Bajaj Auto vs Hero MotoCorp: Which Auto Stock is Better?

The automobile sector is one of the major sectors contributing to India's growth story and accounts for 7.1% of India's GDP.

It's also one of the fast-growing sectors in India. It's expected to be the world's third-largest auto market in terms of volumes by 2026. A majority of the volumes will come from the two-wheeler segment in India.

India is home to two of the most well-known two-wheeler manufacturers in the world - Hero MotoCorp and Bajaj Auto.

In this article, we compare these two companies based on their financial performance, operational efficiency, sustainability efforts, and future growth prospects with respect to the EV megatrend.

Business Overview

Bajaj Auto is a leading manufacturer of motorcycles and three-wheelers in India. The company is the flagship company of the Bajaj Group.

It's the world's largest three-wheeler and fourth-largest two-wheeler manufacturer. It exports to over 70+ countries. This is a clear testimony to its brand image - The World's Favourite Indian.

Of the many segments it operates in, the company has a considerable market share in the mileage and sports segments of two-wheelers.

Hero MotoCorp is the world's largest two-wheeler manufacturer. It has an over 50% share in the domestic two-wheeler market and a sizeable market share in the global market.

It has a presence in over 40 countries and is one of the most popular brands in India. Its products are spread across all the segments - entry, deluxe, premium, and scooter.

Bajaj Auto vs Hero MotoCorp Business Overview

	Bajaj Auto	Hero MotoCorp
Products	Motorcycles Electric Scooter Three Wheelers Quadricycle Spare parts Engine Oils	Motorcycles Scooters Spare parts Engine Oils
Brands	MotorcyclesDominar Pulsar Avenger Platina CT Electric ScootersChetakThree Wheelers and QuadricycleMaxima RE Qute	MotorcyclesXtreme Xpulse Splendor Passion HF Glamour ScootersPleasure Maestro Destini
Competitive Advantage	Leadership in three-wheeler segment Dominant market share in motorcycles segment Diversified geographical presence Strategic partnership with KTM, and Triumph Motorcycles	Leadership in two-wheeler market Leadership in pre-owned motorcycles Strategic partnerships with Harley-Davidson, Gogoro, Ather Energy
Key Risks	Intense competition	Intense competition

Data Source: Company

Bajaj Auto has a significant presence in the premium motorcycle and three-wheeler segment in the world. Hero MotoCorp dominates the two-wheeler segment with their economy range in India and abroad.

Low revenue and volume growth (CAGR)

Bajaj Auto's revenue has grown at a CAGR of 5.8 % in the last five years (2017-2021). Hero MotoCorp's revenue has declined marginally by 1.4%.

The revenue growth for both the companies was driven by price increases due to regulatory changes such as additional safety features, and BSVI emission norms.

Bajaj Auto vs Hero MotoCorp Revenue Growth (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue (in m)
Bajaj Auto	2,59,789	3,17,021	3,14,432	2,90,231	3,44,465
Hero MotoCorp	3,23,390	3,46,561	2,99,832	3,15,171	3,01,063
Revenue Growth (%)
Bajaj Auto		22%	-0.8%	-7.7%	18.7%
Hero MotoCorp		7.2%	-13.5%	5.1%	-4.5%

Source: Equitymaster

Over the same period, the sales volume growth of Bajaj Auto has also been higher than Hero MotoCorp's growth.

Bajaj Auto's sales volumes have grown at a CAGR of 1.4 % whereas Hero MotoCorp's volumes have seen a de-growth of 8.2 %.

The low growth in revenues and volumes of both companies was due to a dip in industry-wide sales for the past five years.

Demonetisation, higher cost of ownership, the pandemic, and stringent regulatory norms all contributed towards it.

Bajaj Auto vs Hero MotoCorp Sales Volume Growth (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Sales Volume (in lakhs)
Bajaj Auto	40	50	46	40	43
Hero MotoCorp	76	78	64	58	49
Sales Volume Growth (%)
Bajaj Auto		25.3%	-8%	-13.9%	8.3%
Hero MotoCorp		2.6%	-17.9%	-9.4%	-14.8%

Data Source: Annual Reports

Profit margins

Operating profit margin indicates what percentage of the operating revenue is the profits after paying for all operating expenses.

The operating profit margin of Bajaj Auto and Hero MotoCorp has averaged at 18.1 % and 14.5 % for the last five years.

Bajaj Auto vs Hero MotoCorp Profit Margins (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Operating Profit Margin (%)
Bajaj Auto	19.4%	18.2%	17%	17.7%	18.2%
Hero MotoCorp	16.7%	14.8%	16.2%	13.2%	11.7%
Net Profit Margin (%)
Bajaj Auto	15.8%	15.1%	16.3%	16.4%	16.9%
Hero MotoCorp	11.5%	10%	12.4%	9.6%	8.6%

Source: Equitymaster

In terms of net profit margin, Bajaj Auto is again leading with a five-year average net profit of 16.1 %. On the other hand, Hero MotoCorp's five-year average net profit margin stands at 10.4 %.

Note that the profit margins have declined for both the companies over the past five years mainly due to a rise in raw material costs and lower volume growth.

Another reason for low margins is the price cuts undertaken by both companies to gain market share.

Though both companies have been increasing their prices recently, they have reduced prices of their products to gain market share quite a few times in the past five years which affected their margins.

Strategically located manufacturing plants

Bajaj Auto has a total manufacturing capacity of 6.6 m units. Of this, 5.7 m units are for motorcycles while 0.9 m units are for commercial vehicles. This is spread across three manufacturing plants in India.

The company is adding another 1 m units of fresh capacity to manufacture premium motorcycles by opening a new manufacturing plant in Maharashtra.

Hero MotoCorp, on the other hand, has eight manufacturing units out of which six are in India, and one each in Columbia and Bangladesh. It has a total manufacturing capacity of 9.5 m units making it the world's largest two-wheeler manufacturer.

In January 2021, Hero MotoCorp achieved a milestone of 100 m in cumulative production and sales. The company aims to achieve the next 100 m in the next 10 years.

Pre-pandemic, the company had an average capacity utilisation of 72.5% across all plants. Bajaj Auto's capacity utilisation stood at around 75%.

Strong distribution network

Hero MotoCorp has a strong distribution network with over 9,000 dealers and customer touchpoints across the globe.

On the other hand, Bajaj Auto has a network of 485 dealers and 1,600 authorised service centres. For its three-wheeler segment, it has a network of 171 dealers and 3,750 outlets in rural areas.

Dividends

A company distributes its profits to its shareholders in the form of dividends. Dividends can be in the form of cash or stock.

We can use dividend ratios such as dividend payout ratio and dividend yield to compare the dividends of both companies.

The dividend payout ratio determines how much dividend is paid from the earnings, while the dividend yield tells us what percentage of the share price the dividend is.

The higher the ratios, the better.

Bajaj Auto vs Hero MotoCorp Dividend Ratios (2017-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Dividend Payout Ratio (%)
Bajaj Auto	44.2%	37.9%	71%	89%	72.5%
Hero MotoCorp	51.7%	51%	49.6%	70.3%	75.1%
Average Dividend Yield (%)
Bajaj Auto	1.9%	2.1%	4.7%	4.4%	3.8%
Hero MotoCorp	2.6%	2.7%	4%	4.1%	3.6%

Source: Equitymaster

The five-year average dividend payout ratio for Bajaj Auto and Hero MotoCorp stands at 62.9 % and 59.5 % respectively. Both the companies have more or less paid similar dividends to the shareholders in the past five years.

The five-year average dividend yield for both companies is 3.4% .

Inventory days

Inventory days measures the time taken by the company to convert its inventory into sales. The 5-year average inventory days for Bajaj Auto and Hero MotoCorp is 20 and 18 days respectively.

Bajaj Auto vs Hero MotoCorp Inventory Days (2017-2022)

Inventory Days	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Bajaj Auto	16	16	18	28	20
Hero MotoCorp	12	15	20	21	23

Source: Equitymaster

Despite higher volumes, Hero MotoCorp is slightly more efficient in managing its inventory and has a better sales performance than Bajaj Auto.

Debt-free companies

Debt-to-equity ratio measures the extent of leverage a company is using to run its business. The lower the leverage, the stronger is the credit profile of the business.

Both Bajaj Auto and Hero MotoCorp have no major debt obligations.

Low Capex, high cash flows and efficient cash flow management has helped both companies remain debt-free.

Return on capital employed (ROCE)

Return on capital employed measures how much profits the company is generating through its capital. Again, the higher the ratio, the better.

The five-year average ROCE of Bajaj Auto and Hero MotoCorp is 26.1 % and 32.1 % respectively.

Bajaj Auto vs Hero MotoCorp Return on Capital Employed (2017-2022)

ROCE (%)	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Bajaj Auto	27.5%	28.3%	29.3%	21.7%	23.6%
Hero MotoCorp	43.5%	38.4%	32%	25.5%	20.9%

Source: Equitymaster

Hero MotoCorp is generating higher returns for shareholders with respect to the capital employed than Bajaj Auto.

Low valuations

Price to Earnings ratio (P/E) and Price to Book Value (P/BV) are valuation ratios that analysts use to determine whether the stock is undervalued or overvalued.

These ratios can be used to compare two different companies in the same industry or different industries.

The P/E ratio indicates how much an investor is willing to pay for one rupee of earnings. A low P/E ratio indicates they are undervalued stocks.

The P/BV ratio measures the market valuation of a company to its book value. A high P/BV ratio indicates the share is overvalued.

Bajaj Auto and Hero MotoCorp's five-year average P/E ratio stands at 19 and 17.8 respectively. The current P/E of Bajaj Auto is 19 .1 and Hero MotoCorp is 20.7 .

In terms of P/E, the shares of both the companies are priced similarly.

Bajaj Auto vs Hero MotoCorp Valuation Ratios (2021-2022)

	P/BV Ratio	5 year average P/BV	Average P/E Ratio	5 year average PE
Bajaj Auto	3.6	3.7	19.1	19
Hero MotoCorp	3.3	4.2	20.7	17.8

Source: Equitymaster

The five-year average P/B ratio of Bajaj Auto and Hero MotoCorp is 3.7 and 4.2 respectively. The current P/B of both the companies is 3.4 and 3.3 respectively .

Hero MotoCorp's shares are slightly priced higher than Bajaj Auto's shares in terms of the P/B ratio. However, both the companies are trading in a similar range of their five-year average P/E and P/B.

Sustainability efforts

The automobile industry is one of the major contributors to environmental pollution.

It is important that the companies in this industry take precautions to reduce their carbon footprint and conserve resources.

Both Bajaj Auto and Hero MotoCorp are adopting practices to conserve energy and resources. Bajaj Auto has already announced its entry into the electric vehicle space last year with its signature brand Chetak.

Hero MotoCorp is all set to enter the electric vehicle space and will launch its first electric scooter in March 2022. The company has partnered with Ather Energy and Gogoro to adopt their technologies in its electric scooters.

It has also achieved green manufacturing in two of its facilities and through its 'Happy Earth' program, it aims to protect, conserve, and optimally use the earth's resources.

Future Prospects

Though India is home to one of the largest two-wheeler manufacturers in the world, the penetration of motorcycles and scooters is low at 110 per 1,000 individuals.

This is lesser than the average in Southeast Asian countries which is 240 per 1,000 individuals. Hence India has a lot of untapped potential in the two-wheeler market.

Even before the pandemic, sales in the two-wheeler segment fell due to higher regulations. Compulsory insurance, rigorous breaking norms, and stringent mission norms increased the cost of ownership which resulted in a decline in sales.

However, once the lockdown restrictions were eased, the demand in the sector picked up swiftly. But the growth was slightly curbed by the shortage of semiconductors impacting the sales of both the companies.

Going forward, the need for personal mobility, the growth of e-commerce start-ups, and an increase in the standard of living, is expected to drive the demand for two-wheelers.

Both companies are investing towards capturing this rise in demand by introducing new models and investing in capex.

With electric vehicles (EV) being the next big opportunity, they have also announced their entry into the EV space.

Bajaj Auto relaunched its iconic model, Chetak, in EV version. It sold 8,817 units in financial year 2022 through two locations and is working on increasing its touchpoints in FY 2023.

In addition to this, to increase the sales volume Bajaj Auto has gone one step ahead and is planning to set up a non-banking financial corporation (NBFC) for automobile financing. It is also investing in strengthening its relationship with its current financers.

Hero MotoCorp, on the other hand, is aiming at strengthening its focus on premium motorcycles. The company has recently partnered to develop and sell Harley Davidsons motorcycles in India.

It is following a three pronged approach for its EV segment by building a product portfolio, developing it, and lastly collaborating with external entities.

Hero MotoCorp has also announced its first electric scooter with a brand name 'Vida' for personal and mass transit which will launch in the upcoming festive season.

Which is better?

Bajaj Auto is leading in terms of revenue and volume growth over Hero MotoCorp. It also has an upper hand with respect to margins, both operating profit and net profit.

However, in terms of operational efficiency and returns for shareholders, Hero MotoCorp is leading the race.

While Bajaj has clear leadership in the three-wheeler segment, Hero MotoCorp enjoys leadership in the economy scooters segment.

Despite the differences in these fundamentally strong stocks, both have almost similar dividend payout ratios and dividend yields. Also, the companies seem to be priced similarly with hardly any gap in their valuation.

Before you take the leap and pick the best multibagger stocks in 2022 , go through the fundamentals and valuations of both companies as suggest by the top investing gurus of India. It will aid in your decision-making process.

Still confused which is better?

Use our feature-rich comparison tool which draws a detailed comparison between any two companies. This tool also includes a graphical analysis making it easy for you to see trends!

Bajaj Auto vs Hero MotoCorp

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For a detailed analysis, check out the Bajaj Auto factsheet and Hero MotoCorp factsheet.

You can also check out the latest quarterly results for Bajaj Auto and Hero MotoCorp.

Since stocks from the automobiles sector and electric vehicles interest you, check out Equitymaster's powerful Indian stock screener tool to find the top automobile companies in India.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...