Q1FY24 Review: Hero Motocorp: Market-share loss needs to be stemmed

14 Aug 2023 , 01:21 PM

Hero’s Q1 Ebitda came in line with IIFL Capital Services estimate. The 2W industry is off to a slow start in FY24, with YTD volumes up 6-7% YoY. Analysts of IIFL Capital Services expect Q2 to be weak, but expect pick-up in H2, aided by delayed festive season and low base, to end FY24 with ~10% growth. Hero has underperformed the industry on both wholesales and retails. Mgmt. is confident of regaining market share, on the back of new model launches (yet, their FY24 estimates build share loss). The newly launched Harley Davidson X440 has garnered decent bookings; they estimate it to contribute 3% to Hero’s revenue. Ebitda margins have improved from lows (from 11.5% in FY22 to 13.8% in Q1FY24 and 14.5% ex EV loss). Going forward, mgmt is planning to focus on volumes and market share, over margins. Analysts of IIFL Capital Services upgrade their EPS estimates by ~5% (3% Ebitda due to ASP & margin; remaining from other income). Retain ADD; TP is Rs3,225. 

Q1 results in line with est.: 

Q1 revenue grew 5% YoY (in-line), despite volumes coming off 3% YoY, on 7% ASP growth. Gross margin (GM) improved 340bps YoY, but contracted 140bps QoQ (mix impact, input costs). Ebitda margin rose 70bps QoQ to 13.8%, coming at par with analysts of IIFL Capital Services expectations. Absolute Ebitda came in line with their estimate. PAT beat came at 8%, on a spike in other income. 

2W industry poised to grow in FY24: 

Despite 16% growth in FY23, 2W industry is ~25% below FY19 peak. Mgmt guided to double-digit revenue growth for 2W industry in FY24 (analysts of IIFL Capital Services forecast 10% volume growth). FY24 is off to a soft start, with YTD growth at 6-7%. They expect Q2 to be weak YoY. However, with benefit of delayed festive season (in Q3) and low YoY base in Q4, they expect H2 to see strong YoY growth. Mgmt mentioned that urban is doing well. Currently, rural is weak; but mgmt is hopeful of revival in festive season with normal rainfall and government spending. 

Persistent market-share loss is a concern: 

Hero has been losing market share in domestic 2Ws. As analysts of IIFL Capital Services have highlighted in their previous reports, model concentration has increased for Hero, with one model – Splendor accounting for bulk of volumes. Mgmt is in the process of reviving its erstwhile strong brands – Passion and Glamour. Hero is also planning to launch premium models to follow the launch of Harley Davidson X440. Hero is planning to improve pan-India availability of its e-scooter (Vida); this may be dilutive to overall margins, to begin with.