Hero MotoCorp Ltd’s journey has been tough compared to peers mainly due to its huge presence in the entry-level two-wheeler (2W) segment, which along with cost inflation had made matters worse after the coronavirus outbreak. Not surprisingly, Hero’s stock has underperformed. Shares of Bajaj Auto Ltd and TVS Motor Co Ltd have gained nearly 17% and 20% respectively in CY22 so far in CY22, while Hero’s stock has gained a slower 5%.
A major catalyst for the stock will be continued growth in volumes. Hero saw a 16% sequential growth in 2W volumes in May. Improvement in rural sentiments and wedding season is indicating an improvement in demand. In addition, a reduction in taxes on fuel signals well-being and reduces the total cost of ownership.
see full image
Hero management at the Nomura Investment Forum said monthly retail sales have improved over the past few months. Dealer inventory has declined from about eight weeks at the end of March to less than six weeks in May. In FY23, it expects to see double-digit growth in volumes. Note that volumes were down about 15% to over 4.9 million units in FY22.
While the 2W manufacturer is seeing good momentum in the export markets, the ongoing crisis in Sri Lanka has turned the demand unfavourable. In the recent investor conference week organized by Nirmal Bang Equities, Hero indicated that it aspires to achieve a run-rate of over 1 million units in the export markets over the long term. In FY22, the export volume stood at 300,624 units.
It also aims to expand into the premium segment. “The company’s focus on improving product mix, led by an increasing share of exports and premiumization of products, will improve margins. We are expected to factor in margin expansion of 150 basis points over the next two years,” Varun Baksi, analyst at Nirmal Bang Equities, said in a report on June 6. One basis point is 0.01%. In FY22, the company’s standalone EBITDA (interest) (earnings before taxes, depreciation and amortization) margin stood at 11.5%. However, there are near-term concerns. Demand is improving, but supply chain constraints are limiting production. In May, the company’s production was hit to the extent of 30,000 units.However, this situation is expected to subside.
Meanwhile, the company is planning to unveil its first electric vehicle (EV) in the upcoming festive season instead of July due to supply chain concerns. Its peers have already launched their EVs. To be sure, Hero has a notable presence in the EV segment as it invests in Ather Energy and has a joint venture with Gogoro Inc. for battery swapping. Still, the delay in the EV launch has dented investor sentiments with Hero shares falling 6% since the announcement.