Hero MotoCorp to vroom on new launches and uptick in rural growth

Hero MotoCorp (HMCL) saw strong volume performance in the first quarter of the current financial year (Q1FY25), but margins disappointed due to weak spare part sales and negative electric vehicle (EV) margins. The company hopes for a strong festive season due to better rural sentiment.

Revenue grew 16 per cent year-on-year (Y-o-Y) to Rs 10,140 crore, operating profit was up 21 per cent to Rs 1,460 crore, and adjusted net profit grew 19 per cent Y-o-Y to Rs 1,120 crore. Net realisations improved 2 per cent Y-o-Y to Rs 66,100 per unit while volumes grew 13.5 per cent Y-o-Y.

Gross margins improved 170 basis points Y-o-Y (down 130 basis points Q-o-Q) to 32.3 per cent while operating profit margin was 14.4 per cent, up 60 basis points Y-o-Y. Margin weakness was due to a combination of adverse mix of entry-level products in marriage season, lower spare parts sales (12.5 per cent of revenues vs 14.7 per cent Q-o-Q) and adverse margin impact of spends on EV at Rs 180 crore. The margins for the internal combustion engine (ICE) portfolio were at 16.4 per cent, according to management. EV revenue stood at Rs 130 crore with an operating loss of Rs 280 crore.

Domestic demand is witnessing a recovery in entry and 125cc segments and rural growth is outpacing urban growth. HMCL has improved market share in the 125cc segment to 20 per cent in Q1FY25 from 13 per cent in Q4FY24. It has increased the capacity of Xtreme 125cc to 25,000 per month and targets 40,000 per month by end Q2FY25.

About 40 per cent of its network received Xtreme 125. HMCL saw modest raw material inflation of Rs 340/unit. Input costs may remain range-bound in the near term. Capex guidance was Rs 1,000-1,200 crore for FY25.

The current situation in Bangladesh has been a setback for exports. Overall exports represent about 4 per cent of revenues and Bangladesh is about 13 per cent of exports. New launches and rural pickup could drive annual volume growth of 8 per cent over FY24-26. This may translate into mid-teens growth for revenue, operating profit, and net profit over FY24-26.

HMCL has around 520 Hero 2.0 outlets, about 50 per cent of total HMCL dealerships and about 40 premia outlets. It plans to have 100 premia outlets by FY25 end and it has upgraded 190 customer service centres. Two new premium model launches are planned in FY25 along with a new scooter. HMCL is looking to reduce costs to launch more affordable EV scooters. It plans to aggressively grow the premium portfolio.

In EVs, the Vida is available with 300 dealers across 175 cities. The new Vida products are expected to be PLI-compliant. As costs come down and HMCL gains scale, it expects the EV segment to achieve profitability.

At the entry-level, HMCL is trying to revive demand backed by refreshes and financing solutions. It has launched the Hero Digi Fin solution, which is an automated aggregation platform for financing solutions, for a wider set of customers. Financing share stood at 60 per cent for Q1.

Exports present a huge opportunity (potentially twice that of the domestic market). HMCL has doubled its target export markets to 40 countries. It is working on launching new products customised to key markets, revamping its distribution network, and investing in brand building. Exports could be a growth driver in the future.

Valuation is trading around 22 times expected FY25 earnings per share and investors would have to factor in holdings in Hero FinCorp and Ather after taking a holding company discount. The near term could see downgrades until the EV segment goes into black. The volume growth prospects look strong, given the rural revival.