Here's why Hero will outperform Bajaj Auto going ahead

In an interview to CNBC-TV18 analyst Mahantesh Sabarad of Fortune Equity Brokers reviewed various auto stocks. From the two-wheeler space, he sees Hero MotoCorp outperforming Bajaj Auto in the coming months. According to him, though Hero reported better than expected sales in the month of October, but it will be tough for the company to sustain this sales growth going forward. 

Hero, India's largest two-wheeler maker sold 6.25 lakh units in the month gone by, registering growth of 18.2 percent compared to a year ago month and growth of 33.5 percent compared to previous month. (Read more) Meanwhile, the broking firm has upgraded Maruti post its second quarter earnings and expects more margin recovery going ahead. Below is the edited transcript of Mahantesh Sabarad’s interview with CNBC-TV18 Q: What did you make of the total sales for the month of October for Tata Motors and do you think that the market is just looking at the global sales versus domestic now for Tata Motors? A: Tata Motors sales numbers were lower than expected at about 8 percent. We were looking at 56,000 and they reported around 51,000 sales. These local sales numbers are not keenly watched and it is about global sales reported by JLR. Ironically, one will notice that while local sales are down and even last month it was like minus 35 percent year over year, JLR was growing plus 35 percent year over year. So, it is the JLR momentum and sales which will dictate the fortune of this company going ahead. Q: What is your call on Maruti Suzuki, it came out with spectacular quarterly numbers, the stock was rerated after that but purely in terms of sales there was not too much domestic cheer, quite a bit of surge in exports? How would you stand on that stock? A: Maruti has been reporting poor top line growth for quite sometime now, but the story about rerating is not really that, it is about the recovery of EBITDA margins back to 11 percent. We were a bit skeptical until the second quarter results were reported and we too have upgraded the stock post the result. We have rerated the stock and we are looking more at margin recovery and hence recovery in profits. There is nothing much on top line side in terms of growth that we are looking at, so we expect them to post 3.5 percent sales growth for FY14 over previous year. We are not too hopeful on the top line front. Q: What about two-wheelers, Hero MotoCorp came out with very good sales numbers for the month of October? A: That was a very big surprise because we were expecting just 570,000 units in sales. We were looking at better dispatches in November, but now with spectacular numbers reported for October, November would be equally down. This is because in the past three months - August, September and October, dispatches have grown 13 percent over the previous year, which is not sustainable according to us. We are more or less looking at something like 7-8 percent overall growth. So, I think November will be quite a disappointing month. Q: What about Hero versus Bajaj Auto equation for stock prices? This year Hero has corrected some of the underperformance, relatively this year it is up about 10-11 percent. Going forward what do you think is likely to happen? A: Hero will continue to outperform Bajaj Auto in the near term because in earnings that Hero would report next year, there will be no royalty to be paid and that will bump up their EPS earnings. They are reporting a fairly good domestic sales numbers. As far as Bajaj is concerned, it has recently recovered growth on exports front, but guidance on exchange rate is quite subdued. They take fairly long forward covers and that makes their earnings forecast for the next two years much lower than Hero.