Hero MotoCorp volume growth cheers investors

Hero MotoCorp’s edge over peers in rural markets and the fact that rural sales account for nearly half of Hero’s domestic sales helped it. Photo: Bloomberg

The Hero MotoCorp Ltd stock, which fell initially on Wednesday on worries about the company’s September-quarter performance, reversed direction after the results.

The 10.4% improvement in net revenue, against a year ago, cheered investors, all the more so since this was driven by a 6.3% growth in sales volume and a 4% improvement in realization, at a time when the sector is down in the dumps. Hero’s edge over peers in rural markets and the fact that rural sales account for nearly half of Hero’s domestic sales helped it.

“Hero’s market share has improved from 16.7% to around 20% in the six months ended September 2013, from a year ago, even as Honda shed some share,” said Surjit Arora, an analyst at Prabhudas Lilladher Pvt Ltd.

The company has also made a slow and steady comeback in motorcycles, while Honda has gained at Bajaj Auto’s expense. This explains the improvement in Hero’s stock price since April, thereby reducing the valuation gap between Bajaj and Hero.

Hero’s operating margin was 14.5%—about 70 basis points (0.7 percentage points) higher than a year ago. “Higher spare part sales could have led to higher average sale price and lower raw material cost,” says a result review report by Emkay Global Financial Services Ltd.

Operating profit rose 15.8% from a year ago, beating Street expectations. Net profit was 9.3% higher at Rs.481.4 crore. But there could be pressure on profitability for the impact of the rupee’s depreciation on imports by vendors comes with a quarter’s lag as payments are made to vendors after the credit period.

Commodity cost pressures are also expected to continue. Whether growth in rural demand can offset this remains to be seen. The management’s mood appears upbeat, given that in the analysts’ concall, it said it would launch several new models in the year to March and about three new engine platforms in calendar year 2014.

It will be some time before Hero can, like its rival Bajaj Auto does, reap the benefits of exports. Exports today comprise nearly one-third of Bajaj’s revenue. Analysts believe the stock’s valuation could gradually improve as Hero proves its mettle.

At the current market price of Rs.2,087, Hero’s shares trade at a fair valuation of around 15 times Bloomberg’s fiscal 2015 estimated earning per share.

 

RANJAY  KUMAR

PGDM 1ST