Ambit Auto Thematic 3june2011

June 3, 2011
Automobiles
THEMATIC
Course Correction Ahead

Analyst contacts
Vijay Chugh
Tel: +91 22 3043 3054
After witnessing strong demand growth in FY10 and FY11 (25-40% vijaychugh@ambitcapital.com
CAGR over FY09-11), we expect auto demand to see a moderation in
Ashvin Shetty
FY12 (10-15%) as all components of the cost of ownership (viz. capital
Tel.: + +91 22 3043 3285
cost, fuel prices and interest rates) have seen significant increases ashvinshetty@ambitcapital.com
over the last 6-8 months. We also expect this moderation to impact the
pricing power and thereby the margins of auto companies. As
indicated in our email dated May 4, 2011, we have cut our volume, Recommendation summary
margin and net earnings estimates for our auto coverage universe for
New Old % Change
FY12 and FY13. While we downgrade Maruti and Hero Honda to SELL,
we continue to highlight Tata Motors and Bajaj Auto as our preferred Ashok Leyland (mcap US$1,543mn)
BUYs in the auto sector. Stance BUY BUY
TP (1 year) (Rs) 65 75 -13%
Volume growth to moderate: With interest rates having increased 150-
200bps in the last six months accompanied by increases in fuel prices by 20- Upside 25%
25% and vehicle prices by 5-10%, we believe the cost of ownership has EPS FY12E (Rs) 4.9 5.2 -6%
crossed the threshold where it will likely impact the demand for automobiles. EPS FY13E (Rs) 5.7 6.1 -8%
Further, our detailed analysis of previous cycles and discussions with key Bajaj Auto (mcap US$8,797mn)
industry participants also corroborate this view with the impact being
Stance BUY BUY
particularly negative in urban markets with replacement and upgradation
demand impacted to the extent of 20-30%. Consequently, on account of the TP (1 year) (Rs) 1,540 1,750 -12%
triple whammy of higher interest rates, increased fuel prices and costlier Upside 13%
vehicles, we are revising our volume growth assumptions to be in line with EPS FY12E (Rs) 97.5 107.7 -9%
long term averages (10-15%) as opposed to our earlier estimates of higher- EPS FY13E (Rs) 113.8 125.2 -9%
than-long term averages (15-20%).
Hero Honda (mcap US$8,292mn)
Negative impact on margins: With input costs continuing to be high, we Stance SELL HOLD
expect margins to be impacted on account of reduced pricing power in the TP (1 year) (Rs) 1,790 1,625 10%
face of moderating demand. There are also indications that the auto
Downside 4%
companies may increase the level of discounts or schemes to support volume
growth. We expect this to impact EBITDA margins to the tune of 50bps. EPS FY12E (Rs) 107.6 109.4 -2%
Further, we expect EBITDA margins for our coverage universe to be EPS FY13E (Rs) 127.6 128.7 -1%
significantly lower (in the range of 100-320 bps) compared to the average Maruti Suzuki (mcap US$7,899mn)
margins seen over FY05-11. Stance SELL BUY
Investment implications: Going forward, given the ongoing moderation in TP (1 year) (Rs) 1,250 1,600 -22%
the volume growth, we expect sluggish stock price performance over the short Upside 2%
term. On a balanced consideration of likely earnings expectations and current EPS FY12E (Rs) 86.5 94.6 -9%
valuations, we downgrade Maruti Suzuki and Hero Honda to SELL (from
EPS FY13E (Rs) 96.5 108.9 -11%
our earlier stance of BUY and HOLD respectively) but continue to highlight
Tata Motors and Bajaj Auto as our top BUYs. Tata Motors (mcap US$13,795mn)
Stance BUY BUY
For Maruti Suzuki, we believe the challenges surrounding volumes and
TP (1 year) (Rs) 1,475 1,600 -8%
earnings (growth of only 9% over FY11-13E) are still not fully factored in the
current valuation (14.2x FY12 earnings). Similarly for Hero Honda, we Upside 41%
believe the recent share price run-up and premium valuations (22% premium EPS FY12E (Rs) 159.3 168.8 -6%
to Bajaj Auto) ignore the concerns surrounding competition, margins and EPS FY13E (Rs) 184.4 191.4 -4%
transition, post separation from Honda Motors. Source: Ambit Capital research
On the other hand, we continue to favour Bajaj Auto due to its diversified
product and geographical profile as well as better margin structure versus
peers (close to 20% compared to Hero Honda’s margins of 11-12%). We like
Tata Motors for its JLR business (strong volume outlook of close to 15-20%
for FY12) and attractive valuations (trading at nearly 40% discount to the
sector).
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit
Capital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to disclaimer section on the last page for further important disclaimer.
Automobiles
Volume growth to moderate …

Marginal demand under pressure
Interest rates at top end of the long-term average band
Historically automobile demand has been susceptible to interest rates with, for
example, a spike in the interest rates in FY06 and FY08 being accompanied by a
dip in demand for automobiles (exhibit 1). With the recent hike in interest rates by
banks (totalling to around 150-200bps over the last 6-8 months) following the
50bps increase in the repo rate by the RBI, we believe the borrowing rates have
now reached a level (exhibit 2) where they will start affecting the demand for
automobiles (see exhibits 5 and 6 on page 3 for expected moderation in the
automobile demand).
This is also corroborated by our discussions with auto industry participants with
their feedback pointing towards the impact of rising interest rates particularly in
the urban markets (drop in footfalls and conversions – to the extent of 20-30%)
with rural demand still holding up. The rate increases have impacted replacement
and upgradation demand to a similar extent.
Exhibit 1: Automobile volumes’ susceptibility to interest Exhibit 2: With recent hikes, interest rates have moved
rates towards higher end of the long term average band*
50% 14 12,000
40% 13 10,000
30% 12
20% 11 8,000
10% 10 6,000
0% 9
-10% 4,000
8
-20% 7 2,000
-30% 6 -
-40%
Apr-03
Dec-03
Aug-04
Apr-05
Dec-05
Aug-06
Apr-07
Dec-07
Aug-08
Apr-09
Dec-09
Aug-10
Apr-11
-50%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Dom cars (ex-Nano) Dom MHCV Goods

Interest Rate LTA - 200bps
Dom Motorcycles Dom three wheelers LTA + 200bps BSE Auto (RHS)
Source: SIAM, Ambit Capital research Source: Bloomberg, Ambit Capital research
*Long term average interest rate band is arrived at by adding/deducting
200bps to 5 year Indian Government bond yield
Fuel price increases have been substantial at 20-25%

After the recent (May 14, 2011) hike of Rs5/litre in petrol prices by the oil
marketing companies, the increase in the fuel prices now total to Rs12-12.5 (20-
25% increase) for the last six months. We believe the sharp increase in fuel prices
to also adversely impact automobile demand.
Exhibit 3: Fuel price trends (Rs/litre)

Date Delhi Mumbai
01-Apr-10 47.93 52.20
26-Jun-10 51.43 55.88
16-Dec-10 55.87 60.46
16-Jan-11 58.37 62.96
02-Mar-11 58.37 63.08
15-May-11 63.37 68.33
Source: Hindustan Times
Ambit Capital Pvt Ltd 2

Automobiles
Vehicle prices are also up by 5-10%

The healthy demand seen in FY11 enabled auto companies to take price increases
(exhibit 4) to compensate for the steep increase in input costs. However, this has,
at the same time, resulted in vehicles becoming costlier by around 5-10% over the
past year, raising the cost of ownership significantly.
Exhibit 4: Recent pricing actions of some companies

Manufacturer Announcement Price action
date
Increase in the prices of all of its commercial vehicles (in
Tata Motors Oct-10 the range of Rs1,500 to Rs30,000) and some passenger
vehicles.
Oct-10 Increase in the prices of Tata Nano by about Rs9,000.
Increase in the prices of all of its commercial vehicles (in
Jan-11 the range of Rs1,500 to Rs30,000) and some passenger
vehicles.
Increase in the prices of passenger vehicles ranging from
Mar-11
Rs7,000 to Rs29,000.
Maruti Suzuki Jan-11 Hike in prices by upto Rs 8,000.
Apr-11 Hike in prices by upto Rs 9,000.
Source: Companies, Press articles
Consequently, on account of the triple whammy of an increase in interest rates,

hike in fuel prices and costlier vehicles, we have revised our FY11-13 domestic
volume CAGR expectations for motorcycles to 15%, cars to 13%, three wheelers to
15% and MHCV Goods to 11% (compared to previous estimates of 17%, 15%, 16%
and 15% respectively). We expect the MHCV Goods and passenger car segments
to be impacted the most compared to two-wheelers.
Exhibit 5: Volume growth trends across domestic motorcycles and cars

FY01-06 FY06-11 FY01-11 FY09-11 FY11-13E
Volume growth trends
Old New
Motorcycles – domestic 22% 25% 16% 24% 17% 15%
Cars - domestic (ex Nano) 9% 17% 13% 25% 15% 13%
Source: SIAM, Ambit Capital research
Exhibit 6: Volume growth trends across commercial vehicles segments

FY03- FY07- FY03- FY09- FY11-13E
Volume growth trends
07 11 11 11 Old New
MHCV Goods – domestic 26% 3% 14% 36% 15% 11%
MHCV Passenger – domestic 9% 13% 11% 17% 12% 10%
LCV Goods – domestic 31% 17% 24% 35% 15% 15%
LCV Passenger – domestic 8% 12% 10% 18% 11% 11%
3W – domestic 9% 17% 13% 25% 16% 15%
Whilst we expect market leaders in the respective segments (Maruti, Tata Motors,
Hero Honda, Bajaj Auto) to be particularly prone to competition, specific strategies
adopted by them such as the introduction of new models and variants should help
arrest the market share loss. Consequently, we expect the domestic market losses
of Maruti Suzuki, Bajaj Auto and Tata Motors to be restricted to around 10-50bps
over FY11-13E (exhibit 7) and as a result, largely track the industry growth rates.
Only in the case of Hero Honda, we expect a higher domestic market share loss of
around 100bps over FY11-13E on account of company-specific transition
challenges after the separation from Honda (with the latter likely to adopt a
focused pursuit of Hero Honda’s stronghold on the economy and executive
motorcycle segments).

Automobiles
Exhibit 7: Changes in market shares across different time periods

FY03-07 FY07-11 FY03-11 FY09-11 FY11-13E
Motorcycle – domestic
Bajaj Auto 7.7% -4.9% 2.8% 5.0% -0.1%
Hero Honda 3.5% 6.6% 10.1% -5.2% -1.0%
Honda Motors 2.5% 4.7% 7.2% 1.0% 0.7%
TVS Motors -5.8% -5.9% -11.7% -0.8% 0.0%
Others -7.9% -0.5% -8.4% 0.0% 0.4%
Cars – domestic (ex Nano)
Maruti Suzuki 0.2% -0.7% -0.4% -1.8% -0.4%
Hyundai Motors -1.0% 0.6% -0.4% -1.3% -1.8%
Tata Motors (ex Nano) 2.0% -6.7% -4.7% -3.2% -1.2%
Others -1.2% 6.8% 5.6% 6.3% 3.4%
Three wheeler – domestic
Bajaj Auto -21.5% -5.3% -26.7% 0.8% 0.0%
Piaggio Vehicles Pvt Ltd 19.2% 2.9% 22.0% -2.8% -1.5%
TVS Motor 4.3% 4.3% 3.0% 0.4%
Mahindra & Mahindra 4.0% 3.4% 7.4% -1.0% 0.3%
Others -1.7% -5.3% -7.0% 0.0% 0.8%
MHCV Goods – domestic
Tata Motors -2.8% -1.8% -4.6% -4.0% -0.5%
Ashok Leyland 2.0% -4.1% -2.1% 1.9% 0.0%
Eicher Motors 0.5% 3.1% 3.7% 2.0% 0.0%
Others 0.3% 2.8% 3.1% 0.1% 0.5%
LCV Goods – domestic
Tata Motors 21.0% -9.7% 11.3% -3.2% -0.5%
M&M (inc Navistar) -9.1% 9.0% -0.2% 5.4% 0.2%
Others -11.9% 0.7% -11.2% -2.1% 0.3%

Automobiles
… with negative impact on margins

With input costs continuing to be high, we expect margins to be impacted on
account of reduced pricing power in the face of moderating demand. There are
also indications that the auto companies may increase the level of discounts or
schemes to support volume growth.
Exhibit 8: Raw material index continues to show an Exhibit 9: 4QFY11 reflects the continuing slide in gross
upward trend margins of the auto companies
200 32%
180 31%
160 30%
29%
140
28%
120
27%
100
26%
80
25%
Apr-11
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
24%
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
2W blended Car blended
Source: Crisil, Ambit Capital research Source: Companies, Ambit Capital research
Note: We include Ashok Leyland, Bajaj Auto, Hero Honda, Maruti Suzuki
and Tata Motors (standalone) for the above analysis
Consequently, we are downgrading our EBITDA margin estimates for Tata Motors
(standalone) and Maruti Suzuki by around 50bps. While in the case of Ashok
Leyland and Hero Honda owing to better-than-expected margin performance in
4QFY11, we are maintaining our EBITDA margin estimates for FY12 and FY13 at
the earlier levels; it is significantly lower than the average margins commanded by
these companies over FY05-11 (see exhibit 10). On the other hand, in the case of
Bajaj Auto, the downgrade to EBITDA margin is more severe on account of our
base case assumption of a withdrawal of duty entitlement pass book (DEPB)
benefits to the tune of 50%.
Overall, we expect margins for FY12 and FY13 to remain significantly lower
compared to the average margins seen over FY05-11. The only exception is Bajaj
Auto which witnessed a structural uplift in margins since FY09 owing to its focus on
premium motorcycles.
Exhibit 10: Revision in EBITDA margins

FY05-11 OLD NEW Change (bps)
Margin trends FY11
Average FY12E FY13E FY12E FY13E FY12E FY13E
Ashok Leyland 11.0% 11.0% 10.0% 10.0% 10.0% 10.0% - -
Bajaj Auto 17.3% 21.2% 20.2% 20.1% 18.4% 18.4% (180) (170)
Hero Honda* 14.6% 12.7% 11.6% 11.6% 11.4% 11.8% (20) 20
Maruti Suzuki 12.7% 10.3% 10.5% 10.8% 10.0% 10.3% (50) (50)
Tata Motors (standalone) 10.7% 9.8% 9.5% 9.5% 9.0% 9.0% (50) (50)
Source: Companies, Ambit Capital research; *- Post amortisation of royalty to Honda Motors

Automobiles
Valuations and recommendations

Over the last three months, despite the significant increase in input costs, the auto
sector has outperformed the benchmark index (exhibit 11) on account of strong
volume growth.
Exhibit 11: Share price performance
Mcap Absolute performance (%) Relative performance to benchmark (%)
(US$ mn 1M 3M 6M 1yr 1M 3M 6M 1yr
India
BSE Sensex NA (3.0) 0.6 (6.5) 12.0
BSE Auto NA (6.5) 2.6 (13.1) 17.7 (3.4) 2.0 (6.6) 5.7
Ashok Leyland 1,543 (1.9) (0.4) (29.4) (12.9) 1.2 (1.0) (24.5) (22.2)
Bajaj Auto 8,797 (8.1) 1.4 (13.8) 25.2 (5.3) 0.8 (7.8) 11.8
Hero Honda 8,292 8.4 24.3 (3.7) (3.7) 11.8 23.5 3.0 (14.0)
Maruti Suzuki 7,899 (5.9) (3.9) (12.3) (1.3) (2.9) (4.5) (6.2) (11.9)
Tata Motors 13,795 (12.3) (5.0) (15.7) 49.7 (9.5) (5.5) (9.8) 33.7
TVS Motor 592 (0.6) (0.5) (32.2) 12.0 2.5 (1.1) (27.4) 0.0
Eicher Motor 812 8.5 23.4 13.7 58.3 11.8 22.6 21.6 41.3
M&M 9,271 (10.3) 2.1 (15.5) 20.3 (7.5) 1.5 (9.6) 7.5
Source: Bloomberg, Ambit Capital Research
On a cross cycle basis, while Hero Honda and Maruti Suzuki are trading at a
premium or close to their long term average P/E, Ashok Leyland and Tata Motors
are trading at significant discounts (22% and 40% respectively) to their long-term
multiples.
Exhibit 12: Ashok Leyland – P/E cycle Exhibit 13: Hero Honda – P/E cycle
29 22
24 19
P/E
19 16
P/E
14 13
9
10
4
7
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
P/E 6 year average 4 year average Apr-11

P/E 6 year avg 4 year avg
Exhibit 14: Maruti Suzuki – P/E cycle Exhibit 15: Tata Motors – EV/EBITDA cycle
23 18
20 16
14
EV/EBITDA
17 12
10
P/E
14
8
11 6
8 4
2
5 0
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
P/E 6 year avg 4 year avg EV/EBITDA 6 year avg 4 year avg
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Automobiles
On a relative P/E valuation, Bajaj Auto, Tata Motors and Ashok Leyland appear
inexpensive compared to Hero Honda and Maruti Suzuki after adjusting for
expected growth (PEG). While global auto companies are trading at a premium to
Indian auto companies, it seems somewhat justified by their higher earnings
expectations compared to Indian peers.
Exhibit 16: Comparative valuation

MCAP P/E EV/EBITDA Sales growth EPS growth (%) EBITDA growth
Company
(US $mn) FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13 (%) (FY11-13) (FY11-13) (%) (FY11-13)
India
Ashok Leyland 1,543 16.4 11.0 10.6 9.2 12.2 7.7 7.3 6.5 14% 9% 9%
Bajaj Auto 8,797 21.2 15.1 14.0 12.0 13.8 10.5 9.9 8.6 18% 12% 10%
Hero Honda * 8,292 16.7 18.6 17.4 14.6 11.9 13.3 12.3 10.4 17% 13% 13%
Maruti Suzuki 7,899 14.0 15.1 14.2 12.8 7.6 8.1 7.3 6.2 15% 9% 14%
Tata Motors
13,795 21.1 7.5 6.6 5.7 9.6 4.6 4.1 3.6 16% 15% 13%
(as reported)
Tata Motors
13,795 21.1 9.5 9.0 7.2 NA 5.2 4.9 4.2 16% 15% 11%
(proforma) **
Average 18.4 12.8 12.0 10.3 11.0 8.2 7.7 6.6 16% 12% 12%
GLOBAL - Cars
Toyota 142,743 86.7 21.2 15.9 11.3 17.5 14.6 13.4 10.5 5% 37% 18%
Hyundai 51,655 24.4 13.4 11.7 10.9 14.2 10.4 9.5 9.0 5% 11% 7%
Ford 55,454 NM 7.0 8.0 7.6 37.1 11.0 9.5 8.4 9% -4% 14%
Volkswagen 79,229 48.9 11.1 9.0 7.9 11.7 7.5 6.7 6.2 7% 19% 10%
Renault 16,500 NM 7.3 5.7 4.2 16.0 7.9 8.2 7.4 4% 32% 3%
BMW 55,755 234.9 13.5 10.5 9.1 16.2 8.4 7.7 7.3 7% 22% 8%
Daimler 73,668 NM 10.6 9.1 7.8 31.9 8.8 7.9 7.1 8% 17% 12%
Average 98.7 12.0 10.0 8.4 20.6 9.8 9.0 8.0 6% 19% 10%
GLOBAL - CVs
Navistar 4,728 29.1 21.3 12.0 8.8 12.6 10.6 8.2 6.6 15% 56% 27%
Volvo 37,985 NM 19.4 13.3 10.2 NM 10.1 8.1 6.8 14% 38% 22%
SCANIA 19,275 134.3 13.6 12.1 11.1 27.8 8.9 8.3 7.7 11% 10% 7%
PACCAR 18,072 258.9 39.7 20.5 14.0 39.5 20.7 13.1 9.5 30% 68% 47%
MAN 20,131 60.9 21.0 15.5 13.4 20.4 10.5 8.4 7.7 9% 25% 17%
Average 120.8 23.0 14.7 11.5 25.1 12.2 9.2 7.7 16% 39% 24%
Source: Bloomberg, Ambit Capital research (Ambit Capital estimates for Indian companies, Bloomberg estimates for global companies)
*EBITDA taken post amortisation of royalty to Honda Motors
**Proforma figures are arrived at by adjusting EBITDA/PAT for normalised R&D charge (by expensing 70% of R & D costs instead of current 20%).
Recommendations
Going forward, given the ongoing moderation in volume growth, we expect
sluggish stock price performance over the short term. On a balanced consideration
of likely earnings expectations and current valuations, we downgrade Maruti
Suzuki and Hero Honda to SELL (earlier stance of BUY and HOLD respectively);
we continue to highlight Tata Motors and Bajaj Auto as our top BUYs.
DOWNGRADE to SELL
Maruti Suzuki (MSIL IN, mcap US$7,899 mn, SELL, TP Rs1,260, 2% upside):
The headwinds of rising interest rates, more expensive fuel prices and costlier
vehicle prices are likely to impact volume growth and put further pressure on
Maruti’s already fragile margins. We downgrade Maruti Suzuki to SELL with a
22% cut in valuation. With current valuation at 14.2x our revised FY12 earnings,
we believe the challenges surrounding volumes and earnings are still not fully
factored in the current stock price. For more details please refer to page 20.

Automobiles
Hero Honda (HH IN, mcap US$8,292 mn, SELL, TP Rs1,790, 4% downside):
While competitive challenges continue to be high, commodity costs and transition
challenges (necessitating increased spends on marketing, business development
and R&D) will continue to weigh down on the earnings. We believe the recent
share price run-up and premium valuations (22% premium to Bajaj Auto) ignore
competition, margin and transition concerns. We downgrade the stock to SELL
(from HOLD). For more details please refer to page 15.
TOP BUYs
Bajaj Auto (BJAUT IN, mcap US$8,797mn, BUY, TP Rs1,540, 13% upside): At
the current market price, the stock is trading at 8.6x and 12.0x our revised FY13
EBITDA and earnings respectively. We believe the moderation in volume growth
expectations and potential impact of withdrawal of the duty entitlement pass book
(DEPB) benefits have been more than factored in the current stock price. Bajaj Auto
remains one of our preferred picks in the Auto sector based on its diversified
products and geographical profile as well as better margin structure versus peers.
For more details please refer to page 11.
Tata Motors (TTMT IN, mcap US$13.8bn, BUY, TP Rs1,475, 41% upside):
While 4QFY11 results were disappointing on the margin front, the volume outlook
at JLR continues to be healthy particularly on account of strong demand from
emerging markets (the company expects nearly 50% growth in JLR’s China
volumes for FY12) and expected launch of Range Rover Evoque in September
2011. Even after revising downwards our EBITDA and net earnings estimates, we
expect the company to record EBITDA and net earnings CAGR of 13% and 15%
respectively for FY11-13E. Tata Motors trades currently at 5.7x FY13 earnings
which is at a discount of 50% to its Indian automobile peers despite having nearly
similar EBITDA and net earnings growth expectations over FY11-13E (exhibit 16 on
page 7).Even after proforma adjusting Tata Motors’ net earnings for normalised
R&D expenses (arriving at EBITDA and net earnings after charging 70% of product
development expenses to P&L instead of current levels of 20%), it trades at 7.2x
FY13 earnings implying a discount of 40% to its Indian automobile peers. We
continue to highlight Tata Motors as one of our preferred picks in the auto sector.
For more details please refer to page 13.
Exhibit 17: Recommendation summary

Market cap Stance CMP Target price Upside/
(USD mn) (Rs) (Rs/share) (downside)
Ashok Leyland 1,543 BUY 52 65 25%
Bajaj Auto 8,797 BUY 1,368 1,540 13%
Hero Honda 8,292 SELL 1,869 1,790 -4%
Maruti Suzuki 7,899 SELL 1,230 1,250 2%
Tata Motors 13,795 BUY 1,046 1,475 41%
Source: Ambit Capital research; Bloomberg

Automobiles
Ashok Leyland
(AL IN, mcap US$1,543mn, BUY, TP Rs65, 25% upside)
Why are we revising our estimates?
Given the high sensitivity of the commercial vehicle segment to interest rates, fuel
prices and the macro environment, we are moderating our volume growth
expectations for FY12 to 10% now from 15% earlier. While the moderating
demand should typically impact margins, given the strong EBITDA margin
outperformance seen in the 4QFY11 results (higher than our expectation by
312bps), we maintain our earlier EBITDA margin assumptions (which however is
lower by 100bps compared to the average margins earned by the company over
FY05-11). Furthermore, higher-than-expected debt for FY12 leads us to increase
our interest costs assumptions for FY12 and FY13.
Impact on estimates
While we cut our volume estimates to 103,517 units for FY12 and to 115,939
units for FY13 (from earlier unit levels of 108,603 for FY12 and 122,721 for FY13),
better-than-expected mix/realisation trends in 4QFY11 leads to net revenue
downgrades of 2% for FY12 and 3% for FY13. We maintain our earlier EBITDA
margin assumption of 10.0% for FY12 and FY13 (which are nearly 100 bps lower
compared to FY11), leading to downward revision in EBITDA by 2% for FY12 and
3% for FY13 respectively. However, we raise our interest expenses for FY12 by
nearly 11% and for FY13 by 14% prompting net earnings downgrades of 6% for
FY12 and 8% for FY13.
Exhibit 18: Revision in estimates (standalone)

Old estimates New estimates YoY change (%)
Particulars FY12E FY13E FY12E FY13E FY12E FY13E

Volumes (CVs – domestic + exports) 108,603 122,721 103,517 115,939 -4.7% -5.5%
Volume growth 15% 13% 10% 12% (500)bps (100)bps
Revenues (Rs mn) 129,249 147,402 126,747 143,245 -1.9% -2.8%
Revenue YoY growth 18% 14% 14% 13% (413)bps (103)bps
EBITDA (Rs mn) 12,925 14,740 12,714 14,369 -1.6% -2.5%
EBITDA margin 10.0% 10.0% 10.0% 10.0% - -
EPS (Rs) 5.2 6.1 4.9 5.7 -6.3% -7.8%
Source: Company, Ambit Capital research
Ambit v/s Consensus

While our revenue estimates are in-line with consensus, our margin assumptions
are conservative compared to consensus (management has guided towards
EBITDA margins in the range of 10-10.5% for FY12 and our estimates reflect the
lower end of this guidance range). Lower-than-consensus EBITDA is also reflected
in lower-than-consensus net earnings.

Automobiles
Exhibit 19: Ambit v/s consensus for Ashok Leyland (standalone)

Consensus Ambit Divergence
Revenue (Rs mn)
FY12E 126,030 126,747 1%
FY13E 141,258 143,245 1%
EBITDA (Rs mn)
FY12E 13,246 12,714 -4%
FY13E 15,161 14,369 -5%
EPS (adjusted) (Rs)
FY12E 5.2 4.9 -6%
FY13E 6.1 5.7 -8%
Source: Bloomberg, Ambit Capital research
Valuation and recommendation:

At the current market price, the stock is trading at 6.5x and 9.2x our revised FY13
EBITDA and earnings respectively. Our revised earnings imply a CAGR of 9% over
FY11-13E. We value the standalone business at 10x FY13 earnings (a discount of
20% to the long term average multiple) and other strategic investments at 1x book
value to arrive at our revised target price of Rs65 (compared to our earlier target
price of Rs75) implying 25% upside. Despite downgrading our estimates, we
believe the recent share price underperformance (30% decline in the last six
months) has made the stock reasonably attractive. We maintain BUY on the
stock.

Automobiles
Bajaj Auto
(BJAUT IN, mcap US$8,797mn, BUY, TP Rs1,540, 13% upside)

Given the recent increase in interest rates, moderation in GDP growth expectations
by the RBI and volume trends witnessed for the month of April 2011, we are
revising downward our FY12 industry volume growth expectations for the domestic
motorcycle segment to 16% now from 18% previously. However, we expect Bajaj
Auto to maintain its market share given the recent significant additions to its
dealer network and positive response seen by the recent launch of Discover 125cc.
We are also revising downward our domestic three wheeler volume growth
forecasts. Further, we are running with a base case assumption of about a 50%
withdrawal in the duty entitlement pass book (DEPB) benefits, which could
adversely impact EBITDA. Besides, we also expect EBITDA margin to be impacted
to some extent by the moderation in volumes.
Impact on estimates:
We cut our FY12 domestic motorcycle and three wheeler volume growth estimates
to 16% and 15% respectively (from the earlier levels of 18% and 20% respectively).
We also factor in a base case assumption of about a 50% withdrawal in the DEPB
benefits, which impacts EBITDA to the extent of about 4% of export revenues, and
operating margins, by around 135bps. Furthermore, we factor in close to a 50bps
EBITDA margin impact owing to a moderation in volumes. Our revised EBITDA
estimates for FY12 and FY13 are lower than our previous estimates by 9% and
10% respectively. Overall, our revised net earnings estimates for FY12 and FY13
are lower than previous levels by 9%.
Exhibit 20: Revision in estimates (standalone)

Particulars
FY12E FY13E FY12E FY13E FY12E FY13E
Motorcycles volumes
Domestic 2,856,404 3,271,010 2,800,939 3,207,495 -2% -2%
YoY growth 18% 15% 16% 15% (200)bps -
Exports 1,216,340 1,379,089 1,216,340 1,379,089 0% 0%
YoY growth 26% 13% 25% 13% (79)bps -
Total motorcycles volumes 4,072,745 4,650,099 4,017,280 4,586,584 -1% -1%
Three wheelers volumes
Domestic 251,403 288,392 235,790 270,505 -6% -6%
YoY growth 20% 15% 15% 15% (486)bps -
Exports 278,424 307,581 270,395 298,711 -3% -3%
YoY growth 23% 11% 17% 11% (597)bps -
Total 3 wheelers volumes 529,828 595,973 506,185 569,216 -4% -4%
Net sales (Rs mn) 197,711 228,231 195,610 224,237 -1% -2%
Net sales YoY growth 23% 15% 22% 15% (116)bps (80)bps
Other operating income 7,359 8,495 4,969 5,669 -32% -33%
Total operating income 205,070 236,725 200,579 229,906 -2% -3%
EBITDA (Rs mn) 39,840 45,982 36,069 41,311 -9% -10%
EBITDA margin 20.2% 20.1% 18.4% 18.4% (171)bps (172)bps
EPS (Rs) 107.7 125.2 97.5 113.8 -9% -9%

Automobiles
Ambit v/s Consensus

While our revenue estimates are in-line with consensus, our EBITDA margin
estimates are significantly lower compared to consensus. This is mainly due to
assumption of a 50% withdrawal of the DEPB benefits factored in our estimates,
which does not appear to have been factored in by the consensus. This lower-
than-consensus EBITDA also leads to sub-consensus net earnings.
Exhibit 21: Ambit v/s consensus for Bajaj Auto (standalone)

Revenue (Rs mn)
FY12E 196,999 200,579 2%
FY13E 228,511 229,906 1%
EBITDA (Rs mn)
FY12E 38,035 36,039 -5%
FY13E 43,725 41,311 -6%
EPS (adjusted) (Rs)
FY12E 102.7 97.5 -5%
FY13E 117.2 113.8 -3%
Valuation and recommendation:

At the current market price, the stock is trading at 8.6x and 12.0x our revised FY13
EBITDA and net earnings respectively. Our revised estimates imply net earnings
CAGR of 12% over FY11-13E. We value the stock at 13.5x FY13 earnings (discount
of around 10% to the long-term average) to arrive at a target price of Rs1,540
(compared to earlier target price of Rs1,750), implying an upside of 13%.
We believe the moderation in volume growth expectations and the potential
impact of withdrawal of the DEPB benefits has been more than factored in the
current stock price. Bajaj Auto remains one of our preferred picks in the auto
sector on account of its diversified product and geographical profile as well as
better margin structure compared to peers.

Automobiles
Tata Motors
(TTMT IN, mcap US$13.8bn, BUY, TP Rs1,475, 41% upside)

Given the high sensitivity of the commercial vehicle segment to interest rates, fuel
prices and the macro environment, we are moderating domestic MHCV Goods
volume growth expectations for FY12 to 10% now from 15% previously. With
moderation in domestic demand in the face of high input costs, we also
downgrade standalone EBITDA margins by 50bps. Further, JLR margins for
4QFY11 were below our expectations by around 137bps warranting a downgrade
to JLR margins for FY12 and FY13. On the positive side, however, we upgrade
FY12 and FY13 JLR volumes due to continuing strong demand from Emerging
Markets (the company expects nearly 50% growth in JLR’s China volumes) and due
to the expected launch of Range Rover’s Evoque in September 2011. We also raise
the capex estimates (including product development expenses) at JLR in line with
the company’s guidance.
Impact on estimates
Despite downgrading the domestic volume growth assumptions, upgrades to JLR’s
volumes leads to an upward revision in consolidated revenues by 1% for FY12 and
by 2% for FY13. However, at the same time, the downgrade to both JLR and
standalone margins leads to net downgrades of 3% and 1% at the EBITDA level for
FY12 and FY13 respectively. Overall, our revised net earnings are around 6% and
4% lower than previous estimates.
Exhibit 22: Revision in estimates (consolidated)

Particulars FY12E FY13E FY12E FY13E FY12E FY13E
Volumes
Commercial vehicles
Domestic 450,465 512,028 441,915 498,520 -2% -3%
YoY growth 15% 14% 13% 13% (218)bps (86)bps
Exports 57,899 65,905 57,899 65,905 - -
YoY growth 16% 14% 16% 14% - -
Jaguar Landrover
Volumes 271,223 298,345 280,164 313,784 3% 5%
YoY growth 13% 10% 15% 12% 200bps 200bps
Consolidated
Revenues (Rs mn) 1,429,538 1,617,505 1,447,588 1,650,832 1% 2%
Revenue YoY growth 18% 13% 18% 14% 41bps 89 bps
EBITDA (Rs mn) 195,956 220,224 189,882 217,803 -3% -1%
EBITDA margin 13.7% 13.6% 13.1% 13.2% (59)bps (42)bps
EPS (Rs) 168.8 191.4 159.3 184.4 -6% -4%
Ambit v/s Consensus

While there are no significant differences between our and consensus’ revenues or
EBITDA estimates for both FY12 and FY13, we are 6% ahead of consensus for
FY13 net earnings. The main reason for this appears to be our lower-than-
consensus interest expense assumptions.

Automobiles
Exhibit 23: Ambit v/s consensus for Tata Motors (consolidated)

Revenue (Rs mn)
FY12E 1,424,420 1,454,074 2%
FY13E 1,610,716 1,657,527 3%
EBITDA (Rs mn)
FY12E 192,728 189,882 -1%
FY13E 216,613 217,803 1%
EPS (adjusted) (Rs)
FY12E 156.6 159.3 2%
FY13E 174.1 184.4 6%
Valuation and recommendation

Even after revising our estimates downwards, we expect the company to record
EBITDA and net earnings CAGR of 13% and 15% respectively for FY11-13E. Tata
Motors currently trades at 5.7x FY13 earnings, which is at a discount of 50% to
that of Indian automobile peers having nearly similar net earnings growth
expectations over FY11-13E (exhibit 16 on page 7). Even after proforma adjusting
Tata Motors’ net earnings for normalised R&D expenses (arriving at normalised
EBITDA and net earnings after charging 70% of product development expenses to
P&L instead of current levels of 20%), the stock trades at 7.2x FY13 earnings
implying a discount of 40% to its Indian automobile peers.
We prefer to value the company on an SOTP basis. For the domestic business,
our target FY13 EV/EBIDTA multiple of 6x is at a discount to the average multiple
of 7x commanded by the company over FY04-11. For domestic business, we arrive
at a fair value of Rs360 (compared to the previous fair value of Rs486).
For the JLR operations we arrive at a target FY13 EV/EBITDA of 6x, which is at a
discount of 30% to global car companies. This multiple of 6x is also consistent with
what we have been using in our earlier valuation estimates. Our current estimates
factor in 20% of the product development expenses being charged to the profit
and loss statement (the rest being capitalised). We have therefore proforma
adjusted EBITDA to account for the normalised product development expense
charge to P&L by deducting 70% (in line with average of BMW, Daimler and Audi)
of product development expenses from EBITDA for the purpose of valuing JLR. For
JLR, we arrive at a fair value of Rs980 (compared to the previous fair value of
Rs980).
Within the other key subsidiaries, we value each of the companies at average
multiples accorded to similar sized peers in the respective industry and recent
transaction multiples arriving at a fair value of Rs135 (compared to the previous
fair value of Rs134).
Overall, we arrive at an SOTP-based 12-month target price of Rs1,475
(compared to earlier target price of Rs1,600), implying 41% upside.

Automobiles June 3, 2011
Hero Honda
Bloomberg: HH IN Equity
Reuters: HROH.BO SELL CHANGE IN RECOMMENDATION
The Perils Of Being Single In India

Analyst contacts
Vijay Chugh
Tel: +91 22 3043 3054
While competitive challenges continue to be high, commodity costs and vijaychugh@ambitcapital.com
transition challenges (necessitating increased spends on marketing,
Ashvin Shetty
business development and R&D) will continue to weigh down on Hero
Tel: +91 22 3043 3285
Honda’s earnings. We believe the recent share price run-up and ashvinshetty@ambitcapital.com
premium valuations ignore competition, margin and transition
concerns. We downgrade the stock to SELL from HOLD.
Competitive challenges continue to be high: Despite posting strong volume Recommendation
and market share gains in the month of April 2011, we believe Hero Honda CMP: Rs1,869
will continue to face competitive challenges especially in its core economy and
executive segments. We expect the company to lose market share to the tune Target Price (one year): Rs1,790
of 100bps over FY11-13E. Previous TP: Rs1,625
Downside (%) 4
Margins to remain under pressure: Earnings in our opinion will continue to
EPS (FY12): Rs107.6
be weighed down by competitive pressures and material costs, particularly in
the face of moderating volume growth. Marketing and business development Change from previous (%) (2)
expenses will also remain above the trend implying little headroom for margin Variance from consensus (%) (4)
improvement in FY12.The R&D and marketing capabilities of the company will
face transition challenges and we believe these will also have impact on Stock Information
earnings especially in FY12. Mkt cap: Rs374bn/US$8,292mn
Outlook and valuation: Overall our revised estimates imply earnings CAGR 52-wk H/L: Rs2,075/1,376
of 13% over FY11-13E.
3M ADV: Rs1,099mn/US$25mn
We value the stock at 14x FY13 earnings (at a 5% premium to Bajaj Auto but Beta: 0.6x
at a discount to long term average P/E to account for lower expected earning
growth). This gives us a 12-month target price of Rs1,790, implying 4% BSE Sensex: 18,494
downside. Nifty: 5,550
While most auto stocks have seen share price declines in the range of 3-5% in
Stock Performance (%)
the last three months, Hero Honda’s stock price has seen an appreciation of
24% on an absolute basis and 23% on a relative basis (to the Sensex) and now 1M 3M 12M YTD
trades at 14.6x the revised FY13 earnings, which is at a 22% premium to Bajaj Absolute 8.4 24.3 -3.7 -5.9
Auto, despite having nearly similar earnings growth expectations. While some Rel. to Sensex 11.8 23.5 -14.0 3.9
of the recent share price gains are justified by better-than-expected volumes in
the last three months and 4QFY11 results, the gains ignore competition, Performance (%)
margins and transition challenges faced by the company post separation from
25,000 2100
Honda Motors. We downgrade the stock to SELL from HOLD.
1900
20,000
Catalysts: We expect increasing competition to reflect in coming months’ 1700
15,000
numbers. This together with continuing margin pressure could negatively 1500
impact the stock price. 10,000 1300
Jun-10 Oct-10 M ar-11
Sensex Hero Ho nda
Source Bloomberg, Ambit Capital research

Exhibit 1: Key financials (standalone)
Year to March (Rs mn) FY09 FY10 FY11E FY12E FY13E
Operating income 123,823 158,313 194,012 232,829 267,608
EBITDA * 17,729 27,351 24,399 26,313 31,276
EBITDA (%)* 14.4% 17.4% 12.7% 11.4% 11.8%
EPS (Rs) 65.5 111.6 100.5 107.6 127.6
RoE (%) 38.5% 61.4% 62.5% 61.3% 53.1%
P/E (x) 28.5 16.7 18.6 17.4 14.6
Source: Company, Ambit Capital research* Post amortisation of royalty to Honda Motors
Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers at the end of this Report.

Hero Honda
Exhibit 2: Key assumptions & estimates

Standalone FY11 FY12E FY13E Remarks
Volumes 5,402,444 6,218,721 7,096,242 We expect demand for motorcycles to moderate. Further owing
to strong competitive intensity, we expect the company to lose
YoY growth 17.4% 15.1% 14.1% market share to the tune of 100bps over FY12 and FY13
Net sales (Rs mn) 192,450 230,955 265,484 Revenue grows much faster than volume growth for FY12 on
YoY Growth 20.0% 15.0% account of favourable mix (as evident in 4QFY11 results)
EBITDA* (Rs mn) 24,399 26,313 31,276 We expect EBITDA margin to remain under pressure on account
of moderation in volumes, high input costs and transition
EBITDA margin * 12.7% 11.4% 11.8% challenges faced by the company
Adjusted PAT (Rs mn) 20,077 21,497 25,482

Earnings for FY12 to remain under pressure on account of
Adj PAT margin 10.4% 9.3% 9.6%
moderating volumes and margin headwinds
Fully diluted EPS (Rs) 100.5 107.6 127.6
Wk cap days (ex cash) –

(76) (73) (72)
closing
We do not expect any significant change in working capital days
Work cap days (ex cash) –
(75) (68) (68)
average
Capex (Rs mn) (4,216) (9,000) (6,000)
FCF (Rs mn) 18,356 21,124 28,681
Source: Company, Ambit Capital research; * Post amortisation of royalty to Honda Motors
Exhibit 3: Change in estimates

New estimates Old estimates Change (%, bps)
Standalone Comments
Net sales (Rs mn) 230,955 265,484 225,464 262,128 2% 1% Despite downgrading the volume estimates,
EBITDA (Rs mn) * 26,313 31,276 26,160 30,414 1% 3% there are net upgrades to revenues owing
to favourable mix. EBITDA margin though
EBITDA margin * 11.4% 11.8% 11.6% 11.6% (21)bps 18bps maintained at earlier levels owing to better
PBT (Rs mn) 26,814 31,785 27,145 31,933 -1% 0% than expected margins in 4QFY11, is
expected to remain much lower compared
PAT (Rs mn) 21,497 25,482 21,852 25,706 -2% -1% to what the company has achieved in the
EPS (Rs) 107.6 127.6 109.4 128.7 -2% -1% past.
Source: Ambit Capital research, * Post amortisation of royalty to Honda Motors
Exhibit 4: Ambit v/s consensus (standalone)

(Rs m) Ambit Consensus % divg. Reasons for divergence
Revenues
FY12E 230,955 223,458 3% Our revenue estimates are above
FY13E consensus largely on account of higher
265,484 253,324 5% realisation assumed in our estimates
EBIT
FY12E 23,712 24,160 -2% Despite higher than consensus revenues,
lower than consensus margins keeps
FY13E 28,134 28,070 0% absolute EBITDA in line with consensus
EPS (Rs)
FY12E 107.6 112.4 -4% Our net earnings estimates are largely
in line with consensus
FY13E 127.6 127.0 0%

Hero Honda
Valuation and Recommendation

Relative valuation
On relative valuation, Hero Honda currently trades at a premium of 22% to Bajaj
Auto on FY13 P/E despite having nearly similar earnings expectations.
Exhibit 5: Comparative valuation for our coverage universe

Company
India
Ashok Leyland 1,543 16.4 11.0 10.6 9.2 12.2 7.7 7.3 6.5 14% 9% 9%
Bajaj Auto 8,797 21.2 15.1 14.0 12.0 13.8 10.5 9.9 8.6 18% 12% 10%
Hero Honda * 8,292 16.7 18.6 17.4 14.6 11.9 13.3 12.3 10.4 17% 13% 13%
Maruti Suzuki 7,899 14.0 15.1 14.2 12.8 7.6 8.1 7.3 6.2 15% 9% 14%
Tata Motors 13,795 21.1 7.5 6.6 5.7 9.6 4.6 4.1 3.6 16% 15% 13%
Average (ex-
18.2 12.2 11.4 9.9 10.8 7.7 7.2 6.2 16% 11% 12%
Hero Honda)
Source: Bloomberg, Ambit Capital research (Ambit Capital estimates)
Cross cycle valuation

On a cross cycle basis, the recent run-up in share prices has resulted in Hero
Honda trading at 18% premium to its long-term average one-year forward P/E.
Exhibit 6: Hero Honda – EV/EBITDA cycle Exhibit 7: Hero Honda – P/E cycle
16 22
19
13
EV/EBITDA
16
P/E
10
13
7 10
4 7
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
EV/EBITDA 6 year avg 4 year avg P/E 6 year avg 4 year avg
Recommendation
Overall our revised estimates imply earnings CAGR of 13% over FY11-13E. We
value the stock at 14x FY13 earnings (at a 5% premium to Bajaj Auto but at a
discount to long term average P/E to account for lower expected earning growth).
This gives us a valuation of Rs1,790, implying 4% downside. While most auto
stocks have seen share price declines in the range of 3-5% in the last three
months, Hero Honda’s stock price has seen an appreciation of 24% on an absolute
basis and 23% on a relative basis (to the Sensex) and now trades at 14.6x the
revised FY13 earnings, which is at a 22% premium to Bajaj Auto, despite having
nearly similar earnings expectations. While some of the recent share price gains
are justified by better-than-expected volumes in the last three months and 4QFY11
results, the gains ignore competition, margins and transition challenges faced by
the company post separation from Honda Motors. We downgrade the stock to
SELL from HOLD.

Hero Honda
Exhibit 8: Balance sheet (Standalone)

Shareholders' equity 399 399 399 399 399
Reserves & surpluses 37,608 34,251 29,161 40,144 55,112
Total net worth 38,008 34,650 29,561 40,543 55,511
Debt 785 660 327 327 327
Deferred tax liability 1,444 1,528 2,468 2,468 2,468
Deferred payments - - 14,585 7,501 416
Total liabilities 40,237 36,838 46,940 50,838 58,723
Gross block 25,163 27,510 28,707 36,207 42,207
Net block 15,737 16,588 38,554 36,369 32,143
CWIP 1,205 481 3,500 5,000 5,000
Unamortised Royalty - - 23,022 15,938 8,854
Investments (non-current) 1,403 3,496 3,496 3,496 3,496
Cash & equivalents 34,480 54,834 48,507 59,136 77,407
Debtors 1,499 1,084 1,306 1,567 1,801
Inventory 3,268 4,364 5,249 6,300 7,241
Loans & advances 3,113 4,058 7,287 8,744 10,052
Other current assets 59 248 489 586 674
Total current assets 42,419 64,587 62,838 76,333 97,176
Current liabilities 15,259 38,051 50,637 57,704 65,272
Provisions 5,270 10,264 10,811 12,655 13,820
Total current liabilities 20,528 48,314 61,448 70,359 79,092
Net current assets 21,891 16,273 1,390 5,974 18,084
Total assets 40,237 36,838 46,940 50,839 58,723
Exhibit 9: Income statement

Net sales 123,191 157,582 192,450 230,955 265,484
% growth 19.23% 27.9% 22.1% 20.0% 15.0%
Total operating income 123,823 158,313 194,012 232,829 267,608
% growth 19.48% 27.9% 22.5% 20.0% 14.9%
Operating expenditure 106,094 130,962 169,613 206,515 236,331
EBITDA * 17,729 27,351 24,399 26,313 31,276
Depreciation & amortisation 1,807 1,915 4,024 9,685 10,226
EBIT 15,921 25,436 22,146 23,712 28,134
Net interest (317) (206) (19) (19) (105)
Non-operating income 1,830 2,649 2,681 3,084 3,546
Adjusted PBT 18,068 28,291 24,846 26,814 31,785
Tax 4,997 5,999 4,769 5,317 6,303
Adjusted PAT/ Net profit 13,071 22,292 20,077 21,497 25,482
% growth 71% -10% 7% 19%
Extraordinaries 0 0 798.4 0 0
Reported PAT/Net profit 13,071 22,292 19,279 21,497 25,482
Source: Company, Ambit Capital research; Post amortisation of royalty to Honda Motors

Hero Honda
Exhibit 10: Cash flow statement (standalone)

PBT 17,815 28,317 24,048 26,814 31,785
Depreciation & amortisation 1,807 1,915 4,024 9,685 10,226
Others (2,000) (2,440) (3,143) (7,103) (7,189)
Tax (5,016) (5,751) (3,828) (5,317) (6,303)
(Incr) / decr in net working
985 4,846 1,473 6,045 6,161
capital
Cash flow from operations 13,590 26,887 22,572 30,124 34,681
Capex (3,135) (2,101) (4,216) (9,000) (6,000)
(Incr) / decr in investments (6,692) (3,633) - - -
Other income (expenditure) 1,215 458 - - -
Cash flow from investments (8,612) (5,276) (4,216) (9,000) (6,000)
Net borrowings (535) (125) (333) - -
Interest paid (25) (21) 19 19 105
Dividend paid (4,439) (20,948) (24,533) (10,514) (10,514)
Cash flow from financing (4,999) (21,093) (24,848) (10,496) (10,409)
Net change in cash (21) 518 (6,492) 10,628 18,272
Closing cash & cash equivalents 34,480 54,834 48,507 59,136 77,407
Free cash flow 10,455 24,787 18,356 21,124 28,681
Exhibit 11: Ratio analysis

Year to March (%) FY09 FY10 FY11E FY12E FY13E
EBITDA margin* (%) 14.4% 17.4% 12.7% 11.4% 11.8%
EBIT margin (%) 12.9% 16.1% 11.5% 10.3% 10.6%
Net profit margin (%) 10.6% 14.1% 10.4% 9.3% 9.6%
Net debt: equity (x) (0.9) (1.6) (1.6) (1.5) (1.4)
RoE (%) 38.5% 61.4% 62.5% 61.3% 53.1%
Source: Company, Ambit Capital research; * Post amortisation of royalty to Honda Motors
Exhibit 12: Valuation parameters

EPS (Rs) 65.5 111.6 100.5 107.6 127.6
Diluted EPS (Rs) 65.5 111.6 100.5 107.6 127.6
Book value per share (Rs) 190.3 173.5 148.0 203.0 278.0
Dividend per share (Rs) 20.0 110.0 105.0 45.0 45.0
P/E (x) 28.5 16.7 18.6 17.4 14.6
P/BV (x) 9.8 10.8 12.6 9.2 6.7
EV/EBITDA (x) 18.3 11.9 13.3 12.3 10.4
EV/EBIT (x) 20.4 12.8 14.7 13.7 11.6

Automobiles June 3, 2011
Maruti Suzuki
Bloomberg: MSIL IN EQUITY
Reuters: MRTI.BO SELL CHANGE IN RECCOMENDATION
Running Into A Brick Wall

Analyst contacts
Vijay Chugh
Tel: +91 22 3043 3054
The headwinds of rising interest rates, increasing fuel prices and vijaychugh@ambitcapital.com
costlier vehicles are likely to impact volume growth and put further
Ashvin Shetty
pressure on Maruti’s already fragile margins. We downgrade Maruti
Tel: +91 22 3043 3285
Suzuki to SELL (from BUY) with a 22% cut in our valuation. ashvinshetty@ambitcapital.com
Volume headwinds imminent: We believe that the triple whammy, of rising
interest rates and the hike in prices of fuel and automobiles, has raised the
cost of ownership to a level where it has started impacting the purchase Recommendation
decisions of passenger cars. Our discussions with auto industry participants CMP: Rs1,230
suggest that the most impact is being faced in urban areas, arising from the
deferment of replacement and upgradation demand. Consequently, we expect Target Price (1 year): Rs1,250
several headwinds to impact volume growth in FY12 and moderate our Previous TP: Rs1,600
domestic volume growth estimate for FY12 to 13% from 17% previously. Upside (%) 2
EPS (FY12): Rs86.5
Slowdown in demand may raise competitive intensity: With the
Change from previous (%) -9
moderation in the demand we expect competition to rise. While we expect
Maruti to maintain market share on account of new launches (the New Swift Variance from consensus (%) -6
and the diesel variants of SX4), the company may have to step up the level of
discounts or incentive schemes. That in turn could adversely impact margins. Stock Information
Moderating demand to impact pricing power: With input costs continuing Mkt cap: Rs354bn/US$7,899mn
to be high, we expect margins to be impacted on account of reduced pricing 52-wk H/L: Rs1,600/1,122
power in the face of moderating demand. Overall, we believe these should
3M ADV: Rs602mn/US$13mn
negatively impact margins leading us to downgrade our EBITDA margin
assumptions by around 50bps for FY12 and FY13. Beta: 0.8x
Cuts to our estimates: We are cutting our FY12 estimates for revenues by BSE Sensex: 18,494
2%, EBITDA by 7% and net earnings by 9%. The revenue cuts are driven by the Nifty: 5,550
likely volume headwinds mentioned above. The reduction in the EBITDA
estimates result partly from the revenue cuts and partly from rising competitive Stock Performance (%)
intensity. 1M 3M 12M YTD
Valuation and recommendation: With the current market price at 14.2x our Absolute -5.9 -3.9 -1.3 -13.8
revised FY12 earnings, we believe the challenges surrounding volumes and Rel. to Sensex -2.9 -4.5 -11.9 -4.0
margins are still not fully factored in the current stock price. We value the
stock at 13x FY13 earnings (10% discount to its long term average to factor Performance (%)
lower earnings CAGR of 9% over FY11-13E) to arrive at a 12-month target
25,000 1600
price of Rs1,250 (compared to our previous valuation of Rs1,600). We
downgrade the stock to SELL from BUY. 20,000 1400
15,000 1200
Catalysts: We expect moderation in the volumes and margin pressures
reflected in monthly auto numbers and quarterly results to negatively impact 10,000 1000
the stock price performance. Jun-10 Oct-10 M ar-11
Sensex M aruti Suzuki
Exhibit 1: Key financials (standalone) Source: Bloomberg, Ambit Capital research

Operating income 208,525 296,230 370,401 425,816 485,431
EBITDA 18,321 39,879 37,297 41,526 48,826
EBITDA (%) 9.0% 13.8% 10.3% 10.0% 10.3%
EPS (Rs) 42.2 87.6 81.5 86.5 96.5
RoE (%) 13.7% 23.9% 18.3% 16.7% 16.1%
RoCE (%) 19.9% 50.0% 36.6% 28.6% 26.5%
P/E (x) 29.2 14.0 15.1 14.2 12.8
Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers at the end of this Report.

Maruti Suzuki
Exhibit 2: Key assumptions & estimates (standalone)

Standalone FY11 FY12E FY13E
Volumes (nos)
Domestic 1,132,739 1,279,995 1,447,334 Given the challenges arising from increasing interest rates, hike
in fuel prices and increase in vehicle prices, we expect demand
YoY growth 30% 13% 13% to moderate significantly in FY12
Exports 138,266 142,917 157,380 Exports to remain subdued in FY12 before recovering somewhat
YoY growth -6% 3% 10% in FY13, helped to some extent by the lower base
Total 1,271,005 1,422,912 1,604,714
Net sales (Rs mn) 361,282 416,429 475,179 Revenue growth to be helped to some extent by better than
YoY growth 25% 15% 14% expected mix (as visible in 4QFY11 results)
EBITDA (Rs mn) 37,297 41,526 48,826 We expect moderation in demand to impact the ability of
automobile companies to pass on the rise in input costs and
EBITDA margin 10.3% 10.0% 10.3% thereby keep the margin under pressure.
Adjusted PAT (Rs mn) 23,540 25,010 27,879

Earnings for FY12 to remain muted on account of moderating
Adj PAT margin 6.5% 6.0% 5.9%
volumes and margin headwinds
Fully diluted EPS (Rs) 81.5 86.5 96.5
Wk cap days (ex cash) –

(2) (2) (2)
closing
We do not expect any significant change in working capital days
Work cap days (ex cash) –
(1) (2) (2)
average
Capex for FY12 to remain high on account of expansion projects
Capex (Rs mn) 25,592 40,000 25,000
undertaken by the company
FCF (Rs mn) 11,334 (2,800) 18,708
High capex in FY12 to impact FCF and net debt
Net debt/(cash) (Rs mn) (53,565) (47,510) (62,982)
Exhibit 3: Change in estimates (standalone)

New estimates Old estimates Change (%, bps)
Standalone Comments
Net downgrades to revenues largely flowing
Net sales (Rs mn) 416,429 475,179 423,851 485,223 -1.8% -2.1%
from moderation in volumes
EBITDA (Rs mn) 41,526 48,826 44,409 52,225 -6.5% -6.5% We downgrade margins by around 50bps
on account of moderation in volumes which
EBITDA margin 10.0% 10.3% 10.5% 10.8% (51)bps (49)bps may impact the pricing power of the
company
PBT (Rs mn) 34,736 39,267 38,487 44,308 -9.7% -11.4% Lower EBITDA together with increase in
PAT (Rs mn) 25,010 27,879 27,326 31,459 -8.5% -11.4% depreciation expenses leads to significant
downgrades at PBT, PAT and EPS levels.
EPS (Rs) 86.5 96.5 94.6 108.9 -8.5% -11.4%
Source: Ambit Capital research

Maruti Suzuki
Exhibit 4: Ambit v/s consensus

(Rs m) Ambit Consensus % divg. Reasons for divergence
Revenues
FY12E 425,816 427,331 0% Our revenue estimates are largely in
FY13E 485,431 493,651 -2% line with consensus
EBITDA
FY12E 41,526 41,869 -1% We are only marginally behind
FY13E 48,826 49,330 -1% consensus on EBITDA
EPS (Rs)
FY12E 86.5 92.5 -6% The divergence magnifies at the net
earnings level due to higher–than-
FY13E 96.5 107.2 -10% consensus depreciation expenses

Maruti Suzuki
Valuation and Recommendation

Relative valuation
On relative valuation, Maruti Suzuki currently trades at a premium of 23% to the
sector on FY13 P/E despite having lower-than-average earnings expectations
versus the sector.
Exhibit 5: Comparative valuation for our coverage universe

Company
India
Ashok Leyland 1,543 16.4 11.0 10.6 9.2 12.2 7.7 7.3 6.5 14% 9% 9%
Bajaj Auto 8,797 21.2 15.1 14.0 12.0 13.8 10.5 9.9 8.6 18% 12% 10%
Hero Honda * 8,292 16.7 18.6 17.4 14.6 11.9 13.3 12.3 10.4 17% 13% 13%
Maruti Suzuki 7,899 14.0 15.1 14.2 12.8 7.6 8.1 7.3 6.2 15% 9% 14%
Tata Motors 13,795 21.1 7.5 6.6 5.7 9.6 4.6 4.1 3.6 16% 15% 13%
Average (ex-
18.9 13.0 12.1 10.4 11.9 9.0 8.4 7.3 16% 12% 11%
Maruti)
Source: Bloomberg, Ambit Capital research, (Ambit Capital estimates)
Cross cycle valuation

On a cross cycle basis, while Maruti Suzuki is trading at 4% discount to its long-
term average one-year forward P/E, we believe this discount does not factor in the
near term challenges to the earnings growth.
Exhibit 6: Maruti Suzuki – EV/EBITDA cycle Exhibit 7: Maruti Suzuki – P/E cycle
14 23
20
11
EV/EBITDA
17
P/E
8 14
11
5
8
2 5
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
EV/EBITDA 6 year avg 4 year avg P/E 6 year avg 4 year avg
Recommendation
We cut our FY12 estimates for revenues by 2%, for EBITDA by 7% and for net
earnings by 9%. With the current market price at 14.2x our revised FY12 earnings,
we believe the challenges attendant with volumes and margins are still not fully
factored in the current stock price. We value the stock at 13x FY13 earnings (10%
discount to the long-term average to factor lower earnings CAGR of 9% over
FY11-13E) to arrive at a 12-month target price of Rs1,250 (compared to the earlier
target price of Rs1,600). We downgrade the stock to SELL from HOLD.

Maruti Suzuki
Exhibit 8: Balance sheet (standalone)

Shareholders' equity 1,445 1,445 1,445 1,445 1,445
Reserves & surpluses 92,004 116,906 137,230 159,204 184,049
Total net worth 93,449 118,351 138,675 160,649 185,494
Debt 6,989 8,214 3,093 3,093 3,093
Deferred tax liability 1,551 1,370 1,644 1,644 1,644
Total liabilities 101,990 127,935 143,412 165,386 190,231
Gross block 87,206 104,067 129,659 169,659 194,659
Net block 40,708 50,247 65,704 93,731 103,430
CWIP 8,613 3,876 3,876 3,876 3,876
Investments (non-current) 3,827 19,494 19,494 19,494 19,494
Cash & equivalents 47,297 53,254 56,658 50,603 66,075
Debtors 9,189 8,099 8,933 10,297 11,749
Inventory 9,023 12,088 14,150 16,310 18,611
Loans & advances 16,328 15,707 13,722 15,817 18,048
Other current assets 981 848 1,673 1,928 2,201
Total current assets 82,818 89,996 95,136 94,955 116,684
Current liabilities 30,169 29,394 35,540 40,965 46,744
Provisions 3,807 6,284 5,258 5,705 6,509
Total current liabilities 33,976 35,678 40,798 46,669 53,253
Net current assets 48,842 54,318 54,338 48,285 63,431
Total assets 101,990 127,935 143,412 165,386 190,231
Exhibit 9: Income statement (standalone)

Net sales 203,583 289,585 361,282 416,429 475,179
% growth 39.5% 42.2% 24.8% 15.3% 14.1%
Total operating income 208,525 296,230 370,401 425,816 485,431
% growth 12.7% 42.1% 25.0% 15.0% 14.0%
Operating expenditure 190,205 256,351 333,104 384,290 436,605
EBITDA 18,321 39,879 37,297 41,526 48,826
Depreciation 7,065 8,250 10,135 11,973 15,301
EBIT 11,255 31,629 27,162 29,554 33,525
Interest expenditure 510 335 244 220 200
Non-operating income 6,013 4,967 4,823 5,402 5,942
Adjusted PBT 16,759 36,261 31,741 34,736 39,267
Tax 4,571 10,949 8,201 9,726 11,387
Adjusted PAT/Net profit 12,187 25,312 23,540 25,010 27,879
% Growth -30% 108% -7% 6% 11%
Extraordinaries 0 0 -651 0 0
Reported PAT/Net profit 12,187 25,312 22,889 25,010 27,879

Maruti Suzuki
Exhibit 10: Cash flow statement (standalone)

PBT 16,758 35,925 31,090 34,736 39,267
Depreciation 7,065 8,250 10,135 11,973 15,301
Others (6,367) (4,905) 244 220 200
Tax (4,524) (10,279) (7,927) (9,726) (11,387)
(Incr) / decr in net working
(999) (117) 3,384 (2) 327
capital
Cash flow from operations 11,933 28,874 36,926 37,200 43,708
Capex (16,136) (13,149) (25,592) (40,000) (25,000)
(Incr) / decr in investments 22,181 (38,787) - - -
Other income (expenditure) 3,469 4,103 - - -
Cash flow from investments 9,514 (47,833) (25,592) (40,000) (25,000)
Net borrowings (3,339) 1,881 (5,121) - -
Interest paid (579) (319) (244) (220) (200)
Dividend paid (1,444) (1,011) (2,529) (3,035) (3,035)
Cash flow from financing (5,362) 551 (7,895) (3,255) (3,235)
Net change in cash 16,085 (18,408) 3,439 (6,055) 15,472
Closing cash & cash equivalents 47,297 53,254 56,658 50,603 66,075
Free cash flow (4,203) 15,725 11,334 (2,800) 18,708
Exhibit 11: Ratio analysis

Year to March (%) FY09 FY10 FY11E FY12E FY13E
EBITDA margin (%) 9.0% 13.8% 10.3% 10.0% 10.3%
EBIT margin (%) 5.5% 10.9% 7.5% 7.1% 7.1%
Net profit margin (%) 6.0% 8.7% 6.5% 6.0% 5.9%
Net debt: equity (x) (0.4) (0.4) (0.4) (0.3) (0.3)
RoCE (%) 19.9% 50.0% 36.6% 28.6% 26.5%
RoIC (%) 14.4% 34.9% 27.1% 20.6% 18.8%
RoE (%) 13.7% 23.9% 18.3% 16.7% 16.1%
Exhibit 12: Valuation parameters

EPS (Rs) 42.2 87.6 81.5 86.5 96.5
Diluted EPS (Rs) 42.2 87.6 81.5 86.5 96.5
Book value per share (Rs) 323.4 409.5 479.8 555.9 641.8
Dividend per share (Rs) 1.8 3.0 7.5 9.0 9.0
P/E (x) 29.2 14.0 15.1 14.2 12.8
P/BV (x) 3.8 3.0 2.6 2.2 1.9
EV/EBITDA (x) 16.5 7.6 8.1 7.3 6.2
EV/EBIT (x) 26.8 9.5 11.1 10.2 9.0

Maruti Suzuki
Institutional Equities Team

Saurabh Mukherjea,
Managing Director - Institutional Equities – (022) 30433174 saurabhmukherjea@ambitcapital.com
CFA
Research
Analysts Industry Sectors Desk-Phone E-mail

Aadesh Mehta Banking / NBFCs (022) 30433239 aadeshmehta@ambitcapital.com
Amit K. Ahire Telecom / Media & Entertainment (022) 30433202 amitahire@ambitcapital.com
Ankur Rudra, CFA IT/Education Services (022) 30433211 ankurrudra@ambitcapital.com
Ashish Shroff Technical Analysis (022) 30433209/3221 ashishshroff@ambitcapital.com
Ashvin Shetty Consumer/Automobile (022) 30433285 ashvinshetty@ambitcapital.com
Bhargav Buddhadev Power/Capital Goods (022) 30433252 bhargavbuddhadev@ambitcapital.com
Chandrani De, CFA Metals & Mining (022) 30433210 chandranide@ambitcapital.com
Chhavi Agarwal Construction, Infrastructure (022) 30433203 chhaviagarwal@ambitcapital.com
Gaurav Mehta Derivatives Research (022) 30433255 gauravmehta@ambitcapital.com
Hardik Shah Technology (022) 30433291 hardikshah@ambitcapital.com
Krishnan ASV Banking (022) 30433205 vkrishnan@ambitcapital.com
Nitin Bhasin Construction, Infrastructure, Cement (022) 30433241 nitinbhasin@ambitcapital.com
Pankaj Agarwal, CFA NBFCs (022) 30433206 pankajagarwal@ambitcapital.com
Parita Ashar Metals & Mining / Media / Telecom (022) 30433223 paritaashar@ambitcapital.com
Puneet Bambha Power/Capital Goods (022) 30433259 puneetbambha@ambitcapital.com
Ritika Mankar Economy (022) 30433175 ritikamankar@ambitcapital.com
Ritu Modi Cement (022) 30433292 ritumodi@ambitcapital.com
Shariq Merchant Consumer (022) 30433246 shariqmerchant@ambitcapital.com
Subhashini Gurumurthy IT/Education Services (022) 30433264 subhashinig@ambitcapital.com
Consumer (incl FMCG, Retail,
Vijay Chugh (022) 30433054 vijaychugh@ambitcapital.com
Automobiles)
Sales
Name Regions Desk-Phone E-mail

Deepak Sawhney India / Asia (022) 30433295 deepaksawhney@ambitcapital.com
Dharmen Shah India / Asia (022) 30433289 dharmenshah@ambitcapital.com
Dipti Mehta India / Europe (022) 30433053 diptimehta@ambitcapital.com
Pramod Gubbi, CFA India / Asia (022) 30433228 pramodgubbi@ambitcapital.com
Sarojini Ramachandran UK / US +44 (0) 20 7614 8374 sarojini@panmure.com

Maruti Suzuki
Explanation of Investment Rating
Investment Rating Expected return

(over 12-month period from date of initial rating)
Buy >15%
Hold 5% to 15%
Sell <5%
Disclaimer
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June 3, 2011

Course Correction Ahead

Volume growth to moderate …

Dom cars (ex-Nano) Dom MHCV Goods

Fuel price increases have been substantial at 20-25%

Exhibit 3: Fuel price trends (Rs/litre)

Ambit Capital Pvt Ltd 2

Vehicle prices are also up by 5-10%

Exhibit 4: Recent pricing actions of some companies

Consequently, on account of the triple whammy of an increase in interest rates,

Exhibit 5: Volume growth trends across domestic motorcycles and cars

Exhibit 6: Volume growth trends across commercial vehicles segments

Ambit Capital Pvt Ltd 3

Exhibit 7: Changes in market shares across different time periods

Ambit Capital Pvt Ltd 4

… with negative impact on margins

Exhibit 10: Revision in EBITDA margins

Ambit Capital Pvt Ltd 5

Valuations and recommendations

P/E 6 year average 4 year average Apr-11

Ambit Capital Pvt Ltd 6

Exhibit 16: Comparative valuation

Ambit Capital Pvt Ltd 7

Exhibit 17: Recommendation summary

Ambit Capital Pvt Ltd 8

Exhibit 18: Revision in estimates (standalone)

Particulars FY12E FY13E FY12E FY13E FY12E FY13E

Ambit v/s Consensus

Ambit Capital Pvt Ltd 9

Exhibit 19: Ambit v/s consensus for Ashok Leyland (standalone)

Valuation and recommendation:

Ambit Capital Pvt Ltd 10

Why are we revising our estimates?

Exhibit 20: Revision in estimates (standalone)

Ambit Capital Pvt Ltd 11

Ambit v/s Consensus

Exhibit 21: Ambit v/s consensus for Bajaj Auto (standalone)

Valuation and recommendation:

Ambit Capital Pvt Ltd 12

Why are we revising our estimates?

Exhibit 22: Revision in estimates (consolidated)

Ambit v/s Consensus

Ambit Capital Pvt Ltd 13

Exhibit 23: Ambit v/s consensus for Tata Motors (consolidated)

Valuation and recommendation

Ambit Capital Pvt Ltd 14

The Perils Of Being Single In India

Source Bloomberg, Ambit Capital research

Please refer to the Disclaimers at the end of this Report.

Exhibit 2: Key assumptions & estimates

Adjusted PAT (Rs mn) 20,077 21,497 25,482

Wk cap days (ex cash) –

Exhibit 3: Change in estimates

Exhibit 4: Ambit v/s consensus (standalone)

Ambit Capital Pvt Ltd 16

Valuation and Recommendation

Exhibit 5: Comparative valuation for our coverage universe

Cross cycle valuation

Ambit Capital Pvt Ltd 17

Exhibit 8: Balance sheet (Standalone)

Exhibit 9: Income statement

Ambit Capital Pvt Ltd 18