Kotak retains ‘reduce’ rating on Hero MotoCorp amid likely loss to market share

Kotak Institutional Equities has maintained a reduced rating on Hero MotoCorp Ltd and lowered its target price to Rs 2400 from Rs 2600 earlier.

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Kotak Institutional Equities has maintained a reduced rating on Hero MotoCorp Ltd and lowered its target price to Rs 2,400 from Rs 2,600 earlier.

This can be attributed to the launch of Honda’s competitively priced 100cc motorcycle in the entry-level segment, which may result in Hero MotoCorp experiencing a further decline in its market share.

Kotak also expresses concern over the company’s failure to make headway in the scooter and premium motorcycle segments, despite releasing newer models.

The brokerage house predicts a gradual rebound in the volume of entry-level two-wheelers because of three factors: (1) a persistent rise in the cost of ownership, (2) elevated inflation levels, and (3) sluggish demand in rural areas.

Kotak predicts that Hero MotoCorp’s volume of entry-level motorcycles will continue to face challenges due to two factors: (1) ongoing sluggishness in rural demand and (2) the entry of Honda Motorcycle with its Shine 100 model in the 100cc motorcycle segment, which has been priced competitively at an ex-showroom rate of Rs 64,900, 3 percent lower than Hero HF Deluxe. Additionally, Honda Shine 100 is OBD-II compliant while Hero HF Deluxe will see a price increase from April 2023 onwards to meet OBD-II norms, creating a larger price differential between the two models.

“Overall, we expect Hero MotoCorp and Bajaj Auto to lose market share given aggressive pricing of Shine 100. We are building Hero MotoCorp’s
below-125cc domestic motorcycle segment volumes to grow by 5 percent on-year in FY2024,” Kotak report said.

Hero MotoCorp’s share in the domestic motorcycle segment has fallen from 53 percent in FY16 to 45.8 percent in nine months ended FY23, which is a cause for concern. Although the company has managed to hold its ground in the Northern region, its market share has been declining steadily, especially in South India, Maharashtra, and Bihar.

Additionally, the contribution from the top three states to Hero MotoCorp’s domestic volumes has risen from 35 percent in FY2016 to 44 percent in 9MFY23, indicating a weakening brand reputation in the domestic market.

“We have cut our FY2023-25 EPS estimates by 3-7 percent on lower volume and EBITDA margin assumptions. We remain concerned on demand recovery in the over-125cc motorcycle segment given (1) persistent price increases taken by the OEMs and (2) weak rural demand. Also, increase in competitive intensity in 100cc motorcycle segment with the launch of Honda Shine 100 may result in further market share loss.

The ‘reduce’ tag stays with a revised FV of Rs2,400 (Rs2,600 earlier), valuing the company at 12.5X FY2025 standalone EPS adjusted for subsidiaries valuation, the Kotak report added.