
to remain stable at about 70% offered by the ‘special zones’. However, additional capacity is expected to shore up margins
levels in this segment unlike along with catering to the new target markets and increasing marketshare. Consequently,
the PV and CV segments where utilisation levels are expected to remain stable at about 70% levels in this segment unlike the
a sharp fall is expected, albeit PV and CV segments where a sharp fall is expected, albeit from much higher levels.
from much higher levels
Exhibit 24: Player-wise Capacity addition and Investment plans
(in '000) 2006-07 2007-08E 2008-09E 2009-10E Investment and Remarks
Hero Honda 3,950 4,450 4,950 5,450 Total investments together with
investment from suppliers will eventually
touch Rs1,900cr by 2010
Bajaj Auto 3,000 4,000 4,100 4,600 To spend Rs150cr towards
expansion of plant at Pantnagar
in FY2008
TVS Motor 2,000 2,400 2,400 2,600 New plant in Himachal Pradesh with an
annual production capacity of 4,00,000
units scalable to 6,00,000 units at an
initial investment of Rs120cr
HMSI 1,200 1,500 1,750 2,000 -
*Others 1,987 2,069 2,094 2,230 -
Total 12,137 14,419 15,294 16,880 Total capacity growing at a CAGR of
11.6% over the next three years
Source: Industry, Company, Angel Research; Note: *Others include idle capacities of LML and Kinetic Motors
Key Concerns
z Rise in Interest rate and Inflation.
z Rising Income levels lowering affordability cost of four wheelers.
z Intensifying competition.
z Increase in input cost.
TM

THIS PAGE IS INTENTIONALLY LEFT BLANK
TM

Company
TM
Angel Broking Textile Sector

Maruti Suzuki Buy

CMP: Rs1,004 Target Price: Rs1,260
(12 Months)
Vaishali Jajoo Good things in small packages

Tel: 022 - 4040 3800 Ext: 344 Maruti has been playing a significant role in the motorisation of India. However, the
key concern is volume growth after a slew of competitive car launches in 2009.
E-mail:vaishli.jajoo@angeltrade.com
Nevertheless, in view of having the strongest and preferred brand image in the domestic
market, we believe that Maruti will continue to be a dominant player in the PV segment.
Stock Info
Over and above this, completion of capacity addition will provide it additional support
Sector Automobile to expand in the overseas market and increase its exports. We expect Maruti's valuation
Market Cap (Rs cr) 29,003
to be largely determined by its ability to maintain marketshare amidst the intensifying
competition. At the CMP of Rs1,004, the stock is trading at 16.5x FY2008E and
Beta 1.03 13.8x FY2009E EPS. We maintain a Buy on the stock, with a Target Price of
Rs1,260.
52 Week High / Low 1252/713
Strongly Positioned: We expect Maruti to clock a CAGR growth of 15% in
Avg Daily Volume 222377 domestic volumes over FY2007-09E. Growth will be mainly driven by Maruti's
newly launched products in the A2 and A3 segments. Its timely placed diversified
Face Value (Rs) 5
fuel options by way of diesel-Swift and LPG - WagonR-DUO, SX4 and Omni
BSE Sensex 19,035 with an improved technology are already catching attention. We believe that
Maruti will maintain its marketshare of over 50% at least over the next 2-3 years.
Nifty 5,695
Export story to unfold: We expect the company's exports to grow at a CAGR
BSE Code 532500 of around 40% over FY2007-09E, and exports' contribution to total sales is
expected to double from 5.8% in FY2007 to 12% by FY2010 Suzuki is increasing
NSE Code MARUTI production in India to become the largest manufacturing base by 2009. Maruti
has plans to export 50,000 units of a new small car model in FY2009 to Nissan,
Reuters Code MRTI.BO
and another 50,000 units of the same car to Europe in FY2010.
Bloomberg Code MUL IN Vast and well-entrenched domestic dealership network: Maruti has a vast
dealership network of 500 outlets covering 312 cities and a service network of
Shareholding Pattern (%) 2,445 covering 1,172 cities. For the new players it would be a formidable task to
put in place such a huge network. This gives Maruti a competitive edge over
Promoters 54.2
other players.
MF / Banks / Indian FIs 28.9 Key Financials
FII / NRIs / OCBs 14.2 Y/E March (Rs cr) FY2006 FY2007 FY2008E FY2009E
Net Sales 12,058 14,654 18,058 21,753
Indian Public / Others 2.7
% chg 10.0 21.5 23.2 20.5
Net Profit 1,189 1,562 1,754 2,099
% chg 39.3 31.4 12.3 19.7
OPM (%) 13.5 13.6 13.6 13.8
EPS (Rs) 41.1 54.0 60.7 72.6
P/E (x) 24.4 18.6 16.5 13.8
P/CEPS (x) 19.7 15.8 13.3 11.4
P/BV (x) 5.3 4.2 3.4 2.8
RoE (%) 21.8 22.8 20.7 20.2
RoCE (%) 23.9 22.5 22.0 22.9
EV/Sales (x) 2.3 1.9 1.6 1.3
EV/EBITDA (x) 17.0 14.2 11.4 9.3
Source: Company, Angel Research
TM
Angel Broking Maruti Suzuki

The company is well-placed in Maruti has been playing a significant role in the motorisation of India. However, the key concern
a competitive scenario having is volume growth after a slew of competitive car launches in 2009. Nevertheless, in view of
successfully launched new having the strongest and preferred brand image in the domestic market, we believe that Maruti
products in the last two years will continue to be a dominant player in the PV segment. The company is well-positioned in a
competitive scenario having successfully launched new products in the last two years. Over and
above this, due completion of capacity addition will provide it additional support to expand in the
overseas market and increase its exports. We remain positive on Maruti.
Strongly Positioned: We expect Maruti to clock a CAGR growth of 15% in domestic volumes
over FY2007-09E. This is in line with our industry growth estimates. Growth will be mainly driven
by Maruti’s newly launched products in the A2 and A3 segments. Its timely placed diversified
fuel options in terms of diesel-Swift and LPG - WagonR-DUO and Omni with an improved tech-
nology is already catching attention and enjoys sizable position in the market. Moving up the
ladder, the company is now positioning itself in the mid size segment with the recent launch of
SX4. We believe that Maruti will maintain its marketshare of over 50% at least over the next
2-3 years.
Exhibit 1: Volume and Marketshare
Moving up the ladder, the

company is now positioning
itself in the mid size segment
with the recent launch of SX4
Exhibit 2: Product volumes

Product FY2005 FY2006 FY2007 FY2008E FY2009E CAGR(%)
A1 : Maruti 800 1,16,262 89,223 79,245 70,000 67,000 (12.9)
C: Omni, Versa 65,019 66,366 83,091 8,9,738 91,533 8.9
A2: Alto, WagonR, Zen, Swift 2,71,280 3,35,136 4,40,375 5,06,431 5,82,396 21.0
A3 : SX4, Esteem 29,637 31,939 29,697 3,8,606 50,188 14.1
Total Passenger cars 4,82,198 5,22,664 6,32,408 7,04,776 7,91,117 13.2
MUV: Gypsy, Vitara 5,204 4,374 3,221 3,000 3,000 (12.9)
Domestic 4,87,402 5,27,038 6,35,629 7,07,776 7,94,117 13.0
Export 4,8,899 34,781 3,9,295 53,048 84,877 14.8
Total Sales 5,36,301 5,61,819 6,74,924 7,60,824 8,78,994 13.1
Maruti will launch two new compact segment cars in second half of FY2009. These will include
the recently unveiled small car Splash and a new small car called A Star. The A Star is the new
small car that has been designed for the export market. The A Star will also be launched in
India. These launches together with the expected launch of the Swift sedan will drive volume
growth for Maruti in FY2009-10.
TM

Maruti having one of the most Export story to unfold: We expect Maruti’s exports to grow at a CAGR of 40% over
competitive manufacturing FY2007-09E, and exports’ contribution to Total Sales is expected to nearly double from 5.8% in
bases ensures continued and FY2007 to 12% in FY2010 Suzuki is increasing production in India to become the largest
increasing focus by parent manufacturing base by 2010. Hence, with Maruti having one of the most competitive
manufacturing bases ensures continued and increasing focus by parent, which is among the top
players globally. Also, Suzuki is in the process of shifting production from Hungary to India.
Going ahead, Maruti is expected to play a significant role in Suzuki’s global plans as well.
Maruti plans to export 1,00,000 units of its newly built export model annually. Maruti plans to
export 50,000 units of a new small car model in FY2009 to Nissan, and another 50,000 units of
the same car to Europe on its own in 2010. It is also targeting to export an additional 1,00,000
units to the non-European countries in FY2010.
Maruti along with Suzuki Building up capacities: Maruti has been operating at over 100% capacity utilisation since the
plans to invest around past eight years. Visible domestic growth, overseas supply order of 50,000 units from Nissan
Rs9,000cr over the next 3-4 and expanding footprint in the export market with the help of the parent, has resulted in Maruti
years ramping up capacity from 6,50,000 units pa., to 1,000,000 units by FY2010. Maruti along with
Suzuki plan to invest around Rs9,000cr over the next 3-4 years. This will ultimately expand
infrastructure and capability at a breath taking place.
Vast and well-entrenched domestic dealership network: Maruti has a vast dealership
network of 500 outlets covering 312 cities and a service network of 2,445 covering 1,172 cities.
For the new players it would be a formidable task to put in place such a huge network. This
gives Maruti a competitive edge over other players. The Sales Satisfaction Survey conducted
by J D Power Asia Pacific has rated Maruti as first three years in a row, which indicates it
enjoys the preferred and strong brand image at least in the domestic market. Maruti’s efforts to
come closer to its customers and meet all their needs will reinforce the trust in Brand Maruti.
Concerns
z Currency fluctuation could adversely impact the company as going ahead export's contribution
is expected to increase.
z Delay in capacity ramp up could exert pressure on supplies.
z Competition is intensifying as the global OEMs have plans to enter the Indian market, more
specifically the small car segment.
Financial Performance
Overall, better realisations and We estimate Maruti to clock a CAGR growth of 22% in revenues over FY2007-09E on the back
an improving product mix are of an estimated CAGR growth of 15% in volumes over the same period. We expect an 8% drop
the primary reasons why we in M800 volumes and a 15% and 30% CAGR growth in the volumes of both the A2 and A3
expect Maruti's revenues to segment offerings. Overall, better realisations and an improving product mix are the primary
outpace volumes reasons why we expect Maruti's revenues to outpace volumes. We expect the company to
clock a 22% CAGR growth in Operating Profit over FY2007-09E. We expect OPM to improve
from 13.6% in FY2007 to around 13.8% by FY2009E. Maruit's OPM is expected to improve on
the back of enhanced localisation and increased productivity. However, an increase in exports,
as a percentage of sales, could restrict further improvement in OPM.
We expect Maruti's EPS and Cash EPS to increase to Rs72.6 and Rs88.2 in FY2009 from
Rs54 and Rs63.4 in FY2007 respectively, despite aggressive capex undertaken by the
company. Maruti plans to fund capex through internal accruals in the next two years. This
entails no change to the existing capital structure and RoCE also remains unchanged at 23%
during FY2007-09E. We estimate Maruti's free cash flow generation to dip marginally in FY2008
and FY2009 to Rs169.4cr and Rs262.8cr, as the company would be incuring capex towards
capacity expansion (brownfield and greenfield ) and in the Suzuki Power train JV.
TM

Exhibit 3: RoE, RoCE, Free Cash Flow and Capital expenditure
Outlook and Valuation

We expect Maruti's valuation to be largely determined by its ability to maintain marketshare
amidst an uncertain interest rate regime and intensifying competition. At the CMP of Rs1,004,
the stock is available at 16.5x FY2008E and 13.8x FY2009E Earnings. We maintain a Buy
on the stock with Target Price of Rs1,260.
Exhibit 4: P/E Band
Source: C-line, Angel Research
TM
Angel Broking Maruti

Textile Suzuki
Sector
Profit & Loss Statement Rs crore Balance Sheet Rs crore

Y/E March FY2006 FY2007 FY2008E FY2009E Y/E March FY2006 FY2007 FY2008E FY2009E
Net Sales 12,058.2 14,653.9 18,057.9 21,753.2 SOURCES OF FUNDS
% chg 10.0 21.5 23.2 20.5 Equity Share Capital 144.5 144.5 144.5 144.5
Total Expenditure 10,431.6 12,663.5 15,594.8 18,751.6 Reserves& Surplus 5308.1 6709.4 8314.1 10224.0
Shareholders Funds 5,452.6 6,853.9 8,458.6 10,368.5
EBIDTA 1,626.6 1,990.4 2,463.1 3,001.6
Total Loans 71.7 630.8 630.8 630.8
(% of Net Sales) 13.5 13.6 13.6 13.8
Deffered Tax Liability (Net) 77.9 167.5 167.5 167.5
Other Income 429.2 598.4 600.0 600.0
Total Liabilities 5,602.2 7,652.2 9,256.9 11,166.8
Depreciation& Amortisation 285.4 271.4 430.0 450.0
APPLICATION OF FUNDS
Interest 20.39 37.63 54.02 65.11 Gross Block 4,955 6,147 8,147 10,147
PBT 1,750.0 2,279.8 2,579.0 3,086.5 Less: Acc. Depreciation 3,259 3,487 4,073 4,566
(% of Net Sales) 14.5 15.6 14.3 14.2 Net Block 1,695.2 2,659.7 4,073.4 5,580.7
Extraordinary Expense/(Inc.) - - - - Capital Work-in-Progress 92.0 238.9 200.0 200.0

Investments 2,051.2 3,409.2 3,585.9 3,702.4
Tax 560.9 717.9 825.3 987.7
Current Assets 3,740.9 3,845.9 4,514.5 5,438.3
(% of PBT) 32.1 31.5 32.0 32.0
Current liabilities 1,977.1 2,501.5 3,116.8 3,754.7
PAT 1,189.1 1,562.0 1,753.7 2,098.8
Net Current Assets 1,763.8 1,344.4 1,397.6 1,683.6
% chg 39.3 31.4 12.3 19.7
Total Assets 5,602.2 7,652.2 9,256.9 11,166.8
Cash Flow Statement Rs crore Key Ratios

Profit before tax 1,750.0 2,279.8 2,579.0 3,086.5 Per Share Data (Rs)
Depreciation 285.4 271.4 430.0 450.0 EPS 41.1 54.0 60.7 72.6
(Inc)/Dec in Working Capital (399.8) 419.4 (53.2) (286.0) Cash EPS 51.0 63.4 75.6 88.2
Interest (Net) - - - - DPS 3.5 4.5 5.2 6.5
Direct taxes paid 560.9 717.9 825.3 987.7 Book Value 188.7 237.2 292.7 358.8
Others 147.93 -224.74 - - Operating Ratio (%)
Cash Flow from Operations 1222.6 2028.0 2130.5 2262.8 Inventory (days) 26.7 17.8 18.0 18.0
Inc./ (Dec.) in Fixed Assets -48.6 1339.1 1961.1 2000.0 Debtors (days) 19.6 18.6 19.0 19.0
Free Cash Flow 1271.2 688.9 169.4 262.8 Creditors (days) 45.6 50.1 50.0 50.0
(Inc)/Dec in Investments (534.6) (1,358.0) (176.7) (116.5) Returns (%)
Issue of Equity - - - - ROE 21.8 22.8 20.7 20.2
Inc./(Dec.) in loans (235.9) 559.1 - - ROCE 23.9 22.5 22.0 22.9
Dividend Paid (Incl. Tax) 101.1 130.0 149.1 188.9 Dividend Payout 8.5 8.3 8.5 9.0
Others (17.3) (0.9) - - Valuation Ratio (x)
Cash Flow from Financing (319.7) 430.0 (149.1) (188.9) P/E 24.4 18.6 16.5 13.8
Others (44.7) 260.3 230.2 348.7 P/E (Cash EPS) 19.7 15.8 13.3 11.4
Inc./(Dec.) in Cash 372.2 21.2 73.8 306.1 P/BV 5.3 4.2 3.4 2.8
Opening Cash balances 1,029.4 1,401.6 1,422.8 1,496.6 EV / Sales 2.3 1.9 1.6 1.3
Closing Cash balances 1,401.6 1,422.8 1,496.6 1,802.8 EV / EBITDA 17.0 14.2 11.4 9.3
TM

Mahindra & Mahindra Buy

CMP: Rs708 Target Price: Rs952
(12 Months)
Vaishali Jajoo Value the group

Mahindra & Mahindra’s (M&M) ambitious strategies are at the verge of take off and
Tel: 022 - 4040 3800 Ext: 344 could give back recurring benefits. A view on the potential investments in its
E-mail: vaishali.jajoo@angeltrade.com subsidiaries and joint ventures is important while evaluating investment in the M&M
stock as its core business analysis. We maintain a Buy on the stock with a long-term
Stock Info outlook on its core business, diversifying product portfolio to reduce risks and value
of its investment in subsidiaries. This multi-coherent model will keep the stock at
Sector Automobile
lower downside risks despite a decline in tractor volumes and UV sales. Our SOTP
Market Cap (Rs cr) 17,391 Target Price for M&M works out to Rs952, wherein its core business fetches
Rs586 and subsidiaries Rs366 per share.
Beta 0.97 Leader in core business: M&M is a leader in tractors with a marketshare of
52 Week High / Low 1002/608
around 40% (post acquisition of Punjab Tractors). Increasing infrastructure
activities has stepped up tractor sales in India in the last three-four years. Clearly,
Avg Daily Volume 201441 M&M is the leader in the domestic utility vehicle (UV) market with a 30%
marketshare. We expect M&M to outperform the UV segment clocking a
Face Value (Rs) 10 CAGR growth of 10-11% over the next two-three years.
Exports to contribute significantly: YTD, export volume contribution to
BSE Sensex 19,035
Total Sales has risen to 14.4% in FY2007 as against around 5.5% in FY2006.
Nifty 5,695 We expect M&M's exports to grow at a better CAGR of around 16%
over FY2007-09E on the back of its aggressive move to have a presence in new
BSE Code 500520 geographies like Europe, Australia, New Zealand, South Africa, Middle East,
China, CIS, Latin America and Spain, going ahead.
NSE Code M&M
Diversifying product portfolio with potential JVs: M&M has entered into a
Reuters Code MAHM.BO joint venture (JV) with International Truck & Engine Corporation (ITEC) and Renault
for the manufacture of CVs and PVs in India. These JVs will start contributing
Bloomberg Code MM IN positively and substantially to M&M's consolidated EPS in FY2009E.
Auto Ancillary business to unfold: M&M's Auto Parts Division, Mahindra
Shareholding Pattern (%)
Systems & Technologies (MSAT), targets to grow its revenues to $1bn by
Promoters 22.7 FY2010E from the current $830mn. MSAT has done few acquisitions to expand
its operations over the last two years and is scouting around for more acquisitions,
MF / Banks / Indian FIs 31.7 which could add value, provide technology and customer access.
FII / NRIs / OCBs 35.0 Key Financials
Indian Public / Others 10.6 Y/E March (Rs cr) FY2006 FY2007 FY2008E FY2009E
Net Sales 7,989 9,628 11,146 12,481
% chg 22.3 20.5 15.8 12.0
Net Profit 647 966 966 1,059
% chg 29.6 49.2 (0.0) 9.7
OPM (%) 11.1 11.7 11.2 11.6
EPS (Rs) 27.7 40.6 39.3 43.2
P/E (x) 25.5 17.5 18.0 16.4
P/CEPS (x) 15.6 13.2 13.5 12.4
RoE (%) 22.2 27.2 22.6 20.8
RoCE (%) 17.4 17.6 15.1 16.1
P/BV (x) 5.7 4.7 4.1 3.4
EV/Sales (x) 2.1 1.7 1.7 1.4
EV/EBITDA (x) 19.1 14.7 14.9 11.9
TM
Angel Broking Mahindra & Mahindra

M&M’s ambitious strategies M&M’s ambitious strategies are on the verge of take off and give back recurring benefits. A view
are on the verge of take off and on the potential investments in its subsidiaries and joint ventures is important while
give back recurring evaluating an investment in the M&M stock as is core business analysis. It is no more a tractor
benefits or UV manufacturing company but its diversified different arms have the potential to grow at a
much faster pace and can be valued at a better price than its core business. But, being a leader
in tractors in the UV market should be the first investment rationale to be taken into consider-
ation, and we believe that M&M will benefit from relatively low penetration levels and the
government’s thrust on increasing rural and agricultural contribution to the total GDP of India.
Leader in core business
Tractors: M&M is a leader in tractors with a marketshare of around 40% (post acquisition of
M&M’s ambitious strategies Punjab Tractors, improving irrigation facilities, nearly normal monsoons, good ground water
are on the verge of take off and levels, easy availability of credit, increased player thrust and rising income from custom-hiring
give back recurring - non-farm income). Increasing infrastructure activities has stepped up tractor sales in India in
benefits the last three-four years. In view of these factors, we conservatively estimate around 6% CAGR
growth in tractor volumes over FY2007-09E for M&M. Domestic sales have declined in the last
two quarters on the back of tightening in credit by financial institutions. However, long-term
drivers remain intact and would keep volume growth intact. Even in the near term, volumes are
expected to pick up on the back of normal monsoons and higher Kharif minimum support
prices (MSPs) announced. Crop production is expected to be 2.6% yoy higher in FY2008.
Industry growth driver: Even though tractor penetration in India was estimated at around 20
units per 1,000 hectares of the net sown area as compared with the world average of around 21
units per 1,000 hectares, adjusting for the average global hp (which is significantly higher than
the average Indian hp of 35), penetration in India seems to be fairly lower, which provides ample
potential for the Indian tractor players to increase their sales.
Utility vehicles: M&M is a clear leader in the domestic utility vehicle (UV) market with 30%
marketshare. We expect the company to outperform the UV segment clocking a CAGR growth
of 10-11% over the next two-three years. We believe that the company’s strong product portfolio
caters to the different user segments including taxis, rural, urban and the semi-urban
Post the success of Scorpio Exhibit 1: Volume and Marketshare

and Bolero keeping pace with
the changes in requirements
and scenario, M&M is also
expected to launch an all new
platform called Ingenio in
FY2008
Source: Industry, Cris Infac, Angel Research, Note: Marketshare in Tractor segment for the period of Jan 07 to
Oct 07 is an average market share for the period as monthly data is not available
segments, which is taking care of its ability to outperform industry growth. Further, post the
success of Scorpio and Bolero keeping pace with the changes in requirements and scenario,
M&M is also expected to launch an all new platform called Ingenio in FY2008, which will help it
retain its leadership position in the UV segment.
Industry growth driver: UV industry sales are likely to grow on the back of growth in the
TM

commercial segment from tour operators and BPOs. Personal vehicle segment growth is ex-
pected to be in line with growth in the mid-size and large car segments, aided by new launches.
Three-wheeler segment: We believe that the competitive pressure in three-wheeler segment
will be limited as a large number of players have entered or are planning to enter the segment
in the near future. We conservatively estimate M&M’s three-wheeler segment to clock a CAGR
growth of 6-7% over FY2007-09E.
Exports to contribute significantly: M&M has been recording strong growth in exports in
Aggressive move to have a both tractors and UVs during FY2008. YTD the company’s export volume contribution to total
presence in new geographies sales has risen 14.4% in FY2007 as against around 5.5% in FY2006. We expect the company’s
like Europe, Australia, New exports to grow at a better CAGR of around 16% over FY2007-09E on the back of its aggressive
Zealand, South Africa, Middle move to have a presence in new geographies like Europe, Australia, New Zealand, South Africa,
East, China, CIS, Latin Middle East, China, CIS, Latin America and Spain.
America and Spain
Exhibit 2: Product Volume

Auto 12,2,071 1,24,997 1,35,707 1,62,848 1,82,390 10.6
Tractor 62,727 81,556 99,797 1,02,791 1,13,070 15.9
Three Wheelers 22,953 22,419 33,718 36,415 38,965 14.1
Total Volume 2,07,751 2,28,972 2,69,222 3,02,055 3,34,425 12.6
M&M is looking at de-risking Diversifying product portfolio with potential JVs: M&M has entered into a joint venture (JV)
its product portfolio through with International Truck & Engine Corporation (ITEC) and Renualt for the manufacture of CVs
segment diversification. and PVs in India. These JVs will start contributing positively to M&M’s consolidated earnings in
FY2009E and the potential upside is expected to be substantial. Thus, M&M is looking at
de-risking its product portfolio through segment diversification.
Exhibit 3: JVs and Alliances

CompanyM&M Holding Investment (Rs cr) Remark
ITEC 51% 400 * Become a full-line CV company in India.
* Become a full service provider of Engineering Services.
* Establish Contract Sourcing business.
* Selling & Distribution in India through existing M&M
dealers and new JV dealers.
* Products to be branded as Mahindra International.
Renault 51% 700 * Capacity 500,000 units.
* Localisation 50%.
* Production is expected to begin in mid 2009.
* JV will manufacture Renault products to address the
Indian market.
* Renault will bring in its engineering skills while M&M will
contribute with its large supplier base and its sales
network.
TM

The M&M-Renault JV has launched its first car the Logan in India. The Logan is a low-frills car
platform that Renault has developed specifically for emerging economies. It is currently being
sold in 51 countries around the world. We believe that the localisation content of ‘Logan’ is 55%
due to which profitability in FY2008 will be relatively muted. The company proposes to take the
localisation content up to 70% by FY2009E. Success of the Logan is crucial for M&M given its
aspirations in the passenger vehicle market. A successful launch will translate into greater
traction for M&M’s second joint venture in cars with Renault and Nissan, which is expected to
commence production in 2009.
MSAT has done few Auto Ancillary business to unfold: M&M's Auto Parts Division, Mahindra Systems &
acquisitions to expand the Technologies (MSAT), targets to improve its revenues to $1bn by FY2010E from the current
Division in the last two years , $800mn. The company is looking at product development through acquisitions in forging,
which could add value, design and engineering software solutions to add value to its offering. The company has made
provide technology and strong headway in positioning MSAT, a fully equipped auto component entity. MSAT has done
customer access few acquisitions to expand the Division in the last two years and is scouting around for more
acquisitions, which could add value, provide technology and customer access.
The increase in value of its Potential investment in subsidiaries: M&M has substantial investments on its Books
investments will restrict the including in some of its key subsidiaries, some of which are performing much better than the
downturn of the stock on the parent. The company has invested in other Mahindra group companies too. We believe that
bourses M&M's Non-Automotive subsidiaries like Tech Mahindra, Mahindra Financial Services (MMFSL)
and Mahindra Gesco will not only add significantly to its consolidated financials, but will
enhance valuations too. The company has already announced listing of its highly profitable
subsidiary Mahindra Holidays in the next 2-3 months. We expect M&M's stock to do well
despite weakening UVs and tractor sales if the overall market is strong. In this case, the
increase in value of its investments will restrict the downturn of the stock on the bourses.
Concerns
z Too many diversified projects could reduce the hold on core business.
z Adverse changes in the Interest Rate scenario and credit flow.
z Competition.
M&M's Auto, Tractor and We estimate M&M to clock around 13% CAGR growth in revenues over FY2007-09E on the
Three-wheeler segments to back of an estimated 11.5% CAGR growth in volumes over the mentioned period. We estimate
clock a CAGR growth of 16%, the company's Auto, Tractor and Three-wheeler segments to clock a CAGR growth of 16%,
6.4% and 7.5% respectively, in 6.4% and 7.5% respectively, in volumes over FY2007-09E. We estimate M&M to register a
volumes over FY2007-09E 12.6% CAGR growth in Operating Profits over FY2007-09E. We expect OPMs to be stable at
11.6% in FY2009E. The company's OPM is expected to improve thereafter on the back of
increased localisation and higher productivity. However, increasing exports, as a percentage of
sales, could restrict further improvement in OPM.
For FY2007, the company's consolidated revenues stood at Rs17,617cr (Rs12,335cr), an increase
of 42.8%. Consolidated PAT was at Rs1,582cr (Rs1,070cr), a growth of 48%. M&M reported
consolidated EPS of Rs63.3 for FY2007.
We expect M&M's EPS and Cash EPS to improve to Rs43.2 and Rs57.3 in FY2009 from
Rs40.6 and Rs53.7 in FY2007, respectively. This is despite the aggressive capex program
undertaken by the company. However, the significant capital expenditure is resulting in M&M's
RoE and RoCE declining in FY2008E. However, capacity expansions are crucial to tap the
upcoming opportunities in the medium to long term. We estimate M&M's free cash flow generation
to dip in FY2008 and FY2009 as the company would be investing in brownfield and greenfield
capacity expansion, viz., joint venture with ITEC and Renault-Nissan.
TM


Valuation
High growth potential of M&M’s subsidiaries is expected to unlock actual value of the stock.
Our SOTP Target Price for M&M works out to Rs952 wherein its core business fetches
Rs586 and subsidiaries Rs366. We maintain a Buy on the stock.
Exhibit 5: SOTP Valuation
Key Subsidiaries No. of Shares held (cr) CMP (Rs) Value (Rs cr)
Mahindra Financial Services 5.8 240 1,398
Mahindra GESCO 1.3 567 712
Tech Mahindra 5.8 1,234 7,108
Other major subsidiaries at BV 1,144
Total Value 10,362
No of share o/s of M&M (cr) 24
Per share value of Investments 366
Intrinsic value of M&M 586
M&M's Target Price with investments in subsidiaries (Rs) 952
Exhibit 6: P/E Band
TM
Angel Broking Mahindra

Textile
& Mahindra
Sector

SOURCES OF FUNDS
Net Sales 7,988.8 9,627.7 11,145.9 12,481.1
Equity Share Capital 233.4 238.0 245.4 245.4
% chg 22.3 20.5 15.8 12.0
Reserves& Surplus 2,675.5 3,314.9 4,035.9 4,850.6
Total Expenditure 7,255.4 8,787.4 9,975.6 11,108.2
EBIDTA 885.7 1,125.9 1,245.3 1,447.9 Total Loans 883.4 1,636.0 2140.7 2,038.4
(% of Net Sales) 11.1 11.7 11.2 11.6 Deffered Tax Liability (net) 146.8 19.8 19.8 19.8
Other Income 185.4 331.9 300.0 300.0 Total Liabilities 3,939.0 5,208.7 6,441.8 7,154.1
Gross Block 2,885.5 3,229.7 4,029.7 4,368.4
Interest (18.40) (67.45) (22.29) (24.96)
Less: Acc. Depreciation 1,510.3 1,639.1 2,045.1 2,217.0
PBT 889.5 1,315.7 1,297.6 1,475.8
Net Block 1,375.3 1,590.6 1,984.6 2,151.4
(% of Net Sales) 11.1 13.7 11.6 11.8 Capital Work-in-Progress 179.2 280.6 160.0 150.0
Extraordinary Expense/(Inc.) 210.0 102.8 50.0 50.0 Investments 1,669.1 2,237.5 2,445.0 211.5
Tax 242.4 350.1 357.1 391.7 Current Assets 2,761.4 3,748.2 4,564.2 7,604.4
(% of PBT) 27.3 26.6 27.5 26.5
Net Current Assets 697.4 1,082.5 1,832.2 4,616.3
Adj. PAT 647.1 965.6 965.5 1,059.1
Misc Expenditure 18.1 17.6 20.0 25.0
% chg 29.6 49.2 0.0 9.7
Total Assets 3,939.0 5,208.7 6,441.8 7,154.1

EPS 27.7 40.6 39.3 43.2
Depreciation 200.0 209.6 270.0 297.0
Cash EPS 45.3 53.7 52.4 57.3
Interest(1-T) 483.0 1,727.4 579.6 649.0
DPS 10.0 14.0 12.0 12.0
(Inc)/Dec in Working Capital 51.2 (210.7) 1,733.5 2,536.4 Book Value 124.6 149.3 174.5 207.7
Direct taxes paid 242.4 350.1 357.1 391.7 Operating Ratio (%)
Cash Flow from Operations 1,488.9 3,216.0 106.6 (456.2) Inventory (days) (6.7) (0.4) (1.0) (2.0)
Inc./ (Dec.) in Fixed Assets 254.3 445.6 679.4 328.7 Debtors (days) 29.1 26.6 27.0 28.0
Creditors (days) 69.5 73.9 70.0 70.0
Free Cash Flow 1,234.6 2,770.4 (572.8) (784.9)
Returns (%)
(Inc)/Dec in Investments 479.3 568.4 207.5 (2,233.5)
RoE 22.2 27.2 22.6 20.8
Issue of Equity 121.8 4.6 7.3 - RoCE 17.4 17.6 15.1 16.1
Inc./(Dec.) in loans (169.2) 752.6 504.7 (102.3) Dividend Payout 27.2 31.2 29.0 26.5
Dividend Paid (Incl. Tax) 278.2 324.7 294.5 294.5 Valuation Ratio (x)
Cash Flow from Financing 710.0 1,650.4 1,014.0 (2,041.3) P/E 25.5 17.5 18.0 16.4
P/E (Cash EPS) 15.6 13.2 13.5 12.4
Inc./(Dec.) in Cash 524.7 1,120.1 (1,586.8) 1,256.4
P/BV 5.7 4.7 4.1 3.4
Opening Cash balances 337.8 862.4 1,982.5 395.7
EV / Sales 2.1 1.7 1.7 1.4
Closing Cash balances 862.4 1,982.5 395.7 1,652.2 EV / EBITDA 19.1 14.7 14.9 11.9
TM

Tata Motors Buy

(12 Months)
Vaishali Jajoo Giant on the move

Tel: 022 - 4040 3800 Ext: 344 Tata Motors is gearing up for the next league of CVs and PVs and has been
progressively beefing up its competitive positioning through acquisitions and JVs.
E-mail:vaishali.jajoo@angeltrade.com
Short-term cyclical pressures in the CV segment are exerting pressure on the cash
flow. We believe Tata's next generation product will have a big impact on industry and
Stock Info will help it re-define itself from being a CV manufacturer to becoming an automobile
Sector Automobile manufacturer. In the long term, investments in subsidiaries would unlock real value
for the stock. Based on SOTP valuation, we have arrived at a Target Price of Rs880
Market Cap (Rs cr) 26,706 for the stock. We have valued the core business at Rs620 or 7x FY2009E
EV/EBITDA equivalent to 11x FY2009E P/E. Value of the subsidiaries and embedded
Beta 0.99
value works out to Rs260 per share. The current weakness in the stock due to
52 Week High / Low 975/616 near-term growth concerns is an excellent opportunity to Buy the stock, with a
long-term perspective.
Avg Daily Volume 346234
Advantageously positioned: The company has six new platforms across
Face Value (Rs) 10 segments, which are expected to be launched in the next couple of years
at regular intervals. This is expected to help the company renew its product
BSE Sensex 19,035 portfolio, have segment and technological diversification and arrest marketshare
declines. A real-time example is its successful product ACE. Successful launch
Nifty 5,695
of its Rs 1 lakh car could set a benchmark in the PV industry.
BSE Code 500570 Tying up for technology and market: Successful tie ups with MNCs across
segments have given a sense of the company's aggressive capex plans of
NSE Code TATAMOTORS Rs.12,000cr. These JVs are long-term positives for Tata Motors and are expected
Reuters Code TAMO.BO
to significantly improve its competitive position in the domestic market. Tata
Motors expects its export contribution to increase from the current 18% to 25%
Bloomberg Code TTMT IN by FY2011 on the back of its global launches.
Investment Portfolio: Tata Motors has strategic investments in several
subsidiaries, which have attained maturity in their respective businesses and
Promoters 33.4
have clocked robust performance. Management has also shown interest in
unlocking value in subsidiaries. Investment value along with subsidiary companies
MF / Banks / Indian FIs 17.6 accounts for almost one-fourth of Tata Motors current valuation.
Net Sales 20,293 27,062 30,213 34,556
% chg 17.7 33.4 11.6 14.4
Net Profit 1,529 1,914 1,985 2,138
% chg 23.6 25.2 3.8 7.7
OPM (%) 10.7 10.5 10.7 10.5
EPS (Rs) 39.9 49.6 51.5 55.5
P/E (x) 17.4 14.0 13.5 12.5
P/CEPS(x) 12.9 10.7 10.3 9.3
P/BV (x) 4.8 3.9 3.3 2.9
RoE (%) 27.7 28.0 24.6 22.8
RoCE (%) 18.2 19.3 17.4 16.0
EV/Sales (x) 1.2 0.9 0.8 0.7
EV/EBITDA (x) 13.0 10.0 8.8 7.8
TM
Angel Broking Tata Motors

We believe Tata’s next Tata Motors is gearing up for the next league of commercial and passenger vehicles, and has
generation product will have been progressively beefing up its competitive positioning through acquisitions and JVs.
a big impact on industry and Short term cyclical pressures in the CV segment is surely exerting pressure on the company’s
will help it re-define itself from cash flows. However, the giant is on the move slowly but steadily. The company is not only
being a CV manufacturer to expanding capacities but is also broadening its focus on the global market. We believe Tata’s
becoming an automobile next generation product will have a big impact on industry and will help it re-define itself from
manufacturer as well being a CV manufacturer to becoming an automobile manufacturer as well. In the long term,
investments in subsidiaries would unlock real value for the stock.
Advantageously positioned: Tata Motors has initiated some strategic measures to beef up
its competitive positioning in the market. The company has six-seven new platforms across
segments, which are expected to be launched in the next couple of years at regular intervals.
This is expected to help the company renew its product portfolio, have segment and
technological diversification and arrest marketshare declines in the short term. A real time
example is its successful product, ACE. The company has also grabbed attention of the global
majors with the announcement of its Rs1lakh car. Successful launch of this could well set a
benchmark in the PV industry.
Exhibit 1: Truck and Bus Volumes and Marketshare
The company has six-seven

new platforms across
segments, which are expected
to be launched in the next
couple of years at regular
intervals
Exhibit 2: Product volumes

M&HCV 1,35,337 1,36,850 1,83,592 1,85,428 1,96,554 9.8
LCV 74,253 1,08,104 1,45,763 1,67,627 1,92,772 26.9
Total CVs 2,09,590 2,44,954 3,29,355 3,53,055 3,89,325 16.7
UVs 37,032 39,783 48,599 52,487 58,785 12.2
Cars 1,52,943 1,69,101 1,91,934 207,289 2,38,382 11.7
Total PVs 1,89,975 2,08,884 2,40,533 2,59,776 2,97,167 11.8
Total Volume 3,99,565 4,53,838 5,69,888 6,12,831 6,86,493 14.5
Exports (Inc above ) 30,496 50,151 49,018 61,283 75,514 25.4
Tata Motors plans to invest Ambitious expansion plans: The company plans to invest Rs12,000cr towards capacity
Rs12,000cr towards capacity addition and new product launches over the next three-four years. This will help the company to
addition and new product open up new markets in the long run. To fund this capex, Tata Motors recently issued zero
launches over the next coupon foreign currency convertible alternative reference securities (CARS) of US $450mn,
three-four years convertible at Rs960.96 per share where outstanding CARS would be redeemable at 31.8%
premium on maturity.
TM

Exhibit 3: Capital expenditure

Capex Rs8,000cr on new product development and Rs4,000cr on capacity expansion
Segment Passenger Vehicle Commercial Vehicle
Current capacity 2,25,000 cars + 60,000 UV 2,65,000
Capacity after addition 3,00,000 +2,50,000 small car+ 90,000 UV 5,11,000 including 200,000 ACE
Products New Indica platform ACE Passenger Variant
Rs1,000,00 car Global Truck
New product range jointly with Fiat Global Pick-up
Successful tie ups with MNCs Tying up for technology and market: Successful tie ups with MNCs across segments have
across segments have given a given a sense of the company’s aggressive capex plans. These JVs are long-term positives for
sense of the company’s Tata Motor and are expected to significantly improve its competitive position in the domestic
aggressive capex plans market. It will also pave the way for better access to new products and technology for Tata
Motors and give it access to the global markets. Tata Motors expects its export
contribution to increase from the current 18% to 25% by 2010 on the back of its global launches.
Exhibit 4: Joint Ventures and Alliances

Joint Tata Motors' Product/Segment Focus Remarks
Venture share
FIAT 50% Fiat and Tata vehicles and * 1,00,000 cars and 2,00,000 engines
the Fiat branded cars * Distribution through the Tata-Fiat dealer network
* Investment of Rs4,000cr
IVECO MoU Commercial Vehicle * To analyse feasibility of co-operation in
engineering, manufacturing, sourcing
* Distribution of products in the CV
space across markets
Morcopolo 51% Buses and Coaches * Initial capacity of 7,000 units annually
* Investment of Rs150-200cr
* Targeting Domestic and Export market
Thonburi Automotive * Focus on Thailand and nearby country
Company of Thailand 70% Low tonne pick-up trucks * Assembly Plant at an investment of Rs120cr
Management intends to Investment Portfolio: Tata Motors has strategic investments in several subsidiaries, which
commence the process of have attained maturity in their respective businesses and have clocked robust performance.
de-merging its subsidiaries by Management has also shown interest in unlocking value in subsidiaries either through
end FY2008 induction of a strategic partner or through public listing of the same going ahead when these
businesses are able to garner more value. Management intends to commence the
process of de-merging its subsidiaries by end FY2008 with HV Transmissions and HV Axles
being the businesses to be initially listed. Investment value along with subsidiary companies
accounts almost one-fourth of Tata Motors’ current valuation.
Concerns
z Lack of moderate demand will impact earnings negatively as the company has chalked out
significant capex.
z Fluctuation in Interest and Freight rates.
z Aggressive move by the Railways and new competitors.
TM

OPM is expected to be stable We expect Tata Motors’ revenues to grow at a CAGR of around 12% over FY2007-09E on the
at around 10.5% over back of an estimated 10% CAGR growth in volumes over the mentioned period. Further, we
FY2007-09E expect new product launches to boost volumes and improve realisations of the company.The
company’s Operating Profits are expected to grow at a CAGR of 13.2% over FY2007-09E.
OPM is expected to be stable at around 10.5%. We estimate the company’s Profits to grow at
a CAGR of 6.7% in the mentioned period.
In FY2007, the company’s consolidated revenues stood at Rs9,759cr (Rs7865cr), an increase
of 24.1%. Consolidated PAT at Rs649.8cr (Rs523cr) recorded a growth of 24.3%. Tata Motors
reported consolidated EPS of Rs56.3 for FY2007.
We expect the company’s standalone EPS and Cash EPS to increase to Rs55.5 and Rs74.7
respectively, in FY2009E from Rs49.6 and Rs64.9 in FY2007 despite the aggressive capex.
Nonetheless, the significant capex is resulting in a decline in the company’s RoE and RoCE.
However, capacity expansions are crucial to capitalise on the huge opportunities likely to emerge
in the medium to long term. We estimate the company’s free cash flow generation to turn
positive once again in FY2008 to around Rs721.7cr and subsequently improve in FY2009. The
recently issued CARS would also help the company improve its cash flow.
TM

Valuation
Based on SOTP valuation, we arrived at a Target Price of Rs880 for the stock. We have valued
the core business at Rs620 or 7x FY2009E EV/EBITDA equivalent to 11x FY2009E P/E. The
reduction in our Target multiple reflects the rising risks to growth in both commercial vehicles
and passenger cars in the near-term. Value of the subsidiaries and embedded value works out
to Rs260 per share. The current weakness in the stock due to near-term growth
concerns is an excellent opportunity to Buy the stock with a long-term perspective.
Exhibit 6: P/E Band
TM
Angel Broking Textile

Tata Motors
Sector

% chg 17.7 33.4 11.6 14.4 Equity Share Capital 382.9 385.4 385.4 385.4
Total Expenditure 18,119.4 24,231.9 26,979.8 30,927.2 Reserves& Surplus 5,154.2 6,484.3 7,707.9 9,002.8
EBIDTA 2,173.9 2,829.6 3,232.7 3,628.3 Shareholders Funds 5,537.1 6,869.8 8,093.3 9,388.2
(% of Net Sales) 10.7 10.5 10.7 10.5 Total Loans 2,936.8 4,009.1 6,009.1 7,509.1
Other Income 693.9 693.9 500.0 500.0 Deffered Tax Liability (net) 622.5 786.8 973.4 1,174.2
Depreciation& Amortisation 520.9 586.3 614.7 740.5 Total Liabilities 9,096.5 11,665.7 15,075.9 18,071.6
Interest 293.5 368.5 453.2 518.3 APPLICATION OF FUNDS
PBT 2,053.4 2,568.8 2,664.9 2,869.5 Gross Block 7,971.6 8,775.8 10,418.1 12,341.3
(% of Net Sales) 10.1 9.5 8.8 8.3 Less: Acc. Depreciation 4,401.5 4,894.5 5,509.2 6,249.7
Extraordinary Expense/(Inc.) 145.4 36.4 - - Net Block 3,570.0 3,881.3 4,908.9 6,091.6
Tax 524.5 659.7 679.5 731.7 Capital Work-in-Progress 951.2 2,513.3 3,125.4 3,702.4
(% of PBT) 25.5 25.7 25.5 25.5 Investments 2,015.2 2,477.0 3,015.2 3,614.3
PAT 1,528.9 1,909.0 1,985.3 2,137.8 Current Assets 9,487.8 10,141.8 12,158.9 14,184.4
% chg 23.6 24.9 4.0 7.7 Current liabilities 6,941.9 7,357.8 8,132.5 9,521.1
Ad. PAT 1,383.5 1,877.1 1,985.3 2,137.8 Net Current Assets 2,546.0 2,784.1 4,026.4 4,663.4
% chg 14.1 35.7 5.8 7.7 Total Assets 9,082.3 11,655.6 15,075.9 18,071.6

(Inc)/Dec in Working Capital 953.7 1.9 472.9 1,034.1 Cash EPS 53.5 64.9 67.5 74.7
Interest (Net) 114.9 103.4 403.2 468.3 DPS 13.5 15.0 15.0 17.0
Other Current Assets (3,155.6) (343.6) (500.0) (600.0) Operating Ratio (%)
Cash Flow from Operations (37.3) 2,257.1 2,976.1 3,780.7 Inventory (days) 36.2 33.7 34.5 34.1
Inc./ (Dec.) in Fixed Assets 61.5 2,366.4 2,254.4 2,500.1 Debtors (days) 12.9 10.5 12.2 13.0
Free Cash Flow (98.8) (109.3) 721.7 1,280.6 Creditors (days) 103.0 80.8 81.7 84.7
(Inc)/Dec in Investments 896.9 (461.9) (538.2) (599.1) Returns (%)
Others (836.5) 230.0 250.0 250.0 RoE 27.7 28.0 24.6 22.8
Issue of Equity 375.9 110.2 - - RoCE 18.2 19.3 17.4 16.0
Inc./(Dec.) in loans 441.4 1,072.3 2,000.0 1,500.0 Dividend Payout 33.9 30.2 29.1 30.6
Dividend Paid (Incl. Tax) 515.6 587.7 676.3 669.8 Valuation Ratio (x)
Interest Paid 293.5 368.5 453.2 518.3 P/E 17.4 14.0 13.5 12.5
Cash Flow from Financing 8.2 226.3 870.5 311.9 P/E (Cash EPS) 12.9 10.7 10.3 9.3
Inc./(Dec.) in Cash (30.1) (114.9) 1,304.0 1,243.4 P/BV 4.8 3.9 3.3 2.9
Opening Cash balances 2005.5 1975.4 1860.5 3164.5 EV / Sales 1.2 0.9 0.8 0.7
Closing Cash balances 1975.4 1860.5 3164.5 4407.9 EV / EBITDA 13.0 10.0 8.8 7.8
TM

Bajaj Auto Buy

CMP: Rs2,336 Target Price: Rs2,746
(12 Months)
Vaishali Jajoo Value in investments but will Exceed Growth!!!!!

Tel: 022 - 4040 3800 Ext: 344
Bajaj Auto (BAL) is back to tap the growth and enhance marketshare with its new
launch in the Executive segment. The company's strategy has been to tap the higher
E-mail: vaishali.jajoo@angeltrade.com bike segment where growth and realisations are better. The company is back again
in the limelight with its new launch, 'XCD', in the above 125cc segment. We believe
Stock Info the company is positioning itself in line with its strategy of 'value and price product'. In
the three-wheeler segment also BAL is countering intense competition. However, the
Sector Automobile
company's potential investments in its Insurance and Finance arms are doing well,
Market Cap (Rs cr) 23,638 which are expected to unfold value in the long run.Our SOTP Target Price based on
FY2009 estimates works out to Rs2,746. We maintain a Buy on stock.
Beta 0.62
XCDs ….hope to drive: The company expects its new 125CC motorcycle XCD
52 Week High / Low 3172/2063 to deliver market share gains and improve profitability over the next year. Any
cannibalization from the 'Discover 135CC' and the 'Platina' would be offset by
Avg Daily Volume 80101 market share gains from Hero Honda by FY09, in Bajaj's view. Bajaj is reiterating
Face Value (Rs) 10
its focus on 125CC and above motorcycles going forward.
New initiative to diversify and beat competition: BAL has lined up new
BSE Sensex 19,035 launches like a six-seater 3W 'Mega', a low tonnage goods 4W vehicle similar to
Tata Motors' Ace by FY2010. The company is also in talks with Renault-Nissan
Nifty 5,695
for a $3,000 small car product manufacturing plant in India. All these initiatives
BSE Code 500490 should pay off in the long run.
Export performance to further improve: BAL is targeting 30-35% of Revenues
NSE Code BAJAJAUTO from Exports over the next three years, which is currently 16%. In its bid to tap
Reuters Code BJAT.BO the overseas market, BAL has already initiated steps and expanding its footprint
in countries like Indonesia,Nigeria, Columbia, Sri Lanka and Iran. Bajaj is targeting
Bloomberg Code BJA IN Exports to touch 35% of Total Revenues by FY2010.
Insurance and other subsidiaries have substantial value: Bajaj Allianz Life
has not only maintained its position as the second largest private life insurer, it
Promoters 30.0 has also improved its marketshare despite intense competition. We have
arrived at Rs663 per share value for BAL's Insurance arm based on 20x NBAP
MF / Banks / Indian FIs 23.0 for its Life Insurance business and 18x its General Insurance business.
Net Sales 7,488 9,520 10,896 12,778
% chg 30.3 27.1 14.4 17.3
Net Profit 1,102 1,307 1,394 1,608
% chg 43.1 18.6 6.7 15.4
OPM (%) 15.4 15.1 15.2 15.4
EPS (Rs) 108.9 129.1 137.8 159.0
P/E (x) 21.5 18.1 17.0 14.7
P/CEPS (x) 18.3 15.8 14.8 12.9
RoE (%) 23.1 23.6 21.7 21.7
RoCE (%) 15.2 17.2 17.9 19.0
P/BV (x) 5.0 4.3 3.7 3.2
EV/Sales (x) 3.5 2.8 2.5 2.1
EV/EBITDA (x) 23.0 18.6 16.2 13.5
TM
Angel Broking Bajaj Auto

We believe BAL is positioning Bajaj Auto (BAL) is back to tap the growth and enhance marketshare with its new launch in the
itself in line with its strategy Executive segment. The company’s strategy has been to tap the higher bike segment where
of ‘value and price product’ growth and realisations are better. The company is back again in the limelight with its new
launch, XCD, in the above 125cc segment. We believe the company is positioning itself in line
with its strategy of ‘value and price product’. We believe that BAL’s closest rival, Hero Honda
(HH), may find the going tough particularly in this segment. HH may not be able to offer its
products at aggressive pricing points as it is already facing pressure at the operating level. As
for BAL, similar offerings from TVS and HMSI could threaten its position in the two-wheeler
space. In the three-wheeler segment also BAL is countering intense competition. However, the
company’s potential investments in its Insurance and Finance arms are doing well, which are
expected to unfold value in the long run.
XCDs ….hope to drive: The company expects its new 125cc motorcycle XCD to deliver
marketshare gains and improve profitability over the next year. BAL expected volumes to reach
50,000 units per month by December 2007. However, XCD sales crossed 63,000 units within
two months of launch, leading to Bajaj Auto deciding to increase the manufacturing capacity of
the bike from 50,000 units to 75,000 units in November 2007. BAL is reiterating its focus on
125cc and above motorcycles going forward. BAL believes that going forward industry sales
mix will shift in favour of 125cc+ motorcycles and is aiming at upgrading 100cc customers to
125cc by offering superior features at similar price points. BAL has stated that currently 100cc
bikes account for 60% of industry volumes but only 35% of industry profits, hence it would
focus on the 125cc+ bikes going forward.
BAL has stated that currently Exhibit 1: Volume and Marketshare
100cc bikes account for 60%
of industry volumes but only
35% of industry profits, hence
it would focus on the 125cc+
bikes going forward

Product FY2005 FY2006 FY2007 FY2008E FY2009ECAGR (%)
Motorcycles 14,49,677 19,12,224 23,85,995 25,29,155 28,32,653 18.2
Geared Scooters 1,02,575 62,860 5,253 - -
Ungeared Scooters 30,931 52,612 13,765 23,401 3,0421 (0.4)
Step thrus 19,165 870 - - -
Total Two Wheelers 16,02,348 20,28,566 24,05,013 25,52,555 28,63,074 15.6
Three Wheelers 2,21,987 2,52,006 3,24,220 3,27,462 3,53,659 12.3
Grand Total 18,24,335 22,80,572 27,29,233 28,80,017 32,16,733 15.2
Export out of above 1,96,710 2,50,204 4,38,768 5,70,398 7,12,998 38.0
TM

BAL is in talks with New initiative to diversify and beat competition: BAL has lined up new launches like a
Renault-Nissan for a $3,000 six-seater 3W ‘Mega’ to counter the unregulated rural 3W market and a CNG version of cargo
small car product 3Ws. BAL will also be launching a low tonnage goods 4W vehicle similar to Tata Motors Ace
manufacturing plant in India by FY2010. This will be followed by a passenger version of the vehicle. Bajaj has developed new
three-wheeler models scheduled for launch over the next few quarters. We believe that some of
these products would also find acceptance in the export markets. However, due to the high
base effect, we expect BAL’s three-wheeler volumes to be flat in FY2008. The company is also
in talks with Renault-Nissan for a $3,000 small car product manufacturing plant in India. All
these initiatives should pay off in the long run.
BAL is targeting 30-35% of Export performance to further improve: BAL is targeting 30-35% of Revenues from Exports
Revenues from Exports over over the next three years, which is currently 16%. In its bid to tap the overseas market, BAL
the next three years, which is has already initiated steps including plans to set up an Assembly operation in Indonesia
currently 16% predominantly for three wheelers and high-end-motorcycles. Bajaj Auto Indonesia, BAL’s
majority owned subsidiary, commenced operation during Q3FY2007. BAL has also begun
selling motorcycles in Nigeria since Q2FY2007. BAL has forayed into Nigeria with a more
rugged version of the Boxer. Currently, it is in the process of setting up an Assembly line for
two-wheelers in Nigeria. The company is also expanding its footprint in countries like Columbia,
Sri Lanka and Iran. Bajaj is targeting Exports to touch 35% of Total Revenues by FY2010.
BAL plans to increase its Capacity expansion to fuel potential volume growth: BAL plans to increase its capacity
capacity to 5.1mn units from to 5.1mn units from the current 3.5mn units over the next three years. It is also setting up a
the current 3.5mn units over plant in Uttarakhand for the manufacture of motorcycles. Total capacity of the plant will be 1mn
the next three years units pa., which will be increased in a phased manner. BAL is also planning a
Greenfield project for three-wheelers and light cargo four-wheelers in Chakan, Pune, which is
expected to witness strong demand in the domestic market on account of the emerging hub
and spoke transportation model. The company plans to spend Rs1,500cr towards expansion,
R&D, new model developments and pro biking showrooms over the next three years. Funding
will be entirely from internal accruals. The company needs to expand capacity as it has had to
deal with supply shortages for some time now.
BAL has announced De-merger plan: BAL has announced de-merger of its Auto and Finance businesses which
de-merger of its Auto and entails setting up two 100% subsidiaries viz., Bajaj Holdings & Investment (BHIL) and
Finance businesses, which Bajaj Finserv (BFL). This far only three shareholders have raised objections to the
entails setting up two 100% demerger - one being Shishir Bajaj brother of Rahul Bajaj - Chairman of BAL, and two other
subsidiaries small shareholders. BAL expects the court ruling to come in its favour and expects the new
companies to get listed by the end of FY2008. This is a deviation from the previously conveyed
timeline of January 2008.
Exhibit 3: Plan of De-merger
TM

Bajaj Allianz Life has not only Insurance and other subsidiaries have substantial value: BAL’s Insurance business was
maintained its position as the given premium valuation in the market prior to the disclosure made by the company.
second largest private life Considering the strong growth in the company’s life insurance business along with the higher
insurer, it has been able to NBAP margin of over 20%, we expect Bajaj Allianz Life’s valuation to increase. Bajaj Allianz Life
improve its marketshare has not only maintained its position as the second largest private life insurer, it has been able
despite intense competition to improve its marketshare despite intense competition. We have arrived at Rs663 per share
value for BAL’s Insurance arm based on 20x NBAP for its Life Insurance business and 18x its
General Insurance Business. We have assumed BAL’s 26% economic interest in Bajaj Allianz
Life as against 51% economic interest.
Concerns
z If the new launch of the 125cc bike, XCD, fails to garner marketshare from existing player
and below the 125cc segment.
z Further increase in Interest rate.
BAL has set an ambitious We expect BAL's Net Sales to grow at a CAGR of 16% on the back of 9% estimated growth in
target to increase its OPM to volumes during FY2007-09E. We estimate realisations to grow at a CAGR of 7% over the same
20% levels over the next period. We estimate revenues to outpace volumes following better realisations and product
couple of years mix. We estimate BAL’s Operating Profits to grow at a CAGR of 17% over FY2007-09E, while
OPMs would improve from 15.1% in FY2007 to around 15.4% by FY2009E. BAL has set an
ambitious target to increase its OPM to 20% levels over the next couple of years. This is in line
with the company’s policy to target Profits to enhance shareholders’ value. We estimate BAL’s
PAT to grow at a CAGR of 11% over the mentioned period.
We expect the company’s RoCE to improve as the incremental cash generated will be utilised
for capex. We expect BAL to fund its capex through internal accruals requiring no changes to
its existing capital structure. We expect BAL to invest Rs1,500cr towards capacity addition in
India and for the assembly plant in Indonesia and Nigeria. We expect BAL’s free cash flow
generation to improve in FY2008E and FY2009E.
TM

The higher margin bike will Valuation

help the company suppress We expect Bajaj’s two-wheeler volumes to pick up in the second half of FY2008 on the back of
the input cost pressure the new launch in the 125cc segment. The higher margin bike will help the company suppress
the input cost pressure. We estimate BAL’s OPMs to further improve in 2HFY2008 as volumes
of the new 125cc bike starts coming in. Our SOTP Target Price based on FY2009 estimates
works out to Rs2,746. We maintain a Buy on stock.
Exhibit 5: SOTP Valuation

Value of Auto Business @13.5x FY2009E Earnings (Rs) 1,539
Current Value of Insurance Business on FY2009 basis (Rs) 663
Other Investments at cost (Rs) 544
SOTP Target Price (Rs) 2,746
We are also valuing BAL on the basis of its de-merger plan. We have arrived at Rs663 per share
value for BAL’s Insurance arm based on 20x NBAP for its Life Insurance business and 18x P/E
for its General Insurance Business.
Exhibit 6: Valuation post De-merger

Company Business Value for
Value Shareholder (Rs)
Bajaj Auto (Shareholder's stake of 70%) 1,539 1,077
Auto Business (Fair Value) 1,389
Cash 150
Bajaj Finserve (Shareholder's stake of 70%) 770 539
Insurance 663
38.4% stake in Bajaj Auto Finance (@15% discount to market value) 27
Cash 80
Bajaj Holdings (Shareholder's stake 100%) 1,130 1,130
30% stake in Bajaj Auto (@30% discount) 323
30% stake in Bajaj Finserve (@30% discount) 162
Cash 645
Total (Rs) 2,746
Exhibit 7: P/E Band
TM
Angel Broking Textile

BajajSector
Auto

SOURCES OF FUNDS
Net Sales 7,488.1 9,520.4 10,895.8 12,778.1
% chg 30.3 27.1 14.4 17.3
EBIDTA 1,154.5 1,436.7 1,654.0 1,967.8 Total Loans 1,467.2 1,625.4 1,625.4 1,625.4
(% of Net Sales) 15.4 15.1 15.2 15.4 Deffered Tax Liability (net) 87.6 74.2 74.2 74.2
Gross Block 2,892.9 3,178.5 3,595.6 3,833.4
Interest 0.34 5.34 5.45 6.39
Less: Acc. Depreciation 1,761.2 1,922.4 2,122.4 2,262.8
PBT 1,580.2 1,796.7 1,898.5 2,181.4
Net Block 1,131.7 1,256.1 1,473.2 1,570.6
Extraordinary Expense/(Inc.) - - - - Investments 5,857.0 6,447.5 7,213.9 8,040.9
(% of PBT) 30.3 27.3 26.6 26.3
Net Current Assets (688.7) (514.1) (597.0) (525.1)
PAT 1,101.6 1,306.6 1,393.9 1,608.4
Misc Expenditure 1.3 17.5 5.0 10.0
% chg 43.7 18.6 6.7 15.4 Total Assets 6,325.5 7,233.9 8,121.9 9,123.3

Profit before Tax 1,580.2 1,796.7 1,898.5 2,181.4 Per Share Data (Rs)
EPS 108.9 129.1 137.8 159.0
Depreciation 191.0 190.3 200.0 230.0
Cash EPS 127.8 147.9 157.5 181.7
Interest 0.2 3.9 4.0 4.7
DPS 40.0 40.0 50.0 60.0
(Inc)/Dec in Working Capital (457.9) 173.2 (89.0) (2.8)
Book Value 471.5 547.0 634.7 733.7
Direct Taxes paid 478.6 490.1 504.6 573.0
Operating Ratio (%)
Cash Flow from Ops 1,750.7 1,327.6 1,686.9 1,845.9 Inventory (days) 4.7 5.0 5.3 5.5
Free Cash Flow 1,585.6 1,039.2 1,269.9 1,608.1 Creditors (days) 59.9 57.5 65.0 70.0
(Inc)/Dec in Investments 1,296.4 590.6 766.4 827.0 Returns (%)
Issue of Equity - - - - RoE 23.1 23.6 21.7 21.7

RoCE 15.2 17.2 17.9 19.0
Inc./(Dec.) in Loans 240.2 158.3 - -
Dividend Payout 36.7 31.0 36.3 37.7
Dividend Paid (Incl. Tax) 404.7 404.7 505.9 607.1
Valuation Ratio (x)
Cash Flow from Financing 1,941.3 1,153.6 1,272.3 1,434.1
P/E 21.5 18.1 17.0 14.7
Others 329.1 115.7 (4.2) (86.7) P/E (Cash EPS) 18.3 15.8 14.8 12.9
Inc./(Dec.) in Cash (26.5) 1.3 (6.6) 87.3 P/BV 5.0 4.3 3.7 3.2
TM

Ashok Leyland Hold

(12 Months)
Vaishali Jajoo Long way to go

Tel: 022 - 4040 3800 Ext: 344 Ashok Leyland (ALL) has been trading lacklustre on the bourses on fears of a slow
E-mail: vaishali.jajoo@angeltrade.com down in the CV industry. Though demand for CVs is expected to remain subdued in
the near term, towards end of FY2008 it is expected to recover on the back of healthy
growth outlook in commercial vehicles, sustained pick-up in economic activity, focus
Stock Info
on infrastructure spending and a strong replacement cycle. Moreover, growth in the
Sector Automobile agriculture, infrastructure and manufacturing sectors – all of which have positive
linkages to the freight business – is expected to remain positive. At the CMP, the
stock is trading at 10.2x FY2008E and 9.2x FY2009E EPS. We maintain a Hold on
Beta 0.90 the stock with a Target Price of Rs42.
52 Week High / Low 51/34 New joint ventures and acquisitions to pay off in the long run: ALL has
recently signed few Vs and made some acquisitions, which are expected to
Avg Daily Volume 10,97,656
help ALL expand its product portfolio and intensify its hold in the overseas market.
Face Value (Rs) 1 ALL is also trying to increase its focus on non-cyclical businesses like buses,
ancillary and Defence through new JVs and acquisitions. ALL targets to increase
BSE Sensex 19,035 contribution from these businesses to around 30% over the next three-four years.
Nifty 5,695 New Model launches: New models expected to be launched in Q3FY2008
include 49T tractor trailer, a new luxury bus and a CNG bus. Management has
BSE Code 500477
guided sales target of 90,000 vehicles including 8,000 units of exports in FY2008E
NSE Code ASHOKLEY implying a growth of 8%. However, it may be noted that CV sales were the
worse-hit due to the rising interest rates, competition from railways, and the new
Reuters Code ASOK.BO players who pose a high risk to the company’s volume growth guidance.
Bloomberg Code AL IN New facilities and Capex: ALL has announced plans to set up a vehicle
manufacturing unit in Uttaranchal at an investment of over Rs1,500cr. The company
will set up a vehicle assembly and cab facility to manufacture 25,000 vehicles a
Promoters 38.6 year initially and the production facility will be expanded to manufacture 40,000
vehicles per annum. This is expected to strengthen its presence in the northern
MF / Banks / Indian FIs 19.4 region, which contributes one/fourth of its sales.
Net Sales 5,248 7,168 7,890 8,896
% chg 23.5 36.6 10.1 12.8
Net Profit 327 441 485 540
% chg 30.7 34.9 9.9 11.3
OPM (%) 10.2 9.8 10.0 10.1
EPS (Rs) 2.7 3.3 3.7 4.1
P/E (x) 14.0 11.2 10.2 9.2
P/CEPS (x) 10.1 8.4 7.7 7.0
P/BV (x) 3.2 2.6 2.3 2.0
RoE (%) 23.2 23.3 22.2 21.5
RoCE (%) 18.0 20.2 20.1 20.0
EV/Sales (x) 1.0 0.7 0.6 0.6
EV/EBITDA (x) 9.4 7.3 6.5 5.8
TM
Angel Broking Ashok Leyland

In the long term, new JVs, ALL has been trading lacklustre on the bourses on fears of a slow down in the CV industry.
acquisitions and exports Though demand for CVs is expected to remain subdued in the near term, towards Q4FY2008 it
could emerge as growth is expected to pull back. Fundamentally, the key reasons for a healthy growth outlook in CVs
drivers for ALL, which could include a sustained pick-up in economic activity, focus on infrastructure
help it leverage its low-cost spending and a strong replacement cycle. Moreover, growth in the agriculture, infrastructure
competitive advantage to and manufacturing sectors – all of which have positive linkages to the freight business – is
enter foreign markets expected to remain positive. ALL is raising capacity by around 30% over the next two years to
meet demand and also plans to launch new products. In the long term, new JVs, acquisitions
and exports could emerge as growth drivers for ALL, which could help it leverage its low-cost
competitive advantage to enter foreign markets.
ALL will likely benefit from CV industry growth while buses beginning to go up: Being
a pure commercial vehicle play, ALL will likely to benefit from revival in domestic CV demand.
ALL has lost marketshare to Tata Motors in FY2007 in the passenger M&HCV segment.
However, last few months have seen passenger M&HCVs driving growth for the company against
lackluster goods M&HCV segment sales.
Exhibit 1: Volume and Marketshare

Product FY2005 FY2006 FY2007 FY2008E FY2009E CAGR (%)
MDV Passenger 12,521 15,665 15,445 23,168 26,179 20.2
MDV Goods 41,800 45,193 67,296 64,604 69,126 13.4
LCV 359 797 289.14 376 432 4.8
Export (Inc above) 6,812 4,879 6,025 6,628 7,423 2.2
Total 54,680 61,655 83,030 88,148 95,738 15.0
ALL has recently signed few New JVs and acquisitions to pay off in the long run
JVs and made some ALL has recently signed few JVs and made some acquisitions, which are expected to help it
acquisitions, which are expand its product portfolio and strengthen its hold in the overseas market. ALL has entered
expected to help it expand its into an initial agreement to set up three JVs with Nissan Motor Co. for the
product portfolio and development, manufacture and distribution of LCV products. This partnership is a positive
strengthen its hold in the development for ALL as it has near-zero presence in the LCV space.
overseas market
In October 2006, the company’s wholly-owned foreign subsidiary, AVIA Ashok Leyland
Motors s.r.o., completed acquisition of the truck business unit of Avia a.s. in the Czech
Republic in pursuance of the framework agreement signed earlier. The subsidiary has begun its
July 16, 2007

TM

ALL will be able to boast of a business operations post acquisition in Q3FY2007. The company said it plans to manufacture
complete portfolio of CVs once two range of trucks from the Avia unit, thus more than doubling its production capacity to 5,000
the JVs with Nissan get vehicles a year. With the Avia acquisition offering a presence in MCVs, ALL will be able to boast
operational of a complete portfolio of CVs once the JVs with Nissan get operational.
Other recent announcements:
(i) Partnership with Shriram Transport Finance for Ashley Transport Services;
(ii) a JV with Siemens VDO Automotive AG to design, develop and adapt infotronic products
and services for the transportation sector; and,
(iii) a JV with the Alteams group to manufacture HPDC products for the automotive and
telecommunications sectors.
ALL is also trying to increase its focus on non-cyclical businesses like buses, ancillary and
Defence through new JVs and acquisitions. ALL targets to increase contribution from these
businesses to around 30% over the next three-four years.
New facilities and Capex
The company has planned ALL has announced plans to set up a vehicle manufacturing unit in Uttaranchal at an
capex of Rs1,000cr for FY2008 investment of over Rs1,500cr. ALL will set up a vehicle assembly and cab facility to
manufacture 25,000 vehicles a year initially and the production facility will be expanded to
manufacture 40,000 vehicles per annum. This is expected to strengthen its presence in the
northern region, which contributes one/fourth of its sales. The investments will avil Excise duty
and Income Tax sops for five-ten years. The company has incurred Rs388cr towards capital
expenditure including Rs100cr for the Uttranchal land payment YTD. It plans to complete the
Uttranchal expansion by 2010. The Ennore unit will manufacture 50,000 more engines by
mid-2007 and gear boxes by the end of the next fiscal in addition to the 85,000 existing ones.
The company has planned capex of Rs1,000cr for FY2008. Around Rs400cr will be spent on
the facility in Uttranchal, Rs350cr on completing the facility in Ennore, Rs100cr on new product
development and the balance Rs150cr on regular capex. The company has also outlined
investments of Rs400cr, which include Rs80cr to be spent on Defiance Testing & Engineering
Services, Detroit and Rs300cr has been set aside for future acquisitions. ALL plans to fund its
capex requirement largely through debt. It plans to raise debt to the tune of Rs1,000cr by
Q3FY2008. At present, ALL raised Rs500cr worth of loans in Q1FY2008.
New Model launches
Management has guided a New models expected to be launched in Q3FY2008 include 49T tractor trailer, a new luxury bus
sales target of 90,000 vehicles and a CNG bus. Management has guided a sales target of 90,000 vehicles including 8,000
including 8,000 units of units of exports in FY2008E implying a growth of 8%. However, it may be noted that CV sales
exports in FY2008E implying were the worse-hit due to rising interest rates. Competition from railways and new players also
a growth of 8% pose a high risk to the company’s volume guidance .
Concerns
z Lack of presence in LCV segment is exerting pressure on volumes.
z Fluctuation in Interest and Freight rates.
z Aggressive move by Railways and new competitors.
July 16, 2007

TM

ALL’s OPM is currently lower We estimate ALL to grow its revenues at a CAGR of 11.4% over FY2007-09E on the back of an
than its peers due to high estimated CAGR growth in volumes of 7.5% over the mentionded period. Growth could exceed
inventory days and SG&A this band if sentiment changes for the better and deferral of vehicle purchase ends along with
expenditure interest rates settling down. We expect ALL’s new product launches to boost its volumes and
improve realisations. We expect Operating Profits to grow at a CAGR of 12.8% over
FY2007-09E. We expect OPMs to improve from 9.8% in FY2007 to 10.1% by FY2009E. ALL’s
OPM is currently lower than its peers due to high inventory days and SG&A expenditure. But,
these expenses are expected to reduce over a period of time.
We expect the company’s EPS and Cash-EPS to increase to Rs4.1 and Rs5.4 in FY2009E
from Rs3.3 and Rs4.5 in FY2007 respectively, despite its aggressive capex program. ALL plans
to incur Rs1,000 towards capex in FY2008E for capacity expansion. This is being financed by
an ECB of US $250m at an estimated 7% interest rate. This would result in a sharp increase in
interest costs and higher depreciation expenses, thereby impacting Profitability. We estimate
ALL’s free cash flow generation to once again turn positive in FY2008E to Rs2.3cr and improve
to Rs34.3cr in FY2009E.
July 16, 2007

TM

Valuation
We estimate ALL to clock an EPS of Rs3.7 in FY2008 and Rs4.1 in FY2009. At the CMP, the
stock is trading at 10.2x FY2008E and 9.2x FY2009E EPS. We maintain a Hold on the
stock, with a Target Price of Rs42. The stock will likely perform only towards end FY2008 as
there is reasonable confidence that FY2008 will see better CV volumes growth due to softening
of interest rates.
Exhibit 4: P/E Band
Source: C-line, Angel Research
July 16, 2007

TM
Angel Broking Ashok

TextileLeyland
Sector

SOURCES OF FUNDS
Net Sales 5,247.7 7,168.2 7,889.8 8,895.8
% chg 23.5 36.6 10.1 12.8
EBIDTA 536.9 702.8 791.6 894.2 Total Loans 691.9 640.4 762.1 908.3
(% of Net Sales) 10.2 9.8 10.0 10.1 Deffered Tax Liability (Net) 179.7 196.9 200.0 200.0
Gross Block 2,139 2,620 3,120 3,620
Interest 16.50 5.40 39.45 44.48
Less: Acc. Depreciation 1,195 1,313 1,560 1,810
PBT 427.3 617.6 662.2 739.8
Net Block 943.3 1,307.0 1,560.1 1,810.1
Extraordinary Expense/(Inc.) (24.9) 13.1 5.0 - Investments 368.2 221.1 221.1 221.1
(% of PBT) 29.2 26.4 26.0 27.0
Net Current Assets 823.9 941.9 1,216.5 1,486.7
PAT 327.2 441.3 485.0 540.0
Miscellaneous Exp. 7.3 24.4 - -
% chg 30.7 34.9 9.9 11.3 Total Assets 2,284.1 2,731.9 3,147.7 3,617.9

Profit before Tax 427.3 617.6 662.2 739.8 Per Share Data (Rs)
(Inc)/Dec in Working Capital 167.7 (118.0) (274.6) (270.2) Cash EPS 3.7 4.5 4.9 5.4
Interest (Net) 16.5 5.4 39.4 44.5 DPS 1.3 1.5 1.5 1.6
Direct Taxes paid 125.0 163.2 172.2 199.7 Book Value 11.6 14.3 16.5 19.0
Others (290.5) 7.5 - - Operating Ratio (%)
Free Cash Flow 129.5 (77.8) 2.3 34.3 Creditors (days) 79.8 84.1 80.0 80.0
(Inc)/Dec in Investments (139.0) 147.1 - - Returns (%)
Issue of Equity 3.2 10.2 - - ROE 23.2 23.3 22.2 21.5
Inc./(Dec.) in loans (188.5) (51.5) 121.7 146.2 ROCE 18.0 20.2 20.1 20.0
Others (87.4) 49.5 Valuation Ratio (x)
Cash Flow from Financing (257.6) (289.4) (72.3) (69.8) P/E 14.0 11.2 10.2 9.2
Others 197.9 (319.0) 406.2 170.9 P/E (Cash EPS) 10.1 8.4 7.7 7.0
Inc./(Dec.) in Cash (69.2) (539.1) 336.2 135.4 P/BV 3.2 2.6 2.3 2.0
TM

Hero Honda Neutral

CMP: Rs661
Vaishali Jajoo Need to renew interest

Tel: 022 - 4040 3800 Ext: 344
We remain negative on the stock in view of more threats than opportunities going
ahead for the company. We believe that there exist risks of another price war starting
E-mail: vaishali.jajoo@angeltrade.com among two-wheeler majors, Bajaj Auto, Hero Honda and TVS Motor post launch of
Bajaj Auto's and TVS's new bike in the 125cc segment. We see lack of a strong
Stock Info product pipeline to compete with new launches of rivals as risks to marketshare of
Hero Honda. While interest rate and input costs are adding to the woes of the
Sector Automobile
companies, prizing power seems to have disappeared. We remain Neutral on
Market Cap (Rs cr) 13,194 the stock.
Leader with high marketshare: Hero Honda (HH) is a leader with the highest
Beta 0.51
marketshare of over 40% in the two-wheeler industry. We believe HH is unlikely
52 Week High / Low 809/565 to wrest more marketshare from competition from current levels. Management
has already indicated that overall volume growth in FY2008 would come in at
Avg Daily Volume 74317 lower single digits, which sounds a bit lacklustre for the two-wheeler major. Even
Face Value (Rs) 2
though the company has been clocking better numbers in recent months, going
ahead new launches by Bajaj and TVS in the 125cc segment could put an halt
BSE Sensex 19,035 to the company’s volume growth.
Margins under pressure: HH has witnessed a major decline in Margins over
Nifty 5,695 the last four quarters. HH posted a 385bp yoy decline in OPM for FY2007.
Going ahead, there are few chances of Margins reverting back to FY2007 prior
BSE Code 500182
levels as input costs are expected to hover at higher levels. Also, there is little
NSE Code HEROHONDA room for price hikes due to the prevalent low sentiment and intensifying
competition.
Reuters Code HROH.BO Capacity addition: To address the growing demand, HH continued its capacity
expansion initiatives in FY2007 taking its total capacity to 3.9mn units. Expansion
Bloomberg Code HH IN
of 4,50,000 units each at its Gurgaon and Dharuhera plants have been completed
Shareholding Pattern (%) at an investment of Rs47cr and Rs96cr, respectively. HH has also announced
plans of setting up its third plant in Jaipur. The plant will have a production
Promoters 55.0 capacity of 5,00,000 units per year expandable to one million units per year and
entails an investment of Rs320cr. The plant will be funded through internal accruals
MF / Banks / Indian FIs 8.3 and is likely to be commissioned within one year.
Net Sales 8,711 9,895 10,799 11,998
% chg 17.4 13.6 9.1 11.1
Net Profit 897 777 872 976
% chg 20.2 (13.3) 12.2 11.9
OPM (%) 15.6 11.7 11.5 11.3
EPS (Rs) 44.9 38.9 43.7 48.9
P/E (x) 14.7 17.0 15.1 13.5
P/CEPS (x) 13.1 14.4 12.9 11.6
P/BV (x) 6.6 5.3 4.4 3.7
RoE (%) 44.6 31.5 29.1 27.3
RoCE (%) 53.9 36.7 33.1 30.9
EV/Sales (x) 1.5 1.3 1.2 1.1
EV/EBITDA (x) 9.7 11.6 10.8 9.7
TM
Angel Broking Hero Honda

We remain negative on HH in We remain negative on HH in view of more threats than opportunities going ahead for the
view of more threats than company. We believe that there exist risks of another price war starting among two-wheeler
opportunities going ahead for majors, Bajaj Auto, Hero Honda and TVS Motor post launch of Bajaj Auto’s and TVS’s new bike
the company in the 125cc segment. We see lack of a strong product pipeline to compete with new launches
of rivals as risks to marketshare of Hero Honda. While interest rate and input costs are adding
to the woes of the companies, prizing power seems to have disappeared.
Leader with high marketshare: HH is a leader with the highest marketshare of over 40% in
the two-wheeler industry. We believe HH is unlikely to wrest more marketshare from
competition from current levels. New model launches announced by some of its peers at
aggressive price points will again test the positioning of the company apart from adversely
impacting its Margins. Management has already indicated that overall volume growth in FY2008
would come in at lower single digits, which sounds a bit lacklustre for the two-wheeler major.
Even though the company has been clocking better numbers in recent months, going ahead
New model launches new launches by Bajaj and TVS in the 125cc segment could put an halt to the company’s
announced by some of its volume growth.
peers at aggressive price
points will again test the Exhibit 1: Volume and Marketshare
positioning of the company
apart from adversely
impacting its Margins

Product FY2005 FY2006 FY2007 FY2008E FY2009E CAGR (%)
Total Volume 2,621,400 3,000,751 3,336,756 3,603,696 3,964,066 10.9
Source: Company, Angel Research Source
In order to improve its portfolio in premium segment, Hero Honda has augmented its offerings in
the premium segment - CBZ Xtreme and Karizma with launch of the 150cc Hunk. This launch
will help Hero Honda offer a more complete portfolio of bikes.
Management has already Strengthening of its Entry level motorcycle offering in December 2006 has helped HH expand
indicated that overall volume marketshare by 800bp over January-May 2007, to 56%, at the expense of BAL and TVS
growth in FY2008 would come Motor. However, BAL countered this with the launch of the new 125cc bike at an aggressive
in at lower single digits, which price-point in the September quarter in its bid to shift volumes from the traditional 100cc
sounds a bit lacklustre for the Entry-level bike. TVS plans to strengthen its offering in the Executive segment in 2HFY2008
two-wheeler major with its new launch, Flame. This should put HH’s marketshare gains once again to test.
TM

HH has witnessed a major Margins under pressure: HH has witnessed a major decline in Margins over the last few
decline in Margins over the quarters. We note that raw material prices were higher in the recent past apart from high input
last few quarters costs and other expenditure, which also moved up due to higher royalty and advertisement
costs. HH posted a 385bp yoy decline in OPM for FY2007. Going ahead, there are few chances
of Margins reverting back to FY2007 prior levels as input costs are expected to hover at higher
levels. Also, there is little room for price hikes due to the prevalent low sentiment and
intensifying competition.
Exhibit 3: Operating Profit and Margin trend
There are few chances of

Margins reverting back to
FY2007 prior levels as input
costs are expected to hover at
higher levels
HH has announced plans of Capacity addition: To address the growing demand, HH continued its capacity expansion
setting up its third plant at initiatives in FY2007 taking its total capacity to 3.9mn units. Expansion of 4,50,000 units each
Jaipur, with a production at its Gurgaon and Dharuhera plants have been completed at an investment of Rs47cr and
capacity of 5,00,000 units per Rs96cr, respectively. HH has also announced plans of setting up its third plant at Jaipur. The
year expandable to 1mn units plant will have a production capacity of 5,00,000 units per year expandable to one million units
per year at an investment of per year at an investment of Rs320cr. The plant will be funded through internal
Rs320cr accruals and is likely to be commissioned within one year. The plant will have an initial capacity
of 0.5mn units, which will be scaled up to 1.5mn units by 2010. The company has announced
an initial investment of Rs300cr for the plant. Total investments together with investment from
suppliers will eventually touch Rs1,900cr by 2010. The company is likely to enjoy tax benefits
for this plant, which could boost profitability as production from the plant scales up. The tax
sops include a 100% excise duty exemption for 10 years, 100% income tax exemption for the
first five years and 30% over the next five years. The new plant will have flexible production for
HH’s entire range of models and will also cater to the export market.
Concerns
z Unable to sustain Margins amidst intensifying competition.
z HH has not announced new products to compete with the new launches by competitors in
the 125cc segment.
We expect HH to clock around 10% CAGR growth in revenues over FY2006-09E on the back
of estimated CAGR growth of 9% in volumes over the same period. We expect HH to clock
8.4% CAGR in Operating Profits over FY2007-09E. We, however, expect OPMs to decline from
11.7% in FY2007 to around 11.3% by FY2009E. We expect HH's EPS and Cash EPS to
increase to Rs48.9 and Rs56.9 in FY2009E from Rs38.9 and Rs45.9 in FY2007 respectively,
despite the aggressive capex program.The significant capital expenditure is also resulting in a
decline in the company'sRoE and RoCE. HH witnessed a dip in free cash flows as well in
FY20007 to Rs150.7cr. However, we estimate HH's free cash flow generation to improve in
FY2008 and FY2009.
TM

Exhibit 5: P/E Band
Valuation
At the CMP, the stock is trading at 15.1x FY2008E and 13.5x FY2009E Earnings. The difficult
operating environment remains a key concern for the company. We believe current valuations
largely factor in the forecast earnings growth and a further re-rating may not be justified against
the backdrop of marketshare and Margin pressures. In view of risks of lower volume growth
and Margin pressure, we remain Neutral on the stock. HH also faces threat from BAL's
new bike launch in the Executive segment in Q3FY2008.
TM


SOURCES OF FUNDS
Net Sales 8,711.3 9,894.5 10,798.9 11,997.6
% chg 17.4 13.6 24.0 21.3
Reserves& Surplus 1969.4 2430.1 2953.3 3538.6
EBIDTA 1,362.2 1,153.4 1,236.5 1,355.7
Total Loans 185.8 165.2 165.2 165.2
Depreciation& Amortisation 114.6 139.8 150.0 160.0 APPLICATION OF FUNDS
Interest 2.92 1.61 1.00 1.00 Gross Block 1,472 1,801 2,201 2,501
PBT 1,412.2 1,246.1 1,285.5 1,394.7 Less: Acc. Depreciation 523 635 770 875
Net Block 949.4 1,165.5 1,430.4 1,625.4
(% of Net Sales) 16.2 12.6 11.9 11.6
Capital Work-in-Progress 44.2 189.9 100.0 50.0
Extraordinary Expense/(Inc.) 74.8 80.8 50.0 25.0
Investments 2,061.9 1,973.9 1,908.5 2,267.2
Tax 440.9 388.2 363.6 394.2
Current Assets 821.2 913.3 971.9 1,079.8
(% of PBT) 31.2 31.2 28.3 28.3
PAT 896.6 777.1 871.9 975.6
Net Current Assets (741.6) (565.9) (152.4) (70.7)
% chg 20.2 (13.3) 12.2 11.9 Total Assets 2,313.9 2,763.4 3,286.6 3,871.9

(Inc)/Dec in Working Capital (204.4) (175.7) (413.5) (81.7) Cash EPS 50.6 45.9 51.2 56.9
Interest (Net) 2.9 1.6 1.0 1.0 DPS 22.8 19.9 17.5 19.5
Others 51.58 (198.6) - - Operating Ratio (%)
Free Cash Flow 565.0 150.7 349.3 829.9 Creditors (days) 45.0 38.4 38.0 35.0
(Inc)/Dec in Investments (35.2) 88.0 65.3 (358.6) Returns (%)
Inc./(Dec.) in loans (16.0) (20.6) - - RoCE 53.9 36.7 33.1 30.9
Others (0.1) 56.5 - - Valuation Ratio (x)
Cash Flow from Financing (471.3) (474.3) (348.8) (390.2) P/E 14.7 17.0 15.1 13.5
Others 82.9 113.2 (71.5) 2.9 P/E (Cash EPS) 13.1 14.4 12.9 11.6
Inc./(Dec.) in Cash 141.3 (122.4) (5.6) 83.9 P/BV 6.6 5.3 4.4 3.7
TM

TVS Motor Neutral

CMP: Rs56
Vaishali Jajoo To be or not to be

TVS Motor has been a clear underperformer in every aspect in the two-wheeler industry
Tel: 022 - 4040 3800 Ext: 344
in the last one year. TVS was hit the hardest on account of heightened competition,
E-mail:vaishali.jajoo@angeltrade.com industry slow down and sharply declining Margins compared to its peers. Going ahead,
the new ventures like the entry into three-wheelers and foray into exports could prove
Stock Info
to be a drag on the company's profitability in the medium to long term. An aggressive
Sector Automobile capex plan and intensifying competition in the two-wheeler segment could also keep
Net Profits subdued and the company’s plans under high execution risks. At the
CMP, the stock trades at 25.3x FY2008E and 18.7x FY2009E Earnings. We remain
Beta 0.80 Neutral on the stock.
New initiative building hopes: TVS Motor recently announced launch the 11
52 Week High / Low 105/53 new models by April 2008. The new product line includes motorcycles in the
Entry and Executive segments, a scooterette and an electric scooter, besides
Avg Daily Volume 292919
two-stroke and four-stroke three-wheelers. The company is betting on selling
Face Value (Rs) 1 40,000 incremental motorcycle units every month October 2007 onwards, taking
its total monthly sales to 90,000 units. However, we believe that the number
BSE Sensex 19,095 looks a bit too ambitious.
Nifty 5,695
Foraying into the three-wheeler segment: The company plans to set up
manufacturing capacity for three-wheelers at its existing Mysore plant with an
BSE Code 532343 initial capacity of 90,000 units. We believe that TVS Motor will have to counter
stiff competition from entrenched players like Bajaj Auto, Piaggio and M&M,
NSE Code TVSMOTOR which have become more active in the three-wheeler space. Profitability from
this project could take a longer time to contribute and break even.
Reuters Code TVSM.BO
Focusing at increasing International focus: The company is putting in place
Bloomberg Code TVSL IN its strategy to go global by leveraging on its development and manufacturing
facility. Going ahead, the company will continue to focus on exports. During
Shareholding Pattern (%) FY2007, seven new countries were added to the company's global presence.
The company is now exporting its products to over 44 countries. We view this
Promoters 56.8 foray as important from the long-term growth prospects of the company and
MF / Banks / Indian FIs 25.5
would pay off in the next two-three years.
Key Financials
FII / NRIs / OCBs 4.8
Y/E March (Rs cr) FY2006 FY2007 FY2008E FY2009E
Indian Public / Others 12.9 Net Sales 3,235 3,855 3,781 4,242
% chg 12.5 19.2 (1.9) 12.2
Net Profit 103.7 60.2 52.6 71.2
% chg (6.1) (42.0) (12.5) 35.2
OPM (%) 6.3 3.5 3.5 4.0
EPS (Rs) 4.4 2.5 2.2 3.0
P/E (x) 12.8 22.1 25.3 18.7
P/CEPS 6.7 9.0 8.2 7.0
P/BV (x) 1.7 1.6 1.6 1.5
RoE (%) 13.5 7.4 6.2 8.0
RoCE (%) 8.4 3.0 1.4 2.9
EV/Sales (x) 0.5 0.5 0.5 0.4
EV/EBITDA (x) 8.3 13.9 14.3 11.1
TM
Angel Broking
TVS Motor has been a clear TVS Motor has been a clear underperformer in every aspect in the two-wheeler industry in the
underperformer in every last one year. TVS was hit the hardest on account of heightened competition, industry slow
aspect in the two-wheeler down and sharply declining Margins compared to peers. Currently, the stock is witnessing a
industry in the last one year short-term upswing on the back of possible new launches in the second half of FY2008, which
is expected to cap the Margin pressure which the company has been experiencing since the
last twelve months. But, going ahead the new ventures like entry into three-wheelers and foray
into exports could prove to be a drag on the company’s Profitability in the medium to long term.
An aggressive capex plan and intensifying competition in the two-wheeler segment could also
keep Net Profits subdued and the plans under high execution risks.
New initiative building hopes: TVS Motor recently announced the launch of 11 new models
by April 2008. The new product line includes motorcycles in the Entry and Executive segments,
a scooterette and an electric scooter, besides two stroke and four-stroke three-wheelers. The
company is betting on selling 40,000 incremental motorcycle units every month October
onwards, taking its total monthly sales to 90,000 units. However, we believe that the number
looks a bit too ambitious on the back of recently launched or expected to launch bikes in the
Executive segment. We do not foresee the company garnering any marketshare given that it is
We do not foresee TVS yet to come up with a product that dominates any of three segments of the motorcycle market.
garnering any marketshare The company did gain some marketshare for a brief period on the back of the success of Star
given that it is yet to come up City and TVS Victor GLX, but was unable to hold on to the same for a long time.
with a product that dominates
any of three segments of the Exhibit 1: Volume and Marketshare
motorcycle market

Motorcycles 6,79,099 8,06,655 9,25,123 7,40,098 8,06,707 4.4
Scooters 2,24,527 2,45,276 2,58,967 2,90,043 2,92,943 6.9
Mopeds 2,63,390 2,90,273 3,44,513 4,47,867 5,28,483 19.0
Grand Total 11,67,016 13,42,204 15,28,603 14,78,008 16,28,134 8.7
TVS plans to set up Foraying into the three-wheeler segment: TVS plans to set up manufacturing capacity for
manufacturing capacity for three-wheelers at its existing Mysore plant with an initial capacity of 90,000 units. We believe
three-wheelers at its existing that TVS will have to counter stiff competition from entrenched players like Bajaj Auto, Piaggio
Mysore plant with an initial and M&M, which have become more active in the three-wheeler space. However, Profitability
capacity of 90,000 units from this project could take a longer time to contribute and break even.
TM
Angel Broking TVS Motors

TVS is putting in place its Focusing at increasing International focus: TVS is putting in place its strategy to go global
strategy to go global by by leveraging on its development and manufacturing facility. In line with this, the company had
leveraging on its development set up a manufacturing unit in Indonesia for two-wheelers in FY2007 with an initial capacity of
and manufacturing facility 3,00,000 units. The first phase would entail investments to the tune of US $50mn and TVS plans
to increase this amount to US $100mn over the next three years. Going ahead, the company
will continue to focus on exports. During FY2007, seven new countries were added to the
company’s global presence. TVS is now exporting its products to over 44 countries. We view
this foray as important from the long-term growth prospects of the company and would pay off in
the next two-three years.
Expanding capacities: TVS Motor has commenced operations at its new manufacturing facil-
ity at Nalagarh, in Himachal Pradesh. The company’s initial investment in this plant is esti-
mated at Rs120cr with a production capacity of 4,00,000 motorcycles a year, which can easily
be scaled up to 6,00,000 per annum. The company will avail Excise and Income Tax sops from
this plant, which will help it reduce pressure on Margins in the medium term.
Concerns
z Lack of moderate demand will impact Earnings negatively as the company has planned
significant capex.
z Fluctuation in Interest rates and Inflation.
z Intensifying competition.
z Delay in implementing new initiatives.
We expect the company to clock a CAGR growth of around 5% in revenues over FY2007-09E
on the back of a CAGR growth of 3.2% in volumes over the mentioned period. We believe the
new products will boost volumes and improve realisations of the company. We expect
Operating Profits to grow at a CAGR of 15.4% over FY2007-09E. We expect OPM to move up
from 3.5% in FY2007 to around 4% by FY2009E. This would be mainly on account of the tax
benefits that the new plant and the company’s steps towards reducing the product development
cycle. New product launches and foray into the three-wheeler segment will also help the
company improve Margins.
We expect TVS’ EPS and Cash EPS to increase to Rs3 and Rs8 in FY2009 from Rs2.5 and
Rs6.2 in FY2007, respectively. However, significant capex over the last two years has resulted
in the company’s RoE and RoCE declining. TVS’s free cash flow generation also dipped in
FY2007 to Rs135.7cr. However, we expect it to recover in FY2008 though still negative, and turn
positive in FY2009 to Rs39.4cr.
TM

Valuation
At the CMP, the stock trades at 25.3x FY2008E and 18.7x FY2009E Earnings. The current
valuation is fair and fully captures the Earnings growth prospects. Recoveries in volumes and
improvement in Margins (due to cost cutting measures and better-than-estimated pricing) pose
a risk to our Earning estimates. The pressure on Margins continues to be a key concern as
TVS has not been able to tackle the rising material costs and pricing pressure. We remain
Neutral on the stock.
Exhibit 4: P/E Band
TM


% chg 12.5 19.2 (1.9) 12.2 Equity Share Capital 23.8 23.8 23.8 23.8
Reserves& Surplus 742.4 785.5 819.7 866.0
Shareholders Funds 766.1 809.3 843.5 889.7
EBIDTA 202.6 135.5 132.3 167.6
Total Loans 385.0 633.6 633.6 633.6
Depreciation& Amortisation 93.9 87.6 110.0 120.0 APPLICATION OF FUNDS

Gross Block 1,378 1,483 1,833 2,013
Interest 20.99 42.35 32.14 33.93
Less: Acc. Depreciation 612 686 843 906
PBT 168.5 90.9 70.2 93.6
Net Block 766.8 797.1 989.8 1,107.2
Extraordinary Expense/(Inc.) 13.3 6.4 - - Investments 344.2 344.7 326.9 250.2
Tax 51.5 24.3 17.5 22.5 Current Assets 655.6 822.4 831.7 933.2
Current liabilities 586.9 626.8 621.5 697.3
(% of PBT) 30.5 26.7 25.0 24.0
Net Current Assets 68.7 195.7 210.3 235.9
PAT 103.7 60.2 52.6 71.2
Miscellaneous Exp. 65.8 58.5 - -
% chg (6.1) (42.0) (12.5) 35.2
Total Assets 1,300.2 1,601.8 1,577.0 1,623.3

Profit before tax 168.5 90.9 70.2 93.6 Per Share Data (Rs)
(Inc)/Dec in Working Capital (64.9) (126.9) (14.6) (25.7) Cash EPS 8.3 6.2 6.8 8.0
Interest (Net) 21.0 42.4 32.1 33.9 DPS 1.5 1.0 0.8 1.0
Others (61.6) 50.5 - - Operating Ratio (%)
Free Cash Flow (33.5) (135.7) (14.0) 39.4 Creditors (days) 59.2 54.6 55.0 55.0
(Inc)/Dec in Investments (168.8) (0.6) 17.8 76.7 Returns (%)
Inc./(Dec.) in loans 198.2 248.5 - - RoCE 8.4 3.0 1.4 2.9
Others 21.1 54.4 - - Valuation Ratio (x)
Cash Flow from Financing 142.0 171.0 (18.4) (24.9) P/E 12.8 22.1 25.3 18.7
Others 10.8 27.5 (1.7) (58.8) P/E (Cash EPS) 6.7 9.0 8.2 7.0
Inc./(Dec.) in Cash (49.5) 62.3 (16.3) 32.4 P/BV 1.7 1.6 1.6 1.5
TM

TVS Motors
Fund Management & Investment Advisory 022 - 4040 3800 / 2835 9600)
(
Ajay Jaiswal Investment Strategist (Kolkata) ajay.jaiswal@angeltrade.com
P. Phani Sekhar Fund Manager phani.sekhar@angeltrade.com
Prakarsh Gagdani AVP - Investment Advisory prakarsh@angeltrade.com
Research Team 022 - 4040 3800 / 2835 9600)
(
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Ratings (Returns) Buy > 15%, Hold 5-15%, Sell < - 10%
TM

TVS Motors
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Tel: (040) 6673 3573 / 74
Private Client Group Offices: Sub - Broker Marketing:

Mumbai - Prakarsh Gagdani Ahmedabad (C. G. Road) - Arpit Shah Surat - Ali Asgar Rasiwala Acme Plaza - Pankaj Mungre
Tel: (022) 4040 3800 Fax: (022) 4040 3899 Tel: (079) 3007 4049 / 50 Mobile : (0261) 6696 666 Tel: (022) 4000 3900 Fax: (022) 4000 3999
Branch Offices:
Andheri (Lokhandwala) - Muskaan Doultani Ahmedabad (C. G. Road) - Ritesh Patel Jamnagar - Jwalant Shingala Rajkot (Star Chambers) - Manish Baradia
Tel : (022) 2639 2626 / 3255 0987 Tel: (079) 4021 4023 Tel : (0288) 266 4941-44, 3217 790 Tel : (0281) 2233 230 / 50
Andheri (W) - Dinesh Nihalani Ahmedabad (Gurukul) - Kaivalya Shah Jodhpur - Amit Kumbhat Rajkot (Star Chambers) - Nilesh Vora
Tel: (022) 2635 2345 / 6668 0021 Tel: (079) 6522 5510 / 3012 5492-94 Tel: (0291) 5100 941 - 948 / 3208 354 Tel : (0281) 2225 401 / 02 / 03
Bandra (W) - Anit Hake Ahmedabad (Kalupur) - Jicky Thomas Junagadh - Vishal Kanabar Secunderabad - Srinivas
Tel: (022) 2655 5560 / 70 Tel: (079) 3240 7474 / 75 Tel : (0285) 2622 483 /2622 484 Tel : (040) 6690 5192 / 3 / 4
Bandra (W) - Faruq Wakani Ahmedabad (Maninagar) - Ashok Kumar Kota - Sumit Maheshwari Surat (Mahidharpura) - Sameet Kapadia
Tel: (022) 6643 2694 - 99 Tel: (079) 3048 0241 / 0242 / 0245 Tel : (0285) 2622 483 /2622 484 Tel: 2402 911 - 915
Borivali (W) - Gyan P. Joshi Ahmedabad (Ramdevnagar) - Krunal Pandya Mehsana - Alipt Doshi Surat (Parle Point) - Akshay Panwala
Tel:(022) 2895 2600 / 1 / 2 Tel : (079) 2692 6401 / 51 Tel: (02762) 645 291 / 92 Tel : (0261) 2257 990 / 909
Borivali (W) - Tarun Dhami Ahmedabad (Sabarmati) - Kaushik Rathi Nadiad - Vipul Patel Surat (Ring Road) - Piyush Bothra
Tel: (022) 3092 1969 / 2892 8890 Tel : (079) 2692 6401 / 51 Tel : (0268) - 2527 230 / 31 Tel : (0261) 6696 666
Chembur - Rajesh Mehta Ahmedabad (Satellite) - Rishi Parghi Nashik - Nilesh Supekar Surendranagar - Prashant Jani
Tel:(022) 6703 0210 / 11 /12 Tel: (079) 4000 1000 Tel: (0253) 6611 201 / 206 Tel : (02752) 325905 / 223305
Fort - Pankaj V. Shah Ahmedabad (Shahibaug) - Chirag Raghvani New Delhi (Bhikaji Cama Place) - Sumit Bhuttan Udaipur - Anurag Jain
Tel: (022) 2263 4050-55 Tel: (079) 22861053 / 5 / 6 Tel: (011) 41659 711/12 Tel - 098870 60723 / 099291 04723
Ghatkopar (E) - Ashwin Thakkar Amreli - Nishith Hemani New Delhi (Lawrence Rd.) - Surender Kumar Valsad - Suchita Krishnani
Tel: (022) 6799 3185 - 88 / 2510 1525 Tel: (02792) 228 800/231039-42 Tel: (011) 3262 8699 / 8799 Tel - (02632) 645 344 / 45
Goregaon (W) - Sanjiv Dhami Anand - Pragnesh Pandya New Delhi (Pitampura) - Roopal Agarwal Vapi - Jalpa Desai
Tel: (022) 2878 9401 / 02 Tel : (02692) 267 041-45 Tel: (011) 4700 2380 / 84 Tel: (0260) 2400 210 / 214 / 236
Kalbadevi - Viren Ved Ankleshwar - Ankit Mathur New Delhi (Preet Vihar) - Vipul Kaushik Vijayawada - Badrinath Majeti
Tel: (022) 2243 5599 / 2242 5599 Tel: (02646) 652 681-85 Tel: (011) 4242 1105 - 07 Tel :(0866) 6636900 / 901/ 902 / 903
Kandivali (W) - Sachin Ghelani Baroda - Manthan/Rashmikant Palanpur - Paresh Patel

Tel: (022) 2867 3800 / 2867 7032 Tel: (0265) 6624 280 / 2226 103 Tel : (02742) 645 171 / 72
Kandivali (Thakur Village) - Akharam Chaudhary Baroda (Akota) - Manisha Tandel Patan - Shikha Saxena
Tel: (022) 2846 1267 / 1654 / 2056 / 2076 Tel: (0265) 2355 258 / 3080 615 Tel: (02766) 222 306
Malad (E) - Satish Kanwarjani Bhavnagar - Apurva Dhami Porbandar - Ketan Thanki
Tel: (022) 2880 4440 Tel: (0278) 2512099 / 755 / 3001717 / 18 Tel : (0286) 221 5310 / 31 / 221 5450
Malad (W) - Tushar Shah Bhopal - Sandeep Kothana Pune - Iftikhar Chouhan
Tel: (022) 2880 0960 / 68 Tel :(0755) 3256 663 / 4024 000 Tel : (020) 6620 6591 / 6620 6595
Mulund (W) - Niraj Anand Gandhinagar - Vivek Thakker Rajkot (202 Race Cource) Hitesh Rupareliya
Tel: (022) 2562 2282 Tel: (079) 4010 1010 - 31 Tel : (0281) 2921 568, 99049 10001
Thane (W) - Diksha Khushalani / Rajesh Kumar Gondal - Lenin Trivedi Rajkot (University Rd.) - Prashant Ukani
Tel: (022) 2539 0786 / 0789 / 0796 Tel: (02825) 240 693 / 4 Tel : (0281) 2577408
Vashi - Punit Chopra Himatnagar - Aasif Hirani Rajkot (Bhaktinagar) - Dhaval Dave
Tel: (022) 2765 4749 / 2251 Tel: (02772) 241 008 Tel : (0280) 236 1935 / 329 6881 / 329 8100
Vile Parle (W) - Manish Negandhi Indore - Alok Rathi Rajkot (Indira Circle) - Denish Patel
Tel: (022) 2610 2894 / 95 Tel: (0731) 4042242 / 4044 366 / 4087 966 Tel : (0281) 2585 751, 99258 84848
Ahmedabad (Bapu Nagar) - Milan Kanabar Jalgaon - Sandeep Mundra Rajkot (Orbit Plaza) - Hitesh Popat
Tel : (079) 3026 0204 / 0205 Tel: (0257) 3200 906 Tel: (0281) 2463 291-94
Angel Broking Limited

Central Support & Registered Office:G-1, Akruti Trade Centre, Road No. 7, MIDC Marol, Andheri (E), Mumbai - 400 093 Tel : 2835 8800 / 3083 7700
Angel Broking Ltd : BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798
Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

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Automobile Sector

Vaishali Jajoo November 2007

Angel Broking Automobile

Mahindra & Mahindra 25

Angel Broking Automobile

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Angel Broking Automobile

Angel Broking Automobile

Exhibit 1: Valuation summary

Angel Broking Automobile

Exhibit 2: Auto Index v/s Sensex

Underperforming broder market

Source: Capitaline, Angel Research

Exhibi 3: Relative Performance

Pertinently, improving affordability is resulting in higher volumes in the four-wheeler segment

Angel Broking Automobile

Commercial Vehicles: Impending recovery

Exhibit 4: Goods CV sales volume v/s GDP growth

Source: Cris Infac, Angel Research

Demand drivers intact

Exhibit 5: Freight rate movement

Source: TCI, IOCL, Cris Infac, Angel Research

Angel Broking Automobile

Improving Road infrastructure to overtake Railways

Exhibit 6: Increasing Road Freight movement

Source: Cris Infac, Angel Research

Renewed vigour in reviving Indian Railways

Regulatory Policy, Emission norms to elevate Replacement demand

Angel Broking Automobile

Exhibit 7: Replacement demand

Utilisation levels likely to taper off as fresh capacities get added

Angel Broking Automobile

Passenger Vehicles: Joy ride to continue

Exhibit 9: PV sales volume v/s Per capita GDP (US $)

Source: SIAM, ACMA, Cris Infac, IMF, Angel Research

Favourable demographics and low penetration levels

Exhibit 10: Rise in size of Great Indian Middle Class

Angel Broking Automobile

Source: Cris Infac, Angel Research

Exhibit 12: Rapid expansion in addressable households

Source: Cris Infac, NCAER, Angel Research

High selling Small car segment

Angel Broking Automobile

Exhibit 13: Passenger Cars- Segment-wise % contribution to Total Sales

Source: Cris Infac, Angel Research

Exhibit 14: Ownership costs

Angel Broking Automobile

Source: Industry, Company, Angel Research

Angel Broking Automobile

Exports and Outsourcing - Key to additional growth

Exhibit 17: Export volume and growth

Source: Industry, Company, Angel Research

Angel Broking Automobile

Two Wheelers: Riding on rugged terrain

Exhibit 18: Two-wheeler Sales volume and Growth trend

Source: Cris Infac, Angel Research

Amidst intensifying competition players in a major rush to grab marketshare

Exhibit 19: Changing customer preferences in Motorcycle segment

Source: Industry, Cris Infac, Angel Research

Angel Broking Automobile

Motorcycles dominate two-wheeler market; top three players in commanding position

Exhibit 20: Key players and marketshare

Exhibit 21: Segment-wise % contribution to Motorcycle Sales volume