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Sector: Automobiles
Sector view: Positive
Sensex: 27,702
52 Week h/l (Rs): 2695 / 1793
Market cap (Rscr) : 71,685
6m Avg vol (‘000Nos): 322
Bloomberg code: BJAUT IS
BSE code: 532977
NSE code: BAJAJ‐AUTO
FV (Rs): 10
Price as on December 22, 2014
Company rating grid
Low High
1 2 3 4 5
Earnings Growth
Cash Flow
B/S Strength
Valuation appeal
Risk
Share price trend
70
90
110
130
150
Dec‐13 Jun‐14 Dec‐14
BAJAJ‐AUTO Sensex
Share holding pattern (%) Mar‐14 Jun‐14 Sep‐14
Promoter 50.0 50.0 50.0
Insti 25.7 25.7 25.7
Others 24.3 24.3 24.3
Rating: AccumulateTarget (9‐12 months): Rs2,666
CMP: Rs2,477
Upside: 7.6%
Bajaj Auto
Company Report
December 23, 2014
This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices, estimates and views on sectors and markets.
Change in Estimates Rating Target
Research Analyst: Prayesh Jain
Clear and Candid We attended the analyst meet of Bajaj Auto held to unveil its strategy with three goals 1) regain the lost market share in the domestic motorcycle market, 2) strengthen its leadership in the domestic three‐wheeler market and 3) deepen its presence in the international market. We maintain our Accumulate rating as valuations appear fair at P/E of 15.7x FY17E EPS of Rs156.8. Key highlights of the meet were as follows: Bajaj Auto aims to use the KTM brand to further strengthen its leadership
position in the sports category. The company expects 100% growth in KTM sales in FY15 and a 50% growth in FY16.
Pulsar brand will see new launches in the 200cc‐400cc category to try to capture a large share in the S2 category, where it has a limited presence.
The Discover brand has been the key issue and the company blames it to the brand confusion between a neutral and youthful customer. The company is rekindling its strategy to reposition Discover brand for the Youthful customer in the M3 category.
The Platina brand has been losing out to competition owing to absence of an electric start variant, which the company is launching in Q4 FY15.
The Avenger brand will now be aggressively marketed to capture share from Royal Enfield.
The company is now moving from one segment one brand strategy to multi brand strategy and plans to launch one brand in M1 category (above Platina) and one brand in M3 category.
For domestic 3‐W the company is strengthening its leadership position in the small passenger vehicle segment, as it plans to gain 5% pa market share in big vehicle market. Also it plans to enter the goods segment.
In the international market the company aims to double its volumes in 5 years and this it aims to achieve through entering new markets, introducing new products and strengthening relationship with dealers.
The company has no plans to enter the scooters market as it prefers to focus on gaining larger share in the global motorcycle market.
Financial summary Y/e 31 Mar (Rs m) FY14 FY15E FY16E FY17E
Revenues 201,495 221,095 251,575 291,182
yoy growth (%) 0.8 9.7 13.8 15.7
OPM (%) 20.1 19.3 20.0 20.0
Pre‐exceptional PAT 31,784 33,670 40,163 45,381
Reported PAT 31,784 30,267 40,163 45,381
yoy growth (%) 4.4 (4.8) 32.7 13.0
EPS (Rs) 109.8 116.4 138.8 156.8
P/E (x) 22.5 21.2 17.8 15.7
Price/Book (x) 7.4 6.6 5.6 4.7
EV/EBITDA (x) 17.8 16.8 14.1 11.9
RoE (%) 36.3 33.0 34.1 32.3
RoCE (%) 50.7 46.7 48.4 46.0 Source: Company, India Infoline Research
Bajaj Auto
2
Domestic motorcycle industry: Shifting to multi brand strategy To devise an in‐depth strategy, Bajaj Auto has further segmented the Indian Motorcycle industry into sub segments of Executive and premium segments based on price points. The broader segments are mileage and sports sub classified into M1, M2 and M3 for mileage category and S1, S2 and S3 for sports category. Further, the company has categorized customers into three categories which are neutral (commuter category), youthful and mature. Categorization of the domestic motorcycle industry
Source: Company, India Infoline Research
Segmental trend in the past decade
Source: Company, India Infoline Research
Bajaj Auto attributed the recent loss in market share in the domestic motorcycle market particularly in the M2 + M3 category to the brand confusion in the Discovery brand between appealing to a neutral customer than to a youthful customer who prefers a more stylish bike. The company claimed that in the past three months, while as per the wholesale numbers declared Bajaj Auto seems to be losing market share, on retail sales the company has been able to retain its market share owing to a substantial inventory built up by the competition. Going ahead the company aims to correct this using 1) repositioning strategy for the Discover brand with prime focus on showcasing it as a youthful brand, 2) strengthening its position in the sports category and 3) move from a two brand strategy to a multi brand strategy.
Bajaj Auto
3
Competitive positioning in various segments
Source: Company, India Infoline Research
Bajaj Auto’s strategy in various segments
Source: Company, India Infoline Research, X & Y are new brands the company is planning to launch
KTM: A perfect complement to Pulsar Excluding Royal Enfield, Bajaj Auto has been able to retain its market share in the premium end of the motorcycle market. KTM has played a vital role in that as the volumes (S3 category) for the brand have been on a sustained rising trend in the past many months. Volumes have risen from 468 units per month in Q4 FY13 to 2176 units for the month of November 2014. One of the key reasons for the surge in volumes has been the deepening presence of the KTM’s dealership network which has grown from 33 3S facilities to 155 3S facilities currently. It is now present in 112 towns through 128 dealers. For FY15, the company expects a 100% growth while it aims for a 50% growth in FY16 sales.
The Pulsar brand has been a leader in the sports category motorcycles, while KTM has slowly and steadily built its position as a key brand in the premium sports motorcycle category. KTM has no plans to move into the entry level sports segment.
Bajaj Auto
4
Trend in KTM sales Trend in KTM’s network built up
0
500
1,000
1,500
2,000
2,500
3,000
Q1 FY13
Q2 FY13
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
Q4 FY14
Q1 FY15
Q2 FY15
Oct‐15
Nov‐15
Units/month
0
20
40
60
80
100
120
140
160
180
Jan‐12 Jul‐12 Jan‐13 Jul‐13 Jan‐14 Oct‐14 Current
Source: Company, India Infoline Research Source: Company, India Infoline Research
Pulsar: Feather in the cap The Pulsar has established itself as the leader in the entry level sports segment (S1 category). The company’s key strategies here is to 1) defend its leadership as competition is heating up in the S1 category and 2) establish a position in the S2 category, where it has a very limited presence. Bajaj Auto has lined up new launches in the future for the Pulsar brand which include 200cc and 400cc variants. The Avenger which so far the company has not marketed aggressively will now be pushed in order to grab some share in the cruiser bike segment where Royal Enfield is the market leader by far. The company is considering launching a new brand in the M3 category for the mature customers. Discover and Platina: rediscovering these brands The Discover brand has not lived up to the expectations of the management owing to the brand confusion in the minds of the customer between it being a mileage bike for neutral customer or for a youthful customer. The company believes, this was owing to the extension of the initial success of Discover 125cc bikes to 100cc segment. The company is now concentrating on moving the Discover brand from a mixed position between M2 & M3 and Neutral & youthful customer to a clear M3 category bike appealing to a youthful customer. The first step for the same has been taken as the company launched the Discover 150cc bike. The initial response for the same has been exciting. For the M1 category, where Platina brand has been quite successful in the kick‐start sub category, absence of the electric start variant has been detrimental. The company is launching an electric start variant of Platina in Q4 which will also have increased mileage and refreshed looks. The company believes that there is a potential for a new brand in the M1 category appealing to a neutral customer and is planning to launch a new brand in due course above the Platina brand.
Bajaj Auto
5
Through the aforementioned initiatives, the company is hopeful of increasing market share across segments. In the S1 category, the company is looking at gains of 800bps market share from the current levels of 44%. The biggest increase is expected in the M1 category where it sees a jump from 23% to 35%. In the M1 category the company has conservatively forecasted a gain of 200bps. During this phase the company expects the monthly run rate to increase from ~160,000 units/month to 217,500 units/month and overall market share in the domestic motorcycle market to increase from 18% to 24%.
Market share trend across segments
Source: Company, India Infoline Research
Medium term target across segments
Source: Company, India Infoline Research
No plans to enter the scooters market The company currently has no plans to enter the scooters market as it does not believe it will have a much differentiated product. While the company continues to develop scooters under its R&D department, launching a scooter would require separate marketing channel development. The company wants to gain market share in the global motorcycle market where the addressable market size is much larger than the domestic scooters market. Maintaining the current profitability would also be difficult.
Bajaj Auto
6
Three wheelers: Getting aggressive in big 3-Ws, entry into the goods category Bajaj Auto has established its leadership position in the 3‐Ws small passenger vehicle market with a 80% market share. However, in the big 3‐W passenger market, it has only 18% market share. Also the company is absent in the 3‐Ws goods segment. Going ahead, the company is focusing on three strategies 1) defend its leadership position in the small passenger vehicle market, 2) grow its market share in the big passenger vehicle market and 3) make its presence felt in the 3‐Ws goods market. To maintain the leadership position in the small 3‐W passenger vehicle market, the company has launched new products with 15% lower running and operating costs, superior ergonomics for the driver and more comfortable ride for the user. In the big vehicle market, the company aims to increase 5% market share every year and has launched a new product RE Maxima which in comparison with the competition, has a higher power and torque while giving lower running costs. RE60: Product ready, approvals pending The company sees large opportunities for the quadricycle RE60 on the back of rising urbanization in the country, safety requirements for public transport, etc. The cost dynamics for RE60 are right in the middle of a taxi and an auto rickshaw. Almost all approvals have been received from all regulatory agencies. However, the writ petitions filed to stay implementation of notification GSR 99E pertaining to quadricycles by auto rickshaw unions and individuals in high court has delayed the launch. The government of India is filing a transfer petition in the Supreme Court seeking to transfer all cases to the Supreme Court on the plea that the matter being the same and pertaining to legislation, it should be heard at the apex court. Targets for the three wheeler domestic market
Source: Company, India Infoline Research
Bajaj Auto
7
Motorcycle penetration (per ‘000 population) in key Bajaj Auto export markets
Market share in international markets
0
10
20
30
40
50
60
70
80
90
Africa Asia and ME Latin America
Chinese, 47%
Japanese, 27%
Bajaj Auto, 23%
Other Indian, 3%
Source: Company, India Infoline Research Source: Company, India Infoline Research
International business: Expanding footprints Exports account for close to 50% of Bajaj Auto’s volumes and hence form a key part of its strategy for the future. The company believes that most of its important markets are still underpenetrated. Indian players, including Bajaj Auto have a 26% share in the international market which is dominated by Chinese players who command a 47% market share. With customers in emerging market uptrading towards higher cc and better styling bikes, there is substantial scope for Indian players to gain market share. Challenges exist in the form of 1) volatile currency causing difficulties in retail pricing, 2) uncertain political and economic environment (falling crude oil prices are detrimental to Nigeria’s economy having 35% contribution to its GDP from the oil & gas sector), and 3) rising competitive intensity. Bajaj Auto currently is the leader in motorcycle exports from India with a 23% share. Currently it is present in 48 countries with market size of 5.65mn units and has plans to enter 28 countries in the next two years having a market size of 2.75mn units. Also the company has identified 22 other countries having market size of 750,000 units which it will enter after 2 years. The company is implementing a three pronged strategy wherein 1) it plans to enter newer markets and entrench its presence in existing markets, 2) improve user experience with better products and reasonable prices and 3) constantly improve its distributor tie‐ups through commercial, marketing and technical inputs.
Bajaj Auto
8
Bajaj Auto’s motorcycle market share in key export markets
Bajaj Auto’s three wheeler market share in key export markets
Source: Company, India Infoline Research Source: Company, India Infoline Research
Bajaj Auto’s plans for new export markets
Source: Company, India Infoline Research
Bajaj Auto
9
Financial highlights The company is pretty confident of maintaining its 20% EBIDTA margins on
the back of a robust business model depicted below:
Gross under recoveries to decline substantially
Source: Company, India Infoline Research
Currently funds worth Rs3.8bn and Rs6.15bn are blocked for Excise – receivable on exports and VAT refund receivable respectively.
Fixed costs account for only 7% of sales, while variable costs account for 74% of net sales.
Currently the company has Rs83bn surplus cash. Investments in FMPs are worth Rs49bn. Income for FMP was Rs1.2bn in H1 FY15, which is expected to rise to Rs1.4bn for FY15 and Rs5bn for FY16.
Valuations factor in upsides, retain Accumulate rating Bajaj Auto strategies for future growth are quite exciting but we will wait for the results to fructify before raising our estimates. With key export geographies witnessing tough economic and political environment, we see risks to export volume growth. We expect a 12.6% earnings CAGR for Bajaj Auto during FY14‐17E. Valuations at 15.7x FY17E EPS of Rs156.8 appear fair. We maintain our Accumulate rating with a revised price target of Rs2,666.
Bajaj Auto
10
Financials Income statement Y/e 31 Mar (Rs m) FY14 FY15E FY16E FY17E
Revenue 201,495 221,095 251,575 291,182
Operating profit 40,408 42,671 50,315 58,236
Depreciation (1,796) (1,880) (2,048) (2,216)
Interest expense (5) (50) (50) (50)
Other income 7,064 7,640 9,495 9,240
Profit before tax 45,672 48,381 57,711 65,210
Taxes (13,887) (14,711) (17,548) (19,828)
Adj. profit 31,784 33,670 40,163 45,381
Exceptional items 0 (3,403) 0 0
Net profit 31,784 30,267 40,163 45,381
Balance sheet Y/e 31 Mar (Rs m) FY14 FY15E FY16E FY17E
Equity capital 2,894 2,894 2,894 2,894
Reserves 93,187 104,991 125,014 150,256
Net worth 96,080 107,885 127,908 153,149
Debt 577 0 0 0
Def tax liab (net) 1,432 1,432 1,432 1,432
Total liabilities 98,089 109,317 129,340 154,581
Fixed assets 21,501 23,621 25,572 27,356
Investments 85,496 95,496 105,496 115,496
Net working capital (5,327) (5,984) (7,006) (8,334)
Inventories 6,397 7,019 7,987 9,245
Sundry debtors 7,962 8,737 9,941 11,506
Other current assets 21,165 23,165 25,165 27,165
Sundry creditors (21,114) (23,168) (26,362) (30,512)
Other curr liabilities (19,737) (21,737) (23,737) (25,737)
Cash (3,581) (3,816) 5,277 20,062
Total assets 98,089 109,317 129,340 154,581
Cash flow statement Y/e 31 Mar (Rs m) FY14 FY15E FY16E FY17E
Profit before tax 45,672 48,381 57,711 65,210
Depreciation 1,796 1,880 2,048 2,216
Tax paid (13,887) (14,711) (17,548) (19,828)
Working capital ∆ 2,009 657 1,022 1,328
Operating cashflow 35,589 36,207 43,233 48,926
Capital expenditure (2,307) (4,000) (4,000) (4,000)
Free cash flow 33,282 32,207 39,233 44,926
Equity raised 2,060 ‐ ‐ ‐
Investments (21,192) (10,000) (10,000) (10,000)
Debt financing/ disposal
(1,356) (577) ‐ ‐
Dividends paid (16,783) (18,462) (20,140) (20,140)
Other items 281 (3,403) ‐ ‐
Net ∆ in cash (3,708) (235) 9,093 14,785
Key ratios Y/e 31 Mar FY14 FY15E FY16E FY17E
Growth matrix (%)
Revenue growth 0.8 9.7 13.8 15.7
Op profit growth 11.2 5.6 17.9 15.7
EBIT growth 7.1 6.0 19.3 13.0
Net profit growth 4.4 5.9 19.3 13.0
Profitability ratios (%)
OPM 20.1 19.3 20.0 20.0
EBIT margin 22.7 21.9 23.0 22.4
Net profit margin 15.8 15.2 16.0 15.6
RoCE 50.7 46.7 48.4 46.0
RoNW 36.3 33.0 34.1 32.3
RoA 24.6 23.0 24.1 23.3
Per share ratios
EPS 109.8 116.4 138.8 156.8
Dividend per share 50.0 55.0 60.0 60.0
Cash EPS 116.0 122.9 145.9 164.5
Book value per share 332.0 372.8 442.0 529.3
Valuation Ratios (x)
P/E 22.5 21.2 17.8 15.7
P/CEPS 21.3 20.1 16.9 15.0
EV/EBIDTA 17.8 16.8 14.1 11.9
P/B 7.4 6.6 5.6 4.7
Payout (%)
Dividend payout 52.8 54.8 50.1 44.4
Tax payout 30.4 30.4 30.4 30.4
Liquidity ratios
Debtor days 14 14 14 14
Inventory days 12 12 12 12
Creditor days 38 38 38 38
Du‐pont analysis Y/e 31 Mar (Rs m) FY14 FY15E FY16E FY17E
Tax burden (x) 0.70 0.70 0.70 0.70
Interest burden (x) 1.00 1.00 1.00 1.00
EBIT margin (x) 0.23 0.22 0.23 0.22
Asset turnover (x) 1.56 1.51 1.51 1.49
Financial leverage (x) 1.47 1.44 1.42 1.39
RoE (%) 36.3 33.0 34.1 32.3
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