Hero MotoCorp: Q1 disappoints, but there's hope of a better second half

Volumes and margins are expected to improve on the back of a good monsoon and decline in raw material costs, respectively

The 2-wheeler market industry has been reeling from the combination of supply chain issues, high raw material costs and weak demand. While demand continues to look weak going by sales data from July, the Q1 (April-June quarter) results indicate some degree of stability on the supply chain front with chip sourcing becoming less difficult and the costs of RM (raw materials) may also have leveled off as metal prices corrected through Q1.

Hero MotoCorp saw sequential rise in revenue of 13 per cent to Rs 8,393 crore, which is marginally higher than pre-covid levels of 2019-20 (ignoring inflation) while EBITDA of Rs 941 crore grew by 14 per cent QoQ (quarter-on-quarter), which was still well below EBITDA of Q1, 2019-20. The PAT was Rs 624 crore, flat QoQ. This was well below consensus expectations due to revenue miss and higher RM costs.  

Q1 sales volume was buoyed up by marriage season sales in North India but sale of spares declined by 8 per cent to Rs 1,060 crore. Employee expenses were up 13 per cent QoQ. The expiry of state government incentives at Neemrana plant led to a drop in Other Operating Income.

The management guidance is that there will be margin expansion going forward (since commodity prices have eased from April-May levels) and also lower Yen-denominated costs. But July 2022 two-wheeler (2W) sales were flat year-on-year (YoY), and declined 7 per cent Month-on-Month over June 2022 sales so there is, as yet, no sign of a big pick-up in demand. Demand for 2W is correlated to rural/ semi-rural growth and a good monsoon may trigger demand during the festival season.

While volume pickup is anticipated in the second half as part of an ongoing Unlock trade effect as more businesses open up, and due to positive effects from a good monsoon, overall volumes would remain well below 2018-19. The management says double-digit volume expansion is expected at 2022-23. Hero Moto also says its aggressively focussed on launches in the EV segment, with a joint development with Gogoro for a swappable battery model (to launch in 2023), and investments in Ather Energy where it holds around 35 per cent stake. The company took price hikes in April 2022 and Rs 1,200 in July 2022. Dealer inventory levels stood at 6-7 weeks in June 2022, which is high by historical standards.

The other 2W (and 3W) players such as Bajaj Auto and TVS have similar management guidances, which point to possible recovery in (currently low) demand in the second half and also better margins as raw material costs come down. But exports are under pressure. None of the players have, as yet, complained about the possibly negative impact of higher interest rates on demand. About 50 per cent of Hero’s sales are financed (with 36 per cent financed by Hero group subsidiaries). Eicher and to some extent, TVS, mostly operate in the premium segment and there, demand has seen better growth.

Most analysts have reduced 2022-23 EPS assumptions, factoring in these results. But despite the challenges, this fiscal will see growth after three years of contraction and 2023-24 should see volumes recovering to pre-Covid levels. The Hero Moto stock is flat with minor losses of 0.9 per cent in the last year and 3 per cent losses in the last month. One analyst has a target price of Rs 3,470, which is a 25 per cent upside in 12-month timeframe from current level of Rs 2,762. Another values the stock at Rs 2,925 and a third at Rs 3,225.