Backed by Diwali cheer, auto major Hero Motocorp hit record high post bumper sales of 1.5 lakh units on Dhanteras. Market experts Jagdish Malkani, Member BSE and NSE along with P Phani Sekhar, Fund Manager, PMS Angel Broking analyse if this is the best stock to play the recovery cycle.
Hero Motocorp and Maruti Suzuki remain great stories from the auto space, Malkani says in an interview with CNBC-TV18’s Menaka Doshi and Senthil Chengalvarayan.
Meanwhile, Sekhar feels Hero is the best domestic recovery play in the consumer space, as Hero is a very dominant domestic story in both entry level as well as executive segment of motorcycles, strong presence in scooters. Furthermore, its Pan India presence will even get stronger in south with its impending manufacturing unit in Andhra Pradesh.
However, Sekhar cautions investors to not look at Hero as a 10-year long story.
Below is the verbatim transcript of Jagdish Malkani and P Phani Sekhar’s interview:
Q: Some fabulous sales coming in from Hero. Though the market is also abuzz, especially the dealer pipeline is abuzz with the fact that Honda may have done even better than Hero has done on Dhanteras day in terms of sales but nonetheless you can’t take away from the fact that Hero has had a knock out day of sales on Dhanteras. What does that tell you about this company and is this the best bet?
Malkani: Yes, Hero MotoCorp really has been fantastic. If you go take a longer view there were a lot of cynics, probably me included, when the parting happened and what happens with other great Japanese by the helm etc. They have done tremendously and increased market share and may be aided and abetted a bit by Bajaj Auto's bullheadedness about their specific brands and the re-jigging of Discover etc but not to take away their credit and they have had this huge giant gorilla in the room of Honda by itself.
Well a long-winded answer. Basically, it is a great play on the consumer story, no doubt about it but at these prices I would still be cautious and as I said first of all there is the entire scooter phenomena. That bit of the pie is just increasing much faster than motorcycles and there Honda and even TVS has done fantastically. That is one large worry I would imagine and in motorcycles I would not underplay the threat or ability of Bajaj to bounce back. Rajiv Bajaj is talking coming back to 20 percent market share etc sooner rather than later. So all in all caution but yes, Hero and Maruti are the two great consumer stories in the auto space right now.
Q: Great company but a tad expensive is what Jagdish seems to say, would you agree?
Sekhar: I would agree but let me just add another dimension to this. I would put Hero in the best domestic recovery play in the consumer space because if you look at recovery in the investment space then Ashok Leyland might give you better return than Hero but coming specifically to Hero it is a very dominant domestic story in both entry level as well as executive segment of motorcycles, strong presence in scooters. Pan India presence that will even get stronger in south with its impending manufacturing unit in Andhra Pradesh.
So, everything is going right for Hero. Valuations wise also it is tad expensive, valuations are slightly ahead of the median multiples currently trading at around 16.5 times 18 month forward i.e. FY16 earnings, but that should be okay. For a company that is expected to beat consensus forecast. If you look at consensus forecast of Hero they are talking about 15 percent earnings growth next year but the way things are going it will beat those forecasts and to that extent, the valuation premium is justified.
Q: The stock is up 50 percent year-to-date (YTD), what kind of further appreciation can you expect given that both you and Jagdish have mentioned how expensive in terms of valuation the stock already is? Or would you say that the growth potential is so humungous that you are expecting big gains in the stock?
Sekhar: One can expect returns of 20-25 percent. However, I would caution investors to not look at Hero as a 10-year long story. Of course, the business potential remains but at the end of the day, this is prone to business cycles. So over the next three years as you begin from the trough of this cycle the first year of recovery should easily help you make around 20-25 percent returns because valuations are not very expensive. Yes, they are tad ahead of what the median multiples are, so the market is trading at around 16 times, Hero is at around 16.5 times. So, that should be okay, but its growth rate is likely to be ahead of market. So, whatever the growth rate that you are likely to see in earnings that will be at least 20 percent will be reflected in the stock price.
Q: It made a new 52 week high today, Rs 3,119, what would your expectation from this stock in terms of appreciation be from hereon?
Malkani: In the short run these things normally tend to go, it is at an all time high and they tend to fly.
Q: Or would you say that the stock has already factored in many of these growth anticipation. Since we have already seen the beginnings of a turnaround in the market?
Malkani: Yes, I am sure it has but I am just saying in the short run typically a wave like this it is possibly institutional buying etc, so in another couple of bucks where it is not beyond reason. In this kind of changing mood and longer the markets are cooperating etc. Because it is a very unfair market out there, the rich get richer, the stocks that make new highs continue to make new highs whereas the Reliances of the world are languishing.
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