th November 2017 SECTOR: AUTOMOBILES BUY · Way2Wealth Brokers Pvt. Ltd. ( CIN...

Way2Wealth Brokers Pvt. Ltd. (CIN U67120KA2000PTC027628) SEBI Rgn. No. : INH200002739No. 14, Frontline Granduer, Walton Road, Bangalore-560001; Website: www.way2wealth.com Email: [email protected]

Way2wealth Research is also available on Bloomberg WTWL <GO>

Chintan Gupta

Tel: +9122-66638972

[email protected]

SECTOR: AUTOMOBILES

INITIATING COVERAGECMP: `3,293/-

24th November 2017

BUY

Set For Changing timeS….

http://www.way2wealth.com/

mailto:[email protected]




Key Stock Data

CMP `3,293Market Cap (` Mn) 952,91552W High/Low 3,344/2,555Shares o/s (Mn) 289.4

BloombergNSE Code BAJAJ-AUTOBSE Code 532977

Company Details

Shareholding Pattern (Sep-17)

Promoters 49.30

FIIs & DIIs 26.05

Public & Others 24.65

224 November 2017

Comparison Chart

6500700075008000850090009500100001050011000

20002200240026002800300032003400

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Bajaj Auto Nifty 50




Way2wealth Research is also available on Bloomberg WTWL <GO> 324 November 2017

Investment Theme

Changing product mix in the domestic market – Superior growth in domestic motorcycles segment driven by newlaunches (CT 100 ES, Pulsar 160 NS, Platina ES, modified V and an Avenger upgrade).

Motorcycle and 3W exports set to pick up – Exports recovery (Motorcycle + 3W) led by volume pick up in theAfrican markets (where BAL is a key player) as well as entering new geographies.

Three-wheeler sales set to pick up – Domestic 3W volumes set for an uptick with release of permits of ~10,000units in Delhi, abolition of permits in Maharashtra, conversion of 2-stroke vehicles to 4-stroke vehicles in Karnatakaand ban on diesel vehicles in Bangalore.

Other Growth Drivers – Other growth drivers such as partnership between BAL and Triumph Motorcycles UK, electric3W launch and approval of Qute in the domestic market by the regulatory authorities would be icing on the cake.These factors have not been considered in our earnings estimates.

At CMP of `3,293, BAL is currently trading at a PE of 20.0x and 17.0 its FY18E and FY19E consolidated EPS. Wevalue BAL at `3,969 per share by applying 21xP/E its consolidated FY19E EPS of `189 (including `297/sharefor KTM stake and `150 cash/share). We expect BAL to generate free cash flow greater than `50bn/annum inthe next 2-3 years. With no major capex around, there is considerable scope for increasing payouts. We initiatecoverage on BAL with a BUY rating for a target price of `3,969 (upside potential of 21% over the next 12-18months).





Company Overview

Bajaj Auto Ltd. (BAL) is the world’s third largest manufacturer of motorcycles and the largest three-wheeler manufacturer. It wasestablished on November 29, 1945 as Bachraj Trading Corporation Pvt. Ltd., initially an importer of two-wheeler and three-wheeleruntil it obtained license from the Govt. of India to manufacture two and three wheelers in 1959.

BAL offers various brands in motorcycles across different engine capacities as shown below:

424 November 2017

Engine Capacity Range Brand BAL’s market share (FY17)

75cc-110cc CT 100 and Platina 13%110cc-125cc Discover and V12 7%125cc-150cc Avenger, Pulsar and V15 58%150cc-200cc Pulsar and KTM 18%Above 200cc KTM, Avenger, Pulsar and Dominar 22%

BAL’s market share in the domestic motorcycles segment remained flat at 18% in FY17 compared to FY16. However, BAL lost marketshare in the exports motorcycles segment, from 66% in FY16 to 60% in FY17, owing to economic and political uncertainties in Africawhere BAL is a major exporter.

BAL is the world’s largest three wheeler manufacturer. Its market share in FY17 improved to 64.2% in FY17 as compared to 63.3% inthe passenger three wheeler segment primarily due to market share gains in the domestic market. Its overall market share (domestic aswell as exports) in the goods carrier segment was 12% in FY17, having entered the segment only in FY16.

Source : Industry, Way2Wealth Institutional Equity





Company Overview

BAL manufacturers its range of motorcycles and three wheelers at its three facilities situated at Waluj, Chakan and Pantnagar. Theproduction capacity, actual manufacturing during FY17 and product range manufactured at each plant is shown below:

BAL enjoys the best operating margins in the industry, at 20.3% as of FY17.

BAL’s revenue mix and volume fix for FY17 is shown below:

524 November 2017

Plant TypeCapacity (units

per annum)Actual manufacturing

(FY17)Product Range

WalujMotorcycles 24,00,000 16,40,000 Boxer, CT 100, Platina, Discover, Pulsar, V12 and V15

Three wheelers 6,60,000 4,45,563 All three-wheelers and quadricyclesChakan Motorcycles 12,00,000 6,08,974 Pulsar, Avenger, Dominar and KTM

Pantnagar Motorcycles 18,00,000 9,60,686 CT100, Platina, Discover, V12, V15 and PulsarTotal 60,60,000 36,55,223

Domestic53%Exports

35%

Spare Parts12%

Revenue Mix (FY17)

Domestic 2W55%Exports

2W33%

Domestic 3W7%

Exports 3W5%

Quadricycle (Exports)

0%

Volume Mix (FY17)

Source : Annual Report

Source : Annual Report





Industry Overview

624 November 2017





Industry Overview – 2W Industry

2010 -2011 2014 2015

724 November 2017

The Indian two wheeler industry is the largest in the world. Indian manufacturers sold 19.92mn units in FY17 (domestic + exports). Thedomestic market comprised of 88% of the total sales, while exports stood at 12%.

The Indian two wheeler industry can be classified as below:

BAL is present only in the motorcycle segment.

It is worth mentioning that the scooter segment is growing faster than the motorcycle segment primarily due to urbanisation, increasingworking females and gender neutral nature. While the scooter segment has grown at 17% CAGR over the past 5 years, motorcycleshave grown at 2% CAGR over the same period. The chart below shows the growing preference of commuters to scooters overmotorcycles:

Type No. of units sold (including exports) (FY17) % of totalMotorcycles 13,118,015 65%

Scooters 5,896,051 30%Mopeds 910,519 5%

Total 19,924,585

75% 73% 71% 67% 65% 63%

19% 21% 24% 28% 31% 32%

6% 6% 5% 5% 4% 5%0%

20%40%60%80%

FY12 FY13 FY14 FY15 FY16 FY17

2W Industry Trend (Domestic)

Motorcycles Scooter MopedsSource : Industry Reports

Source : Industry Reports






2010 -2011 2014 2015

824 November 2017

Domestic Motorcycle Market

Domestic motorcycle market stood at 11.09mn units in FY17. Its sales have grown at a meagre 2% CAGR over FY12-FY17. There are11 players in the motorcycle market, with Hero Motocorp (51%), Bajaj Auto (18%), Honda Motorcycle and Scooters India (HMSI)(12%), TVS Motors (7%) and Eicher Motors (6%) dominating 94% of the market as of FY17.

1%

77%

0%

0%

22%

0%

10%

0%

50%

21%

18%

0%

22%

0%

0%

12%

58%

8%

4%

0%

8%

41%

7%

40%

0%

0%

5%

7%

13%

75%

Others

Eicher Motors

TVS Motors

HMSI

Bajaj Auto

Hero Motocorp

Market share of different players in Domestic Market (Category wise)

75-110cc

110-125cc

125-150cc

150-200cc

Above 200cc

57%

17%

13%

7%7%

75-110cc 110cc-125cc

125cc-150cc 150cc-200cc

Above 200cc







2010 -2011 2014 2015

924 November 2017

We expect the domestic motorcycle market to clock 7% CAGR over the next three years on the back of minimum support pricesannounced by the Govt. which is the highest in the past five years, implementation of farm loan waiver by States, implementation of therecommendations of Seventh Pay Commission and growth of infrastructure in smaller towns and non-urban areas. The other key driversfor growth are rising incomes and low interest rates.

10,085 10,481 10,743 10,700 11,095 11,761

12,702 13,591

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

Domestic Motorcycle Market ('000's)







2010 -2011 2014 2015

1024 November 2017

Motorcycle Exports

Motorcycle Exports have been sluggish since the past 2 years on account of benign crude oil prices and economic and politicaluncertainty in the importing countries. BAL is India’s largest exporter of motorcycles commanding a market share of 60%, followed byTVS Motors (15%), HMSI (9%) and Hero Motocorp (7%). Exports are expected to rebound FY18 onwards on account of increasedcurrency availability in the export markets, economic and political stability in African countries and exploring of new markets by theindustry players.

6%

5%

8%

12%

25%

44%

8%

1%

15%

9%

60%

7%

6%

6%

7%

12%

18%

51%

Others

Eicher Motors

TVS Motors

HMSI

Bajaj Auto

Hero Motocorp

Motorcycle Market Share (FY17)

Domestic

Exports

Total

Source : Industry Reports






2010 -2011 2014 2015

1124 November 2017

We expect the exports motorcycle market to clock 10% CAGR over FY17-20E driven by recovery off-late in African countries(especially Nigeria) and exploring of newer markets by the industry players. Further, newer markets also provide stability in volumes forthe future since it reduces dependence on volatile markets like Nigeria and Egypt.

1,865 1,979

2,260 2,210 2,023

2,266

2,492 2,667

-

500

1,000

1,500

2,000

2,500

3,000


Exports Motorcycle Volumes ('000's)







2014 2015

1224 November 2017

The domestic 3W industry has been flattish since the past 5 years. Though FY17 was impacted due to demonetisation, increasingpreference for shared mobility (taxi aggregators) cabs as a means of commute and regulated markets (based on permit system) ofKarnataka, Maharashtra, Delhi, West Bengal has been one of the main reasons behind flattish volumes in this segment. However, withthe release of permits of ~10,000 units in Delhi, abolition of permits in Maharashtra, conversion of 2-stroke vehicles to 4-stroke vehiclesin Karnataka and ban on diesel vehicles in Bangalore, the three-wheeler market has opened up. Also, recent aggressive expansion byshared mobility providers such as Ola to provide last mile connectivity to commuters augurs well for the domestic three-wheeler industryas a whole. On the exports front, the three-wheeler industry has de-grown in the past 2 years on account of the economic and politicaluncertainty in the importing countries.

5,13,281 5,38,2904,80,085

5,32,626 5,38,208 5,11,658

3,61,7533,03,088

3,53,3924,07,600 4,04,441

2,71,894

8,75,034 8,41,378 8,33,477

9,40,226 9,42,649

7,83,552

0

1,00,000

2,00,000

3,00,000

4,00,000

5,00,000

6,00,000

7,00,000

8,00,000

9,00,000

10,00,000

FY12 FY13 FY14 FY15 FY16 FY17

Three-wheeler volume trend

Domestic Exports TotalSource : SIAM






2014 2015

1324 November 2017

1%

5%

7%

9%

21%

57%

0%

1%

1%

21%

6%

70%

1%

7%

10%

2%

30%

49%

Scooters India

Atul Auto

Mahindra & Mahindra

TVS Motor

Piaggio

Bajaj Auto

3W Market Share (FY17)

Domestic

Exports

Total






Investment Rationale

1424 November 2017






Changing product mix in the domestic market – BAL’s increasing focus towards the premium segments of the motorcycle market awayfrom the volume driven 75-110cc segment (where BAL makes a loss/single digit operating margin) augurs well for the company. Weexpect BAL to clock 13% CAGR in the 125cc-150cc segment driven by an Avenger upgrade launch in that segment in Q4FY18 andpick up in volumes of Pulsar. We expect BAL to clock 10% CAGR in the 150cc-200cc segment on the back of success of Pulsar NS 160and KTM in the domestic market. In the >200cc segment, we expect Dominar to bounce back H2FY18 onwards and expect improvedtraction from Pulsar. Further, we expect the share of 110-125cc segment motorcycles to reduce from the present 7% in FY17 to 4% inFY20E due to fading volumes of Discover.

1524 November 2017

56%47% 49% 42% 39% 38% 37%

13%

6% 8%7%

5% 5% 4%

22%

33% 29%37% 40% 41% 42%

4% 6% 7% 5% 6% 6% 6%

5% 7% 9% 9% 10% 11% 11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY14 FY15 FY16 FY17 FY18E FY19E FY20E

75-110cc 110-125cc 125-150cc 150-200cc >200c

Source : Company, Way2Wealth Institutional Equity






The first six months of FY18 was particularly tough on BAL due to channel filing by competitors due to ban on sale of BS-III vehiclesafter 31st March, 2017 and de-stocking by channel partners ahead of GST. However, the recent launches of CT100 ES, Platina ES andPulsar 160 NS have been received well in the market. Further, Pulsar NS 200 continues to do well. The management plans to launch anAvenger upgrade positioned with the V-series in Q4FY18. We expect BAL to clock 9% CAGR over FY17-20E with the full effects ofnew launches playing out in FY19 and FY20 and expect BAL to achieve a market share of 19% by FY20.

1624 November 2017

24%

20%

16%18% 18% 17% 18% 19%

0%

5%

10%

15%

20%

25%

30%


Domestic Motorcycle Market Share of BAL

Source : Industry, Company, Way2Wealth Institutional Equity






Motorcycle exports set to pick up – Motorcycle exports have been sluggish since the past two years due to lower crude prices andcontinuing economic and political uncertainties in the importing countries. However, recent uptick in exports indicate stabilization intrading conditions in Africa (primarily Nigeria) and revenue diversification by entering newer markets in the last three years. It is worthmentioning that BAL generates 85% of its sales from 21 countries where it is either no. 1 or no. 2 player. BAL reached a healthy 40%+market share in South Asia and Middle East and 25% in Latin America. In the FY17, BAL entered four new markets. Management hasindicated better traction from Latin America, Indonesia, Nepal and South Asian countries going forward and double-digit volumegrowth in exports even after not factoring much growth from Sri Lanka and Nigeria due to economic and political uncertainty in therespective countries. We expect motorcycle exports to clock 12% CAGR over FY17-20E.

1724 November 2017

13,23,173

15,21,306 14,59,295

12,18,541

14,37,87815,81,666

17,08,200

0

2,00,000

4,00,000

6,00,000

8,00,000

10,00,000

12,00,000

14,00,000

16,00,000

18,00,000


2W Exports volume

Source : Annual Report, Way2Wealth Institutional Equity






BAL lost market share last year primarily due to heavy dependence on African countries where it is a major exporter. However, with theeconomic conditions improving in Africa and newer markets entered by BAL last year, we expect BAL to gradually gain market sharefrom 60% in FY17 to 64% by FY20. Newer markets currently contribute 16% of total volume as against 10% in FY17 and 6% in FY16.Entering of newer markets also reduce dependence of BAL on the uncertain markets of Africa and Egypt. Further, the share of premiumproducts has increased to 30% in FY17 from 25% in FY16, which augurs well for BAL.

1824 November 2017

69%

67% 67%66%

60%

63% 63% 64%

54%

56%

58%

60%

62%

64%

66%

68%

70%

72%


BAL's Market Share in Exports Motorcycle Market

Source : Industry Reports, Company, Way2Wealth Institutional Equity






Three-wheeler sales set to pick up – Domestic three-wheeler sales are set to pick up mainly on account of robust growth in the cargosegment, albeit on a small base. Further, release of permits of ~10,000 units in Delhi, abolition of permits in Maharashtra, conversionof 2-stroke vehicles to 4-stroke vehicles in Karnataka and ban on diesel vehicles in Bangalore would aid growth. On the exportsside, the three wheeler sales have been muted since the past 2 years due to economic difficulties and currency as well as paymentconstraints in several importing countries, as also highlighted in 2W exports. Recent volume trends indicate stabilization in Africancountries as well as improved performance in the newly entered markets. We expect domestic three-wheelers to clock 15% CAGR overFY17-20E and three-wheeler exports at 18% CAGR over FY17-20E.

1924 November 2017

1,86

,912

2,34

,345

2,54

,995

2,53

,226

3,08

,936

3,49

,097

3,87

,498

2,60

,762

2,84

,772

2,80

,000

1,91

,236

2,39

,045

2,77

,292

3,13

,3404,

47,6

74

5,19

,117

5,34

,995

4,44

,462

5,47

,981

6,26

,390

7,00

,838

0

1,00,000

2,00,000

3,00,000

4,00,000

5,00,000

6,00,000

7,00,000

8,00,000


3W volumes

Domestic Exports TotalSource : Annual Report, Way2Wealth Institutional Equity






2024 November 2017

Domestic Exports TotalPassenger Segment FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17Bajaj Auto 1,86,856 2,34,345 2,53,670 2,40,064 2,60,762 2,84,772 2,80,000 1,90,958 4,47,618 5,19,117 5,33,670 4,31,022 Industry 3,84,923 4,32,234 4,41,091 4,02,034 3,51,442 4,05,370 4,01,497 2,69,000 7,36,365 8,37,604 8,42,588 6,71,034 Mkt. share 49% 54% 58% 60% 74% 70% 70% 71% 61% 62% 63% 64%

Goods carrier FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17Bajaj Auto 56 - 1,325 13,162 - - - 278 56 - 1,325 13,440 Industry 94,711 99,693 97,001 1,09,624 1,950 2,587 2,944 2,894 96,661 1,02,280 99,945 1,12,518 Mkt. share 0% 0% 1% 12% 0% 0% 0% 10% 0% 0% 1% 12%

Total FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17Bajaj Auto 1,86,912 2,34,345 2,54,995 2,53,226 2,60,762 2,84,772 2,80,000 1,91,236 4,47,674 5,19,117 5,34,995 4,44,462 Industry 4,79,634 5,31,927 5,38,092 5,11,658 3,53,392 4,07,957 4,04,441 2,71,894 8,33,026 9,39,884 9,42,533 7,83,552 Mkt. share 39% 44% 47% 49% 74% 70% 69% 70% 54% 55% 57% 57%

39% 44% 47% 49%

74% 70% 69% 70%

20%

40%

60%

80%

FY14 FY15 FY16 FY17

BAL's Market Share in 3W

Domestic Exports

3W Industry and Bajaj Auto Volume Data

Source : Annual Report, Way2Wealth Institutional Equity





Other Key Additional Triggers

2124 November 2017

Global roll out of Husqvarna motorcycles in 2018 – Husqvarna Motorcycles, founded in 1903, is the world’s second oldest motorcyclebrand, for which KTM had secured a long-term license agreement in 2013. After its new positioning, the volumes have gone up sharplyto over 30,000 units sold in 2016. KTM and BAL have decided to take Husqvarna brand global. The first models, Vitpilen401, Svartpilen 401 and Vitpilen 701 will be produced in Austria and launched in early 2018. Later in 2018, Vitpilen 401 andSvartpilen 401 will be transferred to BAL’s Chakan factory. This is expected to increase KTM and Husqvarna branded motorcyclesvolume from 100,000 in 2017 to 200,000 in the next few years.

Electric 3W – Management of BAL has recently indicated to bring out an electric version of 3W by next year. With the Govt.’sincreased thrust on electric vehicles for mobility, we feel 3W would be one of the first segments to face regulatory action by theauthorities to move towards electric version considering the small size of the 3W industry. This would augur well for BAL being an earlymover advantage as well as also having the necessary scale and resources to bring electric 3W in the market on a big platform.

BAL and Triumph Motorcycles UK forge a non-equity partnership – Recently, BAL and Triumph Motorcycles UK have forged a non-equity partnership to manufacture mid-capacity motorcycles (250cc-750cc). The partnership will focus on entering high volume marketsegments, especially emerging markets. BAL has very limited presence in this segment, and hence is expected to benefit from thispartnership. Apart from India, BAL is expected to sell its products in Africa and parts of ASEAN and Latin America. The product will bemanufactured at its Chakan factory (existing or new plant). The first rollout of Triumph motorcycles from BAL’s stable is expected inCY2020.

Quadricycle(Qute) launch – The quadricycle launch in India has been facing regulatory hurdles. The product could receiveoverwhelming response as and when it clears the regulatory hurdles due to it being emission friendly and more fuel-efficient comparedto three-wheeler. Launched in FY16, BAL currently exports to its three-wheeler overseas markets and plans to export to other marketsas well. BAL exported ~1500 quadricycles in FY17 as compared to 334 in FY16. As per the management, the quadricycle is expectedto clear regulatory hurdles in India in the next 3-4 months.





Financial Performance

Sales to post 15% CAGR over FY17-19E – We expect sales to post 15% CAGR over FY17-19E on the back of better product mix(gradual shift towards premium segment), improving prospects of exports and positive triggers for domestic three-wheelers goingahead.

2224 November 2017

2,01,583 2,16,142 2,25,865 2,17,667 2,49,319 2,87,073

0

1,00,000

2,00,000

3,00,000

4,00,000

FY14 FY15 FY16 FY17 FY18E FY19E

Net Sales (`mn)

Operating Margins to remain stable – BAL enjoys the best in class operating margins in the industry. We expect BAL’s operatingmargin to remain stable over the next two years. Rising raw material costs pressures would be offset by better margins in premiumproducts, exports and high margin 3W (EBITDA>25%).

20.6%

19.0%

21.2%20.3% 20.0% 20.3%


EBITDA Margins

Source : Company Reports, Way2Wealth Institutional Equity

Source : Company Reports, Way2Wealth Institutional Equity





Financial Performance

PAT to post 16% CAGR over FY17-19E – We expect PAT to post 16% CAGR over FY17-19E on the back of better product mix(gradual shift towards premium segment), improving prospects of exports (2W and 3W) and positive triggers for domestic three-wheelers going ahead.

2324 November 2017

33,803 30,25640,612 40,795 46,571

54,829

020,00040,00060,000


Consolidated PAT (`mn)

Avg. Gross Realization/Vehicle to continue inching up – We expect Avg. Gross Realization/Vehicle to continue improving driven byBAL’s focus on premium segment of the motorcycle market in the domestic market and superior growth in exports market. BAL’smanagement has mentioned that product mix in the export market is changing from lower end of the portfolio to higher end and thathigher end now consist of 30% of the portfolio.

48,643 51,851

53,700 54,505 56,685

58,669 60,430

40,000

45,000

50,000

55,000

60,000

65,000


Average Gross Realization/Vehicle

Source : Way2Wealth Institutional Equity






Story in Charts

2424 November 2017

50 50 55 5560 60 65

010203040506070

FY14

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

Dividend per share

8.0 8.5 10.1 11.012.9

15.1 16.7

0.0

5.0

10.0

15.0

20.0

FY14

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

Improving Fixed Asset Turnover Ratio

40,9

63

27,0

71

36,7

65

42,0

96

49,6

78

57,3

87

64,0

13

-

20,000

40,000

60,000

80,000

FY14

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

Robust Free Cash Flows to continue going forward

33.9%28.6% 29.6%

23.3% 22.1% 22.3% 21.9%

35.5%

29.6% 30.6%

24.0% 22.8% 22.8% 22.4%

10%15%20%25%30%35%40%

FY14

FY15

FY16

FY17

FY18

E

FY19

E

FY20

E

ROCE ROE






Management Team

2010 -2011 2014 2015

2524 November 2017

Rahul Bajaj (Chairman)Rahul Bajaj heads the Bajaj group of companies which is into variety of manufactured products and financial services in India andabroad. He holds an Honours Degree in Economics from Delhi University, a degree in law from Bombay University and an MBA fromHarvard Business School.

Rajiv Bajaj (Managing Director)Rajiv Bajaj holds directorship in various group companies such as Bajaj Auto, Bajaj Holdings and Investment Ltd., Bajaj Finserv Ltd. andBajaj Finance Ltd. He completed Mechanical Engineering from the University of Pune and then completed his Masters in ManufacturingSystems Engineering from University of Warwick.

S Ravikumar (President- Business Development and Assurance)S Ravikumar joined Bajaj in June 1984 and is now the President- Business Development and Assurance. He is an active member of theInstitute of Chartered Accountants of India.

Kevin P D`sa (President (Finance)- CFO)Kevin D`sa began his career with Bajaj in September 1978 and is presently the President (Finance). After acquiring a Bachelor’sdegree in Commerce, he completed his CA in 1978 and ICWA in 1981.





FinancialsSales (Bn) EBITDA(Bn) PAT(Bn) EPS

Company FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E

Hero Motocorp* 319.9 355.7 52.8 57.7 37.6 41.1 188.7 202.7

Bajaj Auto 249.3 287.1 49.9 58.3 46.6 54.8 161 189

TVS Motor 151.1 173.7 13.0 16.7 7.4 10.0 15.5 21.0

Eicher Motors 89.6 107.9 28.5 35.7 22.1 27.7 810.2 1,021.0

P/E(x) EV/EBITDA(x) P/B(x) ROE (%)Company FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19EHero Motocorp 19.4 18.0 12.7 11.6 6.3 5.5 34.1 32.2

Bajaj Auto 20.0 17.0 16.3 13.6 4.6 3.9 22.8 22.8

TVS Motor 47.8 35.4 28.1 21.8 12.4 10.4 29.4 34.0

Eicher Motors 38.0 30.2 28.9 23.1 12.2 9.3 36.4 34.5

Average 31.3 25.2 21.5 17.5 8.9 7.3 30.7 30.9

Relative Valuation

*Standalone

Valuations

Source : Bloomberg Estimates, Way2Wealth Institutional Equity





Valuation & Recommendation

BUY with Target Price of `3,969 (upside potential of 21% over 12-18 months). We expect BAL Sales and Profit to grow at a CAGR of 15% and 16% over FY17-19E on the back of high exports

demand (2W and 3W) led by recovery in African markets and on account of entering new markets. Further, releaseof permits of ~10,000 units in Delhi, abolition of permits in Maharashtra, conversion of 2-stroke vehicles to 4-strokevehicles in Karnataka and ban on diesel vehicles in Bangalore augurs well for BAL being the largest player in the 3Windustry.

We believe BAL will clock 9% CAGR over FY17-20E in the domestic motorcycles segment driven by new launches (CT100 ES, Platina ES, Pulsar 160 NS, modified V and Avenger upgrade positioned with the V-family inQ4FY18), coupled with improved performance of KTM and Dominar in the next 2-3 years.

Other growth drivers such as partnership between BAL and Triumph Motorcycles UK, electric 3W launch and approvalof Qute in the domestic market by the regulatory authorities would be icing on the cake. These have not beenconsidered in our earnings estimates.

At CMP of `3,293, BAL is currently trading at a PE of 20.0x and 17.0 its FY18E and FY19E consolidated EPS. Wevalue BAL at `3,969 per share by applying 21xP/E its consolidated FY19E EPS of `189 (including `297/sharefor KTM stake and `150 cash/share). We expect BAL to generate free cash flow greater than `50bn/annum in thenext 2-3 years. With no major capex around, there is considerable scope for increasing payouts. We initiatecoverage on BAL with a BUY rating for a target price of `3,969 (upside potential of 21% over the next 12-18months).





Rising commodity prices with the company’s inability to pass on the cost increase by appropriate price hikes could putpressure on margins.

Since BAL derives a significant proportion of its revenue from overseas markets, continuing economic and politicaluncertainties in its export markets could result in muted financial performance going forward.

Appreciation of rupee vis a vis other currencies could have an adverse impact on BAL’s margins.

Cannibalizing effects of new product launches on existing products could have an adverse impact on BAL’s volumes.

Risks & Concerns





Financials

2924 November 2017





Income Statement

3024 November 2017

(` mn)Income Statement FY15 FY16 FY17 FY18E FY19ENet sales 216,142 225,865 217,667 249,319 287,073YoY (%) 7.2 4.5 (3.6) 14.5 15.1

Raw material cost 148,514 150,569 146,242 169,253 194,883Employee Cost 8,985 9,171 9,974 10,926 12,293Admin Expenses 17,511 18,315 17,258 19,268 21,612Total expenses 175,010 178,054 173,473 199,613 232,605

EBIDTA 41,132 47,811 44,194 49,873 58,286(%) 19.0% 21.2% 20.3% 20.0% 20.3%Growth (%) (1) 16 (8) 13 17

Depreciation 2,675 3,072 3,073 3,209 3,415EBIT 38,457 44,739 41,121 46,663 54,871

Interest 65 11 14 14 14Other income 5,840 9,846 12,222 15,609 17,323PBT 44,232 54,575 53,329 62,258 72,180(-) Tax 12,711 16,177 15,081 18,678 21,654Tax/ PBT 28.7 29.6 28.3 30.0 30.0 PAT 31,522 38,398 38,249 43,581 50,526YoY (%) (2.6) 21.8 (0.4) 13.9 15.9 PAT(%) 14.6% 17.0% 17.6% 17.5% 17.6%Share of Profit of associates 2,137 2,214 2,546 3,310 4,303Extraordinary (3,403) 0 0 (320) 0Reported Profit 30,256 40,612 40,795 46,571 54,829





Balance Sheet

3124 November 2017

(` mn)FY15 FY16 FY17 FY18E FY19E

Equity capital 2,894 2,894 2,894 2,894 2,894Reserves 108,060 137,309 175,672 201,344 235,275Net worth 110,953 140,203 178,566 204,238 238,168Total borrowings 1,124 1,179 1,199 1,199 1,199Deferred Tax 1,416 2,028 3,136 3,136 3,136Other Long Term Liabilities 1,400 1,183 1,347 1,347 1,347Total Liabilities 114,893 144,593 184,248 209,920 243,850Gross block 46,317 44,349 45,332 48,332 51,332Less: Acc. depreciation 21,837 24,092 25,900 29,109 32,524Net block 24,480 20,257 19,433 19,223 18,808Work in progress 2,549 522 422 422 422

Investments 89,853 110,672 155,356 175,356 197,356Other non-current assets 5,111 6,822 6,982 6,982 6,982

Inventories 8,142 7,191 7,284 8,430 9,706Debtors 7,170 7,179 9,533 9,571 11,021Cash 5,927 8,670 3,014 11,792 26,281Loans and advances 16,424 11,089 14,354 14,944 15,648Current assets 37,663 34,130 34,185 44,738 62,656

Current liabilities 25,667 26,337 30,762 35,235 40,571Provisions 19,096 1,473 1,367 1,565 1,802Net current assets (7,100) 6,319 2,056 7,937 20,283Total Assets 114,893 144,593 184,248 209,920 243,850





Cash Flow Statement

3224 November 2017

(` mn)

Cash Flow FY15 FY16 FY17 FY18E FY19E

Net profit 30,256 40,612 40,795 46,571 54,829Depreciation 2,675 3,072 3,073 3,209 3,415Deferred tax 131 (238) 504 0 0Change in W/C (5,928) (10,676) (1,394) 2,898 2,143Operating cash flow 27,133 32,770 42,978 52,678 60,387

Capex (62) 3,995 (882) (3,000) (3,000)Investments (5,375) (20,820) (44,683) (20,000) (22,000)Investing cash flow (5,437) (16,825) (45,566) (23,000) (25,000)

Free Cash Flow 27,071 36,765 42,096 49,678 57,387

Dividend and other (17,680) (21,050) (19,812) (20,900) (20,899)Equity (3,629) 7,793 16,723 0 0Debt 532 55 20 0 0Financing cash flow (20,778) (13,202) (3,069) (20,900) (20,899)

Net change in cash 918 2,743 (5,657) 8,778 14,488Opening cash 5,009 5,927 8,670 3,014 11,792Closing cash 5,927 8,670 3,014 11,792 26,280





Ratio Analysis

3324 November 2017

Key Ratios FY15 FY16 FY17 FY18E FY19E

EPS 105 140 141 161 189

Book value 383 485 617 706 823

Cash /Share 110 363 334 399 484

P/E (x) 23.4 20.0 17.0

EV/EBDITA (x) 19.4 16.3 13.6

P/B (x) 5.3 4.6 3.9

ROCE 28.6% 29.6% 23.3% 22.1% 22.3%

ROE 29.6% 30.6% 24.0% 22.8% 22.8%

Free cash/Share 94 127 146 172 198

Dividend/Share 50 55 55 60 60

Dividend Yield 1.6% 1.7% 1.7% 1.9% 1.9%

Fixed Asset T/O 8.5 10.1 11.0 12.9 15.1

Avg Net WC Days (27) (12) (3) (4) (6)

Net W/C (% of sales) (6.0) (1.0) (0.4) (1.5) (2.1)

Revenue/Day (`mn) 592 619 596 683 787

Other Income (%PBT) 13% 18% 23% 25% 24%





Quarterly Performance

3424 November 2017

(` mn) Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18

Net Sales 56,436 59,493 49,756 48,050 53,285 64,748 Other operating income 1,043 1,052 913 923 1,139 1,051 Income from operation 57,480 60,545 50,669 48,973 54,424 65,799

Raw Material 38,628 40,571 33,841 33,203 38,093 45,492 Staff Cost 2,683 2,593 2,423 2,274 2,727 2,650 Expenses Capitalised (43) (56) (47) (77) (46) (41)Other expenditure 4,449 4,493 4,012 4,523 4,270 4,723 Total Expenditure 45,716 47,601 40,229 39,924 45,044 52,824

EBITDA 11,763 12,945 10,440 9,049 9,379 12,975 Depreciation 775 770 772 757 753 770 EBIT 10,989 12,175 9,668 8,292 8,627 12,205

Interest 2 7 3 2 2 5 Other Income 2,671 3,427 3,187 2,937 3,235 2,972 PBT 13,657 15,595 12,853 11,227 11,859 15,172 Tax 3,873 4,378 3,612 3,218 3,642 4,055 PAT 9,784 11,218 9,241 8,009 8,217 11,117 Extraordinary 320 Share of PAT in JV 790 527 613 471 819 Reported PAT 9,784 12,007 9,768 8,622 8,367 11,935 Other comprehensive income, net of tax (190) 82 (1,103) 481 1,248 455 Total other comprehensive income, net of tax

9,594 12,089 8,665 9,103 9,615 12,391

Equity 2894 2894 2894 2894 2894 2894EPS 33.8 38.8 31.9 27.7 28.4 38.4






3524 November 2017

Margins Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18Gross margins 32.8% 33.0% 33.2% 32.2% 30.0% 30.9%EBITDA 20.5% 21.4% 20.6% 18.5% 17.2% 19.7%PAT 17% 19% 18% 16% 15% 17%Tax Rate 28% 28% 28% 29% 31% 27%GrowthSales 3% -1% -9% -9% -5% 9%EBITDA 3% -2% -11% -22% -20% 0%EBIT 3% -2% -12% -23% -21% 0%PAT 2% 20% 3% -16% -16% -1%

(` mn)

Segmental Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18Sales in numbers 994,733 1,031,945 851,645 787,627 888,434 1,071,510Growth (YoY) -2% -2% -10% -10% -11% 4%Growth (QoQ) 14% 4% -17% -8% 13% 21%

Average Relisation 60,161 61,313 61,796 65,012 64,611 60,301 Growth (YoY) 5.6% 2.7% 1.4% 1.2% 7.4% -1.7%Growth (QoQ) -6.3% 1.9% 0.8% 5.2% -0.6% -6.7%






Domestic 2W volumes for BAL were affected in Q1FY18 due to channel filling by competitors after sale of BS-III vehicles were bannedafter 31stMarch, 2017 and channel de-stocking by partners ahead of GST. Domestic 3W were also affected in Q1FY18 due to de-stocking ahead of GST and demonetisation. However, domestic volumes of 2W and 3W have rebounded post the initial hiccups of GSTand recovery in demand. Exports have grown by 7% in 2W and 20% in 3W in H1FY18.

5,48,880 5,79,545 4,26,562

5,83,997

-

2,00,000

4,00,000

6,00,000

8,00,000

Q1 Q2

Domestic 2W volumes

FY17 FY18

3,23,660 3,17,869

3,49,152

3,34,724

3,00,000

3,20,000

3,40,000

3,60,000

Q1 Q2

Exports 2W volumes

FY17 FY18

Source : Company Filings, Way2Wealth Institutional Equity

75,204 74,383 52,347

84,938

-

50,000

1,00,000

Q1 Q2

Domestic 3W Volume

FY17 FY18

46,989 60,148 60,373 67,851

-20,000 40,000 60,000 80,000

Q1 Q2

Exports 3W Volume

FY17 FY18





Team

Analyst Designation Sector Email Telephone

Alok Ranjan Head – Research [email protected] +9122-6663 8950

Jaisheel Garg AVP Power, Power Equipment, Coal Mining [email protected] +9122-6146 2974

Shivani V. Vishwanathan AVP FMCG, Consumer Durables [email protected] +9122-6663 8956

Chintan Gupta Research Associate [email protected] +9122-6663 8972

Ashwini Sonawane Research Associate [email protected] +9122-4019 2956

Institutions Designation Email Telephone

Kaushal Jaini Vice President [email protected] +9122-4027 8919

Bhavika Ravasia Senior Manager [email protected] +9122-4019 2995

Mitul Doshi Institutional Sales [email protected] +9122-2575 8932





DisclaimerAnalyst Certification: I, Chintan Gupta the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflect our personal views about the subjectsecurities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in thisresearch. The analyst(s), principally responsible for the preparation of this research report, receives compensation based on overall revenues of the company (Way2Wealth Brokers Private Limited, hereinafter referred to asWay2Wealth) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.It is confirmed that Chintan Gupta the author of this report has not received any compensation from the companies mentioned in the report in the preceding 12 months. Our research professionals are paid in part based on theprofitability of Way2Wealth, which include earnings from other business. Neither Way2Wealth nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special orconsequential including lost revenue or lost profits that may arise from or in connection with the use of the information contained in this report.This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Way2Wealth is not soliciting any action based upon it. Nothing in this research shall beconstrued as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any such transaction. The contents of this material are general and are neither comprehensive nor appropriate for everyindividual and are solely for the informational purposes of the readers. This material does not take into account the specific objectives, financial situation or needs of an individual/s or a Corporate/s or any entity/s.This research has been prepared for the general use of the clients of the Way2Wealth and must not be copied, either in whole or in part, or distributed or redistributed to any other person in any form. If you are not the intendedrecipient you must not use or disclose the information in this research in any way. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. Way2Wealth will not treatrecipients as customers by virtue of their receiving this report. The distribution of this document in other jurisdictions may be restricted by the law applicable in the relevant jurisdictions and persons into whose possession thisdocument comes should inform themselves about, and observe any such restrictions.The report is based upon information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up to date and it should not be relied upon as such. Way2Wealthor any of its affiliates or employees makes no warranties, either express or implied of any kind regarding any matter pertaining to this report, including, but not limited to warranties of suitability, fitness for a particularpurpose, accuracy, timeliness, completeness or non-infringement. We accept no obligation to correct or update the information or opinions in it. Way2Wealth or any of its affiliates or employees shall not be in any way responsible forany loss or damage that may arise to any person from any inadvertent error in the information contained in this report. The recipients of this report should rely on their own investigations. In no event shall Way2Wealth be liable for anydamages of any kind, including, but not limited to, indirect, special, incidental, consequential, punitive, lost profits, or lost opportunity, whether or not Way2Wealth has advised of the possibility of such damages.This material contains statements that are forward-looking; such statements are based upon the current beliefs and expectations and are subject to significant risks and uncertainties. Actual results may differ from those set forth inthe forward-looking statements. These uncertainties include but are not limited to: the risk of adverse movements or volatility in the securities markets or in interest or foreign exchange rates or indices; adverse impact from aneconomic slowdown; downturn in domestic or foreign securities and trading conditions or markets; increased competition; unfavorable political and diplomatic developments; change in the governmental or regulatory policies; failure ofa corporate event and such others. This is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. No part of this material may be copied orduplicated in any form by any means or redistributed without the written consent of Way2Wealth. In no event shall any reader publish, retransmit, redistribute or otherwise reproduce any information provided by Way2Wealth in anyformat to anyone. Way2Wealth and its affiliates, officers, directors and employees including persons involved in the preparation or issuance of this report may from time to time have interest in securities / positions, financial orotherwise in the securities related to the information contained in this report.To enhance transparency, Way2Wealth has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.Disclosure of Interest Statement in Bajaj Auto Ltd. as on November 24, 2017

Name of the Security Bajaj Auto Ltd.Name of the analyst Chintan GuptaAnalysts’ ownership of any stock related to the information contained

Financial Interest Analyst : Analyst’s Relative : Yes / NoAnalyst’s Associate/Firm : Yes/No

NIL

NoNoNo

Conflict of Interest NoReceipt of Compensation NoWay2Wealth ownership of any stock related to the information contained

NIL

Broking relationship with company covered NIL

Investment Banking relationship with company covered NIL

This information is subject to change without any prior notice. Way2Wealth reserves at its absolute discretion the right to make or refrain from making modifications and alterations to this statement from time to time.Nevertheless, Way2Wealth is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries.

3824 November 2017



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