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Stock Mantra | Hero Moto falls 25% in 6 months, but could rally 36%

Experts advise investors to buy the stock on dips, given the company’s strong fundamentals and its progressive work on electric vehicles

August 27, 2021 / 10:38 AM IST
 
 
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Shares of Hero MotoCorp, the world’s largest two-wheeler manufacturer, fell 25 percent in the past six months, becoming the biggest loser among auto stocks in this period.

The stock underperformed the Nifty Auto index, which declined about 10 percent, and the Nifty 50, which gained more than 9 percent.

The drop in the Hero MotoCorp share price is attributed to competition, shrinking market share, lower monthly sales volumes during the second wave of Covid-19, rising commodity prices, and regulatory changes in emission norms and safety parameters.

The auto sector as a whole has been a major underperformer in this period, when the benchmark indices touched record highs on hopes of strong economic and earnings growth due to the vaccination drive and efforts to contain the spread of the pandemic.

“Hero MotoCorp is one of the underperformers in the last few years mainly due to a decrease in market share as it is facing tough competition… Hero MotoCorp has a decent presence in entry-level bikes, where it is losing its grip to Bajaj Auto and TVS Motor,” said Gaurav Garg, head of research at CapitalVia Global Research. “Rising commodity prices have been putting pressure on profit margins.”

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Rising fuel prices along with higher vehicle prices have been a drag on the momentum in two-wheeler sales, Garg said. Potential buyers are taking to public transport or opting for electric vehicles instead, he said.

“Two-wheeler affordability has also been impacted by many regulatory changes in insurance, emission and safety parameters,” Garg added.

Hero MotoCorp reported a 36.8 percent drop in profit in the three months ended June from the previous quarter, while its gross margin declined 210 bps following a sharp increase in metal prices. Earnings before interest, tax, depreciation and amortisation fell 57.5 percent QoQ to Rs 514.8 crore against estimates of Rs 679.3 crore.

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Hero MotoCorp is the market leader in the two-wheeler segment in India and has been the world’s largest manufacturer of two-wheelers, in terms of unit volumes sold by a single company in a calendar year, for 19 years in a row.

Given its strong fundamentals, research & development and progressive work on electric vehicles, investors should hold the stock for the long term and accumulate at current levels for strong returns in the coming quarters.

“Hero is doing enough R&D and working on their first e-scooter. Two-wheeler volumes may grow in CAGR 14 percent in FY2023 as compared to FY2019 peak, therefore we can see some traction in the coming festive season. The stock is worth investing in the long term as its fundamentals are intact along with a strong balance sheet,” said Garg.

“The company has superb fundamentals. The company has launched its first EV recently. It follows a cost-plus strategy, so in the long run, any additional cost will be transferred to customers through price rise,” said Rahul Sharma, cofounder of Equity99.

He recommended maintaining positions in the counter for a target price of Rs 3,650. Any further dip should be used as an opportunity to buy more shares, he advised.

Sharma said the situation has started to normalise and sales volumes are again expected to climb.

“The auto sector is expected to be a huge beneficiary of the EV theme and most companies have launched EV models,” he said.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Sunil Shankar Matkar
first published: Aug 27, 2021 10:38 am
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