The Q3 performance of Hero showcased a 3% rise in operating revenue to ₹9,724 crore, attributed to a 3% sequential volume growth and stable average selling prices. This positive trajectory reflects the company’s strategic positioning and adaptability within the competitive landscape.
Decent Q3 Performance Overshadowed by Challenges Ahead for Hero MotoCorp Ltd.
Hero MotoCorp Ltd.’s shares surged to a 52-week high of ₹4,949.05 per share during early trading on Monday, only to tumble nearly 5% by the end of the day amid broader market weakness. Although the company’s December-quarter (Q3FY24) results were respectable, the path forward presents significant obstacles.
Steady Q3 Performance Amid Market Challenges
During Q3, Hero witnessed a 3% sequential volume growth, which, coupled with a flat average selling price, translated to a 3% increase in operating revenue, reaching ₹9,724 crore. Despite a 130 basis points sequential expansion in gross margin to 32.7%, elevated marketing expenses for electric vehicles subdued the operating profit level.
This resulted in a 10 basis points sequential decline in the Ebitda margin to 14%, attributable to a 200 basis points impact due to the increased marketing expenses. In contrast, Bajaj Auto Ltd and TVS Motor Co. Ltd observed a slight sequential uptick in their Q3 Ebitda margins.
Challenges and Expectations for FY24
Looking ahead to FY24, Hero anticipates that the impact of EV business-related costs on margins will range from 125-150 basis points. However, stable commodity costs and a focus on premiumization are expected to bolster profitability.
Nevertheless, Hero continues to grapple with the pressing concern of market share erosion, particularly within the entry-level segment, amidst the industry’s ongoing premiumization trend. Antique Stock Broking highlights a decline in Hero’s domestic motorcycle market share to 41.6% in Q3, down from 50.4% in Q4FY23, despite a series of new launches this fiscal year.
Navigating the Path to Recovery
Hero’s recent launches, including the Karizma XMR and Harley Davidson X440, have bolstered its product portfolio. Yet, reclaiming lost market share in the face of intensifying competition remains a pivotal challenge. The company faces questions about the effectiveness of these new offerings and their potential to offset market share losses.
HDFC Securities’ Observation
HDFC Securities notes that the Xtreme 160R, one of Hero’s premium segment launches, did not significantly impact the market, indicating that not all of the company’s recent product launches have been successful in gaining traction.
Assessing Hero’s Q3 Performance and Future Outlook
Evaluating Market Position
HDFC’s report indicates that Hero has maintained a healthy launch pipeline, with a focus on the 125cc and above segments. Despite this, the report suggests that the company’s history of new launches in these segments may hinder substantial share recovery.
Factors Affecting Market Share
The company has observed signs of revival in entry-level demand, which could potentially boost Hero’s market share. Rural inquiries have increased to 50-55% of total inquiries, compared to 40% earlier. However, it remains uncertain whether this heightened interest will translate into volume growth.
Outlook for Rural Markets
Antique’s assessment, based on dealer interactions, forecasts positive momentum in rural areas, particularly in the north and central markets. The report expresses confidence in the continuation of this momentum, attributing it to the recovery of replacement demand.
Electric Vehicle Initiatives
Hero has articulated plans to launch a mass-market electric scooter priced at approximately ₹100,000, along with a mid-segment electric scooter priced at around ₹125,000 in the upcoming quarter. Efforts to increase production capacity are underway for accelerated growth in FY25. Nonetheless, Hero still lags behind Bajaj Auto Ltd and TVS Motor Co. in terms of market share in this segment.
Investor Sentiment and Stock Performance
Despite the prevailing challenges, investors have reason to be optimistic. Hero’s shares have demonstrated an 81.5% gain over the past year, reflecting recovery in entry-level demand and positivity surrounding new launches.
Identifying Upsides and Valuation
While the recent rally in Hero’s stock presents a positive outlook, there are indicators suggesting that substantial upsides may be limited. The company’s valuation, however, remains favorable in comparison to its peers. Hero’s stock currently trades at approximately 21 times its FY25 estimated earnings, while Bajaj and TVS trade at 26 times and 37 times, respectively, according to Bloomberg data.
In conclusion, while challenges and uncertainties persist, Hero’s strategic initiatives and market positioning remain critical factors to monitor going forward.
