a eicher motors cy14 r t - motilal · pdf filethe analysis of eicher motors ltd’s ......

10 March 2015

ANNUAL REPORT THREADBARE

The ART of annual report analysis WHAT’s NEW IN CY14

Additional sales tax

demand of INR1.4b in CY14

Industrial promotion

subsidy of INR370m (9.7%

of VECV EBITDA) in CY14

Comparison with global/

domestic 2Ws on various

operating metrics

Stock Info Bloomberg EIM IN

CMP (INR) 15,964

Equity Shares (m) 27.0

52-Week Range (INR) 17,200/4,405

M.Cap. (INR b)/(USD b) 423.7/6.8 1,6,12 Rel. Perf. (%) 2/41/155

Financial summary (INR b) Y/E Mar 2015E 2016E 2017E Net Income 130.8 184.7 219.8

EBITDA 19.9 32.1 37.7

Net Profit 11.1 17.8 21.5

Adj. EPS (INR) 407.8 655.8 791.5

EPS Gr. (%) 79.6 60.8 20.7

BV/Sh. (INR) 1,154.5 1,749.2 2,472.8

RoE (%) 39.2 45.2 37.5

RoCE (%) 42.9 52.8 45.0

Payout (%) 0.3 0.3 0.3

P/E (x) 38.5 23.9 19.8

P/BV (x) 13.6 9.0 6.3

EV/EBITDA (x) 24.9 15.3 12.3

Div. Yield (%) 0.3 0.3 0.3 E: MOSL Estimates

Shareholding pattern (%) As on Dec-14 Sep-14 Dec-13 Promoter 55.0 55.0 55.1

DII 4.7 4.4 5.1

FII 19.5 20.1 20.0

Others 20.9 20.5 19.8 Note: FII Includes depository receipts

Auditor’s name Deloitte Haskins & Sells, Chartered Accountants

Ashish Gupta ([email protected]); +91 22 3982 5544

Aditya Dakh ([email protected]); +91 22 3980 4263

EICHER MOTORS CY14 The analysis of Eicher Motors Ltd’s (EIM) latest annual report highlights the highest-ever net income from operations, record EBIT margins and strong volume growth in Royal Enfield (RE) segment. The benefit of economies of scale in this segment drove consolidated RoE to 27% (~6pp YoY increase). Higher level of capex is targeted to enhance the production capacity in RE segment and commercialization of new VECV products. During CY14, contingent liabilities increased substantially to INR4b (from INR2.1b in CY13) due to a sales tax demand raised by Maharashtra VAT authority.

Healthy consolidated operating cash flows driven by RE;

planned capex of INR10b in FY16: Consolidated operating cash

flows grew from INR7.2b in CY13 to INR10.5b in CY14 due to

strong volumes and higher EBITDA in RE segment. However, high

capex of INR9.7b in CY14 resulted in relatively lower free cash

flows. Company targets to invest INR10b in FY16 (15 months), of

which INR5b will be in RE segment.

Contingent liabilities jump in CY14: Contingent liabilities jumped

to INR4b in CY14 (16% of net worth) from INR2.1b in CY13 (10.2%

of net worth), an increase of ~90%. This is due to a sales tax

demand raised by Maharashtra VAT authority in VECV.

Subsidy aids VECV EBITDA by 9.7% in CY14: During CY14, VECV

received an industrial promotion subsidy (refund of sales tax) of

INR370m (3.7% of consolidated PBT). This aided VECV’s CY14

EBITDA by 9.7%, in turn aiding VECV margins by 64bp to 6.7%.

Consolidated tax rate increases to 29%; VECV continues to

operate under MAT rate: Effective tax rate of standalone entity

increased from 23% in CY13 to 30% in CY14. However, CV

business continued to operate under MAT rate (21% in CY14) due

to weighted R&D deduction and investment allowance benefits.

Comparison with peers – RE’s operating metrics superior;

however lags in R&D and warranty expense as percentage of

sales: RE’s EBIT margin at 22.5% in CY14 is probably the best in

the world [CY13 EBIT margins of Harley Davidson (16.6%) and

BMW (5.3%)], aided by continuous improvement in gross margin

(34% in CY14). RE’s R&D and warranty expenses as a percentage

of sales is higher than domestic 2Ws (Hero Moto and Bajaj Auto).

Change in financial year: In line with the new Companies Act,

2013, EIM’s financial year will be changed from the current

January-December year-end to April-March year-end.

ART will present a threadbare portrait of annual reports - statistical, strategic and structured. We believe ART's wide canvas - from accounting and auditing issues to operating performance to management insights to governance matters - will help readers paint a clearer picture of the stock's investment worthiness.

Investors are advised to refer through disclosures made at the end of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

http://www.motilaloswal.com/Institutional-Equities�

10 March 2015 2

ART| Eicher Motors CY14

ACCOUNTING/AUDITING AND KEY FINANCIAL MATTERS RE’s superior performance drives operating cash flows by ~46% in CY14 Cash flow from operations on a consolidated basis increased from INR7.2b in

CY13 to INR10.5b in CY14. The increase was due to Royal Enfield (RE) business which continued to generate healthy cash flows and contributing more than 65% to the consolidated cash flows (CY13: 51.5%).

However, consolidated free cash flows continued to remain subdued at INR755m in CY14 (CY13: INR40m). Despite a ~170% increase in capex in RE business, there was a 33% increase in standalone free cash flows. Free cash flows for CVs remained negative for the third consecutive year, impacted by pressure on profitability due to weak demand and high capex.

EIMs EBITDA to operating cash flows conversion continued at an impressive rate of 94% in CY14 (CY13: 100%).

Even on the margins front, RE’s EBITDA margins at 24.2% in CY14 (CY13: 18.4%) were at an all-time high backed by strong gross margins of 40%. However, VECV margins continued to lag at 6.7% in CY14 due to macro-economic factors, although far better than peers like Ashok Leyland (FY14: 2%) and Tata Motors (FY14: -3%).

Exhibit 1: Free cash flow remain muted on higher capex; RE continues to drive healthy operating cash flow (INR m)

Particulars Standalone Subsidiary (derived) Consolidated

CY11 CY12 CY13 CY14 CY11 CY12 CY13 CY14 CY11 CY12 CY13 CY14 EBITDA (Operations) 801 1,454 3,137 7,336 5,093 4,036 3,995 3,812 5,894 5,490 7,132 11,148

Add/Less: Non-cash adjustments 13 7 9 50 30 14 35 67 43 21 44 117

Less: Direct taxes paid (243) (334) (780) (2,255) (1,426) (743) (724) (555) (1,668) (1,077) (1,504) (2,810) Operating profit before working capital changes

572 1,127 2,366 5,131 3,697 3,307 3,306 3,324 4,269 4,435 5,672 8,455

Inventories (170) (301) (684) (613) (844) (307) 305 (574) (1,014) (609) (380) (1,187)

Trade receivables (33) (137) (59) 14 (1,932) (1,334) (607) (511) (1,965) (1,471) (666) (497)

Loans and advances including other current assets

- - (242) (298) - - (109) (1,010) - - (351) (1,308)

Trade Payables & other current liabilities and provisions

483 1,213 2,308 2,625 2,278 1,257 580 2,386 2,761 2,470 2,889 5,012

Cash generated from operations 851 1,902 3,688 6,860 3,200 2,923 3,475 3,615 4,050 4,825 7,163 10,475

Less: Capital expenditure & investment in subsidiaries

(652) (1,130) (1,892) (4,464) 234 (6,725) (5,231) (5,256) (419) (7,855) (7,123) (9,720)

Free cash flows 199 773 1,796 2,397 3,433 (3,802) (1,756) (1,641) 3,632 (3,030) 40 755

Source: Company Annual Report, MOSL

ART #1

EBITDA to operating cash flow conversion at 94% in

CY14

Standalone free cash flows continue to impress despite

heavy capex

10 March 2015 3

ART | Eicher Motors CY14

Exhibit 2: Consolidated: EBITDA to operating cash flow conversion continued to remain impressive


Exhibit 3: RE’s EBITDA margins best in CY14 backed by superior gross margins; PAT margins subdued to higher tax (INR b) Standalone Subsidiary (derived) Consolidated Particulars CY11 CY12 CY13 CY14 CY11 CY12 CY13 CY14 CY11 CY12 CY13 CY14 Net revenue 6.7 10.5 17.0 30.3 50.1 53.4 51.1 57.1 56.8 63.9 68.1 87.4 Gross profit 2.3 3.7 6.4 12.2 13.4 14.3 15.3 17.5 15.7 18.0 21.7 29.7 Gross margins (%) 33.7 35.6 37.7 40.4 26.7 26.8 29.9 30.6 27.6 28.2 31.9 34.0 EBITDA 0.8 1.5 3.1 7.3 5.1 4.0 4.0 3.8 5.9 5.5 7.1 11.1 EBITDA margins (%) 11.9 13.9 18.4 24.2 10.2 7.6 7.8 6.7 10.4 8.6 10.5 12.8 PBT 1.4 1.7 3.6 8.0 5.2 4.3 3.1 1.9 6.6 6.0 6.7 9.9 PBT margins (%) 21.1 16.6 21.3 26.3 10.3 8.0 6.0 3.4 11.6 9.4 9.8 11.4 PAT 1.2 1.4 2.8 5.6 3.7 3.3 2.5 1.4 5.0 4.7 5.3 7.0 PAT margins (%) 18.6 13.8 16.4 18.4 7.4 6.2 4.8 2.5 8.8 7.4 7.7 8.0


Planned capex of ~INR10b in FY16; CY14 intangible assets sees huge jump on R&D capitalisation EIM intends to invest ~INR10b in capital expenditure in FY16 comprising of

investment of INR5b in Royal Enfield business to enhance the production capacity. EIM acquired 50 acres of land in Vallam Vadagal near Chennai, Tamil Nadu, to set up the third manufacturing plant for RE business. Accordingly, the company’s consolidated land block (including leasehold land) increased by ~150% from ~INR1b in CY13 to INR2.5b in CY14.

The company is also upgrading its capabilities in product development with two new technology centres on the anvil.

In the VECV business, EIM intends to invest INR5b to facilitate commercialization of new products. Further, the company has capitalized INR3b during CY14 on account of Pro series product development cost.

During CY14, the company invested INR750m in Eicher Polaris Pvt Ltd, a JV with Polaris Industries, which targets to launch a personalized four wheeler in 2HCY15. The total investment in Eicher Polaris Pvt Ltd stands at INR1.3b at CY14 end (CY13: INR0.56b).

69%

88%

100% 94%

CY11 CY12 CY13 CY14

Operating cash flows / EBITDA (%)

Higher level of capex planned to enhance the

production capacity of RE, facilitate commercialization

of new products in CV segment

10 March 2015 4


Exhibit 4: EIM to spend ~INR10b for enhancing production in RE and commercializing new products (INR m) Particulars CY11 CY12 CY13 CY14 CY15E Standalone 419 1,075 1,392 3,714 5,000 Subsidiary - 6,780 5,731 6,006 5,000 Consolidated 419 7,855 7,123 9,720 10,000


Exhibit 5: Higher capex in standalone in recent years to augment production capacity


Exhibit 6: Significant land acquisitions during CY14 for capacity enhancements (INR m) Particulars CY13 Additions Deductions CY14 Freehold land block 362 836 - 1,198 Leasehold land block 606 753 53 1,305 Gross tangible assets (A) 21,559 5,657 509 26,707 Products, designs and prototypes 409 3,010 - 3,419 Gross intangible assets (B) 1,434 3,244 11 4,667 Gross fixed assets (A+B) 22,993 8,901 520 31,374 Land as a % of gross fixed assets 4% 18% 10% 8%


Exhibit 7: Investment in Eicher Polaris Pvt Ltd increases (INR m) Particulars CY11 CY12 CY13 (A) CY14 (B) Diff (B-A) Equity investments 0 55 255 1,055 800 Advance for equity 0 0 300 250 -50 Total investments 0 55 555 1,305 750


Contingent liabilities increase due to higher sales tax demands Contingent liabilities jumped from INR2.1b in CY13 to INR4b in CY14 [16% of

CY14 net worth (FY13: 10.2%)] primarily due to sales tax demands. Sales tax demands pertaining to VECV business raised by Maharashtra VAT

authorities increased from INR0.2b in CY13 to INR1.7b in CY14. Matters pertaining to sales tax contribute more than 40% of the total contingent

liabilities as at CY14 end. Exhibit 8: Sales tax demands in VECV increases contingent liabilities (INR m) Particulars CY11 CY12 CY13 CY14 Excise duty matters 596 618 626 659 Sales tax matters 188 221 219 1,656 Service tax matters 298 693 690 984 Income tax matters 304 249 343 329 Claims not acknowledged as debts 72 74 88 120 Bills discounted 46 153 140 279 Total 1,503 2,008 2,106 4,028


100% 14% 20%

38% 50%

0% 86% 80% 62% 50%

CY11 CY12 CY13 CY14 CY15E

Standalone contribution (%) Subsidiary contribution (%)

Sales tax demand from Maharashtra VAT authority

is the primary reason for contingent liabilities

jumping to INR4b in CY14 from INR2.1b

10 March 2015 5


Exhibit 9: Contingent liabilities increased to 16% of net worth (INR m)


Industrial promotion subsidy of INR370m adds to CY14 profitability The company has received industrial promotion subsidy of INR370m in CY14

recognized under ‘Other operating income’, which enhanced the consolidated PBT by 3.7%.

The above subsidy is the refund of sales tax paid to the government on sales from MDEP (Medium Duty Engine Plant) and Bus Body Plant in Pithampur, Madhya Pradesh. The company gets refund of 75% of sales tax paid.

This subsidy will be recurring in nature and aids VECV EBITDA by 9.7% (aids VECV EBITDA margins by 64bp).

Comparison with global and domestic peers: RE’s performance impressive on operating metrics; lags global peers on R&D and warranty provisions We have compared various operating parameters of Eicher’s RE segment with

the domestic two-wheelers such as Hero Motocorp and Bajaj Auto and global peers such as Harley Davidson (HD) and BMW for our analysis. The comparison is based on gross margins, EBIT margins and other variables such as R&D and warranty expenses incurred over the period.

Gross margins performance: HD’s gross margins at 35% are higher than RE’s at 32% in CY13, despite higher costs for HD being considered in gross profit due to accounting GAAP difference. However, RE’s gross margins have shown a significant improvement in the past two years with the current gross margins at 34% in CY14. BMW’s gross margins are much lower at 17% in CY13.

EBIT margins (operating margins): RE and HD have shown steady improvement in the EBIT margins over the years, with RE’s operating margins at par with HD in CY13 at 16.6%. The EBIT margin of RE soared to an all time high of 22.5%, which is probably the best in the world in this segment. The margins of BMW (CY13: 5.3%), however, have been low and inconsistent over the period.

R&D expenses as a percentage of sales: As a percentage of sales, R&D expenses incurred by RE (0.9%) have been significantly lower as compared to HD (2.9%) in CY13. However, when compared to domestic two-wheeler companies, this is higher. Hero Motocorp (0.4%) has the least R&D expenditure as a percentage of sales.

1,503 2,008 2,106

4,028 10.1%

11.4% 10.2%

16.0%

CY11 CY12 CY13 CY14

Contingent liabilities (INR m) Net worth

Subsidy of INR370m on refund of 75% of sales tax paid on sales from MDEP

and bus body plant

HD’s gross margins at 35% marginally superior to EIM

(32%) in CY13

RE’s operating margins at 22.5% in CY14, probably the best in the world; BMW lags

at 5.3%

As a percentage of sales, R&D expenses incurred by

HD (2.9%) is highest, followed by RE (0.9%); Bajaj (0.7%) and Hero (0.3%) has

lower R&D spend as % of sales

10 March 2015 6


Warranty expenditure as a percentage of sales: The warranty expenses as a percentage of sales provided by RE (0.7%) is marginally lower than that made by HD (1.1%). With the increase in sales, it has declined over the period from 1.2% in CY11 to 0.7% in CY14. Hero Motocorp and Bajaj Auto continue to have low warranty expenditure as a percentage of sales of 0.1% each in FY14.

Exhibit 10: Gross margins (%): HD has the best margins; EIM margins continue to rise

Source: Company Annual Report, Harley Davidson Form 10-K, BMW Annual Report, MOSL

Exhibit 11: EBIT margins (%): EIM's operating margins steadily increasing and the best in the world in CY14

Source: Company Annual Report, Harley Davidson Form 10-K, BMW Annual Report, MOSL

Exhibit 12: R&D expenses as a percentage of sales (%): EIM lower than HD; higher than Hero and Bajaj

Source: Company Annual Report, Harley Davidson Form 10-K, Bajaj Auto Annual Report, Hero

Motocorp Annual Report, MOSL

28 28

32

34

33 35 35

16 17 17

CY11 CY12 CY13 CY14

EIM Harley Davidson BMW

10.0 12.2

16.6

22.5

12.0 14.5

16.6

3.1

0.6

5.3

CY11 CY12 CY13 CY14

EIM Harley Davidson BMW

1.6 1.6

0.9 0.6

3.1 2.8 2.9

0.2 0.3 0.4 0.7 0.6 0.7

CY11/FY12 CY12/FY13 CY13/FY14 CY14

Royal Enfield Harley davidson Hero Bajaj

EIM’s R&D expenses as a percentage of sales may

increase with two new technology centres on the

anvil

10 March 2015 7


Exhibit 13: Warranty expenses as a percentage of sales (%): EIM's warranty provision higher than domestic two-wheeler companies but lower than HD

Source: Company Annual Report, Harley Davidson Form 10-K, Bajaj Auto Annual Report, Hero

Motocorp Annual Report, MOSL

Key assumptions: (i) For comparison as a percentage of sales, we have considered ‘net

sales’, (ii) Hero Motocorp and Bajaj Auto are financial year end companies; EIM and global

peers are calendar year ends (iii) the operating metrics comparison with global peers might

be influenced due to difference in accounting practices (IFRS/US GAAP).

Effective tax rate in RE closer to marginal corporate rate; CVs continue under MAT Effective tax rate of standalone entity (RE business) surged towards the marginal

tax rate from 23% in CY13 to 30% in CY14. However, CV business continued to operate under MAT rate (~21%) in CY14.

The lower tax rate (MAT rate) for the CV business is primarily due to two benefits: (i) On the R&D front, VECV is entitled to a deduction @ 200% on actual R&D expenditure (capital and revenue) and (ii) On capex, the actual cost of plant and machinery acquired and installed during the year is entitled to 15% investment allowance.

Since the share of the standalone tax in the consolidated entity has increased from 10.6% in CY11 to 82.2% in CY14 (due to higher profitability in RE business), the consolidated effective tax rate also increased to 29% (in-line with higher standalone tax rate) in CY14.

With the recent budget announcement of reduction in tax rates from 30% to 25% in four years, EIM might be positively impacted on account of standalone tax rate coming down.

1.2

0.9 0.7 0.7

0.9 1.1 1.1

0.1 0.1 0.1

0.2 0.2 0.1

CY11/FY12 CY12/FY13 CY13/FY14 CY14

EIM Harley Davidson Hero Motocorp Baja Auto

RE’s effective tax rate at 30% in CY14

10 March 2015 8


Exhibit 14: Standalone tax rate consistently rises; consolidated tax rate rises due to higher share of standalone profits


Exhibit 15: VECV tax rate continues to operate under MAT (INR m) Particulars CY12 CY13 CY14 Current tax 869 749 529 MAT credit entitlement (475) (653) (529) Deferred tax charge 564 509 515 Total tax 958 605 515 Effective tax rate 22% 17% 21%


Other financial highlights Change in financial year end: In line with the new Companies Act, 2013, the

financial year of the company will be changed from the current ‘January-December year end’ to ‘April-March year end’. Consequently, the current financial year of the company that commenced from Jan 1, 2015 shall be extended to Mar 31, 2016 (i.e; a period of 15 months).

During CY14, unbilled revenue appearing as part of ‘Other current assets’ increased from INR147m in CY13 to INR423m in CY14. It is pertaining to the long blocks and CBU manufactured by MDEP, for which the billing to Volvo will be done in CY15.

Payout ratio increases further to 23%: The dividend payout ratio of the company has increased on a continuous basis, it has more than double over past four years.

Exhibit 16: Consistent improvement in the payout ratio


12%

17% 23% 30%

25%

21% 22% 29% 10.6%

23.2%

58.2%

82.2%

CY11 CY12 CY13 CY14

Standalone effective tax rate

Consolidated effective tax rate

Share of standalone tax in consolidated tax expense

4,974 4,748 5,254 7,018 10%

13%

18%

23%

CY11 CY12 CY13 CY14

Profit after tax (INR m) Payout ratio (%)

CV segment operates under MAT due to tax benefits

arising on R&D expenditure and investments in plant

and machinery

10 March 2015 9


MANAGEMENT SPEAK/KEY PLANS Heavy capex planned for FY16 (15 months) Company intends to invest INR10b in the business with INR5b in Royal Enfield

business and INR5b in VECV segment in FY16. These investments will be towards research and development and enhancing

the production capacity to achieve the targets set. It has recently acquired 50 acres of land in Vallam Vadagal, near Chennai, Tamil

Nadu, to set up the third manufacturing plant. The company continues to invest heavily with two new technology centres on

the anvil. A smaller satellite center is being set up in UK, and will be operational by the end of 2015. Such new centres will be responsible for creating a robust and beautiful range of new motorcycles from the two new platforms that are under development.

Exploring the international markets for RE The company has commenced strategic foray into the international markets. Markets such as USA, UK and Europe are highly influential, and success in these

markets will be crucial to gain currency, credibility and thereby achieve global leadership in the midsized segment.

In Latin America and South East Asia, motorcycles, like in India, are popular as the favourite means of daily commute.

The size of these markets is much larger than the developed countries and similar to India with enormous potential to upgrade to mid-sized motorcycles.

Strengthening senior management in RE for expanding addressable market Key hires include Rudratej ‘Rudy’ Singh who has joined as President, Royal

Enfield. After leading Harley Davidson’s geographic expansion across emerging markets, industry veteran Rod Copes has recently joined the team to drive Royal Enfield’s growth in the North America.

Company also now has on-board one of the most prolific industrial designers for motorcycles, Pierre Terblanche, who has created some extraordinary motorcycles as the head of design for Ducati for over a decade. With their worldwide expertise and perspective, the global team will be instrumental in company’s domestic cum- export expansion strategy; taking the products to new markets while bringing global designs and technology to India.

Eicher trucks and buses (ETB) reports a robust 76.5% volume growth ETB exported 5,824 units in 2014, registering a robust growth of 76.5% over

2013. This is against Industry growth of 51.2% in exports of CVs (without sub 5 Ton GVW) from India.

The growth has been led by gains in market shares in South Asia in key markets of Bangladesh, Sri Lanka and Nepal and also increased volumes from Africa.

ETB registered volume growth and increase in share of exports from India in all three segments of LMD, HD and Bus.

ART #2

10 March 2015 10


LMD-VECV segment records highest ever market share In LMD, VECV recorded its highest ever market share of 32.6% for the year. In

the Buses segment also, VECV posted its best ever market share of 14.9%. In 2014, the company began commercializing the Pro series range in a phased

manner, starting with the LMD segment– Pro 1000 and Pro 3000 trucks. The company has also launched the Pro series trucks in Heavy Duty segments – Pro 6000 and Pro 8000.

By end of 2015, the Pro series range will be available across all the distribution points in the country. In 2014, the company made and sold ~12,000 units. These meet Volvo’s exacting standards of quality and performance and have been very well received.

VECV’s lean business model gives it the distinction of being the only CV Company to remain profitable in every quarter during the longest downturn in the recent decades for the Indian commercial vehicle industry.

Volvo trucks continue as market leader in premium truck segment New Volvo Trucks platform mega-launch generated significant orders at

targeted prices. Volvo trucks continue to be the market leader in premium truck segment with

overall market share of 61.6% in 2014 predominantly driven by tipper sales. The focus of the company is on maximizing the operating leverage which has

played a vital role in growing the net profits faster than the net sales from operations.

JV with Polaris Industries set to launch a personalized four wheeled vehicle by end of 2015 Eicher Polaris Private Ltd is all set to commence production in 2015 by launching

a personalised four wheeler by the end of the year 2015. Emphasis is on sharp product-market offering emphasized along with a great

focus on nurturing the brand.

10 March 2015 11


GOVERNANCE MATTERS Brand fees paid to promoter group company remains steady The brand fees paid to promoter group company (Eicher Goodearth Pvt Ltd)

increased marginally from INR245m in CY13 to INR269m in CY14. It remained stable at 0.3% of consolidated sales in CY14 (CY13: 0.4%). Exhibit 17: Brand fees paid to promoter group company at 0.3% of sales (INR m) Particulars CY11 CY12 CY13 CY14 Brand fees 207 253 245 269 Rent paid 2 29 93 106 Total 2 29 93 106 Brand fees as a % of sales (%) 0.37% 0.40% 0.37% 0.31%


Managerial remuneration as a percentage of PBT dips during CY14 There has been a marginal increase in managerial remuneration from INR54m in

CY13 to INR61m in CY14. However, as a percentage of PBT it declined from 1.4% in CY13 to 1% in CY14. In

fact, this is the lowest in past four years. Exhibit 18: Managerial remuneration as a % of PBT remains steady


All directors are regular in attending board meetings The company is regular in calling its board meetings as per the prescribed laws.

During CY14, the company held four board meetings. All the directors have attended at least 50% of the meetings. Further, in February 2015, EIM has appointed Ms Manvi Sinha as an Additional

Director (Independent director) on the Board of Directors of the company (Woman Director). She replaced Mr R L Ravichandran, who has ceased to be a Director with effect from December 31, 2014.

Exhibit 19: All directors attended the board meetings regularly Name Director's position CY11 CY12 CY13 CY14 Mr Siddhartha Lal MD 4 4 4 4 Mr R L Ravichandran WTD 3 3 3 3 Mr S Sandilya NEI 4 4 4 4 Mr Priya Brat NEI 4 4 4 4 Mr M J Subbaiah NEI 3 4 4 3 Mr Prateek Jalan NEI 4 4 4 4 Total meetings held 4 4 4 4


35 46 54 61

1.1%

1.4% 1.4%

1.0%

CY11 CY12 CY13 CY14

Managerial remuneration (INR m) Managerial remuneration as a% of PBT

ART #3

10 March 2015 12


Financials and valuations

Income Statement (Consolidated)

(INR Million) Y/E December 2010 2011 2012 2013 2014 2015E 2016E 2017E

Net Sales 43,971 56,775 63,299 66,858 85,987 128,436 180,865 215,404 Change (%) 49.6 29.1 11.5 5.6 28.6 49.4 40.8 19.1 EBITDA 3,811 6,037 5,490 7,137 11,148 19,922 32,126 37,704

EBITDA Margin (%) 8.6 10.5 8.6 10.5 12.8 15.2 17.4 17.2 Depreciation 573 640 822 1,300 2,198 3,085 3,877 4,904 Interest cost 95 77 38 79 98 70 70 70 Other Income 1,034 1,281 1,366 953 1,074 1,746 2,595 3,960 PBT 4,177 6,602 5,997 6,711 9,926 18,514 30,774 36,690 Tax 1,108 1,628 1,249 1,452 2,909 5,155 8,428 10,071 Effective Rate (%) 26.5 24.7 20.8 21.6 29.3 27.8 27.4 27.4 PAT 3,068 4,974 4,749 5,259 7,017 13,359 22,346 26,618 Change (%) 137.0 62.1 -4.5 10.8 33.4 90.4 67.3 19.1 Less: Minority Interest 1,179.3 1,886.3 1,505.9 1,314.4 863.8 2,308.0 4,575.3 5,167.9 Adj. PAT 1,889 3,088 3,243 3,945 6,154 11,051 17,771 21,451

Change (%) 126.6 63.4 5.0 21.7 56.0 79.6 60.8 20.7

Balance Sheet (Consolidated)


Share Capital 269 270 270 270 271 271 271 271 Net Worth 12,321 14,931 17,549 20,554 25,159 31,286 47,404 67,014 Minority Interest 6,774 8,377 9,485 10,397 10,851 13,159 17,734 22,902 Deferred Tax 249 645 1,232 1,805 2,394 2,720 3,303 3,981 Loans 956 504 384 839 584 584 584 584 Capital Employed 20,301 24,456 28,649 33,595 38,986 47,748 69,025 94,480 Application of Funds

Gross Fixed Assets 8,113 9,887 15,260 22,993 31,374 42,571 52,571 62,821 Less: Depreciation 4,269 4,843 5,342 6,431 8,280 11,365 15,242 20,146 Net Fixed Assets 3,844 5,044 9,918 16,561 23,093 31,206 37,330 42,675 Capital WIP 703 4,128 5,044 4,636 4,188 1,250 1,250 1,250 - of which Goodwill 223 223 223 223 223 223 223 223 Investments 4,586 5,126 6,385 8,255 10,777 9,171 9,171 9,171 Curr.Assets, L & Adv. 20,500 23,501 23,368 23,914 26,018 37,602 65,288 93,912 Inventory 3,265 4,280 4,888 5,268 6,455 9,561 13,494 16,032 Sundry Debtors 2,609 3,434 4,459 5,125 5,622 6,053 8,492 9,896 Cash & Bank Balances 12,457 11,973 8,035 6,826 4,806 13,731 31,821 54,333 Loans & Advances 1,814 3,391 5,503 6,163 8,578 7,305 10,139 12,063 Others 355 424 483 532 557 952 1,342 1,588 Current Liab. & Prov. 9,332 13,343 16,066 19,771 25,089 31,481 44,014 52,528 Sundry Creditors 7,596 11,238 14,356 17,612 21,876 23,586 33,308 39,648 Other Liabilities 346 608 6 0 0 4,459 6,371 7,862 Provisions 1,391 1,497 1,704 2,159 3,213 3,436 4,335 5,018 Net Current Assets 11,168 10,157 7,302 4,143 928 6,121 21,274 41,384 Application of Funds 20,301 24,456 28,649 33,595 38,987 47,748 69,025 94,480 E: MOSL Estimates

10 March 2015 13


Financials and valuations

Ratios (Consolidated)

Y/E December 2010 2011 2012 2013 2014 2015E 2016E 2017E Basic (INR)

EPS 70.1 114.4 120.1 145.9 227.1 407.8 655.8 791.5 EPS Growth (%) 6.5 63.1 5.0 21.5 55.6 79.6 60.8 20.7 Cash EPS 91.4 138.1 150.5 194.0 308.2 521.6 798.8 972.5 Book Value per Share 457.4 553.2 650.0 760.1 928.4 1,154.5 1,749.2 2,472.8 DPS 11.0 16.0 20.0 30.0 35.0 40.0 45.0 50.0 Payout (Incl. Div. Tax) % 18.3 16.3 19.5 24.1 27.5 11.5 8.0 7.4 Valuation (x)

P/E 223.8 137.2 130.7 107.6 69.1 38.5 23.9 19.8 Cash P/E 171.7 113.6 104.2 80.9 50.9 30.1 19.6 16.1 EV/EBITDA 180.6 114.9 113.9 76.3 43.9 24.9 15.3 12.3 EV/Sales 15.8 12.1 10.4 9.2 6.7 4.4 3.0 2.4 Price to Book Value 34.3 28.4 24.1 20.6 16.9 13.6 9.0 6.3 Dividend Yield (%) 0.1 0.1 0.1 0.2 0.2 0.3 0.3 0.3 Profitability Ratios (%)

RoE 16.4 22.7 20.0 20.7 26.9 39.2 45.2 37.5 RoCE 22.4 29.8 22.7 21.8 27.6 42.9 52.8 45.0 RoIC

Turnover Ratios

Debtors (Days) 22 22 25 27 23 17 17 16 Inventory (Days) 27 27 28 28 27 27 27 27 Creditors (Days) 63 72 82 94 91 66 66 66 Working Capital (Days) -14 -22 -29 -39 -41 -22 -22 -23 Asset Turnover (x) 2.2 2.3 2.2 2.0 2.2 2.7 2.6 2.3 Fixed Asset Turnover

Leverage Ratio

Debt/Equity (x) 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cash Flow Statement (Consolidated)


Profit before Tax 4,177 6,602 5,997 6,706 9,926 18,514 30,774 36,690 Depreciation & Amort. 573 640 822 1,300 2,198 3,085 3,877 4,904 Direct Taxes Paid -831 -1,668 -1,077 -1,504 -2,810 -4,828 -7,845 -9,393 (Inc)/Dec in Working Capital 374 -234 391 1,491 2,020 -1,827 3,350 2,398 Interest/Div. Received 1,039 1,316 1,351 1,023 950 1,746 2,595 3,960 Other Items -933 -1,305 -1,308 -819 -1,809 3,884 -2,938 -3,885 CF from Oper. Activity 4,399 5,351 6,177 8,197 10,475 20,573 29,813 34,674 (Inc)/Dec in FA+CWIP -1,315 -4,173 -7,820 -7,054 -9,682 -8,260 -10,000 -10,250 Free Cash Flow 3,084 1,178 -1,644 1,143 793 12,313 19,813 24,424 (Pur)/Sale of Invest. -1,645 -540 -1,263 -1,879 -1,190 1,606 0 0 CF from Inv. Activity -2,960 -4,713 -9,083 -8,933 -10,872 -6,654 -10,000 -10,250 Issue of Shares 88 24 4 17 79 -3,655 -226 -256 Inc/(Dec) in Debt -307 -453 -43 610 -255 0 0 0 Interest Paid -118 -84 -40 -80 -98 -70 -70 -70 Dividends Paid -351 -609 -895 -1,020 -1,348 -1,268 -1,427 -1,585 CF from Fin. Activity -689 -1,122 -974 -474 -1,622 -4,994 -1,723 -1,911 Inc/(Dec) in Cash 750 -484 -3,880 -1,209 -2,020 8,925 18,090 22,512 Add: Beginning Balance 11,707 12,457 11,915 8,035 6,826 4,806 13,731 31,821 Closing Balance 12,457 11,973 8,035 6,826 4,806 13,731 31,821 54,334 E: MOSL Estimates

0 0 0 0 0 0 0

10 March 2015 14


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