Hero MotoCorp operational revenue increased by 3% to INR 19,724 crore in Q3 despite a stable average selling price and a 3% sequential volume growth.
Although the gross margin increased by 130 basis points to 32.7%, the operating profit was constrained by increased marketing costs for electric vehicles.
New Delhi: Hero MotoCorp Ltd.’s shares saw a 52-week high of INR 4,949.05 a share during early Monday trading hours, but they ended roughly 5% lower as a result of general market weakness. The company had a wild ride on the stock market. The two-wheeler maker may have difficult times ahead of it, despite the December quarter’s (Q3FY24) respectable performance, according to a recent article from a top national business daily.
Hero MotoCorp operational revenue increased by 3% to INR 19,724 crore in Q3 despite a stable average selling price and a 3% sequential volume growth. Higher marketing costs for electric vehicles limited the gain at the operational profit level, even if the gross margin increased by 130 basis points to 32.7%.
The impact on the EBITDA margin was 200 basis points, which resulted in a further 10 basis point drop to 14%. Conversely, Q3 EBITDA margins for Bajaj Auto Ltd. and TVS Motor Co. Ltd. saw a minor sequential increase.
Hero projects a margin hit of 125–150 basis points in FY24 due to expenses related to its electric vehicle operations.
Despite this, profitability is anticipated to be supported by stable commodity prices and an emphasis on premiumization. However, the company’s major focus is maintaining its market share, especially in the entry-level market where the premiumization trend has impacted its position.
Despite multiple new launches in the current fiscal year, Hero’s market share for domestic bikes fell to 41.6% in Q3 from 50.4% in Q4FY23, according to Antique Stock Broking. Although certain high-end products, such as the Harley Davidson X440 and Karizma XMR, add value to the portfolio as a whole, concerns are raised regarding their ability to win back market share in the face of fiercer rivalry.
Interestingly, not every launch that Hero MotoCorp has done recently has been a success. The Xtreme 160R, a new premium sector offering, did not have a major influence, as HDFC Securities notes.
Though there are indications that entry-level demand is picking up again, it is unclear if this will result in a real increase in volume. Hero stated during its Q3 earnings call that rural inquiries now make up 50–55% of all inquiries, up from 40% previously.
Regarding electric vehicles, Hero intends to introduce two models in the April-June quarter: an electric scooter for the mass market, priced at roughly INR 1 lakh, and an electric scooter for the mid-segment, priced at approximately INR 1.25 lakh. To spur expansion, the company plans to ramp up its capacities in FY25. In the category of electric vehicles, Hero remains behind Bajaj Auto Ltd. and TVS Motor Co. in terms of market share.
Investors appear satisfied despite these difficulties. Hero MotoCorp’s stock has increased 81.5% in the last 12 months thanks to the rebound in demand for entry-level products and the favorable perception of recent releases.
With the recent rally, future gains appear limited to the upside.
Hero’s fair value however reassures investors in comparison to its competitors; according to Bloomberg statistics, the stock is trading at around 21 times its expected FY25 earnings, whereas Bajaj and TVS are trading at 26 and 37 times, respectively.