Bajaj Auto, TVS, Eicher Motors, Hero downgraded by CLSA after 20-30% rally in three months

Brokerage firm CLSA has downgraded two-wheeler manufacturers Bajaj Auto Ltd., Eicher Motors Ltd., and Hero Moto Corp Ltd. after shares of these companies rallied between 20% and 30% over the last three months.

The brokerage said that the upside in these stocks has reduced due to the recent rally and hence the downgrade. CLSA has also turned cautious on these stocks as valuations are pricing in double-digit volume growth over the next few years.

Over the last three months, the Nifty Auto index gained 11.6%, whereas Bajaj Auto and TVS Motor were up 30% each.

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Bajaj Auto: Downgraded to "underperform" from "outperform"

Eicher Motors: Downgrade to "underperform" from "buy"

Hero MotoCorp: Downgrade to "outperform" from "buy"

TVS Motor: Maintain "Sell"

CLSA believes that the margins in electric two-wheelers are likely to remain challenging in the near term as all original equipment manufacturers (OEMs) plan to launch more affordable electric scooters.

TVS, Hero and Bajaj Auto have also highlighted that they are planning to launch more affordable electric scooters next year, although CLSA believes that it could be dilutive for margins.

"We expect two-wheeler industry volumes to grow at a 10% Compounded Annual Growth Rate between the financial year 2023 and 2025," the note said.

The brokerage is also anticipating the share of premium motorcycles to increase from 22.6% in 2023 to 26.8% in 2026, which will help OEMs improve their net realisations.

"Within the premium motorcycle segment, CLSA expects the more than 250cc segment to gain further market share due to new launches.

CLSA has downgraded Bajaj Auto as it believes that the stock is fairly valued. The downgrade from Eicher is due to the assumption that new competitors will gain market share from Royal Enfield.

The sharp rally in shares of Hero has prompted the downgrade from CLSA but the brokerage has increased its volume estimates in the premium motorcycle and electric scooter segments. Just last week, Hero MotoCorp received a double upgrade from BofA Securities.