Eicher Motors Ltd. :: Diwali Picks 2011: GEPL Capital

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Eicher Motors Ltd.
Summary
Eicher Motors Ltd. (EML) operates in CV business through VECV Ltd. which is a JV with AB Volvo
in which company holds 54.4%. On standalone basis company operates in two wheeler segment
through Royal Enfield brand. The CV business contributes 90% to its consolidated revenues while
10% comes from the Royal Enfield business. CV industry grew by 35% and 30% in FY10 and FY11;
however, currently this industry is facing a slowdown in line with the trends witnessed by the
broader automobile sector. During April-September 2011, the CV industry growth came down to
20% due to rising interest rates and slowing industrial growth, EML outperformed by growing 25%
in the same period. SIAM in the month of October has increased its growth forecast of CV
segment by 1% to 13-15% in FY12E, we expect EML to continue outperforming the same.
EML’s CV business to continue to grow above industry (~21% CAGR till 2015E); there by
increasing its market share to 15%:
VECV, the commercial vehicle arm of the company is currently growing above the industry
growth rate and company expects it to continue further going forward (~21% CAGR till 2015).
This will help EML in increasing its market share to 15% from 8.2% in CY10 in HCV segment.
Company intends to increase its monthly sales rate of 600 units to 1000 units by end of CY11E.
EML also plans to increase its CV capacity to 100K units in next 3-4 years with a capital
expenditure of `5 bn.
Contribution from stand alone business to increase from 10% to 15% by 2015E:
EML sells Royal Enfield bikes in the stand alone business which has good demand and the waiting
period for same is between six to nine months. In order to cope up with the demand company is
expanding its two wheeler capacity from 70K units to 150K units by Q3CY12E with an investment
of `1.5 bn. We expect EML to garner ~29% CAGR in revenues from this stand alone business till
2015E. This will help in increasing the contribution from the stand alone business to 15% by
2015E.
High Tech Medium Duty Engine Project for Volvo’s Global business to further add steam to
the company’s top line and bottom line:
VECV will invest `3-3.5 bn to design and manufacture medium duty engines (85K units per
annum) for Volvo’s global requirements. The commercial production will commence by end of
CY12E. These engines will be supplied to Volvo’s medium duty vehicles in Europe and US. This
will further add steam to company’s top line and bottom line.
Valuation
We value Eicher Motors based on SOTP as company derives earnings from 2 wheeler (Royal
Enfield) business, CV business through VECV JV and returns on the surplus cash it holds. We
value the two wheeler business at a P/E multiple of 14.5x its CY12E earnings, the CV business at
a P/E multiple of 11x its CY12E earnings and add cash per share of `445 to arrive at a target
price of `1896, which is a potential upside of 15%.

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Diwali Picks 2011: GEPL Capital