Downgrades unlikely

The scrips of leading two-wheeler makers fell three-six per cent over the last two days on a disappointing volume performance in December and a slowing growth outlook. The benchmark Sensex gained three per cent during the same period.

While demand in the sector had been extremely resilient to both rising interest rates and fuel prices so far, the Street was disappointed as a sustained volume performance was expected to continue. While sales are expected to slow down, analysts do not expect major revisions to volume estimates and margins are likely to hold. Among the two-wheeler makers, Bajaj Auto is the key pick due to significant exports and higher margins.

Earnings downgrade unlikely
The growth outlook is expected to moderate. Bajaj Auto has lowered its FY12 volume guidance to 4.4 million from 4.5 million units. “For the sector too, the outlook could stretch out into FY13,” says Sachin Gupta of Edelweiss, adding that it could be worse than the current year. However, he doesn’t envisage any significant correction in analyst consensus estimates, which largely factor in moderating demand.
 

SLOWING DEMAND
Company	11-Dec	YoY (%)	MoM (%)	P/E* (x)
Hero Honda	540,276	7.8	0.7	13.5
Bajaj Auto	305,690	10.4	-18.4	12.5
TVS Motor	170,428	-0.8	-2.9	7.2
* FY13 Consensus Bloomberg estimates

Bhaumik Bhatia, auto analyst at IDBI Capital, has retained his 12-13 per cent volume growth assumptions for the sector in FY13. Stable input costs should buffer margins and no significant earnings downgrades are expected. A key concern is slowing rural demand slowdown. According to Emkay research, lower realisations and inelastic costs of cultivation will pinch cash margins and cashflows in the farm sector, impacting discretionary spend and, therefore, two-wheeler volumes.

Bajaj Auto preferred pick
According to Edelweiss’ Gupta, given their rich balance sheets and dividend yield of about six per cent for Hero Motocorp and 3.5 per cent for Bajaj Auto, these stocks should continue to trade at a premium to the broader market.

Without exports, Hero Motocorp could feel the brunt of a moderating domestic demand, he believes. But, it will grow faster than the market at about 5-6 per cent, he adds. It is more complicated for TVS Motors with a weak motorcycle portfolio.

Also, rural and semi-urban areas are a key market for scooters and mopeds contributing about 65 per cent of TVS total volumes in December. This makes it more vulnerable to any demand moderation, says Bhatia.

With its strong export performance and healthy profitability, Bajaj Auto continues to be the key pick. The two-wheeler maker gets nearly a third of its volumes from exports and is seen as relatively buffered from the moderating domestic demand scenario. Also, the weaker rupee will boost export margins and overall profitability. Its new Pulsar launch and performance will be closely watched and could be a trigger post the recent correction of the stock.

Price increases will buffer the topline for FY12 and Bajaj auto management expects 20 per cent FY12 revenue growth, although the volume growth would be lower.