Hero MotoCorp set for a smooth ride
PremiumRural recovery will benefit Hero as it has a strong distribution network in rural and semi-urban areas
Hero MotoCorp Ltd has been on a rocky path for some time now. The two-wheeler (2W) company operates primarily in the <125cc (cubic centimetres) segment (mostly entry- and executive-level vehicles). These categories have faced the most heat as rising inflation and dull rural demand weighed on motorcycle sales. Plus, soaring fuel prices mean a rise in the cost of ownership of vehicles.
Unsurprisingly, Hero’s shares have declined by 19.5% in the past one year, sharply underperforming the Nifty Auto index, which rose by 12.7%.
View Full Image
“Consensus (FY23 and FY24) indicates strong revenue growth and margin recovery for Hero MotoCorp," said an analyst requesting anonymity. “However, this is unlikely to play out as steep price hikes would impact demand," the analyst said.
For the March quarter (Q4FY22), Hero’s sales volumes fell 24% year-on-year. FY23 is expected to begin well. The low base of Q1FY22 because of the second covid wave should aid growth in Q1FY23. After that, though, volume growth trajectory can be expected to normalise.
Even so, there is hope that the 2W segment can see a rebound. The rural economy would recover with a timely monsoon, and in turn, boost rural incomes, analysts hope. “Hero is likely to be the key beneficiary because of its strong and deep-rooted distribution network in rural and semi-urban areas in the country," noted analysts at Sharekhan Ltd in a report on 19 April.
Also, the opening of colleges and offices would drive demand for 2Ws as they have become a preferred medium of transport because of the pandemic. “Entry and executive segments in motorcycles are seeing good recovery in enquiries," said Varun Baxi, analyst at Nirmal Bang Equities in a report on 19 April based on channel checks.
Besides, sales from exports may surprise, enhancing profit margins. In FY22, the company’s exports grew by nearly 57% year-on-year, while domestic sales fell by 17%. True, the share of exports now at 6% is small for Hero.
Hero is expected to launch its electric vehicle (EV), Vida, in July. Dispatches are likely to begin later in the year. The EV is expected to be in the affordable segment, said the Nirmal Bang report. Peers Bajaj Auto and TVS Motor Co. have already launched their EVs. Further, Hero has invested in Ather Energy and is in a joint venture with Gogoro Inc. for battery swapping.
MINT PREMIUM See All
Meanwhile, the steep underperformance of the stock has rendered valuations undemanding. Plus, the dividend yield is attractive. Bloomberg data shows Hero MotoCorp trades at 12 times estimated earnings for FY24. In comparison, Bajaj Auto and TVS Motor trade at 16 times and 20 times respectively.