Bajaj Auto, Eicher Motors And Hero Moto Downgraded By CLSA Over Valuation Concerns

The research firm has turned cautious as valuations are pricing in double-digit growth in volumes over the next few years already.

<div class="paragraphs"><p>Two-wheelers, bikers on a flyover. (Source: pexels)</p></div>
Two-wheelers, bikers on a flyover. (Source: pexels)

CLSA downgraded two-wheeler makers Bajaj Auto Ltd., Eicher Motors Ltd. and Hero MotoCorp Ltd. citing valuation concerns.

Volumes of the domestic two-wheeler industry increased 8% year-on-year in the festive months, leading to a rally in the stock prices for the companies, according a Dec. 5 CLSA note. The upside in the stocks has reduced due to the recent surge, it said.

The research firm has turned cautious as valuations are pricing in double-digit growth in volumes over the next few years already.

CLSA expects two-wheeler volumes to expand at 10% compounded annual growth rate in fiscal 2023–25, with motorcycle sales increasing at 11%, scooters growing 8% and mopeds rising 6%.

Since the industry volumes are still below the previous peak, growth is likely to be supported by replacement demand and the premium segment, it said.

Affordable Electric 2-W To Drag Margins

The brokerage expects electric two-wheeler adoption to increase with the launch of more affordable battery-powered options and improvement in charging infrastructure. It sees sales rising at 27% CAGR from 2023-2036.

"Electric 2-W retail sale units crosses 91,000-mark in November 2023 with the launch of more affordable scooter by Ola. Ola launched S1X the cheapest scooter in the market with starting price lower than Honda Activa and garnered 75,000 bookings on this model," it said.

CLSA said TVS Motors, Hero MotoCorp and Bajaj Auto also highlighted that they are planning to launch more affordable electric scooters next year to increase adoption, although this could be dilutive for margins.

Premium Motorcycles To Grow Faster

CLSA expects the share of premium motorcycles to increase from 22.6% in 2023 to 26.8% in 2026, which would help the original equipment manufacturers to improve net realisation. "With the launch of Harley (Davidson) and Triumph, we expect Hero and Bajaj to gain market share in (the) premium motorcycle segment from Royal Enfield."

The Nifty Auto was down 0.23% in early morning trading, with Bajaj Auto and Eicher Motors, the maker of Royal Enfield motorcycles, dragging the sector.

Change In Target Price And Ratings

  • CLSA downgrades Bajaj Auto to 'underperform' from 'outperform', calling the stock fairly valued; raises target price to Rs 6,382 from Rs 5,670.

  • The research firm revies target price for Eicher Motors to Rs 4,129 from Rs 4,252 as it expects new competitors (Harley and Triumph) to gain market share from Royal Enfield; downgraded to 'underperform', from 'buy'.

  • Downgrades Hero MotoCorp from 'buy' to 'outperform' on account of sharp rally in share price; raises target price from Rs 3,701 to Rs 4,127.

  • Maintains 'sell' on TVS Motor with a revised target price of Rs 1,378 from Rs 1,206 as increase volume estimates for FY25/25 by 5.3%/7.1%. "TVS has been gaining share in executive motorcycle segment with successful launch of Raider."

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