Flag Bearer of the Recovery in Automotive Segment

Sector Report 2 Wheelers 28th August, 2020 Auto

2 Wheelers in a sweet spot – Flag bearer of the recovery in Automotive Segment Indian two-wheelers faced a severe downturn in FY20 and are expected to fall further in FY21 due to COVID-19 and BSVI cost push; however, volumes should rebound by FY22E and FY23E on two years of low base. In light of COVID-19 pandemic, we expect the industry volumes to fall by ~12% in FY21E, followed by strong growth of ~18% and ~14% in FY22E and FY23E. We are bullish on the Indian 2W industry over the next 2-3 years. The auto volumes are back by almost adecade whereas the margins are at cyclical lows; we expect multi-fold earnings growth in the recovery period. We believe Hero Motocorp Ltd will outperform its peers on the back of strong rural demand and preference for entry-level motorcycles. Eicher Motors with its strong franchise and a renewed focus on new products is expected to do well. We are of the opinion that TVS Motors is trading at significantly higher multiples in comparison to other 2 wheeler OEMs and hence we expect limited upside from current levels. We assume coverage on the two-wheeler industry with a BUY rating on Hero Motocorp Ltd (Hero), HOLD rating on Eicher Motors Ltd (EIM) and a SELL rating on TVS Motors Ltd (TVSL). We upgrade our rating from HOLD to BUY on Bajaj Auto Ltd (BJAUT).

Covid-19 and Key Regulatory Changes amidst weak cycle India's two-wheeler (2W) industry saw its worst downturn in a decade as volumes fell by 18% YoY in FY20 amid weakening economy and regulatory changes leading to higher insurance and road tax. Near-term outlook in the domestic market has been further weakened due to Covid- 19 and the large 10-20% price hikes on account of transition to BSVI emission norms. Sharp fall in oil prices as a fall out of the demand destruction due to spread of Covid-19 will also hurt 2W exports, which were at a cyclical high after three strong years and hence likely to lag the domestic cycle. We expect FY22E and FY23E to be years of strong growth driven by domestic market as volumes would likely rebound after two years of steep fall, while exports are likely to normalize as crude prices stabilze in $40-50/bbl.

Resilient rural economy to support demand We expect lesser impact of COVID-19 on the rural economy as compared to urban as the spread is largely in the latter (due to high population density), and agricultural income is likely to suffer less from the lock-down. Taking all the cues so far, we think rural India is better placed in terms of the virus severity, although the risk remains in the form of reverse migration. Farm income is improving due to better Rabi output, better yields, normal monsoon and better kharif sowing. Moreover, the recent reforms related to abolition of essential commodities act and sale of Agriculture Produce would help further support the farm incomes in years to come. Improving farm incomes is corroborated by the tractor sales data which indicates a revival in the rural economy. Since rural India is more inclined towards motorcycles, we see share of this segment increasing in 2Ws.

Shift in Preference towards Personal mobility over shared mobility Covid-19 should also trigger a shift towards personal mobility, where a section of public transportation users would switch to 2Ws or smaller cars, especially in urban areas. A survey conducted by Hero Motocorp suggests that demand share has increased for personal 2W from people going to work, which clearly indicates a shift towards personal mobility. Also due to intermittent lockdowns still going on in many areas across the country, public transport is disrupted which is further boosting the growth for personal mobility.

Competitive intensity to remain high We expect competition in 2Ws to stay high as OEMs will remain aggressive to protect and gain market share amid weak demand. Despite benign commodity price, we expect contraction in margins in FY21E amid subdued demand; likely downtrading would lead to adverse product mix and big cost push, but expect an improvement in FY22E as demand recovers. We expect downtrading happening over the medium term on account of BS-VI price increase, lower incomes and job losses if any.

We initiate coverage on Hero MotoCorp with a BUY rating as we believe that the rural revival and down-trading in a rising price scenario works well for its motorcycle sales. We prefer Eicher Motors for its strong franchise, long-term growth potential and a renewed focus on products and initiate with a HOLD rating as we believe that the Company is fairly valued at this juncture. We have a SELL rating on TVS Motor as we believe that the premium valuation is unwarranted owing to lower volume growth and pressure on margins. We upgrade our rating from HOLD to BUY on Bajaj Auto as we expect the Company to fare well in the current environment on the back of its diversified portfolio mix and dual focus on entry and premium segment.

Key Financials (Standalone)

Market Cap CMP Target Price % Up EPS (Rs) P/E (x) Companies Rating Rs (Crs) (Rs) (Rs) /Down F21E F22E F23E F21E F22E F23E Hero Motocorp Buy 62,742 3,141 3,450 9.8% 137.9 179.0 215.6 22.8 17.6 14.6 Eicher Motors Hold 61,097 2,236 2,400 7.3% 55.2 72.1 88.7 40.5 31.0 25.2 TVS Motors Sell 21,811 459 400 12.8% 10.3 17.1 18.2 55.2 30.5 25.2 Bajaj Auto Buy 88,112 3,045 3,300 8.4% 157.6 179.7 198.7 19.3 16.9 15.3 Source: Company, Axis Securities

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Story in Charts Exhibit 1: Trend in 2W Industry Volume & Volume Growth Exhibit 2: Domestic 2W Industry mix

100% 25.0 26.6% 26.3% 30.0% 6.0 5.9 5.8 5.7 4.9 4.7 4.4 5.1 4.3 4.2 3.7 4.2 20.9% 15.6 14.8% 20.0% 17.6 19.0 21.2 24.3 26.2 20.0 13.9% 13.5% 80% 28.2 30.6 31.9 33.3 31.6 32.0 6.9% 4.9% 7.3% 7.9% 3.0% 2.9% 10.0% 15.0 60% 0.0% 10.0 40% 78.3 76.5 75.2 73.1 -10.0% 70.8 67.1 69.6 -17.8% 65.0 63.1 62.5 64.2 64.4 -20.5% 5.0 -20.0% 20%

0.0 -30.0% 0%

Volume (in millions) LHS % Growth Y-o-Y RHS Motorcycles Scooters Mopeds

Source: Company, Axis Securities Exhibit 3: Trend in total 2W market share Exhibit 4: Trend in Domestic Scooter market share

100% 0.6 0.9 1.4 2.0 3.0 100% 3.7 4.0 3.8 3.8 4.3 5.2 6.9 7.1 6.5 8.5 9.2 7.4 6.6 6.3 7.68 14.1 12.8 11.8 13.1 6.1 13.4 14.2 14.2 14.8 13.8 14.4 11.3 11.2 8.2 4.4 5.0 6.3 9.2 11.6 6.9 80% 80% 15.2 15.4 14.9 12.7 14.7 16.4 18.9 24.0 19.4 14.5 18.5 18.3 23.7 26.6 26.0 19.9 26.9 28.6 26.1 27.0 19.2 16.7 16.3 14.1 13.1 60% 19.1 60% 10.7 7.2 17.9 16.3 18.8 11.5 14.2 14.4 11.1 11.5 11.4 9.8 12.0 11.9 40% 40%

55.5 56.9 56.9 56.6 52.8 55.4 54.9 50.1 45.1 42.9 41.3 47.8 48.6 20% 40.3 39.0 36.9 36.6 35.9 35.8 41.6 20%

0% 0% FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Q1FY21 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Q1FY21

Hero Bajaj Honda TVS RE Honda Hero Motocorp TVS Motors Suzuki Others

Source: Company, Axis Securities, Exhibit 5: Trend in Domestic Motorcycle market share Exhibit 6: Trend in Economy Segment market share

100% 0.8 1.2 100% 1.9 3.0 4.7 5.9 6.4 5.9 5.9 6.1 5.4 6.2 5.5 5.5 6.2 12.5 12.1 9.0 6.7 7.0 7.3 7.4 6.7 5.7 20.2 17.8 20.6 15.8 7.6 11.8 25.0 15.8 16.4 14.0 9.7 80% 13.8 15.5 13.5 13.9 80% 32.2 28.5 35.2 25.4 24.2 32.5 24.4 20.7 24.9 24.9 35.7 20.0 16.5 17.7 18.0 18.5 60% 15.7 18.7 60% 28.7

40% 40% 59.5 62.4 56.0 53.2 51.8 52.9 52.4 52.0 55.5 53.2 56.5 53.3 55.1 55.8 51.3 51.5 50.7 48.1 20% 20% 44.7

0% 0% FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Q1FY21 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Hero Bajaj Honda TVS RE Hero Bajaj TVS

Source: Company, Axis Securities Exhibit 7: Trend in Executive Segment market share Exhibit 8: Trend in Premium Segment market share

100% 0.2 0.7 1.3 0.6 1.1 2.6 2.0 3.0 100% 2.5 1.4 1.6 4.0 3.7 2.2 0.64.0 7.9 5.7 4.3 8.3 5.6 11.0 11.8 10.8 14.5 19.5 16.0 11.1 10.6 20.1 20.2 13.3 21.6 15.6 20.8 23.6 21.8 24.0 14.7 11.1 80% 22.3 80% 11.4 14.1 13.2 14.1 8.8 9.3 19.8 15.3 14.6 13.8 13.8 17.5 11.5 11.7 13.8 14.6 60% 60% 9.5 14.3 9.9 8.5 7.4 8.2 24.7 21.9 25.8 4.5 7.3 16.0 27.7 25.1 40% 40% 11.5 68.7 71.8 69.5 69.4 72.0 71.0 62.6 61.0 66.5

42.2 40.6 20% 20% 36.9 34.5 34.8 37.3 32.9 28.6 32.1

0% 0% FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Hero Honda Bajaj TVS Bajaj Royal Enfield TVS Honda Yamaha Hero

Source: Company, Axis Securities

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COVID-19 Impact The auto sector had witnessed one of the worst slowdowns of the decade, and the segment is likely to remain under pressure in the very near term if the outbreak persists, though the month-on-month sales numbers are indicating that the worst is behind. The impact on decline in volumes was visible in Q1FY21 with volume decline ranging between ~70-75% across 2W OEMs. The first quarter forms ~21-25% of yearly volumes. Though the lost sales in Q1FY21 would not be completely recovered, it needs to be seen how soon the the festival led demand brings back the automobile recovery. Anyhow, we expect the industry volumes to fall by ~12% in FY21E, and expect strong recovery of ~18% and ~14% in FY22E and FY23E.

While the steep fall in 2Ws volumes over the last 12 months has created a low base, the economic impact of Covid-19 is expected to keep demand under pressure in the very near-term. However, we have been witnessing incremental growth in the month-on-month demand across OEMs which the companies feel is sustainable going forward and not just due to the pent-up demand. More than the demand side, supply constraints and intermittent lockdowns are impacting the auto sales. Companies almost lost ~20-25% of volumes in the months of July and August to unfulfilled demand on account supply constraints. The things are slowly progressing back to normal with plant utilization levels reaching ~90-95% (still varying day to day depending on the area wise lockdowns). While labour availability issues continue to prevail, import of critical components from China is back to normal (impacted due to geo-political tension and covid-19). However, re-imposition of lockdown in auto clusters (like Aurangabad) is an incremental risk.

Tough times to last longer Export volumes to come under pressure; weak Rupee may support margins. We forecast auto exports from India to be down ~15-20% in FY21. This is a result of production shutdown (April & half of May) and supply constraints (June to August) in India, impact of COVID-19 restrictions in some of the export markets, impact of fall in oil price on Nigeria and on other oil-exporting nations, and a weak economic environment globally. Auto exports (especially 2Ws, 3Ws) saw high growth in the past 2-3 years and may be due for a down-cycle.

Margins to come under further pressure; fall in global commodities prices may provide some respite. We expect sector margins to further contract in FY21E, due to negative operating leverage, BS-VI related costs increase, Rupee impact on imports and potential increase in discounts. Fall in price of global commodities (steel, aluminium, lead and crude derivatives) may provide partial relief in the short term.

Lessons from previous crisis In both the situations, the Global Financial Crisis (FY09) and Demonetisation (FY17), the auto sector went through a shock decline period. However, in both cases, the declines were followed by periods of sharp recovery.The improvement in auto markets of China and Korea indicates that the COVID-19 related pain is temporary.

As we have witnessed in our domestic markets, after a significant hit in Q1FY21 volumes, we are seeing a healthy recovery in month-on-month numbers led by tractors and 2W and followed by PVs and CVs. A large part of it can be attributed to the pent-up demand from previous months where everything was shut on account of the lockdowns, but if this demand sustains going forward then, we can see a good traction in auto numbers from second half of the year.

Rural and Semi-Urban areas leading the recovery Economic situation of rural/ semi urban India remains robust. This is on the back of less severity of virus in those areas and fewer lockdwons. The incremental monthly demand across auto segments has been on the back of strong recovery in rural and semi-urban markets. OEMs are seeing good volumes from Tier-2 and Tier-3 cities as compared to metro cities. We expects urban India to also catch up soon as pace of virus spread slows and lockdown restriction further eases.

Shift from public/shared mobility to personal mobility It has happened in the past, post SARS, there was a surge in car demand in China. People moved away from public transport, in fear of infection. In India post COVID-19 it is an upside risk to demand. It is unlikely that people commuting on trains, public buses will move to buying cars. 2Ws may be a potential purchase for these buyers, but cars are unlikely to be affordable for these users.There will be a switch in the short term towards owning 2Ws and smaller cars. The thought of social distancing is going to stay for a couple of quarters, before it disappears from the consumers’ mind. We should see some usage decline in shared mobility and a growing preference for personal mobility in the medium term.

3

Probable downward rate revision of GST on 2W Finance Minister Nirmala Sitharaman recently stated that the GST Council would look into the auto industry’s demand for lowering the tax rate on 2W, which are currently being taxed under the highest slab rate of 28 per cent. She mentioned that since 2Ws are neither sin nor luxury products, they do merit a rate revision. A tax cut for two-wheelers can spur demand ahead of the festive season, and at a time when private consumption is sluggish due to the outbreak of coronavirus and the consequent lockdown.

The industry has been demanding for a rate reduction for quite some time, especially for the segment below 150cc. Last year, the country's largest two-wheeler maker Hero MotoCorp had urged the government to consider a phase-wise reduction in GST on the segment, starting with bringing bikes up to 150 cc into the 18 per cent slab but the Council has still not taken up this issue. 2Ws have become a necessity as a mode for transportaion, especially for the middle income households in India on the back of safety concerns and shift in preference for personal mobility over public transport in the wake of rising Covid-19 cases. If the proposal does go through, then it will be a positive development for the 2W industry, especially for Hero Motocorp and Bajaj Auto as they command highest market share in entry level motorcycles. (We believe in the initial phase, rate revision will be applicable to lower CC bikes (less than 150cc) and then gradually move towards higher segment bikes.)

However, the government will also have to take some revenue hit in case states agree to come on board for a rate cut during the council meeting. Also the current juncture does not appear to be condusive for further rate cuts as GST revenues are way below targets. As of now, the above rate cut has just been proposed to be put up before the GST council and nothing is conclusive as of now, we will have to wait and watch how the situation pans out going ahead.

Impact of BS-VI norms and other Regulatory Changes

Adoption of BS-VI emission norms The Indian auto industry has adopted BS-VI emission norms starting April 2020, which has resulted in large cost increases for 2Ws. The BS-VI adoption not just impacts the overall demand but also poses the risk of value migration and change in competitive positioning of OEMs.

For achieving the eligibility criteria set under BS-VI emission regulations, motorcycle manufacturers have employed certain equipment such as electronic fuel-injection (EFI, in place of carburetors) and larger catalytic converters.

The technical changes in the motorcycles have also resulted in the need to upgrade to BSVI fuel, which is different than the gasoline suitable for BS-IV power plants.

We have seen that the models launched with EFI and other BS-VI updates have taken a price increase of ~12-15% on the ex-showroom price. Models that already came with EFI saw a price increase of ~2-3%. Along with the BS-VI update, OEMs have refreshed and updated features in the models, and hence, some of the price increase pertains to the feature enhancements.

Mandatory CBS/ABS Effective April 1, 2018, all new 2W models above 125cc are equipped with an anti-lock braking system (ABS), while 2W less than 125cc have installed either ABS or the combined brake system (CBS). The above regulations for existing models came into effect from Apr 1, 2019.

The prices of economy and executive 2W increased by ~Rs. 500-1000 post installation of CBS, while at the higher end of the premium bikes, the cost increase was estimated to be as high as Rs.4,000-9,000. However, price impact was not material in scooters as models were already equipped with CBS.

Mandatory 5 Year Third Party insurance W.e.f. Sep 2018, third party insurance has been made mandatory for 2W for a minimum period of 5 years, compared to 1 year earlier. A premium hike in March 2020 has further increased upfront insurance costs, resulting in insurance costs being ~5-6% of on-road price currently compared to ~1-2% pre-Sep 18.

The 2W industry is facing the brunt of new regulations as the combined effect of new insurance, braking and emission norms has resulted in a massive ~15-30% jump in vehicle prices in just one and a half year. Given the hike in regulatory costs over the last 1.5 years and transition to BS-VI coupled with the current impact of COVID-19 on volumes, we expect pressure on EBIDTA margins in FY21E across the industry.While few OEMs have completely passed on the BS-VI costs, some are yet to pass on and we expect the same to be complete by end of FY21 in a staggered manner.

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BS-VI Price Changes

BS-IV Price BS-VI Price OEM Model Diff (Rs) % Diff (Rs) (Rs)

Hero HF Deluxe 48,575 55,925 7,350 15%

Hero Motocorp Hero Spledor iSmart 57,430 64,900 7,470 13%

Hero Passion Pro 58,200 64,990 6,790 12%

Honda SP125 63,857 72,900 9,043 14%

Honda Activa (6G) 55,934 63,912 7,978 14% Honda Honda Activa 125 Drum Alloy 61,858 70,990 9,132 15%

CT 110 (Alloy, ES) 44,352 50,852 6,500 15%

Bajaj Pulsar 150 75,200 85,536 10,336 14% Bajaj Auto KTM 200 Duke 162,253 172,749 10,496 6%

TVS Apache RTR 160 4V 92,306 99,950 7,644 8%

TVS Apache RTR 200 4V 111,845 124,000 12,155 11% TVS Motors TVS Jupiter Classic SBT 59,990 67,911 7,921 13%

TVS XL 100 39,544 43,044 3,500 9%

Eicher Motors RE Classic 350 153,000 165,000 12,000 8%

Yamaha Fascino 56,023 66,430 10,407 19%

Yamaha Yamaha FZ 96,680 99,200 2,520 3%

Yamaha FZS 98,600 101,200 2,600 3%

Suzuki Motors Suzuki Access 125 58,323 64,800 6,477 11%

Source: Company, Axis Securities

5

Improving Financing Penetration over the years

Organized financing penetration has increased from ~23% in FY11 to ~46% in FY20. Ease of access, low down payments, and increased competition (leading to softening rates) have aided penetration. Rural states like UP, Bihar, MP have high potential for higher financing penetration. Industry commentary suggests that financing penetration in metros and top cities is estimated at ~55-60%.

Finance availability will be the key demand driver once normalcy resumes. Given that pre-COVID-19 it was already constrained, post COVID-19 financers could further tighten norms as pressure on incomes persists and vehicle prices stay elevated (BSVI transition). 2W prices have escalated 13-30% and PV 9-22% due to regulatory cost pressure (average price hike over the past 10 years was ~2%), leading to a severe and never before seen spike in cost of ownership. During every previous slowdown cycle, government support–direct (tax cut) or indirect (pay commissions)–has supported demand. However, that support does not seem forthcoming in the current cycle, further denting consumers’ ability to purchase vehicles. We note that, in this regard, India is an exception. Globally,governments have come up with various schemes aimed at direct and indirect benefits for the sector. We believe that finance availablity will be the key demand driver going ahead amidst lower income, job losses and liquidity constraints.

Exhibit 9: Financing Penetration

80%

60% 59% 60% 53% 51% 52% 53% 48% 46% 45% 40% 38% 40% 37%

20%

0% Hero Bajaj TVS RE

FY18 FY19 FY20

Source: Company, Axis Securities

Premium Bikes better placed for Long Term

We expect weakness across 2W segments in FY21 but believe that premium bikes are better placed in the long-term. India's 2W penetration has already reached ~53% of households, and a maturing industry should see demand shifting to premium products. The share of premium segment has been increasing gradually over the years from ~15% in FY14 to ~22.7% in FY20. It reached ~23.7% in FY19 but lost 100 basis points in FY20 on account of general slowdown in the economy and shift towards entry level bikes.

Hero Motocorp is eyeing to gain back its lost market share in the scooters and premium motorcycle segment. The company is also going to focus more on its export strategy going forward. Eicher Motors is already a market leader (~80% market share) in more than 200cc segment.TVS Motors & Bajaj Auto are also coming up with new models in the premium segment and already have strong market share in the 2-wheeler exports market. We believe that going forward, premium segment along with exports will drive the next leg of growth in 2 wheeler industry over the long term.

6

Electric Vehicles

With the intention to move away from Internal Combustion Engines (ICE), the government is focused on increasing number of electric vehicles in India. Under Faster Adoption and Manufacturing of Hybrid and Electric vehicles in India (FAME) I and the recently launched FAME-II norms, the government is offering incentives for electric vehicles. Many listed 2W OEMs have adapted to the changing landscape like (1) E-scooters from the stables of BJAUT (Chetak) and TVS (iQube), (2) Making strategic investments in electric vehicle start-ups like Hero MotoCorp (in Ather Energy).

The Ministry of Heavy Industry and Public Enterprise, through a notification on March 28, 2019, laid out the eligibility criteria for electric buses, PVs, 3Ws and 2Ws to avail the FAME II incentives. The criteria is based on:- (1) 40 kmph minimum top speed, (2) 80 km range, (3) Minimum acceleration of 0.65m/s, (4) Higher number of charging cycles, (5) 50% localization.

FAME II scheme aims to encourage faster adoption of electric and hybrid vehicles by offering upfront incentive on EV purchase and establish charging infrastructure.FAME II scheme will be implemented over a period of three years (FY20-22). The capital outlay for the scheme increased from Rs.8.95bn in FAME I(FY17-19) to Rs. 100bn with focus on electric and hybrid vehicles and setting up charging infrastructure (Rs. 10bn for setting up over 2700 charging stations in Metro and other key smart cities).

FAME II aims to increase commercial use of electric vehicle, presence across three-wheeler (e-rickshaws) and passenger vehicles while providing incentive for two-wheeler personal use.

 2W – Bajaj, Hero, TVS and Yamaha have already announced the electric two wheelers to be launched in CY20 to capitalize on growing opportunity. The pricing is expected to be under Rs. 150,000 to be eligible for FAME II incentive (estimated to be greater than 13% of cost price). Furthermore, startups such as Ather, Ampere, Ultraviolette, Tork, and Revolt have announced launch of FAME II compliant new models to capitalize on favorable incentives.  3W– (Delhi’s e-rickshaws population is estimated at 70,000)  Buses - State governments like Delhi, Maharashtra, Karnataka, Tamil Nadu have placed orders for electric buses under FAME-II. Indian government has approved addition of 5,500 electric buses for 64 cities). Delhi government intends to deploy 25% battery operated among all new public transport by 2024.

Key challenges in FAME II for 2W

High eligibility criteria for 2W Incentives :- FAME-II eligibility for 2W include 40 kmph minimum top speed, 80 km range, minimum acceleration (0.65m/s) and higher number of charging cycles which was not available in over 95% of models under FAME-I. Furthermore, 50 per cent localisation in manufacturing is also expected to be a key challenge.

Reduced incentive compared to FAME-I :- FAME-I incentives ranged from Rs. 17,000-Rs.22,000 while FAME-II has linked the demand incentive to the size of the battery, with the government providing Rs 10,000 per kWh of battery used for a two-wheeler. As the average size of a lithium ion battery in electric scooters sold during FAME-I was ~1.5kWh (average subsidy of about Rs 15,000 per vehicle), it reduced the average subsidy per vehicle by Rs 2,000 to Rs 7,000

Ambiguity on incentive for battery swapping technology:- Vehicles running on battery swapping technology have been kept of out of the ambit of FAME2. Industry chamber and OEMs have requested for inclusion.

The stringent compliance norms have resulted in slump in electric vehicle demand (6,500 in 9MFY20 vs 75,000 in FY19)

7 HOLD Initiating Coverage Eicher Motors Ltd Target Price 28th August, 2020 Auto OEM 2,400

Improving Outlook priced in CMP as of Aug 27, 2020)

We are initiating coverage on Eicher Motors Ltd (Eicher)with a HOLD recommendation CMP (Rs) 2,236 and a Target Price of Rs 2,400, which implies ~7% upside from the current levels. Royal Upside /Downside (%) 7.3% Enfield's (RE) near-term outlook remains weak given Covid and BS-VI cost push; however, it is High/Low (Rs) 2,389/1246 well-placed to benefit from a potential demand recovery in Indian 2Ws by FY22E given its differentiated products and strong franchise. RE is further strengthening its core with a fresh Market cap (Cr) 61,097 focus on products and big network expansion in India, and should be the key beneficiary of Avg. daily vol. (6m) Shrs. 2,787,450 premiumization in Indian 2Ws in the long term. Exports, merchandise sales and bike customization offer further growth avenues.The order bookings for RE have remained healthy No. of shares (Cr) 27.31 with an order backlog of 45,000 in August 2020. The sharper-than-expected recovery in the currentenvironment, along with the launch of the all-new vehicle platform should furtherreinforce the RE brand pull. The company remains committed to a new launchevery six months and further expand its dealer network in India and exportmarkets. We expect the Shareholding (%) company to register Revenue/Ebitda/PATCAGR of~9%/~11%/~8% respectively from Dec-19 Mar-20 Jun-20 FY20-FY23E driven by volume CAGR of 5.5% over FY20-23E.We initiate coverage with a HOLD rating and target of Rs2,400 valuing RE at 25x FY23E P/E and VECV business at 9x Promoter 49.28 49.28 49.28 FY23E EV/EBITDA. FIIs 31.19 27.71 26.95 Our investment thesis is based on the following premises: MFs / UTI 6.09 8.49 9.32 Volume Outlook to remain weak in the near-term Banks /FIs 0.11 0.47 0.47 RE volumes declined 16% YoY in FY20 as the combined effect of weakening economy and Others 13.33 14.05 13.98 new insurance and braking norms took a big toll on demand. The economic impact of Covid- 19 along with the BS6 related cost push will keep volumes under pressure in the near term, Financial & Valuations and we factor in a further ~13 YoY drop in FY21E. However, we believe Indian 2W demand Y/E Mar (Rs. Cr) FY21E FY22E FY23E will revive in FY22E-23E on the low base of two years and RE will witness a volume growthof~20%/~12% YoY in FY22E/ FY23E respectively. Net Sales 8,465 10,311 11,721 EBITDA 1,889 2,475 3,024 Key beneficiary of premiumization in Indian 2Ws EPS (Rs.) 55.2 72.1 88.7 We believe RE offers one of the most differentiated products in Indian autos, and will be the key RoE (%) 16.9 19.1 20.1 beneficiary of premiumization in the maturing 2W industry. It has just 6% share in annual RoCE (%) 16.3 18.5 19.6 industry volumes, which provides large headroom for growth. While competition will rise with PER (x) 40.5 31.0 25.2 entry of Bajaj-Triumph, TVS-Norton and Harley over next 2-3 years, we believe taking away meaningful share from RE would be a tough given its strong franchise and widespread network. P/BV (x) 6.4 5.5 4.7 Moreover, entry of new players has potential to expand the market especially as demand shifts EV/ EBITDA 28.2 20.8 16.4 towards premium bikes. However given the uncertainty on overal consumer sentiment in FY21, we feel the growth in premium bikes to be muted as compared to entry level bikes. But over the Key Drivers (%) (Growth in %) long term we believe the Premiumization trend to remain intact. Y/E Dec FY21E FY22E FY23E Strengthening its core; multiple levers of growth Revenue Growth -6.7 21.8 13.7 RE is turning more aggressive on product launches and plans to introduce 2-3 new platforms in EBITDA Margin 22.3 24.0 25.8 coming years, along with product upgrades and variants. A big dealer network expansion is Net Profit Margin 17.7 19.0 20.6 also underway, mainly targeting semi-urban and rural markets, which should fuel the next leg of growth. Studio stores will greatly help improve accessibility in tier 2 and smaller towns. Exports Axis vs Consensus offer another area of potential growth and the 650-cc bikes launched in 2019 have seen good traction. Initiatives such as bike customization, digital platform to enhance ownership EPS Estimates 2021E 2022E 2023E experience, and raising merchandise sales provide further levers for growth as well as Axis 55.2 72.1 88.7 strengthening the franchise. Consensus 63.7 98.0 100.4 Fairly Valued – Initiate with a HOLD Mean Consensus TP (12M) 2,066 Though we remain positive for the 2W industry, we expect demand to remain subdued and a slow recovery for higher end bikes like Royal Enfield. Moreover, supply side constraints are a Relative performance bigger issue than demand for the company. Thestock is currently trading at 25.2x FY23E P/E (ex of VECV) which we believe is in the fair zone.We initiate coverage on Eicher Motors Limited 160 with a HOLD rating, valuing the company at 25x of its FY23E standalone EPS and add Rs 189 140 for VECV (9x FY23E Ev-EBITDA) to arrive at a Target Price of Rs 2,400/ share. 120 Key Financials (Standalone) 100 (Rs. Cr) FY20A FY21E FY22E FY23E 80 60 Net Sales 9,077 8,465 10,311 11,721 40 EBITDA 2,204 1,889 2,475 3,024 Aug-19 Feb-20 Aug-20 Eicher Motors Sensex EPS (Rs.) 70.0 55.2 72.1 88.7 RoE (%) 24.7 16.9 19.1 20.1 Source: Capitaline, Axis Securities RoCE (%) 23.7 16.3 18.5 19.6 PER (x) 32.0 40.5 31.0 25.2 Darshan Gangar P/BV (x) 7.4 6.4 5.5 4.7 Research Analyst

EV/ EBITDA 24.4 28.2 20.8 16.4 Source: Company, Axis Research email: [email protected]

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Story in Charts Exhibit 1: Trend in RE Volumes & Volume Growth Exhibit 2: Trend in VECV Volumes & Volume Growth

1,000 120% 80,000 55% 60% 99% 100% 50% 800 33% 40% 70% 80% 60,000 57% 24% 30% 52% 60% 16% 600 42% 13% 11% 20% 40% 40,000 10% 23% 20% 0% -1% 12% 400 11% 20% -7% 0% 1% -16% -10% -16% -13% 0% 20,000 -22% 200 -20% -20% -33% -30% 0 -40% 0 -40%

Volumes (000') Growth % (YoY) Volumes (units) Growth % (YoY)

Source: Company, Axis Securities

Exhibit 3: Trend in RE Sales Exhibit 4: Trend in VECV Sales

14,000 120% 14,000 40% 104% 32% 12,000 100% 12,000 30% 17% 17% 78% 15% 20% 10,000 80% 10,000 62% 10% 8,000 60% 8,000 0% 0% 6,000 27% 40% 6,000 -13% 22% -10% 14% 14% 4,000 9% 20% 4,000 -27% -20% -7% -7% 2,000 0% 2,000 -30%

0 -20% 0 -40% FY13 FY14 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Net Sales (INR Crs) Growth % (YoY) Net Sales (INR Crs) Growth % (YoY)

Source: Company, Axis Securities

Exhibit 5: Trend in RE realizations Exhibit 6: Trend in VECV realizations

Realizations (000'/unit) Realizations (000'/unit) 2,500 160 138 140 142 1,942 1,951 140 130 2,000 1,923 119 1,750 120 106 109 1,589 100 103 1,526 1,524 96 1,423 100 1,500

80 1,000 60

40 500 20

0 0 FY13 FY14 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Source: Company, Axis Securities

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Exhibit 7: Trend in RE EBITDA & EBITDA Margins Exhibit 8: Trend in VECV EBITDA & EBITDA Margins

3,500 35% 1,200 10.0% 31% 32% 9.1% 30% 8.5% 28% 8.1% 8.0% 3,000 30% 1,000 26% 7.5% 8.0% 24% 24% 24% 2,500 22% 25% 800 18% 6.0% 2,000 20% 4.9% 600 1,500 15% 3.3% 4.0% 400 1,000 10% 2.0% 500 5% 200

0 0% 0 0.0% FY13 FY14 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY17 FY18 FY19 FY20 FY21E FY22E FY23E

EBITDA (Rs Crs) EBITDA Margin (%) EBITDA (Rs Crs) EBITDA Margin (%)

Source: Company, Axis Securities

Exhibit 9: Trend in RE PAT & PAT margins Exhibit 10: Dealer Network Expansion

3,000 25% 2,000 22% 23% 21% 21% 21% 21% 2,500 18% 19% 18% 20% 1,600 16% 2,000 638 15% 1,200 600 1,500 10% 800 1,000 915 921 921 400 825 5% 675 500 527 400 0 0 0% FY14 FY16 FY17 FY18 FY19 FY20 FY21YTD FY13 FY14 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Large Stores Studio Stores Net Profit (Rs Crs) Net Profit Margin (%)

Source: Company, Axis Securities

Volume outlook to remain weak in the near term

RE volumes declined 16% YoY in FY20 as the combined effect of weakening economy and new insurance and braking norms took a big toll on demand. Even in Q1FY21, Company posted a volume decline of almost 70% in 2W and 84% in VECV business. This was on the back of total lockdown in April and large part of May’20. But gradually as the economy opened up, the month on month volumes has started witnessing traction driven by tier 2 and tier 3 cities. The current bookings are almost back at pre-COVID-19 levels, and inquires are higher than pre-COVID- 19 levels for the last 6-8 weeks, indicating that the pick-up is not just driven by the pent-up demand and the same can be sustainable going forward. However, more than demand, production has been a bigger issue for the company. While RE’s plants in Chennai were impacted by regional lockdowns and government restriction on transport between districts, its suppliers in Chennai, Pune and Aurangabad also faced similar issues leading to lower production. The utilization levels were at 40-45% in July and the volumes could have been higher by 25% if production was not constrained. We believe that once supply chain normalizes, the production can be ramped up rapidly. Company’s current capacity is ~100k vehicles per month. Covid continues to impact dealership operations on and off. ~90% of dealerships were open as of June end, but have currently reduced to 75-80% given some intermittent regional lockdowns in many parts. However, this number continues to vary almost every day depending on regional lockdowns/restrictions. Due to production constraints, company has not been able to meet the demand leading to an order backlog of ~40-45k units. We expect production to return to normal levels by end-Aug or September 2020 (assuming there is no further impact due to COVID-19).

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Key beneficiary of premiumization in Indian 2W industry

We believe RE offers one of the most differentiated products in Indian autos, and will be the key beneficiary of premiumization in the maturing 2W industry. While competition will rise with entry of Bajaj-Triumph, TVS-Norton, Hero and Harley over next 2-3 years, we believe taking away meaningful share from RE would be a tough given its strong franchise and widespread network. Eicher Motors is already a market leader (~80% market share) in more than 200cc segment motorcycles. Moreover, entry of new players has potential to expand the market especially as demand shifts towards premium bikes. The share of premium segment has been increasing gradually over the years from ~ 15% in FY14 to ~22.7% in FY20. It reached 23.7% in FY19 but lost 100 basis points in FY20 on account of general slowdown in the economy and shift towards entry level bikes. However given the uncertainty on overal consumer sentiment in FY21, we feel the growth in premium bikes to be muted as compared to entry level bikes in the short term. But over the long term we believe the Premiumization trend to remain intact.

Strengthening its core; multiple levers of growth

RE is turning more aggressive on product launches and plans to introduce 2-3 new platforms in coming years, along with product upgrades and variants. A big dealer network expansion is also underway, mainly targeting semi-urban and rural markets, which should fuel the next leg of growth. Studio stores will greatly help improve accessibility in tier 2 and smaller towns. Exports offer another area of potential growth and the 650-cc bikes launched in 2019 have seen good traction. Initiatives such as bike customization, digital platform to enhance ownership experience, and raising merchandise sales provide further levers for growth as well as strengthening the franchise. Eicher is focusing on enhancing its product development capabilities, strengthening the distribution network and growing the RE brand. Company inaugurated a technology center in Chennai, India last year which, along with the UK-based center, will focus on new product development. It launched the new variants of Classic and Bullet during the year, including their BS-6 and ABS complaint versions. It improved the distribution network in India’s tier 2/3 cities with the launch of 600 small format stores, taking the total store count to 1,521 (921 regular stores); in the international market, RE has 77 exclusive stores and 660 touch points that cover 60 countries. It has taken steps to reduce the cost of ownership and extend the warranty period to three years (from two) across its product lines. RE continues to focus on vehicle customisation and has launched a new range of accessories and apparel.

New Product launches to drive Growth

The UK and India R&D center will enable RE to take complete ownership of all the aspects of motorcycle design and development (concept to production). RE plans to launch another in-house developed platform in 2QFY21, ahead of the festive season. Unlike the launches in the last few years, the new platform is designed for the domestic market and targets the mass market segment. New-generation Royal Enfield bikes would use four platforms – P, J, Q and K. The Classic, Thunderbird, Bullet, and Himalayan will use the J platform, while the middleweight (650) range will feature the P architecture. The Q and K architecture would underpin higher-displacement RE motorcycles. With a healthy response received for the new 650cc Twins, Interceptor GT, and Continental GT (both in the Indian as well as international markets) and some recovery seen in domestic sales, we expect RE volumes to recover from 2HFY21, after declining up to 1HFY21. The upcoming new product launches on the brand-new platform would expand the product portfolio and narrow the gap in product quality vis-à-vis 650cc Twins. Moreover, it would substantially expand the addressable market in India and globally. The company is committed tolaunch one model per quarter. However, the current launches which were planned from Apr has been delayed to Sep’20, but since product development continues, the gap between future launches is expected to narrow.

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Volvo Eicher Commercial Vehicles (VECV)

Volvo Eicher Commercial Vehicles (VECV) is a 50:50 JV between the Eicher group and Volvo and was formed in 2008. Over the years, VECV has made its mark in the ICV (7.5 to 12 ton) segment where it has been gaining share, which stood at 29.5% in FY20. VECV has performed well in the Bus segment and reached 17% share in FY18 before losing some share in FY19 and FY20. In Q1FY21, VECV increased its market share to 40.7% in ICV segment from 29.5% in FY20 and also increased its market share in Buses from 14.1% (FY20) to 35.6% in Q1FY21. However, Q1FY21 being an unprecedented quarter, we donot expect this drastic increase in market share to sustain and expect it to normalize going ahead as the supply side constraints for other players ease and industry demand returns to normal. VECV introduced the Pro 2000 series, a new range of light/medium duty vehicles. The new vehicles are indigenously developed with two new engines (2L and 3L engines) designed from scratch.VECV started operations at its new plant at Bagroda, near Bhopal, for the assembly of new engines for the Pro 2000 series with delivery expected in FY21. VECV acquired Volvo Bus India for Rs 1.05 bn, completing its Buses product portfolio. This is a no-debt acquisiton as it is a slump sale and acquisition of all assets. Post this, now the Company has a complete line up of products in the commercial vehicle (CV) space. The utilization levels at VECV are currently at 25%. All plants have started operations, but demand continues to be low. We expect the demand to recover from Q4FY21.

Exhibit 11: VECV market share (including exports) (%) Exhibit 12: Eicher Light and Medium Duty Trucks (In %)

50.0% Market Share Market Share 40.7% 25.0% 23.1% 40.0% 31.5% 31.3% 20.0% 29.4% 29.5% 30.0% 14.6% 15.0% 13.3% 13.3% 13.1% 20.0% 10.0% 10.0% 5.0%

0.0% 0.0% FY17 FY18 FY19 FY20 Q1FY21 FY17 FY18 FY19 FY20 Q1FY21

Source: Company, Axis Securities

Exhibit 13: Eicher Heavy Duty Trucks (excluding exports) (In %) Exhibit 14: Buses (excluding exports) (In %)

Market Share Market Share 40.0% 8.0% 7.0% 35.6% 7.0% 35.0% 6.0% 30.0% 4.9% 5.1% 4.6% 5.0% 4.5% 25.0% 4.0% 20.0% 16.8% 17.0% 15.6% 14.1% 3.0% 15.0% 2.0% 10.0% 1.0% 5.0% 0.0% 0.0% FY17 FY18 FY19 FY20 Q1FY21 FY17 FY18 FY19 FY20 Q1FY21

Source: Company, Axis Securities

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Expanding International Footprint

Royal Enfield is rapidly expanding its presence in the global arena with its new differentiated range of evocative, accessible and truly global line of motorcycles. These unique motorcycles having an element of history and coming along with Royal Enfield motorcycling experiences is setting the stage for its global expansion. Royal Enfield motorcycles and experiences are continuing to draw more enthusiasts to its world of pure motorcycling. There is an increased interest for motorcycles, leading to growing customer base across geographies. Royal Enfield continues to strengthen its distribution network to grow faster in these regions. During FY2019-20, Royal Enfield added 35 new stores across its international markets with a focus on Thailand, Brazil, Argentina, France and the UK, increasing its overall touchpoints to over 660 stores including 77 exclusive stores and 585 multi brand outlets. This network expansion, combined with sustained brand and marketing initiatives, have greatly increased its sales outside India. Export volume increased 96% YoY to 38.7k units in FY20. This led to an increase in export share in total sales volume of 5.5% in FY20 (v/s 2.4% in FY19), mainly driven by the launch of 650cc Twins.

Deepening presence across Europe

Europe is one of the most established motorcycle markets with strong motorcycling culture. With pristine locations and roads that facilitate long rides, there is significant demand for mid-sized motorcycles. During the year, Royal Enfield strengthened its presence in the region by opening its first exclusive store in Italy. It also strengthened presence in France and the UK. With this, Royal Enfield has established a presence in key European markets of France, Argentina, Italy, the UK and Colombia where strong growth is expected. Royal Enfield now has 25 exclusive stores and 370 multi-brand outlets across Europe and the UK.Europe is the largest market for RE (outside India) with ~400 dealers. RE’s market share in the mid-sized motorcycle segment stood at 5.4% in Europe and 4.8% in the Asia Pacific region (5.3% in Thailand). Led by this, RE was ranked #6 in the mid-sized motorcycle segment in the EU in CY19, up from rank #9 in CY19.

Focussed on leading in the South East Asian Market

Countries in South East Asia have a great motorcycling culture which is complemented by their terrains that are best suited for Royal Enfield motorcycles and its ecosystem of rides and events. The demand for motorcycles here is fuelled by the growing aspiration of the large youth population wanting to upgrade to mid- sized segments both for commuting purposes as well as for having the right medium of self-expression and exploration. Moreover, there is a growing interest of tourists to explore these countries on motorcycles. To serve the rising demand for mid- sized motorcycles, RE further strengthened its presence in this region by opening 13 new exclusive stores during the year. In Thailand, efforts were sustained to become a part of its rich motorcycling culture by opening 11 exclusive stores during the year. It entered the South Korean market with a flagship store in Seoul along with setting-up the entire ecosystem of the motorcycling way of life including sales, after sales service, rides and events. Royal Enfield now has a strong presence in South East Asian countries of Thailand, Indonesia, Vietnam and South Korea where its motorcycles are witnessing an encouraging response and have exciting opportunities for growth.

Building the LATAM and US markets

Royal Enfield is focussed on expanding its presence in the LATAM and the US markets. Its subsidiary in Brazil is engaged in continuously undertaking initiatives to deepen penetration. To cater to the growing demand, Royal Enfield has strengthened presence in Brazil and Argentina by launching new motorcycles and adding new stores.The North America market has ~120 dealers. RE has witnessed growth in exports over FY20, albeit off a low base. Growth in shipments is driven by the 650 twins. We believe that developing the affordable luxury biking segment will be a medium term initiative as customers will gradually adapt to the 650cc products, especially in the developed markets. These countries are witnessing stagnating volumes, and hence, expanding the market will require considerable effort.

Exhibit 15: RE Exports Trend Exhibit 16: VECV Exports Trend

12,000 83% 100% 50,000 100% 89% 80% 10,000 60% 40,000 80% 35% 32% 64% 8,000 40% 12% 30,000 60% 7% 11% 20% 45% 6,000 0 -2% 37% 0% 20,000 32% 40% 25% 4,000 -20% 19% -40% 10,000 20% 8% 2,000 -60% 0 -54% 0 0% 0 -80% FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY12 FY13 FY14 FY14 FY16 FY17 FY18 FY19 FY20

Volumes Growth YoY (%) Volumes Growth YoY (%)

Source: Company, Axis Securities

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Company Overview

Eicher Motors Limited (Eicher), incorporated in 1982, is the listed flagship company of the Eicher Group in India and a leadingplayer in the Indian automobile industry. On a standalone basis, Eicher manufactures and markets motorcycles under theiconic Royal Enfield (RE) brand, with its production facilities based in Chennai, Vallam Vadagal and Oragadam (Tamil Nadu). Italso has research and development (R&D) facilities at two locations, Leicestershire, UK, and Chennai.

Exhibit 17: India Footprint

Source: Company, Axis Securities; * Industry volume of 125cc engine size motorcycle per month

Additionally, the company operates as a holding company for investments in Volvo Eicher Commercial Vehicles (VECV) Limited. A jointventure of Eicher (54.4%) and AB Volvo (45.6%), VECV came into existence with effect from July 1, 2008. The JV is engagedin: (a) Eicher’s truck and bus operations, auto components business and technical consulting services business; and (b)Volvo Group’s Indian truck and buses sales and marketing functions, as well as service and spares network operations for bothVolvo trucks and buses.

Management Change

RE appointed Mr Vinod Dasari as a new CEO in April’19. Having worked with Ashok Leyland, Cummins India, Timken Co and General Electric among many others, Mr Dasari brings decades of experience to RE and Eicher. Mr Dasari’s primary responsibilities are to steer RE operations with focus on new product launches, network expansion and adoption of more customer-focused approach among other things. Mr Dasari replaces Mr Siddhartha Lal who will continue to support the CEO and the company on product and brand related areas. Mr Lal has moved to London in 2016 and is focusing on establishing RE as a global brand.

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Valuations and Outlook

We believe FY21 would be another challenging year for the domestic 2W industry as well as for Eicher due to the COVID-19 pandemic and its impact. As a result, along with volume pressure, RE production will also be at higher risk due to its singular location unlike other OEMs, which have plants located in multiple locations. We estimate Company’s volumes to decline ~13% in FY21Efollowed by a sharp recovery of ~20% &~12% in FY22E and FY23E. The technical parity with other high-end motorcycles, strong product pipeline and network expansion in both domestic and export market has equipped RE to capture the benefit of the upcoming favorable product cycle. With a healthy response received for the new 650cc Twins, Interceptor GT, and Continental GT (both in the Indian as well as international markets) and some recovery seen in domestic sales, we expect RE volumes to recover from 2HFY21, after declining up to 1HFY21. We expect the company to register Revenue/Ebitda/PAT CAGR of ~9%/~11%/~8% from FY20-FY23E driven by volume CAGR of 5.5% over FY20-23E. The stock is currently trading at 25.2x FY23E P/E (ex of VECV); We are of the opinion that the CMP factors in all the positives for the Company and that the stock is fairly valued. We initiate coverage on Eicher Motors Limited with a HOLD rating and target price of Rs. 2,400/share, valuing RE at 25x FY23E P/E and VECV business at 9x FY23E EV/EBITDA.

Exhibit 18: FWD PE BAND (x) Exhibit 19: FWD PE Chart (x)

Eicher Motors 12M Fwd PE Band Eicher Motors 1Y Fwd PE Chart

3500 45 3000 40 2500 35 2000 30 1500 25 1000 20 500 15 0 10 15 16 17 18 19 20 16 17 18 19 20 16 17 18 19 20 15 16 17 18 19 16 17 18 19 20 16 17 18 19 20 15 15 16 16 17 17 18 18 19 19 20 Feb- Feb- Feb- Feb- Feb- Nov- Nov- Nov- Nov- Nov- Aug- Aug- Aug- Aug- Aug- Aug- May- May- May- May- May- Feb- Feb- Feb- Feb- Feb- Aug- Nov- Aug- Nov- Aug- Nov- Aug- Nov- Aug- Nov- Aug- May- May- May- May- May- Price 20x 25x 30x 35x PE Mean Mean+1Stdev Mean-1Stdev

Source: Company, Axis Securities

Key Risks  Better than expected Volume Growth in domestic as well as exports markets is an upside risk to our estimates.  Failure of new product launches.  Increasing competitive intensity in the premium segment.  Lower discretionery spends due to prolonged muted economic environment on acoount of COVID-19.

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Financials (standalone) Profit & Loss (Rs Cr)

Y/E March FY20A FY21E FY22E FY23E Net Revenues 9,077 8,465 10,311 11,721 Operating Expenses 6,874 6,576 7,836 8,697 EBITDA 2,204 1,889 2,475 3,024 EBITDA Margin (%) 24.3 22.3 24.0 25.8 Other Income 615 563 659 790 Interest 11 11 11 11 Depreciation 378 446 516 597 Profit before Tax 2,430 1,995 2,606 3,206 Tax 527 492 643 791 Reported Net Profit 1,904 1,502 1,963 2,414 Net Margin (%) 21.0 17.7 19.0 20.6 Adjusted Net Profit 1,904 1,502 1,963 2,414

Source: Company, Axis Securities

Balance Sheet (Rs Cr)

Y/E March FY20A FY21E FY22E FY23E Equity capital 27 27 27 27 Reserves & surplus 8,248 9,483 11,051 12,921

Shareholders’ funds 8,275 9,511 11,078 12,949 Total Loans 101 101 101 101 Deferred tax liability 252 252 252 252 Total Liabilities and Equity 8,628 9,863 11,431 13,301 Gross block 3,684 4,284 4,934 5,734 Depreciation 1,316 1,762 2,278 2,875 Net block 2,369 2,523 2,656 2,859 Capital WIP 312 312 312 312 Investments 3,926 3,920 5,420 7,820 Inventory 518 498 601 677 Debtors 134 125 152 173 Cash & Bank Bal 2,926 3,948 4,117 3,558 Loans & Advances 394 394 394 394 Current Assets 3,973 4,965 5,264 4,802 Sundry Creditors 1,021 970 1,171 1,319 Other Current Liability 930 887 1,052 1,173 Current Liability& Provisions 1,951 1,857 2,222 2,492 Net current assets 2,022 3,108 3,042 2,310 Misc Exp 0 0 0 0 Total Assets 8,628 9,863 11,431 13,301

Source: Company, Axis Securities

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Cash Flow (Rs Cr)

Y/E March FY20A FY21E FY22E FY23E EBIT 1,826 1,443 1,958 2,427 Other Income 615 563 659 790 Depreciation & Amortization 378 446 516 597 Interest Paid (-) 11 11 11 11 Tax paid (-) -628 -492 -643 -791 Extra Ord Income -552 0 0 0 Operating Cash Flow 1,650 1,970 2,501 3,033 Change in Working Capital 92 -65 235 173 Cash Flow from Operations 1,742 1,906 2,736 3,206 Capex -555 -600 -650 -800 Strategic investments 0 0 0 0 Non-Strategic Investments -964 5 -1,500 -2,400 Cash Flow from Investing -1,519 -595 -2,150 -3,200 Change in borrowing -103 0 0 0 Others 28 0 0 0 Dividends paid (-) -809 -267 -395 -544 Cash Flow from Financial Activities -883 -267 -395 -544 Change in Cash -661 1,044 190 -537 Opening Cash 691 19 1,041 1,210 Closing Cash 19 1,041 1,210 651

Source: Company, Axis Securities

Ratio Analysis (%)

Y/E March FY20A FY21E FY22E FY23E Revenue Growth -7.3 -6.7 21.8 13.7 EBITDA Margin 24.3 22.3 24.0 25.8 Net Profit Margin 21.0 17.7 19.0 20.6 ROCE (%) 23.7 16.3 18.5 19.6 ROE (%) 24.7 16.9 19.1 20.1 EPS (Rs) 70.0 55.2 72.1 88.7 P/E (x) 32.0 40.5 31.0 25.2 P / BV (x) 7.4 6.4 5.5 4.7 EV / EBITDA (x) 24.4 28.2 20.8 16.4 Fixed Asset Turnover Ratio (x) 3.4 3.0 3.5 3.7 Debt Equity (x) 0.0 0.0 0.0 0.0 EV / Sales 5.9 6.3 5.0 4.2

Source: Company, Axis Securities

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About the analyst

Analyst: Darshan Gangar

Contact Details: [email protected]

Sector: Auto

Analyst Bio: Darshan Gangar is Chartered Accountant with over a year of research experience in the Mid Cap space and Auto sector.

Disclosures:

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations). 1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial products. ASL is a subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India’s largest private sector bank and has its various subsidiaries engaged in businesses of Asset management, NBFC, Merchant Banking, Trusteeship, Venture Capital, Stock Broking, the details in respect of which are available on www.axisbank.com. 2. ASL is registered with the Securities & Exchange Board of India (SEBI) for its stock broking & Depository participant business activities and with the Association of Mutual Funds of India (AMFI) for distribution of financial products and also registered with IRDA as a corporate agent for insurance business activity. 3. ASL has no material adverse disciplinary history as on the date of publication of this report. 4. I/We, Darshan Gangar, Chartered Accountant, author/s and the name/s subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my/our views about the subject issuer(s) or securities. I/We (Research Analyst) also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. I/we or my/our relative or ASL does not have any financial interest in the subject company. Also I/we or my/our relative or ASL or its Associates may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Since associates of ASL are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. I/we or my/our relative or ASL or its associate does not have any material conflict of interest. I/we have not served as director / officer, etc. in the subject company in the last 12-month period.Any holding in stock – No 5. 5. ASL has not received any compensation from the subject company in the past twelve months. ASL has not been engaged in market making activity for the subject company. 6. In the last 12-month period ending on the last day of the month immediately preceding the date of publication of this research report, ASL or any of its associates may have:

Received compensation for investment banking, merchant banking or stock broking services or for any other services from the subject company of this research report and / or; Managed or co-managed public offering of the securities from the subject company of this research report and / or; Received compensation for products or services other than investment banking, merchant banking or stock broking services from the subject company of this research report; ASL or any of its associates have not received compensation or other benefits from the subject company of this research report or any other third-party in connection with this report.

Term& Conditions: This report has been prepared by ASL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ASL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ASL will not treat recipients as customers by virtue of their receiving this report.

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DEFINITION OF RATINGS

Ratings Expected absolute returns over 12-18 months

BUY More than 10%

HOLD Between 10% and -10%

SELL Less than -10%

NOT RATED We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events

NO STANCE We do not have any forward looking estimates, valuation or recommendation for the stock

Disclaimer: Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to the recipient’s specific circumstances. The securities and strategies discussed and opinions expressed, if any, in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient.

This report may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this report should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this report (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. Certain transactions, including those involving futures, options and other derivatives as well as non-investment grade securities involve substantial risk and are not suitable for all investors. ASL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Past performance is not necessarily a guide to future performance. Investors are advice necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice.

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ASL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the recipients of this report should be aware that ASL may have a potential conflict of interest that may affect the objectivity of this report. Compensation of Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ASL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. The Research reports are also available & published on AxisDirect website.

Neither this report nor any copy of it may be taken or transmitted into the United State (to U.S. Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. If this report is inadvertently sent or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ASL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors.

The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The Company reserves the right to make modifications and alternations to this document as may be required from time to time without any prior notice. The views expressed are those of the analyst(s) and the Company may or may not subscribe to all the views expressed therein. Copyright in this document vests with Axis Securities Limited.

Axis Securities Limited, Corporate office: Unit No. 2, Phoenix Market City, 15, LBS Road, Near Kamani Junction, Kurla (west), Mumbai-400070, Tel No. – 022- 40508080/ 022-61480808, Regd. off.- Axis House, 8th Floor, Wadia International Centre, PandurangBudhkar Marg, Worli, Mumbai – 400 025. Compliance Officer: AnandShaha, Email: [email protected], Tel No: 022-42671582.SEBI-Portfolio Manager Reg. No. INP000000654

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