Investment Ideas Bajaj Auto Ltd. 24 November 2017

INITIATING COVERAGE CMP: `3,293/- 24th November 2017 SECTOR: AUTOMOBILES BUY

Set For Changing Times….

Chintan Gupta Tel: +9122-66638972 [email protected]

Key Stock Data Comparison Chart CMP `3,293 Market Cap (` Mn) 952,915 Bajaj Auto Nifty 50 52W High/Low 3,344/2,555 3400 11000 Shares o/s (Mn) 289.4 3200 10500 10000 3000 9500 50 Nifty Bloomberg BJAUT:IN 2800 9000 8500 NSE Code BAJAJ-AUTO 2600 Bajaj Auto 2400 8000 BSE Code 532977 7500 2200 7000 2000 6500 Shareholding Pattern (Sep-17) 17 17 17 17 17 17 17 17 17 16 17 16 17 ------Promoters 49.30 - - Jul Jun Jan Oct Apr Feb Dec Sep Aug Nov Nov Mar FIIs & DIIs 26.05 May Public & Others 24.65

 Changing product mix in the domestic market – Superior growth in domestic motorcycles segment driven by new launches (CT 100 ES, Pulsar 160 NS, Platina ES, modified V and an Avenger upgrade).  Motorcycle and 3W exports set to pick up – Exports recovery (Motorcycle + 3W) led by volume pick up in the African markets (where BAL is a key player) as well as entering new geographies.  Three-wheeler sales set to pick up – Domestic 3W volumes set for an uptick with release of permits of ~10,000 units in Delhi, abolition of permits in Maharashtra, conversion of 2-stroke vehicles to 4-stroke vehicles in Karnataka and ban on diesel vehicles in Bangalore.  Other Growth Drivers – Other growth drivers such as partnership between BAL and Triumph Motorcycles UK, electric 3W launch and approval of Qute in the domestic market by the regulatory authorities would be icing on the cake. These factors have not been considered in our earnings estimates.  At CMP of `3,293, BAL is currently trading at a PE of 20.0x and 17.0 its FY18E and FY19E consolidated EPS. We value BAL at `3,969 per share by applying 21xP/E its consolidated FY19E EPS of `189 (including `297/share for KTM stake and `150 cash/share). We expect BAL to generate free cash flow greater than `50bn/annum in the next 2-3 years. With no major capex around, there is considerable scope for increasing payouts. We initiate coverage on BAL with a BUY rating for a target price of `3,969 (upside potential of 21% over the next 12-18 months).

 Bajaj Auto Ltd. (BAL) is the world’s third largest manufacturer of motorcycles and the largest three-wheeler manufacturer. It was established on November 29, 1945 as Bachraj Trading Corporation Pvt. Ltd., initially an importer of two-wheeler and three-wheeler until it obtained license from the Govt. of India to manufacture two and three wheelers in 1959.  BAL offers various brands in motorcycles across different engine capacities as shown below:

Engine Capacity Range Brand BAL’s market share (FY17) 75cc-110cc CT 100 and Platina 13% 110cc-125cc Discover and V12 7% 125cc-150cc Avenger, Pulsar and V15 58% 150cc-200cc Pulsar and KTM 18% Above 200cc KTM, Avenger, Pulsar and Dominar 22% Source : Industry, Way2Wealth Institutional Equity

 BAL’s market share in the domestic motorcycles segment remained flat at 18% in FY17 compared to FY16. However, BAL lost market share in the exports motorcycles segment, from 66% in FY16 to 60% in FY17, owing to economic and political uncertainties in Africa where BAL is a major exporter.  BAL is the world’s largest three wheeler manufacturer. Its market share in FY17 improved to 64.2% in FY17 as compared to 63.3% in the passenger three wheeler segment primarily due to market share gains in the domestic market. Its overall market share (domestic as well as exports) in the goods carrier segment was 12% in FY17, having entered the segment only in FY16.

 BAL manufacturers its range of motorcycles and three wheelers at its three facilities situated at Waluj, Chakan and Pantnagar. The production capacity, actual manufacturing during FY17 and product range manufactured at each plant is shown below: Capacity (units Actual manufacturing Plant Type Product Range per annum) (FY17) Motorcycles 24,00,000 16,40,000 Boxer, CT 100, Platina, Discover, Pulsar, V12 and V15 Waluj Three wheelers 6,60,000 4,45,563 All three-wheelers and quadricycles Chakan Motorcycles 12,00,000 6,08,974 Pulsar, Avenger, Dominar and KTM Pantnagar Motorcycles 18,00,000 9,60,686 CT100, Platina, Discover, V12, V15 and Pulsar Total 60,60,000 36,55,223 Source : Annual Report  BAL enjoys the best operating margins in the industry, at 20.3% as of FY17.  BAL’s revenue mix and volume fix for FY17 is shown below: Volume Mix (FY17) Revenue Mix (FY17) Exports Spare 3W Quadricycl Parts 5% e (Exports) 12% Domestic 0% 3W 7% Domestic Domestic Exports 53% 2W 35% Exports 55% 2W 33% Source : Annual Report

 The Indian two wheeler industry is the largest in the world. Indian manufacturers sold 19.92mn units in FY17 (domestic + exports). The domestic market comprised of 88% of the total sales, while exports stood at 12%.  The Indian two wheeler industry can be classified as below: Type No. of units sold (including exports) (FY17) % of total Motorcycles 13,118,015 65% Scooters 5,896,051 30% Mopeds 910,519 5% Total 19,924,585 Source : Industry Reports BAL is present only in the motorcycle segment. 2010 - 2014 2015  It is worth mentioning that the scooter segment is growing faster than the motorcycle segment2011primarily due to urbanisation, increasing working females and gender neutral nature. While the scooter segment has grown at 17% CAGR over the past 5 years, motorcycles have grown at 2% CAGR over the same period. The chart below shows the growing preference of commuters to scooters over motorcycles: 2W Industry Trend (Domestic) 75% 73% 71% 80% 67% 65% 63% 60% 40% 28% 31% 32% 19% 21% 24% 20% 6% 6% 5% 5% 4% 5% 0% FY12 FY13 FY14 FY15 FY16 FY17 Motorcycles Scooter Mopeds Source : Industry Reports

Domestic Motorcycle Market Domestic motorcycle market stood at 11.09mn units in FY17. Its sales have grown at a meagre 2% CAGR over FY12-FY17. There are 11 players in the motorcycle market, with Hero Motocorp (51%), Bajaj Auto (18%), Honda Motorcycle and Scooters India (HMSI) (12%), TVS Motors (7%) and Eicher Motors (6%) dominating 94% of the market as of FY17. Market share of different players in Domestic Market (Category wise)

75% 7% Hero 40% 8% 7% Motocorp 0% 0% 13% Bajaj 7% 2010 - 13% 58% 2014 2015 Auto 18% 2011 75-110cc 22% 7% 110-125cc 57% 41% HMSI 12% 125-150cc 17% 21% 0% 150-200cc 5% TVS 8% Above 200cc 0% Motors 50% 0% 0% Eicher 0% 75-110cc 110cc-125cc 0% Motors 0% 125cc-150cc 150cc-200cc 77% 0% Above 200cc 4% Others 22% 10% Source : Industry, Way2Wealth Institutional Equity 1%

We expect the domestic motorcycle market to clock 7% CAGR over the next three years on the back of minimum support prices announced by the Govt. which is the highest in the past five years, implementation of farm loan waiver by States, implementation of the recommendations of Seventh Pay Commission and growth of infrastructure in smaller towns and non-urban areas. The other key drivers for growth are rising incomes and low interest rates.

Domestic Motorcycle Market ('000's) 16,000

14,000 13,591 12,702 11,761 12,000 11,095 10,481 10,743 10,700 2010 - 10,085 2014 2015 10,000 2011

8,000

6,000

4,000

2,000

- FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Source : Industry, Way2Wealth Institutional Equity

Motorcycle Exports Motorcycle Exports have been sluggish since the past 2 years on account of benign crude oil prices and economic and political uncertainty in the importing countries. BAL is India’s largest exporter of motorcycles commanding a market share of 60%, followed by TVS Motors (15%), HMSI (9%) and Hero Motocorp (7%). Exports are expected to rebound FY18 onwards on account of increased currency availability in the export markets, economic and political stability in African countries and exploring of new markets by the industry players. Motorcycle Market Share (FY17)

51% Hero Motocorp 7% 44% 18% 2010 - Bajaj Auto 60% 2014 2015 25% 2011 Domestic 12% Exports HMSI 9% 12% Total 7% TVS Motors 15% 8% 6% Eicher Motors 1% 5% 6% Others 8% 6%

Source : Industry Reports

We expect the exports motorcycle market to clock 10% CAGR over FY17-20E driven by recovery off-late in African countries (especially Nigeria) and exploring of newer markets by the industry players. Further, newer markets also provide stability in volumes for the future since it reduces dependence on volatile markets like Nigeria and Egypt.

Exports Motorcycle Volumes ('000's) 3,000 2,667 2,492 2,500 2,260 2,210 2,266 2,023 1,979 2010 - 2015 2,000 1,865 2011 2014

1,500

1,000

500

- FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Source : Industry, Way2Wealth Institutional Equity

The domestic 3W industry has been flattish since the past 5 years. Though FY17 was impacted due to demonetisation, increasing preference for shared mobility (taxi aggregators) cabs as a means of commute and regulated markets (based on permit system) of Karnataka, Maharashtra, Delhi, West Bengal has been one of the main reasons behind flattish volumes in this segment. However, with the release of permits of ~10,000 units in Delhi, abolition of permits in Maharashtra, conversion of 2-stroke vehicles to 4-stroke vehicles in Karnataka and ban on diesel vehicles in Bangalore, the three-wheeler market has opened up. Also, recent aggressive expansion by shared mobility providers such as Ola to provide last mile connectivity to commuters augurs well for the domestic three-wheeler industry as a whole. On the exports front, the three-wheeler industry has de-grown in the past 2 years on account of the economic and political uncertainty in the importing countries. Three-wheeler volume trend 10,00,000 9,40,226 9,42,649 8,75,034 9,00,000 8,41,378 8,33,477 7,83,5522015 8,00,000 2014 7,00,000 6,00,000 5,38,290 5,32,626 5,38,208 5,13,281 4,80,085 5,11,658 5,00,000 4,07,600 4,04,441 4,00,000 3,61,753 3,53,392 3,03,088 3,00,000 2,71,894 2,00,000 1,00,000 0 FY12 FY13 FY14 FY15 FY16 FY17 Domestic Exports Total Source : SIAM

3W Market Share (FY17)

49% Bajaj Auto 70% 57%

30% Piaggio 6% 21%

2% TVS Motor 21% 9% 2014 Domestic2015 Exports 10% Total Mahindra & Mahindra 1% 7%

7% Atul Auto 1% 5%

1% Scooters India 0% 1%

Source : Industry, Way2Wealth Institutional Equity

 Changing product mix in the domestic market – BAL’s increasing focus towards the premium segments of the motorcycle market away from the volume driven 75-110cc segment (where BAL makes a loss/single digit operating margin) augurs well for the company. We expect BAL to clock 13% CAGR in the 125cc-150cc segment driven by an Avenger upgrade launch in that segment in Q4FY18 and pick up in volumes of Pulsar. We expect BAL to clock 10% CAGR in the 150cc-200cc segment on the back of success of Pulsar NS 160 and KTM in the domestic market. In the >200cc segment, we expect Dominar to bounce back H2FY18 onwards and expect improved traction from Pulsar. Further, we expect the share of 110-125cc segment motorcycles to reduce from the present 7% in FY17 to 4% in FY20E due to fading volumes of Discover. 100% 5% 7% 4% 9% 9% 10% 11% 11% 90% 6% 7% 5% 6% 6% 6% 80% 22% 70% 33% 29% 37% 40% 60% 13% 41% 42% 50% 6% 8% 7% 40% 5% 5% 4% 30% 56% 47% 49% 20% 42% 39% 38% 37% 10% 0% FY14 FY15 FY16 FY17 FY18E FY19E FY20E

75-110cc 110-125cc 125-150cc 150-200cc >200c

Source : Company, Way2Wealth Institutional Equity

The first six months of FY18 was particularly tough on BAL due to channel filing by competitors due to ban on sale of BS-III vehicles after 31st March, 2017 and de-stocking by channel partners ahead of GST. However, the recent launches of CT100 ES, Platina ES and Pulsar 160 NS have been received well in the market. Further, Pulsar NS 200 continues to do well. The management plans to launch an Avenger upgrade positioned with the V-series in Q4FY18. We expect BAL to clock 9% CAGR over FY17-20E with the full effects of new launches playing out in FY19 and FY20 and expect BAL to achieve a market share of 19% by FY20.

Domestic Motorcycle Market Share of BAL 30% 24% 25% 20% 19% 20% 18% 18% 17% 18% 16% 15%

10%

0% FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Source : Industry, Company, Way2Wealth Institutional Equity

 Motorcycle exports set to pick up – Motorcycle exports have been sluggish since the past two years due to lower crude prices and continuing economic and political uncertainties in the importing countries. However, recent uptick in exports indicate stabilization in trading conditions in Africa (primarily Nigeria) and revenue diversification by entering newer markets in the last three years. It is worth mentioning that BAL generates 85% of its sales from 21 countries where it is either no. 1 or no. 2 player. BAL reached a healthy 40%+ market share in South Asia and Middle East and 25% in Latin America. In the FY17, BAL entered four new markets. Management has indicated better traction from Latin America, Indonesia, Nepal and South Asian countries going forward and double-digit volume growth in exports even after not factoring much growth from Sri Lanka and Nigeria due to economic and political uncertainty in the respective countries. We expect motorcycle exports to clock 12% CAGR over FY17-20E.

2W Exports volume 18,00,000 17,08,200 15,21,306 15,81,666 16,00,000 14,59,295 14,37,878 14,00,000 13,23,173 12,18,541 12,00,000 10,00,000 8,00,000 6,00,000 4,00,000 2,00,000 0 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Source : Annual Report, Way2Wealth Institutional Equity

BAL lost market share last year primarily due to heavy dependence on African countries where it is a major exporter. However, with the economic conditions improving in Africa and newer markets entered by BAL last year, we expect BAL to gradually gain market share from 60% in FY17 to 64% by FY20. Newer markets currently contribute 16% of total volume as against 10% in FY17 and 6% in FY16. Entering of newer markets also reduce dependence of BAL on the uncertain markets of Africa and Egypt. Further, the share of premium products has increased to 30% in FY17 from 25% in FY16, which augurs well for BAL.

BAL's Market Share in Exports Motorcycle Market 72% 70% 69% 68% 67% 67% 66% 66% 64% 63% 63% 64% 62% 60% 60% 58% 56% 54% FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Source : Industry Reports, Company, Way2Wealth Institutional Equity

 Three-wheeler sales set to pick up – Domestic three-wheeler sales are set to pick up mainly on account of robust growth in the cargo segment, albeit on a small base. Further, release of permits of ~10,000 units in Delhi, abolition of permits in Maharashtra, conversion of 2-stroke vehicles to 4-stroke vehicles in Karnataka and ban on diesel vehicles in Bangalore would aid growth. On the exports side, the three wheeler sales have been muted since the past 2 years due to economic difficulties and currency as well as payment constraints in several importing countries, as also highlighted in 2W exports. Recent volume trends indicate stabilization in African countries as well as improved performance in the newly entered markets. We expect domestic three-wheelers to clock 15% CAGR over FY17-20E and three-wheeler exports at 18% CAGR over FY17-20E.

3W volumes 8,00,000 7,00,838 7,00,000 6,26,390

6,00,000 5,47,981 5,34,995 5,19,117 4,47,674 5,00,000 4,44,462 3,87,498

4,00,000 3,49,097 3,13,340 3,08,936 2,84,772 2,80,000 2,77,292 2,60,762 2,54,995 3,00,000 2,53,226 2,39,045 2,34,345 1,91,236 2,00,000 1,86,912 1,00,000 0 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Domestic Exports Total Source : Annual Report, Way2Wealth Institutional Equity

3W Industry and Bajaj Auto Volume Data Domestic Exports Total Passenger Segment FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 Bajaj Auto 1,86,856 2,34,345 2,53,670 2,40,064 2,60,762 2,84,772 2,80,000 1,90,958 4,47,618 5,19,117 5,33,670 4,31,022 Industry 3,84,923 4,32,234 4,41,091 4,02,034 3,51,442 4,05,370 4,01,497 2,69,000 7,36,365 8,37,604 8,42,588 6,71,034 Mkt. share 49% 54% 58% 60% 74% 70% 70% 71% 61% 62% 63% 64%

Goods carrier FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 Bajaj Auto 56 - 1,325 13,162 - - - 278 56 - 1,325 13,440 Industry 94,711 99,693 97,001 1,09,624 1,950 2,587 2,944 2,894 96,661 1,02,280 99,945 1,12,518 Mkt. share 0% 0% 1% 12% 0% 0% 0% 10% 0% 0% 1% 12%

Total FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 Bajaj Auto 1,86,912 2,34,345 2,54,995 2,53,226 2,60,762 2,84,772 2,80,000 1,91,236 4,47,674 5,19,117 5,34,995 4,44,462 Industry 4,79,634 5,31,927 5,38,092 5,11,658 3,53,392 4,07,957 4,04,441 2,71,894 8,33,026 9,39,884 9,42,533 7,83,552 Mkt. share 39% 44% 47% 49% 74% 70% 69% 70% 54% 55% 57% 57%

BAL's Market Share in 3W

80% 74% 70% 69% 70%

60%

40% 49% 44% 47% 39% 20% FY14 FY15 FY16 FY17

Domestic Exports Source : Annual Report, Way2Wealth Institutional Equity

 Global roll out of Husqvarna motorcycles in 2018 – Husqvarna Motorcycles, founded in 1903, is the world’s second oldest motorcycle brand, for which KTM had secured a long-term license agreement in 2013. After its new positioning, the volumes have gone up sharply to over 30,000 units sold in 2016. KTM and BAL have decided to take Husqvarna brand global. The first models, Vitpilen 401, Svartpilen 401 and Vitpilen 701 will be produced in Austria and launched in early 2018. Later in 2018, Vitpilen 401 and Svartpilen 401 will be transferred to BAL’s Chakan factory. This is expected to increase KTM and Husqvarna branded motorcycles volume from 100,000 in 2017 to 200,000 in the next few years.  Electric 3W – Management of BAL has recently indicated to bring out an electric version of 3W by next year. With the Govt.’s increased thrust on electric vehicles for mobility, we feel 3W would be one of the first segments to face regulatory action by the authorities to move towards electric version considering the small size of the 3W industry. This would augur well for BAL being an early mover advantage as well as also having the necessary scale and resources to bring electric 3W in the market on a big platform.  BAL and Triumph Motorcycles UK forge a non-equity partnership – Recently, BAL and Triumph Motorcycles UK have forged a non- equity partnership to manufacture mid-capacity motorcycles (250cc-750cc). The partnership will focus on entering high volume market segments, especially emerging markets. BAL has very limited presence in this segment, and hence is expected to benefit from this partnership. Apart from India, BAL is expected to sell its products in Africa and parts of ASEAN and Latin America. The product will be manufactured at its Chakan factory (existing or new plant). The first rollout of Triumph motorcycles from BAL’s stable is expected in CY2020.  Quadricycle(Qute) launch – The quadricycle launch in India has been facing regulatory hurdles. The product could receive overwhelming response as and when it clears the regulatory hurdles due to it being emission friendly and more fuel-efficient compared to three-wheeler. Launched in FY16, BAL currently exports to its three-wheeler overseas markets and plans to export to other markets as well. BAL exported ~1500 quadricycles in FY17 as compared to 334 in FY16. As per the management, the quadricycle is expected to clear regulatory hurdles in India in the next 3-4 months.

 Sales to post 15% CAGR over FY17-19E – We expect sales to post 15% CAGR over FY17-19E on the back of better product mix (gradual shift towards premium segment), improving prospects of exports and positive triggers for domestic three-wheelers going ahead. Net Sales (`mn) 4,00,000 2,87,073 3,00,000 2,49,319 2,01,583 2,16,142 2,25,865 2,17,667 2,00,000 1,00,000 0 FY14 FY15 FY16 FY17 FY18E FY19E Source : Company Reports, Way2Wealth Institutional Equity

 Operating Margins to remain stable – BAL enjoys the best in class operating margins in the industry. We expect BAL’s operating margin to remain stable over the next two years. Rising raw material costs pressures would be offset by better margins in premium products, exports and high margin 3W (EBITDA>25%). EBITDA Margins 21.2% 20.6% 20.3% 20.0% 20.3% 19.0%

FY14 FY15 FY16 FY17 FY18E FY19E

Source : Company Reports, Way2Wealth Institutional Equity

 PAT to post 16% CAGR over FY17-19E – We expect PAT to post 16% CAGR over FY17-19E on the back of better product mix (gradual shift towards premium segment), improving prospects of exports (2W and 3W) and positive triggers for domestic three- wheelers going ahead. Consolidated PAT (`mn) 54,829 60,000 40,612 40,795 46,571 40,000 33,803 30,256 20,000 0 FY14 FY15 FY16 FY17 FY18E FY19E

Source : Company, Way2Wealth Institutional Equity  Avg. Gross Realization/Vehicle to continue inching up – We expect Avg. Gross Realization/Vehicle to continue improving driven by BAL’s focus on premium segment of the motorcycle market in the domestic market and superior growth in exports market. BAL’s management has mentioned that product mix in the export market is changing from lower end of the portfolio to higher end and that higher end now consist of 30% of the portfolio.

Average Gross Realization/Vehicle 65,000 60,430 58,669 60,000 56,685 53,700 54,505 55,000 51,851 48,643 50,000 45,000 40,000 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Source : Way2Wealth Institutional Equity

Robust Free Cash Flows to continue going 40% forward 35.5% 35% 29.6% 30.6% 30% 33.9% 24.0% 22.8% 22.8% 22.4% 80,000 64,013 25% 28.6% 29.6% 57,387

60,000 49,678 20% 42,096 40,963 23.3%

36,765 22.1% 22.3% 21.9%

40,000 27,071 15% 20,000 10% - FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY14 FY15 FY16 FY17

FY18E FY19E FY20E ROCE ROE

Dividend per share 65 Improving Fixed Asset Turnover Ratio 70 60 60 55 55 20.0 16.7 60 50 50 15.1 50 15.0 12.9 40 10.1 11.0 8.0 8.5 30 10.0 20 5.0 10 0 0.0 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY18E FY19E FY20E

Source : Company, Way2Wealth Institutional Equity

 Rahul Bajaj (Chairman) Rahul Bajaj heads the Bajaj group of companies which is into variety of manufactured products and financial services in India and abroad. He holds an Honours Degree in Economics from Delhi University, a degree in law from Bombay University and an MBA from Harvard Business School.

 Rajiv Bajaj (Managing Director) Rajiv Bajaj holds directorship in various group companies such as Bajaj Auto, Bajaj Holdings and Investment Ltd., Bajaj Finserv Ltd. and Bajaj Finance Ltd. He completed Mechanical Engineering from the University of Pune and then completed his Masters in Manufacturing Systems Engineering from University of Warwick.

 S Ravikumar (President- Business Development and Assurance) 2010 - S Ravikumar joined Bajaj in June 1984 and is now the President- Business Development and Assurance. He is an active member2015of the 2011 2014 Institute of Chartered Accountants of India.

 Kevin P D`sa (President (Finance)- CFO) Kevin D`sa began his career with Bajaj in September 1978 and is presently the President (Finance). After acquiring a Bachelor’s degree in Commerce, he completed his CA in 1978 and ICWA in 1981.

Financials Sales (Bn) EBITDA(Bn) PAT(Bn) EPS Company FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E Hero Motocorp* 319.9 355.7 52.8 57.7 37.6 41.1 188.7 202.7 Bajaj Auto 249.3 287.1 49.9 58.3 46.6 54.8 161 189 TVS Motor 151.1 173.7 13.0 16.7 7.4 10.0 15.5 21.0 Eicher Motors 89.6 107.9 28.5 35.7 22.1 27.7 810.2 1,021.0 Valuations

P/E(x) EV/EBITDA(x) P/B(x) ROE (%) Company FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E Hero Motocorp 19.4 18.0 12.7 11.6 6.3 5.5 34.1 32.2 Bajaj Auto 20.0 17.0 16.3 13.6 4.6 3.9 22.8 22.8 TVS Motor 47.8 35.4 28.1 21.8 12.4 10.4 29.4 34.0 Eicher Motors 38.0 30.2 28.9 23.1 12.2 9.3 36.4 34.5 Average 31.3 25.2 21.5 17.5 8.9 7.3 30.7 30.9 *Standalone

Source : Bloomberg Estimates, Way2Wealth Institutional Equity

BUY with Target Price of `3,969 (upside potential of 21% over 12-18 months).  We expect BAL Sales and Profit to grow at a CAGR of 15% and 16% over FY17-19E on the back of high exports demand (2W and 3W) led by recovery in African markets and on account of entering new markets. Further, release of permits of ~10,000 units in Delhi, abolition of permits in Maharashtra, conversion of 2-stroke vehicles to 4-stroke vehicles in Karnataka and ban on diesel vehicles in Bangalore augurs well for BAL being the largest player in the 3W industry.  We believe BAL will clock 9% CAGR over FY17-20E in the domestic motorcycles segment driven by new launches (CT 100 ES, Platina ES, Pulsar 160 NS, modified V and Avenger upgrade positioned with the V-family in Q4FY18), coupled with improved performance of KTM and Dominar in the next 2-3 years.  Other growth drivers such as partnership between BAL and Triumph Motorcycles UK, electric 3W launch and approval of Qute in the domestic market by the regulatory authorities would be icing on the cake. These have not been considered in our earnings estimates.  At CMP of `3,293, BAL is currently trading at a PE of 20.0x and 17.0 its FY18E and FY19E consolidated EPS. We value BAL at `3,969 per share by applying 21xP/E its consolidated FY19E EPS of `189 (including `297/share for KTM stake and `150 cash/share). We expect BAL to generate free cash flow greater than `50bn/annum in the next 2-3 years. With no major capex around, there is considerable scope for increasing payouts. We initiate coverage on BAL with a BUY rating for a target price of `3,969 (upside potential of 21% over the next 12-18 months).

 Rising commodity prices with the company’s inability to pass on the cost increase by appropriate price hikes could put pressure on margins.  Since BAL derives a significant proportion of its revenue from overseas markets, continuing economic and political uncertainties in its export markets could result in muted financial performance going forward.  Appreciation of rupee vis a vis other currencies could have an adverse impact on BAL’s margins.  Cannibalizing effects of new product launches on existing products could have an adverse impact on BAL’s volumes.

(` mn) Income Statement FY15 FY16 FY17 FY18E FY19E Net sales 216,142 225,865 217,667 249,319 287,073 YoY (%) 7.2 4.5 (3.6) 14.5 15.1

Raw material cost 148,514 150,569 146,242 169,253 194,883 Employee Cost 8,985 9,171 9,974 10,926 12,293 Admin Expenses 17,511 18,315 17,258 19,268 21,612 Total expenses 175,010 178,054 173,473 199,613 232,605

EBIDTA 41,132 47,811 44,194 49,873 58,286 (%) 19.0% 21.2% 20.3% 20.0% 20.3% Growth (%) (1) 16 (8) 13 17

Depreciation 2,675 3,072 3,073 3,209 3,415 EBIT 38,457 44,739 41,121 46,663 54,871

Interest 65 11 14 14 14 Other income 5,840 9,846 12,222 15,609 17,323 PBT 44,232 54,575 53,329 62,258 72,180 (-) Tax 12,711 16,177 15,081 18,678 21,654 Tax/ PBT 28.7 29.6 28.3 30.0 30.0 PAT 31,522 38,398 38,249 43,581 50,526 YoY (%) (2.6) 21.8 (0.4) 13.9 15.9 PAT(%) 14.6% 17.0% 17.6% 17.5% 17.6% Share of Profit of associates 2,137 2,214 2,546 3,310 4,303 Extraordinary (3,403) 0 0 (320) 0 Reported Profit 30,256 40,612 40,795 46,571 54,829

(` mn) FY15 FY16 FY17 FY18E FY19E Equity capital 2,894 2,894 2,894 2,894 2,894 Reserves 108,060 137,309 175,672 201,344 235,275 Net worth 110,953 140,203 178,566 204,238 238,168 Total borrowings 1,124 1,179 1,199 1,199 1,199 Deferred Tax 1,416 2,028 3,136 3,136 3,136 Other Long Term Liabilities 1,400 1,183 1,347 1,347 1,347 Total Liabilities 114,893 144,593 184,248 209,920 243,850 Gross block 46,317 44,349 45,332 48,332 51,332 Less: Acc. depreciation 21,837 24,092 25,900 29,109 32,524 Net block 24,480 20,257 19,433 19,223 18,808 Work in progress 2,549 522 422 422 422

Investments 89,853 110,672 155,356 175,356 197,356 Other non-current assets 5,111 6,822 6,982 6,982 6,982

Inventories 8,142 7,191 7,284 8,430 9,706 Debtors 7,170 7,179 9,533 9,571 11,021 Cash 5,927 8,670 3,014 11,792 26,281 Loans and advances 16,424 11,089 14,354 14,944 15,648 Current assets 37,663 34,130 34,185 44,738 62,656

Current liabilities 25,667 26,337 30,762 35,235 40,571 Provisions 19,096 1,473 1,367 1,565 1,802 Net current assets (7,100) 6,319 2,056 7,937 20,283 Total Assets 114,893 144,593 184,248 209,920 243,850

(` mn) Cash Flow FY15 FY16 FY17 FY18E FY19E Net profit 30,256 40,612 40,795 46,571 54,829 Depreciation 2,675 3,072 3,073 3,209 3,415 Deferred tax 131 (238) 504 0 0 Change in W/C (5,928) (10,676) (1,394) 2,898 2,143 Operating cash flow 27,133 32,770 42,978 52,678 60,387

Capex (62) 3,995 (882) (3,000) (3,000) Investments (5,375) (20,820) (44,683) (20,000) (22,000) Investing cash flow (5,437) (16,825) (45,566) (23,000) (25,000)

Free Cash Flow 27,071 36,765 42,096 49,678 57,387

Dividend and other (17,680) (21,050) (19,812) (20,900) (20,899) Equity (3,629) 7,793 16,723 0 0 Debt 532 55 20 0 0 Financing cash flow (20,778) (13,202) (3,069) (20,900) (20,899)

Net change in cash 918 2,743 (5,657) 8,778 14,488 Opening cash 5,009 5,927 8,670 3,014 11,792 Closing cash 5,927 8,670 3,014 11,792 26,280

Key Ratios FY15 FY16 FY17 FY18E FY19E EPS 105 140 141 161 189 Book value 383 485 617 706 823 Cash /Share 110 363 334 399 484

P/E (x) 23.4 20.0 17.0 EV/EBDITA (x) 19.4 16.3 13.6 P/B (x) 5.3 4.6 3.9

ROCE 28.6% 29.6% 23.3% 22.1% 22.3% ROE 29.6% 30.6% 24.0% 22.8% 22.8%

Free cash/Share 94 127 146 172 198 Dividend/Share 50 55 55 60 60 Dividend Yield 1.6% 1.7% 1.7% 1.9% 1.9%

Fixed Asset T/O 8.5 10.1 11.0 12.9 15.1 Avg Net WC Days (27) (12) (3) (4) (6) Net W/C (% of sales) (6.0) (1.0) (0.4) (1.5) (2.1) Revenue/Day (`mn) 592 619 596 683 787 Other Income (%PBT) 13% 18% 23% 25% 24%

(` mn) Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Net Sales 56,436 59,493 49,756 48,050 53,285 64,748 Other operating income 1,043 1,052 913 923 1,139 1,051 Income from operation 57,480 60,545 50,669 48,973 54,424 65,799

Raw Material 38,628 40,571 33,841 33,203 38,093 45,492 Staff Cost 2,683 2,593 2,423 2,274 2,727 2,650 Expenses Capitalised (43) (56) (47) (77) (46) (41) Other expenditure 4,449 4,493 4,012 4,523 4,270 4,723 Total Expenditure 45,716 47,601 40,229 39,924 45,044 52,824

EBITDA 11,763 12,945 10,440 9,049 9,379 12,975 Depreciation 775 770 772 757 753 770 EBIT 10,989 12,175 9,668 8,292 8,627 12,205

Interest 2 7 3 2 2 5 Other Income 2,671 3,427 3,187 2,937 3,235 2,972 PBT 13,657 15,595 12,853 11,227 11,859 15,172 Tax 3,873 4,378 3,612 3,218 3,642 4,055 PAT 9,784 11,218 9,241 8,009 8,217 11,117 Extraordinary 320 Share of PAT in JV 790 527 613 471 819 Reported PAT 9,784 12,007 9,768 8,622 8,367 11,935 Other comprehensive income, net of tax (190) 82 (1,103) 481 1,248 455 Total other comprehensive income, net of 9,594 12,089 8,665 9,103 9,615 12,391 tax Equity 2894 2894 2894 2894 2894 2894 EPS 33.8 38.8 31.9 27.7 28.4 38.4 Way2Wealth Brokers Pvt. Ltd. (CIN U67120KA2000PTC027628) SEBI Rgn. No. : INH200002739 No. 14, Frontline Granduer, Walton Road, Bangalore-560001; Website: www.way2wealth.com Email: [email protected] 24 November 2017 Way2wealth Research is also available on Bloomberg WTWL 34 Quarterly Performance

(` mn) Margins Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Gross margins 32.8% 33.0% 33.2% 32.2% 30.0% 30.9% EBITDA 20.5% 21.4% 20.6% 18.5% 17.2% 19.7% PAT 17% 19% 18% 16% 15% 17% Tax Rate 28% 28% 28% 29% 31% 27% Growth Sales 3% -1% -9% -9% -5% 9% EBITDA 3% -2% -11% -22% -20% 0% EBIT 3% -2% -12% -23% -21% 0% PAT 2% 20% 3% -16% -16% -1% Segmental Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Sales in numbers 994,733 1,031,945 851,645 787,627 888,434 1,071,510 Growth (YoY) -2% -2% -10% -10% -11% 4% Growth (QoQ) 14% 4% -17% -8% 13% 21%

Average Relisation 60,161 61,313 61,796 65,012 64,611 60,301 Growth (YoY) 5.6% 2.7% 1.4% 1.2% 7.4% -1.7% Growth (QoQ) -6.3% 1.9% 0.8% 5.2% -0.6% -6.7%

Domestic 2W volumes for BAL were affected in Q1FY18 due to channel filling by competitors after sale of BS-III vehicles were banned after 31stMarch, 2017 and channel de-stocking by partners ahead of GST. Domestic 3W were also affected in Q1FY18 due to de- stocking ahead of GST and demonetisation. However, domestic volumes of 2W and 3W have rebounded post the initial hiccups of GST and recovery in demand. Exports have grown by 7% in 2W and 20% in 3W in H1FY18.

Domestic 2W volumes Exports 2W volumes

8,00,000 3,60,000 3,49,152 5,79,545 5,83,997 6,00,000 5,48,880 4,26,562 3,40,000 3,34,724 3,23,660 4,00,000 3,17,869 3,20,000 2,00,000 - 3,00,000 Q1 Q2 Q1 Q2 FY17 FY18 FY17 FY18

Domestic 3W Volume Exports 3W Volume 84,938 1,00,000 75,204 74,383 67,851 80,000 60,373 60,148 52,347 60,000 46,989 50,000 40,000 20,000 - - Q1 Q2 Q1 Q2 FY17 FY18 FY17 FY18 Source : Company Filings, Way2Wealth Institutional Equity

Analyst Designation Sector Email Telephone Alok Ranjan Head – Research [email protected] +9122-6663 8950 Jaisheel Garg AVP Power, Power Equipment, Coal Mining [email protected] +9122-6146 2974 Shivani V. Vishwanathan AVP FMCG, Consumer Durables [email protected] +9122-6663 8956 Chintan Gupta Research Associate [email protected] +9122-6663 8972 Ashwini Sonawane Research Associate [email protected] +9122-4019 2956

Institutions Designation Email Telephone Kaushal Jaini Vice President [email protected] +9122-4027 8919 Bhavika Ravasia Senior Manager [email protected] +9122-4019 2995 Mitul Doshi Institutional Sales [email protected] +9122-2575 8932

Way2Wealth Brokers Pvt. Ltd. (CIN U67120KA2000PTC027628) SEBI Rgn. No. : INH200002739 No. 14, Frontline Granduer, Walton Road, Bangalore-560001; Website: www.way2wealth.com Email: [email protected] 24 November 2017 Way2wealth Research is also available on Bloomberg WTWL 37 Disclaimer Analyst Certification: I, Chintan Gupta the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflect our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. 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Name of the analyst Chintan Gupta Analysts’ ownership of any stock related to the information contained NIL Financial Interest Analyst : No Analyst’s Relative : Yes / No No Analyst’s Associate/Firm : Yes/No No Conflict of Interest No Receipt of Compensation No Way2Wealth ownership of any stock related to the information NIL contained Broking relationship with company covered NIL Investment Banking relationship with company covered NIL

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