Hero MotoCorp share price declines 5% : 4 reasons why Jefferies sees more than 20% upside for the stock

Hero MotoCorp share price declined more than 5% on Monday during intraday trades. Hero MotoCorp had reported its December quarter financial performance on Friday post market hours.

Hero MotoCorp had seen its profit after tax (PAT) rise 51% to ₹1,073 crore. The company further had announced an interim dividend of ₹100 per share.

Analysts at Jefferies India Pvt Ltd  continue to like Hero as they believe the Indian two wheeler industry is poised for a strong cyclical recovery. Hero's market share decline in two wheelers and adverse demand profile shifts are concerns, although any potential success in premium bikes and EVs can enhance its growth outlook, said analysts at Jefferies. They have raised their target price to ₹5650 for Hero Motocorp trading at ₹4670 levels indicating more than 20% upside for the stock.

Four key reasons why Jefferies sees more than 20% upside for the stock-

1. Strong growth in 3Q: Hero's 3Q Earnings before interest tax depreciation and amortisation) EBITDA grew 47% YoY and was 5% above Jefferies estimates. Volumes rose 18% YoY (were up 3% sequentially) while average selling price SP was flattish sequentially. Gross margin expanded 130 basis points sequentially, while EBITDA margin was flattish sequentially at 14.0%. Hero said that its ICE margin was 16% in 3Q but the EV business had 2ppt drag on overall margin. Net profit was 7%  above Jefferies estimates.
2.  Two-Wheelers poised for strong rebound: Jefferies believes that Indian two-wheeler industry is on the path of a strong rebound after an abnormal cyclical slowdown in FY20-22. Hero said that underlying demand trends are improving; rural is recovering too and is now forming 50-55% of its inquiries versus 40-45% earlier. Hero expects two-wheeler industry revenues to grow double-digits in FY25. They expect two-wheeler industry volumes to grow 11% in FY24 followed by 15% CAGR over FY24-26E.

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3.  Market share concerns and adverse demand profile shift: Hero' MotoCorp's two-wheeler wholesale market share had slipped from average 36% in FY18-22 to 30% in 9MFY24. Over this period, Hero has gained market share in 75-110cc motorcycles from 74% to 77%, but its share has slipped  from 39% to 18% in 110-125cc bikes,. Also from 10% to 7% in ICE scooters. Adverse demand profile shift also impacted Hero as share of 75-110cc bikes in industry fell 5ppt over this period, while that of 110cc+ bikes and Electric Vehicles scooters rose. 

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4. Focus on premium bikes and EVs- Hero MotoCorp, at its recent investor day, highlighted a strong focus on expanding its premium bike and EV portfolio, along with upscaling its dealer network and increasing use of digital technologies in business. The new premium 125cc bike fills a key product gap and could help Hero regain some share in the segment. In Electric Vehicles, Hero is planning to expand its portfolio by launching 3 new electric scooters across price categories in 1HFY25, and a fourth scooter in 2HFY25. Hero is also investing Rs600 Crore to set up a new parts center, which it believes can help expand its non-vehicle (parts, accessories and merchandise) revenues from ~Rs5500- Rs10,000 crore annually.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions

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