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Eicher Motors

Company Update | Auto | EIM IN

Inst'l Equity Research | India


Growth moderation sinking in… April 3, 2018

Rating Target Price (Rs) Upside/Downside (%)


Eicher Motors (EIM), today, announced Royal Enfield’s (RE) production
capacity guidance of 950k units for FY19e (implying 16% YoY growth vs. SELL 22,700 (19)
23% in FY18) along with a Rs8bn capex program. The sharp moderation in
Market data
volume growth guidance is a clear reflection of its weakening underlying
Current price Rs 27,990
demand trends and growing ‘brand fatigue’ (refer to our note). While FY19e
Mkt capitalisation USDm 11704.7
growth would be supported by continued dealer network expansion, we see
Average daily value 3M USDm 27.5
an increasing risk to its growth visibility for FY20e and beyond, considering
Free float % 48.5
the weakening underlying demand trends. With growth converging towards
Promoter holding % 50.5
mass market two-wheeler peers, we expect EIM’s de-rating to continue. We
reiterate EIM as our top SELL recommendation in Indian autos with a TP of
1 Year Performance
Rs22,700 (20x FY20e EPS).
140
Underlying demand trend weakening – reflective of growing brand fatigue:
RE’s reported growth has moderated gradually from 30% in FY17 to 23% in 125
FY18. However, consistent with our thesis, underlying demand has weakened to
110
a greater extent, with reported volumes being driven by network expansion and
run-down of the order book. Consequently, SSG has declined through FY18. We 95
view EIM’s 16% YoY volume growth, despite an aggressive network expansion
plan, as further evidence of the growing brand fatigue for RE, post a decade of 80
Apr-17 Jul-17 Sep-17 Dec-17 Mar-18
super-normal growth. We highlight that, including Tamil Nadu, three out of RE’s
seven largest markets (~60% of volumes) posted a decline in 3QFY18. Eicher Motors Ltd Nifty Index

Reported growth driven by network expansion: With RE fast approaching Source Bloomberg, SSLe
saturation levels in mature markets, reported volumes have increasingly been
driven by aggressive network expansion in Tier C and D towns. Strong growth in
states in the Hindi belt, like Uttar Pradesh, Madhya Pradesh, etc, has cushioned
the strain in mature markets. While the strengthening rural recovery is likely to
sustain the momentum in the Hindi belt, saturation and intensifying weakness in
early adopter markets may lead to growth converging towards mass market
peers.
Major impediments to medium-term success in exports: We expect RE’s
limited brand appeal and comparatively weaker R&D capabilities (compared to
global majors) to act as major impediments to its success in exports. Hence,
exports growth is unlikely to offset the deceleration in domestic growth over
FY18-20e.
Valuation de-rating to continue converging with mass 2W peers; Maintain
SELL: Post recording a robust volume CAGR of 54% over FY12-17, we see clear
signs of growing ‘brand fatigue’ for RE, as indicated by multiple and strong signs
of weakening underlying demand trends (falling volumes on same-store basis and
sharp decline in mature markets) and our extensive dealer checks. We expect
reported RE volume growth to slow down to 12%/8% in FY19e/FY20e. With
growth converging with mass-market two-wheeler peers, we believe EIM’s de-
rating to continue. We reiterate EIM as our top SELL recommendation in Indian
autos with a revised TP of Rs22,700 ( 20x FY20e EPS).

Financial Summary (Consolidated)


Y/E March (Rs m n) FY16 FY17 FY18e FY19e FY20e
Net sales 61,469 70,030 90,241 102,882 113,560
EBITDA margin (%) 27.5 31.0 31.3 31.0 31.2
Adjusted net profit 13,215 16,671 22,388 26,874 30,907
Free cash flow 9,531 11,569 13,299 15,664 16,869
EPS (Rs) 487 613 823 988 1,136
grow th (%) 114.8 26.1 34.3 20.0 15.0
P/E (x) 57.5 45.7 34.0 28.3 24.6
P/BV x 20.8 14.2 10.5 7.9 6.2 Chirag Jain
EV/EBITDA (x) 45.0 35.0 26.9 23.6 21.1 +91 22 4348 7183
chirag.jain@sbicapsec.com
D/E 0.0 0.0 0.0 0.0 0.0
RoE (%) 42.8 37.1 35.5 31.9 28.3 Indarpreet Singh
RoCE (%) 45.5 49.1 48.0 41.8 36.9 +91 22 4348 7232
Dividend yield (%) 0.4 0.0 0.4 0.4 0.4 indarpreet.singh@sbicapsec.com
Source: Company, SSLe

SBICAP Research on Bloomberg SBICAP <GO>, www.emis.com Please refer to our disclaimer given at the last page.
Eicher Motors Ltd SBICAP Securities Ltd
Brand fatigue spreads further with Tamil Nadu volumes too declining during 3QFY18
RE FY17 M/c Ind Motorcycle Ind. (%) Dom . 2W Ind. (%)
State-w ise Grow th
vol. contri. FY17 vol. FY12 FY13 FY14 FY15 FY16 FY17 1QFY18 2QFY18 3QFY18
(%)
(%) contri. (%) 1QFY18 2QFY18 3QFY18 1QFY18 2QFY18 3QFY18
Punjab & Chandigarh 7 3 1 25 33 39 33 14 23 20 11 (6) 10 (2) 3 11 8
Delhi 7 2 64 14 78 63 61 33 24 17 18 8 10 13 6 9 10
Haryana 3 3 (11) 94 20 35 60 21 36 12 35 8 5 10 10 7 10
H.P. 1 0 105 25 63 63 22 26 39 31 15 14 22 (3) 30 25 (7)
J&K 1 0 100 45 43 43 53 103 43 52 11 39 62 (13) 44 40 (8)
Punjab 6 3 (2) 28 37 42 36 15 22 21 13 (7) 10 (2) 3 11 8
UP 7 15 24 65 50 91 73 57 52 61 60 37 20 23 36 22 26
Uttranchal 2 2 24 50 45 19 150 34 43 40 28 (78) 1 (6) (67) (3) (3)
North Zone 27 26 17 37 44 53 56 34 35 32 29 12 16 15 14 16 16

Assam 2 2 110 30 46 76 83 32 47 73 56 (3) 25 46 7 22 43


Bihar 3 6 220 76 130 104 24 36 34 30 79 19 16 36 21 17 36
Jharkhand 2 3 12 403 91 83 94 30 32 41 45 16 14 26 18 15 27
Orissa 2 3 126 62 90 39 74 43 28 43 88 10 34 34 16 35 33
West Bengal 3 6 82 73 86 39 50 29 32 32 41 (8) 6 20 3 11 23
East Zone 11 20 110 83 94 61 53 33 33 41 60 7 15 30 13 18 31

Goa 1 0 13 28 34 37 25 29 14 39 52 1 14 (1) 12 19 5
Gujarat 5 6 105 47 71 73 57 28 24 21 16 (2) 6 25 9 10 26
Madhya Pradesh 2 6 99 68 81 38 70 38 47 46 46 14 31 24 13 27 24
Chattisgarh 1 2 90 57 87 90 71 3 25 23 59 5 34 38 8 34 33
Maharashtra 12 10 55 88 84 64 38 3 (3) (16) (6) (8) 0 10 (2) 1 10
Rajasthan 3 7 50 51 77 55 101 32 10 30 31 10 11 (1) 11 14 1
West zone 24 31 63 71 79 63 49 14 9 6 12 2 12 14 6 12 15

AP (undivided) 7 8 51 81 71 59 42 27 35 29 14 (4) 19 21 5 20 19
Karnataka 9 5 71 65 89 65 45 21 7 (9) (22) (8) (5) (7) 1 1 0
Kerala 12 2 40 44 102 76 76 43 24 26 21 1 11 4 12 4 20
Pondicherry 0 0 (30) (66) 912 124 37 77 58 25 (23) (8) (13) (21) 10 (6) (13)
Tamil Nadu 10 7 70 52 71 50 63 64 43 29 (12) (14) 2 (11) (4) 1 (2)
Southzone 38 23 56 59 84 63 57 39 27 19 0 (7) 7 2 2 7 8

Top 7 States 62 36 41 48 72 60 50 27 18 11 3 (7) 3 5 2 4 9


All-India 100 100 43 55 71 60 54 30 25 22 18 4 12 15 8 12 16
Source: SIAM

We estimate SSG to have declined further by 7% during 3QFY18 Volumes per dealer have stagnated over past few years

80 800 100
70 86 86 85
57 83
52 80
55 53 600 80
32 33 63
(Dealers)

29 30

(Units)
25
(%)

30 24 22
18 400 60
48
5
5 (3) 38
(5) (7) 200 33 40

(20)
0 20
1QFY18

2QFY18

3QFY18
CY12

CY13

CY14

FY16

FY17

FY16

FY17

1QFY18

2QFY18

3QFY18
CY11

CY12

CY13

CY14

Same-store growth (%) Reported wholesale gr. (%) No. of dealers (LHS) Volumes/dealer/m (RHS)

Source: Company, SSLe

chirag.jain@sbicapsec.com I indarpreet.singh@sbicapsec.com April 3, 2018 | 2


Eicher Motors Ltd SBICAP Securities Ltd
RE volume growth decelerating sharply EBITDA margin largely stable over last few quarters
210,000 70 7,200 35

157,500 55 5,400 33
(Units)

(Rs mn)

(%)
105,000 40 3,600 30

(%)
52,500 25 1,800 28

0 10 0 25
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18

1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
RE volumes (LHS) Growth YoY (RHS) RE EBITDA (LHS) % Margin (RHS)

Source: SIAM, Company

EIM’s valuation de-rating to continue converging with Sharp correction in HOG PE ahead of slowdown in growth
mass-market 2W peers (1-yr fwd)

50.0 48 30

37.5 36 13

(%)
(x)

24 (5)
(x)

25.0

12.5 12 Average (23)


Average
PE: 25x PE: 15x
0 (40)
0.0
Oct-94

Oct-99

Oct-04

Oct-09

Oct-14
Jun-96

Jun-01

Jun-06

Jun-11

Jun-16
Feb-98

Feb-03

Feb-08

Feb-13

Feb-18
Nov-17
Jan-13

Jan-14

Jan-15

Jan-16

Jan-17
Jul-13

Jul-14

Jul-15

Jul-16

May-17

Feb-18
Apr-13

Oct-13

Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16

Aug-17

1-year fwd PE (LHS) Qtrly 1-yr fwd vol. gr. (RHS)


EIM PE HMCL PE

Source: Bloomberg, SSLe

chirag.jain@sbicapsec.com I indarpreet.singh@sbicapsec.com April 3, 2018 | 3


Eicher Motors Ltd SBICAP Securities Ltd

Financials (Consolidated)
Income Statement Balance Sheet
Y/E Mar (Rs m n) FY16 FY17 FY18e FY19e FY20e Y/E Mar (Rs m n) FY16 FY17 FY18e FY19e FY20e
Net sales 61,735 70,334 90,559 103,219 113,921 Cash & Bank balances 133 130 3,568 8,313 12,468
growth (%) (29.4) 13.9 28.8 14.0 10.4 Other Current assets 6,534 7,440 8,148 8,725 9,166
Operating expenses 44,839 48,594 62,325 71,320 78,480 Investments 33,882 49,913 65,424 82,080 103,285
EBIDTA 16,896 21,740 28,234 31,899 35,441
growth (%) 51.0 28.7 29.9 13.0 11.1 Net fixed assets 8,841 12,423 18,495 22,797 26,617
Depreciation & amortisation 1,366 1,538 1,929 2,698 3,680 Goodw ill & intangible assets 0 0 0 0 0
EBIT 15,530 20,202 26,305 29,202 31,761 Other non-current assets 0 0 0 0 0
Other income 1,781 2,273 4,403 6,373 8,905 Total assets 49,390 69,907 95,635 121,916 151,535
Interest paid 21 36 31 17 18
Extraordinary/Exceptional items 1,314 1,435 0 0 0 Current liabilities 12,347 15,375 22,206 25,216 27,889
PBT 18,604 23,874 30,677 35,558 40,649 Borrow ings 154 304 72 72 72
Tax 5,389 7,203 9,800 11,340 12,946 Other non-current liabilities 359 778 792 792 792
Effective tax rate (%) 29.0 30.2 31.9 31.9 31.8 Total liabilities 12,859 16,456 23,070 26,079 28,753
Net profit 13,215 16,671 22,388 26,874 30,907
Minority interest 0 0 0 0 0 Share capital 272 272 272 272 272
Reported Net profit 13,215 16,671 22,388 26,874 30,907 Reserves & surplus 36,259 53,179 72,292 95,564 122,509
Non-recurring items (1,314) (1,435) 0 0 0 Shareholders' funds 36,531 53,451 72,564 95,837 122,782
Adjusted Net profit 12,282 15,669 22,388 26,874 30,907 Minority interest 0 0 0 0 0
growth (%) 99.6 27.6 42.9 20.0 15.0 Total equity & liabilities 49,390 69,907 95,635 121,916 151,535

Key Financials ratios 29629.7 Cash Flow Statement


Y/E Mar FY16 FY17 FY18e FY19e FY20e Y/E Mar (Rs m n) FY16 FY17 FY18e FY19e FY20e
Profitability and return ratios (%) Pre-tax profit 18,769 23,874 30,677 35,558 40,649
EBIDTAM 27.4 30.9 31.2 30.9 31.1 Depreciation 1,366 1,538 1,929 2,698 3,680
EBITM 25.2 28.7 29.0 28.3 27.9 Chg in w orking capital 2,630 1,644 2,864 2,105 1,873
NPM 19.9 22.3 24.7 26.0 27.1 Total tax paid (5,187) (6,516) (9,800) (11,340) (12,946)
RoE 42.8 37.1 35.5 31.9 28.3 Other operating activities (2,948) (3,494) (4,371) (6,356) (8,887)
RoCE 49.1 48.0 41.8 36.9 33.6 Operating CF 14,631 17,046 21,299 22,664 24,369
RoIC 406.1 349.6 471.1 384.2 351.1
Capital expenditure (5,100) (5,477) (8,000) (7,000) (7,500)
Per share data (Rs) Chg in investments (3,909) (11,718) (11,098) (10,227) (13,095)
O/s shares (mn) 27 27 27 27 27 Other investing activities 49 36 1,500 2,600 4,000
EPS 487 613 823 988 1136 Investing CF (8,960) (17,160) (17,598) (14,627) (16,595)
FDEPS 487 613 823 988 1136 FCF 9,531 11,569 13,299 15,664 16,869
CEPS 597 723 950 1150 1340
BV 1345 1964 2667 3522 4512 Equity raised/(repaid) 48 57 0 0 0
DPS 100 0 100 110 121 Debt raised/(repaid) 0 444 (232) 0 0
Dividend (incl. tax) (4,682) 0 0 (3,274) (3,602)
Valuation ratios (x) Other financing activities (21) (32) (31) (17) (18)
PE 57.5 45.7 34.0 28.3 24.6 Financing CF (4,655) 469 (263) (3,292) (3,620)
P/BV 20.8 14.2 10.5 7.9 6.2
EV/EBIDTA 45.0 35.0 26.9 23.6 21.1 Net chg in cash & bank bal. 1,016 356 3,438 4,746 4,154
EV/ Net sales 3.0 2.5 2.1 1.8 1.8 Closing cash & bank bal 133 130 3,568 8,313 12,467

Other key ratios


D/E (x) 0.0 0.0 0.0 0.0 0.0
DSO (days) 2 3 2 2 2

Du Pont Analysis - RoE


NPM (%) 21.4 23.7 24.7 26.0 27.1
Asset turnover (x) 1.1 1.2 1.1 0.9 0.8
Equity Multiplier (x) 1.8 1.3 1.3 1.3 1.3
RoE (%) 42.8 37.1 35.5 31.9 28.3
Source: Company, SSLe

chirag.jain@sbicapsec.com I indarpreet.singh@sbicapsec.com April 3, 2018 | 4


Eicher Motors Ltd SBICAP Securities Ltd

Recommendation History
Date Stock Price TP Rec.
BUY HOLD SELL 21-Sep-17 32,404 25,110 SELL
Stock Price Target Price
14-Nov-17 30,090 25,110 SELL
35,000
22-Nov-17 30,175 25,110 SELL

30,000 1-Dec-17 29,281 25,110 SELL


1-Jan-18 29,893 25,110 SELL
(Rs)

25,000 29-Jan-18 27,550 25,110 SELL


7-Feb-18 27,905 22,700 SELL
20,000 20-Mar-18 28,360 22,700 SELL
3-Apr-18 27,990 22,700 SELL
15,000
Apr-17

Oct-17

Apr-18
Nov-16

Dec-16

Aug-17

Nov-17

Dec-17
Jan-17

Jun-17

Jan-18
Jul-17
May-17
Mar-17

Feb-18
Source: Bloomberg, SSLe

SBICAP Securities Limited


(CIN): U65999MH2005PLC155485 | Research Analyst Registration No INH000000602
SEBI Registration No.: NSE Capital Market: INB 231052938 | NSE Derivatives: INF 231052938 |BSE Capital Market: INB 011053031
Currency Derivatives: INE 231052938 | CDSL: IN-DP-CDSL-370-2006 | IRDA/IR2/2014/241

Corporate Office:
Marathon Futurex, A & B Wing, 12th Floor, N. M. Joshi Marg, Lower Parel, Mumbai -400013.
Tel.: 91-22-42273300/01 | Fax: 91-22-42273335 | Email: sbicapresearch@sbicapsec.com | www.sbismart.com

KEY TO INVESTMENT RATINGS


Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points);
2=HOLD (expected to give absolute returns between -10 and 15 percentage points); 3=SELL (expected to give absolute returns
less then -10 percentage points)

DISCLOSURES &DISCLAIMERS

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Name Qualification Designation Sector


Chirag Jain CA, CFA Lead Analyst Auto
Indarpreet Singh MBA Associate Auto

chirag.jain@sbicapsec.com I indarpreet.singh@sbicapsec.com April 3, 2018 | 5


Eicher Motors Ltd SBICAP Securities Ltd
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chirag.jain@sbicapsec.com I indarpreet.singh@sbicapsec.com April 3, 2018 | 6