INITIATING COVERAGE REPORT Market Cap. 52 Week H/L CMP Target Price LTD Rs.89,530.2 Cr. Rs.3,289/2,400 Rs.3,093 Rs.4,006 STOCK DATA Best positioned to benefit from the BS-VI transition Bajaj Auto’s product portfolio is diversified across the entry-level and premium bikes segments. The entry level and BUY economy segments are expected to be most affected by the cost increases under the BS-VI regulations, while the Reuters Code BAJA.BO Premium bikes will be less affected. Bajaj Auto deriving ~40% of it’s revenue from Exports provides it a hedge against Bloomberg Code BJAUT IN any declines in volumes during the introductory phase of the BS-VI roll out. Premiumisation of 2-Wheelers to play into Bajaj Auto’s hands BSE Code 532977 NSE Symbol BAJAJ-AUTO The demand for Premium in India is on the rise (the market share of the segment has grown from 15% in FY13 to 24% in FY19) led by a younger demographic with more disposable income and a desire for performance and Face Value Rs. 10 power. Bajaj Auto has a rich portfolio with the multi-variant Pulsar, Dominar, Avenger, KTMs and Husqvarna to cater Shares Outstanding* 289.4 Mn to these needs. Leadership position in export business Avg. Daily Vol. (6m) 471,412 Bajaj Auto is the largest exporter from India with an export market share of ~60% and exporting its Price Performance (%) products to over 70 countries. KTM, which is the fastest growing motorcycle brand in the world, exported 50,408 1M 3M 6M bikes manufactured in India. The company is well prepared for the future with Husqvarna and a JV with Triumph (5) (3) 21 Motorcycles UK. 3-Wheeler business boosted by No Permit regime, outlook positive led by growing demand 200 Days EMA Rs. 2965 3-Wheelers running on Alternate Fuels don’t require a permit. Bajaj Auto is the largest manufacturer of 3-Wheelers in the world with a domestic and export market share of 56.9% and 66.7% respectively. The demand for 3-wheelers will continue to grow as public transport penetrates deeper in the country.

OUTLOOK & VALUATION We have forecasted a Revenue growth of 8.9% CAGR over FY19-22E and derived a revenue of Rs. 39,049.36 Cr for FY22E. We expect the FY22E EPS to be Rs.236 and the PAT margin to be 17.5%. We have assigned a P/E multiple of 17x and arrive at a Target Price of Rs. 4,006 which is an upside of 30% from the current price of Rs. 3,093. We initiate coverage on Bajaj Auto with a BUY rating with an investment horizon of 24-30 months.

Revenue EBITDA PAT NPM REPS P/E P/S P/BV SHARE HOLDING (%) Y/E Mar Promoters 53.5 (Rs. Cr) (Rs. Cr) (Rs. Cr) (%) (Rs.) (x) (x) (x) FII 13.9 FY19 30,250 4,980 4,928 16.3 170 17.94 0.10 3.81 FI/Bank 10.1 FY20E 31,487 4,912 4,932 15.7 170 17.93 0.10 3.37 Body Corporate 4.6 FY21E 34,673 5,790 5,743 16.6 198 15.40 0.09 2.97 Public & Others 17.9 FY22E 39,049 6,990 6,819 17.5 236 12.97 0.08 2.60

Please refer to the disclosure on last page ## Scrips part of Sushil’s Bonanza2 Bajaj Auto Ltd.

INVESTMENT RATIONALE Best positioned to benefit from the BS-VI transition The BS-IV to BS-VI transition will require major upgrades to 2-wheelers. It requires manufacturers to cut emission levels, shift from carburetor based systems to fuel injection systems. Exhaust systems are also needed to be equipped with 3-way catalytic converter system and oxygen sensors. These changes will increase the cost of vehicles by Rs. 6k-14k. However, the 2-wheelers on the lower end of the price spectrum will face the highest increase in prices as they were the least equipped under the BS-IV regulations. The Premium and Super Sport bikes are equipped with richer features and hence come with some of these technologies already. OEMs with a portfolio reliant on Executive motorcycles and scooters have a higher exposure to price rises and hence carry a larger risk of reduced sales. Bajaj Auto’s portfolio consists of 3 Entry-level commuter bikes and the rest are primarily Sport and Premium Sport bikes, which will not see as much of a price increase as the Entry-level and Executive segments. The export business provides a hedge against the domestic risks that all 2- wheeler OEMs face in this transitory phase.

Premiumisation of 2-Wheelers to play into Bajaj Auto’s hands Bajaj Auto is a leading player in the Premium segment, competing with Royal Enfield for market share. The company has a diverse product portfolio with its Pulsars, Dominar, Avengers, KTMs and now Husqvarna as well. The Pulsar brand has multiple variants ranging from 125cc to 220cc engines, which offers something for every buyer. The other motorcycles broadly fall in a similar price range, but are different enough from each other to appeal to all kinds of buyers; Pulsars & Dominar are Sports type, Avenger is Cruiser type, KTMs are Super Sport type and Husqvarna are Café Racer type. This gives Bajaj Auto an advantage over Royal Enfield, whose motorcycles essentially fall in the retro-styled motorcycles. The demand scenario for 2-Wheelers in India is changing, with the Premium segment gaining market share (~24% in FY19, up from 15% in FY13). Factors like a young population with more disposable income wanting a thrilling motorcycle with good performance and richer features and the ease of availing hassle free financing has pushed the demand for Premium motorcycles up. The entry-level segment has also gained market share on account of introduction of higher displacement engines (110cc-125cc) and features like electric start, ABS, Disk Brakes, etc. This has eaten into the market share of the Executive segment which has reduced from 54% in FY13 to 35% in FY19, while the Entry-level’s market share went from 19% in FY13 to 29% in FY19. These developments in the Entry-level segment offer greater value to audiences considering the Executive segment, where they can either buy a motorcycle from the entry-level segment and save some money, or spend a bit more and buy a Sports (150cc) bike from the Premium segment.

Source: Company, Sushil Finance Research

January 27, 2020 3 Bajaj Auto Ltd.

INVESTMENT RATIONALE Leadership position in export business Exports of Bikes and Scooters from India is rising as companies become more competitive in the export market led by favorable policies (Make in India) and strategic alliances by OEMs to acquire technologies and brands. Bajaj Auto is the leader in exports segment among all Indian OEMs with a market share of ~60% and exports to over 70 countries worldwide. The market share has declined over the last few years, from 67.6% in FY15 to 59.2% in FY19, mainly due to restrictions in Egypt and Sri Lanka, which affected the volumes adversely. The exports to countries like Africa, Latin America and ASEAN countries have been doing well. The Sri Lanka market is said to be recovering and the Egyptian business is also expected to turnaround in the coming year.

The future looks even better than the past driven by the following steps taken by Bajaj Auto: • KTM is the fastest growing motorcycle brand in the world. Bajaj Auto manufactures the Duke and RC series for KTM at its Pune plant, which are sold domestically and globally. The KTM growth story should drive the export business of Bajaj Auto going forward. • Bajaj Auto has recently announced a new brand ‘Husqvarna’( Swedish company acquired by KTM) which will sell 2 models, the Vitpilen and Svartpilen from early 2020. These motorcycles will also be manufactured for the export markets, and Bajaj has a vision to grow these to 50,000 units a year by FY22. • Bajaj Auto entered into a JV with Triumph Motorcycles UK to develop and produce motorcycles in the 250-750cc engine displacement range. The bikes will be designed by Triumph and manufactured by Bajaj and will be sold under the Triumph brand. The first model is expected by FY22 and open up further opportunities for the export segment.

3-Wheeler business boosted by No Permit regime, outlook positive led by growing demand In September 2018, the union minister for road transport and highways announced a “no-permit” regime for auto rickshaws run on alternate fuels. The Bajaj Auto manufactured rickshaws and quadricycle are powered by CNG/LPG. Further, permits were released in Maharashtra, Karnataka, Andhra Pradesh and Delhi, which led to increase in 3-wheeler demand. Bajaj Auto is the leader in the 3-Wheeler segment in India enjoying a market share of 56.9% in the domestic market and 66.7% in the export market. The demand for 3-wheelers will continue to grow as public transport penetrates deeper in the country. Bajaj Auto being the largest 3-wheeler manufacturer in the world is well poised to benefit from this increased demand.

Source: Company, Sushil Finance Research

January 27, 2020 4 Bajaj Auto Ltd.

COMPANY OVERVIEW

Bajaj Auto was founded in 1945 and is headquartered in Pune. The company initially manufactured scooters but has gradually shifted its focus on motorcycles. It is the second largest motorcycle manufacturer in India with a market share of ~20%. The company is the leader in the 3- wheeler commercial and goods carrier segment with a market share of ~90%.

Bajaj Auto exports its motorcycles to over 70 countries. Approximately 40% of the company’s revenues come from exports, which it dominates among all Indian 2-wheeler manufacturers. The company’s market share in exports is ~60%.

The company has 3 manufacturing facilities at Waluj and Chakan in Pune and Pantnagar in Uttarakhand. The Waluj plant manufactures Boxer, CT, Platina, Discover, Pulsar and V motorcycles and Passenger Carriers, Goods Carrier and Quadricycle with an annual capacity of 24 Lakh units of motorcycles and 9.3 Lakh units of Commercial Vehicles. The Chakan plant manufactures Pulsar, Avenger, KTM and Dominar with an annual manufacturing capacity of 12 Lakh motorcycles. The third plant at Pantnagar manufactures CT, Platina, Discover, V and Pulsar and has a production capacity of 18 Lakh units per annum. The total Manufacturing Capacity of Bajaj Auto is 63.3 Lakh units per annum. In FY19, the company manufactured 50,19,503 units in FY19 which brings the capacity utilization to 79.3% for FY19.

The company has one subsidiary, Bajaj Auto International Holdings BV (BAIH BV), which is a Netherlands based 100% subsidiary. Through the subsidiary, Bajaj Auto has invested Rs. 1,219 crores in KTM AG of Austria, which is the fastest growing motorcycle brand in the world. Bajaj Auto received Rs. 350 crores as share of profits and Rs. 104 crores as dividend from KTM for last year.

The Promoter Holding for Bajaj Auto stood at 53.52% as on Dec 31st, 2019, while Foreign and Domestic Institutions held 23.98% collectively.

For the year ended 31st March 2019, the company recorded a consolidated turnover of Rs.30,450 Cr, with an EBITDA margin of 16.5% and a net margin of 16.3% resulting into an EPS of Rs.170.31. The company declared a dividend of Rs.60 per share.

Source: Company, Sushil Finance Research

January 27, 2020 5 Bajaj Auto Ltd.

BUSINESS OVERVIEW

The Bajaj motorcycles are sold under the following 7 brands: The 7 Brands of Bajaj Auto are positioned Products Price (Rs.) Products Price (Rs.) Products Price (Rs.) over the Entry- level and Sports Segments. The CT100 series, Platina series and Dominar 400 190,000 Avenger Platina Discover Series make up the Entry-level Cruise 220 105,088 Platina 100 ES 48,429 segments. Pulsar Street 220 105,288 Platina 100 KS 40,896 The Pulsars and Avenger series have RS200 141,933 Street 160 83,251 Platina 110 50,899 made Bajaj Auto the leader in the Sports NS200 114,355 Platina 110 H Gear 56,371 segment. NS160 94,195 V15, V12 66,739 The Super Sports segment consists of the 220F 108,326 CT Dominar, the Pulsar RS200 and the KTM 150 85,958 Discover CT100 ES 41,837 range. 150 Twin Disc 89,837 Discover 125 62,253 CT100 KS 33,997 125 Neon 63,616 Discover 110 53,811 CT110 ES 44,352 These brands offer something for 150 Neon 75,200 CT110 KS 39,994 everyone with the cheapest model 180F Neon 96,390 starting at Rs. 33,997 (ex-showroom Delhi) going all the way to above Rs. 2 lakhs with the KTM models.

The company recognizes the opportunity which lies ahead in the Sports and Super Sports segment as young people’s preferences have gone from Fuel Economy to Performance and Power. Bajaj Auto is well equipped to serve these demographics with their upper end Pulsars, upgraded Dominars and KTMs and soon to be launched Husqvarna motorcycles.

Source: Company, Sushil Finance Research

January 27, 2020 6 Bajaj Auto Ltd.

BUSINESS OVERVIEW

• KTM AG is the Premium Sports Bike offering from the Bajaj Auto stable. Bajaj Auto owns ~48% stake in the company through its Subsidiary company Bajaj Auto International Holdings BV (BAIH BV).

• KTM AG was founded in 1934 in Austria, and engages in the development, production and distribution of motorcycles in the off-road, sport mini-cycles, street bikes, x-bow, and motorcycle parts and accessories.

• The company sold over 50,000 bikes in India in FY19 making India the largest market for KTM in the world. The Duke 125 was launched in Q3 FY19, positioned as an entry level KTM. The Duke 125 is targeted at young customers who are first time purchasers of premium sports bikes.

• The company is in the process of launching the new Adventure series of bikes in India. 60,000 50,705 • KTMs are sold through a dealership network of 460 50,000 46,321 showrooms across the country, which is the largest network 40,000 34,970 for any premium sports bike brand. 30,362 30,000 22,627 • During FY19 Bajaj Auto manufactured 99,862 units of KTM 20,000 Duke at its Chakan Plant out of which 50,705 units were sold 11,050 in India and 50,408 units were exported. 10,000 7,399

- FY13 FY14 FY15 FY16 FY17 FY18 FY19

Volumes Source: Company, Sushil Finance Research

January 27, 2020 7 Bajaj Auto Ltd.

BUSINESS OVERVIEW The Road Ahead… • KTM acquired Husqvarna AG of Sweden in 2013 from BMW. Husqvarna produces a diverse range of , and machines. The company is preparing its re- entry into the street bikes market with the Vitpilen and Svartpilen Motorcycles .

• Starting 2020, Bajaj Auto will sell Husqvarna motorcycles through KTMs Pro-Biking dealership network in India. The company plans to build the Husqvarna brand similar to the KTM brand in India. The above images show us the different appeal of KTM and Husqvarna • Bajaj Auto has also partnered with Triumph Motorcycles to motorcycles from the Bajaj branded motorcycles, where the KTMs are develop and manufacture Motorcycles with mid to high more sport bike like and Husqvarna bikes have a more retro street bike displacement engines (350cc-700cc range). look. Also notice how different they are to the Pulsars, Avenger and Dominar • The motorbike will be designed and developed by Triumph Sport bikes from Bajaj Auto. and manufactured by Bajaj Auto at its Chakan plant. The bikes will be sold by Triumph through their dealership network while Bajaj will sell it in some international markets. The first products from this collaboration are expected to be launched in the next 2-3 years.

• Bajaj Auto launched its first electric scooter, the Chetak, for a price in the range of Rs.1-1.15 Lakhs. The scooter will use a 4kW electric motor, powered by a lithium ion battery and will offer a range of close to 100 kilometers on a single charge. The Chetak will also be sold through the company’s Pro-biking dealerships. The Electric Scooter Chetak

Source: Company, Sushil Finance Research

January 27, 2020 8 Bajaj Auto Ltd.

BUSINESS OVERVIEW Motorcycles Industry performance vis-à-vis Bajaj Auto Motorcycles Domestic Sales Motorcycles Export Sales Year End Total Sales Sales % BJAuto Sales BJAuto % BJAuto Total Export Export % BJAuto Export BJAuto % BJAuto (nos.) Growth nos. Growth Market Share (nos.) Growth nos. Growth Market Share

2015 10,743,549 2.50% 1,770,778 -15.60% 16.50% 2,251,791 13.60% 1,521,306 15.00% 67.60%

2016 10,700,466 -0.40% 1,898,957 7.20% 17.70% 2,208,932 -1.90% 1,459,295 -4.10% 66.10%

2017 11,094,543 3.70% 2,001,391 5.40% 18.00% 2,025,529 -8.30% 1,218,541 -16.50% 60.20%

2018 12,613,241 13.70% 1,974,577 -1.30% 15.70% 2,483,297 22.60% 1,394,757 14.50% 56.20%

2019 13,599,678 7.80% 2,541,320 28.70% 18.70% 2,865,851 15.40% 1,695,553 21.60% 59.20%

14,000 46.2% 50.0% 44.1% 41.6% 40.1% 45.0% Bajaj Auto has slowly increased its domestic market 12,000 39.3% 36.9% 40.0% share from 16.5% in FY15 to 18.7% in FY19. However, 34.2% 34.4% 10,000 their real strength lies in their domination of the exports 35.0% 28.0%

segment, the market share in which has declined from 8,000 30.0%

67.6% in FY15 to 59.2% in FY19, mainly on account of 25.0%

rising competition but still is quite dominant. 6,000

20.0%

11,845

9,773 9,758

9,703 15.0%

To the right we can see the Exports sales of Bajaj auto 4,000

8,147

7,880

which have increased from 28% of total sales in FY11 to 7,108 6,897

10.0%

40.1% of total sales in FY19. 2,000 4,341

5.0% Exports of Bajaj Auto for FY19 stood at Rs. 11,845 Cr. - 0.0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Export Revenue and Exports as a % of Sales Source: Company, Sushil Finance Research

January 27, 2020 9 Bajaj Auto Ltd.

BUSINESS OVERVIEW • The Commercial Vehicles business of Bajaj Auto consists of 3-wheeler passenger carriers and 3 wheeler goods carriers. Bajaj Auto is the world’s largest manufacturer and seller of 3-wheelers. • In FY19, Bajaj Auto’s 3-wheeler sales grew by more than 22% YoY selling 777,603 units; a record for the company. The domestic sales grew by 8% YoY to 398,826 units and exports increased by over 42% to 378,777 units. • The market share for Domestic Commercial 3-wheelers stood at 56.9%, with a dominant market leadership in the passenger vehicles segment. • Bajaj Auto also had sales of 66.7% of all 3-wheelers exported from India. • Bajaj Auto entered the goods carrier business just 3 years ago. Domestic sales for FY19 stood at 30,618 units and accounted for a market share of 24%. • The quadricycle QUTE was launched in 4 states: Kerala, Gujarat, Odisha and Rajasthan and sold 627 units in the domestic market. Total Sales Domestic Sales Export Sales Volumes FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19 Passenger Carriers Industry Sales 671,034 894,234 1,133,908 402,034 517,423 572,392 269,000 376,811 561,516 BJAuto Sales 431,022 612,590 745,254 240,064 346,846 368,208 190,958 265,744 377,046 BJAuto Market Share 64.20% 68.50% 65.70% 59.70% 67.00% 64.30% 71.00% 70.50% 67.10%

Goods Carriers Industry Sales 112,518 122,466 134,792 109,624 118,275 128,619 2,894 4,191 6,173 BJAuto Sales 13,440 23,262 32,349 13,162 22,791 30,618 278 471 1,731 BJAuto Market Share 11.90% 19.00% 24.00% 12.00% 19.30% 23.80% 9.60% 11.20% 28.00%

Total Three Wheelers Industry Sales 783,552 1,016,700 1,268,700 511,658 635,698 701,011 271,894 381,002 567,689 BJAuto Sales 444,462 635,852 777,603 253,226 369,637 398,826 191,236 266,215 378,777 BJAuto Market Share 56.70% 62.50% 61.30% 49.50% 58.10% 56.90% 70.30% 69.90% 66.70% Source: Company, Sushil Finance Research

January 27, 2020 10 Bajaj Auto Ltd.

RECENT QUARTER

Net Sales for the quarter stood at Rs. 7,707 Cr, as against Rs. 8,036 Cr in the corresponding quarter last year, a decrease of 4% YoY; and against Rs. 7,756 Cr in the previous quarter, a decrease of 1% QoQ.

EBITDA for the quarter was Rs. 1,278 Cr as against Rs. 1,414 Cr in Q2 FY19, down by 10% on a YoY basis; and against Rs. 1,198 Cr in the previous quarter, an increase of 7% QoQ.

EBITDA margin for Q2FY20 was 16.6%, down by 101 Bps on a YoY basis and up by 113 Bps on a QoQ basis.

Net Income for Q2FY20 stood at Rs. 1,402 Cr with a net margin of 18.2% as against Rs. 1,152 Cr in the corresponding quarter last year, up by 22% YoY; and against Rs. 1,126 Cr in the previous quarter, up by 25% QoQ.

Particulars Q2FY20 Q2FY19 YoY Q1FY20 QoQ Revenue 7,707 8,036 -4% 7,756 -1% Cost of Goods Sold 5,437 5,784 -6% 5,564 -2% Employee Benefit Expenses 338 312 8% 361 -6% Other Expenses 654 526 24% 633 3% EBITDA 1,278 1,414 -10% 1,198 7% EBITDA margin 16.6% 17.6% -101 Bps 15.4% 113 Bps Depreciation 61 72 -14% 60 2% Interest expense 1 0 300% 1 130% PBT 1,609 1,653 -3% 1,579 2% PBT margin 20.9% 20.6% 31 Bps 20.4% 52 Bps Tax expense 206 500 -59% 453 -54% PAT 1,402 1,152 22% 1,126 25% PAT margin 18.2% 14.3% 386 Bps 14.5% 368 Bps EPS 48.50 39.80 22% 38.90 25% Source: Company, Sushil Finance Research

January 27, 2020 11 Bajaj Auto Ltd.

Profit & Loss Statement (Rs. Cr.) Balance Sheet (Rs. Cr.)

Y/E Mar. FY19 FY20E FY21E FY22E Y/E Mar. FY19 FY20E FY21E FY22E Revenue 30,250 31,487 34,673 39,049 PP&E (incl. CWIP) 1,700 1,952 2,160 2,355 Raw Material Cost 21,824 22,986 24,964 27,725 Other Non-Current 20,061 21,100 22,190 23,845 Employee Cost 1,257 1,322 1,456 1,640 Inventories 962 1,532 1,314 1,320 Trade Receivables Other Expenses 2,189 2,267 2,462 2,694 2,560 2,624 2,667 2,789

EBITDA 4,980 4,912 5,790 6,990 Cash and Bank Balances 933 1,140 1,227 1,383 EBITDA Margin (%) 16% 16% 17% 18% Other Current Assets 2,619 3,740 6,499 9,218 Depreciation 266 315 347 390 Total Assets 28,834 32,089 36,058 40,911 EBIT 4,714 4,597 5,444 6,599 Equity Share Capital 289 289 289 289

EBIT Margin (%) 16% 15% 16% 17% Reserves & Surplus 22,944 25,967 29,482 33,755 Finance Costs 4 5 5 6 Borrowings (LT) - - - - Other Income 1,555 1,606 1,803 2,031 Other Non-Current Liabilities 727 727 727 727 Profit before Tax 6,956 6,576 7,658 9,093 Trade Payables 3,787 3,929 4,231 4,621 Tax Expense 2,028 1,644 1,914 2,273 Other Financial Liabilities 371 419 476 540 Net Profit 4,928 4,932 5,743 6,819 Other Current Liabilities 560 601 696 823 Net Margin (%) 16% 16% 17% 17% Current Tax Liab & Provisions 156 156 156 156 EPS 170.31 170.44 198.47 235.67 Total Liabilities 28,834 32,089 36,058 40,911

Source: Company, Sushil Finance Research

January 27, 2020 12 Bajaj Auto Ltd.

Cash Flow Statement (Rs. Cr.) Financial Ratio Statement Y/E Mar. FY19 FY20E FY21E FY22E Y/E Mar. FY19 FY20E FY21E FY22E PBT 6,956 6,576 7,658 9,093 Growth (%) Depreciation 266 315 347 390 Revenue 19.9% 4.1% 10.1% 12.6% Interest 4 5 5 6 EBITDA 3.0% -1.4% 17.9% 20.7% CFO before Working Cap chg 7,227 6,896 8,009 9,489 Net Profit 16.8% 0.1% 16.4% 18.7% Chg in Inventories (219) (571) 218 (6) Chg in Investments 4,189 (943) (2,682) (2,609) Profitability (%) Chg in Trade Receivables (1,068) (64) (43) (122) EBITDA Margin 16.5% 15.6% 16.7% 17.9% Chg in Other Current Assets (550) (179) (77) (110) Net Profit Margin 16.3% 15.7% 16.6% 17.5% Chg in Trade Payables 542 142 302 390 ROCE 19.7% 17.0% 17.8% 19.0% Chg in Other Fin Liabilities 42 48 57 64 ROE Chg in Other Current Liabilities 163 41 95 127 21.2% 18.8% 19.3% 20.0% Income Taxes Paid (2,028) (1,644) (1,914) (2,273) Other Adjustments (5,792) - - - Per Share Data (Rs.) Cash Flow from Operations 2,487 3,727 3,965 4,949 EPS 170 170 198 236 BVPS 803 907 1,029 1,176 Other Non-Current Liabilities (0) 0 0 0 Interest Paid (4) (5) (5) (6) Valuation (x) Dividend Paid (1,910) (1,910) (2,228) (2,546) P/E 17.9 17.9 15.4 13.0 Other Adjustments (282) - - - P/BV 3.8 3.4 3.0 2.6 Cash Flow from Financing (2,074) (1,914) (2,233) (2,552) EV/EBITDA 17.6 17.8 15.1 12.5 P/SALES 0.10 0.10 0.09 0.08 Capital Expenditure (134) (567) (555) (586)

Investment in Subsidiaries (137) (42) (170) (285) Turnover Investments (5,760) (958) (885) (1,321) Inventory days 16 24 19 17 Other Non-Current Assets 50 (40) (35) (48) Debtor days 31 30 28 26 Other Adjustments 5,798 - - - Creditor days Cash Flow from Investing (338) (1,606) (1,645) (2,240) 63 62 62 61

Opening Cash 776 916 1,122 1,209 Free Cash Flow to the Firm 8,269 3,267 3,669 4,596 Total Cash Flow 74 207 87 156 Closing Cash 916 1,122 1,209 1,366 Free Cash Flow to Equity 8,126 3,057 3,578 4,435 Source: Company, Sushil Finance Research January 27, 2020 13 Bajaj Auto Ltd.

MARKET INFORMATION

20 28 18 23 16 14 18 12 13 10 8 8 1/23/2017 1/23/2018 1/23/2019 1/23/2020 1/23/2017 1/23/2018 1/23/2019 1/23/2020 EV/EBITDA Price/Earning

45,000 3,600 3,400 40,000 3,200 3,000 35,000 2,800 2,600 30,000 2,400 2,200

25,000 2,000

1/23/2017 2/23/2017 3/23/2017 4/23/2017 5/23/2017 6/23/2017 7/23/2017 8/23/2017 9/23/2017 1/23/2018 2/23/2018 3/23/2018 4/23/2018 5/23/2018 6/23/2018 7/23/2018 8/23/2018 9/23/2018 1/23/2019 2/23/2019 3/23/2019 4/23/2019 5/23/2019 6/23/2019 7/23/2019 8/23/2019 9/23/2019 1/23/2020

10/23/2017 11/23/2017 12/23/2017 10/23/2018 11/23/2018 12/23/2018 10/23/2019 11/23/2019 12/23/2019 BSE Sensex Bajaj Auto

Source: Company, Sushil Finance Research

January 27, 2020 14 Bajaj Auto Ltd.

OUTLOOK & VALUATION India is the largest 2-Wheeler market in the world. The market dynamics are shifting from a commuter perspective to a performance oriented mindset, which is evident in the changing segment mix, where the Economy segment is losing ground to the Premium segment as people choose powerful and feature rich motorcycles over basic point to point units.

The Auto Industry has seen a sharp decline in demand during the last year. This was mainly due to the NBFC crisis, which made financing an issue. This was coupled with the economic slowdown, which further impacted demand and lastly the introduction of BS-VI regulations led to confusion among buyers. Some people held off their purchases anticipating discounts when OEMs try to clear their unsold BS-IV inventory. The Government’s push for electrification of vehicles in the country has also somewhat contributed to customer’s confusion. However, we believe it will take longer than expected for EVs to dominate the 2-wheeler market.

Bajaj Auto has the strongest portfolio of Premium bikes and is chasing Royal Enfield’s Bullets for market leadership. The company has strategically differentiated its brands to appeal to all kinds of buyers. The company is the leader in motorcycle exports from the country and is also the largest producer of 3-wheelers in the world.

We have forecasted a Revenue growth of 8.9% CAGR over FY19-22E and derived a revenue of Rs. 39,049.36 Cr for FY22E. We expect the FY22E EPS to be Rs. 236 and the PAT margin to be 17.5%. We have assigned a P/E multiple of 17x and arrive at a Target Price of Rs. 4,006 which is an upside of 30% from the current price of Rs. 3,093. We initiate coverage on Bajaj Auto with a BUY rating with an investment horizon of 24-30 months.

Risks & Concerns

• Change in customer preferences for International products- many Foreign OEMs are entering the sub 250cc segment. • Increase in prices of raw materials can adversely impact margins. • Foreign Exchange Risk- as around 40% of the revenue comes from exports. • 3-wheelers business faces a risk from Electrification if the company cannot adapt to the technology.

Source: Company, Sushil Finance Research

January 27, 2020 15 Bajaj Auto Ltd.

Research Associate SALES Dhruvin Upadhyay | +91 22 4093 4082 Devang Shah | +91 22 4093 6060/62 [email protected] [email protected]

Rating Scale This is a guide to the rating system used by our Institutional Research Team. Our rating system comprises of six rating categories, with a corresponding risk rating.

Risk Rating Risk Description Predictability of Earnings / Dividends; Price Volatility Low Risk High predictability / Low volatility Medium Risk Moderate predictability / volatility High Risk Low predictability / High volatility

Total Expected Return Matrix Rating Low Risk Medium Risk High Risk Buy Over 15 % Over 20% Over 25% Accumulate 10 % to 15 % 15% to 20% 20% to 25% Hold 0% to 10 % 0% to 15% 0% to 20% Sell Negative Returns Negative Returns Negative Returns Neutral Not Applicable Not Applicable Not Applicable Not Rated Not Applicable Not Applicable Not Applicable

Please Note • Recommendations with “Neutral” Rating imply reversal of our earlier opinion (i.e. Book Profits / Losses). • ** Indicates that the stock is illiquid With a view to combat the higher acquisition cost for illiquid stocks, we have enhanced our return criteria for such stocks by five percentage points. • Stock Review Reports: These are Soft coverage’s on companies where Management access is difficult. Views and recommendation on such companies may not necessarily be based on management meeting but may be based on the publicly available information and/or attending Company AGMs. Hence Stock Reviews may be just one-time coverage’s with an occasional Update, wherever possible. … January 27, 2020 16 Bajaj Auto Ltd.

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Analyst Stock Ownership No Stock Recommended to Clients Yes Sushil Financial Services Private Limited Remuneration/Benefits received from company in 12 months No Member : BSE / NSE - SEBI Regn. No. INZ000165135 Research Analyst – SEBI Registration No. INH000000867 Merchant Banking Market Making activities / projects No Regd. Office : 12, Homji Street, Fort, Mumbai 400 001. Sushil Financial Services Pvt. Ltd and Group Companies Holding Yes Phone: +91 22 40936000 Fax: +91 22 22665758 Sushil Financial Services Pvt. Ltd and Group Directors Holding Yes Email : [email protected] Broking Relationship with the company covered No

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