Hero MotoCorp finds it hard to speed up in tough environment

What gives? Overall performance remains muted. The sequential rise of 254 basis points (bps) in Q3 gross margin to 30.6% did not translate to commensurate improvement at the Ebitda (earnings before interest, tax, depreciation and amortization) level. One basis point is 0.01%. This was due to adverse operating leverage thanks to weak volumes and a rise in other expenses. Ebitda margin was up by only 10bps sequentially to 11.5% in Q3. Moreover, Ebitda margin was impacted to the tune of 70bps owing to spends on its electric vehicle (EV) launch, Vida V1, Hero said in the earnings call.

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The company expects such expenses to continue going forward as it expands its EV offering to more cities. In view of this, Hero’s Ebitda margin trajectory is unlikely to surprise positively. Currently, the EV product is available in only three cities – Delhi, Bengaluru and Jaipur– and investors would do well to track the market acceptance. Hero said that EV deliveries have been in the range of 250-300 vehicles so far.

“While the company has equipped its EV product with industry-leading features, we believe the company’s strategy to focus on the premium segment by pricing its product above competition will limit volume growth,” analysts at Kotak Institutional Equities said in a report on 7 February.

Overall, while softening raw material costs and price hikes would aid margin expansion, volume growth is paramount. Hero primarily caters to the entry level segment and the company notes green shoots in rural demand recovery. However, rural still lags urban. “As of now, there is nothing concrete in terms of strategy as to how Hero will ramp up its volume and thus regain the lost market share, which largely hinges on rural demand recovery,” said Varun Baxi, an analyst at Nirmal Bang Equities. In January, Hero’s two-wheeler volumes declined by 9.5% sequentially to 3,56,690 units. The company noted premiumization has been a trend and is accordingly strengthening its 125cc portfolio. The XTEC variants are seeing good traction.

The stock could see near-term pressure given the muted rural markets and accordingly, slow recovery in volume. Valuations, though, appear reasonable. The shares trade at almost 15 times its FY24 estimated earnings, show Bloomberg data.