Motorcycle sales have been nothing to write home about in recent times. But things may change for the better as rural demand improves, fuelled by the measures announced in the Budget. With a chunk of its entry-level bike sales coming from the rural markets, Hero MotoCorp will be a beneficiary.
A growing foothold in the executive bikes category and recent scooter launches also stand the company in good stead. Investors with a one-to two year perspective can buy the Hero MotoCorp stock. It trades at 20 times its trailing 12-month earnings, in line with historical averages.
Benefit from rural pick up
While car and commercial vehicle sales picked up in the last one year, growth in the motorcycle sales remains elusive. For the first 11 months of this fiscal, car volumes have grown by about 9 per cent over the same period last year, while buses and heavy trucks have shown a stronger 30 per cent growth.
In contrast, motorcycle volumes have dipped by 1 per cent. With bulk of the motorcycle volumes coming from the entry-segment (up to 110 cc bikes), which caters predominantly to the rural markets, the slowdown in rural demand has hit bike sales. Failed monsoon, a meltdown in global farm prices and low minimum support prices took a toll on rural incomes.
Hero MotoCorp, the market leader in the entry segment bikes, saw its sales dip by about 5 per cent so far this fiscal. But measures announced in the Budget provide a ray of hope.
Higher allocations to irrigation, agricultural development and MGNREGA apart, the Budget also brought in crop insurance, easier credit access and means for farmers to get better prices for their produce. These measures are expected to boost rural incomes and, hence, consumption over the next one to two years. Normal monsoon in fiscal 2017 could be another sweetener.
With bikes such as Dawn, Deluxe, Splendor, Passion and its variants, Hero has more than two-third market share in the entry segment. The company has marginally improved its market share by about one percentage point to 71.4 per cent in this space in this fiscal. Recent launches include the Splendor Pro and Passion Pro.
Getting a grip
Secondly, even amid the challenging times, Hero has managed to gain ground in other bike segments. In the last 11 months, it has improved its market share in the 110-125 cc bikes category by three percentage points to 38.5 per cent (over the corresponding period in fiscal 2015), while Honda, the market leader in this segment, has seen its market share dip by 7 percentage points.
The Super Splendor, Glamour and Ignitor brands belong to these segments. Hero should reap the benefits of good demand for scooters as well. Even as bike sales faltered, industry volumes for scooters have grown by 11.6 per cent so far this fiscal. Hero has launched the Maestro Edge and Duet scooters recently, and these have been received well in the market.
The pick up in urban consumption in recent times along with the Pay Commission awards and lower borrowing costs should improve sales growth in scooters and in higher segment bikes in the months to come.
Net sales for the nine months ended December 2015 remained almost flat over the corresponding period in the previous year at Rs.20,775 crore. Low input costs and higher realizations from increasing share of executive segment bikes helped net profits move up 21.5 per cent to Rs.2,318 crore. Operating margin expanded to 15.5 per cent from 13 per cent a year ago.