Hero Honda - JM Fin Initiation - June 2010

Two Wheeler Industry 15 June 2010
Contents
Two–wheeler Industry: Limited players to share a growing pie 3

Poised to grow at a CAGR of 12-13% 4
Insulated from rise in interest rates 8

Two wheelers and cars to co-exist 9
Scooters to outperform motorcycles 11
Up-trading to gain momentum 12
Market share to change hands 12
Players one of the most efficient 14
Bajaj Auto: Best play on emerging markets 15
Hero Honda: The best is behind us 21
TVS Motors: New beginning 27
JM Financial Institutional Securities Private Limited Page 2

15 June 2010
India | Automobiles | Initiating coverage
Two–wheeler Industry
Pramod Kumar
pramod.kumar@jmfinancial.in
Limited players to share a growing pie Tel: (91 22) 6630 3019
Mitakshi Ashar
Poised to grow at a CAGR of 12-13%: Supported by a) rising income levels, mitakshi.ashar@jmfinancial.in
Tel: (91 22) 6630 3079
b) young population profile, c) increased demand from rural India, d) strong
replacement demand, and e) huge export potential.
Recommendations
Two-wheelers and cars to co-exist: We believe the Indian market will not
follow the western trend of motorisation wherein people bypassed two- Company
Bajaj Hero TVS
Auto Honda Motors
wheelers for cars as their first mode of motorised transport. Also, we do not
Rating BUY HOLD BUY
expect existing users to replace their two-wheelers with cars. We expect two-
B'berg Ticker BJAUT IB HH IB TVSL IB
wheelers and cars to co-exist harmoniously with the former being the daily
workhorse. In addition to the cost advantage, lack of adequate road FY11E EPS (Rs) 152.5 123.1 9.5
infrastructure and ease of commuting makes two-wheelers irreplaceable. FY12E EPS (Rs) 182.8 133.4 13.3
Limited players to share a growing pie: Unlike the car market this industry FY11E PE (x) 15.0 16.3 10.9
is not exposed to competition onslaught by new players. All global majors FY12E PE (x) 12.5 15.1 7.8
have been operating in India for at least a decade. About 95% of the market is
TP (Rs) 2,745 1,867 148
shared between four players, of whom two are home grown companies (Bajaj
CMP (Rs) 2,283 2,009 103
and TVS). Consequently, the industry enjoys better pricing power and this is
reflected in the 46% growth in per vehicle operating profit for the top three Upside/Downside (%) 20.2 -7.1 43.7
listed players in FY10 against a revenue growth of 30%. Source: Bloomberg, JM Financial
Expect scooters to outperform motorcycles: Scooters (c.15% of total two- Relative Performance
wheelers) are expected to outperform motorcycles (80% of total two-wheelers)
HH BJAUT TVSL SENSEX
by 2% for the next few years driven by a) higher number of female users, b) 5.00
rising congestion in cities, c) multiple purpose usage, and d) unisex appeal. 4.50
4.00
3.50
Up-trading to gain momentum: We expect up-trading, not in the narrow 3.00
sense of cc, to gain momentum as new launches like Bajaj’s Discover 150 and 2.50
Honda Twister attract executive bikes’ customers, which are c.60% of the 2.00
1.50
current motorcycle population. This up-trading will result in better 1.00
1-Apr- 1-Jun- 1-Aug- 1-Oct- 1-Dec- 1-Feb- 1-Apr- 1-Jun-
contribution and profitability for companies. 09 09 09 09 09 10 10 10
Market share to change hands: We expect HH to continue to cede market

Source: Bloomberg, JM Financial
share to a resurgent competition (Bajaj Auto and TVS Motor) and due to entry
of Honda Motorcycles and Scooters (HMSI) into the executive motorcycle
market. We expect HH to register 10% CAGR during FY10-FY12E against
estimated industry growth of 13%.
Industry one of the most efficient: The three listed players on an aggregate
basis, enjoy a) RoIC of c.70%, b) negative working capital, c) sales/net fixed
assets turnover of 6x, and d) debt free balance sheets.
Available at a discount to the broader market: Despite all the inherent

strengths and a comparable earnings growth (16% vs 17% CAGR for FY10-
FY12) the two-wheeler stocks are trading at a high discount to the broader
market multiple of 17x FY12E. This sector compares very well with the FMCG
space on most counts like revenue visibility and efficiency and scores very
high in terms of competition intensity, but is available at a steep discount. We
expect the valuation gap to narrow in favour of two-wheeler stocks.
Initiate coverage with BUY rating on Bajaj Auto (TP of Rs2,745), TVS
Motor (TP of Rs148) and a HOLD rating on Hero Honda (TP of JM Financial Research is also available on:
Bloomberg - JMFR <GO>, Thomson Publisher & Reuters.
Rs1,867)Exhibit
Please see important disclosure at the end of the report
JM Financial Institutional Securities Private Limited

Two–wheeler Industry 15 June 2010
Poised to grow at a CAGR of 12-13%

Rising income levels to improve penetration: India compares very poorly
with most emerging markets in terms of two-wheeler penetration (see exhibit
1). With rising incomes, penetration levels are expected to follow other
emerging markets. We do not expect India to follow the Chinese path as most
factors that harmed the two-wheeler market in China - a) restriction on
gasoline two wheelers, b) ban on entry of two wheelers in the top cities and c)
very efficient public transport - are not applicable for India.
Exhibit 1. Penetration level vis-à-vis per capita income

China at 1.8x (excluding electric), Indonesia at 3.2x, Vietnam at 5x of India
60
Taiwan
50
Penetration (%)
40
Malay sia
30 Vietnam Thailand
20 Indonesia
10 Brazil
India China
0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
GDP percapita PPP ($)
Source: Company, JM Financial
Huge disparities between urban and non-urban penetration and scarce

penetration in the lower income groups further strengthen growth prospects
of the industry. (see exhibit 2).
Exhibit 2. Household penetration of motorcycles income wise

Huge potential as household income increases in India.
70.0
59.8 60.0
60.0 53.4
50.0 42.9
40.0
(% )
30.0
21.1
20.0 16.1
10.0 2.3
-
All India Upto Rs5,001 - Rs8,001 - Rs16,001 - Rs25,001 - Over Rs
Rs5,000 Rs8,000 Rs16,000 Rs25,000 Rs50,000 50,000

Young population profile supports growth: c.70% of India’s population is

between the 15 to 49 age group, largely the target audience for two-wheelers.
Moreover, as per NASSCOM, c.4.5 mn people are expected to graduate in
2010 and this number is expected to grow every year. Age-wise review for
motorcycles (see exhibit 3) shows that penetration levels below 40 years is
below the national average. This age group is the biggest growth driver for
the industry as it forms bulk of the working group which has the buying
power.
Exhibit 3. India’s age mix and age wise penetration of motorcycles

Age profile favours two-wheelers demand
12-14 years
50 years+ 10%
2006 2008
19% 25
15-19 years 20.5

13% 20 18.5 17.9
16.1 15.8 15.6 15.6
14.8
15 13.7
13.0 12.6
11.6 12.0
40-49 years
14% 10 9.2
7.5
5.9
5
20-29 years
24%
0
30-39 years All India Upto 25 26-30 31-35 36-40 41-45 46-50 50+
20%
Rising prosperity in rural India a big opportunity: Strong income growth in

rural India, due to higher minimum support prices (MSP) for crops and
government spending, in the recent years is resulting in a big catch-up for
rural customers with their urban counterparts for consumption (see exhibit
4). Two-wheelers being the cheapest mode of motorised mobility are being
lapped up by rural customers, resulting in not only a broad-based growth but
also reducing exposure to global economic volatility. Rural India, which
accounts for c.65% of population share, accounted for less than 40% of total
two-wheeler sales in FY08. Growth in the rural markets for the past three
years has been higher than in the urban markets, driving companies to
increase their rural footprint. Despite this, penetration in rural markets is
almost one-third of the penetration in the bigger cities (ex-top 7 cities) (see
exhibit 5).

Exhibit 4. Trend in MSPs

Increase in MSPs driving farmer and rural prosperity
Support Prices (Rs/quintal) FY04 FY06 FY08 FY10 FY11
Paddy (common) 550 570 745 1,000 1,000

Paddy (Grade A) 580 600 775 1,030 1,030
Jowar (Hybrid) 505 525 600 840 880
Jowar (Maldandi) - - 620 860 900
Bajra 505 525 600 840 880
Maize 505 540 620 840 880
Ragi 505 525 600 915 965
Arhar (tur) 1,360 1,400 1,590 2,300 3,000
Moong 1,370 1,520 1,740 2,760 3,170
Urad 1,370 1,520 1,740 2,520 2,900
Cotton - medium staple 1,725 1,760 1,800 2,500 2,500
Cotton - long staple 1,925 1,980 2,030 3,000 3,000
Groundnut in shell 1,400 1,520 1,550 2,100 2,300
Sunflower seed 1,250 1,500 1,510 2,215 2,350
Soyabean (Black) 840 900 910 1,350 1,400
Soyabean (Yellow) 930 1,010 1,050 1,390 1,440
Sesamum 1,485 1,550 1,580 2,850 2,900
Nigerseed 1,155 1,200 1,240 2,405 2,450
Source: Business Line
Exhibit 5. Motorcycle penetration as per population strata

Low penetration in towns and rural areas a huge engine of growth
40 2006 2008 36.8

35 33.3
30.9
28.4 27.7
30
25 22.0 22.9
18.8
(%)
20 16.1
15 13.0
10.1
10 8.2
0
Rural areas Tow ns 1-10 lakh cities Other 1 mn Top 7 metro All India
+cities cities
Higher first time buyers to feed strong replacement demand: With

increased demand from the rural markets many first time users are joining
the two-wheeler bandwagon. For 2009, the first time buyers are expected to
have accounted for 58% of motorcycle sales against 52% in 2008 (see exhibit
6). Such sharp improvement happened despite finance constraints, which
hampered demand from first time buyers in the urban markets. We expect
contribution from first time buyers to increase further due to the very low
penetration in rural India. Strong increase in first time buyers will result in big
replacement opportunity in the future as normally the replacement cycle is
around 4 years.

Exhibit 6. First time and repeat buyers trend

Rural India driving first time purchases
100
90
80
70
60
(%)
50
40
30
20
10
0
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
First time buyers Repeat buyers
Huge export potential: Exports out of India have grown at a CAGR of 32%
since FY00 to 1.1 mn units in FY10 against a growth of 9.7% in domestic sales
to 9.4 mn units. While this growth seems spectacular it pales significantly
when compared to the 10 mn units exported by China (see exhibit 7). China
is currently the biggest two-wheeler manufacturer in the world with exports
higher than domestic (gasoline two-wheelers) sales. China accounts for close
to 70% of the world’s two-wheeler market.
Exhibit 7. Export trend of China and India

Huge potential for India to catch up
12.0
China India
10.0
8.0
Millions
6.0
4.0
2.0
0.0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
The product profile for India and China is similar with both being big players
in the sub 150 cc market (see exhibit 8). However, a big negative for China,
and thus a positive for India, is an inherent association of low quality and
price with Chinese products. With increasing per capita income of developing
nations customers will definitely look at quality options which can be an
advantage for India. This trend has already started in Africa where Indian
players (Bajaj Auto and TVS Motor), who have been relatively new to the

market, have been able to raise market share despite cheaper offerings from
the Chinese. This is due to better quality products which are less prone to
breakdown. Bajaj Auto claims it has market share of over 15% in Nigeria,
Africa’s biggest market, and was able to increase prices by 5% in November
2009, commanding a big premium over Chinese competition. The export
opportunity is expected to be bigger than domestic in the long-term, opening
up a huge growth frontier for existing players. Africa and Asia will remain the
key export markets.
Exhibit 8. Exports by region

China has exposure to America and Europe
China India
Nigeria, 15% Nigeria,
18%
Others,
Argetina, 6% 31%
Brazil, 5%
Others, 50% Sri lanka,
13%
America, 5%
7
Ukraine, 5%
Keny a, 5%
Mexico, 3%
Banglades
Indonesia, 4% Nepal, 5% h, 11%
Germany, 2% Italy, 2% Japan, 1% Phillipins,
Egypt, 2% Columbia,
6% 11%
Insulated from rise in interest rates

Currently customers who seek to avail financing for two wheelers have to pay an
interest of c.24% and make a down-payment of c.25%. Despite such stringent
costs financing is not easily available as major financiers like ICICI Bank have
exited the market. Other financiers who are active in the market have been
selective in lending by rejecting over 50% of loan applications. Credit quality has
also improved due to the CIBIL database (which tracks the credit history of
borrowers). Currently c.35% of two wheelers is financed as against c.75% in FY07.
This reduced dependence on financing and very high interest rates makes the
sector less susceptible to rise in interest rates.

Two wheelers and cars to co-exist

We believe that the Indian market will not follow the western trend of
motorisation wherein people bypassed two wheelers for cars as their first
mode of motorised transport. Also, we do not expect existing users to
replace their two-wheelers with cars. We expect two-wheelers and cars to co-
exist harmoniously with the former being the daily workhorse. In addition to
the cost advantage (see exhibit 9), lack of adequate road infrastructure and
ease of commuting makes two-wheelers irreplaceable.
Exhibit 9. Comparison between cheapest motorcycle (HH CD Dawn) and car

(Tata Nano) - Two wheelers are much more efficient on all counts
5.0
4.4 4.5
4.5
4.0 4.0
4.0
3.5
3.0
3.0
(x)
2.5
2.0
1.5
1.0
0.5
0.0
Pric e Insuranc e EMI Cost/ km Maintenanc e
Source: JM Financial
Limited players to share the growing pie: Unlike the car market, this
industry is not exposed to competition onslaught by new players. All global
majors have been operating in India for at least a decade. Over 90% of the
market is shared between four players, of whom two are home grown
companies (Bajaj Auto and TVS Motor).
Between FY01 and FY10 the combined market share (see exhibit 10) of the
top four players increased to 95% from 80%, marginalising even Yamaha.
However, in the car industry, market leader Maruti Suzuki has lost market
share and new players have taken over considerably. With limited number of
players, the industry enjoys better pricing power and this is reflected in the
46% per vehicle operating profit growth for the top three listed players in
FY10 against a revenue growth of 30%.

Exhibit 10. Comparison of market share

China has exposure to America and Europe. Entry of new players a threat in car market.
FY01 – cars FY01 – Two wheelers
Ho nda Others
Others
To yo ta 2% Suzuki 16%
14%
0% 0%
Fo rd
Hero Ho nda
3% Yamaha
28%
4%
GM
HM SI
1%
0%
Tata
8% M aruti
58%
Hyundai TVS
14% M o to rs
23% B ajaj A uto
29%
FY10 – cars FY10 – Two wheelers

Yamaha
To yo ta 2% Suzuki
Fo rd
1% 2%
2% Ho nda Others
4% 1%
Others
HM SI
4%
GM 13%
5%
Hero Ho nda
Tata M aruti
49%
13% 50% TVS
M o to rs
14%
Hyundai
B ajaj A uto
21%
19%
Source: SIAM, JM Financial
Chinese or other Asian players not a threat

We do not expect the Chinese or other Asian players to dent the existing
market as entry barriers in the two-wheeler market are very high due to the
extremely competitive environment and very demanding customers.
Incumbent players offer superior products at competitive prices, which these
players have been unable to do so far. Companies like Hyosung Group of
Korea and SYM of Taiwan have attempted in vain to make a mark in the Indian
market. Even the much hyped Mahabharata Motors, a JV between Universal
Group of India and Indonesia’s Salim Group, has not been able to attract
buyers.

Scooters to outperform motorcycles

The scooter segment is in a sweet spot as industry wide demand outstrips
supply. Thanks to Honda Motorcycle and Scooters (HMSI) thrust, the segment,
which was once declining, is growing rapidly (see exhibit 11).
Exhibit 11. Scooter sales trend

Launch of Honda Activa revived the scooter market
1.6
1.4
1.2
1.0
Millions
0.8
0.6
0.4
0.2
-
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Source: SIAM, JM Financial
Switch to gearless revived the segment: Shift to the gearless technology

revived the scooter segment, which was other wise loosing out to motorcycles
on account of convenience and fuel efficiency. Shift to gearless made scooters
very convenient to ride, making them popular in crowded cities and markets.
A big play on empowerment of women: Contrary to general perception,

over 70% of scooter users in India are males. This shows there is a huge
opportunity to increase sales to female users as they get more empowered.
Progressive states like Delhi, Punjab and Gujarat have household scooter
penetration of over 20%. However, remaining states have penetration levels
below 10% with Eastern states under 5%. With increasing economic growth
and thrust on women empowerment, we expect these states to see a steady
increase in scooter demand.
Strong demand and pricing environment: Unlike other segments, the

scooter sector enjoys higher demand than the collective industry capacity.
Markets like Mumbai have waiting period of over 3 months for popular
brands like Activa, and HMSI is believed to have dealer orders backlog of over
300,000 units. This has resulted in strong pricing environment in the
segment as players are scrambling to meet demand.
Versatility, unisex appeal biggest USPs: A scooter, unlike motorcycle, due

to its structure, doubles up as a utility vehicle which can be used to carry a
wide array of goods. Scooters carrying anything from luggage to LPG cylinder
are a common sight in India, making them very popular with households and
businesses. What further boosts desirability of a scooter is its ability to cater
to both men and women across a much wider age group.

Up-trading to gain momentum

We expect the Indian two-wheeler market to move up the value chain faster
(see exhibit 12) as rising income levels and media penetration increase
demand for premium bikes which satisfy the aspirational need of the
customer. The manufacturers are doing their bit to expedite the transition by
introducing premium features in the commuter executive bikes and by
bringing down the entry level price of powerful bikes. Recent examples
include HMSI’s launch of Twister, a 110 cc bike with premium features, in the
executive segment and BJAUT’s launch of a 150 cc variant of Discover at a
price of Rs46,000. BJAUT’s launch is a significant one as it’s the first premium
bike under Rs50,000 and is an attempt to democratise performance biking.
Exhibit 12. Trend in motorcycle category share

Entry-to-Executive-to-Premium transition to gather steam
70
Entry Executive Premium
60
50
40
(%)
30
20
10
0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Source: Compnany, JM Financial
Market share to change hands

We expect the churn in market share between the top four players in the
motorcycle market to continue in FY11. HH, the market leader will further
cede ground to a resurgent competition (Bajaj Auto and TVS Motor) which has
launched new models in the key executive segment which accounts for c.60%
of motorcycle demand and c.75% of HH’s sales.
HH ceding marketshare gifted to it by competition in FY08: The rise in

HH’s marketshare in FY08 was due to wrong strategies (of exiting the 100 cc
segment) adopted by home grown competitors (BJAUT and TVSL). This gave
HH a free run for over two years during which it increased its marketshare
from 48% to a high of 64% in August 2010.
BJAUT’s course correction has paid big dividends: Having lost market
share for two years the competition realised their mistake and started
focusing on the 100 cc segment again. BJAUT re-introduced the Discover
brand with a 100 cc engine in August 2009 and since then has been able to
regain market share from HH (see exhibit 13). Discover 100 has rapidly
grown to become the third largest selling brand in the industry, quashing the
myth that HH’s dominance in this segment is invincible.

TVSL and HMSI also increasing market share: TVSL and HMSI have also
introduced new products in the executive segment, increasing pressure on
HH. TVSL launched Jive, the only bike in the market with an automatic clutch,
with an aim to create a niche in the voluminous executive segment. This
vehicle, due to its technology, will take some time to become popular. HMSI’s
Twister, a 110 cc bike, is targeted towards the higher end of the executive
segment which is dominated by HH’s Passion.
Exhibit 13. Trend in motorcycle market share

New launches driving up marketshare for the challengers
BJAUT HH TVSL HMSI
70
60
50
40
(%)
30
20
10
0
May09
Jun09
Jul09
Oct09
Nov09
Dec09
Jan10
Feb10
Mar10
FY04
FY05
FY06
FY07
FY08
FY09
Sep09
Aug09
Apr09
Source: Compnany, JM Financial

Players one of the most efficient

Compares very well with FMCG, one of the most efficient sector, and stocks
like BJAUT and TVSL available at half the multiples.
Exhibit 14. Comparison between Two Wheeler and FMCG companies

Please note: PEG = FY11E PE multiple / FY10-FY12E EPS CAGR.
EBITDA Margins (%) PAT Growth (%)
25 FY11E FY12E FY11E FY12E
100
20 90
80
15 70
60
10 50
40
30
5 20
10
0 0
HH B JA UT TVSL HUL Dabur HH B JA UT TVSL HUL Dabur
ROCE (%) ROE (%)

FY11E FY12E FY11E FY12E
120 90
80
100
70
80 60
50
60
40
40 30
20
20
10
0 0
PE (x) PEG (x)

FY11E FY12E
35 3.5
30 3.0
25 2.5
20 2.0
15 1.5
10 1.0
5 0.5
0 0.0
P/BV (x) EV/EBITDA (x)

FY11E FY12E FY11E FY12E
20 25
18
16 20
14
12 15
10
8 10
6
4 5
2
0 0

15 June 2010
India | Automobiles | Initiating Coverage

Price: Rs2,283
BUY
Bajaj Auto | BJAUT IB Target: Rs2,745 (Mar’11)
Pramod Kumar
Best play on emerging markets Tel: (91 22) 6630 3019
Mitakshi Ashar
Strong volumes driven by domestic resurgence and export ramp-up: We mitakshi.ashar@jmfinancial.in
Tel: (91 22) 6630 3079
expect BJAUT’s volumes CAGR of 22% in FY10-FY12E. Success of recent
launches like Discover 100 and 150 and Pulsar 135 in the domestic market,
and ramp-up in exports to Africa will drive volumes.
Key Data
Reduced dependence on three-wheelers: Strong growth in Discover and Market cap (bn) Rs 330.4 / US$ 7.1
Pulsar has enabled BJAUT to drastically reduce its dependence on the three- Shares in issue (mn) 145
wheeler segment. Improving motorcycle mix and exports have enabled the Diluted share (mn) 145
company to post margins over 20%. 3-mon avg daily val (mn) Rs 524.9 / US$ 11.3
52-week range 2315.0 / 906.6
Operating margins to remain at c.20% in FY10-12E: We expect the company
Sensex/Nifty(14/06/2010) 17,338/5,198
to hold on to the 20% margin mark due to strong operating leverage, 46.4
Rs/US$
improved motorcycle mix and ramp-up in tax haven operations. We expect
PAT CAGR of 21% in FY10-FY12E aided by strong operating performance and Daily Performance
higher other income. Bajaj Auto
2500 250%
Offers multiple triggers: Amongst all the two-wheeler names, BJAUT offers 2000 200%
the highest triggers right from launch of KTM bikes to entry into the car 1500 150%
market, with Renault-Nissan which have not been accounted for in our 1000 100%
estimates. 500 50%
0 0%
Best placed to tap the huge export opportunity: We believe BJAUT is best
Jan-09
Mar-09
Jul-09
Sep-09
Jan-10
Mar-10
May-09
Nov-09
May-10
placed to tap the export opportunity due to its strong overseas presence, tie-
Bajaj Auto Relative to Sensex (RHS)
up with KTM and an operational plant in China. For the developed world the
company will use the KTM brand using India as the export hub. % 1M 3M 12M
Absolute 4.5 24.0 126.8
Attractive valuations, recommend BUY: In addition to a net cash of Relative* 2.5 23.0 113.0
c.Rs33bn and negative working capital, the company enjoys RoIC and RoE of * To the BSE Sensex
c.150% and c.70% respectively. Based on a 15xFY12E core EPS (PEG of 0.7x) Shareholding Pattern (%)
and the cash value we arrive at a target price of Rs2,745 (Rs2,517 and Q4FY09 Q4FY10
Rs228). The stock is attractively priced at 12.5x FY12E EPS with a PEG of 0.6x. Promoters 49.6 49.6
We initiate coverage with a BUY rating. FII 13.8 17.8
DII 9.9 6.5
Exhibit 15.
Public / others 26.6 26.1
Exhibit 15: Financial Summary (Rs mn)

Y/E March FY09 FY10E FY11E FY12E
Net sales 88,080 119,210 149,699 178,374
Sales growth (%) -2.0 35.3 25.6 19.2
EBITDA 12,006 25,917 29,885 35,313
EBITDA (%) 13.6 21.7 20.0 19.8
Adjusted net profit 8,011 18,118 22,063 26,447
EPS (Rs) 55.4 125.2 152.5 182.8
EPS growth (%) -3.3 126.2 21.8 19.9
ROCE (%) 27.3 54.6 58.0 58.8
ROE (%) 48.9 82.4 63.4 50.6
PE (x) 8.9 18.2 15.0 12.5
Price/Book value (x) 4.2 12.2 7.8 5.3
EV/EBITDA (x) 5.6 12.0 9.9 8.0 JM Financial Research is also available on:
Source: Company data, JM Financial. Note: Valuations as of 14 / 06 / 2010

Bajaj Auto 15 June 2010
Strong volumes driven by domestic resurgence and export ramp-up: We

expect BJAUT’s volumes CAGR of 22% in FY10-FY12. Success of recent
launches like Discover 100 and 150 and Pulsar 135 will enable the company
to grow its domestic sales at a CAGR of 23%, beating the industry growth by a
wide margin, and ensure further marketshare gains. Growth in exports (33%
of volumes) of 18% will be driven by ramp-up in the African continent (c.45%
of exports) and pick-up in demand from the Asian markets (c.35% of exports).
Reduced dependence on three-wheelers: Strong growth in Discover and

Pulsar (see exhibit 16) has enabled the company to drastically reduce its
dependence on the three wheeler segment for profitability. These two brands
accounted for c.33% of overall volumes in FY09, which increased to c.42% in
FY10, and we believe it will further improve to c.58% in FY11. This will enable
the company to post strong margins despite lower contribution from three-
wheelers (estimated to be 10.7% of overall volumes against 12.0% in FY10).
Exhibit 16. Mix and margin trend

Improving motorcycle mix rather than three-wheelers driving margins
Economy Executive Premium Three wheelers Opearting margins
120 25
100
20
Maket share (%)
80
Margins (%)
15
60
10
40
5
20
- -
2FY09 3FY09 4FY09 1QFY10 2QFY10 3QFY10 4QFY10
Operating margins to remain at c.20% in FY10-12: We expect the company

to hold on to the 20% margin mark due to strong operating leverage,
improved motorcycle mix and ramp-up in tax haven operations. All these will
help the company mitigate the impact of lower contribution from three-
wheeler segment and higher commodity prices.
Strong R&D to sustain product excitement: BJAUT has made rapid strides
since 2001, when it launched Pulsar - its first indigenous bike, to become the
product leader in the Indian market. This has been achieved by a very strong
R&D headed by Dr. Abraham Joseph. Renault-Nissan choosing BJAUT as the
lead partner in the three way car JV is the best acknowledgement of its R&D
prowess. We expect BJAUT to continue to be ahead of peers when it comes to
technology and launches. The company has already done some disruptive
launches like the new Pulsar 220 and Discover 150, further cementing its
position as the price and product leader.

Offers multiple triggers: Amongst all the two-wheeler names, BJAUT offers
the highest triggers right from launch of KTM bikes to entry into the car
market with Renault-Nissan. First of the Made in India KTM bikes will be rolled
out in Europe and other markets by end-2010 followed by the Indian market
in 2011. These 125 cc bikes will carry premium pricing in-line with the KTM
brand, resulting in huge profitability due to the low cost of manufacturing in
India. These bikes are expected to do well due to the relaxed license
requirement in Europe for sub-250 cc street bikes. In India these bikes will
halve the entry price point for performance bikes, expanding the market
considerably. The small car is scheduled to be launched in 2012 and is
expected to be branded as Nissan/Renault around the world while BJAUT will
do the manufacturing. The management is quite confident of maintaining
margins at c.20% even in the car business and claims that the project cost is
1/7 the amount normally spent by big car companies on a similar project. We
expect both ventures to be very promising; however, we have not factored in
any of these in our estimates yet, exposing our earnings to an upside risk.
Strong R&D to sustain product excitement: BJAUT has made rapid strides
since 2001, when it launched Pulsar - its first indigenous bike, to become the
product leader in the Indian market. This has been achieved by a very strong
R&D headed by Dr. Abraham Joseph. Renault-Nissan choosing BJAUT as the
lead partner in the three way car JV is the best acknowledgement of its R&D
prowess. We expect BJAUT to continue to be ahead of peers when it comes to
technology and launches. The company has already done some disruptive
launches like the new Pulsar 220 and Discover 150, further cementing its
position as the price and product leader.
Best placed to tap the huge export opportunity: We believe, BJAUT is best
placed to tap the export opportunity due to its strong overseas presence, tie-
up with KTM and an operational plant in China. The company’s exports have
witnessed a CAGR of 33% between FY06 and FY10 and have grown 25x since
FY01 (see exhibit 17). BJAUT has been focusing on the African markets in the
last three years and has grown there rapidly to make it the company’s largest
overseas market.
Exhibit 17. Trend in exports

Management wants to grow exports from 30% of volumes to 50%
900,000
800,000
CAGR-33%
700,000
600,000
Units
500,000
400,000
300,000
200,000
100,000
0
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10

The African opportunity – India of 1980s: The world’s second most populous
continent is the final frontier for the two-wheeler companies as it offers a
market, as big as India, in terms population with abysmally low penetration
levels (below 2%). What brighten prospects further are the low income levels,
poor infrastructure and smaller regional markets which favor the two-wheelers.
Currently c.2.5mn units are sold in the African continent with Nigeria being the
biggest market with c.1mn units. Bulk of the demand is from the taxi segment
(motorcycles are converted to three-wheelers by attaching a trailer). This market
is predominantly occupied with entry level bikes, which are expected to be very
rugged to handle the overloading and bad roads. Chinese have been the biggest
exporters to Africa at the expense of refurbished Japanese exports. Very low
pricing by the Chinese rapidly eroded demand for the refurbished Japanese
exports. However, quality has been a big issue with the Chinese bikes, especially
for people who use them as taxis. This is where the Indian players (BJAUT and
TVSL) have been able to rapidly establish themselves as they offer superior
quality at a reasonable premium. BJAUT has quickly grown to become the largest
non-Chinese player and commands c.50% price premium over the Chinese entry
level bikes. With rising income levels, customers are expected to upgrade to
quality bikes, which is again an advantage for the Indian manufacturers.
Eyeing Brazil and China: The company will be entering major markets like
China (largest market) and Brazil (fourth largest market) in the next few years
after tapping the African continent. The company already has a plant in China
which it is using for sourcing non-engine parts for exports to Africa. For the
Brazilian market, development of flex engines (which can work with high
ethanol content) is a requirement which the company can easily develop.
KTM alliance- blend of price leverage and cost advantage: BJAUT’s alliance
with KTM is a great marriage of frugal engineering and premium branding.
While BJAUT will develop and manufacture the new bikes KTM will sell them in
the North America and Europe market. This alliance is mutually beneficial as
it improves KTM’s profitability and provides BJAUT access to developed
markets. BJAUT currently holds 35% equity in KTM and we expect it to
become the majority owner in the future and further integrate KTM
operations into the company. The company will be launching the new 125 cc
bikes – the first from the alliance, by year-end (see exhibit 18)
Exhibit 18. 125 cc KTM bikes – Race and Stunt variants

The company will be working on bigger bikes as well

Key assumptions
Exhibit 19. Volumes and Realisations assumption
(Units) FY10 FY11E YoY (%) FY12E YoY (%)
Volumes 2,852,632 3,653,077 28.1 4,221,289 15.6
Motorcycles 2,506,845 3,257,039 29.9 3,787,288 16.3
3 Wheelers 340,936 391,187 14.7 431,030 10.2
Domestic 1,961,534 2,615,285 33.3 2,986,300 14.2
Motorcycles 1,781,748 2,423,177 36.0 2,786,654 15.0
3 Wheelers 176,027 188,349 7.0 197,766 5.0
Export 891,098 1,037,792 16.5 1,234,990 19.0
Motorcycles 725,097 833,862 15.0 1,000,634 20.0
3 Wheelers 164,909 202,838 23.0 233,264 15.0
Realisations (Rs) 41,789 40,979 -1.9 42,256 3.1
Valuations
In addition to surplus cash (net of PV of sales tax deferral loan) of c.Rs33bn
and negative working capital, the company enjoys RoIC and RoE of c.150%
and c.70%, respectively. Based on a 15xFY12E core EPS (PEG of 0.7 x) and the
cash value we arrive at a target price of Rs2,745 (Rs2,517 and Rs228). The
stock is attractively priced at 12.5x FY12E EPS with a PEG of 0.6x. We initiate
coverage with a BUY rating.
Key risks
Key downside risks are: a) Poor monsoons, b) steep increase in commodity
prices, and c) failure of new launches.
Key upside risks are: a) Management achieving its 4 mn volume guidance for
FY11E, and b) further decrease in commodity costs.
Exhibit 20. BJAUT 1 yr fwd P/E

2500
15x
2000 13x
11x
1500
9x
7x
1000
5x
500
0
Oct-08
Mar-09
Aug-09
Jan-10
Jun-10
May-08

Financial Tables
Profit & Loss (Rs mn) Balance Sheet (Rs mn)
Y/E March FY09 FY10E FY11E FY12E Y/E March FY09 FY10E FY11E FY12E
Net sales (Net of excise) 88,080 119,210 149,699 178,374 Share capital 1,447 1,447 1,447 1,447
Growth (%) -2.0 35.3 25.6 19.2 Other capital 0 0 0 0
Other operational income 0 0 0 0 Reserves and surplus 15,417 25,682 40,974 60,651
Raw material (or COGS) 64,635 80,705 106,216 127,431 Networth 16,864 27,129 42,421 62,098
Personnel cost 3,544 3,995 4,341 4,816 Total loans 15,700 16,360 17,054 17,783
Other expenses (or SG&A) 7,896 8,593 9,257 10,814 Minority interest 0 0 0 0
EBITDA 12,006 25,917 29,885 35,313 Sources of funds 32,564 43,490 59,475 79,880
EBITDA (%) 13.6 21.7 20.0 19.8 Intangible assets 0 0 0 0
Growth (%) -3.3 115.9 15.3 18.2 Fixed assets 33,339 35,289 37,246 40,711
Other non-op. income 1,134 1,225 2,034 2,523 Less: Depn. and amort. 18,079 19,444 20,932 22,539
Depreciation and amort. 1,298 1,365 1,488 1,607 Net block 15,260 15,845 16,314 18,173
EBIT 11,842 25,777 30,431 36,229 Capital WIP 383 355 2,855 2,855
Add: Net interest income -210 -60 0 0 Investments 18,085 27,552 32,039 33,703
Pre tax profit 11,632 25,717 30,431 36,229 Def tax assets/- liability -42 -591 -964 -1,259
Taxes 3,621 7,600 8,369 9,782 Current assets 16,053 23,035 35,612 54,842
Add: Extraordinary items -1,446 -1,082 0 0 Inventories 3,388 4,572 5,742 7,819
Less: Minority interest 0 0 0 0 Sundry debtors 3,587 2,939 3,691 7,819
Reported net profit 6,565 17,036 22,063 26,447 Cash & bank balances 1,369 8,153 18,669 30,695
Adjusted net profit 8,011 18,118 22,063 26,447 Other current assets 1,257 1,440 1,514 2,440
Margin (%) 9.1 15.2 14.7 14.8 Loans & advances 6,453 5,930 5,996 6,069
Diluted share cap. (mn) 145 145 145 145 Current liabilities & prov. 17,176 22,707 26,381 28,433
Diluted EPS (Rs.) 55.4 125.2 152.5 182.8 Current liabilities 12,134 14,505 17,978 19,799
Growth (%) -3.3 126.2 21.8 19.9 Provisions and others 5,042 8,202 8,404 8,635
Total Dividend + Tax 3,724 6,771 6,771 6,771 Net current assets -1,123 328 9,231 26,409
Source: Company, JM Financial Others (net) 0 0 0 0
Application of funds 32,564 43,490 59,475 79,880

Cash flow statement (Rs mn) Key Ratios

Y/E March FY09 FY10E FY11E FY12E Y/E March FY09 FY10E FY11E FY12E
Reported net profit 6,565 17,036 22,063 26,447 BV/Share (Rs) 116.6 187.5 293.2 429.2
Depreciation and amort. 818 1,365 1,488 1,607 ROCE (%) 27.3 54.6 58.0 58.8
-Inc/dec in working cap. -1,513 4,527 1,420 -4,529 ROE (%) 48.9 82.4 63.4 50.6
Others 0 0 0 0 Net Debt/equity ratio (x) -0.2 -0.7 -0.8 -0.8
Cash from operations (a) 5,870 22,928 24,971 23,526 Valuation ratios (x)
-Inc/dec in investments 486 -9,467 -4,487 -1,665 PER 8.9 18.2 15.0 12.5
Capex -3,428 -1,922 -4,457 -3,465 PBV 4.2 12.2 7.8 5.3
Others 1,169 806 193 -623 EV/EBITDA 5.6 12.0 9.9 8.0
Cash flow from inv. (b) -1,774 -10,583 -8,751 -5,753 EV/Sales 0.8 2.6 2.0 1.6
Inc/-dec in capital -1,853 0 0 0 Turnover ratios (no.)

Dividend+Tax thereon -3,724 -6,771 -6,771 -6,771 Debtor days 15 9 9 16
Inc/-dec in loans 2,357 660 694 728 Inventory days 14 14 14 16
Others -68 549 373 295 Creditor days 45 59 56 52
Financial cash flow ( c ) -3,288 -5,561 -5,704 -5,747 Source: Company, JM Financial
Inc/-dec in cash (a+b+c) 808 6,784 10,516 12,026
Opening cash balance 561 1,369 8,153 18,669
Closing cash balance 1,369 8,153 18,669 30,695


15 June 2010

Price: Rs2,009
HOLD
Hero Honda | HH IN Target: Rs1,867 (Mar’11)
Pramod Kumar
The best is behind us Tel: (91 22) 6630 3019
Mitakshi Ashar
Unbridled volume growth is history: Hero Honda (HH) had an unbridled mitakshi.ashar@jmfinancial.in
volume growth between FY08 and mid-FY10 with its marketshare improving Tel: (91 22) 6630 3079
from 48% to 64%. However, BJAUT’s re-entry into the 100 cc segment has
resulted in HH’s marketshare retreating to 54%. We expect the company to
Key Data
underperform the industry with a growth of 12% in FY11 and 8% in FY12.
Market cap (bn) Rs 401.1/US$ 8.6
Mix getting adverse: Increased competition to Splendor and Passion is Shares in issue (mn) 199.7
dragging the mix for HH. The contribution of these brands to overall volumes Diluted share (mn) 199.7
has slipped from c.76% to c.73% in the recent months and we expect the mix 3-mon avg daily val (mn) Rs 1107.0 / US$ 23.8
to dilute further as new launches from competition gain further traction. 52-week range 2050.0 / 1251.2
Sensex/Nifty(14/06/2010) 17,338/5,198
Inability to grow beyond Splendor-Passion: Making matters worse is HH’s Rs/US$ 46.4
inability to grow beyond the Splendor and Passion brands. The company’s
repeated attempts to push Glamour, Super Splendor and Splendor NXG have Daily Performance
been futile. Company’s aim to crack into the bigger bike segment in a Hero Honda
2500 60%
meaningful way has also been a failure. 50%
2000
40%
‘Rural belongs to HH’ a myth: BJAUT’s Discover 100 is selling close to 1500 30%
20%
90,000 units a month within 9 months of launch and is the third largest 1000 10%
selling model in the industry after HH’s Splendor and Passion. This would not 500
0%
-10%
have been possible without strong demand from the rural markets, which 0 -20%
historically has been HH’s forte.
Jan-09
Mar-09
Jul-09
Sep-09
Jan-10
Mar-10
May-09
Nov-09
May-10
Hero Honda Relative to Sensex (RHS)
Rumored exports to Africa will not benefit much: We believe HH’s rumored
entry into Africa will not compensate for the loss in domestic market and will % 1M 3M 12M
further hurt margins due to wafer thin profits in Africa (BJAUT, the largest Absolute 7.0 8.9 42.4
exporter, earns c.6% margin after factoring in export benefits). Relative* 5.0 7.9 28.6
* To the BSE Sensex
Too early to play 2014 developments: We think it’s too early to play on
possible positive fallout of developments in 2014, when the JV expires. Shareholding Pattern (%)
4Q FY09 4Q FY10
Valuations expensive on PEG basis: At the current price the stock trades at Promoters 55.0 55.0
an expensive PEG multiple of 1.7x. Based on a 14xFY12E EPS (PEG of 1.6x) we FII 27.0 30.0
arrive at a target price of Rs1,867. While the downside is limited due to the DII 9.6 6.7
strong balance sheet, relative high PEG will result in sustained Public / others 8.4 8.3
underperformance. We initiate coverage with a HOLD rating.
Exhibit 21.
Y/E March FY08 FY09 FY10E FY11E FY12E
Net sales 103,318 123,191 158,312 180,948 199,267
Sales growth (%) 0 19.2 28.5 14.3 10.1
EBITDA 13,537 17,291 27,670 30,070 32,783
EBITDA (%) 13.1 14.0 17.5 16.6 16.5
Adjusted net profit 9,667 12,818 22,318 24,590 26,630
EPS (Rs) 48.4 64.2 111.8 123.1 133.4
EPS growth (%) 0 32.6 74.1 10.2 8.3
ROCE (%) 32.4 38.6 79.5 84.0 65.9
ROE (%) 32.4 37.8 61.3 57.9 45.3
PE (x) 14.3 12.6 18.0 16.3 15.1
Price/Book value (x) 4.6 4.3 11.5 8.0 6.0
EV/EBITDA (x) 8.3 7.3 12.6 11.6 10.2 JM Financial Research is also available on:

Hero Honda 15 June 2010
Unbridled volume growth is history: Hero Honda (HH) had an unbridled

volume growth between FY08 and mid-FY10 with its marketshare improving
from 48% to 64% due to strong rural demand coupled with competition
shifting focus from the 100 cc segment. However, in August 2010 arch rival
BJAUT re-entered the 100 cc segment with Discover 100, and since then HH
has seen its marketshare retreat to 54% with unremitting underperformance.
We expect the company to underperform the industry with a volume growth
of 12% in FY11 and 8% in FY12.
Exhibit 22. Monthly marketshare movement in motorcycles

Discover 100 putting sustained pressure on HH’s marketshare
70
60
50
40
%
30
20
10
-
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
Hero Honda Bajaj Auto
Mix getting adverse: Increased competition to Splendor and Passion is

dragging the sales mix for HH. The contribution of these brands to overall
volumes has slipped from c.76% to c.73% in the recent months while
contribution from the low margin entry level bikes has increased (see exhibit
23 and 24). We expect the mix to dilute further as new launches from
competition gain further traction.
Exhibit 23. Trend in HH’s volume mix

Splendor and Passion’s share of profits much higher than their volume share
100%
80%
60%
40%
20%
0%
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Executive Entry Premium Scooters

Exhibit 24. Comparison between HH’s entry and executive bikes

CD range a drag on margins while Passion Plus a margin booster
Comparison CD Dawn CD Deluxe Splendor Plus Passion Plus
Price (Rs ex-showroom Delhi) 33,000 38,350 39,950 43,050

Engine (cc) 97 97 97 97
Power (bhp) 7.5 7.5 7.5 7.5
Speed (kph) 85 85 82 85
Weight (kgs) 109 109 109 116
Self start No Yes No No
Inability to grow beyond Splendor-Passion: Making matters worse is HH’s

inability to grow beyond the Splendor and Passion brands. The company has
five brands beyond Passion which account for a mere 10% of overall volumes.
The company’s repeated attempts to push Glamour, Super Splendor and
Splendor NXG have been futile. Company’s aim to crack into the bigger bike
segment in a meaningful way has also been a failure. In this segment the
company is a distant third even trailing HMSI. Despite its wide reach and
network the company’s premium brands, CBZ Xtreme and Hunk, are outsold
by HMSI’s Unicorn on an individual basis despite HMSI’s limited reach and
higher prices. This throws up an interesting paradox wherein HH is the
preferred name in the executive segment but a distant third in the premium
segment. This proves that the brands are bigger than the company – Splendor
and Passion in case of HH, Pulsar and Discover in case of BJAUT, Scooty and
Apache in case of TVSL and Activa in the case of HMSI.
‘Rural belongs to HH’ a myth: BJAUT’s Discover 100 is selling close to

90,000 units a month within nine months of its launch and is the third largest
selling model in the industry after HH’s Splendor (c.175,000) and Passion
(c.100,000). This would not have been possible without strong demand from
the rural markets, which historically has been HH’s forte (see exhibit 25).
Dealer checks indicate that rural sales of Discover 100 have been much
higher than the urban centers. This brand is particularly doing very well in the
Northern states like Uttar Pradesh which is the biggest market for entry and
executive segments. Strong growth in agricultural income and increased
media penetration is increasing aspirations of rural customers, making them
more open to new brands and premium bikes. This, according to us, is not a
good development for HH as its premium bikes do not excite the customer.
Exhibit 25. Monthly volumes of Splendor, Passion and Discover 100

Discover 100 is taking away incremental growth from Splendor and Passion
200,000
180,000
160,000
140,000
120,000
(units)
100,000
80,000
60,000
40,000
20,000
-
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Apr-10
Mar-10
Splendor Passion Discover 100

Rumored exports to Africa will not benefit much: We believe HH’s rumored
entry into Africa will not compensate for the loss in domestic market share
and will further hurt margins due to wafer thin profits in Africa. BJAUT, the
largest exporter to Africa from India, earns c.6% margin after factoring in
export benefits of c.8%. This is after being in the market for over three years
and after increasing prices considerably from the launch rates. The company
initially lost c.USD150 per bike in an attempt to establish themselves. The
overall African market is c.2.5mn units a year which is c.50% of HH’s
expected FY11 volumes, ruling out immediate gains on volumes. HH will have
to modify its existing CD Dawn, the cheapest HH bike, to meet the market
requirement in Africa and sell it at a much lower price. This, we believe, will
be very negative for margins as CD Dawn at its current prices is a drag on
margins.
Too early to play 2014 developments: We think it’s too early to play on
possible positive fallout of developments in 2014, when the JV expires. The
best possible out come for investors would be a merger of HMSI into HH. This
will increase the competitive position of HH by giving it access to HMSI’s
enviable scooter portfolio. It will also take out the conflict of interest existing
currently with Honda Motor Company (HMC) holding stakes in both HH and
HMSI. A lot will depend on HMC’s ambition and strategy as they are the ones
who have a higher bargaining power. What will further strengthen their
position is HMSI’s increasing marketshare in India, which is currently at
c.14%, and which we expect to increase to c.20% by 2014.
Moderate top line and PAT growth: We expect top line and PAT CAGR of
12% and 9% respectively between FY10-FY12E. Payout of extraordinary
dividend resulted in outflow of c.Rs25bn which will reduce the treasury
income going forward. Incremental benefits from tax haven operations are
limited and will not be able to negate the impact of higher commodity prices
and limited pricing actions (company has not increased prices of Splendor+).

Key assumptions
(units) FY10 FY11E YoY (%) FY12E YoY (%)
Total volumes 4,600,130 5,158,574 12.1 5,576,188 8.1
Realisation (Rs) 34,415 35,077 1.9 35,735 1.9
Valuations
At the current price the stock trades at an expensive PEG multiple of 1.7x.
Based on a 14xFY12E EPS (PEG of 1.6x) we arrive at a target price of Rs1,867.
Relative high PEG will result in sustained underperformance. We initiate
coverage with a HOLD rating.
Key risks
Key downside risks are: a) Poor monsoons, and b) steep increase in
commodity prices.
Key upside risks are: a) Failure of competition launches, and b) further

decrease in commodity costs
Exhibit 27. HH 1 yr fwd P/E

3000
2500 20x
2000 17x
14x
1500
11x
1000 8x
500 5x
0
Dec-07
Oct-08
Jan-05
Jul-05
Mar-07
Jul-07
Mar-09
Jan-10
Jun-10
Apr-04
Aug-04
Sep-06
Aug-09
Nov-05
May-06
May-08

Financial Tables
Y/E March FY08 FY09 FY10E FY11E FY12E Y/E March FY08 FY09 FY10E FY11E FY12E
Net sales (Net of excise) 103,318 123,191 158,312 180,948 199,267 Share capital 399 399 399 399 399
Growth (%) 19.2 28.5 14.3 10.1 Other capital 0 0 0 0 0
Other operational income 0 0 0 0 0 Reserves and surplus 29,463 37,608 34,466 49,710 66,995
Raw material (or COGS) 74,025 87,420 107,342 125,102 138,886 Networth 29,862 38,008 34,865 50,110 67,394
Personnel cost 3,835 4,487 5,603 6,424 7,174 Total loans 1,320 785 185 185 185
Other expenses (or SG&A) 11,921 13,994 17,698 19,352 20,425 Minority interest 0 0 0 0 0
EBITDA 13,537 17,291 27,670 30,070 32,783 Sources of funds 31,182 38,792 35,050 50,295 67,579
EBITDA (%) 13.1 14.0 17.5 16.6 16.5 Intangible assets 161 0 0 0 0
Growth (%) 27.7 60.0 8.7 9.0 Fixed assets 19,388 25,163 26,643 28,773 34,403
Other non-op. income 2,189 2,356 2,592 2,648 2,785 Less: Depn. and amort. 7,825 9,427 11,342 13,493 15,959
Depreciation and amort. 1,615 1,807 1,915 2,151 2,466 Net block 11,723 15,736 15,301 15,280 18,443
EBIT 14,111 17,840 28,347 30,567 33,102 Capital WIP 3,924 1,205 200 200 200
Add: Net interest income -20 -25 -30 -20 -21 Investments 25,668 33,688 36,403 41,403 41,404
Pre tax profit 14,091 17,815 28,317 30,547 33,081 Def tax assets/- liability -1,254 -1,444 -1,594 -1,744 -1,894
Taxes 4,424 4,997 5,999 5,957 6,451 Current assets 9,333 10,024 28,829 25,308 41,970
Add: Extraordinary items 0 0 0 0 0 Inventories 3,171 3,268 4,771 5,453 6,551
Less: Minority interest 0 0 0 0 0 Sundry debtors 2,974 1,499 6,072 6,445 7,643
Reported net profit 9,667 12,818 22,318 24,590 26,630 Cash & bank balances 1,311 2,196 15,421 11,305 25,667
Adjusted net profit 9,667 12,818 22,318 24,590 26,630 Other current assets 0 1 0 0 0
Margin (%) 9.4 10.4 14.1 13.6 13.4 Loans & advances 1,877 3,060 2,565 2,105 2,108
Diluted share cap. (mn) 200 200 200 200 200 Current liabilities & prov. 18,212 20,417 44,088 30,152 32,544
Diluted EPS (Rs.) 48.4 64.2 111.8 123.1 133.4 Current liabilities 13,250 15,259 18,112 20,212 22,516
Growth (%) NA 32.6 74.1 10.2 8.3 Provisions and others 4,963 5,158 25,976 9,940 10,028
Total Dividend + Tax 4,439 4,673 25,460 9,346 9,346 Net current assets -8,880 -10,392 -15,260 -4,844 9,426
Source: Company, JM Financial Others (net) 0 0 0 0 0
Application of funds 31,182 38,792 35,050 50,295 67,579


Reported net profit 9,667 12,818 22,318 24,590 26,630 BV/Share (Rs) 149.5 190.3 174.6 250.9 337.5
Depreciation and amort. 1,474 1,601 1,915 2,151 2,466 ROCE (%) 32.4 38.6 79.5 84.0 65.9
-Inc/dec in working cap. 1,975 847 -94 806 -245 ROE (%) 32.4 37.8 61.3 57.9 45.3
Others 0 0 0 0 0 Net Debt/equity ratio (x) -0.9 -0.9 -1.5 -1.0 -1.0
Cash from operations (a) 13,117 15,266 24,139 27,547 28,851 Valuation ratios (x)
-Inc/dec in investments -5,930 -8,019 -2,716 -5,000 -1 PER 14.3 12.6 18.0 16.3 15.1
Capex -3,567 -2,895 -475 -2,130 -5,630 PBV 4.6 4.3 11.5 8.0 6.0
Others 2,198 1,550 18,186 -15,337 337 EV/EBITDA 8.3 7.3 12.6 11.6 10.2
Cash flow from inv. (b) -7,298 -9,365 14,996 -22,467 -5,294 EV/Sales 1.1 1.0 2.2 1.9 1.7
Inc/-dec in capital -66 0 0 0 0 Turnover ratios (no.)

Dividend+Tax thereon -4,439 -4,673 -25,460 -9,346 -9,346 Debtor days 11 4 14 13 14
Inc/-dec in loans -332 -535 -600 0 0 Inventory days 11 10 11 11 12
Others -28 191 150 150 150 Creditor days 37 29 44 43 44
Financial cash flow ( c ) -4,865 -5,017 -25,910 -9,196 -9,196 Source: Company, JM Financial
Inc/-dec in cash (a+b+c) 953 885 13,225 -4,115 14,362
Opening cash balance 358 1,311 2,196 15,421 11,305
Closing cash balance 1,311 2,196 15,421 11,305 25,667


15 June 2010

Price: Rs103
BUY
TVS Motors | TVSL IN Target: Rs148 (Mar’11)
Pramod Kumar
New beginning Tel: (91 22) 6630 3019
Mitakshi Ashar
New launches drive volumes and mix: We expect the company to witness mitakshi.ashar@jmfinancial.in
topline CAGR of 21% during FY10-FY12E driven by volume growth of 15% and Tel: (91 22) 6630 3079
realisations growth of 5%. New launches (Jive and Wego) and higher three-
wheeler volumes will drive overall volume and realisations. Both Jive and
Key Data
Wego are realisation and margin accretive.
Market cap (bn) Rs 24.6 / US$ 0.5
Margins of 8.7% and PAT CAGR of 64% in FY10-12E: High operating Shares in issue (mn) 238
leverage, better mix, turnaround in three-wheeler operations and lower legacy Diluted share (mn) 238
write-offs will drive margin expansion of 160 bps over the 4QFY10 levels. 3-mon avg daily val (mn) Rs 174.4 / US$ 3.8
Growth in standalone earnings will be higher at 64% due to higher other 52-week range 110.8 / 39.2
income and non-linear growth in depreciation. Sensex/Nifty(14/06/2010) 17,338/5,198

Rs/US$ 46.4
This time it’s different: Unlike its earlier attempt, when it took HH and BJAUT
head-on in the motorcycle market, the company is focusing on segments with Daily Performance
low competition intensity. This strategy is much wiser as it reduces the TVS Motors
120 200%
competition intensity on an already lower margin portfolio. With the new 100 150%
launches, c.70% of TVSL’s portfolio will be fairly insulated from competition. 80
100%
60
New launches fill a big gap in portfolio: Before the new launches, TVSL was 50%
40
not participating in 80% of scooter market and 60% of the motorcycle market. 20 0%
Wego and Jive fill these glaring gaps in the portfolio. 0 -50%
Jan-09
Mar-09
Jul-09
Sep-09
Jan-10
Mar-10
May-09
Nov-09
May-10
Exports ramp-up can be significant: Exports currently account for c.13% of
TVS Motors Relative to Sensex (RHS)
overall volumes and are expected to grow at a CAGR of 31% during FY10-
FY12E. Revival in exports to Africa and entry into Brazil will drive volumes. % 1M 3M 12M
Absolute 5.2 40.3 113.9
Indonesia to achieve break-even during FY12E: We expect Indonesia to
Relative* 3.2 39.3 100.1
break-even during FY12E and end the year with a loss of Rs200mn against * To the BSE Sensex
management’s expectation of no losses.
Shareholding Pattern (%)
Huge upside; recommend BUY: We value the standalone business at 11.5x 4Q FY09 4Q FY10
FY12E earnings (PEG of 0.17x) and the Indonesian business at 5x FY12E Promoters 57.4 60.5
losses (largely start-up losses). This results in a standalone value of Rs152 FII 2.2 5.5
against a negative value of Rs 4.2 per share leading to a combined value of DII 11.4 12.7
Rs148. The stock is currently trading at 7.8x FY12E standalone earnings with Public / others 29.1 21.4
a throwaway PEG of 0.12x. We initiate coverage with a BUY rating.
Exhibit 28.
Y/E March FY08 FY09 FY10E FY11E FY12E
Net sales 32,702 37,367 44,221 55,500 66,009
Sales growth (%) 14.3 18.3 25.5 18.9
EBITDA 928 1,849 2,786 4,619 5,750
EBITDA (%) 2.8 4.9 6.3 8.3 8.7
Adjusted net profit 318 296 1,170 2,254 3,166
EPS (Rs) 1.3 1.2 4.9 9.5 13.3
EPS growth (%) -7.0 295.8 92.7 40.5
ROCE (%) 2.9 6.2 10.7 15.9 20.3
ROE (%) 4.1 3.9 15.2 25.2 28.5
PE (x) 43.9 23.0 21.0 10.9 7.8
Price/Book value (x) 1.8 0.9 3.1 2.5 2.0
EV/EBITDA (x) 18.5 5.8 9.9 5.5 4.0 JM Financial Research is also available on:

TVS Motors 15 June 2010
New launches drive volumes and mix: We expect the company to witness
topline CAGR of 21% during FY10-FY12E driven by volume growth of 15% and
realisations growth of 5%. New launches (Jive and Wego) and higher three-
wheeler volumes will drive overall volume and realisations. Both Jive and
Wego are realisation and margin accretive.
Margins of 8.7% and PAT CAGR of 64% for FY10-12E: High operating
leverage, better mix, turnaround in three-wheeler operations and lower legacy
write-offs will drive margin expansion of 160 bps over the 4QFY10 levels (see
exhibit 29). Operating profits are expected to grow at a CAGR of 43% during
FY10-12E to Rs5.7bn, highest ever. Growth in standalone earnings will be
higher at 64% due to higher other income and non-linear growth in
depreciation. Our conservative volume assumption (150,000/month vs May’s
157,000) provides cushion to our earnings in case of margin shortfall.
Exhibit 29. Margin trend vis-à-vis quarterly average volumes

Higher volumes and mix improvement aiding margin improvement
600,000 10
9
500,000
8
7
400,000
6
300,000 5
4
200,000
3
2
100,000
1
- 0
Q3FY10 Q4FY10 FY11E FY12E
Motorcycle Scooters Mopeds Three Wheelers EBITDA %
This time it’s different: Unlike its earlier attempt, when it took HH and BJAUT
head-on in the motorcycle market, the company is focusing on segments with
low competition intensity and where it has stronger equity. This strategy is
much wiser as it reduces the competition intensity on an already lower
margin portfolio. With the new launches, c.65% of TVSL’s portfolio will be
fairly insulated from competition. Jive, the new executive motorcycle,
differentiates itself from competition due to its unique technology of
automatic clutch. Wego, the bigger scooter, is targeted towards a segment
where demand exceeds supply and which is expected to outperform other
segment in the next two years. With these launches the portfolio is much
more defensive and balanced compared to FY09 levels (see exhibit 30).

Exhibit 30. Sales mix over the years

Mix getting much balanced
100%
80%
60%
40%
20%
0%
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
M o to rcycle Sco o ters M o peds Three Wheelers
Very high operating and financial leverage: The company so far has been
operating at sub-optimal level which will improve considerably with these
launches. We do not expect much increase in manpower and marketing
expenditure as both are adequately funded for the next two years. A D/E of
1x also provides ample financial leverage resulting in accelerated PAT growth.
Jive and Wego are realisation and margin accretive: Jive is priced at a
premium of c.16% over the Star range (weighted average), which is TVSL’s
largest selling bike. Wego is priced at a premium of c.11% over Scooty Streak,
the most expensive Scooty variant. Despite both products being marginally
heavier and technologically better the high realisation difference will result in
higher contribution, and consequently better margins.
Three-wheeler can provide huge upside: At current volumes, three-wheelers

are adding to profitability and once they achieve 4,000-5,000 unit/month run
rate they will be clocking margins of over 12%, making them big earning
drivers given that they are more than 2x the prices of motorcycles. Margins
can be higher if exports grow at a faster clip. For FY10-12E we expect
volumes of 38,000 units and 47,500 units respectively.
New launches fill a big gap in portfolio: Before the new launches TVSL was
not participating in 80% of scooter market and 60% of the motorcycle market.
Wego and Jive fill these glaring gaps in the portfolio.
Mopeds will continue to surprise: Rising economic activity in rural India has
revived the otherwise declining moped segment, which is a monopoly for
TVSL. This segment has grown by 16% since FY07 (see exhibit 31) as more
people upgraded from cycle to moped, the cheapest mode of motorised
transport. This puny looking vehicle which weighs c.80 kg can carry load of
over 200 kgs and traverse on almost all terrains. This makes it a big hit with
rural entrepreneurs who account for c.70% of its demand. Moped
predominantly has been a South India phenomenon with over 85% of them
being sold there. However, due to increasing prosperity in the Northern rural
belt the company has increased the supply to these states. Now c.30% of the
demand comes from non-south markets, reducing the geographical risk and
making the growth more sustainable. This business being a monopoly offers
TVSL attractive margins and increases its rural thrust.

Exhibit 31. Moped sales over the years

Rural boom has revived the segment; it grew even in FY09
800,000 40
Units YoY % (RHS)
700,000 30
600,000 20
500,000 10
400,000 0
300,000 -10
200,000 -20
100,000 -30
0 -40
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Indonesia to achieve break-even during FY12E: We expect Indonesia to

break-even during FY12E and end the year with a loss of Rs200mn. As per the
management, the breakeven volumes are c.5,000 units against the current
volumes of over 2,000 units. Volumes are expected to improve as dealer
network expands from the current c.100 to over 150 in the next few months.
We expect volumes to move closer to 3,000 levels during 2HFY11.

Key assumptions
(units) FY10 FY11E YoY (%) FY12E YoY (%)
Motorcycle Volumes 641,033 787,663 22.9 905,813 15.0
Scooter volumes 302,575 364,071 20.3 453,814 24.6
Moped volumes 569,585 609,667 7.0 651,802 6.9
Three wheeler Volumes 15,188 38,023 150.3 47,529 25.0
Overall volumes 1,528,381 1,799,425 17.7 2,058,957 14.4
Realisation (Rs) 28,933 30,843 6.6 32,059 3.9
Valuations
We value the standalone business at 11.5x FY12E earnings (PEG of 0.17x) and
the Indonesian business at 5x FY12E losses. We are valuing the Indonesian
losses at a lower multiple as these are start-up losses. This results in a
standalone value of Rs152 against a negative value of Rs4.2 per share,
leading to a combined value of Rs148. The stock is currently trading at 7.8x
FY12E standalone earnings with a throwaway PEG of 0.12x. We initiate
coverage with a BUY rating.
Key risks
Key downside risks are: a) Poor monsoons, b) steep increase in commodity
prices, and c) failure of new launches.
Key upside risks are: a) Management achieving its 2 mn volume guidance for
FY11E, and b) further decrease in commodity costs.
Exhibit 33. TVSL 1 yr fwd P/E

180
160
14x
140
12x
120
10x
100
8x
80
6x
60
4x
40
20
0
Apr-08
Sep-08
Feb-09
Jul-09
Jan-10
Jun-10

Financial Tables
Net sales (Net of excise) 32,702 37,367 44,221 55,500 66,009 Share capital 238 238 238 238 238
Growth (%) 14.3 18.3 25.5 18.9 Other capital 0 0 0 0 0
Other operational income 0 0 0 0 0 Reserves and surplus 7,451 7,140 7,756 9,641 12,109
Raw material (or COGS) 24,455 27,834 31,425 40,036 48,463 Networth 7,688 7,378 7,993 9,879 12,346
Personnel cost 1,764 2,045 2,435 2,609 3,036 Total loans 6,663 9,060 8,987 8,987 5,700
Other expenses (or SG&A) 5,555 5,639 7,575 8,236 8,759 Minority interest 0 0 0 0 0
EBITDA 928 1,849 2,786 4,619 5,750 Sources of funds 14,352 16,437 16,980 18,866 18,046
EBITDA (%) 2.8 4.9 6.3 8.3 8.7 Intangible assets 0 0 0 0 0
Growth (%) 99.2 50.7 65.8 24.5 Fixed assets 17,910 18,654 19,574 20,194 21,318
Other non-op. income 486 122 81 122 153 Less: Depn. and amort. 7,745 8,703 9,726 10,832 12,029
Depreciation and amort. 946 1,029 1,023 1,106 1,197 Net block 10,165 9,951 9,848 9,361 9,288
EBIT 468 942 1,844 3,634 4,706 Capital WIP 266 404 100 100 101
Add: Net interest income -115 -646 -628 -629 -485 Investments 3,390 4,777 5,877 6,377 6,778
Pre tax profit 354 296 1,216 3,005 4,221 Def tax assets/- liability -1,549 -1,481 -1,532 -1,584 -1,637
Taxes 36 0 46 751 1,055 Current assets 7,504 8,805 9,439 13,000 13,757
Add: Extraordinary items 0 15 -305 0 0 Inventories 4,054 3,206 3,877 4,866 5,968
Less: Minority interest 0 0 0 0 0 Sundry debtors 879 1,816 1,938 2,433 3,074
Reported net profit 318 310 865 2,254 3,166 Cash & bank balances 37 421 -14 1,573 580
Adjusted net profit 318 296 1,170 2,254 3,166 Other current assets 0 10 10 1 2
Margin (%) 1.0 0.8 2.6 4.1 4.8 Loans & advances 2,534 3,353 3,628 4,128 4,132
Diluted share cap. (mn) 238 238 238 238 238 Current liabilities & prov. 5,424 6,017 6,752 8,389 10,241
Diluted EPS (Rs.) 1.3 1.2 4.9 9.5 13.3 Current liabilities 5,058 5,504 6,179 7,756 9,406
Growth (%) NA -7.0 295.8 92.7 40.5 Provisions and others 366 513 573 633 835
Total Dividend + Tax 195 195 278 417 695 Net current assets 2,080 2,787 2,687 4,611 3,516
Source: Company, JM Financial Others (net) 0 0 0 0 0
Application of funds 14,352 16,438 16,980 18,866 18,046


Reported net profit 318 310 865 2,254 3,166 BV/Share (Rs) 32.4 31.1 33.7 41.6 52.0
Depreciation and amort. 886 958 1,023 1,106 1,197 ROCE (%) 2.9 6.2 10.7 15.9 20.3
-Inc/dec in working cap. -565 357 -119 93 -94 ROE (%) 4.1 3.9 15.2 25.2 28.5
Others 0 0 0 0 0 Net Debt/equity ratio (x) 0.4 0.5 0.4 0.1 -0.1
Cash from operations (a) 638 1,626 1,768 3,453 4,269 Valuation ratios (x)
-Inc/dec in investments 58 -1,388 -1,100 -500 -401 PER 43.9 23.0 21.0 10.9 7.8
Capex -1,287 -882 -616 -620 -1,125 PBV 1.8 0.9 3.1 2.5 2.0
Others -387 -681 -215 -430 197 EV/EBITDA 18.5 5.8 9.9 5.5 4.0
Cash flow from inv. (b) -1,616 -2,951 -1,931 -1,550 -1,329 EV/Sales 0.5 0.3 0.6 0.5 0.3
Inc/-dec in capital 58 -426 29 49 -4 Turnover ratios (no.)

Dividend+Tax thereon -195 -195 -278 -417 -695 Debtor days 10 18 16 16 17
Inc/-dec in loans 328 2,396 -73 0 -3,287 Inventory days 45 31 32 32 33
Others -41 -68 51 52 53 Creditor days 75 72 72 71 71
Financial cash flow ( c ) 150 1,708 -271 -316 -3,932 Source: Company, JM Financial
Inc/-dec in cash (a+b+c) -828 382 -434 1,587 -992
Opening cash balance 866 37 421 -14 1,573
Closing cash balance 37 420 -13 1,573 580


# Notes

# Notes

# Notes


MEMBER, BOMBAY STOCK EXCHANGE LIMITED AND NATIONAL STOCK EXCHANGE OF INDIA LIMITED
51, Maker Cha mber s III, Nari man Point , Mu mba i 400 021, In dia .
B oard: +9122 6630 3030 | Fa x: +91 22 6747 1825 | E mail : jmfin an cial.re sear ch @jmfin ancial .in | www.jmfi n an cial .in
Analyst Certification
The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that:
All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and
No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research
report.
Analyst(s) holding in the Stock: (Nil)
Other Disclosures
This research report has been prepared by JM Financial Institutional Securities Private Limited (JM Financial Institutional Securities) to provide information about the
company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its affiliated companies solely for the purpose of information of the select recipient
of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written consent of JM Financial
Institutional Securities. This report has been prepared independently of the companies covered herein. JM Financial Institutional Securities and/or its affiliated entities are a
multi-service, integrated investment banking, investment management and brokerage group. JM Financial Institutional Securities and/or its affiliated company(ies) might have
lead managed or co-managed a public offering for the company(ies) covered herein in the preceding twelve months and might have received compensation for the same during
this period for the services in respect of public offerings, corporate finance, investment banking, mergers & acquisitions or other advisory services in a specific transaction. JM
Financial Institutional Securities and/or its affiliated company(ies) may receive compensation from the company(ies) mentioned in this report within a period of three to six
months' time following the date of publication of this research report for rendering any of the above services. Research analysts and Sales Persons of JM Financial Institutional
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While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred to
herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may not be in any way responsible for any
loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This report is provided for information only and is not
intended to be and must not alone be taken as the basis for an investment decision. The investment discussed or views expressed herein may not be suitable for all investors.
The user assumes the entire risk of any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities
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Hero Honda - JM Fin Initiation - June 2010

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Two Wheeler Industry 15 June 2010

Two–wheeler Industry: Limited players to share a growing pie 3

Insulated from rise in interest rates 8

Bajaj Auto: Best play on emerging markets 15

Hero Honda: The best is behind us 21

TVS Motors: New beginning 27

JM Financial Institutional Securities Private Limited Page 2

India | Automobiles | Initiating coverage

 Market share to change hands: We expect HH to continue to cede market

 Available at a discount to the broader market: Despite all the inherent

JM Financial Institutional Securities Private Limited

Poised to grow at a CAGR of 12-13%

Exhibit 1. Penetration level vis-à-vis per capita income

GDP percapita PPP ($)

Source: Company, JM Financial

 Huge disparities between urban and non-urban penetration and scarce

Exhibit 2. Household penetration of motorcycles income wise

Source: Company, JM Financial

JM Financial Institutional Securities Private Limited Page 4

 Young population profile supports growth: c.70% of India’s population is

Exhibit 3. India’s age mix and age wise penetration of motorcycles

15-19 years 20.5

Source: Company, JM Financial

 Rising prosperity in rural India a big opportunity: Strong income growth in

JM Financial Institutional Securities Private Limited Page 5

Exhibit 4. Trend in MSPs

Paddy (common) 550 570 745 1,000 1,000

Source: Business Line

Exhibit 5. Motorcycle penetration as per population strata

40 2006 2008 36.8

Source: Company, JM Financial

 Higher first time buyers to feed strong replacement demand: With

JM Financial Institutional Securities Private Limited Page 6

Exhibit 6. First time and repeat buyers trend

Source: Company, JM Financial

Exhibit 7. Export trend of China and India

Source: Company, JM Financial

JM Financial Institutional Securities Private Limited Page 7

Exhibit 8. Exports by region

Source: Company, JM Financial

Insulated from rise in interest rates

JM Financial Institutional Securities Private Limited Page 8

Two wheelers and cars to co-exist

Exhibit 9. Comparison between cheapest motorcycle (HH CD Dawn) and car

JM Financial Institutional Securities Private Limited Page 9

Exhibit 10. Comparison of market share

FY10 – cars FY10 – Two wheelers

Source: SIAM, JM Financial

Chinese or other Asian players not a threat

JM Financial Institutional Securities Private Limited Page 10

Scooters to outperform motorcycles

Exhibit 11. Scooter sales trend

Source: SIAM, JM Financial

 Switch to gearless revived the segment: Shift to the gearless technology

 A big play on empowerment of women: Contrary to general perception,

 Strong demand and pricing environment: Unlike other segments, the

 Versatility, unisex appeal biggest USPs: A scooter, unlike motorcycle, due

JM Financial Institutional Securities Private Limited Page 11

Up-trading to gain momentum

Exhibit 12. Trend in motorcycle category share

Source: Compnany, JM Financial

Market share to change hands

 HH ceding marketshare gifted to it by competition in FY08: The rise in

JM Financial Institutional Securities Private Limited Page 12

Market share to change hands: We expect HH to continue to cede market

Available at a discount to the broader market: Despite all the inherent

Huge disparities between urban and non-urban penetration and scarce

Young population profile supports growth: c.70% of India’s population is

Rising prosperity in rural India a big opportunity: Strong income growth in

Higher first time buyers to feed strong replacement demand: With

Switch to gearless revived the segment: Shift to the gearless technology

A big play on empowerment of women: Contrary to general perception,

Strong demand and pricing environment: Unlike other segments, the

Versatility, unisex appeal biggest USPs: A scooter, unlike motorcycle, due

HH ceding marketshare gifted to it by competition in FY08: The rise in

Strong volumes driven by domestic resurgence and export ramp-up: We

Reduced dependence on three-wheelers: Strong growth in Discover and

Operating margins to remain at c.20% in FY10-12: We expect the company

Unbridled volume growth is history: Hero Honda (HH) had an unbridled

Mix getting adverse: Increased competition to Splendor and Passion is

Inability to grow beyond Splendor-Passion: Making matters worse is HH’s

‘Rural belongs to HH’ a myth: BJAUT’s Discover 100 is selling close to

Key upside risks are: a) Failure of competition launches, and b) further