Indian 2W Segment –

Your Aim is Our Only Target
Indian 2W Segment –
Bajaj Auto or Hero MotoCorp
Himanshu Sharma
Auto & Auto Ancillary Analyst
June - 2016
Strictly Private and Confidential
Wealth creation drivers – Focus of our research
 Factors contributing to huge long-term wealth creation
–
Corporate governance standards

Management pedigree
–
Quality of earnings
–
Financials
Corporate Governance
& Quality of Earnings
are two very important
drivers of valuation
multiples, but are often
ignored
&
underresearched by the
street in general
 Our core research process – To include in-depth insights on:
–
Corporate governance standards analysis – Details on next slide
–
Analysis of various attributes which impact quality of earnings
Our Belief: We believe that long-term wealth creators in Indian equities over the past decade have benefitted
disproportionately from expansion of valuation multiple. While earnings play a key role in a business getting
higher multiples, quality of earnings & corporate governance standards of the company are equally or more
important but are often ignored or under-researched.
2
Corporate governance parameters & their significance
 Minority investors’ interest aligned with promoters
–
Promoter ownership and their board representation, promoter compensation & board structure. These will
reflect if minority shareholders are adequately represented, guided by an independent board and, more
importantly, promoters’ economic interest are aligned with shareholders.
 Independent Directors & Auditors
–
We would highlight which other prominent listed companies these auditors & Independent Directors
represent; this will not only build confidence in the accounting & disclosure standards but also add much faith
in independent decision making by the company which will always protect the interests of all shareholders.
 Tax paying status & Dividend payout ratio
–
Consistent dividend payout by a company reflects that the economic interests of all shareholders are aligned
and also reduces dependence on capital gains for equity returns to investors.
 Contingent Liability & Related party Transactions (RPT)
–
3
This would capture any future liability which could surprise the equity owners at a future point in time & RPT
would again be useful to capture if there are any other ways for promoters’ economic interest which are not
aligned with all shareholders.
BJAUT or HMCL?

We assess BJAUT and HMCL on various parameters:
–
–
–

4
Corporate governance

Promoter compensation

Ownership & Auditors

Board composure

Independent directors

Related party transactions

Contingent liability
Quality of earnings

Business model – industry leading margins

Ability to generate cash flows

Return ratios – ROE

R&D
Business outlook
Based on our analysis we prefer BJAUT over HMCL (see slide 33 for details)
Corporate Governance Standards
Objective – To study the corporate governance standards of two companies over
the past several years and make relative assessment
5
Promoter compensation
(Rs mn)
Bajaj Auto
Chairman (Rahul Bajaj)
- % share of PBT
MD (Rajiv Bajaj)
- % share of PBT
Vice Chairman (Madhur Bajaj)
- % share of PBT
Total
- % share of PBT
HMCL
Chairman Emeritus (Brijmohan Lall Munjal)
- % share of PBT
Chairman, MD and CEO (Pawan Munjal)
- % share of PBT
Jt. Managing Director (Sunil Kant Munjal)
- % share of PBT
Total
- % share of PBT
FY11
FY12
FY13
FY14
FY15
FY11-15 Total
78
0.2%
69
0.2%
58
0.1%
206
0.5%
111
0.3%
102
0.3%
83
0.2%
296
0.7%
120
0.3%
153
0.4%
153
0.4%
426
1.0%
112
0.2%
184
0.4%
84
0.2%
379
0.8%
112
0.3%
205
0.5%
84
0.2%
401
1.0%
534
0.2%
712
0.3%
461
0.2%
1707
0.8%
268
1.1%
265
1.1%
1
0.0%
533
2.1%
344
1.2%
345
311.4%
327
1.3%
328
1.3%
315
1.2%
970
3.8%
370
1.3%
379
1.3%
360
1.3%
1108
3.9%
442
1.3%
446
1.3%
425
1.2%
1313
3.8%
1,751
1.2%
1,763
1.2%
1,100
0.8%
4,614
3.2%
0.0%
689
2.4%
Source: Annual Reports, Centrum Research
•
Promoter’s compensation is significantly lower for BJAUT vs HMCL, both in terms of absolute amount and as a % of
PBT.
Promoter compensation for both companies has increased over the last five years.
•
Promoters and minority investors’ interests are always closely aligned if promoter gains are linked more to dividends and
equity value rather than salary.
6
Ownership & auditors
While BJAUT has maintained its stake in the
business over the last five years, HMCL
promoters have diluted their stake to finance
other initiatives.
Promoter Ownership trend
(%)
FY11
FY12
FY13
FY14
FY15
FY16
BJAUT
50.0
50.0
50.0
50.0
49.2
49.3
HMCL
52.2
52.2
52.2
39.9
34.6
34.7
Source: Annual Reports, Centrum Research
HMCL released a statement at the time of stake sale in
FY15 – "(Parent Hero Group led by Brij Mohan Lal) will
use the sale proceeds to fund new growth avenues
available through the government's ‘Make in India’
initiative.“
Although stake sale between BJAUT and
HMCL is not necessarily negative, it clearly
highlights some shift in promoter focus from
existing business to new ventures.
Auditors
Auditor Name
BJAUT
HMCL
7
Dalal & Shah
Deloitte Haskins & Sells
Auditor Fees FY15 (Rs mn)
As % to PBT
Statutory
Raymond Ltd, Century Textiles & Industries Ltd,
Bharat Bijlee Ltd, Ador Welding Ltd, Bajaj
Holdings & Investment Ltd
15.1
0.04%
Statutory
Many Marquee Cos
17.6
0.05%
Type
Other Companies Audited by the auditor
Board of Directors
Board of Directors Composition
FY11
FY12
FY13
FY14
FY15
16
16
16
16
16
- Promoter group Directors
7
7
7
7
7
- Independent Directors
9
9
9
9
9
- % share of promoters
43.8
43.8
43.8
43.8
43.8
- % share of independent
56.3
56.3
56.3
56.3
56.3
14
12
11
11
12
- Promoter group Directors
6
5
5
5
5
- Independent Directors
8
7
6
6
7
- % share of promoters
42.9
41.7
45.5
45.5
41.7
- % share of independent
57.1
58.3
54.5
54.5
58.3
BJAUT
- Total Strength
HMCL
- Total Strength
Source: Annual Reports, Centrum Research
Source: Annual Reports, Centrum Research
8
Both BJAUT and
HMCL have fair
representation from
independent
directors. Two points
to highlight are:
• BJAUT has a larger
board compared
to HMCL
• While
BJAUT
promoter
representation is
broadly in line
with its holding,
HMCL promoter
representation is
higher than its
holding
Independent Directors – Profile & compensation
Independent Director
Name
No. of directorship
in other public ltd cos
Kantikumar R Podar
3
D J Balaji Rao
7
D S Mehta
3
J N Godrej
10
S H Khan
7
Ms. Suman Kirloskar
2
BJAUT
Naresh Chandra
9
Nanoo Pamnani
4
P Murari
8
Source: Annual Reports, Centrum Research
9
FY15
Name of some prominent listed companies
Compensation
in which Director
(Rs mn)
As % to
FY15 PBT
CEAT Ltd.
3M India Ltd., Ashok Leyland Ltd., Graphite India
Ltd., JSW Energy Ltd.
1.0
0.00
3.0
0.01
Bajaj Finance Ltd., Bajaj Hindusthan Ltd.
1.6
0.00
0.6
0.00
3.0
0.01
1.2
0.00
3.0
0.01
4.6
0.01
0.6
0.00
Godrej & Boyce Mfg. Company Ltd., Geometric
Ltd., Haldia Petrochemicals Ltd.
Bajaj Allianz Life Insurance Company Ltd., IDFC
Ltd., ITC Ltd.,
Balrampur Chini Mills Ltd., Cairn India Ltd.,
Electrosteel Castings Ltd., EROS International
Media Ltd., Gammon Infrastructure Projects
Ltd.,
Bajaj Finserv Ltd. (Vice Chairman), Bajaj Finance
Ltd. (Vice Chairman), Bajaj Holdings &
Investment Ltd.
Aban Offshore Ltd., Aditya Birla Nuvo Ltd.,
Adayar Gate Hotel Ltd., Fortis Malar Hospital
Ltd., Great Eastern Energy Corporation Ltd., HEG
Ltd., IDEA Cellular Ltd.
Independent Directors – Profile & compensation
Independent Director
Name
HMCL
No. of directorship
in other public ltd cos
FY15
Name of some prominent listed companies
Compensation
in which Director
(Rs mn)
Mr. Pradeep Dinodia
6
DCM Shriram Limited, JK Lakshmi Cement Ltd,
6.5
0.02
Dr. Pritam Singh
3
Godrej Properties Limited,
4.0
0.01
Mr. M. Damodaran
5
CRISIL Limited, ING Vysya Bank Limited, L&T
Limited, Bennett Coleman and Company Limited.
3.6
0.01
Dr. Anand C. Burman
6
Dabur India Limited, Aviva Life Insurance
Company India Limited.
0.7
0.00
Mr. Ravi Nath
4
Kanoria Chemicals & Industries Limited, Somany
Ceramics Limited
2.3
0.01
Ms. Shobana Kamineni
10
KEI Group, Blue Star Limited
0.0
0.00
Gen. (Retd.) V.P.Malik
2
5.3
0.02
Source: Annual Reports, Centrum Research

Both companies have prominent and well known board members

Despite its smaller size, HMCL outgo on Independent Directors is more than that of BJAUT.
10
As % to
FY15 PBT
Related party transactions
Nature of Transaction (Rs mn)
FY11
FY12
FY13
FY14
FY15
Equity Contribution – Bajaj Auto International, PT Bajaj Auto Indonesia
2,101
681
2,319
678
0
Purchase of investments – Bajaj Finserv
2,069
0
0
0
1,515
Insurance premium paid – Bajaj Allianz
90
122
137
92
149
Sale of vehicles and materials – KTM
63
1,287
2,308
3,586
7,334
As a % of revenues
0.0
0.7
1.2
1.8
3.5
Equity Inv – Hero FinCorp Limited, HMCL (NA)
0
0
529
1,516
2,443
Equity Inv written off – HMCL (NA)
0
0
0
0
1,514
Hero FinCorp Limited – Inter-corporate deposits given
4,650
4,550
3,850
6,050
2,950
Hero FinCorp Limited – Inter-corporate deposits repaid
4,450
3,550
2,650
6,250
5,150
A.G. Industries Private Limited – Purchase of RM
4,702
5,718
5,723
6,800
7,076
3.3
3.3
3.3
3.7
3.6
8,469
10,986
11,197
12,370
15,416
6.0
6.4
6.4
6.8
7.8
Bajaj Auto
Hero MotoCorp
As a % of total RM cost
Rockman Industries Limited – Purchase of RM
As a % of total RM cost
Source: Annual Reports, Centrum Research
While there is no significant RPT in case of BJAUT, there are RPT of RM sourcing from promoter owner company
(c. 10%). Analysing their financials shows single-digit EBITDA margin for A.G. and low double-digit margins for
Rockman.
11
Contingent liability
(Rs mn)
FY11
FY12
FY13
FY14
FY15
4,225
4,187
4,189
4,464
4,505
232
254
271
0
0
2
1
0
0
0
1,227
1,818
2,933
3,921
4,861
0
96
541
986
4,542
Value Added Tax (VAT)/Sales Tax matters under dispute
3,284
2,579
3,775
1,161
1,263
- Total
8,970
8,935
11,710
10,532
15,171
18.3
14.8
14.8
11.0
14.2
304
400
471
292
409
0.5
0.6
0.7
0.4
0.6
Bajaj Auto
Claims against the company not acknowledged as debts
Guarantees on behalf of its subsidiaries
Guarantees to HDFC Ltd
Excise and customs demand
Income tax matters – Appeal by company
- % share of Net Worth
Hero MotoCorp
In respect of excise matters
- % share of Net Worth
Source: Annual Reports, Centrum Research
While HMCL has minimal contingent liability, the same has been significantly high for BJAUT since a long time.
12
Assessment of Quality of Earnings
Objective – To study the historical trend of margins and cash flow generation.
13
BJAUT – Superior margin profile
BJAUT – Steady margin performance
BJAUT Vs HMCL EBITDA margins
40
25
30
20
15
20
10
10
5
0
FY11
FY12
FY13
FY14
FY15
FY16
0
FY11
FY12
FY13
BJAUT EBITDA Margin (%)
-10
BJAUT EBITDA Margin (%)
FY14
FY15
FY16
HMCL EBITDA Margin (%)
Change in Export volumes (%)
Source: Company, Centrum Research

High-margin segments like domestic 3W, domestic premium 2W segment, exports and spares account for more than c.
80% of topline, helping the company report healthy EBITDA margins, despite sluggish growth.

Over the years, the company optimised its cost structure with lower fixed costs (like advertising), helping it maintain
margins even with subdued volumes.

In FY16, despite subdued export volumes (-4% YoY), BJAUT has maintained 21.3% EBITDA margins (+200bps), again
highlighting the strength of its business model.

While we expect both BJAUT and HMCL margins to taper off from FY16 levels, we see little chance of the delta closing in
anytime soon.
14
BJAUT vs HMCL – Margins
As % to Sales
FY11
FY12
FY13
FY14
FY15
FY16
28.3
27.9
28.5
31.7
31.5
33.8
Employee Costs
2.9
2.6
3.0
3.4
4.0
3.9
Other expenses
5.8
6.0
6.6
7.3
8.2
8.6
19.6
19.3
18.8
20.9
19.3
21.3

Both BJAUT and HMCL have
reported healthy improvement
in gross margins and EBITDA
margins since FY11.

While in case of BJAUT, the
improvement in gross margin
was driven by richer sales mix
and subdued input costs, the
same in case of HMCL was
driven by LEAP program and
subdued input prices.

However, not all gains were
passed on at EBITDA levels,
with
both
companies
reinvesting gains from GM in
other heads like employee
cost, advertising, R&D, etc.
Bajaj Auto
Gross Margins
EBITDA Mgn
Hero MotoCorp
Gross Margins
26.7
26.0
26.2
27.4
27.8
31.9
Employee Costs
3.2
3.1
3.5
3.7
4.3
4.7
Other expenses
10.7
8.3
9.6
10.3
11.4
12.4
EBITDA Mgn
12.8
14.6
13.1
13.5
12.1
14.8
Source: Annual Reports, Centrum Research
Over last several years, BJAUT has constantly reported higher EBITDA margins (c. 600 – 700 bps), primarily on the back
of better business model (revenue-mix)
15
Employee costs – Advantage BJAUT
FY11
FY12
FY13
FY14
FY15
Bajaj Auto
No. of Employees
8,627
8,627
9,127
9,119
9,183
Employee Cost (Rs mn)
4,768
5,154
6,118
6,965
8,652
2.9
2.6
3.0
3.4
4.0
No. of Employees
5,257
6,106
5,800
6,782
7,334
Employee Cost (Rs mn)
6,190
7,355
8,209
9,300
11,729
3.2
3.1
3.5
3.7
4.3
As % to Sales
Hero MotoCorp
As % to Sales
Source: Annual Reports, Centrum Research
16

Despite a smaller topline,
BJAUT boasts of relatively
lower spend on personnel
expenses (as a % of sales).

Also, despite its bigger scale,
HMCL has lesser number of
employees. This we believe is
because HMCL uses a higher
share of contractual labour.
Lower fixed cost model – Where is the delta?
% to Sales
FY11
FY12
FY13
FY14
FY15
Other Expenses
5.8
6.0
6.6
7.3
8.2
Advertisement & sales promotion
0.8
1.1
1.3
1.6
1.9
Packing and forwarding
1.5
1.7
1.5
1.6
1.8
Misc. expenses
0.9
1.0
1.0
1.1
1.4
Other Expenses
10.7
8.3
9.6
10.3
11.4
Advertisement
2.0
1.6
2.0
2.0
2.4
Packing forwarding and freight
2.4
2.6
2.8
2.9
3.1
Misc. expenses
2.0
1.9
2.2
2.3
2.7
Bajaj Auto
Hero MotoCorp
Source: Annual Reports, Centrum Research

Overall, other expenses as a % of sales are higher for HMCL in the last few years due to higher proportion of advertising,
packaging & forwarding, and miscellaneous expenses.

Over the last five years, other expenses of both BJAUT and HMCL have increased significantly. While the increase in case of
BJAUT has been driven by higher advertising expense, the same in case of HMCL has been led by higher packaging,
forwarding & freight, and miscellaneous expenses. Although advertising expenses (as a % of sales) for HMCL have not seen
significant spike, they are significantly higher than BJAUT (despite a smaller BJAUT topline).
17
Higher advertising expenditure – The difference

Over the years, while BJAUT worked to highlight its brand by focusing on products, HMCL has banked on roping in popular
personalities like movie stars (Ranbir Kapoor, Alia Bhatt, Hrithik Roshan, Tiger Woods). This along with higher frequency of
advertisements has led to higher advertising spend for HMCL.

HMCL advertising has also been led by the desire to break into premium segment. Unlike BJAUT, which is a well known
brand in the premium segment, HMCL is known for executive/entry level bikes. On the other hand, BJAUT dominates the
premium segment.
Source: Media articles, Centrum Research
18
Cash flow generation – BJAUT significantly better
FY11
FY12
FY13
FY14
FY15
Cumulative
FY10-15
27,380
16,120
1,678
14,442
32,837
31,709
3,678
28,031
32,103
21,338
5,285
16,053
34,229
35,452
2,547
32,906
34,214
21,408
2,952
18,456
160,764
126,028
16,140
109,889
24,101
22,390
3,610
18,780
0
34,755
23,385
5,034
18,351
8,167
32,599
18,785
6,004
12,781
7,477
32,164
29,516
9,328
20,188
6,854
30,806
22,389
11,530
10,859
2,873
154,425
116,465
35,505
80,960
25,370
Adjusted free cash flow generation (Rs mn)
Adjusted free cash flow / OCF (%)
40,000
BJAUT
88%
100%
30,000
90%
HMCL
BJAUT
84%
HMCL
28%
40%
10,000
20%
0
FY12
FY13
Source: Annual Reports, Centrum Research
19
44%
60%
45%
80%
20,000
86%
Payment of deferred credits
36%
Hero MotoCorp
Cash Profit
Adj. OCF
Purchase of Fixed Assets
FCF
93%
Bajaj Auto
Cash Profit
Adj. OCF
Purchase of Fixed Assets
FCF
HMCL reported FCF during FY12-15,
including write-back of royalty
amortisation paid to Honda.
Adjusted for this, HMCL generated
FCF of Rs37bn, 61% lower than what
BJAUT generated during similar
period. Going forward, HMCL has
guided for annual capex of Rs1113bn, keeping free cash flow
generation subdued.
75%
(Rs mn)
FY14
FY15
FY11
FY12
FY13
FY14
FY15
Adjusted ROE comparison shows that real difference is
trivial
HMCL’s return ratios appear better than BJAUT. However, as the royalty payment to Honda was included in
depreciation and amortisation, the same depressed the PAT and net worth.
To bring both companies on a common plane, we have adjusted HMCL’s PAT and net worth for royalty payment to
HMCL. The table below shows a convergence in return ratios, once HMCL is adjusted for royalty payment.
(Rs mn)
Bajaj Auto
ROE (%)
Hero MotoCorp
Reported ROE (%)
Payment of deferred credit as deducted (Rs mn)
Adjusted PAT (Rs mn)
Adjusted Net Worth (Rs mn)
Adjusted ROE
Source: Annual Reports, Centrum Research
20
FY11
FY12
FY13
FY14
FY15
FY16
53
52
39
34
29
30
63
66
46
40
42
43
0
8,167
7,477
6,854
2,873
0
20,077
30,380
27,223
26,629
27,729
31,324
29,561
49,498
62,703
74,178
85,914
100,415
68
61
43
36
32
31
Bajaj R&D – Proven track record

Bajaj launched Pulsar in 2001 with the tagline – ‘Definitely Male’. The bike instantly gained traction in the
premium segment. In 2003, Bajaj refreshed the bikes (150cc/180cc) with DTS-i engine – an engine with two spark
plugs. For the first time in the world, this engine was used in a small capacity 2W engine. Even Honda has doubted
the benefits of using twin spark plugs in small capacity engines. Nonetheless, the results were spectacular – DTS-i
gave 18% better fuel economy and 12% more power.

The team has had its share of misses as well. Despite almost all launches under the Pulsar brand being well
received in the market, the team has been unable to crack the executive segment with its Discover bikes range.
2500
1.20
R&D Spend (Revenue, Rs Mn)
R&D Spend (As a % of sales)
1.00
2000
0.80
1500
0.60
1000
0.40
500
0.20
0.00
0
FY11
FY11
FY12
FY13
BJAUT
Source: Company, Centrum Research
21
HMCL
FY14
FY12
FY13
FY15
BJAUT
HMCL
FY14
FY15
Hero R&D – Ramping up rapidly, though headwinds prevail
Hero is rapidly ramping up its R&D footprint, but it might not be easy

Over the years, HMCL has been dependent on Honda for technology inputs.

While the company is making huge investments to ramp up its R&D, we primarily see two risks:

22

The teams will have an initial learning phase, and this might impact the market share in next few years.

At some point, HMCL will have to revamp its product range and supplement it with in-house developed
products/engines. Consequently, we clearly see a product risk as HMCL transitions from Honda sourced
technology/engines to in-house developed technology/engines.
While Splendor/Passion remain the mainstay of HMCL, it is concerning that none of the last few launches in the
>125cc segment have worked for the company. More importantly, while BJAUT has completely overhauled the
Pulsar range (with design inputs from KTM), HMCL continues to broadly follow the design theme/engines set-ups
provided by Honda.
New launches in motorcycle segment – Track record
Engine size (cc)
Volume performance
Jan 16-Mar 16 average
monthly volumes
Hero Karizma ZMR
220
Subdued
96
Xtreme Sports
150
Subdued
Xtreme
150
Subdued
Ignitor
125
Subdued
1,828
Passion Pro TR
100
Subdued
NA
Splendor ismart
100
Well received
NA
150/220
Well received
27,908
V15
150
Well received
8,987 (2 months)
Pulsar RS200
200
Well received
NA
150/200
Subdued
NA
200
Well received
NA
100/125/150
Subdued
11,860
100
Well received
43,887
Product
Hero MotoCorp
1,823
Bajaj Auto
New Avenger series
Pulsar AS 200/150
Pulsar NS 200
Discover variants
CT100
Source: Centrum Research
BJAUT’s recent models have been well received, whereas almost all launches by HMCL in the motorcycle segment (except
i-smart) have failed to make a mark in the market.
23
BJAUT – Offering consumers the best VFM
BJAUT bikes in premium segment come across as best VFM product in the market. Premium segment
accounts for 53% of domestic 2W volumes (4QFY16) and is one of the key segments supporting 2W
volume growth going forward. This again is a product of a dedicated R&D team, which has helped BJAUT
maintain its domination in the premium segment.
Price Per BHP for models in >150cc segment (top 5)
Price per BHP (Rs)
4500
4400
4300
4200
4100
4000
3900
3800
Pulsar NS200
Apache RTR 200 4V
Source: Media Articles, Company, Centrum Research
24
Avenger 220 Street
Pulsar 220F
Apache RTR 180
Business outlook
Objective – To understand and assess near-term growth momentum.
25
BJAUT domestic volume growth – On a steady ground
Uptick in BJAUT premium segment volumes
250
184
200
4QFY16
Premium
202
250
190
215
300
Executive
216
Entry
Domestic 2W volume mix
2QFY16
3QFY16
50
36
60
100
68
150
0
4QFY16
Entry
Executive
Premium
Source: Company, SIAM, Centrum Research
New launches in premium segment:


Refreshed Avenger and recently launched ‘V15’ have been well received in the market.

Pulsar 150 – a refreshed version of the largest selling bike in 150cc segment – is on its way.

The company would launch a 390cc variant, further expanding the product range.

We believe entry-level volumes could significantly improve on the back of normal monsoons and recovery
in rural demand.

The management expects domestic 3W FY17 volume growth to be supported by issuance of 50-60k
additional permits.
26
Upgraded Avenger catching consumer fancy

Aided by new model launches, increasing consumer interest and growing distribution, Royal Enfield (the only
other bike in the cruiser segment) volumes have grown at 61% CAGR over FY13-16.

Bajaj launched a refreshed Avenger in Nov 2015 which has been very well received. From 18% volume CAGR
during FY13-15, Avenger volumes have more than tripled in FY16 (compared to FY15). It reported volume of 84k
in 4QFY16, up 6x YoY/2x QoQ.

The refreshed Avenger boasts of aggressive styling and comes with twin engine (150cc, 220cc) and twin styling
(street and cruise) options. Earlier, only one variant was available (220cc).
35000
Avenger dispatches (units)
30000
25000
20000
15000
10000
5000
Source: Company, SIAM, Centrum Research
27
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
0
V15 – Started on a robust note

V15 – A combination of innovative marketing and aggressive styling & pricing has helped V15 start on a strong
note. Lower price tag has helped BJAUT pull customers from the upper end of executive segment, a strategy it
was unable to execute with Discover 150.

The company dispatched c. 1,442/16,532/24,054 units in the first three months (Feb/Mar/Apr).

Although V15 is priced at c. 10% discount to Pulsar 150, we do not expect the same to be margin dilutive, given a)
detuned engine (12PS against 15PS in Pulsar 150), lack of features like PM meter, adjustable rear shock absorber
and smaller fuel tank (13L vs 15L). Also, the bike is lightweight, with kerb weight of 135.5kg (144kg for Pulsar 150).

V15 is already among the top 10 bikes sold in India (April 2016).
Bajaj V15 vs competition
Bajaj V15
Bajaj Pulsar Hero
Honda
150
Xtreme 150 Unicorn
Engine size (cc)
150
150
149
149
Power (PS)
12
15
16
13
Kerb weight (kg)
136
144
146
146
Price (Rs '000)
63
70
69
73
Source: Company, Centrum Research
28
Exports – Medium- to long-term potential intact





BJAUT continues to enter new markets, diversifying its base.
However, during FY13-15, the volume contribution from Africa
reduced from 47% to 43%.
In most export markets (particularly Africa), there are no domestic
players, so all players face the headwinds.
As per the management, the company has leadership position in
majority of its markets and continues to consolidate its position. Of
all markets it had presence in, BJAUT is the largest or second largest
seller in 20 markets. Boxer is the No.1 brand in Africa among all
competitors.
Geography-wise export mix
Africa
Latam
Europe
120%
100%
80%
60%
40%
20%
47%
46%
43%
FY13
FY14
FY15
0%
In terms of model mix, the company’s sales mix in exports has
improved. Premium segment volume contribution in exports also
increased by c. 400bps in FY16.
As on Mar’16, the company had presence in more than 75 export
markets (35 in FY12) and had identified c. 23 new markets for
expansion in the medium to long term.
Asia - ME
Exports ('000 units)
Export contribution (%,…
2,000
50%
1,600
40%
1,200
30%
800
20%
Source: Company, Centrum Research
29
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
400
HMCL – Splendor/Passion remain the mainstay
Monsoons – an important trigger

Despite strong growth in scooter volumes, its volume contribution stands at 13.5% (FY16).

In motorcycles segment, entry and executive segment accounts for 98% of the volumes. This segment is most
leveraged to rural demand. While the initial indications of monsoons are encouraging, the devil is in details –
distribution in terms of time and area.

The famed Splendor/Passion continue to account for 75% of motorcycle volumes (average 75% for FY13-15),
impacted by HMCL’s inability to grow any other brand.

Premium segment accounts for c. 2% of motorcycle volumes.
Source: Company, Centrum Research
30
Volume growth assumptions
BJAUT

2W Domestic – Volume growth of c. 18% in FY17 on the back of 45% growth in premium segment (average
monthly volume of c. 98.5k for FY17 against 68k in FY16 and 91k in Mar’16), 34% decline in executive segment
volumes (c. average monthly volumes of 13k against 20k in FY16 and c. 13k in Mar’16) and 7% volumes in entrylevel segment (risk to upside given its exposure to rural demand).

3W – 8% growth in domestic

Exports – Flat volumes for FY17

4Ws – Assuming volumes of c. 10k for FY17

Overall – 10.4% growth in FY17
HMCL

Motorcycle – Assuming volume growth of 6.5% in FY17, supported by recovery in rural demand

Scooter – Assuming c. 25% growth in FY17 led by recent launches (Duet/Maestro Edge) and capacity expansion

Overall – 9% growth in FY17
31
Valuation
Financial and valuation snapshot
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
-10.1
1.3
6.6
-13.2
29.8
9.3
18.0
Adj Oper CF / EV Yield (%)
7.5
4.7
6.9
4.4
4.9
8.3
7.8
Free Cash flow / EV Yield (%)
6.7
3.6
6.4
3.8
4.6
7.8
7.2
ROE (%)
55
44
37
28
32
30
30
15.5
17.1
18.6
20.7
19.0
19.1
16.2
23.4
-10.9
-0.4
13.1
31.3
10.8
12.6
Adj Oper CF / EV Yield (%)
6.2
6.9
7.2
4.5
7.2
7.9
8.4
Free Cash flow / EV Yield (%)
4.9
4.7
4.9
2.2
4.9
5.8
6.0
ROE (%)
66
46
40
42
43
40
39
17.3
14.5
21.5
20.7
18.8
18.2
16.2
Bajaj Auto
PAT Growth (%)
PE (x)
Hero MotoCorp
PAT Growth (%)
PE (x)
Source: Annual Reports, Bloomberg, Centrum Research
We believe BJAUT deserves to trade at a premium to HMCL, given a) better corporate governance, b) higher margins, c)
higher free cash flow generation and d) converging ratios (as discussed in slide 20).
32
Overall assessment – Advantage Bajaj
Score
Parameter
Corporate
Governance Standards
Quality of earnings
Business Outlook
Overall Assessment
Attribute
BJAUT
HMCL
Promoter compensation
Equity ownership
Board composure vs equity ownership
Independent directors
2
2
2
1
1
1
1
1
Related Party Transactions
1
1
Contingent liabilities
1
2
Sub-Total
9
7
Margin Profile
2
1
Free Cash flow generation
2
1
Return ratios – ROE
1
1
R&D
2
1
Sub-Total
7
4
Volume outlook
1
1
Grand Total
17
12

We assign a score of 2 to
company that is better in
a particular attribute and
1 to the other company.
In case of a comparable
performance we assign a
score of 1 to both
companies.

We assign colours to
each company on all
attributes, with green
indicating
better
performance.

We note that BJAUT
scores well above HMCL
in both business factors
and
corporate
governance standards.
Source: Centrum Research, Score – 2 for company which is better and 1 for other; 1 each in case of a comparable performance.
BJAUT scores well above HMCL based on our detailed overall assessment.
33
BJAUT – Profit & Loss
Y/E Mar (Rs mn)
FY14
FY15
FY16E
FY17E
FY18E
Net Sales
202,908
216,880
227,526
262,053
313,780
Raw Materials
138,685
148,613
150,619
177,093
214,662
% of sales
68.3
68.5
66.2
67.6
68.4
Personnel
6,965
8,652
8,832
9,867
10,792
% of sales
3.4
4.0
3.9
3.8
3.4
14,788
17,689
19,630
22,185
25,681
7.3
8.2
8.6
8.5
8.2
42,470
41,925
48,446
52,908
62,645
EBITDA Margin (%)
20.9
19.3
21.3
20.2
20.0
Depn..& Amortn
1,796
2,674
3,072
3,224
3,389
40,674
39,251
45,374
49,684
59,256
5
65
5
5
5
40,669
39,187
45,369
49,679
59,251
5,652
5,064
8,482
9,025
10,006
PBT
46,321
44,251
53,852
58,704
69,257
Tax-Total
13,887
12,711
17,328
18,785
22,162
30.0
28.7
32.2
32.0
32.0
32,433
31,540
36,524
39,919
47,095
-
3,403
-
-
-
32,433
28,137
36,524
39,919
47,095
Manufact. & Other Exp.
% of sales
EBITDA
EBIT
Interest Expenses
EBT
Other Income
Tax Rate (%) - Total
Reported PAT
Extraord. items -Adj.
Adjusted PAT
Source: Company, Centrum Research Estimates
34
Y/E Mar (Rs mn)
SOURCES OF FUNDS
Capital
Reserves & Surplus
Shareholders’ Funds
Total Loan Funds
Deferred Tax Liabi. - Net
Total
APPLICATION OF FUNDS
Gross Block
Accumulated Dep.
Capital WIP
Net Fixed Assets
Investments
Inventories
Sundry Debtors
Other current assets
Cash & Bank Balances
Loans and Advances
Total Current Assets,
Loans & Adv.
Current Liabilities
Provisions
Total Current Liab. &
Prov.
Net Current Assets
Total assets
FY14
FY15
FY16E
FY17E
FY18E
2,894
93,187
96,080
592
1,432
98,104
2,894
104,028
106,922
1,124
1,416
109,461
2,894
120,023
122,917
1,625
1,883
126,424
2,894
139,715
142,608
1,625
1,883
146,116
2,894
166,582
169,476
1,625
1,883
172,983
40,770
(20,710)
1,441
21,501
85,496
6,397
7,962
4,181
4,955
16,984
41,009
(21,837)
2,549
21,722
91,533
8,142
7,170
3,469
5,862
17,727
45,059
(24,908)
629
20,779
95,127
7,191
7,179
2,320
8,715
15,418
48,388
(28,132)
629
20,884
112,127
9,845
8,439
3,520
21,098
23,101
52,017
(31,521)
629
21,125
129,627
14,324
10,111
4,720
27,480
27,679
40,479
42,368
40,822
66,001
84,313
29,635
19,737
26,242
19,920
26,614
3,690
29,796
23,101
34,402
27,679
49,372
46,162
30,304
52,897
62,081
(8,893)
98,104
(3,794)
109,461
10,518
126,424
13,105
146,116
22,232
172,983
BJAUT – Cash Flow
Y/E Mar (Rs mn)
FY14
FY15
FY16E
FY17E
FY18E
Pre-tax profit
46,321
44,251
53,852
58,704
69,257
Total tax paid
(13,607)
(12,727)
(16,861)
(18,785)
(22,162)
Depreciation
1,796
2,674
3,072
3,224
3,389
Chg in debtors
(286)
793
(10)
(1,259)
(1,672)
(34)
(1,744)
951
(2,654)
(4,479)
(2,048)
712
1,149
(1,200)
(1,200)
Chg in creditors
3,036
(2,861)
872
3,183
4,606
Chg in provisions
2,312
183
(16,230)
19,410
4,578
Net chg in working capital
Cash flow from operating
activities (a)
Capital expenditure
3,738
(3,661)
(10,958)
9,796
(2,745)
38,248
30,537
29,104
52,939
47,738
(2,317)
(2,895)
(2,129)
(3,329)
(3,629)
Chg in inventory
Chg in other current assets
Chg in Trade investments
Cash flow from investing
activities (b)
Debt raised/(repaid)
(31,984)
(6,851)
6,407
(7,000)
(7,500)
(23,509)
(8,932)
(5,722)
(20,329)
(21,129)
-
-
Dividend (incl. tax)
(16,930)
(16,856)
(18,541)
(20,227)
(20,227)
1,509
326
(1,988)
(15,421)
(16,529)
(20,529)
(20,227)
(20,227)
46,321
44,251
53,852
58,704
69,257
Other financing activities
Cash flow from financing
activities (c)
Net chg in cash (a+b+c)
Source: Company, Centrum Research Estimates
35
BJAUT – Ratios
Y/E Mar
FY14
FY15
FY16E
FY17E
FY18E
Y/E Mar
FY14
FY15
FY16E
FY17E
FY18E
0.0
0.0
0.0
0.0
0.0
(0.9)
(0.9)
(0.8)
(0.9)
(0.9)
0.8
0.9
1.3
1.2
1.4
Dividend per share
50.0
50.0
55.0
60.0
60.0
Dividend Payout (%)
44.6
45.9
43.6
43.5
36.9
1.9
1.9
2.1
2.3
2.3
Basic EPS
112.1
109.0
126.2
138.0
162.7
Fully diluted EPS
112.1
97.2
126.2
138.0
162.7
Cash earnings per share
118.3
118.2
136.8
149.1
174.5
Book value per share
332.0
369.5
424.8
492.8
585.7
18.6
20.7
19.0
19.1
16.2
6.3
5.5
5.7
5.4
4.5
12.1
11.6
12.2
12.0
9.7
Adj Oper CF / EV Yield
6.9
4.4
4.9
8.4
7.8
EV/Sales
2.5
2.2
2.6
2.4
1.9
Gearing Ratio (x)
Growth Ratio (%)
Revenue
0.7
6.9
4.9
15.2
19.7
Debt-equity
EBITDA
11.9
(1.3)
15.6
9.2
18.4
Net debt-equity
6.6
(2.8)
15.8
9.3
18.0
Current ratio
PAT
Dividend
Margin Ratios (%)
EBITDA Margin
20.9
19.3
21.3
20.2
20.0
EBIT Margin
20.0
18.1
19.9
19.0
18.9
PAT Margin
16.0
13.0
16.1
15.2
15.0
ROE
37.0
27.7
31.8
30.1
30.2
ROCE
36.2
30.4
31.0
29.3
29.5
ROIC
302.7
283.8
177.6
190.5
280.1
Return Ratios (%)
Turnover Ratios (days)
Inventory Period
11
14
11
14
16
Debtors Period
14
12
11
12
12
Creditor Period
67.4
54.7
54.2
52.0
50.0
(33.4)
(25.8)
(10.9)
(40.0)
(37.5)
Net working capital
Source: Company, Centrum Research Estimates
36
Dividend Yield (%)
Per share Ratios (Rs)
Valuation (x)
P/E
P/BV
EV/EBITDA
HMCL – Profit & Loss
Y/E Mar (Rs mn)
FY14
FY15
FY16E
FY17E
FY18E
Net Sales
251,249
273,506
283,574
319,200
363,772
Raw Materials
182,299
197,539
193,149
221,205
254,641
% of sales
72.6
72.2
68.1
69.3
70.0
Personnel
9,300
11,729
13,196
14,204
15,642
% of sales
3.7
4.3
4.7
4.5
4.3
25,755
31,163
35,178
37,306
40,778
10.3
11.4
12.4
11.7
11.2
33,895
33,075
42,051
46,484
52,711
13.5
12.1
14.8
14.6
14.5
Depn..& Amortn
11,074
5,400
4,414
5,121
5,877
EBIT
22,821
27,675
37,637
41,363
46,834
(377)
(380)
(543)
(601)
(663)
23,198
28,055
38,180
41,963
47,497
5,474
6,784
5,766
6,919
7,957
28,672
34,838
43,946
48,883
55,455
7,582
9,432
12,622
14,176
16,359
26.4
27.1
28.7
29.0
29.5
21,091
23,856
31,324
34,707
39,095
-
(1,550)
-
-
-
21,091
25,407
31,324
34,707
39,095
Manufact. & Other Exp.
% of sales
EBITDA
EBITDA Margin (%)
Interest Expenses
EBT
Other Income
PBT
Tax-Total
Tax Rate (%) - Total
Reported PAT
Extraord. items -Adj.
Adjusted PAT
Source: Company, Centrum Research Estimates
37
Y/E Mar (Rs mn)
SOURCES OF FUNDS
Capital
Reserves & Surplus
Shareholders’ Funds
Total Loan Funds
Deferred Tax Liabi. - Net
Total
APPLICATION OF FUNDS
Gross Block
Accumulated Dep.
Capital WIP
Net Fixed Assets
Investments
Inventories
Sundry Debtors
Other current assets
Cash & Bank Balances
Loans and Advances
Total Current Assets,
Loans & Adv.
Current Liabilities
Provisions
Total Current Liab. &
Prov.
Net Current Assets
Total assets
FY14
FY15
FY16E
FY17E
FY18E
399
55,599
55,999
245
(1,060)
55,183
399
65,014
65,413
313
(735)
64,991
399
79,515
79,914
313
(735)
79,492
399
93,193
93,593
313
(2)
93,904
399
108,924
109,323
313
830
110,466
69,089
(46,657)
8,541
30,974
40,888
6,696
9,206
699
1,175
10,277
81,140
(52,013)
7,126
36,252
31,541
8,155
13,896
1,200
1,593
11,845
95,943
(56,319)
4,797
44,421
42,664
6,730
12,828
1,532
571
13,919
109,240
(61,440)
3,277
51,077
47,164
7,871
14,430
1,685
8,328
15,641
122,017
(67,317)
3,661
58,360
54,164
9,468
16,444
1,853
11,560
17,825
28,052
36,688
35,579
47,954
57,151
28,787
15,943
31,494
7,997
34,742
8,430
39,249
13,042
44,829
14,380
44,730
39,490
43,172
52,291
59,209
(16,678)
55,183
(2,802)
64,991
(7,593)
79,492
(4,337)
93,904
(2,058)
110,466
HMCL – Cash Flow
Y/E Mar (Rs mn)
FY14
FY15
FY16E
FY17E
FY18E
Pre-tax profit
28,672
34,838
43,946
48,883
55,455
Total tax paid
(9,966)
(9,432)
(12,622)
(13,443)
(15,527)
Depreciation
11,074
5,400
4,414
5,121
5,877
Chg in debtors
(2,556)
(4,690)
1,068
(1,602)
(2,015)
Chg in inventory
(328)
(1,459)
1,425
(1,141)
(1,597)
Chg in loans and advances
3,059
(1,568)
(2,074)
(1,722)
(2,184)
Chg in other current assets
(15)
(501)
(332)
(153)
(168)
Chg in creditors
4,173
5,513
696
4,507
5,580
Chg in provisions
1,545
(7,946)
433
4,612
1,338
(2,996)
(2,806)
2,552
-
-
Net chg in working capital
2,882
(13,458)
3,769
4,502
953
Other operating activities
Cash flow from operating activities
(a)
Capital expenditure
2,429
(1,648)
-
-
-
35,091
15,700
39,507
45,063
46,757
(10,717)
(10,679)
(12,583)
(11,777)
(13,161)
Chg in other current liabilities
Chg in Trade investments
Cash flow from investing activities
(b)
Debt raised/(repaid)
(4,649)
9,347
(11,123)
(4,500)
(7,000)
(15,366)
(1,332)
(23,706)
(16,277)
(20,161)
(2,777)
69
-
-
-
Dividend (incl. tax)
(15,199)
(14,019)
(16,823)
(21,028)
(23,365)
(2,384)
(1)
-
-
-
(20,360)
(13,951)
(16,823)
(21,028)
(23,365)
(635)
417
(1,022)
7,757
3,232
Other financing activities
Cash flow from financing activities
(c)
Net chg in cash (a+b+c)
Source: Company, Centrum Research Estimates
38
HMCL – Ratios
Y/E Mar
FY14
FY15
FY16E
FY17E
FY18E
Y/E Mar
FY14
FY15
FY16E
FY17E
FY18E
0.0
0.0
0.0
0.0
0.0
(0.7)
(0.5)
(0.5)
(0.6)
(0.6)
0.6
0.9
0.8
0.9
1.0
Gearing Ratio (x)
Growth Ratio (%)
Debt-equity
Revenue
6.5
8.9
3.7
12.6
14.0
EBITDA
9.4
(2.4)
27.1
10.5
13.4
(0.4)
13.1
31.3
10.8
12.6
Dividend per share
13.5
12.1
14.8
14.6
14.5
65.1
60.0
72.0
90.0
100.0
Dividend Payout (%)
EBIT Margin
9.1
10.1
13.3
13.0
12.9
72.1
55.2
53.7
60.6
59.8
Dividend Yield (%)
2.1
1.9
2.3
2.8
3.2
PAT Margin
8.4
9.3
11.0
10.9
10.7
Per share Ratios (Rs)
Basic EPS
105.6
119.5
156.9
173.8
195.8
38.5
Fully diluted EPS
105.6
127.2
156.9
173.8
195.8
161.1
154.3
179.0
199.4
225.2
280.4
327.6
400.2
468.7
547.4
P/E
21.5
20.7
18.8
18.2
16.2
P/BV
11.3
9.7
7.9
6.8
5.8
EV/EBITDA
12.2
14.9
13.0
12.4
10.8
Adj Oper CF / EV Yield
7.2
4.5
7.2
7.8
8.2
EV/Sales
1.6
1.8
1.9
1.8
1.6
PAT
Margin Ratios (%)
EBITDA Margin
Return Ratios (%)
ROE
39.8
41.9
43.1
40.0
Net debt-equity
Current ratio
Dividend
ROCE
38.0
41.8
42.8
39.5
37.8
Cash earnings per share
ROIC
113.9
89.7
78.8
78.7
79.4
Book value per share
Valuation (x)
Turnover Ratios (days)
Inventory Period
10
11
9
9
9
Debtors Period
13
18
16
16
16
Creditor Period
38.5
43.1
44.0
45.0
46.0
Net working capital
(27.3)
Source: Company, Centrum Research Estimates
39
(7.9)
(11.1)
(23.7)
(24.9)
Thank You
40
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