Hero MotoCorp: Ride this long-term buy

Nitin Agrawal Moneycontrol Research

Hero MotoCorp (HMCL) continues to cruise well as is evident from its Q4 and FY18 results. The largest player in the Indian two-wheeler (2W) segment posted strong volume and revenue growth and maintained its earnings before interest, tax, depreciation and amortisation (EBITDA) margin on the back of tight cost control measures. Strong leadership in the 2W segment, revival in rural growth, slew of new launches, structural changes from upcoming product rejig, focus on exports and reasonable valuations make it a stock worth buying for long-term investors.

Result snapshot

Volumes continue to grow

In terms of quarterly performance, HMCL registered a year-on-year (YoY) volume growth of 23.4 percent, aided by improving rural sentiment on hopes of an abundant monsoon. The management expects the sales momentum to continue going forward. On the back of robust volumes, the company registered a 23.7 percent YoY growth in net revenue from operations as realisations remained largely flat. For FY18, volume and realisation growth of 13.8 percent and 1.4 percent YoY, respectively, led to a 15.4 percent YoY growth in revenue from operations.

Operating performance remains intact

Despite a rise in raw material prices, the company was able to report a 217bps YoY expansion in its Q4 EBITDA margin. The same remained flat on a full-year basis. The expansion was aided by tight cost control as is evident from the 99.5bps YoY fall in other expenses as a percentage of net operating revenue. Staff cost too witnessed a 25.3bps YoY contraction in the quarter gone by.

What makes this a long-term bet?

Strong presence in the 2W motorcycle segment

HMCL is a formidable player in the 100/110cc segment and maintains its pole position on the back of its strong distribution network and brand recall. The management expects to continue to achieve volume growth better than the industry’s double-digit growth rate on the back of a normal monsoon, market share gains and network reach.

Rejig in portfolio to include premium products

Given that the company is under-represented in the growing premium motorcycle segment, the management has started reworking its product strategy. The management unveiled two 200cc motorcycles – ‘XPulse’ and ‘Xtreme 200R’ – at Auto Expo 2018, the sales of which would begin in FY19.

The company has launched ‘Passion PRO’, ‘Passion XPRO’ and ‘Super Splendor’ to strengthen its leadership in 100-125cc motorcycle segments. The management has forayed into high growth 125cc scooter market by launching ‘Maestro Edge 125’ and ‘Duet 125’ at Auto Expo 2018.

Focus on electric vehicles

The company continues to maintain its strong focus on electric vehicles and invested Rs 201 crore to acquire 30 percent equity in start-up Ather Energy to build EV scooters. The management said Ather will start retailing its smart electric scooter S340 soon.

Expansion plans on track

The management has earmarked Rs 2,500 crore over the next two years for capacity expansion, technology upgrade and digitisation. It has commenced construction of its eighth manufacturing facility in Chittoor, Andhra Pradesh and started commercial production at its second manufacturing facility outside India, in Bangladesh.

Export gain momentum

The company’s focus on exports continues. The management plans to expand its presence in the fast growing markets of Sri Lanka, Bangladesh and Nepal. It commenced production at its second global manufacturing facility in Bangladesh in May last year. The plan is to expand to as many as 50 countries by 2020 from the current 35. The management sees positive momentum in many countries going forward.

Valuations at a reasonable level

The stock currently trades at 16.8 times FY19e and 14.9 times FY20e earnings. With an efficient execution and transformation strategy in place, the emerging macro tailwinds make the counter an ideal candidate for long-term accumulation.

Follow @NitinAgrawal65

For more research articles, visit our Moneycontrol Research page