Two Wheelers: HMCL, TVSL well seated; BJAUT chooses to stay out

Automobiles

2013: Scooters re-Activa-ted...

Page No.

Executive summary........................................................................................................ 3-4

Story in charts................................................................................................................ 5-7

Value migrating to scooters, led by changing customer priorities.......................... 8-12

Japanese players had triggered shift towards motorcycles

....................................

13-17

Resurgence of scooters led by automatic segment

.................................................

18-22

Can share of scooters revert to historical level of ~45%?

.......................................

24-28

Estimate share of scooters at 37% by 2020.............................................................. 29-31

HMCL, TVSL well seated for scooter ride.................................................................. 32-33

Companies

..................................................................................................................

34-73

Hero MotoCorp (HMCL): Riding on sharply focused, differentiated brands

.....

35-42

Bajaj Auto (BJAUT): Would exports make up for absence in scooters?

.............

43-49

TVS Motor (TVSL): A dark horse

...........................................................................

50-73

Prices as on 13 December 2013

Value migrates from outmoded business designs to new ones that are better able to sa tisfy customers' most important

priorities. Developing a strategic understanding of how current and prospective customers change through time could

serve as a compass that would point to the best direction for any company seeking to create value growth. Changing

customer priorities trigger the value migration process, creating opportunities for new business designs. Incumbents

frequently ignore or overlook such opportunities, presenting significant openings for newcomers.

In this report, we present the process of value migration in India's two-wheeler industry over the last two decades and

the changing trend for the coming decade.

December 2013

Automobiles: Thematic | 16 December 2013

Two-wheelers

Re-Activa-ted: Value migrating to scooters

HMCL, TVSL well seated; BJAUT chooses to stay out



Changing customer preferences are driving value migration from motorcycles to scooters

in India. In 1HFY14, the share of scooters was 23.5%, up from 12% in FY07. In the

economically developed states, the share of scooters is higher at ~34%, and is growing.

Around 51% of the dealers we surveyed expect the scooters share to be over 40% by

2020. We estimate the scooters share at 37% by 2020, implying 20% CAGR in scooter

volumes.

HMCL and TVSL are prepared for the transition, while BJAUT has strategically decided

to stay out to focus on the global motorcycle industry.

Value migrating to scooters, led by changing customer priorities

Industries evolve, driven by changing customer priorities, challenging

incumbents and opening opportunities for proactive business design, in turn

resulting in a new industry order.



Lack of proactive business design from Bajaj Auto (BJAUT; incumbent leader in

geared scooters) had allowed Hero Honda (now Hero MotoCorp; HMCL) to

capture a large part of the value outflow from scooters to motorcycles. Geared

scooters became extinct in India by the mid-2000s.



We are witnessing early signs of value outflow from motorcycles in the urban

markets to automatic scooters, with scooters growing at ~23% CAGR (twice the

growth rate for motorcycles) over the last five years.



Resurgence of scooters led by automatic segment

Traditional geared scooters dominated till the mid-1990s due to lack of credible

competition. The entry of Japanese players brought reliability, durability and

fuel efficiency to motorcycles, resulting in shift towards motorcycles in the

late-1990s and geared scooters becoming extinct by mid-2000s.



The resurgence of scooters is led by the automatic scooters, offering

convenience, universal appeal and narrowing of gap in mileage vis-à-vis

motorcycles.



With the launch of

Honda Activa

in the 2000s, acceptance of automatic scooters

amongst men began growing. The share of scooters recovered from ~12% in

FY07 to ~23.5% in 1HFY14 (v/s average of ~45% till the early 2000s).



Can share of scooters revert to historical level of ~45%?

Globally, scooters constitute ~55% of the two-wheeler market (ex China and

Africa). Excluding India, the share of scooters is at ~79% (including geared step-

throughs).



In India, scooter penetration in economically developed states has been higher

at ~34% . Six states contribute ~60% of scooter volumes. Penetration of scooters

is increasing in urban centres, while smaller towns are seeing increased

acceptance.



Investors are advised to refer

through disclosures made at

the end of the Research

Report.

December 2013

Automobiles

Around 51% of the dealers we surveyed expect the share of scooters to be over

40% by 2020.



Historically, the share of scooters in India was ~45% for over 30 years till 2000.

The experience of global peers and select developed states, and dealer feedback

suggests that the share of scooters might once again increase to 40-45%.



Estimate share of scooters at 37% by 2020

Based on our multi-model analysis, we expect scooter industry volumes to grow

at ~20% CAGR over FY14-20, twice the growth rate for motorcycles. Overall two-

wheeler industry volumes are likely to grow at 12% CAGR during this period.



The share of scooters would increase to 37% by 2020, with annual sales of 10.7m

units (equal to the current market size of the domestic motorcycle industry).



While the share of scooters is likely to increase, we expect the dominance of

motorcycles to continue, driven by increasing penetration in rural markets.

Motorcycles fare better in rural areas, where road infrastructure is relatively

poor, are more suitable for longer distance travel, and offer higher mileage (an

important factor for cost conscious customers).



HMCL, TVSL well-seated

Despite its late entry into the segment,

HMCL

is the second largest scooter

player, helped by its differentiated positioning aimed at the youth. It plans two

new launches in FY15, coupled with 25% capacity expansion to 900,000 units per

year.

Buy

with a target price of INR2,680 (14x FY16E EPS).



TVSL

is getting its act together, with multiple launches in both the scooter and

motorcycle space. Post the recent launch of

Jupiter,

TVSL has a complete portfolio

of scooter offerings. The upcoming launch of

Scooty

upgrade would further

strengthen its position. Initiating coverage with

Buy

and target price of INR85

(9x FY16E standalone EPS)



For now,

BJAUT

would lose out due to this migration, as it has taken the strategic

position of being 'a global motorcycle specialist'.

Buy

with a target price of

INR2,255 (14x FY16E EPS).



Financials and Valuations

EPS (INR)

EPS Gr. (%)

P/E (x)

EV/EBITDA(x)

RoE (%)

Div. yield (%)

FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E

Bajaj Auto

Hero Moto

TVS Motor

121.4 141.6 161.1

116.8 161.7 191.5

5.2

7.5

9.4

15.4

10.1

35.9

16.6

38.4

44.4

13.8

18.5

25.9

16.1

17.5

10.4

13.8

12.7

7.2

12.1

10.7

5.7

10.5

9.9

6.0

8.6

8.3

4.5

7.0

6.9

3.4

39.9

43.1

18.7

38.1

48.8

23.2

36.1

45.2

24.6

2.6

3.2

2.8

3.1

3.4

3.3

3.7

4.7

Source: MOSL

December 2013

Automobiles

Story in charts







Globally, two-wheeler markets (ex China and Africa) are

skewed towards scooters, especially in Asia

Motorcycles gained share till early 2000s; automatic

scooters driving resurgence of scooters now



Scooter penetration is directly correlated with the level

of development and urbanization



Prior to motorcycle invasion the share of scooters was

~45% till the early 2000s

Automatic scooters have been growing and have outpaced motorcycle growth over the last 10 years



Break-up of global two-wheeler market (m units) *



Urbanization and scooter penetration

Ge ared scoote rs/ste p-thrus (% of to tal 2W )

Automati cs (% o f total 2W)

Urb ani zati on (%)

Vi etna m

Thai l an d

S coo ters

17.0

55%

Mo torcycl e

13.9

45%

Ind i a

Indo nes i a

* Excluding China and Africa

Source: Piag gio, Indus try, MOSL



Break-up of Indian two-wheeler market over the last two decades

Motorcycl es

100%

75%

50%

25%

Ge ared Scoote rs

Au toma ti c Scooters

Mo peds

Hero Sp l endo r l aun ch

Hond a Acti va l a unch

B ajaj exi ts geare d

s cooters

B ajaj exi ts scoote rs

Sour ce: Industr y, MOSL



Share of scooters over the last four decades

Scoo ter (% of to tal 2Ws)



Automatic scooters now growing faster than motorcycles

Motorcycl e s Gr. (%)

19.1

17.4

Au toma ti c Scoote rs Gr. (%)

22.3

18.6

17.3

10.7

11.8

16.4

20-ye ar CAGR 15-year CAGR 10-year CAGR 5-yea r CAGR

Source: Indus tr y, MOSL

December 2013

Automobiles

Story in charts







Increasing share of men and young boys in scooter sales

...

Scooter contribution rising even in smaller towns

Scooter share in developed states is at ~34%, as against

pan India average of ~23.5%







…reflected in rising share of bigger scooters

Over 50% of dealers expect scooter share to be over

40% by 2020

We expect scooter volumes to grow at ~20% CAGR over

FY14-20, 2x the growth in motorcycle volumes



Break-up of scooter buyers

F em al e

Mal e (a ge 25+)

Yo uth



Break-up of scooter sales by capacity

Smal l s co oters (< 100cc)

Large scoo ters (> 100cc)

2013

F Y09

FY11

F Y12

FY13

FY14YTD

2008

F Y10

Source: Indus tr y, MOSL



Results of dealer survey on expected share of scooters



Scooter contribution rising even outside the metros (%)

FY10

by 2020

FY13

Other to wn s Al l (4 state s)

* Gujarat Maha rash tra MP & Ch atti sgarh

Metros

Ti er 1 ci ti es

<10%

10-20% 20-30% 30-40% 40-50% 50-70%

>70%

Sour ce: Industr y, MOSL



Scooter share in developed states higher than all-India average

Ratio

Kerala

Gujarat

Tami l Nadu

Delhi

Karnataka

Punjab

Maharashtra

Average of above

Pan-India

FY11

29.5

25.9

17.1

18.6

23.8

21.6

24.4

23.0

17.4

FY13

42.2

30.6

20.7

29.7

28.0

28.2

27.8

29.6

21.3

1HFY14

Urban

Popln (%)

47.7

42.6

48.5

97.5

38.6

37.5

45.2

Popln

(m)

33.4

60.4

72.1

16.8

61.1

27.7

112.4



Our two-wheeler volume estimates

m units

Scooters

% of total

Motorcycle

% of total

Mopeds

% of total

Total Industry

FY14E

3.5

10.4

0.7

14.6

FY20E

10.7

17.3

0.9

28.9

CAGR (%)

20.3

8.9

5.0

12.0

Source: MOSL

51.2

33.3

24.9

35.3

31.6

32.7

30.6

34.2

23.5

31.2 1,210.2

Source: Indus tr y, MOSL

December 2013

Automobiles

Two-wheelers: Changing landscape

Era

Product

1970s-mid 2000s

Bajaj Chetak

From 1990s

Hero Splendor

From 2001

Hero Passion Pro

From 2000

Honda Activa

Pricing (INR '000) ^

Performance

- Engine (cc)

145

- Power (bhp)

6.25

- Mileage (Kms/ltr)

35-40

- Ground clearance (mm)

145

Positioning

Fami ly scoot er, with

conservative design

Available Options

LML NV

Lamby 150

Bajaj Priya

Bajaj Cub

Bajaj Super

48.74

51.25

109

40-45

153

Family scooter with improved

asthetics & higher mileage

than geared scooters

Hero Maestro

TVS Jupiter

TVS Wego

Yamaha Ray

Suzuki Access

Suzuki Swish

Hero Pleasure

TVS Scooty

HMSI Dio

HMSI Aviator

Starting trouble, lack of riding

comfort over long distance

^ ex-showroom Mumbai

Comments

97.2

7.8

60-65

159

165

Focus on male user, g ood ride

Fami ly scoot er, with

quality & best mileage

Bajaj Platina

Bajaj Discover

Hero HF Dawn

Hero HF Deluxe

Honda CB Twist er

Honda Dream Yug a

Honda Dream Neo

Suzuki Hayate

TVS Star Sport

TVS Star City

Yamaha Crux

Yamaha YBR

Good ride quality on bad roads,

best mileage

Convenience due to Automatic

transmission, universal appeal

December 2013

Automobiles

Value migrating to scooters, led by changing customer priorities

Greater convenience, multi-usage, improved mileage driving value migration



Industries evolve, driven by changing customer priorities, challenging incumbents and

opening opportunities for proactive business design, in turn resulting in a new industry

order.

Lack of proactiv e business design from Bajaj Auto (BJAUT; incumbent leader in geared

scooters) had allowed Hero Honda (now Hero MotoCorp; HMCL) to capture a large part of

the value outflow from scooters to motorcycles. Geared scooters became virtually extinct

in India by the mid-2000s.

The fact that BJAUT partly recovered by reacting to the changed world indicates that the

incumbent can retain value by having a proactive business design.

We are now witnessing early signs of value outflow from motorcycles in the urban markets

to automatic scooters.

While HMSI has captured a large part of this value migration by being the driver of this

change, HMCL and TVSL are also well positione d. For now, BJAUT would lose out due t o

this migration, as it has taken the strategic position of being 'a global motorcycle specialist'.

Value migration in the Indian two-wheeler industry

The Indian two-wheeler industry has evolved over the last four decades, with value

migrating from geared scooters to motorcycles, and now to automatic scooters, driven

by changing customer preferences and availability of new products. We analyze below

various changes in the industry across different sub-segments.

Changing customer priorities drove value outflow from scooters (geared) and mopeds to

motorcycles from the 1990s to the mid-2000s

Motorcycl e

100%

75%

50%

25%

FY74

FY79

FY84

FY89

FY94

FY99

FY04

FY09

1HFY14

Scooter

Mop ed

Sour ce: Company, MOSL

Value migration: Is business design apt to cater to changing customer priorities?

In his book, 'Value Migration: How to Think Several Moves Ahead of the Competition',

Adrian J Slywotzky describes how value migrates from outmoded business models to

business designs that are better able to satisfy customers' priorities. Developing a

strategic understanding of how current and prospective customers change through time

could serve as a compass that would point to the best direction for any company seeking

to create value growth. There are three phases of value migration - value inflow, stability

and value outflow. These phases describe the relative value-creation power of the

business model, based on its ability to satisfy customer priorities better than competitors

and thus, earn superior returns.

December 2013

Automobiles

Changing consumer priorities driving value migration in the two-wheeler industry

Source: MOSL

"Significant growth in

disposable income and

sharp rise in young

consumers led to higher

demand for better two-

wheelers with good

looks, greater power,

high quality, but with

fuel efficiency. These

were the major drivers of

shift from scooters to

motorcycles." - BJAUT

Annual Report, 1999-2000

1. Geared scooters (Bajaj Chetak, LML NV, Lamby 150, etc)

a. Value inflow (Phase-I: 1960s to mid-1980s):

The period between the 1960s to

the mid-1980s was dominated by traditional metal-bodied geared scooters

due to relatively lower cost, higher mileage and lower maintenance compared

with the then available motorcycles like

Royal Enfield, Yezdi

and

Rajdoot.

Volumes of geared scooters are estimated to have grown at ~17% CAGR during

the period between the 1970s to the mid-1980s.

b. Stability (Phase-II: mid-1980s to mid-1990s):

The period between the mid-

1980s to the mid-1990s saw geared scooters maintaining their dominance,

just before the entry of Japanese players, with relatively superior product

offerings. During this period, scooter volumes grew at a CAGR of ~7.5%, also

aided by emergence of ungeared scooters (Kinetic

DX, Bajaj Sunny,

etc).

c. Value outflow (Phase-III: mid 1990s to 2007):

This phase saw increasing

dominance of four-stroke, fuel efficient, sturdy motorcycles, meeting the

changing priorities of emerging India - liberalization ushered higher economic

growth and urbanization. This resulted in continuous decline in geared

scooters, as consumers shifted to motorcycles and automatic scooters.

Production of

Bajaj Chetak

(synonym for geared scooters in India) was stopped

in 2005.

December 2013

Automobiles

Geared scooters became extinct by the mid-2000s

Vol umes ('000 u ni ts)

1,200

800

400

% of 2W i ndus try

Domestic two-wheeler market share trend (%)

BJAUT

LML

HMCL

Enfi el d

Yamaha

TVS L

5 5

Ki neti c

‐

F Y93

FY03

Source: SIAM, MOSL

2. Motorcycles (Hero Splendor/Passion, Bajaj Pulsar, Honda Shine, etc)

Fuel efficiency, suitability

for poor roads key

reasons for customer

preference for

motorcycles

a. Value inflow (Phase-I: 1990s to mid-2000s):

While motorcycles had been

growing at ~20% CAGR during the value inflow stage of geared scooters, growth

gathered momentum after the entry of Japanese players with four-stroke (4S)

technology in 1985. It took almost 10 years for 4S motorcycles to find acceptance

in India. The Indian motorcycle industry grew at ~22% CAGR over FY93-08,

overtaking scooters in FY00. Value migrated towards motorcycles, with

customer priorities being better mileage, superior quality (product and ride)

and aesthetics.

b. Stability (Phase-II: mid-2000s onwards):

After strong growth during the 1990s

to the mid-2000s, motorcycle volume growth moderated to ~12% CAGR over

FY08-13. While in urban markets, motorcycles would have to compete with

automatic scooters for new and replacement demand, growth in motorcycle

volumes would be driven by increasing rural penetration.

Motorcycles gained at the expense of scooters in 1990s

Vol umes ('000 uni ts )

12,000

8,000

4,000

% of 2W i n dus try

Domestic two-wheeler market share trend (%)

Source: SIAM, MOSL

December 2013

Automobiles

"Scooters find multiple

uses in urban households

vs. motorcycles, which

are more suited for men"

stated by Mr Anil Dua,

Senior VP (Marketing &

Sales) HMCL in an

interview with ET, dated

Nov. 3, 2013

3. Automatic scooters (Honda Activa, Hero Pleasure, TVS Scooty, etc)

a. Value inflow (Phase-I: mid 2000s onwards):

Automatic scooters (Kinetic

DX,

Bajaj Sunny,

etc) have been around since the mid-1980s and have grown at

~14% CAGR over FY93-03. However, they gained traction with the launch of

Honda Activa,

the first 4S automatic scooter, in 2001. Customer acceptance of

automatic scooters has been increasing, especially in urban markets, driven

by narrowing fuel efficiency gap vis-à-vis motorcycles, improvement in urban

roads and unisex appeal. Automatic scooter volumes grew at ~22% CAGR over

FY08-13.

Domestic two-wheeler market share trend (%)

BJAUT

HMCL

10.3

HMSI

Yamah a

TVSL

4.9

12.8

2.6

18.9

42.9

17.9

FY13

Source: SIAM, MOSL

Automatic scooters are driving the resurgence of scooters

Vol u mes ('000 un i ts)

3,600

2,400

1,200

% of 2W i nd ustry

Others

22.5

5.4

3.1

33.8

24.9

FY03

Catalysts for changing customer priorities, leading to value migration to scooters

Rising per capita income

Increasing female worker participation in non-agri sectors

Average PCI In dex

1,933

Sha re of women e mpl o yed i n th e non agri cul tura l

sector (% o f total n onagri cu l tural e mpl oyment)

895

334

100

1980-1990

1990-2000

2000-2010

2010-2013

1990

1995

2000

2005

2010

Growing urbanization

Urba n po pul ati on (%)

Increasing road infrastructure in urban areas ('000 km)

Urb an Ro ads

411.8

252.0

186.8

123.1

72.1

1961

1971

1981

1991

2001

2011

1971

1981

1991

2001

2011

Source: World Bank, MORTH, Industr y, MOSL

December 2013

Automobiles

Value migration poses threat, but also opens up opportunities



Value migration is relocation of underlying value, rather than disappearing of

value, to products/business designs that aptly address changed priorities.

The changing dynamics pose challenges for incumbents, but also open up large

opportunities. Though changing customer priorities undermine the incumbents'

position of strength, they do not have to necessarily lose out. By having a

responsive business design, they can sustain their position and create a new value

proposition that addresses new priorities.

In context of the Indian two-wheeler industry, we have already witnessed value

migration from geared scooters to motorcycles. Lack of proactive business design

from BJAUT (incumbent leader in geared scooters) allowed HMCL to capture a

large part of the value migration to motorcycles.

However, the fact that BJAUT recovered part of the lost ground by reacting to the

changed world indicates that the incumbent can retain value by having a proactive

business design.

In the current context, we are witnessing early signs of value outflow from

motorcycles to automatic scooters in the urban markets, driven by higher

convenience and unisex design.

While HMSI has so far captured a large part of this value migration by being the

driver of this change, HMCL and TVSL are also well positioned. For now, BJAUT

would lose out due to this migration, as it taken has taken the strategic position of

being 'a global motorcycle specialist'.

December 2013

Automobiles

Japanese players had triggered shift towards motorcycles

Fuel efficiency, reliability and suitability for poor roads were key drivers



Traditional geared scooters dominated till the mid-1990s due to their lower cost, higher

mileage, and lower maintenance compared to the then locally available motorcycles.

The entry of Japanese players brought reliability, durability and fuel efficiency t o

motorcycles.

The shift from traditional geared scooters gathered pace in the 1990s, as higher income

levels and economic development led to increase in demand for better two-wheelers.

Sharp rise in fuel prices (in the late 1990s) led to a sudden and sharp rise in the share of

motorcycles due to their better mileage (scooter sales declined by 30-40% annually in

the late 1990s v/s annual decline of 10-15% earlier). By mid-2000s, geared scooters were

extinct.

Why scooters had dominated pre-1990s

"Yezdi had serious

mechanical issues,

especially starting

trouble. One had to

pump about 20 times to

get that machine started.

It stood no chance against

the peppy, new

generation Japanese

bikes." - West-based

HMCL dealer



Lack of reliable and fuel efficient motorcycle

Motorcycles, by nature of their design, are generally more rugged and sturdy than

scooters. They have better ground clearance, strong suspensions and larger

wheelbases.

However, pre-1980s, available motorcycle brands lacked reliability and fuel efficiency.

There were only three serious players in the Indian motorcycle market -

Bullet, Rajdoot

and Ideal Jawa (Yezdi). Rajdoot

was popular in rural areas because of its sturdy

suspension, while

Bullet

and

Jawa

were popular in the urban markets for their strong

performance.

While the products were popular, due to issues with respect to mechanical reliability

and fuel efficiency, majority of the customers preferred the then available traditional

geared scooters.



Reliability and low cost helped scooters, especially Bajaj Chetak

Though scooters were an imperfect solution, they offered better functionality than

motorcycles. They were preferred for their functionality of motorized mobility,

affordable pricing, reliability and higher mileage.

Bajaj Chetak

had captured a major

market share and became a must have for every middle-class Indian.

Bajaj Chetak

was synonymous with scooters and demand was so strong that it had a waiting period

of up to 10 years.

December 2013

Automobiles

Bajaj Auto advertisement highlighting sturdiness and reliability of its scooter

BJAUT's iconic 'Hamara

Bajaj' advertisement

(click here for video)

captures the joy ride of a

quintessential Indian

middle class family to its

finest details,

immediately connecting

with the consumers

Sour ce: Company, MOSL

Lamby 150 advertisement, positioning it as an ideal family vehicle

LML Vespa advertisement, highlighting its mi leage

Sour ce: Company, MOSL

December 2013

Automobiles

"Japanese motorcycles

with better ground

clearance, stronger

suspension and larger

wheelbase, performed

well on village roads.

They were more fuel

efficient than traditional

geared scooters due to

their four-stroke

technology. The good

looks and aesthetics

were an added bonus." -

North-based HMCL dealer



Entry of Japanese brought much-needed reliability and fuel efficiency

The 1980's saw a sea change in the Indian two-wheeler market, with the entry of

several Japanese players through joint ventures with Indian partners. They introduced

several 100cc motorcycles with state-of-the-art technology; these were far more fuel

efficient, reliable and easy to ride.

Moreover, Hero Honda (now Hero MotoCorp; HMCL) introduced four-stroke

technology, which is superior to the two-stroke technology that Yamaha, Suzuki and

Kawasaki (through Bajaj) had introduced, in terms of fuel efficiency and reliability.

Shift from geared scooters to motorcycles started in 1990s

Factors that drove the shift:



Motorcycles generally more suitable for bad roads:

Motorcycles performed well

on the relatively poor village roads, with their higher ground clearance, stronger

suspension and larger wheelbase.



Better technology with more reliable and fuel efficient engines:

Post the entry of

Japanese players and introduction of four-stroke technology by Hero Honda,

motorcycles became more fuel efficient and reliable.



Goods looks and aesthetics

were a bonus.

Hero Honda advertisements in the 90s, highlighting fuel efficiency, style and power

Source: Compan y, MOSL

Sharp increase in fuel prices accelerated shift in late 1990s

Apart from motorcycles being better in terms of looks, performance, reliability and

fuel efficiency, the following factors accelerated the shift away from traditional geared

scooters:



Oil crisis in the late 1990s led to a sharp increase in fuel prices. Motorcycles being

more fuel efficient than traditional geared scooters, their sales increased sharply.



With multiple motorcycle launches, the price difference between motorcycles

and geared scooters narrowed. This encouraged motorcycle purchases.



Sharp growth in the population of young (18-25 years old) consumers coupled

with significant growth in disposable incomes led to a quantum jump in the

demand for better two-wheelers - vehicles with good looks, greater power and

higher quality, but with fuel economy as well.

December 2013

Automobiles

Hero Honda advertisement, highlighting running expenses

at 10paise/km due to four-stroke technology from world

leader, Honda

Yamaha RX100 (two-stroke) advertisement, highlighting

better power, faster pick-up and s peed as the key featur es

Sour ce: Company, MOSL

Trend favoring motorcycles strengthened in early 2000s; Bajaj Auto exited geared scoot ers in

FY06, ungeared scooters in FY11

"Traditional scooters

stood for old family

values and the 'we' factor

- remember the Humara

Bajaj campaign?

Motorcycles are far more

individualistic and are an

image product." - South-

based HMCL dealer

Moto rcycl es

100%

75%

50%

25%

Geared Scoo ters

Automa ti c Scoote rs

Moped s

Hero Sp l endo r

l au nch

Hond a Acti va

l aun ch

Baja j exi ts

gea red s co oters

B ajaj exi ts

s cooters

Source: SIAM, MOSL

December 2013

Automobiles

Share of scooters recovering post FY07

"Depending upon models

and their characteristics,

motorcycles have swept

rural, semi-urban and

urban India in a way that

would have been

inconceivable even a few

years ago." - BJAUT

Annual Report, 1999-2000

Sco oter (% of total 2Ws )

Pri or to moto rcycl e i nvas i on, average s co oters

s hare wa s ~45% ti l l earl y 2000s

Source: SIAM, Company, MOSL

Excerpts from dealer interaction

What were the key reasons for the shift from scooters to motorcycles in

the 1990s?

The biggest factor for the shift was higher mileage associated with four-stroke

motorcycles.

In those days, scooters used two-stroke technology. They delivered

35-40kmpl, while Hero Honda's four-stroke 100cc motorcycles delivered 60kmpl. In

the late 90s, fuel prices rose sharply. With 60kmpl fuel efficiency, motorcycles

became very popular and the share of four-stroke motorcycles increased

tremendously over 1997-2001.

Mr Ajay Kumar Patni,

Owner of Arun Automobiles,

BJAUT dealer since 1964

Motorcycles were also more comfortable due to their larger wheels and longer

wheelbase.

With the economy opening up in the early 90s, there was an increase in

economic activity, and consequently, traveling needs. Motorcycles offered better

mileage and convenience than scooters.

Though motorcycles were more expensive (INR30k v/s INR20k for scooters),

consumer financing was catching up rapidly.

Citibank was very aggressive in two-

wheeler financing then. This coupled with general increase in income levels

supported motorcycle demand.

December 2013

Automobiles

Resurgence of scooters led by automatic segment

Convenience, universal appeal coupled with economic development driving demand



Increasing focus on automatic

scooters

Company

TVS

Honda

Hero

Suzuki

Honda

Mahindra

TVS

Mahindra

Yamaha

Suzuki

Hero

Honda

Piaggio

Mahindra

TVS

Brand

Scooty

Activa

Pleasure

Access

Aviator

Rodeo

Flyte

Wego

Kine

Ray

Swish

Maestro

Dio

Vesp a

Duro

Jupiter

Year

1994

2000

2005

2007

2009

2010

2012

2013



While the sale of traditional geared scooters declined, the share of automatic scooters

continued to increase, driven largely by higher demand from working women, college

students (female) and senior citizens.

With the launch of Honda Activa in the 2000s, automatic scooters started gaining acceptance

amongst men as well, due to attributes such as comfort, convenience and universal usage.

Automatic scooters (particularly those launched by Honda) were far ahead of traditional

geared scoot ers in terms of their perf ormance, reliability and fuel efficiency.

Urban markets could see further increase in the share of scooters, driven by (a) new

demand from a wider target audience, and (b) replacement demand from motorcycle

users.

Automatic scooters address shortcomings of geared scooters

While traditional geared scooters died down, the growth momentum in ungeared

(automatic transmission) scooters continued. Over the last two decades, automatic

scooters have grown at 16% CAGR against ~7% CAGR for the overall scooter segment.

Automatic scooters offer several advantages over traditional scooters. Attributes such

as convenience (self-start, no need to change gears), contemporary looks, and

powerful engines are making them popular amongst customers across age categories

and gender.

…but automatic scooters have been driving resurgence

over the last 10 years

Motorcycl es Gr. (%)

19.1

16.4

Automa ti c Scoote rs Gr. (%)

22.3

17.4

18.6

17.3

10.7

11.8

Share of scooters has declined over the last two decades

due to decline in geared scooters (% of 2Ws)…

Motorcycl e s

100

‐

Scoote rs

20‐yea r CAGR 15‐year CAGR 10‐year CAGR 5‐yea r CAGR

Source: SIAM, MOSL

Share of automatic scooters has been rising, driven by several launches (% of total 2Ws)

‐

Gea red Sco oters

Unge ared Scooters

Source: SIAM, Indus try, MOSL

December 2013

Automobiles

"Ungeared scooters were

initially used by urban

women and college

students, who prefer

automatic transmission,

self-start, light weight

and easy

maneuverability." -

South-based TVSL dealer

Initially, urban women and students drove demand for automatic scooters

Ungeared scooters, which were predominantly plastic bodied (lighter weight and

smaller size), with lower capacity engines (largely sub-100cc), were popular among

females. Usage by males was limited, considering the tiny/feminine looks of the

plastic bodied scooters.



Companies promoted automatic scooters through high decibel celebrity

endorsements, focusing on women empowerment.



With greater economic development, increasing women participation in the

workforce, demand from female customers increased at a healthy rate till FY12.

However, post FY12, there is a distinct trend towards large/unisex scooters.



Small scooters were popular among females

"Scooters are perceived

to be safer than

motorcycles. Hence,

parents generally buy

scooters for their school/

college going children in

the age bracket of 18-22

years." - South-based

HMSI dealer

S mal l s cooters ('000 un i ts)

% of to tal s co oters

752

759

447

560

783

521

F Y09

FY10

F Y11

FY12

FY13

FY14YTD

Sour ce: Industr y, MOSL

Hero Pleasure advertising campaign focusing on women empowerment

Hero Pleasure

advertisement, 'Why

should boys have all the

fun?', featuring

Bollywood actress

Priyanka Chopra

(Click

here to see video)

Sour ce: Company, MOSL

December 2013

Automobiles

Acceptance amongst men has also increased

"The scooter is turning

out to be the perfect

'second car' in the family.

High fuel prices and

traffic congestion make

scooters a convenient

mode of transport for

daily commutes, while

cars are more suitable for

occasional weekend

drives." - Noida-based

HMSI dealer

Growth for automatic scooters has accelerated over the last four years, with 26%

volume CAGR. Large scooters (>100cc) have been growing faster at ~31% CAGR. This is

largely driven by increasing acceptance of automatic scooters among men. Among

the reasons for the growing popularity of automatic scooters are:



Significant reduction in performance and fuel efficiency gap with motorcycles:

With advancement in technology, the performance of current generation scooters

has improved significantly and is near motorcycle levels. The fuel efficiency gap

v/s motorcycles has reduced - 40-45kmpl v/s 60-65kmpl for motorcycles (35-40kmpl

for geared scooters).



Universal appeal:

Being automatic transmission vehicles with self-start option

and consequent ease in driving, scooters can be used by both males and females,

young and old.



Convenience and comfort:

Automatic transmission scooters offer a lot of comfort

and convenience, particularly in urban traffic conditions.



Perfect primary family vehicle:

High fuel prices and traffic congestion make

scooters a convenient mode of transport for daily commutes, while cars are used

for occasional drives.

Comparison of competing two-wheelers

Parameters

Honda

Hero

Activa

Splendor Pro

Price (INR '000) ^

51.25

48.74

Engine (cc)

109

Power (bhp)

8.00

7.80

Weight (Kgs)

111

109

Mileage (Kms/Ltr) *

Mileage on-road (Kms/Ltr)

40-45

60-65

Wheelbase (mm)

1,238

1,230

Seat height (mm)

765

785

Ground clearance (mm)

153

159

^ Ex-showroom Mumbai, * Manufacturer's claim

Hero

Bajaj

Passion Pro

Chetak 2S

145

7.80

6.25

116

103

60-65

35-40

1,235

1,230

795

840

165

145

Sour ce: Company, MOSL

Bollywood actress

Anushka Sharma in TVS

Scooty ad focusing on

women empowerment

Large scooters gaining wider acceptance, taking away share from small scooters

Large scoo ters ('000 uni ts )

% of total s cooters

Sour ce: Compan y, MOSL

(click here to see video)

1,806

586

F Y09

734

F Y10

1,041

2,090

1,361

F Y11

F Y12

F Y13

FY14YTD

Source: SIAM, Indus try, MOSL

December 2013

Automobiles

Mr Anil Dua, Senior VP,

Marketing & Sales, HMCL

indicated that with

Maestro

scooters, which

are targeted towards the

youth, urban consumers

are now more

comfortable with

scooters. Earlier, while

the women customers

were largely from cities,

male customers were

largely from smaller

towns.

Scooters becoming popular amongst youth as well

Our channel interactions indicate that scooters are gaining acceptance amongst

the youth. Brands such as

Honda Dio

and

Yamaha Ray-Z

are being bought by young/

college going boys.



However, they are not yet attractive relative to motorcycles, which still constitute

a big chunk of the market.



Attractiveness amongst youth would be the key inflection point.



Sensing this, two-wheeler players have launched several male-specific products

Hero Maestro, Honda Aviator, Yamaha Ray-Z, TVS Jupiter.



With several recent launches targeting the youth (young boys in the 18-25 years

bracket), acceptance amongst youth is also increasing at a rapid pace, especially as

the 'network' effect sets in. HMCL is focusing on positioning its Maestro scooters as a

'cool' product for young men. The product is endorsed by Bollywood star and youth

icon, Ranbir Kapoor.

Hero Maestro online advertisement focused on young men

TVS Jupiter advertisement positioning it as 'for men'

Sour ce: Company, MOSL

Hero Maestro advertisement featuring bollywood star Ranbir Kapoor

HMCL is focusing on

positioning its Maestro

scooters as a 'cool'

product for young men.

The product is endorsed

by Bollywood star and

youth icon, Ranbir Kapoor

(click here to see the

video)

Source: Compan y, MOSL

December 2013

Automobiles

Share of men and young boys rising over the last five years…

F em al e

Mal e (a ge 25+)

Yo uth

…reflected in rising share of bigger scooters

Smal l s co oters

Large s co oters

2013

F Y09

FY11

F Y12

FY13

FY14YTD

2008

F Y10

Sour ce: Industr y, MOSL

Scooter share of incremental 2W industry volumes (%)

Trend in volumes in best motorcycle and scooter brand ('000)

Sp l endo r

2,755

2,309

1,999

Acti va

2,337

584

1,011

655

1,209

1,282

885

FY09

FY10

FY11

FY12

FY13

1HFY14

FY10

FY11

FY12

FY13

1HFY14

Sour ce: Industr y, MOSL

December 2013

Automobiles

Excerpts from dealer interaction

How has been the trend in scooter sales in the Baroda market over the

last five years?

More and more customers are preferring scooters. In Baroda, the share of scooters

in total two-wheeler sales has increased from 15% to 30% over the last five years.

Mr Jayant Shah,

Owner of Kumar Motors,

HMCL dealer since inception

(1984)

Why are scooters increasingly becoming the preferred choice for

personal transportation?

Scooters are a convenient mode of transport for city driving due to automatic

transmission, self-start and light weight (easy maneuverability). With

advancement in technology, the mileage gap between scooters and motorcycles

has also reduced significantly.

What is the typical customer profile for scooters?

Students in the age bracket of 18-22 years, working women, housewives, small

traders and business men, aged people (over 40 years) are the key customer

categories for scooters.

Scooters are no longer only a female targeted product. Earlier products were

largely plastic bodied and small, and hence, perceived as female only products.

Today, there are a lot of options available in the scooter segment, with high power,

larger size and good looks -

Activa, Maestro,

etc.

In fact, now the share of male customers (self-employed, small traders, service

category) is much higher than female customers, though overall number of female

customers has also increased over the years.

Will scooters overtake motorcycles over the next 5-7 years?

Scooters will continue to grow ahead of motorcycles. However, motorcycles will

remain popular up-country and for longer distance travel (until infrastructure

improves significantly). Motorcycles have their own advantages in rural areas in

terms of being more comfortable on relatively poor quality roads and for long

distance travel (larger wheelbase, higher ground clearance, better shock

absorbers) and higher mileage (for cost conscious rural customers).

December 2013

Automobiles

Can share of scooters revert to historical level of ~45%?

Global (and select local) experience suggests acceleration in scooter share



Globally, scooters constitute ~55% of the two-wheeler market (ex China and Africa).

Excluding India, the share of scooters is at ~79% (including geared step-throughs).

In India, scooter penetration in economically developed states has been higher. Six states

contribute ~60% of scooter volumes. Penetration of scooters is increasing in urban centres,

while smaller towns are seeing increased acceptance.

~51% of the dealers we surveyed expect the share of scooters to be over 40% by 2020.

Historically, the share of scooters in India was ~45% for over 30 years ti ll 2000. The

experience of global peers and select developed states, and dealer feedback suggests

that the share of scooters might once again increase to 40-45%.

Large global markets skewed towards scooters

"The latent demand for

scooter was always there

because of its utility

value; it was a question

of bringing the right

product." HMSI Ex-

Operating Head (Sales

and Marketing) NK Rattan

said in an interview with

Economic Times dated

November 21, 2010.



Scooters constitute ~55% of the global two-wheeler market (ex China and Africa).

Excluding India, the share of scooters is ~79%.

Globally, large evolved two-wheeler markets are largely scooter/step-through

markets, with share as high as 100%.

Asia is the largest two-wheeler market, accounting for over 85% of the global

two-wheeler market (ex China and Africa). Market dynamics in India are similar

to other Asian countries, though India is behind its Asian peers in terms of

economic evolution. The evolution of the two-wheeler market in India is likely to

be on similar lines as in other Asian countries.

Indonesia, the third-largest two-wheeler market in the world after China and

India, with annual sales of 7m units, is primarily a scooter/step-through market.

A similar shift is likely in India, but not as fast and steep, considering the difference

in fuel efficiency, aesthetics and road infrastructure (especially in rural areas).

Globally, two-wheeler markets are skewed towards scooters, especially in Asia (m units) *

Scoote rs

1.3

0.5

Motorcycl e

Scoote rs

17.0

55%

Moto rcycl e

13.9

45%

10.1

12.5

1.6

0.5

0.8

2.9

Indi a

AS EAN

0.8

0.04

North

Ame ri ca

S outh

Ameri ca

Euro pe

* Excluding China and Africa

Source: Piaggio, MOSL

December 2013

Automobiles

Two-wheeler penetration high in ASEAN region, especially scooter penetration, due to higher development and urbanization

Mark et Si ze (m u ni ts)

13.8

7.3

3.1

2.1

Ind i a

Indo nes i a

Penetra ti on (% of popu l ati on)

Ge ared scoote rs/ste p-thrus (% of to tal 2W )

Automati cs (% o f total 2W)

Urb ani zati on (%)

Vi etna m

Thai l an d

Sour ce: Industr y, MOSL

Scooters dominate in Indonesia; will India follow?

Market skewed towards step-throughs:

Just as 100cc motorcycles dominate the

Indian two-wheeler market, step-throughs dominate the Indonesian market.

Step-throughs account for ~86% of the two-wheelers sold in Indonesia, the rest

being motorcycles.



Practicality, universal appeal of step-throughs make them popular:

Step-throughs

are popular due to their practicality (in crowded Indonesian streets), higher

mileage (than motorcycles available in Indonesia) and universal appeal (female

labor force participation high at 50% v/s 29% in India).



Step-through market shifted towards automatic transmission due to convenience:

Since 2004, with the launch of automatic transmission step-throughs (locally

called skubeks), the share of geared step-throughs (locally called bebeks) in

overall two-wheeler sales declined significantly in favor of skubeks due to their

convenience in the face of traffic congestion, supported by similar pricing, looks

and fuel efficiency.



Share of automatic transmission step-throughs increased significantly over 7-8 years

Bebe ks (ge ared)

Sk ubek s (ungeared )

2004

2012

Source: Indus try, MOSL

December 2013

Automobiles

Honda Blade (geared step-through; bebek)

Honda Vario (automatic transmission; skubek)

Source: Company, MOSL

Local experience of select developed states indicates higher share of scooters

The share of automatic scooters has been rising in the overall two-wheeler

industry across states over the last few years.



Anecdotal evidence suggests that states with higher economic development and

open culture have higher scooter sales penetration.



Our analysis of last few years' town-wise two-wheeler sales in Gujarat, Madhya

Pradesh, Maharashtra and Chattisgarh (four states contributing 27% of pan-India

market) indicates that scooter penetration is increasing even in smaller towns.



Top-6 states (four in the South and two in the West) contribute over 60% of scooter

demand. All these states are relatively more developed; hence, the higher scooter

penetration.



Share of ungeared scooters has increased across markets

Scooter share (% of total 2W)

FY11

FY13

1HFY14

PCI

(INR '000)

135

176

109

Urbanization

2W share

(%)

47.7

4.9

97.3

0.6

97.5

2.2

42.6

7.6

37.5

3.6

38.6

6.5

45.2

11.4

48.5

11.4

31.0

100.0

24.3

3.0

33.5

8.2

23.2

2.3

16.7

2.6

31.9

3.9

27.6

5.6

24.9

6.5

22.3

10.7

Source: SIAM, MOSPI, RBI, Industry

In 1HFY14, scooter sales

in Kerala and Chandigarh

were similar to

motorcycle sales

Kerala

Chandigarh

Delhi

Gujarat

Punjab

Karnataka

Maharashtra

India Average

Haryana

Chattisgarh

Orissa

Rajasthan

December 2013

Automobiles

Scooter sales contribution rising even in smaller towns (%)

FY10

19 22

FY13

FY13: State-wise scooter sales contribution (%)

Mah a‐

ras htra, 15

Others , 37

Tami l

Nadu , 11

Gu jarat, 11

Other towns Al l (4 s tates )

* Guja rat, Mahara shtra , MP & Chatti s garh

Metros

Ti er 1 ci ti es

An dhra

Prad esh, 7

Ka rnatak a,

Keral a, 10

Sour ce: Indus try, MOSL

Takeaways from dealer survey

Over 50% of dealers expect the share of scooters to increase to over 40% by 2020 - increasing trend seen across OEs and markets

What proportion of the total two-wheeler industry sales in your respective market comes/

would come from the scooter segment?

21 19

2008

2013

2020

Source: MOSL

Share of scooters expected to rise across categories of towns (%)

2008

2013

2020

Tie r I (Metro Cities )

Ti er II

Tier III

Rural

Source: MOSL

December 2013

Automobiles

Within male customers, do you believe that scooters are

cannibalizing motorcycle sales?

Incre‐

menta l

s a l es , 25%

Are young boys (age 18-22 years) also getting attracted and

buying scooters largely for their own usage?

Yes , 53%

No t yet,

47%

Ca nna ba l i z

i ng, 75%

Source: MOSL

OEM-wise dealer participant share (%)

Market classification of participant dealers (%)

Rura l , 15

T ier I

(Metro

Ci ti es), 21

T i er I II , 24

Hero Moto

HMSI

TVS Motor

T ie r II , 41

Source: MOSL

December 2013

Automobiles

Estimate share of scooters at 37% by 2020

However, dominance of motorcycles to continue



Based on our multi-model analysis, we expect scooter industry volumes to grow at ~20%

CAGR over FY14-20, twice the growth rate for motorcycles. Overall two-wheeler industry

volumes are likely to grow at 12% CAGR during this period.

The share of scooters would increase to 37% by 2020, with annual sales of 10.7m units

(equal to the current market size of the domestic motorcycle industry).

While the share of scooters is likely to increase, we expect the dominance of motorcycles

to continue, driven by increasing penetration in rural markets. Motorcycles fare better in

rural areas, where road infrastructure is relatively poor, are more suitable for longer

distance travel, and offer higher mileage (an important factor for cost conscious customers).

Mr YS Guleria, VP

(Marketing & Sales),

HMSI indicated that

scooter sales are strongly

correlated to economic

development and

education. "First it was

Chandigarh - a hub of

education in the north.

And then in South India,

Kerala - India's most

literate state - became

the first state where

scooters outsold bikes.

Our data show that

Gujarat is now emerging

as a major hub where

scooters are narrowing

the gap with motorcycles

pretty fast,".

Estimate share of scooters at 37% by 2020, volume CAGR at ~20%

Based on our multi-model analysis, we expect scooter industry volumes to grow

at ~20% CAGR over FY14-20, twice the growth rate for motorcycles. Overall two-

wheeler industry volumes are likely to grow at 12% CAGR during this period.



The share of scooters would increase to 37% by 2020, with annual sales of 10.7m

units (equal to the current market size of the domestic motorcycle industry).



We discuss the two methodologies used to estimate potential scooter volume

growth over the next six years, based on (A) expected penetration in urban and

rural markets, and (B) experiential evidence in relatively developed states.



Scooter volumes likely to grow at twice the growth rate for motorcycles

m units

Scooters

% of total

Motorcycle

% of total

Mopeds

% of total

Total Indus try

FY14E

3.5

10.4

0.7

14.6

FY20E

10.7

17.3

0.9

28.9

CAGR (%)

20.3

8.9

5.0

12.0

Source: MOSL

(A)

Estimating two-wheeler penetration in urban and rural markets, and further

estimating replacement and incremental demand for scooters within the urban-

rural mix.

Expect scooter share to increase to ~40% by FY20, implying 20% CAGR in scooter volumes

FY14E

FY20E

CAGR

Key Assumptions for scooters

Replacement demand (% of replacement demand

New demand (% of new demand)

Urban

3.3

8.7

17.5

Rural

0.2

2.9

54.4

Total

3.5

11.6

22.0

Source: MOSL

% of total

24.1

40.0

December 2013

Automobiles

(B)

Scooter demand following similar trend on pan-India basis, as currently

experienced in relatively developed and urbanized states.

Scooter share in developed states at ~34%, as against pan-India average of 23.5%

We note that it took just

three years for these

developed states to

improve scooter share

from 23% (current pan-

India average) to ~34%

(estimated pan-India

average by 2020)

Ratio

Kerala

Gujarat

Tamil Na du

Delhi

Karnataka

Punjab

Maharashtra

Average of above

Pan-India

FY11

29.5

25.9

17.1

18.6

23.8

21.6

24.4

23.0

17.4

FY13

42.2

30.6

20.7

29.7

28.0

28.2

27.8

29.6

21.3

1HFY14

51.2

33.3

24.9

35.3

31.6

32.7

30.6

34.2

23.5

Urban Popln (%)

47.7

42.6

48.5

97.5

38.6

37.5

45.2

Popln (m)

33.4

60.4

72.1

16.8

61.1

27.7

112.4

31.2

1,210.2

Sour ce: Industr y, MOSL

Share of automatic transmission step-throughs increased significantly over 7-8 years

Urbani zati o n (%)

27.7

29.2

30.9

32.8

34.8

2000

2005

2010

2015

2020

Source: UN, MOSL

Based on experience of developed states, scooter volumes can grow at ~19% CAGR to ~34% of

two-wheeler industry

FY14E

FY20E

CAGR

2W Demand

14.6

28.9

12.0

Motocycle

11.1

19.0

9.4

Scooter

3.5

9.9

18.7

% of total

24.1

34.2

Source: MOSL

Motorcycle volumes to grow at ~9%, driven by rural markets

While the share of scooters is likely to increase, we expect the dominance of

motorcycles to continue, driven by increasing penetration in rural markets.



In rural markets, motorcycles will continue to be preferred due to their suitability

for:



higher travelling distances (average of 40-50km/day v/s 10-15km/day in urban

markets)



relatively poor road infrastructure



largely male user category (relatively less open culture)



relatively cost conscious customers (motorcycles deliver higher weight-to-

fuel efficiency and maintenance cost is perceived to be lower).



December 2013

Automobiles

Estimating industry's volume to grow 12.4% CAGR

Domestic

Scooters

Motorcycles

Mopeds

Dom. industry vols (A)

Exports

Scooters

Motorcycles

Mopeds

Export industry vols (B)

Total industry vols (A+B)

FY14E

3,500,000

10,400,102

700,000

14,600,102

FY14

84,146

1,927,918

5,302

2,017,366

16,617,468

FY20E

10,518,574

17,361,371

938,067

28,818,012

FY20

166,089

4,459,392

8,414

4,633,895

33,451,907

CAGR (%)

20.1

8.9

5.0

12.0

CAGR (%)

12.0

15.0

8.0

14.9

12.4

Source: MOSL

Would profitability for scooters be very different from motorcycles?

Based on our interaction with the industry, gross margins on scooters are slightly

lower than motorcycle due to a) expensive automatic transmission and b) higher

body components. However, EBITDA margins would be largely driven by the

operating leverage and economies of scale, and is expected to be similar as

motorcycle on comparable volumes. When we compare EBITDA margins of HMSI

(large scooter contribution) with Hero MotoCorp (large motorcycle contribution),

EBITDA margins for FY13 for HMSI were lower by ~70bp vis-à-vis HMCL (at 45%

volumes of HMCL).

December 2013

Automobiles

HMCL, TVSL well seated for scooter ride

BJAUT, however, decides to stay out to be a global motorcycle specialist



While the increasing share of scooters could have a disruptive impact on listed players'

domestic operations, a proactive business model would help to benefit from changing

industry dynamics.

By being the driver of the shift towards scooters, HMSI would continue to benefit. HMCL

and TVSL are also well positioned for this migration.

Despite its late entry in the segment, HMCL has become the second-largest scooter

player, helped by its differen tiated positioning aimed at the youth. It plans tw o new

launches in FY15 coupled with 25% capacity expansion to 900k/year.

TVSL is getting its act together with multiple launches in both the scooter and motorcycle

space. With the recent launch of Jupiter, TVSL has a complete portfolio of scooter offerings.

The upcoming launch of Scooty upgrade would further strengthen its position in the

female scooter space.

For now, BJAUT would lose out on this migration, as it has taken the strategic position of

being a 'global motorcycle specialist'.

HMCL: Differentiated positioning in scooters, with focused marketing

Though HMCL was a late entrant in the scooter space (entered in 2006), it has

differentiated its positioning by targeting the youth as against competitors' focus

on the family.



Further, HMCL is preparing to strengthen its position by launching two scooters in

FY15, along with expansion of its scooter capacity.



We believe HMCL can outgrow the scooter market, leveraging its differentiated

positioning based on customer understanding, wide reach and focused marketing.



This coupled with added volumes from export markets and potential levers for

margin expansion makes HMCL our top two-wheeler pick.

Buy

with a target price

of INR2,680 (14x FY16E EPS).



TVSL: Dark horse with ingredients in place for sharp EPS growth



TVSL is getting its act together by having relevant products in place in both the

scooter and the motorcycle segments.

A moderate success of the

Jupiter

and the upcoming executive segment motorcycle

launch would drive significant operating leverage, margins and strong EPS growth.

Further, any clarity on Indonesian operations (success of recent launch or closure

of operations) could also act as a re-rating trigger for the stock.

We believe FY15 would be critical year for TVSL due to (a) full benefit of launches

in 2HFY14, and (b) multiple launches in FY15.

It is a dark horse, with potential to deliver annualized returns of 25-30% CAGR

over the next 2-3 years. We initiate coverage with a

Buy

rating and a target price of

INR85 (9x FY16E standalone EPS).

December 2013

Automobiles

"Great brands are built on

the foundation of

sacrifices. Making more

scooters doesn't mean

making more money. We

are a specialist

motorcycle company. We

won't venture out of that

easily."

- Mr Rajiv Bajaj,

Managing Director, BJAUT

BJAUT: Would exports make up for absence in scooters?

BJAUT would lose out in the domestic market, as it has taken a strategic decision

to focus on being a 'global motorcycle specialist'.



With its specialization strategy and focused approach, BJAUT aims to garner a

higher share of the global motorcycle market together with industry-leading

profitability.



Based on 12% export volume CAGR over FY14-20, BJAUT could underperform the

two-wheeler industry by 3%, considering its absence in the fast growing scooter

industry.



BJAUT would benefit on (a) uptrading in the domestic motorcycle market, driven

by economic recovery, and (b) revival in exports, which could offset the negative

of absence in scooters.

Buy

with a target price of INR2,255 (14x FY16E EPS). We

prefer HMCL and TVSL to play the trend of rising scooter share.



Domestic scooter market share

FY14-YTD

HMCL, 19.4

Domestic motorcycle market share (%)

Suzuk i ,

0.67

Oth ers,

F Y14-YTD

2.96

Yama ha,

4.8

Su zu ki , 9.1

Others , 2.7

Yamaha,

3.04

TVS L, 5.72

BJAUT,

21.00

TVSL, 12.4

HMSI, 15.22

HMCL,

51.40

HMSI, 51.6

Source: SIAM, MOSL

December 2013

Automobiles

Companies

December 2013

16 December 2013

Thematic | Sector: Automobiles

Hero MotoCorp

BSE SENSEX

S&P CNX

20,716

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

1,6,12 Rel. Perf. (%)

6,168

HMCL IN

199.7

412.4/6.6

CMP: INR2,065

TP: INR2,680

Buy

Riding on sharply focused, differentiated brands

Focus mainly on youth segment; plans two more launches in FY15



52-Week Range (INR)2,150/1,434

1/21/3

Valuation summary (INR b)

Y/E March

Sales

EBITDA

EPS Gr. (%)

RoE (%)

RoCE (%)

Payout (%)

Valuations

P/E (x)

P/BV (x)

Div. Yield (%)

17.7

7.1

3.1

12.8

5.6

8.4

3.4

10.8

4.3

7.0

3.6

2014E 2015E 2016E

256.5 297.0 339.8

37.3

23.3

(1.9)

43.1

55.2

64.0

43.2

32.3

38.4

48.8

64.6

49.8

49.5

38.2

18.5

45.2

61.5

45.0

Despite a late entry, the differentiated positioning aimed at youth helps HMCL to

be the second-largest scooter player.

It plans to further strengthen the scooter portfolio with two new launches in FY15.

Capacity expansion being undertaken by 25% to 900,000 units by Jan 2014 to meet

rising demand.

This coupled with added volumes from entry into new export markets and potential

levers to improve margins, makes HMCL our top pick in the two-wheeler space.

Maintain Buy with a target price of ~INR2,680 (14x FY16E EPS).



Adj. EPS (INR) 116.8 161.7 191.5

BV/Sh. (INR) 291.2 371.5 475.9



EV/EBITDA (x) 10.0



Shareholding pattern (%)

As on

Sep-13

Promoter

39.9

Dom. Inst

8.8

Foreign

42.8

Others

8.5

Jun-13 Sep-12

52.2

9.3

6.7

30.0

32.5

8.6

8.7



Stock performance (1 year)



Focus mainly on youth segment as against competitors focus largely on family

segment:

Although HMCL was a late entrant in the scooter space, it

differentiated by positioning its products towards the youth segment, against

competitors’ focus on the family segment. While Hero Pleasure (2006 launch)

is specifically designed and positioned at women, Maestro (2012 launch) is

sharply positioned at the fast-growing yet untapped youth segment.

Two new scooter launches planned in FY15:

HMCL is preparing to further

strengthen its scooter portfolio with two new launches in FY15. The new

products are expected to be unveiled at the Auto Expo 2014 (February 2014).

To meet the growing demand, company plans to increase the scooter

production capacity by 25% to 900,000 units annually by Jan 2014.

HMCL to outgrow industry with differentiated positioning and new launches:

We believe HMCL can outgrow the scooter market by its differentiated

positioning based on customer understanding, strong reach and focused

marketing.

Volumes to pick-up driven by rural momentum, new product launches and

entry in exports:

HMCL’s volume momentum is expected to pick-up driven

by a) full benefit of good monsoon starts reflecting in 2HFY14, b) product

lifecycle turns favorable with ~15 launches (upgrades/refreshes) in October

2013 and new product launches in 1HFY15 and c) gradual ramp-up in exports

over next 2-3 years. We are factoring in for volume growth of 5%/13.4%/

12.8% for FY14/FY15/FY16 (2%/10%/12% for domestic motorcycle).

Multiple levers to margin expansion:

HMCL’s EBITDA margins are expected

to improve from FY14 levels, driven by a) no fixed royalty beginning July

2014 (~320bp in FY14) and b) potential savings driven by cost cutting initiatives

yielding 4-5pp benefit over 30-40months.

HMCL our top pick in two-wheeler space:

HMCL offers strong rural presence,

scooter market share gain and potential export ramp-up. This coupled with

multiple margin levers, we expect 28% EPS CAGR over FY14-16E (factoring in

only ~25bp accretion from cost saving initiatives). Maintain

Buy

with target

price of ~INR2,680 (14x FY16E EPS).

December 2013

Automobiles

In scooters, HMCL is focused mainly on youth segment as against

competitors focus largely on family segment



Although HMCL was a late entrant in the scooter space, it differentiated by

positioning its products towards the youth segment, against competitors’ focus

on the family segment.

Entered the scooter space in 2006 with launch of Hero Pleasure:

Sensing a shift in

customer preferences, company entered the scooter space in 2006 with the launch

of Hero Pleasure (100cc engine) scooter, specifically designed and positioned at

women.

Expanded portfolio in 2012 to tap demand potential from youth segment:

In 2012,

HMCL expanded its scooter portfolio with the launch of another scooter named

Maestro. With its contemporary looks and brand endorsement by bollywood actor

Ranbir Kapoor, Hero Maestro is sharply positioned at the fast-growing yet

untapped youth segment.

Two new launches planned in FY15:

HMCL is preparing to further strengthen its

scooter portfolio with two new launches in FY15. The new products are expected

to be unveiled at the Auto Expo 2014 (February 2014).

Expanding capacity by 25% to meet rising demand:

To meet the growing demand,

company plans to increase the scooter production capacity by 25% to 900,000

units annually by Jan 2014.

HMCL to outgrow industry with differentiated positioning and new launches:

believe HMCL can outgrow the scooter market by its differentiated positioning

based on customer understanding, strong reach and focused marketing.

HMCL estimated to grow at 10.7% CAGR, driven by scooters and exports

Dom. M/C share (%)

Dom. M/C vols.

Dom. Scooter share (%)

Dom. Scooter vols.

Total dom. vols

Export vols.

Export share (%)

Total (units)

Industry (Dom + Exports)

Underperformance

FY14E

51.2

5,322,675

19.6

687,163

6,009,838

259,056

4.1

6,268,895

16,617,468

FY20E

46.2

8,017,320

24.6

2,591,065

10,608,384

950,000

8.2

11,558,384

33,451,907

CAGR (%)

7.1

24.8

9.9

24.2

10.7

12.4

1.6

Source: MOSL

December 2013

Automobiles

Sharply focussed, differentiated positioning helps gain share

HMCL dom. s cooter s ha re (%)

17.4

13.3

9.7

14.4

19.3

17.2

20.1

Share of scooters on a rising trend (%)

Scooter

Motorcycl e

FY09

FY08

FY09

FY10

FY11

FY12

FY13

1HFY14

FY08

FY10 FY11

FY12 FY13 FY14E FY15E FY16E

Source: Company, MOSL

Volumes to pick-up driven by rural momentum and new product launches

Biggest beneficiary of good monsoon and expected government spending in rural

markets (being an election year), given its high dependence and dominance in

rural markets (~45% of volumes vs 35% for industry).



Product life cycle turning favorable, with 15 new offerings (upgrades/refreshes)

in October 2013 and planned new product launches in 1HFY15. Hero didn’t have

any launch since Nov-12, during which HMSI launched ~5 products.



Despite no new launches in FY14YTD, it has been able to restrict market share

loss, despite new launches from HMSI, on back of strong festive/marriage season

demand reflecting its strength in rural markets.



Export foray can support overall volume growth by 2pp p.a; to contribute

10% by FY20



Post exit from JV with Honda, HMCL is looking to export beyond Sri Lanka, Nepal,

Bangladesh and Colombia (markets where it was allowed to export by Honda). In

line with the ambition to become a global two-wheeler major, HMCL has made an

international foray in 2HFY13 covering Africa, Latin America and Central America.

To support international operations, HMCL has already set up assembly operations

in Sri Lanka and Kenya. It has plans to build 20 assembly facilities (including India)

to expand the company’s presence to 50 countries by the end of the decade.

In recent media interaction, Mr Pawan Munjal, MD, HMCL said, “We will be selling

in 50-plus countries by 2020 and produce 12 million motorcycles and scooters

every year. This will come from 20 assembly lines from inside and outside the

country.” Despite near term challenges, management maintains FY20 export

volume guidance of 1m units (10% of total volumes).

While the near term outlook looks challenging in various key exports markets,

the company is hopeful of better performance during 2HFY14. As of September

2013, it had presence in 10 countries, and plans to enter another 8 markets in

2HFY14 (four each in 3Q/4QFY14), taking total market coverage to ~18 (largely

Africa and Latin America). However, benefit of entry into new markets would be

only visible in FY15 onwards.

Entry in new export markets can improve overall growth by 2pp p.a. We estimate

exports of ~0.23m units in FY14, ~0.44m units in FY15 and ~0.53m units for FY16.

December 2013

Automobiles

Present already in ~12 countries currently, to rise to ~18 by end-FY14

Markets

Nepal

Sri Lanka

Distributor Partner

NGM

ABANS

Products introduced/launched

Introduced Hero Xtreme, Pleasure

Launched HF Deluxe, HF Dawn, Splendor Pro,

Splendor NXG, Super Splendor, Glamour, Passion

Pro, Karizma ZMR, Hunk, Xtreme, Achiever

Launched Hunk, Karizma, Glamour, HF Dawn,

Splendor NXG, Super Splendor, Achiever

Pleasure, Passion Pro, Glamour, Hunk, Thriller,

Karizma ZMR and Karizma R

HF Dawn

Central America

Indy Motos Group

(Guatemala, El Salvador

and Honduras)

Peru

MOTOCORP SAC

Kenya

Burkina Faso

Ivory Coast

Ecuador

RYCE East Africa

Source: MOSL, Company

Exports contribution targeted at ~10% of volumes by FY20

Exports ('000 uni ts )

Exports (% of tota l vol umes )

6.9

3.8

441

529

7.3

1,200

232

FY14E

FY15E

FY16E

FY20

Source: MOSL, Company

Comprehensive margin improvement project can yield 400-500bp benefit

over 30-40 months



HMCL has initiated cost rationalization programme effective April 2013 with a

team of 300 people to improve efficiencies and improve profitability of the

company. The project would be carried out over five phases spread over 30 months

(plus ~12 months for testing).

Cost management project is expected to yield 4-5pp benefit over 30-40months,

driven by a) value engineering/re-engineering of components (~65% currently

sourced from associate companies), b) outbound logistics (driven by customized

fleets & new Gujarat plant), and c) Optimizing marketing spend.

The benefit of first phase was seen in 1HFY14 largely driven by value engineering/

re-engineering of components of couple of models (entry level motorcycle and a

scooter), some modifications on outbound logistics etc.

For 2HFY14, the company has guided savings of INR600-800m with large ticket

benefit to be visible only after 12-15 months.

Overall, management expects annual savings of INR15-17b by FY18 (400-500bp of

EBITDA margins). We estimate benefit of savings of ~INR700m (~25bp) in FY15.

December 2013

Automobiles

Further, royalty would stop from Jun-14, resulting in annual savings of ~INR8b or

~320bp at EBITDA level.



However, it would need to invest in a) R&D (to increase from 0.4% in FY13, 0.7% in

FY14E and 1.3-1.8% in FY15), and b) investments in export markets.



EBITDA Margins to improve meaningfully from FY15

EBITDA Ma rgi ns (%)

Vol Gr (%)

9.5 -3

16.9

FY10

11.8

FY11

11.0

FY12

FY13

11.3

FY14E

13.9

FY15E

14.6

FY16E

Levers to profitability

Base Case

FY14E

FY15E

13.4

13.9

161.7

FY16E

12.8

14.6

191.5

2,680

FY17E

13.0

14.8

211.4

2,960

Volume Growth (%)

5.0

Adj EBITDA Margins (%)

11.3

EPS (INR)

116.8

TP (14x)

Cost cutting initiatives: Base case 100bp savings in FY16

Adj EBITDA Margins (%)

11.3

Implied cost savings (INR b)

EPS (INR)

116.8

EPS Upgrades (%)

TP (@ 16x)

14.4

1.5

167.1

3.4

15.6

16.3

3.4

5.7

203.9

232.1

6.4

9.8

3,262

3,714

Source: MOSL, Company

Hero MotoCorp our top-pick in two-wheelers; Buy

HMCL offers strong rural presence, scooter market share gain and potential export

ramp-up. This coupled with multiple margin levers, we expect 28% EPS CAGR over

FY14-16E (factoring in only ~25bp accretion from cost saving initiatives).



We are factoring in for volume growth of 5%/13.4%/12.8% for FY14/FY15/FY16 (2%/

10%/12% for domestic motorcycle) for Hero MotoCorp, adj. EBITDA margins of

11.3%/13.9%/14.6% (+180bps/260bp/70bp) and EPS of ~INR117/INR162/INR191 for

FY14/FY15 (v/s consensus INR109/INR143/INR165).



The stock trades at 12.8x FY15 EPSE and ~10.8x FY16E EPS. Maintain

Buy

with target

price of ~INR2,680 (14x FY16E EPS).



December 2013

Automobiles

EPS to grow at 28% CAGR, after 4 years of muted EPS

EPS

EPS Growth (%)

38.4

18.4

-10.0

112

FY10

101

FY11

119

FY12

18.5

10.1

-10.9

106

FY13

117

FY14E

162

FY15E

192

FY16E

Payout expected to remain high

Ca s h (INR/s h)

110

105

DPS (INR/s h)

289

FY10

153

FY11

117

FY12

175

FY13

195

FY14E

250

FY15E

332

FY16E

Source: MOSL, Company

December 2013

Automobiles

HMCL: Financials and Valuation

Income Statement

Y/E March

Volumes (‘000)

Volume Growth (%)

Net Sales

Change (%)

EBITDA

EBITDA Margin (%)

Adj EBITDA Margin (%)

Depreciation

EBIT

Interest cost

Other Income

PBT

Tax

Effective Rate (%)

PAT

Change (%)

% of Net Sales

Adj. PAT

Change (%)

2012

6,235

15.4

233,681

21.4

34,078

14.6

11.0

10,973

23,105

213

5,756

28,647

4,866

17.0

23,781

23.4

10.2

23,781

18.4

2013

6,074

-2.6

235,827

0.9

30,991

13.1

9.5

11,418

19,574

119

5,838

25,292

4,110

16.3

21,182

-10.9

9.0

21,182

-10.9

2014E

6,380

5.0

256,544

8.8

37,291

14.5

11.3

11,432

25,859

125

6,109

31,843

8,522

26.8

23,321

10.1

9.1

23,321

10.1

2015E

7,237

13.4

296,979

15.8

43,244

14.6

13.9

5,781

37,463

125

6,735

44,073

11,789

26.7

32,284

38.4

10.9

32,284

38.4

(INR Million)

2016E

8,164

12.8

339,835

14.4

49,500

14.6

4,499

45,001

125

7,812

52,688

14,441

27.4

38,248

18.5

11.3

38,248

18.5

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Deferred Tax

Loans

Capital Employed

Application of Funds

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Investments

Curr.Assets, L & Adv.

Inventory

Sundry Debtors

Cash & Bank Balances

Loans & Advances

Others

Current Liab. & Prov.

Sundry Creditors

Other Liabilities

Provisions

Net Current Assets

Application of Funds

E: MOSL Estimates

2012

399

42,499

42,898

2,083

17,143

62,124

2013

399

49,663

50,062

1,324

3,022

54,408

2014E

399

57,755

58,154

1,324

1,900

61,378

2015E

399

73,792

74,192

1,324

-100

75,416

(INR Million)

2016E

399

94,633

95,032

1,324

-100

96,256

63,083

25,228

37,855

388

39,643

21,003

6,756

2,723

768

10,092

664

36,765

22,932

2,933

10,901

-15,762

62,124

67,355

36,645

30,710

621

36,238

28,848

6,368

6,650

1,810

13,336

683

42,008

18,733

8,876

14,399

-13,161

54,408

82,976

48,077

34,899

1,000

36,238

34,050

6,927

7,234

4,638

14,508

743

44,809

20,379

8,786

15,644

-10,759

61,378

94,976

53,858

41,117

1,000

36,238

47,548

8,019

8,374

13,500

16,794

861

50,488

23,591

10,171

16,727

-2,940

75,416

104,976

58,357

46,619

1,000

36,238

68,989

9,176

9,583

30,028

19,218

985

56,590

26,995

11,638

17,956

12,399

96,256

December 2013

Automobiles

HMCL: Financials and Valuation

Ratios

Y/E March

Basic (INR)

EPS

EPS Growth (%)

Cash EPS

Book Value per Share

DPS

Payout (Incl. Div. Tax) %

Valuation (x)

P/E

Cash P/E

EV/EBITDA

EV/Sales

Price to Book Value

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors (Days)

Working Capital (Days)

Asset Turnover (x)

Fixed Asset Turnover

Leverage Ratio

Debt/Equity (x)

2012

119.1

18.4

132.0

214.8

45.0

43.5

2013

106.1

-10.9

120.2

250.7

60.0

65.1

2014E

116.8

10.1

132.2

291.2

65.0

64.0

2015E

161.7

38.4

190.6

371.5

70.0

49.8

(INR Million)

2016E

191.5

18.5

214.1

475.9

75.0

45.0

19.5

17.2

12.2

1.6

8.2

2.9

17.7

15.6

10.0

1.5

7.1

3.1

12.8

10.8

8.4

1.2

5.6

3.4

10.8

9.6

7.0

1.0

4.3

3.6

65.6

49.9

45.6

43.6

43.1

55.2

48.8

64.6

45.2

61.5

-25

3.8

5.9

-20

4.3

6.9

-15

4.2

7.8

-4

3.9

7.8

3.5

7.7

0.4

0.1

0.0

Cash Flow Statement

Y/E March

Profit before Tax

Depreciation & Amort.

Direct Taxes Paid

(Inc)/Dec in Working Capital

Interest/Div. Received

Other Items

CF from Oper. Activity

(Inc)/Dec in FA+CWIP

(Pur)/Sale of Invest.

CF from Inv. Activity

Interest Paid

Dividends Paid

CF from Fin. Activity

Inc/(Dec) in Cash

Add: Beginning Balance

Closing Balance

E: MOSL Estimates

December 2013

2012

28,647

2,807

-5,827

-6,906

698

-3,290

16,130

-5,034

13,430

8,396

-213

-24,369

-24,582

-56

393

337

2013

25,292

3,941

-6,133

-7,872

1,073

-3,800

12,500

-6,004

5,079

-925

-119

-10,444

-10,563

1,012

337

1,349

2014E

31,843

3,082

-8,522

-696

125

25,832

-7,650

-125

-15,229

-15,354

2,827

1,810

4,638

2015E

44,073

3,781

-11,789

-956

125

35,234

-10,000

-125

-16,247

-16,372

8,863

4,638

13,500

(INR Million)

2016E

52,688

4,499

-14,441

1,188

125

44,060

-10,000

-125

-17,407

-17,532

16,528

13,500

30,028

16 December 2013

Thematic | Sector: Automobiles

Bajaj Auto

BSE SENSEX

S&P CNX

20,716

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

1,6,12 Rel.Perf.(%)

6,168

BJAUT IN

289.4

552/8.9

CMP: INR1,908

TP: INR2,255

Buy

Would exports make up for absence in scooters?

Asean, Brazil markets vital to sustain volume growth



52-Week Range (INR)2,229/1,656

-8/0/-16



Valuation summary (INR b)

Y/E March

Sales

EBITDA

EPS Gr. (%)

RoE (%)

RoCE (%)

Payout (%)

Valuations

P/E (x)

P/BV (x)

Div. Yield (%)

16.0

5.7

2.6

13.7

4.7

8.5

3.1

11.8

3.9

6.8

3.4



2014E 2015E 2016E

210.5 241.0 281.9

43.5

34.5

13.4

39.3

54.7

49.0

50.3

40.3

16.7

37.8

52.3

50.1

59.4

46.6

15.8

36.1

49.8

46.9



Adj. EPS (INR) 119.3 139.2 161.1

BV/Sh. (INR) 333.9 403.3 488.9



Bajaj exited scooters segment in 2010 to be a global motorcycle specialist. It aims

to garner a higher market share in the global motorcycle market, together with

industry leading profitability.

Company’s strategy of specialization has worked well over the past few years, with

superior profitability versus peers, despite weak motorcycle demand environment.

However, inroads into Japan-dominated Asean and Brazilian market are imperative

to maintain healthy volume growth over the long term, considering its absence

from the scooter segment.

Despite assuming 12% export volume growth, Bajaj could underperform the industry

by 3% over FY14E-20E due to absence from scooters.

Company would benefit on a) resumption in up-trading in domestic motorcycles

driven by economic and consumer sentiment recovery and b) revival in exports,

which could offset the negative of absence in scooters segment. We prefer HMCL

and TVSL to play the trend of rising scooter share.

EV/EBITDA (x) 10.4

Shareholding pattern (%)

As on

Sep-13

Promoter

62.1

Dom. Inst

8.1

Foreign

11.1

Others

18.8

Jun-13 Sep-12

62.1

61.0

9.7

11.7

9.7

10.5

18.6

16.9



Stock performance (1 year)



Bajaj exited scooters to be a global motorcycle specialist:

Faced with declining

scooter sales and the need to be a global motorcycle specialist, Bajaj exited

the scooter space in 2010. With its specialization strategy, focused approach

on motorcycles coupled with KTM and Kawasaki’s association, Bajaj aims to

garner a higher share of the global motorcycle market (currently estimated

at 10%), together with industry leading profitability.

Specialization strategy lends superior profitability despite weak demand:

Bajaj’s strategy of specialization has worked well over the past few years

and has been one of the key reasons for its superior profitability versus

peers, despite weak demand environment for motorcycles.

Inroads into Japan dominated Asean and Brazilian market imperative to

maintain healthy volume growth over long term:

While the current growth

in exports is driven by the under-developed and developing economies,

going forward Bajaj due to its association with KTM and Kawasaki plans to

aggressively enter the Japan dominated Asean (annual sales of 15m units)

and Brazil market (annual sales of 2m units). Asean markets are dominated

by Japan majors like Honda and Yamaha. Except Philippines, Bajaj’s previous

attempts into the Asean markets have been unsuccessful.

Company could underperform the industry due to absence from scooters:

Assuming a 12% export volume CAGR over FY14E-20E, Bajaj could

underperform the two-wheeler industry by 3% due to absence from the

fast-growing scooter industry.

Valuation & view:

While valuations at 14x FY15 and 12.1x FY16 EPS are

reasonable, demand recovery along with stability in competitive intensity

would be the key driver for the stock performance. Maintain

Buy

with target

price of INR2,255 (14x FY16E EPS).

December 2013

Automobiles

Bajaj exited scooters to be a global motorcycle specialist, with focus on

superior profitability



Faced with declining scooter sales and the need to be a global motorcycle specialist,

Bajaj exited the scooter space in 2010.

With its specialization strategy, focused approach on motorcycles coupled with

KTM and Kawasaki’s association, Bajaj aims to garner a higher share of the global

motorcycle market (currently estimated at 10%), together with industry leading

profitability.

Recent comment by Rajiv Bajaj sums up their position on scooters “Great brands

are built on the foundation of sacrifices. Making more scooters doesn’t mean

making more money. We are a specialist motorcycle company. We won’t venture

out of that easily.”

Bajaj’s strategy of specialization has worked well over the past few years and has

been one of the key reasons for its superior profitability versus peers, despite

weak demand environment for motorcycles.

However, BJAUT’s market share has been impacted as scooter has grown at 2x of

motorcycle volumes over last 5 years, as a result its domestic two wheeler market

share has shrunk by 530bp since FY08 to ~17.9% in FY13 (~15.4% in 1HFY14).

Bajaj's market share in domestic two wheeler on a declining trend

Dom. motorcycl e s hare (%)

37.0

32.0

27.0

22.0

17.0

12.0

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

1HFY14

Dom. 2W s ha re (%)

Source: Company, MOSL

Exports offers significant headroom to grow, but inroads into ASEAN and

Brazil market key to maintain healthy growth

Bajaj Auto, due to its headstart in exports and well placed global alliances (with

KTM and Kawasaki), is best placed to benefit from this huge opportunity in the

international market.



While the current growth in exports is driven by the under-developed and

developing economies, going forward Bajaj due to its association with KTM and

Kawasaki plans to aggressively enter the Japanese dominated Asean (annual sales

of 15m units) and Brazil market (annual sales of 2m units).



ASEAN and Brazil markets are dominated by Japan majors like Honda and Yamaha.

Except Philippines, Bajaj’s previous attempts into the Asean markets have been

unsuccessful. Both of its alliances with KTM (for LatAm) and Kawasaki (for ASEAN)

are expected to play major role in gaining foothold in these two markets.



December 2013

Automobiles



In most of its existing export markets, BJAUT is the market leader and is expected

to grow in-line with the industry with limited scope of further market share gain.

BJAUT exports are predominantly to Africa and South Asia

La ti n Ameri ca

40%

Afri ca

As i a & ME

Europe

32%

41%

18%

FY12

47%

20%

FY13

Source: Company, MOSL

Could underperform the industry in the long term due to absence in scooters

Assuming a 12% export volume CAGR over FY14E-20E, Bajaj could underperform

the two-wheeler industry by 3% due to absence from the fast-growing scooter

industry.



However, Bajaj could benefit from:



Up-trading in domestic motorcycles driven by economic and consumer

sentiment recovery



Revival in exports, which could offset the negative of absence from scooters

segment.



Based on our estimates, we expect BJAUT motorcycle volumes to grow at 9.1%

CAGR over FY14-20E vis-à-vis industry growth (including exports) of 12.4%. It would

be critical for BJAUT to succeed in ASEAN and Brazilian markets (not factored in

our estimates) to make-up for absence in scooters.



Bajaj Auto to underperform industry growth due to lack of presence in scooters

Bajaj

Dom. M/C share (%)

Vols.

Implied dom. 2W share (%)

Export vols.

Export share (%)

Total (units)

Industry (Dom + Exports)

Underperformance

FY14E

2,288,022

15.7

1,286,810

36.0

3,574,832

16,617,468

FY20E

3,472,274

12.0

2,539,934

42.2

6,012,208

33,451,907

CAGR (%)

7.2

3.6

12.0

9.1

12.4

3.3

Source: MOSL

December 2013

Automobiles

Well diversified product/market mix, with limited exposure to domestic

executive level segment

Well diversified product/market mix, with 2W exports & 3W volumes contributing

27% & 21% respectively to total revenues.



Exposure upto 110cc motorcycle segment, where competitive intensity is

increasing, is only ~29% of volumes.



Exports, which are scaling up rapidly, is expected to contribute ~41% to FY14

revenues, and would benefit from alliance with Kawasaki (market access) and

KTM (access to brand, technology & markets).



Bajaj’s 3W passenger business is virtual monopoly with over 85% market share in

permit segment and ~65% market share in over all passenger segment. 3W business

enjoys margins of over 30%.



Well diversified revenues, with domestic two-wheelers contributing ~42%

Dom - 2W

Dom - 3W

Exports - 2W

Exports - 3W

Spare s a l es

FY08

FY09

FY10

FY11

FY12

FY13

FY14E

FY15E

Source: Company, MOSL

Only ~15% of EBITDA at risk due to HMSI’s focus on entry/executive level

motorcycle

Considering BJAUT’s well diversified product portfolio and market mix, we

estimate ~28% EBITDA contribution from domestic motorcycle and ~14% from

domestic entry/executive segment motorcycle (as of 1HFY14).



Exports contribute ~50% to EBITDA, where as domestic premium segment and

domestic 3W would contribute ~14%/12%.



EBITDA contribution from domestic two-wheeler business at ~28% (1HFY14)

Spa res

12%

Exports - 3W

18%

Domes ti c -

Entry/Executi ve

14%

Domes ti c -

Premi um

16%

Exports - 2W

29%

Domes ti c - 3W

12%

Source: Company, MOSL

December 2013

Automobiles

Margin resilience despite various adverse developments, a reflection of

business model and weaker INR

BJAUT’s maintained its profitability in 18-20% range in FY13 despite a) adverse

product mix (lower exports to high margin Sri Lanka market), reduction in export

incentives (from 5.5% to 2% effective Oct-12) and marginal decline in volumes.



Margin resilience signifies the success of its twin brand strategy as well as reflects

the inherent strength of its strategy of differentiation and deeper market

segmentation.



BJAUT, being one of the largest net exporters from India, would be one of the

biggest beneficiaries of of weak INR.



We estimate exports of ~USD1.4/USD1.6b in FY14/FY15, at USD/INR rate of 60. For

every INR1 movement, BJAUT’s margins/EPS for FY15 change by 50bps/2.7%.



EBITDA margins resilient despite pressure on volumes

EBITDA ma rgi ns (%)

30.0

34.1

20.9

13.7

14.3

13.5

21.7

19.3

19.0

18.2

(2.6)

FY10

FY11

FY12

FY13E

20.7

12.5

Vol ume Growth (%)

21.1

14.5

(9.9)

(10.5)

FY08

FY09

(5.6)

FY14E

FY15E

FY16E

Source: Company, MOSL

Valuation & view

We believe BJAUT’s lack of presence in scooter is made up with its well diversified

product portfolio, significant headstart in exports, well positioned global strategic

alliances, premium profitability and consistent step-up in dividends.



However, its decision to be a global motorcycle specialist and sacrificing

opportunity in scooter segment, would result in BJAUT missing out in strong growth

potential of the scooter segment.



We are downgrading our FY14/FY15 EPS estimates by ~2% each to ~INR119/INR139

to factor in for weak volume momentum.



While valuations at 13.7x FY15 and 11.8x FY16 EPS are reasonable, demand recovery

along with stability in competitive intensity would be the key driver for the stock

performance. Maintain

Buy

with target price of ~INR2,255 (14x FY16E EPS).



December 2013

Automobiles

BJAUT: Financials and Valuation

Income Statement

Y/E March

Volumes

Change (%)

Net Sales

Change (%)

EBITDA

Change (%)

EBITDA Margins (%)

Depreciation

EBIT

Int. & Fin. Charges

Other Income

Non-recurring Exp.

PBT

Tax Rate (%)

PAT

Adj. PAT

Change (%)

Balance Sheet

Y/E March

Share Capital

Reserves

Net Worth

Deferred Tax

Loans

Capital Employed

Gross Fixed Assets

Less: Depreciation

Net Fixed Assets

Capital WIP

Investments

Current Assets

Inventory

No. of Days

Sundry Debtors

Cash & Bank Balances

Loans & Advances

Others

Current Liab. & Prov.

Sundry Creditors

No. of Days

Other Liabilities

Provisions

Net Current Assets

No. of Days

Application of Funds

E: MOSL Estimates

2012

4,349,560

13.7

195,290

19.1

37,200

17.3

19.0

1,456

35,744

222

6,080

1,340

40,262

25.4

30,041

31,069

18.8

2013

4,237,151

-2.6

199,973

2.4

36,353

-2.3

18.2

1,640

34,713

7,955

42,662

28.7

30,436

(2.0)

2014E

4,000,094

-5.6

210,535

5.3

43,500

19.7

20.7

1,793

41,707

7,614

49,308

30.0

34,515

13.4

2015E

4,500,473

12.5

240,996

14.5

50,285

15.6

20.9

2,013

48,272

9,274

57,536

30.0

40,276

16.7

(INR Million)

2016E

5,153,493

14.5

281,859

17.0

59,406

18.1

21.1

2,148

57,258

9,357

66,605

30.0

46,623

15.8

(INR Million)

2016E

2,894

138,573

141,467

4,620

713

146,800

49,224

26,198

23,026

1,000

64,305

129,127

10,571

6,506

86,837

21,146

4,067

70,659

30,906

8,133

31,620

58,469

146,800

2012

2,894

57,517

60,411

484

975

61,870

33,961

19,143

14,817

417

48,828

46,749

6,785

4,228

16,538

16,227

2,970

48,941

20,031

7,161

21,749

-2,192

61,870

2013

2,894

76,126

79,020

1,151

713

80,883

38,289

20,244

18,044

2,936

64,305

39,502

6,363

7,676

5,589

17,741

2,133

43,903

19,796

6,682

17,425

-4,401

80,883

2014E

2,894

93,714

96,608

2,137

713

99,457

43,224

22,037

21,187

1,000

64,305

66,147

7,853

4,834

34,125

16,314

3,021

53,181

22,960

6,042

24,178

12,966

99,457

2015E

2,894

113,811

116,704

3,288

713

120,705

46,224

24,050

22,174

1,000

64,305

95,025

9,016

5,549

58,956

18,035

3,468

61,799

26,360

6,937

28,503

33,226

120,705

December 2013

Automobiles

BJAUT: Financials and Valuation

Income Statement

Y/E March

Basic (INR)

EPS

Core EPS

Cash EPS

Book Value per Share

DPS

Payout (Incl. Div. Tax) %

Valuation (x)

P/E

Cash P/E

EV/EBITDA

EV/Sales

Price to Book Value

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios

Debtors (Days)

Inventory (Days)

Creditors (Days)

Working Capital (Days)

Leverage Ratio

Debt/Equity (x)

2012

107.4

90.6

112.4

208.8

45.0

48.7

2013

105.2

83.2

110.8

273.1

45.0

49.7

2014E

119.3

98.2

125.5

333.9

50.0

49.0

2015E

139.2

113.5

146.1

403.3

60.0

50.1

(INR Million)

2016E

161.1

135.3

168.5

488.9

65.0

46.9

17.8

17.0

13.1

2.5

9.1

2.4

18.1

17.2

13.3

2.4

7.0

2.4

16.0

15.2

10.4

2.2

5.7

2.6

13.7

13.1

8.5

1.8

4.7

3.1

11.8

11.3

6.8

1.4

3.9

3.4

56.7

73.0

43.7

59.8

39.3

54.7

37.8

52.3

36.1

49.8

-16

-10

-17

0.0

Cash Flow Statement

Y/E March

2012

OP/(Loss) before Tax

38,829

Interest/Div. Received

3,261

Depreciation & Amort.

1,456

Direct Taxes Paid

-11,483

(Inc)/Dec in Working Capital

797

CF from Oper. Activity

32,860

(Inc)/Dec in FA+CWIP

(Pur)/Sale of Invest.

CF from Inv. Activity

Inc. / Dec.in Networth

Inc/(Dec) in Debt

Interest Paid

Dividends Paid

CF from Fin. Activity

Inc/(Dec) in Cash

Add: Beginning Bal.

Closing Balance

E: MOSL Estimates

December 2013

-1,159

-6,557

-7,716

-2,001

-222

-13,420

-15,644

9,501

5,565

15,066

2013

34,713

7,955

1,640

-11,560

-8,740

24,007

-7,386

-15,477

-22,862

3,307

-262

-5

-15,134

-12,094

-10,950

16,538

5,589

2014E

41,707

7,614

1,793

-13,806

11,169

48,476

-3,000

-13

-16,927

-16,940

28,536

5,589

34,125

2015E

48,272

9,274

2,013

-16,110

4,571

48,020

-3,000

-10

-20,179

-20,189

24,831

34,125

58,956

(INR Million)

2016E

57,258

9,357

2,148

-18,649

2,639

52,752

-3,000

-10

-21,860

-21,870

27,881

58,956

86,837

16 December 2013

Thematic | Sector: Automobiles

TVS Motor

BSE SENSEX

S&P CNX

20,716

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

6,168

TVS IN

475.1

25.5/0.4

56/28

10/50/32

CMP: INR54

TP: INR85

Buy

A dark horse

Well seated for scooter ride, good product pipeline; favorable risk-reward



Valuation summary (INR b)

Y/E March

Sales

EBITDA

Adj. PAT

EPS (INR)

EPS Gr. (%)

BV/Sh (INR)

RoE (%)

RoCE (%)

Payout (%)

Valuations

P/E (x)

P/BV (x)

EV/EBITDA (x)

Div. Yield (%)

10.1

1.8

6.4

2.8

7.2

1.5

4.6

3.7

5.7

1.3

3.4

4.7

2013 2014E 2015E

78.5

4.6

2.5

5.3

39.9

29.8

19.2

19.3

30.2

93.3 106.9

5.9

3.6

7.5

40.4

35.0

23.1

24.3

31.3

7.1

4.5

9.4

25.9

41.5

24.6

26.9

31.0



TVSL is well positioned to benefit from the scooterization wave with its complete

scooter porfolio. Over the next 12-18 months, TVSL plans to launch multiple products

across segments to reinforce and fill gaps in product portfolio.

Operating leverage and mix to drive margins from 5.8% in FY14E to 6.7% in FY16E.

EBITDA losses in Indonesian operations continue to reduce. Any further clarity (success

of recent launch or closur e of operations) could also act as a re-rating trigger.

Expect earnings CAGR of 33%, FCF of 24.8% over FY14E-16E with return ratios (RoE)

improving from 19.2% in FY14E to 24.6% in FY16E.

Initiate coverage with a Buy rating and target price of INR85. We value TVSL at 9x

FY16E standalone EPS.



Shareholding pattern (%)

As on

Sep-13 Jun-13 Sep-12

Promoter

57.4

Dom. Inst

Foreign

Others

18.3

2.9

21.4

18.1

3.0

21.5

18.3

1.7

22.6



Stock performance (1 year)

TVS Mo tor

S ens ex - R ebas ed



TVSL is well positioned to benefit from the scooter ride:

With the recent

launch of Jupiter, TVSL has the complete range of scooters, with product

across every sub-segment (women, unisex, men). Response to Jupiter has

been strong, with a waiting period of three months in non-South markets

(South launch, 60% of TVSL scooter market, expected in 4QFY14). Upcoming

launch of Scooty Zest (110cc engine, currently offering 90cc variant) will

further strengthen its positioning in the women's scooter space. Expect

scooter volumes to register a CAGR of 19.5% over FY14E-16E driven by product

actions, capacity ramp-up and robust scooter industry growth.

Strong product pipeline to reinforce, fill gaps in portfolio:

Limited product

actions were the key reason for significant market share loss from 22.3% in

FY03 to 12% in 1HFY14. Unlike the past, TVSL has a strong product pipeline

and plans to launch a product every quarter, including two new executive

motorcycles and diesel three-wheeler.

Success of new launches could give disproportionate gains given wide

distribution network and low base:

Due to its widespread distribution

network (second best to Hero Moto) and low base, success of any one or two

launches could drive disproportionate gains in market share and volumes.

Expected recovery in South from 4QFY14 to drive cyclical recovery in volumes:

TVSL has high exposure to South/Tamil Nadu with 56%/33% of its FY13 volumes

(v/s industry share of 31%/11%) respectively. With a favorable monsoon,

adequate water levels in reservoirs and reducing power deficit, recovery in

demand from southern market is expected to drive strong volume

improvement from 4QFY14. New launches, expected recovery in South (56%

of volumes) coupled with robust 19.5% CAGR in scooter volumes to drive

13.2% CAGR in overall volumes over FY14E-16E

Sale of non-core investments coupled with healthy cash from operations to

transform the company into net cash:

Healthy cash from operations (FCF

CAGR of 24.8% over FY14E-16E) coupled with sale of non-core investments

would transform the company into net cash by FY16E from net debt of INR6.2b

TVS Motor

in FY13. TVSL recently sold its majority stake in its energy venture thereby

reducing consolidated debt by INR2.6b.



EBITDA losses in Indonesian operations reduce:

Recent launch of Skubek TVSL

Dazz

(automatic transmission step-thru, 61% of the market) could improve

company's Indonesia performance. We, however, conservatively factor annual

EBITDA losses and incremental investments of INR500m over FY14E-16E (v/s

FY13 EBITDA loss of INR375m and NIL investments in FY13). Total investments

would increase from INR4.7b in FY13 to INR6.2b by FY16E.



BMW Motorrad tie-up to give additional revenue stream and technological

edge:

We believe this tie-up would give TVSL an additional revenue stream in

the form of contract manufacturing for BMW Motorrad. Moreover, it would give

an aspirational value to TVSL products, particularly for its premium products.

TVSL would invest EUR20m over CY13-15 with first product expected to be

launched by CY15-end. Due to inadequate details, we have not factored the

P&L implications, though ave covered the investment requirements on a

conservative basis.

Valuation and view: Risk-reward favorable; bull case returns could be 80%



Considering well positioned scooter portfolio, robust product pipeline coupled

with possibility of disproportionate gains on new launch success, we believe

risk-reward is favorable.



Expect earnings CAGR of 33% over FY14E-16E driven by volume CAGR of 13.2%,

margin improvement of 5.8% to 6.7% by FY16 and reduction in interest cost.



Initiate coverage with a Buy rating and target price of INR85. We value TVSL at

9x FY16E standalone EPS.



Key risks:

1) Failure of new launches, 2) higher than estimated cash losses in

Indonesian operations, 3) Higher than expected investments outside standalone

business.

16 December 2013

TVS Motor

Story in charts







Significant market share loss over last 10 years due to

limited product actions compared to peers

Expected recovery in South to benefit TVSL considering

its high exposure (56% of vols.) versus industry (31%)

New launches, strong scooter growth and recovery in

South to drive volume CAGR of 13.2% over FY14E-15E







Unlike past, TVSL has a robust product pipeline over the

next 12-18 months, including two new motorcycles

New launch success could give disproportionate gains

given wide network and low base

Strong 16.7% CAGR in revenues driven by volume growth

of 13.2% CAGR and realization increase.



Significant market share loss over last 10 years

Domestic 2W share (%)



Robust product pipeline over 12-18 month (indicative)

Timeline Product

2QFY14 Jupiter

4QFY14 Jupiter

4QFY14

1QFY15

1HFY15

Comments

Launch in non-South states

Launch in Southern states

(60% of TVSL scooter market)

Scooty Zest 110cc engine as in Wego, Jupiter

Star City

Product upgrade (all-new platform)

Diesel 3W Diesel segment constitute 65% of three-

wheeler market

Victor

To share platform with

Star City upgrade model

4-stroke

To improv e fuel efficiency signific a ntly

Moped



Expected recovery in South 4Q onwards beneficial to TVSL (%)



Wide distribution to be supplemented with new launches

No rth

Ea st

We st

Sout h

TVS Motor

Ind ust ry

Hero Moto

TVS Motor

Ba jaj Auto

HMSI

No. of dealers

900

850

650

700



Expect volume CAGR of 13.2% over FY13-15E

To tal vol umes (' 000 u ni ts)

15.2

11.3

8.2

4.1

2,032

‐7.5

2,198

FY12

FY13

2,116

FY14E

2,439

FY15E

2,713

FY16E

Growth (%)



Strong 16.7% CAGR in revenues led by volume growth

Net sales (INR m)

44.1

106,858

93,289

62,880

71,415

13.6

-1.1

FY11

FY12

FY13

FY14E

FY15E

FY16E

Growth (%)

70,650

78,524

18.8

11.1

14.5

16 December 2013

TVS Motor

Story in charts







Expect margins to improve on higher volumes and better

mix

Return ratios to improve with higher revenue growth

and better profitability

High cash from operations, limited investments outside

standalone business to transform into net cash company







PAT growth to be higher with better margins and lower

interest cost

FCF to register a CAGR of 24.8% over FY14E-16E despite

high capex

EBITDA losses on a reducing trend in Indonesia, further

clarity (on closure of operations) a re-rating trigger



Higher volumes and better mix to drive margins

6.6

EBITDA ma rgi n (%)

6.2

5.8

6.7



Higher PAT growth with better margin, lower interest cos t

PAT (INR m)

39.9

26.3

Growth (%)

40.4

25.9

5.8

(27.3)

2,491

1,810

FY13

2,532

F Y14E

3,555

F Y15E

4,476

F Y16E

FY12

FY13

FY14E

FY15E

FY16E

FY12



Return ratios to improve with better profitability

RoCE (%)

23.0

19.2

15.1

19.8

19.3

24.3

26.9

RoE (%)

23.1

24.6



FCF to register a CAGR of 24.8% over FY14E-15E

CFO (INR m)

4,440

2,672 3,303 2,536

Cape x (INR m)

5,232

3,278

FCF (INR m)

6,569

6,315

5,015

4,756

15.7

‐767

‐1,768

‐1,953

FY13

FY14E

‐1,559

FY15E

‐1,554

FY16E

F Y12

FY13

F Y14E

FY15E

FY16E

FY12



High FCF to transform into net cash company by FY16E

Net d ebt (INR m)

571

480

8,181

6,170

3,886

FY12

FY13

FY14E

FY15E

1,289

‐1,318

FY16E

198

In terest co st (INR m)



EBITDA losses reducing in Indonesia (INR m)

FY10

FY11

FY12

FY13

19,000

-17.4

1,000

-375

-37.5

-245

4,742

38.7

Sales volumes (units)

15,000 19,800 23,000

Growth (%)

32.0

16.2

Revenues

683

854

1,074

EBITDA

-642

-584

-490

EBITDA Margin (%)

-94.0

-68.4

-45.6

PAT

-1,017

-623 -1,124

Cumm. Investments

2,928

3,524

4,742

% of S/A Net Worth

33.8

35.3

40.5

FY13 post USD16.7m gain on sale of surplus land

16 December 2013

TVS Motor

Stretched R&D impacted TVSL’ market share

Limited launches, product specific issues, shift in market preference for bigger

scooters significantly dented its market position



Constrained R&D bandwidth, post split with Suzuki in 2001, led to inadequate product

actions in the past.

Despite launching motorcycles at par on technology with peers over the last three to five

years, it suffered due to product specific issues.

Shift in market preference for bigger/higher engine capacity scooter impacted its share

in scooters.

"R&D handled too many

projects at the same

time.''- Mr KN

Radhakrishnan,

President, TVSL in an

interview with Business

Today in April 2008

Constrained R&D bandwidth, post split with Suzuki in 2001, led to inadequate

product actions in the past:

During the early phase of ramping up its R&D capabilities

(post split with Suzuki in 2001), TVSL had spread itself too thin. At one point, the

R&D team was working on five projects that were diverse in terms of segments

(entry, executive and premium motorcycles), geographies (a step-through model

for the Indonesian market) and a three-wheeler. This constrained TVSL’ R&D

bandwidth which resulted in relatively lower new launches/timely upgrades of

existing successful products like

Victor.



Despite launching motorcycles at par on technology with peers over the last 3-5

years, it suffered due to product specific issues:

For instance,

Jive

(110cc auto-

clutch motorcycle) was a technologically innovative product. However, it failed to

find acceptance among customers. Similarly,

TVS Flame

(aggressive styling with

‘twin-spark-plug’ technology) lost its momentum due to the long drawn legal

battle with Bajaj Auto (which TVSL won in the Supreme Court in 2009).



Shift in market preference for bigger/higher engine capacity scooter impacted its

share in scooters:

TVSL was the second largest player in the scooter segment, with

26.6% share in FY06. How ever, its product offering in scooters was entirely

dependent on

Scooty

brand (only 70cc variant then). With launch of

Hero Pleasure

in 2006 (with a bigger 100cc engine) coupled with rising preference for family

scooter (due to universal appeal), TVSL lost significant market share in scooters.



Significant decline in market share over the years…

Domestic 2W share (%)

...Primarily due to absence in the executive motorcycle

segment (constitutes over 60% of volumes)…

Dom. Motorcycl e sh are (%)

15.3

19.2

12.9

16.4

12.9

8.7

6.7

7.9

7.0

6.2

5.5

Sour ce: Company, MOSL

16 December 2013

TVS Motor

…coupled with preference shift for bigger/family segment...

S ma l l scoo ters

Large scoo ters

...impacted its share in scooters too

Dom. Sco oters sha re (%)

25.7

21.4

26.6

23.7

17.9

14.7

20.9

23.8

20.5

21.5

19.4

15.8

FY12

F Y13

FY14YTD

F Y09

F Y10

FY11

Sour ce: Company, MOSL

TVSL’ new model introductions over 10 years much lower than competition

Compared to major competition in the two-wheeler space, the frequency of new

product launches has been relatively lower from TVSL. Moreover, as mentioned above,

due to its constrained R&D bandwidth, company was not able to sustain the momentum

of successful products like

Victor

due to absence of timely upgrade/refreshes.

TVSL’ launches were few and far compared to competition (motorcycles)

"Victor was a good first

attempt. It did well

initially before we

realised that durability of

certain parts was not

good enough,'' - Mr Vinay

Harne, Senior Vice-

President (R&D) in an

interview with Business

Today in April 2008.

TVS Motor

2013

Hero Moto

2012

Phoenix

Passion XPro,

Ignitor

Impulse

2011

2010

2009

Bajaj Auto

Discover 125T,

100M, 100T,

KTM 390

Pulsar 200NS,

Discover 125ST,

KTM 200

Discover 125

HMSI

Dream Neo

Dream Yug a,

CBR150R

CBR250R

CB Twister

Jive, Max 4R

Pulsar 135,

XCD 135,

Discover 100

Platina 125,

Discover 135

Hunk

XCD 125,

Pulsar 220,

Pulsar 200

Platina

CD Deluxe,

Discover 110,

Achiever, Super Avenger

Splendor, Glamour

Ambition

KT 100, Discover

CD Dawn,

Wind 125

Karizma

Dawn, Ambition

Passion, Joy

Elimina t o r,

Pulsar, Caliber

2008

2007

Flame

Star

CBF Stunner

2006

2005

Apache

CB Shine

2004

2003

2002

2001

2000

No. of models

Continuing model

Continuing model (%)

16 December 2013

CB Unicorn

Centra

Victor, F iero

100

Source: MOSL, Company

TVS Motor

Unlike past, TVSL has strong product pipeline

Well seated for the scooter ride



Common platform strategy to support series of new launches; TVSL plans to reduce the

platforms to two or three. This would improve the time to market, product quality and

dur ability, coupled with be tter profitability.

Plans to launch a product every quarter over the next 12-18 months. This will help to

strengthen its current offerings and fill gaps in the portfolio.

Given widespread distribution network and low base, successful product actions could

drive disproportionate gains in market share and volumes .

With the recent launch of Jupiter, TVSL has the complete range of scooters, with product

across every sub-segment. Management expects scooter volumes to increase to 55,000-

60,000 units in 4QFY14 v/s ~39,000 in 2QFY14.

TVSL's upcoming Scooty

upgrade will share the

same 110cc engine as

Wego and Jupiter.

Similarly, the new Star

City (all-new platform)

and Victor motorcycle

would share the same

platform, stated a West-

based TVSL Dealer

Common platform strategy to support series of new launches:

Historically, TVSL had

multiple platforms across its two-wheeler portfolio. Now, it has adopted a common

platform strategy and plans to reduce it to two to three common platforms straddling

across segments. This would enable the company to quicken product introductions,

timely upgrades/refreshes, coupled with associated benefits of margin

improvement led by higher commonality of parts/consolidation of supplier base.



Plans to launch a product every quarter,

including two executive motorcycles,

Scooty Zest

(with 110cc engine) and diesel three-wheelers. Multiple product actions

will strengthen its current offerings and fill gaps in product portfolio.



Robust product pipeline over the next 12-18 months (Indicative list)

Timeline

2QFY14

4QFY14

1QFY15

1HFY15

Product

Jupiter

Scooty Zest

Star City

Diesel 3W

Victor

4-stroke Moped

Comments

Launch in non-South states

Launch in Southern states (60% of TVSL scooter market)

110cc engine as in Wego, Jupiter

Product upgrade (all-new platform)

Diesel segment constitute 65% of three-wheeler market

To share platform with Star City upgrade model

To improv e fuel efficiency signific a ntly

Source: Compan y, Industr y, MOSL

"TVS was slower in

launching the product for

the last three years,

because we invested the

time on quality. Going

forward, every quarter

we will introduce one

new product," - Venu

Srinivasan, CMD, TVSL

New launches to fill gaps in product portfolio

BJAUT

Scooter

HMCL

Pleasure,

Maestro

HMSI

Activa,

Dio,

Aviator

Dream Neo,

Dr eam Y uga,

Shine

Unicorn,

Trig ger,

CBR150R,

CBR250R

TVS

Scooty,

Wego,

Jupiter*

Star City,

Star Sports

Phoenix,

Victor**

Apache

Motorcycle

Economy

Executive

Platina

Discover (100cc,

125cc, 150cc)

Pulsar,

KTM,

Kawasaki

CD Deluxe

Splendor,

Passion,

Glamour

X-treme,

Hunk,

Karizma

Premium

Moped

*Recently launched, ** Upcoming launch

16 December 2013

XL Super

Sour ce: Company, MOSL

TVS Motor

Victor re-launch should

strengthen TVSL's

presence in executive

segment i.e in ~45% of

the domestic two-

wheeler market

Given widespread distribution network and low base, success of new launches

could drive meaningful volume rise:

TVSL has a wide reach with over 850 dealers,

second best only to market leader Hero MotoCorp (~900 dealers) and much ahead

of Bajaj (~650 dealers) and HMSI (~700 dealers). Success of new launches could

give huge fillip to market share and volumes considering low base.



Recent launch of

Jupiter

scooter completes the scooter portfolio:

To strengthen its

presence in the executive motorcycle segment, TVSL had launched

Phoenix

125cc

motorcycle in September 2012. With recent

Jupiter

(110cc scooter) launch, TVSL has

a complete scooter portfolio. The scooter has been launched in non-South market

and has received strong response with waiting of thee months. Launch in South is

expected in January 2014 (coinciding with

Pongal

festival). Management expects

scooter volumes to increase to 55-60,000 units in 4QFY14 v/s ~39,000 in 2QFY14.



TVSL plans to launch two executive motorcycles; recent

launch of

Phoenix

motorcycle has been received well

TV S: Segme nt-wi se moto rcycl e marke t sh are (%)

20.1

Executive segment is the largest in motorcycles

with over 60% volume share

Segmen t-wi s e motorcycl e sh are o f i ndus try

vol s (%)

7.3

1.6

Eco nomy

Executi ve

Premi um

Econ omy

Executi ve

Premi u m

Sour ce: Company, MOSL

Launch of new

Scooty Zest

(with 110cc engine) to strengthen

presence in the small segment, while production ramp-up in

Jupiter

to boost market share in bigger/family segment

26.5

TVS: Segment-wise scooter market share (%)

TVSL network second best only to market leader

Hero Moto

No. of dealers

900

850

650

700

7.2

9.73

Apr-Aug 2013

(b efore Jupi ter)

Smal l

Se pt-Oct (after

Jup i ter)

He ro Moto

TVS Mo to r

Baja j Auto

HMSI

Bi gger/Fami l y Se gment

Sour ce: Company, MOSL

16 December 2013

TVS Motor

TVS

Scooty

aimed at female drivers

(currently 70cc, 110cc engine variant

launch in Jan-14)

TVS

Wego

positioned as

unisex product (110cc engine)

TVS

Jupiter

targeted for male

riders (110cc engine)

With the recent launch of Jupiter, TVSL has the complete range of scooters, with product across

every sub-segment (women, unisex, men)

Sour ce: Company, MOSL

16 December 2013

TVS Motor

Expected recovery in South to drive volumes

TVSL derived 56%/33% of its FY13 volumes from South/Tamil Nadu



Consumer sentiments in southern region, particularly Tamil Nadu, have been weak over

the last couple of years due to drought and major power shortage which impacted

industrial activity and small-scale industries. This had impacted TVSL’ volumes, particularly

its mopeds.

Going forward, income levels and consequent sentiments (mainly in rural belts) are

expected to improve with favorable monsoon, adequate water levels in reservoirs and

improvement in power availability.

TVSL has a high exposure to the southern region with 56% of its FY13 volumes v/s

industry exposure of 31%. Expected recovery in demand in southern region from 4QFY14

onwards would benefit TVSL given its high exposure



Southern region, particularly Tamil Nadu, has performed relatively weak:

Consumer sentiments in the southern region, particularly Tamil Nadu, have been

weak over the last couple of years due to a drought and major power shortage

which impacted industrial activity and small-scale industries. Given its high

exposure to the southern region, TVSL’s volumes, mainly moped sales, were

impacted.

Among south, exposure to Tamil Nadu is the highest (%)

TVSL derived 56% of its FY13 volumes from south (%)

North

Ea s t

Wes t

TVS Motor

Indus try

South

Source: Industry, MOSL

Tamil Nadu provide almost half of moped volumes…

FY13 State-wise sales break-up (%)

Others , 21

...weak sentiments in Tamil Nadu impacted moped sales

Growth YoY (%)

18.7 19.4

10.2

30.8

23.0

11.8

6.2

0.8

UP, 7

Tami l Nadu,

‐0.8

4.9

‐6.7

Andhra

Pradesh,

‐9.7

Karnataka, 9

Source: Industry, Company , MOSL

16 December 2013

TVS Motor



Favorable monsoon and better power availability to drive recovery 4QFY14

onwards:

Going forward, income levels and consequent sentiments (mainly in

rural belts) are expected to improve with favorable monsoon, adequate water

levels in reservoirs and improvement in power availability.

Expected recovery in South to drive volumes, given high exposure:

TVSL has a

high exposure to the southern region with 56% of its FY13 volumes v/s industry

exposure of 31%. In the southern region, exposure to Tamil Nadu, particularly for

scooters and mopeds at 33% and 47% respectively, is higher.

Power deficit trend improves in southern region (%)

South

Al l Indi a



Favorable monsoon across regions

Source: Industry, India Me teorlogical department, CEA

Product actions and recovery in South to drive 13% CAGR in

two-wheeler volumes over FY14E-15E

Two-wheel e rs (' 000 u ni ts)

Growth (%)

14.9

11.1

8.3

2.3

2,158

1,983

2,028

-8.1

F Y12

FY13

F Y14E

FY15E

F Y16E

2,331

2,590

Expect scooters to grow at strong rate driven by ramp-up

Jupiter

coupled with new

Scooty Zest

launch

FY12

FY13

FY14E

FY15E

FY16E

Mo torcycl es

Scooters

Mop eds

Sour ce: Company, MOSL

16 December 2013

TVS Motor

Immense export opportunity for three-wheelers

Launch of diesel variants and new permits to drive domestic recovery



Our industry interactions indicate that the three-wheeler export opportunity is immense,

with estimated annual market size of 0.9m units (Global market size of 1.5m units).

TVSL’ three-wheeler export volumes have increased by over 150% YTD FY14 driven

primarily by strong performance of the African markets (~75% of its volumes).

Launch of diesel variants coupled with new permits issuance to drive recovery in domestic

three wheeler volumes.

TVSL plans to increase capacity by 25% to 10,000 units per month to accommodate high

export growth and diesel variants launch in domestic market.

Expect three-wheeler volumes to register a CAGR of 18.5% over FY14E-16E (1HFY14

growth of 150%) driven by continued growth in exports and recovery in domestic volumes.

Three-wheeler is a high margin business. Bajaj Auto is estimated to have over 30% EBITDA

in three-wheelers. Even a smaller player like Atul Auto enjoys double digit margin (FY13

EBITDA margin of 11.6%) and over 30% return ratios.

Export markets for three-

wheelers primarily

include developing and

under-developed

countries like Africa

Three-wheeler export opportunity is immense to developing/under-developed

economies:

Our industry interactions indicate that the three-wheeler export

opportunity is immense, with estimated annual market size of 0.9m units. Export

markets for three-wheelers primarily include developing and under-developed

countries like Bangladesh, Sri Lanka, African countries and Latin American countries.

Demand from Africa drives robust growth in exports:

TVSL’ three-wheeler export

volumes have increased by over 150% YTD FY14, driven primarily by African markets

(~75% of its volumes). Increase in export volumes has been primarily through a

combination of entry into new markets, offering competitive pricing together with a

better product.

Launch of diesel three-wheeler to drive recovery in domestic volumes:

Diesel three-

wheeler segment constitutes a bigger chunk in the domestic three-wheeler market,

with 65% share. Of this, ~15% of the market consists of smaller diesel three-wheelers.

TVSL plans to enter this segment in 4QFY14/1QFY15. Company has already started selling

diesel three-wheelers in Kerala on a trial basis. Our industry interactions indicate that

TVSL plans to double sales in the domestic market, with the availability of diesel variants.

Diesel segment constitutes 65% of the 3-wheeler market

Petrol /

al te rnate

fu el

se gment,

Strong export growth, dieselvariant to drive domestic recovery

Dome sti c gr. (%)

Exports gr. (%)

150

Di ese l

s egmen t,

(34)

FY12

(33)

FY13

1HF Y14

16 December 2013

Source: MOSL

TVS Motor

Diesel three-wheeler

segment constitutes a

bigger chunk in the

domestic three-wheeler

market, with 65% share

Capacity expansion to 10,000 units:

Company is constrained by capacity, which currently

stands at 8,000 units per month. It plans to increase capacity to 10,000 units a month.

This would accommodate higher demand from exports coupled with ramp-up in

domestic volumes, driven by launch of diesel variants.

Three-wheeler is a high margin business:

Bajaj Auto (which is also largely into petrol/

alternate fuel segment) is estimated to achieve over 30% EBITDA on its three-wheeler

sales. A relatively smaller player like Atul Auto (FY13 annual sales of 32,000 units) also

enjoys double digit margin (FY13 EBITDA margin of 11.6%) and over 30% return ratios.

Expect 3Ws to register a CAGR of 18.5% over FY14E-15E

3W vol umes (uni ts )

78.7

108,050

23.6

-0.2

49,190

39,792

FY12

FY13

FY14E

FY15E

FY16E

87,895

22.9

14.1

123,325

Gro wth (%)

Share of high margin 3Ws to increase

Vo l ume s (%)

9.2

6.3

4.6

1.8

2.1

3.6

3.8

3.9

Revenu es (%)

9.9

10.2

FY12

FY13

FY14E

FY15E

FY16E

Source: MOSL

16 December 2013

TVS Motor

Operating leverage and better mix to drive margins

Upside risk exist with enhanced competitive position and better pricing power



Weak brand acceptance (due to product failure earlier) and consequent low volumes

resulted in significantly higher marketing spends and lower margins compared to peers.

Operating leverage benefits coupled with better gross margins on improved mix (higher

three-wheeler share) to drive margin improvement from 5.8% in FY13 to 6.7% in FY16E.

EBITDA CAGR of 24.8% (FY14E-16E) on revenue CAGR of 16.7% led by margin increase.

Success of new launches could drive considerable improvement in brand acceptance,

competitive positioning and volumes due to wide distribution network and low base.

Any improvement in competitive positioning and consequent narrowing of pricing gap

versus peers provides significant upside risk to our margins (currently not factored in).

Weak brand acceptance and consequent low volumes resulting in significantly higher

marketing spends:

Over the years, due to lack of successful product introductions,

TVSL brands (mainly in urban markets) have been hugely impacted. This resulted in

heavy marketing spends to drive volumes and thus is a constant strain on profitability.

…high marketing spends the key reason, coupled with high

Despite similar gross margins, EBITDA margin lower than peers… employee cost

and low

volumes

FY13 gro ss margi ns (%)

27.9

26.2

FY13 EBITDA margi ns (%)

28.0

TVS Mo tor

5.8

3.1

Hero Moto

6.5

Bajaj Auto

4.6

1.4

2.2

3.7

1.6 1.3

0.9

1.3

2.0

2.4

3.9

18.2

9.5

5.8

1.3

0.6

0.5

3.5

TVS

He ro

Baja j

Sour ce: Company, MOSL

TVSL’ recently-launched

product

Jupiter

(110cc

scooter) has been priced

at ~10% to market leader

Honda Activa

despite

offering higher features.

Success of certain model introductions could drive a turnaround:

The success of certain

model introductions could drive significant improvement in brand acceptance,

competitive positioning and consequent volumes due to TVSL’ low volume base and

wide distribution network.

Operating leverage and better mix to drive margins:

Higher volumes coupled with

better gross margins on improved mix (higher three-wheeler share) to drive margin

rise from 5.8% in FY13 to 6.7% in FY16.

Any improvement in competitive positioning provides upside risk to margins:

TVSL

has been generally aggressive in pricing the products due to its weak brand equity.

For example, the recently-launched product

Jupiter

(110cc scooter) has been priced

at ~10% to market leader

Honda Activa,

despite offering higher features. Improvement

in competitive positioning could lead to narrowing of pricing gap versus peers and

key driver for margin improvement (current not factored in our estimates).

16 December 2013

TVS Motor

Total volumes to register CAGR of 13.2%

Total vo l ume s (' 000 u ni ts)

15.2

11.3

8.2

4.1

2,032

-7.5

2,198

FY12

FY13

2,116

FY14E

2,439

FY15E

2,713

FY16E

Growth (%)

Product mix to improve with higher 3W, lower mopeds

Moto rcycl es

Thre e-wheel ers

10.6

6.3

22.2

20.7

40.1

Scoote rs

Spa re pa rts

10.9

9.2

18.0

23.3

38.6

10.5

9.9

17.2

25.0

37.4

Mop eds

10.6

10.2

16.7

25.6

36.9

FY13

FY14E

FY15E

FY16E

Sour ce: Company, MOSL

Higher volumes and better mix to drive EBITDA margin increase from 5.8% to 6.7% in FY16E

6.6

EB ITDA margi n (%)

6.2

6.7

5.8

FY12

FY13

FY14E

FY15E

FY16E

Sour ce: Company, MOSL

16 December 2013

TVS Motor

EBITDA losses reduce in Indonesia operations

Further clarity (on closure of operations) could also act as a re-rating trigger



Indone sia is the third largest two-wheeler market globally. Considering the size and

gr owth opportunity, TVSL entered Indonesia in FY07.

Unlike India, Indonesian market is largely dominated by step-thrus. Moreover c ompetitive

intensity is high, with over 90% share held by Honda and Yamaha combined.

Given dominance of Japanese majors coupled with significant market shift towards Skubek

segment in a few years time, TVSL continues to make cash losses.

Entry into Skubek segment in FY14 (constituting 61% of market) is expected to improve

performance. Management expects cash break-even by FY15-end.

However, we conservatively estimate annual cash losses and incremental investments of

INR500m over FY14E-15E.

Indonesia is the third-

largest two-wheeler

market globally, after

China and India

TVSL entered Indonesia in FY07 eyeing size, growth opportunity

Indonesia is the third-largest two-wheeler market globally, after China and India.

Considering the size and healthy growth potential, company entered Indonesia in

FY07 through its wholly-owned subsidiary PT TVS Motor Company Indonesia, with a

manufacturing facility and an annual capacity of 300,000 units.

Investments in Indonesia are held indirectly through TVS Motor Company (Europe)

B.V. and TVS Motor (Singapore) Pte Ltd.

Indonesian market dominated by step-thrus; over 90% of market share

held by Honda and Yamaha

Unlike the Indian market

where motorcycle sales

form a sizeable part, the

Indonesian market is

largely dominated by

step-thrus

Unlike the Indian market where motorcycle sales form a sizeable part, the Indonesian

market is largely dominated by step-thrus. Moreover, the Indonesian market is

dominated by Japanese players, Honda and Yamaha, holding over 90% of the market

share.

TVSL’ losses continue due to Japanese majors, preference for Skubeks

Company’s addressable market declined sharply (to 27% from over 90% in FY04) as

demand shifted to automatic transmission step-thrus called Skubeks, which provided

convenience and comfort comparable to the mileage and performance of geared

step-thrus called Bebeks. Until recently, TVSL was present only in the Bebek segment.

Skubek as a category increased to 61% in FY13 from almost nil in FY04.

Moreover, given the dominance of Japanese majors along with the significant market

shift for Skubeks in a few years time, TVSL continues to make losses in the Indonesian

operations, thereby requiring continuous investments to fund the cash losses.

Financials: Indoensia operations (INR m)

FY10

FY11

FY12

FY13

Sales volumes (units)

15,000

19,800

Growth (%)

32.0

Revenues

683

854

EBITDA

-642

-584

EBITDA Margin (%)

-94.0

-68.4

PAT

-1,017

-623

Cumm. Investments

2,928

3,524

% of S/A Net Worth

33.8

35.3

FY13 PAT post USD16.7m gain on sale of surplus land

23,000

19,000

16.2

-17.4

1,074

1,000

-490

-375

-45.6

-37.5

-1,124

-245

4,742

40.5

38.7

Sour ce: Company, MOSL

16 December 2013

TVS Motor

Management guided cash break-even by FY15-end; cash losses reduce



FY13 performance was

boosted by a surplus land

sale for USD23.4m, which

led to a one-time profit

of USD16.9m



Average realizations in the Indonesian market are high at USD1,000/unit

(compared to USD700/unit in India).

Considering the high realizations and consequent high gross margins, as per

management, the Indonesian operations would break even with monthly sales of

5,000 units (v/s current monthly sales of ~2,000 units).

TVSL introduced a new Skubek

TVS Dazz

(automatic transmission step-thru) in

FY14. Hence, it expects monthly volumes and financial performance to improve.

Also, it plans to ramp up the dealer network to 150 by FY14-end (from 100 in FY13)

and tie up with multi-finance companies to leverage retail finance and increase

sales during FY14.

TVSL plans to use the Indonesian base to export to Asean countries.

Indonesian operations’ EBITDA losses reduce

EBITDA losses in the Indonesian operations have been on a reducing trend, with

cost control measures.



For FY13, TVSL Indonesia delivered a better performance with EBITDA loss reducing

to INR375m v/s INR490m in FY12, despite volumes declining by ~17%.



However, profits were boosted by a surplus land sale for USD23.4m, which led to

a profit of USD16.9m.



Factor cash losses, investment of INR500m annually over FY14E-16E

Due to the dominance of Japanese majors and weak historical performance, we

factor annual cash losses and investments of INR500m over FY14E-16E.



Any further clarity (success of recent launch or closure of operations) could also

act as a re-rating trigger.



16 December 2013

TVS Motor

BMW Motorrad tie-up: Largely a contract manufacturing

opportunity

In April 2013, TVS Motor and BMW Motorrad signed a long-term technology co-

operation agreement to develop and produce a new series of sub 500cc

motorcyclesto be sold through their own distribution network and under their own

brand.

In April 2013, TVS Motor and BMW Motorrad signed a long-term technology co-

operation 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 for both OEMs, one for TVSL and other for BMW.



BMW’s variant is expected to have premium technology and features, while

TVSL’s counterpart is expected 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 brand.



Manufacturing would be done entirely by TVSL.



The first product would hit the market in 2015-end.



TVSL would invest EUR20m over CY13-15. BMW would also invest an undisclosed

sum for joint development.

Rationale for the tie-up

For BMW Motorrad

Gain from TVSL's cost effective manufacturing

operations to expand operations in fast growing

Asian and South American markets. Global market

size for 250-750cc is 800,000 units.

Access to superior high-end technology Access to Indian market - world's second

largest and growing market

BMW association could improve its

Shared investments

market position and greater brand

acceptance in urban markets

Source: Company, MOSL

For TVS Motor

Outsourcing/contract manufacturing

opportunity giving additional revenue

stream

Similarity in TVS-BMW collaboration vis-a-vis Bajaj-KTM association

Product

Technology

alliance

Cost arbitrage

Intention to jointly product 250-500cc motorcycles for Indian and

global markets

Both foreign partners brings in the technology and aspirations to the

Cost effective operations of the Indian partner

Source: MOSL

16 December 2013

TVS Motor

Difference in TVS-BMW collaboration and Bajaj-KTM association

Brand gap

Bajaj-KTM

TVS-BMW

Narrow gap between Bajaj-KTM

Wider gap between TVS-BMW

brand i.e. Bajaj highest offering is brand i.e. TVSL biggest offering is

200cc motorcycle, while KTM's

of 180cc, while BMW's lowest

lowest offering starts from 50cc

offering is of 650cc

to to over 1000cc

Bajaj sells almost a million

TVSL relatively small player with

annual premium motorcycle

annual premium motorcycles sale of

180k units

Bajaj has 48% equity stake

Only a tie-up with no equity

in KTM

interest

Source: MOSL

Current volumes

Ownership

interest

Our view

Similar to Bajaj-KTM alliance, we believe this tie-up would give TVSL an

additional revenue stream in the form of contract manufacturing for BMW

Motorrad.



However, unlike the Bajaj-KTM alliance, we are apprehensive if the tie-up

involves joint product development. In its absence, TVSL may not be able to

gain significantly from the pact.



Due to inadequate details, we have not factored the P&L implications, though

have covered the investment requirements on a conservative basis.



16 December 2013

TVS Motor

Non-core investments remains a concern

TVSL recently divested majority stake in its non-core energy venture

Key subsidiaries'

performance

(INR m)

FY12 FY13

136

-892

-1

-245

-5

-926

MOSL



Sundaram Auto

TVS Energy

-69

TVS Wind Energy

-9

TVS Wind Power

-2

TVS Europe

TVS Singapore

TVS Indonesia -1,124

Sundaram

Business Dev.

Total Losses

-1,128

Sour ce: Company,

Investments in non-core businesses constitute 37% of FY13 standalone net worth and

have been a cause of concern. TVSL made these investments to leverage the TVS brand

name in other business opportunities.

TVS divested its majority stake in its energy venture in 2QFY14. Also, company has guided

for no major incremental investments in its housing business.

TVSL though plans to scale up its captive financing arm to support the two-wheeler

business and hence guided for further equity investment in this business.

We have factored further annual investments of INR500m largely in its captive financing

arm over FY14E-16E.

Investments into various business constitute 62% of standalone networth (INR m)

Unqoted Investments

Indonesian operations

TVS Europe

Less: Write down

TVS Singapore

TV S Indonesia (Pr ef. shar es)

Total (net of write do wn)

Low cost housing business

TVS Housing

Emerald Haven Realthy

Total

Holding (%)

100

Relationship

Subsidiary

FY12

1,265

2,012

1,465

4,742

FY13

1,265

(916)

2,012

1,465

3,826

FY14E

1,265

(916)

2,012

1,965

4,326

FY15E

1,265

(916)

2,012

2,465

4,826

FY16E

1,265

(916)

2,012

2,965

5,326

100

48.8

Subsidiary

Associate

400

401

400

401

400

401

400

401

400

401

Vehicle Finance arm (engaged in two-wheelers financing , also present in used cars and tractor financing)

TVS Motor Services

Subsidiary

TVS Motor Ser vices (Pr ef. shares)

Subsidiary

2,460

2,710

3,210

Total

2,464

2,714

3,214

Auto Component (business of supplying Interior and exterior plastic parts and rubber products for automobiles)

Sundaram Auto

100

Subsidiary

609

TVS Energy

Others

Total investments

Incremental investments

S/A Net Worth

% of S/A Net Worth

(Ex-Indonesia, Ex-Engery venture)

768

9,015

11,696

768

8,349

12,247

8,614

265

14,172

3,710

3,714

4,210

4,214

609

9,614

1,000

16,615

609

10,614

1,000

19,479

Sour ce: Company, MOSL

16 December 2013

TVS Motor

Initiate at Buy with a target price of INR85

Risk-reward favorable; expect earnings CAGR of 33% over FY14E-16E



TVSL is well positioned to benefit from the scooterization wave with its complete scooter

porfolio. Over the next 12-18 months, TVSL plans to launch multiple products across

segments to reinforce and fill gaps in product portfolio.

Operating leverage and better mix to drive margins from 5.8% in FY14E to 6.7% in FY16E.

EBITDA losses in Indonesian operations continue to reduce. Any further clarity (success of

recent launch or closure of operations) could also act as a re-rating trigger

Expect earnings CAGR of 33% over FY14E-16E with return ratios (RoE) improving from 19.2%

in FY14E to 24.6% in FY16E.

Healthy cash from operations (FCF CAGR of 24.8% over FY14E-16E) coulpled with sale of

non-core investments would transform into net cash by FY16E from net debt of INR6.2b in

FY13.

Initiate coverage with a Buy rating and target price of INR85. We value TVSL at 9x FY16E

standalone EPS.

Key risks: 1) Failure of new launches, 2) higher than estimated cash losses in Indonesian

operations, 3) Higher than expected investments in outside standalone business.

TVS Motor PE band

2.5

9.5

8.1

P/ E (x)

Avg(x)

Pe a k(x)

M i n(x)

1 6.8

TVS Motor PB band

P/B (x)

4.0

3.0

2.0

1.0

0.0

0. 2

1. 6

Avg (x)

3. 5

Pe a k(x)

Mi n(x)

Source: Bloomberg, MOSL

Average discount to Hero Moto has been 33% over the last five years

Di scou nt (%)

Average (%)

Source: Bloomberg, MOSL

16 December 2013

TVS Motor

Key assumptions

Total v olumes (units)

Growth (%)

Motorcycle (units)

Growth (%)

Scooter (units)

Growth (%)

Moped (units)

Growth (%)

Three-wheelers (units)

Growth (%)

Domestic (units)

Growth (%)

Export (units)

Growth (%)

Net realization (INR/unit)

Growth (%)

Net Sales (INR m)

Growth (%)

FY13

2,032,240

-7.5

749,429

-11.1

441,552

-16.5

792,069

0.8

49,190

23.6

1,787,007

-6.5

245,233

-14.8

33,749

5.9

70,650

-1.1

FY14E

2,116,156

4.1

801,800

7.0

481,312

9.0

745,151

-5.9

87,895

78.7

1,807,116

1.1

309,063

26.0

36,531

8.2

78,524

11.1

FY15E

FY16E

2,438,707

2,713,269

15.2

11.3

911,661

1,016,481

13.7

11.5

599,066

687,817

24.5

14.8

819,930

885,646

10.0

8.0

108,050

123,325

22.9

14.1

2,086,736

2,321,364

15.5

11.2

351,994

391,925

13.9

11.3

37,564

38,629

2.8

93,289

106,858

18.8

14.5

Sour ce: Company, MOSL

16 December 2013

TVS Motor

Financials and Valuation

Standalone - Income Statement

Y/E March

Net Sales

Total Expenditur e

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income - Rec.

PBT be f. EO Exp.

EO Expense/(Income)

PBT after EO Exp.

Curren t Tax

Deferred Tax

Tax Rate (%)

Reported PAT

PAT Adj for EO items

Change (%)

2012

71,415

66,722

93.4

4,694

6.6

1,175

3,518

571

217

3,165

655

21.3

2,491

26.3

2013

70,650

66,560

94.2

4,090

5.8

1,304

2,786

480

246

2,552

916

1,636

520

-44

29.1

1,160

1,810

-27.3

2014E

78,524

73,930

94.2

4,594

5.8

1,291

3,302

198

271

3,375

-303

3,678

809

110

25.0

2,759

2,532

39.9

2015E

93,289

87,412

93.7

5,877

6.3

1,388

4,490

298

4,740

1,043

142

25.0

3,555

40.4

(INR Billion)

2016E

106,858

99,731

93.3

7,127

6.7

1,470

5,657

328

5,968

1,313

179

25.0

4,476

25.9

Standalone - Balance Sheet

Y/E March

Equity Share Capital

Tot al Reser ves

Net Worth

Deferred Liabilities

Tot al Loans

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Tot al Investmen ts

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Provisions

Net Current Assets

Appl. of Funds

E: MOSL Estimates

2012

475

11,221

11,696

976

8,311

20,982

21,545

11,289

10,256

525

9,309

11,055

5,846

2,080

130

2,998

10,163

9,585

577

892

20,982

2013

475

11,772

12,247

931

6,345

19,523

22,479

12,365

10,115

361

8,688

12,029

5,097

3,005

175

3,752

11,670

11,136

534

359

19,523

2014E

475

13,696

14,172

931

4,345

19,448

24,479

13,656

10,823

314

8,953

12,768

5,357

3,012

459

3,940

13,412

12,207

1,204

-643

19,448

2015E

475

16,140

16,615

931

4,320

21,866

25,979

15,043

10,936

373

9,953

16,673

6,183

3,323

3,031

4,137

16,070

14,503

1,567

604

21,866

(INR Million)

2016E

475

19,226

19,701

931

3,820

24,452

27,479

16,514

10,966

427

10,953

20,663

7,082

4,099

5,138

4,344

18,558

16,612

1,945

2,105

24,452

16 December 2013

TVS Motor

Financials and Valuation

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Shar e

DPS

Payout (%)

Valuation (x) *

P/E

Cash P/E

P/BV

EV/Sale s

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

RoE

RoCE

Working Capital Ratios

Asset Turno ver (x)

Inventory (Days)

Debtor (Days)

Leverage Ratio (x)

Current Ratio

Debt/Equity

* Adjusted for treasury stocks

Y/E March

NP/(Loss) bef. Tax & EO It ems

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(inc)/dec in FA

(Pur)/Sale of Investments

Others

CF from Investments

(Inc)/Dec in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

16 December 2013

2012

5.2

7.7

24.6

1.3

28.8

2013

3.8

6.6

25.8

1.2

56.5

2014E

5.3

8.0

29.8

1.5

30.2

2015E

7.5

10.4

35.0

2.0

31.3

2016E

9.4

12.5

41.5

2.5

31.0

10.3

7.0

2.2

0.5

7.2

2.4

14.1

8.2

2.1

0.4

7.8

2.2

10.1

6.7

1.8

0.4

6.4

2.8

7.2

5.2

1.5

0.3

4.6

3.7

5.7

4.3

1.3

0.2

3.4

4.7

23.0

19.8

15.1

15.7

19.2

19.3

23.1

24.3

24.6

26.9

3.4

29.9

3.6

26.3

4.0

24.9

4.3

24.2

4.4

24.2

1.1

0.7

1.0

0.5

1.0

0.3

1.0

0.3

1.1

0.2

Standalone - Cash Flow Statement

2012

3,165

942

408

700

626

4,440

-31

4,409

-1,768

-2,699

658

-3,809

-778

-571

-659

2,269

261

861

-731

130

2013

1,628

1,076

327

527

800

3,303

878

4,181

-767

-295

-985

-276

-517

-715

564

-945

2,251

-2,077

175

2014E

3,375

1,291

198

920

1,287

5,232

-271

4,961

-1,953

-265

271

-1,947

-2,000

-198

-834

303

-2,729

285

175

459

2015E

4,740

1,388

1,185

1,325

6,315

-298

6,017

-1,559

-1,000

298

-2,261

-25

-48

-1,112

-1,184

2,572

459

3,031

(INR Million)

2016E

5,968

1,470

1,492

606

6,569

-328

6,241

-1,554

-1,000

328

-2,226

-500

-17

-1,390

-1,907

2,107

3,031

5,138

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