It was a rough ride for Hero MotoCorp Ltd in the December quarter (Q3FY22), given that volumes had declined by 30% year-on-year (y-o-y). Pierce TVS Motor Company and Bajaj Auto saw a drop of 10-11% in volumes. Hero hiked the prices but obviously, it was not enough to make up for the fall in the overall volumes. Net receipts per vehicle increased 15% annually, limiting the decline in standalone revenue to 19% year-over-year. 7,883 crore. TVS and Bajaj saw revenue growth in the third quarter.
Hero’s earnings before interest, taxes, depreciation and amortization (Ebitda) declined 32% year-on-year. Nevertheless, it did well on EBITDA margin of 12.2% (up at 12.6% in Q2) despite higher commodity costs and supply chain constraints. Margins were helped by higher exports and 15% year-on-year growth in spare parts business.
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Some weakness may persist in the near future as well. As the economy gradually opens up, a surge in demand can be expected. Also, a healthy rabi harvest season will lead to higher cash flow to rural areas, which in turn will boost vehicle sales. Margins could benefit further as commodity costs stabilize. Also, management expects to watch more than 1,000 crore quarterly revenue in the spare parts business here. Also, the export volume may cross 300,000 units in FY 2012. In 9MFY22, the export volume was 217,626 units.
Meanwhile, on the electric vehicle (EV) front, Hero MotoCorp has been comfortably placed. Ties up with Ather Energy and Gogoro Inc. for battery swap. The JV with the U.S. will prove beneficial with the shift towards sustainable alternatives in the industry. Hero MotoCorp is also expected to launch its EV by March 2022.
Varun Baxi, an analyst with Prabhudas Lilladher said, “The association with Ather is positive for Hero as the former has established its vehicle in the market and there is no concern over product quality. Also, their in-house vehicle has been Considering their manufacturing and sourcing prowess, there is a good chance of acceptance from the customers. The vehicle is expected to be in the affordable segment which will attract more consumers.”
To be sure, Hero MotoCorp shares have outperformed their peers over the past year due to a confluence of factors. For one, the entry level segment, where Hero has a good presence, has seen more disruption than the premium segment. “Furthermore, Hero’s export volumes benefit from larger export volumes as compared to only 5% of the total volumes of its peers. Also, 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, Reliance Securities Ltd.
To that extent, appraisals are not too demanding. Bloomberg data show Hero’s stock is trading at 14.6 times estimated earnings for FY23. Analysts believe the stock is factoring pessimism enough.
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