Why Hero Motocorp is better poised than peers to ride out of the lockdown2 min read . Updated: 26 May 2020, 10:58 PM IST
It remains to be seen if Hero can pass on the cost of BS-VI vehicles to customers. Else, it will add to margin pressure
Hero MotoCorp Ltd’s stock has retraced lost ground faster than its peers since the lockdown was eased. The stock has gained 15.7% since 21 April, while shares of Bajaj Auto Ltd and TVS Motor Co. Ltd rose by 10.2% and 3.4% each, respectively. The 15% decline in Hero MotoCorp shares from their highs seen earlier in the year is also far less than that of peers.
The kicker for Hero’s stock came from news that the firm had sold 10,000 motorcycles within a week after some dealers reopened.
But greater conviction on prospects come from the company’s large exposure to rural markets. This will help offset the covid-19 impact for the company to a relatively greater extent, say analysts. About half of Hero’s domestic sales are from rural areas.
A good rabi crop forecast points to improving rural incomes, which compares favourably with urban problems of job losses and pay cuts. Further, government focus on agriculture and the rural economy is likely to continue in the near- to medium-term.
Moreover, most auto companies indicate that liquidity stress and uncertainty ahead may force consumers to downtrade (go for lower/entry-level models).
“We expect downtrading to benefit Hero as it has a two-thirds market share in the entry/executive segments (overall market share of 52% in motorbikes)," said a report by HDFC Securities Institutional Equities Ltd.
Meanwhile, Hero’s dominant position (50%-plus market share) in the domestic motorcycle segment will hold it in good stead.
True, Bajaj Auto’s exports helped bring in better realizations and profit margins so far. But, with the global turmoil, analysts say the fact that 47% of Bajaj Auto’s sales come from exports is a risk.
That said, Hero too has its share of challenges. There is uncertainty about how demand would pan out for Hero’s executive segment motorcycles. This hinges on urban demand, mainly from the salaried class, which is facing the brunt of the pandemic. Weakness in this segment, where it enjoys comparatively higher margins, could drag overall profitability.
Besides, existing BS-VI inventory of a little over a month will stall production ramp-up.
Negative operating leverage will weigh on profitability in the near term. Further, it remains to be seen if the company can pass on the higher cost of BS-VI vehicles to customers during such challenging times. Else, it would add to margin pressure.
Be that as it may, the Hero stock also has the benefit of relatively lower valuations, in spite of the recent stock rally. It trades at 12 times FY22 estimated earnings compared to Bajaj and TVS that trade at 14 and 20 times, respectively.