Name of Institute: INTERNATIONAL INSTITUTE OF PLANING AND MANAGEMENT. Place: MUMBAI.

Title of Thesis: How has the Global Meltdown affected the Automobile Industry in India and its impact on the shareholders value? Student`s Name: ANSHUL S KOTHARI INTERNAL GUIDES NAME: : MS.SONAL PANDEY External Guide`s Name: MR. RAJESH KOTHARI Batch No.: PGP/ 08-10/FW Reference No.: IIPM/FW/08-10/MUM/FIN/039

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ABSTRACT

The recent meltdown in US market due to the sub prime crisis is having an impact on Indian corporate sector. The unemployment rate in united states stood at 9.5% in June 2010 .The number of registrations for bankruptcy is exorbitant. United States is a big consumer of goods produces by developing countries. As the consumption pattern in US economy is going down the demand for goods produced by these countries is decreasing. Indias exports to US are $ 24.1 billion which is increasing 10% YoY. India is a major outsourcing partner, as an FII (Foreign institutional Investor in Indian stock market) and FDI (Foreign Direct Investment by US companies) and big importer of consumer goods, textiles, medical and diagnostic products, engineering goods and many more. The impact of the crisis was not visible on the balance sheets of the Indian companies as a whole baring some MNCs and BPO which are on a job cut spree till Q2FY10. Till then because most of them had there order books full for 6-8 months but the meltdown in demand was be visible from Q4 (January09 to march09) and we then began to witness the cut down in jobs by Indian companies in Q4 because the effect was beginning to pinch.

We observed a short period slowdown in growth rate of Indias exports to US to the tune of 2025% which comes out to 7.5% to 8%. Despite the fact that India has slowly been coming out of recession, the FY10 imports and exports data of the company has managed to reveal disappointing figures. A decline of 4.7% to $176.5 Billion was recorded by Indian exports in the year up-to 31 March, 2010. During the same period, imports also managed to decline by 8.2% to $278.7 Billion as compared to FY09. All this has had a profound impact on the Indian companies. We will study as to how what triggered the crisis and how it trickled down to India and find out whether it created a dent in the Indian Two Wheeler Industry in India, mainly Bajaj Auto Ltd, Hero Honda Motors Ltd & TVS Motor Company Ltd.

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CERTIFICATE OF ORIGINALITY

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INTERNAL GUIDE CONCENT LETTER

From: Sonal Pandey (sonal.pandey@iipm.edu) Sent: 22nd May 2010 To: 'Anshul Kothari' (kothari_anshul@hotmail.com)

Dear Anshul,

I have received your synopsis as well as the confirmation of your external guide for the thesis. This letter is a formal approval to the topic proposed by you

Please go ahead with the thesis. Make it a comprehensive thesis by using empirical data as the basis of the research.

Your ref. id number is IIPM/FW/08-10/MUM/FIN/030

Furthermore, you are required to send me a total of at least 6 thesis guidance response sheets at equal intervals before the coalescence of the thesis. Please find below the format for the response sheet.

Best of Luck.

Sonal Pandey

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ACKNOWLEDEGEMENTS
This thesis involved the efforts of lot of people. I would like to firstly start by thanking my internal guide from the Indian Institute of Planning and Management Ms Sonal Pandey who firstly went through my synopsis and later approved the topic. I wish to express my sincere thanks and deep sense of gratitude towards my respected guide Mr. Rajesh Kothari. I am highly indebted to him for his esteemed and inspiring guidance and constant encouragement. My family for their unconditional love, support and belief in me- thanks for putting up with me. I am confident that this thesis will prove useful to everybody in some or the other way.

ANSHUL S KOTHARI

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THESIS SYNOPSIS
Details of the student

Name :- Anshul S Kothari Batch :- PGP/ FW/ 2008-10 Section :- F1 Specialization :- Finance Cell No. :- 9892300714 Email :- kothari_anshul@hotmail.com; anshul.kothari@almondz.com

Desired Area intended to do Research Impact of Global Slowdown on Indian Two Wheeler Industry with a case study on Bajaj Auto Ltd, Hero Honda Motors Ltd & TVS Motor Company Ltd. Title of the thesis How has the Global Meltdown affected the Automobile Industry in India and its impact on the shareholders value?

Problem definition /hypothesis /Research objective The objective of this research is to understand the cause of the Global Slowdown and how it has affected the Indian Economy. Also it is imperative to study whether it affected the two-wheeler industry and the financial performance of the above mentioned companies. The core objective is advice the shareholders of the above mentioned companies to take the right call on the stock. Introduction to the Area of research (In brief) India is one fastest growing economies on the world and is well combating the economic crisis. The government has tried its best to keep India least exposed to the global economic downfall. Although India is not as affected as other nations are, it still has to bare the brunt of the melt down and thus various companies in many sectors suffered a blow to their financial performance. As a result it is very crucial understand how this can affect the share price of a particular
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company and thus try to advice the shareholders and investors to take a call on the stock performance. Scope of the thesis work There are various reasons that have led to global meltdown. What is most important at this critical juncture is that how can India still grow at a GDP of 9% from its existing growth rate of almost 6%. This thesis will allow me study the two-wheeler industry in India and its exposure to the crisis. This will also enable to evaluate the financial performance of Bajaj Auto Ltd, Hero Honda Motors Ltd & TVS Motor Company Ltd and thus advice whether it is worth investing the respective stock or not. Research Methodology By using the Secondary Data

Justification for choosing a particular research proposal This topic will allow me to do a comprehensive fundamental research on the financial performance of the above mentioned companies and find out whether the global meltdown really affected the performance. Simultaneously it also allows me to exploit my analytical skills and take a call on whether to BUY, HOLD or SELL the stock and advice the investors accordingly. Summer Training Company: Abchlor Investment Advisors Pvt Ltd. Assignment: Develop low cost marketing strategies.

Details of the External guide

Name: Mr. Rajesh Kothari Company: AlfAccurate Advisors Designation: Managing Director Email: rajeshkothari@alfaccurate.com Ph: 022.42360305/08

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Contents
...................................................................................................................... 1 Contents................................................................................................................... 12 INTRODUCTION.........................................................................................................14 Global Meltdown: A synopsis.................................................................................14 GLOBAL RECESSION AND ITS IMPACT ON INDIAN FINANCIAL MARKETS...................16 Meaning of Recession.........................................................................................16 Impact on Indian Economy....................................................................................16 Stock Market......................................................................................................17 Forex Market......................................................................................................18 Money Market.....................................................................................................18 Slowing GDP....................................................................................................... 18 Table 1: Rate of Growth at Factor Cost at 1999-2000 Prices (per cent).............19 Table 2: Rate of Growth at Factor Cost at 1999-2000 Prices (per cent).............19 Strain On Balance Of Payments.........................................................................20 Reduction In Import-Export................................................................................20 Chart 1: Export Growth Year Wise......................................................................20 Reduction In Employment..................................................................................21 Chart 2: Growth in Employment Rate.................................................................21 Taxation............................................................................................................. 22 Chart 3: Reduction in Tax-GDP ratio...................................................................22 INDIAN TWO-WHEELER INDUSTRY: A PERSPECTIVE (mapsof india. Twm india)........23 ................................................................................................................................. 23 QUESTIONNAIRE:...................................................................................................... 25 PRIMARY FINDINGS AND ANALYSIS...........................................................................27 IIPM/FW/08-10/MUM/FIN/030 Page 12

Chart 4: Will India be severely affected by the World Economic Crisis in the future? .............................................................................................................................. 27 Chart 5: How much volatility have we observed in the Sensex due to the Meltdown?.............................................................................................................27 Chart 6: Has the two wheeler market in India been severely affected post the crisis?.................................................................................................................... 28 Chart 7: Which segment has been the most affected by the meltdown?..............28 Chart 8: Does the Fundamental Performance of a company always affect the share price?...........................................................................................................29 Chart 9: Is it the right time to invest in the stock market?....................................29 FINDINGS & ANALYSYS.............................................................................................30 Chart 10: Net Profit Margin.................................................................................30 Peer Comparison...................................................................................................... 32 Chart 11: Bajaj Auto Ltd Product Mix..................................................................32 Chart 12: Hero Honda Motors Ltd Product Mix......................................................33 ................................................................................................................................. 33 Chart 13: TVS Motor Company Ltd Product Mix.....................................................34 Chart 19: 125-249cc Production............................................................................37 Chart 20: 125-249cc Sales....................................................................................38 RESEARCH OBJECTIVES & METHODOLOGY...............................................................40 CONCLUSION............................................................................................................41 LAST PAGE................................................................................................................ 51

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INTRODUCTION Global Meltdown: A synopsis

Credit Crunch to downturn.. Defined as "a severe shortage of money or credit", the start of the phenomenon has been pinpointed as 9 August 2007 when bad news from French bank BNP Paribas triggered sharp rise in the cost of credit, and made the financial world realise how serious the situation was. The roots of the credit crunch, however, started earlier. The story.. Most analysts link the current credit crisis to the sub-prime mortgage business, in which US banks give high-risk loans to people with poor credit histories. These and other loans, bonds or assets are bundled into portfolios - or Collateralised Debt Obligations (CDOs) - and sold on to investors globally. Falling house prices and rising interest rates lead to high numbers of people who cannot repay their mortgages. Investors suffer losses, making them reluctant to take on more CDOs. Credit markets freeze as banks are reluctant to lend to each other, not knowing how many bad loans could be on their rivals' books. The impact of the sub-prime mortgage crisis is quickly shown to have implications beyond the United States. Losses are felt by investment banks as far afield as Australia. Firms cancel sales of bonds worth billions of dollars, citing market conditions. The US Federal Bank and the European Central Bank tries to bolster the money markets by making funds available for banks to borrow on more favourable terms. Interest rates are also cut in an effort to encourage lending. But the short-term help does not solve the liquidity crisis - or availability of cash for banks - as banks remain cautious about lending to each other. A lack of credit - to banks, companies and individuals - brings with it the threat of recession, job losses, bankruptcies, repossessions and a rise in living costs.
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UK bank Northern Rock seeks an emergency loan to stay afloat, prompting a "run" on the bank, as worried customers withdraw 2bn. The bank is later nationalised. In the US, the near-collapse of Bear Stearns leads to a crisis of confidence in the financial sector and the end of investmentonly banks. Seeking a long-term solution, the US government agrees a $700bn bail-out that will buy up Wall Street's bad debts in return for stake in the banks. The US government plans to borrow the money from world financial markets and hopes it can sell the distressed assets back once the housing market has stabilised. The UK government launches its own bail-out, making 400bn extra capital available to eight of the UK's largest banks and building societies in return for preference shares in them. In return for its investment, the government expects to get a stake in the banks - although exactly how much is not quite clear yet. Economies around the world are affected by the credit crunch. Governments move to nationalise banks from Iceland to France. Central banks in the US, Canada and some parts of Europe take the unprecedented step of co-ordinating a half-point percent cut in interest rates in an effort to ease the crisis. Shares have risen and fallen with news of failures, takeovers and bail-outs. In part, this reflects investors' confidence in the banking system. While bank shares have been hammered because of bad debts, retailers have been hit as consumer confidence is shaken by falling house prices and job insecurity.

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GLOBAL RECESSION AND ITS IMPACT ON INDIAN FINANCIAL MARKETS

The economic slowdown of the advanced countries which started around mid-2007, as a result of sub-prime crisis in USA, led to the spread of economic crisis across the globe. Many hegemonic financial institutions like Lehman Brothers or Washington Mutual or General Motors collapsed and several became bankrupt in this crisis. According to the current available assessment of the IMF, the global economy is projected to contract by 1.4 per cent in 2009.Even as recently as six months ago, there was a view that the fallout of the crisis will remain confined only to the financial sector of advanced economies and at the most there would be a shallow effect on emerging economies like India. These expectations, as it now turns out, have been belied. The contagion has traversed from the financial to the real sector; and it now looks like the recession will be deeper and the recovery longer than earlier anticipated. Many economists are now predicting that this Great Recession will be the worst global recession since the 1930s.

Meaning of Recession
A recession is a decline in a country's gross domestic product (GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by several quarters of slowing down. An economy, which grows over a period of time, tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. A recession normally takes place when consumers lose confidence in the growth of the economy and spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investors spend less; as they fear stocks values will fall and thus stock markets fall on negative sentiment. Risk aversion, deleveraging and frozen money markets and reduced investor interest adversely affect capital and financial flows, import-export and overall GDP of an economy. This is exactly what happened in US and as a result of contagion effect spread all over the world due to high integration in the global economy.

Impact on Indian Economy

In India, the impact of the crisis has been deeper than what was estimated by our policy makers although it is less severe than in other emerging market economies. The extent of impact has been restricted due to several reasons such as-

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 Indian financial sector particularly our banks have no direct exposure to tainted assets and its off-balance sheet activities have been limited. The credit derivatives market is in an embryonic stage and there are restrictions on investments by residents in such products issued abroad. Indias growth process has been largely domestic demand driven and its reliance on foreign savings has remained around 1.5 per cent in recent period. Indias comfortable foreign exchange reserves provide confidence in our ability to manage our balance of payments notwithstanding lower export demand and dampened capital flows. Headline inflation, as measured by the wholesale price index (WPI), has declined sharply. Consumer price inflation too has begun to moderate. Rural demand continues to be robust due to mandated agricultural lending and social safety-net programmes. Indias merchandise exports are around 15 per cent of GDP, which is relatively modest. Despite these mitigating factors, India too has to weather the negative impact of the crisis due to rising two-way trade in goods and services and financial integration with the rest of the world. Today, India is certainly more integrated into the world economy than ten years ago at the time of the Asian crisis as the ratio of total external transactions (gross current account flows plus gross capital flows) to GDP has increased from 46.8 per cent in 1997-98 to 117.4 per cent in 2007-08. Although Indian banks have very limited exposure to the US mortgage market, directly or through derivatives, and to the failed and stressed financial institutions yet Indian economy is experiencing the knock-on effects of the global crisis, through the monetary, financial and real channels all of which are coming on top of the already expected cyclical moderation in growth.

Stock Market
The economy and the stock market are closely related as the buoyancy of the economy gets reflected in the stock market. Due to the impact of global economic recession, Indian stock market crashed from the high of 20000 to a low of around 8000 points. Corporate performance of most of the companies remained subdued, and the impact of moderation in demand was visible in the substantial deceleration during the current fiscal year. Corporate profitability also exhibited negative growth in the last three successive quarters of the year. Indian stock market has tumbled down mainly because of 'the substitution effect' of: Drying up of overseas financing for Indian banks and Indian corporates; Constraints in raising funds in a bearish domestic capital market; and Decline in the internal accruals of the corporates.

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Thus, the combined effect of the reversal of portfolio equity flows, the reduced availability of international capital both debt and equity and the perceived increase in the price of equity with lower equity valuations has led to the bearish influence on stock market.

Forex Market
In India, the current economic crisis was largely insulated by the reversal of foreign institutional investment (FII), external commercial borrowings (ECB) and trade credit. Its spillovers became visible in September-October 2008 with overseas investors pulling out a record USD 13.3 billion and fall in the nominal value of the rupee from Rs. 40.36 per USD in March 2008 to Rs. 51.23 per USD in March 2009, reflecting at 21.2 per cent depreciation during the fiscal 2008-09. The annual average exchange rate during 2008-09 worked out to Rs. 45.99 per US dollar compared to Rs. 40.26 per USD in 2007-08 which is the biggest annual loss for the rupee since 1991 crisis. Moreover, there is reduction in the capital account receipts in 2008-09 with total net capital flows falling from USD 17.3 billion in April-June 2007 to USD 13.2 billion in April-June 2008. Hence, sharp fluctuation in the overnight forex rates and the depreciation of the rupee reflects the combined impact of the global credit crunch and the deleveraging process underway in Indian forex market.

Money Market
The money market consists of credit market, debt market and government securities market. All these markets are in some or other way related to the soundness of banking system as they are regulated by the Reserve Bank of India. According to the Report submitted by the Committee for Financial Sector Assessment (CFSA), set up jointly by the Government and the RBI, our financial system is essentially sound and resilient, and that systemic stability is by and large robust and there are no significant vulnerabilities in the banking system. Yet, NPAs of banks may indeed rise due to slowdown as Reserve Bank has pointed out. But given the strength of the banks balance sheets, that rise is not likely to pose any systemic risks, as it might in many advanced countries. Nevertheless, the call money rate went over 20 per cent immediately after the Lehman Brothers collapse and banks borrowing from the RBI under daily liquidity adjustment facility overshot Rs. 50,000 crore on several occasions during September-October 2008 under tight liquidity situation.

Slowing GDP
In the past 5 years, the economy has grown at an average rate of 8-9 per cent. Services which contribute more than half of GDP have grown fastest along with manufacturing which has also done well. But this impressive run of GDP ended in the first quarter of 2008 and is gradually reduced. Even before the global confidence dived, the economy was slowing. According to the revised estimates released by the CSO (May 29, 2009) for the overall growth of GDP at factor cost at constant prices in 2008-09 was 6.7 per cent as against the 7 per cent projection in the midyear review of the Economy presented in the Parliament on December 23, 2008. The growth of GDP at factor cost (at constant 1999-2000 prices) at 6.7 per cent in 2008-09 nevertheless
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represents a deceleration from high growth of 9 per cent and 9.7 per cent in 2007-08 and 2006-07 respectively. (Table 1) The RBI annual policy statement 2009 presented on July 28, 2009 projects GDP growth at 6 per cent in 2009-10 in 2009-10.

Table 1: Rate of Growth at Factor Cost at 1999-2000 Prices (per cent)

Agriculture, Forestry and Fishing Mining & Quarrying Manufacturing Electricity, Gas & Water Supply Construction Trade, Hotels & Restaurants Transport, Storage & Communication Finance, Insurance, Real Estate, Business Services Community, Social & Personal Services Total GDP at factor cost
Source: Bloomberg

2003- 20042004 2005 10 0 3.1 8.2 6.6 8.7 4.8 7.9 12 16.1 10.1 7.7 15.3 15.6 5.6 8.7 5.4 6.8 8.5 7.5

20052006 5.8 4.9 9.1 5.1 16.2 10.3 14.9 11.4 7.1 9.5

2006- 2007- 20092007 2008 2010 4 4.9 1.6 8.8 3.3 3.6 11.8 8.2 2.4 5.3 5.3 3.4 11.8 10.1 7.2 10.4 10.1 9 16.3 15.5 9 13.8 11.7 7.8 5.7 6.8 13.1 9.7 9 6.7

The slowdown in growth of GDP is more clearly visible from the growth rates over successive quarters of 2008- 09. In the first two quarters of 2008-09, the growth in GDP was 7.8 and 7.7 respectively which fell to 5.8 per cent in the third and fourth quarters of 2008-09. The third quarter witnessed a sharp fall in the growth of manufacturing, construction, trade, hotels and restaurants. The last quarter was an added deterioration in manufacturing due to the deepening impact of the global crisis and a slowdown in domestic demand.
Table 2: Rate of Growth at Factor Cost at 1999-2000 Prices (per cent)

Agriculture, Forestry and Fishing Mining & Quarrying Manufacturing Electricity, Gas & Water Supply Construction Trade, Hotels, Transport & Communication Finance, Insurance, Real Estate, Business Service
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2007-08 Q1 Q2 Q3 4.3 3.9 8.1 0.1 3.8 4.2 10 8.2 8.6 6.9 5.9 3.8 11 13.4 9.7 13.1 10.9 11.7 12.6 12.4 11.9

Q4 2.2 4.7 6.3 4.6 6.9 13.8 10.3

Q1 3 4.6 5.5 2.7 8.4 13 6.9

2008-09 Q2 Q3 2.7 -0.8 3.7 4.9 5.1 0.9 3.8 3.5 9.6 4.2 12.1 5.9 6.4 8.3

Q4 2.7 1.6 -1.4 3.6 6.8 6.3 9.5

Community, Social & Personal Services Total GDP at factor cost

Source: Bloomberg

4.5 9.2

7.1 9

5.5 9.3

9.5 8.6

8.2 7.8

9 7.7

22.5 12.5 5.8 5.8

Hence, the slowdown in Indian economy is evident from the low GDP growth with deceleration in the industrial activity, particularly in the manufacturing and infrastructure sectors and moderation in the services sector mainly in the construction, transport and communication, trade, hotels and restaurants.

Strain On Balance Of Payments

The overall balance of payments (BoP) situation remained resilient in 2008-09 despite signs of strain in the capital and current accounts, due to the global crisis. During the first three quarters of 2008- 09 (April-December 2008), the current account deficit (CAD) was US $ 36.5 billion as against US $ 15.5 billion for the corresponding period in 2007-08. The capital account balance declined significantly to US $ 16.09 billion in 2008-09 as compared to US $ 82.68 billion during the corresponding period in 2007-08. As at end-March 2009 the foreign exchange reserves stood at US $ 252 billion.

Reduction In Import-Export
During 2008-09, the growth in exports was robust till August 2008. However, in September 2008, export growth evinced a sharp dip and turned negative in October 2008 and remained negative till the end of the financial year. For the first time in seven years, exports have declined in absolute terms in October 2008.
Chart 1: Export Growth Year Wise

Source: Economic Survey 2009, Government of India

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The above chart show that the exports have declined since October 2008 due to contraction in global demand due to the synchronised global recession. Similarly, imports growth also witnessed a deceleration during October-November 2008, before turning negative thereafter. The merchandise trade deficit declined during 2009-10 (April-May) over the corresponding period of the previous year, reflecting the sharper decline in the imports in relation to exports.

Reduction In Employment
Employment is worst affected during any financial crisis. So is true with the current global meltdown. This recession has adversely affected the service industry of India mainly the BPO, KPO, IT companies etc. According to a sample survey by the commerce ministry 109,513 people lost their jobs between August and October 2008, in exportrelated companies in several sectors, primarily textiles, leather, engineering, gems and jewelry, handicraft and food processing. Economic Survey of India gives alarming bell about the on-going effects of the global slowdown on employment and has pressed upon the government the urgency of the major response, especially in the unorganized sector.
Chart 2: Growth in Employment Rate

Source: Economic Survey 2009, Government of India

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Taxation
The economic slowdown has severely dented the Centres tax collections with indirect taxes bearing the brunt. The tax- GDP ratio registered a steady increase from 8.97 per cent to 12.56 per cent between 2000-01 and 2007-08. But this trend has been reversed as the tax-GDP ratio has fallen to 10.95 per cent during current fiscal year mainly on account of reduction in Customs and Excise Tax due to effect of economic slowdown.
Chart 3: Reduction in Tax-GDP ratio

Source: Bloomberg

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INDIAN TWO-WHEELER INDUSTRY: A PERSPECTIVE (mapsof india. Twm india)

Source: SIAM

The two-wheeler market in India is the biggest contributor to the automobile industry with a size of Rs.100,000 million. The two-wheeler market in India comprises of 3 types of vehicles, namely motorcycles scooters, and mopeds. Foreign collaborations have been playing a major role in the growth of the Indian two-wheeler market, and most of them are Japanese firms. The modern two-wheeler firms in India have been manufacturing new categories of two wheelers such as Step Thrus and Scooterettes. These have been produced by combining two or more two-wheeler segments. Foreign firms have already taken initiatives to own their two-wheeler subsidiaries in India.
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Among the 3 segments of the Indian two wheeler market, major growth trends have been seen in the motorcycle segment over the last four to five years. One good reason for such increase in demand for motorcycles is due to its resistance and balance even on bad road conditions. Most of the rural areas in India do not have decent roads and hence the need for good, shock-resistant, and steady two-wheelers such as motorcycles had been felt. Some of the major players in the Indian motorcycles market are Hero Honda CBZ, Bajaj Pulsar, TVS and Apache. Other brands include Splendor, Passion, Fiero, Victor, Star City, Boxer, CD Dawn, Karizma, Caliber, etc. Having classified the motorcycle brands into economy, executive, and premium segments, Bajaj stands as the leader in the economy segment, Hero Honda leads in the executive segment, and there is a competition in the premium segment between Hero Honda and Bajaj. The following are the main factors that affect two-wheeler sales in India:

Increase in credit and financing for auto vehicles - Two-wheeler loans and financing has been on the rise. Increase in consumer's salary - Due to opportunities offered by multinationals the disposable incomes of salaried individuals have increase manifold. Constant petrol prices - Today, the government of India has been working on reducing subsidies on kerosene and diesel which will keep petrol prices at more or less the same level. Delay in initiation of Mass Transport System - Probably a future threat to the two-wheeler market, the implementation of the mass transport system has been delayed.

However, the two-wheeler market in India is a fast growing market due to its technological advancements in product manufacturing and emphasis on design innovation.

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QUESTIONNAIRE:
1. Will India we severely affected by the World Economic Crisis in the future? No Yes 2. How much volatility have we observed in the Sensex do to the Meltdown? High volatility Low volatility Medium volatility 3. Has the Two wheeler market in India been severely affected post the crisis? No Somewhat Yes 4. Which segment has been the most affected by the Meltdown? Corporate Banks/Institutions Individual

5. If the answer to the fourth question is YES, then kindly list a few points relating to it?

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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6. Do you think that the Global Meltdown is one of the main cause that may have affected

the Indian Two Wheeler Industry? ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------7. Does the Fundamental Performance of a company always affect the share price? Yes No

8. How are the two wheeler companies coping with the current crisis?

-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9. Is it the right time to invest in the Stock Market? Yes No Cant Say

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PRIMARY FINDINGS AND ANALYSIS

Chart 4: Will India be severely affected by the World Economic Crisis in the future?

Out of 10 analysts, 3 analysts had the answer that Indian policies and regulations are so strong that they can withstand the crisis and yet grow in line with the expectations. They also said that the RBI has very well formulated the banking regulations and thus can keep the Economy standstill.
Chart 5: How much volatility have we observed in the Sensex due to the Meltdown?

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Chart 6: Has the two wheeler market in India been severely affected post the crisis?

Chart 7: Which segment has been the most affected by the meltdown?

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Chart 8: Does the Fundamental Performance of a company always affect the share price?

Chart 9: Is it the right time to invest in the stock market?

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FINDINGS & ANALYSYS

This research has helped me in understanding the two wheeler industry in a much better way than I knew before conducting the research. All the findings and analysis of this Thesis will be extremely easy to understand by the way of charts and tables.
Chart 10: Net Profit Margin

Source: Bloomberg, IAS

As we can see in Chart:10, it is clearly seen that the net profit margins of Hero Honda Motors have been consistently rising on the back of increase in sales and efficient utilization of their resources. Moreover Hero Honda Motors have added new plant that has added more capacity and hence their volumes has risen substantially. HH recently crossed a significant milestone, covering 100,000 villages under its rural initiative: Har Gaaon Har Angan. This umbrella platform for all rural initiatives (launched in late 2007) has helped steadily widen its reach in rural and upcountry markets, taking its share of sales to 42%. On the other hand Bajaj Auto Ltd posted a net sales of Rs.119bn which grew by 35% on a YoY basis. This was on the back of a huge spurt iin the volumes which added extra capacity and Bajaj Discover sales were the highest in the year 2010 which added to an incline in the Net Profits. The net profit of Bajaj Auto grew by a staggering 160% to Rs.17bn. hence we can see that the
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net profit margins in the year had taken a slump as the increase in raw material costs lead to a shrink their their margins and thus the net profit was simply Rs.6.5bn. Simultaneously, TVS Motor Company Ltd Achieves highest ever quarterly revenues on robust volume growth. TVS Motors revenue grew 41% YoY, the highest ever for a quarter on the back of 32.8% YoY volume growth to 4.6lakh units. The company reported 5.7% YoY and 3.8% QoQ realization growth. Moreover the company has added Brazilian, Nigeria and Peru apart from Sri Lanka to its preferred export destinations. With Rs8bn or 2.5 lakh units of export target in FY11, exports would form 13.5 % of overall volumes.

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Peer Comparison

Chart 11: Bajaj Auto Ltd Product Mix

Source: Bloomberg, IAS

In the above chart 11, we can clearly see that in Jan 09 the total sales and production had taken a slump due to the global meltdown. The demand for two wheelers had gone down as the consumer spending rate had diminished substantially. Moreover banks were also very strict in granting loans as they did not want to increase their NPAs. Also Bajaj Auto had decided to stop the production of their Scooter segment and thus we can observe that the sales and production of scooters had diminished and come almost to nil. Bajaj Auto Ltd launched two new bikes, Pulsar 220cc and the Kawasaki Ninja that has added to their premium segment. Bajaj Auto Ltd is yet to break even from their premium segment bikes. Also it has tied up a strategic Alliance with the Austrian bike manufacturer KTM. Bajaj Auto created history when it recorded a sale of 6lac units of Bajaj Discover in just a stunning 250 days. This has been the major contributor to the turnover of Bajaj Auto Ltd and has also had a major share in contributing to the bottom-line PAT. This is also reflected in the chart
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above in the Jan 10 where there is a sudden spurt in the production and the sales of the 75cc to 124cc bikes.
Chart 12: Hero Honda Motors Ltd Product Mix

Source: Bloomberg, IAS

Driven by a 19% growth in sales volumes, net sales at Rs 4092.6 crore registered a 20% rise over the year-ago period. The company sold 1.2 million vehicles in the quarter, which was the highest in fiscal 2010. Net profit at Rs598.8 crore was 48.9% higher over the year-ago period and 11.8% higher on a sequential basis. The biggest surprise came from a higher-than-expected operating profit margin (OPM). Compared with analysts consensus of around 16.5%, the company posted an OPM of 17.3%, well above the 16.1% registered in the year-ago period. The Hero Honda management stated that margin expansion was a result of effective price negotiations with component makers, which brought down the raw material costs during the quarter despite raw material price increases. Meanwhile, the company is constantly adding capacity and introducing new products. By August, its installed capacity is expected to touch 5.7 million units from the present 5.4 million. With plants operating at around 90% of their capacities, the company has maintained its leadership position with a market share of around 59%. Hero Honda Motors Ltd. has been exploiting the two wheeler market with its 75-124cc bikes. HH introduced two models in Apr, the refreshed Glamour and Glamour FI. It plans to continue to build on its strategy of innovation and technology focus by introducing new products and
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product refreshes. Rural initiative continues to gain in size. HH recently crossed a significant milestone, covering 100,000 villages under its rural initiative: Har Gaaon Har Angan. This umbrella platform for all rural initiatives (launched in late 2007) has helped steadily widen its reach in rural and upcountry markets, taking its share of sales to 42%. For the past four months, volumes of Pleasure have been sustained at ~25,000 a month. They constitute~6.25% of HHs two-wheeler sales in 1QFY11, compared to 4.25% for the year-ago quarter.
Chart 13: TVS Motor Company Ltd Product Mix

Source: Bloomberg, IAS

TVS Motors clocked net sales of Rs12160 mn, up 36.3% yoy, which was marginally lower than our expectations of Rs 12,287mn. The growth was driven by 29.5% higher volumes and 5.3% rise in realizations. Realizations improved on account of a richer product mix as proportion of three wheeler volumes rose during the quarter. In terms of volumes, growth was driven by 37.8% yoy jump in volumes of scooters and mopeds. Motorcycle volumes declined by 6.4% yoy as against industry growth of 37%. TVS Motors has lost market share from ~7.1% in Q4 FY09 to ~6.5% in Q4 FY10. Three wheelers sales during Q4 FY10 stood at 5,305 units in comparison to 1,649 units in Q4 FY09. Export volumes for TVS Motors witnessed a growth of 17.8% yoy basis. Sequentially exports grew by 26.5%. We can see that the sales and the production have been consistently rising. But an astonishing fact is that TVS Motor Company Ltd has been unable to increase its volume and sales drastically. TVS Motors introduced new premium segment bikes which enhanced its total sales but yet it is lagging behind in capturing a considerable market share. Also it has been facing stiff competition from rivals namely Yamaha that introduced two new bikes namely Fazer and FZ. Severe competition and un ability to combat higher material expenses, the EBITDA margins could not expand and thus the net profit margin is below the average industry standard.
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Chart 14: Total Production

Chart 15: Total Sales

Source: Bloomberg, IAS

Source: Bloomberg, IAS

Hero Honda Motors Ltd has been the Market Leader and will continue to be. The charts portray this fact consistently. Hero Honda Motors Ltd has proved that the company has an efficient management that has continuously strived for excellence. On the other hand TVS Motor Company Ltds sales as well as production have been more or less stagnated since Dec 04. There has been just a marginal difference. Bajaj Auto Ltd and TVS Motor Company Ltd had felt the brunt of the Global meltdown where their sales and production fell. Moreover their margins were also sqeezed on the grounds of higher raw material prices. Also an important factor was that the spending power of the consumers had fallen substantially. Also stringent norms by the banks made it even difficult for availing automobile loans. The major sales of two wheeler comes from the rural as they contribute close to 69% of the total two wheeler sales in the country and a credit crunch in the country will first affect the spending power of the rural population.

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Chart 16: Scooter Production

Chart 17: Scooter Sales

Source: Bloomberg, IAS

Source: Bloomberg, IAS

Chart 18: 75-124cc Sales

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Source: Bloomberg, IAS

Chart 16 and 17 gives a first hand idea about the scooter market in India. Scooter was the prime two wheeler vehicle that was in demand 2 decades ago. Bajaj Auto Ltd dominated this segment for almost over a decade and had the highest market share in this space. But later on it realized that the scooter sales had taken a huge blow as the perception of people changed and began to prefer motor bikes over a scooter as a motor bike has a better status symbol that a scooter. By the time Bajaj realized it was too late and Hero Honda had captured a substantial share of the motor bike segment. Hence we can see that Bajaj Auto Ltd stopped its scooter production and started focusing more on motor bikes. But then again the demand for scooters have not diminished as companies like Hero Honda Motors, Suzuki have entered this segment and introduced better looking scooters with better features. Because of lower price compared to motor bikes and low cost maintenance, the scooter market has gradually catching pace and adds a decent share to the net profit of the company. When we take a close look at chart no 18, 75-124cc SCOOTER Sales, we can see how Bajaj Auto Ltd has drastically reduced the production as of its scooter division and hence the no of units sold from Dec-08 and Dec-10 have just been a handful. Bajaj Auto Ltd has strategically aligned its product mix and has now shifted its to premium and the aspirer class bikes.
Chart 19: 125-249cc Production

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Source: Bloomberg, IAS

Chart 20: 125-249cc Sales

Source: Bloomberg, IAS

Chart 18 & 19 expose us to a fact that even though Hero Honda Motors Ltd is the market leader, Bajaj Auto has gained a strong foot hold in the premium segment bikes which is very well seen in chart 20. The introduction of the Pulsar 220 and the Kawasaki Ninja 250 have helped Bajaj revive its share in the premium segment. These bikes are priced from 1 lac and go up to 3.5 lac rupees. The premium bike segment is gradually picking up pace and thus has compelled other companies within the industry to come up with innovative and powerful premium category bikes.
Chart 21: 75-124cc Production IIPM/FW/08-10/MUM/FIN/030 Page 38 Chart 22: 75-124cc Sales

Chart 21 & 22shows that we can see that Hero Honda has got a strong foot hold in this segment and this is the reason why it is commanding the market share in the Indian two wheeler industry. Also we can notice that Bajaj Auto Ltds sales and production have taken dip in the year 2009 due to the economic slow down in India.

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RESEARCH OBJECTIVES & METHODOLOGY

Research objective:
The objective of this research is to find out if during the Global Meltdown, the Indian Two wheeler Industry was affected or no and to study the performance of the company and see if the it would be safe for the investors to invest in two wheeler companies.

Research Methodology:
Questionnaire (Primary Data) By using the Secondary Data

Tool used:
Interviews with highly skilled professionals from the financial sectors. Data from Bloomberg and IAS

Target Audience:
Highly skilled professionals from the financial sector.

Sample size:
10 highly skilled fundamental analysts.

Sampling method used:

Qualitative Research.

Research Area:
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India economy is very sensitive to global news and any upheaval globally does have an impact on the Indian economy. So it was imperative to check the influence of the Global Meltdown on the Indian economy and how it trickled down to the two wheeler industry. So the study was conducted on the causes and impacts of the meltdown and how the financial performance was affected.

CONCLUSION
The year 2008, one of the worst years in the worlds economic history, experienced a major global meltdown. This global meltdown led to job lay-offs across the world. It claimed its first casualty in Los Angeles with a 45 year old NRI killing 5 members of his family before taking his own life. According to the Labor Departments report, the unemployment rolls swelled by 2.2 million, over the last year, to 9.5 million. Different Indian associates and CEOs of multinational companies have started feeling the heat. The recent downturn is weighing on the minds of employers. Although India has not been directly impacted by the global financial crisis, we should be cautious about the indirect knock-on effect of the global crisis. According to the GET report, over 50 million could lose their jobs by 2009 worldwide. The worst thing is that as we live in an agrarian economy where the unemployment rate is already high and 60% of the population is still dependent on agriculture, the rate of unemployment is rising further due to these worldwide lay-offs as most of the students of India go abroad for job purposes. The two-wheeler industry has seen an unexpected slump in the current year. Firm interest rates are being cited as the obvious reason for the lack of demand. The two-wheeler has always been an intrinsic part of the Indian milieu. It offered and continues to offer the Indian middle class the freedom from the clutches of an often non-existent or unreliable public transport system. It offers mobility at a reasonable cost. For a large portion of the population a scooter or a motorcycle is a necessary accessory for their livelihood. Of late, the two-wheeler industry has been under an analytical microscope with volumes slowing down and even showing a negative growth. Financiers are being more cautious in their lending, leading to greater pressure on volumes. The industry seems to be caught in a negative downturn at the moment but the key question remains is this downturn temporary or is it here to stay?
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From the financiers perspective, servicing this industry and this customer segment is an operationally intensive exercise, covering locations that fall outside city limits and being dependent on correspondent banking relationships and a robust collection infrastructure. In the case of a downturn, caution enters the equation as financiers look to keep NPAs under control. The customer typically belongs to the lower-middle and middle class. For this segment, aspirations have outpaced real income growth leading to a greater propensity to borrow and spend. With rising inflation, this segment has found itself over-leveraged. The hardening of interest rates at such a juncture leads to the customer postponing or deferring a new purchase. This is what has happened to the two-wheeler industry today. The one-lakh-rupee car is seen to be another threat to the two-wheeler industry but the truth is that the running and maintenance cost and the sheer convenience of a two-wheeler, given our infrastructure, are difficult to replace. However we must wait and judge the aspirational impact of owning a car on the Indian consumer. This environment has prevailed for the past six months but this is beginning to see a change with inflation showing a definite decline and interest rates showing the first signs of softening. As a general trend the industry has begun to lower interest rates, in a segmented fashion. Given these changes in the environment I expect to see an increase in demand with a certain lag effect the time it takes the benefits of reduced inflation to impact the customers cash flows. Manufacturers are also working at increased segmenting of the market launching products aimed a newer segments like girls and women. Newer products, such as electrically powered motorbikes are also being introduced in the market. The market also is seeing a lot of action in the 150cc plus market with new models slated to hit the market. At the same time, brand building and promotional spends of top manufacturers have not shown significant reduction, keeping the category in the minds of potential customers. I expect that the festive season will bring in priceoffs and discounts along with other promotional offers that will provide another fillip to sales. While this will have a temporary impact, it is imperative that the manufacturers, dealers and financiers work together even more closely. Manufacturers have a very strong relationship with their suppliers and dealers but very often view the financier as an external service provider. The financier has to have greater integration in the entire supply chain, working towards maximising customer solutions and services. Advice to Share Holders FY10 Bajaj Auto Ltd Hero Honda Motors Ltd TVS Motor Company Ltd

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EPS P/E Book Value Market Capitalisation CMP (29th July)

117.70 22.93 202.39 388899.8 2688

29.99 60.52 N/A 362510 1815

1.41 97.87 N/A 32940 138.70

Based on the above valuation table, Bajaj Auto Ltd is leading as its EPS is stands to be the highest and also the PE ratio is low. This points out the fact that the Earnings of Bajaj Auto Ltd are far superior that its peers even though it does not command the market share unlike Hero Honda Motors Ltd does. But at this stage it is important to know that the stock price of Bajaj Auto Ltd is at its peak and thus entering the stock at this level is not feasible. Also the companys plant at Pantnagar that has a tax subsidy will be over in the next two years. Also the companys exports have taken a dip as the global demand had reduced on the back of the world economic slowdown. Moreover the company had also been exposed to commodity price rise such as rubber that will now impact the margins. Hence the stock gets a rating of NEUTRAL at this stage. In the case of Hero Honda Motors Ltd, the EPS has reduced by Rs.4 compared to FY09. Moreover the PE ratio of the stock is very high denoting that the share price is cuttenrlt being traded at a premium and thus at the moment shareholders and investors are advised to Sell/Accumulate the stock. In the case of TVS Motor Company Ltd, the stock is currently at a very low EPS denoting that the company still needs to boost its profit levels and increase its net profit margins. The stock is trading at a very high premium and hence the share holders are recommended Sell on the stock.

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BIBLIOGRAPHY

Websites
http://www.livemint.com www.moneycontrol.com http://economictimes.indiatimes.com www.bseindia.com www.nseindia.com www.mapsofindia.com www.bajajauto.com www.herohonda.com www.tvsmotor.in

Books
Bajaj Auto Ltd Annual Report 2010 Hero Honda Motors Ltd Annual Report 2009 TVS Motor Company Ltd Annual Report 2009 Damodaran on Valuation

RESPONSE SHEETS
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Response Sheet No: 1 Name: ANSHUL S KOTHARI ID NO: IIPM/FW/08-10/MUM/FIN/030 Date when the Guide was consulted: 2/06/10 The outcome of the discussion: Discussions were made on following 1. GLOBAL MELTDOWN 2. CURRENT ECONOMIC SCENARIO IN INDIA Discussion on above topics helped me to understand the causes and impacts on the global meltdown and how the economy in India is moving and what are the factors that affect India. The Progress of the Thesis: Data collection for the introduction has commenced.

Response Sheet No: 2

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Name: ANSHUL S KOTHARI ID NO: IIPM/FW/08-10/MUM/FIN/030 Date when the Guide was consulted: 21/06/10 The outcome of the discussion: Discussions were made on following 1. Two wheeler industry in India 2. Data collection from IAS and its interpretation Got an insight on the volume and sales of two wheelers and the drivers for growth. The Progress of the Thesis: Introduction of the Global Meltdown is over. A synopsis of the two wheeler industry is in progress and also the structure of the questionnaire is in progress.

Response Sheet No: 3

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Name: ANSHUL S KOTHARI ID NO: IIPM/FW/08-10/MUM/FIN/030 Date when the Guide was consulted: 30/06/10 The outcome of the discussion: Discussions were made on following 1. Performance of Bajaj Auto Ltd 2. Performance of Hero Honda Motors Ltd 3. Performance of TVS Motor Company Ltd The discussion helped to analyse the reasons for the performance of the above mentioned three companies in detail and whether the share price is moving in tandem with the performance of these companies.

The Progress of the Thesis: The questionnaire was approved and 10 analysts have put their thoughts. The introduction and data collection has been done. Analysis of the companies is in progress.

Response Sheet No: 4

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Name: ANSHUL S KOTHARI ID NO: IIPM/FW/08-10/MUM/FIN/030 Date when the Guide was consulted: 09/07/10 The outcome of the discussion: How to analyse the companies, which ratios to keep in mind while advising clients. The Progress of the Thesis: Analysis is in progress and will then be followed by conclusion.

Response Sheet No: 5

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Name: ANSHUL S KOTHARI ID NO: IIPM/FW/08-10/MUM/FIN/030 Date when the Guide was consulted: 22/07/10 The outcome of the discussion: Framing the analytical findings in the conclusion The Progress of the Thesis: Conclusion in progress.

Response Sheet No: 6

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Name: AMIN V.MORABIA ID NO: IIPM/FW/08-10/MUM/FIN/004 Questionnaire: Questionnaire has been prepared. Date when the Guide was consulted: 25/07/10 The outcome of the discussion: Sir when through my final thesis made some changes in the structure and approved it. The Progress of the Thesis: Conclusion has been finished. Full thesis has been completed after making necessary changes in it.

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LAST PAGE

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