INDIA DAILY July 9, 2019 India 8-Jul 1-day 1-mo 3-mo Sensex 38,721 (2.0) (2.3) (0.6) Nifty 11,559 (2.1) (2.6) (1.0) Contents Global/Regional indices Dow Jones 26,806 (0.4) 3.2 2.5 Daily Alerts Nasdaq Composite 8,098 (0.8) 4.6 2.4 Company alerts FTSE 7,549 (0.1) 3.0 1.7 Bajaj Auto: Annual report analysis Nikkei 21,667 0.6 3.7 (0.6) Hang Seng 28,332 (1.5) 5.1 (6.1) Key takeaways from annual report KOSPI 2,066 0.1 (0.3) (6.7) Fine-tune FY2020-21E EPS estimates; maintain REDUCE rating Value traded – India Cash (NSE+BSE) 343 324 357 Sobha: Strong sales momentum Derivatives (NSE) 11,615 9,431 7,968 Sales volume continues to remain upbeat, change in sales mix pulls Deri. open interest 3,221 3,014 3,332 realizations Maintain ADD with revised fair value of Rs580/share Forex/money market Sector alerts Change, basis points 8-Jul 1-day 1-mo 3-mo Banks: Still more room to converge Rs/US$ 68.6 (6) (96) (70) Remain positive on banks that have a higher share of corporate NPLs over 10yr govt bond, % 6.9 (10) (33) (82) retail Net investment (US$ mn) 5-Jul MTD CYTD Gradual shift in focus towards book value as compared to adjusted book FIIs 87 (368) 10,971 value MFs 28 (4) 1,261 A lot of positives underway, which we believe augur well for banks Top movers – 3mo basis Change, % Best performers 8-Jul 1-day 1-mo 3-mo TGBL IN Equity 264 (1.1) 2.5 25.4 TTAN IN Equity 1,252 (2.0) (1.3) 14.0 SBIN IN Equity 355 (4.1) 3.9 12.9 HPCL IN Equity 283 (1.5) (9.1) 10.5 BHARTI IN Equity 356 (2.3) (0.2) 10.4 Worst performers RCAPT IN Equity 61 (1.9) (39.0) (67.4) YES IN Equity 93 5.7 (33.4) (65.6) RELI IN Equity 50 (2.2) (32.4) (61.7) RPWR IN Equity 4 (3.6) (35.0) (59.4) JPA IN Equity 3 (8.5) (37.2) (53.4) [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. REDUCE Bajaj Auto (BJAUT) Automobiles & Components JULY 08, 2019 UPDATE Coverage view: Neutral Annual report analysis. Bajaj Auto’s annual report analysis highlights the success of Price (`): 2,780 the company’s aggressive pricing strategy in order to gain market share in the motorcycle Fair Value (`): 2,700 segment. However, the company’s EBITDA margin took a hit due to an inferior product BSE-30: 38,721 mix and higher discounts in 2HFY19. Entering the electric scooter market is a good opportunity for the company but shift to electric vehicles in the three-wheeler segment could be a risk for the company’s margin going ahead. Maintain REDUCE. Company data and valuation summary Bajaj Auto Stock data Forecasts/Valuations 2019 2020E 2021E 52-week range (Rs) (high,low) 3,195-2,420 EPS (Rs) 153.3 155.0 171.8 Market Cap. (Rs bn) 804.4 EPS growth (%) 8.4 1.1 10.8 Shareholding pattern (%) P/E (X) 18.1 17.9 16.2 Promoters 51.2 Sales (Rs bn) 302.5 319.8 355.9 FIIs 15.6 Net profits (Rs bn) 44.4 44.9 49.7 MFs 2.2 EBITDA (Rs bn) 49.8 49.7 55.2 Price performance (%) 1M 3M 12M EV/EBITDA (X) 12.6 12.3 10.7 Absolute (6.1) (2.6) (8.0) ROE (%) 22.9 19.6 19.6 Rel. to BSE-30 (4.0) (2.6) (15.2) Div. Yield (%) 2.2 2.2 2.5 Key takeaways from annual report Bajaj Auto’s revenues increased by 20% yoy in FY2019 led by strong volume growth in the economy bike segment. The company’s strategy to focus on the economy segment resulted in a market share gain of 670 bps, led by aggressive pricing of CT100 and Platina models. The company also improved market share in the premium segment from 28% in FY2018 to 32.3% in FY2019, due to (1) 40% yoy increase in Pulsar volumes and (2) 14% yoy increase in KTM volumes. Overall, the company gained 350 bps yoy market share in the domestic motorcycle segment in FY2019. However, EBITDA margin of the company declined by 270 bps yoy in FY2019. R&D as a percent of sales stood at 1.5% in FY2019. The company’s volumes grew by 8% yoy in the three-wheeler segment led by (1) 34% yoy growth in the goods segment and (2) 6% yoy growth in the passenger segment. The company sold 282,406 vehicles in petrol and alternate fuel versions and had 86% market share in this segment in FY2019. We believe that a significant portion of three- wheelers in the petrol and alternate fuel segments will shift to electric by FY2030. The company makes 20-25% of the EBITDA margin in the three-wheeler segment, which might be at risk in the medium term. The company reported 22% yoy revenue growth in the export segment led by (1) 22% yoy growth in export motorcycle volumes and (2) 43% yoy growth in export three-wheelers in FY2019. Hitesh Goel The company has increased its production capacity to 6.33 mn units in FY2019 from 6.24 mn units in FY2018 led by increase in production capacity in three-wheelers due to increased Nishit Jalan demand in both domestic and international markets. In CY2018, KTM Industries achieved record revenues of EUR1,560 mn (+2% yoy growth) led Rishi Vora by 10% yoy growth in sales volume. Fine-tune FY2020-21E EPS estimates; maintain REDUCE rating We have fine-tuned our FY2020-21E estimates. Maintain REDUCE; fair value revised to `2,700 based on 14X March 2021E core EPS + ₹240/share for KTM stake + ₹718/share value of cash and cash equivalents. [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Bajaj Auto Automobiles & Components Gains in domestic market share due to competitive pricing The domestic motorcycle industry grew by only 8% yoy in FY2019 despite strong sales in 1HFY19 due to (1) increase in prices owing to mandatory insurance cover of five years as well as introduction of stricter safety regulations and (2) weak festive sales. The economy market share in the domestic motorcycle industry volumes increased from 25% in FY2018 to 29% in FY2019, led by (1) aggressive pricing strategy adopted by Bajaj Auto and (2) increasing number of first-time motorcycle buyers in the economy segment. However, executive and premium segments struggled to capture market shares due to steep increase in prices. Bajaj Auto’s revenues increased by 20% yoy in FY2019 led by strong volume growth in the economy bike segment. The company’s strategy to focus on the economy segment resulted in a market share gain of 670 bps, led by aggressive pricing of CT100 and Platina models. The company also improved market share in the premium segment from 28% in FY2018 to 32.3% in FY2019, due to (1) 40% yoy increase in Pulsar volumes and (2) 14% yoy increase in KTM volumes. Overall, the company gained 350 bps yoy market share in the domestic motorcycle segment in FY2019. However, we would like to highlight that even after outperforming the industry in the domestic motorcycle segment, EBITDA margin of the company declined by 270 bps yoy as a result of a weak product mix in FY2019. The company will be launching its first electric scooter under the URBANITE brand in next six to nine months. We believe the company has good opportunity to enter the scooter segment and leverage the first-mover advantage in the electric scooter segment. Exhibit 1: Bajaj Auto gained 250 bps yoy market share in the domestic motorcycle segment in FY2019 Domestic motorcycle market share of major two-wheeler players, March fiscal year-ends, 2015-19 (%) Market share (%) 2015 2016 2017 2018 2019 Economy bike segment market share Hero 53.5 48.1 55.1 59.5 55.8 Honda — — — — — Bajaj 24.7 35.7 32.5 28.5 35.2 TVS 20.7 15.8 12.5 12.1 9.0 Others 1.2 0.4 — — — Total - Economy segment 100.0 100.0 100.0 100.0 100.0 Executive bike segment market share Hero 66.3 71.3 69.5 69.4 72.1 Honda 22.5 21.4 20.8 23.6 21.8 Bajaj 8.4 3.9 5.1 3.2 2.1 TVS 0.6 1.1 2.6 2.0 3.0 Others 2.3 2.2 2.1 1.8 1.0 Total - Executive segment 100.0 100.0 100.0 100.0 100.0 Premium bike segment market share Hero 8.0 5.8 4.3 2.5 1.4 Honda 13.1 9.0 11.4 14.0 13.2 Bajaj 34.9 35.5 32.6 28.0 32.3 TVS 10.2 11.7 11.7 13.8 14.6 Royal Enfield 16.3 22.3 25.8 27.7 25.0 Others 17.6 15.7 14.1 14.1 13.6 Total - Premium segment 100.0 100.0 100.0 100.0 100.0 Total motorcycles market share Hero 52.9 52.4 51.3 51.5 50.7 Honda 16.3 14.0 13.8 15.5 13.5 Bajaj 16.5 17.7 17.7 15.2 18.7 TVS 6.3 6.7 7.0 7.3 7.4 Others 4.9 4.6 4.3 4.2 3.7 Total - motorcycles 100.0 100.0 100.0 100.0 100.0 Source: SIAM, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Automobiles & Components Bajaj Auto Domestic three-wheeler market growth aided by goods segment The company’s volumes grew by 8% yoy in the three-wheeler segment led by (1) 34% yoy growth in the goods segment and (2) 6% yoy growth in the passenger segment.