Eicher Motors

India Equity Research | Auto & Auto Ancillaries

February 19, 2019
Company Update Emkay
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Refer to important disclosures at the end of this report

CMP Target Price

RE weakness spreads far and wide Rs 20,410

as of (February 19, 2019)
Rs 18,000 (■)
12 months

Rating Upside
SELL (■) (11.8) %

 RE’s domestic volumes declined 5% yoy in Q3, led by declines in major states such as Change in Estimates
Tamil Nadu (-37%), Kerala (-24%), Gujarat (-25%), Maharashtra (-15%), Karnataka (-9%), EPS Chg FY19E/FY20E (%) -/-
and Andhra Pradesh (-11%). The number of states witnessing a decline has increased Target Price change (%) NA
to 18 in Q3 from 10 in Q2, with the addition of major states including Tamil Nadu Target Period (Months) 12
and Andhra Pradesh.
Previous Reco SELL
 South region volumes declined sharply by 21%, while West region fell 7%. In comparison, Emkay vs Consensus
the North and East regions grew at a slower pace of 5% and 12%, respectively. The
EPS Estimates
company has indicated price increases and model-year change impact as the major
reasons for volume declines. As per our channel checks, volume performance was also FY19E FY20E
impacted due to the emergence of strong competition. Emkay 835.6 956.4

 Vehicle prices have increased substantially (more than 15%) in the 350cc category Consensus 861.0 1,017.3
motorcycles due to an increase in insurance premiums (~3%), adoption of new safety Mean Consensus TP (12M) Rs 22,959
norms (~10%), and pass-through of commodity inflation (~2%). Prices are expected to Stock Details
increase further in Apr'20 due to the transition to BS6 emission norms (3-6%). Bloomberg Code EIM IN
 Competitive intensity has increased in the cruiser motorcycles segment after the entry of Face Value (Rs) 10
Jawa Motorcycles, which has provided an alternative to RE's unique brand positioning and Shares outstanding (mn) 27
offerings. Jawa has witnessed strong order bookings, and its existing production capacity
52 Week H/L 32,237 / 18,780
is fully booked until Sep'19.
M Cap (Rs bn/USD bn) 557 / 7.80
 After 3% volume growth for RE in FY19E, we expect the growth rate to remain in single
Daily Avg Volume (nos.) 122,745
digits at 9% in FY20E and 6% in FY21E. This is notably lower than the 46% volume CAGR
over FY13-18. We have assumed revenue/earnings growth of 14%/9% over FY18-21E. Daily Avg Turnover (US$ mn) 36.7
We have a Sell rating on the stock, with a target price of Rs18,000, valuing the RE
Shareholding Pattern Dec '18
business at a PE of 17x and the VECV business at a PE of 15x.
Promoters 49.3%

 Substantial increase in vehicle prices: Vehicle prices have increased substantially FIIs 30.8%
(more than 15%) in the 350cc category motorcycles due to an increase in insurance DIIs 6.2%
premiums (~3%), adoption of new safety norms (~10%), and pass-through of commodity Public and Others 13.7%
inflation (~2%). Prices are expected to increase further in Apr'20 due to the transition to
BS6 emission norms (3-6%). The sharp price increases have resulted in a Price Performance
postponement of purchases and in marginal down-trading toward lower (%) 1M 3M 6M 12M
displacement vehicles as well. Absolute 1 (18) (28) (25)
 Credible competition emerges: Competitive intensity has increased in the cruiser Rel. to Nifty 4 (17) (22) (26)
motorcycles segment with the launch of Jawa motorcycles by Classic Legends.
Relative price chart
Jawa/Jawa42 motorcycles have received strong order bookings and its existing production
31600 Rs % 20
capacity is fully booked until Sep’19. Another product, Jawa Perak, is expected to be
launched by the end of 2019. We expect the cruiser motorcycles segment (300-650cc) 29050 8

to see an 8% CAGR over FY18-21E, driven by strong demand for Jawa (our FY20/21 26500 -4

volume estimate: 48,000/72,000), and a 6% CAGR for RE. 23950 -16

Please see our sector EAP (page 7): Emkay Alpha Portfolio – Automobiles & Auto 21400 -28

Ancillaries
18850 -40
Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19
Financial Snapshot (Consolidated) Eicher Motors (LHS) Rel to Nifty (RHS)

(Rs mn) FY17 FY18 FY19E FY20E FY21E Source: Bloomberg

Revenue 70,334 89,650 99,243 116,328 132,257 This report is solely produced by Emkay Global. The
EBITDA 21,740 28,076 30,015 34,238 37,368 following person(s) are responsible for the production
of the recommendation:
EBITDA Margin (%) 30.9 31.3 30.2 29.4 28.3
APAT 17,131 21,797 22,808 26,107 28,377 Raghunandhan N L
EPS (Rs) 645.6 798.6 835.6 956.4 1,039.6 raghunandhan.nl@emkayglobal.com
EPS (% chg) 63.8 23.7 4.6 14.5 8.7 +91 22 6624 2428
ROE (%) 38.1 35.2 28.6 26.1 23.2 Mumuksh Mandlesha
P/E (x) 31.6 25.6 24.4 21.3 19.6 mumuksh.mandlesha@emkayglobal.com
EV/EBITDA (x) 23.5 18.1 16.5 13.9 12.1 +91 22 6612 1334
P/BV (x) 10.1 7.9 6.3 5.0 4.2
Source: Company, Emkay Research
Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.

ED: ANISH MATHEW SA: DHANANJAY SINHA

 Eicher Motors (EIM IN) India Equity Research | Company Update

Exhibit 1: Tapering volume growth

1,000,000 80
67
59
800,000 52 53
50 60
600,000
31 40
400,000 23
18 18
9 20
200,000
3
0 0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E

Total volumes (units) Growth (RHS; %)

Source: Company, Emkay Research

Exhibit 2: Yearly state-wise growth trend – volume under pressure in West and South regions
Share Growth (%)
(%) FY15 FY16 FY17 FY18 9MFY19
Total 100 59 54 31 23 6
Zone wise
South Zone 35 63 57 39 14 (3)
North Zone 30 53 56 34 35 15
West Zone 21 63 49 14 12 (3)
East Zone 14 61 53 33 47 28
Top 10 states
Kerala 11 76 76 43 20 (5)
Tamil Nadu 10 50 63 64 20 (7)
U.P. 10 91 73 57 61 25
Maharashtra 9 64 38 3 (5) (14)
Delhi 7 63 61 33 22 8
Karnataka 7 65 45 21 (8) (10)
Punjab 6 42 36 15 21 9
Gujarat 5 73 57 28 19 (15)
Telangana 4 147 22 14
Bihar 3 104 24 36 52 41
Source: SIAM, Emkay Research

Exhibit 3: Quarterly state-wise growth trend – decline continues in South and West regions
Growth (%)
1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19
Total 25 22 18 28 23 3 (5)
Zone wise
South Zone 27 19 0 14 13 (2) (21)
North Zone 35 32 29 43 32 8 5
West Zone 9 6 12 20 7 (7) (7)
East Zone 33 41 60 52 55 23 12
Top 10 states
Kerala 24 26 21 8 25 (10) (24)
Tamil Nadu 43 29 (12) 29 11 1 (37)
U.P. 52 61 60 68 64 9 8
Maharashtra (3) (16) (6) 6 (15) (11) (15)
Delhi 24 17 18 30 18 4 3
Karnataka 7 (9) (22) (9) (11) (8) (9)
Punjab 22 21 13 29 5 6 15
Gujarat 24 21 16 16 6 (23) (25)
Telangana 35 28 9 20 30 11 2
Bihar 34 30 79 65 74 46 13
Source: SIAM, Emkay Research

Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.

ED: ANISH MATHEW SA: DHANANJAY SINHA February 19, 2019 | 2

 Eicher Motors (EIM IN) India Equity Research | Company Update

Exhibit 4: Third-party insurance premium increase

Third party insurance premium (Rs)
Category
1 year rate 5 year rate Increase
<75 cc 427 1,045 618
75 cc to 150 cc 720 3,285 2,565
150 cc to 350 cc 985 5,453 4,468
> 350 cc 2,323 13,034 10,711
Source: IRDAI, Emkay Research

Exhibit 5: Price increases on accounts of regulatory changes – Classic 350 Redditch

185,000 179,000
7,000
180,000
175,000 5,000
170,000 9,000

165,000
158,000
160,000
155,000
150,000
145,000
Earlier price Disc brakes cost Insurance cost ABS cost Latest price

Source: Dealers, Emkay Research; Note: On road price in Mumbai

Exhibit 6: Comparison of technical specifications between Classic 350, Jawa Forty Two, and Jawa
Classic 350 Jawa forty two Jawa
Ex-showroom Delhi 147,464 155,000 164,000
Engine capacity (cc) 346 293 293
Power (bhp) 20 27 27
Torque (Nm) 28 28 28
Front tyres (inch) 19 18 18
Rear tyres (inch) 18 17 17
Front brakes Disc Disc Disc
Rear brakes Drum Drum Drum
Kerb weight (kg) 192 170 170
Source: Company, Emkay Research

Exhibit 7: Down-trading being witnessed due to price hikes

100 3 5 6 7
8 8
13 15 15
80 17 15 16

60

40 84 81 79 76 76 77

20

0
FY14 FY15 FY16 FY17 FY18 FY19 YTD

75-125cc 125-200cc > 200cc

Source: SIAM, Emkay Research

Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.

ED: ANISH MATHEW SA: DHANANJAY SINHA February 19, 2019 | 3

 Eicher Motors (EIM IN) India Equity Research | Company Update

Exhibit 8: Peer group financial comparison

Domestic 2W Volumes Revenues PAT
Growth (%)
FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E FY18 FY19E FY20E FY21E
Eicher Motors (P) 23 3 8 6 27 11 17 14 30 5 16 11
Hero MotoCorp 14 5 5 4 13 6 9 11 9 (7) 11 8
Bajaj Auto (1) 28 9 5 16 20 14 10 7 6 15 8
TVS Motors 15 11 10 5 25 22 16 13 19 10 30 14
Source: Company, Emkay Research

Exhibit 9: SOTP Valuation

Basis of Valuation Equity value Equity value/share
Standalone (Motorcycles) 17x P/E 457,723 16,810
VECV (CVs) 15x P/E 32,825 1,206
Total 490,548 18,015
Rounded Off Target Price 18,000
Source: Company, Emkay Research

Exhibit 10: One-year forward P/E

50
40
30
20
10
0
-10
Feb-09

Aug-12

Feb-18
Aug-09

Aug-10

Aug-11

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18
Feb-10

Feb-11

Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

Feb-17

Feb-19
1yr Fwd PE (x) Average PE +1 STD -1 STD
Source: Company, Emkay Research

Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.

ED: ANISH MATHEW SA: DHANANJAY SINHA February 19, 2019 | 4

 Eicher Motors (EIM IN) India Equity Research | Company Update

Key Financials (Consolidated)

Income Statement
Y/E Mar (Rs mn) FY17 FY18 FY19E FY20E FY21E
Revenue 70,334 89,650 99,243 116,328 132,257
Expenditure 48,594 61,573 69,228 82,089 94,888
EBITDA 21,740 28,076 30,015 34,238 37,368
Depreciation 1,538 2,233 2,950 3,533 4,048
EBIT 20,201 25,843 27,064 30,706 33,320
Other Income 2,273 2,801 3,935 5,041 6,461
Interest expenses 36 53 63 67 70
PBT 22,439 28,591 30,936 35,680 39,711
Tax 7,203 9,359 10,828 12,309 13,502
Extraordinary Items (460) (2,201) (175) 0 0
Minority Int./Income from Assoc. 1,895 2,566 2,699 2,737 2,168
Reported Net Income 16,671 19,597 22,632 26,107 28,377
Adjusted PAT 17,131 21,797 22,808 26,107 28,377

Balance Sheet
Y/E Mar (Rs mn) FY17 FY18 FY19E FY20E FY21E
Equity share capital 272 273 273 273 273
Reserves & surplus 53,179 70,028 88,818 110,468 133,906
Net worth 53,451 70,301 89,090 110,741 134,178
Minority Interest 0 0 0 0 0
Loan Funds 1,119 1,508 1,553 1,717 1,869
Net deferred tax liability 778 1,421 1,730 2,087 2,484
Total Liabilities 55,347 73,230 92,373 114,545 138,532
Net block 8,686 14,978 20,080 24,547 27,319
Investment 49,913 55,847 75,847 95,847 119,847
Current Assets 7,754 21,065 16,206 17,318 18,010
Cash & bank balance 251 12,120 6,241 5,638 4,755
Other Current Assets 860 2,263 2,505 2,936 3,339
Current liabilities & Provision 14,744 21,992 23,039 26,448 29,105
Net current assets (6,990) (928) (6,834) (9,130) (11,094)
Misc. exp 0 0 0 0 0
Total Assets 55,347 73,230 92,373 114,545 138,532

Cash Flow
Y/E Mar (Rs mn) FY17 FY18 FY19E FY20E FY21E
PBT (Ex-Other income) (NI+Dep) 20,166 27,990 27,176 30,639 33,250
Other Non-Cash items 0 0 0 0 0
Chg in working cap 1,635 6,450 336 2,050 1,479
Operating Cashflow 14,806 22,022 21,813 26,102 27,030
Capital expenditure (5,470) (8,120) (8,000) (8,000) (6,000)
Free Cash Flow 9,336 13,902 13,813 18,102 21,030
Investments (12,022) (5,934) (20,000) (20,000) (24,000)
Other Investing Cash Flow 57 (7,397) 0 0 0
Investing Cashflow (15,163) (18,649) (24,065) (22,959) (23,539)
Equity Capital Raised 57 1 0 0 0
Loans Taken / (Repaid) 213 390 44 164 153
Dividend paid (incl tax) 0 (3,608) (3,843) (4,457) (4,940)
Other Financing Cash Flow (138) 11,769 234 614 483
Financing Cashflow 115 8,497 (3,628) (3,745) (4,374)
Net chg in cash (241) 11,869 (5,879) (603) (883)
Opening cash position 492 251 12,120 6,241 5,638
Closing cash position 251 12,120 6,241 5,638 4,755
Source: Company, Emkay Research

Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.

ED: ANISH MATHEW SA: DHANANJAY SINHA February 19, 2019 | 5

 Eicher Motors (EIM IN) India Equity Research | Company Update

Key Ratios
Profitability (%) FY17 FY18 FY19E FY20E FY21E
EBITDA Margin 30.9 31.3 30.2 29.4 28.3
EBIT Margin 28.7 28.8 27.3 26.4 25.2
Effective Tax Rate 32.1 32.7 35.0 34.5 34.0
Net Margin 21.7 21.5 20.3 20.1 19.8
ROCE 48.6 44.6 37.4 34.6 31.4
ROE 38.1 35.2 28.6 26.1 23.2
RoIC 1,040.7 1,531.0 605.7 365.9 313.6

Per Share Data (Rs) FY17 FY18 FY19E FY20E FY21E

EPS 645.6 798.6 835.6 956.4 1,039.6
CEPS 703.6 880.4 943.7 1,085.9 1,187.9
BVPS 2,014.5 2,575.5 3,263.9 4,057.1 4,915.7
DPS 102.6 109.8 117.0 135.6 150.4

Valuations (x) FY17 FY18 FY19E FY20E FY21E

PER 31.6 25.6 24.4 21.3 19.6
P/CEPS 29.5 23.6 22.0 19.1 17.5
P/BV 10.1 7.9 6.3 5.0 4.2
EV / Sales 7.3 5.7 5.0 4.1 3.4
EV / EBITDA 23.5 18.1 16.5 13.9 12.1
Dividend Yield (%) 0.5 0.5 0.6 0.7 0.7

Gearing Ratio (x) FY17 FY18 FY19E FY20E FY21E

Net Debt/ Equity (0.6) (0.7) (0.7) (0.7) (0.8)
Net Debt/EBIDTA (1.5) (1.7) (2.1) (2.4) (2.8)
Working Cap Cycle (days) (37.6) (53.1) (48.1) (46.3) (43.7)

Growth (%) FY17 FY18 FY19E FY20E FY21E

Revenue 42.4 27.5 10.7 17.2 13.7
EBITDA 60.8 29.1 6.9 14.1 9.1
EBIT 62.6 27.9 4.7 13.5 8.5
PAT 28.0 27.2 4.6 14.5 8.7

Quarterly (Rs mn) Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19

Revenue 22,690 25,280 25,478 24,082 23,411
EBITDA 7,072 7,972 8,096 7,293 6,795
EBITDA Margin (%) 31.2 31.5 31.8 30.3 29.0
PAT 5,309 6,486 5,762 5,663 5,330
EPS (Rs) 194.5 237.6 211.1 207.4 195.6
Source: Company, Emkay Research

Shareholding Pattern (%) Dec-17 Mar-18 Jun-18 Sep-18 Dec-18

Promoters 50.5 50.5 50.5 49.4 49.3

FIIs 32.1 31 31.1 31.5 30.8
DIIs 4.9 5.9 5.8 5.6 6.2
Public and Others 12.5 12.6 12.6 13.6 13.7
Source: Capitaline

Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.

ED: ANISH MATHEW SA: DHANANJAY SINHA February 19, 2019 | 6

 Eicher Motors (EIM IN) India Equity Research | Company Update

RECOMMENDATION HISTORY TABLE RECOMMENDATION HISTORY CHART

Closing Period
Date TP Rating Analyst BUY Hold Sell
Price (months) Accumulate Reduce Price
Target Price
4-Feb-19 20,128 18,000 12m Sell Raghunandhan NL 38000
31-Jan-19 19,006 18,000 12m Sell Raghunandhan NL
34000
27-Dec-18 22,995 27,700 12m Buy Raghunandhan NL
30000
12-Nov-18 21,934 25,700 12m Accumulate Raghunandhan NL
26000
6-Jul-18 27,626 31,900 12m Accumulate Raghunandhan NL
9-May-18 30,316 31,900 12m Accumulate Raghunandhan NL 22000

7-Feb-18 28,010 30,200 12m Accumulate Raghunandhan NL 18000

21-Feb-16

19-Aug-16

14-Aug-17
15-Feb-17

10-Feb-18

9-Aug-18

5-Feb-19
14-Nov-17 30,090 38,000 12m Accumulate Raghunandhan NL
4-Oct-17 30,885 34,000 12m Accumulate Raghunandhan NL
4-Sep-17 31,754 33,000 12m Accumulate Raghunandhan NL Source: Bloomberg, Company, Emkay Research
9-Aug-17 31,489 33,000 12m Accumulate Raghunandhan NL
13-Jul-17 28,056 28,000 12m Accumulate Kaushal Maroo
5-May-17 25,833 28,000 12m Accumulate Kaushal Maroo
3-Feb-17 23,386 27,000 12m Accumulate Kaushal Maroo
1-Feb-17 24,030 27,000 12m Accumulate Kaushal Maroo
7-Dec-16 23,382 26,000 12m Accumulate Kaushal Maroo
29-Jul-16 22,461 22,500 12m Accumulate Kaushal Maroo
6-May-16 20,216 21,200 12m Accumulate Kaushal Maroo
Source: Company, Emkay Research

Emkay Alpha Portfolio – Automobiles & Auto Ancillaries

EAP sector portfolio
BSE200 OW/UW EAP Weight
Company Name EAP Weight
Weight (bps) (Normalised)
Auto & Auto Ancillaries 7.06 7.06 0 100
Amara Raja Batteries 0.11 0.18 7 3
Apollo Tyres 0.12 0.19 7 3
Ashok Leyland 0.21 0.00 -21 0
Atul Auto 0.00 0.07 7 1
Bajaj Auto 0.61 0.26 -35 4
Balkrishna Industries* 0.12 0.12 0 2
Bharat Forge* 0.22 0.22 0 3
Bosch* 0.31 0.31 0 4
Eicher Motors 0.45 0.10 -35 1
Endurance Technologies* 0.05 0.05 0 1
Escorts 0.00 0.00 0 0
Exide Industries 0.19 0.26 7 4
Hero Motocorp 0.60 0.24 -36 3
Mahindra & Mahindra 1.13 1.42 28 20
Maruti Suzuki India 1.56 1.84 28 26
Motherson Sumi 0.30 0.51 21 7
MRF* 0.23 0.23 0 3
Tata Motors 0.59 0.59 0 8
Tata Motors DVR* 0.08 0.08 0 1
TVS Motor 0.18 0.39 21 6
Source: Emkay Research

Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.

ED: ANISH MATHEW SA: DHANANJAY SINHA February 19, 2019 | 7

 Eicher Motors (EIM IN) India Equity Research | Company Update

Emkay Rating Distribution

BUY Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next 12-18 months.
ACCUMULATE Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next 12-18 months.
HOLD Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.
REDUCE Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next 12-18 months.
SELL The stock is believed to underperform the broad market indices or its related universe within the next 12-18 months.

Emkay Global Financial Services Ltd.

CIN - L67120MH1995PLC084899
7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai - 400028. India
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ED: ANISH MATHEW SA: DHANANJAY SINHA February 19, 2019 | 8
 Eicher Motors (EIM IN) India Equity Research | Company Update

Raghunandhan N L, MBA
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+91 22 6624 2428

Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.

ED: ANISH MATHEW SA: DHANANJAY SINHA February 19, 2019 | 9