HSBC Research, HERO with OW rating (TP INR2,400) and on Bajaj with Neutral rating (TP INR1,745)

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Valuation and risks
 Stocks are trading at valuations in line with historical averages
 We use both DCF and relative valuation methodologies to value
the companies
 Initiate on HERO with OW rating (TP INR2,400) and on Bajaj with
Neutral rating (TP INR1,745)



Hero MotoCorp
 HERO seems better placed for FY13/14, due to higher rural
presence, scooters exposure and stronger margin levers
 The company faces an uphill task to develop in-house R&D, and
results are likely to be visible only beyond FY13
 Initiate on HERO with OW and TP of INR2,400; dividend yield of
4.2% is another key attraction


Notwithstanding the risks from the split with
Honda, we believe Hero MotoCorp (HERO) is
in a better position to face slowing market growth
and rising competition, at least for the next
few quarters.
HERO has a strong rural presence (45-46% of
sales from rural India in 2Q12, up from 38% in
1Q09). Rising rural income (both agrarian and
non-agrarian) should continue to support sales
growth. Additionally, even if it is not the market
leader in the scooters market, the company is
likely to benefit from the strong growth in the
scooters market, aided by the launch of
“Maestro”. Overall, thanks to growth in the
scooters market, a strong rural presence and lower
dependence on exports, we believe competitive
risks for HERO from Honda are equal or lower
than for Bajaj.
In terms of margins, HERO saw additional sales
and marketing expenditure (relating to rebranding)
and higher royalty payments in FY12.
The company is likely to face margin tailwinds on
both these fronts in FY13. Tax breaks on the
Haridwar facility should also last one year more
than on the Pantnagar facility of Bajaj.






Bajaj Auto
 Robust sales and 30% earnings CAGRs for FY10-12e made Bajaj
one of the best performing auto stocks in the past two years
 However, moderating industry growth may hit Bajaj the most; margin
growth seems unlikely as well
 Initiate with Neutral rating and TP of INR1,745; we like its defensive
business, but see limited upside in the stock at the current level
The operational performance of Bajaj, both in
terms of new growth and margins, has been
noteworthy in the past few years. Its share price
performance has mirrored this strong operational
record, with 135% absolute and 55% relative
returns in the last two years.
We believe the industry cycle has peaked and is
likely to grow at a moderate pace in 2012. In such a
scenario – with industry growth off the peak, slower
growth in the premium market (Bajaj’s core
strength) and an increase in competition from Honda
in the premium segment – the stock is likely to
remain range-bound at best, in our view.
Furthermore, margins are likely to remain stable at
most, compared to HERO where margins could
expand resulting in stronger earnings growth.
The stock is currently trading at a PE of 15x our
FY13e EPS. We believe the defensive nature of the
business and expected upside from the launch of the
new Pulsar model might keep “hopium” levels high
in the near term, but we don’t see any material
absolute upside on a one-year investment horizon.
Based on our valuation, we initiate coverage on
the stock with a Neutral rating and recommend
investors to wait for a stock correction to become
more constructive.