Industrial Sector Indian Auto & Auto Ancillary

March 2011

Analyst: Paras Mantri Contact Details: paras@avistaadvisory.com Notice The information contained herein has been prepared solely for the purpose of providing information. Every effort is made to ensure that the information provided here is accurate. This document has been compiled in good faith but no representation is made or warranty given either expressed or implied as to the completeness or accuracy of the information it contains

Outlook & Opportunity Automobile and Automobile Components Key Trends Indian auto component production is estimated to grow by 21-23 percent in FY 2010-2011, led by strong demand from automobile OEMs on the back of buoyant sales of commercial vehicles, cars, tractors and two wheelers. Automobile component exports are estimated to grow by 16-18 percent in FY 2010-2011, due to the revival of automobile production in key global export markets. Growth in the automobiles segment is likely to moderate in 2011-2012, due to rise in car ownership costs and high interest rates. Consequently, the growth in production of auto components will moderate to 15-17 percent in 20112012. Automobile OEM segment is expected to grow by 16-18 percent and automobile exports are likely to grow by 19-21 percent during this period.

Tata Motors Tata Motors announced that it will increase the prices of its passenger vehicles from 1st April 2011. The Company is forced to hike the prices on account of a steep rise in input costs. Depending upon the model, Indica prices will go up by Rs.7,000 to Rs.9,000, Vista and Indigo CS by Rs.8,000 to Rs.11,000 and Manza by Rs.10,000 to Rs.15,000.

Hero Group The Munjals-led Hero group announced its decision to buy out Japanese copromoter Honda Motor's 26 percent stake in Hero Honda for Rs.3,842 crore. The purchase of 26 percent by the twowheeler manufacturer company, Hero Group would be made through its investment arm, Hero Investments Pvt. Ltd. (HIPL). The purchase would be initially financed through debt. Hero and Honda have decided to amicably part ways after Hero Group completes the purchase of Hondas interest in the JV, and will henceforth be competitors in the Indian twowheeler market.

Update on Key Players Mercedes-Benz Mercedes-Benz India won eight prestigious awards from various reputed automobile magazines and television channels for the year 2010. Year 2011 is a significant year for Mercedes, as it marks its 125th anniversary of automobile manufacturing. The company won accolades across various categories from the jury members and customers. The show stealer was SLS AMG that won 3 top awards including Imported Car of the Year by CNBC Overdrive Awards and Cars & Bikes India Awards, CBU Sports Car of the Year Award by ET Zigwheels and Performance Car of the Year Award by BS Motoring.

Ford India Ford India has witnessed a rapid boost in sales of its Figo model from the time of the launch of the hatchback in 2009. Ford India sold over 9,293 Figos in February 2011, registering a 188 percent growth over the 3,223 Figos sold in February 2010. In total, the company has sold over 76,000 Figos since 2009.

Trading Comparables Valuation Metrics

4/5/2011
(In millions of USD)

Valuation EV EV Revenue EBITDA 2010A 2011E 2012E 2010A 2011E 2012E 1.1x 1.3x 2.0x 3.6x 1.1x 1.7x 1.5x 0.9x 0.9x 1.7x 2.8x 0.9x 1.4x 1.2x 0.8x 0.8x 1.5x 2.5x 0.8x 1.2x 1.0x 10.2x 11.9x 11.3x 15.4x 7.8x 9.3x 10.7x 6.9x 8.2x 11.3x 14.5x 8.7x 15.5x 10.0x 6.1x 6.8x 10.1x 12.7x 7.1x 13.4x 8.6x

Size Market Value of Equity 16,364.3 1,675.7 6,890.3 9,089.1 7,989.1 9,401.9 Enterprise Value 22,590.8 2,051.7 6,875.8 9,369.4 6,993.2 11,675.4 LTM Revenue 26,078.1 2,291.5 4,032.4 2,570.3 6,589.1 6,956.7

Profitability EBITDA Margin 2010A 2011E 2012E 10.8% 10.6% 17.4% 23.6% 13.5% 18.0% 15.4% 13.0% 11.1% 14.9% 19.7% 10.1% 9.3% 12.1% 12.9% 11.5% 14.7% 19.3% 10.7% 9.2% 12.2%

Growth Historical Projected 1-Year 1-Year Revenue Revenue 31.5% 21.1% 27.9% 36.7% 43.2% 18.1% 29.7% 22.8% 39.0% 15.8% 27.9% 21.5% 16.4% 22.1%

Auto Companies Tata Motors Ltd. Ashok Leyland Ltd. Hero Honda Motors Ltd. Bajaj Auto Ltd. Maruti Suzuki India Ltd Mahindra & Mahindra Ltd. Median Auto Component Companies Bharat Forge Ltd. Tube Investments of India Ltd. Mahindra Forgings Ltd. Motherson Sumi Systems Ltd. Median

2.9x 3.5x 0.9x 1.3x 2.1x

2.1x 3.2x 0.6x 1.1x 1.6x

1.8x 2.8x 0.5x 1.0x 1.4x

27.0x 20.8x NM 22.2x 22.2x

12.4x 27.8x 6.1x 11.1x 11.8x

9.5x 24.0x 4.1x 8.5x 9.0x

1,757.1 562.2 130.3 1,818.7

2,143.8 2,093.8 263.7 1,998.7

726.3 870.0 295.6 1,745.5

10.9% 17.1% 0.5% 6.0% 8.5%

17.0% 11.6% 10.5% 10.2% 11.1%

18.5% 11.8% 12.2% 11.2% 12.0%

(30.2%) 9.2% (40.8%) 158.2% (10.5%)

39.4% 10.0% 38.0% 17.9% 27.9%

Industry Transaction Comps Automobile & Auto Ancillary Manufacturers

Date Acquirer Target Deal Value (m) Transaction Comments

M ar-11 Spitmaan Group Hindustan Composites Ltd., Jalna Unit M ar-11 NA Rasandik Auto Components Pvt Ltd. M unjal Kiriu Industries Pvt. Ltd.

$1.3

Spitmaan acquired the Jalna unit of Hindustan Composites, which develops asbestos industrial products and friction materials in India. It offers friction materials like brake linings, roll linings, clutch facings, fiction sheets and disc brake pads used in trucks, cars, two/three wheelers, off-road vehicles and construction and mining equipment Rasandik Engineering Industries India Ltd. sold Rasandik Auto Components Pvt. Ltd. for Rs. 31.8 million on M arch 15, 2011. Rasandik Engineering Industries engages in the manufacture and sale of sheet metal components, assemblies and sub assemblies, tools, dies and moulds primarily in India Kiriu Corp acquired an additional 17.6% stake in M unjal Kiriu Industries Pvt Ltd from Hero M otors Limited on February 11, 2011. Post acquisition, Hero M otors will hold 49% stake in M unjal Kiriu and Kiriu Corp will hold 51% stake

$0.7

Feb-11

Kiriu Corporation

NA

Dec-10 GS Global Corp

Steel Strips Wheels Ltd.

$5.0

Steel Strips Wheels Ltd. announced a private placement of 377,000 common shares at INR 595 per share to GS Global Corp on preferential allotment basis for gross proceeds of ~4.98 million On November 29, 2010, Steel Strips Wheels Ltd. announced that it will issue up to 850,000 shares at INR 520 per equity share in one or more tranches to Sumitomo M etal Industries Ltd.

Nov-10 Sumitomo M etal Steel Strips Industries Ltd. Wheels Ltd.

$9.8

Jul-10

RPG Cellular Investments & Holdings Pvt Ltd.

Ceat Ltd.

$1.3

Ceat Ltd. announced a private placement of 1,712,176 equity share warrants (18 months maturity). The company will receive 25% of the exercise price as upfront payment at the time of issuance

Source: CapitalIQ, Mergermarket NA- Not Available

Stock Price Chart Automobile Manufacturers

200

180

160

140
(%)
120

100

80

60 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

BSE Sensex Ashok Leyland

BSE Auto Index Hero Honda Motors

Tata Motors Mahindra & Mahindra

Maruti Suzuki India Bajaj Auto

Stock Price Chart Auto Ancillary Manufacturers

250

200

(%)

150

100

50 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

BSE Sensex Sundaram-Clayton

BSE Auto Index Mahindra Forgings

Bharat Forge Motherson Sumi Systems

Tube Investments of India

Source: CapitalIQ

Recent News Government likely to clear Hero Group's Rs. 4,500 crore FDI 28 Mar 2011 The Union Cabinet is likely to approve the induction of foreign equity by Hero Investments Pvt. Ltd. (HIPL). Rs. 4,500 crore is being raised mainly to fund the buyout of 26 percent stake of Japan's Honda in Hero Honda. HIPL is one of the main shareholders of the country's largest two-wheeler maker Hero Honda. It holds 17.33 percent stake in the company as on December 31, 2010. Two private equity firms, BC India Investors II and Lathe Investment Pvt. Ltd. will together pick up a 29 percent stake in HIPL for Rs. 3,650 crore. http://economictimes.indiatimes.com/news/news-byindustry/auto/two-wheelers/govt-likely-to-clearhero-groups-rs-4500-cr-fdi-ontuesday/articleshow/7808715.cms India may protect auto companies in EU pact 28 Mar 2011 Indian automobile manufacturers may manage to retain some protection from cheaper imports for another five years. Officials said that the government has committed to retain the "protection" for the auto sector under the Automotive Mission Plan (AMP) 2006-16. The Automotive Mission Plan aims to spur investment in the Indian auto sector as the government wants to double its contribution to the GDP to over 10 percent by 2016 while creating as many as 25m new jobs. While the move may come as a relief for many of the domestic manufacturers, it will act as a dampener to the expectations of foreign players, particularly the luxury makers, who will be impacted by the government's decision to hike customs duty on assembled cars from 10 percent to 30 percent. http://economictimes.indiatimes.com/news/news-byindustry/auto/automobiles/india-may-protect-autocompanies-in-eu-pact/articleshow/7804221.cms

Anand Automotive Group aims USD 2bn sales by 2014 25 Mar 2011 Auto component maker Anand Automotive Group is targeting a sales turnover of USD 2bn (about Rs. 10,000 crore) by 2014, and will invest up to Rs. 1,500 crore in the next five years for expansion purposes. http://economictimes.indiatimes.com/news/news-byindustry/auto/auto-components/anand-automotivegroup-aims-2-billion-sales-by2014/articleshow/7789325.cms Automakers face paint shortage after Japan quake 26 Mar 2011 Major automakers including Chrysler Group LLC, Toyota Motor Co., General Motors Co. and Ford Motor Co. use a pigment called Xirallic, produced at the Onahama plant near the Fukushima-Daiichi nuclear power station in Japan. The shortage of this specialty pigment has prompted automakers to temporarily restrict orders on vehicles in certain shades of black, red and other colors. The plant is operated by the German chemical company Merck KGaA, and has been evacuated after the March 2011 earthquake. http://articles.economictimes.indiatimes.com/201103-26/news/29192339_1_assembly-plants-haltproduction-onahama Tata Motors first Indian company to make 1 lakh commercial vehicles 25 Mar 2011 Leading automobile company Tata Motors became the first Indian company to produce one lakh commercial vehicles in a single financial year. Ravi Pisharody, the President of commercial vehicle business unit (CVBU) of Tata Motors said that their sales growth rate was 20-22 percent this financial year and is likely to be 10-15 percent next fiscal year.

http://articles.economictimes.indiatimes.com/201103-25/news/29188634_1_ravi-pisharody-growthrate-interest-rate Maserati to make India debut in April 24 Mar 2011 Italian luxury sports car brand Maserati will make its debut in India next month, posing a competition to other sports car models such as the Lamborghini, Bugatti, Ferrari and Porsche. Maserati spokeswomen Silvia Saporetti said that the Company sees a great potential for Maserati marquee as all major luxury brands are sold out in the Indian market. The company is yet to announce its Indian partner, but has inked a deal with a Mumbai based company that will import its models from the next fiscal year. Part of the Fiat Group, the racing inspired three-spoke Maserati line-up is produced only in Modena in Italy, and is shipped to about 57 markets worldwide. http://articles.economictimes.indiatimes.com/201103-24/news/29181691_1_maserati-india-debutgranturismo Hindustan Motors complete makeover 19 Mar 2011 The quintessential Ambassador is set to get its most radical makeover in the six decades of its history. The oldest face of Indian automobiles, which carries the legacy of the British Raj on its wheels, will undergo a complete changefrom structural design to aerodynamics to aesthetics. Hindustan Motors is hoping that a new-look Amby will be able to compete with today's modern cars. The revamp began last December, and it will take at least a year before the results become evident. http://articles.economictimes.indiatimes.com/201103-19/news/29146318_1_amby-hindustan-motorsspaciousness-and-comfort to give Ambassador a

Mahindra & Mahindra to develop Ssangyong brand 18 Mar 2011 Utility vehicle major Mahindra & Mahindra (M&M) emerged as the preferred bidder for SsangYong in August 2010, and has finalized formalities to acquire a 70 percent stake for USD 463m. M&M plans to focus on developing the Ssangyong brand, said Mr. Pawan Goenka, the South Korean company's newlyappointed Chairman. The Korean auto major will invest over Rs. 960 crore in 2011 on product development and brand building. Ssangyong has targeted sales of 1.21 lakh vehicles in 2011 against the 82,000 sold in 2010. http://articles.economictimes.indiatimes.com/201103-18/news/29141799_1_korando-ssangyong-brandkorean-suv Volvo expects India to be its third biggest market in Asia by 2016 11 Mar 2011 Swedish car-maker Volvo Car Corp expects India to become its third largest market in Asia after China and Japan by 2016. Volvo sold 130 cars in India in 2010, while the country's overall luxury market registered sales of around 15,000 units. http://articles.economictimes.indiatimes.com/201103-11/news/28680362_1_indian-luxury-car-marketvolvo-auto-india-china-and-japan Ford India to export Figo to Mexico, Middle East, North Africa 9 Mar 2011 U.S. carmaker Ford announced that it will expand the export market for its compact car Figo to Mexico and other nations in North Africa, the Caribbean and the Middle East, as part of plans to make India a global small car hub. The company plans to launch eight models in the country by the middle of this decade, and could consider adopting a strategy of producing cars only

in India for some of the new products, as it does with the Figo. http://articles.economictimes.indiatimes.com/201103-09/news/28672605_1_figo-michael-bonehamford-india Italian firm to fix Mahindra's Stallio defects 3 Mar 2011 Mahindra Two Wheelers has roped in an Italian design services firm, Engines Engineering, to rectify the defects of its 100 cc bike Stallio, as the Mahindra Group firm has been struggling to boost its sales ever since Stallio's launch in October 2010. The bike sold only 46 units in February after the company curtailed production to repair faulty clutch and gear parts. http://economictimes.indiatimes.com/news/news-byindustry/auto/automobiles/italian-firm-to-fixmahindras-stallio-defects/articleshow/7616274.cms

Bosch plans Rs.13 bn rupees Capital expenditure over 3 yrs 1 Mar 2011 Auto parts maker Bosch Ltd. has planned a Capital expenditure of more than Rs. 13bn over the next three years to meet the demands of India's fast growing automotive sector. The vehicle sales in India grew by 31 percent in 2010. http://articles.economictimes.indiatimes.com/201103-01/news/28645817_1_bosch-plans-auto-partscapex