 "Volumes, rural exposure give Hero Moto the edge")
The valuation premium of Hero MotoCorp over Bajaj Auto has increased over the past week, following the Budget proposals aimed at boosting rural income and robust February numbers of Hero MotoCorp. The scrip, which gained 13 per cent, was trading at seven-month highs, while Bajaj Auto in the same period was up three per cent.
The key trigger has been the sharp increase in allocation to the agricultural sector and in rural development in the Budget, which also spells out the government’s aim to double farm income by 2020. These moves should lead to higher disposable income and result in increased demand for Hero MotoCorp, which gets 48 per cent of revenue from rural markets.
The coming marriage season will also help keep the volume momentum going. Bajaj Auto, too, saw a 12 per cent growth in volumes, lower than expected given the weaker export performance.
While domestic sales were strong due to traction in the Avenger and entry-level motorcycles, this was offset by a 12 per cent fall in export. The shortage of the dollar to fund imports continues to hamper sales to Egypt and Nigeria. What is hurting Bajaj Auto more is the lack of a scooter option, while Hero MotoCorp’s new launches have been bringing in strong volumes. In the December quarter 2015, Hero MotoCorp launched two scooters, Duet and Maestro Edge, which boosted its scooter market share to 20 per cent from 13 per cent earlier. This, too, is significant given Honda’s dominance in the scooters space.
Given the expectation of a volume uptick and higher earnings growth, analysts are giving Hero MotoCorp a higher multiple of 17-18 times its FY18 estimates against 15-16 times earlier, which was in line or at a slight premium to its smaller peer. Bajaj Auto has seen some downgrades due to worries on export front. According to Bloomberg, the consensus target price for the Hero MotoCorp stock is Rs 2,857, which is almost at par with the current levels. Investors should, therefore, await a correction in the counter before taking an exposure.
The key trigger has been the sharp increase in allocation to the agricultural sector and in rural development in the Budget, which also spells out the government’s aim to double farm income by 2020. These moves should lead to higher disposable income and result in increased demand for Hero MotoCorp, which gets 48 per cent of revenue from rural markets.
The coming marriage season will also help keep the volume momentum going. Bajaj Auto, too, saw a 12 per cent growth in volumes, lower than expected given the weaker export performance.
While domestic sales were strong due to traction in the Avenger and entry-level motorcycles, this was offset by a 12 per cent fall in export. The shortage of the dollar to fund imports continues to hamper sales to Egypt and Nigeria. What is hurting Bajaj Auto more is the lack of a scooter option, while Hero MotoCorp’s new launches have been bringing in strong volumes. In the December quarter 2015, Hero MotoCorp launched two scooters, Duet and Maestro Edge, which boosted its scooter market share to 20 per cent from 13 per cent earlier. This, too, is significant given Honda’s dominance in the scooters space.
Given the expectation of a volume uptick and higher earnings growth, analysts are giving Hero MotoCorp a higher multiple of 17-18 times its FY18 estimates against 15-16 times earlier, which was in line or at a slight premium to its smaller peer. Bajaj Auto has seen some downgrades due to worries on export front. According to Bloomberg, the consensus target price for the Hero MotoCorp stock is Rs 2,857, which is almost at par with the current levels. Investors should, therefore, await a correction in the counter before taking an exposure.