India TwoWheelers Dec2011

India Automobiles Two Wheelers
Allegro Capital Advisors Pvt Ltd

Dec 2011
Strictly Private & Confidential
Two Wheelers An Introduction
Import of
Parts
Drive chains,
engine
components,
transmissions etc.
Auto
Component
Manufacturer
300+ players.
castings, forgings,
tires etc.
Dealers*
2000+ dealers in
domestic market
Original
Equipment
Manufacturer
(OEM)
Domestic
Customers
Low penetration
at 7%. Lower in
rural areas
SubDealers/Touch
Points
INR 55K Cr
turnover with
13.3Mn units in
FY11
3 players account
for 80% of market
share
12000+ dealer
touch points
International
Customers
Service
Centers
Raw Material
Suppliers
Key revenue
generator for
dealers
Sheet metal,
aluminum etc
Key markets Africa, Latin

America and South
East Asia
Primary business model

is appointed dealer,
though Subsidiary model
also used
Source: ACE, Allegro Calculations.

* Dealer numbers are for listed players.
Two Wheelers An Overview (1)

Auto Sector Volumes and Growth
20
Market Share (Volume) of Key Players
30%
TVS
Motors
9%
25%
15
20%
Yamaha
4%
Others
7%
15%
Hero
Moto
39%
10
10%
Honda
Motors
14%
5%
0%
0
-5%
FY05
FY06
FY07
FY08
FY09
Total Auto Volumes (Mn)
FY10
FY11
Bajaj
Auto
27%
FY12 (YTD)
Growth (%)
Two Wheeler Market Value and Growth

60,000
35%
30%
50,000
25%
40,000
20%
30,000
15%
10%
20,000
5%
10,000
0%
-5%
2006
2007
2008
Value (INR Cr)
2009
2010
2011
Indian Auto Sector had a volume growth of 13% CAGR over

the last 5 years - Driven by two wheelers which account for
80% of the total volumes.
Two wheeler sales reached INR 55K Cr and volumes reached
13.3 mn units clocking a CAGR of 15% and 13% respectively
over 2006-2011. This works to an average realisation ~ Rs.
42,000 or 1.2x the real per capita GDP of India.
Top 3 players account for 80% of the total market share.
Growth (RHS)
Source: Bloomberg, McKinsey, Data Monitor Allegro Calculations.

Two Wheelers An Overview (2)

Two Wheeler Domestic Volume Growth
Auto Segment Volume Growth - YTD
14
30%
12
25%
10
20%
25%
20%
15%
5%
0%
-5%
15.4%
15%
10%
17.0%
12.8%
8.7%
10%
7.5%
5%
-10%
FY05
FY06
FY07
FY08
FY09
FY10
Domestic Volumes (millions)
FY11
FY12
(YTD)
0%
% Growth (RHS)
-5%
-0.6%
2W
1.8
Two Wheeler Export Volume Growth
40%
1.4
35%
1.2
30%
25%
0.8
20%
0.6
15%
0.4
10%
0.2
5%
0%
FY06
FY07
FY08
FY09
Export Volumes (millions)
FY10
FY11
Utility
M&HCV
PV
FY12
(YTD)
Domestic volume growth has been strong over the past

five years growing at 11% CAGR.
Exports have been a significant contributor to overall
volumes with a growth of 27% CAGR over the last 5 years.
Year to date, the volume growth in two wheelers has
surpassed all other automobile segments.
% Growth (RHS)
Source: Bloomberg, Allegro Calculations.

MPV
45%
1.6
FY05
3W
Two Wheelers Industry Analysis
BUYER POWER: MODERATE

High demand (+)
Limited suppliers (+)
Low product differentiation (-)
Low dealer bargaining power (+)
Buyer
Power
5
THREAT OF SUBSTITUTES: WEAK

Cost of ownership lowest for 2 wheeler (+)
Lack of efficient public transport system (+)
Lack of cheap / beneficial alternative (+)
SUPPLIER POWER: WEAK
4
3
Threat of
Substitutes
2
1
Fragmented, small sized suppliers of

castings/forgings (+)
Supplier Contractual relationship (+)
Power High localisation of finished product (+)
THREAT OF NEW ENTRANTS: MODERATE-WEAK

Moderate fixed cost to enter ()
Moderate gestation period ()
High investment in a dealership network (+)
High brand recognition of existing players (+)
Threat of
New
Entrants
Degree of
Rivalry
NOTE: (+) and () are represented in terms of the Sector on the whole.
DEGREE OF RIVALRY: MODERATE-STRONG

Oligopolistic nature of market (+)
Low revenue diversification (-)
Strong similarity of players (-)
Large competitor size (+)
Buyer Power Moderate (1)

Lower Two Wheeler Penetration in India*
35%
Demand Close to Inflexion Point*
31%
30%
25%
20%
15%
11%
10%
7%
7%
6%
4%
5%
1%
0%
Malaysia Sri lanka
India
China
Brazil
Korea
Mexico
Source: OECD (2008)
Source: MoRTH (2008)
Opportunity exists in Unisex Category (Scooters)
In developed markets, two wheelers are seen as a luxury rather than a

necessity. The reverse is true for developing/emerging economies.
25%
23.1%
India is one of the lowest penetrated markets for two wheelers even
amongst emerging economies.
20.3%
20%
17.3%
15%
11.9%
10%
5%
11.5%
10.3%
2.8%
2.7%
13%
According to OECD, as per capita income and penetration levels

increase, there is a shift in consumer preference toward high
end/premium motorcycles.
11%
11.5%
9%
8%
7%
7%
15%
14.2%
13.2%
7%
7%
2.8%
3.1%
3.2%
4.1%
5.5%
5.5%
6.3%
India is at an inflexion point where penetration is low and per capita

income is rising. Although income distribution is skewed, the potential
demand opportunity for two wheelers is large.
0%
FY05
FY06
FY07
FY08
Total 2W
FY09
FY10
FY11
FY12E
FY13E
Motocycles vs Male Population
Scooters vs Female Population
Source: Bloomberg, McKinsey, Allegro Calculations.
*NOTE: Variations in calculation exist among agencies.
Buyer Power Moderate (2)

Domestic Volume Growth is Strong
Despite a Steady Increase in Prices Less Elastic

30%
20
1500
12
25%
18
1400
10
20%
14
16
15%
8
6
10%
14
5%
12
0%
-5%
-10%
FY05
FY06
FY07
FY08
FY09
FY10
Domestic Volumes (millions)
FY11
1300
1200
1100
10
1000
FY12
(YTD)
900
FY05
% Growth (RHS)
FY06
FY07
FY08
Auto Volumes (Millions)
Top 3 Players Have More Than 80% Market Share
FY09
FY10
FY11
Avg Price (Indexed) RHS
85%
80%
80%
80%
77%
Single Brand Retail Model
73%
75%
Indian Two Wheeler market follows a Single Brand

Retail Model unlike western and other markets
where a Dealer can sell multiple brands.
70%
65%
60%
2008
2009
2010
2011
Share of Top 3 Players
High Demand, Concentrated Supply and Low Demand Elasticity Lowering Bargaining Power of Dealers and Buyers.
Source: Bloomberg, Companies, Allegro Calculations.
Supplier Power Value Chain (1)
Exports
Auto
Component
Manufacturer
Fragmented and small sized.

Stringent Quality Control
Lengthy Approval Process
Long Term Contracts
Dependence on OEM for Technology
Inputs
Original Equipment
Manufacturers (OEMs)
300+ players as
compared to 11+
OEMs
Dependency on OEM for

Dealer/Service Center
Access
Dealers / Service
Centers (Replacement
Market)
Forms 10-30% of
Revenue for
Component
Manufacturer
Supplier Power Weak (2)

Volatile Margins for Component Manufacturers
15%
Dependence of OEMs for revenue, reduces

bargaining power of suppliers.
10%
Contracts have limited escalation clauses.

Trying maintain long term relationships
leaves them at mercy of OEMs
5%
0%
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
OEMs EBITDA Margins
Auto Anicillary EBITDA Margins
Note: Calculation based on industry sales and EBITDA figures.
Localisation Level
Most components are manufactured within

India for OEMs. An advantage more than a
disadvantage
Bajaj Auto
90-100%
TVS Motors
90-100%
Honda Motors
80%
Hero MotoCorp
85-90%
Fragmented, Contractual Relationship and High Localisation makes Supplier Power Moderate
Source: Bloomberg, Companies, ACE, Allegro Calculations.
Degree of Rivalry Moderate-Strong

Competitive Intensity is Increasing
Market Share (Oct 11) Oligopolistic Nature

2850
2775
2700
2625
2550
2475
2400
2008
2009
2010
2011
HHI Index
Lack of Revenue Diversification
More Players Entering

Year
2008
2010
2011
2011
2011
2012
Company
100%
10%
Mahindra & Mahindra enters two wheeler

space buy buying out 80% share in Kinetic
Motors
2%
0%
98%
100%
TVS
Hero MotoCorp
90%
80%
Harley Davidson launches a line of models

for India
70%
60%
Ducati launches its showrooms in India
90%
50%
Aprilla in collaboration with Piaggio to bring

in Vespa 125cc and RSV4
Hyosung re-enters the market after JV with
Kinetic
Triumph to unveil its India plans at Auto
Expo 2012
40%
30%
Bajaj Auto
Two Wheelers (Volumes)
Three Wheelers (Volumes)
Increasing Competition, New Players Entering the Market and Lack of Revenue Diversification shows increasing Rivalry
Source: Bloomberg, Companies, Media, Allegro Calculations.
10
Threat of New Entrants Moderate-Weak

Company
Investment
Type of
Expansion
Capacity
(units)
Time
Cost Per Unit

(INR)
Bajaj Auto
INR 75 Cr
Brownfield
600,000
6-9 Months
1250
Honda Motors INR 500 Cr
Greenfield
2,500,000
18-24 Months
2000
Brownfield
600,000
6-9 Months
1000
Yamaha
INR 60 Cr
The initial investment to set up a

new plant isn't very large. But
the time taken can be anywhere
between 18-24 months.
Brownfield investments are faster
and less capital intensive as
compared to Greenfield.
Touch Points
Dealership Network
6000
1000
5000
800
At the same time,

existing players
have a large
dealership network
enhancing their
brand recognition.
600
400
200
0
Hero MotoCorp
Bajaj Auto
TVS Motors
4000
3000
2000
1000
0
Honda Motors
Hero MotoCorp
Bajaj Auto
TVS Motors
While investment and time is not very high, access to a distribution network make entry difficult.
Source: Bloomberg, Companies, Allegro Calculations.
11
Honda Motors
Threat of Substitutes Weak

Running Cost 4x Lower
Two Wheeler Four Wheeler
Average KM per annum (30 * 365)
9125
9125
Average Mileage
50
15
Liters of Petrol Consumed per

annum
183
608
Current INR Price of Petrol (70.03)
70.03
70.03
Running Expenditure per annum
12780
42602
1.4
4.7
Cost per KM
Demographic Split by Income

The addressable
market for two
wheelers is 4x
larger than four
wheelers
<90K
41%
90K-200K
42%
200K-500K
10%
Above 500K
2%
Source: McKinsey
Source: Allegro Calculations
Yet Low Bus Penetration in India
Roadways Dominate Commuter Traffic
3.0%
2.6%
2.5%
Railways
15%
2.0%
1.5%
1.0%
0.7%
0.4%
0.5%
Roadways
85%
South Korea
Source:Lower
MoRTH (2008)
running
0.1%
0.1%
Taiwan
India
0.0%
China
Indonesia
costs, larger addressable market and lack of public transport make two wheelers attractive.
12
Export Business Overview of Major Markets (1)

Key Export Markets for Listed Two Wheeler Players
Company
Destination
Key Brands Exported

CD Dawn, Splendor, Passion,
Glamour, CBZ, Hunk, Pleasure
Hero MotoCorp
Bangladesh, Sri Lanka, Nepal, Columbia
Bajaj Auto
36 countries; Africa and Middle East: 51%;

South East Asia: 34%; Latin America: 15%
Boxer, Discover, Pulsar
TVS Motors
55 countries across Africa, South East Asia,

Latin America
Apache, RockZ, Neo
The dynamics of most markets

(except Africa) are similar to India
where two wheelers are
predominantly used for
transportation rather than lifestyle
products.
AFRICAN COUNTRIES
Low Per Capita Income (In USD)
Nigeria accounts for 40% of all two wheelers sold with
annual demand of 1.2mn.
Nascent stage where two wheelers are used mostly for
commercial purposes Hence skewed towards low cost
products.
Huge export opportunity for Indian OEMs as economy
and affordability levels grow.
But Strong GDP Growth
Indian OEMs face stiff competition from Chinese

counterparts.
Indian products are perceived to be of a better quality
at the same time, though slightly higher priced.
Source: MFSL, IMF, Company Data, Allegro Research

13
Export Business Overview of Major Markets (2)

SOUTH EAST ASIA
Sales (000 units)
LATIN AMERICA
Market Share of Key Players
14000
Others,
2%
12000
10000
Suzuki,
8%
Products exported are mostly premium bikes. Moreover, the

market is dominated by 100-150cc bikes which is a positive for
Indian players.
8000
6000
4000
Yamaha,
37%
2000
Honda,
53%
Again, Japanese players (Honda and Yamaha) control 90% of

the market with Honda having 75% market share.
0
CY04
CY05
CY06
Indonesia
CY07
CY08
Thailand
CY09
CY10
Brazil is a key market amongst Indian OEMs, but they

command a very small share. Other important markets include
Colombia and Central America.
CY11E
Vietnam
Brazil Motorcycle Sales Mix
Indonesia, Thailand and Vietnam are the fastest growing

markets with dynamics very similar to India.
3%
6%
Brazil Sales and Growth
3% 7%
Both Bajaj Auto and TVS Motors have opened subsidiaries in

Indonesia to tap the third largest two wheelers market.
Companies here face stiff competition from established
Japanese brands such as Honda and Yamaha.
81%
India products enjoy a price advantage over the Japanese two

wheelers with similar levels of quality.
<100cc
101cc - 150cc
151cc - 250cc
251cc - 400cc
>401cc
Source: MFSL, Company Data, Allegro Research

14
Investment Thesis Domestic Business

Rural , Semi Rural towns Still LagExpected to Grow
Lower Penetration Demand at an Inflection Point

25%
40%
23%
20%
20%
30%
17%
15%
12%
10%
10%
11%
3%
11%
20%
11%
7%
7%
6%
6%
5%
4%
3%
3%
3%
3%
13%
9%
8%
7%
7%
5%
15%
14%
13%
10%
0%
FY05
FY06
FY07
FY08
FY09
Total 2W
FY10
FY11
0%
FY12E FY13E
Rural
Motocycles vs Male Population
Towns
Tier III
Tier II
Metros
Penetration across India
Scooters vs Female Population
Scooters to Outperform Industry and Lead Growth
Lower Dependency on Finance Increase in Affordability
Two Wheeler Segment Contribution
60%
25%
40000
82%
80%
20%
79%
15%
78%
15%
14%
19%
17%
77%
16%
21%
20%
22% 80%
50%
78%
40%
30000
76%
76%
75%
6%
6%
6%
6%
6%
5%
30%
25000
74%
74%
10%
6%
20%
73%
72%
5%
5%
0%
0%
68%
FY09
FY10
FY11
FY12E
FY13E
FY14E
15000
FY07
FY15E
FY08
FY09
% of Two Wheelers Financed
Scooters
Mopeds
Motorcycles (RHS)
Source: Bloomberg, McKinsey, Company Data, RBI, Allegro Calculations
20000
10%
70%
FY08
35000
15
FY10
FY11
India Real Per Capita Income (INR)
Investment Thesis Export Business

Expect Volumes to grow by 12% CAGR to FY15
20
30%
17
Management Quotes on Export Strategy

Rajiv Bajaj, MD Bajaj Auto Exports to outstrip domestic sales
in the near future.exports will probably contribute 35% of sale
in FY12
20%
14
10%
11
Anil Dua, SVP (Marketing and Sales) Hero MotoCorp We are

looking at an exponential increase in export numbers. In 5-6
years of time, we aim to sell a million bikes (every year) in
international markets, which will be 10% of our total business
0%
8
5
-10%
FY08
FY09
FY10
FY11
FY12E
Two Wheeler Volumes (Milions)
FY13E
FY14E
FY15E
% Growth
Duty Entitlement Pass Book (DEPB) Scheme:

The DEPB scheme allowed exporters of two wheelers to claim reimbursements at 8-9% of the Free On Board (FOB) value of exports.
The Government has announced a withdrawal of this scheme (effective Sept 2011) moving to the Duty Drawback scheme where
reimbursement rates would be around 1-5% of FOB value.
The likely impact of this would be for two wheeler exporters to increase prices and/or reduce dealer margins; both affecting demand
in export markets, impacting margins and lowering profitability.
Two wheeler manufacturers are showing an increased focus on exports to contribute to their top line.
Source: Bloomberg, Media, Company Data
16
Investment Thesis Volume Projection

Share of Scooters to increase to 22% of Total Volumes
Total Demand Expected to be 18mn Units by FY15

20
100%
30%
17
6%
6%
6%
6%
6%
6%
5%
5%
14%
15%
16%
17%
19%
20%
21%
22%
80%
79%
78%
77%
76%
75%
74%
73%
FY08
FY09
FY10
FY11
FY12E
FY13E
FY14E
FY15E
80%
20%
60%
14
10%
11
40%
0%
8
5
20%
-10%
FY08
FY09
FY10
FY11
FY12E
FY13E
Two Wheeler Volumes (Milions)
FY14E
0%
FY15E
% Growth
Motorcycles
Premium Segment Expected to be Fastest Growing

14%
17%
19%
20%
21%
23%
Mopeds
Expected Market Share of Key Players FY13E
100%
13%
Scooters
24%
80%
60%
53%
59%
64%
64%
64%
64%
64%
62%
17%
16%
15%
14%
14%
40%
20%
34%
27%
19%
Bajaj Auto
29%
Others
25%
0%
FY08
FY09
FY10
Economy
FY11
FY12E FY13E FY14E FY15E
Executive
Premium
Source: Bloomberg, Citigroup, CRISIL, Allegro Calculations

17
Hero
MotoCorp
36%
TVS
Motors
10%
Investment Thesis Summary of Key Points

DOMESTIC MARKET
EXPORT MARKETS
POSITIVES
POSITIVES
!Low penetration of two wheelers in India Lower in
rural and semi rural towns.
!Exports to be a major focus for OEMs Key markets

include Africa and Latin America.
!Affordability on the rise with increasing per capita

GDP.
!Increasing awareness of Indian OEM manufacturers.
!Scooter penetration lower than motorcycles.
! Price competitive in comparison to bigger global

brands.
!Scooters expected to lead growth on the back of a

wider acceptability and addressable market.
! Indian two wheelers are perceived to be of a better

quality than their Chinese counterparts.
!Premium motorcycles to see fastest growth

command larger share of motorcycles.
RISKS & CONCERNS
RISKS & CONCERNS
Increasing competitive environment leading to

inefficient price competition.
Drawback of fiscal benefits (DEPB) affecting prices and

dealer margins.
Slowdown in consumer discretionary expenditure.
Increasing focus on exports leading to slowdown in

domestic business.
18
Companies Recommendation Summary
Company
MCAP
EPS Growth
P/E
EV/EBITDA
ROE
Target
INR CMP
FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E Price
(cr)
Upside
Rating
Bajaj Auto
50,000
1723
-10%
9%
16.2
14.8
15.2
11.8
53%
47%
1755
Neutral
Hero MotoCorp
41,600
2059
5%
18%
21.1
17.9
16.4
13.5
49%
48%
2078
Underweight
TVS Motors
2,731
58
78%
31%
12.0
9.2
15.9
6.1
29%
31%
73
Overweight
Bajaj Auto
INR (Cr)
Hero MotoCorp
TVS Motors
FY12E
FY13E
FY14E
FY12E
FY13E
FY14E
FY12E
FY13E
FY14E
Sales
19,759
22,389
25,251
23,149
27,437
NA
7,687
8,913
10,205
Sales Growth
24%
13%
13%
22%
19%
NA
24%
16%
14%
EBITDA
3,832
4,193
4,693
3,441
4,136
NA
512
606
687
EBITDA Margin
19%
19%
19%
15%
15%
NA
7%
7%
7%
Adj PAT
3,093
3,385
3,569
2,296
2,871
NA
231
292
344
PAT Margin
16%
15%
14%
10%
11%
NA
3%
3%
3%
PAT Growth
18%
9%
6%
19%
20%
NA
19%
27%
18%
Source: Bloomberg, ACE, Allegro Calculations

19
Bajaj Auto - NEUTRAL

CMP (INR)
Target Price (INR)
Upside
FY13E EV/EBITDA
FY13E PE
1723
1754
2%
11.8
14.8
MCAP (INR cr)

EV (INR cr)
CMP (INR)
52-week high
52-week low
PE
EV/EBITDA
50,000
49,796
1723
1822
1166
14.4
18.0
Promoter
Group
50%
Segment
Motorcycles
35%
2,414,633
972,437
Economy
25%
NA
NA
Executive
21%
NA
NA
Premium
48%
NA
NA
NA
NA
NA
55%
205,603
Scooters
Three Wheelers
Non Institutions
2W
3W
Capacity Capacity
1.5 Mn
540K
1.2 Mn
1.2 Mn
Source: Bloomberg, CRISIL, Company Data.

Strongest player in the domestic premium

segment of motorcycles.
Best operating margins amongst two wheeler

OEMs EBITDA ~20%
Diversified revenue with 28% coming from

exports.
Strategic tie up with Kawasaki and KTM

Leveraging their network to explore new
231,281
markets.
Domestic
3W
10%
Largest player in the three wheeler space which

has an EBITDA margin ~30%.
Launch of their maiden four wheeler would be a

key valuation catalyst.
Exports
28%
Current Capacity 4.4mn Units
Waluj,
Maharashtra
Chakan,
Maharashtra
Pantnagar,
Uttarakhand
Market Domestic Export

Models
Share
Volumes Volumes
(Domestic) (FY11)
(FY11)
Institutions
24%
Area
POSITIVES:
REVENUE MIX:
Share Holding Pattern

26%
BUSINESS MODEL & PRODUCT MIX:
Domestic
2W
56%
Spares
6%
RISKS & CONCERNS:
Failure of new Pulsar and KTM launch early next

year.
Slowdown amongst emerging economies

affecting domestic and export markets.
KEY RECOMMENDATION: NEUTRAL

Valuations are at a discount to Hero MotoCorp,
though trading at its historic average. Higher
margins (~20%) and highest ROE (50%+) vs
industry should command a higher multiple.
20
Irrational price competition in the domestic two

wheeler market.
Appreciating rupee could have an adverse

impact on margins.
Bajaj Auto
Profit & Loss (INR Cr)
Mar-08
Mar-09
Mar-10
Mar-11
Total Volumes(Units)
2,451,407
2,194,154
2,852,520
8,663
8,437
11,509
3,823,954 Share Capital

15,998 Reserves
35,340
38,452
40,345
7,753
7,619
9,328
EBITDA
911
818
2,180
Other Income
506
496
535
Depreciation
174
130
136
1,242
1,184
2,579
21
Extraordinary Items
(102)
(205)
(162)
PBT
1,135
958
2,411
Tax
379
302
708
Net Income
756
656
1,704
26
23
59
Net Sales
Avg Realisation
Total Expenditure
EBIT
Interest
EPS
Key Ratios
Mar-08
Mar-09
Sale Growth
Net Income Growth
Mar-10
Balance Sheet (INR Cr)
Mar-08
Mar-09
Mar-10
Mar-11
145
145
145
289
1443
1725
2784
4621
1588
1870
2928
4910
13
24
1327
1570
1326
302
1334
1570
1339
325
1269
1542
1480
1483
35
22
42
70
1857
1809
4022
4795
4,351 Non Cash Current Assets

1,011 Cash
1594
2188
4317
7110
56
137
101
556
3,340 Current Liabilities
1877
2438
5692
8749
-228
-112
-1274
-1083
41,837 Shareholders' fund

13,240
Secured Loans
2,758
Unsecured Loans
993
Total Debt
123
Net Block
3,628
CWIP
2
725 Investments
115 Net Working Capital
Mar-11
-3%
36%
39%
-13%
160%
96%
Du Pont
Mar-08
Mar-09
Mar-10
Mar-11
Tax Burden
0.48
0.55
0.65
0.62
Interest Burden
0.99
0.97
1.00
1.00
Depreciation Burden
0.81
0.84
0.94
0.96
EBITDA Margin
11%
10%
19%
17%
EBITDA Margin
11%
10%
19%
17%
EBIT Margin
14%
14%
22%
1.80
1.48
1.16
1.14
PAT Margin
9%
8%
15%
23% Asset Turnover

21% Financial Leverage
3.03
3.05
3.40
2.85
0.84
0.84
0.46
0.07 ROE
54%
46%
64%
53%
Debt / Equity
Source: ACE Equity, Bloomberg.
21
Hero MotoCorp - UNDERWEIGHT

CMP (INR)
Target Price (INR)
Upside
FY13E EV/EBITDA
FY13E PE
2059
2077
9%
13.5
17.9
MCAP (INR cr)

EV (INR cr)
CMP
52-week high
52-week low
PE
EV/EBITDA
41,600
43,019
2059
2250
1376
19.7
17.9
Segment
POSITIVES:

Models
Share
Volumes Volumes
(Domestic) (FY11)
(FY11)
Motorcycles
48%
5,040,971
46%
NA
NA
Executive
68%
NA
NA
Premium
22%
NA
NA
17%
361,473
NA
NA
NA
Three Wheelers
Institutions
52%
Non Institutions
Gurgaon, Haryana
Dharuhera,
Haryana
Haridwar,
Uttrakhand
Strong brand recognition and positioning in the
Volume growth been strong post capacity

expansion in January 2011.
Post Honda split exports seen as an untapped
opportunity for Hero boosting volumes.
NA
RISKS & CONCERNS:
Export
Sales
2%
Domestic
Sales
98%
1.95 Mn
1.95 Mn

Hero to continue to pay royalty expenses till

FY14.
2W
3W
Capacity Capacity
2.25 Mn
Increasing competition in the Executive and

Scooter segment.
Current Capacity 6.15mn Units

Area
market with 39% market share.
Promoter
Group
9%
Largest domestic player in the two wheeler
economy and executive segments.
Economy
Scooters
REVENUE MIX:
39%
Increasing R&D costs as well as increasing

Marketing and Ad costs due to brand repositioning to dampen margins in the near term
KEY RECOMMENDATION: UNDERWEIGHT

Valuations are at historical highs. Near term
expect margins and ROE to get impacted due to
higher expected cost structure and increasing
competitive intensity.
22
Slow launch of new models makes Hero

susceptible to attacks from competition.
Hero MotoCorp
Mar-08
Mar-09
Mar-10
Mar-11
3,337,142
3,722,000
4,600,130
Net Sales
10,332
12,319
15,758

19,245 Reserves
Avg Realisation
30,960
33,098
34,256
Total Expenditure
9,032
10,691
13,146
EBITDA
1,300
1,628
2,612
Other Income
272
337
414
Depreciation
160
181
191
1,412
1,784
2,834
Interest
Extraordinary Items
PBT
1,410
1,781
2,832
Tax
442
500
600
Net Income
968
1,282
2,232
48
64
112
EBIT
EPS
Key Ratios
Mar-08
Sale Growth
Mar-09
Mar-10

16,839
Secured Loans
2,406
Unsecured Loans
497
Total Debt
402
Net Block
2,500
CWIP
16
(80) Investments
2,405 Non Cash Current Assets
477 Cash
1,928 Current Liabilities
97 Net Working Capital
Mar-11
Mar-10
Mar-11
40
40
40
40
2946
3761
3425
2916
2986
3801
3465
2956
132
78
66
1491
132
78
66
1491
1156
1574
1659
4080
392
121
48
125
2567
3369
3926
5129
806
794
975
1433
131
220
1907
72
1825
2053
4831
6145
-888
-1039
-1949
-4640
Mar-08
Mar-09
Mar-10
Mar-11
0.61
0.65
0.75
0.76
Interest Burden
1.00
1.00
1.00
0.99
Depreciation Burden
0.88
0.89
0.93
0.83
EBITDA Margin
13%
13%
17%
13%
2.04
2.03
1.85
1.78
14%
13% Asset Turnover

1.69
1.60
2.46
3.67
0.02
0.50 ROE
32%
34%
64%
68%
19%
28%
22%
Net Income Growth
13%
32%
74%
-14%
EBITDA Margin
13%
13%
17%
13%
EBIT Margin
14%
14%
18%
PAT Margin
9%
10%
0.04
0.02

Mar-09
Tax Burden
4%
Debt / Equity
Du Pont
Mar-08
23
TVS Motors - OVERWEIGHT

CMP (INR)
Target Price (INR)
Upside
FY13E EV/EBITDA
FY13E PE
58
73
26%
7.3
9.2
MCAP (INR cr)

EV (INR cr)
CMP
52-week high
52-week low
PE
EV/EBITDA
2700
3480
58
78
44
11.6
12.4
Promoter
Group
Institutions
21%

Share
Volumes Volumes
(Domestic) (FY11)
(FY11)
8%
632,150
204,681
Mysore, Karnataka 1.25 Mn
Hosur, Tamil Nadu 1.25 MN

Second largest player in the scooter market

with 2 key models; Scooty and Wego. Expect
this segment to see the fastest growth.
Successful launches in FY11 have led to TVS
Economy
27%
NA
NA
Executive
2%
NA
NA
Premium
8%
NA
NA
Scooters
22%
1,145,526
24,451
since FY06. TVS has a wider reach with
Three Wheelers
6%
22,357
17,503
presence in 55 countries against 36 for Bajaj
regaining market share in the domestic market.
Export volumes have been on an upward trend
Auto.
Exports
8%
3 Wheelers
3%
Motorcycles
14%
Key valuation catalyst would be the launch of

its electric scooter in 2012.
RISKS & CONCERNS:
Spares
14%
Scooters &
Mopeds
61%
2W
3W
Capacity Capacity
500K
Current Capacity 3 mn Units
Nalagarh,
Himachal Pradesh
Motorcycles
POSITIVES:
59%
Non Institutions
Area
No:
Models
Segment
REVENUE MIX:

20%
could hamper growth.
Valuations are at historical lows. Management has

been able to successfully turnaround the company
into profits. With higher expected growth we
might see a valuation re-rating for the company.
24
Extended focus on exports could lead to

domestic supply constraints.
KEY RECOMMENDATION: OVERWEIGHT
Increasing competition in the scooter segment
Highest operating leverage amongst listed two

wheeler companies.
TVS Motors
Mar-08
Mar-09
Mar-10
Mar-11
1,277,000
1,346,000
1,534,000
3,220
3,671
4,363

6,179 Reserves
25,211
27,273
28,443
3,178
3,552
4,243
41
119
120
Other Income
100
80
134
Depreciation
95
103
103
EBIT
47
96
152
Interest
11
65
75
PBT
35
31
76
Tax
(12)
32
31
88
1.3
1.3
3.7
Net Sales
Avg Realisation
Total Expenditure
EBITDA
Extraordinary Items
Net Income
EPS
Key Ratios
Mar-08
Mar-09
Mar-10
Mar-10
Mar-11
24
24
48
798
786
842
952
822
810
865
999
453
622
830
566
214
287
173
219
666
909
1003
785
1016
996
956
938
27
40
27
57
339
478
739
661
248 Non Cash Current Assets

54 Cash
771
852
864
1196
42
101
195 Current Liabilities
506
550
667
885
4.1 Net Working Capital
269
343
298
316

5,898
Secured Loans
281
Unsecured Loans
144
Total Debt
107
Net Block
318
CWIP
70
- Investments
Du Pont
Mar-11
14%
19%
42%
Net Income Growth
-2%
183%
121%
Mar-09
Mar-10
Mar-11
1.06
1.00
0.79
0.49
Interest Burden
1.22
-3.08
-3.24
0.60
-1.29
0.13
0.15
0.62
1%
3%
3%
5%
1.49
1.52
1.62
2.16
2.63
2.97
3.11
2.86
4%
4%
10%
19%
Depreciation Burden
1%
3%
3%
5%
EBIT Margin
1%
3%
3%
PAT Margin
1%
1%
2%
5% Asset Turnover
0.81
1.12
1.16
EBITDA Margin
0.79 ROE
25
Mar-08
Tax Burden
EBITDA Margin

Mar-09
24
Sale Growth
Debt / Equity
Mar-08
Companies - Summary
Operating Leverage
ROCE
ROA
Dividend Payout
Cash Conversion Cycle
(Days)
Bajaj Auto
Hero MotoCorp
TVS Motors
FY10
2.9
1.9
1.5
FY11
1.0
-0.2
1.6
FY10
64.7%
76.5%
8.7%
FY11
91.6%
60.7%
17.6%
FY10
44.2%
60.2%
4.9%
FY11
70.3%
48.3%
10.7%
FY10
34.0%
98.4%
32.4%
FY11
34.7%
108.8%
26.9%
FY10
-26
-15
-16
FY11
-32
-17
-14
Valuations
Current Price
1723
2059
58
Target Price
1754
2077
73
Upside
2%
9%
26%
FY13E EV/EBITDA
11.8
13.5
7.3
FY13E P/E
14.8
17.9
9.2
Source: Bloomberg, ACE, Allegro Calculations

26
Appendix
27
Hero Honda JV Split Analysis

Share Holding Pattern Pre Split
Share Holding Pattern Post Split
Hero Honda Motors
Promoter Group (51%)
Hero Investments P Ltd

(18%)
Hero Moto Corp
Public / Institutions
(49%)
Bahadur Chand
Investments P Ltd
(7%)
Honda Motorcycles
(26%)
BM Munjal & Family

(100%)
Promoter Group (51%)
Public / Institutions
(49%)
Hero Investments P Ltd

(44%)
Bahadur Chand
Investments P Ltd
(7%)
BM Munjal & Family

(70%)
GIC & Bain

(30%)
Deal Features:
Hero Group agreed to buy out Honda Motors stake for a lump-sum payment of Rs. 3800 Cr (Approx Rs 730 / share of Hero Honda).
Hondas stake was transferred to Hero Investments Pvt Ltd (HIPL)
In addition Honda would get a fixed payment of Rs. 2450 Cr for the use of the Honda brand name on the existing product line of
Hero. New products using Honda technology or branding would attract a royalty of 3% - 5%.
HIPL buys the stake using a bridge finance initially. HIPL got an approval to raise Rs. 4000 Cr worth of FCCBs to finance the deal.
HIPL gets Government Investment Corporation of Singapore (GIC) and Bain Capital to buy 30% stake in HIPL. The deal was for an
amount close to $830 million (Approx Rs 1400 / share of Hero Moto Corp)
28
Price / Earnings Charts

TVS Motors
Bajaj Auto
Hero MotoCorp
25
25
20
20
15
15
30
25
20
15
10
10
5
May-08
Nov-08
May-09
P/E
Nov-09
May-10
Nov-10
Mean
+1
-1
May-11
Nov-11
10
5
May-08
5
Nov-08
May-09
P/E
Nov-09
Mean
May-10
Nov-10
+1
May-11
Nov-11 May-08
May-09
P/E
-1
2500
3000
2000
2500
120
2000
100
1500
Nov-08
Nov-09
May-10
Mean
Nov-10
+1
May-11
Nov-11
-1
140
80
1500
1000
60
1000
500
40
500
0
May-08
Nov-08
Price
May-09
11x
Nov-09
14x
May-10
16x
Nov-10
18x
May-11
21x
Nov-11
0
May-08
20
Nov-08
Price
May-09
7x
Nov-09
May-10
Nov-10
12x
14x
17x
29
May-11
22x
Nov-11
0
May-08
Nov-08
May-09
Price
Nov-09
10X
May-10
15X
Nov-10
20X
May-11
25X
Nov-11
Premium vs. Market Leader & EV / EBITDA

TVS Motors
Bajaj Auto
Hero MotoCorp
150%
40%
100%
20%
50%
0%
0%
-20%
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
-50%
-40%
-100%
May-08
Nov-08
May-09
Prem/Disc
Nov-09
May-10
Mean
Nov-10
+1
May-11
-60%
May-08
Nov-11
Nov-08
May-09
Prem/Disc
-1
Nov-09
May-10
Mean
Nov-10
+1
May-11
Nov-11
-60%
May-08
Nov-08
-1
May-09
Prem/Disc
Nov-09 May-10
Mean
Nov-10
+1
May-11
-1
*Note: Hero MotoCorp has been

compared against the BSE Auto
Index
20
15
25
30
20
25
15
20
10
15
10
10
5
May-08
Nov-08
May-09
EV/EBITDA
Nov-09
May-10
Mean
Nov-10
+1
May-11
-1
Nov-11
0
May-08
Nov-08
May-09
Nov-09
EV/EBITDA
May-10
Mean
30
Nov-10
+1
May-11
-1
Nov-11
5
Jul-08
Jan-09
Jul-09
EV/EBITDA
Jan-10
Mean
Jul-10
Jan-11
+1
Jul-11
-1
Nov-11

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India Automobiles Two Wheelers

Allegro Capital Advisors Pvt Ltd

Two Wheelers An Introduction

Key markets Africa, Latin

Primary business model

Source: ACE, Allegro Calculations.

* Dealer numbers are for listed players.

Two Wheelers An Overview (1)

Market Share (Volume) of Key Players

Total Auto Volumes (Mn)

Two Wheeler Market Value and Growth

Value (INR Cr)

Indian Auto Sector had a volume growth of 13% CAGR over

Source: Bloomberg, McKinsey, Data Monitor Allegro Calculations.

Two Wheelers An Overview (2)

Auto Segment Volume Growth - YTD

Domestic Volumes (millions)

Two Wheeler Export Volume Growth

Export Volumes (millions)

Domestic volume growth has been strong over the past

Source: Bloomberg, Allegro Calculations.

Two Wheelers Industry Analysis

BUYER POWER: MODERATE

THREAT OF SUBSTITUTES: WEAK

SUPPLIER POWER: WEAK

Fragmented, small sized suppliers of

THREAT OF NEW ENTRANTS: MODERATE-WEAK

DEGREE OF RIVALRY: MODERATE-STRONG

Buyer Power Moderate (1)

Demand Close to Inflexion Point*

Malaysia Sri lanka

Source: MoRTH (2008)

Opportunity exists in Unisex Category (Scooters)

In developed markets, two wheelers are seen as a luxury rather than a

According to OECD, as per capita income and penetration levels

India is at an inflexion point where penetration is low and per capita

Motocycles vs Male Population

Scooters vs Female Population

Source: Bloomberg, McKinsey, Allegro Calculations.

Strictly Private & Confidential

*NOTE: Variations in calculation exist among agencies.

Buyer Power Moderate (2)

Despite a Steady Increase in Prices Less Elastic

Domestic Volumes (millions)

Auto Volumes (Millions)

Top 3 Players Have More Than 80% Market Share

Avg Price (Indexed) RHS

Single Brand Retail Model

Indian Two Wheeler market follows a Single Brand

Share of Top 3 Players

Strictly Private & Confidential

Supplier Power Value Chain (1)

Fragmented and small sized.

Dependency on OEM for

Strictly Private & Confidential

Supplier Power Weak (2)

Dependence of OEMs for revenue, reduces

Contracts have limited escalation clauses.

OEMs EBITDA Margins

Auto Anicillary EBITDA Margins

Note: Calculation based on industry sales and EBITDA figures.

Most components are manufactured within

Strictly Private & Confidential

Degree of Rivalry Moderate-Strong