InCred Equities recommends buying Hero MotoCorp shares on dip, upgrades rating to ’Add’ – here’s why

Shares of Hero MotoCorp, the world's largest 2-wheeler manufacturer, have been on a steady decline since reaching their all-time high in June. Multiple factors are currently dragging the stock lower, with the company's June quarter numbers coming in below the Street estimates, as profitability was impacted by weak average selling prices.

Furthermore, the heightened competition in the 2-wheeler segment, driven by the introduction of CNG bikes, increased demand for premium models, and intensified rivalry in the electric vehicle (EV) sector, has put additional pressure on the stock. Combined with weak demand in the rural economy, these factors have exacerbated the downward trend in the stock price.

The stock is presently trading 11% below its all-time high of ₹5,894, achieved in June. This decline has adjusted the stock's valuation to a more favorable level. As a result, domestic brokerage firm InCred Equities has upgraded its rating to 'Add' from 'Hold' and revised its target price to ₹5,812 per share, up from the previous target of ₹4,766. It also noted that the recent decline in the stock price offers an attractive entry point.

Market share gets priority

The prolonged market share erosion, the brokerage believes, is nearing its end. With the revival in rural markets still unfolding, supported by good rainfall and favorable government policies, the emphasis on HMCL’s strategy to prioritise market share recovery after achieving peak EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin for its internal combustion engine (ICE) portfolio appears promising, it noted. 

The company's market share in the 125cc segment improved to 20% in 1QFY25 from 13% in 4QFY24, driven by the success of the Hero Xtreme 125cc. In the below 110cc segment, Hero commands a 90% market share. To fuel growth in the entry-level category, the company plans to launch a refreshed Passion model, with additional premium models expected soon.

To further enhance its market presence, the company intends to increase the production capacity of Hero Xtreme 125cc bikes from 25,000 to 40,000 units per month within a few months. It is expected to drive higher sales volume for Super Splendor by offering higher mileage facility. It has launched Glamour model in Andhra Pradesh and Telangana.

The company believes that improving vehicle financing options, lowering down payments, and expanding distribution reach will be crucial factors in accelerating rural market growth, given its already extensive range of entry-level bikes.

With rural market demand improving, InCred feels high-teen growth for the domestic 2W segment and HMCL is possible, aided by a better rural mix and a new 125cc bike launch.

OLA EV bike competition is limited

The brokerage noted that while OLA’s aggressive pricing for Hero's new EV bike launch may pose a challenge, it could take up to three years for OLA to establish a strong presence in the motorcycle segment, much like its experience with scooters. Meanwhile, Hero MotoCorp’s revenue from the EV business reached ₹1.25 billion.

The company aims to double its EV sales volume by expanding the presence of its Vida EV motorcycle and plans to introduce a more affordable variant. The company is also focusing on developing flex-fuel and hybrid models, as well as improving the fuel efficiency of its internal combustion engine (ICE) vehicles.

The EV industry saw a decline in sales volume after April 2024 due to subsidy cuts, with Hero’s market share at 5% in Q1. However, with new launches on the horizon, the company expects its market share to grow. Additionally, Hero has partnered with Ather to establish 2,500 charging stations, further supporting its EV strategy.

Forays into Southeast Asia

The company has recently forayed into the Southeast Asia region to drive its export business. It is witnessing soft demand in Nigeria, while demand in Columbia is making a comeback. Bangladesh remains under pressure, contributing 0.3–0.4% to total revenue and accounting for 13% of the global business.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.