Siddhartha Khemka’s top 4 two-wheeler and tyre picks in current market

Siddhartha Khemka, V-P, Head of Research (Retail), MOFSL, says “the passenger vehicle segment within the auto universe has been consistently doing well. But of late, we have seen good recovery especially in the festive season, where demand for some of the two-wheelers have been pretty strong and some of the niche players have reported good numbers like Eicher. But the foray into EVs is helping companies like TVS Motors to show a stronger growth. In the two-wheeler space in terms of valuations, Hero Moto continues to trade at a steep discount to something like Bajaj Auto and Eicher.”


How are you seeing this QSR space develop and how do you see this moving because the trend of burgers versus pizza seems to be continuing even as of now. Plus, you do have those factors coming in from food inflation at some point of time as well. So, overall, in this QSR space, anything that you find attractive or what are you looking at here?
Yes, definitely, there has been a case in the last few quarters where there is a clear-cut differentiation between the pizzas and the burgers. The burgers have definitely picked up pace be it the Westlife or we have the Restaurant Brands, say Burger King, they have reported steady growth in terms of volumes compared to pizzas which are kind of struggling, especially if you look at Jubilant FoodWorks. The last time they refreshed their menu they did really well. But in the current ongoing season, especially in an environment where you have the ICC World Cup going on in India, generally we have seen that the demand has been pretty strong for QSRs and that is also reflective in the demand that we have seen, the growth uptake for companies like Zomato and Swiggy.


Overall, we are very positive and constructive on the QSR space. We believe that this is a space which will continue to do well and the increasing need for the quick eating at home, at restaurants will only go up with the higher penetration of these restaurants in the tier II, tier III cities. Within that, if you ask us what we like, Restaurant Brands is something where results just came in and things are improving.

The company is yet to turn around at the net levels and that is something that we are expecting by FY25. The company should be able to start reporting profits and that should lead to some improvement in valuations as well. We currently have a buy rating on Restaurant Brands which is a high risk choice in the QSR space.

What is your view on real estate? Should one start getting careful and book some profits or given the fact we are coming out of decade-long consolidation as far as the fundamentals are concerned, is there going to be a longer cycle on the upside here?
Yes, definitely. If you look at the overall real estate sector, the sector is coming out of a decade-long glut where now finally the demand is outpacing the supply. Realisations have improved and the pace of absorption, if you look at any of the pre-launches, has increased and all this is happening at a time where interest rate cycle is peaking out in India.

So that shows the kind of strength in the demand for real estate especially in the residential side in India. If you look at some of the data points, in the top eight cities in India, the demand is at an almost nine-year high. In terms of the pre-sales operational numbers, most of the real estate companies have been reporting record pre-sales operating numbers and that is supporting their overall financials. There has been some concerns in previous quarters with regards to the increasing raw material cost, but now that has also kind of leaned off and kind of supported.

Next year, if there is a rate cut by the middle of the year or by April-May, that will again add to the overall sentiments for the real estate space. If you look at some of the niche pockets, we definitely like the Mumbai region where our preferred picks are Godrej Properties and Macrotech Developers. They have moved up sharply in the near term and hence we could see some consolidation but the long-term story, we feel that for the next two-three years, there could be a good upside and good delivery in terms of performance from the real estate players.

You heard the commentary from the management. The numbers from the tyre companies have been strong. What do you make of this and if I had to ask you for a top bet within two-wheeler space and tyre companies, which two stocks come to mind?
Definitely, we are looking at a constructive view on the entire two-wheeler space. The passenger vehicle segment within the auto universe has been consistently doing well. But of late, we have seen good recovery especially in the festive season where demand for some of the two-wheelers have been pretty strong, some of the niche players have reported good numbers like Eicher.

But the foray into EVs is helping companies like TVS Motors to show a stronger growth. If you look at the entire two-wheeler space in terms of valuations, Hero Moto continues to trade at a steep discount to something like Bajaj Auto and Eicher and hence, overall, if you look at the recovery in the two-wheeler space, the recovery in the rural segment and the strong festive demand, we believe Hero would do preferably well because of the valuation comfort as well going forward.

So Hero followed by Eicher would be the two preferred picks within the two-wheeler space. Now, coming to the tyre segment, again, on the back of strong OEM demand, tyre companies have been reporting strong numbers and to add to the overall profitability, the margins have also been supportive with the fall in the crude oil prices, so that is something that is again helping bulk of the tyre companies.

We had numbers from Ceat earlier, MRF, JK and now from Apollo Tyres. So, within the tyre space, we prefer Ceat. We believe that the company has a very stable growth outlook both for its OEMs as well as for the replacement demand and the absorption of new capacities would drive operating leverage.

Valuation-wise, it is also comfortable at 13.5 times FY24 and almost like 12 times FY25 PE and hence we have a good upside on Ceat. We have a target price of Rs 2950. Apollo also, we like. The numbers have been pretty strong and that is doing well. So far, the margin improvements have been higher than our expectations, something that we like within the tyre space, Apollo Tyres. Our previous target was Rs 500 which is also a good decent upside from current levels.