Hero MotoCorp to benefit from higher rural share; downtrading to help

Market leader's share in the economy segment improved by 600 basis points in FY20

While the slowdown has impacted all players in the two-wheeler space, Hero MotoCorp — with a higher share of volumes from entry-level segments and the rural marketplace — is better placed than listed peers, TVS Motor Company and Bajaj Auto. 

The company announced it is commencing operations from May 6 in a graded manner at three of its manufacturing plants — Gurugram/Dharuhera  (Haryana), Haridwar (Uttarakhand), and Neemrana (Rajasthan). The company is also opening its network of dealerships and customer touchpoints gradually this week. 

While the overall sentiment is weak due to multiple headwinds in the form of Bharat Stage-VI transition, higher costs, and availability of finance, the two-wheeler sector’s tilt towards the economy segment should help the market leader. 

Even as it gained 130 basis points (bps) in the overall motorcycle segment to 52 per cent, the gain in the economy segment of motorcycles for Hero was higher at 660 bps in 2019-20 (FY20) to 62 per cent. The gains came in largely at the expense of Bajaj Auto.  

 

The downtrading to lower segments in the motorcycle value chain is expected to aid volume growth of Hero, which accounts for 62 per cent of the market in the economy segment and 68 per cent in the executive segment.  

Shashank Kanodia and Jaimin Desai of ICICI Securities expect the preference for personal vehicles, and the company’s leadership in the 75-100 cc segment (Splendor HF Deluxe and Passion) and 110-125 cc (Glamour, Splendor 125) should help Hero MotoCorp capitalise on this opportunity. 
 

ICICI Securities expects the two-wheeler segment to recover faster than passenger vehicles. The other trigger is the exposure of Hero MotoCorp to the rural segment, which accounts for half of its sales. 

Kapil Singh and Siddhartha Bera of Nomura say the demand recovery could be faster for the company, given the government’s rural focus, good rabi crop, and a favourable monsoon forecast, which could drive rural income. 

 

Most red zones are centred around urban areas; the top 10 cities account for only 9 per cent of Hero’s volumes, compared to 14 per cent for the industry. 

Further with the lockdown expected to be eased in rural areas earlier than urban and given its network, Hero is in a better position to improve sales, compared to competition. While it is better placed than competition in the current environment, it is lagging competition in certain segments. 

In scooters, the company lost 350-bps market share in FY20, and its share at 7.2 per cent is half of what it was in 2016-17. Though it is still the largest player in the executive segment, the loss of market share in FY20 due to the launch of Bajaj Pulsar 125cc bike is worrying. Most brokerages are positive about the company, given the rural positioning, higher share of entry-level segments, and attractive valuation. The stock, which is down 35 per cent from its 52-week highs, is trading at 20 per cent discount to its long-term average valuation.

While cash on the books and 4 per cent dividend yield are compelling, investors should be cautious, given the recovery will be gradual and a weak operating leverage will have a negative impact on financials over the next couple of quarters.