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The Hero MotoCorp stock has gained 15 per cent since mid-April. The gains come on the back of record monthly sales in May (after weak performance in April) and on the hope that a normal monsoon will help revive demand in the rural segment, a key market for India's largest two-wheeler maker. While volume growth is likely to record slow recovery in the coming quarters on low base and improving sentiments, Elara Capital's Mohan Lal and Pooja Sharma favour players such as Hero MotoCorp because of strong margin levers, better medium-term volume growth and reasonable valuations. At Rs 1,658, the stock is currently trading at 14.5 times its FY14 estimates and trades at 14 per cent discount to its smaller peer Bajaj Auto.
Further, the company is expected to gain given that royalty payments will cease in FY15, aiding margin expansion while volume growth should enhance operating leverage. A benign raw material environment and the yen depreciation should also help in margin uptick. However, the key near-term trigger continues to be the expectations of an improvement in volumes on the back of normal monsoons. Given this, about 50 per cent of analysts have a buy on the stock, according to Bloomberg's consensus ratings, with a target price of Rs 1,805.
Volume uptick ahead?
One of the key concerns of the Street is the pressure on sales volumes on the back of weak demand. For the June quarter, the volumes fell 5 per cent, year-on-year. However, analysts are expecting a recovery in the second half of the current financial year, especially with the start of the festival season. A normal monsoon should aid growth in volumes.
The company's senior vice-president (marketing and sales), Anil Dua, says that given the environment, the June quarter was a good one on the back of high retail sales. While the indications are for a near-normal monsoon and should boost rural incomes, the company is also hoping for a pickup in macroeconomic activity to provide a fillip to two-wheeler sales. The company is hoping that the despatches run-rate (500,000 units a month) continues going ahead, driven by its initiatives (five-year warranty, launch of Hero Fincorp to finance two-wheeler sales) while the expansion in export markets should cushion any pressure in domestic sales.
On the back of high demand for the gearless scooter segment, the company has seen its market share in scooters go up from 15 per cent FY12 to 20 per cent in the June 2013 quarter. This segment is expected to clock strong volume growth going ahead, which should be in line with the 14 per cent year-on-year increase reported in the June quarter.
Price hikes to offset volume fall
The company took a price hike of Rs 500-1,500 effective May 1, in order to make up for costs associated with extended warranty and rise in logistics and the power expenses. While fuel costs are up, the company says there is no immediate plan to increase prices, but it will keep its options open going ahead. In fact, it is the price increase effected earlier that is likely to help it offset loss in volumes. Analysts at Ambit Capital say higher realisations per vehicle from price increases should cushion the fall in volumes and result in year-on-year growth in revenues (of a per cent) for the June quarter.
Margins to improve
Hero MotoCorp saw an improvement in margins in the March 2013 quarter on the back of favourable currency, softness in commodity prices as well as internal cost control programme. The depreciation of the yen to the tune of 19 per cent should help in the June quarter as well. Going ahead, with license fee cost to Honda ending in Q1'FY15 (June 2014 quarter), sharp yen depreciation and re-branding exercise getting over, the company's margins are set to expand by over 300 basis points in the next two years (from 13 per cent in FY13), according to Emkay Global's analysts Kaushal Maroo and Siddhartha Bera.
This will significantly reduce the margin gap with Bajaj Auto, which reported margins of about 20 per cent.
