Hero MotoCorp: Up 76% in last 1 year, this auto stock is Axis Securities' ‘pick of the week’ – 3 key reasons why

Following an almost 76 percent rise in the stock in the last 1 year, domestic brokerage house Axis Securities has picked auto major Hero MotoCorp as its 'top pick of the week'. This is on the back of new product rollout, improvement in two-wheeler (2W) business, robust margin trajectory, and rural recovery.

The brokerage has a ‘buy’ call on the stock with a target price of ₹4,935, implying a potential upside of 10 percent.

Hero MotoCorp Ltd (HEROMOTOCO) holds the market leader position in the Indian 2W industry with a market share of 34.6 percent (as of March 2022). Motorcycles constitute the primary source of its revenue, contributing 94 percent of total volumes, while scooters contribute 6 percent to its total volumes. 

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Hero is primarily focused on the domestic market, with 94 percent of its volumes originating from India. Entry-level motorcycles (75cc to 110cc) represent a significant portion of 75 percent of overall volumes. The company operates six plants in India and two international plants in Colombia and Bangladesh. Hero boasts a domestic manufacturing capacity of 9.30 million units per annum and a global capacity of 0.23 million units per annum.

Stock Price Trend

The stock has surged almost 76 percent in the last 1 year and gained 7.5 percent in 2024 YTD. The stock witnessed some correction in April, down around 6 percent after a 6.7 percent rise in March. Meanwhile, it fell 4 percent in February but jumped 11.6 percent in January this year.

Currently trading at ₹4,491.85, the stock is 10 percent away from its record high of ₹4,979.95, hit on February 12, 2024. Meanwhile, it has soared 82 percent from its 52-week low of ₹2,470.60, hit on May 2, 2023.

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FY24 Auto Sales

Hero MotoCorp, a major two-wheeler manufacturer, reported a 5.5 percent increase in total sales for the fiscal year 2023-24, with 56,21,455 units sold, compared to 53,28,546 units sold in the previous fiscal year. This rise in sales demonstrates a positive trend for the company.

In terms of motorcycle sales, Hero MotoCorp sold 51,90,672 units in FY24, up from 49,59,156 units in FY23. Additionally, scooter sales increased to 430,783 units in FY24 from 369,390 units in FY23, indicating growth in both categories.

Domestic sales were also higher in FY24, with 54,20,532 units sold compared to 51,55,793 units in FY23. This growth in sales across various segments suggests that Hero MotoCorp experienced a successful fiscal year, reflecting a strengthening market position and potentially improved consumer demand for its products.

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Investment Rationale

New Products Rollout, Execution Strategy to be in Spotlight: The brokerage pointed out that with the launch of differentiated products offering multiple industry-first features, Hero has built a strong product portfolio, thereby filling white spaces. The company has a clear strategy to win market share in the premium category of 2W, growing EV business, expanding Premia stores, upgrading existing stores to Hero 2.0, and investing in marketing (via both traditional and digital routes). While the change in top management has hit the throttle – all eyes are now on volume growth in coming quarters, it said.

2W Business: The current industry (domestic + exports) volumes in FY24E are approximately 14-16 percent below the industry peak of around 2.45 crore units in FY2018-19 (pre-COVID). This suggests that there is still potential for growth in the 2W industry, largely led by the expected revival in the rural economy, noted Axis. Overall, in the 2W domestic industry, it expects the 125cc and above segment to grow faster than the entry-level segment. With a stable increase in models, Axis estimates the company to grow at par with the industry (previously below industry). As the execution strategy plays out in FY25, it has conservatively build in a 7 percent CAGR volume growth over FY23-26E for Hero.

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Strong EBITDA Margins: The company’s EBITDA margin in Q3 came in at 14 percent, with a 200bps impact due to EV-related expenses. It is expected to improve further on the back of new product launches in the premium category and the management’s focus on exports in key geographies, believes Axis. With commodity prices expected to largely remain stable, operational efficiency in EVs, and higher ASP led by product premiumization, the brokerage has factored in a conservative 14.5 percent EBITDA margin in FY26E.

Outlook & Valuation

The brokerage is closely monitoring Hero MotoCorp's strategic moves, particularly its roadmap in the electric vehicle (EV) product portfolio, which includes investments in Ather Energy, the scaling up of VIDA, and its association with Gogoro. Additionally, the brokerage is watching Hero's foray into the mid-weight motorcycle segment, featuring models like the Karizma, HarleyX440, and Mavrick440. This expansion takes place amid a landscape of rising competition, where both existing and new players are vying for market share.

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Actual volume growth across key segments will be the key monitor. Axis expects the 2W industry growth to play in favor of Hero specifically in the entry and 125cc segment.

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 decision.