Hero Moto share price is near a six-year low because of its Indian, middle class obsession
- The shares of India's largest two-wheeler has lost a fifth of its value in the last five months.
- At the same time, peers like Bajaj Auto (up 5%) and TVS Motor (up about 3%) have gained value.
- While all three players are facing a demand slowdown in India, stronger focus on exports have helped Bajaj and TVS offset the losses here.
This price hike barely covers the rise in cost— up to 15% as estimated by B&K Securities last year—of making BS-VI models. There is pressure on Hero Moto to retain its pole position in India and therefore keep the profit margin competitive.
The company is too reliant on India's middle class feeling good about their prospects to make money. Its portfolio is heavily skewed towards commuter models and there is barely any contribution from exports.
That has knocked the share price of Hero Moto down to near a six-year low.
The shares of India's largest two-wheeler has lost a fifth of its value in the last five months. At the same time, peers like Bajaj Auto (up 5%) and TVS Motor (up about 3%) have gained value. While all three players are facing a demand slowdown in India, stronger focus on exports have helped Bajaj and TVS offset the losses here.
|Stock||Since Sep 20, 2019|
Hero Moto has 36% market share in India. However, it is no good being a market leader where the market is shrinking.
The $3.2 billion net worth family led by Pawan Munjal has been leading a losing battle in a sluggish economy. Two-wheeler sales of Hero Moto have been on a downtrend for seven quarters in a row. That has taken a toll on the family’s wealth, which is down a little less than 10% in the last 10 months.
And the pain is far from over. "The next financial year may be the third consecutive year of earnings contraction," said a recent Maybank report, which also said that the share price may fall to ₹2,100.
This is largely because Hero Moto may not be able to fully pass on the increased cost of BS-VI bikes in a weak demand and priority to maintain market share. While both Bajaj Auto and TVS Motor sell nearly one in every four vehicles they make in foreign countries, Hero Moto has negiligible contribution from exports.
Within India, the consumer confidence was at a six-year low before dipping further, as the recent RBI survey showed. The rural distress does not bode well for Hero Moto, which sells a large portion of bikes outside the cities. Rise in prices of basic items like foodgrains, dairy, and vegetables does not leave the common people of India with enough money to afford a bike.
The other hope, apart from exports, is that the company will focus on higher-end bikes while the mass market remains squeezed. Richer, motorbike enthusiasts are less likely to base their purchase decision on the prospects of the economy. "While the ramp up of the premium segment will enable Hero to diversify from mass segment, the bikes are yet to gain customer acceptance," a recent report from HDFC Securities said.
However, both the 150 cc variants of Karizma and Xtreme Sports will not make it to the BS-VI era, which mandate tighter emission norms, according to a recent report. The focus will now be on 200 cc and 300 cc bikes.
So till the time the Indian economy recovers, there is little hope for Hero Moto. In the meantime, the rising cost pressures and the new BS-VI norms will chip away from the earnings. Meanwhile the promoters are focussing on the future. "We have earmarked an investment of ₹10,000 crore along with our ecosystem, which will be utilised towards research and development of alternative mobility solutions, modern, state-of-the-art, sustainable manufacturing facilities, network expansion, and brand building across the globe,” a regulatory filing today said.
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