Bajaj Auto (BAAUTO) 2815

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1 Result Update Rating matrix Rating : Hold Target : 2780 Target Period : 12 months Potential Upside : 1% What s Changed? Target changed from 3000 to 2780 EPS FY18E Changed from to EPS FY19E Changed from 181 to Rating Unchanged Quarterly Performance Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) Revenue 5, , , EBITDA , EBITDA (%) bps bps PAT Key Financials Crore FY16 FY17 FY18E FY19E Net Sales 22,587 21,767 23,961 27,749 EBITDA 4,782 4,422 4,409 5,333 Net Profit 3,930 3,828 3,951 4,767 EPS ( ) Valuation summary FY16 FY17 FY18E FY19E Core P/E (x) Tgt Core P/E (x) EV/EBITDA(x) P/BV (x) RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( crore) 81,457.7 Total Debt (FY17) ( crore) 119.9crore Cash & Liquid Invests (FY17) ( crore) Crore EV ( crore) crore 52 week H/L ( ) 3120 / 2510 Equity capital ( ) Face value ( ) 10 Price performance (%) 1M 3M 6M 12M Bajaj Auto Ltd Hero MotoCorp Ltd TVS Motor Company Ltd Research Analyst Nishit Zota nishit.zota@icicisecurities.com Vidrum Mehta vidrum.mehta@icicisecurities.com Weak performance continues July 24, 2017 Bajaj Auto (BAAUTO) 2815 Bajaj Auto reported its Q1FY18 results, which were below our estimates on the operational front. Revenues were at 5442 crore (down 5.3% YoY, up 11.1%QoQ) vs. our estimate of 5378 crore. The beat is attributable to higher than estimated domestic & export realisations Total volumes for Q1FY18 were at units (down 10.7% YoY, up 12.8% QoQ). Domestic volumes declined 23.3% YoY, up 3.3% QoQ to units. Domestic realisations grew 8.2% YoY against our estimate of 7.1%. Export volumes increased 10.5% YoY, 26.4% QoQ to units. Export realisations grew 9.1% QoQ vs. our estimate of 4.6%. In export markets, the sales mix of high end motorcycles improved to 30% vs. 26% in Q1FY17 Reported EBITDA margins were at 17.2% (down 322 bps YoY, 126 bps QoQ) against our estimate of 19.5%. The miss is mainly attributable to lower than estimated gross margins. Of the ~210 bps decline in gross margins, renewal of contract with steelmakers has had ~110 bps impact. Margins in the domestic motorcycle segment declined as the company reduced prices of entry level bikes and increased marketing expense in the premium segment Reported PAT declined 5.7% YoY, up 15.1% QoQ to 923 crore vs. our estimate of crore. The beat is attributable to higher than estimated other income, which increased 56% QoQ to 457 crore due to onetime dividend of 135 crore from KTM Struggling in domestic business BAL s domestic volumes grew 5.4% in FY17, outpacing industry growth of ~3.7%. This was mainly on account of new launches like the Dominar, V series & Avengers. However, volumes from these new models have come off sharply (Avenger: Q1FY units, Q1FY units; V12/V15: Q1FY units, Q1FY units). The market share has fallen across segments in the motorcycle segment, with CT 100 & Platina losing share in economy segment, single digit share in executive segment reducing further to sub 5% while in the premium segment the company has lost its dominance with the likes of Royal Enfield s market share now equal to BAL. With no new launches expected in the near term, we expect domestic volumes to grow at 5% CAGR in FY1719E. One positive that could emerge is the possible tieup with a global company in the motorcycle segment in the next few weeks. Export growth on low base and geography diversification BAL is cautiously optimistic on the export market. The company expects to offset the expected decline in Nigeria with growth in markets like Turkey, Iran and SouthEast Asia. In 3W, BAL has already reduced its dependence on SriLanka by increasing exports to Bangladesh, Peru etc. We expect export volumes to grow at 12.8% CAGR in FY1719E. Margins to be under pressure BAL continues to focus on profitability, with ~60% of the business operating at ~20%+ EBITDA margin. However, margins in domestic motorcycle segment will be under pressure, due to commodity cost pressure & customer acquisition costs. We value BAL on an SOTP basis, valuing the core business at 16x FY19E EPS and investment in KTM to arrive at a target price of We have a HOLD recommendation on the stock. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Standalone Q1FY18 Q1FY18E Q1FY17 YoY (%) Q4FY17 QoQ (%) Comments Total Operating Income 5,442 5,378 5, , Higher than estimates due to higherthanexpected domestic/export realisations Raw Material Expenses 3,809 3,679 3, , Renewal of contracts with steelmakers led to rise in raw material prices Employee Expenses Other Expenses EBITDA , , EBITDA Margin (%) bps bps EBITDA margins came in lower due to lower than estimated gross margins Other Income Other income came in higher due to to onetime dividend of 135 crore from KTM Depreciation Interest NA Total Tax Reported PAT Beat on profit attributable to higher than estimated other income EPS ( ) Key Metrics Revneue ( crore) Domestic 3,261 3,210 3, , Higher than estimates on account of higher ASPs Exports 2,479 2,377 2, , Higher than estimates on account of higher ASPs Blended ASP ( / unit) Domestic 68,099 67,036 62, , Exports 60,534 58,035 55, , ASPs higher due to higher share of premium motorcycles Change in estimates FY18E FY19E ( Crore) Old New % Change Old New % Change Comments Revenue 25,501 23, ,739 27, Downward revision as we have revised volume estimates downwards post Q1FY18 volume performance EBITDA 5,179 4, ,176 5, EBITDA Margin (%) bps bps Margin estimates reduced post management guidance PAT 4,497 3, ,237 4, PAT estimates reduced to reflect reduction in revenue & margin estimates EPS ( ) Assumptions Current Earlier Comments Units (mn) FY16 FY17E FY18E FY19E FY18E FY19E Motorcycle volumes Downward revision of estimates considering weak Q1FY18 performance ThreeWheeler volumes Quadricycle volumes Export volumes Domestic revenues ( crore) 13,774 14,816 15,617 17,916 17,102 19,787 Export revenues ($ mn) 1,492 1,134 1,417 1,688 1,382 1,618 US$INR Realisation rate Export ASP ($/unit) Increased estimates due to better mix Blended ASP ( /unit) 60,475 61,907 65,287 68,438 65,705 69,171 RM/Vehicle ( /unit) 32,318 38,919 40,821 42,821 40,821 42,821 EBIDTA/Vehicle ( /unit) 12,320 11,260 12,445 10,415 12,028 10,043 ICICI Securities Ltd Retail Equity Research Page 2

3 Key conference call takeaways In Q1FY18, rise in commodity prices had a ~110 bps adverse impact on gross margins. In May 2017, the company raised prices by 500 on motorcycles & 1000 on 3W. Going ahead, the company expects raw material to sales to be in the range of 68.7%69% in FY18 (~70% in Q1FY18) Volume of V12 & Avenger family has come off sharply in the past few quarters (Avenger: Q1FY units, Q1FY units; V12/V15: Q1FY units, Q1FY units). Going ahead company has guided for a monthly run rate of units for Avenger & pickup in V series volumes from festive season onwards to ~25000 units a month The company is hopeful of achieving total export volumes of 1.6 million The exceptional item of 32 crore related to GST transition: a) compensation to dealers & b) adjustment to GST price from June 15 onwards Dealer inventory was reduced by ~50000 units (retail~ units, wholesale ~ units) in anticipation of GST The company attributes the 30% YoY fall in domestic 3W to high base of units in Q1FY17 (Maharashtra permit). Going ahead, the management expects a monthly run rate of ~20,000+ units in domestic 3W due to removal of restriction on new permits in Maharashtra, ~10,000 new permits in Delhi & proposed replacement of 2 stroke 3W with 4stroke 3W in Bangalore Domestic spare part revenues were at 460 crore with export at 190 crore. Total spare part revenue was at 650 crore vs. 637 crore YoY The company is in talks with a global motorcycle company for a possible tieup The Pulsar brand has witnessed market share erosion as the competitor brand Apache is doing well in states like Odisha, UP and Bihar In FY18, BAL expects total KTM sales from India at 1.1 lakh units, of which ~50,000 units will be sold in India The US$:INR realisation in the export market is expected to be for the balance period in FY18 ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Export volumes to recover BAL s domestic volumes grew 5.4% in FY17, outpacing industry growth of ~3.7%. This was mainly on account of new launches like the Dominar, V series & Avengers. However, volumes from these new models have come off sharply (Avenger: Q1FY units, Q1FY units; V12/V15: Q1FY units, Q1FY units). The market share has fallen across segments in the motorcycle segment, with CT 100 & Platina losing share in economy segment, single digit share in executive segment reducing further to sub 5%. In the premium segment, the company has lost its dominance with the likes of Royal Enfield s market share now equal to BAL. With no new launches expected in the near term, we expect domestic volumes to grow at 5% CAGR in FY1719E. One positive that may emerge is the possible tieup with a global company in the motorcycle segment in the next few weeks. Overall, we expect revenues to grow at 12.9% CAGR in FY1719E to 27,749 crore. Exhibit 1: Revenue growth at 13.4% CAGR in FY1719E ( crore) 30,000 25,000 20,000 15,000 10,000 5, ,398 19, , , , , , , , (%) FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Revenue % increase The company is cautiously optimistic on the export market. BAL expects to offset the expected decline in Nigeria with growth in markets like Turkey, Iran and SouthEast Asia. In 3W, the company has already reduced its dependence on Sri Lanka by increasing exports to Bangladesh, Peru, etc. We expect export volumes to grow at 12.8% CAGR in FY1719E. ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 2: Revenue mix trend 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, ,223 6,604 13,905 6,713 12,527 8,200 12,255 9,758 13,774 9,772 14,816 7,879 15,617 9, ,916 11,308 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Domestic Exports % share of exports EBITDA margin to be under pressure in near term! Looking at BAL s financial performance, we can clearly see that the company is almost synonymous with strong consistency. However, BAL expects EBITDA margins to drop due to commodity price pressure and customer acquisition cost. We estimate EBITDA margin of 18.4% and 19.2% for FY18E and FY19E, respectively. Exhibit 3: EBITDA margins to decline! 6, ( crore) 5,000 4,000 3,000 2,000 1, , ,720 3, , , ,782 4, , , (%) FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E 16 EBITDA EBITDA margin ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 4: Per vehicle metrics and estimates 67,000 62,000 57,000 52,000 47,000 42,000 37,000 32,000 27,000 22,000 60,953 38,842 64,775 40,498 65,012 61,796 42,155 39,735 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 ( ) Q1FY18 Avg RM Cost Avg realisation Source: Company press release, ICICIdirect.com Research Return ratios to remain strong as company continues its profit growth! BAL remains a cash generating franchise, which has an annual CFO of ~ 4066 crore and CFO/EBITDA ratios of ~76% (five year average). The company has extremely tight control on working capital and has already worked towards reducing the system inventory. We believe the cash accumulated in BAL s balance sheet could be better utilised via higher dividend payout as capex requirements are just ~7% of CFO generated annually. Exhibit 5: CFO continues to remain strong 6, ,000 4, crore 3, % 2, ,000 3,899 2,207 4,116 2,527 3,136 4,070 3,970 5,330 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E 20.0 CFO CFO/EBITDA ICICI Securities Ltd Retail Equity Research Page 6

7 Exhibit 6: Trend in profitability 6, ( crore) 5,000 4,000 3,000 2,000 1, , , , , , , , , , (%) FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E PAT PAT margin Source: Company press release, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Key takeaways from annual report The domestic motorcycle market continued to remain sluggish, with domestic growth of 3.7% in FY17, after degrowth 0.4% in previous year. Compared to FY15, growth in FY17 was a mere 1.6% per annum from 10.7 million units two years earlier to 11.1 million in the current year. The muted performance is attributable to increasing share of scooter (~30% of total 2W sales) In the last two years, BAL s domestic motorcycle sales have outpaced industry growth. In FY17, BAL s domestic motorcycle volumes grew by 5.4% vs. market growth of 3.7%. The outperformance is attributable to launch of V series that sold units BAL has captured major market shares in sport segment but lost share in entry segment. In entry segment, where the company has presence through CT100 & Platina, its market share has reduced from 35% in FY16 to 32% in FY17. In the sports (Pulsar, Avenger) segment, market share has increased from 43% last year to 45%. In the super sports segment (KTM, Pulsar RS 200 & Dominar 400), sales were at 63,575 units. KTM sale of 34,970 units in India was higher 15% YoY The industry domestic 3W volumes declined 5% where BAL s corresponding volumes declined just 0.7%. In the domestic 3W (passenger + goods) market share increased from 47.4% in FY16 to 49.5% in FY17. In the domestic passenger segment, market share increased from 57.5% to 59.7% in FY17. BAL has recently entered the goods segment, where its volumes increased from 1325 units in FY16 to (12% market share) units in FY17. In export 3w, BAL saw a drop in volumes from 280,000 units last year to 191,236 units in FY17. The reason of decline was economic difficulty and currency constraint in several importing countries. Motorcycle exports degrew 16.5%. In export market, of the 18 markets that contribute 85% of the motorcycle exports, BAL gained market share in 16, reaching a healthy 40%+ in South Asia & Middle East & 25% in 25% in Latin America. In FY17, company has entered four new markets each for motorcycle & 3W, of which three were in the Asean region In FY17, Waluj the export hub of Bajaj Auto, produced 1.64 million motorcycles of which over 1.03 million were exported; and 445,563 threewheelers of which 191,000 were shipped abroad. The Chakan plant has used its core competencies in developing and manufacturing the high end sports bikes, and manufactured 608,974 units in FY17. The Pantnagar plant manufactured 960,686 motorbikes As of FY17, BAL s employee strength was at 9509 employees Bajaj Auto International Holdings BV is a 100% Netherlands based subsidiary of Bajaj Auto. Over the years, through this subsidiary, Bajaj Auto has invested a total of million (H 1,219 crore), and holds approximately 48% stake in KTM AG of Austria (KTM). In CY16, KTM sold 203,423 motorcycles, growth of 11% and achieved a turnover of 1.14 billion, growth of 12%. Profit after tax was at 72.1 million ( 531 crore), growth of 13%. The proportionate profit to Bajaj Auto is million ( 255 crore) ICICI Securities Ltd Retail Equity Research Page 8

9 Outlook and valuation On the financials front, ~60% of the business operates at ~20% EBITDA margin. However, margins will be under pressure due to commodity cost pressure and customer acquisition costs. We value BAL on an SOTP basis, valuing the core business at 16x FY19E EPS and investment in KTM to arrive at a target price of We have a HOLD recommendation on the stock. Exhibit 7: Valuation Revenues Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY16 22, FY17 21,766.7 (3.6) (2.6) FY18E 23, FY19E 27, Exhibit 8: SOTP valuation SOTP Valuation Estimated value Per share ( ) Remark Core Business FY19E EPS ( ) Multiple (x) 16 Longterm average valuation multiple Value per share ( ) 2,640 Stake in KTM (48%) Total valuation ( crore) Value towards BAL 5115 Value per share post 20% holdco disc Total Value per Share ( ) 2, % stake via Bajaj Auto International Holdings % holding company discount ICICI Securities Ltd Retail Equity Research Page 9

10 (%) ( ) Recommended history vs. consensus 3, , ,500 2,000 1,500 1, Aug15 Oct15 Dec15 Feb16 Apr16 Jun16 Aug16 Oct16 Dec16 Jan17 Mar17 May17 Jul Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Apr09 Unveils going global strategy aided by KTM (stake raised to 30% from 14.5% initially in 2007) May09 Unveils all new 150/180 cc Pulsar DTSI to enhance market leadership position in premium segment Nov09 Bajaj Auto's export strategy bears strong fruit as volumes rise 46% YoY to ~98,000 odd units (35% of overall share) Jan10 Takes historic decision to exit scooter business completely and become a pure play motorcycle manufacturer Jul10 Bajaj Auto shuns JV with Nissan for small car venture to continue alone with RE60 Dec10 Auto stocks slide as oil firms hike petrol prices steeply by ~ 3/ litre Feb11 Bajaj Auto crosses 1 million units in the exports markets May11 Rising input cost pressures cause automakers to raise prices; Bajaj hikes prices further as DEPB tax benefits reduced by government Oct11 US$INR skids touching 50 causing market preference towards exporters; Bajaj stands out in the same Mar12 Bajaj Auto raises stake in KTM to ~48%, first product launch KTM Duke 200 cc receives strong response Mar13 Bajaj Auto reports lowest March volumes since FY10 on account of weak domestic motorcycle sales as scooter sales shares rise Oct13 Exceptionally strong Q2FY14 margin performance makes it stand head and shoulders above any domestic & global OEM May14 Bajaj Auto reports lowest overall market share drop in the 2W space to below 15% Mar15 Bajaj Auto reports a market share of 18% in Q4FY15 Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Bajaj Group of Industries 31Mar Life Insurance Corporation of India 31Mar Firodia Group of Industries 31Mar Norges Bank Investment Management (NBIM) 31Mar Lazard Asset Management, L.L.C. 30Jun Bajaj (Niraj) 31Mar Bajaj (Rahulkumar) 31Mar BlackRock Institutional Trust Company, N.A. 30Jun The Vanguard Group, Inc. 30Jun J.P. Morgan Asset Management (Hong Kong) Ltd. 31May Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Jun16 Sep16 Dec16 Mar17 Jun17 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Bajaj Group of Industries +1,921.85M M PineBridge Investments Asia Limited 41.06M 1.06M Life Insurance Corporation of India M +1.05M Lyxor Asset Management 13.11M 0.30M Bajaj (Sanjivnayan) M +0.63M Firodia Group of Industries 7.18M 0.17M Caisse de Depot et Placement du Quebec +6.57M +0.17M Fidelity Management & Research Company 4.32M 0.10M City of London Investment Management Co. Ltd M +0.13M Tata Asset Management Limited 2.72M 0.06M Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 10

11 Financial summary Profit and loss statement Crore (Yearend March) FY16 FY17 FY18E FY19E Total operating Income Growth (%) Raw Material Expenses 15, , , ,964.2 Employee Expenses , ,289.4 Other expenses 1, , , ,189.7 Total Operating Expenditure 17, , , ,415.9 EBITDA Growth (%) Depreciation Interest Other Income 1, , , ,811.2 PBT 5, , , ,810.2 Total Tax 1, , , ,043.1 PAT Growth (%) EPS ( ) Cash flow statement Crore (Yearend March) FY16 FY17 FY18E FY19E Profit after Tax 3, , , ,767.1 Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions 1, CF from operating activities (Inc)/dec in Investments 4, , , ,000.0 (Inc)/dec in Fixed Assets Others 5, CF from investing activities Inc/(dec) in loan funds Dividend paid & dividend tax 3, , ,238.3 Inc/(dec) in Sec. premium CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Yearend March) FY16 FY17 FY18E FY19E Liabilities Equity Capital Reserve and Surplus 12, , , ,158.9 Total Shareholders funds 13, , , ,448.3 Total Debt Deferred Tax Liability Other noncurrent liabilities Total Liabilities Assets Gross Block 4, , , ,957.8 Less: Acc Depreciation 2, , , ,145.1 Net Block 1, , , ,812.7 Capital WIP Total Fixed Assets 2, , , ,823.3 Investments 10, , , ,531.5 Inventory Debtors ,140.4 Loans and Advances Other current assets Cash Total Current Assets 3, , , ,995.0 Creditors 2, , , ,660.9 Provisions Other current liabilities Total Current Liabilities 2, , , ,494.5 Net Current Assets Deferred Tax asset Application of Funds Key ratios (Yearend March) FY16 FY17 FY18E FY19E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Net sales PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) Core P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 11

12 ICICIdirect.com coverage universe (Auto & Auto Ancillary) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Amara Raja (AMARAJ) Hold Apollo Tyre (APOTYR) Buy Ashok Leyland (ASHLEY) Buy Bajaj Auto (BAAUTO) Hold Balkrishna Ind. (BALIND) Buy Bharat Forge (BHAFOR) Buy Bosch (MICO) Buy Eicher Motors (EICMOT) Buy Exide Industries (EXIIND) Buy Hero Mototcorp (HERHON) Buy JK Tyre & Ind (JKIND) Buy Mahindra CIE (MAHAUT) Buy Maruti Suzuki (MARUTI) Buy Motherson (MOTSUM) Hold Tata Motors (TELCO) Buy Wabco India (WABTVS) Buy ICICI Securities Ltd Retail Equity Research Page 12

13 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/10%; Sell: 10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 13

14 ANALYST CERTIFICATION We /I, Nishit Zota, MBA & Vidrum Mehta, MBA Research Analyst, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a fullservice, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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