Analysts cautious on Hero Moto on hazy outlook, competition
India's largest two-wheeler maker Hero MotoCorp delivered second quarter results in-line with street expectations on Tuesday. However, there are no particular reasons to celebrate just yet, warn analysts.
October 25, 2012 / 15:29 IST
Moneycontrol Bureau
India's largest two-wheeler maker Hero MotoCorp delivered second quarter results in-line with street expectations on Tuesday. However, there are no particular reasons to celebrate just yet,with its future growth outlook remaining cloudy, amid an industry-wide slowdown and heightened competition in its bread and butter executive motorcycle segment, warn analysts. "While Hero has made gains in the scooters on back of its successful product launches, it has seen competition making inroads in its dominant 75-125cc market and eating into its market share. In a flat domestic market with a weak product mix, we do not see any near term volume triggers for the company's growth," said IIFL India Private Clients, downgrading the stock to "market performer" with a target price of Rs 1,767."Hero Moto has witnessed a significant de-growth [16%] in the motorcycle segment, which declined by 3% in the quarter...We estimate it would be facing low CAGR [compounded annual growth rate] earnings growth of 1% [FY12-FY14]. Till the time more clarity emerges over the export capability, we remain cautious and maintain 'hold' rating on the stock," Nishant Vass and Venil Shah of ICICI Direct.com, the retail broking arm of ICICI Securities, said on Thursday. They have a target price of Rs 1,712 on the stock and cut their earnings per share (EPS) estimates on Hero for FY13 to Rs 109.9 from Rs 129.5.Hero ended its long running joint venture with Japan's Honda in 2010 and has been going solo since. It still remains India's largest two-wheeler company with products like Splendor and Passion motorcycles and Maestro and Pleasure scooters. The company says it dispatched 1.2 million Splendor motorcycles in the first half of this financial year and it is gaining market share in scooters too with the new Maestro scooter. However, it has lost market share in the last quarter in some segments and competition has intensified, especially from its former parter Honda, which launched the Dream Yuga directly pitted against Splendor earlier this year. Bajaj Auto too has been very active in that category, with the launch of new Discover and Discover ST motorcycles in the last few months."We continue to believe that Bajaj Auto is better placed than Hero Moto to weather weak demand environment as it strives hard to recover lost exports in Sri Lanka as also capitalize on recent launches like Discover 125 ST and Pulsar 200 NS. Also, Honda Motorcycle and Scooter India's increased aggression seems to be hitting Hero more than Bajaj Auto, as HMSI focuses on the executive segment [Dream Yuga], which is the bread-n-butter segment for Hero [80% of volumes]," said Bhaumik Bhatia of IDBI Capital.Bhatia too has a "hold" rating oh the stock with a target price of Rs 1,896.The slowdown in the domestic two-wheeler market will hit Hero the most since 90% of its total sales are from India, compared with just half of that for Bajaj Auto, warn analysts. Hero is working on a export strategy and has aggressive growth plans in markets like Sri Lanka, where it plans new distributor arrangements, and dedicated showrooms and workshops, to have a network of 1.5 times of what it had earlier. It will also enter African markets like Kenya and Nigeria and Latin America this year.However, the company admits that it will have to try harder in these markets and there will be significant expenditure on brand building, advertising and distribution setup."We believe the export markets can revive Hero's fortunes. However, it remains to be seen how fast it moves on this front," the ICICI Direct.com analysts said.Some analysts do still remain positive on Hero MotoCorp."We expect a revival in sales and market share from Q3 as retail demand in rural markets pick up. We do not believe Hero's core brands are under threat and continue to like the business for its strong cash flows and return ratios," said Govindarajan Chellappa and Rajasa Kakulavarapu of Jefferies.The Jefferies analysts have a "buy" rating on Hero, as they expect it to gain market share in scooters and maintain its year-to-date market share in executive segment of motorcycles, and feel adjusted P/E of 11.5 times FY14 expected earnings is attractive.However, they too have cut their volume and EPS estimates on Hero by 4-5% for FY13-15 period. Hero MotoCorp shares opened lower on Thursday, but at 11:00 hrs were up 1.1% at Rs 1,815.20 on NSE.Nachiket Kelkar
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