Automobile Sector

Agenda
Industry Analysis Individual Company Analysis & Valuation Assumptions Comparative Analysis

Automobile Industry: Analysis 2012

Car sales in India rose just 2.2 percent in FY2012 Commercial vehicles, SIAM said total sales in FY12 were 809,532 units, up 18.2 per cent.
Automobile Industry 2011-12
Passenger Vehicles Three Wheelers Commercial Vehicles Two Wheelers

Percentage Market Share: Passenger & Commercial Vehicles

16%

4% 3%

77%

Asian Journal of Technology & Management Research, Vol. 01 Issue: 02

Automobile Industry: Analysis 2013

SIAM has projected passenger car sales growth at 10-12 per cent in 201213. Sales of trucks and buses, a key indicator of economic activity, rose 18.2 percent in 2011/12 and are seen growing 9 to 11 per cent in this fiscal year. Commercial Vehicles is projected to grow by nine to 11 per cent in FY13. SIAM has also projected five to seven per cent growth for Three Wheelers.

Source: SIAM

Porters 5 Forces
Regulatory framework

Barriers to Entry

The startup capital required to establish manufacturing capacity to achieve minimum efficient scale is prohibitive

Buyer/Customer Power

Availability of options Low Switching Costs

Porters 5 Forces
Bargaining Power of Suppliers
Powerful buyers who are generally able to dictate terms to suppliers

Fairly Mild

Threat of Substitutes

Switching cost may be high in terms of personal time, convenience and utility

Porters 5 Forces
Intense due to the entry of foreign companies Product being matched in a few months by the competitors

Rivalry among Competitors

S.W.O.T
Strengths
Large domestic market Sustainable labor cost advantage Competitive auto component vendor base Government incentives for manufacturing plants Strong engineering skills in design etc.

Weaknesses
Low labor productivity/strikes/lock-outs High interest costs and high overheads make the production uncompetitive Various forms of taxes push up the cost of production Low investment in Research and Development Infrastructure bottleneck

S.W.O.T
Commercial vehicles: SC ban on overloading Heavy thrust on mining and construction activity Increase in the income level Cut in excise duties Rising rural demand
Tata Motors trades at favorable valuations with JLR recording strong volumes and domestic commercial vehicle sales perform better than the peers. AutomitiveHorision.com

Opportunities

Threats

Rising input costs Cut throat competition Rising fuel Prices Economic uncertainty High interest rates

No cut in interest rates a big disappointment for India Inc.: Seshagiri Rao, JSW Steel, Economic Times

Ashok Leyland

About Company
Flagship company of the Hinduja Group

Founded by Raghunandan Saran, Ashok Motors was set up in collaboration with

Austin Motor Company, England in1948

2nd largest commercial vehicle manufacturer in India Turnover of US $ 2.5 billion (around 70,000 vehicles) in 2011-12 having Ventured into construction equipment in 2011 through a JV with John Deere Very limited presence as of now

JV with Nissan Motor Company for LCV in 2007 Exports contribute 10-12 % to total revenue

Product Portfolio
H&MCV Goods Carrier (Trucks) H&MCV Passenger Carrier (Buses ) LCV Goods Carrier (Dost) LCV Passenger carrier Construction Equipment Defense Vehicles Power Solutions

Cyclical Trend
YoY Growth Industry
0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2 2004 2005 2006 2007 2008 2009 2010 2011 2012

YoY Growth Ashok Leyland

0.60
0.50 0.40

0.30
0.20 0.10 0.00 -0.10 -0.20 -0.30 Mar Mar Mar Mar Mar Mar Mar Mar Mar 04(12) 05(12) 06(12) 07(12) 08(12) 09(12) 10(12) 11(12) 12(12)

Projection of Revenue Growth

Growth projected by measures like mean and CAGR 19-23%

Growth projected for the next 5 years : 13.5 %

Reasons
Cycle trending towards trough

Growth in 1st quarter of FY13 coming from LCV, whereas major segment is trucks which
shows de-growth Economic slowdown expected to continue leading to lower good transits and low truck rentals

Terminal Growth rate : 5.5 %

- In line with the long term GDP growth rate

Projection Of EBIT Margin

Projection is 9.5 % Reason is downward trend in EBIT Margin
Upward Pressure on Cost due to inflation Downward pressure on prices due to
Competition from expected New Entrants (Benz, Navistar) Market slowdown and inventory accumulation forcing lower prices
0.16

0.14
0.12 0.1 0.08 0.06 0.04 0.02 0 Mar 03(12) Mar 04(12) Mar 05(12) Mar 06(12) Mar 07(12) Mar 08(12) Mar 09(12) Mar 10(12) Mar 11(12) Mar 12(12)

Other Projections
TAX Rate
Based on Average PAT/Average PBT

Capital Expenditure
Based on companys guidance

Changes in Net Working Capital

Based on increase in sales

Depreciation
Based on historical rate of depreciation and projected increase in Net Block

Valuation
Market Price : Rs. 22.10/share Valuation : Rs. 30.47/share

Maruti Suzuki

Maruti An Automobile Giant

Largest Passenger segment Automobile manufacturer of India Subsidiary of Japanese auto maker Suzuki Motor Corporation

Has around 45% market share in passenger vehicles

Sells more than 7 lakhs cars in India annually. Exports close to 50000

Till 2007, 55% of the company was owned by Suzuki Corp and 18% by Indian Govt.

Currently: 54.21% Foreign promoters, 18.71% FIIs, 14.58% Banks/FIs

Maruti Product Portfolio

Mostly into Passenger Vehicle Segment Major Car brands include: Entry level: Maruti Alto Hatchback: Ritz, A-Star, Swift, Wagon-R Has a multi purpose vehicle and a sports utility vehicle also

Swift currently is the largest selling model

Produces both petrol and diesel variants of the car Manufacturing Plants: Manesar and Gurgaon Major competitors include: Honda, Chevrolet, Hyundai and Ford

Sales and Market Share

Sales Sales in Rs Cr Market Share 2011 Data

45,000.00 40,000.00 35,000.00 30,000.00 25,000.00 20,000.00 15,000.00 10,000.00

5,000.00
0.00 2004 2005 2006 2007 Series1 2008 2009 2010 2011

Valuation - Assumptions
Growth Rate of Sales is assumed to be 12% for 2013 and 15% thereafter The CAGR of Total Sales for both last 5 years and last 10 years is close to 15% The trend line shows a growth of 15-20% For a country like India growth in passenger vehicle segment will be through Tier2 and Tier 3 cities where Maruti holds a large market share and is considered to be a way of life. Excellent brand image Passenger vehicle segment grew by 29% in year 2010-2011. Reduced Growth of 4% in 2011-2012 was mainly due to other macroeconomic parameters For 2013 growth rate is assumed less due to recent agitation in Manesar manufacturing plant which hampered production
45 40 35 30 25 20 15 10 5 0 -52004 -10

2006

2008

2010

2012

2014

Valuation - Assumptions
Operating Profit Mean of percentage of Sales for the last 5 years.

Depreciation Depreciation calculated as percentage of Gross Block for last 5 years. Gross Block estimated for the next 5 years using CAGR. And then Depreciation calculated on these gross blocks using mean obtained

Capital Expenditure
Based on Percentage of Sales. Mean of last 5 years

Valuation - Assumptions
Beta Assumed to be = 0.7. taken from CapitalLine Database

Tax Rate Assumed to be 27%. Calculated on the basis of past data. Tax as a percentage of PBT for the last 5 years

Price of each share : Rs. 1199.46 Current market price: 1177

TATA MOTORS

Tata Motors Group

Tata motors Consolidated

Standalone

Jaguar Land Rover

Tata Financials

Tata Technologies

Tata Daewoo

TML Drivelines

Product Range
Tata Motors

Commercial Vehicles

Premium and Luxury SUV

Premium and Luxury Cars

Passenger cars

Utility Vehicles

SCV

LCV

Medium and Heavy CV

Vans

Buses and Coaches

Micro

Compact

Midsize

Standalone Business Past Performance of FY12

Standalone Tata Motors
Particular s Volumes Revenue EBITDA% PAT FY12 926,353 54,307 8.1% 1,242 FY11 836,629 47,088 10.2% 1,812

Commercial vehicles

Passenger Cars

Net revenue up 15% PAT lower by 31% impacted by competitive pressure in passenger vehicles business and on account of foreign exchange fluctuation on borrowing and capex taken

Exports

Standalone Business Past Performance of 5 years

Jaguar Land Rover Past Performance

Growth supported by demand from China and other developing markets Range Rover Evoque launched in September 2011 has garnered over 100 international awards. Jaguar XF 12 model year lineup included a new four cylinder 2.2 litre diesel version that makes it the most fuel efficient car. Signed JV with Chery Automotive company to develop, manufacture and sell vehicles to the Chinese market and Chinese regulatory approvals are awaited. Announced new engine plant at Wolverhampton UK to manufacture all new advanced low emission engines. Issued 1.5 bn pounds of unsecured bonds with 7-10 year term to improve funding structure of the business

Tata Motors Consolidated Past Performance of 5 years

Assumptions in Valuation of Tata Motors

Projected Sales Growth
Since JLR acquisition, Tata Motors is showing impressive growth mainly due to JLR. Therefore we decided to project sales of JLR and rest of business separately: Projected sales of JLR Over past three years, JLR is growing close to 30 % . But this has been due to increasing demand from China and strengthening dollar against British pound. So we took a conservative estimate of 20% growth for next 5 years. Projected Sales of Standalone business + subsidiaries The trend line for a business cycle of past 5 years show a growth rate of 13%. We have taken a conservative estimate of 10% for next 5 years because of inflationary pressures, downturn and stiff competition from foreign players in the Indian market

Assumptions in Valuation of Tata Motors

EBITD has been projected as a % of projected sales. The GM of EBITD has been taken for past 5 years and on that basis EBITD has been projected.

CAGR of gross block of past 5 years was calculated and on that basis, gross block for next five years was calculated.

EBITD has been projected as a % of projected sales. The GM of EBITD has been taken for past 5 years and on that basis EBITD has been projected. Depreciation expense has been taken as a % of gross block. GM of past 5 years was taken and on that basis depreciation for next 5 years was projected Terminal horizon was taken as 5 years and terminal growth rate was taken as 5 %.

Comparative Analysis of Tata Motors, Maruti Suzuki and Ashok Leyland

Product Range

MARUTI SUZUKI

TATA MOTORS

Includes offerings in the cars and trucks space, besides vehicles for the military Some of the premier offerings are Tata Sumo, Tata Ace, Tata JLR and Tata Nano

14 models in India since the beginning Product Portfolio includes Maruti 800, Maruti Swift, WagonR and Ertiga

ASHOK LEYLAND

Primarily into trucks and buses besides military and industrial vehicles Some premier offerings are Luxura, Viking BS-1, Stag CNG and the like

Accounting Policies

MARUTI SUZUKI

TATA MOTORS

Depreciation is calculated on a SLM basis Cost of raw materials and consumables are ascertained on a moving weighed average method.

Depreciation is calculated on a SLM basis Inventories are calculated on a weighed average basis at the lower of cost R&D Costs are charged to revenues as incurred.

ASHOK LEYLAND

Assets are depreciated on SLD basis Inventories are valued at lower of cost and net realizable value. R&D costs are charged to revenues as incurred.

Business Risk
Volatility in Return on Asset values are used in determining Business Risk of a firm. It is the inherent risk in doing business. Variance in ROA figures for the firms used.
Variance in ROA values over the last 5 years is 64.00 and the Standard Deviation or Business Risk Value is 8.0023 Variance in ROA values over the last 5 years is 20.62 and the standard deviation or business risk value is 4.54% Variance in ROA values over the last 5 years is 33.23 and the Standard Deviation or Business Risk value is 5.76 %

Thus we can see that Maruti Suzuki seems to be enjoying the lowest amount of business risk amongst the 3 firms( due to first mover advantage, tie-up with the Government)

ASHOK LEYLAND

MARUTI SUZUKI

TATA MOTORS

Operating Risk
The cash flow due to operations is normally estimated from EBIT. By computing the variance in operating margins, we can evaluate the operating risk.
Operating Margins 2012 0.099772384 2011 0.109453187 2010 0.07070896 2009 -0.000786642 2008 0.109776611 Operating Risk is 4.67% Operating Margins 2012 0.0611 2011 0.0851 2010 0.1251 2009 0.0849 2008 0.1445 Operating Risk is 3.38 % Operating Margins 2012 0.0900 2011 0.0604 2010 0.087 2009 0.086 2008 0.070 Operating Risk IS 1.283%

Thus we can see that Ashok Leyland seems to be enjoying the lowest amount of operating risk amongst the 3 firms( indicating consistency between operating margins and sales)

ASHOK LEYLAND

MARUTI SUZUKI

TATA MOTORS

Financial Risk
Financial leverage is using debt, such as bonds or loans, to increase returns for equity holders.
Interest Coverage Ratio for 2012 is 3.7, a rise from the 2011 value of 2.6 This increase in the 2012 value is a an the lower Financial Risk as Tata Motors will be able to pay off its debts faster. Interest Coverage Ratio for Maruti is 39.85 for 2012, a drop from the figure of 126.04 in 2011 The high value clearly indicates that Maruti faces minimal amount of financial risk. Interest Coverage ratio has fallen from 5.23 in 2011 to 3.68 in 2012 indicating that the debt paying capacity of Ashok Leyland has relatively increased The Debt to Equity ratio has come down The financial risk of Ashok Leyland has increased.

MARUTI SUZUKI

TATA MOTORS

Thus from the above values , we can clearly see that Maruti enjoys the highest interest coverage and therefore minimal amount of financial exposure. It can consider financing its future expansion plans through debt financing.

ASHOK LEYLAND

DuPont's 5 Factor Model

DuPont's 5 factor model takes into account
Net Profit/Pre-tax Profit= 0.99 Pre-tax profit/EBIT= 0.8194 EBIT/Sales=0.0997 sales/Asset=2.368 Asset/Equity= 2.1100 ROE=5 factor multiplication=0.4 0947 Net Profit/Pre-tax Profit=0.7615 Pre-tax profit/EBIT=0.972 0 EBIT/Sales=0.0611 sales/Asset=2. 239 Asset/Equity= 1.028 ROE=5 factor multiplication=0.1 04 Net Profit/Pre-tax Profit=0.8202 Pre-tax profit/EBIT=0.729 9 EBIT/Sales=0.0709 sales/Asset=2.023 Asset/Equity= 1.564 ROE=5 factor multiplication=0.1 344

MARUTI SUZUKI

TATA MOTORS

Thus from the above values , we can see that Tata Motors enjoys the highest Return on Equity Value amongst the 3 companies indicating highest utilization of equity.

ASHOK LEYLAND

Long Term Valuation and Growth

MARUTI SUZUKI

TATA MOTORS

Projected Growth in Sales over the next 5 years taken as 10% for Standalone Business. Projected Growth of JLR has been taken as 20%.

Projected Growth in Sales taken as 12% in 2013 and 15% thereafter Price of each share estimated Rs. 1199.46 Current market price: 1177 So recommended a buy/hold

ASHOK LEYLAND

Projected Growth in Sales taken as 13.5% over the next 5 years Valuation Rs 27.31 per share Current Market Price Rs 22.1 per share So recommend a buy.

THANK YOU