The auto industry is still grappling with a slowdown, but good times are here for Hero MotoCorp. Market share gains in the scooters and deluxe bikes category, both of which are growing. A long line-up of launches and exports, promise good volume growth for Hero. Commuter bikes, whose sales so far have been sluggish, are also likely to pick up in the coming months.
Investors with a one-year horizon can buy the stock. At the current market price of Rs 1,865, it trades at a PE of about 17 times its estimated earnings for FY14. That the company is a regular dividend payer also adds to the recommendation.
Even as bike sales remain subdued, scooters continue to defy the industry trend growing by about 14 per cent. Despite stiff competition from Honda and new launches such as Ray (Yamaha) and Vespa (Piaggio), Hero (Pleasure, Maestro) has been a big gainer of this trend. Hero’s market share has steadily improved to 21 per cent in the three months ended June 2013 from about 16 per cent last year. Hero also cashed in on the premium segment customer trading down to mid-segment bikes, with the launch of Ignitor.
In the coming months, good monsoons can be expected to revive demand for commuter bikes from the rural markets. With offerings such as the Dawn, Deluxe, Splendor and Passion, Hero is the market leader in this segment with about 70 per cent share. It is also coming out with 7-8 re-launches/model variants beginning with the festival season. The company expects two-wheeler industry to grow at 7-8 per cent in 2013-14. It shrank in the three months ended June.
Margins to benefit
In the quarter ended June 30, 2013, Hero was able to maintain its margins at 14.8 per cent. But the lag effect of a depreciated rupee on commodity costs and the influence of higher commuter bike sales may drag down margins in the coming quarters. However, growing deluxe products and the cost rationalisation will aid margins.