Bajaj Auto vs Hero MotoCorp: Market prefers growth over margins

Analysts believe Bajaj needs to rediscover its pulse, revive growth in domestic 2-wheeler market

Bajaj Auto shares have rallied 15.5 per cent through the past three months, in anticipation of strong volume growth. In the same period, the Hero MotoCorp stock rose only 3.5 per cent. With volume growth returning, the market turned positive on Bajaj Auto, which lost market share to Honda Motorcycle and Scooter India through the past two years. Analysts expect the company to report a volume recovery in the domestic market, following the launch of two variants of its popular Discover model in August. The management has said the new Discover 150cc clocked 17,500 sales, adding this could rise to 25,000-30,000 units in the coming months. However, the company's domestic two-wheeler volumes continue to disappoint.

  From an investment point of view, Bajaj Auto would have been more attractive, as its margin profile and valuations are better. However, the company's volume growth in August disappointed. While the two-wheeler sector returned to double-digit volume growth, Bajaj continues to report a decline in volumes. Before the onset of the festive season, two-wheeler manufacturers excluding Bajaj Auto reported robust volume growth in August - Hero reported year-on-year (y-o-y) volume growth of 21 per cent and Honda 26 per cent. By contrast, Bajaj Auto reported total volume growth of eight per cent, led by three-wheeler sales and 21 per cent growth in exports. Volume growth in the domestic market dropped four per cent y-o-y to 161,713 units.

The two-wheeler sector is expected to grow at a compounded annual rate of 14 per cent through FY14-16, against five per cent in FY12-14, as consumer sentiment improves and economic growth revives. Through the past two years, Bajaj Auto's market share has fallen to less than 10 per cent in the domestic market, while Honda's market share has risen to 20 per cent of the two-wheeler market.

Antique Stock Broking says: "Though one might debate Bajaj Auto has lost share to peers in volume terms, not value terms, it is time it focused on growth and regained volume share through new brands and unique products with mass appeal and value proposition, rather than debating and defending the existing topic." Despite Hero's split with Honda, the company has defended its market share of 40-42 per cent.

Hero is also showing far greater signs of stability, though competition has risen in the executive bike segment. Honda has largely gained at the expense of Bajaj. Analysts are factoring in 10 per cent volume growth in FY15, against nine per cent volume growth for Bajaj Auto. However, for this, the company will need to record volumes of 368,000 units a month.

Analysts continue to prefer Hero MotoCorp, as it has defended market share and is seeking to expanding margins by 300-400 basis points to 18 per cent by FY18. Hero trades at a valuation earnings multiple of 16 for FY16, while Bajaj is trading at 15.5. While some have a 'Buy' rating on both Bajaj and Hero, others believe Bajaj must revive volume growth and look at adding scooters to its portfolio, as this space is expected to contribute to volume growth in the coming years.