Hero MotoCorp volume momentum stays strong, but margin headwinds persist

Hero MotoCorp's Q1 FY27 performance beat estimates on volume and revenue growth, but rising input costs and margin pressure remain key risks ahead

Two-wheeler major Hero MotoCorp (HMCL) had a strong June quarter (Q1 FY27), registering a beat across most parameters. While revenues were aided by volume as well as value growth, operating performance remained resilient despite commodity headwinds. After a 14 per cent volume growth in the June quarter for the sector, with HMCL growing faster at 22.7 per cent, the company expects the momentum to continue into the September quarter.

 

For 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.

 

 

Revenues for the quarter saw a 35.7 per cent jump, aided by a 22.7 per cent year-on-year (Y-o-Y) growth in volumes to 1.7 million units, though the growth was 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 selling 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, units based on internal combustion engines increased 84 per cent Y-o-Y, improving its market share to 6.9 per cent. In the Vida electric vehicle (EV) business, volumes rose 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 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. It lowered its FY27 and FY28 earnings by about 5 per cent each to factor in ongoing margin pressure. It has reiterated a buy rating with a target price of ₹6,450.

 

The ongoing positive rural sentiment bodes well for stable demand momentum for HMCL, points out Motilal Oswal Research. Further, it is delivering a steady outperformance in scooters, both EV and internal combustion engine (ICE), while exports have started outperforming, albeit over a low base, it adds. Analysts led by Aniket Mhatre of the brokerage project annual growth of 10 per cent in revenues, 8 per cent growth in operating profit, and 9 per cent growth in net profit over the FY26-28 period. The brokerage has a buy rating with a target price of ₹6,560.

 

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