Motilal Oswal prefers Hero Motocorp over Bajaj Auto

Demand weak since mid Dec-12; aggravates further in Feb-13

Our survey indicates continued weakness in retail demand for Feb-13, with 52% of dealers (60% of Hero, 68% of TVS ) indicating lower MoM sales. HMSI dealers though expect Feb-13 sales to be higher MoM led by launch of upgraded scooter variants offering higher mileage and higher promotional  spends by the company.

Sales may improve MoM in March, but decline YoY

Around 56% of dealers expect YoY decline in March sales across major players, HMSI being the only exception. However, on a MoM basis, 40% dealers expect March to be better than February (due to seasonality).

Channel inventory at 5-6 weeks for Hero, Bajaj
Over 2/3rd of the dealers indicated inventory of 4 weeks or higher, with 19% of them having over 6 weeks. HMSI dealers though are relatively better-placed, with 62% reporting less than 4-week inventory.

OEMs support dealers with higher credit limit; offer attractive finance schemes
Around 44% of dealers reported higher credit limit support provided by OEMs to aid higher inventory. Moreover, OEMs are offering discounts/freebies (38% of dealers reported) largely in the form of concessional interest rates through tie-ups with various finance companies/captive financing arm.

Valuation & view: Expect demand recovery in FY14
We expect two-wheeler volumes to recover in FY14 on better macro-economic environment, though over the near term expect them to remain weak.

For Bajaj, we expect 13% volume CAGR in domestic motorcycles over FY13-15E, with new launches and industry recovery. This coupled with an
improvement in export volumes and 3Ws will drive 14.6% overall CAGR. Volume growth and favorable currency to drive 19.6% earnings CAGR in FY13-15E.

"Despite factoring market share loss, we expect Hero to report 11% domestic volume CAGR over FY13-15E. Expect export volumes to ramp up to 0.5m units by FY15E. We expect Hero to report 13.3% overall volume CAGR. Expiry of royalty payments, post June 2014, would drive EPS CAGR of 23% over FY13-15E. We prefer Hero over Bajaj on valuation," says Motilal Oswal research eport.

Institutional holding more than 40% in Indian cos

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