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Hero Honda: attractive two wheeler play

Nov 14, 2000

While most other automobile companies are going through trying times in the current year, Hero Honda continues to see good times. Hero Honda, India's largest motorcycle manufacturer has reported buoyant growth rates in the current year. Its market share has gone up from 42% in FY2000 to 48% currently.This is despite higher competition in the motorcycle industry in the current financial year. Bajaj Auto's aggressive entry into this market has resulted in a loss of market share for TVS Suzuki. However, Hero Honda continues to increase its market share despite this.

Market share
Hero Honda 393,416 42%48%
Bajaj Auto 215,216 56%26%
TVS Suzuki 141,028 4%17%
Yamaha Motor Escorts 66,072 -24%8%
Royal Enfield 9,323 4%1%
LML 143 NA0%
Total 825,198 28%100%

It has managed this by coming out with new fuel efficient models and superior quality products to counter the competition. During FY2000, it launched the CBZ (ee), a four-stroke bike powered with a 156 cc engine and it is the only bike currently available in India with a disc brake option. As 100 cc bikes are currently in demand and Hero Honda caters primarily to this market, its products continue to be in good demand.

The motorcycle industry continues to report strong demand in the two wheeler segment. The consumer preference for motorcycles over scooters continues. The share of motorcycles in India's two wheeler market has gone upto 54% for the period of April-August 00, while that of scooters has declined to 27% during this period.

Market share
Scooters 411,521 27%
Motorcycles 825,198 54%
Mopeds 302,330 20%
Two wheelers 1,539,049 100%

In comparison to its peers too, Hero Honda seems more attractive than Bajaj Auto and TVS Suzuki. Hero Honda future growth prospects continue to appear bright. We are expecting an EPS growth of 33% for Hero Honda over the next two years. Even though on a P/E multiple, Hero Honda may look more expensive than Bajaj Auto and TVS Suzuki currently, this is deservedly so in comparison to its future EPS growth, gross margins and return on equity.

(FY2000)EPS (Rs)P/E (x)EPS growth (%)Gross ROE (ROCE)
 (FY02E)(FY02E)(FY01E-FY02E)margin (%)(%)%
Hero Honda85.29.733%13.4%43.3%38.7%
Bajaj Auto42.45.9-10%12.5%19.2%16.7%
TVS Suzuki41.43.76%10.9%27.4%21.3%

The other two players, TVS Suzuki and Bajaj Auto have their fair share of problems. TVS Suzuki's operating margins are under pressure and it has lost market share. Bajaj Auto is also facing pressure on margins and its scooter volumes continue to decline.

In the past Hero Honda has traded at over 20x future earnings and hence the current valuations seems low when compared to this. Though there has been buying interest in Hero Honda over the past few trading sessions, the news about Honda Motors 100% subsidiary in India is still keeping many investors away from the stock.

This subsidiary is currently manufacturing scooters, but will be free to produce motorcycles after a period of five years. However, we feel that these fears are unfounded, as it is likely that Honda Motors could dilute its stake in this subsidiary by tying up with a scooter manufacturer. In China it has three separate joint ventures, so it can have the same in India.

On the current price of Rs 827 it is trading at 13.0x FY01E EPS of Rs 63.5.

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