Hero Motocorp Ltd is back on firm ground. The company has travelled quite a distance since December 2010, when challenges mounted as it severed ties with its Japanese joint venture partner Honda Motor Co. Ltd. The optimism is mirrored on the bourses. The stock has risen by 37.4% since April, clocking higher returns compared with its strong competitor Bajaj Auto Ltd, which has risen only 7.6%, while the benchmark Sensex index has moved up by 10.75%.
A combination of several factors has rekindled investor confidence. Most important, the company has gained momentum in the fastest growing segment of two-wheelers—scooters. Industry estimates point out that the scooter segment grew at a 26% compounded annual growth rate (CAGR) over fiscal years 2009-13, as opposed to 15% for motorcycles. A report by Espirito Santo Investment Bank Research forecasts the trend to continue with scooter sales growing at a faster 13.6% CAGR compared with 7.7% for motorcycles until fiscal year 2020. Hero is expanding scooter capacity by 25% even as its market share rose by 2 percentage points to 19%, amid competition by Honda. Bajaj Auto is not present in this segment.
Meanwhile, a key concern about competition from Honda Motorcycle and Scooter India Pvt. Ltd (HMSI) is on the ebb. Strong rural demand augurs well for Hero, what with nearly half its sales accruing from these markets. On the whole, it has regained lost market share (post-Honda). In fact, HMSI’s foray into the domestic motorcycle market led to a greater erosion of Bajaj Auto’s pie than that of Hero.
Analyst estimates says that HMSI’s gain of around 3.7 percentage points market share between April to November has seen a greater loss to Bajaj Auto than Hero, which still retains its leadership with a 51% share. One may recall that three years ago, there was a 25% erosion in its stock price as investors were worried whether Hero could sustain growth amidst strong competition.
That said, one must note that the forthcoming years would see only single-digit growth in the motorcycle segment, more so in domestic markets. Of course, Bajaj Auto could well offset the pain in domestic markets through growth in exports, an area where Hero is just making efforts. In fact, Bajaj’s strength in registering the highest profitability among peers comes from strong exports, where realizations are better, and from three-wheelers, which bring in higher operating margins.
The recent bump up in Hero’s stock price is partially due to a huge jump in earnings per share estimated in fiscal year 2015. Royalty payable to Honda, following the partnership break-up, ends in June 2014. A report by Prabhudas Lilladher Pvt. Ltd says that a Rs.450 crore saving on royalty, along with some margin expansion coming from cost savings, will translate into a 20% compounded growth rate between fiscal years 2013 and 2015.
Not surprisingly, the stock is rated among the top auto picks by most brokerage firms although the recent rally has priced in most of the positives. At Rs.2,120, the stock, which rose 3.1% on Wednesday, trades at 15 times one-year estimated earnings per share.
A combination of several factors has rekindled investor confidence. Most important, the company has gained momentum in the fastest growing segment of two-wheelers—scooters. Industry estimates point out that the scooter segment grew at a 26% compounded annual growth rate (CAGR) over fiscal years 2009-13, as opposed to 15% for motorcycles. A report by Espirito Santo Investment Bank Research forecasts the trend to continue with scooter sales growing at a faster 13.6% CAGR compared with 7.7% for motorcycles until fiscal year 2020. Hero is expanding scooter capacity by 25% even as its market share rose by 2 percentage points to 19%, amid competition by Honda. Bajaj Auto is not present in this segment.
Meanwhile, a key concern about competition from Honda Motorcycle and Scooter India Pvt. Ltd (HMSI) is on the ebb. Strong rural demand augurs well for Hero, what with nearly half its sales accruing from these markets. On the whole, it has regained lost market share (post-Honda). In fact, HMSI’s foray into the domestic motorcycle market led to a greater erosion of Bajaj Auto’s pie than that of Hero.
Analyst estimates says that HMSI’s gain of around 3.7 percentage points market share between April to November has seen a greater loss to Bajaj Auto than Hero, which still retains its leadership with a 51% share. One may recall that three years ago, there was a 25% erosion in its stock price as investors were worried whether Hero could sustain growth amidst strong competition.
That said, one must note that the forthcoming years would see only single-digit growth in the motorcycle segment, more so in domestic markets. Of course, Bajaj Auto could well offset the pain in domestic markets through growth in exports, an area where Hero is just making efforts. In fact, Bajaj’s strength in registering the highest profitability among peers comes from strong exports, where realizations are better, and from three-wheelers, which bring in higher operating margins.
The recent bump up in Hero’s stock price is partially due to a huge jump in earnings per share estimated in fiscal year 2015. Royalty payable to Honda, following the partnership break-up, ends in June 2014. A report by Prabhudas Lilladher Pvt. Ltd says that a Rs.450 crore saving on royalty, along with some margin expansion coming from cost savings, will translate into a 20% compounded growth rate between fiscal years 2013 and 2015.
Not surprisingly, the stock is rated among the top auto picks by most brokerage firms although the recent rally has priced in most of the positives. At Rs.2,120, the stock, which rose 3.1% on Wednesday, trades at 15 times one-year estimated earnings per share.
