Outlook and valuation

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1 February 9, 2016 Neutral Bajaj Auto Industry: Auto and Auto Components Industry View: Positive l Result Update Downgrade on export worries Q3 FY16 results came above our expectations despite exports worries Bajaj Auto posted a good set of numbers despite exports underperformance. On the back of reduction in commodity costs and higher realizations coming from better product mix, gross margins showed an improvement. EBITDA margins came in at 21%, second highest in the last nine quarters. Higher than expected other income which included treasury income of 830mn and one time forex gain of 621mn led to net profits coming above our expectations at 9bn. Adjusting for this one off gain, the net profit would have come at 8.34bn, a growth of just 7% yoy. The company sold 9.51lakh units in Q3, which was a 3.4% yoy and 10% qoq decline as exports disappointed. Net realizations growth however came on the back of stronger than expected sales of the high margin Avenger. Currency benefits were seen in Q3, as rupee depreciated in the range of 66-67/$ which led to margins surge to 21% range. Other expenses as a % of sales grew to 8.6% as the mktg activity of its new launches like the Avenger prevailed. Domestic business to perform well on new launches amidst competition The company has failed to make a mark in the 125 cc segment with the Discover underperformance. In the premium segment, Pulsar and its variants are doing well. With the new launch of Avenger which sold just about 3500 units initially has witnessed a surge as it sold 28,000 units in January. Management expects about 85,000 units to be sold in Q4. Both the Avenger models of 150 cc and 250 cc are attracting good demand. The company is expanding its capacities to 30,000 units per month in Q4, which may further push the sales numbers in Q4. Bajaj is also launching a CT 100 variant named as CT 100-B in Q4 at a price discount of 3K-4K to the original CT 100 model. This would lead to a further growth in Bajaj s market share. Furthermore, Bajaj has launched the V motorcycle in Feb 16 in the value segment, which is different in form and offers superior mileage and performance compared to existing products in that segment. Though the competition is heating up in the motorcycle industry with new launches like the new Honda Unicorn, TVS Apache and Victor and Hero s ismart, we expect Bajaj to perform well with its well differentiated product lineup. We have reduced our volume outlook for FY16E/17E to 1%/5% on the weak performance seen in 9M FY16. Exports business pulling down the overall performance Exports in the quarter faced stiff challenge from the African countries which contribute about 50% of the exports business of Bajaj. Oil dependent countries like Nigeria, which is the biggest exports nation in Africa for Bajaj faced currency devaluation as oil prices plummeted and availability of $ was a challenge. Egypt, the second largest exports country for Bajaj had issues related with balance of payment and hence sales over there also went down. Other African countries like Angola, Tanzania, Kenya and western African countries still were the strong performers for Bajaj. Sri Lanka also continued to face slack in demand on import duty hike. In Latin America, Colombia faced issues similar to Nigeria, while other Latam countries still grew at a decent pace. The newer geographies in Latam and Africa are expected to contribute 9k-10k units from the coming quarter. The quadricycle Qute is expected to drive the exports commercial vehicle segment in Africa, Latam, Asia and Europe. Stock Data Current Market Price ( ) 2,350 Target Price ( ) 2,531 Potential upside (%) 8 Reuters BAJA.BO Bloomberg BJAUT IN Market Cap ( bn) Week Range ( ) 2,655 / 1,914 Avg Dly Trading Value last 6 mts(.mn) 723 What s Changed 12 month PriceTarget ( ) From 2,916 to 2,531 FY2016E EPS ( ) From 138 to129 FY2017E EPS ( ) From 166 to 142 Share Holding Pattern 31% 69% Promotors Public Fiscal YE YE Mar FY14 FY15 FY16E FY17E Revenues ( bn) EBITDA (%) PAT (%) EPS (Rs) EPS growth (%) 6.5% -2.7% 18.4% 9.8% P/E (x) P/B(x) EV/EBITDA (x) ROE(%) 33.7% 29.5% 29.9% 28.4% Dividend yield (%) 2.2% 2.1% 2.5% 2.7% Relative Price Performance Jan-15 May-15 Sep-15 Jan-16 Bajaj Auto Ltd. S&P Bse Sensex Ashwin Patil ashwin_patil@lkpsec.com

2 Financial Highlights Bajaj Auto Margins may come down from Q3 levels on low margin new launches and exports pressure EBITDA margins witnessed a strong performance at 21% on higher sales of the superior margin product Avenger despite exports underperformance. The company also got high returns from the currency movement as rupee v/s dollar remained favorable for the company alongside commodity cost benefit accruals. Going forward, as the pain in exports markets remains we may see the impact of price cuts taken in Nigeria and Colombia impacting the numbers to a further extent. 3W domestic sales may expand hereon in the occurrence of permits from Q4, but it is an uncertain event. 3W exports may get hurt as Egypt continues to face balance of payments issue. Higher Platina and CT 100 sales may lead to some margin compression. The new launch of CT 100-B which is priced at 3k-4k lesser than the high selling CT 100 may bolster the volumes but hurt margins in a competitive scenario. In line with these factors, we now expect 20.9%/20.3% EBITDA margins in FY16E/17E. mn Q3 FY16 Q2 FY16 % qoq Q3 FY15 % yoy Net sales 54,632 59, % 55, % Other op. income 1,017 1, % 1, % Total income 55,649 60, % 56, % RM cost 36,958 40, % 38, % Employee cost 2,302 2, % 2, % Other expenses 4,685 4, % 4, % EBITDA 11,704 13, % 11, % EBITDA Margins % (60 bps) bps Other income 1,376 1, % % Depreciation % % Interest N/A 0.7 N/A PBT 12,332 13, % 11, % Tax 3,947 4, % 3, % Adj PAT 8,385 9, % 7, % Adj PAT Margins% bps bps Exceptional items N/A 790 N/A Reported PAT 9,006 9, % 8, % Outlook and valuation With the success of Avenger, upcoming launches of Bajaj V and CT 100-B we may see an improved volume performance from Bajaj on the domestic 2W side. But rival launches may lead to a limited upside to the growth in market share. Domestic 3W sales expansion is subject to government s decision of issuing permits, which is always an uncertain event. Any development on that may provide a kicker as 50,000 permits are pending in Maharasthra to get issued. Exports business faces a daunting task as Nigeria, Egypt, Colombia and Sri Lanka are facing various issues as mentioned above. Newer geographies may provide further growth trigger which may pan out in FY17E. Margin performance may see a tug of war as positive triggers like commodity price benefits, higher Avenger sales may face negatives from the likes of costs associated with new launches, lower margin new launches, exports challenges etc. Considering these factors we ultimately analyse that the negatives may outweigh positives on margin front. We hence cut the earnings by 7%/15% respectively for FY16E/17E and prune the target price by 11% to 2,531 and downgrade the stock from BUY to NEUTRAL.

3 Per unit parameters Q3 FY16 Q2 FY16 Q1 FY16 Q4 FY15 Q3 FY15 Q2 FY15 Q1 FY15 Q4 FY14 Gross Realisation per Unit ( ) 60,953 59,704 57,126 62,486 58,237 57,355 53,972 53,859 Net Realisation per Unit ( ) 57,417 56,603 54,343 59,076 56,068 55,200 51,935 51,535 Total Cost per unit ( ) 46,185 45,246 44,163 48,852 45,801 45,817 43,779 42,369 Material Cost per unit ( ) 38,842 38,379 37,242 40,854 39,227 38,936 37,233 36,709 Staff Cost per unit ( ) 2,420 2,288 2,406 3,304 2,173 1,992 2,171 1,868 Other Expn per unit ( ) 4,963 4,620 4,553 4,925 4,538 5,040 4,503 3,933 EBITDA per unit ( ) 12,300 12,466 11,250 11,701 11,660 10,674 9,360 10,338 PAT per unit ( ) 8,812 8,831 10,017 8,939 7,946 8,822 7,486 8,534

4 Financials Income statement YE Mar (.mn) FY14 FY15 FY16E FY17E Total Revenues 201, , , ,514 Raw Material Cost 138, , , ,930 Employee Cost 7,266 8,973 9,243 10,051 Other Exp 14,405 17,484 20,167 22,596 EBITDA 41,057 41,165 47,350 49,936 EBITDA Margin(%) Other income Depreciation 1,796 2,674 2,949 3,291 Interest PBT 46,321 44,251 53,351 58,596 PBT Margin(%) Exceptional items Tax 13,901 12,711 16,005 17,579 APAT 32,420 31,540 37,346 41,017 APAT Margins (%) PAT 32,420 28,137 37,346 41,017 PAT Margin (%) Key Ratios YE Mar FY14 FY15 FY16E FY17E Per Share Data ( ) Adj. EPS CEPS BVPS DPS Growth Ratios(%) Total revenues 0.8% 7.3% 4.6% 8.6% EBITDA 12.9% 0.3% 15.0% 5.5% PAT 6.5% -2.7% 18.4% 9.8% EPS Growth 6.5% -2.7% 18.4% 9.8% Valuation Ratios (x) PE P/CEPS P/BV EV/Sales EV/EBITDA Operating Ratios (Days) Inventory days Recievable Days Payables day Net Debt/Equity (x) (0.05) (0.12) Profitability Ratios (%) ROE 33.7% 29.5% 29.9% 28.4% Dividend payout 40.0% 45.0% 45.0% 45.0% Dividend yield 2.2% 2.1% 2.5% 2.7% Source: Company, Balance sheet YE Mar (.mn) FY14 FY15 FY16E FY17E EQUITY AND LIABILITIES Shareholder's funds Share capital 2,894 2,894 2,894 2,894 Reserves and surplus 93, , , ,485 Total networth 96, , , ,379 Non current liabilities Long term borrowings & prov 2,662 2,518 2,268 2,018 Deferred tax liabilities 1,432 1,416 1,556 1,696 Current liabilities Current liabilities and provisions 39,641 37,093 36,777 38,028 Other current liabilities 7,661 7,675 7,235 7,868 Total equity and liabilities 147, , , ,989 ASSETS Net block 20,060 19,172 19,224 18,933 Capital work in progress 326 1,017 1,217 1,417 Intangible assets 1,115 1,532 1,732 1,932 Non current investments 62,599 33,528 38,528 43,528 Long term loans and advances 7,199 5,111 3,611 2,111 Other non current assets Total non current assets 91,309 60,361 64,322 67,931 Current assets Current investments 22,897 58,006 60,006 62,006 Inventories 6,397 8,142 8,441 8,851 Trade receivables 7,962 7,170 7,235 7,868 Cash and cash bank 4,954 5,862 14,820 27,008 Short term loans and advances 9,785 12,616 13,867 15,736 Other current assets 4,170 3,468 3,919 4,590 Total current assets 56,165 95, , ,058 Total Assets 147, , , ,989 Cash Flow YE Mar ( mn) FY14 FY15 FY16E FY17E PBT 46,321 40,848 53,351 58,596 Depreciation 1,796 2,674 2,949 3,291 Interest Chng in working capital 4,319 (5,825) (2,821) (1,700) Tax paid (13,139) (12,854) (16,005) (17,579) Other operating activities Cash flow from operations (a) 35,457 21,473 31,829 37,145 Capital expenditure (236) (598) (9,940) (9,940) Chng in investments (21,166) (3,546) 1, Other investing activities Cash flow from investing (b) (21,402) (4,144) (8,508) (9,449) Free cash flow (a+b) 14,055 17,330 23,321 27,696 Inc/dec in borrowings Dividend paid (incl. tax) (13,015) (14,450) (16,806) (18,458) Other financing activities Cash flow from financing (c) (14,695) (16,442) (14,251) (15,509) Net chng in cash (a+b+c) (640) 888 9,070 12,187 Closing cash & cash equivalents 4,863 5,750 14,820 27,008

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