INDUSTRY AUTOS CMP (as on 20 July 2017) Rs 2,819 Target Price Rs 3,296 Nifty 9,873 Sensex 31,904 KEY STOCK DATA Bloomberg BJAUT IN No. of Shares (mn) 289 MCap (Rs bn) / ($ mn) 816 / 12,658 6m avg traded value (Rs mn) 828 STOCK PERFORMANCE (%) 52 Week high / low Rs 3,122 / 2,510 3M 6M 12M Absolute (%) (0.5) 4.4 1.4 Relative (%) (8.9) (13.7) (12.9) SHAREHOLDING PATTERN (%) Promoters 49.30 FIs & Local MFs 8.16 FPIs 17.48 Public & Others 25.05 Source : BSE Abhishek Jain abhishekkumar.jain@hdfcsec.com +91-22-6171-7320 Sneha Prashant sneha.prashant@hdfcsec.com +91-22-6171-7336 Weak quarter, faith intact Bajaj Auto s (Bajaj) 1Q EBITDA at Rs 9.4bn (-20% YoY) and margin at 17.2% came in below estimates, owing to 279bps YoY fall in gross margin and higher employee expenses. Net revenue came in at Rs 54.4bn (-5.3% YoY), owing to a fall in volumes (- 11%YoY), offset by ASP growth (+6.5% YoY). ASP growth was driven by a price hike taken on BS4 vehicles, and a better product mix. APAT at Rs 9.5bn (-2.3% YoY) was above expectations, led by higher other income (dividend received from KTM). We expect volumes to improve in 2QFY18, led by restoration of channel inventory, introduction of new variants and promotional activities at the ground level. We are positive on Bajaj, based on (1) Strong product portfolio and increasing mix of premium models (KTM, Pulsar, Avenger, Dominar), (2) Revival in exports (management is confident of achieving double-digit growth in FY18E), and (3) Boost in 3W sales, led by a pick-up in rural demand, and new permits from Maharashtra, Karnataka and Delhi in the coming months. We cut 3% EPS for FY18E, factoring in lower OPM in, but keep FY19 numbers intact. RESULTS REVIEW 21 JUL 2017 Bajaj Auto BUY Maintain BUY with a SOTP-based TP of Rs 3,296 (19x 19E Core EPS + cash + 30% discount for KTM stake). Highlights of the quarter Revival in exports: With Bajaj entering several new markets (including Poland, Malaysia, Nepal, Latin America), and generating higher volumes in Iran, Bangladesh and Peru, overall volumes grew by 11% in Q1FY18. 3W/2W exports grew by 28/8%. Bajaj has hiked prices in the export market in July-17. Decline in domestic market share: Bajaj s domestic 2W motorcycle market share declined by 462bps YoY to18.6% in 1Q. Given the higher BS-4 channel inventory (peers kept minimum inventory, owing to higher discounts offered in 4Q) and input tax credit losses owing to GST, the company deliberately dispatched lower volumes. Bajaj reduced its channel inventory to 108k in Jun-17 end, vs retail inventory of 155k. Bajaj expects 10% volume growth, starting July. Near-term outlook: Expect strong volume growth in 2Q, owing to lower channel inventory, new permits and festive season demand. Financial Summary (Rs mn) YoY (%) QoQ (%) FY16 FY17 FY18E FY19E Net Sales 54,424 57,480 (5.3) 48,973 11.1 229,495 217,667 250,910 281,335 EBITDA (adj.) 9,384 11,763 (20.2) 9,060 3.6 50,414 44,224 50,076 58,187 APAT 9,559 9,784 (2.3) 8,018 19.2 39,143 38,284 41,431 48,449 Diluted EPS (Rs) 33.0 33.8 (2.3) 27.7 19.2 135.3 132.3 143.2 167.4 P/E (x) 20.8 21.3 19.7 16.8 EV / EBITDA (x) 14.2 15.4 13.3 11.1 RoE (%) 32.7 25.3 23.4 24.7 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Bajaj 1Q volumes were down 11% YoY, marred by 23% fall in the domestic market, offset by 11% growth in the export market Better-than-expected ASP helped offset the fall in volumes Among the product segments, 3W volumes were relatively less impacted, down 8% YoY (30% decline in domestic 3W volumes was offset by 28% jump in the export market) as compared to the motorcycle segment (down 11% YoY) Gross margins contracted 279 BPS YoY (-220 bps QoQ), owing to lower-than-needed price hikes to offset input cost pressure, lower Pulsar volumes and 50bps impact of removal of the excise duty benefit of the Pantnagar plant Quarterly Financials Snapshot: Standalone (Rs mn) YoY (%) QoQ (%) Volumes (in units) 884,434 994,733 (11.1) 787,627 12.3 Net ASP (Rs/veh) 61,535 57,784 6.5 62,178 (1.0) Net Sales 54,424 57,480 (5.3) 48,973 11.1 Material Expenses 38,093 38,628 (1.4) 33,203 14.7 Employee Expenses 2,725 2,683 1.6 2,273 19.9 Other Operating Expenses 4,222 4,405 (4.2) 4,438 (4.9) EBITDA 9,384 11,763 (20.2) 9,060 3.6 Depreciation 753 775 (2.9) 757 (0.6) EBIT 8,631 10,989 (21.5) 8,303 4.0 Other Income 4,573 2,671 71.2 2,936 55.7 Interest Cost 2 2 9.1 2 - PBT 13,201 13,657 (3.3) 11,236 17.5 Tax 3,642 3,873 (6.0) 3,218 13.2 APAT 9,559 9,784 (2.3) 8,018 19.2 EO Items (Adj For Tax) (320) - - - - RPAT 9,879 9,784 1.0 8,018 23.2 Margin Analysis: Standalone YoY (%) QoQ (%) Material Expenses % Net Sales 70.0 67.2 279 67.8 220 Employee Expenses % Net Sales 5.0 4.7 34 4.6 37 Other Expenses % Net Sales 7.8 7.7 9 9.1 (130) EBITDA Margin (%) 17.2 20.5 (322) 18.5 (126) Tax Rate (%) 27.6 28.4 (77) 28.6 (105) APAT Margin (%) 17.6 17.0 54 16.4 119 EBITDA margins contracted by 322bps YoY to 17.2% (below our est of 19.3%), owing to higher RM and employee cost Page 2
We expect 10% volume growth over FY17-19E, on the back of a pick-up in rural demand and revival in exports The company has taken a price hike of Rs 500-1000 in 2Ws and Rs 1500 in 3Ws in May-17, in order to partially offset the impact of rising input costs and upgradation of its portfolio to BS-IV emission norms Management believes that the export markets have bottomed out, and will show double-digit growth in FY18 Incremental growth will come from Iran, Bangladesh, Peru, Nepal, among others The management has guided for electric 3W launch in 2018 We cut 3% EPS for FY18, factoring in lower OPM in, but keep FY19 numbers intact Volume Assumptions (in units) FY15 FY16 FY17 FY18E FY19E Domestic Sales 2,005,123 2,153,952 2,254,540 2,427,573 2,685,377 % YoY -12.3% 7.4% 4.7% 7.7% 10.6% 2W 1,770,778 1,898,957 2,001,393 2,150,390 2,395,234 % YoY -15.6% 7.2% 5.4% 7.4% 11.4% 3W 234,345 254,995 253,147 277,184 290,143 % YoY 25.4% 8.8% -0.7% 9.5% 4.7% Exports Sales 1,806,078 1,739,295 1,408,998 1,598,907 1,734,713 % YoY 14.0% -3.7% -19.0% 13.5% 8.5% 2W 1,521,306 1,459,295 1,217,762 1,388,547 1,503,317 % YoY 15.0% -4.1% -16.6% 14.0% 8.3% 3W 284,772 280,000 191,236 210,360 231,396 % YoY 9.2% -1.7% -31.7% 10.0% 10.0% (in units) FY15 FY16 FY17 FY18E FY19E 2W 3,292,084 3,358,252 3,219,155 3,538,937 3,898,551 % YoY -3.8% 2.0% -4.1% 9.9% 10.2% 3W 519,117 534,995 444,383 487,543 521,539 % YoY 16.0% 3.1% -16.9% 9.7% 7.0% Total Sales 3,811,201 3,893,247 3,663,538 4,026,480 4,420,090 % YoY -1.5% 2.2% -5.9% 9.9% 9.8% Net ASP (Rs./vehicle) 55,373 57,825 59,376 61,129 62,503 % YoY 8.7% 4.4% 2.7% 3.0% 2.2% Source: SIAM, HDFC sec Inst Research Change In Estimates Rs Mn New Old % Chg FY18E FY19E FY18E FY19E FY18E FY19E Volumes (in mn) 3.66 4.03 4.03 4.42 - - Net sales 217,667 250,910 250,910 281,335 - - EBITDA 44,224 50,076 52,335 58,187 (4.3) - EBITDA margin (%) 20 20 21 21 - - APAT 38,284 41,431 42,645 48,449 (2.8) - EPS 132 143 147 167 (2.8) - Page 3
Maintain BUY with a SOTPbased TP of Rs 3,296 (19x 19E Core EPS + cash + 30% discount for KTM stake). SOTP Valuation Value FY19E Core EPS (Rs) 131 Target P/E (x) 19 Base business (Rs mn) (a) 2,538 KTM market cap (Rs mn) 101,509 Baja Auto's stake 48% Attributable value (Rs mn) 48,714 Holdco discount 30% Per share value from KTM (Rs mn) (b) 126 19E Cash/share (Rs mn) (c) 632 Target Price (a+b+c) (Rs/share) 3,296 Source: HDFC sec Inst Research Peer Valuations Mcap (Rs bn) CMP (Rs/sh) Reco TP Adj EPS (Rs/sh) P/E (x) EV/EBITDA (x) RoE (%) FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E Maruti Suzuki 2,263 7,491 BUY 8,478 242.9 272.4 353.3 30.8 27.5 21.2 21.7 18.8 14.4 23.2 22.4 26.3 Tata Motors 1,563 460 BUY 542 30.2 34.6 49.3 15.2 13.3 9.3 7.2 5.0 3.8 12.2 12.7 15.8 Bajaj Auto 816 2,819 BUY 3,296 132.3 143.2 167.4 21.3 19.7 16.8 15.3 13.3 11.1 25.3 23.4 24.7 M&M 822 1,393 BUY 1,556 56.6 75.8 86.4 24.6 18.4 16.1 13.8 11.6 9.1 14.4 17.5 17.7 Hero Motocorp 745 3,730 NEU 3,740 169.1 182.1 208.0 22.1 20.5 17.9 15.1 13.9 12.1 35.6 33.9 34.8 Eicher Motors 793 29,253 BUY 31,934 624.3 804.9 1,010.0 46.9 36.3 29.0 34.2 27.0 21.9 39.4 38.9 39.3 Ashok Leyland 301 106 BUY 118 4.3 6.0 7.4 24.6 17.5 14.3 13.4 10.1 8.4 20.7 26.2 27.8 Force Motors 54 4,107 BUY 5,186 137.3 154.2 241.2 29.9 26.6 17.0 20.1 17.4 11.4 11.4 11.5 15.8 SML Isuzu 17 1,172 BUY 1,325 43.4 48.2 66.2 27.0 24.3 17.7 16.0 14.1 10.5 16.9 16.5 20.0 Atul Auto 9 420 BUY 528 17.7 26.2 31.1 23.7 16.0 13.5 13.3 9.3 7.8 23.1 28.5 27.7 Source: HDFC sec Inst Research Page 4
Exports were strong on account of incremental volume from new markets Negative operating leverage and impact of commodity price dragged down EBITDA margin to 17.2% Weak Domestic Volume Partially Offset By Export Volumes 1,200 1,000 800 600 400 200 - Dom ('000) Exports ('000) % YoY (RHS) GMs Contracted QoQ/YoY 20,000 16,000 12,000 8,000 4,000 - Gross profit/vehicle (Rs) 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% Gross margin (RHS) 35.0% 34.0% 33.0% 32.0% 31.0% Net ASP Growth Supported By Richer Product Mix Net ASP % YoY (RHS) 64,000 7.0% 62,000 6.0% 60,000 5.0% 58,000 4.0% 56,000 3.0% 54,000 2.0% 52,000 1.0% 50,000 0.0% EBITDA Margin Contracted QoQ/YoY EBITDA/vehicle (Rs) EBITDA margin (RHS) 14,000 25.0% 12,000 20.0% 10,000 8,000 15.0% 6,000 10.0% 4,000 2,000 5.0% - 0.0% Page 5
Premium Segment Continues To Hold Strong Share Economy Executive Premium 100% 80% 35% 40% 42% 49% 37% 42% 41% 48% 43% 2W Mix Gone Down QoQ 2W 3W 100% 14% 15% 13% 14% 12% 13% 12% 11% 13% 80% Volume mix of CT and Platina increased marginally to 44% 60% 40% 13% 14% 12% 11% 20% 15% 15% 16% 15% 60% 40% 86% 85% 87% 86% 88% 87% 88% 89% 87% 20% 52% 46% 45% 39% 42% 43% 45% 36% 43% 20% 0% 0% Bajaj s overall 2W domestic market share was down 400bps Source: SIAM, HDFC sec Inst Research Pulsar Continues To Hold Strong Share CT Platina Discover Pulsar Eliminator/Avenger V12/V15 100% 80% 60% 40% 20% Source: SIAM, HDFC sec Inst Research Bajaj Auto: One Year Forward P/E Chart PE Avg Core P/E +1 SD -1 SD 24.0 22.0 20.0 18.0 16.0 14.0 0% 12.0 Apr-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Source: SIAM, HDFC sec Inst Research Source: SIAM, HDFC sec Inst Research Page 6
Income Statement Standalone (Rs mn) FY15 FY16 FY17 FY18E FY19E Net Revenues 216,120 229,495 217,667 250,910 281,335 Growth (%) 7.3 6.2 (5.2) 15.3 12.1 Material Expenses 148,498 150,569 146,242 168,765 190,107 Employee Expenses 8,973 9,184 9,971 11,100 12,133 Other Operating Expenses 16,981 19,327 17,231 20,969 20,908 EBITDA 41,667 50,414 44,224 50,076 58,187 EBITDA Margin (%) 19.3 22.0 20.3 20.0 20.7 EBITDA Growth (%) (0.4) 21.0 (12.3) 13.2 16.2 Depreciation 2,674 3,072 3,073 3,327 3,321 EBIT 38,993 47,343 41,151 46,750 54,866 Other Income (Including EO Items) 5,824 9,133 12,220 14,638 15,362 Interest 65 5 5 5 8 PBT 44,753 56,471 53,365 61,383 70,220 Tax (Incl Deferred) 12,711 17,328 15,081 19,950 21,768 RPAT 32,042 39,143 38,285 41,433 48,452 EO (Loss) / Profit (Net Of Tax) (3,905) - - - - APAT 28,137 39,143 38,284 41,431 48,449 APAT Growth (%) (13.2) 39.1 (2.2) 8.2 16.9 Adjusted EPS (Rs) 97.2 135.3 132.3 143.2 167.4 EPS Growth (%) (13.2) 39.1 (2.2) 8.2 16.9 Balance Sheet Standalone (Rs mn) FY15 FY16 FY17 FY18E FY19E SOURCES OF FUNDS Share Capital - Equity 2,894 2,894 2,894 2,894 2,894 Reserves 104,028 129,772 167,448 181,101 206,016 Total Shareholders Funds 106,922 132,666 170,342 183,997 208,912 Long Term Debt 1,124 1,625 1,764 - - Short Term Debt - - - - - Total Debt 1,124 1,625 1,764 - - Net Deferred Taxes 1,416 2,028 3,136 3,416 3,604 Long Term Provisions & Others 19,920 2,100 2,175 5,018 5,627 TOTAL SOURCES OF FUNDS 129,381 138,418 177,418 192,433 218,146 APPLICATION OF FUNDS Net Block 19,172 20,257 20,018 23,165 26,209 CWIP 3,483 1,901 375 500 500 Investments 51,533 25,427 72,728 78,778 105,433 LT Loans & Advances 16,794 14,158 11,325 13,047 14,629 Total Non-current Assets 90,982 61,743 104,447 115,492 146,774 Inventories 8,142 7,191 7,284 8,249 10,020 Debtors 7,170 7,179 9,533 10,999 12,332 Other Current Assets 3,469 3,112 9,542 10,142 10,642 Cash & Equivalents 45,862 85,774 77,524 82,883 77,401 Total Current Assets 64,641 103,256 103,883 112,273 110,396 Creditors 17,605 20,270 22,357 24,210 25,677 Other Current Liabilities & Provns 8,637 6,310 8,556 11,123 13,347 Total Current Liabilities 26,242 26,580 30,913 35,333 39,025 Net Current Assets 38,399 76,676 72,969 76,941 71,372 TOTAL APPLICATION OF FUNDS 129,381 138,418 177,417 192,433 218,146 Page 7
Cash Flow Standalone (Rs mn) FY15 FY16 FY17P FY18E FY19E Reported PBT 44,753 56,471 53,365 61,383 70,220 Non-operating & EO items (3,905) - - - - Interest expenses 65 5 5 5 8 Depreciation 2,674 3,072 3,073 3,327 3,321 Working Capital Change (4,649) (13,549) (3,478) (1,351) (2,750) Tax Paid (12,727) (16,716) (13,972) (19,669) (21,581) OPERATING CASH FLOW ( a ) 26,211 29,283 38,993 43,694 49,218 Capex (2,438) (2,574) (599) (4,500) (4,500) Free cash flow (FCF) 23,773 26,709 38,394 39,194 44,718 Investments 33,963 66,107 19,549 68,537 47,932 Non-operating Income (3,855) 5,699 36,923 - - INVESTING CASH FLOW ( b ) 27,670 69,232 55,873 64,037 43,432 Debt Issuance/(Repaid) 532 501 (1,625) - - Interest Expenses (65) (5) (5) (5) (8) FCFE 24,239 27,205 36,764 39,189 44,710 Dividend (17,346) (19,098) (24,306) (27,780) (23,537) FINANCING CASH FLOW ( c ) (16,879) (18,602) (25,936) (27,785) (23,545) NET CASH FLOW (a+b+c) 37,002 79,913 68,929 79,946 69,105 EO Items, Others 3,905 - - - - Closing Cash & Equivalents 45,862 85,774 77,524 82,883 77,401 Key Ratios Standalone FY15 FY16 FY17P FY18E FY19E PROFITABILITY (%) GPM 31.3 34.4 32.8 32.7 32.4 EBITDA Margin 19.3 22.0 20.3 20.0 20.7 APAT Margin 13.0 17.1 17.6 16.5 17.2 RoE 27.7 32.7 25.3 23.4 24.7 RoIC (or Core RoCE) 41.0 71.4 26.5 22.0 22.2 RoCE 27.2 31.9 24.6 22.9 24.2 EFFICIENCY Tax Rate (%) 28.4 30.7 28.3 32.5 31.0 Fixed Asset Turnover (x) 5.3 5.2 4.7 5.0 5.1 Inventory (days) 13.8 11.4 12.2 12.0 13.0 Debtors (days) 12.1 11.4 16.0 16.0 16.0 Other Current Assets (days) 5.9 4.9 16.0 14.8 13.8 Payables (days) 29.7 32.2 37.5 35.2 33.3 Other Current Liab & Provns (days) 14.6 10.0 14.3 16.2 17.3 Cash Conversion Cycle (days) (12.6) (14.5) (7.6) (8.6) (7.8) Debt/EBITDA (x) 0.0 0.0 0.0 - - Net D/E (x) (0.8) (0.7) (0.8) (0.8) (0.8) Interest Coverage (x) 600.8 9,863.1 8,230.1 9,349.9 6,858.3 PER SHARE DATA (Rs) EPS 97.2 135.3 132.3 143.2 167.4 CEPS 106.5 145.9 142.9 154.7 178.9 Dividend 50.0 55.0 70.0 80.0 85.0 Book Value 369.5 458.5 588.7 635.9 722.0 VALUATION P/E (x) 29.0 20.8 21.3 19.7 16.8 P/BV (x) 7.6 6.1 4.8 4.4 3.9 EV/EBITDA (x) 17.6 14.2 15.4 13.3 11.1 EV/Revenues (x) 3.4 3.1 3.1 2.7 2.3 OCF/EV (%) 3.6 4.1 5.7 6.6 7.6 FCF/EV (%) 3.2 3.7 5.7 5.9 6.9 FCFE/Mkt Cap (%) 3.0 3.3 4.5 4.8 5.5 Dividend Yield (%) 1.8 2.0 2.5 2.8 3.0 Page 8
RECOMMENDATION HISTORY Bajaj Auto 3,400 3,200 3,000 2,800 2,600 2,400 2,200 2,000 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 TP May-17 Jun-17 Jul-17 Date CMP Reco Target 29-Jul-16 2,661 NEU 2,716 29-Oct-16 2,848 BUY 3,163 1-Feb-17 2,833 BUY 3,400 19-May-17 2,970 BUY 3,400 21-Jul-17 2,819 BUY 3,296 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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