Today’s top gainer on BSE Sensex is down 33% so far this year, here’s what made it rally

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Updated: April 1, 2020 3:41:45 PM

After plummeting 33% since the beginning of this year, Hero Motocorp has suddenly de-aligned its path from that of the benchmark S&P BSE Sensex which tanked 1200 points on Wednesday.

legend investor peter lynch investment tips, stock market tips, stock investment tips in volatile market, coronavirus, COVID-19, bear market, bull marketWith around 1,50,000 unsolved inventory of BS-IV vehicles still piled up and factories closed for production, what is drawing investors towards this auto giant?

After plummeting 33% since the beginning of this year, Hero Motocorp has suddenly de-aligned its path from that of the benchmark S&P BSE Sensex which tanked 1200 points on Wednesday. Hero Motocorp is up 2.2% to trade at Rs 1625 per share on a day when the 30 stock BSE index fell over 4%. With around 1,50,000 unsolved inventory of BS-IV vehicles still piled up and factories closed for production, what is drawing investors towards this auto giant? Brokerages think that the two-wheeler sales of the company largely drawn from rural India will pick up in the second half of the fiscal and apart from that the cheap valuation of the scrip makes it attractive enough to be picked.

In a conference call earlier this week, Hero Motocorp highlighted that 1,50,000 units of BS-IVvehicles that the company expected to sell by March 23 have now been stuck with sales only happening online and not via retail channels. Hero Motocorp is witnessing a cash burn of Rs 200 crore per month owing to the lockdown. “However, presence of Rs 4000 crore in liquid funds and no debt on the balance sheet is expected to not lead to any liquidity concerns,” noted ICICI Securities in a research note. The brokerage has pinned a target price of Rs 2501 per share on Hero Motocorp translating to a 53% upside.

As the economy slows down, Hero Motocorp is expecting a shift in preference among entry-level four-wheeler owners towards the premium two-wheeler segment, said JM Financial Services while putting a ‘buy’ call on the stock without a target price. While business remains under a lockdown hitting the BS-VI manufacturing the company has provided dealers with stocks for at least a month which will not discourage sale figures once the lockdown eased. To ramp up sales via the online channel, Hero Motocorp has increased discounts on Motorcycles and Scooters. As for the unsold inventory, the company will look to export the stock.

Hero Motocorp has earmarked Rs 100 crore for the fight against coronavirus of which Rs 50 crore will be sent to the government and rest will be utilised by the group in fighting the pandemic.

“Hero Motocorp is well prepared for restart as and when it (removal of lockdown restrictions) happens, as dealers have around one month of BS6 inventory. Pent-up demand will be there and be realized at some point in time, which is difficult to predict as of now,” said Motilal Oswal in a research note on the stock. The brokerage added, “The near-term outlook is challenging amid economic stress across sectors due to lockdown. The lockdown has added pain to the already weak demand environment and anomalies due to BS6 transition. This is largely discounted in the price with the recent fall in the stock price. We believe that clarity on the demand scenario will emerge post the lockdown is lifted as there will be pent-up retail demand and refilling of inventory with BS6 models. Barring near-term volatility, we see limited downside risk from current levels (due to cheap valuations).” Motilal Oswal is neutral on the stock but has a target price of Rs 2000 per share, with an upside of 23% on the current market price.

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