Hero MotoCorp: Morgan Stanley Cuts Target, Earnings Estimate On Weak Volumes, Inflation Woes

Morgan Stanley lowered price target and earnings estimate for the nation’s biggest two-wheeler maker citing weaker-than-expected volumes.

“The two-wheeler industry has passed on all cost pressures to date, but in an ongoing inflationary environment, spot prices imply that the industry will need another price hike of 1.5%/2%, which could delay demand recovery, especially for the entry-level segment that Hero MotoCorp Ltd. is exposed to,” the financial services provider said in a March 7 report. “We lower EPS estimates by 12% each for FY22, FY23 and FY24.”

Morgan Stanley remains ‘underweight’ on the stock, and cut target price to Rs 1,937 from Rs 2,400 earlier, a potential downside of 11.90%.

That, it said, is because though Indian two-wheeler volumes are “close to a trough”, the next cycle will be driven by electric and premium two-wheelers. “Hero has strong collaborations in the premium (Harley) and electric (Ather and Gogoro) spaces, but limited presence in those segments currently.”

Also, the company’s market share declined from 45% in FY11 to 37% in FY21. It plans to launch electric two-wheelers in July 2022, but “given the significant shift in the competitive scenario, we think it might not be able to command a market share similar to ICE (internal combustion engine) two-wheelers in EV two-wheelers”.

Morgan Stanley lowered its volume assumptions for Hero MotoCorp for FY22 by 13%.

• Amid recent geopolitical uncertainty, raw material prices are increasing once again. At current levels, two-wheeler original equipment makers would require another Rs 1,000-1,500 in price hikes to offset commodity headwinds.

• High exposure to mass-market two-wheelers makes it relatively difficult for OEMs such as Hero MotoCorp to pass on commodity headwinds, and hence margins could remain under pressure in the near term.

• Expects industry shifts toward electric vehicles to continue.

• A 10% hike in fuel prices is likely to lead to a 3% reduction in total cost of ownership for EVs compared to ICEs.

Morgan Stanley’s views concurs with Goldman Sachs’, who initiated coverage on Hero MotoCorp with a ‘sell’ and a target price of Rs 2,080 apiece—implying a potential downside of 10%.

Shares of Hero MotoCorp declined as much as 2% intraday on Tuesday before reversing the losses to close with 2.41% gains. The stock snapped a five-day losing streak.

Of the 51 analysts tracking the company, 33 say ‘buy’, 13 recommend a ‘hold’ and five suggest a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies an upside of 35.6%.