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Hero Motocorp share price up 11% so far in 2022; ‘buy on dips’, analysts see up to 10% upside in 6 months

Hero Motocorp shares have rallied 11% so far this year, outperforming benchmark Nifty 50 which has fallen over 6%. According to analysts at HDFC Securities, Hero Motocorp shares may jump 10% in the next two quarters on the back of gradual recovery of lost market share in motorcycles, market share expansion in premium segment, and ramp-up in exports.

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Analysts believe investors can buy the stock on dips in the band of Rs 2600-2640 and add further on dips to Rs 2360-2400 band (12.25x FY24E EPS) for a base case fair value of Rs 2,875.

Hero Motocorp shares have rallied 11% so far this year, outperforming benchmark Nifty 50 which has fallen over 6%. According to analysts at HDFC Securities, Hero Motocorp shares may jump 10% in the next two quarters on the back of gradual recovery of lost market share in motorcycles, market share expansion in premium segment, and ramp-up in exports. Analysts also believe that the company is well-positioned to benefit from recovery in the rural economy, going forward. “We believe investors can buy the stock on dips in the band of Rs 2600-2640 and add further on dips to Rs 2360-2400 band,” they said in a report. The stock was quoting at Rs 2760 on BSE, down 0.8% intraday.

Buy on dips in Rs 2600-2640 band and add further on dips to Rs 2360-2400 band
Target price: Rs 3069; Upside: 10%
Time Horizon: 6 months

The analysts expect Hero Motocorp’s Revenue, EBITDA and PAT to grow at 16%, 25% and 25% CAGR respectively between FY22-FY24, led by market share revival in domestic motorcycles and ramp-up in exports. The company’s aggressive plans in scooters, premium bikes, and EV segments are also likely to mean well for medium term growth. Analysts believe investors can buy the stock on dips in the band of Rs 2600-2640 and add further on dips to Rs 2360-2400 band (12.25x FY24E EPS) for a base case fair value of Rs 2,875 (14.75x FY24E EPS) and bull case fair value of Rs 3069 (15.75x FY24E EPS) over the next two quarters.

Key upside triggers

Reduction in excise duty on fuel to benefit automobile players

The Government recently cut excise duty on petrol and diesel in its efforts to contain inflation. Petrol prices had risen to around Rs 120 levels in some of the states after the increase effected by the OMCs in of March-April’22. In order to offer some relief, the Government reduced petrol and diesel prices by Rs 8 and Rs 6 respectively. Some states have also cut the VAT on these fuels resulting in higher fall in prices thereof. The fuel price hike had been one of the major factors impairing demand, particularly among two-wheelers as the cost of ownership rose significantly higher. Analysts believe that this excise cut will benefit automobile players including Hero Motocorp

Waiving off import duty on raw materials to cool down prices

Government’s decision to remove import duty on certain raw materials of steel industry like coking coal and ferronickel and hiking/levying export duties on iron ore/some steel intermediate products will lead to lower costs for domestic steel manufacturers, with the Engineering Export Promotion Council (EEPC) saying that prices may fall by 10%, according to the report. “This would increase domestic availability of key industry inputs and reduce manufacturing costs. With softening prices, they would be able to pass on the benefit by reducing prices. 2W demand is sensitive to initial cost of ownership,” the brokerage report stated.

On track to commercially launch its own EV in July

Hero MotoCorp has launched its new dedicated brand for electric mobility, Vida. In keeping with the relentless pursuit towards its vision, ‘Be the Future of Mobility’, the company had unveiled Vida and called it a brand new identity for its emerging mobility solutions, including upcoming electric vehicles (EVs). Hero Motocorp’s first electric two-wheeler under Vida will be unveiled on July 1 this year.

Well positioned to benefit from recovery in the rural economy

Expectations of a normal monsoon in 2022 and elevated food prices have brightened the outlook for rural income in FY23 which is another positive for Hero Motocorp, according to analysts. Additionally, various high-frequency indicators of rural demand, most of which have been turning up recently have also aided it. Bank of America expects nominal farm income for Kharif season FY23 to improve to 17.1% on-year, atop a strong 15.4% increase in FY22. Analysts noted that Hero Motocorp has the strongest distribution network in the country’s rural and semi-urban areas and would be one of the key beneficiaries of the revival in rural demand.

Premiumisation and export growth to drive margin expansion

The two-wheeler maker is already firmly established in the entry level motorcycle segment and it is now looking to gain market share in the premium segment as well. On the export front, Hero Motocorp aims to export 5 lakh units in the next couple of years. It has commenced operations in Mexico and expanded its presence in El Salvador and Dubai, and is also exploring opportunities in few export destinations such as Colombia, Bangladesh, Nepal, Sri Lanka, Africa, and Mexico. “Increasing share of premium products and exports is expected to significantly contribute to its overall revenue and margin expansion,” analysts said.

(The stock recommendations in this story are by the respective research analysts and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)

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