HEROMOTOCO_CaseStudy.pdf

HERO MOTOCORP LIMITED
CASE STUDY
18-Jul-2022

ABOUT THE COMPANY CASE STUDY
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ABOUT THE COMPANY Case Study
Hero MotoCorp (HMC) is the dominant leader with an overall market share of 34.6% in FY22 in the Indian two-wheeler segment,
while 48.3% share in the Indian motorcycles segment.
Hero Moto Corp has a wide distribution and service network spread throughout the country. The company has eight world-class
facilities across the globe including Colombia and Bangladesh and assembly lines in several other countries i.e, in Africa and Latin
America with a combined installed capacity of ~9.5 million units of two-wheelers per annum. The company has developed capabilities
with a pre-eminent R&D ecosystem in India and Germany.
In the motorcycles segment: their 100cc category company’s models include Splendor+Xtec, HF deluxe, etc; 110cc category has
Splendor iSmart, Passion Pro; 125cc includes Passion Xtec, New Super Splendor, Glamor Xtec, etc; 160cc has Xtreme 160R; 200cc
includes models like Xtreme 200S, Xpulse 200T, Xpluse 200 4V and Xpulse200. In the scooters segment their models include
Pleasure+Xtec, New Maestro Edge 110 in the 110cc category & New Maestro Edge 125, Destini 125 Xtec and Destini 125 in 125cc
category.
The company embarked on a collaborative journey with Harley-Davidson in 2020. Hero MotoCorp marked the milestone of becoming
a top seller in the 1,000cc+ segment, taking the market share in the category to 37% as compared to 27% in FY21. In FY22, they sold
531 units and have 13 dealers (one pipeline dealer) & 10 authorized service centers (one planned authorized service center).

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ABOUT THE COMPANY Case Study
PRODUCT MIX*
94%
6%
Domestic Export
MARKET SHARE MIX*
25%
67%
7%
1%
Entry Deluxe Scooter Premium
GEOGRAPHY MIX
*Domestic
All figures are for FY22
62.10%
58.50%
3.70%
Entry
Deluxe
Premium

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GROWTH
SALES GROWTH
5 Year CAGR: -0.9%
In FY21, the revenues grew by 6% YoY to ₹30,959 cr
primarily led by ~17% YoY increase in the average
realizations to ~₹53,000 per vehicle, while the
volumes de-grew by 10% YoY during the year. Hero
also gained market share by 140 bps in FY21 which
was led by Pleasure+, Platinum and Destini scooters.
During FY22, the revenue de-grew by 4.5% YoY to
₹29,551 cr. 49.4 lac units of motorcycles and scooters
(domestic+exports) were sold in FY22 v/s 58 lakh
units in FY21.
The revenue from PAM (parts, accessories &
merchandise) business during FY22 stood at ~₹3,934
cr. Their PAM business exhibited momentum and
grew by ~24% YoY in FY22, backed by extensions of
range, increased pull-based demand system &
deepening of distribution reach.

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GROWTH
EBITDA GROWTH
5 Year CAGR: -5.5%
For FY21, the EBITDA grew by just 1% YoY to ₹4,100
cr impacted by lower volumes and ~7% higher
operating expenses during the period. HMC had
taken a ~4% price hike during the year on account of
rising commodity costs. The management had also
indicated that it would continue to take judicious
price hike in order to mitigate the impact of higher
commodity costs, going forward.
In FY22, EBITDA stood at ₹3,445 cr and saw a decline
of 16% YoY. LEAP (cost saving programme)
contributed ₹1,002 cr of savings and ₹454 cr of
accruals to the bottom line.
The company had also indicated that it would
continue to take judicious price hike in order to
mitigate the impact of higher commodity costs, going
forward. Cost rationalization, focus on premium
motorcycles and exports is expected to aid the
EBITDA.

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GROWTH
PAT GROWTH
5 Year CAGR: -4.8%
The PAT stood at ₹2,983 cr during FY21, which was
17.7% YoY lower as compared to FY20 due to a
higher base on account of a one off reversal of a
provision created for “National Calamity Contingent
Duty” worth ₹737.5 cr and lower other income. The
effective tax rate during the year stood at ~24%.
In FY22, the PAT declined by 15.2% to ₹2,528 cr on
the back of fall in operating profit.

GROWTH EDGE METER: 3
An Edge Meter is a graded measurement of certain aspects of a company on a scale of 1 to 5, 5 denoting the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments, it is better to study
each aspect and give an individual grading to arrive at the final evaluation of a stock.

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PROFITABILITY
EBITDA MARGIN
In FY21, the EBITDA margin stood at ~15% (v/s
16.38% in FY20) impacted due to ~10% increase in
the commodity costs and ~23.7% lower other
income. However, the company managed to contain
the margin squeeze on account of LEAP 2 savings
programme (~200 bps of savings for FY21) and
judicious price increases (~4% price hike in FY21).
In FY22, the EBITDA margin was ~13.5%. The fall is
largely attributable to a surge in commodity prices,
partly offset by leap savings and judicious price
increases. The employee cost grew nominally due to
increase in headcount and impact of annual
increments.

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PROFITABILITY
PAT MARGIN
In FY21, the PAT margins stood at ~9.6%, marginally
impacted due to lower other income and higher
effective tax rate.
Broadly the company has been able to sustain a PAT
margin of ~10%-11% since the last few years.
In FY22, the metric reduced to ~8.6%, mainly
attributable to negative operating leverage and
higher commodity inflation.

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PROFITABILITY
ROCE
The ROCE has been on a decline since 2017 as a
result of consistent increase in the retained earnings
which has led to an increase in the investments.
The ROCE declined on a YoY basis on account of fall
in EBIT to ₹3,310 cr in FY22.

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PROFITABILITY
ROE
In FY21, on account of lower net profits and higher
net worth, the ROE has been negatively impacted
and stood at 20%.
The return on equity has been declining over the
years as a result of tepid growth coupled with steady
increase in the net worth.
In FY22, the net profit and net worth was reported at
₹2,528 cr and ₹15,847 cr, respectively. The ROE
stood at ~16%. There was an increase in other equity
during the year attributable to rise in retained
earnings.

PROFITABILITY EDGE METER: 3

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EFFICIENCY
CASH FLOWS
The cash flow from operations in FY22 stood at
₹2,104 cr, as it continued to generate a healthy cash
flow from operations led by operational efficiencies.
However, a YoY decline was majorly pertaining to
working capital adjustments and fall in profit.
Cash outflow from investing activities was ₹222 cr.
The major adjustments included capital expenditure
on PP&E, intangible assets, capital WIP, etc at ₹570 cr
and investment in associates at ₹150 cr. Further,
there was net purchase of investments at ~₹332 cr
and interest income on financial assets carried at
amortized cost at ₹157 cr.
Cash outflow from financing activities was ₹1,975 cr
were primarily driven by the dividends paid out
during the year.

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EFFICIENCY
WORKING CAPITAL CYCLE
The working capital days of Hero Motocorp has been
significantly strong over the years. However, the
company’s working capital days have gone up
recently due to a rise in the receivable days (from 17
days in FY18 to 26 days in FY20) and inventory days
(from 9 days in FY18 to 16 days in FY20).
In FY21, the working capital days improved with
lower receivable days and higher payable days. The
inventory days also stood higher due to lower sales
volume.

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EFFICIENCY
FREE CASH FLOW
HMC has been consistently generating a positive FCF
per share. In FY21, the free cash flow per share was
steady at ₹202.92 aided by lower capex related
outflows.
In FY22, the company spent ₹436 cr towards R&D
and ~₹188 cr as capex.

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EFFICIENCY
ASSET TURNOVER RATIO
In FY21, the asset turnover ratio stood at 1.38x on
account of ~11% increase in the total assets while
just 6% growth in the revenues.
This has been on account of an increase in the
financial assets as well as the fixed assets over the
past few years. The overall economic and the auto
market slowdown, the sales volumes were impacted,
hence bringing down the asset turnover ratio.
In FY22, the metric stood at ~1.27x. Total assets
stood at ₹22,478 cr which majorly comprised of
property, plant & equipment, equity accounted
investment in associates (Ather Energy & Hero
FinCorp) and non-current investments (equity,
debentures/bonds & mutual funds).

EFFICIENCY EDGE METER: 3

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SOLVENCY
DEBT TO EQUITY
HMC had a total debt of ~₹330.34 cr in FY21 of which
~₹285 cr is short term borrowings and the remaining
long term. Hence, the D/E ratio is low at 0.02x in
FY21.
The company has had a low debt profile over the
years which indicates a strong balance sheet with
limited obligations towards creditors.
In FY22, the long-term borrowings & short-term
borrowings of the company stood at ₹36.2 cr and
₹317.3 cr, respectively.

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SOLVENCY
INTEREST COVERAGE RATIO
The company continues to have sufficient coverage
for its interest payment obligations.
In FY22, the EBIT and interest payments were ₹3,310
cr and ₹53 cr. The interest coverage ratio stood at
62.3x.

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SOLVENCY
CURRENT RATIO
HMC has improved its current ratio over the years on
the back of stable current liabilities and growing
current assets.
In FY21, the current ratio dipped marginally to 1.75x
due to significantly higher current liabilities (led by
higher outstanding dues to creditors). Having said
that, the company continues to have comfortable
liquidity to meet the short term obligations.
In FY22, the current ratio stood at ~1.92x. Current
assets was ₹10,572 cr and current liabilities at ₹5,518
cr. Current assets majorly constituted investments,
trade receivables and inventories. Current liabilities
comprised of trade payables, other current liabilities
and borrowings.

SOLVENCY EDGE METER: 5

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VALUATION
PE RATIO
HMC is currently trading at a PE of 24.27x with a TTM
EPS of ₹115.95 per share.
Hero MotoCorp is enhancing capabilities and
preparing itself to expand its presence in the
premium two-wheeler segment both under Harley &
its own brand name.

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VALUATION
DIVIDEND YIELD
In FY22, the company declared an interim dividend of
₹60/share in February 2022 and a final dividend of
₹35/share in July 2022.
The dividend pay-out ratio stood at 81.9%.

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VALUATION
KEY LEVELS
HMC had been in a down trend since the last few
years as it fell up to ~₹2400 at the beginning of the
year 2020 after making a high of ₹4200 in August
2017.
The stock witnessed further selling pressure during
lockdown to test a low of ₹1475 in March 2020.After
which it rallied significantly to test ₹3600 odd mark
in February 2021. Since then it has witnessed some
cooling off in the price.
₹2150-₹2350 zone can be used by long term
investors for accumulation. On the upside, the stock
can go up to ₹3600 level and a breach of the same
would be required for further legs to the rally.

VALUATION EDGE METER: 3

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QUALITY
MANAGEMENT
The high quality management of the company has a
strong vision to pursue outperformance in order to
generate value for the business and the stakeholders.
The management plans to strategically enter new,
developed and fast-growing economies, forging more
partnerships to drive growth. They are also working
on consolidating their presence and increasing
market share through network expansion, brand
building and focusing on retail finance in top six
markets- Bangladesh, Sri Lanka, Nepal, Nigeria,
Colombia and Guatemala. Aim to build a complete
portfolio across engine capacities, aligned with an
ambition of catering to the aspirational segment and
growing its existence in premium motorcycle market.
Leveraging their brand credibility, R&D capabilities
and technology prowess, the management is now
geared up to redefine the clean mobility space with
its new offering- Vida (EV).

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QUALITY
SHAREHOLDING PATTERN
The promoter group holds 34.78% stake in the
company.
FII shareholding decreased from 29.22% in Q4 FY22
to 28.84% in Q1 FY23.
DII shareholding increased from 24.24% in Q4 FY22
to 25.58% in Q1 FY23.
Top Public Shareholding:
LIC 11.29%
Government Pension Fund Global 2.40%
WGI Emerging Markets Fund, LLC 2.32%
Parag Parikh Flexi Cap Fund 2.14%
SBI-ETF Nifty 50 1.96%
ICICI Prudential BlueChip Fund 1.12%

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QUALITY
SECTOR POTENTIAL
• The auto industry demand softened during FY15-20. This was a result of overall macroeconomic factors, increasing urban
congestion, growth of shared mobility, increase in vehicle prices due to addition of multiple features and implementation of
regulations mainly in the area of safety and emission.
• In FY22, the Indian auto industry sales volume witnessed a de-growth of 5.9% to 17.51 million. There was a YoY growth in sales
units of passenger vehicles, commercial vehicles and three wheelers. However, two wheelers segment showed a de-growth.
(Source: SIAM)
• The 2W industry witnessed a growth of 3.81% YoY with a sales volume of ~1.2 cr units in FY22. The sales from exports market
remained strong. (Source: FADA)
• During FY22, the two-wheeler industry faced multiple headwinds, owing to weak demand and continuous challenges in the supply
chain. The rural markets, which account for over half the annual sales of motorcycles and scooters in India, remained under
economic stress. Higher material costs, shortages of products and services and soaring fuel prices increased the cost of ownership,
further dampening consumer sentiment and their ability to buy.
• Demand for personal and sustainable mobility solutions continue to keep the global two-wheeler market buoyant. In the long
term, the market is expected to benefit from tailwinds such as superior technology, higher fuel efficiency, better drive experience
and lower environmental impact.

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QUALITY
COMPETITIVE LANDSCAPE
In the Indian 2W market, HMC captures the majority
of the market share with ~34.6% share in two
wheelers and 48.3% in motorcycles in FY22.
HMC has a dominant market share in the entry and
executive level motorcycle segments with a strong
brand equity in the rural markets. Further, they have
strong network with over 9,000 touchpoints across
the globe.
Players like Royal Enfield, Bajaj Auto & TVS Motors
have a strong foothold on the premium segment.
Growing aspirations of owning a premium
motorcycle has led to HMC to start foraying into the
premium segment demonstrating collaboration with
Harley Davidson.

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QUALITY
FUTURE OUTLOOK
• During FY22, they significantly expanded their presence in the Central and South American markets through strategic partnerships.
They partnered with Gilera Motors in Argentina, one of the leading automotive companies in the country. They further expanded
their presence in El Salvador and reinvigorated the strategy in Nigeria, with a goal to attain market leadership in the African
markets. New dealership in Dubai will help them to tap into the growing market in the Gulf region. Their goal is to garner 15% of
total volumes from global markets by 2025.
• As of FY22, the company has ~38% stake in Ather Energy, which is involved into EV two wheelers business in India. It has been
increasing its stake in the company gradually. It has also established a strategic partnership with Gogoro in FY21, in order to
establish a battery swapping platform in India. Gogoro is a Taiwanese EV specialization company with the world’s largest battery-
swapping network. The company is on course to launch an EV product by March 2023. The product has been designed by R&D
(research & development) in Jaipur and tech centre in Germany. The company aims to launch one EV product every year.
• Hero MotoCorp’s new strategy for its global business called R4 which was launched in 2021, has been transformative and has
delivered great results. The R4 mission was to Recalibrate, Revitalise, Revolutionise and Revive its global business. This programme
led to a delivery of 3,00,624 two-wheelers in 43 markets during FY22, exhibiting a growth of 57% compared to total units sold in
the previous year.
• They will develop and build a line-up of EV products, to offer mobility solutions to a diverse customer-base around the globe, both
in-house and through partnerships with global players. In the premium segment the company continued to expand its portfolio &
recently launched XPulse 4V which saw high demand from the customers.

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QUALITY
FUTURE OUTLOOK
• The Income Tax Department conducted a Search activity under the Income Tax Act in March 2022. Subsequently, the company has
provided all the necessary documents and data to the department, as requested. While the uncertainty exists regarding the
outcome of the proceedings by the department, the company has not identified the need for any adjustments to the current or
prior period financial statements.
• The Board of Directors of the company, in its meeting held on 13th Jan 2022, had approved an investment of up to ₹420 cr in one or
more tranches, in Ather Energy Private Limited. Of the state amount, ~₹150 cr was invested in Q4 FY22 and the balance ~₹270
crore would be initiated during Q1 FY23.
• Recently, they unveiled Vida- powered by Hero, a brand-new identity for its emerging mobility solutions, including upcoming
Electric Vehicles (EV) which would be sold in India & global markets including Europe & Latin America. They further announced
rollout of the first EV from Chittoor plant on 1st Jul 2022 and collaborated with Bharat Petroleum Corporation Limited to set up
charging infrastructure for two-wheeler electric vehicles across the country.
• The Board of Directors of the company, in its meeting held on 24th Jan 2022 approved an investment of ₹700 cr in one or more
tranches in Hero FinCorp Limited (HFCL). HFCL recently raised ₹2,000 cr in growth capital, which will help to expand its reach &
offering and drive two-wheeler sales. They plan to evolve into a full-service finance company in the near future.
• They launched a sales and aftersales services platform on WhatsApp. Going forward, they expect 30% of their sales to be
generated from digital channels. Additionally, they have launched seven new ‘PHYGITAL Hero 2.0’ stores across the country.

QUALITY EDGE METER: 3

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FINAL EDGE MATRIX
Edge Meter Aspects Grade
Growth 3
Profitability 3
Efficiency 3
Solvency
Valuation
Quality
TOTAL
The maximum grade for a company could be 30. Any company above grade 20
is worth considering. A grade below 15 is considered to be poor.
5
3
3
20

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THANK YOU
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equity involves individual judgements, this analysis should be used for only learning enhancements and cannot be considered to
be a recommendation on any stock or sector. Our knowledge team has limited understanding and we all are learning the art and
science behind this.
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DISCLOSURES

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