Largecap debt-free auto stock to 'buy': Ventura Securities initiates coverage on this stock for 18% potential gains

Stocks to buy, Auto stock to buy: Amid strategic posiitioning through various initiatives, such as capitalisaling on rural demand recovery, product diversification as well as premiumization, the largecap 2-wheeler major's Hero MotoCorp (HMCL) is collectively enhanching its growth potential across various segments and regions, noted Ventura Securities in its report dated November 27.

And in light of it, the brokerage has initiated coverage on the stock with a 'Buy' rating with a target pegged at Rs 5,704, implying gains of nearly 18 per cent from the last close of Rs 4,871.

Given strong revenue growth on account of demand recovery and portfolio diversification along with profit margin expansion and negative net debt, the brokerage remains positive on the stock.

Hence we initiate coverage with a BUY rating and a price target of INR 5,704 (21.9X FY27 P/E), added the brokerage.

Over FY24-27, the brokerage expects HMCL’s revenue/ EBITDA/ net earnings to grow at a CAGR of 8.9 per cent/ 11.7 per cent/ 11.6 per cent  to INR 48,787 cr/ INR 7,216 cr/ INR 5,202 cr respectively, while EBITDA and net margins are expected to improve by 109bps to 14.8 per cent and 75bps to 10.7 per cent.

HMCL maintains a net debt-free balance sheet and consistently generates positive free cash flow to the firm (FCFF) due to its improving profitability. This is expected to enhance its balance sheet strength and
improve key financial metrics.

As a result, return ratios – RoE and RoIC – are expected to improve by 332bps to 24.5 per cent and 560bps to 40.7 per cent, respectively by FY27E.

Key risks and concerns

•  A shift in demand towards premium and lifestyle motorcycles, as opposed to traditional commuter bikes, may challenge HMCL, who rely heavily on the mass-market segment.
• The rising cost of raw materials, such as steel, aluminum, rubber, and other essential components, increases production costs for two-wheeler manufacturers. Passing these costs on to consumers could reduce demand,especially in the price-sensitive market.
•  Global supply chain issues, such as shortages of semiconductors and other critical components, have caused production delays and increased costs forthe two-wheeler industry.

Hero MotoCorp share price performance

In the last one year, the stock has gained 35 per cent, while Nifty Auto during the same period has gained 36 per cent.