Hero MotoCorp's scooters start revving up

Launches to improve market share

Volume outperformance vis-à-vis peers helped the Hero MotoCorp stock post smart gains this month. The company did better than expected, posting monthly sales growth 0.4 per cent to around 600,000 units, while peers posted a decline of two to three per cent year-on-year for August. Motilal Oswal Securities analysts had estimated Hero to post a sales decline of 7.5 per cent year-on-year. The volumes surprised positively, despite a delayed festive season this year and a high base a year ago, largely led by strong scooter sales.

Given the muted motorcycles sales, Hero is focusing on scooters. It recently launched two models — Hero Duet and Maestro Edge (110 cc) — adding to its existing portfolio of Pleasure and Maestro. Analysts at Antique Stock Broking believe with these launches, coupled with increased monthly scooter capacity of 120,000 units, Hero could beat the demand weakness in the motorcycle space in the coming quarters. Hero is looking to regain its market share in scooters, which has fallen from a peak of 20 per cent in FY14 to 12 per cent. However, analysts at Goldman Sachs say the company will look at replacing older brands with newer ones, as the former attract a royalty payment of five per cent to Honda. The biggest change in Hero’s new scooter offerings is the indigenous engine (Duet). Whether it has the ability to match competitors such as Activa (Honda) and Jupiter (TVS), time will tell.

While rural sentiments remain weak, analysts at Elara Securities in a recent report say the structural growth drivers for two-wheelers are in place. They argue rural penetration is at 14 per cent compared to 35 per cent in urban areas. They also contend the direct benefit transfer mechanism will boost rural income and in turn two-wheelers in the rural areas where Hero MotoCorp is strong. Against this backdrop, the contribution of scooters to Hero’s overall volumes could rise from the current 9.6 per cent. The near term might be muted, with September quarter revenues expected to fall four per cent on a seven per cent decline in volumes. However, the market seems to have factored in these concerns.

At the current price, the stock is trading at 15 times its FY17 estimates, with 58 per cent of analysts having a buy suggestion on the Hero stock. While the scooter sales should do well, investors should await a recovery in motorcycles, which form 90 per cent of its overall volumes.