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Two-wheelers stocks change gears, prices run up in FY21; do you own any?

The share price of Bajaj Auto, Eicher Motors, Hero MotoCorp and TVS Motor gain 80-100 percent in FY21, so far. In comparison, BSE Auto index gained 113 percent. In the financial years 2019 and 2020, two-wheeler stocks were in the slow lane

March 23, 2021 / 12:20 PM IST
India’s two-wheelers (2W) stocks have seen a phenomenal run-up in FY21, it includes names like Bajaj Auto, Eicher Motors, Hero MotoCorp, and TVS Motor Company whose share prices gained anywhere between 80-100 percent. However, these stocks have on remained off-tracked in FY19 and FY20 as in both fiscal mostly these stocks have given negative returns. According to Nirmal Bang research report, "India’s two-wheeler industry entered slow lane in late 2018 due to rising cost of ownership, tepid economic growth, and weak consumer sentiment. We believe that the recent uptrend in wholesale volume post some relief from Covid-19 is largely led by inventory build-up, which masks the continued stress on retails.  We expect the 2W industry’s growth to moderate to mid-to-low single-digit CAGR over the medium term. Sustained export momentum should provide an additional growth lever to 2W OEMs with a higher export exposure. Against this backdrop, we reinitiate coverage on the 2W industry with a “neutral” stance and prefer OEMs having relatively better outperformance opportunities. We recommend a BUY rating on TVS and on Bajaj Auto and Accumulate rating on Hero MotoCorp and Eicher Motors."
India’s two-wheelers (2W) stocks, such as Bajaj Auto, Eicher Motors, Hero MotoCorp and TVS Motor, have seen a phenomenal run-up in FY21. The share price of these companies have gained between 80 percent and 100 percent in FY21 so far. In comparison, BSE Auto index gained 113 percent. In the financial year 2019 and 2020, two-wheeler stocks were in the slow lane with most of them giving negative returns. According to a Nirmal Bang research report, "India’s two-wheeler industry entered slow lane in late 2018 due to rising cost of ownership, tepid economic growth and weak consumer sentiment. We expect the 2W industry’s growth to moderate to mid-to-low single-digit CAGR over the medium term. Sustained export momentum should provide an additional growth lever to 2W original equipment manufacturers (OEMs) with a higher export exposure. Against this backdrop, we reinitiate coverage on the 2W industry with a “neutral” stance. We recommend a BUY rating on TVS, Bajaj Auto, and Accumulate rating on Hero MotoCorp and Eicher Motors." Here is the performance of four listed two-wheeler companies:
Eicher Motors | In FY21 so far, the stock has gained 104 percent to Rs 2677 on March 22, 2021, from Rs 1310 on March 31, 2020. However, in the fiscal year, FY19 and FY20 stock were down 28 percent and 36 percent respectively. Nirmal Bang report says"With the recent production ramp-up issues largely behind (current monthly run-rate of ~70-75k units), we expect volume to remain relatively strong, led by urban demand recovery, new models, network expansion and exports. However, our deep dive analysis on state-wise registration trends (Exhibit:80) indicates that RE has been witnessing growth moderation in most matured markets since FY14 (with overall share in retails coming off from 75%+ in FY14 to ~55% in FY20). We believe that the rapid studio store expansion (now forming close to 50% of total dealer network within a short span of two years) to improve reach has arrested the overall decline. We also note that most of the studio store expansion is in relatively low potential markets (UP, Rajasthan, Bihar etc), thereby restricting sustained gains. We expect RE’s profitability to remain range-bound in the near term due to commodity cost pressures. While we remain constructive on the near term demand outlook, we believe that market expectations about demand turnaround remain elevated. We reinitiate coverage on Eicher Motors with an Accumulate rating and value RE (standalone) at 23x (slightly below -1SD to its 5-year mean) and VECV at 12x EV/EBITDA to arrive at a TP of Rs2,575. The stock is currently trading at 25x FY23E consolidated EPS, which restricts any meaningful upside from the current level.
Eicher Motors | In FY21 so far, the stock has gained 104 percent to Rs 2,677 on March 22, 2021, from Rs 1,310 on March 31, 2020. However, in the fiscal year, FY19 and FY20, the stock was down 28 percent and 36 percent, respectively. "With the recent production ramp-up issues largely behind, we expect volume to remain relatively strong, led by urban demand recovery, new models, network expansion and exports. However, our analysis on state-wise registration trends indicates that Royal Enfield (RE) has been witnessing growth moderation in most matured markets since FY14 (with overall share in retails coming off from 75%+ in FY14 to ~55% in FY20). We expect RE’s profitability to remain range-bound in the near term due to commodity cost pressures. While we remain constructive on the near-term demand outlook, we believe that market expectations about the demand turnaround remain elevated," Nirmal Bang said in the report. It has given an Accumulate rating and a target price of Rs 2,575.
TVS Motor Company | In FY21 so far, the stock has gained 95 percent to Rs 580 on March 22, 2021, from Rs 298 on March 31, 2020. However, in the fiscal year, FY19 and FY20 stock were down 24 percent and 37 percent respectively. Nirmal Bang report says"TVS has outperformed on margin expectations over the last two quarters, delivering >9% EBITDA margin, supported by price hikes, better mix and cost controls. We note that for TVS, within 2Ws, the volume share of structurally low growth segments (commuter, mopeds) has fallen from ~47% in FY14 to ~24% in FY20; the same has been offset by gains in scooters (~10%), exports (~10%) and premium (~4%) segments. Our deep dive analysis of state-wise registration trends (Exhibit:15) indicates steady market share gains for TVS across most states, supported by improving brand franchise, new product launches and presence in high-growth categories (scooters and premium motorcycles). We note that the gains have been broad-based with TVS outperforming both Hero and Bajaj in 20 out of the 23 states analyzed both on volume and market share gains (over FY14-FY20). We expect normalization in urban demand (scooter recovery) and new launches planned in 1HFY22 to support further market share gains. Export momentum also holds strong on the back of stable crude prices and Fx availability. We expect significant headroom for margin improvement going ahead, led by strong cost focus, better mix and improving franchise. We reinitiate coverage on TVS with a BUY and value it at 25x FY23E EPS (20% premium to 10-year mean of 21x on improving business outlook) to arrive at a TP of Rs684. Our PE multiple is at a 30-55% premium to peers like Bajaj and Hero. We expect TVS’ premium valuation to sustain, underpinned by consistent volume and earnings outperformance (FY14-20 volume/EPS CAGR of 8%/15% against ~2%/6% for peers).
TVS Motor Company | In FY21 so far, the stock has gained 95 percent to Rs 580 on March 22, 2021, from Rs 298 on March 31, 2020. However, in the fiscal year FY19 and FY20, the stock was down 24 percent and 37 percent, respectively. "TVS has outperformed on margin expectations over the last two quarters, delivering >9% EBITDA margin, supported by price hikes, better mix and cost controls. Our analysis of state-wise registration trends indicates steady market share gains for TVS across most states, supported by improving brand franchise, new product launches, and presence in high-growth categories (scooters and premium motorcycles). We note that the gains have been broad-based with TVS outperforming both Hero and Bajaj in 20 out of the 23 states analyzed both on volume and market share gains (over FY14-FY20)," said the Nirmal Bang report. It reinitiated coverage on TVS with a BUY and a target price of Rs 684.
Hero MotoCorp | In FY21 so far, the stock has gained 94 percent to Rs 3096 on March 22, 2021, from Rs 1596 on March 31, 2020. However, in the fiscal year, FY19 and FY20 stock were down 28 percent and 37 percent respectively. Nirmal Bang report says"Hero MotoCorp has maintained its dominant position in the domestic motorcycles segment (>50%) despite increase in competitive intensity over the years. However, it has lost >550bps two wheeler market share over FY14-20 due to weak presence in the fast-growing segments. Our deep dive analysis of state-wise registration trends (Exhibit:61) indicates that Hero has not only lost significant market share in matured markets (as expected), but has also failed to keep pace in relatively under-penetrated markets over FY14-20. We appreciate its efforts to diversify further into growth segments like scooters, premium motorcycles and export markets. But, we believe that meaningful progress on these fronts will be visible only in the medium term. Further, the negative impact on demand from the recent price hikes (due to BS-6 and RM cost inflation) will play out in the near term as the initial fillip to demand from a buoyant rural economy fades out due to the gradual re-opening of public transport. Consequently, we expect structurally weak demand trends in the domestic market and higher dependence on the commuter segment (~90% volume share in FY20) to lead to volume under-performance vs peers. We re-initiate coverage on Hero and value it at 16x FY23E EPS (in-line with 10-year average) to arrive at TP of Rs3,300. We maintain a relatively cautious stance on Hero with an Accumalate rating.
Hero MotoCorp | In FY21 so far, the stock has gained 94 percent to Rs 3,096 on March 22, 2021, from Rs 1,596 on March 31, 2020. However, in the fiscal years FY19 and FY20, the stock was down 28 percent and 37 percent respectively. "Hero Moto has maintained its dominant position in the domestic motorcycles segment (>50%) despite an increase in competitive intensity over the years. However, it has lost >550bps two-wheeler market share over FY14-20 due to a weak presence in the fast-growing segments. Our deep dive analysis of state-wise registration trends indicates that Hero has not only lost significant market share in matured markets (as expected), but has also failed to keep pace in relatively under-penetrated markets over FY14-20. We expect structurally weak demand trends in the domestic market and higher dependence on the commuter segment (~90% volume share in FY20) to lead to volume under-performance versus peers," said the Nirmal Bang report. It re-initiated coverage on Hero with Accumulate rating and a target price of Rs 3,300.
Baja Auto | In FY21 so far, the stock has gained 81 percent to Rs 3,664 on March 22, 2021, from Rs 2,022 on March 31, 2020. However, in the fiscal year, FY19 and FY20 stock were up 6 percent and down 31 percent respectively. Nirmal Bang report says"We are enthused by Bajaj Auto’s solid execution in filling the white spaces in the domestic 2W portfolio (launch of Pulsar 125cc) and the recent shift in strategy to focus on margins (over volume). Bajaj has improved its domestic portfolio profitability through smart price actions and premium launches while broadly maintaining its market share. Analysis of state-wise registration trends indicates that Bajaj has been gaining retail market share in almost all major states since FY19 and has broadly maintained its share in FY21 YTD. The company expects the domestic 2W industry to register a growth of 15-20% in FY22 on a low base. We believe that a strong export outlook should hold given the following (1) stable oil prices (2) scope for further recovery in ASEAN and Sri Lankan markets and (3) dealer re-stocking and market share gains. The company is well placed to capitalize on urban demand normalization and premiumisation trends, which should support profitability and operational performance going forward. We reinitiate coverage on Bajaj with a BUY rating and value it on SOTP basis, with the core business valued at Rs 3,325 (19x FY23E core EPS), cash of Rs 718 per share, and investment in KTM at Rs 206 per share to arrive at a target price of Rs 4,250.
Baja Auto | In FY21 so far, the stock has gained 81 percent to Rs 3,664 on March 22, 2021, from Rs 2,022 on March 31, 2020. However, in the fiscal years FY19 and FY20, the stock was up 6 percent and down 31 percent, respectively. "We are enthused by Bajaj Auto’s solid execution in filling the white spaces in the domestic 2W portfolio (launch of Pulsar 125cc) and the recent shift in strategy to focus on margins (over volume). Bajaj has improved its domestic portfolio profitability through smart price actions and premium launches while broadly maintaining its market share. The company expects the domestic 2W industry to register a growth of 15-20% in FY22 on a low base. We believe that a strong export outlook should hold given the following (1) stable oil prices (2) scope for further recovery in ASEAN and Sri Lankan markets, and (3) dealer re-stocking and market share gains," the Nirmal Bang report said. It reinitiated coverage on Bajaj with a BUY rating and a target price of Rs 4,250.
Ritesh Presswala Research Analyst at Moneycontrol
first published: Mar 23, 2021 12:17 pm

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