Market sweepstakes more inclined towards Hero Moto-Corp than Bajaj Auto

By Jwalit Vyas & Bakul Chugan Tongia

Bajaj Auto seems to falling out of favour with analysts and investors, who are shifting their preference to Hero Moto-Corp in their portfolios in the near to medium term, given the way in which the Delhi-based two-wheeler company has clawed its way back into contention.

Hero has demonstrated exceptional customer franchise by growing better than most competitors in the festive season.

“We expect stock to re-rate in line with historical multiples (9.5x EV/Ebitda),” said S Arun, auto analyst at DSP Merrill Lynch, in a recent note.

According to Bloomberg consensus estimates, Hero’s earnings per share (EPS) will equal that of Bajaj by FY15-end and exceed it in FY16. For FY14, Hero’s EPS is expected to be Rs 109 and that of Bajaj to be Rs 124. Given its strong distribution network and rural reach, Hero clearly has an edge over rivals in rural India, currently the most attractive market amid the economic slump, given a good monsoon and consequent rise in farm-related incomes.


“Hero appears on a stronger foothold due to its strong presence in the rural market, demand from which is likely to sustain, while prospects for Bajaj are relatively not so good, at least for the next two quarters,” said an analyst at a leading foreign brokerage who didn’t want to be named. Besides the expected bumper harvest, thanks to higher minimum support prices and initiative such as the rural jobs programme, India’s villages are buzzing with activity, attracting not just auto and other consumer goods makers but also banks and non-banking financial institutions.

Hero, with almost 47% of its sales coming from rural India, is thus better placed than competitors in terms of revenue visibility in the interim, though overall these are currently weak for everyone. Still, in the April-October period, Hero’s sales grew 2.8% from the year earlier, while they dropped 9.4% for Bajaj Auto. The past five years have been good for the Pune-based company. Bajaj Auto’s focus on the premium and export segments helped the company surge past Hero MotoCorp in terms of market value. Hero was labelled as the bike maker for the mass segment, while its split with Honda Motor also hurt sales.

Since November 2008, Hero’s market capitalisation has gone up by 175% to Rs 40,950 crore from Rs 14,943 crore, while that of Bajaj Auto shot up 600% to Rs 57,143 crore from Rs 7,884 crore.

That balance appears to be shifting. According to a report by Motilal Oswal, Hero’s November sales volume is expected at 5.6 lakh units, up 12% from the year ago, while Bajaj may continue to see a decline, down 8.7% to 3.4 lakh units.

Bajaj’s exports, which account for more than 30% of its business, have also been hit by the global uncertainty. On the revenue front, however, Bajaj has managed to hold its own, helped by the weakening of the rupee against the dollar in the first half of the year resulting in better export realisations. But if the rupee stabilises or corrects further from the current levels, revenue growth could be impacted in the second half of the year.

What also adds to investor confidence that Hero’s stock may outperform its rival in the near term is an aggressive cost-cutting exercise, for which it has hired a well-known consultancy firm. This is expected to expand Hero’s margins by 300-400 basis points over the next three years. A basis point is one-hundredth of a percentage point. A further boost to margins will accrue from royalty payments to Honda coming to an end by the first quarter of FY15. This will bring Hero’s margins closer to that of Bajaj Auto.

Hero’s recent initiatives to enter global markets and its plans to launch 12-15 new variants or refreshes in the second half of the current year are also being perceived as positives for the stock. Sensing better prospects ahead, local mutual funds increased their shareholding in Hero to 2.01% in the September quarter compared with 0.85% in the June quarter. This is the highest mutual fund shareholding in Hero since March 2010. Mutual fund managers have kept their shareholding in Bajaj Auto at 1.36% over the past two quarters.