Hero MotoCorp needs 125cc to stay in the fast lane

As such, even before the April-June results (Q1FY25), the Hero stock had been on a downward trajectory, losing almost 12% in the past month. Therefore, the negative market reaction might be more about profit booking rather than disappointment with the results, given the stock had gained about 70% over the past year.

Read this | Hero MotoCorp gears up for robust growth led by rich product mix

Moreover, investors can find some solace in the sequential increase in Hero’s retail market share, which rose to 31.1% from 30.7%, according to Vahan data. The company’s vehicle sales value (excluding spare parts) in Q1 grew 17.4% year-on-year to ₹10,144 crore, driven by a 10.3% increase in volume and a 6.4% rise in realization. Although material costs increased in absolute terms, they fell to 67.7% of sales, boosting the gross margin to 32.3% from 30.6%.

While the impact of electric vehicle (EV) sales under the ‘Vida’ brand on gross margin remains unclear, management noted that it reduced the reported Ebitda margin of 14.4% by 200 basis points. Nevertheless, Ebitda margin improved 63 basis points year-on-year and 11 basis points sequentially.

Hero sold about 10,000 Vida units in Q1 fetching it a revenue of ₹125 crore. The EV business reported an Ebitda loss of ₹181 crore. The management believes operating leverage will kick in for EV sales when the units sold at least double from here. That along with cost savings should help the business achieve breakeven.

More here | Slashed subsidies to cause e-two-wheeler sales to ebb

Interestingly, ‘Vida’ competes with Ather Energy, another electric two-wheeler company in which Hero is the largest shareholder with 40% stake. The management’s strategy on managing two competing brands within the group remains unclear.

While Hero has reported its highest ever quarterly revenue and net profit for Q1FY25, its estimated FY25 sales volume of about 6 million would end up being lower than the peak of 7.8 million seen in FY19. 

Q1FY25’s record sales and profit has been achieved because of year-on-year ASP increase and higher Ebitda per vehicle. At peak volume, Hero’s ASP (excluding spare parts) was nearly ₹38,000 and Ebitda per unit was ₹6,300. The same numbers for Q1FY25 stand at ₹58,000 and ₹9,500, respectively.

Going ahead, all eyes will be on the fast-growing premium 125cc segment where the game has achieved a new dimension with Bajaj launching the Freedom bike having dual fuel option of CNG and petrol. 

Although Hero, too, launched Xtreme 125R in February and received encouraging response with over a month of waiting period, the segment is far below the company’s peak level pre-covid sales volume when it was 400,000 units in a quarter, according to an Emkay Global Financial Services report.

Also read | Bajaj Auto vs Hero MotoCorp: Can CNG bikes fuel a new era?

Meanwhile, Hero’s valuation based on Bloomberg consensus net profit for FY25 is the lowest among peers. Based on estimates, the stock trades at 21x versus 31x for Bajaj and 46x for TVS Motor Co. Ltd. The comparison on the price-to-earnings multiple is on standalone numbers. 

However, the valuation argument further tilts in Hero’s favour when considering its stakes in Hero Fincorp and Ather Energy. The value of these stakes, along with cash in books, accounts for 10%-15% of Hero’s total sum-of-the-parts valuation.