Sector & Industry: Two-Wheelers, Automobiles Ticker | Exchange: HEROMOTOCO | NSE Current Price: ₹ 2875 (21-05-2021)

Recommendation: BUY Target Price: ₹ 3,303 Upside: 14.9%

Stock Information EXECUTIVE SUMMARY
NSE Code HEROMOTOCO
We issue a buy recommendation on Hero Motorcorp with a target price of, presenting a 15% upside
BSE Scrip Code 500182
potential on the closing price of INR 2875 on May 21st, 2021. Our valuation is based on a blend of
Market Cap (INR bn.) 574.25 a Discounted Cash Flow to firm model and a Relative valuation method. Our recommendation is
Recommendation:
CMP (INR) SELL ₹ 2875 Target Price:
based on the following ₹ 385.57
pillars: (i) Strong foothold in entry andDownside: 19.32%
executive segment ; (ii) Paving a way
Shares Outstanding (mn) 199.74 into Premium segment; and (iii) Investments in 2W EV. We expect the market to boom further with
52 Week H | L (INR) ₹ 3629 | ₹2166 the expectation of significant monsoon rains, driving demand from the rural segment, and also
Dividend Yield 3.65% because pandemic is making people move more towards personal mobility.
Beta 0.96
Strong foothold in entry and executive segment
Face Value (INR) 2
P/E 20.48x Hero Motocorp occupies a significant share in the entry and executive-level segments, driving most
P/BV 3.88x of the demand in the 2W industry. The percentage is such that one out of every two bikes sold in
the segment is from Hero. The demand in these sectors is expected to grow at a CAGR of 8-10%
from FY23-28. It is likely that demand will shoot up right after the pandemic is over.

HERO and NIFTY Rebased to 100 Hero derives almost half of its demand from the rural segment; with expectations of a great
monsoon season, the company can count on sales from this sector. Also, the distribution sector of
200% HMCL is so extensive that it will grab every opportunity that will come its way.
180%
160%
Deep diving into the Premium segment
140%
120%
100% Earlier, the premium segment used to be Hero's weak point, but winds are turning. Hero has been
80% quite aggressive on this front now, and its share in the premium segment went up to 4% in FY21.
60% Also, Hero has signed an agreement where it would develop and sell a range of premium
40%
motorcycles under the Harley-Davidson brand name in the country. It also plans to launch one
20%
0%
product each year until the next four years in the premium segment.
Mar-17

Mar-18

Mar-19

Mar-20

Mar-21
Sep-16
Dec-16

Sep-17
Dec-17

Sep-18
Dec-18

Sep-19
Dec-19

Sep-20
Dec-20
Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Harnessing the capability of 2W EV

Hero Motocorp NIFTY Though EVs currently do not even contribute 1% to the overall sales in the 2W industry. The recent
Source: Yahoo finance announcement by the Government for the adoption of electric vehicles through the FAME-II
scheme, the 'Go Electric' media campaign and incentive allocation for ACC batteries has given
OEMs a morale boost for efforts to promote electric vehicles in India. Prices of lithium-ion batteries
Price of Li-ion Battery/KwH
have dropped 89% in the last 10 years. They are currently at $110 compared to $280 in 2014. It
$300.00 has pushed prices of electric two-wheelers down and drawn more investments. However, the key
$250.00 to growth lies in scaling up charging stations.
$200.00
Everyone knows that EVs are the future and IC engines are not sustainable in the long run. Hero
$150.00
understands the potential of the 2W EV segment and is expected to roll out a mass e-2W product
$100.00
which is expected to launch in FY23. Hero also owns a 34.6% stake in Ather energy, which has an
$50.00 11% stake in 2W EV market. It has also tied up with Taiwanese start-up Gogoro that develops and
$- sells electric scooters and battery swapping infrastructure.
2014A 2019A 2020A

Source: Arthanaya Capital’s Research Q4 Results

Net Profit Margin Hero saw an absolute gain in the market share in FY21, with an overall of 140 basis points powered
by the scooter segment, which saw a growth of 270 basis points. Hero Motocorp grew at an 8%
rate versus an industry decline of 6%. The quarter saw a spare parts business of more than 1000
crores which is bound to become 10-12% of the revenue of the next two to three years. The margins
in Q4 were close to 14%, which is the courtesy of the company's Leap-II savings program, which
has delivered a 300 basis point in Q4 and 200 bps in the full year. The net revenues in Q4 were up
by almost 35% y-o-y basis in Q4FY2021. The company declared a dividend of Rs.105, out of which
Rs.90 was normal, and Rs.15 as a special dividend. The PAT margin stood at 10.1%, and the
EBITDA margin was 14.78% in Q4.
2017A 2018A 2019A 2020A 2021A

HMCL Industry
Source: Arthanaya Capital’s Research, Company Report

PROFITABILITY RATIOS

2017A 2018A 2019A 2020A 2021A 2022E 2023E 2024E 2025E 2026E

EBITDA Margin Operating Profit Margin Net Profit Margin

Source: Arthanaya Capital’s Research, Company Report

1 | Page
 Shareholding Pattern
BUSINESS DESCRIPTION

Hero Motocorp Ltd (HMCL) is the world's largest manufacturer of two-wheelers in terms of volume
and has an installed capacity of 9.1mn units per annum at eight manufacturing facilities. HMCL
operates in over 40 countries in Asia, Africa, the Middle East, South and Central America, and they
crossed a mark of 100 million customers across the globe in the past financial year. HMCL targets
two of the three segments in the two-wheelers industry i.e.,, the Motorcycle and scooter segment.
HMCL has a market share of 35.7% in the total Indian two-wheelers market and a 51.9% in the
motorcycle segment as of FY20. HMCL became the first two-wheeler manufacturer in India to
receive the BSVI certification, and it also became the first two-wheeler manufacturer to launch a
BSVI motorcycle.

Promoter FIIs DIIs Public Business Model

Source: Company Report
HMCL's primary revenue comes from the sale of two-wheelers and spare parts. It creates value for
Product Mix all its stakeholders – consumers, employees, shareholders, the society at large, and the planet.

Hero has been quite active when it comes to new product launches, and with new products, it tries
to cater to the new and everchanging needs of the customers. Hero's product mix includes
motorcycles and scooters, out of which many have set industry standards in many segments. Hero
is known to provide value to its customers through its wide range of products. Today, one of every
two motorcycles sold in the entry and executive segment is from Hero.

Hero has an extensive distribution network which helps in achieving this humongous amount of
sales. As of FY20, Hero Motocorp has a total of 7267 domestic touchpoints with a year-on-year
growth of 8%. In terms of training, Hero has trained almost 25819 dealer executives, 64 dealer
owners, and around 158 dealer owners trained in HR program.
Economy Executive Premium Scooter Hero has also been quite active with its CSR activities and working more towards sustainability.
Source: Arthanaya Capital’s Research, Company Report
Impact of Covid -19
Sales Business - The company halted operations at all manufacturing plants, offices, and other facilities
80,00,000 across the globe and instituted the Work-From-Home (WFH) policy on March 22, 2020, two days
70,00,000 prior to the Government enforced national lockdown in India. The company’s sale have fallen to
60,00,000 their lowest in 5 years, it fell by 12.8% CAGR.
50,00,000
Supply Chain - The Company did face some problems in sourcing the raw materials in the initial
40,00,000
phase of the lockdown, but by the end of August, the company had reached 80-90% of the pre-
30,00,000
COVID levels. The company was able to ramp up real fast on this ground.
20,00,000

10,00,000 Retail operations - With a detailed restart manual in 10 languages for supporting all dealers, service
-
2017A 2018A 2019A 2020A 2021A
centres, and parts distributors, the company started its retail operations. The manual provides
Source: Company Report
comprehensive guidance on acquisition and usage of key safety materials such as masks, gloves,
sanitizers, disinfectants, and various other aspects like social distancing protocols, hygiene/care of
Market Share tools, vehicle pick-up and drop protocols, delivery norms, digital payments, creation of waiting
areas, and so on
37.1%
35.7%
Market Share – While most companies struggled to stay on track during these hard times, Hero
Motocorp was among those companies, which were able to gain a market share. The overall market
share gain was 140bps in FY21, whereas the scooter segment witnessed 270bps market share
gains. The share in the premium segment went up to 4%.

Employees Safety - To ensure hygienic workplaces, measures such as thorough sanitization of all
workplaces, sanitization of buses, shuttles, and other official vehicles after each trip, deep cleaning,
9.9%
7.2%
and sanitization before daily shift commencement were taken. Also, a key safety guideline was
launched for employee safety.

Social Initiatives - Hero Motocorp, along with Hero Group companies, committed a corpus of Rs
Motorcycles Scooters 100 crore towards COVID-19 relief efforts in India. Under project seva, the company provided relief
2020A 2021A
material, including meals, ration kits, masks, sanitizers, Personal Protective Equipment (PPE) kits,
Source: Company Report, Call Transcripts and other equipment, along with donations to PM cares fund.

INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING

Segment wise domestic market share
Indian two-wheeler industry

India is the world's biggest two-wheeler market and is estimated to be worth around Rs 1204 billion
in fiscal 2020, with total sales volumes of about 20.9 million units. 64% of this industry is made up
of the motorcycle segment, which has various sub-segments as Entry, Deluxe, and Premium. 32%
of the industry segment consists of scooters which have comprised of two segments: 100-110cc
and 125cc. The remaining 4% of the industry consists of Mopeds which only has a single-player,
i.e., TVS.
FY 11FY 12FY 13FY 14FY 15FY 16FY 17FY 18FY 19FY 20FY 21

Motorcycles Scooters Mopeds

Source: CRISIL
2 | Page
 Industry Growth Trend

40 Urbanization: Growing urbanization is expected to further keep the two-wheeler industry buoyant;
30 two-wheelers serve as an affordable product that supports last-mile delivery. Two-wheelers have
20
become income enablers for a lot of people in these times.
10
0
FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21
Greater demand for personal Mobility: Greater two-wheeler demand is expected due to the
-10
customer's need for personal mobility to maintain safety standards.
-20
-30
We have segregated the Indian two-wheeler industry into segments relevant and material to HMCL:
Domestic Exports
Motorcycle – Entry level
Source: CRISIL

This segment accounts for almost 30% of the market, and its demand has been continuously
Economy/Entry increasing for various reasons, such as the introduction of aggressively priced models, higher
demand in rural areas. Further growth in this segment is expected as the prices of Bikes are rising
35
30
due to the introduction of BSVI.
25
Hero: While due to the consumption slow down accentuated by stress in the financial sector
20
impacted total demand in the entry-level segment, Hero gained a significant market share, i.e.,,
15
10
around 6%, and currently commands 64% of the segment, and this is due to the fact that half of
5
Hero's sales come from rural segment which is under-penetrated and sustained by government
0
support.
FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21

Source: SIAM, Arthanaya Capital’s Research Major Players – HMCL, Bajaj Auto, TVS.

Executive
Motorcycle – Executive level

Accounting for almost 50% of the market. Post the easing of lockdown, the executive bikes are
70
rising on the back of higher sales in rural and semi-urban areas. Good monsoons and the favorable
60 trends for agriculture products further helped strong growth in the executive segment. Channel
50 checks suggest strong underlying demand from rural areas and tier-2 and tier-3 cities
40
Hero: The company has divided this segment into two sub-segments: Deluxe 100cc and Deluxe
30
125cc. The products are such well-positioned that it commands 74.8% share in the deluxe 100cc
20
segment and 49.8% in the 125cc deluxe segment. The company has seen a decline in the market,
10 but with volume build-up and launch of the new BSVI Glamour, we look forward to strengthening
0 our segment share again.
FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21

Source: SIAM, Arthanaya Capital’s Research Major Players – HMCL, Bajaj Auto, TVS.

Premium Motorcycle – Premium level

25 This sector accounts for around 20% of the market and is expected to grow in line with industry
levels. It is driven mostly by new launches and expected recovery in the urban areas.
20

15 Hero: The company acquired a 4% share in this segment and continuously working on the
premiumization of its products. The company is aggressively working in this direction. It currently
10

5
has 5.5% of its product mix in the premium segment.

0 Major Players – HMCL, Bajaj Auto, Royal Enfield, KTM, Jawa.

FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21
Source: SIAM, Arthanaya Capital’s Research Scooters

Scooters account for almost 27% of the total sales in the two-wheeler industry. Scooters are
Scooters
expected to witness higher penetration in the rural market which will aid its growth.
35% Hero: It owns a 7.2% market share in this segment. The company has gained a good share in the
30% 125cc scooter segment even though it saw an overall decline in the market share. There have been
25% aggressive launches in this segment by Hero to boost growth. 9% of its product mix comprises
20% scooters.
15%

10% Major Players – Honda, Suzuki, HMCL, TVS.

5%

0%
EV 2-Wheelers
FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21
Source: SIAM, Arthanaya Capital’s Research The e-2W industry is at a nascent stage in India, with penetration of less than 1% of the domestic
2W market. The adoption of e-2W would require a major push from the Government – not just
incentivizing electric vehicles but also discouraging ICE vehicles. Despite concerns of slower
Sales of 2W EVs
adoption of the e-2Ws, the large two-wheeler players are taking big strides in developing technology
160000 and supportive infrastructure for electric vehicles
140000
Hero: It owns a 34.6% stake in Ather Energy, which has around 11% market share in the e-2W
120000
market. Hero MotoCorp is developing a mass e-2W product, which is slated to be launched next
100000 year
80000
Major Players – Ola Electric, Okinawa, Bajaj Auto, Ather Energy, Hero Electric.
60000

40000

20000

0
2016A 2017A 2018A 2019A 2020A 2021A

Source: SMEV, Arthanaya Capital’s Research

3 | Page
 INVESTMENT THESIS

Market Share(Entry Level) R1 – Strong foothold in entry and executive segment

1. High rural penetration

Hero MotoCorp enjoys extensive distribution and dealer networks in the country, which is also the
largest in the 2W industry. It has a strong presence in tier 2&3 cities and rural areas from where we
expect a large part of incremental demand for two-wheelers.

The share of the economy and executive bikes are rising on the back of higher sales in rural and
semi-urban areas. Good monsoons and the favorable trends for agriculture products further helped
strong growth in the economy/executive segment. The rural area accounts for as much as 50% of
Hero's sales in terms of volume.

2. Extensive dealer network

Hero Bajaj TVS
Source: Arthanaya Capital’s Research, Company Report As of FY20, Hero Motocorp has a total of 7267 domestic touchpoints with a year-on-year growth of
8%. This helps in increasing the reach to far-off areas where there is little competition.

Domestic Market Share In terms of training, Hero has trained almost 25819 dealer executives, 64 dealer owners, and
around 158 dealer owners trained in HR program.
36.8% 37.1%
36.4% 35.9% 35.7%
3. Sustained Market share

Hero accounts for half of the entry and executive segment, which forms a market of 80% in the total
2W industry. Despite aggressive strategies by competitors like Bajaj Auto, TVS, it has been able to
sustain its position in the market.

Hero has been able to sustain this position through its value offerings. Nearly 85% of the total
product mix comprises entry and executive-level products.
2017A 2018A 2019A 2020A 2021A
R2 – Deep Diving into the Premium segment
Source: SIAM, Company Report, HSIE
1. Aggressive launches

Premium motorcycles share in product mix Hero MotoCorp has been very aggressive with launches in the premium segment to get a fair share.
It has strengthened its product portfolio in the premium bike segment by launching three products
in the premium bike segment.

Hero plans to launch at least one product every year over the next four years in this segment. These
new launches will help in acquiring a better positioning in the long term.

2. Partnership with Harley-Davidson

India accounts for around 5% of Harley-Davidson sales, and HD decided to exit this market. Hero
has signed an agreement where it would develop and sell a range of premium motorcycles under
the Harley-Davidson brand name in the country. It will take care of service and parts requirements
for the Harley bikes.

Harley-Davidson India is officially back in business with 11 dealerships that joined under Hero's
2020A 2021A purview and are spread out in 11 cities. Both the organizations are working jointly on the Hero-
Source: Arthanaya Capital’s Research, Company Report Harley brand.

R3 – Harnessing the capability of 2W EV

Sales of Ather Energy 1. Forging Partnerships

Hero MotoCorp acquired a 35.10% share in Ather energy, which produces electric scooters, and is
also an established electric vehicle charging infrastructure Ather grid. Ather grid has a market share
of around 11% in the two-wheeler EV market.

Besides Ather, Hero has also collaborated with Taiwan start-up Gogoro that develops and sells
electric scooters and battery swapping infrastructure. The company is working on both technologies
– fixed charging system through its own R&D and swapping technology system through its partner,
Gogoro.

2. Rolling out mass segment EV

The management is of the opinion that a lot is going to happen in the EV market in the upcoming
year. The company is working on developing its own production lines for 2W-EVs. The company
might roll out its mass-market product in FY2022.
2019 2020
Source: Arthanaya Capital’s Research, Autocar Professional
With Government incentivizing and subsidizing 2W-EV, it is evident that the Government is working
towards a more sustainable future. With the launch of a mass-market product and with the brand
image of providing value for money products, we can surely expect Hero Motocorp to stay in the
position of the market leader in the future too

4 | Page
 Valuation

Most of Hero Motocorp's revenues are generated from sales of two-wheelers; a small part of the
revenues also get generated from the spare parts business. The two-wheeler industry is divided
into three segments, namely Motorcycles, scooters, and mopeds. Hero operates in only the first
two segments and only occupies a 10% share in the scooter business. Based on the type of
business Hero operates in, we have used two methodologies, i.e., Relative and Discounted cash
flow.

Key valuation methodology for Hero MotoCorp follows the process of identifying peers and valuing
the company in line with these peers. Relative valuation is a reliable process as it considers the
overall effect on price from multiple peers and hence has been assigned a weightage of 40%.

Finally, the intrinsic value of the firm has been estimated by understanding the business in detail
and forming assumptions from this understanding to make projections for the firm. These
projections translate into Free Cash Flows to Equity which have been discounted to get the intrinsic
value of the firm, which has been assigned a weightage of 60% as the fundamentals of the company
look quite strong.

Relative Valuation

Hero Motocorp seems to be undervalued by most Relative Valuation multiples. Its multiples are one
of the lowest in the industry, even when it is growing at a good pace. Their current P/E ratio is 20.9x,
one of the lowest in the industry. We priced the stock by taking a weighted average of Price and
EV multiples and arrived at a one-year target price of INR 3441.

A set of companies having similar business to Hero Motocorp were analysed based on their
offerings and industry to identify similarities with Hero Motocorp. Then the price drivers of these
companies were compared to that of Hero Motocorp. Their multiples were then considered as the
benchmark for TCPL by considering similarity in values of price drivers, similarity of peer, subject
to skewness in the valuation ratio of the peer itself. Accordingly, P/E, P/S, P/B, P/FCF, EV/Sales
and EV/ EBIT values were found for HMCL which were used to estimate the CMP.

DCF Valuation using FCFE Methodology

Revenue Projections – The major part of Hero MotoCorp's revenue is derived from the sales of two-
wheelers, i.e., motorcycles and scooters. The projections are based upon the capacity utilization
and the trend which is expected in the near future. Production capacity as of FY2021 is 9.13million
which is slated to increase by 1 million over the next three years, which has also been taken into
account.

Realization amount has also been taken into consideration while coming up with revenue
projections since the amount is subject to change due to inflation and other uncertainties that might
occur at any point in time.

Costs and margins - Historical cost breakups were studied, and costs were projected based on
future expectations and management commentary. The future tax rate was assumed at 25%.

Terminal growth – A value of 6.17% has been calculated as a weighted average of the company's
terminal growth value and the future growth rates of the FMCG Industry, economy, and population
growth.

Capex and depreciation – As per the annual reports and management commentaries, we have
factored in the depreciation and Capex. The CAPEX is stated to increase, i.e., growth CAPEX of
900cr is expected, which is for the production facility being constructed. The rest of the amount is
due for maintenance CAPEX.

Cost of Equity - For calculating the Cost of Equity, we used the CAPM, which came out to be
12.5%.

FINANCIAL ANALYSIS
DOMESTIC SALES
Strong and sustained domestic sales growth
9000000
8000000
Hero has been at the forefront of the two-wheeler industry owing to its sustained market share in
7000000
6000000
the domestic market. Exports form a minuscule part of the total sales of Hero. Hero has been able
5000000 to maintain a major market share of around 36% in the growing two-wheeler market. When due to
4000000
the pandemic, overall sales of all the industry declined. Hero was still able to benefit from its entry-
3000000
2000000
level bikes and saw a rise in revenue by around 6% in FY21. After the pandemic is over, the revenue
1000000 is expected to increase by more than 10% year on year.
0
2017A 2018A 2019A 2020A 2021A 2022E 2023E 2024E 2025E 2026E

Values(units) growth

Source: Arthanaya Capital’s Research, Company Report

5 | Page
 Cash Cycle
Erratic Working Capital Management
10
Historically, the Working Capital of the firm has displayed erratic growth. This is not expected to
5 change in the future. With a focus on gaining a higher market share in the scooters and premium
segment, the company is going to require a good amount of working capital to fund its needs.
0
2017A 2018A 2019A 2020A 2021E

-5
Negative Cash cycle

-10
Hero has been a dominant player in the market for quite a long time; this also gets reflected by the
fact that it has a negative cash cycle. The company's credit policy is such that it gets more time to
-15 pay its creditors than the time in which its inventory turns into cash, or it receives cash from its
Source: Arthanaya Capital’s Research, Company Report debtors.
COGS
Cost Trimming

COGS have seen a growth in the past years, which could be due to various reasons, such as
adopting new BS standards. The COGS saw a decline in the past financial year but saw an increase
in FY21 due to commodity inflation. We expect that once the pandemic the over, the COGS will
decline as the LEAP program in existence has proven beneficial and has contributed to cost
reduction. The LEAP program aimed at fixed cost optimization and material cost reduction, the
company expects a drop of 50-100bps costs annually. LEAP 2 saved 200bps in EBITDA margin in
2017A 2018A 2019A 2020A 2021A 2022E 2023E 2024E 2025E 2026E
FY21
% of sales Absolute Growth

Source: Arthanaya Capital’s Research, Company Report

Better Profit margins

RETURN RATIOS
The profit margins saw a decline in recent years due to BSVI adoption and commodity inflation,
which led to an increase in costs. The LEAP program saved 200bps in the EBITDA margin in FY21.
Overall EBITDA per bike has increased and is expected to stay on the same track. Profit margins
are expected to increase once the commodity prices are back on track; the net profit margins are
also expected to increase since the company is also working towards fixed cost optimization, and
a boost in sales is expected in the coming years..

2017A 2018A 2019A 2020A 2021A 2022E 2023E 2024E 2025E 2026E

Return on Assets Return on Capital Employed Return on Equity

Source: Arthanaya Capital’s Research, Company Report

CONSOLIDATED COST BRIDGE

100 %
100% 71%

80%

60%

40%

10%
20%
6%
3% 2% 0.15% 9%
0%
Tax
Revenue

COGS

Employee

PAT
Finance Costs
Other Expenses

Depreciation
Expenses
Benefit

Financial Ratios

6 | Page
 INVESTMENT RISKS

Industry || I1: Prolonged recovery from Covid 19 – The volume estimates of the whole industry are
suffering because it is not clear when the economy will fully recover from Covid. A ray of hope can
be seen with the launch of the vaccine earlier this year, but Indians fooled by superstitions are not
adopting it at a high pace which is the only potential measure that would lead the country to
Risk Factors recovery.

Industry || I2: Covid imposed lockdowns – The second wave of the virus struck the country at the
place where it hurts the most. The country saw a decline in growth after a long time in the year
2020, but the year 2021 is facing the worst wrath of the virus. States are imposing lockdown, which
is going to lead to underutilization of the industry's assets and a fall in the overall revenue. The
lockdowns also lead to reverse migration, after which companies fail to find enough labor to carry
out production at optimum levels.

Industry || I3: Strict Regulations – The Industry has to follow strict norms and procedures due to
which the cost of ownership increases. Due to the introduction of BSVI regulations, we saw a hike
in the prices of bikes which led to a fall in the overall industry sales. Given low affordability, hikes
in prices bring the industry down. Also, insurance prices saw a hike last year which led to an
increase in the prices of automobiles which led to a fall in sales.

Industry || I4: Crude Oil prices– The Industry gets highly impacted by an increase in crude oil
prices, as petrol acts as a complement to most of 2W. The effect of petrol prices can be directly
seen in the sales of automobiles and especially 2W, which accounts for the highest share in
Source: CRISIL, Arthanaya Capital’s Research
automobile sales.

Industry || I5: Dependence on monsoon- Motorcycles and mopeds, which together contribute
about 60-65% of demand, mainly cater to rural areas where disposable incomes are highly
dependent on crop output and in turn on monsoons. Thus, for the overall two-wheeler industry,
dependence on monsoons is very high. In fact, bad monsoons impacted industry growth in FY2019
Sales in 2020 and sales growth dropped to 4.8% from 14.8% in previous fiscal. A similar impact was also observed
in FY2013 when industry growth dropped to 2.8% from a high 14% growth in fiscal 2012. The
10,00,000
industry witnessed normal monsoon in previous two fiscals, which positively boosted sales.
9,00,000
8,00,000 Business || B1: Government's focus towards 2W-EV – With rising levels of pollution and more
7,00,000
6,00,000
focus on sustainability, the Government is incentivizing consumers and companies to move towards
5,00,000 EVs. Though the adoption rate is slow, the ICE engine 2W might not be able to stay relevant in the
4,00,000
future. Currently, Hero electric has the highest market share in this EV market, and Hero Motocorp
3,00,000
2,00,000
has still not come up with any product in this segment.
1,00,000
0 Business || B2: High focus on Domestic market: The company's revenue from exports just
Bajaj Hero
accounts for 2-3% of the total revenue, whereas its competitor Bajaj Auto's nearly half of the
Domestic sales Exports
revenue comes from exports. Hero Motocorp has a footprint in more than 40 countries, but the
Source: Company Reports sales form a negligible part of the total sales.

Business || B3: High focus on premiumization – The company is focusing on gaining share in the
Fall in 2W EV sales premium bike segment, which is helping the company to some extent as the company has been
quite aggressive in this segment, but some unsuccessful launches can restrain its growth path, it
154000 should work carefully in this segment.
152000

150000
Business || B4: Aggressive launches by competitors in Entry & Executive level segments – Hero
Motocorp has benefited the most in the domestic 2W market because of its stronghold in the entry-
148000
level and executive segment, which is around 80% of the total market, and Hero has a market share
146000
greater than 50%, now with competitors aggressively launching more bikes in this segment Hero
144000 has been seeing losing out on market share in these segments.
142000

140000
Business || B5: Mass segment EV announced: Hero Motocorp has announced that it will launch a
mass segment EV in the coming year, which can act as a blow to the company. 2W-EVs are
138000
2020A 2021A currently at a very nascent stage in the country and have a very slow adoption rate. Coming up with
Source: SMEV a mass segment EV would require high investments, but the returns do not look very optimistic at
the current moment. The sales have fallen in the recent year and are even expected to fall in the
FY22.

Exchange rate (USD) Market || M1: Commodity Price Risk - Being a part of the manufacturing industry, the raw materials
form a high part of the total cost of the product. With a rise in the price of raw materials, the company
80 has to push its effect towards the customer, which then leads to a fall in sales. Shortage of
75
semiconductors is a key risk which is an essential part, and with a demand-supply mismatch, a
70
65
price effect is very common.
60
55 Market || M2: Currency Risk (Foreign Exchange Risk) - The risk of changes in foreign exchange
50 rates relates primarily to the Group's operating activities and translation risk, which arises from the
45
recognition of foreign currency assets and liabilities and consolidation of foreign subsidiaries. Hero
40
2012 2013 2014 2015 2016 2017 2018 2019 2020 Apr' 21 Motocorp has six subsidiaries with an operational footprint in more than 40 countries, so it is always
Source: BookmyForex
associated with currency risk.

7 | Page
 CORPORATE GOVERNANCE
Shareholding Pattern
To achieve good conduct and governance, HMCL focuses on the following attributes, i.e.,
Transparency, Fairness, Integrity, Equity, and Accountability.

Board of Directors

The size and composition of the Board meet the requirements of SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015 ('Listing Regulations'). As of March 31, 2020, the
Company's Board comprised of eight Directors, with two Executive Directors, one of them being
the Chairman, two Non-Executive Directors, four Non-Executive and Independent Directors,
including one woman Director, i.e., 75% of the total strength of Board comprises of Non-Executive
Directors. Dr. Pawan Munjal and Mr. Suman Kant Munjal are promoter directors and brothers. Apart
from this, there is no relationship among other directors. There are a total of six board committees
Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 QFY21
whose performance is evaluated from time to time and is led by the Nomination & Remuneration
Committee
Promoter & Promoter group FIIs DIIs Public
Source: Company’s filings Codes & Policies

CSR Spend(in crores) The company has laid down a comprehensive Code of Conduct ('Code') for the Board and senior
management personnel of the company. To support this code of conduct, the company has put in
₹ 140.00 place sixteen policies that are available on the company's website, and they are all in compliance
with the SEBI regulations.
₹ 120.00

Shareholding Pattern
₹ 100.00

₹ 80.00
The Promoters & Promoters group holds the highest stake, i.e., 34.6%, which is followed by the
foreign investors who hold a stake of 34.3% in the company. The Indian public holds an 8.3% stake
₹ 60.00 in the company, which is equal to the stake of Insurance companies. Mutual funds/ AIFs have a
₹ 40.00
stake of 8.2%. The rest is owned by Banks, NBFCs, Body corporates, trusts, etc.

₹ 20.00 Social Responsibility

₹- HMCL has been dedicated to corporate social responsibility and has undertaken various projects
FY17 FY18 FY19 FY20
focused upon:
Source: Company’s filings

(i) Environment protection and conservation: HMCL has saved more than 39 million litres of water
and channelized more than 32 million litres in the villages of Haryana. It also installed LED lights in
330 villages saving up to 30 million units of electricity per year.

(ii) Ensuring safety on the road: More than 6,50,000 youth trained on "Safe Driving" across nine
safety training parks.

(iii) Supporting underprivileged communities. Project Shiksha is supporting 216 schools and more
than four lakh students to build scientific temperament and lower dropout rates. More than 7700
youth trained, of which many are working now.

It spent Rs.130.61 cr on CSR activities in FY20, which is greater than the 2% CSR obligation. HMCL
has won the Best CSR practices in Haryana award and Mahatma Award for Excellence in CSR.

Environmental and Sustainability Efforts

Energy Conservation: HMCL has a long-term target to become Carbon neutral by 2030, for which
it has been consistently enhancing its renewable energy portfolio through solar power plants. It has
an installed solar capacity of 7.7 MW

Waste Neutrality: Three plants of HMCL, namely, Daruhera, Gurgaon, and Global Parts Centre,
Neemrana achieved Zero Waste to Landfill certification. HMCL has adopted the approach of
extended producer responsibility for the treatment and disposal of plastics used as packaging
material.

Water Recycling: The major water conservation measure adopted includes large-scale rainwater
harvesting projects that ensure water recovery and recycling and recharge of groundwater. It has
also invested in Effluent Water Treatment plants which are capable of treating wastewater, which
can be re-used in general activities or recycled back to processes.

Related Party Transaction

In terms of Section 188(1) of the Act, all related party transactions entered into by the Company
during FY 2019-20 were carried out with prior approval of the Audit Committee. No approval of the
Board was required as all transactions were on an arm's length basis and in the ordinary course of
business. Related party transactions pursuant to Indian Accounting Standard 24 were, however,
disclosed to the Board. There were no material significant related party transactions made by the
company with the Promoters, Directors, Key Managerial Personnel or other related parties, which
may have a potential conflict with the interest of the company at large.

8 | Page
TECHNICAL CHECK

Technically stock has made a strong bottom in the range of 2730 - 2758 which was a good demand zone earlier too. From
there it reversed and currently is at the supply zone of 2997 - 2976. RSI is trending and stock is still not in the overbought
zone. Also it is above the short term daily moving average of 50 days and 20 days. It indicates strength, if volume support
comes then it has a high chance to cross the supply zone and move towards a higher level of 3120 - 3170.

Arthanaya Capital’s Exclusive Publication

Primary Analysts:
Chirag Bajaj: chirag.bajaj20@iimranchi.ac.in
Hrishabh Bhatt: hrishabh.bhatt20@iimranchi.ac.in

Secondary Analysts:
Aniket Vaslas: aniket.vaslas20@iimranchi.ac.in
Anuveksh Taneja: anuveksh.taneja20@iimranchi.ac.in
Dishant Khaneja: dishant.khaneja20@iimranchi.ac.in
Sudhanshu Agarwal: sudhansh.agarwal20@iimranchi.ac.in

For any feedback/suggestion please write to us at: arthanaya.capital@iimranchi.ac.in

Disclaimer: This report is only for educational purposes neither IIM Ranchi nor Arthanaya capital should be
held responsible for any profit/loss incurred.

9 | Page