Hero MotoCorp: Dawn of new hope

Revival in demand for two-wheelers and a slew of launches are growth drivers

A revival in demand for motorcycles bodes well for Hero MotoCorp. The company’s leadership position in the entry bikes segment and the upcoming launches to fill gaps in its product portfolio also hold promise. Investors with a two-year perspective can buy the stock. It now trades at about 19.9 times its trailing 12-month earnings, cheaper than peers such as Bajaj Auto (20.5 times) and TVS Motors (41.8).

Bikes back in vogue

Cash crunch from demonetisation and hiccups due to the BS-IV/GST transitions took the wind out of two-wheeler sales in 2016-17. After growing in double-digits in the first half of 2016-17 (over the same period in the previous year), two-wheeler sales slowed down with only a 6.9 per cent rise (over 2015-16). With the situation getting back to normal in the first half of 2017-18, two-wheeler sales regained momentum, moving up by 14.8 per cent. Rising affordability of the urban consumer, traction in rural demand and reasonable borrowing costs also helped. Double-digit growth has continued into the first two months of this fiscal as well.

Hero MotoCorp has been a beneficiary of the improving two-wheeler sales. What has particularly favoured the company during this period is the revival in demand for commuter or entry-level bikes (75-110 cc) — a segment in which it is the market leader. Headwinds from the note ban saw entry-level or commuter bikes, which predominantly cater to rural customers, go out of favour in 2016-17, with sales volumes shrinking by 2.6 per cent that year. But in 2017-18, sales volumes of bikes in the 75-110-cc segment recorded 15 per cent growth. Thanks to this, the share of entry bikes to total motorcycle sales inched up by one percentage point to 76.4 per cent in 2017-18 after having been on a decline in the earlier years.

 

 

With products such as the Dawn, Deluxe, Splendor and Passion in this segment, Hero’s volumes have grown on par with the industry. The company has been able to retain its market share (74.5 per cent) in this space, despite stiff competition from other players.

Traction in demand from rural India has been the main driver of growth in this space. According to the company, rural demand has grown 2 to 3 percentage points higher than the national average in 2017-18. Although crashing farm prices squeezed the wallets of farmers, higher government spending on building rural roads, rural electricity and housing, has created jobs and helped improve non-farm income of rural India, putting more disposable income in the hands of the rural consumer.

Farm loan waivers also boosted consumption demand. Commuter bikes have continued to see good offtake this fiscal as well. Rural demand is expected to drive sales for the company. The company expects two-wheeler sales to grow by up to 10 per cent this fiscal.

Strong sales of products such as the Super Splendor and Glamour have helped Hero improve its market share in the executive bike segment (110-125-cc bikes), which brings in slightly higher realisations.

Strengthening product mix

The company improved its market share in the 110-125-cc bikes category to 40.1 per cent in 2017-18, after showing a declining trend in the previous two fiscals.

A new model of Glamour is expected to hit the markets shortly and will strengthen its position here. Increasing affordability in the urban areas has seen the sale of premium bikes heat up in recent times.

While Hero has not traditionally been strong in this segment, it is now introducing two 200 cc bikes to cash in on the demand for these bikes. The Xtreme/Xpulse 200 cc will be launched this fiscal. It is also upgrading the Karizma, which is offered in the 200-250 cc segment.

The company is also improving its product mix in scooters. Over the last few years, the scooters segment has seen steady double-digit growth even in times when motorcycle sales slipped. Scooters now constitute one-third of the total two-wheelers sold. Unlike Bajaj Auto, which does not have a presence in this segment, Hero has products such as the Pleasure, Maestro and Duet in this segment.

But stiff competition from Honda and TVS has seen the company lose market share in this space over the last few years. It now stands at 13 per cent, down from 19 per cent five years ago. To regain lost share in this segment, the company will launch the 125 cc version of the Duet and Maestro Edge scooters. This is the sub-segment where all the action lies and competitors such as Honda already have 125-cc versions of their products such as the Activa.

Improving financials

For the quarter ended March 2018, net sales grew by 23.7 per cent to ₹8,564 crore and net profit by 35 per cent to ₹967.4 crore. Operating margins came in at 16 per cent, up from 13.8 per cent in the March 2017 quarter. Despite higher prices of commodities such as steel, lead and copper, what partially cushioned margins was an average price hike of ₹300 per vehicle taken this January, along with cost-control efforts under the LEAP programme.

In the coming quarters, the run-up in input prices is expected to hit the company with a lag. Besides, the expiry of excise benefits (CGST benefit ) for the Haridwar plant is expected to impact margins to the extent of 60 basis points this fiscal.

 

However, given its pricing power, the company can pass on the increases to customers to shield margins to an extent. It has already taken another price increase in April this year. A richer product mix will also boost realisations.

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