Hero MotoCorp Vs Bajaj Auto: Goldman Sachs’ Pick

Goldman Sachs initiated coverage on Hero MotoCorp Ltd. with a ‘sell’, but suggested a ‘buy’ for peer Bajaj Auto Ltd.

“We see the risk reward on Hero as unfavourable given high dependency (94% of volumes) on domestic two-wheeler market where demand remains subdued, concentrated portfolio in entry-level sub-110 cc segments where customers are more vulnerable to the present wave of raw material-led price hikes, and higher loan losses than peer at captive financing subsidiary,” the financial services provider said in a March 3 report.

These factors, it said, drive its 3.1% FY19 to FY25E top line CAGR at Hero MotoCorp versus 8% median growth for India two-wheeler coverage. “Our FY24E EPS is 20% below consensus.”

“Diversification away from the entry-level segment, an increase in exports penetration and the nature of response to Hero’s upcoming fixed and swappable battery electric scooter launches are the key events that we would watch to see success on in order to turn more optimistic.”

On the other hand, Bajaj Auto’s “meaningful export market exposure in two-wheelers, offsetting ongoing domestic demand weakness, upcoming cyclical recovery in higher margin three-wheeler demand, its industry leading dividend yield of 5.4%” prompts Goldman Sachs to bet on the Pune-based company.

“These factors underline our FY22E-FY25E EPS CAGR of 21%, with FY24E EPS 6% above consensus.”

Goldman Sachs, however, cautioned that the ongoing geopolitical uncertainties, associated volatility in raw material costs and transition toward electric two-wheelers could impact margin of the industry.

Hero MotoCorp

• Initiates coverage with a ‘sell’ rating and a price target of Rs 2,080 apiece, indicating a downside of 13.8%.

• Hero MotoCorp’s high domestic business mix is sensitive to recent price hikes and could take longer to start showing revenue growth compared to peers.

• Witnessed lowest Ebitda growth and the highest margin compression among its listed mass market two-wheeler peers (Bajaj Auto and TVS Motor Co. Ltd.)

• Missed out on the two key market shifts in the motorcycles segment—exports market development and premium motorcycles growth.

• Lost market share in 11 of the past 12 years since split with Honda.

• Non-performing assets at Hero FinCorp could weigh on capital allocation flexibility.

• Slower to market in the electric scooter space versus Bajaj and TVS, both of which have already launched their electric scooters and have been competing for more than 12 months.

Bajaj Auto

• Initiates coverage with a ‘buy’ and a price target of Rs 4,270 apiece, indicating an upside of 27%.

• Benefit of exports market exposure where emission-related price hikes have been less of a challenge.

• CNG network expansion by the Indian government to further support Bajaj’s three-wheeler volumes.

• Upside optionality from plans to set up captive financing arm.

• Expected recovery in domestic three-wheeler market to benefit Bajaj more than peers.

• Low exposure to scooters and mopeds which are more at risk from EV-led disruption.