Bajaj Auto

Bajaj Auto Initiating Coverage
May 16, 2011
Bajaj Auto Limited

16 May 2011
INITIATING COVERAGE
As on May 16, 2011 Market Cap. ( ` mn ) 38,5880 52 Week High/Low (`) 1664.5/999.9 Book Value (FY11E) 177 Face Value (`) 10
Jaypee Research Desk

www.jaypeeindia.com www.jaypeeusa.com
CMP: ` 1309
TARGET: ` 1532
BUY
Codes BSE Code NSE Code Bloomberg Code Reuters Code 532977 BAJAJ-AUTO BJAUT IN BAJA.BO
We initiate coverage on Bajaj Auto Ltd with a 12 month target price of `1532. We expect volumes in two wheeler industry to remain robust on the back of higher rural demand and rising disposable incomes. BALs two brand strategy has been highly successful resulting in higher volumes and improvement in market share. Exports of the company have also remained robust and we believe that BALs growing contribution from exports will help the company in offsetting higher base in domestic industry in future. Strong growth expected: Bajaj auto has reported strong growth in volumes in the last one year on the back of successful launch of Discover and Pulsar variants. Three wheeler volumes have also remained robust and have exceeded FY11 target of 4lac units by 9%.We estimate volumes of 4.6mn in FY12E and 5.3mn in FY13E. Exports to remain strong: Exports of the company till March 2010 have reported strong growth of 35% YoY to 1.2 mn units which has been ahead of managements earlier guidance. The company management expects the growth in exports market to continue due to strong underlying demand in Africa and Latin America. Company is also planning to enter new territories viz Brazil and China, which are one of the key two wheeler markets. We expect exports volume to grow by 25% in FY12E and by 27% in FY13E. Expect the company to recover market share: After gaining strong market share till November 2010, the company has lost market share since December 2010 on the back of lower volumes which were affected by 1) Logistics issues and 2) lower exports .After the launch of Discover 125 in April 2011 the domestic volumes have improved which we believe will help the company to win back the lost market share in the next 2-3 months. The company is expected to launch 1 new model in H2FY12 which we believe will help the company in maintaining the market share at 29% levels. Best in segment margins of ~20%: BAL has clocked margins in excess of 20% in the last 6 quarters and has been the most profitable company in the two wheeler segment in India. However, with the steep increase in commodity prices the EBITDA margins are expected to drop below 20% levels in Q4FY11 and H1FY12. We estimate EBITDA margin of 19.5% and 19% in FY12E and FY13E respectively Valuation: We expect BALs earnings to report a growth of 21% and 16% in FY12E and FY13E to `102 and `119 respectively. At CMP of `1309 the stock trades at 12.8x FY12E EPS and 11x FY13E EPS. We recommend a BUY rating on the stock with a target price of `1532 (15x FY12EPS). Financials Net sales EBITDA EBITDA Margin Net Profit PAT Margin EPS P/E (x) EV/EBITDA
Source: Jaypee Research
Promoters FII DII Others
Shareholding Pattern Mar 2011 Dec 2010 Sep 2010 50.02% 49.66% 49.66% 15.99% 17.77% 18.42% 7.87% 6.24% 5.12% 26.12% 26.33% 26.80%
Share Price Performance

180 160 140 120 100 80 60 40 20 0
14-Nov-10 14-Jun-10 14-Jul-10 14-Aug-10 14-May-10 14-Sep-10 14-Feb-11 14-Mar-11 14-Oct-10 14-Dec-10 14-Jan-11 14-Apr-11
Bajaj Auto
Sensex
Absolute Relative
Share Price Returns (%) 1M 6M -6% -17% 0% -8%
12M 22% 14%
Gaurant Dadwal gdadwal@jaypeeindia.com Prasun Kumar prasunkumar@jaypeeindia.com Contact No: +91-22-43542014
FY10 119210.0 25926.1 21.7 18641.9 15.6 64.4 20.3 7.2
FY11E 161071.1 32730.9 20.3 24482.8 15.2 84.6 15.5 5.7
FY12E 198515.9 38706.6 19.5 29545.4 14.9 102.1 12.8 4.8
FY13E 233832.7 44311.9 19.0 34306.1 14.7 118.6 11.0 4.2
Our reports are available on Bloomberg < JAYP > Please refer to the disclaimer at the end of the report
Bajaj Auto Limited

16 May 2011

Index
Investment Arguments 3 Q3FY11 Quarterly Result Analysis... 9 Financial Analysis .. 12 Key Risks ..... 15 Outlook and Valuation .. 16
Service offerings
Research and Advisory Execution Corporate Access & Events
Bajaj Auto Limited

16 May 2011
Investment Arguments
Volumes for FY11 have been robust in line with managements guidance

Expect the volumes to touch 4 mn units by the end of FY11E, which the company had guided for.
Strong growth expected: Bajaj auto has reported strong surge in volumes in the last one year on the back of successful launch of Discover and Pulsar variants. The two brand strategy of the company has helped the company in winning back the lost market share which the company had lost due to unsuccessful launch of XCD in FY09. Three wheeler volumes have also remained robust and have exceeded FY11 target of 4lac units by 9%. We believe both the domestic and export market demand remains strong and estimate volumes of 4.6mn in FY12E and 5.3mn in FY13E.
Domestic volumes
Three wheeler sales have been ahead of our estimates and are expected to do well.
Source: Jaypee Research, Company
Quarterly volumes
Exports have reported a 51% YoY YTDFY11 growth on the back of strong demand from Africa and Latin America.
Service offerings
Bajaj Auto Limited

16 May 2011

Exports are likely to cross managements guidance in FY11E.
Exports to remain strong: Exports of the company in FY11 have reported strong growth of 35% YoY to 1.2 mn units which has been ahead of managements earlier guidance. The company management expects the growth in export markets to continue due to strong underlying demand in Africa and Latin America. We believe higher exports will help the company in offsetting higher base in the domestic market in future .We estimate exports of 1.5mn and 1.9 mn in FY12E and FY13E. Brazil/China could be the next large export destinations: Export growth for BAL has been largely driven by strong demand in African and Latin American markets , the company is planning to expand its market in new territories viz that of Brazil and China which, if successful will lead to higher volumes looking at the size of both the markets.
Exports Volume
We estimate exports of 1.3mn and 1.6mn in FY11E and FY12E respectively
Currently exports account for 27% of overall volumes. Company plans to raise exports share to 50% by 2015
Exploring options in Brazil and China, one of the key markets for two wheelers across the globe.
Region wise Exports distribution (Q3FY11)
Latin America, 18% Southeast Asia, 8% South Asia, 35%
Africa, Middleeast, 39%
Service offerings
Bajaj Auto Limited

16 May 2011

Gained market share after loss across segments in FY10
Expect the company to recover market share Strong market share gain: After gaining strong market share till November 2010, the company has lost market share since December 2010 on the back of lower volumes which were affected by 1) Logistics issues and 2) lower exports .After the launch of Discover 125 in April 2011 the domestic volumes have improved which we believe will help the company to win back the lost market share in the next 2-3 months. The company is expected to launch 1 new model in H2FY12 which we believe will help the company in maintaining the market share at 29% levels.
Motorcycles market share (125-250cc)
Gained the lost market share from Hero Honda
Source: Jaypee Research, SIAM
Motorcycles market share (75-125cc)
Strong Pulsar sales coupled with good response for discover 100 cc has led to strong market share gain post Dec09.
Total Motorcycles market share
Service offerings
Bajaj Auto Limited

16 May 2011

Managements two brand strategy has been highly successful post the failure of XCD
Two brand strategy, seven variants: BALs two brand strategy (Pulsar and Discover) has been the success behind the companys strong volume growth seen in last one year. The company has launched Discover 100, Pulsar 135 and Discover 150 in the last one year after the failure of XCD. The Company has also launched Discover 125 in April 2011 which has contributed around 20000 units in April 2011. The Discover family models have been very well accepted in the market which sells close to 135,000 units a month while the Pulsar brand sells close to 75,000 units a month. The company currently has seven variants of Pulsar and Discover.
Bajaj Auto product matrix
Company will continue to focus on the two brands Viz Discover and Pulsar
Source: Jaypee Research, Overdrive
Currently offering 7 variants under the two brand strategy
Hero Honda product matrix

95 85 75
in ` 000
Karizma ZMR
Products largely in <125CC

Karizma
65 Glamour Fi 55 45 35 25 75 100 125 Passion Pro Passion Plus Splendor Pro Splendor Plus Splendor NXG CD Deluxe Pleasure CD Dawn Glamour Disc Splendor
Hunk CBZ Extreme
150 CC
175
200
225
250
Source: Jaypee Research, Overdrive
Service offerings
Bajaj Auto Limited

16 May 2011

We estimate margins in excess of 20% in FY11E and FY12E
Margins to remain constant: BAL has consistently clocked margins in excess of 20% in the last 6 quarters. The Company reported best ever margins of 22.9% in Q4FY10 due to higher sales and improvement in product mix. In Q1FY11 there was sequential drop in margins across the industry due to cost pressures arising out of change in emission norms and higher rubber prices, as a result BALs EBITDA margin during the quarter dropped by 300 bps. However, in Q3FY11 BALs margins have improved by 80 bps, its rival Hero Honda has reported drop in margins. Price hike to help Bajaj Auto maintain margins at 20%: BAL has taken two price hikes in first four months of CY12 months, one in the month of January and other in the month of February. For FY11, EBIDTA margin of the company is expected to be at 20.3%. However, with the steep increase in commodity prices the EBITDA margins are expected to drop below 20% levels in Q4FY11 and H1FY12. We estimate the Q4FY11 EBITDA margin at 19.7% and for FY12E we estimate EBITDA margin at 19.5%.
EBITDA margin estimate
Price hike of 2% in October to help the company in improving margins in H2FY11
We expect FY11E and FY12E margins to sustain at 20.4% and 20.1% in FY11E and FY12E respectively
Improved margins in Q2FY11 after a 300 bps sequential drop in margins during Q1FY11.
BAL and HH EBITDA margin comparison
Service offerings
Bajaj Auto Limited

16 May 2011

Capacity not a constraint as the company will have a capacity of 5 mn by FY11 end, sufficient enough for FY12 volumes.
Capacity not a constraint: BAL currently has a capacity of 5mn vehicles which is sufficient enough to meet our FY12E volume expectation of 4.6mn units. The company was facing capacity constraints in the three wheeler segment wherein the company has expanded the capacity to 0.5mn units .
Currently at 5mn capacity

We expect FY12 volumes at 4.6 mn units. Location Chakan Waluj Pantnagar Total Motorcycles 1.2 1.5 1.8 4.5 Three wheelers 0.5 0.5
Service offerings
Bajaj Auto Limited

16 May 2011
Q3FY11 result review
BAL reported 27% YoY growth in net sales , led by improvement in average realizations and higher volumes.

Strong quarter, EBITDA Margins improves by 80 bps QoQ Strong volume growth: Sales volume of the company during the quarter grew by 17% YoY to 0.94 mn units largely on the back of robust Pulsar sales (246,000 units) and Discover sales (392,000 units). Realizations aid net sales: The company reported a top line growth of 26.7% YoY to `41.7 bn on the back of improvement in realizations which stood at `44,116 per vehicle (up by 8.3% YoY and 1.7% QoQ). Improved product mix (consisting of higher Pulsar, Discover and three wheeler sales) and price hike taken in Q2FY11 led to improvement in realizations. EBITDA margins in line with management guidance: Due to change in technology on account of emission norms, RM cost as a % of sales during the quarter increased by 70 bps sequentially to 71.4%. Higher input costs resulted in a 40 bps sequential fall in EBITDA margins to 20.3%, which was in line with managements guidance of EBITDA margin in excess of 20%. Net profit grows by 57% YoY: Aided by stronger EBITDA and lower tax outgo BALs PAT during the quarter stood at `6.67 bn (up by 40% YoY)
Particulars (` mn) Sales Volume Avg. Realizations Sales EBIDTA EBIDTA Margin (%) PBT Tax PAT Q3FY11 946850 44,116 41,770.8 8,493.2 20.3% 9,174.0 2,502.9 6671.1 Q3FY10 809218 40,725.1 32,955.5 7,235.3 22.0% 6,771.4 2,020.0 5058.4 YoY% 17.0% 8.3% 26.7% 17.4% (170)bps 35.5% 23.9% 31.9% Q2FY11 1000570 43,393.5 43,418.2 8,971.7 20.7% 9,502.8 2,682.0 6820.8 QoQ% -5% 1.7% -4% -5.3% (40)bps -3.5% -7% -2.2%
Margins fell by 40 bps QoQ to 20.3% in Q3FY11.
RMC as a % of sales increased by 70 bps Q-o-Q to 71.4%
PAT grew by 32% YoY .
Service offerings
Bajaj Auto Limited

16 May 2011

Revenues have grown in Excess of 10% on a Q-o-Q basis on the back of strong volume growth
Quarterly performance
` in Millions
Net revenues YoY growth QoQ growth Adj. RMC % Sales Gross profit Other operating expenses Employee Expenses % Sales Other Expenses % Sales EBITDA margin
Q3FY10
32,955.5 56.7% 14.1% 22,567 68.5% 10,389 3,153.6 930 2.8 2,224 6.7 22.0% 7,235 136.6% 13.7% 357 11.9% 6.3% 6,879 151.1% 14.1% 0 351 1.07 (458) 6,771
Q4FY10
33,994.5 80.5% 3.2% 23,544 69.3% 10,451 2,679.9 862 2.5 1,818 5.3 22.9% 7,771 156.6% 7.4% 341 9.0% (4.4%) 7,430 173.6% 8.0% (0) 425 1.25 (458) 7,397 (9)
Q1FY11
38,900.6 66.4% 14.4% 27,682 71.2% 11,219 3,458.5 1,264 3.25 2,195 5.64 19.9% 7,760 70.4% (0.1%) 318 (3.8%) (6.7%) 7,442 76.2% 0.2%
Q2FY11
43,418.2 50.4% 11.6% 30,712 70.7% 12,706 3,734.6 1,142 2.63 2,593 5.97 20.7% 8,972 41.0% 15.6% 300 (10.8%) (5.9%) 8,672 43.8% 16.5% 7
Q3FY11
41,770.8 26.7% -3.8% 29,826 71.4% 11,945 3,451.6 1,066 2.55 2,386 5.71 20.3% 8,493 17.4% (5.3%) 310 (13.1%) 3.6% 8,183 19.0% (5.6%) 4 995 2.38 --
EBITDA margin of the company has been in line with the management guidance of 20%.
EBITDA YoY growth QoQ growth Depreciation YoY growth QoQ growth Amortisation EBIT YoY growth
After a drop of 300 bps in EBITDA margins in Q1FY11, margins have improved in Q2FY11.
QoQ growth Interest expenses, gross Other income % of Sales Exceptional items PBT Extraordinary items Income taxes % of PBT Reported net profit YoY growth QoQ growth
817 2.10 -8,259
837 1.93
9,503
9,174
2,020 29.8 4,751 189.2% 18.0% 307 5,058 146.5% 16.7%
2,101 28.4 5,287 306.0% 11.3% 307 5,594 183.7% 10.6%
2,360 28.6 5,899 101.0% 11.6% -5,899 95.1% 5.5%
2,682 28.2 6,821 69.3% 15.6% -6,821 57.3% 15.6%
2,503 27.3 6,671 40.4% (2.2%) -6,671 31.9% (2.2%)
One time VRS activity came to an end by the end of FY10.
Adjustments Adjusted net profit YoY growth QoQ growth
Service offerings
10
Bajaj Auto Limited

16 May 2011
Realization /Vehicle (`) Quarterly sales volumes

Quarterly EBITDA/Vehicle (`)
Quarterly PAT/Vehicle (`)
RMC /Vehicle (`)
Quarterly EBITDA/ PAT Margin
Source Jaypee Research
Service offerings
11
Bajaj Auto Limited

16 May 2011
Financial Analysis
Strong volume growth to aid net sales growth in FY11E and FY12E

Strong growth in sales: We expect BAL to report strong growth in net sales on the back of strong volume growth in FY12E. We estimate net sales to grow by 23% in FY12E backed by 21% volume growth in FY12E.We estimate volumes of 4.6mn in FY12E, driven largely by strong exports and motorcycle sales.
Net sales estimates
Estimate net sales growth of 41% and 19% in FY11E and FY12E.
Source: Jaypee Research. Company
Expect margins in excess of 20% in FY11E and FY12E.
Margins in excess of 20%: BALs EBITDA margin moved up sharply from 13.6% in FY09 to 21.7% in FY10 largely led by 1) better operating leverage due to improvement in volumes 2) better product mix and softening of key raw material prices. For 9MFY11 the company has reported margins of 20.3% and we expect the company to report margins of 20.3% in FY11. However, with the steep increase in commodity prices the EBITDA margins are expected to drop below 20% levels in Q4FY11 and H1FY12. We estimate EBITDA margin at 19.5% and 19% in FY12E and FY13E.
EBITDA Margin estimates
Service offerings
12
Bajaj Auto Limited

16 May 2011

Expect PAT growth of 37% in FY11E and 19.7% in FY12E on the back of improvement in EBITDA and incentives from tax free plant at Pantnagar
Net Profit to grow by 37% in FY11E: On the back of strong volume growth and higher production from the tax free plant at Pantnagar, we expect the companys PAT to report a growth of 21% in FY12 to `29.5bn. While, for FY11E we estimate net profit growth of 31% to `24.4bn.
Net profit estimates
Service offerings
13
Bajaj Auto Limited

16 May 2011
Key Risks:

Sharp increase in input costs could hurt the profitability of the company.
Input costs: Steel and aluminium constitute a major part of the raw material prices for BAL. Any significant spurt in steel and aluminium prices could hurt the margins of the company in turn affecting the profitability of the company.
Steel HRC (USD/Ton)
It would be difficult to pass on another price hike in short term as the company has already taken a price hike in October 2010
Source: Jaypee Research, Bloomberg
Aluminum (USD/Ton)
New launches by players in premium segment could impact the volumes of BAL
Rubber (INR/KG)
Excise duty rollbacks are expected in forthcoming budgets.
Service offerings
14
Bajaj Auto Limited

16 May 2011

New launches: BAL is a market leader in premium segment bikes largely due to its Pulsar brand which has been well accepted since inception. With new players entering Indian two wheeler markets there are chances BAL losing market share to other players in case of successful launches in premium segment. Expected excise roll backs: Demand for two wheelers had picked up after government offered various incentives in the form of excise cuts in FY09. Since automobile demand has picked up strong momentum in the last 18 months, there are chances of excise duty roll back in the forthcoming budget. Any significant excise duty hike could hurt the demand for BALs two wheelers in India. Removal DEPB benefit: - There have been market rumors regarding non extension of DEBP benefit from June 2011.Since, BAL derives 1/3rd of its revenues from exports, removal of DEBP would result in a drop in EBITDA margins of the company , thereby impacting the profitability of the company.
Valuation:
We expect BALs earnings to report a growth of 21% and 16% in FY12E and FY13E to `102 and `119 respectively. At CMP of `1309 the stock trades at 12.8x FY12E EPS and 11x FY13E EPS. We recommend a BUY rating on the stock with a target price of `1532 (15x FY12EPS).
P/E Band
Service offerings
15
Bajaj Auto Limited

16 May 2011
Key Financials:

Service offerings
16
Bajaj Auto Limited

16 May 2011

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16 May 2011

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Bajaj Auto Limited

16 May 2011

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Bajaj Auto Limited

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Bajaj Auto Initiating Coverage

May 16, 2011

Bajaj Auto Limited

Jaypee Research Desk

Promoters FII DII Others

Share Price Performance

Share Price Returns (%) 1M 6M -6% -17% 0% -8%

12M 22% 14%

Gaurant Dadwal gdadwal@jaypeeindia.com Prasun Kumar prasunkumar@jaypeeindia.com Contact No: +91-22-43542014

FY10 119210.0 25926.1 21.7 18641.9 15.6 64.4 20.3 7.2

FY11E 161071.1 32730.9 20.3 24482.8 15.2 84.6 15.5 5.7

FY12E 198515.9 38706.6 19.5 29545.4 14.9 102.1 12.8 4.8

FY13E 233832.7 44311.9 19.0 34306.1 14.7 118.6 11.0 4.2

Bajaj Auto Limited

Jaypee Research Desk

Research and Advisory Execution Corporate Access & Events

Bajaj Auto Limited

Jaypee Research Desk

Source: Jaypee Research, Company

Source: Jaypee Research, Company

Research and Advisory Execution Corporate Access & Events

Bajaj Auto Limited

Jaypee Research Desk

Exports are likely to cross managements guidance in FY11E.

We estimate exports of 1.3mn and 1.6mn in FY11E and FY12E respectively

Source: Jaypee Research

Region wise Exports distribution (Q3FY11)

Latin America, 18% Southeast Asia, 8% South Asia, 35%

Africa, Middleeast, 39%

Source: Jaypee Research, Company

Research and Advisory Execution Corporate Access & Events

Bajaj Auto Limited

Jaypee Research Desk

Gained market share after loss across segments in FY10

Gained the lost market share from Hero Honda

Source: Jaypee Research, SIAM

Motorcycles market share (75-125cc)

Source: Jaypee Research, SIAM

Total Motorcycles market share

Source: Jaypee Research, SIAM

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Bajaj Auto Limited

Jaypee Research Desk

Source: Jaypee Research, Overdrive

Currently offering 7 variants under the two brand strategy

Hero Honda product matrix

Products largely in <125CC

Hunk CBZ Extreme

Source: Jaypee Research, Overdrive

Research and Advisory Execution Corporate Access & Events

Bajaj Auto Limited

Jaypee Research Desk

We estimate margins in excess of 20% in FY11E and FY12E

Price hike of 2% in October to help the company in improving margins in H2FY11

Source: Jaypee Research

BAL and HH EBITDA margin comparison

Source: Jaypee Research

Research and Advisory Execution Corporate Access & Events