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Bajaj Auto and Hero MotoCorp have outperformed the BSE Auto Index, as well as the Sensex, by a wide margin over the last few months. While Bajaj Auto has gained on stable margins and export pick up, Hero MotoCorp is up on festival demand and hope that rural sales will pick up in the second half of the financial year.
While September quarter results from both companies were above analyst expectations, Hero MotoCorp's volume performance in the domestic market has been much better than Bajaj in recent months. This is likely to impact the valuation gap between the two with Bajaj Auto normally trading at a premium to its larger peer. The higher price to earnings multiple for the Pune-based company is due to its higher margins and diversified geographic sales base. Also, the split between Hero and erstwhile partner Honda, and subsequent fear of market share loss, had led to de-rating of the Hero stock in the past. Credit Suisse analysts say Hero MotoCorp's price to earnings multiples had de-rated from 16 times one-year forward earnings estimate in January 2012 to 12 times in May 2013.
While September quarter results from both companies were above analyst expectations, Hero MotoCorp's volume performance in the domestic market has been much better than Bajaj in recent months. This is likely to impact the valuation gap between the two with Bajaj Auto normally trading at a premium to its larger peer. The higher price to earnings multiple for the Pune-based company is due to its higher margins and diversified geographic sales base. Also, the split between Hero and erstwhile partner Honda, and subsequent fear of market share loss, had led to de-rating of the Hero stock in the past. Credit Suisse analysts say Hero MotoCorp's price to earnings multiples had de-rated from 16 times one-year forward earnings estimate in January 2012 to 12 times in May 2013.
Whereas, with Bajaj Auto’s prospects holding up, aided by exports, its stock valuation largely ranged 13-16 times one-year forward estimates. However, with Hero outperforming expectations on volumes, the valuation gap which was about eight per cent in May has come down to 3.5 per cent currently as Hero has started getting re-rated. Says Manish Sonthalia, senior vice-president and fund manager, Motilal Oswal AMC, “Given the performance of Hero MotoCorp over the last two months, the valuation gap between Hero and Bajaj Auto has reduced.”
Bajaj Auto is currently trading at 14.1 times its FY15 estimates, while Hero MotoCorp is trading at 13.6 times. Given the performance of the two-wheeler sector in the festive season and export performance of Bajaj Auto, most analysts are bullish on both companies, with Bajaj Auto a favoured pick over a longer term. However, in the near term, given the rural franchise of Hero MotoCorp, the larger company finds more favour among analysts than Bajaj Auto. The long-term call on Hero will depend on its ability to scale up its international operations as well as counter the rising competition from Honda.
Hero is getting the volumes
Hero has been an outperformer registering a 3.3 per cent volume growth in the two-wheelers space to 3.53 million in the first seven months of FY14, while Bajaj Auto's domestic volumes were down 11.8 per cent to 1.31 million. In fact, Hero has been registering record volumes this festive season with October sales up 19 per cent year-on-year to 6.14 units, while Bajaj's sales was down 12 per cent to 228,000 units.
Competition to remain high
While Honda has taken market share in two-wheelers from both Bajaj Auto and Hero MotoCorp, given its plans to go further down the motorcycle chain (economy and lower executive; price below Rs 45,000 per unit), Hero is likely to see more competition than Bajaj Auto. Already Honda has made inroads into the Hero stronghold of the executive segment (Rs 45,000-65,000) with the Dream series bikes of Neo and Yuga, as well as the CB Shine, Twister and Stunner. The executive segment accounts for 65 per cent of motorcycle industry volumes and 66 per cent of Hero's volumes. In this segment, Hero lost 157 basis points of market share in the first half of FY14, as compared to FY13, with its share hovering at 61 per cent, while Bajaj’s is down 451 basis points during the same period.
Ambit Capital analysts Ashvin Shetty and Ritu Modi, believe that given Hero’s greater exposure to the executive segment, it will be impacted more by HMSI (Honda) as compared to Bajaj Auto. With Honda looking at entering the economy segment (below Rs 42,000; 20 per cent of two-wheeler market) in FY15 and plans to become India's largest two-wheeler maker by 2020, there could be further market share loss for the two Indian players. Hero has planned 7-10 launches, including some with engines developed in-house, even as it is aggressively looking to have a larger international presence. While its recent market share losses have come down, how it is able to cope will also reflect on its share price and valuations.
