Hero MotoCorp rides high on investor confidence despite downgrades by analysts

Analysts are beginning to get cautious about Hero Moto Corp’s prospects, but investors don’t seem to have got the memo. The stock has been among the best performers in the auto pack over the last six months, rising 19 percent compared to a 16 percent rise in the Nifty Auto index and a 9.5 percent gain in the benchmark Nifty 50 index.

That outperformance could be under threat as the number of ratings downgrades by analysts are on the rise.

According to data compiled by Bloomberg, the total buy calls for the stock have come down to 23 from 28 in the first quarter FY24. Similarly, the number of analysts that have a sell rating on scrip has increased to 11 from 8. Furthermore, only 11 analysts have a hold call on the company, a reduction from the previous figure of 12 analysts during the same period.

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Expanding the core segment, winning in the premium segment, and looking to become a leader in the EV business are the three key levers of growth that two-wheeler (2W) manufacturer Hero MotoCorp has identified for the future.

Let us look at what analysts are saying:

In June, broking firm CLSA revised its outlook on the stock to a “sell” rating due to its assessment of limited potential upside. Furthermore, the downgrade is attributed to the presence of fierce competition in the market.

According to the brokerage’s analysis, the pivotal factors for Hero’s performance lie in the effective execution of its strategy and a resurgence in the entry-level market segment. While the company has ambitious intentions in the premium market sector, it contends with strong competitive pressure.

Analysts at Bank of America Securities (BofA), in their July note, have said that the recent stock price rally seen in Hero MotoCorp captures the optimism among investors due to the change in the company’s chief executive officer (CEO).

In May, the company appoint Niranjan Gupta as the new CEO. Since Gupta assumed office, the stock has rallied nearly 24 percent. BofA Securities said that the current valuation at 17 times 1-year forward earnings is “not cheap anymore” factoring in the risk to market share. It added that the risk-reward ratio is rather decent in rival Eicher Motors Ltd.

Furthermore, stiff competition from majors players as well as new-age players in the electric vehicle (EV) space are some other reasons for BofA’s downgrade on the company.

In June, HDFC Securities said Hero’s market share is expected to experience a further reduction due to the entrance of Honda Motor and Scooter (HMSI) into the entry-level segment with a 100cc motorcycle. Analysts attribute this potential decline to the competitive pricing approach adopted by HMSI, which has introduced the Shine 100cc model at a price of Rs 64,900. It leverages the already well-established ‘Shine’ brand from the 125cc category and aims to achieve sales of 300,000 units in its inaugural year.

“If HMSI effectively executes its plans, their entry into the 100cc segment could pose a serious threat to Hero MotoCorp”, the note added. The company encounters difficulties as the motorcycle market demand gradually transitions from the 100cc segment, which has traditionally been the company’s strong suit, to the 125cc category. This change in the market dynamics poses challenges for HMC because the company heavily depends on the 100cc segment, which constitutes 78 percent of its sales volumes and where Hero MotoCorp currently holds an 80 percent market share.

Global firm Morgan Stanley has rated Hero as ‘underweight’ with a target price of Rs 2,344 implying a downside potential of 20 percent.

As for the stock price, TVS and Baja Auto have outperformed the company after gaining 22 percent and 25 percent in the last six months, respectively.

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