Hero MotoCorp Q2 Review: Demand Recovery, Softening Material Costs To Drive Growth, Says Analysts

Demand recovery and softening of key raw materials prices to support Hero MotoCorp Ltd. growth in the coming years, analysts said.

Analysts see signs of revival in the two-wheeler demand as reflected in the retail sales of two-wheelers in October, which rose nearly 6% over the corresponding pre-pandemic period in 2019 and also witnessed significant sales growth in festival period.

The brokerages also took comfort from management's commentary on softening raw material costs, which may lead to better margins in the second-half of the current fiscal and in the coming years.

The company's consolidated net profit fell 8% year-on-year to Rs 688.4 crore in the quarter ended September, with the operating margin contracting to 11.9% from 12.7% last year.

The Splendor motorcycle-maker sold 14.28 lakh units during the quarter, slightly lower than the 14.38 lakh units sold over the same period last year. However, sales were 2.7% higher compared with the quarter ended June.

Shares of Hero MotoCorp were trading 0.1% higher at 12 p.m., compared with 0.16% rise in benchmark Nifty 50 on the NSE.

Of the 50 analysts tracking the company, 32 maintain 'buy', 10 suggest 'hold' and eight recommend 'sell'. The average of the 12-month consensus price target implies an upside of 13.2%.

Here's what brokerages had to say about Hero MotoCorp's Q2 Results:

Motilal Oswal

• Demand recovery in the domestic two-wheeler industry coupled with stable commodity prices can drive earnings over the next two to three years.

• Company has lower vulnerability to rising electric vehicle penetration with just 8% of volumes coming from scooters and core 100cc motorcycle segment is less prone to EVs.

• Lower our earnings per share estimates for FY23 and FY24 by 3% and 2%, respectively due to changes in volumes, realization and margin estimates.

• Retain ‘buy' rating with a target price of Rs 3,000 per share with an upside of 16%.

Nomura

• Costs were down 30-40 basis points quarter-on-quarter but likely softening in material prices will be limited by rupee depreciation and higher EV-related spends.

• It will be difficult to achieve a market share similar to conventional vehicles in EVs as several players have entered the market and Vida scooters are at the premium end.

• Progress in key areas including premiumisation, EVs and exports crucial for re-rating but no traction visible yet.

• Aggressively priced EVs may shift customers away from conventional vehicles.

• Rating remains ‘neutral' with target price of Rs 2,965, a potential upside of 14.5%.

Jefferies

• Sustainable success in EVs, premium motorcycles or exports could improve long-term growth and market share outlook.

• Expect Hero's volumes to rise 42% and Ebitda and PAT to almost double over FY22-FY25 as improving demand drives better pricing power.

• Drop in market share in 110-125cc bikes and scooters is hurting Hero.

• Retain ‘buy' rating at a target price of Rs 3,000 per share, with potential return on investment of 16%.