India Two Wheelers Riding Up The Value Curve

27 November 2015
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Auto & Auto Ancillaries

Sector Research
Sector review Company Rec Target
Auto & Auto Ancillari es:

Bajaj Auto Buy INR2900
India two-wheelers: Riding up the value curve Hero Motocorp Hold INR2790
TVS Motors Sell INR200
While we expect competitive intensity to hurt the profitability of the two

wheelers (2Ws) executive segment in India, we are optimistic about the
premiumisation trends playing out. Moreover, our analysis of Africa/ LATAM
2Ws markets suggests significant opportunities for Indian 2W exporters.
While we believe Bajaj is well positioned to benefit from premiumisation and
exports, Hero looks vulnerable to margin pressures in the executive
segment. We also think market share gains/margin expansion for TVS will
not be easy. Initiate coverage on Bajaj (Buy), Hero (Hold) and TVS (Sell).
Changing landscape to hurt as well as benefit a few: Though we expect a

slowdown in growth momentum of the domestic 2Ws industry, we identify those
segments and companies that should benefit and those that are likely to lose
out. We expect competitive intensity in the executive segment (65% of
motorcycle industry) to increase, led by Hondas aggressive approach and
Bajajs desire to make a comeback, which could heighten pressure on operating
margins of the segment. In our opinion, Hero is the most vulnerable as it derives
c.70% of its volumes from the executive segment. Moreover rising income
levels and aspirational purchases should accelerate the premiumisation trend
and we believe Bajaj, with 35% market share, should be the biggest beneficiary.
Exports offer a significant opportunity: Though Indian players have

demonstrated their ability to break into overseas 2Ws markets, we believe they
have only scratched the surface. We analyse the dynamics of markets in Africa Increasing Premiumisation trends
and LATAM and conclude that these markets offer significant growth potential 3.2 22.3% 23.0%
Millions
3.0 21.8%
for Indian 2Ws players as a) penetration is low and incremental income growth 21.3% 22.0%
2.8 20.8%
has a magnifying effect on motorcycle sales, b) poor infrastructure and weak 2.6 20.1%
21.0%
3.1
public transport systems make 2Ws a good option for commuters, c) we see 2.4
2.9 20.0%
2.2 2.7
room for market share gains from Chinese manufacturers as consumers trade 18.6% 2.4 19.0%
2.0 2.2
up. Bajaj, with an already established brand and distribution network, should be 1.8
2.0
18.0%
FY15 FY16E FY17E FY18E FY19E FY20E
able to gain from the export opportunity the most, in our view.
Premium Segment Share of Premium Segment (RHS)
Initiate coverage on Bajaj (Buy, TP Rs. 2900), Hero (Hold, TP Rs. 2790)
Source: Investec Securities Estimates
and TVS (Sell, TP Rs. 200)): Trading at 16x FY17E P/E, we believe Bajajs
valuations are attractive given its a) industry leading margins, b) strong 16%
EPS CAGR over FY15-18E, c) robust ~30% ROCE/ROE, and d) high Indias share in key African 2W markets
FCF/Dividend yield of 5%/3%. For Hero though, we believe increasing 200 Tanzania Nigeria (1.5m
180 Guinea units)
Size of the market ('000 units)
competition, slower domestic growth and margin headwinds, could cause the 160 Kenya
Mali
company to miss management guidance and streets expectation on margin 140
120 Benin Egypt
Mozambique
expansion. Consequently our FY17E/18E PAT are 5/6% below consensus; 100
Algeria
80 Uganda
however, at 15.9x FY17E P/E the stock price reflects these concerns. While 60
Ghana
40 Burkina Faso
TVS seems to have captured low hanging fruit in terms of volumes in 20 Ethiopia
domestic/exports markets, to chase incremental growth would be an uphill 0
0% 20% 40% 60% 80% 100%
task, in our view. TVS is trading at 15.5x FY17E EV/EBITDA, at ~30% premium Share of India in 2W imports (%)
to Bajaj/Hero, despite a much lower ROCE (19% vs. ~30%/40%). Source: Nigeria total quantity is c.1.5m units, Investec Securities estimates
Readers in all geographies please refer to important disclosures and disclaimers starting on page 98 In the United Aditya Jhawar
Kingdom this document is a MARKETING COMMUNICATION. It has not been prepared in accordance with the rules in the +91 (22) 6136 7415
FCA Conduct of Business Sourcebook designed to promote the independence of research and is also not subject to any aditya.jhawar@investec.co.in
prohibition on dealing ahead of the dissemination of research. The global contacts include: Andrew Fitchie (EU) and Leon
van Heerden (SA). Full analyst and global contact details are shown on the back page. Pratik Rangnekar
+91 (22) 6136 7425
pratik.rangnekar@investec.co.in
Table of Contents
Indian 2ws industry to change lanes ..................................................................... 4
Rural areas to drive growth .................................................................................... 5
Near term pain in rural areas could hurt demand .................................................. 5
Changing landscape to benefit a few .................................................................... 8
Competition to hurt profitability of Executive segment ........................................... 8
Hero most vulnerable to rising competitive ...................................................... 10
Premiumisation trend to accelerate ..................................................................... 10
Share of scooter to increase and the industry to shift towards higher engine
displacement ....................................................................................................... 12
Exports provide significant opportunity ............................................................. 14
While China dominates the global 2Ws trade, see increasing shift towards India15
Market share gains from China ............................................................................ 16
One size fits all doesnt work here ................................................................... 17
Africa presents a sizeable opportunity ............................................................... 19
Nigeria dominates the African market ................................................................. 21
Africa beyond Nigeria ........................................................................................... 23
LATAM: Market share gains to drive growth ...................................................... 25
Indian manufacturers gaining a strong hold in LATAM ........................................ 26
Indian players gain at the expense of Chinese ................................................ 26
Colombia- an example of Latin American potential for Indian companies ...... 28
Significant growth opportunities in LATAM ....................................................... 29
Asia could also support 2Ws export growth ...................................................... 31
Bangladesh Indian 2Ws rule the roost ............................................................. 32
We initiate coverage on Bajaj, Hero and TVS .................................................. 33
Bajaj Auto (BAJA.NS) ........................................................................................... 35
Targeting the global market ................................................................................. 37
Bajaj a strong brand in Africa & LATAM ..................................................... 38
Strong structural drivers of Africa and Latin America ....................................... 38
Decline in Oil prices to have limited impact on Nigeria volumes ...................... 39
Expect export momentum to accelerate .............................................................. 40
Along with volumes, exports brings strong profitability ........................................ 41
Page 2 | 27 November 2015

Domestic 2ws: New launches to spur growth .................................................... 42
Executive Segment: Confusing branding & multiple variants............................... 42
Expect volume uptick in the Executive Segment .............................................. 43
Economy Segment: CT100 & Platina to help sustain momentum ....................... 44
Premium Segment: Bajaj a prime beneficiary of the premiumisation trend ......... 44
Three wheelers provide another wheel to profitable growth ................................ 46
Sector leading operating/financial metrics ......................................................... 49
Attractive valuations Initiate with BUY ............................................................. 52
Hero Motocorp (HROM.NS) .................................................................................. 56
Dominance in the Indian 2Ws market .................................................................. 58
Growth to slow down in economy segment ....................................................... 59
Exposure to executive segment a concern......................................................... 61
Premium segment - not Heros forte ................................................................... 64
High scooter industry growth to benefit Hero .................................................... 65
Export a long-term game; first, some short-term pain....................................... 67
Financial strength intact despite headwinds ...................................................... 68
LEAP or a short hop? ....................................................................................... 68
Aptly valued Initiate with HOLD ........................................................................ 71
TVS Motors (TVSM.NS) ......................................................................................... 76
Scooters: At a respectable second place ........................................................... 78
Higher scooters industry growth to benefit TVS ................................................... 79
Premium segment: Strong positioning but limited market share gains........... 80
TVS to remain a challenger in the economy segment ....................................... 82
TVS not a serious contender in Executive segment ............................................ 83
Growth rate to decelerate in mopeds ................................................................... 84
Impressive performance in exports to continue ................................................ 86
Where does TVS stand vs the leader?............................................................. 86
Exports growth to continue............................................................................... 87
Turnaround of Indonesian operations still some time away ............................. 88
Margins should improve, but miss guidance ..................................................... 91
Performance on financial matrix improves, but momentum to moderate ....... 93
Unwarranted valuation: Initiate with Sell ............................................................ 94

Indian 2ws industry to change lanes
The Indian two wheelers industry showcases the remarkable growth experienced by
Indias consumer discretionary segment in the last decade, with sales growing at a
Domestic 2Ws industry growth to slow healthy 11% CAGR over FY01-15. The sector also bounced back quickly after a
down to 7.4% CAGR until 2020 decline in FY08, registering a 12% CAGR over FY08-15, as seen in Figure 1. This
growth was driven by an increase in volumes for both scooters (23% CAGR) and
motorcycles (12% CAGR). We attribute these improved volumes to a number of
factors including rising economic activity and income. Rural markets have witnessed
significant growth too on account of increasing penetration and aspirational
consumption with income levels bolstered by MNREGA, credit availability,
government initiatives and higher farm incomes. However, the market has slowed
recently, with the 2W industry growing by 6% CAGR over FY12-15, due to lower
GDP growth, negative real wage inflation, and limited increase in employment
opportunities and slowdown in rural demand.
In the sections below we argue that double-digit growth rates in the domestic 2W
market are a thing of the past, and based on our analysis of 2W penetration by
household/population and anecdotal evidence from other countries that have
passed through the growth phase and hit maturity, we expect the domestic market
to grow at an 7.4% CAGR until 2020E. However, we forecast strong growth in 2W
exports, and take a close look at Latin American, African and Asian markets, which
we feel are still at nascent stage and provide significant growth potential.
Figure 1: Growth in the domestic 2Ws industry moderating Figure 2: while share of exports in 2Ws sales on the rise
17 16 30% 13% 12% 12% 12%

15 20 12% 13%
Millions
15 13 14 25% 11% 11% 12%

2.5
13 12 20% 15 2.1 11%
1.9 2.0
15% 9% 10%
11 9 1.5
10%
9 8 7 7 10 1.1 9%
Millions
7 7 5% 8%
0.6 1.0 16 8%
0.8 15
7 5 6 0% 12 13 14
4 5 9 7%
5 3 4 4 -5% 8 7 7
6%
3 -10%
0 5%
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Domestic 2Ws sales % YoY Domestic sales Exports Exports (% of sales, RHS)
Source: Investec Securities estimates Source: Investec Securities estimates

Rural areas to drive growth
Our analysis goes beyond current cyclical pressures and suggests that India is near
a tipping point. Although total penetration of 2Ws might look optically low at 7% of
Figure 3: 2Ws % of addressable households
the population, the penetration has reached 67% of the addressable household in
80% urban areas, as seen in Figure 4. At the same time over 80% of urban households
80% 67% 63%
52%
(82 million) are already in the income bracket that can afford 2Ws, leaving little
60% 49% 50%
39% 39% scope of incremental addition of new target customers for 2Ws in urban areas. On
40% 29% the contrary, rural markets offer significant growth opportunity considering the
20% relatively lower level of penetration and higher scope of addition of new target
FY10 FY15E FY20E customers. Penetration of 2Ws in rural areas currently stands at 39% of
Urban Rural All India
addressable households as seen in Figure 5. Moreover, 40% of households are yet
to come in the income bracket who can afford 2Ws, which should potentially drive
Source: Investec Securities estimates relatively stronger growth of 2Ws in the rural markets.
By 2020 we expect penetration of 2Ws to reach 63% of addressable households on
a pan-India basis (from 52% currently) with most of the growth driven by an
increase in penetration and addition of addressable households in the income
bracket that can afford 2Ws in rural areas.
Figure 4: Though we expect urban demand to slowdown Figure 5: rural markets offers significant opportunity
97 96 183
100 90% 200 173 60%
161 50%
90 85 82 80% 80% 142 50%
150 39%
80 73 70%
67 67% 40%
70 60% 103
100 29%
60 50% 30%
49% 73
50 40% 50 20%
FY10 FY15E FY20E FY10 FY15E FY20E
Urban total HH (mn) Rural total HH (mn)

Addresable HH (mn) Addresable HH (mn)
2Ws penetration (% of addresable HH) 2Ws penetration (% of addresable HH)
Near term pain in rural areas could hurt demand

Domestic motorcycle volumes have been relatively subdued over the last few
months as seen in Figure 6. In our opinion, this is a reflection of slowdown in rural
demand. Our channel checks in rural areas indicate relatively weak sentiments
driven by disrupted monsoon both in FY15 and FY16.
Figure 6: Monthly run-rate of domestic motorcycles volumes Figure 7: Monthly run-rate of domestic scooters volumes
950 25% 450 45%
Thousands
391 393
Thousands
897 20% 376 386

886 400 40%
900 873 879 876
15% 350 35%
842 841 300
850 10% 300 30%
244
5% 250 213 25%
800
752 200 173 20%
0%
750 150 15%
-5%
100 10%
700 -10%
Jul-15
Apr-15
Aug-15
Sep-15
FY11
FY12
FY13
FY14
Jul-15
FY11
FY12
FY13
FY14
FY15
Aug-15
Sep-15
Motorcycles YoY (%) (RHS) Scooters YoY (%) (RHS)

In our opinion, there are strong drivers at play which could drive rural
demand:-
Figure 8: Workforce split in rural areas Growth in non-farm sector: Given the limited rural to urban migration in India,
90% a large segment of the population remains in rural areas. However,
2% 3% 4% 5% 9% employment trends in rural areas over the last decade indicate a sharp increase
60%
in trade, infrastructure and construction- particularly of hotels and restaurants -
80% 78% 75% 75% 68%
30% driving rapid growth in the rural non-farm sector. Other areas of growth include
retail trade, STD/PCO telephone booths and the maintenance and repair of
0%
1994 2000 2005 2008 2010
motor vehicles. Share of Agriculture in rural workforce has come down from
Agriculture Construction 84% in 1978 to 68% in 2010 as per NSSO as seen in Figure 9. Also, As part of
Source: Investec Securities estimates
the increasing government spend on infrastructure projects in rural areas, the
laying down of roads in rural areas has resulted in a significant uptick in
construction activity thereby increasing employment in the construction sector.
As seen in Figure 8, share of rural labour force in the construction sector has
increased from 2% in 1994 to 9% in 2010 and in our opinion, this trend should
continue for the foresaid reasons. Moreover the share of non Agri Income has
increased from 14% in 1999 to 28% in 2007, as seen in Figure 10 and Figure
11, thereby further reducing dependence on Agriculture sector for earning
means of livelihood.
Figure 9: Distribution of workforce in rural India

100%
% distribution of workers
80%
60%
40% 84% 83% 80% 80% 78% 75% 75% 68%

20%
0%
1978 1983 1988 1994 2000 2005 2008 2010
Agriculture Construction
Manufacturing Trade/Hotel/Restaurant
Transportation & Storage Others
Source: Investec Securities Research, NSSO
Figure 10: Income distribution of rural India in 1999 Figure 11: Income distribution of rural India in 2007
Non-farm Salaries &
selfemployment renting out agri
Salaries &
7% assets 7%
renting out agri
Non-farm assets 5%
Non-agri wages selfemployment
7% 20%
Agri wages 7% Non-agri wages Agri profit 62%
8%
Agri profit 72%
Agri wages 5%
Source: Investec Securities Research, NSSO Source: Investec Securities Research, NSSO
Wealth in the rural economy has increased significantly: Over the past
decade, although liquidity in Indias rural economy has not increased
significantly, immovable wealth (as a proportion of the rural economy) has
increased substantially given the multi fold increase in land prices, which has
also led to a vast divide in wealth amongst people in rural areas. All this has
happened due to the better connectivity created by road/rail networks over the
last decade, leading to a drastic cut in distance, travel times and ease in

travelling between urban and rural centres. Examples abound of farmers in
Gurgaon and Noida owning premium luxury vehicles or the multi fold increase
in price of non-arable land in Rajasthan.
Diversification out of agriculture: Within the agricultural sector a trend of

people moving towards remunerative self-employment in the non-farm sector is
also evident, highlighting a shift to a productive and modern model of part-time
farming.
All this augurs well for growing 2W demand in rural areas where
penetration is still low, at 39% of addressable households.
Figure 12: Rural to contribute more in domestic motorcycles volume Figure 13: which should drive aggregate volumes of motorcycles
100% 14.5 9%
14.0
Millions
14.0 8% 8%
80% 40% 46% 13.5 7% 13.2 7%
60% 13.0 6% 6% 6%
60% 12.4
12.5 5%
12.0 11.6 4%
40%
61% 11.5 3%
54%
11.0 10.8 3% 10.8 2%
20% 40%
10.5 1%
0% 10.0 0% 0%
FY10 FY15 FY20 FY15 FY16E FY17E FY18E FY19E FY20E
Urban Rural Motorcycles % YoY (RHS)

Changing landscape to benefit a few
Table 1: Motorcycle segments Though we expect slowdown in the growth momentum of the Indian domestic 2Ws
industry, we identify those segments and companies that tend to benefit and those
Segments Engine capacity Price points
that are disadvantaged. We expect competition to further intensify in the Executive
Economy < 110 cc < Rs.45,000 Segment leading to a market share tussle which could potentially put pressure on
Executive 110 -150 cc Rs.45,000- Rs.65,000 margins of the segment. Hero Motocorp should be the
Premium > 150 cc > Rs.65,000 most impacted as the Executive Segment contributes c.70% to Heros volumes.
Source: CRISIL, Investec Securities Research Furthermore, we expect the premiumisation trend to rise further on account of rising
income and aspirations of consumers which could drive the share of the premium
segment in the industry from 19% in FY15 to 23% by FY20E. In our opinion, Bajaj
Auto being a dominant player in the segment, with market share 35% in FY15,
should be a prime beneficiary of this trend.
We expect the following trends to emerge in the domestic two wheeler
industry in India:-
Competition to hurt profitability of Executive segment

Figure 14: Executive segments growth lags Executive segments volumes, representing ~62% of the motorcycle industry,
reported a decline of 2% YoY in FY15 as compared to growth of 9% and 15%
30% 20%
15% 14% reported by Economy and premium segment respectively in FY15. Also, comparing
20% 12% 9%
10% 3% 4% 5% 5% 2% volume growth across segments over last few years suggest that growth in the
0%
-1% Executive segment has lagged both Economy and Premium segments. Executive
-10% -3%-1% -2%
-20% -11%
segment has reported a CAGR of 0.7% over FY12-15, while Economy and
FY12 FY13 FY14 FY15 FY16YTD Premium segments have grown at a relatively higher CAGR of 4% and 6%
Economy Executive Premium respectively over the same period.
We expect the share of executive segment to shrink from 62% in FY15 to 59% by
Source: Investec Securities Research, CRISIL FY20 leading to segment reporting relatively slower growth of 4.3% CAGR over
FY15-20, which could further intensify the market share tussle between players.
Though Hero has managed to maintain its leadership in the segment, with 66%
market share in the executive segment, there is a lot of market share swing
amongst the players over the years, as seen in Figure 16, primarily reflecting
increasing competitive intensity in the segment.
Figure 15: Growth moderates in Executive segment Figure 16: and market share tussle further intensifies
YoY market share change in executive segment
7.5 29% 35% 8%
5% 5% 6%
7.0 30% 6% 5% 5%
23% 4%
6.5 25% 4% 3%
2% 2%
6.0 20% 2% 0% 0%
Millions
5.5 12%
15% 0%
5.0 6.8 6.7
6.5 6.5 10% -2% 0%
4.5 5.8 5% -1% -2%
5% -4% -2%
4.0 -1%
4.7 -2% -4%
3.5 0% -6% -4%
-6% -6% -6%
3.0 -5% -8% -6%
FY10 FY11 FY12 FY13 FY14 FY15 FY10 FY11 FY12 FY13 FY14 FY15 FY16YTD
Executive % YoY Hero Honda Bajaj

Going ahead we expect that the competitive intensity to further intensify in
the executive segment primarily driven by Honda and Bajaj Auto:-
Hondas increase in marketing push: Our interactions with one of the largest
dealers of Honda in Western India (contributing ~1% to Hondas annual volume)
Honda dealers are offering gold coin, suggest a relatively lukewarm customer response to the 2015 CB Shine (125 cc)
gifts and cash discounts to liquidate launched Honda. According to the dealer the new graphics, relatively simpler looks
inventory of Honda Shine and higher price point failed to create excitement among new customers. This
resulted int Hondas market share in the executive segment falling from the peak of
25% in Sep15 (monthly volume of 155K units) to 20% in July15 (monthly volume of
92K units) as seen in Figure 18.
Figure 17: Hondas aggressive push for Shine
Decline in volumes of Shine led to an aggressive marketing push by Honda.
During our channel checks we were told that Honda is pushing volumes of Shine
(executive segment) even though demand environment for motorcycles remains
subdued. We were told that Honda is making it compulsory for dealers to take
delivery of Shine (slowing moving product now), if the dealer wants delivery
of Activa (good demand product). However to liquidate inventory of Shine,
dealers have to come out with offers at their own expense. We came across offers
such as gifts worth Rs.3,000 (like Kitchen articles, Sun Glasses, portable speakers),
1 gram gold coin (~worth Rs.3000), Rs.5000 cash discount, etc.
Furthermore, Hondas recent launch of Livo (110 cc) in the Executive segment
seemed to have increased some traction after the subdued response to the Dream
series. Though it is bit early to gauge the success of Livo, we could see
encouraging response from potential customer and dealers.
In sections ahead we analyse why it is important to break into the
Executive segment for Honda to fulfil its desire to become Numero Uno in
Source: Investec Securities Research India
Bajajs desire to make a comeback: Bajaj Autos market share in the executive
segment (Discover family) has come down to 4.1% in FY16YTD (Apr-Sep15) from
20% in FY13, as seen in Figure 19. We believe the main reasons are 1) a
confusing branding strategy for its Discover platform, wherein it launched multiple
bikes with the same branding, 2) non-focused product promotions due to multiple
models and 3) the discontinuation of a few nonworking models, thereby impacting
their re-sale value and branding. However, our recent interaction with Bajaj Autos
management suggest a strong desire to reclaim market share in the executive
segment with a reengineered strategy and a new product launch in 2HFY16. In our
opinion, the desire to reclaim market share could potentially lead to new product
launches at aggressive pricing, enhanced features and increased marketing efforts.
This could up the ante in the executive segment thereby increasing pressure on
industry margins, in our view.
Figure 18: Honda market share in executive segment Figure 19: Bajaj Auto market share in executive segment
(000' Units) (%) 100 ('000 Units) (%) 14

160 25
150 12
80
140 23 10
130 60 8
21
120 40 6
110 19 4
100 20
2
90 17 0 0
Jul-14
Jul-15
Jan-14
Mar-14
May-14
Jan-15
Mar-15
Sep-14
Nov-14
May-15
Sep-15
Jul-14
Jul-15
Jan-14
Mar-14
May-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Sep-15
Honda executive segment (Volumes) Bajaj executive segment (Volumes)

Honda Executive segment market share (RHS) Bajaj Executive segment market share (RHS)

Hero most vulnerable to rising competitive
Underpinned by increase in competitive intensity and expectation of relatively
slower growth of the executive segment could mean heightened pressure on
operating margins of the segment. As per our interaction with management of Bajaj
Auto, EBITDA margin of the executive segment has come down to 10-11% currently
as compared to 13%-15% a couple of years ago. Pressure on profitability in the
executive segment could hurt Hero the most as it derives 67% of the volumes from
the executive segment, as seen in Table 2.
Table 2: Heros 67% volumes come from executive segment making it the most vulnerable to the increased competition
Proportion of volumes
from executive segment Market Share - Market Share -
Company (FY15) Brands Monthly run-rate FY16 FY15 FY16YTD*
Hero Motocorp 67% Splendour 206,330
Passion 105,581
Glamour 56,901
Total 368,812 66.3% 72.1%
Honda Motorcycles & Scooters 34% Shine 69,015

Dream series (Yuga & Neo) 35,966
Total 104,981 22.5% 20.6%
Bajaj Auto 15% Discover series 21,228 8.4% 4.1%
Source: Investec Securities Research. Note* FY16YTD April15-Sep15
Premiumisation trend to accelerate

Motorcycles can be categorized into three segments in India: 1) economy/entry
segment (engine capacity <110cc, launch price < Rs.45,000); 2) executive segment
(engine capacity 110-150cc, launch price Rs.45,000-65,000); and 3) premium
segment (engine capacity >150cc, launch price > Rs.65,000). The executive
segment continues to be the preferred choice of customers, and this segment
accounts for 65% of industry volumes. However, this mix has changed significantly
in recent years, with the share of the economy segment contracting from 25% in
FY09 to 20% in FY15, primarily as rising incomes have led consumers to trade up
to the executive and premium segments. This has increased the share of the
executive segment from 61% in FY09 to 62% in FY15 and the premium segment
from 14% to 19% in the same period.

Figure 20: Share of premium segment to further increase Figure 21: leading to higher than industry growth
100% 11% 10.5%

14% 17% 18% 10.0%
17% 16% 17% 19% 20% 21% 22% 22% 23%
10%
80%
9% 8.3% 7.9%
60% 8% 7.2%
61% 64%
64% 65% 64% 65% 62% 58% 58% 58% 59% 59%
40% 7%
6% 5.4%
20% 4.3%
25% 19% 17% 19% 19% 18% 20% 22% 21% 20% 19% 18% 5%
3.7%
0% 4%
3%
Economy Executive Premium Total Motorcycles
Economy Executive Premium CAGR FY10-15 CAGR FY15-20E
Figure 22: Change in segment share In our opinion, as aspirations and income level of potential customers of 2Ws
5%
improve further, customers would try to move up the ladder towards the premium
5% FY10-15 FY15-20E segment and the pace of adoption to the premium segment should accelerate in our
2%
view. Also, increased number of product offerings and product launches by different
0%
0%
players in the premium segments has increased awareness and made the segment
more appealing to potential customers. Between FY10-15 the share of premium
-2% segment increased by 2% to 19% of the domestic motorcycles industry. We expect
-2%
-5%
-3% the move to the premium segment to accelerate, driving the share of the premium
Economy Executive Premium segment to 23% by 2020, resulting in higher industry growth for the segment. We
expect the premium segment to grow at 10% CAGR over FY15-20E, significantly
Source: Investec Securities estimates ahead of 5% CAGR growth expected by the domestic motorcycle industry.
Bajaj Auto, being a dominant player in the segment with ~33% market share, should
be biggest beneficiary of the trend of premiumisation in the domestic 2Ws industry.
Figure 23: Share of premium segment on the rise Figure 24: Bajaj Auto should be the prime beneficiary
3.2 22.3% 23.0% 50%

Millions
3.0 21.8%
21.3% 22.0% 40%
2.8 20.8%
21.0% 30%
2.6 20.1%
2.4 3.1 20%
2.9 20.0%
2.2 2.7 10%
18.6% 2.4 19.0%
2.0 2.2
2.0 0%
1.8 18.0% Bajaj Auto Eicher Yamaha Honda TVS Hero
FY15 FY16E FY17E FY18E FY19E FY20E Motors
Premium Segment Share of Premium Segment (RHS) FY09 FY10 FY11 FY12 FY13 FY14 FY15

Share of scooter to increase and the industry to shift
towards higher engine displacement
The 2W market in India was historically dominated by motorcycles; however, over
the past five years a shift in consumer preference towards gearless scooters has
been evident. This, we believe, is primarily on account of new launches with more
Expect increase in preference for powerful engines and improved mileage, design and ride quality. All this indicate
scooters to continue that consumers, especially in urban areas, seem to increasingly prefer scooters as
a second vehicle to move around in traffic congested cities. Moreover, women, who
in India have historically shied away from motorcycles, are now major buyers of
scooters. This trend has helped scooters outgrow motorcycles at a 25% CAGR
over FY10-15 vs. the 8% CAGR growth registered by motorcycles in the same
period. Scooters, which accounted for a 16% share of domestic 2W sales in FY10,
now control 28% of the industry in FY15.
and expect industry to shift towards The Indian scooter industry is shifting toward higher engine displacements (from
higher engine displacement c.100 cc to 110cc and above) which in our opinion is driven by increasing
preference for more powerful engines, improved mileage, design and ride quality.
This shift has resulted in TVS losing market share in from 21% in FY08 to 13% in
FY14, before they could tweak their portfolio to include 110 CC Jupiter (Sep13) and
Scooty Zest (Aug14) which increased market share of TVS to 15% in 1HFY16.
Hero launched 110 cc scooters Maestro Edge (Sep15) and Duet (Oct15) which
in our view should help Hero market share by 100bps over 1HFY16-FY17 to 14%.
While Hero/TVS have equipped Moreover, we expect a gradual increase in proportion of 125cc scooters (relatively
themselves with scooters in 110 cc small now) as technological advancement drives further improvement in fuel
engine displacements, they should efficiency. Players will have to equip their portfolio with 125cc engine displacement
also look at expanding portfolio scooters to benefit from this trend. Currently, the market leader Honda is the only
towards 125cc, which currently only major player with product offering in the 125cc engine displacement.
Honda has presence in amongst the
top three players Along with the factors outlined above we expect the improvement in rural
infrastructure to help scooters maintain the strong growth momentum. Overall we
expect volumes of scooters in the domestic market to grow by 12% CAGR over
FY15-20 leading to share of scooters increasing from 28% in FY15 to 35% by
FY20E.
Figure 25: Share of scooters to further trend upwards Figure 26: leading to higher growth than motorcycles growth
9 40% 16% 15%

34% 35%
Millions
8 14% 12% 12%

32% 33% 35% 11%
12%
7 30% 12% 10%
6 28% 10%
30% 8%
5 24% 8% 7%
7.9 6% 6% 5%
25% 5% 5% 5% 5%
4
19%
21%
5.8 6.5 7.2 6% 4%
3 18% 4.5 5.0 4% 2%
16% 3.6 20%
2 1.5 2.1 2.6 2.9 2% 0%
1 15% 0%
FY16E FY17E FY18E FY19E FY20E CAGR
FY15-20E
Scooters Scooters share (%) (RHS) Scooters Motorcycles Mopeds

Figure 27: Honda dominates scooters market with c.60% share Figure 28: Shift toward bigger engines dents TVS market share
23% 60% 25%

21% 19%
19% 55% 20%
17% 15% 15% 15%
15% 15% 13%
50% 12%
13%
11% 10% 9%
9% 45%
6%
7% 4%
5% 2%
5% 40%
0%
FY12 FY13 FY14 FY15 1HFY16
Honda (RHS) Hero TVS Susuki Industry share of scooters between 90 cc TVS Market Share
Higher proportion of domestic scooters in aggregate volumes makes TVS a

preferred play on the scooterisation trend.
Figure 29: Domestic scooters volume share (%) Figure 30: Market share in Indian scooters market
30 (%) 28 20 (%) 19 19 19
27
25 23 18
22 17
21 16
20 16 15 15
15
15 14
11 11 13 13
11
9
10 7 12
5 10
FY16YTD
FY12
FY13
FY14
FY15
FY16YTD
FY12
FY13
FY14
FY15
Hero TVS Hero TVS
Table 3: Domestic two wheelers industry growth expectations
Sales in units FY14 FY15 FY16E FY17E FY18E FY19E FY20E

Bikes 10,479,819 10,759,664 10,576,750 11,422,890 12,222,492 12,955,841 13,733,192
Scooters 3,602,744 4,506,289 5,047,044 5,804,100 6,500,592 7,215,657 7,937,223
Mopeds 722,920 755,503 725,283 761,547 799,624 839,606 881,586
Total Two wheelers 14,805,483 16,021,456 16,349,076 17,988,537 19,522,709 21,011,104 22,552,001
Growth
Bikes 4% 3% -2% 8% 7% 6% 6%
Scooters 23% 25% 12% 15% 12% 11% 10%
Mopeds -8% 5% -4% 5% 5% 5% 5%
Total Two wheelers 7% 8% 2% 10% 9% 8% 7%
2W Market split
Bikes 71% 67% 65% 64% 63% 62% 61%
Scooters 24% 28% 31% 32% 33% 34% 35%
Mopeds 5% 5% 4% 4% 4% 4% 4%

Exports provide significant opportunity
Over the last 15 years (FY00-FY15) Indias export of 2Ws has grown at a 23%
CAGR in volumes terms and by 27% CAGR over the same period in value terms.
From little over 100K 2Ws exported in FY00, India exported ~2.5 million units in
FY15. The surge in exports is primarily driven by strong growth in exports to African
Figure 31: 2W exports growth outpace and Latin American countries and steady growth in Bangladesh and Sri Lanka.
domestic Given the strong growth in exports, share of exports in aggregate 2Ws volumes
increased from 2% in FY00 to 13% in FY15, as seen in Figure 31.
20 year 17% We undertake an analysis of the dynamics in each of these markets in LATAM,
10%
15 year 23% Africa and Asia in the sections below and come to the conclusion that these
11%
10 year 17% markets offer huge growth potential for Indian 2W companies, primarily as: 1) these
9%
5 year 17% markets are still at a nascent stage, with very low penetration, which means that
12%
0% 5% 10% 15% 20% 25% even limited incremental growth in income has a magnifying effect on motorcycle
sales; 2) Infrastructure in some of these markets is very poor and public transport is
Exports (% YoY) Domestic (% YoY) sometimes non-existent (more so in some African countries), hence motorcycles
offer a good alternative for commuters; 3) We see room for market share gains from
Source: Investec Securities estimates Chinese motorcycle manufacturers, who still hold a majority share in these markets,
as they are typically of lower quality and use old technology even though they
provide motorcycles at cheaper price points. Having established a strong brand in
most of these markets, we think Bajaj clearly has the first mover advantage and
should be in a better position than Hero to capture growth.
Figure 32: Share of exports in Indias 2Ws on the rise
3,000 15%
13%
13%
Figure 33: Share of India 2Ws export FY15 12%
2,500 12% 12% 13%
11% 12%
Colomb 10% 11%
ia 15%
Thousands
Sri 2,000
Lanka 9%
Others 12% 7%
1,500 7%
42% 6% 7%
Nigeria 5%
12% 1,000 5%
Bangla 4% 4% 5%
Philippi 4%
Nepal desh 3% 3% 3%
nes 6% 500 4% 2% 2%
6% 8% 2% 4% 3%
Source: Ministry of commerce, Investec Securities
- 1%
Research
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Exports Exports (% of sales, RHS)
Source: SIAM, Investec Securities Research

Figure 34: Indias exports of 2Ws has increased by 27% CAGR over FY00-FY15
2,000 Colombia Sri Lanka Nigeria Bangladesh Philippines Nepal Angola Kenya
1,800
Uganda U.A.E Mexico Peru Guatemala Egypt Iran Others
1,600
1,400
1,200
US$ m
1,000
800
600
400
200
0
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Source: Ministry of Commerce, Investec Securities Research
Figure 35: Share in global 2ws trade 2014

While China dominates the global 2Ws trade, see
Others China increasing shift towards India
20 28
Global trade of 2Ws is estimated to be ~US$20bn in 2014 with China dominating
Thailand
6 with the third of the share at 28% with exports of 2Ws worth US$5.8bn. India is
Italy 7 the third-largest exporter at US$1.8bn in 2014, following remarkable growth in
India 9 exports from US$62m in 2000. India and China are emerging as global power
German Japan house of 2Ws exports globally with share of China in global 2Ws trade increasing
y9 USA 7 15 from 16% in 2005 to 28% in 2014. While Indias share increased from ma ere 2%
to 9% over the same period.
Source: UN Comtrade, Investec Securities Research
Figure 36: Share of countries in 2Ws global trade
100%
90%
80% 39% 38% 40% 42% 42% 40% 41% 42% 41%
46%
70%
60% 5% 6%
2% 2% 7% 7% 7% 6% 7% 7% 7%
50% 1% 2% 8% 6%
5% 7% 8% 9%
4%
40% 17%
38% 36% 32% 26% 19% 16% 14% 15%
30% 21%
20%
27% 30% 29% 29% 28%
10% 18% 20% 22% 21%
16%
0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
China Japan India USA Others

Market share gains from China
Increased penetration of 2Ws in China and increasing government restriction of
2Ws sales in certain provinces were one of the reasons that resulted in Chinese
companies looking for growth avenues overseas leading to surge in 2Ws export
from China. In 2014 China exported 11.4 million 2Ws representing ~55% of total
2Ws sales from China. However in our opinion, rising exports from India could
compete with China and potentially overtake China as:-
Indian companies offer a better quality proposition: Our channel checks in

Nigeria and Sudan suggest that quality is a perennial issue with Chinese
Chinese motorcycles are ~30% motorcycles. As per 2W dealers the only unique selling proposition that
cheaper but Indian offer better quality Chinese motorcycles offers is low cost offering with limited focus on product
proposition durability. This is also reflected in the consistently lower average realisation for
Chinese 2Ws exports as compared to Indian motorcycles. In 2014, average
realisation for 2Ws exports from China stood at US$ 504 per unit which is
~30% cheaper as compared to the average realisation of 2Ws exports from
India as seen in Figure 37. We believe that Indian players have an advantage
over their Chinese competitors in this area.
Figure 37: Average 2Ws export realisation from China significantly lower as compared to India
800 Realisation /unit (US$)

723 710
702
682
700
605 618
600 553
531 525
503 512 504
494
500 457
421 417 415
400 359
321
300 264
200
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
China India

Indian score quite well on after sales Poor after sales service by Chinese companies: Our checks with dealers in
service as compared to Chinese the markets of Nigeria and the South of Sudan (where Indian players have
made substantial inroads) suggest that Chinese motorcycles are losing
popularity as after sales service of Chinese motorcycles can be a major issue,
and consumers sometimes struggle to find service centres to fix their
motorcycle. Our checks also highlighted that people acknowledge Bajajs good
Bajaj has built a strong brand around
quality and lower need of maintenance as compared to Chinese motorcycle
durability, quality and need of lower
brands.
maintenance
Chinese manufacturers dont have muscle/desire to invest in technology:

Our talks with dealers in Africa highlight that almost 20-50% Chinese
motorcycles have some defect. This is where we think Indian companies are
drawing consumers attention as they are shaping the two wheeler market in
Chinese manufacturers dont have
low income but high potential countries (as they have done in India, which was
muscle/desire to invest in technology
in a similar position few decades ago). India has a huge domestic market with
three major domestic players (Hero, Honda and Bajaj) holding over 80% market
share. We think this means that the industry has been fairly disciplined and
these companies have the financial muscle to innovate with high-quality
products, cut costs due to volume and aggressively expand in other markets.

Although Chinese domestic motorcycle market and exports are huge, the
industry is fragmented with over 50 players, and the top 10 players collectively
hold c.60% market share. We think this makes it more difficult for any one
player to be highly profitable and pricing wars are very common, with pricing
taking precedence over quality.
Chinese manufacturing wages have Manufacturing in China is becoming more expensive: On the back of rising
increased c.400% over the last 10 wage inflation the cost of manufacturing in China is increasing every year.
years Chinese manufacturing wages have increased c.400% in CNY terms over the
last 10 years. Comparatively, motor vehicle manufacturing wages have grown
by a 80% in India over the same period.
Figure 38: Comparing manufacturing wage inflation in China and India
450%
400%
350%
300%
250%
200%
150%
100%
50%
0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
China India
Source: National bureau of statistics China , Labour Bureau GOI, Investec Securities research
Over 2004-2014 exports of 2Ws from China has grown at 1% CAGR to 11.4 million
units while exports from India has grown by 21% CAGR over the same period to 2.6
million units as seen in Figure 39. We expect this trend to further accelerate.
One size fits all doesnt work here

Indian companies have several decades of experience in developing the 2W market
in India, arguably the most diverse market in the world, and hence we think they
have the experience needed to woo a diverse range of customers. African and Latin
American countries display similar diversities. Hero, Bajaj & TVS are working hard
directly and through partnerships to develop the market by launching products
which are customised for these markets, combined with market-relevant ad
campaigns. Furthermore, we think the Indian players understand the importance of
pre-sales experience, quality service and brand building. On the other hand, we
think Chinese players often are at a disadvantage in this respect, with a limited
focus on brand building and often low-quality service. Often their only focus seems
to be on manufacturing and pushing motorcycles in these markets at lower prices,
an edge which they are slowly losing.

Figure 39: Pace of 2Ws exports from India accelerate while China is not growing
('000 units) 2,800

('000 units)
12,000
2,300
10,000
8,000 1,800
6,000
1,300
4,000
800
2,000
0 300
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
India (RHS) China
Source: Un Comtrade, Investec Securities estimates

Africa presents a sizeable opportunity
Given the limited statistics available on African markets we analyse the international
trade flow data on 2Ws to understand the opportunities and market dynamics of
each of these markets. In our view, given the limited manufacturing of two wheelers
in the frontiers markets of Africa, trade flow data gives a good representation of
these markets.
The African two wheeler market, excluding South Africa, in estimated to be worth
US$2bn in 2014 with volumes of 3.4 million units. Value of exports of two wheelers
to frontier markets of Africa have grown at a CAGR of 22% between 2000 and
2014. Nigeria is the biggest African market, representing 42% (as seen in Figure
41) of the regions 2W demand, with 1.5m unit sales worth over US$ 722m in 2014.
Despite this strong growth in the region, we estimate penetration in most African
countries (except for Nigeria) is still very low. We estimate that average penetration
of 2W in Africa is 3.4%, with Nigeria having the highest penetration at 7.6%; ex
Nigeria, the region has a 2W penetration of just 2.2%.
In most of the frontier markets of Africa, infrastructure and public transport is
virtually non-existent with well paved roads restricted to top 2-3 cities in each
country. During our channel checks in Nigeria we were made to understand that the
lower middle class in the region either walks to work or use Boda-boda (two wheeler
taxi).
Over the last few years there has been an increasing trend of opting for two
wheelers as a personal mode of transport. Hence we believe 2Ws could play a
major role as a mode of transport either by way of commercial taxi or as a personal
mode of transport.
Figure 40: Africas 2W market has grown at 22% CAGR over 2000-14 Figure 41: Key African frontier markets for 2Ws CY14
1,400
1,200
Ghana 2.9% Others
1,000 Algeria 3.1% 13.4%
800 Mali 3.6%
US$ m
Nigeria 42.0%
600 Benin 3.9%
400 Congo 4.1%
200 Egypt 4.5%

- Kenya 4.9%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Guinea 5.3% Tanzania Morocco 6.3%

5.9%
Source: UN Comtrade, Investec Securities Research Source: UN Comtrade, Investec Securities Research
Africa market share swing from Japanese to Chinese and now to Indian
The frontier markets of Africa have seen interesting market share swing in the 2Ws
market among the Japanese, Chinese and Indian players historically. Advent of
imports from China resulted in a cumulative share of Japanese manufacturers
falling from 43% in 2000 to a mere 2% in 2014. Its worthwhile to note that the share
of Japanese companies in 2014 should be a tad higher if we include the production
facility started by Honda in Nigeria and Kenya with aggregate capacity of 0.15
million units. On the other hand, cumulative market share of imports from China
increased from 25% in 2000 to 68% in 2014, as seen in Figure 42.
However going ahead, we expect significant market share gains for Indian players
in Africa primarily from the Chinese manufacturers, as explained in earlier sections
Market share tussle with China

Figure 42: Market share in frontier markets of Africa
100% 5 6 5 4
10 8 10 6 8 6 10 6
90% 6 5 4 3 3 2 2
27 22 22 9 7 4 5 5
11 3 6 12 18 18
80% 3 24 28 26
2 19
70% 20
28
60%
43 5
50% 4
40% 80 79 84 81
77 78 73 73
65 67 65 68
30% 4 53
20% 46
10% 25
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
China India Japan Others

Figure 43: Indian player have made inroads in key markets Figure 44: still presenting significant opportunities to explore
800 722 50% 60% 2,000 50% 60%

45% 1,510 45%
50% 50%
600 35% 1,500 35%
Thousands
40% 40%
US$ m
400 21% 30% 1,000 21% 30%

14% 17% 14% 17%
2% 1% 2% 5% 20% 2% 1% 2% 5% 20%
200 102 91 85 78 70 67 63 54 50 500 185 186 153 130 135 126 144 83 78
10% 10%
- 0% - 0%
Size of the market (US$ m) Market share of India (RHS) Size of the market ('000 units) Market share of India (RHS)
Though Africas 2Ws market (ex-South Africa) has grown at 12% CAGR over 2006-
2014, Indias exports to Africa have grown by 43% CAGR over the same period as
seen in Figure 45. The surge in Indias exports to Africa is primarily driven by
Nigeria, which reported growth of over 60% CAGR over the same period.
Figure 45: Indias 2Ws export to Africa has grown at 43% CAGR Figure 46: Destination for Indias 2Ws export Africa - FY15
500 (US$m)
450
400 Others 10%
350
Congo 3%
300 Tanzania 3%
250 Guinea 4%
200 Nigeria 45%
Egypt 8%
150
100
50 Uganda 9%
-
Kenya 9%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Angola 9%
Nigeria Angola Kenya Uganda Egypt
Guinea Tanzania Congo Others
Source: Ministry of Commerce, Investec Securities Research Source: Ministry of Commerce, Investec Securities Research

Nigeria dominates the African market
Nigeria was the first country in the frontier markets of Africa to experience the 2Ws
boom. Sales of 2Ws in Nigeria grew from 0.1m units in 2000 to 1.5 million units in
Figure 47: Boda-boda stand in Nigeria
2014 (a 20% CAGR). The country represented 42% of Africas 2W demand, with
1.5m unit sales worth over US$ 722m in 2014.
Though the penetration of 2Ws in Nigeria stands at ~7.1%, more than half of the
2Ws sold in Nigeria are used as commercial taxis, popularly called Boda-boda, A
substantial amount of motorcycles in Africa are used for commercial purposes such
as taxis and are known by different names in different countries: Okada (former
Nigerian airline) in Nigeria, Boda-Boda (border to border) in Kenya and Uganda,
Zemidjan (take me fast) in Benin, Kabu Kabu in Niger, Velo-taxi in Senegal, Oleyia
in Togo, and Bendkin in Cameroon. High unemployment rates and poor public
transport created the opportunity for two wheelers to be used as taxis (able to
Source: Investec Securities Research transport up to two customers as well as luggage, enabling the driver to earn a good
income). Demand for these taxis was substantial, as many African countries grew
rapidly with nearly non-existent public transport. As two wheelers were unaffordable
for many consumers, financing companies cropped up and provided funding to buy
a 2W taxi by keeping it as collateral.
Figure 48: Nigeria 2Ws market has grown at 20% CAGR Figure 49: Volume of Nigeria 2Ws market
800 747 722 2.0

1.7 1.7
700 647 1.8
615 1.5 1.5
1.6
600 529 543 1.3 1.4
1.4
1.1 1.1 1.1
US m
500 436 1.2 1.0

406 380
400 348 1.0 0.9 0.9
287 277
Millions
300 0.8
0.6 0.4
200 141
92 0.4 0.2
100 48 0.1
0.2
- 0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Indian players gain significant market share in Nigeria

Indian players have seen immense growth in Nigeria with Indias 2Ws export
growing by 73% CAGR over FY06-15. Most of this growth has come from market
share gains at the expense of Chinese players with the market share of Indian
Bajaj Auto is the single largest player
players in Nigeria growing from just 1% in 2006 to 36% in 2014. Chinese players
with over 30% market share in Nigeria
cumulative market share declined by 34% in the same period to 62% in 2014.
Bajaj Auto is the single largest player with over 30% market share in Nigeria. Our
primary channel checks indicate that Bajaj has become known for superior quality
and need for lower maintenance in most of the African countries.
Figure 50: Market share of Indian players on the rise Figure 51: Driving strong growth in Indias export of 2Ws to Nigeria
100 1
4 251 225 225
12 23
28 22 212
80 37 39 36
201 188
60
96 151 127
92
US$ n
40 84
69 75 75 104
60 58 62 101 85
20
51 31
-
2006 2007 2008 2009 2010 2011 2012 2013 2014 2 6
1
China India FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Dependence on Crude is reducing
Petroleum exports as a proportion of GDP have fallen from 34% in 2011 to 22% in
2014 indicating the reducing dependence of the Nigerian economy on oil.
Nonetheless even at this level, oil remains one of the prime drivers of the economy.
The price of oil has corrected c.50% since the beginning of 2015. During the last
instance of such a fall in 2009, Nigeria's GDP fell 19%. This time around one would
need to account for the reduced contribution of petroleum products to GDP which
could mean relatively lower impact on the economy and there by demand of 2Ws.
Figure 52: Strong correlation between 2Ws & GDP Growth Figure 53: Correlation between oil exports and GDP growth
40.0 (% of GDP) (% YoY) 60%
50%
25% 35.0 30%
0% 30.0 0%
-25%
25.0 -30%
-50%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
20.0 -60%
2007
2008
2009
2010
2011
2012
2013
2014
GDP growth (%) 2Ws volume growth (% YoY) Oil exports GDP growth (RHS) Oil exports (% YoY) (RHS)
Source: OPEC, Investec Securities Research Source: OPEC, Investec Securities Research
Strong long term prospects

Near term headwinds brought on by lower crude prices should lead to weak GDP
Figure 54: Nigeria per capita GDP to trend up
growth but we believe that the long term potential of Nigeria as Africas leading two
600 (US$bn) 574 (US$) 3,400 wheeler market remains intact driven by strong structural drivers of the economy.
550 3,200 As per IMF, the pace of expansion of the Nigerian economy should accelerate
522 515 518
3,000 from 2016 after an expected slowdown in 2015, as seen in Figure 55. This, in our
500 467
2,800 view, should drive the per capita income and thereby increase the preference for
450 419 2,600 2Ws as a personal mode of transport. Our channel checks in Nigeria also reveal
400 2,400 that as the income of people increase they tend to opt for 2Ws as a personal mode
2012 2013 2014 2015 E 2016 E 2017 E of transport as compared to using 2Ws commercial taxi. In our opinion, this could
GDP GDP per capita (RHS) potentially create a big opportunity for Indian 2Ws manufacturers over the medium
Source: IMF, Investec Securities Research term.
Figure 55: Near term headwinds should recede Figure 56: driving uptick in per capita income
100 (%) 14.0 1,000 ('000 Niara) 910
(Tn Niara)
900 835
90 12.0
10.0 800 762
80 10.0 685
700 611
70 8.0 600 518 540
6.3 6.0 479
5.4 5.5 5.8 500 441
60 4.9 5.0 5.3 6.0 397
4.8 355
4.3 400
50 4.0 300
2010
2011
2012
2013
2014
2015E
2016E
2017E
2018E
2019E
2020E
2015E
2016E
2017E
2018E
2019E
2020E
2010
2011
2012
2013
2014
GDP (Tn Niara) GDP Growth (%, RHS)
Source: IMF, Investec Securities Research Source: IMF, Investec Securities Research

Africa beyond Nigeria
Other African countries also present Africa is generally seen as a large homogenous market and Nigeria is often a proxy
enormous untapped opportunities for the African market from a 2W perspective. However, there are other markets as
well where penetration is low and the market is in growth phase. At the same time,
we also observe markets like Algeria where per capita income is high enough but
2W penetration is low. This makes us believe that Algeria is likely to have
leapfrogged the stage of 2W popularity. Ghana is a small market with low
penetration. In Figure 57 and Figure 58:Figure 58 we compare key African 2W
markets on four metrics; Market size, GDP per capita, 2W penetration and Share of
Indian companies in the market.
Figure 57: Indias share in key African 2W markets Figure 58: Penetration of 2Ws vs GDP per capita in Africa
200 Tanzania Nigeria (1.5m 6000
180 Guinea units) Algeria
5000
160 Kenya
GDP per capita (US$)

140 Mali
Egypt 4000
120 Benin
Mozambique Egypt Nigeria
100 3000
Algeria Uganda
80 Ghana
60 2000
40 Burkina Faso Kenya
1000 MozambiqueTanzania Benin Mali
20 Ethiopia Congo Uganda Guinea
0 0
0% 20% 40% 60% 80% 100% 0% 2% 4% 6% 8% 10% 12% 14%
Share of India in 2W imports (%) 2W Penetration of 2Ws (%)
Source: Nigeria total quantity is c.1.5m units, Investec Securities estimates Source: Investec Securities estimates
Figure 61, provides a snapshot of various African markets on the basis of their
market size and Indias potential in these markets. Further, based on the economic
outlook of these countries we try to find potential winners for the future.
While Nigeria, Egypt and Kenya are three markets where Indian companies have
Figure 59: Tanzania market share by country
enjoyed considerable success, four other markets that we think could become
100%
important are:-
80% Tanzania (Market Size US$102m, 0.2m units): On the back of structural reforms
60%
40%
in the financial system and driven by a boom in agriculture, Tanzania is likely to
20% become a middle income country. This should drive growth in the market and
0% Indias share in the market has been increasing.
2002
2005
2000
2001
2003
2004
2006
2007
2008
2009
2010
2011
2012
2013
2014
Mozambique (Market Size US$44m, 0.1m units): Following large discoveries in

China India Japan Others mineral and petroleum resources, the country is on the road to monetise these
resources. Investments are ongoing and their completion is likely to boost
Source: Investec Securities estimates government financials.
Figure 60: Uganda market share by country Ethiopia (Market Size US$14m, 0.01m units) and Uganda Market Size US$47m,
0.1m units): While these are two markets where Indian companies already have a
100% significant presence; economic reforms and control over inflation is likely to allow
80% them to maintain their high growth rates. These could potentially grow into large
60%
40% two wheeler markets. Indian companies are likely to face rising competition here.
20%
0%
2000
2007
2010
2013
2001
2002
2003
2004
2005
2006
2008
2009
2011
2012
2014

Figure 61: Expect enormous opportunities as economies growth and Indian players expand their penetration into untapped geographies
Large market (>100k pa) - Low share (<30%) Large market (>100k pa) High share (>30%)
Countries that should see greater focus from Relatively larger African economies;
Indian 2W cos; growth depends on winning a Tanzania, Mozambique Indian cos enjoy a sweet spot; their performance
larger share & transition to D-IV. is linked to GDP growth & political stability.
Tanzania 10% Real GDP growth in lcy (%)
10% Real GDP growth in lcy (%)
Agri: 34% of GDP; Likely to attain Middle income 8%
status; Greater fin. inclusion to boost growth. 8% Nigeria
6% 99% of 2Ws used as cabs.
Guinea 6%
2014 Ebola political tensions & infra shortages; 4% Oil is the prime driver of economy, lower oil prices
Mozambique
4% to have a deep negative impact.
Nigeria
Kenya
2015 IMF assistance should aid GDP.
Tanzania
Guinea
2%
Egypt
Benin
Mali
2% Kenya
Mali 0%
0% CY14 CY15E CY16E Agri: 30% of GDP; Tourism; the other large eco.
Commodities remain key risk
CY14 CY15E CY16E driver, was affected in 2014 due to terrorism.
Key exports Cotton (36%) & Gold (21%) 3,500 GDP per capita (US$) 3,298 3,303 Government stressing on addressing infra, energy
2015 / 2016 Structural reforms, political stability, 3,000
1,200 GDP per capita (US$) 1,006
2,500 and security challenges.
Mozambique 1,000 822
800 573 630
755 2,000 1,416 Lower fuel prices are a positive
Increasing investment in mineral exploration will 1,500
600
1,000 Egypt
carry forward 2014 momentum to 2015/2016. 400
500 Severe downturn due to political situation.
Size of the market (units)
200
Benin 0 0
Recently undertook reforms to promote private
Nigeria
Kenya
Egypt
Commodities remain key risk
Tanzania
Mozambique
Mali
Benin
Guinea
sector and restore business confidence

Cotton 40% of GDP and 80% of exports Elections are due in Oct / Nov.
Ethiopia, Uganda
2015 / 2016 Structural reforms, political stability,
Small market (<100k pa) - Low share (<30%) Small market (<100k pa) - High share (>30%)
Too small to individually move the needle. 10% Real GDP growth in lcy (%) Indian companies have had early successes
8% Real GDP growth in lcy (%)
Key is identifying whether these countries can 8% Would have to fend off competition especially
make the transition into a large 2W market. 6% 6% from Chinese and hold on to market share.
4% 4%
Algeria
Oil and gas - 98% of exports, 58% of government 2% Uganda
2%
revenue and 28% of GDP. 0% Key produce: Coffee, tea, gold
Continued weakness in oil prices is the driver of 0% Uganda Ethiopia 2014: Infra investment, private consumption and
the weak economic outlook. Algeria Ghana CY14 CY15E CY16E agri rebound (27% of GDP) drove GDP growth.
CY14 CY15E CY16E 2015-16: Higher growth dependent on
Government to focus on controlling public
expenditure, revisit the viability major 800 GDP per capita (US$) 726
improvement in government financials
6,000 GDP per capita (US$) 5,532
infrastructure projects, reduction of imports. 5,000 600
575 Ethiopia
4,000 Increasing FDI due to reforms and privatisation.
Ghana 3,000
400 Agriculture - 40% of GDP; 70% of export earnings
Financial indiscipline and rising indebtedness the 2,000 1,474
200 Volume growth to offset lower commodity prices
main cause of the ongoing economic weakness. 1,000 Double digit inflation is now under control.
0
2016 recovery due to higher oil & gas production, 0
Uganda
Ethiopia
Algeria
Ghana
private sector investment, political stability

Countries likely to
transition
India share in 2W imports (%)
Source: Un Comtrade, IMF, Investec Securities Research
Table 4: Snapshot of African 2Ws market
Size of the Size of the market Share of India Penetration of GDP per capita GDP growth GDP growth GDP growth
Market market (US$ m) (units million) exports 2Ws (%) (US$)* CY14 CY15E CY16E
Tanzania 102 184,950 14% 2.1% 1,006 10% 4% 8%
Guinea 91 185,500 21% 12.0% 573 5% 10% 11%
Kenya 85 153,245 44% 3.3% 1,416 10% 8% 12%
Egypt 78 129,621 54% 2.5% 3,304 6% na na
Congo 70 134,690 21% 1.3% 437 10% 13% 11%
Benin 67 126,084 3% 5.3% 822 5% -4% 8%
Mali 63 144,487 3% 7.3% 755 8% -8% 7%
Algeria 54 83,416 2% 1.1% 5,532 3% -13% 6%
Ghana 50 77,531 4% 2.4% 1,474 -20% 1% 9%
Uganda 47 83,765 90% 1.6% 726 8% -3% 5%
Mozambique 44 112,201 4% 2.3% 630 7% 1% 12%
Senegal 27 60,281 1% 1.5% 1,072 5% -3% 8%
Ivory Coast 26 51,682 5% 0.8% 1,495 9% -6% 10%
Burkina Faso 25 40,591 16% 1.0% 717 2% -9% 8%
Ethiopia 14 17,055 62% 0.1% 575 12% 10% 8%
Namibia 7 5,954 24% 5.0% 6,095 2% -6% 8%
Source: Un Comtrade, IMF, Investec Securities Research

LATAM: Market share gains to drive growth
Given the limited manufacturing of 2Ws in Latin America (ex-Brazil) we analyse the
trade flow data to understand the market potential for this geography. We estimate
that Latin America (ex-Brazil) is a 2.6m unit 2W market worth US$2bn per annum
and has grown at a strong 21% CAGR over 2003-13. Argentina, Colombia and
Mexico are the most significant markets for 2Ws, which dominated 63% of the
regions demand. Argentinas 2Ws import decline of 56% YoY in 2014 dragged
down aggregate LATM (ex-Brazil) volume from 3.3m units in 2013 to 2.6m units in
2014. Indian manufacturers have had limited inroads to Argentina with a mere 12%
market share in CY14, which translated as less impact for Indian manufacturers.
Brazil is a 2m unit p.a. market with Honda dominating c.80% of the market.
Figure 62: Imports of 2Ws in LATAM has grown at 20% CAGR over 2003-2014 to US$2bn in 2014
2,800
2,600
2,400
2,200
2,000
1,800
1,600
US$ m
1,400
1,200
1,000
800
600
400
200
-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Argentina Bolivia Chile Colombia Cuba Dominica Ecuador

El Salvador Guatemala Honduras Mexico Paraguay Peru Venezuela
Figure 63: Key markets for 2Ws in LATAM (ex- The size of the LATAM 2Ws market, excluding Brazil, has increased from just over
Brazil) CY14 300K units in 2000 to 3.3 million units in 2013, as seen in , registering CAGR of
20% over the same period. The strong growth was primarily driven by Argentina,
Colombia and Mexico which grew by CAGR of 16%, 23% and 18% respectively
Paraguay 5% Others Argentina
13% 13% over the same period.
Chile 5%
Ecuador 6% Colombia 24%
Peru 8%
Mexico 26%
UN Comtrade, Investec Securities Research

Indian manufacturers gaining a strong hold in LATAM
Indias export of 2Ws to LATAM (ex-Brazil) grew by 24% CAGR over FY05-15 with
exports of US$493mn in FY15, as seen in Figure 64. Exports to Colombia have
been a major contributor, representing 55% of Indias 2Ws export to the LATAM
region and reporting a growth of 24% CAGR over the same period.
Figure 64: Indias export of 2Ws to LATM has grown by 24% CAGR Figure 65: Indias 2Ws export in LATAM (ex-Brazil) - FY15
500
400 Argentina 5% Others

11%
300
US$ m
Guatemala
200 8%
Peru 7% Colombia 55%
100
Mexico
- 13%
FY05 FY06 FY08 FY07 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Colombia Mexico Peru Guatemala Argentina Others
Source: Ministry of Commerce, Investec Securities Research Source: Ministry of Commerce, Investec Securities Research
Indian players gain at the expense of Chinese

The impressive growth experienced by Indian companies has come primarily at the
cost of Japanese and even Chinese players in select markets; Indian companies
have been able to increase market share from 4% in Latin America in 2007 to 22 %
in 2014.Chinese and Japanese companies witnessed a decline in share of over the
same period as seen in Figure 66. Moreover Indian player have made remarkable
in-roads in most of the key 2Ws markets in the Latin American region (ex-Brazil)
with market share over 50% in Colombia, the biggest 2Ws market in the region, as
highlighted in Figure 75 and Table 5 .
Figure 66: Market share of 2W players in LATAM (ex-Brazil)
100%
90% 19 16 18 20 20
28 26 24 28
80% 38 35 4 3
49 43 46 47 5 3 4
70% 9 7 9 15 17
8 6 7 19 22
60% 9 9 4 9
13
50% 11
22 13 10
40% 30
34 7 67
30% 61 63 65 61
11 56 56 57 54
6 45
20% 39
4 32
10% 21 21
13
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Figure 67: Indian players have made in-roads in key markets Figure 68: still significant scope for volumes expansion
600 60% 800 60%
53%
674
700 53%
500 50% 614 50%
600
400 34% 40% 40%
500
34%
Thousands
US$ m
300 30% 400 326 30%

516 513
14% 300
200 15% 20% 203 20%
9%
9%
263 9% 200 15%158 135 129 14%
7% 116
100 166 10% 9% 9% 9% 71 10%
125 2% 1% 100 7% 46 46
112 100 73 0%
54 50 36
2% 0% 1% 0%
- 0% -
2Ws Market Size (US$ m) Market share of Indian players (RHS) 2Ws Market Size ('000 units) Market share of Indian players (RHS)

Colombia- an example of Latin American
potential for Indian companies
Bajaj Auto holds 44% market share in Colombias 2W market grew at a 21% CAGR over 2000-14 (as seen in Figure 69 &
Colombia Figure 70), while Indian players have grown at an impressive 68% CAGR in this
country. The focus of Indian players on this region, along with their quality offering
at reasonable prices, means that Indian motorcycles now dominate with over 50%
of a market once controlled by Chinese and Japanese manufacturers. Bajaj Auto
has made successful inroads in Colombia being the single largest player with 44%
of the market share.
Figure 69: Colombia 2Ws imports grew by 21% CAGR in value terms Figure 70: as well as in volume terms
600 540 516 700 627 614

484 540 558
500 426 600
500 461
400 383
400
300 250 245 230 245 289 286
300 248 230
182
200 150 157
96 200
100 38 37 47 53 100 44 39 51 69
- -
Colombia 2Ws Imports (US$ m) Colombia 2Ws Imports volume ('000 units)
Figure 71: Market share in the 2Ws industry of Colombia
100
12 9 8 9
90 19 14
23 26 20 5 5 6
33 33 28 7 4
80 40
51 48 11
70 12 14
12 17
60 44 52 54 50
27 27 52
50 28 37
37 19
28 33
40
30 40
42 27
20 17 17
37 39 39 37 35
33 34 29 33
26
10 4
0 12 14 14
6 7
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Significant growth opportunities in LATAM
While we believe Colombia offers a great example of how quickly Bajaj, Hero and
TVS can translate an export opportunity into exponential growth, we see similar
growth opportunities in other LATAM countries due to two key factors:
Figure 72: Industry expansion to drive volume
50% 54%
60% Strong industry growth to drive volumes for Indian players: In markets
35% 35% where Indian players already have a significant presence such as Colombia
40%
(50% market share) and Guatemala (34% market share), we see growth for
20% 6% 5% Indian players piggybacking on industry growth. Low penetration of 2Ws in
0% these markets (6% in Colombia, 5% in Guatemala) should lead to 2Ws industry
Penetration Indian market China market growing by double digits, in our view. Moreover, we expect Indian players to
share share
Colombia Guatemala gradually increase market share in these countries at the expense of Chinese
manufacturers which hold 35% and 54% market share in Colombia and
Source: Investec Securities estimates Guatemala, respectively as seen in Figure 72.
Significant potential for market share gains: In Figure 75, we highlight some
of the key Latin American markets. Increased focus on countries where Indian
firms have negligible or non-existent market shares such as Venezuela (0%
share), Mexico (9%), Argentina (9%) etc. presents an immense opportunity for
Figure 73: Huge potential for market share gains Indian players. These countries are dominated by Chinese manufacturers with
market share of 76%, 63% and 46% in Venezuela, Mexico and Argentina
100% 76%
63% respectively. In our opinion, Indian players can potentially replicate the success
46% they have seen in the Colombian market
50%
9% 9%
0%
0% Furthermore, given the strong market dynamic and rising middle class in the
Venezuela Mexico Argentina region, demand should grow at double digits, in our view. We also expect
Indian market share China market share Indian companies to increase their footprint in Brazil, which is presently
dominated by Japanese manufacturers garnering a 90% market share.
Thought there will likely be potholes along the way, such as the recent forex issues
in Argentina, we see these as short term issues that should have no impact on the
longer-term growth potential that we think this region offers for Indian companies.
Figure 74: Penetration of 2Ws vs GDP per capita in Latin America
800
700
Mexico
600 Colombia
Market size ('000 units)
500
400
Argentina
300
200 Peru
Ecuador
Chile Guatemala
100
Bolivia El Salvador
0
0% 10% 20% 30% 40% 50% 60%
India market share (%)
Source: UN Comtrade, Investec Securities research

Figure 75: Key markets in Latin America
Colombia
US$513m 2015E GDP growth: 3% (4%)
GDP per capita (US$) 4,459
674k units Share of India in 2W imports 53%
Weaker 2015 due to low commodity prices
Mexico
affecting export income & government revenues.
2015E GDP growth: 3% (2%)
Inflation to deteriorate owing to currency
depreciation but this is also likely to boost exports
Share of India in 2W imports 9%
and lead the recovery come 2016.
Growth led by a recovery in US import demand
Renewed interest in the oil sector post reforms.
The above factors along with a weaker Peso US$516m
should take growth higher.
614k Units
US$166m
203k Units
Peru
2015E GDP growth: 4% (2%)
Climatic factors, Inflation and lower public
spending hurt 2014.
2015 should be better as above factors recede.
New mines and infrastructural projects becoming
operational should aid.
US$263m
326k Units
Argentina
2015E GDP growth: -0.3% (0.5%)
2014 saw a stagnant economy as exports tanked
and so did the currency ad public spending.
Investment growth turned negative.
Activity will continue to remain weak in 2015.
A modest recovery is expected in 2016 due to
higher foreign demand and rise in business
confidence.
Table 5: Snapshot of Latin American countries
Country 2Ws Imports 2Ws Imports 2Ws Penetration India market Comments
(US$ m) (m units) (%) Share (%)
Colombia 516 614 9% 53% Most of the growth for Indian cos. to come from industry growth
Guatemala 100 129 6% 34% Most of the growth for Indian cos. to come from industry growth
El Salvador 22 28 2% 15% Strong industry growth coupled with market share gains
Peru 166 203 6% 15% Strong industry growth coupled with market share gains
Honduras 36 46 4% 14% Strong industry growth coupled with market share gains
Mexico 513 674 3% 9% Strong industry growth coupled with market share gains
Argentina 263 326 13% 9% Market share gains to drive growth
Ecuador 112 158 7% 9% Strong industry growth coupled with market share gains
Chile 125 116 6% 7% Strong industry growth coupled with market share gains
Indian companies are yet to make significant inroads. Growth to
Paraguay 73 135 24% 2%
come from industry growth coupled with market share gains
Indian players are yet to make significant in roads. Growth to come
Bolivia 50 46 2% 1%
from industry growth coupled with market share gains
Indian players are yet to make significant in-roads. Growth to come
Venezuela 54 71 8% 0%
from industry growth coupled with market share gains

Asia could also support 2Ws export growth
The Asian opportunity for Indian 2W manufacturers should be bifurcated into two; 1)
countries that are a part of the Indian subcontinent which share a cultural and
geographical proximity to India and the others. Within the key subcontinent markets
of Sri Lanka, Bangladesh, Nepal etc. the dominance of Indian players is virtually
undisputed. Here, Indian players, especially Bajaj, have managed to oust the
Japanese (following the appreciation of the Yen which put Japanese products out of
reach for majority of the populace) as well as the Chinese (who lost out on quality
and serviceability perceptions).Myanmar is the one subcontinent country where
Indian players are yet to make inroads
The other Asian markets where Indian players are focusing on are Philippines,
Indonesia, and Vietnam. However, step through motorcycles are more popular in
these markets and the market is shared between the Chinese and Japanese
players. Indian players are short on product offerings as well as credible distribution
networks. Bajaj Auto has chosen to partner with Kawasaki and has tasted early
success in Philippines managing to capture a 30% market. It plans to replicate this
model in Indonesia and may even carry forward to Thailand, Vietnam and Malaysia.
Figure 76: Sri Lanka Split of 2Ws imports by destination Figure 77: Philippines Split of 2Ws imports by destination
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
China India Japan Others China India Japan Others

Figure 78: Indonesia domestic 2W sales growth Figure 79: Myanmar Split of 2Ws imports by destination
100%
9.0 (mn units) (% YoY) 100
8.0 80 80%
7.0 60
6.0 40
20 60%
5.0
0
4.0 -20 40%
3.0 -40
2.0 -60 20%
1.0 -80
0.0 -100 0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Wholesales %YoY

Bangladesh Indian 2Ws rule the roost
Indian two wheeler companies have enjoyed a strong ride in Bangladesh (annual
market of 300k units) as both geographical and cultural proximity have given Indian
brands an advantage over Chinese and other brands. Bangladeshs GDP per capita
crossed the threshold of US$1,000 in 2013 which in our opinion is the threshold
post which two wheeler consumption gets a boost, in our view.
The two factors in favour of Chinese motorcycles are 1) a huge cost advantage and
assembly tie-ups with many local players and 2) the Bangladesh governments
recent increase of import duty on CKD (Completely Knocked Down) kits to 45%
from 30% earlier favours local assembly.
Albeit Indian 2Ws prices are 25-40% Though many international players assemble motorcycles in Bangladesh, they do
higher than local manufactured not match the localisation threshold to qualify this as manufacture hence giving
motorcycles, Indian command ~75% them a duty disadvantage. Nonetheless despite this price disadvantage, Indian
of the market share motorcycles command nearly 75% of Bangladeshs motorcycle sales and their
dominance has multiplied since the 40% levels seen in early 2000s.
We believe that this is primarily due to the perception that Indian offerings provide
much higher quality justifying their higher price tag as well as easier availability of
spares. Further, the likes of Bajaj, Hero and TVS have established local assembly
lines which help to slightly moderate the cost. Additionally, Indian exports have
increased after the Indian government permitted 2W exports to Bangladesh over
land; through the neighbouring Indian state of Tripura; instead of the more
expensive sea route earlier.
The most popular Indian brands are Bajajs Discover and Pulsar followed by Hero
and TVS.
Figure 80: Bangladesh Split of 2Ws imports by destination Figure 81: Bangladesh 2W Market share
100%
90% Walton Others
80% 6% 12%
70%
60% Danyang -
50% Runner
40% 8%
30%
Hero Honda Bajaj
20%
9% 53%
10%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
TVS
12%
Source: UN Comtrade, Investec Securities Research Source: Industry Sources, Investec Securities estimates
Figure 82: Bajajs products lie in the higher end of the range Figure 83: Average Indian 2W prices are 45-25% higher than
local/Chinese
220
('000 tk) 50% 45%
190 45%
160 40%
35%
130
30% 25%
100 25% 20%
TVS Phoenix
Hero Passion pro
Hero Xtreme
TVS Star Sport
Honda Shine
Hero Hunk
Bajaj Pulsar 150

TVS Metro Plus 110
Hero HF Dawn
Bajaj Platina 100
Hero Glamour
Bajaj CT100
Bajaj Discover 100
Bajaj Discover 125

Hero Splendour
Hero Splendour
20%
15%
10%
5%
0%
100cc 125cc 150cc 100cc 125cc 150cc
Source: Investec Securities estimates Source: Company data, Investec Securities estimates

We initiate coverage on Bajaj, Hero and TVS
Bajaj Auto: Racing ahead of the pack: Our channel checks in Africa give us
confidence in Bajajs ability to replicate their success in Nigeria/Colombia to other
geographies. The revised strategy of the Executive segment and an increasing
premiumisation trend should help drive volumes of domestic 2Ws and allay
investors concerns on loss of domestic market share. Bajajs uniquely diversified
business, with sector leading operating margins, low exposure to Executive
segment (which is likely to experience increasing margin pressure) and strong
return ratios, offers a compelling investment opportunity.
Bajajs leadership in premium motorcycles, low exposure to the under-pressure
executive segment, and diversification of export markets highlight Bajajs strong
revenue growth potential. Trading at 16x FY17E P/E, we believe valuations of Bajaj
are attractive given a) Industry leading margins, b) strong 16% EPS CAGR
(FY15/18E), c) robust ~30% ROCE/ROE and D) high FCF/Dividend yield of
+5%/+3%. Initiating coverage at BUY and target price of Rs.2900.
Hero Motocorp: Multiple headwinds; valuations supportive: In the backdrop of

increasing competition, slower growth and margin headwinds, we believe Hero
could miss management guidance and streets expectation on margin expansion.
We also think Heros guidance of 1.2m units of annual export by FY20 is optimistic,
as breaking into markets of Africa/LATAM will take some time given the lack of
brand exposure there. Consequently our FY17E/18E PAT estimate are 5/6% below
consensus, though at 16x FY17E P/E the stock price reflects these concerns.
Despite headwinds surrounding its core operating business, we think Heros
ROCE/ROCE of ~41/34%, FCF/Dividend Yield of ~5%/3% can be sustained over
the next three years. Heros valuation at 16xFY17 P/E (in-line with five year
average), seems fair to us. Initiate with Hold recommendation and target price of
Rs.2790 based on 16x Sep17 earnings. Stronger than expected growth in exports
and higher margin expansion are key risk to our thesis.
TVS Motor: A Challenger with unwarranted premium valuation: While TVS

seems to have captured the low hanging fruit in terms of volumes in
domestic/exports markets, garnering incremental market share would be an uphill
task, in our view. Moreover, we are circumspect of TVS ability to increase margins
significantly on account of the necessity of sustaining its ad spend at current
elevated levels partly due to exports. We see limited benefits accruing from
operating leverage and thereby expect TVS to miss guidance of margin expansion.
In our view, TVS premium of ~30% on FY17E EV/EBITDA to Bajaj/ Hero despite
low ROCE and weaker positioning in the industry is unwarranted.
Unwarranted rich valuation: TVS is trading at 15.5x FY17E EV/EBITDA at 31%/33%
premium to Bajaj/Hero despite a much lower ROCE (19% ~vs. 30%/40%
respectively). In our opinion, premium valuations seems unwarranted given a)
TVSs positioning as a challenger to the current leaders in most segments, Bajaj
and Hero and b) our expectation of deceleration of EPS growth momentum (22%
CAGR over FY15-18E vs 32%YoY growth in FY15 leading to our FY17E/18E PAT
being 21%/26% below consensus. We value TVS at 16x Sep17E EPS leading to
our target price of Rs.200. Initiate with Sell.

Figure 84: Global peer valuation matrix
PE 2Y EPS EV/Ebitda Price to Bk RoE (%)
Market cap 3m ADV
Company Price (lcy) CAGR
(US$mn) (US$mn)
CY15/FY16 CY16/FY17 CY17/FY18 (%) CY15/FY16 CY16/FY17 CY17/FY18 CY15/FY16 CY16/FY17 CY17/FY18 CY15/FY16 CY16/FY17 CY17/FY18
2W OEMs
Bajaj Auto 2,448 10,637 12.3 18.9 16.2 14.4 15 13.5 11.9 10.6 5.7 4.8 4.1 32 32 31
Hero Motocorp 2,689 8,062 13.8 17.7 16.1 14.7 10 12.8 11.7 10.7 6.7 5.5 4.6 41 38 34
TVS Motors 298 2,127 8.3 32.4 25.7 22.4 20 19.0 15.5 13.7 7.2 5.9 5.0 24 25 24
Eicher Motors 16,486 6,722 20.0 51.5 34.7 25.7 42 25.6 19.0 15.2 13.8 12.1 8.8 33 38 38
Mean 30.1 23.2 19.3 21.5 17.7 14.5 12.6 8.3 7.1 5.6 32.6 33.3 31.8
India 4Ws
Maruti 4,607 20,894 3,452.3 26.7 21.3 15.6 31 15.6 13.0 10.4 4.9 4.1 3.4 21 23 23
TATA Motors 424 20,687 4,084.1 12.3 8.6 7.0 32 4.5 3.7 3.2 1.9 1.5 1.3 17 20 20
M&M 1,346 12,555 1,682.9 22.1 16.8 15.1 21 12.8 10.2 8.9 2.7 2.4 2.1 11 15 15
Mean 20.4 15.6 12.6 28.0 11.0 9.0 7.5 3.1 2.7 2.3 16.4 19.2 19.4
Domestic 2W / 4W Auto comps

Motherson Sumi 296 5,886 21.9 29.1 20.9 16 35.0 11.7 9.2 7.3 9.3 7 6 35 38 40
Bharat Forge 859 3,002 15.6 23.5 18.8 16 20.1 13.2 11.1 9.9 4.9 4 4 22 24 23
Gabriel 90 194 0.5 16.6 13.4 10.3 27 10.2 8.7 6.7 3.5 3.1 2.4 20 22 24
Munjal Showa 193 116 0.1 9.7 8.0 - - 5.1 4.3 - 1.6 1.4 - 18 19 -
Rane Brake Linings 351 42 0.0 14.7 12.5 - - 6.2 5.3 - 2.1 1.9 - 14 15 -
Mahindra CIE 253 1,227 1.0 25.2 17.7 14 34.7 11.6 9.0 7.6 3.7 3 3 15 19 20
WABCO 6,089 1,734 0.8 57.9 38.2 29.7 40 36.4 24.7 19.8 11.2 8.8 6.8 20 25 25
Alicon Castalloy 361 60 0.0 20.1 18.2 - - 7.6 6.9 - 2.7 2.4 - 14 13 -
SKF India 1,211 959 0.3 29.9 25.5 23.3 13 20.2 17.2 15.3 4.1 3.8 3.4 14 15 16
Mean 25.2 19.2 12.2 18.8 13.6 10.7 7.4 4.8 4.0 2.7 19.3 21.0 16.5
Europe
Vollkswagen 135 69,505 49.1 10.3 8.4 6.5 26 1.9 1.6 1.4 0.7 0.7 0.7 8 9 10
BMW 101 68,969 186.4 10.8 10.5 9.8 5 7.7 7.5 7.2 1.6 1.5 1.3 17 15 15
Fiat Chyrsler 13 18,058 218.8 16.0 8.8 7.0 52 2.9 2.5 2.2 1.3 1.2 1.0 6 13 16
Diamler 82 93,162 326.5 9.9 9.3 8.9 6 3.4 3.2 3.1 1.8 1.6 1.4 19 18 17
Renault 93 29,312 123.7 9.4 7.8 7.0 15 5.4 4.9 4.6 1.0 0.9 0.8 11 12 12
Mean 11.3 9.0 7.9 20.6 4.3 3.9 3.7 1.3 1.2 1.1 12.1 13.5 14.0
Japan
Toyota 7,687 214,378 642.9 9.9 9.3 8.7 7 10.3 9.7 9.2 1.3 1.2 1.1 14 13 13
Honda 4,066 60,095 145.4 12.5 10.9 9.9 12 8.3 7.8 7.3 1.0 0.9 0.9 8 9 9
Suzuki 3,841 17,583 67.0 14.6 14.7 13.5 4 6.2 5.7 5.3 1.4 1.3 1.2 10 10 10
Yamaha 3,015 8,608 48.5 14.8 10.8 9.8 23 7.7 7.0 6.4 2.1 1.8 1.6 15 17 17
Mean 13.0 11.4 10.5 11.6 8.1 7.5 7.0 1.5 1.3 1.2 11.6 12.3 12.3
Korea
Hyundai 152,500 29,251 94.2 6.1 5.5 5.3 7 5.8 5.3 5.1 0.7 0.6 0.5 11 11 10
Kia 53,900 19,025 52.1 7.4 6.6 6.2 9 5.0 4.4 4.2 0.9 0.8 0.7 12 13 12
Mean 6.7 6.1 5.8 8.2 5.4 4.9 4.6 0.8 0.7 0.6 11.7 11.7 11.4
US
Ford 15 57,744 437.2 9.0 7.6 6.9 14 4.3 3.6 3.3 2.0 1.7 1.4 28 24 20
General Motors 36 56,551 479.3 7.6 6.8 6.4 10 3.1 2.8 2.6 1.6 1.3 1.1 21 22 19
Mean 8.3 7.2 6.6 11.7 3.7 3.2 3.0 1.8 1.5 1.2 24.5 23.0 19.6
Note: Numbers in red are Investec estimates. Source: Investec Securities Research, Bloomberg

Baj aj Auto ( Buy - TP: 2900INR)
Bajaj Auto (BAJA.NS)

India | Automobiles & Parts BUY
Racing ahead of the pack Price: INR2478
INR2479 INR2900
Our channel checks in Africa give us confidence in Bajajs ability to replicate Target: INR2900
their success in Nigeria/Colombia to other geographies. The revised strategy Forecast Total Return: 19.9%
of the Executive segment and an increasing premiumisation trend should help
drive volumes of domestic 2Ws and allay investors concerns on loss of Market Cap: INR717bn
domestic market share. Bajajs uniquely diversified business, with sector EV: INR703bn
leading operating margins, low exposure to Executive segment (which is Average daily volume: 336k
likely to experience increasing margin pressure) and strong return ratios,
offers a compelling investment opportunity. Initiate with BUY.
Channel checks highlight the export opportunity for Bajaj: Our primary channel
checks in Africa indicate a strong brand recall for Bajaj and suggest that the brand
has been built around quality/durability. We believe Bajaj is well placed to benefit
from the strong industry growth expected in Africa and LATAM, where it should also
win market share from Chinese manufacturers. Moreover, we believe Bajaj's foray
into new markets dominated by Japanese players (Brazil, South East Asia) along
with alliance partners Kawasaki/ KTM will add another wheel to their growth story.
We expect Bajaj's exports to grow at 13% CAGR over FY16-18E.
Premiumisation & new product launches to drive growth in domestic 2Ws:
Bajaj Auto is a dominant player in the premium segment (35% market share) with a
strong product portfolio leaning towards next generation bikes and a focus on
expanding into the cruiser segment. This should make Bajaj the prime beneficiary of
the premiumisation trend, in our view. Moreover, a rejig of the Executive segment
(Discover) strategy and sustainability of growth momentum generated by the new
CT100 and Platina in the economy segment should help domestic 2Ws report
volume growth of 9% CAGR over FY16-18E,higher than the expected industry
growth of 7% CAGR
Initiate with BUY, TP of Rs 2,900: Bajajs leadership in premium motorcycles, low
Aditya Jhawar
exposure to the under-pressure executive segment, and diversification of export
+91 (22) 6136 7415
markets highlight Bajajs strong revenue growth potential. Trading at 16x FY17E aditya.jhawar@investec.co.in
P/E, we believe valuations of Bajaj are attractive given a) Industry leading margins,
b) strong 16% EPS CAGR (FY15/18E), c) robust ~30% ROCE/ROE and D) high Pratik Rangnekar
+91 (22) 6136 7425
FCF/Dividend yield of +5%/+3%. Initiating coverage at BUY and target price of pratik.rangnekar@investec.co.in
Rs.2900.
Financials and valuation Year end: 31 March Price Performance

2014A 2015A 2016E 2017E 2018E 2,700
Revenue (INRm) 201,495 216,120 245,914 277,013 310,686 2,600
EBITDA (INRm) 41,056 41,166 52,441 59,657 67,032 2,500
EBITA (INRm) 39,260 38,492 49,644 56,616 63,729 2,400
PBT (normalised) (INRm) 46,319 44,251 55,952 65,137 73,611 2,300
Net Income (normalised) (INRm) 32,418 31,540 37,703 43,892 49,602 2,200
EPS (norm. cont.) FD (INR) 112.0 109.0 130.3 151.7 171.4 2,100
FCFPS - FD (INR) 113.7 64.0 118.9 129.3 146.3 2,000
DPS (INR) 50.0 50.0 65.1 75.8 85.7 1,900
Nov-14 Feb-15 May-15 Aug-15
PE (normalised) (x) 22.1 22.7 19.0 16.3 14.5
EV/sales (x) 3.5 3.3 2.9 2.5 2.3
EV/EBITDA (x) 17.1 17.1 13.4 11.8 10.5 1m 3m 12m
FCF yield (%) 4.6 2.6 4.8 5.2 5.9 Price
____________________________
(1.4) 12.4 (6.1)

Dividend yield (%) 2.0 2.0 2.6 3.1 3.5 3.0
Price rel to India S&P BSE 500 - BSE India (Indian
____________________________
11.7
Rupee) (3.2)
Source: Company accounts/Investec Securities estimates Source: FactSet
Page 35 | 26 November 2015 | Bajaj Auto

Figure 85: Company description Figure 86: Shareholding Pattern
Bajaj Auto Ltd. (Bajaj), a Rahul Bajaj group company,

primarily manufacturers and markets motorcycles and three-
wheeler vehicles. In the domestic motorcycle market, Bajaj Others
is the second largest OEM with a market share of c20% and 25%
dominance in the premium category of motorcycles. Bajaj is
the market leader in the domestic three wheeler industry Promoter
with a market share of 51%. Bajaj derived c47% of its 49%
DII
revenue from exports in FY15, roughly half of which came 8%
from Africa. The promoters group holds 49% stake in the
company. Bajaj Auto was founded in 29 November 1945 and
FII
is headquartered in Pune, India. 18%
Source: Company data, Investec Securities estimates Source: BSE
Figure 87: FY15 Segment wise break up of sales volume Figure 88: EBITDA contribution by Segment (FY15)
3Ws Economy 3% Executive 5%

6%
Executive
16%
Exports
Exports 48% Premium 20%
47%
Economy
13% 3Ws 12%
Spares
13%
Premium
18%
Source: Company data Source: Investec Securities estimates
Figure 89: Free cash flow and capex Figure 90: Key value drivers
45 (Rsbn) 42
37 35% 31% (x) 20
40 34
33 30%
35 18
28 Domestic peer
30 25% average
25 16
18 20% 16%
20 14 16
15 15% 14
10 4 5 4 4 10% 6%
2 3 3 4
5 4% 12
5%
0
0% 10
FY16E
FY17E
FY18E
FY11
FY12
FY13
FY14
FY15
FY15-18E FY18E RoE FY18E FCF FY18E FY17/18

EPS CAGR yield Dividend Average PE
Capex Free cash flow yield (x, RHS)
Source: Company data, Investec Securities estimates Source: Company data, Investec Securities estimates

Targeting the global market
Figure 91: Bajaj dominates India 2/3Ws exports Bajaj Autos management has stated its intent in becoming a global leader in a
single product category i.e. motorcycles rather than becoming a leader in many
75% 70% products in one country, a strategy that has resulted in an increase in focus on
70% exports by Bajaj.
65% 62% Exports not only provide opportunities for growth, they also tap into the significant
60% demand of two wheelers in emerging markets. Moreover, in the backdrop of
55% expected slower growth for the domestic two wheelers industry, Indian players will
2Ws 3Ws necessarily have to tap overseas markets to continue the growth momentum.
Bajaj Auto's market share in exports Bajaj Auto was quick to identify the export opportunity which resulted in Bajajs
exports increasing from a mere 41K units in FY98 to over 1.8 million units in FY15
Source: SIAM, Investec Securities Research. As on FY15
registering a CAGR of 25% over the same period. Amongst the Indian players,
Bajaj Auto has become the biggest exporter of 2Ws and 3Ws from India with a
market share of 62% and 70% respectively in FY15, as seen in Figure 91.
Figure 92: Bajaj Autos exports have grown at 25% CAGR over FY98-FY15
2,000
1,806
1,800 1,584
1,580 1,547
1,600
1,400
1,204
1,200
Thousands
1,000 891
770
800 618
600 442
400 250
156 197
200 41 33 33 31 44 94
-
Figure 93: Break-up of Bajaj FY15 exports

Bajaj Autos's Exports
LATAM ASEAN
19% 6%
Source: Company Data, Investec Securities Research
Africa
43% While Africa still comprises the bulk of Bajajs export with a share of 43% of export
volumes in FY15, the contribution from the region is trending down from ~50% in
South
Asia & FY10. This is primarily on the back of Bajajs widening geographic footprint. In
ME FY15, Bajaj exported to 62 countries and is amongst the top two players in twenty
32% countries. Increasing brand recognition overseas drove strong growth in exports
Source: Company data, Investec Securities Research volumes and increased the share of exports from 22% in FY08 to ~47% in FY15.
Figure 94: Exports for Bajaj has become ~50% of aggregate Figure 95: with 2Ws contributing over 80% of total export
volume
1.9 1.8 50% 2,000

1.7 1.6 1.5 1.6 285
47% 45% 1,500
1.5 312 254 261
Thousands
41%
1.3 1.2
40% 1,000 231
1.1 36% 37%
35% 0.9 165 1,521
139 1,268 1,293 1,323
0.9 0.8 35% 500 972
31% 31% 631 726
0.7
0.5 30% -
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Exports (mn units) % of Aggregate volumes 2Ws 3Ws
Source: Company data, Investec Securities Research Source: Company data, Investec Securities Research

Bajaj a strong brand in Africa & LATAM
Figure 96: Bajaj Boxer - Popular brand in Bajaj first forayed into Africa and Latin America after establishing a presence in
Nigeria Asian countries, where other Indian two wheeler manufacturers are also present. In
a relatively short span of time Bajaj Auto became the single largest dominant player
in most of the emerging markets of Africa as well as Latin America, capturing
market share both from Chinese and Japanese manufacturers.
Our primary channel checks in Nigeria and South Sudan suggest that over the last
few years Bajaj has built a strong brand in Africa around quality and durability.
Respondents acknowledge Bajajs superior quality and lower maintenance
requirement compared with lower cost Chinese motorcycles. Despite the cost of
Bajajs motorcycles ~30% higher than Chinese, the overall cost of ownership is
lower when one includes better fuel efficiency, lower cost of maintenance and
Source: Company Data, Investec Research longer durability. Bajaj Boxer (150cc & 100 cc) is extremely popular amongst the
Okada / Boda-boda drivers (two wheeler taxis drivers) in Africa.
Figure 97: Two wheelers market share in Africa (ex-South Africa) Figure 98: Bajaj Auto dominates most frontier markets of Africa
88%
90%
100
80 70% 58%
49%
60 50% 42%
33%
40 29%
30% 25%
20 16%
- 10%
Nigeria
Tanzania
Congo
Kenya
Angola
Sudan South
Ethiopia
Uganda
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Bajaj Auto's Market Share
Source: UN Comtrade, Investec Securities Research Source: Company data, Investec Securities Research. Market share as on FY14
Figure 99: Two wheelers market share in LATAM (ex-Brazil) Figure 100: Bajaj targeting key markets of LATAM
50% 44% 46%

100%
80% 40% 34%
60% 30%
40% 19% 18%
20%
20%
10%
0%
2007
2008
2009
2010
2011
2012
2013
2014
0%
Colombia Nicaragua Guatemala Peru Honduras
Bajaj Auto's Market Share
Source: UN Comtrade, Investec Securities Research Source: Company data, Investec Securities Research. Market share as on FY14
Strong structural drivers of Africa and Latin America

Low penetration, rising middle class, We believe anaemically low penetration, rising middle class, increasing
increasing urbanisation, robust urbanisation, robust economic growth and market share gains from Chinese should
economic growth and market share drive 2Ws volume growth in the emerging markets of Africa and Latin America.
gains from Chinese to drive growth Moreover, increase in presence of Indian players in relatively untapped large
markets like Tanzania (US$100m, 0.2m units) and Guinea (US$91m, 0.2m units

market) in Africa and Mexico (US$513m, 0.7m units), Argentina (US$263m, 0.33m
units market), Ecuador (US$112m, 0.16m units market) and Chile (US$125m and
0.12m units) in Latin America should potentially add another avenue of growth for
Indian players.
Bajaj Auto has a strong brand in Bajaj Auto not only has the first mover advantage in these geographies but has also
Africa & LATAM and also enjoys first established a strong brand in these countries, making it one of the strongest
mover advantage beneficiaries of the expected spurt in demand of 2Ws in these markets.
Figure 101: Immense untapped opportunity for Bajaj in Africa Figure 102: as well as LATAM
200 Tanzania Nigeria (1.5m units) 800
180 Guinea
700 Mexico
160
Market size ('000 units)

Mali
Kenya
600 Colombia
140
Benin Egypt
120 500
Mozambique
100 400
Algeria Uganda
80 Argentina
Ghana 300
60
40 Burkina Faso 200 Peru
Ecuador Guatemala
20 Ethiopia 100 Chile
0 Bolivia El Salvador
0% 20% 40% 60% 80% 100%
0
Share of India in 2W imports (%) 0% 10% 20% 30% 40% 50% 60%
India market share (%)
Source: UN Comtrade, Investec Securities Research. Data as on CY14 Source: UN Comtrade, Investec Securities Research. Data as on CY14
Decline in Oil prices to have limited impact on Nigeria volumes

There seem to be concerns on the impact of lower crude oil prices on the Nigerian
economy and the potential impact it could have on import of 2Ws from India. In our
Figure 103: Nigeria petroleum export as % GDP opinion, this should have a relatively lower impact on 2Ws demand in Nigeria as
Petroleum exports as a proportion of GDP have fallen from 34% in 2011 to 22% in
40
34 33
2014 indicating the reducing dependence of the Nigerian economy on oil, as seen in
35
. The price of oil has corrected c.50% since the beginning of 2015. During the last
30 28
instance of such a fall in 2009, Nigeria's GDP fell 19%. This time around one would
25 22 need to account for the reduced contribution of petroleum products to GDP which
could mean relatively lower impact on the economy and consequently demand of
20
2Ws.
2011
2012
2013
2014
Figure 103: Nigeria petroleum export as % GDP

Moreover, we believe the recent
decline (Feb-March15) in Indias exports of 2Ws to Nigeria is on account of
Source: OPEC, Investec Securities estimates
presidential election and not on account of decline in crude prices. Generally around
presidential elections in Nigeria, discretionary expenditure of consumers reduces
significantly primarily led by reduced government spending. In Feb-Mar15 the
monthly run-rate of 2Ws & 3Ws exports from India to Nigeria reduced to US$6m as
compared to average run-rate of over US$20m in the preceding 12 months, as seen
in Figure 104.

Figure 104: Indias 2Ws & 3Ws export to Nigeria start to pick-up after fall during local elections
30 25 120
30
27 110
26 24 26
25
25 24 100
20 22
21 20 90
19 19 19 19
Nigeria volumes have picked up post 20 18 19
US$ m
17 80
presidential election (Feb-Mar15) 16 16
15 15
15 70
12 13
12
60
10
6 7 50
5 40
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Jun-13
Aug-13
Dec-13
Feb-14
Jun-14
Aug-14
Dec-14
Feb-15
Jun-15
Exports (US$m) Crude Oil (US$/barrel, RHS)
Source: GOI, Bloomberg, Investec Securities Research
Expect export momentum to accelerate

We expect export momentum for Bajaj Auto to accelerate from here on primarily
driven by:-
so is the case with Sri Lanka Revival of demand in key markets: Volumes of 2Ws/3Ws export to Sri Lanka and
Nigeria from India has seen a temporary drop recently primarily driven by political
issues in both countries. While the import orders were put on freeze by the new
government in Sri Lanka, presidential elections had impacted demand of 2Ws in
Nigeria. However, over the last few months volumes seemed to have picked up in
both these geographies, as seen in Figure 105 & Figure 106 and we expect the
momentum to further accelerate led by the strong demand drivers in these
geographies.
Figure 105: Indias export of 2Ws & 3Ws to Sri Lanka on the rise Figure 106: Indias exports of 2Ws/3Ws to Nigeria as well
30 29 30
28 26 26 25 26
25
26 25 25 24
23 22
24 20
19
22 20 17
US$ m
19
US$ m
20 15
18 17 15
15 16
16
14 12 10
11 6 7
12
10 5
Jul-15
May-15
Oct-14
Nov-14
Dec-14
Jan-15
Mar-15
Apr-15
Jun-15
Sep-14
Feb-15
May-15
Jul-15
Oct-14
Apr-15
Sep-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Jun-15
Source: GOI, Investec Securities Research Source: GOI, Investec Securities Research

Increasing penetration in relatively untapped markets: An increasing focus on
relatively untapped markets like Tanzania and Guinea in Africa and Mexico,
Table 6: Untapped markets Argentina, Ecuador, Chile in Latin America should help accelerate export growth
momentum, in our view. All these markets are reasonably big (over US$100m
2Ws Market 2Ws Share of
(US$ m) Penetration each), 2Ws penetration is low and Indian players have made limited in-roads. In
Indian player
Mexico 513 3% 9%our opinion, Bajaj Auto can potentially replicate the success it has seen in markets
Argentina 263 13% 9%like Nigeria and Colombia over next few years in these markets.
Chile 125 6% 7%
Distribution network of alliance partners Kawasaki & KTM: Bajaj has entered
Ecuador 112 7% 9%
Tanzania 100 2% 14%
into a tie-up with Kawasaki to use the latters distribution network in markets where
Guinea 91 12% 21%either Bajaj has no presence or the brand Bajaj is relatively less known. We expect
this strategy to be useful to penetrate markets where Japanese manufacturers are
Source: Investec Securities Research
dominant such as South East Asian countries and Brazil. Through KTM/Kawasaki,
Bajaj is getting an opportunity to study these varied markets and over period of
time use this understanding to launch more products under the brand Bajaj. For
instance Bajaj entered Philippines along with Kawasaki in 2007 and now it holds
market share of 30% (as on 2014).
Figure 107: Expect Bajajs export to grow at 12% CAGR FY15-18
3.2
2.80
2.7
2.47
Millions
2.22
2.2 2.09
1.89 1.84
1.80
1.7
1.43
1.2 1.06
0.91
0.7
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Source: Company data, Investec Securities estimates
Along with volumes, exports brings strong profitability

As per management, Bajaj Auto on blended basis makes EBITDA margin of ~25%
in exports with 3Ws the most profitable at ~30% and 2Ws at ~22%. While Latin
America offers strong margins on the back of higher realisation as well as higher
share of Executive and Premium segment, the profitability of Africa is relatively less
as the portfolio is more geared towards Economy(least operating margin) segment
and the competitive intensity is higher. In our opinion, the profitability in exports
should gradually trend upwards as the share of non-African markets increase and
the product mix change favourably. The depreciating rupee will further aid in margin
expansion for Bajajs export. In all, we expect Bajajs export EBITDA margin to
increase by c.50 bps over FY16-18 to 25.5% in FY18 derive EBITDA growth of 15%
CAGR over FY16-18E.

Domestic 2ws: New launches to spur growth
Figure 108: India motorcycle market share Bajaj Auto, the second largest player in the Indian motorcycle industry (with market
share of 18% as on FY16 Apr-Sep15) has successfully created strong brands
Others Bajaj across 2W segments. The company is the clear market leader in the premium and
8% 17%
Honda sport motorbike segment (Pulsar) and has managed to hold on to its leadership
16% TVS despite increasing competition. At the same time, new launches in the Economy
6% segment (CT100 and Platina) have helped Bajaj Auto scale market share up to 39%
Hero in FY16YTD. However, in the Executive segment (Discover) Bajaj has lost
53%
significant market share over last the few years (mainly to Honda) which resulted in
overall market share loss.
Source: Investec Securities Research, SIAM
Figure 109: Bajaj Auto domestic 2Ws volume Bajaj Autos domestic 2Ws volumes declined 7.4% CAGR over FY11-15 to 1.8m
units in FY15, as seen in Figure 118. This resulted in companys domestic 2W
3.0 market share dropping from 27% in FY11 to 17% in FY15. Segmental analysis
2.6 reveals that Bajajs loss of market share in the Executive segment (Discover) by
2.4 2.5
2.5 21% to 8% over the same period has accounted for the biggest dent on aggregate
Millions
2.1
volumes seen in Figure 111.
2.0 1.8
1.5
FY11 FY12 FY13 FY14 FY15
Figure 110: Bajaj Autos market share across motorcycle segments Figure 111: Loss in executive segment dragged the overall volumes
60% 2.7 (mn units)

48% 0.1
50% 2.5
0.7
40% 35%
2.3
30% 25% 25% 27%
21%
17% 2.1
20%
8% 2.4
10% 1.9 0.1
0% 1.7
Economy Executive Premium Aggregate 1.8
1.5
FY11 FY15 FY11 Economy Executive Premium FY15
Source: Company Data, Investec Securities Research Source: Company Data, Investec Securities Research
Executive Segment: Confusing branding & multiple

variants drove Discover down
In our opinion, Bajaj lost ground in the Executive segment primarily on account of :
1) confusing branding strategy for its Discover brand, wherein it launched over 8
Confusion around positioning of bikes with the same branding, 2) non-focused product promotions due to multiple
Discover as Fun or Mileage bike models, 3) discontinuation of a few nonworking models, thereby impacting their re-
drove down the market share of sale value and branding, 4) platform shift in Discover impacting volumes of earlier
Discover platform and gradual ramp-up of production from the new platform, 5) intense
competition and new launches from Honda and Hero. Discover was initially
positioned as a Fun bike with Discover 150 and Discover 125. However the launch
of Discover 100M and Discover 125M (positioned as Mileage bikes) in Oct13 and
Mar14 respectively when fuel prices were heading northwards, diluted the brand, in
our view.

Figure 112: Market share in Executive segment Figure 113: Bajajs performance in Executive segment
100% 1,500 27%

8% 7% 9% 9% 15% 21% 20% 20%
20% 22% 21% 1,300
80% 17% 22%
1,100 14%
Thousands
60% 900 17%
77% 73% 67% 69% 63% 12%
40% 61% 66% 72% 700 1,235 1,315 1,312 8% 12%
500 986
20% 796 4% 7%
300 425 559 105
17% 21% 20% 20% 14%
0% 12% 8% 4% 100 2%
FY16YTD
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16YTD
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Bajaj Hero Honda
Volumes ('000 units) Market Share (%, RHS)
Source: SIAM, Investec Securities Research Source: SIAM, Investec Securities Research
Expect volume uptick in the Executive Segment

Launch of new product in Q4FY16 Bajaj plans to come with a new product in the Executive segment in Q4FY16. We
would be key to Bajajs performance will be keenly watching whether this launch will be under the Discover umbrella or a
in the Executive segment completely new brand. In our opinion, a new brand would be preferable for the
Executive segment as the Discover brand has been diluted, in our view.
We expect gradual volume growth in Bajajs executive segment primarily led by the
Discover 125 and the expected new product launch in Q4FY16. We expect
Earnings growth not significantly
domestic executive segments volumes to grow at strong 28% CAGR over FY16-18
impaired by decline in volumes of the
to 375K units in FY18, compared to the 1.3 million units sold by Bajaj in the
Executive segment
Executive segment in FY13 before the drop in market share. We expect the low
share of executive segment in overall volumes for Bajaj to have a limited impact of
increasing margin pressure in the executive segment.
Figure 114: Bajajs executive segment volumes to gradually improve Figure 115: But limited impact on EBITDA given lower contribution
1,400 ('000 units) 1,315 1,312 Economy 3% Executive 2%
1,235
1,200
986
1,000
796
800 Premium 21%
Exports 50%
559
600 3Ws 11%
373
400 314
229 Spares
14%
200
FY16E
FY17E
FY18E
FY10
FY11
FY12
FY13
FY14
FY15
EBITDA Contribution FY16E


Economy Segment: CT100 & Platina to help sustain
momentum
Bajaj has always maintained a presence in the commuter segment, earlier through
Table 7: CT 100 priced aggressively its Boxer/CT100 offerings and more recently through the Platina. The economy
Ex-Showroom Price - Pune (Rs) segment is dominated by Hero Motocorps HF Dawn with market share of 45%, as
seen in Figure 116. This segment mainly caters to the base of the consumers
CT100 35,888
pyramid characterised by extreme price and mileage sensitivity. With the launch of
HF Dawn 38,263
CT100 (discontinued in 2006) at aggressive pricing (~6% lower to segment leader
Note: Price for Kick start & Spoke wheels variants Hero Motocorps HF Dawn) and Platina with Electric Start, Bajajs market share
increased to 39% in FY16YTD (Apr-Sep15) from 25% in FY15.
Though the economy segment features on the lower end of the operating margin
Bajajs market share increased to band, we expect increasing traction in the economy segment to improve Bajajs
39% in FY16YTD from 25% in FY15. aggregate market share, brand awareness in the commuter segment (Economy &
Executive segment) and dealers profitability.
Overall we see volume growth of 12% CAGR over FY15-18E, significantly higher
than the expected industry growth of 5% CAGR over the same period which should
drive Bajajs market share in the economy segment from c.25% in FY15 to over
30% by FY18E.
Figure 116: Market share in Economy segment Figure 117: Bajajs performance in Economy segment
100% 650 ('000 units) 49% 55%

600 44%
80% 35% 45%
43% 46% 45% 45% 550
53% 56% 53%
60% 500 29% 35%
22% 24% 22%
15% 450 607 21% 20% 25%
40% 24% 27% 25% 16%
20% 21% 535 523
18% 400 485 465 15%
20% 41% 39% 350 426
30% 29% 384 376
25% 25% 24% 25%
300 5%
0%
FY16YTD
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16YTD
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Bajaj TVS Hero Yamaha Volumes ('000 units) Market Share (%, RHS)
Premium Segment: Bajaj a prime beneficiary of the

premiumisation trend
Expect share of Premium segment in As income of potential 2W customers of improve and aspirations increase, they
the industry to increase to 23% by would likely move up the ladder towards the premium segment and the pace of
2020 from 18% in FY15 adoption to the premium segment should accelerate in our view. Also, increased
number of product offerings and product launches by different players in the
premium segments has increased awareness and made the segment more
appealing to the potential customers, as per our channel checks. Between FY10-15
the share of premium segment increased by 2% to 19% of the domestic
motorcycles industry. We expect the pace of adoption to the premium segment to
accelerate which should drive the share of premium segment to 23% by 2020 and
should result in higher than industry growth for the segment. We expect the
premium segment to grow at 10% CAGR over FY15-20E, significantly ahead of
5.4% CAGR growth expected by the domestic motorcycle industry.
In our opinion, Bajaj Auto, being a dominant player in the premium segment (35%
market share) with a strong product portfolio leaning towards next generation bikes

as well as expanding towards cruiser segment, should make Bajaj the prime
beneficiary of the premiumisation trend, in our view.
Figure 118: Share of premium segment on the rise Figure 119: Market share in the domestic premium segment
3.2 22.3% 23.0% 50%

Millions
3.0 21.8%
21.3% 22.0% 40%
2.8 20.8%
2.6 21.0% 30%
20.1%
2.4 3.1
2.9 20.0% 20%
2.2 2.7
18.6% 2.4 19.0% 10%
2.0 2.2
2.0
1.8 18.0% 0%
FY15 FY16E FY17E FY18E FY19E FY20E Bajaj Auto TVS Hero Honda Yamaha
Premium Segment Share of Premium Segment (RHS) FY09 FY10 FY11 FY12 FY13 FY14 FY15
Source: Investec Securities estimates Source: Company Data, Investec Securities estimates
Encouraging feedback for new launches

Enhancement of product portfolio In a bid to further strengthen its position in the premium segment, Bajaj has
towards technologically advanced launched three variants of Pulsar in FY16YTD (AS 150, RS 200 and AS 200) and
features should help Bajaj maintain its three variants under the brand Avenger in the cruiser segment.
dominance
Our channel checks and interactions with biking enthusiasts suggest encouraging
response to the new Pulsar RS 200. The option of ABS (Anti Braking System) in the
higher variant is one of the key differentiating factors, in our view. Also, the recent
launches by Bajaj in the premium segment and the product line-up seems to
Table 8: Expected product launches suggest that Bajaj is enhancing its portfolio towards technologically advanced
products such as ABS, FIE (Fuel Injection System), etc. In our opinion, enhancing
Bajaj KTM Kawasaki
the product line-up with technologically advanced features should help Bajaj
Pulsar 400 SS 390 Adventure Ninja H2 maintain its dominance in the premium segment.
Pulsar 160 NS 1190 Adventure Ninja ZX-6R
Pulsar 400 CS 1050 Adventure
Renewed focus on the Avenger brand should further expand Bajajs offering in the
Avenger
growing cruiser segment in which Royal Enfield is the leader. In October15, Bajaj
RS400
re-launched its Avenger brand with two variants in the 220 cc (cruiser & street bike
180NS segment) and one in the 150 cc street bike segment in the price range of Rs.73,000
200NS FI -Rs.83,000 (ex-taxes). As per management, the new Avenger should help increase
Source: Company data, Investec Securities Research the monthly run-rate of the brand from currently ~3,500 units per month to ~15,000
units per month over the next few months. Though, we expect the share of Avenger
in aggregate volumes to ~4%-5%, given the higher realisation and relatively higher
margin, it should moderately change the overall product mix favourably. We expect
domestic premium segment of Bajaj to grow at 12% CAGR over FY16E-18E, a tad
higher than the expected industry growth of 11% CAGR.

Figure 120: The new Pulsar 200RS Figure 121: Bajajs new Avenger in the cruiser segment
Three wheelers provide another wheel to profitable

3Ws Auto rickshaw are called Bajaj
in few African countries growth
While the domestic 3Ws industry has grown at 4% CAGR over FY10-15, exports
have grown at a robust 19% over the same period, leading to their share of exports
increasing from 28% in FY10 to 43% in FY15. We expect this trend to continue on
the back of strong demand drivers in emerging markets of Africa and Asia.
Channel checks indicate strong Our channel checks in Africa indicate that demand for three wheelers in Northern
demand drivers in countries of Africa should be strong as a) motorcycle taxis are not considered an appropriate
Northern Africa means of transport by the public in general and (b) lack of alternate modes of
transport. Bajaj Auto has over a period of time built a strong brand in three wheelers
in Africa and it is clearly reflected in the three wheeler Auto rickshaw being referred
to as Bajaj in some African countries such as Madagascar and Somalia.
In our opinion Bajaj Auto, with 70% market share in Indias 3Ws exports (FY15),
should benefit from the trend given the strong brand, dominance and the distribution
the company has created over the last two decades.
Figure 122: Exports of 3Ws grow at 19% CAGR over FY10-15 Figure 123: leading to increase in share of exports to 43% in FY15
45% 42% 43%

900 41%
800 40%
Thousands
408 36%
700 363 303 34%
270 353 35%
600
500 173 30% 28%
400
526 513 538 480 532 25%
300 440
200 20%
FY10 FY11 FY12 FY13 FY14 FY15 FY10 FY11 FY12 FY13 FY14 FY15
Domestic 3Ws - Industry Exports 3Ws - Industry Share of exports in 3Ws Industry
Bajaj dominates Indian 3Ws market Bajaj Auto is the dominant player in the Indian 3Ws industry with a 44% domestic
with 44% market share & exports of market share in FY15, as seen in Figure 124 and Figure 125. While Bajaj has a big
3Ws from India at 70% market share lead in the race for export domination, TVS is the second biggest Indian player with
market share at 22%. It is interesting to note that, Bajaj is not present in the goods
carrier segment (~20% of the industry); yet remains the dominant player in the
domestic market.

Figure 124: Bajaj dominant player in 3Ws exports from India Figure 125: as well as domestic market
100% 1% 100% 4% 3%
3% 6% 7% 3% 3% 3% 3%
11% 19%
7% 6% 4% 22%
80% 6% 80% 34% 35% 32%
7% 41% 39% 36%
60% 60% 11%
13% 12% 13%
95% 10% 12%
40% 86% 86% 84% 40%
74% 70%
42% 39% 44%
40% 39% 40%
20% 20%
0% 0% 3% 4% 5% 6% 8% 8%
Bajaj Piaggio TVS Atul Bajaj M&M Piaggio TVS
Three wheelers offer strong profitability

Along with providing another avenue of growth, three wheelers offer strong
profitability, with EBITDA margin of +30% in exports and ~27% domestically
compared to the overall EBITDA margin of 19% reported by Bajaj in FY15. Led by
relatively higher realisation and higher margin of 3Ws, the contribution of 3Ws in
aggregate EBITDA was ~40% in FY15, despite the share of 3Ws in aggregate
volumes being c.15%, in our view.
Figure 126: Higher realisation & margins of 3Ws drives higher contribution in aggregate
EBITDA
45%
40%
35%
30%
26%
25%
20%
17%
15%
10% 7%
15%
5% 10%
6%
0%
Volume Revenue EBITDA
Domestic 3Ws Export 3Ws
Source: Investec Securities Research

While the demand for domestic three wheelers is dependent on permits issued by
government agencies, which is relatively difficult to predict, we expect domestic
three wheelers volumes for Bajaj Auto to grow at 5% CAGR over FY16-18. We
expect Bajaj to continue to dominate the petrol alternate fuel category of 3Ws (88%
market share) and also expand the product portfolio towards large diesel segment.
Expect 3Ws exports for Bajaj to grow As seen in Figure 127, Bajajs 3Ws export run-rate normalised to over 31K units per
at 9% CAGR over FY15-18 month in September15 after declining to ~13K units in February15 (led by balance
of payment issues in Egypt, a temporary order freeze by the Sri Lanka government
and presidential elections in Nigeria). From here on we expect an uptick in 3Ws
exports for Bajaj as these country specific issues have receded and we expect
strong volume growth from emerging markets of Africa and Asia driving the 9%
CAGR volume growth over FY15-18E.

Figure 127: Exports run-rate normalised to over 31K in Sep15 Figure 128: Expect 3Ws volumes to grow at 6% CAGR led by exports
35 600
Thousands
30 500
25 365
338
Thousands
400 313
285
20
300 261
15
200 258
10 234 234 246
187
100
Apr14
Jun14
Oct14
Apr15
Jun15
Aug14
Dec14
Feb15
Aug15
FY14 FY15 FY16E FY17E FY18E
3Ws Export 3Ws Domestic 3Ws Domestic 3Ws Exports
Source: Company Data, Investec Securities Research Source: Company Data, Investec Securities estimates

Sector leading operating/financial metrics
Figure 129: EBITDA split FY15 We believe Bajaj Autos product mix is structurally geared towards higher operating
Economy Executive margins compared to peers. As seen in Table 10 , contribution of domestic
3% 5%
economy and executive segments (relatively lower margin) in aggregate revenue of
Bajaj is c.20%. On the contrary, premium segment, exports, domestic 3Ws and
Premium
20% spares which have all have EBITDA margin in excess of 20% have a cumulative
Exports
48% contribution of ~90% to EBITDA in FY15 (revenue share 80%). Bajaj is the market
3Ws 12%
leader (35%in the premium sports segment which commands the highest margin
Spares among all domestic two wheeler products.
13%
Source: Company data, Investec Securities Research
Table 9: Portfolio geared towards higher profitability
Revenue (%) FY15 FY16E FY17E FY18E Comments

Economy 8% 12% 10% 10% Lowest margin in motorcycles
Relatively higher margin than economy

segment, but margin pressure trending
Executive 11% 4% 5% 6% upwards
Premium 21% 22% 23% 23% High margin
Margin comparable to the executive
Spares 9% 10% 10% 9% segment
3Ws 9% 9% 8% 8% High margin
Exports 41% 43% 43% 44% High margin
Total 100% 100% 100% 100% High margin
Table 10: Bajaj relatively better placed as compared to Hero and TVS
Volume break-up (FY15) Bajaj Hero TVS

Economy 14% 17% 17%
Executive 15% 66% 1%
Premium 18% 2% 8%
Scooters 11% 27%
3Ws 6% 1%
Mopeds 30%
Exports 47% 3% 16%
Total 100% 100% 100%
EBITDA margin to gradually expand from here on

Between FY10 to FY15, while Bajaj grew revenues at a 13% CAGR, EBITDA grew
much faster at a 50% CAGR. This is attributable to the growing share of Premium
segment (highest margin in 2W segment) in the domestic volumes and increasing
share of exports. In our opinion, further rise in proportion of exports coupled with
increase in share of non-Africa exports (richer product mix) should further improve
profitability Bajajs exports business. Moreover, a gradual product mix change in the
domestic business (increase in share of premium segment) should also improve
aggregate profitability of Bajaj Auto, in our view. Overall we expect Bajaj EBITDA
margin to increase from 19% in FY15 (21% reported 1HFY16) in to 22% by FY18E.

Figure 130: Contribution of Premium (21%) and exports (41%) Figure 131: to revenues is likely to increase in FY18
100%
Spares
80% 9%
3Ws
8%
60% Executive
6%
Exports
40% 45%
Economy
20% 10%
0%
FY16E
FY17E
FY18E
FY13
FY14
FY15
Premium
22%
Exports Premium Economy Executive 3Ws Spares
Source: Company Data, Investec Securities estimates Source: Company Data, Investec Securities estimates
Figure 132: Indicative segmental EBITDA margin range Figure 133: Bajajs revenues likely to grow at 13% but EBITDA to
grow faster at 16% CAGR over FY15 18E.
35 22% 22%
(%) 330 21% 22%
311
30 310
290 277
25 21%
270
20 250
20% 216 246 20%
230
15 201
210
10 190 19%
19%
170
5
150 18%
0 FY14 FY15 FY16E FY17E FY18E
Economy Executive Premium 3W Spares 2W 3W
Revenue (Rs bn) EBITDA margin (RHS)
Domestic Exports
Source: Investec Securities estimates Source: Company Data, Investec Securities estimates
Figure 134: Negative net working capital cycle Bajajs just in time inventory management, asset light business model and cash and
0 carry nature of transactions with dealers significantly boost the operating cash flow
(5) of the company with strong EBITDA to cash conversion ratio of ~70%, as seen in
(12)
(10) (20) Figure 135. Managements preference towards asset light business model has
(25) (24)
(15) resulted in the outsourcing of most non-critical components; thereby it further limits
(20) the need for any significant capital expenditure. Working in tandem, these factors
(25) are likely to result in free cash flow accretion of c.Rs130bn over FY16E to FY18E.
(Days)
(30)
FY12
FY13
FY14
FY15
Source: Company Data, Investec Securities estimates

Figure 135: Bajaj convert c70% of EBITDA to cash; and coupled Figure 136: capex requirement will result in c.Rs133bn of free
with limited cash flow accretion over FY16E to FY18E
50 (Rs bn) 130% 45 (Rsbn) 42

40 37
45 120% 33 34
110% 35
40 28
100% 30
35 25
90% 18
30 20 16
80% 14
25 70% 15
20 10 4 5 4 4
60% 2 3 3 4
15 5
50%
0
10 40%
FY16E
FY17E
FY18E
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY10
FY11
FY12
FY13
FY14
FY15
Operating cash flow as a % of EBITDA (RHS) Capex Free cash flow

In our opinion, Bajajs significant free cash flow generation has stifled ROCE/ROE
expansion given the lower necessity of deployment of cash in core business led by
asset light nature of the business. Nonetheless, this is a rather pleasant problem to
have.
In the past Bajaj used its surplus cash to make acquisitions, like KTM, which
resulted in significant learning in terms of design capability/ technology and also as
a distribution channel in developed countries, where Bajaj lacks a significant
presence. Given that the company has not indicated any plans for acquisition, the
likelihood of greater distribution among shareholders in the form of a higher
dividend payout ratio remains strong. Additionally one cannot rule out the possibility
of a share buyback which is a more tax efficient route of surplus distribution.
Figure 137: ROCE and ROCE likely to be stable
45% 44%
40%
37%
35%
35%
32% 32%
31% 31% 31%
30% 28%
28%
26% 26%
25%
20%
FY13 FY14 FY15 FY16E FY17E FY18E
ROACE (post tax) ROE
Figure 138: Cash and cash equivalents Figure 139: Dividend payout ratio
150 (Rsbn) (Rs/share) 55%
500 51%
50% 50% 50%
130 450
50%
400
110 43 45%
350 45% 43% 43%
90 300
1 26
2 250 40%
70
13
1 2 87 200 35%
50 69 72 71 35%
1 57 150
47 39 46
30 100
30%
FY16E
FY17E
FY18E
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY11
FY12
FY13
FY14
FY15
Current investments Cash

Attractive valuations Initiate with BUY
ROE/ROCE of ~30%, FCF Yield of Bajaj is trading at 16x FY17E earnings broadly in-line with five year average
5.3%, Dividend Yield of 3.2% and valuation. In our opinion, valuations are attractive given a) strong earnings growth of
EPS growth of 16% CAGR suggest 16% CAGR over FY15-18E, b) robust return ratios (ROE/ROCE of 32%/28% in
attractive valuation of 16xFY17 FY16E), c) high FCF yield (5.3%/6% FY17E/18E with expected FCF generation of
earnings Rs42bn in FY18), and d) dividend yield of 3.1% in FY17E.
We value Bajaj at 17x Sep17 earnings which is at 10% premium to one year
forward P/E. We value Bajajs 48% stake in KTM at listed market price of Rs.153
per share leading to our target price of Rs.2900.
In our opinion, Bajaj deserves a premium to historic valuations primarily led by:
1 Expected higher volume growth of 7% CAGR over FY15-18 as compared to a
volume decline 4% CAGR over FY12-15.
2 Lower exposure to the domestic executive segment which in our opinion should
see further increase in competitive intensity. Contribution of the domestic
executive segment in Bajaj is expected to decline from 16% of aggregate
volume in FY15 to 8% by FY18E.
3 Increase in share of premium segment in which Bajaj has a strong hold (35%
market share) and entail higher margins (+20% EBITDA margin) in the
domestic volumes from 38% in FY15 to 44% in FY18. Strong product line-up
and encouraging feedback of the recent launches by Bajaj in the premium
segment gives us the confidence that Bajaj should deliver volumes growth of
12% CAGR in the domestic premium segment over FY16E-18E.
4 Further diversification of export business thereby reduces the risk of volatility of
demand in any single geography. While Bajaj exported to 62 countries in FY15,
the share of Africa in total exports was at 43%. Though the share of Africa is
still high, as Bajaj enter new markets and increases penetration into other non-
African markets (like LATAM) we expect the share of Africa to further come
down (share of Africa was ~50% in FY10)
Table 11: SOTP
FY17E FY18E Average Sep'17

EPS (Rs.) 152 171 162
P/E (x) 17
Equity value (Rs/share) 2,747
KTM valuation (Rs/share) 153
Target Price (Rs/share) 2,900
Figure 140: One year forward P/E
20
Max 19.5
19
18
17
16
15 Avg 15.2
14
13
12 Min 12.1
11
10
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
P/E (x) Avg Max Min
Source: FactSet

Figure 141: Bajaj Auto summary financials
Income Statement (Rsm) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Revenue 96,900 90,497 121,181 168,302 198,270 206,179 207,270 220,132 250,944 283,105 317,937
Other Operational Income 3,103 3,734 4,125 5,014 6,487 5,083 4,319 5,081 5,335 5,602 5,882
Less: Excise duty 10,267 6,127 6,096 9,334 9,468 11,289 10,094 9,093 10,366 11,694 13,133
Total income 89,736 88,104 119,210 163,982 195,290 199,973 201,495 216,120 245,914 277,013 310,686
% change YoY 0% -2% 35% 38% 19% 2% 1% 7% 14% 13% 12%
EBITDA 12,210 11,921 25,926 31,712 37,200 36,352 41,056 41,166 52,441 59,657 67,032
EBITDA margin 14% 14% 22% 19.3% 19.0% 18.2% 20.4% 19.0% 21.3% 21.5% 21.6%
PBT 14,451 13,315 28,236 43,478 40,262 42,634 46,319 40,848 55,952 65,137 73,611
Investec Net profit 11,686 12,350 22,776 26,152 31,381 30,408 32,418 31,540 37,703 43,892 49,602
Weighted average shares 289 289 289 289 289 289 289 289 289 289 289
EPS, diluted 40.4 42.7 78.7 90.4 108.4 105.1 112.0 109.0 130.3 151.7 171.4
DPS 20.0 22.0 40.0 40.0 45.0 45.0 50.0 50.0 65.1 75.8 85.7
Balance Sheet (Rsm) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Net Block 12,686 15,423 14,796 14,827 14,796 18,044 20,060 19,172 19,876 20,835 21,532
Investments 18,571 18,085 40,215 47,219 48,828 64,305 85,496 91,533 101,533 116,533 131,533
Inventories 3,496 3,388 4,462 5,473 6,785 6,363 6,397 8,142 7,641 8,607 9,653
Sundry Debtors 2,753 3,587 2,728 3,599 4,228 7,676 7,962 7,170 8,085 9,107 10,214
Cash and Bank 561 1,369 1,014 2,288 16,538 5,589 4,955 5,862 15,480 21,993 31,666
Loans and advances 9,687 14,909 21,805 12,084 13,204 15,240 13,955 16,085 16,085 16,085 16,085
Total assets 48,102 58,814 85,436 92,475 110,841 124,786 147,476 155,623 176,359 200,820 228,343
Equity 1,447 1,447 1,447 2,894 2,894 2,894 2,894 2,894 2,894 2,894 2,894
Reserves and Surplus 14,429 17,250 27,837 46,209 57,517 76,126 93,187 104,028 122,879 144,825 169,626
Debt 13,343 15,700 13,386 2,917 975 713 577 1,118 1,118 1,118 1,118
Deferred Tax Assets / Liabilities 110 42 17 2,234 2,055 2,372 2,306 1,992 1,992 1,992 1,992
Current Liabilities & Others 18,773 24,376 42,750 38,222 47,400 42,682 48,512 45,592 47,477 49,992 52,714
Total Liabilities 48,102 58,814 85,436 92,475 110,841 124,786 147,476 155,623 176,359 200,820 228,343
Cash Flow Statement (Rsm) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Cash From Operating Activities 7,860 31,496 16,137 31,932 21,344 35,458 21,473 37,921 41,423 46,327
Cash Flow from Investing Activities -2,087 -21,636 -6,232 -6,819 -12,778 -21,415 -4,143 -9,441 -12,953 -11,842
Cash from Financing Activities -1,230 -6,090 -8,620 -15,644 -15,002 -14,682 -16,441 -18,862 -21,957 -24,812
Net Cash Inflow / Outflow 4,542 3,770 1,285 9,469 -6,436 -639 889 9,618 6,513 9,673
FCFF 3,999 30,418 14,523 28,254 16,059 32,911 18,521 34,421 37,423 42,327
Performance Ratios FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Growth
Revenue -2% 35% 38% 19% 2% 1% 7% 14% 13% 12%
EBITDA -2% 117% 22% 17% -2% 13% 0% 27% 14% 12%
EBIT 1% 131% 24% 17% -3% 13% -2% 29% 14% 13%
EPS 6% 84% 15% 20% -3% 7% -3% 20% 16% 13%
Margins
EBIT 12% 12% 21% 19% 18% 17% 19% 18% 20% 20% 21%
Net profit 13% 14% 19% 16% 16% 15% 16% 15% 15% 16% 16%
Solvency
Net debt / equity (%) 81% 77% 42% 1% -26% -6% -5% -4% -11% -14% -18%
Net debt / total assets (%) 27% 24% 14% 1% -14% -4% -3% -3% -8% -10% -13%
Net debt / EBITDA (x) 1.0 1.2 0.5 0.0 -0.4 -0.1 -0.1 -0.1 -0.3 -0.3 -0.5
EBITA interest cover (x) 237x 57x 434x 1,876x 167x 6,732x 8,379x 634x 4,692x 5,337x 5,997x
Capital productivity
Capital employed 29,219 34,397 42,669 52,019 61,386 79,732 96,658 108,039 126,890 148,836 173,637
Capital growth (%) 0% 18% 24% 22% 18% 30% 21% 12% 17% 17% 17%
Capital turn (x) 0.3x 0.4x 0.4x 0.3x 0.3x 0.4x 0.5x 0.5x 0.5x 0.5x 0.6x

Summary Financials (INRm) Year end: 31 March
Income Statement 2014 2015 2016E 2017E 2018E
Revenue 201,495 216,120 245,914 277,013 310,686
EBITDA 41,056 41,166 52,441 59,657 67,032
Depreciation and amortisation -1,796 -2,674 -2,796 -3,041 -3,303
Operating profit 39,260 38,492 49,644 56,616 63,729
Other income 2,833 2,055 2,260 2,486 2,735
Net interest 4,226 3,705 4,048 6,036 7,147
Share-based-payments 0 0 0 0 0
PBT (normalised) 46,319 44,251 55,952 65,137 73,611
Impairment of acquired intangibles - - - - -
Non-recurring items/exceptionals 14 -3,403 0 0 0
PBT (reported) 46,333 40,848 55,952 65,137 73,611
Taxation -13,901 -12,711 -18,250 -21,246 -24,010
Minorities & preference dividends 0 0 0 0 0
Discontinued/assets held for sale 0 0 0 0 0
Net Income (normalised) 32,418 31,540 37,703 43,892 49,602
Attributable profit 32,432 28,137 37,703 43,892 49,602
EPS (reported) 112.1 97.2 130.3 151.7 171.4
EPS (norm., cont.) FD (INR) 112.0 109.0 130.3 151.7 171.4
EPS (norm., cont., IAS19R adj.) FD - - - - -
DPS (INR) 50.0 50.0 65.1 75.8 85.7
Average number of group shares - FD (m) 289 289 289 289 289
Average number of group shares (m) 289 289 289 289 289
Total number of shares in issue (m) 289 289 289 289 289
Cash Flow 2014 2015 2016E 2017E 2018E
Depreciation & amortisation 1,796 2,674 2,796 3,041 3,303
Other cash and non-cash movements -991 -4,718 -1,788 -3,549 -4,413
Change in working capital 4,319 -5,825 1,471 526 569
Operating cash flow 44,384 30,623 52,123 56,633 63,189
Interest 4,226 3,705 4,048 6,036 7,147
Tax paid -13,153 -12,854 -18,250 -21,246 -24,010
Dividends from associates and JVs 0 0 0 0 0
Cash flow from operations 35,458 21,473 37,921 41,423 46,327
Maintenance capex -2,547 -2,952 -3,500 -4,000 -4,000
Free cash flow 32,911 18,521 34,421 37,423 42,327
Expansionary capex - - - - -
Exceptionals and discontinued operations - - - - -
Other financials 641 -55 -11 -11 -11
Acquisitions -18,868 -1,191 -5,941 -8,953 -7,842
Disposals - - - - -
Net share issues 0 0 0 0 0
Dividends paid -15,182 -16,909 -18,851 -21,946 -24,801
Change in net cash -498 366 9,618 6,513 9,673
Net cash/(debt) 4,377 4,744 14,362 20,875 30,548
FCFPS - FD (INR) 113.7 64.0 118.9 129.3 146.3
Balance Sheet 2014 2015 2016E 2017E 2018E
Property plant and equipment 20,386 20,190 20,893 21,852 22,549
Intangible assets 1,115 1,532 1,532 1,532 1,532
Investments and other non current assets 92,706 96,644 106,644 121,644 136,644
Cash and equivalents 4,955 5,862 15,480 21,993 31,666
Other current assets 28,315 31,396 31,810 33,799 35,952
Total assets 147,476 155,623 176,359 200,820 228,343
Total debt -577 -1,118 -1,118 -1,118 -1,118
Preference shares 0 0 0 0 0
Other long term liabilities -9,968 -9,666 -9,666 -9,666 -9,666
Provisions & other current liabilities -40,851 -37,918 -39,803 -42,317 -45,040
Pension deficit and other adjustments 0 0 0 0 0
Total liabilities -51,396 -48,702 -50,587 -53,101 -55,824
Net assets 96,080 106,922 125,773 147,719 172,519
Shareholder's equity 96,080 106,922 125,773 147,719 172,519
Minority interests 0 0 0 0 0
Total equity 96,080 106,922 125,773 147,719 172,519
Net working capital -6,755 -2,686 -4,157 -4,683 -5,252
NAV per share (INR) 332.0 369.5 434.6 510.4 596.1
Source: Company accounts, Investec Securities estimates

Sel ecti on.Tables(1).R ang e.Fi elds .Update
Calendarised Valuation Year end: 31 March

2014 2015 2016E 2017E
Calendar PE (x) 22.6 19.9 16.9 14.9
Calendar Price/NAVPS (x) 6.9 5.9 5.0 4.3
EV/sales (x) 3.3 3.0 2.6 2.3
EV/EBITDA (x) 17.1 14.2 12.1 10.8
FCF yield (%) 3.1 4.2 5.1 5.7
Dividend yield (%) 2.0 2.5 3.0 3.4
Ratios and Metrics Year end: 31 March

Ratios and metrics 2014 2015 2016E 2017E 2018E
Revenue growth (y-on-y) (%) 0.8 7.3 13.8 12.6 12.2
EBITDA growth (y-on-y) (%) 12.9 0.3 27.4 13.8 12.4
Net income (normalised) growth (yoy) 6.6 (2.7) 19.5 16.4 13.0
EPS (normalised) growth (y-on-y) (%) 6.6 (2.7) 19.5 16.4 13.0
FCFPS growth (y-on-y) (%) 104.9 (43.7) 85.8 8.7 13.1
NAVPS growth (y-on-y) (%) 21.6 11.3 17.6 17.4 16.8
DPS growth (y-on-y) (%) 11.1 0.0 30.3 16.4 13.0
Interest cover (x) (9.3) (10.4) (12.3) (9.4) (8.9)
Net debt/EBITDA (x) (0.1) (0.1) (0.3) (0.3) (0.5)
Net debt/equity (%) (4.6) (4.4) (11.4) (14.1) (17.7)
Net gearing (%) (4.8) (4.6) (12.9) (16.5) (21.5)
Dividend cover (x) 2.2 2.2 2.0 2.0 2.0
EBITDA margin (%) 20.4 19.0 21.3 21.5 21.6
EBITA margin (%) 19.5 17.8 20.2 20.4 20.5
ROE (%) 33.7 29.5 30.0 29.7 28.8
ROCE (%) 37.0 33.0 36.7 36.0 35.0
NWC/revenue (%) (3.4) (1.2) (1.7) (1.7) (1.7)
Tax rate (normalised) (%) 30.0 28.7 32.6 32.6 32.6
Tax rate (reported) (%) 30.0 31.1 32.6 32.6 32.6
Target Price Basis

PE multiple on average FY17/18 earnings
Key Risks
Geopolitical risk impacting volumes in key geographies

Hero M otoc orp ( Buy - T P: INR)
Hero Motocorp (HROM.NS)

India | Automobiles & Parts HOLD
Multiple headwinds; valuations supportive Price: INR2645
INR2646 INR2790
In the backdrop of increasing competition, slower growth and margin Target: INR2790
headwinds, we believe Hero could miss management guidance and streets Forecast Total Return: 8.5%
expectation on margin expansion. We also think Heros guidance of 1.2m
units of annual export by FY20 is optimistic, as breaking into markets of Market Cap: INR528bn
Africa/LATAM will take some time given the lack of brand exposure there. EV: INR512bn
Consequently our FY17E/18E PAT estimates are 5/6% below consensus, Average daily volume: 386k
though at 16x FY17E P/E the stock price reflects these concerns. Initiate with
Hold.
Increasing competition & slower growth to hurt domestic business: With

Hondas aggression and Bajajs desire to get back market share, we expect
competition in the executive segment to further increase and potentially drag down
operating margins for the industry. In our opinion, Hero is the most vulnerable
given it derives c.70% of the volumes from this segment and Hondas track record
of breaking into and dominating markets globally could spoil the party for Hero.
Slower rural growth (led by weak monsoon) could also potentially hurt Hero the
most given the exposure to commuter segment (economy + executive) which
contribute c.85% of Heros volumes.
Margin to fall short of management guidance/street expectations: Margin
pressure in the executive segment, increasing spend on R&D and
marketing/setting-up expenses in export markets could put pressure on Heros
margin, posing risk to management guidance and street expectation, in our view.
Though management has trimmed its EBITDA margin expansion target by 200bps
from 400bps earlier to c.15% by FY17, we are circumspect on the incremental
benefits that could flow through Heros LEAP program.
Initiate with Hold and target price of Rs 2790: Despite headwinds surrounding its
core operating business, we think Heros ROCE/ROCE of ~41/34%, FCF/Dividend
Aditya Jhawar
Yield of ~5%/3% can be sustained over the next three years. Heros valuation at
+91 (22) 6136 7415
16xFY17 P/E (in-line with five year average), seems fair to us. Initiate with Hold aditya.jhawar@investec.co.in
recommendation and target price of Rs.2790 based on 16x Sep17 earnings.
Stronger than expected growth in exports and higher margin expansion are key risk Pratik Rangnekar
+91 (22) 6136 7425
to our thesis. pratik.rangnekar@investec.co.in

2014A 2015A 2016E 2017E 2018E 3,400
Revenue (INRm) 252,755 275,853 288,825 313,822 338,977 3,200

EBITDA (INRm) 27,270 33,420 41,897 45,837 49,850
3,000
EBITA (INRm) 24,327 30,022 38,042 41,593 45,217
PBT (normalised) (INRm) 28,673 34,839 42,115 46,424 50,752 2,800
Net Income (normalised) (INRm) 21,091 25,407 30,182 33,270 36,372
2,600
EPS (norm. cont.) FD (INR) 105.6 127.2 151.1 166.6 182.1
2,400
FCFPS - FD (INR) 101.7 54.9 145.9 137.3 163.1
DPS (INR) 65.0 60.0 75.9 83.7 91.5 2,200
PE (normalised) (x) 25.1 20.8 17.5 15.9 14.5
EV/sales (x) 2.0 1.9 1.8 1.6 1.5
EV/EBITDA (x) 18.8 15.3 12.2 11.2 10.3 1m 3m 12m
FCF yield (%) 3.8 2.1 5.5 5.2 6.2 Price
____________________________
2.0 6.8 (13.1)

Dividend yield (%) 2.5 2.3 2.9 3.2 3.5 6.5
Price rel to India S&P BSE 500 - BSE India (Indian
____________________________
6.1 (10.4)
Rupee)
Page 56 | 26 November 2015 | Hero Motocorp

Figure 142: Company description Figure 143: Shareholding pattern
Hero MotoCorp Limited, formerly Hero Honda Motors

Public
Limited, manufactures two wheelers and their parts and 13%
ancillary services. The company has three manufacturing
facilities, two in Haryana and a third in Uttrakhand. It has
DII Promoters
17 different products across 100cc, 125cc, 150cc, 225cc 35%
14%
and scooter category. The company offers a range of
bikes which include CD Dawn, CD Deluxe, Splendor
Plus, Splendor NXG, Super Splendor and Passion Pro.
The company is the largest manufacturer of motorcycles
in the world and commands a market share of 41% in the
domestic two-wheeler industry. The company was
founded by Late Mr. Brijmohan Lall Munjal on 19 January FII
1984 and is headquartered in New Delhi, India. 38%
Figure 144: Heros is the market leader in the domestic Figure 145: but its portfolio is skewed towards executive segment
motorcycles
100% 5%
5% 5% 5% 8% 8% 100%
8% 8% 7% 6% 6% 7% 14% 16% 18% 17% 16% 17% 18%
6% 7% 7% 11%
80% 14% 14% 80%
60% 48% 48% 60%

52% 46% 61%
44% 45% 64% 64% 65% 64% 65% 62%
40% 40%
20% 20%
30% 32% 32% 31% 27% 25% 25% 20% 17% 18% 20% 18% 19%
0% 0%
FY10 FY11 FY12 FY13 FY14 FY15 2009 2010 2011 2012 2013 2014 2015
Bajaj Hero Honda TVS Others Economy Executive Premium
Figure 146: Heros cash generation profile to remain strong Figure 147: Expect strong & stable ROCE/ROE
45 (Rsbn) 41 41 50%
40 37
35 45%
30
30 40%
23 24 22
25 19
20 35%
15 12 12
9 10
6 8 30%
10 6
4
5 25%
0
20%
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY16E
FY17E
FY18E
FY13
FY14
FY15
Operating cash flow Capex RoCE RoE

Dominance in the Indian 2Ws market
Figure 148: Heros volume split (FY15) Hero is the leader in the Indian two wheeler industry with 38% share (1H FY16) in
Exports
2Ws overall and 53% share in motorcycles. The seeds for this domination were
Scooters
3% sown over the past three decades with the help of its erstwhile partner Honda.
11% Heros partnership with Honda provided the former with Hondas superior
technology, knowledge, know-how and experience garnered over several years
from diverse markets, and this helped hero build a dominant position in the Indian
Motorcycle markets.
86%
c.70% of Heros domestic volumes comes from the Executive segment, a segment it
dominates with the decade-old brands Splendour and Passion. Both these brands
Source: Company filings, Investec Securities research cumulatively account for 66% of Heros total volumes, 69% of the executive
segments volume and c.25% of the entire 2Ws industry.
Figure 149: Hero dominates the Indian 2Ws industry Figure 150: Splendour & Passion corner a large share in the
industry
48%
7.0 50% 70% 61% 60%
47%
44% 45% 43% 60%
6.0 50%
45%
41% 40% 35%
5.0 40%
23%
Millions
40% 30%
4.0 6.1 6.1 6.4 20%
6.0
5.2 10%
4.5 35%
3.0 3.3 0%
Industry Hero's domestic Domestic Domestic 2Ws
2.0 30% Executive volumes Motorcycle
2009 2010 2011 2012 2013 2014 2015 Segment Industry
Domestic volumes Market share (RHS) Splendour & Passion Share
Source: CRISIL, Investec Securities research Source: CRISIL, Investec Securities research
Figure 151: Heros market share in the domestic 2Ws industry Figure 152: Heros market share in domestic motorcycles industry
100% 100% 5%
6% 7% 7% 8% 9% 9% 5% 5% 5% 8% 8%
8% 8% 7% 6% 6% 7%
14% 15% 14% 13% 12% 13% 6% 7% 7% 11%
80% 80% 14% 14%
12% 12% 14% 17% 22% 24%
60% 60% 48% 48%
52% 46%
44% 41% 44% 45%
41% 39%
40% 37% 40%
36%
20% 20% 32%
24% 25% 25% 24% 30% 32% 31% 27% 25%
20% 18%
0% 0%
Bajaj Hero Honda TVS Others Bajaj Hero Honda TVS Others
Source: CRISIL, Investec Securities research Source: CRISIL, Investec Securities research

Growth to slow down in economy segment
In our opinion, the industry growth rate of the economy segment (engine capacity <
Figure 153: Motorcycle industry split
110 cc and launch price < Rs45,000) should slow down to 3% CAGR over FY15-
20E as compared to 8% CAGR reported by the industry over FY10-15.
100% 14% 17% 20% 23% Rising incomes and aspirations of first time buyers (economy segment is generally
50% 61% 65% 58% 59% characterised by first time buyers) should drive the move to the executive segment,
25% 22% in our view. Relatively slower growth should drive share of economy segment in the
0% 18% 18%
industry to 18% by FY20 from 22% reported in 1HFY16, as seen in Table 12.
FY09 FY12 1HFY16 FY20E
For Hero, the contribution from the economy segment was at 17% in proportion to
Economy Executive Premium aggregate volumes in FY15. The economy segment is dominated by Hero
Motocorps HF Dawn with market share of 46%, as seen in Figure 154 . This
Source: Investec Securities estimates segment mainly caters to the base of the consumers pyramid characterised by
extreme price and mileage sensitivity.
Table 12: Expect growth to slow down for the economy segment for the industry
Volume Growth (%) Segment Share (%)

CAGR (FY10-15) CAGR (FY15-20E) 1FHY16 FY20E
Economy 8% 3% 22% 18%
Executive 8% 4% 58% 59%
Premium 11% 10% 20% 23%
Total volumes 9% 5% 100% 100%
Source: SIAM, Investec Securities estimates
Figure 154: Market share in the domestic economy segment Figure 155: Hero lost market share in 1HFY16 to Bajaj
100% 2% 2% 2% 1% 2% 2% 1% 1% 100 56% 60%

52% 54%
Thousands
90 55%
80% 35% 43% 45% 46%
46% 52% 56% 54% 80 46% 45% 46% 50%
70 43%
60% 45%
22% 60 88 94
25% 16% 87
40% 27% 26% 20% 50 35% 40%
18% 21% 68
40 51 59 35%
20% 42% 38% 44
30% 25% 28% 26% 24% 24% 30 39 30%
0%
FY16YTD
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Bajaj TVS Hero Others Heroeconomy segment monthly run-rate

Market share (RHS)
With the launch of CT100 (discontinued in 2006) at very competitive pricing (~6%
lower to segment leader Hero Motocorps HF Dawn) and Platina with Electric Start,
Bajajs market share increased to 38% in FY16YTD (Apr-Sep15) from 25% in
FY15.

Figure 156: increased competition from Bajaj post the launch of Platina & CT100
100 94 45%
42%
Thousands
Table 13: CT 100 priced aggressively 87 88 87
90
38% 40%
Ex-Showroom Price - Pune (Rs)
80
CT100 35,888 72
68 35%
HF Dawn 38,263 70
30% 59
Note: Price for Kick start & Spoke wheels variants 60 28% 30%
Source: Company Data, Investec Securities Research 51
48 25% 26%
50
43 43 24% 24% 42
39 38 25%
40 35
32
30 20%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16
Hero avg. monthly run-rate Bajaj avg. monthly run-rate

Bajaj's market share (RHS)
Expected slower growth of the economy segment and aggressive pricing of new
products in the backdrop of increased competition could potentially hurt margins of
the economy segment, in our view. Overall we expect Hero to deliver volume
growth of 4.6% CAGR over FY15-18E in the economy segment, as compared to
industry growth of 5.2% CAGR over FY15-18E. On the back of encouraging
response to the recently launched products by Bajaj (CT100, Platina), we expect
the growth momentum to continue and report volume growth of 12% CAGR over
FY15-18E which should drive the domestic economy segment industry growth.

Exposure to executive segment a concern
Figure 157: Heros executive segment share While the share of Executive Segment (motorcycles with engine capacity 110-
150cc and launch price of Rs.45,000-Rs65,000) in the domestic motorcycle industry
80% 76% 74% 72% is ~65% (FY15), its share in Heros domestic motorcycles volumes stood at 77%
70% 67% 68% 65% (67% of total volumes in FY15). With the popular brands Splendour and Passion,
63% 61%
60% the share of Executive segment in Hero was always on a higher side as seen in
Figure 158. In our opinion, the domestic executive segment should see further
50%
increase in competitive intensity which could potentially hurt margins for Hero.
FY09
FY10
FY11
FY12
FY13
FY14
FY15
1HFY16
Increase in competitive intensity should be primarily driven by aggressive marketing
by Honda and Bajaj.
Figure 158: Hero portfolio geared towards executive segment Figure 159: share of premium segment trending up in the industry
100% 3% 100%
5% 6% 7% 6% 5% 4% 14% 16%
16% 18% 17% 17% 18%
80% 80%
60% 76% 76% 77% 60%

80% 80% 79% 80% 61% 64% 64%
64% 65% 65% 62%
40% 40%
20% 20%
15% 14% 15% 15% 19% 20% 20% 25% 20% 17% 18% 20% 18% 19%
0% 0%
2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015
Economy Executive Premium Economy Executive Premium

Hondas desire to become Numero Uno drives their aggression:
Hondas desire to become Number Honda has an enviable track record of breaking into and dominating markets
Uno drives the aggression in the globally. We take a look at its history to understand how its experience is likely to
executive segment benefit it in India. With 70 years experience in creating and breaking into
established markets, Honda can easily gain leadership position from current
position of number two. Hondas strategy is to focus on one market at a time with
the objective to become market leader before moving on to another market. Honda
is already market leader in most of the relevant two wheeler markets globally,
except India, so Honda could potentially use similar strategies to garner market
share in India.
Table 14: Timeline of Honda motorcycles entering and dominating 2Ws markets
Country Year Market Share

Japan 1946 No.1 player in 1958 with over 30% share
USA 1959 No.1 player with over 50% share in 1965
UK Mid 1960' No.1 player share in 1974 at 54%
Holland Mid 1960' No.1 player share in 1974 at 41%
Germany Mid 1960' No.1 player share in 1974 at 39%
France Mid 1960' No.1 player share in 1974 at 37%
Germany Mid 1960' No.1 player share in 1974 at 39%
Canada Mid 1960' No.1 player share in 1974 at 41%
Indonesia 1974 No.1 player within a few years, 2012 share at 58%
Brazil 1975 No.1 player within a few years, 2012 share a t 80%
Thailand 1975 No.1 player within a few years , 2012 share a t 76%
Vietnam 1990' No.1 player within a few years , 2012 share a t 62%
India 1984 leader in a few years 2010 share 65%
Second innings but standalone, from 4th largest player in 2010
India 2011 to 2nd largest in 2013.

Executive segment to support market share gains: Hondas market share in the
domestic 2Ws industry in FY15 stood at 27% with market share in motorcycles and
scooters at 17% and 55%, respectively. Given the dominance of Honda in scooters
and new product launches by Hero and TVS, we feel Hondas further market share
gains in scooters, if any, would be limited and gradual. On the contrary, with market
share of 17% (FY15) in the domestic motorcycle industry and increasing traction in
the executive segment (market share of 23% in FY15, +4% YoY) we expect Honda
to further strengthen its foothold in the domestic motorcycle industry. Share of
executive segment stood at 85%/36% of the motorcycles/aggregate volumes for
Honda in FY15. Importance of the executive segment from Hondas perspective is
clearly reflected from the higher contribution of the segment to total motorcycles
and aggregate two wheelers at 85%/36% respectively in FY15.
Figure 160: Honda dominates scooters, and has ample scope for Figure 161: In motorcycles, Executive remains the key segment for
gains in motorcycles Honda
57% 55% 85%
60% 53% 1,800 86%
51% 49% 81% 266
48% 84%
50% 43% 1,500 298
81%
80% 82%
40% 1,200 79% 79%
27% Thousands 77%
228 80%
30% 24% 900
19% 1,528 78%
20% 15% 15% 17% 600 160 1,287
14% 13% 13% 123
11% 923 76%
6% 6% 7% 7% 97
10% 300 67 537 596 74%
257 333
0% - 72%
Motorcycles Scooters Aggregate Executive Premium Share of executive (RHS)
Source: SIAM, Investec Securities Research Source: Investec Securities Research
Figure 162: Hondas executive volume grew by 135% CAGR Figure 163: resulting in an increase in market share to 23%
1,600 23% 25% 100% 4% 2% 3% 2% 2% 5% 3%

9%
Thousands
1,400 12% 16% 21% 21% 20% 15%

19% 80% 8%
20% 7% 23%
1,200 9% 9% 14% 19%
1,000 14% 60%
1,528 15%
800 40%
1,287 76% 74%
9% 9% 67% 68% 63% 61% 65%
600 8% 923 10%
7% 20%
400 537 596
257 333
200 5% 0%
Executive Seg volume Market share in Executive segment Hero Honda Bajaj Others

Hondas increase in marketing push: Our channel checks indicate that Honda
has become aggressive on the ground, especially in the executive segment. We
observed that few dealers in Pune (Maharashtra- Western India) were offering
Dealers offer gifts worth Rs.3000 on
gifts on Honda Shine (125 cc offering in the executive segment) worth Rs.3,000
the new Honda Shine
(like Kitchen articles, Sun Glasses, portable speakers), 1 gram gold coin (~worth
Rs.3000), Rs.5000 cash discount, etc. At the same time during channel checks in
Udaipur (Rajasthan-North Western India), we observed that dealers were offering
helmets with all motorcycles. We were told that Honda is making it compulsory
According to some dealers, Honda for dealers to take delivery of Shine (relatively slowing moving product now),
has linked deliver of Shine to deliver if the dealer wants delivery of Activa (good demand product).
of Activa

Figure 164: Hondas aggression resulted in a slide in Heros EBITDA margin, despite 35%
revenue CAGR
160 13%
HMSI EBITDA margin declined 12.0%
140 12%
300bps despite 35% revenue CAGR
over FY10-14 120 10.9%
11%
10.3%
100
8.9% 10%
8.8%
80 144
9%
60 105
78
40 8%
59
43
20 7%
FY10 FY11 FY12 FY13 FY14
Revenue (Rs bn) EBITDA margin (RHS)
Bajajs desire to get back market share could hurt Hero

Bajaj Autos market share in the executive segment (Discover family) has come
down to 4.2% in FY16YTD (Apr-Sep15) from 20% in FY13, as seen in Figure 19.
Bajajs desire to regain market share
We believe the main reasons for the same being 1) confusing branding strategy for
could lead into a new product launch;
its Discover platform, wherein it launched multiple bikes with the same branding, 2)
possibly priced aggressively
non-focused product promotions due to multiple models and 3) discontinuation of a
few nonworking models, thereby impacting their re-sale value and branding.
However our recent interaction with Bajaj Autos management suggest a strong
desire to get back market share in the executive segment with reengineered
In our view, this could potentially strategy and a new product launch in 4QFY16. In our opinion, the desire to get back
increase pressure on executive market share could potentially lead to a new product launch at aggressive pricing,
segment margins enhanced features and increased marketing efforts. This could up the ante in the
executive segment potentially increasing pressure on margins for the industry.
Figure 165: Bajajs market share slide in the executive segment
21% 21%
1,450 20% 22%
20%
1,250
16% 18%
1,050 15% 16%
Thousands
14%
850 12%
12%
1,346 1,305
650 1,202 9%
10%
1,012
450 8%
739
609 4% 6%
250 394
4%
50 127 2%
Executive segment volumes Market share (RHS)

We expect Hero to maintain its leadership in the executive segment, but expect its
market share to moderately come down to 71% by FY18E from 72.1% in 1HFY16.
Heros loss of market share is primarily on account of Bajaj and Honda which we
expect to moderately gain market share. Overall we expect Hero to deliver volume
growth of 4.7% CAGR in the executive segment over FY15-18E.

Premium segment - not Heros forte
Though we are quite upbeat on the prospects of the premium segment given the
Figure 166: Share of premium segment for aspirational moves we expect in the domestic motorcycle industry, we believe
Hero premiumisation should have only have limited benefit for Hero. We agree that
premium segment was never Heros forte, with contribution of the segment to
6% 5%
4% 4% aggregate volumes being c.5%, but the recent performance of the company has
4% 2% 2% 2% 3% been more uninspiring. Heros market share in the premium segment has come
2% down to 6% in 1HFY16 from 22% in FY09, as seen in Figure 167. On the back of
0% limited focus and lack of a strong product pipeline in the premium segment, we do
FY09 FY10 FY11 FY12 FY13 FY14 FY15 not expect Hero to make significant in-roads in the premium segment.
Share in aggregate volumes
Source: CRISL, Investec Securities Research

Figure 167: Hero has been losing ground in the premium segment
100%
5% 4% 3% 4% 7% 11%
10% 10% 16%
11% 15% 14% 21%
80% 9% 8% 14%
8% 9% 16%
14%
20% 17% 15%
22% 20%
60% 20% 13%
16% 11%
9% 12%
10% 9% 9% 8% 6%
7%
40% 8% 10% 12%
44% 44% 49%

20% 42% 41% 37% 35% 32%
0%
FY16YTD
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Bajaj TVS Hero Honda Yamaha Royal Enfield Motors Others
Source: CRISIL, Investec Securities Research

High scooter industry growth to benefit Hero
Over the past five years a shift in consumer preference towards gearless scooters
has been evident, primarily on account of new launches with more powerful engines
and improved mileage, design and ride quality. Ease of use and better
manoeuvrability around congested cities is increasingly making scooters the two
wheeler of choice for women and urban consumers.
This trend has helped scooters outgrow motorcycles at a 25% CAGR over FY10-
15 vs. the 8% CAGR growth registered by motorcycles in the same period.
Scooters, which accounted for a 16% share of domestic 2W sales in FY10, now
control 28% of the industry in FY15.
As highlighted in the thematic section, we expect the Scooter segment to grow at

12% CAGR over FY15-18E and become 35% of the domestic two wheeler industry
by FY20E. While Honda dominates the scooters industry with 58% market share
(1HFY16), Hero (market share of 13%) is well placed to benefit from the expected
higher growth of the scooters industry, in our view.
Figure 168: Expect share of scooters to trend up Figure 169: Market share split in scooters
100% 6% 6% 5% 4% 4% 100% 8% 7%
17% 16% 10%
16% 5% 5% 6%
19% 28% 2%
80% 33% 35% 80% 13% 15% 15%
19% 15%
60% 60%
49% 53% 56% 58%

40% 78% 75% 40% 48%
67% 63% 61%
20% 20%
16% 19% 19% 17% 13%
0% 0%
FY09 FY12 FY15 FY18E FY20E FY12 FY13 FY14 FY15 FY16YTD
Motorcycles Scooters Mopeds Hero Honda TVS Yamaha Others
Diversion of volumes to exports and Heros performance in the scooters segment has been quite encouraging with the
inventory buildup for Maestro Edge company reporting a volume growth of 29% CAGR over FY10-15, higher than the
and Duet launch resulted in a decline industry growth of 25% in the same period. Heros market share increased from
in market share of Hero 14% in FY10 to 17% in FY15 with domestic scooters volume at 0.75m units in
FY15.
However, for the 12 months over Aug14 to Jul15, Heros domestic scooter market
share has been volatile. This was due to a large scooter export order that Hero
received. The company was constrained by inadequate scooter manufacturing
Hero launched 110 cc scooters
capacity to fulfil both export and domestic demand. Moreover, from 1QFY16, Hero
Maestro Edge (Sep15) and Duet
is likely to have started building up inventory for its upcoming Maestro Edge and
(Oct15)
Duet launch. Also, new model launches by Honda and TVs also contributed to the
decline in Heros market share.

Figure 170: : Heros market share has come off from the peak of 24% Figure 171: Heros scooter domestic and export sales vs. Hero
in Dec12 to 13% in Sep13 monthly scooter manufacturing capacity
27% 60% 120 Likely inventory

Domestic prodn. constrained buildup for Maestro
110 due to one-off export order
20% Edge + Duet launch
22% 17% 100
55%
90
17% 80
15% 14% 50% 70
12%
13% 60
10% 45% 50
7%
40
2% 40% 30
Jul-14
Jul-15
Jan-14
Mar-14
May-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Sep-15
Jul-14
Jul-15
Jan-14
Mar-14
Nov-14
Jan-15
Mar-15
May-14
Sep-14
May-15
Sep-15
Honda (RHS) Hero TVS Yamaha Domestic Export Est. monthly scooter mfr. capacity
Scooters volumes to grow at 13% Nonetheless, Heros desire to get back market share and the latest launches
CAGR over FY16E-18E (Maestro Edge and Duet) are the first steps towards this. Further, the company has
increased its scooters manufacturing capacity to 1.3mn units per annum with a plan
to expand further to 1.5mn units once Heros Gujarat plant is up and running. We
build in a 13% CAGR in Heros scooter sales between FY16E to 18E following a 6%
YoY decline in FY16E. Over all we expect Heros market share to increase from
12.7% in 1HFY16 to 14% by FY18E.

Export a long-term game; first, some short-
term pain
Hero has set a target to export 1.2 million units annually by 2020, which in our
Figure 172: Share of exports in Heros volume
opinion is ambitious. Whilst exports do offer good long term potential, achieving this
6% 5% target will require enormous effort considering the challenges that these
4% geographies (Africa and LATAM) offer especially to the new entrant in these
4% 3% 3%
3% 3% 3% 2% markets. Our channel checks in Africa indicate that it is one of the most difficult
2% geographies to build a brand for a foreign player. As seen in Figure 173, Bajaj Auto
required a significant amount of time before its export operations began to ramp-up
0% and contribute meaningfully to volumes.
FY16E
FY17E
FY18E
FY11
FY12
FY13
FY14
FY15
In 2012, Heros management had guided for annual export volume of ~1 million
Source: Company Data, Investec Securities Research units by FY17E, which was later revised to 1.2 million units by FY20E. In our
opinion, creating a brand and setting up a distribution network may not be as quick
as the management expects and could potentially lead to a second postponement
of the target of 1.2m units beyond FY20E.
Notwithstanding the above, exports are unlikely to contribute significantly to

In 2012 management had guided for profitability in initial years led by higher advertising and brand building spend and
annual volume 1million units by FY17, relatively lower volumes. On the contrary, aggressive pricing in Africa (one of the
which they change to 1.2million units most price sensitive markets) with the objective to gain market share could
by 2020 potentially hurt aggregate margins of the company. Bajaj sold its motorcycles at a
loss during initial years to gain market share.
Overall we expect Heros exports to grow by 25% CAGR over FY15-18 to 0.4
million units by FY18 representing 5% of aggregate volumes.
Figure 173: Bajajs export ramp-up Figure 174: Heros expected export ramp-up
53%
425
2,000 ('000 units) 36% 50%
375 30% 30%
40%
325 25%
30%
Thousands
1,500 It took several years 15%

before exports became 275 20%
meaningful for Bajaj 225 389 10%
1,000 -3%
175 299 0%
-19% 230
125 166 200 -10%
133 161 131
500 75 -20%
FY16E
FY17E
FY18E
FY11
FY12
FY13
FY14
FY15
0
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Exports % YoY (RHS)

Financial strength intact despite headwinds
Given multiple weaknesses, we expect Heros revenue growth to remain in single
digits and grow at 7% CAGR over FY15-18E. Moreover, Margin expansion to the
level envisaged in its LEAP may not come through in entirety, leading to Heros
missing management guidance and street expectation of margin expansion.
With Heros market leadership position being challenged, can expect Hero to
aggressively defend its turf through increased marketing efforts and concentrated
expansion into selected overseas markets. Additionally, following the exit of Honda
and failure of Eric Buell racing; Hero is investing in developing and launching
products born out of its own research efforts. All of these will require Hero to fall
back on the strength of its balance sheet and leverage its large cash flow stream.
LEAP or a short hop?

Hero launched the LEAP (Leadership in Motion) program in FY14 to drive margin
expansions through better price and feature optimisation, improvement in raw
material sourcing, efficiency in logistics, marketing expenditure and product design.
However, during this period, Heros EBITDA margin (pre-royalty expenses) actually
fell by c.100bps over FY13-FY15 (from 13.8% to 12.8%). It is only when one adjusts
for royalty, that Heros margins indicate a c.200bps expansion to 12.1%, as seen in
Figure 175.
In FY15, on a gross basis LEAP accrued Rs3.2bn to Hero. However, during the
period, pre-royalty EBITDA margin fell by 120 bps YoY, as benefits from cost
savings were more than offset by pricing pressures (inability to pass on duty hikes
in scooters), vendor cost increases, diesel conversion costs and foreign exchange
fluctuations.
On the brighter side, it appears that LEAP benefits have only just started to flow
through, as indicated by 1HFY16 results when aggregate margins expanded by
c250bps. Off this the management has attributed 200bps to commodity price related
factors and 50bps to LEAP.
Figure 175: Heros EBITDA margin trend Figure 176: LEAP provided support to reported margins
15.3% 250
16%
200
15% 14.0%
13.8% 150
13.5%
14% 12.8% 100
13% 50
11.8%
12% 12.5% 12.1% 0
10.8%
11% 10.2% (50)
10% (100)
FY11 FY12 FY13 FY14 FY15 (150)
Dec-13
Dec-14
Mar-14
Jun-14
Mar-15
Jun-15
Sep-13
Sep-14
Sep-15
Reported EBITDA margin (Pre-royalty)

Adj. EBITDA margin (post royalty) Reported EBITDA margin (bps YoY) LEAP benefit (gross)

We gather that the total gross annualized benefit from the LEAP program by FY16E
Table 15: Estimated LEAP benefit
will be c.Rs10bn i.e. around 320bps on our FY16E estimates. Incrementally, as per
Benefit from LEAP program (Rs bn) managements original estimate of a 400 bps expansion, another 50bps of benefit
FY14 (annualised) 4.47 could accrue by FY17E, which is when the LEAP program concludes. Pertinently, in
FY15 3.29 light of external factors that have pulled down the net benefit of LEAP, management
FY16 (expected) 2.00 trimmed its margin expansion target by 200bps from 400bps earlier to c.15%. Given
Total benefit 9.76
the above, we are circumspect on the incremental benefits that could flow through
Rounded off to 10.00
Heros LEAP program.
Investec Hero revenue FY16E 288.8
Total expected margin benefit (%) 3.2 Rising competition in Heros mainstay Executive motorcycle segment (c.70%
contribution to aggregate volumes) is likely to increase pressure on Heros pricing
Source: Company releases. Investec Securities
estimates and may require an increase in advertising spends from the current level of 2%-
2.5% of revenues. We have analysed these issues surrounding the executive
section in detail in the thematic and also highlighted the aggressive pricing strategy
that players have started to adopt in the Economy segment.
Further, following the exit of Honda, Hero was relying on Erik Buell, Magneti Marelli
for technological inputs. However, with the recent bankruptcy of Eric Buell, a
significant burden of research and development has shifted onto Hero. We expect
Heros spend on R&D to gradually increase to c.1%% of sales by FY18 from 0.5%
reported in FY15.
We build in a 2.4ppt YoY margin expansion in FY16 to accommodate the benefits

primarily from lower commodity prices and benefit from savings initiatives and only
a modest 20 bps expansion through FY16E-18E on the back of benefits from LEAP
to 14.7% by FY18.
Figure 177: Single digit revenue growth with moderate margin Figure 178: this is likely to boost EPS in FY16 but growth rate
expansion post the one time commodity led boost in FY16E may dip in FY17/18
400 (Rs bn) 19% 200 (Rs) 80%

70%
350 60%
150
50%
300 16% 40%
250 100 30%
20%
200 13% 10%
50
150 0%
-10%
100 10% - -20%
FY16E
FY17E
FY18E
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Revenues EBITDA Margin (%) (RHS) EPS (Rs) EPS Growth YoY (%) (RHS)
Hero is comfortably placed with respect to its gearing and cash flow. We expect
Hero to generate sufficient operating cash flow to fund its Rs30bn capex plan
across FY16E-18E. The commodity windfall in FY16 should meaningfully boost
operating cash flow to Rs41bn in FY16E and we expect the year run rate of
operating cash flow to stabilise at a lower rate of Rs35-40bn annually.

This should drive a steady increase in Heros free cash flow accretion as capex
tapers by FY18E. Heros immediate capex plans include capacity expansion
(Gujarat, Rajasthan), new Research & Development centre, new product
development and maintenance capex. We like Heros high RoEs, RoCEs, cash
rich status and dividend payout ratios. All of these parameters are towards the
higher end of the industry range but these could moderate slightly given the
operational overhangs and as cash accrual increases.
Figure 179: Operating cash flow has remained strong but free cash Figure 180: Expect strong & stable ROCE/ROE
flow has been lower due to increased capex
45 (Rsbn) 41 41 50%
40 37
35 45%
30
30 40%
23 24 22
25 19
20 35%
15 12 12
9 10
6 8 30%
10 6
4
5 25%
0
20%
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY16E
FY17E
FY18E
FY13
FY14
FY15
Operating cash flow Capex RoCE RoE

Aptly valued Initiate with HOLD
ROE/ROCE of ~41/34%, FCF Yield of Despite headwinds surrounding its core operating business, we think Heros
5-6%, and EPS growing at 12% ROCE/ROCE of ~41/34%, FCF/Dividend Yield of ~5%/3% should sustain over the
CAGR justify the current valuation of next three years. Hero valuation at 16xFY17 P/E (in-line with five year average),
16xFY17 earnings seems fair to us. We value Hero at 16x Sep17 earnings (vs 17x for Bajaj) which is
at par to one year forward P/E leading to our target price of Rs.2790.
As shown in Figure 182, this is reflected in Heros discount to Bajaj which has
expanded over last few months. Consequently, we also expect Hero to
underperform Bajaj in terms of stock price returns and initiate with a HOLD stance.
Table 16: SOTP
FY17E FY18E Average Sep'17

EPS (Rs.) 167 182 174
P/E (x) 16
Target Price (Rs/share) 2,790
Figure 181: One year forward P/E

20
Max 19.4
19
18
17 +1Sd 17.0
16
Avg 15.6
15
14 -1Sd 14.1
13 Min 12.8
12
11
10
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Feb-11
May-11
Aug-11
Feb-12
May-12
Aug-12
Feb-13
May-13
Aug-13
Feb-14
May-14
Aug-14
Feb-15
May-15
Aug-15
Source: FactSet, Investec Securities estimates

Figure 182: Bajajs premium / (discount) to Hero Motocorp on 12m forwards consensus EPS
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
May-13
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Bajaj's Premium / (Discount) to Hero Average

Source: FactSet, Investec Securities estimates

Table 17: Volume assumptions
(mn units) 2015 2016E 2017E 2018E

Economy 1.1 1.2 1.3 1.3
Executive 4.4 4.4 4.7 5.1
Premium 0.2 0.1 0.1 0.1
Domestic motorcycles 5.7 5.7 6.1 6.5
% YoY 4.7% 0.4% 7.0% 6.0%
Scooters 0.8 0.7 0.8 0.9

% YoY 9.4% -6.0% 15.0% 12.0%
Exports 0.2 0.2 0.3 0.4

% YoY 53.0% 15.0% 30.0% 30.0%
Aggregate Volume 6.6 6.6 7.2 7.8

% YoY 6.2% 0.1% 8.6% 7.7%

Figure 183: Hero Motocorp Summary Financials
Income Statement FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Revenue: 87,140 99,000 103,631 123,813 158,561 193,979 235,790 237,681 252,755 275,853 288,825 313,822 338,977
% change YoY 14% 5% 19% 28% 22% 22% 1% 6% 9% 5% 9% 8%
EBITDA 13,645 11,730 13,806 17,465 27,599 24,303 27,798 24,242 27,270 33,420 41,897 45,837 49,850
EBITDA margin 15.7% 11.8% 13.3% 14.1% 17.4% 12.5% 11.8% 10.2% 10.8% 12.1% 14.5% 14.6% 14.7%
2.4%
PBT 14,122 12,461 14,416 18,437 28,317 24,048 28,647 25,292 28,673 33,288 42,115 46,424 50,752
Investec Net profit 9,713 8,579 9,991 13,440 22,318 20,077 23,781 21,182 21,091 25,407 30,182 33,270 36,372
Weighted average shares 200 200 200 200 200 200 200 200 200 200 200 200 200
EPS, diluted 48.6 43.0 50.0 67.3 111.8 100.5 119.1 106.1 105.6 127.2 151.1 166.6 182.1
DPS 20 17 19 20 110 105 45 60 65 60 76 84 91
Balance Sheet FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Net Block 9,494 11,655 11,563 15,737 16,588 40,803 37,855 30,710 22,433 29,127 37,272 43,029 46,396
Investments 20,619 19,739 25,668 33,688 39,257 51,288 39,643 36,238 40,888 31,541 31,541 31,541 31,541
Inventories 2,266 2,756 3,171 3,268 4,364 5,249 6,756 6,368 6,696 8,155 8,360 9,115 9,881
Sundry Debtors 1,587 3,353 2,974 1,499 1,084 1,306 2,723 6,650 9,206 13,896 6,330 6,878 7,430
Cash and Bank 1,587 358 1,311 2,196 19,072 715 768 1,810 1,175 1,593 16,545 28,680 44,769
Loans and advances 2,773 2,667 1,912 3,172 4,306 3,815 5,160 5,855 5,724 6,275 6,275 6,275 6,275
Total assets 38,780 42,440 50,736 60,851 85,231 107,263 98,889 96,417 100,973 105,217 120,954 140,149 160,923
Equity 399 399 399 399 399 399 399 399 399 399 399 399 399
Reserves and Surplus 19,694 24,301 29,463 37,608 34,251 29,161 42,499 49,663 55,599 65,014 80,038 96,599 114,704
Debt 1,858 1,652 1,320 785 660 14,710 10,114 3,022 245 313 313 313 313
Deferred Tax Assets / Liabilities 0 0 0 0 0 0 0 0 0 0 0 0 0
Current Liabilities & Others 15,628 14,792 18,247 20,528 48,314 60,524 43,794 42,008 44,730 39,490 40,203 42,838 45,506
Total Liabilities 37,579 41,144 49,430 59,321 83,625 104,795 96,807 95,092 100,973 105,217 120,954 140,149 160,923
Cash Flow Statement (Rsm) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Cash From Operating Activities 9,361 6,251 12,118 13,590 26,866 22,542 23,598 18,904 29,634 22,500 41,130 37,414 40,562
Cash Flow from Investing Activities -3,235 -2,731 -7,810 -8,612 -5,276 -13,223 928 -7,329 -16,193 121 -11,006 -8,557 -6,193
Cash from Financing Activities 0 0 0 0 0 0 0 0 0 0 0 0 0
Net Cash Inflow / Outflow 1,414 -1,415 -16 -21 497 -234 -56 1,012 -709 316 14,953 12,135 16,089
FCFF 5,424 1,099 8,379 10,455 24,766 18,932 18,564 12,900 20,307 10,970 29,130 27,414 32,562
Performance Ratios FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Growth
Revenue 14% 5% 19% 28% 22% 22% 1% 6% 9% 5% 9% 8%
EBITDA -14% 18% 27% 58% -12% 14% -13% 12% 23% 25% 9% 9%
EBIT -17% 18% 28% 64% -14% 14% -15% 14% 23% 27% 9% 9%
EPS -12% 16% 35% 66% -10% 18% -11% 0% 20% 19% 10% 9%
Margins
EBITDA 16% 12% 13% 14% 17% 13% 12% 10% 11% 12% 15% 15% 15%
EBIT 14% 10% 12% 13% 16% 11% 11% 9% 10% 11% 13% 13% 13%
Net profit 11% 9% 10% 11% 14% 10% 10% 9% 8% 9% 10% 11% 11%
Solvency
Net debt (cash) 271 1,294 9 -1,411 -18,412 13,995 9,346 1,211 -931 -1,279 -16,232 -28,367 -44,456
Net debt / equity (%) 1% 5% 0% -4% -53% 47% 22% 2% -2% -2% -20% -29% -39%
Net debt / total assets (%) 1% 3% 0% -2% -22% 13% 10% 1% -1% -1% -13% -20% -28%
Net debt / EBITDA (x) 0.0 0.1 0.0 -0.1 -0.7 0.6 0.3 0.0 0.0 0.0 -0.4 -0.6 -0.9
EBITA interest cover (x) 467x 729x 690x 690x 1,314x 160x 131x 204x 231x 301x 3,343x 3,658x 3,978x
Capital employed 21,951 26,352 31,182 38,792 35,311 44,628 53,392 53,386 56,743 66,383 81,407 97,968 116,073
Capital growth (%) 0% 20% 18% 24% -9% 26% 20% 0% 6% 17% 23% 20% 18%
Capital turn (x) 0.0x 0.3x 0.3x 0.3x 0.2x 0.2x 0.2x 0.2x 0.2x 0.2x 0.3x 0.3x 0.3x

Revenue 252,755 275,853 288,825 313,822 338,977
EBITDA 27,270 33,420 41,897 45,837 49,850
Other income 3,030 3,435 3,092 3,401 3,741
Net interest 1,316 1,381 981 1,430 1,794
Share-based-payments - - - - -
PBT (normalised) 28,673 34,839 42,115 46,424 50,752
Non-recurring items/exceptionals 0 -1,550 0 0 0
PBT (reported) 28,673 33,288 42,115 46,424 50,752
Taxation -7,582 -9,432 -11,933 -13,154 -14,380
Discontinued/assets held for sale - - - - -
EPS (reported) 105.6 119.5 151.1 166.6 182.1
DPS (INR) 65.0 60.0 75.9 83.7 91.5
Cash Flow 2014 2015 2016E 2017E 2018E
Other cash and non-cash movements 6,999 1,055 2,110 1,971 1,947
Change in working capital 545 -3,359 8,074 1,330 1,351
Interest 1,316 1,381 981 1,430 1,794
Tax paid -6,495 -9,998 -11,933 -13,154 -14,380
Cash flow from operations 29,634 22,500 41,130 37,414 40,562
Free cash flow 20,307 10,970 29,130 27,414 32,562
Other financials 2,732 -78 -13 -13 -13
Acquisitions -6,866 11,651 994 1,443 1,807
Disposals - - - - -
Net share issues 0 0 0 0 0
Dividends paid -14,031 -22,194 -15,158 -16,709 -18,267
Change in net cash 2,142 349 14,953 12,135 16,089
Net cash/(debt) 931 1,279 16,232 28,367 44,456
FCFPS - FD (INR) 101.7 54.9 145.9 137.3 163.1
Intangible assets 0 0 0 0 0
Cash and equivalents 1,175 1,593 16,545 28,680 44,769
Total assets 99,913 104,482 120,219 139,414 160,188
Total debt -245 -313 -313 -313 -313
Net assets 55,999 65,413 80,437 96,999 115,104
Total equity 55,999 65,413 80,437 96,999 115,104
Net working capital -7,162 -3,168 -11,242 -12,572 -13,924
NAV per share (INR) 280.4 327.6 402.8 485.8 576.4


2014 2015 2016E 2017E
Calendar PE (x) 21.7 18.3 16.2 14.8
EV/sales (x) 1.9 1.8 1.7 1.5
EV/EBITDA (x) 16.1 12.9 11.4 10.5
FCF yield (%) 2.5 4.7 5.3 5.9
Dividend yield (%) 2.3 2.7 3.1 3.4

Net income (normalised) growth (yoy) (0.4) 20.5 18.8 10.2 9.3
EPS (normalised) growth (y-on-y) (%) (0.4) 20.5 18.8 10.2 9.3
FCFPS growth (y-on-y) (%) 57.4 (46.0) 165.5 (5.9) 18.8
DPS growth (y-on-y) (%) 8.3 (7.7) 26.5 10.2 9.3
Interest cover (x) (18.5) (21.7) (38.8) (29.1) (25.2)
Net debt/EBITDA (x) (0.0) (0.0) (0.4) (0.6) (0.9)
Net debt/equity (%) (1.7) (2.0) (20.2) (29.2) (38.6)
Net gearing (%) (1.7) (2.0) (25.3) (41.3) (62.9)
Dividend cover (x) 1.6 2.1 2.0 2.0 2.0
EBITDA margin (%) 10.8 12.1 14.5 14.6 14.7
EBITA margin (%) 9.6 10.9 13.2 13.3 13.3
ROE (%) 37.7 38.8 37.5 34.3 31.6
ROCE (%) 40.0 44.3 46.0 41.9 38.5
NWC/revenue (%) (2.8) (1.1) (3.9) (4.0) (4.1)
Target Price Basis

Key Risks
Stronger than expected growth in exports, Higher margin expansion, Global downturn, falling demand of motorcycles,
failure of new products,

TVS Motors ( Sell - T P: 200INR)
TVS Motors (TVSM.NS)

India | Automobiles & Parts SELL
A Challenger with unwarranted premium valuation Price: INR290
INR290 INR200
While TVS seems to have captured low hanging fruit in terms of volumes in Target: INR200
domestic/exports markets, garnering incremental market share would be an Forecast Total Return: -30.2%
uphill task, in our view. Moreover, we are circumspect of TVS ability to
increase margins significantly on account of the necessity of sustaining its Market Cap: INR138bn
ad spend at current elevated levels partly due to exports. We see limited EV: INR130bn
benefits accruing from operating leverage and thereby expect TVS to miss Average daily volume: 2.2m
guidance of margin expansion. In our view, TVS premium of ~30% on FY17E
EV/EBITDA to Bajaj/ Hero despite low ROCE and weaker positioning in the
industry is unwarranted. Initiate with Sell and target price of Rs.200.
Incremental market share gains, an uphill task: In our opinion, it would not be
easy for TVS to defend market share in scooters and premium motorcycles,
relatively stronger segments of TVS, on account of a strong product line-up by the
competition (Bajaj/Honda). Moreover we do not expect TVS to be a serious
contender in the executive segment given the increase in competition amongst the
more established players. Overall we expect TVS to deliver volume growth of 7%
CAGR over FY15-18E, in-line with the industry.
Margin to miss guidance: While management has guided for double digit EBITDA
margins in the near term, we remain circumspect as we believe increase in
competitive intensity in the domestic 2Ws industry will keep the advertisement (ad)
spend at elevated levels. TVS will also be exposed to this, given its position as a
challenger across segments. Also, expansion of geographic footprint overseas
should inflate ad spend. Moreover, we do not expect any meaningful margin benefit
arising from operating leverage given already high asset turns (TVS asset turns are
greater than Bajaj but EBITDA margin one third) and lack of track record of
operating leverage led margin expansion despite strong volume growth.
Unwarranted rich valuation: TVS is trading at 15.5x FY17E EV/EBITDA at
31%/33% premium to Bajaj/Hero despite a much lower ROCE (19% ~vs. 30%/40%
Aditya Jhawar
respectively). In our opinion, premium valuations seems unwarranted given a)
+91 (22) 6136 7415
TVSs positioning as a challenger to the current leaders in most segments, Bajaj aditya.jhawar@investec.co.in
and Hero and b) our expectation of deceleration of EPS growth momentum (22%
CAGR over FY15-18E vs 32%YoY growth in FY15 leading to our FY17E/18E PAT Pratik Rangnekar
+91 (22) 6136 7425
being 21%/26% below consensus. We value TVS at 16x Sep17E EPS leading to pratik.rangnekar@investec.co.in
our target price of Rs.200.

2014A 2015A 2016E 2017E 2018E 320
Revenue (INRm) 79,659 100,982 109,434 124,858 141,221 300
EBITDA (INRm) 4,822 6,043 7,660 9,364 10,592
280
EBITA (INRm) 3,505 4,510 5,926 7,423 8,429
PBT (normalised) (INRm) 3,554 4,562 5,911 7,451 8,525 260
Net Income (normalised) (INRm) 2,644 3,478 4,374 5,514 6,308
240
EPS (norm. cont.) FD (INR) 5.6 7.3 9.2 11.6 13.3
220
FCFPS - FD (INR) (3.6) 2.5 5.6 8.4 9.4
DPS (INR) 1.4 1.9 2.3 2.9 3.3 200
PE (normalised) (x) 52.2 39.7 31.5 25.0 21.9
EV/sales (x) 1.6 1.3 1.2 1.0 0.9
EV/EBITDA (x) 26.9 21.4 16.9 13.8 12.2 1m 3m 12m
FCF yield (%) (1.3) 0.9 1.9 2.9 3.2 Price
____________________________
15.5 29.8 30.9

Dividend yield (%) 0.5 0.7 0.8 1.0 1.1 Price rel to India S&P BSE 500 - BSE India20.7
____________________________
28.9
(Indian Rupee) 35.0
Page 76 | 26 November 2015 | TVS Motors

Figure 184: Company description Figure 185: Shareholding Pattern
TVS Motor Company is the third largest two-wheeler

manufacturer in India, with three manufacturing facilities in Others
India (Karnataka, Tamil Nadu and Himachal Pradesh) and 16%
one in Indonesia. The company leads in the mopeds
segment, and ranks 2nd and 3rd respectively in scooters
DII
and bikes. The TVS group started operations in 1911 as a 14%
bus fleet operator and logistics services provider but has
Promoter
since then expanded to Automobiles (Two wheelers, three
57%
wheelers and auto components) Aviation, Education, FII
Electronics, Energy, Finance, Housing, Insurance, 13%
Investment, Logistics, Service, Textiles etc.
Source: Investec Securities research Source: BSE
Figure 186: FY15 Segment wise break up of sales volume Figure 187: Market share in domestic 2W
3W exports 30%
3% 25%
25%
Economy 21% 19%
3W domestic 2W exports Executive 20%
17%
1% 13% 1% 15% 14%13%
15%
Premium
10%
8% 8%
10%
6% 6%
Mopeds 5%
30%
Scooters 0%
27% Economy Premium Motorcycles Scooters Two wheelers
FY12 FY15
Source: CRISIL, Investec Securities research Source: CRISIL, Investec Securities resarch
Figure 188: Operating leverage to have limited boost for TVS Figure 189: Expect deceleration in growth momentum for TVS
margins
45% 43%
40
33.2 Sharp drop in interest
35 40%
cost drove strong
30 earnings growth over
25 22.1 35%
20 15.2 30%
15 25%
24% 23%
10 7.3 21%
5 1.5 2.0 20% 18%
2.4 0.3
0 15% 12%
-5 11%
-0.1 -0.8 -0.1 8%
10%
-10 -7.5
FY10 FY11 FY12 FY13 FY14 FY15 5%
Volume Growth Revenue growth EBITDA growth PBT growth
Volume growth (%) EBITDA margin change (%) CAGR FY10-15 CAGR FY15-18E
Source: Investec Securities research Source: Investec Securities estimates

Scooters: At a respectable second place
TVS was amongst the first few players to introduce gearless scooters in India way
Figure 190: TVS domestic scooters back in 1994 with its then popular product Scooty. TVS had developed a strong
performance foothold in smaller engines scooters (below 100cc) which were popular in late
27% 1990s and early 2000.
30% 25%
25% While Honda maintains its dominance in the Indian scooter industry, TVS
18% commands a respectable market share of 15% (1HFY16). The companys market
20% 15%
15% share has come down from 21% in FY08 to 15% in 1HFY16, which in our opinion is
10% a function of shift of the industry towards bigger engine scooters (greater than
Market Volume Volume Industry
Share share CAGR CAGR
100cc) in which TVS had limited product offerings. New launches with more
(FY15) 5yrs 5yrs powerful engines, improved mileage, design and ride quality as well as scooters
incrementally getting used as unisex family vehicle should have driven the shift of
Note: Market share 1HFY16, CAGR over FY10-5
the industry towards engines with higher displacement, in our view.
As seen in Figure 192, the share of below 100 cc engines scooters came down from
12% in FY12 to c.2% in 1HFY16, which primarily drove down TVS market share in
our view. However, with the launch of Jupiter (Sep'13) and Scooty Zest (Aug14),
TVS has geared its portfolio towards larger size engines thereby increased its
market share 15% in 1HFY16 from 13% in FY14.
Figure 191: TVS: second largest player in scooters with 15% share Figure 192: Shift toward bigger engines dents TVS market share
23% 60% 25%

21% 19%
19% 55% 20%
17% 15% 15% 15%
15% 15% 13%
50% 12%
13%
11% 10% 9%
9% 45%
6%
7% 4%
5% 2%
5% 40%
0%
FY12 FY13 FY14 FY15 1HFY16
Honda (RHS) Hero TVS Susuki Industry share of scooters between 90 cc TVS Market Share
With the launch of Jupiter and Scooty Zest, the share of 110cc scooters in TVS
increased to 80% in FY15 from 43% in FY12. Moreover, our channel checks
suggest encouraging feedback for Jupiter, which we believe should help TVS
sustain growth momentum.
Figure 193: Increasing traction of Jupiter/Wego & Scooty Zest help TVS improve market share
100% 20%
90% 19% 19%
Table 18: TVS Scooters offerings 80% 40% 42% 18%
70% 57% 17%
Share in 71%
60% 3% 0% 16%
Product Engine (cc) volume (FY15) 5%
50% 15% 15%
15%
Pep 88 cc 18% 40% 6% 13% 14%
3%
Scooty Streak 88 cc 3% 30% 57% 13%
53% 9%
Scooty Zest 110 cc 9% 20%
34% 3% 12%
TVS Wego/Jupiter 110 cc 71% 10% 18% 11%

0% 10%
Source: Company Data, Investec Securities Research FY12 FY13 FY14 FY15
Pep Scooty Streek Scooty Zest

TVS Wego/Jupiter Market share (RHS)

Higher scooters industry growth to benefit TVS
In our opinion, TVSs improved product portfolio should help the company benefit
Table 19: Expected scooter launches
from the higher growth expected in the scooter industry. Encouraging product
Players Models feedback of TVS Jupiter should help TVS continue its strong volume momentum, in
Hero Dare our view. However, the absence of new product launches in scooters by TVS
Dash coupled with competitor launches (refer Table 19), should result in a slowing of
Leap Hybrid SES growth momentum (from +50% YoY in FY15) and market share expansion
ZIR (+260bps YoY to 15.2% in FY15), in our view.
Honda PCX125
Yamaha Ray 125 We expect TVS to report volume growth of 14% CAGR over FY15-18E in scooters,
D'elight a tad above expected industry growth of 13% over same period and expect TVS
NMax market share to moderately increase by 60bps over FY15-18 to 15.8%.
Vespa Fly 125
Vespa 946 Figure 194: Expect scooters volume to grow by 14% CAGR over FY15-18
1,100 60%
50% 1,024
1,000 50%
900
900 40%
Thousands
782
800 30%
684
700 14% 15% 14% 20%
600 0% 10%
-6%
500 455 0%
430
400 -10%
FY13 FY14 FY15 FY16E FY17E FY18E
Scooters % YoY (RHS)

Premium segment: Strong positioning but
expect limited market share gains
TVS has successfully made a mark in the premium segment of motorcycles through
Figure 195: TVS standing in premium segment its Apache brand. In last five years TVS volume in the premium segment grew by
13% 13% CAGR over FY10-15, outperforming the industry growth of 11% over the same
15% 10% 11%
8% period. TVS has managed to near double its market share in the premium segment
10%
from the low of 6% in Dec 2012 to 12% in 1HFY16. Strong response to the Apache
5%
RTR (Racing Throttle Response) series RTR 160, RTR 180 and RTR 180 ABS
0%
Market Volume Volume Industry primarily drove market share gains for TVS.
Share share CAGR CAGR
(FY15) 5yrs 5yrs
Segment first features such as Fuel Injection System, ABS, etc. were one of the key
Source: Company Data, Investec Securities Research differentiating factors which created the buzz for TVS, as per our channel checks.
The company plans to launch a new model in the premium segment with a 200cc
engine using the design from its own Draken concept. This offering aims to
challenge Bajaj Pulsar 200NS leadership in the 200cc segment.
Figure 196: TVS has successfully created a niche in the premium segment through the Apache
Strong product line-up from 25 (%) Frequent refresh propels brand (Units) 20.0
competitors to restrict TVS market 23 to leadership in sub-segment
18.0
share gains 21
19 16.0
Channel checks suggest encouraging Apache launched as first ever
response to Bajaj Pulsar RS 200 17 Indian bike with ABS 14.0
which directly competes with Apache 15
12.0
RTR 180 13
11 10.0
9
8.0
7
5 6.0
Feb-13
Feb-14
Feb-15
Apr-12
Jun-12
Oct-12
Dec-12
Apr-13
Jun-13
Oct-13
Dec-13
Apr-14
Jun-14
Oct-14
Dec-14
Apr-15
Jun-15
Aug-12
Aug-13
Aug-14
Aug-15
TVS premium segment (Volumes) TVS Premium segment market share (RHS)
Source: CRISIL, Investec Securities estimates
In our opinion, recent product launches by competitors (Bajaj, Yamaha, Honda) with
enhanced features like Fuel Injection System, ABS, etc., (which were one of the key
differentiating factors of TVS in the relatively lower value premium segment)
coupled with the strong product line-up by peers in the premium segment (refer
Table 20) should make it difficult for TVS to defend market share in the premium
segment.
We expect TVS to deliver volume growth of 9% CAGR over FY16-18, lower than
the expected industry growth of 11% over the same period leading to loss of 20pbs
market share over 1HFY16-FY18 to 11.5%.

Table 20: New product pipeline of key competitors
Bajaj Hero Honda Yamaha Kawasaki Royal Enfield

Pulsar 400 SS Impulse 250 CB Hornet YZF R25 Ninja H2 410 cc
Pulsar 160 NS HX250R CBR300R YZF-R3 Ninja ZX-6R
Pulsar 400 CS RNT CB500F XSR 700
Avenger Hastur CBR500R
RS400 CB500X
180NS
200NS FI
KTM - 390 Adventure
KTM - 1190 Adventure
KTM- 1050 Adventure
Figure 197: Premium segment to grow at 9% CAGR (FY16-18) Figure 198: leading to moderate market share decline
370 44% 50% 13

332 12.0 11.8
30% 40% 12 11.5
320 297
30% 11
260 10
14%
Thousands
270 12% 12% 20% 10

220 200 10% 9
8
-15% 0% 7
170 8
138 -10%
124 7
120 -20%
FY13 FY14 FY15 FY16E FY17E FY18E 6
5
Premium Segment % YoY FY13 FY14 FY15 FY16E FY17E FY18E

TVS to remain a challenger in the economy
segment
Figure 199: TVS performance in economy TVS with market share of 16% in 1HFY16 is the third largest player in the economy
segment segment which is dominated by Hero and Bajaj with cumulative market share of
c.85%. TVS has been a challenger in the segment over the last few years with a
20% 16% 17%
spurt in volumes led by new launches which we expect to normalise in due course.
15%
8% Three years of underperformance (FY12-FY14) resulted in TVS market share falling
10% 4% from 27% in FY11 to 18% in FY14.
5%
0%
Market Volume Volume Industry While the launch of Star City in May14 helped TVS increase its market share to
Share share CAGR CAGR 21% (+240bps YoY) in FY15, launch of CT100 (April15) and Platina ES (Jan15) by
(FY15) 5yrs 5yrs Bajaj resulted in TVS losing its market share gains. We do not think that dynamics
of the economy segment would materially change and expect TVS to remain a
Source: CRISIL Investec Securities estimates
challenger in the foreseeable future.
Figure 200: Hero & Bajaj dominate c.85% of the economy segment, while TVS holds a 16%
share
100% 2% 2% 2% 1% 2% 2% 1% 1%
90% 18% 16%
22% 25% 20% 21%
27% 26%
80%
70%
60% 35% 46%
50% 43% 45% 52% 56% 54%
46%
40%
30%
20% 42% 38%
30% 25% 28% 26%
10% 24% 24%
0%
Bajaj Hero TVS Yamaha
Increase in competition could put Moreover, we expect the economy segment to grow at 3% CAGR (FY15-20E) for
pressure on already low margins the industry, as compared to the 7% growth expected from the domestic two
wheeler industry over the same period. Slower growth should mean the share of
economy segment in the industry will come down to 18% by FY20E from 22.4% in
1HFY16. Slowdown in growth momentum could increase the competitive intensity
and could potentially put pressure on margins of the economy segment, which in
our view are already lowest amongst motorcycles.

Figure 201: Star City launched in May14 helped TVS increase share Figure 202: Bajajs CT100/ Platina (ES) launch dent TVS market
share
45 27% 30% ('000 units) CT100 (ES) &

26% 48
Thousands
25% Platina launch

40 25% 43
22%
20% 21%
35 38
18% 20%
30 39 16% 33
34 34 36
15% 28 Stary City
25 29 28 30
24 launch
20 10% 23
18
Jul-09
Jul-14
Apr-08
Oct-10
Apr-13
Sep-08
Feb-09
Dec-09
May-10
Mar-11
Aug-11
Jan-12
Jun-12
Nov-12
Sep-13
Feb-14
Dec-14
May-15
Economy average monthly volume Market Share (RHS)
3 Months rolling average
Source: CRISIL, Investec Securities Research Source: CRISIL, Investec Securities Research
Overall we expect TVS economy segments volume to decline by 3% CAGR over

FY15-18E as compared to industry growth of 5% over the same period. On the back
of strong product feedback for recently launched products by competitor (Bajaj) and
absence of any strong product in the pipeline, we expect TVS to underperform the
industry over FY15-18.
Figure 203: TVS in Executive segment

TVS not a serious contender in Executive segment
We believe TVS is not a serious contender in the executive segment. Though new
7.2% product launches by TVS generates spurts in volumes initially, it fizzles out in due
8%
6% course as seen in Figure 206. Executive segment is the strong hold of Hero (market
4% 1.5%
2% 0.6% share 72% in 1HFY16) with decades old popular brand Splendour and Passion,
0% whereas TVS market share is at 1%.
-2% -0.2%
Market Volume Volume Industry
Share share CAGR CAGR While management plans to re-launch its Victor brand motorcycle in the executive
(FY15) 5yrs 5yrs segment in Q4FY16, in our opinion it should not move the needle for the company.
Competitive intensity makes it difficult for TVS to garner meaningful market share, in
Source: CRISIL, Investec Securities Research our view, with Hondas aggressive approach and new product launches, Bajajs
desire to get back market share, with the expected new brand launch by Bajaj in the
executive segment in Q4FY16.
Figure 204: Domestic motorcycle industry split Figure 205: TVS market share in Executive segment
100% 100 1.4 0.8 1.1 0.2 0.7 0.6 1.1

14% 16% 1.3
17% 18% 17% 17% 19% 8 7 9 15
9 20 22 21
80% 80
60% 60
61% 64% 64% 73 67 69 63
64% 65% 65% 62% 77
61 66
40% 40 72
20% 20
25% 19% 17% 18% 19% 18% 20% 17 21 20 20
12 14 8
0% - 4
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY09 FY10 FY11 FY12 FY13 FY14 FY15 1HFY16
Economy Executive Premium Bajaj Hero Honda TVS
Source: CRISIL, Investec Securities Research Source: CRISIL, Investec Securities Research

Figure 206: Spurt in volumes led by new launches which fizzles out in due course
12,000
Flame launch Jive launch
Mar'08 Nov'09
10,000
8,000
Phoenix
launch Nov'12
6,000
4,000
2,000 New Phoenix

launch April'15
-
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Aug-08
Dec-08
Aug-09
Dec-09
Aug-10
Dec-10
Aug-11
Dec-11
Aug-12
Dec-12
Aug-13
Dec-13
Aug-14
Dec-14
Aug-15
Flame Jive TVS Phoenix
Low base and expected initial spurt in volumes led by Victor launch should drive
volume growth of 21% CAGR over FY15-18 for TVS, however we expect annual
run-rate to fall back to c.70K units (-15% YoY) by FY18.
Figure 207: Expect Victor launch to drive volumes, which we dont expect to be sustained
100 313% 350%

Thousands
90 300%
80 250%
200%
70
101% 150%
60 94%
73% 100%
50 8%
88
79 -15% 50%
40 -23% -57% 73
66 67 0%
-84%
30 -50%
44
38 38
20 -100%
11
10 -150%
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Executive segment % YoY (RHS)
Growth rate to decelerate in mopeds

Figure 208: TVS is the industry in mopeds TVS is the only manufacturer of mopeds in India with annual volumes of 0.8m units
(FY15). Mopeds (engine displacement c.70cc) are generally used in small
150% businesses for carrying light weight goods. While the share of mopeds in TVS
100%
100% volumes is ~30% (FY15), its share in the two wheeler industry is mere c.5%.
50% 30% Moreover we expect relatively slower growth of 3% CAGR for mopeds over FY15-
6%
20 as compared to expected 7% CAGR for the two wheeler industry over the same
0%
period, which should mean further decline of share of mopeds in the two wheeler
Market Volume Volume
Share share CAGR 5yrs industry. On the back of lower realisation (~Rs25K-Rs30K), the share of moped in
(FY15) aggregate revenue is ~15% (FY15) despite volume contribution being at 30%.

Figure 209: Moped industry to grow at 2% CAGR over FY15-18E, driving a contraction of share
100% 4.9% 4.7% 4.4% 4.2% 4.1%

6.0% 5.9% 5.8% 5.7%
90%
16% 18% 19% 21% 24% 28%
80% 31% 32% 33%
70%
60%
50%
40% 78% 76% 75% 73% 71% 67% 65% 64% 63%
30%
20%
10%
0%
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Motorcycles Scooters Mopeds
Table 21: Overall we expect TVS to deliver volume growth of 7% CAGR over FY15-18, in-line with the domestic two wheeler industry
Volumes ('000 units) CAGR Market Share (%)

Domestic two wheeler assumptions for TVS FY15 FY16E FY17E FY18E (FY15-18) FY15 FY16E FY17E FY18E
Motorcycles
Economy 433 371 384 397 -2.8% 20.6% 16.0% 16.0% 16.3%
Executive 38 73 79 67 21.3% 0.6% 1.2% 1.2% 1.0%
Premium 203 259 284 308 14.9% 10.1% 12.0% 11.8% 11.5%
Total motorcycles 674 703 747 773 4.7% 6.3% 6.6% 6.5% 6.3%
Scooters 684 782 900 1,024 14.4% 15.2% 15.5% 15.5% 15.8%
Mopeds 756 725 762 800 1.9% 100% 100% 100% 100%
Aggregate two wheelers 2,113 2,210 2,408 2,596 7.1% 13.4% 13.5% 13.4% 13.3%
Source: SIAM, Investec Securities estimates

Impressive performance in exports to
continue
Figure 210: Share of exports on the rise TVS performance in exports has been impressive over the last five years, with the
company reporting volume growth of 20% CAGR. Strong growth in exports volumes
25 22 22
resulted in the contribution of aggregate volumes/revenue increasing from
20 16 16 15 16 12%/14% in FY11 to 16%/22% in FY15 as seen in Figure 210. The company mainly
14 13
15 12 12 exports to Africa, Latin America and Asia. While two wheelers dominate exports
10 volumes, three wheelers is also picking-up pace.
FY11 FY12 FY13 FY14 FY15 Two wheeler export opportunity from India remains one of the bright spots amidst a
subdued domestic environment for motorcycles. As highlighted earlier, two
Volume (%) Revenue (%) wheelers export opportunity to emerging markets of Africa and Latin America
present enormous opportunity for Indian companies and we believe that TVS is
Source: Investec Securities Research strongly poised to take advantage of this export opportunity.
Figure 211: TVS exports has grown by 20% CAGR over FY10-15 Figure 212: While 2Ws dominates 3Ws are picking up in volume
share
440 60% 1% 7%
48% 100% 4% 8%
41% 3% 3% 14% 22% 22%
390 50% 6% 1%
80% 7% 11% 2%
31% 31% 40% 5% 2%
340 7% 6%
Thousands
30% 60%
17%
290 20%
410 89% 83%
10% 40% 77% 80%
240 69% 70%
-14% 240 314 0%
288 20%
190 247 -17%
193 -10%
140 167 -20% 0%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY10 FY11 FY12 FY13 FY14 FY15
Export volumes % YoY (RHS) MC SC Mopeds 3Ws
Source: Investec Securities research Source: Investec Securities research
Where does TVS stand vs the leader?

TVS gaining traction in three wheeler While Bajaj has a big lead in this race for export domination, TVS is the second
exports, while 2Ws volume yet to pick- biggest Indian player. There are two legs to this race in two wheelers and three
up significantly wheelers. While TVS has long been present in the two wheeler segment, its share
is stagnant between 15-13% from FY10 FY13. However, TVS has managed to
increase its market share in three wheelers post launch of TVS King and cornered a
22% market share in the segment. TVS has grown at a 51% CAGR over FY11-15,
albeit over a low base in FY11.
Figure 213: TVS market share in 2Ws export from India Figure 214: TVS market share in 3Ws export from India
100 100 1
13 13 13 15 17 6 7 11
18 3 7 6 19 22
4
80 15 15 13 11 13 80 6
12 7
9 9 10 8 6 8
60 60
95
40 40 86 86 84
66 74 70
64 63 64 63 62
20 20
- -
Bajaj Hero TVS Others Bajaj Hero TVS

Exports growth to continue
Competition is high in motorcycles exports with target markets (Africa, LATAM and
Reliable distribution network and Asia) being the same for Bajaj, TVS and Hero. Moreover, the presence of Chinese
creating a brand in overseas market two wheeler manufacturers further intensifies the competition in these geographies.
could pose an entry barrier Our channel checks indicate that setting up a reliable distribution network from
scratch and building a brand in these markets are the greatest entry barriers which
new entrants have to deal with. Hence, Bajaj with its first mover advantage enjoys a
however, Bajaj not only enjoys the competitive advantage versus relatively new entrants like TVS. We see this as the
first mover advantage but has also most likely reason why TVS has been unable to make significant inroads into the
created a strong brand in markets of markets of Africa and Latin America.
Africa and Latin America
The only method to make an impact seems to be through breakthrough products.
One such product for TVS has been in the three wheeler segment, where TVS King
has been able to successfully disturb Bajajs dominance. The other apparent
strength in TVSs product portfolio versus Bajaj, are its scooter and moped
offerings.
Scooters and three wheelers should We expect TVS exports of two wheelers to grow at 13% CAGR over FY15-18E
drive exports growth of 14% CAGR driven by strong growth of 33%/ 16% in scooters and mopeds respectively, over the
over FY15-18 same period. Moreover, on the back increasing distribution network of three
wheelers and strong feedback of TVS King we expect TVS three wheelers exports
to grow at 17% CAGR over FY15-18E.
Figure 215: TVS export to grow at 14% CAGR over FY15-18
650
600
550 144
500
125
15
450
Thousands
109 54
14
400
47
91 13
350 39
10
300 23 405
362
250 323
294
200
FY15 FY16E FY17E FY18E
Motorcycles Scooters Mopeds Three wheelers

Turnaround of Indonesian operations still
some time away
TVS had set-up a wholly owned subsidiary PT.TVS Motor Company Indonesia in
Shift of industry from Bebek to
Indonesia in 2002 with the objective to cater to the large two wheelers market ~7.8
Skubeks came as a big setback for
million units (2014). Indonesia market is dominated by Japanese manufacturers
TVS initially; however the company
with Hondas share at 64% in 2014.
equipped itself to address the change
by the launch of Dazz in FY14
TVS entered Indonesia through Bebek (geared scooters) which was a popular
product at that time. However, the company was surprised by the sudden shift in
consumer tastes when preference for Skubeks (automatic scooters) increased.
Following this shift in tastes the market share of Bebeks fell from 80% in 2006 to
40% in 2011. In FY14, TVS introduced its own Skubek model- TVS Dazz, post
which TVS product portfolio has become more relevant from Indonesia domestic
market perspective.
Tie-up with three financiers enabled Given the volatile demand environment in the domestic Indonesian market and
TVS to cater to the Indonesia two underutilisation of capacity (c.15% in FY10), TVS planned to use Indonesia facility
wheeler industry which is ~60-70% as a hub to supply the South East Asian region. The company sold ~23,000 units in
financed FY15 (domestic at 9K and exports at 14K) and plans to make the facility a
springboard for other Asian economies. There are significant operating leverages to
be enjoyed here as the plant currently operates at 2,000-3000 units a month while
the breakeven is c.6,000 units; however we believe exports ramp-up could take
some time.
Figure 216: TVS Indonesia export volume gradually ramp-up Figure 217: Losses reduce in Indonesia led by pick-up in exports
-
25
(200)
(400)
20
Thousands units
(375) (392)
11 (600) (490) (500)
5 (584) (623) (543)
14 (800) (642)
15
10 10
(1,000)
(1,045)
10 15 15 (1,200) (1,124)
12 (1,400)
9 9 9 (1,399)
5 (1,600)
FY10 FY11 FY12 FY13 FY14 FY15 (1,800) (1,649)
FY10 FY11 FY12 FY13 FY14 FY15
Domestic Exports EBITDA (Rsm) Adj.PAT (Rsm)
Source: Company data Source: Company data

In our opinion, given the subdued outlook of the domestic two wheeler industry in
Indonesia coupled with the time required to make an impact in a segment
Expect gradual ramp-up in exports dominated by Japanese manufacturers, TVS will have to rely on ramp-up of exports
from Indonesia, which could keep volume to turn the Indonesian operations profitable. As highlighted in the thematic
turnaround still some time away section, entry into overseas market by a new player typically takes time given the
money and effort required to establish distribution network and brand in these
geographies.
Hence we expect a gradual volume ramp-up in exports from Indonesia for TVS and
this could potentially delay turnaround of the subsidiary, putting a drag on the
standalone financials. As seen in Figure 218, incremental investment every year in
Indonesia subsidiary by the parent has put a significant drag on performance of the
standalone entity. In FY15, TVS infused ~Rs.250m which is ~22% of free cash flow
generated by the standalone operation in that year.

Figure 218: Expect Indonesian operations to remain a drag in the near future
103% 110%
3,000
90%
2,000 2,626 70%

3,101
1,000 36% 37% 2,382 50%
(Rs m)
(%)
498
936 869 249 1,157
596 577 - 22% 30%
0
0% 10%
-1,000 -1,757
-10%
-28%
-2,000 -30%
Additional invesement FCF As % of TVS FCF (RHS)
Source: Company data
Figure 219: Indonesia loss in FY15 stood at 11% of standalone profits
4,000 3,478 0%
-11% -10%
3,000 2,491 2,644
-20%
1,979 2,069
2,000 1,748 -30%
-31%
-40%
Rs m
(%)
1,000 -45%
-50%
-53%
0 -60% -60%
-392 -70%
-1,000 -623
-1,045 -80% -80%
-1,124
-1,399
-2,000 -1,649 -90%
Standalone Adj. PAT TVS Indonesia Adj. PAT

Indonesia % of standalone (RHS)
Source: Company data

BMW agreement too early to bank upon
TVS has entered into a co-operation agreement with BMW Motorrad for jointly
developing and manufacturing premium segment motorcycles with engine
displacement between 200cc-500 cc. We understand that there are two aspects to
this agreement: 1) jointly develop product which can be sold under TVS brand and
2) Contract manufacturing for BMW Motorrad. It is similar to the arrangement that
Bajaj has with KTM.
TVS-BMW agreement to jointly In our opinion, TVS could find it difficult to chase significant volumes under the
design, develop and manufacture "TVS" brand in this segment which is dominated by Royal Enfield, Bajaj (Pulsar,
motorcycles between 200cc-500cc KTM, Kawasaki) etc. Moreover led by necessity of higher marketing expenditure to
create brand in the newer "Super Premium" segment, we remain circumspect of any
meaningful contribution to the profitability from sale of super premium bikes.
TVS-BMW agreement could also At the same time, if TVS is able to demonstrate seamless contract manufacturing
entail into contract manufacturing for up to BMW's desired standards, the agreement with BMW could potentially
BMW contribute meaningfully to TVS profitability in the long term. In our opinion, TVS
could make manufacturing EBITDA margin of ~7-8% (in-line with companys
margin) in this arrangement. However, in our opinion it will take some time to
meaningfully ramp-up contract manufacturing volumes.
Given lack of clarity on both TVS brand motorcycles and contract manufacturing
arrangements; we have not build in any benefits emerging from the BMW co-
operation agreement.

Margins should improve, but miss guidance
TVSs margins are normally under the scanner for hitting far below industry levels.
TVS EBITDA margin at 6% in FY15 were one third of Bajaj (19%) and half of
Figure 220: EBITDA margin (%) Hero(12.1%). Though gross margins for TVS are broadly comparable to Bajaj and
19 19 18 19 Hero, higher advertisement spend and staff cost result in anaemically low EBITDA
20
margin for TVS as compared to peers.
15 13 12 12
10 11 Since the last two years, management commentary has been targeting double digit
10 7 6 6 6 7
EBITDA margins. However, in both these years management commentary has
5 fallen short of actuals. The key drivers of margin as per management are a) positive
FY11 FY12 FY13 FY14 FY15 operating leverage and b) lowering of advertisement expenditure from current levels
of c.6% of sales (FY15).
Bajaj Hero TVS
We analyse expected TVS performance on each of the above mentioned factors
Source: Company Data, Investec Securities Research and what impact it could potentially have on EBITDA margin of the company.
Figure 221: Comparing FY15 margins across Indian 2W companies
(% of sales)
33
31.3
28.4 27.7
28
23
19.0
18
13.0
12.1
13
8.6
8 6.0
3.4
3
Bajaj Hero TVS Bajaj Hero TVS Bajaj Hero TVS
Gross Margin EBITDA Margin Net Margin
Figure 222: Difference between TVS and Bajaj EBITDA margins Figure 223: Difference between TVS and Hero EBITDA margins
14.0
20.0 0.6 19.0 (as a % of 1.2 0.1 12.1
(as a % of 0.7
18.0 2.0 12.0 FY15 sales)
16.0 FY15 sales)
10.0 4.3
14.0 5.3 1.5
12.0 8.0
1.6 0.7
10.0 6.0
6.0
8.0 6.0 3.6
6.0 4.0
4.0
2.0 2.0
- -
TVS
Others
Gross Margin exp
Bajaj
TVS
Others
Hero
Lower Royalty
Gross Margin exp
Advertising
Packing
Staff costs
Staff costs
Advertising
Packing
Reduction Reduction

Operating leverage to have limited impact: Though positive operating leverage
could mean margin expansion for TVS, we believe the margin expansion will be
modest. In FY11/FY15 TVS reported strong volume growth of 33%/22% YoY,
respectively; however the strong volume growth could not improve the EBITDA
margin in both these years leading to an EBITDA margin contraction of 0.1% in
both FY11/FY15. Moreover, despite lower asset turns of Bajaj as compared to TVS
and a broadly comparable product portfolio, Bajajs EBITDA margin is more than
3x TVS, as seen in Figure 225. On the contrary we expect volume growth
momentum to decelerate from 22%YoY in FY15 to 8% CAGR over FY15-18E,
potentially lowering the margin expansion trajectory, in our view.
Figure 224: Operating leverage to have limited boost for TVS Figure 225: TVS scores well on asset turns, but not so on margins
margins
40 20 19.0
33.2 ASSET TURNS
35 18
30 Bajaj >TVS > Hero
22.1 16
25 14 12.1
20 15.2
12 EBITDA Margin
15
10 7.3 10 TVS > Hero > Bajaj
5 1.5 2.0 8 6.0
2.4 0.3
0 6
-5 -0.1 -0.1 4 2.6 2.2
-0.8 1.4
-10 -7.5 2
FY10 FY11 FY12 FY13 FY14 FY15 0
Bajaj Hero TVS Bajaj Hero TVS
Volume growth (%) EBITDA margin change (%)
Asset Turnover EBITDA Margin
Source: Investec Securities research Source: Investec Securities research

Meaningful reduction in ad spend unlikely: Higher advertisement spends vis-a-
vis Hero (by 4.3%) and Bajaj (by 5.3%) are the prime component of TVS lower
EBITDA margin. Currently TVS spends 6% of sales on advertising and marketing.
Figure 226: Ad spend as % of revenue
Though the management has indicated in the past that it intends to bring down ad
8 7 7
7
6 6
spends to c.4% of revenues, we remain circumspect. We expect ad spend in TVs
6 5
to remain at elevated levels led by:-
4
2 2 2
2 a) TVS positioning as a challenger in all the motorcycle segment domestically
2 2
2 1
1 1 1 1 (relatively more in economy and executive segments and less in premium
0.5
0 segment)
FY10
FY11
FY12
FY13
FY14
FY15
b) Continuation of initiatives to establish TVS brand in non-south markets in

Bajaj Hero TVS India
Source: Company Data, Investec Securities Research c) Recurring new brand launches to gains volumes in domestic market, more
so in the executive segment of motorcycles in which the company has a
track record of launching new brands to chase volumes. New brand
launch entails higher ad spend
d) Expansion of geographic footprint and creating brand awareness in
overseas markets
Given the increase in competitive intensity and expected lower growth in the
domestic two wheeler industry, we expect ad spend for the industry to remain at
elevated levels, and TVS should not be an exception. The company has launched a
scooter advertising campaign for the festive season with Amitabh Bachchan (Indian
movie star). This makes us sceptical on whether ad spending can be meaningfully
reduced.
In our opinion, lower commodity prices, moderate benefits from operating leverage,
favourable and cost rationalisation initiatives could lead to EBITDA margin
expansion for 6.8% in 1HFY16 to 7.5% by FY18E, significantly lower than
management guidance of 10%.

Performance on financial matrix should
improve, but momentum to moderate
There has been a significant improvement in TVS performance on financial front
over last five years; which was primarily driven by volumes gains and margin
Volume growth, low base,
expansion (on account of a relatively low base). TVS reported a volume growth of
improvement in sub-par EBITDA
11% CAGR over FY10-15 to 2.5m units in FY15 (market share decline by 1.3% YoY
margin and savings on finance cost
in the domestic two wheeler industry in the same period). Moreover, the companys
drive 43% earnings growth over
EBITDA margin improvement by 120bps over FY10-15 to 6% in FY15 (still amongst
FY10-15
the lowest in the industry) coupled with reduction in interest cost resulted in TVS
reporting PBT (Profit Before Tax) of 43% CAGR over FY10-15.
However, going forward, we expect significant deceleration in growth momentum for

TVS. In our opinion, TVS has enjoyed the benefits of low hanging fruits so far
(volumes and margin expansion drivers) and from here on to chase incremental
market share gains and margin expansion should be a relatively uphill task.
however going ahead we expect We expect TVS to report a volume growth of 7% CAGR over FY15-18E in the
significant deceleration in growth domestic volumes coupled with exports growth of 11% CAGR should translate in
momentum led by lower volume aggregate volume growth of 8% CAGR (as compared to 11% CAGR growth over
growth, limited befit from saving on FY10-15) and revenue growth of 12%, as discussed in earlier sections. However
interest cost coupled with expected lower commodity prices, moderate benefits from operating leverage and cost
increase in effective tax rate should rationalisation initiatives could lead to EBITDA margin expansion from 6.8% in
limit earnings growth to 23% CAGR 1HFY16 to 7.5% by FY18E which should drive PBT growth of 23% CAGR over
over FY15-18 FY15-18E, significantly lower than PBT CAGR of 43% reported by the company
over FY10-15 as well as earnings growth of 32% reported in FY15.
Figure 227: Expect deceleration in growth momentum for TVS
45% 43%
Sharp drop in interest
40%
cost drove strong
35% earnings growth over
30%
24% 23%
25%
21%
20% 18%
15% 12%
11%
10% 8%
5%
Volume Growth Revenue growth EBITDA growth PBT growth
CAGR FY10-15 CAGR FY15-18E

Unwarranted valuation: Initiate with Sell
TVS is trading at 15.5x FY17 EV/EBITDA on standalone basis which is at 31%/32%
Table 22: Comparable valuations premium to Bajaj/Hero respectively; despite TVS ROCE (19%) being lower than
Bajaj/Hero (~28%/34%), respectively, as seen in Table 22. On FY17E P/E, TVS is
FY17E P/E (x) EV/EBITDA (x) ROCE (%) trading at 25.7x earnings on a standalone basis which is also at 58%/60% premium
Bajaj 16.2 11.9 28% to Bajaj and Hero, respectively.
Hero 16.1 11.7 34%
TVS 25.7 15.5 19% In our opinion, the premium valuation of TVS seems unwarranted given our
expectation of deceleration in earnings growth momentum over FY15-18 (22%
Avg. 19.3 13.0 27%
CAGR) as compared to 32% earnings growth reported by TVS in FY15 (which also
Avg. (ex-TVS) 16.2 11.8 31% resulted into P/E re-rating over last few months). On the contrary, deceleration of
Source: Investec Securities estimates growth momentum could potentially led to de-rating of valuation multiples of TVS.
Moreover, TVS is positioned as a challenger to the current leaders in most

segments, Bajaj and Hero This also limits TVS ability to command a premium as
compared to peers.
We value TVS at 16x Sep17 earnings (average multiple of Hero and Bajaj) leading
to our target price of Rs.200 implying 30% downside from current levels.
Figure 228: 12 month forward P/E(x) for two wheeler OEMs Figure 229: TVS Motors one year forward P/E (x)
30
32
25 Max 28.6
27
20 22
15 17
12 Avg 13.0
10
7 -1Sd, 6.9
5 Min 5.6
2
Nov'10
May'11
Nov'11
May'12
Nov'12
May'13
Nov'13
May'14
Nov'14
May'15
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
P/E (x) Avg Max Min +1Sd -1Sd
Bajaj TVS Hero
Source: FactSet. Note: based on consensus numbers Source: FactSet. Note: based on consensus numbers

Figure 230: TVS Motor Summary Financial
Income Statement FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Revenue: 32,195 36,709 43,631 61,795 71,415 70,650 79,659 100,982 109,434 124,858 141,221
% change YoY 0% 0% 0% 42% 16% -1% 13% 27% 8% 14% 13%
EBITDA 413 1,187 2,072 2,848 4,694 4,090 4,822 6,043 7,660 9,364 10,592
EBITDA margin 1% 3% 5% 5% 7% 5.8% 6.1% 6.0% 7.0% 7.5% 7.5%
74% 37%
PBT 354 311 762 2,481 3,165 1,636 3,525 4,562 5,911 7,451 8,525
Investec Net profit 318 311 1,748 1,979 2,491 2,069 2,644 3,478 4,374 5,514 6,308
32%
Weighted average shares 475 475 475 475 475 475 475 475 475 475 475
EPS, diluted 0.7 0.7 3.7 4.2 5.2 4.4 5.6 7.3 9.2 11.6 13.3
DPS 0.7 0.7 1.2 1.1 1.3 1.2 1.4 1.9 2.3 2.9 3.3
Balance Sheet FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Net Block 10,431 10,364 9,828 9,950 10,781 10,476 11,738 14,190 15,956 17,515 19,352
Investments 3,390 4,777 7,393 6,611 9,309 8,688 8,959 10,125 10,875 11,625 12,375
Inventories 4,054 3,206 2,897 5,279 5,846 5,097 5,482 8,197 8,789 10,063 11,461
Sundry Debtors 879 1,816 2,208 2,706 2,080 3,005 3,341 5,039 5,460 6,230 7,046
Cash and Bank 37 421 1,010 60 130 175 826 54 718 2,465 4,550
Loans and advances 2,778 3,495 3,537 3,970 2,998 3,752 5,302 8,438 8,438 8,438 8,438
Others 528 753 300 - - - - - - - -
Total assets 22,096 24,831 27,172 28,577 31,145 31,193 35,647 46,042 50,236 56,336 63,223
Equity 238 238 238 475 475 475 475 475 475 475 475
Reserves and Surplus 7,978 7,864 8,416 9,519 11,221 11,772 13,678 15,979 19,259 23,394 28,126
Debt 6,663 9,060 10,033 7,854 7,155 5,459 4,759 9,187 9,187 9,187 9,187
Deferred Tax Assets / Liabilities 1,549 1,481 1,146 957 976 931 1,247 1,527 1,527 1,527 1,527
Current Liabilities & Others 5,058 5,533 6,672 8,852 10,834 12,025 14,957 18,437 19,350 21,315 23,470
Long term provision 610 655 669 920 485 532 532 437 437 437 437
Total Liabilities 22,096 24,831 27,172 28,577 31,145 31,193 35,647 46,042 50,236 56,336 63,223
Cash Flow Statement (Rsm) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Cash From Operating Activities 1,616 3,389 2,024 4,408 4,181 848 5,238 6,145 7,482 8,464
Cash Flow from Investing Activities -2,043 -2,852 318 -3,809 -984 -2,599 -4,933 -4,026 -3,995 -4,440
Cash from Financing Activities 206 880 -4,083 -2,546 -4,659 -1,984 3,308 -1,455 -1,740 -1,938
Net Cash Inflow / Outflow -221 1,417 -1,742 -1,946 -1,462 -3,735 3,613 664 1,747 2,086
FCFF 1,108 3,464 954 2,640 3,414 -1,732 1,187 2,645 3,982 4,464
Performance Ratios FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
Growth
Revenue 0% 0% 42% 16% -1% 13% 27% 8% 14% 13%
EBITDA 187% 74% 37% 65% -13% 18% 25% 27% 22% 13%
EBIT -130% 560% 70% 98% -21% 26% 29% 31% 25% 14%
EPS -2% 462% 13% 26% -17% 28% 32% 26% 26% 14%
Margins
EBITDA 1% 3% 5% 5% 7% 6% 6% 6% 7% 8% 8%
EBIT -2% 0% 2% 3% 5% 4% 4% 4% 5% 6% 6%
Net profit 1% 1% 4% 3% 3% 3% 3% 3% 4% 4% 4%
Solvency
Net debt (cash) 6,626 8,639 9,023 7,794 7,024 5,284 3,933 9,134 8,470 6,722 4,637
Net debt / equity (%) 81% 107% 104% 78% 60% 43% 28% 56% 43% 28% 16%
Net debt / total assets (%) 30% 35% 33% 27% 23% 17% 11% 20% 17% 12% 7%
Net debt / EBITDA (x) 16.0 7.3 4.4 2.7 1.5 1.3 0.8 1.5 1.1 0.7 0.4
EBITA interest cover (x) 19x 2x 3x 6x 8x 9x 19x 22x 21x 26x 29x
Capital employed 12,743 14,326 16,953 15,653 16,495 17,188 18,577 21,643 24,924 29,059 33,791
Capital growth (%) 0% 12% 18% -8% 5% 4% 8% 17% 15% 17% 16%
Capital turn (x) 0.4x 0.4x 0.4x 0.3x 0.2x 0.2x 0.2x 0.2x 0.2x 0.2x 0.2x

Revenue 79,659 100,982 109,434 124,858 141,221
EBITDA 4,822 6,043 7,660 9,364 10,592
Other income 83 111 122 134 147
Net interest -35 -59 -137 -106 -51
Share-based-payments 0 0 0 0 0
PBT (normalised) 3,554 4,562 5,911 7,451 8,525
Non-recurring items/exceptionals -28 0 0 0 0
PBT (reported) 3,525 4,562 5,911 7,451 8,525
Taxation -909 -1,083 -1,537 -1,937 -2,216
Discontinued/assets held for sale 0 0 0 0 0
EPS (reported) 5.5 7.3 9.2 11.6 13.3
DPS (INR) 1.4 1.9 2.3 2.9 3.3
Cash Flow 2014 2015 2016E 2017E 2018E
Other cash and non-cash movements -4,277 4,512 259 240 198
Change in working capital 1,613 -3,851 -101 -79 -59
Interest -35 -59 -137 -106 -51
Tax paid -1,275 -1,407 -1,537 -1,937 -2,216
Cash flow from operations 848 5,238 6,145 7,482 8,464
Free cash flow -1,732 1,187 2,645 3,982 4,464
Other financials 1,566 6,273 -1,689 -3,856 -4,532
Acquisitions -19 -881 -526 -495 -440
Disposals - - - - -
Net share issues -476 -547 0 0 0
Dividends paid -690 -831 -1,094 -1,378 -1,577
Change in net cash -1,351 5,200 -664 -1,747 -2,086
Net cash/(debt) 3,933 9,134 8,470 6,722 4,637
FCFPS - FD (INR) (3.6) 2.5 5.6 8.4 9.4
Intangible assets 198 347 347 347 347
Cash and equivalents 826 54 718 2,465 4,550
Total assets 35,647 46,042 50,236 56,336 63,223
Total debt -4,759 -9,187 -9,187 -9,187 -9,187
Net assets 14,153 16,454 19,734 23,870 28,601
Total equity 14,153 16,454 19,734 23,870 28,601
Net working capital -1,261 -1,401 1,416 2,181 4,007
NAV per share (INR) 29.8 34.6 41.5 50.2 60.2


2014 2015 2016E 2017E
Calendar PE (x) 42.2 33.3 26.3 22.6
EV/sales (x) 1.4 1.2 1.1 0.9
EV/EBITDA (x) 22.6 17.9 14.5 12.6
FCF yield (%) 0.3 1.7 2.7 3.1
Dividend yield (%) 0.6 0.8 0.9 1.1

Net income (normalised) growth (yoy) 27.8 31.5 25.8 26.1 14.4
EPS (normalised) growth (y-on-y) (%) 27.8 31.5 25.8 26.1 14.4
FCFPS growth (y-on-y) (%) 122.9 50.6 12.1
DPS growth (y-on-y) (%) 16.7 35.7 21.1 26.1 14.4
Interest cover (x) 99.6 76.7 43.2 70.0 164.9
Net debt/EBITDA (x) (0.8) (1.5) (1.1) (0.7) (0.4)
Net debt/equity (%) (27.8) (55.5) (42.9) (28.2) (16.2)
Net gearing (%) (38.5) (124.8) (75.2) (39.2) (19.3)
Dividend cover (x) 4.0 3.9 4.0 4.0 4.0
EBITDA margin (%) 6.1 6.0 7.0 7.5 7.5
EBITA margin (%) 4.4 4.5 5.4 5.9 6.0
ROE (%) 18.7 21.1 22.2 23.1 22.1
ROCE (%) 17.7 19.5 22.4 24.3 23.9
NWC/revenue (%) (1.6) (1.4) 1.3 1.7 2.8
Target Price Basis

Key Risks
Higher than expected market share gain, Higher than expected EBITDA margin

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Company disclosures
Bajaj Auto Hero Motocorp TVS Motors
Key: Investec has received compensation from the company for investment banking services within the past 12 months,
Investec expects to receive or intends to seek compensation from the company for investment banking services in the next 6
months, Investec has been involved in managing or co-managing a primary share issue for the company in the past 12 months,
Investec has been involved in managing or co-managing a secondary share issue for the company in the past 12 months,
Investec makes a market in the securities of the company, Investec holds/has held more than 1% of common equity
securities in the company in the past 90 days, Investec is broker and/or advisor and/or sponsor to the company, The
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Limited holds 1% or more of a derivative referenced to the securities of the company

Recommendation history (for the last 3 years to previous days close)
Hero Motocorp (HROM.NS) Rating Plotter as at 27 Nov 2015
3,200
3,000
2,800
2,600
2,400
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Price Target
Buy Hold Sell Not Rated
Source: Investec Securities / FactSet
Bajaj Auto (BAJA.NS) Rating Plotter as at 27 Nov 2015
2,600
2,400
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Price Target
TVS Motors (TVSM.NS) Rating Plotter as at 27 Nov 2015
300
250
200
150
100
50
Price Target

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India Two Wheelers Riding Up The Value Curve

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27 November 2015

Auto & Auto Ancillaries

Sector review Company Rec Target

Auto & Auto Ancillari es:

While we expect competitive intensity to hurt the profitability of the two

Changing landscape to hurt as well as benefit a few: Though we expect a

Exports offer a significant opportunity: Though Indian players have

Rural areas to drive growth .................................................................................... 5

Near term pain in rural areas could hurt demand .................................................. 5

Changing landscape to benefit a few .................................................................... 8

Competition to hurt profitability of Executive segment ........................................... 8

Hero most vulnerable to rising competitive ...................................................... 10

Premiumisation trend to accelerate ..................................................................... 10

Exports provide significant opportunity ............................................................. 14

Market share gains from China ............................................................................ 16

One size fits all doesnt work here ................................................................... 17

Africa presents a sizeable opportunity ............................................................... 19

Nigeria dominates the African market ................................................................. 21

Africa beyond Nigeria ........................................................................................... 23

LATAM: Market share gains to drive growth ...................................................... 25

Indian manufacturers gaining a strong hold in LATAM ........................................ 26

Indian players gain at the expense of Chinese ................................................ 26

Colombia- an example of Latin American potential for Indian companies ...... 28

Significant growth opportunities in LATAM ....................................................... 29

Asia could also support 2Ws export growth ...................................................... 31

Bangladesh Indian 2Ws rule the roost ............................................................. 32

We initiate coverage on Bajaj, Hero and TVS .................................................. 33

Bajaj Auto (BAJA.NS) ........................................................................................... 35

Targeting the global market ................................................................................. 37

Bajaj a strong brand in Africa & LATAM ..................................................... 38

Strong structural drivers of Africa and Latin America ....................................... 38

Decline in Oil prices to have limited impact on Nigeria volumes ...................... 39

Expect export momentum to accelerate .............................................................. 40

Along with volumes, exports brings strong profitability ........................................ 41

Page 2 | 27 November 2015

Executive Segment: Confusing branding & multiple variants............................... 42

Expect volume uptick in the Executive Segment .............................................. 43

Economy Segment: CT100 & Platina to help sustain momentum ....................... 44

Premium Segment: Bajaj a prime beneficiary of the premiumisation trend ......... 44

Three wheelers provide another wheel to profitable growth ................................ 46

Sector leading operating/financial metrics ......................................................... 49

Attractive valuations Initiate with BUY ............................................................. 52

Hero Motocorp (HROM.NS) .................................................................................. 56

Dominance in the Indian 2Ws market .................................................................. 58

Growth to slow down in economy segment ....................................................... 59

Exposure to executive segment a concern......................................................... 61

Premium segment - not Heros forte ................................................................... 64

High scooter industry growth to benefit Hero .................................................... 65

Export a long-term game; first, some short-term pain....................................... 67

Financial strength intact despite headwinds ...................................................... 68

LEAP or a short hop? ....................................................................................... 68

Aptly valued Initiate with HOLD ........................................................................ 71

TVS Motors (TVSM.NS) ......................................................................................... 76

Scooters: At a respectable second place ........................................................... 78

Higher scooters industry growth to benefit TVS ................................................... 79

Premium segment: Strong positioning but limited market share gains........... 80

TVS to remain a challenger in the economy segment ....................................... 82

TVS not a serious contender in Executive segment ............................................ 83

Growth rate to decelerate in mopeds ................................................................... 84

Impressive performance in exports to continue ................................................ 86

Where does TVS stand vs the leader?............................................................. 86

Exports growth to continue............................................................................... 87

Turnaround of Indonesian operations still some time away ............................. 88