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2 Wheeler Automobile to Underperform

December 27, 2007

In several research notes on the Indian 2 Wheeler industry, it is observed that the sector will underperform in the near term. In Q3FY08 the environment for the two wheelers was negative. Banks had tightened the credit norms and increased the down payment requirement, which has rendered a large number of potential two wheeler buyers ineligible for obtaining loans. The competitive intensity in the industry has also increased.Total vehicle sales during the quarter are expected to increase by 2.6%.

Bajaja Auto is the only market performer and that to due to the de-merger of Bajaj Allianz Insurance / Finance company. TVS and hero Honda are market underperformers.

Bajaj Auto Ltd:
Bajaj Auto currently trades at 18.1x and 16.3x FY09E and FY10E earnings. As it is one of the strongest player in the sector and its ability to launch new product on the back of it is strong R&D capabilities make it an attractive investment and hence our Accumulate.

Hero Honda:
Hero Honda currently trades at 13.7x and 12.7x FY09E and FY10E earnings. Although Hero Honda has underperformed the market and also de-rated, it still trades above its average historical trading band at a time when earnings growth is set to slow and its competitive position is weakening. Bajaj has considerably narrowed the technology gap with Hero Honda and poses a serious threat to Hero Honda’s dominance in the executive segment. Avoid Hero Honda.

TVS Motors:
Its low single digit margins make earnings very sensitive to a change in margins. Any reasonable improvement in margins will provide a trading opportunity – but the timing is hard to predict. However, it is the weakest players in the segment and there is little to suggest that it will improve its position. AVOID any fresh Investments, HOLD if you have already invested.

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