Is it worth investing in Hero Motocorp shares? Premium products, new launches and plant - This is what may power stock

On Friday, the Hero Motocorp shares were trading at Rs 2,590.70 per piece gradually down by 0.28% on Sensex at around 1331 hours. After rising by nearly 2%, the two-wheeler giant Hero MotoCorp gave away gains and ended at Rs 2,598.10 per piece up by Rs 24 or 0.93% on Thursday. Currently, Hero MotoCorp price is affordable owing to the overall auto sectors subdued to downward performance in past few months. However, there is potential in the company, going forward, as new launches, premium products, strong dealer network and new plant development in Andhra Pradesh will play major role. Interestingly, Hero is also expected to gain market share, after the price war dilemma created last year by Bajaj Auto when the latter slashed prices of their entry level motorcycle. Here’s what you can do with Hero MotoCorp shares!

Rishabh Kale, Research Analyst at Indsec Securities and Finance Ltd, listed out seven key factors for Hero Motocorp in upcoming fiscals. These are: 

Increase in market share after a price war with competitors: 

Bajaj Auto slashed prices of their entry level motorcycle in April 2018 in order to gain market share, leading to a potential price war between Bajaj Auto and HMCL.  This caused HMCL to lose some market share in the short term, but left no long term effect as competitors eventually felt the need to increase prices on back of rising input costs. HMCL market share in the entry level segment recovered from previous quarters and stood at 66% in Q4FY19. This shows the confidence of the customers in the brand and the loyalty towards the company.

Focus on Premium products: 

HMCL will be focusing on premium products with new launches in the 400cc segment. The company plans to follow a portfolio strategy launching motorcycles upto 400cc over a period of 3 years targeting various segments in this range, launching 1- 2 models on an annual basis. This year the company has launched Xpulse and the Xtreme 200S. Including these, it currently has 4 models in the premium segment 1)Xtreme200R, 2)Xtreme 200S 3) Xpulse200T and 4) Xpulse 200.

Dedicated corner for premium products: 

HMCL plans to upgrade their existing dealership and setup a dedicated corner where customers can experience premium products. 

New launches in the fastest growing 125cc scooter segment: 

To follow up on the huge success of the recently launched Destini 125cc, HMCL introduced Maestro Edge 125cc to cater to the increased demand in the 125cc segment. This segment grew by 56% in FY19, and as per the management there is a shift in demand to 125cc scooter from the traditional 100-110cc.

New Plant in Andhra Pradesh to be commissioned from H2 FY20: 

With a total of 7 plants, 5 in India and 2 overseas, HMCL will commission (estimated from H2FY19) one more plant in India at Chittoor District in Andhra Pradesh (AP). This will take the overall capacity to 10 mn units per annum. The AP plant setup will reduce logistics costs, as all 5 units are placed in North India with no plants in South. With the launches of premium bikes which are mostly an urban product, the proximity of the AP plant to key metro cities would help HMCL cater to these markets with ease. 

Strong dealer network:

HMCL has a total of 6600 touch points across India which includes service centers, dealers etc. Out of these ~1000 are dealership, the balance being a mix of service station, sub dealers, workshops etc.

Comparison between urban and rural growth:

Urban demand is currently ahead of rural, although it has seen a slowdown due to increase in cost and liquidity crunch in the economy. Rural demand is expected to pick up on back of a favorable monsoon. The management expects H1FY20 to be flattish, although demand is expected to pick up in H2FY20 on back of festive season, as well as pre-buying before BSVI transition. 

What can you do with the two-wheeler makers stock?

Kale says, “ the stock currently trades at 15.6x/15.2x its FY20E/21E consensus estimates. We feel the current valuations are relatively cheap owing to the downtrend in the auto industry. The introduction of new products in the premium segment, capacity expansion , pre-buying before BSVI and a good product mix augur well for HMCL. The current political stability in India, coupled with an expected increase in rural income make HMCL a major beneficiary in the two-wheeler segment. Further, SIAM is expected to submit a proposal for reduction of GST (currently 28%) which could give the realizations and margins an additional fillip. In such a scenario HMCL is well placed given its heavy market share (>50 %) to benefit from any potential opportunity. Hence, we hold a positive view on the stock.”