Auto sector - Motorcycles
Changing product mix: More hype than reality
Bajaj Auto REDUCE Hero Honda ACCUMULATE
Price Target Price Price Target Price
Rs.563 Rs.485 Rs.988 Rs.1,055
The domestic motorcycle industry has witnessed an increase in the share of 125cc+ motorcycles from 10% in FY02 to 29% in FY09YTD. This has resulted in investor confidence in Bajaj Auto, considering the fact that the125cc+ segment contributes around 75% of its domestic motorcycle portfolio. Also, concerns are being raised over Hero Honda's market share sustainability as the 125cc+ segment accounts for only 7% of its domestic motorcycle portfolio.
We do not deny that the share of the125cc+ segment is likely to increase going forward. However, we dispute the view that the demand for sub 125cc segment is likely to come under pressure. The structural shift from sub 125cc to 125cc+ motorcycles (as was observed during FY99-FY04 from scooters to motorcycles) is not likely to happen any time soon.
We attribute the rising share of 125cc+ segment to the shift in focus of players from 100cc to 125cc motorcycles rather than lower demand for sub 125cc motorcycles. Therefore, we view the rising share of 125cc+ motorcycles as a classification phenomenon rather than as the emergence of a new trend. Also, rather than just focusing on the CC based classification, it is also pertinent to look at price based classification of the industry.
We summarize our key observations below
n Higher share of 125cc+ motorcycles – a classification issue rather than a demand issue
n Infact, Ex-Bajaj Auto, the share of 125cc+ segment has gone up by only 500 bps to 18% during FY02-FY09YTD period
n Inability to break the stronghold of 'Splendor' and 'Passion' despite lower pricing and significant increase in raw material cost are the key reasons for exit of players from the sub 125cc segment
n Rising share of 125cc+ motorcycles is largely due to a shift in strategy by Bajaj Auto
n Rather than just focusing on the CC based classification, it is pertinent to look at price based classification of the industry
n 'Splendor' and 'Passion' continue rule the executive segment
n Bajaj Auto is the leader in the entry and premium segment
n However, Bajaj Auto is losing market share in executive and premium segment which constitutes the 125cc+ segment for the company
n We do not expect Bajaj to regain market share aggressively in the next 12 months
n Bajaj Auto's history of product failures casts doubts on runaway success of new launches
Valuations and View
At CMP of Rs 563, Bajaj Auto trades at a PER of 9.3x FY10E earnings. Considering the fact that export is a more profitable franchise for Bajaj Auto (unlike other OEMs), the risk to negative surprises on earnings due to pressure on export volumes is considerably high. We would like to assign a lower multiple to export business (6xPER) and higher multiple to domestic business (10xPER). Considering the pressure on the volumes front- both in domestic as well as export markets, we believe that at the current price, the stock is fully valued. We maintain our REDUCE rating on the stock with a target price of Rs 485.
At CMP of Rs 988, Hero Honda trades at a PER of 12.2x FY10E earnings. We have upgraded our target price to Rs 1055, post the revision in our earnings estimates. While we maintain our positive view on the company, owing to the recent run up in the stock price, we have downgraded our rating from BUY to ACCUMULATE.
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