2W penetration in market MEDIUM

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29 August 2012

Asia Pacific/India

Equity Research

Auto Parts & Equipment (Auto) / MARKET WEIGHT

India Two Wheeler Sector THEME

Riding the world

Figure 1: Bajaj’s exports can grow at 20% CAGR on market share gains & high

market growth in the low penetration countries: from 1.2m to 3m in 5 years

Baj

aj's

Mkt

Sh

are

HIG

HLO

W

2W penetration in market MEDIUMLOW

Nigeria, East & Central Africa

West Africa

South Asia, Colombia, Peru, Philippines

Argentina, Chile, Rest of Latin America

0.03

0.4

0.55

1.3

0.55

0.06

0.8

0.5

Grey Bubble: Bajaj's FY12 volumes (Mn units), Blue Bubble: FY17 volumes

Source: UN Comtrade, Credit Suisse estimates.

■ Putting India on the global map. Our detailed analysis of the global two-

wheeler market suggests that Bajaj Auto, India’s largest exporter, could

easily grow its exports volumes at >20% CAGR for the next five years. We

reckon FY14 will be a big year for Bajaj’s exports as it stands to gain vis-à-

vis its Chinese competitors on the back of a weak INR and rising labour

costs for its Chinese counterparts destroying their pricing advantage.

■ Africa, Latin America—opportunity beckons. We have analysed the two

key export markets viz. Africa and Latin America and divided them into four

buckets on the basis of penetration and its current market share. We believe

whilst market growth will drive volumes in Nigeria and East & Central Africa,

market share gains will be the key catalyst for growth in the Latin American

countries of Argentina and Chile. West Africa, despite its relatively smaller

size, presents an opportunity as it is a region with both low market share and

low penetration.

■ Bajaj Auto, our top pick in the sector: - We raise our FY14 estimates for

Bajaj Auto by 5% and increase target price to Rs2,152. Though we continue

to like Hero Motocorp from a long-term perspective given the near term risk

on volumes and margins, we have reduced our FY13/FY14 estimates by

~6% and downgraded Hero Motocorp to NEUTRAL.

Research Analysts

Jatin Chawla

91 22 6777 3719

[email protected]

Akshay Saxena

91 22 6777 3825

[email protected]

29 August 2012

India Two Wheeler Sector 2

Focus Charts Figure 2: The large Asian 2W markets are dominated by

incumbents, opportunity lies in Africa and Latin America

Figure 3: Indians yet to enter few Latin American markets

implying market share gains will drive growth

76%

0%

1%

18%

11%

21%

6%

87%

3%

11%

3%

94%

12%

80%

78%

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

South Asia (15 Mn)

China (17 Mn)

South East Asia,Brazil (16 Mn)

Africa(3 Mn)

Latin America ex Brazil (3 Mn)

Mkt Share Chinese Japanese Indians

0%

10%

20%

30%

40%

50%

60%

70%

80%

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Argentina Colombia Peru Venez Guatem Chile Dominican

Mkt Size (Mn units) Indians Mkt Share

Source: UN Comtrade, Credit Suisse estimates Source: UN Comtrade, Credit Suisse estimates

Figure 4: 2W penetration is extremely low in most African

countries; opportunities for large future growth …

Figure 5:.. Indian players have caught up well on market

share in Africa in a short time of ~5 years

0.0%

1.0%

2.0%

3.0%

4.0%

0.00

0.40

0.80

1.20

1.60

Nigeria East & CentralAfrica

West Africa North & SouthernAfrica

Mkt Size (Mn Units) Penetration (RHS)

84% 87% 87% 83%74% 77% 78%

3%2% 4% 9%

17%16% 17%

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011

Mkt Share in Africa: Chinese Indians Japanese & others


Figure 6: In spite of their export volumes declining… Figure 7: …Chinese players had to resort to price hikes

-60%

-40%

-20%

0%

20%

40%

60%

90 ml <disp ≤ 100ml




YoY change in volumes in 2010 2011 Jan to May-12

-10%

-5%

0%

5%

10%

15%

20%





YoY increase in realisations in 2010 2011 Jan to May-12

Source: China Motorcycle Association, Credit Suisse estimates Source: China Motorcycle Association, Credit Suisse estimates

29 August 2012


Investment Summary Global 2W demand driven by Asia The global two-wheeler market at ~55mn is dominated by Asia on both the demand (80%)

and supply side (>95% by Asian players – Indian, Japanese and Chinese). With most of

the large Asian markets being dominated by incumbents, incremental volume growth for

players will be a function of what they can gain in Africa and Latin America, where the

markets are evolving. Currently, the Chinese dominate both these markets but these

markets represent a large opportunity for the Indian players as well.

Waka Waka – it’s time for Africa The African market is the fastest growing motorcycle market in the world growing at a 21%

CAGR in the past five years. With an overall population of 1 bn, very young and growing

also at the fastest pace in the world, and with GDP per capita now approaching US$1,000

per capita; a stage at which two-wheeler volumes start taking off; Africa represents one of

the most exciting opportunities for two-wheeler manufacturers. We have divided the

African market into five regions: (i) Nigeria – largest two-wheeler importer globally (1.3mn

units) (ii) Western Africa – taxi market like Nigeria but dominated by Chinese (1mn units)

(iii) Eastern and Central Africa – region with the highest scope for growth (0.8mn units) (iv)

Northern and (v) Southern Africa currently do not offer much. We reckon Bajaj Auto’s two-

wheeler exports to Africa can grow from ~0.6mn units to 1.7mn in the next five years.

Latin America – market share gains is the story here Overall, Latin American export market ex Brazil is similar in size to the African market at

~US$2bn. Given a higher penetration of 5% compared to ~2.5% in Africa, the potential

opportunity is lesser but when compared with penetration in South East Asia, there is clearly

a lot of growth for the next 5-8 years. Latin American countries are a bit of a contradiction in

the sense that at a GDP per capita of ~US$10,000, countries normally start moving away

from two-wheelers to passenger cars; however, Latin America ex Brazil despite high income

levels has witnessed strong two-wheeler growth in the past few years on account of reducing

income inequality. Income inequality in most countries went up significantly in the 1980s and

1990s but since the early 2000s income inequality has started to come down and hence the

region has seen the emergence of a strong middle class and this consequently has resulted

in a strong demand for two-wheelers. For example, the Argentina market is up 6x in the past

five years. Amongst the large Latin American markets of Argentina, Colombia, Peru and

Venezuela; Indian players are strong only in Colombia and thus market share gains in the

other markets would drive growth here.

Export opportunity is massive Both Africa (~80% MS) and Latin America ex Brazil (~72% MS) are currently dominated by

Chinese players. Whilst the Indian players have been gaining share from the Chinese on

account of their better quality, we expect market share gains for the Indian players to

accelerate over the next few years as pricing – the only plank on which the Chinese score

over the Indians – will work in favour of the Indian companies. Given the increasing labour

costs (up ~40% in Chongqing, the key motorcycle producing region) in China, Chinese

companies have had to increase their prices (up ~15% YoY in May 2012). Also, in most

large two-wheeler importing countries, the INR has depreciated meaningfully vis-à-vis the

RMB giving a further advantage to the Indian players. Amongst Indian players Bajaj Auto,

on account of the fact that it has already made significant inroads into these markets, is

likely to gain the most.

We believe Bajaj’s exports can easily grow at a CAGR of 20% over the next five years.

Without assuming any market share gains from the Chinese, we would have a 12% CAGR

in volumes — ~8% CAGR in lower growth markets and a ~15% CAGR in higher growth

markets of Africa. We increase our FY14 estimates on Bajaj Auto by ~5% and increase TP

to Rs2,152. We continue to like the long-term story on Hero Motocorp. However, given the

lack of any near-term triggers, we downgrade the stock to NEUTRAL.

Indian, Japanese, Chinese

dominate their home

markets

Africa is the most

underpenetrated and fastest

growing motorcycle market

in the world

Reducing income inequality

has driven two-wheeler

sales in LatAm

Africa and LatAm are

currently dominated by the

Chinese…

…who are fast losing their

only competitive edge,

pricing, due to rising costs

and currency

Bajaj Auto to be the key

beneficiary

29 August 2012


Financial Summary Figure 8: We expect a 20% CAGR in Bajaj’s export volumes

Current 5 Years

2W penetration

Mkt Size (Mn units)

Bajaj Size Bajaj's Mkt

Share

Mkt growth Bajaj's Mkt

share

Mkt size

(Mn Units)

Bajaj's size Bajaj's

growth

South Asia 1.0% 1.2 0.2 17% 8% 17% 1.8 0.3 8.0%

Nigeria 3.4% 1.35 0.31 23% 10% 30% 2.2 0.7 16.0%

East & Central Africa 0.8% 0.8 0.22 28% 20% 30% 2.0 0.6 22.1%

West Africa 2.5% 1.0 0.03 3% 15% 20% 2.0 0.4 68.1%

North & Southern Africa 0.9% 0.4 0.03 8% 10% 15% 0.6 0.1 26.4%

Philippines, Lat America high

share (Colombia, Peru) 4.0% 1.2 0.35 29% 8% 30% 1.8 0.5 8.6%

Latin America low share

(Argentina, Chile etc) 5.0% 1.8 0.06 3% 8% 20% 2.6 0.5 54.5%

Total 7.75 1.2 15% 24% 13.0 3.1 20.6%

Source: UN Comtrade, Company data, Credit Suisse estimates

Figure 9: Changes to estimates for Bajaj Auto

FY13 FY14

Old New Change Old New Change

Volumes 4,620,155 4,494,500 -2.7% 5,147,928 5,101,039 -0.9%

Sales 208,400 204,887 -1.7% 243,803 248,280 1.8%

EBITDA 37,877 38,170 0.8% 48,175 50,075 3.9%

EBITDA margin 18.2% 18.6% 19.8% 20.2%

PAT 30,923 31,130 0.7% 38,293 40,137 4.8%

Source: Company data, Credit Suisse estimates

Figure 10: Changes to estimates for Hero Motocorp

FY13 FY14

Old New Change Old New Change

Volumes 6,727,426 6,468,051 -3.9% 7,470,582 7,187,140 -3.8%

Sales 258,815 249,432 -3.6% 293,184 282,726 -3.6%

EBITDA 39,767 37,354 -6.1% 45,744 42,185 -7.8%

EBITDA margin 15.4% 15.0% 15.6% 14.9%

PAT 26,351 24,812 -5.8% 29,397 27,374 -6.9%


Figure 11: Sector valuation table

Company Currency CMP Market Cap P/E EV/EBITDA ROE

(LC) (USD Bn) 2012 2013 2014 2012 2013 2014 2012 2013 2014

Bajaj Auto Limited INR 1627 8.8 14.5 12.5 11.3 9.7 7.9 7.0 44.7 41.1 38.5

Hero Motocorp Ltd INR 1850 6.9 13.9 12.8 10.0 9.0 7.4 5.6 52.7 43.7 43.3

Honda Motor JPY 2559 58.7 8.9 7.7 6.8 4.4 3.9 3.4 11.4 12.0 12.2

Yamaha Motor JPY 716 3.2 9.3 6.8 2.8 2.2 9.0 11.1

Source: Company data, Credit Suisse estimates, I/B/E/S Datastream. All estimates are consensus estimates. 2013 is Dec-13 for Yamaha and is

Mar-13 for all other companies.

29 August 2012


Global 2W demand driven by Asia The global two-wheeler market is a 55 mn vehicle market with bulk of volumes coming

from Asia. As we have been highlighting in our reports earlier, the two key factors which

determine the success of two-wheelers in a particular country are income levels and

weather. In most developed markets, two-wheelers are not popular as a means of

transportation because people in these countries can afford buying cars, which are

believed to be a much safer and more convenient means of traveling, especially in

countries which have very cold weather. Hence in developed markets, motorcycles are

used more for hobby activities rather than as a primary means of commuting. Also, two-

wheelers as a means of commuting are more popular in developing countries where the

public transport systems are not adequate. Globally, around 80% of the two-wheelers sold

are in Asia with China, India, Indonesia and Vietnam being the four largest markets

globally.

Figure 12: 80% of global 2W demand from Asia Figure 13: China, India, South East Asia the key markets

Asia81%

Africa5%

Latin America9%

Others5%

56

17

13

8

3

2

2

0 10 20 30 40 50 60

Global

China

India

Indonesia

Vietnam

Thailand

Brazil

2W market annual size (Mn units)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

We believe two-wheeler volumes witness the fastest growth rates till a GDP per capita of

US$ 5,000 and thereafter start slowing down. Growth really starts accelerating once

economies reach a GDP per capita of US$ 1,000. However, post US$ 5,000 per capita

income growth starts slowing down and actually two-wheeler penetration starts reversing

once income levels cross US$ 10,000. However, in certain countries, two-wheeler growth

picks up very late; we believe this is on account of a higher income inequality in these

countries which means that despite a high overall GDP per capita, the lower income

segment still cannot afford two-wheelers.

Bulk of global 2W demand

from Asia

There is an inflection point

in terms of GDP per capita

when 2W penetration kicks

off; at even higher GDP, car

sales pick up

29 August 2012


Figure 14: Relation between GDP per capita and 2W sales

US

India

Germany

AustriaSwitzerland

Spain

Japan

China

Indonesia

Italy

Vietnam

ThailandMalaysia

100

1,000

10,000

100,000

0 5 10 15 20 25 30 35

GD

P p

er c

apit

a (U

SD

)

Penetration (%)

Argentina

West Africa

Nigeria

East Africa

Brazil

Source: Yamaha presentation, Credit Suisse estimates

Africa and Latin America big drivers of incremental growth

While global 2W market is by far concentrated in Asia, other smaller markets can be big

drivers of incremental volumes for any player. Penetration is already very high in South

East Asia and growth will slow down in these countries. Moreover, India, China and South

East Asian markets are completely dominated by Indians, Chinese and Japanese,

respectively, and it is very difficult to break their stronghold.

Figure 15: Penetration is quite high in many areas of

South East Asia; China and India some way off though

Figure 16: Difficult to break stronghold of established

players in the bigger 2W markets

0%

5%

10%

15%

20%

25%

30%

35%

40%

India Thailand Vietnam Indonesia China

2W penetration/ population (%)

79%

0% 1%

21%

6%

87%

0%

94%

12%

0%

25%

50%

75%

100%

India China South East Asia

Mkt share Indians Japanese Chinese


Africa and Latin America have emerged as completely new markets in the past few years

and given their lower penetration relative to the Asian market, these regions will be the

pillars of growth for the motorcycle industry in the next decade. Hence, we have analysed

the market in these two regions in detail in later sections.

Africa and Latin America will

be driver of incremental

growth since big markets

are already dominated by

incumbents

29 August 2012


Most production too dominated by Asian Players Japanese players had a first mover advantage in many of the two-wheeler markets in the

world. However, given their large domestic markets (India and China account for more

than half of global motorcycle volumes) and the fact that the Japanese have not really

been able to make a dent in their home markets, the Indian and Chinese players too have

a strong positioning in their domestic markets.

Figure 17: Global 2W production divided between… Figure 18: ..Chinese, Japanese and Indian players in

descending order

12

19

25

56

0

10

20

30

40

50

60

Indians Japanese/ otherdeveloped

Chinese Total

Annual sales by different players (50-250 cc 2W's)

Indians21%

Japanese/ other developed

35%

Chinese44%

Global 2W Market Share of different players


Japanese players Honda, Yamaha and Suzuki are the three major Japanese players in the two-wheeler

segment. Among these, Honda is by far the largest, contributing to over 80% of volumes.

They have always been very strong in South East Asia and Brazil, have a reasonable

presence in India and rest of Latin America. However they have a negligible share in

China and Africa. Currently, focus of most of these players is on India, given the large

market size and growth potential. Domestic sales in Japan are very less since market is

small so entire revenue comes from other geographies though they have plants spread

across in India, Indonesia, Thailand, Vietnam, Brazil, etc.

Figure 19: Japanese dominate the South East Asian

markets which combined are equal to China and India

Figure 20: Brazil is the other region dominated by the

Japanese

2.5

0.5

12.25

0.850.1

1.8

0.351.2

0

2

4

6

8

10

12

14

India SouthAsia

SouthEast Asia

China Africa Brazil LatAmerica

Others

Sales of Japanese players in different geographies (Mn units)

20%

30%

87%

92%

11%

5%

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

India

South Asia

South East Asia

Brazil

Lat America

China/ Africa

Mkt Share of Japanese players in different geographies


Japanese have a big share

in South East Asia,

developed markets and

Brazil

29 August 2012


Chinese industry is highly fragmented

Apart from dominating their home market the Chinese players also dominate the African

and the Latin American ex-Brazil markets. In all these markets, the Chinese have a clear

edge over their Japanese counterparts on account of their cost competitiveness. Around

two-thirds of sales of Chinese players are in the domestic market and the rest in foreign

markets.

Figure 21: 2/3rd

of sales by Chinese players are in

domestic market

Figure 22: Chinese players are dominant in China, Africa,

Latin America ex Brazil

16

2.4 2.51.7 1.8

0

2

4

6

8

10

12

14

16

18

China Africa Lat America South East Asia Others

Sales of chinese players in different geographies (Mn units)

94%

80%

78%

12%

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

China

Africa


South East Asia

Mkt Share of Chinese players in different geographies


The key strength of the Chinese players is their cost structure and hence their ability to

price their products at a significant discount to their Indian and Japanese counterparts.

Hence, the Chinese have an edge in markets with lower GDP per capita where people are

not very brand conscious but want the cheapest vehicle.

The unique business model which helps the Chinese players price their products so

competitively is based on focus on price and not differentiation. Under this business

model, each player specialises on a job and components are simple and standardised. By

doing this, not only was there a more efficient division of labour, it also resulted in a very

low cost of transaction. These costs would increase if a player were to try and differentiate.

The motorcycle OEMs were only doing the job of motorcycle assembly. This business

model meant that the cost of the motorcycle kept on falling and each player just made

~2% margin which meant that no new player who would want to differentiate could

compete against these players. The share of the Chongqing region, where these players

were based, started increasing from nothing to over a third in a matter of years. In fact,

they managed to reduce vehicle prices by ~40% in the period from 1997 to 2001. This big

pricing advantage has helped the Chinese players grab a lot of market share globally,

especially in low cost markets.

However, the same business model means that barriers to entry on the OEM side are low

since it is difficult for an OEM to create differentiation. As a result, the industry is very

fragmented with the largest player having a market share of ~10% only. The fact that

China has a large domestic market means that a lot of these players have enough

volumes to get economies of scale.

Chinese players dominate

home country, Africa and


Chinese industry is highly

fragmented as bulk of

manufacturing work is

outsourced and OEMs only

assemble

29 August 2012


Figure 23: Top 10 players just have ~55% share in China

43.0%

9.7%

8.5%

6.2%

5.5%

5.2%

4.4%

4.1%

4.1%

3.6%

2.9%

2.7%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Others

Chongqing Loncin locomotive Co

Lifan Industry (Group) Co.

Zongshen Industrial Group Co

Guangzhou Jin Hao Motorcycle Co

Chongqing Yinxiang Motorcycle (Group) Co

Jiangmen Grand River Group Co.

Chongqing Astronautic Bashan Motorcycle Manufacturing Co

The Guangzhou Grand Canal Motorcycle Co.

Jincheng Group Co.

New Honda Motorcycle Co.

Qianjiang Group Co. Mkt Share of top Chinese players

Source: China motorcycle association, Credit Suisse estimates

Indian players Indian players have traditionally had a big presence in domestic market along with

neighbouring South Asian countries like Sri-Lanka, Bangladesh, etc., and these

geographies still constitute to over 90% of their sales. The major Indian players are Hero

Motocorp, Bajaj Auto and TVS. They dominate the Indian markets with a 80% market

share (Hero Motocorp: 45%, Bajaj Auto: 20% and TVS: 15%). Bajaj Auto started focusing

on exports since 2005 and since then Indian players have started gaining prominence in

Africa and Latin America. Today exports are 12% of their total sales equally divided

between South Asia, Africa and other regions like Latin America, South East Asia. Bajaj

Auto is the clear leader in exports despite Hero Motocorp being the leader in the domestic

market as per the terms of its agreement with Honda was barred from exporting to all

regions barring few in South Asia. Consequently, Bajaj accounts for ~70% of India’s export

volumes; whilst exports form more than a third of Bajaj’s volumes currently.

Figure 24: Most of sales of Indian players in domestic

market only

Figure 25: Have been dominant in India and South Asia,

gradually catching up in Africa and Latin America

10.5

0.5 0.55 0.5

0

2

4

6

8

10

12

India South Asia Africa Lat America &others

Sales of Indian players in different geographies (Mn units)

80%

50%

18%

11%

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

India

South Asia

Africa


Mkt Share of Indian players in different geographies


29 August 2012


Waka Waka – it’s time for Africa The African market which is the fastest growing motorcycle market in the world is

estimated to ~US$2bn and has grown at a 21% CAGR in the past five years. Given that

there are no plants in Africa, it is the largest importer of motorcycles globally and hence

one of the most important export market for most players. With an overall population of ~1

bn people and with the fastest population growth rate in the world, the African market has

a lot of potential, especially given the fact that income levels across countries are

gradually reaching a stage of GDP US$1,000 per capita where two-wheeler sales really

take off.

Figure 26: Barring 2009, Africa has witnessed consistent growth in the past five years

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

500

1,000

1,500

2,000

2,500

2006 2007 2008 2009 2010 2011

(US

$ m

n)

Source: UN Comtrade, Credit Suisse estimates

Africa’s cities are growing rapidly; however, the public transport infrastructure in these

cities has not kept pace. Public transport was nationalised in the 60s and since then has

seen a gradual decline. It completely collapsed in the 90s resulting in the private sector

taking over. The collapse of the bus transport services in the region resulted in the origin

and growth of motorcycle taxis. They are referred by various names – Okadas in Nigeria,

boda boda in Uganda, kupapatas in Angola and bendskins in Cameroon – and constitute

bulk of the motorcycle sales in the region.

Thus, the African market is unique in the sense that motorcycles are largely used as a taxi

rather than as a means of personal transport. This means that the kind of vehicles that are

used are also slightly different. We believe this is a reflection of the current income levels

of most of these countries in Africa and with improving income levels people will start

using motorcycles as a means of personal transport. Another inhibiting factor for

motorcycle volumes in Africa is the absence of organised consumer lending.

Our estimates on the African market are based on the import/export data made available

by various countries. The fact that some of the African countries are land locked countries

and not many countries have well developed ports means that the import/export trade is

done through a few countries with well-developed ports and, hence, in the import/export

data countries like Togo and Benin show very high numbers. In order to get over this

anomaly, we have divided the African market into five regions and done all our analysis on

this basis. The five regions we have looked at are:

(1) Nigeria – being the largest market currently and even by potential given its population

is ~2x the second largest country; we have looked at Nigeria in detail

Africa is among the fastest

growing 2W market in the

world

Nigeria is the largest market

in Africa

29 August 2012


(2) Western Africa – this is the second largest market in Africa consisting of countries like

Togo, Guinea, Ghana, Mali, Benin, Burkina Faso, Niger and Ivory Coast

(3) Eastern and Central Africa – third largest and the fastest growing market in the region

consisting of countries like Angola, Kenya, Tanzania, Uganda, Democratic Republic of

Congo and Ethiopia

(4) Northern Africa – being in Islamic region we reckon this region is not comfortable with

the idea of a motorcycle as a taxi so demand here is largely for personal use only.

Egypt is the largest market here, followed by Morocco and Algeria.

(5) Southern Africa – very small market with South Africa being the country with potential

but a country where two-wheelers are still not widely accepted as a respectable

means of transport

Figure 27: Split of the African two-wheeler market Figure 28: Indians have gained share in the past few years

Nigeria, 1.33, 38%

East & Central Africa, 0.77,

22%

West Africa, 1.02, 29%

North Africa,

0.29, 8%

South African region, 0.11,

3%

84% 87% 87% 83%74% 77% 78%

3%2% 4% 9%

17%16% 17%

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011

Mkt Share in Africa for Chinese Indians Japanese


Figure 29: Given low penetration, the entire region has a

lot of potential

Figure 30: East & Central Africa and West Africa have

driven growth in past five years

3.4%

0.8%

2.5%

1.0%

0.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%


West Africa North Africa South Africanregion


13%

39%

35%

11%

2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%


West Africa North Africa South Africanregion

5 year CAGR growth in 2W market


29 August 2012


Nigeria

Not surprisingly, given its population, Nigeria is the largest two-wheeler market at

~US$750 mn in Africa with sales exceeding 1.3mn in 2011. As mentioned earlier,

motorcycle taxis are referred as Okadas in Nigeria, the name originating from one of

Nigeria’s popular local airline Okada Air because, like the airline, motorcycles could

manoeuvre through heavy traffic and take their passengers to their destinations in a timely

manner. The Nigeria market has witnessed a 13% CAGR in the past five years and with a

penetration of 3.4%; there is clearly still a lot of growth left.

Figure 31: High population, inadequate public transport and rising income levels make Nigeria an attractive market

GDP per capita (PPP terms

in USD)

GDP per capita

(USD)

GDP (Bn USD) -

2011

5 Yr GDP growth

(%)

10 yr growth Population (Mn)

Nigeria 2,578 1,490 239 7% 9% 160

Source: IMF Databank, Credit Suisse estimates

Figure 32: Nigeria is the largest market in Africa Figure 33: Indians gaining share from Chinese

-45%

-30%

-15%

0%

15%

30%

45%

0

100

200

300

400

500

600

700

800

2006 2007 2008 2009 2010 2011

(US

$ m

n)

Nigeria Mkt Size YoY growth (RHS)

1% 4%10%

25% 22% 23%

98% 95%90%

75% 78% 76%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011

Mkt Share in Nigeria: Indians Chinese Japanese & others


Given the fact that motorcycles are largely used as taxis here, cheap motorcycles are the

norm here and hence Chinese dominate the market. In fact till 2005, they were virtually the

only players in the market. Bajaj Auto entered the Nigerian market in 2005 and has had

great success in the past five years. Its market share has already reached ~25% despite

the fact that its vehicles are almost 50% more expensive than the Chinese bikes. Even the

Nigerians have started appreciating Bajaj’s quality and realising that though the upfront

cost is higher with a Bajaj vehicle, the total cost of ownership on account of the lower

maintenance and better mileage is lower than that of Chinese bikes. The Boxer brand with

its larger seats is suitable for usage as a taxi. Bajaj has recently launched the Boxer 150,

which has been well received by the market.

However, in the past couple of years, given the fact that a lot of the okadas were being

used by people committing crimes and the increase in the number of accidents, various

state governments have started banning commercial use of motorcycles. In March 2012,

Lagos, which is the largest market for such commercial motorcycles, banned their use

from a large part of the town. Various other states like Kwara, Bayelsa and Jos have also

imposed a temporary ban on commercial motorcycles in order to regularise the business.

But with the fact that motorcycles for personal use are just starting to grow we reckon

volumes in this market can continue to grow at a 10% CAGR in this market.

Motorcycles are primarily

used as taxis; hence, cheap

Chinese motorcycles

dominate

29 August 2012


Western Africa

With a combined population of ~130 mn and a penetration of only 2.5%; this region too

has a lot of potential, going forward. Given their income levels and their population, we

reckon Ghana and Ivory Coast could be large countries. In the export/import data Togo,

which is a small country with population of only 7.1 mn, stands out as the largest importer

of motorcycles within Western Africa. In our view, this is because of the fact that Lomé (the

capital of Togo) being the only deep-water port in the region serves as the unofficial hub

for transit trade within the region. Togo serves as a transit market for the larger economies

of Nigeria, Ghana and for land-locked Burkina Faso and Niger. This region is completely

dominated by Chinese manufacturers who have a >90% share of the market. Like in

certain states of Nigeria, even Ghana has banned the use of Okadas in July 2012; this, we

reckon, could put pressure on motorcycle volumes in the near term.

Figure 34: Ghana and Ivory Coast are big potential 2W market countries in West Africa region

GDP per capita (PPP

terms in USD)

GDP per capita

(USD)

GDP (Bn USD) -

2011

5 Yr GDP growth

(%)


Ghana 3,083 1,529 37 8% 7% 24

Ivory Coast 1,590 1,062 24 1% 1% 23

Senegal 1,871 1,076 14 4% 4% 13

Mali 1,128 669 11 4% 5% 16

Burkina Faso 1,466 664 10 5% 6% 15

Benin 1,481 737 7 4% 4% 10

Niger 771 399 6 4% 5% 15

Guinea 1,083 492 5 2% 3% 11

Togo 899 506 4 3% 3% 7


Figure 35: Western Africa has seen strong growth in 2011 Figure 36: A market dominated by Chinese players

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

100

200

300

400

500

600

2006 2007 2008 2009 2010 2011

(US

$ m

n)

Western Africa market size YoY growth (RHS)

1% 1% 1% 1% 3% 4%

91% 92% 91% 92% 92% 92%

8% 6% 8% 7% 6% 5%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011

Mkt Share in West Africa : Indians Chinese Japanese & others


Eastern and Central Africa

With a combined population of ~330 mn and with penetration at a paltry 0.8%, we reckon

this region has the highest potential. The region with volumes of ~0.8mn units has been

the fastest growing region with a 40% CAGR in the last five years. Whilst the data

suggests that the Japanese and others have lost market share here, the fact is that the

Chinese and the Indian players have gained market share. So whilst the share of

Japanese bikes has remained constant at ~US$30mn, the share of Chinese and Indian

bikes has increased significantly in the last few years to ~US$270mn and US$120mn

respectively. This suggests that like in other markets a part of the growth here as well has

come from the motorcycle taxi segment where the Chinese bikes are very popular. For the

Chinese are near dominant

in West Africa

East & Central Africa are

marked by low penetration

though income levels are

also low

29 August 2012


Indian players, Kenya, Uganda and Angola are strong markets with market share >30%

and they have done well in grabbing ~15% share in markets like Tanzania and Ethiopia as

well. We believe success in this region will be the key driver for volumes for the Indian

players.

Figure 37: Though income levels are comparatively low in East & Central Africa; 2W penetration is very low

GDP per capita

(PPP in USD)

GDP per capita

(USD)

GDP (Bn USD) -

2011

5 Yr GDP growth

(%)


Angola 5,895 5,144 101 9% 11% 20

Cameroon 2,257 1,230 26 3% 3% 21

Democratic Congo 348 216 16 6% 6% 73

Central African Republic 768 456 2 3% 1% 5

Kenya 1,746 851 35 4% 4% 41

Ethiopia 1,093 360 31 10% 8% 87

Tanzania 1,515 553 23 7% 7% 42

Uganda 1,317 478 17 7% 8% 35


Figure 38: Robust growth in markets in last few years Figure 39: Indians have established strong presence

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

50

100

150

200

250

300

350

400

450

2006 2007 2008 2009 2010 2011

(US

$ m

n)

East & Central Africa Mkt Size YoY growth (RHS)

9% 10%20%

29% 28% 29%

58%63%

60%

55% 62% 64%

33%27%

19% 15% 11% 8%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011

Mkt Share in East & Central Africa: Indians Chinese Japanese & others


Northern Africa

Unlike the other parts of Africa, motorcycles are not used as taxis in this region, probably,

in our view, on account of the fact that most of these countries are Islamic countries and it

would not be viewed as proper to have motorcycles as a means of public transport. Given

the relatively higher income levels in this region, a large part of the sale is bikes sold for

personal use. However, these regions do have tricycles (three-wheelers) as a means of

public transport. Egypt is the second largest three-wheeler export market from India. In

some cities of Sudan, the usage of boda-boda (commercial motorcycles are referred by

this name here) has just started.

Figure 40: While high GDP per capita in Northern Africa, 2W usage restricted as can’t be used as taxis

GDP per capita (PPP

terms in USD)

GDP per capita

(USD)

GDP (Bn USD) -

2011

5 Yr GDP growth

(%)


Egypt 6,540 2,970 236 17% 9% 79

Algeria 7,333 5,304 191 10% 13% 36

Morocco 5,052 3,083 99 9% 10% 32

Sudan 2,726 1,982 65 13% 17% 33

Tunisia 9,478 4,351 46 6% 8% 11

Libya 5,787 5,691 37 -8% 1% 6


Both Northern and Southern

Africa do not have a strong

2W market

29 August 2012


Figure 41: Egypt is the only big 2W market in region Figure 42: Chinese dominate here too

-50%

0%

50%

100%

150%

200%

250%

300%

0

20

40

60

80

100

120

140

160

180

2006 2007 2008 2009 2010 2011

(US

$ m

n)

North Africa market size YoY growth (RHS)

2% 1% 1% 3% 6% 10%

92% 95% 94% 87%92% 88%

5% 4% 5% 9%3% 2%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011

Mkt Share in North Africa : Indians Chinese Japanese & others


Southern Africa

This region is not really a motorcycle market currently. Despite the fact that it has a

population of 90 mn and a reasonably high GDP per capita in most countries, this region

has not really taken to motorcycles as motorcycles are generally perceived to be unsafe

from both a crime and accidents point of view. Also, it has never been considered

prestigious to own a motorcycle in this region and, hence, people prefer to purchase an

old car rather than a new motorcycle. But now given the fact that the black middle class is

emerging, Indian players have started efforts to develop a two-wheeler market in South

Africa as well; with very limited success so far though. Bajaj Auto has just opened four

dealerships around Johannesburg and started efforts to educate people about the benefits

of using a motorcycle.

Income inequality is the highest in the world as Namibia, South Africa and Botswana are

all in the top five in rankings of all countries by Gini co-efficient which measures income

inequality. And thus despite high per capita incomes, the lower income class in these

countries cannot afford a two-wheeler. We believe once income inequality starts coming

down and the income levels of those at the bottom also start improving; motorcycle

volumes in this region too will pick up. As of now, we do not assume any volumes for the

next five years from these markets.

Figure 43: GDP per capita high in the region but extremely small 2W market due to large income inequalities

GDP per capita

(PPP terms in USD)

GDP per capita

(USD)

GDP (Bn USD) -

2011

5 Yr GDP growth

(%)


South Africa 10,973 8,066 408 3% 4% 51

Zambia 1,611 1,414 19 7% 6% 14

Botswana 16,030 9,481 18 3% 4% 2

Mozambique 1,085 583 13 7% 8% 22

Namibia 7,363 5,828 12 4% 5% 2

Zimbabwe 487 741 9 0% -4% 13


29 August 2012


Figure 44: Southern Africa is smallest 2W market in Africa Figure 45: Chinese have comparatively smaller presence

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

10

20

30

40

50

60

70

80

2006 2007 2008 2009 2010 2011

(US

$ m

n)

Southern Africa market size YoY growth (RHS)

8% 5%11% 13% 17% 14%

31% 36%

40%26%

30%49%

61% 59%49%

61%52%

37%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011

Mkt Share in Southern Africa : Indians Chinese Japanese & others


Three-wheelers exports mitigate 2W ban risk

One of the key risks to Africa 2W export story would be the imposition of bans on use of

motor-cycles as taxis as has happened recently in select cities of Nigeria, Ghana, etc. We

believe that at margin it wouldn’t hurt Indian players like Bajaj much. Not only will the shift

of motorcycles usage from taxis to personal vehicles will continue happening, this ban

would also lead to a spurt in 3W demand for commercial purposes. In the 3W space, Bajaj

is already on a very strong footing in Africa. In some countries like Egypt it is the only

player in the 3W space while in countries like Tanzania, Ethiopia, Bajaj’s vehicles are so

popular that 3W’s are in fact known by the name Bajaj.

Total 3W exports from India were ~US$500 mn in 2011 with Bajaj having a ~90% share.

Among that while exports to neighbouring countries like Sri-Lanka, Bangladesh constituted

a big percentage; 3W exports to Africa were roughly 25% of total with Egypt, Nigeria the

key countries. As of now 3W’s are particularly prevalent in Muslim dominant areas like

North Nigeria where motorcycles can’t be used for taxi purposes. With most of the

Northern Africa region falling in this category, it would continue to drive Bajaj’s 3W exports.

Figure 46: Sri-Lanka, Egypt and Nigeria are biggest 3W export markets for India

Sri-Lanka43%

Egypt17%

Nigeria12%

Bangladesh8%

Peru7%

Sudan4%

Guatemala2% Ethopia

2%

Mexico1% Tanzania

1%

Colombia1% Others

2%

Break-up of India's 3W exports


Ban on motorcycles usage

as Taxis wouldn’t hurt Indian

players like Bajaj much

because it would lead to a

spurt in 3W sales

29 August 2012


Latin America ex Brazil—market share gains is the story here Overall, the Latin American export market ex Brazil is similar in size to the African market

at ~US$2bn. Brazil, which is the largest market in the region with an annual demand of 2

mn units is currently dominated by Honda with an 82% market share which has a local

production base in Brazil as well. With an overall population of 340 mn units (one-third of

Africa), the potential opportunity in Latin America is not as large as the one in Africa.

However, Latin America is already in the midst of a very strong boom in two-wheelers and

hence represents a good near-term opportunity.

Figure 47: GDP per capita of most countries in Latin America is high

GDP per capita (PPP

terms in USD)

GDP per capita

(USD)

GDP (Bn USD) -

2011

5 Yr GDP growth

(%)

10 yr GDP growth Population (Mn)

Argentina 17,516 10,945 448 7% 6% 41

Bolivia 4,789 2,315 25 5% 4% 11

Brazil 11,769 12,789 2493 4% 4% 195

Chile 17,222 14,278 248 4% 4% 17

Colombia 10,249 7,132 328 4% 5% 46

Dominican 9,287 5,639 57 6% 6% 10

Ecuador 8,492 4,424 66 4% 5% 15

Guatemala 5,070 3,182 47 3% 3% 15

Mexico 14,610 10,153 1155 1% 2% 114

Paraguay 5,413 3,252 21 5% 4% 7

Peru 10,062 5,782 174 7% 6% 30

Uruguay 15,113 13,914 47 6% 4% 3

Venezuela 12,568 10,611 316 3% 3% 30


Latin American countries are a bit of a contradiction in the sense that with GDP per capita

at ~US$10,000, countries normally start moving away from two-wheelers to passenger

cars. Also, a number of these countries already have a higher passenger car penetration

than two-wheeler penetration. But unlike the other developing countries in the world they

never went through the phase where two-wheelers first took off, got saturated and then

people started moving to cars. We reckon the reason for the same is that there is a very

wide income inequality in these countries. Thus, despite these countries being “middle-

income” countries, ~40% of the population in these countries is poor.

Income inequality in most countries went up significantly in the 1980s with the reforms and

then again in 1990s with the liberalisation policies. However, there has been considerable

progress made in reducing inequality in a number of these countries since the early 2000s

on the back of the skill premium coming down and higher investments by governments in

improving standards of those at the bottom of the pyramid. Most of the countries have

witnessed strong growth and hence a surge in employment in the 2000s has also helped.

This reduction in inequality has resulted in the emergence of a strong middle class and

this consequently has resulted in a strong demand for two-wheelers. For example, The

Argentinian two-wheeler market today is 6x of what it used to be in 2005 and is the second

largest importer of two-wheelers globally after Nigeria.

Most countries in Latin

America are marked by high

income inequality

29 August 2012


Figure 48: Income inequality among the largest in the

world

Figure 49: However it has improved greatly over the years

9

10

13

18

21

22

30

31

33

43

45

0 10 20 30 40 50

Bolivia

Colombia

Brazil

Paraguay

Mexico

Chile

Ecuador

Peru

Dominican Rep

Argentina

Venenzuela

Gini coefficient ranking among 150 countries

40

50

60

70

2002 2003 2004 2005 2006 2007 2008 2009 2010

Gini coefficient for Argentina Peru Colombia Brazil

Source: World Bank, Credit Suisse estimates Source: World Bank, Credit Suisse estimates

Brazil, which is the biggest market in Latin America, is completely dominated by Japanese

players (over 90% market share) so our analysis is focused on the rest of Latin America

(ex Brazil). The region has witnessed a 17% CAGR in volumes in the past five years with

most markets barring Guatemala growing in double digits during the period. Peru and

Argentina were the fastest growing markets during the period. Unlike the African region,

motorcycles are not at all used as taxis in this region and hence all the demand is for

personal usage. Given this, the traditional penetration based analysis can be used to

gauge the potential of the region. Overall, as a region, the penetration levels stand at only

5%; assuming an average household size of four for the region the household penetration

is only 20% and thus it still has another decade of growth should the middle income class

continue to grow.

Figure 50: Market has grown at 17% 5 year CAGR Figure 51: Most markets grew in healthy double digits

-60%

-40%

-20%

0%

20%

40%

60%

80%

0

500

1,000

1,500

2,000

2,500

2006 2007 2008 2009 2010 2011

(US

$ m

n)

Latin America ex Brazil market size YoY growth (RHS)

23%

32%

11%

14%

6%

19%

19%

0% 5% 10% 15% 20% 25% 30% 35%

Argentina

Peru

Colombia

Venezuela

Guatemala

Paraguay

Chile

5 Yr CAGR growth (%)


29 August 2012


Figure 52: Penetration levels still comparatively low

7%

3%

4%3%

3%

8%

2%

8%

3%

5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Argentina Peru Colombia Venezuela Guatemala Paraguay Chile Brazil Dominican Overall



Apart from Brazil, the other large markets in the region are Argentina, Colombia,

Venezuela and Peru. Out of these markets, Indian players have a high share only in

Colombia whereas the Chinese dominate the other markets particularly Venezuela and

Peru. The Japanese players (Honda) have a strong presence in Argentina with a 25%

market share as they export products to Argentina from their Brazilian plants.

Figure 53: Argentina, Colombia the biggest markets Figure 54: Indians have high share in Peru, Colombia

574

191

392

222

82102

76

32

0

100

200

300

400

500

600

700

Argentina Peru Colombia Venez Guatem Parag Chile Dominican

Mkt Size (Mn USD)

5%

15%

57%

0%

32%

0%

3%

3%

69%

82%

36%

96%

63%

98%

83%

79%

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

Argentina

Peru

Colombia

Venezuela

Guatemala

Paraguay

Chile

Dominican

Chinese Mkt Share Indians Mkt Share


Indian players have gained market share in most markets. Whilst they have managed to

consolidate strong positions in Colombia (30% to 60% MS, both Hero and Bajaj export

here) and Guatemala (12% to 30% MS), they have managed to enter the markets of

Argentina, Brazil, Peru and Chile and grab single digit market shares. Growth in Latin

America would be a function of how the Indian players can take share from their Chinese

counterparts in these countries. Except for Brazil where Honda is dominant with a 82%

market share, we reckon Indian players can increase their share from 3% currently to 20%

in the next five years.

Indians have yet to ramp up

fully in key Latin American

markets like Argentina,

Chile, and Venezuela

29 August 2012


Figure 55: Market share for Indians have gradually grown over the years

9%4% 5% 9% 11%

16%

65% 72% 75% 65%72%

71%

26% 23% 20%26%

17%12%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011

Mkt Share in Latin America ex Brazil : Indians Chinese Japanese & others


South Asia ex India

Excluding India, South Asia’s size is 1.5 mn units. Pakistan is over half of this market and

given the history between two nations, Indian players never had a presence in this

country. Pakistan was earlier completely dominated by Japanese players but Chinese

players have slowly established a foothold and now the market is equally divided between

the Japanese and Chinese players.

Figure 56: Pakistan is the biggest 2W market given its population and GDP

GDP per capita (PPP

terms in USD)

GDP per capita

(USD)

GDP (Bn USD) -

2011

5 Yr GDP growth

(%)

10 yr GDP growth Population (Mn)

Bangladesh 1,693 678 113 6% 6% 167

Nepal 1,328 653 19 4% 4% 28

Pakistan 2,787 1,201 211 4% 5% 175

Sri Lanka 5,674 2,877 59 7% 6% 21


The rest of the markets – Bangladesh, Nepal and Sri-Lanka – are largely dominated by

India. While Chinese have a reasonable presence in Bangladesh, sales in both Sri-Lanka

and Nepal are nearly exclusively by Indians. Sri-Lanka has the highest per capita GDP,

hence not surprisingly has the highest two-wheeler penetration. Among these countries,

while Bangladesh is the greatest potential market with high population and extremely low

penetration, its income levels and per capita GDP is also quite low. The two-wheeler

market in all these countries have grown in double digits in last five years with highest

growth in Bangladesh and Nepal (given the low base).

Indians have no presence in

Pakistan but are dominant in

other South Asian markets

29 August 2012


Figure 57: Pakistan is bulk of 2W market in South Asia

excluding India

Figure 58: Other than Pakistan, Indian players are

dominant in all other south Asian countries

SL18%

Pak64%

Bangladesh15%

Nepal3%

0%

20%

40%

60%

80%

100%

120%

Sri-Lanka Nepal Bangladesh Pakistan

Mkt Share Indians Japanese/ Chinese


Figure 59: All markets have grown in double digits in last

five years

Figure 60: Sri-Lanka’s 2W penetration is high given the

per capita GDP levels – Nepal and Bangladesh far behind

0%

5%

10%

15%

20%

25%

30%

Sri-Lanka Nepal Bangladesh

5 Yr CAGR growth (%)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Sri-Lanka Nepal Bangladesh



29 August 2012


Export opportunity is massive Both Africa (~80% MS) and Latin America ex Brazil (~72% MS) are currently dominated by

Chinese players. Whilst the Indian players have been gaining share from the Chinese on

account of their better quality, we reckon market share gains for the Indian players will

accelerate over the next few years as pricing – the only plank on which the Chinese score

over the Indians; will work in favour of the Indian companies.

Indian players to gain share from Chinese

The low-cost motorcycle market globally has been dominated by the Chinese for the past

few years. However, Chinese exports have declined in the 1HCY12 on account of the fact

that China’s price advantage is starting to disappear. The key reasons for the same are (i)

an increase in production costs and (ii) currency.

Figure 61: Volume growth has come off

-60%

-40%

-20%

0%

20%

40%

60%

90 ml <disp ≤ 100ml 100 ml <disp ≤ 110ml 110 ml <disp ≤ 125ml 125 ml <disp ≤ 150ml

YoY change in volumes in 2010 2011 May-12


Increase in Production costs is reducing competitiveness…

One of the key components of production costs for motorcycles is labor costs, especially in

the supply chain. In the case of China, a large part of the supply chain is located in the

Chongqing province. As per certain estimates, Chongqing province witnessed a ~45%

increase in average labor costs from RMB1,866/month to RMB2,671/month. As a result,

for similar kind of products the Chinese motorcycle producers had to increase their prices

by ~15% in the 1HCY12.

Labour costs have

increased greatly in China

29 August 2012


Figure 62: Chinese vehicle export prices are up ~25% in the last two years

-10%

-5%

0%

5%

10%

15%

20%

90 ml <disp ≤ 100ml 100 ml <disp ≤ 110ml 110 ml <disp ≤ 125ml 125 ml <disp ≤ 150ml

YoY increase in realisations in 2010 2011 May-12


…RMB appreciation too is hurting

Whilst the RMB has been appreciating against the USD, the currency of most of Chinese

export markets has been declining against the USD, making the vehicles even more

expensive for them. On the contrary, the Indian currency which has been one of the worst

currencies globally has declined against most of these countries; thereby helping the

business case for Indian manufacturers.

Figure 63: While the Indian rupee has depreciated against most countries, Chinese Yaun

has appreciated against the same

-20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30%

Nigeria

West African Franc

Uganda

Tanzania

Kenya

Egypt

Sri-Lanka

Bangladesh

Philippines

Argentina

Colombia

Peru

USA

Chinese Yaun depreciation Indian Rupee depreciation vs major countries


29 August 2012


Bajaj Auto will be the key beneficiary

Within the Indian players, Bajaj, on account of the fact that it has already made significant

inroads into these markets and already has a successful export strategy in place, is likely

to gain the most. We have divided the export opportunity into four segments on the basis

of market growth and market share and analysed each segment.

Figure 64: Bajaj’s export volumes have jumped 6x in the

last six years

Figure 65: Given Sri-Lanka’s high share in three-wheeler

exports, growth here has been dependent on Sri-Lanka

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Bajaj 2W exports Growth YoY(RHS)

-10%

0%

10%

20%

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50%

60%

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0

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150,000

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350,000

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Bajaj 3W Exports Growth (%)


Figure 66: Africa already accounts for ~50% of Bajaj’s two-wheeler export volumes

South Asia18%

Nigeria26%

East & Central Africa17%

Rest of Africa3%

Latin America20%

Philippines, South East

Asia10%

Others7%

Share of Bajaj's 2W exports


Low penetration, mid market share markets

We believe the Western African region falls in this category. In this region, the key

competition for Bajaj Auto comes from the Chinese competitors and for reasons outlined

above we reckon Bajaj will be able to win market share here. We believe Bajaj can

increase its market share from ~3% currently to ~20% in the next five years and given the

fact that the market penetration is low, the market also has the potential to grow at 15%

CAGR over the next five years. Hence, Bajaj’ exports to this region can increase from 30k

p.a. today to 400k p.a. in the next five years.

29 August 2012


Low penetration, high market share markets

We believe that Eastern and Central Africa and Nigeria fall into this category. Motorcycles

are very popular in this part of the African region but largely as motorcycle taxis and since

entering in 2004 Bajaj was able to increase its market share from 20% within five years.

Though here too the Chinese are the main competition and there is a potential for Bajaj

Auto to further increase market share, we have assumed a marginal market share

improvement from 28% to 30%. Given the increase incidence of Nigeria banning

motorcycle taxis, we have assumed a 10% CAGR in volumes in Nigeria vs a 20% CAGR

in volumes in Eastern and Central Africa where penetration at 0.8% is very low. However,

the ban on motorcycle taxis presents a great opportunity for Bajaj’s three-wheeler exports.

Already, a number of these states which have banned three-wheelers have started

replacing motorcycle taxis with tricycles from Bajaj Auto; hence three-wheelers can be a

big opportunity here. Overall, we expect Bajaj’s motorcycle exports in this region to

increase from 550k p.a. currently to 1.3mn units p.a. in the next five years.

Mid penetration, low market share markets

These are countries where penetration is reasonably high but not high enough for growth

to have tapered out; hence we expect these countries to grow at a 8% CAGR over the

next five years. But in these countries, Bajaj’s share is very low and hence growth will be

boosted by market share gains. We have been careful not to select countries where the

Japanese are dominant and the main completion is with the Chinese manufacturers. We

would put Latin American countries like Argentina, Mexico, Venezuela and Chile in this

bucket. We assume Bajaj can increase market share from 3% to 20% and expect its

volumes to grow from 60k currently to 500k in the next five years.

Mid penetration, high market share markets

These are markets where penetration is reasonably high and with an already high market

share we don’t expect any gains for Bajaj Auto. In most of these markets, Bajaj Auto is

already the number one player and hence it won’t be easy for Bajaj to grow faster than the

market. These markets include South Asian markets like Sri Lanka, Bangladesh, Nepal,

Latin American markets like Colombia, Guatemala, Peru and South East Asian markets

like the Philippines. These markets clearly are not saturated; however, we believe that with

penetration at ~5% in most of these markets vs ~2.5% for the lower penetration markets

volumes would grow at an 8% CAGR in the next five years. We don’t assume any market

share increases for Bajaj Auto in these markets as either it already has a high share or the

main competition is from the Japanese players. We expect volumes in this segment to

increase from ~550k to ~800k over the next five years.

Figure 67: Penetration still low in many potential areas Figure 68: Bajaj has not yet penetrated some markets

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

South Asia Nigeria East &CentralAfrica

WestAfrica

North &Southern

Africa

Philip, LatAm high

share

LatAmerica

low share

2W penetration

0%

10%

20%

30%

40%


WestAfrica

North &Southern

Africa

Philip, LatAm high

share

LatAmerica

low share

Bajaj's current market share


29 August 2012


Figure 69: Large growth in under-penetrated markets Figure 70:Market share gains in West Africa, Argentina

0%

5%

10%

15%

20%

25%


WestAfrica

North &Southern

Africa

Philip, LatAm high

share

LatAmerica

low share

5 Yr CAGR growth in market (2011-2016)

0%

10%

20%

30%

40%


WestAfrica

North &Southern

Africa

Philip, LatAm high

share

LatAmerica

low share

Bajaj's mkt share in 5 years


FY14 could be a big year for Bajaj

Given the fact that Bajaj has hedged its entire export exposure for FY13 at Rs50/USD, the

benefits of difference in currency depreciation with respect to Chinese players will start

from FY14 only. We believe Bajaj will not retain the entire currency benefit in FY14 as well

and will pass a part of it especially in regions where it has lower market share to grab

market share from the Chinese. Also, FY13 export volumes for Bajaj have been impacted

by a number of disruptions in some of its large export markets viz. increase in import

duties in Sri Lanka, political disruptions in Egypt, trade restrictions in Argentina, dollar

trade embargo in Iran, etc., and hence FY13 will be weak year meaning a weak base for

FY14 growth.

Figure 71: We expect a 20% CAGR in Bajaj’s export volumes over the next five years

Current 5 Years

2W penetration

Mkt Size Bajaj Size Bajaj's

Share

Mkt growth Bajaj's

share

Mkt size Bajaj's size Bajaj's

growth

South Asia 1.0% 1.2 0.2 17% 8% 17% 1.8 0.3 8.0%

Nigeria 3.4% 1.35 0.31 23% 10% 30% 2.2 0.7 16.0%

East & Central Africa 0.8% 0.8 0.22 28% 20% 30% 2.0 0.6 22.1%

West Africa 2.5% 1.0 0.03 3% 15% 20% 2.0 0.4 68.1%

North & Southern Africa 0.9% 0.4 0.03 8% 10% 15% 0.6 0.1 26.4%

Philippines, Lat America high

share (Colombia, Peru etc) 3.0% 1.2 0.35 29% 8% 30% 1.8 0.5 8.6%

Lat America low share

(Argentina, Chile etc) 5.0% 1.8 0.06 3% 8% 20% 2.6 0.5 54.5%

Total 7.75 1.2 15% 24% 13.0 3.1 20.4%


Alliances could help in Japanese dominated markets

High penetration, low market share markets

South-east Asian markets like Indonesia, Vietnam, Thailand and Brazil in Latin America

are markets where penetration is >20%. However, there is steady replacement demand in

these markets. Also, given the improving income levels the demand for higher cc vehicles

is increasing in these countries. Whilst Bajaj already sells its Pulsar in most of these

countries, it has not had too much success in the South East Asian markets where the

Japanese players are dominant except for Philippines. And in the Philippines, Bajaj sells

its vehicles via the Kawasaki network; so the Pulsar is sold as a Kawasaki Bajaj Rouser.

The Pulsar is assembled in Kawasaki’s Philippines plant and Kawasaki’s higher cc models

29 August 2012


like Ninja250 and Ninja 650R are assembled in Bajaj’s Chakan plant. Media reports and

management commentary has hinted at the possibility of extending this tieup for other

markets. The fact that Kawasaki’s models start from 250cc range means that this tieup

could be beneficial for both parties. Hence, if this happens, there is the possibility of

additional volumes from these markets as well; currently, we do not build any of it in our

numbers.

Kawasaki, Bajaj, KTM could be a formidable global alliance

Bajaj Auto acquired a 24.5% stake in KTM in 2007 for ~Euro 100 mn in 2008 and since

then the relationship between KTM and Bajaj Auto has developed further resulting in Bajaj

Auto increasing its stake to ~47% with an overall investment of ~Euro 190 mn. KTM is the

second largest motorcycle manufacturer in Europe with a sharp focus on off-road and

motor-cross segments, where it is a global leader.

The focus of the KTM and Bajaj partnership lies on the common development and

production (in India) of street motorcycles in the 125 to 375 cc segments. KTM and Bajaj

have already jointly developed a product called the KTM Duke 125. The Duke which was

launched in March 2011 is one of the largest selling motorcycles in the European market.

All KTM street motorcycles jointly developed with Bajaj would be manufactured at Bajaj’s

Chakan plant helping the two companies realising back end synergies thus allowing KTM

to take advantage of Bajaj’s lower cost of production. The two companies are currently

jointly working on a 375 cc street motorcycle.

The two companies are also working on a common distribution in select emerging markets

(along with Kawasaki in some cases) like India, Malaysia, Indonesia, etc. Bajaj has

already introduced the KTM Duke 200 (extension of the 125cc) motorcycle into the Indian

market.

Figure 72: KTM’s financials have steadily improved

Euro m Sep-07 to Aug-08 Sep-08 to Aug-09 Sep-09 to Dec-10 2011

Volumes 92,385 64,080 85,543 81,200

Net Sales 605,655 454,618 591,379 526,801

EBITDA 20,128 (32,013) 29,961 31,010

EBITDA margin 3.3% -7.0% 5.1% 5.9%

PAT 6,044 (81,433) 13,963 20,819

Source: Company data, Credit Suisse

29 August 2012


Asia Pacific / India

Automobile Manufacturers

Bajaj Auto Ltd.

(BAJA.BO / BJAUT IN) INCREASE TARGET PRICE

Distinctly global

■ Raise target price by 16%. Given our expectations of higher growth in export markets and a better visibility on the same (post our detailed analysis), we increase our FY14 estimates by ~5% and target multiple for Bajaj Auto by 10% from 14x to 15.5x; this leads to an increase in target price to Rs2,152 providing a >30% potential upside. On current prices, both Bajaj and Hero trade at similar multiples of ~12x FY14; however, we reckon given its stronger export franchise volume growth (driven by exports) in Bajaj will be higher than Hero and, hence, we price Bajaj at a ~5% premium to Hero.

■ Exports to grow at a ~20% CAGR for the next five years. We reckon Bajaj Auto is set to increase its market share in the export markets from ~15% to ~25% largely taking away share from Chinese. Our market share prognosis is based on the fact that pricing which is the key advantage of the Chinese manufacturers vis-à-vis the Indians is likely to diminish going forward on account of currency fluctuations and increase in labor costs for the Chinese manufacturers. Chinese dominate the two largest and fastest growing export markets of Africa and Latin America with ~80% share and, thus, there is plenty on offer for Bajaj.

■ Premiumisation trend should continue in medium term. The share of the premium segment doubled from 9% to 18% from FY06 to FY11; however, with the slowdown in the economy in the last couple of years, premium segment share has declined to 16%. Given that Bajaj Auto is the market leader in this segment, its domestic volumes were impacted by the same. We believe that with economic recovery, premiumisation trend should return.

■ Maintain Bajaj Auto as our top pick in Indian Autos. Despite the fact that the stock is up ~15% since 1Q results, we reckon there are more legs to this story. Whilst earlier we saw a bottoming out of margins, this time our outlook is based on more comfort on growth. We believe Bajaj will witness robust growth in its FY14 exports and at ~12x FY14 valuations clearly are not demanding. The key risk to our call is adverse regulation in any of their large export markets and continued slowdown in the domestic market impacting premium segment volumes.

Share price performance

80

100

120

140

1200

1400

1600

1800

2000

Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the BSE

SENSEX IDX which closed at 17490.81 on 29/08/12

On 29/08/12 the spot exchange rate was Rs55.67/US$1

Performance Over 1M 3M 12M Absolute (%) 1.4 7.6 3.4 Relative (%) -0.6 -0.3 -1.4

Financial and valuation metrics

Year 3/12A 3/13E 3/14E 3/15E Revenue (Rs mn) 195,946.5 204,886.7 248,280.5 284,657.6 EBITDA (Rs mn) 37,099.7 38,169.8 50,074.6 58,104.7 EBIT (Rs mn) 35,632.4 36,725.6 48,503.0 56,405.9 Net profit (Rs mn) 30,454.0 31,129.7 40,136.8 45,989.4 EPS (CS adj.) (Rs) 105.35 107.68 138.84 159.09 Change from previous EPS (%) n.a. 0.7 4.8 6.2 Consensus EPS (Rs) n.a. 112 130 144 EPS growth (%) -11.9 2.2 28.9 14.6 P/E (x) 15.4 15.1 11.7 10.2 Dividend yield (%) 2.8 2.8 3.4 3.7 EV/EBITDA (x) 11.2 10.5 7.5 6.0 P/B (x) 7.7 6.2 4.8 3.9 ROE (%) 55.9 45.5 46.3 41.9 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM* Price (29 Aug 12, Rs) 1,627.25 Target price (Rs) (from 1,854.00) 2,152.00¹ Upside/downside (%) 32.2 Mkt cap (Rs mn) 470,872 (US$ 8,459) Enterprise value (Rs mn) 401,854 Number of shares (mn) 289.37 Free float (%) 50.0 52-week price range 1,812.7 - 1,423.7 ADTO - 6M (US$ mn) 14.1

*Stock ratings are relative to the relevant country benchmark.

¹Target price is for 12 months.

Research Analysts

Jatin Chawla

91 22 6777 3719

[email protected]

29 August 2012


Premiumisation in domestic market will continue In the past few quarters, Bajaj’s product mix in domestic motorcycles has worsened due to

downtrading in the market on account of an economic slowdown resulting in a decline in

premium segment volumes where Bajaj dominates with its Pulsar brand. However, over a

longer period, premium segment share in the industry has doubled from ~9% in FY05 to

~17% in FY12 as customers preferences have shifted towards more sporty bikes.

We believe that deterioration in product mix has now peaked. Once things start

recovering, premium segment volumes should once again grow faster than the market as

consumers again start moving towards higher-end bikes which will benefit Bajaj more as it

has a higher share in these segments (over 40% vs 20% in lower segments).

Figure 73: Deterioration in product mix in Bajaj’s

domestic motorcycles peaked in 4Q12

Figure 74: While a temporary blip in FY12, share of

premium bikes in India has gradually moved up

16 18 18 21 26 24

5358 54 49

45 48

3124 28 29 29 27

0

20

40

60

80

100

4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13

Share of Entry bikes in Bajaj Executive Premium

5%

10%

15%

20%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Share of Premium motorcycles in total


Bajaj will also continue coming up with new launches in the executive segment which will

help it to further challenge Hero’s dominance there. The launch of four-gear Discover 100

in May has already helped in increasing the volumes of Discover 100. The other new

Discover 125 ST has had a limited launch till now and company will slowly ramp it up to

gain greater foothold in executive segment (contributes to ~65% of domestic volumes).

Figure 75: Discover volumes have ramped up well since

the launch of new 4 gear model

Figure 76: Bajaj domestic 3W growth has outpaced

industry due to market share gains in diesel segment

20,000

40,000

60,000

80,000

Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12

Discover 100 domestic volumes

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12

Bajaj domestic 3W's growth (%) Domestic 3W industry growth (%)


Revival of premiumisation

trend in domestic

motorcycle will help Bajaj

the most

29 August 2012


3W volumes stable, RE60 can provide additional upside

While domestic three-wheeler industry has become stagnant, Bajaj’s three-wheeler growth

has consistently outpaced the industry growth in the last few months. This was on account

of strong growth in the diesel segment vehicles which ply outside cities and don’t require

permits. Bajaj is still comparatively new in this segment and is gradually gaining market

share, which is helping it to grow faster than domestic three-wheeler industry.

Bajaj had also launched a new commercial passenger vehicle RE60 at the Auto Expo

2012 which we are currently not building into our numbers but can provide additional

upside. The vehicle is positioned between a three-wheeler and a passenger car and the

idea is of having the basic DNA of a three-wheeler with the stability and safety of a car.

Government has already given approval of recognising this new segment ‘quadricycle’

which as of now only benefits Bajaj Auto. This vehicle will particularly help the company in

markets like Delhi where the Government is not keen on issuing any new three-wheeler

permits as they create havoc with the traffic (no new permits issued since 2002) and has

potential of becoming a new mass segment.

Strong R&D capability helps reduce time to market and develop market specific

products

Bajaj, despite spending <1% of its revenues on R&D, has a very strong R&D team. Bajaj

is the only company which has been able to create a new brand in the Indian market in the

last 10 years in the form of the Discover. The company has the capability to develop

market specific products as well. For example, Africa being largely a taxi market needs a

vehicle with a longer wheelbase so Bajaj has developed the Boxer product for this market.

It has also managed to introduce a 150cc engine on this product thereby giving it enough

power to pull two people or additional cargo when it is being used as a taxi.

The company has three strong brands for specific market segments:

(1) Boxer – for use as an entry level motorcycle for the taxi market

(2) Discover – commuter brand where motorcycles are used for personal use

(3) Pulsar – mid-end level sporty brand

The KTM and Kawasaki tieup gives the company vehicles at the higher end of the sports

segment as well.

Brand and Distribution – not a bottleneck

One of the key questions we asked ourselves was whether Bajaj will be able to quickly set

up a distribution network to take advantage of this opportunity. We understand that across

most African markets, we only have multi-brand two-wheeler dealers. Hence what one

needs is a strong distributor with knowledge of the local market to get ones products into

distribution. The fact that Bajaj has been able to scale up its African business, especially in

Nigeria, up so quickly is testimony to that. So in our view, distribution especially in Africa

will not be a challenge.

The fact that in most of these markets the competition is with the Chinese brands who

have no clear distinction amongst themselves and hence no strong brand, means that

Bajaj has an advantage here. Also, Bajaj has been very smart and thinking long term with

its branding strategy by using the Boxer brand for the taxi market; this does not dilute the

Bajaj brand whenever the African market is ready for personal commuter bikes. We

believe one of the reasons the Japanese have not focused on the taxi segment is that they

didn’t wont to dilute their premium image but Bajaj seems to have done it the smarter way,

in our view.

29 August 2012


Margin improvement from higher FX realisations

While the company’s margins declined ~200 bps QoQ in 1QFY13 on worsening mix, the

worst is now over and there should be a big margin expansion, going forward. After slight

increase during rest of the year; margins will expand ~150 bps YoY just on better export

realisation which should improve from Rs50/US$ to Rs55/US$. The company hedges on a

one-year forward basis, hence it was already hedged for FY13 at Rs50/US$. However, the

full benefit of the INR depreciation will start coming from the next year as company has

now hedged FY14 exposure at these favourable rates. This will flow directly into top-line.

Potentially margins can expand 350 bps (10% greater realisations on exports which are

35% of sales). However, we are building in less than half of that improvement to come

through and we reckon the company will use the rest to increase its volumes, especially in

price sensitive markets where the main competition is from Chinese manufacturers.

Figure 77: Export realisations will jump up ~10% in FY14

due to FX effect alone …

Figure 78: ...even after assuming only 50% benefit

margins will expand at least ~150 bp in FY14

44,000

46,000

48,000

50,000

FY12 FY13E FY14E FY15E

Realization/ Vehicle (Rs)

18%

19%

20%

21%

FY12 FY13E FY14E FY15E

Bajaj's EBITDA margin (%)


Financials remain solid

Two-wheeler business continues to remain one of the best in the country

(1) Lower fixed cost business model gives high margin stability. Bajaj’s fixed costs

are only 6% of sales as the company has developed a model based on outsourcing a

large part of the components to its vendors. Thus, the company is essentially only

assembling vehicles and, hence, there is limited fluctuation on margins with volumes.

Whilst the company does not benefit much with an increase in volumes, in a slowdown

like the current one this provides comfort on margins.

(2) Cash flow generation continues to be the best in business. With most of the

production being outsourced to vendors, the capex intensity of the business is very

low as a large part of the investment is done by vendors. This, coupled with a negative

working capital cycle and healthy margins, implies that the business is a very high

cash generating business with a 9% FCF yield and core ROEs of ~50%.

29 August 2012


Figure 79: FCF/profits has averaged 95% and... Figure 80: ...ROEs have averaged ~50% in last 5 years

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

FY08 FY09 FY10 FY11 FY12

FCF Profits FCF/Profits (RHS)

0

10

20

30

40

50

60

70

FY08 FY09 FY10 FY11 FY12

ROE (%)


Valuation vs Hero Motocorp

Given our expectations of a higher growth in export markets and a better visibility on the

same (post our detailed analysis); we increase our target multiple for Bajaj Auto by 10%

from 14x to 15.5x; this leads to an increase in target price to Rs2,152 providing a >30%

upside from current prices.

Historically Bajaj has traded at a slight discount to Hero Motocorp (14.8x one-year forward

earnings for Bajaj vs 15.3x one-year forward earnings for Hero Motocorp). On current

prices, both Bajaj and Hero trade at similar multiples of ~13.7x; however, we reckon given

its stronger export franchise volume growth (driven by exports) in Bajaj will be higher than

Hero and hence we price Bajaj at a ~5% premium to Hero. Even on HOLT both the stocks

are implying a similar volume expectation of 7% growth going forward; however we reckon

given its stronger export franchise volume growth (driven by exports) in Bajaj will be higher

than Hero justifying the premium.

Figure 81: Bajaj has traded at a slight discount to Hero (14.8x vs 15.3x)

10

12

14

16

18

20

Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

Bajaj Price to 12M fwd EPS Hero Motocorp


29 August 2012


Financial Summary

Figure 82: Income statement

(Rs Mn) Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13E Mar-14E Mar-15E

Domestic 2W's volumes ('000) 1,683 1,286 1,786 2,415 2,567 2,623 2,885 3,174

Exports 2W's volumes ('000) 482 633 726 972 1,268 1,394 1,673 1,953

Domestic 3W's volumes ('000) 154 135 176 206 203 212 211 210

Exports 3W's volumes ('000) 136 139 165 231 312 265 332 398

Total Volumes ('000 units) 2,455 2,194 2,853 3,824 4,350 4,495 5,101 5,735

% YoY -10% -11% 30% 34% 14% 3% 13% 12%

Net Sales 90,169 87,920 119,565 164,291 195,947 204,887 248,280 284,658

Realization/ Vehicle (Rs) 36,726 40,071 41,914 42,964 45,050 45,586 48,673 49,637

Raw materials 66,193 64,616 81,038 118,032 141,260 147,714 177,236 203,427

RM as % of net sales 73% 73% 68% 72% 72% 72% 71% 71%

EBITDA 12,294 11,015 25,730 31,585 37,100 38,170 50,075 58,105

EBITDA margin (%) 13.6% 12.5% 21.5% 19.2% 18.9% 18.6% 20.2% 20.4%

EBITDA/ vehicle (Rs) 5,007 5,020 9,020 8,260 8,530 8,493 9,817 10,132

Depreciation 1,746 1,306 1,374 1,239 1,467 1,444 1,572 1,699

PBT 11,174 8,264 23,013 44,380 40,131 43,374 56,150 64,818

Tax 3,684 2,889 7,035 10,063 10,197 12,795 16,564 19,445

Tax Rate (%) 33% 35% 31% 23% 25% 30% 30% 30%

PAT 7,490 5,375 15,978 34,549 30,454 31,130 40,137 45,989


Figure 83: Balance sheet


Share Capital 1,447 1,447 1,447 2,894 2,894 2,894 2,894 2,894

Reserves and surplus 14,789 16,681 25,723 45,179 57,924 73,267 94,232 119,291

Shareholders funds 16,236 18,128 27,169 48,072 60,817 76,161 97,126 122,185

Deferred liability (Net) 13,242 12,993 12,935 1,601 1,667 1,667 1,667 1,667

Capital employed 29,483 31,121 40,234 49,909 63,459 78,802 99,767 124,826

Net fixed assets 12,628 15,301 14,833 14,824 14,812 16,138 17,317 18,368

Capital WIP + Misc 3,570 5,889 3,705 4,427 4,805 5,389 5,389 5,389

Total Investments 15,633 14,232 34,452 42,839 44,728 44,728 44,728 44,728

Inventories 3,661 3,718 4,584 5,763 7,036 8,599 10,373 11,860

Debtors 2,529 2,809 2,719 3,416 4,019 5,806 7,704 8,809

Cash and equivalents 712 1,426 1,073 5,753 16,598 29,925 53,794 80,698

Other current assets 9,778 15,066 21,908 14,123 19,235 20,425 21,693 23,023

Creditors 10,497 12,340 20,318 24,373 20,137 24,282 29,135 33,440

Other current liabilities 8,531 14,980 22,719 16,862 27,638 27,927 32,096 34,608

Net current assets (2,348) (4,300) (12,753) (12,181) (886) 12,547 32,334 56,341

Total assets 29,483 31,121 40,237 49,909 63,459 78,802 99,767 124,826


29 August 2012



Automobile Manufacturers

Hero Motocorp Ltd.

(HROM.BO / HMCL IN) DOWNGRADE RATING

Slowdown woes

■ Downgrade to NEUTRAL. Whilst we still like Hero on a medium-term basis,

we are a lot more circumspect about the company’s near-term progress

given the slowdown in the domestic two-wheeler market. We downgrade

Hero Motocorp to NEUTRAL from Outperform.

■ Slowing retails, rising inventories. Retail volumes in the Indian two-

wheeler industry have slowed significantly in the past few months and with a

poor monsoon are unlikely to pick up the near term. For Hero, almost the

entire growth in despatches since January has been a function of the

company building inventory and hence with little scope for further inventory

increase, despatches will track retail volumes and hence remain weak.

■ Longer term thesis intact. We continue to believe that Hero will not lose

significant market share in motorcycles to Honda over the next 2-3 years as

Honda would need time to establish a new brand in the Indian market.

Margins will be impacted in the next few quarters on account of currency

depreciation and the fact that given a slow market Hero will not be able to

pass this on. However, we maintain our medium-term margin expansion

thesis on account of royalty expiry and possibility of benefits from component

sourcing.

■ Valuation. We revise our FY13/FY14 volume estimates for Hero down by

~4%. This, coupled with the fact that currency is likely to put margins under

pressure, means that there is an earnings cut of 6%/7% in our FY13/FY14

estimates and our numbers are now 5% below consensus. We reduce our

target price to Rs2,056 and downgrade the stock to NEUTRAL. The key

upside risk is a rerating of the stock on account of failure of Honda’s recently

launched motor-cycle in the executive segment – “Dream Yuga”.

Share price performance

80

100

120

140

160

1400

1900

2400

Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the BSE

SENSEX IDX which closed at 17490.81 on 29/08/12

On 29/08/12 the spot exchange rate was Rs55.67/US$1

Performance Over 1M 3M 12M Absolute (%) -8.9 0.7 -9.7 Relative (%) -10.9 -7.2 -14.6

Financial and valuation metrics

Year 3/12A 3/13E 3/14E 3/15E Revenue (Rs mn) 235,790.3 249,432.3 282,726.2 321,434.9 EBITDA (Rs mn) 36,187.8 37,354.3 42,185.1 47,647.9 EBIT (Rs mn) 25,214.4 25,362.2 29,726.9 41,022.8 Net profit (Rs mn) 23,781.3 24,811.9 27,373.9 35,584.9 EPS (CS adj.) (Rs) 119.09 124.25 137.07 178.19 Change from previous EPS (%) n.a. -5.8 -6.9 -6.0 Consensus EPS (Rs) n.a. 133 145 185 EPS growth (%) 23.4 4.3 10.3 30.0 P/E (x) 15.5 14.9 13.5 10.4 Dividend yield (%) 2.4 3.0 3.3 4.3 EV/EBITDA (x) 9.3 8.6 7.3 5.9 P/B (x) 8.6 6.8 5.5 4.4 ROE (%) 65.6 50.8 44.7 46.7 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating (from Outperform) NEUTRAL* Price (29 Aug 12, Rs) 1,849.65 Target price (Rs) (from 2,401.00) 2,056.00¹ Upside/downside (%) 11.2 Mkt cap (Rs mn) 369,352 (US$ 6,635) Enterprise value (Rs mn) 321,156 Number of shares (mn) 199.69 Free float (%) 47.8 52-week price range 2,245.0 - 1,727.6 ADTO - 6M (US$ mn) 16.5

*Stock ratings are relative to the relevant country benchmark.

¹Target price is for 12 months.

Research Analysts

Jatin Chawla

91 22 6777 3719

[email protected]

29 August 2012


Financial summary

Figure 84: Hero Motocorp income statement


Volumes ('000 units) 3,337 3,722 4,601 5,406 6,235 6,468 7,187 8,001

% YoY 0% 12% 24% 17% 15% 4% 11% 11%

Net Sales 103,318 123,191 157,684 194,012 235,790 249,432 282,726 321,435

Realization/ Vehicle (Rs) 30,960 33,098 34,269 35,891 37,816 38,564 39,338 40,175

Raw materials 74,025 87,420 107,364 141,110 172,816 184,333 206,543 234,806

RM as % of net sales 72% 71% 68% 73% 73% 74% 73% 73%

EBITDA 16,261 20,337 30,784 29,851 36,223 37,413 42,257 47,735

EBITDA margin (%) 15.7% 16.5% 19.5% 15.4% 15.4% 15.0% 14.9% 14.9%

EBITDA/ vehicle (Rs) 4,873 5,464 6,690 5,522 5,809 5,784 5,879 5,966

Depreciation + Royalty 1,603 1,807 1,891 4,024 10,973 11,992 12,458 6,625

PBT 14,103 17,815 27,291 24,047 28,647 29,299 34,242 45,958

Tax 4,424 4,997 6,000 4,769 4,866 4,487 6,868 10,373

Tax Rate (%) 31% 28% 22% 20% 17% 15% 20% 23%

PAT 9,679 12,818 21,291 19,279 23,781 24,812 27,374 35,585

PAT margin (%) 9.4% 10.4% 13.5% 9.9% 10.1% 9.9% 9.7% 11.1%


Figure 85: Balance sheet


Share Capital 399 399 399 399 399 399 399 399

Reserves and surplus 29,463 37,608 34,251 29,161 42,499 54,303 67,326 84,256

Shareholders funds 29,862 38,007 34,650 29,561 42,898 54,703 67,726 84,655

Long term debt 1,320 785 660 0 0 0 0 0

Deferred liability (Net) 1,254 1,444 1,528 17,178 12,197 4,197 2,083 2,083

Capital employed 32,436 40,237 36,838 46,739 55,095 58,899 69,808 86,738

Net fixed assets 10,817 15,079 16,017 40,803 37,855 38,363 39,405 35,780

Capital WIP + Misc 4,831 1,863 1,052 500 388 500 500 500

Total Investments 25,668 33,688 39,257 51,288 39,643 39,643 39,643 39,643

Inventories 3,171 3,268 4,364 5,249 6,756 6,060 6,790 7,720

Debtors 2,974 1,499 1,084 1,306 2,723 2,050 2,324 2,642

Cash and equivalents 1,311 2,196 19,072 715 768 15,293 29,829 57,528

Other current assets 1,912 3,172 4,306 7,402 10,756 10,781 10,857 10,944

Creditors 7,561 7,030 11,114 20,733 22,932 27,496 31,261 34,761

Other current liabilities 10,687 13,498 37,200 39,791 20,863 26,295 28,279 33,257

Net current assets (8,880) (10,393) (19,488) (45,851) (22,791) (19,607) (9,739) 10,815

Total assets 32,436 40,237 36,838 46,739 55,095 58,899 69,808 86,738


29 August 2012


HOLT view Bajaj Auto: Priced for 7% sales growth per year with stable EBITDA margins

■ We use HOLT, a Credit Suisse valuation tool that derives the stock price based on a

company’s cash flow return on investment (CFROI®) and estimated asset growth

rates. Using Credit Suisse Equity Research’s sales and EBITDA forecast from 3/2013

to 3/2015, Bajaj Auto is expected to maintain CFROI of 32% over this period, similar to

its return last year.

■ Bajaj Auto’s current share price implies that sales growth will slow from 15% in FY15

to just 7% per year in FY16 and FY17, with EBITDA margins maintained at 20.1% a

year.

■ If the company can maintain sales growth at 15% in FY16 and FY17, Bajaj Auto’s

HOLT fair value is Rs 2,138 per share, 37% potential upside.

Figure 86: HOLT scenario showing market-implied sales growth of 7% in 3/2016 and 3/2017

Source: Credit Suisse HOLT, Credit Suisse estimates

29 August 2012


Hero Motocorp: Priced at similar sales growth expectations as Bajaj Auto

■ Using Credit Suisse Equity Research’s sales and EBITDA forecast from FY13 to

FY15, Hero Motocorp’s CFROI is expected to further increase from 40% in the current

year to 45% over this period.

■ At the current share price, Hero Motocorp’s embedded expectations are for sales

growth to slow down to 7% per year with EBITDA margins of 14.2% in FY16 and

FY17.

Figure 87: Hero Motocorp: Priced at similar sales growth expectations as Bajaj Auto

Source: Credit Suisse HOLT, Credit Suisse estimates

29 August 2012


Companies Mentioned (Price as of 29 Aug 12) Bajaj Auto Ltd. (BAJA.BO, Rs1,627.25, OUTPERFORM, TP Rs2,152.00) Hero Motocorp Ltd. (HROM.BO, Rs1,849.65, NEUTRAL, TP Rs2,056.00) Honda Motor Corp. (7267, ¥2,559, OUTPERFORM, TP ¥2,850, OVERWEIGHT) Suzuki Motor Corp. (7269, ¥1,494, NEUTRAL, TP ¥1,540, OVERWEIGHT) Yamaha Motor Co. (7272, ¥716, OUTPERFORM [V], TP ¥960, OVERWEIGHT)

Disclosure Appendix Important Global Disclosures

Jatin Chawla & Akshay Saxena each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names.

3-Year Price, Target Price and Rating Change History Chart for BAJA.BO

BAJA.BO Closing

Price

Target

Price

Initiation/

Date (Rs) (Rs) Rating Assumption

19-Oct-09 746.65 791.572

25-Jan-10 866.5 810.785

26-Jul-10 1,263.95 1,139.619

20-Oct-10 1,487.15 1,531.525

22-Aug-11 1,482.1 1552 X

21-Oct-11 1,640.55 1641

4-Jan-12 1,426.3 1670

4-Apr-12 1,632.8 1651

18-May-12 1,532.95 1779

26-Jun-12 1,559.2 1776

18-Jul-12 1,522.35 1854 O

792 811

1140

1532 1552

1641 1670 1651

177917761854

22-Aug-11

O

591

791

991

1191

1391

1591

1791

Closing Price Target Price Initiation/Assumption Rating

Rs

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

3-Year Price, Target Price and Rating Change History Chart for HROM.BO

HROM.BO Closing

Price

Target

Price

Initiation/

Date (Rs) (Rs) Rating Assumption

8-Sep-09 1,671.7 1,775.361

25-Jan-10 1620 1,697.651 N

20-Apr-10 1,852.85 1,736.191

24-Sep-10 1850 1,773.17

18-Nov-10 1,925.3 2,364.734 O

9-Feb-11 1476 2,293.922

5-May-11 1,697.9 2,347.867 X

22-Aug-11 2,005.95 2492 X

19-Oct-11 2,066.9 2522

4-Jan-12 1787 2238

7-Mar-12 1,883.1 2278

4-Apr-12 2,010.6 2245

3-May-12 2,072.35 2470

20-Jul-12 2,084.35 2401

17751698

17361773

23652294

2348

2492 2522

22382278

2245

24702401

5-May-11 22-Aug-11

N

O

1388

1588

1788

1988

2188

2388

Closing Price Target Price Initiation/Assumption Rating

Rs

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities.

Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry

29 August 2012


factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months.

Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 45% (52% banking clients) Neutral/Hold* 42% (49% banking clients) Underperform/Sell* 11% (39% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

See the Companies Mentioned section for full company names. Price Target: (12 months) for (BAJA.BO) Method: Our Rs2,152 target price for Bajaj Auto is based on a P/E (price-to-earnings) of 15.5x FY14 earnings. Our valuation P/E is a 5% premium to the company's historic multiple, as we now have greater visibility on exports, and believe the company will witness robust growth in its FY14 exports. Risks: Key risks that could impede achievement of our Rs2,152 target price for Bajaj Auto include: if 3W exports fail to recover and Honda gains much greater traction in domestic 2W market. Price Target: (12 months) for (HROM.BO) Method: Our Rs2,056 target price for Hero Motocorp is based on a P/E (price-to-earnings) of 15x FY14 earnings. Our valuation multiple is in line with historic multiples. Risks: Key risks that could cause the share price to diverge from our target price of Rs2,056 for Hero Motocorp include: if there is a disruption caused by the fact that Hero Motocorp would shift to new brand identity along with Honda's entry in the Indian motorcycle market. The key upside risk is a rerating of the stock on account of failure of Honda's recently launched motor-cycle in the executive segment - "Dream Yuga".

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (HROM.BO) within the next 3 months.

Important Regional Disclosures

Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (BAJA.BO, HROM.BO) within the past 12 months.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

29 August 2012


Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. • Jatin Chawla, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (India) Private Limited. • Akshay Saxena, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (India) Private Limited.

Important Credit Suisse HOLT Disclosures

With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default variables and incorporated into the algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. These adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variables may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, HOLTSelect, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse. Additional information about the Credit Suisse HOLT methodology is available on request.

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683. Disclaimers continue on next page.

29 August 2012


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