Security analysis report on automobile sector

I T M B u s i n e s s S c h o o l , N a v i M u m b a i

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A SECURITY ANALYSIS REPORT ON INDIAN AUTOMOBILE INDUSTRY

Submitted by-

Rahul Hedau (73)

Sujit Kumar Jha (76)

Sneha Manocha (81)

Shilpa Sharma (87)

Risabh Srivastava (110)

Vinayak Chauhan (111)

Sunny Dwivedi (114)

Submitted to-

Prof. Urmil Shah


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ECONOMIC FACTORS IMPACTING AUTOMOBILE SECTOR

1. Excess Capacity.

According to CSM Worldwide, an automotive research firm, in 2004 the estimated

automotive industry global production capacity for light vehicles (about 74 million units)

significantly exceeded global production of cars and trucks (about 60 million units). In North

America and Europe, the two regions where the majority of revenue and profits are earned in

the industry, excess capacity was an estimated 17% and 13%, respectively. CSM Worldwide

projects that excess capacity conditions could continue for several more years.

2. Pricing Pressure.

Excess capacity, coupled with a proliferation of new products being introduced in key

segments by the industry, will keep pressure on manufacturers’ ability to increase prices on

their products. In addition, the incremental new capacity in the United States by foreign

manufacturers (so-called “transplants”) in recent years has contributed, and is likely to

continue to contribute, to the severe pricing pressure in that market. In the United States, the

reduction of real

3. Financing Options

Auto industry observers cite car loans as the biggest driving factor for the expansion of the

Compact Car segment. At present, almost 85 per cent of all new car sales are backed by auto

finance, compared to 65 per cent five years ago. Interest rates on car loans have come down

drastically in the past four or five years, which helps prospective buyers take the plunge. The

growth of the CC-segment in the past few years can be mainly credited to factors such as rise

in income levels leading to increased affordability and simultaneous reduction in interest

rates leading to lower EMIs. The drop in interest rates usually helps very few people to

probably shift from the base model to a deluxe model. A larger shift happens if people are

willing to take long-term loans, like five years instead of the earlier three-year loans.

4. Advertising and Marketing

Due to the advertising techniques adopted by all the manufacturers in the CC-Segment the

sales have risen drastically. It is all due to because the companies now a day are using even

aggressive selling techniques for which they are even coping with the Film celebrities and

Cricket stars, like Maruti has contracted Irfan Pathan as the brand ambassador of Zen and for

Santro Hyundai has contracted for Shah Rukh Khan. And the companies are even trying to

approach to the customer as to there demand for a vehicle at special interest loans, etc. They

are using data according to the customers return and earning capacity for attracting the

customers for their vehicles.


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5. Income of Consumer / Buyer

The income of the consumer or buyer of the car is a very important factor of demand. In

recent time we have seen that due to increase in the Income of the general public, there has

been a shift from the Lower CC-segment cars to the Upper CC-segmentcars.2Due to the

recent increase in the number of multinationals in India, the income level of the employees

have risen drastically and has made CC-segment cars an entry level car for a lot of people.

The average age of a CC-segment car owner has also dropped from 35 years to 31 years in

India.

6. Increase In Affordability

The demand for passenger cars is driven mainly by greater affordability, which in turn

increases the aspiration level of the customers. Today with high amount of disposable income

in the hand of Indian youth, who forms major portion of the population, PV market has larger

addressable market.

7. Demographic Drivers

Cars being inspirational products, purchase decisions are influenced by the overall economic

environment. Increase in per capita income increases the consumption tendency of the

customer. Growth in per capita income and rising aspirations and changing lifestyle is

leading to increased preference for cars over two-wheelers, which is also having a positive

rub off on car demand.

8. Exports

The share of exports from domestic production is currently at 12-13%, which is much lower

than current export hubs. Currently, India’s share of global passenger cars export volume

stands at less than 1%. But India is fast emerging as a manufacturing hub for leading global

car makers, and several manufacturers have already firmed up plans for setting up

manufacturing bases in India, which will also be used for exports.

9. Presence Across Segments

Manufacturers with presence across various product segments can ensure higher volume and

better capacity utilization by using the common manufacturing capacity. Typically a

customer upgrades from one segment to higher segment and the presence across various

segments ensures that the company retains its existing customers.

10. Efficient Operations

Competition in PV segment is very intense and this requires the existing player’s to initiate

steps to reduce their cost of production. Effective and successful operation methods like

platform commonality, reduction in vendor base and work force rationalization can help a

company immensely.


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11. Wide Dealer Network and Availability of Finance

A wide dealer network helps the company serve customers over wide geographical area. For

e.g. Maruti has used its available wide service network as point of difference over

competitors. The companies are tying up with the financial institutions having rural presence

to provide additional financing options to customers in such areas.

12. Access to Latest Technologies

Indian PV segment is highly competitive with as many as 14 players operating in it and more

than 80 models on the offering. But still any new model launch meets with increase in sales

volume for the company. Moreover in a time when a substantial portion of Indian customer is

looking to upgrade in higher segment, companies with latest technologies and latest models

will catch more attentions.

13. Factors of Production

There are some factors of production which influence the supply of a car like Cost of Labour

Cost Machinery Input Cost These factors influence the supply of a car largely. If the cost of

the raw material (Steel, Spare Parts, Rubber) increases there will be an increase in the cost

of production leading to decrease in profit margins. Costs like labour costs, machinery and

input costs also influence the supply with the increase or decrease in these costs.7.

14. Government Policies and Taxes

If there is a change in the government policies regarding the increase in the road tax charged

or the tax which is to be paid per unit sold, the supply of a car will fluctuate with the nature

of the change. Recently the government has reduced the custom duty on inputs and raw

material from 20% to 15% which has increased the supply

ECONOMIC FACTORS IMPACTING CAPITAL MARKETS AS A WHOLE

The capital market is affected by a range of factors. Some of the factors which influence capital

market are as follows:-

1. Performance of domestic companies

The performance of the companies’ or rather corporate earnings is one of the factors which

have direct impact or effect on capital market in a country. Weak corporate earnings indicate

that the demand for goods and services in the economy is less due to slow growth in per

capita income of people. Because of slow growth in demand there is slow growth in

employment which means slow growth in demand in the near future. Thus weak corporate

earnings indicate average or not so good prospects for the economy as a whole in the near

term. In such a scenario the investors (both domestic as well as foreign) would be wary to


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invest in the capital market and thus there is bear market like situation. The opposite case of

it would be robust corporate earnings and its positive impact on the capital market.

2. Environmental Factors

Environmental Factor in India’s context primarily means- Monsoon. In India around 60 % of

agricultural production is dependent on monsoon. Thus there is heavy dependence on

monsoon. The major chunk of agricultural production comes from the states of Punjab,

Haryana & Uttar Pradesh. Thus deficient or delayed monsoon in this part of the country

would directly affect the agricultural output in the country. Apart from monsoon other natural

calamities like Floods, tsunami, drought, earthquake, etc. also have an impact on the capital

market of a country. The Indian Met Department (IMD) on 24th

June stated that India would

receive only 93 % rainfall of Long Period average (LPA). This piece of news directly had an

impact on Indian capital market with BSE Sensex falling by 0.5 % on the 25th

June. The

major losers were automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take a hit. This is

because a deficient monsoon could seriously squeeze rural incomes, reduce the demand for

everything from motorbikes to soaps and worsen a slowing economy.

3. Macro Economic Numbers

The macroeconomic numbers also influence the capital market. It includes Index of

Industrial Production (IIP) which is released every month, annual Inflation number indicated

by Wholesale Price Index (WPI) which is released every week, Export – Import numbers

which are declared every month, Core Industries growth rate. This macro –economic

indicators indicate the state of the economy and the direction in which the economy is headed

and therefore impacts the capital market in India.

4. Global Cues

In this world of globalization various economies are interdependent and interconnected. An

event in one part of the world is bound to affect other parts of the world; however the

magnitude and intensity of impact would vary. Thus capital market in India is also affected

by developments in other parts of the world i.e. U.S. , Europe, Japan , etc. Global cues

includes corporate earnings of MNC’s, consumer confidence index in developed countries,

jobless claims in developed countries, global growth outlook given by various agencies

like IMF, economic growth of major economies, price of crude –oil, credit rating of various

economies given by Moody’s, S & P, etc. An obvious example at this point in time

would be that of subprime crisis & recession. Recession started in U.S. and some parts of

the Europe in early 2008 .Since then it has impacted all the countries of the world-

developed, developing, less- developed and even emerging economies.


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5. Political stability and government policies

For any economy to achieve and sustain growth it has to have political stability and pro-

growth government policies. This is because when there is political stability there is

stability and consistency in government’s attitude which is communicated through

various government policies. The vice- versa is the case when there is no political stability

.So capital market also reacts to the nature of government, attitude of government, and

various policies of the government.

6. Growth prospectus of an economy

When the national income of the country increases and per capita income of people

increases it is said that the economy is growing. Higher income also means higher

expenditure and higher savings. This augurs well for the economy as higher expenditure

means higher demand and higher savings means higher investment. Thus when an economy

is growing at a good pace capital market of the country attracts more money from investors,

both from within and outside the country and vice -versa. So we can say that growth

prospects of an economy do have an impact on capital markets.

7. Investor Sentiment and risk appetite

Another factor which influences capital market is investor sentiment and their risk appetite.

Even if the investors have the money to invest but if they are not confident about the returns

from their investment, they may stay away from investment for some time. At the same time

if the investors have low risk appetite , which they were having in global and Indian

capital market some four to five months back due to global financial meltdown and

recessionary situation in U.S. & some parts of Europe , they may stay away from investment

and wait for the right time to come.

Risk involved in this sector.

Labour unrest and industrial action.

Unexpected delays and cost overrun due to.

Overlapping government jurisdiction.

Corruptions and bureaucratic inefficiency.

Slow down in government decision due to political instability.

Raw material price.

Restructuring of Automobile company

Financial - Allocation and cash flow

Supply Chain

Operational Efficiency

Raw Material prices


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Fuel Efficiency

Segment Competitiveness

Fuel Prices

Demands

Emerging markets

ANALYSIS OF PRESENT-FUTURE OPPORTUNITIES AND RISK IN THE AUTO

SECTOR.

Talking about the present and future trend and opportunity of auto industry we see, after being

hit by spiraling raw material costs for several quarters, auto makers would have gained from

softer commodity prices in the June quarter (Q1). But unfavorable and volatile currency

movements played spoilsport. Prices of aluminum and steel dropped from the December quarter,

as did that of rubber

An 8% depreciation in the Indian rupee against the dollar in the period would have negated these

gains because auto firms import key raw materials, which become more expensive. Passenger car

maker Maruti Suzuki India Ltd and two-wheeler leader Hero MotoCorp Ltd are likely to take a

hit on imported raw materials and components, besides royalty payments. A preview report on

the sector by Antique Stock Broking Ltd says, “Hero’s Japanese yen-denominated fixed royalty

expense, which stood at around Rs. 205 Crore in 4QFY12 (fourth quarter of fiscal 2012) is likely

to revert to the around Rs. 220 Crore level in the first quarter of FY13 (similar to the third

quarter of FY12 levels).”

Of course, the magnitude of the impact will vary depending on the extent to which currency

volatility has been hedged. For example, analyst reports express concern that Maruti has hedged

its forex exposure up to the first six months of FY13, but given the currency volatility, fresh

hedges are likely to be less attractive for the company. In the case of Bajaj Auto Ltd, a report by

Prabhudas Lilladher Pvt. Ltd said that average realization per vehicle is expected to increase only

by 2.4% year-on-year (y-o-y) as exports have been hedged at Rs. 51 to the dollar, restricting the

benefit of a greater slide in the rupee.

Further, the June quarter will not see any gains because of operating leverage on account of

strong volumes. Most brokerage firms that track the top five listed companies in the auto

universe (Tata Motors Ltd, Maruti, Bajaj, Hero and Mahindra and Mahindra Ltd) reckon that

June quarter aggregate sales volume grew by a mere 8% over the year-ago quarter, the lowest

quarterly performance in three years.

Of course, the biggest slowdown was in the passenger car and commercial vehicle (medium and

heavy truck) segments, while utility and light commercial vehicles fared a tad better. Two-

wheeler segment volumes slowed to single-digit y-o-y growth for the first time in these years.


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This will change for the better only if fuel price hikes are contained and if interest rates start

falling.

Undoubtedly, lower volumes and foreign currency volatility will weigh on the June quarter’s

profitability. Brokerage firms’ consensus points to average 150-180 basis points dip in y-o-y

operating margins. Meanwhile, even the profitability of firms such as Bajaj, which is better than

others in the universe because of its three-wheeler sales, will also see a margin contraction as

exports of these vehicles to Sri Lanka suffered a setback in the quarter.

In the final analysis, the auto sector is likely to post a mere 8-10% y-o-y growth in net profit

during the quarter. The Street already seems to have factored this into valuations. The BSE Auto

Index, which was steadily outperforming the benchmark Sensex even as other sectoral indices

were stumbling, has finally cooled off and underperformed in the last three months. The only

trigger that can lift sentiment is higher volume, which in turn will be the result of lower cost of

ownership of vehicles.

Talking on risk factor the overall slowdown in automobile sector continues so it’s a risky sector

to invest for now:

The auto industry continued its slow momentum in June with single-digit volume growth, due to

low growth in two-wheelers, modest volume of commercial vehicles (CVs) and fall in multi-

purpose vehicles (MPVs).

While companies including Mahindra and Mahindra Ltd, Maruti Suzuki India Ltd and Honda

Motorcycles and Scooters India (HMSI) registered robust volumes, Tata Motors Ltd, Bajaj Auto

Ltd and TVS Motor Co. Ltd saw negative growth. This suggests that the growth of about 20%

registered in March is unlikely to continue.

Inventory at dealers’ end remained higher than normal, indicating low retail sales.

The two-wheeler segment registered 6.7% year-on-year (y-o-y) growth in June led by a 19.2% y-

o-y growth in scooter sales. While the motorcycle segment witnessed 4.5% growth, moped sales

grew 2% y-o-y. The commercial vehicles segment witnessed a muted 8.8% y-o-y growth with

12.7% y-o-y decline in medium and heavy commercial vehicles sales.


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Also see, on a slow drive? (Graphic)

The passenger vehicle segment rose 13% y-o-y in June due to growth of 44% y-o-y in utility

vehicles, and 11.5% in cars, while MPVs remained subdued in the month.


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COMPANY ANALYSIS

LARGE CAP COMPANIES: MARUTI SUZUKI

BSE: 532500

NSE: MARUTI

CMP: 1179.9 (BSE)

1181.00 (NSE)

SECTOR: Auto

1. Industry Outlook and Current company position

Following India's growing openness, the arrival of new and existing models, easy

availability of finance at relatively low rate of interest and price discounts offered by

the dealers and manufacturers all have stirred the demand for vehicles and a strong

growth of the Indian automobile industry.

The Indian car industry is going from strength to strength. Fast, faster and fastest.

And there is no turning back. International giants are zeroing on to India.

Tata Motors, M&M, Marico, Tata Global, Titan and Havells India improve debt to

equity ratio shows good prospect for Automobile companies.

Maruti Suzuki keeps meeting demand for India and Swift, Dzire and new launch

Ertiga are most popular with waiting period of more than 8 months.

Maruti Suzuki to fast track its New Alto 800 launches; to be priced at around Rs 2

lakhs which would give direct competition to Tata Nano and Hyundai Eon.

2. Management Capabilities- Promoters and top management

Problems between Management and Worker trade Union started when Maruti asked

to sign good conduct bond when 62 workers were suspended due to indiscipline.

After a rough spat with Trade Union the Manesar planed would be reopened with

more than 500 workers sacked involved in the riot.

Maruti Suzuki to operate violence-hit facility in Manesar under police protection -

Maruti Suzuki, which is facing huge production loss at violence-hit Manesar due to

severe labour unrest, will get police protection on recommencement of production.

Maruti Suzuki to make 150 cars a day at Manesar plant

Market leader Maruti Suzuki had seen been the biggest place for poaching executive.

Rakesh Srivastava a Zonal head at company recently joined Hyundai. Pankaj Sharma

GM at True Value division joined VW operations head.


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3. Corporate Governance

The Company strives to foster a corporate culture in which high standards of ethical

behavior, individual accountability and transparent disclosure are ingrained in all its

business dealings and shared by its Board of Directors, Management and Employees.

The Company has established systems & procedures to ensure that its Board of

Directors is well-informed and well-equipped to fulfill its overall responsibilities and

to provide the management strategic direction it needs to create long-term shareholder

value.

On its Board, the Company has four non-Executive- Independent Directors of high

stature from varied backgrounds, who bring with them rich experience and high

ethical standards.

In recent years, the Company has evolved a Control Self-Assessment mechanism to

evaluate the effectiveness of internal controls over financial reporting.

Key internal controls over financial reporting were identified and put to self-

assessment by control owners in the form of Self-Assessment Questionnaires through

a web based online tool called "Control Managers”.

With the successful implementation of the online Controls Self-Assessment

framework, the Company has become one of the few companies in India to have a

transparent framework for evaluating the effectiveness of internal controls over

financial reporting. The initiative further reinforces the commitment of the Company

to adopt best corporate governance practices

4. Shareholder Returns- ROE and Earnings growth


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Regarding Shareholding pattern shows that majority of holding is of Promoter and Promoter

group which is 54% and then is Public Shareholding Institutional which FII and Public

Shareholding Non institutional which are retailers.

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

ROE 10.76 16.5 21.1 13.04 20.56

EPS 56.60 79.21 86.45 42.18 59.91

The EPS shows profitability of firm on per share basis. Over the years it has been seen that the

EPS is more or less above 50.

ROE shows how well the firm has used the resources of owners that are net worth.

5. FINANCIAL ANALYSIS

Balance Sheet – From balance sheet it can be seen that the Investments are increasing during the

last few years as a result of which the depreciation has increased significantly because most of

the investment is in machinery and other fixed assets. Sundry Debtors are constant that means

payments are all received on time as per previous year records. Cash and bank balance shows

that it increased drastically since 2 years because the investment which company did in past is

yielding good returns and Net worth has also increased in the same pattern. Total current assets

have increased which shows increase in net current assets and higher working capital required.

Share Capital is has not changed but reserves and surplus has increased which shows large

undistributed profits. In Auto Company sufficient inventories are required so that the plant has

no halt. It can be seen that inventories are large enough because Maruti is manufacturing almost

more than 150 cars per day.

Income Statement – with the increase in the market share and being the market leader the sales

revenue of Maruti is increasing around 5 to 10 % every year except that last year is reduced due

to high petrol prices and Interest rates on loans. Manufacturing expenses has increased due to

due to high cost of steel and other raw material required for manufacturing. Interest is lower due

to reduced debt and other loans.

Cash Flow – Profit before Tax is lower as compared to previous year because of cash from

investment activities has lowered. Whereas cash from operating expenses has increased is an

upper trend with the latest technology and inventory management. Cash from financing

investment has lowered slows that the bonds and debentures which company issued turned to

give negative returns.


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6. RATIO ANALYSIS

LIQUIDITY RATIO:

1. Current ratio – current ratio measures firms short term solvency, it indicates the availability of

current assets for every one rupee of current liability. A ratio greater than indicates the firm has

more current assets than current liabilities. It can be seen that current ratio is above 1 so a good

margin of safety is available for creditors.

2. Net working Capital –It shows firms ability to meet its current obligation. Working capital is

used to run daily operations. The working capital is reduced compared to last year because of

lower production due to strike in plant due to worker union problems as result the production is

lowered.

ACTIVITY RATIO:

1. Inventory Turnover – Indicates efficiency of firm in production and selling its product. It

shows how rapidly inventory is getting replaced. Itcan be seen that Maruti is turning is inventory

of finished goods into sales in 22.8 times a year. Days of inventory holding are 16 days. The

ratio is maintained somewhat similar as previous years.

2. Total asset turnover ratio – This ratio shows the firm’s ability in generating sales from total

pool of assets. The ratio shows that Maruti generates sales of Rs. 2.22 from every one rupees of

current and fixed asset.

LEVERAGE RATIO:

1. Debt Equity ratio – It can be seen that company has lower deb equity ratio that means

company is using more of its shareholders firm to run its business rather than its debt. This will

reduce risk. The ratio is also lower than 1 for all years. So risk is lesser.

2. Interest coverage – This show about interest paying capability is company. The amount of

loan company has taken is that company is position to pay its debt or equity. It is firm’s debt

servicing capacity. The ratio has reduced almost to half compared to last 2 years. The one

possible reason could be reduction is EBIT and higher interest payment for previous year.

PROFITABILITY RATIO:

1. Net Profit Margin –It indicates management’s efficiency in manufacturing, administrating and

selling the products. Net profit is reduced due to lower sales turnover and PAT as a result of

reduced demand for cars due to high interest rates and hike in fuel prices.

2. Return on Asset –Indicates amount of profit earned on each rupee of investment. The ratio is

higher for previous year indicates good return and it has increased compared to last few years.

Higher the better it is.

3. Return on Equity – ROE indicates the return a shareholder gets on his investment. The PAT

can be either used to give dividends or used in reserves and surplus depends on company .ROE is

important for shareholders higher the ratio better it is and vice a versa. It can be seen that ratio is

lower compared to previous year because of reduced PAT as a result of reduced sales.


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COMMON STOCK RATIO:

1. Dividend per share – It shows the amount of dividend paid to the common stock holders a

large number of potential and present investors are interested in it. It can be seen that DPS has

remained constant for last years but increased for earlier years.

2. Dividend Payout ratio – It indicates how much earnings company is ready to pay to its

stockholders. The ratio has increased compared to last year.

7. FORECASTING

Company Background – Maruti Suzuki Ltd

Maruti Suzuki (MSIL), a subsidiary of Suzuki Motor Corporation, Japan (with a54.2% stake), is

the largest passenger car (PC) company in India, accounting for42.4% of the domestic PC

market. MSIL derives ~75% of its overall sales from thesmall car segment and has a dominant

position in the segment with a marketshare of ~50%, led by popular models like Alto, Wagon R

and Swift. The companyoperates from two facilities in India (Gurgaon and Manesar) and is in

the processof expanding its manufacturing capacity to 1.9mn units (currently 1.65mn)

byFY2014. Also, MSIL has steadily increased its presence internationally and exportsnow

account for the 11% of its overall sales volume.

Historical data –

Domestic sales fell by 11.2 per cent to 1,006,316 units, Net Sales, including exports,

stood at ` 347,059 million, a decline of 3.2 per cent over the previous year 2010.

The market share in passenger vehicles declined from the past levels of about 45 per cent

to 38.4 per cent.

The difference between petrol and diesel prices shot up causing a further decline in the

demand for petrol vehicles and a customer waitlist for diesel vehicles. The percentage of

diesel vehicles in domestic passenger vehicle sales increased from 36 per cent in 2010-11

to 47 per cent in 2011-12.

Four out of the top five selling models in India in the year were from the Maruti Suzuki

stable.

During the year, the Company launched refreshed variants of the Swift and the DZire.

These brands have been on waiting lists for delivery since their launch.

The market response to the new models has been satisfying and the combined volumes

have shot up from about 22,000 units to over 30,000 units per month.

During the year, the dealer sales network reached 1,100 outlets in 801 cities and total

service points expanded to 2,958 workshops in 1,408 cities.

Parts and accessories achieved a gross turnover of`23, 385 million, a growth of 16 per

cent over the previous year.

Non-European markets now account for 66 per cent of total exports upin the year, the

Company exported 127,379 vehicles, a decline of 8 per cent over the previous year.


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Over 100,000 man-hours of safety training were provided in 2011-12.

The aggregate decline of 11.2 per cent in the domestic market in the year 2011 was

accompanied by fluctuations in demand in each quarter, and also across models.

The Company was impacted by lower sales owing to a tough macroeconomic scenario

and higher cost owing to adverse foreign exchangerates and commodity price increases.

Assumptions

A lower FY2013E/2014E/FY2015E volume assumption by ~4%/~2% to 1.21mn/1.34mn

units, respectively, to factor in loss of production due to the lockout at Manesar plant.

MSIL’s net sales grew by a strong 27.5% yoy to `10,778cr (11.3% higher than our

estimates) driven by 21.3% yoy increase innet average realization.

MSIL’s EBITDA margin declined 230bp yoy to 7.3% primarily due to 2.4% increase in

other expenditure. Overall expenses increased by 10-15 % as rising cost of raw material

and steel.

MSIL posted 22.8% yoy decline in net profit at 424cr mainly on account of sharp decline

in other income. Other income declined 39.0% yoy during the quarter mainly due to

deferral in booking treasury income. Further higher interest cost also restricted bottom-

line growth.

Believing that 2QFY2013 will be a difficult quarter for the company as volumes during

the quarter will be impacted on account of the labor strike at the Manesar plant.

Assuming a daily production loss of ~1,700 units per day, MSIL has already lost 18,000-

20,000 units of production since the violence erupted at the company’s plant leading to a

shutdown of facility.

But since Manesar plant is opening in august a sales growth of approx. 10-15% is

assumed over the years.

The raw material costs as per previous year would increase about 10% which would

increase expenses and increase operating cost. This also includes high cost of steel rise in

inflation.

The employee salary will increase approx. by 3-4% as man hours would increase due to

high volume demand.

Since new plant would be complete in Gurgaon b 2014 the investments would increase

which would increase depreciation and amortization.

Net PAT would decrease in FY13 due to workers strike but later on a constant growth of

about 10-15% expected further years

Total liability would increase due to expansion of plant and new R&D coming up in

Haryana.

The net working capital is expected to increase around 10% for further years.

Total Assets would increase about 15 to 20% further with increase in cash and bank

balance.


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Company in expected to give a dividend which would yield good returns for

shareholders. Dividend of Rs.254 is assumed.

PROFIT AND LOSS STATEMENT (Rs. In Crore)

FY11 FY12 FY13 FY14 FY15

Total Income 35,849 34,706 42,887 49,079 56440.85

% Change 23.2 -3.2 23.6 14.4 15

RM cost 28,338 28,066 34,138 38,772 44587.8

Manufacturing cost 515 493 643 687 790.05

Employee expenses 704 844 1,072 1,252 1439.8

Others 3,423 3,672 4,675 5,153 5925.95

Total Expenditure 32,980 33,074 40,528 45,864 52743.6

EBIDTA 2,869 1,632 2,359 3,215 3,697

% Change -16.3 -43.1% 44.5% 36.3% 15.0%

Depreciation and Amortization 1,014 1,138 1,303 1,486 1708.9

Interest 25 55 86 86 98.9

Other Income 1,278 1,708 1,606 1734 1,734

PBT 3,108 2,147 2,576 3,377 3,623

Tax 820 511 644 844 971

PAT 2,288 1,636 1,932 2,533 2,653


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BALANCE SHEET (Rs. In Crore)


Sources of Funds

Equity share capital 145 145 145 145 145

Reserves and Surplus 13,723 15,043 16,721 19,000 21850

Shareholders Fund 13,868 15,188 16,866 19,145 21995

0

Total Loans 170 1,078 1,078 1,078 1240

Differed Tax liability 164 302 302 302 347

Other long Term liabilities 96 97 97 97 97

Provisions 140 168 168 168 168

Total Liabilities 14,438 16,833 18,511 20,790 23909

Gross Block 11,172 14,461 16,495 18,804 21625

Less: Depreciation 6,208 7,347 8,650 10,135 11655

Net Block 4,964 7,114 7,845 8,669 9,969

Capital work in progress 1,429 1,018 1,320 1,128 1297

Investments 5,107 6,147 6,760 7,592 8731

Long term loans and advances 1,255 1,671 1,671 1,671 1922

Other noncurrent assets 47 26 26 26 30

Total Current Assets 5,625 6,325 7,527 9,085 10448

Total Current Liabilities 3,987 5,469 6,638 7,382 8489

Net Current Assets 1,638 856 889 1,703 1,958

Total Asset 14,438 16,833 18,511 20,790 23909


Page 18

CASH FLOW (Rs. In Crore)


Profit Before Tax 3,108 2,147 2,576 3,377 3,623

Depreciation 1,014 1,138 1,303 1,486 1,709

Change in Working capital 978 709 733 128 169

Others 689 -133 0 0 0

Other Income -1,278 -1,708 -1,606 -1,734 -1,734

Direct Tax Paid -820 -511 -644 -844 -844

Cash Flow from Operations 3,691 1,642 2,362 2,413 2,923

Increase/Decrease in Fixed Assets -1,806 -2,879 -2,336 -2,118 -1,800

Increase/Decrease in Investments 2,070 -1,041 -613 -832 -1,139

Other Income 1,278 1,708 1,606 1,734 1,734

Cash Flow from Investments 1,542 -2,212 -1,343 -1,216 -1,205

Issue of Equity 0 0 0 0 0

Increase/Decrease in Loans -651 908 0 0 0

Dividend Paid 252 256 254 254 254

Others -2,423 155 0 0 0

Cash Flow from financing -2,822 497 -254 -254 -254

Increase/Decrease in Cash 2,410 -72 766 942 1,464

Opening Cash Balance 98 2,509 2,436 3,202 4,144

Closing Cash Balance 2,509 2,436 3,202 4,144 5,608


Page 19

8. INVESTMENT RECOMMENDATIONS

Based on growth of Maruti Suzuki in past and being 1 of the major market player in mid-size

cars Maruti future prospects are really good. Even though problems have been with Manesar

plant but things are gone settle down and plant is going to open by end of august and production

will start with full safety of employees.

EPS for Maruti Suzuki has increased only for the year 2011-12 when there was dip in sales due

to higher fuel prices, interest rates and inflation. Further the demand doe diesel cars is increasing

this was seen when 2011-12 the sales of diesel cars went past petrol cars. Maruti Suzuki is

coming with a R&D center in Haryana for efficient car design on Indian roads so further expect

good diesel cars from company. This would give a boost to its sales too.

Also Maruti is coming up with New Alto in range of 2 Lakhs to give direct competition to Tata

Nano and Hyundai EON. This would help Maruti to gain lost sales due to Maruti’s problem in

Manesar plant. Even though there’s a waiting period of 8 to 10 months for cars in Maruti people

are ready to but cars and be a loyal customers. Maruti Suzuki’s Ertiga has been a wonder for

company and its other best-selling include Swift and Dzire.

It can be seen the ROE for past years have been significant to attract more equity players to

trade. Only for year 2011-12 it reduced due to economic factors but overall returns are above all

auto companies in India. Dividends are paid every year and even though there was dip in sales

company paid a dividend of Rs.7.50 which was same as earlier year. Dividend is one of the most

important return an investor gets investing in a company.

The market capital of Maruti Suzuki is Rs. 34263 cr which is high enough to attract investors.

The P/E is 22.10 which is high above industry average of 18.3.

1. Demand for cars in India is increasing due to Per capita near inflexion point for car demand.

2. Suzuki focusing to make Maruti a small car manufacturing hub

3. Structural and cyclical factors to keep market share under check

4. Manesar plant issue sorted out so waiting for cars by customers would reduce

5. Maruti Suzuki has new launch Cervo which would in near future and this car is also a mid-

size car.

6. Management indicated that order book for Swift/Dzire/Ertiga stands at 55k/62k/32k units

7. The company has hedged ~30% of USD/JPY exposure in FY13 while USD/INR exposure

largely remains un-hedged (has natural hedge to some extent)

8. Avg. discounts for the quarter stood at Rs 11,500/unit

9. Share of diesel vehicle stood at 38% during the 1st quarter for year 2012-13


Page 20

CMP – 1186.80

52 weeks High – 1428.50

Low – 905.50

Target price – 1250 (12 months)

With the current Market condition being volatile an investor who is having Maruti Suzuki shares

must hold it because company is coming will resolve Manesar plant issues in a while and

production will restart as a result market demand for Maruti cars would be satisfied.

Investors who are planning to invest in company then this is best time to invest because they

have to look into company from long term perspective. In long run company is planning to have

new launch in mid-size and even company is coming up with diesel cars. Also government

would reduce interest rates which would see an overall increase in the sales growth in the

company.

Overall it can concluded that from long-term point of view Maruti Suzuki is best to invest and

current stock holders should hold their stock with lower limit of around 5% because wouldn’t go

below 2-3% in current volatile market.

VALUATION

2005 2006 2007 2008 2009 2010 2011 2012 Average

P/E ratio 14.26 21.24 15.17 13.9 18.5 16.4 15.9 22.58 17.24

No. of Outstanding Shares 28.89

PAT 1,932

EPS 66.87

Price of Share 1153.16

CMP of Maruti Suzuki is Rs. 1186.80 and based on Valuation method of Price earning Multiple

Valuation the price of the stock is Rs.1153.16. It can be seen that stock is valued appropriate

because the market currently is under volatility.

Rating – Buy rating under Long term Investment


Page 21

TATA MOTORS

BSE: 500570

NSE: TATAMOTORS

CMP: 245.20 (BSE)

245.30 (NSE)

SECTOR: Auto

1. Industry outlook and current company position

Increase in Net worth Rs 13,979crs

Cash & Cash Equivalents stood at Rs 25,730 crs (JLR GBP 2.43 bn, TML – Rs 1,841

crs)

Net Automotive Debt Equity as on March 31, 2012 stood at 0.25:1 vs 0.56:1 as on

Dec 31, 2011

EPS (basic) stood at Rs 42.58 for FY12 as compared to Rs 31.05 for FY11

Cash & Cash Equivalents stood at Rs 1,841 crs

FY 12 Capex spend Rs 3,118 crs

Net Debt Equity as on Mar 31, 2012 stood at 0.72 vs 0.76 on Dec 31, 2011

Inventory days as on Mar 31, 2012 at ~ 31 vs 37 as on Dec 31,2011

Receivable days as on Mar 31, 2012 at ~ 18 vs 19 as on Dec 31,2011

The Board of Directors recommended a dividend of Rs 4 per Ordinary Share of Rs 2/- each

and Rs 4.10 per A Ordinary share of Rs 2/- each for FY 2011-12.

Jaguar Land rover-

Highest ever volumes – 314,433 units – up 29.1% Y-o-Y

Issued £1.5 bn of unsecured bonds with 7-10 year term during FY 12 (GBP 1 bn in

May 2011 & GBP 0.5 bn in March 2012). Completed an unsecured Revolving Credit

Facilty (RCF) totaling £710m for 3-5 years with a consortium of banks. These

facilities have significantly strengthened JLR’s debt, capital and liquidity structure.

Other subsidiaries of Tata Motors-

1. Tata motors Finance

Issued £1.5 bn of unsecured bonds with 7-10 year term during FY 12 (GBP 1 bn in May

2011 & GBP 0.5 bn in March 2012). Completed an unsecured Revolving Credit Facilty

(RCF) totaling £710m for 3-5 years with a consortium of banks. These facilities have

significantly strengthened JLR’s debt, capital and liquidity structure.

2. Tata technologies

Revenue & PAT continued its upward trend. 2011=208.4 2012=139.0


Page 22

Offshore revenue strongly grew by 66%

Strong Cash & cash equivalents – Rs 489.9 crs as on March 31, 2012

Operational efficiency measures continue to improve performance.

3. Tata Daewoo

Adverse product mix and Lower realization on exports due to appreciation were some

of the major reasons which resulted in decline in EBITDA and PAT. EBITDA

decreases from 52.3 to 39.4 and PAT decreases from 18.4 to 3.6.

Continuing cost reduction efforts to control impact of material & other operating cost

increases.

4. TML Drivelines

Sales volumes increased on the back of growth in domestic CV market

While overall cost pressures increased, EBITDA margins were supported by volumes and

cost control initiatives. EBITDA increases from 179.7 to 351.6.

PRESENT SCENARIO

Tata motors redeemed overseas convertible bonds with a face value of $472.90 million

by raising funds internally.

Credit Suisse has downgraded Indian auto major Tata Motors after the company

announced disappointing results for Q1. Tata Motors announced 12% increase in net

profit for Q1 at Rs 2245 crore.

Tata Motors Ltd has informed BSE that the Board of Directors on August 14, 2012

appointed Mr. Karl Slym as the Managing Director of the Company w.e.f. October 01,

2012.

The performance of the truck market is forecast to accelerate, with an anticipated CAGR

of 30.9% for the five-year period 2010 - 2015, which is expected to drive the market to a

value of $61.7 billion by the end of 2015.

3. Corporate governance-

As part of the Tata group, the Company’s philosophy on Corporate Governance is

founded upon a rich legacy of fair, ethical and transparent governance practices, many of

which were in place even before they were mandated by adopting highest standards of

professionalism, honesty, integrity and ethical behaviour. As a global organisation the

Corporate Governance practices followed by the Company and its subsidiaries are

compatible with international standards and best practices. Through the Governance

mechanism in the Company, the Board alongwith its Committees undertake its fiduciary

responsibilities to all its stakeholders by ensuring transparency, fairplay and

independence in its decision making. It is divided mainly into three parts namely; Audit

committee, remuneration committee, grievance committee there are also having sub

committees.


Page 23

4. Shareholder Returns- ROE and Earnings growth-

Promoters have 41.56 % of stake in the shareholdings. Here Institution mainly comprises of FII

and insurance companies and non institutional consists mainly of individuals rest other have

small proportion in shareholdings.


ROE 41.33 48.74 31.30 -49.05 25.01

EPS 3.91 28.55 39.26 19.48 52.63

FINANCIAL ANALYSIS

Ratio Analysis:

Investment Valuation ratios- From 2008 to 2011 there is increase in all investment ratios every

year. But as we look at 2012 there is decline in all ratios which demotivates the investors.

Dividend per share is declined from 20 to 4. It clearly shows the bad market condition flourishes

in the market. Operating, net operating and free reserve face sharp decline.

Profitability Ratios- There is ups and down from 2008 to 2010. From 2008 to 2009 there is

decline in the ratios but from 2009 to 2010 again we can see increase in all ratios. As we can see

today gross profit margin and net profit margin declines from 2010 to 2012. Here we can say that

profit is declined since 2010, which is not a good indicator for Tata Motors. Return on asset is

falling very disastrously means there is no proper utilization of asset.

Liquidity and Solvency ratios-

Current Ratio- Current ratio is low since 2008 as we can estimate it from ratios. This

shows that they are unable to pay back its short-term liabilities (debt and payables) with

its short-term assets (cash, inventory, receivables).

Quick Ratio- Here quick ratio is less than 1 from starting which tells us that they are

unable to pay their current liabilities. It is not a good sign for Tata motors. It is at lowest

since 2008 i.e. at 0.40

Debt equity ratio- In 2011 and 2012 it is 0.80 and 0.57 respectively. Which is less and it

has to be better.


Page 24

Management Efficiency ratios- Inventory turnover has seen upward and downward movements

from 2008 to 2011. In comparison to 2011 it has fallen in 2012 from 13.86 to 13.57. Same

happened in the case of debtors turnover is also face up and down movements throughout but

increases from last year to 20.42 from 19.20. Asset turnover ratio increases with slow rate since

2009. This all ratios show that management is not consistent with their performance. They need

to focus on that.

Cash flow indicator ratio- When we look for dividend payout ratio it is increasing year by year

on the other hand cash earnings retention ratio is declined, it clearly shows that retend earning is

used to pay dividend because profit is on declining mode. In these case they don’t want to

demotivate investors and are paying their dividend in the condition of declined profit.

Income Statement:

2011 2012 2013E 2014E 2015E

Net revenue 1,231,333 1,680,131 1,894,543 2,045,280 2,206,857

Raw Material 790,084 1,103,170 1,242,305 1,338,187 1,441,227

Gross Profit 441,249 576,961 652,238 707,094 762,954

Employee Cost 93,427 122,045 131,427 141,137 152,287

Other Expenses 172,273 212,981 238,054 256,918 277,215

EBITDA 175,550 241,935 282,757 309,039 333,453

Depr. &

amortization 56,180 70,807 74,530 80,450 86,806

Net Interest 20,454 24,066 26,556 27,066 29,204

Other Income 895 2,100 2,300 2,500 2,698

Profit before tax 99,810 149,162 183,971 204,023 220,141

Total Tax 12,164 28,700 36,095 40,700 43,915

Profit after tax 87,646 120,462 147,876 163,323 176,226

Ex-Od items 4,074 -9,320 780 1,014 1,094

Adj. PAT 88,175 119,862 147,096 162,309 175,131

Avg. Shares 3,188.60 3,335.10 3,335.10 3,335.10 3,599

EPS (Rs.) 27.7 35.9 44.1 48.7 53


Page 25

Balance sheet:

2011 2012 2013E 2014E 2015E

Shareholder's Funds 191,715 284,414 357,839 373,378 389,583

Total Debt 327,914 455,392 464,892 475,892 490168.8

Other Liabilities 23,428 24,628 24,828 25,028 25778.84

Total Liabilities 543,057 764,433 847,559 874,298 905530.6

Net Fixed Assets 434,931 604,169 791,997 871,935 898093.1

Goodwill 42,171 42,171 40,171 45,171 50,592

Investments 25,443 45,505 48,505 51,505 54,698

Net Current Assets 40,512 72,588 -33,115 -94,314 -150,051

Cash & Equivalents 109,479 161,941 174,512 216,019 267,863

Other Current Assets 400,870 454,886 433,306 387,916 341,466

Current Liabilities 469,838 544,239 640,933 698,249 761,091

Total Assets 543,057 764,433 847,559 874,298 701,571

Cash Flow:

2,011 2,012 2013E 2014E 2015E

C/F from Operations 104,095.00 133,242.00 200,162.00 184,125.00 169,377

C/F from Investing -70,657 -182,858 -168,868 -118,938 -83,257

C/F from Financing -11,393 102,077 -18,723 -18,067 -17,435

Inc. / Dec. in Cash 22,046 52,462 12,571 47,120 68,685

Opening Cash 87,433 109,479 161,941 174,511 199,178

Closing Cash 109,479 161,941 174,511 216,019 267,863

FCFF 56,736 61,316 174,032 229,528 302,977

FCFE 33,566 188,793 183,532 240,528 315,091


Page 26

VALUATION

2012 2011 2010 2009 2008 Average

P/E ratio 82.5 48.9 20.5 9.6 12.3 34.76


PAT 12422.30

EPS 3.89


As per calculation we can say that stock is over valuated. But stock can see upwards and

downward movements. So at present we can suggest to sell the shares. PAT is 12422.3.

Analysis of financial statement and future predictions:

Slower industrial growth, weak economic outlook, excise duty increases, and present concern

deregulation of diesel prices impact overall demand. Freight rates dipped marginally; however,

finance availability is adequate. Interest rates are expected to moderate.

Demand pressure for some of the MHCV applications. A good monsoon and

increase in infrastructure spending could propel demand for MHCV trucks.

LCV / SCV continue to grow. Commenced production of Ace Zip in Dharwad, Magic

Iris to follow. Services and agriculture sector along with rural connectivity, proliferation

of hub & spoke model and demand of passenger applications is expected to drive growth

in LCV/SCV segment.

Company well placed with a wide and compelling product portfolio and customer support

against the increasing competitive intensity in CVs.

Competitive intensity and increasing costs poses significant challenge to the passenger vehicle

industry, with higher inflation, interest costs, fuel price increases dampening the demand.

Customer preference expected to continue to tend towards diesel vehicles.

Significant market initiatives which have resulted in improving retail sales for passenger

vehicles and market share in Q3 FY 12 and Q4 FY 12 in to continue.

Future products in pipeline for FY 12 – Variants from Prima range, World LCV range,

ACE variants. Safari Storme unveiled in January 2012.

Further expand sales and service network in India and enhanced customer care.

Extend export potential.

For overall industry, RM & component prices are expected to be under control. For the

Company, material cost reductions and expense reduction focus will continue.

Jaguar Land Rover-With Strong operating cash flows, expectation are to self support the

growth strategy Capex and Investment plans expected to be about GBP 2 bn in FY 13.


Page 27

ASHOK LEYLAND

BSE Code: 500477

NSE Code: ASHOKLEY

CMP: 21.95(BSE)

22.00(NSE)

Sector: Transport Equipments

1. Industry Outlook and Current company position

2011-12 CV Industry performance:-

Low industrial production and a slowdown in mining in

certain states impacted freight availability

Higher interest rates impacted new truck sales

MHCV grew by 9%

LCVs continued to grow strongly by 26-29%

As of 2011-12, Tata Motors remained the largest commercial vehicle exporter, with a

58.4 per cent share while, Mahindra and Mahindra (M&M), Ashok Leyland and Eicher

Motors had a share of 23.1 per cent, 14 per cent and 3.3 per cent.

However, In terms of growth in exports, Ashok Leyland registered the highest growth of

a 45 per cent CAGR over 2006-07 to 2011-12, followed by M&M, which reported a 31

per cent CAGR in the same period.

As macroeconomic indicators remain weak, commercial vehicles (CV) sales volumes are

also expected to continue to moderate in 2012-13. CRISIL expect CV sales growth to

slow further to 2-5 per cent (y-o-y) in 2012-13, from 6-8 per cent estimated in July 2012

due to a downward revision to our GDP growth outlook.

CRISIL Research expects demand for buses to moderate, growing by 8-10 per cent from

2011-12 to 2016-17, after two years of strong growth. One-time schemes like JNNURM

supported bus demand from STUs in the last few years combined with rise in demand

from corporates and private operators. Going forward, demand will be driven by

development of road infrastructure, institutional demand from schools and corporates

(IT/ITes and BFSI verticals) and bus orders from state transport undertakings (STUs).

Domestic tractor sales estimated to grow by 3-5 per cent in 2012-13. Fall in mandi prices

and scanty rainfall in southern region will have negative impact on farm income.


Page 28

However, over a long-term, tractor sales are expected to grow by a CAGR of 8-10 per

cent, with reducing replacement cycles, stable farm income and increased focus of

government on agricultural and rural development. Operating margins for the next 2

years are expected to improve, mainly due to higher utilisation leading to lower fixed cost

for 2011-12 and fall in raw material prices in 2012-13.

Several exciting products lined up for launch in MDVs like Jan Bus-World’s first front

engine, single step entry bus with full flat floor and India’s first 5 axle rigid truck

During 2011-12 to 2015-16, CRISIL Research expects an average of 14.7 km of national

highways to be constructed /upgraded per day, at an estimated cost of Rs 2,535 billion.

The construction of national highways is expected to increase the length to 5,773 kms in

2015-16 from 3,737 in 2011-12.

So, with stricter implementation of the Supreme Court ban on overloading and increasing

consolidation in the transportation industry, HCVs will continue to eat into the share of

MCVs on long-haul routes. The development of highways is expected to replace MCVs

by HCVs, use of which is currently restricted by inadequate road infrastructure. This will

indeed contribute to increase in sale of Ashok Leyland trucks in this category.

As the hub and spoke model proliferates, CRISIL Research expects SCV sales (forming

86 per cent of LCV sales) to post a CAGR of 17-20 per cent during 2010-11 to 2015-16.

HCV sales (including tippers) will grow by 12-14 per cent during the same period. This

would be faster than the 9-11 CAGR growth in overall MHCV sales.

2. SHAREHOLDING PATTERN- ROE AND EARNINGS GROWTH


Page 29

No. Name of the Shareholder Total Shares

held

Shares as

% of Total

No. of

Shares

A)1 Hinduja Automotive Ltd [Promoter Group] 1,027,237,424 38.61

B)1 Life Insurance Corporation of India 253,991,776 9.55

2 The Master Trust Bank of Japan Ltd as Trustee of

PCA Asia Oceania High Dividend Equity Mother

Fund

56,766,917 2.13

3 Matthews India Fund 40,022,554 1.5

4 Bajaj Allianz Life Insurance Company Ltd 51,236,220 1.93

5 General Insurance Corporation of India 30,150,000 1.13

6 HDFC Standard Life Insurance Company Limited 37,724,344 1.42

7 Eastspring Investments India Equity Open Limited 45,479,459 1.71

Total promoter holding 1,027,237,424 38.61

Total Public Share Holdings 1,276,081,570 47.96

357,357,640 13.43


ROE 19.57 23.80 18.27 9.05 22.30

EPS 2.13 4.75 3.18 1.43 3.53

The EPS shows profitability of firm on per share basis. Over the years it has been seen that the

EPS is more or less above 2.5.

ROE shows how well the firm has used the resources of owners that is net worth. This company

shows a attractive ROE>15% consistently, which makes it good option for investment.

3. Corporate Governance

The Board of Directors and the Management of Ashok Leyland are committed to the

enhancement of shareholder value,

Through sound business decisions, prudent financial management and high standards of

ethics throughout the organization

By ensuring transparency and professionalism in all decisions and transactions.

Achieving excellence in Corporate Governance by conforming to, and exceeding

wherever possible, the prevalent mandatory guidelines on Corporate Governance and by

regularly reviewing the Board processes and the Management systems for further

improvement

The company has adopted a Code of Conduct for the members of the Board and senior

management, who have all affirmed in writing their adherence to this Code.


Page 30

Ombudsman- Another significant step has been the appointment of an Ombudsman to

deal with any references, complaints or grievances about the Company, its employees or

its dealings.

If the suppliers, employees or customers have any suggestions on governance issues or

grievances or complaints on Ashok Leyland's practices - inclusive of its executives in

various functions - which they feel ought to be raised with the Ombudsman and not with

the usual channels of business, they may do so.

It is advised that the regular business dealings should be through the usual business

functional channels. The Ombudsman will not deal with them under normal

circumstances.

4. Ratio Analysis

LIQUIDITY RATIO:

1. Current ratio – current ratio measures firms short term solvency, it indicates the availability of

current assets for every one rupee of current liability. A ratio of 0.88 last FY and continuously

decreasing current ratio indicates that the firm has less current assets than current liabilities,

which is not a encouraging factor for creditors.

2. Net working Capital –It shows firms ability to meet its current obligation. Working capital is

used to run daily operations. The working capital is increased substantially compared to last year

due to lower sales. But this is notable that company shows huge volatility in net working capital

position, which shows company`s uneven sales in the market.

ACTIVITY RATIO:

1. Inventory Turnover – Indicates efficiency of firm in production and selling its product. It

shows how rapidly inventory is getting replaced. It can be seen that Ashok Leyland is turning is

inventory of finished goods into sales in 6.63 times a year. The ratio is steadily improving as

compared to previous years.

2. Total asset turnover ratio – This ratio shows the firm’s ability in generating sales from total

pool of assets. The ratio shows that Ashok Leyland generates sales of Rs. 2.75 from every one

rupees of current and fixed asset, which is continuously improving compared to previous years.

Leverage Ratio:

1. Debt Equity ratio – It can be seen that company has lower deb equity ratio that means

company is using more of its shareholders firm to run its business rather than its debt. The

company has ratio of 0.83 and it is also lower than 1 for all years. So risk is lesser.

2. Interest coverage – This show about interest paying capability is company. The amount of

loan company has taken is that company is position to pay its debt or equity. It is firm’s debt

servicing capacity. The ratio has reduced compared last 2 years but it is well above 1.5.So the

company`s interest coverage is better than moderate.


Page 31

PROFITABILITY RATIO:

1. Net Profit Margin –It indicates management’s efficiency in manufacturing, administrating and

selling the products. Net profit is reduced due to lower sales turnover and PAT as a result of

reduced demand due to high interest rates and hike in fuel prices.

2. Return on Asset –Indicates amount of profit earned on each rupee of investment. The ratio is

lesser compared to previous years which indicate less return.

3. Return on Equity – ROE indicates the return a shareholder gets on his investment. The PAT

can be either used to give dividends or used in reserves and surplus depends on company .ROE is


lower compared to previous year because of reduced PAT as a result of reduced sales.

COMMON STOCK RATIO:

1. Earnings per share – It is the amount of income earned during a period per share of common

stock .It can be seen that EPS has remained constant to more or less about 2.5 for last years.

2. Dividend Payout ratio – It indicates how much earnings company is ready to pay to its

stockholders. The ratio has decreased in last 3 years, which may discourage investors.

FORECAST

Assumptions:

Y-o-Y growth in M&HCVs

YEAR Annual Growth

2010-11 36

2011-12 9

2012-13 5

2013-14(projected) 6


Y-o-Y growth in Buses

YEAR Annual Growth

2010-11 11

2011-12 3

2012-13 4




Page 32

While Total Industry Volume dipped 12% over last year market share is up 4% [65069 in Q1

FY 13 compared to Q1 FY 12- Actual 74698

Robust performance in volume terms

–43% growth over the Q1 of the previous fiscal at 27,487 vehicles

Reasons for the strong showing

–Continued ‘pull’ for ‘Dost’ MCV

–Strong marketing thrust across the country

–Strong performance of enhanced network (Now at 419 nationwide)

–New launches doing well e.g. 3118, ICV products

–Robustness in International Operations

-Proposed FDI in retail

INCOME STATEMENT

Income Statement Y/e 2011 2012E 2013E 2014E 2015E

Net Revenue 1,11,177 1,30,996 1,60,675 1,73,929 1,93,061

Raw Material Expenses 81,210 96,488 1,20,254 1,30,045 1,44,350

gross profit 29,967 34,508 40,421 43,885 48,712

employee cost 9,597 10,461 11,768 12,710 14,108

other expenses 8,192 10,459 12,796 13,683 15,051

EBITDA 12,178 13,589 15,856 17,491 19,415

Depr. & Amortization 2,674 3,503 3,758 3,937 4,213

Net Interest 1,636 2,307 2,570 2,421 2,469

Other Income 151 90 250 260 270

PBT 8,019 7,869 9,778 11,394 12,419

Total Tax 1,705 1,495 1,858 2,165 2,360

PAT 6,314 6,374 7,921 9,229 10,060

Ex-Od items / Min. Int. -150 0

Adjusted PAT 6,314 6,524 7,921 9,229 10,060

Avg. Shares O/S (m) 2,660.70 2,660.70 2,660.70 2,660.70 2,661

EPS (Rs.) 2.4 2.5 3 3.5 4

The net sales of Ashok Leyland is expected to increase in the coming years as the sales in HMV

and cranes category is expected to grow at the rate more than 10% for years 2013-15.This

increase will be mainly due to increasing infrastructure projects and increasing number of

organized retail which will indeed result in requirement of more number of heavy and medium

commercial motor vehicles


Page 33

BALANCE SHEET

Balance Sheet

Y/e March 2011 2012E 2013E 2014E 2015E

Shareholder's Funds 39,629 42,891 46,920 52,258 59,052

Total Debt 25,683 35,450 33,950 33,450 34,119

Other Liabilities 5,338 6,291 6,325 6,325 6,325

Total Liabilities 70,650 84,632 87,195 92,033 98,475

Net Fixed Assets 49,918 52,415 52,657 51,720 52,754

Investments 12,300 16,300 18,300 19,800 20,988

Net Current Assets 8,390 15,853 16,159 20,433 23,498

Cash & Equivalents 1,795 6,043 5,636 7,322 8,420

Other Current Assets 41,877 49,875 59,363 64,870 69,411

Current Liabilities 35,283 40,065 48,840 51,759 53,933

Other Assets 43 64 80 80 80

Total Assets 70,650 84,632 87,195 92,033 98,475

CASH FLOW STATEMENT

Cash Flow Statement

Y/e March 2011 2012E 2013E 2014E 2015E

C/F from Operations 9,695 6,356 11,966 10,577 12,655

C/F from Investing -13,620 -10,093 -6,982 -4,500 -2,500

C/F from Financing 531 7,984 -5,391 -4,391 -3,391

Inc. / Dec. in Cash -3,394 4,248 -407 1,686 2,486

Opening Cash 5,189 1,795 6,043 5,636 7,322

Closing Cash 1,795 6,043 5,636 7,322 5834


Page 34

VALUATION:-

2005 2006 2007 2008 2009 2010 2011 2012 Average

P/E ratio 9.51 15.04 11.53 10.03 12.69 17.55 11.97 22.58 13.86

No. of

Outstanding

Shares 2660.68

PAT 7,921

EPS 2.98

Price of

Share 41.27

Last

Traded

Price 21.95

As we can see that the last traded price of Ashok Leyland Ltd was Rs. 21.95 as compared to

current valuation of Rs. 41.27 .So, the share is undervalued we could suggest to invest in this

stock to get good return in FY2012-13.

Rating – Buy rating under Long term Investment


Page 35

EICHER MOTORS

BSE: 505200

NSE: EICHERMOTEQ

CMP: 2214 (BSE)

2222.45 (NSE)

1. Current Company Position

Eicher Motors Limited, incorporated in 1982, is the flagship company of the Eicher Group in

India and a leading player in the Indian automobile industry.

Its 50-50 joint venture with the Volvo group, VE Commercial Vehicles Limited, designs,

manufactures and markets reliable, fuel-efficient commercial vehicles of high quality and

modern technology, engineering components and provides engineering design solutions.

Eicher Motors manufactures and markets the iconic Royal Enfield motorcycles. Eicher

Motors recorded revenue of over USD 1 billion in 2010.

2. Corporate Governance:

The code of conduct and the governance are based on the corporate principles and strong

emphasis laid on transparency, accountability, integrity and compliance.

The governance processes of the company include creation of empowered sub-committees of

the Board to oversee the functions of executive management. These sub-committees of the

Board mainly consist of non-executive directors and independent directors, which meet and

deliberate regularly to discharge their obligations.

There are various committees formed in order to keep track of various operations of the

company and the Board. Some of the committees are: Audit Committee, Shareholders’ and

investors’ grievance committee, compensation committee and Shares committee.

Various disclosures that the Company abides by are: Related Party transactions, compliances

by the company, code of conduct for Directors and Senior management, ceo/cfo certification,

accounting treatment and risk management.

The company has established a comprehensive risk management process that includes risk

identification, risk assessment, risk mitigation and periodical monitoring. As part of the risk

management mechanism, identified risks are regularly reviewed along with action plans by

the management through monthly business review meetings. these are reported to the Board

of directors on the yearly basis for the inputs and further suggestions for effective

management of risks.


Page 36

3. Shareholder’s Return – ROE & Earnings Growth

The Shareholding pattern shows that maximum of the shares are held by the Promoters to the

extent of 55.21 %, followed by Institutional Investors having 24.60%, Individuals having

10.97% and then by Body Corporate holding 9.22%.

DEC’11 DEC’10 DEC’09 DEC’08 MAR’07

EPS 46.14 28.01 29.64 13.88 22.4

ROE 23.06 16.51 9.66 8.10 13.75

4. Liquidity & Solvency Ratios

1. Current Ratio: It is a measure of financial strength of a company. It indicates how much

money in assets is likely to be converted to cash within one year in order to pay debts that come

due during the same year. A current ratio anywhere above 1 is acceptable. Here, the current ratio

has decreased to around 0.5 from last two years. For a company having current ratio below 1, it

should have inventories that can immediately be converted into cash. Here the inventory turnover

ratio has been around 17 i.e the holding period is around 21 days, which is good owing to its

large inventory.

2. Working Capital: The company’s working capital has increasingly decreased over a period of

time and has eventually turned into negative. This has occurred due to comparative increase in

current liabilities than current assets. Such negative working capital puts financial pressure on

the company forcing in increased borrowings and eventually late payments, which is evident

from balance sheet.


Page 37

5. Management Efficiency Ratio

1. Inventory Turnover Ratio: It is a measure of how rapidly the inventory is getting replaced.

Company’s inventory turnover ratio is maintained around 17-18 times a year. Inventory holding

period is around 21 days which is good for auto sector.

2. Total assets turnover Ratio: The total asset turnover ratio measures the ability of a company to

use its assets to efficiently generate sales. This ratio considers all assets, current and fixed. The

company’s total assets turnover ratio has increased above 1. The ratio shows that the company

generates sales of Rs. 1.24 from every one rupees of current and fixed asset.

6. Profitability Ratios

1. Net Profit Margin: It indicates management’s efficiency in manufacturing, administrating and

selling the products. Net profit has increased over the years owing to increased sales year-on-

year.

2. Return on Asset: Indicates amount of profit earned on each rupee of investment. The ratio is

higher for previous year indicates good return and it has increased compared to last few years.

Higher the better it is.

3. Return on Equity: ROE indicates the return a shareholder gets on his investment. The PAT can

be either used to give dividends or used in reserves and surplus depends on company .ROE is


much higher (from 16.51 to 23.06) as compared to previous year because of increased PAT as a

result of increased sales.


Page 38

7. Forecasting

1. Profit and Loss Statement

Y/E Dec (Rs cr) CY2010 CY2011 CY2012E CY2013E CY2014E CY2015E

Total Income 4,421 5,726 6,805 9,251 11,851 14,084

Total Expenditure 4,040 5,137 6,106 8,306 8,614 10,244

Materials Costs 3,315 4,196 4,998 5,834 7,048 8,395

Employee Costs 263 346 432 500 620 774

Other Exp 462 595 676 790 946 1,075

EBITDA 381 589 699 945 3,237 3,840

Depn & Amort 57 64 80 109 136 170

EBIT 324 525 619 835 3,101 3,670

Other Income 103 142 166 176 212 247

Interest Exp 10 8 7 9 9 8

PBT (reported) 418 660 778 1,003 3,321 3,925

Exceptional item 0 0 0 0 0 0

Tax 111 163 195 260 347 415

PAT (before minority) 307 497 583 743 2,975 3,511

Minority Interest 118 189 196 229 291 301

PAT 189 309 314 513 2,684 3,209

Diluted EPS (Rs) 70.3 114 142.7 189.6 150 188


Page 39

2. Balance Sheet

Y/E Dec (Rs cr) CY2010 CY2011 CY2012E CY2013E CY2014E CY2015E

SOURCES OF FUNDS

Equity Share Capital 27 27 27 27 27 27

Reserves& Surplus 1,205 1,466 1,802 2,265 2,853 3,566

Shareholders Funds 1,232 1,493 1,829 2,292 2,880 3,593

Deferred Tax Liabilities 25 64 64 64 64 64

Total Loans 96 50 50 50 50 50

Minority Interest 677 838 1,034 1,263 1,540 1,863

Total Liabilities 2,030 2,446 2,978 3,670 4,534 5,570

APPLICATION OF FUNDS

Gross Block 811 989 1,589 1,989 2,486 3,082

Less: Acc. Depreciation 427 484 564 673 800 944

Net Block 384 504 1,025 1,315 1,686 4,026

Capital Work-in-Progress 67 395 200 200 200 200

Investments 459 513 513 513 513 513

Deferred Tax Assets 0 0 0 0 0 0

Current Assets 2,050 2,350 2,731 3,516 4,271 5,184

Cash 1,246 1,197 1,430 1,996 2,495 3,118

Debtors 261 343 410 456 506 556

Inventory 327 428 468 592 745 931

Loans & Advances 181 339 374 416 461 507

Other CA 36 42 48 56 64 72

Current Liab & Prov 933 1,334 1,508 1,892 2,366 2,942

Current Liabilities 794 1,185 1,338 1,707 2,167 2,730

Provisions 139 150 170 185 199 212

Net Current Assets 1,117 1,016 1,222 1,624 1,905 2,242

Pre-operative Exp 3 18 18 18 18 18

Total Assets 2,030 2,446 2,978 3,670 4,271 2,260


Page 40

3. Cash Flow Statement

Y/E Dec (Rs cr) CY2010 CY2011 CY2012E CY2013E

Profit before tax 418 660 778 1,003

Depreciation 57 64 80 109

Change in Working Cap. 37 -23 26 164

Interest / Dividend (Net) -76 -103 -159 -167

Direct taxes paid -83 -167 -195 -260

Others -17 -28 0 0

Cash Flow from Ope. 336 403 530 849

(Inc.)/ Dec. in Fixed Assets -131 -417 -405 -400

Interest/Divd Recd 104 132 166 176

(Inc.)/ Dec. in Invest. -164 -54 0 0

Cash Flow from Investing -192 -340 -239 -224

Issue of Equity/(Buyback) 9 2 0 0

Borrowings -43 -54 -7 -9

Dividend Paid (Incl. Tax) -35 -61 -51 -51

Cash Flow from Fin. -69 -112 -58 -60

Inc./(Dec.) in Cash 75 -48 233 566

Opening Cash balances 1,171 1,246 1,197 1,430

Closing Cash balances 1,246 1,197 1,430 1,996

Standalone sales increased 52.7% yoy to Rs255cr in 1QCY2012, reflecting the strong

demand for Royal Enfield. The company witnessed a strong growth of 48.1% yoy in sales of

two-wheelers despite significant moderation in industry growth rate.

Further, average realization rates increased ~3% yoy reflecting price hikes and better product

mix. Royal Enfield sales increased ~15% on a sequential basis. Royal Enfield has crossed

10,000 units landmark in sales in July 2012 for the first time. The demand for Royal Enfield

remains strong even from smaller cities and towns.

The company has increased its capacity to ~12,000 units per month. If demand continues to

remain buoyant the company can further increase the capacity at its new plant in CY2013E.

Robust top-line growth: Eicher Motors’ (EML) consolidated top-line saw a robust growth of

23.6% yoy to Rs1,585cr in 2QCY2012, which was in-line with our estimate. The top-line

growth was driven by 48.1% yoy increase in sales of Royal Enfield to 27,519 units and 8.9%

yoy increase in volumes of Commercial vehicles to 12,016 units while average realization

rates was stable in both the segments.

EBITDA margin declined: EML’s EBITDA saw a moderate growth of 11.1% yoy to Rs140cr

due to significant increase in costs in VE Commercial Vehicles Ltd (VECV). Company’s


Page 41

standalone margin (Royal Enfield) increased from 13.9% in 1QCY2012 to 15.3% in

2QCY2012 (much better than our expectation of ~14%) to reach new high.

Lower other income hurts PAT growth: Significant decline in other income and marginal

increase in effective tax rate led to a 0.5% yoy decline in PAT to ~Rs76cr. Notably, Royal

Enfield’s (company’s standalone) PAT increased 11.7% yoy to Rs32cr driven by stronger

operating performance.

8. Valuation

2005 2006 2007 2008 2009 2010 2011 2012 Average

P/E ratio 13.5 18.3 16.03 14.33 16.69 17.4 16.46 15.86 16.07


PAT 26,406

EPS 132.23


EML’s sales were in-line with expectations. However, decline in VECV margins was

discouraging. Nonetheless, it is expected that Royal Enfield will continue to be a strong growth

driver in near term with strong growth in sales and higher margins. It is expected that VECV

sales will improve going forward. Further, company has recently received order of 1,000 buses

from Gujarat State Government which would enable the bus segment to maintain growth

momentum. Joint Venture with Polaris Industries will provide new growth dimension to the

company in the long term. It is expected that the company will report a top-line and PAT CAGR

of 27% and 29% respectively for CY2011-CY2013E and so on. Thus, we maintain positive

outlook on the company. Hence, we maintain our target price of Rs2,125.07 and our Buy

recommendation on the stock.

9. Risks to the view

Greater-than-expected slowdown in economy could lead to a lower demand for CV vehicles

impacting the company’s top-line.

Inability to garner higher market share in M&HCV segment could impact the company’s

fortunes as it had earlier failed to achieve any success in M&HCV segment before joining

hands with Volvo.

Sustained high interest rates can reduce the demand in short-term.


Page 42

HERO MOTO CORP

BSE: 500182

NSE: HEROMOTOCO

Bloomberg: HMCL: IN

CMP: 1940.20 (BSE)

1941.50 (NSE)

1. Industry Outlook for Two- Wheelers:

The increased consumer appetite for two-wheelers is especially promising.

According to the data received from Census 2011, the share of Indian households

owning two-wheelers spurted to 21%, having risen from 12% indicated in Census

2001.

During the year, 15.4 million two-wheelers were sold; recording a growth of 15%

compared with 13.4 million units sold a year earlier.

Continuing the trend witnessed in the last few years, scooters emerged as the

fastest growing years, scooters emerged as the fastest growing segment grew 24%

with annual sales of 2.7 million, inching close to the 3-million mark, compared

with 2.2 million scooters sold in the previous year. Motorcycle sales grew 14% to

11.9 million units. Domestic motorcycle sales crossed the 10 million mark during

the year, compared with 9 million units sold earlier. Moped sales jumped 12%

from over 0.7 million units to over 0.78 million units.

2. Company Overview:

Hero MotoCorp Ltd. (Formerly Hero Honda Motors Ltd.) is the world's

largest manufacturer of two - wheelers, based in India. In 2001, the company achieved

the coveted position of being the largest two-wheeler manufacturing company in India

and also, the 'World No.1' two-wheeler company in terms of unit volume sales in a

calendar year. Hero MotoCorp Ltd. continues to maintain this position till date.

Hero MotoCorp two wheelers are manufactured across three globally benchmarked

manufacturing facilities. Two of these are based at Gurgaon and Dharuhera which are

located in the state of Haryana in northern India. The third and the latest manufacturing

plant is based at Haridwar, in the hill state of Uttrakhand.

http://heromotocorp.com/


Page 43

3. Management Capabilities:

HMCL recently announced setting up a Global Parts Centre (GPC) at Neemrana

in Rajasthan.

With this expansion, total installed capacity of the company would be touching

more than nine million units in two years’ time – which is in line with the stated

objective of reaching 10 million units in the next five years.

HMCL reported sales of 4, 84,217 units of two-wheelers in the month of July

2012.

The company also informed its supply chain partners that it will set up the fifth

plant at Halol in the western India state of Gujarat, in addition to the fourth plant

at Neemrana in Rajasthan.

4. Corporate Governance:

The Company’s philosophy of Corporate Governance stems from a belief that the

Company’s business strategy and plans should be consistent with the welfare of

all its stakeholders, including shareholders.

The Company has always strived to promote Good Governance practices, which

ensure that:

- A competent management team is at the helm of affairs;

- The Board is strong with an optimum combination of Executive and Non-

Executive (including Independent) Directors, who represent the interest of

all stakeholders;

- The Board is effective in monitoring and controlling the Company’s

affairs;

- The Board is concerned about the Company’s shareholders; and

- The Management and Employees have a stable environment.

Essence of Corporate Governance lies in the phrase “Your Company”

(Shareholders).

5. Shareholder Returns:

Mar ’12 Mar ’11 Mar ’10 Mar ’09 Mar ’08

ROE 55.43 65.21 64.41 33.72 32.41

EPS 119.09 96.55 111.77 64.19 48.47


Page 44

6. Financial Analysis:

Income Statement (in INR Million)

Mar’ 11A Mar’ 12A Mar’ 13E Mar’ 14E Mar’ 15E

Volumes (’000) 5402 6235 6796 7646 8601

Net Sales 192,450 233,681 261,940 300,369 345,424

Change (%) 22.1 21.4 12.1 14.7 15.0

Total

Expenditure

167,980 199,700 224,313 256,280 293,610

EBITDA 24,603 34,078 37,715 44,179 51,814

Depreciation 4,024 10,973 11,693 12,105 12,528

EBIT 20,579 23,105 26,022 32,074 36,286

Interest Cost -19 213 120 100 120

Other Income 4,249 5,756 5,722 6,618 7,676

PBT 24,048 28,647 31,624 38,592 43,842

Tax 4,769 4,866 5,218 9,387 7453

Effective Rate

(%)

19.8 17.0 16.5 24.3 17.0

PAT 19,279 23,781 26,406 29,205 36,389

% of Net Sales 10.0 10.2 10.1 9.7 10.5


Page 45

Balance Sheet (INR Million)

Mar’ 11A Mar’ 12A Mar’ 13E Mar’ 14E Mar’15

Share Capital 399 399 399 399 399

Reserves 29,161 42,499 56,055 71,240 90,474

Net Worth 29,561 42,898 56,454 71640 90,873

Deferred Tax 2,527 2,083 2,083 2,083 2,083

Loans 14,912 10,114 3,028 327 327

Capital

Employed

46,999 55,095 61,565 74,040 88,848

Gross Fixed

Assets

55,385 50,679 66,679 76,679 88180

Less:

Depreciation

14,582 17,175 20,168 23,573 27580

Net Fixed Assets 40,803 33,504 46,511 53,106 60,540

Capital WIP 1,251 5,000 1,000 1,000 1,000

Investments 51,288 39,643 39,643 39,643 39,643

Current Assets,

L & Advances

15,046 20,743 31,420 44,965 64,299

Inventory 5,249 6,756 7,573 8,684 9,986

Sundry Debtors 1,306 2,723 3,052 3,500 4,025

Cash & Bank 715 768 9,030 19,290 19,290

Loans &

Advances

7,287 10,092 11,313 12,973 14,919

Others 489 404 452 519 519

Current

Liabilities &

Provisions

61,448 43,854 57,069 64,724 73,138

Sundry Debtors 14,268 22,932 25,705 29,476 33,897

Other Liabilities 33,369 9,962 17,941 20,573 23,659

Provisions 10,811 10,960 13,423 14,675 15,995

Net Current

Assets

-46,402 -23,111 -25,648 -19,759 -8,839

Miscellaneous

Expenditure

60 60 60 60 60

Application of

Funds

46,999 55,095 61,565 74,050 88860


Page 46

Cash Flow Statement (INR Million)

Mar’ 11A Mar’ 12A Mar’ 13E Mar’ 14E

Profit before Tax 24,048 28,647 32,340 38,600

Depreciation &

Amortization

4,024 10,973 11,140 11,710

Direct Taxes Paid -4,812 -4,866 -5,498 -9,438

(Inc)/ Dec in WC 2,181 23,238 11,057 4,350

Interest/Dividend

received

381

Other items -1,760

CF from Operating

Activity

24,061 11,517 49,039 45,222

Extraordinary Items -798 0 0 0

CF after EO items 23,262 11,517 49,039 45,222

(Inc)/Dec in FA+CWIP -3,292 -7,423 -18,400 -18,400

(Pur)/ Sale of

Investment

-9,994 11,645 0 0

CF from Inv. Activity -13,286 4,222 -18,400 -18,400

Inc/(Dec) in Debt -333 -4,798 -7,086 -2,701

Interest Paid -158 0 0 0

Dividends Paid -9,401 -10,514 -12,851 -14,019

CF from Fin. Act -9,892 -15,312 -19,936 -16,720

Inc /(Dec) in Cash 84 427 10,703 10,102

Add: Beginning

Balance

632 715 768 11,471

Closing Balance 716 1,142 11,471 21,573

Analysis:

Volumes grew 8% YoY (-1% QoQ) to 1.57m. Realization grew 3% YoY (0.7% QoQ) to

INR37,929 (v/s est INR37,694), driven by price increase in Dec-11.

Adj EBITDA margin at 10.8% declined 30bp QoQ (70bp YoY) on lag impact of adverse JPY

movement on vendor imports. As a result, RM cost was higher 70bp QoQ and YoY. Royalty

cost was lower by 30bp QoQ (due to favorable QoQ JPY movement).

Other income came in 36% higher QoQ; however, higher tax restricted adj PAT to INR6.04b

(v/s est INR6.25b), up 20% YoY (-1.5% QoQ).

HMCL took price increase of ~1.5% on 2 May, to offset cost pressure of 4QFY12. This

coupled with operating leverage would expand margin 50bp in FY13.

It has indicated that it would be making announcement on its capacity addition plans in next

7-10 days.

HMCL declared dividend of INR45/share (v/s est INR60 and INR105 in FY11).


Page 47

4QFY12 volumes grew 8% YoY (-1% QoQ) to 1.57m led by strong 17% YoY growth in

scooters. Motorcycle volumes grew 7.4% YoY.

HMCL lost market share in domestic 2-wheeler industry by 90bp QoQ (160 YoY) to 44.5%.

Realization improved 0.7% QoQ (3% YoY) to INR37, 929 driven by price hike taken in

Dec-2011.

As a result, revenues grew 11% YoY (flat QoQ) to INR59.8b (v/s est INR59.9b).

7. Valuation

2005 2006 2007 2008 2009 2010 2011 2012 Average

P/E ratio 13.5 18.3 16.03 14.33 16.69 17.4 16.46 15.86 16.07

No. of

Outstanding

Shares 199.7

PAT 26,406

EPS 132.23

Price of

Share 2125.07

CMP of Hero MotoCorp is 1940.20 and as Hero MotoCorp is planning expansion plans by

setting up new plants. The total capacity of Hero MotoCorp is expected to increase to more than

9 million units. Thus, Hero MotoCorp has positive signs of growth and the share price is

expected to go to around 2125.

Thus, we would give a rating of BUY for this company as this stock can be good for investment

in long term.

8. Assign Target Price:

CMP: 1940.2

Target Price: 2125.07

9. Investment Recommendations:

Hero MotoCorp, erstwhile JV between Honda Corporation Japan and the Munjal Family is

the market leader in domestic motorcycle market with ~47% market share, benefiting by a

strong dealership network with good penetration in the rural areas as well. Post split from

Honda, Hero MotoCorp is free to tap global opportunity in 2W.

Volume growth is expected to remain stable, driven by recovery in urban markets and

increasing penetration of its product in rural markets. We estimate volume growth of 10.4%

in FY13 to 6.9m units.


Page 48

Margins to improve from historical lows of FY12 at 11.0% to 11.5% in FY13E, driven by

RM cost savings and operating leverage.

With exit of Honda, Hero MotoCorp is free to explore global markets, which provides

Key Investment Risks:

Strengthening of commodity prices to put pressure on margins.

Maintaining market share in increasing competitive pressure (100cc segment), to restrict

pricing power and impact margins.

Honda's exit from Hero MotoCorp would result in focused approach of HMSI in domestic

market.

Recent Developments:

It recently launched scooter 'Maestro' has received a good response. It plans to launch the

125cc Ignitor and 110cc Passion XPro (both showcased at Auto Expo 2012) along with 5-6

other models in FY13.

Demand drivers in place, driven by increasing penetration in rural markets and replacement

demand from urban markets

Industry dynamics favorable, with focus on profitability rather than market share.


Page 49

TVS Motor Company limited

BSE: 532343,

NSE: TVSMOTOR

Bloomberg: TVSL: IN

Stock Data

Current Market Price (46)

Target Price (50)

History of TVS

TVS Motor Company Ltd, the flagship company of TVS Group is the third largest two-wheeler

manufacturer in India. The company manufactures a wide range of two-wheelers from mopeds to

racing inspired motorcycles. The company is having their manufacturing plants at Hosur in

Tamilnadu, Mysore in Karnataka and Solan in Himachal Pradesh. They are also having one unit

located at Indonesia. Their subsidiaries include Sundaram Auto Components Ltd, TVS Motor

Company (Europe) BV, TVS Motor (Singapore) Pte Ltd, PT TVS Motor Company, Indonesia,

TVS Energy Ltd and TVS Housing Ltd. TVS Motor Company Ltd is a part of Sundaram Clayton

group in TVS group of companies.

Company analysis:

Industry outlook and current company position:

During the global meltdown in 2008, auto companies suffered a double whammy with

rapidly rising oil prices and escalating raw material costs coupled with a drastic drop in

demand of their fuel guzzling SUVs due to changes in consumer buying habits.

The Indian automobile industry gathered momentum rapidly, with Indian Automotive

citing April 2009's overall vehicle sales rising by 9.83 percent year-on-year.

The automotive industry remains one of the highest revenue-earning industries in India

and contributed over 5% to India’s GDP in 2009, providing direct and indirect

employment to more than 13 million people.

The market outlook for the industry remains promising, especially in the small car

segment.


Page 50

The Indian automobile market is currently dominated by the two-wheeler segment but

with an expanding middle class population, growing earning power and industrial

development.

TVS has recently launched 2012 edition of Apache series RTR, which is accepted well

by the consumers.

TVS is planning to launch a series of new products in FY 2013, along withupgradation of

existing product.

One new executive segment motorcycle will be launched in august(this) 2012.

It is in talk with BMW’s motorcycle division for a technology tie up. It is in top gear after

initiating the talk with BMW.

Management capabilities:

TVS Motor Company Ltd has announced a fire broke out in the early hours of July 29, 2012

in the paint shop in one of the Company's plants at Hosur. The plant that suffered damage has

been adequately insured. Production is not expected to be disrupted, in view of the

availability of spare capacity. The extent of damage and possibility of restoring the damaged

unit to normalcy as early as possible are being assessed.

Daily work management consists of defining and monitoring key processes, ensuring that

they meet set targets, detecting abnormalities and preventing their recurrence. TVS Motor

encourages continuous improvement in all aspects of work, using Cross Functional Teams

(CFT), Supervisory Improvement Teams (SIT) Quality Control Circles (QCC) and

suggestion schemes.

Work in the line with principal of kaizen ( Japanese technique) and TQM(Total Quality

Management).

The management philosophy is based on five pillars of TQM (Total Quality Management)

which rests on the foundation of Total Employee Involvement, daily management and

Kaizen (Continuous improvement).

Corporate governance:

Ministry of Corporate Affairs has undertaken a 'Green Initiative in Corporate

Governance' to promote paperless compliances by the companies through electronic

mode. Members can now receive notices, annual reports and other documents through

electronic mode by registering their email addresses with the Company.

The Company would like to avail this opportunity for sending notices / annual reports /

other documents to the members in the electronic mode to their email addresses already

registered and available.

To note that members, who opted to receive the documents in electronic mode, are also

entitled to receive copies of the documents free of cost, upon receipt of a requisition at

any time.

As a TVS Group Company, the Company has a strong legacy of fair, transparent and

ethical governance practices. The Company's philosophy on corporate governance is

founded on the fundamental ideologies of the group viz., Trust, Value and Service.


Page 51

Shareholding pattern:

It can be observed from the share holding pattern that majority of the holding is of promoters

which is 59%, rest are distributed among FII, DII and Public and Other Holdings which are

respectively 5%, 16% and 20%.

March’11 March’10 March’09 March’08 March’07

ROE 12.7 5.29 -10.18 -0.96 9.63

EPS 2.69 1.41 -2.70 -0.30 3.27

Financial performance

During the year ended March 2012, TVS Motor Company registered a growth of 7% in sales

with overall two-wheeler sales growing from 20.03 lakh units in the previous financial year to

21.47 lakh units. While motorcycle sales during the fiscal increased marginally from 8.32 lakh

units in the previous year to 8.44 lakh units in the current fiscal, scooters grew at 13% from 4.66

lakh units in the previous year to 5.25 lakh units in the current fiscal. Three wheeler sales of the

company increased marginally from 39,257 units in the previous year to 40,166 units in the year

ended 31 March 2012.

The company's total revenue grew from Rs.6288 crores in the year ended March 2011 to Rs.

7126 crores in March 2012. Profit Before Tax during the year ended March 2012 grew by 27%

increasing from Rs. 248.09 crores in the year ended March 2011 to Rs. 316.46 crores in the

current financial year. Profit After Tax during the year ended March 2012 increased by 28%

from Rs. 194.58 crores in the corresponding period of the year ended March 2011 to Rs. 249.07

crores in year ended March 2012.


Page 52

Financial analysis:

Balance sheet:

While analyzing balance sheet it has been observed that share capital has increased by more than

20 crores, and reserve has shown a fluctuation from 2008 but growing steadily afterwards. They

have reduced their total debt obligation by paying of secured loans but they have increased their

unsecured loan, which shows they have gained market confidence. They have acquired a

company this year. By year on year they are increasing their fixed asset which indicates growth

path and strength in their ability. They have finished their long waited project by year on year.

Their inventory has jumped by almost 100% , which indicates they may have huge demand in

next financial year or they could not sale their product properly. Sundry debtors is increasing

YOY which shows they may have less cash in hand or they are having much more confident on

consumer that they have given more credit to them. But cash in hand has decreased drastically

one of the reasons is increase in debtors and inventory. Their W.C. has decreased due to increase

in current liabilities. They are having huge contingent liability.

Income statement:

Company sales turnover has increased more than 2000 crores, the reason may be credit liberal

policy which in turn has shown a YOY profit in PBDIT. The net profit has increased by 300%.

So their EPS has also increased from last 3 years. Which shows a positive growth for the

company, at this point of time company can go for raising fund through equity if they want for

their future prospect, it can be observed from the sales figure that company has performed

excellent from last few years which has helped them increase total sales turnover

Cash flow analysis:

Cash from operating activity has decreased the reason behind this may be increasing number of

debtors and huge inventory in their hand, because of huge inventory carrying cost will also

increase which in turn will decrease the profit. They have purchased heavily on YOY that’s why

their net cash from investment activity is showing a negative figure which is positive for the

company. Due to repayment of their loans the net cash use from financing activity has shown a

negative figure.

Ratio analysis:

Liquidity and solvency ratio

1.Current ratio

Current ratio has decreased from last year which shows the low confidence in payout in current

liabilities. the reason behind this is huge number of stock and debtors and uncertain increment in

current liability.


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2. Debt equity ratio:

Debt equity ratio has decreased which shows the dependency on outsiders fund has come down

and inside funds has got strengthen which indicates a strong capital structure for a company.

3. Debt coverage ratio:

Interest coverage ratio: this has increased which shows company is having more fund in hand to

repay the liability.

Management efficiency ratio

Inventory turnover ratio has decreased from last year may be due to the high amount of inventory

in hand. Fixed asset turnover ratio has been showing a steady growth which indicate the

company is using its fixed asset properly to increase revenue.

Cash flow indication ratio:

Dividend payout ratio has decreased on net profit which may give a negative impact to the

investor. Which in turn may effect on the equity fund.

Earning retain ratio:

This has increased more than 100 %. Which shows a positive impact on the financial structure, it

indicates they are retaining much more amount than that of last year.

Forecasting:

As we can see the recent scenario due to of high inflation and low GDP growth companies have

almost their positive figures and profit, where as TVS motors have shown a steady growth in

their company. Which shows they are performing in a good way. Apart from that we can also say

as because the sales figure has jumped drastically from last year by giving a positive effect in net

profit figure which is the positive sign for a company in long run. As because the EPS has also

increased, it’s a good time to invest in this company. As because the company has acquired huge

amount of fixed asset this would also have some future plan or they should try and increase their

production capacity which will in turn will give a positive impact on their financial sheet.


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Income statement (INRmn)

Fiscal year ending 11-Mar 03/12f 03/13f 03/14f

Total operating income 62891 75851 85496 95919

Total operating expenses 58963 70381 79576 89548

EBITDA 3928 5470 5921 6371

Other income 113 23 23 23

Depreciation 1073 1439 1469 1457

EBIT 2968 4054 4475 4937

Interest 470 461 461 461

Recurring PBT 2498 3593 4014 4476

Net extra ordinary items -17 0 0 0

PBT (reported) 2481 3593 4014 4476

Total taxes 535 886 1204 1343

PAT (reported) 1946 2708 2810 3133

(+) Share in assoc.

earnings

0 0 0 0

Less: Minority interest 0 0 0 0

Prior period items 0 0 0 0

Net income (reported) 1946 2708 2810 3133

Avendus net income 1963 2708 2810 3133

Shares outstanding (mn) 475.1 475.1 475.1 475.1

Avendus dil. shares (mn) 475.1 475.1 475.1 475.1

Avendus EPS (INR) 4.1 5.7 5.9 6.6


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Balance sheet (INR mn)

11-Mar 12-Mar 13-Mar 14-Mar

equity capital 475 475 475 475

preference capital 0 0 0 0

reserves and surplus 9519 11393 13336 15504

net worth 9994 11868 13812 15980

minority interest 0 0 0 0

total debt 7854 7854 7854 7854

deffered tax liability 957 957 957 957

total liabilities 18805 20678 22622 24790

gross block 19723 217960 2317 24544

less: acc. Depreciation 10347 11786 13255 14712

net block 9376 10010 9915 9832

CWIP 574 574 574 574

Goodwill 0 0 0 0

investments 6611 6611 6611 6611

cash 60 1760 3525 6335

inventories 5279 5495 6592 6970

debtors 2706 3223 3502 4044

loans and advances 3970 3975 3978 3981

less: current liabilities 8852 10051 11155 12638

less: provisions 920 920 920 920

net working capital 2244 3483 5522 7773

total asset 18805 20678 22622 24790


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Cash flow statement ( INR mn)

11-Mar 12-Mar 13-Mar 14-Mar

net profit 1946 2708 2810 3133

depriciation 1073 1439 1469 1457

deffered tax 0 0 0 0

working capital changes ‐883 461 ‐275 560

less: other income 113 23 23 23

cash flow from operations 2023 4585 3981 5127

capital expenditure ‐935 ‐2074 ‐1374 ‐1374

Strategic investments -2680 0 0 0

Marketable investments 3461 0 0 0

Change in other loans & adv. 0 0 0 0

Goodwill paid 0 0 0 0

Other income 113 23 23 23

Cash flow from investing ‐41 ‐2051 ‐1351 ‐1351

Equity raised 0 0 0 0

Change in borrowings ‐2179 0 0 0

Dividends paid (incl. tax) ‐605 ‐834 ‐866 ‐965

Others -149 0 0 0

Cash flow from financing ‐2933 ‐834 ‐866 ‐965

Net change in cash ‐950 1700 1765 2811


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Investment Decision:

As because the company is having steady growth in their sales and profit figure it is expected

that if the economic scenario don’t take a u turn in next year than profitable place is there for the

investors. Risk averse investors can take step cause risk is comparatively low at here.

As because the EPS is higher than that of last year the possibility of getting higher return is

more than that of last year.

For more details and accuracy we need to go for technical analysis.

Valuation:

2005 2006 2007 2008 2009 2010 2011 2012 Average

P/E ratio 11.74 28.49 21.27 26.04 17.33 22.26 14.6 7.67 18.68


PAT 1,946

EPS 4.10


CMP of TVS Motor Company is Rs.38.95 and when valuation method use P/E it is found that

the price of the stock is Rs.76.49 which seems its undervalued. When seen in long run the 52

week high is Rs.70.14 and low is Rs.31.90.

So it can be stated that under current market conditions the volatility in market seems to be

affecting the share prices. There has been a good trading in the stock with high volume.

So it can be suggested that its BUY for stock at current stages so that profits can be earned in

long run.


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INVESTMENT OPPORTUNITIES

Sector Overview

The automobile industry in India is one of the country’s major sectors and is the seventh-largest

in the world. It accounts for 22% of India’s manufacturing GDP. The Indian automotive industry

comprises passenger cars, two-wheelers, three-wheelers and commercial vehicles, with two-

wheelers dominating the market. More than 75% of the vehicles sold are two wheelers.

Collectively, India makes 17.5 million vehicles and exports 2.3 million annually.

According to Ministry of Heavy Industry and Public Enterprises, the total turnover of the Indian

automobile industry was estimated at USD 73 billion and exports were estimated to be USD 11

billion in the year 2010–11. The announced cumulative investments in this sector were USD 30

billion during this period.

Total FDI inflow into the Indian automobile sector in 2010–2011 was USD 1,331 million.

Cumulative FDI during the period April 2000 to March 2011 was USD 5.93 billion, according to

the Department of Industrial Policy and Promotion (DIPP), which is a part of the Ministry of

Commerce and Industry.

Policy and Promotion

The Indian government encourages foreign investment in the automobile sector and allows 100%

FDI under the automatic route. It is a fully delicensed industry, freely allowing imports of

automotive components.

The main automobile hubs in India are based at Chennai, Gurgaon, Manesar, Pune, Ahmedabad,

Halol, Aurangabad, Kolkata, Noida and Bangalore. Chennai is the biggest hub accounting for

60% of Indian auto exports. The auto components industry, although largely concentrated near

automobile hubs, is fairly widespread in other parts of the country too.

The government has made successive policy changes that allow for stronger growth in the

automotive sector. Major among these are:

Automotive Mission Plan: The plan has been prepared to accelerate and sustain growth in

the automotive sector during the period 2006–2016. It aims to make India a global

automotive hub. This will involve doubling the contribution of the automotive sector to the

country’s GDP by taking its turnover to USD 145 billion and providing additional

employment to 25 million people with special emphasis on the export of small cars, MUVs,

two- and three-wheelers and auto components.

National Automotive Testing and R&D Infrastructure Project: This is a USD 400

million initiative of the Government of India and various state governments; it is aimed at

creating a state-of-art, dedicated testing, validation and R&D infrastructure across the

country.


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Major Players

The size and high growth potential of the Indian car market has attracted several foreign players,

such as Mercedes Benz, BMW, Volkswagen, Toyota, Honda, Ford, Hyundai and General

Motors, among others. Several of these players have expanded operations in India.

For instance, Hyundai Motor India Limited (HMIL) is a dominant passenger car manufacturer in

India, controlling 14% market share in the passenger vehicles segment. It is the largest passenger

car exporter and the second-largest car manufacturer in India. The company sold a total of

616,039 vehicles in the year 2010–11. It has a fully integrated, state-of-the-art manufacturing

plant near Chennai and has also set up a modern multi-million dollar R&D facility at Hyderabad.

HMIL currently exports cars to more than 115 countries across the EU, Africa, the Middle East,

Latin America and Asia Pacific.

Another success story is Honda Siel Cars India Limited (HSCIL). The company was

incorporated in December 1995 as a joint venture between Honda Motors of Japan and Siel

Limited, an Indian company. The total investment made by the company in India until now is

INR 1,620 crore in a plant at Greater Noida in Uttar Pradesh and INR 784 crore in its Tapukara

plant, in the state of Rajasthan. HSCIL’s first state-of-the-art manufacturing unit at Greater

Noida was a greenfield project spread across 150 acres (over 600,000 sq. m.). The annual

capacity of this facility is 100,000 units. The company’s second manufacturing facility at

Tapukara is spread over 600 acres and will has an initial production capacity of 60,000 units per

annum.

Similarly, the high-end luxury car maker Mercedes Benz is also growing at a healthy pace in

India, being driven by demand for its C-Class and E-Class vehicles. It sold 7,430 units during the

period January 2011 to December 2011. The strong sales, in 2011, of SLS AMG at INR 2.5

crore; G 55 AMG at INR 1.1 crore and the new SLK 350 and E-Class Cabriolets, reaffirms the

high demand for sports cars from the Mercedes-Benz portfolio and also the growing preference

for the brand among Indian consumers.

Major Indian companies present in the automobiles market include Tata Motors, Maruti Suzuki

India, Mahindra & Mahindra, Ashok Leyland, Hero Honda Motors and Bajaj Auto. Tata Motors

is India’s largest automobile company, making commercial and passenger vehicles. It is world's

fourth-largest truck manufacturer and the world's second-largest bus manufacturer. Maruti

Suzuki is India's largest passenger car company, accounting for 45% share of the Indian car

market. Hero Honda is world’s largest two-wheeler manufacturing company in the world. Its

market share in the Indian two-wheeler segment is 41%. Bajaj Auto is the world’s fourth-largest

two-wheeler and three-wheeler manufacturer.

Sector Outlook

According to the Society of Indian Automobile Manufacturers (SIAM), the automobile sector is

expected to grow by up to 13% in 2011. In the longer term, the passenger vehicle segment is

expected to grow to nine million units and the two-wheeler segment to 30 million units by 2020,


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according to Ministry of Heavy Industries and Public Enterprises. SIAM estimates that car sales

in India will grow to five million vehicles by 2015 and nine million by 2020 annually. In fact, by

2050, Indian roads will top the world in car volumes, running a total of 611 million vehicles.

Going forward, there are several advantages to investing in the Indian auto sector, the most

important of which include the following:

Structural advantages: Over half the country’s population is in the working age group and

the economy has shown strong growth over most part of the last decade. These factors, in

turn, translate into beneficial spillovers for the Indian automobile sector:

1. Indian banks provide easy finance schemes for the segment

2. The country has low-cost, high-skilled manpower with the second-largest pool of engineering

talent in the world

Auto components: India has a strong auto components industry as is evident from the fact

that this sub-sector accounts for about 2% of India’s national income and had growth rate of

19.2% in 2009–10. The country has emerged as an outsourcing hub for international

companies such as Ford, General Motors, Daimler Chrysler, Fiat, Volkswagen and Toyota.

Steel: India is the fifth-largest producer of steel in the world and among the lowest-cost ones

as well. It is slated to become the second-largest steel producer, more than doubling its

capacity to 124 million tonnes as part of the push being given to assist overall infrastructure

development.

Domestic Sales

The overall growth in domestic sales during April-July 2012 was 9.34 percent over same

period last year.

Passenger Vehicles segment grew at 10.20 percent during April-July 2012 over same period

last year. Passenger Cars grew by 5.55 percent, Utility Vehicles grew by 53.66 percent and

Vans grew by (-12.73) percent during April-July 2012 as compared to same period last year.

The overall Commercial Vehicles segment registered growth of 4.74 percent in April-July

2012 as compared to the same period last year. While Medium & Heavy Commercial

Vehicles (M&HCVs) registered negative growth at (-12.75) percent, Light Commercial

Vehicles grew at 18.02 percent.

Three Wheelers sales recorded marginal growth at 0.81 percent in April-July 2012. Passenger

Carriers grew by 4.93 percent during April-July 2012 and Goods Carriers registered de-

growth at (-13.62) percent during this period.

Two Wheelers registered a growth of 9.75 percent during April-July 2012. Mopeds,

Motorcycles and Scooters grew by 4.02 percent, 6.35 percent and 26.71 percent respectively

in the period of April-July 2012.


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Exports

During April-July 2012 overall automobile exports registered negative growth at (-4.03)

percent. While Passenger Vehicles and Commercial Vehicles both grew by 9.14 percent.

Two & Three wheelers declined by (-1.00) and (-39.23) percent respectively in April–July

2012 compared to the same period last year.

CONCLUSION –

It can be seen that automobile sector growth in the previous year 2011-12 was lower due to high

interest rates, high cost of petrol and inflation rates. The cost of petrol increased due to

deregulation of petrol prices as a result the sales of petrol cars reduced yoy. High cost of petrol

was due to increased crude oil cost. During year 2011-12 cost of petrol increased with 10-15% in

all states. It was also observed sale of diesel cars increased in India which act as subsidy to petrol

cars and diesel being unregulated the cost of diesel is still under control. Also it was observed

that people are more into substitute which being CNG and LPG.

Regarding investment in Auto Sector the industry is growing at a steady rate of 10-12% and

many major car players from around the world are ready to invest in India.

It was also observed that premium car manufacturers like Audi, Merc, BMW are having at a high

rate due to higher demand in Indian market. They have introduced cars in the range of 25-30

lakhs to attract customers.

After doing Investment research regarding auto companies in India it is found that they have

been performing excellent except some internal problems. Even the growth at foreign countries

have been exceptional which has brought them international named all around.

Companies on which research is performed it is seen that Maruti Suzuki, Tata Motors, Ashok

Leyland, Hero Motors have performed satisfactorily but future prospects for these companies in

excellent. These are market leaders in their respective segments of car which they are into.


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REFERENCE

www.moneycontrol.com

www.moneysight.com

www.myiris.com

www.bloomberg.com

www.tatamotors.com

www.eicher.in

www.ashokleyland.com

CRISIL Research report

Security analysis report on automobile sector

Automotive

jaguar land

indian automobile

weak corporate

interest paying

give direct

indian automobile

total quality

indian car