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The Hero MotoCorp stock has underperformed peers TVS Motor and Bajaj Auto in recent months on the back of muted September quarter numbers, lower presence in higher growth areas and margin pressures. Brokerages have been highlighting three areas --- scooters, premium motorcycles and exports -- where it is falling short of its smaller peers.
Exports account for a negligible two per cent of Hero’s sales (20-40 per cent for TVS, Bajaj Auto). Scooters and premium motorcycles, the fastest-growing segments of the domestic two-wheeler market, contribute only 13 per cent to its volumes. The company is seventh in the ranking for premium bikes, with a market share of three-four per cent.
Scooters is another segment where it is lagging, as the market share of its portfolio (Maestro Edge, Duet, Pleasure) has been trending down from a peak of just under 20 per cent two years ago to 12 per cent. While its volumes in the first half are up a per cent, TVS Motor has gained 40 per cent and the sector has gained 17 per cent. To improve its position, the company is looking at introducing new models, including a 125cc model this financial year.
Analysts at JPMorgan, who have ‘neutral’ rating on the stock, say a sustained industry shift towards scooters and premium motorbikes is an overhang, given the company’s lack of a significant presence in these segments. Credit Suisse, too, is ‘neutral’ on the stock, and believes the company needs some traction in scooters and premium bikes if it is to be re-rated.
The key trigger is uptick in rural volumes, one of the key markets for the commuter motorcycle category, where it has two-thirds of the volume market share. After a muted October, volumes grew 26 per cent over a year in November.
The management is confident demand momentum will continue in the second half of FY18 (year-to-date volume growth of eight per cent), led by a ramp-up in rural demand and new launches. Analysts at HDFC Securities say given product reliability and brand acceptability, the company’s market share is resilient in the entry and commuter segment. It will be a key beneficiary of the increase in penetration of two-wheelers in the northern (especially Uttar Pradesh, the largest market with a share of 14 per cent) and eastern parts. This could be at risk, as the pace of scooterisation and premiumisation of the Indian two-wheeler industry, according to analysts at Goldman Sachs, is on the rise, as rural customers are starting to shift to these categories, mimicking their urban counterparts.
In addition to this, margins will remain under pressure on ceasing of the Haridwar excise duty benefits and lagged impact of commodity cost in inflation. Investors should await sustained volume growth and traction in high-growth areas before considering the stock.
