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Two wheelers: Who is the best?

Mar 10, 2003

In the last six months, the performance of two-wheeler stocks on the bourses has been a mixed one. While Bajaj Auto and TVS have held ground, Hero Honda has been on the receiving end. With competitors like TVS and Bajaj Auto emerging strong on the products front, Hero Honda, which has been the market leader in the last decade in the motorcycle segment, has been taken by surprise. We take a brief look at the growth prospects of the two-wheeler segment, individual strengths and weaknesses of players and a valuation comparison.While much has been talked about the shift in consumers’ preference in the past, a brief look at the reasons for the same is of significance. For one, the price difference between an entry-level motorcycle and a geared scooter has been on the decline ever since Bajaj Auto decided to go hung-ho on the motorcycles front. Secondly, geared scooter market is also shrinking because of a palpable shift in demand to trendier ungeared scooters. Following the success of Honda's 'Activa', new models have been predominantly focused on this particular category. Last but not the least, the shift has also been significantly led by the fall in interest rates. Consumers currently do not mind shelling out an extra Rs 6,000 for entry-level motorcycle/ungeared scooter as compared to a geared scooter (in installment terms, the rise in largely insignificant).

Having looked at the industry in brief, the question in investor's mind at the current juncture is which stock to invest in the two-wheeler sector? To make things easy for readers, we have listed a few strengths and weaknesses for each of the players discussed in the article in brief.

Hero Honda

Strengths

  1. Access to Honda’s engine technology. Enjoys strong brand equity due to fuel efficiency and as a result, sells twice as much the second player on a monthly basis.

  2. Efficient distribution and after sales service. Large capacity and a cost competitive operation.

  3. A rewarding management with an impressive return on net worth at 69% in FY02.

Weakness

  1. Expiration of agreement with Honda in FY05. Highly reliant on Honda and so far, has not developed an indigenous model unlike TVS and Bajaj Auto.

  2. Weaker presence in the entry-level motorcycle segment i.e. Rs 30,000 per unit category.

Bajaj Auto

Strengths

  1. Has developed the capability to conceptualise and manufacture indigenously without any foreign hand.

  2. Derives benefit from large-scale operations and thus launches models at a competitive price. Has a big balance sheet.

Weakness

  1. Consistency has not been the hallmark of the company. The ability to foresee trends has been weak. The late entry into the motorcycle segment is an apparent example.

  2. The management has not rewarded shareholders adequately in the past despite large cash surpluses.

TVS Motor Company

Strengths

  1. The company is well regarded for its research and development facilities. The success of ‘Victor’ is in itself a vindication.

  2. The management shares wealth with investors.

Weakness

  1. Historically, TVS has been a regional player with a relatively stronger presence in southern markets.

  2. Has gone overboard at times on the product front. The huge sum spent on ‘Spectra’, an ungeared scooter in the late 1990s is yet to be recovered. Some motorcycle models like ‘Shogun’ and ‘Shaolin’ have failed in the past.

The table below highlights the snapshot of not only valuations but also the operating efficiency of each player viz. Hero Honda, Bajaj Auto and TVS.

Who is the best?*
ParameterUnitsHero HondaBajaj AutoTVS
Current price (Rs) 213.0 500.0 500.0
Valuation ratios    
P/E (x) 6.9 9.2 9.0
Market cap/sales (x) 0.9 1.1 0.4
EV/EBDITA (x) 5.1 4.0 4.5
Dividend yield (%) 10.2%3.8%4.5%
Return ratios    
RONW (%) 57.6%15.6%27.7%
ROCE (%) 55.8%35.0%29.6%
Div. payout (%) 70.0%14.7%40.0%
Operating ratios    
Operating margins (%) 14.7%17.5%9.2%
Net profit margins (%) 10.2%12.0%4.6%
Avg. realisation/motorcycle (Rs) 29,307 31,000 27,178
EBDITA/vehicle sold (Rs) 4,525 5,009 2,248
*FY04E estimates

Hero Honda seems to be the most attractive of the lot trading at a significantly low P/E multiple and a high dividend yield. As a market leader, Hero Honda is likely to suffer the most from competitive factors. Secondly, there are concerns about the technology sourcing from Honda post FY05. However, considering the superior return ratios, the concerns seem to be overplayed. Bajaj Auto, meanwhile, is expected to enter into an agreement with Kawasaki during the course of the week for sourcing of motorcycle to select export markets. This will drive topline of the company. TVS also has concrete export plans, apart from a series of new launches.

For more details analysis and projections, please visit our research report section.


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