Hero MotoCorp Share price: Sharekhan retains Buy rating with target price of Rs 4030

Hero MotoCorp’s Q3 FY21 results were slightly ahead of expectations by 1.5% on revenue level and 6.4% at net profit level. Net revenue grew by 39.7% yoy at Rs 9776 cr in Q3 FY21, led by a growth of 19.8% growth in volumes and 16.7% growth in average realization. The average realization improved on back of richer product mix and price hikes taken during the year, owing to BS-VI transition and a rise in raw material cost.

Hero MotoCorp’s qoq growth in revenues was 4.4% in Q3 FY21, aided by 2.1% qoq in volumes and 2.2% growth in average realization. The operating profit margin for the Q3 FY21 stood at 14.5% showing a decline of 39 bps y0y and improvement of 73 bps qoq. The RMC/vehicle increased 23.5% yoy at Rs 37345, mainly due to a rise in raw material costs. As a result, the gross margin declined 389 bps yoy to 29.5% in Q3 FY21. PAT grew by 23.2% yoy and 13.7% qoq to Rs 1084 cr.

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Sharekhan believes the structural growth drivers for the two-wheelers (2W) industry remains intact. Hero MotoCorp is expected to benefit from premiumisation of its products, its stronghold in the economy and executive motorcycle segments, and aggressive products offerings in premium bike and scooters segments. Hero MotoCorp is a market leader in the Indian 2W industry, commanding a 38.5% share.

Hero MotoCorp commands 65% market share in the combined economy and executive motorcycle segment, which together makes up 80% of the motorcycle market size in India. Hero MotoCorp has strong reach in semi-urban and rural areas, aided by its largest distribution network in the 2W industry. Sharekhan expects Hero MotoCorp to be the beneficiary of rural demand and the increased need for personal mobility in a post COVID scenario.

Hero MotoCorp’s brand equity is because of value-for-money products, extensive service centres, low maintenance cost and higher resale value. Hero MotoCorp has renewed focus on gaining market share in the premium bike segment and increasing exports capability. Its partnership with Ather Energy and Harley Davidson will help Hero Moto Corp increase its presence in new technology and premium segment bikes.

Sharekhan expects a strong recovery in FY2022 for Hero Motocorp, driven by normalisation of economic activities, operating leverage, price hikes, and cost saving under the company’s leap programme, which would result in margin improvement. Sharekhan expects Hero MotoCorp to reach its historical margin range of 14%-16%. Hence, Sharekhan retains Buy rating on the Hero MotoCoro with target price of Rs 4030 factoring better multiples owing to business outlook and earnings upgrade.