Auto stocks have been underperforming on the back of weak macro factors like the decline in demand, continued pressure on semiconductor supply, and rise in raw material and crude oil prices. However, experts believe the growth outlook of the sector is intact despite adverse macro indicators.
Domestic brokerage ICICI Securities said that the margin outlook is still better than at the moment in the calendar year 2021 for all players despite multiple adversities.
"In the first half of 2022 (H1CY22), the profitability of the key auto component makers globally on an average declined by about 200bps year-on-year (YoY) due to the combined effect of adverse operating leverage, elevated input commodity costs and rising power/fuel costs. The outlook of nearly 50-100bps improvement in profitability for the same companies in CY22, implies price hikes in the offing, benefits of raw material cost reduction and improvement in scale," ICICI Securities said.
The sector has started recovering which can be seen in the August auto sales figures. The August auto sales numbers saw a decent rise thanks to improving chip availability and a build-up in inventory ahead of the upcoming festive season.
Both stocks have given negative returns in the last 1 year, however, some recovery was witnessed in them recently.
While Hero Moto shed 2.5 percent in the last 1 year Bajaj Auto has lost around 1 percent in the same time. However, on a YTD basis, Hero has added 12 percent while Bajaj has advanced nearly 14 percent.
After giving positive returns in July and August, Hero has been in the red in September so far, down 2.5 percent. In the 9 months of the year, the stock has been positive in 5 of them and negative in the rest. It had surged the most in January and May 2022, up 10.5 percent in both months while it had lost the most in March, down 9.5 percent.
Meanwhile, September has been a weak month for Bajaj. It has lost over 9 percent in the current month so far after rising 4 percent and 5.5 percent in August and July. In the 9 months of the current calendar year, the scrip has been positive in 6 months and negative in the remaining three. It had risen the most in January, up nearly 10 percent and lost the most in the current month MTD (September).
About Hero MotoCorp and Bajaj Auto
Hero MotoCorp Limited is engaged development, manufacturing, marketing, sale and distribution of two-wheelers and its parts and accessories. Its product category includes motorcycles, scooters, and parts.
Bajaj Auto is an India-based manufacturer of motorcycles, and three and four-wheeler vehicles. The Company is engaged in the business of development, manufacturing, and distribution of automobiles such as motorcycles, commercial vehicles, electric two-wheelers, and parts.
Bajaj Auto's total sales increased 8 percent to 4,01,595 units in August 2022 compared with 3,73,270 units sold in August 2021. On a sequential basis, the company's total sales climbed 13.23 percent from 3,54,670 units sold in July 2022. During the year, domestic sales jumped 49 percent to 2,56,755 units while exports fell 28 percent to 1,44,840 units in August 2022. Total two-wheelers sales rose 5 percent to 3,55,625 units while total commercial vehicle sales rose 31 percent to 45,970 units in August 2022 over August 2021.
Meanwhile, Hero Moto reported just a 1.92 percent increase in total sales at 4,62,608 units in August 2022. The company had sold 4,53,879 units in the year-ago period. Domestic sales were at 4,50,740 units as compared to 4,31,137 units in August 2021, a growth of 4.55 percent, it added. Exports, however, declined to 11,868 units from 22,742 units in the corresponding period of last year. Motorcycle sales were up at 4,30,799 units last month from 4,20,609 units in the preceding year, while scooter sales declined to 31,809 units against 33,270 units in August last year.
In the June quarter, Hero Moto's consolidated profit after tax grew 71 percent YoY to ₹625 crore while revenue recorded a 53 percent YoY growth at ₹8,393 crore. The world's largest manufacturer of motorcycles and scooters said its EBITDA for the quarter stood at ₹941 crore vs ₹515 crore in the year-ago period, reflecting an 11.2 percent EBITDA margin and a growth of 83 percent.
During the quarter, Hero sold 13.90 lakh units of motorcycles and scooters, recording a growth of 36 percent over the corresponding quarter in the previous fiscal.
Meanwhile, two and three-wheeler maker Bajaj Auto on July 26 clocked a 10.6 percent year-on-year growth in standalone profit at ₹1,173.3 crore for the quarter ended June 2022, supported by strong operating profit and price hikes. Profit for the June 2021 quarter was ₹1,061.2 crore. Standalone revenue for the quarter was ₹8,005 crore, up 8.4 percent from the year-ago quarter led by pricing and mix. However, the sales volume declined by 7.2 percent.
Bajaj Auto sold more than 9.33 lakh units during the April-June period of this year, against 10.06 lakh units sold in the same period last year, with two-wheeler volumes falling 6 percent and commercial vehicle segment volumes down 19 percent YoY.
Which is a better stock?
Nishit Master, Portfolio Manager, Axis Securities has chosen Hero over Bajaj for the near term.
"We believe both the names have some long-term challenges, especially since the EV penetration in the two-wheeler industry is growing faster among all auto segments. With the advent of new players in the EV two-wheeler space, it becomes difficult for Bajaj and Hero to maintain market share. From a long-term perspective, amongst the two names, we believe Bajaj Auto is in a relatively better position given its positioning in the EV space. In the near term, we believe Hero is better placed compared to Bajaj, as the export markets will witness a significant slowdown, and here, Bajaj has significant volumes coming from the export markets compared to Hero," Master pointed out.
Saji John, Research Analyst at Geojit Financial Services also agrees. He has also picked Hero between the two. At current valuation we have a buy rating on Hero Motocop and Hold rating on Bajaj Auto, he said.
In the short run, John believes Hero will fare better than Bajaj. For the last couple of quarters, Bajaj is struggling in its export sales, due to lower participation from the African market owing to their home currency fluctuation and an export prohibition in Egypt.
"Bajaj’s earns 50 percent of its earnings from export, which are experiencing a slump in demand. Furthermore, Bajaj’s strategic initiative to focus more on the premium vehicle rather than entry one is having a detrimental influence on domestic volume sales. Hero, on the other hand, delivered a strong pick at this level, growing by 22 percent from April to August and de-growing by 19 percent from the previous year's period. As a result, Bajaj’s overall volume was -3 percent, whereas Hero’s was 18 percent," he explained.
However, in the long term, he believes the major catalyst for growth would be how fast the companies will ramp up in the EV platform and compensate for market share in the scooter category which is mostly dominated by its peers. Going ahead, both Bajaj and Hero have distinct characteristics and lined up robust capex initiatives in their respective segment, which will underpin long-term growth, noted John.
In a contrarian view, Vinit Bolinjkar, Head of Research, Religare Broking has picked Bajaj.
Both Hero Motocorp and Bajaj Auto are 2nd largest and 4th largest 2W manufacturers globally, however, Bajaj Auto has an upper hand in terms of product mix and diversification compared to Hero Motocorp. Hence, we see better growth potential in Bajaj Auto compared to Hero Motocorp, said Bolinjkar.
"Better product mix and diversification have resulted in better margins for Bajaj Auto (EBITDA margins of 17 percent) compared to Hero Motocorp (EBITDA margins of 13 percent). In terms of valuation, Bajaj Auto is trading at an FY25 P/E of 15.1X, while Hero Motocorp FY25 P/E is 13.5X. There is no significant valuation gap between Bajaj Auto and Hero Motocorp, hence we recommend Bajaj Auto over Hero Motocorp," stated Bolinjkar. He further added that unlike Hero Motocorp which is only in 2W, Bajaj Auto also has a 3W business. The company is the leading 3W manufacturer in India and sells its 50 percent volumes in the export market.
He explained that Bajaj Auto has a diversified and strong export market for its 2Ws which is significantly higher than Hero Motocorp and a larger export market reduces the concentration risk and helps in maintaining stable volume growth.
Besides, Bajaj Auto has also managed to improve its presence across all sub-segments of the Indian motorcycle industry (from 100 cc to 700 cc), making it a well-diversified player in the motorcycle space, whereas Hero Motocorp generates 80 percent of its 2W volumes from less than 125cc segment where the realizations and profit margins are lower, added Bolinjkar.
Pranjal Kamra - CEO, Finology Ventures has also favoured Bajaj over Hero
Hero Motocorp and Bajaj Auto have kept the investing community divided for a long. However, there seems to be some clarity in recent years. While Bajaj seems a better investment opportunity than Hero at present, it is just a matter of time before EVs start becoming mainstream, which could be a game-changer for the latter, noted Kamra.
"Hero has better operational efficiency and return ratios, along with a lion’s share in the economy two-wheelers segment. However, this has been bittersweet, as its concentrated portfolio in entry-level segments, where customers are more vulnerable to price hikes, has impacted its topline. Also, Hero’s extremely high dependency on the domestic two-wheeler market (94 percent of sales volume), where demand growth is comparatively sluggish, seems to be a bottleneck. Resultantly, it’s witnessed the lowest EBITDA growth and the highest margin contraction among its listed mass market two-wheeler peers - Hero, Bajaj and TVS. On the contrary, Bajaj’s strategic export market exposure (with better demand and less evident emission-led price hikes), a recovery in the higher-margin three-wheelers segment (with the added advantage of the Government’s CNG initiatives) and less exposure to scooters where EV-led disruption is more of a threat, has put it one step ahead of Hero. Bajaj also has better revenue growth (5-yr revenue CAGR 8.77 percent vs Hero’s 0.65 percent) and margin figures," explained Kamra.
Basant Maheshwari, smallcase manager and Co-founder, Basant Maheshwari Wealth Advisers LLP also said that taking a time frame of the last 5 years, between Bajaj Auto and Hero Motocorp, the former has better fundamental growth.
He pointed out that if you see, Bajaj’s both topline and bottom line witnessed a healthy growth of 50 percent, whereas Hero struggled with a sluggish bottom line. The better performance from Bajaj was due to a strong tailwind in the export markets that covered up for the lackluster domestic demand. However, he noted that on the flip side, Hero’s exposure towards countries like Nepal and Sri Lanka acted as a spoil-sport for their overall book (which is anyway substantially less than Bajaj, since Bajaj Auto derives ~50 percent of its book from exports, while Hero derives a mere ~7 percent).
However, it is important to note that both companies were reeling from supply side issues, primarily of semiconductor chip shortages. Over the long term, chances are that the pent-up demand and easing of supply chain issues are going to act as growth triggers in the domestic market, with an increasing share of EVs. Though Bajaj’s key differentiator is its strong exports, a global recession could derail the geographies Bajaj caters to and that could impact growth, he opined.