Pre-festive despatches of two-wheelers in September led to strong growth in quarterly sales volumes of Hero MotorCorp Ltd, Bajaj Auto Ltd and TVS Motor Co. Ltd, which collectively account for nearly 80% of the country’s total production of two-wheelers.
The three firms individually clocked double-digit year-on-year (y-o-y) volume growth and the highest-ever motorcycle sales, defying conventional logic of slowing demand because of high cost of ownership—a function of product price, fuel cost and interest rates. This, along with the price hikes the firms announced during the quarter, should see revenue rise by more than 15% y-o-y.
Yet, blame it on poor market sentiment or valuations, the stock prices of the three firms do not seem to reflect the stellar growth numbers. More importantly, the Street seems to ascribe differential valuations.
Hero Honda motorcycles parked at a showroom in New Delhi. Photo: Bloomberg
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Hero’s rich valuation of about 17 times estimated fiscal 2013 (FY13) earnings leaves little room for upside in the stock. Improving sales despite severing ties with its Japanese partner has already led to a rerating of the stock, which has outperformed its peers since July. But what could temper valuations in the ensuing quarters are the higher research and development costs and marketing expenses, which may weigh on profit margins and earnings, despite revenue momentum.
TVS, the third largest domestic two-wheeler maker, enjoys the least investor fancy. At Rs60, the stock trades at a mere nine times its estimated FY13 earnings. Its long-drawn efforts in brand positioning, particularly in the motorcycle and scooter segments, has kept valuations suppressed. Upsides in valuation could come only with a strong ramp-up in three-wheeler and scooter volumes, which in turn will improve profitability. The firm’s total sales volume grew 15% during the quarter, and analysts are hopeful of revenue growth in excess of 20%. A key trigger in valuation could also come from a turnaround in its Indonesian subsidiary, which the management expects will break even in FY13.
In comparison, Bajaj Auto’s sustained export growth across products is a positive factor contributing to valuations. Besides, its strong positioning in the domestic motorcycle market has raised hopes of a consistent increase in volumes, which will buoy valuations. Analysts expect that the 16% y-o-y growth in volumes, along with price hikes, should see 19-20% revenue expansion during the September quarter. At Rs1,516, the stock trades at around 12 times its estimated 2013 earnings—lower than that of Hero, perhaps because its market share is merely half that of Hero. What could affect the stock favourably is export growth and three-wheeler sales, which will boost earnings growth.
On the whole, two-wheeler sales have bucked the gloomy prediction for the auto sector. “Rural demand and lower dependence on borrowed finance for purchases have kept the sales momentum. Yet, the post-festive season December quarter sales could alter valuations,” says Umesh Karne, research analyst at Brics Securities Ltd.