About the Company:
Hero MotoCorp Limited (HPCL) formerly Hero Honda Motors Ltd, was jointly promoted by the Munjal family based in Ludhiana, Punjab, and HMC in 1984, and began manufacturing motorcycles in 1985. In 2011 the JV partners separated to pursue their position in the 2 wheeler industry.
Hero MotoCorp is the dominant leader in the world’s largest two-wheeler market, India. At the same time, it has also rapidly expanded its global footprint to 37 countries across Asia, Africa, and South and Central America. They have seven globally-benchmarked manufacturing facilities, including five in India and one each in Colombia and Bangladesh, with a combined installed capacity of around 9 million units of two-wheelers per annum. This capacity will go up to 11 million units, once the 8th manufacturing facility in the southern Indian state of Andhra Pradesh becomes operational.
The company is present in both the motorcycles and the scooter segments, having a market share close to 51% and 11% respectively. Motorcycles form the major chunk of revenue, contributing about 90% to volumes while scooters contribute 10% to volumes. The hero is a domestically focused company deriving about 97% of volumes from the Indian market. The entry-level motorcycles ranging from 75 cc to 100 cc forms a major chunk of about 70% of overall volumes.
The company has an unparalleled reach in rural areas and derives about half of its revenues from the remote areas of the country. The market position is also backed by strong brand appeal, wide distribution and service network, and considerable focus on growing rural markets. The wide-ranging product portfolio of Hero MotoCorp across segments is known globally for reliability, durability, and efficiency. ‘Splendor’ continues to be the largest selling two-wheeler made in India while, other motorcycle brands from the Hero stable – such as Glamour, Passion, Ignitor, Xtreme 200, and Hunk – continue to be popular among the youth in various parts of the world. During FY20, the company has launched various next-generation motorcycles and scooters which are expected to benefit volume growth in the near term.
The company's R&D has evolved from a small center at Dharuhera to 250+ acre center at Jaipur which was inaugurated in the year 2016. The new facility has led to a cut in the product development cycle by almost 25%. The company's investment in R&D over the past 5 years is 2x of competitors. Hero MotoCorp has also earmarked an investment of Rs 10,600 crores over a period of 5-7 years towards research and development of alternative mobility solutions, modern state-of-the-art sustainable manufacturing facilities, network expansion, and brand building across geographies. While the plan is to develop an entire ecosystem in two-wheelers, it is also betting big on electric vehicles. In addition to its investment in Ather, which has launched electric scooters, Hero plans to launch its in-house electric two-wheelers in 2021 and plans to explore getting into electric three-wheeler segment.
While there was no sale in the month of April due to nationwide lockdown led by Coronavirus, the company has sold around 10,000 units of motorcycles and scooters since the reopening of ~1,500 touch-points, including authorized dealerships, across the country. These outlets contribute to around 30% of the total domestic retail sales. This tells us the demand for motorcycles is unlikely to be affected due to the Coronavirus scare. Also, the crash in international crude oil prices and resultant fall in domestic petrol prices should help to revive buyer interest in two-wheelers. Domestic demand should also improve due to good Rabi sowing and better water reservoir levels.
While Hero had a 70% market share in the domestic executive segment and a 58.5% market share in the domestic economy segment, the share in the export market is low at 7%, with exports constituting only 2.7% of total sales volume in FY19.
If you look at the financials, Hero MotoCorp has reported an increase in revenue from Rs 27,538 crores in 2015 to Rs 33,972 crores in 2019 an increase of over 20%. The Profit After Tax (PAT) too has increased from Rs 2,349 crores in 2015 to Rs 3,466 crores in 2019 which is up by over 45%. The company had stable Profit margin of around 10% over the last 5 years, it also had stable return on equity (RoE) during the same period. The company has a near debt-free status, robust cash accrual, and substantial liquid surplus of over Rs 4,600 crores as of March 31, 2019. The strong financial position enables it to withstand competitive challenges in terms of pricing as well as making fresh investments.
Risks:
The company derives about half of its volumes from rural areas and any slowdown in rural and agricultural segment will have an adverse impact on the volumes.
The company imports certain raw materials and fluctuation in the currency would be negative.
Prolonged slowdown in the economy could impact the financials, and
Above-expected competition to gain market share could result in further deterioration in industry level profitability.
Final Thoughts:
The coronavirus outbreak has led to muted economic growth and an increase in cost on account of transition to BS 6 norms, the two-wheeler industry volumes are expected to be soft in the near term.
However, due to its low price which is currently trading at close to year 2015 levels and robust financial profile, Hero Motocorp is a good bet worth investing now. Hero has also successfully defended market share in the current downturn, and is most likely to benefit when there is a revival.
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