Signs of revival for Hero MotoCorp

Strong volumes, market-share gains in scooters, Budget's rural push, and monsoon, are positives

After a two per cent year-on-year fall in two-wheeler volumes in January, Hero MotoCorp registered 14 per cent growth each in February and March. The sales numbers, which were above expectations, were led by strong scooter sales from new launches and a favourable base. While scooter sales for the two months are up by an estimated 30 per cent, motorcycle sales, too, recorded double-digit growth. Two-wheeler sales have also been boosted by marriage and festival seasons. Strong performance in the past two months helped Hero report flat sales performance for FY16 (versus 6.2 per cent growth in FY15) — its year-to-date volumes till February were down 1.2 per cent. Analysts at JM Financial have upgraded the stock as they expect Hero to deliver a 13.5 per cent earnings growth over FY16-18, driven by a 22 per cent growth in scooters, rural demand recovery on better monsoon, deep network penetration, and improving profit margins.

Among key reasons for the uptick over the past two months has been a surge in scooter sales. Hero, which lost market share due to a lack of products, has been gaining traction with the launches of Maestro Edge and Duet in the December quarter. Its scooter share has increased from 15 per cent at the start of FY16 to over 20 per cent now.

Given the company's scooter portfolio, which is growing at 25 per cent year-on-year over the past six months (versus the scooter segment's 14 per cent growth), market-share gains are expected to continue. Further, with scooters now accounting for 31 per cent of the sector, higher share of this fast-growing space will add to Hero's volume growth. What could push up sales is the availability of the Duet scooter pan-India over the next few months. Additionally, volumes could be boosted by exports, which were up 47 per cent to 14,000 units in March, on the back of Maestro Edge and Duet sales. From two-three per cent of volumes, Hero has an export target of 10 per cent by FY20. In motorcycles, too, Hero is expected to maintain its market share, despite intensifying competition.

The Budget's push to boost the rural economy, especially policies related to improving the road infrastructure, should help raise overall two-wheeler sales. The most important factor for Hero, which gets over 45 per cent of its volumes from the rural space, is a normal monsoon after two years of rain failure.