Prefer Hero to Bajaj on valuations: Analysts

Fortune Research is upgrading rating, target price (Rs 1,962, CMP: 1,690) as valuations have hit a two year low

Analysts are turning positive on Hero MotoCorp on inexpensive valuations, uptick in volumes and market share gains.

Mahantesh Sabarad and Vijay Nara of Fortune Research are upgrading the rating and target price (Rs 1,962, CMP: 1,690) as valuations have hit a two year low.

The stock which trades at valuations of 14 times its FY14 estimates is at a discount of 12-15% to its smaller rival Bajaj Auto. The valuation discount is also prompting Motilal Oswal Securities analysts Jinesh Gandhi and Chirag Jain to prefer the scrip over Bajaj Auto.

Further, an improvement in operating performance should also reflect in higher earnings.

“With expiry of royalty payments on existing products post June 2014, Hero’s operating performance is likely to improve significantly and will deliver EPS growth of 36% in FY15 (CAGR of 23% over FY13-15E). Given the reasonable valuations, the we prefer Hero over Bajaj,” they add .

Market share gains

Four new launches over the past year (Maestro, Ignitor, Impulse, Passion Xpro), have helped the company improve its market share in recent quarters. The company has improved its market share from a low of 39.8% recorded in the September quarter to 44.4% in the November to January 2013 period.

Maestro success has also helped the company improve its market share in the December quarter in Scooters by 300 bps to 20.6%. With consumers downtrading, Hero is witnessing higher sales of its entry level bikes HF Dawn/Deluxe. Consumers are downtrading in favor of less pricey and more fuel-efficient motorcycles, say Motilal Oswal Securities analysts quoting dealers.  

Tough road ahead

The going ahead however, could get tough given increasing competition from Bajaj Auto and Honda Motors and Scooters India focusing on the executive segment. Say Jatin Chawla and Akshay Saxena of Credit Suisse, “Both Honda and Bajaj are increasing focus in the executive segment (which constitutes 75% of Hero’s sales).”

While Bajaj recently launched a 100 cc Discover (in competition to Hero Passion) and will come up with another bike in the segment this year,  Honda, which is increasing its capacity is expected to come with a new bike priced ~Rs3,000-4,000 cheaper than Dream Yuga. This could be a direct competitor to Hero’s best-selling product—Splendour, they add.