RESEARCH

SECTOR REPORT

TWO-WHEELER INDUSTRY

High on Profitability;
Low on Volumes

1
Contents

Industry Overview .......................................................................... 3

Companies

Hero Honda Motors .......................................................................... 14

Bajaj Auto .......................................................................... 19

TVS Motor .......................................................................... 25

2
 RESEARCH

TWO WHEELER INDUSTRY Sector View - Neutral

20 March 2009
Introduction
Indian 2-wheelers industry after showing impressive
performance over 1992-2007 is facing a tough environment
for the last two years. We believe that this phase is 2-Wheelers Industry Growth
temporary and 2-wheelers will again move into growth 2w heelers Grow th %
phase. Given their operational efficiency, ease in 8.0 30.0

maneuvering city traffic and low cost of ownership, 2-

6.0 20.0
wheelers continue to be the preferred mode for daily

Millions
commuting. We expect domestic 2-wheelers market to 4.0 10.0
stabilise by FY17 with penetration levels of 135 vehicles
2.0 0.0
per thousand population. We expect entry of low cost
cars to have some impact on 2-wheelers demand 0.0 -10.0
especially in scooters segments.

FY1994

FY1996

FY1998

FY2000

FY2002

FY2004

FY2006

FY2008
Base correction over the last two years: Over the last two
INDUSTRY OVERVIEW

years, the 2-wheelers industry has seen a base correction

especially in the entry level segment. This should provide a
platform for the sustainable growth in future. 2-Wheelers Penetration
800
Low dependence on financing: During FY02-07,
increasing penetration of financing led to strong growth for the
per '000 population

600
industry. However with high default rates, financing flow has
been restricted over the last two years. This augurs well for the 400
industry and now onwards, we can expect growth in the industry
200
on its own merits rather than finance stimulation. Return of
financing will provide upside to our volume estimates for the 0
industry.

India
Indonesia
Vietnam

Brazil
Thailand

China

Mexico
Global financial crisis to impact exports : 2-wheelers
exports from India are expected to be adversely impacted by
global financial crisis. We forecast exports growth to slowdown
to single digits in FY10 & post that we expect a growth of
15%.
Vineet Hetamasaria
Rationality in players’ behaviour: Over the past one year, vineet.hetamasaria@pinc.co.in
we have observed rationality in players’ behaviour, which has Tel: +91-22-6618 6388
led to profitability improvement despite increase in raw material
Nikhil Deshpande
cost. We expect that this trend to continue and players will nikhil.deshpande@pinc.co.in
refrain from indulging in price war. Tel: +91-22-6618 6339

Sector Summary
KEY FINANCIALS
Company CMP Mkt Cap Net sales (Rs mn) EPS (Rs) P/E (x) TP Potential
(Rs) (Rs bn) FY10E FY11E FY10E FY11E FY10E FY11E (Rs) upside (%)

Hero Honda Motors 991 198 125,998 133,117 73.6 80.1 13.5 12.4 957 (3.4)
Bajaj Auto 563 82 89,472 96,187 66.9 74.5 8.4 7.6 669 18.8
TVS Motor 20 5 39,689 43,053 2.1 3.2 9.8 6.4 16 (20.0)

PINC Research reports are also available on Reuters, Thomson Publishers and Bloomberg PINV <GO> 3
 RESEARCH

INDUSTRY OVERVIEW

Indian 2-wheelers industry not at saturation levels

2-wheelers remain the
preferred vehicle for daily
commuting...
In India, 2-wheelers remain a major mainstay for the daily commuting. Given the shortage
of public transportation system in major cities and towns, there are no cost-effective solutions
to the daily commuting. Hence 2-wheelers remain the preferred vehicle for the purpose. In
rural areas also, they remain one of the major mode of conveyance to nearby urban areas.
2-wheelers retain their edge over other mode of transport due to multiple reasons, such as:

Lower price tag of Rs 35k-50k

Low operating cost due to better fuel efficiency

Flexibility in maneuvering the congestion in city traffic

International 2-Wheeler Penetration (In Nos)

800

600
per '000 population

400

200

Iran
Indonesia

India
Argentina
Italy
Vietnam

UK
Japan

France

China

Russia

USA
Brazil
Thailand

Spain

Phillipines
Malayasia

Mexico
Germany

Turkey
Source: Crisil, PINC Research

Indian domestic 2-wheelers
will have a CAGR of 8% over
FY09-17...
Currently, 2-wheelers penetration in India is at 90 vehicles per 1000 population. We expect
this to reach a saturation stage by 2017 wherein penetration levels will reach 135 vehicles
per thousand population. To reach these levels of penetration, Indian domestic 2-wheelers
will have a CAGR of 8% over FY09-17. Post that, we expect demand growth to decline to
4%.

Domestic 2-Wheeler Penetration (%)

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Penetration % 9.0 10.0 10.4 10.8 11.3 11.8 12.3 12.9 13.5

Source: PINC Research

Rural India - a major demand driver

Lower penetration levels in rural areas is another opportunity for the domestic markets and
this has been one of the major reasons for stability in domestic 2-wheeler sales despite
gloomy economic scenario. During the current year, rural areas have been the major demand
driver for the industry and we expect this trend to continue due to following:

Lower penetration

Trickle down impact of various rural focused schemes of the government (Bharat
Nirman, National Rural Employment Guarantee Schemes etc.)

Growth in agriculture and related activities

vineet.hetamasaria@pinc.co.in 4
 RESEARCH
Two continuous years of
decline will lead to base
correction for the industry...
A significant correction in raw
material prices will improve
profitability of the
companies...
vineet.hetamasaria@pinc.co.in
Base correction
Over FY04-07, Indian 2-wheelers industry especially motorcycles reported an impressive
performance. The major reason was decline in interest rates and easy availability of financing.
To reap the benefits, manufacturers devised aggressive schemes like zero down payment,
relaxation in loan eligibility norms, relaxation in due diligence procedures etc. This led to
higher growth in the industry and also led to preponement of buying by the customers.
However, this took a nasty turn with reversal in interest rates leading to increase in defaults
on 2-wheelers loans. Recovery process in 2-wheelers is costly due to small ticket size
and the problem was aggravated as financiers have not adhered to due diligence process.
This forced many financiers to either exit or reduce their exposure in the segment.
FY07 was the peak for the industry with domestic sales volumes of 7.8 mn units. Post that
it declined by 8% in FY08 and is expected to remain flat during FY09. Two continuous
years of decline will lead to base correction for the industry.
Low dependence on financing
Over the last two years, dependence of 2-wheeler industry on financing has come down
significantly. Financing of 2-wheelers peaked at 65% during FY07 and since then there
has been a contraction in it owing to high default levels. During the current year, 35% of the
2-wheelers sold in the domestic markets were financed. Loan to value ratio has also declined
from a high of 80% in FY07, it has come down to 65% in FY09. This low dependence on
financing augurs well for the industry and now the industry can grow on its own merits
rather than finance stimulation.
Rationality in player behaviour
Over the last few years, there has been intense price based competition in the motorcycle
segment. This was particularly severe in the entry level segment. In their pursuit of market
share, manufactures resorted to price cuts and discount schemes which had an adverse
impact on the profitability of the companies. In recent times, there has been a balance in
the behavior of major players and this has started to have a positive impact on profitability
despite lower volumes. We believe that this trend will continue and thus provide stability to
the industry.
Improvement in profitability outlook
Over the last six months, there has been a significant correction in the raw material prices
and we expect that manufacturers will retain these benefits leading to improvement in
profitability of the companies.
High returns on investment business
2-wheelers business remains a high return on investment business especially for HH and
BJAUT. 2-wheeler manufacturers have shifted a major part of their capital burden to their
vendors and this has led to high RoI for the manufacturers. Due to this, these companies
have created an entry barrier for the new players.
R&D Capabilities
Japanese technology is prevalent in the Indian 2-wheelers industry. HH is dependent on
their joint venture partner Honda Motor Company, Japan for the technology input. Other
Indian players - BJAUT and TVSL have developed their own R&D capabilities with support
from Japanese companies.
5
 RESEARCH

2-wheelers business - cash cow for large manufacturers

We expect FY10 exports
growth to be in low single
digit...
For big players like HH & BJAUT, 2-wheelers business is a cash cow & these two companies
has over the years made a big war chest to take on the competition. Availability of the
surplus fund is helping the companies in tackling the market dynamics. In recent times,
these companies extended temporary credit lines to their vendors when liquidity in the
financial system was acute. This is giving the companies a control over their vendor base.
Impressive performance in tapping the global markets
Indian 2-wheelers industry has shown impressive performance in the exports market. The
major export destinations for Indian 2-wheelers are South East Asia, South Asia, Africa
and Latin America. Our outlook on exports is cautious in the near term due to global
financial crisis. We expect that FY10 exports growth will be in low single digits. Post that
we expect a recovery in the exports market leading to 15% growth in FY11.

2-Wheeler Industry Exports

Ex ports Grow th %
1,000,000 80

750,000 60

500,000 40

250,000 20

0 0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 YTD FY09

Source: SIAM

India 2-wheelers industry structure

Advent of Japanese Indian 2-wheelers industry was a scooters market till 1990s. However advent of Japanese
manufacturers led to a shift manufacturers led to a shift towards motorcycles.
towards motorcycles...
Indian 2-Wheeler Industry Structure

Source: SIAM

vineet.hetamasaria@pinc.co.in 6
 RESEARCH

By FY07 motorcycles
increased their dominance to
80%...
The major reason for the success of Japanese manufacturers was the fuel efficiency and
styling as compared to rustic looks for scooters. Hero Honda's campaign "Fill it, Shut it,
Forget it" captures this theme. In 1993, scooters were almost 50% of 2-wheelers sales in
India while motorcycles contribution was 25%. By 2007, scooters share in domestic 2-
wheelers industry settled at 15% while motorcycles increased their dominance to 80%.

2-Wheeler Segment-wise Growth Rates (%)

Source: SIAM

Indian motorcycle industry

Indian motorcycle industry is divided into three segments:

Entry level

Executive

Premium

In the initial phase, the market was predominantly in the executive segment. Later on
BJAUT developed the premium segment with their Pulsar range of vehicles. At the same
time, BJAUT and TVSL started to focus on entry level segment. This segmentation became
much more visible during FY02-07. With lower price points, BJAUT and TVSL stimulated
the market and this led to market expansion for the motorcycles. Easy financing accelerated
in this process.

Motorcycle Industry Segments

Entry Executive Premium
Indicative Price < Rs 40,000 Rs 40,000-55,000 > Rs 55,000
Major products BJAUT – CT 100, Platina BJAUT - XCD, Discover BJAUT – Pulsar
HH - CD Dawn HH - Splendor, Passion HH – Hunk, CBZ
TVSL – Star TVSL – Flame TVSL - Apache
HMSI - Shine HMSI - Unicorn
Composition (FY08) 33% (1.9 mn units) 54% (3.1 mn units) 13% (0.8 mn units)
Profitability Wafer thin Good Good
Typical Buyer Bargain hunter Cost of ownership Performance, Style
USP Discounts, Price cut Reliability Novelty

Source: PINC Research

vineet.hetamasaria@pinc.co.in 7
 RESEARCH
Easy availability of financing
& aggressive pricing led to
strong growth of the entry
level segment...
vineet.hetamasaria@pinc.co.in
Motorcycle Industry Segmentwise Product-mix
Source: CRIS Infac, PINC Research
Entry Level Segment
This segment was the major reason behind the growth in the domestic motorcycle market.
TVSL was the first one to penetrate this segment with their 'Max' range; however this
market was stimulated by BJAUT with 'Boxer'. This segment was then strengthened by
'Platina'. Easy availability of financing and aggressive pricing led to strong growth of this
segment till FY07. High defaults in the loan repayment led to exit of many financiers from
the segment in 1HFY08 leading to demand contraction. Even for the manufacturers this
segment started to become a problem with wafer thin margins. To overcome this, BJAUT
started to increasingly focus on development of >100 cc segment.
Pulling out of major financiers and inventory correction in the system led to 24% contraction
in the primary sales of entry level segment products. This trend has continued during the
current year with further decline of 17% till January 2009. We estimate this trend to continue
till 1HFY10 and post that we expect recovery to happen in this segment due to base
correction.
Motorcycle Marketshare - Economy Segment (%)
Source: CRIS Infac
8
 RESEARCH
Executive segment is the
largest motorcycle segment
& is a stronghold of HH ...
Premium segment is the
performance segment &
customers pay a premium for
the novelty...
vineet.hetamasaria@pinc.co.in
Executive Segment
Executive segment is the largest motorcycle segment and this is the stronghold of market
leader HH. Competitors have tried to challenge HH in this segment, however all such
challenges have fizzled out over time. With higher growth in economy segment, the
contribution of this segment had come below 50% in FY06. However over the last three
years, it has made a strong come back and now accounts for almost 60% of the motorcycle
share.
Motorcycle Marketshare - Executive Segment (%)
Source: CRIS Infac
Premium Segment
This segment was creation of HH with 'CBZ'; however major boost to the segment was
given by BJAUT through 'Pulsar' which has dominated the segment. HH has remained a
marginal player in this segment and one of the reasons for this is presence of HMSI in this
segment. This segment remains a small segment in the Indian market with contribution of
around 14% to the motorcycle industry. This is the performance segment and customers
pay a premium for the novelty. Hence constant upgradation in the product is a requisite for
success in this segment.
Motorcycle Marketshare - Premium Segment (%)
Source: CRIS Infac
9
 RESEARCH

Scooters

Over the last 5 years the
scooter segment has made a
recovery & emerging as a
niche segment...
Advent of fuel efficient motorcycles in the Indian 2-wheelers industry led to decline of
Scooters. However, over the last five years, it has made a recovery and is emerging as a
niche segment targeted towards women commuters. One of the reasons for this is the
increasing need of mobility for the women commuters especially in the urban areas is due
to higher number of college going girls and greater participation of women in urban work
force.

The product itself has gone for a complete revamp and now this category mainly consists
of gearless products. This segment is now dominated by Japanese manufacturers with
HMSI having the leadership. HH, which is a late entrant in this segment, has also cornered
a sizeable marketshare in the scooter segment. Another development in this segment is
the launch of battery operated scooters. However, given the high replacement cost for the
batteries, this has remained a marginal segment.

Scooter Volumes
Scooters Grow th %
1,400,000 40.0

1,200,000 20.0

1,000,000 0.0

800,000 -20.0

600,000 -40.0
FY1994

FY1995

FY1996

FY1997

FY1998

FY1999

FY2000

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008
Source: SIAM

Scooter Marketshare (%)

Source: SIAM

vineet.hetamasaria@pinc.co.in 10
 RESEARCH

Mopeds

Mopeds remains a marginal
category with just one player
in the segment...
Over the last 15 years, moped’s contribution in overall 2-wheelers has declined significantly
and now it remains a marginal category with just one manufacturer for the product. Its
contribution in the 2-wheelers industry now stands at 5% and we expect that this segment
will continue to be marginalised. The only player in this segment is TVS Motor.

Moped Volumes
Mopeds Grow th %
800,000 40.0

600,000 20.0

400,000 0.0

200,000 -20.0

0 -40.0
FY1994

FY1995

FY1996

FY1997

FY1998

FY1999

FY2000

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008
Source: SIAM

Indian 3-Wheeler Market

Passenger Carriers

The Indian 3-wheelers passenger market predominantly consisted of passenger vehicles

comprising of 80% of all 3-wheelers sold in FY02. BJAUT was the dominant player holding
~85% of the marketshare in passenger carriers segment. The passenger carriers are
regulated in major towns and cities and require licenses issued by local state governments.
Over the last few years, 3-wheelers have become dependent on replacement demand as
state governments have not released many new permits. This has led to subdued CAGR of
6% for the industry over FY02-08. In FY09, passenger 3-wheelers have shown a growth
amidst decline in almost all automobile segments. However we expect growth in the
segment to taper-off to a low single digit growth.

Overall 3-Wheeler Industry Volumes (‘000)

Passenger 3W Goods 3W % Gr (YoY)
480 30%

360 15%

240 0%

120 -15%

0 -30%
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09YTD

Source: SIAM

vineet.hetamasaria@pinc.co.in 11
 RESEARCH
3-Wheeler goods carriers are
primarily used for the ‘Last-
mile’ transportation in the
supply chain...
vineet.hetamasaria@pinc.co.in
In FY02, BJAUT held 85% marketshare. However during FY02-08, while the market
expanded at a CAGR of 6%, the company witnessed its volumes shrink from 137,000
units in FY02 to 127,000 units in FY08 resulting in a reduced marketshare of ~55%. The
increased competition from Piaggio was the primary reason for this downfall. Piaggio
increased its volumes to 90,000 units in the same time frame with an impressive CAGR of
37% thus garnering ~39% marketshare. The Piaggio product being more robust compared
to a BJAUT product, could endure overloading. Further, due to diesel engine, it had lower
operating cost making it a hit in semi-urban areas for mass transportation. These are the
markets which at present are unregulated and don't require permits. In FY08, TVSM launched
its passenger 3-wheeler in South India and is scheduled for country wide roll out in FY10.
3-Wheeler Passenger Segment Marketshare
Source: SIAM
Goods Carriers
3-Wheeler goods carriers are primarily used for the 'Last-mile' transportation in the supply
chain. Compared to passenger vehicles, goods carriers have shown a far better performance
however the same has tapered off since FY06. During the FY02-06 period 3-wheeler goods
carriers grew at a CAGR of 38% albeit on a smaller base. In FY06, Tata Motors (TTMT)
launched the sub 1-tonne 4-wheeled Tata ACE which revolutionized the SCV (Small
commercial vehicle) space. Although, double the cost of the traditional 3-wheeler, the ACE
found acceptance due to the flexibility it offered as well as overloading capacity. Additionally
3-Wheeler Goods Segment Marketshare
Source: SIAM
12
RESEARCH

the strong service network of TTMT and prior relationship with CV vehicle operators has
helped ACE capture a significant market. The SVC segment has flourished due to its
acceptance in the hub and spoke model of transportation.

Piaggio is the market leader in this segment with a market share of 40% followed by
Mahindra & Mahindra with market share of ~25%. Both these players has now launched
products in the SCV segment, however they remain a marginal player in this segment.
BJAUT is scheduled to enter the SCV segment in FY10.

3-Wheeler Goods Segment vs LCVs <3.5MT (Volume in ‘000s)

Total Goods 3W LCVs < 3.5MT
200
Tata ACE launched

150

100

50

0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09YTD

Source: SIAM

13
 RESEARCH
Update
HERO HONDA MOTORS Maintain HOLD

CMP : Rs991 TP : Rs957 BSE Sensex : 9,002

Over the last one year, HH has made a strong come back in the Indian 20 March 2009
2-wheelers market with growth despite a tough environment. This
has been accompanied with profitability improvement. However, we
Vineet Hetamasaria
believe that current valuation fairly captures the impressive
vineet.hetamasaria@pinc.co.in
performance of the company.
+91-22-6618 6388
Improved marketshare
Nikhil Deshpande
An emphasis on rural markets has aided HH to post an impressive volume nikhil.deshpande@pinc.co.in
growth in FY09YTD. While domestic motorcycle industry volumes have +91-22-6618 6339
remained flat during the current year, HH has managed to post a growth of
11.1% thus expanding marketshare by 540bps to 59%.
Better margins
STOCK DATA
Despite a steep hike in raw material prices, HH has managed to keep a
check on margin erosion through a judicious mix of pricing action and cost Market Cap Rs 198 bn.
Book Value per share Rs 150
control. Going forward we expect the company’s profitability to improve due
Eq Shares O/S (F.V. Rs.2) 199.7 mn.
to lower RM costs and higher production from its Haridwar plant which enjoys Free Float 45.0%
fiscal incentives. Avg. Traded Value (6 mths) Rs 492 mn
52 Week High/Low Rs 1014/630
No financial leverage
Bloomberg Code HH IN
HH remains a debt free company & continues to operate on negative working Reuters Code HROH.BO
capital. It has funded the Rs4.2bn initial expansion at Haridwar entirely through
internal accruals. With the 2-wheelers business continuing to be a cash
cow, we see further increase in the cash reserves of the company.
TOP SHAREHOLDERS
RISKS
Name % holding
For HH, its joint venture agreement is the major risk. The current agreement
LIC India 3.9
is valid till 2014. Due to JV, HH has restrictions in approaching the global
markets. Further the company remains dependent on the JV partner Honda Aberdeen Asset Managers Ltd. 3.7
Motor Company (HMC) for the technology input. Lazard Asset Management LLC 1.1
Increasing aspiration of HMC through its 100% subsidiary HMSI is a
potential risk for the company & can restrict its ability to launch new products.
VALUATION
At the CMP of Rs991, HH trades at a P/E of 13.5x FY10E earnings. We PERFORMANCE (%)
believe that current valuations are fair considering the growth and risks for 1M 3M 12M
the company. We maintain our ‘HOLD’ recommendation on the stock with a Absolute 6.8 24.3 45.4
revised price target of Rs957 discounting FY10E earnings 13x. Relative 10.3 31.9 84.8

KEY FINANCIALS (STANDALONE) Rs mn

FY07 FY08 FY09E FY10E FY11E
RELATIVE PERFORMANCE
Net Sales 99,000 103,318 120,437 125,998 133,117
YoY Gr. (%) 13.6 4.4 16.6 4.6 5.6
HH BSE (Rebased)
Op. Profits 11,875 13,537 16,799 19,064 20,294 1000
Op. Marg. (%) 12.0 13.1 13.9 15.1 15.2
800
Adjusted Net Profit 8,579 9,667 12,558 14,696 15,997
YoY Gr. (%) (11.7) 12.7 29.9 17.0 8.9 600
KEY RATIOS
Dil. EPS (Rs) 43.0 48.4 62.9 73.6 80.1 400
ROCE (%) 49.1 46.9 48.2 43.8 37.8
200
RoE (%) 38.3 35.4 37.1 34.4 30.1
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
PER (x) 23.1 20.5 15.8 13.5 12.4
EV/Net sales (x) 1.8 1.7 1.4 1.2 1.1
EV/EBDITA (x) 15.1 12.7 9.8 8.1 7.1

14
 RESEARCH
HH has maintained its
leadership position due to a
strong brand recall & good
resale value...
HH commenced Haridwar
plant operations in Apr’08..
vineet.hetamasaria@pinc.co.in
Hero Honda Motors
Product Portfolio
The company's offering are largely concentrated on the executive segment wherein its
largest selling models Splendor and Passion have consistently commanded upwards of
65% marketshare. Splendor, launched more than a decade ago, along with its variants is
the single largest selling model in the world. Even after increased competition in the segment
from the likes of Bajaj XCD, TVS Flame and Honda CBF Stunner, HH has maintained its
leadership position due to a strong brand recall and good resale value.
In the economy segment, HH commands ~27% marketshare trailing segment leader BJAUT
(~50% marketshare). This segment is highly price sensitive and the manufacturers operate
on wafer thin margins.
In the premium segment too, with a ~20% marketshare HH is second only to BAL which
enjoys 50% marketshare. The company's products in this segment have failed to make a
sustained impact in this segment.
HH is a late entrant in the gearless scooter space and launched it's only offering 100cc
Pleasure in FY06. It commands a ~15% marketshare while competing with the Activa &
Dio from the HMSI stable.
HH Domestic Motorcycle Product-mix
Source: CRIS Infac
Capex Plans
HH commenced operations at its third plant at Haridwar in Apr'08 with an initial capacity
of 0.5mn units and an investment of ~Rs4.2bn in the green-field facility. This has taken the
current capacity for the company to 4.4mn units which will stand at 5.4mn units after
additional capacity creation of 1mn units at the Haridwar facility. The Haridwar facility is
eligible for excise duty exemption & sales tax concession for 10 years. Additionally, profits
from this plant gets an exemption from income tax to the extent of 100% for the first 5
years & 30% for the next 5 years.
Investment Rationale
Improved marketshare
As volumes from urban areas have slumped, a renewed emphasis on rural markets has
aided HH to post positive growth in 9MFY09. While domestic 2-wheelers market remained
flat during the current year, HH has managed to post a growth of 10.7% leading to expansion
in its domestic motorcycle marketshare by 450bps to 59%.
15
 RESEARCH
A judicious mix of pricing
action & cost control resulted
in stable margins for HH...
HH’s dependence on retail
financing is only 20% as
compared to industry
dependence of 35%...
vineet.hetamasaria@pinc.co.in
Hero Honda Motors
Stable Margins
Despite a steep hike in raw material prices, HH has managed to keep a check on margin
erosion through a judicious mix of pricing action and cost control. Further, eliminating the
cash incentives & discounts to customers as well as negotiations with vendors has also
helped maintain margins. In Q3FY09, HH managed to improve margins by 30bps to 14.5%
as a result of a 50bps drop in raw material cost as percentage of sales to 70.2%. With
Haridwar plant increasing its production levels, HH will be able to increase its margins
further. The recent cut in the excise duty rates is beneficial for the Haridwar plant, as most
of the raw materials are supplied from Haryana and the excise duty paid on these raw
materials are not eligible for Cenvat credit. Hence reduction in excise duty rates has
helped the company in further reducing its raw material cost at Haridwar plant.
HH’s Profitability Trend (%)
OPM (%) NPM (%)
18.0
15.0
12.0
9.0
6.0
Q3FY07 Q4FY07 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09
Source: Company
Lower dependence on financing
As compared to peers BJAUT & TVSL, HH has a higher percentage of cash purchases.
Interest rates scaling upwards in H1FY09 and leading financers hesitant to lend to the
segment on account of higher delinquencies translated into loss of sales. However HH
with higher proportion of cash purchases was able to improve marketshare. Currently HH
dependence on the financing is only 20% as compared to industry finance dependency of
35%.
Benefits from Haridwar plant
HH commissioned its second manufacturing unit at Haridwar in Apr'08 with an initial capacity
of 0.5mn units. The company has shifted production of its high volume motorcycles Splendor
& Passion to this location. At present, excise duty benefits from this plant are restricted
as a large number of vendors of the company has not set up their operations in Uttrakhand.
To maximise the excise duty benefits local sourcing of raw materials is compulsory. HH is
targeting 100% localisation by end FY10. However, we believe that there may be further
delay on this given the financial crisis being faced by the major vendors.
No financial leverage
HH remains a debt free company. The company continues to operate on negative working
capital. It has funded the Rs4.2bn initial expansion at Haridwar entirely through internal
accruals. With the 2-wheelers business continuing to be a cash cow, we see further
increase in the cash reserves of the company.
16
 RESEARCH
HH is entirely dependent on
domestic markets to drive
volume growth...
We expect HH’s earnings to
have a CAGR of 12.9% over
FY09-11...
vineet.hetamasaria@pinc.co.in
Hero Honda Motors
Risks
Aging product portfolio
The mainstays of HH’s product portfolio i.e. Splendor & Passion have been launched more
than a decade ago. Although these products have a strong brand image and excellent
product recall, HH has been unsuccessful in moving beyond these two products. At the
same time, till date except for TVS Victor, there has not been any major challenge to HH’s
dominance in the executive segment. However, HMSI’s planned foray in the executive
segment in CY09 could be one serious challenge to HH.
Negligible exports
HH export business is constrained by the joint venture agreement with Honda Motor
Company, Japan (HMC) and the company’s exports are limited to countries having no
direct competition from HMC. In FY08, HH exported just 90k units representing 3% of its
overall volumes and in FY09YTD the company has exported 75k units i.e. 2% of overall
sales. Thus HH is entirely dependent on domestic markets to drive volume growth.
Dependence on JV partner
Unlike BJAUT & TVSL, HH does not have an active R&D for developing newer technology.
The company is entirely dependent on its JV partner HMC for providing new technology.
HMC over the last ten years has developed their wholly owned subsidiary Honda Motorcycles
& Scooters India (HMSI). In this time, they have developed their sales and distribution
network and got the flavor of the local market. Currently, HMSI is the market leader in the
scooters segment. Beside that they have motorcycles in the premium segment. However,
at present they are not competing against HH in the executive segment of motorcycles.
This is going to change in CY09 with the launch of 100cc motorcycle from HMSI. Going
forward, we may see rift in the partner relationship impacting the flow of technology to HH.
Outlook
We expect volumes for HH to grow by 4% during FY10 and 5% in FY11. The company will
be able to improve its profitability due to lower raw material costs and higher production
from its Haridwar plant which enjoys fiscal incentives. The profits will get further boost due
to reduction in corporate tax rates. We estimate that average tax rate will reduce to 25%
in FY10 and 23% in FY11 from the current levels of 28%. Over FY09-11E, we expect
earnings to have a CAGR of 12.9%.
Valuations
Over the last one year, the stock of HH has outperformed the market due to volume growth
achieved by the company in a tough environment. At the current price, the stock of the
company is trading at 13.5x FY10E earning and 12.4x FY11E earnings. We believe that
the current price fairly captures the future growth potential of the company. We maintain
our ‘HOLD’ rating on the stock with target price of Rs957 discounting FY10E earnings 13x.
17
 RESEARCH

Hero Honda Motors

Year Ended March (Figures in Rs mn)

Income Statement FY07 FY08 FY09E FY10E FY11E Cash Flow Statement FY07 FY08 FY09E FY10E FY11E
Net sales 99,000 103,318 120,437 125,998 133,117 Profit before tax 12,461 14,091 17,441 19,595 20,776
Growth (%) 13.6 4.4 16.6 4.6 5.6 Depreciation 1,125 1,474 1,858 2,209 2,501
Operating profit 11,875 13,537 16,799 19,064 20,294 Total tax paid (3,802) (4,420) (4,762) (4,749) (4,627)
Other operating income - - - - - Chg in working capital (2,390) 3,675 (2,015) 441 144
EBITDA 11,875 13,537 16,799 19,064 20,294 Other operating activities - - - - -
Growth (%) (13.0) 14.0 24.1 13.5 6.5 Cash flow from oper. (a) 7,394 14,820 12,521 17,496 18,794
Depreciation (1,398) (1,615) (1,858) (2,209) (2,501) Capital expenditure (4,744) (3,567) (795) (2,530) (2,530)
Other income 2,000 2,189 2,528 2,770 3,003 Chg in investments - (59) - - -
EBIT 12,477 14,111 17,469 19,625 20,796 Other investing activities - - - - -
Interest paid (16) (20) (28) (30) (20) Cash flow from inv. (b) (4,744) (3,627) (795) (2,530) (2,530)
PBT (before E/o items) 12,461 14,091 17,441 19,595 20,776 Free cash flow (a+b) 2,650 11,193 11,726 14,966 16,264
Tax provision (3,882) (4,424) (4,884) (4,899) (4,778) Equity raised/(repaid) - - - - -
E/o Income / (loss) - - - - - Debt raised/(repaid) (206) (332) (535) (600) (185)
Net profit 8,579 9,667 12,558 14,696 15,997 Chg in Minorities int. - - - - -
Adjusted net profit 8,579 9,667 12,558 14,696 15,997 Dividend (incl. tax) (4,554) (3,972) (4,439) (4,673) (4,672)
Growth (%) (11.7) 12.7 29.9 17.0 8.9 Other financing activities - (67) - - -
Diluted EPS (Rs) 43.0 48.4 62.9 73.6 80.1 Cash flow from fin. (c) (4,760) (4,370) (4,974) (5,273) (4,857)
Diluted EPS Growth (%) (11.7) 12.7 29.9 17.0 8.9 Net chg in cash (a+b+c) (2,110) 6,823 6,752 9,693 11,407

Balance Sheet FY07 FY08 FY09E FY10E FY11E Key Ratios FY07 FY08 FY09E FY10E FY11E
Equity Share Capital 399 399 399 399 399 OPM (%) 12.0 13.1 13.9 15.1 15.2
Reserves & surplus 24,301 29,463 37,348 47,371 58,229 Net margin (%) 8.7 9.4 10.4 11.7 12.0
Shareholders' funds 24,701 29,862 37,747 47,771 58,628 Dividend yield (%) 1.7 1.9 2.0 2.0 2.2
Minorities interests - - - - - Net debt/Equity (x) (0.7) (0.9) (0.9) (0.9) (0.9)
Total Debt 1,652 1,320 785 185 - Net Working Capital (days) (1) (9) (8) (8) (8)
Capital Employed 26,352 31,182 38,532 47,956 58,628 Asset turnover (x) 2.4 2.2 2.2 1.9 1.7
Net fixed assets 13,555 15,648 14,585 14,906 14,935 ROCE (%) 49.1 46.9 48.2 43.8 37.8
Cash & Cash Eq. 20,062 26,885 33,637 43,330 54,737 RoE (%) 38.3 35.4 37.1 34.4 30.1
Net other Current Assets (6,017) (10,191) (8,380) (8,821) (9,433) EV/Net sales (x) 1.8 1.7 1.4 1.2 1.1
Investments 35 94 94 94 94 EV/EBITDA (x) 15.1 12.7 9.8 8.1 7.1
Net Deferred Tax Assets (1,282) (1,254) (1,404) (1,554) (1,705) PER (x) 23.1 20.5 15.8 13.5 12.4
Total assets 26,352 31,182 38,532 47,956 58,628 Price/Book (x) 8.0 6.6 5.2 4.1 3.4

P/E Band EV/EBIDTA

1200 200,000 12X

18X
16X 10X
900 14X 150,000
8X
12X
600 10X 100,000 6X

4X
300 50,000

0 -
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

vineet.hetamasaria@pinc.co.in 18
 RESEARCH
Update
BAJAJ AUTO Upgrade to BUY
CMP : Rs563 TP : Rs669 BSE Sensex : 9,002
Over the last two years, BJAUT has disappointed the market with 20 March 2009
declining volumes. However despite lower volumes, we see
profitability of the company to improve from the current levels.
Vineet Hetamasaria
Improved product-mix vineet.hetamasaria@pinc.co.in

While BJAUT has witnessed volume contraction across all motorcycle +91-22-6618 6388

segments, the decline was more prominent is the low margin entry level Nikhil Deshpande
segment leading to a overall improvement in the product mix. The focus of nikhil.deshpande@pinc.co.in
the company is increasingly towards 125cc+ with a focus on profitability +91-22-6618 6339
rather than market share.
Margin expansion led by rupee depreciation
Despite depreciation of Indian currency during FY09, BJAUT was unable to STOCK DATA
benefit from it due to forward contracts. However with old contracts getting
Market Cap Rs81.5bn.
settled and ~ 30% depreciation in rupee over last one year, we see significant
Book Value per share Rs110
improvement in export realisations leading to margins expansion. Eq Shares O/S (F.V. Rs.10) 144.7 mn.
New product launches Free Float 49.7%
Avg. Traded Value (6 mths) Rs 91 mn
BJAUT has been at the forefront of 2-wheeler R&D in India. The company will 52 Week High/Low Rs 945/262
be launching 6 models this year to regain marketshare & boost sales. Also Bloomberg Code BJAUT IN
expected is a launch of 4-wheeler product in the cargo segment, which has Reuters Code BAJA.BO
huge potential in the Indian markets due to emerging hub and spoke model
for transportation of goods.
TOP 5 SHAREHOLDERS
RISKS
Name % holding
The steep decline in domestic volumes of the company over the last four
LIC India 5.2
months raises a concern regarding its ability to safeguard its marketshare.
Jaya Hind Investments Pvt. Ltd. 3.3
Exports which were showing an impressive performance over the last five
years has been adversely impacted by global economic crisis. We expect Maharashtra Scooters Ltd. 2.3

exports to show marginal growth in FY10. T Rowe Price International Inc 1.6
FID Funds (Mauritius) Ltd. 1.9
VALUATION
At the CMP of Rs563, the stock of the BJAUT trades at 8.4x FY10E adjusted
earnings. This is a discount of 61% over market leader HH. Given the earnings
growth and balance sheet strength of the company, we see this steep discount PERFORMANCE (%)
unjustified. We upgrade our recommendation on the stock to ‘BUY’ with a 1M 3M 12M
target price of Rs669 discounting FY10E earnings 10x. Absolute 23.9 46.1 NA
Relative 27.4 53.7 NA

KEY FINANCIALS (STANDALONE) Rs mn

FY08 FY09E FY10E FY11E
RELATIVE PERFORMANCE
Net Sales 86,633 84,816 89,472 96,187
YoY Gr. (%) - (2.1) 5.5 7.5
BJAUT BSE (Rebased)
Op. Profits 9170 8599 10224 10917 650
Op. Marg. (%) 12.3 12.5 14.1 14.0
Adjusted Net Profit 8245 7842 9684 10774 550
YoY Gr. (%) - (4.9) 23.5 11.3 450
KEY RATIOS
Dil. EPS (Rs) 57.0 54.2 66.9 74.5 350
ROCE (%) 23.9 37.1 41.3 39.3 250
RoE (%) 23.2 44.9 45.2 39.8 May -08 Aug-08 Oct-08 Dec-08 Mar-09
PER (x) 9.9 10.4 8.4 7.6
EV/Net sales (x) 0.9 0.9 0.8 0.7
EV/EBDITA (x) 7.6 7.4 5.9 5.0

19
 RESEARCH
The premium segment has
remained BJAUT’s
stronghold since launch of
Pulsar...
BJAUT is the market leader
in the domestic three wheeler
passenger segment...
vineet.hetamasaria@pinc.co.in
Bajaj Auto
Product Profile
BJAUT currently dominates the economy as well as the premium segments while the
executive segment is dominated by HH. The executive segment, i.e. the largest segment,
however accounts for ~55% of all motorcycles sold in the country. In the economy segment,
the company's offerings CT-100 & Platina together hold ~50% marketshare. The company
also introduced an upgraded 125cc variant of its Platina model. As the segment is highly
price competitive, it has shifted the production of Platina to Uttaranchal so as to avail the
duty benefits and price the vehicle more aggressively in the market.
BJAUT, through its strategy of upgrading commuters from 110cc to 125cc vehicles by
offering a value proposition, is striving to break the stronghold of Splendor/Passion on the
executive segment. The launch of XCD-125 in Sep'07 was an important step towards
executing the strategy, however the product failed to generate the response expected. The
company further launched XCD-135 in Jan'09 with added features from its 150cc bike
platform to boost sales in this segment.
The premium segment has remained BJAUT's stronghold ever since the launch of Pulsar
back in Nov'01. The company has managed to retain marketshare at ~50% through
consistent launch of upgrades and variants incorporating technologically advanced features.
However, increased competition in the segment post launch of Yamaha FZ-16 & Suzuki
GS150R has seen BJAUT lose marketshare in this segment. The company is set to
launch a refreshed Pulsar alongwith an entirely new model in the 150cc range to take on
the competition.
BJAUT Domestic Motorcycle Product-mix
Source: CRIS Infac
Three-Wheelers
BJAUT is the market leader in the domestic three wheeler passenger segment with a
~45% marketshare. In the Goods segment however, the company's marketshare has halved
from 25% in FY07 to ~12% in FY09YTD, primarily due to preference towards bigger 3-
wheelers (>1MT GVW). Piaggio (45% marketshare) is the market leader in the goods
segment while M&M (25% marketshare) holds second position.
In the passenger segment BJAUT offers a wide range of products that includes 2-stroke
and 4-stroke petrol engines. The company also offers diesel powered products and vehicles
fitted with alternate fuel kits such as CNG and LPG. The products offered by the company
are a common mode of public transport in especially Tier II & Tier III cities.
20
 RESEARCH
Bajaj Auto

In the goods vehicle category BJAUT has a limited product range with sub 1 tonner product
GC Max powered by diesel or CNG.

BJAUT Overall Product-mix

2-Wheelers 3-Wheelers
100%
12 14 12 12 10 13 9 12 16

75%

50%
88 86 88 88 90 87 91 88 84

25%

0%
Q3FY07 Q4FY07 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09

Source: SIAM

BJAUT plans to double its
pro-biking outlets at an
investment of Rs1.5bn in
couple of years...
Capex Plans
BJAUT commissioned its Pantnagar, Uttaranchal facility in Apr'07 with a capacity of 0.5mn
units. Post the expansion, the company has no further capex plans for capacity expansion.
The company however plans to double its pro-biking outlets from 21 currently, setup at an
investment of Rs1.5bn, to 42 in the next couple of years. BJAUT is also expected to incur
an expenditure of Rs2.5-3.0bn annually on research & development.

Investment Rationale

Improved Product-mix

While BJAUT has witnessed volume contraction across all motorcycle segments, the
decline was more prominent is the low margin entry level segment. This has led to an
overall improvement in the product mix of the company. The focus of the company is
increasingly towards 125cc and above segment and this will help the company in further
enriching its product mix. This is a change in the strategy of the company to focus on
profitability rather than market share.

BJAUT’s Profitability Trend

OPM (%) NPM (%)
20.0

15.0

10.0

5.0

0.0
Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09

Source: Company

vineet.hetamasaria@pinc.co.in 21
 RESEARCH
The global financial crisis will
impact BJAUT’s exports in
the near term...
Shift to executive segment
products in Uttaranchal
facility will now benefit
BJAUT...
vineet.hetamasaria@pinc.co.in
Bajaj Auto Ltd.
Robust Exports growth
BJAUT has a strong presence in the export markets, with presence in Srilanka, Indonesia,
Egypt, Columbia and African continent. During the 9MFY09 period, the company witnessed
two wheeler exports surge 42% to 507k units while three wheeler exports grew at 9.5% to
111k units. The growth in exports has helped BJAUT compensate for the demand slump in
domestic markets. Due to global financial crisis, we see exports of BJAUT to be adversely
impacted in the near term. We estimate that exports will grow by 3% during FY10 as
against 25% growth expected in FY09. However, despite this subdued volume growth, we
see strong growth in exports value due to depreciation of Indian currency. This will also
have a favorable impact on the company’s profitability.
BJAUT 2-Wheeler Exports BJAUT 3-Wheeler Exports
2W Ex ports ('000s) (LHS) % Gr (YoY) (RHS) 3W Ex ports ('000s) (LHS) % Gr (YoY) (RHS)
640 80.0 160 90.0
480 60.0 120 60.0
320 40.0 80 30.0
160 20.0 40 -
- - - (30.0)
FY04 FY05 FY06 FY07 FY08 FY09 FY04 FY05 FY06 FY07 FY08 FY09
YTD YTD
Source: SIAM
Strong product line-up
BJAUT has been in the forefront of research & development of two-wheelers in India and
introducing newer technology by means of new models or improved variants of existing
models. The current slump in sales and loss of marketshare has prompted the company
to line-up upto six models in the coming year with an increased emphasis on the executive
segment.
Tax Savings at Uttaranchal due to change in product mix
Despite being the first 2-wheelers manufacturer to commence operations at a tax heaven,
BJAUT has failed to capitalise on it for increasing its profitability. It used the plant in tax
haven for garnering market share rather than its profits. However, with the shift in company's
strategy in favour of executive segment products, we expect that company will now benefit
from the tax exemption available at its Uttaranchal facility.
Entry in four wheeler cargo segment
BJAUT is making a re-entry in the cargo segment wherein it was marginalized by Piaggio.
Later on 3-wheelers cargo segment gave way to 4-wheeler products wherein Tata Motors
is the undisputed leader with 'Ace' range of products. During FY10, BJAUT will be launching
their product in this category. We expect that this category has huge potential in the
Indian markets due to emerging hub and spoke model for transportation of goods. Even a
small market share in the segment will give incremental volumes to BJAUT.
22
 RESEARCH
BJAUT is developing a low
cost car scheduled to be
launched in FY11...
We expect domestic
volumes to grow by 7% and
9% during FY10 and FY11
respectively...
vineet.hetamasaria@pinc.co.in
Bajaj Auto
Low cost cars
BJAUT is developing a low cost car. The objective of the company is to develop an alternative
for its passenger three wheelers. Unlike Tata Motors, BJAUT aims to develop a product
which will be high on fuel efficiency and robustness. This is a learning from its past experience
wherein BJAUT lost out to Piaggio and Tata Motors in the cargo segment of 3-wheelers.
This product is scheduled to be launched in FY11.
Profitability improvement
Despite decline in volumes, BJAUT has been successful in arresting the decline in its
profitability. The major reason for this was the steep decline in the low margin entry level
segment. On the exports business during FY09, BJAUT was not able to take the benefit of
depreciating rupee due to forward contracts. With rupee depreciating by ~30% over the
last one year, we see benefits to get reflected in BJAUT’s profitability in FY10. Beside this,
decline in prices of major raw materials will further boost the company’s margins.
Risks
High dependence on financing
BJAUT is highly dependant on retail finance for its sales mainly aided by its financing arm
Bajaj Auto Finance. The dependence on financing has reduced from 70% in FY07 to 40%
currently. However, it still remains high as compared to market leader HH where dependence
is only 20%.
Failure of new launch over the last two years
BJAUT changed its strategy of targeting executive segment through its focus on 125 cc
products. However, this strategy has not worked with product failing to generate desired
volumes for the company. For BJAUT, a lot depends on the success of its planned launches
and disappointment on this front will be a key risk to our estimates.
Domestic passenger 3-wheelers market in a declining phase
3-wheelers has been a hugely profitable segment for the company. However, BJAUT's
exposure in this segment is in the regulated space wherein there have been restrictions on
the issue of new permits. Over the last few years, very few state governments have issued
new permits and as such this market is largely dependent on the replacement demand.
This is adversely impacting the performance of the segment.
Outlook
We expect domestic volumes to grow by 7% and 9% during FY10 and FY11 respectively.
Exports are estimated to grow by 3% and 10% during these two years. However, with
rupee depreciation and richer product mix, the company will be in a position to improve its
profitability. We estimate 160bps improvement in margins to 14.1%. Adjusted earnings for
the company are likely to grow by 24% during FY10 and 11% during FY11.
Valuations
At the CMP of Rs563, the stock of BJAUT trades at 8.4x FY10E adjusted earnings. This
is a discount of 61% over market leader HH. Given the earnings growth and balance sheet
strength of the company, we see this steep discount unjustified. We upgrade our
recommendation on the stock to ‘BUY’ with a target price of Rs669 discounting FY10E
earnings 10x.
23
 RESEARCH

Bajaj Auto

Year Ended March (Figures in Rs mn)

Income Statement FY08 FY09E FY10E FY11E Cash Flow Statement FY08 FY09E FY10E FY11E
Net sales 86,633 84,816 89,472 96,187 Pre-tax profit 11,685 10,267 12,664 15,034
Growth (%) (2.1) 5.5 7.5 Depreciation (2,186) 1,306 1,351 1,401
Operating profit 9,170 8,599 10,224 10,917 Total tax paid (3,928) (4,568) (3,301) (3,713)
Other operating income 1,667 2,271 2,750 2,984 Chg in working capital (2,445) 776 92 318
EBITDA 10,837 10,870 12,974 13,901 Other operating activities (2) (24) (26) (28)
Growth (%) 0.3 19.4 7.1 Cash flow from oper. (a) 3,125 7,757 10,779 13,012
Depreciation (1,740) (1,306) (1,351) (1,401) Capital expenditure 1,983 (853) (950) (1,150)
Other income 3,325 2,181 2,619 2,885 Chg in investments 58,150 (1,949) (1,999) (1,999)
EBIT 12,423 11,745 14,242 15,384 Other investing activities (44,075) - - -
Interest paid (52) (250) (350) (350) Cash flow from inv. (b) 16,058 (2,802) (2,949) (3,149)
PBT (before E/o items) 12,371 11,495 13,892 15,034 Free cash flow (a+b) 19,183 4,955 7,831 9,863
Tax provision (4,126) (3,654) (4,208) (4,260) Equity raised/(repaid) 435 - - -
E/o Income / (loss) (686) (1,228) (1,228) - Debt raised/(repaid) (2,911) (1,328) (1,195) (1,075)
Net profit 7,560 6,614 8,456 10,774 Chg in Minorities int. - - - -
Adjusted net profit 8,245 7,842 9,684 10,774 Dividend (incl. tax) (4,735) (3,386) (3,385) (3,724)
Growth (%) (4.9) 23.5 11.3 Other financing activities - - - -
Diluted EPS (Rs) 57.0 54.2 66.9 74.5 Cash flow from fin. (c) (7,211) (4,713) (4,580) (4,799)
Diluted EPS Growth (%) (54.7) (4.9) 23.5 11.3 Net chg in cash (a+b+c) 11,972 242 3,251 5,064

Balance Sheet FY08 FY09E FY10E FY11E Key Ratios FY08 FY09E FY10E FY11E
Equity capital 1,447 1,447 1,447 1,447 OPM (%) 12.3 12.5 14.1 14.0
Reserves & surplus 14,429 17,633 22,340 28,854 Net margin (%) 9.5 9.2 10.8 11.2
Shareholders' funds 15,876 19,080 23,786 30,301 Dividend yield (%) 3.6 3.6 3.9 4.4
Minorities interests - - - - Net debt/Equity (x) 0.0 (0.1) (0.2) (0.4)
Total Debt 13,343 12,016 10,821 9,746 Net Working Capital (days) (18) (24) (25) (24)
Capital Employed 29,219 31,096 34,607 40,047 Asset turnover (x) 1.3 1.8 1.7 1.7
Net fixed assets 13,034 12,580 12,179 11,928 ROCE (%) 23.9 37.1 41.3 39.3
Cash & Cash Eq. 12,807 13,048 16,299 21,364 RoE (%) 23.2 44.9 45.2 39.8
Net other Current Assets (2,837) (3,638) (4,069) (4,894) EV/Net sales (x) 0.9 0.9 0.8 0.7
Investments 6,325 8,275 10,274 12,273 EV/EBITDA (x) 7.6 7.4 5.9 5.0
Net Deferred Tax Assets (110) 831 (76) (623) PER (x) 9.9 10.4 8.4 7.6
Total assets 29,219 31,096 34,607 40,047 Price/Book (x) 5.1 4.3 3.4 2.7

P/E Band EV/EBIDTA

1,000 160,000

12X
750 14X 120,000
10X
12X
10X 8X
500 80,000
8X
6X
6X
250 40,000 4X

- 6X -
May -08 Aug-08 Oct-08 Jan-09 Mar-09 May -08 Aug-08 Oct-08 Jan-09 Mar-09

vineet.hetamasaria@pinc.co.in 24
 RESEARCH
Update
TVS MOTOR Downgrade to SELL

CMP : Rs20 TP : Rs16 BSE Sensex : 9,002

TVSL has been consistently losing its market share in the Indian 2- 20 March 2009
wheelers market over the last five years. The shrinking market share
and leverage on the balance sheet makes it vulnerable to competitive
Vineet Hetamasaria
environment.
vineet.hetamasaria@pinc.co.in
Over dependence on price sensitive entry segment products +91-22-6618 6388

TVSL is over dependent on price sensitive entry level products of mopeds Nikhil Deshpande
and economy segment motorcycles. This is adversely impacting the nikhil.deshpande@pinc.co.in
profitability of the company. +91-22-6618 6339

Leveraged balance sheet

While other Indian 2-wheelers manufacturers has huge cash reserves, TVSL
has debt equity of 1:1 with total debt of Rs 5bn. The small cash flow generation STOCK DATA
will make it difficult for the company to repay its debt through internal accruals. Market Cap Rs 4.8 bn.
Rupee depreciation further aggravates the problem as these loans are in Book Value per share Rs 35
foreign currency. Eq Shares O/S (F.V. Rs.1) 238 mn.
Free Float 42.6%
Aggressive approach to international business Avg. Traded Value (6 mths) Rs 13.7 mn
52 Week High/Low Rs 47/15
TVSL has taken an aggressive approach to its international business by Bloomberg Code TVSL IN
setting up manufacturing facility in Indonesia and foraying into a new product Reuters Code TVSM.BO
segment of Step-thrus. This aggressive approach may back fire on the
company due to big capex involved.
TOP 5 SHAREHOLDERS
RISKS
Name % holding
The ability of the company to make a rebound in the domestic motorcycle
LIC India 7.7
market is the key risk to our rating. However, we see this as very difficult
given the product pipeline of the company. ICICI Pru. Life Insurance 2.0
Sandstone Cap. India Master Fund 2.3
Any significant ramp up in 3-wheelers business will have a big impact on
the profitability of the company. Strategic Mgt. & Marketing Consultancy 1.4
Horticulture Const. Engg. Pvt. Ltd. 1.4
VALUATION
At the current price, the stock of the company is trading at 9.8x FY10E
earnings of Rs2.1. Given its over dependence on price sensitive entry segment
PERFORMANCE (%)
products and leverage on balance sheet, we see TVSL more vulnerable to
competitive environment. We downgrade the stock to ‘SELL’ with a target 1M 3M 12M
Absolute 11.0 (17.8) (44.4)
price of Rs16, discounting FY10E earnings 7.5x. Relative 14.5 (10.2) (5.0)

KEY FINANCIALS (STANDALONE) Rs mn

FY07 FY08 FY09E FY10E FY11E
RELATIVE PERFORMANCE
Net Sales 38,550 32,195 36,681 39,689 43,053
YoY Gr. (%) 19.2 (16.5) 13.9 8.2 8.5
TVSL BSE (Rebased)
Op. Profits 1399 440 1207 1399 1727 50
Op. Marg. (%) 3.6 1.4 3.3 3.5 4.0
Adjusted Net Profit 663 318 (492) 493 754 40
YoY Gr. (%) (45.9) (52.1) (254.7) n/a 52.9 30
KEY RATIOS
Dil. EPS (Rs) 2.8 1.3 (2.1) 2.1 3.2 20
ROCE (%) 8.9 2.9 (0.9) 6.6 8.9
10
RoE (%) 9.1 4.2 (6.5) 6.5 9.2
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
PER (x) 7.3 15.2 n/a 9.8 6.4
EV/Net sales (x) 0.2 0.3 0.3 0.3 0.2
EV/EBDITA (x) 6.6 24.4 9.5 7.3 5.4

25
 RESEARCH
Gearless scooter segement
has been a stronghold for
TVSL ever since the launch
of Scooty...
vineet.hetamasaria@pinc.co.in
TVS Motor
Product Profile
TVSL has a presence across all the motorcycles segments. With its economy offering
Star-City, TVSL has a ~20% marketshare in the segment with the segment leader BJAUT
holding ~50% marketshare.
After resolving legal issues with BJAUT over the design patents for the engine, TVSL
reintroduced its Flame model in the executive segment. The model has however failed to
generate a positive response with a meager ~2% marketshare. TVSL has been unsuccessful
over the last five years to come out with a model which can give it a strong foothold in the
executive segment.
In the premium segment, TVSL successfully replaced a high selling model like Fierro with
another advanced product Apache. Apache alongwith the recently launched fuel injected
(FI) model have been able to garner a ~10% marketshare. However increased competition
in the segment owing to Yamaha FZ-16 & Suzuki GS150R could translate into loss of
marketshare for TVSL.
The gearless scooter segment has been a stronghold for TVSL ever since the launch of
Scooty almost a decade ago. However, the mighty presence of HMSI in this segment
means that the marketshare for TVSL is limited to ~20%. The light and zippy Scooty is an
ideal drive for city conditions & with commuter friendly features TVSL has managed to
keep the product updated.
TVSL’s Domestic Motorcycle Product-Mix
Economy Ex ecutiv e Premium
100%
75%
50%
25%
0%
Q3FY07 Q4FY07 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09
Source: CRIS Infac
Over the last four years, the positive surprise for the company has come from most unlikely
segment of mopeds. This segment had a CAGR of 13% over FY05-09 with strong demand
from rural areas of South India. At present, TVSL is the only player in the moped segment.
In the same timeframe, motorcycles sales for the company had a negative CAGR of 8%.
Mopeds which were contributing 22% of TVSL’s volumes in FY05, now contributes 32% of
volumes. This reflects the marginalisation of the company in the domestic motorcycle
market. In this process, company’s profitability has been adversely impacted due to growing
dependence on low margin entry level segment motorcycles.
26
 RESEARCH
Over dependence on the
economy segment has
resulted in wafer thin
margins...
vineet.hetamasaria@pinc.co.in
TVS Motor
Foray into Three-Wheelers
After a project delay of 2 years, TVSL launched its 3-wheelers passenger carrier in end
FY08. At present, this product is launched in South India and company intends to have a
countrywide presence during FY10. TVS King is currently available with a 2-stroke engine
in petrol and LPG variants, with 4-stroke version planned for launch by Q2FY10.
The 3-wheelers industry in India is in a slowdown phase and is dependent on replacement
demand as there are restrictions on issue of new permits for 3-wheelers in major towns
and cities. The market is currently dominated by BJAUT which is developing a 4-wheeled
alternative for the 3-wheelers.
Investment Rationale
Poor product portfolio
Though TVSL has a presence in all the segments of 2-wheelers industry, it is too much
dependent on low margins economy segment motorcycles and mopeds. In motorcycles,
it derives almost 70% of its volumes from economy segment. This over dependence on
economy segment is the reason behind wafer thin margins of the company.
TVSL’s Overall Product-Mix
Source: SIAM
Unable to capitalise on tax benefits
In FY08, TVSL commissioned its greenfield facility at Nalagarh (Himachal Pradesh) with a
capacity of 400k units p.a. with an initial investment of Rs1.2bn. This plant enjoys excise
duty exemption and sales tax concessions for ten years. The company is using the plant
for manufacturing its economy segment motorcycle Star/Star City. Post commissioning
of this plant, the company reduced the prices of its products and passed on the excise
duty benefits to the customers. However this price cut was unable to stimulate the demand
and impacted the company adversely.
27
 RESEARCH
Key export destination for
TVSL is South East Asia...
TVSL setup a manufacturing
facility in Indonesia in FY08
with a capacity to produce
300k units p.a...
vineet.hetamasaria@pinc.co.in
TVS Motor
Robust Exports
Similar to BJAUT, TVSL has a significant proportion of sales through exports. In FY08
TVSL exported 137k units comprising of 10.5% of its total sales volume. In FY09YTD,
TVSL has already exported 160k units, a growth of 44% comprising of 15% of the total
sales volumes. Key export destination for TVSL is South East Asia.
TVSL’s Two-Wheeler Exports
Ex ports sales '000s (LHS) % Gr (YoY) (RHS)
200 200
150 150
100 100
50 50
- 0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 YTD
Source: SIAM
Foray in Indonesia
As compared to its peers, TVSL has adopted a more aggressive approach towards
international business. While its peers has made a gradual move in the international markets
by exporting products from India, TVSL has set up a full fledged manufacturing facility in
Indonesia which was commissioned in FY08 with a capacity to produce 300k units p.a.
The Indonesian 2-wheeler market estimated at ~5mn units is the third largest market in
the world after China & India and had a CAGR of 15% over the past 5 years. However, this
market is different in terms of products and unlike the conventional motorcycles, this
market has a preference for Step-thrus. TVSL commenced operations in this market with
their Step-thru product TVS Neo. This strategy of having an investment heavy foray in a
new market with a new product is more risky.
Leveraged balance sheet
Unlike its peers, TVSL has a leveraged balance sheet. While peers, HH and BJAUT has
huge cash reserves, TVSL has debt equity ratio of 1:1. The depreciation of Indian currency
has adversely impacted the debt as this debt is in the form of external commercial
borrowings. Given, the small cashflow generation, it will be difficult for the company to
repay this debt through internal accruals and raises the risk for the company.
28
 RESEARCH
We see TVSL more
vulnerable to the competitive
environment, hence we
downgrade the stock to
‘SELL’...
vineet.hetamasaria@pinc.co.in
TVS Motor
Wafer thin margins
Out of all the listed 2-wheelers manufacturers in India, TVSL has got the least margins.
Compared to double digit margins for BJAUT & HH, TVSL’s margins have languished
below 5%. A high dependence on entry level products such as economy segment
motorcycles & mopeds has been a drag on the margins. Other expenditure, including
advertising & marketing expenses, as a percentage of sales is as high as 15% as compared
to 10-11% for its peers.
TVSL’s Operating Margins
OPM (%) NPM (%)
9.0
6.0
3.0
0.0
-3.0
Q1FY07 Q2FY07 Q3FY07 Q4FY07 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09
Source: Company
Outlook
We expect that during FY10, TVSL will be able to restrict the decline in its domestic
motorcycle volumes with a growth of 5%. We expect exports to remain flat for FY10 due to
global financial crisis. Profitability of the company is expected to show marginal improvement
due to easing of raw material pricing pressure. Due to mark to market losses on foreign
currency debt, we expect TVSL to end FY09 with losses of Rs 492 mn.
Valuations
At the current price, the stock of the company is trading at 9.8x FY10E earnings of Rs2.1.
Given its over dependence on price sensitive entry segment products and leverage on
balance sheet, we see TVSL more vulnerable to competitive environment. We downgrade
the stock to ‘SELL’ with a target price of Rs16, discounting FY10E earnings 7.5x.
29
 RESEARCH

TVS Motor

Year Ended March (Figures in Rs mn)

Income Statement FY07 FY08 FY09E FY10E FY11E Cash Flow Statement FY07 FY08 FY09E FY10E FY11E
Net sales 38550 32195 36681 39689 43053 Pre-tax profit 908 354 (702) 657 1005
Growth (%) 19.2 (16.5) 13.9 8.2 8.5 Depreciation 743 886 1017 1020 1051
Operating profit 1399 440 1207 1399 1727 Total tax paid (310) (168) 410 (204) (291)
Other operating income - - - - - Chg in working capital (362) (1014) (449) 502 (155)
EBITDA 1399 440 1207 1399 1727 Other operating activities - - - - -
Growth (%) (32.4) (68.5) 174.1 16.0 23.5 Cash flow from oper. (a) 979 57 276 1975 1609
Depreciation (895) (965) (1017) (1020) (1051) Capital expenditure (2558) (1287) (984) (620) (670)
Other income 754 994 (342) 708 758 Chg in investments - (258) - (185) -
EBIT 1259 468 (152) 1087 1435 Other investing activities - - - - -
Interest paid (351) (115) (550) (430) (430) Cash flow from inv. (b) (2558) (1545) (984) (805) (670)
PBT (before E/o items) 908 354 (702) 657 1005 Free cash flow (a+b) (1578) (1488) (709) 1170 939
Tax Provision (246) (36) 211 (164) (251) Equity raised/(repaid) 73 58 173 130 115
E/o loss / (Income) - - - - - Debt raised/(repaid) 2485 328 717 (1281) (500)
Net profit 663 318 (492) 493 754 Chg in minorities - - - - -
Adjusted net profit 663 318 (492) 493 754 Dividend (incl. tax) (352) (42) (195) (69) (139)
Growth (%) (45.9) (52.1) (254.7) n/a 52.9 Other financing activities - - - - -
Diluted EPS (Rs) 2.8 1.3 (2.1) 2.1 3.2 Cash flow from financing (c) 2206 344 695 (1220) (524)
Diluted EPS Growth (%) (45.9) (52.1) (254.7) n/a 52.9 Net chg in cash (a+b+c) 628 (1144) (13) (50) 415

Balance Sheet FY07 FY08 FY09E FY10E FY11E Key Ratios FY07 FY08 FY09E FY10E FY11E
Equity Share Capital 238 238 238 238 238 OPM (%) 3.6 1.4 3.3 3.5 4.0
Reserves & surplus 7,855 7,978 7,487 7,841 8,456 Net margin (%) 1.7 1.0 (1.3) 1.2 1.8
Shareholders' funds 7,507 7,688 7,369 7,853 8,583 Dividend yield (%) 4.2 3.4 0.0 2.5 2.5
Minorities interests - - - - - Net debt/Equity (x) 0.6 0.8 0.9 0.7 0.5
Total Debt 6,336 6,663 7,381 6,100 5,600 Net Working Capital (days) (9) (2) 3 (2) (2)
Capital Employed 13,843 14,352 14,750 13,953 14,183 Asset turnover (x) 1.9 1.5 1.6 1.7 1.9
Net fixed assets 10,029 10,431 10,398 9,998 9,617 ROCE (%) 8.9 2.9 (0.9) 6.6 8.9
Cash & Cash Eq. 1,903 759 746 696 1,111 Return on equity (%) 9.1 4.2 (6.5) 6.5 9.2
Net other Current Assets 1,091 2,043 2,447 1,876 2,031 EV/Net sales (x) 0.2 0.3 0.3 0.3 0.2
Investments 2,410 2,668 2,668 2,853 2,853 EV/EBITDA (x) 6.6 24.4 9.5 7.3 5.4
Net Deferred Tax Assets (1,590) (1,549) (1,509) (1,469) (1,429) PER (x) 7.3 15.2 n/a 9.8 6.4
Total assets 13,843 14,352 14,750 13,953 14,183 Price/Book (x) 0.6 0.6 0.7 0.6 0.6

EV/SALES EV/EBIDTA

50,000 60,000

37,500 1.0X 45,000

0.8X
25,000 30,000 25X
0.6X
20X
0.4X 15X
12,500 15,000
10X
0.2X 5X
- -
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

vineet.hetamasaria@pinc.co.in 30
 T E A M

EQUITY DESK
Gealgeo V. Alankara Head - Institutional Sales alankara@pinc.co.in 91-22-6618 6466

Sailav Kaji Head Derivatives & Strategist sailavk@pinc.co.in 91-22-6618 6344

SALES
Anil Chaurasia anil.chaurasia@pinc.co.in 91-22-6618 6483

Alok Doshi adoshi@pinc.co.in 91-22-6618 6484

Sundeep Bhat sundeepb@pinc.co.in 91-22-6618 6486

Gagan Borana gagan.borana@pinc.co.in 91-22-6618 6485

DEALING
Ashok Savla ashok.savla@pinc.co.in 91-22-6618 6400

Raju Bhavsar rajub@pinc.co.in 91-22-6618 6301

Manoj Parmar manojp@pinc.co.in 91-22-6618 6326

Hasmukh D. Prajapati hasmukhp@pinc.co.in 91-22-6618 6325

Pratiksha Shah pratikshas@pinc.co.in 91-22-6618 6329

DIRECTORS
Gaurang Gandhi gaurangg@pinc.co.in 91-22-6618 6400

Hemang Gandhi hemangg@pinc.co.in 91-22-6618 6400

Ketan Gandhi ketang@pinc.co.in 91-22-6618 6400

COMPLIANCE
Rakesh Bhatia Head Compliance rakeshb@pinc.co.in 91-22-6618 6400

31
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