23-May-17

Key Highlights of the Report:

52wk Range H/L

Mkt Capital (Rs Cr)

Av. Volume (,000)

Financials/Valu

ation

FY15 FY16 FY17 FY18E FY19ENet Sales 21,106 22,152 21,374 23,451 25,371

EBITDA 4,113 4,764 4,419 4,890 5,717

EBIT 3,846 4,457 4,112 4,588 5,432

PAT 3,026 4,044 4,079 4,377 5,142

4QFY17 3QFY17 2QFY17 EPS (Rs) 105 140 141 151 178

Promoters 49.3 49.3 49.3 EPS growth (%) -10% 34% 1% 7% 17%

Public 50.7 50.7 50.7 ROE (%) 27% 29% 23% 22% 23%

Total 100.0 100.0 100.0 ROCE (%) 34% 32% 23% 23% 24%

BV 383 485 617 692 780

P/B (X) 5 5 5 4 4

1Mn 3Mn 1Yr P/E (x) 19 17 20 19 16

Absolute 3.1 4.0 19.3

Rel.to Nifty (0.4) (1.7) (1.9) RECENT DEVELOPMENT: Recovery seen in the export markets

NIFTY - 9438

Target Price 3150

Previous Target Price 3150

Upside 8%

3122/2366

Bajaj Auto posted a weak set of results after several quarters. This was

largely driven by slow recovery after demonetization in the domestic

market and currency availability issue in the export market. But the

management expects that negatives have been bottomed out and it will

grow double digit going forward.

CMP 2912

INDUSTRY - AUTOMOBILE

BSE Code - 532977

NSE Code - BAJAJ-AUTO

NAVEEN KUMAR DUBEYNaveen.dubey@narnolia.com

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

Volumes in Nigeria which was Bajaj Auto's biggest export market has

been stabalizing somewhere between 15000-20000 units a month. This is

good sign for the company and it has plans to enter at least five new

markets each year to de-risk its export portfolio.

Bajaj has started receiving good traction from countries like Philipines,

Bangladesh, Nepal and Malaysia where it entered earlier. It has also

started shipping Dominar 400 to Latin American market.

Bajaj Auto commands more than 20% EBITDA margin which is second

best in the industry after Eicher Motors.

RoE to maintain over 22%

84,278

39

Premium Segment motorcycles to dominate the 2 wheeler industry in the

long run where it holds over 55% market share.

Based on management's aggressive strategy to gain 25% market share,

healthy dividend payout and strong fundamentals we have positive view

on this stock and we maintain ‘BUY’ with the previous target price of

Rs.3150.

The company reported strong monthly volumes in April 2017. 2 wheelers

grew by 20% MoM and Commercial vehicles grew by 28% MoM.

On the exports front Bajaj Auto posted 48% MoM volume growth. This

growth was led by recovery in African region, Latin America and South

East Asian region.

Company Data

Stock Performance %

Shareholding patterns %

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125

May

-16

Jun

-16

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c-1

6

Jan

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-17

Ap

r-1

7

May

-17

BAJAJ-AUTO NIFTY

0%

5%

10%

15%

20%

25%

30%

35%ROE

Financials 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY % QoQ% FY16 FY17 YoY %

Total Volumes ('000) 872 995 1,032 852 788 -10% -8% 3,892 3,666 -6%

Realization(Rs.) 60,197 56,735 57,652 58,423 61,006 1% 4% 57,177 58,034 1%

Net Sales 5,359 5,748 6,055 5,067 4,897 -9% -3% 22,587 21,767 -4%

Other Income 257 267 342 319 294 14% -8% 985 1,222 24%

COGS 3,533 3,863 4,057 3,384 3,320 -6% -2% 15,057 14,624 -3%

Employee Cost 202 268 259 242 227 12% -6% 917 997 9%

Other Expenses 476 445 449 401 452 -5% 13% 1,848 1,748 -5%

EBITDA 1,153 1,176 1,294 1,044 905 -22% -13% 4,764 4,419 -7%

Depreciation 76 77 77 77 76 -1% -2% 307 307 0%

Interest 0 0 1 0 0 -38% -8% 1 1 33%

PBT 1,334 1,365 1,558 1,285 1,123 -16% -13% 5,440 5,333 -2%

Tax 384 387 438 361 322 -16% -11% 1,618 1,508 -7%

PAT 949 978 1,121 924 801 -16% -13% 4,044 4,079 1%

Revenue declined on sub-dued export volumes

Volume trend Realization trend

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

Quarterly Performance

EBITDA Declined sharply by 22% YoY on account of higher commodity prices and additional BS-IV

transition cost during the quarter.

The company posted a 16% YoY decline in the PAT. Further reduction in the PAT was restricted by

higher other income in the quarter.

The company reported 9%YoY decline in net sales to Rs.4897 crore in 4QFY17. The company

witnessed 10% YoY decline in sales volume due to sub-dued export markets and impact of

demonetization in the domestic volumes.

Domestic 2 wheeler volumes de-grew by 11%YoY. Export 2 wheeler volumes remained flat YoY

during the quarter. Domestic commercial vehicle volumes declined by 32%YoY and Export

commercial vehicle volumes contracted by 22% YoY in 4QFY17.

Bajaj Auto reported 4% decline in the net sales in FY17. PAT stood at Rs.4079 crore flat YoY and

this was mainly because of higher other income.

1,0

13

,02

9

1,0

56

,50

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95

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85

1,6

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78

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2%0%

-3%

11%

-2% -2% -10%-10%

-15%

-10%

-5%

0%

5%

10%

15%

-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Volumes Growth YoY

54

,34

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56

,43

9

57

,23

7

60

,19

7

56

,73

5

57

,65

2

58

,42

3

61

,00

6

5%

2% 2%2%

4%

2%

2%

1%

0%1%1%2%2%3%3%4%4%5%5%

50,000

52,000

54,000

56,000

58,000

60,000

62,000

Realization Growth YoY

Margin % 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 YoY(+/-) QoQ(+/-) FY16 FY17 YoY(+/-)

Gross Margin 34% 33% 33% 33% 32% -1.87% -0.01 33% 33% -0.01

EBITDA Margin 22% 20% 21% 21% 18% -3.04% -0.02 21% 20% -0.01

PAT Margin 19% 18% 20% 19% 18% -0.98% -0.02 18% 19% 0.01

EBITDA and EBITDA Margin trend PAT and PAT Margin trend

5-7% of industry growth guidance for FY18 and Bajaj Auto growth will be better than industry.

No model launches in next 3-5 months as the company has refreshed its portfolio during FY17.

Tax rate will be in the range of 30% in FY18 as Pantnagar tax benefit expired in FY17.

Capex guidance of Rs.200 crore in FY18

CSR contribution during FY17 was Rs.95 crore.

Avengers sustainable monthly run rate to be around 15000-17000 units.

Nigeria to be stabalized somewhere around 20000 units per month.

Cost increase of around Rs. 600 per motorcycle on BS-III to BS-IV transition

Amount of Rs.16 crore included in other expenses related to BS-III related discount.

The company has planns to spend Rs.100 crore on Advertising and Promotional expenses on exports.

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

Gross Margin contracted by 190 bps YoY to 32% during the quarter due to higher commodity prices

and BS-IV transition from BS-III.

EBITDA Margin also declined by 300 bps YoY majorily because of higher discounts on leftover BS-III

inventory.

PAT Margin also declined by 100 bps but further contraction in the margin was arrested by higher

other income during the qaurter.

Concall Highlights:

Dominar- currently monthly volumes are 2000-2500 units in India and 7000 units per month by August

2017 including exports.

The management is cautiously optimistic on exports guidance but expects volumes to grow double

digit in FY18 onwards.

There will be cost pressure in 1QFY18 also due to higher commodity prices and despite that the

management has maintained its EBITDA margin guidance of 20% in FY18.

The government will issue new permits during the year in Delhi and Maharastra. (around 40000

permits) and this may drive the sub-dued 3 wheelers demand in FY18.

Margins to be under pressure for one more quarter

1,1

40

1,3

17

1,1

71

1,1

53

1,1

76

1,2

94

1,0

44

90

5

20%

22% 21% 22%20%

21% 21%

18%

16%

17%

18%

19%

20%

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22%

-

200

400

600

800

1,000

1,200

1,400

EBITDA EBITDA Margin

1,0

15

1,1

20

1,0

31

99

6

1,0

40

1,2

00

97

7

86

2

18% 18%19%

19%18%

20%19%

18%

17%

17%

18%

18%

19%

19%

20%

20%

-

200

400

600

800

1,000

1,200

1,400

PAT PAT Margin

Capacity Utilization to improve going ahead ROE and ROCE trend

View & Valuation

Auto Permits to drive 3 wheelers demand- 3 wheelers have been mostly hit by the demonetization

during the second half of FY17. Fresh auto permits are expected to be given in NCR and Maharastra

region in FY18, which will boost the 3 wheeler sales in the domestic market. The government has

announced to allot approx. 40000 permits in these regions in the 1HFY18.

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

Premium Segment motorcycles to dominate the 2 wheeler industry in the long run- Being a

prominent premium segment player in the country Bajaj Auto has competitive advantage over its

peers. With increasing income level and growing demand for sports and cruiser segment motorcycles

Bajaj Auto will get benefited most as it has well positioned itself in the Indian Motorcycle market.

Operating Leverage to drive the margins up- Bajaj Auto has built sufficient capacities to cater the

growing demand in the near future. Currently the company is running at 60% capaciity utilization and

going forward boost in the volumes will drive the margins upward. This will lead to reduction in capital

expenditure for couple of years and will boost the PAT Margins to 20% by FY19.

Recent model launches in premium segment have strengthened the product-mix thus resulting in the

higher realization and margin for Bajaj Auto. The company witnessed a sharp decline in export

volumes due to dollar availability issue in the various African countries, company's major export

market. Management has started exploring other fast growing 2 wheeler markets to de-risk its export

portfolio. The company enjoys more than 55% market share in the domestic premium 2 wheelers

segment, this is the reason Bajaj Auto has one of the best margins in the two wheeler industry. The

government has announced to allot approx. 40000 permits in NCR and Maharastra regions in the

1HFY18 which will drive the 3 wheelers demand going ahead. We expect company to maintain its

ROE over 22% in the long run. Considering management's aggressive strategy to gain 25% market

share, healthy dividend payout and strong fundamentals we have positive view on this stock and we

maintain ‘BUY’ with the previous target price of Rs.3150.

Investment Arguments:

New geographies to propel exports in current fiscal- Bajaj Auto has started expanding its footprints

in other geographies also. Earlier it was concentrated mostly in the African region and it had cost Bajaj

Auto significantly. It had over 65% contribution from African countries. So the management has shifted

its focus towards other fast growing 2 wheeler markets like Latin America, Indonesia and Malaysia etc.

39%33%

27% 29%

23% 22% 23%

43%39%

34% 32%

23% 23% 24%

0%

5%

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25%

30%

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40%

45%

ROE ROCE

5,4

00

,00

0

5,7

60

,00

0

6,0

60

,00

0

6,0

60

,00

0

6,2

40

,00

0

6,2

40

,00

0

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,00

0

78%

67%63% 64%

59% 59% 62%

0%

10%

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30%

40%

50%

60%

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90%

4,800,000

5,000,000

5,200,000

5,400,000

5,600,000

5,800,000

6,000,000

6,200,000

6,400,000

Capacity Capacity Utilization

Income Statement Rs in Crores Key Ratios

Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E

Revenue from Operation 22,152 21,374 23,451 25,371 ROE 29% 23% 23% 24%

Change (%) 5% -4% 4% 5% ROCE 32% 23% 23% 24%

Other Operating Income 435 393 385 402 Asset Turnover 1.3 1.0 1.0 1.0

EBITDA 4,764 4,419 4,890 5,717 Debtor Days 11.6 16.0 16.0 16.0

Change (%) 16% -7% 3% 29% Inventory Days 11.6 12.2 12.2 12.2

Margin (%) 21% 20% 21% 22% Payable Days 32.8 37.5 37.5 37.5

Dep & Amortization 307 307 301 285 Interest Coverage 4,245 2,937 3,277 3,880

EBIT 4,457 4,112 4,588 5,432 P/E 17.2 19.9 18.4 15.7

Interest & other finance cost 1 1 1 1 Price / Book Value 5.0 4.5 4.2 3.7

Other Income 985 1,222 1,183 1,378 EV/EBITDA 14.5 18.3 17.2 14.7

EBT 5,440 5,333 5,770 6,808 FCF per Share 3,944 4,748 5,189 5,878

Exceptional Item - - - - Dividend Yield 2.3% 2.0% 2.3% 2.7%

Tax 1,618 1,508 1,673 1,974

Minority Int & P/L share of Ass. 221 255 280 308 Assumptions

Reported PAT 4,044 4,079 4,377 5,142 Y/E March FY16 FY17 FY18E FY19E

Adjusted PAT 4,044 4,079 4,377 5,142 Volume ('000) 3,892 3,666 3,866 4,181

Change (%) 34% 1% 8% 26% Volume Growth 2% -6% 5% 8%

Margin(%) 18% 19% 18% 20% Realization(Rs./vehicle) 58,034 59,375 61,656 61,638

Realization Growth 2% 2% 4% 0%

Capex(Rs crore) 295 270 200 200

Balance Sheet Rs in Crores Cash Flow Statement Rs in Crores

Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17E FY18E FY19E

Share Capital 289 289 289 289 PBT 5,295 5,333 6,039 7,130

Reserves 13,731 17,567 19,832 22,494 (inc)/Dec in Working Capital 6,057 5,896 6,622 7,725

Networth 14,020 17,857 20,121 22,783 Non Cash Op Exp 307 307 301 285

Debt 117.86 119.9 119.9 119.9 Interest Paid (+) 0 1 1 1

Other Non Current Liab 233 321 321 321 Tax Paid (1,782) (1,508) (1,751) (2,068)

Total Capital Employed 14,138 17,976 20,241 22,903 others 454 1 1 1

Net Fixed Assets (incl CWIP) 2,078 1,985 1,929 1,844 CF from Op. Activities 3,678 4,533 4,945 5,678

Non Current Investments 7,718 7,459 10,577 12,364 (inc)/Dec in FA & CWIP (265) (215) (245) (200)

Other Non Current Assets 279 268 268 268 Free Cashflow (572) (522) (546) (485)

Non Current Assets 12,507 12,169 15,231 16,933 (Pur)/Sale of Investment 116 - 638 (939)

Inventory 719 728 537 566 others 36 (2,942) (3,119) (1,787)

Debtors 718 953 1,044 1,129 CF from Inv. Activities (113) (3,157) (2,726) (2,926)

Cash & Bank 820 288 202 244 inc/(dec) in NW

Other Current Assets 1,049 1,096 1,201 1,298 inc/(dec) in Debt - - - -

Current Assets 4,733 9,469 8,756 9,955 Interest Paid (0) (1) (1) (1)

Creditors 2,027 2,236 2,449 2,648 Dividend Paid (inc tax) (3,434) (1,908) (2,303) (2,708)

Provisions 161 199 218 236 others 50 2 - -

Other Current Liabilities 299 558 411 433 CF from Fin. Activities (3,384) (1,907) (2,305) (2,710)

Curr Liabilities 2,781 3,213 3,291 3,522 Inc(Dec) in Cash 238 (531) (86) 42

Net Current Assets 1,952 6,256 5,466 6,433 Add: Opening Balance 582 820 288 202

Total Assets 17,240 21,638 23,988 26,888 Closing Balance 820 289 202 244

Financials Snap Shot

Narnolia Securities LtdPlease refer to the Disclaimers at the end of this Report

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