Hero MotoCorp Q4 Review: Analysts See Rural Demand Revival, Launches To Help

Analysts expect Hero MotoCorp Ltd. to benefit from a revival in rural demand, wedding season sales, new launches, focus on exports and a successful execution of electric vehicle strategy.

This came even as India's largest two-wheeler maker reported a 28% year-on-year decline in its standalone net profit in the quarter ended March. Sequentially, too, the bottom line fell 8.6%. Still, the earnings meet estimates.

Q4 FY22 Highlights (YoY)

• Revenue declined 15% to Rs 7,421 crore.

• EBITDA fell 32% to Rs 828 crore.

• EBITDA margin contracted to 11.2% from 13.90%.

“With the economy picking up, we expect the demand for motorcycles and scooters to see a positive turnaround in coming months," Niranjan Gupta, chief financial officer at Hero MotoCorp Ltd., said in a post-earnings call on Tuesday. "While concerns related to high input costs continue to remain a challenge, we will keep monitoring the situation and take judicious measures as appropriate."

The forecast of a normal monsoon, according to him, is likely to aid the crops, which in turn is expected to improve cash flows in the rural sector. “All these factors are likely to help in a steady recovery in consumer sentiments and market demand.”

Shares of the company fell as much 3.5% intraday, the most in just over a month, before ending 3.1% lower.

Of the 51 analysts tracking the company, 33 maintain a ‘buy', 13 suggest a ‘hold' and five recommend a ‘sell', according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 18.7%.

Here's what analysts made of Hero MotoCorp's Q4 FY22 results:

Jefferies

• Rates ‘hold' with a target price of Rs 2,400, implying a potential downside of 3.5%.

• Gross profit per vehicle rose 8% sequentially to a historical high; however, Ebitda per vehicle fell 6% due to higher other expenses on lower volumes.

• Ebitda margin contracted 100 basis points sequentially to 11.2%. Profit fell 28% year-on-year but was 8% beat due to lower depreciation and tax.

Yes Securities

• Rates ‘buy' with a target price of Rs 2,825, implying a potential upside of 13.6%.

• Gross margin expanded for third consecutive quarter despite raw material inflation, margins miss led by high operating expenses.

• Hero trades at a discount versus Bajaj Auto and TVS, reflecting challenges like declining industry mix of entry-level motorcycles and weak scooter/premium product portfolio.

• Expected recovery in demand (led by healthy rural sentiments) and successful execution of EV strategy would be a growth trigger.

Dolat Capital

• Has an ‘accumulate' rating with a target price of Rs 2,987 apiece, implying a potential upside of 20%.

• Ebitda margin contracted due to negative operating leverage offset by price hike and better mix.

• Expects two-wheeler volume to revive from hereon led by a pickup in rural demand and marriage season sales and opening of schools, offices, educational institutions.

Prabhudas Lilladher

• Rates ‘buy' with a target price of Rs 3,200 apiece, implying a potential upside of 28.6%.

• Though gross margin improved, other expense ratio expanded. The increased expenses are likely to be toward advertising and promotions.

• Management highlighted expectations of a positive turnaround in the coming months, with the economy picking up.

• Hero MotoCorp will be a key beneficiary of the rural revival. Rabi harvest, along with the forecast of a normal monsoon will aid in the improvement of rural cash flows (rural contribute abour 50% to Hero's portfolio).

• Though the pressure of input cost remains in the near term, Hero MotoCorp's cost-savings programme (LEAP-II) has helped in supporting the margins over the year.

• Along with rural revival, the company has lined up multiple product launches in FY23, in different segments intending to continue building its premium portfolio. The company has grown its focus on exports and clocked the highest exports in FY22.