Hero MotoCorp gains market share; higher sales in weaker segments is key

The Hero MotoCorp (HMCL) stock gained 3 per cent on expectations of strong volume performance in September. The company is expected to outperform its peers and post 10 per cent growth in volumes to 675,000 this month. 

 

The gains for India’s largest two-wheeler maker are largely expected to come from the rural market, a shift to personal mobility, and higher sales of entry-level bikes. The rural market accounts for half the company’s volumes. 

 

Analysts at Axis Securities cite healthy farm income — because of a normal monsoon, record procurement of foodgrain at the end of the rabi season and robust government spend on agriculture and rural infrastructure — as the reason for the robust rural demand. The higher share of the entry-level market amid downtrading by customers has helped the company increase its market share from 35 per cent last year to about 39 per cent in August this year. 

 

Motilal Oswal Research believes HMCL’s competitive positioning has improved in the entry-level segment due to the narrowing of the price differential in the economy segment vis à vis Bajaj Auto’s CT100, and product upgrades in the executive segment. This, according to the firm, should enable further recovery in the market share in FY21. 

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The biggest trigger for the stock is traction in scooters, premium motorcycles, and exports. These segments account for 55 per cent of sales, but Hero is not a prominent player in them. However, the company’s focus on these segments and launch of new products could help reverse weak volumes and market share. chart

 

 

While there is a recovery, given the muted showing in the first quarter, analysts expect the company to end the year with a volume decline of 15 per cent to just under 5.5 million units. 

While the volume recovery is positive, there may be cost headwinds. Though companies spent less on advertising and promotions and gained from lower discounts, the gains, according to analysts at Nomura, could have bottomed. 

Further, given the sharp rise in raw material costs, companies may need to raise prices by 150-200 basis points in the second half of the financial year. This will put pressure on operating profit margins and offset gains from higher volumes. 

While there are multiple rerating triggers for the stock, investors should wait for consistent volume growth before considering the stock.