Stock Update

Bajaj Auto
To outgrow the industry

Sector: Auto Bajaj Auto Limited (BAL) is poised to continue outpacing the domestic
2W industry, driven by new product launches across segments (entry,
Company Update
mid and premium). Moreover, BAL would be the least impacted by
transition to BS6 emission norms given the higher share of premium
Change
motorcycles (40% of volumes) where price increase on account of
Reco: Buy á BS6 is 6-7% compared to 12-14% for the entry-level bikes. In addition,
CMP: Rs. 3,101 higher proportion of exports (45% of volumes), which is immune from
BS6 norm change and growing at a healthy rate of 7-8% would enable
Price Target: Rs. 3,575 á
outperformance by BAL. We expect mid-single digit volume growth
for BAL in FY2021 as against flat volumes expected for the industry.
á Upgrade  No change â Downgrade
Earnings growth is expected to accelerate to 9% CAGR over FY2020-
FY2022 as against 3% earnings CAGR over FY2017-FY2019. Hence, we
Company details upgrade our recommendation on the stock to Buy from Hold earlier, as
we rollover our target multiple to FY2022 earnings. Our price target (PT)
Market cap: Rs. 89,740 cr
stands at Rs. 3,575. BAL is our preferred pick in the 2W space.
52-week high/low: Rs. 3,290/2,400 BAL to outgrow the 2W industry: BAL’s market share improved from 15.6%
in FY2018 to 18.8% in 9MFY2020, driven by new launches across segments
NSE volume: (No of
shares)
4.7 lakh viz. (entry, mid and premium). With planned new launches, management
is targeting to reach 24% market share over the next few years. Moreover,
BSE code: 532977 BAL would be least impacted by transition to BS6 norms, given the higher
proportion of premium motorcycles (40% of volumes), where price hike
NSE code: BAJAJ-AUTO is half compared to entry bikes and exports (45% of volumes), which are
immune to BS6 norms. Strong growth in exports, driven by healthy growth
Sharekhan code: BAJAJ-AUTO
in key markets and entry into new markets would also volumes. We expect
Free float: (No of mid-single digit volume growth for BAL in FY2021 as against flat volumes
13.45 cr for the industry.
shares)

Our Call
Shareholding (%) Earnings growth to accelerate; Upgrade to Buy: BAL is poised to outpace
Promoters 53.5% the industry’s growth, driven by new launches, minimal impact of BS6
transition and healthy growth in exports. We expect mid-single digit
Institutions 9.8% volume growth for BAL as against flat volumes expected for the industry.
Corporate Bodies 4.6% Earnings growth is expected to accelerate to 9% CAGR over FY2020-
FY2022 as compared to 3% growth over FY2017-FY2019. We rollover our
Foreign 14.5%
target multiple on FY2022 earnings and upgrade our recommendation to
Public and Others 17.6% Buy from Hold earlier. Our PT stands at Rs. 3,575 (earlier PT of Rs. 3,400).

Price chart
Key Risks
3400 ŠŠ Prolonged slowdown in the domestic market can impact the financials.
3200 ŠŠ Aggressive discounting adopted by 2W players can have an adverse
3000 impact on margins.
2800
Valuation Rs cr
2600
Particulars FY17 FY18 FY19 FY20E FY21E
2400 Net Sales 25,218.9 30,250.0 31,320.2 35,479.5 38,839.5
Jan-19

Jan-20
Jul-19

Sep-19

Nov-19
May-19
Mar-19

Growth (%) 15.9 19.9 3.5 13.3 9.5

EBIDTA 4,837.4 4,982.0 5,099.6 5,597.3 6,292.0
OPM (%) 19.2 16.5 16.3 15.8 16.2
Price performance
Recurring PAT 4,100.1 4,333.2 4,963.7 5,270.3 5,908.7
(%) 1m 3m 6m 12m Growth (%) 7.1 5.7 14.6 6.2 12.1
EPS (Rs.) 141.8 149.8 171.6 182.2 204.3
Absolute -3.4 3.7 15.1 17.1 PE (x) 21.9 20.7 18.1 17.0 15.2
P/BV (x) 4.7 4.1 3.7 3.3 2.9
Relative to EV/EBIDTA (x) 15.7 15.8 12.4 9.8 7.7
-5.4 -4.7 6.4 0.5
Sensex RoCE (%) 29.5 28.3 25.6 25.0 25.2
RoNW (%) 21.5 19.9 20.2 19.2 19.3
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates

January 16, 2020 2

 Stock Update
BAL to continue outpacing the domestic industry
BAL has outpaced the domestic motorcycle industry over the past two years. Driven by new launches, BAL’s
market share has improved from 15.6% in FY2018 to 18.8% in 9MFY2020. Management is targeting to reach
market share of ~24% over the next two years. BAL is aiming to launch new products across the motorcycle
segments viz. (entry, mid and premium segments) to gain share. Moreover, the impact of transition to BS6
emission norms would be least for BAL amongst 2W players given the higher share of premium motorcycles
at 40% (where the cost increase is 6-7% as compared to 12-14% for entry-level bikes) and higher share of
exports at 45% (BS6 emission norms would impact only domestic markets). We expect BAL to outgrow the
domestic industry; and we have factored 5% volume growth for the domestic market in FY2021 as against
expectations of flat volumes for the industry.

Domestic motorcycle market share trend

23

21

19

17

15

13
Q1FY18

Q2FY18

Q3FY18

Q4FY18

Q1FY19

Q2FY19

Q3FY19

Q4FY19

Q1FY20

Q2FY20

Q3FY20
Source: SIAM, Company

Motorcycle exports on strong footing

BAL’s motorcycle exports have been strong with the company reporting strong 9% growth in 9MFY2020. Key
markets of Africa and Latin America have been buoyant, leading to robust exports for BAL. BAL has been
increasing its penetration in key markets to further strengthen its position. Moreover, BAL is tapping new
markets such as CIS countries and Philippines to drive growth. With firm oil prices and commodity prices,
we expect export growth momentum to continue. We expect high single-digit growth of 7-8% for motorcycle
exports in FY2021.

First amongst listed players to enter the electric 2W space

BAL has re-launched the ‘Chetak’ brand, which marks its re-entry into the scooter segment. BAL is the first
player in the listed space to launch an electric scooter and is aiming for a leadership position in electric
vehicles. Chetak electric scooter has been launched in two variants, with the standard variant costing Rs. 1
lakh (ex-showroom), while the disc brake variant costing Rs. 1.15 lakh (ex-showroom). The scooter is powered
by 3kWh lithium-ion battery that would deliver a range of about 95 km on full charge. BAL has initially
launched the products in Pune and Bangalore and would gradually tap other markets. Chetak would be sold
through premium KTM dealerships, which are spread over 300 cities in India.

January 16, 2020 3

 Stock Update
Financials in charts

Revenue Trends Volume Mix

50,000 25

40,000 20

15
30,000
10 Export, 45%
20,000
5
10,000 0 Domestic ,
55%
0 (5)
FY17 FY18 FY19 FY20E FY21E FY22E

Revenues (Rs cr - LHS) Growth (% - RHS)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

EBIDTA trend Profitability trend

7,000 25 7,000 20

6,000 6,000
20 15
5,000
5,000
4,000 15 10
4,000
3,000 10 5
3,000
2,000
5 2,000 0
1,000
0 0 1,000 (5)
FY17 FY18 FY19 FY20E FY21E FY22E FY17 FY18 FY19 FY20 FY21 FY22

EBITDA (Rs cr - LHS) OPM (% - RHS) PAT (Rs cr - LHS) Growth (% - RHS)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

ROCE trend ROE trend

40.0 30.0

30.0
20.0

20.0

10.0
10.0

0.0 0.0
FY17 FY18 FY19 FY20E FY21E FY22E FY17 FY18 FY19 FY20E FY21E FY22E

ROCE (%) ROE (%)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

January 16, 2020 4

 Stock Update
Outlook
To outpace the 2W industry; Earnings growth to accelerate: BAL is likely to continue gaining market share
in the domestic industry, driven by new launches and would be least impacted by transition to BS6 emission
norms given the higher share of premium motorcycles. Further, strong increase in exports (45% of volumes)
provides additional growth trigger. We expect BAL’s volumes to grow by 6% in FY2021 as against flat volumes
expected for the industry. Earnings growth is expected to accelerate to a 9% CAGR over FY2020-FY2022 as
against 3% earnings CAGR over FY2017-FY2019. Hence, we upgrade our recommendation on the stock to
Buy from Hold earlier.
Valuation
Rollover to FY2022 estimates; Upgrade to Buy: We have retained our earnings estimates for FY2021 and
FY2022. BAL is poised to outgrow the 2W industry, given new launches in the domestic market and strong
export growth. We rollover our target multiple to FY2022 earnings and upgrade our recommendation on the
stock to Buy from Hold earlier. Our PT on the stock stands at Rs. 3,575 (earlier Rs. 3,400).

One-year forward P/E (x) band

25.0

20.0

15.0

10.0

5.0

0.0
Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19
Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19
Forward P/E (x) Average P/E (x) Peak P/E (x) Trough P/E (x)

Source: Sharekhan Research

Peer valuation
CMP O/S P/E (x) EV/EBIDTA (x) P/BV (x) RoCE (%)
MCAP
Particulars (Rs / Shares
(Rs Cr) FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
Share) (Cr)
Bajaj Auto 3,101.0 28.93 89,740 18.3 17.0 9.6 8.0 3.3 3.0 18.1 17.9
Hero Motocorp 2,433.0 19.97 48,601 14.8 14.1 8.1 7.5 3.3 3.0 22.3 21.4
TVS Motors 489.0 47.51 23,313 23.0 19.2 11.0 9.4 5.1 4.3 22.1 22.5
Source: Company, Sharekhan Research

January 16, 2020 5

 Stock Update
About company
BAL is the second largest motorcycle manufacturer in India with a market share of about 20%. Over the years,
BAL has created a strong brand not only domestically but also in export markets. Exports currently constitute
about 45% of overall volumes with Africa, Southeast Asia and Latin America amongst the key markets. BAL is
the leader in the premium motorcycle segment having a market share of 41%. Apart from premium motorcycles,
BAL is also the leader in the three-wheeler segment, commanding market share of about 57%. Motorcycles
constitute about 85% of overall volumes, while three-wheelers contribute to 15%

Investment theme
BAL is the market leader in the premium motorcycle segment and three-wheelers. BAL has strongly developed
its brand in key export markets and is currently India’s largest two-wheeler and three-wheeler exporter. BAL
is likely to outgrow the 2W industry given the minimal impact of transition from BS4 to BS6 norms due to
lower inventory levels, higher share of exports and premium motorcycles. BAL management has planned
new launches across segments and aims to increase its market from 19% currently to 24% over the next few
years. Healthy growth in export motorcycles should continue. We upgrade our recommendation to “Buy”
from “Hold” earlier.

Key Risks
ŠŠ BAL derives about 45% of volumes from export markets; hence, it is exposed to forex risks. Any adverse
currency movement in INR/USD can impact profitability.
ŠŠ Any adverse government policy for full switchover to electric vehicles in both the two-wheeler and three
wheeler segments would impact market positioning of the company.
ŠŠ Prolonged slowdown in domestic market can impact the financials

Additional Data
Key management personnel
Rahul Bajaj Chairman Executive
Rajiv Bajaj MD & CEO
Rakesh Sharma Executive Director
Soumen Ray CFO
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Bajaj Holdings & Investment Ltd 33.43
2 Jamnalal Sons Pvt Ltd 8.95
3 Life Insurance Corp of India 4.6
4 Jaya Hind Industries Ltd 3.35
5 Maharashtra Scooters Ltd 2.34
6 Bajaj Sevashram Pvt Ltd 1.54
7 Norges Bank Investment Management 1.38
8 Government Pension Fund 1.38
9 Bachhraj & Co Pvt Ltd 1.26
10 SBI Funds Management 1.14
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

January 16, 2020 6

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