January 2008

Automobiles

Big impact
Amit Kasat (AKasat@MotilalOswal.com); Tel: +91 22 3982 5411 Rohan Korde (RohanKorde@MotilalOswal.com); Tel: +91 22 3982 5414

Contents
Page No. A new segment called Nano? ...................................................................... 4-9 What was showcased at Auto Expo 2008 ................................................ 10-19 Maruti Suzuki ............................................................................ 11-14 Tata Motors .............................................................................. 15-17 Bajaj Auto ....................................................................................... 18 Others............................................................................................. 19 Companies (Our top picks) ..................................................................... 20-31 Maruti Suzuki .............................................................. 21-23 Tata Motors ................................................................ 24-26 Bajaj Auto .................................................................... 27-29 Hero Honda ................................................................. 30-31

21 January 2008

Update
SECTOR: AUTOMOBILES

Automobiles
BSE Sensex: 17,605 S&P CNX: 5,209

21 January 2008

COMPANY NAME

PG.

Maruti Suzuki (Buy; Rs808) Tata Motors (Buy; Rs654) Bajaj Auto (Buy; Rs2,064) Hero Honda (Buy; Rs692)

21

24

27

The highlight of Auto Expo 2008 was the unveiling of Tata Motors one lakh car. The car, christened Nano, is expected to hit the roads by 3QFY09. We believe that the Nano will create a new segment in passenger cars, straddling the gap between two-wheelers and the Maruti-800. We do not expect the launch of this car to adversely impact two-wheeler volumes. Nor do we see a major impact on the sale of other cars barring the Maruti-800, which may witness some heat initially. Three-wheelers, though, is another matter. The Expo offered a chance for most global players to showcase their commitment towards developing the Indian auto industry further, while for the domestic OEMs it was yet another opportunity to prove that they could compete on an equal footing with the global players. We believe that both sets of OEMs carried out their objectives successfully. We were particularly impressed by the tremendous response to the launch of Nano by Tata Motors and the indication given by Maruti to straddle more segments of passenger cars by displaying its concept car Kizashi, to be launched in the A4 segment and the new age concept A-Star hatchback. We remain positive on the prospects of both these companies and have a Buy rating on both of them. Among the other passenger car players, Skoda displayed its recently launched Fabia, Fiat showcased Punto, Bajaj Auto displayed its under-development passenger car on the Lite platform, and Volvo showcased Jazz. The excitement was a bit muted in the two-wheeler segment, with the top-3 already having made significant launches in the prior months (during the festival season). Nevertheless, it offered Bajaj Auto the opportunity to showcase KTM bikes and the 150cc Discover, along with the latest Sprintvariant of XCD, while Hero Honda focused on the Hunk and other premium segment bikes. We remain positive on both these companies in the same order of preference. We maintain our positive view on the auto sector and expect the robust industry growth to resume after a breather in FY08 for segments like two-wheelers and M&HCVs, while passenger vehicles and LCVs are expected to sustain a healthy growth rate.

30

COMPARATIVE VALUATIONS EV / EPS (RS) COMPANY RECO FY07 FY08E FY09E FY10E EPS GR. YOY (%) FY08E FY09E FY10E FY08E P/E (X) FY09E FY10E ROE

EBITDA (X) (%) FY09E FY09E

Automobiles Bajaj Auto Hero Honda Maruti Suzuki Tata Motors* *Consolidated Buy Buy Buy Buy 127.2 43.4 53.9 52.9 134.4 43.9 68.1 47.8 155.1 51.4 79.6 56.4 171.7 56.6 90.4 64.0 5.7 1.2 26.4 -9.6 15.4 17.2 16.8 18.0 10.7 10.1 13.6 13.4 15.4 14.7 11.9 13.7 13.3 12.6 10.1 11.6 12.0 11.4 8.9 10.2 8.2 7.2 5.1 8.4 20.7 31.7 21.3 20.2

Source: Motilal Oswal Securities

21 January 2008

A new segment called Nano?

Tata Motors was the cynosure of all eyes during the Auto Expo, with the car dubbed as the lakh carset to be unveiled. The car has been christened Nano, and is expected one to hit the Indian roads by 3QFY09. We believe that the Nano will create a new segment in passenger cars, straddling the gap between two-wheelers (average price Rs50,000), and the Maruti-800 standard non-AC version, which is available at an on-road price of Rs218,000. Our views on the change in industry dynamics as portended by this launch are as under: Two-wheelers not to be impacted Domestic two-wheeler demand is a function of three major factors: (a) upgradation from bicycles, (b) replacement demand from existing two-wheelers, and (c) first-time buyers who have been propelled into a higher income group with new found affordability on account of economic growth. We believe that even in a worst case scenario, the impact of the launch of the Nano on two-wheelers would be marginal, as:
DEMAND TRIGGERS FOR TWO-WHEELERS

Increasing affordability

Poor public transport

New demand

Rise of the Indian middle class

Increasing youth population

+
Shorter replacment cycle Replacement demand Newer and attractive models being launched

+
Large untapped markets in SAARC and African regions Exports Highly competitive products on price and technology

=
Strong long-term growth potential for two-wheelers Source: Industry/Motilal Oswal Securities 21 January 2008

(a) Cost of ownership of two-wheelers is nearly one-third that of a small car. A car, no matter how small, is the proverbial white elephant requiring regular maintenance and giving significantly lower mileage.
COMPARATIVE COST OF OWNERSHIP MOTORCYCLE (RS) ENTRY EXECUTIVE PREMIUM STANDARD NANO DELUXE I DELUXE II

Average cost (Rs) Amount financed (%) Loan Amount (Rs) Interest rate (%) Duration (months) Monthly EMI (Rs) Per day usage (km) Fuel efficiency (km/lt) Petrol price (Rs / lt) Fuel cost per month Monthly maintenance cost Ownership cost (per month)

40,000 70.0 28,000 21.0 36 1,055 30 70 49 630 450 2,135

47,500 70.0 33,250 21.0 36 1,253 30 60 49 735 450 2,438

60,000 70.0 42,000 21.0 36 1,582 30 50 49 882 450 2,914

125,000 80.0 100,000 16.0 36 3,516 30 20 49 2,205 800 6,521

150,000 80.0 120,000 16.0 36 4,219 30 19 49 2,321 800 7,340

175,000 80.0 140,000 16.0 36 4,922 30 18 49 2,450 800 8,172

Source: Industry/Motilal Oswal Securities

(b) With rising delinquencies being encountered by financers in two-wheelers over the last 12-15 months, financing for potential Nano buyers would not be easy to avail. Given that both two-wheelers and the Nano are broadly targeted at the same basket of potential customers, it would be easier to get a smaller loan for a two-wheeler than for a Nano, which would cost 2-3 times as much. (c) The ongoing upgradation of bicycle owners and integration of first-time buyers into the two-wheeler population would offset any drifters to the Nano (bicycle production in India is ~10-11m units per annum).
BICYCLE PRODUCTION IN INDIA UNITS ( 000 NOS) % GROWTH

FY01 FY02 FY03 FY04 FY05 FY06

12,622 12,587 11,595 12,341 11,595 10,653 -0.3 -7.9 6.4 -6.0 -8.1

Source: CMIE/Motilal Oswal Securities

(d) The growth rate for two-wheelers has slowed down substantially for multiple reasons. We believe that over the next few years, two-wheelers would witness a growth of 7-10%. This growth rate discounts a small proportion of potential two-wheeler buyers who opt for the Nano. Moreover, two-wheeler sales were 8.5m units in FY07. In a worst case scenario, if the Nano succeeds in attracting 0.5m two-wheeler buyers post FY10, it would constitute only 6% of two-wheeler sales, by no means a mind-boggling number.

21 January 2008

(e) Premium motorcycles have their own set of loyal customers who can afford cars but prefer to stick to high performance bikes. (f) Scooters, which have been depicted as the vehicles carrying a family of four have been seeing declining sales for a number of years; there has been a steady shift to motorcycles. FY08 is likely to see growth in scooters after years of decline. Motorcycles do not carry the image of family vehicles in cities. Hence, the Nano would not appeal to all motorcycle owners.
MOTORCYCLE VOLUME (UNITS): KEY DRIVER OF TWO-WHEELERS GROWTH

8,100,000 6,100,000 4,100,000 2,100,000 100,000

Motorcycle sales

YoY Grow th (%)

52.0 34.0 16.0 -2.0 -20.0

DECLINE IN SCOOTER VOLUMES (NOS)

1,200,000

FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08E FY09E
Source: SIAM/Motilal Oswal Securities

Scooters

Scooters as a % of total tw o-w heeler sales

24

900,000

20

600,000

16

300,000

12

0 FY02 FY03 FY04 FY05 FY06 FY07 9MFY08

Source: Industry/Motilal Oswal Securities

(g) We believe that the reach of Tata Motorsdealerships is not completely attuned to the rural areas. In such a case, penetration can be ensured only over the medium term, wherein two-wheelers will continue to rule the roost. We also believe that the poor road infrastructure in most rural areas make SUVs the more conducive option as compared to the Nano.

21 January 2008

Maruti-800 to feel the heat initially A case has been made for the other industry players to feel the negative impact of the launch of the Nano. We believe that although the Nano would be able to wean away market share from M-800 in the A1 segment, the impact would not be felt in the A2 segment. We believe:
?

The domestic passenger car sector is a rapidly growing market, which has diverse people with diverse aspirations. It is not a homogeneous market, where the lowest priced car has the highest number of takers Alto easily outsells M-800 in a ratio higher than 3:1, despite being priced higher by ~Rs50,000. ? The impact on the M-800 is expected to be the most severe. Prior to the unveiling of the Nano, this was the cheapest car available in India. M-800 sales have averaged 5,776 units in 9MFY08, a decline of 13.5% YoY. So far, the decline in M-800 sales has been captured by other A2 segment models of Maruti, mainly Alto. ? With the introduction of the Nano, M-800 standard version sales may drop further, with the differential accruing to Tata Motors. We do not expect the higher priced models including the Alto to feel a significant negative impact on this count, as they cater to a segment of the population that can afford and prefer the higher-priced, nonbase models. ? We expect Maruti-Suzuki to take steps to counter the threat from the Nano, and believe that a cut-price version of M-800 may be a feasible short-term alternative.

BASE MODEL MODEL PRICE (RS)

ENG. DISP. (CC)

ECONOMY (KPL)

LENGTH (MM)

WIDTH (MM)

HEIGTH (MM)

KERB WEIGHT (KG)

Nano M-800 Alto Indica Xeta Santro

125,000 218,000 262,000 277,000 294,000

623 796 796 1,193 1,086

20.0 NA 17.5 14.5 16.2

3,100 3,335 3,495 3,675 3,565

1,500 1,440 1,495 1,665 1,525

1,600 1,405 1,460 1,485 1,590

NA 665 725 980 854

Source: Industry/Motilal Oswal Securities

Three-wheelers on a less sound footing We believe that the three-wheeler industry would not be on as secure a footing as twowheelers and other passenger cars. Three-wheeler sales have declined 5.3% in FY08 after an excellent FY07 (25% growth). The problems on the passenger three-wheeler side have been exacerbated by lack of new licenses from regulatory authorities. We believe that this may result in the demand for passenger three-wheelers getting shifted to the Nano and we may even possibly see the Ace impact getting repeated here. This may result in further shrinkage of the passenger three-wheeler market, particularly at the expense of the fringe players (subject to regulatory approvals being received).

21 January 2008

THE ACE EFFECT ON THREE-WHEELERS

120 90 60 30 0 FY05

Market share (%) 3-w heelers

Market share (%) Ace

FY06

FY07
Source: Company/Motilal Oswal Securities

However, on a cautionary note, for the impact to be noticeable, certain regulatory approvals are necessary the RTO would have to allow the Nano to operate as a three-wheeler alternative on the same licenses. The other key factor is whether Tata Motors would want its car to widely operate in this segment, as it could effectively scuttle plans for such a commercial use if it feels this does not go with the family vehicle image currently portrayed. Moreover, if the Nano enters the taxi segment, it could also negatively impact Indicab sales, thereby impacting Tata Motorsmargins negatively. It not a zero sum game s We believe that there exists a gap comprising of people who are uncomfortable with twowheelers and who aspire to own a car but are currently unable to do so due to the price point, and hence have avoided purchasing one so far. We believe that it is this entirely new segment of potential car buyers that will get tapped by the Nano. The impact on the existing passenger car players is thus likely to range from marginal to mild. As per Crisil Research, the lower price point increases the number of addressable households (income over Rs200,000 per annum) for passenger cars by 65% (from ~19m to ~31m). However, this will not translate straight away into demand as it includes two-wheeler owning individuals (estimated at ~50m vehicles). We estimate Nano volumes at 97,385 in FY09 and at 293,343 in FY10.
INCREASE IN TARGET AUDIENCE FOR PASSENGER CARS

80,000 60,000 40,000 20,000 0

FY03 FY04 FY05

Total addressable households ('000's)

FY06

FY07

FY08E

FY09E

FY10E

FY11E

FY12E

Source: Crisil Research 21 January 2008

We believe that the Nano would change the face of the Indian passenger car industry over the next 2-3 years and the picture is a very pretty one, all inclusive, where the top2 players Maruti and Tata Motors have plenty of room to grow, without engaging in destructive competition. We also expect two-wheelers to grow at a stable 7-10% over the medium-term, following the disappointment of FY08. We remain positive on the auto sector, and our top picks are Bajaj Auto, Maruti Suzuki, Hero Honda and Tata Motors.

21 January 2008

What was showcased at Auto Expo 2008

21 January 2008

10

Maruti Suzuki
Maruti Suzuki showcased three concept cars at the Auto Expo 2008. These were: 1. A-Star: This is Maruti Suzuki fifth world strategic car. The company is expected to s commence manufacture of a production model based on concept A-Star in October 2008, with full-scale production for Europe in December 2008 to be followed by expansion to other markets around the world. The car would be manufactured at Maruti Suzuki new plant in Manesar. Though Europe is expected to be the main s target market, the car would also be sold in India and other countries. A manual powertrain for the car would be manufactured by Suzuki Powertrain India, a subsidiary of Suzuki Motor Company, and in which Maruti Suzuki holds 30% stake.
A-STAR

Source: Company

2. Splash: This is being positioned as a family car, and was Maruti Suzuki fourth world s strategic car (unveiled at the 2007 Frankfurt Motor Show). The target market is once again mainly Europe, and the car would initially be manufactured in Hungary and at Magyar Suzuki. Splash is likely to hit the European market in the spring of 2008, with targeted sales being 60,000 units. Although the car would also be manufactured and launched in India, the schedule for the same has not been decided.
SPLASH

Source: Company 21 January 2008

11

COMPARISON OF NEW MODELS WITH MARUTI SUZUKI OTHER EXISTING A2 SEGMENT MODELS: S MODEL ENGINE TYPE LENGTH (MM) WHEELBASE (MM)

Concept A-Star Concept Splash Swift Wagon-R Zen Estilo

1.0 litre aluminum petrol engine 1.0, 1.2 litre petrol and 1.3 liter diesel 1.3 litre 1.06 litre 1.06 litre

3,580 3,715 3,695 3,520 3,495

2,360 2,360 2,390 2,360 2,360 Source: Industry

3. Kizashi: Of the three new models on display, this is the one likely to be the last to make its debut on Indian roads. Kizashi marks Suzuki entry into the A4 segment and s means preludeor foretaste The idea is to create a large car so that Suzuki customers . aspiring for bigger cars remain within the fold. The benefits from Kizashi are thus two-fold: (i) enhancement of Suzuki portfolio to cover all the segments from A1 to s A4 over the next few years, and (ii) to exploit the company high level of technological s competence and enhance its brand image. Kizashi is expected to hit the Indian roads in 2010, after being customized for the more rugged Indian roads.
KIZASHI

Source: Company
COMPARISON OF KIZASHI WITH OTHER A4 SEGMENT MODELS MODEL COMPANY ENGINE TRANSMISSION LENGTH (MM) WHEEL BASE (MM) WIDTH (MM) HEIGHT (MM)

Concept Kizashi Civic Elantra Octavia Corolla

Maruti Suzuki Honda Hyundai Skoda Toyota

2.0 liter 1.8 liter 1.8 liter 1.9 liter 1.8 liter

Sequential six speed 5-speed Manual/Automatic 5-speed Manual 5-speed Manual 5-speed Manual

4,650 4,545 4,525 4,507 4,530

2,850 2,700 2,610 2,512 2,600

1,950 1,750 1,725 1,731 1,705

1,400 1,450 1,450 1,325 1,490

Source: Industry

21 January 2008

12

TREND IN NEW LAUNCHES BY MARUTI SUZUKI

FY00 FY01 FY02 FY04 FY06 FY07 FY08 FY09E

Baleno & WagonR Alto, Altura & CNG Omni Versa Grand Vitara Swift Swift diesel, Zen Estilo, WagonR Duo SX4, relaunch of Vitara Dezire, Car based upon Concept A-Star Source: Industry

OTHER VARIANTS ON SHOW BY MARUTI SUZUKI SX4 CROSSOVER ZEN ESTILO EXECUTIVE

OMNI CARAVAN

Source: Company

Maruti Suzuki pavilion was under the theme s Colours of Life signifying the wide range , of the company products and services, and how these would enable it to serve the needs s of diverse Indian customers. The company strategy for the future is five-pronged: s

21 January 2008

13

(i) Launch more strategic world models: Swift, which is being followed by A-Star and Splash is a pre-cursor to this strategy. (ii) Step up R&D: R&D expenditure as a percentage of turnover was 0.36% in FY07 (0.44% in FY06), but is now likely to be higher. A-Star is the first concept car in which designers from Maruti-Suzuki R&D team have been involved from the start of styling s development. (iii)Boost exports to Europe and the rest of the world: Exports in 9MFY08 have increased by 51.5% YoY, and are expected to grow at 55.3% CAGR over FY07-10. The launch of world models would make it easier to tap the European market. (iv)Offer next generation engine technology: This would help Maruti-Suzuki to remain a step ahead of the existing environmental standards. A-Star has Euro-V compliant technology. (v) Invest in facilities for manufacturing, marketing, and branding: Investment in manufacturing gets captured in the vision to undertake capex of Rs90b over FY06-10, enter into JVs such as the one with Magneti Marelli for diesel engines and ECU, increasing capacity at the Manesar plant, etc. The company has also undertaken an aggressive marketing and branding exercise. Television commercials for models like Omni, an established brand not advertised on screen for several years, can now be seen. Other innovative strategies involve advertising the Maruti service network (which is the widest car service network in India currently), highlighting the reach and ease of servicing provided by the company.

21 January 2008

14

Tata Motors
Tata Motors was the cynosure of all eyes during the auto expo, with the car dubbed as the lakh carset to be unveiled. The company did not disappoint the people present at the one time of launch by unveiling a neat looking car, with the price tag at Rs100,000 at the dealer end. The car has been christened Nano, and is expected to hit Indian roads in 3QFY09. About Nano When launched, the Nano would be available in both standard and deluxe versions. We expect the deluxe version to retail at a price lower than the M-800 AC version. Some features of the Nano include an all sheet-metal body, intrusion-resistant doors, seat belts, strong seats and anchorages, rear tailgate glass bonded to the body, single side mirror, tubeless tyres, etc. The car is currently Euro III compliant and is capable of being scaled up to Euro IV standards. It also meets the crash test norms in India and in Europe.
NANO

Source: Company

We believe that there exists a gap comprising of people who are uncomfortable with twowheelers and who aspire to own a car but are currently unable to do so due to the price point, and hence have avoided purchasing one so far. We believe that it is this entirely new segment of potential car buyers that will get tapped by the Nano. The impact on the existing players is thus expected to range from marginal to mild. We believe that Tata Motors might be hard pressed to arrest the decline in Indica volumes as has been seen in 9MFY08 (-2.2% YoY). We do not believe that the launch of the new variant of Indica will arrest this decline in FY09, as the launch date is still some time away. Moreover, with the high profile Nano being launched in 3QFY08, Indica may end up getting marginalized in terms of priority, particularly at the dealer end. There is also the additional threat that Indicab sales will be cannibalized by the Nano.

21 January 2008

15

COMPARISON OF NANO WITH OTHER SMALL CARS BASE MODEL COMPANY BASE MODEL PRICE (RS) ENGINE DISPLACE -MENT (CC) ECONOMY CITY (KPL) ECONOMY HIGHWAY (KPL) LENGTH WHEELBASE (MM) (MM) WIDTH (MM) HEIGTH (MM) KERB WEIGHT (KG)

Nano M-800 Alto Santro

Tata Motors Maruti Maruti Hyundai

120,000 218,000 262,000 277,000 294,000

623 796 796 1,193 1,086

NA NA 12.9 10.5 12.1

20.0 NA 17.5 14.5 16.2

3,100 3,335 3,495 3,675 3,565

NA 2,175 2,360 2,400 2,380

1,500 1,440 1,495 1,665 1,525

1,600 1,405 1,460 1,485 1,590

NA 665 725 980 854

Indica Xeta Tata Motors

Source: Industry

We expect the Nano to clock volumes of 97,385 units in FY09 and 293,343 units in FY10. It would be a drag on Tata MotorsEBITDA margins in the initial years.
COMPUTATION FOR ONE-LAKH CAR RS MILLION MAR-07 MAR-08 MAR-09 MAR-10

Passenger Cars & MPVs Sales Total Sales (units) Volume growth (%) Domestic Sales Volume growth (%) Export Sales Volume growth (%) Realisation (Rs) Growth in realisation (%) Normal passenger car sales Sales Total Sales (units) Volume growth (%) Domestic Sales Volume growth (%) Export Sales Volume growth (%) Realisation (Rs) Growth in realisation (%) One lakh car Sales Total Sales (units) Volume growth (%) Domestic Sales Volume growth (%) Export Sales Volume growth (%) Realisation (Rs) Growth in realisation (%) 9,787 97,385 97,385 0.0 0.0 100,499 31,995 293,343 201.2 293,343 201.2 0.0 109,070 8.5 51,495 195,408 15.3 179,001 18.6 16,407 -11.6 263,528 3.5 49,417 182,058 -6.8 166,471 -7.0 15,587 -5.0 271,433 3.0 48,279 171,025 -6.1 152,321 -8.5 18,704 20.0 282,291 4.0 50,879 176,703 3.3 156,129 2.5 20,574 10.0 287,937 2.0 51,495 195,408 15.3 179,001 18.6 16,407 -11.6 263,528 3.5 49,417 182,058 -6.8 166,471 -7.0 15,587 -5.0 271,433 3.0 58,066 268,410 47.4 249,706 50.0 18,704 20.0 216,332 -20.3 82,874 470,046 75.1 449,472 80.0 20,574 10.0 176,311 -18.5

Source: Company/Motilal Oswal Securities

21 January 2008

16

It was not all about the Nano While the Nano hogged most of the attention, Tata Motors also displayed the new Indica, which is due for launch in 2QFY09. The company intends to roll out two variants of the new Indica fitted with Fiat popular 1.3 multi-jet diesel engine and its 1.2-liter petrol s engine, besides the indigenously developed 1.4-liter DICOR diesel engine and 1.2-liter petrol engine. The new engine for Indica and Palio would be made at the new Tata-Fiat joint venture plant in Ranjangaon, Maharashtra. The new Indica would be offered at a higher price than the present range. Other models displayed included the CNG variant of Ace and the Sumo Grande.
NEW INDICA SUMO GRANDE

CNG ACE

Source: Company

21 January 2008

17

Bajaj Auto
Bajaj Auto displayed its motorcycles, scooters, passenger car prototype and two trucks lite . The company also showcased five motorcycles from its German partner, KTM stable. s Some of the bikes on display were: ? XCD DTSi Sprint: A sportier version of the XCD, designed for enthusiasts amongst 100cc customers. ? Discover 150 DTSi: The Discover 150 is positioned to upgrade the 125cc consumer. ? Blade 125cc DTSi scooter: This scooter targets young males. Bajaj may introduce KTM bikes in India and also develop scooters on the platform. Passenger car prototype: the highlight The highlight of Bajaj Auto pavilion was its prototype low cost car. The prototype vehicle s is likely to be the basic platform for the Renault-Bajaj ultra low cost car expected to be priced in the range of US$3,000. However, this car is in the development stage, and will take 2-4 years to manufacture commercially.
PASSENGER CAR PROTOTYPE

Source: Company

The car will be manufactured at Chakan, near Pune. The plant, which is being built with an initial capacity of 250,000 units, will also produce the light trucks, which Bajaj expects to launch in 2009.

21 January 2008

18

Others
FIAT BRAVO

FIAT PUNTO

Source: Company

21 January 2008

19

Our top picks

21 January 2008

20

SECTOR: AUTOMOBILES

Maruti Suzuki
STOCK INFO. BLOOMBERG

BSE Sensex: 17,605 S&P CNX: 5,209

MSIL IN
REUTERS CODE

21 January 2008
Previous Recommendation: Buy

Buy
Rs808

MRTI.BO

Maruti Suzuki is the largest passenger vehicle manufacturer in India, with a strong presence in small and compact cars. It was initially set up as a joint venture between the Government of India and Suzuki Motors of Japan. Subsequently the Government of India divested a part of its stake and Suzuki Motors is now the majority stakeholder. A key beneficiary of sustained growth in passenger vehicles We expect passenger vehicles (PV) to continue registering healthy growth rates, boosted by structural and fundamental factors. The key growth drivers for PVs would be: ? Strong economic growth is leading to rapid growth in middle/high income households. With increasing salaries, changing lifestyles, and increased urbanization, the demand for passenger vehicles is likely to remain strong. ? Stability in interest rates and increase in availability of finance will result in higher volume growth. ? Global majors are committing resources to India to gain a share of the domestic market and have a low-cost export base (as already seen with Hyundai). Established
PASSENGER VEHICLES: GROWTH DRIVERS

companies like Maruti are also looking to grab a larger share of the exports pie. ? Vehicle penetration in India is low even by developing countries standards. Among the main demand drivers for motor vehicles are robust economic growth and increasing prosperity, improving road infrastructure, and access to financing. Being the leading player, Maruti would be one of the key beneficiaries of the rapid growth in demand for passenger cars. We expect the company to post strong volume growth, driven by aggressive model launches, entry into the diesel space and rising exports. We estimate 16% growth in Maruti domestic volumes in FY08 to 737,330 units and s expect it to increase its market share from 51.1% in the beginning of the year. Maruti is also carrying out its capacity expansion at a well timed and opportune moment the expansion would help Maruti sustain its double-digit volume growth. We expect its production capacity to reach 1m cars per year by 2010.

PV Growth Drivers

Economy

Duty Structure

Competition

Infrastructure

Rising Middle Class

Finance

+8% GDP growth over the past 3 years Double digit growth in industrial output Lower dependence on monsoons / agriculture

Consistent reduction in duty structure - 16% for small cars Reduction in import duty down to 10% from 12.5% in budget 2007

Market expansion initiatives by Maruti like entry into diesel segment, new models in A3 segment, capex

Government programs like Bharat Nirman, increased NHDP outlay, etc Formation of India Infrastructure Financing Co for PPP

Increase in the ratio of working population and multi income families

Greater reach to smaller towns Tenure increase Increase in

Huge two-wheeler population

affordability and availability

Source: Company 21 January 2008

21

MARUTI SUZUKI: VOLUME GROWTH TREND

Sales (in unit nos)- LHS 1,200,000 900,000 13.6 600,000 300,000 0 FY05 FY06 20.1 16.9

Grow th (%)-RHS 24 18 16.3 12 6 0

car buyers. Diesel cars are increasingly becoming more popular and we believe Maruti would be able to garner growth in this segment as well. We expect the company to gain share of ~20% in the diesel segment by FY10. Best placed to maintain profitability Its internal efficiencies and superior product mix make Maruti the most efficient car manufacturer in India. Despite competitive pressure and cost inflation, Maruti has consistently expanded its margins over the past three years (220bp over FY04-07). Though rising input/power costs, consolidation of the Manesar assembly plant, higher royalty payments and advertising expenditure due to new model launches, and discounts are challenges to its profitability, we expect Maruti to achieve a 40bp margin expansion in FY08 to 15.7%. EBITDA margin expansion would be aided by the successful completion of Maruti cost reduction and productivity s improvement ( Challenge-30and Challenge-50 programs ) in FY06. The company subsequently started its new cost reduction program called Next Leap which targets 20% , cost reduction and productivity improvement over FY0608, while also reducing the import content. Through focusing on lean manufacturing, where workers and supervisors on the shop floor jointly drive improvements in quality and productivity and through interactions between senior management and workers, Maruti was able to achieve 6.5% improvement in productivity in FY07. Valuations attractive; maintain Buy We remain positive on Maruti Suzuki growth prospects. s We estimate volume growth at 16.4% CAGR over FY0710; aggressive model launches and faster ramping up of exports could result in positive surprises over the medium term. Margins would expand from 15.3% in FY07 to 15.7% in FY08, despite consolidation of the Manesar plant. We estimate EPS at Rs68.1 for FY08 and Rs79.6 for FY09. The stock trades at attractive valuations of 11.9x FY08E EPS and 10.1x FY09E EPS. Also, subsidiaries/associate companies could add further value. We maintain Buy.
22

16.0

4.8

FY07E FY08E FY09E FY10E

Source: Company/Motilal Oswal Securities

To maintain leadership in passenger cars We believe that any concerns over Maruti dominance in s the passenger car industry are unfounded. While competition is intensifying in the A1 and A2 segments, where Maruti currently reigns supreme, the company is expected to sustain its dominance due to: ? A rapid growth in the PV market ? Established and loyal customer base ? Suzuki market familiarity it has spent over 25 years s in India ? Persistent attractive schemes for customers such as the teachers scheme, government employees scheme, new schemes for the rural populace, etc ? Well-established dealer network Apart from retaining its market leadership in the A2 segment, the recently launched SX4 in the A3 segment and the soon to be launched sedan version of Swift will help Maruti to revive its fortunes in the A3 segment. We estimate that the company domestic volumes would grow 16% in s FY08 and 13% in FY09, while overall volumes would increase by 16.9% in FY08 and by 16% in FY09. Maruti is thus best placed to maintain market share due to adequate capacity, higher productivity, established domestic presence and consistent new model launches. Diesel debut opens a new niche Through the launch of its diesel-powered Swift, Maruti has entered the fast-growing diesel segment. This opens up a hitherto untapped market for the company that of diesel
21 January 2008

INCOME STATEMENT Y / E MARCH 2006 2007 2008E

(Rs Million) 2009E 2 0 10 E

RATIOS Y / E MARCH 2006 2007 2008E 2009E 2 0 10 E

Net Sales Change (%) Operating Other Income Total Income EBITDA Change (%) % of Net Sales Depreciation EBIT Def Revenue Exp. / Others Interest & Finance Charges Other Income PBT Tax Effective Rate (%) PAT Change (%) % of Net Sales Adj. P A T Change (%)

12 2 , 0 12 149,047 1 0.5 488 122,500 18,177 1 8.6 1 4.8 2,854 15,323 -67 204 2,663 17,500 5,609 32.1 11,891 39.3 9.7 12,118 42.0 22.2 617 149,663 22,945 26.2 1 5.3 2,714 20,232 -1 43 376 2,730 22,797 7,1 78 31 .5 15 , 6 19 31 .4 1 0.5 15,574 28.5

186,582 25.2 678

2 2 1,242 1 8.6 678

2 6 0 , 6 19 1 7.8 650 2 6 1,269 39,201 1 4.6 1 5.0 4,745 34,456 -1 43 61 2 3,892 37,878 1 ,742 1 31 .0 2 6 , 136 1 3.6 1 0.0 2 6 , 136 1 3.6

Basic (Rs) Adjusted EP S EPS Growth (%) Cash EPS Book Value per Share DPS Payout (Incl. Div. Tax) % Valuation (x) P/E EV/EBITDA EV/Sales Price to Book Value Dividend Yield (%) P rofitability Ratios (%) RoE RoCE Leverage Ratio Debt/Equity (x) 0.0 0.1 0.1 0.1 0.0 21 .8 32.2 22.8 30.2 22.7 30.9 21.3 29.2 1 9.7 27.4 19.3 1 .0 1 1 .6 4.3 0.4 15.0 8.3 1 .3 3.4 0.6 1 .9 1 6.2 1 .0 2.7 0.6 1 0.1 5.1 0.8 2.2 0.7 8.9 4.3 0.6 1.8 0.7 41.9 42.0 51 .8 1 88.7 3.5 8.3 53.9 28.5 63.3 237.2 4.5 8.3 68.1 26.4 80.3 300.3 5.0 7.3 79.6 1 6.8 93.7 374.4 5.5 6.9 90.4 13.6 106.9 458.8 6.0 6.6

187,261 2 2 1,920 29,399 28.1 1 5.7 3,518 25,880 -1 43 612 3,227 28,639 8,950 31 .3 19,689 26.1 1 0.6 19,689 26.4 3 4 , 199 1 6.3 1 5.4 4,068 3 0 , 131 -1 43 61 2 3,679 33,342 1 0,336 31 .0 23,006 1 6.8 1 0.4 23,006 1 6.8

CASH FLOW STATEMENT Y / E MARCH 2006 2007 2008E

(Rs Million) 2009E 2 0 10 E

BALANCE SHEET Y / E MARCH 2006 2007 2008E

(Rs Million) 2009E 2 0 10 E

OP/(Loss) before Tax Int./Dividends Received

15,390 2,663 2,854 -5,930 -276 14,701 -349 0 14,352 -1 ,568 -5,346

20,375 2,730 2,714 -6,282 4,406 23,942 69 0 2 4 , 0 11 -13,828 -13,580

26,023 3,227 3,518 -8,950 -2,684 2 1,135 0 0 2 1,135 -1 0,000 0 - 10,000 0 0 -612 -1 ,445 -2,057 9,078 1 4,228 23,306

30,274 3,679 4,068 -1 0,336 -1,276 26,409 0 0 26,409 -1 5,000 0 - 15,000 0 0 -61 2 -1,590 -2,201 9,208 23,306 3 2 , 5 14

34,599 3,892 4,745 -1 ,742 1 -2,843 28,650 0 0 28,650 -20,000 0 -20,000 0 0 -61 2 -1,734 -2,346 6,304 32,51 4 3 8 , 8 19

Share Capital Reserves Net Worth Loans Deferred Tax Liability C a p i t a l E m p l o yed Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments Curr.Assets, Loans Inventory Sundry Debtors Cash & Bank Balances Loans & Advances Others Current Liab. & P rov. Sundry Creditors Provisions Net Current Assets Appl. of Funds E: M OSt Estimates

1 ,445 53,081 54,526 71 7 779 56,022 49,546 32,594 16,952 920 20,51 2 37,496 8,81 2 6,548 14,01 6 7,662 458 19,858 15,058 4,800 17,638 56,022

1 ,445 67,094 68,539 6,308 1 ,675 76,522 61 ,468 34,871 26,597 2,389 34,092 38,459 7,1 32 7,474 14,228 9,241 384 2 5 , 0 15 20,1 0 1 4,905 13,444 76,522

1 ,445 85,338 86,783 6,308 1 ,675 94,766 73,857 38,389 35,468 0 34,092 51,207 8,924 9,352 23,306 9,241 384 26,000 22,395 3,605 25,206 94,766

1,445 1 06,754 10 8 , 199 6,308 1,675 116,182 88,857 42,457 46,400 0 34,092 63,797 1 0,575 1 ,082 1 32,51 4 9,241 384 2 8 , 107 24,502 3,605 35,691 116,182

1,445 1 ,1 31 56 132,601 6,308 1,675 140,584 1 08,857 47,202 6 1,655 0 34,092 73,942 1 2,450 1 3,047 38,81 9 9,241 384 2 9 , 104 26,893 2,21 1 44,838 140,584

Depreciation & Amort. Direct Taxes Paid (Inc)/Dec in Wkg. Capital CF from Oper.Activity Extra-o rdinary Items Other Items CF after EO Items (Inc)/Dec in FA+CWIP (Pur)/Sale of Invest. CF from Inv. Activity Change in Networth Inc/(Dec) in Debt Interest Paid Dividends Paid CF from Fin. Activity Inc/(Dec) in Cash Add: Beginning Balance Closing Balance

- 6 , 9 14 -27,408 -1 42 -2,359 -204 -1,011 - 3 , 7 16 3,722 10,294 14 , 0 16 -306 5,591 -376 -1 ,300 3,608 2 12 1 4,016 14,228

21 January 2008

23

SECTOR: AUTOMOBILES

Tata Motors
STOCK INFO. BLOOMBERG

BSE Sensex: 17,605 S&P CNX: 5,209

TTMT IN
REUTERS CODE

21 January 2008
Previous Recommendation: Buy

Buy
Rs654

TAMO.BO

Tata Motors is the dominant player in the M&HCV segment, with a market share of 61%. While the runaway success of Ace has ensured its dominance in the fastgrowing LCV segment as well, the Nano and other new launches would freshen up its passenger vehicle portfolio. Its subsidiaries are adding considerable value and joint venture companies offer additional growth triggers. Resurrection in commercial vehicle sales We believe that lower interest rates and fundamental growth factors will revive the demand for CVs, which would be sustained due to introduction of the passenger version of Ace, substitution of three-wheelers by sub-one tonners, tonnage redistribution demand (due to hub-and-spoke, restriction on entry of M&HCVs in cities, rising penetration of consumer goods), under-achievement of overloading ban and continued strong growth in industrial production. We maintain our positive view on the sector. Moreover, LCV demand continues to be robust due to increased acceptance of the hub and spoke model and convenience of transportation of non-bulky items. Tata Motors remains the dominant player in the M&HCV segment with a market share of 61%. The runaway success of Ace ensures Tata Motorsdominance in the fast-growing LCV segment as well. Passenger vehicle portfolio to get freshened up Tata Motors is revamping its passenger car portfolio. Its existing models like the Indica and Indigo have been longserving and the company has been finding it difficult to achieve volume growth with its existing portfolio. Its new launches the Nano, new Indica, Sumo Grande, etc would freshen up Tata Motors passenger vehicle portfolio and enable it to compete more effectively. Subsidiaries to add significant value Tata Motors is increasingly focusing its attention on its subsidiaries such as Telcon, Tata Daewoo, and TML
21 January 2008

Financial Services, which have been delivering strong performance. Any value unlocking initiative could be a rerating trigger for the stock. We currently value the company subsidiaries and associates at Rs163/share of s Tata Motors. Domestic and overseas JVs offer additional growth triggers 1. Tata Motors and Fiat's 50:50 JV will manufacture passenger vehicles, engines and transmissions for the domestic and overseas markets. The JV would be located at Fiat Ranjangaon plant, which would have s the capacity to produce 0.1m cars and 0.2m engines and transmissions annually, and would manufacture products of both the companies. Production is expected to commence in 2008. Total investment would be Rs40b, carried out in phases over four years. The JV also gives Tata Motors access to one of the best engine families (Fiat 1.3/1.5 liter and 1.2 liter gasoline engines) and transmission. The Tata-Fiat joint dealer network would be progressively expanded from 42 dealerships to 100 outlets. 2. The Tata Motors-Fiat combine plans for their South s American venture have been crystallized; the two companies will jointly manufacture a pick-up truck at Fiat plant at Cordoba, Argentina. Targeted annual s production is 20,000 units, with a capital outlay of US$80m. These pick-ups will be powered by Fiat engines and powertrains, but will be based on Tata Motors platform. The pick-ups will be sold under the Fiat brand in the Central American and South American markets, along with select European markets. 3. Tata Motors is considering options to launch commercial vehicles and a passenger car range in China, preceded by a manufacturing plant. The timeframe for entry to this market is not yet finalized. Entry into Latin America and China would offer Tata Motorsoperations global scale.
24

4. Tata Motors and Iveco have signed an MoU to cooperate in areas like engineering, manufacturing, product sourcing, aggregates, etc. Under this JV, it is likely that Tata Motors will sell Iveco trucks in India, while Iveco will reciprocate the arrangement overseas. It is also likely that Tata Motorsglobal truck project set for launch in August 2008 will be based on design specifications provided by Iveco. 5. Tata Motors has announced the formation of a JV with Thailand-based Thonburi Automotive Assembly Plant Co. The JV would manufacture, assemble and market pick-up trucks there. This JV will provide Tata Motors with a local assembly base in Thailand, and help it to capitalize on Thonburi local market knowledge and s distribution network. It will also be easier to tap the Asean market (for pick-ups) from the Thailand facility. Remain positive on growth prospects; Buy We remain positive on Tata Motors growth prospects. Volume growth outlook for M&HCVs is positive over the long term. There are indications that the CV cycle has

bottomed out and is entering the growth phase. We believe that LCVs will maintain their robust growth rate, given the success of the hub-and-spoke model. We expect CV volumes to grow at 9.2% CAGR over FY07-10; and tieups with Fiat and Iveco to result in positive surprises both in the domestic and export markets. We expect the valuations of subsidiaries to increase as their scale of operations and profitability improve. While the Nano effect would leave margins subdued in the next 2-3 years, we expect better margins as Nano volumes pick up. We estimate EPS at Rs47.8 for FY08 and Rs56.4 for FY09. The stock is trading at 13.7x FY08E and 11.6x FY09E EPS. Maintain Buy.
SOTP VALUE FY08E FY09E FY10E

Standalone Value - EPS (Rs) Less: Dividends from subsidiaries EPS Value (Rs) PE Multiple (x) Value - (Rs per share) Subsidiary Value - (Rs per share) Value of Tata Sons - (Rs per share) Target Price

36.7 2.4 34.3 15.0 515 137 59 711

43.0 2.5 40.5 15.0 607 163 59 829

48.3 2.6 45.7 15.0 685 187 59 931

Source: Motilal Oswal Securities

21 January 2008

25

INCOME STATEMENT Y / E MARCH 2006 2007 2008E

(Rs Million) 2009E 2 0 10 E

RATIOS Y / E MARCH 2006 2007 2008E 2009E 2 0 10 E

Total Income Change (%) Expenditure EBITDA Change (%) % of Net Sales Depreciation EBIT Deferred Revenue Exp. Interest & Fin. Charges PBT Tax Effective Rate (%) PAT Change (%) Adj. P A T Change (%)
BALANCE SHEET Y / E MARCH

206,022 274,048 1 8.3 1 80,009 2 6 , 0 13 1 9.8 1 2.6 5,209 20,804 738 2,264 20,533 5,245 25.5 15,288 23.6 14,295 1 4.7 33.0 241,180 32,868 26.4 1 2.0 5,863 27,005 850 3,1 31 25,732 6,597 25.6 19,135 25.2 18,963 32.7

2 8 2 , 137 3.0 255,207 26,931 -1 8.1 9.5 6,362 20,569 893 3,614 2 2 , 9 10 4,582 20.0 18,328 -4.2 14,934 -21 .2

3 2 1,445 1 3.9 288,994 32,450 20.5 1 0.1 8,136 2 4 , 3 15 937 3,61 4 22,278 4,790 21 .5 17,488 -4.6 17,488 1 7.1

377,007 1 7.3 340,322 36,685 1 3.0 9.7 9,31 6 27,370 984 3,61 4 25,336 5,675 22.4 19,660 1 2.4 19,660 1 2.4

Basic (Rs) E P S F u l l y Diluted EPS Cons. Cash EPS Book Value per Share DPS Payout (Incl. Div. Tax) % Valuation (x) Standalone P/E Consolidated P/E Cash P/E EV/EBITDA EV/Sales Price to Book Value Dividend Yield (%) P rofitability Ratios (%) RoE RoCE 25.8 26.0 0.3 27.6 27.1 0.3 19.4 19.7 0.2 20.2 21 .1 0.2 20.0 21.7 0.2 1 8.6 1 6.3 1 3.5 9.5 1.2 4.5 2.0 1 4.0 1 2.4 1 0.6 7.9 0.9 3.7 2.3 17.8 13.7 12.4 9.8 0.9 3.3 2.4 1 5.2 1 .6 1 1 0.3 8.4 0.9 3.0 2.6 1 3.5 1 0.2 9.1 7.6 0.7 2.7 2.8 35.1 40.0 48.4 144.6 1 3.0 39.7 46.6 52.9 61 .6 178.2 1 5.0 34.3 36.7 47.8 52.9 1 99.8 16.0 46.1 43.0 56.4 63.6 21 5.5 1 7.0 45.0 48.3 64.0 71.9 240.8 1 8.0 42.9

(Rs Million) 2006 2007 2008E 2009E 2 0 10 E

Operational RoCE Leverage Ratio Debt/Equity (x)

CASH FLOW STATEMENT Y / E MARCH

Share Capital Reserves Net Worth Loans C a p i t a l E m p l o yed Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments Curr.Assets Inventory Sundry Debtors Cash & Bank Balances Loans & Advances Others Current Liab. & P rov. Sundry Creditors Other Liabilities Provisions Net Current Assets Deferred Tax Misc. Expenditures Appl. of Funds E: M OSt Estimates

3,829 51 ,542 55,371 29,368 84,739 79,716 44,015 35,700 9,512 20,1 51 9 6 , 6 13 20,1 22 7,1 58 1 ,1 1 94 58,077 62 71,154 55,359 3,645 12,1 50 25,460 -6,225 1 41 84,739

3,854 64,843 68,698 40,091 108,789 87,758 48,945 3 8 , 8 13 25,1 33 24,770 101,4 18 25,010 7,822 8,268 60,260 59 73,578 57,1 35 2,799 13,643 27,841 -7,868 1 01 108,789

3,854 73,1 44 76,998 40,091 117,090 127,891 55,307 72,584 5,000 24,770 97,767 25,748 8,053 3,648 60,260 59 75,264 58,822 2,799 1 3,643 22,503 -7,868 101 117,090

4,028 82,758 86,786 40,091 126,877 1 47,891 63,443 84,449 5,000 24,770 103,885 29,335 9,175 5,057 60,260 59 83,459 67,01 7 2,799 1 3,643 20,426 -7,868 1 01 126,877

4,072 93,991 98,062 40,091 13 8 , 154 167,891 72,758 9 5 , 133 5,000 24,770 116,061 41,31 6 1 0,760 3,666 60,260 59 95,043 78,601 2,799 1 3,643 2 1,018 -7,868 101 13 8 , 154

0.5

0.6

0.5

0.5

0.4

(Rs Million) 2006 2007 2008E 2009E 2 0 10 E

OP/(Loss) before Tax Interest/Div. Received Depreciation & Amort. Direct Taxes Paid (Inc)/Dec in Wkg. Capital Other Items CF from Op Activity Extra-o rdinary Items CF after EO Items (Inc)/Dec in FA+CWIP (Pur)/Sale of Invest. CF from Inv Activity Issue o f Shares Inc/(Dec) in Debt Interest Paid Dividends Paid CF from Fin Activity Inc/(Dec) in Cash Add: Beginning Balance Closing Balance E: M OSt Estimates

20,066 1,248 5,209 -4,672 -28,822 4,435 -2,535 1,483 -1,053 -1 3,457 8,970 -4,487 21 1 4,41 4 -2,264 -5,678 - 3 , 3 16 -8,856 20,050 11,195

26,155 2,452 5,863 -4,954 -5,267 671 2 4 , 9 19 256 2 5 , 174 -24,596 -4,61 9

19,676 2,466 6,362 -4,582 717 -2,935 2 1,704 4,381 26,086 -20,000 0

23,377 2,51 4 8,136 -4,790 3,486 0 32,723 0 32,723 -20,000 0 -20,000 173 0 -3,61 4 -7,874 - 11, 3 14 1,409 3,648 5,057

26,385 2,564 9,31 6 -5,675 -1,983 0 30,607 0 30,607 -20,000 0 -20,000 44 0 -3,61 4 -8,428 -11,998 - 1,391 5,057 3,666

- 2 9 , 2 15 -20,000 25 1 0,723 -3,1 31 -6,504 1,114 -2,927 1 ,194 1 8,267 0 0 -3,614 -7,092 -10,706 -4,620 8,268 3,648

21 January 2008

26

SECTOR: AUTOMOBILES

Bajaj Auto
STOCK INFO. BLOOMBERG

BSE Sensex: 17,605 S&P CNX: 5,209

BJA IN
REUTERS CODE

21 January 2008
Previous Recommendation: Buy

Buy
Rs2,064

BJAT.BO

Bajaj Auto has taken aggressive steps to re-invent itself. From playing the volumes game in the entry-level segment, it has shifted focus to strengthening its dominance in the premium motorcycle segment. The company has also created an identity for Indian motorcycles in the global market, as exports constitute an increasing portion of its volumes. While we expect core business profitability to sustain the improvement shown in 2QFY08, its insurance business is a potential value driver. Superior product mix Bajaj Auto has a stronghold over the performance segment (>125cc motorcycles), wherein it sports the models Pulsar and Discover. Its share in this segment was 60% in FY07. Profitability of performance bikes is higher than that of entrylevel bikes and the launch of its 125cc XCD would help to strengthen the company position in this segment. s EBITDA margin set to improve We believe Bajaj Auto EBITDA margin will sustain the s improvement shown in 2QFY08 due to the company s

improving product mix, lower raw-material prices and accrual of higher DEPB benefit. We expect EBITDA margin of 15.1% in 2HFY08 and 15.3% in FY09 v/s 13.1% in 1QFY08 and 14.6% in 1HFY08. Insurance business posts robust performance In the life insurance business, Bajaj Allianz is the second largest private player, with a healthy EBITDA margin of 22%. Considering the strong growth in the company life s insurance business along with the higher NBAP margin of 22% (v/s 19% for Prudential ICICI Life), we expect Bajaj Allianz Life valuations to remain higher. Bajaj Allianz Life s has maintained its position as the second largest private life insurer, while also improving its market share despite intense competition among the players. We expect the insurance business to retain its higher valuation post demerger as well. Possible upside of 44%; Buy Given the better business prospects, increase in insurance valuation, and significant underperformance of the stock, we remain positive on Bajaj Auto. Our SOTP-based price target of Rs2,973 indicates a 44% upside.

EXPORTS TO DRIVE GROWTH

Total Income (Rs M) 120,000 90,000 60,000 30,000 0

Adj. PAT (% grow th) 48 36 24 12 0 FY08E FY09E

19,000 15,000 11,000

Ex ports (Rs M)

As a % of Net Sales 28.0 22.0 16.0 10.0 4.0

23.1 12.1 11.3 8.2 12.2 17.8

7,000 3,000

FY04

FY05

FY06

FY07

FY03

FY04

FY05

FY06

FY07

1HFY08

Source: Company/Motilal Oswal Securities

21 January 2008

27

VALUATION OF CURRENT BAJAJ AUTO SHARES BASED ON THE PROPOSED DE-MERGER SCHEME FY08E FY09E FY10E

A] Valuation of Bajaj Auto Ltd (New) Core business profit (Rs m) Core EPS (Rs) PE (x) Value of core business (Rs/share) Cash held after de-merger (Rs m) Cash per share (Rs) Outstanding shares (M nos) Total Value of demerged Auto business (Rs/Share) Value of demerged Auto business with 20% discount on Cash (Rs/Share) B] Valuation of Bajaj Finserv Ltd Life Insurance (Rs) General Insurance (Rs) Total Value (Rs/ Share) Bajaj Auto Finance CMP Outstanding shares Market cap (Rs m) Total Stake (%) Value (Rs) Cash held after de-merger (Rs m) Value of call option exercised (16% interest) (Rs m) Cash per share (Rs) Outstanding shares (M nos) Value of Finserv with 20% discount on insurance business (Rs/Share) Value of Finserv company with overall 20% discount (Rs/Share) C] Valuation of Bajaj Holdings and Investments Ltd (BHIL) Net Cash & Investments (MV) (Rs m) Less: Cash transfer to auto business (Rs m) Less: Cash transfer to Finservices business (Rs m) Net Cash & Equivalents (BV) (Rs m) Value per share (Rs/Share) Outstanding shares (M nos) Value of Bajaj Auto business (30% of value) (Rs/Share) Value of Bajaj Finserv Business (30% of value) (Rs/Share) Total value (Rs/Share) Value of BHIL @ 20% discount on cash, 20% holding co discount (Rs/Share) Value of BHIL @ 0% discount on cash, 20% holding co discount (Rs/Share) Value of BHIL @ 0% discount on cash, 30% holding co discount (Rs/Share) TOTAL VALUE OF CURRENT BAJAJ AUTO/SHARE (RS) - [A + B + C] @ 20% holding company discount, 20% discount on cash (Rs) @ 20% holding company discount, 0% discount on cash (Rs) @ 30% holding company discount, 0% discount on cash (Rs) 2,551 2,697 2,624 2,973 3,134 3,048 3,361 3,537 3,440 547 101 409 321 1,277 1,022 1,131 1,058 602 101 492 366 1,460 1,168 1,289 1,203 662 101 558 417 1,637 1,310 1,442 1,345 356 36 12,661 44 39 8,800 785 66 145 613 599 356 36 12,661 44 39 9,680 911 73 145 698 683 356 36 12,661 44 39 10,648 1,057 81 145 795 778 592 52 644 681 61 742 783 70 853 8,671 60 14 839 16,500 114 145 953 930 10,559 73 14 1,022 18,150 125 145 1,147 1,122 12,015 83 14 1,163 19,965 138 145 1,301 1,273

Source: Motilal Oswal Securities

21 January 2008

28

INCOME STATEMENT Y / E MARCH 2006 2007 2008E

(Rs Million) 2009E 2 0 10 E

RATIOS Y / E MARCH 2006 2007 2008E 2009E 2 0 10 E

Net Sales Change (%) Operating Other Income Total Income Change (%) Total Expenditure EBITDA Change (%) % of Net Sales Depreciation Interest & Finance Charges Other Income Non-recurring Expense Non-recurring Income PBT Tax Effective Rate (%) PAT Adj. P A T Change (%)

74,694 30.5 1 ,985 76,679

92,922 24.4 2,282 95,204

97,141 4.5 2,396 99,536

109,733 1 3.0 2,51 6 112,249

122,351 1 .5 1 2,641 124,992

Basic (Rs) EPS EPS growth (%) Cash EPS Book Value per Share DPS 111.0 46.5 1 29.9 471 .5 40 40.5 127.2 14.6 141 .1 547.0 40 36.8 134.4 5.7 1 53.1 638.6 42 36.1 155.1 1 5.4 175.6 748.7 45 33.4 17 1.7 1 0.7 192.5 872.5 48.0 28.0

29.6
63,116 13,563 48.5 1 7.7 1 0 ,91 3 4,385 226 21 6 16,024 4,791 29.9 11,233 11,243 40.8

24.2
8 1,034 14,170 4.5 1 4.9 1 ,903 53 5,556 490 -9 17,272 4,901 28.4 12,371 12,869 1 4.5

4.6
84,745 14,792 4.4 1 4.9 1 ,973 56 6,1 59 77 0 18,845 5,324 28.3 13,521 13,599 5.7

12.8
95,047 17,202 1 6.3 1 5.3 2,065 56 6,424 0 0 2 1,505 5,806 27.0 15,698 15,698 1 5.4

11.4
1 05,729 19,264 1 2.0 1 5.4 2,1 07 56 6,702 0 0 23,803 6,427 27.0 17,376 17,376 1 0.7

Payout (Incl. Div. Tax) % Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price to Book Value Dividend Yield (%) P rofitability Ratios (%) RoE RoCE Leverage Ratio Debt/Equity (x)

18.6 15.9 12.1 2.2 4.4 1 .9

16.2 14.6 1 .3 1 1 .7 3.8 1 .9

15.4 13.5 10.4 1 .6 3.2 2.0

1 3.3 1 .8 1 8.2 1 .3 2.8 2.2

1 2.0 1 0.7 6.6 1.0 2.4 2.3

23.6 25.4

23.3 24.6

21 .0 23.3

20.7 23.2

1 9.7 22.7

0.3

0.3

0.3

0.2

0.2

CASH FLOW STATEMENT

BALANCE SHEET Y / E MARCH 2006 2007 2008E (Rs Million) 2009E 2 0 10 E

(Rs Million) 2006 2007 2008E 2009E 2 0 10 E

Y / E MARCH

OP/(Loss) before Tax Interest/Div. Received Depreciation & Amort. Direct Taxes Paid (Inc)/Dec in Wo rking Capital CF from Oper. Activity Extra-o rdinary Items

1 ,653 1 4,385 1 0 ,91 -5,31 4 4,579 17 , 2 12 -1 0 17,202 -2,033 -1 2,964 -14,997 -31 6 2,402 -3 -4,553 -2,471 -266 1 ,087 821

12,267 5,556 1 ,903 -5,035 -1 ,732 12,960 -498 12,461 -3,336 -5,906 -9,242 -1 82 1 ,583 -53 -4,553 -3,206 14 821 835

12,81 9 6,1 59 1 ,973 -5,324 -3,909 11,720 -77 11,643 -2,000 0 -2,000 0 0 -56 -4,250 -4,306 5,337 835 6,172

1 5,137 6,424 2,065 -5,806 658 18,479 0 18,479 -800 0 -800 0 0 -56 -4,553 -4,609 13,070 6,172 19,242

1 57 7,1 6,702 2,1 07 -6,427 632 2 0 , 173 0 2 0 , 173 -600 0 -600 0 0 -56 -4,857 - 4 , 9 13 14,660 1 9,242 33,902

Share Capital Reserves Net Worth Deferred Tax Loans C a p i t a l E m p l o yed Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments Curr.Assets, L & Adv. Inventory Sundry Debtors Cash & Bank Balances Loans & Advances Others Current Liab. & P rov. Sundry Creditors Other Liabilities Provisions Net Current Assets Application of Funds E: M OSt Estimates

1 2 ,01 46,696 47,707 876 1 4,672 63,255 28,929 1 7,787 11,142 242 58,570 28,561 2,729 3,01 6 821 21 ,274 721 35,448 1 ,802 1 487 23,159 -6,887 63,255

1 2 ,01 54,331 55,343 742 16,254 72,339 31 ,744 19,224 12,520 269 64,475 3 8 , 186 3,097 5,298 835 28,594 362 43,328 13,745 1 ,245 28,338 -5,141 72,339

1 ,012 63,603 6 4 , 6 15 742 16,254 8 1,611 34,013 21 97 ,1 12 , 8 16 0 64,475 43,743 3,1 78 5,437 6,1 72 28,594 362 39,641 14,1 05 1 ,245 24,291 4,103 8 1,611

1 2 ,01 74,748 75,760 742 1 6,254 92,756 34,81 3 23,262 11,551 0 64,475 57,849 3,560 6,091 1 9,242 28,594 362 4 1,336 1 5,801 1,245 24,291 16,513 92,756

1 2 ,01 87,267 88,279 742 1 6,254 105,275 35,41 3 25,369 10,045 0 64,475 73,499 3,926 6,71 7 33,900 28,594 362 42,960 1 7,424 1,245 24,291 30,539 105,275

CF after EO Items (Inc)/Dec in FA+CWIP (Pur)/Sale of Invest. CF from Inv. Activity Inc. / Dec.in Netwo rth Inc/(Dec) in Debt Interest Paid Dividends Paid CF from Fin. Activity Inc/(Dec) in Cash Add: Beginning Balance Closing Balance E: M OSt Estimates

21 January 2008

29

SECTOR: AUTOMOBILES

Hero Honda
STOCK INFO. BLOOMBERG

BSE Sensex: 17,605 S&P CNX: 5,209

HH IN
REUTERS CODE

21 January 2008
Previous Recommendation: Buy

Buy
Rs692

HROH.BO

Hero Honda is the industry leader in two-wheelers in India. However, it has seen its market share decline in FY07 due to intense competition. With the industry scenario expected to improve in 2HFY08, volumes are likely to be higher, while the improvement in the company operating performance s and commencement of production at the Uttaranchal plant in FY09 would help boost profitability. Market leader in two-wheelers Hero Honda is well-placed considering the following: (1) market leader in motorcycle segment, (market share of 48% in FY07), (2) well entrenched in rural and semi urban areas (about 60% of sales) and enjoys very strong brand equity, (3) most consistent operating history; huge free cash flows and negative working capital employed. Substantial rural presence Hero Honda substantial presence in rural India insulates s it somewhat from the onslaught of competition. It also ensures continual access to the majority of the population, which is as yet largely untapped and is seeing an improvement in its economic condition. Improvement in EBITDA margin We believe that Hero Honda EBITDA margin will sustain s the improvement seen in 2QFY08. While 3QFY08 margins would be lower on account of festival season discounts, the outlook for 4QFY08 and FY09 is better on account of the decline in raw-material prices, commencement of the Uttaranchal plant in FY09 (where Hero Honda will be able to avail of tax incentives) and launch of bikes in the performance segment leading to an improvement in the product mix.

Start of new plant delayed Hero Honda has set up a state-of-the-art manufacturing facility at Haridwar, Uttaranchal with an initial capacity of 0.5m units. However, production is likely to commence only in the next fiscal due to lower volume growth visibility in FY08. This will help Hero Honda to avail tax benefits in FY09. The capacity can be ramped up to 1.5m units by 2010. Most efficient two-wheeler manufacturer in India; Buy We expect Hero Honda to report volume growth of 1.3% in FY08 and 8.4% in FY09. We believe that the improvement in EBITDA margin is sustainable we expect the company to report EBITDA margin of 11.9% in FY08 and 12.2% in FY09. Hero Honda efficiency ratios are the best in the industry. s The company would have cash of Rs126/share at the end of FY08. The stock has an attractive dividend yield (3.5% on FY09 estimated dividend of Rs22.5). We expect the company to report EPS of Rs43.9 in FY08 and Rs51.4 in FY09. The stock trades at 14.7x FY08E EPS and 12.6x FY09E EPS. Maintain Buy, with a target price of Rs819.
HERO HONDA - SOTP VALUATION FY08 FY09 FY10

Core EPS Mulitple Value Cash per Share Price (Rs)

39.0 15.0 585 89.4 674

46.2 15.0 693 126.2 819

51.1 15.0 767 157.9 925

Source: Motilal Oswal Securities

21 January 2008

30

INCOME STATEMENT Y / E MARCH 2006 2007 2008E

(Rs Million) 2009E 2 0 10 E

RATIOS Y / E MARCH 2006 2007 2008E 2009E 2 0 10 E

Net Sales Change (%) Expenditure

8 7 , 140 1 7.4 73,498

99,000 105,008 1 3.6 87,192 6.1 92,566

117,979 1 2.4 1 03,647

130,659 1 0.7 1 4,786 1

Basic (Rs) EPS EPS growth (%) Cash EPS 48.6 20.8 54.4 100.6 20.0 46.3 43.4 -1 0.9 50.0 123.7 1 7.0 44.5 43.9 1 .2 51 .8 1 47.6 20.0 52.4 51.4 17.2 60.7 1 76.5 22.5 50.3 56.6 1 0.1 66.7 207.7 25.0 50.8

EBITDA Change (%) % of Net Sales Depreciation EBIT Interest & Finance Charges Other Income Non-recurring Expense

13,645 1 7.2 1 5.7 1,146 1 2,498 -61 1,563 0

11,810 -1 3.4 1 .9 1 1,398 1 3 0,41 -230 1,899 -80

12,443 5.4 1 .9 1 1 ,574 1 0,870 -41 5 1 ,420 0

14,334 1 5.2 1 2.2 1 ,855 12,480 -415 1 ,473 0

15,875 1 0.7 1 2.2 2,007 1 3,868 -41 5 1,533 0

Book Value per Share DPS Payout (Incl. Div. Tax) % Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price to Book Value

1 3.3 1 .9 1 8.0 1.2 6.4 3.1

1 4.9 1 2.9 9.4 1 .1 5.2 2.6

1 4.7 1 2.5 8.9 1 .1 4.4 3.1

12.6 10.6 7.2 0.9 3.7 3.5

1 .4 1 9.7 6.1 0.7 3.1 3.9

PBT Tax Effective Rate (%)

14,122 4,409 31 .2

12,461 3,882 31 .2

12,706 3,939 31 .0

14,368 4,095 28.5

15,817 4,508 28.5

Dividend Yield (%) P rofitability Ratios (%) RoE

55.5 68.4

38.3 48.5

32.4 40.9

31 .7 39.5

27.3 34.7

PAT % of Net Sales Adj. P A T Change (%)

9,713 1 .1 1 9,713 20.8

8,579 8.7 8,659 -1 0.9

8,767 8.3 8,767 1 .2

10,273 8.7 10,273 1 7.2

11,309 8.7 11,309 1 0.1

RoCE Turnover Ratios Debtors (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x)

7 3.8

1 2 3.6

1 2 3.2

10 3.1

1 0 2.9

BALANCE SHEET Y / E MARCH 2006 2007 2008E

(Rs Million) 2009E 2 0 10 E

0.1

0.1

0.1

0.0

0.0

Share Capital Reserves Net Worth Deferred Tax Loans C a p i t a l E m p l o yed Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments Curr.Assets, L & Adv. Inventory Sundry Debtors Cash & Bank Balances Loans & Advances Current Liab. & Prov. Sundry Credito rs Other Liabilities Provisions Net Current Assets Application of Funds E: M OSt Estimates

399 1 9,694 20,093 1,201 1,858 2 3 , 152 1 4,720 5,226 9,494 442 20,61 9 8,212 2,266 1,587 1,587 2,738 15,628 6,344 4,385 4,899 - 7 , 4 16 2 3 , 152

399 24,301 24,701 1,296 1,652 27,648 1 8,006 6,351 11,655 1,899 1 9,739 9,133 2,756 3,353 358 2,631 14,792 5,51 1 4,909 4,372 -5,659 27,648

399 29,074 29,473 1 ,296 1 ,652 32,421 23,406 7,925 15,481 0 1 9,239 9 , 4 19 2,923 3,556 273 2,631 11,731 5,845 4,909 978 - 2 , 3 12 32,421

399 34,854 35,253 1 ,296 1 ,652 38,201 25,406 9,779 15,626 0 18,739 16,276 2,263 3,232 8,1 4 1 2,631 12,453 6,567 4,909 978 3,822 38,201

399 41,072 4 1,472 1,296 1,652 4 4 , 4 19 27,406 1 ,786 1 15,619 0 1 8,239 23,707 2,506 3,580 1 4,955 2,631 13,159 7,273 4,909 978 10,548 4 4 , 4 19
CASH FLOW STATEMENT Y / E MARCH 2006 2007 2008E (Rs Million) 2009E 2 0 10 E

OP/(Loss) before Tax Interest/Div. Received Depreciation & Amort. Direct Taxes Paid (Inc)/Dec in Wo rking Capital Other Items CF from Oper. Activity

1 2,498 1,563 1,146 -4,223 -633 -7 10,345

1 3 0,41 1,899 1,398 -3,787 -3,146 -1 6,775

1 0,870 1 ,420 1 ,574 -3,939 -3,431 0 6,494

12,480 1 ,473 1 ,855 -4,095 1 ,706 0 13 , 4 19

1 3,868 1,533 2,007 -4,508 15 1 0 13,016

(Inc)/Dec in FA+CWIP (Pur)/Sale of Invest. CF from Inv. Activity

-3,929 -352 -4,281

-5,01 7 880 - 4 , 137

-3,500 500 -3,000

-2,000 500 -1,500

-2,000 500 - 1,500

Changes in Reserves Inc/(Dec) in Debt Interest Paid Dividends Paid CF from Fin. Activity

-560 -1 60 61 -3,994 -4,652

-577 -206 230 -3,395 -3,948

0 0 41 5 -3,994 -3,579

0 0 415 -4,493 -4,078

-98 0 41 5 -4,993 -4,675

Inc/(Dec) in Cash Add: Beginning Balance Closing Balance E: M OSt Estimates

1, 4 11 1 76 1,587

- 1,229 1,587 358

-84 358 273

7,841 273 8,114

6,840 8,1 4 1 14,955

21 January 2008

31

For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: inquire@motilaloswal.com

Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021
This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement Maruti Suzuki 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No Tata Motors No Yes No No Bajaj Auto No No No No Hero Honda No Yes No No

This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries.

21 January 2008

32