Hero MotoCorp Ltd: BUY CMP : 2771
TARGET PRICE: 3301
TARGET RET: 19.16%
TARGET PERIOD: 12 -15 MONTHS
Stock Analysis Report | NSE Ticker: HEROMOTOCO | Recommendation Aug 1, 2021
OVERVIEW
Hero MotoCorp Limited (formally Hero Honda Motors Limited) is the world’s largest manufacturer of two-wheelers. It is present
Business in South Asia, Africa, Middle East, and Latin America. Hero MotoCorp was the first Indian two-wheeler company to establish a
manufacturing plant in Latin America. Its key products include two wheelers up to 350cc and spare parts.
Overview It is the dominant market leader in India – the world's largest two-wheeler market – with over 50% share in the domestic
motorcycle market.
Start of retail operations in Mexico with popular motorcycles such as the Xpulse 200, Xpulse 200T, Hunk 190, Hunk 160R,
Key Events Hunk 150, Eco 150 TR etc. | Launch of Maestro edge and glamour’ XTEC’ | Payment of Final and Special Dividend @ INR 25
and 10 per share respectively | Achieving unique milestone of crossing 100 million units in cumulative production and sales.
INVESTMENT RATIONALE
Key beneficiary of demand recovery:
Hero is well placed to benefit from the demand revival post Covid 2.0 in light of rural Indicators & Analyst View
economic recovery, and enhanced need for personal mobility over the shared mobility.
While the rural economy was well-insulated from the first Covid-19 wave last year, it Financial Trend
witnessed a higher adverse impact of COVID 2.0.
Renewed focus on Premium Motorcycles and Scooters: Quality
Hero has aggressively launched a slew of products in the scooters and premium bikes Valuation
segments over the past two years. Over two years, the company has strengthened its
portfolio by launching three new models in the scooters segment, viz. Destini 125, Street Sentiment
Pleasure+ 110, and Maestro Edge 125. 15
Strong focus on EVs:
Hero has undertaken several initiatives to strengthen its position in the emerging EV
segment and has announced a three-pronged strategy to meet this objective. While on- 10
ground presence currently is limited to the company’s ~35% stake in leading electric
scooter maker Ather Energy, it is now working on introducing its own offering (under
fixed charging) during FY22. The recent tie-up with Taiwan’s Gogoro Network which Analyst Position
5
uses swappable battery technology will further aid Hero’s EV penetration.
Margins: 0
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HMCL’s Q4FY21 margins surprised positively. The company has displayed admirable
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resilience on the blended margins front in the past two quarters despite steep
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commodity cost inflation (~6-7% yoy in FY21) via a mix of price hikes (400 bps) and
sizeable cost savings under the LEAP-2 programme (300 bps savings).
FUNDAMEMTAL ANALYSIS
Higher Realization per bike
One of the factors that pushed Hero MotoCorp’s profitability this quarter was the higher
realisation per unit. The company was successfully able to pass on the higher input costs to
the customers. On average, realisations moved up by 15.4% to Rs 55,386 on every bike.
Additionally, increased sales volume on spare parts also lent extra support to the margins.
Higher EBIDTA through cost reduction
HMCL reported an EBITDA of Rs 1,211 crores (growth of 84% yoy). EBITDA margin came
in at 13.9% led by higher gross margins, robust sales volume during the quarter, and a
combination of key strategic initiatives such as cost reduction efforts to partially offset the
impact of the commodity costs. The company reported PAT of Rs 865 crores, up 39% yoy
over Rs 621 crores in Q4FY20.
Rural decline, Higher exports
Purchases in rural areas which were still healthy during the first lockdown have stalled
during the second wave’s lockdown. We expect a 10-15% sales volume growth in the
domestic market in FY22. We forecast a whopping 70-80% growth for the exports segment.
As things stand, exports currently account for 3% of the cumulative sales volume.
Revival in Demand
We foresee the demand returning gradually from June onwards, with Q2FY22E set to
benefit from underlying demand drivers in the form of normal monsoons, high crop
production levels, need for personal mobility and increase in economic activity levels
RISK METRICS
Economic Risk | Covid impact and Economic Uncertainty
ER 1 Decline in demand due to lockdowns, decline in sales and impact on EBITDA margins
due to Covid will foster negative sentiments.
Operational Risk | Production Disruption
OR 1 Producers are struggling to ramp up manufacturing due to disruption in supply chain
network. Increased inspection of parts from China has added to production woes.
Environmental Risk | Rising pollution and depleting AQI
EV 1 Public transport and shared mobility taking over private modes of transportation primarily
two wheelers. Prolonged exposure to poor air can lead to several ailments.
Social Risk | Diseased workforce and pandemic fears
SR 1 Labour challenges are causing the workforce to stay away from work for long periods.
Fear of pandemic has lead to reduced customer demands.
VALUATION
TARGET PRICE : TARGET P/E(X) 18.3 X 180.397 INR (FY 22F) INR 3301.2651
We expect Hero to continue its dominancy in the two-wheeler industry,
driven by benefits from the premiumisation of its products, a strong foothold
in the economy and executive motorcycle segments, and aggressive
products offerings in the premium bikes and scooters segments. Its
partnership with Ather Energy and Harley Davidson will help HMCL increase
its presence in new technology and premium segment bikes.
The company’s EPS is estimated to grow at 17.97 % CAGR over the next
FY21- 23. We have valued the stock at TTM P/E at 18.3(x) for the FY-2021-
22. The TTM P/E as on 01 August, 2021 is valued at 18.3(x). Based on this
information and FY22F EPS of INR 180.397 , we have arrived at the target
price of INR 3301 for the stock. This represents an upside of 19.12% from
the current market price of INR 2771.
Peer Review
Relative Performance
Shareholding Pattern
Summary: Overall we are bullish on Hero MotoCorp
Analysts: Rahul Malhotra | Anirudh Kansal
BSE SENSEX HERO MOTOCORP
