Hero MotoCorp Ltd – A Proxy To The Aspirational Rural India Market?
Company Name – Hero MotoCorp Ltd (Hero MotoCorp)
Current Share Price – INR 2,832 (July 6, 2022)
Market Cap – INR 56,585 cr
1. What is interesting about the stock?
Covid-19 pandemic hit every business in the world except probably e-commerce, healthcare & food delivery companies. People stopped venturing out of their homes but many internet-based companies were quick enough to realize this overnight shift in consumer spending. To cater to this new demand, the likes of Zomato, Swiggy, Urban Company, etc. increased their fleet size of delivery partners in major cities across India. However, this model of business works well when everyone works at their peak efficiency levels including the machinery that goes into delivering goods & services. When it comes to efficient vehicles in India, no one comes close to the entry segment bikes from Hero MotoCorp. If you are a regular user of Zomato or Swiggy, there are very high chances that your order might have been delivered using a Hero MotoCorp bike. A small business owner in the hinterlands of India must own a bike from Hero MotoCorp, since they provide excellent fuel efficiency, high reliability & durability under Indian road conditions, along with the benefit of a vast dealership & service network.
Hero MotoCorp Ltd is the world’s largest manufacturer of motorcycles and scooters, a position it has held for the past 20 years. With a presence in over 40 countries across the globe, the Company’s vision is to ‘Be the Future of Mobility, through its R&D, manufacturing, products, services, and sustainable approach. However, Hero MotoCorp’s numero-uno position in the domestic two-wheeler segment is poised to be challenged by incumbent new entrants in the electric mobility space.
Hero Electric belongs to a different part of the Munjal family and was engaged in a court battle with Hero MotoCorp for the use of the Hero brand in the EV space. Recently, an arbitration tribunal appointed by the Delhi High Court has allowed Hero MotoCorp to manufacture and sell electric vehicles under the trademark 'Hero'.
Hero Motocorp is looking to launch its own electric vehicle in the next festive season under the brand name 'Vida'.
Separately, Hero MotoCorp has made a couple of partnerships with Ather Energy (35% stake) and Gogoro (JV in India) to address the EV market opportunities. While Ather Energy designs, manufactures & sells electric scooters, Gogoro is a leader in battery swapping technology based out of Taiwan.
Gogoro, started by Horace Luke (ex-HTC), has 2,100 battery stations with over 4 lakhs riders. Horace says that plug & charge is not feasible in an urban setting due to space constraints. The key point is that scooters will be offered without battery & consumers will be offered a subscription model (battery as a service). No hassles to manually charge battery or plug compatibilities, less initial cost of the scooter as the battery will be subscription-based, and no anxiety issues since vehicles can be refueled faster than petrol. Hero MotoCorp plans to scale this JV across the world where Hero MotoCorp is present (Latin American and African markets). All this they plan to achieve through financing provided by Hero Fincorp, in which they have a 41% stake.
To counter the mainstay of Royal Enfield’s premium segment bike category, Hero MotoCorp has started a new JV (38% stake) with Harley Davidson. As part of a licensing agreement, Hero MotoCorp will develop and sell a range of premium motorcycles under the Harley-Davidson brand name.
Two-wheeler dispatches declined by 11 percent in FY22 vs FY21 impacting the revenue of all major players including Hero Motocorp. Sales seems to be turning around in June 2022 with growth of ~20% on a YoY basis.
In the deluxe 100-110cc segment, Hero MotoCorp’s market share stands at a solid 68% whereas, in the 125cc segment, it commands a market share of 41%.
Hero MotoCorp’s bikes are income enablers for a large section of the population hence there is a lot of trust & faith in the brand.
Strong, efficient & visionary management led by Dr. Pawan Munjal with high ESG ratings.
Due to supply chain disruptions, reverse migration of labor, and subdued demand after the Covid-19 outbreak, the motorcycles, and scooters industry was adversely impacted in 2020-21. In case of any similar lockdowns in the future, we can expect similar downward pressure on sales.
Subdued growth with many headwinds like increase in raw material prices, increase in petrol prices, semiconductor availability, and loss of income in lower-middle-income class. Hero MotoCorp’s stronghold is rural India but they have lost volumes & market share there.
Lack of product launches in the electric bike space currently, the electric two-wheeler market is dominant with scooters.
2. Key Historical Financials
3. What is my view on company valuation?
Hero MotoCorp, with its established infrastructure, is completely debt-free and available at a P/E (TTM) of 24x & dividend yield of 3.3%. The stock price has remained sideways with a meager return of ~3% CAGR in the last decade. The company has cash & short-term investments of ~INR 11,000 cr (~20% of market cap) in its books.
Its competitors, Bajaj Auto & TVS Motors trade at P/E (TTM) of 20x & 52x respectively. In terms of EV/EBIDTA, Hero MotoCorp trades at 15x while Bajaj Auto at 16x & TVS Motors at 19x.
On an overall basis, the valuation of Hero MotoCorp looks reasonable but the business hasn’t grown much in the last few years. Their investments in the EV space may address some of the growth challenges, and hence investors could evaluate holding the stock in the medium/long term. However, Hero Electric is a separate company, and sharing the brand name could create conflict in the mind of the customers.
4. What are the risks to the investment analysis?
Key risks to investment analysis are:
Delay in launch of EV portfolio can dent the growth strategy if not immediately addressed.
To make electric two-wheelers mainstream, technology up-gradation & manufacturing capability issues need to be addressed.
About the Author
I have over 7 years of work experience in the Automobile Industry & Technology Sector in India. Currently, I am working as a Research & Development Engineer at a Global Automobile major helping them scale their Electric Vehicles ambitions.
I hold Master’s & Bachelor’s degrees in Engineering from the Indian Institute of Technology, Madras (IITM).
I am an insignificant public investor & have an avid interest in Trekking, Photography, and Cybersecurity.
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.