The stocks of Hero Honda and Bajaj Auto have tanked 18-21 per cent since the start of the year on concerns over profit margins and the ability to maintain higher sales growth. The December quarter results of the companies which control over 80 per cent of the motorcycle market also confirm pressure on the margin front. The Street is worried that higher interest rates, availability of finance, the rising cost of fuel and firm raw material prices may take a turn for the worse and hit the two companies’ profitability. While these issues are likely to see these stocks underperform in the near term, analysts prefer Bajaj Auto over Hero Honda on account of higher margins and more attractive valuations.
Margin pressures Both companies have been facing margin pressures over the last few quarters, with Hero Honda faring worse than its closest competitor as it had to contend with supply constraints as well. To counter input cost pressures, Hero Honda has effected price increases of 2-3 per cent across models in December and Bajaj has raised prices 2 per cent in January. Pawan Munjal, managing director and CEO, Hero Honda, believes demand will remain bullish but he expects margins to remain under pressure in the near term. On the other hand, Bajaj Auto's management says it can maintain margins at 20 per cent on the back of higher operating leverage.
No problems on demand front Though there are operational and macro headwinds, demand has been robust. While Hero Honda's volumes grew 16 per cent for the ten months ended January to 44 lakh units, Bajaj Auto posted an increase of 38 per cent to 32 lakh units for the same period. In 2011-12, analysts expect Hero Honda's volumes to grow 14 per cent to six million units while Bajaj is expected to register a growth of 25 per cent to 4.3 million. They believe capacity expansion is critical for the growth of Hero Honda (the company is scouting for its fourth plant to expand its current capacity of 5.5 million units) if it is to top six million units. Exports, which have been a strong point for Bajaj Auto (a third of sales), could become a window of opportunity for Hero Honda (3 per cent of sales) post its split with Honda.
BAJAJ SCORES ON HIGHER MARGINS FY12 estimates in Rs cr Hero Honda Bajaj Auto Sales 20,184 19,281 Ebitda 2,817 3,862 Ebitda margin (%) 14.0 20.0 Net profit 2,296 2,885 P/E (x) 13.7 12.1 Source: Analyst reports
