Hero MotoCorp rides on robust Q2 performance and better prospects

Markets give thumbs up to the two-wheeler major's performance, analysts bullish on stock

Lower raw material costs and better rural demand boosted Hero MotoCorp’s (HMCL) Q2FY24 performance. There was a 4.7 per cent quarter-on-quarter (Q-o-Q) increase in volumes and 7.7 per cent rise in revenue to Rs 9,445 crore. The earnings before interest and tax, depreciation and amortization (Ebitda) increased by 10.1 per cent Q-o-Q to Rs 1,328 crore. 

The Ebitda margin expanded by 30 basis points (bps) Q-o-Q to 14.1 per cent and gross margin also expanded by around 80bps expansion.

The EV (electric vehicle) business dragged the Ebitda margin down by 90 bps because scale benefits have not yet kicked in. 

The adjusted PAT increased by 11.5 per cent Q-o-Q to Rs 1,054 crore. 

The October sales volume is also up leading to optimism for the ongoing festival season.

The key focus areas include improving the customer experience via digitisation and revamped dealerships and an increased presence in the scooter segment with aggressive product launches. 

The company is also targeting more EV market share and it is looking at unit revenue growth. 

There is also a focus on exports and hopes of a 14-16 per cent Ebitda margins. HMCL has witnessed 15 per cent year-on-year (Y-o-Y) growth in festival demand so far.

There’s a big order backlog of some 25,000 units for the Harley Davidson range and around 14,000 for the other premium offering, Karizma. HMCL aims to ramp up Harley plus Karizma production capacity to 10,000 units/month together.

However, Other Expenses as a percentage of sales have expanded from 10.3 per cent in Q1FY24 to 11.2 per cent though part of this may be seasonal.

The entry-level demand has yet to fully recover looking at offtake versus product mix. Higher-than-estimated ‘other income’ boosted adjusted PAT, which grew 47 per cent Y-o-Y and it remains to be seen if Other Income is sustainable.

The EV business has not yet hit scale. EVs are holding 5 per cent volume share in the festival season, which suggests encouraging adoption of EVs in rural areas. Vida has breached the milestone of 2,000 units in monthly sales.

The company’s objective is to extend its presence to more than 100 cities by December 2023 and diversify its EV offerings further in FY25. Currently, the production run rate stands at about 1,000 units/week.

The guidance is that festive demand has been strong in both rural and urban segments and the product mix expansion is working out well. Export volumes in H2FY24 are expected to improve over H1FY24. 

The capex for H1FY24 was Rs 310 crore (vs. Rs 230 crore in H1FY23) but H2FY24 capex may be close to Rs 700 crore. 

The Free Cash Flow was at Rs 780 crore in H1FY24 vs Rs 220 crore in H1FY23.

The stock market response has been positive. 

Most analysts seem to assess Q2FY24 performance as in-line with margin expectations and slightly better than expectations on volumes. 

Long-term, the Ebitda margin should improve as EV operating efficiencies kick in. 

The consensus is “Buy” or “accumulate”.