Hero Honda - JM Fin Initiation - June 2010

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Two Wheeler Industry 15 June

JM Financial Institutional Securities Private Limited

Contents

Twowheeler Industry: Limited players to share a growing pie 3

Poised to grow at a CAGR of 12-13% 4

Insulated from rise in interest rates 8

Two wheelers and cars to co-exist 9

Scooters to outperform motorcycles 11

Up-trading to gain momentum 12

Market share to change hands 12

Players one of the most efficient 14

Bajaj Auto: Best play on emerging markets 15

Hero Honda: The best is behind us 21

TVS Motors: New beginning 27


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Limited players to share a growing pie

Poised to grow at a CAGR of 12-13%: Supported by a) rising income levels,b) young population profile, c) increased demand from rural India, d) strong

replacement demand, and e) huge export potential.

Two-wheelers and cars to co-exist: We believe the Indian market will not

follow the western trend of motorisation wherein people bypassed two-

wheelers for cars as their first mode of motorised transport. Also, we do not

expect existing users to replace their two-wheelers with cars. We expect two-

wheelers and cars to co-exist harmoniously with the former being the daily

workhorse. In addition to the cost advantage, lack of adequate road

infrastructure and ease of commuting makes two-wheelers irreplaceable.

Limited players to share a growing pie: Unlike the car market this industry

is not exposed to competition onslaught by new players. All global majors

have been operating in India for at least a decade. About 95% of the market is

shared between four players, of whom two are home grown companies (Bajaj

and TVS). Consequently, the industry enjoys better pricing power and this is

reflected in the 46% growth in per vehicle operating profit for the top three

listed players in FY10 against a revenue growth of 30%.

Expect scooters to outperform motorcycles: Scooters (c.15% of total two-

wheelers) are expected to outperform motorcycles (80% of total two-wheelers)

by 2% for the next few years driven by a) higher number of female users, b)

rising congestion in cities, c) multiple purpose usage, and d) unisex appeal.

Up-trading to gain momentum: We expect up-trading, not in the narrow

sense of cc, to gain momentum as new launches like Bajajs Discover 150 and

Honda Twister attract executive bikes customers, which are c.60% of thecurrent motorcycle population. This up-trading will result in better

contribution and profitability for companies.

Market share to change hands: We expect HH to continue to cede market

share to a resurgent competition (Bajaj Auto and TVS Motor) and due to entry

of Honda Motorcycles and Scooters (HMSI) into the executive motorcycle

market. We expect HH to register 10% CAGR during FY10-FY12E against

estimated industry growth of 13%.

Industry one of the most efficient: The three listed players on an aggregate

basis, enjoy a) RoIC of c.70%, b) negative working capital, c) sales/net fixed

assets turnover of 6x, and d) debt free balance sheets.

Available at a discount to the broader market: Despite all the inherentstrengths and a comparable earnings growth (16% vs 17% CAGR for FY10-

FY12) the two-wheeler stocks are trading at a high discount to the broader

market multiple of 17x FY12E. This sector compares very well with the FMCG

space on most counts like revenue visibility and efficiency and scores very

high in terms of competition intensity, but is available at a steep discount. We

expect the valuation gap to narrow in favour of two-wheeler stocks.

Initiate coverage with BUY rating on Bajaj Auto (TP of Rs2,745), TVS

Motor (TP of Rs148) and a HOLD rating on Hero Honda (TP of

Rs1,867)Exhibit

JM Financial Research is also available Bloomberg - JMFR , Thomson Publisher & Reute

Please see important disclosure at the end of the rep

Pramod Kumpramod.kumar@jmfinancial.

Tel: (91 22) 6630 30

Mitakshi Ash

[email protected]: (91 22) 6630 30

Recommendations

CompanyBajajAuto

HeroHonda

TVSMotor

Rating BUY HOLD BU

B'berg Ticker BJAUT IB HH IB TVSL

FY11E EPS (Rs) 152.5 123.1 9

FY12E EPS (Rs) 182.8 133.4 13

FY11E PE (x) 15.0 16.3 10

FY12E PE (x) 12.5 15.1 7

TP (Rs) 2,745 1,867 14

CMP (Rs) 2,283 2,009 10

Upside/Downside (%) 20.2 -7.1 43

Source: Bloomberg, JM Financial

Relative Performance

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

1-Apr-

09

1-Jun-

09

1-Aug-

09

1-Oct-

09

1-Dec-

09

1-Feb-

10

1-Apr-

10

1-Jun-

10

HH BJAUT TVSL SENSEX


Twowheeler Industry

15 June 2010

India | Automobiles | Initiating coverage


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Twowheeler Industry 15 June 20


Poised to grow at a CAGR of 12-13%

Rising income levels to improve penetration: India compares very poorly

with most emerging markets in terms of two-wheeler penetration (see exhibit

1). With rising incomes, penetration levels are expected to follow other

emerging markets. We do not expect India to follow the Chinese path as most

factors that harmed the two-wheeler market in China - a) restriction on

gasoline two wheelers, b) ban on entry of two wheelers in the top cities and c)very efficient public transport - are not applicable for India.

Exhibit 1. Penetration level vis--vis per capita income

China at 1.8x (excluding electric), Indonesia at 3.2x, Vietnam at 5x of India

0

10

20

30

40

50

60

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

GDP percapita PPP ($)

P

enetration

(%)

India ChinaBrazil

Indonesia

Vietnam Thailand

Malaysia

Taiwan

Source: Company, JM Financial

Huge disparities between urban and non-urban penetration and scarce

penetration in the lower income groups further strengthen growth prospects

of the industry. (see exhibit 2).

Exhibit 2. Household penetration of motorcycles income wiseHuge potential as household income increases in India.

16.1

2.3

21.1

42.9

53.4

59.8 60.0

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

All India Upto

Rs5,000

Rs5,001 -

Rs8,000

Rs8,001 -

Rs16,000

Rs16,001 -

Rs25,000

Rs25,001 -

Rs50,000

Over Rs

50,000

(%

)



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Young population profile supports growth: c.70% of Indias population is

between the 15 to 49 age group, largely the target audience for two-wheelers.

Moreover, as per NASSCOM, c.4.5 mn people are expected to graduate in

2010 and this number is expected to grow every year. Age-wise review for

motorcycles (see exhibit 3) shows that penetration levels below 40 years is

below the national average. This age group is the biggest growth driver for

the industry as it forms bulk of the working group which has the buying

power.

Exhibit 3. Indias age mix and age wise penetration of motorcycles

Age profile favours two-wheelers demand

15-19 years

13%

20-29 years

24%

30-39 years

20%

40-49 years

14%

50 years+

19%

12-14 years

10%

13.0 12.6

14.815.6 15.616.1

7.5

11.6

13.7

15.8

18.5

20.5

17.9

12.0

9.2

5.9

0

5

10

15

20

25

A ll India Upto 25 26-30 31-35 36-40 41-45 46-50 50+

2006 2008


Rising prosperity in rural India 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 (see exhibit

4). Two-wheelers being the cheapest mode of motorised mobility are beinglapped up by rural customers, resulting in not only a broad-based growth but

also reducing exposure to global economic volatility. Rural India, which

accounts for c.65% of population share, accounted for less than 40% of total

two-wheeler sales in FY08. 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. Despite this, penetration in rural markets is

almost one-third of the penetration in the bigger cities (ex-top 7 cities) (see

exhibit 5).


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Exhibit 4. Trend in MSPs

Increase in MSPs driving farmer and rural prosperity

Support Prices (Rs/quintal) FY04 FY06 FY08 FY10 FY11

Paddy (common) 550 570 745 1,000 1,000

Paddy (Grade A) 580 600 775 1,030 1,030

Jowar (Hybrid) 505 525 600 840 880

Jowar (Maldandi) - - 620 860 900

Bajra 505 525 600 840 880

Maize 505 540 620 840 880

Ragi 505 525 600 915 965

Arhar (tur) 1,360 1,400 1,590 2,300 3,000

Moong 1,370 1,520 1,740 2,760 3,170

Urad 1,370 1,520 1,740 2,520 2,900

Cotton - medium staple 1,725 1,760 1,800 2,500 2,500

Cotton - long staple 1,925 1,980 2,030 3,000 3,000

Groundnut in shell 1,400 1,520 1,550 2,100 2,300

Sunflower seed 1,250 1,500 1,510 2,215 2,350

Soyabean (Black) 840 900 910 1,350 1,400

Soyabean (Yellow) 930 1,010 1,050 1,390 1,440

Sesamum 1,485 1,550 1,580 2,850 2,900

Nigerseed 1,155 1,200 1,240 2,405 2,450

Source: Business Line

Exhibit 5. Motorcycle penetration as per population strata

Low penetration in towns and rural areas a huge engine of growth

8.2

22.0

27.7

30.9

18.8

13.010.1

28.4

33.3

36.8

22.9

16.1

0

5

10

15

20

25

30

35

40

Rural areas Towns 1-10 lakh cit ies Other 1 mn

+cities

Top 7 metro

cities

All India

(%)

2006 2008


Higher first time buyers to feed strong replacement demand: With

increased demand from the rural markets many first time users are joining

the two-wheeler bandwagon. For 2009, the first time buyers are expected to

have accounted for 58% of motorcycle sales against 52% in 2008 (see exhibit

6). Such sharp improvement happened despite finance constraints, which

hampered demand from first time buyers in the urban markets. We expect

contribution from first time buyers to increase further due to the very low

penetration in rural India. Strong increase in first time buyers will result in big

replacement opportunity in the future as normally the replacement cycle is

around 4 years.


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Exhibit 6. First time and repeat buyers trend

Rural India driving first time purchases

0

10

20

30

40

50

60

70

80

90

100

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

(%)

First time buyers Repeat buyers


Huge export potential: Exports out of India have grown at a CAGR of 32%

since FY00 to 1.1 mn units in FY10 against a growth of 9.7% in domestic sales

to 9.4 mn units. While this growth seems spectacular it pales significantly

when compared to the 10 mn units exported by China (see exhibit 7). China

is currently the biggest two-wheeler manufacturer in the world with exports

higher than domestic (gasoline two-wheelers) sales. China accounts for close

to 70% of the worlds two-wheeler market.

Exhibit 7. Export trend of China and India

Huge potential for India to catch up

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Millions

China India


The product profile for India and China is similar with both being big players

in the sub 150 cc market (see exhibit 8). However, a big negative for China,

and thus a positive for India, is an inherent association of low quality and

price with Chinese products. With increasing per capita income of developing

nations customers will definitely look at quality options which can be an

advantage for India. This trend has already started in Africa where Indian

players (Bajaj Auto and TVS Motor), who have been relatively new to the


8/36



market, have been able to raise market share despite cheaper offerings from

the Chinese. This is due to better quality products which are less prone to

breakdown. Bajaj Auto claims it has market share of over 15% in Nigeria,

Africas biggest market, and was able to increase prices by 5% in November

2009, commanding a big premium over Chinese competition. The export

opportunity is expected to be bigger than domestic in the long-term, opening

up a huge growth frontier for existing players. Africa and Asia will remain the

key export markets.

Exhibit 8. Exports by region

China has exposure to America and Europe

China IndiaNigeria, 15%

Argetina, 6%

Brazil, 5%

America, 5%

Ukraine, 5%

Mexico, 3%

Indonesia, 4%

Others, 50%

Japan, 1%Italy, 2%

Egypt, 2%

Germany, 2%

Nigeria,

18%

Sri lanka,

13%

Banglades

h, 11%

Columbia,

11%

Phillipins,

6%

Nepal, 5%

Kenya, 5%

Others,

31%


Insulated from rise in interest rates

Currently customers who seek to avail financing for two wheelers have to pay an

interest of c.24% and make a down-payment of c.25%. Despite such stringent

costs financing is not easily available as major financiers like ICICI Bank have

exited the market. Other financiers who are active in the market have beenselective in lending by rejecting over 50% of loan applications. Credit quality has

also improved due to the CIBIL database (which tracks the credit history of

borrowers). Currently c.35% of two wheelers is financed as against c.75% in FY07.

This reduced dependence on financing and very high interest rates makes the

sector less susceptible to rise in interest rates.


9/36



Two wheelers and cars to co-exist

We believe that the Indian market will not follow the western trend of

motorisation wherein people bypassed two wheelers for cars as their first

mode of motorised transport. Also, we do not expect existing users to

replace their two-wheelers with cars. We expect two-wheelers and cars to co-

exist harmoniously with the former being the daily workhorse. In addition to

the cost advantage (see exhibit 9), lack of adequate road infrastructure andease of commuting makes two-wheelers irreplaceable.

Exhibit 9. Comparison between cheapest motorcycle (HH CD Dawn) and car

(Tata Nano) - Two wheelers are much more efficient on all counts

4.0

4.4 4.5

3.0

4.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Pric e Insuranc e EMI Cost/ km Maintenanc e

(

x)

Source: JM Financial

Limited players to share the growing pie: Unlike the car market, this

industry is not exposed to competition onslaught by new players. All global

majors have been operating in India for at least a decade. Over 90% of the

market is shared between four players, of whom two are home grown

companies (Bajaj Auto and TVS Motor).

Between FY01 and FY10 the combined market share (see exhibit 10) of the

top four players increased to 95% from 80%, marginalising even Yamaha.

However, in the car industry, market leader Maruti Suzuki has lost market

share and new players have taken over considerably. With limited number of

players, the industry enjoys better pricing power and this is reflected in the

46% per vehicle operating profit growth for the top three listed players in

FY10 against a revenue growth of 30%.


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Exhibit 10. Comparison of market share

China has exposure to America and Europe. Entry of new players a threat in car market.

FY01 cars FY01 Two wheelers

M aruti

58%

Hyundai

14%

Others

14%

Honda

2%Toyota

0%

Ford

3%

GM

1%

Tata

8%

Hero Honda

28%

Bajaj Auto

29%

TVS

Motors

23%

HMSI

0%

Yamaha

4%

Suzuki

0%

Others

16%

FY10 cars FY10 Two wheelers

M aruti

50%

Hyundai

21%

Tata

13%

GM

5%

Ford

2%

Toyota

1%Honda

4%Others

4%

Hero Honda

49%

Bajaj Auto

19%

Others

1%

Suzuki

2%

Yamaha

2%

HMSI

13%

TVS

Motors

14%

Source: SIAM, JM Financial

Chinese or other Asian players not a threat

We do not expect the Chinese or other Asian players to dent the existing

market as entry barriers in the two-wheeler market are very high due to the

extremely competitive environment and very demanding customers.

Incumbent players offer superior products at competitive prices, which theseplayers have been unable to do so far. Companies like Hyosung Group of

Korea and SYM of Taiwan have attempted in vain to make a mark in the Indian

market. Even the much hyped Mahabharata Motors, a JV between Universal

Group of India and Indonesias Salim Group, has not been able to attract

buyers.


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Scooters to outperform motorcycles

The scooter segment is in a sweet spot as industry wide demand outstrips

supply. Thanks to Honda Motorcycle and Scooters (HMSI) thrust, the segment,

which was once declining, is growing rapidly (see exhibit 11).

Exhibit 11. Scooter sales trend

Launch of Honda Activa revived the scooter market

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Millions

Source: SIAM, JM Financial

Switch to gearless revived the segment: Shift to the gearless technology

revived the scooter segment, which was other wise loosing out to motorcycles

on account of convenience and fuel efficiency. Shift to gearless made scooters

very convenient to ride, making them popular in crowded cities and markets.

A big play on empowerment of women: Contrary to general perception,

over 70% of scooter users in India are males. This shows there is a huge

opportunity to increase sales to female users as they get more empowered.

Progressive states like Delhi, Punjab and Gujarat have household scooterpenetration of over 20%. However, remaining states have penetration levels

below 10% with Eastern states under 5%. With increasing economic growth

and thrust on women empowerment, we expect these states to see a steady

increase in scooter demand.

Strong demand and pricing environment: Unlike other segments, the

scooter sector enjoys higher demand than the collective industry capacity.

Markets like Mumbai have waiting period of over 3 months for popular

brands like Activa, and HMSI is believed to have dealer orders backlog of over

300,000 units. This has resulted in strong pricing environment in the

segment as players are scrambling to meet demand.

Versatility, unisex appeal biggest USPs: A scooter, unlike motorcycle, due

to its structure, doubles up as a utility vehicle which can be used to carry a

wide array of goods. Scooters carrying anything from luggage to LPG cylinder

are a common sight in India, making them very popular with households and

businesses. What further boosts desirability of a scooter is its ability to cater

to both men and women across a much wider age group.


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Up-trading to gain momentum

We expect the Indian two-wheeler market to move up the value chain faster

(see exhibit 12) as rising income levels and media penetration increase

demand for premium bikes which satisfy the aspirational need of the

customer. The manufacturers are doing their bit to expedite the transition by

introducing premium features in the commuter executive bikes and by

bringing down the entry level price of powerful bikes. Recent examplesinclude HMSIs launch of Twister, a 110 cc bike with premium features, in the

executive segment and BJAUTs launch of a 150 cc variant of Discover at a

price of Rs46,000. BJAUTs launch is a significant one as its the first premium

bike under Rs50,000 and is an attempt to democratise performance biking.

Exhibit 12. Trend in motorcycle category share

Entry-to-Executive-to-Premium transition to gather steam

0

10

20

30

40

50

60

70

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

(%)

Entry Executive Premium

Source: Compnany, JM Financial

Market share to change hands

We expect the churn in market share between the top four players in the

motorcycle market to continue in FY11. HH, the market leader will further

cede ground to a resurgent competition (Bajaj Auto and TVS Motor) which has

launched new models in the key executive segment which accounts for c.60%

of motorcycle demand and c.75% of HHs sales.

HH ceding marketshare gifted to it by competition in FY08: The rise in

HHs marketshare in FY08 was due to wrong strategies (of exiting the 100 cc

segment) adopted by home grown competitors (BJAUT and TVSL). This gave

HH a free run for over two years during which it increased its marketshare

from 48% to a high of 64% in August 2010.

BJAUTs course correction has paid big dividends: Having lost market

share for two years the competition realised their mistake and started

focusing on the 100 cc segment again. BJAUT re-introduced the Discover

brand with a 100 cc engine in August 2009 and since then has been able to

regain market share from HH (see exhibit 13). Discover 100 has rapidly

grown to become the third largest selling brand in the industry, quashing the

myth that HHs dominance in this segment is invincible.


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TVSL and HMSI also increasing market share: TVSL and HMSI have also

introduced new products in the executive segment, increasing pressure on

HH. TVSL launched Jive, the only bike in the market with an automatic clutch,

with an aim to create a niche in the voluminous executive segment. This

vehicle, due to its technology, will take some time to become popular. HMSIs

Twister, a 110 cc bike, is targeted towards the higher end of the executive

segment which is dominated by HHs Passion.

Exhibit 13. Trend in motorcycle market share

New launches driving up marketshare for the challengers

0

10

20

30

40

50

60

70

FY04

FY05

FY06

FY07

FY08

FY09

Apr09

May09

Jun09

Jul09

Aug09

Sep09

Oct09

Nov09

Dec09

Jan10

Feb10

Mar10

(%)

BJAUT HH TVSL HMSI

Source: Compnany, JM Financial


14/36



Players one of the most efficient

Compares very well with FMCG, one of the most efficient sector, and stocks

like BJAUT and TVSL available at half the multiples.

Exhibit 14. Comparison between Two Wheeler and FMCG companies

Please note: PEG = FY11E PE multiple / FY10-FY12E EPS CAGR.

EBITDA Margins (%)

0

5

10

15

20

25

HH BJAUT TVSL HUL Dabur

FY11E FY12EPAT Growth (%)

0

10

20

30

40

50

60

70

80

90

100


FY11E FY12E

ROCE (%)

0

20

40

60

80

100

120


FY11E FY12E

ROE (%)

0

10

20

30

40

50

60

70

80

90


FY11E FY12E

PE (x)

0

5

10

15

20

25

30

35


FY11E FY12E

PEG (x)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5


P/BV (x)

0

2

4

6

8

10

12

14

16

18

20


FY11E FY12E

EV/EBITDA (x)

0

5

10

15

20

25


FY11E FY12E



15/36


Best play on emerging markets

Strong volumes driven by domestic resurgence and export ramp-up: Weexpect BJAUTs volumes CAGR of 22% in FY10-FY12E. Success of recent

launches like Discover 100 and 150 and Pulsar 135 in the domestic market,

and ramp-up in exports to Africa will drive volumes.

Reduced dependence on three-wheelers: Strong growth in Discover and

Pulsar has enabled BJAUT to drastically reduce its dependence on the three-

wheeler segment. Improving motorcycle mix and exports have enabled the

company to post margins over 20%.

Operating margins to remain at c.20% in FY10-12E: We expect the company

to hold on to the 20% margin mark due to strong operating leverage,

improved motorcycle mix and ramp-up in tax haven operations. We expect

PAT CAGR of 21% in FY10-FY12E aided by strong operating performance andhigher other income.

Offers multiple triggers: Amongst all the two-wheeler names, BJAUT offers

the highest triggers right from launch of KTM bikes to entry into the car

market, with Renault-Nissan which have not been accounted for in our

estimates.

Best placed to tap the huge export opportunity: We believe BJAUT is best

placed to tap the export opportunity due to its strong overseas presence, tie-

up with KTM and an operational plant in China. For the developed world the

company will use the KTM brand using India as the export hub.

Attractive valuations, recommend BUY: In addition to a net cash of

c.Rs33bn and negative working capital, the company enjoys RoIC and RoE of

c.150% and c.70% respectively. Based on a 15xFY12E core EPS (PEG of 0.7x)

and the cash value we arrive at a target price of Rs2,745 (Rs2,517 and

Rs228). The stock is attractively priced at 12.5x FY12E EPS with a PEG of 0.6x.

We initiate coverage with a BUY rating.

Exhibit 15.




Tel: (91 22) 6630 30

Mitakshi Ash


Key Data

Market cap (bn) Rs 330.4 / US$ 7

Shares in issue (mn) 1

Diluted share (mn) 1

3-mon avg daily val (mn) Rs 524.9 / US$ 11

52-week range 2315.0 / 906

Sensex/Nifty(14/06/2010) 17,338/5,1

Rs/US$ 46

Daily PerformanceBajaj Auto

0

500

1000

1500

2000

2500

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

0%

50

100

150

200

250

Bajaj Auto Relat ive to Sensex (RHS)

% 1M 3M 12

Absolute 4.5 24.0 126

Relative* 2.5 23.0 113

* To the BSE Sensex

Shareholding Pattern (

Q4FY09 Q4FY

Promoters 49.6 49

FII 13.8 17

DII 9.9 6

Public / others 26.6 26

Bajaj Auto | BJAUT IB

15 June 2010

India | Automobiles | Initiating CoveragePrice: Rs2,283

BUY

Target: Rs2,745 (Mar11)

Exhibit 15: Financial Summary (Rs mn)

Y/E March FY09 FY10E FY11E FY12E

Net sales 88,080 119,210 149,699 178,374

Sales growth (%) -2.0 35.3 25.6 19.2

EBITDA 12,006 25,917 29,885 35,313

EBITDA (%) 13.6 21.7 20.0 19.8

Adjusted net profit 8,011 18,118 22,063 26,447

EPS (Rs) 55.4 125.2 152.5 182.8

EPS growth (%) -3.3 126.2 21.8 19.9

ROCE (%) 27.3 54.6 58.0 58.8

ROE (%) 48.9 82.4 63.4 50.6

PE (x) 8.9 18.2 15.0 12.5

Price/Book value (x) 4.2 12.2 7.8 5.3

EV/EBITDA (x) 5.6 12.0 9.9 8.0

Source: Company data, JM Financial. Note: Valuations as of 14 / 06 / 2010


16/36

Bajaj Auto 15 June 20


Strong volumes driven by domestic resurgence and export ramp-up: We

expect BJAUTs volumes CAGR of 22% in FY10-FY12. Success of recent

launches like Discover 100 and 150 and Pulsar 135 will enable the company

to grow its domestic sales at a CAGR of 23%, beating the industry growth by a

wide margin, and ensure further marketshare gains. Growth in exports (33%

of volumes) of 18% will be driven by ramp-up in the African continent (c.45%

of exports) and pick-up in demand from the Asian markets (c.35% of exports).

Reduced dependence on three-wheelers: Strong growth in Discover and

Pulsar (see exhibit 16) has enabled the company to drastically reduce its

dependence on the three wheeler segment for profitability. These two brands

accounted for c.33% of overall volumes in FY09, which increased to c.42% in

FY10, and we believe it will further improve to c.58% in FY11. This will enable

the company to post strong margins despite lower contribution from three-

wheelers (estimated to be 10.7% of overall volumes against 12.0% in FY10).

Exhibit 16. Mix and margin trend

Improving motorcycle mix rather than three-wheelers driving margins

-

20

40

60

80

100

120

2FY09 3FY09 4FY09 1QFY10 2QFY10 3QFY10 4QFY10

Maketshare(%)

-

5

10

15

20

25

Margins(%)

Economy Executive Premium Three wheelers Opearting margins


Operating margins to remain at c.20% in FY10-12: We expect the company

to hold on to the 20% margin mark due to strong operating leverage,

improved motorcycle mix and ramp-up in tax haven operations. All these will

help the company mitigate the impact of lower contribution from three-

wheeler segment and higher commodity prices.

Strong R&D to sustain product excitement: BJAUT has made rapid strides

since 2001, when it launched Pulsar - its first indigenous bike, to become the

product leader in the Indian market. This has been achieved by a very strong

R&D headed by Dr. Abraham Joseph. Renault-Nissan choosing BJAUT as the

lead partner in the three way car JV is the best acknowledgement of its R&D

prowess. We expect BJAUT to continue to be ahead of peers when it comes to

technology and launches. The company has already done some disruptive

launches like the new Pulsar 220 and Discover 150, further cementing its

position as the price and product leader.


17/36



Offers multiple triggers: Amongst all the two-wheeler names, BJAUT offers

the highest triggers right from launch of KTM bikes to entry into the car

market with Renault-Nissan. First of the Made in India KTM bikes will be rolled

out in Europe and other markets by end-2010 followed by the Indian market

in 2011. These 125 cc bikes will carry premium pricing in-line with the KTM

brand, resulting in huge profitability due to the low cost of manufacturing in

India. These bikes are expected to do well due to the relaxed license

requirement in Europe for sub-250 cc street bikes. In India these bikes willhalve the entry price point for performance bikes, expanding the market

considerably. The small car is scheduled to be launched in 2012 and is

expected to be branded as Nissan/Renault around the world while BJAUT will

do the manufacturing. The management is quite confident of maintaining

margins at c.20% even in the car business and claims that the project cost is

1/7 the amount normally spent by big car companies on a similar project. We

expect both ventures to be very promising; however, we have not factored in

any of these in our estimates yet, exposing our earnings to an upside risk.

Strong R&D to sustain product excitement: BJAUT has made rapid strides

since 2001, when it launched Pulsar - its first indigenous bike, to become the

product leader in the Indian market. This has been achieved by a very strong

R&D headed by Dr. Abraham Joseph. Renault-Nissan choosing BJAUT as thelead partner in the three way car JV is the best acknowledgement of its R&D

prowess. We expect BJAUT to continue to be ahead of peers when it comes to

technology and launches. The company has already done some disruptive

launches like the new Pulsar 220 and Discover 150, further cementing its

position as the price and product leader.

Best placed to tap the huge export opportunity: We believe, BJAUT is best

placed to tap the export opportunity due to its strong overseas presence, tie-

up with KTM and an operational plant in China. The companys exports have

witnessed a CAGR of 33% between FY06 and FY10 and have grown 25x since

FY01 (see exhibit 17). BJAUT has been focusing on the African markets in the

last three years and has grown there rapidly to make it the companys largest

overseas market.

Exhibit 17. Trend in exports

Management wants to grow exports from 30% of volumes to 50%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Units

CAGR-33%



18/36



The African opportunity India of 1980s: The worlds second most populous

continent is the final frontier for the two-wheeler companies as it offers a

market, as big as India, in terms population with abysmally low penetration

levels (below 2%). What brighten prospects further are the low income levels,

poor infrastructure and smaller regional markets which favor the two-wheelers.

Currently c.2.5mn units are sold in the African continent with Nigeria being the

biggest market with c.1mn units. Bulk of the demand is from the taxi segment

(motorcycles are converted to three-wheelers by attaching a trailer). This marketis predominantly occupied with entry level bikes, which are expected to be very

rugged to handle the overloading and bad roads. Chinese have been the biggest

exporters to Africa at the expense of refurbished Japanese exports. Very low

pricing by the Chinese rapidly eroded demand for the refurbished Japanese

exports. However, quality has been a big issue with the Chinese bikes, especially

for people who use them as taxis. This is where the Indian players (BJAUT and

TVSL) have been able to rapidly establish themselves as they offer superior

quality at a reasonable premium. BJAUT has quickly grown to become the largest

non-Chinese player and commands c.50% price premium over the Chinese entry

level bikes. With rising income levels, customers are expected to upgrade to

quality bikes, which is again an advantage for the Indian manufacturers.

Eyeing Brazil and China: The company will be entering major markets like

China (largest market) and Brazil (fourth largest market) in the next few years

after tapping the African continent. The company already has a plant in China

which it is using for sourcing non-engine parts for exports to Africa. For the

Brazilian market, development of flex engines (which can work with high

ethanol content) is a requirement which the company can easily develop.

KTM alliance- blend of price leverage and cost advantage: BJAUTs alliance

with KTM is a great marriage of frugal engineering and premium branding.

While BJAUT will develop and manufacture the new bikes KTM will sell them in

the North America and Europe market. This alliance is mutually beneficial as

it improves KTMs profitability and provides BJAUT access to developed

markets. BJAUT currently holds 35% equity in KTM and we expect it to

become the majority owner in the future and further integrate KTM

operations into the company. The company will be launching the new 125 cc

bikes the first from the alliance, by year-end (see exhibit 18)

Exhibit 18. 125 cc KTM bikes Race and Stunt variants

The company will be working on bigger bikes as well



19/36



Key assumptions

Exhibit 19. Volumes and Realisations assumption(Units) FY10 FY11E YoY (%) FY12E YoY (%)

Volumes 2,852,632 3,653,077 28.1 4,221,289 15.6

Motorcycles 2,506,845 3,257,039 29.9 3,787,288 16.3

3 Wheelers 340,936 391,187 14.7 431,030 10.2

Domestic 1,961,534 2,615,285 33.3 2,986,300 14.2

Motorcycles 1,781,748 2,423,177 36.0 2,786,654 15.0

3 Wheelers 176,027 188,349 7.0 197,766 5.0

Export 891,098 1,037,792 16.5 1,234,990 19.0

Motorcycles 725,097 833,862 15.0 1,000,634 20.0

3 Wheelers 164,909 202,838 23.0 233,264 15.0

Realisations (Rs) 41,789 40,979 -1.9 42,256 3.1


Valuations

In addition to surplus cash (net of PV of sales tax deferral loan) of c.Rs33bn

and negative working capital, the company enjoys RoIC and RoE of c.150%

and c.70%, respectively. Based on a 15xFY12E core EPS (PEG of 0.7 x) and the

cash value we arrive at a target price of Rs2,745 (Rs2,517 and Rs228). The

stock is attractively priced at 12.5x FY12E EPS with a PEG of 0.6x. We initiate

coverage with a BUY rating.

Key risks

Key downside risks are: a) Poor monsoons, b) steep increase in commodity

prices, and c) failure of new launches.

Key upside risks are: a) Management achieving its 4 mn volume guidance for

FY11E, and b) further decrease in commodity costs.

Exhibit 20. BJAUT 1 yr fwd P/E

0

500

1000

1500

2000

2500

May-08

Oct-08

Mar-09

Aug-09

Jan-10

Jun-10

13x

5x

11x

7x

15x

9x



20/36



Financial Tables

Profit & Loss (Rs mn)


Net sales (Net of excise) 88,080 119,210 149,699 178,374

Growth (%) -2.0 35.3 25.6 19.2

Other operational income 0 0 0 0

Raw material (or COGS) 64,635 80,705 106,216 127,431

Personnel cost 3,544 3,995 4,341 4,816

Other expenses (or SG&A) 7,896 8,593 9,257 10,814

EBITDA 12,006 25,917 29,885 35,313

EBITDA (%) 13.6 21.7 20.0 19.8

Growth (%) -3.3 115.9 15.3 18.2

Other non-op. income 1,134 1,225 2,034 2,523

Depreciation and amort. 1,298 1,365 1,488 1,607

EBIT 11,842 25,777 30,431 36,229

Add: Net interest income -210 -60 0 0

Pre tax profit 11,632 25,717 30,431 36,229

Taxes 3,621 7,600 8,369 9,782

Add: Extraordinary items -1,446 -1,082 0 0

Less: Minority interest 0 0 0 0

Reported net profit 6,565 17,036 22,063 26,447

Adjusted net profit 8,011 18,118 22,063 26,447

Margin (%) 9.1 15.2 14.7 14.8

Diluted share cap. (mn) 145 145 145 145

Diluted EPS (Rs.) 55.4 125.2 152.5 182.8

Growth (%) -3.3 126.2 21.8 19.9

Total Dividend + Tax 3,724 6,771 6,771 6,771


Balance Sheet (Rs mn

Y/E March FY09 FY10E FY11E FY1

Share capital 1,447 1,447 1,447 1,4

Other capital 0 0 0

Reserves and surplus 15,417 25,682 40,974 60,6

Networth 16,864 27,129 42,421 62,0

Total loans 15,700 16,360 17,054 17,7

Minority interest 0 0 0

Sources of funds 32,564 43,490 59,475 79,8

Intangible assets 0 0 0

Fixed assets 33,339 35,289 37,246 40,7

Less: Depn. and amort. 18,079 19,444 20,932 22,5

Net block 15,260 15,845 16,314 18,1

Capital WIP 383 355 2,855 2,8

Investments 18,085 27,552 32,039 33,7

Def tax assets/- liability -42 -591 -964 -1,2

Current assets 16,053 23,035 35,612 54,8

Inventories 3,388 4,572 5,742 7,8

Sundry debtors 3,587 2,939 3,691 7,8

Cash & bank balances 1,369 8,153 18,669 30,6

Other current assets 1,257 1,440 1,514 2,4

Loans & advances 6,453 5,930 5,996 6,0

Current liabilities & prov. 17,176 22,707 26,381 28,4

Current liabilities 12,134 14,505 17,978 19,7

Provisions and others 5,042 8,202 8,404 8,6

Net current assets -1,123 328 9,231 26,4

Others (net) 0 0 0

Application of funds 32,564 43,490 59,475 79,8


Cash flow statement (Rs mn)


Reported net profit 6,565 17,036 22,063 26,447

Depreciation and amort. 818 1,365 1,488 1,607

-Inc/dec in working cap. -1,513 4,527 1,420 -4,529

Others 0 0 0 0

Cash from operations (a) 5,870 22,928 24,971 23,526

-Inc/dec in investments 486 -9,467 -4,487 -1,665

Capex -3,428 -1,922 -4,457 -3,465

Others 1,169 806 193 -623

Cash flow from inv. (b) -1,774 -10,583 -8,751 -5,753

Inc/-dec in capital -1,853 0 0 0

Dividend+Tax thereon -3,724 -6,771 -6,771 -6,771

Inc/-dec in loans 2,357 660 694 728

Others -68 549 373 295

Financial cash flow ( c )-3,288 -5,561 -5,704 -5,747

Inc/-dec in cash (a+b+c) 808 6,784 10,516 12,026

Opening cash balance 561 1,369 8,153 18,669

Closing cash balance 1,369 8,153 18,669 30,695


Key Ratios

Y/E March FY09 FY10E FY11E FY1

BV/Share (Rs) 116.6 187.5 293.2 429

ROCE (%) 27.3 54.6 58.0 58

ROE (%) 48.9 82.4 63.4 50

Net Debt/equity ratio (x) -0.2 -0.7 -0.8 -0

Valuation ratios (x)

PER 8.9 18.2 15.0 12

PBV 4.2 12.2 7.8 5

EV/EBITDA 5.6 12.0 9.9 8

EV/Sales 0.8 2.6 2.0 1

Turnover ratios (no.)

Debtor days 15 9 9

Inventory days 14 14 14

Creditor days 45 59 56



21/36


The best is behind us

Unbridled volume growth is history: Hero Honda (HH) had an unbridledvolume growth between FY08 and mid-FY10 with its marketshare improving

from 48% to 64%. However, BJAUTs re-entry into the 100 cc segment has

resulted in HHs marketshare retreating to 54%. We expect the company to

underperform the industry with a growth of 12% in FY11 and 8% in FY12.

Mix getting adverse: Increased competition to Splendor and Passion is

dragging the mix for HH. The contribution of these brands to overall volumes

has slipped from c.76% to c.73% in the recent months and we expect the mix

to dilute further as new launches from competition gain further traction.

Inability to grow beyond Splendor-Passion: Making matters worse is HHs

inability to grow beyond the Splendor and Passion brands. The companys

repeated attempts to push Glamour, Super Splendor and Splendor NXG have

been futile. Companys aim to crack into the bigger bike segment in ameaningful way has also been a failure.

Rural belongs to HH a myth: BJAUTs Discover 100 is selling close to

90,000 units a month within 9 months of launch and is the third largest

selling model in the industry after HHs Splendor and Passion. This would not

have been possible without strong demand from the rural markets, which

historically has been HHs forte.

Rumored exports to Africa will not benefit much: We believe HHs rumored

entry into Africa will not compensate for the loss in domestic market and will

further hurt margins due to wafer thin profits in Africa (BJAUT, the largest

exporter, earns c.6% margin after factoring in export benefits).

Too early to play 2014 developments: We think its too early to play on

possible positive fallout of developments in 2014, when the JV expires.

Valuations expensive on PEG basis: At the current price the stock trades at

an expensive PEG multiple of 1.7x. Based on a 14xFY12E EPS (PEG of 1.6x) we

arrive at a target price of Rs1,867. While the downside is limited due to the

strong balance sheet, relative high PEG will result in sustained

underperformance. We initiate coverage with a HOLD rating.

Exhibit 21.




Tel: (91 22) 6630 30

Mitakshi Ash


Key Data

Market cap (bn) Rs 401.1/US$ 8

Shares in issue (mn) 199

Diluted share (mn) 199

3-mon avg daily val (mn) Rs 1107.0 / US$ 23

52-week range 2050.0 / 125

Sensex/Nifty(14/06/2010) 17,338/5,1

Rs/US$ 46

Daily Performance

Hero Honda

0

500

1000

1500

2000

2500

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

-20

-10

0%

10

20

30

40

50

60

Hero Honda Relative to Sensex (RHS)

% 1M 3M 12

Absolute 7.0 8.9 42

Relative* 5.0 7.9 28

* To the BSE Sensex


4Q FY09 4Q FY

Promoters 55.0 55

FII 27.0 30

DII 9.6 6


Hero Honda | HH IN

15 June 2010

India | Automobiles | Initiating CoveragePrice: Rs2,009

HOLD

Target: Rs1,867 (Mar11)


Y/E March FY08 FY09 FY10E FY11E FY12E

Net sales 103,318 123,191 158,312 180,948 199,267

Sales growth (%) 0 19.2 28.5 14.3 10.1

EBITDA 13,537 17,291 27,670 30,070 32,783

EBITDA (%) 13.1 14.0 17.5 16.6 16.5

Adjusted net profit 9,667 12,818 22,318 24,590 26,630

EPS (Rs) 48.4 64.2 111.8 123.1 133.4

EPS growth (%) 0 32.6 74.1 10.2 8.3

ROCE (%) 32.4 38.6 79.5 84.0 65.9

ROE (%) 32.4 37.8 61.3 57.9 45.3

PE (x) 14.3 12.6 18.0 16.3 15.1

Price/Book value (x) 4.6 4.3 11.5 8.0 6.0

EV/EBITDA (x) 8.3 7.3 12.6 11.6 10.2



22/36

Hero Honda 15 June 20


Unbridled volume growth is history: Hero Honda (HH) had an unbridled

volume growth between FY08 and mid-FY10 with its marketshare improving

from 48% to 64% due to strong rural demand coupled with competition

shifting focus from the 100 cc segment. However, in August 2010 arch rival

BJAUT re-entered the 100 cc segment with Discover 100, and since then HH

has seen its marketshare retreat to 54% with unremitting underperformance.

We expect the company to underperform the industry with a volume growthof 12% in FY11 and 8% in FY12.

Exhibit 22. Monthly marketshare movement in motorcycles

Discover 100 putting sustained pressure on HHs marketshare

-

10

20

30

40

50

60

70

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

%

Hero Honda Bajaj Auto


Mix getting adverse: Increased competition to Splendor and Passion is

dragging the sales mix for HH. The contribution of these brands to overall

volumes has slipped from c.76% to c.73% in the recent months whilecontribution from the low margin entry level bikes has increased (see exhibit

23 and 24). We expect the mix to dilute further as new launches from

competition gain further traction.

Exhibit 23. Trend in HHs volume mix

Splendor and Passions share of profits much higher than their volume share

0%

20%

40%

60%

80%

100%

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Executive Entry Premium Scooters



23/36



Exhibit 24. Comparison between HHs entry and executive bikes

CD range a drag on margins while Passion Plus a margin booster

Comparison CD Dawn CD Deluxe Splendor Plus Passion Plus

Price (Rs ex-showroom Delhi) 33,000 38,350 39,950 43,050

Engine (cc) 97 97 97 97

Power (bhp) 7.5 7.5 7.5 7.5

Speed (kph) 85 85 82 85Weight (kgs) 109 109 109 116

Self start No Yes No No


Inability to grow beyond Splendor-Passion: Making matters worse is HHs

inability to grow beyond the Splendor and Passion brands. The company has

five brands beyond Passion which account for a mere 10% of overall volumes.

The companys repeated attempts to push Glamour, Super Splendor and

Splendor NXG have been futile. Companys aim to crack into the bigger bike

segment in a meaningful way has also been a failure. In this segment the

company is a distant third even trailing HMSI. Despite its wide reach and

network the companys premium brands, CBZ Xtreme and Hunk, are outsoldby HMSIs Unicorn on an individual basis despite HMSIs limited reach and

higher prices. This throws up an interesting paradox wherein HH is the

preferred name in the executive segment but a distant third in the premium

segment. This proves that the brands are bigger than the company Splendor

and Passion in case of HH, Pulsar and Discover in case of BJAUT, Scooty and

Apache in case of TVSL and Activa in the case of HMSI.

Rural belongs to HH a myth: BJAUTs Discover 100 is selling close to

90,000 units a month within nine months of its launch and is the third largest

selling model in the industry after HHs Splendor (c.175,000) and Passion

(c.100,000). This would not have been possible without strong demand from

the rural markets, which historically has been HHs forte (see exhibit 25).

Dealer checks indicate that rural sales of Discover 100 have been muchhigher than the urban centers. This brand is particularly doing very well in the

Northern states like Uttar Pradesh which is the biggest market for entry and

executive segments. Strong growth in agricultural income and increased

media penetration is increasing aspirations of rural customers, making them

more open to new brands and premium bikes. This, according to us, is not a

good development for HH as its premium bikes do not excite the customer.

Exhibit 25. Monthly volumes of Splendor, Passion and Discover 100

Discover 100 is taking away incremental growth from Splendor and Passion

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

(units)

Splendor Passion Discover 100



24/36



Rumored exports to Africa will not benefit much: We believe HHs rumored

entry into Africa will not compensate for the loss in domestic market share

and will further hurt margins due to wafer thin profits in Africa. BJAUT, the

largest exporter to Africa from India, earns c.6% margin after factoring in

export benefits of c.8%. This is after being in the market for over three years

and after increasing prices considerably from the launch rates. The company

initially lost c.USD150 per bike in an attempt to establish themselves. The

overall African market is c.2.5mn units a year which is c.50% of HHsexpected FY11 volumes, ruling out immediate gains on volumes. HH will have

to modify its existing CD Dawn, the cheapest HH bike, to meet the market

requirement in Africa and sell it at a much lower price. This, we believe, will

be very negative for margins as CD Dawn at its current prices is a drag on

margins.

Too early to play 2014 developments: We think its too early to play on

possible positive fallout of developments in 2014, when the JV expires. The

best possible out come for investors would be a merger of HMSI into HH. This

will increase the competitive position of HH by giving it access to HMSIs

enviable scooter portfolio. It will also take out the conflict of interest existing

currently with Honda Motor Company (HMC) holding stakes in both HH and

HMSI. A lot will depend on HMCs ambition and strategy as they are the oneswho have a higher bargaining power. What will further strengthen their

position is HMSIs increasing marketshare in India, which is currently at

c.14%, and which we expect to increase to c.20% by 2014.

Moderate top line and PAT growth: We expect top line and PAT CAGR of

12% and 9% respectively between FY10-FY12E. Payout of extraordinary

dividend resulted in outflow of c.Rs25bn which will reduce the treasury

income going forward. Incremental benefits from tax haven operations are

limited and will not be able to negate the impact of higher commodity prices

and limited pricing actions (company has not increased prices of Splendor+).


25/36



Key assumptions

Exhibit 26. Volumes and Realisations assumption(units) FY10 FY11E YoY (%) FY12E YoY (%)

Total volumes 4,600,130 5,158,574 12.1 5,576,188 8.1

Realisation (Rs) 34,415 35,077 1.9 35,735 1.9


Valuations

At the current price the stock trades at an expensive PEG multiple of 1.7x.

Based on a 14xFY12E EPS (PEG of 1.6x) we arrive at a target price of Rs1,867.

Relative high PEG will result in sustained underperformance. We initiate

coverage with a HOLD rating.

Key risks

Key downside risks are: a) Poor monsoons, and b) steep increase in

commodity prices.

Key upside risks are: a) Failure of competition launches, and b) further

decrease in commodity costs

Exhibit 27. HH 1 yr fwd P/E

0

500

1000

1500

2000

2500

3000

Apr-04

Aug-04

Jan-05

Jul-05

Nov-05

May-06

Sep-06

Mar-07

Jul-07

Dec-07

May-08

Oct-08

Mar-09

Aug-09

Jan-10

Jun-10

17x

5x

11x

8x

20x

14x



26/36



Financial Tables



Net sales (Net of excise) 103,318 123,191 158,312 180,948 199,267

Growth (%) 19.2 28.5 14.3 10.1

Other operational income 0 0 0 0 0

Raw material (or COGS) 74,025 87,420 107,342 125,102 138,886

Personnel cost 3,835 4,487 5,603 6,424 7,174

Other expenses (or SG&A) 11,921 13,994 17,698 19,352 20,425

EBITDA 13,537 17,291 27,670 30,070 32,783

EBITDA (%) 13.1 14.0 17.5 16.6 16.5

Growth (%) 27.7 60.0 8.7 9.0

Other non-op. income 2,189 2,356 2,592 2,648 2,785

Depreciation and amort. 1,615 1,807 1,915 2,151 2,466

EBIT 14,111 17,840 28,347 30,567 33,102

Add: Net interest income -20 -25 -30 -20 -21

Pre tax profit 14,091 17,815 28,317 30,547 33,081

Taxes 4,424 4,997 5,999 5,957 6,451

Add: Extraordinary items 0 0 0 0 0

Less: Minority interest 0 0 0 0 0

Reported net profit 9,667 12,818 22,318 24,590 26,630

Adjusted net profit 9,667 12,818 22,318 24,590 26,630

Margin (%) 9.4 10.4 14.1 13.6 13.4

Diluted share cap. (mn) 200 200 200 200 200

Diluted EPS (Rs.) 48.4 64.2 111.8 123.1 133.4

Growth (%) NA 32.6 74.1 10.2 8.3

Total Dividend + Tax 4,439 4,673 25,460 9,346 9,346



Y/E March FY08 FY09 FY10E FY11E FY1

Share capital 399 399 399 399 3

Other capital 0 0 0 0

Reserves and surplus 29,463 37,608 34,466 49,710 66,9

Networth 29,862 38,008 34,865 50,110 67,3

Total loans 1,320 785 185 185 1

Minority interest 0 0 0 0

Sources of funds 31,182 38,792 35,050 50,295 67,5

Intangible assets 161 0 0 0

Fixed assets 19,388 25,163 26,643 28,773 34,4

Less: Depn. and amort. 7,825 9,427 11,342 13,493 15,9

Net block 11,723 15,736 15,301 15,280 18,4

Capital WIP 3,924 1,205 200 200 2

Investments 25,668 33,688 36,403 41,403 41,4

Def tax assets/- liability -1,254 -1,444 -1,594 -1,744 -1,8

Current assets 9,333 10,024 28,829 25,308 41,9

Inventories 3,171 3,268 4,771 5,453 6,5

Sundry debtors 2,974 1,499 6,072 6,445 7,6

Cash & bank balances 1,311 2,196 15,421 11,305 25,6

Other current assets 0 1 0 0

Loans & advances 1,877 3,060 2,565 2,105 2,1

Current liabilities & prov. 18,212 20,417 44,088 30,152 32,5

Current liabilities 13,250 15,259 18,112 20,212 22,5

Provisions and others 4,963 5,158 25,976 9,940 10,0

Net current assets -8,880 -10,392 -15,260 -4,844 9,4

Others (net) 0 0 0 0

Application of funds 31,182 38,792 35,050 50,295 67,5




Reported net profit 9,667 12,818 22,318 24,590 26,630

Depreciation and amort. 1,474 1,601 1,915 2,151 2,466

-Inc/dec in working cap. 1,975 847 -94 806 -245

Others 0 0 0 0 0

Cash from operations (a) 13,117 15,266 24,139 27,547 28,851

-Inc/dec in investments -5,930 -8,019 -2,716 -5,000 -1

Capex -3,567 -2,895 -475 -2,130 -5,630

Others 2,198 1,550 18,186 -15,337 337

Cash flow from inv. (b) -7,298 -9,365 14,996 -22,467 -5,294

Inc/-dec in capital -66 0 0 0 0

Dividend+Tax thereon -4,439 -4,673 -25,460 -9,346 -9,346

Inc/-dec in loans -332 -535 -600 0 0

Others -28 191 150 150 150

Financial cash flow ( c )-4,865 -5,017 -25,910 -9 ,196 -9,196

Inc/-dec in cash (a+b+c) 953 885 13,225 -4,115 14,362

Opening cash balance 358 1,311 2,196 15,421 11,305

Closing cash balance 1,311 2,196 15,421 11,305 25,667


Key Ratios


BV/Share (Rs) 149.5 190.3 174.6 250.9 337

ROCE (%) 32.4 38.6 79.5 84.0 65

ROE (%) 32.4 37.8 61.3 57.9 45

Net Debt/equity ratio (x) -0.9 -0.9 -1.5 -1.0 -1


PER 14.3 12.6 18.0 16.3 15

PBV 4.6 4.3 11.5 8.0 6

EV/EBITDA 8.3 7.3 12.6 11.6 10

EV/Sales 1.1 1.0 2.2 1.9 1


Debtor days 11 4 14 13

Inventory days 11 10 11 11

Creditor days 37 29 44 43



27/36


New beginning

New launches drive volumes and mix: We expect the company to witnesstopline CAGR of 21% during FY10-FY12E driven by volume growth of 15% and

realisations growth of 5%. New launches (Jive and Wego) and higher three-

wheeler volumes will drive overall volume and realisations. Both Jive and

Wego are realisation and margin accretive.

Margins of 8.7% and PAT CAGR of 64% in FY10-12E: High operating

leverage, better mix, turnaround in three-wheeler operations and lower legacy

write-offs will drive margin expansion of 160 bps over the 4QFY10 levels.

Growth in standalone earnings will be higher at 64% due to higher other

income and non-linear growth in depreciation.

This time its different: Unlike its earlier attempt, when it took HH and BJAUT

head-on in the motorcycle market, the company is focusing on segments with

low competition intensity. This strategy is much wiser as it reduces thecompetition intensity on an already lower margin portfolio. With the new

launches, c.70% of TVSLs portfolio will be fairly insulated from competition.

New launches fill a big gap in portfolio: Before the new launches, TVSL was

not participating in 80% of scooter market and 60% of the motorcycle market.

Wego and Jive fill these glaring gaps in the portfolio.

Exports ramp-up can be significant: Exports currently account for c.13% of

overall volumes and are expected to grow at a CAGR of 31% during FY10-

FY12E. Revival in exports to Africa and entry into Brazil will drive volumes.

Indonesia to achieve break-even during FY12E: We expect Indonesia to

break-even during FY12E and end the year with a loss of Rs200mn against

managements expectation of no losses.

Huge upside; recommend BUY: We value the standalone business at 11.5x

FY12E earnings (PEG of 0.17x) and the Indonesian business at 5x FY12E

losses (largely start-up losses). This results in a standalone value of Rs152

against a negative value of Rs 4.2 per share leading to a combined value of

Rs148. The stock is currently trading at 7.8x FY12E standalone earnings with

a throwaway PEG of 0.12x. We initiate coverage with a BUY rating.

Exhibit 28.




Tel: (91 22) 6630 30

Mitakshi Ash


Key Data

Market cap (bn) Rs 24.6 / US$

Shares in issue (mn)

Diluted share (mn)

3-mon avg daily val (mn) Rs 174.4 / US$

52-week range 110.8 / 3

Sensex/Nifty(14/06/2010) 17,338/5,

Rs/US$ 4

Daily Performance

TVS Motors

0

20

40

60

80

100

120

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

-50

0%

50

100

150

200

TVS Motors Relat ive to Sensex (RHS)

% 1M 3M 12

Absolute 5.2 40.3 113

Relative* 3.2 39.3 100

* To the BSE Sensex


4Q FY09 4Q FY

Promoters 57.4 60

FII 2.2 5

DII 11.4 12


TVS Motors | TVSL IN

15 June 2010

India | Automobiles | Initiating CoveragePrice: Rs103

BUY

Target: Rs148 (Mar11)



Net sales 32,702 37,367 44,221 55,500 66,009

Sales growth (%) 14.3 18.3 25.5 18.9

EBITDA 928 1,849 2,786 4,619 5,750

EBITDA (%) 2.8 4.9 6.3 8.3 8.7

Adjusted net profit 318 296 1,170 2,254 3,166

EPS (Rs) 1.3 1.2 4.9 9.5 13.3

EPS growth (%) -7.0 295.8 92.7 40.5

ROCE (%) 2.9 6.2 10.7 15.9 20.3

ROE (%) 4.1 3.9 15.2 25.2 28.5

PE (x) 43.9 23.0 21.0 10.9 7.8

Price/Book value (x) 1.8 0.9 3.1 2.5 2.0

EV/EBITDA (x) 18.5 5.8 9.9 5.5 4.0



28/36

TVS Motors 15 June 20


New launches drive volumes and mix: We expect the company to witness

topline CAGR of 21% during FY10-FY12E driven by volume growth of 15% and

realisations growth of 5%. New launches (Jive and Wego) and higher three-

wheeler volumes will drive overall volume and realisations. Both Jive and

Wego are realisation and margin accretive.

Margins of 8.7% and PAT CAGR of 64% for FY10-12E: High operating

leverage, better mix, turnaround in three-wheeler operations and lower legacy

write-offs will drive margin expansion of 160 bps over the 4QFY10 levels (see

exhibit 29). Operating profits are expected to grow at a CAGR of 43% during

FY10-12E to Rs5.7bn, highest ever. Growth in standalone earnings will be

higher at 64% due to higher other income and non-linear growth in

depreciation. Our conservative volume assumption (150,000/month vs Mays

157,000) provides cushion to our earnings in case of margin shortfall.

Exhibit 29. Margin trend vis--vis quarterly average volumes

Higher volumes and mix improvement aiding margin improvement

-

100,000

200,000

300,000

400,000

500,000

600,000

Q3FY10 Q4FY10 FY11E FY12E

0

1

2

3

4

5

6

7

8

9

10

Motorcycle Scooters Mopeds Three Wheelers EBITDA %


This time its different: Unlike its earlier attempt, when it took HH and BJAUT

head-on in the motorcycle market, the company is focusing on segments with

low competition intensity and where it has stronger equity. This strategy is

much wiser as it reduces the competition intensity on an already lower

margin portfolio. With the new launches, c.65% of TVSLs portfolio will be

fairly insulated from competition. Jive, the new executive motorcycle,

differentiates itself from competition due to its unique technology of

automatic clutch. Wego, the bigger scooter, is targeted towards a segment

where demand exceeds supply and which is expected to outperform other

segment in the next two years. With these launches the portfolio is much

more defensive and balanced compared to FY09 levels (see exhibit 30).


29/36



Exhibit 30. Sales mix over the years

Mix getting much balanced

0%

20%

40%

60%

80%

100%

FY06 FY07 FY08 FY09 FY10E FY11E FY12E

Motorcycle Scooters Mopeds Three Wheelers


Very high operating and financial leverage: The company so far has been

operating at sub-optimal level which will improve considerably with theselaunches. We do not expect much increase in manpower and marketing

expenditure as both are adequately funded for the next two years. A D/E of

1x also provides ample financial leverage resulting in accelerated PAT growth.

Jive and Wego are realisation and margin accretive: Jive is priced at a

premium of c.16% over the Star range (weighted average), which is TVSLs

largest selling bike. Wego is priced at a premium of c.11% over Scooty Streak,

the most expensive Scooty variant. Despite both products being marginally

heavier and technologically better the high realisation difference will result in

higher contribution, and consequently better margins.

Three-wheeler can provide huge upside: At current volumes, three-wheelers

are adding to profitability and once they achieve 4,000-5,000 unit/month runrate they will be clocking margins of over 12%, making them big earning

drivers given that they are more than 2x the prices of motorcycles. Margins

can be higher if exports grow at a faster clip. For FY10-12E we expect

volumes of 38,000 units and 47,500 units respectively.

New launches fill a big gap in portfolio: Before the new launches TVSL was

not participating in 80% of scooter market and 60% of the motorcycle market.

Wego and Jive fill these glaring gaps in the portfolio.

Mopeds will continue to surprise: Rising economic activity in rural India has

revived the otherwise declining moped segment, which is a monopoly for

TVSL. This segment has grown by 16% since FY07 (see exhibit 31) as more

people upgraded from cycle to moped, the cheapest mode of motorisedtransport. This puny looking vehicle which weighs c.80 kg can carry load of

over 200 kgs and traverse on almost all terrains. This makes it a big hit with

rural entrepreneurs who account for c.70% of its demand. Moped

predominantly has been a South India phenomenon with over 85% of them

being sold there. However, due to increasing prosperity in the Northern rural

belt the company has increased the supply to these states. Now c.30% of the

demand comes from non-south markets, reducing the geographical risk and

making the growth more sustainable. This business being a monopoly offers

TVSL attractive margins and increases its rural thrust.


30/36



Exhibit 31. Moped sales over the years

Rural boom has revived the segment; it grew even in FY09

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

-40

-30

-20

-10

0

10

20

30

40

Units YoY % (RHS)


Indonesia to achieve break-even during FY12E: We expect Indonesia tobreak-even during FY12E and end the year with a loss of Rs200mn. As per the

management, the breakeven volumes are c.5,000 units against the current

volumes of over 2,000 units. Volumes are expected to improve as dealer

network expands from the current c.100 to over 150 in the next few months.

We expect volumes to move closer to 3,000 levels during 2HFY11.


31/36



Key assumptions

Exhibit 32. Volumes and Realisations assumption(units) FY10 FY11E YoY (%) FY12E YoY (%)

Motorcycle Volumes 641,033 787,663 22.9 905,813 15.0

Scooter volumes 302,575 364,071 20.3 453,814 24.6

Moped volumes 569,585 609,667 7.0 651,802 6.9

Three wheeler Volumes 15,188 38,023 150.3 47,529 25.0

Overall volumes 1,528,381 1,799,425 17.7 2,058,957 14.4

Realisation (Rs) 28,933 30,843 6.6 32,059 3.9


Valuations

We value the standalone business at 11.5x FY12E earnings (PEG of 0.17x) and

the Indonesian business at 5x FY12E losses. We are valuing the Indonesian

losses at a lower multiple as these are start-up losses. This results in a

standalone value of Rs152 against a negative value of Rs4.2 per share,

leading to a combined value of Rs148. The stock is currently trading at 7.8x

FY12E standalone earnings with a throwaway PEG of 0.12x. We initiatecoverage with a BUY rating.

Key risks

Key downside risks are: a) Poor monsoons, b) steep increase in commodity

prices, and c) failure of new launches.

Key upside risks are: a) Management achieving its 2 mn volume guidance for

FY11E, and b) further decrease in commodity costs.

Exhibit 33. TVSL 1 yr fwd P/E

0

20

40

60

80

100

120

140

160

180

Apr-08

Sep-08

Feb-09

Jul-09

Jan-10

Jun-10

14x

4x

6x

8x

10x

12x



32/36



Financial Tables



Net sales (Net of excise) 32,702 37,367 44,221 55,500 66,009

Growth (%) 14.3 18.3 25.5 18.9

Other operational income 0 0 0 0 0

Raw material (or COGS) 24,455 27,834 31,425 40,036 48,463

Personnel cost 1,764 2,045 2,435 2,609 3,036

Other expenses (or SG&A) 5,555 5,639 7,575 8,236 8,759

EBITDA 928 1,849 2,786 4,619 5,750

EBITDA (%) 2.8 4.9 6.3 8.3 8.7

Growth (%) 99.2 50.7 65.8 24.5

Other non-op. income 486 122 81 122 153

Depreciation and amort. 946 1,029 1,023 1,106 1,197

EBIT 468 942 1,844 3,634 4,706

Add: Net interest income -115 -646 -628 -629 -485

Pre tax profit 354 296 1,216 3,005 4,221

Taxes 36 0 46 751 1,055

Add: Extraordinary items 0 15 -305 0 0

Less: Minority interest 0 0 0 0 0

Reported net profit 318 310 865 2,254 3,166

Adjusted net profit 318 296 1,170 2,254 3,166

Margin (%) 1.0 0.8 2.6 4.1 4.8

Diluted share cap. (mn) 238 238 238 238 238

Diluted EPS (Rs.) 1.3 1.2 4 .9 9.5 13.3

Growth (%) NA -7.0 295.8 92.7 40.5

Total Dividend + Tax 195 195 278 417 695




Share capital 238 238 238 238 2

Other capital 0 0 0 0

Reserves and surplus 7,451 7,140 7,756 9,641 12,1

Networth 7,688 7,378 7,993 9,879 12,3

Total loans 6,663 9,060 8,987 8,987 5,7

Minority interest 0 0 0 0

Sources of funds 14,352 16,437 16,980 18,866 18,0

Intangible assets 0 0 0 0

Fixed assets 17,910 18,654 19,574 20,194 21,3

Less: Depn. and amort. 7,745 8,703 9,726 10,832 12,0

Net block 10,165 9,951 9,848 9,361 9,2

Capital WIP 266 404 100 100 1

Investments 3,390 4,777 5,877 6,377 6,7

Def tax assets/- liability -1,549 -1,481 -1,532 -1,584 -1,6

Current assets 7,504 8,805 9,439 13,000 13,7

Inventories 4,054 3,206 3,877 4,866 5,9

Sundry debtors 879 1,816 1,938 2,433 3,0

Cash & bank balances 37 421 -14 1,573 5

Other current assets 0 10 10 1

Loans & advances 2,534 3,353 3,628 4,128 4,1

Current liabilities & prov. 5,424 6,017 6,752 8,389 10,2

Current liabilities 5,058 5,504 6,179 7,756 9,4

Provisions and others 366 513 573 633 8

Net current assets 2,080 2,787 2,687 4,611 3,5

Others (net) 0 0 0 0

Application of funds 14,352 16,438 16,980 18,866 18,0




Reported net profit 318 310 865 2,254 3,166

Depreciation and amort. 886 958 1,023 1,106 1,197

-Inc/dec in working cap. -565 357 -119 93 -94

Others 0 0 0 0 0

Cash from operations (a) 638 1,626 1,768 3,453 4,269

-Inc/dec in investments 58 -1,388 -1,100 -500 -401

Capex -1,287 -882 -616 -620 -1,125

Others -387 -681 -215 -430 197

Cash flow from inv. (b) -1,616 -2,951 -1,931 -1,550 -1,329

Inc/-dec in capital 58 -426 29 49 -4

Dividend+Tax thereon -195 -195 -278 -417 -695

Inc/-dec in loans 328 2,396 -73 0 -3,287

Others -41 -68 51 52 53

Financial cash flow ( c )150 1,708 -271 -316 -3,932

Inc/-dec in cash (a+b+c) -828 382 -434 1,587 -992

Opening cash balance 866 37 421 -14 1,573

Closing cash balance 37 420 -13 1,573 580


Key Ratios


BV/Share (Rs) 32.4 31.1 33.7 41.6 52

ROCE (%) 2.9 6.2 10.7 15.9 20

ROE (%) 4.1 3.9 15.2 25.2 28

Net Debt/equity ratio (x) 0.4 0.5 0.4 0.1 -0


PER 43.9 23.0 21.0 10.9 7

PBV 1.8 0.9 3.1 2.5 2

EV/EBITDA 18.5 5.8 9.9 5.5 4

EV/Sales 0.5 0.3 0.6 0.5 0


Debtor days 10 18 16 16

Inventory days 45 31 32 32

Creditor days 75 72 72 71



33/36



Notes


34/36



Notes


35/36



Notes


36/36


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51, Maker Chambers III, Nari man Point, Mumbai 400 021, India.

Board: +9122 6630 3030 | Fax: +91 22 6747 1825 | Email: jmfinancial.research@jmfinancia l.in | www.jmfinancial.i

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