Hero awaits demand revival after tough Q3
PremiumAssociations with Ather Energy and a JV with Gogoro Inc. for battery swapping will benefit Hero MotoCorp
It was a tough ride for Hero MotoCorp Ltd in the December quarter (Q3FY22), given that volumes had fallen by 30% year-on-year (y-o-y). Peers TVS Motor Co. and Bajaj Auto saw 10-11% volume drop. Hero took price hikes but obviously, that wasn’t enough to compensate for the entire volume drop. Net realizations per vehicle rose by 15% y-o-y, restricting the fall in standalone revenues to 19% y-o-y to ₹7,883 crore. TVS and Bajaj saw revenue growth in Q3.
Hero’s earnings before interest, tax, depreciation and amortization (Ebitda) declined by 32% y-o-y. Even so, it performed well on Ebitda margin at 12.2% (at 12.6% in Q2) despite higher commodity costs and supply chain constraints. Higher exports and 15% y-o-y growth in the spare parts business aided margins.
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Some near-term weakness may persist ahead. As the economy gradually opens up, demand can be expected to bounce back. Also, a healthy rabi crop season will generate higher rural cash flows which will, in turn, boost vehicle sales. Margins could benefit further as commodity costs stabilize. Also, the management expects to clock more than ₹1,000 crore quarterly revenue in the spare parts business hereon. Also, export volumes could cross 300,000 units in FY22. In 9MFY22, export volumes were 217,626 units.
Meanwhile, on the electric vehicle (EV) front, Hero MotoCorp is comfortably placed. Associations with Ather Energy and joint venture with Gogoro Inc. for battery swapping will prove beneficial with the shift in industry towards sustainable options. Hero MotoCorp also expects to launch its own EV by March 2022.
Varun Baxi, an analyst at Prabhudas Lilladher said, “The collaboration with Ather is positive for Hero as the former has established its vehicle in the market and there is no concern over the product quality. Also, their in-house vehicle has a good chance of acceptance from customers given their manufacturing and sourcing skills. The vehicle is expected to be in the affordable segment thereby attracting more consumers."
To be sure, Hero MotoCorp’s shares have underperformed its peers in the past one year due to a confluence of factors. For one, the entry level segment, where Hero has a sizeable presence, has seen more disruption than the premium segment. “Also, its peers benefit from the sizeable export volumes compared with Hero’s export volume of only about 5% of total volumes. Further, the company does not have a presence in the high-margin 3W segment as is not the case with Bajaj Auto and TVS Motor," said Mitul Shah, head of research at Reliance Securities Ltd.
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To that extent, valuations are not too demanding. Bloomberg data shows the Hero stock trades at 14.6 times estimated earnings for FY23. Analysts reckon the shares are factoring the pessimism adequately.
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