INVESTMENT IDEA 27 Jan 2017

PCG RESEARCH
SML Isuzu

Industry CMP Recommendation Add on Dips to band Target Time Horizon

Commercial Vehicles Rs. 1202 BUY Rs. 1120 - 1070 Rs. 1432 12 Months

HDFC Scrip Code SWAMAZ

SML Isuzu Ltd. (SMLI) is a commercial vehicle manufacturer company. It was set up as Swaraj Mazda
BSE Code 505192 Limited in 1983. At that time, it represented the coming together of 3 powerful corporate brands: Swaraj,
NSE Code SMLISUZU Mazda and Sumitomo (Japanese Company).

Bloomberg SM IN SMLI manufactures a range of vehicles such as trucks, buses and ambulances. The company has launched
products like 4WD, Samrat, Sartaj, Dual Cab, Supreme8 tonner, Truck Super 12, Super ALFD and many
CMP as on 27 Jan 17 1202
more. Companys products finds its buyers in countries such as Bangladesh, Nepal, Nigeria, Ghana, Zambia,
Equity Capital (Rs mn) 144.7 West Indies, Sri Lanka etc.
Face Value (Rs) 10
Investment Rationale:
Equity O/S (mn) 1.45
Economic growth will drive growth in CV Segment: Economic growth in the medium to long term would
Market Cap (Rs mn) 17401.4 be driven by infrastructure investments. And this trend would generate increased demand for commercial
Book Value (Rs) 235 vehicles in coming years. Apart from macro-economic factors, implementation of emission (BS-IV norm) &
anti-overloading norms, scrapping regulations for older vehicles and changing landscape of the logistics
Avg. 52 Week Volumes 97814
industry towards an organized one would continue to support demand for CVs.
52 Week High 1434
Capacity Expansion: We expect SMLs capacity utilization to improve in near future. The board has already
52 Week Low 645 approved a proposal to invest Rs 300mn to expand the capacity of its plant from 18,000 units to 24,000
units p.a. The expansion will enable to meet the high demand during the peak season and reduce inventory
build-up and its related costs. The new production line will become operational by FY18.
Shareholding Pattern (%)
New Launches: The Company has upgraded product range to stay relevant and competitive against larger
Promoters 44
peers. Recently, the company has launched Ecomax Bus which is designed for tours and travel operators and
Institutions 7.5 staff shuttle operations. This bus will compete with Force traveler, Tata Motors City ride, Tata Motors Winger
and Mahindra tourister. Market size of this segment buses (upto 5 ton bus category) are ~2200
Non Institutions 48.5
buses/month and SMLI is expecting to clock ~300 units in coming months.

PCG Risk Rating* Yellow Steady Growth rate: Company has maintained healthy top and Bottom line growth over the period FY13-
* Refer Rating explanation 16. Topline grew at 5% and Bottom-line Grew at 12% CAGR over the same period. The Company has very
minimal debt and paying healthy dividend to its shareholders since 2000. SML Isuzu has sold total 12700
units (7% YoY) in FY16 and according to our estimates it will cross the 20000 till FY19E. ROE and ROCE rose
Nisha Sankhala
to 16% & 15% compare to previous 14.4% & 12.8%. We expect both to reach at 25.8% & 22.2% till FY19E.
nishabenshankhala@hdfcsec.com While Revenue and Profit are estimated to post CAGR of 21% and 38% over FY16-19E.

Private Client Group - PCG RESEARCH Page |1

 PCG RESEARCH
Aftermath of Demonetization: SMLIs ~50% revenue comes from school buses segment which is high
growing segment and least impacted from currency demonetization.

Truck segment which contributes ~ 47% of overall volume, presence in 5.5-10 MT categories, given low
ticket offerings and 95% finance through bank, could be relatively insulated in terms of demand impacts. As
per our channel checks, LCV cargo demand fell by 30% owing to demonetization issue but situation will
improve in the next two months.

Risk & Concerns:

High Competition from big players
Increase in raw material prices may impact its margins

View & Valuation:

Improved capacity utilization, expanding dealership network and new product launches (with focus on
improved cabin and fuel efficiency) bode well for the growth of SML in times to come. Currently the stock
trades at ~12.8x of FY19E. We recommend SML Isuzu to BUY between the price bands of Rs. 1120 - 1070
for the Target price of Rs. 1432 (at ~15.3x) for next 12 Months time period.

Financial Summary (Rs mn)

2QFY17 2QFY16 YoY (%) 1QFY17 QoQ (%) FY16 FY17E FY18E FY19E
Net Sales 3,046 2,689 13.3 4,632 -34.2 11,643 14,100 17,087 20,383
EBITDA (adj.) 179 125 42.8 612 -70.8 848 1,233 1,712 2,220
APAT 97 64 52.5 411 -76.4 512 746 1,037 1,357
Diluted EPS (Rs) 6.7 4.4 52.5 28.4 -76.4 35.4 51.5 71.6 93.7
P/E (x) 34 23.3 16.8 12.8
EV / EBITDA (x) 20.7 14.7 10.6 8.2
RoE (%) 15.1 18 20.3 22.3
Source: Company, HDFC sec Research

H1 FY17 Update:

In 1HFY17, the company reported 19.8% YoY growth in top line and 45% growth in bottom line. SMLIs
market share in the overall bus segment increased to 9.2% in H1 FY17 vs. 8.5% in H1 FY16 and volume
jumped by 14% YoY to 4744 units. The company is also gaining traction in cargo segment. Sales volume in
cargo segment jumped by 34% in H1 FY17 to 3360 units with growing acceptance of its Super Supreme,
Cosmo, Sartaj and Prestige premium trucks.

Private Client Group - PCG RESEARCH Page |2

 PCG RESEARCH

Financial Summary (Rs mn)

Q2 FY17 Q2 FY16 YoY (%) Q1 FY17 QoQ (%)
Volume (Mn Units) 3,427 3,042 12.7 4,783 -28.4
Net ASP (Rs) 8,84,389 8,77,909 0.7 9,65,168 -8.4
Net Sales 3,031 2,671 13.5 4,616 -34.3
Other Operating Income 15 18 -17.4 16 -3.2
Net sales (incl OOI) 3,046 2,689 13.3 4,632 -34.2
Material Expenses 2,229 2,003 11.3 3,404 -34.5
Employee Expenses 360 296 21.9 351 2.6
Other Operating Expenses 278 265 4.8 265 5.1
EBITDA 179 125 42.8 612 -70.8
Depreciation 56 46 22.4 58 -3.8
EBIT 123 80 54.4 554 -77.8
Other Income 16 21 -20.4 10 67.3
Interest Cost 7 7 2.8 6 25.4
PBT 132 93 41.8 558 -76.3
Tax 35 30 18.9 147 -76.1
APAT 97 64 52.5 411 -76.4
Adj EPS 6.7 4.4 52.5 28.4 -76.4
Source: Company, HDFC sec Research

Volume Assumptions:
(in units) FY15 FY16 FY17 FY18E FY19E
Buses 7,759 6,789 7,726 8,892 10,018
% YoY 23.90% -12.50% 13.80% 15.10% 12.70%
Trucks 3,692 5,408 6,902 8,494 10,250
% YoY 18.00% 46.50% 27.60% 23.10% 20.70%
Domestic volumes 11,451 12,197 14,628 17,386 20,268
% YoY 22.00% 6.50% 19.90% 18.90% 16.60%
Exports 370 503 490 489 522
% YoY -0.30% 35.90% -2.60% -0.20% 6.70%
Total sales 11,821 12,700 15,118 17,875 20,790
% YoY 21.10% 7.40% 19.00% 18.20% 16.30%
Source: Company, HDFC sec Research

Private Client Group - PCG RESEARCH Page |3

 PCG RESEARCH

Steady Volume Growth Net ASP Witnessed Decline on Weaker Mix

Volume (units) % YoY - RHS Net ASP (Rs '000) % YoY - RHS

5,000 50% 1,050,000 15.0

4,500 1,000,000 10.0

4,000 30% 950,000 5.0
3,500 900,000 -
3,000 10% 850,000 (5.0)
2,500
800,000 (10.0)
2,000 -10%
750,000 (15.0)
1,500
700,000 (20.0)
1,000 -30%

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17
2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17
Source: Company, HDFC sec Research Source: Company, HDFC sec Research

Strong Shift towards Cargo Segment Tonnage Mix Was Adverse On YoY Comparison

Total buses Total trucks HCV LCV

100% 100%

32 27 32
80% 37 43 80% 43 55
44 34 44 39 39 47
52 55 43 45
67
60% 60%

40% 40%
68 73 68
63 57
56 57 66 56 61 53 45
48 45 57 61 55
20% 20%
33

0% 0%
2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17
Source: Company, HDFC sec Research Source: Company, HDFC sec Research

Private Client Group - PCG RESEARCH Page |4

 PCG RESEARCH

Balance Sheet (mn)

Income Statement (mn) As at March FY15 FY16 FY17E FY18E FY19E
Year ending March FY15 FY16 FY17E FY18E FY19E
SOURCES OF FUNDS
Net Revenues 11,055 11,643 14,100 17,087 20,383 Share Capital - Equity 145 145 145 145 145
Growth (%) 25.4 5.3 21.1 21.2 19.3 Reserves 2,884 3,257 3,799 4,565 5,650
Material Expenses 8,106 8,479 10,293 12,508 14,879 Total Shareholders Funds 3,029 3,401 3,944 4,710 5,796
Employee Expenses 1,201 1,249 1,367 1,504 1,730 Long Term Debt - - 500 500 500
Other Operating Expenses 1,093 1,068 1,206 1,363 1,554 Short Term Debt 223 550 550 550 550
EBITDA 655 848 1,233 1,712 2,220 Total Debt 223 550 1,050 1,050 1,050
EBITDA Margin (%) 5.9 7.3 8.7 10 10.9 Net Deferred Taxes 26 56 56 56 56
EBITDA Growth (%) 106.9 29.4 45.4 38.8 29.6 Long Term Provisions &
Depreciation 198 196 236 322 372 Others 844 869 1,043 1,251 1,501
EBIT 458 652 998 1,390 1,847 TOTAL SOURCES OF FUNDS 4,122 4,876 6,092 7,067 8,404
Other Income (Including APPLICATION OF FUNDS
EO Items) 88 83 105 120 122 Net Block 1,378 1,711 2,575 3,453 3,881
Interest 58 52 95 89 84 CWIP 266 403 700 300 500
PBT 487 684 1,008 1,421 1,885 Investments - - - - -
Tax (Incl Deferred) 118 172 262 384 528 LT Loans & Advances 326 378 403 428 453
Total Non-current Assets 1,971 2,492 3,679 4,181 4,834
APAT 369 512 746 1,037 1,357
Inventories 2,859 3,385 3,721 4,509 5,379
APAT Growth (%) 112.2 38.6 45.7 39 30.9
Debtors 1,044 1,028 1,332 1,614 1,925
Adjusted EPS (Rs) 25.5 35.4 51.5 71.6 93.7
Other Current Assets - - - - -
EPS Growth (%) 112.2 38.6 45.7 39 30.8
Cash & Equivalents 878 361 293 233 329
Source: Company, HDFC sec Research
Total Current Assets 4,780 4,775 5,346 6,356 7,632
Creditors 2,003 1,719 2,193 2,658 3,171
Other Current Liabilities &
Provns 626 671 738 812 893
Total Current Liabilities 2,629 2,390 2,932 3,470 4,064
Net Current Assets 2,151 2,384 2,414 2,886 3,568
Total Application of Funds 4,122 4,876 6,092 7,067 8,404
Source: Company, HDFC sec Research

Private Client Group - PCG RESEARCH Page |5

 PCG RESEARCH
Key Ratio
Cash Flow Statement (mn)
Key Ratios (%) FY14 FY15 FY16 FY17E FY18E
Year ending March FY14 FY15 FY16 FY17E FY18E
PROFITABILITY (%)
Reported PBT 487 684 1,008 1,421 1,885
GPM 26.7 27.2 27 26.8 27
Non-operating & EO items 8 - - - EBITDA Margin 5.9 7.3 8.7 10 10.9
Interest expenses 58 52 95 89 84 APAT Margin 3.3 4.4 5.3 6.1 6.7
Depreciation 198 196 236 322 372 RoE 12.8 15.9 20.3 24 25.8
Working Capital Change 35 -777 51 -348 -362
RoIC (or Core RoCE) 11.6 14.1 15.7 17.9 20.4
Tax Paid -68 -172 -262 -384 -528 RoCE 13.5 15.1 18 20.3 22.3
OPERATING CASH FLOW (a) 719 -18 1,127 1,100 1,452 EFFICIENCY
Capex -343 -664 -1,398 -800 -1,000 Tax Rate (%) 24.2 25.1 26 27 28
Free cash flow (FCF) 376 -682 -271 300 452 Fixed Asset Turnover (x) 4.7 4.1 3.6 3.3 3.4
Investments - - - - Inventory (days) 94.4 106.1 96.3 96.3 96.3
Non-operating Income -23 -59 -168 -294 -444 Debtors (days) 34.5 32.2 34.5 34.5 34.5
INVESTING CASH FLOW ( b ) -367 -723 -1,565 -1,094 -1,444 Payables (days) 66.1 53.9 56.8 56.8 56.8
Debt Issuance/(Repaid) 223 327 500 - - Other Current Liab & Provns (days) 20.7 21 19.1 17.3 16
Interest Expenses -58 -52 -95 -89 -84 Cash Conversion Cycle (days) 42 63.4 54.9 56.7 58
Debt/EBITDA (x) 0.3 0.6 0.9 0.6 0.5
FCFE 540 -407 135 211 368
Net D/E (x) -0.2 0.1 0.2 0.2 0.1
Share Capital Issuance - - - - -
Interest Coverage (x) 7.9 12.6 10.6 15.6 22
Dividend -51 -136 -203 -271 -270
PER SHARE DATA (Rs)
FINANCING CASH FLOW ( c ) 114 140 202 -360 -354
EPS 25.5 35.4 51.5 71.6 93.7
NET CASH FLOW (a+b+c) 466 -602 -236 -355 -346 CEPS 39.2 48.9 67.8 93.9 119.5
Closing Cash & Equivalents 877 361 293 233 329 Dividend 6 8 12 16 16
Source: Company, HDFC sec Research Book Value 209.2 234.9 272.4 325.3 400
VALUATION
P/E (x) 47.1 34 23.3 16.8 12.8
P/BV (x) 5.7 5.1 4.4 3.7 3
EV/EBITDA (x) 25.6 20.7 14.7 10.6 8.2
EV/Revenues (x) 1.4 1.4 1.1 0.9 0.8
OCF/EV (%) 4.5 -0.1 7.2 7 9.2
FCF/EV (%) 2.4 -4.1 -1.7 1.9 2.9
FCFE/Mkt Cap (%) 3.3 -2.5 0.9 1.4 2.5
Dividend Yield (%) 0.5 0.7 1.2 1.5 1.5
Source: Company, HDFC sec Research

Private Client Group - PCG RESEARCH Page |6

 PCG RESEARCH

Rating Chart

R HIGH
E
T
U MEDIUM
R
N LOW
LOW MEDIUM HIGH
RISK

Ratings Explanation:

RATING Risk - Return BEAR CASE BASE CASE BULL CASE

IF RISKS MANIFEST
IF INVESTMENT
PRICE CAN FALL 15%
IF RISKS MANIFEST RATIONALE
LOW RISK - LOW & IF INVESTMENT
BLUE PRICE CAN FALL FRUCTFIES PRICE
RETURN STOCKS RATIONALE
20% OR MORE CAN RISE BY 20% OR
FRUCTFIES PRICE
MORE
CAN RISE BY 15%
IF RISKS MANIFEST
IF INVESTMENT
PRICE CAN FALL 20%
MEDIUM RISK - IF RISKS MANIFEST RATIONALE
& IF INVESTMENT
YELLOW HIGH RETURN PRICE CAN FALL FRUCTFIES PRICE
RATIONALE
STOCKS 35% OR MORE CAN RISE BY 35% OR
FRUCTFIES PRICE
MORE
CAN RISE BY 30%
IF RISKS MANIFEST
IF INVESTMENT
PRICE CAN FALL 30%
IF RISKS MANIFEST RATIONALE
HIGH RISK - HIGH & IF INVESTMENT
RED PRICE CAN FALL FRUCTFIES PRICE
RETURN STOCKS RATIONALE
50% OR MORE CAN RISE BY 50%
FRUCTFIES PRICE
OR MORE
CAN RISE BY 30%

Private Client Group - PCG RESEARCH Page |7

 PCG RESEARCH

Rating Definition:

Buy: Stock is expected to gain by 10% or more in the next 1 Year.

Sell: Stock is expected to decline by 10% or more in the next 1 Year.

Private Client Group - PCG RESEARCH Page |8

 PCG RESEARCH

I, Nisha Sankhala, MBA, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject
issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No

Disclaimer:
This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or
arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of
warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information
purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an
offer or solicitation of an offer, to buy or sell any securities or other financial instruments.
This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any
locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject HDFC Securities
Ltd or its affiliates to any registration or licensing requirement within such jurisdiction.
If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not
be reproduced, distributed or published for any purposes without prior written approval of HDFC Securities Ltd .
Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived
from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.
It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HDFC Securities Ltd may from time to time solicit from, or perform broking, or other services for,
any company mentioned in this mail and/or its attachments.
HDFC Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies)
mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the
company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and
other related information and opinions.
HDFC Securities Ltd, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any
action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the
dividend or income, etc.
HDFC Securities Ltd and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or
may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report.
HDFC Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other
assignment in the past twelve months.
HDFC Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report
for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or
specific transaction in the normal course of business.
HDFC Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research
report. Accordingly, neither HDFC Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not
based on any specific merchant banking, investment banking or brokerage service transactions. HDFC Securities may have issued other reports that are inconsistent with and reach different
conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an
officer, director or employee of the subject company. We have not received any compensation/benefits from the Subject Company or third party in connection with the Research Report.
HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH000002475

HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg
(East), Mumbai 400 042

HDFC securities Limited, 4th Floor, Above HDFC Bank, Astral Tower, Nr. Mithakali 6 Road, Navrangpura, Ahmedabad-380009, Gujarat.

Website: www.hdfcsec.com Email: pcg.advisory@hdfcsec.com

Private Client Group - PCG RESEARCH Page |9