INDUSTRY AUTOS CMP (as on 23 Oct 2015) Rs 2,514 Target Price Rs 2,720 Nifty 8,295 Sensex 27,471 KEY STOCK DATA Bloomberg/Reuters BJAUT IN/BAJA.BO No. of Shares (mn) 289 MCap (Rs bn) / ($ mn) 728 / 11,216 6m avg traded value (Rs mn) 948 STOCK PERFORMANCE (%) 52 Week high / low Rs 2,695 / 1,913 3M 6M 12M Absolute (%) 1.1 26.3 (0.6) Relative (%) 4.7 27.9 (3.1) SHAREHOLDING PATTERN (%) Promoters 49.29 FIs & Local MFs 8.13 FIIs 17.76 Public & Others 24.82 Source : BSE Navin Matta navin.matta@hdfcsec.com +91-22-6171-7322 Sneha Prashant sneha.prashant@hdfcsec.com +91-22-6171-7336 Decent quarter, but lacking catalysts Bajaj Auto s APAT at Rs 9.3bn (+6.5% YoY, -8.1% QoQ) surpassed expectations. Strong domestic Net ASP and muted cost trends led to 130bps QoQ expansion in EBITDA margins to 21.6%. Starting Sept-15, the company hiked prices between Rs 500 and Rs 2,000/vehicle for domestic 2Ws and Rs 2,000/vehicle for 3Ws. The management ssaid it cut export prices from Oct-15, as it is reinvesting part of its forex gains to push up volumes in price sensitive markets. Although positive on Bajaj Auto s exports strategy, we are skeptical about its domestic 2W business. Inability to create a sustainable presence in the executive segment and risk of shift towards leisure bikes in the premium segment are the key challenges. We value the company at 16x core EPS + 1x cash + stake in KTM business to arrive at our TP of Rs 2,720. The stock would trade at 17.2x average of FY17/18E EPS. Maintain NEUTRAL. RESULTS REVIEW 23 OCT 2015 Bajaj Auto Key highlights NEUTRAL Domestic market growth outlook: According to the company, domestic motorcycle demand remains muted and Navratra sales are 7-8% lower compared with last year s. Rural demand is also weak with no signs of change in the near future. Market share trends: The success of CT100 drove Bajaj Auto s domestic motorcycle share by ~300bps to 18% in. This was maintained even in 2Q. The management, however, hopes to push it up to ~22-23% on exit basis in FY16 following ramp-up of its new Pulsar vehicles, incremental volumes from the new Avenger bikes and introduction of a new brand in the midsegment in 4QFY16. Exports growth to accelerate in 2HFY16: Despite macro concerns in several key export regions, Bajaj Auto has maintained 2mn volume guidance for FY16 (implied +18% YoY in 2HFY16). Volume growth from recently entered markets is offsetting any demand weakness in existing markets. Financial Summary (Rs mn) YoY (%) QoQ (%) FY15 FY16E FY17E FY18E Net Sales 60,978 59,631 2.3 56,135 8.6 216,120 237,104 264,875 297,080 EBITDA (adj.) 13,171 11,942 10.3 11,397 15.6 41,667 49,464 55,620 62,184 APAT 9,331 8,763 6.5 10,149 (8.1) 32,042 38,263 43,206 48,367 Diluted EPS (Rs) 32.2 30.3 6.5 35.1 (8.1) 110.7 132.2 149.3 167.1 P/E (x) 22.7 19.0 16.8 15.0 EV / EBITDA (x) 16.0 13.1 11.3 9.8 RoE (%) 27.7 33.1 32.3 31.5 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
BAJAJ AUTO : RESULTS REVIEW Topline growth was ahead of expectations as domestic realisation (ex-spares) saw 8% QoQ rise on the back of higher 3W mix and richer 2W model mix Despite 2% QoQ improvement in USD/INR rates, export ASP declined by 1.5% QoQ because of lower 3W mix Gross margin improved by 70bps (vs. our estimate of 100bps) partially on better product mix and balance from lower commodity prices EBITDA margin rose to 21.6% (+130bps QoQ) as staff/other expenses saw muted growth on QoQ basis Quarterly Financials Snapshot: Standalone (Rs mn) YoY (%) QoQ (%) Volumes (in units) 10,56,596 10,55,582 0.1 10,13,029 4.3 Net ASP (Rs/veh) 57,712 56,491 2.2 55,413 4.1 Net Sales 60,978 59,631 2.3 56,135 8.6 Material Expenses 40,551 41,101 (1.3) 37,728 7.5 Employee Expenses 2,417 2,102 15.0 2,437 (0.8) Other Operating Expenses 4,839 4,486 7.9 4,574 5.8 EBITDA 13,171 11,942 10.3 11,397 15.6 Interest Cost 3 1 440.0 0 3,275.0 Depreciation 780 686 13.7 784 (0.5) Other Income 1,526 1,136 34.4 4,368 (65.1) PBT 13,915 12,391 12.3 14,980 (7.1) Tax 4,584 3,628 26.3 4,832 (5.1) APAT 9,331 8,763 6.5 10,149 (8.1) E/o (adj for tax) - (2,854) - - - RPAT 9,331 5,909 57.9 10,149 (8.1) Margin Analysis: Standalone YoY (%) QoQ (%) Material Expenses % Net Sales 66.5 68.9 (242.4) 67.2 (70.8) Employee Expenses % Net Sales 4.0 3.5 43.9 4.3 (37.8) Other Expenses % Net Sales 7.9 7.5 41 8.1 (21.2) EBITDA Margin (%) 21.6 20.0 157 20.3 129.8 Tax Rate (%) 32.9 29.3 366 32.3 69.1 APAT Margin (%) 15.3 14.7 61 18.1 (277.8) Page 2
BAJAJ AUTO : RESULTS REVIEW We expect Bajaj s domestic 2W motorcycle sales to see moderate growth on a low base (after three years of continuous decline) Domestic 3W growth outlook aided by new permits being issued in a few states over the next few quarters Expect exports to witness 10% CAGR over FY15-18E as the company continues to improve penetration in existing markets, along with seeding new markets We expect Net ASP growth trends to remain muted given the largely insipid domestic product mix and Bajaj passing on part of its FX benefits in export markets Volume Assumptions (in units) FY14 FY15 FY16E FY17E FY18E Domestic Sales 2,286,155 2,005,123 2,158,933 2,347,750 2,520,474 % YoY -15.0% -12.3% 7.7% 8.7% 7.4% 2W 2,099,242 1,770,778 1,912,871 2,082,002 2,233,467 % YoY -14.8% -15.6% 8.0% 8.8% 7.3% 3W 186,912 234,345 246,062 265,747 287,007 % YoY -17.3% 25.4% 5.0% 8.0% 8.0% Exports Sales 1,583,935 1,806,078 1,970,607 2,164,365 2,397,877 % YoY 2.4% 14.0% 9.1% 9.8% 10.8% 2W 1,323,173 1,521,306 1,640,272 1,804,299 2,005,406 % YoY 2.3% 15.0% 7.8% 10.0% 11.1% 3W 260,762 284,772 330,336 360,066 392,472 % YoY 2.7% 9.2% 16.0% 9.0% 9.0% (in units) FY14 FY15 FY16E FY17E FY18E 2W 3,422,415 3,292,084 3,553,142 3,886,301 4,238,872 % YoY -8.9% -3.8% 7.9% 9.4% 9.1% 3W 447,674 519,117 576,398 625,813 679,479 % YoY -6.7% 16.0% 11.0% 8.6% 8.6% Total Sales 3,870,090 3,811,201 4,129,540 4,512,114 4,918,351 % YoY -8.7% -1.5% 8.4% 9.3% 9.0% Source: SIAM, HDFC sec Inst Research Net Realisations (Rs/vehicle) FY14 FY15 FY16E FY17E FY18E Domestic 42,064 45,355 44,168 44,545 53,958 % YoY 2.1% 7.8% -2.6% 0.9% 21.1% Exports 51,765 54,028 56,161 57,733 59,004 % YoY 19.3% 4.4% 3.9% 2.8% 2.2% Net ASP (incl spares) 50,949 55,373 56,162 57,414 59,096 % YoY 10.8% 8.7% 1.4% 2.2% 2.9% Page 3
BAJAJ AUTO : RESULTS REVIEW Our 1-2% EPS cut for FY16/FY17E reflects lower Net ASP assumptions on account of lower export ASP Change In Estimates New Old % chg FY16E FY17E FY16E FY17E FY16E FY17E Volumes (in mn) 4.13 4.51 4.13 4.51 0.1 0.1 Net sales 237,104 264,875 241,169 270,325 (1.7) (2.0) EBITDA 49,464 55,620 50,484 56,377 (2.0) (1.3) EBITDA margin 20.9 21.0 20.9 20.9 APAT 38,263 43,206 38,977 43,736 (1.8) (1.2) Adj EPS 132 149 135 151 (1.8) (1.2) Source: HDFC sec Inst Research Peer Valuations CMP Mcap Adj EPS (Rs/sh) P/E (x) EV/EBITDA (x) RoE (%) TP Reco (Rs/sh) (Rs bn) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Ashok Leyland 95 270 94 NEU 0.8 3.7 5.2 115.4 25.3 18.1 28.4 13.3 10.2 4.9 19.7 24.7 Bajaj Auto 2,514 728 2,720 NEU 110.7 132.2 149.3 22.7 19.0 16.8 15.4 12.6 10.9 27.7 33.1 32.3 Eicher Motors 18,170 492 20,470 NEU 227.0 384.3 618.9 80.0 47.3 29.4 43.0 25.8 15.8 26.9 36.0 42.8 Hero Motocorp 2,595 518 2,836 BUY 126.2 160.8 177.6 20.6 16.1 14.6 14.0 11.3 10.0 36.2 40.8 38.0 M&M 1,248 737 1,400 NEU 47.6 64.9 75.9 17.5 12.9 11.0 10.5 8.1 6.8 16.6 19.4 19.7 Maruti Suzuki 4,381 1,324 4,802 BUY 122.9 188.0 240.1 35.7 23.3 18.3 19.2 13.4 10.6 16.6 22.1 24.0 Tata Motors 383 1,301 445 BUY 45.0 39.2 53.3 8.5 9.8 7.2 4.4 4.0 3.3 23.8 19.9 21.0 SML Isuzu 1,333 19 1,181 NEU 25.5 53.6 65.5 52.2 24.9 20.3 26.8 15.5 12.7 14.1 23.6 24.6 Source: HDFC sec Inst Research Page 4
4QFY14 4QFY14 4QFY14 4QFY14 BAJAJ AUTO : RESULTS REVIEW Volumes Remain Flattish Dom ('000) Exports ('000) % YoY (RHS) 1,200 15.0% 1,000 10.0% 800 5.0% 0.0% 600-5.0% 400-10.0% 200-15.0% - -20.0% NET ASP YOY growth moderating due to weaker product mix 62,000 60,000 58,000 56,000 54,000 52,000 50,000 48,000 Net ASP % YoY (RHS) 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Gross Margins Continue To Expand Gross profit/vehicle (Rs) Gross margin (RHS) 20,000 34.0% 16,000 33.0% 32.0% 12,000 31.0% 8,000 30.0% 4,000 29.0% - 28.0% EBITDA Margin Expands By 130bps QoQ 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - EBITDA/vehicle (Rs) EBITDA margin (RHS) 22.0% 21.0% 20.0% 19.0% 18.0% 17.0% Page 5
4QFY14 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 4QFY14 4QFY14 BAJAJ AUTO : RESULTS REVIEW Domestic 2W Mix Improves Economy Executive Premium 100% 80% 31% 36% 40% 40% 43% 35% 40% 60% 13% 45% 33% 36% 34% 21% 40% 14% 52% 20% 46% 31% 36% 24% 25% 26% 0% Exports of 2W Improves With Higher Pulsar Volumes Boxer Pulsar CT D-125cc Others 100% 13% 12% 11% 11% 18% 13% 11% 7% 9% 17% 11% 6% 6% 80% 8% 11% 10% 10% 12% 12% 10% 22% 60% 16% 15% 16% 12% 16% 16% 40% 20% 20% 53% 53% 47% 52% 53% 54% 38% 0% Source: SIAM, HDFC sec Inst Research Source: SIAM, HDFC sec Inst Research Overall Domestic 2W Market Share Stable At ~18% >75-110 cc >110-125 cc >125-150 cc >150 cc- 200cc >200 cc 60% 50% 40% 30% 20% 10% Bajaj Auto One-year forward Core P/E chart Core P/E Avg Core P/E +1 SD -1 SD 22 20 18 16 14 0% 12 Source: SIAM, HDFC sec Inst Research Source: Bloomberg, HDFC sec Inst Research Page 6
BAJAJ AUTO : RESULTS REVIEW Income Statement Standalone (Rs mn) FY14 FY15E FY16E FY17E FY18E Net Sales 201,495 216,120 237,104 264,875 297,080 Growth (%) 0.8 7.3 9.7 11.7 12.2 Material Expenses 138,685 148,613 158,284 177,420 199,976 Employee Expenses 7,266 8,973 10,070 11,261 11,868 Other Operating Expenses 13,718 16,866 19,285 20,573 23,052 EBIDTA 41,825 41,667 49,464 55,620 62,184 EBIDTA (%) 20.8 19.3 20.9 21.0 20.9 EBIDTA Growth (%) 15.0 (0.4) 18.7 12.4 11.8 Other Income 7,064 5,824 8,403 9,525 10,562 Depreciation 1,796 2,674 3,186 3,398 3,620 EBIT 47,093 44,817 54,682 61,748 69,126 Interest 5 65 20 25 30 PBT 47,088 44,753 54,662 61,723 69,096 Tax 13,915 12,711 16,398 18,517 20,729 APAT 33,174 32,042 38,263 43,206 48,367 APAT Growth (%) 8.9 (3.4) 19.4 12.9 11.9 EO items (net of tax) (768) (3,905) - - - RPAT 32,406 28,137 38,263 43,206 48,367 Adj EPS 114.6 110.7 132.2 149.3 167.1 Adj EPS Growth (%) 8.9 (3.4) 19.4 12.9 11.9 Balance Sheet Standalone (Rs mn) FY14 FY15E FY16E FY17E FY18E SOURCES OF FUNDS Share Capital 2,894 2,894 2,894 2,894 2,894 Reserves 93,187 104,028 121,456 140,355 160,943 Total Shareholders Funds 96,080 106,922 124,350 143,249 163,837 Long-term Debt 592 1,124 1,124 1,124 1,124 Short-term Debt - - - - - Total Debt 592 1,124 1,124 1,124 1,124 Deferred Taxes 1,432 1,416 1,416 1,416 1,416 Long-term Provisions & Others - - - - - TOTAL SOURCES OF FUNDS 98,104 109,461 126,889 145,788 166,376 APPLICATION OF FUNDS Net Block 20,060 19,172 22,469 22,571 23,451 CWIP 2,830 3,483 500 500 500 Investments, LT Loans & Advs 85,496 91,533 110,533 129,533 148,533 Inventories 6,397 8,142 9,094 10,160 11,395 Debtors 7,962 7,170 7,795 8,708 9,767 Cash & Equivalents 4,955 5,862 5,675 6,506 8,631 ST Loans & Advances, Others 19,775 20,262 21,952 24,734 27,750 Total Current Assets 39,089 41,435 44,516 50,108 57,543 Creditors 21,114 17,998 19,535 21,785 24,455 Other Current Liabilities & Provns 28,258 28,165 31,594 35,139 39,196 Total Current Liabilities 49,372 46,162 51,129 56,925 63,651 Net Current Assets (10,283) (4,727) (6,613) (6,816) (6,108) Misc Expenses & Others - - - - - TOTAL APPLICATION OF FUNDS 98,104 109,461 126,889 145,788 166,376 Page 7
BAJAJ AUTO : RESULTS REVIEW Cash Flow Standalone (Rs mn) FY14 FY15E FY16E FY17E FY18E Reported PAT 33,174 32,042 38,263 43,206 48,367 Non-operating & EO items 814 (3,855) 0 (0) (0) PAT from Operations 33,988 28,187 38,263 43,206 48,367 Interest expenses 5 65 20 25 30 Depreciation 1,796 2,674 3,186 3,398 3,620 Working Capital Change 4,220 (4,649) 1,699 1,034 1,417 Other Operating Items 281 (16) - - - OPERATING CASH FLOW ( a ) 40,290 26,261 43,168 47,663 53,435 Capex (2,507) (2,438) (3,500) (3,500) (4,500) Free cash flow (FCF) 37,783 23,823 39,668 44,163 48,935 Investments (21,192) (6,037) (19,000) (19,000) (19,000) INVESTING CASH FLOW ( b ) (23,699) (8,475) (22,500) (22,500) (23,500) Debt Issuance (293) 532 - - - Interest expenses (5) (65) (20) (25) (30) FCFE 37,490 24,354 39,668 44,163 48,935 Share capital Issuance - - - - - Dividend (16,927) (17,346) (20,835) (24,307) (27,780) FINANCING CASH FLOW ( c ) (17,225) (16,879) (20,855) (24,332) (27,810) NET CASH FLOW (a+b+c) (634) 907 (186) 831 2,125 Non-operating and EO items - - - - - Closing Cash & Equivalents 4,955 5,862 5,675 6,506 8,632 Key Ratios Standalone FY14 FY15E FY16E FY17E FY18E PROFITABILITY (%) GPM 31.2 31.2 33.2 33.0 32.7 EBITDA Margin 20.8 19.3 20.9 21.0 20.9 APAT Margin 16.1 13.0 16.1 16.3 16.3 RoE 38.8 27.7 33.1 32.3 31.5 RoIC 141.9 114.9 141.4 166.3 191.2 RoCE 37.0 30.9 32.4 31.7 31.0 EFFICIENCY Tax Rate (%) 29.6 28.4 30.0 30.0 30.0 Asset Turnover (x) 2.1 2.0 1.9 1.8 1.8 Inventory (days) 12 14 14 14 14 Debtors (days) 14 12 12 12 12 Payables (days) 38 30 30 30 30 Cash Conversion Cycle (days) (12) (5) (4) (4) (4) Debt/EBITDA (x) 0.0 0.0 0.0 0.0 0.0 Net D/E (x) -0.81-0.79-0.83-0.86-0.88 Interest Coverage (x) 9,611 691 2,734 2,470 2,304 PER SHARE DATA EPS (Rs/sh) 115 111 132 149 167 CEPS (Rs/sh) 121 120 143 161 180 DPS (Rs/sh) 50 50 60 70 80 BV (Rs/sh) 332 369 430 495 566 VALUATION P/E 21.9 22.7 19.0 16.8 15.0 P/BV 7.6 6.8 5.9 5.1 4.4 EV/EBITDA 16.7 16.0 13.1 11.3 9.8 OCF/EV (%) 6.2 4.1 6.9 7.9 9.2 FCF/EV (%) 5.8 3.7 6.3 7.3 8.4 FCFE/mkt cap (%) 5.2 3.3 5.5 6.1 6.7 Dividend Yield (%) 2.0 2.0 2.4 2.8 3.2 Page 8
Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 BAJAJ AUTO : RESULTS REVIEW RECOMMENDATION HISTORY Bajaj Auto 2,800 2,600 2,400 2,200 2,000 TP Date CMP Reco Target 17-Oct-14 2,373 NEU 2,504 22-Dec-14 2,473 NEU 2,648 19-Jan-15 2,420 NEU 2,614 22-May-15 2,300 NEU 2,509 24-Jul-15 2,497 NEU 2,505 9-Oct-15 2,431 NEU 2,538 23-Oct-15 2,514 NEU 2,720 1,800 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 9
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