Q2FY24 Review: Hero Motocorp: Q2 in-line; market-share recovery awaited

3 Nov 2023 , 11:35 AM

Hero’s Q2 Ebitda was largely in line with analysts of IIFL Capital Services estimate. The 2W industry was off to a slow start in H1FY24 with 4.5% growth. Analysts of IIFL Capital Services expect the industry to clock double-digit growth in H2FY24 and end FY24 with 9-10% growth. The festive season is off to a good start with double-digit growth. The industry also has the benefit of a weak base in H2FY23. Consistent loss of market-share has been a concern for Hero. Despite new model introductions, analysts of IIFL Capital Services are yet to see any signs of improvement. If industry growth improves, it would have a positive rub-off on Hero. Recently launched premium motorcycles, although small in volume terms, may have a positive impact on ASP. Listing of Hero FinCorp may also be a positive catalyst. Retain ADD with TP of Rs3,330. 

Q2 Ebitda in line with estimates: 

Q2 rev grew 4% YoY (2% beat), despite flattish volumes, on improvement in ASP (price hikes, mix). Gross margin improved 80bps QoQ and came in 20bps higher than analysts of IIFL Capital Services estimate. Ebitda margin rose 30bps QoQ to 14.1%, 20bps below analysts of IIFL Capital Services expectations. Operating costs were 11% above their est., leading to margin miss. Absolute Ebitda came largely in line. PAT beat came at 6%, on spike in other income. 

No signs of market-share recovery yet: 

Hero has been consistently 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 has also launched new models in the premium segment – Harley Davidson X440, Karizma. Yet, overall marketshare has not shown signs of improvement. 

Few positive catalysts in the near-term: 

The festive season is off to a good start for the 2W industry with Bajaj and Hero mgmt. indicating double digit volume growth. The 2W industry has the benefit of a favourable base of H2FY23 (weak festive, destocking, production cut before BS-VI Phase 2). Analysts of IIFL Capital Services expect the industry to clock double-digit volume growth in H2FY24 and end FY24 at 9-10% growth (H1FY24 was up 4.5%). Addition of Harley Davidson and Karizma may not add much to volumes, but may push up ASP. Volumes of Hero Vida (2W EV) have started inching up, from few 100s to ~2,000 in Oct. Listing of Hero FinCorp may also be a positive catalyst (Rs250-300 in SoTP).