Hero Motocorp stock price is up 11% so far in 2022; ‘buy on dip’, analysts see up to 10% upside in 6 months
Hero Motocorp shares are up 11% so far this year, outperforming the benchmark Nifty 50 index which has fallen more than 6%. HDFC Securities analysts say Hero Motocorp shares could jump 10% over the next two quarters as it gradually recovers lost market share in motorcycles, expands market share in the segment premium and the rise of exports. Analysts also believe that the company is well placed to benefit from the recovery of the rural economy in the future. “We think investors can buy the stock on dips in the Rs 2600-2640 band and add more dips in the Rs 2360-2400 band,” they said in a report. The stock was trading at Rs 2,760 on BSE, down 0.8% intraday.
Buy drops in the Rs 2600-2640 band and add more drops in the Rs 2360-2400 bandTarget price: Rs 3069; Up: 10%
Time horizon: 6 months
Analysts expect Hero Motocorp’s revenue, EBITDA and PAT to grow 16%, 25% and 25% CAGR respectively between FY22-24, driven by recovery in motorcycle market share national and the rise of exports. The company’s aggressive plans in the scooter, high-end bicycle and electric vehicle segments are also likely to mean well for medium-term growth. Analysts believe investors can buy the stock on dips in the Rs 2600-2640 band and add more dips in the Rs 2360-2400 band (12.25x FY24E EPS) for a fair benchmark value of Rs 2,875 (14.75x FY24E EPS) and fair value of the bullish case of Rs 3,069 (15.75x FY24E EPS) over the next two quarters.
Main upside triggers
Reduction of excise duties on fuels for the benefit of automotive players
The government recently reduced excise duties on petrol and diesel in its effort to contain inflation. Petrol prices had reached around 120 rupees in some states after the increase made by the WTO on March-April 22. In order to offer some relief, the government reduced petrol and diesel prices by Rs 8 and Rs 6 respectively. Some states have also reduced the VAT on these fuels, which has led to a greater drop in their prices. Rising fuel prices have been one of the main factors that have weighed on demand, especially for two-wheelers, as the cost of ownership has risen significantly. Analysts believe the excise duty reduction will benefit automotive players, including Hero Motocorp
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Removal of import duties on raw materials to cool prices
The government’s decision to remove import duties on certain steel industry raw materials such as coking coal and ferronickel and to increase/levy export duties on iron ore/certain intermediate products in steel will lead to lower costs for domestic steelmakers, with the Engineering Export Promotion Council (EEPC) saying prices could fall by 10%, according to the report. “This would increase the domestic availability of key industry inputs and reduce manufacturing costs. With prices falling, they would be able to pass on the benefits by reducing prices. 2W demand is sensitive to the initial cost of ownership,” the brokerage report states.
On track to commercially launch its own electric vehicle in July
Hero MotoCorp has launched its new brand dedicated to electric mobility, Vida. In line with the relentless pursuit of its vision, “Be the Future of Mobility”, the company unveiled Vida and called it an all-new identity for its emerging mobility solutions, including upcoming electric vehicles (EVs). . Hero Motocorp’s first electric two-wheeler under Vida will be unveiled on July 1 this year.
Well positioned to benefit from the recovery of the rural economy
Expectations of a normal monsoon in 2022 and high food prices have improved rural income prospects for FY23, which is another bright spot for Hero Motocorp, analysts said. In addition, various high-frequency indicators of rural demand, most of which emerged recently, also helped her. Bank of America expects nominal farm income for the FY23 Kharif season to improve to 17.1% year-on-year, on top of a strong 15.4% increase during FY22. Analysts noted that Hero Motocorp has the strongest distribution network in rural and semi-urban areas of the country and would be one of the main beneficiaries of the revival of rural demand.
Premiumization and export growth to drive margin expansion
The two-wheeler manufacturer is already firmly established in the entry-level motorcycle segment and is now looking to gain market share also in the premium segment. On the export front, Hero Motocorp aims to export 5 lakh units in the next two years. It started operations in Mexico and expanded its presence in El Salvador and Dubai, and is also exploring opportunities in a few export destinations such as Colombia, Bangladesh, Nepal, Sri Lanka, Africa and Mexico . “The growing share of premium products and exports should contribute significantly to the overall expansion of its revenues and margins,” analysts said.
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