FMCG Model At A Discount
The Indian two-wheeler industry has undergone a complete makeover over the last two decades with entry of Japanese manufacturers. The geared scooters, which used to dominate the industry, have been totally replaced by fuel efficient and stylish motorcycles. In the last couple of years the industry seems to be entering a maturing phase with rationality in players' behaviour and improvement in profitability. This evolvement of the two-wheeler industry is on the line of FMCG industry. Twowheelers has attained a status of essentials due to the need for personal mobility and inadequate public transportation system in the country. Despite an overall household penetration level of 45%, the industry continues to grow in double digits due to demand from under penetrated rural markets and shortening replacement cycle. Indian two-wheeler industry has lots of similarity to FMCG business and despite that they trade at a significant discount to the companies in FMCG industry. Branding is the key: Branding plays a major role in product differentiation in an industry where there are marginal differences in the products based on technology and features. Low capex requirement: Two-wheeler industry like FMCG, is low on capex requirement and due to this, companies have impressive cash accruals which they are using to reward the shareholders through dividends. Negative working capital: Vendors are important part of the business and besides raw materials they also provide working capital to the business. Due to this, two-wheeler industry works on negative working capital like their counterparts in FMCG sector. High return ratios: Low capex requirement, negative working capital coupled with high dividend payout provide high return on equity for the two-wheeler industry. Wide differential in valuations: Despite a lot of similarities in the business model, there is a wide gap in valuations of twowheeler companies as compared to FMCG industry. While FMCG companies have been trading at a multiple of 22-23x one year forward P/E ratio, two-wheeler stocks are trading in the range of 15-16x one year forward P/E ratio. We believe that this differential will gradually narrow down with two-wheeler industry moving up on the valuation matrix. Our top picks in the sector are Hero Honda and Bajaj Auto.

Sector View - Positive

12 October 2010

Two-Wheelers Industry Growth
2-w heeler Sales (mn units) 10.0 7.5 5.0 2.5 0.0 H1FY11

Grow th % 30 20









32 24 16 8 0 HUL

Valuation Gap








Vineet Hetamasaria, CFA Tel: +91-22-6618 6388 Nikhil Deshpande Tel: +91-22-6618 6339

Sector Summary
Company Bajaj Auto Hero Honda TVS Motor CMP (Rs) 1,522 1,874 75 Mkt Cap (USD mn) 9,879 8,393 797 Net sales (Rs mn) FY11E FY12E 161,510 188,161 176,083 197,714 61,670 69,633 EPS (Rs) FY11E 88.8 113.6 4.5 FY12E 103.0 128.1 5.3 P/E (x) FY11E 17.1 16.5 16.6 FY12E 14.8 14.6 14.1 TP (Rs) 1,854 2,305 85

PINC Research reports are also available on Reuters, Thomson Publishers and Bloomberg PINV <GO>



10 0 (10)

5% of net sales over the past four years. Both have been positioned independently. targeting specific customer segments. 2-wheeler business . two-wheelers continue to retain their importance for last mile connectivity. Maruti Suzuki in the passenger car segment recorded an average capex of 7. This presents a large replacement market especially in a scenario of a shortening replacement cycle.) 12 9 6 3 0 NESTLE COLGATE HONDA HUL DABUR ITC MOTOR 2 (%) BAJAJ AUTO HERO Source: In comparison.deshpande@pinc. Capex requirement reduced for two-wheeler industry… Low capex requirement: Similar to FMCG. Over the past five years. There are a number of similarities between the two businesses. This theme has been well demonstrated by HH through the positioning of its Splendor and Passion brands.18% of their top line. The brand has almost managed to dissociate itself from HH. BJAUT and HH have invested only 2. Even in cities with a good public transportation system. This has led to low capex requirement for two-wheeler manufacturers and greater reliance on component suppliers. During the same period. where the penetration levels are quite low. The dividing lines between competitors based on technology are dissolving swiftly with a brand-based theme evolving across the sector. Pulsar and Discover. in capex. the Indian two-wheeler business has evolved along the lines of an FMCG business. Capex as Percentage of Sales (5 years TVS . The two-wheeler population in India is currently estimated at ~100mn units.45% and 3.RESEARCH FMCG model at a discount Two-wheeler business evolving as a brand play… The Indian two-wheeler sector is fast changing its DNA and is emerging as more of marketing play with companies selling products based on brand equity. the two-wheeler industry has adopted an asset-light model with a significant portion of value addition happening at the vendor's end. Despite a large two-wheeler population. BJAUT is creating two separate brands.3% respectively. Splendor is the largest selling motorcycle in India and this brand has been built over the past 14 years. there is an ample scope for growth in the industry due to lack of an efficient public transportation system in the country.hetamasaria@pinc.9% and 16.Evolving as a FMCG play Over the past few years. Borrowing from the Splendor experience. indicating further scope for nikhil. respectively. PINC Research vineet. Rural India is another opportunity for the net sales for the companies grew at a CAGR of 14.

Over the years. Average working capital for BJAUT and HH over the past five years has been at net payables of 25 days and 11 days respectively.deshpande@pinc. and Colgate is above 50 days payable. have moderate dividend payouts of ~50% and delivered RoE of TVS . Dividend Payout Ratio and ROE (5 years Avg. High dividend payout maximising shareholders return… High and consistent dividend payout: Two-wheeler companies have consistently maintained a high dividend payout ratio. Net working capital for Nestle. Hindustan Uniliver.RESEARCH Working capital negative due to credit provided by vendors… Negative working capital cycle: With a distribution model in place and a strong supply 60 30 Days 0 COLGATE NESTLE DABUR HONDA HUL ITC BAJAJ MOTOR MOTOR 3 AUTO HERO (30) (60) Source: Company. two-wheeler OEMs have been able to maintain a negative working capital cycle akin to FMCG players. In the two-wheelers sector. PINC Research Zero debt and strong cash accruals from operations: Most of the FMCG and twowheeler companies have zero debt and strong cash flow accruals from the business. have sustained RoE at 40-60%. which enable them to reward shareholders through high dividend payout. Consequently. Companies such as Dabur and Marico. in line with the FMCG companies. these companies have been able to maintain a high return on equity (RoE). Hindustan Unilever and Colgate have been able to maintain superior RoE of ~100% due to a high payout ratio of more than 70% over the past five years. with a payout ratio of ~45%.) Div idend Pay out Ratio 120 90 (%) 60 30 0 NESTLE COLGATE HONDA HUL DABUR ITC BAJAJ AUTO HERO TVS ROE Source: Company. Multinational FMCG players such as Nestle. Net Working Capital (5 years avg. two-wheeler companies have created a huge amount of cash reserves on their balance nikhil. BJAUT and HH.hetamasaria@pinc. which are in an aggressive expansion phase. PINC Research

comparing sales growth of major FMCG companies with that of two-wheeler players indicates that growth in both industries are in a similar range although FMCG rates are steadier. growth rates. the two-wheeler sector has traded at ~15-16x one-year forward earnings. Over the past five years. and returns. valuations of the two-wheeler sector have always been at a steep discount to those of the FMCG sector. PINC Research Wide gap in valuations: Despite similar business models. the sector appears set for a re-rating. leading to higher valuations. two-wheelers in the Indian markets have emerged as a crucial product since they offer a quicker mode of transportation. nikhil. We believe that given the consistency in the two-wheeler Two-wheeler growth in-line with FMCG… Similarity in growth rates: FMCG has a matured business model with steady growth rates given the essential nature of the products. P/E Ratio 32 24 (x) 16 8 0 NESTLE COLGATE HONDA HUL DABUR ITC MOTOR 4 BAJAJ AUTO HERO Source: Bloomberg TVS Net Sales Growth NESTLE DABUR 40 HUL BAJAJ AUTO ITC HERO HONDA COLGATE TVS MOTOR 25 (%) 10 (5) (20) FY04 FY05 FY06 FY07 FY08 FY09 FY10 Source: Company. While the FMCG sector trades at 22-23x one-year forward earnings. PINC Research vineet.

hetamasaria@pinc. By the turn of the century.RESEARCH Trends in the Indian two-wheeler industry Volumes . taking on competition from Japan and China. giving way to executive and premium segments. However. Indian companies have been able to expand their global footprint. the Indian two-wheeler industry has made a strong comeback during the past 18 months with growth of more than 25%. motorcycles overtook scooters and now constitute more than 80% of two-wheeler composition. Some of these major trends include the following: Scooters have made a strong comeback with growth outperforming overall two-wheeler sector growth In motorcycles. Japanese two-wheeler companies entered the Indian market with fuel-efficient motorcycles. over the past five years. scooters have made a strong comeback as a second vehicle with a strong customer base in teenage and female groups. In mid-1980s. Reliance of the two-wheelers industry on financing has seen a significant dip. The past five years have been eventful with significant changes in customer preference and industry macro trends. Motorcycles retain their dominance. Strong demand and capacity constraints are helping the industry avert undercutting. 2-Wheeler Market Composition Mopeds 100% Scooters Motorcy cles Scooter Contribution % (RHS) 60 75% 45 50% 30 25% 15 0% H1FY11 FY01 FY03 FY05 FY07 FY1993 FY1995 FY1997 FY1999 FY09 0 Source: SIAM vineet. Besides domestic demand.Robust growth across segments Two-wheeler industry back on growth track post disappointment during FY08-09… Following a brief pause during FY07-09. The product itself has undergone a complete makeover with geared scooters giving way to non-geared the economy segment has taken a 5 . exports have been a significant contributor to the growth of the Indian two-wheeler nikhil. which changed the face of the industry. engendering high but scooters make a strong comeback Scooters outperforming industry growth… The Indian two-wheeler industry was dominated by scooters until late-1990s.

9% for two wheelers. the market leader. lately. However. HMSI's share declined 645bps to 45. has been facing severe production constraints and the waiting period for its flagship product Activa has reached six months. In H1FY11.3% market share. competitors have had a good run in the light of Activa's production constraints. nikhil.600 Grow th (RHS) 50 1.2%.4% compared with 25. M&M has been able to garner 7.Emulating the Activa The scooter segment has seen strong traction with increasing options for In H1FY11.RESEARCH Entry of new players in scooter segment stimulating demand… Scooter . scooter sales have grown at an incredible 44. Scooter Sales Growth Scooter Sales 1. While TVSL has been able to maintain market share at 21%.200 (Units '000s) 35 400 5 0 FY02 Source: SIAM (10) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 H1FY11 Scooter Marketshare (%) HH 80 Bajaj Auto Dominance HMSI TVSM Kinetic Motor/M&M Others 60 (%) 40 20 0 FY01 Source: SIAM FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 H1FY11 The revival of the segment was solely led by Activa following the era of BJAUT's geared scooters. Products benefiting the most have been TVSL's newly launched Wego and M&M's Rodeo and (%) 6 800 20 .deshpande@pinc.

However. successive products failed to make much impact and.0%. and in the nikhil. Compared with BJAUT. market leader HH has seen a growth of 7.000 0 0 FY02 Source: SIAM (15) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 H1FY11 Motorcycle Marketshare HH 80 TVSM BJAUT OTHERS 60 (%) 40 20 0 FY01 Source: SIAM vineet. in the current year. In FY03. losing market share to HH even as the combined share remained constant at ~80% levels. In H1FY11. BJAUT and HMSI have been beneficiaries of this loss of market share with both of them gaining 666bps and 167bps respectively. it ceded 776bps market share. motorcycle sales have grown by 22.BJAUT presses the accelerator With the economy turning a new leaf in H2FY10. TVSL was looking to challenge BJAUT for the second spot with a product portfolio of Victor and Fiero.5% with BJAUT being a major contributor with a 61% recovery started in H2FY10.deshpande@pinc. motorcycle sales were up 38% to 3.000 (Units '000s) 30 2. Motorcycle Sales Growth Motorcy cle Sales 8.000 Grow th (RHS) 45 6. when its market share peaked at 31.8mn units.1%. However.RESEARCH BJAUT made a strong come back with new branding strategy… Motorcycle . motorcycle sales have seen strong uptick.hetamasaria@pinc. During H2FY10. the company was relegated to the fourth spot with HMSI moving up the 7 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 H1FY11 (%) 4.8% with volumes of 2mn units while that of HH hit a low of 48. this increase is basically covering the ground it lost after FY07. BJAUT went through a rough patch. In FY08-09.000 15 . For BJAUT. for BJAUT.

has been a stronghold for HH. Splendor and Passion.Bajaj 'Discovering' growth BJAUT posing serious challenge to HH’s stronghold… The executive segment. in the segment.To be or not to be The economy or the entry level segment accounts for ~20% of domestic motorcycle volumes. The company has three products in the segment: Shine. Inline with its two brand policy the company made Discover its flagship brand in the executive segment and translating into a slow death for XCD platform. leading manufacturers devote less effort to the segment owing to its low margins. However. HH's model. CD Dawn. HMSI is the third largest player in the segment with a 10% market is the market leader in the segment. the product failed to retain interest. The company plans to re-launch Max. BJAUT had aimed to challenge HH in the executive segment. has been a dominant player in the segment. With its much hyped XCD platform. especially for the rural segment. nikhil. from the high 30% levels in 2008. its market share has gone up to 50% benefiting from slack competitors. The other BJAUT brand in the segment Discover 135cc then enjoyed a limited share of ~5%. which accounts for two third of the motorcycle market. The company with two powerful brands. However.e. after initial success. launched in Aug-09. Discover 100cc. Economy Segment Market Share BJAUT 60 HH TVSL 45 (%) 30 15 0 Dec-08 Dec-09 Oct-08 Oct-09 Apr-09 Apr-10 Jul-09 Jul-10 Feb-10 Aug-09 Sep-09 Feb-09 Aug-08 Sep-08 Mar-10 Mar-09 Nov-08 Nov-09 May-09 May-10 Aug-10 8 Jan-10 Jan-09 Source: Crisil Research Executive Segment . drove the company's market share over the 20% Jun-09 Jun-10 . In 2008. BJAUT took a stance to exit the segment and consequently the company's market share currently stands at ~23%. vineet.hetamasaria@pinc.deshpande@pinc. Stunner and Twister. TVSL too discontinued Max and currently has only a single product. TVSL has marginal presence in the segment as Flame has failed to generate any significant interest.RESEARCH Economy segment losing its charm due to low profitability… Market Share Economy Segment .

Apache (TVSL) and Unicorn (HMSI) have been major competitors for the brand over the years. BJAUT through launch of facelifts and variants has been able to retain the product's aspiration nikhil. the FZ had managed to grab market share from Pulsar reducing it to 45% levels. Pulsar. has maintained its numero uno spot in the premium segment.RESEARCH Executive Segment Market Share BJAUT 100 75 (%) 50 HH HMSI 25 0 Dec-08 Oct-08 Aug-09 Sep-09 Dec-09 Aug-08 Sep-08 Jan-09 Oct-09 Nov-08 May-09 Nov-09 May-10 Aug-10 Aug-10 9 Jun-09 Jan-10 Mar-09 Mar-10 Feb-09 Feb-10 Jun-10 Jun-10 Apr-09 Apr-10 Jul-09 Source: Crisil Research Premium Segment . when it received good initial Jul-10 .deshpande@pinc. The brand has a 50% market share in the After its launch in Oct'08. HH continues to have a 20% market share while TVSL and HMSI each hold on to Premium Segment Market Share BJAUT 60 HH TVSL HMSI OTHERS 45 (%) 30 15 0 Oct-08 Dec-08 Oct-09 Dec-09 Apr-09 Aug-08 Sep-08 Feb-09 Aug-09 Sep-09 Feb-10 Jan-09 Jun-09 Jan-10 Apr-10 Jul-08 Jul-09 Mar-09 Nov-08 May-09 Nov-09 Mar-10 May-10 Jul-10 Source: Crisil Research vineet.Challenging the Pulsar Product innovation remains critical for premium segment… Since its launch in the 2001. CBZ (HH). the flagship brand of BJAUT. BJAUT's latest gamble on the Pulsar brand was the launch of the 135cc variant. Initial scepticism of brand dilution passed away as the model pushed BJAUT's market share back above the 50% level. Yamaha's FZ16 is the newest challenge to the Pulsar.

high operating costs and higher delinquency. financiers have taken a more cautious approach this time around. In Africa. the company competed against the Japanese OEMs and Chinese manufacturers to create a space for itself. The growth achieved in the past 12 months has been sans high financing penetration and hence is more It also has plans for Europe where it would develop products in association with KTM. Currently. it exports one out of every three motorcycles it produces. Africa and Latin America. Latin America is the next big opportunity. The company started exports with the SAARC countries and moved on to South East Asia. Two-wheeler finance penetration had dipped to an all-time low of 15% for a brief period during FY09. Indonesia is the third largest market for two-wheelers. Currently lenders have started coming back into the market but with a more rational approach. More than 50% of its exports are currently to Africa. from a high of 56% in FY08. After a bitter experience in FY07-08.RESEARCH Financiers taking a cautious approach Financing for the two-wheeler business remains low… Two-wheeler finance has seen various hurdles such as low ticket size. Both BJAUT and TVSL have established subsidiaries in the country and have major Financing levels have risen to 25% but continue to be 10 . where the company is moving into bigger markets of Brazil and Argentina. PINC Research FY09E FY10E FY11P FY12P Beyond Indian Shores Indian companies are extending their presence in global two-wheeler market… BJAUT is a pioneer in taking the Indian two-wheeler industry beyond domestic markets.deshpande@pinc. which is the preferred type of 2-wheeler in Indonesia. vineet. BJAUT primarily markets its premium product Pulsar while TVSL has presence with Apache in the premium segment.hetamasaria@pinc. Finance Penetration for Two Wheelers Finance Penetration (%) 80 LTV (%) 60 (%) 40 20 0 FY08E Source: Crisil. TVSL has also launched a step-thru product.

The silver lining out of this scenario is the pricing discipline which is being maintained in the two-wheeler market.RESEARCH Two Wheeler Exports Ex ports (LHS) 1.6 40.9 Units mn U 60.3 PINC Research BJAUT TVSL HMSI vineet.0 FY01 Source: SIAM 0. Liquidity crisis increased the problems for vendors further thus restricting investment in the business. Monthly Capacity and Production (6 months Avg.) Capacity 500 Production (YTD Av g) 375 Units '000s 250 125 0 HH Source: SIAM.hetamasaria@pinc. The problem is aggravated further due to constraints being faced by leading auto component suppliers. Due to paucity of capacity.0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 H1FY11 Pressed for Capacity Capacity constraints restricting undercutting in the industry… Due to high demand.0 0. All the major manufacturers are currently facing problems in meeting the demand as there has not been any major capex by the industry in last two (%) 11 0. there is no incentive for any player to undercut thus leading to higher profitability for the industry. the two-wheeler industry is facing severe capacity constraints.0 0.0 0.0 . The suppliers have been under severe financial strain in the last few years due to falling profitability and low utilisation levels.deshpande@pinc. Grow th % (RHS) Contribution % (RHS) 80.

4bn Rs101. With the company looking at expanding into newer markets.0 12M 86.2 289. the company migrated to a new dual brand strategy: the commuter focused Discover and the sports-imaged Pulsar.962 (Unit ‘000s) FY11E 2.7% to 0. Product portfolio revamp: Over the last ten years. VOLUMES FY10 Dom estic 2-Wheelers 3-Wheelers Total Dom estic Exports 2-Wheelers 3-Wheelers Total Exports Total Sales YoY Gr.473 13.BO PERFORMANCE (%) 1M Absolute Relative 4.203 RESEARCH BAJAJ AUTO Rise of the Pheonix Vineet Hetamasaria.6mn units and the company should comfortably eclipse its target of 1mn for FY11. 3-wheelers too are expected to maintain robust performance. (%) 726 165 891 2. Exports a hedge: The company exports one in three motorcycles and every other 3-wheeler it manufactures.Sector: Auto BSE Sensex: 20. Its new brand strategy with Pulsar and Discover is falling in place and the company seems to have found its Midas touch.051 223 1. Now it seems to have 'Discovered' the recipe to challenge the leader. Rs10) Free Float Avg Traded Val. including Europe.9 1.8x FY11E and FY12E earnings respectively. exports should act as a cushion to any disturbance in domestic markets.199 249 +91-22-6618 6388 Nikhil Deshpande nikhil.854 discounting FY12E earnings 18x. market share has recovered to 30% in September 2010. with hiccups on the way. Three-wheelers and exports are adding to its volume and helping it to maintain over 20% margins.4% Rs882.6mn Rs1611/684 BJAUT IN BAJA. In FY10.9mn units in FY11 and 4. New strategy tasting success: The company’s market share after touching a high of 37% in FY07 witnessed a steep fall and halved to 18% over the next two years.4mn 50.853 29.600 1. Bajaj Auto (BJAUT) appears to have got its act together. VALUATIONS AND RECOMMENDATION The stock trades at 17.657 1. leaving the company struggling to meet demand.5 RELATIVE PERFORMANCE BJAUT BSE 2.786 176 1.448 4.200 800 400 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 PINC Research reports are also available on Reuters. 3-wheelers demand across markets: Strong replacement demand and abolition of permit system in states such as TamilNadu is helping the industry to post strong growth.1x and 14. in partnership with KTM. (6 mnts) 52 w eek High/Low Bloomberg Code Reuters Code Rs440. BJAUT has metamorphosed under the new leadership.deshpande@pinc. Export demand is robust CFA BUY CMP Rs1. In H1FY11. It shed its scooter image to emerge as a motorcycle manufacturer. This would help the company maintain over 20% margins in FY11 and FY12.931 37.2) 3M 26. as the company was hard pressed to roll out products that would challenge the market leader.854 12 October 2010 vineet.8 FY12E 2.803 222 3. We expect the company to record earnings of Rs89 and Rs103 in FY11 and FY12 respectively.522 TP Rs1.5mn units in FY12. Outlook: We expect the company to achieve volumes of 3. The transition hasn't been smooth.459 198 2.274 3. The product mix has substantially moved in favour of high-margin products such as Pulsar and Discover. the company decided to exit the low-margin entry segment while the much hyped XCD platform proved to be a damp squib. Thomson Publishers and Bloomberg PINV <GO> .2 67.V.000 1. During the period.8 Company Update STOCK DATA Market Cap Book Value per share Eq Shares O/S (F.025 1. With multiple products under each +91-22-6618 6339 After a tumultuous FY08-09.hetamasaria@pinc. We maintain our 'BUY' rating with a target price of Rs1.3 14.3 (3. exports have grown at

386 42.000 18X 480.644 918 (7.8 1.111 (9) 26.5 48.8 6.564 FY10 1.502 (7.050) (17. tax ) Other financing activ ities Cash flow from fin.506) 8.074) 7.786 (60) 25.2 10.735) (7.3) 28.669 15.000 0 May -08 Dec-08 Jul-09 Mar-10 Oct-10 0 May -08 Dec-08 Jul-09 Mar-10 Oct-10 vineet.184 (17) 42.804 68.4 (3.118 128.622) (17.817 29.0 51.501) 28.298) 1.8 41.141 (3.7 0.754) P/E Band EV/EBIDTA 2.4 27. (a) Capital ex penditure Chg in inv estments Other inv esting activ ities Cash flow from inv.207 (7.450) 27.565 Key Ratios OPM (%) Net margin (%) Div idend y ield (%) Net debt/Equity (x ) Net Working Capital (day s) Asset turnov er (x ) ROCE (%) RoE (%) EV/Net sales (x ) EV/EBITDA (x ) PER (x ) Price/Book (x ) FY08 14.036 18.200) (5.9 (1.693 25.544 23.897) 4.492) (13.618) (8.7 12.740) 1.7) 27.588 12.447 14.9 1.7 FY09 13.763 (70) 35.179 (1.389 11.685 34.842 (210) 11.6 128.539 FY11E 35.000 10X 8X 1.685 (2.612 (3.456 11.424 FY12E 2.752 119.560 8.357 (3.496 13.835) (3.hetamasaria@pinc.300) FY10 24.3 37.699 41.722) (9.5 (0.211) 11.2 FY11E 40.8 FY12E 16.384 (209) 59.835 3.161 FY12E 40.826) 3.693) (1.060 59.575 (8.700 32.894 15.867 79.5 (54.826 (205) 31.977 5.894 44.7 1.0 (15) 1.0 15.447 17.326) (6.3 (0.250 16.deshpande@pinc.698 10.507 7.150) 20.424 15.876 13.608) (1.1) (39) 1.423 (52) 12.428) 1.217 40.2 (8) 1.211 16.0 67.699 25.519 39.797 15.928) (2.2 (1.000 240.3 15.374) 6.4 14.994) (11.797 29.580 35.2) (14) 2.9 103.837 29.186) (3.510 188.751 (7.445) (2) 3.399 25.020) Balance Sheet Equity capital Reserves & surplus Shareholders' funds Preference Share Capital Total Debt Capital Employed Net fix ed assets Cash & Cash Eq.1 2.629 (1.983 58.2 62.034 12.632 (3.141) 30.283 13.950) (2.565 15.371 (4.5 26. Net other Current Assets Inv estments Net Deferred Tax Assets Total assets FY08 1.4 (2.158 (485) 8.807 (2.562 2.693 1.0 FY11E 20.669 FY11E 2.502) 2.7 36.565 7.4 0.500) (4.884 (420) 79.5 33.7) FY10 36.170 3.447 27.2 5. Div idend (incl.749) (8.219 FY09 1.6 (0.082) 17.564 15.8 nikhil.085 161.075) 16.811) 18.947 (42) 32.190 34.887 (70) 40.4 9.365) 1.495 5.726 (7.4 17.889) (555) (20) 6.9 23.8 15.864 15.758 (12.058 19.8 88.7 (1. (c) Net chg in cash (a+b+c) FY08 11.4 78.3 2.1 9.125 1.126) (686) 7.4 15.295 3.644 11.8) 9. (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Chg in Minorities int.8 65.1 9.258 818 (3.5) (1.633 (6.245 (35.724) 2.219 13.939 ( .9 Cash Flow Statement Pre-tax profit Depreciation Total tax paid Chg in w orking capital Other operating activ ities Cash flow from oper.3 FY12E 20.183 435 ( 21.775) (10.6 53.000 6X 4X 500 6X 120.917 25.325 (110) 29.150 (44.404 12.7 0.0 24.000 12X 1.817 1.668 41.270 (1.833) (2.470 47.368 84.343 29.911) (4.364 12.235 (1.5 5.500 15X 12X 9X 360.8 17.5 0.314) (3.161 (9.RESEARCH Bajaj Auto Year Ended March (Figures in Rs mn) Income Statem ent Net sales Growth (%) Operating profit Other operating income EBITDA Growth (%) Depreciation Other income EBIT Interest paid PBT (before E/o items) Tax prov ision E/o Income / (loss) Net profit Adjusted net profit Growth (%) Diluted EPS (Rs) Diluted EPS Growth (%) FY08 86.035) 15.193) (7.1 FY10 21.6) 8.386) (1.862) (1.972 FY09 10.8 55.809) (1.9) (1.1 34.237) (5.3 23.7) FY09 (2.046 25.4) (14) 1.436 (2.6 15.5 3.4 67.3 29.836) 6.369 115.

740 10.7 3M (5.Sector: Auto BSE Sensex: 20.0 288 12. Following flat sales in FY08.8% Rs0. Rs2) Free Float Avg Traded Value (6 mnths) 52 w eek High/Low Bloomberg Code Reuters Code Rs374. We expect the company to maintain margins of ~15.0 5.deshpande@pinc.950 1. The media is abuzz with news and speculation on the possible end of the JV and different combinations following such an event.874 TP Rs2.1 respectively. Outlook: We expect HH to achieve volumes of 5.452 10.4 214 54. We believe given the aspirations of Honda and its experience in India through its wholly owned subsidiary will lead it to have an independent presence in India and hence this JV is unlikely to be renewed beyond 2014 when the current agreement ends. We maintain our earning estimates for FY11 and FY12 at Rs113. Concerns on technology: HH has no in-house R&D.5xFY11E and (%) 4.700 The stock currently trades at 16.5% over FY11-12. Success of other Indian two-wheeler manufacturers in the overseas market support this. CFA BUY CMP Rs1.6) 12M 14. However.0 257 20. Thomson Publishers and Bloomberg PINV <GO> . 1. However.hetamasaria@pinc.305.7mn units in FY11 and FY12 respectively.5 200mn 47. End of the road for the JV? The JV agreement with Honda. we do not expect this to be a major hurdle as two-wheeler business is not technology intensive.3) (17.8 and Rs128.450 1. Following the break-up we expect HH to emerge as a strong player in the exports.213 13.5% in FY09 even as the industry grew only 5%.9 4. Opening of export frontiers: HH is currently restrained from exporting due to the JV agreement and has access to only three overseas +91-22-6618 6339 VOLUMES FY10 Motorcycles YoY Gr. With no inhouse R&D. question marks are being raised over the company’s ability to maintain its leadership in case of a breakup between the partners. Robust performance even during the downturn: In the 2-wheeler pack. (%) Total Sales YoY Gr.3 FY12E 5. Lesser dependence on finance and a stable product range shielded HH from the meltdown in the 2-wheeler market. HH was the least affected during the downturn of FY08-09.0 5.1 Company Update STOCK DATA Market Cap Book Value per share Eq Shares O/S (F. Japan is due to end in 2014.93bn Rs2094/1452 HH IN HROH. we expect HH to overcome these overhangs and maintain its numero uno position. The company has been in the limelight recently regarding a possible end to the JV with Honda. discounting FY12E earnings 18x.V.BO PERFORMANCE (%) 1M Absolute Relative 8.200 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 PINC Research reports are also available on earnings. VALUATIONS AND RECOMMENDATION vineet.200 1.9 (3. Further we expect that Indian promoters will demand technology continuity for some years and this will give HH time to develop its inhouse R&D +91-22-6618 6388 Nikhil Deshpande nikhil.2mn and 5.305 12 October 2010 Hero Honda (HH) has been the most stable player in the 2wheeler sector over the past two years with a stable product profile.956 13. which is a major concern being raised. (%) Scooters YoY Gr.7) RELATIVE PERFORMANCE HH BSE 2.2bn Rs173.6 (Unit ‘000s) FY11E 4.386 22.203 RESEARCH HERO HONDA MOTORS Will The Party End? Vineet Hetamasaria.600 23.2 0. We maintain 'BUY' on the stock with a target price of Rs2. HH's volumes were up 11.

6 64.320 31.434) (7.578 12.0 37.162 66.8 74.322) 22.5 12.849) (11.225 16.204) 17.490 FY12E 399 66.623) 27.9 (1.999) 22.593 28.9) (2) 2.069 57.4 1.0 (0.032 (20) 28.943 35. (a) Capital ex penditure Chg in inv estments Other inv esting activ ities Cash flow from inv.648 26.100 360.543 (125) 22.439) (4.916 1. Net other Current Assets Inv estments Net Deferred Tax Assets Total assets FY08 399 29.980 17.485 (0.8 2.849) (11.800 18X 15X 480.895) (263) (3.RESEARCH Hero Honda Motors Year Ended March (Figures in Rs mn) Incom e Statement Net sales Growth (%) Operating profit Other operating income EBITDA Growth (%) Depreciation Other income EBIT Interest paid PBT (before E/o items) Tax prov ision E/o Income / (loss) Net profit Adjusted net profit Growth (%) Diluted EPS (Rs) Diluted EPS Growth (%) FY08 103.446 FY11E 28.481 (5.311 FY11E 399 48.576 25.840 (25) 17.792 16.4 1.7 Cash Flow Statem ent Pre-tax profit Depreciation Total tax paid Chg in w orking capital Other operating activ ities Cash flow from oper.850 13.1 12.997) 12.000 14X 2.203) 2.582 27.6 10.317 (5.111 (20) 14.885 (10.682 979 27.4 61.177) (8.057) 357 (1.000 0 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 0 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 vineet.973) (25.4 9.1 (0.9) (10) 2.3 10.666 27.2 32.420) 3.690 1.0 16.094 31.675 14.6 1.338 (21) 28.983 12.5 FY09 14.376) ( nikhil.091 (4.815 1.000 8X 6X 700 6X 120.560) 357 (1. (c) Net chg in cash (a+b+c) FY08 14.739 28.527 (12.999) 25.317 1.9 26.2 38.1 63.623) (1.254) 31.371 17.576 2.715 44.576 (5.9 1.622) 4.972) (67) (4.163 327 49.deshpande@pinc.479 1.974) 8.496 (5.318 4.193 (332) (3.hetamasaria@pinc.7 FY09 123.3 29.9 (0.667 12.8 10.709) Balance Sheet Equity capital Reserves & surplus Shareholders' funds Preference Share Capital Total Debt Capital Employed Net fix ed assets Cash & Cash Eq.807) 1.097) (25.1 1.7 113.191) 94 (1.847) 161 28.608 38.993 (13.6 (1.300) ( 32.667 9.2 46.4 3.896) 357 (1.2 1.679) 49.203 (5.736 (14.6 P/E Band EV/EBIDTA 2.600 (4.444) 38.5 16.6 5.528) 35.876 14.739 Key Ratios EBITDA margin (%) Net margin (%) Div idend y ield (%) Net debt/Equity (x ) Net Working Capital (day s) Asset turnov er (x ) ROCE (%) RoE (%) EV/Net sales (x ) EV/EBITDA (x ) PER (x ) Price/Book (x ) FY08 13.627) 11.820 (3.831) 66.158) 13.182 FY09 399 37.862 1.7 12.616 (535) (4.792 FY10 399 34.182 15.071 (150) (8.7 44.000 12X 10X 1.318 74.7 128.9 12.642 FY10 28.2 49.823 FY09 17.975 29.008 785 38.818 12.567) (59) (3.251 34.318 22.2 9.166 (1.534 53.4 25.300) (4.7) (18) 2.660 56.562 177 66.463 29.714 12.2 52.744 (4.537 313 13.6 54.774 (2.729 (333) (12.012 (5. (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Chg in Minorities int.815 (4.596 (20) 31.973 (38.400 12X 9X 240.5 7.2 29.9 1.191 19.763 49.4 13.8) (2) 2.2 5.9 35.9 (0.1 111.690 22.8 19.037 629 17.4 12.3 14.8 FY10 17.866) 2.6 FY12E 15.481) 3.424) 9.2 73.490 19.083 11.006 27.751 28.9) (9) 2.650 660 35.6 12.6) (2.7 (2.311 17.1 (1.370) 6.091 1.4 2.7 48. Div idend (incl.6 (1.7 FY12E 197.589) 357 (1.474 (4. tax ) Other financing activ ities Cash flow from fin.012 2.915) 2.327) 8.1 FY11E 176.068 .980) FY12E 31.7 26.6 FY10 157.0 11.576 12.8 FY11E 15.4 14.615) 1.

3-wheeler business taking roots: TVSL has been a late entrant into the 3-wheeler segment. managing to keep up with the industry growth rate. scooters grew 41. Vineet Hetamasaria. success of the Activa and similar products (large scooters) from HH and Suzuki resulted in a market share declining to early 20% levels.6 FY12E 704 500 667 1. New launches in the two-wheeler segment and ramp up in 3-wheelers are expected to give it the much needed profitability boost. TVSL has tried to plug this gap in its scooter portfolio by launching Wego in Jan'10.Sector: Auto BSE Sensex: 20. TVSL failed to repeat the performance with other products in the +91-22-6618 6388 Nikhil Deshpande nikhil.180 10.871 34 1.0 14.5 145. We expect the company to post earnings of Rs4.357 13 1. FY10 was a year of consolidation and the company expects to build on it in FY11.1x FY12E standalone earnings. Apache and Star City in the premium and economy segments respectively have helped the company to hold on to 8% market share.hetamasaria@pinc. this subsidiary is expected to achieve cash break-even. TVSL launched the Victor. the company is nearing its peak monthly performance of 65K motorcycles it has been unable to take its market share back in double digits. We expect TVSL to achieve annual volumes of 50k by FY12. Indonesian operations: The Indonesian subsidiary has run rate of TVSL's moped volumes have grown at 23. However in the recent past. In H1FY11.V.7% to 341k units. Wego leading the way: The company has been a consistent performer in the scooter segment with a market share at 20% levels. (%) 492 300 565 1. Rs1) Free Float Avg Traded At these levels. Positioned in the executive segment. Outlook: We expect the company to achieve volumes of 2mn units in FY11 and 2.710 29 1. VALUATIONS AND RECOMMENDATION The stock trades at 16.2) 3M 27.976 28.000 units during the current year with support from local financiers.203 RESEARCH TVS MOTOR Riding On The Wego TVS Motors (TVSL) in FY08-09 was a pale shadow of its heydays of FY03-04. CFA vineet.370 167 1.5%. significantly lower compared with peers. Japan.3 in FY11 and FY12 respectively. Mopeds moving out of South: Mopeds have traditionally been in demand only in the souther region.2 (Unit ‘000s) FY11E 640 435 635 1.5 and Rs5.7mn units to cater to this demand.deshpande@pinc. moped demand has started emerging from other markets too. Post Victor. discounting FY12E earnings at 16x.905 275 2.3 Company Update STOCK DATA Market Cap Book Value per share Eq Shares O/S (F.7 12M 164.18mn units in FY12. Having made a countrywide launch. However. Thomson Publishers and Bloomberg PINV <GO> . The company started dispatches only in Apr'08. it was hit hard by the downturn.7) (10.8 RELATIVE PERFORMANCE TVSL BSE 80 60 40 20 0 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 PINC Research reports are also available on Reuters.6x FY11E and 14. (6 mnts) 52 w eek High/Low Bloomberg Code Reuters Code Rs35.5bn Rs17. Overcoming the Victor shadow: Within a year of its break-up with Suzuki. We maintain a 'HOLD' rating on the stock with a price target of Rs85.537 15.BO PERFORMANCE (%) 1M Absolute Relative (2. Although.740 237 1. Margins are expected to be maintained near the 7% mark. TVSL expects this to increase to 5. the company is consistently clocking volume of 2k in the domestic market and 1k in the export market.000 units per +91-22-6618 6339 HOLD CMP Rs75 TP Rs85 12 October 2010 VOLUMES FY10 Motorcycles Scooters Mopeds 2-Wheelers 3-Wheelers Total Dom estic Exports Total Sales YoY Gr. With the product portfolio in disarray. Victor to date has been TVSL's most successful model and the nearest challenger to HH's Splendor. The company is expanding capacity to 2.4mn Rs80/26 TVSL IN TVSM.6 475mn 39.6% Rs326. In H1FY11.

7 (2.0 32.3 5.6 3.1 nikhil.352 10.3 43.9 1.106) 19.000 15X 120 24X 18X 12X 60.5 4.9 0.387 58.6 9.416 8. (c) Net chg in cash (a+b+c) FY08 354 886 (168) (1. (a) Capital ex penditure Chg in inv estments Other inv esting activ ities Cash flow from inv.224 (668) 141 3.6 0.1 1.014) 57 (1.875 97.4 (1.5 0.6 13.000 40 6X 20.745 FY11E 2.5 FY12E 69.3 FY11E 61.978 7.523) 1.033) 115 957 (646) 311 (0) 311 311 (2.8) (965) 486 468 (115) 354 (36) 318 318 (52.438 10.401 (1.224) 210 3.683 704 4.5 FY11E 475 9.033 18.7 (52.1) 0.747 Key Ratios EBITDA margin (%) Net margin (%) Div idend y ield (%) Net debt/Equity (x ) Net Working Capital (day s) Asset turnov er (x ) ROCE (%) RoE (%) EV/Net sales (x ) EV/EBITDA (x ) PER (x ) Price/Book (x ) FY08 2.145 2.502 (304) (460) (764) 1.211 665 1.0 15.431 759 2.353 10.401 (1.9 0.7 9.5 1.358 3.273) (2.9 1.257 2.130 739 4.hetamasaria@pinc.230) (1.386 9.060 16.deshpande@pinc.8 0.002 1.681 1.8 0.278) 2.633 12.670 41.0 0.755 FY12E 475 12.000 3X 0 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 0 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 vineet.6 5.9 4.1 (9) 2.709 14.287) (258) (1.5 7.156) (1.145 1.145 (629) 2.647 8.516 2.533 7.516 17.014 4.3 17.0 1.7 (1.400 19.5) 440 507 947 (48.9 3. Div idend (incl.352 FY09 238 7.906 5.9 2.044) 145 1.281 (633) (301) 190 (744) 1.6 21.0 0.195 (16.067) 20.4 (9) 2.3 2.3 Cash Flow Statement Pre-tax profit Depreciation Total tax paid Chg in w orking capital Other operating activ ities Cash flow from oper.355 9.539 1.0 (1.5 14.438 FY10 238 8.764 47.3 4.2) FY10 43.092 251.941 (1.3 251.421 (740) 2.4 4.007 2.9 (1.1 2.2 1.5 0.537 FY12E 3.688 6.0 16.000 12X 9X 6X 80 40.144) FY09 311 949 30 (412) 878 (883) (1.481) 16.5 2.7 111.5 96.2 2.468 Balance Sheet Equity capital Reserves & surplus Shareholders' funds Preference Share Capital Total Debt Capital Employed Net fix ed assets Cash & Cash .1) FY09 36.151) 185 3.869 11.549) 14.992 (1.747 9.364 1.230) 2.007 873 4.396 (195) (426) 1.100 20.043 2.842 (850) (850) 2. (b) Free cash flow (a+b) Equity raised/(repaid) Debt raised/(repaid) Chg in Minorities int.8 FY10 6.8 0.1 (7) 1.1 114.3 FY11E 7.151 (569) 248 3.5 22.378 9.8 P/E Band EV/EBIDTA 160 30X 80.146) 18.8 0.5 4. tax ) Other financing activ ities Cash flow from fin.2) 0.864 7.172 12.300) (333) 110 (1.301 4.828 4.865 (754) 1.3 3.6 FY09 5.488) 328 (42) 58 344 (1.2 23.0 3.990 10.RESEARCH TVS Motor Year Ended March (Figures in Rs mn) Incom e Statement Net sales Growth (%) Operating profit Other operating income EBITDA Growth (%) Depreciation Other income EBIT Interest paid PBT (before E/o items) Tax prov ision E/o Income / (loss) Net profit Adjusted net profit Growth (%) Diluted EPS (Rs) Diluted EPS Growth (%) FY08 32.737 973 (389) 424 1.631 18.094 670 2.545) (1.1 17.7 (16) 1.776 498 FY10 899 840 (220) 982 2.681 (536) 2.663 14.8 (2) 1.855 (710) 3. Net other Current Assets Inv estments Net Deferred Tax Assets Total assets FY08 238 7.510 (1.755 9.145 96.111 (19) (212) 880 1.8 4.4 FY12E 6.668 (1.9 4.401 (1. 91-22-6618 6303 91-22-6618 6333 91-22-6618 6327 91-22-6618 6321 91-22-6618 6322 91-22-6618 6326 91-22-6618 6325 91-22-6618 6337 91-22-6618 6324 DIRECTORS Gaurang Gandhi Hemang Gandhi Ketan Gandhi subramaniam. Sales Technical Analyst sadanand.sharma@pinc. Auto Ancillary.RESEARCH T E A M EQUITY DESK Sadanand Raje Head Capital Goods Capital Goods Power Construction Power Engineering IT Services Media IT Services Prajapati Sajjid Lala Chandani Bhatia Head Trading Co-Head .in sajjid. Cement 91-22-6618 6483 91-22-6618 6486 91-22-6618 6349 91-22-6618 6347 DEALING Mehul Desai Naresh Panjnani Amar Margaje Ashok Savla Raju Bhavsar Manoj Parmar Hasmukh 91-22-6618 6400 91-22-6618 6400 91-22-6618 6400 COMPLIANCE Rakesh Bhatia Head Compliance rakeshb@pinc. FMCG 91-22-6618 6366 RESEARCH Vineet CFA Nikhil Deshpande Vinod Nair Ankit Babel Hitul Gutka Subramaniam Yadav Madhura Joshi Satish Mishra Rohit Kumar Anand Namrata Sharma Karan Taurani Bikash Bhalotia Harleen Babber Dipti Vijaywargi Chirag Dagli Naveen Trivedi Auto. Mining naveent@pinc.vijaywargi manojp@pinc. Cement Trading amar.savla@pinc.chaurasia@pinc. Fertiliser Mining 91-22-6618 6388 91-22-6618 6339 91-22-6618 6379 91-22-6618 6551 91-22-6618 6410 91-22-6618 6371 91-22-6618 6395 91-22-6618 6488 91-22-6618 6372 91-22-6618 6412 91-22-6618 6382 91-22-6618 6387 91-22-6618 6389 91-22-6618 6393 91-22-6618 6462 91-22-6618 6384 SALES Anil Chaurasia Rajeev Gupta Shailesh Kadam Ganesh Gokhale Equities Equities Derivatives Derivatives Mining 91-22-6618 6400 .in hasmukhp@pinc.

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