It is time to take a re-look at two-wheeler stocks in general considering the fact that all the three majors viz. Hero Honda, Bajaj Auto and TVS are close to their 52-week high levels. Is the optimism warranted or the markets ignoring some fundamental factors?
To start with, a brief snapshot on all the three companies that are analysed in this article could be of significance. Hero Honda is a pure motorcycle manufacturer with a 44% market share in FY03. The company has been reaping the benefits from being an early mover in the segment. Also, the company has benefited from Honda's fuel efficient technology and a wide distribution reach. However, in the last two years, increased competition in the sector has exercised a downward pressure on its market share.
Bajaj Auto and TVS, on the other hand, have a diversified product portfolio. Bajaj has presence in geared (market leader), ungeared scooters (fourth largest, step-thrus (market leader) and three wheelers (market leader). TVS is a market leader in mopeds, where growth is hard to come by. Though both these players have been present in the motorcycle market, the real thrust started in FY01. Post FY01, Bajaj and TVS have made significant strides on various fronts like engine technology, distribution network and productivity. In FY03, while Bajaj and TVS gained market share in the motorcycle segment, Hero Honda's share was lower by 600 basis points.
Having looked at the profile in brief, consider the table below. Except for average blended realisation, Hero Honda scores over Bajaj and TVS, be it on factors like operating margin, return ratios and average sales per employee. On the outset, it may seem that Hero Honda has grown at a faster rate compared to its peers. But in the growth market of motorcycles, Hero Honda has lagged behind TVS and Bajaj, which indicates the kind of progress the other two have made since FY01.
Sales - 3 year CAGR
Motorcycles sold - 3 year CAGR
Blended realisation - two wheelers
Mkt share - motorcycles
Raw material cost/sales
Return on net worth
Return on assets
Earnings per share
Price to earnings
Price to book value
On the valuations front, Hero Honda trades at a discount compared to its peers despite its track record of healthy dividend payout and better efficiency parameters. One of the key reason attributed to the same in the increasing competition in the motorcycle segment. New model launches from not only Bajaj and TVS, but also from the likes of Kinetic, LML and Yamaha has increased the level of fragmentation. Falling life cycle of new products, robust growth in industry capacity and rising discount levels indicate that it will a rough ride for all two-wheeler majors. Besides, it has to be remembered that Honda and Suzuki are slated to enter the market next fiscal, which could add to the woes.
The way we see it is that operating margin expansion from FY03 level will be limited in the next three years, if not a decline. There will be a upward pressure in debtor days as manufacturers will try to push for volumes to maintain market share (similar to the tractor industry in FY02). Hero Honda's debtor days already doubled in the last four years. Keeping these factors in mind, the risk profile of two-wheeler stocks are on the higher end of the spectrum.
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