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India Equity Research Reports, IPO and Stock News
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Two-wheelers: Business model drives returns on capital; Buy Bajaj
1Q cash return cos outperform markets: Focus on India 2-wheelers
Our analysis of Indian auto sector valuation relative to the broader GS India
coverage of 131 stocks indicates: 1) Top quartile cash return companies on
average tend to outperform across the cycle, with strong correlation of
valuation to returns (90% r-squared). Indian auto companies with similar
business models as branded consumer goods companies appear well
positioned to sustain high returns on capital. In this regard, we highlight Indian
2-wheeler (2W) market leaders Bajaj Auto and Hero Motocorp. 2) We reiterate
Buy on Bajaj Auto: It screens as the most attractive Indian auto company
relative to GS India coverage of 131 stocks (trading 0.5X standard deviation
below its returns-implied EV/IC multiple). The current stock price reflects 20 pp
lower FY13E cash returns (or 5 pp EBITDA margin decline), which we think is
unlikely given its sustainable leadership in the highest-margin 3W and
premium motorcycle segments (>45% of volumes, generating >25% blended
FY12E EBITDA margins), and growing export markets. 3) We reiterate Sell on
Hero Motocorp: Relatively more expensive within our Indian auto coverage on
returns-implied valuation and lack of visibility on long-term product and
market strategy. The stock is currently trading at 14.8X FY13E P/E vs. its 10-
year historical average of 13X and Bajaj Auto at 13.2X.
What sustains high returns in Indian 2Ws— exploring key themes
1) Business models of Indian 2W market leaders appear similar to branded
consumer goods companies, in our view, with low developmental capex and
significant role of brand equity in sustaining market share. 2) Brand and
product strategy—particularly Bajaj Auto appears to focus on sustaining
leadership through first-mover advantage and leveraging the law of duality in
markets. 3) Limited global competition and high Herfindahl index relative to
other Indian industrial segments. 4) Penetration/distribution: 2W makers cater
to the bottom of the global economic pyramid, with low penetration rates in
India that can sustain 10% yoy growth rates over next two decades, and further
potential in lower income export markets such as Africa and Latin America.
Raising estimates, target prices for Bajaj Auto and Hero Motocorp
We raise our FY12E-FY14E EPS for Bajaj Auto and HMCL by 1%-4% on higherthan-expected 2W demand FY2012 ytd, and our 12-month P/E-based TPs by
10%-20% mainly on rolling forward to FY13E. Key risks: Higher/lower-thanexpected competition from Honda and volatile commodity costs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Two-wheelers: Business model drives returns on capital; Buy Bajaj
1Q cash return cos outperform markets: Focus on India 2-wheelers
Our analysis of Indian auto sector valuation relative to the broader GS India
coverage of 131 stocks indicates: 1) Top quartile cash return companies on
average tend to outperform across the cycle, with strong correlation of
valuation to returns (90% r-squared). Indian auto companies with similar
business models as branded consumer goods companies appear well
positioned to sustain high returns on capital. In this regard, we highlight Indian
2-wheeler (2W) market leaders Bajaj Auto and Hero Motocorp. 2) We reiterate
Buy on Bajaj Auto: It screens as the most attractive Indian auto company
relative to GS India coverage of 131 stocks (trading 0.5X standard deviation
below its returns-implied EV/IC multiple). The current stock price reflects 20 pp
lower FY13E cash returns (or 5 pp EBITDA margin decline), which we think is
unlikely given its sustainable leadership in the highest-margin 3W and
premium motorcycle segments (>45% of volumes, generating >25% blended
FY12E EBITDA margins), and growing export markets. 3) We reiterate Sell on
Hero Motocorp: Relatively more expensive within our Indian auto coverage on
returns-implied valuation and lack of visibility on long-term product and
market strategy. The stock is currently trading at 14.8X FY13E P/E vs. its 10-
year historical average of 13X and Bajaj Auto at 13.2X.
What sustains high returns in Indian 2Ws— exploring key themes
1) Business models of Indian 2W market leaders appear similar to branded
consumer goods companies, in our view, with low developmental capex and
significant role of brand equity in sustaining market share. 2) Brand and
product strategy—particularly Bajaj Auto appears to focus on sustaining
leadership through first-mover advantage and leveraging the law of duality in
markets. 3) Limited global competition and high Herfindahl index relative to
other Indian industrial segments. 4) Penetration/distribution: 2W makers cater
to the bottom of the global economic pyramid, with low penetration rates in
India that can sustain 10% yoy growth rates over next two decades, and further
potential in lower income export markets such as Africa and Latin America.
Raising estimates, target prices for Bajaj Auto and Hero Motocorp
We raise our FY12E-FY14E EPS for Bajaj Auto and HMCL by 1%-4% on higherthan-expected 2W demand FY2012 ytd, and our 12-month P/E-based TPs by
10%-20% mainly on rolling forward to FY13E. Key risks: Higher/lower-thanexpected competition from Honda and volatile commodity costs.
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