 "Hero MotoCorp: Riding alone, riding strong")
The Hero MotoCorp scrip is being re-rated on the back of the company’s motorcycle launch plans (including those developed in-house), regaining lost market share and expected improvement in demand in the second half of FY14, especially from rural markets.
Hero MotoCorp, which has the highest exposure to rural markets (45-48 per cent of sales) among two-wheeler makers, has lined up about 12 models to be launched over 18 months. This should help it gain volume traction from the upcoming festive season and consolidate its position. The company has also been able to regain market share, from 40 per cent in the September quarter last year to 44 per cent at the end of the June quarter.
What should also help the stock, which took a beating in the market meltdown (down 7.5 per cent in two days) and gave up a bit of its 16 per cent gains since July, is the fact that while the auto sector is going through a rough phase due to demand concerns, two-wheelers are likely to perform better due to higher rural sales on the back of good monsoons and a low base.
Religare Capital Markets analysts Mihir Jhaveri and Prateek Kumar say they prefer two-wheelers in the current tough environment, given better demand visibility vis-à-vis four-wheelers as well as a lower payback period (1-1.5 years), high dividend yields, better return on equity and strong free cash flow yields. While analysts are positive on both Hero MotoCorp and Bajaj Auto, the top picks in this space, Motilal Oswal Securities (MOSL) prefer Hero ahead of Bajaj considering the near-term triggers and current valuations. “Its strong franchise of Splendor and Passion, and wide distribution reach makes it best placed to benefit from demand recovery, especially in rural markets”, say Jinesh Gandhi and Chirag Jain of MOSL. At the current price of Rs 1,900, the stock is trading at 17.3 times its FY14 estimates, with target prices at about Rs 2,250.
New launches
The biggest overhang for the Hero MotoCorp stock post the company’s split with Honda about three years ago was Hero’s ability to maintain the technological edge. Now, with the company announcing plans to launch bikes based on its own technology, these fears are easing. The company plans to launch 12 models across product categories over the next 18 months with a couple being new models. Says Joseph George of IIFL Institutional Equities, “These launches (new models) will be based on Hero’s R&D (independent of Honda). We believe these will remove concerns on Hero’s ability to attain technological competence.” In addition to its R&D, what has helped is its tie-up for technology with three partners: AVL of Austria for engine technology, Engines Engineering of Italy for vehicle design and Erik Buell Racing of the US for high performance motorcycles. These should go a long way in further strengthening the company’s technological capabilities in the coming years.
Further, the company’s programme of a five-year warranty or 50,000-70,000 kilometres, whichever is earlier across its scooters and motorcycles also helped reinstate customer confidence, the IIFL analyst believes.
In the immediate future, a normal monsoon is likely to give a fillip to two-wheeler sales, which have either stagnated or seen a sharp fall over the last couple of quarters due to a deteriorating economic situation, high interest rates and rising cost of fuel. Hero, which has managed to keep its sales volumes at an average of about five lakh units a month, is expected to benefit, as a significant chunk is expected to come from the rural markets where higher farm incomes are expected to perk demand.
“The company would be the biggest beneficiary of a normal monsoon and consequent demand recovery in the second half of FY14, led by rural markets, where it has high exposure with 45 per cent of sales,” say Gandhi and Jain of MOSL. The Hero management has pegged industry growth in the best case estimates at seven-eight per cent growth for FY14, as against about two per cent growth last year. In the long run, the company is looking to have a larger international presence. It has already forayed into geographies including Latin America and Africa. And, though it has made a small beginning, expect volumes to increase from FY15 onwards compared to the target of 350,000 units in FY14.
On August 8, Pawan Munjal, the company’s managing director & chief executive officer, announced plans to have operations in 50 countries with plants/assemblies in 20 locations. Also, Munjal outlined the company’s vision of reaching cumulative sales of 100 million two-wheelers by 2020, with annual volumes of 12 million units. This translates into volume CAGR growth of 10.4 per cent over the next seven years. These changes have come within days of a top management overhaul across functions.
Hero MotoCorp, which has the highest exposure to rural markets (45-48 per cent of sales) among two-wheeler makers, has lined up about 12 models to be launched over 18 months. This should help it gain volume traction from the upcoming festive season and consolidate its position. The company has also been able to regain market share, from 40 per cent in the September quarter last year to 44 per cent at the end of the June quarter.
What should also help the stock, which took a beating in the market meltdown (down 7.5 per cent in two days) and gave up a bit of its 16 per cent gains since July, is the fact that while the auto sector is going through a rough phase due to demand concerns, two-wheelers are likely to perform better due to higher rural sales on the back of good monsoons and a low base.
Religare Capital Markets analysts Mihir Jhaveri and Prateek Kumar say they prefer two-wheelers in the current tough environment, given better demand visibility vis-à-vis four-wheelers as well as a lower payback period (1-1.5 years), high dividend yields, better return on equity and strong free cash flow yields. While analysts are positive on both Hero MotoCorp and Bajaj Auto, the top picks in this space, Motilal Oswal Securities (MOSL) prefer Hero ahead of Bajaj considering the near-term triggers and current valuations. “Its strong franchise of Splendor and Passion, and wide distribution reach makes it best placed to benefit from demand recovery, especially in rural markets”, say Jinesh Gandhi and Chirag Jain of MOSL. At the current price of Rs 1,900, the stock is trading at 17.3 times its FY14 estimates, with target prices at about Rs 2,250.
New launches
The biggest overhang for the Hero MotoCorp stock post the company’s split with Honda about three years ago was Hero’s ability to maintain the technological edge. Now, with the company announcing plans to launch bikes based on its own technology, these fears are easing. The company plans to launch 12 models across product categories over the next 18 months with a couple being new models. Says Joseph George of IIFL Institutional Equities, “These launches (new models) will be based on Hero’s R&D (independent of Honda). We believe these will remove concerns on Hero’s ability to attain technological competence.” In addition to its R&D, what has helped is its tie-up for technology with three partners: AVL of Austria for engine technology, Engines Engineering of Italy for vehicle design and Erik Buell Racing of the US for high performance motorcycles. These should go a long way in further strengthening the company’s technological capabilities in the coming years.
Further, the company’s programme of a five-year warranty or 50,000-70,000 kilometres, whichever is earlier across its scooters and motorcycles also helped reinstate customer confidence, the IIFL analyst believes.
In the immediate future, a normal monsoon is likely to give a fillip to two-wheeler sales, which have either stagnated or seen a sharp fall over the last couple of quarters due to a deteriorating economic situation, high interest rates and rising cost of fuel. Hero, which has managed to keep its sales volumes at an average of about five lakh units a month, is expected to benefit, as a significant chunk is expected to come from the rural markets where higher farm incomes are expected to perk demand.
“The company would be the biggest beneficiary of a normal monsoon and consequent demand recovery in the second half of FY14, led by rural markets, where it has high exposure with 45 per cent of sales,” say Gandhi and Jain of MOSL. The Hero management has pegged industry growth in the best case estimates at seven-eight per cent growth for FY14, as against about two per cent growth last year. In the long run, the company is looking to have a larger international presence. It has already forayed into geographies including Latin America and Africa. And, though it has made a small beginning, expect volumes to increase from FY15 onwards compared to the target of 350,000 units in FY14.
On August 8, Pawan Munjal, the company’s managing director & chief executive officer, announced plans to have operations in 50 countries with plants/assemblies in 20 locations. Also, Munjal outlined the company’s vision of reaching cumulative sales of 100 million two-wheelers by 2020, with annual volumes of 12 million units. This translates into volume CAGR growth of 10.4 per cent over the next seven years. These changes have come within days of a top management overhaul across functions.