The Hero MotoCorp stock is down 11% over the last month on rural slowdown worries, fall in scooter market share and increased competition leading to a cut in earnings estimates. Rural areas, which account for over 50% of Hero MotoCorp's volumes, have seen muted sales especially for motorcycles due to weak monsoons, lower crop yields and benign minimum support prices for key crops.
Analysts at Goldman Sachs are bearish on the stock given portfolio risk with about 87% of the volumes coming from lower growth motorcycle market, especially the mid price segment, loss of market share in scooters and higher competition. Given the rural slowdown, most analysts have cut volume growth estimates for the two wheeler sector to 5.6% in FY16 as against 8% growth in FY15.
The company has, however, indicated that the rural slowdown has not been uniform across the country. Sales coming from markets such as Bihar, Madhya Pradesh, and particularly sugarcane growing areas of Uttar Pradesh and Maharashtra have been affected much more than other rural markets. The company spokesperson indicated that the company has managed to buck the trend and registered healthy double-digit growth in in rural markets such as West Bengal, Orissa, Karnataka, Uttarakhand and some parts of Uttar Pradesh. How the monsoon pans out will be critical to the volume fortunes of Hero.
The slowdown impact has been felt in the second half of the fiscal. Hero MotoCorp had recorded a 15% year-on-year increase in domestic sales growth in the first half of FY15, which was pulled down by the slowdown in the second half as annual growth came in at a muted 5.2%. Growth in March month was a muted 2.7% and is being pulled down by performance of entry level bikes (CD Dawn/Deluxe) which were up 4% in FY15 but were down 9% in March. The company lost 160 basis points market share in the economy segment to 50.3% in FY15.
What has aided the overall performance has been the sales of key brands such as Splendour (up 19% in March and FY15) as well as Glamour which was up 22%. It is on the back of this performance that has helped the company post a 10% growth in the executive segment while overall sales in the segment for the sector is down two%. In FY15, the company gained a 500 basis points market share to 67.6% in the executive segment, which is the largest category by volumes.
What would be worrying for the company is that increased scooterisation has meant that the share of executive segment (its key segment) to domestic two wheelers is down from 54% in FY10 to 41% in FY15 while scooters now form about 30% of two wheeler sales from 17% five years ago. For Hero, which has presence in the scooters segment as well, the worry is the loss in market share. While the company grew its scooter sales in FY15 by 22%, its rivals Honda and TVS grew faster at 30% and 88%, respectively. Capacity constraints and diversion of capacity to meet export demand were part of the reasons for the drop in market share.
The company, however, is looking to broad base its portfolio with the launch of two new scooters Dash and Dare, but in the second quarter of FY16. While its two current brands, Pleasure and Maestro have together achieved peak sales of about 77,000 units a month, analysts expect the same to move up to about a lakh units post the the launch of the two new models. With new scooter capacity expected to come on stream from its Gujarat plant in CY16, it will have a total scooter capacity of 1.4 lakh units a month. Going ahead, volume growth for the company, according to analysts is expected to come from scooters and exports. However, much of it is likely to be back-ended from second half of FY16.
Positively, from the financials point of view, the auto space should gain from the falling commodity prices and lower oil prices. While falling raw material prices are expected to aid in margin expansion, lower oil prices should bring down the cost of ownership for customers, thereby boosting demand.
Given the 25% year-to-date decline in stock prices, analysts say quite a bit of the negatives has already been factored. The progress of the monsoons and its ability to win back market share in scooters and export performance will decide the future course of the stock.
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