Bajaj Auto vs Hero MotoCorp: Which Stock is Better?

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  • Dec 31, 2021 - Bajaj Auto vs Hero MotoCorp: Which Stock is Better?

Bajaj Auto vs Hero MotoCorp: Which Stock is Better?

Dec 31, 2021

Bajaj Auto vs Hero MotoCorp: Which 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 and is 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.

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 which 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 Motorcycles Dominar
Pulsar
Avenger
Platina
CT
Electric Scooters Chetak
Three Wheelers and Quadricycle Maxima
RE
Qute
Motorcycles Xtreme
Xpulse
Splendor
Passion
HF
Glamour
Scooters Pleasure
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 6% in the last five years (2017-2021) while Hero MotoCorp's revenue has grown at a CAGR of 3.3%.

The revenue growth of both 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 (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Revenue (in m)          
Bajaj Auto 216,688 259,789 317,021 314,432 290,231
Hero MotoCorp 267,592 323,390 346,561 299,832 315,171
Revenue Growth (%)          
Bajaj Auto   19.9% 22.0% -0.8% -7.7%
Hero MotoCorp   20.9% 7.2% -13.5% 5.1%
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 1.6% whereas Hero MotoCorp's volumes have seen a de-growth of 2.8%.

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, and stringent regulatory norms all contributed towards it.

Bajaj Auto vs Hero MotoCorp Sales Volume Growth (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Sales Volume (in lakhs)          
Bajaj Auto 37 40 50 46 40
Hero MotoCorp 67 76 78 64 58
Sales Volume Growth (%)          
Bajaj Auto   9.3% 25.3% -8.0% -13.9%
Hero MotoCorp   13.4% 2.6% -17.9% -9.4%
Data Source: Annual Reports

Declining 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 18.8% and 15.7% for the last five years.

Bajaj Auto vs Hero MotoCorp Profit Margins (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Operating Profit Margin (%)          
Bajaj Auto 21.6% 19.4% 18.2% 17.0% 17.7%
Hero MotoCorp 17.4% 16.7% 14.8% 16.2% 13.2%
Net Profit Margin (%)          
Bajaj Auto 18.7% 15.8% 15.1% 16.3% 16.4%
Hero MotoCorp 12.3% 11.5% 10% 12.4% 9.6%
Source: Equitymaster

In terms of net profit margin, Bajaj Auto is leading with a five-year average net profit of 16.5%. On the other hand, Hero MotoCorp's five-year net profit margin stands at 11.2%.

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 6.3 m units. Of this, 5.4 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 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 is the dividend.

The higher the ratios, the better.

Bajaj Auto vs Hero MotoCorp Dividend Ratios (2016-2021)

  2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Dividend Payout Ratio (%)          
Bajaj Auto 41.6% 44.2% 37.9% 71.0% 89.0%
Hero MotoCorp 52.6% 51.7% 51.0% 49.6% 70.3%
Average Dividend Yield (%)          
Bajaj Auto 2.0% 1.9% 2.1% 4.7% 4.4%
Hero MotoCorp 2.6% 2.6% 2.7% 4.0% 4.1%
Source: Equitymaster

The five-year average dividend payout ratio for Bajaj Auto and Hero MotoCorp stands at 56.7% and 55% 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% and 3.2% respectively.

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 287 and 119 days respectively.

Bajaj Auto vs Hero MotoCorp Inventory Days (2016-2021)

Inventory Days 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Bajaj Auto 290 291 259 256 340
Hero MotoCorp 114 116 100 124 141
Source: Equitymaster

Despite higher volumes, Hero MotoCorp is 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 27.3% and 36.6% respectively.

Bajaj Auto vs Hero MotoCorp Return on Capital Employed (2016-2021)

ROCE (%) 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
Bajaj Auto 29.7% 27.5% 28.3% 29.3% 21.7%
Hero MotoCorp 43.7% 43.5% 38.4% 32.0% 25.5%
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 high P/E ratio indicates the shares are trading at a premium.

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 19.3 and 17.7 respectively. The current P/E of Bajaj Auto is 20.1 and Hero MotoCorp is 17.3.

In terms of P/E, Bajaj auto's shares are slightly more expensive when compared to Hero MotoCorp's shares.

Bajaj Auto vs Hero MotoCorp Valuation Ratios (2020-2021)

ROCE (%) P/BV Ratio 5 year average P/BV Average P/E Ratio 5 year average PE
Bajaj Auto 3.4 3.8 20.1 19.3
Hero MotoCorp 3.4 4.8 17.3 17.7
Source: Equitymaster

The five-year average P/B ratio of Bajaj Auto and Hero MotoCorp is 3.8 and 4.8 respectively. The current P/B of both the companies is 3.4.

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.

Impact of Covid

Being a part of the manufacturing sector, the production and sales of Bajaj Auto and Hero MotoCorp were impacted during the lockdown.

Hero MotoCorp's volumes fell by 9.4% during the period while Bajaj Auto's volumes fell by 13.9%.

Hero MotoCorp was the first company to stop manufacturing before lockdown as a precautionary measure. The company adopted a cost optimisation strategy to keep the overhead and other general costs under control during the year.

Once the lockdown restrictions eased, the demand for the company's products picked and during the festive season, the company recovered a part of the lost sales.

For Bajaj Auto, demand picked up soon after the restrictions were eased as it has a dominant presence in the three-wheeler segment. Despite a decline in revenue in the financial year 2021, it achieved the third highest sales in its history.

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.

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.

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 also investing in launching electric vehicles for personal and mass transit.

Equitymaster's view

We reached out to Tanushree Banerjee, Co-head of Research at Equitymaster for her view on both companies. Here's what she had to say...

  • Although the valuations look similar for both the companies, it should be noted that while Bajaj Auto has made record profits over the last one year, Hero Motocorp's profits are at multi-year low.

    Therefore, if Hero Motocorp were to regain its past profitability, there's some upside for the taking there perhaps.

    From a long term perspective though a lot will depend on how the whole EV story pans out and how they deal with this threat that's growing with each passing day.

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 above differences, both companies have almost the same dividend payout ratio and dividend yield. Also, the companies seem to be priced similarly with hardly any gap in their valuation.

Before you take the leap and invest in one stock, go through the fundamentals and valuations of both companies. 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

You can also compare both the companies with their peers.

Bajaj Auto vs Atul Auto

Hero MotoCorp vs Eicher Motor

Bajaj Auto vs Scooters Ind

Hero MotoCorp vs TVS Motors

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 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...

Equitymaster requests your view! Post a comment on "Bajaj Auto vs Hero MotoCorp: Which Stock is Better?". Click here!

  

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