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Target: ₹3,135
CMP: ₹2,427.80
Hero Motocorp Ltd’s (HMCL) employee cost over the years have risen sharply when compared with other two-wheeler OEMs and there was a need to keep it in check. Fixed cost for HMCL increased substantially over the years, while volumes did not pick up, which became a drag on the margins (increased 270 bps from 3.7 per cent in FY14 to 6.4 per cent in FY23).
HMCL has announced the launch of a voluntary retirement scheme (VRS) for its staff. This should make the organisation more agile and ‘future-ready’, consolidating roles and reducing layers to increase empowerment and agility. Details of the VRS are not out yet. In the short term, we could see one-time costs for HMCL.
We analysed cost structure of all major two-wheeler ICE OEMs (except EIM IN) to access the scope available for HMCL to reduce the cost and we arrived at an estimate of 80-120 bps as percentage of revenue, which could be derived in cost savings through the VRS.
We expect HMCL to show double-digit revenue growth in FY24 benefiting from a low base, improving consumer sentiment, stable pricing environment (as commodity prices stabilise) and helped by internal factors like product launches in premium/scooter segment and higher exports.
We have a ‘Buy’ rating with a target price of ₹3,135 (at 15x on December 2024E standalone EPS, ₹86 for Fincorp and ₹78 for Ather).
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