SUBMITTED TO:

PROF. Ajay Kumar Panda

SUBMITTED BY:
Kavish Jagwani(09BSHYD0364)
Mudit Chaudhry(09BSHYD0471)
Siddharth Saboo(09BSHYD0816)

Section ‘E’
 TABLE OF CONTENTS
I. Executive Summary………………................................................................4
II. Economic Analysis………………..................................................................5
A. SWOT Analysis…………...................................................................6
III. Global Automobile Industry………...........................................................8
IV. Indian Automobile Industry………...........................................................11
A. Evolution of the Automobile Industry ……....................................11
B. Overview of the Segments………...................................................14
C. SWOT Analysis…………..................................................................18
D. Porter’s Five Forces Analysis.........................................................20
E. Government Initiatives.................................................................22
F. Recent Developments...................................................................23
G. Future Outlook.............................................................................24
V. Valuation Models...................................................................................25
VI. Hero Honda Motors Ltd..........................................................................29
VII. TVS Motors Ltd......................................................................................38
VIII. BAJAJ AUTO ltd…………………………………………………………………………………….41

2
 Acknowledgement

We would like to take this opportunity to thank Prof. Ajay Kumar Panda for providing
invaluable inputs and assistance in completing this report and helping us in moving ahead
in a systematic manner with the project as well as assisting in clearing various difficulties
along the way.

3
Executive summary:
A sound and efficient investment forms the key for any investor to generate maximum returns.
Given the current scenario in the markets, an investor has to have proper insights regarding the
value, risk and volatility of the covered security so as to understand whether to buy, hold, sell
or simply avoid the security. Apart from understanding these intricacies he also has to have a
proper basket of securities in order to optimize his gains. And here arises the crux of taking a
thoughtful decision for investing in certain industry.
In order to make a right investment, proper research and analysis is necessary. Without
research and analysis it becomes difficult for investor to optimize the gains given the fact that
there is continuous flow of information. Depending on this research and analysis, an investor
determines the field and kind of investment he would make given his tolerance level of risk,
volatility and requirement of returns. Therefore the main objectives of the project covered are:

To understand the impact of global markets on Indian automobile industry and the
movement of industry in stock market.
To understand the sector specific intricacies, the threats and opportunities posed by
the sector.
To develop an understanding of fundamental analysis and take a leap into future to
understand the growth of the selected companies under certain fundamental
parameters based on news and expectations from the given companies.
Finally selecting a security to invest on the basis of fundamental analysis valuation
done.
In order to achieve the objective i.e. whether the sector is investment worthy for a longer term
and which of the equities to choose for investment to maximize the gains; three major
automobile leaders ( two wheeler segment) in India namely HERO HONDA LTD., BAJAJ AUTO
LTD., TVS MOTORS LTD. are taken whose fundamental valuation has been done.
The whole project has been conducted in two parts i.e. data collection (which was mostly
secondary in nature) and fundamental analysis which included developing an excel valuation
module for the companies after the economic and industry analysis.
Fundamental analysis of the companies involved analyzing their financial statements and
health, and was performed on the historical and present data with the goal of making financial
forecasts on the basis of company’s stockholder reports, news releases, industry publications
and other publicly available information. One of the objectives of the fundamental analysis that
was used in the project was conducting stock valuation for the companies and its probable
price was predicted.

4
Economic analysis:
India is developing into an open-market economy, yet traces of its past autarkic policies remain.
Economic liberalization, including reduced controls on foreign trade and investment, began in
the early 1990s and has served to accelerate the country's growth, which has averaged more
than 7% per year since 1997.

India's diverse economy encompasses traditional village farming, modern agriculture,

handicrafts, a wide range of modern industries, and a multitude of services. More than 50% of
the work force is in agriculture, but services are the major source of economic growth,
accounting for more than half of India's output, with less than one-third of its labor force. India
has capitalized on its large educated English-speaking population to become a major exporter
of information technology services and software workers.

An industrial slowdown early in 2008, followed by the global financial crisis, led annual GDP
growth to slow to 6.7% in 2009, still second highest growth in the world among major
economies. India escaped the brunt of the global financial crisis because of cautious banking
policies and a relatively low dependence on exports for growth. Domestic demand, driven by
purchases of consumer durables and automobiles, has re-emerged as a key driver of growth, as
exports have fallen since the global crisis started.

India's fiscal deficit increased substantially in 2008 due to fuel and fertilizer subsidies, a debt
waiver program for farmers, a job guarantee program for rural workers, and stimulus

5
expenditures. The government abandoned its deficit target and allowed the deficit to reach
6.8% of GDP in FY10. Nevertheless, as shares of GDP, both government spending and taxation
are among the lowest in the world.

The government has expressed a commitment to fiscal stimulus in FY10, and to deficit
reduction the following two years. It has increased the pace of privatization of government-
owned companies, partly to offset the deficit. India's long term challenges include widespread
poverty, inadequate physical and social infrastructure, limited employment opportunities, and
insufficient access to basic and higher education.

SWOT Analysis
Political Scenario

Strengths

 India is the world's largest democracy. A secular constitution, framed in 1950, officially
guarantees justice, liberty and equality while aiming to promote fraternity among the
citizenry. More than 1,000 political parties registered for the April-May 2009 general
elections, competing for the preference of India's 714 million eligible voters.
 Despite its multitude of problems, India has generally managed to avoid hard
authoritarian rule or military coups, which have happened in many other developing
countries, including India's neighbors Bangladesh, Myanmar and Pakistan.

Weaknesses

 Large coalition governments complicate policy-making at the centre, as coalition

partners and outside parties pursue their own agendas. The competence of state
government varies enormously across India's 35 states and union territories.
 India's tense relationship with Pakistan still weighs on regional stability. The two
countries have gone to war three times since they were 'partitioned' on independence
from British rule in 1947.

Opportunities

 India has in recent years edged closer to the US in foreign policy, with Prime Minister
Manmohan Singh finally closing an eagerly sought civilian nuclear deal with Washington
in October 2008. We see the deal as evidence of Washington's increased interest in
having New Delhi as a geopolitical partner in Asia. The fact that both the US and India
are democracies, and the presence of a two million-strong affluent Indian diaspora in
the US, are bringing the two countries closer together.
 Thawing relations with Pakistan, following the earthquake crisis in October 2005 and a
tentative peace process initiated in 2004, has made it easier for the parties to defuse

6
 potentially explosive situations, such as the Mumbai attacks in November 2008, which
Islamabad acknowledges were planned and launched from its territory.

Threats

 Hindu nationalism presents a growing threat to India's constitutionally enshrined

secularism. Communal tensions between the Hindu majority and minority Muslims,
Christians, Sikhs and Buddhists have often erupted into deadly violence with the Gujarat
riots in 2002-03 being the latest instance of large-scale killings.
 India has experienced a series of serious terrorist attacks over the past two years,
perpetrated by radical Islamist as well as rural Maoist groups. The Mumbai attacks in
November 2008, perpetrated by Pakistani-based terrorists, have raised the spectre of
further violence.

Economic Scenario

Strengths

 India has a very large domestic market, and rising domestic demand is a major driver of
economic growth.
 A vast supply of inexpensive but skilled labour has turned India into the back office of
the world. Around half of the population is under the age of 25.
 Booming exports of IT-enabled services, from business process outsourcing to software
development, are a valuable source of foreign exchange.

Weaknesses

 Despite rapid economic growth, India remains a very poor country. According to BMI
estimates, India's GDP per capita was $1,149 in 2008, compared with $3,214 in China.
 Agriculture remains inefficient. Poor June-September monsoon rains can slash rural
incomes and consumption. Two-thirds of the population depends on farming for its
livelihood.
 India has chronic trade and fiscal deficits, the latter of which is ballooning due to fiscal
stimulus measures. The government spends a significant part of its revenue on interest
payments, salaries and pensions. This limits the amount of money available on
infrastructure improvements.

Opportunities

 India's emerging middle class will continue to drive demand for new goods and services.
A wealthier society, combined with tax reforms, would serve to boost revenue receipts,
relieving fiscal pressures.
 The government has implemented some tax reforms. A value-added tax (VAT)
introduced in 2005 to replace a complex web of sales taxes and a uniform goods and

7
 services tax to be implemented in April 2010 help should help boost compliance and
therefore raise government revenue.

Threats

 India's dependency on oil imports is problematic. This undermines the trade balance
and makes India vulnerable to energy price-driven inflation.
 India is at risk of severe environmental problems. Many of its cities' air and rivers are
heavily polluted, raising questions about the sustainability of the economy's rapid
growth.

Global Automobile Industry

In the initial years, most of the manufacturing activities were concentrated in the USA and
some of the European countries. Though these countries account for a significant share in the
production, more and more volume of production comes from other parts of the world, like
China, Japan and Korea. Around three-fourth of the global production was carried out in top 10
producing countries, in 2007. Of these, Japan, USA and China cumulatively constituted over 40
per cent of global production.

Global
Global Automobile
Automobile Industry
Industry ($
($ bn)
bn)
1,600.00
1,600.00

1,561.10
1,561.10
1,553.40
1,553.40
1,550.00
1,550.00

1,504.80
1,504.80
1,500.00
1,500.00

1,469.30
1,469.30

1,450.00
1,450.00

1,423.00
1,423.00

1,400.00
1,400.00

1,350.00
1,350.00
2005
2005 2006
2006 2007
2007 2008
2008 2009
2009

Source : Datamonitor

8
 Growth
Growth Rate
Rate (value)
(value)
8.00%
8.00%

5.70%
5.70%
4.00%
4.00% 3.70%
3.70%

0.00%
0.00% -0.50%
-0.50%
2006
2006 2007
2007 2008
2008 2009
2009

-4.00%
-4.00%
-5.40%
-5.40%

-8.00%
-8.00%

Source: Datamonitor

The last decade has experienced a growing level of motorization, as reflected by the production
of automobiles. According to Datamonitor, the global automobile industry was $1561.1 billion
in 2007 which shrank to $1469.3 billion in 2009 because of negative growth in two consecutive
years of 0.5% in 2008 and 5.4% in 2009. The compound annual growth rate of the industry in
the period 2005–09 was 0.8%.

Global
Global Automobile
Automobile Industry
Industry
(Million
(Million Vehicles)
Vehicles)
70.00
70.00

67.50
67.50
65.70 65.90
65.90
65.70
65.00
65.00
65.00
65.00 64.20
64.20

62.50
62.50

60.20
60.20
60.00
60.00

57.50
57.50

55.00
55.00
2005
2005 2006
2006 2007
2007 2008
2008 2009
2009

Source : Datamonitor

9
 Growth
Growth Rate
Rate (volume)
(volume)
8.00%
8.00%

6.60%
6.60%

4.00%
4.00%

2.40%
2.40%

0.30%
0.30%
0.00%
0.00%
2006
2006 2007
2007 2008
2008 2009
2009
-1.40%
-1.40%

-4.00%
-4.00%

Source : Datamonitor

The global automobiles industry shrank by 1.4% in 2009 to reach a volume of 65 million
vehicles. The compound annual growth rate of the industry in the period 2005–09 was 1.9%.

Passeng
er cars sales constitute the largest segment of the global automobiles industry, accounting for
80.3% of the industry's total value. The commercial vehicles segment accounts for a further
13.7% of the industry and motorcycles 6.0%.

10
Europe accounts for 35% of the global automobiles industry value. Asia-Pacific accounts for a
further 29.4% of the global industry. The United States has a share of 15.7% with the Rest of
the World contributing nearly 20%.

Indian Automobile Industry

Indian automobile industry has metamorphosed into a great industry since the first car ran on
the streets of Bombay in 1898. Today, automobile sector in India is one of the key sectors of the
economy in terms of the employment. Directly and indirectly it employs more than 10 million
people and if we add the number of people employed in the auto-component and auto
ancillary industry then the number goes even higher.

The automobile sector in India underwent a metamorphosis as a result of the liberalization

policies by the government since 1991 which included relaxation of the foreign exchange and
equity regulations, reduction of tariffs on imports, and refining the banking policies. After the
automobile industry opened to direct investment from foreign countries in 1996, global
automobile industry majors moved in. Automobile industry in India also received a boost from
stringent government auto emission regulations over the past few years. This ensured that
vehicles produced in India conformed to the standards of the developed world.

Evolution of Indian Automobile Industry

Protectionism - Early 1980s

This was the pre-1980 era where the manufacturing of automobiles especially cars was subject
to strict licensing, restrictive tariff structure and limited avenues for expansion. The advent of
foreign technology collaboration came with the inception of Maruti Udyog in collaboration with
Suzuki of Japan in the passenger car segment. Indian roads saw the launch of Maruti 800. It was
still not very easy to own a car, first was affordability and next was a long waiting period.

Liberalization-1990s

In the early 1990s, with liberalization, some more Japanese manufacturers entered the two-
wheeler and the commercial vehicle segment in a collaborative arrangement. This period
characterized joint ventures in India and the market started opening up. Automobile Industry
was delicensed in July 1991 with the announcement of the New Industrial Policy. The passenger
car industry was, however, delicensed in 1993.

The abolition of the controls led to an avalanche of demand. The era of controls and protection
came to an end. Curbs on capacity were done away with, decrease in customs and excise duties
meant that a vehicles started getting affordable. The entry of foreign banks with attractive auto

11
finance schemes helped garner a huge base of middle class population. However the market
was still ruled by the sellers.

Globalization - 2000s

Early 2000 however saw globalization of Indian auto industry. Several policy changes were
introduced with focus on boosting the auto exports. A Core Group on Automotive Research and
Development (CAR) was established in 2003 for encouraging R&D activities. Foreign
manufactures started looking at India for sourcing auto components. The buyers started ruling
the market due to the availability of choices in the form of models, price points and brands. A
vibrant economy meant an increase in the GDP and per capita income. These factors turned out
to be significant contributors in pushing up the domestic demand. The vast geographic spread
of India attracted foreign investments. The marquee brands from all over the world started
courting Indian consumers aggressively. The mature markets in the developed countries paled
in comparison to the sheer numbers and the growth phase of the Indian auto industry.

For the commercial vehicles, the steady growth in Indian economy led to demand for trucks,
tempos, buses etc. The IT and BPO culture that boosted exports and employment also pushed
the sales of vehicles. Indian economy also witnessed rapid industrialization. Factories needed
transport both for goods and for their employees. The retail boom in India saw malls,
supermarket chains mushrooming all over the urban areas, pushed the demand for efficient
logistics and that in turn increased the number of commercial vehicles.

Current Scenario

12
Today no industrial license is required for setting up any unit for manufacture of automobiles
except in some special cases. The norms for foreign investment and import of technology have
also been progressively liberalized over the years for vehicles manufacture including passenger
cars in order to make this sector globally competitive.

At present, 100% Foreign Direct Investment (FDI) is permissible under automatic route in this
sector including passenger car segment. The import of technology/technological upgradation
on the royalty payment of 5% without any duration limit and lump sum payment of $2 million is
also allowed under automatic route in this sector. With the gradual liberalization of the
automobile sector since 1991, the number of manufacturing facilities in India has grown
progressively. There are 16 manufacturers of passenger cars & multi utility vehicles, 13
manufacturers of commercial vehicles, 16 of 2/3 wheelers and 12 of tractors besides 5
manufacturers of engines.

With domestic sales of nearly 12.3 million vehicles in FY09-10, the Indian automotive industry
has shown an outstanding growth after the negative growth in FY07-08 and 7% growth in FY08-
09. The industry grew at astonishing 26.4% in 2009-10. In the last few years, the Indian
automotive industry has grown at a healthy rate by reducing costs and improving efficiency.
The Indian automotive market has grown with a healthy CAGR of 10.3% in the last 6 years and
was a source of attraction to many foreign automobile companies whose entry in the Indian
market not only increased competition, but also raised customer expectations about product
quality and reliability.

13
Indian automobile industry has also become an out sourcing hub for automobile companies
worldwide, as indicated by the zooming automobile exports from the country. Today, GM, Ford,
Hyundai, Honda, Mitsubishi and Toyota have set up their manufacturing units in India. Due to
rapid economic growth and higher disposable income it is believed that the success story of the
Indian automobile industry is just beginning. Factors influencing the growth of the auto industry
include sales incentives, introduction of new models as well as variants and easy availability of
low cost finance with comfortable repayment options continued to increase demand and sales
of automobiles.

The major characteristics of Indian automobile sector are:

 Indian automobile is the second largest two-wheeler manufacturer in the world

 Indian automobile fifth is the largest commercial vehicle manufacturer in the world
 Indian automobile is the 11th largest passenger car market in the world and fourth
largest in Asia.
 India has the largest three wheeler market in the world
 India manufactures largest number of tractors in the world.

Overview of the Segments

The major segments of the industry include two-wheelers, three-wheelers, commercial

vehicles and passenger vehicles. Among these segments the two wheeler is largest segment
having a share of nearly 76.23% (in units) followed by passenger vehicles with a market share of

14
15.86%. The three-wheeler and commercial vehicle segment have a market share of 3.58% and
4.32% respectively.

Two Wheelers
The Two wheeler segment includes Motorcycles, Mopeds and Scooters. However the segment
is dominated by motorcycles which contribute nearly 80% to the total two wheeler sales. The
domestic two wheeler demand grew at a CAGR of around 9.7% from 5.3 million units in FY 2004
to 9.4 million units in FY009-10, mainly led by the motorcycle segment. The market dynamics of
the industry has substantially changed with a majority of the customers preferring bikes to
scooters and mopeds. This is primarily due to better fuel efficiencies, dynamics, looks and
longer product lives of motorcycles.

The segment grew at 26% in the last fiscal year. Major companies catering to this segment
includes Hero Honda, Bajaj Auto, TVS Motors among others.

Passenger Vehicles
The passenger vehicles segment includes passenger cars, Utility and Multi Purpose Vehicles.
The segment, however, is dominated by passenger cars which have a share of 78 percent. The
cumulative growth of the Passenger Vehicles segment during FY 2010 was 25.57%. It grew at a

15
CAGR of 13.7% over the last 6 years. The major players catering to this segment includes Maruti
Suzuki, Tata Motors, Hyundai Motors, Mahindra & Mahindra among others.

Commercial Vehicles
The Commercial Vehicles segment includes Medium & Heavy Commercial Vehicles like trucks,
buses, tractor etc. and Light Commercial Vehicles like pick up vans, jeeps, ambulances etc. The

16
domestic commercial vehicles demand grew at a CAGR of around 12.64% from 260 thousands
units in FY 2004 to 531.4 thousands units in FY09-10. The segment showed outstanding growth
of 38.3% in FY09-10 after the negative growth of 21.7% in the previous year.

This segment is mainly dominated by the Indian players like the Tata motors, Ashok Leyland,
Mahindra & Mahindra, and Eicher

Three Wheelers
The Three Wheeler segment includes both the passenger carriers as well as goods carrier with
three wheels. The three wheeler sales in India registered a CAGR of 7.5% over the last six years.
However, it grew at 26% in the last fiscal year.

The major players in this segment include Bajaj Auto Ltd, Piaggio Vehicles and Mahindra &

Mahindra.

Exports
India has emerged as one of the world's largest manufacturers of small cars. According to New
York Times, India's strong engineering base and expertise in the manufacturing of low-cost,
fuel-efficient cars has resulted in the expansion of manufacturing facilities of several
automobile companies like Hyundai Motors, Nissan, Toyota, Volkswagen and Suzuki. In

17
September 2009, Ford Motors announced its plans to setup a plant in India with an annual
capacity of 250,000 cars for $500 million.

During April-March 2010, overall automobile exports registered a growth rate of 17.90 percent.
Passenger Vehicles, Commercial Vehicles, Three wheelers and two wheelers segment, grew by
32.89 percent, 5.59 percent, 17.03 and 13.54 percent respectively in this period.

SWOT Analysis

Strengths

 High domestic consumption has played a major role in the growth of the industry. Low
penetration level of automobiles in India is the major thrust for the growth
 It is globally cost competitive. Cost competitiveness is transforming India into global
outsourcing hub.
 With new emission norms in practice the manufacturers are producing the vehicles that
can be exported complying with the global standards

18
  The world's major car manufacturers continue to invest in India, with Nissan, Toyota and
Honda announcing fresh investment in 2009
 Foreign joint ventures (JVs) ensure capacity building for local partners, as overseas firms
bring expertise
 Government initiatives to promote the growth of the industry to $145 billion till 2016

Weaknesses

 Local demand is still skewed heavily towards low-cost vehicles due to low income levels
 In 2009 India just produced 2.35% of world production. There is very low share in world
production despite high growth in the industry.
 Low R & D investment by the industry will reduce the competitiveness of the
automotive industry. The sustained competitiveness comes through improvement in
productivity which needs high orientation in Research and Development
 Infrastructure constraints may prove to be a bottleneck in the growth. India lacks in road
infrastructure as well as port-handling infrastructure

Opportunities

 The premium segment is benefiting from higher levels of personal wealth, attracting
investment from brands such as Audi, while Tata has expanded the Jaguar Land Rover
division into India
 The commercial vehicle segment stands to benefit from a number of new JVs
announced recently, including Ashok Leyland and Nissan, and Isuzu and Swaraj Mazda,
while the bus segment is also attracting investment
 The rapid urbanization of the population will continue the robust demand from the
industry. According to the United Nations, the rate of spread of urbanization is 30%
which is likely to increase by 40% in 2030.

Threats

 The rising cost of core inputs like steel, non-ferrous metals, rubber etc have grown over
the last few years. Such cost escalation in input prices may impact the industry.
 The fuel price volatility can have serious impact on the industry. Firstly, polymers, one of
the inputs in the manufacturing will get expensive. Secondly, it will increase the inflation
which affect the consumers and decrease their disposable income, thereby affecting the
demand for automobiles.
 High tariffs on imports stand to restrict the potential growth of the hybrid vehicle
segment, as the cost of the technology is already expensive before taxes

19
Porter Five Forces Analysis

Bargaining Power of Customers

Buyers in commercial vehicle industry tend to have a great deal of financial strength than in
other segments as end users are mainly business customers. These can include construction
companies, transportation companies, as well as farmers and numerous small and medium
businesses.

Losing these end users has a much larger impact on truck manufacturers than individual
consumers, thus increasing buyer power. Furthermore, buyers are relatively price sensitive, and
this is particularly evident in the current economic climate when businesses and consumers are
looking for ways to cut costs and save money.

For passenger vehicles the buyers are end users. Although many buyers, for whom switching
costs are low, will be price-sensitive, manufacturers have invested in brand building, which
weakens buyer power. The industry has a large volume of vehicles being sold to an equally large
number of consumers, which reduces buyer power.

Therefore financial strength of business customers and tough competition in retail segment
provides bargaining power to the customers.

Bargaining Power of Suppliers

20
There are several inputs to the automobiles industry, including a variety of raw materials (such
as steel, aluminum, resins, copper and lead), components, freight, transportation and energy.
Suppliers of raw materials are usually large companies who provide materials to a range of
sectors, negating their reliance upon the automobiles industry for revenues, thus putting them
in a strong position.

Global prices of primary raw materials used, such as steel and aluminum, are rising, putting
pressure on manufacturers' margins; additionally, the increasing consolidation of the steel
industry has the potential to lead to even higher raw materials costs. To ensure timely delivery
of such materials, market players often sign contracts with their providers, thus strengthening
their power.

Furthermore, industry players require raw materials for their business, strengthening supplier
power further. However, players are likely to use a variety of suppliers for the majority of their
inputs, meaning they are less reliant upon individual suppliers.

The bargaining power for ancilliary units is low. But at the same time raw material suppliers
have significant bargaining power.

Threat of New Entrants

New companies may enter the automotive market as start-ups, by diversifying from other areas
of manufacturing, or by entering a particular geographical market by exporting. Brand strength
and reputation are highly important within this industry, and it is therefore relatively difficult
for new players to directly enter the market.

Due to the high fixed costs in car design and manufacture, as well as the economies of scale
gained from mass production, new start-up companies are rare: the capital requirements for a
manufacturing facility of feasible scale are high.

Therefore threat of new entrants is low it requires huge capital expenditure and the already the
competition is tough in the market.

Rivalry within the Industry

The trucks market is intensely competitive with large international incumbents dominating the
market. Larger manufacturers offer competitive pricing which increases rivalry between market
players further. Strong growth in this market in the last year alleviates rivalry between market
players to an extent.

The Indian new cars market is concentrated, with just three leading players - two of them India-
based - dominating. Rivalry is reduced somewhat due to a degree of differentiation, with

21
several different segments within the market, such as luxury and budget, and companies
utilizing a high level of design and marketing to promote their models.

The Indian motorcycles market too is concentrated, with top four players – namely Honda,
Yamaha, Bajaj Auto and TVS Motor, holding about 86% of the market share by volume.
Presence of such large, multi-national companies, with exceptionally high assets, boosts the
degree of rivalry.

Most companies have diversified their business, so are not solely reliant on revenues one
sector. They operate in many sectors, negating their reliance upon revenue. Furthermore the
cost of raw materials has also risen, increasing production costs accordingly. Manufacturers are
under growing pressure to meet global environmental demands, which further increases
rivalry, as each company is trying to gain an edge on their rival competitors.

Additionally, fixed cost and exit barriers are of significant meaning within this market and
leaving it requires substantial divestment of highly specific assets. These factors enhance the
rivalry.

All the above factors reflect high level of rivalry within the industry.

Government Inititatives

National Automotive Testing R&D Infrastructure Project (NATRiP)

The National Automotive Testing R & D Infrastructure Project (NATRiP) was approved by the
Government on 25 July 2005 and notified by the Department of Heavy Industry on 31 August
2005. NATRiP envisages setting up of world-class automotive testing and homologation facilities
in India with a total investment of INR1,718 crore in two phases of three years each, from the
date of its being notified. The principal facilities will come up in the three automotive hubs of
the country, in the south, the north and the west. The project aims at

 Creating critically needed automotive testing infrastructure to enable the Government

in ushering in global vehicular safety, emission and performance standards
 Deepening manufacturing in India, promoting larger value addition leading to significant
enhancement of employment potential and facilitating convergence of India’s strengths
in IT and electronics with automotive engineering
 Enhancing India’s considerably low global outreach in this sector by de-bottlenecking
exports, and
 Removing the crippling absence of basic product testing, validation and development
infrastructure for automotive industry in the country.

22
Automotive Mission Plan 2006-16
The AMP stresses the importance of improving local brand competition as well as investment in
energy-efficient and eco-friendly technologies. It envisages a total investment of US$40bn over
the 10-year period. By 2016, the government is targeting an annual turnover of US$145bn,
representing 10% of GDP and employing a total of 25mn staff. This represents a more than
threefold increase over 2006 levels. It recommends

 Setting up of Automotive training Institute and Auto Design Centre, Special Auto Parks
and auto component virutal SEZs, Technology Modernization Fund, with special
emphasis on SMEs
 Enhancing exports and related infrastructure and streamlining training/research
institutions in and around auto hubs
 Encouragement to establishing Development Centres for SMEs

Union Budget 2010-11

2010 has started on a positive note for the Indian Automobile Sector, with volumes improving
every month. Overall recovery in the Indian Auto Sector continues on sustained improvement
in demand aided by improving macro-economic factors such as liquidity, lower interest rates
and consumer confidence. The recent Union Budget 2010-11 also came in better than expected
for the Automobile Sector, with the government keen on increasing its tax base and the Budget
hiking Excise Duty by 2% to 10% (from 8% earlier). The industry was however, expecting a duty
hike of 4%. Moreover, measures like thrust on rural, infrastructure and road development
would also aid the Auto Sector in clocking consumption-based growth in volumes.

Recent Developments
 German car major Audi will start assembling its sports utility vehicle Audi Q5 from mid-
2010. The company plans to assemble more cars locally at its Aurangabad plant instead
of importing completely built units (CBUs).
 Ford India commenced commercial production of its compact car Figo, and diesel and
petrol engines at a new factory in Chennai. The Figo will be built exclusively in India and
exported to Asian countries and South Africa.
 Japanese major Nissan has decided to shift the entire production of its small car, Micra,
from the UK to India. After production of the Micra begins here, Nissan plans to
manufacture four more models in India, involving a total investment of over US$ 412.2
million.
 Suzuki Motorcycle India (SMIPL), a wholly-owned subsidiary of Japanese auto major
Suzuki Motor Corporation, plans to double production capacity of its two-wheelers to
300,000 units by the end of the current fiscal year. The company will invest US$ 26.77
million.

23
  Volkswagen has set a target to localise production in India to about 80 per cent in 2-3
years from the current levels of almost 50 per cent as it seeks to offer cars at more
competitive prices.

Future Outlook
“To emerge as the destination of choice in the world for design and manufacture of
automobiles and auto components with output reaching a level of USD 145 billion accounting
for more than 10 per cent of GDP and providing additional employment to 25 million people by
2016” is the vision put forward by the Ministry of Heavy Industries and Public Enterprises.
Going forward it is evident that the automotive industry in India offers immense potential in
terms of sales and employment opportunities.

Growth in the economy is expected to continue which is also going to help the automotive
industry to expand. Rising disposable incomes and the new wave of consumerism arising out of
it are going to be key drivers. Foreign direct investments are pouring into India in large numbers
and manufacturing companies including global majors are going to setup manufacturing
facilities first and then develop R&D services, both on a large scale.

Companies are confident that productivity can be increased through low cost automation and
management efficiency. After productivity, the major concern among manufacturers is the
relatively poor infrastructure in the country. The slow pace of development of roads, railways
and ports is a disadvantage, but continuous improvements are being made in this regard also.

The automotive industry in India has been crossing record milestones and is one of the world’s
fastest growing markets. The strengths of the Indian economy – large pool of skilled human
resources, high quality engineering skills, strategic position combined with the strong growth
trends in the economy and vast investments by global companies, are expected to drive the
automotive industry to great heights.

24
VALUATION MODELS:

Value of any asset is the present value of future cash flows. Using this definition we can
estimate the value of any firm by calculating the present value of its future cash flows.
Discounted Cash Flow is the technique we use to measure the intrinsic value of an asset.

To calculate the value of equity is a difficult task as the cash flows are not fixed. We have to
estimate the performance of the firm in order to estimate the cash flows for the equity. Here
we will not consider only dividend as the only cash flow because almost all the firms pay only a
part of profits as dividends. And secondly, as an investor we are interested in dividends as well
as capital gains in the share price.

Estimating future cash flows with growth in economy:

To estimate the future cash flow the first step is to estimate the future sales and for the same i
have estimated the future unit sales for the whole industry.

Here I have linked the Real GDP of India and two wheeler produced from the period 1997-2010

Year Real GDP Two

(Crores) Wheeler
(Units)
1997 1508378 2963497
1998 1573263 3040500
1999 1678410 3394479
2000 1786525 3809819
2001 1864301 3747384
2002 1972606 4320059
2003 2048286 5076221
2004 2222758 5629297
2005 2388768 6576172
2006 2616101 7565560
2007 2871120 8491978
2008 3129717 8068981
2009 3339375 8441793
2010 3589828(E 10512889

The GDP figure for 2010 is an estimate. It is calculated assuming that the growth rate for the
2009-10 at 7.5%. The RBI estimates the Real growth rate for India at 7.5% till 2014.

25
The Real GDP and Two Wheeler Units show a correlation of 0.97.

I used linear correlation to estimate the relationship between economy growth and volume
sales of the industry. The correlation was carried out using Real GDP as independent variable
and two-wheeler produced as dependent variable.

LOG_GDP LOG_SALES

6.17851 6.471804
6.196801 6.482945
6.224898 6.530773
6.252009 6.580904
6.270516 6.573728
6.29504 6.63549
6.311391 6.705541
6.346892 6.750454
6.378174 6.817973
6.417655 6.878841
6.458051 6.929009
6.495505 6.906819
6.523665 6.926435
6.555074 7.021722

Correlations

LOG GDP LOGSALES

LOGGDP Pearson 1 .983(**)

Correlation
Sig. (2-tailed) .000
N 14 14
LOGSALES Pearson .983(**) 1
Correlation
Sig. (2-tailed) .000
N 14 14

The correlation matrix signifies that there is an high significant relationship between sales in
two wheeler units to increase in GDP. This forms the basis of our analysis running on the
assumption that the automobile sector grows with growth in the economy

26
Factors affecting cost of goods sold in this industry:
The next step is to estimate the sales figure for our company. Given below are the price chart
of Steel, Aluminium, Copper and Nickel.

Historical MCX Aluminium Index

Historical MCX Copper Index

27
Historical MCX Nickel Index

Historical MCX Steel Index

28
We can see in the graphs that the price of the metals is increasing. They are expected to rise as
economy expands. Therefore I have estimated the COGS to be at 70% of revenues for 2011-12
and then increase to 72% thereafter.

Hero Honda Motors Ltd.

Hero Honda Motors Limited is engaged in manufacturing of two wheelers and its parts. It has
two manufacturing facilities at Dharuhera and Gurgaon in Haryana and its third plant is at
Haridwar. It is the World's single largest two-wheeler motorcycle company. Honda Motor
Company of Japan and the Hero Group entered a joint venture to setup Hero Honda Motors
Limited in 1984.

It offers its products under the CD DAWN, CD Deluxe, Pleasure, Splendor+, Splendor-NXG,
Passion PRO, Passion Plus, Super Splendor, Glamour, Glamour PGM FI, Achiever, CBZ X-treme,
Hunk, and Karizma brand names through dealers, authorized representatives, stockists, and
sales and service points. The company was founded in 1984 and is based in New Delhi, India.

29
Source : Capital IQ, Annual Reports

30
Hero Honda is currently best performing major automobile company in India. Their overall
profitability has increased from 2007 level. The return on assets, return on capital and return on
equity are stable at around 17, 28 and 37%. Their margins have also increased around 2% from
2007 level. They also have negative cash conversion cycle of 10 days.

Hero Honda has sound financial position. They have Debt/Equity ratio of just 0.02. The loan that
they have is interest free loan from Haryana Government. They have high current ratio of 2.05.
Even without using debt they have stable and robust return on equity of around 39%.

31
Valuation of Hero Honda

Hero Honda had market share of 33% in 2002 which it expanded to 44% in 2010. It grew at
CAGR of more than 15% in this period in unit terms.

Year Two Hero Hero

Wheeler Honda Honda
Sales Sales Share in
(Units) (Units) the
Industry
2002 4320059 1425302 32.99%
2003 5076221 1677537 33.05%
2004 5629297 2070147 36.77%
2005 6576172 2621400 39.86%
2006 7565560 3000751 39.66%
2007 8491978 3336756 39.29%
2008 8068981 3337142 41.36%
2009 8441793 3722000 44.09%
2010 1051288 4600130 43.76%
9

To estimate the unit sales for Hero Honda I used Scenario analysis where I assign probabilities
for Best Case, Normal Case and Worse Case based on market future plans of Hero Honda and
its competitors.

Under best case scenario Hero Honda will continue to expand and will have a market share of
56% by 2014. Under normal case it will have the same market share which it currently has. And
under the worst case it will start losing its market share. It will drop down to 38.5% by 2014.

The reason I have allocated a probability of 0.2 for best case are:

 Firstly, its presence in rural India. The company holds a significant share in the rural two
wheeler market. This helps the company to register good sales numbers even at the
time of slowdown and financial crisis as rural India was least affected by the global
financial crisis.
 Secondly, the Splendor and Passion models have shown remarkable success. They are
largest selling models in the world. The sales from these models are unlikely to go down
in rural market.
  Also, they started their rural market initiative- ‘Har Gaaon Har Angan’ in late 2007. It is
expected to cover 100,000 by the end of May 2010.
 Fourthly, Hero Honda has announced that it will launch a 75cc bike around Diwali in
2010. It is lower end bike priced at around Rs. 20000/-. The bike might create a
revolution in the two wheeler industry.

The worst case scenario has been allocated probability 0.15 because

 The strong performance by the competitors. Bajaj has gained significant share in 2010.
They have also launched Discover 150 priced at Rs. 46000/-. It is cheapest 150cc bike.
 Secondly, Hero Honda has not been able to replicate the success of Splendor and
Passion with other models. It is yet to be seen if they can cater to the needs of
customers once these models are out.
The normal case is calculated as the difference between 1 and sum of best and worst case

1-(0.2+.015) = 0.65

Using this analysis the expected units sales for Hero Honda is computed as

Year Two Best % of Normal % of Worst % of Expected % of

Wheelers Case Sales Case Sales Case Sales Sales Sales
2011 11218190 5290149 47.16 4936003 44.00 483013 43.06 4990953 44.49
6
2012 12236390 6083671 49.72 5384011 44.00 507164 41.45 5477088 44.76
3
2013 13330956 6996222 52.48 5865620 44.00 532522 39.95 6010682 45.09
5
2014 14507614 8045656 55.46 6383350 44.00 559148 38.54 6597032 45.47
6
Probabilit 0.20 0.65 0.15
y

Now we have the expected figure for the units sales. Now we have to multiply this with the
expected realizable value per vehicle for next four years.

Net realizable value is calculated as

The Net realizable value per verhicle in 2010 was Rs.34256. Net realizable has been growing at
CAGR of 3% for last 5 years. I have estimated its growth to drop because

33
  Firstly, in the last two years it grew at compound rate of 5.2%. This has increased the
value for 2010.
 Secondly, Bajaj Auto has launched Discover 150 at Rs. 46000/- which is cheaper by Rs.
6000/- from competitors. The move is likely to trigger a price war which will decrease
net realizable value.
 Thirdly, Hero Honda will launch 75 cc bike in the festival season for Rs. 20,000/-. The
sales of the new model will eat into the share of exiting models which are prices higher.

Year Net Realizable Units Revenues

Value Sales(mn) (mn)

2011 34941 4.99 174389.2

2012 35640 5.48 195202.8
2013 36352 6.01 218504.4
2014 37079 6.60 244616.2

Now we have estimated the revenue figures for our valuation.

Cost of Goods Sold

The next step is to estimate the Cost of Goods Sold. The COGS for the company has been
constantly decreasing from 76.71% in 2007 to 74.41% in 2009. In the latest fiscal it was 68.13%.
The constant decrease is due to better efficiency and low metal prices in the last fiscal.

Non Operating expenses

Now we have our Gross Profit. The next step is to estimate the non-operating expenses. For the
last five years the non-operating expenses are around 45% of Gross profit. It is assumed to
remain same.

Depreciation and Amortization

Now we have EBITDA. The next step is estimate depreciation and amortization expenses. To
estimate it, we first need to estimate the future Gross Fixed Assets. Fixed assets as a
percentage of sales has an average of 19.7% for last 3 years. It has been fixed at 20% for next 4
years.

Depreciation as a percentage of Fixed Assets has shown a decreasing trend over the last 5
years. It dropped from 8.4% in 2005 to 7.4% in 2009. Taking this trend depreciation has been
fixed at 7%.

34
Non Operating Income

It has been taken as the percentage of net revenue except for the year 2010 where it grew from
0.25% to 1.5% of Sales.

Investment Income

The income from investment is assumed to be 25% from the existing investment which is
around Rs. 1400 million.

Working Capital

It is estimated as a percentage of revenue: Current assets at 27% and current liabilities at 14%
of revenue. The estimation is based on previous years’ data.

Debt

Hero Honda has 660 million of interest free loan. I have assumed that they pay the loan in 2010.

Tax

The Tax rate has been taken at 33%.

Cost of Equity

The cost of equity is calculated using Capital Asset Pricing Model. BSE 500 is used as the
benchmark index for beta calculation and estimating market return.

The Market Return used is Compounded Annual Growth Rate

of BSE 500 from the period 2004-10. The market return is COVARIANCE
COVARIANCE 0.0038707
0.0038707
20.78%. VARIANCE
VARIANCE 0.0085178
0.0085178
BETA
BETA 0.4544217
0.4544217
364 days Treasury Bill yield is taken as the risk-free rate. The
GEOMETRIC
GEOMETRIC MEANMEAN 3.1046086
3.1046086
instrument has implicit yield of 4.91% as on 12 May 2010.
11 YEAR RETURN
YEAR RETURN 20.78%
20.78%
Beta for Hero Honda come out to be 0.45. 364
364 TT BILL
BILL YIELD
YIELD 4.91%
4.91%
Ke
Ke 12.12%
12.12%
Ke = Rf + Beta (Risk Premium)

Ke = 12.12%

35
Terminal Growth Rate

The Terminal growth rate is assumed at 6.5%. The reason being,

 Firstly, a company with domestic sales can’t grow at higher growth rate than the GDP of
the nation for perpetuity.
 Secondly, Hero Honda is a Joint Venture between Hero Group and Honda Group. Under
the Venture the firm is not allowed to expand its exports. Once the Indian market
saturates, the firm might face low growth.
 Thirdly, bulk of the sales for the firm comes from two premier models viz, Splendor and
Passion. They have not been able to replicate the same success with other variants.
 Lastly, Honda is the technology provider for the firm. If the group doesn’t renew the
joint venture, hero group might not be able to keep up with the industry in such a
competitive environment.

Free Cash Flow to Equity

The Free Cash Flows to Equity are calculated as

FCFE = EBIT(1-T)-(Capital Expenditure-Depreciation)-Debt Payment-Working Capital Changes

36
The Figures for 2010 are from the consolidated Income statement for all the 4 quarters from
April 2009 to March 2010.

The Present Value of all the free cash flows to equity is calculated using cost of equity as the
discounting rate.

The Sum of Present Value of Free Cash Flows to Equity comes out to be Rs 274354.22 million.

The Number of Equity Share outstanding for the firm are 199.7 million.

The Present value of the share is Rs 1373.83/-.

The Price of the share on 13 May 2010 closed at Rs 1902.

The Share is currently overpriced according to this model.

37
TVS MOTORS ltd.

Background:

TVS Motor Company Ltd, the flagship company of TVS Group is the third largest two-wheeler
manufacturer in India. The company manufactures a wide range of two-wheelers from mopeds
to racing inspired motorcycles. The company has their manufacturing plants at Hosur in
Tamilnadu, Mysore in Karnataka and Solan in Himachal Pradesh. Their subsidiaries include
Sundaram Auto Components Ltd, TVS Motor Company (Europe) BV, TVS Motor (Singapore) Pte
Ltd and PT TVS Motor Company, Indonesia.

PRODUCT portfolio:

TVS Motor currently manufactures a wide range of two-wheelers from mopeds to racing
inspired motorcycles.
Motorcycles (Apache RTR 180, Flame DS 125, Flame, TVS Jive, StaR City, Sports)
Variomatic Scooters (TVS Wego, Scooty Streak, Scooty Pep+, Scooty Teenz)
Mopeds (TVS XL Super, TVS XL Heavy Duty)

Financial profile:

38
 Stock Info
Sector Automobile
Market Cap (Rs cr) 3,170
Beta 1.0
52 Week High / 140/45
Low
Avg. Daily Volume 505,512
Face Value (Rs) 1
BSE Sensex 18,113
Nifty 5,442
Reuters Code [Link]
Bloomberg Code TVSL@IN

SHARE HOLDING PATTERN

RECENT TRENDS OF GROWTH IN DIFFERENT SEGMENTS OF COMPANY OPERATIONS:

Motorcycles grow 27%; Scooters 42%; Domestic sales up 27%; Exports grow 62%

Sustaining growth across all segments, TVS Motor Company continued to post significant
growth in the month of May 2010. Total two wheeler sales of the company grew 30% in May
2010 from 118,574 units in May 2009 to 154,667 units. Cumulative sales for the current
financial year increased 29% with sales of 299,356 units against 231,693 units in the
comparable period of the previous year.

NEWS ANALYSIS:

Higher earnings growth on success of new launches: TVS has showcased healthy
performance in FY2010, aided by overall volume recovery, improved product mix and

39
 the benefits of operating leverage. Besides, its new launches of Jive and Wego would
help it to clock higher earnings growth in Future years

Improved product mix and three-wheeler support to increase margins: Higher

contribution from three-wheeler volumes to total volumes would help the company
expand margins implying higher earnings CAGR over the period. However, we believe
that the overall scenario will remain challenging for the company in terms of intensifying
competition.

TVS’s consolidated performance was impacted by poor performance of its Indonesian

subsidiary. The facility in Indonesia started in FY2007 with an initial investment of
around Rs200cr; on a cumulative basis, TVS had invested around Rs270cr until FY2010.
After the facility started, the economic meltdown extended the gestation period for TVS
in the Indonesian market. However, the recent recovery in the overseas market helped
the company to improve its consolidated performance.

Thus based on all these assumptions and news bits we have prepared the valuation model
which gives us an intrinsic price of Rs. 83.2 which is near to its extrinsic value being floated in
the market during march 31ST 2010

FUTURE:

Moving ahead, TVSM will have to counter intensive competitive pressures, particularly from
Bajaj Auto, Hero Honda and HMSI, which are launching new bikes and reducing prices in their
bid to boost volumes. However, launch of the 125cc Flame, Jive, Wego and three-wheelers
would provide some respite to TVSM on the margin front, going ahead, which is also reflected
in the company’s FY2010 performance.
Thus after the valuation we can see that the company holds neutral aspects as of now and
however has good prospects in future.

40
BAJAJ AUTO LTD.

Bajaj Auto Ltd is one of the leading two & three wheeler manufacturers in India. The company
is well known for their R&D, product development, process engineering and low-cost
manufacturing skills. The company is the largest exported of two and three-wheelers in the
country with exports forming 18% of its total sales.

The company was incorporated on April 30, 2007 as a wholly owned subsidiary of erstwhile
Bajaj Auto Ltd (the holding company) with the name Bajaj Investment & Holding Ltd. The
company received the certificate of commencement of business on May 7, 2007. The holding
company operated in the segments, such as automotive, insurance and investment, and
others. Considering the growth opportunities in the auto, wind-energy, insurance and finance
sectors, the holding company de-merged their activities into three separate entities, each of
which can focus on their core businesses and strengthen competencies. 
 
 The auto business of the holding company along with all assets and liabilities pertaining
thereto including investments in PT Bajaj Auto Indonesia and in a few vendor companies
transferred to Bajaj Investment & Holding Ltd. In addition a total of Rs 15,000 million in cash
and cash equivalents also transferred to Bajaj Investment & Holding Ltd. As the part of the
scheme, Bajaj Holdings and Investment Ltd were renamed as Bajaj Auto Ltd. The appointed
date of this de-merger was closing hours of business on March 31, 2007. 
 

41
 shareholding pattern

Foreign
Institutions
Govt Holding
Non Promoter Corp.
Hold.
Promoters
Public & Others

FINANCIAL PROFILE OF THE COMPANY

Market Data (As on Friday, August 27, 2010 )

Price (Rs) 2779.7 52 W H/L(Rs) 2862.9 / 1125.55
Lat. EPS(Rs) 144.71 Lat. P/E 19.2088
Mkt. Cap.(Rs Cr) 40216.7 [Link] (Rs Cr) 144.68
Lat. BV(Rs) 202.4 Div. Yield (%) 1.43903
PRODUCT PORTFOLIO:

The product portfolio of the company consists of Two wheelers and Commercial vehicles. The
two wheelers include:

Avenger 220 DTS-i, Pulsar 135 LS Pulsar 220 DTS-i, Pulsar 180 DTS-i, Pulsar 150 DTS-i, Discover
150, Discover 100 , Platina 125, Platina 100 CC, Ninja 250R  

42
PRESENT STARTEGY FOLLOWED:

Bajaj Auto has been focusing on developing a brand centered strategy highlighting the
Discover and Pulsar. It believes near perfect alignment between the front-end (power of
the brands) and the back-end (production efficiency, quality, costs and logistics). This
alignment resulted in its growing faster than the market and being most profitable in
the industry.

Strong operating performance: Due to this focused strategy, FY10 was a record year for
Bajaj Auto by all parameters. It posted its highest sales, exports, margins and profits.
FY10 volumes grew 30%, driven by 31% two-wheeler growth and 24% growth in three-
wheelers. Net sales grew 35% to Rs119b and EBITDA margins rose 820bp to 21.7%,
translating into recurring PAT growth of 133% to Rs18.2b. Strong operating performance
and normalization of the working capital cycle generated free cash flow of Rs26.3b (v/s
Rs197m in FY09).

Robust FY11 outlook: The management expects its strategy to fully play out in FY11,
with pervasive brand strategy resulting in higher profits.
Bajaj Auto has strong volumes and high margins. Volume is expected to grow strongly
and margins sustain at higher levels due to operating leverage and a ramp-up at
Pantnagar. The product mix will improve in favor of high margin products, driven by a
strategy of focus on two brands (~85% of two-wheeler volumes) and continued recovery
in three-wheelers.

Bajaj Auto is focused on a brand-centered strategy. The “front end” is guided by a

strategy of differentiation, to continuously specialize its brand positioning in

43
 motorcycles. Bajaj Auto positioned its motorcycle brands in the utility, price, value and
sports categories. The basic proposition is that while products may generate market
share, brands provide pricing power and boost profits. As a result, it has identified
Discover and Pulsar as its key brands. The two brands contribute ~80% to two-wheeler
volumes. The “back end”—R&D, quality, production efficiency, logistics and throughput
—is guided by TPM or “The Prime Mover”, towards excellence. In FY10 the front end
and the back end were well aligned, which resulted in Bajaj Auto growing faster than the
market, gaining market share and being the most profitable in the industry.

NEWS ABOUT THE COMPANY

BAL is aiming a target of 4mn vehicles volume for FY11; 3.6mn 2-wheelers and .4mn 3-
wheelers. Target for domestic and exports are pegged at 3mn and 1mn units respectively.

Bajaj Auto plans to increase its capacity of two- and three-wheelers from the current
4.2m to 5m in March 2011. The company is developing a four-wheeler and the
commercial launch is scheduled for 2012. The techno-economic feasibility of the four-
wheeler project and related agreements between Bajaj and partners, Renault and
Nissan, will be concluded at a suitable stage of this platform development.
Currently at Pantnagar facility, BAL manufactures 60,000 units per month, which is
expected to increase to 70,000 units per month in 1QFY11 and subsequently going to
120,000 units per month in 2HFY11.
BAL enters in quarterly steel contracts. The steel cost would be higher for 1QFY11 in
comparison to 4QFY10 numbers. However, aluminum cost will not witness any increase,
company enter into volume contracts for the same.
Company expects the EBIDTA margins of around 20% going forward.
The CAPEX guidance for FY11 is to the tune of Rs 2500 mn, mainly for R&D and other
support activities.
Management reiterated its focus on profitability not on just gaining market share at the
cost of profitability.
Bajaj plans to assemble CKD kits to lower import duty
The first product to be developed under the joint venture of KTM and Bajaj is goin on
sale in 2010-11
Strong exports growth for three wheelers in Sri lanka, Egypt and Africa. On the domestic
from expect strong demand from Tamil Nadu (30,000 to 35,000 units) due to withdrawal
of permit regime. For Two wheelers, Africa will be the key contributor to the growth.

Thus based on all these assumptions and news bits we have prepared the valuation model
which gives us an intrinsic price of Rs.2118 which is near to its extrinsic value being floated in
the market during march 31ST 2010

44
Future:

The company seems to be undervalued at the first instant and looking deeper into its financials
and its future projects, the thought is confirmed that the company will come out with better
colors in the near future

45
CONCLUSION:

A scenario analysis has been done on both companies taking into consideration the best and
the worst to happen with the company

The automotive industry in India has been crossing record milestones and is one of the world’s
fastest growing markets. The strengths of the Indian economy – large pool of skilled human
resources, high quality engineering skills, strategic position combined with the strong growth
trends in the economy and vast investments by global companies, are expected to drive the
automotive industry to great heights.

The Joint Ventures and technological inputs from global automobile companies have made
India a manufacturing hub. Though today India produces technologically advanced vehicles, the
consumption pattern is skewed towards low cost vehicles. In two wheelers major portion of
demand comes from entry level motorcycles and in cars more than 3/4 thmarket is small car

46