Brokerages remain mixed on Hero MotoCorp's Q1; EV EBITDA concerns loom

Hero MotoCorp shares have rallied 22 percent since the start of the year.

Hero MotoCorp's lower-than-expected first quarter earnings prompted a mixed reaction from brokerages as some suggest that new launches may help. At the same time, some fear a possible downward volume trajectory.

During the quarter, the world's largest two-wheeler manufacturer reported a 36 percent year-on-year rise in Q1 FY25 standalone net profit to Rs 1,122.63 crore.  A Moneycontrol poll of eight brokerage estimates pegged its fiscal first quarter net profit at Rs 1,190 crore and revenue at Rs 10,520 crore.

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Here's what analysts have to say about the company's prospects:

Nomura retains a 'buy' rating on Hero MotoCorp, with a target price of Rs 5,663 per share, an upside of 12 percent from current levels. The brokerage highlights rural revival and the Xtreme 125 as key catalysts for growth. While Q1 margins were lower, improvements in internal combustion engine (ICE) sales were offset by drags from the electric vehicle (EV) segment. Nomura expects cost reductions in the EV segment to alleviate these pressures in the second half of FY25. Consequently, they have trimmed their volume growth estimate to 6 percent for FY25-26.

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Bank of America Securities also has a 'buy' rating but has cut its target price to Rs 6,000 per share. The margin miss in Q1 is attributed to a weaker product mix and EV losses. However, the brokerage sees market share recovery as a crucial catalyst, driven by rural demand and the ramp-up of the Xtreme 125. BofA notes that the stock's valuation, adjusted for Ather and its captive finance company, is attractive.

Jefferies, too, maintains a 'buy' rating with a target price of Rs 5,800 per share as it believes that the Indian two-wheeler market is poised for strong double-digit growth over the next three years. However, they caution that the company's market share decline in two-wheelers and shifting demand profiles are concerns.

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Contrarian view

Goldman Sachs reiterates 'sell' with a target price of Rs 4,150 per share. This is because the management cited a decline in the revenue share from spare parts as a contributing factor. Moreover, the year-on-year average selling price (ASP) growth of 3 percent lagged behind peers such as Bajaj Auto and Eicher Motors.

Morgan Stanley remains 'underweight' on Hero MotoCorp, with a target price of Rs 4,110 per share. They found the company’s Q1 FY25 results weaker than expected, with stronger ICE margins offset by EV losses and lower spare parts sales. Morgan Stanley also points out Hero's under-representation in the faster-growing premium two-wheeler and EV segments as a concern.

In the post-result earnings call, Hero also said it is on a strong footing as rural demand is on an uptrend, and the growth being witnessed is more balanced than urban demand." With the kind of economic movements that the government has made, the favourable monsoon season that we are seeing, we see a better outlook from rural as we get into the festival season," said Ranjivjit Singh, Chief Business Officer.

Hero MotoCorp shares have rallied 22 percent since the start of the year.

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