RESULTS REVIEW 4QFY17 06 MAY 2017

Eicher Motors BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Cruise controlEicher Motors’ (EIM) 4QFY17 consolidated APAT at Rs 4.56bn (+27% YoY, +9% QoQ) beat estimates by ~4%, led by VECV’s strong performance. VECV’s margins hit 8.2% (+370bps YoY, +129bps QoQ), led by operating leverage.

We see persistent momentum at Royal Enfield, despite the stupendous growth (93% vol CAGR) over CY13-FY17. Early commissioning of the third plant at Vallam Vadagal, low penetration in several Indian states, rising consumer confidence, aggressive expansion into key global markets and new revenue streams (spares and accessories) will drive volumes profitably at 39% CAGR over FY17-19E. VECV has gained significant market share, driven by the Pro-Series (delivers best in class RoCE for truckers) and has increased distribution and service footprint.

We maintain BUY, with SOTP-based TP to Rs 31,934 (RE at 28x core FY19E EPS, VECV 9x EV/EBITDA on FY19E and 1.5x BV for Eicher-Polaris).

Highlights of the quarter RE on a network expansion phase: The company has

achieved Same-Store Growth of 15% in the top 20 cities. Demand for RE bikes continues to be strong, with the dealership network at 675+ covering 400 cities, and a stable waiting period for Classic 350 at 2 months.

Global foray: RE has 25 exclusive stores overseas, and plans to add ~25 more in FY18. RE has recently opened its first store in Brazil, and will focus on Thailand, Indonesia, Brazil and Columbia as key export markets.

VECV gaining market share: VECV’s market share in the MHCV segment increased by 80bps YoY. The ban of BS 3 vehicle sales has not impacted the company, as it had very low inventory, which it was able to liquidate.

Near-term outlook: Expect strong earnings momentum at RE and VECV, given the strong demand for 2W and anticipation of pre-buying ahead of BS-IV implementation in CVs.

Financial Summary (Consolidated) (Rs mn) 4QFY17 4QFY16 YoY (%) 3QFY17 QoQ (%) CY14 FY16 FY17P FY18E FY19E Net Sales 18,844 15,322 23.0 18,348 2.7 87,382 66,209 70,380 95,130 1,12,083 EBITDA 5,811 4,471 30.0 5,770 0.7 11,108 21,370 22,058 30,917 36,988 PAT 4,558 3,599 26.7 4,182 9.0 6,114 14,896 17,035 23,630 29,164 Diluted EPS (Rs) 167.8 132.5 26.7 154.0 9.0 225.6 548.6 627.4 870.4 1,074.2 P/E (x) 114.8 59.0 41.3 29.8 24.1 EV / EBITDA (x) 62.0 32.3 31.0 22.0 18.2 RoE (%) 26.7 39.0 41.4 45.0 44.5 Source: Company, HDFC sec Inst Research * FY16 is 15M ending Mar-16, earnings are annualised. Financials from FY16 are based on Ind AS

INDUSTRY AUTOS

CMP(as on 05 May 2017) Rs 25,833

Target Price Rs 31,934 Nifty 9,285

Sensex 29,859

KEY STOCK DATA

Bloomberg EIM IN

No. of Shares (mn) 27

MCap (Rsbn) / ($ mn) 703/10,920

6m avg traded value (Rsmn) 1,271

STOCK PERFORMANCE (%)

52 Week high / low Rs 26,748 / 18,000

3M 6M 12M

Absolute (%) 10.5 8.0 31.2

Relative (%) 4.7 (1.5) 13.0

SHAREHOLDING PATTERN (%)

Promoters 50.58

FIs & Local MFs 4.29

FPIs 32.45

Public & Others 12.94 Source : BSE

Sneha Prashant sneha.prashant@hdfcsec.com +91-22-6171-7336 Abhishek Jain abhishekkumar.jain@hdfcsec.com +91-22-6171-7320

EICHER MOTORS : RESULTS REVIEW 4QFY17

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23% YoY growth in topline is mainly led by strong results from RE’s stable Consol APAT was marginally above our est, owing to higher profits at VECV (+61% YoY) Consolidated margins were marginally below our estimates QoQ, owing to increase in other expenses Dividend from VECV stands at Rs 100/share, of which RE’s share is Rs 520mn, yielding a payout of 1000% vs 800% in FY16

Quarterly Financials Snapshot (Consolidated) (Rs mn) 4QFY17 4QFY16 YoY (%) 3QFY17 QoQ (%) Sales volumes (in units) 2W 173,768 148,186 17.3 166,941 4.1 CV 17,175 15,568 10.3 13,001 32.1 Total volumes 190,943 163,754 16.6 179,942 6.1 Net sales (incl OOI) 18,844 15,322 23.0 18,348 2.7 Material Expenses 9,925 8,331 19.1 9,691 2.4 Employee Expenses 1,060 775 36.8 1,058 0.2 Other Operating Expenses 2,048 1,746 17.3 1,829 12.0 EBITDA 5,811 4,471 30.0 5,770 0.7 Depreciation 432 375 15.3 356 21.4 EBIT 5,380 4,096 31.3 5,414 (0.6) Other Income 551 620 (11.3) 590 (6.7) Interest Cost 11 6 91.2 10 13.5 PBT 5,919 4,711 25.7 5,995 (1.3) Tax 1,890 1,440 31.2 2,000 (5.5) RPAT 4,030 3,270 23.2 3,995 0.9 Share Of Profit/(Loss) Of Joint Ventures 528 328 61.0 187 182.4 APAT 4,558 3,599 26.7 4,182 9.0 Adj EPS 167.8 132.5 26.7 154.0 9.0 Source: Company, HDFC sec Inst Research. All quarterly data has been restated as per Ind AS by Eicher Margin Analysis (Consolidated) 4QFY17 4QFY16 YoY (bps) 3QFY17 QoQ (bps) Material Expenses % Net Sales 52.7 54.4 (170) 52.8 (15) Employee Expenses % Net Sales 5.6 5.1 57 5.8 (14) Other Operating Expenses % Net Sales 10.9 11.4 (53) 10.0 90 EBITDA Margin (%) 30.8 29.2 166 31.4 (61) Tax Rate (%) 31.9 30.6 135 33.4 (144) APAT Margin (%) 24.2 23.5 70 22.8 140 Source: Company, HDFC sec Inst Research

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Quarterly Financials Snapshot (Standalone) (Rs mn) 4QFY17 4QFY16 YoY (%) 3QFY17 QoQ (%) Sales Volume (units) 173,768 148,186 17.3 166,941 4.1 Net sales (incl OOI) 18,844 15,450 22.0 17,625 6.9 Material Expenses 9,908 8,418 17.7 9,161 8.2 Employee Expenses 1,014 742 36.7 956 6.0 Other Operating Expenses 2,012 1,709 17.7 1,984 1.4 EBITDA 5,910 4,580 29.0 5,524 7.0 Depreciation 430 374 14.8 358 20.1 EBIT 5,481 4,206 30.3 5,166 6.1 Other Income 550 1,266 (56.5) 665 (17.2) Interest Cost 7 6 19.3 8 (9.3) PBT 6,024 5,467 10.2 5,823 3.4 Tax 1,909 1,489 28.2 1,862 2.5 APAT 4,114 3,975 3.5 3,961 3.9 Adj EPS 151.5 146.4 3.5 145.9 3.9 Source: Company, HDFC sec Inst Research, All quarterly data has been restated as per Ind AS by Eicher Margin Analysis (Standalone) 4QFY17 4QFY16 YoY (bps) 3QFY17 QoQ (bps) Material Expenses % Net Sales 52.6 54.5 (191) 52.0 60 Employee Expenses % Net Sales 5.4 4.8 58 5.4 (5) Other Operating Expenses % Net Sales 10.7 11.1 (38) 11.3 (58) EBITDA Margin (%) 31.4 29.6 172 31.3 2 Tax Rate (%) 31.7 27.2 444 32.0 (29) APAT Margin (%) 21.8 25.7 (390) 22.5 (64) Source: Company, HDFC sec Inst Research

Net sales growth came almost in line at 22% YoY on the back of 17% YoY rise in volumes, and increase in net ASP (+4% YoY) owing to price hike taken in Jan-17 to pass on impact of BS4 compliance cost EBIDTA margins rose to 31.4% (+172bps YoY), aided by gross margin expansion (price hike taken in Jan-17) and operating leverage Rs 8bn of capex in FY18 will be spent on the third plant at Vallam Vadagal, product development, two technical centres (UK and Chennai) and market expansion Management indicated that the third plant at Vallam Vadagal will come on stream earlier than scheduled in Aug-17, taking the total capacity to 825k Management hinted at a new launch in FY18 in a new segment

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Quarterly Financials Snapshot – VECV (Rs mn) 4QFY17 4QFY16 YoY (%) 3QFY17 QoQ (%) Sales volumes (in units) 17,175 15,568 10.3 13,001 32.1 Net Sales 25,540 20,740 23.1 18,850 35.5 EBITDA 2,090 930 124.7 1,300 60.8 APAT 1,160 60 1,833.3 570 103.5 Source: Company, HDFC sec Inst Research Margin Analysis – VECV 4QFY17 4QFY16 YoY (bps) 3QFY17 QoQ (bps) EBITDA Margin (%) 8.2 4.5 370 6.9 129 APAT Margin (%) 4.5 0.3 425 3.0 152 Source: Company, HDFC sec Inst Research Strong Revenue Trajectory Margin Expansion Led By Operating Leverage

v

Source: Company, HDFC sec Inst Research Source: SIAM, HDFC sec Inst Research

VECV’s performance was strong, with 13% YoY growth in volumes EBITDA margin surprised positively with the expansion of 129bps QoQ The management indicated that owing to lower inventory as compared to its peers, VECV was impacted less by the transition from BS 3 to BS 4 MDEP engine volumes at 7,217 units (+21% YoY, +24% QoQ) FY18 capex for VECV will be ~Rs 4.5bn

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SOTP Valuation Stake held Valuation methodology Multiple (x) Attributable value (Rs mn) Per share (Rs) VECV 54.4% EV/EBIDTA on FY19E 9.0 47,410 1,746 Standalone (RE) 100% P/E on FY19E Core EPS 28.0 1,074 30,078 Eicher Polaris JV 50% BV in CY16 1.5 3,000 110 Target price (Rs) 51,484 31,934 Source: HDFC sec Inst Research. * Note Core EPS excludes dividend from VECV

Key Assumptions CY14 FY16* FY17P FY18E FY19E Volumes (in units) RE 3,02,601 4,80,800 6,66,135 8,17,728 9,23,638 % YoY 69.9 27.1 38.5 22.8 13.0 VECV 40,783 40,660 58,604 65,050 73,181 % YoY (1.1) (20.2) 44.1 11.0 12.5

Net ASP (Rs/vehicle) RE 1,00,172 1,34,318 1,07,594 1,16,334 1,21,350 % YoY 4.8 7.3 (19.9) 8.1 4.3 VECV 14,11,867 19,02,838 14,58,780 16,75,476 17,17,920 % YoY 13.5 7.8 (23.3) 14.9 2.5 Source: HDFC sec Inst Research, * FY16 is 15M ending Mar-16,% YoY annualised for FY16 Change In Estimates

In Rs mn New Old % Chg

FY18E FY19E FY18E FY19E FY18E FY19E Net Sales 95,130 1,12,083 85,769 1,03,036 10.9 8.8 EBITDA 30,917 36,988 27,875 34,002 10.9 8.8 Adj PAT 23,630 29,164 21,853 27,423 8.1 6.4 Adj EPS (in Rs) 870 1,074 805 1,010 8.1 6.4 Source: HDFC sec Inst Research

We value RE at 28x FY19E EPS and VECV at 9x FY19E EV/EBIDTA, and revise our SOTP-based TP to Rs 31,934 We forecast higher volumes for RE in FY18E, given the early commissioning of the Vallam Vadagl plant and forecast volumes at ~817k units,~1% lower than the management’s guidance of 825k in FY18E VECV is witnessing robust volume growth traction and improving HD market share over the past few months given the wider acceptability of its PRO series range We have revised our estimates for FY18/19E given the earlier than expected commissioning of the Vallam Vadagl plant

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Peer Valuation

MCap (Rs bn)

CMP (Rs/sh) Reco TP

Adj EPS (Rs/sh) P/E (x) EV/EBITDA (x) RoE (%) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E

Maruti Suzuki 2,006 6,640 BUY 7,070 242.9 272.4 353.3 27.3 24.4 18.8 19.2 16.7 12.7 23.2 22.4 26.3 Tata Motors 1,482 437 BUY 516 34.5 49.3 54.2 12.7 8.8 8.0 6.8 4.8 3.7 13.6 16.9 15.9 Bajaj Auto 851 2,943 BUY 3,400 134.8 154.0 172.4 21.8 19.1 17.1 16.0 13.4 11.5 29.9 30.5 29.8 M&M 788 1,335 BUY 1,551 56.6 75.8 86.4 23.6 17.6 15.4 13.2 11.0 8.7 14.4 17.5 17.7 Eicher Motors 703 25,833 BUY 31,934 627.4 870.4 1,074.2 41.3 29.8 24.1 31.0 22.0 18.2 41.4 45.0 44.5 Hero Motocorp 678 3,394 BUY 3,740 161.4 184.2 202.8 21.0 18.4 16.7 14.1 12.2 10.6 37.3 36.9 36.0 Force Motors 60 4,563 BUY 5,350 131.2 192.9 254.7 34.8 23.7 17.9 21.6 14.0 10.6 11.0 14.4 16.4 SML Isuzu 19 1,325 BUY 1,640 50.2 61.2 82.0 26.4 21.7 16.2 16.5 13.3 10.1 19.8 20.9 23.8 Atul Auto 9 426 BUY 528 17.7 26.2 31.1 24.0 16.2 13.7 13.5 9.5 7.9 23.1 28.5 27.7 Source: Companies, Bloomberg, HDFC sec Inst Research

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Strong QoQ Volumes, Margins Sharply Higher RE's Mix Favours C-350 With Stable Waiting Period

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

VECV: Volumes Ramping Up VECV:LMD Witnesses Sharp Market Share Gain

v

Source: Company, HDFC sec Inst Research Source: SIAM, HDFC sec Inst Research

The delivery backlog for RE’s best-selling motorcycle (Classic 350) stands stable at 2 months With the new plant at Vallam Vadagal coming on-stream earlier than expected in Aug-17, volumes can ramp up faster in FY18E VECV’s volumes were not impacted by transition to BS 4, as the company had very low inventory of BS 3, which they managed to liquidate Favourable demand for Pro Series and launch of a full truck range seems to have helped in gaining market share in a tough market

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C-350 TB 350 Bullet ElecBullet 350 C-500 TB 500Bullet 500 Cont GT

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Income Statement (Consolidated) (Rs mn) CY14 FY16* FY17 FY18E FY19E Volumes (in units) 2W 3,02,601 4,80,800 6,66,135 8,17,728 9,23,638 CV 40,783 40,660 58,604 65,050 73,181 Total volumes 3,43,384 5,21,460 7,24,739 8,82,779 9,96,819 Net Revenues 87,382 66,209 70,380 95,130 1,12,083 Growth (%) 28.3 NM 6.3 35.2 17.8 Material Expenses 57,699 34,351 37,066 51,085 59,628 Employee Expenses 6,596 3,503 3,851 3,805 4,483 Other Operating Expenses 11,979 6,985 7,405 9,323 10,984 EBITDA 11,108 21,370 22,058 30,917 36,988 EBITDA Margin (%) 12.7 32.3 31.3 32.5 33.0 EBITDA Growth (%) 51.4 NM 3.2 40.2 19.6 Depreciation 2,198 1,366 1,533 1,953 2,027 EBIT 8,910 20,004 20,525 28,964 34,961 Other Income (Including EO Items) 1,074 1,781 2,273 2,255 3,538

Interest 98 21 28 20 25 PBT 9,886 21,764 22,770 31,199 38,474 Tax (Incl Deferred) 2,909 5,389 7,169 9,048 11,157 RPAT 6,978 16,375 15,601 22,151 27,316 Share of Profit/Loss in JVs - 1,479 1,435 1,479 1,848 Minority Interest 864 - - - - APAT 6,114 14,896 17,035 23,630 29,164 APAT Growth (%) 55.2 NM 14.4 38.7 23.4 Adjusted EPS (Rs) 226 549 627 870 1,074 EPS Growth (%) 54.8 NM 14.4 38.7 23.4

Source: Company, HDFC sec Inst Research * FY16 is 15M ending Mar-16 Financials from FY16 are as per Ind AS

Balance Sheet (Consolidated) (Rs mn) CY14 FY16* FY17 FY18E FY19E SOURCES OF FUNDS Share Capital - Equity 271 272 272 272 272 Reserves 24,888 36,705 46,068 58,358 72,315 Total Shareholders’ Funds 25,159 36,977 46,340 58,630 72,586 Minority Interest 10,851 11,569 13,133 14,614 16,463 Long-term Debt 584 859 859 859 859 Short-term Debt - - - - - Total Debt 584 859 859 859 859 Net Deferred Taxes 2,394 3,382 778 934 1,126 Long-term Provisions & Others 1,695 - 4,139 5,400 6,035 TOTAL SOURCES OF FUNDS 40,681 52,786 65,247 80,436 97,070 APPLICATION OF FUNDS Net Block 23,093 30,671 31,126 41,783 45,435 CWIP 5,867 2,518 2,518 2,518 2,518 Investments 106 125 4,307 6,307 8,308 LT Loans & Advances 6,976 9,886 11,297 13,429 16,130 Total Non-current Assets 36,042 43,200 49,248 64,037 72,391 Inventories 6,455 10,143 10,017 13,350 15,933 Debtors 5,622 8,336 8,921 10,622 12,769 Other Current Assets 480 990 1,858 1,918 1,978 Cash & Equivalents 15,477 24,452 30,738 33,521 44,100 Total Current Assets 28,034 43,921 51,534 59,411 74,780 Creditors 21,876 32,141 33,221 40,335 46,990 Other Current Liabilities & Provns 1,518 2,195 2,313 2,678 3,111 Total Current Liabilities 23,395 34,336 35,534 43,012 50,101 Net Current Assets 4,639 9,585 16,000 16,398 24,679 TOTAL APPLICATION OF FUNDS 40,681 52,786 65,247 80,436 97,070 Source: Company, HDFC sec Inst Research * FY16 is 15M ending Mar-16

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Cash Flow (Consolidated) (Rs mn) CY14 FY16* FY17P FY18E FY19E Reported PBT 9,886 21,764 22,770 31,199 38,474 Non-operating & EO items - - - - - Interest expenses 98 21 28 20 25 Depreciation 2,198 1,366 1,533 1,953 2,027 Working Capital Change 2,020 (575) 2,599 1,514 232 Tax Paid (2,320) (4,401) (11,679) (12,160) (14,835) OPERATING CASH FLOW ( a ) 11,883 18,175 15,251 22,526 25,922 Capex (9,046) (5,596) (4,500) (15,500) (8,978) Free cash flow (FCF) 2,837 12,580 10,751 7,026 16,944 Investments (106) (19) (4,182) (2,000) (2,001) Non-operating Income (53) 3,553 1,435 1,479 1,848 INVESTING CASH FLOW ( b ) (9,204) (2,062) (7,247) (16,021) (9,130) Debt Issuance/(Repaid) (255) 275 - - - Interest Expenses (98) (21) (28) (20) (25) FCFE 2,484 12,834 10,724 7,006 16,919 Share Capital Issuance 79 0 1,077 (1,077) 0 Dividend (1,999) (11,144) (4,975) (10,599) (6,982) FINANCING CASH FLOW ( c ) (2,273) (10,890) (3,927) (11,696) (7,007) NET CASH FLOW (a+b+c) 405 5,224 4,078 (5,190) 9,784 EO Items, Others - - - - - Closing Cash & Equivalents 15,477 23,409 30,738 33,522 44,101

Source: Company, HDFC sec Inst Research * FY16 is 15M ending Mar-16

Key Ratios (Consolidated) CY14 FY16* FY17P FY18E FY19E PROFITABILITY (%) GPM 34.0 48.1 47.3 46.3 46.8 EBITDA Margin 12.7 32.3 31.3 32.5 33.0 APAT Margin 7.0 22.5 24.2 24.8 26.0 RoE 26.7 39.0 41.4 45.0 44.5 RoIC (or Core RoCE) 18.6 32.3 36.5 50.3 50.7 RoCE 17.0 26.3 30.2 34.7 35.1 EFFICIENCY Tax Rate (%) 29.4 24.8 31.5 29.0 29.0 Fixed Asset Turnover (x) 2.8 1.5 1.5 1.5 1.6 Inventory (days) 27.0 55.9 51.9 51.2 51.9 Debtors (days) 23.5 46.0 46.3 40.8 41.6 Other Current Assets (days) 2.0 5.5 9.6 7.4 6.4 Payables (days) 91.4 177.2 172.3 154.8 153.0 Other Current Liab & Provns (days) 6.3 12.1 12.0 10.3 10.1 Cash Conversion Cycle (days) (45.3) (82.0) (76.4) (65.7) (63.2) Debt/EBITDA (x) 0.1 0.0 0.0 0.0 0.0 Net D/E (x) (0.5) (0.4) (0.4) (0.4) (0.4) Interest Coverage (x) 91.1 943.6 735.7 1,448.2 1,398.4 PER SHARE DATA (Rs) EPS 225.6 548.6 627.4 870.4 1,074.2 CEPS 306.7 599.0 683.9 942.3 1,148.8 Dividend 50.0 100.0 130.3 170.0 190.0 Book Value 928.2 1,323.5 1,706.8 2,159.5 2,673.5 VALUATION P/E (x) 114.8 59.0 41.3 29.8 24.1 P/BV (x) 27.9 19.6 15.2 12.0 9.7 EV/EBITDA (x) 62.0 32.3 31.0 22.0 18.2 EV/Revenues (x) 7.9 10.4 9.7 7.2 6.0 OCF/EV (%) 1.7 2.6 2.2 3.3 3.9 FCF/EV (%) 0.4 1.8 1.6 1.0 2.5 FCFE/Mkt Cap (%) 0.4 1.8 1.5 1.0 2.4 Dividend Yield (%) 0.2 0.4 0.5 0.7 0.7

Source: Company, HDFC sec Inst Research * FY16 is 15M ending Mar-16

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Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month

d

Date CMP Reco Target 6-May-16 19,687 NEU 19,633 1-Aug-16 22,461 BUY 24,736 5-Oct-16 25,842 BUY 28,463

31-Oct-16 24,020 BUY 26,657 5-Dec-16 22,678 BUY 25,800 2-Feb-17 23,650 BUY 28,603

11-Apr-17 26,423 BUY 30,113 6-May-17 25,833 BUY 31,934

RECOMMENDATION HISTORY

15,00017,00019,00021,00023,00025,00027,00029,00031,000

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Disclosure: We, Sneha Prashant, MBA & Abhishek Jain, MBA, authors and the names 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. HSL has no material adverse disciplinary history as on the date of publication of this report. 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 HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. 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. 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