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Hero MotoCorp Ltd’s increasing focus to expand in the premium segment is likely to hold it in good stead in the long run. The automaker has launched premium variants, which is the XTEC series across Glamour, Passion, Splendor, and Destini models. The demand for these products is outstripping supply as of now, the company said in the June quarter (Q1FY23) earnings call held last week. This is despite the vehicles being priced 7-10% higher than the base model, reflecting strong demand for them.

Recall that the entry-level two-wheeler segment was the most impacted post the coronavirus outbreak with higher inflation levels adding to the woes. This impacted Hero’s performance sharply owing to its wide presence here. In FY22, the domestic sub-125cc bikes segment formed 86% of Hero’s volumes, according to Jefferies India. On the other hand, the segment constituted about 26-28% of TVS Motor Co. Ltd and Bajaj Auto Ltd’s FY22 volumes.

In the slow lane
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In the slow lane

Predictably, Hero’s shares have remained flat in the past one year, drastically underperforming the Nifty Auto index, which has appreciated by 27%. Sustained volume growth is a primary trigger for the stock and so is the growing presence in the premium segment. Even so, given the strong foothold by its peers in this segment, gaining significant market share immediately would be a tall task.

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Nevertheless, it helps that in the near term, Hero’s current portfolio is not highly vulnerable to the upcoming electric vehicle (EV) disruption. Its core 100cc motorcycle is less prone to the threat from EVs, pointed out Motilal Oswal Financial Services.

However, it is crucial that the company steps up on its EV launches as it is a laggard now. Plus, having an EV exposure would also aid investor sentiments. It expects to launch its maiden EV scooter in the festive season and swappable battery scooter with Gogoro Inc. in FY23. Hero continues to invest in Ather Energy and holds about 35% stake after factoring in full dilution. Further, an increasing share of premium products in the portfolio also means a boost to margins, which underperformed expectations in Q1.

Hero clocked 17% volume growth sequentially, driven by the marriage season. However, net realization fell by 3% due to a lower share of spare parts sales and expiry of incentives at Neemrana plant. Further, elevated commodity costs meant Ebitda margin stood at 11.2%, flat sequentially. Ebitda came in at 941 crore, missing analysts’ estimates. Recall that peers TVS and Bajaj Auto had fared better on the Ebitda front.

Going ahead, softening commodity costs would boost Ebitda margin. But a significant portion of this benefit would reflect from Q3 onwards due to the lag effect. Also, the company has taken a price hike of 1,200 per unit in July, which will be reflected Q2 onwards. Even so, Hero maintains there would still be some under-recovery. Against this backdrop, the company’s efforts to reach 14% Ebitda margin levels is key to track.

No doubt demand is on a strong footing with the upcoming marriage season, economy opening up and expectations of revival in rural demand. However, amid supply chain constraints and rising competitive intensity, it remains to be seen how volume pans out. In July, Hero’s total volumes dropped by 8% month-on-month to 445,580 units.

Owing to the aforementioned factors, better finance availability and a favourable base, analysts at Emkay Global Financial Services expect 13% volume compound annual growth rate in the domestic market over FY22-24E for Hero. But, FY24E volume estimate would still be 22% below the peak witnessed in FY19 indicating the path to recovery is long.

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