Hero awaits demand recovery after difficult Q3

It was a tough race for Hero MotoCorp Ltd in the December quarter (Q3FY22) as volumes fell 30% YoY. Peers TVS Motor Co. and Bajaj Auto saw their volume drop 10-11%. Hero took price increases, but obviously that wasn’t enough to offset all of the volume drop. Net realizations per vehicle increased by 15% year-on-year, limiting the decline in own-source revenue to 19% year-on-year for 7,883 crore. TVS and Bajaj saw revenue increases in the third quarter.

Hero’s earnings before interest, taxes, depreciation and amortization (Ebitda) were down 32% year-on-year. Even so, it performed well on EBITDA margin at 12.2% (at 12.6% in Q2) despite rising raw material costs and supply chain constraints. Rising exports and 15% year-on-year growth in the spare parts sector supported margins.

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Some short-term weakness may persist. As the economy gradually opens up, demand can be expected to rebound. Furthermore, a healthy rabi harvest season will generate higher rural cash flow which, in turn, will boost vehicle sales. Margins could further benefit from the stabilization of raw material costs. In addition, management expects to record more than 1,000 crore quarterly revenue in the spare parts business here. Additionally, export volumes could exceed 300,000 units in FY22. In 9MFY22, export volumes were 217,626 units.

Meanwhile, on the electric vehicle (EV) front, Hero MotoCorp is comfortably placed. The associations with Ather Energy and the joint venture with Gogoro Inc. for battery exchange will prove beneficial as the industry moves towards sustainable options. Hero MotoCorp also plans to launch its own electric vehicle by March 2022.

Varun Baxi, Analyst at Prabhudas Lilladher said, “The collaboration with Ather is positive for Hero as the former has established their vehicle in the market and there are no concerns about the quality of the product. Moreover, their in-house vehicle has a good chance of being accepted by customers considering their manufacturing and sourcing skills. The vehicle should be in the affordable segment, thus attracting more consumers.”

Admittedly, shares of Hero MotoCorp have underperformed their peers over the past year due to a confluence of factors. For one, the entry-level segment, where Hero has a significant presence, has seen more disruption than the premium segment. “In addition, its peers benefit from the large export volumes compared to Hero’s export volume which is only about 5% of the total volumes. Moreover, the company does not have a presence in the high-margin 3W segment, unlike Bajaj Auto and TVS Motor,” said Mitul Shah, head of research at Reliance Securities Ltd.

To that extent, valuations are not too demanding. Data from Bloomberg shows that Hero stock is trading at 14.6 times estimated earnings for FY23. Analysts say stocks price pessimism adequately.

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