Strong volumes, lowbase aid Hero’s Q4

Growth momentum to continue in FY19 on rural demand, distribution presence and new launches

Aided by strong volume growth and a marginal gain in realisations, Hero MotoCorp reported 23.7 per cent year-on-year growth in net sales in the March quarter to ~85.64 billion. This was in line with what most analysts had estimated.

The March quarter volume growth of 23.4 per cent is the highest for the company in six years. Volumes in the quarter were aided by strong traction in rural areas as well as a low base in the yearago quarter. While most analysts believe that the revenue performance was in line some, however, indicated that it was marginally lower as they were expecting better realisations. In a flat market, the stock was down 1.9 per cent.

For its two segments, while scooters, which account for about 12 per cent of overall volumes, grew at a faster clip of 32 per cent, motorcycle volume growth came in at 22.4 per cent. The operating performance, too, was strong. The company reported an operating profit of ~13.7 billion, which is 43 per cent higher over the year-ago period, and margins at 16 per cent were up over 320 basis points. Margin improvement was on account of a low base as the year-ago quarter saw higher discounting amidst transition to the BSIV emission norms with the impact pegged at ~1.9 billion. The base quarter thus had a weaker operating leverage. Reported net profit was up 35 per cent over the year-ago period to ~9.67 billion.

While the company has a high base of FY18, post muted performance in FY16 and FY17, there are a number of triggers going for it in FY19. The first clearly is the growth from rural markets, which account for half of Hero MotoCorp’s sales. Bharat Gianani of Sharekhan expects double-digit growth for the company to sustain in FY19 given positive rural sentiments on back of prediction of normal rainfall for the third consecutive year and higher crop output and minimum support prices in the last two years.

The other trigger is traction in the scooter segment. The company has gained 150 basis points market share in the segment in FY18 and the launch of Maestro Edge 125 and Duet 125 shortly will help it to improve it volumes. In addition to this, what should help is that the company has higher market share in northern, central and eastern India, where two-wheeler penetration levels are lower, according to analysts at ICICI Securities.

In addition to its rural presence, its strong brand equity in the executive and economy segments will help Hero MotoCorp to improve on

the volume front. Analysts at HSBC who recently upgraded the stock believe that government’s focus on improving rural incomes and favourable schemes ahead of elections — state elections in three large states this year and the run-up to general elections next year — should help boost growth. Capacity constraints in HMSI (Honda) may provide an opportunity for Hero MotoCorp to firm up its share within scooters.

The launch in FY19 of XPulse and Xtreme 200R, which are targeted at the premium segment, should also help improve its volumes and margins. Any success in this segment, where the company is on a weak wicket, is expected to rub off positively. Among the headwinds for the company are rising commodity costs, which could offset volume gains, price hikes and ongoing cost-cutting efforts. At the current price, the stock is trading at 18 times its FY19 estimates and could be a good long-term prospect on further dips.