EQUITY RESEARCH REPORT HERO MOTOCORP

Company informations Company Discription

Recommedation – BUY Hero Motorcorp is the leader in the 2W market with a dominating
Target Price - 2945 presence in the entry level segment. The model starting from CD Dawn,
CMP - 2490 CD Delux, Splendor NXG and Passion Pro. The company have presence in
Mkt. Cap (in crs.) -50404 South Asia, Africa, Middle East and Latin America
Share outstanding – 20.0 Business Drivers
Enterprise Value - 47024 1.Economic Condition
Share price performance 2 year The first key driver is economic conditions. When economic conditions are
favorable, people are more likely to purchase new vehicles giving
3500
3000 momentum to the industry. The International Monetary Fund has
2500
2000
1500 predicted a real GDP% change of 6.1% for India in 2023 and its per-capita
1000
500 income is expected to clock 5.8% CAGR over calendar years 2022-2027
0
Mar/21

Mar/22
Jul/21

Jul/22
Jan/22

Jan/23
Sep/21

Sep/22
Nov/21

Nov/22
May/21

May/22

Additionally, from a projected Rs.24,69,23,842 million at the end of 2023,

the total disposable personal income in India is predicted to increase to
(Source: Investing.com)
Rs.26,63,02,919 million in 2025. It will see a CAGR of 3% between 2023 and
Market share
2025.With deposable incomes and easy financing solutions available, there
Will be a increase in consumer spending on 2 Wheelers.
2.Reduction in excise duty on fuel by government
The government cut excise duty on petrol and diesel in its efforts to
contain inflation. Petrol price had risen to Rs.120 levels in some of the
states after the increase effected by the OMCs in of March-April 22. The
government reduced petrol and diesel prices by Rs.8 and Rs.6 respectively
(Source: ET.com)
Some states have also cut the VAT on these fuels resulting in higher fall in
Indian 2W Market Expected
Prices thereof. The fuel price hike had been one of the major factors for
Growth (USD Mn)
demand, particularly among two-wheelers as the cost of ownership rose
30
25 significantly higher.
20
3.Waiving off import duty on raw materials
15
10 Government’s decision to remove import duty on certain raw materials of
5 steel industry like coking coal and ferronickel and hiking/levying export
0
2022 2028E duties on iron/ some steel intermediate products will lead to lower costs

1
for domestic steel manufacturers, with the Engineering Export Promotion Council (EEPC)
saying that price may fall by 10%.This would increase the domestic availability of key
industry inputs and reduce manufacturing costs.
4.Lauched new EV
Hero Motocorp, has launched its new dedicated brand for electric mobility, called Vida.
HMCL had unveiled Vida and the company called it a brand new identity for it’s emerging
mobility solutions, including upcoming electric vehicles (EVs) .HMC’s first electric two-
wheeler under new Vida brand was launched on July 1, 2022. The company planning to
increase allocation towards innovation ( Rs.1000 crore over the next 10 years) and partner
with 10 or more firms with a focus on sustainability. Hero has also announced a USD
100 million Global sustainability fund
5.Well positioned to benefit from recovery in the rural economy
Normal monsoon in 2022 and elevated food prices have brightened the outlook for rural
income in FY23.Additionally, various high-frequency indicators of rural demand, most of
which have been turning up recently have also aided it. Bank of America expects the Kharif
crop income to grow by 10.1% YoY in FY23.Net Rabi income expected to grow by 12% YoY. It
expects nominal farm income for Kharif season FY23 to improve to 17.1% YoY. HMCL has
strongest distribution network in the country’s rural and semi-urban areas and would be
one of the key beneficiaries of the revival in rural demand.
Investment Thesis
The Indian two wheeler vehicle market is around USD 16,007.84 million in 2022 and is
estimated to reach USD 26,638.49 million in 2028, registering a CARG of 9.88%. With the
introduction of electric vehicles and rising demand for two wheelers are due to its low
maintenance, fuel efficiency and easy handling. Hero motocorp increasing investment in
Ather Energy. HMC announced investment of Rs.420cr in electric two wheeler market Ather
Energy. The company has also partnered with Taiwan’s Gogoro on battery swapping& EV
scooters. HMC lauched new brand for EV called Vida, we can expect more sales from EVs
because of the fuel efficiency and less maintenance. Most of the working professional prefer
EV scooters to commute office. The company is using new technologies like ICE in their new
models, it will helps to maintain the fuel efficiency. The expected growth in Indian economy
will help to drive a better growth in coming years.
Accounting for the above factors, I anticipate HMC revenue and EBITDA
increase to 44,945/6359 Crs respectively from FY22 to FY27.In the premium segment HMC
targets to double its market share to 10% in the coming years , planning atleast one launch a
year for the next 3-4 years. HMC target to ramp up export contribution to 15% of total sales
in the next four years. The expected growth in Indian GDP (6.1%) and the per-capita income
there will be a increase in consumer spending on vehicles. The recovery of rural area
economy will increase the sale of the starting segment models.

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Recommendation and Target Price
With an upside potential of 18.3%, I recommend buying HMC, Hero Motocorp. The targeted
price of the stock is Rs.2945. The current market price of this stock is 2490, Enterprise value
calculated Rs.47024
Market capitalization Rs.50404

Company Update

1. Hero Motocorp Chairman Pawan Munjal has called for a reduction in GST on two-
wheelers to 18 per cent from current 28 per cent, while lauding the Union Budget 2023-
2024 as the dawn of a new high-growth economy, ensuring India’s increased
contribution to the global economy
2. Hero Motocorp said that the firm needs to recover its market share in the 125-CC engine
motorcycle segment as it sees an opportunity in building a premium portfolio
3. Hero Motocorp plans to expand its electric two-wheeler range over the next 18-24
months as it looks to cater to demand across multiple customer segments, according to
a senior company official
4. Hero Motocorp launched new scooter named XOOM. It’s a 110 cc engine scooter
5. To set up charging infrastructure across the country, HMC recently tied up with Bharath
Petroleum Corporation Limited (BPCL)
6. Hero Motorcorp building on their collaboration with Harley-Davidson to strategically
augment their premium portfoilio

Financial Informations & Valuation

Revenue (in Crs)

35,000
34,000
33,000
32,000
31,000
30,000
29,000
28,000
27,000
26,000
2018 2019 2020 2021 2022

3
 Net Income (in Crs.)
4000

3500

3000

2500

2000

1500

1000

500

0
2018 2019 2020 2021 2022

For FY22, company posted revenue of Rs.29245 Crs. ( -5% degrowth over previous year)
with PAT of Rs.2473 Crs.

(Rs cr) 2020 2021 2022 2023E 2024E 2025E 2026E 2027E
Revenue 29255 30801 29245 33047 36352 39260 42401 44945
Growth% -14% 5% -5% 13% 10% 8% 8% 6%
Operating Expenses 5363 5050 5096 5569 6126 6616 7145 7574
EBITDA 4061 4019 3369 4676 5143 5555 5999 6359
Growth% -19% -1% -16% 39% 10% 8% 8% 6%
EBITDA Margin 14% 13% 12% 14% 14% 14% 14% 14%
EBIT 3215 3342 2719 4015 4416 4769 5151 5460
EBIT Margin 11% 11% 9% 12% 12% 12% 12% 12%

Valuation:
I have used business drivers to forecast the revenue. HMCL is outperformed last few years
in the terms of growth rate. But as per the market scenario and business drivers shows that
there will be double digit growth in coming years
I projected revenue growth of 13% and 10% for FY23 and
FY24. For FY25, FY26, FY27 8%, 8%, 6% respectively. Expecting a terminal growth of 3%
HMC is a debt free company, 100% contribution for the company from equity. All other
particulars in income statement forecasted using average of last 5 years or last FY ratio.
From Balance sheet Trade receivable and Trade payable have DSO of 28.8 FY22 and DPO
74.8 FY22, This ratio used for the forecasting of Trade receivable and Trade payable. D/O
19.7 for FY22, used average of last five years D/O 20.7 for forecast Inventory. PP&E got 21%
for the FY22, used average of last five years 20% forecast the PP&E.

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Forecasted FY 2023-27 EBITDA and Net Income:

EBITDA
7000
6359
5999
6000 5555
5143
5000 4676

4000

3000

2000

1000

0
2023E 2024E 2025E 2026E 2027E

Net Income
4000

3500

3000

2500

2000

1500

1000

500

0
2023E 2024E 2025E 2026E 2027E

Terminal growth:
Terminal growth considered as 3% after FY27E. DCF value for FY23E to FY27E got Rs.13386Cr
and terminal value is Rs.33638 Cr. The Enterprise value (EV) is Rs.47024 Cr. Out of EV value
DCF value 28% and Terminal value 72%. WACC calculated 10.6%, five years Equity beta of
HMC is 0.65

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Sensitivity Analysis:

Growth

47,024 1.0% 2.0% 3.0% 4.0% 5.0%

8.6% 50,275 56,162 64,152 75,615 93,448
W
A 9.6% 44,258 48,614 54,289 61,991 73,042
C 10.6% 39,499 42,824 47,024 52,497 59,925
C 11.6% 35,642 38,244 41,452 45,503 50,782
12.6% 32,453 34,531 37,042 40,137 44,046

Forecasted Revenue:

Revenue (in Cr.)

50,000

45,000

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0
2020 2021 2022 2023E 2024E 2025E 2026E 2027E

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Target Share Price:
Based on projected revenue, I have set two target price for the company as per case basis.
For Bull case, share price target will be Rs.2945 with upside of 18.3%
In worst case scenario the value is expected to fall to Rs.2199 at a discount of 11.6% from
current market price

Risk

 Inability to create strong brand in scooters and premium motorcycles remains the
biggest risk. HMC has been losing market share in scooters segment
 Decline in market share due to shift of preference by customers towards scooters
and premium motorcycles and Electric bikes where HMC is a late entrant
 Lower than expected volume growth in export markets
 High competitors like Bajaj Auto and TVS Motor
 Raw materials prices currently on an increasing trend due to supply chain disruption.
Inability of the company to pass on higher raw material costs could impact its
margins
 Less safety and nearly half of Indian road accident deaths involve two-wheelers