It is going to be a joyous ride for the investors of two-wheeler stocks as the next two financial years are expected to be a turnaround years for the industry. According to Religare Institutional Research, two-wheeler volume growth has bottomed out at a 6.9 per cent annual growth in the past four financial year and is expecting a strong rebound to an 11 per cent CAGR in the next two years due to surge in disposable and farm income, falling ownership costs and rising 2-wheeler penetration amid limited availability of public transport and last mile connectivity.
In the two-wheeler space, share price of Bajaj Auto, Eicher Motors, Hero MotoCorp and TVS Motor Company surged by 64 per cent, 1,268 per cent, 36 per cent and 310 per cent respectively in the past five years. However, the benchmark index Sensex jumped 27 per cent during the same period.
According to market experts, falling prices of major cost components such as steel, aluminium and rubber will also support margins of two-wheeler companies in the next few years. During the previous financial year ended March 2015, consolidated net profit of Bajaj Auto fell 13 per cent year-on-year (yoy) to Rs 2,811.90 crore.
However, net profit of Hero MotoCorp and TVS Motor Company surged 11.52 per cent yoy and 71.35 per cent yoy to Rs 2,348.51 crore and Rs 320.22 crore, respectively.
Religare in a research report said, “Sliding commodity prices coupled with higher capacity utilisation as demand gathers traction should spur margin gains by 260 basis points, 460 basis points and 140 basis points for Hero MotoCorp, Eicher Motors and Bajaj Auto, respectively, over FY15-FY18E. This is an opportune time for investors to accumulate Hero MotoCorp, Eicher Motors and Bajaj Auto shares.”
On January 27, shares of two-wheeler majors Bajaj Auto, TVS Motor Company and Hero MotoCorp were trading at trailing 12-month price-to-earnings ratio of 19.41, 35.55 and 19.20 against industry average of 20.34. The price-to-earnings ratio (P/E) is a valuation method used to compare a company’s current share price to its per-share earnings.
The benefits of a recovery in two-wheeler space could multiply earnings growth for auto ancillary companies. G Chokkalingam, founder and managing director, Equinomics Research, said, “In the present market scenario, I am optimistic on component players like MRF and JK Tyres. However, in the 2-wheeler space TVS is doing good but it is trading at higher valuations. Others continue to suffer from stiff competition from Honda.”
On TVS Motor Company, Karvy Stock Broking in a research note said, “We expect healthy competition in domestic two wheeler amid number of new launches by Bajaj Auto, Honda Motorcycle and Hero MotoCorp over next six months. Therefore, we expect TVS’s volume to remain under pressure and will have margin pressure over coming quarters. Most of the positives on account of new launches are priced in at the current market price. At present we have ‘Hold’ recommendation on TVS with target price of Rs 305.
On January 27, 2016, shares of Hero MotoCorp, TVS Motor, Eicher Motors and Bajaj Auto were at Rs 2482.05, Rs 289.85, Rs 16211.05 and Rs 2301.70, respectively.