Automobiles Two Wheelers – Motorcycle Segment Stages a Comeback

Automobiles Two Wheelers – Motorcycle segment stages a comeback

November 16, 2012 Scooter segment accounted for 21.7% of the two‐wheeler market in Oct’12: Led by new launches from Honda (Dio), Hero (Maestro), TVS (Pep+) and Suzuki Surjit Arora (Swish), the scooter segment grew at a faster clip of 32.4%YoY in the month of [email protected] Oct’12 as against the 6.7% YoY growth in the motorcycle segment. For April- +91-22-66322235 Oct’12, the scooter segment registered a growth of 22.3%, with an estimated growth of 16.7% for FY13E. The faster volume growth of the scooter segment Update lead to a 300bps improvement in its share to 21.0% of the two-wheeler market for YTD FY13E. The main drivers for this growth are (a) growing acceptability of gearless scooters, particularly by women, (b) rising urbanization and increasing

Sensex v/s. Hero Motocorp & Bajaj Auto proportion of working women, (c) comparatively lower base and (d) new Sector

Sensex Hero Motocorp launches. We expect 14-15% CAGR in scooter volumes for the next three years. Bajaj Auto 120 Motorcycle segment stages a comeback with a 6.7% YoY growth in Oct’12: In 115 the last couple of months, three new bikes have been launched in this segment 110 105 – Suzuki’s 110cc ‘Hayate’, Honda’s 110cc ‘Dream Yuga’ and the most recent 100 Hero’s 125cc ‘Ignitor’. While ‘Hayate’ marks Suzuki's maiden entry into the mass 95 90 segment, with ‘Dream Yuga’, Honda now has a second offering in the mass 85 commuter segment, a product having austere looks and styling. For the month 80 of Oct’12, motorcycle segment grew by 6.7% YoY despite flattish volumes by

Jul-12 Hero Motocorp (HMCL). This was mainly on account of 69.4% YoY growth Jan-12 Sep-12 Nov-11 Nov-12 Mar-12 May-12 registered by HMSI. For April-Oct’12, the segment reported flattish numbers, Source: Bloomberg with an estimated growth of 4.0% for FY13E led by the new launches.

Honda Motorcycle and Scooter India (HMSI) gains 440bps market share in the Stock Performance motorcycle segment: In the motorcycles segment, HMSI is banking on the (%) 1M 6M 12M success of its newly launched 110cc bike ‘Dream Yuga’ with a target of 3.0m Sensex (0.6) 15.2 10.1 units in FY13E, thereby, translating into an incremental volumes of Auto 4.0 11.3 20.0 25,000/month. HMSI reported a growth of 69.4% YoY to 111,235 units, as against a 6.7% YoY growth in the motorcycle segment in Oct’12. As a result, it Bajaj Auto 4.8 13.7 6.4 gained market share to the tune of 440bps to 11.9%. For YTD FY13E, HMSI’s Hero Motocorp 2.3 (2.4) (12.6) market share improved by 450bps to 11.5%, whereas HMCL lost market share to the tune of 240bps to 52.8%. Stock Data HMCL gains 460bps in scooter segment market share: Led by the success of CMP (Rs) TP (Rs) PE (x) recently launched ‘Maestro’, HMCL reported a growth of 71.7% YoY to 56,039 FY13E FY14E units, as against a 32.4% YoY growth in the scooter segment in Oct’12. As a Bajaj Auto 1,836 1,916 17.1 14.5 result, it gained market share to the tune of 460bps to 20.1%. For YTD FY13E, Hero Honda 1,840 1,768 16.2 14.6 HMCL’s market share improved by 100bps to 17.2%, whereas HMSI maintained its lead with a 470bps gain in market share to 49.8% (led by New ‘Activa’) How we differ from Consensus Upside in stock price capped; Prefer Bajaj Auto over Hero Motocorp (HMCL): EPS (Rs) PL Cons. % Diff. We believe Bajaj Auto is likely to outperform HMCL in the near-to-medium Bajaj Auto term. With exports, three-wheeler and spares (higher margin business) 2013 107.6 110.6 ‐2.7 2014 126.7 129.8 ‐2.4 accounting for ~50% of its FY14E turnover, we believe Bajaj Auto’s margins are set to improve. With earnings CAGR of 9.0% as against 6.5% for HMCL for FY12- Hero Motocorp FY14E period, we believe the valuations at 14.5x FY14E EPS for Bajaj Auto seems 2013 113.9 117.6 ‐3.2 attractive as against similar valuation for HMCL. Maintain ‘Accumulate’ on Bajaj 2014 126.3 129.1 ‐2.2 Auto and ‘Reduce’ on HMCL.

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

Automobiles

Exhibit 1: Two‐ Wheeler sector snapshot Avg. Domestic Monthly Sales Key New Launches Scooter (FY13E) Motorcycle (FY13E) Share in Market Share Share in Market Share Scooters Motorcycles Scooters Motorcycles portfolio (%) (%) portfolio (%) (%) 110cc Passion 110cc - Hero Motocorp 36,253 480,912 X Pro 125cc - 8.5% 17.6% 91.5% 53.7% Maestro Ignitor Discover 125 Bajaj Auto NA 204,756 NA ST Pulsar NA NA 65.0% 24.2% 200 NS Honda Motorcycles & 110cc Dio 110cc Dream 121,690 90,752 54.5% 50.9% 45.5% 11.8% Scooters India 110cc Activa Yuga 100cc TVS 125cc new TVS Motor 36,512 44,719 27.6% 15.8% 31.1% 5.2% Qube Bike Source: Company Data, PL Research

New Launches

Scooter

Hero’s ‘Maestro’ Honda’s ‘Dio’ Suzuki’s ‘Swish’

Motorcycles

Hero’s ‘Ignitor’ Honda’s ‘Dream Yuga’ Bajaj’s 125 ST ‘Discover’

November 16, 2012 2

Automobiles

Exhibit 2: Domestic Scooter Segment – Market Share Companies Oct’11 Oct’12 Apr‐Oct’11 Apr‐Oct’12 Hero MotoCorp Ltd 32,638 56,039 225,199 293,225 YoY gr. (%) 71.7 30.2 MS (%) 15.5 20.1 16.2 17.2 Honda Motorcycle & Scooter India (Pvt) Ltd 106,154 124,827 627,025 847,925 YoY gr. (%) 17.6 35.2 MS (%) 50.3 44.7 45.1 49.8 Mahindra Two Wheelers Ltd 17,933 11,139 92,168 69,827 YoY gr. (%) (37.9) (24.2) MS (%) 8.5 4.0 6.6 4.1 Suzuki Motorcycle India Pvt Ltd 9,793 27,354 144,996 191,375 YoY gr. (%) 179.3 32.0 MS (%) 4.6 9.8 10.4 11.2 TVS Motor Company Ltd 44,550 43,066 302,170 265,652 YoY gr. (%) (3.3) (12.1) MS (%) 21.1 15.4 21.7 15.6 Total 211,068 279,427 1,391,558 1,701,474 YoY gr. (%) 32.4 22.3

Source: SIAM, PL Research

November 16, 2012 3

Automobiles

Exhibit 3: Domestic Motorcycle Segment ‐ Market Share Companies Oct’11 Oct’12 Apr‐Oct’11 Apr‐Oct’12 Bajaj Auto Ltd 244,503 261,771 1,552,349 1,482,136 YoY gr. (%) 7.1 (4.5) MS (%) 27.9 28.0 26.4 25.1 Hero MotoCorp Ltd 461,563 459,203 3,248,023 3,116,266 YoY gr. (%) (0.5) (4.1) MS (%) 52.6 49.1 55.2 52.8 Honda Motorcycle & Scooter India (Pvt) Ltd 65,660 111,235 411,992 678,523 YoY gr. (%) 69.4 64.7 MS (%) 7.5 11.9 7.0 11.5 India Yamaha Motor Pvt Ltd 38,229 27,119 210,856 186,844 YoY gr. (%) (29.1) (11.4) MS (%) 4.4 2.9 3.6 3.2 Royal Enfield (Unit of Eicher Ltd) 6,793 10,247 43,929 65,892 YoY gr. (%) 50.8 50.0 MS (%) 0.8 1.1 0.7 1.1 Suzuki Motorcycle India Pvt Ltd 1,463 8,851 30,709 51,468 YoY gr. (%) 505.0 67.6 MS (%) 0.2 0.9 0.5 0.9 TVS Motor Company Ltd 58,959 57,607 389,629 324,955 YoY gr. (%) (2.3) (16.6) MS (%) 6.7 6.2 6.6 5.5 Total 877,270 936,122 5,887,587 5,906,712 YoY gr. (%) 6.7 0.3

Source: SIAM, PL Research

November 16, 2012 4

Bajaj Auto – Accumulate – CMP: Rs1,836 – TP: Rs1,916 Automobiles

Income Statement (Rs m) Balance Sheet Abstract (Rs m) Y/e March 2011 2012 2013E 2014E Y/e March 2011 2012 2013E 2014E Net Revenue 163,982 195,290 207,254 235,617 Shareholder's Funds 49,102 60,411 74,749 93,168 Raw Material Expenses 117,975 141,027 146,721 165,625 Total Debt 3,252 975 975 975 Gross Profit 46,007 54,263 60,533 69,992 Other Liabilities 297 484 484 484 Employee Cost 4,936 5,446 5,944 6,513 Total Liabilities 52,651 61,870 76,208 94,627 Other Expenses 9,359 11,663 13,100 14,673 Net Fixed Assets 15,483 14,913 15,480 15,493 EBITDA 31,713 37,154 41,489 48,806 Goodwill — — — — Depr. & Amortization 1,228 1,456 1,551 1,605 Investments 47,952 48,828 51,828 54,828 Net Interest 17 222 50 50 Net Current Assets (10,827) (2,192) 8,579 23,986 Other Income 13,011 4,740 4,000 4,600 Cash & Equivalents 5,565 16,553 19,616 41,140 Profit before Tax 43,478 40,215 43,888 51,751 Other Current Assets 23,161 30,196 33,366 40,088 Total Tax 10,110 10,215 12,741 15,096 Current Liabilities 39,553 48,941 44,403 57,242 Profit after Tax 33,368 30,001 31,147 36,655 Other Assets 43 320 320 320 Ex-Od items / Min. Int. 7,246 (1,340) — — Total Assets 52,651 61,870 76,208 94,627 Adj. PAT 26,123 31,341 31,147 36,655 Avg. Shares O/S (m) 289.4 289.4 289.4 289.4 EPS (Rs.) 90.3 108.3 107.6 126.7

Cash Flow Abstract (Rs m) Quarterly Financials (Rs m) Y/e March 2011 2012 2013E 2014E Y/e March Q3FY12 Q4FY12 Q1FY13 Q2FY13 C/F from Operations 20,136 27,806 25,037 44,682 Net Revenue 49,859 47,019 49,557 50,496 C/F from Investing (6,966) 629 (5,118) (4,618) EBITDA 9,841 9,711 9,617 9,924 C/F from Financing (8,620) (17,446) (16,855) (18,541) % of revenue 19.7 20.7 19.4 19.7 Inc. / Dec. in Cash 4,550 10,988 3,064 21,524 Depr. & Amortization 321 434 352 410 Opening Cash 1,015 5,565 16,552 19,616 Net Interest — 18 — — Closing Cash 5,565 16,552 19,616 41,140 Other Income 1,681 890 920 895 FCFF 29,872 35,119 22,873 42,760 Profit before Tax 10,612 10,352 10,184 10,409 FCFE 19,738 32,843 22,873 42,760 Total Tax 2,660 2,631 3,000 3,000 Profit after Tax 7,952 7,720 7,184 7,409 Adj. PAT 8,540 7,518 7,184 7,409

Key Financial Metrics Key Operating Metrics Y/e March 2011 2012 2013E 2014E Y/e March 2011 2012 2013E 2014E Growth 2W Domestic Vol. (nos) 2,414,603 2,566,757 2,520,365 2,721,994 Revenue (%) 37.6 19.1 6.1 13.7 2W Export Vol. (nos) 972,437 1,267,648 1,390,060 1,598,569 EBITDA (%) 22.3 17.2 11.7 17.6 3W Domestic Vol. (nos) 206,884 202,979 225,123 234,133 PAT (%) 40.1 20.0 (0.6) 17.7 3W Export Vol. (nos) 230,000 312,176 270,032 310,537 EPS (%) 40.1 20.0 (0.6) 17.7 Total Vol. (nos) 3,823,924 4,349,560 4,405,580 4,865,234 Profitability Net Realization/Unit (Rs) 42,883 44,899 47,118 48,491 EBITDA Margin (%) 19.3 19.0 20.0 20.7 RM Cost/Unit (Rs) 30,852 32,423 33,349 34,043 PAT Margin (%) 15.9 16.0 15.0 15.6 EBITDA/Unit (Rs) 8,293 8,542 9,441 10,094 RoCE (%) 55.0 55.4 45.5 43.2 Net Profit /Unit (Rs) 6,839 7,204 7,090 7,597 RoE (%) 66.7 57.2 46.1 43.7 Tyres & Tubes (Rs m) 5,143 6,732 6,401 7,079 Balance Sheet Other Comp./Unit (Rs) 27,859 28,971 29,695 30,289 Net Debt : Equity — (0.3) (0.2) (0.4) Employee Cost (Rs m) 4,936 5,446 5,944 6,513 Net Wrkng Cap. (days) (50) (45) (36) (47) Advertisement (Rs m) 817 1,603 2,100 2,550 Valuation Tax Rate (%) 23.2 25.4 29.0 29.0 PER (x) 20.3 16.9 17.1 14.5 Source: Company Data, PL Research.

P / B (x) 10.8 8.8 7.1 5.7 EV / EBITDA (x) 16.7 13.9 12.4 10.1 EV / Sales (x) 3.2 2.6 2.5 2.1 Earnings Quality Eff. Tax Rate 23.3 25.4 29.0 29.2 Other Inc / PBT 15.9 14.6 9.1 8.9 Eff. Depr. Rate (%) 3.6 4.3 4.3 4.3 FCFE / PAT 75.6 104.8 73.4 116.7 Source: Company Data, PL Research.

November 16, 2012 5

Hero Motocorp – Reduce – CMP: Rs1,840 – TP: Rs1,768 Automobiles

Income Statement (Rs m) Balance Sheet Abstract (Rs m) Y/e March 2011 2012 2013E 2014E Y/e March 2011 2012 2013E 2014E Net Revenue 194,012 235,790 241,192 273,932 Shareholder's Funds 29,561 42,898 59,860 74,491 Raw Material Expenses 141,111 172,816 175,497 198,579 Total Debt 357 380 380 380 Gross Profit 52,901 62,974 65,696 75,353 Other Liabilities 17,178 12,197 7,467 — Employee Cost 6,189 7,355 8,371 9,208 Total Liabilities 47,096 55,475 67,707 74,871 Other Expenses 16,908 19,572 21,659 24,610 Net Fixed Assets 41,302 38,244 59,954 73,189 EBITDA 29,804 36,047 35,665 41,534 Goodwill — — — — Depr. & Amortization 7,657 10,973 12,290 13,765 Investments 51,288 39,643 34,643 29,643 Net Interest (19) (79) 100 125 Net Current Assets (45,493) (22,411) (26,889) (27,961) Other Income 2,681 3,494 4,000 4,400 Cash & Equivalents 715 768 1,358 2,440 Profit before Tax 24,847 28,648 27,276 32,045 Other Current Assets 13,959 20,235 22,948 27,102 Total Tax 4,770 4,865 4,533 6,831 Current Liabilities 60,167 43,414 51,195 57,503 Profit after Tax 20,077 23,783 22,742 25,214 Other Assets — — — — Ex-Od items / Min. Int. 1,596 — — — Total Assets 47,096 55,475 67,707 74,871 Adj. PAT 20,077 23,783 22,742 25,214 Avg. Shares O/S (m) 199.7 199.7 199.7 199.7 EPS (Rs.) 100.5 119.1 113.9 126.3

Cash Flow Abstract (Rs m) Quarterly Financials (Rs m) Y/e March 2011 2012 2013E 2014E Y/e March Q3FY12 Q4FY12 Q1FY13 Q2FY13 C/F from Operations 35,537 47,531 40,410 41,487 Net Revenue 60,315 60,349 62,473 51,875 C/F from Investing (43,911) (20,050) (30,000) (23,000) EBITDA 9,430 9,252 9,369 7,192 C/F from Financing (9,982) (27,428) (9,820) (17,405) % of revenue 15.6 15.3 15.0 13.9 Inc. / Dec. in Cash (18,357) 53 590 1,082 Depr. & Amortization 2,987 2,804 3,035 2,895 Opening Cash 19,072 715 768 1,358 Net Interest (32) 29 29 30 Closing Cash 715 768 1,358 2,440 Other Income 763 1,050 1,044 993 FCFF 3,501 3,322 15,100 23,132 Profit before Tax 7,238 7,469 7,349 5,261 FCFE 3,198 3,345 15,100 23,132 Total Tax 1,108 1,433 1,194 855 Profit after Tax 6,130 6,036 6,155 4,406 Adj. PAT 6,130 6,036 6,155 4,406

Key Financial Metrics Key Operating Metrics Y/e March 2011 2012 2013E 2014E Y/e March 2011 2012 2013E 2014E Growth Total Vol. (nos) 5,402,444 6,235,205 6,244,249 6,993,559 Revenue (%) 22.3 21.5 2.3 13.6 Net Realization/Unit (Rs) 35,912 37,816 38,626 39,169 EBITDA (%) 7.7 20.9 (1.1) 16.5 RM Cost/Unit (Rs) 26,120 27,716 28,105 28,395 PAT (%) (10.0) 18.5 (4.4) 10.9 Other Exp./Unit (Rs) 3,130 3,139 3,469 3,519 EPS (%) (10.0) 18.5 (4.4) 10.9 EBITDA/Unit (Rs) 5,517 5,781 5,712 5,939 Profitability Net Profit/Unit (Rs) 3,716 3,814 3,642 3,605 EBITDA Margin (%) 15.4 15.3 14.8 15.2 Components/Unit (Rs) 26,119 27,700 28,087 28,368 PAT Margin (%) 10.3 10.1 9.4 9.2 Emp. Cost (Rs m) 6,189 7,355 8,371 9,208 RoCE (%) 50.2 48.4 38.3 36.0 Advertising (Rs m) 5,044 5,895 6,392 7,122 RoE (%) 62.5 65.6 44.3 37.5 Depreciation (Rs m) 7,657 10,973 12,290 13,765 Balance Sheet Tax Rate (%) 19 17 17 21 Net Debt : Equity — — — — Source: Company Data, PL Research.

Net Wrkng Cap. (days) (38) (30) (33) (30) Valuation PER (x) 18.3 15.4 16.2 14.6 P / B (x) 12.4 8.6 6.1 4.9 EV / EBITDA (x) 12.3 10.2 10.3 8.8 EV / Sales (x) 1.9 1.6 1.5 1.3 Earnings Quality Eff. Tax Rate 19.2 17.0 16.6 21.3 Other Inc / PBT 10.8 12.2 14.7 13.7 Eff. Depr. Rate (%) 12.9 16.2 13.2 12.4 FCFE / PAT 15.9 14.1 66.4 91.7 Source: Company Data, PL Research.

November 16, 2012 6

Automobiles

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Rating Distribution of Research Coverage

60% 55.4%

50%

40% Coverage 30% 23.1% 20.7% Total 20% of

% 10% 0.8% 0% BUY Accumulate Reduce Sell

PL’s Recommendation Nomenclature

BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months

Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months

Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month

Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

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November 16, 2012 7