Hero: Rural revival to offset worries

Note ban will affect sales in near term, but company will benefit from rise in rural demand

Hero MotoCorp stock gained six per cent over the past week as analysts turned positive on the prospects of the company on an expected rise in rural consumption. What helped matters was management statement that footfall is back to 85 per cent of normal level, after steep fall. "With a slew of measures being implemented by government, we expect the situation to return to normal sooner than later," Pawan Munjal, chief executive, Hero MotoCorp said. The stock had lost 15 per cent after note ban on fears that the move will affect its sales. About 67 per cent of its sales, according to Nomura, are through cash or bank.

 

Deutsche Bank analysts, who have a buy rating on the company and a hold rating on other two-wheeler stocks, say Hero should be a key beneficiary of any revival in the rural economy, which should aid motorcycle growth. Further, the launch of its own scooters should aid market share. The company lost market share in the current financial year on higher growth of scooter segment, where it has a lower share, and faster growth of premium motorcycles over entry-level space, where Hero is better placed. In FY17 so far, Hero has lost 179 basis points in market share at 50 per cent. This could change going ahead. 

In October, Hero outperformed the motorcycle market, growing eight per cent year over year. The key factor was the 75-100 cc segment, which sold well in rural India. Also, festive sales have grown in double-digits, say analysts at Elara Capital. Hero gained 340-basis-point market share year over year in October, with its share of the 75-100 cc segment reaching 70.8 per cent. This segment accounts for 60 per cent of the sector's motorcycle sales and 83 per cent of Hero's revenues. In fact, the revival in rural markets and festival demand in October helped the company's Splendor retake crown from Activa, for being the largest-selling two-wheeler. Activa had been leader since start of 2016. 

Analysts believe sales will be affected in the second half of FY17, but they still favour Hero, considering its potential to gain once rural demand revives. Analysts at Antique Stock Broking say, "Though we fear risk of de-rating in the near term on poor second half of FY17, we believe it's worthwhile to hold on to the largest two-wheeler player in turbulent times and add on stock fall 15 per cent earnings, compounding play with a three per cent dividend yield." 

The stock, at 16.5 times its FY18 net profit estimate, is at a five per cent discount to Bajaj Auto, and 37-39 per cent discount to TVS Motor Company and Eicher Motors.