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Investors have welcomed Hero MotoCorp Ltd’s decision to raise ex-showroom prices of its motorcycles and scooters from 1 December. The automaker’s shares rose by almost 3% on Monday on NSE. The price hike will range up to 1,500 per model and the quantum of increase will vary depending on the models and markets.

The size of the price hike is small, but it would support margin expansion amid easing commodity cost inflation. “The latest price increase is a nominal one but is the fourth in FY23 and we expect others also to raise prices. This move signals Hero’s bold intent and confidence given that the cost pressures are receding now," said Varun Baxi, an analyst at Nirmal Bang Institutional Equities. In other words, margin tailwinds are there and the price rise would benefit incrementally.

A laggard
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A laggard

In the September quarter (Q2FY23), Hero’s Ebitda margin had fallen by about 120 basis points (bps) year-on-year (y-o-y), while it rose 20bps sequentially to 11.4%. Ebitda is earnings before interest, taxes, depreciation and amortization. One basis point is 0.01%.

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As such, the margin is expected to improve in the coming quarters, but currency headwinds need to be tracked closely as that could be a party pooper. Baxi expects Hero’s Ebitda margin to expand by 230 bps by FY25-end from 11.5% in FY22.

On the demand front, this year’s festive trends were robust for Hero. During the 32-day festive period, the company’s retail sales grew by 20% y-o-y and inventory levels fell to one of the lowest after a festive season.

The overall demand sentiment has remained upbeat in November as well, analysts pointed out. This is encouraging and maintaining the momentum is key.

As such, improvement in rural markets is crucial to Hero’s fortunes. “As much as 75-80% of the company’s products are in the lower-end 75cc-110cc categories, which usually see demand from rural areas," said Aditya Welekar, senior research analyst at Axis Securities Ltd. Hero is missing out on the premiumization trend that has been playing out in the two-wheeler sector, he said.

The K-shaped recovery that the automobile industry has seen, in which demand for the entry-level segment got beaten is one factor that has weighed on sentiments for the Hero stock. In the past year, shares of Hero have underperformed the sectoral index Nifty Auto. “The Street is currently not pricing in the recovery in Hero’s entry segment two-wheeler volume, which can come on the back of improving rural incomes," pointed out Baxi. Replacement demand would act as a trigger for Hero, but Baxi does not expect volumes to touch FY19 levels before FY25.

The company aims to regain lost market share in segment of vehicles above 125cc through new premium model launches over the medium-term.

In the electric vehicle (EV) segment, Hero has been a late entrant. Moreover, its EV product, Vida V1, which was launched in October, is priced at the upper end and this could limit volume growth.

Kotak Institutional Equities expects gradual recovery in Hero’s two-wheeler volumes despite a low base because of deficient monsoon in Uttar Pradesh, which make up a quarter of its domestic volumes, and slowdown in exports. “Also, the company’s inability to gain traction in the scooter and premium motorcycle segments remains a concern," said Kotak analysts in their Q2 results update earlier this month.

In short, Hero’s investors are in for a rocky ride ahead and this may well limit meaningful upsides in the near term. “Unless rural demand sees meaningful revival, we do not expect the stock to showcase outperformance," according to Welekar.

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ABOUT THE AUTHOR

Pallavi Pengonda

Pallavi Pengonda is a financial journalist producing cutting edge commentary and analysis on companies, economy and market trends. Over her journalism career spanning more than 14 years, she has covered topics across sectors such as oil & gas, consumer, aviation and new age tech companies. She heads the Mark to Market team and joined Mint in June 2010. She lives in Bengaluru. She is an art enthusiast and likes to paint in her leisure time.
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