More the people ride alone, more the zip for Hero

ET Intelligence Group: A higher preference among investors for rural-facing automobile segments is likely to help Hero MotoCorp sustain momentum on bourses. India’s largest two-wheeler maker derives more than 50 per cent sales from the rural market, where income has been supported by higher disbursements through MGNREGA scheme. In addition, the entry-level bikes segment, a core forte of Hero, is expected to outperform the overall two-wheeler growth as consumers tend to rely more on personal vehicles than public transport to stay safe amid the Covid-19 outbreak. This is expected to augur well for Hero’s volume growth.Hero dominates the economy and executive two-wheeler segments with a market share of 69.3 per cent and 77 per cent, respectively, at the end of March 2020. During a challenging economic environment, new buyers often tend to buy affordable products from market leaders. Another positive factor is the rural income is expected to be less affected by the pandemic given the expectations of a record food grain production – FY20 advance estimate of 295.7 million tonnes by the Ministry of Agriculture. Moreover, a forecast of normal monsoon augurs well for the kharif crop.During an analyst call after declaring the March quarter numbers, Hero stated that rural and semi-urban areas are expected to show better growth than urban areas in the coming quarters. The company commands a market share of 54-56 per cent in rural-dominated states of Uttar Pradesh, Bihar and Rajasthan.After the government relaxed the lockdown norms in May, over 90 per cent of the company’s retail outlets are back in operation. The dealers who have restarted operations in the last three weeks have reached 70-80 per cent of their pre-pandemic operating level.76312701The company’s operating margin before depreciation (Ebitda margin) fell by 427 basis points to 10.6 per cent in the March 2020 quarter compared with the average margin in the past four quarters. The slide was due to lower sales volume, liquidation of BS-IV inventory by dealers ahead of the implementation of BS-VI emission norms from April 1, and provision of GST incentives. When adjusted for these items, the company’s margin was 13.5 per cent. For the current fiscal, Hero expects to rationalise operating costs, which may result in 100 basis points support to the margin.The combined effect of factors including resumption in retail activities, the product mix in favour of entry-level bikes and stronger balance sheet are expected to limit the company’s volume decline in the current fiscal. Analysts project 12-15 per cent volume decline for FY21 compared with the 18 per cent drop in the previous year’s sales volume.Hero’s stock has gained 22 per cent in the past three months while the BSE Auto index has not earned meaningful returns. Based on Wednesday’s closing price of Rs 2,292.2 on the BSE, the stock was traded at 16 times of its one-year forward earnings, which is in line with its long-term average.

from Economic Times https://ift.tt/3hkKqvY