Equitymaster Agora Research Private Limited

Independent Investment Research

This Bluechip Company is All Set to Rev Up Its

Engine and Zoom Ahead...
Turnaround stories are always endlessly fascinating.

This could be either in personal lives or professional lives, or even in the corporate world.

Who doesn't like to read a well written rags-to-riches story? Such stories give hope of a similar transformation in
our lives, the idea that anything is possible.

The same can be said of corporate turnaround stories.

Most badly managed businesses have little hope for a future. But there are those tiny few which do manage to
stage spectacular turnarounds.

This could be a factor of either change in external circumstances or a change in management.

For the company we are discussing in today's edition, its turnaround success can largely be attributed to its CEO
Siddhartha Lal.

Siddhartha Lal was barely in his late twenties when he took over the reins at Eicher Motors. At the time, the
company was planning to shut down Royal Enfield.

But Siddhartha Lal had other plans in mind.

Eicher Motors at the time was dabbling in 15 different businesses, ranging from motorbikes, trucks, tractors, to
garments, footwear to name a few. But here's the crucial part - it was the market leader in none.

Being an avid and passionate biker himself, Siddhartha Lal took the tough call of retaining only two of the family
businesses - motorcycles and trucks. He decided to sell the rest.

The idea was to have a razor sharp focus on the two retained businesses, ramp up sales, take growth to the next
level and attain market leadership.

This strategy paid off big time.

From selling around 25,000 units annually in 2000, Royal Enfield today sells more than 800,000 motorcycles in a
year.

Because of its superior brand positioning, Royal Enfield currently commands a 91% market share in the premium
bikes segment (250-750 cc).

This has resulted not only in an impressive growth in both volumes and profits but has also strengthened the
balance sheet.

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Because the cash flows are so strong, all capacity expansion has been done through internal accruals. There is no
debt on its books. And the return on capital has been upwards of 40%. What more, because of the high demand for
its motorcycles, the inventory and debtor levels have also been low resulting in a negative working capital, which
is a huge positive.

The fact that the promoters (especially the CEO Mr Siddhartha Lal and the family trust Simran Siddhartha Tara
Benefit Trust) also believe in the success of their company can be gauged by the fact that they have maintained
their stakes in the company at more than 44%.

We believe the hiccups that the company is facing currently to be near term headwinds, ultimately leading to
healthy growth going forward. This will largely be led by market expansion and new product launches.

About the Company

Established in 1959, Eicher Motors Limited (EML) is the owner of the 'Royal Enfield' brand, the global leader in the
mid-size (250-750 cc) motorcycles.

In addition to motorcycles, EML has a joint venture with Sweden's AB Volvo - Volvo Eicher Commercial vehicles
(VECV). VECV manufactures trucks and buses in the range of 5 to 49 tonnes.

# Royal Enfield (RE) Business

RE has been the growth driver of EML over the years and has managed to create strong brand equity in the
mid-sized motorcycle segment as evidenced by its leading position with more than 90% market share in premium
motorcycle segment (engine capacity between 250cc - 750cc).

Over the years RE has created powerful product offerings viz; 'Bullet', 'Classic' and 'Thunderbird' which were well
accepted by the market, leading to strong growth in volumes.

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 RE Product Range

Over a last decade, RE has been able to grow domestic volumes at a CAGR of 40%, while exports have grown at a
CAGR of 32%.

Strong Growth Over a Last Decade (2009-2018)

Volume 50,002 49,946 71,341 109,900 173,865 296,371 589,291 651,107 801,229 40.0%
(Domestic)

Volume 1,953 2,630 3,285 3,532 4,256 6,221 11,653 15,383 19,264 32.0%
(Exports)

Total Volume 51,955 52,576 74,626 113,432 178,121 302,592 600,944 666,490 820,493 39.7%

Source: Company

RE currently exports to more than 50 countries around the world. It also has 36 exclusive Royal Enfield stores
across UK, Colombia, USA, UAE, France, Spain, Indonesia, Thailand, Philippines, Australia, Portugal, Malaysia,
Brazil, Vietnam and Argentina.

RE manufactures its motorcycles near Chennai in Tamil Nadu, India. (Tiruvottiyur, Oragadam and Vallam Vadagal).
The company has modern product development facilities in Leicestershire, UK and Chennai, India.

# VE Commercial Vehicles (VECV)

VECV is the joint venture between the Volvo group (45.6% stake) and Eicher Motors limited (54.4% stake). In
operation since 2008, VECV manufactures the complete range of medium and heavy-duty trucks and buses.

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 VECV Journey

Eicher + Volvo - Complementing Each Other

Strong player in Light to medium Duty (LMD) Trucks Global expertise and leadership in product technology

Wide distribution network and after sales infrastructure Well-defined process and controls

Cost-effective operations Brand image and customer relationships

Source: Company, Equitymaster

VECV is focused on few key segments like mining, construction, e-commerce, etc. It is the market leader in the
400+ horsepower truck segment with an 88% market share.

It has recently entered the ASEAN market with sales starting in the first quarter of 2018-19. To cater to the
increasing demand, VECV has increased its plant capacity to 84,000 vehicles per annum.

Business Model of EML

To understand the strength of EML, we decided to use business model canvas template.

The business model canvas is a great tool to understand a business model in a straightforward, structured way. It
gives a clear picture about how the company makes money, insights about the customers, what value
propositions are offered and through what channels.

Here's the Business Model Canvas of EML.

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 The Business Model Canvas of Eicher Motors Ltd

From the above business model canvas, few things stand out. These include:

Frugal and Efficient Manufacturing

One of the key differentiators for RE is its frugal manufacturing practices. For instance, by 2010, RE was
selling 50,000 bikes, but on three platforms. That was when the company management decided to build
all Enfield bikes on a single platform to maximize economies of scale. The Enfield Classic, launched
from this single platform, caught the fancy of customers.

Back in 2013, RE's second manufacturing plant at Oragadam in Tamilnadu has been instrumental in
achieving high scale and helped in cost optimization through low cost automation, new cathode electro
deposition (CED) paint shop, robotic painting system, powder coating system, ergonomically sound new
vehicle assembly line.

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 Painting Transformation - From Manual Spray Painting to CED and Robotic Painting

Over the last many years, RE has managed to play demand-supply situation very well and managed to
expand capacity from ~50,000 to ~8,00,000 over a decade. With demand outpacing supply, RE followed
MTO (make-to-order approach) in which manufacturing starts only after a customer's order is received.
Also, over the years, RE also managed to reduce the waiting period from about 4-5 months to around
1-1.5 months on the back of capacity expansion.

This has resulted in the optimized use of fixed assets and in turn, helped EML to improve its overall
operational efficiency.

Highest Fixed Asset Turnover among its Competitors

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The business model of EML really panned out over the years and as a result, the company has a
zero-operating capital in the business. The entire net block is negated by strong business model and
negative working capital.

Strong Product Portfolio and Vintage Brand Appeal

The unique selling points for RE are clearly product portfolio and its vintage brand appeal.

RE's range of machines address a unique mix of appeals from its traditional customer base to urban
aspiration driven youth. While Bullet and Classic are traditional and iconic, Thunderbird, Continental and
Himalaya are urban, lifestyle and adventure motorcycles and it looks pretty complete.

A Royal Enfield motorcycle is something many riders aspire to own and its loyal fans love RE
motorcycles. Another important factor that works in the company's favour is that its products are
accessible both in terms of price and with its sales and service network, unlike some of the foreign
brands such as Harley and Davidson which sells its bike starting from Rs 5.3 Lakh.

RE through its innovative branding and marketing has able to maintain this vintage amongst bikers -old
and new. It also makes it stand out with respect to its competitors.

For example, in 2017, RE supported the NSG Motorcycle Expedition 2017. 15 Black Cat NSG Commandos
went on an 8,000-km expedition, riding Royal Enfield Stealth Black Classic 500 motorcycles around the
country to raise awareness against terrorism. These 15 motorcycles were then sold online within just 15
seconds of their launch as limited-edition motorcycles.

Royal Enfield Stealth Black Classic 500

In FY18, besides partnering in NSG, the company introduced concepts like Garage Cafe, Vintage store
and replicated its successful concept of marquee rides in its overseas markets.

Going forward, RE will step up its efforts in rides, events and community building as these act as
catalysts for more people to enter RE Clubs.

Efficient Supply Chain and Distribution

RE's supply chain is extremely lean. The company through its supplier rationalization has consolidated

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its supplier base and brought in best in class supplier partners and worked closely with them in
improving efficiency and quality.

It has achieved a cost reduction with respect to input materials by 20% and rationalized its supplier base
over the last six years.

Raw Material as % of sales 72% 68% 66% 56% 53% 52%

Source: ACE Equity

Highest Gross Margins

Gross Margins 48% 33% 31% 31%

Source: ACE Equity

This led to operating efficiency and in turn, helped the company to achieve a high degree of operating
leverage resulting into exponential growth in profits.

On the distribution side also, there is no difference between retail and wholesale sales. Any change in
retail sales immediately comes into wholesale.

Here is what the management had to say in the recent con-call regarding maintaining inventory:

Obviously, we will take calls on these based on true projections of demand and supply and all of
that. So, you'll never see us doing anything sort of adding more inventory because -- or pushing
dealers for more sales because we want to have 10,000 more in a quarter. So that's our thing. It's
not from a financial perspective, we're not interested about making our books look any better. It's
all 100% from a business-led perspective, what's the best thing of the business in terms of what
will help us in achieving what we want to achieve. So, if you find that the offpeak may not be as
much, then we will cut down on production and inventory and all of that immediately. No
questions. Doesn't matter if it reflects slightly worse on a quarterly performance or any of that
sort. So that's the 100% approach at Royal Enfield.

Differentiated Marketing Strategies

2-wheeler companies in India spend huge money on advertisement. For instance, advertisement as a
percentage of sales accounted for 4% in the case of TVS Motors. Similarly. Bajaj Auto and Hero
MotoCorp spent 2.2% and 2.6% respectively in FY18.

Whereas, in the case of RE, this stands for just 0.2% of net sales. The company witnessed strong
demand without any significant advertisement spending. RE's existing products continue to have a very
strong pull.

To promote its brand, RE has rolled out a differentiated retail experience to its customers through
various initiatives. RE has defined its innate philosophy of 'PURE MOTORCYCLING' for its unified global
retail identity. This unique identity has been rolled out to RE stores in India and its exclusive stores in the
international market. This retail format has drawn inspiration from its brand philosophy of creating an

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ambience similar to what could be found in the living room of an avid motorcycle enthusiast.

Royal Enfield's Store in Delhi's Khan Market

The new face of RE's stores have created a benchmark in motor cycle retail. New retail identity extends
itself to every aspect of RE ownership experience. The service centers are also designed on same lines.

The company prefers doing annual rider events which have a direct connect with the customer.

Annual Rider Events

One of its branding initiatives is the Royal Enfield Garage Cafe in Goa. A 120-seater cafe, it also has a RE
motorcycle museum and exhibition area.

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 Such a unique way of communicating helps the company to increase its bike community base. This also
a strong brand loyalty.

Not to mention, this also creates a positive loop wherein its loyal base wants to try a new and higher
version of RE. In fact, the recent product launch of higher cc motorcycles (the 650 twins) is a result of
customer feedback. RE Customers wanted an upgrade to their existing motorcycles.

Pre-Owned Motorcycle Store

The company recently launched a new pre-owned motorcycle store format called Royal Enfield Vintage.
Here, the dealers will sell pre-owned, restored, refurbished motorcycles. The company has opened the
first store in Chennai and it aims to open 10 stores this year. In the coming years, RE will scale up this
concept nationwide.

How Will Pre-Owned Motorcycle Help the Company?

It will give its customers a really good experience of buying a pre-owned RE. The company will
provide a warranty on these pre-owned motorcycles.

With this, the company will have a complete control of the entire value chain. Also, it is an
important tool to maintain strong residual value of REs.

Although, the pre-owned business will not reflect in the company's revenues (because this
would be done directly by the dealers), it should help its revenue by selling more spare parts.

With new upgrades coming in (the Interceptor and Continental GT 650), it will help existing
customers to sell their existing REs to pre-owned store and buy new upgrades.

Key Revenue Drivers

Premiumisation of Motorcycle

Consumers are increasingly looking at riding as an extension of their lifestyle and also aim to be
associated with brands which are aspirational in nature.

This trend is reflected in the fact that, the 250cc and above segment grew at a CAGR of 48% in the last
six years, whereas, the overall growth in the motorcycle segment has grown by 5%. The percentage
share of >250cc bikes has increased from 0.9% in FY13 to 4.2% in FY18.

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 Premiumization Of the Motorcycle Industry

While higher disposable income, increased awareness, mushrooming biking clubs, road infrastructure
and lifestyle upgrades are driving the demand, and improved access to financing is aiding the
affordability for premium and branded products. For instance, the financing percentage as a proportion
of total customer increased to around 50% compared to around 33-35% one and half year ago.

Not to mention, India's median age of the population stands at 27.1 years as compared to 38.1 years in
developed countries like US. 59% of the Indian population lie in the 15-54 age group, the main target
market for RE bikes.

This provides a long runway for growth in premium bikes. RE has more than 90% market share in the
mid-size motorcycle (between 250cc - 750cc) segment.

Domestic Market Opportunity

RE has a good chunk of market share (20% to 35%) in states like Kerala, Punjab, Goa, Delhi, Chandigarh
which have very high per capita income.

Whereas, in bigger states like UP, Bihar, Madhya Pradesh, Rajasthan, RE has a market share of 2% to 4%.

These states offer significant room for growth in the coming years.

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 RE Matured and Untapped Markets

The management is focused on ramping up its dealership network from 825 dealers in FY18 to ~1,000
dealers in the next two-three years. Over CY13-FY18, RE's network has expanded substantially from 307
dealers to 825, and to ~858 by the end of Q2FY19.

Expansion of dealership network would lead to increase in access to the brand, which in turn, would
drive volume growth.

New Product Launch to Spurt Growth

RE recently launched its Interceptor 650 and Continental GT 650 twin cylinder motorcycles; its highest
cc bike yet.

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 Interceptor 650 and Continental 650 GT

The company has received the outstanding response from the global press on the overall motorcycle
and other aspects such as the ride quality, performance, look, and design.

Reviews of Interceptor

http://overdrive.in/ The Royal Enfield Interceptor, in a word, is desirable. It's simple design, classy
execution, marvelous engine are all things that will easily endear it to you. Take a
test ride and it's hard not to start thinking about buying one, a process made
ridiculously easy thanks to the stunning, stunning price.

I would say that the Royal Enfield Interceptor changes every known paradigm for
Indian motorcycles on the market today. A twin at this price? This kind of
smoothness at this price bracket? This kind of engineering at Royal Enfield? You
name, and it changes it. I looked askance at the company when they announced that
they wanted to be the world's largest maker of middleweight motorcycles. Today, I'm
a convert. Because they're off to a superb, superb start. Go take a test ride, I think
you'll find yourself reaching for a cheque book almost by reflex. The Royal Enfield
Interceptor is just that good.

auto.ndtv.com The Interceptor 650 is fantastic value for money. And I suspect a lot of prospective
Classic 500 customers may very well walk out of Royal Enfield dealerships with an
Interceptor 650 instead. A short test ride is all it takes to make an impression, and
we think this will certainly change the game, not just for Royal Enfield, but for
motorcycling in India in general. At those prices, for a product as well-rounded and
well-engineered as the Interceptor 650, motorcycling will never be the same again.

www.zigwheels.com/ This is a motorcycle that is hard to fault. Genuinely so. It makes for a great step up
for existing riders while offering new levels of refinement and performance. he

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 Interceptor’s charm will creep up on you, a motorcycle with lots of maturity that is
looking for a similar partner.

www.team-bhp.com You cannot but come away from a test ride feeling, that RE has finally brought out a
product that is a stunner. Ergonomics which can be fixed, aside, this bike has already
brought down prices of other bikes. That should give you even more confidence that
RE has actually got it right, first time, this time.

http://www.topgear.com
With the Interceptor, Royal Enfield has created an ideal upgrade for existing Classic/
Thunderbird 500 owners and an automatic option for anyone who has ever thought
of the Street 750/ T 100. Here is an exquisite modern classic that has the
refinement, build and handling to match anything else in the class and is incredibly
easy to use and live with. The fact that it feels nothing like a traditional Royal Enfield
should help bring a lot of new people into the fold too. Moreover, with a starting price
of Rs 2.5 lakh, makes this a proposition that you cannot turn away from.

Source: Review websites

The 650 Twins will provide a compelling upgrade to Royal Enfield's large customer base in India.
Similarly, it provides an attractive proposition to customers in developing markets like South East Asia
and Latin America to graduate to the mid-motorcycling segment. Not to mention, the 650 Twins pave the
way to target customers in mature markets like Europe and North America.

Apart from this new launch, the company also introduced a number of new variants to its best-selling
Classic range of motorcycles including the Gunmetal Grey and Stealth Black versions that added a rear
disc brake.

Similarly, RE launched the Classic Signals- Airborne Blue and Stormrider Sand. These are the first
motorcycles in India to feature dual channel Anti-Lock Braking System from Royal Enfield.

Earlier this year, RE launched Thunderbird X which received very good response.

Launching new products along with new variants of existing motorcycles will help the company to
deliver strong growth in both domestic as well as the export market.

Untapped Export Market

With its domestic business on a strong footing, the company has started to spread its wings outside
India. RE expects the international business to be its next major growth driver.

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 Mature Market - Targeting Mid-Sized Motorcycle Segment (250-750cc)

Royal Enfield is now present across 50 countries through a network of over 500 multi brand outlets and
36 exclusive stores, 11 of which were opened in in FY18. It has a strong presence in its existing markets
in UK, Thailand, France and Colombia. The company plans to add ~20-30 stores internationally by FY19.

It has started focusing on the LATAM market with opening up of a flagship store in Sao Paulo, Brazil.
LATAM is a market with a strong motorcycling culture.

In FY18, RE made entry into the new markets of Argentina in Latin American region and Vietnam in the
South-East Asia region. Vietnam is the world's fourth largest motorcycle market.

Over CY13-FY18, the company's export sales has grown at a CAGR of 43%. Going forward, the company
will continue its growth trajectory as export market is still relatively untapped. New product launch in
650cc category provides a way to enter mature markets like USA, Europe and Australia.

About Indian Two-Wheeler Industry

The Indian two-wheeler industry is the largest in the world. The two-wheeler market primarily comprises
motorcycle and scooter segments.

In the motorcycle segment, the industry is further structured into the entry, deluxe, performance segments.

Indian manufacturer sold 23 million units in FY18 (domestic + export). The domestic market contributed 88% of
sales with exports contributing the remaining.

Growing middle class, aspirational lifestyle, the need for mobility and increased penetration levels, increasing
urbanisation will continue to trigger growth of two-wheeler industry. Rapid growth of scooter and premium
motorcycles in the industry are led by the emergence of women buyers and millennials.

Does the Company Qualify on Equitymaster's Smart Money Score TM?

We believe, any good business needs to pass our checklist i.e. smart money score. You can find a detailed
explanation of what the smart money score in our guide. Smart Money Secrets - A Quick Start Guide.

1. Smart Money Invested - One of the important catalysts we look in a stock is the smart money. Based on the

15
holding (higher the better) and our comfort with super investor we assign a rating on a scale of 10.

We also like to see either the super investor or the promoters of the company increase their stake in the
company.

The main promoter in Eicher Motors is Mr Siddhartha Lal who is also the Managing Director and CEO of Eicher
Motors Ltd. Besides having a stake himself, he also owns the company through the Simran Siddhartha Tara
Benefit Trust, which is the family trust.

Eicher Motors' phenomenal success in the last decade can largely be attributed to Mr Siddhartha Lal. Indeed,
not all was hunky dory for the Royal Enfield brand from the beginning. When Siddhartha Lal entered the family
business in 2000, the management at Eicher was contemplating a sale or shutdown of the Royal Enfield
business. With paltry sales of 2000 motorcycles per month, it also seemed like the logical thing to do.

Siddhartha asked for time to give this business a shot as he felt it had immense potential. He first started
simplifying the business. When he joined, EML had businesses ranging from motorcycles, tractors, trucks to
footwear and garments.

The first thing he did was divest 13 of those businesses to focus on just the two i.e. Royal Enfield and the
truck business. This was his rationale behind the same:

'In my mind the basic question was this: do we want to be a mediocre player in 15 small businesses or just be
good in one or two businesses'

And focus on the RE business he did. From 2000 units in the year 2000, Royal Enfield sells 70,000 units a
month on an average today.

Even with the motorcycle business, Mr Lal was very clear about not getting into the mass market. He was
confident about RE's appeal as a premium bike. With that in mind, he focused on the positioning of the brand
through innovative marketing techniques.

Thus, Mr Lal's vision and sharp focus ensured not just the turnaround of Eicher Motors but also its superlative
growth in the last decade.

To add to that, Mr Lal has maintained his stake in the company over the years, a further indicator of the
conviction he has in the business.

There are also quite a few strong mutual funds and institutional investors who are betting on the Eicher
Motors growth story. For instance, ICICI Prudential Bluechip Fund and Vanguard Emerging Markets Stock
Index Fund have increased their stakes in Eicher in recent times.

Strong Fund Managers Betting on the Company

Cartica Capital Ltd 3.46 1.34 1.01 1.01 1.32

EUROPACIFFIC GROUTH FUND 3.97 4.00 4.00 2.37 2.37 2.20 1.76

ICICI Prudential Bluechip Fund 1.61 1.07 1.23

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 Motilal Oswal Multicap 35 Fund 1.07 1.06

New World Fund Inc 1.06 1.06

Vanguard Emerging Markets Stock Index Fund 0.69 0.69 0.76 0.76 0.84 0.84 0.84

8.12 6.03 4.76 4.19 6.89 6.19 6.21

Siddhartha Lal 1.08 1.08 1.08 1.08 1.08 1.08 1.08

Simran Lal 1.16 1.16 1.16 1.16 1.16 1.16 1.16

TARA LAL 1.16 1.16 1.16 1.16 1.16 1.16 1.16

The Brinda Lal Trust-Trustee Vikram Lal 1.79 1.79 1.79 1.78 1.78 1.78 1.78

THE EICHER GOODEARTH TRUST - TRUSTEE 10.04

VIKRAM LAL

The Simran Siddhartha Tara Benefit Trust- 25.03 44.22 44.21 44.17 44.14 44.12 44.12
Trustee Vikram Lal

Others 10.26 1.12 1.12

50.52 50.53 50.52 49.35 49.32 49.3 49.3

Source: Stock Exchange

Thus, keeping in mind that there is a super investor catalyst (promoter and CEO Mr Siddhartha Lal as well as
the family trust maintaining their stakes) and some strong mutual funds increasing their stake, we assign a
rating of 7 to Eicher Motors Ltd.

2. Business quality - One reason that makes Eicher Motors Ltd such a compelling story is the strength of its
business and the commanding position it enjoys in the premium bike segment.

Let us consider the company's business model first. Royal Enfield (RE) is present exclusively in the >250 cc
segment. It is virtually the market in this segment with a 91% market share.

For one, RE's vintage appeal gives it an edge over other contemporary bikes. The first Royal Enfield was rolled
out in the year 1901. Its vintage styling, traditional paint schemes make it stand out among other bikes.

Second, is the brand positioning. RE has positioned its bikes as a Leisure Bike That Can Be Owned By the
Masses. Thus, the positioning is such that it does not get thrown into competition with the mass markets but
also does not turn away the masses.

All of this has ensured that Eicher Motors has a strong footing in the domestic markets of Maharashtra,
Karnataka, Kerala and Punjab where it enjoys a high market penetration.

But that's not all. Royal Enfield has recently started in new regions like UP, Bihar, Madhya Pradesh and
Rajasthan where it is steadily able to increase market share. UP which is the largest motorcycle market in
India will provide further impetus for growth in case of market saturation in their other strongholds.

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Indeed, in the last decade, Royal Enfield volumes have grown at a blistering CAGR of 40%, which is
commendable.

But Royal Enfield is not resting on its laurels in the domestic markets and has ventured into exports as well.
RE expects the international business to be its next major growth driver. RE currently has 37 exclusive stores
overseas. It has a strong presence in its existing markets in UK, Thailand, France and Colombia and has
started focusing on the LATAM market with opening up of a flagship store in Sao Paulo, Brazil. LATAM is a
market with a strong motorcycling culture. In South East Asia, RE recently entered Vietnam, the world's fourth
largest motorcycle market. Indeed, although smaller compared to the domestic volumes, RE's export volumes
have grown at a robust CAGR of 32% in the last decade.

Essentially, the vintage appeal of the brand, strong new product line-up (Interceptor 650 and Continental GT
650 twin cylinder motorcycles), untapped export opportunity will further help Eicher Motors to post strong
growth in the coming years.

All of this can be seen in Eicher Motors' financials as well, which is reflected in the following metrics:

Business Quality

ROEs (out of 1.5) 30% 25% 1.5

ROCES (out of 1.5) 42% 32% 1.5

Total     3

       

Topline Growth (out of 1) 7% 16% 0.5

Bottomline Growth (out of 1) 46% 18% 1

Operating Profits (out of 1) 38% 16% 1

Total     2.5

       

D/E 0.02 0.0 2

       

OCF/PAT 1.4 1.2 2

Source: Ace Equity

As can be seen, the company has a lean balance sheet - there is no debt on its books, and superior return
ratios. Although return ratios are expected to be slightly lower than that in the past account of the near term
headwinds that the company has been facing.

Thus, we assign a rating of 9.5 on business quality.

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3. Competitive advantage - One of the important factors super investors look for is sustainable competitive
advantages aka economic moats. They love to invest in companies focusing on widening of moats.

So what makes Eicher Motors stand out?

First, if Warren Buffett were to invest in India, he would find Eicher Motors a very compelling case simply
because the company possesses a moat that is one of Buffett's favourites - strong brand.

RE has positioned its bikes as a Leisure Bike That Can Be Owned By the Masses. Thus, the positioning is such
that it does not get thrown into competition with the mass markets but also does not turn away the masses.

While high end bikes like can cost anywhere between Rs 5 lakh to Rs 50 Lakh, RE sells its bikes in the range of
Rs 1.4 Lakh - Rs 2 Lakh with slight variations depending on the colors and features. This puts RE in a
completely different segment by itself. A position where the masses aspire to be and the price point is likely to
be affordable once their disposable income increases.

Second, RE riders have made a strong network amongst themselves. Biking groups ride RE for long road trips
around India. These motorcycles have a cult status across India. A lot of youngsters go for an RE for joining
these bike groups around the world. A combination of a bike for daily use plus also one which can be used for
long weekend rides make RE stand out with respect to other bikes.

Third, what has also made Eicher Motors so dominant in the premium space it operates in is that other Indian
players have failed to leave any meaningful mark in this segment despite repeated attempts. This is testimony
to the strength and cult status of the Royal Enfield brand. Having said that, future competition not making any
dent on RE's fortunes cannot entirely be ruled out.

Thus, after doing a detailed analysis regarding Industry Rivalry, Bargaining Power of Buyers, Bargaining Power
of Suppliers, Threat of New Entrants and Threat of Substitutes, we assign a rating of 9 to Eicher Motors for its
economic moat.

4. Soul in the Game - The idiom of soul in the game stands for the owner operated companies i.e. companies
where owners and operators of the business are same. We believe higher stake and active involvement in the
business puts the incentives perfectly aligned.

So, we look out for companies owned and operated by good managers.

The Simran Siddhartha Tara Benefit Trust (which is the family trust with the trustee being Mr Vikram Lal,
Siddharth Lal's father) holds the majority stake in the company at around 44%, and this it has maintained over
the years. As mentioned earlier, Mr Siddharth Lal is the founder and CEO of Eicher Motors. He has pioneered
Eicher Motors' remarkable turnaround and superlative growth in the last decade. As a result, the brand Royal
Enfield now holds a dominating position in the premium bikes segment.

Further, in CY12-FY18, the total salary drawn stood at 1% of the total profits earned during the same period. In
FY18, in particular, salaries accounted for 2% of net profits. Thus, the salary numbers are decent given the kind
of involvement and improvements the management provides to the company.

Also, we have gone through the auditor's report and Related Party Transactions; even though the company
has entered in some related party transactions, we do not find any material transactions which may raise
questions on the management integrity.

19
 We believe, management has put its soul in the business. This is a kind of pattern our Super Investors look
out for. Thus, we assign a rating of 10 on this parameter.

5. Capital allocation - One of the patterns our super investors and we seek for is the efficient capital allocation by
the management. The best way to evaluate this could be to look at both the sources and the application of the
funds by the management over a period.

Sources of Funds

By sources of funds we mean the money raised by the company to grow its business. Typically, there are three
big sources i.e. Equity Dilution, Raising Debt and Internal Accruals (cash generated by the business).

We love the companies with capabilities of funding their growth using cash generated by the business itself.
Further, if these companies are present in the industries with big market opportunity, sky is the limit for them.

In case of Eicher Motors Ltd, in the period FY14-18, of the total funds raised by the company, around 95% of
the total funds were generated by the business. We believe this shows the robustness of the company's
business model. This shows the growth has been funded by cash generated by the business.

Sources of Funds over FY14-18

Application of Funds

After sourcing the capital, the next and most important aspect is the allocation of the raised money. We
believe generating cash from the business is not enough, it is very important for the company to deploy the
same in profitable ventures.

In the case of Eicher Motors Ltd, around 38% has gone towards growth capex, around 13% towards the
payment of dividend. The payment of dividend again gives us comfort for the shareholders of the company.

20
 However, the use of cash has not been optimal. Indeed, over this period, around 47.4% of the cash has been
used for purchase of investments. Much of this cash can be utilized by either increasing dividend payouts to
shareholders or investing more of it fruitfully back in the business.

Application of Funds over FY14-18

Thus, while Eicher Motors scores well in terms of its business generating healthy cash, we believe there is
scope to improve when it comes to allocating this capital. We, thus, assign a rating of 8 for capital allocation.

6. Earnings quality - One of the key challenges while evaluating small and mid-cap companies is the quality of
their earnings.

The growth in the sales and profits should translate into cash flows for the company. There should be a good
comparison between the accounting and cash profits to understand the quality of the earnings.

Eicher Motors now is a bluechip company. However, one crucial tool to check the earnings quality is the
proper analysis of the Cash Flow Statements (which many people miss to look at).

Over the years, we have found a similar pattern in companies that were fraudulent or bankrupt or both in India
and abroad. The usual culprit in both the cases involved money stuck in their working capital which meant
accounting profits weren't converted into cash profits.

We have devised a simple way to inspect earnings quality of any company. We begin with cash flow from
operations. Divide it in two parts i.e. Gross Cash Flow from Operations (GCFO) and Net Cash Flow from
Operations (NCFO). The difference being the 'changes in working capital'.

As a thumb rule, for a manufacturing company NCFO as a percentage of GCFO should not be significantly
below sixty percent. This simply means ideally not more than forty percent of the money should be stuck in
working capital.

21
 We applied the same rule on Eicher Motors Ltd and over FY14-18 this number on an average stood at 86%
which well above the sixty percent rule.

More importantly, in the case of Eicher Motors, robust advance booking due to high demand, low inventory
levels have ensured a negative net working capital for the company.

Thus, we assign a rating of 10 for earnings quality.

7. Scalability of the business - Identifying a good business is one thing, identifying a good business with
potential to grow at decent rates for years to come is another. One crucial factor for a business is the size of
the market it caters to.

Way back in 2000, Eicher Motors had contemplated selling or shutting down the same 'Royal Enfield' brand in
2000. But then, Siddhartha Lal took over and the rest they say is history.

From selling around 25,000 units annually in 2000, Royal Enfield today sells more than 800,000 motorcycles in
a year. That's a significant ramp up in volumes over the last 18 years led by a strong management team at the
help, superior brand positioning and high demand for Royal Enfield.

The robust business model has also ensured strong cash flows, as a result of which Eicher Motors managed
to increase its capacity through internal accruals. All this has resulted in minimal debt for the company and a
healthy cash balance to fund for future capacity expansion and other business activities.

All three of RE's manufacturing facilities are located near Chennai, Tamil Nadu. (Tiruvottiyur, Oragadam and
Vallam Vadagal). Through its three plants, RE currently has an annual production capacity of 9,50,000
motorcycles. To cater to the increasing demand, RE has commenced construction of Phase-2 of its Vallam
Vadigal facility in 2018-19.

Going forward, the vintage appeal of the brand, strong new product line-up (Interceptor 650 and Continental
GT 650 twin cylinder motorcycles), expansion into domestic markets, untapped export opportunity will further
help Eicher Motors to post strong growth in the coming years.

Thus, given all these factors, we assign a rating 10 based on scalability of business parameter.

8. Market leadership - Eicher Motors Limited (EML) is the owner of the 'Royal Enfield' brand, the global leader in
middleweight (250-750 cc) motorcycles.

RE commands a 91% market share in this particular segment with annual sales of more than 8,00,000
motorcycles.

Strong brand positioning, a robust network effect, razor sharp focus of the management, and inability of
competition so far to make a dent in its growth has ensured Royal Enfield's commanding hold over the
premium bikes segment.

Keeping these aspects in mind, we have assigned a rating of 8 to the company on this parameter.

Considering the above analysis, the total ranking assigned to the company is 71.5 (out of 80). On a weighted
basis, it stands at 9.0. This indicates that fundamentals of the business are robust.

22
Equitymaster Smart Money ScoreTM

Smart Money Invested 7.0                     15.0% 1.1

Business Quality 9.5                     15.0% 1.4

Competitive Advantage 9.0                     10.0% 0.9

Soul in the Game 10.0                     10.0% 1.0

Capital Allocation 8.0                     10.0% 0.8

Earnings Quality 10.0                     15.0% 1.5

Scalablilty in the Business 10.0                     15.0% 1.5

Market Leadership 8.0                     10.0% 0.8

*Excluding extraordinary gains

Lower the risk on a given parameter higher is the rating

Key Concerns
Increased Competition in the Premium Motorcycle Segment

The competition in the premium motorcycle segment is heating up. Recently M&M launched its cruiser
motorcycle Jawa at year-end. The Jawa will challenge the Royal Enfield Bullet, Bullet Electra and Classic
350.

Also, Harley Davidson has aggressive plans to launch 250-500cc motorcycles in India from 2020.
Additionally, Bajaj Auto will be launching the Triumph brand in this segment. Other international brands
such as BMW, Suzuki Motorcycles and Kawasaki have recently entered the Indian market.

Not to mention, apart from external competition, new product launch of the GT 650 Twins will likely to
cannibalize sales of the Classic 350 and Classic 500 models. This could have an impact on overall sales
growth and profitability in the coming years.

Short-Term Headwinds to Keep Business Under Pressure

The premium bike segment is mostly impacted due to higher insurance cost. The road safety committee
recently recommended that third-party insurance should be made mandatory for a period of five years
for two-wheelers instead of the one year currently.

For example, Royal Enfield's most popular model, the Classic 350 (with rear disc) has an ex-showroom
(Mumbai) price of Rs 1.47 lakh. With the RTO charges and the new mandatory insurance ruling, it now
has a minimum on-road cost of Rs 1.73 lakh, an increase of about 18%.

Similarly, additional regulatory requirements such as the anti-locking braking system (in April 2019) and
BS-VI implementation (in April 2020) will increase the cost of its bikes. This, in turn, will result in a
short-term disruption in demand.

23
 Apart from above unfavourable macroeconomic factors, such as tightening liquidity conditions, higher
inflation and a falling rupee also impacted consumer sentiment and hit demand for Royal Enfield and the
broader industry.

Updates On EICHER MOTOR: Valuations

Add: Alert | Portfolio
Market Data
Price On Reco. Date (Rs)
We have valued EML based on price to earnings basis. In fact, given the
company is growing rapidly and can surprise our conservative
assumptions on the positive side, we have conducted a scenario analysis.
20,570 (BSE)

CMP - BSE / NSE (Rs) 20,315 / What we have essentially done is kept both the earnings growth and the
20,335
PE multiple in a range that we are comfortable with and have tried to
Change Since Reco.  -1.2% deduce target price based on different combinations of the same.
52-week High/Low (Rs) 19,751 /
32,209 We believe, this gives a fair idea about the potential upside for the stock.
NSE Symbol EICHERMOT However, in addition to this we have derived a target price on basis of our
BSE Code 505200 numbers.
No. Of Shares 27.3 m

Face value 10
Expected Target Price (FY22) Under Different Assumptions of
Earnings Growth and P/E Multiples
FY18 dividend/share (Rs) 110

Dividend yield (%) 0.5%

Stock Classification Small cap

12% 15% 18% 20% 22%
Free Float 51%
20 22,623 25,147 27,598 29,813 31,851
Market Cap (Rs m) 561,561
22 24,886 27,661 30,358 32,795 35,036

25 28,279 31,433 34,497 37,267 39,814

Premium Search
28 31,673 35,205 38,637 41,739 44,592

EML is one of the most profitable companies within the two-wheeler

Rs 100 Invested Is Now Worth
industry with operating margins above 30%. Over CY12-FY18, the
company has expanded its operating margin by 22.7%.

RE's volume growth in the last few years has been very strong. The
company posted volume growth of 45.8% over CY12-FY18. Consistent
strong demand has outpaced supply in the last few years resulted in a
strong order book for the company.

View Updated Chart

Going forward, we expect moderate volume growth of 14% CAGR and 25% CAGR from the domestic and the export
market respectively. This would be driven by strong volume growth in under-penetrated markets such as UP,
Rajasthan, MP etc. Similarly, untapped export market, new product launches, and dealership expansion will further
help the company to post strong growth.

We have valued EML based on price to earnings basis. While doing this, we have assigned a PE multiple of 23 to
RE Business and a PE multiple of 12 to VECV Business. After considering the overall weightage of the respective
businesses, the aggregate multiple comes to around 22x.

24
Based on the strong fundamentals of the company and industry growth prospects, we value the company at 22
times our FY22 estimated earnings. This is still a 33% discount to the last 10-year average PE of the stock.

As such, we have arrived at a target price of Rs 30,358 for the company (from FY22 perspective).

This implies a CAGR of 14.1% (excluding dividend yield of 0.5%) and a point to point upside of 53%.

Please note, we have sent a special note on 7 January 2019. We have considered the closing price as of 7 January
2019.

We believe subscribers who are willing to hold the stock for the long-term could consider taking a partial exposure
of 50%.

Please note that the maximum buy price for 50% exposure is Rs 21,500.

For the stock to become a strong buy, it will have to fall by around 10% from its current price.

Subscribers could consider putting in not more than 50% of the sum intended to invest into the stock of
Eicher Motors Ltd at current valuations. We will let subscribers know through a special update when the
stock approaches best buy price. Until such an update, we recommend subscribers to consider not acting
on short term price movements.

According to us, in a scenario of ideal allocation of funds, bluechip stocks could be considered to comprise at
least 60% of one's total equity portfolio. Further, we believe that a single bluechip stock should ideally not form
more than 5-6% of the total portfolio. However, please note that this allocation will vary from person to person. For
something that works best for you, we recommend you talk to your investment advisor.

More On EICHER MOTOR

All Recommendation Reports | Latest Update | Latest Stock Quote

Financials At A Glance

Operational & Financial Ratios

EPS (Rs.) 613 719 845 995 1168 1380

Book Value Per Share 1961 2579 3220 3976 4792 5757

Dividend Payout Ratio (%) 16% 15% 20% 20 25% 25%

Margin Ratios (%)

EBITDA Margins 31% 31% 31% 31% 31% 31%

EBIT Margins 32% 32% 30% 30% 30% 30%

PBT Margins 32% 32% 30% 30% 30% 30%

PAT Margins 24% 22% 23% 23% 23% 23%

Performance Ratios (%)

25
 ROE 31% 28% 26% 25% 24% 24%

ROCE 41% 40% 34% 32% 32% 32%

ROIC 49% 54% 51% 50% 51% 54%

             

Turnover Ratios Days

Debtors 2 2 2 2 2 2

Inventory 17 15 20 17 17 18

Creditors 40 48 43 44 45 44

Cash Conversion Cycle (days) -21 -30 -21 -24 -25 -23

Fixed Assets Turnover (x) 8 8 5 5 5 6

Financial Stability Ratios (x)

Debt-equity 0 0 0 0 0 0

Current Ratio 1 1 2 2 2 2

Growth Ratios

Net Sales Growth (%) 14% 27% 11% 18% 18% 18%

PAT Growth (%) 25% 18% 17% 18% 17% 18%

Valuation Ratios

Price to Earnings (x) 32.4 27.6 23.5 19.9 17.0 14.4

Price to book value (x) 10.1 7.7 6.2 5.0 4.1 3.4

Price to sales (x) 7.7 6.0 5.5 4.6 3.9 3.3

Valuations

Sales 70,380 89,575 99,106 117,391 139,049 164,704

Sales growth (%) 14% 27% 11% 18% 18% 18%

Operating Profit 21,740 28,076 30,655 36,480 43,119 51,068

Operating profit margin (%) 31% 31% 31% 31% 31% 31%

Net profit (Adjusted) 16671 19597 23024 27120 31849 37616

Net profit margin (%) 24% 22% 23% 23% 23% 23%

Balance Sheet

Current assets 13,809 25,350 39,443 47,470 61,048 78,932

Fixed assets 12,423 18,310 23,155 26,984 29,798 31,597

Investments 41,077 49,513 49,014 61,805 72,924 84,850

Other non current assets 2,781 2,049 2,151 2,258 2,371 2,490

Total Assets 70,091 95,222 113,762 138,518 166,141 197,869

Current liabilities 15,298 22,652 23,711 27,875 33,234 38,666

Net worth 53,451 70,301 87,782 108,373 130,638 156,934

26
 Loan funds 1,119 1,508 1,508 1,508 1,508 1,508

Other liabilities 224 761 761 761 761 761

Total liabilities 70,091 95,222 113,762 138,518 166,141 197,869

Performance Review
This Performance Review is as per the closing prices for the stocks as on 16th January 2019.

GE Shipping - The maximum Buy price for this stock is Rs 286. Since the current price is above our maximum Buy
price. Our view remains HOLD.

Ador Fontech Ltd.- The Maximum Buy price for this stock is Rs 100. Since the current price is above our maximum
Buy price. Our view remains HOLD.

PI Industries Ltd- The Maximum Buy price for this stock is Rs 780. Since the current price is above our maximum
Buy price. Our view remains HOLD.

Newgen Software Technologies Ltd. - The maximum Buy price for this stock is Rs 260.

The stock has seen a significant up move recently and currently trading above our maximum buy price of Rs 260.
Our view remains HOLD.

Ajanta Pharma Ltd- We recommended Ajanta Pharma in September month. We came out with a special report in
October recommending subscribers to consider taking a partial exposure of 50%. Since then, the stock is up 16%.
We maintain our HOLD view on the stock.

Thomas Cook India Ltd - The maximum Buy price for this stock is Rs 220. The current price is above our maximum
buy price of Rs 220. Our View remains HOLD.

All other recommendations are trading below their respective recommended prices. Please find our views below.

SP Apparels - Our maximum Buy price for the stock is Rs 460. Thus, we maintain BUY view on the stock of SP
Apparels.

TCPL Packaging Ltd. - Our maximum Buy price for the stock is Rs 600. Thus, we maintain BUY view on the stock
of TCPL Packaging Ltd.

Mayur Uniquoters - Our maximum Buy price for the stock is Rs 400. Thus, we maintain BUY view on the stock of
Mayur Uniquoters Ltd.

TVS Srichakra Ltd. - The maximum Buy price for this stock is Rs 3,250. Hence, we maintain our BUY view on the
stock of TVS Srichakra Ltd.

Honda Siel Power Products Ltd. - The maximum Buy price for this stock is Rs 1,400. Hence, we maintain our BUY
view on the stock of Honda Siel Power Products Ltd.

Jagran Prakashan Ltd. - Thus, the current price is still below our maximum Buy Price of Rs 185. Hence, we
maintain our BUY view on the stock of Jagran Prakashan Ltd.

27
Ashiana Housing Ltd. - The maximum Buy price for this stock is Rs 200. Hence, we maintain our BUY view on the
stock of Ashiana Housing Ltd.

Bodal Chemicals Ltd. - The maximum Buy price for this stock is Rs 140. Hence, we maintain our BUY view on the
stock of Bodal Chemicals Ltd.

Karur Vysya Bank Ltd. - The maximum Buy price for this stock is Rs 105. Hence, we maintain our BUY view on the
stock of Karur Vysya Bank Ltd.

Indian Terrain Ltd. - The maximum Buy price for this stock is Rs 194. Hence, we maintain our BUY view on the
stock of Indian Terrain Ltd.

CCL Products Ltd - The maximum Buy price for this stock is Rs 280 (for 50% exposure). Hence, we maintain our
BUY view (50% of the sum intended to be put into the stock) on the stock CCL Products Ltd.

CDSL - The maximum Buy price for this stock is Rs 245 (for 50% exposure). Hence, we maintain our BUY view (50%
of the sum intended to be put into the stock) on the stock CDSL.

Persistent Systems Ltd - The maximum Buy price for this stock is Rs 625 (for 50% exposure). Hence, we maintain
our BUY view (50% of the sum intended to be put into the stock) on the stock Persistent Systems Ltd.

Smart Money Secrets Open positions as on 16th January 2019

Company

SP Apparels Ltd 3-Jun-17 Buy 424 766 236 -44% Buy 225%

TCPL Packaging Ltd 23-Jun-17 Buy 515 1,100 444 -14% Buy 148%

Ador Fontech Ltd 27-Jul-17 Buy 95 169 116 22% Hold 45%

Mayur Uniquoters Ltd 21-Aug-17 Buy 345 673 394 14% Buy 71%

TVS Srichakra Ltd 25-Sep-17 Buy 3,127 4,934 2,415 -23% Buy 104%

Honda Siel Power Products 26-Oct-17 Buy 1,314 2,387 1,075 -18% Buy 122%
Ltd

Jagran Prakashan Ltd 22-Dec-17 Buy 171 312 112 -34% Buy 178%

Ashiana Housing Ltd 27-Jan-18 Buy 187 328 116 -38% Buy 184%

Newgen Software 26-Feb-18 Buy 239 416 303 27% Hold 37%
Technologies Ltd

Bodal Chemicals Ltd 19-Mar-18 Buy 125 190 115 -8% Buy 66%

Karur Vysya Bank Ltd# 26-Apr-18 Buy 95 145 91 -5% Buy 59%

Indian Terrain Ltd 24-May-18 Buy 177 295 137 -23% Buy 115%

PI Industries Ltd* 25-Jun-18 Buy 736 1,054 837 14% Hold 26%

GE Shipping Ltd 23-Jul-18 Buy 280 420 306 9% Hold 37%

CCL Products (India) Ltd *^ 27-Aug-18 Buy 245 473 264 8% Buy 79%

Thomas Cook (India) Ltd 22-Oct-18 Buy 200 330 231 16% Hold 43%

Ajanta Pharma Ltd 23-Oct-18 Buy 976 1,555 1,137 16% Hold 37%

28
 Company

Central Depository Services 26-Nov-18 Buy 233 343 233 0% Buy 47%
(India) Ltd^

Persistent Systems 21-Dec-18 Buy 611 897 551 -10% Buy 63%
Limited^

Eicher Motors Ltd^ 7-Jan-19 Buy 19,823 30,358 20,737 5% Buy 46%

^ 50% of the sum intended to be put into the stock.

# Adjusted for bonus issue
*Average Price after Increasing Exposure

Here is our list of Top Stocks To Consider Buying

TVS Srichakra

Ashiana Housing Limited

Karur Vysya Bank

The Mailbag

A query about 3 Stocks in Super Investor Sumeet Nagar's Portfolio That You Can Buy Right Now.

The 3 stocks in Sumeet Nagar's portfolio are as follows

1. Mayur Uniquoters

2. CCL Products

3. Indian Terrain

Please note that you can view the stocks in open position on the homepage of Smart Money Secrets when you log
in.

Regards,

Sarvajeet Bodas (Research Analyst)

Co-editor, Smart Money Secrets

Sarvajeet Bodas (Research Analyst), holds a master's degree in finance. He has been a
finance blogger for more than four years, covering various topics in personal finance
and investing. His deep interest in behavioral finance was inspired by Charlie Munger,
Howard Marks, Guy Spier, and the works of Daniel Kahneman and Richard Thaler. He
likes to study the business models of companies in detail, keeping in mind the big
picture and focusing on current risks and challenges.

29
 Radhika Pandit (Research Analyst), is one of our senior analysts with more than a
decade-long stint in the field of equity research. She has helped build our
pharmaceutical sector research from scratch and has a firm grasp of the Indian
automobile industry. Being an ardent follower of Warren Buffett's value investing
philosophy, she believes in investing in solid businesses for the long haul.

Where Smart Money Secrets Fits In...

Our team will focus primarily in the mid and small cap domain. Having said that, we will remain market-cap agnostic towards
mispriced opportunities that the markets may present to us.

Market participants must note that stock markets tend to be very volatile. Mid and Small cap stocks are inherently riskier
compared to large blue-chip stocks. On the brighter side, they present a huge growth potential. It is not unusual for a good small
and mid-cap stock to turn a multibagger in a short period of time. But on the flipside, there is a considerable risk attached. And
putting too much money in a single stock or sector can be very risky.

According to us, in a scenario of ideal allocation of funds, predominantly mid and small-cap stocks could be considered to
comprise of not more than 30-40% of your total equity portfolio. Further, we believe a single small cap stock should not form more
than 2-3% of the total portfolio. Please note that this allocation will vary from person to person. For something that works best for
you, we recommend you talk to your investment advisor.

Frequently Asked Questions

These are some of the Most Frequently Asked Questions on Smart Money Secrets. Please view the others here.

If the stock price runs up post the recommendation and trades at levels higher than the
buy price, should one still buy the stock?
Please note that small and midcap stocks, in general, have low market capitalisation and liquidity. There is always
the possibility that these stocks may shoot up in price in no time, even at the time of our recommendation.

Therefore, we would like to recommend to our subscribers not to chase prices and not to consider buying a stock
once it goes beyond our recommended maximum buy price. There will be enough recommendations in a year so
that the pain of missing out on a few recommendations is eased considerably.

Do note that we give maximum buy price range for every stock we recommend in Smart Money Secrets.

Can there be an overlap or contrary views on the stocks recommended under this service
and that of the other Equitymaster services?
We believe that earning good returns from stocks is all about following a well-defined process.

In line with this, each of our product teams, be it the Smart Money Secrets team or Hidden Treasure or The India
Letter, has its own unique screen and checklist for selecting and recommending stocks. In rare cases, where there
is a compelling proposition to recommend a stock in more than one service simultaneously, could there be an
overlap in stocks.

For example, the Smart Money team has unique smart money screener for any stock to pass i.e. 1) Greater than 1%
shareholding of Super Investors; 2) Bulk & Block Deals; and 3) Increasing Promoter Shareholding. On the other
hand, same stock could be recommended under another service irrespective of the smart money screener. In fact,
any service may have recommend a stock and now smart money has entered the stock, it becomes a candidate

30
for Smart Money Team.

Thus, there could be recommendations that overlap with those in our other services. This aspect also leaves the
stage open for sometimes contradictory recommendations.

What does 'Closed Position' mean?

StockSelect recommendations are meant to meet the target prices within a time frame of three years. So when the
stock meets target price or completes the time frame we 'close the recommendation'. However, since we keep
reviewing our assumptions and estimates for the stock even in the interim, the view or target price on the stock
may warrant a change. This could be a revision upwards or downwards. In such cases, if the previous
recommendation on the stock is no longer valid we close that recommendation. So we essentially close
recommendations either by giving a Sell view or putting out a changed view.

How to read the returns calculations?

For positions that are not closed returns are calculated from date of recommendation till date.

For closed positions, there can be two types of calculations.

Assuming we initially gave a Buy on a stock with no subsequent recommendations on the same stock.
In that case the calculation is fairly simple. The returns shown in this case is simply the change in stock
price from the date of recommendation till the date on which the position was closed.

Now let us take a case where we initiated with a Buy (1st position) and subsequently came with another
recommendation (2nd position) on the same stock. Let us assume that the subsequent
recommendation was also a buy. In such cases, the return calculation depends on whether the 1st
position is closed or not. If the first position is closed before we reiterate buy then the return on the first
position will be calculated as shown previously. However, if 1st position was not closed before we
reiterated buy, then the return calculation is from the earlier buy recommendation till the date on which
the position was closed. Basically where we have reiterated view on a stock we try to show cumulative
returns. The same logic applies with Hold recommendations as well.

Now let us look at Sell recommendations. There can be two situations here.

If there is no recommendation subsequent to the Sell recommendation we show maximum drop in stock
price from date of sell recommendation till date.

If the Sell recommendation is followed up by another recommendation, we show maximum drop in stock
price between the two recommendation dates.

Basically we have tried to cover all hypothetical instances in this note that may help you better understand the
return calculations and closed positions of our recommendations. If you have any query pertaining to it please do
write in to us for further clarifications.

Definitions of Terms Used

Buy recommendation: This means that the subscribers could consider buying the concerned stock at
current market price keeping in mind the tenure and objective of the recommendation service.

31
 Hold recommendation: This means that the subscribers could consider holding on to the shares of the
company until further update and not buy more of the stock at current market price.

Buy at lower price: This means that the subscribers should wait for some correction in the market price
so that the stock can be bought at more attractive valuations keeping in mind the tenure and the
objective of the service.

Sell recommendation: This means that the subscribers could consider selling the stock at current
market price keeping in mind the objective of the recommendation service.

To enhance your experience of using Smart Money Secrets and to ensure that this journey is smooth for you we have compiled a list
of Frequently Asked Questions.

DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014

INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint
venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research
Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment
opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:

For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:

a. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
b. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
c. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject
company at the end of the month immediately preceding the date of publication of the research report.
d. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research
report.

DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:

a. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
b. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
c. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject
company in the past twelve months.
d. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or
brokerage services from the subject company in the past twelve months.
e. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the
research report.

GENERAL DISCLOSURES:

a. The Research Analyst has not served as an officer, director or employee of the subject company.
b. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.

Definitions of Terms Used:

a. Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective
of the recommendation service.
b. Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock
at current market price.
c. Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive
valuations keeping in mind the tenure and the objective of the service.

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 d. Sell recommendation: This means that the subscriber could consider selling the stock at current market price keeping in mind the objective of the
recommendation service.

Feedback:

If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

MORE ON EICHER MOTOR MORE SMART MONEY SECRETS

This Quality Stock is Finally Available at Persistent Systems Ltd

Reasonable Valuations (Smart Money Secrets)
(Smart Money Secrets Special Report) Dec 21, 2018

Jan 7, 2019
Smart Money Secrets recommendation report for
For the first time, we are recommending this the month of December 2018.
bluechip stock in Smart Money Secrets.

Ashiana Housing Limited: Supply Reducing,

Does the Recent Correction In Eicher Motors Bookings on Track, Profits Delayed
Merit an Action? (Smart Money Secrets Special Report)
(ValuePro Updates) Nov 27, 2018

Jan 2, 2019
Overall Improvement in the Supply Situation in its
Eicher Motors' recent sales numbers have resulted core market and strong pipelines of new projects
in a sharp correction in the stock. Is it a good time makes its future promising.
to buy this brand?

Central Depository Services Ltd

Eicher Motors Ltd (Smart Money Secrets)
(ValuePro) Nov 26, 2018

Nov 5, 2018
Smart Money Secrets recommendation report for
During times of extreme pessimism, buy branded the month of November 2018.
stocks.

CCL Products: 13% Down from Our

Eicher Motors: Enfield supports consolidated Recommended Price, What Next?
numbers (Smart Money Secrets Special Report)
(Quarterly Results Update - Detailed) Oct 25, 2018

Nov 13, 2013

The recent correction in this stock can be an
Eicher Motors declared its results for the quarter opportunity.
ended September 2013. The company's revenues
grew by 14% YoY, while profits were higher by 63%
Does the Recent Correction Warrant Exposure
YoY during the quarter.
in Ajanta Pharma?
(Smart Money Secrets Special Report)
Oct 23, 2018
Eicher: Enfield keeps the momentum going
(Quarterly Results Update - Detailed) What does the 10% correction in the stock price of
Sep 4, 2013
Ajanta Pharma mean for subscribers?

More Views on News     Recommended Reading More Views on News     Recommended Reading

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