Recommendation From 2/3 Wheeler Sectors

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year. 

Hero MotoCorp 

RIDE THIS STOCK FOR ACCELERATED PERFORMANCE 

HERE IS WHY
Company is a leading two-wheeler maker in India.
Available at an attractive valuation
Consistent dividend paying company 

India is the fourth largest automobile market in the world. The sector is divided into different segments such as two-wheelers (2Ws), three wheelers (3Ws), passenger vehicles (PVs) and commercial vehicles (CVs). On the basis of volume contribution, two-wheelers (2W) contributed the highest volumes vs other segments present in the automobile industry. Hence, our Choice Scrip for this issue is Hero MotoCorp, a key player in the two-wheeler segment. 

The company was established as a joint venture between Honda Motor Company of Japan and Hero Group of India. Hero MotoCorp has four manufacturing facilities across Dharuhera and Gurgaon in Haryana, Haridwar in Uttarakhand and Neemrana in Rajasthan. The company offers a range of bikes starting from CD Dawn, CD Deluxe, Splendor Plus, Splendor NXG, Passion and Passion Pro. The 125 cubic centimeter segment offers Glamour, Super Splendor and Glamour F1. It also has an offering called Achiever in 135 cubic centimeter segment. In the 150 cubic centimeter and above segment, the company offers brands like the Hunk, CBZ X-treme, Karizma and the Karizma ZMR. It also offers a 100 cubic centimeter scooter, Pleasure. 

On a consolidated basis, the total income from operations declined by 16.44 per cent to Rs7,660.60 crore in the second quarter of FY20 from Rs9,168.24 crore in the same period of FY19. The decline was lower than expected due to higher average realisations. The EBITDA (excluding other income) declined by 18.02 per cent to Rs1,144.27 crore in Q2FY20 from Rs1,395.79 crore in the same quarter of the previous year. The EBITDA margin (excluding other income) stood at 14.94 per cent in Q2FY20 as against 15.22 per cent in the same quarter of FY19. It was saving from lower material prices that helped the company to contain the fall in EBITDA margins. The net profit declined by 11.08 per cent to Rs872.26 crore in Q2FY20 from Rs980.91 crore in Q2FY19. 

To regulate output of air pollutants from engines of vehicles, the government of India came up with BSVI norms. To comply with BSVI norms, Hero MotoCorp is launching new models before full transition to BSVI. The first launch of Hero MotoCorp to comply with BS-VI norms is Splendor iSmart. and will make Hero MotoCorp the first two-wheeler manufacturer in the country to receive the BS-VI certificate from iCAT. 

Hero has the highest number of touch points, ie -6,600 compared to ~5,800 of the next follower. Hero has the lowest cost for dealerships which makes expanding the present dealer network easier. With recovery in rural income and demand, Hero is poised to benefit more than its peers because it has higher product concentration in entry level bikes and a wide dealer network (which can be expanded fast due to its lowest cost of dealership). 

On the valuation front, the stock of Hero MotoCorp is trading at a PE ratio of 13.52x and ROE of 25.56 per cent. The valuation looks attractive than its peer group. By the virtue of above factors, we recommend our readers-investors to BUY this stock.