Bajaj Auto

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Khambatta Securities Ltd.

Bajaj Auto Limited
MEMBER OF EQUITY & DERIVATIVE SEGMENTS DEPOSITORY PATICIPANT
THE STOCK EXCHANGE, MUMBAI NATIONAL STOCK EXCHANGE OF INDIA LTD. CENTRAL DEPOSITORY SERVICES (I) LTD.
Fax: +91-(0)22 6641 3377 www.khambattasecurities.com
05 June 2012
Motoring powerfully through the cycles

Investment summary
New product launches to support volume growth
Strong Buy
Sector Target Price
: Automobile : Rs 1,954
Current Market Price : Rs 1,487 Market Cap : Rs 432 bn
Bajaj Auto Limited (BAL) is likely to launch a Discover variant in 2H FY13, a Pulsar variant by the end of Q1 FY13 and previously launched Bajaj Boxer 150cc with modifications in 1H FY13. We believe that these launches will strengthen the companys product portfolio and support volume growth. The first of BALs products co-developed with KTM Power Sports, the KTM Duke 200 has received impressive response in the early stages of its launch in Europe and India. BAL has lined up more variants in the range of 125cc to 250cc for the KTM Duke model. We believe that these product launches will help BAL to sustain revenue growth of ~15.5% CAGR for the next three years. The export market will remain a key growth driver BAL recorded export volumes of 1.6 mn vehicles in FY 2012 with the contribution of exports to total volumes touching 36%. Export revenues have grown at a CAGR of 37.3% over the period FY 2006 to FY 2011. We expect exports to grow by a CAGR of 25% between FY 2013 and FY 2015 aided by strong brands such as Discover, Pulsar, Boxer and KTM Duke. 3W sales to be driven by passenger carriers Three wheelers (3W) contributed 11.84% of BALs total volume in FY 2012. The company has a 48% and 7% market share in the domestic Passenger Carrier (PC) and Goods Carrier (GC) sub-segments, respectively. In the face of stiff competition from four-wheeled LCVs, we expect BALs 3W volume growth to be driven by PCs. Margins are expected to remain stable We expect conversion costs to remain stable in the foreseeable future while raw material costs are anticipated to cool down further. We expect, on average, 2% increase in total costs until FY 2015. Going forward, we believe BAL will be able to maintain its margins at current levels on the back of a stable product mix and full pass through of any increase in raw material costs to the customers. Initiate coverage with a Strong Buy rating Bajaj Auto is currently trading at a trailing 12-month (TTM) P/E of 14.3x which is within its five year range of 12.2x-18.2x. Considering the factors outlined above, we have valued the BAL common stock at 16x FY 2013E EPS of Rs 120, generating a value of Rs 1,925 per share. Assuming a target EV/EBITDA multiple of 15x for FY 2013E EBITDA, we arrive at a target price of Rs 1,889 per share. Our DCF model generates a valuation of Rs 2,001 per share. Using a weighted average approach, we arrive at a target price of Rs 1,954, generating a 31% potential upside from current levels. Therefore, we initiate coverage on BAL with a Strong Buy rating.
Exhibit 1:Key Financials
52 Weeks High/Low : Rs 1,839/1260 Daily Avg. Volume Shares in issue Face Value Beta Pledged Shares Year End BSE Scrip Code NSE Scrip Code Bloomberg Code Reuters Code Nifty Sensex Analyst Price Performance
BAL 2000 1800 1600 1400 1200 1000
May12 Feb12 Mar12 Aug11 Sep11 Nov11 Dec11 Apr12 Jun11 Jul11 Oct11 Jan12
: 448,630 : 289 mn : Rs. 10 : 0.9 : 0% : March : 532977 : BAJAJ-AUTO : BJAUT IN : BAJA. BO : 4,895 : 16,123 : Ravikant Sangepag
NIFTY
CNXAUTO
Shareholding Pattern
Promoter 50%
FII 16%
Rs m n
FY 10 115,085 36.41% 21,801 166.39% 18.94% 17,036 159.51% 118
FY 11 159,981 39.01% 27,582 26.52% 17.24% 33,397 96.04% 115 -1.98%
FY 12E 188,803 18.02% 30,713 11.35% 16.27% 30,041 -10.05% 104 -10.05%
FY 13E 212,957 12.79% 35,395 15.25% 16.62% 34,823 15.92% 120 15.92%
FY 14E 251,338 18.02% 41,272 16.60% 16.42% 40,655 16.75% 140 16.75%
DII 9%
Sales % Growth EBITDA % Growth
Public 25%
EBITDA Margin
Net Income % Growth EPS
% Growth 159.51% Source: Company data, Khambatta Research
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Bajaj Auto Limited
05 June 2012
Company background:
BAL is the worlds second largest 2W & largest 3W manufacturer in terms of volume and the lowest cost 2W producer globally
Founded in 1926, Bajaj Auto Limited (BAL) is Indias oldest two wheeler (2W) manufacturer. It is the worlds second largest 2W and largest three wheeler (3W) manufacturer in terms of volume. BAL is also the worlds lowest cost 2W manufacturing company. The company has facilities in India, the Netherlands and Indonesia. Bajaj is a well-known brand in several countries of Latin America, Africa, the Middle East, South Asia and South East Asia. In India, BAL operates three manufacturing units in Aurangabad (Maharashtra), Pune (Maharashtra) and Pantnagar (Uttaranchal) with a combined capacity of ~5 mn vehicles. The company has plans to set up another factory in the western Indian state of Gujarat. Subsidiaries Bajaj Auto International Holdings BV Bajaj Auto International Holdings BV (BAIH), a wholly-owned Netherlands-based subsidiary of BAL, was established in FY 2008 to focus on international ventures including possible acquisitions. BAL, through BAIH, started buying stake in KTM Power Sports AG (KTM) in 2007 when it bought 14.5% shares of the company for approximately Rs 3 bn. The company has since been continuously increasing its stake in KTM and following the latest round of share purchase BAL now owns more than 47% of KTM. KTM is Europes second largest sports motorcycle manufacturer. KTM is a renowned brand and its products are based on the latest and most sophisticated technologies. As a matter of fact it has been the worlds off-road racing champion for the last eight years. As a result of its superior technology and brand appeal KTMs motorcycles have strong pricing power. In other words, KTM has an excellent front-end. What they lack is the back-endeconomies of scale and a low-cost production centre. With BAL having that advantage, both the companies will derive benefits from using common platforms for KTM and Pulsar motorcycles for key emerging markets. PT Bajaj Indonesia (PT BAI) PT BAI was incorporated in FY 2007 as a subsidiary of BAL in Indonesia with a share capital of US$ 12.5 mn. During FY 2010, BAL infused additional capital of US$ 17 mn, thereby increasing its stake to 98.9% in PT BAI and taking BALs total investment in the subsidiary to US$ 29.5 mn (Rs 1,378 mn). Considering continued losses and a longer-than-anticipated gestation period, after assessing the carrying value of investments made in PT BAI, BAL made an impairment of Rs 1,020 mn in FY 2011.
Exhibit 2: Key financials of peer group (FY 2011 standalone)
Rs m n Net Sales Y-o-Y Growth EBITDA EBITDA Margin EBIT EBIT Margin PAT PAT Margin EPS
Source: Company Data
TVS 61,795 42% 2,832 4.58% 1,759 2.85% 1,946 3.15% 4.1
BAL 159,981 39% 27,582 17.24% 26,354 16% 33,397 20.87% 115.41
HM C L 192,450 22% 24,057 12.50% 20,033 10.41% 19,279 10.02% 96.54
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Bajaj Auto Limited
05 June 2012
Investment Rationale:
New product launches to support volume growth
The upcoming re-launch of the Pulsar 200cc and the expected launch of a new Discover variant will further strengthen BALs product portfolio
After 10 years of leadership of the Pulsar family, BAL unveiled the new 200cc Pulsar at the Delhi Auto Expo 2012. The motorcycle is expected to hit the roads in 1Q FY13 and will be priced under Rs 100,000 in a segment in which its nearest rivals are Yamaha's R15 and Honda's CBR bikes with price tags in the range of Rs 100,000 to Rs 150,000. BAL is also planning to launch a 350cc Pulsar next year and is exploring even bigger motorcycles under the Pulsar brand.
with the new triple spark technology, is likely to be launched by 2H FY13. This
An all-new commuter bike which is likely to be a part of the Discover family, fitted
Discover variant will also have a new styling and consequently is expected to be a completely new model in terms of technology, design and features. We believe the new Discover and Pulsar bikes will further strengthen BALs product portfolio within the premium commuter segment, where the company is already well-positioned, and drive volume growth going forward.
Following the successful Indian launch of the KTM Duke 200 BAL plans to introduce other variants of the model in the country
BAL is expected to benefit from its alliance with Austria-based KTM in the longer term. The company has a 47% stake in KTM and will gain in terms of access to technology while also finding a way to the European market. The first of BAL-KTM co-developed products, KTM Duke 200 has received impressive response so far in the early stages of its launch in Europe and India. BAL has lined up more variants of KTM Duke in the range of 125cc to 250cc. We believe that these product launches will help BAL to generate revenue growth of ~15.5% CAGR over the coming three years. Further, BAL is all set to re-enter the scooter market, where it had a leadership position in the past, with the launch of its automatic gear scooter Blade in 3Q FY13. However, we do not anticipate the scooter segment to be a significant revenue driver over the next couple of years, at least. In the long run, the key demand drivers for the 2W industry will be rising per capita GDP, moderate penetration levels, favourable demographic profile, increasing rural demand, growing urbanization, growing replacement demand and lower dependence on financing. Increasing focus on the rural market The rural market accounts for 55% of overall sales of the 2W market. Sales of 2W in smaller towns and rural locations (<1mn population), accounting for 75% of Indias aggregate 2W sales, has grown at more than 29% CAGR over FY 2009 to FY 2011 in spite of limited availability of retail finance. As a matter of fact the penetration of 2W financing in rural India is under 30%. With the objective of enhancing its rural presence, BAL plans to increase its advertising spend on state-owned broadcaster Doordarshan from 4% to 16% of its total advertising budget. The company recognises that Doordarshan has the most extensive reach in rural areas amongst all TV channels. The company has also beefed up its small town penetration by increasing its dealer strength by over 20%. Following the expansion of the dealership network BAL now has over 600 dealers across the country. BAL launched the Boxer 150cc (Bharat Motorcycle) in August 2011. The company currently sells 3,000 units of the model per month which is far below its expectations. With the variant having failed to live up to expectations and break Hero MotoCorps stranglehold over the rural market, BAL is now planning to relaunch the model with a few modifications, supported by a new marketing and brand building strategy. We believe, this time around, BAL will be successful in competitively positioning the Boxer in the rural market after having learnt from its past mistakes.
The rural market contributes 55% of domestic 2W volumes while small towns and rural locations together account for 75%
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Bajaj Auto Limited
05 June 2012
Exhibit 3: Market share: motorcycle segment
HMCL 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY07
Source:SIAM
45.80% 49.40% 52.40% 51.90% 48.00% 48.27% 33.50% 5.30% 2.40% 13.00% 4.20% 4.30% 9.40% 32.70%
BAL
TVS
4.40% 5.90% 9.30%
HMSI
4.60% 6.20% 7.60% 29.70%
Others
4.60% 7.10% 8.00% 32.30% 5.17% 7.01% 7.14% 32.41%
28.00%
FY08
FY09
FY10
FY11
FY12
ZZZ
Exhibit 4: Market share: executive motorcycle sub-segment

HMCL BAL 6% 2% 16% 6% 59% TVSL 5% 6% 21% 8% 49% 11% FY09 HMSI Yamaha 5% 8% 22% 7% 45% 13% FY10 Others
BAL has a market share of 50% in the executive segment (125-249 cc range) which contributes 69% of domestic motorcycle volumes
120% 100% 80% 60% 40% 20% 0%

Source:SIAM
7% 4% 12% 11%
4% 8% 19% 6% 49% 13% FY11
2% 10% 21% 6% 50% 11% FY12
59%
8% FY07
11% FY08
Exhibit 5: Market share: scooter segment

HMCL 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
26.50% 2.10% 9.50% 24.20% 2.00% 9.70% 21.20% 1.00% 13.30% 20.70% 0.30% 14.40% 21.90% 0.00% 17.00% 20.93% 0.00% 16.29% 56.00% 58.50% 56.90% 50.30% 42.70% 46.41% 5.90% 5.60%
BAL
TVS
7.60%
HMSI
14.30%
Others
18.40% 16.37%
FY07
FY08
FY09
FY10
FY11
FY12
Source:SIAM
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Bajaj Auto Limited
05 June 2012
Exhibit 6: History of product launches
Product Launches History 2001 - Eliminator, Pulsar 2003 - Caliber115, Wind 125, Pulsar Endura FX 2004 - CT 100, New Chetak 4-stroke with Wonder Gear, Discover DTS-i 2005 - Wave, Avenger, Discover 2006 - Platina 2007 - Pulsar-200 (Oil Cooled), Kristal, Pulsar 220 DTS-Fi (Fuel Injection) , XCD 125 DTS-Si 2008 - Discover 135 DTS-i - sport (Upgrade of existing 135cc model) 2009 - XCD 135cc , Pulsar 180 DTS-i UG IV, Discover 100 DTS-Si 2010 - Pulsar 135, Pulsar 150 DTS-i UG IV, Pulsar 220 DTS-i , Discover 150, Avenger 220 2010 - XCD 135cc , Pulsar 180 DTS-i UG IV, Discover 100 DTS-Si 2011 - Pulsar 135, Pulsar 150 DTS-i UG IV, Pulsar 220 DTS-i , Discover 150, Avenger 220 2012- Discover125, Boxer150, KTM duke 200, Pulsar and Discover variants
Source: Company data
Exhibit 7: Domestic product portfolio

Se gm e nt Entry HM CL (CC) CD Dawn (100) CD Deluxe (100) Splendor+ (100) Splendor NXG (100) Passion Pro (100) Splendor Pro (100) Executive Super Splendor (125) Glamour PGm Fi (125) Glamour (125) Impulse (150) Achiever (150) CBZ Xtreme (150) Hunk (150) Premium Karizma (223) Karizma ZMR (223) Scooter Pleasure (100) Pulsar (220) Avenger (220) Wego (88) Scooty (88) Scooty (88) Scooty (88)
B A L (CC) Platina (100) Discover (100)
TV SL (CC) Sport (100) Star City (110) Jive (110)
Discover (125) Discover (150) Boxer (125) Pulsar (135) Pulsar (150) Pulsar (180)
Flame (125) Flame (125) Apache RTR (160) Apache RTR (160) Apache RTR (180) Apache RTR (180)
Exports contribute ~36% of BALs revenues and this is expected to reach ~40% by FY 2013
The export market will remain a key growth driver Over the years, BAL has made a successful transition from being a scooter manufacturing company to a predominantly motorcycle producing one. Further, it is also Indias leading exporter of motorcycles and 3W. BALs motorcycle exports have gone up six times in the last five years.
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Bajaj Auto Limited
05 June 2012
BAL recorded export volumes of 1.6 mn vehicles in FY 2012 with the share of exports as a proportion of total volumes touching 36%. After having grown at a CAGR of 37.3% over the period FY 2006 to FY 2011, we expect export revenues to grow by a CAGR of 25% from FY 2013E to FY 2015E on the back of strong brands such as Discover, Pulsar, Boxer and KTM Duke.
Exhibit 8: Export performance of BAL
Rs bn 50 40 30 20 10 0 FY06 FY07 FY08 FY09 FY10 FY11 Growth 35% 30% 25% 20% 15% 10% 5% 0%
Exhibit 9: Contribution of exports to total volumes (FY 2012)

B A L Pr o d uct 2W 3W Total
Source: SIAM
F Y 12 33% 61% 37%
Co mp a ny BAL TVSL HMCL
Ex p o r t Co ntr i b uti o n 37% 13% 3%
Between FY 2006 and FY 2012, contribution of exports in BALs total revenues increased from 14% to 36%. We expect this trend to continue with exports contributing 40% of BALs revenues in FY 2013.
Exhibit 10: Contribution of exports to total sales
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% FY08 FY09 FY10 FY11 FY12E FY13E 24% 31% 28% 28% 36% 40%
Source: Company data, Khambatta Research
Superior product quality enables BAL to price its two wheelers at a 40% premium to Chinese vehicles in the Africa markets
BAL has successfully penetrated the export market with its flagship products Pulsar, Discover and Boxer. The newly launched Pulsar 135 LS and Discover 150 have also made a mark in the export market. In the African markets where BAL competes with Chinese OEMs, the company sells its 2Ws at a 40% premium to the Chinese vehicles. In spite of the premium pricing, its superior quality products have enabled BAL to successfully capture market share to become the second largest player in the Nigerian market. Further, within the exports market the company has a
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Bajaj Auto Limited
05 June 2012
diversified market base which protects it to a certain extent from business cycle risks. BAL has presence in over 36 countries including emerging markets in Africa and the Middle East (47%), South Asia (27%), Latin America (17%) and South East Asia (9%) regions. The major export markets where BAL sells its products are relatively underpenetrated compared to other emerging markets such as Malaysia, Taiwan and Thailand, thereby providing huge growth potential.
Exhibit 11: Geographical split of exports by volume
Africa&MiddleEast South Asia 9% LatinAmerica South EastAsia
17% 47%
27%
BALs 3W exports are expected to grow at 20% in FY 2013. The company exports as many three-wheelers (predominantly passenger carriers) as it sells domestically. Export demand is primarily driven by the four-stroke 3W.
3W contributed ~25% of BALs sales and ~12% of total volumes in 3Q FY12
3W sales to be driven by passenger carriers 3W contributed 11.84% of BALs total volume in FY 2012. The company has a 48% and 7% market share in the domestic Passenger Carrier (PC) and Goods Carrier (GC) sub-segments, respectively. We expect the 3W segment to grow at CAGR of ~13% through FY 2015 while its contribution to total volumes is expected to rise to 12.50% in FY 2013. BALs market share in the 3W GC sub-segment had declined significantly to 7% in FY 2012 compared to 24% in FY 2006. This sharp decline in market share is mainly attributable to the stiff competition from four-wheeled LCVs such as the Ace, Ape, Gio and Maxximo. In such a scenario, going forward we expect BALs 3W volume growth to be driven by PCs. We expect overall 3W sales in India to grow at CAGR of 12% through FY 2015 in the absence of new permit issuances by the state governments. However, there could be a surprise from the Karnataka government with regards to the issuance new 3W PC permits.
We expect the 3W segment to grow at CAGR of ~13% through FY 2015
Over the longer term we expect a structural shift in the domestic passenger 3W sub-segment with four-wheelers replacing them. BAL has embarked on a brandbuilding exercise for its 3W portfolio under the RE' brand. The RE range will have five platforms, one of which will be four-wheeled. The company is expected to launch the four-wheeler RE60 by the end of FY 2013. We expect this product to contribute incremental volumes in both the domestic and international markets.
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Bajaj Auto Limited
05 June 2012
Exhibit 12: Three-wheeler export performance (Lakh units)
GC 6 5 4 3 2 1 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 YTD
PC
Total
Source:SIAM
Exhibit 13: Three-wheeler market share trend

GC 80% 70% 60% 50% 40% 30% 20% 10% 0% FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 YTD PC Total
Source:SIAM
Margins are expected to remain stable BAL is the worlds lowest cost 2W company. Amongst its peers TVS reported an EBITDA margin of 4.58% while HMCLs EBITDA margin was 12.50% in FY 2011; in comparison BAL reported an EBITDA margin of 17.24% in FY 2011. BALs higher operating margin structure is primarily attributable to its lower proportion of selling and marketing expenses, which in turn is a reflection of the strong image of the companys brands. Going forward, we expect BAL to maintain its cost advantage as HMCLs marketing expenses will increase following its split with Honda.
BAL has been successful to pass on the loss of 3.5 percentage points following the withdrawal of the DEPB through price hikes
The Duty Entitlement Pass Book (DEPB) scheme, which gave liberal reimbursements to exporters at the rate of 8% to 9% of the freight on board (FOB) value, came to end on 30 September 2011. Subsequently exporters will have to migrate to the Duty Drawback scheme where the reimbursement is much lower at ~5.5% of the FOB value. BAL has, however, been successful to pass on the loss of 3.5 percentage points to the customers through price hikes. Rising raw material costs have been the biggest challenge for sustaining profit margins in the industry. Cost of raw materials is the biggest component of the cost structure accounting for ~72% of total costs. We expect raw material prices to cool down in the near term. On back of strong demand, we believe, BAL will be able to pass on the increase in input costs to customers.
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Bajaj Auto Limited
05 June 2012
Exhibit 14: Raw material cost split
Others 22% Plastics/Rubber 8%
Steel 40%
Alluminium 30%
Source: ICRA
Exhibit 15: Raw material costs (Rs/kg)

Steel 140 120 100 80 60 40 20 FY 05
Source: Bloomberg
Alluminium
FY 06
FY 07
FY 08
FY 09
FY 10
FY 11
Stabilising raw material prices should help BAL maintain margins
In the manufacturing of 2W the conversion cost (cost incurred for converting commodities into finished auto parts) is of primary importance as it accounts for a major portion of the total raw material cost. On average ~75% of raw material costs comprise conversion costs while the balance is the actual cost of raw materials. We expect conversion costs to remains stable in the foreseeable future while raw material costs are anticipated to cool down further. Based on our analysis of costs, we expect, on average, 2% increase in total costs until FY 2015.
Exhibit 16: Sensitivity of total cost to input and conversion costs
RM Cost Input cost Conversion cost Impact of Input cost Impact of conversion cost Input cost Conversion Cost Increase in total cost
Source: Khambatta Research
Sce nario 1 Sce nario 2 Sce nario 3 72% 72% 72% 25% 75% 18% 54% 4% 2% 1.8% 25% 75% 18% 54% 5% 2% 2.0% 25% 75% 18% 54% 6% 2% 2.2%
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Bajaj Auto Limited
05 June 2012
Going forward, we believe BAL will be able to maintain its margins at current levels on the back of a stable product mix and full pass through of any increase in raw material costs to the customers.
Valuation
We expect BALs revenues to grow by 12.8% while EBITDA and PAT are expected to increase 12.8% and 11.4%, respectively in FY 2013. We expect an EPS of Rs 120 and 140 in FY 2013 and FY 2014, respectively.
We value BAL at Rs 1,954 with a Strong Buy rating
Bajaj Auto is currently trading at a trailing 12-month (TTM) P/E of 14.3x which is within its five year range of 12.2x-18.2x. Considering the factors outlined above, we have valued the BAL common stock at 16x FY 2013E EPS of Rs 120, generating a value per share of Rs 1,925 per share. Assuming a target EV/EBITDA multiple of 15x FY 2013E EBITDA, we arrive at a value per share of Rs 1,889. BALs valuation based on the DCF methodology is Rs 2,001 per share. In our DCF model we have assumed a weighted average cost of capital (WACC) of 14.3% and a terminal growth rate of 4% following explicit free cash flow forecasts through FY 2022. Using a weighted average approach, we arrive at a target price of Rs 1,954, which generates a 31% upside potential from current levels. Therefore, we initiate coverage on BAL with a Strong Buy rating.
Exhibit 17:Valuation
M etho do lo gies DCF Using FCFF P/E Approach (FY 13) EV/EBITDA (FY 13) Target Price Current Price Upside
W e ights 50% 25% 25%
Price 2,001 1,925 1,889
Target Price 1,000.27 481.37 472.31 1,954 1,487 31%
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Bajaj Auto Limited
05 June 2012 Financial statements

Exhibit 18:Income statement
Figures In INR mn Net Sales COGS Gross Profit Operating Expenses EBITDA Depreciation Operating Profit Non Operating Income EBIT Interest Expense EBT Taxes PAT Diluted EPS
FY 09 65,244 19,126 10,942 8,184 1,298 6,886 4,956 11,842 210 9,581 3,016 6,565 45.37
FY 10
FY 11
FY 12E
FY 13E
FY 14E
84,369 115,085 159,981 188,803 212,957 251,338 81,408 118,854 141,025 159,423 188,155 33,677 11,876 21,801 1,365 20,436 5,350 25,786 60 24,111 7,075 17,036 117.75 41,127 13,545 27,582 1,228 26,354 9,925 36,279 17 43,508 10,110 33,397 115.42 47,777 494 30,713 1,456 29,257 12,568 41,824 222 40,262 10,221 30,041 103.81 53,535 222 35,395 1,435 33,961 12,777 46,738 5 46,733 11,910 34,823 120.34 63,183 262 41,272 1,785 39,487 15,080 54,567 8 54,559 13,904 40,655 140.50
Exhibit 19:Cash flow statement
Figures In INR mn PAT Depreciation Change in WIP Cash Flow from Operations Capex Capital WIP Investments Misc exp not written off Cash Flow from Investing Secured Loans Availed Unsecured Loans Availed areholders fund (adjustment) Deferred Taxes Cash from Financing Change in Cash Opening Cash Closing Cash
FY 09 6,565 1,298 (345) 7,518 (4,035) 127 486 (1,833) (70) 2,426 (3,744) (68) (1,455) 808 561 1,369
FY 10 17,036 1,365 11,263 29,664 (738) (195) (22,130) 1,833 130
FY 11 33,397 1,228 2,638 37,263 (1,260) (283) (7,737) (9,280) 106
FY 12E 30,041 1,456 782 32,279 (2,000) 59 (876) (2,818) (235) (471) 187 10,210 5,565 15,775
FY 13E 34,823 1,435 (16,433) 19,825 (5,000) 876 (4,124) 1,520 3,291 16,538 19,830
FY 14E 40,655 1,785 133 42,573 (2,000) (2,000) (894) 23,417 19,830 43,247
(5,255) (21,229)
(2,444) (10,240) (25) (355) 1,369 1,014 280 4,551 1,014 5,565
(6,450) (13,579) (18,732) (13,929) (16,262) (8,789) (23,433) (19,251) (12,410) (17,156)
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Bajaj Auto Limited
05 June 2012
Exhibit 20:Balance sheet
Figures In INR mn Sources of funds Shareholders Funds Share Capital Reserves and Surplus Loan Funds Secured Unsecured Deferred Tax Liability Total Application of Funds Fixed Assets Gross Block Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets Inventories Sundry Debtors Cash & Bank Balance Loans & Advances Other Current Assets Less Current Liabilities Net Current Assets Misc Exp Not Written off Total
FY 09 18,697 1,447 17,250 15,700 15,700 42 34,439
FY 10 29,283 1,447 27,837 13,386 130 13,256 17 42,686
FY 11 49,102 2,894 46,209 3,252 235 3,016 297 52,651
FY 12E 60,411 2,894 57,517 2,546 2,546 484 63,441
FY 13E
FY 14E
81,305 105,698 2,894 4,065 4,065 484 2,894 3,171 3,171 484 78,411 102,804
85,854 109,353
33,502 18,079 15,423 221 18,085 23,253 3,388 3,587 1,369 13,652 1,257 24,376 1,833 34,439
33,793 18,997 14,796 415 40,215 44,181 4,462 2,395 1,014 34,916 1,394 56,921 42,686
33,952 19,125 14,827 699 47,952 76,668 5,473 3,628 5,565 59,838 2,164 87,495 52,651
33,238 18,082 15,155 640 48,828 6,785 4,228 16,538 16,227 2,956 47,370 (635) 63,988
37,690 19,517 18,173 640 47,952 7,341 4,842 19,830 79,646 2,875 19,089 -
39,690 21,302 18,388 640 47,952 8,664 5,734 43,247 94,000 3,393 42,373 -
46,735 114,533 155,039
95,444 112,666
(1,123) (12,740) (10,827)
85,854 109,353
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Exhibit 21: Ratio analysis
FY 09 Working Capital Ratios Inventory TO Debtors TO Leverage Ratios Debt/Equity Debt/EBITDA EBIT/Interest Exp Profatibility Ratios EBITDA Margin EBIT Margin Net Margin Valuation Ratios Price/Earnings Price/Book Value EV/EBITDA ROE 16.7 7.5 17.3 38% 18.3 7.6 10.8 71% 12.2 9.4 16.6 85% 14.3 4.2 13.6 55% 12.4 5.3 11.7 49% 10.6 4.1 9.5 43%
FY 10 19 24 18 48 0.5 0.6 431 18.9% 22.4% 14.8%
FY 11 22 44 0.1 0.1 2,147 17.2% 22.7% 20.9%
FY 12E 22 44 0.1 0.1 188 16.3% 22.2% 15.9%
FY 13E 22 44 0.1 0.1 9,181 16.6% 21.9% 16.4%
FY 14E 22 44 0.0 0.1 6,711 16.4% 21.7% 16.2%
0.8 1.9 56 9.7% 14.0% 7.8%
Key Risks Increasing competition: Sales may be negatively affected due to increasing competition and failure on the part of BAL to launch new models and variants. Rise in raw material prices: If the prices of steel, aluminium, and rubber increase at a higher than estimated rate, margins may be adversely affected as a result of the companys inability to fully pass through the higher costs to customers. Alternatively, product price increase may negatively affect demand. Riseininterestratesandfuelprices:increase in interest rates and fuel prices may affect sales adversely.
Exhibit 22: Risk matrix
TV SL Increase in competition Product Portfolio mix Increase in RM cost Interest rates & Fuel prices Source: Khambatta Research High Low Same Same BAL Medium Low Same Same HM CL Medium High Same Same
Page 13
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Bajaj Auto Limited
A n i sa K e i th A tu l Su ch a k A m i t Sh a h A n a l y st Ritwik Bhattacharjee Prashant Gattani Nirav Shah Atish R Matlawala Devang Bhatt Fathima Khan Ravikant Sangepag Ronak Jhaveri Raj Kumar Jha He a d o f Gl o b a l Sa l e s H e a d o f I n d i a Sa l e s Ch i e f De a l e r Se cto r / I n d u str y / Co v e r a ge Economy, Financials FMCG Oil & Gas Power, Capital Goods Telecom, IT Services Health Care Automobiles Metals Cement
05 June 2012
anisa@khambattasecurities.com atul@khambattasecurities.com amit@khambattasecurities.com Em a i l ritwik@khambattasecurities.com prashant@khambattasecurities.com nirav@khambattasecurities.com atish@khambattasecurities.com devang@khambattasecurities.com fathima@khambattasecurities.com ravikant@khambattasecurities.com ronak@khambattasecurities.com rajjha@khambattasecurities.com 212-245-2991 347-229-5195
91-22-40273336 91-9820027836 91-22-40273342 91-9820643464 Ph o n e Mobi l e
91-22-40273340 91-9322121415 91-22-40273338 91-9702490062 91-22-40273378 91-9892165859 91-22-40273378 91-9833361736 91-22-40273338 91-9819606275 91-22-40273340 91-9320703003 91-22-40273349 91-9975169868 91-22-40273378 91-9819788333 91-22-40273337 91-9768129851
Guide to Khambattas research approach Valuation methodologies We apply the following absolute/relative valuation methodologies to derive the fair value of the stock as a part of our fundamental research: DCF: The Discounted Cash Flow (DCF) method values an estimated stream of future free cash flows discounted to the present day, using a companys WACC or cost of equity. This method is used to estimate the attractiveness of an investment opportunity and as such provides a good measure of the companys value in absolute terms. There are several approaches to discounted cash flow analysis, including Free Cash Flow to Firm (FCFF), Free Cash Flow to Equity (FCFE) and the Dividend Discount Model (DDM). The selection of a particular approach depends on the particular company being researched and valued. ERE: The Excess Return to Equity (ERE) method takes into consideration the absolute value of a companys return to equity in excess of its cost of equity discounted to the present day using the cost of equity. This methodology is more appropriate for valuing banking stocks than FCFF or FCFE methodologies. Relative valuation: In relative valuation, various comparative multiples or ratios including Price/Earnings, Price/Sales, EV/Sales, EV/EBITDA, Price/Book Value are used to assess the relative worth of companies which operate in the same industry/industries and are thereby in the same peer group. Generally our approach involves the use of two multiples to estimate the relative valuation of a stock. Other methodologies such as DuPont Analysis, CFROI, NAV and Sum-of-the-Parts (SOTP) are applied where appropriate. Stock ratings Strong Buy recommendations are expected to improve, based on consideration of the fundamental view and the currency impact (where applicable) by at least 15%. Market-perform recommendations are expected to improve, based on consideration of the fundamental view and the currency impact (where applicable) between 5% and 15%. Underperform recommendations are expected to improve up to 5% or deteriorate, based on consideration of the fundamental view and the currency impact (where applicable). Disclaimer You are reminded that investment advice provided by Khambatta Securities Ltd. is for your general information and use and is not intended to address your particular requirements. Any advice or recommendations contained in this report may not be suitable for you and are not intended to be relied upon by you in making (or refraining from making) any specific investment or other decision. Such decisions should only be made on the basis of independent advice from an appropriately qualified adviser. Research analysts working for the company are subject to stringent confidentiality and security policies and are located in secure-access premises which may be in the proximity of professionals conducting similar work for other firms. The company is not nor has been nor will be engaged in investment banking and does not make markets in any of the securities covered in this report or have any investment banking relationship with the firm whose security is covered in this report. No employee or contractor of the company is permitted to personally buy or sell stock in the company covered in this report, and neither the analysts responsible for this report nor any related household members are officers, directors, or advisory board members of any covered company. No one at a covered company is on the Board of Directors of the Group or any of its affiliates. This report is not a solicitation to buy or sell any security and past performance is no guarantee of future results.
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Khambatta Securities Ltd.

MEMBER OF EQUITY & DERIVATIVE SEGMENTS DEPOSITORY PATICIPANT

Fax: +91-(0)22 6641 3377 www.khambattasecurities.com

Motoring powerfully through the cycles

Sector Target Price

Current Market Price : Rs 1,487 Market Cap : Rs 432 bn

FY 10 115,085 36.41% 21,801 166.39% 18.94% 17,036 159.51% 118

FY 11 159,981 39.01% 27,582 26.52% 17.24% 33,397 96.04% 115 -1.98%

Sales % Growth EBITDA % Growth

Net Income % Growth EPS

% Growth 159.51% Source: Company data, Khambatta Research

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HM C L 192,450 22% 24,057 12.50% 20,033 10.41% 19,279 10.02% 96.54

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Khambatta Securities Ltd.

MEMBER OF EQUITY & DERIVATIVE SEGMENTS DEPOSITORY PATICIPANT

Fax: +91-(0)22 6641 3377 www.khambattasecurities.com

Tel: +91-(0)22 4027 3300

Khambatta Securities Ltd.

MEMBER OF EQUITY & DERIVATIVE SEGMENTS DEPOSITORY PATICIPANT

Fax: +91-(0)22 6641 3377 www.khambattasecurities.com

Exhibit 4: Market share: executive motorcycle sub-segment

120% 100% 80% 60% 40% 20% 0%

4% 8% 19% 6% 49% 13% FY11

2% 10% 21% 6% 50% 11% FY12

Exhibit 5: Market share: scooter segment

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Khambatta Securities Ltd.

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Fax: +91-(0)22 6641 3377 www.khambattasecurities.com

Exhibit 7: Domestic product portfolio

B A L (CC) Platina (100) Discover (100)

TV SL (CC) Sport (100) Star City (110) Jive (110)

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Source: Company data

Exhibit 9: Contribution of exports to total volumes (FY 2012)

F Y 12 33% 61% 37%

Co mp a ny BAL TVSL HMCL

Ex p o r t Co ntr i b uti o n 37% 13% 3%

Source: Company data, Khambatta Research

Tel: +91-(0)22 4027 3300

Khambatta Securities Ltd.

MEMBER OF EQUITY & DERIVATIVE SEGMENTS DEPOSITORY PATICIPANT

Fax: +91-(0)22 6641 3377 www.khambattasecurities.com

Source: Company data

3W contributed ~25% of BALs sales and ~12% of total volumes in 3Q FY12

We expect the 3W segment to grow at CAGR of ~13% through FY 2015

Tel: +91-(0)22 4027 3300

Khambatta Securities Ltd.

MEMBER OF EQUITY & DERIVATIVE SEGMENTS DEPOSITORY PATICIPANT

Fax: +91-(0)22 6641 3377 www.khambattasecurities.com