Bajaj Auto, Hero MotoCorp Shares Slump As CLSA Sees Recovery Momentum Slowing

Shares of Hero MotoCorp Ltd. and Bajaj Auto Ltd. declined after CLSA said it expects two-wheeler makers' recovery to lag other automotive segments.

“While FY22 volume growth will look strong optically, it comes on the back of a 29% cumulative decline over FY19-21. We do not expect two-wheelers to reach their FY19 peak even by FY23 (unlike passenger vehicles),” the research firm said in a note. “The rapid rise in commodity prices will also pressure two-wheeler OEMs to choose between customer affordability (volume) and margins.”

Bajaj Auto's stock declined as much as 5.2% to Rs 3,445.9 apiece, making it the worst performer on the Nifty Auto Index. Peers Hero MotoCorp, Eicher Motors Ltd. and TVS Motor Co. too dropped as much as 3.6%.

Two-wheeler affordability, according to CLSA, has been adversely impacted over the past three years due to regulatory changes (insurance, safety and emissions). “Our channel checks indicate that pent-up demand is largely behind us. In addition, demand from segments such as high school and college students as well as urban semi-skilled professionals (retail, hospitality and small traders) continues to be pushed forward,” it said.

India's hinterland was expected to drive two-wheeler sales, buoyed by a good monsoon, a bumper crop, increased government spending to boost the economy and less severe Covid-19 curbs compared to urban centres. But a series of price hikes prior to the pandemic, followed by a lockdown, caused sales to tumble. Besides, the transition to BS-VI emission standards hurt. Sales of entry-level or budget motorcycles, according to Crisil, fell nearly 27% in the last year—the highest for a segment that accounts for about 60% of total motorcycle volumes and 36% of overall two-wheeler volumes.

CLSA's highlights

• Cuts FY22/23 industry volume forecasts by 1%-3% primarily led by a 4% cut in motorcycle volume forecasts.

• “Rural demand should perform relatively better than urban but we need to watch trends during the April and May wedding season.”

• “We forecast Q4 FY21 Ebitda margins to decline by 70-220 basis points quarter-on-quarter across our two-wheeler coverage. We expect FY22 margins to be slightly lower than Q4 FY21.”

CLSA's stance on two-wheeler makers

• Hero: Cuts target price to Rs 3,040 from Rs 3,610 apiece. Its wholesale and retail market share gains have begun to taper as the entry/executive motorcycle segments have started to underperform other categories.

• Bajaj: Cuts target price to Rs 3,750 from Rs 3,915 apiece. While exports are doing relatively better for Bajaj, it will likely face headwinds in domestic two-wheelers and three-wheelers.

• Eicher: Target price unchanged at Rs 2,450 apiece. Its wholesale and retail market share has begun to improve as premium segments have started to outperform.

• TVS: Target price unchanged at Rs 600 apiece.