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Mark to Market | Is Hero MotoCorp’s slip a one-off?

Markets seem to be thinking that Bajaj Auto is better off in the current environment
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First Published: Wed, Oct 03 2012. 08 44 PM IST
Investors’ hopes are now pinned on a strong performance in the festive season in the third quartert. 
Photo: Ramesh Pathania/Mint
Investors’ hopes are now pinned on a strong performance in the festive season in the third quartert. Photo: Ramesh Pathania/Mint
Updated: Thu, Oct 04 2012. 09 03 AM IST
Bajaj Auto Ltd said on Wednesday that its Discover motorcycle overtook Hero MotoCorp Ltd’s Splendor in September. For years Splendor has been the market leader, far outpacing other brands. Discover’s sales in September were only marginally ahead and doesn’t come as a big surprise.
This outcome was likely because Hero cut production sharply to correct dealer inventory. Bajaj, on the other hand, had altered production earlier in the year, and didn’t have to decrease sales to dealers by the same extent. This is evident from Hero 26% drop in two-wheeler sales in September and Bajaj’s smaller 15% drop. Between April and September, sales of both companies fell by a similar 3-4%.
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While it’s true sales fell in September partly because of a delay in the festive season vis-à-vis 2011, it’s evident overall retail demand has come down due to high inflation and a drop in rural income because of a delayed monsoon. Hero is struggling more than the others because of a shift in market share away from the 75-110cc segment, which accounts for most of its sales.
Investors’ hopes are now pinned on a strong performance in the festive season in the third quarter. But even if sales pick up in the third quarter, growth during the year will be in single digits. “The growth outlook for the industry is pared to roughly 5%, contingent on an uptick in festive demand,” Citigroup said in a recent note.
Will Hero bounce back after the drop in September performance? One can argue the sales of its flagship product fell due to a one-time inventory correction and will soon return to normal. The markets, however, seem to be thinking that Bajaj Auto is better off in the current environment and the separation from Honda is adversely affecting Hero’s performance.
Since mid-July, Hero’s shares have declined by 12%, but Bajaj has risen by 23%. Analysts at Citi forecast Hero’s earnings growth at only around 5% in the years to March 2014, “reflecting a modest volume CAGR (compounded annual growth rate) of 8% over the same period—a confluence of industry-wide demand moderation and increased competitive intensity”. In addition, they have valued the stock at a discount to its long-term historical average of around 14 times, “due to the uncertainties regarding the company’s market positioning, as well as R&D (research and development) and brand related issues, post its split with Honda”.
Bajaj, on the other hand, is gearing up to increase capacity and appears better placed in the current environment, especially with the shift towards motorcycles with higher engine capacity.
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First Published: Wed, Oct 03 2012. 08 44 PM IST
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