>EICHER MOTORS: Significant outsourcing opportunities from Volvo

With our expectation of market share gains in heavy tonnage trucks, margin improvement and significant outsourcing opportunities from Volvo, we believe Eicher is poised to emerge as a powerhouse in the Indian commercial vehicle industry over the long term.


With 38% market share in the sub-12T truck segment, Eicher is a leader in that segment. However, it has only 3% market share in heavy tonnage trucks (above 12T). Similarly, in motorcycles, it commands a dominant market share in the 250cc and above bikes but has a negligible market share in the overall motorcycle market. Our BUY stance on Eicher is underpinned by four drivers:


■ Eicher looks well suited to capture market share in heavy tonnage trucks on the back of positive user feedback on quality and fuel efficiency, improved availability of spare parts and after-sales network, keen involvement of Volvo and the duopoly industry structure (which makes it vulnerable to competition). In the heavy tonnage trucks segment we expect Eicher to post market share of 8.2% by CY2015 v/s 3.1% in CY11.


■ Volvo Eicher Commercial Vehicles’ (VECV’s) EBITDA margin has expanded to 9.7% in CY11 (from 4.8% in CY09). With increasing market share in the heavy tonnage segment, VECV’s margin has further scope for improvement arising from the narrowing pricing discounts v/s peers, reduction in sales incentives/selling expenses and operating leverage benefits. We factor in an EBITDA margin of 10.2% for core Eicher trucks and buses by CY15 (v/s 9.1% in CY11 and v/s Ashok Leyland’s 11% in FY11).


■ We believe that medium duty engine outsourcing from Volvo carries benefits of opening up more outsourcing opportunities from Volvo, enhancing the R&D capability at VECV and, given its captive nature, reducing the cyclicality of the business.


■ With premiumisation on the rise in the Indian motorcycle market, we believe Royal Enfield is batting on a good wicket given its leadership in the 250cc and above bikes and strong brand appeal. With near doubling of capacity by 1QCY13, we expect volume CAGR of 21% over CY11-CY15.


Valuation: Our DCF model values the motorcycle business at `600/share, implying 9x CY13 EBITDA, a 10% discount to Hero MotoCorp and Bajaj Auto. Our DCF valuation for VECV yields `1,451/share, implying 7.3x CY13 EBITDA (i.e. 5% premium to Ashok Leyland). This gives us an SOTP-based value of `2,051 i.e. 19% upside. Competition from new entrants in the heavy trucks segment, a shift in tonnage dynamics within the truck industry and imposition of royalty by Volvo on VECV at a future date are the key risks to our BUY stance. Rising market share for Eicher in heavy tonnage trucks and margin improvements are the key positive catalysts.


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