Money-making stock! Hero Motocorp gives 5% return in 1 day - Should you buy? Find out!

Investors were very upbeat on two-wheeler giant Hero Motocorp in Wednesday’s trading session after the company surprised both experts and industry by bagging a massive 38% jump in their net profit during Q1FY20. The share price of Hero Motocorp ended at Rs 2,349.75 per piece up by Rs 90.40 or 4%. At one point, the company gave a nearly 5% return in 1 day, after it touched an intraday high of Rs 2,369 per piece. In Q1FY20, Hero posted a net profit of Rs 1,257.34 crore on a standalone basis for the quarter ended June 30. However, revenue from operations for the quarter fell to Rs 8,030.27 crore, from Rs 8,809.82 crore for the quarter ended June 30, 2018. Post Q1FY20 result, one can actually still continue buying Hero shares as the company is seen as soaring further. 

Here’s what the experts say: 

Chirag Shah and Jay Mehta, Research Analysts at Edelweiss Securities said, “ Demand across rural and urban markets continued to remain subdued with recovery contingent on a strong monsoon and improvement in availability of financing. With the Destini 125cc (18% market share), the company has tasted success in the fastgrowing 125cc scooter segment, but we believe it needs to replicate the performance in the premium motorcycle segment as well. Ability to pass on BSVI costs and prudent inventory management remain key H2FY20 monitorables. Maintain ‘HOLD’ with revised TP of INR2,498 (INR2,532 earlier) as we roll over to December 2020E.”

Meanwhile, Saksham Kaushal, Research Analyst at Phillip Capital said, “2W industry has not yet recovered from the negative impact of the recent price hikes and further given the weak consumer sentiment coupled with a liquidity crunch we don’t see the market fully absorbing the  another increase of c.Rs 8,000 because of BS6 emission norms from April 2020. Industry already is witnessing trends of down‐ trading towards cheaper variants, which will put more pressure on profitability. To factor in the same we build in  ‐6.2%/ 1.5 volume growth and EBITDA margins of 14.1%/13.9% for FY20/21. Maintain Neutral with a target of Rs 2,273, valuing the company at 14x FY21 EPS.”

Similarly, expert at Motilal Oswal in their note said, “We cut our FY21 EPS estimate by ~4% to factor in our reduced volume/margin assumptions. Near-term demand uncertainty, BS6 transition and increasing threat of electrification are likely to keep earnings and valuations under check. The stock trades at 14.5x/13.3x FY20/21 EPS, which is a fair reflection of flat EPS over FY19-21. Maintain Neutral with a target price of INR2,525 (~14x Mar’21 EPS + INR140/share for Hero FinCorp).”

However, on the other hand, Aditya Makharia and Mansi Lall analysts at HDFC Securities said, “Maintain BUY as (1) Hero has successfully defended market share in the 2W segment in the current downturn. (2) The premium launches will further enhance its addressable customer base. The market share shift away from scooters will benefit given its motorbike dominant portfolio. (3) The stock is trading at attractive valuations of 13.7x on FY20E estimates and offers a dividend yield of ~3.9%. The co has healthy return ratios with an ROE of 24%.”

Hence, the duo at HDFC said, “1QFY20 operating performance was a beat as margins at 14.4% were up +90bps QoQ on improved cost management. Amidst an uncertain environment, Hero is addressing white spaces in its portfolio and upgrading its existing products. Re-iterate BUY, with a TP of Rs 2,875 (16x FY21 EPS).”