Analysis: Bajaj Auto vs Hero Motocorp

A quick look at the performance of both companies in the June 2012 quarter

Two-wheeler majors Bajaj Auto and Hero MotoCorp both announced their results for quarter ended June 2012 this week, in what was expected to be a tough quarter. We compare the two companies performance on various parameters.

For the quarter ended June 2012, Bajaj Auto sold 1,078,971 units - a growth of six per cent over the previous quarter. However, there was a drop of 1.3 per cent when compared with June 2011. Hero on the other hand sold 1,642,292 registering a growth of 4.5 per cent over the previous quarter and a 7.4 per cent growth over the same quarter in 2011.

Net sales at Bajaj Auto stood at Rs 4,713.64 crore in June 2012, a growth of 4.4 per cent over March 2012 and 3.93 per cent over June 2011. Hero MotoCorp posted sales of Rs 6,207.78 crore growing by 4.11 per cent over March 2012 while it posted a more robust 10 per cent as compared to June 2011.

Average per unit realisation stood at Rs 43,686 for Bajaj Auto on account of a better product mix, while the same figure for Hero was at Rs 37,799.

Exports sales for Hero stood at 44,665 a gain of 7.4 per cent over previous quarter, while Bajaj Auto posted much higher numbers at 364,134 in June 2012, though the growth rate was a similar figure of seven per cent. Bajaj Auto has a much stronger presence in Africa and Sri Lanka, but was impacted by unrest in Egypt and a hike in excise duty in Sri Lanka.

Bajaj Auto is operationally more efficient with its operating margin being at 19.4 per cent as compared to 15.1 per cent for Hero in the quarter under consideration. The main reason for better operating margin can be seen in the raw material to sales ratio. In case of Bajaj Auto for every Rs 100 of sales it consumes Rs 67.9 worth of raw material, while Hero consumes more at Rs 75.2. Part of the reason of higher raw material for Hero is that it consumes some imported components.

At the net profit level, Bajaj Auto posted a 7 per cent decline over the previous quarter at Rs 718.4 crore and a 1 per cent growth over previous year on account of higher effective tax rate which moved up to 29.5 per cent for June 2012 as compared to 25 per cent in earlier periods. Hero, on the other hand, posted a profit of Rs 614.46 crore growing by 10.3 per cent over previous year and 1 per cent over previous quarter after providing for tax at a rate of 16.25 per cent against 19.2 per cent in March 2012.

Despite a flattish growth rate by both the companies, the market has reacted differently. Shares of Hero fell by nearly 1 per cent since the announcement of its results, while those of Bajaj Auto shot up by 10 per cent. The main reason for this is inventory levels. While the inventory level for Bajaj Auto remains at the average level of two weeks, at Hero MotoCorp, the stock has shot up from two weeks to four weeks, indicating a slower growth for the company.

On valuations, Bajaj Auto trades at 14 times its trailing one-year earnings, while Hero trades at 17 times reflecting its higher market share in India.

As sales and profit growth has tapered off from levels seen earlier indicating that Indian markets have matured, both companies are now looking at global markets. Hero has indicated that it plans to touch an export volume of 1 million units by FY17 from its current level of nearly 100,000 a year. It intends to increase its export sales with launches in Africa and South America. Bajaj, on the other hand, is also aggressively pushing export sales as can be seen from its strategy of reducing prices in Sri Lanka, after the local government increased excise duties.

It is clear that the two companies will continue to compete aggressively against each other with new product launches. But the more interesting battle and one which can decide the ultimate leader will be fought on foreign soils where Bajaj has the lead as of now.