Hero had a decent Q3, but road ahead may not be as smooth

Investors remain upbeat about Hero MotoCorp given the recovery in entry-level demand for two-wheelers and the company's new vehicles.
Investors remain upbeat about Hero MotoCorp given the recovery in entry-level demand for two-wheelers and the company's new vehicles.


Hero's market share remains a pressing worry, especially as it primarily operates in the entry-level segment amidst an ongoing premiumisation trend

Hero MotoCorp Ltd’s shares hit a 52-week high of 4,949.05 apiece in early trading hours on Monday, but proceeded to close nearly 5% lower with broader markets remaining weak. While the two-wheeler maker’s December-quarter (Q3FY24) results were decent, the road ahead appears anything but smooth.

In Q3, a sequential volume growth of 3% coupled with flat average selling price meant a 3% rise in operating revenue to 9,724 crore. While Hero’s gross margin expanded by 130 basis points sequentially to 32.7%, the benefit was curbed at the operating profit level due to higher marketing expenses for its electric vehicles.


The impact on the Ebitda margin was to the tune of 200 basis points, leading to a sequential drop of 10 basis points in the parameter to 14%. In contrast, Bajaj Auto Ltd and TVS Motor Co. Ltd saw a sequential uptick in Q3 Ebitda margins, albeit slightly.

For FY24, Hero expects the impact on margin due to EV business-related costs to be in the range of 125-150 basis points. However, stable commodity costs and premiumisation would support profitability.

Having said that, the pressing worry continues to be Hero’s market share. The company primarily operates in the entry-level segment and the ongoing premiumisation trend has had a bearing.

In Q3, Hero’s market share in domestic motorcycles stood at 41.6%, down from 50.4% in Q4FY23,even after a slew of launches in this financial year, according to Antique Stock Broking.

Some of Hero’s new bikes, including premium vehicles such as Karizma XMR and Harley Davidson X440, bolster its overall portfolio.But to what extent can these help in regaining the lost market share with competition intensifying?

Notably, not all of Hero’s launches are bearing fruit. HDFC Securities notes that the Xtreme 160R, one of the new launches by Hero in the premium segment, failed to make any significant impact.

“Despite Hero maintaining a healthy launch pipeline largely focused on the 125cc and above segments, we expect it will not lead to substantial share recovery, given its patchy track record of new launches in these segments," HDFC said in its report.

Sure, an uptick in entry-level demand, where signs of revival are being noticed, would aid Hero’s market share. Hero noted in its Q3 earnings call that rural inquiries are currently at 50-55% of total inquiries, versus 40% earlier. But whether this translates into volume growth remains to be seen.

Based on interactions with dealers, Antique expects /a positive momentum in rural areas, especially in the north and central markets. “We are quite positive the momentum will continue as we believe replacement demand has started to recover," Antique said in its report.

On the electric vehicle front, Hero plans to launch a mass-market electric scooter (priced at about 1 lakh) and a mid-segment electric scooter (priced at about 1.25 lakh) in the April-June quarter. It is ramping up capacities to scale up faster in FY25. As of now, Hero continues to lag Bajaj Auto Ltd and TVS Motor Co. in terms of market share.

But investors have little to crib about. Hero’s shares have gained 81.5% over the past year. Recovery in entry-level demand and new launches worked in favour of investor sentiment.

But given this rally, significant upsides hereon appear capped, although it is comforting that Hero’s valuation is reasonable versus its peers. The stock trades at nearly 21 times its FY25 estimated earnings, while Bajaj and TVS trade at 26 times and 37 times, respectively, according to Bloomberg data.

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