Hero Motocorp Ltd.

Hero MotoCorp Ltd.

Recommendation - Buy

Industry – Auto (Two-Wheelers)

In FY2012-13, two-wheeler industry witnessed one of its worst performance in a decade. This was because of high inflation, steep oil prices and interest rates. Also, a poor crop contributed to dampening the consumption potential of rural markets. Two-wheeler sales registered growth of 11.67% in April 2014 over April 2013. Within this segment, scooters, motorcycles and mopeds grew by 26.0%, 8.06% and 0.23% respectively. Still, these 2 financial years were not very good for this industry.

But, in the coming year, the growth prospects of this industry look good. 2W industry sales volume were up 15.5% YoY as per June 2014 data. A fall in interest rates and stable fuel prices are expected to create an environment conducive for growth in this industry.

HMCL is the world's largest manufacturer of two-wheelers, based in India. In 2001, the company achieved the position of being the largest two-wheeler manufacturing company in India and also the top two-wheeler company globally in terms of unit volume sales in a calendar year. The company continues to maintain this position till date.

It offers 19 different two-wheelers across 100cc, 125cc, 150cc, 225cc categories. With 3 plants in Gurgaon, Haryana and Haridwar, its total installed capacity is approx. 6.90 million units. It is building a fifth plant at Halol in Gujarat. The company is looking for a location in southern India to set up its sixth local manufacturing plant, which would take its installed capacity to more than 12 million units.

It reaches over 1 lakh villages in India and is also expanding across Asia, Cenral and Latin America and Africa. It controls 54% of the domestic motorcycle market share and nearly one-fifth of the scooter market.

One of the advantages of Hero MotoCorp against its competitors is its strong reach in the rural market. The MNREGA scheme is putting more money in the hands of rural people through higher wages. The 2011 Census has re-classified 2500 large villages as census towns. These settlements are mostly non-dependent on agriculture for livelihood and are experiencing rapid growth. Such drivers of rural prosperity will transform those parts of India that have underperformed for decades. In such a scenario, HMCL can expect good prospects as it has strong sales and distribution networks which are difficult to be replicated quickly. Hero’s stock has surged by about 30% in the last six months, almost three times higher than its nearest listed competitor Bajaj Auto Ltd.

For HMCL, demand drivers are in place, driven by increasing penetration in rural markets and replacement demand from urban markets. It is witnessing strong replacement demand due to shortening of the product replacement cycle; as per the management, the cycle has shortened