India Automobiles Two Wheelers

Allegro Capital Advisors Pvt Ltd

Dec 2011
Strictly Private & Confidential

Two Wheelers An Introduction

Import of Parts
Drive chains, engine components, transmissions etc.

Dealers*
2000+ dealers in domestic market

Domestic Customers
Low penetration at 7%. Lower in rural areas

Auto Component Manufacturer

300+ players. castings, forgings, tires etc.

Original Equipment Manufacturer (OEM)

INR 55K Cr turnover with 13.3Mn units in FY11 3 players account for 80% of market share

SubDealers/Touch Points
12000+ dealer touch points

International Customers

Raw Material Suppliers

Sheet metal, aluminum etc

Service Centers
Key revenue generator for dealers

Key markets Africa, Latin America and South East Asia

Primary business model is appointed dealer, though Subsidiary model also used

Source: ACE, Allegro Calculations. Strictly Private & Confidential 2

* Dealer numbers are for listed players.

Two Wheelers An Overview (1)

Auto Sector Volumes and Growth
20 30% 25% 15 20% 15% 10 10% 5 5% 0% 0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 (YTD)

Market Share (Volume) of Key Players

TVS Motors 9% Yamaha 4% Others 7% Hero Moto 39%

Honda Motors 14% Bajaj Auto 27%

-5% Total Auto Volumes (Mn) Growth (%)

Two Wheeler Market Value and Growth

60,000 50,000 40,000 30,000 20,000 10,000 0
2006 2007 2008 2009 2010 2011

35% 30% 25% 20% 15% 10% 5% 0% -5%

Indian Auto Sector had a volume growth of 13% CAGR over the last 5 years - Driven by two wheelers which account for 80% of the total volumes. Two wheeler sales reached INR 55K Cr and volumes reached 13.3 mn units clocking a CAGR of 15% and 13% respectively over 2006-2011. This works to an average realisation ~ Rs. 42,000 or 1.2x the real per capita GDP of India. Top 3 players account for 80% of the total market share.

Value (INR Cr)

Strictly Private & Confidential

Growth (RHS)

Source: Bloomberg, McKinsey, Data Monitor Allegro Calculations. 3

Two Wheelers An Overview (2)

Two Wheeler Domestic Volume Growth
14 12 10 8 6 4 2 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 (YTD) 30% 25% 20% 15% 10% 5% 0% -5% -10%

Auto Segment Volume Growth - YTD

25% 20% 15% 10% 5% 0% -0.6% -5% 2W 3W MPV Utility M&HCV PV

17.0% 15.4% 12.8% 8.7% 7.5%

Domestic Volumes (millions)

% Growth (RHS)

Two Wheeler Export Volume Growth

1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 (YTD)

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

Domestic volume growth has been strong over the past five years growing at 11% CAGR. Exports have been a significant contributor to overall volumes with a growth of 27% CAGR over the last 5 years. Year to date, the volume growth in two wheelers has surpassed all other automobile segments.

Export Volumes (millions)

Source: Bloomberg, Allegro Calculations. Strictly Private & Confidential

% Growth (RHS)

Two Wheelers Industry Analysis

BUYER POWER: MODERATE

High demand (+) Limited suppliers (+) Low product differentiation (-) Low dealer bargaining power (+)

Buyer Power
5

THREAT OF SUBSTITUTES: WEAK

Cost of ownership lowest for 2 wheeler (+) Lack of efficient public transport system (+) Lack of cheap / beneficial alternative (+)

4 3

SUPPLIER POWER: WEAK

Fragmented, small sized suppliers of castings/forgings (+) Supplier Contractual relationship (+) Power High localisation of finished product (+)

Threat of Substitutes

2 1 0

THREAT OF NEW ENTRANTS: MODERATE-WEAK

Moderate fixed cost to enter () Moderate gestation period () High investment in a dealership network (+) High brand recognition of existing players (+)

Threat of New Entrants

Degree of Rivalry

DEGREE OF RIVALRY: MODERATE-STRONG

Oligopolistic nature of market (+) Low revenue diversification (-) Strong similarity of players (-) Large competitor size (+)

NOTE: (+) and () are represented in terms of the Sector on the whole.
Strictly Private & Confidential 5

Buyer Power Moderate (1)

Lower Two Wheeler Penetration in India*
35% 30% 25% 20% 15% 11% 10% 5% 0% 7% 7% 6% 4% 1% 31%

Demand Close to Inflexion Point*

Malaysia Sri lanka

Source: MoRTH (2008)

India

China

Brazil

Korea

Mexico
Source: OECD (2008)

Opportunity exists in Unisex Category (Scooters)

25% 23.1% 20% 17.3% 15% 11.9% 10% 5% 2.8% 0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E 2.7% 2.8% 3.1% 3.2% 10.3% 7% 7% 8% 13.2% 11.5% 7% 11.5% 9% 7% 4.1% 5.5% 5.5% 6.3% 14.2% 11% 15% 13% 20.3%

In developed markets, two wheelers are seen as a luxury rather than a necessity. The reverse is true for developing/emerging economies. India is one of the lowest penetrated markets for two wheelers even amongst emerging economies. According to OECD, as per capita income and penetration levels increase, there is a shift in consumer preference toward high end/premium motorcycles. India is at an inflexion point where penetration is low and per capita income is rising. Although income distribution is skewed, the potential demand opportunity for two wheelers is large.

Total 2W Scooters vs Female Population

Motocycles vs Male Population

Source: Bloomberg, McKinsey, Allegro Calculations.

Strictly Private & Confidential

*NOTE: Variations in calculation exist among agencies.

Buyer Power Moderate (2)

Domestic Volume Growth is Strong
14 12 10 8 6 4 2 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 (YTD) 30% 25% 20% 15% 10% 5% 0% -5% -10%
10 8 6 FY05 FY06 FY07 FY08 FY09 FY10 FY11 16 14 1200 12 1100 1000 900 1300

Despite a Steady Increase in Prices Less Elastic

20 18 1500 1400

Domestic Volumes (millions)

85% 80% 80% 75% 70% 65% 60% 2008 2009 2010 77% 73%

% Growth (RHS)

Top 3 Players Have More Than 80% Market Share

80%

Auto Volumes (Millions)

Avg Price (Indexed) RHS

Single Brand Retail Model

Indian Two Wheeler market follows a Single Brand Retail Model unlike western and other markets where a Dealer can sell multiple brands.

2011

Share of Top 3 Players

High Demand, Concentrated Supply and Low Demand Elasticity Lowering Bargaining Power of Dealers and Buyers.
Source: Bloomberg, Companies, Allegro Calculations.

Strictly Private & Confidential

Supplier Power Value Chain (1)

Forms 10-30% of Revenue for Component Manufacturer

Exports

Auto Component Manufacturer

300+ players as compared to 11+ OEMs

Fragmented and small sized. Stringent Quality Control Lengthy Approval Process Long Term Contracts Dependence on OEM for Technology Inputs

Original Equipment Manufacturers (OEMs)

Dependency on OEM for Dealer/Service Center Access

Dealers / Service Centers (Replacement Market)

Strictly Private & Confidential

Supplier Power Weak (2)

Volatile Margins for Component Manufacturers
15%

Dependence of OEMs for revenue, reduces bargaining power of suppliers.

10%

Contracts have limited escalation clauses. Trying maintain long term relationships leaves them at mercy of OEMs

5%

0% FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

OEMs EBITDA Margins

Auto Anicillary EBITDA Margins

Note: Calculation based on industry sales and EBITDA figures.

Localisation Level Bajaj Auto 90-100% 90-100% 80% 85-90%

Most components are manufactured within India for OEMs. An advantage more than a disadvantage

TVS Motors Honda Motors Hero MotoCorp

Fragmented, Contractual Relationship and High Localisation makes Supplier Power Moderate
Source: Bloomberg, Companies, ACE, Allegro Calculations.

Strictly Private & Confidential

Degree of Rivalry Moderate-Strong

Market Share (Oct 11) Oligopolistic Nature
2850 2775 2700 2625 2550 2475 2400 2008 2009 2010 2011

Competitive Intensity is Increasing

HHI Index

More Players Entering

Year
2008 2010 2011 2011 2011 2012

Lack of Revenue Diversification

100% 10% 90% 80% 70% 60% 50% 98% 90% 100% 2% 0%

Company
Mahindra & Mahindra enters two wheeler space buy buying out 80% share in Kinetic Motors Harley Davidson launches a line of models for India Ducati launches its showrooms in India Aprilla in collaboration with Piaggio to bring in Vespa 125cc and RSV4 Hyosung re-enters the market after JV with Kinetic Triumph to unveil its India plans at Auto Expo 2012

40% 30% Bajaj Auto TVS Hero MotoCorp

Two Wheelers (Volumes)

Three Wheelers (Volumes)

Increasing Competition, New Players Entering the Market and Lack of Revenue Diversification shows increasing Rivalry
Source: Bloomberg, Companies, Media, Allegro Calculations.

Strictly Private & Confidential

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Threat of New Entrants Moderate-Weak

Company Bajaj Auto Investment INR 75 Cr Type of Expansion Brownfield Greenfield Brownfield Capacity (units) 600,000 2,500,000 600,000 Time 6-9 Months 18-24 Months 6-9 Months Cost Per Unit (INR) 1250 2000 1000

The initial investment to set up a new plant isn't very large. But the time taken can be anywhere between 18-24 months. Brownfield investments are faster and less capital intensive as compared to Greenfield.

Honda Motors INR 500 Cr Yamaha INR 60 Cr

Dealership Network
1000 800 600 400 200 0

Touch Points
6000 5000

At the same time, existing players have a large dealership network enhancing their brand recognition.

4000 3000 2000 1000 0

Hero MotoCorp

Bajaj Auto

TVS Motors

Honda Motors

Hero MotoCorp

Bajaj Auto

TVS Motors

Honda Motors

While investment and time is not very high, access to a distribution network make entry difficult.

Source: Bloomberg, Companies, Allegro Calculations.

Strictly Private & Confidential

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Threat of Substitutes Weak

Running Cost 4x Lower
Two Wheeler Four Wheeler Average KM per annum (30 * 365) Average Mileage Liters of Petrol Consumed per annum Current INR Price of Petrol (70.03) Running Expenditure per annum Cost per KM
Source: Allegro Calculations

Demographic Split by Income The addressable market for two wheelers is 4x larger than four wheelers <90K 90K-200K 200K-500K Above 500K
Source: McKinsey

9125 50 183 70.03 12780 1.4

9125 15 608 70.03 42602 4.7

41% 42% 10% 2%

Roadways Dominate Commuter Traffic

Railways 15%

Yet Low Bus Penetration in India

3.0% 2.6% 2.5% 2.0% 1.5% 1.0% 0.7% 0.5% 0.0% 0.4% 0.1% 0.1%

Roadways 85%
Source: MoRTH (2008)

South Korea
Source: MoRTH (2008)

China

Indonesia

Taiwan

India

Source: MoRTH (2008) Lower running

costs, larger addressable market and lack of public transport make two wheelers attractive.

Strictly Private & Confidential

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Export Business Overview of Major Markets (1)

Key Export Markets for Listed Two Wheeler Players
Company Hero MotoCorp Bajaj Auto TVS Motors Destination Bangladesh, Sri Lanka, Nepal, Columbia 36 countries; Africa and Middle East: 51%; South East Asia: 34%; Latin America: 15% 55 countries across Africa, South East Asia, Latin America Key Brands Exported CD Dawn, Splendor, Passion, Glamour, CBZ, Hunk, Pleasure Boxer, Discover, Pulsar Apache, RockZ, Neo

The dynamics of most markets (except Africa) are similar to India where two wheelers are predominantly used for transportation rather than lifestyle products.

AFRICAN COUNTRIES Low Per Capita Income (In USD)

Nigeria accounts for 40% of all two wheelers sold with annual demand of 1.2mn. Nascent stage where two wheelers are used mostly for commercial purposes Hence skewed towards low cost products.

But Strong GDP Growth

Huge export opportunity for Indian OEMs as economy and affordability levels grow. Indian OEMs face stiff competition from Chinese counterparts. Indian products are perceived to be of a better quality at the same time, though slightly higher priced.

Strictly Private & Confidential

Source: MFSL, IMF, Company Data, Allegro Research 13

Export Business Overview of Major Markets (2)

SOUTH EAST ASIA Sales (000 units)
14000 12000 10000 8000 6000 4000 2000 0 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11E

LATIN AMERICA
Brazil is a key market amongst Indian OEMs, but they command a very small share. Other important markets include Colombia and Central America. Products exported are mostly premium bikes. Moreover, the market is dominated by 100-150cc bikes which is a positive for Indian players. Again, Japanese players (Honda and Yamaha) control 90% of the market with Honda having 75% market share.

Market Share of Key Players

Others, 2% Suzuki, 8%

Yamaha, 37%

Honda, 53%

Indonesia

Thailand

Vietnam

Indonesia, Thailand and Vietnam are the fastest growing markets with dynamics very similar to India. Both Bajaj Auto and TVS Motors have opened subsidiaries in Indonesia to tap the third largest two wheelers market. Companies here face stiff competition from established Japanese brands such as Honda and Yamaha. India products enjoy a price advantage over the Japanese two wheelers with similar levels of quality.

Brazil Motorcycle Sales Mix

3% 6% 3% 7%

Brazil Sales and Growth

81% <100cc 101cc - 150cc 151cc - 250cc 251cc - 400cc >401cc

Strictly Private & Confidential

Source: MFSL, Company Data, Allegro Research 14

Investment Thesis Domestic Business

Lower Penetration Demand at an Inflection Point
25% 23% 20% 17% 15% 12% 10% 5% 3% 0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E 3% 3% 3% 3% 10%
7% 7% 8%

Rural , Semi Rural towns Still LagExpected to Grow

40%

20%

30%
15% 13%

13% 11%
7%

14% 11%
9% 7% 11%

20%
6%

4%

5%

6%

10%

0% Rural Towns Tier III Tier II Metros

Total 2W Scooters vs Female Population

Motocycles vs Male Population

Penetration across India

Scooters to Outperform Industry and Lead Growth

Two Wheeler Segment Contribution
25% 20% 15% 10% 6% 5% 70% 0% FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E 68% 6% 6% 6% 6% 6% 5% 80% 79% 15% 78% 16% 17% 77% 19% 76% 75% 74% 74% 73% 72% 5% 20% 21% 78% 76% 82% 22% 80%

Lower Dependency on Finance Increase in Affordability

60% 50% 40% 30000 30% 25000 20% 10% 0% FY07 FY08 FY09 FY10 FY11 20000 40000

35000

14%

15000

Scooters Mopeds Motorcycles (RHS) Source: Bloomberg, McKinsey, Company Data, RBI, Allegro Calculations
Strictly Private & Confidential 15

% of Two Wheelers Financed

India Real Per Capita Income (INR)

Investment Thesis Export Business

Expect Volumes to grow by 12% CAGR to FY15
20 17 14 10% 11 8 5 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
% Growth

30%

Management Quotes on Export Strategy

Rajiv Bajaj, MD Bajaj Auto Exports to outstrip domestic sales in the near future.exports will probably contribute 35% of sale in FY12

20%

0%

-10% FY15E

Anil Dua, SVP (Marketing and Sales) Hero MotoCorp We are looking at an exponential increase in export numbers. In 5-6 years of time, we aim to sell a million bikes (every year) in international markets, which will be 10% of our total business

Two Wheeler Volumes (Milions)

Duty Entitlement Pass Book (DEPB) Scheme:

The DEPB scheme allowed exporters of two wheelers to claim reimbursements at 8-9% of the Free On Board (FOB) value of exports. The Government has announced a withdrawal of this scheme (effective Sept 2011) moving to the Duty Drawback scheme where reimbursement rates would be around 1-5% of FOB value. The likely impact of this would be for two wheeler exporters to increase prices and/or reduce dealer margins; both affecting demand in export markets, impacting margins and lowering profitability.

Two wheeler manufacturers are showing an increased focus on exports to contribute to their top line.
Source: Bloomberg, Media, Company Data Strictly Private & Confidential 16

Investment Thesis Volume Projection

Total Demand Expected to be 18mn Units by FY15
20 17 14 10% 11 8 5 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
% Growth

Share of Scooters to increase to 22% of Total Volumes

30%

100% 80% 60% 40%

6% 14%

6% 15%

6% 16%

6% 17%

6% 19%

6% 20%

5% 21%

5% 22%

20%

80%

79%

78%

77%

76%

75%

74%

73%

0%

20% 0% FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E

-10% FY15E

Two Wheeler Volumes (Milions)

Motorcycles

Scooters

Mopeds

Premium Segment Expected to be Fastest Growing

100%
13% 14% 17% 19% 20% 21% 23% 24%

Expected Market Share of Key Players FY13E

80% 60% 40% 20% 0% FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E
53%

59% 64% 64% 64% 64% 64% 62%

Bajaj Auto 29%

Hero MotoCorp 36%

34%

27%

19%

17%

16%

15%

14%

14%

Others 25%

TVS Motors 10%

Economy

Executive

Premium
17

Source: Bloomberg, Citigroup, CRISIL, Allegro Calculations Strictly Private & Confidential

Investment Thesis Summary of Key Points

DOMESTIC MARKET
POSITIVES
Low penetration of two wheelers in India Lower in rural and semi rural towns. Affordability on the rise with increasing per capita GDP. Scooter penetration lower than motorcycles. Scooters expected to lead growth on the back of a wider acceptability and addressable market. Premium motorcycles to see fastest growth command larger share of motorcycles.

EXPORT MARKETS
POSITIVES
Exports to be a major focus for OEMs Key markets include Africa and Latin America. Increasing awareness of Indian OEM manufacturers. Price competitive in comparison to bigger global brands. Indian two wheelers are perceived to be of a better quality than their Chinese counterparts.

RISKS & CONCERNS

Increasing competitive environment leading to inefficient price competition. Slowdown in consumer discretionary expenditure.

RISKS & CONCERNS

Drawback of fiscal benefits (DEPB) affecting prices and dealer margins. Increasing focus on exports leading to slowdown in domestic business.

Strictly Private & Confidential

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Companies Recommendation Summary

MCAP EPS Growth P/E EV/EBITDA ROE Target INR CMP FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E Price (cr)
50,000 41,600 2,731 1723 2059 58 -10% 5% 78% 9% 18% 31% 16.2 21.1 12.0 14.8 17.9 9.2 15.2 16.4 15.9 11.8 13.5 6.1 53% 49% 29% 47% 48% 31% 1755 2078 73

Company
Bajaj Auto Hero MotoCorp TVS Motors

Upside

Rating
Neutral Underweight Overweight

Bajaj Auto
INR (Cr)
FY12E FY13E 22,389 13% 4,193 19% 3,385 15% 9% FY14E 25,251 13% 4,693 19% 3,569 14% 6% FY12E 23,149 22% 3,441 15% 2,296 10% 19%

Hero MotoCorp
FY13E 27,437 19% 4,136 15% 2,871 11% 20% FY14E NA NA NA NA NA NA NA FY12E 7,687 24% 512 7% 231 3% 19%

TVS Motors
FY13E 8,913 16% 606 7% 292 3% 27% FY14E 10,205 14% 687 7% 344 3% 18%

Sales Sales Growth EBITDA EBITDA Margin Adj PAT PAT Margin PAT Growth

19,759 24% 3,832 19% 3,093 16% 18%

Source: Bloomberg, ACE, Allegro Calculations Strictly Private & Confidential 19

Bajaj Auto - NEUTRAL

CMP (INR) Target Price (INR) Upside FY13E EV/EBITDA FY13E PE MCAP (INR cr) EV (INR cr) CMP (INR) 52-week high 52-week low PE EV/EBITDA 1723 1754 2% 11.8 14.8 50,000 49,796 1723 1822 1166 14.4 18.0

BUSINESS MODEL & PRODUCT MIX:

Segment
Motorcycles Economy Executive Premium Scooters Three Wheelers 2 3 7 NA 6

POSITIVES:

231,281

Market Domestic Export Models Share Volumes Volumes (Domestic) (FY11) (FY11)
35% 25% 21% 48% NA 55% 2,414,633 NA NA NA NA 205,603 972,437 NA NA NA

Strongest player in the domestic premium segment of motorcycles. Best operating margins amongst two wheeler OEMs EBITDA ~20% Diversified revenue with 28% coming from exports. Strategic tie up with Kawasaki and KTM Leveraging their network to explore new markets.

Share Holding Pattern

26% 50% 24%
Promoter Group Institutions Non Institutions

REVENUE MIX:
Domestic 3W 10%

Largest player in the three wheeler space which has an EBITDA margin ~30%. Launch of their maiden four wheeler would be a key valuation catalyst.

Exports 28%

Current Capacity 4.4mn Units

Area 2W 3W Capacity Capacity

Domestic 2W 56%

RISKS & CONCERNS:

Failure of new Pulsar and KTM launch early next year. Slowdown amongst emerging economies affecting domestic and export markets. Irrational price competition in the domestic two wheeler market. Appreciating rupee could have an adverse impact on margins.

Waluj, Maharashtra Chakan, Maharashtra Pantnagar, Uttarakhand

Spares 6%

1.5 Mn 1.2 Mn 1.2 Mn

540K

KEY RECOMMENDATION: NEUTRAL

-

Source: Bloomberg, CRISIL, Company Data. Strictly Private & Confidential

Valuations are at a discount to Hero MotoCorp, though trading at its historic average. Higher margins (~20%) and highest ROE (50%+) vs industry should command a higher multiple.
20

Bajaj Auto
Profit & Loss (INR Cr) Total Volumes(Units) Net Sales Avg Realisation Total Expenditure EBITDA Other Income Depreciation EBIT Interest Extraordinary Items PBT Tax Net Income EPS Mar-08 2,451,407 8,663 35,340 7,753 911 506 174 1,242 5 (102) 1,135 379 756 26 Mar-09 2,194,154 8,437 38,452 7,619 818 496 130 1,184 21 (205) 958 302 656 23 Mar-10 2,852,520 11,509 40,345 9,328 2,180 535 136 2,579 6 (162) 2,411 708 1,704 59 Mar-11 Balance Sheet (INR Cr) Mar-08 145 1443 1588 7 1327 1334 1269 35 1857 1594 56 1877 -228 Mar-09 145 1725 1870 1570 1570 1542 22 1809 2188 137 2438 -112 Mar-10 145 2784 2928 13 1326 1339 1480 42 4022 4317 101 5692 -1274 Mar-11 289 4621 4910 24 302 325 1483 70 4795 7110 556 8749 -1083 3,823,954 Share Capital 15,998 Reserves 41,837 Shareholders' fund 13,240 Secured Loans 2,758 Unsecured Loans 993 Total Debt 123 Net Block 3,628 CWIP 2 725 Investments 4,351 Non Cash Current Assets 1,011 Cash 3,340 Current Liabilities 115 Net Working Capital

Key Ratios Sale Growth Net Income Growth EBITDA Margin EBIT Margin PAT Margin Debt / Equity

Mar-08

Mar-09 -3% -13%

Mar-10 36% 160% 19% 22% 15% 0.46

Mar-11 39% 96% 17%

Du Pont Tax Burden Interest Burden Depreciation Burden EBITDA Margin

Mar-08 0.48 0.99 0.81 11% 1.80 3.03 54%

Mar-09 0.55 0.97 0.84 10% 1.48 3.05 46%

Mar-10 0.65 1.00 0.94 19% 1.16 3.40 64%

Mar-11 0.62 1.00 0.96 17% 1.14 2.85 53%

11% 14% 9% 0.84

10% 14% 8% 0.84

23% Asset Turnover 21% Financial Leverage 0.07 ROE

Source: ACE Equity, Bloomberg. Strictly Private & Confidential

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Hero MotoCorp - UNDERWEIGHT

CMP (INR) Target Price (INR) Upside FY13E EV/EBITDA FY13E PE MCAP (INR cr) EV (INR cr) CMP 52-week high 52-week low PE EV/EBITDA 2059 2077 9% 13.5 17.9 41,600 43,019 2059 2250 1376 19.7 17.9

BUSINESS MODEL & PRODUCT MIX:

Segment
Motorcycles Economy Executive Premium Scooters Three Wheelers 2 6 4 1 NA

POSITIVES:

NA

Market Domestic Export Models Share Volumes Volumes (Domestic) (FY11) (FY11)
48% 46% 68% 22% 17% NA 5,040,971 NA NA NA 361,473 NA NA NA NA

Largest domestic player in the two wheeler market with 39% market share. Strong brand recognition and positioning in the economy and executive segments. Volume growth been strong post capacity expansion in January 2011. Post Honda split exports seen as an untapped opportunity for Hero boosting volumes.

Share Holding Pattern

9%
Promoter Group Institutions

REVENUE MIX: RISKS & CONCERNS:

39%

52%
Non Institutions

Export Sales 2%

Increasing competition in the Executive and Scooter segment. Hero to continue to pay royalty expenses till FY14. Increasing R&D costs as well as increasing Marketing and Ad costs due to brand repositioning to dampen margins in the near term

Current Capacity 6.15mn Units

Area 2W 3W Capacity Capacity

Domestic Sales 98%

Gurgaon, Haryana Dharuhera, Haryana Haridwar, Uttrakhand

2.25 Mn 1.95 Mn 1.95 Mn

KEY RECOMMENDATION: UNDERWEIGHT

-

Slow launch of new models makes Hero susceptible to attacks from competition.

Source: Bloomberg, CRISIL, Company Data. Strictly Private & Confidential

Valuations are at historical highs. Near term expect margins and ROE to get impacted due to higher expected cost structure and increasing competitive intensity.
22

Hero MotoCorp
Profit & Loss (INR Cr) Total Volumes(Units) Net Sales Avg Realisation Total Expenditure EBITDA Other Income Depreciation EBIT Interest Extraordinary Items PBT Tax Net Income EPS Mar-08 3,337,142 10,332 30,960 9,032 1,300 272 160 1,412 2 1,410 442 968 48 Mar-09 3,722,000 12,319 33,098 10,691 1,628 337 181 1,784 3 1,781 500 1,282 64 Mar-10 4,600,130 15,758 34,256 13,146 2,612 414 191 2,834 2 2,832 600 2,232 112 Mar-11 Balance Sheet (INR Cr) Mar-08 40 2946 2986 0 132 132 1156 392 2567 806 131 1825 -888 Mar-09 40 3761 3801 0 78 78 1574 121 3369 794 220 2053 -1039 Mar-10 40 3425 3465 0 66 66 1659 48 3926 975 1907 4831 -1949 Mar-11 40 2916 2956 0 1491 1491 4080 125 5129 1433 72 6145 -4640 5,402,444 Share Capital 19,245 Reserves 35,623 Shareholders' fund 16,839 Secured Loans 2,406 Unsecured Loans 497 Total Debt 402 Net Block 2,500 CWIP 16 (80) Investments 2,405 Non Cash Current Assets 477 Cash 1,928 Current Liabilities 97 Net Working Capital

Key Ratios Sale Growth Net Income Growth EBITDA Margin EBIT Margin PAT Margin Debt / Equity

Mar-08 4% 13% 13% 14% 9% 0.04

Mar-09 19% 32% 13% 14% 10% 0.02

Mar-10 28% 74% 17% 18% 14% 0.02

Mar-11 22% -14% 13%

Du Pont Tax Burden Interest Burden Depreciation Burden EBITDA Margin

Mar-08 0.61 1.00 0.88 13% 2.04 1.69 32%

Mar-09 0.65 1.00 0.89 13% 2.03 1.60 34%

Mar-10 0.75 1.00 0.93 17% 1.85 2.46 64%

Mar-11 0.76 0.99 0.83 13% 1.78 3.67 68%

13% Asset Turnover 10% Financial Leverage 0.50 ROE

Source: ACE Equity, Bloomberg. Strictly Private & Confidential

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TVS Motors - OVERWEIGHT

CMP (INR) Target Price (INR) Upside FY13E EV/EBITDA FY13E PE MCAP (INR cr) EV (INR cr) CMP 52-week high 52-week low PE EV/EBITDA 58 73 26% 7.3 9.2 2700 3480 58 78 44 11.6 12.4

BUSINESS MODEL & PRODUCT MIX:

Segment
Motorcycles Economy Executive Premium Scooters Three Wheelers 2 3 4 3 1

POSITIVES:
Second largest player in the scooter market with 2 key models; Scooty and Wego. Expect this segment to see the fastest growth. Successful launches in FY11 have led to TVS regaining market share in the domestic market. Export volumes have been on an upward trend since FY06. TVS has a wider reach with presence in 55 countries against 36 for Bajaj Auto. Key valuation catalyst would be the launch of its electric scooter in 2012.

No: Models

Market Domestic Export Share Volumes Volumes (Domestic) (FY11) (FY11)

8% 27% 2% 8% 22% 6% 632,150 NA NA NA 1,145,526 22,357 204,681 NA NA NA 24,451 17,503

Share Holding Pattern

20%
Promoter Group Institutions

REVENUE MIX:
Exports 8% Motorcycles 14% 3 Wheelers 3%

RISKS & CONCERNS:

Increasing competition in the scooter segment could hamper growth. Extended focus on exports could lead to domestic supply constraints. Highest operating leverage amongst listed two wheeler companies.
Scooters & Mopeds 61%

21%

59%
Non Institutions

Current Capacity 3 mn Units

Area 2W 3W Capacity Capacity

Spares 14%

Nalagarh, Himachal Pradesh

500K

KEY RECOMMENDATION: OVERWEIGHT

-

Mysore, Karnataka 1.25 Mn Hosur, Tamil Nadu 1.25 MN

Source: Bloomberg, CRISIL, Company Data. Strictly Private & Confidential

Valuations are at historical lows. Management has been able to successfully turnaround the company into profits. With higher expected growth we might see a valuation re-rating for the company.
24

TVS Motors
Profit & Loss (INR Cr) Total Volumes(Units) Net Sales Avg Realisation Total Expenditure EBITDA Other Income Depreciation EBIT Interest Extraordinary Items PBT Tax Net Income EPS Mar-08 1,277,000 3,220 25,211 3,178 41 100 95 47 11 35 4 32 1.3 Mar-09 1,346,000 3,671 27,273 3,552 119 80 103 96 65 31 0 31 1.3 Mar-10 1,534,000 4,363 28,443 4,243 120 134 103 152 75 76 (12) 88 3.7 Mar-11 Balance Sheet (INR Cr) Mar-08 24 798 822 453 214 666 1016 27 339 771 4 506 269 Mar-09 24 786 810 622 287 909 996 40 478 852 42 550 343 Mar-10 24 842 865 830 173 1003 956 27 739 864 101 667 298 Mar-11 48 952 999 566 219 785 938 57 661 1196 6 885 316 2,043,000 Share Capital 6,179 Reserves 30,247 Shareholders' fund 5,898 Secured Loans 281 Unsecured Loans 144 Total Debt 107 Net Block 318 CWIP 70 - Investments 248 Non Cash Current Assets 54 Cash 195 Current Liabilities 4.1 Net Working Capital

Key Ratios Sale Growth Net Income Growth EBITDA Margin EBIT Margin PAT Margin Debt / Equity

Mar-08

Mar-09 14% -2% 1% 1% 1% 3% 3% 1% 1.12

Mar-10 19% 183% 3% 3% 2% 1.16

Mar-11 42% 121% 5%

Du Pont Tax Burden Interest Burden Depreciation Burden EBITDA Margin

Mar-08 1.06 1.22 -1.29 1% 1.49 2.63 4%

Mar-09 1.00 -3.08 0.13 3% 1.52 2.97 4%

Mar-10 0.79 -3.24 0.15 3% 1.62 3.11 10%

Mar-11 0.49 0.60 0.62 5% 2.16 2.86 19%

5% Asset Turnover 3% Financial Leverage 0.79 ROE

0.81

Source: ACE Equity, Bloomberg. Strictly Private & Confidential

25

Companies - Summary
Bajaj Auto Operating Leverage ROCE ROA Dividend Payout Cash Conversion Cycle (Days)
FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY11 2.9 1.0 64.7% 91.6% 44.2% 70.3% 34.0% 34.7% -26 -32

Hero MotoCorp
1.9 -0.2 76.5% 60.7% 60.2% 48.3% 98.4% 108.8% -15 -17

TVS Motors
1.5 1.6 8.7% 17.6% 4.9% 10.7% 32.4% 26.9% -16 -14

Valuations Current Price Target Price Upside FY13E EV/EBITDA FY13E P/E
1723 1754 2% 11.8 14.8 2059 2077 9% 13.5 17.9 58 73 26% 7.3 9.2

Source: Bloomberg, ACE, Allegro Calculations Strictly Private & Confidential 26

Appendix

Strictly Private & Confidential

27

Hero Honda JV Split Analysis

Share Holding Pattern Pre Split
Hero Honda Motors

Share Holding Pattern Post Split

Hero Moto Corp

Promoter Group (51%)

Public / Institutions (49%)

Promoter Group (51%)

Public / Institutions (49%)

Hero Investments P Ltd (18%)

Bahadur Chand Investments P Ltd (7%)

Honda Motorcycles (26%)

Hero Investments P Ltd (44%)

Bahadur Chand Investments P Ltd (7%)

BM Munjal & Family (100%)

BM Munjal & Family (70%)

GIC & Bain (30%)

Deal Features:
Hero Group agreed to buy out Honda Motors stake for a lump-sum payment of Rs. 3800 Cr (Approx Rs 730 / share of Hero Honda). Hondas stake was transferred to Hero Investments Pvt Ltd (HIPL) In addition Honda would get a fixed payment of Rs. 2450 Cr for the use of the Honda brand name on the existing product line of Hero. New products using Honda technology or branding would attract a royalty of 3% - 5%. HIPL buys the stake using a bridge finance initially. HIPL got an approval to raise Rs. 4000 Cr worth of FCCBs to finance the deal. HIPL gets Government Investment Corporation of Singapore (GIC) and Bain Capital to buy 30% stake in HIPL. The deal was for an amount close to $830 million (Approx Rs 1400 / share of Hero Moto Corp)

Strictly Private & Confidential

28

Price / Earnings Charts

Hero MotoCorp
25
25

Bajaj Auto
30 25 20

TVS Motors

20

20

15

15

15
10
10

10 5
Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-08
Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11

5 May-08

Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

Nov-11

5 May-08

P/E

Mean

+1

-1

P/E

Mean

+1

-1

P/E

Mean

+1

-1

2500 2000 1500 1000

3000 2500 2000 1500

140 120 100 80 60

1000

40

500 0 May-08

500 0 May-08

20 0 May-08

Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

Nov-11

Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

Nov-11

Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

Nov-11

Price

11x

14x

16x

18x

21x

Price

7x

12x

14x

17x

22x

Price

10X

15X

20X

25X

Strictly Private & Confidential

29

Premium vs. Market Leader & EV / EBITDA

Hero MotoCorp
150% 100% 50% 0% -50% -100% May-08

Bajaj Auto
40% 20% 0% -20% -40% -60% May-08 Nov-11
120% 100% 80% 60% 40% 20% 0% -20% -40% -60% May-08

TVS Motors

Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

Nov-11

Nov-08

May-09

Nov-09 May-10

Nov-10

May-11

Nov-11

Prem/Disc

Mean

+1

-1

Prem/Disc

Mean

+1

-1

Prem/Disc

Mean

+1

-1

*Note: Hero MotoCorp has been compared against the BSE Auto Index

20

25

30

20
15

25

15

20

10
10

15

5
5 May-08

10

Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

Nov-11

0 May-08

Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

Nov-11

5 Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

EV/EBITDA

Mean

+1

-1

EV/EBITDA

Mean

+1

-1

EV/EBITDA

Mean

+1

-1

Strictly Private & Confidential

30