The road ahead for Hero MotoCorp

Investors drive stock to new high as rainfall cheers

Subdued volume, smaller presence in the fast-growing scooter segment, and rural slowdown woes have marked the recent performance of the country’s largest two-wheeler maker Hero MotoCorp. Its ace motorcycle, Splendor, is no longer the largest selling two-wheeler brand, overtaken by rival Honda’s scooter, Activa. The investors still bet on the company, driving the company’s stock price to a new high early this week. It has gained 46 per cent from its 52-week low in September last year.

Hero ended FY16 with a share of 39 per cent in the domestic two-wheeler  market against 40 per cent in FY15. In the April-June quarter this year, its share softened to 37.6 per cent against 40.3 per cent in same quarter last year. Rival and former partner Honda has improved share from 25.5 per cent in the first quarter of FY16 to 27.2 per cent this year, riding on the sustained high double-digit growth in scooter sales. Hero, on the other hand, has had two years of setback in motorcycles (87 per cent of domestic volumes) due to weak rural sentiment. The gains in stock, therefore, seem puzzling.

One obvious trigger in store for the company is the revival of rural market as the country is set to receive good rainfall after two consequent deficit years. Hero sells every second two-wheeler in the rural market. The rural market benefits Hero and other two-wheeler and small car makers as well. So, it is a common trigger across consumption-driven companies.

Hero has other triggers, too. Last week, it launched its first in-house developed motorcycle, Splendor iSmart 110, five years after the split with Japanese partner Honda. Early this year, the company inaugurated its Rs 850-crore research and development (R&D) centre in Jaipur. All along its journey, the company had been dependent on Honda for technology, but that support ended with the split. Hero has been selling four products, developed by Honda, and still pays royalty for the same.

As it widens its in-house R&D, it will be phasing out the products on which it is incurring royalty burden. The first such product to get phased out was Maestro when the company launched its own Maestro Edge in September last year. “We will be phasing out the other three products on which we pay royalty by 2017,” Pawan Munjal, chairman, managing director and chief executive officer, said last week. The three products are Impulse, Ignitor and Passion XPro. Royalty payment is down from Rs 120 crore in FY15 to Rs 80 crore in FY16. The company expects this to come down steeply this year.

The firm has also benefited from the low commodity prices last year, which reflect in the near 16 per cent margins and an all-time high profit of Rs 3,132 crore in FY16. In spite of anticipation of an upward movement in commodity prices, the company said it would make efforts to sustain margins in the range of 14-15 per cent.

Analysts have a positive outlook. “Logically, the company should see a recovery this year and an improving market share in second half of the year, owing to a normal monsoon,” said Jinesh Gandhi, senior vice-president (research), at Motilal Oswal.

Rival Honda has moved up its two-wheeler share as it has maintained its market share of 58 per cent in the scooter market.

Overall scooter sales in the country grew 27 per cent in the first quarter. Hero has marginally expanded share from 13 in Q1 last year to 15 per cent this year after it launched two new scooters in 2015. The company said the two scooters were available nationally from this March and the share could move up further.

“There is a huge amount of work going on at the Centre and the results will be seen over the next several months,” Munjal had said last week, hinting at a roll-out of several new products. But, Hero is far from challenging Honda’s dominance in scooters and will need to ride on its motorcycles for growth.

Overseas business has not been in line with expectations. Hero is in the process of reviewing its strategy for the global business. It had, after its split with Honda, set a target of selling 10 million units a year by 2016, with exports bringing a tenth of volumes.

Later, the target date was advanced to 2020. Last year, export was about three per cent of the 6.63 million units sold.

“The past two-three years did not go according to plans in the export market. A lot of markets are oil-based and a decline in oil prices, currency depreciation and high inflation has impacted demand. We have not changed the 2020 targets. But, it makes sense to sit down and review these numbers,” said Munjal. The company is entering new markets such as Nigeria, Argentina and Mexico for exports.

In September last year, Hero’s first overseas manufacturing facility became operational in Colombia.

The manufacturing facility in Bangladesh will commence operations later this year. With a capacity of 150,000 units, this facility is likely to be used as an export base to other neighbouring countries.