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27 November 2015

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Kingdom this document is a MARKETING COMMUNICATION. It has not been prepared in accordance with the rules in the

FCA Conduct of Business Sourcebook designed to promote the independence of research and is also not subject to any

prohibition on dealing ahead of the dissemination of research. The global contacts include: Andrew Fitchie (EU) and Leon

van Heerden (SA). Full analyst and global contact details are shown on the back page.

Aditya Jhawar

+91 (22) 6136 7415

[email protected]

Pratik Rangnekar

+91 (22) 6136 7425

[email protected]

Secto

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Auto & Auto Ancillaries

$AggregName2$

Sector review Company Rec Target

Auto & Auto Ancillari es:

India two-wheelers: Riding up the value curve

While we expect competitive intensity to hurt the profitability of the two

wheelers’ (2Ws) executive segment in India, we are optimistic about the

premiumisation trends playing out. Moreover, our analysis of Africa/ LATAM

2Ws markets suggests significant opportunities for Indian 2W exporters.

While we believe Bajaj is well positioned to benefit from premiumisation and

exports, Hero looks vulnerable to margin pressures in the executive

segment. We also think market share gains/margin expansion for TVS will

not be easy. Initiate coverage on Bajaj (Buy), Hero (Hold) and TVS (Sell).

Changing landscape to hurt as well as benefit a few: Though we expect a

slowdown in growth momentum of the domestic 2Ws industry, we identify those

segments and companies that should benefit and those that are likely to lose

out. We expect competitive intensity in the executive segment (65% of

motorcycle industry) to increase, led by Honda’s aggressive approach and

Bajaj’s desire to make a comeback, which could heighten pressure on operating

margins of the segment. In our opinion, Hero is the most vulnerable as it derives

c.70% of its volumes from the executive segment. Moreover rising income

levels and aspirational purchases should accelerate the premiumisation trend

and we believe Bajaj, with 35% market share, should be the biggest beneficiary.

Exports offer a significant opportunity: Though Indian players have

demonstrated their ability to break into overseas 2Ws markets, we believe they

have only scratched the surface. We analyse the dynamics of markets in Africa

and LATAM and conclude that these markets offer significant growth potential

for Indian 2Ws players as a) penetration is low and incremental income growth

has a magnifying effect on motorcycle sales, b) poor infrastructure and weak

public transport systems make 2Ws a good option for commuters, c) we see

room for market share gains from Chinese manufacturers as consumers trade

up. Bajaj, with an already established brand and distribution network, should be

able to gain from the export opportunity the most, in our view.

Initiate coverage on Bajaj (Buy, TP Rs. 2900), Hero (Hold, TP Rs. 2790)

and TVS (Sell, TP Rs. 200)): Trading at 16x FY17E P/E, we believe Bajaj’s

valuations are attractive given its a) industry leading margins, b) strong 16%

EPS CAGR over FY15-18E, c) robust ~30% ROCE/ROE, and d) high

FCF/Dividend yield of 5%/3%. For Hero though, we believe increasing

competition, slower domestic growth and margin headwinds, could cause the

company to miss management guidance and street’s expectation on margin

expansion. Consequently our FY17E/18E PAT are 5/6% below consensus;

however, at 15.9x FY17E P/E the stock price reflects these concerns. While

TVS seems to have captured low hanging fruit in terms of volumes in

domestic/exports markets, to chase incremental growth would be an uphill

task, in our view. TVS is trading at 15.5x FY17E EV/EBITDA, at ~30% premium

to Bajaj/Hero, despite a much lower ROCE (19% vs. ~30%/40%).

Increasing Premiumisation trends

2.02.2

2.42.7

2.93.1

18.6%

20.1%

20.8%21.3%

21.8%22.3%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

FY15 FY16E FY17E FY18E FY19E FY20E

Mill

ion

s

Premium Segment Share of Premium Segment (RHS)

Source: Investec Securities Estimates

India’s share in key African 2W markets

Nigeria (1.5m units)

TanzaniaGuinea

Kenya

EgyptBenin

Mali

AlgeriaGhana

Uganda

Mozambique

Burkina Faso

Ethiopia0

20

40

60

80

100

120

140

160

180

200

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

Siz

e o

f th

e m

arke

t ('0

00 u

nit

s)

Share of India in 2W imports (%)

Source: Nigeria total quantity is c.1.5m units, Investec Securities estimates

Bajaj Auto Buy INR2900

Hero Motocorp Hold INR2790

TVS Motors Sell INR200

Page 2 | 27 November 2015

Table of Contents

Indian 2ws industry to change lanes ..................................................................... 4

Rural areas to drive growth .................................................................................... 5

Near term pain in rural areas could hurt demand .................................................. 5

Changing landscape to benefit a few .................................................................... 8

Competition to hurt profitability of Executive segment ........................................... 8

Hero most vulnerable to rising competitive ...................................................... 10

Premiumisation trend to accelerate ..................................................................... 10

Share of scooter to increase and the industry to shift towards higher engine

displacement ....................................................................................................... 12

Exports provide significant opportunity ............................................................. 14

While China dominates the global 2Ws trade, see increasing shift towards India15

Market share gains from China ............................................................................ 16

One size fits all doesn’t work here ................................................................... 17

Africa presents a sizeable opportunity ............................................................... 19

Nigeria dominates the African market ................................................................. 21

Africa beyond Nigeria ........................................................................................... 23

LATAM: Market share gains to drive growth ...................................................... 25

Indian manufacturers gaining a strong hold in LATAM ........................................ 26

Indian players gain at the expense of Chinese ................................................ 26

Colombia- an example of Latin American potential for Indian companies ...... 28

Significant growth opportunities in LATAM ....................................................... 29

Asia could also support 2Ws export growth ...................................................... 31

Bangladesh – Indian 2Ws rule the roost ............................................................. 32

We initiate coverage on Bajaj, Hero and TVS .................................................. 33

Bajaj Auto (BAJA.NS) ........................................................................................... 35

Targeting the global market ................................................................................. 37

“Bajaj” – a strong brand in Africa & LATAM ..................................................... 38

Strong structural drivers of Africa and Latin America ....................................... 38

Decline in Oil prices to have limited impact on Nigeria volumes ...................... 39

Expect export momentum to accelerate .............................................................. 40

Along with volumes, exports brings strong profitability ........................................ 41


Domestic 2ws: New launches to spur growth .................................................... 42

Executive Segment: Confusing branding & multiple variants............................... 42

Expect volume uptick in the Executive Segment .............................................. 43

Economy Segment: CT100 & Platina to help sustain momentum ....................... 44

Premium Segment: Bajaj a prime beneficiary of the premiumisation trend ......... 44

Three wheelers provide another wheel to profitable growth ................................ 46

Sector leading operating/financial metrics ......................................................... 49

Attractive valuations – Initiate with BUY ............................................................. 52

Hero Motocorp (HROM.NS) .................................................................................. 56

Dominance in the Indian 2Ws market .................................................................. 58

Growth to slow down in economy segment ....................................................... 59

Exposure to executive segment a concern......................................................... 61

Premium segment - not Hero’s forte ................................................................... 64

High scooter industry growth to benefit Hero .................................................... 65

Export a long-term game; first, some short-term pain....................................... 67

Financial strength intact despite headwinds ...................................................... 68

LEAP or a short hop? ....................................................................................... 68

Aptly valued – Initiate with HOLD ........................................................................ 71

TVS Motors (TVSM.NS) ......................................................................................... 76

Scooters: At a respectable second place ........................................................... 78

Higher scooters industry growth to benefit TVS ................................................... 79

Premium segment: Strong positioning but limited market share gains........... 80

TVS to remain a challenger in the economy segment ....................................... 82

TVS not a serious contender in Executive segment ............................................ 83

Growth rate to decelerate in mopeds ................................................................... 84

Impressive performance in exports to continue ................................................ 86

Where does TVS stand vs the leader?............................................................. 86

Exports growth to continue ............................................................................... 87

Turnaround of Indonesian operations still some time away ............................. 88

Margins should improve, but miss guidance ..................................................... 91

Performance on financial matrix improves, but momentum to moderate ....... 93

Unwarranted valuation: Initiate with Sell ............................................................ 94


Indian 2ws industry to change lanes The Indian two wheelers industry showcases the remarkable growth experienced by

India’s consumer discretionary segment in the last decade, with sales growing at a

healthy 11% CAGR over FY01-15. The sector also bounced back quickly after a

decline in FY08, registering a 12% CAGR over FY08-15, as seen in Figure 1. This

growth was driven by an increase in volumes for both scooters (23% CAGR) and

motorcycles (12% CAGR). We attribute these improved volumes to a number of

factors including rising economic activity and income. Rural markets have witnessed

significant growth too on account of increasing penetration and aspirational

consumption with income levels bolstered by MNREGA, credit availability,

government initiatives and higher farm incomes. However, the market has slowed

recently, with the 2W industry growing by 6% CAGR over FY12-15, due to lower

GDP growth, negative real wage inflation, and limited increase in employment

opportunities and slowdown in rural demand.

In the sections below we argue that double-digit growth rates in the domestic 2W

market are a thing of the past, and based on our analysis of 2W penetration by

household/population and anecdotal evidence from other countries that have

passed through the growth phase and hit maturity, we expect the domestic market

to grow at an 7.4% CAGR until 2020E. However, we forecast strong growth in 2W

exports, and take a close look at Latin American, African and Asian markets, which

we feel are still at nascent stage and provide significant growth potential.

Figure 1: Growth in the domestic 2Ws industry moderating… Figure 2: …while share of exports in 2Ws sales on the rise

3 4 4 4

5 6 7 7

8 7 7

9

12

13 14 15

16

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

3

5

7

9

11

13

15

17

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

Mill

ion

s

Domestic 2Ws sales % YoY

8 7 7 9

12 13 14 15 16 0.6 0.8 1.01.1

1.51.9 2.0

2.12.5

8%

9%

12%

11% 11%

13% 12% 12% 12%

5%

6%

7%

8%

9%

10%

11%

12%

13%

0

5

10

15

20

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Mill

ion

s

Domestic sales Exports Exports (% of sales, RHS)

Source: Investec Securities estimates Source: Investec Securities estimates

Domestic 2Ws industry growth to slow

down to 7.4% CAGR until 2020


Rural areas to drive growth Our analysis goes beyond current cyclical pressures and suggests that India is near

a tipping point. Although total penetration of 2Ws might look optically low at 7% of

the population, the penetration has reached 67% of the addressable household in

urban areas, as seen in Figure 4. At the same time over 80% of urban households

(82 million) are already in the income bracket that can afford 2Ws, leaving little

scope of incremental addition of new target customers for 2Ws in urban areas. On

the contrary, rural markets offer significant growth opportunity considering the

relatively lower level of penetration and higher scope of addition of new target

customers. Penetration of 2Ws in rural areas currently stands at 39% of

addressable households as seen in Figure 5. Moreover, 40% of households are yet

to come in the income bracket who can afford 2Ws, which should potentially drive

relatively stronger growth of 2Ws in the rural markets.

By 2020 we expect penetration of 2Ws to reach 63% of addressable households on

a pan-India basis (from 52% currently) with most of the growth driven by an

increase in penetration and addition of addressable households in the income

bracket that can afford 2Ws in rural areas.

Figure 4: Though we expect urban demand to slowdown… Figure 5: …rural markets offers significant opportunity

73

85

97

67

82

96

49%

67%

80%

40%

50%

60%

70%

80%

90%

50

60

70

80

90

100

FY10 FY15E FY20E

Urban total HH (mn)

Addresable HH (mn)

2Ws penetration (% of addresable HH)

161

173183

73

103

142

29%

39%

50%

20%

30%

40%

50%

60%

50

100

150

200

FY10 FY15E FY20E

Rural total HH (mn)

Addresable HH (mn)

2Ws penetration (% of addresable HH)


Near term pain in rural areas could hurt demand Domestic motorcycle volumes have been relatively subdued over the last few

months as seen in Figure 6. In our opinion, this is a reflection of slowdown in rural

demand. Our channel checks in rural areas indicate relatively weak sentiments

driven by disrupted monsoon both in FY15 and FY16.

Figure 6: Monthly run-rate of domestic motorcycles volumes Figure 7: Monthly run-rate of domestic scooters volumes

752

842 841

873

897886 879 876

-10%

-5%

0%

5%

10%

15%

20%

25%

700

750

800

850

900

950

FY

11

FY

12

FY

13

FY

14

FY

15

Jul-1

5

Aug

-15

Sep

-15

Th

ou

san

ds

Motorcycles YoY (%) (RHS)

173

213244

300

376 386 391 393

10%

15%

20%

25%

30%

35%

40%

45%

100

150

200

250

300

350

400

450

FY

11

FY

12

FY

13

FY

14

Apr

-15

Jul-1

5

Aug

-15

Sep

-15

Th

ou

san

ds

Scooters YoY (%) (RHS)


Figure 3: 2Ws % of addressable households

49%

67%80%

29%39%

50%39%

52%63%

20%

40%

60%

80%

FY10 FY15E FY20E

Urban Rural All India

Source: Investec Securities estimates


In our opinion, there are strong drivers at play which could drive rural

demand:-

Growth in non-farm sector: Given the limited rural to urban migration in India,

a large segment of the population remains in rural areas. However,

employment trends in rural areas over the last decade indicate a sharp increase

in trade, infrastructure and construction- particularly of hotels and restaurants -

driving rapid growth in the rural non-farm sector. Other areas of growth include

retail trade, STD/PCO telephone booths and the maintenance and repair of

motor vehicles. Share of Agriculture in rural workforce has come down from

84% in 1978 to 68% in 2010 as per NSSO as seen in Figure 9. Also, As part of

the increasing government spend on infrastructure projects in rural areas, the

laying down of roads in rural areas has resulted in a significant uptick in

construction activity thereby increasing employment in the construction sector.

As seen in Figure 8, share of rural labour force in the construction sector has

increased from 2% in 1994 to 9% in 2010 and in our opinion, this trend should

continue for the foresaid reasons. Moreover the share of non Agri Income has

increased from 14% in 1999 to 28% in 2007, as seen in Figure 10 and Figure

11, thereby further reducing dependence on Agriculture sector for earning

means of livelihood.

Figure 9: Distribution of workforce in rural India

84% 83% 80% 80% 78% 75% 75% 68%

0%

20%

40%

60%

80%

100%

1978 1983 1988 1994 2000 2005 2008 2010

% d

istr

ibu

tio

n o

f w

ork

ers

Agriculture Construction

Manufacturing Trade/Hotel/Restaurant

Transportation & Storage Others

Source: Investec Securities Research, NSSO

Figure 10: Income distribution of rural India in 1999 Figure 11: Income distribution of rural India in 2007

Agri profit 72%

Agri wages 7%

Non-agri wages 7%

Non-farm selfemployment

7%

Salaries & renting out agri

assets 7%

Agri profit 62%

Agri wages 5%

Non-agri wages 8%

Non-farm selfemployment

20%

Salaries & renting out agri

assets 5%

Source: Investec Securities Research, NSSO Source: Investec Securities Research, NSSO

Wealth in the rural economy has increased significantly: Over the past

decade, although liquidity in India’s rural economy has not increased

significantly, immovable wealth (as a proportion of the rural economy) has

increased substantially given the multi fold increase in land prices, which has

also led to a vast divide in wealth amongst people in rural areas. All this has

happened due to the better connectivity created by road/rail networks over the

last decade, leading to a drastic cut in distance, travel times and ease in

Figure 8: Workforce split in rural areas

80% 78% 75% 75% 68%

2% 3% 4% 5% 9%

0%

30%

60%

90%

1994 2000 2005 2008 2010Agriculture Construction



travelling between urban and rural centres. Examples abound of farmers in

Gurgaon and Noida owning premium luxury vehicles or the multi fold increase

in price of non-arable land in Rajasthan.

Diversification out of agriculture: Within the agricultural sector a trend of

people moving towards remunerative self-employment in the non-farm sector is

also evident, highlighting a shift to a productive and modern model of part-time

farming.

All this augurs well for growing 2W demand in rural areas where

penetration is still low, at 39% of addressable households.

Figure 12: Rural to contribute more in domestic motorcycles volume Figure 13: …which should drive aggregate volumes of motorcycles

61% 54%40%

40% 46%60%

0%

20%

40%

60%

80%

100%

FY10 FY15 FY20

Urban Rural

10.8 10.8

11.6

12.4

13.2

14.0

3%

0%

8%

7%

6% 6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5


Mill

ion

s

Motorcycles % YoY (RHS)



Changing landscape to benefit a few Though we expect slowdown in the growth momentum of the Indian domestic 2Ws

industry, we identify those segments and companies that tend to benefit and those

that are disadvantaged. We expect competition to further intensify in the Executive

Segment leading to a market share tussle which could potentially put pressure on

margins of the segment. Hero Motocorp should be the

most impacted as the Executive Segment contributes c.70% to Hero’s volumes.

Furthermore, we expect the premiumisation trend to rise further on account of rising

income and aspirations of consumers which could drive the share of the premium

segment in the industry from 19% in FY15 to 23% by FY20E. In our opinion, Bajaj

Auto being a dominant player in the segment, with market share 35% in FY15,

should be a prime beneficiary of this trend.

We expect the following trends to emerge in the domestic two wheeler

industry in India:-

Competition to hurt profitability of Executive segment Executive segment’s volumes, representing ~62% of the motorcycle industry,

reported a decline of 2% YoY in FY15 as compared to growth of 9% and 15%

reported by Economy and premium segment respectively in FY15. Also, comparing

volume growth across segments over last few years suggest that growth in the

Executive segment has lagged both Economy and Premium segments. Executive

segment has reported a CAGR of 0.7% over FY12-15, while Economy and

Premium segments have grown at a relatively higher CAGR of 4% and 6%

respectively over the same period.

We expect the share of executive segment to shrink from 62% in FY15 to 59% by

FY20 leading to segment reporting relatively slower growth of 4.3% CAGR over

FY15-20, which could further intensify the market share tussle between players.

Though Hero has managed to maintain its leadership in the segment, with 66%

market share in the executive segment, there is a lot of market share swing

amongst the players over the years, as seen in Figure 16, primarily reflecting

increasing competitive intensity in the segment.

Figure 15: Growth moderates in Executive segment… Figure 16: …and market share tussle further intensifies

4.7

5.86.5 6.5 6.8 6.7

29%

23%

12%

-1%5%

-2%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

FY10 FY11 FY12 FY13 FY14 FY15

Mill

ion

s

Executive % YoY

-4%

-6%

2%

-6%

-2%

5% 6%

0%

2%0%

5% 5%

3%

-2%

5%4%

-1%

0%

-6% -6%

-4%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

FY10 FY11 FY12 FY13 FY14 FY15 FY16YTD

YoY market share change in executive segment

Hero Honda Bajaj


Table 1: Motorcycle segments

Segments Engine capacity Price points

Economy < 110 cc < Rs.45,000

Executive 110 -150 cc Rs.45,000- Rs.65,000

Premium > 150 cc > Rs.65,000

Source: CRISIL, Investec Securities Research

Figure 14: Executive segments growth lags

20%

4%

-1%

9%14%12%

-1%

5%

-2%

-11%

3%

-3%

5%

15%

2%

-20%

-10%

0%

10%

20%

30%

FY12 FY13 FY14 FY15 FY16YTD

Economy Executive Premium

Source: Investec Securities Research, CRISIL


Going ahead we expect that the competitive intensity to further intensify in

the executive segment primarily driven by Honda and Bajaj Auto:-

Honda’s increase in marketing push: Our interactions with one of the largest

dealers of Honda in Western India (contributing ~1% to Honda’s annual volume)

suggest a relatively lukewarm customer response to the 2015 CB Shine (125 cc)

launched Honda. According to the dealer the new graphics, relatively simpler looks

and higher price point failed to create excitement among new customers. This

resulted int Honda’s market share in the executive segment falling from the peak of

25% in Sep’15 (monthly volume of 155K units) to 20% in July’15 (monthly volume of

92K units) as seen in Figure 18.

Decline in volumes of Shine led to an aggressive marketing push by Honda.

During our channel checks we were told that Honda is pushing volumes of Shine

(executive segment) even though demand environment for motorcycles remains

subdued. We were told that Honda is making it compulsory for dealers to take

delivery of Shine (slowing moving product now), if the dealer wants delivery

of Activa (good demand product). However to liquidate inventory of Shine,

dealers have to come out with offers at their own expense. We came across offers

such as gifts worth Rs.3,000 (like Kitchen articles, Sun Glasses, portable speakers),

1 gram gold coin (~worth Rs.3000), Rs.5000 cash discount, etc.

Furthermore, Honda’s recent launch of Livo (110 cc) in the Executive segment

seemed to have increased some traction after the subdued response to the Dream

series. Though it is bit early to gauge the success of Livo, we could see

encouraging response from potential customer and dealers.

In sections ahead we analyse why it is important to break into the

Executive segment for Honda to fulfil its desire to become Numero Uno in

India

Bajaj’s desire to make a comeback: Bajaj Auto’s market share in the executive

segment (Discover family) has come down to 4.1% in FY16YTD (Apr-Sep’15) from

20% in FY13, as seen in Figure 19. We believe the main reasons are 1) a

confusing branding strategy for its Discover platform, wherein it launched multiple

bikes with the same branding, 2) non-focused product promotions due to multiple

models and 3) the discontinuation of a few nonworking models, thereby impacting

their re-sale value and branding. However, our recent interaction with Bajaj Auto’s

management suggest a strong desire to reclaim market share in the executive

segment with a reengineered strategy and a new product launch in 2HFY16. In our

opinion, the desire to reclaim market share could potentially lead to new product

launches at aggressive pricing, enhanced features and increased marketing efforts.

This could up the ante in the executive segment thereby increasing pressure on

industry margins, in our view.

Figure 18: Honda market share in executive segment Figure 19: Bajaj Auto market share in executive segment

17

19

21

23

25

90

100

110

120

130

140

150

160

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Honda executive segment (Volumes)

Honda Executive segment market share (RHS)

(%)(000' Units)

0

2

4

6

8

10

12

14

0

20

40

60

80

100

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Bajaj executive segment (Volumes)

Bajaj Executive segment market share (RHS)

(%)('000 Units)


Honda dealers are offering gold coin,

gifts and cash discounts to liquidate

inventory of Honda Shine

Figure 17: Honda’s aggressive push for Shine

Source: Investec Securities Research


Hero most vulnerable to rising competitive

Underpinned by increase in competitive intensity and expectation of relatively

slower growth of the executive segment could mean heightened pressure on

operating margins of the segment. As per our interaction with management of Bajaj

Auto, EBITDA margin of the executive segment has come down to 10-11% currently

as compared to 13%-15% a couple of years ago. Pressure on profitability in the

executive segment could hurt Hero the most as it derives 67% of the volumes from

the executive segment, as seen in Table 2.

Table 2: Hero’s 67% volumes come from executive segment making it the most vulnerable to the increased competition

Company

Proportion of volumes from executive segment

(FY15) Brands Monthly run-rate FY16 Market Share -

FY15 Market Share -

FY16YTD*

Hero Motocorp 67% Splendour 206,330

Passion 105,581

Glamour 56,901

Total 368,812 66.3% 72.1%

Honda Motorcycles & Scooters 34% Shine 69,015

Dream series (Yuga & Neo) 35,966

Total 104,981 22.5% 20.6%

Bajaj Auto 15% Discover series 21,228 8.4% 4.1%

Source: Investec Securities Research. Note* FY16YTD – April’15-Sep’15

Premiumisation trend to accelerate Motorcycles can be categorized into three segments in India: 1) economy/entry

segment (engine capacity <110cc, launch price < Rs.45,000); 2) executive segment

(engine capacity 110-150cc, launch price Rs.45,000-65,000); and 3) premium

segment (engine capacity >150cc, launch price > Rs.65,000). The executive

segment continues to be the preferred choice of customers, and this segment

accounts for 65% of industry volumes. However, this mix has changed significantly

in recent years, with the share of the economy segment contracting from 25% in

FY09 to 20% in FY15, primarily as rising incomes have led consumers to trade up

to the executive and premium segments. This has increased the share of the

executive segment from 61% in FY09 to 62% in FY15 and the premium segment

from 14% to 19% in the same period.


Figure 20: Share of premium segment to further increase… Figure 21: …leading to higher than industry growth

25% 19% 17% 19% 19% 18% 20% 22% 21% 20% 19% 18%

61% 64% 64% 65% 64% 65% 62% 58% 58% 58% 59% 59%

14%17% 18%17% 16% 17% 19% 20% 21% 22% 22% 23%

0%

20%

40%

60%

80%

100%


8.3%

7.2%

10.5%

7.9%

3.7%4.3%

10.0%

5.4%

3%

4%

5%

6%

7%

8%

9%

10%

11%

Economy Executive Premium Total Motorcycles

CAGR FY10-15 CAGR FY15-20E


In our opinion, as aspirations and income level of potential customers of 2Ws

improve further, customers would try to move up the ladder towards the premium

segment and the pace of adoption to the premium segment should accelerate in our

view. Also, increased number of product offerings and product launches by different

players in the premium segments has increased awareness and made the segment

more appealing to potential customers. Between FY10-15 the share of premium

segment increased by 2% to 19% of the domestic motorcycles industry. We expect

the move to the premium segment to accelerate, driving the share of the premium

segment to 23% by 2020, resulting in higher industry growth for the segment. We

expect the premium segment to grow at 10% CAGR over FY15-20E, significantly

ahead of 5% CAGR growth expected by the domestic motorcycle industry.

Bajaj Auto, being a dominant player in the segment with ~33% market share, should

be biggest beneficiary of the trend of premiumisation in the domestic 2Ws industry.

Figure 23: Share of premium segment on the rise Figure 24: Bajaj Auto should be the prime beneficiary

2.02.2

2.42.7

2.93.1

18.6%

20.1%

20.8%21.3%

21.8%22.3%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2


Mill

ion

s


0%

10%

20%

30%

40%

50%

Bajaj Auto EicherMotors

Yamaha Honda TVS Hero

FY09 FY10 FY11 FY12 FY13 FY14 FY15


Figure 22: Change in segment share

0%

-2%

2%

-2%

-3%

5%

-5%

0%

5%


FY10-15 FY15-20E



Share of scooter to increase and the industry to shift

towards higher engine displacement The 2W market in India was historically dominated by motorcycles; however, over

the past five years a shift in consumer preference towards gearless scooters has

been evident. This, we believe, is primarily on account of new launches with more

powerful engines and improved mileage, design and ride quality. All this indicate

that consumers, especially in urban areas, seem to increasingly prefer scooters as

a second vehicle to move around in traffic congested cities. Moreover, women, who

in India have historically shied away from motorcycles, are now major buyers of

scooters. This trend has helped scooters outgrow motorcycles — at a 25% CAGR

over FY10-15 vs. the 8% CAGR growth registered by motorcycles in the same

period. Scooters, which accounted for a 16% share of domestic 2W sales in FY10,

now control 28% of the industry in FY15.

The Indian scooter industry is shifting toward higher engine displacements (from

c.100 cc to 110cc and above) which in our opinion is driven by increasing

preference for more powerful engines, improved mileage, design and ride quality.

This shift has resulted in TVS losing market share in from 21% in FY08 to 13% in

FY14, before they could tweak their portfolio to include 110 CC Jupiter (Sep’13) and

Scooty Zest (Aug’14) which increased market share of TVS to 15% in 1HFY16.

Hero launched 110 cc scooters – Maestro Edge (Sep’15) and Duet (Oct’15) which

in our view should help Hero market share by 100bps over 1HFY16-FY17 to 14%.

Moreover, we expect a gradual increase in proportion of 125cc scooters (relatively

small now) as technological advancement drives further improvement in fuel

efficiency. Players will have to equip their portfolio with 125cc engine displacement

scooters to benefit from this trend. Currently, the market leader Honda is the only

major player with product offering in the 125cc engine displacement.

Along with the factors outlined above we expect the improvement in rural

infrastructure to help scooters maintain the strong growth momentum. Overall we

expect volumes of scooters in the domestic market to grow by 12% CAGR over

FY15-20 leading to share of scooters increasing from 28% in FY15 to 35% by

FY20E.

Figure 25: Share of scooters to further trend upwards… Figure 26: …leading to higher growth than motorcycles growth

1.5 2.1 2.6 2.9 3.64.5 5.0

5.8 6.5 7.2 7.9

16%18%

19%21%

24%

28%30%

32% 33% 34% 35%

15%

20%

25%

30%

35%

40%

1

2

3

4

5

6

7

8

9

Mill

ion

s

Scooters Scooters share (%) (RHS)

12%

15%

12%11%

10%

12%

0%

8%7%

6% 6% 5%

2%

5% 5% 5% 5% 4%

0%

2%

4%

6%

8%

10%

12%

14%

16%

FY16E FY17E FY18E FY19E FY20E CAGRFY15-20E

Scooters Motorcycles Mopeds


Expect increase in preference for

scooters to continue …

…and expect industry to shift towards

higher engine displacement

While Hero/TVS have equipped

themselves with scooters in 110 cc

engine displacements, they should

also look at expanding portfolio

towards 125cc, which currently only

Honda has presence in amongst the

top three players


Figure 27: Honda dominates scooters market with c.60% share Figure 28: Shift toward bigger engines dents TVS market share

40%

45%

50%

55%

60%

5%7%9%

11%13%15%17%19%21%23%

Honda (RHS) Hero TVS Susuki

12%

9%

6%4%

2%

19%

15%13%

15% 15%

0%

5%

10%

15%

20%

25%

FY12 FY13 FY14 FY15 1HFY16

Industry share of scooters between ≤ 90 cc TVS Market Share


Higher proportion of domestic scooters in aggregate volumes makes TVS a

preferred play on the scooterisation trend.

Figure 29: Domestic scooters volume share (%) Figure 30: Market share in Indian scooters market

79

11 11 11

2321

22

27 28

5

10

15

20

25

30

FY

12

FY

13

FY

14

FY

15

FY

16Y

TD

Hero TVS

(%)

16

19 19

17

13

19

15

13

15 15

10

12

14

16

18

20F

Y12

FY

13

FY

14

FY

15

FY

16Y

TD

Hero TVS

(%)


Table 3: Domestic two wheelers industry growth expectations

Sales in units FY14 FY15 FY16E FY17E FY18E FY19E FY20E

Bikes 10,479,819 10,759,664 10,576,750 11,422,890 12,222,492 12,955,841 13,733,192

Scooters 3,602,744 4,506,289 5,047,044 5,804,100 6,500,592 7,215,657 7,937,223

Mopeds 722,920 755,503 725,283 761,547 799,624 839,606 881,586

Total Two wheelers 14,805,483 16,021,456 16,349,076 17,988,537 19,522,709 21,011,104 22,552,001

Growth Bikes 4% 3% -2% 8% 7% 6% 6%

Scooters 23% 25% 12% 15% 12% 11% 10%

Mopeds -8% 5% -4% 5% 5% 5% 5%

Total Two wheelers 7% 8% 2% 10% 9% 8% 7%

2W Market split Bikes 71% 67% 65% 64% 63% 62% 61%

Scooters 24% 28% 31% 32% 33% 34% 35%

Mopeds 5% 5% 4% 4% 4% 4% 4%



Exports provide significant opportunity Over the last 15 years (FY00-FY15) India’s export of 2Ws has grown at a 23%

CAGR in volumes terms and by 27% CAGR over the same period in value terms.

From little over 100K 2Ws exported in FY00, India exported ~2.5 million units in

FY15. The surge in exports is primarily driven by strong growth in exports to African

and Latin American countries and steady growth in Bangladesh and Sri Lanka.

Given the strong growth in exports, share of exports in aggregate 2Ws volumes

increased from 2% in FY00 to 13% in FY15, as seen in Figure 31.

We undertake an analysis of the dynamics in each of these markets in LATAM,

Africa and Asia in the sections below and come to the conclusion that these

markets offer huge growth potential for Indian 2W companies, primarily as: 1) these

markets are still at a nascent stage, with very low penetration, which means that

even limited incremental growth in income has a magnifying effect on motorcycle

sales; 2) Infrastructure in some of these markets is very poor and public transport is

sometimes non-existent (more so in some African countries), hence motorcycles

offer a good alternative for commuters; 3) We see room for market share gains from

Chinese motorcycle manufacturers, who still hold a majority share in these markets,

as they are typically of lower quality and use old technology even though they

provide motorcycles at cheaper price points. Having established a strong brand in

most of these markets, we think Bajaj clearly has the first mover advantage and

should be in a better position than Hero to capture growth.

Figure 32: Share of exports in India’s 2Ws on the rise

2%

3%

4%

5%

4%

4%

4%

3%2%

3%2%

4%

5%6%

7%7%

10%

12%

11%12%

13%12%

12%

13%

1%

3%

5%

7%

9%

11%

13%

15%

-

500

1,000

1,500

2,000

2,500

3,000

FY

92

FY

93

FY

94

FY

95

FY

96

FY

97

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

Th

ou

san

ds

Exports Exports (% of sales, RHS)

Source: SIAM, Investec Securities Research

Figure 31: 2W exports growth outpace domestic

12%

9%

11%

10%

17%

17%

23%

17%

0% 5% 10% 15% 20% 25%

5 year

10 year

15 year

20 year

Exports (% YoY) Domestic (% YoY)


Figure 33: Share of India 2Ws export FY15

Colombia 15% Sri

Lanka 12%

Nigeria 12%

Bangladesh 8%

Philippines 6%

Nepal 6%

Others 42%

Source: Ministry of commerce, Investec Securities Research


Figure 34: India’s exports of 2Ws has increased by 27% CAGR over FY00-FY15

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000F

Y98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

US

$ m

Colombia Sri Lanka Nigeria Bangladesh Philippines Nepal Angola Kenya

Uganda U.A.E Mexico Peru Guatemala Egypt Iran Others

Source: Ministry of Commerce, Investec Securities Research

While China dominates the global 2Ws trade, see

increasing shift towards India Global trade of 2Ws is estimated to be ~US$20bn in 2014 with China dominating

with the third of the share at 28% with exports of 2Ws worth US$5.8bn. India is

the third-largest exporter at US$1.8bn in 2014, following remarkable growth in

exports from US$62m in 2000. India and China are emerging as global power

house of 2Ws exports globally with share of China in global 2Ws trade increasing

from 16% in 2005 to 28% in 2014. While India’s share increased from ma ere 2%

to 9% over the same period.

Figure 36: Share of countries in 2Ws global trade

16% 18% 20% 22% 21%27% 30% 29% 29% 28%

38% 36% 32% 26%21%

19% 17% 16% 14% 15%

2% 2%1%

2%4%

5% 6% 7% 8% 9%

5% 6%7% 7%

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

39% 38% 40% 42% 46% 42% 40% 41% 42% 41%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

China Japan India USA Others


Figure 35: Share in global 2ws trade – 2014

China 28

India 9

Japan 15USA 7

Germany 9

Italy 7

Thailand 6

Others 20

Source: UN Comtrade, Investec Securities Research


Market share gains from China Increased penetration of 2Ws in China and increasing government restriction of

2Ws sales in certain provinces were one of the reasons that resulted in Chinese

companies looking for growth avenues overseas leading to surge in 2Ws export

from China. In 2014 China exported 11.4 million 2Ws representing ~55% of total

2Ws sales from China. However in our opinion, rising exports from India could

compete with China and potentially overtake China as:-

Indian companies offer a better quality proposition: Our channel checks in

Nigeria and Sudan suggest that quality is a perennial issue with Chinese

motorcycles. As per 2W dealers the only unique selling proposition that

Chinese motorcycles offers is low cost offering with limited focus on product

durability. This is also reflected in the consistently lower average realisation for

Chinese 2Ws exports as compared to Indian motorcycles. In 2014, average

realisation for 2Ws exports from China stood at US$ 504 per unit which is

~30% cheaper as compared to the average realisation of 2Ws exports from

India as seen in Figure 37. We believe that Indian players have an advantage

over their Chinese competitors in this area.

Figure 37: Average 2Ws export realisation from China significantly lower as compared to India

264

321

359

421 417 415

457

503 512 504

605 618

531 553

494 525

682 702

723 710

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Realisation /unit (US$)

China India


Poor after sales service by Chinese companies: Our checks with dealers in

the markets of Nigeria and the South of Sudan (where Indian players have

made substantial inroads) suggest that Chinese motorcycles are losing

popularity as after sales service of Chinese motorcycles can be a major issue,

and consumers sometimes struggle to find service centres to fix their

motorcycle. Our checks also highlighted that people acknowledge Bajaj’s good

quality and lower need of maintenance as compared to Chinese motorcycle

brands.

Chinese manufacturers don’t have muscle/desire to invest in technology:

Our talks with dealers in Africa highlight that almost 20-50% Chinese

motorcycles have some defect. This is where we think Indian companies are

drawing consumers’ attention as they are shaping the two wheeler market in

low income but high potential countries (as they have done in India, which was

in a similar position few decades ago). India has a huge domestic market with

three major domestic players (Hero, Honda and Bajaj) holding over 80% market

share. We think this means that the industry has been fairly disciplined and

these companies have the financial muscle to innovate with high-quality

products, cut costs due to volume and aggressively expand in other markets.

Chinese motorcycles are ~30%

cheaper but Indian offer better quality

proposition

Indian score quite well on after sales

service as compared to Chinese

Bajaj has built a strong brand around

durability, quality and need of lower

maintenance

Chinese manufacturers don’t have

muscle/desire to invest in technology


Although Chinese domestic motorcycle market and exports are huge, the

industry is fragmented with over 50 players, and the top 10 players collectively

hold c.60% market share. We think this makes it more difficult for any one

player to be highly profitable and pricing wars are very common, with pricing

taking precedence over quality.

Manufacturing in China is becoming more expensive: On the back of rising

wage inflation the cost of manufacturing in China is increasing every year.

Chinese manufacturing wages have increased c.400% in CNY terms over the

last 10 years. Comparatively, motor vehicle manufacturing wages have grown

by a 80% in India over the same period.

Figure 38: Comparing manufacturing wage inflation in China and India

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%20

03

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

China India

Source: National bureau of statistics China , Labour Bureau GOI, Investec Securities research

Over 2004-2014 exports of 2Ws from China has grown at 1% CAGR to 11.4 million

units while exports from India has grown by 21% CAGR over the same period to 2.6

million units as seen in Figure 39. We expect this trend to further accelerate.

One size fits all doesn’t work here

Indian companies have several decades of experience in developing the 2W market

in India, arguably the most diverse market in the world, and hence we think they

have the experience needed to woo a diverse range of customers. African and Latin

American countries display similar diversities. Hero, Bajaj & TVS are working hard

directly and through partnerships to develop the market by launching products

which are customised for these markets, combined with market-relevant ad

campaigns. Furthermore, we think the Indian players understand the importance of

pre-sales experience, quality service and brand building. On the other hand, we

think Chinese players often are at a disadvantage in this respect, with a limited

focus on brand building and often low-quality service. Often their only focus seems

to be on manufacturing and pushing motorcycles in these markets at lower prices,

an edge which they are slowly losing.

Chinese manufacturing wages have

increased c.400% over the last 10

years


Figure 39: Pace of 2Ws exports from India accelerate while China is not growing

300

800

1,300

1,800

2,300

2,800

0

2,000

4,000

6,000

8,000

10,000

12,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

India (RHS) China

('000 units) ('000 units)

Source: Un Comtrade, Investec Securities estimates


Africa presents a sizeable opportunity Given the limited statistics available on African markets we analyse the international

trade flow data on 2Ws to understand the opportunities and market dynamics of

each of these markets. In our view, given the limited manufacturing of two wheelers

in the frontiers markets of Africa, trade flow data gives a good representation of

these markets.

The African two wheeler market, excluding South Africa, in estimated to be worth

US$2bn in 2014 with volumes of 3.4 million units. Value of exports of two wheelers

to frontier markets of Africa have grown at a CAGR of 22% between 2000 and

2014. Nigeria is the biggest African market, representing 42% (as seen in Figure

41) of the regions 2W demand, with 1.5m unit sales worth over US$ 722m in 2014.

Despite this strong growth in the region, we estimate penetration in most African

countries (except for Nigeria) is still very low. We estimate that average penetration

of 2W in Africa is 3.4%, with Nigeria having the highest penetration at 7.6%; ex

Nigeria, the region has a 2W penetration of just 2.2%.

In most of the frontier markets of Africa, infrastructure and public transport is

virtually non-existent with well paved roads restricted to top 2-3 cities in each

country. During our channel checks in Nigeria we were made to understand that the

lower middle class in the region either walks to work or use Boda-boda (two wheeler

taxi).

Over the last few years there has been an increasing trend of opting for two

wheelers as a personal mode of transport. Hence we believe 2Ws could play a

major role as a mode of transport either by way of commercial taxi or as a personal

mode of transport.

Figure 40: Africa’s 2W market has grown at 22% CAGR over 2000-14 Figure 41: Key African frontier markets for 2Ws – CY14

-

200

400

600

800

1,000

1,200

1,400

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

US

$ m

Nigeria 42.0%

Morocco 6.3%Tanzania 5.9%

Guinea 5.3%

Kenya 4.9%

Egypt 4.5%

Congo 4.1%

Benin 3.9%

Mali 3.6%

Algeria 3.1%

Ghana 2.9% Others 13.4%

Source: UN Comtrade, Investec Securities Research Source: UN Comtrade, Investec Securities Research

Africa market share swing from Japanese to Chinese and now to Indian

The frontier markets of Africa have seen interesting market share swing in the 2Ws

market among the Japanese, Chinese and Indian players historically. Advent of

imports from China resulted in a cumulative share of Japanese manufacturers

falling from 43% in 2000 to a mere 2% in 2014. It’s worthwhile to note that the share

of Japanese companies in 2014 should be a tad higher if we include the production

facility started by Honda in Nigeria and Kenya with aggregate capacity of 0.15

million units. On the other hand, cumulative market share of imports from China

increased from 25% in 2000 to 68% in 2014, as seen in Figure 42.

However going ahead, we expect significant market share gains for Indian players

in Africa primarily from the Chinese manufacturers, as explained in earlier sections

– “Market share tussle with China”


Figure 42: Market share in frontier markets of Africa

25

46 53

77 80 79 84 81 78 65

73 73 67 65 68 4

4

5

2 3 3

4 6 12

19 18 18 24 28 26

43

28 20

11 9 7

6 5 5 5

4 3 3 2 2 27 22 22

10 8 10 6 8 6 10 5 6 6 5 4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

China India Japan Others


Figure 43: Indian player have made inroads in key markets… Figure 44: …still presenting significant opportunities to explore

722

102 91 85 78 70 67 63 54 50

35%

14%21%

45%50%

17%2% 1% 2% 5%

0%

10%

20%

30%

40%

50%

60%

-

200

400

600

800

US

$ m

Size of the market (US$ m) Market share of India (RHS)

1,510

185 186 153 130 135 126 144 83 78

35%

14%21%

45%50%

17%2% 1% 2% 5%

0%

10%

20%

30%

40%

50%

60%

-

500

1,000

1,500

2,000T

ho

usa

nd

s

Size of the market ('000 units) Market share of India (RHS)


Though Africa’s 2Ws market (ex-South Africa) has grown at 12% CAGR over 2006-

2014, India’s exports to Africa have grown by 43% CAGR over the same period as

seen in Figure 45. The surge in India’s exports to Africa is primarily driven by

Nigeria, which reported growth of over 60% CAGR over the same period.

Figure 45: India’s 2Ws export to Africa has grown at 43% CAGR Figure 46: Destination for India’s 2Ws export Africa - FY15

-

50

100

150

200

250

300

350

400

450

500

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Nigeria Angola Kenya Uganda Egypt

Guinea Tanzania Congo Others

(US$m)

Nigeria 45%

Angola 9%Kenya 9%

Uganda 9%

Egypt 8%

Guinea 4%

Tanzania 3%

Congo 3%

Others 10%

Source: Ministry of Commerce, Investec Securities Research Source: Ministry of Commerce, Investec Securities Research


Nigeria dominates the African market Nigeria was the first country in the frontier markets of Africa to experience the 2Ws

boom. Sales of 2Ws in Nigeria grew from 0.1m units in 2000 to 1.5 million units in

2014 (a 20% CAGR). The country represented 42% of Africa’s 2W demand, with

1.5m unit sales worth over US$ 722m in 2014.

Though the penetration of 2Ws in Nigeria stands at ~7.1%, more than half of the

2Ws sold in Nigeria are used as commercial taxis, popularly called Boda-boda, A

substantial amount of motorcycles in Africa are used for commercial purposes such

as taxis and are known by different names in different countries: Okada (former

Nigerian airline) in Nigeria, Boda-Boda (border to border) in Kenya and Uganda,

Zemidjan (take me fast) in Benin, Kabu Kabu in Niger, Velo-taxi in Senegal, Oleyia

in Togo, and Bendkin in Cameroon. High unemployment rates and poor public

transport created the opportunity for two wheelers to be used as taxis (able to

transport up to two customers as well as luggage, enabling the driver to earn a good

income). Demand for these taxis was substantial, as many African countries grew

rapidly with nearly non-existent public transport. As two wheelers were unaffordable

for many consumers, financing companies cropped up and provided funding to buy

a 2W taxi by keeping it as collateral.

Figure 48: Nigeria 2Ws market has grown at 20% CAGR Figure 49: Volume of Nigeria 2Ws market

48 92

141

287 277

348 406

436

615

380

529

747

543

647

722

-

100

200

300

400

500

600

700

800

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

US

m

0.10.2

0.4

0.9 0.9

1.1

1.31.5

1.7

1.01.1

1.7

1.1

1.41.5

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Mill

ion

s


Indian players gain significant market share in Nigeria

Indian players have seen immense growth in Nigeria with India’s 2Ws export

growing by 73% CAGR over FY06-15. Most of this growth has come from market

share gains at the expense of Chinese players with the market share of Indian

players in Nigeria growing from just 1% in 2006 to 36% in 2014. Chinese players

cumulative market share declined by 34% in the same period to 62% in 2014.

Bajaj Auto is the single largest player with over 30% market share in Nigeria. Our

primary channel checks indicate that Bajaj has become known for superior quality

and need for lower maintenance in most of the African countries.

Figure 50: Market share of Indian players on the rise Figure 51: Driving strong growth in India’s export of 2Ws to Nigeria

96 92 84 69 75 75

60 58 62

1 4 12

28 22 23 37 39 36

-

20

40

60

80

100

2006 2007 2008 2009 2010 2011 2012 2013 2014

China India

2 6

31

85 104

127

188

212 225 225

1

51

101

151

201

251

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

US

$ n


Figure 47: Boda-boda stand in Nigeria


Bajaj Auto is the single largest player

with over 30% market share in Nigeria


Dependence on Crude is reducing

Petroleum exports as a proportion of GDP have fallen from 34% in 2011 to 22% in

2014 indicating the reducing dependence of the Nigerian economy on oil.

Nonetheless even at this level, oil remains one of the prime drivers of the economy.

The price of oil has corrected c.50% since the beginning of 2015. During the last

instance of such a fall in 2009, Nigeria's GDP fell 19%. This time around one would

need to account for the reduced contribution of petroleum products to GDP which

could mean relatively lower impact on the economy and there by demand of 2Ws.

Figure 52: Strong correlation between 2Ws & GDP Growth Figure 53: Correlation between oil exports and GDP growth

-50%

-25%

0%

25%

50%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

GDP growth (%) 2Ws volume growth (% YoY)

-60%

-30%

0%

30%

60%

20.0

25.0

30.0

35.0

40.0

2007

2008

2009

2010

2011

2012

2013

2014

Oil exports GDP growth (RHS) Oil exports (% YoY) (RHS)

(% of GDP) (% YoY)

Source: OPEC, Investec Securities Research Source: OPEC, Investec Securities Research

Strong long term prospects

Near term headwinds brought on by lower crude prices should lead to weak GDP

growth but we believe that the long term potential of Nigeria as Africa’s leading two

wheeler market remains intact driven by strong structural drivers of the economy.

As per IMF, the pace of expansion of the Nigerian economy should accelerate

from 2016 after an expected slowdown in 2015, as seen in Figure 55. This, in our

view, should drive the per capita income and thereby increase the preference for

2Ws as a personal mode of transport. Our channel checks in Nigeria also reveal

that as the income of people increase they tend to opt for 2Ws as a personal mode

of transport as compared to using 2Ws commercial taxi. In our opinion, this could

potentially create a big opportunity for Indian 2Ws manufacturers over the medium

term.

Figure 55: Near term headwinds should recede … Figure 56: …driving uptick in per capita income

10.0

4.9 4.3

5.4 6.3

4.8 5.0 5.3 5.5 5.8 6.0

4.0

6.0

8.0

10.0

12.0

14.0

50

60

70

80

90

100

2010

2011

2012

2013

2014

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

GDP (Tn Niara) GDP Growth (%, RHS)

(Tn Niara)(%)

355 397

441 479

518 540

611

685

762

835

910

300

400

500

600

700

800

900

1,000

2010

2011

2012

2013

2014

2015

E

2016

E

2017

E

2018

E

2019

E

2020

E

('000 Niara)

Source: IMF, Investec Securities Research Source: IMF, Investec Securities Research

Figure 54: Nigeria per capita GDP to trend up

419

467

522

574

515 518

2,400

2,600

2,800

3,000

3,200

3,400

400

450

500

550

600

2012 2013 2014 2015 E 2016 E 2017 E

GDP GDP per capita (RHS)

(US$)(US$bn)

Source: IMF, Investec Securities Research


Africa beyond Nigeria Africa is generally seen as a large homogenous market and Nigeria is often a proxy

for the African market from a 2W perspective. However, there are other markets as

well where penetration is low and the market is in growth phase. At the same time,

we also observe markets like Algeria where per capita income is high enough but

2W penetration is low. This makes us believe that Algeria is likely to have

leapfrogged the stage of 2W popularity. Ghana is a small market with low

penetration. In Figure 57 and Figure 58:Figure 58 we compare key African 2W

markets on four metrics; Market size, GDP per capita, 2W penetration and Share of

Indian companies in the market.

Figure 57: India’s share in key African 2W markets Figure 58: Penetration of 2Ws vs GDP per capita in Africa

Nigeria (1.5m units)

TanzaniaGuinea

Kenya

EgyptBenin

Mali

AlgeriaGhana

Uganda

Mozambique

Burkina Faso

Ethiopia0

20

40

60

80

100

120

140

160

180

200

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

Siz

e o

f th

e m

arke

t ('0

00 u

nit

s)


Nigeria

TanzaniaGuinea

Kenya

Egypt

CongoBenin Mali

Algeria

Uganda

Mozambique

0

1000

2000

3000

4000

5000

6000

0% 2% 4% 6% 8% 10% 12% 14%

GD

P p

er c

apit

a (U

S$)

2W Penetration of 2Ws (%)

Source: Nigeria total quantity is c.1.5m units, Investec Securities estimates Source: Investec Securities estimates

Figure 61, provides a snapshot of various African markets on the basis of their

market size and India’s potential in these markets. Further, based on the economic

outlook of these countries we try to find potential winners for the future.

While Nigeria, Egypt and Kenya are three markets where Indian companies have

enjoyed considerable success, four other markets that we think could become

important are:-

Tanzania (Market Size US$102m, 0.2m units): On the back of structural reforms

in the financial system and driven by a boom in agriculture, Tanzania is likely to

become a middle income country. This should drive growth in the market and

India’s share in the market has been increasing.

Mozambique (Market Size US$44m, 0.1m units): Following large discoveries in

mineral and petroleum resources, the country is on the road to monetise these

resources. Investments are ongoing and their completion is likely to boost

government financials.

Ethiopia (Market Size US$14m, 0.01m units) and Uganda Market Size US$47m,

0.1m units): While these are two markets where Indian companies already have a

significant presence; economic reforms and control over inflation is likely to allow

them to maintain their high growth rates. These could potentially grow into large

two wheeler markets. Indian companies are likely to face rising competition here.

Other African countries also present

enormous untapped opportunities

Figure 59: Tanzania market share by country

0%

20%

40%

60%

80%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014



Figure 60: Uganda market share by country

0%

20%

40%

60%

80%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014




Figure 61: Expect enormous opportunities as economies growth and Indian players expand their penetration into untapped geographies

Tan

zani

a

Moz

ambi

que

Gui

nea

Mal

i

Ben

in

0%

2%

4%

6%

8%

10%

CY14 CY15E CY16E

Real GDP growth in lcy (%)

0%

2%

4%

6%

8%

Algeria GhanaCY14 CY15E CY16E


0%

2%

4%

6%

8%

10%

Uganda EthiopiaCY14 CY15E CY16E


Countries that should see greater focus from

Indian 2W cos; growth depends on winning a

larger share & transition to D-IV.

Too small to individually move the needle.

Key is identifying whether these countries can

make the transition into a large 2W market.

Indian companies have had early successes

Would have to fend off competition especially

from Chinese and hold on to market share.

Relatively larger African economies;

Indian cos enjoy a sweet spot; their performance

is linked to GDP growth & political stability.

Large market (>100k pa) - Low share (<30%)

Tanzania

Agri: 34% of GDP; Likely to attain Middle income

status; Greater fin. inclusion to boost growth.

Guinea

2014 Ebola political tensions & infra shortages;

2015 IMF assistance should aid GDP.

Mali

Commodities remain key risk

Key exports Cotton (36%) & Gold (21%)

2015 / 2016 – Structural reforms, political stability,

Mozambique

Increasing investment in mineral exploration will

carry forward 2014 momentum to 2015/2016.

Benin

Commodities remain key risk

Cotton – 40% of GDP and 80% of exports

2015 / 2016 – Structural reforms, political stability,

Large market (>100k pa) – High share (>30%)

Nigeria

99% of 2Ws used as cabs.

Oil is the prime driver of economy, lower oil prices

to have a deep negative impact.

Kenya

Agri: 30% of GDP; Tourism; the other large eco.

driver, was affected in 2014 due to terrorism.

Government stressing on addressing infra, energy

and security challenges.

Lower fuel prices are a positive

Egypt

Severe downturn due to political situation.

Recently undertook reforms to promote private

sector and restore business confidence

Elections are due in Oct / Nov.

Small market (<100k pa) - Low share (<30%)

Algeria

Oil and gas - 98% of exports, 58% of government

revenue and 28% of GDP.

Continued weakness in oil prices is the driver of

the weak economic outlook.

Government to focus on controlling public

expenditure, revisit the viability major

infrastructure projects, reduction of imports.

Small market (<100k pa) - High share (>30%)

Ghana

Financial indiscipline and rising indebtedness the

main cause of the ongoing economic weakness.

2016 recovery due to higher oil & gas production,

private sector investment, political stability

Uganda

Key produce: Coffee, tea, gold

2014: Infra investment, private consumption and

agri rebound (27% of GDP) drove GDP growth.

2015-16: Higher growth dependent on

improvement in government financials

Ethiopia

Increasing FDI due to reforms and privatisation.

Agriculture - 40% of GDP; 70% of export earnings

Volume growth to offset lower commodity prices

Double digit inflation is now under control.

Tanzania, Mozambique

573 630 755 822

1,006

0

200

400

600

800

1,000

1,200

Gui

nea

Moz

ambi

que

Mal

i

Ben

in

Tan

zani

a

GDP per capita (US$)

1,416

3,298 3,303

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Ken

ya

Nig

eria

Egy

pt


1,474

5,532

0

1,000

2,000

3,000

4,000

5,000

6,000

Gha

na

Alg

eria

GDP per capita (US$)575

726

0

200

400

600

800

Eth

iopi

a

Uga

nda


Eth

iop

ia,U

gan

da

Countries likely to

transition

Ken

ya

Egy

pt

Nig

eria

0%

2%

4%

6%

8%

10%

CY14 CY15E CY16E


Siz

e o

f th

e m

arke

t (u

nit

s)

India share in 2W imports (%)

Source: Un Comtrade, IMF, Investec Securities Research

Table 4: Snapshot of African 2Ws market

Market Size of the

market (US$ m) Size of the market

(units million) Share of India

exports Penetration of

2Ws (%) GDP per capita

(US$)* GDP growth

CY14 GDP growth

CY15E GDP growth

CY16E

Tanzania 102 184,950 14% 2.1% 1,006 10% 4% 8%

Guinea 91 185,500 21% 12.0% 573 5% 10% 11%

Kenya 85 153,245 44% 3.3% 1,416 10% 8% 12%

Egypt 78 129,621 54% 2.5% 3,304 6% na na

Congo 70 134,690 21% 1.3% 437 10% 13% 11%

Benin 67 126,084 3% 5.3% 822 5% -4% 8%

Mali 63 144,487 3% 7.3% 755 8% -8% 7%

Algeria 54 83,416 2% 1.1% 5,532 3% -13% 6%

Ghana 50 77,531 4% 2.4% 1,474 -20% 1% 9%

Uganda 47 83,765 90% 1.6% 726 8% -3% 5%

Mozambique 44 112,201 4% 2.3% 630 7% 1% 12%

Senegal 27 60,281 1% 1.5% 1,072 5% -3% 8%

Ivory Coast 26 51,682 5% 0.8% 1,495 9% -6% 10%

Burkina Faso 25 40,591 16% 1.0% 717 2% -9% 8%

Ethiopia 14 17,055 62% 0.1% 575 12% 10% 8%

Namibia 7 5,954 24% 5.0% 6,095 2% -6% 8%

Source: Un Comtrade, IMF, Investec Securities Research


LATAM: Market share gains to drive growth Given the limited manufacturing of 2Ws in Latin America (ex-Brazil) we analyse the

trade flow data to understand the market potential for this geography. We estimate

that Latin America (ex-Brazil) is a 2.6m unit 2W market worth US$2bn per annum

and has grown at a strong 21% CAGR over 2003-13. Argentina, Colombia and

Mexico are the most significant markets for 2Ws, which dominated 63% of the

regions demand. Argentina’s 2Ws import decline of 56% YoY in 2014 dragged

down aggregate LATM (ex-Brazil) volume from 3.3m units in 2013 to 2.6m units in

2014. Indian manufacturers have had limited inroads to Argentina with a mere 12%

market share in CY14, which translated as less impact for Indian manufacturers.

Brazil is a 2m unit p.a. market with Honda dominating c.80% of the market.

Figure 62: Imports of 2Ws in LATAM has grown at 20% CAGR over 2003-2014 to US$2bn in 2014

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US

$ m

Argentina Bolivia Chile Colombia Cuba Dominica Ecuador

El Salvador Guatemala Honduras Mexico Paraguay Peru Venezuela


The size of the LATAM 2Ws market, excluding Brazil, has increased from just over

300K units in 2000 to 3.3 million units in 2013, as seen in , registering CAGR of

20% over the same period. The strong growth was primarily driven by Argentina,

Colombia and Mexico which grew by CAGR of 16%, 23% and 18% respectively

over the same period.

Figure 63: Key markets for 2Ws in LATAM (ex-Brazil) – CY14

Argentina 13%

Colombia 24%

Mexico 26%

Peru 8%

Ecuador 6%

Chile 5%

Paraguay 5% Others 13%

UN Comtrade, Investec Securities Research


Indian manufacturers gaining a strong hold in LATAM India’s export of 2Ws to LATAM (ex-Brazil) grew by 24% CAGR over FY05-15 with

exports of US$493mn in FY15, as seen in Figure 64. Exports to Colombia have

been a major contributor, representing 55% of India’s 2Ws export to the LATAM

region and reporting a growth of 24% CAGR over the same period.

Figure 64: India’s export of 2Ws to LATM has grown by 24% CAGR Figure 65: India’s 2Ws export in LATAM (ex-Brazil) - FY15

-

100

200

300

400

500

FY05 FY06 FY08 FY07 FY09 FY10 FY11 FY12 FY13 FY14 FY15

US

$ m

Colombia Mexico Peru Guatemala Argentina Others

Colombia 55%

Mexico 13%

Peru 7%

Guatemala 8%

Argentina 5% Others 11%

Source: Ministry of Commerce, Investec Securities Research Source: Ministry of Commerce, Investec Securities Research

Indian players gain at the expense of Chinese

The impressive growth experienced by Indian companies has come primarily at the

cost of Japanese and even Chinese players in select markets; Indian companies

have been able to increase market share from 4% in Latin America in 2007 to 22 %

in 2014.Chinese and Japanese companies witnessed a decline in share of over the

same period as seen in Figure 66. Moreover Indian player have made remarkable

in-roads in most of the key 2Ws markets in the Latin American region (ex-Brazil)

with market share over 50% in Colombia, the biggest 2Ws market in the region, as

highlighted in Figure 75 and Table 5 .

Figure 66: Market share of 2W players in LATAM (ex-Brazil)

13 21 21

32 39 45

56 61 63 56

67 65 61 57 54

4

6 11

7

10 11

9 4 6

9

9 15 17 19 22

34

30 22 13

13 9

8 9 7 7

5 4 3 3 4 49 43 46 47 38 35

28 26 24 28 19 16 18 20 20

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014




Figure 67: Indian players have made in-roads in key markets… Figure 68: …still significant scope for volumes expansion

516 513

263

166 125 112 100 73 54 50 36

53%

9%9%

15%

7% 9%

34%

2%0% 1%

14%

0%

10%

20%

30%

40%

50%

60%

-

100

200

300

400

500

600

US

$ m

2Ws Market Size (US$ m) Market share of Indian players (RHS)

674

614

326

203 158 135 129 116

71 46 46 9%

53%

9%

15%

9%

2%

34%

7%

0%

14%

1% 0%

10%

20%

30%

40%

50%

60%

-

100

200

300

400

500

600

700

800

Th

ou

san

ds

2Ws Market Size ('000 units) Market share of Indian players (RHS)



Colombia- an example of Latin American potential for Indian companies Colombia’s 2W market grew at a 21% CAGR over 2000-14 (as seen in Figure 69 &

Figure 70), while Indian players have grown at an impressive 68% CAGR in this

country. The focus of Indian players on this region, along with their quality offering

at reasonable prices, means that Indian motorcycles now dominate with over 50%

of a market once controlled by Chinese and Japanese manufacturers. Bajaj Auto

has made successful inroads in Colombia being the single largest player with 44%

of the market share.

Figure 69: Colombia 2Ws imports grew by 21% CAGR in value terms Figure 70: …as well as in volume terms

38 37 47 53 96

150

250 245 230 182

245

426 484

540 516

-

100

200

300

400

500

600

Colombia 2Ws Imports (US$ m)

44 39 51 69

157

289

461

383

286 248 230

540 558 627 614

-

100

200

300

400

500

600

700

Colombia 2Ws Imports volume ('000 units)


Figure 71: Market share in the 2Ws industry of Colombia

6 7 12 14 14

26 37 39 39

33 37 34 29 33 35

0 4

17 17 27

33

28 19

27 37

44 52 52

54 50

42 40

37 28

27

12 12

17

14 11

7 5

4 5 6

51 48

33 40

33 28 23 26

20 19 12 9

14 8 9

0

10

20

30

40

50

60

70

80

90

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014



Bajaj Auto holds 44% market share in

Colombia


Significant growth opportunities in LATAM While we believe Colombia offers a great example of how quickly Bajaj, Hero and

TVS can translate an export opportunity into exponential growth, we see similar

growth opportunities in other LATAM countries due to two key factors:

Strong industry growth to drive volumes for Indian players: In markets

where Indian players already have a significant presence such as Colombia

(50% market share) and Guatemala (34% market share), we see growth for

Indian players piggybacking on industry growth. Low penetration of 2Ws in

these markets (6% in Colombia, 5% in Guatemala) should lead to 2Ws industry

growing by double digits, in our view. Moreover, we expect Indian players to

gradually increase market share in these countries at the expense of Chinese

manufacturers which hold 35% and 54% market share in Colombia and

Guatemala, respectively as seen in Figure 72.

Significant potential for market share gains: In Figure 75, we highlight some

of the key Latin American markets. Increased focus on countries where Indian

firms have negligible or non-existent market shares such as Venezuela (0%

share), Mexico (9%), Argentina (9%) etc. presents an immense opportunity for

Indian players. These countries are dominated by Chinese manufacturers with

market share of 76%, 63% and 46% in Venezuela, Mexico and Argentina

respectively. In our opinion, Indian players can potentially replicate the success

they have seen in the Colombian market

Furthermore, given the strong market dynamic and rising middle class in the

region, demand should grow at double digits, in our view. We also expect

Indian companies to increase their footprint in Brazil, which is presently

dominated by Japanese manufacturers garnering a 90% market share.

Thought there will likely be potholes along the way, such as the recent forex issues

in Argentina, we see these as short term issues that should have no impact on the

longer-term growth potential that we think this region offers for Indian companies.

Figure 74: Penetration of 2Ws vs GDP per capita in Latin America

Colombia

Mexico

Argentina

Peru

ChileEcuador

Guatemala

Bolivia El Salvador0

100

200

300

400

500

600

700

800

0% 10% 20% 30% 40% 50% 60%

Mar

ket s

ize

('000

un

its)

India market share (%)

Source: UN Comtrade, Investec Securities research

Figure 72: Industry expansion to drive volume

6%

50%

35%

5%

35%

54%

0%

20%

40%

60%

Penetration Indian marketshare

China marketshare

Colombia Guatemala


Figure 73: Huge potential for market share gains

0%9% 9%

76%63%

46%

0%

50%

100%

Venezuela Mexico Argentina

Indian market share China market share



Figure 75: Key markets in Latin America

US$513m

674k units

US$263m

326k Units

Mexico

2015E GDP growth: 3% (2%)

GDP per capita (US$) – 8,626

Share of India in 2W imports – 9%

Growth led by a recovery in US import demand

Renewed interest in the oil sector post reforms.

The above factors along with a weaker Peso

should take growth higher.

Colombia




Weaker 2015 due to low commodity prices

affecting export income & government revenues.

Inflation to deteriorate owing to currency

depreciation but this is also likely to boost exports

and lead the recovery come 2016.

Peru




Climatic factors, Inflation and lower public

spending hurt 2014.

2015 should be better as above factors recede.

New mines and infrastructural projects becoming

operational should aid.

Argentina

2015E GDP growth: -0.3% (0.5%)



2014 saw a stagnant economy as exports tanked

and so did the currency ad public spending.

Investment growth turned negative.

Activity will continue to remain weak in 2015.

A modest recovery is expected in 2016 due to

higher foreign demand and rise in business

confidence.

US$516m

614k Units

US$166m

203k Units


Table 5: Snapshot of Latin American countries

Country 2Ws Imports

(US$ m) 2Ws Imports

(m units) 2Ws Penetration

(%) India market

Share (%) Comments

Colombia 516 614 9% 53% Most of the growth for Indian cos. to come from industry growth

Guatemala 100 129 6% 34% Most of the growth for Indian cos. to come from industry growth

El Salvador 22 28 2% 15% Strong industry growth coupled with market share gains

Peru 166 203 6% 15% Strong industry growth coupled with market share gains

Honduras 36 46 4% 14% Strong industry growth coupled with market share gains

Mexico 513 674 3% 9% Strong industry growth coupled with market share gains

Argentina 263 326 13% 9% Market share gains to drive growth

Ecuador 112 158 7% 9% Strong industry growth coupled with market share gains

Chile 125 116 6% 7% Strong industry growth coupled with market share gains

Paraguay 73 135 24% 2% Indian companies are yet to make significant inroads. Growth to come from industry growth coupled with market share gains

Bolivia 50 46 2% 1% Indian players are yet to make significant in roads. Growth to come from industry growth coupled with market share gains

Venezuela 54 71 8% 0% Indian players are yet to make significant in-roads. Growth to come from industry growth coupled with market share gains



Asia could also support 2Ws export growth The Asian opportunity for Indian 2W manufacturers should be bifurcated into two; 1)

countries that are a part of the Indian subcontinent which share a cultural and

geographical proximity to India and the others. Within the key subcontinent markets

of Sri Lanka, Bangladesh, Nepal etc. the dominance of Indian players is virtually

undisputed. Here, Indian players, especially Bajaj, have managed to oust the

Japanese (following the appreciation of the Yen which put Japanese products out of

reach for majority of the populace) as well as the Chinese (who lost out on quality

and serviceability perceptions).Myanmar is the one subcontinent country where

Indian players are yet to make inroads

The other Asian markets where Indian players are focusing on are Philippines,

Indonesia, and Vietnam. However, step through motorcycles are more popular in

these markets and the market is shared between the Chinese and Japanese

players. Indian players are short on product offerings as well as credible distribution

networks. Bajaj Auto has chosen to partner with Kawasaki and has tasted early

success in Philippines managing to capture a 30% market. It plans to replicate this

model in Indonesia and may even carry forward to Thailand, Vietnam and Malaysia.

Figure 76: Sri Lanka – Split of 2Ws imports by destination Figure 77: Philippines – Split of 2Ws imports by destination

0%

20%

40%

60%

80%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014


0%

20%

40%

60%

80%

100%20

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014



Figure 78: Indonesia domestic 2W sales growth Figure 79: Myanmar – Split of 2Ws imports by destination

-100-80-60-40-20020406080100

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Wholesales %YoY

(mn units) (% YoY)

0%

20%

40%

60%

80%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014




Bangladesh – Indian 2Ws rule the roost Indian two wheeler companies have enjoyed a strong ride in Bangladesh (annual

market of 300k units) as both geographical and cultural proximity have given Indian

brands an advantage over Chinese and other brands. Bangladesh’s GDP per capita

crossed the threshold of US$1,000 in 2013 which in our opinion is the threshold

post which two wheeler consumption gets a boost, in our view.

The two factors in favour of Chinese motorcycles are 1) a huge cost advantage and

assembly tie-ups with many local players and 2) the Bangladesh government’s

recent increase of import duty on CKD (Completely Knocked Down) kits to 45%

from 30% earlier favours local assembly.

Though many international players assemble motorcycles in Bangladesh, they do

not match the localisation threshold to qualify this as manufacture hence giving

them a duty disadvantage. Nonetheless despite this price disadvantage, Indian

motorcycles command nearly 75% of Bangladesh’s motorcycle sales and their

dominance has multiplied since the 40% levels seen in early 2000’s.

We believe that this is primarily due to the perception that Indian offerings provide

much higher quality justifying their higher price tag as well as easier availability of

spares. Further, the likes of Bajaj, Hero and TVS have established local assembly

lines which help to slightly moderate the cost. Additionally, Indian exports have

increased after the Indian government permitted 2W exports to Bangladesh over

land; through the neighbouring Indian state of Tripura; instead of the more

expensive sea route earlier.

The most popular Indian brands are Bajaj’s Discover and Pulsar followed by Hero

and TVS.

Figure 80: Bangladesh Split of 2Ws imports by destination Figure 81: Bangladesh 2W Market share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014


Bajaj53%

TVS12%

Hero Honda9%

Danyang -Runner

8%

Walton6%

Others12%

Source: UN Comtrade, Investec Securities Research Source: Industry Sources, Investec Securities estimates

Figure 82: Bajaj’s products lie in the higher end of the range Figure 83: Average Indian 2W prices are 45-25% higher than local/Chinese

100

130

160

190

220

Her

o H

F D

awn

Baj

aj C

T10

0

Baj

aj P

latin

a 10

0

Her

o S

plen

dour

Her

o P

assi

on p

ro

TV

S M

etro

Plu

s 11

0

Baj

aj D

isco

ver

100

TV

S S

tar

Spo

rt

Her

o S

plen

dour

Her

o G

lam

our

TV

S P

hoen

ix

Baj

aj D

isco

ver

125

Hon

da S

hine

Her

o H

unk

Her

o X

trem

e

Baj

aj P

ulsa

r 15

0

('000 tk)

100cc 125cc 150cc

45%

20%

25%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

100cc 125cc 150cc

Source: Investec Securities estimates Source: Company data, Investec Securities estimates

Albeit Indian 2Ws prices are 25-40%

higher than local manufactured

motorcycles, Indian command ~75%

of the market share


We initiate coverage on Bajaj, Hero and TVS

Bajaj Auto: Racing ahead of the pack: Our channel checks in Africa give us

confidence in Bajaj’s ability to replicate their success in Nigeria/Colombia to other

geographies. The revised strategy of the Executive segment and an increasing

premiumisation trend should help drive volumes of domestic 2Ws and allay

investors’ concerns on loss of domestic market share. Bajaj’s uniquely diversified

business, with sector leading operating margins, low exposure to Executive

segment (which is likely to experience increasing margin pressure) and strong

return ratios, offers a compelling investment opportunity.

Bajaj’s leadership in premium motorcycles, low exposure to the under-pressure

executive segment, and diversification of export markets highlight Bajaj’s strong

revenue growth potential. Trading at 16x FY17E P/E, we believe valuations of Bajaj

are attractive given a) Industry leading margins, b) strong 16% EPS CAGR

(FY15/18E), c) robust ~30% ROCE/ROE and D) high FCF/Dividend yield of

+5%/+3%. Initiating coverage at BUY and target price of Rs.2900.

Hero Motocorp: Multiple headwinds; valuations supportive: In the backdrop of

increasing competition, slower growth and margin headwinds, we believe Hero

could miss management guidance and street’s expectation on margin expansion.

We also think Hero’s guidance of 1.2m units of annual export by FY20 is optimistic,

as breaking into markets of Africa/LATAM will take some time given the lack of

brand exposure there. Consequently our FY17E/18E PAT estimate are 5/6% below

consensus, though at 16x FY17E P/E the stock price reflects these concerns.

Despite headwinds surrounding its core operating business, we think Hero’s

ROCE/ROCE of ~41/34%, FCF/Dividend Yield of ~5%/3% can be sustained over

the next three years. Hero’s valuation at 16xFY17 P/E (in-line with five year

average), seems fair to us. Initiate with Hold recommendation and target price of

Rs.2790 based on 16x Sep’17 earnings. Stronger than expected growth in exports

and higher margin expansion are key risk to our thesis.

TVS Motor: A Challenger with unwarranted premium valuation: While TVS

seems to have captured the low hanging fruit in terms of volumes in

domestic/exports markets, garnering incremental market share would be an uphill

task, in our view. Moreover, we are circumspect of TVS’ ability to increase margins

significantly on account of the necessity of sustaining its ad spend at current

elevated levels partly due to exports. We see limited benefits accruing from

operating leverage and thereby expect TVS to miss guidance of margin expansion.

In our view, TVS’ premium of ~30% on FY17E EV/EBITDA to Bajaj/ Hero despite

low ROCE and weaker positioning in the industry is unwarranted.

Unwarranted rich valuation: TVS is trading at 15.5x FY17E EV/EBITDA at 31%/33%

premium to Bajaj/Hero despite a much lower ROCE (19% ~vs. 30%/40%

respectively). In our opinion, premium valuations seems unwarranted given a)

TVS’s positioning as a challenger to the current leaders in most segments, Bajaj

and Hero and b) our expectation of deceleration of EPS growth momentum (22%

CAGR over FY15-18E vs 32%YoY growth in FY15 leading to our FY17E/18E PAT

being 21%/26% below consensus. We value TVS at 16x Sep’17E EPS leading to

our target price of Rs.200. Initiate with Sell.


Figure 84: Global peer valuation matrix

CY15/FY16 CY16/FY17 CY17/FY18 CY15/FY16 CY16/FY17 CY17/FY18 CY15/FY16 CY16/FY17 CY17/FY18 CY15/FY16 CY16/FY17 CY17/FY18

2W OEMs

Bajaj Auto 2,448 10,637 12.3 18.9 16.2 14.4 15 13.5 11.9 10.6 5.7 4.8 4.1 32 32 31

Hero Motocorp 2,689 8,062 13.8 17.7 16.1 14.7 10 12.8 11.7 10.7 6.7 5.5 4.6 41 38 34

TVS Motors 298 2,127 8.3 32.4 25.7 22.4 20 19.0 15.5 13.7 7.2 5.9 5.0 24 25 24

Eicher Motors 16,486 6,722 20.0 51.5 34.7 25.7 42 25.6 19.0 15.2 13.8 12.1 8.8 33 38 38

Mean 30.1 23.2 19.3 21.5 17.7 14.5 12.6 8.3 7.1 5.6 32.6 33.3 31.8

India 4Ws

Maruti 4,607 20,894 3,452.3 26.7 21.3 15.6 31 15.6 13.0 10.4 4.9 4.1 3.4 21 23 23

TATA Motors 424 20,687 4,084.1 12.3 8.6 7.0 32 4.5 3.7 3.2 1.9 1.5 1.3 17 20 20

M&M 1,346 12,555 1,682.9 22.1 16.8 15.1 21 12.8 10.2 8.9 2.7 2.4 2.1 11 15 15

Mean 20.4 15.6 12.6 28.0 11.0 9.0 7.5 3.1 2.7 2.3 16.4 19.2 19.4

Domestic 2W / 4W Auto comps

Motherson Sumi 296 5,886 21.9 29.1 20.9 16 35.0 11.7 9.2 7.3 9.3 7 6 35 38 40

Bharat Forge 859 3,002 15.6 23.5 18.8 16 20.1 13.2 11.1 9.9 4.9 4 4 22 24 23

Gabriel 90 194 0.5 16.6 13.4 10.3 27 10.2 8.7 6.7 3.5 3.1 2.4 20 22 24

Munjal Showa 193 116 0.1 9.7 8.0 - - 5.1 4.3 - 1.6 1.4 - 18 19 -

Rane Brake Linings 351 42 0.0 14.7 12.5 - - 6.2 5.3 - 2.1 1.9 - 14 15 -

Mahindra CIE 253 1,227 1.0 25.2 17.7 14 34.7 11.6 9.0 7.6 3.7 3 3 15 19 20

WABCO 6,089 1,734 0.8 57.9 38.2 29.7 40 36.4 24.7 19.8 11.2 8.8 6.8 20 25 25

Alicon Castalloy 361 60 0.0 20.1 18.2 - - 7.6 6.9 - 2.7 2.4 - 14 13 -

SKF India 1,211 959 0.3 29.9 25.5 23.3 13 20.2 17.2 15.3 4.1 3.8 3.4 14 15 16

Mean 25.2 19.2 12.2 18.8 13.6 10.7 7.4 4.8 4.0 2.7 19.3 21.0 16.5

Europe

Vollkswagen 135 69,505 49.1 10.3 8.4 6.5 26 1.9 1.6 1.4 0.7 0.7 0.7 8 9 10

BMW 101 68,969 186.4 10.8 10.5 9.8 5 7.7 7.5 7.2 1.6 1.5 1.3 17 15 15

Fiat Chyrsler 13 18,058 218.8 16.0 8.8 7.0 52 2.9 2.5 2.2 1.3 1.2 1.0 6 13 16

Diamler 82 93,162 326.5 9.9 9.3 8.9 6 3.4 3.2 3.1 1.8 1.6 1.4 19 18 17

Renault 93 29,312 123.7 9.4 7.8 7.0 15 5.4 4.9 4.6 1.0 0.9 0.8 11 12 12

Mean 11.3 9.0 7.9 20.6 4.3 3.9 3.7 1.3 1.2 1.1 12.1 13.5 14.0

Japan

Toyota 7,687 214,378 642.9 9.9 9.3 8.7 7 10.3 9.7 9.2 1.3 1.2 1.1 14 13 13

Honda 4,066 60,095 145.4 12.5 10.9 9.9 12 8.3 7.8 7.3 1.0 0.9 0.9 8 9 9

Suzuki 3,841 17,583 67.0 14.6 14.7 13.5 4 6.2 5.7 5.3 1.4 1.3 1.2 10 10 10

Yamaha 3,015 8,608 48.5 14.8 10.8 9.8 23 7.7 7.0 6.4 2.1 1.8 1.6 15 17 17

Mean 13.0 11.4 10.5 11.6 8.1 7.5 7.0 1.5 1.3 1.2 11.6 12.3 12.3

Korea

Hyundai 152,500 29,251 94.2 6.1 5.5 5.3 7 5.8 5.3 5.1 0.7 0.6 0.5 11 11 10

Kia 53,900 19,025 52.1 7.4 6.6 6.2 9 5.0 4.4 4.2 0.9 0.8 0.7 12 13 12

Mean 6.7 6.1 5.8 8.2 5.4 4.9 4.6 0.8 0.7 0.6 11.7 11.7 11.4

US

Ford 15 57,744 437.2 9.0 7.6 6.9 14 4.3 3.6 3.3 2.0 1.7 1.4 28 24 20

General Motors 36 56,551 479.3 7.6 6.8 6.4 10 3.1 2.8 2.6 1.6 1.3 1.1 21 22 19

Mean 8.3 7.2 6.6 11.7 3.7 3.2 3.0 1.8 1.5 1.2 24.5 23.0 19.6

Company

2Y EPS

CAGR

(%)

PE3m ADV

(US$mn)

Market cap

(US$mn)Price (lcy)

EV/Ebitda Price to Bk RoE (%)

Note: Numbers in red are Investec estimates. Source: Investec Securities Research, Bloomberg

Page 35 | 26 November 2015 | Bajaj Auto

Bajaj Auto (BAJA.NS)

Baj aj Auto ( Buy - TP: 2900INR)

India | Automobiles & Parts

Racing ahead of the pack

INR2479 INR2900

Our channel checks in Africa give us confidence in Bajaj’s ability to replicate

their success in Nigeria/Colombia to other geographies. The revised strategy

of the Executive segment and an increasing premiumisation trend should help

drive volumes of domestic 2Ws and allay investors’ concerns on loss of

domestic market share. Bajaj’s uniquely diversified business, with sector

leading operating margins, low exposure to Executive segment (which is

likely to experience increasing margin pressure) and strong return ratios,

offers a compelling investment opportunity. Initiate with BUY.

Aditya Jhawar +91 (22) 6136 7415

[email protected]

Pratik Rangnekar +91 (22) 6136 7425

[email protected]

Channel checks highlight the export opportunity for Bajaj: Our primary channel

checks in Africa indicate a strong brand recall for Bajaj and suggest that the brand

has been built around quality/durability. We believe Bajaj is well placed to benefit

from the strong industry growth expected in Africa and LATAM, where it should also

win market share from Chinese manufacturers. Moreover, we believe Bajaj's foray

into new markets dominated by Japanese players (Brazil, South East Asia) along

with alliance partners Kawasaki/ KTM will add another wheel to their growth story.

We expect Bajaj's exports to grow at 13% CAGR over FY16-18E.

Premiumisation & new product launches to drive growth in domestic 2Ws:

Bajaj Auto is a dominant player in the premium segment (35% market share) with a

strong product portfolio leaning towards next generation bikes and a focus on

expanding into the cruiser segment. This should make Bajaj the prime beneficiary of

the premiumisation trend, in our view. Moreover, a rejig of the Executive segment

(Discover) strategy and sustainability of growth momentum generated by the new

CT100 and Platina in the economy segment should help domestic 2Ws report

volume growth of 9% CAGR over FY16-18E,higher than the expected industry

growth of 7% CAGR

Initiate with BUY, TP of Rs 2,900: Bajaj’s leadership in premium motorcycles, low

exposure to the under-pressure executive segment, and diversification of export

markets highlight Bajaj’s strong revenue growth potential. Trading at 16x FY17E

P/E, we believe valuations of Bajaj are attractive given a) Industry leading margins,

b) strong 16% EPS CAGR (FY15/18E), c) robust ~30% ROCE/ROE and D) high

FCF/Dividend yield of +5%/+3%. Initiating coverage at BUY and target price of

Rs.2900.

Financials and valuation Year end: 31 March Price Performance

2014A 2015A 2016E 2017E 2018E

Revenue (INRm) 201,495 216,120 245,914 277,013 310,686

EBITDA (INRm) 41,056 41,166 52,441 59,657 67,032

EBITA (INRm) 39,260 38,492 49,644 56,616 63,729

PBT (normalised) (INRm) 46,319 44,251 55,952 65,137 73,611

Net Income (normalised) (INRm) 32,418 31,540 37,703 43,892 49,602

EPS (norm. cont.) – FD (INR) 112.0 109.0 130.3 151.7 171.4

FCFPS - FD (INR) 113.7 64.0 118.9 129.3 146.3

DPS (INR) 50.0 50.0 65.1 75.8 85.7

PE (normalised) (x) 22.1 22.7 19.0 16.3 14.5

EV/sales (x) 3.5 3.3 2.9 2.5 2.3

EV/EBITDA (x) 17.1 17.1 13.4 11.8 10.5

FCF yield (%) 4.6 2.6 4.8 5.2 5.9

Dividend yield (%) 2.0 2.0 2.6 3.1 3.5

1,900

2,000

2,100

2,200

2,300

2,400

2,500

2,600

2,700

Nov-14 Feb-15 May-15 Aug-15

1m 3m 12m

____________________________Price (1.4) 12.4 (6.1)

____________________________Price rel to India S&P BSE 500 - BSE India (Indian Rupee)3.0 11.7 (3.2)

Source: Company accounts/Investec Securities estimates Source: FactSet

BUY

Price: INR2478

Target: INR2900

Forecast Total Return: 19.9%

Market Cap: INR717bn

EV: INR703bn

Average daily volume: 336k


Figure 85: Company description Figure 86: Shareholding Pattern

Bajaj Auto Ltd. (Bajaj), a Rahul Bajaj group company,

primarily manufacturers and markets motorcycles and three-

wheeler vehicles. In the domestic motorcycle market, Bajaj

is the second largest OEM with a market share of c20% and

dominance in the premium category of motorcycles. Bajaj is

the market leader in the domestic three wheeler industry

with a market share of 51%. Bajaj derived c47% of its

revenue from exports in FY15, roughly half of which came

from Africa. The promoters’ group holds 49% stake in the

company. Bajaj Auto was founded in 29 November 1945 and

is headquartered in Pune, India.

Promoter49%

FII18%

DII8%

Others25%

Source: Company data, Investec Securities estimates Source: BSE

Figure 87: FY15 Segment wise break up of sales volume Figure 88: EBITDA contribution by Segment (FY15)

Exports 47%

Premium18%

Economy13%

Executive 16%

3Ws6%

Economy 3% Executive 5%

Premium 20%

3Ws 12%

Spares 13%

Exports 48%

Source: Company data Source: Investec Securities estimates

Figure 89: Free cash flow and capex Figure 90: Key value drivers

24 5

3 3 4 4 4

14

28

16

33

18

3437

42

0

5

10

15

20

25

30

35

40

45

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

Capex Free cash flow

(Rsbn)

16%

31%

6%4%

10

12

14

16

18

20

0%

5%

10%

15%

20%

25%

30%

35%

FY15-18EEPS CAGR

FY18E RoE FY18E FCFyield

FY18EDividend

yield

FY17/18Average PE

(x, RHS)

Domestic peer average

(x)

Source: Company data, Investec Securities estimates Source: Company data, Investec Securities estimates


Targeting the global market Bajaj Auto’s management has stated its intent in becoming a global leader in a

single product category i.e. motorcycles rather than becoming a leader in many

products in one country, a strategy that has resulted in an increase in focus on

exports by Bajaj.

Exports not only provide opportunities for growth, they also tap into the significant

demand of two wheelers in emerging markets. Moreover, in the backdrop of

expected slower growth for the domestic two wheelers industry, Indian players will

necessarily have to tap overseas markets to continue the growth momentum.

Bajaj Auto was quick to identify the export opportunity which resulted in Bajaj’s

exports increasing from a mere 41K units in FY98 to over 1.8 million units in FY15

registering a CAGR of 25% over the same period. Amongst the Indian players,

Bajaj Auto has become the biggest exporter of 2Ws and 3Ws from India with a

market share of 62% and 70% respectively in FY15, as seen in Figure 91.

Figure 92: Bajaj Auto’s exports have grown at 25% CAGR over FY98-FY15

41 33 33 31 44 94 156 197 250

442

618

770 891

1,204

1,580 1,547 1,584

1,806

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Th

ou

san

ds

Bajaj Autos's Exports

Source: Company Data, Investec Securities Research

While Africa still comprises the bulk of Bajaj’s export with a share of 43% of export

volumes in FY15, the contribution from the region is trending down from ~50% in

FY10. This is primarily on the back of Bajaj’s widening geographic footprint. In

FY15, Bajaj exported to 62 countries and is amongst the top two players in twenty

countries. Increasing brand recognition overseas drove strong growth in exports

volumes and increased the share of exports from 22% in FY08 to ~47% in FY15.

Figure 94: Exports for Bajaj has become ~50% of aggregate volume…

Figure 95: …with 2Ws contributing over 80% of total export

0.8 0.9

1.2

1.6 1.5 1.6

1.8

35%

31% 31%

36% 37%

41%

47%

30%

35%

40%

45%

50%

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9


Exports (mn units) % of Aggregate volumes

631 726 972

1,268 1,293 1,323 1,521 139

165

231

312 254 261

285

-

500

1,000

1,500

2,000


Th

ou

san

ds

2Ws 3Ws

Source: Company data, Investec Securities Research Source: Company data, Investec Securities Research

Figure 91: Bajaj dominates India 2/3Ws exports

62%

70%

55%

60%

65%

70%

75%

2Ws 3Ws

Bajaj Auto's market share in exports

Source: SIAM, Investec Securities Research. As on FY15

Figure 93: Break-up of Bajaj’ FY15 exports

Africa 43%

South Asia &

ME 32%

LATAM 19%

ASEAN 6%

Source: Company data, Investec Securities Research


“Bajaj” – a strong brand in Africa & LATAM

Bajaj first forayed into Africa and Latin America after establishing a presence in

Asian countries, where other Indian two wheeler manufacturers are also present. In

a relatively short span of time Bajaj Auto became the single largest dominant player

in most of the emerging markets of Africa as well as Latin America, capturing

market share both from Chinese and Japanese manufacturers.

Our primary channel checks in Nigeria and South Sudan suggest that over the last

few years Bajaj has built a strong brand in Africa around quality and durability.

Respondents acknowledge Bajaj’s superior quality and lower maintenance

requirement compared with lower cost Chinese motorcycles. Despite the cost of

Bajaj’s motorcycles ~30% higher than Chinese, the overall cost of ownership is

lower when one includes better fuel efficiency, lower cost of maintenance and

longer durability. Bajaj Boxer (150cc & 100 cc) is extremely popular amongst the

Okada / Boda-boda drivers (two wheeler taxis drivers) in Africa.

Figure 97: Two wheelers market share in Africa (ex-South Africa)…

Figure 98: …Bajaj Auto dominates most frontier markets of Africa

-

20

40

60

80

100

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


88%

58%49%

42%33%

25%29%

16%

10%

30%

50%

70%

90%

Uga

nda

Sud

an S

outh

Eth

iopi

a

Nig

eria

Con

go

Ken

ya

Ang

ola

Tan

zani

a

Bajaj Auto's Market Share

Source: UN Comtrade, Investec Securities Research Source: Company data, Investec Securities Research. Market share as on FY14

Figure 99: Two wheelers market share in LATAM (ex-Brazil) Figure 100: Bajaj targeting key markets of LATAM

0%

20%

40%

60%

80%

100%

2007

2008

2009

2010

2011

2012

2013

2014


44% 46%

34%

19% 18%

0%

10%

20%

30%

40%

50%

Colombia Nicaragua Guatemala Peru Honduras

Bajaj Auto's Market Share

Source: UN Comtrade, Investec Securities Research Source: Company data, Investec Securities Research. Market share as on FY14

Strong structural drivers of Africa and Latin America

We believe anaemically low penetration, rising middle class, increasing

urbanisation, robust economic growth and market share gains from Chinese should

drive 2Ws volume growth in the emerging markets of Africa and Latin America.

Moreover, increase in presence of Indian players in relatively untapped large

markets like Tanzania (US$100m, 0.2m units) and Guinea (US$91m, 0.2m units

Figure 96: Bajaj Boxer - Popular brand in Nigeria

Source: Company Data, Investec Research

Low penetration, rising middle class,

increasing urbanisation, robust

economic growth and market share

gains from Chinese to drive growth


market) in Africa and Mexico (US$513m, 0.7m units), Argentina (US$263m, 0.33m

units market), Ecuador (US$112m, 0.16m units market) and Chile (US$125m and

0.12m units) in Latin America should potentially add another avenue of growth for

Indian players.

Bajaj Auto not only has the first mover advantage in these geographies but has also

established a strong brand in these countries, making it one of the strongest

beneficiaries of the expected spurt in demand of 2Ws in these markets.

Figure 101: Immense untapped opportunity for Bajaj in Africa… Figure 102: …as well as LATAM

Nigeria (1.5m units)TanzaniaGuinea

Kenya

EgyptBenin

Mali

Algeria

GhanaUganda

Mozambique

Burkina Faso

Ethiopia

0

20

40

60

80

100

120

140

160

180

200

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

Siz

e o

f th

e m

arke

t ('0

00 u

nit

s)


ColombiaMexico

Argentina

Peru

ChileEcuador

Guatemala

Bolivia El Salvador0

100

200

300

400

500

600

700

800

0% 10% 20% 30% 40% 50% 60%

Mar

ket s

ize

('000

un

its)

India market share (%)

Source: UN Comtrade, Investec Securities Research. Data as on CY14 Source: UN Comtrade, Investec Securities Research. Data as on CY14

Decline in Oil prices to have limited impact on Nigeria volumes There seem to be concerns on the impact of lower crude oil prices’ on the Nigerian

economy and the potential impact it could have on import of 2Ws from India. In our

opinion, this should have a relatively lower impact on 2Ws demand in Nigeria as

Petroleum exports as a proportion of GDP have fallen from 34% in 2011 to 22% in

2014 indicating the reducing dependence of the Nigerian economy on oil, as seen in

. The price of oil has corrected c.50% since the beginning of 2015. During the last

instance of such a fall in 2009, Nigeria's GDP fell 19%. This time around one would

need to account for the reduced contribution of petroleum products to GDP which

could mean relatively lower impact on the economy and consequently demand of

2Ws.

Moreover, we believe the recent

decline (Feb-March’15) in India’s exports of 2Ws to Nigeria is on account of

presidential election and not on account of decline in crude prices. Generally around

presidential elections in Nigeria, discretionary expenditure of consumers reduces

significantly primarily led by reduced government spending. In Feb-Mar’15 the

monthly run-rate of 2Ws & 3Ws exports from India to Nigeria reduced to US$6m as

compared to average run-rate of over US$20m in the preceding 12 months, as seen

in Figure 104.

Bajaj Auto has a strong brand in

Africa & LATAM and also enjoys first

mover advantage

Figure 103: Nigeria petroleum export as % GDP

34 33

28

22

20

25

30

35

40

2011

2012

2013

2014

Source: OPEC, Investec Securities estimates

Figure 103: Nigeria petroleum export as % GDP


Figure 104: India’s 2Ws & 3Ws export to Nigeria start to pick-up after fall during local elections

12

16

13 12

19

16

26

19

30

27

21

15

18

20 19

24

19

20

25

25 26

17

6 7

15

19

24 22

40

50

60

70

80

90

100

110

120

5

10

15

20

25

30

Apr

-13

Jun-

13

Aug

-13

Oct

-13

Dec

-13

Feb

-14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb

-15

Apr

-15

Jun-

15

US

$ m

Exports (US$m) Crude Oil (US$/barrel, RHS)

Source: GOI, Bloomberg, Investec Securities Research

Expect export momentum to accelerate We expect export momentum for Bajaj Auto to accelerate from here on primarily

driven by:-

Revival of demand in key markets: Volumes of 2Ws/3Ws export to Sri Lanka and

Nigeria from India has seen a temporary drop recently primarily driven by political

issues in both countries. While the import orders were put on freeze by the new

government in Sri Lanka, presidential elections had impacted demand of 2Ws in

Nigeria. However, over the last few months’ volumes seemed to have picked up in

both these geographies, as seen in Figure 105 & Figure 106 and we expect the

momentum to further accelerate led by the strong demand drivers in these

geographies.

Figure 105: India’s export of 2Ws & 3Ws to Sri Lanka on the rise… Figure 106: India’s exports of 2Ws/3Ws to Nigeria as well

29

25 23

19

17

12

15

11

16

26 26

10

12

14

16

18

20

22

24

26

28

30

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

US

$ m

20

25 25 26

17

6 7

15

19

24 22

5

10

15

20

25

30

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

US

$ m

Source: GOI, Investec Securities Research Source: GOI, Investec Securities Research

Nigeria volumes have picked up post

presidential election (Feb-Mar’15)…

…so is the case with Sri Lanka


Increasing penetration in relatively untapped markets: An increasing focus on

relatively untapped markets like Tanzania and Guinea in Africa and Mexico,

Argentina, Ecuador, Chile in Latin America should help accelerate export growth

momentum, in our view. All these markets are reasonably big (over US$100m

each), 2Ws penetration is low and Indian players have made limited in-roads. In

our opinion, Bajaj Auto can potentially replicate the success it has seen in markets

like Nigeria and Colombia over next few years in these markets.

Distribution network of alliance partners – Kawasaki & KTM: Bajaj has entered

into a tie-up with Kawasaki to use the latter’s distribution network in markets where

either Bajaj has no presence or the brand Bajaj is relatively less known. We expect

this strategy to be useful to penetrate markets where Japanese manufacturers are

dominant such as South East Asian countries and Brazil. Through KTM/Kawasaki,

Bajaj is getting an opportunity to study these varied markets and over period of

time use this understanding to launch more products under the brand “Bajaj”. For

instance Bajaj entered Philippines along with Kawasaki in 2007 and now it holds

market share of 30% (as on 2014).

Figure 107: Expect Bajaj’s export to grow at 12% CAGR FY15-18

0.91

1.06

1.43

1.891.80 1.84

2.092.22

2.47

2.80

0.7

1.2

1.7

2.2

2.7

3.2

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Mill

ion

s

Source: Company data, Investec Securities estimates

Along with volumes, exports brings strong profitability As per management, Bajaj Auto on blended basis makes EBITDA margin of ~25%

in exports with 3Ws the most profitable at ~30% and 2Ws at ~22%. While Latin

America offers strong margins on the back of higher realisation as well as higher

share of Executive and Premium segment, the profitability of Africa is relatively less

as the portfolio is more geared towards Economy(least operating margin) segment

and the competitive intensity is higher. In our opinion, the profitability in exports

should gradually trend upwards as the share of non-African markets increase and

the product mix change favourably. The depreciating rupee will further aid in margin

expansion for Bajaj’s export. In all, we expect Bajaj’s export EBITDA margin to

increase by c.50 bps over FY16-18 to 25.5% in FY18 derive EBITDA growth of 15%

CAGR over FY16-18E.

Table 6: Untapped markets

2Ws Market

(US$ m)

2Ws

Penetration

Share of

Indian player

Mexico 513 3% 9%

Argentina 263 13% 9%

Chile 125 6% 7%

Ecuador 112 7% 9%

Tanzania 100 2% 14%

Guinea 91 12% 21%



Domestic 2ws: New launches to spur growth Bajaj Auto, the second largest player in the Indian motorcycle industry (with market

share of 18% as on FY16 Apr-Sep’15) has successfully created strong brands

across 2W segments. The company is the clear market leader in the premium and

sport motorbike segment (Pulsar) and has managed to hold on to its leadership

despite increasing competition. At the same time, new launches in the Economy

segment (CT100 and Platina) have helped Bajaj Auto scale market share up to 39%

in FY16YTD. However, in the Executive segment (Discover) Bajaj has lost

significant market share over last the few years (mainly to Honda) which resulted in

overall market share loss.

Bajaj Auto’s domestic 2Ws volumes declined 7.4% CAGR over FY11-15 to 1.8m

units in FY15, as seen in Figure 118. This resulted in company’s domestic 2W

market share dropping from 27% in FY11 to 17% in FY15. Segmental analysis

reveals that Bajaj’s loss of market share in the Executive segment (Discover) by

21% to 8% over the same period has accounted for the biggest dent on aggregate

volumes seen in Figure 111.

Figure 110: Bajaj Auto’s market share across motorcycle segments Figure 111: Loss in executive segment dragged the overall volumes

25%21%

48%

27%25%

8%

35%

17%

0%

10%

20%

30%

40%

50%

60%

Economy Executive Premium Aggregate

FY11 FY15

2.4

1.8

0.1

0.7

0.1

1.5

1.7

1.9

2.1

2.3

2.5

2.7

FY11 Economy Executive Premium FY15

(mn units)

Source: Company Data, Investec Securities Research Source: Company Data, Investec Securities Research

Executive Segment: Confusing branding & multiple

variants drove Discover down In our opinion, Bajaj lost ground in the Executive segment primarily on account of :

1) confusing branding strategy for its Discover brand, wherein it launched over 8

bikes with the same branding, 2) non-focused product promotions due to multiple

models, 3) discontinuation of a few nonworking models, thereby impacting their re-

sale value and branding, 4) platform shift in Discover impacting volumes of earlier

platform and gradual ramp-up of production from the new platform, 5) intense

competition and new launches from Honda and Hero. Discover was initially

positioned as a “Fun” bike with Discover 150 and Discover 125. However the launch

of Discover 100M and Discover 125M (positioned as “Mileage” bikes) in Oct’13 and

Mar’14 respectively when fuel prices were heading northwards, diluted the brand, in

our view.

Figure 108: India motorcycle market share

Bajaj 17%

TVS 6%

Hero 53%

Honda 16%

Others 8%

Source: Investec Securities Research, SIAM

Figure 109: Bajaj Auto domestic 2Ws volume

2.42.6

2.5

2.1

1.8

1.5

2.0

2.5

3.0

FY11 FY12 FY13 FY14 FY15

Mill

ion

s


Confusion around positioning of

Discover as “Fun” or ”Mileage” bike

drove down the market share of

Discover


Figure 112: Market share in Executive segment Figure 113: Bajaj’s performance in Executive segment

12% 17% 21% 20% 20% 14% 8% 4%

77% 73% 67% 69% 63%61% 66% 72%

8% 7% 9% 9% 15% 20% 22% 21%

0%

20%

40%

60%

80%

100%

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16Y

TD

Bajaj Hero Honda

425 796

1,235 1,315 1,312 986

559 105

12%

17%

21% 20% 20%

14%

8%

4%

2%

7%

12%

17%

22%

27%

100

300

500

700

900

1,100

1,300

1,500

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16Y

TD

Th

ou

san

ds

Volumes ('000 units) Market Share (%, RHS)

Source: SIAM, Investec Securities Research Source: SIAM, Investec Securities Research

Expect volume uptick in the Executive Segment

Bajaj plans to come with a new product in the Executive segment in Q4FY16. We

will be keenly watching whether this launch will be under the Discover umbrella or a

completely new brand. In our opinion, a new brand would be preferable for the

Executive segment as the Discover brand has been diluted, in our view.

We expect gradual volume growth in Bajaj’s executive segment primarily led by the

Discover 125 and the expected new product launch in Q4FY16. We expect

domestic executive segments volumes to grow at strong 28% CAGR over FY16-18

to 375K units in FY18, compared to the 1.3 million units sold by Bajaj in the

Executive segment in FY13 before the drop in market share. We expect the low

share of executive segment in overall volumes for Bajaj to have a limited impact of

increasing margin pressure in the executive segment.

Figure 114: Bajaj’s executive segment volumes to gradually improve Figure 115: But limited impact on EBITDA given lower contribution

796

1,235

1,315 1,312

986

559

229 314

373

200

400

600

800

1,000

1,200

1,400

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

('000 units)

Economy 3% Executive 2%

Premium 21%

3Ws 11%

Spares 14%

Exports 50%

EBITDA Contribution FY16E


Launch of new product in Q4FY16

would be key to Bajaj’s performance

in the Executive segment

Earnings growth not significantly

impaired by decline in volumes of the

Executive segment


Economy Segment: CT100 & Platina to help sustain

momentum Bajaj has always maintained a presence in the commuter segment, earlier through

its Boxer/CT100 offerings and more recently through the Platina. The economy

segment is dominated by Hero Motocorp’s HF Dawn with market share of 45%, as

seen in Figure 116. This segment mainly caters to the base of the consumers

pyramid characterised by extreme price and mileage sensitivity. With the launch of

CT100 (discontinued in 2006) at aggressive pricing (~6% lower to segment leader

Hero Motocorp’s HF Dawn) and Platina with Electric Start, Bajaj’s market share

increased to 39% in FY16YTD (Apr-Sep’15) from 25% in FY15.

Though the economy segment features on the lower end of the operating margin

band, we expect increasing traction in the economy segment to improve Bajaj’s

aggregate market share, brand awareness in the commuter segment (Economy &

Executive segment) and dealer’s profitability.

Overall we see volume growth of 12% CAGR over FY15-18E, significantly higher

than the expected industry growth of 5% CAGR over the same period which should

drive Bajaj’s market share in the economy segment from c.25% in FY15 to over

30% by FY18E.

Figure 116: Market share in Economy segment Figure 117: Bajaj’s performance in Economy segment

41%30% 25% 29% 25% 24% 25%

39%

22%24%

27% 25%20% 18% 21%

15%

35%43% 46% 45%

53% 56% 53%45%

0%

20%

40%

60%

80%

100%

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16Y

TD

Bajaj TVS Hero Yamaha

607

426 384

535 485 465

523

376

44%

24%

16%21% 20%

22%

29%

49%

5%

15%

25%

35%

45%

55%

300

350

400

450

500

550

600

650

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16Y

TD

Volumes ('000 units) Market Share (%, RHS)

('000 units)


Premium Segment: Bajaj a prime beneficiary of the

premiumisation trend As income of potential 2W customers of improve and aspirations increase, they

would likely move up the ladder towards the premium segment and the pace of

adoption to the premium segment should accelerate in our view. Also, increased

number of product offerings and product launches by different players in the

premium segments has increased awareness and made the segment more

appealing to the potential customers, as per our channel checks. Between FY10-15

the share of premium segment increased by 2% to 19% of the domestic

motorcycles industry. We expect the pace of adoption to the premium segment to

accelerate which should drive the share of premium segment to 23% by 2020 and

should result in higher than industry growth for the segment. We expect the

premium segment to grow at 10% CAGR over FY15-20E, significantly ahead of

5.4% CAGR growth expected by the domestic motorcycle industry.

In our opinion, Bajaj Auto, being a dominant player in the premium segment (35%

market share) with a strong product portfolio leaning towards next generation bikes

Table 7: CT 100 priced aggressively

Ex-Showroom Price - Pune (Rs)

CT100 35,888

HF Dawn 38,263

Note: Price for Kick start & Spoke wheels variants Source: Company Data, Investec Securities Research

Bajaj’s market share increased to

39% in FY16YTD from 25% in FY15.

Expect share of Premium segment in

the industry to increase to 23% by

2020 from 18% in FY15


as well as expanding towards cruiser segment, should make Bajaj the prime

beneficiary of the premiumisation trend, in our view.

Figure 118: Share of premium segment on the rise Figure 119: Market share in the domestic premium segment

2.02.2

2.42.7

2.93.1

18.6%

20.1%

20.8%21.3%

21.8%22.3%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2


Mill

ion

s


0%

10%

20%

30%

40%

50%

Bajaj Auto TVS Hero Honda Yamaha


Source: Investec Securities estimates Source: Company Data, Investec Securities estimates

Encouraging feedback for new launches

In a bid to further strengthen its position in the premium segment, Bajaj has

launched three variants of Pulsar in FY16YTD (AS 150, RS 200 and AS 200) and

three variants under the brand Avenger – in the cruiser segment.

Our channel checks and interactions with biking enthusiasts suggest encouraging

response to the new Pulsar RS 200. The option of ABS (Anti Braking System) in the

higher variant is one of the key differentiating factors, in our view. Also, the recent

launches by Bajaj in the premium segment and the product line-up seems to

suggest that Bajaj is enhancing its portfolio towards technologically advanced

products such as ABS, FIE (Fuel Injection System), etc. In our opinion, enhancing

the product line-up with technologically advanced features should help Bajaj

maintain its dominance in the premium segment.

Renewed focus on the Avenger brand should further expand Bajaj’s offering in the

growing cruiser segment in which Royal Enfield is the leader. In October’15, Bajaj

re-launched its Avenger brand with two variants in the 220 cc (cruiser & street bike

segment) and one in the 150 cc street bike segment in the price range of Rs.73,000

-Rs.83,000 (ex-taxes). As per management, the new Avenger should help increase

the monthly run-rate of the brand from currently ~3,500 units per month to ~15,000

units per month over the next few months. Though, we expect the share of Avenger

in aggregate volumes to ~4%-5%, given the higher realisation and relatively higher

margin, it should moderately change the overall product mix favourably. We expect

domestic premium segment of Bajaj to grow at 12% CAGR over FY16E-18E, a tad

higher than the expected industry growth of 11% CAGR.

Enhancement of product portfolio

towards technologically advanced

features should help Bajaj maintain its

dominance

Table 8: Expected product launches

Bajaj KTM Kawasaki

Pulsar 400 SS 390 Adventure Ninja H2

Pulsar 160 NS 1190 Adventure Ninja ZX-6R

Pulsar 400 CS 1050 Adventure Avenger

RS400 180NS 200NS FI



Figure 120: The new Pulsar 200RS Figure 121: Bajaj’s new Avenger –in the cruiser segment


Three wheelers provide another wheel to profitable

growth While the domestic 3Ws industry has grown at 4% CAGR over FY10-15, exports

have grown at a robust 19% over the same period, leading to their share of exports

increasing from 28% in FY10 to 43% in FY15. We expect this trend to continue on

the back of strong demand drivers in emerging markets of Africa and Asia.

Our channel checks in Africa indicate that demand for three wheelers in Northern

Africa should be strong as a) motorcycle taxis are not considered an appropriate

means of transport by the public in general and (b) lack of alternate modes of

transport. Bajaj Auto has over a period of time built a strong brand in three wheelers

in Africa and it is clearly reflected in the three wheeler Auto rickshaw being referred

to as Bajaj in some African countries such as Madagascar and Somalia.

In our opinion Bajaj Auto, with 70% market share in India’s 3Ws exports (FY15),

should benefit from the trend given the strong brand, dominance and the distribution

the company has created over the last two decades.

Figure 122: Exports of 3Ws grow at 19% CAGR over FY10-15… Figure 123: …leading to increase in share of exports to 43% in FY15

440 526 513 538 480 532

173

270 363 303

353

408

200

300

400

500

600

700

800

900


Th

ou

san

ds

Domestic 3Ws - Industry Exports 3Ws - Industry

28%

34%

41%

36%

42% 43%

20%

25%

30%

35%

40%

45%


Share of exports in 3Ws Industry


Bajaj Auto is the dominant player in the Indian 3Ws industry with a 44% domestic

market share in FY15, as seen in Figure 124 and Figure 125. While Bajaj has a big

lead in the race for export domination, TVS is the second biggest Indian player with

market share at 22%. It is interesting to note that, Bajaj is not present in the goods

carrier segment (~20% of the industry); yet remains the dominant player in the

domestic market.

3Ws Auto rickshaw are called “Bajaj”

in few African countries

Channel checks indicate strong

demand drivers in countries of

Northern Africa

Bajaj dominates Indian 3Ws market

with 44% market share & exports of

3Ws from India at 70% market share


Figure 124: Bajaj dominant player in 3Ws exports from India… Figure 125: …as well as domestic market

95%86% 86% 84%

74% 70%

3%7% 6% 4%

6% 7%

1%6% 7% 11%

19% 22%

0%

20%

40%

60%

80%

100%


Bajaj Piaggio TVS

3% 4% 5% 6% 8% 8%

40% 39% 40% 42% 39% 44%

10% 12% 13% 12% 13% 11%

41% 39% 36% 34% 35% 32%

3% 4% 3% 3% 3% 3%

0%

20%

40%

60%

80%

100%


Atul Bajaj M&M Piaggio TVS


Three wheelers offer strong profitability

Along with providing another avenue of growth, three wheelers offer strong

profitability, with EBITDA margin of +30% in exports and ~27% domestically

compared to the overall EBITDA margin of 19% reported by Bajaj in FY15. Led by

relatively higher realisation and higher margin of 3Ws, the contribution of 3Ws in

aggregate EBITDA was ~40% in FY15, despite the share of 3Ws in aggregate

volumes being c.15%, in our view.

Figure 126: Higher realisation & margins of 3Ws drives higher contribution in aggregate EBITDA

6%10%

15%7%

17%

26%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Volume Revenue EBITDA

Domestic 3Ws Export 3Ws


While the demand for domestic three wheelers is dependent on permits issued by

government agencies, which is relatively difficult to predict, we expect domestic

three wheelers volumes for Bajaj Auto to grow at 5% CAGR over FY16-18. We

expect Bajaj to continue to dominate the petrol alternate fuel category of 3Ws (88%

market share) and also expand the product portfolio towards large diesel segment.

As seen in Figure 127, Bajaj’s 3Ws export run-rate normalised to over 31K units per

month in September’15 after declining to ~13K units in February’15 (led by balance

of payment issues in Egypt, a temporary order freeze by the Sri Lanka government

and presidential elections in Nigeria). From here on we expect an uptick in 3Ws

exports for Bajaj as these country specific issues have receded and we expect

strong volume growth from emerging markets of Africa and Asia driving the 9%

CAGR volume growth over FY15-18E.

Expect 3Ws exports for Bajaj to grow

at 9% CAGR over FY15-18


Figure 127: Exports run-rate normalised to over 31K in Sep’15 Figure 128: Expect 3Ws volumes to grow at 6% CAGR led by exports

10

15

20

25

30

35

Apr

14

Jun1

4

Aug

14

Oct

14

Dec

14

Feb

15

Apr

15

Jun1

5

Aug

15

Th

ou

san

ds

3Ws Export 3Ws Domestic

187 234 234 246 258

261

285 313 338

365

100

200

300

400

500

600

FY14 FY15 FY16E FY17E FY18E

Th

ou

san

ds

3Ws Domestic 3Ws Exports

Source: Company Data, Investec Securities Research Source: Company Data, Investec Securities estimates


Sector leading operating/financial metrics

We believe Bajaj Auto’s product mix is structurally geared towards higher operating

margins compared to peers. As seen in Table 10 , contribution of domestic

economy and executive segments (relatively lower margin) in aggregate revenue of

Bajaj is c.20%. On the contrary, premium segment, exports, domestic 3Ws and

spares which have all have EBITDA margin in excess of 20% have a cumulative

contribution of ~90% to EBITDA in FY15 (revenue share 80%). Bajaj is the market

leader (35%in the premium sports segment which commands the highest margin

among all domestic two wheeler products.

Table 9: Portfolio geared towards higher profitability

Revenue (%) FY15 FY16E FY17E FY18E Comments

Economy 8% 12% 10% 10% Lowest margin in motorcycles

Executive 11% 4% 5% 6%

Relatively higher margin than economy segment, but margin pressure trending upwards

Premium 21% 22% 23% 23% High margin

Spares 9% 10% 10% 9% Margin comparable to the executive segment

3Ws 9% 9% 8% 8% High margin

Exports 41% 43% 43% 44% High margin

Total 100% 100% 100% 100% High margin


Table 10: Bajaj relatively better placed as compared to Hero and TVS

Volume break-up (FY15) Bajaj Hero TVS

Economy 14% 17% 17%

Executive 15% 66% 1%

Premium 18% 2% 8%

Scooters

11% 27%

3Ws 6%

1%

Mopeds

30%

Exports 47% 3% 16%

Total 100% 100% 100%


EBITDA margin to gradually expand from here on

Between FY10 to FY15, while Bajaj grew revenues at a 13% CAGR, EBITDA grew

much faster at a 50% CAGR. This is attributable to the growing share of Premium

segment (highest margin in 2W segment) in the domestic volumes and increasing

share of exports. In our opinion, further rise in proportion of exports coupled with

increase in share of non-Africa exports (richer product mix) should further improve

profitability Bajaj’s exports business. Moreover, a gradual product mix change in the

domestic business (increase in share of premium segment) should also improve

aggregate profitability of Bajaj Auto, in our view. Overall we expect Bajaj EBITDA

margin to increase from 19% in FY15 (21% reported 1HFY16) in to 22% by FY18E.

Figure 129: EBITDA split – FY15

Economy 3%

Executive 5%

Premium 20%

3Ws 12%

Spares 13%

Exports 48%



Figure 130: Contribution of Premium (21%) and exports (41%) … Figure 131: … to revenues is likely to increase in FY18

0%

20%

40%

60%

80%

100%

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

Exports Premium Economy Executive 3Ws Spares

Exports 45%

Premium22%

Economy10%

Executive 6%

3Ws8%

Spares 9%

Source: Company Data, Investec Securities estimates Source: Company Data, Investec Securities estimates

Figure 132: Indicative segmental EBITDA margin range Figure 133: Bajaj’s revenues likely to grow at 13% but EBITDA to grow faster at 16% CAGR over FY15 – 18E.

0

5

10

15

20

25

30

35

Economy Executive Premium 3W Spares 2W 3W

Domestic Exports

(%)

201216 246

277

311

20%

19%

21% 22%22%

18%

19%

20%

21%

22%

150

170

190

210

230

250

270

290

310

330

FY14 FY15 FY16E FY17E FY18E

Revenue (Rs bn) EBITDA margin (RHS)

Source: Investec Securities estimates Source: Company Data, Investec Securities estimates

Bajaj’s just in time inventory management, asset light business model and cash and

carry nature of transactions with dealers significantly boost the operating cash flow

of the company with strong EBITDA to cash conversion ratio of ~70%, as seen in

Figure 135. Management’s preference towards asset light business model has

resulted in the outsourcing of most non-critical components; thereby it further limits

the need for any significant capital expenditure. Working in tandem, these factors

are likely to result in free cash flow accretion of c.Rs130bn over FY16E to FY18E.

Figure 135: … Bajaj convert c70% of EBITDA to cash; and coupled with limited …

Figure 136: … capex requirement will result in c.Rs133bn of free cash flow accretion over FY16E to FY18E

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

10

15

20

25

30

35

40

45

50

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

Operating cash flow as a % of EBITDA (RHS)

(Rs bn)

24 5

3 3 4 4 4

14

28

16

33

18

3437

42

0

5

10

15

20

25

30

35

40

45

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

Capex Free cash flow

(Rsbn)


Figure 134: Negative net working capital cycle

(25)(20)

(24)

(12)

(30)

(25)

(20)

(15)

(10)

(5)

0

FY

12

FY

13

FY

14

FY

15

(Days)

Source: Company Data, Investec Securities estimates


In our opinion, Bajaj’s significant free cash flow generation has stifled ROCE/ROE

expansion given the lower necessity of deployment of cash in core business led by

asset light nature of the business. Nonetheless, this is a rather pleasant problem to

have.

In the past Bajaj used its surplus cash to make acquisitions, like KTM, which

resulted in significant learning in terms of design capability/ technology and also as

a distribution channel in developed countries, where Bajaj lacks a significant

presence. Given that the company has not indicated any plans for acquisition, the

likelihood of greater distribution among shareholders in the form of a higher

dividend payout ratio remains strong. Additionally one cannot rule out the possibility

of a share buyback which is a more tax efficient route of surplus distribution.

Figure 137: ROCE and ROCE likely to be stable

35%

31%

26%

28%28%

26%

44%

37%

31%32% 32%

31%

20%

25%

30%

35%

40%

45%

FY13 FY14 FY15 FY16E FY17E FY18E

ROACE (post tax) ROE


Figure 138: Cash and cash equivalents Figure 139: Dividend payout ratio

47 39

69 72

4657

71871

1

2 1

213

26

43

100

150

200

250

300

350

400

450

500

30

50

70

90

110

130

150

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

Current investments Cash

(Rsbn) (Rs/share)

35%

43% 43%45%

51%50% 50% 50%

30%

35%

40%

45%

50%

55%

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E



Attractive valuations – Initiate with BUY Bajaj is trading at 16x FY17E earnings broadly in-line with five year average

valuation. In our opinion, valuations are attractive given a) strong earnings growth of

16% CAGR over FY15-18E, b) robust return ratios (ROE/ROCE of 32%/28% in

FY16E), c) high FCF yield (5.3%/6% FY17E/18E with expected FCF generation of

Rs42bn in FY18), and d) dividend yield of 3.1% in FY17E.

We value Bajaj at 17x Sep’17 earnings which is at 10% premium to one year

forward P/E. We value Bajaj’s 48% stake in KTM at listed market price of Rs.153

per share leading to our target price of Rs.2900.

In our opinion, Bajaj deserves a premium to historic valuations primarily led by:

1 Expected higher volume growth of 7% CAGR over FY15-18 as compared to a

volume decline 4% CAGR over FY12-15.

2 Lower exposure to the domestic executive segment which in our opinion should

see further increase in competitive intensity. Contribution of the domestic

executive segment in Bajaj is expected to decline from 16% of aggregate

volume in FY15 to 8% by FY18E.

3 Increase in share of premium segment in which Bajaj has a strong hold (35%

market share) and entail higher margins (+20% EBITDA margin) in the

domestic volumes from 38% in FY15 to 44% in FY18. Strong product line-up

and encouraging feedback of the recent launches by Bajaj in the premium

segment gives us the confidence that Bajaj should deliver volumes growth of

12% CAGR in the domestic premium segment over FY16E-18E.

4 Further diversification of export business thereby reduces the risk of volatility of

demand in any single geography. While Bajaj exported to 62 countries in FY15,

the share of Africa in total exports was at 43%. Though the share of Africa is

still high, as Bajaj enter new markets and increases penetration into other non-

African markets (like LATAM) we expect the share of Africa to further come

down (share of Africa was ~50% in FY10)

Table 11: SOTP

FY17E FY18E Average Sep'17

EPS (Rs.) 152 171 162

P/E (x)

17

Equity value (Rs/share)

2,747

KTM valuation (Rs/share)

153

Target Price (Rs/share)

2,900


Figure 140: One year forward P/E

Avg 15.2

Max 19.5

Min 12.1

10

11

12

13

14

15

16

17

18

19

20

Nov

-10

Feb

-11

May

-11

Aug

-11

Nov

-11

Feb

-12

May

-12

Aug

-12

Nov

-12

Feb

-13

May

-13

Aug

-13

Nov

-13

Feb

-14

May

-14

Aug

-14

Nov

-14

Feb

-15

May

-15

Aug

-15

P/E (x) Avg Max Min

Source: FactSet

ROE/ROCE of ~30%, FCF Yield of

5.3%, Dividend Yield of 3.2% and

EPS growth of 16% CAGR suggest

attractive valuation of 16xFY17

earnings


Figure 141: Bajaj Auto summary financials

Income Statement (Rsm) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Revenue 96,900 90,497 121,181 168,302 198,270 206,179 207,270 220,132 250,944 283,105 317,937

Other Operational Income 3,103 3,734 4,125 5,014 6,487 5,083 4,319 5,081 5,335 5,602 5,882

Less: Excise duty 10,267 6,127 6,096 9,334 9,468 11,289 10,094 9,093 10,366 11,694 13,133

Total income 89,736 88,104 119,210 163,982 195,290 199,973 201,495 216,120 245,914 277,013 310,686

% change YoY 0% -2% 35% 38% 19% 2% 1% 7% 14% 13% 12%

EBITDA 12,210 11,921 25,926 31,712 37,200 36,352 41,056 41,166 52,441 59,657 67,032

EBITDA margin 14% 14% 22% 19.3% 19.0% 18.2% 20.4% 19.0% 21.3% 21.5% 21.6%

PBT 14,451 13,315 28,236 43,478 40,262 42,634 46,319 40,848 55,952 65,137 73,611

Investec Net profit 11,686 12,350 22,776 26,152 31,381 30,408 32,418 31,540 37,703 43,892 49,602

Weighted average shares 289 289 289 289 289 289 289 289 289 289 289

EPS, diluted 40.4 42.7 78.7 90.4 108.4 105.1 112.0 109.0 130.3 151.7 171.4

DPS 20.0 22.0 40.0 40.0 45.0 45.0 50.0 50.0 65.1 75.8 85.7

Balance Sheet (Rsm) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Net Block 12,686 15,423 14,796 14,827 14,796 18,044 20,060 19,172 19,876 20,835 21,532

Investments 18,571 18,085 40,215 47,219 48,828 64,305 85,496 91,533 101,533 116,533 131,533

Inventories 3,496 3,388 4,462 5,473 6,785 6,363 6,397 8,142 7,641 8,607 9,653

Sundry Debtors 2,753 3,587 2,728 3,599 4,228 7,676 7,962 7,170 8,085 9,107 10,214

Cash and Bank 561 1,369 1,014 2,288 16,538 5,589 4,955 5,862 15,480 21,993 31,666

Loans and advances 9,687 14,909 21,805 12,084 13,204 15,240 13,955 16,085 16,085 16,085 16,085

Total assets 48,102 58,814 85,436 92,475 110,841 124,786 147,476 155,623 176,359 200,820 228,343

Equity 1,447 1,447 1,447 2,894 2,894 2,894 2,894 2,894 2,894 2,894 2,894

Reserves and Surplus 14,429 17,250 27,837 46,209 57,517 76,126 93,187 104,028 122,879 144,825 169,626

Debt 13,343 15,700 13,386 2,917 975 713 577 1,118 1,118 1,118 1,118

Deferred Tax Assets / Liabilities 110 42 17 2,234 2,055 2,372 2,306 1,992 1,992 1,992 1,992

Current Liabilities & Others 18,773 24,376 42,750 38,222 47,400 42,682 48,512 45,592 47,477 49,992 52,714

Total Liabilities 48,102 58,814 85,436 92,475 110,841 124,786 147,476 155,623 176,359 200,820 228,343

Cash Flow Statement (Rsm) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Cash From Operating Activities 7,860 31,496 16,137 31,932 21,344 35,458 21,473 37,921 41,423 46,327

Cash Flow from Investing Activities -2,087 -21,636 -6,232 -6,819 -12,778 -21,415 -4,143 -9,441 -12,953 -11,842

Cash from Financing Activities -1,230 -6,090 -8,620 -15,644 -15,002 -14,682 -16,441 -18,862 -21,957 -24,812

Net Cash Inflow / Outflow 4,542 3,770 1,285 9,469 -6,436 -639 889 9,618 6,513 9,673

FCFF 3,999 30,418 14,523 28,254 16,059 32,911 18,521 34,421 37,423 42,327

Performance Ratios FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Growth

Revenue -2% 35% 38% 19% 2% 1% 7% 14% 13% 12%

EBITDA -2% 117% 22% 17% -2% 13% 0% 27% 14% 12%

EBIT 1% 131% 24% 17% -3% 13% -2% 29% 14% 13%

EPS 6% 84% 15% 20% -3% 7% -3% 20% 16% 13%

Margins

EBIT 12% 12% 21% 19% 18% 17% 19% 18% 20% 20% 21%

Net profit 13% 14% 19% 16% 16% 15% 16% 15% 15% 16% 16%

Solvency

Net debt / equity (%) 81% 77% 42% 1% -26% -6% -5% -4% -11% -14% -18%

Net debt / total assets (%) 27% 24% 14% 1% -14% -4% -3% -3% -8% -10% -13%

Net debt / EBITDA (x) 1.0 1.2 0.5 0.0 -0.4 -0.1 -0.1 -0.1 -0.3 -0.3 -0.5

EBITA interest cover (x) 237x 57x 434x 1,876x 167x 6,732x 8,379x 634x 4,692x 5,337x 5,997x

Capital productivity

Capital employed 29,219 34,397 42,669 52,019 61,386 79,732 96,658 108,039 126,890 148,836 173,637

Capital growth (%) 0% 18% 24% 22% 18% 30% 21% 12% 17% 17% 17%

Capital turn (x) 0.3x 0.4x 0.4x 0.3x 0.3x 0.4x 0.5x 0.5x 0.5x 0.5x 0.6x



Summary Financials (INRm) Year end: 31 March

Income Statement 2014 2015 2016E 2017E 2018E Revenue 201,495 216,120 245,914 277,013 310,686EBITDA 41,056 41,166 52,441 59,657 67,032Depreciation and amortisation -1,796 -2,674 -2,796 -3,041 -3,303Operating profit 39,260 38,492 49,644 56,616 63,729Other income 2,833 2,055 2,260 2,486 2,735Net interest 4,226 3,705 4,048 6,036 7,147Share-based-payments 0 0 0 0 0PBT (normalised) 46,319 44,251 55,952 65,137 73,611Impairment of acquired intangibles - - - - - Non-recurring items/exceptionals 14 -3,403 0 0 0PBT (reported) 46,333 40,848 55,952 65,137 73,611Taxation -13,901 -12,711 -18,250 -21,246 -24,010Minorities & preference dividends 0 0 0 0 0Discontinued/assets held for sale 0 0 0 0 0Net Income (normalised) 32,418 31,540 37,703 43,892 49,602Attributable profit 32,432 28,137 37,703 43,892 49,602EPS (reported) 112.1 97.2 130.3 151.7 171.4EPS (norm., cont.) – FD (INR) 112.0 109.0 130.3 151.7 171.4EPS (norm., cont., IAS19R adj.) – FD - - - - - DPS (INR) 50.0 50.0 65.1 75.8 85.7Average number of group shares - FD (m) 289 289 289 289 289Average number of group shares (m) 289 289 289 289 289Total number of shares in issue (m) 289 289 289 289 289

Cash Flow 2014 2015 2016E 2017E 2018E Operating profit 39,260 38,492 49,644 56,616 63,729Depreciation & amortisation 1,796 2,674 2,796 3,041 3,303Other cash and non-cash movements -991 -4,718 -1,788 -3,549 -4,413Change in working capital 4,319 -5,825 1,471 526 569Operating cash flow 44,384 30,623 52,123 56,633 63,189Interest 4,226 3,705 4,048 6,036 7,147Tax paid -13,153 -12,854 -18,250 -21,246 -24,010Dividends from associates and JVs 0 0 0 0 0Cash flow from operations 35,458 21,473 37,921 41,423 46,327Maintenance capex -2,547 -2,952 -3,500 -4,000 -4,000Free cash flow 32,911 18,521 34,421 37,423 42,327Expansionary capex - - - - - Exceptionals and discontinued operations - - - - - Other financials 641 -55 -11 -11 -11Acquisitions -18,868 -1,191 -5,941 -8,953 -7,842Disposals - - - - - Net share issues 0 0 0 0 0Dividends paid -15,182 -16,909 -18,851 -21,946 -24,801Change in net cash -498 366 9,618 6,513 9,673Net cash/(debt) 4,377 4,744 14,362 20,875 30,548FCFPS - FD (INR) 113.7 64.0 118.9 129.3 146.3

Balance Sheet 2014 2015 2016E 2017E 2018E Property plant and equipment 20,386 20,190 20,893 21,852 22,549Intangible assets 1,115 1,532 1,532 1,532 1,532Investments and other non current assets 92,706 96,644 106,644 121,644 136,644Cash and equivalents 4,955 5,862 15,480 21,993 31,666Other current assets 28,315 31,396 31,810 33,799 35,952Total assets 147,476 155,623 176,359 200,820 228,343Total debt -577 -1,118 -1,118 -1,118 -1,118Preference shares 0 0 0 0 0Other long term liabilities -9,968 -9,666 -9,666 -9,666 -9,666Provisions & other current liabilities -40,851 -37,918 -39,803 -42,317 -45,040Pension deficit and other adjustments 0 0 0 0 0Total liabilities -51,396 -48,702 -50,587 -53,101 -55,824Net assets 96,080 106,922 125,773 147,719 172,519Shareholder's equity 96,080 106,922 125,773 147,719 172,519Minority interests 0 0 0 0 0Total equity 96,080 106,922 125,773 147,719 172,519Net working capital -6,755 -2,686 -4,157 -4,683 -5,252NAV per share (INR) 332.0 369.5 434.6 510.4 596.1

Source: Company accounts, Investec Securities estimates


Sel ecti on.Tables(1).R ang e.Fi elds .Update

Calendarised Valuation Year end: 31 March

2014 2015 2016E 2017E

Calendar PE (x) 22.6 19.9 16.9 14.9

Calendar Price/NAVPS (x) 6.9 5.9 5.0 4.3

EV/sales (x) 3.3 3.0 2.6 2.3

EV/EBITDA (x) 17.1 14.2 12.1 10.8

FCF yield (%) 3.1 4.2 5.1 5.7

Dividend yield (%) 2.0 2.5 3.0 3.4


Ratios and Metrics Year end: 31 March

Ratios and metrics 2014 2015 2016E 2017E 2018E Revenue growth (y-on-y) (%) 0.8 7.3 13.8 12.6 12.2EBITDA growth (y-on-y) (%) 12.9 0.3 27.4 13.8 12.4Net income (normalised) growth (yoy) 6.6 (2.7) 19.5 16.4 13.0EPS (normalised) growth (y-on-y) (%) 6.6 (2.7) 19.5 16.4 13.0FCFPS growth (y-on-y) (%) 104.9 (43.7) 85.8 8.7 13.1NAVPS growth (y-on-y) (%) 21.6 11.3 17.6 17.4 16.8DPS growth (y-on-y) (%) 11.1 0.0 30.3 16.4 13.0Interest cover (x) (9.3) (10.4) (12.3) (9.4) (8.9)Net debt/EBITDA (x) (0.1) (0.1) (0.3) (0.3) (0.5)Net debt/equity (%) (4.6) (4.4) (11.4) (14.1) (17.7)Net gearing (%) (4.8) (4.6) (12.9) (16.5) (21.5)Dividend cover (x) 2.2 2.2 2.0 2.0 2.0EBITDA margin (%) 20.4 19.0 21.3 21.5 21.6EBITA margin (%) 19.5 17.8 20.2 20.4 20.5ROE (%) 33.7 29.5 30.0 29.7 28.8ROCE (%) 37.0 33.0 36.7 36.0 35.0NWC/revenue (%) (3.4) (1.2) (1.7) (1.7) (1.7)Tax rate (normalised) (%) 30.0 28.7 32.6 32.6 32.6Tax rate (reported) (%) 30.0 31.1 32.6 32.6 32.6


Target Price Basis

PE multiple on average FY17/18 earnings

Key Risks

Geopolitical risk impacting volumes in key geographies

Page 56 | 26 November 2015 | Hero Motocorp

Hero Motocorp (HROM.NS)

Hero M otocorp ( Buy - TP: INR)


Multiple headwinds; valuations supportive

INR2646 INR2790

In the backdrop of increasing competition, slower growth and margin

headwinds, we believe Hero could miss management guidance and street’s

expectation on margin expansion. We also think Hero’s guidance of 1.2m

units of annual export by FY20 is optimistic, as breaking into markets of

Africa/LATAM will take some time given the lack of brand exposure there.

Consequently our FY17E/18E PAT estimates are 5/6% below consensus,

though at 16x FY17E P/E the stock price reflects these concerns. Initiate with

Hold.

Aditya Jhawar +91 (22) 6136 7415

[email protected]


[email protected]

Increasing competition & slower growth to hurt domestic business: With

Honda’s aggression and Bajaj’s desire to get back market share, we expect

competition in the executive segment to further increase and potentially drag down

operating margins for the industry. In our opinion, Hero is the most vulnerable

given it derives c.70% of the volumes from this segment and Honda’s track record

of breaking into and dominating markets globally could spoil the party for Hero.

Slower rural growth (led by weak monsoon) could also potentially hurt Hero the

most given the exposure to commuter segment (economy + executive) which

contribute c.85% of Hero’s volumes.

Margin to fall short of management guidance/street expectations: Margin

pressure in the executive segment, increasing spend on R&D and

marketing/setting-up expenses in export markets could put pressure on Hero’s

margin, posing risk to management guidance and street expectation, in our view.

Though management has trimmed its EBITDA margin expansion target by 200bps

from 400bps earlier to c.15% by FY17, we are circumspect on the incremental

benefits that could flow through Hero’s LEAP program.

Initiate with Hold and target price of Rs 2790: Despite headwinds surrounding its

core operating business, we think Hero’s ROCE/ROCE of ~41/34%, FCF/Dividend

Yield of ~5%/3% can be sustained over the next three years. Hero’s valuation at

16xFY17 P/E (in-line with five year average), seems fair to us. Initiate with Hold

recommendation and target price of Rs.2790 based on 16x Sep’17 earnings.

Stronger than expected growth in exports and higher margin expansion are key risk

to our thesis.


2014A 2015A 2016E 2017E 2018E

Revenue (INRm) 252,755 275,853 288,825 313,822 338,977

EBITDA (INRm) 27,270 33,420 41,897 45,837 49,850

EBITA (INRm) 24,327 30,022 38,042 41,593 45,217




FCFPS - FD (INR) 101.7 54.9 145.9 137.3 163.1

DPS (INR) 65.0 60.0 75.9 83.7 91.5

PE (normalised) (x) 25.1 20.8 17.5 15.9 14.5

EV/sales (x) 2.0 1.9 1.8 1.6 1.5

EV/EBITDA (x) 18.8 15.3 12.2 11.2 10.3

FCF yield (%) 3.8 2.1 5.5 5.2 6.2

Dividend yield (%) 2.5 2.3 2.9 3.2 3.5

2,200

2,400

2,600

2,800

3,000

3,200

3,400


1m 3m 12m

____________________________Price 2.0 6.8 (13.1)

____________________________Price rel to India S&P BSE 500 - BSE India (Indian Rupee)6.5 6.1 (10.4)


HOLD

Price: INR2645

Target: INR2790

Forecast Total Return: 8.5%


EV: INR512bn

Average daily volume: 386k


Figure 142: Company description Figure 143: Shareholding pattern

Hero MotoCorp Limited, formerly Hero Honda Motors Limited, manufactures two wheelers and their parts and ancillary services. The company has three manufacturing facilities, two in Haryana and a third in Uttrakhand. It has 17 different products across 100cc, 125cc, 150cc, 225cc and scooter category. The company offers a range of bikes which include CD Dawn, CD Deluxe, Splendor Plus, Splendor NXG, Super Splendor and Passion Pro. The company is the largest manufacturer of motorcycles in the world and commands a market share of 41% in the domestic two-wheeler industry. The company was founded by Late Mr. Brijmohan Lall Munjal on 19 January 1984 and is headquartered in New Delhi, India.

Promoters35%

FII38%

DII14%

Public 13%


Figure 144: Hero’s is the market leader in the domestic motorcycles…

Figure 145: but its portfolio is skewed towards executive segment…

30% 32% 32% 31% 27% 25%

52% 48% 48% 46%44% 45%

6% 7% 7% 11% 14% 14%

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

5%5% 5% 5% 8% 8%

0%

20%

40%

60%

80%

100%


Bajaj Hero Honda TVS Others

25% 20% 17% 18% 20% 18% 19%

61% 64% 64% 65% 64% 65% 62%

14% 16% 18% 17% 16% 17% 18%

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 2015



Figure 146: Hero’s cash generation profile to remain strong Figure 147: Expect strong & stable ROCE/ROE

23 24

19

30

22

4137

41

46 6

912 12

108

0

5

10

15

20

25

30

35

40

45

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

Operating cash flow Capex

(Rsbn)

20%

25%

30%

35%

40%

45%

50%

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

RoCE RoE



Dominance in the Indian 2Ws market Hero is the leader in the Indian two wheeler industry with 38% share (1H FY16) in

2Ws overall and 53% share in motorcycles. The seeds for this domination were

sown over the past three decades with the help of its erstwhile partner Honda.

Hero’s partnership with Honda provided the former with Honda’s superior

technology, knowledge, know-how and experience garnered over several years

from diverse markets, and this helped hero build a dominant position in the Indian

markets.

c.70% of Hero’s domestic volumes comes from the Executive segment, a segment it

dominates with the decade-old brands Splendour and Passion. Both these brands

cumulatively account for 66% of Hero’s total volumes, 69% of the executive

segment’s volume and c.25% of the entire 2Ws industry.

Figure 149: Hero dominates the Indian 2Ws industry Figure 150: Splendour & Passion corner a large share in the industry

3.3 4.55.2

6.1 6.0 6.1 6.4

47%48%

44% 45% 43%

41%40%

30%

35%

40%

45%

50%

2.0

3.0

4.0

5.0

6.0

7.0

2009 2010 2011 2012 2013 2014 2015

Mill

ion

s

Domestic volumes Market share (RHS)

61% 60%

35%

23%

0%

10%

20%

30%

40%

50%

60%

70%

IndustryExecutiveSegment

Hero's domesticvolumes

DomesticMotorcycle

Industry

Domestic 2Ws

Splendour & Passion Share

Source: CRISIL, Investec Securities research Source: CRISIL, Investec Securities research

Figure 151: Hero’s market share in the domestic 2Ws industry Figure 152: Hero’s market share in domestic motorcycles industry

24% 25% 25% 24% 20% 18%

44% 41% 41% 39%37% 36%

12% 12% 14% 17% 22% 24%

14% 15% 14% 13% 12% 13%

6% 7% 7% 8% 9% 9%

0%

20%

40%

60%

80%

100%



30% 32% 32% 31% 27% 25%

52% 48% 48% 46%44% 45%

6% 7% 7% 11% 14% 14%

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

5%5% 5% 5% 8% 8%

0%

20%

40%

60%

80%

100%



Source: CRISIL, Investec Securities research Source: CRISIL, Investec Securities research

Figure 148: Hero’s volume split (FY15)

Motorcycle 86%

Scooters 11%

Exports 3%

Source: Company filings, Investec Securities research


Growth to slow down in economy segment In our opinion, the industry growth rate of the economy segment (engine capacity <

110 cc and launch price < Rs45,000) should slow down to 3% CAGR over FY15-

20E as compared to 8% CAGR reported by the industry over FY10-15.

Rising incomes and aspirations of first time buyers (economy segment is generally

characterised by first time buyers) should drive the move to the executive segment,

in our view. Relatively slower growth should drive share of economy segment in the

industry to 18% by FY20 from 22% reported in 1HFY16, as seen in Table 12.

For Hero, the contribution from the economy segment was at 17% in proportion to

aggregate volumes in FY15. The economy segment is dominated by Hero

Motocorp’s HF Dawn with market share of 46%, as seen in Figure 154 . This

segment mainly caters to the base of the consumers pyramid characterised by

extreme price and mileage sensitivity.

Table 12: Expect growth to slow down for the economy segment for the industry

Volume Growth (%) Segment Share (%)

CAGR (FY10-15) CAGR (FY15-20E) 1FHY16 FY20E

Economy 8% 3% 22% 18%

Executive 8% 4% 58% 59%

Premium 11% 10% 20% 23%

Total volumes 9% 5% 100% 100%

Source: SIAM, Investec Securities estimates

Figure 154: Market share in the domestic economy segment Figure 155: Hero lost market share in 1HFY16 to Bajaj

42%30% 25% 28% 26% 24% 24%

38%

22%25% 27% 26% 20% 18% 21%

16%

35% 43% 46% 45% 52% 56% 54% 46%

2% 2% 2% 1% 2% 2% 1% 1%

0%

20%

40%

60%

80%

100%

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16Y

TD

Bajaj TVS Hero Others

39 51

59 68

87 88 94

44

35%

43%46% 45%

52%56%

54%

46%

30%

35%

40%

45%

50%

55%

60%

30

40 50

60

70

80

90

100

Th

ou

san

ds

Heroeconomy segment monthly run-rate

Market share (RHS)


With the launch of CT100 (discontinued in 2006) at very competitive pricing (~6%

lower to segment leader Hero Motocorp’s HF Dawn) and Platina with Electric Start,

Bajaj’s market share increased to 38% in FY16YTD (Apr-Sep’15) from 25% in

FY15.

Figure 153: Motorcycle industry split

25% 18% 22% 18%

61% 65% 58% 59%

14% 17% 20% 23%

0%

50%

100%

FY09 FY12 1HFY16 FY20E




Figure 156: increased competition from Bajaj post the launch of Platina & CT100

39

51

59

68

87 88

94

87

48

35 32

43 43 38

42

72

42%

30%

25%

28%

26%24% 24%

38%

20%

25%

30%

35%

40%

45%

30

40

50

60

70

80

90

100

FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16

Th

ou

san

ds

Hero avg. monthly run-rate Bajaj avg. monthly run-rate

Bajaj's market share (RHS)


Expected slower growth of the economy segment and aggressive pricing of new

products in the backdrop of increased competition could potentially hurt margins of

the economy segment, in our view. Overall we expect Hero to deliver volume

growth of 4.6% CAGR over FY15-18E in the economy segment, as compared to

industry growth of 5.2% CAGR over FY15-18E. On the back of encouraging

response to the recently launched products by Bajaj (CT100, Platina), we expect

the growth momentum to continue and report volume growth of 12% CAGR over

FY15-18E which should drive the domestic economy segment industry growth.

Table 13: CT 100 priced aggressively

Ex-Showroom Price - Pune (Rs)

CT100 35,888

HF Dawn 38,263

Note: Price for Kick start & Spoke wheels variants Source: Company Data, Investec Securities Research


Exposure to executive segment a concern While the share of Executive Segment (motorcycles with engine capacity 110-

150cc and launch price of Rs.45,000-Rs65,000) in the domestic motorcycle industry

is ~65% (FY15), it’s share in Hero’s domestic motorcycles volumes stood at 77%

(67% of total volumes in FY15). With the popular brands Splendour and Passion,

the share of Executive segment in Hero was always on a higher side as seen in

Figure 158. In our opinion, the domestic executive segment should see further

increase in competitive intensity which could potentially hurt margins for Hero.

Increase in competitive intensity should be primarily driven by aggressive marketing

by Honda and Bajaj.

Figure 158: Hero portfolio geared towards executive segment… Figure 159: …share of premium segment trending up in the industry

15% 14% 15% 15% 19% 20% 20%

80% 80% 79% 80% 76% 76% 77%

5% 6% 7% 6% 5% 4% 3%

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 2015


25% 20% 17% 18% 20% 18% 19%

61% 64% 64% 65% 64% 65% 62%

14% 16% 18% 17% 16% 17% 18%

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 2015



Honda’s desire to become Numero Uno drives their aggression:

Honda has an enviable track record of breaking into and dominating markets

globally. We take a look at its history to understand how its experience is likely to

benefit it in India. With 70 years’ experience in creating and breaking into

established markets, Honda can easily gain leadership position from current

position of number two. Honda’s strategy is to focus on one market at a time with

the objective to become market leader before moving on to another market. Honda

is already market leader in most of the relevant two wheeler markets globally,

except India, so Honda could potentially use similar strategies to garner market

share in India.

Table 14: Timeline of Honda motorcycles entering and dominating 2Ws markets

Country Year Market Share

Japan 1946 No.1 player in 1958 with over 30% share

USA 1959 No.1 player with over 50% share in 1965

UK Mid 1960' No.1 player share in 1974 at 54%

Holland Mid 1960' No.1 player share in 1974 at 41%

Germany Mid 1960' No.1 player share in 1974 at 39%

France Mid 1960' No.1 player share in 1974 at 37%

Germany Mid 1960' No.1 player share in 1974 at 39%

Canada Mid 1960' No.1 player share in 1974 at 41%

Indonesia 1974 No.1 player within a few years, 2012 share at 58%

Brazil 1975 No.1 player within a few years, 2012 share a t 80%

Thailand 1975 No.1 player within a few years , 2012 share a t 76%

Vietnam 1990' No.1 player within a few years , 2012 share a t 62%

India 1984 leader in a few years 2010 share 65%

India 2011 Second innings but standalone, from 4th largest player in 2010 to 2nd largest in 2013.


Figure 157: Hero’s executive segment share

76%74%

67%68%63%61%

65%

72%

50%

60%

70%

80%

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

1HF

Y16


Honda’s desire to become Number

Uno drives the aggression in the

executive segment


Executive segment to support market share gains: Honda’s market share in the

domestic 2Ws industry in FY15 stood at 27% with market share in motorcycles and

scooters at 17% and 55%, respectively. Given the dominance of Honda in scooters

and new product launches by Hero and TVS, we feel Honda’s further market share

gains in scooters, if any, would be limited and gradual. On the contrary, with market

share of 17% (FY15) in the domestic motorcycle industry and increasing traction in

the executive segment (market share of 23% in FY15, +4% YoY) we expect Honda

to further strengthen its foothold in the domestic motorcycle industry. Share of

executive segment stood at 85%/36% of the motorcycles/aggregate volumes for

Honda in FY15. Importance of the executive segment from Honda’s perspective is

clearly reflected from the higher contribution of the segment to total motorcycles

and aggregate two wheelers at 85%/36% respectively in FY15.

Figure 160: Honda dominates scooters, and has ample scope for gains in motorcycles

Figure 161: In motorcycles, Executive remains the key segment for Honda

6% 6% 7% 7%11%

15% 17%

57%

51%

43%48% 49%

53%55%

14% 13% 13% 15%19%

24%27%

0%

10%

20%

30%

40%

50%

60%


Motorcycles Scooters Aggregate

257 333 537 596

923

1,287 1,528

67 97

123 160

228

298

266

79%

77%

81%

79%

80%

81%

85%

72%

74%

76%

78%

80%

82%

84%

86%

-

300

600

900

1,200

1,500

1,800


Th

ou

san

ds

Executive Premium Share of executive (RHS)

Source: SIAM, Investec Securities Research Source: Investec Securities Research

Figure 162: Honda’s executive volume grew by 135% CAGR … Figure 163: …resulting in an increase in market share to 23%

257 333 537 596

923

1,287 1,528

8% 7%

9% 9%

14%

19%

23%

5%

10%

15%

20%

25%

200

400

600

800

1,000

1,200

1,400

1,600


Th

ou

san

ds

Executive Seg volume Market share in Executive segment

76% 74% 67% 68% 63% 61% 65%

8% 7%9% 9% 14% 19%

23%

12% 16% 21% 21% 20% 15%9%

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

0%

20%

40%

60%

80%

100%


Hero Honda Bajaj Others


Honda’s increase in marketing push: Our channel checks indicate that Honda

has become aggressive on the ground, especially in the executive segment. We

observed that few dealers in Pune (Maharashtra- Western India) were offering

gifts on Honda Shine (125 cc offering in the executive segment) worth Rs.3,000

(like Kitchen articles, Sun Glasses, portable speakers), 1 gram gold coin (~worth

Rs.3000), Rs.5000 cash discount, etc. At the same time during channel checks in

Udaipur (Rajasthan-North Western India), we observed that dealers were offering

helmets with all motorcycles. We were told that Honda is making it compulsory

for dealers to take delivery of Shine (relatively slowing moving product now),

if the dealer wants delivery of Activa (good demand product).

Dealers offer gifts worth Rs.3000 on

the new Honda Shine

According to some dealers, Honda

has linked deliver of Shine to deliver

of Activa


Figure 164: Honda’s aggression resulted in a slide in Hero’s EBITDA margin, despite 35% revenue CAGR

43 59

78

105

144

12.0%

10.9%

10.3%

8.8%8.9%

7%

8%

9%

10%

11%

12%

13%

20

40

60

80

100

120

140

160


Revenue (Rs bn) EBITDA margin (RHS)


Bajaj’s desire to get back market share could hurt Hero

Bajaj Auto’s market share in the executive segment (Discover family) has come

down to 4.2% in FY16YTD (Apr-Sep’15) from 20% in FY13, as seen in Figure 19.

We believe the main reasons for the same being 1) confusing branding strategy for

its Discover platform, wherein it launched multiple bikes with the same branding, 2)

non-focused product promotions due to multiple models and 3) discontinuation of a

few nonworking models, thereby impacting their re-sale value and branding.

However our recent interaction with Bajaj Auto’s management suggest a strong

desire to get back market share in the executive segment with reengineered

strategy and a new product launch in 4QFY16. In our opinion, the desire to get back

market share could potentially lead to a new product launch at aggressive pricing,

enhanced features and increased marketing efforts. This could up the ante in the

executive segment potentially increasing pressure on margins for the industry.

Figure 165: Bajaj’s market share slide in the executive segment

394

739

1,202 1,346 1,305

1,012

609

127

12%

16%

21% 21%20%

15%

9%

4%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

50

250

450

650

850

1,050

1,250

1,450


Th

ou

san

ds

Executive segment volumes Market share (RHS)


We expect Hero to maintain its leadership in the executive segment, but expect its’

market share to moderately come down to 71% by FY18E from 72.1% in 1HFY16.

Hero’s loss of market share is primarily on account of Bajaj and Honda which we

expect to moderately gain market share. Overall we expect Hero to deliver volume

growth of 4.7% CAGR in the executive segment over FY15-18E.

HMSI EBITDA margin declined

300bps despite 35% revenue CAGR

over FY10-14

Bajaj’s desire to regain market share

could lead into a new product launch;

possibly priced aggressively

In our view, this could potentially

increase pressure on executive

segment margins


Premium segment - not Hero’s forte Though we are quite upbeat on the prospects of the premium segment given the

aspirational moves we expect in the domestic motorcycle industry, we believe

premiumisation should have only have limited benefit for Hero. We agree that

premium segment was never Hero’s forte, with contribution of the segment to

aggregate volumes being c.5%, but the recent performance of the company has

been more uninspiring. Hero’s market share in the premium segment has come

down to 6% in 1HFY16 from 22% in FY09, as seen in Figure 167. On the back of

limited focus and lack of a strong product pipeline in the premium segment, we do

not expect Hero to make significant in-roads in the premium segment.

Figure 167: Hero has been losing ground in the premium segment

44% 44% 49%42% 41% 37% 35% 32%

10% 9%9%

9% 7%8% 10% 12%

22% 20%20%

20%16%

12% 8% 6%

9% 8%8%

9%14%

17%13%

11%

10% 11% 10% 15% 14%14%

16%15%

5% 4% 3% 4% 7% 11%16%

21%

0%

20%

40%

60%

80%

100%

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16Y

TD

Bajaj TVS Hero Honda Yamaha Royal Enfield Motors Others


Figure 166: Share of premium segment for Hero

2% 2% 2% 3%4%

5%4%

0%

2%

4%

6%

FY09 FY10 FY11FY12 FY13 FY14 FY15

Share in aggregate volumes

Source: CRISL, Investec Securities Research


High scooter industry growth to benefit Hero Over the past five years a shift in consumer preference towards gearless scooters

has been evident, primarily on account of new launches with more powerful engines

and improved mileage, design and ride quality. Ease of use and better

manoeuvrability around congested cities is increasingly making scooters the two

wheeler of choice for women and urban consumers.

This trend has helped scooters outgrow motorcycles — at a 25% CAGR over FY10-

15 vs. the 8% CAGR growth registered by motorcycles in the same period.

Scooters, which accounted for a 16% share of domestic 2W sales in FY10, now

control 28% of the industry in FY15.

As highlighted in the thematic section, we expect the Scooter segment to grow at

12% CAGR over FY15-18E and become 35% of the domestic two wheeler industry

by FY20E. While Honda dominates the scooters industry with 58% market share

(1HFY16), Hero (market share of 13%) is well placed to benefit from the expected

higher growth of the scooters industry, in our view.

Figure 168: Expect share of scooters to trend up Figure 169: Market share split in scooters

78% 75% 67% 63% 61%

16% 19% 28% 33% 35%

6% 6% 5% 4% 4%

0%

20%

40%

60%

80%

100%

FY09 FY12 FY15 FY18E FY20E

Motorcycles Scooters Mopeds

16% 19% 19% 17% 13%

48% 49% 53% 56% 58%

19% 15% 13% 15% 15%2%

5% 5% 6%17% 16% 10% 8% 7%

0%

20%

40%

60%

80%

100%

FY12 FY13 FY14 FY15 FY16YTD

Hero Honda TVS Yamaha Others


Hero’s performance in the scooters segment has been quite encouraging with the

company reporting a volume growth of 29% CAGR over FY10-15, higher than the

industry growth of 25% in the same period. Hero’s market share increased from

14% in FY10 to 17% in FY15 with domestic scooters volume at 0.75m units in

FY15.

However, for the 12 months over Aug’14 to Jul’15, Hero’s domestic scooter market

share has been volatile. This was due to a large scooter export order that Hero

received. The company was constrained by inadequate scooter manufacturing

capacity to fulfil both export and domestic demand. Moreover, from 1QFY16, Hero

is likely to have started building up inventory for its upcoming Maestro Edge and

Duet launch. Also, new model launches by Honda and TVs also contributed to the

decline in Hero’s market share.

Diversion of volumes to exports and

inventory buildup for Maestro Edge

and Duet launch resulted in a decline

in market share of Hero

Hero launched 110 cc scooters –

Maestro Edge (Sep’15) and Duet

(Oct’15)


Figure 170: : Hero’s market share has come off from the peak of 24% in Dec’12 to 13% in Sep’13

Figure 171: Hero’s scooter domestic and export sales vs. Hero monthly scooter manufacturing capacity

17%

13%

20%

15%

10%

14%

40%

45%

50%

55%

60%

2%

7%

12%

17%

22%

27%

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Honda (RHS) Hero TVS Yamaha

30

40

50

60

70

80

90

100

110

120

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep

-15

Domestic Export Est. monthly scooter mfr. capacity

Domestic prodn. constrained due to one-off export order

Likely inventory buildup for MaestroEdge + Duet launch


Nonetheless, Hero’s desire to get back market share and the latest launches

(Maestro Edge and Duet) are the first steps towards this. Further, the company has

increased its scooters manufacturing capacity to 1.3mn units per annum with a plan

to expand further to 1.5mn units once Hero’s Gujarat plant is up and running. We

build in a 13% CAGR in Hero’s scooter sales between FY16E to 18E following a 6%

YoY decline in FY16E. Over all we expect Hero’s market share to increase from

12.7% in 1HFY16 to 14% by FY18E.

Scooters volumes to grow at 13%

CAGR over FY16E-18E


Export a long-term game; first, some short-term pain Hero has set a target to export 1.2 million units annually by 2020, which in our

opinion is ambitious. Whilst exports do offer good long term potential, achieving this

target will require enormous effort considering the challenges that these

geographies (Africa and LATAM) offer especially to the new entrant in these

markets. Our channel checks in Africa indicate that it is one of the most difficult

geographies to build a brand for a foreign player. As seen in Figure 173, Bajaj Auto

required a significant amount of time before its export operations began to ramp-up

and contribute meaningfully to volumes.

In 2012, Hero’s management had guided for annual export volume of ~1 million

units by FY17E, which was later revised to 1.2 million units by FY20E. In our

opinion, creating a brand and setting up a distribution network may not be as quick

as the management expects and could potentially lead to a second postponement

of the target of 1.2m units beyond FY20E.

Notwithstanding the above, exports are unlikely to contribute significantly to

profitability in initial years led by higher advertising and brand building spend and

relatively lower volumes. On the contrary, aggressive pricing in Africa (one of the

most price sensitive markets) with the objective to gain market share could

potentially hurt aggregate margins of the company. Bajaj sold its motorcycles at a

loss during initial years to gain market share.

Overall we expect Hero’s exports to grow by 25% CAGR over FY15-18 to 0.4

million units by FY18 representing 5% of aggregate volumes.

Figure 173: Bajaj’s export ramp-up Figure 174: Hero’s expected export ramp-up

0

500

1,000

1,500

2,000

FY

98

FY

99

FY

00

FY

01

FY

02

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

('000 units)

It took several years before exports became

meaningful for Bajaj

133 166 161 131200 230

299

389

36%

25%

-3%-19%

53%

15%

30%30%

-20%

-10%

0%

10%

20%

30%

40%

50%

75

125

175

225

275

325

375

425

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

Th

ou

san

ds

Exports % YoY (RHS)


Figure 172: Share of exports in Hero’s volume

3% 3% 3%2%

3% 3%4%

5%

0%

2%

4%

6%

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E


In 2012 management had guided for

annual volume 1million units by FY17,

which they change to 1.2million units

by 2020


Financial strength intact despite headwinds Given multiple weaknesses, we expect Hero’s revenue growth to remain in single

digits and grow at 7% CAGR over FY15-18E. Moreover, Margin expansion to the

level envisaged in its LEAP may not come through in entirety, leading to Hero’s

missing management guidance and street expectation of margin expansion.

With Hero’s market leadership position being challenged, can expect Hero to

aggressively defend its turf through increased marketing efforts and concentrated

expansion into selected overseas markets. Additionally, following the exit of Honda

and failure of Eric Buell racing; Hero is investing in developing and launching

products born out of its own research efforts. All of these will require Hero to fall

back on the strength of its balance sheet and leverage its large cash flow stream.

LEAP or a short hop?

Hero launched the LEAP (Leadership in Motion) program in FY14 to drive margin

expansions through better price and feature optimisation, improvement in raw

material sourcing, efficiency in logistics, marketing expenditure and product design.

However, during this period, Hero’s EBITDA margin (pre-royalty expenses) actually

fell by c.100bps over FY13-FY15 (from 13.8% to 12.8%). It is only when one adjusts

for royalty, that Hero’s margins indicate a c.200bps expansion to 12.1%, as seen in

Figure 175.

In FY15, on a gross basis LEAP accrued Rs3.2bn to Hero. However, during the

period, pre-royalty EBITDA margin fell by 120 bps YoY, as benefits from cost

savings were more than offset by pricing pressures (inability to pass on duty hikes

in scooters), vendor cost increases, diesel conversion costs and foreign exchange

fluctuations.

On the brighter side, it appears that LEAP benefits have only just started to flow

through, as indicated by 1HFY16 results when aggregate margins expanded by

c250bps. Off this the management has attributed 200bps to commodity price related

factors and 50bps to LEAP.

Figure 175: Hero’s EBITDA margin trend Figure 176: LEAP provided support to reported margins

13.5%

15.3%

13.8% 14.0%

12.8%

12.5%11.8%

10.2%10.8% 12.1%

10%

11%

12%

13%

14%

15%

16%


Reported EBITDA margin (Pre-royalty)

Adj. EBITDA margin (post royalty)

(150)

(100)

(50)

0

50

100

150

200

250

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Reported EBITDA margin (bps YoY) LEAP benefit (gross)



We gather that the total gross annualized benefit from the LEAP program by FY16E

will be c.Rs10bn i.e. around 320bps on our FY16E estimates. Incrementally, as per

management’s original estimate of a 400 bps expansion, another 50bps of benefit

could accrue by FY17E, which is when the LEAP program concludes. Pertinently, in

light of external factors that have pulled down the net benefit of LEAP, management

trimmed its margin expansion target by 200bps from 400bps earlier to c.15%. Given

the above, we are circumspect on the incremental benefits that could flow through

Hero’s LEAP program.

Rising competition in Hero’s mainstay ‘Executive’ motorcycle segment (c.70%

contribution to aggregate volumes) is likely to increase pressure on Hero’s pricing

and may require an increase in advertising spends from the current level of 2%-

2.5% of revenues. We have analysed these issues surrounding the executive

section in detail in the thematic and also highlighted the aggressive pricing strategy

that players have started to adopt in the ‘Economy’ segment.

Further, following the exit of Honda, Hero was relying on Erik Buell, Magneti Marelli

for technological inputs. However, with the recent bankruptcy of Eric Buell, a

significant burden of research and development has shifted onto Hero. We expect

Hero’s spend on R&D to gradually increase to c.1%% of sales by FY18 from 0.5%

reported in FY15.

We build in a 2.4ppt YoY margin expansion in FY16 to accommodate the benefits

primarily from lower commodity prices and benefit from savings initiatives and only

a modest 20 bps expansion through FY16E-18E on the back of benefits from LEAP

to 14.7% by FY18.

Figure 177: Single digit revenue growth with moderate margin expansion post the one time commodity led boost in FY16E…

Figure 178: … this is likely to boost EPS in FY16 but growth rate may dip in FY17/18

10%

13%

16%

19%

100

150

200

250

300

350

400

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

Revenues EBITDA Margin (%) (RHS)

(Rs bn)

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

50

100

150

200

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

EPS (Rs) EPS Growth YoY (%) (RHS)

(Rs)


Hero is comfortably placed with respect to its gearing and cash flow. We expect

Hero to generate sufficient operating cash flow to fund its Rs30bn capex plan

across FY16E-18E. The commodity windfall in FY16 should meaningfully boost

operating cash flow to Rs41bn in FY16E and we expect the year run rate of

operating cash flow to stabilise at a lower rate of Rs35-40bn annually.

Table 15: Estimated LEAP benefit

Benefit from LEAP program (Rs bn)

FY14 (annualised) 4.47

FY15 3.29

FY16 (expected) 2.00

Total benefit 9.76

Rounded off to 10.00

Investec Hero revenue FY16E 288.8

Total expected margin benefit (%) 3.2

Source: Company releases. Investec Securities estimates


This should drive a steady increase in Hero’s free cash flow accretion as capex

tapers by FY18E. Hero’s immediate capex plans include capacity expansion

(Gujarat, Rajasthan), new Research & Development centre, new product

development and maintenance capex. We like Hero’s high RoE’s, RoCE’s, cash

rich status and dividend payout ratios. All of these parameters are towards the

higher end of the industry range but these could moderate slightly given the

operational overhangs and as cash accrual increases.

Figure 179: Operating cash flow has remained strong but free cash flow has been lower due to increased capex

Figure 180: Expect strong & stable ROCE/ROE

23 24

19

30

22

4137

41

46 6

912 12

108

0

5

10

15

20

25

30

35

40

45

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

Operating cash flow Capex

(Rsbn)

20%

25%

30%

35%

40%

45%

50%

FY

13

FY

14

FY

15

FY

16E

FY

17E

FY

18E

RoCE RoE



Aptly valued – Initiate with HOLD Despite headwinds surrounding its core operating business, we think Hero’s

ROCE/ROCE of ~41/34%, FCF/Dividend Yield of ~5%/3% should sustain over the

next three years. Hero valuation at 16xFY17 P/E (in-line with five year average),

seems fair to us. We value Hero at 16x Sep’17 earnings (vs 17x for Bajaj) which is

at par to one year forward P/E leading to our target price of Rs.2790.

As shown in Figure 182, this is reflected in Hero’s discount to Bajaj which has

expanded over last few months. Consequently, we also expect Hero to

underperform Bajaj in terms of stock price returns and initiate with a HOLD stance.

Table 16: SOTP

FY17E FY18E Average Sep'17

EPS (Rs.) 167 182 174

P/E (x)

16

Target Price (Rs/share)

2,790


Figure 181: One year forward P/E

Avg 15.6

Max 19.4

Min 12.8

+1Sd 17.0

-1Sd 14.1

10

11

12

13

14

15

16

17

18

19

20

Nov

-10

Feb

-11

May

-11

Aug

-11

Nov

-11

Feb

-12

May

-12

Aug

-12

Nov

-12

Feb

-13

May

-13

Aug

-13

Nov

-13

Feb

-14

May

-14

Aug

-14

Nov

-14

Feb

-15

May

-15

Aug

-15

Source: FactSet, Investec Securities estimates

Figure 182: Bajaj’s premium / (discount) to Hero Motocorp on 12m forwards consensus EPS

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

May

-13

Sep

-13

Jan-

14

May

-14

Sep

-14

Jan-

15

May

-15

Sep

-15

Bajaj's Premium / (Discount) to Hero Average

Source: FactSet, Investec Securities estimates

ROE/ROCE of ~41/34%, FCF Yield of

5-6%, and EPS growing at 12%

CAGR justify the current valuation of

16xFY17 earnings


Table 17: Volume assumptions

(mn units) 2015 2016E 2017E 2018E

Economy 1.1 1.2 1.3 1.3

Executive 4.4 4.4 4.7 5.1

Premium 0.2 0.1 0.1 0.1

Domestic motorcycles 5.7 5.7 6.1 6.5

% YoY 4.7% 0.4% 7.0% 6.0%

Scooters 0.8 0.7 0.8 0.9

% YoY 9.4% -6.0% 15.0% 12.0%

Exports 0.2 0.2 0.3 0.4

% YoY 53.0% 15.0% 30.0% 30.0%

Aggregate Volume 6.6 6.6 7.2 7.8

% YoY 6.2% 0.1% 8.6% 7.7%



Figure 183: Hero Motocorp Summary Financials Income Statement FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Revenue: 87,140 99,000 103,631 123,813 158,561 193,979 235,790 237,681 252,755 275,853 288,825 313,822 338,977

% change YoY 14% 5% 19% 28% 22% 22% 1% 6% 9% 5% 9% 8%

EBITDA 13,645 11,730 13,806 17,465 27,599 24,303 27,798 24,242 27,270 33,420 41,897 45,837 49,850

EBITDA margin 15.7% 11.8% 13.3% 14.1% 17.4% 12.5% 11.8% 10.2% 10.8% 12.1% 14.5% 14.6% 14.7%

2.4%

PBT 14,122 12,461 14,416 18,437 28,317 24,048 28,647 25,292 28,673 33,288 42,115 46,424 50,752

Investec Net profit 9,713 8,579 9,991 13,440 22,318 20,077 23,781 21,182 21,091 25,407 30,182 33,270 36,372

Weighted average shares 200 200 200 200 200 200 200 200 200 200 200 200 200

EPS, diluted 48.6 43.0 50.0 67.3 111.8 100.5 119.1 106.1 105.6 127.2 151.1 166.6 182.1

DPS 20 17 19 20 110 105 45 60 65 60 76 84 91

Balance Sheet FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Net Block 9,494 11,655 11,563 15,737 16,588 40,803 37,855 30,710 22,433 29,127 37,272 43,029 46,396

Investments 20,619 19,739 25,668 33,688 39,257 51,288 39,643 36,238 40,888 31,541 31,541 31,541 31,541

Inventories 2,266 2,756 3,171 3,268 4,364 5,249 6,756 6,368 6,696 8,155 8,360 9,115 9,881

Sundry Debtors 1,587 3,353 2,974 1,499 1,084 1,306 2,723 6,650 9,206 13,896 6,330 6,878 7,430

Cash and Bank 1,587 358 1,311 2,196 19,072 715 768 1,810 1,175 1,593 16,545 28,680 44,769

Loans and advances 2,773 2,667 1,912 3,172 4,306 3,815 5,160 5,855 5,724 6,275 6,275 6,275 6,275

Total assets 38,780 42,440 50,736 60,851 85,231 107,263 98,889 96,417 100,973 105,217 120,954 140,149 160,923

Equity 399 399 399 399 399 399 399 399 399 399 399 399 399

Reserves and Surplus 19,694 24,301 29,463 37,608 34,251 29,161 42,499 49,663 55,599 65,014 80,038 96,599 114,704

Debt 1,858 1,652 1,320 785 660 14,710 10,114 3,022 245 313 313 313 313

Deferred Tax Assets / Liabilities 0 0 0 0 0 0 0 0 0 0 0 0 0

Current Liabilities & Others 15,628 14,792 18,247 20,528 48,314 60,524 43,794 42,008 44,730 39,490 40,203 42,838 45,506

Total Liabilities 37,579 41,144 49,430 59,321 83,625 104,795 96,807 95,092 100,973 105,217 120,954 140,149 160,923

Cash Flow Statement (Rsm) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Cash From Operating Activities 9,361 6,251 12,118 13,590 26,866 22,542 23,598 18,904 29,634 22,500 41,130 37,414 40,562

Cash Flow from Investing Activities -3,235 -2,731 -7,810 -8,612 -5,276 -13,223 928 -7,329 -16,193 121 -11,006 -8,557 -6,193

Cash from Financing Activities 0 0 0 0 0 0 0 0 0 0 0 0 0

Net Cash Inflow / Outflow 1,414 -1,415 -16 -21 497 -234 -56 1,012 -709 316 14,953 12,135 16,089

FCFF 5,424 1,099 8,379 10,455 24,766 18,932 18,564 12,900 20,307 10,970 29,130 27,414 32,562

Performance Ratios FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Growth

Revenue 14% 5% 19% 28% 22% 22% 1% 6% 9% 5% 9% 8%

EBITDA -14% 18% 27% 58% -12% 14% -13% 12% 23% 25% 9% 9%

EBIT -17% 18% 28% 64% -14% 14% -15% 14% 23% 27% 9% 9%

EPS -12% 16% 35% 66% -10% 18% -11% 0% 20% 19% 10% 9%

Margins

EBITDA 16% 12% 13% 14% 17% 13% 12% 10% 11% 12% 15% 15% 15%

EBIT 14% 10% 12% 13% 16% 11% 11% 9% 10% 11% 13% 13% 13%

Net profit 11% 9% 10% 11% 14% 10% 10% 9% 8% 9% 10% 11% 11%

Solvency

Net debt (cash) 271 1,294 9 -1,411 -18,412 13,995 9,346 1,211 -931 -1,279 -16,232 -28,367 -44,456

Net debt / equity (%) 1% 5% 0% -4% -53% 47% 22% 2% -2% -2% -20% -29% -39%

Net debt / total assets (%) 1% 3% 0% -2% -22% 13% 10% 1% -1% -1% -13% -20% -28%

Net debt / EBITDA (x) 0.0 0.1 0.0 -0.1 -0.7 0.6 0.3 0.0 0.0 0.0 -0.4 -0.6 -0.9

EBITA interest cover (x) 467x 729x 690x 690x 1,314x 160x 131x 204x 231x 301x 3,343x 3,658x 3,978x


Capital employed 21,951 26,352 31,182 38,792 35,311 44,628 53,392 53,386 56,743 66,383 81,407 97,968 116,073

Capital growth (%) 0% 20% 18% 24% -9% 26% 20% 0% 6% 17% 23% 20% 18%

Capital turn (x) 0.0x 0.3x 0.3x 0.3x 0.2x 0.2x 0.2x 0.2x 0.2x 0.2x 0.3x 0.3x 0.3x




Income Statement 2014 2015 2016E 2017E 2018E Revenue 252,755 275,853 288,825 313,822 338,977EBITDA 27,270 33,420 41,897 45,837 49,850Depreciation and amortisation -2,943 -3,398 -3,855 -4,243 -4,632Operating profit 24,327 30,022 38,042 41,593 45,217Other income 3,030 3,435 3,092 3,401 3,741Net interest 1,316 1,381 981 1,430 1,794Share-based-payments - - - - - PBT (normalised) 28,673 34,839 42,115 46,424 50,752Impairment of acquired intangibles - - - - - Non-recurring items/exceptionals 0 -1,550 0 0 0PBT (reported) 28,673 33,288 42,115 46,424 50,752Taxation -7,582 -9,432 -11,933 -13,154 -14,380Minorities & preference dividends 0 0 0 0 0Discontinued/assets held for sale - - - - - Net Income (normalised) 21,091 25,407 30,182 33,270 36,372Attributable profit 21,091 23,856 30,182 33,270 36,372EPS (reported) 105.6 119.5 151.1 166.6 182.1EPS (norm., cont.) – FD (INR) 105.6 127.2 151.1 166.6 182.1EPS (norm., cont., IAS19R adj.) – FD - - - - - DPS (INR) 65.0 60.0 75.9 83.7 91.5Average number of group shares - FD (m) 200 200 200 200 200Average number of group shares (m) 200 200 200 200 200Total number of shares in issue (m) 200 200 200 200 200

Cash Flow 2014 2015 2016E 2017E 2018E Operating profit 24,327 30,022 38,042 41,593 45,217Depreciation & amortisation 2,943 3,398 3,855 4,243 4,632Other cash and non-cash movements 6,999 1,055 2,110 1,971 1,947Change in working capital 545 -3,359 8,074 1,330 1,351Operating cash flow 34,813 31,116 52,081 49,138 53,148Interest 1,316 1,381 981 1,430 1,794Tax paid -6,495 -9,998 -11,933 -13,154 -14,380Dividends from associates and JVs 0 0 0 0 0Cash flow from operations 29,634 22,500 41,130 37,414 40,562Maintenance capex -9,328 -11,530 -12,000 -10,000 -8,000Free cash flow 20,307 10,970 29,130 27,414 32,562Expansionary capex - - - - - Exceptionals and discontinued operations - - - - - Other financials 2,732 -78 -13 -13 -13Acquisitions -6,866 11,651 994 1,443 1,807Disposals - - - - - Net share issues 0 0 0 0 0Dividends paid -14,031 -22,194 -15,158 -16,709 -18,267Change in net cash 2,142 349 14,953 12,135 16,089Net cash/(debt) 931 1,279 16,232 28,367 44,456FCFPS - FD (INR) 101.7 54.9 145.9 137.3 163.1

Balance Sheet 2014 2015 2016E 2017E 2018E Property plant and equipment 30,974 36,252 44,398 50,154 53,522Intangible assets 0 0 0 0 0Investments and other non current assets 46,140 38,311 38,311 38,311 38,311Cash and equivalents 1,175 1,593 16,545 28,680 44,769Other current assets 21,625 28,326 20,965 22,268 23,585Total assets 99,913 104,482 120,219 139,414 160,188Total debt -245 -313 -313 -313 -313Preference shares 0 0 0 0 0Other long term liabilities -4,821 -2,340 -2,340 -2,340 -2,340Provisions & other current liabilities -38,849 -36,416 -37,129 -39,763 -42,431Pension deficit and other adjustments 0 0 0 0 0Total liabilities -43,915 -39,068 -39,781 -42,416 -45,084Net assets 55,999 65,413 80,437 96,999 115,104Shareholder's equity 55,999 65,413 80,437 96,999 115,104Minority interests 0 0 0 0 0Total equity 55,999 65,413 80,437 96,999 115,104Net working capital -7,162 -3,168 -11,242 -12,572 -13,924NAV per share (INR) 280.4 327.6 402.8 485.8 576.4





2014 2015 2016E 2017E

Calendar PE (x) 21.7 18.3 16.2 14.8


EV/sales (x) 1.9 1.8 1.7 1.5

EV/EBITDA (x) 16.1 12.9 11.4 10.5

FCF yield (%) 2.5 4.7 5.3 5.9

Dividend yield (%) 2.3 2.7 3.1 3.4



Ratios and metrics 2014 2015 2016E 2017E 2018E Revenue growth (y-on-y) (%) 6.3 9.1 4.7 8.7 8.0EBITDA growth (y-on-y) (%) 12.5 22.6 25.4 9.4 8.8Net income (normalised) growth (yoy) (0.4) 20.5 18.8 10.2 9.3EPS (normalised) growth (y-on-y) (%) (0.4) 20.5 18.8 10.2 9.3FCFPS growth (y-on-y) (%) 57.4 (46.0) 165.5 (5.9) 18.8NAVPS growth (y-on-y) (%) 11.9 16.8 23.0 20.6 18.7DPS growth (y-on-y) (%) 8.3 (7.7) 26.5 10.2 9.3Interest cover (x) (18.5) (21.7) (38.8) (29.1) (25.2)Net debt/EBITDA (x) (0.0) (0.0) (0.4) (0.6) (0.9)Net debt/equity (%) (1.7) (2.0) (20.2) (29.2) (38.6)Net gearing (%) (1.7) (2.0) (25.3) (41.3) (62.9)Dividend cover (x) 1.6 2.1 2.0 2.0 2.0EBITDA margin (%) 10.8 12.1 14.5 14.6 14.7EBITA margin (%) 9.6 10.9 13.2 13.3 13.3ROE (%) 37.7 38.8 37.5 34.3 31.6ROCE (%) 40.0 44.3 46.0 41.9 38.5NWC/revenue (%) (2.8) (1.1) (3.9) (4.0) (4.1)Tax rate (normalised) (%) 26.4 27.1 28.3 28.3 28.3Tax rate (reported) (%) 26.4 28.3 28.3 28.3 28.3


Target Price Basis


Key Risks

Stronger than expected growth in exports, Higher margin expansion, Global downturn, falling demand of motorcycles,

failure of new products,

Page 76 | 26 November 2015 | TVS Motors

TVS Motors (TVSM.NS)

TVS Motors ( Sell - TP: 200INR)


A Challenger with unwarranted premium valuation

INR290 INR200

While TVS seems to have captured low hanging fruit in terms of volumes in

domestic/exports markets, garnering incremental market share would be an

uphill task, in our view. Moreover, we are circumspect of TVS’ ability to

increase margins significantly on account of the necessity of sustaining its

ad spend at current elevated levels partly due to exports. We see limited

benefits accruing from operating leverage and thereby expect TVS to miss

guidance of margin expansion. In our view, TVS’ premium of ~30% on FY17E

EV/EBITDA to Bajaj/ Hero despite low ROCE and weaker positioning in the

industry is unwarranted. Initiate with Sell and target price of Rs.200.

Aditya Jhawar +91 (22) 6136 7415

[email protected]


[email protected]

Incremental market share gains, an uphill task: In our opinion, it would not be

easy for TVS to defend market share in scooters and premium motorcycles,

relatively stronger segments of TVS, on account of a strong product line-up by the

competition (Bajaj/Honda). Moreover we do not expect TVS to be a serious

contender in the executive segment given the increase in competition amongst the

more established players. Overall we expect TVS to deliver volume growth of 7%

CAGR over FY15-18E, in-line with the industry.

Margin to miss guidance: While management has guided for double digit EBITDA

margins in the near term, we remain circumspect as we believe increase in

competitive intensity in the domestic 2Ws industry will keep the advertisement (ad)

spend at elevated levels. TVS will also be exposed to this, given its position as a

challenger across segments. Also, expansion of geographic footprint overseas

should inflate ad spend. Moreover, we do not expect any meaningful margin benefit

arising from operating leverage given already high asset turns (TVS asset turns are

greater than Bajaj but EBITDA margin one third) and lack of track record of

operating leverage led margin expansion despite strong volume growth.

Unwarranted rich valuation: TVS is trading at 15.5x FY17E EV/EBITDA at

31%/33% premium to Bajaj/Hero despite a much lower ROCE (19% ~vs. 30%/40%

respectively). In our opinion, premium valuations seems unwarranted given a)

TVS’s positioning as a challenger to the current leaders in most segments, Bajaj

and Hero and b) our expectation of deceleration of EPS growth momentum (22%

CAGR over FY15-18E vs 32%YoY growth in FY15 leading to our FY17E/18E PAT

being 21%/26% below consensus. We value TVS at 16x Sep’17E EPS leading to

our target price of Rs.200.


2014A 2015A 2016E 2017E 2018E

Revenue (INRm) 79,659 100,982 109,434 124,858 141,221

EBITDA (INRm) 4,822 6,043 7,660 9,364 10,592

EBITA (INRm) 3,505 4,510 5,926 7,423 8,429




FCFPS - FD (INR) (3.6) 2.5 5.6 8.4 9.4

DPS (INR) 1.4 1.9 2.3 2.9 3.3

PE (normalised) (x) 52.2 39.7 31.5 25.0 21.9

EV/sales (x) 1.6 1.3 1.2 1.0 0.9

EV/EBITDA (x) 26.9 21.4 16.9 13.8 12.2

FCF yield (%) (1.3) 0.9 1.9 2.9 3.2

Dividend yield (%) 0.5 0.7 0.8 1.0 1.1

200

220

240

260

280

300

320


1m 3m 12m

____________________________Price 15.5 29.8 30.9

____________________________Price rel to India S&P BSE 500 - BSE India (Indian Rupee)20.7 28.9 35.0


SELL

Price: INR290

Target: INR200

Forecast Total Return: -30.2%


EV: INR130bn

Average daily volume: 2.2m


Figure 184: Company description Figure 185: Shareholding Pattern

TVS Motor Company is the third largest two-wheeler

manufacturer in India, with three manufacturing facilities in

India (Karnataka, Tamil Nadu and Himachal Pradesh) and

one in Indonesia. The company leads in the mopeds

segment, and ranks 2nd and 3rd respectively in scooters

and bikes. The TVS group started operations in 1911 as a

bus fleet operator and logistics services provider but has

since then expanded to Automobiles (Two wheelers, three

wheelers and auto components) Aviation, Education,

Electronics, Energy, Finance, Housing, Insurance,

Investment, Logistics, Service, Textiles etc.

Promoter57%

FII13%

DII14%

Others16%

Source: Investec Securities research Source: BSE

Figure 186: FY15 Segment wise break up of sales volume Figure 187: Market share in domestic 2W

Economy17% Executive

1%

Premium8%

Scooters 27%

Mopeds30%

3W domestic1%

2W exports 13%

3W exports 3%

25%

8%6%

19%

14%

21%

10%

6%

15%13%

0%

5%

10%

15%

20%

25%

30%

Economy Premium Motorcycles Scooters Two wheelers

FY12 FY15

Source: CRISIL, Investec Securities research Source: CRISIL, Investec Securities resarch

Figure 188: Operating leverage to have limited boost for TVS margins

Figure 189: Expect deceleration in growth momentum for TVS

15.2

33.2

7.3

-7.5

2.4

22.1

1.5

-0.1

2.0

-0.8

0.3

-0.1 -10

-505

10152025303540


Volume growth (%) EBITDA margin change (%)

11%

18%

24%

43%

8%

12%

21%

23%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Volume Growth Revenue growth EBITDA growth PBT growth


Sharp drop in interestcost drove strong earnings growth over

Source: Investec Securities research Source: Investec Securities estimates


Scooters: At a respectable second place TVS was amongst the first few players to introduce gearless scooters in India way

back in 1994 with its then popular product Scooty. TVS had developed a strong

foothold in smaller engines scooters (below 100cc) which were popular in late

1990’s and early 2000.

While Honda maintains its dominance in the Indian scooter industry, TVS

commands a respectable market share of 15% (1HFY16). The company’s market

share has come down from 21% in FY08 to 15% in 1HFY16, which in our opinion is

a function of shift of the industry towards bigger engine scooters (greater than

100cc) in which TVS had limited product offerings. New launches with more

powerful engines, improved mileage, design and ride quality as well as scooters

incrementally getting used as unisex family vehicle should have driven the shift of

the industry towards engines with higher displacement, in our view.

As seen in Figure 192, the share of below 100 cc engines scooters came down from

12% in FY12 to c.2% in 1HFY16, which primarily drove down TVS market share in

our view. However, with the launch of Jupiter (Sep'13) and Scooty Zest (Aug’14),

TVS has geared its portfolio towards larger size engines thereby increased its

market share 15% in 1HFY16 from 13% in FY14.

Figure 191: TVS: second largest player in scooters with 15% share Figure 192: Shift toward bigger engines dents TVS market share

40%

45%

50%

55%

60%

5%7%9%

11%13%15%17%19%21%23%

Honda (RHS) Hero TVS Susuki

12%

9%

6%4%

2%

19%

15%13%

15% 15%

0%

5%

10%

15%

20%

25%

FY12 FY13 FY14 FY15 1HFY16

Industry share of scooters between ≤ 90 cc TVS Market Share


With the launch of Jupiter and Scooty Zest, the share of 110cc scooters in TVS

increased to 80% in FY15 from 43% in FY12. Moreover, our channel checks

suggest encouraging feedback for Jupiter, which we believe should help TVS

sustain growth momentum.

Figure 193: Increasing traction of Jupiter/Wego & Scooty Zest help TVS improve market share

57% 53%

34%

18%

5%

3%

3%

3% 0%

6%

9%

40% 42%

57%

71%

19%

15%13%

15%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY12 FY13 FY14 FY15

Pep Scooty Streek Scooty Zest

TVS Wego/Jupiter Market share (RHS)


Figure 190: TVS domestic scooters performance

15%

27%

18%

25%

10%

15%

20%

25%

30%

MarketShare

Volumeshare(FY15)

VolumeCAGR5yrs

IndustryCAGR5yrs

Note: Market share 1HFY16, CAGR over FY10-5


Table 18: TVS Scooters offerings

Product Engine (cc) Share in

volume (FY15)

Pep 88 cc 18%

Scooty Streak 88 cc 3%

Scooty Zest 110 cc 9%

TVS Wego/Jupiter 110 cc 71%



Higher scooters industry growth to benefit TVS In our opinion, TVS’s improved product portfolio should help the company benefit

from the higher growth expected in the scooter industry. Encouraging product

feedback of TVS Jupiter should help TVS continue its strong volume momentum, in

our view. However, the absence of new product launches in scooters by TVS

coupled with competitor launches (refer Table 19), should result in a slowing of

growth momentum (from +50% YoY in FY15) and market share expansion

(+260bps YoY to 15.2% in FY15), in our view.

We expect TVS to report volume growth of 14% CAGR over FY15-18E in scooters,

a tad above expected industry growth of 13% over same period and expect TVS

market share to moderately increase by 60bps over FY15-18 to 15.8%.

Figure 194: Expect scooters volume to grow by 14% CAGR over FY15-18

430455

684

782

900

1,024

-6%

0%

50%

14% 15% 14%

-10%

0%

10%

20%

30%

40%

50%

60%

400

500

600

700

800

900

1,000

1,100


Th

ou

san

ds

Scooters % YoY (RHS)


Table 19: Expected scooter launches

Players Models

Hero Dare

Dash

Leap Hybrid SES

ZIR

Honda PCX125

Yamaha Ray 125

D'elight

NMax

Vespa Fly 125

Vespa 946



Premium segment: Strong positioning but expect limited market share gains TVS has successfully made a mark in the premium segment of motorcycles through

its Apache brand. In last five years TVS’ volume in the premium segment grew by

13% CAGR over FY10-15, outperforming the industry growth of 11% over the same

period. TVS has managed to near double its market share in the premium segment

from the low of 6% in Dec 2012 to 12% in 1HFY16. Strong response to the Apache

RTR (Racing Throttle Response) series – RTR 160, RTR 180 and RTR 180 ABS

primarily drove market share gains for TVS.

Segment first features such as Fuel Injection System, ABS, etc. were one of the key

differentiating factors which created the buzz for TVS, as per our channel checks.

The company plans to launch a new model in the premium segment with a 200cc

engine using the design from its own Draken concept. This offering aims to

challenge Bajaj Pulsar 200NS’ leadership in the 200cc segment.

Figure 196: TVS has successfully created a niche in the premium segment through the Apache

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

5

7

9

11

13

15

17

19

21

23

25

Apr

-12

Jun-

12

Aug

-12

Oct

-12

Dec

-12

Feb

-13

Apr

-13

Jun-

13

Aug

-13

Oct

-13

Dec

-13

Feb

-14

Apr

-14

Jun-

14

Aug

-14

Oct

-14

Dec

-14

Feb

-15

Apr

-15

Jun-

15

Aug

-15

TVS premium segment (Volumes) TVS Premium segment market share (RHS)

(%) (Units)

Apache launched as first ever Indian bike with ABS

Frequent refresh propels brand to leadership in sub-segment

Source: CRISIL, Investec Securities estimates

In our opinion, recent product launches by competitors (Bajaj, Yamaha, Honda) with

enhanced features like Fuel Injection System, ABS, etc., (which were one of the key

differentiating factors of TVS in the relatively lower value premium segment)

coupled with the strong product line-up by peers in the premium segment (refer

Table 20) should make it difficult for TVS to defend market share in the premium

segment.

We expect TVS to deliver volume growth of 9% CAGR over FY16-18, lower than

the expected industry growth of 11% over the same period leading to loss of 20pbs

market share over 1HFY16-FY18 to 11.5%.

Figure 195: TVS standing in premium segment

10%8%

13%11%

0%

5%

10%

15%

MarketShare

Volumeshare(FY15)

VolumeCAGR5yrs

IndustryCAGR5yrs


Strong product line-up from

competitors to restrict TVS market

share gains

Channel checks suggest encouraging

response to Bajaj Pulsar RS 200

which directly competes with Apache

RTR 180


Table 20: New product pipeline of key competitors

Bajaj Hero Honda Yamaha Kawasaki Royal Enfield

Pulsar 400 SS Impulse 250 CB Hornet YZF R25 Ninja H2 410 cc

Pulsar 160 NS HX250R CBR300R YZF-R3 Ninja ZX-6R

Pulsar 400 CS RNT CB500F XSR 700

Avenger Hastur CBR500R

RS400

CB500X

180NS

200NS FI

KTM - 390 Adventure

KTM - 1190 Adventure

KTM- 1050 Adventure


Figure 197: Premium segment to grow at 9% CAGR (FY16-18)… Figure 198: …leading to moderate market share decline

124138

200

260

297

332

-15%

12%

44%

30%

14% 12%

-20%

-10%

0%

10%

20%

30%

40%

50%

120

170

220

270

320

370


Th

ou

san

ds

Premium Segment % YoY

7 8

10

12.0 11.8 11.5

5

6

7

8

9

10

11

12

13




TVS to remain a challenger in the economy segment TVS with market share of 16% in 1HFY16 is the third largest player in the economy

segment which is dominated by Hero and Bajaj with cumulative market share of

c.85%. TVS has been a challenger in the segment over the last few years with a

spurt in volumes led by new launches which we expect to normalise in due course.

Three years of underperformance (FY12-FY14) resulted in TVS market share falling

from 27% in FY11 to 18% in FY14.

While the launch of Star City in May’14 helped TVS increase its market share to

21% (+240bps YoY) in FY15, launch of CT100 (April’15) and Platina ES (Jan’15) by

Bajaj resulted in TVS losing its market share gains. We do not think that dynamics

of the economy segment would materially change and expect TVS to remain a

challenger in the foreseeable future.

Figure 200: Hero & Bajaj dominate c.85% of the economy segment, while TVS holds a 16% share

42%30% 25% 28% 26% 24% 24%

38%

35%

43%46% 45% 52% 56% 54%

46%

22% 25% 27% 26% 20% 18% 21%16%

2% 2% 2% 1% 2% 2% 1% 1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Bajaj Hero TVS Yamaha


Moreover, we expect the economy segment to grow at 3% CAGR (FY15-20E) for

the industry, as compared to the 7% growth expected from the domestic two

wheeler industry over the same period. Slower growth should mean the share of

economy segment in the industry will come down to 18% by FY20E from 22.4% in

1HFY16. Slowdown in growth momentum could increase the competitive intensity

and could potentially put pressure on margins of the economy segment, which in

our view are already lowest amongst motorcycles.

Figure 199: TVS performance in economy segment

16% 17%

4%8%

0%

5%

10%

15%

20%

MarketShare

Volumeshare(FY15)

VolumeCAGR5yrs

IndustryCAGR5yrs

Source: CRISIL Investec Securities estimates

Increase in competition could put

pressure on already low margins


Figure 201: Star City launched in May’14 helped TVS increase share Figure 202: Bajaj’s CT100/ Platina (ES) launch dent TVS market share

24 29

34 39

34 28

36

30

22%

25%27% 26%

20%18%

21%

16%

10%

15%

20%

25%

30%

20

25

30

35

40

45

Th

ou

san

ds

Economy average monthly volume Market Share (RHS)

18

23

28

33

38

43

48

Apr

-08

Sep

-08

Feb

-09

Jul-0

9

Dec

-09

May

-10

Oct

-10

Mar

-11

Aug

-11

Jan-

12

Jun-

12

Nov

-12

Apr

-13

Sep

-13

Feb

-14

Jul-1

4

Dec

-14

May

-15

3 Months rolling average

Stary City launch

CT100 (ES) & Platina launch

('000 units)

Source: CRISIL, Investec Securities Research Source: CRISIL, Investec Securities Research

Overall we expect TVS’ economy segment’s volume to decline by 3% CAGR over

FY15-18E as compared to industry growth of 5% over the same period. On the back

of strong product feedback for recently launched products by competitor (Bajaj) and

absence of any strong product in the pipeline, we expect TVS to underperform the

industry over FY15-18.

TVS not a serious contender in Executive segment We believe TVS is not a serious contender in the executive segment. Though new

product launches by TVS generates spurts in volumes initially, it fizzles out in due

course as seen in Figure 206. Executive segment is the strong hold of Hero (market

share 72% in 1HFY16) with decades old popular brand Splendour and Passion,

whereas TVS market share is at 1%.

While management plans to re-launch its Victor brand motorcycle in the executive

segment in Q4FY16, in our opinion it should not move the needle for the company.

Competitive intensity makes it difficult for TVS to garner meaningful market share, in

our view, with Honda’s aggressive approach and new product launches, Bajaj’s

desire to get back market share, with the expected new brand launch by Bajaj in the

executive segment in Q4FY16.

Figure 204: Domestic motorcycle industry split Figure 205: TVS market share in Executive segment

25% 19% 17% 18% 19% 18% 20%

61% 64% 64% 65% 64% 65% 62%

14% 17% 18% 17% 16% 17% 19%

0%

20%

40%

60%

80%

100%



12 17 21 20 20 14 8 4

77 73 67 69 63 61 66 72

8 7 9 9 15

20 22 21

1.4 0.8 1.1 0.2 0.7 1.3 0.6 1.1

-

20

40

60

80

100


Bajaj Hero Honda TVS

Source: CRISIL, Investec Securities Research Source: CRISIL, Investec Securities Research

Figure 203: TVS in Executive segment

0.6% 1.5%

-0.2%

7.2%

-2%0%2%4%6%8%

MarketShare

Volumeshare(FY15)

VolumeCAGR5yrs

IndustryCAGR5yrs



Figure 206: Spurt in volumes led by new launches which fizzles out in due course

-

2,000

4,000

6,000

8,000

10,000

12,000

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Aug

-11

Dec

-11

Apr

-12

Aug

-12

Dec

-12

Apr

-13

Aug

-13

Dec

-13

Apr

-14

Aug

-14

Dec

-14

Apr

-15

Aug

-15

Flame Jive TVS Phoenix

Flame launch Mar'08Flame launch Mar'08

Jive launch Nov'09

Phoenixlaunch Nov'12

New Phoenixlaunch April'15


Low base and expected initial spurt in volumes led by Victor launch should drive

volume growth of 21% CAGR over FY15-18 for TVS, however we expect annual

run-rate to fall back to c.70K units (-15% YoY) by FY18.

Figure 207: Expect Victor launch to drive volumes, which we don’t expect to be sustained

38

66

11

44

88

38

7379

67-23%

73%

-84%

313%

101%

-57%

94%

8%

-15%

-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

10

20

30

40

50

60

70

80

90

100

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Th

ou

san

ds

Executive segment % YoY (RHS)


Growth rate to decelerate in mopeds TVS is the only manufacturer of mopeds in India with annual volumes of 0.8m units

(FY15). Mopeds (engine displacement c.70cc) are generally used in small

businesses for carrying light weight goods. While the share of mopeds in TVS

volumes is ~30% (FY15), its share in the two wheeler industry is mere c.5%.

Moreover we expect relatively slower growth of 3% CAGR for mopeds over FY15-

20 as compared to expected 7% CAGR for the two wheeler industry over the same

period, which should mean further decline of share of mopeds in the two wheeler

industry. On the back of lower realisation (~Rs25K-Rs30K), the share of moped in

aggregate revenue is ~15% (FY15) despite volume contribution being at 30%.

Figure 208: TVS is the industry in mopeds

100%

30%6%

0%

50%

100%

150%

MarketShare

Volumeshare(FY15)

VolumeCAGR 5yrs



Figure 209: Moped industry to grow at 2% CAGR over FY15-18E, driving a contraction of share

78% 76% 75% 73% 71% 67% 65% 64% 63%

16% 18% 19% 21% 24% 28% 31% 32% 33%

6.0% 5.9% 5.8% 5.7% 4.9% 4.7% 4.4% 4.2% 4.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Motorcycles Scooters Mopeds


Table 21: Overall we expect TVS to deliver volume growth of 7% CAGR over FY15-18, in-line with the domestic two wheeler industry

Volumes ('000 units) CAGR

(FY15-18)

Market Share (%)

Domestic two wheeler assumptions for TVS

FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

Motorcycles

Economy 433 371 384 397 -2.8% 20.6% 16.0% 16.0% 16.3%

Executive 38 73 79 67 21.3% 0.6% 1.2% 1.2% 1.0%

Premium 203 259 284 308 14.9% 10.1% 12.0% 11.8% 11.5%

Total motorcycles 674 703 747 773 4.7% 6.3% 6.6% 6.5% 6.3%

Scooters

684 782 900 1,024 14.4% 15.2% 15.5% 15.5% 15.8%

Mopeds

756 725 762 800 1.9% 100% 100% 100% 100%

Aggregate two wheelers 2,113 2,210 2,408 2,596 7.1% 13.4% 13.5% 13.4% 13.3%

Source: SIAM, Investec Securities estimates


Impressive performance in exports to continue TVS’ performance in exports has been impressive over the last five years, with the

company reporting volume growth of 20% CAGR. Strong growth in exports volumes

resulted in the contribution of aggregate volumes/revenue increasing from

12%/14% in FY11 to 16%/22% in FY15 as seen in Figure 210. The company mainly

exports to Africa, Latin America and Asia. While two wheelers dominate exports

volumes, three wheelers is also picking-up pace.

Two wheeler export opportunity from India remains one of the bright spots amidst a

subdued domestic environment for motorcycles. As highlighted earlier, two

wheelers export opportunity to emerging markets of Africa and Latin America

present enormous opportunity for Indian companies and we believe that TVS is

strongly poised to take advantage of this export opportunity.

Figure 211: TVS exports has grown by 20% CAGR over FY10-15 Figure 212: While 2Ws dominates 3Ws are picking up in volume share

193 167

247 288 240 314

410

41%

-14%

48%

17%

-17%

31% 31%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

140

190

240

290

340

390

440


Th

ou

san

ds

Export volumes % YoY (RHS)

89% 83% 77% 80%69% 70%

6% 7% 11% 5%7%

6%

4%3% 3%

1%2% 2%

1%7% 8%

14% 22% 22%

0%

20%

40%

60%

80%

100%


MC SC Mopeds 3Ws

Source: Investec Securities research Source: Investec Securities research

Where does TVS stand vs the leader?

While Bajaj has a big lead in this race for export domination, TVS is the second

biggest Indian player. There are two legs to this race – in two wheelers and three

wheelers. While TVS has long been present in the two wheeler segment, its share

is stagnant between 15-13% from FY10 – FY13. However, TVS has managed to

increase its market share in three wheelers post launch of TVS King and cornered a

22% market share in the segment. TVS has grown at a 51% CAGR over FY11-15,

albeit over a low base in FY11.

Figure 213: TVS market share in 2Ws export from India Figure 214: TVS market share in 3Ws export from India

64 63 64 66 63 62

9 9 10 8 6 8

15 15 13 11 12 13

13 13 13 15 18 17

-

20

40

60

80

100


Bajaj Hero TVS Others

95 86 86 84

74 70

3 7 6 4 6 7

1 6 7 11

19 22

-

20

40

60

80

100


Bajaj Hero TVS


Figure 210: Share of exports on the rise

12 13 12 15 16

14 16 16

22 22

10

15

20

25


Volume (%) Revenue (%)


TVS gaining traction in three wheeler

exports, while 2Ws volume yet to pick-

up significantly


Exports growth to continue

Competition is high in motorcycles exports with target markets (Africa, LATAM and

Asia) being the same for Bajaj, TVS and Hero. Moreover, the presence of Chinese

two wheeler manufacturers further intensifies the competition in these geographies.

Our channel checks indicate that setting up a reliable distribution network from

scratch and building a brand in these markets are the greatest entry barriers which

new entrants have to deal with. Hence, Bajaj with its first mover advantage enjoys a

competitive advantage versus relatively new entrants like TVS. We see this as the

most likely reason why TVS has been unable to make significant inroads into the

markets of Africa and Latin America.

The only method to make an impact seems to be through breakthrough products.

One such product for TVS has been in the three wheeler segment, where TVS King

has been able to successfully disturb Bajaj’s dominance. The other apparent

strength in TVS’s product portfolio versus Bajaj, are its scooter and moped

offerings.

We expect TVS exports of two wheelers to grow at 13% CAGR over FY15-18E

driven by strong growth of 33%/ 16% in scooters and mopeds respectively, over the

same period. Moreover, on the back increasing distribution network of three

wheelers and strong feedback of TVS King we expect TVS three wheelers exports

to grow at 17% CAGR over FY15-18E.

Figure 215: TVS export to grow at 14% CAGR over FY15-18

294 323

362 405 23

39

47

54

10

13

14

15

91

109

125

144

200

250

300

350

400

450

500

550

600

650

FY15 FY16E FY17E FY18E

Th

ou

san

ds

Motorcycles Scooters Mopeds Three wheelers


Reliable distribution network and

creating a brand in overseas market

could pose an entry barrier…

…however, Bajaj not only enjoys the

first mover advantage but has also

created a strong brand in markets of

Africa and Latin America

Scooters and three wheelers should

drive exports growth of 14% CAGR

over FY15-18


Turnaround of Indonesian operations still some time away TVS had set-up a wholly owned subsidiary “PT.TVS Motor Company Indonesia” in

Indonesia in 2002 with the objective to cater to the large two wheelers market ~7.8

million units (2014). Indonesia market is dominated by Japanese manufacturers

with Honda’s share at 64% in 2014.

TVS entered Indonesia through Bebek (geared scooters) which was a popular

product at that time. However, the company was surprised by the sudden shift in

consumer tastes when preference for Skubeks (automatic scooters) increased.

Following this shift in tastes the market share of Bebeks fell from 80% in 2006 to

40% in 2011. In FY14, TVS introduced its own Skubek model- TVS Dazz, post

which TVS product portfolio has become more relevant from Indonesia domestic

market perspective.

Given the volatile demand environment in the domestic Indonesian market and

underutilisation of capacity (c.15% in FY10), TVS planned to use Indonesia facility

as a hub to supply the South East Asian region. The company sold ~23,000 units in

FY15 (domestic at 9K and exports at 14K) and plans to make the facility a

springboard for other Asian economies. There are significant operating leverages to

be enjoyed here as the plant currently operates at 2,000-3000 units a month while

the breakeven is c.6,000 units; however we believe exports ramp-up could take

some time.

Figure 216: TVS Indonesia export volume gradually ramp-up Figure 217: Losses reduce in Indonesia led by pick-up in exports

15 15 12

9 9 9

5 11

10 10

14

5

10

15

20

25


Th

ou

san

ds

un

its

Domestic Exports

(642)(584)

(490)

(375)

(543) (500)

(1,045)

(623)

(1,124)

(1,649)

(1,399)

(392)

(1,800)

(1,600)

(1,400)

(1,200)

(1,000)

(800)

(600)

(400)

(200)

-


EBITDA (Rsm) Adj.PAT (Rsm)

Source: Company data Source: Company data

In our opinion, given the subdued outlook of the domestic two wheeler industry in

Indonesia coupled with the time required to make an impact in a segment

dominated by Japanese manufacturers, TVS will have to rely on ramp-up of exports

volume to turn the Indonesian operations profitable. As highlighted in the thematic

section, entry into overseas market by a new player typically takes time given the

money and effort required to establish distribution network and brand in these

geographies.

Hence we expect a gradual volume ramp-up in exports from Indonesia for TVS and

this could potentially delay turnaround of the subsidiary, putting a drag on the

standalone financials. As seen in Figure 218, incremental investment every year in

Indonesia subsidiary by the parent has put a significant drag on performance of the

standalone entity. In FY15, TVS infused ~Rs.250m which is ~22% of free cash flow

generated by the standalone operation in that year.

Shift of industry from Bebek to

Skubeks came as a big setback for

TVS initially; however the company

equipped itself to address the change

by the launch of Dazz in FY14

Tie-up with three financiers enabled

TVS to cater to the Indonesia two

wheeler industry which is ~60-70%

financed

Expect gradual ramp-up in exports

from Indonesia, which could keep

turnaround still some time away


Figure 218: Expect Indonesian operations to remain a drag in the near future

936 596 869 -

498 249

2,626

577

2,382

3,101

-1,757

1,157

36%

103%

37%

0%

-28%

22%

-30%

-10%

10%

30%

50%

70%

90%

110%

-2,000

-1,000

0

1,000

2,000

3,000


(%)

(Rs

m)

Additional invesement FCF As % of TVS FCF (RHS)

Source: Company data

Figure 219: Indonesia loss in FY15 stood at 11% of standalone profits

1,7481,979

2,491

2,069

2,644

3,478

-1,045

-623

-1,124

-1,649 -1,399

-392

-60%

-31%

-45%

-80%

-53%

-11%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

-2,000

-1,000

0

1,000

2,000

3,000

4,000


(%)

Rs

m

Standalone Adj. PAT TVS Indonesia Adj. PAT

Indonesia % of standalone (RHS)

Source: Company data


BMW agreement – too early to bank upon TVS has entered into a co-operation agreement with BMW Motorrad for jointly

developing and manufacturing premium segment motorcycles with engine

displacement between 200cc-500 cc. We understand that there are two aspects to

this agreement: 1) jointly develop product which can be sold under TVS brand and

2) Contract manufacturing for BMW Motorrad. It is similar to the arrangement that

Bajaj has with KTM.

In our opinion, TVS could find it difficult to chase significant volumes under the

"TVS" brand in this segment which is dominated by Royal Enfield, Bajaj (Pulsar,

KTM, Kawasaki) etc. Moreover led by necessity of higher marketing expenditure to

create brand in the newer "Super Premium" segment, we remain circumspect of any

meaningful contribution to the profitability from sale of super premium bikes.

At the same time, if TVS is able to demonstrate seamless contract manufacturing

up to BMW's desired standards, the agreement with BMW could potentially

contribute meaningfully to TVS profitability in the long term. In our opinion, TVS

could make manufacturing EBITDA margin of ~7-8% (in-line with company’s

margin) in this arrangement. However, in our opinion it will take some time to

meaningfully ramp-up contract manufacturing volumes.

Given lack of clarity on both “TVS” brand motorcycles and contract manufacturing

arrangements; we have not build in any benefits emerging from the BMW co-

operation agreement.

TVS-BMW agreement to jointly

design, develop and manufacture

motorcycles between 200cc-500cc

TVS-BMW agreement could also

entail into contract manufacturing for

BMW


Margins should improve, but miss guidance TVS’s margins are normally under the scanner for hitting far below industry levels.

TVS EBITDA margin at 6% in FY15 were one third of Bajaj (19%) and half of

Hero(12.1%). Though gross margins for TVS are broadly comparable to Bajaj and

Hero, higher advertisement spend and staff cost result in anaemically low EBITDA

margin for TVS as compared to peers.

Since the last two years, management commentary has been targeting double digit

EBITDA margins. However, in both these years management commentary has

fallen short of actuals. The key drivers of margin as per management are a) positive

operating leverage and b) lowering of advertisement expenditure from current levels

of c.6% of sales (FY15).

We analyse expected TVS performance on each of the above mentioned factors

and what impact it could potentially have on EBITDA margin of the company.

Figure 221: Comparing FY15 margins across Indian 2W companies

31.3

28.4 27.7

19.0

12.1

6.0

13.0

8.6

3.4

3

8

13

18

23

28

33

Bajaj Hero TVS Bajaj Hero TVS Bajaj Hero TVS

(% of sales)

Gross Margin EBITDA Margin Net Margin


Figure 222: Difference between TVS and Bajaj EBITDA margins

Figure 223: Difference between TVS and Hero EBITDA margins

6.0

19.0

3.6

1.6

5.3

2.0

0.6

-

2.0

4.0

6.0 8.0

10.0 12.0 14.0 16.0 18.0 20.0

TV

S

Gro

ss M

argi

n ex

p

Sta

ff co

sts

Adv

ertis

ing

Pac

king

Oth

ers

Baj

aj

Reduction

(as a % of FY15 sales)

6.0

12.1

0.7

1.5

4.3

1.2 0.7 0.1

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

TV

S

Gro

ss M

argi

n ex

p

Sta

ff co

sts

Adv

ertis

ing

Low

er R

oyal

ty

Pac

king

Oth

ers

Her

o

Reduction

(as a % of FY15 sales)


Figure 220: EBITDA margin (%)

19 19 18 19

13 12 10 11 12

7 6 6 6 7

5

10

15

20


Bajaj Hero TVS



Operating leverage to have limited impact: Though positive operating leverage

could mean margin expansion for TVS, we believe the margin expansion will be

modest. In FY11/FY15 TVS reported strong volume growth of 33%/22% YoY,

respectively; however the strong volume growth could not improve the EBITDA

margin in both these years leading to an EBITDA margin contraction of 0.1% in

both FY11/FY15. Moreover, despite lower asset turns of Bajaj as compared to TVS

and a broadly comparable product portfolio, Bajaj’s EBITDA margin is more than

3x TVS, as seen in Figure 225. On the contrary we expect volume growth

momentum to decelerate from 22%YoY in FY15 to 8% CAGR over FY15-18E,

potentially lowering the margin expansion trajectory, in our view.

Figure 224: Operating leverage to have limited boost for TVS margins

Figure 225: TVS scores well on asset turns, but not so on margins

15.2

33.2

7.3

-7.5

2.4

22.1

1.5

-0.1

2.0

-0.8

0.3

-0.1 -10

-505

10152025303540


Volume growth (%) EBITDA margin change (%)

1.4 2.6 2.2

19.0

12.1

6.0

0

2

4

6

8

10

12

14

16

18

20

Bajaj Hero TVS Bajaj Hero TVS

Asset Turnover EBITDA Margin

ASSET TURNSBajaj >TVS > Hero

EBITDA MarginTVS > Hero > Bajaj

Source: Investec Securities research Source: Investec Securities research

Meaningful reduction in ad spend unlikely: Higher advertisement spends vis-a-

vis Hero (by 4.3%) and Bajaj (by 5.3%) are the prime component of TVS’ lower

EBITDA margin. Currently TVS spends 6% of sales on advertising and marketing.

Though the management has indicated in the past that it intends to bring down ad

spends to c.4% of revenues, we remain circumspect. We expect ad spend in TVs

to remain at elevated levels led by:-

a) TVS positioning as a challenger in all the motorcycle segment domestically

(relatively more in economy and executive segments and less in premium

segment)

b) Continuation of initiatives to establish TVS brand in non-south markets in

India

c) Recurring new brand launches to gains volumes in domestic market, more

so in the executive segment of motorcycles in which the company has a

track record of launching new brands to chase volumes. New brand

launch entails higher ad spend

d) Expansion of geographic footprint and creating brand awareness in

overseas markets

Given the increase in competitive intensity and expected lower growth in the

domestic two wheeler industry, we expect ad spend for the industry to remain at

elevated levels, and TVS should not be an exception. The company has launched a

scooter advertising campaign for the festive season with Amitabh Bachchan (Indian

movie star). This makes us sceptical on whether ad spending can be meaningfully

reduced.

In our opinion, lower commodity prices, moderate benefits from operating leverage,

favourable and cost rationalisation initiatives could lead to EBITDA margin

expansion for 6.8% in 1HFY16 to 7.5% by FY18E, significantly lower than

management guidance of 10%.

Figure 226: Ad spend as % of revenue

1

0.5 1 1 1 1

2 2 2

2 2 2

7 6

5

7 7

6

0

2

4

6

8

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

Bajaj Hero TVS



Performance on financial matrix should improve, but momentum to moderate There has been a significant improvement in TVS performance on financial front

over last five years; which was primarily driven by volumes gains and margin

expansion (on account of a relatively low base). TVS reported a volume growth of

11% CAGR over FY10-15 to 2.5m units in FY15 (market share decline by 1.3% YoY

in the domestic two wheeler industry in the same period). Moreover, the company’s

EBITDA margin improvement by 120bps over FY10-15 to 6% in FY15 (still amongst

the lowest in the industry) coupled with reduction in interest cost resulted in TVS

reporting PBT (Profit Before Tax) of 43% CAGR over FY10-15.

However, going forward, we expect significant deceleration in growth momentum for

TVS. In our opinion, TVS has enjoyed the benefits of low hanging fruits so far

(volumes and margin expansion drivers) and from here on to chase incremental

market share gains and margin expansion should be a relatively uphill task.

We expect TVS to report a volume growth of 7% CAGR over FY15-18E in the

domestic volumes coupled with exports growth of 11% CAGR should translate in

aggregate volume growth of 8% CAGR (as compared to 11% CAGR growth over

FY10-15) and revenue growth of 12%, as discussed in earlier sections. However

lower commodity prices, moderate benefits from operating leverage and cost

rationalisation initiatives could lead to EBITDA margin expansion from 6.8% in

1HFY16 to 7.5% by FY18E which should drive PBT growth of 23% CAGR over

FY15-18E, significantly lower than PBT CAGR of 43% reported by the company

over FY10-15 as well as earnings growth of 32% reported in FY15.

Figure 227: Expect deceleration in growth momentum for TVS

11%

18%

24%

43%

8%

12%

21%

23%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Volume Growth Revenue growth EBITDA growth PBT growth


Sharp drop in interestcost drove strong earnings growth over


Volume growth, low base,

improvement in sub-par EBITDA

margin and savings on finance cost

drive 43% earnings growth over

FY10-15…

…however going ahead we expect

significant deceleration in growth

momentum led by lower volume

growth, limited befit from saving on

interest cost coupled with expected

increase in effective tax rate should

limit earnings growth to 23% CAGR

over FY15-18


Unwarranted valuation: Initiate with Sell TVS is trading at 15.5x FY17 EV/EBITDA on standalone basis which is at 31%/32%

premium to Bajaj/Hero respectively; despite TVS’ ROCE (19%) being lower than

Bajaj/Hero (~28%/34%), respectively, as seen in Table 22. On FY17E P/E, TVS is

trading at 25.7x earnings on a standalone basis which is also at 58%/60% premium

to Bajaj and Hero, respectively.

In our opinion, the premium valuation of TVS seems unwarranted given our

expectation of deceleration in earnings growth momentum over FY15-18 (22%

CAGR) as compared to 32% earnings growth reported by TVS in FY15 (which also

resulted into P/E re-rating over last few months). On the contrary, deceleration of

growth momentum could potentially led to de-rating of valuation multiples of TVS.

Moreover, TVS is positioned as a challenger to the current leaders in most

segments, Bajaj and Hero This also limits TVS ability to command a premium as

compared to peers.

We value TVS at 16x Sep’17 earnings (average multiple of Hero and Bajaj) leading

to our target price of Rs.200 implying 30% downside from current levels.

Figure 228: 12 month forward P/E(x) for two wheeler OEMs Figure 229: TVS Motors one year forward P/E (x)

5

10

15

20

25

30

Nov

'10

May

'11

Nov

'11

May

'12

Nov

'12

May

'13

Nov

'13

May

'14

Nov

'14

May

'15

Bajaj TVS Hero

Avg 13.0

Max 28.6

Min 5.6 -1Sd, 6.9

2

7

12

17

22

27

32

Nov

-10

Feb

-11

May

-11

Aug

-11

Nov

-11

Feb

-12

May

-12

Aug

-12

Nov

-12

Feb

-13

May

-13

Aug

-13

Nov

-13

Feb

-14

May

-14

Aug

-14

Nov

-14

Feb

-15

May

-15

Aug

-15

P/E (x) Avg Max Min +1Sd -1Sd

Source: FactSet. Note: based on consensus numbers Source: FactSet. Note: based on consensus numbers

Table 22: Comparable valuations

FY17E P/E (x) EV/EBITDA (x) ROCE (%)

Bajaj 16.2 11.9 28%

Hero 16.1 11.7 34%

TVS 25.7 15.5 19%

Avg. 19.3 13.0 27%

Avg. (ex-TVS) 16.2 11.8 31%



Figure 230: TVS Motor Summary Financial

Income Statement FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Revenue: 32,195 36,709 43,631 61,795 71,415 70,650 79,659 100,982 109,434 124,858 141,221

% change YoY 0% 0% 0% 42% 16% -1% 13% 27% 8% 14% 13%

EBITDA 413 1,187 2,072 2,848 4,694 4,090 4,822 6,043 7,660 9,364 10,592

EBITDA margin 1% 3% 5% 5% 7% 5.8% 6.1% 6.0% 7.0% 7.5% 7.5%

74% 37%

PBT 354 311 762 2,481 3,165 1,636 3,525 4,562 5,911 7,451 8,525

Investec Net profit 318 311 1,748 1,979 2,491 2,069 2,644 3,478 4,374 5,514 6,308

32%

Weighted average shares 475 475 475 475 475 475 475 475 475 475 475

EPS, diluted 0.7 0.7 3.7 4.2 5.2 4.4 5.6 7.3 9.2 11.6 13.3

DPS 0.7 0.7 1.2 1.1 1.3 1.2 1.4 1.9 2.3 2.9 3.3

Balance Sheet FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Net Block 10,431 10,364 9,828 9,950 10,781 10,476 11,738 14,190 15,956 17,515 19,352

Investments 3,390 4,777 7,393 6,611 9,309 8,688 8,959 10,125 10,875 11,625 12,375

Inventories 4,054 3,206 2,897 5,279 5,846 5,097 5,482 8,197 8,789 10,063 11,461

Sundry Debtors 879 1,816 2,208 2,706 2,080 3,005 3,341 5,039 5,460 6,230 7,046

Cash and Bank 37 421 1,010 60 130 175 826 54 718 2,465 4,550

Loans and advances 2,778 3,495 3,537 3,970 2,998 3,752 5,302 8,438 8,438 8,438 8,438

Others 528 753 300 - - - - - - - -

Total assets 22,096 24,831 27,172 28,577 31,145 31,193 35,647 46,042 50,236 56,336 63,223

Equity 238 238 238 475 475 475 475 475 475 475 475

Reserves and Surplus 7,978 7,864 8,416 9,519 11,221 11,772 13,678 15,979 19,259 23,394 28,126

Debt 6,663 9,060 10,033 7,854 7,155 5,459 4,759 9,187 9,187 9,187 9,187

Deferred Tax Assets / Liabilities 1,549 1,481 1,146 957 976 931 1,247 1,527 1,527 1,527 1,527

Current Liabilities & Others 5,058 5,533 6,672 8,852 10,834 12,025 14,957 18,437 19,350 21,315 23,470

Long term provision 610 655 669 920 485 532 532 437 437 437 437

Total Liabilities 22,096 24,831 27,172 28,577 31,145 31,193 35,647 46,042 50,236 56,336 63,223

Cash Flow Statement (Rsm) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Cash From Operating Activities 1,616 3,389 2,024 4,408 4,181 848 5,238 6,145 7,482 8,464

Cash Flow from Investing Activities -2,043 -2,852 318 -3,809 -984 -2,599 -4,933 -4,026 -3,995 -4,440

Cash from Financing Activities 206 880 -4,083 -2,546 -4,659 -1,984 3,308 -1,455 -1,740 -1,938

Net Cash Inflow / Outflow -221 1,417 -1,742 -1,946 -1,462 -3,735 3,613 664 1,747 2,086

FCFF 1,108 3,464 954 2,640 3,414 -1,732 1,187 2,645 3,982 4,464

Performance Ratios FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Growth

Revenue 0% 0% 42% 16% -1% 13% 27% 8% 14% 13%

EBITDA 187% 74% 37% 65% -13% 18% 25% 27% 22% 13%

EBIT -130% 560% 70% 98% -21% 26% 29% 31% 25% 14%

EPS -2% 462% 13% 26% -17% 28% 32% 26% 26% 14%

Margins

EBITDA 1% 3% 5% 5% 7% 6% 6% 6% 7% 8% 8%

EBIT -2% 0% 2% 3% 5% 4% 4% 4% 5% 6% 6%

Net profit 1% 1% 4% 3% 3% 3% 3% 3% 4% 4% 4%

Solvency

Net debt (cash) 6,626 8,639 9,023 7,794 7,024 5,284 3,933 9,134 8,470 6,722 4,637

Net debt / equity (%) 81% 107% 104% 78% 60% 43% 28% 56% 43% 28% 16%

Net debt / total assets (%) 30% 35% 33% 27% 23% 17% 11% 20% 17% 12% 7%

Net debt / EBITDA (x) 16.0 7.3 4.4 2.7 1.5 1.3 0.8 1.5 1.1 0.7 0.4

EBITA interest cover (x) 19x 2x 3x 6x 8x 9x 19x 22x 21x 26x 29x


Capital employed 12,743 14,326 16,953 15,653 16,495 17,188 18,577 21,643 24,924 29,059 33,791

Capital growth (%) 0% 12% 18% -8% 5% 4% 8% 17% 15% 17% 16%

Capital turn (x) 0.4x 0.4x 0.4x 0.3x 0.2x 0.2x 0.2x 0.2x 0.2x 0.2x 0.2x




Income Statement 2014 2015 2016E 2017E 2018E Revenue 79,659 100,982 109,434 124,858 141,221EBITDA 4,822 6,043 7,660 9,364 10,592Depreciation and amortisation -1,317 -1,533 -1,734 -1,941 -2,163Operating profit 3,505 4,510 5,926 7,423 8,429Other income 83 111 122 134 147Net interest -35 -59 -137 -106 -51Share-based-payments 0 0 0 0 0PBT (normalised) 3,554 4,562 5,911 7,451 8,525Impairment of acquired intangibles - - - - - Non-recurring items/exceptionals -28 0 0 0 0PBT (reported) 3,525 4,562 5,911 7,451 8,525Taxation -909 -1,083 -1,537 -1,937 -2,216Minorities & preference dividends 0 0 0 0 0Discontinued/assets held for sale 0 0 0 0 0Net Income (normalised) 2,644 3,478 4,374 5,514 6,308Attributable profit 2,616 3,478 4,374 5,514 6,308EPS (reported) 5.5 7.3 9.2 11.6 13.3EPS (norm., cont.) – FD (INR) 5.6 7.3 9.2 11.6 13.3EPS (norm., cont., IAS19R adj.) – FD - - - - - DPS (INR) 1.4 1.9 2.3 2.9 3.3Average number of group shares - FD (m) 475 475 475 475 475Average number of group shares (m) 475 475 475 475 475Total number of shares in issue (m) 475 475 475 475 475

Cash Flow 2014 2015 2016E 2017E 2018E Operating profit 3,505 4,510 5,926 7,423 8,429Depreciation & amortisation 1,317 1,533 1,734 1,941 2,163Other cash and non-cash movements -4,277 4,512 259 240 198Change in working capital 1,613 -3,851 -101 -79 -59Operating cash flow 2,158 6,704 7,819 9,525 10,731Interest -35 -59 -137 -106 -51Tax paid -1,275 -1,407 -1,537 -1,937 -2,216Dividends from associates and JVs 0 0 0 0 0Cash flow from operations 848 5,238 6,145 7,482 8,464Maintenance capex -2,580 -4,052 -3,500 -3,500 -4,000Free cash flow -1,732 1,187 2,645 3,982 4,464Expansionary capex - - - - - Exceptionals and discontinued operations - - - - - Other financials 1,566 6,273 -1,689 -3,856 -4,532Acquisitions -19 -881 -526 -495 -440Disposals - - - - - Net share issues -476 -547 0 0 0Dividends paid -690 -831 -1,094 -1,378 -1,577Change in net cash -1,351 5,200 -664 -1,747 -2,086Net cash/(debt) 3,933 9,134 8,470 6,722 4,637FCFPS - FD (INR) (3.6) 2.5 5.6 8.4 9.4

Balance Sheet 2014 2015 2016E 2017E 2018E Property plant and equipment 11,540 13,843 15,609 17,168 19,005Intangible assets 198 347 347 347 347Investments and other non current assets 9,822 11,562 12,312 13,062 13,812Cash and equivalents 826 54 718 2,465 4,550Other current assets 13,262 20,236 21,250 23,294 25,508Total assets 35,647 46,042 50,236 56,336 63,223Total debt -4,759 -9,187 -9,187 -9,187 -9,187Preference shares 0 0 0 0 0Other long term liabilities -1,247 -1,527 -1,527 -1,527 -1,527Provisions & other current liabilities -15,489 -18,874 -19,788 -21,752 -23,908Pension deficit and other adjustments 0 0 0 0 0Total liabilities -21,494 -29,588 -30,502 -32,466 -34,622Net assets 14,153 16,454 19,734 23,870 28,601Shareholder's equity 14,153 16,454 19,734 23,870 28,601Minority interests 0 0 0 0 0Total equity 14,153 16,454 19,734 23,870 28,601Net working capital -1,261 -1,401 1,416 2,181 4,007NAV per share (INR) 29.8 34.6 41.5 50.2 60.2





2014 2015 2016E 2017E

Calendar PE (x) 42.2 33.3 26.3 22.6


EV/sales (x) 1.4 1.2 1.1 0.9

EV/EBITDA (x) 22.6 17.9 14.5 12.6

FCF yield (%) 0.3 1.7 2.7 3.1

Dividend yield (%) 0.6 0.8 0.9 1.1



Ratios and metrics 2014 2015 2016E 2017E 2018E Revenue growth (y-on-y) (%) 12.8 26.8 8.4 14.1 13.1EBITDA growth (y-on-y) (%) 17.9 25.3 26.8 22.2 13.1Net income (normalised) growth (yoy) 27.8 31.5 25.8 26.1 14.4EPS (normalised) growth (y-on-y) (%) 27.8 31.5 25.8 26.1 14.4FCFPS growth (y-on-y) (%) 122.9 50.6 12.1NAVPS growth (y-on-y) (%) 15.6 16.3 19.9 21.0 19.8DPS growth (y-on-y) (%) 16.7 35.7 21.1 26.1 14.4Interest cover (x) 99.6 76.7 43.2 70.0 164.9Net debt/EBITDA (x) (0.8) (1.5) (1.1) (0.7) (0.4)Net debt/equity (%) (27.8) (55.5) (42.9) (28.2) (16.2)Net gearing (%) (38.5) (124.8) (75.2) (39.2) (19.3)Dividend cover (x) 4.0 3.9 4.0 4.0 4.0EBITDA margin (%) 6.1 6.0 7.0 7.5 7.5EBITA margin (%) 4.4 4.5 5.4 5.9 6.0ROE (%) 18.7 21.1 22.2 23.1 22.1ROCE (%) 17.7 19.5 22.4 24.3 23.9NWC/revenue (%) (1.6) (1.4) 1.3 1.7 2.8Tax rate (normalised) (%) 25.6 23.7 26.0 26.0 26.0Tax rate (reported) (%) 25.8 23.7 26.0 26.0 26.0


Target Price Basis


Key Risks

Higher than expected market share gain, Higher than expected EBITDA margin


Disclosures Third party research disclosures Research recommendations framework This report has been produced by a non-member affiliate of Investec Securities (US) LLC and is being distributed as third-party research by Investec Securities (US) LLC in the United States. This Report is not intended for use by or distribution to US corporations or businesses that do not meet the definition of a major institutional investor in the United States, or for use by or distribution to any individuals who are citizens or residents of the United States. Investec Securities (US) LLC accepts responsibility for the issuance of this report when distributed in the United States to entities who meet the definition of a US major institutional investor.

Investec Securities bases its investment ratings on a stock’s expected total return (ETR) over the next 12 months (with total return defined as the expected percentage change in price plus the projected dividend yield). Our rating bands take account of differences in costs of capital, risk premia and required rates of return in the various markets that we cover. Prior to 21st January 2013 our rating system for European stocks was: Sell ETR <-10%, Hold ETR -10% to 10%, Buy ETR >10%. From 21st January 2013 any research produced will be on the new framework set out in the tables below. Prior to 11th March 2013, our rating system for South African stocks was: Sell ETR <10%, Hold ETR 10% to 20%, Buy ETR >20%. From 11th March 2013, any research produced on South African stocks will be on the new framework set out in the table below.

Stock ratings for European/Hong Kong stocks Stock ratings for research produced by Investec Bank plc

Expected total return

12m performance Count % of total Count % of total

Buy greater than 10% 185 59% 78 42%

Hold 0% to 10% 99 32% 13 13%

Sell less than 0% 29 9% 1 3%

All stocks Corporate stocks

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Stock ratings for Indian stocks Stock ratings for research produced by Investec Bank plc




Hold 5% to 15% 14 23% 0 0%




Stock ratings for African* stocks Stock ratings for research produced by Investec Securities Limited




Hold 5% to 15% 24 33% 3 13%




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Company disclosures

Bajaj Auto Hero Motocorp TVS Motors

Key: Investec has received compensation from the company for investment banking services within the past 12 months, Investec expects to receive or intends to seek compensation from the company for investment banking services in the next 6 months, Investec has been involved in managing or co-managing a primary share issue for the company in the past 12 months, Investec has been involved in managing or co-managing a secondary share issue for the company in the past 12 months, Investec makes a market in the securities of the company, Investec holds/has held more than 1% of common equity securities in the company in the past 90 days, Investec is broker and/or advisor and/or sponsor to the company, The company holds/has held more than 5% of common equity securities in Investec in the past 90 days, The analyst (or connected persons) is a director or officer of the company, The analyst (or connected persons) has a holding in the subject company, The analyst (or connected persons) has traded in the securities of the company in the last 30 days. Investec Australia Limited holds 1% or more of a derivative referenced to the securities of the company

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Recommendation history (for the last 3 years to previous day’s close)

Hero Motocorp (HROM.NS) – Rating Plotter as at 27 Nov 2015

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

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2,800

3,000

3,200

Buy Hold Sell Not Rated

Price Target

Source: Investec Securities / FactSet

Bajaj Auto (BAJA.NS) – Rating Plotter as at 27 Nov 2015

0

200

400

600

800

1,000

1,200

1,400

1,600

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2,200

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TVS Motors (TVSM.NS) – Rating Plotter as at 27 Nov 2015

0

50

100

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300


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