Hero motocorp results reported lackluster but future prospects look bright

Hero MotoCorp Limited, formerly known as Hero Honda, is a New Delhi-based multinational manufacturer of motorcycles and scooters. The business has a market share of roughly 37.1% in the two-wheeler industry in India and is one of the biggest two-wheeler producers in the world.

Initially, Hero MotoCorp started out as a spare parts manufacturer

In 1953, Brij Mohanlal founded the company. At first, he just produced the replacement parts for bicycles and now the company is a leading two wheeler player in India with a valuation of over $4 billion. In 1983, they signed a partnership with Honda of Japan, through which they sold motorcycles under the Hero Honda brand, which ended in 2011. Ever since it has become independent, it uses its own research and develops the technology for all its vehicles.

Hero Motors was not allowed to export the automobiles to any other countries than Sri Lanka, Bangladesh, and Nepal while the collaboration with Honda was in effect owing to the restrictions. Exports are now easily available following the JV’s demise. This is another plus point for the business.

Hero MotoCorp announced their Q1FY23 results on 13^th August, where they reported a double-digit growth in revenue and profits against the figures of corresponding quarter last year but missed estimates on the EBITDA front. Additionally, it is anticipated that their sales would increase and the demand for two-wheelers will significantly rise during the forthcoming festive season. Even on the stock exchanges the Hero MotoCorp share price is trading near 52 weeks high and has moved up by almost 5% with the announcement of Q1FY23 results. So, let’s now analyse their Q1 results and check if there are any upcoming investment opportunities as well.

Key Highlights of Hero MotoCorp Q1FY23 results:

• Hero MotoCorp’s revenues from operations in Q1FY23 jumped 53% YoY to Rs 8,392.54 crore, up 13% QoQ
• EBITDA margin for Q1FY23 stood at Rs 941 crore against Rs 515 crores in Q1FY22, slightly lower than Analyst’s estimate, by 2%, due to higher RM costs (GM 180bps miss), partially offset by lower other expenses
• EBITDA margin of 2% (up 180bps YoY, flat QoQ) stood in line with expectations
• Hero MotoCorp posted a 71% jump in its net profit at Rs 624.5 crore for Q1FY23, while it fell 3% QoQ
• Hero has raised prices to offset RM inflation. It underwent an increase of Rs 850 in April and Rs 1,200 in July of this year, which would be reflected in the following quarters
• There will be a spill over of increased expenses in Q2 as a result of the lag impact, but in succeeding quarters, the margins are anticipated to increase to 14% from 2% in Q1FY23.

Hero MotoCorp results Q1FY23: Revenue grew 53% YoY, while EBITDA grew by 180 Bps, lower than estimates

The company’s revenues from operations in the Q1FY23 jumped 53% YoY to Rs 8,392.54 crore from Rs 5,487 crore in Q1FY22. While it grew 13% QoQ from Rs 7422 crore in Q4FY22 to Rs 8393 crores in Q1FY23. Part of the growth can be attributed to the low base of Q1FY22, which was one of the worst affected quarters during the pandemic.

The growth of revenue was backed by higher volumes and better realisations which were partly offset by lower mix from spares segment and lower export volumes. The management intends to grow double digit in volumes in FY23E.

While exports were down in Q1FY23 due to macroeconomic challenges such as inflation and the impact of currency depreciation in emerging nations, management expects exports to increase in H2FY23. It is concentrating on developing and scaling up the appropriate product mix for its international portfolio.

EBITDA (Earnings before interest, tax, depreciation, and amortisation) margin for the Q1FY23 stood at Rs 941 crore against Rs 515 crores in Q1FY22. This is slightly lower than Analyst’s estimate, by 2%, due to higher RM costs (GM 180bps miss), partially offset by lower other expenses. EBITDA margin of 11.2% (up 180bps YoY, flat QoQ) stood in line with expectations.

Hero MotoCorp results Q1FY23: Profits increased 71% YoY despite RM inflation

Hero MotoCorp posted a 71% jump in its net profit at Rs 624.5 crore for the Q1FY23 against net profit of Rs 365 crore in the Q1FY22. While it fell 0.3% QoQ from Rs 627 crores in Q4FY22 to Rs 625 crores in Q1FY23.

In addition, the Hero has raised prices to offset RM inflation. It underwent an increase of Rs 850 in April and Rs 1,200 in July of this year, which would be reflected in the following quarters. To balance growth and profitability over the past six to seven quarters, price increases have lagged behind RM inflation. The management sees a chance to move the price in front of the cost in order to make up some of the lost margin as a result of softening

commodity prices. There will be a spill over of increased expenses in Q2 as a result of the lag impact, but in succeeding quarters, the margins are anticipated to increase to 14% from 11.2% in Q1FY23.

Niranjan Gupta, Chief Financial Officer (CFO), Hero MotoCorp, said “While the macro-economic environment globally is facing headwinds of inflation, Indian economy is relatively better placed to move on path to recovery and growth.”

Hero MotoCorp results Q1FY23: Other Key Updates

• The company will be launching its EV product in the upcoming festive Effective stake in Ather Energy after accounting for dilution now stands at 35%.
• The company’s ongoing initiatives to increase its presence in exports, high-end motorcycles, scooters, and EVs are also anticipated to bode well in the longer
• Post-pandemic demand levers remain intact with the rural recovery in
• In addition, it is anticipated that the drastic switch from shared to personal mobility would support future 2W
• The company is getting good traction in premium category XTEC (Extra technology) variants of Glamour, Splendor, Destini and Passion models. The XTEC versions are priced 7-10% higher than base
• Replacement demand share is at 15-18% (~20% pre-pandemic level), Hero will try to increase it to 20%+ in the coming.

The CFO also said, “As the country enters the festive season, we expect the 2-wheeler demand to be on a healthy trajectory supported by micro factors like normal monsoon, crop cycle, opening of all sectors of the economy etc. The margin pressure on the industry is also likely to ease in coming quarters, as commodities cool off and price recovery moves ahead of cost impact.”

Technical Analysis of Hero MotoCorp Share price

Hero MotoCorp share price is currently trading close to 52 weeks high of Rs 2954, with 50 EMA well above 100 and 200 EMA. The Hero MotoCorp stock has gained almost 5% with the announcement of Q1FY23 results with 6X Volumes. It is currently taking a strong support at Rs 2683 with bullish investor sentiment in the market. Investors can consider investing in Hero MotoCorp stock with a medium to long term view. The stock is in an uptrend on the long term charts as well.

Axis Direct said, “We maintain our BUY rating on the stock on the back of reasonable valuations and revise our TP to Rs 3,060/share (Rs 3,000 earlier), implying an 11% upside from the CMP.” IDBI Capital said,” We expect, Hero MotoCorp to report 10.3% volume CAGR and 24.8% PAT CAGR over FY22-24E. We rate the stock as HOLD with price target of Rs 3,062.”

While ICICI Securities downgraded Hero MotoCorp to ADD from Buy with a TP of Rs 3,101 (earlier: Rs3,042) & ICICI Direct said, “We maintain HOLD with TP of Rs 2925 amid muted margin performance, mellow commitment towards EV space & await volume ramp-up during upcoming festive season.”

Our View

Hero is in a suitable position to profit from the increase in 2W demand from the low base. The demand recovery brought on by the reopening of businesses and educational institutions, particularly the anticipated increase in demand in rural areas, provides Hero with the foundation for volume development.

Additionally, its collaboration with Ather Energy, Gogoro Inc., and Harley Davidson will enable it to strengthen its position in the EV and premium bike markets respectively. In the succeeding quarters, a pick-up in actual retail sales and a successful EV launch will determine the company’s growth trajectory.

Therefore, investors can anticipate margins to increase in the upcoming quarters due to the easing of commodity prices and operating leverage and thus Hero MotoCorp emerges as one of the favourable stocks in the Automobile sector.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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