Automobiles Two Wheelers – Ahead in the Race

Automobiles Two Wheelers – Ahead in the race

September 04, 2013 We believe that with the interest rate cycle reversing (read inching up) and robust rural economy, two‐wheeler stocks are likely to outperform over the next one year. Surjit Arora Three key factors leading to our stance are a) strong rural economy led by good [email protected] monsoon and increase in MSPs b) export potential ‐ Indian firms are better placed +91-22-66322235 compared to Chinese counterparts (Africa & Latin America dominated by Chinese) on currency and labour cost front 3) Valuation attractive at 13‐14.0x 1yr fwd P/E, Report given the strong 18% earnings CAGR, coupled with strong balance sheet and better corporate governance. We upgrade Bajaj to ‘Accumulate’ from ‘Reduce’ mainly on account of higher export realization in FY14E and volume recovery from Jan’14. At Sensex v/s. Hero Motocorp & Bajaj Auto Sector the same time, with scooter volumes growing faster than motorcycle (women are Sensex Bajaj Auto increasing opting for the same), entry into the export market and strong rural sales Hero Motocorp (which account for ~45%), we upgrade Hero Motocorp from ‘Reduce’ to 140 130 ‘Accumulate’. 120 110  Recovery in two‐wheelers likely: According to Hero Motocorp management, 100 90 recovery in two-wheeler industry demand is likely, given the good monsoon, 80 coupled with possible increase in government spending ahead of 2014 national 70 elections. We expect 12-13% CAGR in scooter volumes for the next two years. We expect two-wheeler volumes to grow at ~7% CAGR mainly led by 12.2% Jul-13 Jan-13 Sep-12 Sep-13 Nov-12 Mar-13 May-13 CAGR in scooter volumes and 6.0% CAGR in motorcycle volumes over FY13- Source: Bloomberg FY15E period. Scooter share in the last three years has increased from 15% to 21% of two-wheeler volumes mainly driven by (a) growing acceptability of gearless scooters, particularly by women, (b) rising urbanization and increasing Stock Performance proportion of working women. (%) 1M 6M 12M Sensex (3.1) (1.6) 6.5  Rural economy to spur demand: In the country's main cropping regions, Auto (0.1) (1.9) 10.7 monsoon has been timely and 20-30% above average so far, prompting farmers

to expand cultivated area by 9% to 930 lakh hectares, with the biggest gains in Bajaj Auto (1.1) (5.0) 14.6 Hero Motocorp 6.9 17.6 6.6 pulses, oilseeds and coarse cereals. Going by the current trend of rising rural incomes with higher yields and minimum support prices, the outlook on two- wheelers is positive. Low penetration level, lack of adequate mode public Stock Data transport and rising per capita income in rural India would lead to long-term CMP (Rs) TP (Rs) PE (x) healthy volume of two-wheelers. With rural economy accounting for 40-45% of FY14E FY15E the sales for two-wheelers, we expect good times ahead for two-wheeler Bajaj Auto 1,889 2,083 15.9 13.6 manufacturers. Hero Motocorp 1,927 2,176 17.6 13.3

 Competitive intensity likely to slowdown: Over the last two years, HMSI has How we differ from Consensus gained 450bps in motorcycles to 11.8% in FY13 and 520bps market share in EPS (Rs) PL Cons. % Diff. scooters segment to 48.6% in FY13E. At the same time, HMCL has lost only Bajaj Auto 150bps market share in motorcycles to 53.6% in FY13E whereas it has gained 2014 119.1 123.5 ‐3.6 market share of 210bps to 18.8% in FY13 in the scooter segment. Going 2015 138.8 141.8 ‐2.1 forward, in our view, Hero would gain 180bps in market share in scooter segment thanks to ‘Maestro’ and ‘Pleasure’ to 21.6%, whereas it is likely to Hero Motocorp protect its turf in the motorcycle segment by maintaining its market share at 2014 109.3 109.4 0.0 53.3% in FY15E. HMSI is likely to further gain market share to the tune of 260bps 2015 145.1 139.3 4.2 to 14.7% by FY15E at the cost of Bajaj Auto.

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

 Indian Manufactures to gain at the cost of Chinese: Two key export markets, mainly Africa and Latin America, are currently dominated by Chinese players, with ~75-80% market share and ~70% market share, respectively. While the Indian players have been gaining share from the Chinese mainly on account of their better quality, there is a likelihood of further market share gains on account of a) rising labour cost in China b) 16% rupee depreciation v/s 3% CNY appreciation against the USD.

 Exports likely to grow in double‐digit led by Africa and LatAm: Given the low penetration in African and Latin American market relative to the Asian market, these regions are likely to drive double-digit growth over the next 4-5 years. Given that there are no plants in Africa, it is the largest importer of motorcycles globally, thereby, making it the most important export market for Indian players. With an overall population of ~1bn people and with the fastest population growth rate in the world, African market has a lot of potential. In Latin American markets like Argentina and Chile, market share gains are likely, given the currency as well as quality advantage. In our assessment, exports from Indian manufacturers are likely to grow in the region of 13-15% over the next five years.

 Prefer Two‐wheelers over Four‐Wheelers; Upgrade Bajaj Auto & Hero Motocorp to Accumulate: With exports, three-wheeler and spares accounting for ~55% of its FY14E turnover, we believe Bajaj Auto is better placed to mitigate the impact of slowdown in the two-wheeler industry. With earnings CAGR of 17-18% for FY13FY15E period, coupled with attractive dividend yields of 3%+ and ROEs in excess of 38%, we believe valuation at 13.6x FY15E EPS for Bajaj and 13.3x FY15E EPS for Hero Motocorp looks attractive. Given that interest rates are unlikely to come down, we believe two-wheelers are likely to outperform four-wheelers.

September 04, 2013 2

Automobiles

CONTENTS Page No Two wheeler segment - recovery likely ...... 4 Competitive intensity likely to slowdown ...... 7 Scooters ...... 7 Motorcycles ...... 8 New / Recent Launches ...... 9 Indian manufactures to gain at the cost of their Chinese counterparts ...... 11 Two-wheeler exports likely to grow in double-digit led by Africa and LatAm ...... 12 African Market – Motorcycles used as Taxis - Dominated by Chinese Players ...... 13 Nigeria – Dominated by Chinese ...... 13 Western Africa ...... 15 Latin America – dominated by Japanese and Chinese Players ...... 16 South Asia – Dominated by Indian Manufacturers ...... 17

Companies Bajaj Auto ...... 20 Hero Motocorp ...... 26

September 04, 2013 3

Automobiles

Two wheeler segment ‐ recovery likely

Exhibit 1: Penetration Levels

300 253 241 250 228

200 '000)

150 110 101 98

(2Ws 100 56 50 32

0 Japan Vietnam Thailand Indonesia China India India India Overall Rural Urban

Source: PL Research

With an annual domestic sales of 13.8m units in FY13, India is the second-largest market after China (>50m units p.a).

While China is >3x India’s annual volumes, growth rates over the past three years (CAGR 5%) indicate levels of saturation, as penetration level is 20%.

Penetration in India on the other hand is 6.6% (CAGR of 13% for last five years) and likely to grow at 14% CAGR implying a penetration rate of 15% in 2020.

Exhibit 2: Rural v/s Urban Divide

45 2001 2011 40 35 30 25 household)

/ 20

(2W's 10 5 0 All India Rural Urban

Source: PL Research

According to Hero Motocorp management, recovery in two-wheeler industry demand is likely, given the good monsoon, coupled with possible increase in government spending ahead of 2014 national elections.

September 04, 2013 4

Automobiles

Exhibit 3: Per capita income / two‐wheeler prices

2W Prices (Rs) Per capita Rural income (Rs) Ratio (RHS)

80,000 1.8 70,000 1.6 60,000 1.4 1.2 50,000 1.0 40,000 0.8 30,000 0.6 20,000 0.4 10,000 0.2 - - 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: PL Research

In Apr-July 2013, rural volumes grew by 12% YoY for Hero Motocorp and have been resilient despite a weak economic environment. With rural economy accounting for 40‐45% of the sales for two‐wheelers, we expect good times ahead for two‐wheeler We believe farm incomes will rise due to a good crop output and Government manufacturers spending in rural India as elections approach. Going by the current trend of rising rural incomes with higher yields and minimum support prices, the outlook on two- wheelers is positive.

Low penetration level, lack of adequate mode public transport and rising per capita Hero and Bajaj are also likely to launch 7‐8 income in rural India would lead to long-term healthy volume of two-wheelers. new refreshes/models, which will boost demand In the country's main cropping regions, the monsoon has been timely and 20-30% above average so far, prompting farmers to expand cultivated area by 9% to 930 lakh hectares, with the biggest gains in pulses, oilseeds and coarse cereals.

September 04, 2013 5

Automobiles

Exhibit 4: Paddy Exhibit 5: Jowar

Market Price (Rs / Qtl) % over MSP (RHS) Market Price (Rs / Qtl) % over MSP (RHS)

2,000 50% 1,800 80% 40% 1,700 1,500 60% 30% 1,600 40% 1,000 20% 1,500 20% 10% 1,400 500 0% 1,300 0% - -10% 1,200 -20% Jun 11 Jun 12 Jun 11 Jun 12 Oct 11 Oct 12 Oct 11 Oct 12 Oct Apr 11 Apr 12 Apr 13 Apr 11 Apr 12 Apr 13 Apr Feb 12 Feb 13 Feb 12 Feb 13 Feb Dec 11 Dec 12 Dec 11 Dec 12 Aug 11 Aug 12 Aug 11 Aug 12 Source: Ministry of Agriculture, PL Research Source: Ministry of Agriculture, PL Research

Exhibit 6: Cotton Exhibit 7: Wheat

Market Price (Rs / Qtl) % over MSP (RHS) Market Price (Rs / Qtl) % over MSP (RHS)

6,000 60% 1,800 35% 50% 30% 5,000 1,600 40% 25% 20% 4,000 30% 1,400 15% 20% 3,000 1,200 10% 10% 5% 2,000 0% 1,000 0% Jun 11 Jun 12 Jun 11 Jun 12 Oct 11 Oct 12 Oct 11 Oct 12 Oct Apr 11 Apr 12 Apr 13 Apr 11 Apr 12 Apr 13 Apr Feb 12 Feb 13 Feb 12 Feb 13 Feb Dec 11 Dec 12 Dec 11 Dec 12 Aug 11 Aug 12 Aug 11 Aug 12 Source: Ministry of Agriculture, PL Research Source: Ministry of Agriculture, PL Research

September 04, 2013 6

Automobiles

Competitive intensity likely to slowdown

Scooters

We expect 12- 13% CAGR in scooter volumes for the next two years. We expect two- wheeler volumes to grow at ~7% CAGR, mainly led by 12.2% CAGR in scooter volumes and 6.5% CAGR in motorcycle volumes over FY13-FY15E period. Scooter share in the last three years has increased from 15% to 21% of two-wheeler volumes, mainly driven by (a) growing acceptability of gearless scooters, particularly by women (b) rising urbanization and increasing proportion of working women (3) new launches.

Exhibit 8: Scooter Segment ‐ Competitive Scenario Company 2010‐11 2011‐12 2012‐13 2013‐14 2014‐15 Hero MotoCorp Ltd 342,991 414,389 549,808 690,000 793,500 YoY gr. (%) 570.2 20.8 32.7 25.5 15.0 MS (%) 16.7 16.2 18.8 21.0 21.6 Honda Motorcycle & Scooter India (Pvt) Ltd 893,335 1,224,579 1,420,115 1,620,000 1,824,000 YoY gr. (%) 37.1 16.0 14.1 12.6 MS (%) 43.4 47.9 48.6 49.3 49.6 India Yamaha Motor Pvt Ltd 0 60,281 132,000 153,600 YoY gr. (%) 119.0 16.4 MS (%) NA 2.1 4.0 4.2 Mahindra Two Wheelers Ltd 155,260 134,518 101,530 78,000 82,800 YoY gr. (%) (13.4) (24.5) (23.2) 6.2 MS (%) 5.3 3.5 2.4 2.2 Suzuki Motorcycle India Pvt Ltd 230,603 288,603 328,766 300,000 330,000 YoY gr. (%) 25.2 13.9 (8.7) 10.0 MS (%) 11.3 11.2 9.1 9.0 TVS Motor Company Ltd 435,388 496,892 424,183 426,000 456,000 YoY gr. (%) 14.1 (14.6) 0.4 7.0 MS (%) 19.4 14.5 13.0 12.4 Total 2,057,577 2,558,981 2,923,401 3,283,200 3,680,700 YoY gr. (%) 24.4 14.2 12.3 12.1

Source: SIAM Data, PL Research

Going forward, in our view, Hero would gain 180bps in market share in scooter segment, thanks to ‘Maestro’ and ‘Pleasure’ at 21.6%.

September 04, 2013 7

Automobiles

Motorcycles

Over the last two years, HMSI has gained 450bps in motorcycles to 11.8% in FY13 and 520bps MS in scooters segment to 48.6% in FY13E. At the same time, HMCL has lost only 150bps market share in motorcycles to 53.3% in FY13E, whereas it has gained market share of 210bps to 18.8% in FY13.

Exhibit 9: Motorcycle Segment – Competitive Scenario 2010‐11 2011‐12 2012‐13 2013‐14 2014‐15 Bajaj Auto Ltd 2,414,606 2,566,757 2,463,863 2,232,000 2,421,720 YoY gr. (%) 6.3 (4.0) (9.4) 8.5 MS (%) 26.8 25.5 24.4 21.7 21.5 Hero MotoCorp Ltd 4,926,390 5,628,513 5,362,730 5,460,000 6,006,000 YoY gr. (%) 14.3 (4.7) 1.8 10.0 MS (%) 54.7 55.9 53.2 53.1 53.3 Honda Motorcycle & Scooter India (Pvt) Ltd 658,043 771,715 1,186,726 1,488,000 1,680,000 YoY gr. (%) 17.3 53.8 25.4 12.9 MS (%) 7.3 7.7 11.8 14.5 14.9 India Yamaha Motor Pvt Ltd 277,546 355,493 302,562 300,000 294,000 YoY gr. (%) 28.1 (14.9) (0.8) (2.0) MS (%) 3.1 3.5 3.0 2.9 2.6 Royal Enfield (Unit of Eicher Ltd) 54,475 78,546 120,694 168,000 186,000 YoY gr. (%) 44.2 53.7 39.2 10.7 MS (%) 0.6 0.8 1.2 1.6 1.7 Suzuki Motorcycle India Pvt Ltd 50,678 50,081 85,211 72,000 75,600 YoY gr. (%) ‐1.2 70.1 (15.5) 5.0 MS (%) 0.6 0.5 0.8 0.7 0.7 TVS Motor Company Ltd 632,150 621,722 558,468 558,000 588,000 YoY gr. (%) (1.6) (10.2) (0.1) 5.4 MS (%) 7.0 6.2 5.5 5.4 5.2 Total 9,013,888 10,073,303 10,085,586 10,287,080 11,263,520 YoY gr. (%) 11.8 0.1 2.0 9.5

Source: SIAM Data, PL Research

In our view, Hero is likely to protect its turf Over the last two years, HMSI has gained 450bps in motorcycles to 11.8% in FY13 in the motorcycle segment by maintaining and 520bps MS in scooters segment to 48.6% in FY13E. At the same time, HMCL has its market share at 53.2% in FY15E. lost only 150bps market share in motorcycles to 53.2% in FY13E, whereas it has gained market share of 210bps to 18.8% in FY13.

HMSI is likely to further gain market share to the tune of 260bps to 14.7% by FY15E at the cost of Bajaj Auto.

September 04, 2013 8

Automobiles

New / Recent Launches

Exhibit 10: Scooter Segment – New Launches New Launches Price (Rs ex showroom Delhi) Engine Displacement

Piaggio Vespa 60,000 125cc

Ray / Spark 47,102 125cc

Maestro 48,900 110cc

Activa 49,700 110cc

Dio 47,000 110cc

Source: Company Data, PL Research

September 04, 2013 9

Automobiles

Exhibit 11: Motorcycle segment – New Launches New Launches Price (Rs ex showroom Delhi) Engine Displacement

Ignitor 63,800 125cc

Passion X pro 52,700 110cc

Super Splendor 53,900 125cc

Splendor NXG 49,000 100cc

Dream Yuga 52,400 110cc

Dream Neo 51,500 110cc

CBF Stunner 60,200 125cc

Source: Company Data, PL Research

September 04, 2013 10

Automobiles

Indian manufactures to gain at the cost of their Chinese counterparts

Two key export markets, mainly Africa and Latin America, are currently dominated by Chinese players, with ~75-80% market share and ~70% market share, respectively.

While the Indian players have been gaining share from the Chinese mainly on account of their better quality, there is a likelihood of further market share gains on account of a) rising labour cost in China b) 16% rupee depreciation v/s 3% CNY appreciation against the USD.

Exhibit 12: Chinese Yuan (RMB v/s USD) Exhibit 13: Indian Rupee (INR v/s USD)

6.40 70.0 6.35 6.30 65.0 6.25 6.20 60.0 6.15 6.10 55.0 6.05 6.00 50.0 Jul-13 Jul-13 Jan-13 Jan-13 Jun-13 Jun-13 Oct-12 Oct-12 Apr-13 Apr-13 Feb-13 Feb-13 Sep-12 Sep-12 Dec-12 Dec-12 Aug-13 Aug-13 Aug-12 Aug-12 Nov-12 Nov-12 Mar-13 Mar-13 May-13 May-13 Source: Bloomberg, PL Research Source: Bloomberg, PL Research

A report last month by the Nikkei news agency showed per capita labour costs increasing by more than 60% between 2009 and last year, which would make it higher than all its significant competitors in Asia.

In 2010, an assembly line worker costs about 2,000 Yuan per month, but now it is about 2,700 Yuan per month. Every year, salaries increase by 10% to 15%.

September 04, 2013 11

Automobiles

Two‐wheeler exports likely to grow in double‐digit led by Africa and LatAm

Given the low penetration in African and Latin American market relative to the Asian market, these regions are likely to drive double-digit growth over the next 4-5 years.

Given that there are no plants in Africa, it is the largest importer of motorcycles globally, thereby, making it the most important export market for Indian players. With an overall population of ~1bn people and with the fastest population growth rate in the world, the African market has a lot of potential.

In Latin American markets like Argentina and Chile, market share gains are likely, given the currency as well as quality advantage. In our assessment, exports from Indian manufacturers are likely to grow in the region of 13-15% over the next five years.

Exhibit 14: Two‐wheeler Penetration

40% 35% 30% 25% 20% 15% 10% 5% 0% India Thailand Vietnam Indonesia China

Source: PL Research

Exhibit 15: Global Two‐wheeler

India 20% Japanese / Other Developed 35%

China 45%

Source: PL Research

September 04, 2013 12

Automobiles

African Market – Motorcycles used as Taxis ‐ Dominated by Chinese Players

With an overall population of ~1bn people and with the fastest population growth rate in the world, the African market has a lot of potential. Income levels across majority of African countries are gradually reaching a stage of GDP US$1,000 per capita where two-wheeler sales really take off.

Exhibit 16: Low penetration in Africa

4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Nigeria West Africa East & Central North & Southern Africa Africa

Source: PL Research

Nigeria – Dominated by Chinese

In Nigeria, motorcycles are mainly used as taxis as a result of the collapse of the bus transport services in the region. They are referred by various names – Okadas in Nigeria, Boda Boda in Uganda, Kupapatas in Angola and Bendskins in Cameroon – and constitute bulk of the motorcycle sales in the region.

As the income level improves, people will Motorcycle taxis are referred as Okadas in Nigeria, the name originating from one of start using motorcycles as a means of Nigeria’s popular local airline Okada Air because, like the airline, motorcycles could personal transport manoeuvre through heavy traffic and take their passengers to their destinations in a timely manner. The Nigeria market has one of the lowest penetrations of 3.4%; hence, the potential for growth is still high.

Exhibit 17: African Countries data GDP per Capita 5 Yr GDP growth 10 Yr GDP growth Population (m) Nigeria 1555 7% 9% 160 Ghana 1765 8% 7% 24 Ivory Cost 549 1% 1% 23

Source: PL Research

September 04, 2013 13

Automobiles

Given the fact that motorcycles are largely used as taxis here, cheap motorcycles are the norm here and hence, Chinese dominate the market. In fact till 2005, they were virtually the only players in the market.

Exhibit 18: Nigeria Market – Chinese players dominate

Chinese Players Indian Players

120%

100% 4% 25% 22% 23% 80%

60% 95% 40% 75% 78% 76% 20%

0% 2007 2009 2010 2011

Source: PL Research

Nigerians have started appreciating Bajaj’s quality and realising that though the upfront cost is higher with a Bajaj vehicle, the total cost of ownership on account of the lower maintenance and better mileage is lower than that of Chinese bikes.

Bajaj Auto entered the Nigerian market in The Boxer brand with its larger seats is suitable for usage as a taxi. Bajaj has recently 2005 and has had great success in the past launched the Boxer 150, which has been well received by the market. five years. Its market share has already reached ~24% despite the fact that its But with the fact that motorcycles for personal use would be the next growth driver vehicles are almost 50% more expensive the volumes in this market can continue to grow at 8-10% CAGR over the next five than the Chinese bikes years.

Opportunity for Bajaj Auto in the three‐wheeler segment: Given the increase incidence of Nigeria banning motorcycle taxis, we have assumed a 10% CAGR in volumes in Nigeria v/s a 20% CAGR in volumes in Eastern and Central Africa where penetration at 0.8% is very low.

Already, a number of these states which have banned three-wheelers have started replacing motorcycle taxis with tricycles from Bajaj Auto; hence, three-wheelers can be a big opportunity here.

September 04, 2013 14

Automobiles

Western Africa

With a combined population of ~130m and a penetration of only 2.5%, this region too has a lot of potential, going forward. Given their income levels and their population, Ghana and Ivory Coast could generate higher growth and thus, be a big opportunity for big players.

Exhibit 19: West African Market – Chinese Players have an almost monopoly

Chinese Players Indian Players Japanese Players

100%

80%

60%

40%

20%

0% 2007 2009 2010 2011

Source: PL Research

This region is completely dominated by Chinese manufacturers who have a >90% share of the market. In this region, the key competition for Bajaj Auto comes from the Chinese competitors and for reasons outlined above, we reckon Bajaj will be able to win market share here.

We believe Bajaj can increase its market share from ~3% currently to ~15% in the next five years and given the fact that the market penetration is low, the market also has the potential to grow at 12-14% CAGR over the next five years.

September 04, 2013 15

Automobiles

Latin America – dominated by Japanese and Chinese Players

Overall, the Latin American export market excl. Brazil is similar in size to the African market at ~US$2bn. Brazil, which is the largest market in the region with an annual demand of 2m units is currently dominated by Honda with an 82% market share which has a local production base in Brazil as well.

With an overall population of 340m (one-third of Africa), the potential opportunity in Latin America is not as large as the one in Africa. However, Latin America is already in the midst of a very strong boom in two-wheelers and hence, represents a good near-term opportunity.

Latin American countries are a bit of a contradiction in the sense that with GDP per capita at ~US$10,000, countries normally start moving away from two-wheelers to passenger cars. Also, a number of these countries already have a higher passenger car penetration than two-wheeler penetration.

The reason attributed to a trend different from the norm is on account of very wide income inequality in these countries. Thus, despite these countries being “middle- income” countries, ~40% of the population in these countries is poor.

Exhibit 20: Latin America Market GDP per Capita (PPP) 5 Yr GDP growth 10 Yr GDP growth Population (m) Argentina 17,554 7% 6% 41 Chile 15,848 4% 4% 17 Columbia 9,124 4% 4% 46 Guatemala 4,396 3% 3% 15 Peru 9,429 7% 6% 30 Brazil 10,264 4% 4% 195

Source: PL Research

For e.g., Argentinean two‐wheeler market Most of the countries have witnessed strong growth led by investments by today is 6x of what it used to be in 2005 Governments in upliftment of poor and hence, a surge in employment in the 2000s and is the second largest importer of two‐ has also helped. This reduction in inequality has resulted in the emergence of a wheelers globally after Nigeria strong middle class and this consequently has resulted in a strong demand for two- wheelers.

September 04, 2013 16

Automobiles

Exhibit 21: Latin American Market

Indian MS Chinese MS

Argentina Peru Colombia Venezuela Guatemala Paraguay Chile Dominican

0% 20% 40% 60% 80% 100% 120%

Source: PL Research

South Asia – Dominated by Indian Manufacturers

Exhibit 22: Asian Markets GDP per Capita (PPP) 5 Yr GDP growth 10 Yr GDP growth Population (m) Sri Lanka 5,674 7% 6% 21 Bangladesh 1,693 6% 6% 167 Nepal 1,328 4% 4% 28

Source: PL Research

Exhibit 23: Low Penetration – Huge opportunity

5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Sri Lanka Bangladesh Nepal

Source: PL Research

September 04, 2013 17

Automobiles

Exhibit 24: Export Market – Huge volume potential for Indian Manufacturers (m) Bajaj Auto Bajaj Auto Hero Motocorp 2W FY13 Market FY18E Penetration Market Market Growth Market Market Market Volumes Volumes Volumes Size Share Size Share Share South Asia 1.0% 1.2 0.2 16.7% 8.0% 1.8 0.3 17.0% 0.1 5.0% Nigeria 3.5% 1.4 0.3 25.6% 10.0% 2.2 0.6 28.0% 0.3 12.0% West Africa 2.5% 1.0 0.0 3.0% 12.0% 1.8 0.3 15.0% 0.1 5.0% East & Central Africa 0.8% 0.8 0.2 30.0% 15.0% 1.6 0.5 30.0% 0.2 10.0% North & Southern Africa 1.0% 0.4 0.0 7.5% 10.0% 0.6 0.1 10.0% 0.0 5.0% Philippines, LatAm 4.0% 1.2 0.4 29.2% 10.0% 1.9 0.6 30.0% 0.2 10.0% (Colombia, Peru) LatAm (Argentina, Chile) 5.0% 1.8 0.1 3.9% 10.0% 2.9 0.1 5.0% 0.0 1.0% Total 7.8 1.3 16.3% 12.8 2.4 19.1% 0.9

Source: PL Research

We expect Exports to grow at a 13-14% CAGR for the Indian Manufacturers over the next five year period (FY13-FY15E).

Overall, Bajaj’s market share is likely to improve by 300bps to 19.4% over the next five years, translating into volumes of 2.4m in FY18E as against 1.3m in FY13.

On the other hand, with its aggressive export plan, we believe Hero Motocorp could clock volumes of 0.9m in FY18E from 0.16m in FY13. This would be in line with the management’s strategy to increase exports to 10% of overall volumes from ~2.6% currently.

September 04, 2013 18

Automobiles

COMPANIES

September 04, 2013 19 Bajaj Auto

Export revenues to shore up margins; Upgrade to Accumulate

September 04, 2013  Export revenues to grow by 18.5% CAGR over FY13‐FY15E period: Led by 10.5% CAGR in average realisation/unit on account of rupee depreciation, export

Surjit Arora revenues are likely to increase from Rs67bn in FY13 to Rs94bn in FY15E. As [email protected] against flattish two-wheeler volumes in FY14E, we anticipate a strong recovery +91-22-66322235 of 13-14% in volumes in FY15E led by growth in African market and market

share gain in Latin American market. Sri Lanka seems to have bottomed out; Update

however, environment in Egypt has not improved. We expect the ASPs/vehicle

to increase by 14% YoY in FY14E mainly on account of rupee depreciation. (We have assumed 60% benefit being retained). The management highlighted that Rating Accumulate the export realisation in the Q1FY14 stood at Rs55.6/$ which would inch Price Rs1,889 Company Target Price Rs2,083 upwards to Rs58-59/$ in the coming quarters. Implied Upside 10.3%  Three‐wheeler volumes to grow at 11.8% CAGR during FY13‐FY15E period: Sensex 18,568 With the opening of new permits and launch of diesel passenger three- Nifty 5,448 wheelers, volumes are likely to grow at a CAGR of 10% during FY13-FY15E (Prices as on September 04, 2013) period. Permits for 20,000 three-wheelers have opened in Hyderabad and 35,000 permits are likely to open in Maharashtra soon. The company is Trading data confident of maintaining a monthly run-rate of 40,000 driven by new permits Market Cap. (Rs bn) 545.8 and strong exports. Bajaj Auto would tend to benefit the most from new permits Shares o/s (m) 289.0 being issued as it holds a dominant market share in this segment. We expect the 3M Avg. Daily value (Rs m) 913.7 domestic segment to grow at ~10.0% CAGR and exports to grow at ~13.5% CAGR Major shareholders Promoters 50.02% for FY13-FY15E period. Foreign 18.20% Domestic Inst. 7.26% Contd…21 Public & Other 24.52% Stock Performance (%) 1M 6M 12M Absolute (1.1) (5.0) 14.6 Key financials (Y/e March) 2012 2013 2014E 2015E Relative 2.0 (3.4) 8.2 Revenues (Rs m) 198,041 202,880 209,408 238,863 How we differ from Consensus Growth (%) 20.8 2.4 3.2 14.1 EPS (Rs) PL Cons. % Diff. EBITDA (Rs m) 39,951 39,260 45,552 53,585 2014 119.1 123.5 ‐3.6 PAT (Rs m) 31,375 29,116 34,451 40,167 2015 138.8 141.8 ‐2.1 EPS (Rs) 108.4 100.6 119.1 138.8 Growth (%) 20.1 (7.2) 18.3 16.6 Price Performance (RIC:BAJA.BO, BB:BJAUT IN) Net DPS (Rs) 45.0 50.0 55.0 60.0 (Rs) 2,500 Profitability & Valuation 2012 2013 2014E 2015E 2,000 EBITDA margin (%) 20.2 19.4 21.8 22.4 1,500 RoE (%) 51.9 36.8 36.3 35.0 RoCE (%) 73.0 57.9 54.2 53.0 1,000 EV / sales (x) 2.7 2.7 2.6 2.2 500 EV / EBITDA (x) 13.3 13.8 11.9 10.0 0 PE (x) 17.4 18.8 15.9 13.6 P / BV (x) 9.0 6.9 5.8 4.8 Jul-13 Jan-13 Sep-13 Sep-12 Nov-12 Mar-13

May-13 Net dividend yield (%) 2.4 2.6 2.9 3.2

Source: Bloomberg Source: Company Data; PL Research

Bajaj Auto

 Two‐wheeler volumes to recover post CY13: As the slowdown in the domestic market continues and the competitive intensity increases, we don’t see a meaningful growth in the domestic market in FY14E for Bajaj Auto. However, given the six new variants of Discover to be launched over the next six months, there is likely to be recovery in volumes in H2FY14. We expect a 9.5% decline in domestic two-wheeler volumes in FY14E (YTD -14.0% decline) and build in 8.5% volume growth in FY15E (anticipating recovery in the two-wheeler sector).

 Valuations attractive, given 17.5% earnings CAGR; Upgrade to ‘Accumulate’: We expect earnings to grow at a 17.5% CAGR over the next two years led by higher realisation in exports in FY14E and volume recovery in both export and domestic market in FY15E. We had a ‘Reduce’ rating on the stock in our post result note ((Stock Price: 1,985). However, with a positive outlook on the two- wheeler sector, the valuation at 15.9x FY12E EPS and 13.6x FY15E EPS seems attractive. Hence, we upgrade the stock to ‘Accumulate’ from ‘Reduce’ with a target price of Rs2,083 based on 15x FY15E EPS, a 10% premium to its average P/E of 13.5x 1 year fwd. (Earlier TP – Rs1,904 @14x FY15E EPS).

September 04, 2013 21

Bajaj Auto

Export revenues to grow by 18.5% CAGR over FY13‐FY15E period

In FY13, exports saw flattish volumes at 1.55m units compared to 1.58m in the previous period. In large measure, this has to do with a key market, Sri Lanka, which substantially raised import tariffs on motorcycles and three-wheelers.

Exhibit 1: Three‐wheeler Volumes (Nos) Exhibit 2: Two‐wheeler Volumes (Nos)

Domestic Export Domestic Export

350,000 3,000,000 300,000 2,500,000 250,000 2,000,000 200,000 1,500,000 150,000 100,000 1,000,000 50,000 500,000 - 0 FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E

Source: Company Data, PL Research Source: Company Data, PL Research

Since Bajaj Auto accounts for almost 84% of India’s three-wheeler exports, it is not surprising that the company’s exports stumbled by 18.7% to 253,926 units. A key reason for this fall in exports was Sri Lanka, one of the most attractive markets for the company. In May 2012, Sri Lanka significantly raised the import tariff on three- wheelers which seriously affected sales. In addition, during February/March 2013, another major market for exports, Egypt, witnessed difficulties in opening of Letters of Credit, largely due to short availability of US dollars in that country.

At 47% of the total exports, Africa accounts for the largest share by volume, followed by Asia and Middle East at 32%. This is for both motorcycles and three-wheelers.

Exhibit 3: Export Volume Break‐up

Others Latin America 1% 20%

Africa 47%

Asia & ME 32%

Source: Company Data, PL Research

September 04, 2013 22

Bajaj Auto

Product wise, the highlights of the year have been the successful launch of Discover 125 ST and the Pulsar 200 NS across Latin America and Asia. In Latin America, both these models have helped reinforce Bajaj Auto’s dominant leadership position.

As in the last year, Boxer is the largest selling single brand in Africa. A new 150 cc version of it, the BM150, has continued to do well in East Africa and Egypt. Within Africa, Nigeria has witnessed significant growth in volumes and Bajaj Auto has captured market share from Chinese brands.

Within motorcycles, Boxer is the largest selling single brand in Africa. BM‐150 has been received well and holds good growth prospects. In Philippines, Boxer BM‐150 and the Pulsar 135 were launched and were well received, with the latter helping Bajaj Auto gain 34% market share in the Sports segment.

In Latin America, where Bajaj Auto sells 20% of its total motorcycle exports, market shares increased with the Pulsar brand doing exceptionally well. Pulsar 135 ranks among the top selling motorcycle models in various Latin American markets.

Quarterly Trend in profit

Exhibit 4: Quarterly Projection YoY gr. YoY gr. YoY gr. YoY gr. Y/e March Q1FY14 Q1FY13 Q2FY14E Q2FY13 Q3FY14E Q3FY13 Q4FY14E Q4FY13 (%) (%) (%) (%) Vehicles Sold (2&3 982,590 1,078,971 (8.9) 933,098 1,049,208 (11.1) 1,040,000 1,127,741 (7.8) 1,081,048 981,242 10.2 wheeler) Net sales 49,637 49,219 0.8 48,592 50,496 (3.8) 54,701 55,064 (0.7) 56,478 48,220 17.1 Operating Profit 10,553 9,280 13.7 10,840 9,924 9.2 12,059 11,054 9.1 12,101 9,121 32.7 OPM (%) 21.3 18.9 22.3 19.7 22.0 20.0 21.4 18.9 Adjusted PAT 8,338 6,855 21.6 8,193 7,407 10.6 9,059 8,187 10.6 8,871 6,095 45.5

Source: Company Data, PL Research

Despite volume de-growth of 8.9% YoY, PAT grew by 21.6% YoY, mainly led by currency benefits where export realisation/vehicle was higher by more than 20% YoY.

We anticipate similar trend where volumes would continue their slide over the next two quarters. However, with higher export realization/vehicle, the overall profitability is likely to grow at 10-11% for the next couple of quarters, despite a de- growth in volumes.

September 04, 2013 23

Bajaj Auto

Exhibit 5: 1yr forward PE

P/E (x) Peak(x) Avg(x) Median(x) Min(x) 18.6 20.0 14.7 15.4 15.0

10.0 13.5 4.8 5.0

0.0 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Sep-09 Sep-10 Sep-11 Sep-12 Dec-09 Dec-10 Dec-11 Dec-12 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Source: Company Data, Bloomberg, PL Research

Exhibit 6: 1yr forward P/BV

P/B (x) Peak(x) Avg(x) Median(x) Min(x)

9.0 8.1 8.0 7.0 6.1 6.0 5.0 4.0 3.0 5.5 3.0 2.0 1.0 0.0 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Sep-09 Sep-10 Sep-11 Sep-12 Dec-09 Dec-10 Dec-11 Dec-12 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Source: Company Data, Bloomberg, PL Research

Exhibit 7: 1yr forward EV/EBITDA

800,000

700,000 14.0x 600,000 11.5x 500,000 9.0x 400,000 300,000 6.5x 200,000 4.0x 100,000 0 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Sep-09 Sep-10 Sep-11 Sep-12 Dec-09 Dec-10 Dec-11 Dec-12 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Source: Company Data, Bloomberg, PL Research

September 04, 2013 24

Bajaj Auto

Income Statement (Rs m) Balance Sheet Abstract (Rs m) Y/e March 2012 2013 2014E 2015E Y/e March 2012 2013 2014E 2015E Net Revenue 198,041 202,880 209,408 238,863 Shareholder's Funds 60,411 79,019 94,929 114,870 Raw Material Expenses 141,037 144,066 142,606 161,096 Total Debt 975 713 713 713 Gross Profit 57,004 58,814 66,802 77,766 Other Liabilities 484 1,151 1,151 1,151 Employee Cost 5,258 6,395 7,200 7,954 Total Liabilities 61,870 80,883 96,793 116,734 Other Expenses 11,795 13,159 14,050 16,226 Net Fixed Assets 14,913 20,277 25,698 27,728 EBITDA 39,951 39,260 45,552 53,585 Goodwill — — — — Depr. & Amortization 1,456 1,640 1,812 2,002 Investments 48,828 64,305 74,305 84,305 Net Interest 222 5 10 10 Net Current Assets (2,192) (4,402) (3,912) 3,998 Other Income 1,989 5,048 3,440 5,000 Cash & Equivalents 16,553 5,589 4,950 12,812 Profit before Tax 40,261 42,663 47,170 56,573 Other Current Assets 30,196 33,913 33,636 41,434 Total Tax 10,226 12,227 13,679 16,406 Current Liabilities 48,941 43,903 42,498 50,248 Profit after Tax 30,035 30,436 33,491 40,167 Other Assets 320 703 703 703 Ex-Od items / Min. Int. (1,340) 1,320 (960) — Total Assets 61,870 80,883 96,793 116,734 Adj. PAT 31,375 29,116 34,451 40,167 Avg. Shares O/S (m) 289.4 289.4 289.4 289.4 EPS (Rs.) 108.4 100.6 119.1 138.8

Cash Flow Abstract (Rs m) Quarterly Financials (Rs m) Y/e March 2012 2013 2014E 2015E Y/e March Q2FY13 Q3FY13 Q4FY13 Q1FY14 C/F from Operations 31,932 21,344 34,175 42,121 Net Revenue 50,496 55,064 48,220 49,637 C/F from Investing (6,819) (12,777) (17,233) (14,033) EBITDA 9,924 11,054 9,121 10,553 C/F from Financing (14,125) (19,531) (18,541) (20,226) % of revenue 19.7 20.1 18.9 21.3 Inc. / Dec. in Cash 10,988 (10,965) (1,598) 7,862 Depr. & Amortization 410 411 466 444 Opening Cash 5,565 16,553 5,588 4,950 Net Interest — — — — Closing Cash 16,553 5,588 4,950 12,811 Other Income 895 1,095 809 1,230 FCFF 35,154 17,652 27,902 38,088 Profit before Tax 10,409 11,739 9,463 12,299 FCFE 32,877 17,389 27,902 38,088 Total Tax 3,000 3,550 2,676 3,002 Profit after Tax 7,409 8,188 6,787 8,338 Adj. PAT 7,409 8,188 6,787 8,338

Key Financial Metrics Key Operating Metrics Y/e March 2012 2013 2014E 2015E Y/e March 2012 2013 2014E 2015E Growth 2W Domestic Vol. (nos) 2,566,757 2,463,874 2,232,000 2,421,720 Revenue (%) 20.8 2.4 3.2 14.1 2W Export Vol. (nos) 1,267,648 1,293,231 1,273,893 1,452,238 EBITDA (%) 26.0 (1.7) 16.0 17.6 3W Domestic Vol. (nos) 202,979 226,131 244,221 273,528 PAT (%) 20.1 (7.2) 18.3 16.6 3W Export Vol. (nos) 312,176 253,926 286,622 326,749 EPS (%) 20.1 (7.2) 18.3 16.6 Total Vol. (nos) 4,349,560 4,237,162 4,036,736 4,474,235 Profitability Net Realization/Unit (Rs) 45,531 47,881 51,876 53,386 EBITDA Margin (%) 20.2 19.4 21.8 22.4 RM Cost/Unit (Rs) 32,426 34,001 35,327 36,005 PAT Margin (%) 15.8 14.4 16.5 16.8 EBITDA/Unit (Rs) 9,185 9,266 11,284 11,976 RoCE (%) 73.0 57.9 54.2 53.0 Net Profit /Unit (Rs) 7,215 6,871 8,534 8,977 RoE (%) 51.9 36.8 36.3 35.0 Source: Company Data, PL Research. Balance Sheet Net Debt : Equity (0.3) (0.1) — (0.1) Net Wrkng Cap. (days) (45) (37) (40) (42) Valuation PER (x) 17.4 18.8 15.9 13.6 P / B (x) 9.0 6.9 5.8 4.8 EV / EBITDA (x) 13.3 13.8 11.9 10.0 EV / Sales (x) 2.7 2.7 2.6 2.2 Earnings Quality Eff. Tax Rate 25.4 28.7 29.0 29.0 Other Inc / PBT 8.0 9.0 9.1 8.8 Eff. Depr. Rate (%) 4.3 4.3 4.0 4.0 FCFE / PAT 104.8 59.7 81.0 94.8 Source: Company Data, PL Research.

September 04, 2013 25 Hero Motocorp

Volume Recovery Ahead; Upgrade to Accumulate

September 04, 2013  Management commentary positive; Rural economy to drive volumes: In the recent Annual Report, the management was cautiously optimistic and expects a

Surjit Arora recovery in two-wheeler volumes driven by good monsoon and pre-election [email protected] spending. In the country's main cropping regions, monsoon has been timely and +91-22-66322235 20-30% above average so far, prompting farmers to expand cultivated area by

9% to 930 lakh hectares, with the biggest gains in pulses, oilseeds and coarse Update

cereals. Low penetration level, lack of adequate mode public transport and

rising per capita income in rural India would lead to long-term healthy volume of two-wheelers. The company has benefited from stronger rural demand - rural Rating Accumulate forms 45% of Hero's sales versus 40% for the industry and beneficial impact of Price Rs1,927 Company Target Price Rs2,176 the warranty scheme (first to offer a 5-year warranty on two-wheelers). Implied Upside 12.9%  Competitive intensity receding; Hero Motocorp to maintain its turf: Hero has Sensex 18,568 made a strong come back in the recent months on the strength of its strong Nifty 5,448 brands and distribution. Given the strong distribution reach and wider product (Prices as on September 04, 2013) portfolio, including scooters, we believe volumes could grow by ~4% in FY14E and 11% in FY15E, thereby, maintaining its turf in motorcycles with a market Trading data share of 53.6%. Going forward, in our view, Hero would gain 180bps in market Market Cap. (Rs bn) 384.7 share in the scooter segment thanks to ‘Maestro’ and ‘Pleasure’ at 21.6%. HMSI Shares o/s (m) 199.7 is likely to further gain market share to the tune of 260bps to 14.7% by FY15E at 3M Avg. Daily value (Rs m) 898.9 the cost of Bajaj Auto. Our channel checks suggest good traction for its products, Major shareholders Promoters 52.21% both in scooters as well as motorcycle segments, whereas, Honda’s Dream series Foreign 30.57% has fizzled out and no longer a threat. Domestic Inst. 8.46% Public & Other 8.76% Contd…27 Stock Performance (%) 1M 6M 12M Absolute 6.9 17.6 6.6 Key financials (Y/e March) 2012 2013 2014E 2015E Relative 10.0 19.2 0.1 Revenues (Rs m) 235,789 237,681 255,095 291,110 How we differ from Consensus Growth (%) 21.5 0.8 7.3 14.1 EPS (Rs) PL Cons. % Diff. EBITDA (Rs m) 36,047 32,845 37,331 43,923 2014 109.3 109.4 0.0 PAT (Rs m) 23,782 21,100 21,834 28,975 2015 145.1 139.3 4.2 EPS (Rs) 119.1 105.7 109.3 145.1 Growth (%) 18.5 (11.3) 3.5 32.7 Price Performance (RIC: HROM.BO, BB: HMCL Net DPS (Rs) 45.0 60.0 65.0 70.0 IN) (Rs) Profitability & Valuation 2012 2013 2014E 2015E 2,500 EBITDA margin (%) 15.3 13.8 14.6 15.1 2,000 RoE (%) 65.6 45.6 39.2 42.4 RoCE (%) 55.7 46.3 51.6 58.6 1,500 EV / sales (x) 1.6 1.6 1.5 1.3 1,000 EV / EBITDA (x) 10.7 11.7 10.1 8.5 500 PE (x) 16.2 18.2 17.6 13.3 0 P / BV (x) 9.0 7.7 6.3 5.1 Net dividend yield (%) 2.3 3.1 3.4 3.6 Jul-13 Jan-13 Sep-13 Sep-12 Nov-12 Mar-13 May-13 Source: Company Data; PL Research

Hero Motocorp

 Advanced R&D by tie‐ups with various international companies: During 2012- 13, Hero Motocorp tied up with the Italian design firm Engines Engineering. The Bologna-based firm has been developing and designing scooters and motorcycles for various manufacturers over the years and is now sharing its expertise with Hero MotoCorp to help develop next generation two-wheelers. At the same time, R&D tie-up with AVL of Austria will help in developing new engines. It also tied up with EBR of the US to launch high-performance platform bikes for meeting domestic and international needs.

 Entered high growth markets of Africa, LatAm and Asia: HMCL entered into a partnership with the reputed ABANS Group of Sri Lanka. Under the alliance, ABANS has been appointed as the sole distributor of Hero MotoCorp range of two-wheelers in Sri Lanka. HMCL has launched its range of two-wheelers in Guatemala City, El Salvador and Honduras, marking the iconic Indian brand’s first foray into new international markets. A partnership has been forged with Indy Motos Group of Guatemala to bring its two-wheelers to these markets. Under the alliance, Indy Motos has been appointed as the authorized distributor of Hero MotoCorp range of two-wheelers in Guatemala, Honduras and El Salvador. We expect exports to account for ~10% of volumes (0.9m) by FY18E end. We expect exports to grow by 40% in FY15E albeit at a lower base.

 Earnings to grow at a CAGR of 18.0% for FY13‐FY15E period: We expect Hero to gain market share in scooters segment and maintain its market share in the motorcycle segment. We expect a 10.7% CAGR in revenues with margins likely to expand by 130bps (given the lower competitive intensity and cost cutting initiatives). At the same time, we expect savings of Rs4.5bn on account of royalty payments to Honda ending by March 2014. As a result, earnings are expected to grow at 18.0% CAGR for FY13-FY15E period. At the CMP, the stock trades at 17.6x FY14E EPS and 13.3x FY15E EPS. Hence, we upgrade the stock from ‘Reduce’ to ‘Accumulate’ with a TP of Rs2,176 based on 15x FY15E earnings, in line with its past 5 year average. The stock is likely to get re-rated given the strong rural economy and higher interest rates leading to a shift from four-wheeler stocks to two-wheelers.

September 04, 2013 27

Hero Motocorp

Competitive intensity receding; Hero Motocorp to maintain its turf

 The company has benefited from stronger rural demand - rural forms 45% of Hero's sales versus 40% for the industry and beneficial impact of the warranty scheme (first to offer a 5-year warranty on two-wheelers).

 Hero has made a strong come back in the recent months on the strength of its strong brands and distribution.

 Given the strong distribution reach and wider product portfolio, including scooters, we believe volumes could grow by ~4% in FY14E and 11% in FY15E, thereby, maintaining its turf in motorcycles with a market share of 53.3%.

 Going forward, in our view, Hero would gain 180bps in market share in the scooter segment thanks to ‘Maestro’ and ‘Pleasure’ at 21.6%.

 HMSI is likely to further gain market share to the tune of 260bps to 14.7% by FY15E at the cost of Bajaj Auto. Our channel checks suggest good traction for its products, both in scooters as well as motorcycle segments, whereas, Honda’s Dream series has fizzled out and no longer a threat.

September 04, 2013 28

Hero Motocorp

Entered high growth markets of Africa, LatAm and Asia

Exhibit 1: Hero Motocorp’s foray into Export Market Country Tie up Products Hero ‘Xtreme’ Nepal NGM ‘Pleasure’ - Scooter HF Deluxe & HF Dawn, Splendor NXG, Super Splendor, Sri Lanka ABANS Group Glamour, Passion Pro Karizma ZMR, Hunk, Xtreme ‘Pleasure’ – Scooter Hunk, Karizma, Glamour, Guatemala City, El Indy Motos Group HF Dawn, Splendor NXG, Super Salvador and Honduras Splendor and Achiever Source: Company Data, PL Research

Entry into Nepal

HMCL entered into a partnership with the reputed business house NGM to foray into Nepal. NGM has been appointed as the distributor of Hero MotoCorp range of two- wheelers in Nepal.

Sri Lankan foray

HMCL has entered into a partnership with the reputed ABANS Group of Sri Lanka. Under the alliance, ABANS has been appointed as the sole distributor of Hero MotoCorp range of two-wheelers in Sri Lanka.

Products launched in Sri Lanka

 Entry-level segment: HF Deluxe and HF Dawn

 Deluxe segment: Pro, Splendor NXG, Super Splendor, Glamour and Passion Pro

 Premium segment: Karizma ZMR, Hunk, Xtreme and Achiever

 Scooter: Pleasure

September 04, 2013 29

Hero Motocorp

Footprints across Central America

Under the alliance, Indy Motos has been HMCL launched our range of two-wheelers in Guatemala City, El Salvador and appointed as the authorized distributor of Honduras, marking the iconic Indian brand’s first foray into new international Hero MotoCorp range of two‐wheelers in markets. A partnership has been forged with Indy Motos Group of Guatemala to Guatemala, Honduras and El Salvador. bring its two-wheelers to these markets Products will be distributed through a network of outlets spread across these Launched Hunk, Karizma, Glamour, HF Dawn, Splendor NXG, Super Splendor and countries, with more new outlets to be Achiever across these markets added subsequently Exhibit 2: Volume Break‐up FY12 FY13 FY14E FY15E Scooters 414,389 549,808 684,000 793,500 Growth 21.9% 32.7% 24.4% 16.0% Motorcycles 5,628,513 5,362,730 5,460,000 6,006,000 Growth 14.7% ‐4.7% 1.8% 10.0% Exports 192,303 161,043 183,589 257,025 Growth ‐16.3% 14.0% 40.0% Total 6,235,205 6,073,581 6,327,589 7,056,525 Growth 15.4 (2.6) 5.8 11.5

Source: SIAM Data, PL Research

Quarterly Trend in profit

Exhibit 3: Quarterly projection YoY gr. YoY gr. YoY gr. YoY gr. Y/e March Q1FY14 Q1FY13 Q2FY14E Q2FY13 Q3FY14E Q3FY13 Q4FY14E Q4FY13 (%) (%) (%) (%) Volumes (m) 1.55 1.64 (5.1) 1.47 1.33 10.1 1.62 1.57 3.0 1.68 1.53 10.0 Net Sales 61,595 62,473 (1.4) 58,551 51,875 12.9 64,957 61,876 5.0 69,992 61,458 13.9 Operating Profit 9,152 9,369 (2.3) 8,392 7,192 16.7 9,368 7,786 20.3 10,418 8,498 22.6 OPM (%) 14.9 15.0 14.3 13.9 14.4 12.6 14.9 13.8 Adj. PAT 5,486 6,155 (10.9) 4,713 4,406 7.0 5,314 4,879 8.9 6,321 5,742 10.1

Source: Company Data, PL Research

With volume recovery, we expect HMCL to report profit growth in the ensuing three quarters as against a decline in PAT in Q1FY14.

September 04, 2013 30

Hero Motocorp

Exhibit 4: 1yr forward PE

P/E (x) Peak(x) Avg(x) Median(x) Min(x)

25.0 21.1

20.0 16.0 15.0 15.1 15.0 10.0 8.0

5.0

0.0 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Source: Company Data, Bloomberg, PL Research

Exhibit 5: 1yr forward P/BV

P/B (x) Peak(x) Avg(x) Median(x) Min(x) 13.1 14.0 12.0 10.0 7.9 8.0 5.5 6.0 3.6 4.0 2.0 0.0 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Source: Company Data, Bloomberg, PL Research

Exhibit 6: 1yr forward EV/EBITDA

600,000 14.0x 500,000 11.5x 400,000 9.0x 300,000 6.5x 200,000 4.0x 100,000

0 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Source: Company Data, Bloomberg, PL Research

September 04, 2013 31

Hero Motocorp

Income Statement (Rs m) Balance Sheet Abstract (Rs m) Y/e March 2012 2013 2014E 2015E Y/e March 2012 2013 2014E 2015E Net Revenue 235,789 237,681 255,095 291,110 Shareholder's Funds 42,898 50,062 61,442 75,201 Raw Material Expenses 172,816 173,977 184,367 208,435 Total Debt 380 — — — Gross Profit 62,974 63,705 70,728 82,675 Other Liabilities 12,197 4,346 — — Employee Cost 7,355 8,209 9,030 10,114 Total Liabilities 55,475 54,408 61,442 75,201 Other Expenses 19,572 22,650 24,367 28,638 Net Fixed Assets 38,244 31,331 41,020 53,777 EBITDA 36,047 32,845 37,331 43,923 Goodwill — — — — Depr. & Amortization 10,973 11,418 11,932 8,864 Investments 39,643 36,238 34,238 37,238 Net Interest (79) 120 110 125 Net Current Assets (22,411) (13,161) (13,816) (15,814) Other Income 3,494 3,984 4,500 4,950 Cash & Equivalents 768 1,810 7,632 9,438 Profit before Tax 28,647 25,291 29,789 39,885 Other Current Assets 20,235 27,037 27,112 30,559 Total Tax 4,864 4,191 7,955 10,909 Current Liabilities 43,414 42,008 48,561 55,811 Profit after Tax 23,782 21,100 21,834 28,975 Other Assets — — — — Ex-Od items / Min. Int. — — — — Total Assets 55,475 54,408 61,442 75,201 Adj. PAT 23,782 21,100 21,834 28,975 Avg. Shares O/S (m) 199.7 199.7 199.7 199.7 EPS (Rs.) 119.1 105.7 109.3 145.1

Cash Flow Abstract (Rs m) Quarterly Financials (Rs m) Y/e March 2012 2013 2014E 2015E Y/e March Q2FY13 Q3FY13 Q4FY13 Q1FY14 C/F from Operations 23,598 18,903 40,593 42,027 Net Revenue 51,875 61,876 61,458 61,595 C/F from Investing 13,645 3,997 (10,621) (15,621) EBITDA 7,192 7,786 8,498 9,152 C/F from Financing (24,582) (10,563) (13,899) (15,057) % of revenue 13.9 12.6 13.8 14.9 Inc. / Dec. in Cash 12,661 12,338 16,073 11,349 Depr. & Amortization 2,895 2,832 2,655 2,744 Opening Cash 715 768 1,810 7,632 Net Interest 30 30 31 30 Closing Cash 13,376 13,106 17,883 18,981 Other Income 993 901 1,045 1,123 FCFF 8,034 20,542 27,622 29,022 Profit before Tax 5,261 5,826 6,857 7,502 FCFE 8,058 20,162 27,622 29,022 Total Tax 855 947 1,115 2,016 Profit after Tax 4,406 4,879 5,742 5,486 Adj. PAT 4,406 4,879 5,742 5,486

Key Financial Metrics Key Operating Metrics Y/e March 2012 2013 2014E 2015E Y/e March 2012 2013 2014E 2015E Growth Total Vol. (nos) 6,235,205 6,075,583 6,327,589 7,056,525 Revenue (%) 21.5 0.8 7.3 14.1 Net Realization/Unit (Rs) 37,816 39,121 40,315 41,254 EBITDA (%) 20.9 (8.9) 13.7 17.7 RM Cost/Unit (Rs) 27,716 28,635 29,137 29,538 PAT (%) 18.5 (11.3) 3.5 32.7 Other Exp./Unit (Rs) 3,139 3,728 3,851 4,058 EPS (%) 18.5 (11.3) 3.5 32.7 EBITDA/Unit (Rs) 5,781 5,406 5,900 6,224 Profitability Net Profit/Unit (Rs) 3,814 3,486 3,451 4,106 EBITDA Margin (%) 15.3 13.8 14.6 15.1 Advertising (Rs m) 3,661 4,687 5,102 5,968 PAT Margin (%) 10.1 8.9 8.6 10.0 Depreciation (Rs m) 10,973 11,418 11,932 8,864 RoCE (%) 55.7 46.3 51.6 58.6 Tax Rate (%) 17 16 27 27 RoE (%) 65.6 45.6 39.2 42.4 Source: Company Data, PL Research. Balance Sheet Net Debt : Equity — — (0.1) (0.1) Net Wrkng Cap. (days) (30) (16) (22) (23) Valuation PER (x) 16.2 18.2 17.6 13.3 P / B (x) 9.0 7.7 6.3 5.1 EV / EBITDA (x) 10.7 11.7 10.1 8.5 EV / Sales (x) 1.6 1.6 1.5 1.3 Earnings Quality Eff. Tax Rate 17.0 16.6 26.7 27.4 Other Inc / PBT 12.2 15.8 15.1 12.4 Eff. Depr. Rate (%) 17.4 17.1 15.0 9.6 FCFE / PAT 33.9 95.6 126.5 100.2 Source: Company Data, PL Research.

September 04, 2013 32

Hero Motocorp

Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage

60% 52.8% 50%

40% Coverage 30% 26.4% 17.6% Total 20% of

% 10% 3.2% 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

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.

Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.

We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

September 04, 2013 33