CLSA downgrades Bajaj Auto, Hero Moto, Eicher Motors amid valuation concerns

In November, the domestic 2W segment witnessed strong festival demand, accounting for 20-21 percent YoY growth.

Two-wheeler majors Bajaj Auto, Hero MotoCorp and Eicher Motors will be in focus on December 6 after the CLSA downgraded these stocks, saying they were already fairly valued due to the recent sharp rally. It has also stuck with a “sell” call for TVS Motor.

These stocks have surged between 14 and 23 percent in the past month on strong sales in the festival season and hopes of faster growth but CLSA has its concerns.

"We expect margins in electric 2Ws to remain challenging in the near-term, as all original equipment manufacturers (OEMs) are planning to launch more affordable electric scooters," analysts at CLSA wrote in a December 6 note.

CLSA has downgraded Bajaj Auto to “underperform” from “outperform” with a target price of Rs 6,382 a share ,against December 5 close of Rs 6,139.

Eicher Motors has been downgrade to “underperform” from “buy” with a target price of Rs 4,129. The stock closed at Rs 4,136 the previous day.

Hero MotoCorp now has a “outperform” call against “buy” with a revised target price of Rs 4,127. CLSA maintained 'sell' position for TVS Motor, with a target price of Rs 1,378.

Hero MotoCorp ended at Rs 3,805 and TVS Motor at Rs 1,902 on December 5.

ALSO READ: Vehicle retail sales soar 19% to 37.93 lakh units during 42-day festive period: FADA

On the flipside, analysts at global brokerage firm JPMorgan were “overweight” on Bajaj Auto, Hero MotoCorp, and TVS Motor and raised their target prices to Rs 6,400, Rs 3,750, and Rs 1,830, respectively.

The endorsement by JPMorgan, which came a few days before the November numbers, analysts suggested a positive outlook for 2W stocks in India, which is one of the largest world’s largest markets for motorcycles and scooters.

ALSO READ: TVS Motor forays into Vietnam, to offer motorcycles and scooters

Festival cheer

In November, domestic 2W segment witnessed saw strong demand due to the festival season, a time of big-ticket buying, accounting for around 20-21 percent year-on-year growth.

On the volumes front, Hero Moto's volumes surged by 26 percent, whereas TVS Motors reported 31 percent YoY increase in volumes.

Royal Enfield's volumes increased by 13 percent YoY and Bajaj Auto reported a 32 percent YoY increase in overall volumes. Eicher Motors makes the iconic Royal Enfield motorcycle.

Hero MotoCorp and Bajaj Auto gained market share during the festival season, partly on account of supply-chain issues faced by Honda due to which the company got stocked out of key models in the festival season, analysts at Kotak Institutional Equities said.

The brokerage firm added that the strong festival demand was driven by recovery in replacement segment demand, driven by the rural segment and consumer support. Exported trends remain muted, driven by a weakness in African and South Asian markets.

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