Ambit Automobile Sector Update April 2011

8/3/2019 Ambit Automobile Sector Update April 2011

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April 18, 2011

Automobiles

SECTOR UPDATE

Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit

Capital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to disclaimer section on the last page for further important disclaimer.

Analyst contacts

Vijay Chugh

Tel: +91 22 3043 [email protected]

Ashvin Shetty

Tel.: + +91 22 3043 [email protected]

Top Picks (BUY)

Tata Motors (TTMT IN, Market Cap $16.5bn, CMP Rs1,249, Target price Rs1,600)

Helped by positive momentum in Jaguar LandRover and the domestic business and given itsimproving financial position, we expect TataMotors to record earnings CAGR of 17% overFY11-13E. This together with its attractive

valuations (forward valuation of 7.4x P/E and4.6x EV/EBITDA which are at significantdiscounts to domestic and global peers as wellas its long term historical averages) make usreiterate Tata Motors as one of our preferredpicks in the auto sector.

Bajaj Auto (BJAUT IN, Market Cap $8.9bn, CMP Rs1,399, Target price Rs1,750)

Whilst favourable macro trends, new launches,dealer network expansion and strong exportgrowth should help drive healthy volumetrends and protect market share, improvedproduct mix and pricing power should limitdownside to margins on account of a rise ininput costs. At a relatively inexpensive 13.0xFY12 earnings, we recommend BUY on thestock.

India Motors OnGiven our expectations of healthy demand trends over FY11-13E, themuted impact of competition on market shares and the significantpricing power currently enjoyed by the sector, we believe the sector ispoised to outperform the benchmark index over the medium term,particularly given current share prices. We continue to reiterate TataMotors and Bajaj Auto as our preferred picks in the Auto sector.

Positive macro-economic trends to drive higher-than-long-termaverage volumes: Continuing strong consumer sentiment and increasingpenetration should drive healthy demand trends for motorcycles and cars. On

the other hand, with freight rates continuing to hold up well, with theimproved availability of finance at the retail level and with strong performanceof the agricultural segment, there are demand drivers which should supporthigher-than long term average volumes for commercial vehicles. We forecastFY11-13E volume CAGR of 17%, 15%, 16% and 15% for domesticmotorcycles, cars, three wheelers and other commercial vehicles respectively,higher than their respective long-term averages.

Rising competition but market share losses to be calibrated: We expectcompetition to rise across all categories with new entrants/existing playersaggressively pursuing market share. Whilst we expect market leaders to beparticularly prone to rising competition, the strategies (introduction of newmodels and variants) adopted by them should help arrest the market share

loss. Consequently, we expect the market share losses of Maruti Suzuki, BajajAuto and Tata Motors to be restricted to around 30-50bps over FY11-13E.

Input costs to impact margins, but pricing power to restrict downside:Whilst key raw materials such as Steel, Aluminium and Natural Rubber haveshown significant increases (about 8% to 12%) in the recent months, weexpect healthy demand trends to enable companies take calibrated priceincreases limiting the impact of increase in input costs on the gross margin.Nevertheless, we factor in a gross margin decline of about 90-100bps in FY12(from 3QFY11 levels) for our coverage universe (Ashok Leyland, Bajaj Auto,Hero Honda, Maruti Suzuki and Tata Motors).

The sector appears attractively pricedWe expect healthy demand trends and capacity utilization levels, and strongerbalance sheets to enable the sector to post EBITDA and net earnings CAGR ofbetween 15-20% over FY11-13E even after considering the impact of increasein input costs on margins. Given this likely earnings profile, the current

valuation of the sector at 12x FY12 EPS and 7x FY12 EBITDA appearsattractive. After considering likely earnings/EBITDA growth and current

valuation multiples, Ashok Leyland, Bajaj Auto, Maruti Suzuki, Tata Motorsand TVS Motor appear cheaper compared to M&M and Hero Honda. Wecontinue to reiterate Bajaj Auto and Tata Motors as our preferred picks in thesector (see individual company sections for more details).


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Automobiles

Ambit Capital Pvt Ltd 2

Positive macro trends to drive higher than longterm average volumes for FY11-13E

Two wheelers and passenger carsPost the decline in growth seen in FY09, volumes have witnessed a sharp rebound

with domestic volumes of motorcycles and passenger cars growing at the rate of24% and 25% per annum respectively over FY09-11. The growth momentum,though moderating, has continued so far with 4QFY11 seeing strong YoY growthof 18% and 25% in both the motorcycle and passenger car segments respectively(exhibits 1 and 2).

Exhibit 1: Quarterly volume trends for domesticmotorcycles

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

-30%-20%-10%0%10%

20%30%40%50%

Motorcycles Motorcycles (domestic) YoY

Source: SIAM, Ambit Capital research

Exhibit 2: Quarterly volume trends for domesticpassenger cars

-

100,000

200,000300,000

400,000

500,000

600,000

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

-20%-10%0%10%20%30%40%50%

Cars (domestic,ex-Nano) Cars (domestic,ex-Nano) YoY


Outlook: Going forward, whilst we expect volumes to moderate from FY09-11levels, the continuing positive consumer sentiment, rising household income levels,strong aspirational pull and increasing penetration (in urban and rural households)could help the sector post higher-than-long-term average volume growth overFY11-13E in the domestic motorcycle and passenger car segments as the interestrate increases do not appear to have had a major impact on demand so far.

We expect domestic sales of motorcycles and passenger cars to grow at the rate of17% and 15% CAGR respectively over FY11-13E, which although lower than thegrowth rates seen in FY09-11, are ahead of the long term average seen by thesesegments over FY01-11 (see exhibit 3). Further, the growth witnessed by theindustry in March FY11, when domestic motorcycles and passenger cars grew

nearly 20% and 25% YoY respectively despite a high base in March 2010, gives usgreater confidence in our belief.

Exhibit 3: Long-term growth trends across domestic motorcycles and cars

Long term growth trends (CAGR %) FY01-06 FY06-11 FY01-11 FY09-11 FY11-13E

Motorcycles - domestic 22.4 9.2 15.6 24.3 17.0

Passenger cars - domestic (ex Nano) 9.3 16.8 13.0 25.4 15.0


Commercial vehicles

Given the highly cyclical nature of demand for commercial vehicles (CV), thedecline in CV volumes seen in FY09 was more severe compared to the decline for

passenger vehicles. However, CV volumes have bounced back sharply growing atthe rate of 25% per annum over FY09-11.


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Automobiles


Exhibit 4: Quarterly volumes and growth trends formedium and heavy commercial vehicles - goods

-

20,000

40,000

60,000

80,000

100,000

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

-80%-50%-20%10%40%70%100%130%160%

MHCV Goods (domestic) MHCV Goods (domestic) YoY


Exhibit 5: Quarterly volumes and growth trends forthree wheelers

-20,00040,00060,00080,000

100,000120,000140,000160,000

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

-20%-10%0%10%20%30%40%50%60%

3W (domestic) 3W (domestic) YoY


Outlook: In the case of commercial vehicles, where again we expect the volumesto moderate from FY09-11 levels, we believe that strong underlying factors suchas freight rates holding up well, improved availability of finance at the retail leveland strong performance of the agricultural segment should support higher-than-long-term average volume growth over FY11-13E for medium and heavycommercial vehicles (MHCV) goods, MHCV passengers, light commercial vehicles(LCV) passenger and three wheelers. Consequently, we expect MHCV goods,MHCV passenger, LCV passenger and three wheelers to grow at rates of 15%,12%, 11% and 16% per annum respectively over FY11-13E, which are higher thantheir respective long term growth rates seen over FY03-11 (see exhibit 6).

Only in the case of LCV goods, our expectations of volume growth of 15% per

annum over FY11-13E is lower than the long term average growth since thecategory saw unprecedented expansion with the introduction of Tata Motors Acein FY06.

Exhibit 6: Long-term growth trends across commercial vehicle segments

Long term growth trends (CAGR %) FY03-07 FY07-11 FY03-11 FY09-11 FY11-13E

MHCV Goods - domestic 26.2 3.1 14.1 35.6 15.0

MHCV Passenger - domestic 9.5 12.8 11.1 15.4 12.0

LCV Goods - domestic 30.8 17.0 23.7 34.9 15.0

LCV Passenger - domestic 8.0 11.9 9.9 17.5 11.0

3W domestic 15.9 8.1 11.9 23.3 15.7



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Automobiles


Rising competition but market share losses to becalibrated

We expect competition to increase across all categories viz. commercial vehicles,passenger car segments as well as motorcycles with new entrants/existing playersaggressively pursuing market share through multiple launches (see exhibits 7, 8

and 9).

Exhibit 7: Some expected launches in FY12 in the 100-250cc motorcycle segments

Manufacturer Segment Model name Expected launch in

Honda Motors 100 cc CB Twister FY12

Honda Motors 150cc CBR150R Q4 FY11

Honda Motors 250cc CBR 250R Q1 FY12

Bajaj Auto 125 cc Discover 125 Q1 FY12

Bajaj Auto 125 cc Stunt (KTM) FY12

Bajaj Auto 125 cc Race (KTM) FY12

Bajaj Auto 125 cc Duke (KTM) FY12

Hero Honda 250 cc New Karizma FY12

Suzuki 100 cc N.A. FY12

TVS Motor 180 cc Apache RTR 180 Variant Q4 FY11

Yamaha 250 cc Fazer (Variant) H1 FY12

Source: Crisil, press articles, Ambit Capital research

Exhibit 8: Some expected FY12 launches in the A2 and A3 passenger car segments


Honda A2: Compact Brio Jun-11

Toyota A2: Compact Etios Liva Jun-11

Nissan A3: Mid-size Sunny Q4 FY12

Chevrolet A2: Compact Sonic Q4 FY12

Chevrolet A2: Compact Diesel variant of Beat Q1 FY12

Maruti Suzuki A3: Mid-size Diesel variants of SX4 Q4 FY11

Maruti Suzuki A2: Compact New Swift Jul-11

Hyundai Motors A3: Mid-size New Verna Q1 FY12

Source: Press articles, Ambit Capital research

Exhibit 9: Some expected launches in FY12 in the commercial vehicle segments


Mahindra Navistar MHCV - goods MN 25 (25 t), MN 31 (25 t) 1QFY12

Daimler MHCV - goods Bharat Benz (6-49 t) FY12 Ashok Leyland - Nissan LCV - goods Dost (1.25 t), a Nissan LCV FY12

Tata Motors LCV - goods Prima platform FY12

Tata Motors LCV goods Ace Zip 4QFY11Tata Motors LCV passenger Magic Iris 4QFY11Tata Motors MHCV passenger Tata Divo 4QFY11GM SAIC LCV - goods Tavera (1 and sub 1 t) FY12

Source: Press articles, Ambit Capital research

Whilst we expect market leaders to be particularly prone to competition, strategiesadopted by them such as the introduction of new models and variants (see exhibits

7, 8 and 9 above) should help arrest the market share loss. Consequently weexpect the domestic market losses of Maruti Suzuki, Bajaj Auto and Tata Motors to


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Automobiles


be restricted to around 30-50bps over FY11-13E (see exhibit 10) and as a resultlargely track the industry growth rates. Only in the case of Hero Honda, we expecta higher domestic market share loss of around 200bps over FY11-13E on accountof company specific transition challenges after separation from Honda with thelatter likely to adopt a focused pursuit of Hero Hondas stronghold on theeconomy and executive motorcycle segments.

Exhibit 10: Market share trends

All numbers represent changesin market share (%)

FY03-07 FY07-11 FY03-11 FY09-11 FY11-13E

Motorcycle domestic

Bajaj Auto 7.7 (4.9) 2.8 5.0 (0.3)

Hero Honda 3.5 6.6 10.1 (5.2) (2.0)

Honda Motors 2.5 4.7 7.2 1.0 1.7

TVS Motors (5.8) (5.9) (11.7) (0.8) 0.4

Others (7.9) (0.5) (8.4) 0.0 0.3

Passenger cars domestic (exNano)

Maruti Suzuki 0.2 (0.7) (0.4) (1.8) (0.4)

Hyundai Motors (1.0) 0.6 (0.4) (1.3) (1.7)

Tata Motors (ex Nano) 2.0 (6.7) (4.7) (3.2) (0.9)

Others (1.2) 6.8 5.6 6.3 3.0

Three wheeler domestic

Bajaj Auto (21.5) (5.3) (26.7) 0.8 1.0

Piaggio Vehicles Pvt Ltd 19.2 2.9 22.0 (2.8) (1.5)

TVS Motor 4.3 4.3 3.0 0.4

Mahindra & Mahindra 4.0 3.4 7.4 (1.0) 0.3

Others (1.7) (5.3) (7.0) 0.0 (0.1)

MHCV Goods domesticTata Motors (2.8) (1.8) (4.6) (4.0) (0.5)

Ashok Leyland 2.0 (4.1) (2.1) 1.9 0.3

Eicher Motors 0.5 3.1 3.7 2.0 0.0

Others 0.3 2.8 3.1 0.1 0.2

LCV Goods domestic

Tata Motors 21.0 (9.7) 11.3 (3.2) (0.5)

M&M (inc Navistar) (9.1) 9.0 (0.2) 5.4 0.2

Others (11.9) 0.7 (11.2) (2.1) 0.3



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Automobiles


Input costs to impact margins, but pricing powerto restrict downside

The prices of key inputs such as steel, aluminium, LDPE and natural rubber haveseen significant increases (about 8% to 12%) in recent months. This has alsoimpacted the gross margins of automobile companies with the average reported

gross margin for our coverage universe (Ashok Leyland, Bajaj Auto, Hero Honda,Maruti Suzuki and Tata Motors) in 3QFY11 seeing a decline of nearly 210bpscompared with 4QFY10. Whilst some key raw materials such as steel and naturalrubber have, after showing a significant rise in February seen somewhat softeningtrends in March, we nevertheless expect the gross margin of auto companies toshow a further downward trend in FY12. However, at the same time, we expectthe healthy demand trends to enable companies to take calibrated price increases(see exhibit 13 for pricing actions of some auto companies) which although notenough to fully offset the costs pressures, should somewhat limit the impact of theincrease in input costs on the gross margin. Further, our discussions with industrysources indicate that most of the players are operating at almost full capacityutilization levels and are adopting a cautious approach to adding capacities. Thisshould keep the demand-supply situation fairly healthy in the near-to-medium

term. Our current estimates factor in a gross margin decline of about 90-100bpsin FY12 from 3QFY11 levels for our coverage universe.

Exhibit 11: Raw material index shows upward trend

80100

120140

160180

200

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

Q4FY11

2W blended Car blended

Source: Crisil, Ambit Capital research

Exhibit 12: Gross margin trends across auto companies

24%25%

26%

27%

28%

29%

30%

31%

32%

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Q1FY11

Q2FY11

Q3FY11

FY12E

Source: Companies, Ambit Capital research

Exhibit 13: Recent pricing action of some companies

Manufacturer Announcementdate

Price action

Tata Motors Oct-10Increase in the prices of all of its commercial vehicles (inthe range of Rs1,500 to Rs30,000) and some passenger

vehicles.

Oct-10 Increase in the prices of Tata Nano by about Rs9,000.

Jan-11Increase in the prices of all of its commercial vehicles (inthe range of Rs1,500 to Rs30,000) and some passenger

vehicles.

Mar-11Increase in the prices of passenger vehicles ranging fromRs7,000 to Rs29,000.

Maruti Suzuki Jan-11 Hike in prices by upto Rs8,000.

Apr-11 Hike in prices by up to Rs9,000.

Source: Companies, Press articles


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Automobiles


The sector seems to be attractively priced

Over the last six months, most of the domestic auto stocks have underperformedthe benchmark on concerns surrounding the moderation in demand, rising interestrates and contraction in margins (on account of increase in input costs).

Exhibit 14: Comparative share price performance

Absolute performance (%) Relative performance to benchmark (%)Mcap(US$ mn) 3M 6M 1yr

BenchmarkIndex 3M 6M 1yr

India

BSE Sensex - (1.2) (3.9) 9.8

BSE Auto - (0.9) (3.1) 21.8 Sensex 0.3 0.8 12.0

Ashok Leyland 1,662 (9.6) (24.2) 2.3 Sensex (8.5) (21.0) (6.9)Bajaj Auto 8,896 7.6 (8.4) 36.6 Sensex 9.0 (4.7) 24.4Hero Honda 7,785 (11.5) (9.8) (14.3) Sensex (10.4) (6.1) (21.9)Maruti Suzuki 8,297 (6.5) (16.3) (9.4) Sensex (5.3) (12.8) (17.5)Tata Motors 16,539 5.3 13.6 61.1 Sensex 6.6 18.3 46.7TVS Motor 628 (6.7) (20.6) 39.6 Sensex (5.6) (17.4) 27.1Eicher Motor 772 6.6 0.1 85.6 Sensex 7.9 4.2 69.0M&M 10,056 (1.5) 3.4 39.3 Sensex (0.3) 7.7 26.9Global - Cars

Toyota 134,729 (3.3) 15.4 (9.5) Tokyo 5.0 13.5 4.6

Hyundai 43,090 3.5 28.1 60.8 Korea 1.5 14.2 31.0

Ford 56,400 (15.0) 13.7 23.0 S&P 500 (19.0) (0.7) 9.4

Volkswagen 72,355 (11.7) 26.5 63.9 Germany (15.0) 10.2 40.1

Renault 16,424 (15.9) 2.8 11.4 Paris (20.0) (4.8) 9.1

BMW 53,625 (0.4) 18.0 71.1 Germany (4.2) 2.8 46.2

Daimler 78,558 (3.8) 15.5 49.1 Germany (7.4) 0.6 27.5

Global - CVs

Navistar 4,766 12.3 35.2 39.5 S&P 500 7.1 18.1 24.1

Volvo 36,821 (7.8) 20.3 44.5 Stockholm (7.1) 13.6 30.2

SCANIA 18,475 (6.5) 1.2 25.9 Stockholm (5.8) (4.4) 13.5

PACCAR 18,380 (6.9) 5.6 19.1 S&P 500 (11.3) (7.7) 6.0

MAN 19,068 0.3 16.3 40.1 Germany (3.5) 1.3 19.8

Source: Bloomberg, Ambit Capital Research

Further on a cross cycle basis, most of the companies under our coverage aretrading at or below their long term P/E and EV/EBITDA averages (exhibits 15 to22).


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Automobiles


Exhibit 15: Ashok Leyland P/E cycle

4

914

19

24

29

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

P/E

P/E 6 year average 4 year average

Source: Company, Ambit Capital research

Exhibit 16: Bajaj Auto P/E cycle

0

5

10

15

20

May-08

Aug-08

Nov-08

Feb-09

May-09

Aug-09

Nov-09

Feb-10

May-10

Aug-10

Nov-10

Feb-11

P/E

P/E 3 year avg


Exhibit 17: Hero Honda P/E cycle

7

10

13

16

19

22

Apr-

04

Apr-

05

Apr-

06

Apr-

07

Apr-

08

Apr-

09

Apr-

10

Apr-

11

P/E

P/E 6 year avg 4 year avg


Exhibit 18: Maruti Suzuki P/E cycle

5

8

11

14

17

20

23

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

P/E

P/E 6 year avg 4 year avg


Exhibit 19: Ashok Leyland EV/EBITDA cycle

4

7

10

13

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

EV/EBIT

DA

EV/EBITDA 6 year avg 4 year avg


Exhibit 20: Hero Honda EV/EBITDA cycle

4

7

10

13

16

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

EV/EBITD

A




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Automobiles


Exhibit 21: Maruti Suzuki EV/EBITDA cycle

0

3

6

9

12

Apr-

04

Apr-

05

Apr-

06

Apr-

07

Apr-

08

Apr-

09

Apr-10

Apr-11

EV/EBITDA



Exhibit 22: Tata Motors EV/EBITDA cycle

02468

1012141618

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

EV/EBITDA



Going forward, we expect healthy demand trends and capacity utilization levelsacross the sector over FY11-13E. Further the increased profitability seen in the lasttwo years has significantly improved the financial position of most of the autocompanies (seen in the form of a reduction in net debt levels). This should alsohelp most of the companies to post higher net earnings growth compared toEBITDA growth over FY11-13E.

Overall, even after considering the impact of an increase in input costs onmargins, we expect the sector to post EBITDA and net earnings CAGR of between15-20% over FY11-13E. Given this likely earnings profile, the current valuation ofthe sector at a P/E of 11.7x FY12 EPS and 7.2x FY12 EBITDA looks attractive.

Exhibit 24: Comparative valuation

P/E EV/EBITDACompany

MCAP(US $mn) FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13

Sales growth(%) (FY11-13)

EPS growth (%)(FY11-13)

EBITDA growth(%) (FY11-13)

India

Ashok Leyland 1,662 17.2 13.2 10.5 9.0 12.5 8.8 7.4 6.5 16 21 17

Bajaj Auto 8,896 21.7 15.6 13.0 11.2 14.1 10.9 9.2 8.0 19 18 17

Hero Honda 7,785 15.5 16.9 15.9 13.5 11.1 12.6 11.6 10.0 17 12 12

Maruti Suzuki 8,297 14.6 16.3 13.5 11.7 8.1 8.6 7.2 6.2 16 18 18

Tata Motors

(as reported)16,539 25.2 9.0 7.4 6.5 11.1 5.3 4.6 4.1 16 17 14

Tata Motors(proforma seenote below)

16,539 NA 11.2 9.0 8.1 NA 6.0 5.2 4.7 16 18 13

TVS Motor 628 83.8 14.7 10.3 9.0 27.5 8.3 6.6 6.1 15 28 17

Eicher Motor 772 18.1 14.9 12.6 NA 7.2 5.5 4.5 NA NM NM NM

M&M 10,056 16.2 15.8 13.5 11.2 9.6 9.6 8.4 8.0 13 19 6

Average 26.5 14.2 11.7 10.0 12.6 8.4 7.2 6.7 16 19 15

Source: Bloomberg, Ambit Capital research, Company; Note: Ambit estimates for Ashok Leyland, Bajaj Auto, Hero Honda, Maruti Suzuki and TataMotors, rest are Bloomberg consensus estimatesNote: Proforma figures are arrived at by adjusting EBITDA/PAT for normalised R&D spends (by expensing 66% of R & D costs instead of current 25%).

Exhibit 23: Netdebt:equity

FY09 FY11E

Ashok Leyland 0.9 0.8

Bajaj Auto 0.2 (0.9)

Hero Honda (0.9) (0.9)

Maruti Suzuki (0.4) (0.3)

Tata Motors 5.2 0.7

Source: Company, Ambit Capitalresearch


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Automobiles


Considering likely earnings/EBITDA growth and current valuation multiples,AshokLeyland, Bajaj Auto, Maruti Suzuki, Tata Motors and TVS Motor appearcheaper compared to M&M and Hero Honda.

Our top picks in the sector are Bajaj Auto and Tata Motors.

In the case of Tata Motors, helped by positive momentum in Jaguar Land Roverand the domestic business and given its improving financial position, we expect

earnings CAGR of 17% over FY11-13E. This together with its attractive valuations(forward valuation of 7.4x P/E and 4.6x EV/EBITDA, which are at significantdiscounts to domestic and global peers as well as long term historical averages)make us recommend Tata Motors as one of our preferred picks in the auto sector

with a target price of Rs1,600, 28% upside.

In the case of Bajaj Auto, whilst favourable macro trends, new launches, dealernetwork expansion and strong export growth should help the firm maintain healthy

volume trends and protect market share, improved product mix and pricing powershould limit the downside to margins on account of a rise in input costs. At arelatively inexpensive 13.0x FY12 earnings, we recommend a BUY on the stock

with a target price of Rs1,750, 25% upside.


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Automobiles April 18, 2011

Tata MotorsBloomberg: TTMT IN EquityReuters: TAMO.BO COMPANY UPDATE


Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Please refer to the Disclaimers at the end of this Report.

BU

Exhibit 1: Key financials (consolidated)

Year to March (Rs mn) FY09 FY10 FY11E FY12E FY13E

Operating income 708,810 925,193 1,217,750 1,436,024 1,624,199

EBITDA 18,488 81,160 169,787 195,956 220,224

EBITDA (%) 2.6% 8.8% 14.0% 13.7% 13.6%

EPS (fully diluted) (Rs) (45.1) 49.5 139.2 168.8 191.4

RoE (%) (29.9%) 40.9% 60.7% 39.5% 31.5%

RoCE (%) (2.1%) 9.8% 25.1% 23.7% 22.0%

P/E (x) NM 25.2 9.0 7.4 6.5


Analyst contacts

Vijay ChughTel: +91 22 3043 3054

[email protected]

Ashvin Shetty


Recommendation

CMP: Rs1,249

Target Price (one year): Rs1,600

Previous TP: Rs1,600

Upside (%) 28

EPS (FY12): Rs168.8

Change from previous (%) 2

Variance from consensus (%) 10

Stock Information

Mkt cap: Rs738bn/US$16,539mn

52-wk H/L: Rs1,382/670

3M ADV: Rs3,797mn/US$84mn

Beta: 1.4x

BSE Sensex: 19263

Nifty: 5786

Stock Performance (%)

1M 3M 12M YTD

Absolute 4.9 5.3 50.6 -6.8

Rel. to Sensex -1.1 5.0 43.2 -0.7

Performance (%)

15,000

17,000

19,000

21,000

23,000

Apr-10 Jul-10 Nov-10 Feb-11

500

700

9001100

1300

1500

Sensex Tata M otors

Source: Bloomberg, Ambit Capital research

A Marriage of Class and MassHelped by positive momentum in Jaguar Land Rover and in thedomestic business and given its improving financial position, weexpect Tata Motors to record an earnings CAGR of 17% over FY11-13E.This together with its attractive valuations (forward valuation of 7.4xP/E and 4.6x EV/EBITDA, which are at significant discounts to domesticand global peers as well as long term historical averages) make usreiterate Tata Motors as one of our preferred picks in the Auto sector.

Jaguar Land Rover momentum to continue We expect positive momentum in JLR volumes to continue on the back ofexpected new launches in CY11 and healthy trends in the USA and in

emerging Markets like China and Russia (JLRs March sales from the USA is up16% YoY and its European counterparts have reported strong sales from Chinathe same month). We expect JLR to post volume CAGR of 11% over FY11-13E.Further, we expect JLRs current margins to sustain as we expect the overallvolume mix to improve from 2011 launches and there is scope for increasingthe sourcing from low-cost countries from the current 20% to 30% levels.Despite stepping up our product development expense estimates, we expectJLR to post net earnings CAGR of 14% over FY11-13E.

Positive macro trends to help standalone businessDespite moderation, we expect the higher-than-long-term average growth inthe CV segment over the next two years to be helped by strong freight rates,improved availability of finance at the retail level and strong demand from

agriculture. Despite increasing competition, we believe the market sharelosses to be more calibrated at around 50bps over FY11-13E, which shouldenable the company to post volume CAGR of 14%, broadly in line withindustry. Finally healthy demand trends should enable it to take calibratedprice increases limiting EBITDA margin decline to ~50bps over FY11-13E.

Improved financial positionWith the strong performance of JLR as well as the domestic CV business, weexpect the company to generate significant free cash flows, which togetherwith the recent fund raising and debt conversion should bring down the netdebt/equity to 0.4x by FY12. This should enable the company to post higherearnings growth of 17% over FY11-13E compared to EBITDA growth of 14%.

Valuation and recommendationWe reiterate our BUY on the stock with an SOTP-based target price of Rs1,600(upside of 28% from current levels), implying a P/E multiple of 8.4x FY13earnings. The stock is currently trading at a discount of 34% and 41% to itsdomestic and global peers respectively on EV/EBITDA and also at a nearly 35%discount to its long-term average EV/EBITDA adding to its attractiveness.


12/26

Tata Motors


Key assumptions and estimatesExhibit 2: Key assumptions and estimates

FY10 FY11E FY12E FY13E Comments

Standalone

Commercial Vehicle sales (inc exports)

Volume growth YoY (%) 35.0 25.7 14.8 13.7

Market share (%) 61.0 58.9 58.5 58.5

Despite a high base, we expect the industry to posthigher-than-long-term average growth over FY11-13 atabout 15%. Due to increasing competition, we factor in amarket share decline of around 40bps over FY11-13Eresulting in volume CAGR of 14% over FY11-13E

Net sales (Rs mn) 353,738 467,693 544,139 623,232

YoY growth (%) 40 32 16 15

We expect a FY11-13 revenue CAGR of 15% largelyarising from volume growth

EBITDA (Rs mn) 40,343 46,975 51,849 59,222

EBITDA margin (%) 11.4 10.0 9.5 9.5

EBITDA YoY growth (%) 137 16 10 14

EBITDA growth to lag revenue growth on account ofincrease in input costs and a step up in productdevelopment expenses at JLR

Adjusted PAT (Rs mn) 13,588 18,910 22,935 27,575

Adj PAT margin (%) 3.8 4.0 4.2 4.4PAT YoY growth (%) 148 39 21 20

Fully diluted EPS (Rs) 23.2 28.5 34.5 41.5

Fully diluted EPS growth (%) 106 22 21 20

Recent fund raising, debt conversion and improvedprofitability to bring down net debt, interest expensesleading to higher growth at the PBT/PAT/EPS levelcompared to EBITDA growth

Net work cap days (ex cash) closing

(45) (37) (32) (29)

Net work cap days (ex cash) -average

(30) (35) (32) (29)

We conservatively factor in an increase in net workingcapital days. The average days in FY10 looks lower dueto higher days in FY09

Capex (Rs mn) 23,102 26,000 27,000 28,000 We factor in a moderate increase in capex every year

Net debt (Rs mn)143,471 91,807 70,856 63,738

Net interest expenses (net ofinterest capitalised) (Rs mn) 11,038 11,212 8,631 8,338

Recent equity raisings, FCNR conversion and improvedprofitability to bring down the net debt and interestexpenses

Jaguar Land Rover

Volumes 193,982 240,020 271,223 298,345

YoY growth (%) 16 24 13 10

Despite a high base, we expect JLR to record double-digitvolume growth for FY12/13 on the back of healthy trendsfrom USA and Emerging Markets like China and Russia

Average realisation (GBP) 33,787 40,841 42,119 42,961

YoY growth (%) NA 21 3 2

We expect improvement in average realisation price dueto improving mix

Revenues (GBP mn) 6,554 9,803 11,424 12,817

YoY growth (%) NA 50 17 12

We expect FY11-13 revenue CAGR of 14% largely arisingfrom volume growth

EBITDA margin (before proddev expenses) (GBP mn) (%)

6.6 16.7 17.0 17.2

EBITDA (pre product dev expgrowth YoY (%)

NA 279 19 14

We expect JLR margins (before product developmentexpenses) to sustain at FY11 levels

EBITDA margin (post proddev expenses) (GBP mn) (%) 5.9 15.4 15.3 15.2

EBITDA (post product dev expgrowth YoY) (%)

NM 293 15 12

Step up in product development expenses to bring downEBITDA margin marginally

PAT margin (%) 0.0 10.1 10.2 10.1

PAT YoY growth (%) NM 17 11

Increase in product development and amortisationexpenses to stem PAT growth

Work cap days (ex cash) closing

(53) (23) (18) (13)

Work cap days (ex cash) average

(50) (29) (19) (14)

We conservatively factor in an increase in working capitaldays

Capex (GBP mn) 635 671 1,000 1,279 We expect capex to remain in the range of 9-10% of sales

FCF (Rs mn) 424 603 469

Net debt (GBP mn) 603 225 (342) (774)

We expect significant FCF generation over FY11-13E(impacted to some extent by step up in product dev

expenses) to improve the financial position substantiallySource: Company, Ambit Capital research


13/26

Tata Motors


Exhibit 3: Change in estimates

New estimates Old estimates Change (%)Consolidated(Rs mn) FY11E FY12E FY11E FY12E FY11E FY12E

Comments

Net sales (Rs mn) 1,211,457 1,429,538 1,169,628 1,338,465 4 7Upgrades to revenues largely flow from betterthan expected volumes at JLR and recent pricehikes announced in the domestic business

EBITDA (Rs mn) 169,787 195,956 166,030 191,585 2 2

EBITDA margin 14.0% 13.7% 14.2% 14.3% (18) bps (61) bps

Upgrades to the revenues does not fully flowto EBITDA owing to significant increase ininput costs

PBT (Rs mn) 105,069 127,124 103,720 126,097 1 1

PAT (Rs mn) 92,511 112,167 91,436 109,785 1 2

EPS (Rs) 139.2 168.8 137.3 164.9 1 2

We have increased our forecasts for productdevelopment expenses/capex at JLR leadingto higher charge to the P&L on account ofamortisation expenses

Source: Ambit Capital research

Exhibit 4: Ambit v/s consensus

(Rs m) Ambit Consensus % divg. Reasons for divergence

Revenues

FY11E 1,211,457 1,204,392 1

FY12E 1,429,538 1,395,230 2

Our revenue estimates are largely inline with consensus estimates

EBITDA

FY11E 169,787 165,942 2

FY12E 195,956 185,145 6

The main source of our higher-than-consensus margins for FY12 is onaccount of our higher-than-consensusexpectations for JLR margins

PAT

FY11E 92,511 89,332 4

FY12E 112,167 101,600 10

The higher-than-consensus EBITDA ismagnified at the PAT level due to thefixed nature of depreciation andinterest expenses



14/26

Tata Motors


Valuation

Relative valuation

Tata Motors trades currently at a discount of 42% to its Indian automobile peers onFY12 P/E and EV/EBITDA despite having nearly similar EBITDA and net earningsgrowth expectations over FY11-13E. It is also trading at a discount of 48% and

23% on FY12 EV/EBITDA and P/E respectively to global car companies despitehaving near similar net earnings and EBITDA growth expectations.

Even after proforma adjusting Tata Motors EBITDA and net earnings fornormalised R&D expenses (arriving at EBITDA and net earnings after deducting66% of product development expenses instead of current levels of 25%), it tradesat around 34% and 41% discount to Indian automobile peers and global carcompanies respectively on FY12 EV/EBITDA and 30% and 6% discount to Indianautomobile peers and global car companies respectively on FY12 P/E.



Mcap(US

$mn) FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13

Sales growth

(FY11-13E) (%)

EPS growth

(FY11-13E) (%)

EBITDAgrowth (FY11-

13E) (%)India

Ashok Leyland 1,662 17.2 13.2 10.5 9.0 12.5 8.8 7.4 6.5 16 21 17

Bajaj Auto 8,896 21.7 15.6 13.0 11.2 14.1 10.9 9.2 8.0 19 18 17

Hero Honda 7,785 15.5 16.9 15.9 13.5 11.1 12.6 11.6 10.0 17 12 12

Maruti Suzuki 8,297 14.6 16.3 13.5 11.7 8.1 8.6 7.2 6.2 16 18 18

Tata Motors(as reported)

16,539 25.2 9.0 7.4 6.5 11.1 5.3 4.6 4.1 16 17 14

Tata Motors(proforma) seenote below)

16,539 NA 11.2 9.0 8.1 NA 6.0 5.2 4.7 16 18 13

TVS Motor 628 83.8 14.7 10.3 9.0 27.5 8.3 6.6 6.1 15 27 17

Eicher Motor 772 18.1 14.9 12.6 NA 7.2 5.5 4.5 NA

M&M 10,056 16.2 15.8 13.5 11.2 9.6 9.6 8.4 8.0 14 19 10

Average (ex Tata Motors)

26.7 15.3 12.8 10.1 12.9 9.2 7.9 7.4 16 19 15

Global - Cars

Toyota 134,729 84.8 20.7 15.5 11.1 16.9 14.1 13.0 10.2 5 37 18

Hyundai 43,090 20.5 11.3 9.8 9.2 11.7 8.6 7.8 7.4 5 11 7

Ford 56,400 NM 7.2 8.2 7.7 37.9 11.2 9.6 8.6 9 -4 14

Volkswagen 72,355 44.1 10.0 8.1 7.1 10.8 6.9 6.2 5.7 7 19 10

Renault 16,424 NM 7.2 5.6 4.1 16.3 8.0 8.3 7.5 4 32 3

BMW 53,625 223.9 12.9 10.0 8.7 16.6 8.6 7.9 7.4 7 22 8

Daimler 78,558 NM 11.2 9.6 8.2 33.7 9.3 8.3 7.5 8 17 12

Average 93.3 11.5 9.6 8.0 20.6 9.5 8.7 7.8 6 19 10

Global - CVs

Navistar 4,766 29.3 21.4 12.1 8.8 12.7 10.6 8.2 6.6 15 56 27

Volvo 36,821 NM 19.0 13.0 10.0 NM 9.9 7.9 6.7 14 38 22

SCANIA 18,475 130.0 13.2 11.7 10.8 28.7 9.2 8.6 8.0 11 10 7

PACCAR 18,380 263.4 40.4 20.9 14.3 40.2 21.0 13.3 9.7 30 68 47

MAN 19,068 57.1 19.7 14.5 12.5 19.3 10.0 7.9 7.3 9 25 17

Average 119.9 22.7 14.4 11.3 25.2 12.2 9.2 7.7 16 39 24

Source: Bloomberg, Ambit Capital research, CompanyNote: Proforma figures are arrived at by adjusting EBITDA/PAT for normalised R&D spends (by expensing 66% of R & D costs instead of current 25%).


15/26

Tata Motors


Cross cycle valuation

Whilst Tata Motors current one year forward P/B is in line with its historical longterm averages, its current one year forward EV/EBITDA ratio is at a discount ofnearly 35% to its six year and four year averages.

Exhibit 6: Tata Motors EV/EBITDA cycle

02468

1012141618

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

EV/EBITDA

EV/EBITDA 6 year avg 4 year avg Source: Company, Ambit Capital research

Exhibit 7: Tata Motors P/B cycle

0

1

2

3

4

5

6

Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

P/BV

P/B 6 year avg 4 year avg


Recommendation

We prefer to value the company on an SOTP basis. For the domestic business, ourtarget FY13 EV/EBIDTA multiple of 7x is based on the average multiplecommanded by the company over FY04-11. The growth rates in commercialvehicles estimated by us over FY11-13E largely mirrors the growth rate seen in theperiod FY04-11. Our target multiple of 7 is somewhat conservative compared tothe multiple taken by consensus of around 8x.

For the JLR operations, we arrive at a target FY13 EV/EBITDA of 6x, which is at adiscount of 30% to global peers such as BMW and Daimler (exhibit 5). We believeJLRs valuation discount to some of the comparable luxury car makers such asBMW and Daimler is justified, given JLRs product portfolio is restricted to thepremium segment and it has yet to display a consistent profitability track record.This multiple of 6x is also consistent with what we have been using in our earlier valuation estimates. Our current estimates factor in 25% of the productdevelopment expenses being charged to the profit and loss statement (the restbeing capitalised). We have therefore proforma adjusted EBITDA to account for thenormalised product development expenses charge to P&L by deducting 66% (inline with average of BMW, Daimler and Audi) of product development expensesfrom EBITDA for the purpose of valuing JLR.

Within the key subsidiaries, we value each of the companies at average multiplesaccorded to similar sized peers in the respective industry and recent transactionmultiples.

Our SOTP valuation of Rs1,600 (see exhibit 8) implies an upside of 28% fromcurrent levels. We recommend BUY on the stock.


16/26

Tata Motors


Exhibit 8: Tata Motors SOTP valuation table

Valuationmethodology

Targetmultiple (x)

EBITDA/PAT/book value

(Rs mn) (FY13)

Stake value(Rs mn)

Per sharevalue (Rs)

Standalone

EBITDAFY13 EV/

EBITDA59,222

Enterprise

value7 414,555

Less: Net debt 91,807

Equity value 322,748 486

JLR

EBITDA afternormalised R&D

111,250

Enterprisevalue

6 667,498

Less:Net debt 16,350

Equity value 651,148 980

Other subs

Tata Daewoo FY13 P/E 10 1,470 14,702 22

HVAL FY13 P/E 10 1,165 11,651 18

HVTL FY13 P/E 10 982 9,817 15

Tata MotorsFinance

FY13 P/B 1 18,457 18,457 28

TataTechnologies

FY13 P/E 10 1,592 15,919 24

TataConstructionEquipment

50% discountto stake sale to

Hitachi18,440 28

Other subs 134

Fair value 1,600



17/26

Tata Motors


Exhibit 9: Balance sheet (Consolidated)

Year to March (Rs mn) FYO9 FY10 FY11E FY12E FY13E

Shareholders' equity 5,141 5,706 6,336 6,646 6,646

Reserves & surpluses 54,266 76,359 216,508 338,753 455,391

Total networth 59,407 82,065 222,844 345,398 462,037

Minority Interest 4,030 2,135 2,135 2,135 2,135

Debt 349,739 351,924 307,616 314,699 326,131

Deferred tax liability 6,802 11,536 11,284 11,284 11,284

For. curr monetary item trans dif A/c (6,365) 1,912 (973) (973) (973)

Total liabilities 413,613 449,571 542,906 672,543 800,614

Gross block 584,694 648,518 742,234 859,810 981,334

Net block 252,003 304,383 349,533 418,212 484,417

CWIP 105,330 80,680 59,502 59,502 59,502

Goodwill on consolidation 37,187 34,229 34,229 34,229 34,229

Investments 11,769 11,450 11,450 11,450 11,450

Cash & equivalents 42,019 98,174 145,327 188,192 228,006

Debtors 47,949 71,912 100,008 117,167 132,792

Inventory 109,506 113,120 151,350 173,966 194,547

Loans & advances 128,166 152,807 187,854 215,224 243,847Other current assets 26 24 9,611 10,130 10,702

Total current assets 327,665 436,038 594,150 704,679 809,894

Current liabilities 239,802 340,773 421,031 457,532 489,352

Provisions 81,400 76,435 84,927 97,998 109,526

Total current liabilities 321,202 417,208 505,959 555,530 598,878

Net current assets 6,463 18,829 88,191 149,149 211,015

Miscellaneous 861 - - - -

Total assets 413,613 449,571 542,906 672,543 800,614


Exhibit 10: Income statement (Consolidated)


Net sales 703,125 918,935 1,211,457 1,429,538 1,617,505

% growth 98.6% 30.7% 31.8% 18.0% 13.1%

Operating Income 708,810 925,193 1,217,750 1,436,024 1,624,199

% growth 98.8% 30.5% 31.6% 17.9% 13.1%

Operating expenditure 690,322 844,033 790,846 945,236 1,072,799

EBITDA (pre product dev expenses) 21,965 86,142 179,942 211,477 239,968

% growth -48.6% 292.2% 108.9% 17.5% 13.5%

EBITDA (post product devexpenses)

18,488 81,160 169,787 195,956 220,224

% growth -56.1% 339.0% 109.2% 15.4% 12.4%Depreciation 25,068 38,871 45,307 51,658 58,080

EBIT (6,580) 42,288 124,480 144,298 162,143

Interest expenditure (net) 19,309 22,397 20,255 18,019 18,637

Non-operating income 7,990 17,931 845 845 845

Adjusted PBT (17,900) 37,822 105,069 127,124 144,351

Tax 3,358 10,058 12,559 14,957 17,168

Adjusted PAT/ Net profit afterminority interest

(21,660) 28,307 92,511 112,167 127,183

% growth -206.6% NM 226.8% 21.2% 13.4%

Extraordinaries (3,393) (2,596) (326) - -

Reported PAT / Net profit after

minority interest

(25,053) 25,711 92,185 112,167 127,183



18/26

Tata Motors


Exhibit 11: Cash flow statement (Consolidated)


Profit after Tax (25,053) 25,711 92,511 112,167 127,183

Depreciation 25,023 38,826 45,307 51,658 58,080

Net Interest Expenses andOthers

26,965 7,171 46,670 30,072 32,765

Tax (5,986) (12,292) (12,811) (14,957) (17,168)

(Incr) / decr in net workingcapital

(13,450) 33,854 (31,007) (16,788) (20,807)

Cash flow from operations 7,498 93,269 140,669 162,152 180,052

Capex (98,959) (84,532) (72,538) (117,576) (121,524)

Increase/ (Decrease) inInvestments

(90,712) 11,220 - - -

Others 2,883 (2,018) - - -

Cash flow from investments (186,788) (75,331) (72,538) (117,576) (121,524)

Issuance of equity 41,100 283,665 52,226 20,199 -

Net borrowings 168,002 (225,529) (44,308) 7,083 11,432

Interest paid (23,867) (28,553) (20,255) (18,019) (18,637)

Dividend paid (7,595) (3,496) (10,019) (10,973) (11,510)

Others (10) (967) - - -

Cash flow from financing 177,632 25,119 (22,356) (1,711) (18,714)

Net change in cash (1,658) 43,058 45,776 42,865 39,814

Closing cash balance 41,213 87,433 134,586 177,451 217,265

Free cash flow (91,460) 8,737 68,131 44,576 58,529


Exhibit 12: Ratio analysis

Year to March (%) FYO9 FY10 FY11E FY12E FY13E

EBITDA margin (%) 2.6% 8.8% 14.0% 13.7% 13.6%

EBIT margin (%) -0.9% 4.6% 10.3% 10.1% 10.0%

Net profit margin (%) -3.0% 3.0% 7.6% 7.8% 7.9%

Dividend payout ratio (%) NM 33.4% 10.3% 8.9% 7.8%

Net debt:equity (x) 5.2 3.1 0.7 0.4 0.2

RoCE (pre-tax) -2.1% 9.8% 25.1% 23.7% 22.0%

RoIC (%) -2.5% 7.2% 22.1% 21.0% 19.4%

RoE -29.9% 40.9% 60.7% 39.5% 31.5%


Exhibit 13: Valuation parameters


EPS (Rs) (49.7) 54.8 146.0 168.8 191.4

Diluted EPS (Rs) (45.1) 49.5 139.2 168.8 191.4

Book value per share (Rs) 115.6 143.8 351.7 519.8 695.3

Dividend per share (Rs) 6.1 15.1 15.0 15.0 15.0

P/E (x) NM 25.2 9.0 7.4 6.5

P/BV (x) 10.8 8.7 3.6 2.4 1.8

EV/ EBITDA (x) 48.7 11.1 5.3 4.6 4.1

EV/ Sales (x) 1.3 1.0 0.7 0.6 0.6



19/26

Automobiles April 18, 2011

Bajaj AutoBloomberg: BJAUT IN EquityReuters: BAJA.BO COMPANY UPDATE


Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

Please refer to the Disclaimers at the end of this Report.

BU

Exhibit 1: Key financials (standalone)


Operating income 88,102 119,197 166,136 205,070 236,725

EBITDA 11,920 25,912 33,698 39,840 45,982

EBITDA (%) 14.1% 22.5% 21.0% 20.2% 20.1%

EPS (fully diluted) (Rs) 29.8 64.4 89.4 107.7 125.2

RoE (%) 49.8% 77.7% 68.1% 54.5% 45.3%

RoCE (%) 38.5% 70.5% 65.2% 55.1% 47.3%

P/E (x) 47.0 21.7 15.6 13.0 11.2


Analyst contacts

Vijay Chugh


Ashvin Shetty


Recommendation

CMP: Rs1,399

Target Price (one year): Rs1,750

Previous TP: R1,600

Upside (%) 25

EPS (FY12): Rs107.7

Change from previous (%) 2

Variance from consensus (%) 6

Stock Information

Mkt cap: Rs405bn/US$8,896mn

52-wk H/L: Rs1,638/1009

3M ADV: Rs767mn/US$17mn

Beta: 0.9x

BSE Sensex: 19263

Nifty: 5786

Stock Performance (%)

1M 3M 12M YTD

Absolute 0.6 5.9 33.6 -10.3

Rel. to Sensex -5.4 5.5 26.2 -4.2

Performance (%)

10,000

15,000

20,000

25,000

A pr-10 A ug-10 Jan-11

500

1000

1500

2000

Sensex Bajaj Auto


Attractively Priced Whilst favourable macro trends, new launches, dealer networkexpansion and strong export growth should help drive healthy volumetrends and protect market share, improved product mix and pricingpower should limit the downside to margins on account of a rise ininput costs. At a relatively inexpensive 13x FY12 earnings, we reiterateour BUY on the stock with a target price of Rs1,750.

Volume growth momentum to continueThe demand for domestic motorcycles continues to be strong backed bysuperior consumer confidence, rising income levels, faster replacement cycleand aspirational pull. Together with the recent launch of Discover 125cc andthe dealer network expansion (addition of nearly 25% to the existing strength),this should enable the company to post volume CAGR of 17% over FY11-13Ein motorcycles. Similarly we expect three wheeler volumes to grow at a CAGRof 17% over FY11-13E fuelled by favourable domestic demand, improvedavailability of finance as well as a strong revival in the export markets.

Competition to have a muted impact on market share We believe Bajajs stronghold premium segment to be less prone tocompetition compared to Hero Honda, which is a dominant player in theeconomy and executive segments. Together with launch of Discover 125cc anddealer network expansion, this should help Bajaj protect its market share. Wehave nevertheless conservatively factored in a market share decline of 30bps

over FY11-13E in our estimates for domestic motorcycles volumes.

Product mix and pricing power to help margins We expect the share of premium bikes (Pulsar and Discover) in the overallmotorcycle portfolio to remain above 70% with an upward bias from thelaunch of Discover 125cc. This together with volume momentum sustaining inthe higher margin three wheeler segment (where the company earns nearly30% EBITDA margin) and pricing power flowing from healthy demand trends,should help negate the rise in input costs to a significant extent and enable thecompany to post EBITDA margin north of 20% in FY12 and FY13.

Valuation and RecommendationWe expect Bajaj Auto to post EBITDA and net earnings CAGR of 17% and 18%respectively over FY11-13E. At 13.0x FY12 earnings, the stock is trading at a18% discount to Hero Honda despite the higher earnings expectations. Webelieve Bajaj Auto should trade closer to Hero Hondas multiples (compared tocurrent levels). We reiterate our BUY on Bajaj Auto with a target price ofRs1,750 implying 14x FY13 EPS.


20/26

Bajaj Auto


Key assumptions and estimatesExhibit 2: Key assumptions and estimates

Standalone FY10 FY11E FY12E FY13E Comments

Motorcycles (domestic)

Volume growth YoY (%) 40 36 18 15

Market share (%) 24.3 26.8 26.8 26.5

Healthy demand trends, new model launches and dealer

network expansion to help the company protect erosion inmarket share and post 16% volume CAGR over FY11-13E

Motorcycles (exports )


Strong rebound in exports seen in FY11 to continue in FY12.Growth rate in FY12 will also be helped to some extent byaround 25,000 units in transit as at the FY11 end, which

would be accounted as sales in FY12. This however wouldnegatively impact the growth rate of FY13 by around 238bps

Three wheelers (domestic+ exports)


Three wheeler sales to remain strong in FY12. Growth rate inFY12 will also be helped to some extent by around 7,000units in transit as at FY11 end, which would be accounted assales in FY12. This however would negatively impact the

growth rate of FY13 by around 150bpsNet sales (Rs mn) 115,085 160,174 197,711 228,231

YoY growth (%) 36 39 23 15

We expect revenue CAGR of 19% over FY11-13E, led largelyby volume growth

EBITDA (Rs mn) 25,912 33,698 39,840 45,982

EBITDA margin (%) 22.5 21.0 20.2 20.1

EBITDA YoY growth (%) 117 30 18 15

A significant increase in input costs to impact FY12 margins.However, we expect margins to remain above 20%, led by ahealthy mix of premium bikes, exports and three wheelers

Adjusted PAT (Rs mn) 18,651 25,872 31,169 36,247

Adj PAT margin (%) 16.2 16.2 15.8 15.9

PAT YoY growth (%) 116 39 20 16

Fully diluted EPS (Rs) 64.4 89.4 107.7 125.2

PBT/PAT/EPS to grow faster than EBITDA on account of asignificant increase in other income

Wk cap days (ex cash)

closing (22) (19) (19) (20)Work cap days (ex cash) -average

(9) (17) (17) (18)

Working capital days maintained constant. Average for FY10looks higher due to higher working capital days in FY09

Capex (Rs mn) (1,078) (800) (2,500) (2,500) Capex to be stepped up in FY12 for the four wheeler project

FCF (Rs mn) 26,293 24,163 27,420 31,175

Net debt (Rs mn) (19,379) (38,678) (62,438) (89,271)

High profitability amidst stable working capital to generatesignificant cash


Exhibit 3: Change in estimates

New estimates Old estimates Change (%, bps)

Standalone (Rs mn) FY11 FY12 FY11 FY12 FY11 FY12 Comments

Net sales (Rs mn) 160,174 197,711 162,193 190,288 (1.2) 3.9

Recent price hikes announced by thecompany together with the delay inshipment of around 32,000 units as at FY11end are the main sources of upgrades toour FY12 revenue estimates

EBITDA (Rs mn) 33,698 39,840 34,254 39,862 (1.6) (0.1)

EBITDA margin 21.0% 20.2% 21.1% 20.9% (8) bps (80) bps

Whilst we downgrade our FY12 marginestimates on account of an increase in theinput costs, we maintain it at over 20% onaccount of healthy mix trends (premiumbikes and three wheelers)

PBT (Rs mn) 35,934 43,290 36,112 42,564 (0.5) 1.7

PAT (Rs mn) 25,872 31,169 25,893 30,646 (0.1) 1.7

EPS (Rs) 89.4 107.7 89.5 105.9 (0.1) 1.7

We raise our estimates of other incomewhich more than offsets the downgrade toEBITDA resulting in net upgrades at

PBT/PAT/EPS level in FY12.



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Bajaj Auto


Exhibit 4: Ambit v/s consensus

(Rs m) Ambit Consensus % divg. Reasons for divergence

Revenues

FY11E 166,136 165,590 0.3

FY12E 205,070 194,030 5.7

Our revenue estimates are ahead ofconsensus largely flowing from ourhigher than consensus volumeassumptions

EBITDA

FY11E 33,698 33,515 0.5

FY12E 39,840 37,540 6.1

Higher than consensus revenueestimates are the main source of higherthan consensus EBITDA

PAT

FY11E 25,872 25,731 0.5

FY12E 31,169 29,362 6.2

Higher than consensus revenues andEBITDA percolates to PAT



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Bajaj Auto


Valuation and Recommendation

Relative valuation

On relative valuation, Bajaj Auto is currently trading at 21% and 18% discount toHero Hondas FY12 EV/EBITDA and P/E respectively despite having higher EBITDAand net earnings expectations over FY11-13E.



MCAP(US $mn) FY10 FY11 FY12 FY13 FY10 FY11 FY12 FY13

Sales growth(FY11-13) (%)

EPS growth(FY11-13) (%)

EBITDA growth(FY11-13) (%)

India

Ashok Leyland 1,662 17.2 13.2 10.5 9.0 12.5 8.8 7.4 6.5 16 21 17

Bajaj Auto 8,896 21.7 15.6 13.0 11.2 14.1 10.9 9.2 8.0 19 18 17

Hero Honda 7,785 15.5 16.9 15.9 13.5 11.1 12.6 11.6 10.0 17 12 12

Maruti Suzuki 8,297 14.6 16.3 13.5 11.7 8.1 8.6 7.2 6.2 16 18 18

Tata Motors 16,539 25.2 9.0 7.4 6.5 11.1 5.3 4.6 4.1 16 17 14

TVS Motor 628 83.8 14.7 10.3 9.0 27.5 8.3 6.6 6.1 15 27 17Eicher Motor 772 18.1 14.9 12.6 NA 7.2 5.5 4.5 NA NA NA NA

M&M 10,056 16.2 15.8 13.5 11.2 9.6 9.6 8.4 8.0 14 19 10

Average (exBajaj)

27.2 14.4 12.0 10.2 12.4 8.4 7.2 6.8 16 19 15

Source: Bloomberg, Ambit Capital research, Company; Note: Ambit estimates for Ashok Leyland, Bajaj Auto, Hero Honda, Maruti Suzuki and TataMotors, rest are Bloomberg consensus estimates

Cross cycle valuation

Bajaj Auto has historically traded at a discount to Hero Honda. Whilst its valuationgap with Hero Honda on (both P/E and EV/EBITDA) has come down significantly,the current P/E implies a still significant 18% discount to Hero Honda despite

having higher earnings expectation (18% over FY11-13E compared to 12% forHero Honda).

Exhibit 6: Bajaj Auto discount to Hero Honda on P/E

-70%

-60%

-50%

-40%-30%

-20%

-10%

0%

10%

20%

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

Premium Discount to HH P/E


Exhibit 7: Bajaj Auto discount to Hero Honda onEV/EBITDA

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

Premium Discount to HH EV/EBITDA


Recommendation

We believe Bajaj Auto should trade closer to Hero Hondas multiples compared tocurrent levels.We value Bajaj Auto using a target FY13 P/E multiple of 14x(long term median P/E) arriving at a target price of Rs1,750, 25% upsidefrom the current levels.


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Bajaj Auto


Exhibit 8: Balance sheet (standalone)


Shareholders' equity 1,447 1,447 2,894 2,894 2,894

Reserves & surpluses 17,250 27,837 43,826 64,872 89,310

Total net worth 18,697 29,283 46,720 67,766 92,203

Debt 15,700 13,386 13,386 13,386 13,386

Deferred tax liability 42 17 17 17 17

Total liabilities 34,439 42,686 60,123 81,169 105,606

Gross block 33,502 33,793 34,593 37,093 39,593

Net block 15,423 14,796 14,331 15,505 16,586

CWIP 221 415 415 415 415

Investments 7,637 8,465 10,080 10,080 10,080

Cash & equivalents 11,816 32,765 52,064 75,824 102,656

Debtors 3,587 2,728 3,797 4,687 5,411

Inventory 3,388 4,462 6,210 7,666 8,849

Loans & advances 13,652 20,745 28,873 35,639 41,141

Other current assets 1,257 1,060 1,060 1,060 1,060Total current assets 33,700 61,760 92,004 124,876 159,117

Current liabilities 12,134 20,263 26,330 32,500 37,517

Provisions 12,242 22,487 30,377 37,207 43,074

Total current liabilities 24,376 42,750 56,707 69,707 80,592

Net current assets 9,324 19,010 35,297 55,169 78,525

Miscellaneous 1,833 - - - -

Total assets 34,439 42,686 60,123 81,169 105,606


Exhibit 9: Income statement (standalone)


Net sales 84,369 115,085 160,174 197,711 228,231

% growth (2.6) 36.4 39.2 23.4 15.4

Operating Income 88,102 119,197 166,136 205,070 236,725

% growth (2.0) 35.3 39.4 23.4 15.4

Operating expenditure 76,183 93,284 132,437 165,230 190,744

EBITDA 11,920 25,912 33,698 39,840 45,982

% growth (3.4) 117.4 30.0 18.2 15.4

Depreciation 1,298 1,365 1,265 1,326 1,419

EBIT 10,622 24,548 32,433 38,514 44,563Interest expenditure 210 60 20 20 20

Non-operating income 1,220 1,238 3,520 4,796 5,801

Adjusted PBT 11,632 25,726 35,934 43,290 50,343

Tax 3,016 7,075 10,061 12,121 14,096

Adjusted PAT/ Net profit 8,616 18,651 25,872 31,169 36,247

% growth 0.4 116.5 38.7 20.5 16.3

Extraordinaries 2,071 1,624 - - -

Reported PAT/ Net profit 6,545 17,027 25,872 31,169 36,247



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Bajaj Auto


Exhibit 10: Cashflow statement


PBT 9,581 24,111 35,934 43,290 50,343

Depreciation 1,298 1,365 1,265 1,326 1,419

Others (901) 215 (3,500) (4,776) (5,781)

Tax (3,213) (6,999) (10,061) (12,121) (14,096)

(Incr) / decr in net workingcapital

(2,650) 8,679 1,326 2,201 1,789

Cash flow from operations 4,115 27,371 24,963 29,920 33,675

Capex (3,861) (1,078) (800) (2,500) (2,500)

(Incr) / decr in investments 458 (21,944) (1,615) - -

Other income (expenditure) 1,326 1,386 3,520 4,796 5,801

Cash flow from investments (2,077) (21,636) 1,105 2,296 3,301

Net borrowings 2,357 (2,355) - - -

Issuance of equity - - - - -

Interest paid (210) (60) (20) (20) (20)

Dividend paid (3,377) (3,716) (6,749) (8,436) (10,123)

Others - 41 - - -

Cash flow from financing (1,230) (6,090) (6,769) (8,456) (10,143)

Net change in cash 808 (355) 19,299 23,760 26,832

Closing cash balance 1,369 1,014 20,313 44,073 70,906

Free cash flow 254 26,293 24,163 27,420 31,175


Exhibit 11: Ratio analysis

Year to March (%) FYO9 FY10 FY11E FY12E FY13E

EBITDA margin (%) 14.1 22.5 21.0 20.2 20.1

EBIT margin (%) 12.6 21.3 20.2 19.5 19.5

Net profit margin (%) 10.2 16.2 16.2 15.8 15.9

Dividend payout ratio (%) 48.6 34.0 28.0 27.9 27.9

Net debt: equity (x) 0.2 (0.7) (0.8) (0.9) (1.0)

RoCE (%) 38.5 70.5 65.2 55.1 47.3

RoIC (%) 28.5 51.1 47.0 39.7 34.0

RoE (%) 49.8 77.7 68.1 54.5 45.3


Exhibit 12: Valuation parameters

Year to March FYO9 FY10 FY11E FY12E FY13E

EPS (Rs) * 29.8 64.4 89.4 107.7 125.2

Diluted EPS (Rs) * 29.8 64.4 89.4 107.7 125.2

Book value per share (Rs) * 64.6 101.2 161.5 234.2 318.6

Dividend per share (Rs) * 11.0 20.0 25.0 30.0 35.0

P/E (x) 47.0 21.7 15.6 13.0 11.2

P/BV (x) 21.6 13.8 8.7 6.0 4.4

EV/EBITDA (x) 30.7 14.1 10.9 9.2 8.0

EV/EBIT (x) 34.5 14.9 11.3 9.5 8.2



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Bajaj Auto


Institutional Equities Team

Saurabh Mukherjea,CFA

Managing Director - Institutional Equities (022) 30433174 [email protected]

Research

Analysts Industry Sectors Desk-Phone E-mail

Amit K. Ahire Telecom / Media & Entertainment (022) 30433202 [email protected]

Ankur Rudra, CFA IT/Education Services (022) 30433211 [email protected]

Ashish Shroff Technical Analysis (022) 30433209/3221 [email protected]

Ashvin Shetty Consumer/Automobiles (022) 30433285 [email protected]

Bhargav Buddhadev Power/Capital Goods (022) 30433252 [email protected]

Chandrani De, CFA Metals & Mining (022) 30433210 [email protected]

Chhavi Agarwal Infrastructure / Construction (022) 30433203 [email protected]

Gaurav Mehta Derivatives Research (022) 30433255 [email protected]

Krishnan ASV Banking (022) 30433205 [email protected]

Nitin Bhasin Infrastructure / Construction / Cement (022) 30433241 [email protected]

Pankaj Agarwal, CFA NBFCs (022) 30433206 [email protected]

Parikshit Kandpal Construction / Real estate (022) 30433201 [email protected]

Puneet Bambha Power/Capital Goods (022) 30433259 [email protected]

Ritika Mankar Economy (022) 30433175 [email protected]

Ritu Modi Cement (022) 30433292 [email protected]

Shariq Merchant Consumer (022) 30433246 [email protected]

Subhashini Gurumurthy IT/Education Services (022) 30433264 [email protected]

Vijay ChughConsumer (incl FMCG, Retail,

Automobiles)(022) 30433054 [email protected]

Sales

Name Designation Desk-Phone E-mail

Deepak Sawhney VP (022) 30433295 [email protected]

Dharmen Shah VP (022) 30433289 [email protected]

Dipti Mehta Senior Manager (022) 30433053 [email protected]

Pramod Gubbi, CFA VP (022) 30433228 [email protected]

Sarojini Ramachandran Director, Sales +44 (0) 20 7614 8374 [email protected]


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Bajaj Auto

Explanation of Investment Rating

Investment Rating Expected return(over 12-month period from date of initial rating)

Buy >15%

Hold 5% to 15%

Sell

Documents

Ambit Automobile Sector Update April 2011