Indian Two-Wheelers Sector - Initiating Coverage 21-09-17 PDF

Indian Two-wheelers
Prepare for growth ‘shock’
21 September 2017
14-Aug-12
Chirag Jain Indarpreet Singh

+91 22 4348 7183 +91 22 4348 7232
chirag.jain@sbicapsec.com indarpreet.singh@sbicapsec.com
Banking & Finance Monthly
SBI CAP Securities Ltd (SSL)

Marathon Futurex, A & B Wing,12th Floor, N.M. Joshi Marg, Lower Parel, Mumbai 400013
+91 22 4227 3300/01
Prepare for growth ‘shock’
After a cyclical rebound in FY18e, we expect the Indian two-wheeler (2W) industry’s growth to structurally
decelerate to mid-single digits with the beginning of the maturity phase. Our proprietary analysis together with
extensive dealer checks indicate that same-store sales growth (SSSG) for the masstige motorcycles category
(250-500cc - synonymous with Royal Enfield) has stalled and incremental volumes are primarily being driven by
penetration (i.e. network expansion). This too is expected to peter out over the next couple of years once
network expansion has largely played out. We believe the mix-shift towards scooters will accelerate further,
with the segment accounting for ~80% of incremental volumes over FY17-22e (vs. 73% over FY12-17), as
customers choose convenience over costs.
Against the above backdrop, we initiate coverage with a negative stance on the entire Indian 2W space on
account of the following reasons:
 EIM’s (SELL, 23% downside) current valuations of 32x FY19e PE do not reflect the sharp growth
deceleration in the masstige motorcycle category;
 Bajaj Auto (BJAUT, SELL, 17% downside) and Hero MotoCorp (HMCL, SELL, 10% downside) are at a
sustainable competitive disadvantage due to the continued mix-shift towards scooters (estimate scooter
share to rise to 46% by FY22e from 32% in FY17);
 The elevated drag from structural low-growth segments i.e. mopeds and commuter motorcycles (~47% of
volumes) would impede margin expansion for TVS Motor (TVSL) (SELL, 24% downside).
M-cap Price Upside Variation vs.

Com pany Rating TP (Rs) EPS EPS gr. (%) RoE (%) PER (x) EV/EBITDA (x)
(USD bn) (Rs) (%) consensus
FY19e FY20e FY19e FY20e FY19e FY20e FY19e FY20e FY19e FY20e FY19e FY20e
Eicher Motors* (EIM IN) 13.8 SELL 32,404 25,110 (22.5) 1,005 1,187 22.7 18.2 (2.1) (2.4) 32.4 29.3 32.3 27.3 26.2 22.4
Bajaj Auto (BJAUT IN) 14.1 SELL 3,115 2,590 (16.9) 144 161 12.3 12.1 (10.4) (10.2) 21.1 21.4 21.7 19.4 18.2 16.2
Hero MotoCorp (HMCL IN) 12.3 SELL 3,944 3,550 (10.0) 197 200 2.6 1.4 (4.1) (9.0) 31.0 27.9 20.0 19.7 13.1 12.8
TVS Motor (TVSL IN) 4.9 SELL 658 500 (24.1) 18 23 36.5 24.6 (9.8) (6.8) 29.3 30.4 32.2 25.9 22.0 18.1
* Consolidated
Sector: Indian Two-wheelers 2

Indian 2W landscape: Key structural themes
2W industry growth outlook – Approaching structural growth deceleration
 Our state-wise 2W household and sales analysis reflects that 2W growth peaks at around 40-45% HH penetration levels. We
note the penetration volume trade-off is strongly co-related.
 2W volume CAGR of 5.5% since FY12 camouflages the behaviour of more mature markets. The relatively eight developed
states (top-8), witnessed just about 2.7% volume CAGR while the less developed States (Rest of India - ROI) grew 9.5%
volume CAGR. The key insight is that ROI’s penetration levels, at 38% (FY18e) are close to levels where volumes in top-8
states started tapering off. Expect 2W volumes in mid to low-single digits going ahead.
 In this context, around 13% volume growth in FY18e is mostly a one-off cyclical rebound led by rural recovery and should not
be confused with a secular revival in growth trend.
# Theme 1: Masstige craze - End in sight
 One of the biggest surprises in 2Ws over last 5 years has been rapid adoption of masstige motorcycles (250-500cc) and the
longevity of this trend.
 Our proprietary analysis with extensive dealer checks suggests that same-store sales growth (SSSG) has stalled and
incremental volumes are largely penetration-led (i.e network expansion). This too is expected to peter out in the next couple
of years once network expansion is largely through.
 Importantly, our channel checks paint a fairly gloomy picture, with a sharp deceleration in new bookings growth across
markets. This is yet to reflect in PAN-India wholesale dispatches due to run-off of order book and lower channel inventory.
While investors may brush this off as anecdotal, we suspect this is more structural.
 Investment implication: SELL EIM (23% downside)
# Theme 2: Scooterizaton - Long way to go
 We fall back on state-wise analysis for more insights. Scooter penetration co-relate strongly with incomes as consumers up-
trade for convenience over ownership costs. Extremely high commuter motorcycle base offers long-term growth opportunity
for scooters.
 Since FY12, scooters have accounted for ~73% of incremental growth in 2Ws. The skewness is more in the top-8 states, as
expected, with >100% share of incremental volumes, while the motorcycle category registered a decline. We forecast an
acceleration of this trend – scooters will account for 80% of incremental growth in 2Ws, with category share of 46% by FY22e
(vs. 32% in FY17).
 These category tailwinds will have dramatic implications: Honda will likely emerge as the market leader by FY22e. The
former is already the leader in eight states that enjoys high scooter share.
 Investment implications: SELL BJAUT (17% downside), SELL HMCL (10% downside)

Initiate with an SELL rating on entire Indian 2W space
# Eicher Motors (EIM IN, SELL 23% downside): Growth juggernaut entering fatigue mode
After nearly 5 years of >50% volume CAGR, our analysis of state-wise sales trend coupled with our dealer checks
suggests the first-ever signs of a sharp growth deceleration in bookings for Royal Enfield (RE). We believe this is not yet
reflecting in reported sales volumes (up 23% during FY18-YTD) on account of run-off in order book, relatively benign
channel inventory supported with network expansion. RE’s limited brand appeal and comparatively weaker R&D
capabilities would act as meaningful impediments to medium-term success in export markets. Compared to 50% EPS
CAGR over FY12-17, we expect growth to normalize with 20% CAGR over FY18e-20e and hence, argue for a multiple
de-rating to 25x PE (from 32x). We draw parallels from Harley-Davidson (HOG US), a similar cult biking brand, to
demonstrate the possibility of such de-rating. Initiate coverage with an anti-consensus SELL.
# Bajaj Auto (BJAUT, SELL 17% downside): That sinking feeling...
BJAUT’s exclusive focus on motorcycles has severely dented its domestic franchise (market share declined by 750bps
over FY12-17). Going ahead, the company’s domestic franchise will remain under pressure due to the a) continued
absence from fast-growing scooter segment, b) inferior product portfolio in masstige motorcycles and c) emerging risk to
high-margin 3W business from e-rickshaws. Exports offer an attractive long-term opportunity; the near-term outlook,
though, remains hazy. We expect muted EPS CAGR of 6.7% over FY17-20e. Initiate coverage with SELL.
Hero Moto (HMCL, SELL 10% downside): No longer a Hero
HMCL has lost 870bps market share with flat volumes over FY12-17 due to its weak presence in high-growth segments.
Considering its high dependence on structurally low-growth commuter motorcycles (83% volumes) and untested R&D
capabilities, we expect HMCL to lose additional market share of 410bps over FY17-20e. While a cyclical upswing in rural
economy would drive healthy volume growth of 11.5% in FY18e, we expect structural mix-shift to lead to flat volumes in
the subsequent years. Consequently, we expect muted EPS CAGR of 2% over FY18-20e. Initiate coverage with SELL.
TVS Motor (TVSL, SELL 24% downside): ‘Dogs’ to act as a drag on ‘Stars’
TVSL’s strong performance with successful brands (Jupiter, Apache) and its association with BMW (for <500cc
motorcycles), is likely to be offset by the drag from structurally low-growth segments (commuter motorcycles and
mopeds) that account for ~47% of total volumes and thus we expect significant disappointment to street expectations
especially with respect to sharp margin expansion. Despite strong 25% EPS CAGR over FY17-20e, at 32x FY19e PE
(valuation adjusted for BMW collaboration and financing arm), we believe risk-reward is highly unfavourable. We initiate
coverage with SELL with TP of Rs500 (24% downside).

Table of Content
Industry section
2W industry growth outlook: Prepare for growth ‘shock’ .............................................................6
# Theme 1: Masstige craze: End in sight ....................................................................................9
# Theme 2: Scooterization: Long way to go..............................................................................11
Honda to emerge as market leader by FY22e ..........................................................................13
Company Section
Eicher Motors (EIM):
Growth juggernaut entering fatigue mode (SELL, 23% downside) ...........................................15
Bajaj Auto (BJAUT):
That sinking feeling…(SELL, 17% downside) ...........................................................................25
Hero MotoCorp (HMCL):
No longer a Hero (SELL, 10% downside) .................................................................................34
TVS Motor (TVSL):
‘Dogs’ to act as a drag on ‘Stars’ (SELL, 24% downside) .........................................................40

2W industry growth outlook: Prepare for growth ‘shock’
Exhibit 1: Strong inverse co-relation between 2W sales and HH
 We note strong inverse co-relation between household
penetration levels
(HH) penetration rates and 2W volume growth rates.
 State-wise analysis reflects that 2W growth peaks at 20 Delhi an outlier due to high
around 40-45% HH penetration levels. migrant & floating population
FY12-17 Volume CAGR (%)

which is not fully captured in
 Nationally, 2W HH penetration stood at ~42% in FY17 15 HH statistics
and is expected to approach ~50% by FY18-end – thus
high risk of growth slowing down to mid-single digits 10
9
 Replacement cycle, if it shortens (currently assumed 8
years), can support the industry growth to higher-single 5
digits over next 2-3 years
0
0 20 40 60 80 100
Household Penetration Levels (%)
Exhibit 2: Replacement demand constitute nearly 40% of demand; Source: SIAM, Census India, MosPi, SSLe
expected to rise to over 50% by FY22e
30,000 53 60  Domestic industry volume CAGR at 5.5% over

49
43 42 43 FY12-17 significantly lower than 12% over FY02-17
22,500 39 38 38 45
32
35 37
 Share of replacement demand has risen from ~30%
('000)
levels in FY12 to ~40% by FY18e

(%)
15,000 30
 With industry growth maturing, we expect over 50%
7,500 15 of volumes to comprise replacement demand by
FY22e
0 0
FY12
FY13
FY14
FY15
FY16
FY17
FY18e
FY19e
FY20e
FY21e
FY22e
Dom. 2W sales (LHS) Replacement share in 2W sales (RHS)
Source: SIAM, SSLe

2W sales close to peaking out; estimate mid to low-single digit growth
Exhibit 4: Top-8 states grew only by 2.7% CAGR; ROI now at similar stage
 Since FY12, industry CAGR of 5.5% (vs 12% over
FY02-12) has pushed national HH penetration
FY12 HH FY17 HH Dom. 2W
levels above 40% States penetration penetration CAGR
Per capita Industry
(USD) share (%)
(%) (%) FY12-17 (%)
 Careful state-wise analysis over FY12-17 unmasks
more worrying trends. Goa 90 113 -1.7 3,914 0.3
 Top-eight states (~55% of industry volumes) Delhi 63 95 9.2 3,981 2.7
have registered a meagre 2.7% CAGR. Tamil Nadu 41 59 0.3 2,038 7.7
 Growth over FY12-17 primarily driven by the Gujarat 48 66 1.4 1,865 6.9
ROI (Hindi belt) with 9.5% CAGR. Haryana 50 74 4.1 2,245 3.0
 The key insight is that ROI’s penetration levels, Kerala 30 52 3.9 1,879 3.7
now at 32% (~36% by FY18e-end) are close to Karnataka 39 55 6.5 1,479 6.9
levels where volumes in top-8 states started Maharashtra 34 52 3.5 1,997 11.3
tapering off. We expect 2W volumes in mid to low- AP & Telangana 25 37 5.6 1,565 8.4
single digits going ahead Punjab & Chandigarh 46 71 1.8 1,622 3.8
Exhibit 3: Industry showings signs of maturing with HH Avg/Sum of above 38 56 2.7 1,916 54.8
penetration approaching ~45% by FY18e-end PAN India 29 42 5.5 1,495 100
76 16 Rest of India 21 32 9.5 870 45.2
68
65 67
63 Chhattisgarh 29 47 5.3 1,023 2.3
64 60 12
57 Rajasthan 33 55 3.9 1,131 6.4
55
52
49
(%)
Madhya Pradesh 25 40 4.5 949 5.2

(%)
51 46 8
42 Orissa 19 33 10.7 940 3.2
39
39 36 4
33 Uttar Pradesh 25 42 8.1 641 12.7
29 30
West Bengal 6 17 12.4 1,252 4.6
26 0
North East 11 14 19.8 1,334 3.8
FY12
FY13
FY14
FY15
FY16
FY17
FY18e
FY19e
FY20e
FY21e
FY22e
FY23e
FY24e
FY25e
FY26e
FY27e
Bihar 8 19 15.3 574 4.0

Jharkhand 16 35 12.4 820 2.1
HH penetration (LHS) Dom. 2W vol. gr. (RHS)
Source: SIAM, Census India, MoSPI
Source: SIAM, SSLe

Double-digit growth in FY18e is mostly a one-off cyclical rebound
We estimate 12.7% growth in 2W volumes during Exhibit 5: Growth recovering as rural economy bounces back
FY18e:
Growth YoY 3mma (%)
 Rural consumption had been impacted for the last 3 24
years owning to combination of two consecutive

12
monsoon failures (2014 and 2015) and lower growth
in minimum support prices (MSP) for crops. 0
 We believe the growth in FY18e is largely a one-off (12)

cyclical rebound led by rural recovery (2 years of
good monsoon) and low-base (demon last year). (24)
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Apr-17
Source: SIAM
Two themes have defined 2W industry growth over the last 5 years
#1 Rapid adoption of masstige motorcycles #2 Scooterization as customers opt for
Customers have leapfrogged directly towards convenience
masstige (250-500cc) motorcycles from Scooters have outperformed with robust 17%
commuters (<150cc). The premium motorcycle CAGR over FY12-17 as against 2% CAGR for
category (150-250cc) registered just 2% CAGR motorcycles. Consequently, the scooter share have
over FY12-17, while the masstige category risen to 32% from 20% in FY12 with ~73% share of
registered a CAGR of 54%. incremental 2W volumes

# Theme 1: Masstige craze - End in sight
 One of the biggest surprises in 2Ws over last 5 years has been rapid adoption of masstige motorcycles (250-500cc) and the
longevity of this trend.
 Our proprietary analysis with extensive dealer checks suggests that same-store sales growth (SSSG) has stalled and
incremental volumes are largely penetration-led (i.e network expansion). This too is expected to peter out in the next couple of
years once network expansion is largely through.
 We highlight that the top two-markets (Maharashtra and Karnataka) have already started to de-grow sharply in new bookings –
yet to reflect in PAN-India wholesale dispatches due to run-off of order book and lower channel inventory.
 Importantly, our channel checks paint a fairly gloomy picture, with a sharp deceleration in new bookings growth across markets.
While investors may brush this off as anecdotal, we suspect this is more structural.
The term ‘masstige’ was popularised by Michael Silverstein and Neil Fiske in their book ‘Trading Up’ to refer to a new category of
products that are affordable for mass consumers, and yet, are prestigious in nature. While offering an ownership experience and
status closer to luxury brands, the costs are significantly lower.
Over the last five years, customers have leapfrogged directly towards 250-500cc motorcycles (masstige) from commuters (<150cc)
The premium motorcycle category (150-250cc) has registered just 2% CAGR over FY12-17, compared to 27% CAGR over FY02-
12. While the masstige category registered a CAGR of 54% to account for ~6% of motorcycle volumes vs. <1% in FY12.
Exhibit 6: ‘Mass prestige’ 250-500cc motorcycles offering superior Exhibit 7: Customers leapfrogging towards masstige
ownership experience at marginally higher costs (Index) motorcycles (250-500cc) (motorcycle segment share %)
3,200 FY02-12 vol. FY12-17 vol.
CAGR (%) CAGR (%)
Masstige Segment Luxury Segment 2,590
Mass 1 1 54
Ownership costs Ownership costs 100% 11
2,400 Segment 6
~1.6-2.5x but significantly 5 27 16 2
ownership higher upto 17x 16
1,600 status/experience 75%
1,338
closer to luxury 928
brands 50%
800 94
452 83 0 77
247 306 12
100 152
25%
0
Classic …
Triumph
Enfield
BMW 310R
S1000R
Street 750
Splendor
Bajaj Pulsar
KTM 250
Davidson
Royal
BMW
100cc
Harley
Hero
150cc
(Exp)
0%
FY02 FY12 FY17
Commuter Premium Masstige
Source: SIAM, SSLe Source: SIAM, SSLe

We estimate SSSG has stalled for the masstige (RE) category
Exhibit 8: We estimate sharp deceleration in SSSG for RE
 Same-store sales growth (SSSG) has stalled and
80 incremental volumes are largely penetration-led (i.e network
70 expansion). This too is expected to peter out in the next
57
couple of years once network expansion is largely through.
55 52 53
 Our channel checks paint a fairly gloomy picture with a sharp
32 33
29 deceleration in new bookings growth across markets. While
(%)
30 24 30
25 investors may brush this off as anecdotal, we suspect this is
5 more structural.
5 (3)
 Sharp deceleration in SSSG is yet to reflect in PAN-India
CY12 CY13 CY14 FY16 FY17 1QFY18 wholesale dispatches for RE given run-off in order book and
(20) low channel inventory supported with network expansion
Same-store growth Total growth  Compared to over 50% volume CAGR over last 5 years, we
expect wholesale volume growth to decline to sub-15% post
Source: SSLe
FY18e once network expansion is largely through
Exhibit 9: Wholesale growth already started weakening in key markets Exhibit 10: Compared to >50% volume CAGR over last five years,
for RE expect masstige (RE) growth to decelerate to <15%
94
100 1,600 1,442 80

68.0
84
83
1,299
79
59.8
1,148
71
1,200 53.7 53.9 60

63
1,003
63
75
61
59
44.2
57
56
854
53
53
('000)
49
681
44
(%)
800 40
39
(%)
50 25.4
37
35
499
34
33
33
36.6 17.4 14.5

27
324 13.1 11.0 20

400 203
14
25 79 121
9
0 0
FY12
FY13
FY14
FY15
FY16
FY17
FY18e
FY19e
FY20e
FY21e
FY22e
0
North East West South
FY13 FY14 FY15 FY16 FY17 1QFY18

Masstige motorcycles (LHS) Growth (RHS)

# Theme 2: Scooterization phenomena has a long way to go
 Convenience (self-start, automatic transmission), multi-user Exhibit 12: Structural shift towards scooters underway
friendly (unisex appeal) and utility value (storage space) are Dom. 2W Scooter Motorcycle Scooter share Scoote
Per
key growth drivers of scooters over motorcycles States
CAGR CAGR CAGR in incremental r share
capita
FY12-17 FY12-17 FY12-17 vols. (%) FY17
(USD)
 Ownership costs are ~15% higher as compared to commuter (%) (%) (%) FY12-17 (%)
motorcycles, and hence, scooter sales are highly correlated Goa -1.7 2.5 -9.2 -113.1 75 3,914
with per capita income levels (as also reflected in state-wise Delhi 9.2 21.8 1.2 88.2 45 3,981
analysis) Tamil Nadu 0.3 12.4 -2.6 1146.3 36 2,038
 The pace of adoption of scooters has been remarkable with Gujarat 1.4 9.0 -2.6 247.5 41 1,865
~73% of incremental 2W industry volumes over FY12-17. Haryana 4.1 13.0 0.7 80.9 28 2,245
Kerala 3.9 14.4 -6.0 196.6 62 1,879
 The skewness is more in the top-8 states, as expected with
Karnataka 6.5 14.3 1.2 83.6 41 1,479
>100% share of incremental volumes, while the motorcycle
Maharashtra 3.5 11.1 -1.3 123.1 41 1,997
category registered decline.
AP & Telangana 5.6 16.7 1.1 78.7 31 1,565
 Even in less developed states, adoption of scooters has been Punjab &
1.8 11.1 -3.0 228.6 42 1,622
faster despite infrastructure (poor road conditions) challenges, Chandigarh
with ~30% share of incremental volumes Avg/Sum of above 2.7 15.2 -2.6 168.0 41 1,916
PAN India 5.5 16.9 2.0 72.9 32 1,495
Exhibit 11: Scooter share highly linked with income levels Rest of India 9.5 21.4 7.0 35.6 21 870
4,400 Chhattisgarh 5.3 10.5 2.4 52.8 27 1,023
Delhi - Most metros have 45
scooter share around 45- Rajasthan 3.9 13.3 1.4 62.1 21 1,131
Per Capita Income (USD)
50%
3,300 Madhya Pradesh 4.5 12.1 1.8 57.7 23 949
Orissa 10.7 18.0 5.4 44.2 28 940
2,200 Uttar Pradesh 8.1 17.1 4.8 31.4 17 641

62 West Bengal 12.4 25.2 7.2 37.8 23 1,252
North East 19.8 39.0 12.9 53.9 39 1,334
1,100
Kerala - enjoys higher share Bihar 15.3 31.3 11.1 12.5 8 574
of scooters and masstige
motorcycles Jharkhand 12.4 21.3 8.0 31.2 20 820
0
0 20 40 60 80 Source: SIAM, Census India, MoSPI
Share of Scooter Sales (%)

Source: SIAM, Census India, MosPi, SSLe

Scooters could nearly be half of the market by FY22e....
 We expect the pace of adoption to accelerate even further, Exhibit 13: Scooter share gain to be largely at cost of commuter
with ~80% share of incremental volumes over FY17-22e motorcycles
 Implementation of BS-6 emission norms could further 48 80

accelerate the shift towards scooters against entry-level
commuter motorcycles and mopeds 36 60
 Consequently, we expect scooters to contribute 46% to
(%)
(%)
24 40
industry volumes by FY22e vs. 32% in FY17
 We expect the shift towards scooters to take place largely at 12 20
the cost of commuter motorcycle volumes.
0 0
 Correspondingly, we expect commuter motorcycles to
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18e
FY19e
FY20e
FY21e
FY22e
register meagre 1% volume CAGR over FY17-22e, largely
driven by cyclical recovery in FY18e volumes.
Automatic scooters (LHS) Commuter m/c (RHS)
Source: SIAM, SSLe
Exhibit 14: Share of scooters to rise to 46% by FY22e Exhibit 15: Scooters to register 15.5% volume CAGR over FY17-22e
46 12,000 40
48 43
39 25
36 24 23
34 9,000 25
36 31 32 20
28 (Units 000)
14
12 11 15 14 14 14
24
21 6,000 10
(%)
24 19
12 3,000 (5)
0 0 (20)
FY18e
FY19e
FY20e
FY21e
FY22e
FY12
FY13
FY14
FY15
FY16
FY17
FY18e
FY19e
FY20e
FY21e
FY22e
FY12
FY13
FY14
FY15
FY16
FY17
Dom. scooters Growth YoY (%) (RHS)


Honda to emerge as leader with mix-shift towards scooters by FY22e
 Honda 2Ws dominates the scooter segment with strong Exhibit 16: Honda dominates scooter space with 57% share (FY17)
57% share in FY17 (vs. 42.6% in FY11)
Others, 1
 With strong leadership position in scooters, Honda 2Ws Hero Moto, 14
TVS Motor, 15
has emerged as the leader in the top six states.
 HMSI aims to further accelerate the shift towards scooters
Suzuki, 5
with rural centric products. Recent launch of ‘CliQ’ scooter
with lower pricing (Rs42k vs. Rs48k for existing scooters;
Rs45k for entry-level motorcycles) and bigger wheel size, Yamaha, 8
higher ground clearance is one such launch.
 We estimate Honda 2Ws to overtake Hero Moto to emerge Honda 2Ws,
as the industry leader nationally by FY22e. 57
 Continued absence from the scooter space would further

impact BJAUT’s domestic franchise, in our view. Source: SIAM
Exhibit 17: Honda has overtaken Hero in ~42% of the industry, led Exhibit 18: Honda to usurp Hero’s leadership position by FY22e
by mix-shift towards scooters with the help of dominant position in scooters
Market share FY12 (%) Market share FY17 (%) 50
Scooter Scooter
States Honda Hero Honda Hero
share (%) share (%) 40
Goa 45 39 61 53 14 75
(%)
30
Gujarat 18 50 26 41 35 41
Maharashtra 19 46 23 39 28 41
20
Karnataka 17 35 19 30 23 41
Kerala 24 34 30 36 16 62 10 FY12
FY13
FY14
FY15
FY16
FY17
FY18e
FY19e
FY20e
FY21e
FY22e
Tamil Nadu 12 28 23 23 21 36
Above states 17 39 25 34 25 42
HMSI Hero
PAN India 15 45 19 26 36 32
Source: SIAM Source: SIAM, SSLe

2W Industry: Key assumptions and category-wise growth outlook
Exhibit 19: Scooters to drive industry growth with ~80% incremental volume share
CAGR CAGR
Industry Outlook FY12 FY17 FY18e FY22e
FY12-17 (%) FY17-22e (%)
Dom. Motorcycles 10,061 11,095 12,276 12,723 2 3
Growth (%) 11.6 3.7 10.7 1.3
% of total domestic 75.1 63.1 61.9 51.3
Dom. Scooters 2,559 5,605 6,706 11,394 17 15 Expect robust 15%
Growth (%) 26.2 11.4 19.7 13.8 CAGR for scooters

Dom. Mopeds 777 890 846 695 3 (5)
Growth (%) 11.4 23.0 (5.0) (5.0)
Domestic Total 13,397 17,590 19,829 24,811 6 7
Growth (%) 14.1 6.9 12.7 6.5
% of total 87.1 88.3 88.3 84.6
Exports 1,979 2,339 2,637 4,525 3 14
Growth (%) 29.2 19.6 12.7 15.0
% of total 12.9 11.7 11.7 15.4
Total 2W 15,376 19,929 22,465 29,336 5 8
Growth (%) 15.9 8.2 12.7 7.7
CAGR CAGR
Domestic Motorcycles FY12 FY17 FY18e FY22e
FY12-17 FY17-22e
Economy 1,555 2,577 3,158 3,018 11 3
Growth (%) 10.1 23.7 22.6 1.3 Commuter motorcycles
to register only 1%
Segment-share (%) 15.5 23.2 25.7 23.7 CAGR
Executive 5,806 5,993 6,447 5,855 1 (0)
Growth (%) 23.2 (9.8) 7.6 (0.8)
Segment-share (%) 57.7 54.0 52.5 46.0 Significant growth
Premium 1,623 1,826 1,817 2,408 2 6 deceleration in masstige
Growth (%) 1.6 5.3 (0.5) 1.4 motorcycle category
expected; RE expected
Segment-share (%) 16.1 16.5 14.8 18.9 to loose share to lower
Masstige motorcycles (LHS) 79 681 854 1,442 54 16 price-models of global
Growth (RHS) 44.2 36.6 25.4 11.0 brands
Segment-share (%) 0.8 6.1 7.0 11.3

Eicher Motors Ltd
Initiating Coverage | Auto | EIM IN
Growth juggernaut entering fatigue mode

After nearly 5 years of >50% volume CAGR, our analysis of state-wise sales trend Rating Target Price (Rs) Upside/Downside (%)
coupled with our dealer checks suggests the first-ever signs of a sharp growth SELL 25,110 (23)
deceleration in bookings for Royal Enfield (RE). We believe this is not yet reflecting Market data
in reported sales volumes (up 23% during FY18-YTD) on account of run-off in order Current price Rs 32,404
book, relatively benign channel inventory supported with network expansion. RE’s Mkt capitalisation USDm 13753.5
limited brand appeal and comparatively weaker R&D capabilities would act as Average daily value 3M USDm 24.2
meaningful impediments to medium-term success in export markets. Compared to Free float % 49.2
Promoter holding % 50.8
50% EPS CAGR over FY12-17, we expect growth to normalize with 20% CAGR over
FY18e-20e and hence, argue for a multiple de-rating to 25x PE (from 32x). We draw 1 Year Performance
parallels from Harley-Davidson (HOG US), a similar cult biking brand, to 150
demonstrate the possibility of such de-rating. Initiate coverage with an anti-
133
consensus SELL.
First-ever signs of growth deceleration visible in key markets: RE witnessed robust 115
54% volume CAGR over FY12-17 as the brand witnessed growing appeal amongst 98
younger audiences post launch of Classic model in 2009. However, our analysis of
80
quarterly state-wise sales trend coupled with our dealer checks suggests the first-ever Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
signs of a sharp growth deceleration. While the reported wholesale dispatches have Eicher Motors Ltd Nifty Index
grown by 23% FY18-YTD, we estimate growth in new bookings have stalled on same-
store basis. With declining order book and low-single digit wholesale growth, we estimate Source: Bloomberg
new bookings to have declined sharply in two of its key markets of Maharashtra and Industry Dynamics
Karnataka during 1QFY18. LT: We expect masstige motorcycles category to register healthy growth
of 16% CAGR, however, would disappoint consensus 20-25% growth
expectations
Meaningful impediments to medium-term success in exports: We also see RE’s
MT: Near-term growth would be driven by network expansion and entry of
limited brand appeal and comparatively weaker R&D capabilities (compared to global new players (TVS-BMW, Bajaj-Triumph)
majors) as meaningful impediments to medium-term success in export markets - hence, Company Dynamics
LT: Over the long-term, we expect growth to normalize to sub-15% driven
we don’t see exports offsetting decelerating domestic growth over FY17-20e. by high penetration especially in larger towns and rise in competition
Valuations factoring high-growth into perpetuity; Initiate with SELL: We highlight MT: Expect volume growth to decelerate to sub-15% CAGR converging
to SSSG growth partly supported with network expansion over near term
sharp correction in valuations multiples of HOS US, a similar cult motorcycle brand, 2-3 MOAT
years ahead of the end of a two decade super-normal growth phase. With expected Enjoys iconic brand status and have been uniquely positioned
SSSG stalling together with early signs of growth slowdown visible in key markets, we
expect significant downside risk to consensus earnings with sharp correction in valuation Disruption Risk(s) – Low
multiples to 25x from current 32x. We initiate with SELL rating. Electric 2Ws poses a risk though appears low over the near-term
Eicher Motors Ltd 15

RE witnessed robust volume growth over past five years...
Exhibit 20: RE witnessed robust growth over past five years... Exhibit 21: Classic model launch in 2009 was the key
inflection point...
750,000 80
67
59
562,500 52 53 60
43
375,000 31 40
187,500 20
0 0
FY12 FY13 FY14 FY15 FY16 FY17
RE sales volume (units) Growth YoY (%) (RHS)
Source: Company, SIAM Source: Company
Exhibit 22: That expanded the appeal to younger customers... Exhibit 23: Supported with robust network expansion
First time
buyers, 15 800
675
600 525
Dealer Network
400
400
300
249
190
200 165
Upgraders & 0
replacement,
2010 2011 2012 2013 2014 FY16 FY17
85
Source: Company Source: Company

...however, we estimate SSSG stalling with volume growth decelerating post FY18e...
Exhibit 24: Volumes per dealer have stagnated over last Exhibit 25: We estimate sharp deceleration in same-store
couple of years sales growth
800 88 100 80
85 82
70
600 63 75 57
55 52 53
(Dealers)
48 32 33
29
(Units)
400 50
(%)
38 30 24 30
32 25
5
200 25
5 (3)
CY12 CY13 CY14 FY16 FY17 1QFY18

0 0
CY11 CY12 CY13 CY14 FY16 FY17 1QFY18 (20)
No. of dealers (LHS) Volumes/dealer/month (RHS) Same-store growth Total growth
Source: Company, SSLe Source: Company, SSLe
 Our proprietary analysis supported with our extensive dealers checks suggests growth in new bookings have
been muted over last few quarters on SSSG basis v/s 25% plus over last few years.
 We estimate new bookings to have declined sharply in RE’s two key markets viz Maharashtra and Karnataka
(together accounting for 1/5th of sales) considering reduction in order book (no major waitlist) and low-single
digit wholesale growth
 Lack of new product introduction and high penetration cited as key reasons by dealers.
 Reported wholesale volumes (23% during FY18-YTD) are yet to reflect growth moderation at national level on
account of a) run-off in order book and b) relatively benign channel inventory and c) supported with network
expansion.

...first-ever signs of growth slowing in key markets also visible...
Exhibit 26: New bookings growth slowing down in key states
State-wise Growth (%) FY17 vol. contri. (%) FY12 FY13 FY14 FY15 FY16 FY17 1QFY18
Punjab & Chandigarh 7 1 25 33 39 33 14 23

Delhi 7 64 14 78 63 61 33 24
Haryana 3 (11) 94 20 35 60 21 36
H.P. 1 105 25 63 63 22 26 39
J&K 1 100 45 43 43 53 103 43
Punjab 6 (2) 28 37 42 36 15 22
UP 7 24 65 50 91 73 57 52
Uttranchal 2 24 50 45 19 150 34 43
North Zone 27 17 37 44 53 56 34 35
Assam 2 110 30 46 76 83 32 47
Bihar 3 220 76 130 104 24 36 34
Jharkhand 2 12 403 91 83 94 30 32
Orissa 2 126 62 90 39 74 43 28
West Bengal 3 82 73 86 39 50 29 32
East Zone 11 110 83 94 61 53 33 33
Growth has been
weak throughout
Goa 1 13 28 34 37 25 29 14
the year i.e. even
Gujarat 5 105 47 71 73 57 28 24 before
Madhya Pradesh 2 99 68 81 38 70 38 47 demonetization
Chattisgarh 1 90 57 87 90 71 3 25
Maharashtra 12 55 88 84 64 38 3 (3)
Rajasthan 3 50 51 77 55 101 32 10
West zone 24 63 71 79 63 49 14 9
AP (undivided) 7 51 81 71 59 42 27 35
Karnataka 9 71 65 89 65 45 21 7 New bookings
Kerala 12 40 44 102 76 76 43 24 growth has stalled
Pondicherry 0 (30) (66) 912 124 37 77 58 on same store
basis
Tamil Nadu 10 70 52 71 50 63 64 43
Southzone 38 56 59 84 63 57 39 27
Wholesale growth
Top 7 States 62 41 48 72 60 50 27 18 supported by order
book and benign
All-India 100 43 55 71 60 54 30 25
channel inventory
Growth beyond FY18e to slow to sub-15%; era of margin expansion over
Exhibit 27: Expect RE’s volume growth to slow sub-15%
 RE’s volume growth could remain strong during FY18e
FY19e onwards
supported with network expansion. However, risk of RE’s
1,600,000 80 volume growth falling to low double-digit high post FY18e once
67
59 network expansion is largely through.
1,200,000 52 53 60  RE’s EBITDA margin expanded significantly from 10.3% in
43 CY10 to 31.3% in FY17 driven by scale economics and strong
800,000 31 40 pricing power
25
 While scope exist for further margin expansion led by vendor
400,000 14 13 12 20 consolidation and higher volumes, we believe investments in
10
developing global exports markets together with need for higher
marketing and R&D spends would limit the extent of expansion
0 0 going ahead.
FY12 FY14 FY16 FY18e FY20e FY22e
RE sales volume (units) Growth YoY (%) (RHS)  Recent pricing action has been in-line with motorcycle industry
trends indicating the best of pricing power flexibility is behind
Source: Company, SSLe
Exhibit 28: Era of margin expansion is largely over (%) Exhibit 29: EBITDA growth to slow down sharply
40
31.7 4,000,000 134 160
31.3 31.5 31.5
27.6 117
30
(Rs mn)
3,000,000 120
24.3
77 80 76
(%)
18.5 2,000,000 80
20
13.9 29 29
12.1 1,000,000 40
10.3 18 16
10
0 0
FY18e
FY19e
FY20e
CY11
CY12
CY13
CY14
FY17
FY16 (12M)
0
FY18e
FY19e
FY20e
CY10
CY11
CY12
CY13
CY14
FY17
FY16 (12M)
EBITDA EBITDA gr. (%)

Harley-Davidson (HOG US) Case Study : Multiples corrected sharply ahead of
volume slowdown
Exhibit 30: HOG witnessed strong double-digit volume Exhibit 31: EBITDA margin also reversed sharply with
growth over nearly two decades before collapsing around volume decline
early 2000s
40 30
400000 26
CAGR: -0.8% 20
30
300000 12 10
(%)
20 -
(Units)
(%)
200000 (2)
CAGR: 12.6% (10)
10
100000 (16) (20)
0 (30) 0 (30)
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
EBITDA % (LHS) Volume growth % (RHS)
Volumes (LHS) Growth (RHS)
Source: Bloomberg Source: Bloomberg
Exhibit 32: Sharp correction in valuation multiples for Harley

 HOG witnessed over 6x growth in volumes between late 80s to Davidson 2-3 years before deceleration in volume growth
early 2000
48 30
 Strong volume growth phase was also accompanied with EBITDA
margin expansion from 5.5% in 1986 to peak of ~28% in 1999-00 36 13
 However, post 2003 volume growth slowed to single-digit. Volume
CAGR over 2003-16 have been (0.8%) 24 -5
 With weakening volume growth, margins have started reversed Average PE: 25x
12 -23
sharply to ~16% - decline of 12% from peak levels
Average PE: 15x
 With slowdown in volume growth and consequent margin 0 -40
correction, we note HOG witnessed sharp correction in valuation
Oct-94
Oct-96
Oct-98
Oct-00
Oct-02
Oct-04
Oct-06
Oct-08
Oct-10
Oct-12
Oct-14
Oct-16
multiples 2002 onwards – broadly 2 years ahead of volume slow-
down
1-year fwd PE (x) Qtrly 1-yr fwd vol. gr. (%)

VECV (10% profit contribution) struggling to gain market share in HCVs
Exhibit 33: Share in HCVs remains weak despite launch of Exhibit 34: Market share in buses though has improved
new product range (Pro series) with inputs from Volvo
6.0 5.3 20
16.0
4.5 4.4
4.5 4.2 4.2 15
3.8 12.5
10.7 11.3
9.1 9.8
3.0 10
1.5 5
0.0 0
FY13 FY14 FY15 FY16 FY17 1QFY18 FY13 FY14 FY15 FY16 FY17 1QFY18
HCVs (%) Buses (%)

Exhibit 35: Sustained its share in LMD segment Exhibit 36: VECV volume growth and margins
VECV Financials
34
Particulars FY16 (15M) FY17 FY18e FY19e FY20e
32.3 32.2 VECV (units) 61,409 55,854 62,932 72,111 80,480
32 31.4
Growth (%) 53.9 -9.0 12.7 14.6 11.6
30.6
ASP (Rs) 1,466,042 1,475,905 1,484,646 1,512,068 1,553,639
30 29.6
29.1 Growth % 3.9 0.7 0.6 1.8 2.7
Revenue (Rs mn) 90,028 82,435 93,432 109,037 125,037
28 Growth % 59.9 (8.4) 13.3 16.7 14.7
EBITDA (Rs mn) 7,751 6,726 7,042 9,238 10,268
26 Margins (%) 8.6 8.2 7.5 8.5 8.2
PAT (Rs) 3,778 3,474 3,478 4,832 5,417
LMD (%) Growth % 99.4 (8.1) 0.1 38.9 12.1
EIM's share (Rs mn) 2,055 1,890 1,892 2,629 2,947
Growth % 99.4 (8.1) 0.1 38.9 12.1

Initiate with anti-consensus SELL rating and 23% downside
Exhibit 37: Eicher Motors key assumptions
Exhibit 38: Expect further correction in valuation multiples
Particulars FY16 (15M) FY17 FY18e FY19e FY20e
50
Royal Enfield (units) 601,000 666,490 833,113 951,863 1,078,490
Growth (%) 98.6 10.9 25.0 14.3 13.3 40
ASP (Rs) 107,651 110,014 113,315 115,581 117,892
(x)
Growth % 6.0 2.2 3.0 2.0 2.0 30
Revenue (Rs mn) 61,596 70,076 90,287 105,786 123,045

20
Growth % 104.3 13.8 28.8 17.2 16.3
EBITDA (Rs mn) 17,082 22,058 28,561 33,675 38,923 10
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Aug-15
Aug-16
Aug-17
Feb-16
Feb-17
Margins (%) 27.7 31.5 31.6 31.8 31.6
S/A PAT (Rs) 12,038 15,600 21,250 25,587 30,244
Share of profits from JV 1,177 1,071 1,019 1,746 2,054 PE 5-yr Avg PE +1-SD -1-SD
Consol. PAT 13,215 16,671 22,269 27,333 32,298 Source: Bloomberg,, SSLe
Consol. EPS (Rs) 487 613 818 1,005 1,187
Growth % 114.8 26.1 33.6 22.7 18.2
Expect RE volume growth to slow-down to sub-15% post FY18e: We expect RE’s near-term volume growth to remain
strong at 25% during FY18e as they deepen the distribution reach supported with 1 month of order book and low channel
inventory. However, with key markets slowing, we expect volume growth to slow to 14% CAGR over FY18e-20e.
Expect valuations to correct on normalizing growth with downside risk: With early signs of growth slowdown in new
bookings visible in key markets, we expect earnings growth to normalize and hence argue for a correction in valuation
multiples. We initiate with SELL and TP of Rs25,110 (25x FY9e EPS).

EIM: Financials (Consolidated)
Income Statement Balance Sheet
Y/E Mar (Rs m n) FY16 FY17 FY18e FY19e FY20e Y/E Mar (Rs m n) FY16 FY17 FY18e FY19e FY20e
Net sales 61,735 70,334 90,559 106,077 123,360 Cash & Bank balances 133 130 3,568 9,709 17,001
growth (%) (29.4) 13.9 28.8 17.1 16.3 Other Current assets 6,534 7,440 8,148 8,872 9,651
Operating expenses 44,839 48,594 62,325 72,739 84,784 Investments 33,882 49,913 65,305 81,434 101,881
growth (%) 51.0 28.7 29.9 18.1 15.7 Net fixed assets 8,841 12,423 18,495 22,797 26,617
Depreciation & amortisation 1,366 1,538 1,929 2,698 3,680 Goodw ill & intangible assets 0 0 0 0 0
EBIT 15,530 20,202 26,305 30,641 34,897 Other non-current assets 0 0 0 0 0
Other income 1,781 2,273 4,403 6,373 8,905 Total assets 49,390 69,907 95,516 122,811 155,150
Interest paid 21 36 31 17 18
Extraordinary/Exceptional items 1,314 1,435 0 0 0 Current liabilities 12,347 15,375 22,206 25,771 29,774
PBT 18,604 23,874 30,677 36,997 43,784 Borrow ings 154 304 72 72 72
Tax 5,389 7,203 9,800 11,793 13,933 Other non-current liabilities 359 778 792 792 792
Effective tax rate (%) 29.0 30.2 31.9 31.9 31.8 Total liabilities 12,859 16,456 23,070 26,635 30,638
Net profit 13,215 16,671 22,269 27,333 32,298
Minority interest 0 0 0 0 0 Share capital 272 272 272 272 272
Reported Net profit 13,215 16,671 22,269 27,333 32,298 Reserves & surplus 36,259 53,179 72,173 95,904 124,240
Non-recurring items (1,314) (1,435) 0 0 0 Shareholders' funds 36,531 53,451 72,445 96,176 124,512
Adjusted Net profit 12,282 15,669 22,269 27,333 32,298 Minority interest 0 0 0 0 0
growth (%) 99.6 27.6 42.1 22.7 18.2 Total equity & liabilities 49,390 69,907 95,516 122,811 155,150

EIM: Financials (Consolidated)
Key Financials ratios 30135.3 Cash Flow Statement
Y/E Mar FY16 FY17 FY18e FY19e FY20e Y/E Mar (Rs m n) FY16 FY17 FY18e FY19e FY20e
Profitability and return ratios (%) Pre-tax profit 18,769 23,874 30,677 36,997 43,784
EBIDTAM 27.4 30.9 31.2 31.4 31.3 Depreciation 1,366 1,538 1,929 2,698 3,680
EBITM 25.2 28.7 29.0 28.9 28.3 Chg in w orking capital 2,630 1,644 2,864 2,514 2,863
NPM 19.9 22.3 24.6 25.8 26.2 Total tax paid (5,187) (6,516) (9,800) (11,793) (13,933)
RoE 42.8 37.1 35.4 32.4 29.3 Other operating activities (2,948) (3,494) (4,371) (6,356) (8,887)
RoCE 49.1 48.0 43.5 39.4 36.4 Operating CF 14,631 17,046 21,299 24,059 27,507
RoIC 406.1 349.6 471.1 427.6 459.8
Capital expenditure (5,100) (5,477) (8,000) (7,000) (7,500)
Per share data (Rs) Chg in investments (3,909) (11,718) (11,098) (10,227) (13,095)
O/s shares (mn) 27 27 27 27 27 Other investing activities 49 36 1,500 2,600 4,000
EPS 487 613 818 1005 1187 Investing CF (8,960) (17,160) (17,598) (14,627) (16,595)
FDEPS 487 613 818 1005 1187 FCF 9,531 11,569 13,299 17,059 20,007
CEPS 597 723 946 1167 1391
BV 1345 1964 2662 3535 4576 Equity raised/(repaid) 48 57 0 0 0
DPS 100 0 100 110 121 Debt raised/(repaid) 0 444 (232) 0 0
Dividend (incl. tax) (4,682) 0 0 (3,274) (3,602)
Valuation ratios (x) Other financing activities (21) (32) (31) (17) (18)
PE 66.6 52.9 39.6 32.3 27.3 Financing CF (4,655) 469 (263) (3,292) (3,620)
P/BV 24.1 16.5 12.2 9.2 7.1
EV/EBIDTA 52.1 40.6 31.1 26.2 22.4 Net chg in cash & bank bal. 1,016 356 3,438 6,141 7,292
EV/ Net sales 3.0 2.5 2.1 1.8 1.8 Closing cash & bank bal 133 130 3,568 9,708 17,000
Other key ratios

D/E (x) 0.0 0.0 0.0 0.0 0.0
DSO (days) 2 3 2 2 2
Du Pont Analysis - RoE

NPM (%) 21.4 23.7 24.6 25.8 26.2
Asset turnover (x) 1.1 1.2 1.1 1.0 0.9
Equity Multiplier (x) 1.8 1.3 1.3 1.3 1.3
RoE (%) 42.8 37.1 35.4 32.4 29.3

Bajaj Auto Ltd
Initiating Coverage | Auto | BJAUT IN
That sinking feeling…

Bajaj Auto’s (BJAUT) exclusive focus on motorcycles has severely dented its Rating Target Price (Rs) Upside/Downside (%)
domestic franchise (market share declined by 750bps over FY12-17). Going ahead, SELL 2,590 (17)
the company’s domestic franchise will remain under pressure due to the a) Market data
absence from fast-growing scooters segment, b) inferior product portfolio in Current price Rs 3,115
masstige motorcycles, and c) emerging risk to high-margin 3W business from e- Mkt capitalisation USDm 14055.9
rickshaws. Exports offer an attractive long-term opportunity; the near-term Average daily value 3M USDm 13.3
outlook, though, remains hazy. We expect muted EPS CAGR of 6.7% over FY17- Free float % 42.0
20e. Initiate with SELL and downside of 17%. Foreign holding % 17.8
Severe dent to domestic franchise over last 5 years: Frequent product launches and
1 Year Performance
withdrawal, together with an ‘obsession’ with high margins, have badly hit the customer 130
franchise (2nd lowest in JD Power Customer Satisfaction Survey 2017). The consequent
115
decline in motorcycle share along with its absence from the fast-growing scooters
segment has severely affected the viability of its channel partners, with 22% decline in 100
volumes/dealer over FY12-17. We believe these structural challenges would continue to 85
impact BJAUT’s volume and margin performance over the medium term.
70
Expect pressure on domestic franchise to persist: With the continued demand-shift Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
towards scooters and customers leapfrogging towards masstige motorcycles, we expect Bajaj Auto Ltd Nifty Index
BJAUT’s domestic motorcycle franchise to continue to face challenges. The rapid Source: Bloomberg
proliferation of e-rickshaws is raising concerns on the sustainability of the high-margin Industry Dynamics
3W business. Overall, we expect domestic volumes to underperform with 1.6% CAGR. LT: With household penetration approaching ~50%, we expect 2W
industry growth to slow-down to mid-single digit. Exports to emerging
Strong franchise in exports, but near-term outlook remains uncertain: Over the markets though offers strong opportunity over the long-term
MT: Cyclical rebound in rural demand and low base of 2H (post
years, BJAUT has developed a strong export business (37% revenue share) and enjoys demonetization last year) to drive healthy double-digit growth in
FY18e.
a dominant market position in most end-markets. However, given the continued weak
Company Dynamics
outlook in crude oil prices together with restricted availability of foreign exchange, the LT: Absence from scooter segment, weakening motorcycle franchise
near-term outlook remains uncertain. Nevertheless, we factor in export volume CAGR of and emerging risk from e-rickshaws poses structural growth
challenges
14.5% over FY17-FY20e (on low base of 22% decline over FY15-17). MT: Domestic growth continue to remain weak. Recovery in export
business on low base to support overall volumes
Expect downside to consensus; Initiate with SELL rating: With challenges in the MOAT
domestic franchise expected to continue, we expect muted overall volume CAGR of Enjoys strong presence in export markets, dominance in domestic 3W
business and market leadership in premium motorcycle space
6.9%, EBTIDA margin decline of 190bps and 6.7% EPS CAGR over FY17-20e. We
Disruption Risk(s) – Low
initiate coverage with SELL and downside of 17% (18x FY19e EPS).
Electric 2Ws poses a risk though appears low over the near-term
Bajaj Auto Ltd 25

Exclusive focus on motorcycles has fractured domestic franchise
Exhibit 39: Absence from fast-growing scooter segment has Exhibit 40: This also reflects in poor dealer satisfaction
severely dented BJAUT’s dealer viability....
JD Power Dealer Satisfaction Survey Index 2017 (1000
points scale)
1000
868 834 808 790 780 779
731 716
750 643
(Index)
500
250
0
Royal TVS Honda Hero Industry Bajaj Yamaha Suzuki M&M
Enfield Motor 2Ws Moto Avg
Source: Company, SIAM Source: JD Power Customer Survey
Exhibit 41: Exclusive focus on motorcycles has led to fall in Exhibit 42: Drop in 2W share has been sharper due to absence
brand visibility as well as motorcycle share from fast-growing scooter segment
24
20.5
19.0 19.1
17.9
19
14.2
(%)
14 11.5
11.1 11.4
4
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Dom. 2W market share
Source: SIAM Source: SIAM
Bajaj Auto Ltd 26

Domestic franchise to remain weak with further market share loss
Exhibit 43: Most recent launches/upgrades have performed poorly Exhibit 44: Domestic motorcycle share to remain weak with declining
brand visibility and consequent weakening dealer viability (%)
80,000
28 26.8
25.5
24.3 24.4
60,000 21.9
20.0
21
(Un its)
17.7 18.0
40,000 16.5 16.0 16.0 15.9
14
20,000
0 7
Oct-16
Aug-16
Sep-16
Dec-16
Aug-17
Feb-17
Jul-16
Jul-17
Jun-16
Jan-17
Jun-17
Apr-17
May-16
May-17
Nov-16
Mar-17
0
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18e
FY19e
FY20e
Pulsar Avenger V (12 & 15) Dominar
Source: SIAM, Company Source: SIAM, Company, SSLe
Exhibit 45: Consequently, 1% domestic motorcycle volume Exhibit 46: Absence from scooter segment to aggravate share
CAGR likely over FY17-20e loss (%)
24
2,800,000 18.0 20.5
19.0 19.1
17.2 17.9
9.0 18
2,100,000
14.2
0.0
(Units)
11.1 11.5 11.4

(%)
(%)
1,400,000 12 9.9 9.5 9.1

(9.0)
700,000 6
(18.0)
0 (27.0)
FY18e
FY19e
FY20e
FY12
FY13
FY14
FY15
FY16
FY17
FY18e
FY19e
FY20e
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Domestic motorcycles
Source: SIAM, Company Source: SIAM, Company
Bajaj Auto Ltd 27

Collaboration with Triumph Motorcycles not a major positive
During Aug-17, Bajaj Auto and Triumph Motorcycles, UK announced global non-equity partnership to
deliver a range of mid-capacity motorcycles. Globally Triumph motorcycles sell around 65k units
annually with over 700 dealers. In India, it sells around 150units/month starting Rs7lacs (ex-
showroom).
Broad contours of the deal:

 To deliver a range of mid-capacity motorcycles (250-600cc) benefiting from the collective strengths
of both companies:
 BJAUT ’s manufacturing and engineering capabilities; and
 Triumph’s positioning as premium luxury brand with global reach.
 Products would be jointly developed and manufactured exclusively by BJAUT.
 Triumph will continue to assemble and sell high-end (above 750cc) bikes independently.
Our view: The collaboration provides BJAUT an access to fast-growing masstige segment through
contract manufacturing for Triumph Motorcycles. However, its contribution to BJAUT’s performance is
expected to be low (2-3% contribution to EBITDA) even on assumption of near doubling of Triumph
global motorcycle volumes over 3-5 year period. We note that BJAUT’s 10-year old alliance with KTM
still contributes ~60k units annually with only 25% of volumes above 350cc.
Moreover, this tie-up doesn’t solve the structural issues faced by BJAUT in the domestic market
(declining customer mindshare and weakening dealer viability) and thus expect performance to remain
weak with continued pressure on margins.
Bajaj Auto Ltd 28

E-rickshaws pose risk to high-margin 3W business over long term
Exhibit 47: E-rickshaws fast gaining popularity; pose Exhibit 48: E-3W Payback profile
structural risk to high-margin 3W business for BJAUT
Exhibit 49: Government subsidies Exhibit 50: Domestic 3W business contributes to ~13-15% of EBITDA
Source: SSLe
Bajaj Auto Ltd 29

Strong franchise in exports, but near-term outlook is uncertain
Exhibit 51: Export volumes expected to recover, but visibility still low Exhibit 52: Exports to account for 47% of FY20e volumes (vs.
38% in FY17)
2,400,000 40.0
100% 31 40
31 36 37 41 47 45 38 42 44 47
1,800,000 20.0
75% 30.5 34.3 25
13.7
(Units)
(%)
1,200,000 0.0 8.0 7.8
50% 5.0 10
1.9
(2.6) (1.5)
(5.6)
600,000 (20.0) (8.7)
25% (5)
0 (40.0) 69 69 64 63 59 53 55 62 58 56 53
0% (20)
FY18e
FY19e
FY20e
FY12
FY13
FY14
FY15
FY16
FY17
FY18e
FY19e
FY20e
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Total Export Volume Growth (RHS)
Domestic (Units) Exports (Units) Total vol. gr. (%)
Source: SIAM. Company, SSLe Source: SIAM. Company, SSLe
Exhibit 53: EBITDA margins to decline 190bps on continued Exhibit 54: Muted EPS CAGR of 6.7% over FY17-20e
weakness in domestic franchise
48,000 160
72,000 22
21.2 21.2 119.9
20.4 20.3 36,000 110
54,000 21
(Rs mn)
19.3
19.1 19.1
(Rs mn)
24,000 41.1 60
(%)
36,000 18.3 18.4 18.4 19 24.6

18.2 20.0
11.2 12.3 12.1
(0.2) (2.6) (3.4)
12,000 (9.4) 10
18,000 18
37,208
36,359
41,030
41,383
47,819
44,224
43,597
48,879
54,735
FY11 31,722
FY10 25,036
0 (40)
0 16
FY18e
FY19e
FY20e
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18e
FY19e
FY20e
FY12
FY13
FY14
FY15
FY16
FY17
PAT (Rs mn) Growth (%) (RHS)

EBIDTA (LHS) EBIDTAM (RHS)
Bajaj Auto Ltd 30

Earnings disappointment to continue; Initiate with SELL
Exhibit 55: Volume growth to remain muted even with healthy Exhibit 56: Expect BJAUT to de-rate on muted EPS growth
growth in exports outlook
Particulars FY16 FY17 FY18e FY19e FY20e 28
Dom. 2W industry (mn units) 16.5 17.6 19.8 21.1 22.5
Growth (%) 3.0 6.9 12.7 6.5 6.3
21
BJAUT's Dom. 2W share (%) 10.5 11.2 9.8 9.4 9.0
(x)
Change (bps) (257) 67 (141) (36) (44)
Volume (mn units)
14
Domestic m/cs 1.9 2.0 2.0 2.0 2.1
Growth (%) 7.2 5.4 (2.0) 3.0 2.0
Domestic 3Ws 0.25 0.25 0.27 0.29 0.30
7
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Sep-12
Dec-12
Dec-13
Dec-15
Mar-13
Sep-13
Mar-14
Sep-14
Dec-14
Mar-15
Sep-15
Mar-16
Sep-16
Dec-16
Mar-17
Growth (%) 8.5 (0.1) 8.0 5.0 5.0
Exports m/cs 1.5 1.2 1.4 1.6 1.9
Growth (%) (4.1) (16.5) 15.0 15.0 15.0
Export 3Ws 0.3 0.2 0.2 0.2 0.3 PE 5yr avg PE +1-SD
Growth (%) (5.1) (29.3) 10.0 12.0 12.0
Total Volumes 3.9 3.7 3.8 4.2 4.5 Expect downside to consensus; Initiate with SELL
Growth (%) 1.9 (5.6) 5.0 8.0 7.8 rating: With challenges in the domestic franchise
ASP (Rs) 58,172 59,390 61,767 63,772 66,236
expected to continue, we expect muted overall volume
Growth % 2.6 2.1 4.0 3.2 3.9
CAGR of 6.9%, EBTIDA margin decline of 190bps and
Revenue (Rs mn) 225,865 217,667 237,633 264,987 296,738
Growth % 4.5 (3.6) 9.2 11.5 12.0
6.7% EPS CAGR over FY17-20e. We initiate coverage
EBITDA (Rs mn) 47,819 44,224 43,597 48,879 54,735 with SELL and downside of 17% .
Margins (%) 21.2 20.3 18.3 18.4 18.4
EPS (Rs) 136 132 128 144 161
Bajaj Auto Ltd 31

BJAUT: Financials
Incom e Statem ent Balance Sheet

Y/E Mar (Rs m n) F16 F17 F18e F19e F20e Y/E Mar (Rs m n) F16 F17 F18e F19e F20e
Net sales 225,865 217,667 237,633 264,987 296,738 Cash & Bank balances 8,595 2,937 15,286 14,519 16,533
growth (%) 4.5 (3.6) 9.2 11.5 12.0 Other Current assets 32,281 37,458 37,920 42,899 47,223
EBITDA 47,819 44,224 43,597 48,879 54,735
growth (%) 15.6 (7.5) (1.4) 12.1 12.0 Net fixed assets 20,779 19,854 19,169 20,730 21,943
Interest paid 10.5 14.0 5.3 5.3 5.3
Extraordinary/Exceptional items (292) 1,142 0 0 0 Current liabilities 28,286 32,907 51,489 56,508 62,103
PBT 55,473 53,357 54,100 60,762 68,110 Borrow ings 1,886 1,764 1,764 1,764 1,764
Tax 16,177 15,081 17,124 19,230 21,554 Other non-current liabilities 2,028 3,136 3,123 3,123 3,123
Net profit 39,297 38,276 36,975 41,532 46,556
Minority interest 0 0 0 0 0 Share capital 2,894 2,894 2,894 2,894 2,894
Non-recurring items 292 (1,142) 0 0 0 Shareholders' funds 132,666 170,341 187,004 206,530 229,388
growth (%) 24.6 (2.6) (3.4) 12.3 12.1 Total equity & liabilities 164,865 208,149 243,380 267,926 296,378
Bajaj Auto Ltd 32

BJAUT: Financials
Key Financials ratios Cash Flow Statem ent
Y/E Mar F16 F17 F18e F19e F20e Y/E Mar (Rs m n) F16 F17 F18e F19e F20e
EBITDAM 21.2 20.3 18.3 18.4 18.4 Depreciation 3,072 3,073 3,179 3,439 3,787
EBITM 19.8 18.9 17.0 17.1 17.2 Chg in w orking capital 5,753 2,533 (2,193) (1,653) (422)
RoE 32.8 25.3 20.7 21.1 21.4 Other operating activities (9,535) (10,544) (13,681) (15,323) (17,163)
RoIC 26.2 19.3 15.3 15.6 15.9
Per share data (Rs) Chg in investments 717 (35,460) (23,105) (18,773) (20,902)
O/s shares (mn) 289.4 289.4 289.4 289.4 289.4 Other investing activities 1,807 633 13,686 15,328 17,168
EPS 135.8 132.3 127.8 143.5 160.9 Investing CF (188) (36,883) (11,925) (8,445) (8,734)
FDEPS 135.8 132.3 127.8 143.5 160.9 FCF 33,856 31,336 21,773 22,996 27,759
CEPS 146.4 142.9 138.8 155.4 174.0
BV 458.5 588.7 646.2 713.7 792.7 Equity raised/(repaid) 0 0 0 0 0
DPS 55.0 60.0 60.0 65.0 70.0 Debt raised/(repaid) 0 0 0 0 0
Dividend (incl. tax) (28,628) (1,728) 0 (20,313) (22,006)
Valuation ratios (x) Other financing activities (5,213) (173) (5) (5) (5)
PE 22.9 23.6 24.4 21.7 19.4 Financing CF (33,841) (1,901) (5) (20,318) (22,011)
P/BV 6.8 5.3 4.8 4.4 3.9
EV/EBITDA 18.7 20.4 20.4 18.2 16.2 Net chg in cash & bank bal. 2,539 (5,392) 12,349 (767) 2,014
EV/Sales 4.0 4.1 3.7 3.4 3.0 Closing cash & bank bal 8,595 2,937 15,286 14,519 16,533
Other key ratios

D/E (x) 0.0 0.0 0.0 0.0 0.0
DSO (days) 11.6 16.0 18.0 20.0 20.0

NPM (%) 17.4 17.6 15.6 15.7 15.7
Asset turnover (x) 1.4 1.2 1.1 1.0 1.1
RoE (%) 32.8 25.3 20.7 21.1 21.4
Bajaj Auto Ltd 33

Hero MotoCorp Ltd
Initiating Coverage | Auto | HMCL IN
No longer a Hero
Rating Target Price (Rs) Upside/Downside (%)
HMCL has successfully defended its dominant position (65% share) in commuter
motorcycles. However, it lost 870bps market share over FY12-17 (with flat SELL 3,550 (10)
volumes) due to its weak presence in fast-growing categories. Considering its Market data
high dependence on structurally low-growth commuter motorcycles (83% volume Current price Rs 3,944
Mkt capitalisation USDm 12280.7
contribution in FY17) and untested R&D capabilities, HMCL may continue to
Average daily value 3M USDm 23.9
undershoot industry growth, with further market share loss of 410bps over FY17- Free float % 45.1
20e. While a cyclical upswing in the rural economy would drive healthy volume Promoter holding % 54.9
growth of 11.5% in FY18e, we expect a structural industry demand shift to lead to Foreign holding % 42.9
flat volumes in the subsequent years. Consequently, we expect muted EPS CAGR
1 Year Performance
of 2% over FY18e-20e. We initiate coverage with SELL and TP of Rs3,554 (18x
130
FY19e EPS).
115
Mix-shift towards scooters, masstige motorcycles will continue to impact market
share: The mix-shift towards scooters would take place largely at the cost of commuter 100
motorcycles, as with rising incomes, customers tend to prefer convenience over fuel- 85
efficiency. Correspondingly, after a cyclical 12% volume recovery in FY18e, we expect
70
commuter motorcycles to decline 2% annually over FY18e-22e. Considering HMCL’s Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
high dependence on commuter motorcycles (83% volume contribution in FY17), we
Hero MotoCorp Ltd Nifty Index
expect the company to further lose 410bps market share over FY17-20e, with volumes
registering only 1.6% CAGR over FY18-20e. Source: Bloomberg
New launches planned; await more clarity before turning constructive: HMCL Industry Dynamics
plans to launch two new products: a) a 125cc scooter in 4QFY18e, and b) a 200cc LT: With household penetration approaching ~50%, we expect 2W
domestic industry growth to slow-down to mid-single digit over FY17-22e
motorcycle. However, considering the weak response to recent launches, continued MT: Cyclical rebound in rural demand and low base of 2H (post
high competitive intensity and untested R&D capabilities, we await further clarity on demonetization last year) to drive healthy double-digit growth in FY18e
these products before turning constructive. Company Dynamics

LT: High dependence on structurally low-growth commuter motorcycles
and weak presence in fast-growing scooters and masstige motorcycles
We expect muted EPS CAGR of 2% over FY18e-20e; Initiate with SELL: While a
MT: Rural demand recovery during FY18e together with customer
cyclical upswing in the rural economy would drive healthy volume growth of 11.5% in response to upcoming launches in scooters and premium motorcycles key
FY18e, we expect a structural shift in the mix to lead to flat volumes in the subsequent MOAT
years. Consequently, we expect muted EPS CAGR of 2% over FY18-20e. We initiate Strong franchise in commuter motorcycle space (~65% segment share)
supported with extensive distribution network
coverage with SELL and TP of Rs3,554 (18x FY19e EPS) Disruption Risk(s) – Low
Electric 2Ws poses a risk though appears low over the near-term
Hero MotoCorp Ltd 34

Loss of 870bps market share over FY12-17 led by weaker presence in
fast-growing segments
Exhibit 57: HMCL has successfully defended commuter motorcycle Exhibit 58: However, segment share in fast-growing segments remains
franchise... weak
68 14 24
21.5 20.9
12.6 12.4
18.2 12.1
66 65 12 11.4 18
63 63 13.5
62 10.5
(%)
63
(%)
(%)
10 12
8.9
60
60
61 8 6
3.1
7.8
58 6 0
FY12 FY13 FY14 FY15 FY16 FY17 FY12 FY13 FY14 FY15 FY16 FY17
Share in commuter motorcycles Share in scooters (LHS) Share in Premium segment (RHS)
Exhibit 59: HMCL highly dependent on commuter motorcycles (%) Exhibit 60: HMCL to lose additional market share over FY17-20e
Premium Exports, 3 48
45.1
m/cs, 2
43.0
41.9
Scooters, 43
12 (%) 38.7 38.5
38 36.4 36.0
34.2
32.3
33
28
FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e
Commuter
m/cs, 83

Near-term volume growth to recover; structural challenges will continue
Exhibit 61: Volume growth to slow post strong FY18e Exhibit 62: EBITDA margins to dip due to expiry of tax exemption
for Haridwar plant from FY19e onwards
8,800 24 72,000 18
15.4 16.5 16.4

6,600 16 16.3 16.2
12.7 54,000 17
15.7
(Rs mn)
(Units)
(%)
6.2
(%)
4,400 8 36,000 15
2.8 2.0
0.0 0.3
2,200 (2.6) 0 18,000 14
(3.9)
0 (8) 0 12
FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e FY16 FY17 FY18e FY19e FY20e
Total volume (mn units) (LHS) Growth (RHS)
EBITDA (LHS) EBITDA margin (%) (RHS)
Exhibit 63: We expect muted 2% EPS CAGR over FY18e-20e... Exhibit 64: Return ratios expected to decline over FY17-20e...
250 35 70
32.5
200 58
20 60
13.8
50 51
150 6.9 (%) 50 45
2.6 5
(Rs)
41 41
(%)
100 1.4 40 36 36
31
-10 28
50 30
158
169
192
197
200
0 -25 20
FY16 FY17 FY18e FY19e FY20e FY16 FY17 FY18e FY19e FY20e
EPS (LHS) EPS Growth (RHS) RoE (%) RoCE (%)

Initiate with SELL with TP of Rs3,550, implying 10% downside
Exhibit 65: Expect growth to slowdown structurally post strong FY18e Exhibit 66: Expect HMCL’s valuations to correct on growth
challenges
Particulars FY16 FY17 FY18e FY19e FY20e
24
Dom. 2W industry (mn units) 16.5 17.6 19.8 21.1 22.5
Growth (%) 3.0 6.9 12.7 6.5 6.3
21
HMCL's Dom. 2W share (%) 38.5 36.4 36.0 34.2 32.3
Change (bps) (14) (208) (45) (180) (192)
(x)
Volume (mn units) 17
Domestic 6.5 6.5 7.2 7.3 7.4
Growth (%) 5.0 (0.2) 11.5 1.6 1.0 14
Exports 0.2 0.2 0.2 0.2 0.3
Growth (%) 5.1 (14.2) 11.1 12.7 12.7 10
Sep-12
Sep-13
Sep-14
Aug-15
Aug-16
Aug-17
Feb-16
Feb-17
Mar-13
Mar-14
Mar-15
Total Volumes 6.7 6.7 7.4 7.6 7.7
Growth (%) 5.0 (0.7) 11.5 1.9 1.3
Realisations
ASP (Rs) 41,902 43,584 44,485 45,067 45,063 PE 5-yr Avg PE +1-SD -1-SD
Growth % 3.7 4.0 2.1 1.3 0.0
Source: Company, Bloomberg, SSLe
Revenue (Rs mn) 2,84,427 2,84,750 3,27,083 3,41,468 3,47,686

Revenue growth (%) 3.1 0.1 14.9 4.4 1.8
 Expect muted EPS CAGR of 2% over FY18-20e:
While a cyclical upswing in the rural economy would
EBITDA (Rs mn) 44,550 46,348 53,977 56,054 56,446
EBITDA Margins (%) 15.7 16.3 16.5 16.4 16.2
drive healthy volume growth of 11.5% in FY18e, we
expect a structural shift in the mix to lead to 1.6%
EPS (Rs) 158 169 192 197 200 volume CAGR over FY18e-20e. Consequently, we
Source: Company, SSLe expect a muted EPS CAGR of 2% over FY18-20e.
 Initiate with SELL on structural growth
challenges: With weakening competitive position
together with muted EPS CAGR and declining
return ratios, we initiate coverage with SELL and
TP of Rs3,550 (18x FY19e EPS), implying 10%
downside.

HMCL: Financials
Net sales 284,427 284,750 327,083 341,468 347,686 Cash & Bank balances 1,314 1,367 44,981 54,216 63,777
growth (%) 3.1 0.1 14.9 4.4 1.8 Other Current assets 36,707 38,070 39,099 40,757 41,139
EBIDTA 44,550 46,348 53,977 56,054 56,446
growth (%) 25.8 4.0 16.5 3.8 0.7 Net fixed assets 41,898 48,606 58,030 66,896 75,377
Interest paid 49 61 60 60 60
Extraordinary/Exceptional items 0 0 0 0 0 Current liabilities 35,159 41,686 60,419 62,947 65,928
PBT 44,349 46,585 54,114 56,325 57,109 Borrow ings 0 0 0 0 0
Tax 12,747 12,813 15,693 16,897 17,133 Other non-current liabilities 2,225 4,143 4,143 4,143 4,143
Net profit 31,602 33,771 38,421 39,427 39,976
Minority interest 0 0 0 0 0 Share capital 399 399 399 399 399
Non-recurring items 0 0 0 0 0 Shareholders' funds 88,344 101,113 118,435 135,666 151,109

HMCL: Financials
Key Financials ratios Cash Flow Statement
EBITM 15.6 16.4 16.6 16.5 16.4 Chg in w orking capital 3,772 4,208 (3,324) (298) 262
RoE 41.1 35.7 35.0 31.0 27.9 Other operating activities 9,773 9,238 (5,713) (6,405) (7,183)
RoIC 75.3 69.1 72.3 63.2 56.0
Per share data (Rs) Chg in investments (6,549) (7,174) 21,499 3,837 4,221
O/s shares (mn) 199.7 199.7 199.7 199.7 199.7 Other investing activities (843) (758) 2,285 2,628 3,022
EPS 158.2 169.1 192.4 197.4 200.2 Investing CF (22,062) (19,439) 8,784 (8,535) (7,757)
FDEPS 169.1 192.4 197.4 44.2 44.2 FCF 23,821 28,773 19,960 23,859 24,576
CEPS 180.2 193.8 220.3 228.2 232.8
DPS 72 75 90 95 105 Debt raised/(repaid) 6 15 0 0 0
Dividend (incl. tax) (13,978) (17,373) 0 (21,028) (22,197)
Valuation ratios (x) Other financing activities (2,894) (3,597) (60) (60) (60)
PE 24.9 23.3 20.5 20.0 19.7 Financing CF (16,867) (20,956) (60) (21,088) (22,257)
P/BV 8.9 7.8 6.7 5.8 5.2
EV/EBIDTA 17.7 17.0 13.8 13.1 12.8 Net chg in cash & bank bal. (437) (116) 43,684 9,235 9,562
EV/Sales 2.8 2.8 2.3 2.1 2.1 Closing cash & bank bal 1,313 1,367 44,980 54,215 63,777
Other key ratios

D/E (x) 0.0 0.0 0.0 0.0 0.0
DSO (days) 16 20 17 16 16

NPM (%) 11.1 11.9 11.7 11.5 11.5
Asset turnover (x) 3.7 3.0 3.0 2.7 2.4
RoE (%) 41.0 35.7 35.0 31.0 27.9

TVS Motor Ltd
Initiating Coverage | Auto | TVSL IN
‘Dogs’ to act as a drag on ‘Stars’

Rating Target Price (Rs) Upside/Downside (%)
With its successful brands (Jupiter, Apache) and its association with BMW (for
SELL 500 (24)
<500cc motorcycles), TVS Motors (TVSL) is well positioned to meaningfully
participate in high-growth categories (scooters and masstige motorcycles). Market data
Current price Rs 658
However, its performance is likely to be offset by the drag from structurally Mkt capitalisation USDm 4877.4
low-growth segments (commuter motorcycles and mopeds) that account for Average daily value 3M USDm 10.3
~47% of total volumes and thus expects significant disappointment to street Free float % 36.0
expectations. Despite strong 25% EPS CAGR over FY17-20e, at 32x FY19e PE Foreign holding % 18.7
(adjusted for BMW collaboration and financing arm), we believe risk-reward is

highly unfavourable. We initiate coverage with SELL. 1 Year Performance
250
Drag from structurally low-growth segments to offset gains: TVS Motor (TVSL)
200
has been able to develop two successful brands in the fast-growing scooter (Jupiter)
and premium motorcycle segments (Apache). The upcoming product launch of 150
310cc motorcycle (3QFY18e) in collaboration with BMW Motorrad would help TVSL 100
participate in the fast-growing masstige category. However, the structurally low-
50
growth segments of mopeds and commuter motorcycles (~47% of volumes, ~33% of Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
revenues) would restrict volume growth and pricing flexibility over FY17-20e. TVS Motor Co Ltd Nifty Index
Margins poised to expand, but unlikely to reach double-digits over FY17-20e: Source: Bloomberg
The scale-up of key brands (Jupiter, Apache), higher volumes and an improving mix Industry Dynamics
would support margin expansion. However, continued pressure on volume growth LT: With household penetration approaching ~50%, we expect 2W
industry growth to slow-down to mid-single digit over FY17-22e
(drag from low-growth segments) would restrict margin expansion. On balance, we MT: Cyclical rebound in rural demand and low base of 2H (post
demonetization last year) to drive healthy double-digit growth during
expect margins to expand 180bps over FY17-20e to 8.9% (vs. management FY18e
guidance for 10% by FY19e). Company Dynamics
LT: Developed successful brands in fast-growing segments; however
Despite strong EPS growth, risk-reward highly unfavourable at current dependence on structurally low-growth segments equally high with weak
pricing power
valuation: We expect strong 25% EPS CAGR, led by healthy volume growth and MT: Cyclical demand recovery led by rural during FY18e together with
exposure to high-growth segments to drive healthy volume growth
margin expansion over FY17-20e. However, at 32x FY19e EPS (valuation adjusted
MOAT
for BMW collaboration and financing arm), we believe risk-reward is highly
Diversified product portfolio; successful brands in fast-growing segments
unfavourable. We initiate coverage with SELL with TP of Rs 500. Our FY19e/20e Disruption Risk(s) – Low
EPS are 5-10% lower than consensus primarily due to lower margin assumption. Electric 2Ws poses a risk though appears low over the near-term
TVS Motor Ltd 40

Growth will demand continuous investments across brands
Exhibit 67: Dogs a drag on stars Key takeaways from the analysis:
 Apache has emerged as the Star in the portfolio,

with category share of 21% vs. 8% in FY13 (vs.
26% for Bajaj Pulsar, the segment leader). Strong
product performance and quality together with
widening product portfolio would be the key
growth drivers.
 Jupiter now occupies the second spot in the

scooter segment with 11% share; however, huge
gap exists with the category leader Honda
Activa (50% share). Thus, it requires continuous
brand support and product intervention, especially
since the No.3 brand is close at its heels with 7%
share.
 Around half of the volumes (1/3rd of revenues)

comprises low-growth segments of mopeds
and commuter motorcycles, and thus, would
impact growth and pricing flexibility .
 Overall, we believe TVSL will have to focus on

volume growth and market share expansion
rather than significant near-term rise in margins.
 Thus, we expect a downside risk to the

management’s double-digit margin guidance
and consensus EPS estimates by FY19e.
TVS Motor Ltd 41

Apache at an inflection point; Jupiter still a distant No.2 brand
Exhibit 68: Apache brand at inflection point; launch of 310cc Exhibit 69: Upcoming launch of 310cc motorcycle (in association
version to further strengthen franchise with BMW) to further strengthen Apache franchise
48
41
39 39
37
36 33
26
Axis Title
21
24
16 17
13 16
12 10 12 12
7 10 12 9
7 2 9
5
0 3 3
Pulsar Apache Avenger FZ16
Source: SIAM Source: Company
Exhibit 70: Jupiter is now No. 2 brand in scooters; but large gap Exhibit 71: Expect TVS to gain share in scooter, premium motorcycles
exists vis-à-vis market leader Honda Activa led by frequent product interventions, continuous marketing support
35
60 31.2
49 49 50
48 28
42 43
45
21
16.1 16.2
(%)
14.7
30 12.7
14
8.0
11 11 11 7 5.2 5.6 5.3
15 8
3 3
5 7 0
0 3 4 4
1 Scooters Commuter m/cs Premium m/cs
FY14 FY17 FY20e
Honda Activa TVS Jupiter
Source: SIAM
Source: SIAM
TVS Motor Ltd 42

..however, low-growth segments to act as a drag
Exhibit 72: Mopeds, commuter motorcycles contribute ~47% to Exhibit 73: ...and 1/3rd to revenues
volumes..
Mopeds Domestic
31% Exports 3Ws Spare parts
17% 1% 12%
Premium
motorcylce
Commuter 10%
motorcycle Mopeds
16% 19% Scooters
24%
Commuter Premium
Exports Scooters motorcycles
15% 28% motorcycles
13% 14%
Source: SIAM, Company, SSLe Source: SIAM, Company, SSLe
Exhibit 74: Commuter and moped growth to decline Exhibit 75: Overall 2W share to improve 100bps over FY17-20e
40 20
32 15.7 16.1
15.1 15.4 15.3
16 14.7
30
27
22 14.8
(%)
20 12 13.8 13.8 14.3
20 12.8 9.2
14 12.5
8.3
12.0 11.5 7.3
10 8 6.2 6.4
10 7 5.4
4
2 (3)
4
0
FY15 FY16 FY17 FY18e FY19e FY20e
Premium Scooters Exports Commuter Mopeds Total
m/cs m/cs
(10) Dom. scooter share (%) Dom. M/C share (%)
FY14-17 FY17-20e Domestic 2W market share (%)
TVS Motor Ltd 43

Volume CAGR of 12% and higher margins to drive 25% EPS CAGR
Exhibit 76: TVSL to register volume CAGR of 11.5% over FY17- Exhibit 77: EBITDA margins to rise 180bps over FY17-20e on
20e higher volumes, improving mix
4,000 16 11
8.9
11.8 11.1 8.6
3,000 12
9.3 11.6 7.6
8 7.3 7.1
(Units)
6.8
(%)
2,000 6.4 8 6.4
(%)
6.0 6.0
5.8
5.2 5.4
1,000 4 6 4.7
4.4 4.5
3.9
0 0
FY16 FY17e FY18e FY19e FY20e 3
FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e
Volume ('000 units) Growth
EBITDA margins (%) EBIT margins (%)
Exhibit 78: Strong growth in EBITDA on margin expansion Exhibit 79: Healthy EPS CAGR of 25% over FY17-20e
20,000 33.5 35 24 48
31.9
36.5
26.3 18 40.7 36
15,000
25
24.6
(Rs mn)
19.4
(Rs)
(%)
12 24
(%)
10,000
14.1 13.8
15
6 12
5,000
5.8
0 0
0 5 FY16 FY17 FY18e FY19e FY20e
FY16 FY17 FY18e FY19e FY20e
EPS (LHS) Growth (RHS)
EBITDA EBITDA growth
TVS Motor Ltd 44

BMW collaboration not expected to be a meaningful contributor to profits
In April 2013, TVS Motor and BMW Motorrad signed a long-term technology cooperation agreement to develop and produce a
new series of sub-500cc motorcycles to be sold through their own distribution network and under their own brand.
Broad contours of the deal
 Jointly develop sub 500cc premium motorcycles. Each vehicle would have two derivatives, one for TVSL and the other for
BMW.
 BMW’s variant is expected to have premium technology and features, while its TVSL counterpart is likely to cater to the
affordable segment positioned above the current offering, Apache.
 Individual products would be sold through their own distribution channels in India and across the globe and under their
respective brands.
 Manufacturing would be done exclusively by TVSL.
 The first product has already been launched by BMW in global markets, while TVSL is expected to launch the same
during 3QFY18e
Annual sales of 50k units and EBITDA margins of 12% likely by FY20e: We expect BMW-TVS to sell around 50k units of
motorcycles annually by FY20 (vs. current run-rate of 25k units). This is in line with BMW’s own sales projections of incremental
sales of ~50k units and Bajaj-KTM (similar alliance with similar product portfolio) exports of 50k units in FY18e, post nearly 10
years of alliance. With ASP of Rs150k and EBITDA margins of 12%, we arrive at a per share value of Rs30 for TVSL.
Exhibit 80: BMW expects to grow volumes by 38% over 2016-20 Exhibit 81: Expect BMW tie-up value of Rs30 per share by FY20e
220,000 Particulars FY20e
200,000 Expected annual sales (units) 50,000
ASP (Rs/unit) 1,50,000
190,000
Revenues (Rs mn) 7,500
EBITDA margins (assumed) 12%
(Units)
160,000
145,032 EBITDA (Rs mn) 900
Tax (30%) 270
130,000 PAT (Rs mn) 630
PE multiple (x) 22.5
Valuation (Rs mn) 14,175
100,000
2016 2020 (BMW guidance) Per share value (Rs) 30
Source: BMW Presentation, SSLe Source: SSLe
TVS Motor Ltd 45

Initiate with SELL as risk-reward unfavorable at current valuations
Exhibit 82: Healthy EPS growth over FY17-20e supported by margin Exhibit 83: Risk reward highly unfavourable at these
expansion valuations
Particulars FY16 FY17 FY18e FY19e FY20e
50
Dom . 2W industry (m n units) 16.5 17.6 19.8 21.1 22.5
Growth (%) 3.0 6.9 12.7 6.5 6.3 40
TVSL's Dom . 2W share (%) 12.8 14.0 13.8 14.3 14.8
Change (bps) 32 116 (23) 58 49 30
(x)
TVSL: Revenue Model and Key assum ptions 20
Volum e ('000 units) 2,225 2,502 2,777 3,095 3,423
Motorcycle (units) 712 773 894 1,048 1,179 10
Growth YoY (%) 6.2 5.5 15.4 16.6 13.2
0
Scooter 774 826 1,025 1,204 1,417
Sep-12
Aug-13
Aug-14
Aug-15
Aug-16
Aug-17
Feb-14
Feb-15
Feb-16
Feb-17
Mar-13
Growth YoY (%) 15.0 7.2 23.5 17.1 17.5
Moped 724 890 846 829 812
Growth YoY (%) (4.7) 23.3 (4.4) (1.7) (1.7) PE 5-yr avg PE +1-sd
Total 2W 2,209 2,490 2,764 3,081 3,409
Growth YoY (%) 5.3 11.1 11.6 11.8 11.1 Source: Company, Bloomberg, SSLe
Three-w heelers 16 12 13 14 14
Growth YoY (%) 4.0 (37.5) 13.2 10.8 9.2
Dom estic vols. (units) 2,225 2,502 2,777 3,095 3,423  Expect strong 25% EPS CAGR over FY17-20e
Growth YoY (%) 5.2 9.1 11.6 11.8 11.1 led by healthy volume growth and margin
Export vols. (LHS) 454 421 485 552 628 expansion.
Growth YoY (RHS) 5 9 12 12 11
Total volum es (units) 2,679 2,923 3,262 3,647 4,051  However, current valuations at 32x FY19e EPS
Growth YoY (%) 5.2 9.1 11.6 11.8 11.1
(adjusted for BMW valuation and financing arm),
ASP (Rs) 50 49 52 54 56
Growth % 6.1 (2.8) 6.2 4.6 4.3 we believe risk-reward is unfavourable.
Revenue (Rs m n) 111,047 121,353 143,104 166,726 192,398
Growth (%) 10.6 9.3 17.9 16.5 15.4
 We initiate coverage with SELL with TP of Rs
EBITDA (Rs m n) 8,099 8,571 10,822 14,276 17,051 500 (including Rs30 for BMW collaboration and
EBITDA Margin (%) 7.3 7.1 7.6 8.6 8.9 Rs40 for financing arm)
EPS (Rs) 10 12 13 18 23
Growth (%) 40.7 14.1 13.8 36.5 24.6
TVS Motor Ltd 46

TVS Motor: Financials
Net sales 111,047 121,353 143,104 166,726 192,398 Cash & Bank balances 285 44 914 1,814 1,934
growth (%) 10.6 9.3 17.9 16.5 15.4 Other Current assets 19,582 22,663 22,477 24,785 27,192
EBIDTA 8,099 8,571 10,822 14,276 17,051 Net fixed assets 17,506 20,461 22,253 24,141 26,134
growth (%) 33.5 5.8 26.3 31.9 19.4 Goodw ill & intangible assets 0 0 0 0 0
Depreciation & amortisation 2,361 2,878 3,158 3,562 4,007 Other non-current assets 0 0 0 0 0
EBIT 5,738 5,693 7,664 10,714 13,044 Total assets 49,522 59,047 63,823 70,618 76,838
Other income 1,039 1,734 1,320 1,452 1,597
Interest paid 487 440 519 451 40 Current liabilities 23,559 29,019 28,688 33,959 39,187
Extraordinary/Exceptional items 0 0 0 0 0 Borrow ings 4,942 4,688 6,688 3,188 (2,312)
PBT 6,289 6,987 8,465 11,715 14,602 Other non-current liabilities 1,437 1,257 1,357 1,357 992
Tax 1,397 1,406 2,116 3,046 3,796 Total liabilities 29,938 34,963 36,732 38,503 37,867
Effective tax rate (%) 22.2 20.1 25.0 26.0 26.0
Net profit 4,893 5,581 6,349 8,669 10,805 Share capital 475 475 475 475 475
Non-recurring items 0 0 0 0 0 Reserves & surplus 19,108 23,608 26,616 31,640 38,496
Adjusted Net profit 4,893 5,581 6,349 8,669 10,805 Shareholders' funds 19,583 24,083 27,091 32,115 38,971
TVS Motor Ltd 47

TVS Motor: Financials
Key Financials ratios Cash Flow Statement
EBITM 5.2 4.7 5.4 6.4 6.8 Chg in w orking capital 2,753 (514) (45) 2,963 2,457
RoE 27.2 25.6 24.8 29.3 30.4 Other operating activities (534) (821) (801) (1,001) (1,557)

Per share data (Rs) Chg in investments (1,712) (1,942) (2,300) (1,700) (1,700)
O/s shares (mn) 475 475 475 475 475 Other investing activities 502 583 1,320 1,452 1,597
EPS 10.3 11.7 13.4 18.2 22.7 Investing CF (6,082) (7,481) (5,930) (5,698) (6,103)
FDEPS 10.3 11.7 13.4 18.2 22.7 FCF 4,539 1,117 3,711 8,743 9,712
CEPS 15.3 17.8 20.0 25.7 31.2
DPS 2.5 2.5 5.5 6.0 6.5 Debt raised/(repaid) (507) 1,116 2,000 (3,500) (5,500)
Dividend (incl. tax) (2,065) (1,413) (3,341) (3,645) (3,949)
Valuation ratios (x) Other financing activities (489) (431) (519) (451) (40)
PE 63.9 56.1 49.3 36.1 29.0 Financing CF (3,061) (727) (1,860) (7,596) (9,489)
P/BV 16.0 13.0 11.5 9.7 8.0
EV/EBIDTA 39.2 37.0 29.4 22.0 18.1 Net chg in cash & bank bal. 269 (969) 870 899 120
EV/Sales 2.9 2.6 2.2 1.9 1.6 Closing cash & bank bal 323 (646) 224 1,124 1,244
Other key ratios

D/E (x) 0.3 0.2 0.2 0.1 (0.1)
DSO (days) 19 22 18 17 0

NPM (%) 4.4 4.6 4.4 5.2 5.6
Asset turnover (x) 2.3 2.2 2.3 2.5 2.6
RoE (%) 27.2 25.6 24.8 29.3 30.4
Source: Company
TVS Motor Ltd 48

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Name Qualification Designation Sector

Chirag Jain CA, CFA Lead Analyst Auto
Indarpreet Singh MBA Associate Auto
49
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Indian Two-wheelers

Prepare for growth ‘shock’

Chirag Jain Indarpreet Singh

SBI CAP Securities Ltd (SSL)

M-cap Price Upside Variation vs.

Sector: Indian Two-wheelers 2

Sector: Indian Two-wheelers 3

Sector: Indian Two-wheelers 4

Sector: Indian Two-wheelers 5

FY12-17 Volume CAGR (%)

30,000 53 60  Domestic industry volume CAGR at 5.5% over

levels in FY12 to ~40% by FY18e

Dom. 2W sales (LHS) Replacement share in 2W sales (RHS)

Source: SIAM, SSLe

Sector: Indian Two-wheelers 6

Madhya Pradesh 25 40 4.5 949 5.2

Bihar 8 19 15.3 574 4.0

Sector: Indian Two-wheelers 7

years owning to combination of two consecutive

 We believe the growth in FY18e is largely a one-off (12)

Sector: Indian Two-wheelers 8

Sector: Indian Two-wheelers 9

100 1,600 1,442 80

1,200 53.7 53.9 60

36.6 17.4 14.5

324 13.1 11.0 20

FY13 FY14 FY15 FY16 FY17 1QFY18

Source: SIAM, SSLe Source: SIAM, SSLe

Sector: Indian Two-wheelers 10

2,200 Uttar Pradesh 8.1 17.1 4.8 31.4 17 641

Share of Scooter Sales (%)

Sector: Indian Two-wheelers 11

 Implementation of BS-6 emission norms could further 48 80

 Consequently, we expect scooters to contribute 46% to

Dom. scooters Growth YoY (%) (RHS)

Sector: Indian Two-wheelers 12

 Continued absence from the scooter space would further

Source: SIAM Source: SIAM, SSLe

Sector: Indian Two-wheelers 13

% of total domestic 19.1 31.9 33.8 45.9

Segment-share (%) 0.8 6.1 7.0 11.3

Sector: Indian Two-wheelers 14

Growth juggernaut entering fatigue mode

Eicher Motors Ltd 15

Source: Company, SIAM Source: Company

Source: Company Source: Company

Eicher Motors Ltd 16

CY12 CY13 CY14 FY16 FY17 1QFY18

No. of dealers (LHS) Volumes/dealer/month (RHS) Same-store growth Total growth

Source: Company, SSLe Source: Company, SSLe

Eicher Motors Ltd 17

Punjab & Chandigarh 7 1 25 33 39 33 14 23

EBITDA EBITDA gr. (%)

Source: Company, SSLe Source: Company, SSLe

Eicher Motors Ltd 19

Exhibit 32: Sharp correction in valuation multiples for Harley

Source: Company, SSLe

Eicher Motors Ltd 20

HCVs (%) Buses (%)

Eicher Motors Ltd 21

Revenue (Rs mn) 61,596 70,076 90,287 105,786 123,045

Eicher Motors Ltd 22

Eicher Motors Ltd 23