Hero MotoCorp ki dhadkan!

Hero Motocorp’s widening product basket critical for its successful future

Hero MotoCorp ki dhadkan!
Hero MotoCorp ki dhakan!
Neha Seth - 19 July 2017

Hero MotoCorp (HMCL) is the world’s largest 2‐wheeler (2W) company in terms of value. HMCL has production capacity of 9.2 million two-wheelers at its five manufacturing facilities at Gurgaon and Dharuhera in Haryana, Haridwar in Uttaranchal, Neemrana in Rajasthan and the latest one at Vadodara in Gujarat. The company offers motorcycles in all the three major segments: HF Deluxe in entry category; executive range offers brands such as Splendor, Passion and Glamour and followed by Achiever and Karizma in premium class. Hero MotoCorp also offers Maestro Edge, Duet and Pleasure in the un‐geared scooters segment.

Rural demand recovery; impeding market share gain

Hero MotoCorp is well-positioned having strong brand equity in the commuter segment and high rural exposure with 50 percent volumes, making the Delhi-based manufacturer a key beneficiary of rural demand recovery. The structural demand headwinds leading to weak franchise in the fast-growing scooter and premium motorcycles segments will diminish the market share gains for HMCL according to an Edelweiss research report.

Thereby, Hero MotoCorp’s aggregate two-wheeler segment declined by 4.4 percent to 37 percent over the fiscal period 2014-17. The company has maintained stronghold in the executive segment, the segment share of percent two-wheeler industry has reduced to 54 percent in fiscal’17 from 65 percent in 2014.

To offset the market share decline, path‐breaking products from HMCL’s recently inaugurated research and development (R&D) facility in Jaipur is very much essential.

The downside will be limited with healthy return on equity (RoE) of 36 percent and robust free cash flow of 10 percent sales in the expected earnings of 2019.

Limited drivers for margin expansion

On margins front, the benefits from volume recovery and HMCL’s LEAP programme will be offset by expiry of excise benefits and efforts to gain market share across the highly competitive scooter and premium motorcycle segments. Hero MotoCorp started its Cost Optimisation Initiative – LEAP in 2013 with the aim of reducing cost through value engineering, technical feasibility ideas and through import substitution.

In the expected earnings for fiscal’19, the excise benefits at HMCL’s Haridwar plant will cease, thereby impacting the margins by 0.80 percent. Over the fiscal period 2017-19, the margins will expand by 0.50 percent including the discontinuation of excise benefits.

The major risk to Hero MotoCorp is its inability to create strong brand in scooters and premium motorcycles. Its market share has been declining every year by 1 percent due to shifting preference by customers towards scooters and premium motorcycles.

HMCL has to face the demand shift from its key executive motorcycle segment to scooters; also the company will have to counter the effect of rising demand for motorcycles with more than 250 cubic centimeters (cc) speed, where HMCL has low presence.

neha.seth@outlookindia.com

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