Rural focus drives Hero MotoCorp, but inherent risks linger1 min read . Updated: 13 Dec 2018, 01:56 PM IST
A boost in rural demandcourtesy Congress's election wins Rajasthan, Madhya Pradesh and Chhattisgarhhelps Hero MotoCorp but also its competition in Honda and Bajaj
On Wednesday, shares of Hero MotoCorp Ltd rallied nearly 7%, much higher than other two-wheeler firms, which rose about 2-3%. Speculation that the new governments in Madhya Pradesh, Chhattisgarh and Rajasthan will focus on agricultural and rural spends to fulfil electoral promises, was the trigger. Besides, populist measures in the run-up to 2019 Lok Sabha elections may also help, the markets concluded.
True, Hero MotoCorp’s rural exposure is the highest among two-wheeler firms and the three Hindi heartland states have a high rural and farm population. Yet, it is naive to expect fundamentals to change suddenly, more so, considering other concerns have led to the stock’s underperformance in the last several months.
According to brokerage firms, which cut earnings estimates for the company after its September quarter results, Hero MotoCorp’s growth has been stymied by competition, through aggressive pricing and product launches. This was mirrored in the flat year-on-year sales growth in November, as well as in the September quarter, when sales stagnated from the year-before levels. Rising insurance and fuel costs, and an aggressive pricing strategy by Bajaj Auto Ltd also took a toll on Hero MotoCorp sales.
A report by Jefferies India Pvt. Ltd shows a steady drop in Hero MotoCorp’s market share across two-wheeler categories—from 40% in FY15 to 36% so far this fiscal year. No doubt, the company has been riding in top gear in the entry-level segment in domestic markets, where it gobbles up two-thirds of the market share. But, it is the premium motorcycle and scooter segments that has been a tricky ride. The company has lost ground over the last few years, in spite of new launches.
True, the name of the game for Hero MotoCorp is entry-level motorcycles, and a boost in rural demand can help. However, given the stiff competition and pricing pressures, realizations and profitability may be under pressure in the coming quarters, too. Analysts Arya Sen and Ranjeet Jaiswal of Jefferies India trimmed earnings estimates for FY19/20 on account of near-term cost headwinds and structural growth concerns for the company.
The only silver lining that could give a leg-up to profitability is the softening in commodity and crude oil prices from its highs earlier this year. Even so, Hero MotoCorp’s current share price of ₹ 3,248 discounts the FY19 estimated earnings by about 16 times. That is a rich valuation considering the near-term challenges to growth.