Date: 5 June 2015
This Stock Analysis report presents a long term outlook and the future prospects of Hero MotoCorp Limited.
WHAT’S DRIVING THE STOCK
Strong Financial Position
Hero MotoCorp has shown consistent growth over the last 10 years (i.e. 2005-06 to 2014-15). Its income from operations over this period grew at an impressive CAGR of 25.88 %. For FY 2015, income from operations increased by 8.95 % to Rs. 27,538.03 Cr. from Rs. 25,275.47 Cr. and Profit after Tax increased by 11.52 % to Rs. 2,348.51 Cr. from Rs. 2,105.93 Cr. 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. For FY 2015, the Company declared a dividend of 3,000 % i.e. Rs. 60.00 per share.
Dominant and Diversified Market Position
The Company is a market leader in the domestic two-wheeler market with about 41.2 % 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. Hero MotorCorp has its presence in 19 countries across 3 continents and plans to grow its presence in more than 50 countries by FY 2020.
WHAT’S DRAGGING THE STOCK
Stiff Competition in Two-Wheeler Segment
Hero Motor Corp has been enjoying the leadership position in the motorcycle segment on flagship brands like Splendor and Passion. However the key challenge for the Company would be to protect its the market share in the motorcycle segment. The Company faces competition from new and existing players. Various product launches by Bajaj Auto, Honda, Yamaha and TVS are expected over the medium term and this could put pressure on the domestic market share of the Company.
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.
Slowdown in the Two-Wheeler Industry
For FY 2015, micro economic environment continued to remain weak. Depressed economic sentiments coupled with high inflation and poor income growth continued to affect the industry. The domestic market for motorcycles grew by only 3.9% (from 11.95 million units to 12.46 million units), far below from the 20% growth witnessed in FY2010 and FY2011.
The Company depends heavily on auto financing to sell its units. In case if the liquidity situation continues to be tight and/or interest rates continue to rise, it could affect the sales growth of Hero MotoCorp and thus will impact its profitability.