BAJAJ 22 JAN 2018 Company Update BUY Target Price: Rs 3,905 Recovery ahead; upgrade to BUY Bajaj Auto had a tough last 5-6 years due to weakness in exports and domestic 2Ws. Consequently, even after 7% volume growth in FY18 (to ~3.9 mn) its volumes are 8-10% below FY12/13 levels. We met the management. It expects sharp uptick in (i) 3Ws due to removal/issuance of new permits; (ii) exports on new market penetration and recovery in existing markets; (iii) India 2Ws on market share recovery. We expect FY18-20 volume CAGR of 13% and earnings CAGR of 20% given the better mix (higher share of 3Ws/exports). We upgrade FY19E/20E earnings by 7% and rating to BUY. At 14.6x P/E and 9.6x EV/EBITDA (FY20E), we find risk-reward attractive. Our TP of Rs 3,905 values the stock at 12x FY20E EV/EBITDA (+Rs 132/sh for KTM) and provides an upside of 23%. CMP : Rs 3,163 Potential Upside : 23% MARKET DATA No. of Shares : 289 mn Free Float : 51% Market Cap : Rs 915 bn 52-week High / Low : Rs 3,381 / Rs 2,684 Avg. Daily vol. (6mth) : 299,351 shares Bloomberg Code : BJAUT IB Equity Promoters Holding : 49% FII / DII : 17% / 9% Key takeaways from our meeting with the management Three wheelers (3Ws) Strong growth to continue Domestic 3W growth has been 22% YTD (>100% YoY in Nov/Dec 2017) driven by removal of permits in Maharashtra and issuance of new permits in Delhi and Bangalore. This has unleashed huge pent-up demand and will lead to >100% YoY growth continuing over the next 6 months. In Maharashtra itself, the removal of permits provides scope for incremental demand of 200k units. The company is targeting dispatches of 100k units in domestic 3Ws in Q4FY18 (>100% YoY growth) of which >40k will be in Mumbai Bajaj Auto has expanded 3W capacity from 50k/month to 60k/month, but that too is operating at high utilization (current run-rate is 35k/month domestic, 25k/month exports). Karnataka, West Bengal and Tamil Nadu are other states which still have permits. If more permits are issued, the company can leverage on 5k/month capacity of Qute Financial summary (Standalone) Sales (Rs mn) 213,736 241,727 278,193 323,590 Adj PAT (Rs mn) 38,276 41,160 50,014 59,227 Con. EPS* (Rs) - 144.1 164.4 178.8 EPS (Rs) 132.3 142.2 172.8 204.7 Change YOY (%) (2.6) 7.5 21.5 18.4 P/E (x) 23.9 22.2 18.3 15.5 RoE (%) 25.3 23.0 24.9 25.5 RoCE (%) 35.2 32.5 35.2 36.2 EV/E (x) 16.8 15.1 12.0 9.6 DPS (Rs) 55.0 70.0 70.0 70.0 Source: *Consensus broker estimates, Company, Axis Capital Key drivers (%) FY18E FY19E FY20E Volume growth 7.4 12.4 13.9 ASP growth 5.3 2.3 2.0 EBITDA margins 20.2 21.4 21.8 Price performance 140 Sensex Bajaj Auto 120 100 80 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 01
BAJAJ ( Continued from page 1) Overall, the scrapping of permits is very positive for demand for 3Ws, as it will make 3Ws substantially more affordable. The cost of 3W with a permit is 350k, and without a permit it is 150k. Further, financing in the sector has also improved an additional catalyst for demand We expect domestic 3W volumes of 350k in FY18 (a 40% growth), and 400k in FY19 (12% growth). In exports, with normalcy in some of the key markets, we expect volumes of ~250k (+35% on a low base), and ~300k in FY19 (+15% growth) with the introduction of cargo/diesel 3Ws We expect 3W volume growth of 38%/13%/10% in FY18E/19E/20E Motorcycles Banking on new launches Upcoming launches over next 3 months are refreshed Avenger, Pulsar, and re-launch of Discover. Discover will leverage on its earlier positioning as a reliable executive bike to take on Honda Shine. Historically, Discover had many variants, which confused the buyer. The confusion will be avoided this time around and Discover will marketed as a strong commuter bike In domestic motorcycle, the company targets to exit Q4FY18 with an average volume run rate of 200k/month vs. ~165k/month YTDFY18. Expected model-wise break-up: CT + Platina at 75-80k/month, new Avenger + Pulsar + Dominar at 80k/month, KTM at 5k/month. Remaining 35k will come from executive mid-segment with the launch of new Discover (25-30k/month) and the V brand (5-10k/month) In the past Discover has done 100k/month at peak, so getting back to 25-30k is quite attainable. If that happens, and the industry grows at 7-8%, Bajaj can do average motorcycle volumes of 225k/month in FY19. We are not building in these numbers and assume average of ~180k/month for domestic motorcycle in FY19 (+12% YoY after a 4% decline in FY18) If Discover gets back to 1/3 rd of what it used to do at peak, management expects average motorcycle volumes of 225k/month in FY19 (vs. our estimate of 180k/month) Premium bikes Triumph could be a game changer In premium bikes, domestic production of KTM (5k/pm) is growing at double digits and Husqvarna (a notch higher than KTM) too will be localized from FY19 The Triumph alliance could be a big opportunity for both companies. Triumph, with global volumes of 65k/annum, is not present in the <700cc segment. Bajaj will manufacture Triumph branded 350-700cc models which will take on Royal Enfield. The company aims to start with an initial capacity of 120k/annum in FY20 for India and exports. In markets where it is sold by Triumph directly (developed markets), Bajaj will get a contract manufacturing margin. In markets where it will be sold by Bajaj (India and most emerging markets) it will pay Triumph a royalty. But, even after royalty, it is likely be a high-margin product (we reckon >20% margin) Triumph 350-700cc will take on Royal Enfield. With brand in place and almost 100% localization, initial volumes of 10k/month are doable, in our view 02
BAJAJ Exports Recovering from low base In exports, the company has increased penetration in newer geographies. Contribution from new markets (Cambodia, Myanmar, etc.) has increased to 16% of export sales vs. 10% in FY17. Going ahead, the company target to take it up to 30% of exports Given the strong commodity cycle and stability in currency, Nigeria (Bajaj s biggest export market) has recovered. Its exports to Nigeria has recovered to 26k/month (~18% of exports) vs. low of 7k/month in April 2017 (when it touched <5% of exports) Presently, Africa constitutes ~44% of exports, Latin America at ~21%, Sri Lanka, Bangladesh, Egypt at ~20%, and ASEAN countries at ~10%. The only 2 large markets where it is not present are Brazil and China. These can be targeted over the next 5 years by setting up local assemblies New markets coupled with recovery in existing markets could drive 18%/12%/12% volume growth in FY18E/19E/20E. Kicker to EBITDA is substantially higher Over the next 3 years, the management expects 12% volume CAGR in exports (vs. 3% de-growth over last 3 years). Revenue CAGR will be higher (~15%) on improving mix in most export markets (rising share of Pulsar vs. Boxer). We expect 18%/12%/12% growth in exports in FY18/19/20E Foray into electric vehicles Starting with 3Ws The company is initially targeting the electric 3W market. The product is ready, but costs are high and pricing will depend on eventual government subsidies. However, it will be cheaper than the current 3W which costs Rs 350k (if we were to include permit cost of ~Rs 200k) Electric 3Ws currently plying on the road are mainly replacing hand-carts. They have lead acid batteries that last for only 45 km/charge vs. Bajaj s electric 3W that has swappable Lithium ion batteries that last 100km/charge. The only flip side of Baja s electric vehicles is that the battery life is typically 5-6 years whereas 3Ws are typically used for 10-15 years Management was non-committal about electric two wheelers (2Ws) since the technology is not viable for motorcycles. However, we reckon Bajaj can use this as an opportunity to re-enter the scooter space since it will be a differentiated product offering Electric 3W pricing depends on government subsidies. However, adjusting for permit costs, it can be cheaper than existing 3Ws Margin outlook and financials As per the management, if the company achieves 200k monthly domestic 2Ws, the operating leverage will help take the margin to 22% given the kicker in staff cost. Before FY15, the staff cost used to be well under 4% of sales, but with operating deleverage, it is now at 4.5%. The company aims to take this below 4% with volumes picking up Recovery in exports is very positive for the margin. Across segments, exports enjoy 800-1,000 bps higher margins. Further, 3Ws too are margin-accretive. As per our estimates, 3Ws are picking up to be >15.5% of company s volumes vs. average of 12% over the past 5 years. Exports are picking up to ~42% of volumes vs. an average of 40% over the past 5 years We are building in 12%/14% volume growth in FY19/20, and expect margin to improve to 21.8% in FY20 (vs. 20.4% in Q2FY18) on a strong mix. If domestic motorcycles recover with Discover, the management expects 4.8-5 mn sales in FY19 (growth of 20-25%) As per management, if Discover clicks, FY19 volume growth of 20-25% is on the cards We expect FY18-20 volume CAGR of 13%, which coupled with better mix (3Ws/exports) translates into 20% earnings CAGR 03
BAJAJ Annual volume data Volumes FY14 FY15 FY16 FY17 FY18E FY19E FY20E India 2W 2,099,230 1,770,778 1,896,132 2,001,391 1,920,805 2,157,533 2,514,226 Growth % -15% -16% 7% 6% -4% 12% 17% India 3W 186,912 234,345 254,995 253,147 355,064 398,244 431,640 Growth % -17% 25% 9% -1% 40% 12% 8% Total Domestic 2,286,142 2,005,123 2,151,127 2,254,538 2,275,869 2,555,777 2,945,866 Growth % -15% -12% 7% 5% 1% 12% 15% Export 2W 1,323,173 1,521,306 1,459,295 1,218,541 1,401,322 1,569,481 1,757,819 Growth % 2% 15% -4% -16% 15% 12% 12% Export 3W 260,762 284,772 280,334 191,236 258,169 296,894 332,521 Growth % 3% 9% -2% -32% 35% 15% 12% Total Export 1,583,935 1,806,078 1,739,629 1,409,777 1,659,491 1,866,375 2,090,340 Growth % 2% 14% -4% -19% 18% 12% 12% Total volumes 3,870,077 3,811,201 3,890,756 3,664,315 3,935,359 4,422,152 5,036,205 Growth % -9% -2% 2% -6% 7% 12% 14% Estimated market mix Segment-wise volume break-up Domestic Exports Two-wheelers Three-wheelers 100% 100% 80% 41% 47% 45% 38% 42% 42% 42% 90% 12% 14% 14% 12% 16% 16% 15% 60% 80% 40% 20% 59% 53% 55% 62% 58% 58% 58% 70% 60% 88% 86% 86% 88% 84% 84% 85% 0% FY14 FY15 FY16 FY17 FY18E FY19E FY20E 50% FY14 FY15 FY16 FY17 FY18E FY19E FY20E 04
BAJAJ Sensitivity analysis FY18 EPS (R s) EBITDA margin Sensitivity analysis FY19 EPS (R s) EBITDA margin Sensitivity analysis FY20 EPS (R s) EBITDA margin Volume growth 14 2.2-1% 3% 7% 11% 15% 18. 2% 121.8 125.9 130.1 134.2 138.3 19. 2% 127.4 131.8 136.2 140.5 144.9 20. 2% 133.1 137.7 14 2. 2 146.8 151.4 21. 2% 138.7 143.5 148.3 153.1 157.9 22. 2% 144.3 149.4 154.4 159.4 164.5 Volume growth 172.8 4% 8% 12% 16% 20% 19. 4 % 149.2 154.0 158.8 163.7 168.5 20. 4 % 155.7 160.8 165.8 170.9 176.0 21. 4 % 162.2 167.5 172. 8 178.2 183.5 22. 4 % 168.7 174.2 179.8 185.4 191.0 23. 4 % 175.2 181.0 186.8 192.7 198.5 Volume growth 204.7 6% 10% 14 % 18% 22% 19. 8% 177.1 182.8 188.4 194.1 199.8 20. 8% 184.6 190.6 196.5 202.5 208.4 21. 8% 192.2 198.4 204. 7 210.9 217.1 22. 8% 199.8 206.3 212.8 219.3 225.8 23. 8% 207.3 214.1 220.9 227.7 234.5 We expect volume to grow by a 13% CAGR between FY18-20%. The contribution of 3Ws is picking up to >15.5% of volumes (vs. average of 12% over the last 5 years) and exports to ~42% of volumes (vs. an average of 40% over the last 5 years). Volume recovery and stronger mix is driving a ~20% earnings CAGR between FY18-20 05
Financial summary (Standalone) Profit & loss (Rs mn) Net sales 213,736 241,727 278,193 323,590 Other operating income 6,519 7,302 8,178 9,159 Total operating income 220,255 249,029 286,371 332,749 Cost of goods sold (146,242) (168,094) (191,009) (221,944) Gross profit 74,014 80,934 95,361 110,806 Gross margin (%) 34.6 33.5 34.3 34.2 Total operating expenses (27,202) (30,563) (33,961) (38,118) EBITDA 46,812 50,372 61,400 72,688 EBITDA margin (%) 21.9 20.8 22.1 22.5 Depreciation (3,073) (3,195) (3,357) (3,520) EBIT 43,739 47,177 58,043 69,168 Net interest (14) (14) (14) (14) Other income 9,632 11,077 12,738 14,649 Profit before tax 53,357 58,240 70,767 83,803 Total taxation (15,081) (17,079) (20,753) (24,576) Tax rate (%) 28.3 29.3 29.3 29.3 Profit after tax 38,276 41,160 50,014 59,227 Minorities - - - - Profit/ Loss associate co(s) - - - - Adjusted net profit 38,276 41,160 50,014 59,227 Adj. PAT margin (%) 17.9 17.0 18.0 18.3 Net non-recurring items - - - - Reported net profit 38,276 41,160 50,014 59,227 Balance sheet (Rs mn) Paid-up capital 2,894 2,894 2,894 2,894 Reserves & surplus 167,448 184,909 211,223 246,751 Net worth 170,341 187,802 214,117 249,644 Borrowing 1,179 1,002 852 724 Other non-current liabilities (863) (863) (863) (863) Total liabilities 170,657 187,941 214,105 249,505 Gross fixed assets 48,315 50,815 53,315 55,815 Less: Depreciation (27,981) (31,176) (34,533) (38,053) Net fixed assets 20,334 19,639 18,782 17,762 Add: Capital WIP 106 106 106 106 Total fixed assets 20,440 19,745 18,888 17,869 Total Investment 147,315 166,466 191,436 225,894 Inventory 7,284 8,187 9,415 10,940 Debtors 9,533 8,870 10,200 11,851 Cash & bank 2,937 4,689 8,100 12,145 Loans & advances 362 416 479 551 Current liabilities 33,494 37,527 42,361 48,591 Net current assets 2,902 1,730 3,781 5,742 Other non-current assets - - - - Total assets 170,657 187,941 214,105 249,505 Cash flow (Rs mn) 22 JAN 2018 Company Update BAJAJ Profit before tax 53,357 58,240 70,767 83,803 Depreciation & Amortisation 3,073 3,195 3,357 3,520 Chg in working capital (393) 2,924 1,360 2,084 Cash flow from operations 31,338 36,217 42,007 50,196 Capital expenditure (2,130) (2,500) (2,500) (2,500) Cash flow from investing (37,207) (10,574) (14,732) (22,310) Equity raised/ (repaid) - - - - Debt raised/ (repaid) (20) (177) (150) (128) Dividend paid - - - - Cash flow from financing (18,655) (23,890) (23,864) (23,841) Net chg in cash (24,524) 1,752 3,411 4,045 Key ratios OPERATIONAL FDEPS (Rs) 132.3 142.2 172.8 204.7 CEPS (Rs) 142.9 153.3 184.4 216.8 DPS (Rs) 55.0 70.0 70.0 70.0 Dividend payout ratio (%) 41.6 49.2 40.5 34.2 GROWTH Net sales (%) (3.5) 13.1 15.1 16.3 EBITDA (%) (5.6) 7.6 21.9 18.4 Adj net profit (%) (2.6) 7.5 21.5 18.4 FDEPS (%) (2.6) 7.5 21.5 18.4 PERFORMANCE RoE (%) 25.3 23.0 24.9 25.5 RoCE (%) 35.2 32.5 35.2 36.2 EFFICIENCY Asset turnover (x) 5.4 6.5 8.1 10.2 Sales/ total assets (x) 1.2 1.1 1.2 1.2 Working capital/ sales (x) - - - - Receivable days 16.3 13.4 13.4 13.4 Inventory days 15.3 15.0 15.3 15.4 Payable days 47.1 46.1 46.2 46.4 FINANCIAL STABILITY Total debt/ equity (x) - - - - Net debt/ equity (x) (0.9) (0.9) (0.9) (0.9) Current ratio (x) 1.1 1.0 1.1 1.1 Interest cover (x) 3,124.2 3,369.8 4,145.9 4,940.6 VALUATION PE (x) 23.9 22.2 18.3 15.5 EV/ EBITDA (x) 16.8 15.1 12.0 9.6 EV/ Net sales (x) 3.7 3.2 2.6 2.2 PB (x) 5.4 4.9 4.3 3.7 Dividend yield (%) 1.7 2.2 2.2 2.2 Free cash flow yield (%) 3.2 3.7 4.3 5.2 06
BAJAJ Disclosures: The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations). 1. Axis Securities Ltd. (ASL) is a SEBI Registered Research Analyst having registration no. INH000000297. ASL, the Research Entity (RE) as defined in the Regulations, is engaged in the business of providing Stock broking services, Depository participant services & distribution of various financial products. ASL is a subsidiary company of Axis Bank Ltd. Axis Bank Ltd. is a listed public company and one of India s largest private sector bank and has its various subsidiaries engaged in businesses of Asset management, NBFC, Merchant Banking, Trusteeship, Venture Capital, Stock Broking, the details in respect of which are available on www.axisbank.com. 2. ASL is registered with the Securities & Exchange Board of India (SEBI) for its stock broking & Depository participant business activities and with the Association of Mutual Funds of India (AMFI) for distribution of financial products and also registered with IRDA as a corporate agent for insurance business activity. 3. ASL has no material adverse disciplinary history as on the date of publication of this report. 4. I/We, authors (Research team) and the name/s subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my/our views about the subject issuer(s) or securities. I/We also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. I/we or my/our relative or ASL does not have any financial interest in the subject company. Also I/we or my/our relative or ASL or its Associates may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Since associates of ASL are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. I/we or my/our relative or ASL or its associates do not have any material conflict of interest. I/we have not served as director, officer or employee in the subject company. Research Team Sr. No Name Designation E-mail 1 Pankaj Bobade Research Analyst pankaj.bobade@axissecurities.in 2 Kiran Gawle Associate kiran.gawle@axissecurities.in 5. ASL or its associates has not received any compensation from the subject company in the past twelve months. ASL or its Research Analysts has not been engaged in market making activity for the subject company. 6. In the last 12-month period ending on the last day of the month immediately preceding the date of publication of this research report, ASL or any of its associates may have: i. Received compensation for investment banking, merchant banking or stock broking services or for any other services from the subject company of this research report and / or; ii. Managed or co-managed public offering of the securities from the subject company of this research report and / or; iii. Received compensation for products or services other than investment banking, merchant banking or stock broking services from the subject company of this research report; ASL or any of its associates have not received compensation or other benefits from the subject company of this research report or any other third-party in connection with this report Term& Conditions: This report has been prepared by ASL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential 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 ASL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ASL will not treat recipients as customers by virtue of their receiving this report. 07
BAJAJ DEFINITION OF RATINGS Disclaimer: Ratings Expected absolute returns over 12-18 months BUY More than 10% HOLD Between 10% and -10% SELL Less than -10% Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to the recipient s specific circumstances. The securities and strategies discussed and opinions expressed, if any, in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This report may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this report should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this report (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. Certain transactions, including those involving futures, options and other derivatives as well as non-investment grade securities involve substantial risk and are not suitable for all investors. ASL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Past performance is not necessarily a guide to future performance. Investors are advise necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ASL and its affiliated companies, their directors and employees may; (a) from time to time, have long or short position(s) in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities or earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or investment banker, lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting this document. ASL and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, the recipients of this report should be aware that ASL may have a potential conflict of interest that may affect the objectivity of this report. Compensation of Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ASL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither this report nor any copy of it may be taken or transmitted into the United State (to U.S. Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. If this report is inadvertently sent or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ASL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The Company reserves the right to make modifications and alternations to this document as may be required from time to time without any prior notice. The views expressed are those of the analyst(s) and the Company may or may not subscribe to all the views expressed therein. Copyright in this document vests with Axis Securities Limited. Axis Securities Limited, Corporate office: Unit No. 2, Phoenix Market City, 15, LBS Road, Near Kamani Junction, Kurla (west), Mumbai-400070, Tel No. 18002100808/022-61480808, Regd. off.- Axis House, 8th Floor, Wadia International Centre, PandurangBudhkarMarg, Worli, Mumbai 400 025. Compliance Officer: AnandShaha, Email: compliance.officer@axisdirect.in, Tel No: 022-42671582. SEBI-Portfolio Manager Reg. No. INP000000654 08