Bajaj Auto races ahead of Hero on bourses

The m-cap gap is widest despite Hero’s better sales and volumes

Bajaj Auto is yet to dislodge Hero Motocorp from the pole position in the Indian two-wheeler market. The Punebased automaker sold 3.97 million vehicles in FY21 against Hero Motocorp’s 5.8 million units. The number for Bajaj Auto includes three-wheelers, unlike Hero that only sells motorcycles and scooters.

Despite being relatively small in terms of revenues and sales volumes, Bajaj Auto is miles ahead of its rival on the bourses.

Bajaj Auto ended Friday with a market capitalisation of ~1.12 trillion, nearly double the Hero Motocorp's m-cap of ~57,000 crore. This is the biggest gap the m-cap of the two companies ever since Bajaj Auto first overtook its rival in value terms in July 2010. In contrast, Hero's net sales of around ~31,000 crore in FY21 was 14 per cent higher than Bajaj's.

And there is no sign of the gap closing anytime soon. Bajaj Auto mcap is up 34 per cent in the past six months, against just a 2 per cent rise in Hero Motocorp. Hero continues to lag its rival despite its better sales performance. Hero Motocorp sales volumes were down 9.3 per cent in FY21, against a 13.9 per cent decline reported by Bajaj Auto.

Analysts attribute Bajaj superior performance on the bourses to its higher headline profit and superior margin. The Pune automaker generates more profit for every rupee of revenues, compared to its Delhibased rival. “Premiumisation continues to be the key strategy for Bajaj Auto. This is reflected in the market share gain in the 125cc segment with Pulsar 125cc (19 per cent in Q4FY21 versus 7 per cent in FY20) and the rising share of 110cc and disc brake & electric start variants in the entry segment,” write Chirag Shah of Edelweiss Securities.

Bajaj Auto reported a net profit of ~4,857 crore in FY21, nearly 66 per cent higher than Hero Moto's ~2,918 crore. This is primarily due to Bajaj’s superior margin. The company reported an Ebitda margin (including other income) of 22.1 per cent in FY21 against Hero's 14.6 per cent.

Analysts also highlight that Bajaj Auto revenues and profits have grown at a faster clip in the last five years than its rival. Bajaj’s net sales have grown at a compound annual rate (CAGR) of 4.1 per cent in five years, against a 1.9 per cent CAGR reported by Hero.

“We expect pressure on Hero’s volume trajectory and expect it to underperform its peers in the near term in segments like scooters, premium motorcycles, and export markets. We believe that any meaningful progress on these fronts will only be visible in the medium term”, write analysts at Nirmal Bang Securities.

Another big reason for Bajaj's higher earnings and market capitalisation is a much greater contribution from other income compared to Hero. Bajaj Auto reported other income of ~2,323 crore in FY21, accounting for nearly 35 per cent of its earnings. In comparison, Hero Motocorp other income was just ~610 crore in FY21, contributing just 13 per cent to its earnings. But, there is only a small difference in the coreoperating margins of the two companies. This because Bajaj Auto was sitting on cash & liquid investments worth nearly ~20,000 crore at end of March this year, against Hero's cash & equivalent of nearly ~8,000 crore. So, Bajaj Auto is expected to continue to earn much higher profits from investment income than Hero Moto for now.