CoValue Markets

Hero Motocorp: Few bumps while riding!

As social distancing becomes the new norm, the automotive industry gets a boost. COVID19 impact will be short term. Know its Value!

  • Hero Motocorp’s new launch “Xtreme” in premium motorcycle segment with competitive pricing will help the company be back on the map
  • The company increased it’s equity share in Ather Energy, a Bengaluru-based EV manufacturer, from 32.31% to 34.58% thereby investing in future of mobility i.e Electric scooters.
  • Sales of 5.14 lakh units in July 2020 (YOY growth of -4%) show major revival signs of Pre-COVID sales.

Hero MotoCorp Ltd. is a scooter and motorcycle manufacturer, dominating 34.6% market share in the world’s largest two-wheeler market i.e. India! It has more than 100 million satisfied customers and operationally present in over 40 countries across the world. It became the world’s largest two-wheeler manufacturer (in volume terms) in 2001 and has maintained that title ever since. With a workforce of over 8500 employees, the company has eight globally-benchmarked manufacturing facilities with a combined installed capacity of over 9mn units of two-wheelers per annum. It manufactures a new product every two seconds. The company has over 9000 Customer Touch-Points across the Globe with over 7000 in India and over 25,000 retailers. The company’s major target audience is the youth of the world which is expected to grow at a steady pace for the next 5-7 years.

Hero MotoCorp Ltd. has a Market Cap of around INR 56,036.35 Cr as on 14th August 2020. Total Sales Revenue for FY20 was INR 29,255.32 Cr (YOY growth of -13.5%, and 5yr CAGR of 1%) with an Operating Profit Margin (EBIT) of 10.39%. Sales Revenue for Q1FY21 was INR 2,969.08 Cr (Y-O-Y growth of -63.7%) with an OPM (EBIT) of -2%. The number of units sold decreased from 78.21 lakhs in FY19 to 63.98 lakhs in FY20 (YOY Growth of -18%). 

A challenging year for the two-wheeler industry

The 2-wheeler industry contributes around 7% to the Indian GDP segmented based on scooters, motorcycles, and mopeds. The motorcycle segment occupies around two-third of the market share (64%) followed by the scooters (32%) and mopeds segments (4%). The two-wheeler industry volumes declined by 18% to 17.44mn units compared to the previous year. The industry faced major issues due to Third Party Motor Insurance, Agricultural Sector slowdown, lack of income growth, the transition from BS-IV to BS-VI emission norms, Covid-19, and the launch of Electric Vehicles (EV). The industry is expected to show negative or minimal growth for the next year after which it can grow in the range of 5-7%. India’s two-wheeler penetration per 1000 population is around 110 whereas that of Vietnam is around 350, which provides a great opportunity for the future years.

The road ahead..

Motorcycles Segment: The Company has a market share of over 50% in motorcycle segment thereby selling 59.9 lakh motorcycles (YOY Growth of -15.3%) and is further divided into four sub-segments like Entry (68.9% Market share), Premium (1.6%), Deluxe 100cc (74.8%) & Deluxe 125cc (49.8%) thereby having a total of 11 offerings in the motorcycle segment. It provides motorcycles from 100cc to 200cc with all the products already adapted to BS-VI emission giving the company an edge over its competitors. Splendor is the largest two-wheeler brand made in India with over 3 million units sold in a year.

Scooter Segment: The Company has about 7.2% market share in the domestic scooter market thereby ranking third in the market as per FY20, Honda (50-55%), and TVS (15-20%) holding 1st and 2nd position respectively. The company sold 4.19 lakh scooters in FY20 (YOY Growth of -43%). It provides six offerings and all with a BS-VI engine across 110cc-125cc segments. Destini 125, the first scooter with an idle stop-start system crossed 1,00,000 unit sales mark within 26 weeks – the quickest amongst all other scooter segments in India.

Hero Fincorp: An NBFC where the company holds 41.19% equity is an associate company engaged in providing financial services including two-wheeler financing. There has been steady growth over the years in contribution to sales of the company from 7% in FY16 to 16% in FY19, thereby supporting the core business. With an increase in government funding and since the company has a major market share in entry segment motorcycles, this would increase the rural sales of the company. 

COVID19 will change the face of the automobile industry

As there is a rise in the number of people affected by COVID19 and the global pandemic becomes widespread, the Indian two-wheeler market is also going to get affected along with it. Since the country is in lockdown, the automobile industry is undergoing a big change. The main impact will be on sales figures. Still, for valuation purposes, the sales are narrowed down to -30% for FY21. This will severely affect the Operating Profit Margin and Sales Growth of the Company.

Narrative

The Coronavirus pandemic will change the face of the automobile industry. In habit of practicing social distancing and maintaining safety, people will slowly realize the value of owning a private vehicle and hence shift from public vehicles to private vehicles, thereby increasing the demand for automobiles in the country. Hero Motocorp will continue to grow over the next 15 years at a compounded rate of 8% and be able to improve its margin to 14%. And the fact that the company has got a dominant market share in the 2-wheeler segment, primarily in motorcycle, will continue to help them grow along with GDP and Inflation.

Based on the above narrative, the following inputs for the Business Valuation of Hero Motocorp Ltd. has been considered. The last trading price was INR 2803.8 on 16th August 2020, when this valuation was undertaken.

Business Valuation Inputs for Hero Motocorp Ltd:

  • Forecast Period is taken at 15 years
  • Inflation is taken at 5%
  • Sales Growth in nominal terms is assumed at -30% growth for FY2021 and 40% for FY2022 (Corona Impact), 11% for 4th to 10th year, and 10% for 11th to 15th year.
  • Operating Profit Margin for FY21 is assumed at 4% due to operating efficiencies and economies of scale and stabilizes at 14% during the end of the Forecast Period. 
  • Incremental Fixed Asset Investment Rate is assumed to be 0% for FY21 and 20% for the rest of the forecasted period.
  • Incremental Net Working Capital Investment is assumed at -1% of Incremental Sales.
  • Income Tax is taken at 25.17% during the Forecast Period and Residual Period.
  • The Cost of Debt is taken as 0% over the Forecast and Residual period.
  • Debt Equity Ratio: 0% Debt, 100% Equity (Debt subtracted from cash)
  • The Cost of Equity is taken at 11.99% over the Forecast & Residual period. (As per CAPM model, Inflation of 5% is assumed in Computing Expected Market Returns, Two Year Beta is 0.96, and Risk-Free Rate is taken at 5.96%).

The Value of Hero Motocorp Ltd, based on the above assumptions, comes to INR 3060 Per Share. The last trading price was INR 3136 on 27th August 2020.

Import Valuation to analyze/iterate all the Value Drivers to understand its Value and you can also edit the plan and build your own assumptions to Compute Value. Also, check the Valuation Report for Future Value Per share.

Intrinsic Valuation

The Intrinsic Value of Hero Motocorp Ltd. has been computed based on the above assumptions. For detailed reports, assumptions, and in-depth valuation Import Valuation from CoValue App. You must view the Free Cash Flow Report, Valuation Report, and Shareholder Value Augmented Report to get a better insight and perspective. The estimated Future Value Per Share is also mentioned in the Valuation Report.

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About the author

Bhavya Shah

Bhavya Shah

Bhavya Shah is an MBA graduate with specialization in finance from N.L.Dalmia Institute of Management Studies and Research. Has a keen interest in valuing companies..

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