Centrum Broking

Target: ₹4,295

CMP: ₹3,254.05

We expect Hero MotoCorp to post strong volume growth in FY22 over a low base and on the back of continued positive rural sentiments. Strong rural demand is good for its motorcycle segment, which is nearly 94 per cent of is volumes.

The effect of new launches in the scooter and premium segments is visible from the market share improvement in FY21, and we expect these segments to start contributing in a material way from FY23 onwards. This drives our expectation of FY21-23 CARG of 16 per cent for motorcycles, 24 per cent for scooters and 16.5 per cent overall.

We expect margins to improve with operating leverage, Leap II programme and ramping up of the Chittoor capacity. We expect margins to be at 12.4 per cent in FY21 and improve to 14.1 per cent in FY23.

We expect revenue to grow by 18.3 per cent CAGR, and a PAT growth of 27 per cent CAGR for FY21-23. We value the stock at 19x FY23 earnings, which is about 10 per cent premium to its long-term average, considering the higher growth we expect in FY21-23.

It is currently trading at 15.3x FY23E EPS. Our target price comes to ₹4,295 and we assume coverage with a Buy rating. Slower economic recovery and rising fuel prices could act as a dampener to its Splendor and HF Deluxe sales.