Bajaj Auto Ltd. 21 January 2013

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HOLD CMP: Rs.2052

Target Price: Rs.1951

Upside: -4.9%

Key Data

Size Segment Large Cap Market Cap (Rs, Cr.) 59,369 Market Cap (US$ mn) 11,031 O/S Shares, Cr. 28.94 Free Float Factor 0.71 Face Value, Rs 10 2 Wk Avg. Vol., NSE 359 52 Wk High/Low 1850/1407 Rs/US$ 53.82 Bloomberg BJAUT IN Reuters BAJA.BO NSE BAJAJ-AUTO BSE 532977 Source: Shah Investor’s Research

Shareholding Pattern

Q3 FY13 Q3 FY12

Promoter 50.0% 50.0%

FII 17.0% 16.1%

DII 8.3% 8.5%

Public 24.6% 25.4% Source: BSE, Shah Investor’s Research

Institutional Holding

Institutions Q3 FY13 Q3 FY12 Jai Hind Investments 3.5% 3.5% LIC 3.8% 3.1% Maharashtra Scooters 2.3% 2.3% Source: BSE, Shah Investor’s Research

Source: Ace Equity, Shah Investor’s Research Harsh Mehta (Research Analyst) harsh.mehta@sihl.in

Downward revision in sales volumes for FY13 & FY14; Maintain Hold

Bajaj Auto (BAL) revenue for Q3 FY13 was largely in our estimates. Revenue for BAL was higher than estimate at Rs.5,413 Cr (est. Rs.5,342 Cr.). led largely by higher export realization of Rs.46,462/unit. EBITDA for BAL is marginally above our estimate at Rs.1,012 Cr. (est. Rs.986 Cr.) and EBIDTA margin is around 18.7% (est. 18.5%). It is highest ever quarterly EBITDA for BAL. PAT for the BAL is Rs.819 Cr. (est. Rs.782 Cr.)

Key result highlights

Sales volumes: BAL’s volume in Q3 FY13 was up 4.9% YoY and 7.5% QoQ to

1,127,741 units due to festival season falling in Q3 of this FY against Q2 of last FY. Domestic motor-cycle segment was up 7% YoY; 125+ cc segment was down 3.9% over the same period. Sub-125 cc segment was up 22.1% YoY to 329,123 units mainly due to launch of Discover ST 125 cc. BAL has increased its overall market share in motor-cycle segment by 30 bps QoQ to 26%; market share in sub-125 cc segment decreased to 16.0% vs. 16.5% QoQ while in 125+ cc segment it increased to 64.5% from 62.6%.

Improvement in realization: Net realization for BAL is up 4.6% YoY and 2.5% QoQ

to Rs.47,060/unit mainly due to higher export realization which is up 3.5% YoY and 8.9% QoQ to Rs.46,462/units. Higher growth in exports realization is mainly due to richer product mix (higher share of 3-W’s and better motorcycle mix), weak rupee and price hike owing to a reduction in duty drawback on auto exports from 5.5% to 2%.This covers ~75% of the total benefits foregone on account of the duty drawback cut.

Sequential improvement in EBITDA margin: EBITDA for BAL in Q3 FY13 was up

2.8% YoY and 10.5% QoQ to Rs.1,012 Cr.; highest ever EBITDA margin. EBITDA margin is down 105 bps but up 29 bps to 18.7%. RMC as % of net sales were up 29 bps YoY but down 20 bps QoQ to 73.9%. Despite stable metal prices, raw material cost during the quarter remained largely under the control. Other expenditure was around Rs.336 Cr. vs. Rs.318 Cr. YoY and Rs.348 Cr.

Key conference call highlights

Company expects the near term domestic volumes to remain sluggish. However, expect recovery, both in the domestic and exports market, going forward.

Current inventory days stand close to their targeted level of around 30 days (including 6 days of inventory in transit).

BAL has seen slowdown in dispatches due to government/central bank related actions like increase in import duty/increase in interest rates. The African market continues to grow at the targeted pace (12% YTD), and growth in Egypt has picked up sequentially while other export markets remain flattish.

BAL is pushing existing international dealers to increase volumes by appointing sub-distributors even if it means lower margins for them.

Bajaj has gained market share by initiatives such as introducing warranties and training of mechanics.

In Sri Lanka, 3-W/2-W volumes remain low at ~7,500/ 5,500-6,000 per month versus the company’s average run-rate of 10,000/12,000 units. The 2-W run-rate has come down from 7,000 levels witnessed in Q2. RE60 will be first launch in Sri Lanka and then in India

As regards export realisations, the USDINR rate stood at 49.9 in Q3FY13 (versus 48.8 in Q2). The company has made hedges at an average rate of 53-54 for FY14 which is likely to drive realisations in FY14.

Brand-wise, BAL expects to earn margins in the mid-teens for Discover, 20%+ in Pulsar and double digit margins in the Platina brand. Eventual margins may depend on the product mix.

Growth of in 3-Ws was largely driven by higher sales of diesel 3-Ws (24% YoY) in the domestic market. Bajaj continues to enjoy market leadership with 89% share in the petrol/alternative fuel 3-W segment.

In the three-wheeler segment, Jaipur has opened permits for 4,000 new vehicles, while Hyderabad has opened 20,000 new permits.

Company has categorically denied any discounting / subventions in the local market.

With the help of Kawasaki, the company plans to initially enter the Indonesian market before moving into other South East Asian nations. With KTM, BAL has developed the platform and will be launching various new products (350cc and below) over the next few years.

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Bajaj Auto Ltd. 21 January 2013

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Assumption and Valuation

DCF based Valuation Rs. Cr. FY13E FY14E FY15E FY16E FY17E FY18E FY19E Terminal Value

Discounted Cash Flow 2,594 3,397 4,069 4,744 5,269 6,275 7,601 63,152

NPV of Cash Flow 2,351 2,792 3,032 3,205 3,227 3,485 3,827

NPV Enterprise Value 53,711

Source: Shah Investor’s Research

Terminal Growth Rate 4% Total Enterprise Value (Rs. Cr.) 53,711

Beta 0.55 Net Debt (Rs. Cr.) (2,737)

Risk Free Rate 8% No of Shares (Cr.) 28.94

Market Premium 6% Value per Share 1,951

Post Tax Cost of Debt 2.84%

Cost of Equity 10.40%

WACC 10.30%

Debt 1%

Equity 99%

Outlook and Valuation

We have revised downwards our FY13E EPS target to Rs. 111.6 (earlier Rs.114.4) due to subdued sales in domestic market while we have revised upwards our FY14E EPS to Rs.135.9 (earlier Rs.134.3) due to exports hedges made at an average of 53-54 for FY14 which is likely to drive export realization. We have also revised downwards our FY13E sales volume to 4,508,523 units (earlier4,799,923 units) and FY14E to 4,810,146 units (earlier 5,479,996 units) due to weak demand in domestic market and some government related actions in export markets. New product launches such Discover ST and Pulsar 200 has enabled BAL to hold its dominant market share when overall motorcycle industry has flat YTD (around 0.3%) and aggressive launch launches by Honda Motorcycle and Yamaha Scoters. BAL is better placed than its peers to mitigate weak domestic demand led new product launches at various price point and diversified geography mix in exports segment. However key upside to our sales volume estimate is improvement in sentiments and demand in domestic market. We estimate marginal boost for 2-W sales due to increase in fuel prices as it may shun some of the prospective new 4-W buyers. However the gain would be marginal.

The stock is currently trading at PE of 18.4x FY13E EPS of Rs.111.6 and 15.1x FY14E EPS of Rs.135.9. We estimate stock is highly valued as we remain cautious on volume growth in the domestic and export market.

We have revised upwards our target price to Rs.1,951 (earlier Rs.1,847) on DCF basis and maintain HOLD, with an investment horizon of 12 months and upside potential of -4.9%.

PE Band EV-EBITDA Band

Source: SIAM, Shah Investor’s Research Source: SIAM, Shah Investor’s Research

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500

1,000

1,500

2,000

2,500

5x 10x 15x 20x BAL

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2x 7x 12x 17x BAL

Bajaj Auto Ltd. 21 January 2013

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Exhibit 1: Trend in sales volume mix

Product Mix Q3 FY13 Q3 FY12 YoY Q2 FY13 QoQ

Motorcycle 986,263 946,705 4.2% 928,524 6.2%

Domestic 687,351 642,351 7.0% 601,876 14.2%

75-125 cc 329,123 269,525 22.1% 301,565 9.1%

125 cc+ 358,228 372,826 -3.9% 300,311 19.3%

Export 298,912 304,354 -1.8% 326,648 -8.5%

75-125 cc 168,568 186,756 -9.7% 206,584 -18.4%

125 cc+ 130,344 117,598 10.8% 120,064 8.6%

3-W 141,478 128,692 9.9% 120,684 17.2%

Domestic 64,168 52,134 23.1% 57,047 12.5%

Export 77,310 76,558 1.0% 63,637 21.5%

Total 1,127,741 1,075,397 4.9% 1,049,208 7.5%

Source: SIAM, Shah Investor’s Research

Exhibit 2: Trend in segment contribution

Product Mix Q2 FY13 Q2 FY12 YoY Q1 FY13 QoQ

Motorcycle 87.5% 88.0% (58) bps 88.5% (104) bps

Domestic 69.7% 67.9% 184 bps 64.8% 487 bps

75-125 cc 47.9% 42.0% 592 bps 50.1% (222) bps

125 cc+ 52.1% 58.0% (592) bps 49.9% 222 bps

Export 30.3% 32.1% (184) bps 35.2% (487) bps

75-125 cc 56.4% 61.4% (497) bps 63.2% (685) bps

125 cc+ 43.6% 38.6% 497 bps 36.8% 685 bps

3-W 12.5% 12.0% 58 bps 11.5% 104 bps

Domestic 45.4% 40.5% 484 bps 47.3% (191) bps

Export 54.6% 59.5% (484) bps 52.7% 191 bps

Source: SIAM, Shah Investor’s Research

Exhibit 3: Trend in net realization and EBITDA margin

Source: Company, Shah Investor’s Research

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20

42,7

58

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44,8

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43,9

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44

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39,4

98

40,8

60

44,8

92

42,5

14

41,8

15

42,6

61

46,4

62

19.4%

17.8%

18.8%

19.7% 19.8%

17.9%

18.4%

18.7%

16.5%

17.0%

17.5%

18.0%

18.5%

19.0%

19.5%

20.0%

30,000

35,000

40,000

45,000

50,000

55,000

Domestic Realization Export Realization EBITDA Margin

Bajaj Auto Ltd. 21 January 2013

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Exhibit 4: Trend in annual sales volume

Product Mix FY10 FY11 FY12 FY13E FY14E

2-W Sales

Motorcycle 2,506,865 3,387,040 3,834,277 4,008,563 4,110,204

Domestic 1,781,768 2,414,603 2,566,629 2,650,509 2,677,375

75-125 cc 928,882 1,159,187 1,128,410 1,292,502 1,118,350

125 cc+ 852,886 1,255,416 1,438,219 1,358,007 1,559,025

Export 725,097 972,437 1,267,648 1,358,054 1,432,829

75-125 cc 533,126 639,463 832,428 856,036 944,755

125 cc+ 191,971 332,974 435,220 502,019 488,074

Total 2-W Sales 2,511,753 3,387,067 3,834,277 4,008,563 4,110,204

3-W Sales - - - - -

Domestic 176,050 205,603 202,979 210,045 294,061

Passenger 164,502 201,246 195,141 206,266 285,244

Goods 11,548 4,357 7,838 3,779 8,818

Exports 164,909 231,281 312,176 289,915 405,881

Passenger 164,909 231,107 312,176 289,915 405,881

Goods - 174 - - -

Total 3-W Sales 340,959 436,884 515,155 499,960 699,942

Total Sales 2,852,712 3,823,951 4,349,432 4,508,523 4,810,146

Source: Company, Shah Investor’s Research

Exhibit 5: Domestic 2-W break-up

Source: SIAM, Shah Investor’s Research

Exhibit 6: Market share in sub-125 cc Motor-cycle segment

Source: SIAM, Shah Investor’s Research

0%

10%

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100%

Scooter Volumes Motorcycle Volumes

0%

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100%

Yamaha BAL HMSI TVS HMCL Suzuki

Bajaj Auto Ltd. 21 January 2013

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Exhibit 7: Market share in 125+ cc Motor-cycle segment

Source: SIAM, Shah Investor’s Research

Exhibit 8: Quarterly income statement

Particulars, Rs. Cr. Q3 FY13 Q3 FY12 YoY Q2 FY13 QoQ

Gross Sales 5,623 5,084 10.6% 5,101 10.2%

Less: Excise Duty 316 244 29.7% 284 11.5%

Net Sales 5,307 4,840 9.7% 4,817 10.2%

Other operating income 106 146 -27.7% 155 -32.1%

Total Revenue 5,413 4,986 8.6% 4,972 8.9%

Total Expenditure 4,401 4,002 10.0% 4,057 8.5%

EBITDA 1,012 984 2.8% 915 10.5%

EBITDA Margin % 18.7% 19.7% (105) 18.4% 29

Depreciation 41 32 27.8% 41 0.1%

EBIT 971 952 2.0% 874 11.0%

EBIT Margin % 18.3% 19.7% (138) 18.1% 14

Other Income 203 168 20.9% 167 21.9%

Interest 0 0 NA 0 NA

Exceptional Items - (59) NA - NA

PBT 1,174 1,061 -37.4% 1,041 12.8%

PBT Margin % 22.1% 21.9% 19 21.6% 51

Tax 355 266 33.5% 300 18.3%

Effective Tax Rate % 30.2% 25.1% 518 28.8% 142

PAT 819 795 2.9% 741 10.5%

PAT Margin% 15.4% 16.4% (101) 15.4% 5

EPS 28.3 27.5 2.9% 25.6 10.5%

Source: Company Data, Shah Investor’s Research

Exhibit 9: Quarterly expenditure analysis

Q3 FY13 Q3 FY12 YoY Q2 FY13 QoQ

Total No Units 1,127,741 1,075,397 4.9% 1,049,208 7.5%

Domestic Realization 50,012 44,874 11.5% 51,365 -2.6%

Export Realization 46,462 44,892 3.5% 42,661 8.9%

RMC as % of Net Sales 73.9% 73.6% 29 bps 74.1% (20) bps

EC as % of Net Sales 3.0% 2.9% 14 bps 3.2% (18) bps

OE as % of Net Sales 6.3% 6.6% (25) bps 7.2% (89) bps

RMC per Unit 34,769 33,119 5.0% 34,013 2.2%

EC per Unit 1,412 1,285 9.9% 1,460 -3.3%

OE per Unit 2,979 2,961 0.6% 3,316 -10.1%

Net Realization 47,060 45,006 4.6% 45,911 2.5%

Source: Company Data, Shah Investor’s Research

0%

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80%

100%

HMCL TVS BAL Suzuki HMSI Yamaha Royal Enfield

Bajaj Auto Ltd. 21 January 2013

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Exhibit 10: Standalone annual income statement Exhibit 11: Standalone balance sheet statement

Particulars, Rs. Cr. FY10 FY11 FY12 FY13E FY14E Particulars, Rs. Cr. FY10 FY11 FY12 FY13E FY14E

Gross Sales 12,118 16,830 19,827 22,560 25,569 Sources of Funds

Less: Excise Duty 610 933 947 1,145 1,125 Shareholder's Funds 2,929 4,911 6,041 7,589 9,673

Net Sales 11,509 15,897 18,880 21,416 24,444 Share Capital 145 289 289 289 289

Other Operating Income 303 501 649 520 491 Reserves & Surplus 2,784 4,621 5,752 7,299 9,383

Total Revenue 11,811 16,398 19,529 21,936 24,935 Total Loans 1,339 292 97 100 125

Total Liabilities 4,267 5,202 6,139 7,689 9,798

Total Expenditure 9,332 13,227 15,809 17,824 19,816 Application of Funds

EBITDA 2,479 3,171 3,720 4,112 5,119 Gross Block 3,379 3,391 3,394 3,744 3,994

EBITDA M argin % 21.0% 19.3% 19.0% 19.2% 20.9% Less: Depreciation 1,900 1,912 1,914 2,091 2,291

Depreciation 136 123 146 177 200 Net Block 1,480 1,478 1,480 1,652 1,703

EBIT 2,343 3,048 3,574 3,935 4,919 Capital WIP 42 70 12 12 12

EBIT M argin % 20.4% 19.2% 18.9% 18.4% 20.1% Investments 4,022 4,722 4,883 5,218 5,418

Other Income 232 577 608 616 624 Inventory 446 547 679 724 823

Interest 6 2 22 3 3 Sundry Debtors 239 360 423 483 549

Exceptional Items (162) 725 (134) - - Cash & Bank 101 229 1,654 2,837 4,819

PBT 2,407 4,348 4,026 4,547 5,540 Other Current Assets 139 618 297 329 374

PBT M argin % 20.9% 27.3% 21.3% 21.2% 22.7% Loans & Advances 657 1,219 1,623 1,865 2,119

Tax 708 1,008 1,022 1,319 1,607 Total Current Assets 1,584 2,973 4,675 6,237 8,684

Effective Tax Rate % 29.4% 23.2% 25.4% 29.0% 29.0% Current Liabilities 2,026 2,460 2,719 3,071 3,491

PAT 1,700 3,340 3,004 3,229 3,934 Provision 832 1,556 2,175 2,343 2,511

PAT M argin% 14.8% 21.0% 15.9% 15.1% 16.1% Total Current Liabilities 2,858 4,016 4,894 5,414 6,002

EPS 117.5 115.4 103.8 111.6 135.9 Net Current Assets (1,274) (1,043) (219) 823 2,682

Source: Ace Equity, Shah Investor's Research Total Assets 4,267 5,202 6,139 7,689 9,798

Source: Ace Equity, Shah Investor's Research

Exhibit 12: Standalone cash flow statement

Particulars, Rs. Cr. FY10 FY11 FY12 FY13E FY14E Exhibit 13: Key ratios

PBT 2,411 4,348 4,026 4,547 5,540 Y/E March FY10 FY11 FY12 FY13E FY14E

Adjustments: (Add) 307 266 341 190 213 Profitability %

Depreciation 136 123 146 177 200 EBITDA Margin 21.0% 19.3% 19.0% 18.7% 20.5%

Provision for Doubtful Debts 1 0 10 10 10 PAT Margin 14.4% 20.4% 15.4% 14.7% 15.8%

Amortisation of f ixed income securities (16) 16 19 - - RoCE 54.9% 58.6% 58.2% 51.2% 50.2%

Adjustments: (Less) 131 1,205 339 305 305 RoE 70.8% 85.2% 54.9% 47.4% 45.6%

Investment and Other Non-operating Income 123 366 327 296 296 Per Share Data (Rs.)

Interest on Government Securities 18 321 276 276 276 Adj. EPS 58.7 115.4 103.8 111.6 135.9

Profit/(Loss) on Sale of Investments, net 43 53 33 20 20 Adj. CEPS 94.6 55.8 102.3 106.7 131.2

Surplus on Sale of Assets 6 9 10 10 10 BVPS 101.2 169.7 208.8 262.3 334.3

Cash Flow befor Change in WC 2,587 3,409 4,028 4,432 5,448 Adj. DPS 20.0 40.0 45.0 50.0 55.0

(Increase)/Decrease in Current Assets (9) (1,260) (199) (379) (465) Valuation, x

Sundry Debtors 119 (91) (62) (60) (66) P/CEPS 21.7 36.8 20.1 19.2 15.6

Other Current Assets and Loans (20) (1,068) (6) (274) (300) P/BV 20.3 12.1 9.8 7.8 6.1

Increase/(Decrease) in Current Liabilities (877) (458) (298) (352) (420) EV/Sales 2.57 2.59 2.96 2.58 2.19

Liabilities (877) (458) (298) (352) (420) EV/EBITDA 12.3 13.4 15.5 13.8 10.7

CFO before Income Tax 3,437 2,588 4,108 4,405 5,403 Dividend Yield (%) 2.0% 2.7% 2.7% 2.4% 2.7%

Income Tax, Wealth Tax paid 700 974 1,148 1,319 1,607 Gearing Ratios

Net Cash from Operating Activities 2,737 1,613 2,960 3,086 3,796 Net Debt/Equity 0.4 0.0 (0.3) (0.4) (0.5)

(Increase)/Decrease in other investments, net (2,112) (608) (113) (335) (200) Net Debt/EBITDA (12.2) (13.3) (15.1) (13.1) (9.7)

Capital Expenditure (117) (201) (109) (350) (250) Working Capital Cycle (Days) (17) 6 6 5 5

Investment and other Non-operating Income: 123 366 327 296 296 Performance Ratios, x

Interest on Government Securities 18 321 276 276 276 Cash Flow -to-Revenue 1.6 0.5 1.0 1.0 1.0

Interest on Debenture and Bonds 41 0 0 0 0 Cash Return-on-Assets 0.8 0.5 0.9 0.9 1.0

Profit/(Loss) on Sale of Investments, net 43 53 33 20 20 Cash Return-on-Equity 1.1 0.4 0.5 0.5 0.4

Net Cash from Investing Activities (2,164) (623) (445) (389) (154) Cash-to-Income 0.2 0.1 0.2 0.1 0.2

Short term bank Loan taken/(repaid) (249) 134 (134) 3 25 DUPONT Analysis

Cash Credit from Banks 13 11 (24) - - PAT/PBT 0.7 0.8 0.7 0.7 0.7

Interest on (6) (2) (22) (3) (3) PBT/EBIT 1.0 1.4 1.1 1.2 1.1

Repayment of Fixed Deposits (0) - - - - EBIT/Total Income 0.2 0.2 0.2 0.2 0.2

Dividend Paid (317) (578) (1,154) (1,302) (1,447) Total Income/Total Assets 3.5 4.8 5.8 6.1 6.4

Corporate Dividend Tax Paid (54) (96) (188) (211) (235) Total Assets/Total Equity 1.4 0.9 0.6 0.5 0.4

Net Cash from Investing Activities (2,164) (623) (445) (389) (154) Source: Ace Equity, Shah Investor's Research

Net Change in Cash Balance (35) 129 950 1,183 1,982

Opening Balance 137 100 229 1,654 2,837

Cash & Cash Equivalent 102 229 1,179 2,837 4,819

Source: Ace Equity, Shah Investor's Research

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