Automobiles. Heading Into Strong Earnings Growth Quarter QUARTERLY PREVIEW

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1 India Research April 19, 2018 QUARTERLY PREVIEW Mar'18 Quarterly PAT Company PAT (Rs mn) Maruti Suzuki 20,605 M&M 10,367 Hero MotoCorp 8,774 Bajaj Auto 11,253 TVS Motor 2,432 Ashok Leyland 6,472 Bharat Forge 2,460 Subros 154, Rating and Target Price Company Rating TP Maruti Suzuki BUY 10,486 M&M HOLD 917 Hero Motocorp BUY 4850 Bajaj Auto HOLD 3125 TVS Motor BUY 884 Ashok Leyland BUY 177 Bharat Forge BUY 850 Subros HOLD 356 Change in TP Company Old New Maruti Suzuki M&M Hero Motocorp Bajaj Auto Bharat Forge TVS Motor Ashok Leyland Analyst Contact: Mahesh Bendre , Heading Into Strong Earnings Growth Quarter In Q4FY18, Indian automobile industry reported robust volume growth on account of favorable base (demonetization impact in Q4FY17) and current buoyancy in the demand supported by urban and rural markets. Following are the Key highlights during Q4FY18 on yoy basis. Total domestic Auto market grew by 23.6% to 6.4mn 2 Wheeler market grew by 24.8% to 5.1mn Passenger vehicle market grew by 7.2% to 0.8mn Commercial vehicle market grew by 30.9% to 0.3mn Majority of the Companies under our coverage are expected to report strong sales and PAT growth during the quarter on account of a) Robust volume growth in Q4FY18 b) Increase in average realizations due to price increases and c) Favorable base effect as demonetization had impacted their operational and financial performance during Q4FY17. Growth Outlook: Going forward, we anticipate robust volume growth to continue in 4W and 2W segments in India on account of gradual economic recovery, pent up demand, healthy agriculture output and higher rural spending by Government aiding rural economy. At the same time Governments increasing thrust on infrastructure development and stricter implementation of the ban on overloading of trucks is likely to push up higher demand for commercial vehicles in the Country. We expect 2W, 4W and CV market to grow at 8-10%, 10-12% and 12-15% CAGR over FY18-20 respectively. Margin Outlook: Given the robust growth outlook for all Indian Auto OEM s which is likely to result in high capacity utilization of their manufacturing assets, we expects all the major OEM s to report healthy margin expansion going forward. However we anticipate, ancillary companies to witness margin pressure on account of high commodity prices resulting in rise in raw material prices. Key Earnings revision: Based on better than expected Q4FY18 auto numbers and improved business outlook, we have revised our earnings estimates upwards for M&M, Ashok Leyland and TVS. Key Rating Revision: On the basis of improved business outlook and valuations, we have revised our ratings on Maruti Suzuki (HOLD to BUY), Bharat Forge (SELL to BUY), Bajaj Auto (SELL to HOLD) and Subros (BUY to HOLD). Our Top Picks: Maruti, Hero Motocorp, TVS, Ashok Leyland and Bharat Forge remain our Top picks with BUY recommendation.

2 Mar 18 Automobile Quarterly Estimates Rs mn Q4FY18E Q4FY17 YoY (%) Q3FY18 QoQ (%) Comments Maruti Suzuki BUY, CMP Rs. 9121, TP Rs Volumes 461, , , Sales are expected to grow by 13.6% YoY on account of increasing demand for UV Vehicles and better product mix Sales 208, , , like Vitara Brezza, Baleno Etc. EBITDA 31,972 25, , EBIDTA margins are expected to improve by 139bps YoY EBITDA margin (%) bps 15.8 (40) bps on account of operating leverage benefit PAT 20, , , M&M HOLD, CMP Rs. 798, TP Rs 917 Tractor Volume 70,635 50, , Tractor and PV Volumes have grown by 40.9% and 19.7% YoY respectively. Auto Volume 165, , , Sales are expected to grow by 25.6% YoY on account of Sales 133, , , increasing demand for Tractors led better monsoon EBITDA 16,203 12, , expectations. EBITDA margin (%) EBIDTA margins are expected to improve by 50bps YoY on account of operating leverage benefit PAT 10,367 7, , Hero Motocorp BUY, CMP Rs. 3738, TP Rs 4850 Volume 2,001,571 1,621, ,709, Sales 85,686 69, , EBITDA 11,996 9, , EBITDA margin (%) bps 15.9 (185) bps PAT 8,774 7, , Sales are expected to grow by 23.9% YoY on account of higher rural demand. EBIDTA and PAT are expected to grow by 25.3% and 22.2% YoY respectively. Bajaj Auto HOLD, CMP Rs. 2862, TP Rs 3125 Volume 1,045, , ,001, Overall volumes are expected to grow by 32.7% YoY on Sales 67,831 48, , account of higher export volumes and 3W volumes EBITDA EBIDTA is expected to grow by 49.9% and EBIDTA 13,566 9, , margins to expand by 152bps 20.0%. EBITDA margin (%) bps bps PAT is expected to grow by 40.5% YoY. PAT 11,253 8, , TVS Motor BUY, CMP Rs. 673, TP Rs 884 Volume 879, , , Volumes are expected to grow by 30.3% YoY on account of Sales 38,178 28, , Of strong volume growth and better product mix like EBITDA 3,627 1, , Jupiter, Apache and recent launch of Ntorq Scooter. EBIDTA margins are expected to expand by 382bps on EBITDA margin (%) bps bps account of higher operating leverage benefit. PAT 2,432 1, , Ashok Leyland BUY, CMP Rs. 149, TP Rs 177 Volume 58,735 43, % 46, Sales/EBIDTA is expected to grow by 35.4%/47.3% YoY Sales 89,610 66, % 71, respectively on account of strong demand in the MHC CV EBITDA 10,753 7, % 7, segment. PAT is expected to decline by 21.7% YoY mainly on EBITDA margin (%) bps bps account of higher tax outgo compared to Q4FY17 PAT 6,472 8, % 4, Bharat Forge BUY, CMP Rs. 736, TP Rs 850 Volume 67,137 55,189 22% 65,050 3% Sales/EBIDTA/PAT are expected to grow by Sales 14,826 11,257 32% 13,906 7% 32%/41%/45% YoY respectively. EBITDA 4,514 3,199 41% 4,163 8% EBIDTA margins are expected to expand by 202bps on account of 22% YoY Volume growth and higher average EBITDA margin (%) bps bps realizations. PAT 2,460 1,695 45% 2,282 8% rch; N SSource: Company, Karvy Stock Broking 2

3 Rs mn Q4FY18E Q4FY17 Q3FY18 YoY (%) QoQ (%) Comments Subros HOLD, CMP Rs. 321, TP Rs 356 Sales 4,940 4, , Subros to benefit from Maruti s strong performance during the quarter. EBITDA Sales/EBIDTA/PAT is expected grow by 19.1%/30%/9.8% EBITDA margin (%) bps bps YoY respectively. PAT EBIDTA margins are expected to expand by 101bps to 12% Source: Company, Karvy Stock Broking Stock Returns (in %) Company Name Mkt Price 1W 1M 3M 6M 1Y 2Y 5Y Ashok Leyland Bajaj Auto Bharat Forge Hero MotoCorp 3, (0.5) Mahindra & Mahindra Mahindra CIE Automotive (3.4) (3.1) (11.5) (7.1) (3.8) Maruti Suzuki India 9,160.4 (1.2) 5.6 (1.6) Sandhar Technologies Subros (5.6) 5.1 (18.9) ,112.4 TVS Motor Company (7.8) (2.3) ,752.4 Source: ACE Equity, Karvy Stock Broking Auto Industry Segment-wise Volumes in Q4FY18 Automobile Segment Q4FY18 Q4FY17 % Change Q4FY18 Q4FY17 % Change Passenger Cars 555, , , , Utility Vehicles(UVs) 257, , ,537 32, Total Passenger Vehicles ( PVs ) 862, , , , Scooters 1,632,363 1,312, ,825 64, Motor cycles 3,252,513 2,567, , , Mopeds 226, , ,626 5, Total Two wheelers 5,111,529 4,095, , , Total Three Wheelers 197, , ,101 54, Total LCVs 164, , ,157 13, Total M&HCVs 117,482 98, ,600 12, Total Commercial Vehicles 282, , ,757 25, Grand Total of All Categories 6,453,170 5,221, ,063, , Source: SIAM 3

4 Earnings Revision, Outlook and Recommendations Maruti Suzuki (MSL): We broadly maintain our sales and PAT estimates for FY19E and FY20E for MSL. However we have reduced volume estimates in the range of 2-3% during the same period primarily on account of capacity constraint by the Company. Over FY18-20E, we expect, MSL to report 11.5% volume CAGR, 16.3% sales CAGR and 24.2% PAT CAGR. The Company is expected to report EPS of Rs403 and Rs552 in FY19E and FY20E respectively. At CMP Rs 9121, MSL stock is quoting at PE of 22.6xFY20 earnings. We upgrade the stock from HOLD to BUY rating with a price target of Rs10486 (PER of 26xFY20E earnings) Mahindra & Mahindra (M&M): We have increased our Tractor and Auto volume estimates by 7.3%/8.2% and 0.5%/0.6% in FY19E and FY20E respectively for M&M on account of better Monsoon expectations. In line with volume growth, we have also revised Sales and PAT estimates upwards by 5.0%/5.9% and 6.7%/7.9% for FY19 and FY20E respectively. Over FY18-20E, we expect, M&M to report 9.6% volume CAGR, 12.5% sales CAGR and 13% PAT CAGR. The Company is expected to report core EPS of Rs38.7 and Rs42.9 in FY19E and FY20E respectively. At CMP Rs798, M&M stock is quoting at PE of 11.2xFY20 earnings. We maintain our HOLD rating on the stock and upgrade our price target to Rs917 (PER of 14xFY20E core earnings). Hero Motocorp (HMCL): We broadly maintain our volume estimates for FY19E and FY20E for HMCL. However we have reduced PAT estimates by 1.9% and 2% in FY19E and FY20E respectively on account of likely higher spend on R&D and product promotional activities. Over FY18-20E, we expect, HMCL to report 10.4% volume CAGR, 14.6% sales CAGR and 15.8% PAT CAGR. The Company is expected to report EPS of Rs216 and Rs243 in FY19E and FY20E respectively. At CMP Rs 3738, HMCL stock is quoting at PE of 15.4xFY20 earnings. We maintain our BUY rating with a price target of Rs4850 (PER of 20xFY20E earnings). Bajaj Auto (BAL): We broadly maintain our volume and PAT estimates for FY19E and FY20E for BAL. Over FY18-20E, we expect, BAL to report 9.4% volume CAGR, 11.3% sales CAGR and 12.6% PAT CAGR. The Company is expected to report EPS of Rs160 and Rs176 in FY19E and FY20E respectively. At CMP Rs2862, BAL stock is quoting at PE of 16.3xFY20 earnings. We upgrade the stock from SELL to HOLD with a price target of Rs3125 (PER of 17xFY20E earnings). 4

5 TVS Motors (TVS): We have increased our volume estimates by 5.8% and 4.8% in FY19E and FY20E respectively for TVS on account better than expected response to the Company s recent models by the customers. In line with Volume growth we have also revised Sales and PAT estimates upwards by 4.2%/3.5% and 6.6%/1.9% for FY19 and FY20E respectively. Over FY18-20E, we expect, TVS to report 14.1% volume CAGR, 17.5% sales CAGR and 37.5% PAT CAGR. The Company is expected to report EPS of Rs22 and Rs29.5 in FY19E and FY20E respectively. At CMP Rs673, TVS stock is quoting at PE of 22.8xFY20 earnings. We maintain our BUY rating on the stock however we cut the target price to Rs884 valuing the company at a PER of 30xFY20E earnings against previous PER of 33xFY20E to factor in increasing competitive intensity. Ashok Leyland (ASL) We have increased our volume estimates by 13.3% and 9.5% in FY19E and FY20E respectively for ASL on account of better than expected demand for CV industry in India. In line with volume growth, we have also revised Sales and PAT estimates upwards by 12.1%/9.4% and 10.2%/7.4% for FY19E and FY20E respectively. Over FY18-20E, we expect, ASL to report 14.1% volume CAGR, 17.1% sales CAGR and 26.6% PAT CAGR. The Company is expected to report EPS of Rs7 and Rs8.5 in FY19E and FY20E respectively. At CMP Rs149, ASL stock is quoting at PE of 17.6xFY20 earnings. We maintain our BUY rating on the stock however and upgrade our price target to Rs177 (PER of 20xFY20E earnings). Bharat Forge (BFL) We maintain our volume, sales and PAT estimates for FY19E and FY20E for BFL. Over FY18-20E, we expect, BFL to report 12.1% volume CAGR, 14.2% sales CAGR and 18.6% PAT CAGR. The Company is expected to report EPS of Rs22 and Rs25.8 in FY19E and FY20E respectively. At CMP Rs736, BFL stock is quoting at PE of 28.6xFY20 earnings. We upgrade the stock from SELL to BUY with a price target of Rs850 valuing the company at a PER of 33xFY20E earnings against previous PER of 30xFY20E. This is on account of significant improvement in the CV business outlook in the domestic market. Subros (Subros) We maintain our sales and PAT estimates for FY19E and FY20E for Subros. Over FY18-20E, we expect, Subros to report 15.6% sales CAGR and 41.6% PAT CAGR. The Company is expected to report EPS of Rs14.2 and Rs19.8 in FY19E and FY20E respectively. At CMP Rs328, Subros stock is quoting at PE of 16.6xFY20 earnings. We downgrade the stock from BUY to HOLD with a price target of Rs356 (PER of 18xFY20E earnings). 5

6 Valuation Summary Company Name Rating CMP TP Upside Sales (Rs mn) EBITDA (Rs mn) EPS (Rs) PE (x) EV/EBITDA (x) (Rs) (Rs) (%) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Maruti Suzuki BUY , ,893 1,075, , , , M&M HOLD , , ,674 66,902 77,917 86, Hero Motocorp BUY , , ,835 51,092 60,400 68, Bajaj Auto HOLD , , ,070 48,244 55,808 61, TVS Motor BUY , , ,542 12,112 16,845 21, Ashok Leyland BUY , , ,423 27,817 35,347 41, Ancillary Bharat Forge BUY ,319 61,889 69,544 15,705 18,291 20, Subros HOLD ,547 21,545 24,786 2,055 2,495 2, Source: Company, Karvy Stock Broking;

7 Sales (Rs Mn) Old New % change FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Maruti Suzuki 805, ,746 1,069, , ,893 1,075, % 0.0% 0.5% M&M 460, , , , , , % 5.0% 5.9% Hero Motocorp 313, , , , , , % 2.8% 2.8% Bajaj Auto 243, , , , , , % 3.1% 2.1% TVS Motor 147, , , , , , % 4.2% 3.5% Ashok Leyland 247, , , , , , % 12.1% 9.4% Bharat Forge 53,319 61,889 69,544 53,319 61,889 69, % 0.0% 0.0% Subros 18,547 21,545 24,786 18,547 21,545 24, % 0.0% 0.0% EBIDTA (Rs Mn) Old New % change FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Maruti Suzuki 120, , , , , , % 3.8% 4.0% M&M 63,075 72,873 80,521 66,902 77,917 86, % 6.9% 7.8% Hero Motocorp 51,365 60,719 68,869 51,092 60,400 68, % -0.5% -0.5% Bajaj Auto 45,650 54,552 61,147 48,244 55,808 61, % 2.3% 1.3% TVS Motor 147, , , , , , % 4.2% 3.5% Ashok Leyland 26,374 31,364 37,687 27,817 35,347 41, % 12.7% 10.3% Bharat Forge 15,705 18,291 20,623 15,705 18,291 20, % 0.0% 0.0% Subros 2,055 2,495 2,994 2,055 2,495 2, % 0.0% 0.0%

8 EBIDTA Margin (%) Old New bps change FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Maruti Suzuki M&M Hero Motocorp (54) (55) (55) Bajaj Auto (16) (18) TVS Motor (3) (33) Ashok Leyland (10) 6 9 Bharat Forge Subros PAT Old New % change FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Maruti Suzuki 82, , ,795 79, , , % 0.0% 0.0% M&M 38,806 44,811 48,893 41,336 47,792 52, % 6.7% 7.9% Hero Motocorp 36,770 44,080 49,396 36,074 43,230 48, % -1.9% -2.0% Bajaj Auto 38,037 45,660 50,767 40,114 46,439 50, % 1.7% 0.2% TVS Motor 6,417 9,786 13,740 7,403 10,429 13, % 6.6% 1.9% Ashok Leyland 14,741 18,084 22,484 15,069 19,921 24, % 10.2% 7.4% Bharat Forge 8,530 10,234 11,991 8,530 10,234 11, % 0.0% 0.0% Subros , , % 0.0% 0.0%

9 Volumes Old New % change FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Maruti Suzuki 1,815,094 2,057,941 2,273,761 1,779,574 1,993,450 2,212, % -3.1% -2.7% M&M 301, , , , , , % 7.3% 8.2% Hero Motocorp 528, , , , , , % 0.5% 0.5% Bajaj Auto 7,481,515 8,408,359 9,329,627 7,587,130 8,413,359 9,252, % 0.1% -0.8% TVS Motor 3,979,338 4,394,704 4,817,711 3,998,725 4,410,955 4,783, % 0.4% -0.7% Ashok Leyland 3,379,377 3,816,586 4,310,982 3,469,343 4,036,612 4,517, % 5.8% 4.8% Bharat Forge** 245, , , , , ,863 0% 0% 0% Subros NA NA NA NA NA NA NA NA NA, **Bharat Forge Vol. in Tonnage

10 Stock Ratings Absolute Returns Buy : > 15% Hold : 5-15% Sell : < 5% Analyst certification For further enquiries please contact: research@karvy.com Tel: Disclosures Appendix The following analyst(s), Mahesh Bendre, who is (are) primarily responsible for this report and whose name(s) is/are mentioned therein, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer Karvy Stock Broking Limited [KSBL]is registered as a research analyst with SEBI (Registration No INH ). KSBL is also a SEBI registered Stock Broker, Depository Participant, Portfolio Manager and also distributes financial products. The subsidiaries and group companies including associates of KSBL provide services as Registrars and Share Transfer Agents, Commodity Broker, Currency and forex broker, merchant banker and underwriter, Investment Advisory services, insurance repository services, financial consultancy and advisory services, realty services, data management, data analytics, market research, solar power, film distribution and production, profiling and related services. Therefore associates of KSBL are likely to have business relations with most of the companies whose securities are traded on the exchange platform. The information and views presented in this report are prepared by Karvy Stock Broking Limited and are subject to change without any notice. This report is based on information obtained from public sources, the respective corporate under coverage and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of KSBL. While we would endeavor to update the information herein on a reasonable basis, KSBL is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent KSBL from doing so. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. KSBL will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither KSBL nor any associate companies of KSBL accepts any liability arising from the use of information and views mentioned in this report. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Past performance is not necessarily a guide to future performance. Forward-looking statements are not predictions and may be subject to change without notice. Actual results may differ materially from those set forth in projections. 10

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