Hero MotoCorp sales volume may stay in fast lane despite cost pressures

But near-term margin pressurea major concern, analysts reckon

Two-wheeler major Hero MotoCorp (HMCL) saw a strong June quarter (Q1FY27), beating estimates across most parameters. The company also logged 22.7 per cent volume growth during the period, outperforming the sector (14 per cent).

 

During Q1FY27, revenues were aided by volume as well as value growth. Operating performance remained resilient despite commodity headwinds. The company expects the momentum to continue into the September quarter.

 

For financial year 2027 (FY27), the volume growth expectation for the sector is in high single digits. While the sales outlook remains robust -- given new products and refreshes -- its ability to outperform the sector and maintain margins amid rising input costs will be the key drivers going ahead. At the current price, the stock, which has gained about 16 per cent over the past month, is trading at 19.6 times its FY27 estimates. This is at a discount to its five-year average.

 

Revenue jumped 35.7 per cent in Q1FY27, on the back of volumes which rose 22.7 per cent year-on-year (Y-o-Y) to 1.7 million units on a lower base. Price realisation at ₹77,500 per unit grew 10.6 per cent Y-o-Y and 3.8 per cent quarter-on-quarter (Q-o-Q), aiding the topline show. Average sales prices were helped by a 30 per cent Y-o-Y jump in revenue from the high margin parts, accessories and merchandising businesses.

 

In the motorcycle segment, 100cc volumes grew 11.5 per cent Y-o-Y, taking its market share to 85.8 per cent. While, 125cc volumes improved 45.4 per cent Y-o-Y, indicating improving traction in premium commuters.

 

In the scooter segment, internal combustion engine (ICE) volumes rose 84 per cent Y-o-Y, improving its market share to 6.9 per cent. In the Vida electric vehicle (EV) business, volumes surged 151 per cent Y-o-Y and retails increased 163 per cent to 57,000 units. Its EV market share improved to 10.9 per cent and the EV capacity is expected to triple to 45,000 units by the end of FY27.

 

Subhash Gate and Heet Chheda of Choice Equity Broking expect refreshed products and an improving premium mix to support sustained growth going ahead. The brokerage is positive on the stock, considering strong visibility across entry-level motorcycles, scooters, EVs, exports and launches, enhancing medium-term earnings growth. They lowered their FY27 and FY28 earnings by about 5 per cent each to factor in ongoing margin pressure. They have reiterated a "buy" rating with a target price of ₹6,450 apiece.

 

The ongoing positive rural sentiment bodes well for stable demand momentum for HMCL, pointed out Motilal Oswal Research. It is delivering a steady outperformance in scooters -- both EV and ICE -- while exports have started outperforming, albeit over a low base, it added.

 

Analysts led by Aniket Mhatre of the brokerage project an annual growth of 10 per cent in revenue, 8 per cent growth in operating profit and a 9 per cent growth in net profit over FY26-28. The brokerage has a "buy" rating on the stock, with a target price of ₹6,560 per share.

 

While revenue growth and outlook remain robust, the standout metric in the Q1 show was the operating profit performance. Though gross margins contracted 480 basis points Y-o-Y to 28.5 per cent, operating profit beat estimates. This was on account of strong control in other expenses, which were up just 9 per cent Y-o-Y, despite the strong 23 per cent Y-o-Y growth in volumes. The company was able to restrict the fall in operating profit margin performance to 110 basis points, despite the sharp gross margin fall. The company expects a marginal growth in commodity costs in Q2 and is planning to offset the same through product mix improvement, cost savings and deferring non-essential costs.

 

While revenue was driven by better mix and pricing, cost savings and operating leverage helped partially mitigate some of the commodity headwinds, according to Prabhudas Lilladher Research. Its near-term focus shifts to volume and absolute operating profit growth, while retaining mid-term margin guidance of 14-16 per cent, the brokerage said. It has retained an "accumulate" rating with a target price of ₹6,000 per share.