Bajaj Auto. Outperformer. Time for a turnaround?? May 22, A good set of numbers adjusted for one-offs

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1 May 22, 2015 Outperformer Bajaj Auto Industry: Auto and Auto Components Industry View: Positive l Result Update Time for a turnaround?? A good set of numbers adjusted for one-offs Bajaj Auto s Q4 FY15 numbers came above our expectations on the back of strong realizations despite a weak volume growth. The topline dropped by just 4% yoy and by 16% qoq to Rs46.2 bn. This was much better than the volume performance at 16.4% yoy and 20.5% qoq fall. The company sold 7.82 lakh units in Q4 in a weak domestic market environment. Net realizations growth lifted the overall performance as they grew by 5.4% qoq and 15% yoy on the back of good exports performance during the quarter, which reached 46% of total volumes and a better product mix in the form of new Pulsar launches which took place in Q4. Though rupee depreciation benefits reduced in Q4, other expenses as a % of sales (excluding the forex impact and Akurdi plant fire expenses of Rs ~780 mn) reduced to 8.3% of sales which was a surprise post Platina CT 100 and Pulsar launches in this quarter. Also in this quarter, the company paid gratuity close to Rs400 mn which when added back considering it as one-off, margins were at par with last quarter. The adjusted EBITDA margins came at 20.2% higher than our expectations of 18.5%. Depreciation expenses remained steady at Rs 638 mn. Tax rate came at 27.9% as the production at the Pantnagar tax haven plant increased on the back of the CT 100 bike launch as this plant produces Platina products. Adjusted PAT came at Rs7.39 bn a growth of de-growth of 5% qoq and 7% yoy. Including the exceptional item, PAT would have come at Rs6.21 bn. New strategy in the domestic markets started to tick in Bajaj has been on a weak wicket in domestic motorcycle business for the last couple of years as it has been a victim of self cannibalization resulting from its two pronged strategy of concentrating only on Discover and Pulsar. Off late with Discover products failing to make a mark in the fading 2W industry, the company s new strategy of shifting its focus to low end motorcycles like Platina and continuing its emphasis on the higher end of motorcycles like Pulsar seem to do good for Bajaj. The company launched aggressively priced Platina CT 100 and couple of new Pulsar models in Q4, thus differentiating their portfolio. This has panned out well for them as the last couple of months its showing in their numbers and improvement in market share which had virtually bottomed in Q3 and start of Q4. Management mentioned that they are currently selling 35,000 CT 100 additional to 50,000 Platina they have been selling already including exports. This will be added to 2,50,000 units of Pular higher than they were selling earlier. With this guidance, management expects the company to grow much better than the two wheeler industry growth rate of 3-5% and expand their market share from current 15% to 25% by the year end. This target looks a bit too ambitious to us but the momentum seems clearly with Bajaj Auto viewing the volume numbers of last couple of months. Additionally the company has lesser presence in the rural markets which exposes it lesser to the unseasonal rains and weakness in the rural economy. Hence, we now expect domestic motorcycle business to grow at 7%/10% in FY16E/17E better than the industry. Stock Data Current Market Price Rs) 2,269 Target Price Rs) 2,566 Potential upside (%) 13 Reuters Bloomberg What s Changed BAJA.BO BJAUT IN 12 month PriceTarget (Rs) From 2,198 to 2,566 FY2016 EPS (Rs) From 126 to 131 FY2017 EPS (Rs) From 147 to 155 Key Data Market Cap (Rs bn) Week Range (Rs) 2,690 / 1,914 Avg Daily Trading Value last 6 mts(rs.mn) 1,078 Promoters (%) FII Holding (%) DII Holding (%) 8.65 Public & Others Holding (%) Fiscal YE YE Mar FY14 FY15P FY16E FY17E Revenues (Rs.bn) EBITDA (%) PAT (%) EPS (Rs) EPS growth (%) 6.5% -2.7% 20.3% 18.1% P/E (x) P/B(x) EV/EBITDA (x) ROE(%) 33.7% 29.5% 30.3% 30.6% Dividend yield (%) 2.3% 2.2% 2.6% 3.1% Relative Price Performance May-14 Sep-14 Jan-15 May-15 Bajaj Auto Ltd. One Year Indexed S&P Bse Sensex (%) 1 Month 3 Months 12 Months Absolute BSE Relative Ashwin Patil ashwin_patil@lkpsec.com Disclaimer: The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and is for general guidance only. While every effort is made to ensure the accuracy and completeness of information contained, the company makes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or cause of action. LKP Securities Ltd., and affiliates, including the analyst who have issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage o compensation or act as advisor or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation and related information and opinions. LKP Securities Ltd., and affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.

2 Financial Highlights Bajaj Auto Domestic 3W to see a subdued growth while exports may become buoyant 3W business of Bajaj in FY15 has gone up by a mammoth 25% v/s industry growth of 11%. The growth has mainly come on the back of permits getting opened here and diesel based 3W getting a very good response. In the export markets, the growth has slightly come down at 9% as the issues in Sri Lanka still remained. Even Nigeria and Egypt showed a lackluster performance. In Q4, with Egypt getting back to normalcy and other markets like Africa, Middle East, Bangladesh and Nepal performing very well, 3W exports got some good support off late. Estimated launch of RE60 (with starting capacities of 60,000 units p.a.) shortly may also open new revenue avenues. However, we expect that post the impact of permits getting opened, and no visibility of any more permits getting opened in FY16 we may see a lull in domestic 3W in FY16. Management expects domestic 3W growth at 5% in FY 16. We have projected total 3W sales to grow at 9%/11% for FY16E/17E respectively. Exports business gains visibility Exports contributed 46% of Bajaj s FY16 volumes while it was 48% in Q4. The momentum in the exports was strong in FY 15, but could have been stronger had the main geographies like Nigeria, Egypt and Sri Lanka delivered well. Post the elections in Nigeria in April, the momentum seems to have come back to Bajaj with the company having sold a good 35,000 units to Nigeria in April and the management has given an indication that it will increase beyond 45,000 in June. Same ways in Egypt the letter of credits have opened thick and fast and demand is outpacing supply there now. In countries other than Nigeria in Africa, Bajaj sold 25,000 units in April which is looking northwards on a month on month basis. Sri Lanka is yet to re-start its business following which Bajaj will have to ship 1,10,000 units of pending orders to it. With momentum seen in the major export countries for Bajaj, we expect the company to post an overall growth of 10%/12% in FY16E/17E (excluding the Sri Lankan backlog). (Rs mn) Q4 FY15 Q3 FY15 % qoq Q4 FY14 % yoy Net sales 46, , % 48, % Other op. income 1,156 1, % 1, % Total income 47,393 56, % 49, % RM cost 31,976 38, % 34, % Employee cost 2,186 2, % 1, % Other expenses 3,674 4, % 3, % EBITDA 9,558 11, % 9, % EBITDA Margins % (10 bps) bps Other income 1, % 1, % Depreciation % % Interest 63 1 N/A 2 N/A PBT 10,400 11, % 11, % Tax 3,004 3, % 3, % Adj PAT 7,396 7, % 7, % Adj PAT Margins% bps 16.2 (60 bps) Exceptional items 1, N/A (360) N/A Reported PAT 6,216 8, % 7, % Margins may remain close to 20% despite the higher sales of low margin Platina EBITDA margins witnessed a steady margin performance at 20.2% adjusted for one-offs, as exports and 3W saw a strong growth. The company did not get high benefits from the currency movement as rupee v/s dollar remained more or less stable. Going forward, we expect rupee to continue to remain stable with Indian economy improving, thus not providing significant currency benefits to Bajaj.

3 However, on the raw material side, the management mentioned that they procure it on a quarterly contract basis. The company mentioned that they didn t get the RM softness benefits in Q4 but are expecting to flow in Q1. 3W sales may taper off in the absence of any more permits hereon. Higher Platina sales may lead to some margin compression, but its production from the tax haven plant at Pantnagar along with the operating leverage benefits coming from higher sales of CT 100 will offset the margin pressure. Export markets are also looking up now with improvement coming in Nigeria and Egypt. This will lead to further margin expansion. We expect 19.7%/20.1% EBITDA margins in FY16E/17E. Outlook and valuation With the new launches of Platina CT 100 and couple of Pulsars, the company seems to be having a re-look at their strategy in a serious manner. The initial response for these models has been good and we expect with the kind of aggressive pricing and the better mileage associated with CT 100 it will be a success for them. Lesser exposure to rural markets is virtually insulating the company from the risks existing there currently. Market share gains are on the cards as we expect Bajaj to outperform the otherwise lackluster 2W industry in FY 16. With exports markets improving mainly in Nigeria and Egypt, we believe the exports story is back on track. If Sri lanka situation improves it will be an icing on the cake. Though there will be a lull in 3W markets in absence of permits and high base of last year, 3W exports will provide the required fillip. On the margins front, we believe the company has the tailwinds of RM price softening to be felt in Q1 and in the ensuing quarters. Higher sales of low margin Platina may impact margins but will get offset by higher exports, Pantnagar plant production ramp up on higher CT 100 demand and operating leverage. 52% of Rs 45bn of FMPs getting matured in Q1 will add to other income and lift up the bottomline. Somewhat reduction in tax rate on account of higher production from tax haven PN plant may also augur well for the bottomline. We therefore upgrade the stock from Neutral to Outperformer with a target price of Rs 2,566, valued at 16x FY 17E earnings. Per unit parameters Q4 FY15 Q3 FY15 Q2 FY15 Q1 FY15 Q4 FY14 Q3 FY14 Q2 FY14 Q1 FY14 Gross Realisation per Unit (Rs) 62,486 58,237 57,355 53,972 53,859 53,282 55,488 51,652 Net Realisation per Unit (Rs) 59,076 56,068 55,200 51,935 51,535 50,567 52,651 49,105 Total Cost per unit (Rs) 48,341 45,801 45,817 43,779 42,369 41,171 42,056 40,891 Material Cost per unit (Rs) 40,854 39,227 38,936 37,233 36,709 35,889 36,081 34,788 Staff Cost per unit (Rs) 2,793 2,173 1,992 2,171 1,868 1,860 1,908 1,875 Other Expn per unit (Rs) 4,925 4,538 5,040 4,503 3,933 3,621 4,212 4,413 EBITDA per unit (Rs) 12,212 11,660 10,674 9,360 10,338 10,468 11,775 9,259 PAT per unit (Rs) 9,450 7,946 8,822 7,486 8,534 8,147 8,708 7,533

4 Financials Income statement YE Mar (Rs.mn) FY14 FY15 FY16E FY17E Total Revenues 201, , , ,604 Raw Material Cost 138, , , ,859 Employee Cost 7,266 8,973 9,846 11,579 Other Exp 14,405 17,484 21,423 25,031 EBITDA 41,057 41,165 48,496 58,135 EBITDA Margin(%) Other income Depreciation 1,796 2,674 2,806 2,986 Interest PBT 46,321 44,251 53,420 63,079 PBT Margin(%) Exceptional items Tax 13,901 12,711 15,492 18,293 APAT 32,420 31,540 37,928 44,786 APAT Margins (%) PAT 32,420 28,137 37,928 44,786 PAT Margin (%) Key Ratios YE Mar FY 14 FY15P FY16E FY17E Per Share Data (Rs) Adj. EPS CEPS BVPS DPS Growth Ratios(%) Total revenues 0.8% 7.3% 13.9% 17.2% EBITDA 12.9% 0.3% 17.8% 19.9% PAT 6.5% -2.7% 20.3% 18.1% EPS Growth 6.5% -2.7% 20.3% 18.1% Valuation Ratios (x) PE P/CEPS P/BV EV/Sales EV/EBITDA Operating Ratios (Days) Inventory days Recievable Days Payables day Net Debt/Equity (x) (0.01) Profitability Ratios (%) ROE 33.7% 29.5% 30.3% 30.6% Dividend payout 40.0% 45.0% 45.0% 45.0% Dividend yield 2.3% 2.2% 2.6% 3.1% Source: Company, Balance sheet YE Mar (Rs.mn) FY14 FY15P FY16E FY17E EQUITY AND LIABILITIES Shareholder's funds Share capital 2,894 2,894 2,894 2,894 Reserves and surplus 93, , , ,565 Total networth 96, , , ,459 Non current liabilities Long term borrowings and provisions 2,662 2,518 2,268 2,018 Deferred tax liabilities 1,432 1,416 1,556 1,696 Current liabilities Current liabilities and provisions 39,641 37,093 46,056 53,386 Other current liabilities 7,661 7,675 10,527 13,153 Total equity and liabilities 147, , , ,712 ASSETS Net block 20,060 20,386 20,580 20,594 Capital work in progress 326 1,200 1,400 1,600 Intangible assets 1,115 1,415 1,615 1,815 Non current investments 62,599 33,528 43,528 53,528 Long term loans and advances 7,199 5,111 3,611 2,111 Other non current assets Total non current assets 91,309 60,361 70,744 79,658 Current assets Current investments 22,897 58,006 70,006 74,006 Inventories 6,397 8,142 10,527 13,927 Trade receivables 7,962 7,170 7,237 9,285 Cash and cash bank 4,954 5,862 7,535 15,853 Short term loans and advances 9,785 12,616 15,133 18,569 Other current assets 4,170 3,468 4,277 5,416 Total current assets 56,165 95, , ,055 Total Assets 147, , , ,712 Cash Flow YE Mar (Rs mn) FY14P FY15P FY16E FY17E PBT 46,321 40,848 53,420 63,079 Depreciation 1,796 2,674 2,806 2,986 Interest Chng in working capital 4,319 (5,616) 6,037 (66) Tax paid (13,153) (12,711) (15,492) (18,293) Other operating activities Cash flow from operations (a) 35,443 34,109 46,911 47,087 Capital expenditure (236) (23,439) (30,347) (22,347) Chng in investments (21,166) (671) 1, Other investing activities Cash flow from investing (b) (21,402) (24,110) (28,915) (21,856) Free cash flow (a+b) 14,041 9,999 17,996 25,231 Inc/dec in borrowings Dividend paid (incl. tax) (13,015) (14,193) (17,068) (20,154) Other financing activities Cash flow from financing (c) (14,682) (12,683) (14,451) (16,913) Net chng in cash (a+b+c) (641) (2,684) 3,545 8,318 Closing cash & cash equivalents 6,674 3,990 7,535 15,853

5 Team LKP Pratik Doshi Director S. Ranganathan Head of Research Ashwin Patil Research Analyst Chirag Dhaifule Research Analyst Hardik Mehta Sales Varsha Jhaveri Sales Hitesh Doshi Sales Bharat Shah Dealing Kaushik Doshi Dealing LKP Securites Ltd, 13th Floor, Raheja Center, Free Press Road, Nariman Point, Mumbai Tel Fax