PRIVATE CLIENT RESEARCH MAY 13, 2010
Arun Agarwal email@example.com +91 22 6621 6143
Two Wheeler Industry
Fundamentals still attractive; valuations......
Over the years the two wheeler sector has played a key role in a country like India where majority of population lives in rural or semi-urban areas without adequate transportation facilities. The Indian two wheeler market with an annual domestic sale in excess of 9mn units is 2nd largest globally and accounts for 75% of the total domestic automobile industry sales volume and that clearly demonstrates the popularity of two wheelers among the Indian consumers. After facing a slowdown in FY08 and FY09, the two wheeler industry made a remarkable come back in FY10 and we are optimistic about growth prospects in FY11E. Current retail demand is quite robust and this, coupled with new launches and players' focus on volume generating 100cc segment, would be the main growth driver for the industry in FY11E. Volumes in FY10 grew at a significant pace and on that high base in FY11E industry volumes are expected to grow though at a relatively moderate pace. We expect the domestic two wheeler volumes growth rate to come down from 26% in FY10 to 15% in FY11E. Due to relatively lower base and new launches, we expect players like Bajaj Auto (BAL) and TVS Motor (TVS) to outperform the industry volumes growth rate in FY11E. On the other hand, Hero Honda (HH) is expected to underperform on back of enhanced competition and relatively much higher base. We have an ACCUMULATE rating on all three stocks with preference for BAL and TVS. Volume growth to come down but remain decent in FY11E
Hero Honda Motors Bajaj Auto TVS Motor ACCUMULATE ACCUMULATE ACCUMULATE
Industry sales volume (mn units)
12.0 9.0 6.0 3.0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
2W Industry - Market Share Top 3 players (%)
HH BAL TVSM
50 40 30 20 10
After a substantial volume uptick in FY10, we expect the industry to return to a relatively moderate growth path in FY11E. We expect the demand momentum for two wheelers to continue in FY11E but the rate is likely to be lower than FY10. Robust retail demand, new product launches and lower base effect of 1HFY10 would be the main volume driver in FY11E. However, the relatively higher base of 2HFY10 and absence of one time factors (FY10 had the effect of VIth Pay Commission, farmers loan waive-off etc) will restrict the growth rates to a moderate level, we opine. Accordingly we expect the two wheeler volumes to grow by 15% in FY11E versus 26% growth recorded in FY10. New launches would remain crucial New launches over the next 6-12 months would be critical for maintaining the growth in FY11E. Successful product launch generally tends to expand the overall market thereby leading to a robust and higher growth for the industry. With overall two wheelers demand drivers in place; new launches would play a significant role in FY11E to achieve our industry volume growth expectation of 15%. Recent new launches like Pulsar135LS, Twister and Jive would aid industry volume growth over the next six months.
(Rs mn) CMP (Rs) HH BAL TVS Motors 1,901 2,145 100 TP (Rs) Revenues FY10E FY11E 180,658 142,011 57,206 Adjusted PAT FY10E 22,318 18,243 1,320 FY11E 24,396 20,609 1,832 EPS (Rs) FY10E 111.8 126.1 5.6 FY11E 122.2 142.4 7.7 PE(x) FY10E 17.0 18.3 27.5 FY11E 15.6 15.1 13.0 EV/EBITDA(x) FY10E FY11E 12.0 11.9 9.8 11.1 10.1 7.0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 112
1,955 158,312 2,280 119,210 44,240
Source: Companies; Kotak Securities - Private Client Research
Registered Office: Kotak Securities Limited, Bakhtawar, 1st floor, 229 Nariman Point, Mumbai 400021 India.
May 13, 2010
Pick up in exports Exports form around 11% of the overall sales of the two wheeler industry. During the global slowdown, two wheeler players witnessed a dip in...