New Delhi, Dec 8 Domestic two wheeler companies valuations trade significantly above the long-term average multiples, says a report by Kotak Institutional Equities.
“Hero MotoCorp, Bajaj Auto and TVS Motors are trading 1 STD above the long-term price-to-earnings multiple. We believe these multiples are expensive as (1) re-rating in multiples for the companies are not commensurate with the long-term growth prospects of the domestic industry, given high penetration levels and (2) pick-up in electrification, which will result in increased competitive intensity and weigh on profitability," the report said.
“Our reverse DCF analysis on domestic listed 2W players (Bajaj Auto, Eicher Motors, Hero MotoCorp and TVS Motors) yielded a combined market share of more than 90 per cent to justify the current market price of respective companies, implying a negligible market share for Japanese OEMs and other new age OEMs in the EV segment," the report said.
The implied market share of Bajaj, Eicher, Hero, and TVS Motors in the domestic 2W industry is 16 per cent, 7.5 per cent, 35 per cent and 34.5 per cent, respectively. However, on the contrary, unlisted 2W OEMs enjoy a market share of 34 per cent, dominated by the Japanese trio (Honda, Suzuki and Yamaha). We also believe it is extremely unlikely for companies to reach such a high market share, given the (1) growing competitive intensity, with new launches across segments and (2) swift transition to electric vehicles, where select new-age OEMs are making in-roads, with multiple product offerings.
Citing ‘irrational exuberance', the report said, “We expect the domestic 2W segment’s demand to grow by a high single-digit CAGR over FY2023-26E, led by the replacement segment’s recovery and pick-up in the electrification trend. However, our long-term growth expectations remain moderate at a mid-single-digit CAGR, given high penetration levels."
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