The Hero MotoCorp stock is a good bet for investors with a perspective of at least two years. At Rs 2,080, it trades at about 15 times its estimated earnings for FY2013. This is at a slight premium to Bajaj Auto which trades at 13.7 times. The premium is justifiable considering the stronger wicket that Hero is currently in.

Superior volumes

In what has been challenging times for the auto industry, Hero managed a 10 per cent year-on-year growth in net sales and profits in the June quarter.

Hero has benefited from customers down-trading to lower segment bikes, as higher petrol costs and interest rates began to pinch. It has also improved average realisations due to price hikes and has seen stabilisation in raw material costs. In the current scenario of high interest rates and petrol prices, Hero may continue to outperform due to its product mix being tilted towards ‘value’ offerings in the two-wheeler space.

Hero has about 73 per cent market share in the 75-110 cc bikes ( CD Dawn, CD deluxe, Splendor, Passion) and about 32 per cent share in the 110-125 cc segment bikes (Super Splendor, Glamour). The Ignitor and Passion Xpro will soon join the offerings in these segments. The robust demand for scooters also adds in its favour. Beyond the Pleasure and Maestro, a third scooter will be added to its portfolio shortly. The monsoon deficit could dampen rural demand a bit, but this could be offset by the festival season demand in the next two quarters.

Realisations to improve

From about 14.5 per cent a year ago, Hero witnessed an expansion in operating margins in the first quarter to 15 per cent.

However, Bajaj Auto’s margins are consistently 3-4 percentage points higher, courtesy its focus on exports and premium segment bikes.

But Hero is also expecting to boost its realisations and margins over the next few years. Getting a free hand in exports after its split with Honda, Hero plans to enter the Latin American and African markets this calendar year.

The company is making some product changes to and re-launching its entire premium portfolio under the ‘Hero’ brand. In the near-term though, margins may face some pressures from increased brand-building/advertising expenses.

Hero has also addressed concerns on the R&D front after its split from Honda. The company has tied-up with Erik Buell Racing and AVL (Austria). While the former brings technology for building premium bikes and developing new models, AVL will provide the know-how for engines.

(This article was published on July 21, 2012)
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