Bajaj Auto, Hero MotoCorp Shares Slump As CLSA Sees Recovery Momentum Slowing
CLSA does not expect two-wheelers to reach their FY19 peak even by FY23 (unlike passenger vehicles).
Shares of Hero MotoCorp Ltd. and Bajaj Auto Ltd. declined after CLSA said it expects two-wheeler makers' recovery to lag other automotive segments.
“While FY22 volume growth will look strong optically, it comes on the back of a 29% cumulative decline over FY19-21. We do not expect two-wheelers to reach their FY19 peak even by FY23 (unlike passenger vehicles),” the research firm said in a note. “The rapid rise in commodity prices will also pressure two-wheeler OEMs to choose between customer affordability (volume) and margins.”
Bajaj Auto’s stock declined as much as 5.2% to Rs 3,445.9 apiece, making it the worst performer on the Nifty Auto Index. Peers Hero MotoCorp, Eicher Motors Ltd. and TVS Motor Co. too dropped as much as 3.6%.
Two-wheeler affordability, according to CLSA, has been adversely impacted over the past three years due to regulatory changes (insurance, safety and emissions). “Our channel checks indicate that pent-up demand is largely behind us. In addition, demand from segments such as high school and college students as well as urban semi-skilled professionals (retail, hospitality and small traders) continues to be pushed forward,” it said.
We downgrade our ratings on Hero and Bajaj from ‘outperform’ to ‘underperform’ but upgrade Eicher from ‘sell’ to ‘underperform’ to account for recent stock performance. We maintain our ‘outperform’ rating on TVS as it continues to improve its market share and grow its exports.Amyn Pirani, Analyst, CLSA
India’s hinterland was expected to drive two-wheeler sales, buoyed by a good monsoon, a bumper crop, increased government spending to boost the economy and less severe Covid-19 curbs compared to urban centres. But a series of price hikes prior to the pandemic, followed by a lockdown, caused sales to tumble. Besides, the transition to BS-VI emission standards hurt. Sales of entry-level or budget motorcycles, according to Crisil, fell nearly 27% in the last year—the highest for a segment that accounts for about 60% of total motorcycle volumes and 36% of overall two-wheeler volumes.
CLSA’s highlights
Cuts FY22/23 industry volume forecasts by 1%-3% primarily led by a 4% cut in motorcycle volume forecasts.
“Rural demand should perform relatively better than urban but we need to watch trends during the April and May wedding season.”
“We forecast Q4 FY21 Ebitda margins to decline by 70-220 basis points quarter-on-quarter across our two-wheeler coverage. We expect FY22 margins to be slightly lower than Q4 FY21.”
CLSA’s stance on two-wheeler makers
Hero: Cuts target price to Rs 3,040 from Rs 3,610 apiece. Its wholesale and retail market share gains have begun to taper as the entry/executive motorcycle segments have started to underperform other categories.
Bajaj: Cuts target price to Rs 3,750 from Rs 3,915 apiece. While exports are doing relatively better for Bajaj, it will likely face headwinds in domestic two-wheelers and three-wheelers.
Eicher: Target price unchanged at Rs 2,450 apiece. Its wholesale and retail market share has begun to improve as premium segments have started to outperform.
TVS: Target price unchanged at Rs 600 apiece.