Hero MotoCorp trades flat amid mixed reactions from brokerages

Shares of Hero MotoCorp Ltd were trading flat on June 13 after its analysts meeting with brokerages produced mixed reactions.  The brokerage house Kotak Institutional Equities has maintained a reduced rating and kept its target price to Rs 2,600 a share from Rs 2500 earlier.

Meanwhile, Motilal Oswal Securities and Nirmal Bang have maintained buy ratings on the stock and increased its target price. Motilal Oswal expects a stock target at Rs 3,500 a share, up 20 percent from its current market price while Nirmal Bang sees 15 percent upside from current market price to Rs 3,357 a share.

At 9.18am, the stock was trading at Rs 2,919 a share, down 0.31 percent from its previous close.

During the analysts’ meeting of Hero MotoCorp, the management highlighted various points which includes a strategic focus on enhancing the motorcycle segment through expansion, recapturing lost market share, and pursuing international growth. Additionally, the company aimed to increase its market presence in the premium category by developing a diverse portfolio within the 125-450cc segment, while simultaneously enhancing the retail buying experience.

Another important objective outlined by the management was to achieve a leadership position in the Electric 2W (two-wheeler) segment. The management expressed optimism regarding the growth potential of the 2W sector, anticipating a broader economic recovery and the emergence of new opportunities for expansion.

Hero MotoCorp also announced its plans for annual investments of Rs 1000-1500 crore, with a primary focus on the premium segment and electric vehicles (EVs). The company remains committed to maintaining its EBITDA margin target of 14-16 percent. This target is expected to be supported by factors such as an improved product mix, increased operating leverage, and various cost-saving initiatives.

“We believe weak demand trends, coupled with increased competitive intensity in the commuter segment, will weigh on growth
prospects of its core portfolio. In our view, it will be challenging for the company to gain meaningful share in the premium motorcycle and scooter segments, given weak brand positioning and strong customer affinity toward established brands”, said Kotak Institutional Equities in a note to investors.

Kotak has expressed caution regarding the recovery of demand in the <125 cc segment. This caution is due to the persistent price increases implemented by original equipment manufacturers (OEMs), which have resulted in subdued replacement demand trends. Additionally, concerns have arisen regarding a weak monsoon season due to the El Niño phenomenon, which may hinder rural recovery. Furthermore, an increase in competitive intensity is anticipated with the launch of Honda Shine 100, potentially impacting the growth of Hero MotoCorp’s core business negatively.

Although Hero MotoCorp intends to revitalize its positioning in the premium motorcycle and scooter segments, it faces significant challenges ahead. The company’s weak brand reputation in the premium segment and strong customer loyalty towards established brands in these segments pose obstacles. Despite Hero MotoCorp’s focus on global markets, it has faced difficulties in establishing a strong presence in key markets thus far, Kotak report added.

Brokerage firm Nirmal Bang expects the new launches and focus on premiumization to drive growth. The brokerage house has revised its price earnings multiples to 14x to 15x. Motilal Oswal has upgraded its EPS estimates for FY24E/FY25E by 5%/6% to factor in sustained volume recovery in the domestic market.

According to Motilal’s expectations, the recovery of demand for two-wheelers (2Ws) in the domestic market is anticipated to continue, albeit from a low base. This recovery is primarily driven by a strong rebound in the urban market and a gradual improvement in the rural market. Hero MotoCorp operates solely in the domestic 2W industry and has established its core strength in the 100cc motorcycle segment. Consequently, the company has relatively low vulnerability to the impact of electric vehicles (EVs). Scooters makeup only 8% of Hero MotoCorp’s overall volumes, further reducing its exposure to EV disruption. Moreover, the 100cc Motorcycle, which is the company’s primary product, is considered less susceptible to displacement by EVs.

” We estimate revenues/EBITDA/PAT to register a CAGR of 11%/18%/19% over FY23-25E. Our estimates do not factor in any material ramp-up in scooters and premium motorcycles. The stock currently trades ~15.7x/14.3x FY24E/FY25E EPS. We increase our target multiple to 16x (vs 14x earlier) to reflect the recovery in earnings growth. We reiterate our Buy rating with a TP of INR3,500 (16x Jun-25 + Rs231/sh for stake in NBFC business + Rs116/sh for its stake in Ather Energy)”, the Motilal Oswal report said.