India - Two Wheelers - Darashaw (15th Aug 2011)

8/3/2019 India - Two Wheelers - Darashaw (15th Aug 2011)

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11001-Reg ent Cha mb ers, Nariman Point, Mumb ai

Com pet i t i ve Pressures To Rise ; How ever P ie Large Enoug h For A l l

INDIA

15th August 2011

INITIATION

Analyst:

Jehan Bhadha

[email protected]

+91-22-43022256

India Two Wheelers


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Contents

Executive Summary 3

Rise in income levels 5

Rising prosperity in rural India 6

Small cars wont cannibalize 2 W market 7

The 2 W industry composition 8

Volume growth ~ a derivative of GDP growth 13

Japanese companies to increase their market share 14

Huge export potential 15

Concerns 16

- Increase in raw material prices 16

- Increase in prices and interest rates 16

Valuation 18

Companies

Hero MotoCorp 20

Bajaj Auto 32

TVS Motors 47


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EXECUTIVE SUMMARY

Rise in income levels to propel penetration

The Indian two wheeler industry is on the cusp of a multi year growth trajectory before the industry nears saturation

levels. The key drivers of two wheeler demand are the households earning between INR 0.2 mn to INR 1 mn per

annum. As income rises on the back of rapid economic growth, many households are moving into this category from

lower income categories and are shifting upwards and upgrading from public transport to two wheelers. There has beena structural change in terms of affordability of two wheelers with Indias Per Capita Income compounding at 12% which

is 6x the CAGR of 2% in two wheeler realizations.

Rising prosperity in rural India presents a big opportunity

Strong income growth in rural India, due to higher minimum support prices (MSP) for crops and increase in government

spending in the recent years is resulting in a big catch-up for rural customers with their urban counterparts for

consumption. 2W being the cheapest mode of motorized mobility are being lapped up by rural customers. Growth in the

rural markets for the past three years has been higher than in the urban markets, driving companies to increase their

rural footprint.

Huge export potentialExports out of India have grown at a CAGR of 25% over the last 5 years to 1.6 mn units in FY11 against a growth of

11% in domestic sales to 11.8 mn units. While this growth seems spectacular it pales significantly when compared to

the 10 mn units exported by China. Indian companies are rightly targeting African and Asian countries for exports as

two wheeler penetration in these economies is low and growing at a brisk pace.

Japanese companies to increase their market sh are

HMSI will be increasing its capacity from 1.6 mn to 4 mn by FY13E which will help it gain market share. The market

perceives that HMSI lacks distribution strength, however we disagree it has a sales network of 790 outlets (398

dealers and 392 branches). Thus HMSI is not too far behind its peers in terms of dealership rollout. HMSI aims to

become the No.1 player in India by the next decade. We expect Japanese players (HMSI, Yamaha, Suzuki) to increase

their market share from 18% in FY11 to 28% by FY15E.

HMCL - Hero MotoCorp

HMCL will enter a transition phase over the next 3 years, as it attempts to develop internal R&D capabilities and

promote the Hero brand, while simultaneously paying a fairly high royalty rate (of 2.8%) to Honda. Consequently, we

expect margin pressures to persist. HMCL faces concerns on the following fronts (a) Erosion of Brand post exit of

Honda, (b) Loss of market share due to increased competition from HMSI, (c) No supply of new models from Honda to

the company post 2014, (d) Expected rise in advertisement and R&D expenditure to impact margins negatively

(together by about 50 bps), (e) Declining trend in its ROE owing to a likely increase in investments and lower dividend

payout. Our TP of INR 1,664 provides for 12% downside from current levels. The TP discounts HMCLs FY13E EPS by

14.0x which is its historic mean PE.

BJAUT - Bajaj Auto

BJAUT will maintain its market share in the >125cc motorcycle category where it is the leader and will witness a decline

in its share in the 125cc motorcycle segment which are high value products. We expect

BJAUTs dividend yield to increase from the current level of 3% to 5% by FY13E. We value BJAUT at INR 1,735 where it

will discount its FY13 EPS by 15.4x (a 10% premium to HMCLs historic mean PE) providing for returns of 19%.


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TVSL - TVS Motors

Increasing focus on 3W and executive level scooters will expand margins for TVSL. We forecast TVSLs revenue and EPS

CAGR (FY12/13E) at a robust 17% and 49%. EBITDA margin would increase to 7.0% in FY13E from 5.5% in FY11 due

to rising share of higher-margin three-wheelers (7% of revenue in FY13E vs 5% in FY11) and better profitability from

launch of high-end model in the scooter business (21% of revenues). We expect motorcycle and mopeds to grow at

10% and 13% respectively over FY12/13E. At our target price of INR 62, TVSL will trade at 10.5x its FY13E EPS, which

is a discount of 25% to our valuation for HMCLs.

Summary Valuations

Fair PE P/ BV ROECompanies CMP

ValueReturns

FY12E FY13E FY12E FY13E FY12E FY13ERating

HMCL 1890 1664 -12% 17.0 15.9 9.7 7.7 57% 48% SELL

BJAUT 1457 1735 19% 13.8 12.2 6.8 5.9 50% 48% BUY

TVSL 54 62 16% 13.1 9.1 3.2 2.7 25% 30% BUY

Source: Darashaw


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RISE IN IN COME LEVELS TO PROPEL PENETRATION

Our analysis on the income levels and penetration of 2W (two wheelers) in the Asian region reveals that the two have a

very strong correlation. Thus the Indian 2W industry is on the cusp of a multi year growth trajectory before the industry

nears saturation levels.

0

50

100

150

200

250

300

350

3000 6000 9000 12000 15000

Per Capita Income (USD, PPP)

TwoWheelersPer1,000People

Vietnam

IndiaIndonesia

China

Malaysia

Thailand

Source: International Road Federation's - World Road Statistics 2008

Increase in No of Households in the 0.2 - 1 mn category

11

55

95

2 6

33

0

20

40

60

80

100

120

2005 2015E 2025E

Householdsinmn

< 90

90 - 200

200 - 500

500 - 1000

> 1000

Source: McKinsey Global Institute Source: McKinsey Global Institute

Income Groups (in '000s)

1% 1% 3%6%

25%

46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2015E 2025E

Households

< 200

200 - 1000

> 1000

Source: McKinsey Global Institute

Shift in Mix of Households (mn)

I n c o m e i n I NR ' 0 0 0 s 2005 2015E 2025E

< 200 93% 74% 51%

200 - 1000 6% 25% 46%

> 1000 1% 1% 3%

Source: McKinsey Global Institute

No of Households (mn)

I n c o m e i n I NR ' 0 0 0 s 2005 2015E 2025E

> 1000 1 3 10

500 - 1000 2 6 33

200 - 500 11 55 95

90 - 200 91 106 93

< 90 101 74 50

Total 207 244 281

The key drivers of 2W demand are the households

earning between INR 0.2 mn to INR 1 mn per

annum. As income rises on the back of rapid

economic growth, many households are moving

into this category from lower income categories and

are shifting upwards and upgrading from public

transport to 2W.


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Growth in Per Capita Income is many times faster than growth in 2W (two w heeler) prices

There has been a structural change in terms of affordability of 2W with Indias PER Capita Income compounding at 12%

which is 6x the CAGR of 2% in 2W realizations. We believe this trend will prevail in the next decade thereby leading to

sustained sales growth of two wheelers.

FY98 FY11E Change CAGR

Per Capita Income (INR) 12,707 54,527 3.3x 12%

Hero Hondas Realisation (ex showroom) 28,094 37,804 0.3x 2%

Source: Planning Commission, Darashaw

RISING PROSPERITY IN RURAL INDIA PRESENTS A BIG OPPORTUNITY

Strong income growth in rural India, due to higher minimum support prices (MSP) for crops and government spending

in the recent years is resulting in a big catch-up for rural customers with their urban counterparts for consumption. 2W

being the cheapest mode of motorized mobility are being lapped up by rural customers. Growth in the rural markets for

the past three years has been higher than in the urban markets, driving companies to increase their rural footprint.

MSP of various crops

I N R / Qt l FY06 FY12 Change

Paddy 585 1185 103%

Wheat 700 1176* 68%

Jowar 525 990 89%

Bajra/Maize 525 980 87%

Cotton 1760 3300 88%

Sugarcane 115 225* 96%

* denotes our estimate Source: Agriculture Ministry

MSP of various cr ops

200

400

600

800

1000

1200

1400

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

Paddy (F) Wheat Jowar Bajra & Maize Source: Agriculture Ministry


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SMALL CARS WONT CANNIBA LISE 2W (TWO WHEELER) MARK ET

We believe that the Indian market will not follow the western trend of motorization wherein people bypassed two

wheelers for cars as their first mode of motorized transport. Also, we do not expect existing users to replace their two-

wheelers with cars.

Ownership Cost Structure

Splendor NXG Nano CX Alto LXI

Price 50,000 200,000 300,000

Finance % 70% 75% 75%

Down Payment 15,000 50,000 75,000

Loan Amount 35,000 150,000 225,000

Loan Rate 24% 15% 13%

Loan Duration (months) 48 48 48

EMI I 1141 4175 6036

Usage / Day (kms) 25 25 25

Mileage (kms/ltr) 60 20 15

Petrol (INR / ltr) 68 68 68

Fuel Cost / Month II 850 2550 3400

Annual Maintenance Cost 1000 4000 5000

Monthly Maintenance Cost . III 83 333 417

Ownership Cost / month (I + II + III ) 2074 7058 9853

Source: Companies, Darashaw

We expect 2W and cars to coexist harmoniously with the former being the daily workhorse as 2W have a distinct cost

advantage. The monthly ownership cost of an entry level small car is 3 to 5 times costlier than an executive 2W

motorcycle.


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THE TWO WHEELER INDUSTRY COMPOSITION

Two Wheeler Segme nts - Marke t Share

0%

20%

40%

60%

80%

100%

FY97

FY99

FY01

FY03

FY05

FY07

FY09

FY11

Motorcycles

Mopeds

Scooters

Source: CMIE

Motorcycle Segment

125cc Sports

Market Share (FY11) 72% 28%

Target Group Middle aged / middle class Youth

Geography Semi-urban, Rural Urban

Offerings Frugality, Utility Style, Excitement Value

Popular ModelsHMCL Splendor / Passion

BJAUT - Discover

BJAUT Pulsar

HMSI - Unicorn

The two wheeler industry is dominated by

the motorcycle segment which commands a

share of 79% against 16% for scooters and

5% for mopeds.


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Motorcycles - Segmental Market Share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

> 125cc

< 125cc

Source: CMIE

Motorcycles - Growth Profi le

-20%

0%

20%

40%

60%

80%

100%

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

< 125cc

> 125cc

Source: CMIE

< 125cc Market Share (Domestic)

15%7.4%

26%

17.9%

52%71.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY02 FY11

HMCL DomBJAUT Dom

TVSL Dom

Source: CMIE

> 125cc Market Share (Domestic)

15% 14%

7%

50%27%

6%

0%

19.7%

42%

8%

0%

10%

20%

30%

40%

50%

60%

70%

80%90%

100%

FY02 FY11

Yamaha Dom

HMSI Dom

TVSL Dom

BJAUT Dom

HMCL Dom

Source: CMIE

The


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< 125cc Stab le

HMCL is the undisputed leader in the 125cc segment.

Price ('000s) HMCL BJAUT TVSL HMSI Yamaha Suzuki M&M

100 cc

40-45 CD Dawn Platina 100 Crux

CD Deluxe Discover 100 Jive YBR 110

Splendor Star City45-50

Sport

50-55 Passion Twister Stallio

Variants 13 4 2 3 1 2 1

125 cc

40-45 Platina 12545-50 Discover 125

50-55 Flame 125 YBR 125 Slingshot

Super Splendor Shine SS 12555-60

Glamour

60-65 Stunner

Variants 10 2 2 1 2 2 1

Combined

Total Variants 22 6 3 4 3 4 1 1

FY11

Market Share100% 71% 18% 7% 3% 1% 0% 0%

Source: Companies


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> 125cc Stab le

BJAUT has a substantial lead over other players in this segment with a 49% market share as on FY11. This isowing to the success of its model Pulsar. All other companies have since long targeted this segment but have

not been able to increase their market shares.

Price ('000s) HMCL BJAUT TVSL HMSI Yamaha Suzuki M&M

135 cc

55-60 Pulsar 135

Variants 13 0 1 0 0 0 0 0

150 cc

50-55 Discover 150

55-60 Impulse Pulsar 150 SZ

60-65 Achiever SZR/SZX

65-70 Apache 160

70-75CBZ Extreme

HunkUnicorn/Dazzler FZS/FZ16 GS 150

80-85 Fazer

110-120 YZF R15

Variants 14 4 2 1 1 5 1 0

180 cc

70-75 Pulsar 180 Apache 180

Variants 2 0 1 1 0 0 0 0

220 cc

75-80 Avenger

85-90 Karizma

90-95 Pulsar 220Variants 3 1 2 0 0 0 0 0

Combined

Total Variants 20 5 6 2 1 5 1 0

FY11

Market Share100% 13% 49% 6% 19% 8% 2% 0%

Source: Companies

>125cc Market Share Movement

HMCL BJAUT TVSL HMSI Yamaha Suzuki

FY03 19% 41% 8% 0% 26% 0%

FY05 16% 51% 14% 8% 7% 0%

FY07 8% 59% 11% 12% 4% 5%

FY09 11% 49% 8% 21% 6% 3%

FY11 13% 49% 6% 19% 8% 2%

Source: CMIE


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Scooter Segment

Companies like BJAUT, LML and Kinetic have extinguished operations in this segment which paved an easy wayfor HMSI, TVSL, HMCL, Mahindra and Suzuki.

HMSI has managed to increase and maintain its leadership position over the last decade and commands a 43%market share as on FY11.

Price ('000s) HMCL BJAUT TVSL HMSI Suzuki M&M

25-30 Scooty Teenz

30-35 Kine

40-45 Scooty

45-50Pleasure

Maestro Wego Dio

50-55Activa

AviatorAccess 125

Rodeo

Duro

Flyte

Variants 13 2 0 3 3 1 4

FY11

Market Share100% 17% 0% 22% 43% 11% 8%

Source: Companies

Scooters Market Share Movement

HMCL BJAUT TVSL HMSI Suzuki M&M Kinetic LML

FY03 0% 40% 18% 19% 0% 0% 11% 8%

FY05 0% 14% 24% 49% 0% 0% 7% 2%

FY07 10% 2% 26% 56% 0% 0% 5% 0%

FY09 13% 1% 21% 56% 7% 6% 0% 0%

FY11 17% 0% 22% 43% 11% 8% 0% 0%

Source: CMIE


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VOLUME GROWTH ~ A DERIVATIVE OF GDP GROWTH

Our analysis shows that in a stable year, two wheeler growth is correlated to the overall GDP growth by a factor of 1.7x.

Deviation in this trend was observed in (a) FY08 and FY09 due to non availability of retail finance and high interest rate

regime and (b) FY10 & 11 owing to bunching up of latent demand for FY08 & FY09 in FY10 & FY11. Two Wheeler Growth Factor to GDP at 1.7x

FY04

FY05

FY06FY07

FY08

FY09

FY10

FY11

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

CAGR: FY12-15E

0% 5% 10% 15% 20% 25%

< 125cc MC

Mopeds

Scooters

> 125cc MC

Source: Darashaw Source: Darashaw

FY12E FY13E FY14E FY15E

GDP Growth 7.50% 7.50% 7.50% 7.50%

Factor 1.7 1.7 1.7 1.7

Domestic - Two Wheeler Growth 13% 13% 13% 13%

Domestic - Two Wheeler Sales (Mn) 13.3 15.0 16.9 19.1

Exports Two Wheeler Growth 25% 25% 25% 25%

Exports Two Wheeler Sales (Mn) 1.9 2.4 3.0 3.8

Total Two Wheeler Sales (Mn) 15.2 17.4 20.0 22.9

Total Two Wheeler Growth 14% 14% 15% 15%

Break-up Two W heelers

Motorcycles Share 79% 79% 79% 79%

Scooters Share 16% 16% 16% 16%

Mopeds Share 5% 5% 5% 5%

Total Two Wheelers 100% 100% 100% 100%

Motorcycle Sales (Mn) 12.0 13.8 15.8 18.1Growth 14% 15% 15% 15%

Scooter Sales (Mn) 2.4 2.8 3.2 3.6

Growth 14% 14% 15% 15%

Moped Sales (Mn) 0.8 0.9 1.0 1.1

Growth 14% 12% 12% 12%

Source:Darashaw


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JAP ANESE COMPANI ES TO INCREASE THEIR MARKET SHARE

We think that the market is underestimating Hondas capabilities and is using its mediocre historical performance to

buttress their argument. We counter this by stating that models such as the Unicorn, Twister and Stunner were not in

the realm of maximum demand a deliberate strategy in the context of the Hero Honda JV. It is erroneous to believe

HMSI cannot create markets or brands. HMSI will be increasing its capacity from 1.6 mn to 4 mn by FY13E which will

help it gain market share. The market has a perception that HMSI lacks distribution strength, however we disagree ithas a sales network of 790 outlets (398 dealers and 392 branches). The data below indicates that HMSI is not too far

behind its peers in terms of dealership rollout it plans to add 100 outlets in the current year and then 200 annually

over the coming years.

Dealers Sales (Mn) Market Share

HMCL 700 5.3 45%

BJAUT 610 2.4 20%

TVS 490 1.8 15%

HMSI 398 1.6 13%

Yamaha 450 0.3 3%Source: Darashaw

Honda Motor Co. stated in the Nikkei Business Daily (Jan 2011), that it plans to triple sales in India to 5 mn units over

the next five years. Shinji Aoyama, HMSIs outgoing president & CEO, noted in a recent press interview (Source:

Business Standard, Apr 2011) that Whatever we did not have in our product portfolio, we would like to fill. For

instance, we would like to enter the inexpensive product segment, and bring in a core product in the entry-level 100cc

segment. This product will make us really aggressive. Our target in the next decade is to be number one in India.

Comments of Hiroyuki Suzuki CEO & MD, Yamaha Motor India (June 2011): We aim to achieve 1 mn unit sales by

2013. Yamahas FY11 sales stood at 2.8 lac units.We believe the Japanese companies pose a serious threat to the

domestic ones especially HMCL. The below table demonstrates our view and shows the decline in market share of Indian

companies v/s Japanese companies.

Increasing market share of Japanese companies

FY11 FY12E FY13E FY14E FY15E

Japanese Cos 18% 19% 22% 25% 28%

HMSI 13% 13% 15% 16% 17%

Yamaha 2% 3% 4% 6% 8%

Suzuki 2% 3% 3% 3% 3%

Indian Cos 82% 81% 78% 75% 72%

HMCL 45% 45% 42% 40% 38%

BJAUT 21% 21% 20% 20% 19%

TVS 15% 15% 14% 14% 14%

M&M 1% 1% 1% 1% 1%

Source: Darashaw

2W capacities (mn units)

Mar 2011 Mar 2013 Increase

HMSI 1.6 4.0 150%

Yamaha 0.6 1.0 67%

HMCL 6.1 7.4 21%

BJAUT 4.5 5.5 22%

TVS 3.0 3.3 10%Source: Companies, Darashaw


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HUGE EXPORT POTENTIA L

Exports out of India have grown at a CAGR of 25% over the last 5 years to 1.6 mn units in FY11 against a growth of

11% in domestic sales to 11.8 mn units. While this growth seems spectacular it pales significantly when compared to

the 10 mn units exported by China.

Chinese 2 W Exports (mn units)

0

2

4

6

8

10

12

2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Bloomberg

Indian companies are rightly targeting African countries for exports as 2W penetration in these economies is low and

growing at a brisk pace. There is huge demand for cheaper bikes as a result cheaper Chinese bikes have been

successful in capturing the lions share of market in these countries. S & SE Asian countries are characterized by

improving economic conditions and hence there is demand for economy as well as premium segment bikes. L American

nations are at a higher economic trajectory than most Asian nations and hence the market for premium bikes is huge.

Therefore, we find Japanese companies dominating the scene in these countries.

GeographyPer Capita I ncome

(PP P, 2009, in 000s)

Motorcycles

demandedGrowth Competition

Africa 1 2 125cc Moderate Japanese

Source: Company, Darashaw

Growth Rate

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

FY95-00 FY00-05 FY05-10 FY11-15E

Export

Domestic

Source: Darashaw

We forecast Indias exports to grow at a CAGR of 25% over the two year period FY12/13E.


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CONCERNS

RISING RAW MATERIAL P RICES

The major raw materials in 2W consists primarily steel, along with aluminum and rubber. A sustained increase in prices

of these raw materials could squeeze the industry margins. On analyzing previous cycles, we observe that margins

remain healthy in the initial pat of the upturn as raw material prices trail (industrial) demand. Once raw material prices

increase continuously, the industry is unable to pass on the hikes owing to intense competition and a fall in demand

caused by buyer resistance at higher product prices.

Consumption per

motorcycle (in kgs)Steel Aluminum

100cc 70 25

150cc 85 30

Source: Darashaw

Steel

20

25

30

35

40

45

50

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Aluminum

80

90

100

110

120

130

140

FY 03 FY 04 FY 05 FY 06 FY07 FY 08 FY 09 FY10 FY 11

Rubber

0

25

50

75

100

125

150

175

200

FY03 FY 04 FY05 FY 06 FY07 FY 08 FY 09 FY10 FY11

Source: CMIE Source: CMIE Source: CMIE

INCREASE IN PRI CES & INTEREST RATES

To measure the impact of increase in Prices and Interest Rates, we create a hypothetical scenario.

Increase in

Base Case Prices by 10% Interest Rate by 5%Prices by 10% &

Interest rate by 5%

Price 50000 55000 50000 55000

Loan to vehicle ratio 70% 70% 70% 70%

Loan Amount 35000 38500 35000 38500

Loan Rate 24% 24% 29% 29%

Loan Duration (months) 48 48 48 48EMI 1141 1255 1240 1364

Increase / month 114 99 223

Increase / month 10% 9% 20%

Source: Darashaw

Firstly only 34% of two wheelers are bought through financing (loans).

Further in the event of either a major price increase or increase in interest rates, impact on buyers EMI isrestricted to an increase of about INR 100 on the base case EMI of INR 1141. Further, even if both variables

were to spike upwards together, their combined impact on EMI is INR 223 higher than the base case which can

be easily absorbed by buyers.


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Impact of increase in interest rates limited to urban areas

Share of two wheelers purchased through the finance route are expected to decline from 34% in FY11 to 25% in FY14E

as banks continue to avoid exposure to the sector due to high delinquency rates. This would majorly impact the urban

areas as majority of sales in rural areas are driven by cash.

Percentage of Two Wheelers Financed

20%

30%

40%

50%

60%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E

Source: Crisil, Darashaw


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VALUATION

Before moving onto valuations, we observe how the listed companies stack up against each other on various business

and financial parameters.

STACKING LISTED PLAY ERS

BJAUT HMCL TVS

Cost Structure

Expenses as % of sales FY12/13E FY12/ 13E FY12/13E

Advertisement 1.2% 2.2% 2.7%

Royalty 0% 2.8% 0%

R&D 0.8% 0.8% 1.3%

Combined 2.0% 5.8% 4.0%

Volume Mix

Growth {FY11-15E} EBITDA FY11

Mopeds 13% 20% 29% 2% 11%

3Wheelers

EBITDA FY11

3W as % of total sales >30% 28% 0% 7%

Financial Performance FY12/13E FY12/13E FY12/13E

Revenue Growth 19% 13% 16%

EPS Growth 8% 11% 47%

EBITDA Margins 20.5% 13.0% 6.7%

ROE 49% 53% 27%

Dividend Payout Ratio 58% 53% 44%

P/ B (FY13E) 5.9x 7.7x 2.7x

PE (FY13E) 12.2x 15.9x 9.2x

Target PE 15.4x 14.0x 10.5x

CMP 1457 1890 54

TP 1735 1664 61

Returns 19% -12% 14%

We initiate coverage with Buy on BJAUT & TVS and Sell on HMCL


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We value the sector using HMCLs PE ratio as the benchmark. HMCL is the market leader with 45% market share and its

PE is more representative of the 2W space. It is easy to use, has a long, uncomplicated history that has not been

impacted by demerger and relisting (as in the case of BJAUT) or by losses in the business (as in case of TVSL). Its

historical one year forward mean PE is 14.0x.

HMCLs dividend payout ratio is higher than that of BJAUT which has resulted in higher ROE for HMCL over the last few

years and thereby HMCL trades at a higher P/BV multiple than BJAUT. However, we value BJAUT at 10% premium toHMCL as BJAUT has an upper hand on most business and financial parameters over HMCL and moving ahead we expect

BJAUT to increase its dividend payout ratio as well, which should enable the company to trade at a higher valuation

than the market ascribes it today.

BJAUT has a stronger growth model, driven by 50% share in the in the fastest growing >125cc motorcycle segment. Its

business model is well hedged against a slowdown in domestic 2W as exports constitute 29% of its volumes and 3W

constitute 28% of its revenue. Further, BJAUT has the lowest cost structure in terms of lower ad spend and R&D costs.

TVSLs track record fades when compared with HMCL and BJAUT as the company has lost its market share over the past

4 years by 300 bps which now stands at 15.2%. Its business carries higher risk as it is present in low value segments.

TVSL has an expensive cost structure and is facing high competition in all its segments. We value TVS at 10.5x, a 25%discount to HMCLs PE of 14x.

Darashaw v/ s Consensus

Company FY12 EPS FY13 EPS Target Price

DarashawBloombergConsensus

Deviation DarashawBloombergConsensus

Deviation DarashawBloombergConsensus

Deviation

HMCL 111 111 0% 119 128 -8% 1664 1761 -6%

BJAUT 100 102 -2% 113 110 3% 1735 1578 10%

TVS 4.1 4.7 -11% 5.9 5.6 5% 62 65 -5%

Source: Bloomberg, Darashaw


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INVESTMENT ANALYSIS

DOMINANCE IN LOW GROWTH SEGMENTS

HMCLs predominant presence in the


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COMPANY BACKGROUND

Hero MotoCorp Ltd is the world's largest manufacturer of two wheelers, based in India. The company was a JV between

India's Hero Group and Honda Motor Company, Japan that began in 1984. In 2001, the company achieved the coveted

position of being the largest two-wheeler manufacturing company in India and the World No.1 two-wheeler company in

terms of unit volume sales in a calendar year by a single company. HMCL has retained that coveted position till date. In

2010 Honda Motor Company conveyed its intention of exiting from HMCL. Following this, the promoters of HMCL theMunjal family have bought the entire 26% stake of Honda.

INVESTMENT ANALYSIS

DOMINAN CE IN LOW GROWTH SEGMENTS

Motorcycles constitute 78% of the total two wheeler markets, of which 72% constitutes motorcycles under 125cc. HMCL

is the market leader in motorcycles under 125cc with a market share of 71% in FY11. Within Hero Hondas product

portfolio, 125ccMC

Scooters

FY11-15E: 2W Domes tic Growth Rates

0%

5%

10%

15%

20%

125cc MC Scooter Mopeds Source: Company Source: Darashaw

HMCL Marke t Share

42%

44%

46%

48%

50%

FY09 FY10 FY11 FY12E FY13E Source: Darashaw


22/55


AGGRESSIVE COMPETITI ON IN THE OFFING ~


23/55


DETAILS OF THE HERO HONDA SPLIT

The Munjal family will buy Hondas 26% stake in HMCL. An MOU has been signed for a new licensing arrangement

between the two partners. HMCL will now have the freedom to export to any market. Under the earlier agreement,

HMCL was not allowed to export to any country where Honda had a presence. The new licensing agreement will cover

all existing HMCL models till Mar 2014 when the agreement expires. New licensing agreement covers all existing models

and requires Honda to provide new models. The use of the Honda brand will cease in 2014. HMCL will now have thefreedom to set up its own R&D and product development capabilities and acquire technology from their sources. The

royalty will remain unchanged at 2.7-3% on existing products till June 2014, and then removed. On the new models

that the company will get from Honda in the transition period, royalty will be charged at the current rate of 3-5% (the

overall royalty is lower at 2.8%, as there is no royalty on some of the older products).

HMCL will cease to pay royalty for all of its existing products post 2014 and will only need to pay royalty on new models

supplied by Honda between now and 2014. The new models, which Honda would supply to Hero Honda till June 2014,

would attract normal rates of royalties (5%) attached with new launches. Thus post FY14, HMCLs royalty payments will

decline.

HMCL not dependent on Honda for supply of new products till 2014

We believe that there is a risk of Honda giving its better motorcycle models to HMSI over the next three years instead

of HMCL. However, this does not concern us that much since 85% of HMCLs sales come from the old CD Dawn,

Splendor and Passion bikes. All other bikes that HMCL has launched over the last few years cumulatively account for

only 15% of its volumes.

Brand-wise Volume Sales

45%15%

7%

25%

8%

SplendourPassion

CD Dawn/Deluxe

Pleasure

Others

Source: Company


24/55


The Hero-Honda Split

Earlier licence New licence till FY14 Post FY14

Nature of the deal Licensing deal + JV Simply a licensing deal Expiry of license

ShareholdingMunjals & Honda have26% stake each

Munjals stake rises to 52%.26% stake purchased at40% discount from Honda

ProductsHonda sole productsupplier. Raw materialfrom Honda's approvedvendors

Honda remains the sole

supplier. HMCL can startinvesting in R&D on its ownand use cheaper suppliersfor products not owned byHonda

The company can scoutfor new technologypartners, go solo, usecheaper suppliers

Royalty

Based on percentage ofsales and a fixed amountat the time of new modellaunch (2.7-3% of sales)

Structure remains the same.The company can pay lumpsum royalty

Comes down to nil postFY14

BrandingProduct brands owned byHonda. Parent brand isHero Honda

Honda name at most tillFY14. If Hero makes anychange to a product, theHonda name should bedropped from the product.Hero will have to buy brandsfrom Honda if it plans toretain the same name

Only Hero brand for allproducts

Exports

Can use Honda's networkto export to othercountries, based on

minimisecannibalization clause

Hero can export immediatelyto new markets withoutusing the Honda name

Can export to anymarket

Competition in IndiaMinimise cannibalization Honda not to competedirectly

Can compete directly inIndia

Source: Darashaw

INCREASED R&D AND ADVERTISEMENT EXPENDITURE TO DENT MARGINS

HMCL will face headwinds on the margin front from increase in expenditure on R&D and advertisement. We believe that

the three year window that HMCL has is ample time to develop its own R&D capabilities. Despite substantial cash

resources, BJAUT suffered several product failures (Wind, Caliber, Discover 125CC, XCD 125CC) during its journey to

build its own motorcycles. Getting a motorcycle right requires a combination of the Right technology, right

specifications, good styling, appropriate positioning and a lot of trial and error. We wont be surprised if HMCL too

suffers some product failures post FY14E. We expect the company to continue to invest strongly in advertising expenses

to maintain the brand image among customers and loyalists as Hondas exit could cloud customer perception to a

certain degree. We estimate the annual R&D expense for HMCL at 0.8% of sales. We also estimate HMCLs annual

advertising expenditure to increase from its historical average of 2.0% to 2.4% over the next few quarters as the

company tries to propagate its new identity. Thus we expect HMCLs SG&A expenses to increase by 100 bps in

FY12/13E over FY11.

Roya l t y , R&D and Adver t isement expend i t u re as % o f sa les

BJAUT TVS HMCLFY12/ 13E FY12/ 13E Hist. Avg. FY12/ 13E Increase

Royalty 0% 0% 2.8% 2.8% 0.0%R&D 0.8% 1.3% 0.0% 0.8% 0.8%Advertisement 1.2% 2.7% 2.0% 2.2% 0.2%Combined 2.0% 4.0% 4.8% 5.8% 1.0%

Source: Darashaw


25/55


THE RURAL HUNTER

HMCL launched a nation wide campaign Har Gaon Har Aagan in Oct 2009 and has presence in all states in the country.

The company has a network of more than 2,000 rural sales channel partners working on rural vertical. HMCL plans to

expand further into even smaller villages having a population of less than 5,000. The company derives about 45% of its

sales from villages and thus stands to benefit from growing rural incomes owing to escalating MSPs for various crops.

HMCL has a huge lead over its competitors in terms of its rural reach and enjoys a paternal relationship with its ruraldealers as opposed to strictly a business driven relationship (as in the case of HMSI). The management expects the

companys sales volumes to reach 10 mn units over the next five to six years from 5.4 mn units in FY11.

AGGRESSIVE FOCUS ON EXPORT MARKETS; ALTHOUGH IMP ACT TO BE INSIGNI FICANT

The freedom to export to any market is a big positive for HMCL since it was not allowed to export to any country where

Honda had a presence in the earlier agreement. However, we note that ramp-up in export markets will not be an easy

and quick affair for HMCL. BJAUT has built its export presence in African and South and Central American markets after

years of hard work at the ground level understanding local dynamics and nuances and creating appropriate supply chain

infrastructure.

FY 11 Revenue Mix

98%89%

71%

11%29%

2%

0%

20%

40%

60%

80%

100%

HMCL TVSL BJAUT

Exports

Domestic

Source: Companies

The company is all geared up to quickly start exploring new markets. It will focus on Africa, Middle East and countries in

Latin America and South-east Asia, where it could not export in the past. The company will have to use the Hero brand

name in new export markets but may use the Honda brand in existing export markets till 2014. We think its too early

to get enthused about HMCLs export strategy as it is just 2.5% of volumes at present (1.3 Lac units) forecast to

increase to 3.5% in FY13E (2.4 Lac units), HMCLs burgeoning domestic motorcycle business will continue to

overshadow the growth in exports, given its small base. The company targets its exports to reach 10% of total volumes

by the next five to six years.


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THE BEST IN TERMS OF VOLUME GROWTH & MARGINS IS BEHIN D HMCL

After two consecutive years of robust domestic volume growth of 26% for the two wheeler industry, we expect the

industry to witness a slowdown going ahead and grow at a modest growth rate of 13% over the next few years

FY12/13E. Further 87% of HMCLs revenue accrues from the 125cc motorcycles segment. The 125ccMC

Scooters

BJAUT (2W) Segment-wise Volume Mix -

FY11

53%

47% < 125cc MC

> 125ccMC

Source: Company Source: Company

10%

13%

16%

19%

22%

25%

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

HMCL EBITDA BJAUT EBITDA

Source: Companies


27/55


In the previous boom-bust cycle between 2003 to 2009, we witnessed HMCLs EBITDA margins at higher levels in the

initial years owing to lower raw material prices, however, gradually the raw material prices increased at a greater

magnitude which HMCL could not pass on to consumers owing to a slowdown in demand and its predominance in the


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DECLINE IN DIVIDEND PAY OUT RATIO AND ROE

We believe FY10/11 were exceptional years as the Indian promoters increased dividend payouts so as to garner funds

for purchasing Hondas stake. Going forward, we expect HMCLs dividend payout ratio to decline from FY10/11 levels of

100% plus and stabilize at around 50% for FY12/13.

FY08 FY09 FY10 FY11 FY12E FY13EFree Cash Flows 10,117 12,965 26,897 7,099 25,162 23,398

Dividend Paid 4,439 4,673 25,676 24,508 12,620 13,756

PAT 9,679 12,818 22,318 19,280 22,180 23,664

Dividend Payout Ratio 46% 36% 115% 127% 57% 58%

ROE 32% 34% 64% 66% 57% 48%

P/BV (x) 4.7 4.3 8.9 12.3Source: Company, Darashaw

Corelation betwee n Dividend Pay out Ratio & ROE

20%

40%

60%

80%

100%

120%

140%

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

Div

PayoutRatio

30%

40%

50%

60%

70%

ROE

DividendPayoutRatio

ROE

Source: Darashaw

We expect HMCLs investments to increase as its prospects of (a) Setting up subsidiaries abroad (as is the case with

BJAUT & TVS) and (b) Investing in companies abroad for accessing technologies and accessing new markets. Thus we

expect the company to dole out lower dividend payments in FY12/13E and retain cash. This we believe will lower the

ROE for HMCL.

ROE vs P/ BV

2

4

6

8

10

12

14

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

P/BV

30%

40%

50%

60%

70%

ROE

P/BV

ROE

Source: Darashaw

HMCLs ROE and P/BV ratio have moved in sync over the past 6 years. With a decline in ROE over the next couple of

years, we expect HMCLs P/BV ratio to fall.


29/55


VALUATION

HMCL will enter a transition phase over the next 3 years, as it attempts to develop internal R&D capabilities and

promote the Hero brand, while simultaneously paying a fairly high royalty rate (of 2.8%) to Honda. Consequently, we

expect margin pressures to persist.

Our TP of INR 1697 is based on 14x FY13E EPS of INR 118. We believe that over the next couple of years the historicalmean PE of 14x should decline as HMCL faces threats/concerns on the following fronts

Erosion of Brand post exit of Honda Loss of market share due to increased competition from HMSI No supply of new models from Honda to the company post 2014 Expected rise in advertisement and R&D expenditure to impact margins negatively (together by 100 bps in

FY12/13E)

Declining trend in its ROE owing to a likely increase in investments and lower dividend payout

5

8

11

14

17

20

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

HMCL PE HMCL Mean PE

Source: Darashaw


30/55

301001-Reg ent Ch am be rs, Narima n Point, Mumb ai

Profit & Loss FY10 FY11 FY12E FY13E Balance Sheet FY10 FY11 FY

Net Sales 157582 192450 226571 247695 Equity 399.4 399.4 39

Change in stock 0 0 0 0 Reserves & Surplus 34251 29023 38

VoP 157582 192450 226571 247695 Networth 34650 29422 38

Other operating inc 3406 3444 4454 4585

Income160988 195894 231025 252280

Debt660 8,771 12,

Expenditure 130963 169611 201746 218574 Sources of Funds 35311 38193 51

Raw Materials 107364 131120 154368 168760

Employee 5603 6926 8154 8914 Application of Funds 35310 38193 51

SG&A 17996 31565 39224 40900

Gross Fixed Assets 31244 39060 46

EBIDTA 30025 26283 29279 33707 Less Acc. Depreciation 10922 13174 15

Net Fixed Assets 16588 18069 23

Depreciation 1915 2253 2816 3385

Capital WI P 481 0

EBIT 28110 24030 26463 30322

Investments 39257 45146 49

Interest (206) (19) (157) (157)

Non-Operating income 0 0 0 0 Other Current Assets 248 248

Extra-ordinary income 0 0 0 0 Inventories 4364 4253 4

Extra-ordinary exp 0 0 0 0 Debtors 1084 0

Cash 19072 24700 19

PBT 28317 24049 26620 30479 Loans & Advances 4058 4739 5

Current Assets 28826 33940 30

Tax 5999 4769 4440 6815

Current Liabilities 38051 27809 32

PAT 22318 19280 22180 23664 Provisions 10264 29779 17

Minority Interest Current Liabilities & Prov 48314 57588 50PAT after Min Int 22318 19280 22180 23664

Dil EPS 112 97 111 118 Non-Current Liabilities 1528 1375 1


31/55


Ratios FY10 FY11 FY12E FY13E FCFF FY10 FY11

Sales Growth 28% 22% 18% 9% EBIT 28110 24030

Income Growth 28% 22% 18% 9% Less Adj. Taxes 5955 4765

EBIDTA Growth 56% -12% 11% 15% NOPLAT 22155 19265

Adj. PAT Growth 74% -14% 15% 7% Inc / (Dec) in WC (4786) 11013

EPS Growth 74% -14% 15% 7% Operating Cash Flow 26941 8252

Raw Materials 68% 68% 68% 68% Inc / Dec in other op assets (83) 153

Employee 4% 4% 4% 4% Net Capex 43 1153

SG&A 11% 16% 17% 17% Net Investment (4742) 12166

EBIDTA margin 19% 14% 13% 14%

Depreciation rate 7% 7% 7% 7% Free Cash Flow to Firm 26897 7099

EBIT margin 17% 12% 11% 12%

Non-Operating cash flow 0 0

Other income to PBT 12% 14% 17% 15%Tax Rate 21% 20% 17% 22% Cash flow to investors 26897 7099

Adj. Pat Margin 14% 10% 10% 10%

Finaning Cash Flow 26897 7099

PAT / Sales 14% 10% 10% 10% Dividend (adj for inc/dec in prov) 20948 9401

Sales / Assets 446% 504% 441% 447% Equity buyback/(issue) 0 0

Assets / Equity 102% 130% 132% 113% After-tax Interest (163) (15)

Dupont RoE 64% 66% 57% 48% Debt Repayment/(issue) 303 (8175)

Inc/(Dec) in Non-op Investments 5570 5889

RoE 64% 66% 57% 48% Inc/(Dec) in Excess Cash 0 0

RoCE 80% 63% 51% 55% Inc/(Dec) in Non-op L&A 240 0


32/55

31001-Regent Chambers, Nariman Point, Mumbai

INVESTMENT RATIONALE

MARKET SHARE TO REMIAN UNDER PRESSURE AS COMPETITION

INTENSIFIES

We expect a 100 bps fall in BJAUTs market share in the 125cc

motorcycle segment. Competition will certainly take its toll on BJAUT however the

companys earnings will continue to grow backed by growth in exports.

BRAND STRATEGY LEADING TO HIGHER MARGINS

BJAUT has been following a strategy of creating niche brands (Pulsar & Discover)

rather than bomb the market with too many products and attributes its superior

profit margins to this strategy.

PRESENCE IN 3W MARGIN ACCRETIVE

BJAUT commands a 55% share in the domestic market and 86% share of exports

from India. BJAUTs 3W business generates EBITDA margins in excess of 30%

owing to its superior positioning.

EXPORTS LEADING GROWTH FOR BJAUT

Over the past three years, export revenues have grown at 30% as against 20%

growth in domestic revenue. Further over the next few years BJAUT expects this

trend to continue and exports to constitute half of its revenue from 28% in FY11.

BEST IN CLASS EBITDA MARGINS

BJAUTs EBITDA margins are superior to its peers owing to (A) Lower coststructures (B) Almost half of the 2W volumes are from the high margin >125cc

motorcycle segment (C) Exports both 2 & 3W together commanding EBITDA

margins in excess of 20% (D) 3W as % of total revenue constitute 28% where

EBITDA margins are > 30%.

DIVIDEND Y IELD SET TO INCREASE TO 5% BASED ON FY13E NUMBERS

We expect BJAUT to increase its dividend payout ratio in the coming years and

expect its dividend yield to rise from 3% in FY11 to almost 5% based on FY13E

numbers at the CMP.

Summary Financials

Source: Darashaw Estimates

Rating BUY

Date 15 AUG11

CMP INR 1457

Price Target INR 1735

Upside +19%

COMPANY DATA

Industry Auto

Equity (INR mn) 2894

Face Value 10

KEY MARKET DATA

BSE Code 532977

BSE Group A

NSE Code BAJAJAUT

Bloomberg Code BJAUT IN

Mkt Cap. (INR bn.) 422

52 Week high/low 1665 / 1190

Daily Turnover INR 52 mn

SHARE HOLDING PATTERN (Jun 11)

Promoters 50%

MFs, FIs, Ins 8%

FIIs 16%

Others 26%

PRICE PERFORMANCE

Returns (%) Abs Rel.*

3 Month 7 15

6 Month 14 18

12 Month 4 10

* Benchmark Sensex

Analyst Jehan Bhadha

Contact No 022 43022256

Email ID [email protected]

INRMn.

Sales YoY EBIDTA Margin PAT Margin EPS YoY RoE PE P/ BV

FY10 115,432 37% 27097 23% 15978 14% 55 197% 59% - -

FY11 160,287 39% 37404 23% 28159 18% 97 76% 59% 14.2 8.3

FY12E 192,752 20% 40837 21% 28959 15% 100 3% 50% 13.8 6.8

FY13E 225,642 17% 47251 21% 32688 14% 113 13% 48% 12.2 5.9

Bajaj Auto Ltd


33/55


COMPANY BACKGROUND

Bajaj Auto, founded in 1926, is the worlds fourth largest 2 and 3Wheeler manufacturer. The erstwhile scooter company

has re-invented itself by re-innovating its product range to turn into the second-largest motorcycle manufacturer inIndia. The Bajaj brand is well-known across several countries and has a distribution network in 50 countries with a

dominant presence in Sri Lanka, Colombia, Bangladesh, Mexico, Central America, Peru and Egypt.

INVESTMENT ANALYSIS

MARKET SHARE TO REMIAN UNDER PRESSURE AS COMPETITI ON INTENSIFI ES

BJAUT is the market leader in >125cc motorcycles with a market share of 50% in FY11.We expect the company to

witness a decline in its market share over the next couple of years by 380 bps from 50.3% in FY11 to 46.5% by FY13E

BJAUT commands a share of 17.9% (as on FY11) in the


34/55


BRAND STRATEGY LEADING TO HIGHER MARGINS

Bajaj Auto has refocused over the past few years on brands, not products. It is solidly positioned in the commuter as

well as the sport segment with its Discover and Pulsar brands respectively. Management has stated that Brandsdeliver profits, volumes generate market share. As of now, the company is focused on EBITDA and profitability and wil

sacrifice business that doesnt generate profits. Management also believes that it is riding a structural boom, as bikes

shift away from the commuter segment to the sport/premium segment. We buttress the managements observation

and believe that the economy segment will rebound only if HMSI and Yamaha are able to launch quality products at

affordable prices in this segment.

2 W Product Mix

0%

20%

40%

60%

80%

100%

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Scooters

MC < 125cc

MC > 125cc

Motorcycle Mix

0%

20%

40%

60%

80%

100%

FY05

FY06

FY07

FY08

FY09

FY10

Discover +

Platina +

Source: Darashaw & Co Source: Darashaw & Co

BJAUT continues to deliver EBITDA margins higher than competition and highly impressive in the light of rising raw

material costs. The 20%+ EBITDA is due to a change in product mix towards high end products, higher exports and

prudent cost rationalization.

2 W EBITDA Marg ins

0%

5%

10%

15%

20%

25%

FY08 FY09 FY10 FY11 FY12E FY13E

BJAUT

HMCL

TVS

Source: Darashaw


35/55


3W (Three Wheeler) Industry

The domestic 3W industry has grown at a CAGR of 11% over the past decade where as exports have grown at a highe

rate of 28%. The passenger carrier segment commands 88% of the 3W market with the balance being goods carriersThere has been a continuous increase in the passenger carrier segment since FY05 as the launch of Tatas Ace captured

a huge chunk of the 3W goods carrier segment.

Further, over the last few years, 3W have become dependent on replacement demand, as state governments have not

released many new permits. Most of the current demand that is coming in for 3W is through replacement demand, and

not new vehicle purchases. It is the prerogative of the State Government to issue permits to new 3W. If the number of

vehicles on the road is more, there is a reluctance to issue permits for passenger carriers. In recent years, state

governments have capped the number of auto rickshaws allowed in cites. As a result, sales have been largely driven by

replacement demand.

3W Sales

00000

000000000000

00000000

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Exports Domestic

3W Mix

0%

20%

40%

60%

80%

100%

FY05

FY06

FY07

FY08

FY09

FY10

Passenger Carriers Goods Carriers

Source: Darashaw Source: Dara

DOMESTIC MAR KET SHARE

GAINERS HOLDERS LOOSERS

Scooters ForceM&M TVSL Piaggio BJAUT Atul

India Motors

FY05 7% 0% 26% 51% 4% 4% 8%

FY06 6% 0% 30% 49% 4% 3% 6%

FY07 8% 0% 36% 45% 4% 3% 4%

FY08 9% 0% 41% 42% 2% 3% 2%

FY09 12% 1% 41% 39% 2% 0% 1%

FY10 10% 3% 41% 40% 3% 0% 0%

FY11 12% 4% 39% 39% 4% 0% 0%

FY12E 13% 3% 37% 40% 4% 0% 0%

FY13E 14% 3% 36% 40% 4% 0% 0%

Source: CMIE, Darashaw


36/55


BJAUT in 3Wheelers

Primary Application of 3W

Segment Use Fuel BJAUT PositioningCity Office, School, Railway Station Petrol / LPG / CNG Leader with 90% market share

Rural Stage Coach Diesel 23% market share

Cargo Chain from Wholesaler to Retailer to Distributor Diesel / CNG Marginal Presence

(Source: Company)

BJAUT-Domestic 3W 11% volume grow th forecast over FY12/ 13E

BJAUT is a dominant player in the domestic 3W segment, especially in the passenger segment, where it has 47%

market share. In the goods segment, it faces much more competition (4% market share), but this is of less relevance

given passenger segment accounts for 98% of BJAUTs domestic 3W sales.

BJAUT plans to maintain leadership in the passenger segment through:

Improving operating performance of products, promoting and encouraging use of alternate fuels such as LPGand CNG

Increasing distribution network sales touch points to 599 from 435 and service touch points to 599 from 376by FY12E

New rear engine (RE) diesel upgrade, targeted towards rural market by providing higher - mileage, passengeand cargo capacity

Increasing finance penetration


37/55


GLOBAL FOCUS (Exports)

Exports out of India have grown at a CAGR of 30% since FY00 to 1.5 mn units in FY11 against a growth of 12% in

domestic sales to 11.8 mn units. While this growth seems spectacular it pales when compared to the 10 mn unitsexported by China. China is currently the biggest two-wheeler manufacturer in the world with exports higher than

domestic sales. BJAUT has been now espousing its existence as a global motorcycle company and not one focused

domestically. Thus over the last few years the company has successfully paved inroads in many countries.

FY 11 Region-wise Sales

48%

17%

22%

13%

Africa & ME

L America

S Asia

SE Asia

2W Mix: Domestic v/ s Exports

0%

20%

40%

60%

80%

100%

FY06 FY07 FY08 FY09 FY10 FY11

Dom

Exp

3 W Mix - Domestic v/ s Exports

0%

20%

40%

60%

80%

100%

FY06 FY07 FY08 FY09 FY10 FY11

Source: Company Source: Company

The company aims to reach 50:50 mix between exports and domestic sales by FY15E. The company is targeting to

achieve export volumes of 1.4 mn units in FY12 (implying YoY growth of 44%) however we have assumed 1.24 mn

units (implying YoY growth of 27%).

We think BJAUT has an extremely well articulated export strategy for both 3 and 2 wheelers. Overall EBITDA margins

for exports have exceeded 20% historically (4-5% higher than domestic margins), although margins in the African

region are close to those in the domestic market. We think this was to a great extent on account of the DEPB benefit

that BJAUT gets. Post the scheme being scrapped entirely, we expect EBITDA margins to decline by 300 bps. However,

we expect the government to reduce the incentive to 6% from the current 9% in the initial phase of the phase-out and

then gradually reduce it over a period of time so as to enable a smooth transition for the industries affected by the

scheme.

Market leader in motorcycles in Colombia, CentraAmerica, Sri Lanka, Bangladesh, Philippines

Nigeria, Uganda and Kenya

Total motorcycle exports of 0.97 mn in FY11growth of 34% over FY10

Largest exporter of three wheelers in the world 231k units exported in FY11, a rise of 40% ove

FY10


38/55


FY 11 Revenue Mix

98% 89%71%

11%29%

2%

0%

20%

40%

60%

80%

100%

HMCL TVSL BJAUT

Exports

Domestic

Source: Companies

Africa

The success of the Boxer brand in Nigeria has paved the way for entry into neighboring African nations of Uganda,

Kenya, and Tanzania. The African market is characterized by low per capita income levels and zero vehicle financing. In

Nigeria for instance, a motorcycle is used as a Taxi for transporting people. Prior to BJAUTs entry, it was dominated by

low cost Chinese bikes in the range of USD 500. BJAUT initially sold the boxer at par with the Chinese, but over time

the Boxer has emerged as a superior product in terms of fuel efficiency and durability, helping BJAUT garner significant

market share from the Chinese. BJAUT claims that it currently sells the Boxer at 50% premium to Chinese bikes. The

company sells almost 45,000 Boxer brand motorcycles per month in Africa. Honda which had presence only in the

higher end segment has recently announced that it intends to produce lower cost motorcycles for the Nigerian market

by sourcing parts from its Chinese affiliates.

BJAUT will work towards increasing its market share in Africa. On top of it, the market itself is expected to grow

exponentially in the coming years. Thus Africa has the highest scope for growth amongst all countries.

S & SE AsiaS & SE Asia are essentially Pulsar / Discover markets, as income levels in some of these countries are either in line

with India, or exceed it. Indonesia is a Pulsar market, but the rest of ASEAN is a Platina / Discover market.

L America

L America is a Pulsar / KTM market. There is competition from the Japanese (Honda, Yamaha, Suzuki), and BJAUTs

share is estimated at around 30%. BJAUT expects to grow in line with the market rate of 10-12%. Here BJAUT

competes with the Japanese and sells primarily the Pulsar, hence margins from this geography are far higher than the

overall export margin. Going forward, the company is targeting penetration in Brazil which is 50% of Africa in terms

of volumes, and the opinion maker in L America. BJAUT targets entering this in 2 years it is working on a strategy to

leverage off the strengths of both KTM and Kawasaki, and use the different distribution capabilities of both these

companies in Brazil. Bajaj is among the top 3 players and the scope for increasing market share is limited. Hence we

expect Bajaj to gro at industy growth rates I these geographies.

GeographyPer Capita I ncome

(PP P, 2009, in 000s)Brand Exports Mix

Africa 1 2 Boxer 51%

S & SE Asia 3 - 6 Pulsar / Discover / Platina 34%

L America 10 14 Pulsar / KTM 15%Source: Company, Darashaw


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BJAUT-Exports 2 wheelers 25% volume grow th forecast over FY12/ 13E

Motorcycle exports from India were 1.5 mn in FY11 of which BJAUT exports almost 1 mn (2/3 rd of total exports)

Motorcycle exports from India have grown at an astonishing pace of 31% CAGR over the last five years. BJAUT has

outpaced the industry by growing at 43% CAGR over the same period. We expect BJAUT exports to grow at a CAGR o25% over the period FY12/13E in line with the industry growth rate. About two third of the motorcycle exports of BJAUT

are


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BEST IN CLASS EBITDA MARGINS

BJAUT HMCL TVS

Cost Structure

Expenses as % of sales FY12/13E FY12/ 13E FY12/13E

Advertisement 1.1% 2.2% 2.7%

Royalty 0% 2.8% 0%

R&D 0.8% 0.8% 1.3%

Combined 1.9% 5.8% 4.0%

Volume Mix (FY11)

EBITDA FY11

Mopeds 20% 29% 2% 11%

3Wheelers (FY11)

EBITDA FY11

3W as % of total sales >30% 28% 0% 7%

EBITDA Margins FY11 22.0% 13.4% 5.5%

2 W EBITDA Margi ns

0%

5%

10%

15%

20%

25%


BJAUT

HH

TVS

Source: Darashaw


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SUBSIDIARIES

Bajaj Auto International Holdings BV (BAIH BV)

This is a 100% Netherlands based subsidiary of BJAUT. BAIH BV was formed to focus on international venturesincluding possible acquisitions. In FY08, BAIH BV invested EUR 98.36 mn and acquired 24% equity stake in KTM Power

Sports AG of Austria, Europes second largest sport motorcycle manufacturer. BJAUT has invested a total of EUR 160

mn (INR 9.5 bn) in KTM to date to build up a stake of 38%. The company recently announced that KTM would introduce

a co-developed 125cc KTM motorcycle in the European market in 2011. The products launch in India is planned in

H2FY12E. Management also indicated that Bajaj intends to build KTM brand for premium motorcycles which would be

positioned higher than its existing Pulsar brand. KTM bikes are being manufactured at the companys Chakan plant and

are being entirely exported to KTM (majorly in Brazil). The annual volumes for these exports are expected at 11,000

units.

Financials of KTM Power Sports Ag (Fig in EUR mn)

Aug 2008 Aug 2009 Aug 2010

Revenue 606 455 591

Growth -25% 30%

EBITDA 50 7 73

Margin 8% 2% 12%

Net Profit / (Loss) 6 (81) 14

Margin 1% Loss 2%

Source: Company

PT Bajaj Indonesia (PT BAI)

PT BAI was incorporated in FY07 as a subsidiary in Indonesia with an issued and subscribed capital of USD 12.5 mn

During FY10, Bajaj Auto added further capital by USD 17 million, thus increasing its total stake to 98.9% in PT BAI. PT

BAI has not yet broken even, though losses have reduced. Revenue for FY11 stood at INR 1191 mn and the loss was

INR 112 mn at the PBT level. The subsidiary achieved volumes of 20k in FY11 and the management expects to

clock 30k units in FY12. However, it would require selling 50k units to achieve break-even.


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REVENUE & EPS CAGR OF 19% & 8% FOR THE PERIOD FY12/13E

We forecast BJAUTs volumes to grow at a CAGR of 17% between FY12/13E. We assume domestic volume growth of

12% p.a. and export growth of 26% over FY12/13E. We expect realisations to increase by 1.7% p.a., leading to arevenue CAGR (FY12/13E) of 19%. FY12E volume guidance from management is at 4.65 mn vehicles (2+3Wheeler) v/s

our estimate of 4.54 mn. On the EPS front, we expect a CAGR (FY12/13E) of 8%.

BJAUT Volume Summary

FY09 FY10 FY11 FY12E FY13E

2 Wheelers

Domestic 1286119 1785507 2414630 2735963 3040324

Chg -23% 39% 35% 13% 11%

Exports 633463 726189 972437 1237434 1521417

Chg 31% 15% 34% 27% 23%Total 1919582 2511696 3387067 3973397 4561740

Chg -11% 31% 35% 17% 15%

3Wheelers

Domestic 135470 176027 205603 230634 252172

Chg -12% 30% 17% 12% 9%

Exports 139056 164909 231281 337088 397835

Chg 2% 19% 40% 46% 18%

Total 274526 340936 436884 567722 650008

Chg -5% 24% 28% 30% 14%

2 + 3Wheelers

Domestic 1421589 1961534 2620233 2966597 3292496

Chg -22% 38% 34% 13% 11%

Exports 772519 891098 1203718 1574522 1919252

Chg 25% 15% 35% 31% 22%

Total 2194108 2852632 3823951 4541119 5211748

Chg -10% 30% 34% 19% 15%Source: Company, Darashaw


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CAPEX & CASH FLOWS

We forecast BJAUT to generate operating cash flows (post working capital changes) of INR 40 bn over FY12/13E. We

estimate the company will spend INR 5 bn over the same period for capex. Overall, we expect BJAUT to generate free

cash flows of INR 75 bn over FY12/13E.


NOPLAT 8,319 8,196 18,669 26,067 29,023 32,756

Change in WC -4,632 -4,874 -14,212 12,223 -13,156 -4,991

Op Cash Flows 12,951 13,069 32,880 13,844 42,179 37,747

Less: CAPEX 17,839 4,408 719 1,908 2,350 2,439

Add: Depreciation 1,746 1,306 1,374 1,239 1,350 1,439

Non op. Cash Flow 0 -2,051 -1,615 8,268 0 0

Free Cash Flows -6,499 5,430 34,737 19,995 39,671 35,395


DIVIDEND YIELD SET TO INCREASE TO 5% BASED ON FY13E NUMBERS

BJAUT throws up surplus cash year after year which keeps accumulating as no major spending is being carried out by

the company except small capex. As of FY11, it had cash & cash equivalents of INR 44 bn, which are invested in G-Sec

and fixed income instruments. We believe going ahead BJAUT will embellish its dividend policy and establish a trend of

increasing payout ratio. We expect BJAUTs dividend payout ratio to increase from FY10/11 levels of 40% to 64% for

FY12E and 70% for FY13E. Thus the companys dividend yield would increase to 5% in FY13E based on CMP from 3% in

FY11.


Free Cash Flows 5,430 34,737 19,995 39,671 35,395

Dividend Paid 3,724 6,749 13,453 18,634 22,946

PAT 5,375 15,978 34,548 28,959 32,688

Dividend Payout Ratio 69% 40% 39% 64% 70%Dividend Yield 2.1% 1.6% 2.9% 3.9% 4.8%


OUR FORECASTS DO NOT TAKE THE CAR PROJECT INTO ACCOUNT

In May 2008, BAL entered into a joint venture (JV) with Nissan and Renault to manufacture and sell low-cost small car

in India. The tripartite JV was formed with BJAUT holding 50% and Renault and Nissan having 25% each; the venture

targeted 400,000 units of the small car annually. As per the JV design, engineering, sourcing and manufacturing will be

handled by BJAUT, while marketing and selling will be looked after by the Renault-Nissan alliance. According to the

initial plans for the ultra low-cost small car, the vehicle was slated to hit Indian roads in FY11, followed by an

international foray in FY12. But due to delay in implementation of plans, the management has decided to launch it in

CY12. However, till date there has been no significant progress in terms of investments as regards the JV. Given lack of

any definitive guidance on the project cost, timeline or product positioning, we have not factored the impact of the car

project in our financials.


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VALUATION

Bajaj is overvalued vis--vis its historical average, but we turn a blind eye to this, given the short trading history, the

average is artificially depressed given that Bajaj Auto (the restructured entity) started trading in mid 2008 not the

most conducive of times. Its historical PE average of 8.5x is also impacted by the same circumstances.

We have taken HMCLs valuation as the benchmark for valuing other companies as it is the market leader. Our multipleon HMCL is 14.0x. We value BJAUT at a 10% premium to HMCL, mainly due to HMCLs, expected decline in market

share and slowing growth in profitability on one hand and higher expected growth for BJAUT on the other.

Thus our fair value for BJAUT is INR 1,735 where it will trade at 15.4x its FY13E EPS of INR 113.


45/55


Profit & Loss FY10 FY11 FY12E FY13E Balance Sheet FY10 FY11 FY

Net Sales 115432 160287 192752 225642 Equity 1447 2894 2

Change in stock 0 0 0 0 Reserves & Surplus 25723 45179 55

VoP 115432 160287 192752 225642 Networth 27169 48072 58

Other operating inc 5,535 9,794 10,200 10,836

Income 120967 170081 202952 236478 Debt 13610 3475

Expenditure 93869 132676 162115 189226 Sources of Funds 40783 51550 58

Raw Materials 81038 118045 145168 169387

Employee 4061 4847 5829 6823 Application of Funds 40783 51550 58

SG&A 8770 9785 11119 13016

Gross Fixed Assets 33855 33984 37

EBIDTA 27097 37404 40837 47251 Less Acc. Depreciation 19022 19161 20

Net Fixed Assets 14833 14824 16

Depreciation 1374 1239 1350 1439

Capital WI P 415 699 EBIT 25723 36165 39487 45812

Investments 34452 42842 51

Interest68 24 87 95

Non-Operating income 0 0 0 0 Inventories 4584 5763 6

Extra-ordinary income 0 0 0 0 Debtors 2719 3416 4

Extra-ordinary exp 1615 -8268.2 0 0 Cash 1073 5753 21

Loans & Advances 20848 11959 12

PBT 24,041 44,410 39,400 45,717 Current Assets 30284 29054 47

Tax 7,035 10,093 10,441 13,029 Current Liabilities 20318 24373 29

Provisions 22495 15296 31

PAT 17006 34317 28959 32688 Current Liabilities & Prov 42813 39669 60Income from Assoc (1028) 231 0 0

Minority Interest 0 0 0 0 Non-Current Liabilities (321) (72) (2

Adj. PAT 15978 28159 28959 32688

Adj. EPS 55 97 100 113 Misc. Expenditure 0 0


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Ratios SY09 SY10E SY11E SY12E FCFF SY09 SY10E 25723 36165

SalesGrowth 37% 39% 20% 17% EBIT 7054 10098 IncomeGrowth 35% 41% 19% 17% Less Adj. Taxes 18669 26067 EBIDTAGrowth 117% 38% 9% 16% NOPLAT (14212) 12223 (Adj.PATGrowth 197% 116% -16% 13% Inc / (Dec) in WC 32880 13844 EPSGrowth 197% 76% 3% 13% Operating Cash Flow

(2816) 1448

RawMaterials 70% 74% 75% 75% Inc / Dec in other op assets (3471) 2118 Employee 4% 3% 3% 3% Net Capex (17683) 14341 (1SG&A 8% 6% 6% 6% Net I nvestmentEBIDTAmargin 23% 23% 21% 21% 36352 11727 Depreciationrate 4% 4% 4% 4% Free Cash Flow to FirmEBITmargin 21% 21% 19% 19% (1615) 8268

Non-Operating cash flow

Otherincome

to

PBT

23% 22% 26% 24% 34737 19995

TaxRate 29% 23% 27% 29% Cash flow to investorsAdj.PatMargin 14% 18% 15% 14% 34737 19995

Finaning Cash Flow 3724 6749

PAT/Sales 14% 18% 15% 14% Dividend (adj for inc/dec in prov) 0 (1447) Sales/Assets 2.8 3.1 3.3 3.3 Equity buyback/(issue) 48 18 Assets/Equity 1.5 1.1 1.0 1.0 After-tax Interest 2448 10136 DupontRoE 59% 59% 50% 48% Debt Repayment/(issue) 21303 6692

Inc/(Dec) in Non-op Investments 0 6027

RoE 59% 59% 50% 48% Inc/(Dec) in Excess Cash 7218 (8182) RoCE 39% 53% 45% 44% Inc/(Dec) in Non-op L&A 25723 36165


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INVESTMENT RATIONALE

ENCASHING ON MONOPOLY I N MOPEDS

TVSL has a 100% market share in the mopeds segment. In FY 11, moped

volumes grew by 24% YoY to 0.7 mn, which we expect to grow at a CAGR of 12%

to 1.1 mn by FY15E.

ENTRY IN TO PREMIUM SCOOTERS BEARING FRUITS

TVSL has boosted its scooter portfolio with the launch of Wego in FY10, which

addresses the higher-end scooter segment. We expect the company to increase

its market share in the scooter segment by 60 bps to 22.2% by the end of FY12E.

We expect the scooter segment of TVSL to grow at 17% CAGR over the next two

years.

ENTRY INTO THREE WHEELERS ~ A MARGIN ACCRETIVE MOVE

We believe TVSL can attain margins of 15% in the 3W segment by FY13E from

5% in FY11. Based on our forecasts, 3W should constitute 15% of total EBITDA by

FY13E from 4% in FY11.

PRESENCE IN LOW MARGIN SEGMENTS & HIGHER COST STRUCTURE ~

IMPEDING PROFITABILITY

About 75% of TVSLs product portfolio comes from segments wherein margins are

low and 25% comes from high-margin segments. While this is true for HMCL as

well, the latter has volumes to exploit economies of scale which means that it

can earn better margins than TVSL in every segment. On an average, TVSLs

EBITDA margins have been 1000 bps lower than those of both HMCL over FY07-

11. The gap is partially explained by the difference in the scale of operations. In

FY11, TVS produced 2.0 mn 2W compared to 5.4 mn for HMCL.

REVENUE & EPS CAGR OF 16% & 48% over FY12/ 13E

We estimate 2W volumes to increase at a 12% CAGR and 3W volumes at 37%

over FY12/13E. We have increased the realizations at 2% CAGR in both segments

over the same period resulting in revenue CAGR of 16%. We estimate EPS to

grow at a CAGR of 48% for FY12/13E on the back of an increase in EBITDA

margins from 5.5% in FY11 to 7.0% in FY13E.

DIVIDEND Y IELD SET TO INCREASE TO 4% BASED ON FY13E

We believe going ahead TVSL, will establish a trend of increasing dividend payout

ratio. We expect the companys dividend yield to increase to 4% in FY13E based

on CMP from 2% in FY11 owing to an increase in.

Summary Financials

Source: Darashaw

Rating BUY

Date 15 AUG11

CMP INR 54

Price Target INR 62

Upside 16%

COMPANY DATA

Industry Auto

Equity (INR mn) 475

Face Value 1

KEY MARKET DATA

BSE Code 532343

BSE Group B

NSE Code TVSMOTOR

Bloomberg Code TVSL INMkt Cap. (INR bn.) 25

52 Week high/low 87 / 44

Daily Turnover INR 18 mn

SHARE HOLDING PATTERN (Jun 11)

Promoters 59%

MFs, FIs, Ins 14%

FIIs 3%

Others 24%

PRICE PERFORMANCEReturns (%) Abs Rel.*

3 Month 3 12

6 Month 16 23

12 Month -21 -15

* Benchmark Sensex

Analyst Jehan Bhadha

Contact No 022 43022256

Email ID [email protected]

INR

Mn .Sales YoY EBIDTA Margin PAT Margin EPS Y oY RoE PE P/ BV

FY10 45,436 21% 2408 5.3% 325 0.7% 0.7 -151% 5% - -

FY11 64,330 42% 3580 5.6% 1280 2.0% 2.7 294% 19% 19.9 3.7

FY12E 74,103 15% 4825 6.5% 1982 2.7% 4.2 55% 25% 12.9 3.2

FY13E 86,160 16% 6103 7.1% 2837 3.3% 6.0 43% 30% 9.0 2.7

TVS Motors


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COMPANY BACKGROUND

TVSL is the third largest 2W company in India. The company is the second largest exporter after BJAUT. It is the

flagship company of the TVS group in India. The company manufactures motorcycles, scooters, mopeds as well as three

wheelers.

2W - FY11 Domestic Mark et Share

HMCL

45%

TVS

15%

HMSI

13%

Others

6%

BJAUT

21%

3W - FY11 Domestic Market Share

Others

18%

TVS

4%

Piaggio

39%

BJAUT

39%

Source: CMIE Source: CMIE

TVSLs manufacturing plants are located at Hosur (Tamil Nadu), Mysore (Karnataka) and Nalagarh (Himachal Pradesh).

It has a total annual manufacturing capacity of 3 mn 2W and 60,000 3W. TVS also has a manufacturing plant in

Karawang (Indonesia), with the capacity to produce 0.3 mn 2W.

INVESTMENT ANALYSIS

ENCASHING ON MONOPOLY IN MOPEDS

TVSL has a 100% market share in the mopeds segment, since Kinetic Motors exited the segment. This business has

major presence in South India, a geography which contributes 80% of the moped volumes of TVSL. The company

believes the presence of industrial areas in south India like Coimbatore is leading to growth in the mopeds business,

which is considered to be prominently used as a two-wheeler LCV. On the other hand, the company is now targeting

north India as well for mopeds, which also has quite a few industrial belts. 99% of the mopeds are sold domestically by

TVS. In FY 11, moped volumes grew by 24% YoY to 0.7 mn, which we expect to grow at a CAGR of 12% to 1.1 mn by

FY15E.

TVS Moped Segm ent

0.00

0.20

0.40

0.60

0.80

1.00

1.20

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

Vol.mnunits

-10%

0%

10%

20%

30%

40%

Growth Volumes

Grow th

Source: CMIE, Darashaw


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ENTRY INT O PREMIUM SCOOTERS BEARING FRUITS

TVSL has boosted its scooter portfolio with the launch of Wego, which addresses the higher-end scooter segment.

Within the scooter segment only 2% of the total production is exported. TVS holds a 22% market share in the overall

scooter segment. Due to strong competition from HMSI, HMCL, Suzuki and the new entrant Mahindra, TVSL lost 500

bps of market share since FY07, but is still holding its second position strongly in the scooter market since the last two

years.

Scooter - Market Share

0%

10%

20%

30%

40%

50%

60%

FY07 FY08 FY09 FY10 FY11

HMCL

TVSL

HMSI

Suzuki

Mahindra

TVS - Regaining Scooter Marke t Share

18%

20%

22%

24%

26%

28%

FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source: CMIE Source: CMIE, Darashaw

TVSL was mainly present in the entry level segment of scooters, through its portfolio of Scooty Pep+ and Scooty Streak

models. Since the executive segment dominates the scooters market, TVSL is now concentrating on this segment as

incremental growth in TVSLs scooters business is expected to happen through this segment. In an attempt to do so,

TVSL launched Wego in FY10 to take Hondas Activa head on. With this launch, we expect the company to

consolidate its market share in the scooter industry and maintain its share at 21% by the end of FY12E from 21.6% in

FY11. In FY11, the scooter segment of TVS expanded by 51% and we expect the scooter segment of TVSL to grow at

14% CAGR in the next two years.

ENTRY I NTO THREE WHEELERS ~ A MARGIN ACCRETIVE MOVE

TVSL has managed to attain a market share of 5% in the Indian 3W market since its entry in 2008, compared with a

7% share of the motorcycle market, which has historically been its mainstay. We expect TVSLs 3W volumes to continue

to grow faster than the market in the medium term, leading to overall 3W market share of 7% by FY13E.

Management has indicated that the 3W segment achieves breakeven at volumes of 1,500/month (18,000 annually),

which implies an EBITDA margin of 4-5%. TVSLs current run-rate is 4,000/month, and we expect it to average at more

than 6,000/month by FY13E. We believe TVSL can attain EBITDA margins of 15% by FY13E, which compares with 30%

for Bajaj Auto (in 3W). Based on our forecasts, 3W should constitute 15% of total EBITDA by FY13E.

FY10 FY11 FY12E FY13E

Share of 3W Revenue 3% 5% 6% 8%

Share of 3W EBITDA 1% 4% 9% 15%

3W EBITDA Margins 2% 5% 10% 15%

Company EBITDA Margins 5.4% 6.2% 6.7% 7.3%



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POOR PERFORMANCE OF INDONESIAN SUBSIDIAR Y

To date, TVSL has invested around INR 3 bn in its Indonesian subsidiary PT TVS Motor Company. The companys

Indonesian plant in Karawang has an annual capacity of 300,000 units and commercial production was started there in

FY08. Since the commencement of operations, the company has accumulated losses of INR 2.3 bn due to continued

investments in developing products for the Indonesian market and network expansion. Though volumes have picked up,

PT TVS has sold only 20,000 2W up to the end of FY11. The company plans to continue investing in distribution and

intends to increase its dealerships to 500 from 106 dealers in FY10. This, in their view, would enable the company to

achieve volumes of 10,000 2W per month in a few years. The company has guided that the Indonesian operations

would achieve break-even at monthly production of 6,000 units (72,000 units/annum). The subsidiary has three

different products in its portfolio and will continue to add more in the future offering a complete product range for

Indonesian customers. Given that in Indonesia, more than 90% market share is held by Honda and Yamaha, we do not

believe that TVSL will be able to do well any time soon. In the next 2-3 years at least, we believe that the international

business will continue to pose a problem.

PRESENCE IN LOW MARGIN SEGMENTS & HIGHER COST STRUCTURE ~ IMPEDIN G PROFITABI LITY

About 75% of TVSLs product portfolio comes from segments wherein margins are low and 25% comes from high-

margin segments. While this is true for HMCL as well, the latter has volumes to exploit economies of scale which

means that it can earn better margins than TVSL in every segment.

Revenue Share

Low Margin Segments 75%

Mopeds 23%

Scooters 21%

125cc MC 20%

3W 5%

Source: Darashaw

On average, TVSLs EBITDA margins have been 1000 bps lower than those of both HMCL over FY07-11. The gap is

partially explained by the difference in the scale of operations. In FY11, TVS produced 2.0 mn 2W compared to 5.4 mn

for HMCL. Consequently, ad spend and R&D spend for TVSL have averaged at much higher levels than HMCL and

BJAUT.

Ad Spend (% of Revenue)

0%

1%

2%

3%

4%

5%

6%

FY08 FY09 FY10

TVSL

BJAUT

HMCL

R&D Spend (% of Revenue )

1.0%

1.5%

2.0%

2.5%

FY08 FY09 FY10

TVSL

BJAUT

Source: Companies Source: Companies

EBITDA Margins

TVSL

HMCL

BJAUT

0%

5%

10%

15%

20%

25%

FY07 FY08 FY09 FY10 FY11 Source: Companies


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REVENUE & EPS CAGR OF 16% & 48% over FY12/ 13E

We estimate 2W volumes to increase at a 12% CAGR and 3W volumes at 37% over FY12/13E. We have increased the

realizations at 2% CAGR in both segments over the same period resulting in revenue CAGR of 16%. We estimate EPS to

grow at a CAGR of 49% for FY12/13E on the back of an increase in EBITDA margins from 5.5% in FY11 to 7.0% in

FY13E.


2 W

Domestic 1127092 1356338 1777676 1947160 2164489

Chg 20% 31% 10% 11%

Exports 193320 165414 229132 285967 346209

Chg -14% 39% 25% 21%

Total 1320412 1521752 2006808 2233127 2510697

Chg 15% 32% 11% 12%

3W

Domestic 4596 13400 22357 18000 19681

Chg 192% 67% -19% 9%

Exports 17 1716 17503 37639 55086

Chg 9994% 920% 115% 46%

Total 4613 15116 39860 55639 74767

Chg 228% 164% 40% 34%

2 + 3W

Domestic 1131688 1369738 1800033 1965160 2184170

Chg 21% 31% 9% 11%

Exports 193337 167130 246635 323606 401295Chg -14% 48% 31% 24%

Total 1325025 1536868 2046668 2288766 2585465

Chg 16% 33% 12% 13%

Source: Darashaw

CAPEX & CASH FLOWS

We forecast TVSL to generate operating cash flows (post working capital changes) of INR 5.4 bn over FY12/13E. We

estimate the company will spend INR 2.7 bn over the same period for capex. We expect TVSL to generate free cash

flows of INR 4.7 bn over FY12/13E.


NOPLAT -51 -118 1,637 1,609 2,422 3,243

Change in WC -504 921 -236 343 -108 389

Op Cash Flows 454 -1,038 1,873 1,266 2,530 2,853

Less: CAPEX 2,642 1,196 468 2,867 1,261 1,399

Add: Depreciation 1,089 1,332 1,367 1,336 1,461 1,599

Non op. Cash Flow 0 0 0 186 0 0

Free Cash Flows -1,091 -2,103 1,102 1,682 2,221 2,510



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DIVIDEND YIELD SET TO INCREASE TO 4% BASED ON FY13E

We believe going ahead TVSL, like BJAUT will establish a trend of increasing dividend payout ratio. We expect the

companys dividend yield to increase to 4% in FY13E based on CMP from 2% in FY11 owing to an increase in.


Free Cash Flows -2,103 1,102 1,682 2,221 2,510

Dividend Paid 0 359 607 856 1,219

PAT -642 335 1,280 1,950 2,815

Dividend Payout Ratio 0% 107% 47% 44% 43%

Dividend Yield - - 2.0% 2.9% 4.1%


VALUATION

TVSL faced significant deterioration in profitability during FY07,08,09 due to slowing sales volumes and high input costs.

Hence the forward PE for this period has ranged in an abnormal range from a high of 40x to the negative arena owing

to losses. We therefore benchmark TVSLs valuation to that of the largest 2W company HMCL. HMCL historically trades

at a PE of 14x. TVSL has a debt laden balance sheet

India - Two Wheelers - Darashaw (15th Aug 2011)

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