1. Sector Update October 01, 2009
Two-Wheelers Dealer Survey
Over the past few months two-wheeler volumes have been on a steady rise, primarily driven
by strong growth in rural volumes. However, off late there have been indications of a
recovery in urban volumes. To understand the ground realities, we conducted a dealer
survey for two wheeler manufacturers with focus on tier-I and tier-II cities. Our coverage
encompassed 30 dealers from cities of Mumbai, Delhi, Chennai, Hyderabad, Nashik,
Bangalore, Ahmedabad, Jaipur, Nagpur, Indore, Coimbatore, Amritsar and Vadodara. Hero
Honda dealers accounted for 47% of the dealers surveyed, while 37% were Bajaj Auto
dealers and remaining 17% were from a mix of TVS Motors and multi-brand dealers. Most of
the dealers felt that the current festive season would be better than previous year and the
current growth trend is likely to peak out following the festive season.
Breakup of dealers surveyed Expectations about future demand growth
ALL, 2 Unsure
Yamaha, 1 13%
Negative
TVS, 2 Hero Honda, 10%
14
Bajaj, 11
Positive
77%
Source: India Infoline Research
Key reasons for the current recovery
50 %
45
Percentage of dealers
40
35
30
25
20
15
10
5
0
Rural Demand
market share
Festival
recovery ( Job
Stability, Credit
No recovery
season
prefer bikes
Dealers effort
Govt. efforts
Traffic
New launches
Fuel efficiency
for customer
generation
Gain in the
satisfaction
Economic
Young
of the
Source: India Infoline Research
Festive season a key driver for growth
About 57% of the respondents believe that the current festival season has been the driving force for
the recent recovery in urban volumes. Number of bookings surged following the end of inauspicious
period of “Shradpaksha”. Going ahead too, many dealers feel that robust volumes in the current
season would be the key to a robust performance for the current year. In fact, 77% of the dealers feel
that current festive season would be significantly better than previous. However, 23% were still
apprehensive about a relatively better current festive season.

2. Two Wheelers Dealer Survey
Economic recovery improving consumer sentiment
About 20% of the dealers believe that economic recovery has also supported growth in recent times.
Interestingly one of the dealers quoted “this time around we shall have dual force generating growth in
the current year. One, current demand and secondly, the deferred demand during the tough times of
economic instability.” Few dealers cited other demographic reasons such as younger generation
preferring bikes, fuel efficiency vis-à-vis cars and increasing traffic.
Manufacturer’s efforts vital for enhancing brand value
One-third of the dealers stressed on manufacturer’s ability to distinguish its products and services from
other players as an important factor for enhancing brand value. New launches and new variants, which
are in tune with customer requirements, are an essential for increasing market share. Few dealers also
pointed out individual dealers’ service quality as an influencing factor.
Credit availability improving but still below historical highs
Credit financed sales of two wheelers dropped from levels of about 55% to about 45% during the
previous year. However, off late the ratio has improved to about 50% following improved financing by
private banks (according to 53% of dealers). The improvement has been on account of lower
delinquencies in the recent past. Credit sales for 65% of the surveyed Hero Honda dealers had credit
sales less than 30% of their total volumes. For Bajaj Auto, 55% of dealers had credit sales more than
40% of their volumes.
Outlook remains positive
77% of the dealers were positive about near term growth prospects of the industry, while remaining
were skeptical about sustainability of the growth. The growth is expected to peak during the current
festival season, fall during the following two months and will then stabilize during Q4 FY10. During Q4
FY10, corporate buying would increase as they avail depreciation benefits. Urban growth is expected to
remain strong in the current festive season and then peak out. However, we believe rural sales would
continue to remain robust.
Stocks adequately factoring near term earnings growth
With robust recovery in volumes over the past few months, auto stocks significantly outperformed the
broader indices. While Bajaj Auto surged 264% YTD, Hero Honda jumped 106% as compared to 73%
gains in Sensex. Hero Honda currently trades at 16.5x FY11E earnings of Rs101.4 and Bajaj Auto is
trading at 16.2x FY11E earnings of Rs92.2. We maintain our Market Performer rating on both Bajaj
Auto and Hero Honda with target price of Rs1,542 (revised) and Rs1,724 respectively.
Survey response: Cash v/s credit sales Estimates of industry credit sales
50 % 60 (%)
45
40 55
35
30 50
25
20 45
15
10 40
5
0 35
100% 0% - 20% - 40% - 60% - 80% -
cash 20% 40% 60% 80% 100% 30
sales FY03 FY08 FY09 FY10 FY13
Source: India Infoline Research Source: Crisil
Sector Update 2

3. Two Wheelers Dealer Survey
Survey response : Hero Honda credit sales Survey response : Bajaj Auto credit sales
40%+ 0%-20% 0%-30%
14% 21% 18%
50%+
37%
30%-40%
30%-40%
21% 27%
20%-30%
44%
40%-50%
18%
Source: India Infoline Research
Survey response : Key financing sources Survey response : Breakup between buyers
NBFC/Other Replacement
37% 37%
Private New
sector purchases
63% 63%
Source: India Infoline Research
Valuation summary for Bajaj Auto
Y/e 31 Mar (Rs m) FY08 FY09 FY10E FY11E
Revenues 90,462 88,104 95,628 104,880
yoy growth (%) - (2.6) 8.5 9.7
Operating profit 12,705 11,777 18,421 20,417
OPM (%) 14.0 13.4 19.3 19.5
Pre-exceptional PAT 8,583 8,616 11,974 13,346
Reported PAT 7,558 6,545 10,141 13,346
yoy growth (%) - (13.4) 54.9 31.6
EPS (Rs) 59.3 59.6 82.8 92.2
P/E (x) 25.2 25.1 18.1 16.2
Price/Book (x) 13.6 11.6 8.6 6.2
EV/EBITDA (x) 18.0 19.4 12.5 11.1
Debt/Equity (x) 0.8 0.8 0.7 0.4
RoE (%) 54.1 49.8 54.7 44.5
RoCE (%) 42.4 37.1 46.7 43.3
Source: Company, India Infoline Research
Sector Update 3

4. Two Wheelers Dealer Survey
Valuation summary for Hero Honda
Y/e 31 Mar (Rs m) FY08 FY09E FY10E FY11E
Revenues 103,318 123,191 141,482 158,149
yoy growth (%) 4.4 19.2 14.8 11.8
Operating profit 13,494 17,097 23,910 26,253
OPM (%) 13.1 13.9 16.9 16.6
Pre-exceptional PAT 9,679 12,818 18,434 20,250
Reported PAT 9,679 12,818 18,434 20,250
yoy growth (%) 12.8 32.4 43.8 9.9
EPS (Rs) 48.5 64.2 92.3 101.4
P/E (x) 34.5 26.0 18.1 16.5
Price/Book (x) 11.2 8.8 6.4 5.0
EV/EBITDA (x) 24.7 19.4 13.9 12.7
Debt/Equity (x) 0.0 0.0 0.0 0.0
RoE (%) 35.5 37.8 41.1 34.3
RoCE (%) 45.7 48.1 51.6 43.2
Source: Company, India Infoline Research
Sector Update 4

5. Recommendation parameters for fundamental reports:
Buy – Absolute return of over +10%
Market Performer – Absolute return between -10% to +10%
Sell – Absolute return below -10%
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