Valuation of

Eicher
Motors Ltd.

Corporate Valuation & Restructuring

Course, 4th Term, IIM Lucknow

The Valuation of an Indian commercial vehicle manufacturer, Eicher

Motors Ltd. has been done in the project with various valuation methods.
The DCF method has been given the most weightage in the project. This
project has been done in partial fulfillment of the requirements for the
CVR course taught in 4th term at IIM Lucknow

Abhishek Paul
PGP31303

Jayant Lakhotia
PGP31379

Sandeep Vijay Kumar

PGP31343

Ajit Choudhury
PGP31427

Section-B
Group-2

Gopal Pandey
PGP31373

Lucas Erlacher
IEP17002

1. Introduction Eicher Motors Limited

Eicher Motors Limited (EML) (BSE: 505200, NSE: EICHERMOT) incorporated in 1982, is an Indian
automaker company based in Gurgaon, India. Eicher Motors Limited (EML) owns Royal Enfield (India).
Eicher Motors is a commercial vehicle manufacturer in India. The company's origins date back to 1948,
when Good-earth Company was established for the distribution and service of imported tractors. In
1959 the Eicher Tractor Corporation of India Private Ltd was established, jointly with the Eicher tractor
company, a German tractor manufacturer. Since 1965 Eicher in India has been completely owned by
Indian shareholders. The German Eicher tractor was partly owned by Massey-Ferguson from 1970,
when they bought 30%. Massey-Ferguson bought out the German company in 1973. In 2005 Eicher
Motors Ltd sold their tractors and engines business to TAFE Tractors (Tractors And Farm Equipment
Ltd) of Chennai, the Indian licensee of Massey Ferguson tractors. In October 1982 a collaboration
agreement with Mitsubishi for the manufacture of Light Commercial Vehicles was signed in Tokyo and
in the same period the incorporation of Eicher Motors Limited also took place. In February 1990, Eicher
Goodearth bought 26% stake in Enfield India Ltd and by 1993 Eicher acquired a majority stake (60%
equity shareholding) in Royal Enfield India. In July 2008, EML and Volvo Group's 50:50 joint venture
VE Commercial Vehicles (VECV) designs, manufactures and markets commercial vehicles, engineering
components and provides engineering. The Eicher Group has diversified business interests in design and
development, manufacturing, and local and international marketing of trucks, buses, motorcycles,
automotive gears, and components. Eicher has invested in the potential growth areas of management
consultancy services, customised engineering, and maps and travel guides. VE Commercial Vehicles
(VECV) Limited is a 50:50 joint venture between the Volvo Group (Volvo) and Eicher Motors Limited
(EML).VECV is divided into five business units:

Eicher Trucks and Buses - The E Series

Volvo Trucks India - The VE Series
Eicher Engineering Components
Eicher Engineering Solutions
VE Powertrain
Eicher Goodearth
Eicher Publications
Royal Enfield Motors, the motorcycle manufacturing subsidiary, is a part of the Eicher Motors.

The broad industry in which Eicher Motor ltd will fall will be automobile analysis but the automobile
industry would contain every company that deals with cars, trucks, buses, luxury vehicles or auto parts.
So for better industry and competitor analysis we take the industry as Automobiles-LCV/HCVlight and heavy commercial vehicles.

2. Industry Analysis Automobiles (Light and heavy commercial vehicles)

2.1.

Industry overview

Indian Automobile sales were positive for the month of June 2016 led partly by7% YoY growth in CV
sales. M&HCV makers reported decent growth YoY though with the base effect catching up the
quantum has tapered down showing signs of peaking out. LCV segment continued its strong run since

its pick up started in November 2015.CV sales for June 2015 were weak as compared to recent trends.
Pre-buying and replacement demand led to superlative growth in the CV space in the past few months.
The strong growth was driven by continuation of healthy replacement-led demand in case of M&HCV
(Trucks) as well as some pick-up in demand from mining and construction-driven sectors. In addition,
the industry also continues to benefit from the gradual implementation of BS-IV emission norms and
would cover the entire country by April 2017. The demand for LCV (Trucks) also started picking up
from H2FY 2016 after declining for past two years.
Double digit growth in LCVs (form 60% of CV volumes) coupled with steady growth in the MHCV
segment lifted the overall CV industry, which reported a 7% yoy growth in June 2016. On a low base,
LCV volumes saw a meaningful uptick during the month. Besides replacement demand, there are
indications of fresh CV demand rising in select segments. The recovery in the LCV segment witnessed
over the last six months accelerated with the segment reporting a healthy 11% yoy growth during the
month. Robust growth in the MHCV segment over the last four to five quarters has now percolated
down to the LCV segment given the hub and spoke model of transportation.
Overall CV sales (domestic plus exports) rose 7% in June 2016 over the year and dropped marginally
over the month to 66,215units. M&HCV sales rose a mere 1% over the year and dropped 8.9% over the
month to 25,904 units. LCV sales rose 11% over the year and 6.6% over the month to 40,311 units. In
the domestic market, CV sales registered 6% rise to 56,032units in June 2016 over the year. M&HCV
domestic sales inclined 2% to 22,606units. M&HCV domestic goods segment rose 2% to 18,405units.
LCV domestic sales rose 8% to 33,426units. Exports of CVs rose 17% at 10,183units. During June 2016,
CVs for June were weak as compared to recent trends, with Ashok Leyland and Tata Motors both seeing
slowing growth. In M&HCVs Ashok Leyland outpaced Tata Motors; Ashok Leyland grew 8% yoy while
Tata Motors declined 11% yoy. Under LCV segment, TTMT and AL reported growth of ~14% and
0.4%respectively on a YoY basis. Improved economic growth, better fleet operator profitability due to
firm freight rates and reduction in diesel prices and pick up in infrastructure activity have led to
continued robust growth for MHCVs in past few quarters. Further, strong MHCV growth has paved the
way for growth in the LCV segment with a lag effect, thus boosting overall commercial vehicle sales
numbers. With all key players in LCV segment posting healthy volumes, LCV segment recovery is now
gaining pace. The medium & heavy commercial vehicle (MHCV) segment, forming about 40% of
commercial vehicle (CV) volumes, failed to continue with the strong double-digit growth trend after
growing strongly for seventeenth consecutive month. This was for the first time after four quarters, that
growth stagnated. The overall Commercial Vehicles segment registered a growth of 12% in April-March
2016 as compared to same period last year. Medium & Heavy Commercial Vehicles (M&HCVs) grew by
28% and Light Commercial Vehicles grew 3%.
A year before, the overall Commercial Vehicles segment registered a de-growth of (-) 2.83% in AprilMarch 2015 as compared to same period last year. Medium & Heavy Commercial Vehicles (M&HCVs)
grew by 16.02% and Light Commercial Vehicles declined by (-) 11.57%.
The key financial ratios of the industry has been shown in the Industry Analysis worksheet of the
excel file B02.xlsx attached with this document.

2.2.

Historical Beta

The Beta of the stock has been calculated in the Beta Analysis worksheet of the excel file attached
with this document. The stocks of Eicher motors Limited is traded in BSE Sensex and hence the returns
of the BSE has been taken as the returns of the market. The data has been taken for the last 5 years from

August 15, 2011 to August 14, 2016. Hence the regression of the two returns has been done and the
estimated beta was found to be 0.6581. The regressed Beta was also found to be 0.6585. Since
Betas of companies tend to reach 1.0 in the long term, the adjusted beta has been calculated in the same
sheet and found to be 0.7724. The raw data of share prices has been shown in the Share price-Eicher
Motors worksheet of the excel file B02.xlsx attached with this document.

3. Financial Statement Analysis

The financial statements and the calculations has been shown in the file B02_dcf.xlsx

4. DCF (Discounted Cash Flow Valuation)

The discounted cash flow method has been shown in the MS Excel file B02_dcf.xlsx elaborately
with the projected cash flows and the projected income and balance sheets. The WACC calculations
has also been shown in separate worksheet. The value that DCF predicts is INR 24,234 per share
and detailed calculations has been shown in the discounted cash flows worksheet in
B02_dcf.xlsx file.
Note: In the excel file B02_dcf.xlsx the data available for the year 2015 was for 15 trailing
months. We adjusted the data to 12 months.

4.1.

Growth rate assumption

Past Performance
Total revenue from Operations grew at a CAGR of 20.3% during last 5 years, from Rs. 5,684 Crores in
2011 to Rs. 11,924 Crores in 2015. EBIT margins grew from 7.3% in 2012 to 12.3% in 2015, while PAT
grew at CAGR of 21.1% in the period 2011-2015. ROCE varied from 17.5% to 32.4% during this period
and ROA ranged from 10.7% to 14.8%. These led to growth in Net worth at a CARG of 23.3%.
The iconic product of Eicher motors, Bullet has been redesigned and remodelled with more varieties to
suit a unique mix of appeals. Traditional & Iconic Bullet has been modified to address the needs of
urban, aspiration-driven youth using models like Thunderbird, Continental GT, which increased the
market share, revenues and net worth of the company. A new model Himalayan was launched recently
to cash in the 60 years of Himalayan riding experience and increase adventure biking. Launch of
Classic in 2009 was a inflection point for the sales of Royal Enfield motorcycles and led to volume
growth at CAGR of 53.8% from 2010-2015 mainly due to high demand for Classic.
Future Prospect
Eicher motors recently commissioned Phase II of their Oragadam plant and increased their capacity to 6,
20,000 in 2016. Their plan is to ramp up the production capacity to 9, 00,000 by 2018 by commissioning
3rd plant in Vallam Vadagal. For product development, Eicher motors have 2 Technology Centres in
Chennai and Lucknow. They plan to roll out a new product platform in 250-750cc range by 2017.
Number of dealers in India would increase to 600 by the end of 2016.

Considering the past performance, growing sales and future expansion plans of Eicher motors, revenue
growth rate for next 5 years has been considered at 22.7% and the growth rate for 10 years has been
considered at 25.3%. This would lead to a growth in EBIT of 32% in next 5 years and 38.4% in 10 years.
Book value to Eicher motors would increase by 20.1% in next years and would further increase by 27%
in 10 years.

5. Other Valuation techniques

5.1
Relative Valuation
5.1.1. Price to Sales Multiple (P/S ratio valuation)
Every time a company sells a customer something, it produces revenue. Revenue is the income generated
by a company for peddling goods or services. Whether or not a company has made money in the
previous year, there is always revenue -- even companies that may be losing money temporarily and have
earnings depressed due to short-term circumstances, such as product development or higher taxes.
Companies that are relatively new in a high-growth industry are often valued off of their revenue and not
their earnings. Revenue-based valuations are assessed using the price/sales ratio, or PSR. The price/sales
ratio takes the current market capitalization of a company and divides it by the past 12 months trailing
revenue. The market capitalization is the current market value of a company, arrived at by multiplying
the current share price times the shares outstanding. This is the current price at which the market is
valuing the company. For instance, if our example company, XYZ Corp., has 10 million shares
outstanding priced at $10 a share, then the market capitalization is $100 million.
This valuation method assumes that the stock valuation will revert to its historical mean in terms of
Price/Sales Ratio. The reason we use P/S Ratio instead of P/E Ratio or P/B Ratio is because
Price/Sales Ratio is independent of profit margin, and can be applied to a broader range of situations.

Calculation:
Average P/S Value
=

Revenue per Share (TTM)

4327.596

7768.45

10-Year Average P/S Ratio

1.79

10-Year Average P/S Ratio is 1.79.

(Eicher Motors Ltd.s revenue per share for the trailing twelve months (TTM) ended in Jun. 2016 was
1150.523(Sep. 2015) + 1222.023(Dec. 2015) + 1382.263(Mar. 2016) + 572.787(Jun. 2016) = 4327.6.)
(The Median P/S Value of Eicher Motors Ltd for today is 7768.45 INR per share)
The calculations has been shown in the Relative Valuation Methods worksheet of the excel file
attached with this document.

5.2

Peter Lynch Fair Value method

The Peter Lynch Fair Value of Eicher Motors Ltd for today is 9982.5 INR per share

Peter Lynch Fair Value applies to growing companies. The ideal range for the growth rate is between 10
- 20% a year. Peter Lynch thinks that the fair P/E value for a growth company equals its growth rate,
that is PEG = 1. The earnings here is trailing twelve month (TTM) earnings. The growth rate we use is
the average growth rate for earnings per share over the past 5 years. If 5-Year Earnings Growth Rate is
greater than 25% a year, we use 25.

Calculation:
Peter Lynch Fair Value
=

PEG

5-Year EBITDA Growth Rate *

22

9982.5

Earnings per Share (NRI) (TTM)

453.75

5-Year Earnings Growth Rate is 22. If 5-Year Earnings Growth Rate is greater than 25% a year, we use
25.
Eicher Motors Ltd.s Earnings Per Share (NRI) for the trailing twelve months (TTM) ended in Jun. 2016
was 93.69(Sep. 2015) + 99.33(Dec. 2015) + 122.72(Mar. 2016) + 138.01(Jun. 2016) = 453.75.

Please note that we use the 5-year average growth rate of EBITDA per share as the growth rate.
EBITDA growth is subject to less manipulations than net earnings per share. In the calculation, PEG=1
because Peter Lynch thinks that the fair P/E ratio of the growth stock is equal to its earnings growth
rate.
The calculations has been shown in the Relative Valuation Methods worksheet of the excel file
attached with this document.

6. Conclusion
The results/valuations from various valuation techniques show that:
Market Value of Eicher motors ltd.

= INR 22,427 per share (as on 16th Aug, 2016)

Value derived from DCF method

= INR 24,234 per share

Value derived from P-S ratio

= INR 7768 per share

Value derived from Peter Lynch Fair Value method = INR 9983 per share