The current market weakness provides a great opportunity for investors to enter a fundamentally strong business available at a reasonable price and run by a strong management
The automotive sector as a whole has been reeling under multiple blows on the back of higher motor fuel prices, increase in interest rates, compulsory long term insurance prices, lower rainfall, delayed festive season and after-effects of Kerala floods. These factors have led to lower monthly sales volumes for many auto majors leading to significant weakness in stock prices. This, however, provides a great opportunity for investors to enter a fundamentally strong business available at a reasonable price and run by a strong management. One such company is Hero MotoCorp (HMCL) which should be part of investors’ long-term portfolio.
We exude confidence in HMCL on back of the following factors:
Dominant position; strong brandHMCL is a formidable player in the 100/110cc segment and continues to maintain market leadership. Its domestic motorcycle market share remains strong at 51.2 percent on the back of its strong distribution network and brand recall. The management expects to achieve volume growth in this segment, which should be better than the industry’s growth rate on the back of uplifting rural sentiments, market share gains and network reach.Continued focus on brand building
In light of the price action taken by the competitor in entry-level bike segment to capture market share, the management said it will not buy market share and rather focus on brand building and products to gain incremental share. It said discounting has been going on for more than a year. Despite that, the company has been able to expand its market share in the entry-level segment to 60 percent in FY18 from 55 percent in FY17. This shows the management’s confidence in its products and brand.
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The company missed the opportunity present in the fast growing premium bike segment. After recognising that fact, it has started reworking its product strategy. It unveiled two 200cc motorcycles –XPulse and Xtreme 200R - in Auto Expo 2018. Sales of Xtreme 200R pan India marks HMCL’s entry into the premium bike segment. In terms of price point, it the most affordable bike in this engine displacement segment. In the 125cc segment, the company launched new Passion PRO, Passion XPRO and Super Splendor to strengthen its leadership in the 100-125cc motorcycle segments.
It has forayed into high growth 125cc scooter market by launching Maestro Edge 125 and Duet 125 at the Auto Expo as it believes that the next leg of growth in the scooter segment is expected to accrue from this segment.
Focus on exportsThe management is focusing on exports and plans to expand its presence in fast growing markets of Sri Lanka, Bangladesh and Nepal. It commenced production at its second global manufacturing facility in Bangladesh in May last year and was able to garner retail level market share of around 30 percent. It has chalked out plans to grow its exports by entering new market such as Mexico, launching new products and brand building through various marketing activities. They see positive momentum in many countries going forward and plans to expand to 50 countries by 2020 from the current 35 countries.Focus on electric vehicles
HMCL has been focusing on electric vehicles (EVs) and has invested Rs 201 crore to acquire 30 percent equity in Ather Energy, a start-up, to build EV scooters. The management said Ather will start retailing its smart electric scooter S340 soon.Expansion plans are on track
The management has earmarked Rs 2,500 crore, to be spent over two years, for capacity expansion, technology upgradation and digitisation. The company has commenced construction of its eighth manufacturing facility in Chittoor, Andhra Pradesh and has started commercial production at its second manufacturing facility outside India, in Bangladesh.Strong financial performance
The company has been doing well in terms of its financial performance and is a debt-free and cash rich. Given the size of the business, net sales have seen a compounded annual growth rate of 6 percent over FY14-18. Earnings before interest, depreciation, tax and amortisation (EBITDA), however, has grown at 11 percent over the same period. Its EBITDA margin average stands around 14.9 percent over the same period.
Free cash flow has been growing at a compounded annual rate of 12 percent over FY14-18.
In terms of return ratios, the company has been able to deliver very strong returns to its investors. Its return on net worth (RoNW) and return on capital employed (RoCE) averages around 36.6 percent and 50 percent over FY14-18, repectively.
