 "Hero MotoCorp: Rural demand woes will keep near-term outlook muted")
Through the past month, the Hero MotoCorp stock has fallen 11 per cent on rural slowdown worries, a fall in the scooter market share and increased competition, leading to a cut in earnings estimates. Rural areas, which account for about half of Hero MotoCorp’s volumes, have seen muted sales, especially of motorcycles, owing to a weak monsoon, low crop yields and benign minimum support prices for key crops. Analysts at Goldman Sachs are bearish on the stock, given the portfolio risk, with 87 per cent of the volumes coming from the lower-growth motorcycle market, especially the mid-price segment, loss of market share in the scooters segment and higher competition. Given the rural slowdown, most analysts have cut volume growth estimates for the two wheeler sector to 5.6 per cent in FY16, against eight per cent growth in FY15.
In the first half of FY15, Hero MotoCorp had recorded a 15 per cent year-on-year increase in domestic sales growth. This was pulled down by a slowdown in the second half, with annual growth at a muted 5.2 per cent. Growth in March stood at only 2.7 per cent, primarily due to the performance of entry-level bikes (CD Dawn/Deluxe), which were up four per cent in FY15 but down nine per cent in March. In the economy segment, the company lost 160 basis points in market share (50.3 per cent in FY15).
What has aided overall performance has been sales of key brands such as Splendour (up 19 per cent in March and FY15) and Glamour (up 22 per cent). It is due to this that the company posted 10 per cent growth in the executive segment, while overall sales in the segment were down two per cent. In FY15, the company gained 500 basis points in market share at 67.6 per cent in the executive segment, the largest category by volumes.
The company is looking to broad-base its portfolio with the launch of two new scooters --- Dash and Dare --- in the second quarter of FY16. While its brands Pleasure and Maestro have together achieved sales of about 77,000 units a month, analysts expect these to rise to about 100,000 after the launch of the new models. With new scooter capacity expected to come on stream from its Gujarat plant this year, it will have overall scooter capacity of 140,000 units a month. Analysts say volume growth for the company is expected to come from scooters and exports. However, much of this is likely to be back-ended from the second half of FY16.
From the financials point of view, the automobile space should gain from falling commodity prices and lower oil prices. While falling raw material costs are expected to aid margin expansion, lower oil prices should reduce the cost of ownership for customers, boosting demand.
Given the 25 per cent fall in the stock so far this year, analysts say quite a bit of the negatives has been factored in. The progress of the monsoon, the company’s ability to win back market share in the scooters segment, and export performance will decide the course of the stock.
In the first half of FY15, Hero MotoCorp had recorded a 15 per cent year-on-year increase in domestic sales growth. This was pulled down by a slowdown in the second half, with annual growth at a muted 5.2 per cent. Growth in March stood at only 2.7 per cent, primarily due to the performance of entry-level bikes (CD Dawn/Deluxe), which were up four per cent in FY15 but down nine per cent in March. In the economy segment, the company lost 160 basis points in market share (50.3 per cent in FY15).
What has aided overall performance has been sales of key brands such as Splendour (up 19 per cent in March and FY15) and Glamour (up 22 per cent). It is due to this that the company posted 10 per cent growth in the executive segment, while overall sales in the segment were down two per cent. In FY15, the company gained 500 basis points in market share at 67.6 per cent in the executive segment, the largest category by volumes.
The company is looking to broad-base its portfolio with the launch of two new scooters --- Dash and Dare --- in the second quarter of FY16. While its brands Pleasure and Maestro have together achieved sales of about 77,000 units a month, analysts expect these to rise to about 100,000 after the launch of the new models. With new scooter capacity expected to come on stream from its Gujarat plant this year, it will have overall scooter capacity of 140,000 units a month. Analysts say volume growth for the company is expected to come from scooters and exports. However, much of this is likely to be back-ended from the second half of FY16.
From the financials point of view, the automobile space should gain from falling commodity prices and lower oil prices. While falling raw material costs are expected to aid margin expansion, lower oil prices should reduce the cost of ownership for customers, boosting demand.
Given the 25 per cent fall in the stock so far this year, analysts say quite a bit of the negatives has been factored in. The progress of the monsoon, the company’s ability to win back market share in the scooters segment, and export performance will decide the course of the stock.