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Hero MotoCorp and Bajaj Auto have been major outperformers since May with their respective stocks up over 25-30% as compared to the Sensex's more muted 7%. While overall two wheeler sales continue to languish with year to date sales flat, the two stocks have gone up on expectation of better sales due to new launches, rural demand and volume uptick in the festival season. While Hero MotoCorp has seen its motorcycles sales in the fiscal year to date register a fall of 3% year on year its smaller rival has seen its domestic volumes fall by a steeper 12%.
Say Jatin Chawla and Akshay Saxena of Credit Suisse, “Despite a combination of slow industry and sustained market share loss, Hero's and Bajaj's stocks have done well this fiscal year. We believe that the key reason for this is the hope that volumes would pick-up in the festival season, especially after the good monsoon. However, our nationwide channel checks suggest that this is far from true. Most Bajaj and Hero dealers see volume growth this festival season staying flat over last year.”
The managements of the two companies are however confident of a perk up in sales on monsoon driven rural sales as well as higher buying in the festive season. Bajaj Auto which has seen a muted 2-3% y-o-y growth in the festive season so far is hoping that the launch of new Discover, post-monsoon rural spending and strong showing by Pulsar should keep sales buoyant. The company recently launched a 100 cc bike, the Discover 100M and is hoping to recoup some of its lost market share (200 bps in the September quarter) with this launch. The company is looking at launching a total of 5 new variants of Discover as also the Discover 375 in the second half of FY14.
The Hero MotoCorp management is more bullish about its prospects in the festival season and has lined up 15 new variants and upgrades in the December quarter. The company believes that in the October-November season it will be able to post record volumes and surpass last year's volume of 1.1 million units for the two months. A large part of the sales pick up is likely to come from the rural areas given the company's presence and good monsoons as well as stronger festival sales.
One of the worries for analysts has been the steep market share losses both the companies have ceeded to Honda Motorcycles and Scooters India. The Japanese company has gained 800 bps in market share over the last year and a half. Market share gains in the first half of the fiscal is at about 400 bps to 23% as compared to 19% in the FY13. Hero MotoCorp's two wheeler market share fell 100 bps since FY13 to 42% (scooter sales cushioned the fall) while Bajaj lost 300 bps during that period to 15%. While Bajaj Auto is absent in the scooter segment and could not take advantage of the boom in scooter sales, its Discover sales have declined steeply. Discover volumes were down 35% y-o-y (20% in FY14) in the September quarter and its share of the domestic volumes has come down to 42% at the end of September quarter from 54% in the year ago quarter.
Given its operating profit margins are at peak levels, most analysts say that key trigger for the company will be the success of the new Discover and variants going ahead. Positives from the September quarter performance, according to Navin Matta of Daiwa Capital Markets are already priced in and going ahead margins could come under pressure given limited scope for further currency gains, higher proportion of executive segment bikes and commodity cost pressures in the second half of the fiscal.
Most analysts however continue to favour Bajaj Auto as compared to its larger peer Hero due to the difference in margins, derisked geographic model and lower market share loss risk going ahead. Honda which has recently entered the lower executive segment (27% of volumes) is yet to enter the economy segment which constitute 20% of the volumes. This will impact Hero more than Bajaj. Credit Suisse analysts say that with Honda’s entry, Hero’s market share will be affected more than Bajaj's. Moreover, since Bajaj is more diversified with only ~50% of revenue and ~40% of profit from domestic two-wheelers, the net impact should be even less.
