Several domestic brokerage firms have remained bullish on Hero Motocorp despite the company's June numbers being missed by their estimates.
The company reported sales of 4,45,580 units in July 2022, compared to 4,54,398 in July 2021, which is 2% down. The exports fell by 41% to 14,896 units in July 2022. while domestic sales increased marginally to 430,684 units.
The high raw material costs harmed the company's operating margins. The company has raised prices several times to offset RM costs. It took a price hike of ₹850 per unit in April and ₹1,200 in July. Over the last 6-7 quarters the price increase lagged the RM inflation to balance growth and profitability. With softening of commodity prices, management sees an opportunity to move the price ahead of the cost to recover some of the lost margins, Axis Securities said.
The brokerage firm anticipates that growth will resume as the economy returns to pre-COVID levels. It said Hero Motocorp is a good proxy for a rural market recovery, with its stronghold being the 100cc motorcycle segment. The company’s sustained efforts to expand its footprint in exports, premium bikes, scooters, and EVs are also expected to augur well over the medium term.
Post-pandemic demand levers remain intact, with a rural recovery in sight. Furthermore, the radical shift to personal mobility from shared mobility is expected to aid in the 2W demand moving forward, it said.
Axis Securities said Hero's partnerships with Ather Energy, Gogoro Inc., and Harley Davidson will help it increase its presence in EV and premium segment bikes.
Analysts at Motilal Oswal said that "We are seeing initial signs of a demand recovery in the domestic 2W industry. This, coupled with stable commodity prices, could drive earnings over the next two-to-three years".
Hero Motocorp is poised for a faster recovery over other 2W peers due to its rural-focused portfolio and market leadership in the entry and executive segments, it said.
"We are seeing more traction in its core Executive segment (Splendor and Passion) due to a decrease in the percentage-wise price differential between the Entry and Executive models. Any improvement in its competitive positioning in scooters and the fast-growing premium motorcycle segment will further act as re-rating triggers, "Motilal Oswal added.
The company plans to double its target export market to 40 countries over the next few years, from 20 currently. But HMCL, being one of the last entrants, may find it difficult to compete with Bajaj Auto.
The company has been working on its distribution over the last few years and is concentrating on market-specific products. Recovery in some of these markets, after the recent currency turmoil, works in HMCL’s favor.
On the other hand, Prabhudas Lilladher believes the company will benefit from the rural recovery and festive season demand and success in EV via investment in Ather, in-house mass product (Vida), and JV with Gogoro.
Meanwhile, HDFC Securities anticipates that Hero will regain its lost market share gradually over the next 2-3 years. It said the gradual economic recovery, which would drive consumption from the mid-to-low income consumers will be a key segment for the company.
According to HDFC Securities, HMCL plans to double its market share to 10% in the next three to four years by launching at least one product per year for the next three to four years. Sustained demand for motorcycles, especially from rural regions, is likely to be a key upside trigger for the stock, it added.
For the fiscal quarter ending June 30, Hero Motocorp reported a 71% increase in standalone net profit to ₹625 crore. The company's net profit stood at ₹365.44 crore in the corresponding quarter of the previous fiscal. It's Revenue from operations increased to ₹8,445.5 crore from ₹5,625.7 crore in the year-ago period.
Hero expects two-wheeler demand to be on a healthy trajectory, supported by micro factors like a normal monsoon and the opening up of the economy.
Furthermore, when compared to the Nifty Auto Index, which has increased by 18% this year, Hero Motocorp has only gained 14.97%.
In July 2022, Overall two-wheeler sales stood at 10,09,574 units. According to FADA data, this was an 11% decrease from the 11,33,344 units sold in July 2021.
Outlook
Motilal Oswal is bullish on Hero Motocorp and recommended a 'buy' rating on the stock with a target price of ₹3,225/share. However, it reduced its EPS estimates for FY23/FY24 by 14% and 4%, respectively, to reflect the loss of incentive at the Neemrana plant and higher staff costs.
Domestic brokerage firm Axis Securities also retained a 'buy' rating on the stock with a target price of ₹3,060/share.
Brokerage firm JM Financial also maintained a buy call on the stock with a target price of ₹3,200 as it expects Hero Motocorp to draw support from improving consumer spending, leading to a 14% volume CAGR over FY22-24E.
Further, Prabhudas Lilladher maintained a 'buy' call on the stock with a target price of ₹3,130/share.
An average of 44 analysts polled by MintGenie have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
