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Hero MotoCorp Equity Research

HomeCompanyHero MotoCorp Equity Research

Date of Research – 18 January 2016

Price – Rs. 2,411.80

About the Company

Incorporated in 1984, Hero MotoCorp Limited (“Hero Motor” or the “Company”) manufactures motorcycles, scooters, and automonile spare parts. Hero Motor offers its products through a network of dealers under various brands including, Impulse, CD Dawn, CD Delux, Pleasure, Glamour, Splendor Pro, Achiever, CBZ and Karizma.

STRENGTHS

Strong Financial Position

Hero MotoCorp income from operations grew at an impressive CAGR of 25.88 %. The company has reserves in excess of Rs. 5,582.70 Cr and is debt-free for the past 13 years and incurs no borrowing costs. The company has a strong dividend history and has maintained an average dividend yield of 3.93 % over the last 5 financial years.

Dominant and Diversified Market Position

The company is a market leader in the domestic two-wheeler market with about 52.8 % market share. In the domestic motorcycle segment, the company has captured 53.5% market share. Hero MotoCorp’s strong financial position not only enables the company to have bigger advertising budgets to attract customers; it also enables the company to invest in new product launches & technology to maintain its market share and increase its overseas presence.

India’s Demographic Advantage

India’s two-wheeler industry will continue to experience increase in demand, for many reasons. Firstly, the country’s aspirational youth and their high disposable income is a significant growth driver. Secondly, growing rural income across India has increased the two-wheeler sales. Finally, poor public transport and an urgent need to avoid urban congestion have increased need for a quicker and more affordable mode of transport.

CHALLENGES

Stiff Competition in Two-Wheeler Segment

Hero MotoCorp’s key challenge is to protect its the market share in the motorcycle segment. The Company faces competition from Bajaj Auto, Honda, Yamaha and TVS.

The company is likely to face more competition from Honda, which is planning to expand its motorcycle portfolio in the economy and entry segment. Honda has already made its inroads into Hero stronghold in the deluxe segment with its Dream series bikes – Neo and Yuga, as well as the CB Shine, Twister and Stunner. Also, in the scooter segments, the Company faces a strong competition from Honda’s Activa.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016  FY 2017
Total Income from Operations 23,768.11 25,275.47 27,538.03 28,613.73  30,958.19 
Expenses 20,483.63 21,736.37 24,041.30 24,231.48  26,382.22  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 3,284.48 3,539.10 3,496.73 4,382.25  4,575.97  
Depreciation 1,141.75 1,107.37 540.45 447.01  502.25  
Finance Costs 11.91 11.82 11.70 11.87  27.28  
Other income 398.38 444.19 492.11 389.08  521.95  
Exceptional items 144.73 –  – 
PBT 2,529.20 2,864.10 3,291.96 4,312.45  4,568.39  
Tax 411.04 758.17 943.45 1,262.24  1,339.10  
PAT (before Minority Interest and share of Associates) 2,118.16 2,105.93 2,348.51 3,050.21  3,229.29  
Profit/ (loss) attributable to Minority Interest (0.35) (1.04) (4.11)  (262.09) 
Share of profit / (loss) of Associates 3.62 (15.15) (39.46)  (54.92) 
Consolidated Profit / (Loss) for the year 2,102.66 2,364.70 3,093.78  3,546.30  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016  FY 2017
Operating Profit Margin Ratio 13.82 14.00 12.70 15.32  14.78 
Net Profit Margin Ratio 8.91 8.33 8.53 10.66  10.43 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 39.94 39.94 39.94 39.94 39.94 
Reserves & Surplus 4,249.89 4,966.30 5,582.70 6,500.06 7,912.74 
Net worth (shareholders funds) 4,289.83 5,006.24 5,622.64 6,540.00 7,952.68 
Minority Interest 0.85 18.54 53.62 
Long term borrowings 1,011.39 302.16 12.00 145.98 
Current liabilities 4,341.44 2,893.39 4,423.62 3,986.23 4,172.1 
Other long term liabilities and provisions 38.00 1,439.86 74.47 97.58 119.53
Deferred Tax Liabilities 208.26 227.79 
Total Liabilities 9,888.92 9,641.65 10,121.58 10,654.35 12,671.70 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 3,824.35 3,133.07 3,102.03 3,671.48 4,689.46 
Noncurrent Investments 673.96 3,623.83 830.05 821.15 945.26 
Current assets 4,830.96 1,482.80 5,558.28 5,379.72 6,086.91 
Long term advances and other noncurrent assets 559.65 1,401.95 525.24 708.46 950.07 
Deferred Tax Assets 105.98 73.54 – 
Total assets 9,888.92 9,641.65 10,121.58 10,654.35 12,671.70 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 68.26 47.86 62.93 53.22 53.75 
ROE / RONW 55.44 42.31 37.45 36.16 38.35 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016  FY 2017
Total Income from Operations (Rs. Cr.) 23,768.11 25,275.47 27,538.03 28,613.73  30,958.19 
Growth (%) 0.80 % 6.34 % 8.95 % 3.91 %  8.19 % 
PAT (Rs. Cr.) 2,118.16 2,105.93 2,348.51 3,050.21  3,229.29  
Growth (%) (10.93 %) (0.58 %) 11.52 % 29.88 %  5.87 % 
Earnings Per Share – Basic (Rs. ) 106.07 105.29 118.41 154.93  179.49 
Earning Per Share – Diluted (Rs. ) 106.07 105.29 118.41 154.93  179.49 
Price to Earnings 14.54 22.26 20.14 19.00  20.91 

Dividend History

The Company has maintained an average dividend yield of 2.41 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Hero Motor’s average current ratio over the last 5 financial years has been 1.04 times which indicates that that the Company is comfortably placed to pay for its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Hero Motor’s average long term debt to equity ratio over the last 5 financial years has been 0.16 times which indicates that the Company operates with a low level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Hero Motor’s average interest coverage ratio over the last 5 financial years has been 208.79 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Hero Motors reported a promoter holding of 34.64 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 52.00 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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