Barclays downgrades Bajaj Auto; cuts Hero, TVS Motor target

Moneycontrol Bureau

Barclays downgraded Bajaj Auto to "equal weight" from "overweight" on Thursday and maintained an "underweight" rating on Hero MotoCorp and TVS Motor saying the next twelve months would remain challenging for the two-wheeler industry in India.

The brokerage cut its target price on Bajaj Auto and Hero Moto by 18 percent to Rs 1,862 and Rs 1,335 respectively and on TVS Motor by 4 percent to Rs 33.

It has also lowered volume and profit expectations on the three companies due to weaker consumer discretionary spend and an unfavourable product mix change (higher share of entry level motorcycles).

Demand for two-wheelers has slumped over last several months as consumers cut back on their spends amid an overall economic slowdown and high inflation. Two-wheeler growth in FY2013 slipped to just 2 percent, most of it driven by strong demand for scooters, which grew 11 percent.

Barclays analysts Sahil Kedia and Rohit Goel expect two-wheeler sales will see a "mild recovery" in FY2014, growing at 7 percent. Growth in FY2015 is seen at 12 percent.

Society of Indian Automobile Manufacturers has forecast motorcycle sales to grow 6-8 percent this financial year.

Hero's former Japanese partner Honda has become aggressive in India post the breakup between the two over two years ago. Honda Motorcycle & Scooter India launched two commuter motorcycle Dream Yuga last year and Dream Neo on Wednesday to directly take on market leader Hero's Splendor range.

It is also expanding production capacity to 4 million per year from 2.8 million.

The Barclays analysts say this increased competition in the industry will hurt Hero Moto most and have forecast a market share loss of 300 bps to 40 percent in the domestic market by FY2015.

Furthermore, greater incentives and increasing share of entry-level motorcycles will weigh on profits, Kedia and Goel said, cutting EBITDA (earnings before interest, taxes, depreciation and amortization) margin expectation by 120-150 bps.

Bajaj Auto will also be impacted by the sluggish domestic demand and the resultant pricing pressure, the analysts said. An "increased risk of a price war" prompted the stock downgrade, they added.

Hero Moto closed up a percent at Rs 1,505 on NSE on Thursday. Bajaj Auto closed at Rs 1,792.10, almost flat and TVS Motor closed up 0.4 percent at Rs 36.50.

Nachiket Kelkar
nachiket.kelkar@network18online.com