The Hero MotoCorp stock is up over nine per cent in the last month on expectations that the ongoing gradual improvement in sales volumes, coupled with higher industry growth in FY18, should help India’s largest two-wheeler maker. Poor demand from rural areas due to a slowing economy and a lack of cash due to note ban had dented Hero’s sales volumes in the last few months of 2016.
Hero MotoCorp’s sales fell both in November and December, on a year-on-year basis. Sales volumes bottomed out in December 2016, with sales at 330,000 units down 33 per cent over the year-ago period, but have recovered to 487,000 units in January and 524,000 units in February.
Analysts at Religare Institutional Research expect two-wheeler sales to show positive growth in Q1FY18 with the advent of the marriage season while the first half of FY18 is expected to benefit from an early festive season and a favourable base.
Hero MotoCorp, according to them, would be the largest beneficiary of a demand revival. Further, steps to improve the Uttar Pradesh (UP) economy, after recent elections, could benefit Hero MotoCorp as the state is the largest market for two-wheelers in the country, with a share of 14 per cent. UP is a key market for Hero MotoCorp and the company is gaining market share in the state in the motorcycle segment, believe analysts at Nirmal Bang.
The other growth trigger for Hero is the estimate of an 8-10 growth of two-wheeler sales in FY18. The sector is expected to close FY17 with sales volume growth of seven to eight per cent. ICRA expects demand over the medium term to be driven by structural factors such as favourable demographic profile, growing urbanisation trend, besides moderate two-wheeler penetration levels.
Increased penetration of organised finance, especially in Tier-II and Tier-III cities, as well as rural centres where Hero MotoCorp is on a strong wicket, should boost the company’s sales volumes. The key thus will be uptick in the rural segment as this accounts for half of the company’s sales volumes.
Potential demand drivers would be the Pay Commission revision benefits, robust farm output, and government policies, which boost farm incomes.
While the company has effected price hikes in the Rs 500-1,700 range on various models to take care of the higher commodity and BS-IV costs, any further inflation could impact operating profit margin, which came in at 15.65 per cent in the December quarter. Operating profit margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages and raw materials.
The stock is trading at 18.8 times the company’s FY18 earnings estimate. This is lower than TVS Motor’s 27 times.