HERO MotoCorp

EQUITY RESEACH REPORT

Hero MotoCorp Equity Research Report:
This document presents the financial projections and analysis for
Hero MotoCorp, covering the period from 2023 to 2028. The model
is designed to provide insights into the company's financial
performance and assist in making informed decisions regarding
future strategies and investments.

PREPARED BY
Kewal Mehta

www.Heromotocorp.com
 **Use only for Educational Purpose
27 January, 2024

Hero MotoCorp (HEROMOTOCO)

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CMP: ₹ 4442 Target: ₹ 3474 SELL
Expect a substantial volume recovery as a result of the strong
performance
Regarding Hero MotoCorp's stock: Hero MotoCorp (HMCL) holds the distinction of being Particulars
the world's largest manufacturer of two-wheelers in terms of volume. As of FY23, the
company commands a domestic market share of 32.5%. Their portfolio features a range
of popular models such as Splendor, Passion, Glamour, and more.
Approximately 50% of their sales are attributed to rural areas, and they held a
motorcycle market share of 46.9% in FY23.
The company maintains a debt-free balance sheet and boasts strong return ratios.
Additionally, they maintain a healthy dividend payout ratio of approximately 70%.
Hero MotoCorp has made inroads into the electric vehicle (EV) market, both through
its captive offerings under the Vida brand and through investments in companies like
Ather Energy, Gogoro, and Zero Motorcycles. Shareholders Pattern

Q2FY24 Results: The company reported a healthy performance in Q2FY24.

Hero MotoCorp Ltd witnessed a notable 5.33% year-on-year increase in revenue,
reaching ₹9,745.69Cr. Over the past quarter, the company sustained its growth
momentum with a 7.37% rise in revenue.
The net profit of Hero MotoCorp Ltd displayed substantial growth, surging by 46.17%
compared to the same period last year, totaling ₹1,006.31Cr in Q2 2023-2024.
Furthermore, on a quarterly basis, the company achieved a commendable 41.71%
increase in net profits.
Key Risks
Reflecting robust financial performance, Hero MotoCorp Ltd's net profit margins
witnessed a significant upswing of 38.77% since the same period last year, reaching Hero MotoCorp faces strategic risks
10.33% in Q2 2023-2024. Over the last three months, the company continued to related to major business decisions
enhance its profitability, recording a noteworthy 31.98% surge in net profit margins. and sustainability goals, requiring
The total number of motorcycles and scooters sold in the July-September period robust decision-making processes.
amounted to 14.16 lakh units Operational risks, such as
manufacturing defects and labor
What should be the course of action for investors? Over the past five years, HMCL's
disruptions, can impact the
stock price has underperformed the Nifty Auto Index, showing a compound annual
company's operations, necessitating
growth rate (CAGR) decrease of approximately 7.3% from around INR 3,660 levels in May
risk mitigation strategies.
2018.
Financial risks encompass liquidity,
I’m giving HOLD rating because there are no clear indications of a substantial
currency fluctuations, and subsidiary
recovery in sales volume in the commuter motorcycle segment, in which HMCL holds
performance, managed through
a dominant position, in the near future. Furthermore, the growth in the electric
financial modeling and hedging.
vehicle (EV) sector is progressing at a slower pace.
Regulatory compliance is essential to
Target Price and Valuation: In my revised estimates, I have assigned a value of INR 3474
avoid liabilities and protect the
to HMCL, which equates to 16.8 times the Price-to-Earnings (P/E) ratio based on the
company's reputation in the face of
estimated earnings per share (EPS) for FY24.
changing norms.
Key triggers for future price performance: Embracing new technologies while
We anticipate that in the forecast period of FY23-24E, both volume and topline will managing IT and digitalization risks is
exhibit growth at a compounded annual growth rate (CAGR) of 4% and 8%, respectively. central to Hero MotoCorp's strategy,
This growth is expected to be driven by a potential resurgence in rural demand, the focusing on research, development,
introduction of new products, particularly in the premium segment, and the and cybersecurity.
introduction of more budget-friendly electric vehicle (EV) options.
By FY25E, margins will attain a level of 17%, primarily due to favorable operating Research Analyst
leverage, stable commodity prices, and increased revenue from spare parts.
Kewal Mehta,
The company plans to capitalize on its existing partnerships and strategic investments,
kewal007.mehta@gmail.com
such as Aether, Zero Mobility, and Gogoro, to expand its portfolio of cost-effective EV
offerings. Additionally, they intend to extend the Vida network to cover a nationwide
presence, reaching approximately 100 cities by the end of CY23.

*(All Amount in ₹ Crores, Unless otherwise stated)

 **Use only for Educational Purpose
27 January, 2024

Key takeaways of previous quarter & conference call highlights

Q1FY24 Results:
Financial Performance: Hero MotoCorp reported a robust Q1 FY24, with a 32% year-on-
year increase in Profit After Tax (PAT), reaching Rs 825 crore. The company's revenue also
grew by 4.5% to Rs 8,767 crore during this period.
Factors Driving Performance: Lower commodity costs, strategic price adjustments,
positive operating leverage, and an enriched product portfolio contributed to the
company's improved financial results.
Sales Volume: Despite a slight decline in sales volume, the company delivered strong
financials. Total sales, including exports, decreased by 3%, while domestic sales were
down by 0.8%. However, Hero MotoCorp is focusing on strengthening its presence in the
premium segment.
Operational Margin Improvement: The company's Earnings Before Interest, Taxes,
Depreciation, and Amortization (EBITDA) for Q1FY24 increased by 28% to Rs 1,206 crore.
EBITDA margin for the quarter stood at 13.8%, reflecting a 250 basis points improvement,
primarily due to softening commodity costs and prudent price increases.
Positive Outlook: Hero MotoCorp is optimistic about future quarters, citing favorable
economic indicators and positive consumer sentiments. With new product launches
planned and expansion in the premium segment, the company expects demand to
strengthen, especially in the second half of the year.

Q1FY24 Earnings Conference Call highlights

Q1 Financial Performance: The company reported Q1 results, achieving a top-line income of nearly ₹9,000 Crores, indicating its
strong financial performance for the quarter.
EBITDA Growth: EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) increased by an impressive 28%,
signifying significant growth in operating profitability.
Profit After Tax: Despite accounting for the exceptional item of VRS (Voluntary Retirement Scheme), profit after tax surged by
32%, reflecting strong overall profitability.
EBITDA Margins: EBITDA margins reached 13.8%, with underlying ICE (Internal Combustion Engine) business margins at 14.5%,
marking a return to pre-COVID levels. This showcases improved operating efficiency.
Harley-Davidson X440: The company's product, the Harley-Davidson X440, received an overwhelming response, amassing over
25,000 bookings, highlighting its popularity and strong customer demand.
EV Rollout: The company's electric vehicle (EV) rollout remains on track, with ambitious plans to cover 100 cities by December,
demonstrating commitment to expanding the EV market.
125cc Segment: Efforts in the 125cc segment, including products like Super Splendor XTEC and the Glamour 125cc revamp, are
contributing to the recovery of the company's market share in this segment.
Economic Factors: Favorable economic factors, such as government capital expenditure, a pause in rate hikes by the RBI, and a
positive monsoon, are anticipated to drive double-digit growth within the industry.
ICE Margins: The company aims to maintain margins within the range of 14% to 16% for its Internal Combustion Engine (ICE)
products.
EV Cash Burn Reduction: Expectations are set for a reduction in cash burn per unit in the Electric Vehicle (EV) business as
volumes increase, indicating a path to improved profitability in this segment.
Revenue Growth and Market Share: The company's primary focus is on achieving double-digit revenue growth within the two-
wheeler industry and gaining market share.
New Product Launches and Marketing: The company is actively launching new products across different segments, such as
scooters and motorcycles, with a commitment to marketing and brand building to support these launches and boost market
share. The improved margins allow room for increased investment in marketing.
Inventory Management: The company has been actively managing inventory levels and has shifted to a market-first, retail-first
strategy to position itself effectively for the upcoming festival season.
EV Margins: In the Electric Vehicle (EV) segment, the company acknowledges that ex-EV margins are above 14%, despite a 70 to
80 basis point drag attributed to investment in EV infrastructure and the impact of subsidy withdrawal on unit gross margins.
Preparation for Subsidy-Free Environment: The company is proactively preparing to be profitable without subsidies, and it is
accelerating the development of its product portfolio to align with a subsidy-free business environment. The focus on
monitoring retail market share is emphasized as it stood at 36.6% for the quarter. The company recognizes that the time
required for new product launches to reach their full potential typically takes four to eight quarters.
Balancing Growth and Profitability: The company expresses confidence in its ability to balance volume growth and marketing
investments while maintaining profitability, especially in light of margin improvement.
Portfolio and Investment: The company's large product portfolio and strong profit and loss (P&L) position provide the flexibility
and financial strength to support the necessary investments in marketing and product launches, fostering long-term growth and
market competitiveness.
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27 January, 2024

Financial Summary
Balance Sheet

Total Assets Total Liabilities

*(All Amount in ₹ Crores, Unless otherwise stated)

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27 January, 2024

Profit & Loss Statement

Revenue Model

Trend Line of Revenue

*(All Amount in ₹ Crores, Unless otherwise stated)

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27 January, 2024

Cash Flow Statement

Net Profit

Discounted Cash Flow Model

Sensitivity Analysis

Trend Line of EBIT & Revenue

*(All Amount in ₹ Crores, Unless otherwise stated)

 **Use only for Educational Purpose
27 January, 2024

Financial story in charts

Topline Trend

I expect sales to grow at a CAGR of 10.31%

over FY23-25E

Trend in margins

Margins are seen improving to 16% levels by

FY25E amid stable commodity prices. The
company’s long-term target in this domain is
unchanged

Trend in profitability

Net Profit is expected to grow to ₹ 5,039

crore in FY25E i.e., at a CAGR of ~6.7% over
FY23-25E
 **Use only for Educational Purpose
27 January, 2024

Trends in Return Ratio

Return ratios are expected to be healthy and

revert back to 20% + level starting FY24E. This is
largely driven by healthy profitability as well as
high dividend payout, which is the USP at HMC

Peer to Peer Analysis

Hero Motocorp:
Strong Financials: Hero Motocorp boasts a healthy balance sheet with a relatively low net debt of $651 million, indicating a solid
financial position.
Attractive Valuation: The company's valuation metrics are appealing, with an EV/Revenue ratio of 2.6x, suggesting that it
generates ₹2.60 in enterprise value for every ₹1 of revenue. Moreover, the P/E ratio of 18.9x is competitive in the industry, making
it an interesting investment prospect.
Maruti Suzuki:
Market Dominance: Maruti Suzuki is the market leader with the highest market capitalization, reflecting its significant presence in
the automotive industry.
Elevated Valuation Metrics: However, its valuation metrics are relatively moderate. The EV/EBIT ratio of 21.3x and a P/E ratio of
27.4x indicate that investors may have high growth expectations, which might be priced into the stock.
Bajaj Auto:
Solid Financials: Bajaj Auto has a robust financial position and relatively low net debt of $125 million.
Moderate Valuation: While the financials are strong, the valuation is moderate, with an EV/EBIT of 22.3x. This suggests that the
market is pricing the company reasonably in relation to its earnings.
Eicher Motors:
Strong Performance: Eicher Motors displays strong revenue and profitability, making it an appealing investment option.
Higher Valuation: The company's valuation metrics are relatively high, with an EV/EBIT of 21.2x and a P/E ratio of 27.7x, potentially
reflecting investor optimism about its future growth.
Escorts Kubota:
Profitability: Escorts Kubota exhibits strong profitability, despite its smaller market capitalization.
High Valuation: The company's elevated valuation metrics, including an EV/EBIT of 26.8x and a P/E ratio of 35.7x, indicate that
investors expect substantial growth and profitability.
M & M (Mahindra & Mahindra):
High Net Debt: M & M has a high level of net debt at ₹99,712 Crore, which could be a concern for some investors.
Attractive Valuation: On the bright side, the company offers an attractive valuation with a P/E ratio of 16.7x, suggesting that it may
be undervalued based on its earnings.
TVS Motor Co.:
Moderate Market Cap: It has a reasonable market capitalization and financial position.
High P/E Ratio: However, its high P/E ratio of 54.2x may indicate that investors have high expectations for future growth and
earnings, which could be a consideration for potential investors.

*(All Amount in ₹ Crores, Unless otherwise stated)

 **Use only for Educational Purpose
27 January, 2024

RATING RATIONALE
I would like to emphasize that my intention is solely to create educational content and provide forecasts for the next five years for
Hero MotoCorp. I have followed a structured approach wherein stocks are rated based on their notional target price in relation to
the current market price, and subsequently sorted into categories such as Buy, Hold, Reduce, or Sell. The notional target price, a
crucial metric in their analysis, represents the analysts' valuation of a given stock.
Buy: >15%
Hold: -10% to 15%
Reduce: -15% to -10%
Sell: <-15%

Please note that while I may provide information and insights in provided report. My responses are for educational and
informational purposes, and any financial decisions should be made after consulting with a qualified financial advisor.

Disclaimer

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities.
The report and information contained herein is strictly confidential and may not be altered in any way, transmitted to, copied or
distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent.
The report is based on the facts, figures and information that are considered true, correct, reliable and accurate.
The intent of this report is NOT recommendatory in nature but for Educational purpose only.
The information is obtained from publicly available media or other sources believed to be reliable.
Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made
as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice.
The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy
or sell or subscribe for securities or other financial instruments for the clients.

Sources:

1.Annual Reports 2018,19,20,21,22,23 (Hero MotoCorp)

2.Moneycontrol
3.Trendlyne
4.Google Charts
5. Screener
6. Yahoo Finance