avendus two wheelers sector 2011jul
TRANSCRIPT
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8/2/2019 Avendus Two Wheelers Sector 2011Jul
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Pleaserefertothedisclaimertowardstheendofthedocument.
IndiaEquityResearch
Automobiles
July27,2011
TwowheelersSafehavenwithinautomobileindustry
SectorReport The Indian twowheeler manufacturers possess superior resilience to
prevailingadverseeconomicforcessuchasrisingfuelpricesandrising
rates, when compared to other segments within automobiles.
Domestic demand for motorcycles is likely to stay strong with rural
sales growing twice as fast as urban sales. Exports may continue to
grow faster than domestic sales, despite the end to DEPB. Scooters
may continue to grow faster than motorcycles stemming from their
appeal to niche segments. Competition is intensifying following the
emergence of two significant new manufacturers. Yet, the structural
storystaysrobustwithsalesvolumeslikelytogrowata12%CAGRtill
FY14f.
We
initiate
coverage
on,
BJAUT
(Buy),
HH
(Reduce)
and
TVSL
(Buy).Riskfactorsarelowerdutydrawbackrates,fuelpriceincreases,
higherinterestratesandcommodityinflation.
Leastaffectedbytheprevailingheadwindsintheindustry
Consumer affordability is being tested by the increase in fuel prices and
interestrates;ouranalysisshowsthatthe impactofthese factors is loweron
twowheelers than on passenger and commercial vehicles. Rural areas
contribute45%oftwowheelersalesasagainst11%ofpassengervehiclesales.
Thehighercontributionofsalesfromruralareasleveragesonthegrowingrural
income. Sales are partially shielded from the impact of higher interest costs
duetolimitedpenetrationoffinancingoptions.
Momentumin
exports
likely
to
persist
despite
the
end
to
DEPB
Exportscontributed12%oftwowheelersalesinFY11,upfrom7%inFY06.The
robust export growth is a result of the growing acceptance of Indian two
wheelers in developing countries, where they are available at competitive
prices. Export demand is estimated to slow from a CAGR of 25% over FY07
FY11aswithdrawalofDEPBbenefits is likelyto leadtoan increase invehicle
prices.EvenafterDEPB,weestimateexports togrowataCAGRof18%over
FY12fFY14f;tocontribute13%oftwowheelersalesbyFY14f.
Robustgrowthinscootersaddstotwowheelergrowth
Thegrowingacceptanceofscootersasfamilyvehicles,duetoqualitiessuchas
unisex suitability, easy handling and loadbearing capacity, has led to robust
salesgrowth(CAGRof18%overFY07FY11)inthedomesticmarket,outpacing
mopeds
(CAGR
of
16%)
and
motorcycles
(CAGR
of
9%).
Scooters
contributed
18%ofdomestictwowheelersalesinFY11,upfrom13%inFY06.Weestimate
scooterstocontribute20%ofdomestictwowheelersalesbyFY14f.
InitiatecoverageonBJAUT,HHandTVSL
Thetargetpricesforthethreestocksarebenchmarkedtothehistoricalmean
ofHH.WevalueBJAUTatHHsfiveyearhistoricalP/E,whilewevalueTVSLata
15%discountdue to lowerearningsgrowth.Wevalue HHat 12.8xP/Eata
10%discounttoitsfiveyearhistoricalP/Eduetolowerearningsgrowth.We
initiatecoverageonBJAUT(Buy),HH(Reduce)andTVSL(Buy).Riskfactorsare
lower duty drawback rates, fuel price increases, higher interest rates and
commodityinflation.
BajajAutoRating
CurrentMarketPrice
TargetPrice
BloombergCode
Reuterscode
Avg.Vol.(3m)
Avg.Val.(3m)(INRmn)
52wkH/L(INR)
MCAP(INRbn/USDbn)
HeroHondaRating Reduce
CurrentMarketPrice
TargetPrice
BloombergCode
Reuterscode
Avg.Vol.(3m)
Avg.Val.(3m)(INRmn)
52wkH/L(INR)
MCAP(INRbn/USDbn)
TVSMotorsRating
CurrentMarketPrice
TargetPrice
BloombergCode
Reuterscode
Avg.Vol.(3m)(mn)
Avg.Val.(3m)(INRmn)
52wkH/L(INR)
MCAP(INRbn/USDmn)
Valuations
BJAUT
HH
TVSL
03/13f
9.1
03/12f
109
24.11/546
EV/E(x)03/13f03/12f
9.812.2
10.8 9.8
16.4 14.5
412.57/9.34
BJAUTIN
BAJA.BO
1,665/1,166
619
1,426
454,707
TVSLIN
TVSM.BO
87.5/43.6
P/E(x)
5.9
13.8
50.8
1,733
Buy
HROH.BO
1,821
889
363.63/8.23
1,616
HHIN
2,062/1,376
Buy
65
4.9
10.4
8.7
497,158
2.01
SriRaghunandhanNL,+9102266842863
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India Equity Research Twowheelers
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InvestmentSummary
TheIndiantwowheelermanufacturerspossesssuperiorresiliencetoprevailingadverseeconomicforces.We estimate
theadditional
burden
to
the
owner
of
atwo
wheeler
from
rising
fuel
prices
and
rising
interest
rates
to
be
less
than
half
thattotheownerofacar,whenmeasuredrelativetoincomes.Theruralmarketabsorbed45%ofFY11salesoftwo
wheelersandislikelytogrowtwiceasfastasurbansalestillFY14f.Exportswouldstayasignificantdriverofmotorcycle
sales.DespitetheendtotheDEPBschemeweestimateathreeyearCAGRof18%tillFY14f. Scootersaleshadgrown
twiceasfastasmotorcycles inthepast fouryears.Theirstrongappeal innichesegments is likelytopreservehigher
growth. Competition within the Indian twowheeler market may intensify with the emergence of Honda Motorcycle
(not listed)and,Mahindra& Mahindra (notrated).Yet,thestructuralstorystays robustwithsalesvolumes likelyto
growata12%CAGRtillFY14f.WeinitiatecoverageonBJAUT(Buy),HH(Reduce)andTVSL(Buy).
Leastaffectedbytheprevailingheadwindsintheindustry
TheIndiantwowheelermanufacturersaretheleastimpactedbyadverseforcessuchasrisingpricesof
fuel,rising
interest
rates
and
commodity
inflation.
The
addition
to
the
fuel
bill
of
atypical
two
wheeler
owner, following a 10% rise in the price of petrol, is estimated at c0.2% of pretax income. The
correspondingimpactforacarownerisestimatedatc0.5%ofpretaxincome.Similarly,theadditional
burdenfollowinga1%riseintheinterestrateonavehicleloanwouldcorrespondtoc0.1%andc0.5%
of their pretax incomes, respectively. Meanwhile, the adverse effect of an increase in commodity
prices such as steel and aluminum is marginally lower for twowheelers in comparison to passenger
vehicles.Growthintwowheelersaleshasbeenledbytheruralsegment,whichcomprised45%oftotal
sales in FY11.Thus,regardless of the headwinds,webelieve the structural story in the twowheeler
segmentisstillintactandthesegmentisestimatedtogrowataCAGRof12%overFY12fFY14f.
MomentuminexportslikelytopersistdespitetheendtoDEPB
Exportsasapercentageoftotalsaleshavegrownto12%inFY11,from7%inFY06.Thestronggrowth
inexports
was
due
to
positioning
of
Indian
two
wheelers
at
competitive
prices
in
the
global
market,
whichisdominatedbyJapaneseandChineseOEMs.Indianvehiclesarepricedatpricepointsbetween
Japanese and Chinese vehicles. Countries with low twowheeler penetration or inadequate public
transportsystemsarethetargetsforIndiantwowheelerexports.Exportdemandisestimatedtoslow
fromaCAGRof25%overFY07FY11aswithdrawaloftheDutyEntitlementPassBook(DEPB)benefits
islikelytoleadtoanincreaseinvehicleprices.EvenafterwithdrawalofDEPB,weestimateexportsto
growataCAGRof18%overFY12fFY14f;likelytocontribute13%oftwowheelersalesbyFY14f.
Robustgrowthinscootersaddstotwowheelergrowth
Scootersarethepreferredfamilyvehicleofmiddleclassfamiliesduetohigherpower,easeofhanding,
loadbearingcapacityandunisexsuitability.Scootersarepreferredbyyoungadults(learners),women
andbymenbeyondtheageof45.Inthedomesticmarket,scooters,whichgrewataCAGRof18%over
FY07FY11,
have
outpaced
mopeds
(16%
CAGR)
and
motorcycles
(9%
CAGR),
given
the
wider
customer
base. Scooters contributed 18% of domestic twowheeler sales in FY11 as against 13% in FY06. We
estimatescooterstocontribute20%ofdomestictwowheelersalesbyFY14f.
Newwaveofcompetitorsleavingtheirmark
The increasing competition in the twowheeler segment has led to loss of market share, higher
advertising expenditure and lower pricing power for existing players. In the domestic motorcycle
segment,HeroHondas(HHIN)marketsharedeclinedto54.6%inFY11asagainst58.5%inFY10.Inthe
domestic scooter segment, Honda Motorcycle and Scooter Indias (HMSI) market share declined to
43.1%inFY11asagainst50.6%inFY10.Ouranalysisofthepricingpowerinthetwowheelersegment
revealsthatrawmaterialcostasapercentageoftotal income increasedto72.1%aggregateofHH,
BajajAuto(BJAUTIN)andTVSMotorCompany(TVSLIN)intheMar11quarterasagainst68.2%inthe
Leastaffectedthebyfuel
priceincreases
and
interestratehikes.
Stronggrowthinexports
isdue
to
positioning
of
Indiantwowheelersat
competitivepricesinthe
globalmarket.
Scootershaveoutpaced
thegrowthofmopedsand
motorcycles,giventhe
widercustomer
base.
Increasingcompetitionin
thetwowheelersegment
hasledtolossofmarket
share,higheradvertising
expenditureandlower
pricingpowerforexisting
players.
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Mar10quarter,whereasEBITDAmargindecreasedto14.5% intheMar11quarterasagainst18.1% in
theMar10quarter.Thus,allthecompaniesfacedmargincontractionduringFY11.
Relativevaluations
applied
to
arrive
at
price
targets
WeusetherelativevaluationmethodtoderivethestandalonevaluationforBJAUTandTVSL.Weuse
HHasabenchmark,as it isthe largesttwowheelercompany,tovalueBJAUTandTVSL.BJAUT,TVSL
and HH represent the three largest twowheeler players in India. We value BJAUT at HHs fiveyear
historicalP/E,whilewevalueTVSLata15%discountduetolowergrowth.IncaseofHH,thevaluations
takenarebelowthefiveyearmeanduetolowerearningsgrowth.WevalueHHata10%discountto
its fiveyear historical P/E. We initiate coverage on BJAUT (Buy), HH (Reduce) and TVSL (Buy). Risk
factors are lower duty drawback rates, fuel price increases, higher interest rates and commodity
inflation.
Initiatecoverageon3twowheelercompanies
BajajAuto(BJAUT):BJAUThaslinedupnewmodelssuchasKTMDukeandBoxer,andvariantlaunches
fordomesticandexportmarkets inFY12f.These launchesare likelytostrengthentheproduct lineup
andaidgrowth.BJAUTsvehiclesarewellaccepted inexportmarkets CAGRof43%and25% intwo
and threewheeler exports over FY07FY11, respectively. BJAUT is likely to maintain higher EBITDA
margins of 19%20% over FY12fFY14f due to exposure to the highgrowth threewheeler passenger
segment.WeestimateBJAUTssalestogrowat12%overFY12fFY14f.OurJun12TPforBJAUTstands
atINR1,733,anupsideof22%.InitiatecoveragewithaBuyrating.
HeroHonda(HH):TheendoftheJVwithHondaMotorpresentsmanychallenges.Themostpressing
oneistostrengthenR&Doperationstochurnoutnewmodelsandupgradevehiclesforthenextlevel
of emission norms. Another challenge stems from the rise in competitive intensity posed by Honda
Motors solo presence in the country. HH faces margin pressure due to a rise in R&D, royalty and
advertising expenditures as a result of the split. In addition to breakup woes, the companys sales
growth
is
limited
by
production
constraints
and
slowing
launches.
We
estimate
sales
growth
to
taper
to
aCAGRof11%overFY12fFY14f.OurJun12TPforHHstandsatINR1,616,whichimpliesadownsideof
11%.InitiatecoveragewithaReducerating.
TVS Motor Company (TVSL): New launches in FY12f are likely to aid growth and strengthen TVSLs
portfolio.ThescootersegmentislikelytogrowataCAGRof17%overFY12fFY14f,ledbythegrowing
acceptance of scooters as a family vehicle. The company entered the lucrative threewheeler
passengersegment inFY08andsucceeded incapturing6%marketshare inFY11.Weestimatethree
wheelersalestogrowataCAGRof15%overFY12fFY14f.TVSLsuccessfullyrodetheexportgrowth
story (CAGR of 25% over FY07FY11), led by the growing acceptance of Indian vehicles in several
developing countries. We estimate TVSLs exports to grow at a CAGR of 15% over FY12fFY14f. We
estimatesalestogrowataCAGRof12%overFY12fFY14f.OurJun12TPforTVSLstandsatINR65,an
upsideof28%.InitiatecoveragewithaBuyrating.
Exhibit1:RelativevaluationsasonJuly26,2011CMP Rating
Target
Price Upside PriceChange(%) P/E EV/E
ROCE
(%)
ROE
(%)
(INR) (INR) (%) 1m 3m 6m FY12f FY13f FY14f FY12f FY13f FY14f FY12f FY12f
BJAUT 1,426 Buy 1,733 22 2.7 4.0 10.2 13.8 12.2 10.7 9.8 8.7 7.6 49.2 52.1
HH 1,821 Reduce 1,616 11 2.3 2.8 2.6 16.4 14.5 14.2 10.4 9.1 8.5 73.0 78.6
TVSL 51 Buy 65 28 2.8 16.9 15.3 10.8 9.8 8.9 5.9 4.9 4.0 13.1 20.8
Source:Bloomberg,
Avendus
Research
Relativevaluationsused
toderivefairvaluesfor
BJAUTandTVSL.
Initiatecoverage
with
a
BuyratingandJun12
targetofINR1,733.
Initiatecoveragewitha
Reduceratingwitha
Jun12targetofINR1,616.
Initiatecoveragewitha
BuyratingandJun12
targetofINR65.
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TableofContents
InvestmentSummary ........................................................................................................................ 2Leastaffectedbytheprevailingheadwindsintheindustry..................................................................2MomentuminexportslikelytopersistdespitetheendtoDEPB..........................................................2Robustgrowthinscootersaddstotwowheelergrowth......................................................................2Newwaveofcompetitorsleavingtheirmark .......................................................................................2Relativevaluationsappliedtoarriveatpricetargets............................................................................3Initiatecoverageon3twowheelercompanies ....................................................................................3
Leastaffectedbytheprevailingheadwindsintheindustry.............................................................. 5Lowerimpactoffuelpricesontwowheelerowners............................................................................5Lowerimpactofinterestratehikesontwowheelerowners ...............................................................6Marginallylowerimpactofcommodityinflationontwowheelers......................................................7Increasingshareofruralsales ...............................................................................................................9Structural
growth
story
still
intact.......................................................................................................10
MomentuminexportslikelytopersistdespitetheendtoDEPB.................................................... 12ExportslikelytogrowataCAGRof18%overFY12fFY14f .................................................................12Indiantwowheelerspositionedatcompetitiveprices .......................................................................12LowpenetrationinAfrica,LatinAmericaandAsiancountries ...........................................................13WithdrawalofDEPBlikelytoerodeFY12fEPSbyupto6%................................................................14
Robustgrowthinscootersaddstotwowheelergrowth................................................................ 16Widercustomerprofileforscooters ...................................................................................................16Majorplayersinscooter,motorcycleandmopedsegments ..............................................................17Indiantwowheelerscontribute22%24%ofglobaltwowheelers ....................................................18
Newwaveofcompetitorsisleavingitsmark .................................................................................. 19Lossofmarketshareforleaders .........................................................................................................19Marketingexpenditureremainsatsimilarlevelsinrelativeterms.....................................................19Reducedabilitytopassthroughcosts.................................................................................................20
Relativevaluationsappliedtoarriveatpricetargets...................................................................... 22ValuationsderivedforBJAUTandTVSLusingHHasabenchmark .....................................................22Forecastslowerthanconsensusestimates.........................................................................................23Initiatecoverageon3twowheelercompanies ..................................................................................23Riskfactors ..........................................................................................................................................24
Annexure ......................................................................................................................................... 25
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Leastaffectedbytheprevailingheadwindsintheindustry
The Indian twowheeler manufacturers are the least impacted by adverse forces such as rising prices of fuel, rising
interestrates
and
commodity
inflation.
The
addition
to
the
fuel
bill
of
atypical
two
wheeler
owner,
following
a10%
rise in the price of petrol, is estimated at c0.2% of pretax income. The corresponding impact for a car owner is
estimated at c0.5% of pretax income. Similarly, the additional burden following a 1% rise in the interest rate on a
vehicleloanwouldcorrespondtoc0.1%andc0.5%oftheirpretaxincomes,respectively.Meanwhile,theadverseeffect
ofanincreaseincommoditypricessuchassteelandaluminumismarginallylowerfortwowheelersincomparisonto
passengervehicles.Growthintwowheelersaleshasbeenledbytheruralsegment,whichcomprised45%oftotalsales
inFY11.Thus,regardlessoftheheadwinds,webelievethestructuralstoryinthetwowheelersegmentisstillintactand
thesegmentisestimatedtogrowataCAGRof12%overFY12fFY14f.
Lowerimpactoffuelpricesontwowheelerowners
Petrolprices increasedexponentiallyover thepast15 months, leading to an increase inthe running
costof
vehicles.
Petrol
prices
currently
stand
at
INR68.3
(Mumbai),
a31%
increase
from
INR52.2
in
Apr10,whereasdieselpriceshaveonlyincreasedbyc15%.
Exhibit2:Trendinfuelprices(INR)Hikeinmonthof: Petrolprice(INR) Cumulativerise(%) Dieselprice(INR) Cumulativerise(%)
Apr10 52.2 39.88
Jun10 55.88 7 41.98 5.3
Sep10 55.97 7.2
Sep10 56.25 7.8 42.06 5.5
Nov10 57.01 9.2
Nov10 57.35 9.9
Dec10 60.46 15.8
Jan11 63.08 20.8
May11 68.33 30.9
Jun11 45.84 14.9
Jul11 45.99 15.3
Source:Bloomberg
A10%increaseinfuelpricesleadstoa0.2%increaseinexpenditureasapercentageofannualpretax
incomeforatwowheelerowner,whiletheincreaseis0.5%forapassengervehicleowner.
Exhibit3:Sensitivityanalysis impactofhigherpetrolpricesTwowheelers PassengerCars
Fuelcostperkm current(INR) 1.14 4.88
Annualfuelcost(INR)* 12,299 52,712
Annualpretaxincomeofvehicleowner(INRmn) 0.50 0.91
Fuelcostas%ofannualincome(%) 2.5 5.8
Assuming10%increaseinfuelprices
Fuelcostperkmpostincrease(INR) 1.25 5.37
Annualfuelcostpostincrease(INR) 13,529 57,983
Fuelcostas%ofannualincomepostincrease(%) 2.7 6.3
Riseinfuelcostas%ofannualincome(%) 0.2 0.5
Source:AvendusResearch Note:*Assumingvehicleusageof30kmsperday.
Ourestimateoftheincomeoftwowheelerandpassengervehicleownersarebasedontheestimated
contribution to demand across various categories of households (Source: NCAER). The income of a
twowheeler owner is estimated at INR0.50mn, while the income of a passenger vehicle owner is
Petrolpricesonan
uptrend.
Impactofpetrolpricehike
isloweronatwowheeler
ownerdespitelower
income.
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estimatedatINR0.91mn.The incomeofapassengervehicleowner is1.8xhigherthanatwowheeler
owner.
Exhibit4:AnnualpretaxincomeofavehicleownerAnnualpretaxincomeofatwowheelerowner(INRmn)
Householdtype AverageIncome
WeightsEstimated
contributiontodemand(%) WeightedAverageIncome
A B AxB
Global(>INR1.7mn) 1.70* 2% 0.03
Middleclass(INR0.34mntoINR1.7mn) 1.03 32% 0.33
Aspirers(INR0.15mntoINR0.34mn) 0.23 58% 0.13
Deprived(INR1.7mn) 1.70 11% 0.18
Middleclass(INR0.34mntoINR1.7mn) 1.03 67% 0.68
Aspirers(INR0.15mntoINR0.34mn) 0.23 22% 0.05
Deprived(
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Exhibit6:Interestcostasapercentageofrunningcost(%)Twowheeler Passengervehicle
Interestcostasapercentageofrunningcost(%) 24 43
(A+B+C)
Runningcost
per
month
(INR)
1,501
10,026
A Interestcostpermonth(INR)* 358 4,323
B Fuelcostpermonth(INR) 1,025 4,393
C Maintenancecostpermonth(INR) 118 1,310
Interestcostassumptionsforathreeyearloan
Averagecostofvehicle(INR) 47,000 524,000
Loanamount(80%;INR) 37,600 419,200
Interestrate HDFCBank(Flatrate)(%) 11.4 12.4
Source:HDFCBank,AvendusResearch Note:*Assuminginterestforathreeyearloan.
A1%increaseintheinterestrateonavehicleloanleadstoa0.1%increaseincostasapercentageofpre
taxincomeforatwowheelerowner,whiletheincreaseis0.5%forapassengervehicleowner.
Exhibit7:SensitivityanalysisimpactofhigherinterestrateTwowheeler Passengervehicle
Interest(%) Flatrate 11.4 12.4
Annualinterestcost(INR) 4,296 51,876
Annualpretaxincomeofvehicleowner(INRmn) 0.50 0.91
Interestcostas%ofannualincome(%) 0.86 5.67
Assuming1%increaseininterestrate
Interest(%) Flatratepostincrease 12.4 13.4
Annualinterestcostpostincrease(INR) 4,672 56,068
Interestcostas%ofannualincomepostincrease(%) 0.93 6.13
Risein
interest
cost
as
%
of
annual
income
(%)
0.07
0.46
Interestcostassumptionsforathreeyearloan
Averagecostofvehicle(INR) 47,000 524,000
Loanamount(80%;INR) 37,600 419,200
Source:HDFCBank,AvendusResearch Note:*Assuminginterestforathreeyearloan.
Marginallylowerimpactofcommodityinflationontwowheelers
Exhibit8:Rubberprices(INRperkilogram)
0
100
200
300
Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10 Jan11 Apr11
70%
Source:Capitaline
Theadditionalburden
followinga
1%
rise
in
the
interestrateonavehicle
loanwouldcorrespondto
0.1%and0.5%ofannual
pretaxincomesfortwo
wheelerandpassenger
vehicleowner
respectively.
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Exhibit9:Steelprices(USDpertonne)
400
600
800
1000
Apr09 Oct09 Apr10 Oct10 Apr11
Hotrolled Coldrol le d Ga lva ni ze d
16%
Source:Bloomberg
Exhibit10:Aluminumprices(USDpertonne)
1,000
1,500
2,000
2,500
3,000
Apr09 Oct09 Apr10 Oct10 Apr11
21%
Source:Bloomberg
Pricesof
steel,
aluminum
and
rubber
increased
by
16%,
21%
and
70%,
respectively
in
FY11
impacting
therawmaterialscostofOEMsintheautomobileindustry.
Theadverseeffectofanincreaseincommoditypricessuchassteelandaluminumismarginallylower
fortwowheelersduetothehigherproportionofconversioncostasapercentageoftotalrawmaterial
cost. Conversion cost refers to the expenditure incurred for converting commodities into finished
goodsthatarebuiltintoavehicle.Conversioncostasapercentageoftotalrawmaterialcoststandsat
69%fortwowheelers, incomparisonto66%and48%forpassengervehiclesandmediumandheavy
commercialvehicles(MHCVs),respectively.
Exhibit11:Conversioncostasapercentageoftotalrawmaterialcost(%)(INR) Costof
commodities
Conversion
costofvendors
Totalrawmaterial
cost
Conversioncostofvendorsasapercentage
oftotalrawmaterial/cost(%)
A B A+B
Twowheeler 8,456 18,544 27,000 69
Passengervehicle 78,739 153,261 232,000 66
Mediumandheavy
commercialvehicle 458,067 421,933 880,000 48
Source:AvendusResearch
A10%increaseincommoditypricesislikelytoimpacttherawmaterialcostofatwowheelerby3.1%,
comparedto3.4%forpassengervehiclesand5.2%forMHCVs.
Exhibit12:Increaseinrawmaterialcostduetohighercommodityprices(%)Costpervehicle(INR) Twowheelers Passengervehicles Mediumandheavy
commercialvehicles
Costofcommodities(INR) 8,456 78,739 458,067
Increasein
commodity
prices
(%)
10 10
10
Increaseincommodityprices(INR) 846 7,874 45,807
Totalrawmaterialscost(INR) 27,000 232,000 880,000
Increaseinrawmaterialscost(%) 3.1 3.4 5.2
Source:AvendusResearch
Conversion of commodities into finished goods is done by automobile component manufacturers or
vendors.Thus,conversioncostreferstothepaymentmadebyOEMstothevendors.Asvendorsare
dependentonOEMs,theprice increasegiventovendorsforconversionofcommodities intofinished
goodsishalftheriseincommodityprices.A5%increase(halfofthe10%increaseincommodityprices)
inconversioncostislikelytoimpacttherawmaterialcostofatwowheelerby3.4%,comparedto3.3%
forpassengervehiclesand2.4%forMHCVs.
Steel,aluminumand
rubberpricesareonan
uptrend.
Theimpactofcommodity
inflationismarginally
lowerfortwowheelers
thanforpassenger
vehicles.
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Exhibit13:Increaseinrawmaterialcostduetoincreaseinconversioncostofvendors(%)Costpervehicle(INR) Twowheelers Passengervehicles Medium&heavycommercialvehicles
Conversioncostofvendors(INR) 18,544 153,261 421,933
Increasein
conversion
cost
of
vendors
(%)
5 5
5
Increaseinconversioncostofvendors(INR) 927 7,663 21,097
Totalrawmaterialscost(INR) 27,000 232,000 880,000
Increaseinrawmaterialscost(%) 3.4 3.3 2.4
Source:AvendusResearch
The combined effect of the increase in commodity prices (assuming 10%) and conversion cost
(assuming5% halfofincreaseincommodityprices)islikelytoimpacttherawmaterialcostofatwo
wheelerby6.6%,comparedto6.7%forpassengervehiclesand7.6%forMHCVs.Thus,thedifferencein
totalimpactonrawmaterialcostbetweentwowheelersandpassengervehiclesismarginal.
Exhibit14:Increaseintotalrawmaterialcost(INR)Costpervehicle) Twowheelers Passengervehicles
Medium&
heavy
commercialvehicles
Costofcommodities(INR) 8,456 78,739 458,067
Increaseincommodityprice(%) 10.0% 10.0% 10.0%
A Increaseincommodityprice(INR) 846 7,874 45,807
Conversioncostofvendors(INR) 18,544 153,261 421,933
Increaseinconversioncostofvendors(%) 5.0% 5.0% 5%
B Increaseinconversioncostofvendors (INR) 927 7,663 21,097
Totalrawmaterialcost(INR) 27,000 232,000 880,000
A+B Increaseincost(INR) 1,773 15,537 66,903
Increase
in
cost
(%)
6.6% 6.7%
7.6%Source:AvendusResearch
Therawmaterialcostpervehicleincreasedby9%,11%and12%forBJAUT,TVSLandHH,respectively,
inFY11.WedonotestimatethecommoditypriceincreaseinFY12ftobeassevereasthatinFY11.We
estimatetherawmaterialcostpervehicletoincreaseby3%4%fortwowheelercompanies,basedon
our projections forsteel (increase of 14% inFY12f overaverageFY11 prices),aluminum (increaseof
4%)andrubber(increaseof16%)prices.
Increasingshareofruralsales
Theruraldemandfortwowheelershasconsistentlyoutperformedurbandemand.Ruraldemandhas
been increasingdueto lowerpenetrationandrising income levels.Ruralpenetrationstandsat9% in
FY11,whereasurbanpenetrationstandsat40%.
Exhibit15:TwowheelerpenetrationinruralandurbanareasinFY11(%)Households Penetration(%)
Rural 9
Urban 40
Overall 27
Source:Company
Theruraldemandgrowth(CAGRof16%overFY07FY11)hasoutpacedurbandemandgrowth(CAGRof
8%).
Strongruraldemanddue
tolowerpenetrationand
risingincome.
Ruraldemandgrowthhas
outpacedurbandemand.
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Automobiles 10
Only 25% of total twowheeler sales are funded by loans, significantly lower than that for other
automobilesegments(forpassengerandcommercialvehicles,60%65%ofsalesarefundedbyloans).
Thepenetrationoffinanceavenuesislowerinruralareas;inspiteofthis,ruralareascontribute45%of
twowheeler
sales.
This
indicates
ahigher
percentage
of
cash
purchases,
driven
by
higher
income.
The
higherincomeinruralareasisdrivenbyrecordcropproduction,higherfarmproductpricesandrural
jobguaranteeschemes.
Theruralcontributiontodemandishigherfortwowheelers(45%inFY11)thanforpassengervehicles
(11%).Twowheelercompaniesderive45%50%oftheirrevenuesfromruralareas.Totakeadvantage
of the highgrowing rural demand, companies are further expanding their dealership network and
touchpointstopenetratedeeperintoruralareas.
Exhibit16:DealershipnetworkandtouchpointsFY11Dealers Touchpoints
HH 800 4,400
BJAUT 610 4,270
TVSL
700 2,700
Source:Company
Structuralgrowthstorystillintact
Indiasyoungpopulation,growingmiddleclassandrisingincomelevelsarefuelingthehigherspendon
twowheelers.Almost50%ofthepopulationisunder25,whilec65%isunder35.Ayoungpopulation
impliesalargerworkforceandlesserdependents,leadingtohigherdiscretionaryspend.
Exhibit17:Populationbyagegroups
014
36%
1524
18%
2534
15%
3549
17%
50+
14%
Source:2001Censusdata
Higherincomeinrural
areasisdrivenbyrecord
cropproduction,higher
farm
product
prices
and
ruraljobguarantee
schemes.
Companiesareexpanding
theirnetworkto
penetratedeeperinto
ruralareas.
Ayoungpopulation
impliesalargerworkforce
andlesserdependents,
leadingtohigher
discretionaryspend.
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Automobiles 11
Exhibit18:Estimatedgrowthinmiddleclasshouseholds(INRmn)
Source:NCAER
Over70%ofmiddleclasshouseholdsowntwowheelers;thissectionislikelytogrowataCAGRof11%
overFY12eFY16e(Source:NCAER).
The sales price of a vehicle as a ratio of per capita income (FY11) for twowheelers and passenger
vehiclesis0.9xand9.6x,respectively,implyingeasyaffordabilityinthetwowheelersegment.
Thestructuralstory inthetwowheelersegment isstill intactwithruraldemand in thedriversseat.
WeestimatethetwowheelersegmenttogrowataCAGRof12%overFY12fFY14f ledbyaCAGRof
12%indomesticgrowthand18%inexportgrowth.
Exhibit19:Percapitaincome(INR)
10,000
30,000
50,000
70,000
FY01 FY03 FY05 FY07 FY09 FY11
13%CAGR
Source:RBI
Exhibit20:Domestictwowheelersales(mn)
Source:SIAM,AvendusResearch
Over70%ofmiddleclass
householdsowntwo
wheelers;thissectionis
likelytogrowataCAGRof
11%CAGRFY12fFY16f.
Thesalespriceofavehicle
asaratioofpercapita
income(FY11)fortwo
wheelersandpassenger
vehiclesis0.9xand9.6x,
respectively,implying
easyaffordabilityinthe
twowheelersegment.
2
6
10
14
18
FY96 FY99 FY02 FY05 FY08 FY11 FY14f
12%CAGR
11%CAGR
10.7 13.3
31.4
53.3
113.8
0
50
100
150
FY01 FY05 FY11e FY16e FY26e
`
11% CAGR
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Automobiles 12
MomentuminexportslikelytopersistdespitetheendtoDEPB
Exportsasapercentageoftotalsaleshavegrownto12%inFY11,from7%inFY06.Thestronggrowthinexportswas
dueto
positioning
of
Indian
two
wheelers
at
competitive
prices
in
the
global
market,
which
is
dominated
by
Japanese
andChineseOEMs.IndianvehiclesarepricedbetweenJapaneseandChinesevehicles.Countrieswithlowtwowheeler
penetrationor inadequatepublictransportsystemsarethetargetsfor Indiantwowheelerexports.Exportdemand is
estimatedtoslowfromaCAGRof25%overFY07FY11aswithdrawalofDEPBbenefitsarelikelytoleadtoanincrease
invehicleprices.EvenafterwithdrawalofDEPB,weestimateexportstogrowataCAGRof18%overFY12fFY14f;likely
tocontribute13%oftwowheelersalesbyFY14f.
ExportslikelytogrowataCAGRof18%overFY12fFY14f
The twowheeler segment has witnessed robust growth in exports (CAGR of 25% over FY07FY11),
chieflydrivenbymotorcycles(CAGRof31%).DuringFY07FY11,exportgrowthoutperformeddomestic
growth(CAGRof11%)byahugemargin.Exportsasapercentageoftotalsaleshavegrownfrom7%in
FY06
to
12%
in
FY11.
We
estimate
the
contribution
of
exports
to
grow
to
13%
of
two
wheeler
sales
by
FY14f.
Exhibit21:ExportsalesExports FY06 FY07 FY08 FY09 FY10 FY11 CAGR:FY07FY11(%)
Scooters 83,934 35,685 25,482 25,865 30,125 52,312
Growth(%) 57 29 2 16 74 9
Motorcycles 386, 054 545,887 776,007 97 0,969 1,102,978 1,480,983
Growth(%) 41 42 25 14 34 31
Mopeds 43,181 37,566 18,224 7,300 6,905 6,295
Growth(%) 13 51 60 5 9 32
Total 513, 169 619,138 819, 713 1, 004, 134 1,140, 008 1,539,590
Growth(%) 21 32 22 14 35 25
Source:SIAM
Exhibit22:DomesticsalesDomestic FY06 FY07 FY08 FY09 FY10 FY11 CAGR:FY07FY11(%)
Scooters 909, 051 940, 673 1,050,109 1, 145,798 1,462, 507 2,073,797
Growth(%) 3 12 9 28 42 18
Motorcycles 5,810,599 6,553,664 5,768,342 5,835,145 7,341,265 9,019,090
Growth(%) 13 12 1 26 23 9
Mopeds 332,741 355,870 413,759 431,214 564,584 697,418
Growth(%) 7 16 4 31 24 16
Total 7,052,391 7,850,207 7,232,210 7,412,157 9,368,356 11,790,305
Growth(%) 11 8 2 26 26 11
Source:SIAM
Indiantwowheelerspositionedatcompetitiveprices
ChineseandJapaneseOEMsdominatetheworldtwowheelermarket.Chinesevehiclesarecheapand
are positioned at the lower end of the market, whereas Japanese vehicles are expensive. In such a
scenario,IndianOEMsarepricingtheirproductsbetweenJapaneseandChinesevehicles.
IntheNigerianmarket,BJAUTsellstwowheelersata40%premiumtoChinesevehicles.Despitehigher
prices,BJAUThassuccessfullycapturedc28%marketshare(secondlargestplayer)inthismarket.
IntheIndonesianmarket,BJAUTofferstwowheelersatcheaperpricesagainstJapanesevehicles.The
companysellsthreevariantsofthePulsarinIndonesianmarket.HondaMotors(7267JP;NR)vehicles
arecostlierthanBJAUTsvehiclesbyatleast15%34%intheirrespectivecategories.
Exportgrowthhas
outpaceddomestic
growth.
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Automobiles 13
Exhibit23:ComparisonofBJAUTsvehicleswithHondasvehiclesinIndonesiaBJAUT Honda
Pulsar135LS Citisport1
Engine[cc]
135 125
Price[IDR] 14,750,000 17,190,000
PricedifferencewithBJAUT(%) 17
BJAUT Honda Honda
Pulsar180DTSi MegaproCW MegaproSW
Engine[cc] 179 149 149
Price[IDR] 15,900,000 19,500,000 18,300,000
PricedifferencewithBJAUT(%) 23 15
BJAUT Honda
Pulsar220DTSi TigerD/SHeadlight
Engine[cc]
220 197
Price[RP] 18,600,000 24,940,000
PricedifferencewithBJAUT(%) 34
Source:Company,AvendusResearch
LowpenetrationinAfrica,LatinAmericaandAsiancountries
IndianOEMsaretargetingAfrica,theMiddleEast,LatinAmerica,SouthAsia,SouthEastAsiaandWest
Asiancountries.Manyofthesecountrieshavelowtwowheelerpenetration.Someofthesecountries
arehaveinadequatepublictransportsystems,whereinasignificantpartoftheruralpopulationhasno
accesstothetransportsystem.Thismakesthemidealtwowheelerexportdestinations.
Exhibit24:Twowheelerpenetrationacrosscountries(penetrationperthousandpersons)
Source:MeszlerEngineeringServices 2007
Hondasvehiclesare
costlierthanBJAUTs
vehiclesby
at
least
15%
34%.
Targetexportcountries
forIndianOEMsare
countrieswithlow
penetrationorinadequate
publictransportsystems.
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Exhibit25:RuralAccessIndex proportionofruralpopulationwithaccesstotransportsystemsRegion Country RAI(%)
Africa Sudan 5
Tanzania
38
Kenya 44
Nigeria 47
LatinAmerica Brazil 53
Peru 43
Asia Nepal 17
Myanmar 23
Bangladesh 37
Bhutan 47
India 61
Source:WorldBank 2005
Withdrawalof
DEPB
likely
to
erode
FY12f
EPS
by
up
to
6%
The DEPB scheme, which gave liberal reimbursements to exporters at 8%9% free on board (FOB)
value, is coming toanend. Exporters will have to migrate to the Duty Drawback scheme where the
reimbursementislikelytobemuchlower(estimatedtobebetween1%and5%ofFOBvalue).
ThegovernmenthasannouncedthewithdrawaloftheDEPBschemefromSep11.Thegovernmentmay
also extend the scheme till Dec11 as the rates under the Duty Drawback scheme are yet to be
determined.
Wedidasensitivityanalysis togauge the impact ontheFY12fEPS, basedonDEPBexpirydatesand
DutyDrawbackrates.
We have assumed that companies are likely to increase vehicle prices and lower distributor
commissions
by
up
to
4%
to
compensate
for
the
loss
of
DEPB
benefits.
If
the
difference
between
the
DEPBrateandtheDutyDrawbackrateismorethan4%,itislikelytoadverselyaffecttheFY12fEPS.For
instance, if thenewDutyDrawback rate is3%andtheDEPBschemeexpires in Sep11, then BJAUTs
FY12fEPSislikelytobeadverselyaffectedby1.5%asshowninExhibit26.
Exhibit26:ImpactofwithdrawaloftheDEPBschemeonFY12fEPS(%)DEPBschemeextensiondate DutyDrawbackRates(%)
5.0 4.0 3.0 2.0 1.0
BJAUT
TillSep11 0.0 0.8 1.5 2.2 2.9
TillDec11 0.0 0.3 0.7 1.0 1.3
TVSL
TillSep11
0.0
1.6
3.2
4.7
6.3
TillDec11 0.0 0.8 1.7 2.5 3.3
HH
TillSep11 0.0 0.1 0.2 0.3 0.4
TillDec11 0.0 0.1 0.1 0.2 0.2
Source:AvendusResearch
Similarly,wedidasensitivityanalysistogaugethe impactofDEPBexpiryontheFY13fEPS(shown in
Exhibit27).
Wehaveassumedthat
companiesarelikelyto
increasevehiclepricesand
lowerdistributor
commissionsbyupto4%
tocompensatefortheloss
ofDEPBbenefits.
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Exhibit27:ImpactofwithdrawaloftheDEPBschemeonFY13fEPS(%)Company DutyDrawbackRates(%)
5.0 4.0 3.0 2.0 1.0
BJAUT
0.01.7
4.5
6.4
8.7
HH 0.0 0.2 0.5 0.8 1.0
TVSL 0.0 3.1 8.5 12.1 16.4
Source:AvendusResearch
As TVSL has a lower EBITDA margin (6.2% in FY12f) than BJAUT (19.8% in FY12f) and HH (14.4% in
FY12f),theimpactoftheDEPBschemeexpiryislikelytobehigherforthecompany.
Wehaveassumedthenewdutydrawbackrateat5%inourestimatesforthecompanies.Weestimate
thegrowthinexportstoslowfromaCAGRof25%overFY07FY11,ascompaniesmaytakepricehikes
tocompensateforthe lossofDEPBbenefits.EvenafterwithdrawalofDEPB,weestimateexports to
growataCAGRof18%overFY12fFY14f.
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Automobiles 16
Robustgrowthinscootersaddstotwowheelergrowth
Scootersarethepreferredfamilyvehicleofmiddleclass familiesduetohigherpower,easeofhanding, loadbearing
capacityand
unisex
suitability.
Scooters
are
preferred
by
young
adults
(learners),
women
and
by
men
beyond
the
age
of
45. In the domestic market, scooters, which grew at a CAGR of 18% over FY07FY11, have outpaced mopeds (16%
CAGR)andmotorcycles(9%CAGR),giventhewidercustomerbase.Scooterscontributed18%ofdomestictwowheeler
salesinFY11asagainst13%inFY06.Weestimatescooterstocontribute20%oftwowheelersalesbyFY14f.
Widercustomerprofileforscooters
Inthedomesticmarket,thescootersegmentgrewataCAGRof18%overFY07FY11,outperforming
mopeds(16%CAGR)andmotorcycles(9%CAGR).Thisgapingrowthratesoftwowheelercategoriesis
duetothedifferenceincustomerprofiles.
Exhibit28:Salesgrowthfordomesticscooters,motorcyclesandmopeds(%)
20
0
20
40
FY07 FY08 FY09 FY10 FY11
Scooters Motorcycles Mopeds
Source:SIAM
Scooters are the preferred family vehicle of middle class families due to higher power (there is a
growing preference for 100cc+ scootersover the past five years),ease of handing (gearless and self
start),higher loadbearingcapacity (luggagecarryingspace in the front,near the legsandbelow the
seat), lighterhandling(visvismotorcycles)andunisexsuitability(suitedforbothmenandwomen).
Scootersarepreferredbyyoungadults(learners),womenandbymenbeyondtheageof45.
Exhibit29:Customerprofilesofscooters,motorcyclesandmopedsGender Specificsection Class
Scooters Menandwomen Youngadults,women,menabove45 RichandMiddleclass
Motorcycles
Men
Males
up
to
45
years
Rich
and
Middle
class
Mopeds Men Malesupto45years LowerMiddleclass
Source:AvendusResearch
Given the wider customer base for the scooter segment, domestic scooter segment sales as a
percentage of domestic twowheeler sales have increased from 13% in FY06 to 18% in FY11. We
estimate this trend to continue and scooter segment sales as a percentage of twowheelersegment
salestoincreaseto20%byFY14f(representsaCAGRof17%overFY12fFY14f).
Scootersgrowthhas
outpacedgrowthin
mopedsandmotorcycles.
Scootersarepreferredby
youngadults(learners),
womenandbymen
beyondtheageof45.
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Exhibit30:Domesticsalesbreakup(%)
13 12 15 15 1618 18 19 20
82 83 80 79 78 7676 75 74
5 56 6 6 6 6 6 6
0
50
100
FY06 FY07 FY08 FY09 FY10 FY11 FY12f FY13f FY14f
Scooters Motorcycles Mopeds
Source:SIAM,AvendusResearch
Majorplayersinscooter,motorcycleandmopedsegments
Themotorcyclesegmenthas thehighest numberof players, ateight,asagainst five inscootersand
oneinmopeds.
The motorcycle segment witnessed the entry of one player, Mahindra & Mahindra (MM IN, NR),
whereasthescootersegmentwitnessed theexitofoneof itsoldestplayers,BJAUT.TVSL is theonly
playerinthemopedsegment.
After the split from HH, HMSI is planning several product launches, especially in the mass market
category.Thecompanyisalsoaggressivelyrampingupitsdistributionnetworkby200dealersperyear.
Exhibit31:Marketshareinmotorcycleandscootersegments(%) Motorcyclesmarketshare(%) Scootersmarketshare(%)
FY06 FY07 FY08 FY09 FY10 FY11 FY06 FY07 FY08 FY09 FY10 FY11
HH 48.2 45.8 49.4 52.4 51.9 48.0 1.5 9.5 9.7 13.3 14.4 17.0
BJAUT 30.9 33.5 32.7 28.0 29.7 32.3 11.7 2.1 2.0 1.0 0.3 0.0
TVSL 13.0 13.0 9.4 9.3 7.6 8.0 24.7 26.5 24.2 21.2 20.7 21.9
HMSI 1.6 2.4 4.3 5.9 6.2 7.1 50.3 56.0 58.5 56.9 50.3 42.7
YamahaMotor 4.2 3.8 2.6 3.0 3.4 3.6
RoyalEnfield 0.5 0.5 0.6 0.7 0.6 0.5
SuzukiMotorcycleIndia 0.0 0.9 0.9 0.7 0.6 0.5 0.0 0.0 2.3 7.1 9.5 10.9
MM 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.8 7.5
LML 1.1 0.0 0.0 0.0 0.0 0.0 4.2 0.0 0.0 0.0 0.0 0.0
KineticMotor* 7.6 5.9 3.4 0.5 0.0 0.0
Source:SIAM Note:*Mahindra&MahindraacquiredKineticMotorinFY09
Weestimatescooter
segmentsalesasa
percentageoftwo
wheelersalestoincrease
from18%inFY11to20%
byFY14f.
Themotorcyclesegment
sawentryofoneplayer
MM,whereasthescooter
segmentsawtheexitof
anoldplayerBJAUT.
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Indiantwowheelerscontribute22%24%ofglobaltwowheelers
InIndia,thetwowheelersegmenthasgrowninsalesandvaluetermsovertheyears.Thesegmenthad
salesof13.3mninFY11(at93%capacityutilization)andisvaluedatcINR441bn.
Exhibit32:SegmentsizeFY11Sales(mn) FY11fSalesValue(INRbn)
Twowheelers 13.3 c441
Scooters 2.1 c69
Motorcycles 10.5 c359
Mopeds 0.7 c12
Source:SIAM,AvendusResearch
Globally, the twowheeler market is classified into leisure and utility markets; North America and
Europeareleisuremarkets.Thebulkofvehiclesaresoldintheutilitymarkets;withinutility,thereare
two types of markets, viz. Mature and Emerging markets.Thailand, Indonesia, Philippines and Brazil
constitutematuremarkets,whileAfricaisanemergingmarket.
Globally, the twowheeler market is dominated by Chinese and Japanese manufacturers. In mature
markets, Japanese OEMs rule the market. In some emerging markets where Japanese OEMs do not
haveadirectpresence,ChineseOEMshavemadestronginroads.
Exhibit33:Globalsalesoftwowheelers(2010)2010sales(mn)
Global c5560
Asia 43.9
Africa 4.0
Europe 2.0
LatinAmerica 4.0
NorthAmerica 0.5
Source:Yamaha
Motor
annual
report,
Avendus
Research
The Indian twowheeler industry (13.3mn sales) contributes 22%24% of global twowheeler (55mn
60mnsales)sales.
Indiantwowheeler
segmenthassalesof
13.3mnand
is
worth
cINR441bn.
Globally,thebulkoftwo
wheelersaleshappenin
utilitymarkets.Theglobal
marketisdominatedby
ChineseandJapanese
OEMS.
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Newwaveofcompetitorsisleavingitsmark
Theincreasingcompetitioninthetwowheelersegmenthasledtolossofmarketshare,higheradvertisingexpenditure
andlower
pricing
power
for
existing
players.
In
the
domestic
motorcycle
segment,
HHs
market
share
declined
to
54.6%
inFY11asagainst58.5%inFY10.Inthedomesticscootersegment,HMSIsmarketsharedeclinedto43.1%inFY11as
against50.6%inFY10.Ouranalysisofthepricingpowerinthetwowheelersegmentrevealsthatrawmaterialcostasa
percentageoftotalincomeincreasedto72.1%aggregate ofHH,BJAUTandTVSLinMar11quarterasagainst68.2%
inMar10quarter,whereastheEBITDAmargindecreasedto14.5%inMar11quarterasagainst18.1%inMar10quarter.
Thus,allthecompaniesfacedmargincontractionduringFY11.
Lossofmarketshareforleaders
Theincreasingcompetitionhasledtoadropinmarketshareforleadersinthedomestictwowheeler
segment.Indomesticmotorcycles,HHsmarketsharedeclinedfrom58.5% inFY10to54.6% inFY11.
AfterthesplitfromHH,HMSIhasaggressivelylinedupproductlaunchesandcapacityexpansionplans
to
increase
capacity
from
1.6mn
units
to
4.0mn
units
by
1.4mn
units.
HMSI
has
already
overtaken
TVSL
in domestic market share. We see HMSI as HH and BJAUTs biggest competitor in the future. MM
enteredthemotorcyclesegmentwiththelaunchofStallioinFY11.
Exhibit34:Marketshareindomesticsegment(%)Segment Marketleader MarketShare
FY10 FY11
Motorcycles HH 58.5 54.6
Scooters HMSI 50.6 43.1
Source:SIAM
Inthedomesticscootersegment,HMSIsmarketsharedeclinedfrom50.6%inFY10to43.1%inFY11.
MMenteredthescootersegmentwiththeacquisitionofKineticMotor,andhas increased itsmarket
share
in
scooters
from
4.8%
in
FY10
to
7.7%
in
FY11.
Apart
from
competition,
a
long
waiting
list
for
HMSIsvehiclesisanothercauseforlossinmarketshare;customersshiftedtowardsproductsofSuzuki
MotorcycleIndia,HHandTVSL.
Marketingexpenditureremainsatsimilarlevelsinrelativeterms
As total income grows, fixed costs such as marketing expenditure should reduce as a percentage of
total income(reduction inrelativeterms)this isoperatingleverage.Althoughtotal incomegrewby
23% for HH and 42% for TVSL in FY11, marketing expenditure as a percentage of total income has
remained at similar levels for HH (2.3% of total income) and TVSL (7.2% of total income). As the
competitionintensityincreases,thesecompaniesareincreasingtheirmarketingexpendituretoretain
theirmarketshare.
The only company whose marketing expenditure declined was BJAUT. The companys marketing
expenditure
stood
at
0.6%
of
total
income
in
FY11.
In
future,
BJAUT
has
guided
to
an
increase
in
marketingexpenditureasithaslineduplaunchesofmotorcyclessuchastheKTMDukeandBoxer150.
BJAUThasguidedtomarketingexpenditureasapercentageoftotalincometobeupto1.0%oftotal
incomeinFY12.
AfterthesplitfromHonda,HHislikelytospendINR1bnonanimagemakeoverandbrandbuildingin
FY12.Thisexpenditureisoverandabovetheregularmarketingexpenditure.ItislikelytoincreaseHHs
marketingexpenditureto2.7%asapercentageoftotalincomeinFY12fasagainst2.3%inFY11.
HH,themarketleader,
andHMSIwitnessedan
erosioninmarketsharein
motorcyclesandscooters,
respectively.
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Exhibit35:Marketingexpenditure(INRmn)
500
2,000
3,500
5,000
FY10 FY11f
TVSL HH BJAUT
Source:Company,AvendusResearch
Exhibit36:Marketingexpenditureasa%oftotalincome(%)
7.2 7.2
2.3 2.3
1.5
0.6
0
3
6
9
FY10 FY11f
TVSL HH BJ AUT
Source:Company,AvendusResearch
Reducedabilitytopassthroughcosts
Exhibit37:RawmaterialcostasapercentageofTotalincomeandEBITDAmargin(%)
64
67
70
73
76
4QFY10 1QFY11 2QFY11 3QFY11 4QFY11
0
5
10
15
20
Raw material cost AdjEBITDAMargin(RHS)
Source:Company,AvendusResearch
OEMsworkedharderoncostreductiontechniques inFY11astheywereunabletofullypassthrough
theriseininputcoststoconsumers.Alltwowheelercompaniesfacedmargincontraction.
We have calculated the combined raw material costs and EBITDA margins for HH, BJAUT and TVSL
duringMar10
Mar11
quarters.
Our
analysis
showed
that
raw
material
cost
as
apercentage
of
total
income increasedfrom68.2% inMar10quarterto72.1% inMar11quarter,whereasEBITDAmargins
decreasedfrom18.1%to14.5%.Thepressureonmargins indicatesthelossofpricingpowerfortwo
wheelercompanies.
Ashighercompetitionislikelytocontinue,thisscenariooflimitedpricingpowerwouldalsocontinue.
We have assumed an upward trend in commodity prices over FY12fFY14f. Rising input costs,
increasingwagesandhighermarketingexpenditurearealsolikelytoputpressureonmargins.
We have calculated the combined raw material costs and EBITDA margins for HH, BJAUT and TVSL
duringFY12fFY14f.Weassumerawmaterialcostsasapercentageoftotal income to increase from
72.1%inFY11to73.6%inFY14f;EBITDAmarginsarelikelytodeterioratefrom14.8%to14.0%.
Alltwowheeler
companiesfacedmargin
contraction.
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Exhibit38: RawmaterialcostandEBITDAmarginforHH,BJAUTandTVSL
64
67
70
73
76
FY10 FY11 FY12f FY13f FY14f
0
5
10
15
20
Raw Materialcost/Totalincome AdjEBITDAMargin(RHS)
Source:Company,AvendusResearch
ThedeterioratingEBITDAmargins indicatethepresenceofnegativeoperating leverage.Weestimate
theCAGRof12.0%inEBITDAgrowthduringFY12fFY14ftolagtotalincomegrowth(CAGRof14.3%).
Exhibit39:TotalincomeandEBITDAgrowthoverFY12fFY14fFY11 FY12f FY13f FY14f CAGR(FY12fFY14f)
Totalincomegrowth 31.4% 17.7% 12.6% 12.6% 14.3%
EBITDAgrowth 10.0% 10.0% 10.1% 16.0% 12.0%
Source:Company,AvendusResearch
Weassumerawmaterial
costasapercentageof
totalincometoincrease
to73.6%inFY14fas
against72.1%inFY11.
WithdeterioratingEBITDA
margins,wehavenegative
operatingleverageat
work.
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Relativevaluationsappliedtoarriveatpricetargets
We use the relative valuation method to derive the standalone valuation for BJAUT and TVSL. We use HH as a
benchmark,
as
it
is
the
largest
twowheeler
company,
to
value
BJAUT
and
TVSL.
BJAUT,
TVSL
and
HH
represent
the three largest twowheelerplayers in India. WevalueBJAUTat HHs fiveyearhistoricalP/E,while we valueTVSL
at a 15% discount due to lower growth. In case of HH, the valuations taken are below the fiveyear mean due to
lowerearningsgrowth.WevalueHHata10%discountto its fiveyearhistoricalP/E.We initiatecoverageonBJAUT
(Buy),HH(Reduce)andTVSL(Buy).Riskfactorsarelowerdutydrawbackrates,fuelpriceincreases,higherinterestrates
andcommodityinflation.
ValuationsderivedforBJAUTandTVSLusingHHasabenchmark
WehavederivedthestandalonevaluationforBJAUTandTVSLusingtherelativevaluationmethodand
havecomparedthesecompanieswithHH.Thesecompaniesrepresentthetopthreecompaniesinthe
twowheelersegment.Wevaluethesecompaniesonthefollowingbasis:
We value BJAUT at 14.2x 1year forward EPS; this is on par with the fiveyear mean P/E of HH.BJAUT and HH have witnessed similar sales and total income growth over FY07FY11 (shown in
Exhibit40).
WevalueTVSLata15%discounttoHHsfiveyearhistoricalmeanP/EasTVSLshistoricalgrowthinsalesandtotalincomeislowerthanHHs.
Exhibit40:HistoricalgrowthcomparisonofHHandTVSLoverFY07FY11(%)(%) HH BJAUT TVSL
Salesgrowth 12 12 9
Totalincomegrowth 17 16 14
Source:AvendusResearch
WevalueHHat12.8xP/E,whichisata10%discounttoHHsfiveyearhistoricalmeanP/Eof14.2x.We take a 10% discount to historical valuations as the earnings growth for HH over FY12fFY14f
(CAGRof8%)islikelytobelowerthanhistoricalearningsgrowth(CAGRof16%overFY07FY11).HH
hastradedata10%discounttotheSensexP/Emeanoverpastfiveyears.Ourvaluationmultipleof
12.8xfactorsinthisdiscountaswell.
Exhibit41:HHsP/ErelativetoSensex
80
40
0
40
Jul06 Apr07 Dec07 Sep08 May09 Feb10 Oct10 Jul11
RelativetoSensexP/E(%) Avgdiscount(%)
Average=10%
Source:Bloomberg,AvendusResearch
WevalueTVSLata15%
discounttoHHsfiveyear
historicalmeanP/Eas
TVSLshistoricalgrowthin
salesandtotalincomeis
lowerthanHHs.
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Exhibit42:ElementsoftargetpriceMultiple(x)AsapercentageofHHs
historicalvaluation
Fairvalue(INR) Strategicinvestment(INR) Targetprice(INR)
BJAUT
14.2xP/E 100% 1,706 27
1,733
HH 12.8xP/E 90% 1616 1,616
TVSL 12.0xP/E 85% 64 1 65
Source:AvendusResearch
WeinitiatecoverageonBJAUT(Buy),HH(Reduce)andTVSL(Buy)withJun12targetpriceofINR1,733,
INR1,616andINR65respectively.
Forecastslowerthanconsensusestimates
Our aggregate net revenue forecast for BJAUT, HH and TVSL in FY13f is 2% lower than consensus
estimates, implying that oursalesgrowth forecast is lower. We estimate aggregate salesgrowth for
these companies to be lower, at 9%, in FY13f (in comparison to 13% in FY12f) due to continuing
headwinds.
Exhibit43:AvendusandconsensusestimatesoverFY12fFY13f NetSales(INRmn) EPS(INR)
FY12f FY13f FY12f FY13f
BJAUT Consensusestimate 194,909 223,309 102.2 115.4
Avendusestimate 186,909 215,127 103.3 116.7
Difference(%) 4.1 3.7 1.1 1.1
HH Consensusestimate 226,062 256,406 112.4 128.4
Avendusestimate 228,506 254,886 111.0 125.3
Difference(%) 1.1 0.6 1.2 2.4
TVSL Consensusestimate 73,285 84,458 5.3 6.5
Avendusestimate 72,297 83,110 4.7 5.2
Difference
(%)
1.3
1.6
11.7
20.8
Source:Bloomberg,AvendusResearch
We largely differ from the consensus in our estimates for TVSL in FY13f (2% and 21% lower than
consensusestimatesonnetrevenueandEPS,respectively), implyinghighermarginpressures.TVSLs
marginsare likely tobeaffectedbycommodityandwage inflation.Wealsoestimate thecompanys
marketing expenditure to remain at 7.2% of total income in FY13f, as TVSL is likely to continue
spendingonmarketingtocountertherisingcompetition.
Initiatecoverageon3twowheelercompanies
BajajAuto(BJAUT):BJAUThaslinedupnewmodelssuchasKTMDukeandBoxer,andvariantlaunches
fordomesticandexportmarkets inFY12f.These launchesare likelytostrengthentheproduct lineup
andaid
growth.
BJAUTs
vehicles
are
well
accepted
in
export
markets
CAGR
of
43%
and
25%
in
two
and threewheeler exports over FY07FY11, respectively. BJAUT is likely to maintain higher EBITDA
margins of 19%20% over FY12fFY14f due to exposure to the highgrowth threewheeler passenger
segment.WeestimateBJAUTssalestogrowat12%overFY12fFY14f.OurJun12TPforBJAUTstands
atINR1,733,anupsideof22%.InitiatecoveragewithaBuyrating.
HeroHonda(HH): TheendoftheJVwithHondaMotorpresentsmanychallenges.Themostpressing
oneistostrengthenR&Doperationstochurnoutnewmodelsandupgradevehiclesforthenextlevel
of emission norms. Another challenge stems from the rise in competitive intensity posed by Honda
Motors solo presence in the country. HH faces margin pressure due to a rise in R&D, royalty and
advertising expenditures as a result of the split. In addition to breakup woes, the companys sales
growthislimitedbyproductionconstraintsandslowinglaunches.Weestimatesalesgrowthtotaperto
aCAGRof11%overFY12fFY14f.OurJun12TPforHHstandsatINR1,616,whichimpliesadownsideof
11%.Initiate
coverage
with
aReduce
rating.
Weinitiatecoverageon
BJAUT(Buy),HH(Reduce)
andTVSL(Buy)withJun12
targetpriceofINR1,733,
INR1,616andINR65
respectively.
Initiatecoveragewitha
Buy
rating
and
Jun12
targetofINR1,733.
Initiatecoveragewitha
Reduceratingwitha
Jun12targetofINR1,616.
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TVSMotorCompany(TVSL):LaunchesinFY12farelikelytoaidgrowthandstrengthenTVSLsportfolio.
The scooter segment is likely to grow at a CAGR of 17% over FY12fFY14f, led by the growing
acceptance of scooters as a family vehicle. The company entered the lucrative threewheeler
passengersegment
in
FY08
and
succeeded
in
capturing
6%
market
share
in
FY11.
We
estimate
three
wheelersalestogrowataCAGRof15%overFY12fFY14f.TVSLsuccessfullyrodetheexportgrowth
story (CAGR of 25% over FY07FY11), led by the growing acceptance of Indian vehicles in several
developing countries. We estimate TVSLs exports to grow at a CAGR of 15% over FY12fFY14f. We
estimatesalestogrowataCAGRof12%overFY12fFY14f.OurJun12TPforTVSLstandsatINR65,an
upsideof28%.InitiatecoveragewithaBuyrating.
Riskfactors
Failureofproductlaunches:Salesmaybeaffectedduetofailureofmodelsorvariantlaunches.Lower Duty Drawback rates: New duty drawback rates are likely to replace DEPB scheme rates.
These dutydrawback rates formotorcyclesare likelyto beanywherebetween 1%and5%. If the
rateis
lower
than
5%,
then
margins
are
likely
to
be
adversely
affected.
RiseinRawmaterialprices:Wehaveassumedanincreaseofc4%inrawmaterialcostpervehicleinFY12f.Ifthepricesofsteel,aluminum,andrubberincreaseatahigherthanestimatedrate,then
marginsanddemandmaybeadverselyaffectedasaresultofpartialpassthroughofprices.
Rise in interestratesandfuelprices:Further increase in interestratesandfuelpricesmayaffectthe sentiment of replacement and upgrade buyers (these buyers contribute 50% of domestic
demand).
Initiatecoveragewitha
BuyratingandJun12
targetofINR65.
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AnnexureExhibit44:Scootersegmentsales,growthandtopplayersSco oters FY 07 FY 08 FY09 FY10 F Y11 CAGR
(FY07
FY 11)
Totalvolume( 000s) 976 1,076 1,172 1,49 3 2,1 26
Domesticvolume( 000s) 941 1 ,050 1 ,146 1 ,46 3 2,0 74
Exportvolume (0 00s) 36 25 26 3 0 52
Totalvolumegrowth ( % ) 1.7 10.2 8.9 27.4 42.4 16.4
Domesticvolumegrowth ( % ) 3.5 11.6 9.1 27.6 41.8 17.9
Exportvolume growth(%) 57.5 28.6 1.5 16.5 73.6 9.0
Exportsas percentageo fto talvolume(% ) 3.7 2.4 2.2 2.0 2.5
Top 3P layers
Volume(00 0s)
HondaMotorcycle &Scoo ter India 547 629 666 75 1 9 07
TV SL 259 260 248 30 9 4 66
HH 93 105 156 21 4 3 61
Growth( % )
HondaMotorcycle &Scoo ter India 9.4 15.0 5.9 12.8 20.7 12.7
TV SL 5.6 0.4 4.5 24.6 50.7 13.7
HH 51 9.2 12.7 49.0 37.2 68.7 88.9
Market share(%)
HondaMotorcycle &Scoo ter India 5 6.0 58.5 56.9 50.3 42.7
TV SL 2 6.5 24.2 21.2 20.7 21.9
HH 9.5 9.7 13.3 14.4 17.0
Source:SIAM
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Exhibit45:Motorcyclesegmentsales,growthandtopplayersM otorc ycles F Y07 F Y08 F Y09 F Y10 FY1 1 CAGR (FY07 FY11)
Totalvolume( 000s) 7,100 6,54 4 6,806 8,4 44 10,500
Dom esticvolume
( 000s) 6,554 5,76 8 5,835 7,3 41 9,019
Exportvolume(0 00s) 546 77 6 971 1,1 03 1,481
Totalvolumegrowth ( % ) 14.6 7.8 4.0 24.1 24 .3 11.1
Dom esticvolumegrowth ( % ) 12.8 12.0 1.2 25.8 22 .9 9.2
Exportvolumegrowth( %) 41.4 42.2 25.1 13.6 34 .3 30.9
Exportsa spercentage o fto tal volum e(% ) 7.7 11.9 14.3 13.1 14 .1
Top 3Players
Volume(000s)
HH 3,254 3,23 2 3,566 4,3 86 5,041
BJA UT 2,377 2,14 0 1,908 2,5 07 3,387TV SL 925 61 8 636 6 41 837
Growth( % )
HH 9.0 0.7 10.3 23.0 14 .9 11.0
BJA UT 24.2 10.0 10.8 31.4 35 .1 12.1
TV SL 14.7 33.2 3.0 0.8 30 .6 0.7
Market share(%)
HH 45.8 49.4 52.4 51.9 48 .0
BJA UT 33.5 32.7 28.0 29.7 32 .3
TV SL 13.0 9.4 9.3 7.6 8 .0
Source:SIAM
Exhibit46:Annexure3:Mopedsegmentsales,growthandtopplayersMopeds FY 07 FY08 FY09 FY10 FY11 C AGR(FY07FY11)
Totalvolume(000s) 393 4 32 439 57 1 704
Domesticvolume(000s) 356 4 14 431 56 5 697
Exportvolume(0 00s) 38 18 7 7 6
Totalvolumegrowth (%) 4 .7 9.8 1.5 30.3 23.1 1 3.4
Domesticvolumegrowth (%) 7 .0 16.3 4.2 30.9 23.5 1 6.0
Exportvolumegrowth(%) 13.0 51.5 59.9 5.4 8.8 32.0
Exportsaspercentageo ftotalvolume(%) 9 .5 4.2 1.7 1.2 0.9
Top 3Players
Volume(00 0s)
TVSL 345 4 11 437 57 1 704
KineticMoto r 23 12 2 0 0
MajesticAuto 26 8 0 0 0
Growth(% )
TVSL 18 .7 19.4 6.2 30.8 23.1 1 9.4
KineticMotor 19.9 46.6 85.7 NM N M NM
MajesticAuto 54.4 67.6 NM NM N M NM
Marketshare(%)
TVSL 87 .6 95.2 99.6 100.0 100.0
KineticMoto r 5 .8 2.8 0.4 0.0 0.0
MajesticAuto 6 .6 2.0 0.0 0.0 0.0
Source:SIAM
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Exhibit47:Annexure4:3Wpassengersegmentsales,growthandtopplayers3Wpassegnervehicles FY 07 FY08 FY 09 FY10 FY1 1 CAGR(FY07FY11)
Totalvolume(000s) 380 375 415 522 695
Domesticvolume
(000s) 237 235 268 350 427
Exportvolume(0 00s) 143 140 147 173 268
Totalvolumegrowth (%) 31.7 1.2 1 0.7 25.7 33. 2 19.2
Domesticvolumegrowth (%) 11.3 0.9 1 4.4 30.2 22. 1 15.0
Exportvolumegrowth(%) 88.9 1.8 4.6 17.4 55. 6 28.8
Exportsaspercentageo ftotalvolume(%) 37.6 37.4 3 5.4 33.0 38. 6
Top 3Players
Volume(000s)
BJAUT 279 264 264 329 432
PiaggioVehicles 79 94 105 135 158
MM 3 4 27 31 47
Growth(% )
BJAUT 29.3 5.6 0.3 24.6 31. 3 14.9
Piaggio Vehicles 48.7 18.8 1 1.7 28.1 17. 4 24.3
MM 16.2 40.1 52 9.3 13.7 52. 3 66.5
Marketshare(%)
BJAUT 73.6 70.3 6 3.6 63.1 62. 2
Piaggio Vehicles 20.9 25.1 2 5.3 25.8 22. 7
MM 0.8 1.2 6.6 6.0 6. 8
Source:SIAM
Exhibit48:3Wgoodssegmentsales,growthandtopplayers3Wgoodsvehic le s FY 07 FY08 FY 09 FY10 FY11 CAGR(FY07FY11)
Totalvolume(000s) 168 131 82 92 101
Domesticvolume(000s) 167 130 81 91 99
Exportvolume(0 00s) 1 1 1 1 2
Totalvolumegrowth (%) 13.2 22.2 37 .0 11.1 10.0 7.5
Domesticvolumegrowth (%) 13.5 22.2 37 .5 11.7 9.2 7.6
Exportvolumegrowth(%) 20.9 14.0 40 .7 32.6 97.3 5.0
Exportsaspercentageo ftotalvolume(%) 0.6 0.6 1 .4 0.8 1.5
Top 3Players
Volume(000s)
Piaggio Vehicles 67 59 43 51 63
MM 31 30 17 14 17
AtulAuto 9 5 4 7 9
Growth(% )
Piaggio Vehicles 18.2 11.8 27 .4 18.3 22.6 1.9
MM 63.5 2.9 41.2 17.9 21.3 1.5
AtulAuto 12.7 38.9 18 .1 68.5 21.4 2.2
Marketshare(%)
Piaggio Vehicles 40.1 45.4 52 .4 55.8 62.2
MM 18.2 22.7 21 .2 15.7 17.3
AtulAuto 5.2 4.1 5 .3 8.0 8.8
Source:SIAM
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AnalystCertification
I,SriRaghunandhanNL,MBA,researchanalystandauthorofthisreport,herebycertifythatalloftheviewsexpressed inthisdocumentaccuratelyreflectourpersonalviews
aboutthesubjectcompany/companies and itsortheirsecurities.Wefurthercertifythatnopartofourcompensation was, isorwillbe,directlyor indirectlyrelatedtospecific
recommendations orviewsexpressedinthisdocument.
Disclaimer
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and/orsellanysecuritiesmentionedhereinand/orofficialconfirmationofanytransaction. Thisdocumentisprovidedforassistanceonlyandisnotintendedtobe,andmustnot
betakenas,thesolebasisforaninvestmentdecision.Theuserassumestheentireriskofanyusemadeofthisinformation. Eachrecipientofthisdocumentshouldmakesuch
investigationashedeemsnecessarytoarriveatanindependentevaluation,includingthemeritsandrisksinvolved,forinvestmentinthesecuritiesreferredtointhisdocument
andshouldconsulthisownadvisorstodeterminethemeritsandrisksofsuchinvestment.Theinvestmentdiscussedorviewsexpressedmaynotbesuitableforallinvestors.This
documenthasbeenpreparedonthebasisofinformation obtainedfrompubliclyavailable,accessibleresources.Avendushasnotindependently verifiedalltheinformationgiven
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AnycommentorstatementmadehereinaresolelythoseoftheanalystanddonotnecessarilyreflectthoseofAvendus.
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DisclosureofInterestStatement(asofJuly26,2011)
Analystownership
ofthestock
Avendusoritsassociatecompanys
ownershipofthestock
InvestmentBankingmandatewith
associatecompaniesofAvendus
IndianCompanies
BajajAuto No No No
EicherMotors No No No
HDFCbank No No No
HeroHonda No No No
HondaMotorcycleandScooterIndia No No No
LML No No No
Mahindra&Mahindra No No No
StateBankofIndia No No No
SuzukiMotorcycleIndia No No No
TVSMotorCompany No No No
YamahaMotor
India
No
No
No
InternationalCompanies
HondaMotor No No No
KTMPowerSportsAG No No No
PTBajajAutoIndonesia No No No
PTTVSMotorCompanyIndonesia No No No
Yamahamotor No No No
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