Automobiles Two Wheelers – Ahead in the Race
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Automobiles Two Wheelers – Ahead in the race September 04, 2013 We believe that with the interest rate cycle reversing (read inching up) and robust rural economy, two‐wheeler stocks are likely to outperform over the next one year. Surjit Arora Three key factors leading to our stance are a) strong rural economy led by good [email protected] monsoon and increase in MSPs b) export potential ‐ Indian firms are better placed +91-22-66322235 compared to Chinese counterparts (Africa & Latin America dominated by Chinese) on currency and labour cost front 3) Valuation attractive at 13‐14.0x 1yr fwd P/E, Report given the strong 18% earnings CAGR, coupled with strong balance sheet and better corporate governance. We upgrade Bajaj to ‘Accumulate’ from ‘Reduce’ mainly on account of higher export realization in FY14E and volume recovery from Jan’14. At Sensex v/s. Hero Motocorp & Bajaj Auto Sector the same time, with scooter volumes growing faster than motorcycle (women are Sensex Bajaj Auto increasing opting for the same), entry into the export market and strong rural sales Hero Motocorp (which account for ~45%), we upgrade Hero Motocorp from ‘Reduce’ to 140 130 ‘Accumulate’. 120 110 Recovery in two‐wheelers likely: According to Hero Motocorp management, 100 90 recovery in two-wheeler industry demand is likely, given the good monsoon, 80 coupled with possible increase in government spending ahead of 2014 national 70 elections. We expect 12-13% CAGR in scooter volumes for the next two years. We expect two-wheeler volumes to grow at ~7% CAGR mainly led by 12.2% Jul-13 Jan-13 Sep-12 Sep-13 Nov-12 Mar-13 May-13 CAGR in scooter volumes and 6.0% CAGR in motorcycle volumes over FY13- Source: Bloomberg FY15E period. Scooter share in the last three years has increased from 15% to 21% of two-wheeler volumes mainly driven by (a) growing acceptability of gearless scooters, particularly by women, (b) rising urbanization and increasing Stock Performance proportion of working women. (%) 1M 6M 12M Sensex (3.1) (1.6) 6.5 Rural economy to spur demand: In the country's main cropping regions, Auto (0.1) (1.9) 10.7 monsoon has been timely and 20-30% above average so far, prompting farmers to expand cultivated area by 9% to 930 lakh hectares, with the biggest gains in Bajaj Auto (1.1) (5.0) 14.6 Hero Motocorp 6.9 17.6 6.6 pulses, oilseeds and coarse cereals. Going by the current trend of rising rural incomes with higher yields and minimum support prices, the outlook on two- wheelers is positive. Low penetration level, lack of adequate mode public Stock Data transport and rising per capita income in rural India would lead to long-term CMP (Rs) TP (Rs) PE (x) healthy volume of two-wheelers. With rural economy accounting for 40-45% of FY14E FY15E the sales for two-wheelers, we expect good times ahead for two-wheeler Bajaj Auto 1,889 2,083 15.9 13.6 manufacturers. Hero Motocorp 1,927 2,176 17.6 13.3 Competitive intensity likely to slowdown: Over the last two years, HMSI has How we differ from Consensus gained 450bps in motorcycles to 11.8% in FY13 and 520bps market share in EPS (Rs) PL Cons. % Diff. scooters segment to 48.6% in FY13E. At the same time, HMCL has lost only Bajaj Auto 150bps market share in motorcycles to 53.6% in FY13E whereas it has gained 2014 119.1 123.5 ‐3.6 market share of 210bps to 18.8% in FY13 in the scooter segment. Going 2015 138.8 141.8 ‐2.1 forward, in our view, Hero would gain 180bps in market share in scooter segment thanks to ‘Maestro’ and ‘Pleasure’ to 21.6%, whereas it is likely to Hero Motocorp protect its turf in the motorcycle segment by maintaining its market share at 2014 109.3 109.4 0.0 53.3% in FY15E. HMSI is likely to further gain market share to the tune of 260bps 2015 145.1 139.3 4.2 to 14.7% by FY15E at the cost of Bajaj Auto. Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report Automobiles Indian Manufactures to gain at the cost of Chinese: Two key export markets, mainly Africa and Latin America, are currently dominated by Chinese players, with ~75-80% market share and ~70% market share, respectively. While the Indian players have been gaining share from the Chinese mainly on account of their better quality, there is a likelihood of further market share gains on account of a) rising labour cost in China b) 16% rupee depreciation v/s 3% CNY appreciation against the USD. Exports likely to grow in double‐digit led by Africa and LatAm: Given the low penetration in African and Latin American market relative to the Asian market, these regions are likely to drive double-digit growth over the next 4-5 years. Given that there are no plants in Africa, it is the largest importer of motorcycles globally, thereby, making it the most important export market for Indian players. With an overall population of ~1bn people and with the fastest population growth rate in the world, African market has a lot of potential. In Latin American markets like Argentina and Chile, market share gains are likely, given the currency as well as quality advantage. In our assessment, exports from Indian manufacturers are likely to grow in the region of 13-15% over the next five years. Prefer Two‐wheelers over Four‐Wheelers; Upgrade Bajaj Auto & Hero Motocorp to Accumulate: With exports, three-wheeler and spares accounting for ~55% of its FY14E turnover, we believe Bajaj Auto is better placed to mitigate the impact of slowdown in the two-wheeler industry. With earnings CAGR of 17-18% for FY13FY15E period, coupled with attractive dividend yields of 3%+ and ROEs in excess of 38%, we believe valuation at 13.6x FY15E EPS for Bajaj and 13.3x FY15E EPS for Hero Motocorp looks attractive. Given that interest rates are unlikely to come down, we believe two-wheelers are likely to outperform four-wheelers. September 04, 2013 2 Automobiles CONTENTS Page No Two wheeler segment - recovery likely ...................................................................... 4 Competitive intensity likely to slowdown .................................................................. 7 Scooters ............................................................................................................................................. 7 Motorcycles ....................................................................................................................................... 8 New / Recent Launches .............................................................................................. 9 Indian manufactures to gain at the cost of their Chinese counterparts .................. 11 Two-wheeler exports likely to grow in double-digit led by Africa and LatAm ......... 12 African Market – Motorcycles used as Taxis - Dominated by Chinese Players ............................... 13 Nigeria – Dominated by Chinese ................................................................................................ 13 Western Africa ........................................................................................................................... 15 Latin America – dominated by Japanese and Chinese Players ........................................................ 16 South Asia – Dominated by Indian Manufacturers ......................................................................... 17 Companies Bajaj Auto ........................................................................................................................................ 20 Hero Motocorp ................................................................................................................................ 26 September 04, 2013 3 Automobiles Two wheeler segment ‐ recovery likely Exhibit 1: Penetration Levels 300 253 241 250 228 200 '000) / 150 110 101 98 (2Ws 100 56 50 32 0 Japan Vietnam Thailand Indonesia China India India India Overall Rural Urban Source: PL Research With an annual domestic sales of 13.8m units in FY13, India is the second-largest market after China (>50m units p.a). While China is >3x India’s annual volumes, growth rates over the past three years (CAGR 5%) indicate levels of saturation, as penetration level is 20%. Penetration in India on the other hand is 6.6% (CAGR of 13% for last five years) and likely to grow at 14% CAGR implying a penetration rate of 15% in 2020. Exhibit 2: Rural v/s Urban Divide 45 2001 2011 40 35 30 25 household) / 20 15 (2W's 10 5 0 All India Rural Urban Source: PL Research According to Hero Motocorp management, recovery in two-wheeler industry demand is likely, given the good monsoon, coupled with possible increase in government spending ahead of 2014 national elections. September 04, 2013 4 Automobiles Exhibit 3: Per capita income / two‐wheeler prices 2W Prices (Rs) Per capita Rural income (Rs) Ratio (RHS) 80,000 1.8 70,000 1.6 60,000 1.4 1.2 50,000 1.0 40,000 0.8 30,000 0.6 20,000 0.4 10,000 0.2 - - 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: PL Research In Apr-July 2013, rural volumes grew by 12% YoY for Hero Motocorp and have been resilient despite a weak economic environment. With rural economy accounting for 40‐45% of the sales for two‐wheelers, we expect good times ahead for two‐wheeler We believe farm incomes will rise