Hero MotoCorp: Focused on recovering lost ground

13 Jun 2023 , 11:09 AM

Recommendation: Add; Target Price: Rs 3200

 

Analysts of IIFL Capital Services attended Hero’s analyst meet yesterday. In recent years, Hero’s performance has been plagued by: 1) Market-share loss in the core motorcycle and scooter segments, and 2) Lack of traction in premium motorcycles, EVs and exports. The event focused on mgmt’s strategy to revive the business through three actions – a) growing the core business, b) participating in premiumisation, and c) building the EV segment. In the core business, Hero targets regaining market share by reviving the Passion and Glamor brands, increasing non-vehicle revenue and growing exports. Mgmt guided to achieving 14-16% margins in the long-term vs ~12% in FY23 and their forecast of ~13.0% in FY24/FY25. Hero is increasing focus on premium segment, with plans to launch Harley-Davidson 440cc motorcycle next month and opening of exclusive stores for premium offerings. A roadmap has also been laid down to scale up EV volumes. Analysts of IIFL Capital Services await signs of market-share revival before turning positive. Retain ADD with TP of Rs3,020.

Reviving the core business: 

In the core business, mgmt is focused on improving its market share in the 125cc motorcycle segment, and reviving its erstwhile strong brands – Passion & Glamor. As analysts of IIFL Capital Services have highlighted in recent reports, Hero’s dependence on Splendor brand has increased substantially (74% in Q4FY23) due to fall in sales of other brands. Nonvehicle revenue (spare parts) has seen sizeable growth from prepandemic levels. Mgmt aspires to scale it up to Rs100bn in the next three years, vs Rs50bn in FY23. In the export market, mgmt plans to scale up volumes in its top 10 markets.

Shifting focus to premiumisation: 

Hero is increasing its focus on addressing premiumisation in the industry. It will bring out products in the “Upper Premium” category. The Harley-Davidson X440 will be launched in the first week of July. It has taken multiple brand-building initiatives. Hero plans to set up 100+ exclusive stores in next 4 quarters housing premium launches including Harley-Davidson & Vida (EV).

Scaling up the EV business: 

A roadmap has been laid down to sizeably scale up the EV vertical. Hero plans to increase its EV presence from 3 to 100+ cities in FY24. Over time, Hero plans to expand its product line-up. Mgmt plans to improve margins of its EV offering through better scale and increase in localisation of EV components.