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UBS Investment Research
Eicher Motors Limited
I n for the long haul [EXTRACT]
�� Initiate coverage with a Buy rating on fast growing MHCV manufacturer
Eicher Motors (EML) is the third largest manufacturer of medium and heavy
commercial vehicles (MHCV) in India, with a 10% market share. In 2008, EML
formed a JV, Volvo Eicher Commercial Vehicle (VECV), with Volvo and
transferred its commercial vehicle (CV) and components businesses to the JV.
EML holds a 54.4% stake in the JV. EML also owns the Royal Enfield brand in the
niche above-250cc motorcycle segment.
�� Multi-year, market share-driven growth in the MHCV segment
With an established distribution network, a strong position in the medium duty CV
segment, and a strong partner in Volvo, we believe EML has the platform to also
gain market share in the heavy duty (HD) segment. We forecast a 22% CV sales
CAGR over 2010-13 (we forecast a 10% MHCV industry CAGR over FY11-14),
as the company expands its product portfolio and markets.
�� MDE, another driver; strong balance sheet and earnings growth
We forecast a 34% earnings CAGR over 2010-13. We expect a significant earnings
boost when medium-duty engine (MDE) shipments to Volvo start in 2013. EML
was well capitalised at the end of 2010 with Rs11.6bn in net cash at VECV and
Rs4.6bn at the parent level, sufficient to fund future capex, in our view.
�� Valuation: trading at 12.7x 2012E PE
We base our price target on a sum-of-the-parts valuation. We value VECV at 10x
2012E EBITDA, a 25% premium to our multiple for Tata Motors’ domestic
business, based on estimated MDE supplies to Volvo in 2013. We value the
motorcycle business at Rs395/share and add proportional net cash of Rs403/share.
Investment Thesis
We initiate coverage of Eicher Motors (EML) with a Buy rating and a price
target of Rs2,000. EML owns a 54.4% stake in Volvo Eicher Commercial
Vehicles (VECV), a joint venture with Volvo. VECV is the third largest MHCV
manufacturer in India with a 10% market share. EML’s Royal Enfield is a
strong brand in the above-250cc niche motorcycle segment. We are positive on
the company’s growth prospects:
(1) We expect strong growth in VECV’s MHCV sales over the medium term,
as the company expands its product portfolio and markets and gains market
share in the segment. We forecast a 22% sales CAGR in CVs for VECV
over 2010-13 versus our estimate of 10% for the MHCV industry over
FY11-14.
(2) We also expect a significant increase in earnings once it starts supplying
MDEs to Volvo in 2013. We estimate the engine sales would contribute
13% to consolidated revenue in 2013.
(3) We forecast a 34% earnings CAGR for EML over 2010-13, driven by a
22% CAGR in CV sales and a 250bp improvement in the EBITDA margin
over the same period.
(4) We believe the company is well capitalised with significant net cash at the
JV (VECV) and standalone levels and should be able to fund future capex.
At the consolidated level, it had Rs16.1bn in net cash as at end-2010, of
which Rs11.6bn was in VECV.
(5) Our channel checks suggest that the loan-to-value ratio for EML’s heavy
duty products has increased significantly and the gap with incumbents has
narrowed. We believe this will also help EML gain market share.
At our price target of Rs2,000, EML’s implied valuation would be 16x 2012E
PE. Historically, EML has traded at a one-year forward PE of 9x.
Key catalysts
�� Market share gain: We believe the recent launch of the 25-ton tipper and
the 40-ton tractor-trailer will help EML to increase its market share in the
heavy duty (HD) segment (16 ton and above). Management targets to
achieve 15%/35%/16% market share in the HD/light & medium duty (LMD)
truck/bus segments by 2015.
�� New growth opportunity: We believe the new business of manufacturing
medium-duty engines (MDE) for Volvo is a key catalyst for EML’s share
price performance in the medium term. We estimate the MDE business
would constitute 13% VECV’s consolidated net sales in 2013 (first year of
operations).
�� Strong earnings growth: We forecast a 34% earnings CAGR over 2010-
13 for EML, driven by a 22% CV sales CAGR and a 250bp improvement in
the EBITDA margin. We expect high return ratios with average ROE and
ROCE of 20% and 43%.
Risks
Cyclical industry risk
The CV segment is very sensitive to economic swings. We believe the following
factors will increase the risks for EML in an economic downturn. 1) EML does
not have a presence in the defensive the CV pick-up category, 2) EML is focused
on increasing its share in the HD segment, the category most sensitive to
economic swings. 3) EML has a large presence in the high-end motorcycle
(>250cc) category, the leisure and recreational segment. However, EML’s new
MDE business could help to marginally reduce its dependence on the cyclical
segments of its business.
Increase in raw material prices, particularly steel and rubber
Steel and rubber form a substantial proportion of raw material costs for auto
original equipment manufacturers (OEMs). After declining in May-June 2011,
steel and rubber prices started rising again. However, the prices of CVs have
continued to increases and offset raw material cost pressure. Most OEMs expect
a flat to declining raw material cost trend.
Competition and price war
Competition from larger manufacturers, primarily Tata Motors and Ashok
Leyland, and smaller ones such as Asia Motor Works (which has gained
substantial market share in the 16.2-25-ton MHCV goods segment) and
Mahindra Navistar remains a key risk. In addition, the absence of an in-house
financing arm remains a drawback for EML (even though it has arrangements
with financing institutions).
Valuation and basis for our price target
We base our price target on a sum-of-the-parts valuation.
We value VECV at 10x 2012E EBITDA plus net cash and a 25% premium to
our multiple for Tata Motors, given EML’s:
(1) Strong earnings growth potential from supplying MDEs to Volvo from 2013.
We estimate the MDE business would contribute 13% to EML’s consolidated
revenue in its first year of operations. In addition, it should reduce EML’s
dependence on the more cyclical CV business.
(2) Strong growth potential in the CV segment. We estimate 23%/21% YoY
growth in domestic CV business in 2011/2012, higher than the average
industry growth in FY12/FY13.
We value the motorcycle business at 10x 2012E EBITDA, in line with the
industry average. Despite its small scale, we believe EML’s motorcycle business
should trade in line with the industry, as:
(1) It is a niche business segment, representative of the leisure and recreational
segment. The above-250cc segment accounted for 0.9% of the motorcycle
market and is likely to grow rapidly as the proportion of the affluent
population grows.
(2) Royal Enfield has strong brand equity (akin to Harley Davidson in the US)
and is the market leader in this fast-growth segment. Demand for Royal
Enfield bikes remains strong with a waiting period of 6-10 months.
(3) Management is debottlenecking capacity and opening a new factory in
Chennai. This should increase total capacity to 150,000 units pa.
We also add net cash at the standalone level to derive our 12-month price target.
Eicher Motors Limited
Eicher Motors (EML) is the third largest manufacturer of medium and heavy
commercial vehicles in India, with a 10% market share. In 2008, EML formed a
JV, Volvo Eicher Commercial Vehicle, with Volvo. It holds a 54.4% stake in
the JV. EML has transferred its commercial vehicle and components businesses
to the JV. It also owns the 'Royal Enfield' brand in the above-250cc niche
motorcycle segment. It has a 37% market share of the 7.5-12-ton truck segment.
In 2010, it generated 84% of revenue from commercial vehicles, 12% from
motorcycles, and the balance from components.
Statement of Risk
Economic downturns and rising costs of key raw materials such as steel and
rubber are key risks for Eicher Motors’ growth and profitability, in our view.
Rising competition from incumbents and new participants can negatively affect
Eicher Motors’ plans to increase its market share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Eicher Motors Limited
I n for the long haul [EXTRACT]
�� Initiate coverage with a Buy rating on fast growing MHCV manufacturer
Eicher Motors (EML) is the third largest manufacturer of medium and heavy
commercial vehicles (MHCV) in India, with a 10% market share. In 2008, EML
formed a JV, Volvo Eicher Commercial Vehicle (VECV), with Volvo and
transferred its commercial vehicle (CV) and components businesses to the JV.
EML holds a 54.4% stake in the JV. EML also owns the Royal Enfield brand in the
niche above-250cc motorcycle segment.
�� Multi-year, market share-driven growth in the MHCV segment
With an established distribution network, a strong position in the medium duty CV
segment, and a strong partner in Volvo, we believe EML has the platform to also
gain market share in the heavy duty (HD) segment. We forecast a 22% CV sales
CAGR over 2010-13 (we forecast a 10% MHCV industry CAGR over FY11-14),
as the company expands its product portfolio and markets.
�� MDE, another driver; strong balance sheet and earnings growth
We forecast a 34% earnings CAGR over 2010-13. We expect a significant earnings
boost when medium-duty engine (MDE) shipments to Volvo start in 2013. EML
was well capitalised at the end of 2010 with Rs11.6bn in net cash at VECV and
Rs4.6bn at the parent level, sufficient to fund future capex, in our view.
�� Valuation: trading at 12.7x 2012E PE
We base our price target on a sum-of-the-parts valuation. We value VECV at 10x
2012E EBITDA, a 25% premium to our multiple for Tata Motors’ domestic
business, based on estimated MDE supplies to Volvo in 2013. We value the
motorcycle business at Rs395/share and add proportional net cash of Rs403/share.
Investment Thesis
We initiate coverage of Eicher Motors (EML) with a Buy rating and a price
target of Rs2,000. EML owns a 54.4% stake in Volvo Eicher Commercial
Vehicles (VECV), a joint venture with Volvo. VECV is the third largest MHCV
manufacturer in India with a 10% market share. EML’s Royal Enfield is a
strong brand in the above-250cc niche motorcycle segment. We are positive on
the company’s growth prospects:
(1) We expect strong growth in VECV’s MHCV sales over the medium term,
as the company expands its product portfolio and markets and gains market
share in the segment. We forecast a 22% sales CAGR in CVs for VECV
over 2010-13 versus our estimate of 10% for the MHCV industry over
FY11-14.
(2) We also expect a significant increase in earnings once it starts supplying
MDEs to Volvo in 2013. We estimate the engine sales would contribute
13% to consolidated revenue in 2013.
(3) We forecast a 34% earnings CAGR for EML over 2010-13, driven by a
22% CAGR in CV sales and a 250bp improvement in the EBITDA margin
over the same period.
(4) We believe the company is well capitalised with significant net cash at the
JV (VECV) and standalone levels and should be able to fund future capex.
At the consolidated level, it had Rs16.1bn in net cash as at end-2010, of
which Rs11.6bn was in VECV.
(5) Our channel checks suggest that the loan-to-value ratio for EML’s heavy
duty products has increased significantly and the gap with incumbents has
narrowed. We believe this will also help EML gain market share.
At our price target of Rs2,000, EML’s implied valuation would be 16x 2012E
PE. Historically, EML has traded at a one-year forward PE of 9x.
Key catalysts
�� Market share gain: We believe the recent launch of the 25-ton tipper and
the 40-ton tractor-trailer will help EML to increase its market share in the
heavy duty (HD) segment (16 ton and above). Management targets to
achieve 15%/35%/16% market share in the HD/light & medium duty (LMD)
truck/bus segments by 2015.
�� New growth opportunity: We believe the new business of manufacturing
medium-duty engines (MDE) for Volvo is a key catalyst for EML’s share
price performance in the medium term. We estimate the MDE business
would constitute 13% VECV’s consolidated net sales in 2013 (first year of
operations).
�� Strong earnings growth: We forecast a 34% earnings CAGR over 2010-
13 for EML, driven by a 22% CV sales CAGR and a 250bp improvement in
the EBITDA margin. We expect high return ratios with average ROE and
ROCE of 20% and 43%.
Risks
Cyclical industry risk
The CV segment is very sensitive to economic swings. We believe the following
factors will increase the risks for EML in an economic downturn. 1) EML does
not have a presence in the defensive the CV pick-up category, 2) EML is focused
on increasing its share in the HD segment, the category most sensitive to
economic swings. 3) EML has a large presence in the high-end motorcycle
(>250cc) category, the leisure and recreational segment. However, EML’s new
MDE business could help to marginally reduce its dependence on the cyclical
segments of its business.
Increase in raw material prices, particularly steel and rubber
Steel and rubber form a substantial proportion of raw material costs for auto
original equipment manufacturers (OEMs). After declining in May-June 2011,
steel and rubber prices started rising again. However, the prices of CVs have
continued to increases and offset raw material cost pressure. Most OEMs expect
a flat to declining raw material cost trend.
Competition and price war
Competition from larger manufacturers, primarily Tata Motors and Ashok
Leyland, and smaller ones such as Asia Motor Works (which has gained
substantial market share in the 16.2-25-ton MHCV goods segment) and
Mahindra Navistar remains a key risk. In addition, the absence of an in-house
financing arm remains a drawback for EML (even though it has arrangements
with financing institutions).
Valuation and basis for our price target
We base our price target on a sum-of-the-parts valuation.
We value VECV at 10x 2012E EBITDA plus net cash and a 25% premium to
our multiple for Tata Motors, given EML’s:
(1) Strong earnings growth potential from supplying MDEs to Volvo from 2013.
We estimate the MDE business would contribute 13% to EML’s consolidated
revenue in its first year of operations. In addition, it should reduce EML’s
dependence on the more cyclical CV business.
(2) Strong growth potential in the CV segment. We estimate 23%/21% YoY
growth in domestic CV business in 2011/2012, higher than the average
industry growth in FY12/FY13.
We value the motorcycle business at 10x 2012E EBITDA, in line with the
industry average. Despite its small scale, we believe EML’s motorcycle business
should trade in line with the industry, as:
(1) It is a niche business segment, representative of the leisure and recreational
segment. The above-250cc segment accounted for 0.9% of the motorcycle
market and is likely to grow rapidly as the proportion of the affluent
population grows.
(2) Royal Enfield has strong brand equity (akin to Harley Davidson in the US)
and is the market leader in this fast-growth segment. Demand for Royal
Enfield bikes remains strong with a waiting period of 6-10 months.
(3) Management is debottlenecking capacity and opening a new factory in
Chennai. This should increase total capacity to 150,000 units pa.
We also add net cash at the standalone level to derive our 12-month price target.
Eicher Motors Limited
Eicher Motors (EML) is the third largest manufacturer of medium and heavy
commercial vehicles in India, with a 10% market share. In 2008, EML formed a
JV, Volvo Eicher Commercial Vehicle, with Volvo. It holds a 54.4% stake in
the JV. EML has transferred its commercial vehicle and components businesses
to the JV. It also owns the 'Royal Enfield' brand in the above-250cc niche
motorcycle segment. It has a 37% market share of the 7.5-12-ton truck segment.
In 2010, it generated 84% of revenue from commercial vehicles, 12% from
motorcycles, and the balance from components.
Statement of Risk
Economic downturns and rising costs of key raw materials such as steel and
rubber are key risks for Eicher Motors’ growth and profitability, in our view.
Rising competition from incumbents and new participants can negatively affect
Eicher Motors’ plans to increase its market share.
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