Security analysis report on automobile sector

] A SECURITY ANALYSIS REPORT ON
INDIAN AUTOMOBILE INDUSTRY

Submitted to- Submitted by-
Prof. Urmil Shah Rahul Hedau (73)
Sujit Kumar Jha (76)
Sneha Manocha (81)
Shilpa Sharma (87)
Risabh Srivastava (110)
Vinayak Chauhan (111)
Sunny Dwivedi (114)

ITM Business School, Navi Mumbai Page 1

ECONOMIC FACTORS IMPACTING AUTOMOBILE SECTOR

1. Excess Capacity.
According to CSM Worldwide, an automotive research firm, in 2004 the estimated
automotive industry global production capacity for light vehicles (about 74 million units)
significantly exceeded global production of cars and trucks (about 60 million units). In North
America and Europe, the two regions where the majority of revenue and profits are earned in
the industry, excess capacity was an estimated 17% and 13%, respectively. CSM Worldwide
projects that excess capacity conditions could continue for several more years.

2. Pricing Pressure.
Excess capacity, coupled with a proliferation of new products being introduced in key
segments by the industry, will keep pressure on manufacturers’ ability to increase prices on
their products. In addition, the incremental new capacity in the United States by foreign
manufacturers (so-called “transplants”) in recent years has contributed, and is likely to
continue to contribute, to the severe pricing pressure in that market. In the United States, the
reduction of real

3. Financing Options
Auto industry observers cite car loans as the biggest driving factor for the expansion of the
Compact Car segment. At present, almost 85 per cent of all new car sales are backed by auto
finance, compared to 65 per cent five years ago. Interest rates on car loans have come down
drastically in the past four or five years, which helps prospective buyers take the plunge. The
growth of the CC-segment in the past few years can be mainly credited to factors such as rise
in income levels leading to increased affordability and simultaneous reduction in interest
rates leading to lower EMIs. The drop in interest rates usually helps very few people to
probably shift from the base model to a deluxe model. A larger shift happens if people are
willing to take long-term loans, like five years instead of the earlier three-year loans.

4. Advertising and Marketing
Due to the advertising techniques adopted by all the manufacturers in the CC-Segment the
sales have risen drastically. It is all due to because the companies now a day are using even
aggressive selling techniques for which they are even coping with the Film celebrities and
Cricket stars, like Maruti has contracted Irfan Pathan as the brand ambassador of Zen and for
Santro Hyundai has contracted for Shah Rukh Khan. And the companies are even trying to
approach to the customer as to there demand for a vehicle at special interest loans, etc. They
are using data according to the customers return and earning capacity for attracting the
customers for their vehicles.


5. Income of Consumer / Buyer
The income of the consumer or buyer of the car is a very important factor of demand. In
recent time we have seen that due to increase in the Income of the general public, there has
been a shift from the Lower CC-segment cars to the Upper CC-segmentcars.2Due to the
recent increase in the number of multinationals in India, the income level of the employees
have risen drastically and has made CC-segment cars an entry level car for a lot of people.
The average age of a CC-segment car owner has also dropped from 35 years to 31 years in
India.

6. Increase In Affordability
The demand for passenger cars is driven mainly by greater affordability, which in turn
increases the aspiration level of the customers. Today with high amount of disposable income
in the hand of Indian youth, who forms major portion of the population, PV market has larger
addressable market.

7. Demographic Drivers
Cars being inspirational products, purchase decisions are influenced by the overall economic
environment. Increase in per capita income increases the consumption tendency of the
customer. Growth in per capita income and rising aspirations and changing lifestyle is
leading to increased preference for cars over two-wheelers, which is also having a positive
rub off on car demand.
8. Exports
The share of exports from domestic production is currently at 12-13%, which is much lower
than current export hubs. Currently, India’s share of global passenger cars export volume
stands at less than 1%. But India is fast emerging as a manufacturing hub for leading global
car makers, and several manufacturers have already firmed up plans for setting up
manufacturing bases in India, which will also be used for exports.
9. Presence Across Segments
Manufacturers with presence across various product segments can ensure higher volume and
better capacity utilization by using the common manufacturing capacity. Typically a
customer upgrades from one segment to higher segment and the presence across various
segments ensures that the company retains its existing customers.

10. Efficient Operations
Competition in PV segment is very intense and this requires the existing player’s to initiate
steps to reduce their cost of production. Effective and successful operation methods like
platform commonality, reduction in vendor base and work force rationalization can help a
company immensely.


11. Wide Dealer Network and Availability of Finance
A wide dealer network helps the company serve customers over wide geographical area. For
e.g. Maruti has used its available wide service network as point of difference over
competitors. The companies are tying up with the financial institutions having rural presence
to provide additional financing options to customers in such areas.

12. Access to Latest Technologies
Indian PV segment is highly competitive with as many as 14 players operating in it and more
than 80 models on the offering. But still any new model launch meets with increase in sales
volume for the company. Moreover in a time when a substantial portion of Indian customer is
looking to upgrade in higher segment, companies with latest technologies and latest models
will catch more attentions.

13. Factors of Production
There are some factors of production which influence the supply of a car like Cost of Labour
Cost Machinery Input Cost These factors influence the supply of a car largely. If the cost of
the raw material (Steel, Spare Parts, Rubber) increases there will be an increase in the cost
of production leading to decrease in profit margins. Costs like labour costs, machinery and
input costs also influence the supply with the increase or decrease in these costs.7.

14. Government Policies and Taxes
If there is a change in the government policies regarding the increase in the road tax charged
or the tax which is to be paid per unit sold, the supply of a car will fluctuate with the nature
of the change. Recently the government has reduced the custom duty on inputs and raw
material from 20% to 15% which has increased the supply

ECONOMIC FACTORS IMPACTING CAPITAL MARKETS AS A WHOLE

The capital market is affected by a range of factors. Some of the factors which influence capital
market are as follows:-

1. Performance of domestic companies
The performance of the companies’ or rather corporate earnings is one of the factors which
have direct impact or effect on capital market in a country. Weak corporate earnings indicate
that the demand for goods and services in the economy is less due to slow growth in per
capita income of people. Because of slow growth in demand there is slow growth in
employment which means slow growth in demand in the near future. Thus weak corporate
earnings indicate average or not so good prospects for the economy as a whole in the near
term. In such a scenario the investors (both domestic as well as foreign) would be wary to


invest in the capital market and thus there is bear market like situation. The opposite case of
it would be robust corporate earnings and its positive impact on the capital market.

2. Environmental Factors

Environmental Factor in India’s context primarily means- Monsoon. In India around 60 % of
agricultural production is dependent on monsoon. Thus there is heavy dependence on
monsoon. The major chunk of agricultural production comes from the states of Punjab,
Haryana & Uttar Pradesh. Thus deficient or delayed monsoon in this part of the country
would directly affect the agricultural output in the country. Apart from monsoon other natural
calamities like Floods, tsunami, drought, earthquake, etc. also have an impact on the capital
market of a country. The Indian Met Department (IMD) on 24th June stated that India would
receive only 93 % rainfall of Long Period average (LPA). This piece of news directly had an
impact on Indian capital market with BSE Sensex falling by 0.5 % on the 25th June. The
major losers were automakers and consumer goods firms since the below normal monsoon
forecast triggered concerns that demand in the crucial rural heartland would take a hit. This is
because a deficient monsoon could seriously squeeze rural incomes, reduce the demand for
everything from motorbikes to soaps and worsen a slowing economy.

3. Macro Economic Numbers

The macroeconomic numbers also influence the capital market. It includes Index of
Industrial Production (IIP) which is released every month, annual Inflation number indicated
by Wholesale Price Index (WPI) which is released every week, Export – Import numbers
which are declared every month, Core Industries growth rate. This macro –economic
indicators indicate the state of the economy and the direction in which the economy is headed
and therefore impacts the capital market in India.

4. Global Cues

In this world of globalization various economies are interdependent and interconnected. An
event in one part of the world is bound to affect other parts of the world; however the
magnitude and intensity of impact would vary. Thus capital market in India is also affected
by developments in other parts of the world i.e. U.S. , Europe, Japan , etc. Global cues
includes corporate earnings of MNC’s, consumer confidence index in developed countries,
jobless claims in developed countries, global growth outlook given by various agencies
like IMF, economic growth of major economies, price of crude –oil, credit rating of various
economies given by Moody’s, S & P, etc. An obvious example at this point in time
would be that of subprime crisis & recession. Recession started in U.S. and some parts of
the Europe in early 2008 .Since then it has impacted all the countries of the world-
developed, developing, less- developed and even emerging economies.


5. Political stability and government policies

For any economy to achieve and sustain growth it has to have political stability and pro-
growth government policies. This is because when there is political stability there is
stability and consistency in government’s attitude which is communicated through
various government policies. The vice- versa is the case when there is no political stability
.So capital market also reacts to the nature of government, attitude of government, and
various policies of the government.

6. Growth prospectus of an economy

When the national income of the country increases and per capita income of people
increases it is said that the economy is growing. Higher income also means higher
expenditure and higher savings. This augurs well for the economy as higher expenditure
means higher demand and higher savings means higher investment. Thus when an economy
is growing at a good pace capital market of the country attracts more money from investors,
both from within and outside the country and vice -versa. So we can say that growth
prospects of an economy do have an impact on capital markets.

7. Investor Sentiment and risk appetite

Another factor which influences capital market is investor sentiment and their risk appetite.
Even if the investors have the money to invest but if they are not confident about the returns
from their investment, they may stay away from investment for some time. At the same time
if the investors have low risk appetite , which they were having in global and Indian
capital market some four to five months back due to global financial meltdown and
recessionary situation in U.S. & some parts of Europe , they may stay away from investment
and wait for the right time to come.

Risk involved in this sector.

 Labour unrest and industrial action.
 Unexpected delays and cost overrun due to.
 Overlapping government jurisdiction.
 Corruptions and bureaucratic inefficiency.
 Slow down in government decision due to political instability.
 Raw material price.
 Restructuring of Automobile company
 Financial - Allocation and cash flow
 Supply Chain
 Operational Efficiency
 Raw Material prices


 Fuel Efficiency
 Segment Competitiveness
 Fuel Prices
 Demands
 Emerging markets

ANALYSIS OF PRESENT-FUTURE OPPORTUNITIES AND RISK IN THE AUTO
SECTOR.

Talking about the present and future trend and opportunity of auto industry we see, after being
hit by spiraling raw material costs for several quarters, auto makers would have gained from
softer commodity prices in the June quarter (Q1). But unfavorable and volatile currency
movements played spoilsport. Prices of aluminum and steel dropped from the December quarter,
as did that of rubber

An 8% depreciation in the Indian rupee against the dollar in the period would have negated these
gains because auto firms import key raw materials, which become more expensive. Passenger car
maker Maruti Suzuki India Ltd and two-wheeler leader Hero MotoCorp Ltd are likely to take a
hit on imported raw materials and components, besides royalty payments. A preview report on
the sector by Antique Stock Broking Ltd says, “Hero’s Japanese yen-denominated fixed royalty
expense, which stood at around Rs. 205 Crore in 4QFY12 (fourth quarter of fiscal 2012) is likely
to revert to the around Rs. 220 Crore level in the first quarter of FY13 (similar to the third
quarter of FY12 levels).”

Of course, the magnitude of the impact will vary depending on the extent to which currency
volatility has been hedged. For example, analyst reports express concern that Maruti has hedged
its forex exposure up to the first six months of FY13, but given the currency volatility, fresh
hedges are likely to be less attractive for the company. In the case of Bajaj Auto Ltd, a report by
Prabhudas Lilladher Pvt. Ltd said that average realization per vehicle is expected to increase only
by 2.4% year-on-year (y-o-y) as exports have been hedged at Rs. 51 to the dollar, restricting the
benefit of a greater slide in the rupee.

Further, the June quarter will not see any gains because of operating leverage on account of
strong volumes. Most brokerage firms that track the top five listed companies in the auto
universe (Tata Motors Ltd, Maruti, Bajaj, Hero and Mahindra and Mahindra Ltd) reckon that
June quarter aggregate sales volume grew by a mere 8% over the year-ago quarter, the lowest
quarterly performance in three years.

Of course, the biggest slowdown was in the passenger car and commercial vehicle (medium and
heavy truck) segments, while utility and light commercial vehicles fared a tad better. Two-
wheeler segment volumes slowed to single-digit y-o-y growth for the first time in these years.


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

Undoubtedly, lower volumes and foreign currency volatility will weigh on the June quarter’s
profitability. Brokerage firms’ consensus points to average 150-180 basis points dip in y-o-y
operating margins. Meanwhile, even the profitability of firms such as Bajaj, which is better than
others in the universe because of its three-wheeler sales, will also see a margin contraction as
exports of these vehicles to Sri Lanka suffered a setback in the quarter.

In the final analysis, the auto sector is likely to post a mere 8-10% y-o-y growth in net profit
during the quarter. The Street already seems to have factored this into valuations. The BSE Auto
Index, which was steadily outperforming the benchmark Sensex even as other sectoral indices
were stumbling, has finally cooled off and underperformed in the last three months. The only
trigger that can lift sentiment is higher volume, which in turn will be the result of lower cost of
ownership of vehicles.

Talking on risk factor the overall slowdown in automobile sector continues so it’s a risky sector
to invest for now:

The auto industry continued its slow momentum in June with single-digit volume growth, due to
low growth in two-wheelers, modest volume of commercial vehicles (CVs) and fall in multi-
purpose vehicles (MPVs).

While companies including Mahindra and Mahindra Ltd, Maruti Suzuki India Ltd and Honda
Motorcycles and Scooters India (HMSI) registered robust volumes, Tata Motors Ltd, Bajaj Auto
Ltd and TVS Motor Co. Ltd saw negative growth. This suggests that the growth of about 20%
registered in March is unlikely to continue.

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

The two-wheeler segment registered 6.7% year-on-year (y-o-y) growth in June led by a 19.2% y-
o-y growth in scooter sales. While the motorcycle segment witnessed 4.5% growth, moped sales
grew 2% y-o-y. The commercial vehicles segment witnessed a muted 8.8% y-o-y growth with
12.7% y-o-y decline in medium and heavy commercial vehicles sales.


Also see, on a slow drive? (Graphic)

The passenger vehicle segment rose 13% y-o-y in June due to growth of 44% y-o-y in utility
vehicles, and 11.5% in cars, while MPVs remained subdued in the month.


COMPANY ANALYSIS

LARGE CAP COMPANIES: MARUTI SUZUKI

BSE: 532500
NSE: MARUTI
CMP: 1179.9 (BSE)
1181.00 (NSE)
SECTOR: Auto
1. Industry Outlook and Current company position

 Following India's growing openness, the arrival of new and existing models, easy
availability of finance at relatively low rate of interest and price discounts offered by
the dealers and manufacturers all have stirred the demand for vehicles and a strong
growth of the Indian automobile industry.
 The Indian car industry is going from strength to strength. Fast, faster and fastest.
And there is no turning back. International giants are zeroing on to India.
 Tata Motors, M&M, Marico, Tata Global, Titan and Havells India improve debt to
equity ratio shows good prospect for Automobile companies.
 Maruti Suzuki keeps meeting demand for India and Swift, Dzire and new launch
Ertiga are most popular with waiting period of more than 8 months.
 Maruti Suzuki to fast track its New Alto 800 launches; to be priced at around Rs 2
lakhs which would give direct competition to Tata Nano and Hyundai Eon.

2. Management Capabilities- Promoters and top management

 Problems between Management and Worker trade Union started when Maruti asked
to sign good conduct bond when 62 workers were suspended due to indiscipline.
 After a rough spat with Trade Union the Manesar planed would be reopened with
more than 500 workers sacked involved in the riot.
 Maruti Suzuki to operate violence-hit facility in Manesar under police protection -
Maruti Suzuki, which is facing huge production loss at violence-hit Manesar due to
severe labour unrest, will get police protection on recommencement of production.
Maruti Suzuki to make 150 cars a day at Manesar plant
 Market leader Maruti Suzuki had seen been the biggest place for poaching executive.
Rakesh Srivastava a Zonal head at company recently joined Hyundai. Pankaj Sharma
GM at True Value division joined VW operations head.


3. Corporate Governance

 The Company strives to foster a corporate culture in which high standards of ethical
behavior, individual accountability and transparent disclosure are ingrained in all its
business dealings and shared by its Board of Directors, Management and Employees.
 The Company has established systems & procedures to ensure that its Board of
Directors is well-informed and well-equipped to fulfill its overall responsibilities and
to provide the management strategic direction it needs to create long-term shareholder
value.
 On its Board, the Company has four non-Executive- Independent Directors of high
stature from varied backgrounds, who bring with them rich experience and high
ethical standards.
 In recent years, the Company has evolved a Control Self-Assessment mechanism to
evaluate the effectiveness of internal controls over financial reporting.
 Key internal controls over financial reporting were identified and put to self-
assessment by control owners in the form of Self-Assessment Questionnaires through
a web based online tool called "Control Managers”.
 With the successful implementation of the online Controls Self-Assessment
framework, the Company has become one of the few companies in India to have a
transparent framework for evaluating the effectiveness of internal controls over
financial reporting. The initiative further reinforces the commitment of the Company
to adopt best corporate governance practices

4. Shareholder Returns- ROE and Earnings growth


Regarding Shareholding pattern shows that majority of holding is of Promoter and Promoter
group which is 54% and then is Public Shareholding Institutional which FII and Public
Shareholding Non institutional which are retailers.

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08
ROE 10.76 16.5 21.1 13.04 20.56
EPS 56.60 79.21 86.45 42.18 59.91

The EPS shows profitability of firm on per share basis. Over the years it has been seen that the
EPS is more or less above 50.

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

5. FINANCIAL ANALYSIS

Balance Sheet – From balance sheet it can be seen that the Investments are increasing during the
last few years as a result of which the depreciation has increased significantly because most of
the investment is in machinery and other fixed assets. Sundry Debtors are constant that means
payments are all received on time as per previous year records. Cash and bank balance shows
that it increased drastically since 2 years because the investment which company did in past is
yielding good returns and Net worth has also increased in the same pattern. Total current assets
have increased which shows increase in net current assets and higher working capital required.
Share Capital is has not changed but reserves and surplus has increased which shows large
undistributed profits. In Auto Company sufficient inventories are required so that the plant has
no halt. It can be seen that inventories are large enough because Maruti is manufacturing almost
more than 150 cars per day.

Income Statement – with the increase in the market share and being the market leader the sales
revenue of Maruti is increasing around 5 to 10 % every year except that last year is reduced due
to high petrol prices and Interest rates on loans. Manufacturing expenses has increased due to
due to high cost of steel and other raw material required for manufacturing. Interest is lower due
to reduced debt and other loans.

Cash Flow – Profit before Tax is lower as compared to previous year because of cash from
investment activities has lowered. Whereas cash from operating expenses has increased is an
upper trend with the latest technology and inventory management. Cash from financing
investment has lowered slows that the bonds and debentures which company issued turned to
give negative returns.


6. RATIO ANALYSIS

LIQUIDITY RATIO:
1. Current ratio – current ratio measures firms short term solvency, it indicates the availability of
current assets for every one rupee of current liability. A ratio greater than indicates the firm has
more current assets than current liabilities. It can be seen that current ratio is above 1 so a good
margin of safety is available for creditors.
2. Net working Capital –It shows firms ability to meet its current obligation. Working capital is
used to run daily operations. The working capital is reduced compared to last year because of
lower production due to strike in plant due to worker union problems as result the production is
lowered.

ACTIVITY RATIO:
1. Inventory Turnover – Indicates efficiency of firm in production and selling its product. It
shows how rapidly inventory is getting replaced. Itcan be seen that Maruti is turning is inventory
of finished goods into sales in 22.8 times a year. Days of inventory holding are 16 days. The
ratio is maintained somewhat similar as previous years.
2. Total asset turnover ratio – This ratio shows the firm’s ability in generating sales from total
pool of assets. The ratio shows that Maruti generates sales of Rs. 2.22 from every one rupees of
current and fixed asset.

LEVERAGE RATIO:
1. Debt Equity ratio – It can be seen that company has lower deb equity ratio that means
company is using more of its shareholders firm to run its business rather than its debt. This will
reduce risk. The ratio is also lower than 1 for all years. So risk is lesser.
2. Interest coverage – This show about interest paying capability is company. The amount of
loan company has taken is that company is position to pay its debt or equity. It is firm’s debt
servicing capacity. The ratio has reduced almost to half compared to last 2 years. The one
possible reason could be reduction is EBIT and higher interest payment for previous year.

PROFITABILITY RATIO:
1. Net Profit Margin –It indicates management’s efficiency in manufacturing, administrating and
selling the products. Net profit is reduced due to lower sales turnover and PAT as a result of
reduced demand for cars due to high interest rates and hike in fuel prices.
2. Return on Asset –Indicates amount of profit earned on each rupee of investment. The ratio is
higher for previous year indicates good return and it has increased compared to last few years.
Higher the better it is.
3. Return on Equity – ROE indicates the return a shareholder gets on his investment. The PAT
can be either used to give dividends or used in reserves and surplus depends on company .ROE is
important for shareholders higher the ratio better it is and vice a versa. It can be seen that ratio is
lower compared to previous year because of reduced PAT as a result of reduced sales.


COMMON STOCK RATIO:
1. Dividend per share – It shows the amount of dividend paid to the common stock holders a
large number of potential and present investors are interested in it. It can be seen that DPS has
remained constant for last years but increased for earlier years.
2. Dividend Payout ratio – It indicates how much earnings company is ready to pay to its
stockholders. The ratio has increased compared to last year.

7. FORECASTING

Company Background – Maruti Suzuki Ltd

Maruti Suzuki (MSIL), a subsidiary of Suzuki Motor Corporation, Japan (with a54.2% stake), is
the largest passenger car (PC) company in India, accounting for42.4% of the domestic PC
market. MSIL derives ~75% of its overall sales from thesmall car segment and has a dominant
position in the segment with a marketshare of ~50%, led by popular models like Alto, Wagon R
and Swift. The companyoperates from two facilities in India (Gurgaon and Manesar) and is in
the processof expanding its manufacturing capacity to 1.9mn units (currently 1.65mn)
byFY2014. Also, MSIL has steadily increased its presence internationally and exportsnow
account for the 11% of its overall sales volume.

Historical data –
 Domestic sales fell by 11.2 per cent to 1,006,316 units, Net Sales, including exports,
stood at ` 347,059 million, a decline of 3.2 per cent over the previous year 2010.
 The market share in passenger vehicles declined from the past levels of about 45 per cent
to 38.4 per cent.
 The difference between petrol and diesel prices shot up causing a further decline in the
demand for petrol vehicles and a customer waitlist for diesel vehicles. The percentage of
diesel vehicles in domestic passenger vehicle sales increased from 36 per cent in 2010-11
to 47 per cent in 2011-12.
 Four out of the top five selling models in India in the year were from the Maruti Suzuki
stable.
 During the year, the Company launched refreshed variants of the Swift and the DZire.
These brands have been on waiting lists for delivery since their launch.
 The market response to the new models has been satisfying and the combined volumes
have shot up from about 22,000 units to over 30,000 units per month.
 During the year, the dealer sales network reached 1,100 outlets in 801 cities and total
service points expanded to 2,958 workshops in 1,408 cities.
 Parts and accessories achieved a gross turnover of`23, 385 million, a growth of 16 per
cent over the previous year.
 Non-European markets now account for 66 per cent of total exports upin the year, the
Company exported 127,379 vehicles, a decline of 8 per cent over the previous year.


 Over 100,000 man-hours of safety training were provided in 2011-12.
 The aggregate decline of 11.2 per cent in the domestic market in the year 2011 was
accompanied by fluctuations in demand in each quarter, and also across models.
 The Company was impacted by lower sales owing to a tough macroeconomic scenario
and higher cost owing to adverse foreign exchangerates and commodity price increases.

Assumptions
 A lower FY2013E/2014E/FY2015E volume assumption by ~4%/~2% to 1.21mn/1.34mn
units, respectively, to factor in loss of production due to the lockout at Manesar plant.
 MSIL’s net sales grew by a strong 27.5% yoy to `10,778cr (11.3% higher than our
estimates) driven by 21.3% yoy increase innet average realization.
 MSIL’s EBITDA margin declined 230bp yoy to 7.3% primarily due to 2.4% increase in
other expenditure. Overall expenses increased by 10-15 % as rising cost of raw material
and steel.
 MSIL posted 22.8% yoy decline in net profit at 424cr mainly on account of sharp decline
in other income. Other income declined 39.0% yoy during the quarter mainly due to
deferral in booking treasury income. Further higher interest cost also restricted bottom-
line growth.
 Believing that 2QFY2013 will be a difficult quarter for the company as volumes during
the quarter will be impacted on account of the labor strike at the Manesar plant.
Assuming a daily production loss of ~1,700 units per day, MSIL has already lost 18,000-
20,000 units of production since the violence erupted at the company’s plant leading to a
shutdown of facility.
 But since Manesar plant is opening in august a sales growth of approx. 10-15% is
assumed over the years.
 The raw material costs as per previous year would increase about 10% which would
increase expenses and increase operating cost. This also includes high cost of steel rise in
inflation.
 The employee salary will increase approx. by 3-4% as man hours would increase due to
high volume demand.
 Since new plant would be complete in Gurgaon b 2014 the investments would increase
which would increase depreciation and amortization.
 Net PAT would decrease in FY13 due to workers strike but later on a constant growth of
about 10-15% expected further years
 Total liability would increase due to expansion of plant and new R&D coming up in
Haryana.
 The net working capital is expected to increase around 10% for further years.
 Total Assets would increase about 15 to 20% further with increase in cash and bank
balance.


 Company in expected to give a dividend which would yield good returns for
shareholders. Dividend of Rs.254 is assumed.

PROFIT AND LOSS STATEMENT (Rs. In Crore)

FY11 FY12 FY13 FY14 FY15

Total Income 35,849 34,706 42,887 49,079 56440.85
% Change 23.2 -3.2 23.6 14.4 15

RM cost 28,338 28,066 34,138 38,772 44587.8
Manufacturing cost 515 493 643 687 790.05
Employee expenses 704 844 1,072 1,252 1439.8
Others 3,423 3,672 4,675 5,153 5925.95
Total Expenditure 32,980 33,074 40,528 45,864 52743.6

EBIDTA 2,869 1,632 2,359 3,215 3,697
% Change -16.3 -43.1% 44.5% 36.3% 15.0%

Depreciation and Amortization 1,014 1,138 1,303 1,486 1708.9
Interest 25 55 86 86 98.9
Other Income 1,278 1,708 1,606 1734 1,734

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

Tax 820 511 644 844 971

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


BALANCE SHEET (Rs. In Crore)

Sources of Funds
Equity share capital 145 145 145 145 145
Reserves and Surplus 13,723 15,043 16,721 19,000 21850
Shareholders Fund 13,868 15,188 16,866 19,145 21995
0
Total Loans 170 1,078 1,078 1,078 1240
Differed Tax liability 164 302 302 302 347
Other long Term liabilities 96 97 97 97 97
Provisions 140 168 168 168 168

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

Gross Block 11,172 14,461 16,495 18,804 21625
Less: Depreciation 6,208 7,347 8,650 10,135 11655
Net Block 4,964 7,114 7,845 8,669 9,969

Capital work in progress 1,429 1,018 1,320 1,128 1297
Investments 5,107 6,147 6,760 7,592 8731
Long term loans and advances 1,255 1,671 1,671 1,671 1922
Other noncurrent assets 47 26 26 26 30

Total Current Assets 5,625 6,325 7,527 9,085 10448
Total Current Liabilities 3,987 5,469 6,638 7,382 8489
Net Current Assets 1,638 856 889 1,703 1,958

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


CASH FLOW (Rs. In Crore)


Profit Before Tax 3,108 2,147 2,576 3,377 3,623
Depreciation 1,014 1,138 1,303 1,486 1,709
Change in Working capital 978 709 733 128 169
Others 689 -133 0 0 0
Other Income -1,278 -1,708 -1,606 -1,734 -1,734
Direct Tax Paid -820 -511 -644 -844 -844
Cash Flow from Operations 3,691 1,642 2,362 2,413 2,923

Increase/Decrease in Fixed Assets -1,806 -2,879 -2,336 -2,118 -1,800
Increase/Decrease in Investments 2,070 -1,041 -613 -832 -1,139
Other Income 1,278 1,708 1,606 1,734 1,734
Cash Flow from Investments 1,542 -2,212 -1,343 -1,216 -1,205

Issue of Equity 0 0 0 0 0
Increase/Decrease in Loans -651 908 0 0 0
Dividend Paid 252 256 254 254 254
Others -2,423 155 0 0 0
Cash Flow from financing -2,822 497 -254 -254 -254

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

Opening Cash Balance 98 2,509 2,436 3,202 4,144
Closing Cash Balance 2,509 2,436 3,202 4,144 5,608


8. INVESTMENT RECOMMENDATIONS

Based on growth of Maruti Suzuki in past and being 1 of the major market player in mid-size
cars Maruti future prospects are really good. Even though problems have been with Manesar
plant but things are gone settle down and plant is going to open by end of august and production
will start with full safety of employees.

EPS for Maruti Suzuki has increased only for the year 2011-12 when there was dip in sales due
to higher fuel prices, interest rates and inflation. Further the demand doe diesel cars is increasing
this was seen when 2011-12 the sales of diesel cars went past petrol cars. Maruti Suzuki is
coming with a R&D center in Haryana for efficient car design on Indian roads so further expect
good diesel cars from company. This would give a boost to its sales too.

Also Maruti is coming up with New Alto in range of 2 Lakhs to give direct competition to Tata
Nano and Hyundai EON. This would help Maruti to gain lost sales due to Maruti’s problem in
Manesar plant. Even though there’s a waiting period of 8 to 10 months for cars in Maruti people
are ready to but cars and be a loyal customers. Maruti Suzuki’s Ertiga has been a wonder for
company and its other best-selling include Swift and Dzire.

It can be seen the ROE for past years have been significant to attract more equity players to
trade. Only for year 2011-12 it reduced due to economic factors but overall returns are above all
auto companies in India. Dividends are paid every year and even though there was dip in sales
company paid a dividend of Rs.7.50 which was same as earlier year. Dividend is one of the most
important return an investor gets investing in a company.

The market capital of Maruti Suzuki is Rs. 34263 cr which is high enough to attract investors.
The P/E is 22.10 which is high above industry average of 18.3.

1. Demand for cars in India is increasing due to Per capita near inflexion point for car demand.
2. Suzuki focusing to make Maruti a small car manufacturing hub
3. Structural and cyclical factors to keep market share under check
4. Manesar plant issue sorted out so waiting for cars by customers would reduce
5. Maruti Suzuki has new launch Cervo which would in near future and this car is also a mid-
size car.
6. Management indicated that order book for Swift/Dzire/Ertiga stands at 55k/62k/32k units
7. The company has hedged ~30% of USD/JPY exposure in FY13 while USD/INR exposure
largely remains un-hedged (has natural hedge to some extent)
8. Avg. discounts for the quarter stood at Rs 11,500/unit
9. Share of diesel vehicle stood at 38% during the 1st quarter for year 2012-13


CMP – 1186.80
52 weeks High – 1428.50
Low – 905.50

Target price – 1250 (12 months)

With the current Market condition being volatile an investor who is having Maruti Suzuki shares
must hold it because company is coming will resolve Manesar plant issues in a while and
production will restart as a result market demand for Maruti cars would be satisfied.
Investors who are planning to invest in company then this is best time to invest because they
have to look into company from long term perspective. In long run company is planning to have
new launch in mid-size and even company is coming up with diesel cars. Also government
would reduce interest rates which would see an overall increase in the sales growth in the
company.
Overall it can concluded that from long-term point of view Maruti Suzuki is best to invest and
current stock holders should hold their stock with lower limit of around 5% because wouldn’t go
below 2-3% in current volatile market.

VALUATION
2005 2006 2007 2008 2009 2010 2011 2012 Average
P/E ratio 14.26 21.24 15.17 13.9 18.5 16.4 15.9 22.58 17.24
No. of
Outstanding
Shares 28.89
PAT 1,932
EPS 66.87
Price of
Share 1153.16

CMP of Maruti Suzuki is Rs. 1186.80 and based on Valuation method of Price earning Multiple
Valuation the price of the stock is Rs.1153.16. It can be seen that stock is valued appropriate
because the market currently is under volatility.

Rating – Buy rating under Long term Investment


TATA MOTORS
BSE: 500570
NSE: TATAMOTORS
CMP: 245.20 (BSE)
245.30 (NSE)
SECTOR: Auto

1. Industry outlook and current company position
 Increase in Net worth Rs 13,979crs
 Cash & Cash Equivalents stood at Rs 25,730 crs (JLR GBP 2.43 bn, TML – Rs 1,841
crs)
 Net Automotive Debt Equity as on March 31, 2012 stood at 0.25:1 vs 0.56:1 as on
Dec 31, 2011
 EPS (basic) stood at Rs 42.58 for FY12 as compared to Rs 31.05 for FY11
 Cash & Cash Equivalents stood at Rs 1,841 crs
 FY 12 Capex spend Rs 3,118 crs
 Net Debt Equity as on Mar 31, 2012 stood at 0.72 vs 0.76 on Dec 31, 2011
 Inventory days as on Mar 31, 2012 at ~ 31 vs 37 as on Dec 31,2011
 Receivable days as on Mar 31, 2012 at ~ 18 vs 19 as on Dec 31,2011

The Board of Directors recommended a dividend of Rs 4 per Ordinary Share of Rs 2/- each
and Rs 4.10 per A Ordinary share of Rs 2/- each for FY 2011-12.

Jaguar Land rover-
 Highest ever volumes – 314,433 units – up 29.1% Y-o-Y
 Issued £1.5 bn of unsecured bonds with 7-10 year term during FY 12 (GBP 1 bn in
May 2011 & GBP 0.5 bn in March 2012). Completed an unsecured Revolving Credit
Facilty (RCF) totaling £710m for 3-5 years with a consortium of banks. These
facilities have significantly strengthened JLR’s debt, capital and liquidity structure.

Other subsidiaries of Tata Motors-
1. Tata motors Finance
Issued £1.5 bn of unsecured bonds with 7-10 year term during FY 12 (GBP 1 bn in May
2011 & GBP 0.5 bn in March 2012). Completed an unsecured Revolving Credit Facilty
(RCF) totaling £710m for 3-5 years with a consortium of banks. These facilities have
significantly strengthened JLR’s debt, capital and liquidity structure.

2. Tata technologies
 Revenue & PAT continued its upward trend. 2011=208.4 2012=139.0


 Offshore revenue strongly grew by 66%
 Strong Cash & cash equivalents – Rs 489.9 crs as on March 31, 2012
 Operational efficiency measures continue to improve performance.

3. Tata Daewoo
 Adverse product mix and Lower realization on exports due to appreciation were some
of the major reasons which resulted in decline in EBITDA and PAT. EBITDA
decreases from 52.3 to 39.4 and PAT decreases from 18.4 to 3.6.
 Continuing cost reduction efforts to control impact of material & other operating cost
increases.

4. TML Drivelines
 Sales volumes increased on the back of growth in domestic CV market
 While overall cost pressures increased, EBITDA margins were supported by volumes and
cost control initiatives. EBITDA increases from 179.7 to 351.6.

PRESENT SCENARIO

 Tata motors redeemed overseas convertible bonds with a face value of $472.90 million
by raising funds internally.
 Credit Suisse has downgraded Indian auto major Tata Motors after the company
announced disappointing results for Q1. Tata Motors announced 12% increase in net
profit for Q1 at Rs 2245 crore.
 Tata Motors Ltd has informed BSE that the Board of Directors on August 14, 2012
appointed Mr. Karl Slym as the Managing Director of the Company w.e.f. October 01,
2012.
 The performance of the truck market is forecast to accelerate, with an anticipated CAGR
of 30.9% for the five-year period 2010 - 2015, which is expected to drive the market to a
value of $61.7 billion by the end of 2015.

3. Corporate governance-
As part of the Tata group, the Company’s philosophy on Corporate Governance is
founded upon a rich legacy of fair, ethical and transparent governance practices, many of
which were in place even before they were mandated by adopting highest standards of
professionalism, honesty, integrity and ethical behaviour. As a global organisation the
Corporate Governance practices followed by the Company and its subsidiaries are
compatible with international standards and best practices. Through the Governance
mechanism in the Company, the Board alongwith its Committees undertake its fiduciary
responsibilities to all its stakeholders by ensuring transparency, fairplay and
independence in its decision making. It is divided mainly into three parts namely; Audit
committee, remuneration committee, grievance committee there are also having sub
committees.


4. Shareholder Returns- ROE and Earnings growth-

Promoters have 41.56 % of stake in the shareholdings. Here Institution mainly comprises of FII
and insurance companies and non institutional consists mainly of individuals rest other have
small proportion in shareholdings.

ROE 41.33 48.74 31.30 -49.05 25.01
EPS 3.91 28.55 39.26 19.48 52.63

FINANCIAL ANALYSIS

Ratio Analysis:

Investment Valuation ratios- From 2008 to 2011 there is increase in all investment ratios every
year. But as we look at 2012 there is decline in all ratios which demotivates the investors.
Dividend per share is declined from 20 to 4. It clearly shows the bad market condition flourishes
in the market. Operating, net operating and free reserve face sharp decline.

Profitability Ratios- There is ups and down from 2008 to 2010. From 2008 to 2009 there is
decline in the ratios but from 2009 to 2010 again we can see increase in all ratios. As we can see
today gross profit margin and net profit margin declines from 2010 to 2012. Here we can say that
profit is declined since 2010, which is not a good indicator for Tata Motors. Return on asset is
falling very disastrously means there is no proper utilization of asset.

Liquidity and Solvency ratios-
 Current Ratio- Current ratio is low since 2008 as we can estimate it from ratios. This
shows that they are unable to pay back its short-term liabilities (debt and payables) with
its short-term assets (cash, inventory, receivables).
 Quick Ratio- Here quick ratio is less than 1 from starting which tells us that they are
unable to pay their current liabilities. It is not a good sign for Tata motors. It is at lowest
since 2008 i.e. at 0.40
 Debt equity ratio- In 2011 and 2012 it is 0.80 and 0.57 respectively. Which is less and it
has to be better.


Management Efficiency ratios- Inventory turnover has seen upward and downward movements
from 2008 to 2011. In comparison to 2011 it has fallen in 2012 from 13.86 to 13.57. Same
happened in the case of debtors turnover is also face up and down movements throughout but
increases from last year to 20.42 from 19.20. Asset turnover ratio increases with slow rate since
2009. This all ratios show that management is not consistent with their performance. They need
to focus on that.

Cash flow indicator ratio- When we look for dividend payout ratio it is increasing year by year
on the other hand cash earnings retention ratio is declined, it clearly shows that retend earning is
used to pay dividend because profit is on declining mode. In these case they don’t want to
demotivate investors and are paying their dividend in the condition of declined profit.

Income Statement:
2011 2012 2013E 2014E 2015E
Net revenue 1,231,333 1,680,131 1,894,543 2,045,280 2,206,857
Raw Material 790,084 1,103,170 1,242,305 1,338,187 1,441,227
Gross Profit 441,249 576,961 652,238 707,094 762,954
Employee Cost 93,427 122,045 131,427 141,137 152,287
Other Expenses 172,273 212,981 238,054 256,918 277,215
EBITDA 175,550 241,935 282,757 309,039 333,453
Depr. &
amortization 56,180 70,807 74,530 80,450 86,806
Net Interest 20,454 24,066 26,556 27,066 29,204
Other Income 895 2,100 2,300 2,500 2,698
Profit before tax 99,810 149,162 183,971 204,023 220,141
Total Tax 12,164 28,700 36,095 40,700 43,915
Profit after tax 87,646 120,462 147,876 163,323 176,226
Ex-Od items 4,074 -9,320 780 1,014 1,094
Adj. PAT 88,175 119,862 147,096 162,309 175,131
Avg. Shares 3,188.60 3,335.10 3,335.10 3,335.10 3,599
EPS (Rs.) 27.7 35.9 44.1 48.7 53


Balance sheet:
2011 2012 2013E 2014E 2015E
Shareholder's Funds 191,715 284,414 357,839 373,378 389,583
Total Debt 327,914 455,392 464,892 475,892 490168.8
Other Liabilities 23,428 24,628 24,828 25,028 25778.84
Total Liabilities 543,057 764,433 847,559 874,298 905530.6
Net Fixed Assets 434,931 604,169 791,997 871,935 898093.1
Goodwill 42,171 42,171 40,171 45,171 50,592
Investments 25,443 45,505 48,505 51,505 54,698
Net Current Assets 40,512 72,588 -33,115 -94,314 -150,051
Cash & Equivalents 109,479 161,941 174,512 216,019 267,863
Other Current Assets 400,870 454,886 433,306 387,916 341,466
Current Liabilities 469,838 544,239 640,933 698,249 761,091
Total Assets 543,057 764,433 847,559 874,298 701,571

Cash Flow:
2,011 2,012 2013E 2014E 2015E
C/F from Operations 104,095.00 133,242.00 200,162.00 184,125.00 169,377
C/F from Investing -70,657 -182,858 -168,868 -118,938 -83,257
C/F from Financing -11,393 102,077 -18,723 -18,067 -17,435
Inc. / Dec. in Cash 22,046 52,462 12,571 47,120 68,685
Opening Cash 87,433 109,479 161,941 174,511 199,178
Closing Cash 109,479 161,941 174,511 216,019 267,863
FCFF 56,736 61,316 174,032 229,528 302,977
FCFE 33,566 188,793 183,532 240,528 315,091


VALUATION
2012 2011 2010 2009 2008 Average
P/E ratio 82.5 48.9 20.5 9.6 12.3 34.76
No. of Outstanding Shares 3189.69
PAT 12422.30
EPS 3.89

Price of Share 135.37

As per calculation we can say that stock is over valuated. But stock can see upwards and
downward movements. So at present we can suggest to sell the shares. PAT is 12422.3.

Analysis of financial statement and future predictions:

Slower industrial growth, weak economic outlook, excise duty increases, and present concern
deregulation of diesel prices impact overall demand. Freight rates dipped marginally; however,
finance availability is adequate. Interest rates are expected to moderate.
 Demand pressure for some of the MHCV applications. A good monsoon and
increase in infrastructure spending could propel demand for MHCV trucks.
 LCV / SCV continue to grow. Commenced production of Ace Zip in Dharwad, Magic
Iris to follow. Services and agriculture sector along with rural connectivity, proliferation
of hub & spoke model and demand of passenger applications is expected to drive growth
in LCV/SCV segment.
 Company well placed with a wide and compelling product portfolio and customer support
against the increasing competitive intensity in CVs.

Competitive intensity and increasing costs poses significant challenge to the passenger vehicle
industry, with higher inflation, interest costs, fuel price increases dampening the demand.
Customer preference expected to continue to tend towards diesel vehicles.
 Significant market initiatives which have resulted in improving retail sales for passenger
vehicles and market share in Q3 FY 12 and Q4 FY 12 in to continue.
 Future products in pipeline for FY 12 – Variants from Prima range, World LCV range,
ACE variants. Safari Storme unveiled in January 2012.
 Further expand sales and service network in India and enhanced customer care.
 Extend export potential.
 For overall industry, RM & component prices are expected to be under control. For the
Company, material cost reductions and expense reduction focus will continue.
 Jaguar Land Rover-With Strong operating cash flows, expectation are to self support the
growth strategy Capex and Investment plans expected to be about GBP 2 bn in FY 13.


ASHOK LEYLAND

BSE Code: 500477
NSE Code: ASHOKLEY
CMP: 21.95(BSE)
22.00(NSE)
Sector: Transport Equipments
1. Industry Outlook and Current company position
2011-12 CV Industry performance:-
 Low industrial production and a slowdown in mining in
 certain states impacted freight availability
 Higher interest rates impacted new truck sales
 MHCV grew by 9%
 LCVs continued to grow strongly by 26-29%

 As of 2011-12, Tata Motors remained the largest commercial vehicle exporter, with a
58.4 per cent share while, Mahindra and Mahindra (M&M), Ashok Leyland and Eicher
Motors had a share of 23.1 per cent, 14 per cent and 3.3 per cent.
However, In terms of growth in exports, Ashok Leyland registered the highest growth of
a 45 per cent CAGR over 2006-07 to 2011-12, followed by M&M, which reported a 31
per cent CAGR in the same period.

 As macroeconomic indicators remain weak, commercial vehicles (CV) sales volumes are
also expected to continue to moderate in 2012-13. CRISIL expect CV sales growth to
slow further to 2-5 per cent (y-o-y) in 2012-13, from 6-8 per cent estimated in July 2012
due to a downward revision to our GDP growth outlook.

 CRISIL Research expects demand for buses to moderate, growing by 8-10 per cent from
2011-12 to 2016-17, after two years of strong growth. One-time schemes like JNNURM
supported bus demand from STUs in the last few years combined with rise in demand
from corporates and private operators. Going forward, demand will be driven by
development of road infrastructure, institutional demand from schools and corporates
(IT/ITes and BFSI verticals) and bus orders from state transport undertakings (STUs).

 Domestic tractor sales estimated to grow by 3-5 per cent in 2012-13. Fall in mandi prices
and scanty rainfall in southern region will have negative impact on farm income.


However, over a long-term, tractor sales are expected to grow by a CAGR of 8-10 per
cent, with reducing replacement cycles, stable farm income and increased focus of
government on agricultural and rural development. Operating margins for the next 2
years are expected to improve, mainly due to higher utilisation leading to lower fixed cost
for 2011-12 and fall in raw material prices in 2012-13.

 Several exciting products lined up for launch in MDVs like Jan Bus-World’s first front
engine, single step entry bus with full flat floor and India’s first 5 axle rigid truck

 During 2011-12 to 2015-16, CRISIL Research expects an average of 14.7 km of national
highways to be constructed /upgraded per day, at an estimated cost of Rs 2,535 billion.
The construction of national highways is expected to increase the length to 5,773 kms in
2015-16 from 3,737 in 2011-12.
So, with stricter implementation of the Supreme Court ban on overloading and increasing
consolidation in the transportation industry, HCVs will continue to eat into the share of
MCVs on long-haul routes. The development of highways is expected to replace MCVs
by HCVs, use of which is currently restricted by inadequate road infrastructure. This will
indeed contribute to increase in sale of Ashok Leyland trucks in this category.

 As the hub and spoke model proliferates, CRISIL Research expects SCV sales (forming
86 per cent of LCV sales) to post a CAGR of 17-20 per cent during 2010-11 to 2015-16.
HCV sales (including tippers) will grow by 12-14 per cent during the same period. This
would be faster than the 9-11 CAGR growth in overall MHCV sales.

2. SHAREHOLDING PATTERN- ROE AND EARNINGS GROWTH


No. Name of the Shareholder Total Shares Shares as
held % of Total
No. of
Shares
A)1 Hinduja Automotive Ltd [Promoter Group] 1,027,237,424 38.61
B)1 Life Insurance Corporation of India 253,991,776 9.55
2 The Master Trust Bank of Japan Ltd as Trustee of 56,766,917 2.13
PCA Asia Oceania High Dividend Equity Mother
Fund
3 Matthews India Fund 40,022,554 1.5
4 Bajaj Allianz Life Insurance Company Ltd 51,236,220 1.93
5 General Insurance Corporation of India 30,150,000 1.13
6 HDFC Standard Life Insurance Company Limited 37,724,344 1.42
7 Eastspring Investments India Equity Open Limited 45,479,459 1.71
Total promoter holding 1,027,237,424 38.61
Total Public Share Holdings 1,276,081,570 47.96
357,357,640 13.43

ROE 19.57 23.80 18.27 9.05 22.30
EPS 2.13 4.75 3.18 1.43 3.53

The EPS shows profitability of firm on per share basis. Over the years it has been seen that the
EPS is more or less above 2.5.

ROE shows how well the firm has used the resources of owners that is net worth. This company
shows a attractive ROE>15% consistently, which makes it good option for investment.

3. Corporate Governance
The Board of Directors and the Management of Ashok Leyland are committed to the
enhancement of shareholder value,
 Through sound business decisions, prudent financial management and high standards of
ethics throughout the organization
 By ensuring transparency and professionalism in all decisions and transactions.
 Achieving excellence in Corporate Governance by conforming to, and exceeding
wherever possible, the prevalent mandatory guidelines on Corporate Governance and by
regularly reviewing the Board processes and the Management systems for further
improvement
The company has adopted a Code of Conduct for the members of the Board and senior
management, who have all affirmed in writing their adherence to this Code.


 Ombudsman- Another significant step has been the appointment of an Ombudsman to
deal with any references, complaints or grievances about the Company, its employees or
its dealings.
 If the suppliers, employees or customers have any suggestions on governance issues or
grievances or complaints on Ashok Leyland's practices - inclusive of its executives in
various functions - which they feel ought to be raised with the Ombudsman and not with
the usual channels of business, they may do so.
It is advised that the regular business dealings should be through the usual business
functional channels. The Ombudsman will not deal with them under normal
circumstances.

4. Ratio Analysis

LIQUIDITY RATIO:
1. Current ratio – current ratio measures firms short term solvency, it indicates the availability of
current assets for every one rupee of current liability. A ratio of 0.88 last FY and continuously
decreasing current ratio indicates that the firm has less current assets than current liabilities,
which is not a encouraging factor for creditors.
2. Net working Capital –It shows firms ability to meet its current obligation. Working capital is
used to run daily operations. The working capital is increased substantially compared to last year
due to lower sales. But this is notable that company shows huge volatility in net working capital
position, which shows company`s uneven sales in the market.

ACTIVITY RATIO:
1. Inventory Turnover – Indicates efficiency of firm in production and selling its product. It
shows how rapidly inventory is getting replaced. It can be seen that Ashok Leyland is turning is
inventory of finished goods into sales in 6.63 times a year. The ratio is steadily improving as
compared to previous years.
2. Total asset turnover ratio – This ratio shows the firm’s ability in generating sales from total
pool of assets. The ratio shows that Ashok Leyland generates sales of Rs. 2.75 from every one
rupees of current and fixed asset, which is continuously improving compared to previous years.

Leverage Ratio:
1. Debt Equity ratio – It can be seen that company has lower deb equity ratio that means
company is using more of its shareholders firm to run its business rather than its debt. The
company has ratio of 0.83 and it is also lower than 1 for all years. So risk is lesser.
2. Interest coverage – This show about interest paying capability is company. The amount of
loan company has taken is that company is position to pay its debt or equity. It is firm’s debt
servicing capacity. The ratio has reduced compared last 2 years but it is well above 1.5.So the
company`s interest coverage is better than moderate.


PROFITABILITY RATIO:
1. Net Profit Margin –It indicates management’s efficiency in manufacturing, administrating and
selling the products. Net profit is reduced due to lower sales turnover and PAT as a result of
reduced demand due to high interest rates and hike in fuel prices.
2. Return on Asset –Indicates amount of profit earned on each rupee of investment. The ratio is
lesser compared to previous years which indicate less return.
3. Return on Equity – ROE indicates the return a shareholder gets on his investment. The PAT
can be either used to give dividends or used in reserves and surplus depends on company .ROE is
lower compared to previous year because of reduced PAT as a result of reduced sales.

COMMON STOCK RATIO:
1. Earnings per share – It is the amount of income earned during a period per share of common
stock .It can be seen that EPS has remained constant to more or less about 2.5 for last years.
2. Dividend Payout ratio – It indicates how much earnings company is ready to pay to its
stockholders. The ratio has decreased in last 3 years, which may discourage investors.

FORECAST

Assumptions:

Y-o-Y growth in M&HCVs
YEAR Annual Growth
2010-11 36
2011-12 9
2012-13 5
2013-14(projected) 6

Y-o-Y growth in Buses
YEAR Annual Growth
2010-11 11
2011-12 3
2012-13 4


 While Total Industry Volume dipped 12% over last year market share is up 4% [65069 in Q1
FY 13 compared to Q1 FY 12- Actual 74698
 Robust performance in volume terms
–43% growth over the Q1 of the previous fiscal at 27,487 vehicles
 Reasons for the strong showing
 –Continued ‘pull’ for ‘Dost’ MCV

 –Strong marketing thrust across the country

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

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

 –Robustness in International Operations

 -Proposed FDI in retail

INCOME STATEMENT
Income Statement Y/e 2011 2012E 2013E 2014E 2015E
Net Revenue 1,11,177 1,30,996 1,60,675 1,73,929 1,93,061
Raw Material Expenses 81,210 96,488 1,20,254 1,30,045 1,44,350
gross profit 29,967 34,508 40,421 43,885 48,712
employee cost 9,597 10,461 11,768 12,710 14,108
other expenses 8,192 10,459 12,796 13,683 15,051
EBITDA 12,178 13,589 15,856 17,491 19,415
Depr. & Amortization 2,674 3,503 3,758 3,937 4,213
Net Interest 1,636 2,307 2,570 2,421 2,469
Other Income 151 90 250 260 270
PBT 8,019 7,869 9,778 11,394 12,419
Total Tax 1,705 1,495 1,858 2,165 2,360
PAT 6,314 6,374 7,921 9,229 10,060
Ex-Od items / Min. Int. -150 0
Adjusted PAT 6,314 6,524 7,921 9,229 10,060
Avg. Shares O/S (m) 2,660.70 2,660.70 2,660.70 2,660.70 2,661
EPS (Rs.) 2.4 2.5 3 3.5 4

The net sales of Ashok Leyland is expected to increase in the coming years as the sales in HMV
and cranes category is expected to grow at the rate more than 10% for years 2013-15.This
increase will be mainly due to increasing infrastructure projects and increasing number of
organized retail which will indeed result in requirement of more number of heavy and medium
commercial motor vehicles


BALANCE SHEET
Balance Sheet
Y/e March 2011 2012E 2013E 2014E 2015E
Shareholder's Funds 39,629 42,891 46,920 52,258 59,052
Total Debt 25,683 35,450 33,950 33,450 34,119
Other Liabilities 5,338 6,291 6,325 6,325 6,325
Total Liabilities 70,650 84,632 87,195 92,033 98,475
Net Fixed Assets 49,918 52,415 52,657 51,720 52,754
Investments 12,300 16,300 18,300 19,800 20,988
Net Current Assets 8,390 15,853 16,159 20,433 23,498
Cash & Equivalents 1,795 6,043 5,636 7,322 8,420
Other Current Assets 41,877 49,875 59,363 64,870 69,411
Current Liabilities 35,283 40,065 48,840 51,759 53,933
Other Assets 43 64 80 80 80
Total Assets 70,650 84,632 87,195 92,033 98,475

CASH FLOW STATEMENT
Cash Flow Statement
Y/e March 2011 2012E 2013E 2014E 2015E
C/F from Operations 9,695 6,356 11,966 10,577 12,655
C/F from Investing -13,620 -10,093 -6,982 -4,500 -2,500
C/F from Financing 531 7,984 -5,391 -4,391 -3,391
Inc. / Dec. in Cash -3,394 4,248 -407 1,686 2,486
Opening Cash 5,189 1,795 6,043 5,636 7,322
Closing Cash 1,795 6,043 5,636 7,322 5834


VALUATION:-

2005 2006 2007 2008 2009 2010 2011 2012 Average

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

No. of
Outstanding
Shares 2660.68

PAT 7,921

EPS 2.98

Last
Price of Traded
Share 41.27 Price 21.95

As we can see that the last traded price of Ashok Leyland Ltd was Rs. 21.95 as compared to
current valuation of Rs. 41.27 .So, the share is undervalued we could suggest to invest in this
stock to get good return in FY2012-13.

Rating – Buy rating under Long term Investment


EICHER MOTORS

BSE: 505200
NSE: EICHERMOTEQ
CMP: 2214 (BSE)
2222.45 (NSE)

1. Current Company Position

 Eicher Motors Limited, incorporated in 1982, is the flagship company of the Eicher Group in
India and a leading player in the Indian automobile industry.
 Its 50-50 joint venture with the Volvo group, VE Commercial Vehicles Limited, designs,
manufactures and markets reliable, fuel-efficient commercial vehicles of high quality and
modern technology, engineering components and provides engineering design solutions.
 Eicher Motors manufactures and markets the iconic Royal Enfield motorcycles. Eicher
Motors recorded revenue of over USD 1 billion in 2010.

2. Corporate Governance:

 The code of conduct and the governance are based on the corporate principles and strong
emphasis laid on transparency, accountability, integrity and compliance.
 The governance processes of the company include creation of empowered sub-committees of
the Board to oversee the functions of executive management. These sub-committees of the
Board mainly consist of non-executive directors and independent directors, which meet and
deliberate regularly to discharge their obligations.
 There are various committees formed in order to keep track of various operations of the
company and the Board. Some of the committees are: Audit Committee, Shareholders’ and
investors’ grievance committee, compensation committee and Shares committee.
 Various disclosures that the Company abides by are: Related Party transactions, compliances
by the company, code of conduct for Directors and Senior management, ceo/cfo certification,
accounting treatment and risk management.
 The company has established a comprehensive risk management process that includes risk
identification, risk assessment, risk mitigation and periodical monitoring. As part of the risk
management mechanism, identified risks are regularly reviewed along with action plans by
the management through monthly business review meetings. these are reported to the Board
of directors on the yearly basis for the inputs and further suggestions for effective
management of risks.


3. Shareholder’s Return – ROE & Earnings Growth

 The Shareholding pattern shows that maximum of the shares are held by the Promoters to the
extent of 55.21 %, followed by Institutional Investors having 24.60%, Individuals having
10.97% and then by Body Corporate holding 9.22%.

DEC’11 DEC’10 DEC’09 DEC’08 MAR’07

EPS 46.14 28.01 29.64 13.88 22.4

ROE 23.06 16.51 9.66 8.10 13.75

4. Liquidity & Solvency Ratios

1. Current Ratio: It is a measure of financial strength of a company. It indicates how much
money in assets is likely to be converted to cash within one year in order to pay debts that come
due during the same year. A current ratio anywhere above 1 is acceptable. Here, the current ratio
has decreased to around 0.5 from last two years. For a company having current ratio below 1, it
should have inventories that can immediately be converted into cash. Here the inventory turnover
ratio has been around 17 i.e the holding period is around 21 days, which is good owing to its
large inventory.

2. Working Capital: The company’s working capital has increasingly decreased over a period of
time and has eventually turned into negative. This has occurred due to comparative increase in
current liabilities than current assets. Such negative working capital puts financial pressure on
the company forcing in increased borrowings and eventually late payments, which is evident
from balance sheet.


5. Management Efficiency Ratio

1. Inventory Turnover Ratio: It is a measure of how rapidly the inventory is getting replaced.
Company’s inventory turnover ratio is maintained around 17-18 times a year. Inventory holding
period is around 21 days which is good for auto sector.

2. Total assets turnover Ratio: The total asset turnover ratio measures the ability of a company to
use its assets to efficiently generate sales. This ratio considers all assets, current and fixed. The
company’s total assets turnover ratio has increased above 1. The ratio shows that the company
generates sales of Rs. 1.24 from every one rupees of current and fixed asset.

6. Profitability Ratios

1. Net Profit Margin: It indicates management’s efficiency in manufacturing, administrating and
selling the products. Net profit has increased over the years owing to increased sales year-on-
year.

2. Return on Asset: Indicates amount of profit earned on each rupee of investment. The ratio is
higher for previous year indicates good return and it has increased compared to last few years.
Higher the better it is.

3. Return on Equity: ROE indicates the return a shareholder gets on his investment. The PAT can
be either used to give dividends or used in reserves and surplus depends on company .ROE is
much higher (from 16.51 to 23.06) as compared to previous year because of increased PAT as a
result of increased sales.


7. Forecasting

1. Profit and Loss Statement

Y/E Dec (Rs cr) CY2010 CY2011 CY2012E CY2013E CY2014E CY2015E
Total Income 4,421 5,726 6,805 9,251 11,851 14,084
Total Expenditure 4,040 5,137 6,106 8,306 8,614 10,244
Materials Costs 3,315 4,196 4,998 5,834 7,048 8,395
Employee Costs 263 346 432 500 620 774
Other Exp 462 595 676 790 946 1,075
EBITDA 381 589 699 945 3,237 3,840
Depn & Amort 57 64 80 109 136 170
EBIT 324 525 619 835 3,101 3,670
Other Income 103 142 166 176 212 247
Interest Exp 10 8 7 9 9 8
PBT (reported) 418 660 778 1,003 3,321 3,925
Exceptional item 0 0 0 0 0 0
Tax 111 163 195 260 347 415
PAT (before minority) 307 497 583 743 2,975 3,511
Minority Interest 118 189 196 229 291 301
PAT 189 309 314 513 2,684 3,209
Diluted EPS (Rs) 70.3 114 142.7 189.6 150 188


2. Balance Sheet

Y/E Dec (Rs cr) CY2010 CY2011 CY2012E CY2013E CY2014E CY2015E
SOURCES OF FUNDS
Equity Share Capital 27 27 27 27 27 27
Reserves& Surplus 1,205 1,466 1,802 2,265 2,853 3,566
Shareholders Funds 1,232 1,493 1,829 2,292 2,880 3,593
Deferred Tax Liabilities 25 64 64 64 64 64
Total Loans 96 50 50 50 50 50
Minority Interest 677 838 1,034 1,263 1,540 1,863
Total Liabilities 2,030 2,446 2,978 3,670 4,534 5,570
APPLICATION OF FUNDS
Gross Block 811 989 1,589 1,989 2,486 3,082
Less: Acc. Depreciation 427 484 564 673 800 944
Net Block 384 504 1,025 1,315 1,686 4,026
Capital Work-in-Progress 67 395 200 200 200 200
Investments 459 513 513 513 513 513
Deferred Tax Assets 0 0 0 0 0 0
Current Assets 2,050 2,350 2,731 3,516 4,271 5,184
Cash 1,246 1,197 1,430 1,996 2,495 3,118
Debtors 261 343 410 456 506 556
Inventory 327 428 468 592 745 931
Loans & Advances 181 339 374 416 461 507
Other CA 36 42 48 56 64 72
Current Liab & Prov 933 1,334 1,508 1,892 2,366 2,942
Current Liabilities 794 1,185 1,338 1,707 2,167 2,730
Provisions 139 150 170 185 199 212
Net Current Assets 1,117 1,016 1,222 1,624 1,905 2,242
Pre-operative Exp 3 18 18 18 18 18
Total Assets 2,030 2,446 2,978 3,670 4,271 2,260


3. Cash Flow Statement

Y/E Dec (Rs cr) CY2010 CY2011 CY2012E CY2013E
Profit before tax 418 660 778 1,003
Depreciation 57 64 80 109
Change in Working Cap. 37 -23 26 164
Interest / Dividend (Net) -76 -103 -159 -167
Direct taxes paid -83 -167 -195 -260
Others -17 -28 0 0
Cash Flow from Ope. 336 403 530 849
(Inc.)/ Dec. in Fixed
Assets -131 -417 -405 -400
Interest/Divd Recd 104 132 166 176
(Inc.)/ Dec. in Invest. -164 -54 0 0
Cash Flow from
Investing -192 -340 -239 -224
Issue of
Equity/(Buyback) 9 2 0 0
Borrowings -43 -54 -7 -9
Dividend Paid (Incl. Tax) -35 -61 -51 -51
Cash Flow from Fin. -69 -112 -58 -60
Inc./(Dec.) in Cash 75 -48 233 566
Opening Cash balances 1,171 1,246 1,197 1,430
Closing Cash balances 1,246 1,197 1,430 1,996

 Standalone sales increased 52.7% yoy to Rs255cr in 1QCY2012, reflecting the strong
demand for Royal Enfield. The company witnessed a strong growth of 48.1% yoy in sales of
two-wheelers despite significant moderation in industry growth rate.
 Further, average realization rates increased ~3% yoy reflecting price hikes and better product
mix. Royal Enfield sales increased ~15% on a sequential basis. Royal Enfield has crossed
10,000 units landmark in sales in July 2012 for the first time. The demand for Royal Enfield
remains strong even from smaller cities and towns.
 The company has increased its capacity to ~12,000 units per month. If demand continues to
remain buoyant the company can further increase the capacity at its new plant in CY2013E.
 Robust top-line growth: Eicher Motors’ (EML) consolidated top-line saw a robust growth of
23.6% yoy to Rs1,585cr in 2QCY2012, which was in-line with our estimate. The top-line
growth was driven by 48.1% yoy increase in sales of Royal Enfield to 27,519 units and 8.9%
yoy increase in volumes of Commercial vehicles to 12,016 units while average realization
rates was stable in both the segments.
 EBITDA margin declined: EML’s EBITDA saw a moderate growth of 11.1% yoy to Rs140cr
due to significant increase in costs in VE Commercial Vehicles Ltd (VECV). Company’s


standalone margin (Royal Enfield) increased from 13.9% in 1QCY2012 to 15.3% in
2QCY2012 (much better than our expectation of ~14%) to reach new high.
 Lower other income hurts PAT growth: Significant decline in other income and marginal
increase in effective tax rate led to a 0.5% yoy decline in PAT to ~Rs76cr. Notably, Royal
Enfield’s (company’s standalone) PAT increased 11.7% yoy to Rs32cr driven by stronger
operating performance.

8. Valuation

2005 2006 2007 2008 2009 2010 2011 2012 Average
P/E ratio 13.5 18.3 16.03 14.33 16.69 17.4 16.46 15.86 16.07

No. of
Outstanding
Shares 199.7
PAT 26,406
EPS 132.23

Price of Share 2125.07

EML’s sales were in-line with expectations. However, decline in VECV margins was
discouraging. Nonetheless, it is expected that Royal Enfield will continue to be a strong growth
driver in near term with strong growth in sales and higher margins. It is expected that VECV
sales will improve going forward. Further, company has recently received order of 1,000 buses
from Gujarat State Government which would enable the bus segment to maintain growth
momentum. Joint Venture with Polaris Industries will provide new growth dimension to the
company in the long term. It is expected that the company will report a top-line and PAT CAGR
of 27% and 29% respectively for CY2011-CY2013E and so on. Thus, we maintain positive
outlook on the company. Hence, we maintain our target price of Rs2,125.07 and our Buy
recommendation on the stock.

9. Risks to the view
 Greater-than-expected slowdown in economy could lead to a lower demand for CV vehicles
impacting the company’s top-line.
 Inability to garner higher market share in M&HCV segment could impact the company’s
fortunes as it had earlier failed to achieve any success in M&HCV segment before joining
hands with Volvo.
 Sustained high interest rates can reduce the demand in short-term.


HERO MOTO CORP
BSE: 500182
NSE: HEROMOTOCO
Bloomberg: HMCL: IN
CMP: 1940.20 (BSE)
1941.50 (NSE)

1. Industry Outlook for Two- Wheelers:

 The increased consumer appetite for two-wheelers is especially promising.
According to the data received from Census 2011, the share of Indian households
owning two-wheelers spurted to 21%, having risen from 12% indicated in Census
2001.
 During the year, 15.4 million two-wheelers were sold; recording a growth of 15%
compared with 13.4 million units sold a year earlier.
 Continuing the trend witnessed in the last few years, scooters emerged as the
fastest growing years, scooters emerged as the fastest growing segment grew 24%
with annual sales of 2.7 million, inching close to the 3-million mark, compared
with 2.2 million scooters sold in the previous year. Motorcycle sales grew 14% to
11.9 million units. Domestic motorcycle sales crossed the 10 million mark during
the year, compared with 9 million units sold earlier. Moped sales jumped 12%
from over 0.7 million units to over 0.78 million units.

2. Company Overview:
Hero MotoCorp Ltd. (Formerly Hero Honda Motors Ltd.) is the world's
largest manufacturer of two - wheelers, based in India. In 2001, the company achieved
the coveted position of being the largest two-wheeler manufacturing company in India
and also, the 'World No.1' two-wheeler company in terms of unit volume sales in a
calendar year. Hero MotoCorp Ltd. continues to maintain this position till date.

Hero MotoCorp two wheelers are manufactured across three globally benchmarked
manufacturing facilities. Two of these are based at Gurgaon and Dharuhera which are
located in the state of Haryana in northern India. The third and the latest manufacturing
plant is based at Haridwar, in the hill state of Uttrakhand.


3. Management Capabilities:

 HMCL recently announced setting up a Global Parts Centre (GPC) at Neemrana
in Rajasthan.

 With this expansion, total installed capacity of the company would be touching
more than nine million units in two years’ time – which is in line with the stated
objective of reaching 10 million units in the next five years.

 HMCL reported sales of 4, 84,217 units of two-wheelers in the month of July
2012.

 The company also informed its supply chain partners that it will set up the fifth
plant at Halol in the western India state of Gujarat, in addition to the fourth plant
at Neemrana in Rajasthan.

4. Corporate Governance:

 The Company’s philosophy of Corporate Governance stems from a belief that the
Company’s business strategy and plans should be consistent with the welfare of
all its stakeholders, including shareholders.
 The Company has always strived to promote Good Governance practices, which
ensure that:
- A competent management team is at the helm of affairs;
- The Board is strong with an optimum combination of Executive and Non-
Executive (including Independent) Directors, who represent the interest of
all stakeholders;
- The Board is effective in monitoring and controlling the Company’s
affairs;
- The Board is concerned about the Company’s shareholders; and
- The Management and Employees have a stable environment.
 Essence of Corporate Governance lies in the phrase “Your Company”
(Shareholders).

5. Shareholder Returns:

Mar ’12 Mar ’11 Mar ’10 Mar ’09 Mar ’08
ROE 55.43 65.21 64.41 33.72 32.41
EPS 119.09 96.55 111.77 64.19 48.47


6. Financial Analysis:

Income Statement (in INR Million)
Mar’ 11A Mar’ 12A Mar’ 13E Mar’ 14E Mar’ 15E
Volumes (’000) 5402 6235 6796 7646 8601
Net Sales 192,450 233,681 261,940 300,369 345,424
Change (%) 22.1 21.4 12.1 14.7 15.0
Total 167,980 199,700 224,313 256,280 293,610
Expenditure
EBITDA 24,603 34,078 37,715 44,179 51,814
Depreciation 4,024 10,973 11,693 12,105 12,528
EBIT 20,579 23,105 26,022 32,074 36,286
Interest Cost -19 213 120 100 120
Other Income 4,249 5,756 5,722 6,618 7,676
PBT 24,048 28,647 31,624 38,592 43,842
Tax 4,769 4,866 5,218 9,387 7453
Effective Rate 19.8 17.0 16.5 24.3 17.0
(%)
PAT 19,279 23,781 26,406 29,205 36,389
% of Net Sales 10.0 10.2 10.1 9.7 10.5


Balance Sheet (INR Million)
Mar’ 11A Mar’ 12A Mar’ 13E Mar’ 14E Mar’15
Share Capital 399 399 399 399 399
Reserves 29,161 42,499 56,055 71,240 90,474
Net Worth 29,561 42,898 56,454 71640 90,873
Deferred Tax 2,527 2,083 2,083 2,083 2,083
Loans 14,912 10,114 3,028 327 327
Capital 46,999 55,095 61,565 74,040 88,848
Employed
Gross Fixed 55,385 50,679 66,679 76,679 88180
Assets
Less: 14,582 17,175 20,168 23,573 27580
Depreciation
Net Fixed Assets 40,803 33,504 46,511 53,106 60,540
Capital WIP 1,251 5,000 1,000 1,000 1,000
Investments 51,288 39,643 39,643 39,643 39,643
Current Assets, 15,046 20,743 31,420 44,965 64,299
L & Advances
Inventory 5,249 6,756 7,573 8,684 9,986
Sundry Debtors 1,306 2,723 3,052 3,500 4,025
Cash & Bank 715 768 9,030 19,290 19,290
Loans & 7,287 10,092 11,313 12,973 14,919
Advances
Others 489 404 452 519 519
Current 61,448 43,854 57,069 64,724 73,138
Liabilities &
Provisions
Sundry Debtors 14,268 22,932 25,705 29,476 33,897
Other Liabilities 33,369 9,962 17,941 20,573 23,659
Provisions 10,811 10,960 13,423 14,675 15,995
Net Current -46,402 -23,111 -25,648 -19,759 -8,839
Assets
Miscellaneous 60 60 60 60 60
Expenditure
Application of 46,999 55,095 61,565 74,050 88860
Funds


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