Ashika Institutional Equity - Two-Wheeler Industry Report by Sakshi Mahant, Ashika Institutional Desk

COVID puts the brakes on premiumisation; entry-level segment back in vogue

Actionable: We continue to recommend a BUY on Hero and initiate our coverage on Bajaj Auto with a Neutral rating for a target price of Rs2,700 and TVS Motor with a SELL for a target price of Rs370.

# Pre-COVID the 2W industry was moving towards premiumisation its course changed due to need based demand benefiting the entry segment and thus it may negatively impact TVS Motor and Bajaj Auto. Underplay on the expectation of strong volume in the festive season and marriage season could lead to production cuts by Dec2020. We expect the industry's growth to bounce back in FY22 after two consecutive years of steep decline as we believe the two-wheeler industry is placed in an advantageous position to gain from the need based personal mobility and increased rural income.

The two-wheeler industry overall had seen a de-growth of ~18% in FY20. FY21 was expected to witness slowdown pre-COVID as well due to the sharp rise in prices (~22%) in the last year. COVID-19 uncertainties and lockdowns accompanied with the increased cost of BS-VI vehicles continue to impact volume as FY21 has witnessed a decline of ~39% YTD. With the down trading of vehicle demand the entry level segment seems to be the biggest beneficiary, we believe Hero MotoCorp may witness higher volumes than its peers. We recommend a BUY on Hero with a target price of Rs3,100. We initiate our coverage on Bajaj Auto with a Neutral rating for a target price of Rs2,700 and TVS Motor with a SELL for a target price of Rs370.

Bajaj Auto

Pandemic takes a toll on premium motorcycles & 3W; recovery some time away

#A weak near-term demand outlook across segments, moreover cautious on exports (the fluctuating crude and currency impact apart from COVID-19) and 3W segment. While we assume H2FY21 looks positive with the gaining momentum, the volumes for Bajaj are ~48% down YTD, we assume a decline of ~23%YoY for FY21 and a growth of ~27%YoY for FY22 on the low base. Sports segment dominance along with high dependence on the Pulsar range to adversely impact Bajaj Auto. 3W volumes hit by the lockdown coupled with the fear of shared mobility. Banks/NBFCs have turned cautious. Exports in the slow lane as the risk of a second wave of COVID-19 infections and exchange rate headwinds looms large. Despite aggressive volume forecasting, we witness margins contracting from its historical levels of ~20% (FY14-18) to ~17% (FY21-22) due to product mix, ROE and ROCE have also declined by ~1000bps from their historical levels to ~19% and ~25%, respectively. We estimate revenue, EBITDA and PAT CAGR of 5%, 10% and 6% respectively. We forecast FY22E EPS of Rs181 and hence assign a P/E multiple of 15x FY22 and arrive at a target price of Rs2,700. We recommend Neutral Rating.

TVS Motor

Optimism priced in; stretched valuations

# The only company which has established premium brands both in the motorcycle as well as scooter segment, we anticipate a weak near-term demand outlook across segments, cautious on exports and 3W segment. We believe scooters and mopeds might underperform the two-wheeler (2W) industry due to a sharp increase in prices in the BS-6 models. Scooters to recover gradually as urban areas are the worst hit by the virus. Three wheelers (3Ws) and exports are also expected to see muted recovery in demand owing to the Covid-19-led disruptions and macroeconomic headwinds. Sequential market share losses due to weak entry-level portfolio coupled with marginal rural presence to hurt TVSL. Rising competitive intensity in premium segment to test TVSL's ability to defend market share. Exports remain uncertain due to second wave of infections and adverse exchange rate movements. With volume CAGR of ~1% for FY21-22 we estimate revenue, EBITDA and PAT CAGR of 5%,12% and 31% respectively, ROE at ~15%, FY22EPS of Rs13. Thus, value it at 28x FY22 and arrive at a target price of Rs370. We recommend to book profits in this stock.

Source : Equity Bulls

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