Why Bajaj Auto could be a better bet than Hero
ET
Intelligence Group: Bajaj Auto BSE 0.33 %, India's third-largest motorcycle
maker, is likely to outperform market leader Hero MotoCorp in the medium term,
because its shares are cheaper to own and the company looks set to post
improved sales and a stable margin.
In a post-earnings conference, the company's management said it is planning to
launch three bikes in the second half: one from the Pulsar family , a new
variant of the recently-launched V and a premium segment bike -VS 400, which
will compete with Royal Enfield.The management is hoping to sell 7,000-8,000
units of the VS400 every month. The new launches are likely to augment overall
volumes in the second half of the fiscal year, helping it sell more units than
in the first six months ended on September 30 -it sold nearly 11 lakh bikes in
the first half. The company's market share has gained 3.6 percentage points to
18.8% in the past seven quarters, driven by the combined volumes of the CT100,
Avenger and V-15.Interestingly, none of these new bikes was a big success
individually. Bajaj Auto is set to post higher volume growth at a time when its
peers are likely to see sluggish performance due to elevated inventory in the
first half. The street is pricing in domestic volume growth of 12-13% for the
current fiscal year for Bajaj.
Bajaj Auto's margin is expected to remain stable in the medium term. In the
September quarter, its operating margin was 21.4% and the management sounded
confident of maintaining it at around 21%. A pickup in the volumes of
three-wheelers, which offer better profitability than motorcycles, is expected
to insulate the margin from any impact from lower twowheeler exports.
Three-wheeler volumes are expected to grow 5% in FY17, and Bajaj Auto is
expected to outperform the segment growth after its recent entry into the cargo
segment. The company has increased prices by `500 on bikes and `1,000 on three-wheelers
in mid-July . This will help offset any pressure from commodity price increase.
Bajaj Auto is trading at 16 times its FY18 projected earnings after adjusting
for the stake in KTM.This is marginally higher than its long-term average
price-multiple, but most of its peers are trading at 20-50% premium to their
longterm average PE. The valuation of Bajaj has been depressed owing to sliding
volumes in the export markets which are primarily oil dependent countries. The market
is factoring a 9-10% decline in volume growth in Bajaj's motorcycle exports.
This shows headwinds from the export market are already priced-in.
Source
: Why
Bajaj Auto could be a better bet than Hero