Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Assuming coverage of India automobiles with a preference for
two-wheelers. Apart from its higher resilience to the current
adverse macro environment, the two-wheeler sector is also less
competitive than passenger cars and its margins are more
predictable. Our earnings estimates on Hero Motocorp are 11%
above and on Maruti they are 20% below consensus.
● Two-wheelers deserve to trade at a premium. Two-wheeler
companies have much better free cash flow generation given their
higher margins and lower capex requirements. The two-wheeler
business is also much more brand-centric. Given their lower
margins, earnings of car companies tend to be more cyclical.
● Hero Motocorp is our key recommendation. We believe Hero
Motocorp would do better than Bajaj Auto as the two companies
are at different stages of their margin cycle. While for Hero
Motocorp margins are at their bottom, Bajaj Auto’s margins have
peaked and would gradually trend lower. We assume coverage of
Hero Motocorp with an OUTPERFORM, Bajaj Auto with a
NEUTRAL and Maruti with an UNDERPERFORM. For full report,
please click here.
Two-wheelers deserve a premium
While two-wheeler stocks have outperformed Maruti by more than
50% over the last two years, we reckon this outperformance is likely to
continue as the market further differentiates between the two business
models. Two-wheeler companies have much better free cash flow
generation given their higher margins and lower capex requirements.
The two-wheeler business is also much more brand-centric and
brands here – though difficult to establish – have a much longer life.
Hence, companies owning these brands need to be attributed a
premium. In an environment of volatile currencies, the fact that twowheelers
have higher local content also makes their margins more
predictable. As such, with lower margins, the earnings sensitivity to
small swings in margins is high for four-wheelers.
Wages in India continue to grow faster than inflation and, with vehicle
prices remaining steady, affordability continues to improve. Given that
penetration levels across categories are low, we believe the structural
story for Indian automobiles remains strong. However, in the current
adverse macro environment of high inflation, high interest rates and
high fuel prices, we need to focus on segments where volume growth
is least impacted by these factors. We prefer two-wheelers as
volumes in this segment should be more resilient given low sensitivity
to interest rates and higher exposure to rural India.
With volume growth likely to remain healthy across categories in the
medium term, investors should choose stocks where margin
performance will likely supplement volume growth to deliver healthy
earnings growth. We differ materially from the street on our margin
assumptions; while we expect Hero Motocorp’s margins to improve,
we expect margins for Maruti Suzuki to continue to drop despite the
sharp decline witnessed in the last two years.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Assuming coverage of India automobiles with a preference for
two-wheelers. Apart from its higher resilience to the current
adverse macro environment, the two-wheeler sector is also less
competitive than passenger cars and its margins are more
predictable. Our earnings estimates on Hero Motocorp are 11%
above and on Maruti they are 20% below consensus.
● Two-wheelers deserve to trade at a premium. Two-wheeler
companies have much better free cash flow generation given their
higher margins and lower capex requirements. The two-wheeler
business is also much more brand-centric. Given their lower
margins, earnings of car companies tend to be more cyclical.
● Hero Motocorp is our key recommendation. We believe Hero
Motocorp would do better than Bajaj Auto as the two companies
are at different stages of their margin cycle. While for Hero
Motocorp margins are at their bottom, Bajaj Auto’s margins have
peaked and would gradually trend lower. We assume coverage of
Hero Motocorp with an OUTPERFORM, Bajaj Auto with a
NEUTRAL and Maruti with an UNDERPERFORM. For full report,
please click here.
Two-wheelers deserve a premium
While two-wheeler stocks have outperformed Maruti by more than
50% over the last two years, we reckon this outperformance is likely to
continue as the market further differentiates between the two business
models. Two-wheeler companies have much better free cash flow
generation given their higher margins and lower capex requirements.
The two-wheeler business is also much more brand-centric and
brands here – though difficult to establish – have a much longer life.
Hence, companies owning these brands need to be attributed a
premium. In an environment of volatile currencies, the fact that twowheelers
have higher local content also makes their margins more
predictable. As such, with lower margins, the earnings sensitivity to
small swings in margins is high for four-wheelers.
Wages in India continue to grow faster than inflation and, with vehicle
prices remaining steady, affordability continues to improve. Given that
penetration levels across categories are low, we believe the structural
story for Indian automobiles remains strong. However, in the current
adverse macro environment of high inflation, high interest rates and
high fuel prices, we need to focus on segments where volume growth
is least impacted by these factors. We prefer two-wheelers as
volumes in this segment should be more resilient given low sensitivity
to interest rates and higher exposure to rural India.
With volume growth likely to remain healthy across categories in the
medium term, investors should choose stocks where margin
performance will likely supplement volume growth to deliver healthy
earnings growth. We differ materially from the street on our margin
assumptions; while we expect Hero Motocorp’s margins to improve,
we expect margins for Maruti Suzuki to continue to drop despite the
sharp decline witnessed in the last two years.
No comments:
Post a Comment