PremiumWith Hero MotoCorp Ltd announcing price hikes, effective 1 July, the stock soared 3% in early deals on Wednesday. Hikes will be undertaken across product portfolio and by up to Rs3,000. Rising commodity prices and a resultant pressure on operating margins have been concerns. Prices of aluminum, steel, among others, have seen a continuous rise over the past few months.
"The price hike has been necessitated to partially offset the impact of continuous increase in commodity prices," Hero MotoCorp said. “The company continues to drive cost savings program aggressively, in order to minimise the impact on the customer."
While the move bodes well for the immediate short term, demand recovery remains key. Two-wheeler sales have been under pressure for a while now, especially those of entry-level vehicles, which account for 32% of motorbike volumes, said analysts. Sales volumes in FY21Q4 dipped 15% sequentially to 1.56 million vehicles.
Given the second wave of the pandemic and the spread to rural areas, sales are expected to remain soft in April-June as well. Thus, how demand recovery pans out from FY22Q2 is crucial and will be on investors' radar.
Following FY21Q4 results, analysts at Motilal Oswal Financial Services Ltd had cut their price to earnings multiple to 16 times of March 2023 earnings compared with 18 times earlier, due to volume uncertainty and push for electrical mobility.
Meanwhile, the company is working on premiumisation strategy and scooter sales to boost prospects.
"New e-2W entrants like Ola, Ather, Ampere etc. would be able to price high-speed models competitively led by 8-10x fixed asset-turn for e-2Ws vs 3-4x for petrol 2Ws," said analysts at Ambit Capital Research in their report dated 21 June. This could drive price war and hit the profitability of manufactures such as Hero MotoCorp. The company will be the most vulnerable, with 75% of its EBITDA at risk of price war versus 10% and 5% for TVS and Bajaj Auto Ltd respectively, added analysts at Ambit Capital.
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