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27 November 2015
Readers in all geographies please refer to important disclosures and disclaimers starting on page 98 In the United
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
Pratik Rangnekar
+91 (22) 6136 7425
Secto
r Re
se
arc
h
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
Page 3 | 27 November 2015
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
Page 4 | 27 November 2015
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
Page 5 | 27 November 2015
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)
Source: Investec Securities estimates Source: Investec Securities estimates
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)
Source: Investec Securities estimates Source: Investec Securities estimates
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
Page 6 | 27 November 2015
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
Source: Investec Securities estimates
Page 7 | 27 November 2015
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
FY15 FY16E FY17E FY18E FY19E FY20E
Mill
ion
s
Motorcycles % YoY (RHS)
Source: Investec Securities estimates Source: Investec Securities estimates
Page 8 | 27 November 2015
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
Source: Investec Securities estimates Source: Investec Securities estimates
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
Page 9 | 27 November 2015
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)
Source: Investec Securities estimates Source: Investec Securities estimates
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
Page 10 | 27 November 2015
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.
Page 11 | 27 November 2015
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%
Economy Executive Premium
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
Source: Investec Securities estimates Source: Investec Securities estimates
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
FY15 FY16E FY17E FY18E FY19E FY20E
Mill
ion
s
Premium Segment Share of Premium Segment (RHS)
0%
10%
20%
30%
40%
50%
Bajaj Auto EicherMotors
Yamaha Honda TVS Hero
FY09 FY10 FY11 FY12 FY13 FY14 FY15
Source: Investec Securities estimates Source: Investec Securities estimates
Figure 22: Change in segment share
0%
-2%
2%
-2%
-3%
5%
-5%
0%
5%
Economy Executive Premium
FY10-15 FY15-20E
Source: Investec Securities estimates
Page 12 | 27 November 2015
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
Source: Investec Securities estimates Source: Investec Securities estimates
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
Page 13 | 27 November 2015
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
Source: Investec Securities estimates Source: Investec Securities estimates
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
(%)
Source: Investec Securities estimates Source: Investec Securities estimates
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%
Source: Investec Securities estimates
Page 14 | 27 November 2015
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)
Source: Investec Securities estimates
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
Page 15 | 27 November 2015
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$62m in 2000. India and China are emerging as global power
house of 2Ws exports globally with share of China in global 2Ws trade increasing
from 16% in 2005 to 28% in 2014. While India’s share increased from ma ere 2%
to 9% over the same period.
Figure 36: Share of countries in 2Ws global trade
16% 18% 20% 22% 21%27% 30% 29% 29% 28%
38% 36% 32% 26%21%
19% 17% 16% 14% 15%
2% 2%1%
2%4%
5% 6% 7% 8% 9%
5% 6%7% 7%
8%7% 6% 7% 7% 7%
39% 38% 40% 42% 46% 42% 40% 41% 42% 41%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
China Japan India USA Others
Source: Investec Securities estimates
Figure 35: Share in global 2ws trade – 2014
China 28
India 9
Japan 15USA 7
Germany 9
Italy 7
Thailand 6
Others 20
Source: UN Comtrade, Investec Securities Research
Page 16 | 27 November 2015
Market share gains from China Increased penetration of 2Ws in China and increasing government restriction of
2Ws sales in certain provinces were one of the reasons that resulted in Chinese
companies looking for growth avenues overseas leading to surge in 2Ws export
from China. In 2014 China exported 11.4 million 2Ws representing ~55% of total
2Ws sales from China. However in our opinion, rising exports from India could
compete with China and potentially overtake China as:-
Indian companies offer a better quality proposition: Our channel checks in
Nigeria and Sudan suggest that quality is a perennial issue with Chinese
motorcycles. As per 2W dealers the only unique selling proposition that
Chinese motorcycles offers is low cost offering with limited focus on product
durability. This is also reflected in the consistently lower average realisation for
Chinese 2Ws exports as compared to Indian motorcycles. In 2014, average
realisation for 2Ws exports from China stood at US$ 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
Source: Investec Securities estimates
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
Page 17 | 27 November 2015
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
Page 18 | 27 November 2015
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
Page 19 | 27 November 2015
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”
Page 20 | 27 November 2015
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
Source: Investec Securities estimates
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)
Source: UN Comtrade, Investec Securities Research Source: UN Comtrade, Investec Securities Research
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$m)
Nigeria 45%
Angola 9%Kenya 9%
Uganda 9%
Egypt 8%
Guinea 4%
Tanzania 3%
Congo 3%
Others 10%
Source: Ministry of Commerce, Investec Securities Research Source: Ministry of Commerce, Investec Securities Research
Page 21 | 27 November 2015
Nigeria dominates the African market Nigeria was the first country in the frontier markets of Africa to experience the 2Ws
boom. Sales of 2Ws in Nigeria grew from 0.1m units in 2000 to 1.5 million units in
2014 (a 20% CAGR). The country represented 42% of Africa’s 2W demand, with
1.5m unit sales worth over US$ 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
Source: Investec Securities estimates Source: Investec Securities estimates
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
Source: Investec Securities estimates Source: Investec Securities estimates
Figure 47: Boda-boda stand in Nigeria
Source: Investec Securities Research
Bajaj Auto is the single largest player
with over 30% market share in Nigeria
Page 22 | 27 November 2015
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
Page 23 | 27 November 2015
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)
Share of India in 2W imports (%)
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
China India Japan Others
Source: Investec Securities estimates
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
China India Japan Others
Source: Investec Securities estimates
Page 24 | 27 November 2015
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
Real GDP growth in lcy (%)
0%
2%
4%
6%
8%
10%
Uganda EthiopiaCY14 CY15E CY16E
Real GDP growth in lcy (%)
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
GDP per capita (US$)
1,474
5,532
0
1,000
2,000
3,000
4,000
5,000
6,000
Gha
na
Alg
eria
GDP per capita (US$)575
726
0
200
400
600
800
Eth
iopi
a
Uga
nda
GDP per capita (US$)
Eth
iop
ia,U
gan
da
Countries likely to
transition
Ken
ya
Egy
pt
Nig
eria
0%
2%
4%
6%
8%
10%
CY14 CY15E CY16E
Real GDP growth in lcy (%)
Siz
e o
f th
e m
arke
t (u
nit
s)
India share in 2W imports (%)
Source: Un Comtrade, IMF, Investec Securities Research
Table 4: Snapshot of African 2Ws market
Market Size of the
market (US$ 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
Page 25 | 27 November 2015
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
Source: UN Comtrade, Investec Securities Research
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
Page 26 | 27 November 2015
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
China India Japan Others
Source: UN Comtrade, Investec Securities Research
Page 27 | 27 November 2015
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)
Source: UN Comtrade, Investec Securities Research Source: UN Comtrade, Investec Securities Research
Page 28 | 27 November 2015
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)
Source: UN Comtrade, Investec Securities Research Source: UN Comtrade, Investec Securities Research
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
China India Japan Others
Source: UN Comtrade, Investec Securities Research
Bajaj Auto holds 44% market share in
Colombia
Page 29 | 27 November 2015
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
Source: Investec Securities estimates
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
Source: Investec Securities estimates
Page 30 | 27 November 2015
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
2015E GDP growth: 3% (4%)
GDP per capita (US$) – 4,459
Share of India in 2W imports – 53%
Weaker 2015 due to low commodity prices
affecting export income & government revenues.
Inflation to deteriorate owing to currency
depreciation but this is also likely to boost exports
and lead the recovery come 2016.
Peru
2015E GDP growth: 4% (2%)
GDP per capita (US$) – 4,151
Share of India in 2W imports – 15%
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%)
GDP per capita (US$) – 7,956
Share of India in 2W imports – 9%
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$166m
203k Units
Source: Investec Securities estimates
Table 5: Snapshot of Latin American countries
Country 2Ws Imports
(US$ 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 in- roads. 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
Source: UN Comtrade, Investec Securities Research
Page 31 | 27 November 2015
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
China India Japan Others
0%
20%
40%
60%
80%
100%20
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
China India Japan Others
Source: Investec Securities estimates Source: Investec Securities estimates
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
China India Japan Others
Source: Investec Securities estimates Source: Investec Securities estimates
Page 32 | 27 November 2015
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
China India Japan Others
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
Page 33 | 27 November 2015
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.
Page 34 | 27 November 2015
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
Pratik Rangnekar +91 (22) 6136 7425
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
Page 36 | 27 November 2015 | Bajaj Auto
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
Page 37 | 27 November 2015 | Bajaj Auto
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
FY09 FY10 FY11 FY12 FY13 FY14 FY15
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
FY09 FY10 FY11 FY12 FY13 FY14 FY15
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
Page 38 | 27 November 2015 | Bajaj Auto
“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
China India Japan Others
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
China India Japan Others
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
Page 39 | 27 November 2015 | Bajaj Auto
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)
Share of India in 2W imports (%)
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
Page 40 | 27 November 2015 | Bajaj Auto
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
Page 41 | 27 November 2015 | Bajaj Auto
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%
Source: Investec Securities Research
Page 42 | 27 November 2015 | Bajaj Auto
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
Source: Company Data, Investec Securities Research
Confusion around positioning of
Discover as “Fun” or ”Mileage” bike
drove down the market share of
Discover
Page 43 | 27 November 2015 | Bajaj Auto
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
Source: Company Data, Investec Securities Research Source: Company Data, Investec Securities Research
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
Page 44 | 27 November 2015 | Bajaj Auto
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)
Source: SIAM, Investec Securities Research Source: SIAM, Investec Securities Research
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
Page 45 | 27 November 2015 | Bajaj Auto
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
FY15 FY16E FY17E FY18E FY19E FY20E
Mill
ion
s
Premium Segment Share of Premium Segment (RHS)
0%
10%
20%
30%
40%
50%
Bajaj Auto TVS Hero Honda Yamaha
FY09 FY10 FY11 FY12 FY13 FY14 FY15
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
Source: Company data, Investec Securities Research
Page 46 | 27 November 2015 | Bajaj Auto
Figure 120: The new Pulsar 200RS Figure 121: Bajaj’s new Avenger –in the cruiser segment
Source: Company Data, Investec Securities Research Source: Company Data, Investec Securities Research
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
FY10 FY11 FY12 FY13 FY14 FY15
Th
ou
san
ds
Domestic 3Ws - Industry Exports 3Ws - Industry
28%
34%
41%
36%
42% 43%
20%
25%
30%
35%
40%
45%
FY10 FY11 FY12 FY13 FY14 FY15
Share of exports in 3Ws Industry
Source: SIAM, Investec Securities Research Source: SIAM, Investec Securities Research
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
Page 47 | 27 November 2015 | Bajaj Auto
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%
FY10 FY11 FY12 FY13 FY14 FY15
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%
FY10 FY11 FY12 FY13 FY14 FY15
Atul Bajaj M&M Piaggio TVS
Source: SIAM, Investec Securities Research Source: SIAM, Investec Securities Research
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
Source: Investec Securities Research
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
Page 48 | 27 November 2015 | Bajaj Auto
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
Page 49 | 27 November 2015 | Bajaj Auto
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
Source: Investec Securities estimates
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%
Source: Investec Securities estimates
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%
Source: Company data, Investec Securities Research
Page 50 | 27 November 2015 | Bajaj Auto
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)
Source: Company data, Investec Securities estimates Source: Company data, Investec Securities estimates
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
Page 51 | 27 November 2015 | Bajaj Auto
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
Source: Company Data, Investec Securities estimates
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
Source: Company data, Investec Securities estimates Source: Company data, Investec Securities estimates
Page 52 | 27 November 2015 | Bajaj Auto
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
Source: Investec Securities estimates
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
Page 53 | 27 November 2015 | Bajaj Auto
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
Source: Company data, Investec Securities estimates
Page 54 | 27 November 2015 | Bajaj Auto
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
Page 55 | 27 November 2015 | Bajaj Auto
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
Source: Company accounts, Investec Securities estimates
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
Source: Company accounts, Investec Securities estimates
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)
India | Automobiles & Parts
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
Pratik Rangnekar +91 (22) 6136 7425
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.
Financials and valuation Year end: 31 March Price Performance
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
PBT (normalised) (INRm) 28,673 34,839 42,115 46,424 50,752
Net Income (normalised) (INRm) 21,091 25,407 30,182 33,270 36,372
EPS (norm. cont.) – FD (INR) 105.6 127.2 151.1 166.6 182.1
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
Nov-14 Feb-15 May-15 Aug-15
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)
Source: Company accounts/Investec Securities estimates Source: FactSet
HOLD
Price: INR2645
Target: INR2790
Forecast Total Return: 8.5%
Market Cap: INR528bn
EV: INR512bn
Average daily volume: 386k
Page 57 | 27 November 2015 | Hero Motocorp
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%
Source: Investec Securities estimates Source: Investec Securities estimates
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%
FY10 FY11 FY12 FY13 FY14 FY15
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
Economy Executive Premium
Source: Investec Securities estimates Source: Investec Securities estimates
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
Source: Investec Securities estimates Source: Investec Securities estimates
Page 58 | 27 November 2015 | Hero Motocorp
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%
FY10 FY11 FY12 FY13 FY14 FY15
Bajaj Hero Honda TVS Others
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%
FY10 FY11 FY12 FY13 FY14 FY15
Bajaj Hero Honda TVS Others
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
Page 59 | 27 November 2015 | Hero Motocorp
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)
Source: Investec Securities estimates Source: Investec Securities estimates
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
Economy Executive Premium
Source: Investec Securities estimates
Page 60 | 27 November 2015 | Hero Motocorp
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)
Source: Investec Securities estimates
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
Page 61 | 27 November 2015 | Hero Motocorp
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
Economy Executive Premium
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
Economy Executive Premium
Source: Investec Securities estimates Source: Investec Securities estimates
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.
Source: Company Data, Investec Securities Research
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
Source: SIAM, Investec Securities Research
Honda’s desire to become Number
Uno drives the aggression in the
executive segment
Page 62 | 27 November 2015 | Hero Motocorp
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%
FY09 FY10 FY11 FY12 FY13 FY14 FY15
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
FY09 FY10 FY11 FY12 FY13 FY14 FY15
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
FY09 FY10 FY11 FY12 FY13 FY14 FY15
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%
FY09 FY10 FY11 FY12 FY13 FY14 FY15
Hero Honda Bajaj Others
Source: Investec Securities estimates Source: Investec Securities estimates
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
Page 63 | 27 November 2015 | Hero Motocorp
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
FY10 FY11 FY12 FY13 FY14
Revenue (Rs bn) EBITDA margin (RHS)
Source: Investec Securities estimates
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
FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16
Th
ou
san
ds
Executive segment volumes Market share (RHS)
Source: Investec Securities estimates
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
Page 64 | 27 November 2015 | Hero Motocorp
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
Source: CRISIL, Investec Securities Research
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
Page 65 | 27 November 2015 | Hero Motocorp
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
Source: Investec Securities estimates Source: Investec Securities estimates
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 build- up 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)
Page 66 | 27 November 2015 | Hero Motocorp
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
Source: Company Data, Investec Securities estimates Source: Company Data, Investec Securities estimates
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
Page 67 | 27 November 2015 | Hero Motocorp
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)
Source: Investec Securities estimates Source: Investec Securities estimates
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
Source: Company Data, Investec Securities Research
In 2012 management had guided for
annual volume 1million units by FY17,
which they change to 1.2million units
by 2020
Page 68 | 27 November 2015 | Hero Motocorp
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%
FY11 FY12 FY13 FY14 FY15
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)
Source: Company Data, Investec Securities estimates Source: Company Data, Investec Securities estimates
Page 69 | 27 November 2015 | Hero Motocorp
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)
Source: Investec Securities estimates Source: Investec Securities estimates
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
Page 70 | 27 November 2015 | Hero Motocorp
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
Source: Investec Securities estimates Source: Investec Securities estimates
Page 71 | 27 November 2015 | Hero Motocorp
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
Source: Investec Securities estimates
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
Page 72 | 27 November 2015 | Hero Motocorp
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%
Source: Investec Securities estimates
Page 73 | 27 November 2015 | Hero Motocorp
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 productivity
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
Source: Investec Securities estimates
Page 74 | 27 November 2015 | Hero Motocorp
Summary Financials (INRm) Year end: 31 March
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
Source: Company accounts, Investec Securities estimates
Page 75 | 27 November 2015 | Hero Motocorp
Sel ecti on.Tables(1).R ang e.Fi elds .Update
Calendarised Valuation Year end: 31 March
2014 2015 2016E 2017E
Calendar PE (x) 21.7 18.3 16.2 14.8
Calendar Price/NAVPS (x) 8.4 6.9 5.7 4.8
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
Source: Company accounts, Investec Securities estimates
Ratios and Metrics Year end: 31 March
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
Source: Company accounts, Investec Securities estimates
Target Price Basis
PE multiple on average FY17/18 earnings
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)
India | Automobiles & Parts
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
Pratik Rangnekar +91 (22) 6136 7425
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.
Financials and valuation Year end: 31 March Price Performance
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
PBT (normalised) (INRm) 3,554 4,562 5,911 7,451 8,525
Net Income (normalised) (INRm) 2,644 3,478 4,374 5,514 6,308
EPS (norm. cont.) – FD (INR) 5.6 7.3 9.2 11.6 13.3
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
Nov-14 Feb-15 May-15 Aug-15
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
Source: Company accounts/Investec Securities estimates Source: FactSet
SELL
Price: INR290
Target: INR200
Forecast Total Return: -30.2%
Market Cap: INR138bn
EV: INR130bn
Average daily volume: 2.2m
Page 77 | 27 November 2015 | TVS Motors
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
FY10 FY11 FY12 FY13 FY14 FY15
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
CAGR FY10-15 CAGR FY15-18E
Sharp drop in interestcost drove strong earnings growth over
Source: Investec Securities research Source: Investec Securities estimates
Page 78 | 27 November 2015 | TVS Motors
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
Source: Company Data, Investec Securities estimates Source: Company Data, Investec Securities estimates
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)
Source: SIAM, Investec Securities Research
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
Source: Company Data, Investec Securities Research
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%
Source: Company Data, Investec Securities Research
Page 79 | 27 November 2015 | TVS Motors
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
FY13 FY14 FY15 FY16E FY17E FY18E
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Scooters % YoY (RHS)
Source: Investec Securities estimates
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
Source: CRISIL, Investec Securities Research
Page 80 | 27 November 2015 | TVS Motors
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
Source: Company Data, Investec Securities Research
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
Page 81 | 27 November 2015 | TVS Motors
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
Source: CRISIL, Investec Securities Research
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
FY13 FY14 FY15 FY16E FY17E FY18E
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Premium Segment % YoY
7 8
10
12.0 11.8 11.5
5
6
7
8
9
10
11
12
13
FY13 FY14 FY15 FY16E FY17E FY18E
Source: Company data, Investec Securities estimates Source: Company data, Investec Securities estimates
Page 82 | 27 November 2015 | TVS Motors
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%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16
Bajaj Hero TVS Yamaha
Source: CRISIL, Investec Securities Research
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
Page 83 | 27 November 2015 | TVS Motors
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
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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%
FY09 FY10 FY11 FY12 FY13 FY14 FY15
Economy Executive Premium
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
FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16
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
Source: CRISIL, Investec Securities Research
Page 84 | 27 November 2015 | TVS Motors
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
Source: CRISIL, Investec Securities Research
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
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Executive segment % YoY (RHS)
Source: Investec Securities estimates
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
Source: Investec Securities estimates
Page 85 | 27 November 2015 | TVS Motors
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
Source: Investec Securities estimates
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
Page 86 | 27 November 2015 | TVS Motors
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
FY09 FY10 FY11 FY12 FY13 FY14 FY15
Th
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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%
FY10 FY11 FY12 FY13 FY14 FY15
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
FY10 FY11 FY12 FY13 FY14 FY15
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
FY10 FY11 FY12 FY13 FY14 FY15
Bajaj Hero TVS
Source: SIAM, Investec Securities Research Source: SIAM, Investec Securities Research
Figure 210: Share of exports on the rise
12 13 12 15 16
14 16 16
22 22
10
15
20
25
FY11 FY12 FY13 FY14 FY15
Volume (%) Revenue (%)
Source: Investec Securities Research
TVS gaining traction in three wheeler
exports, while 2Ws volume yet to pick-
up significantly
Page 87 | 27 November 2015 | TVS Motors
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
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Motorcycles Scooters Mopeds Three wheelers
Source: Company Data, Investec Securities Research
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
Page 88 | 27 November 2015 | TVS Motors
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
FY10 FY11 FY12 FY13 FY14 FY15
Th
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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)
-
FY10 FY11 FY12 FY13 FY14 FY15
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
Page 89 | 27 November 2015 | TVS Motors
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
FY10 FY11 FY12 FY13 FY14 FY15
(%)
(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
FY10 FY11 FY12 FY13 FY14 FY15
(%)
Rs
m
Standalone Adj. PAT TVS Indonesia Adj. PAT
Indonesia % of standalone (RHS)
Source: Company data
Page 90 | 27 November 2015 | TVS Motors
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
Page 91 | 27 November 2015 | TVS Motors
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
Source: Investec Securities estimates
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)
Source: Investec Securities estimates Source: Investec Securities estimates
Figure 220: EBITDA margin (%)
19 19 18 19
13 12 10 11 12
7 6 6 6 7
5
10
15
20
FY11 FY12 FY13 FY14 FY15
Bajaj Hero TVS
Source: Company Data, Investec Securities Research
Page 92 | 27 November 2015 | TVS Motors
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
FY10 FY11 FY12 FY13 FY14 FY15
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
Source: Company Data, Investec Securities Research
Page 93 | 27 November 2015 | TVS Motors
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
CAGR FY10-15 CAGR FY15-18E
Sharp drop in interestcost drove strong earnings growth over
Source: Company Data, Investec Securities estimates
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
Page 94 | 27 November 2015 | TVS Motors
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%
Source: Investec Securities estimates
Page 95 | 27 November 2015 | TVS Motors
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 productivity
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
Source: Company data, Investec Securities estimates
Page 96 | 27 November 2015 | TVS Motors
Summary Financials (INRm) Year end: 31 March
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
Source: Company accounts, Investec Securities estimates
Page 97 | 27 November 2015 | TVS Motors
Sel ecti on.Tables(1).R ang e.Fi elds .Update
Calendarised Valuation Year end: 31 March
2014 2015 2016E 2017E
Calendar PE (x) 42.2 33.3 26.3 22.6
Calendar Price/NAVPS (x) 8.7 7.3 6.0 5.0
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
Source: Company accounts, Investec Securities estimates
Ratios and Metrics Year end: 31 March
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
Source: Company accounts, Investec Securities estimates
Target Price Basis
PE multiple on average FY17/18 earnings
Key Risks
Higher than expected market share gain, Higher than expected EBITDA margin
Page 98 | 27 November 2015 | TVS Motors
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
Analyst certification Source: Investec Securities estimates
Each research analyst responsible for the content of this research report, in whole or in part, and who is named herein, attests that the views expressed in this research report accurately reflect his or her personal views about the subject securities or issuers. Furthermore, no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in this research report.
Managing conflicts
Investec Securities (Investec) has investment banking relationships with a number of companies covered by our Research department. In addition we may seek an investment banking relationship with companies referred to in this research. As a result investors should be aware that the firm may have a conflict of interest which could be considered to have the potential to affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Stock ratings for Indian stocks Stock ratings for research produced by Investec Bank plc
Expected total return
12m performance Count % of total Count % of total
Buy greater than 15% 35 58% 0 0%
Hold 5% to 15% 14 23% 0 0%
Sell less than 5% 11 18% 0 0%
All stocks Corporate stocks
Source: Investec Securities estimates
Stock ratings for African* stocks Stock ratings for research produced by Investec Securities Limited
Expected total return
12m performance Count % of total Count % of total
Buy greater than 15% 30 42% 5 17%
Hold 5% to 15% 24 33% 3 13%
Sell less than 5% 18 25% 3 17%
All stocks Corporate stocks
Source: Investec Securities estimates
*For African countries excluding South Africa, ratings are based on the 12m implied US dollar expected total return (ETR). This is derived from the expected local currency (LCY) ETR by making assumptions on the 12month forward exchange rates for the respective currencies. For South African stocks, ratings are based on the ETR in rand terms. For European and Hong Kong stocks, within the Hold banding, an Add rating may be (optionally) applied if the analyst is positive on the stock and the ETR is greater than 5%; a Reduce rating may be (optionally) applied if the analyst is negative on the stock and the ETR is less than 5%. Not rated (N/R) is applied to any stock where we have no formal rating and price target. Under Review (U/R) can be applied to an analyst’s rating, price target and/or forecasts for a limited time period and indicates that new information is available tha t has not yet been fully digested by the analyst. We regularly review ratings across our coverage universe as we seek to ensure price targets and ratings remain aligned. However, during periods of market, sector or stock volatility, we may allow minor deviations from our recommendation framework to persist on a temporary basis to avoid a high frequency of rating changes arising from rapid share price movements. The subject company may have been given access to a pre-published version of this report (with recommendation and price target redacted) to verify factual information only. Investec Securities research contains target prices and recommendations which are prepared on a 12 month time horizon, and therefore may not reflect the different circumstances, objectives and investment time horizons of those who receive it. Investors should therefore independently evaluate whether the investment(s) discussed is (are) appropriate for their specific needs. In addition, the analysts named in this report may from time to time discuss with our clients, including Investec salespersons and traders, or may discuss in this report, trading strategies that reference near term catalysts or events which they believe may have an impact in the shorter term on the market price of securities discussed in this report. These trading strategies may be directionally counter to the analyst's published target price and recommendation for such stocks. For price target bases and risks to the achievement of our price targets, please contact the Key Global Contacts for the relevant issuing offices of Investec Securities listed on the last page of this research note. Investec may act as a liquidity provider in the securities of the subject company/companies included in this report. For full disclosures, please visit: http://researchpdf.investec.co.uk/Documents/WDisc.pdf Our policy on managing actual or potential conflicts of interest in the United Kingdom can be found at: https://images.investec.com/group/online/investment-banking/ConflictsPolicy.pdf Our policy on managing actual or potential conflicts of interest in South Africa can be found at: http://www.investec.co.za/legal/sa/conflicts-of-interest.html
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
2,600
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
1,800
2,000
2,200
2,400
2,600
Buy Hold Sell Not Rated
Price Target
Source: Investec Securities / FactSet
TVS Motors (TVSM.NS) – Rating Plotter as at 27 Nov 2015
0
50
100
150
200
250
300
Buy Hold Sell Not Rated
Price Target
Source: Investec Securities / FactSet
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