Hero MotoCorp sweats on growth, competition

Rising competition in the executive segment from the likes of Honda and a slowing domestic market for motorcycles weigh on prospects

While a slowing in sales volumes has taken the shine off Hero MotoCorp’s (Hero) stock, down four per cent in April against a one per cent fall in the Sensex, the expected rise in competitive pressures over the coming months and slowing industry volumes have raised concerns over its medium- to long-term outlook.

A drop in crop realisations and lower two-wheeler sales has translated to a mere 2.4 per cent year-on-year growth for Hero in the month of March. Given the high base, it is likely to achieve eight to 12 per cent growth in volumes in 2012-13, estimate analysts, compared to 15.4 per cent in 2011-12.

The key threat for Hero is the launch of Honda Motorcycle and Scooter India’s (Honda) Dream Yuga, which Citigroup Global Markets analysts Jamshed Dadabhoy and Arvind Sharma believe has the potential to destabilise market share in the executive segment.

Further, a slowing in the domestic segment will hurt Hero more than Bajaj Auto, as the latter gets about 36 per cent of its volumes from exports. The areas of opportunity for Hero will be exports, the fast growing scooter market and the premium motorcycle segment.

At Rs 1,973, the stock is trading at 15 times its FY13 estimates. Given competitive pressures at home and untried export markets, most analysts have a sell/hold rating, with price targets at Rs 1,650-1,950.

CONCERN ON VOLUMES
In Rs crore	FY11	FY12E	FY13E
Volumes (in mn units)	5.4	6.2	6.7
% change y-o-y	17.4	16.2	8.0
Net sales	19245.0	23410.0	25556.0
% change y-o-y	22.1	21.6	9.2
Ebitda	2460.0	3362.0	3630.0
% change y-o-y	-7.6	36.7	8.0
Ebidta (%)	12.8	14.4	14.2
Net profit	1927.0	2240.0	2622.0
% change y-o-y	-13.6	16.2	17.1
EPS (Rs)	96.5	112.0	131.0
P/E (x)	20.4	17.6	15.1
E: Estimates                                                          Source: Citigroup Global Markets

Competitive pressures
While the company has lined new products such as the 110cc Passion X Pro bike and 125cc motorcycle Ignitor for launch in FY13, it is likely to face increasing competition in the executive segment from Honda and TVS. While Honda will pull out all the stops to market its 110cc Dream Yuga, TVS is also expected to re-launch its popular bike, Victor, in a new avatar. Bajaj, too, is expected to launch a bike in this segment.

The Street will be keenly monitoring the battle between Honda and Hero, given that the executive segment accounts for about two-thirds of overall motorcycle sales, and that Honda was until recently Hero’s partner (for 26 years), with equally good understanding of the Indian market.

Hero currently dominates the executive segment, with 74 per cent market share. Due to an estimated slowing in the sector, Citi has cut volume forecasts for Hero and anticipates slight erosion in its market share, particularly in the executive segment. The battle in the segment, however, will be played out over a long term, with Hero unlikely to yield much in the short term, believe experts.

Says the head of research at a leading brokerage firm, “Though Hero MotoCorp will shed some market share, the gains for competition in the short term will be marginal, as Hero still has enough brand pull and distribution reach.” As a comparison, while Hero has a 4,000-dealer network, Honda’s is just a fourth of this. This will be difficult to replicate any time soon.

If the Honda bike is successful, it could generate sales volumes of 500,000-750,000 units annually. The incremental market share Honda would capture within the commuter bike segment in FY14 would be six to nine per cent, feel Citi analysts.

Scooters, export focus
Hero is also looking to improve its share of the scooter market, currently 16 per cent. Unlike motorcycles, this segment is expected to clock another year of higher volumes, with growth estimates pegged at a little over 15 per cent. The company has recently launched a gearless scooter, the Maestro. While analysts say it is too early to predict its impact on the segment (dominated by Honda’s Activa), Vijay Sarthy T S and N Ravindranathan of Spark Capital say the launch is likely to impact sales of TVS’ Wego. Hero is also likely to test-market its hybrid scooter, the Leap, later this year.

The other area which could open substantial opportunities for Hero is export, currently at two per cent of its volumes. The company has an export target of a million units by 2016-17, from just over 100,000 currently. Hero’s managing director and CEO, Pawan Munjal, has already indicated exports would be a focus area and the company was targeting opportunities in markets such as Africa and Latin/Central America. To compete effectively, both in the premium end of the domestic market as well as exports, the company recently entered into a strategic tie-up with US-based Erik Buell Racing. Analysts say the move will help the company turn the heat on Bajaj Auto in the premium segment and offset some of the pressure in the executive segment.

Outlook
Two-wheeler growth is likely to be on the slow lane due to a rise in product prices after the Budget and a likely rise in fuel prices in the first half of FY13, believes Hitesh Goel of Kotak Securities. While the Society of Indian Automobile Manufacturers has put out the FY13 estimates at 11-13 per cent, analysts feel it is likely to be eight to 10 per cent.

Though the impact of the slowing and competitive intensity in the executive segment will be negative, Hero’s strategy of venturing into other new markets, targeting the premium end of the domestic market and making inroads into the scooter segment should soften part of the blow, feel analysts.