Can Hero Motocorp give high returns to investors? Hero Motocorp Fundamental Analysis

India is the 5th largest automobile sector in the world. And it is expected to become the 3rd largest by 2030. So you can imagine the size of the automobile industry in India and the future growth prospects. 

Now within the auto sector, India is predominantly a 2 wheeler market with 80% of the auto sales from 2 wheeler. And within 2 wheeler, the biggest company in India is Hero Motocorp. Initially established as Hero Honda, it was later renamed to Hero Motorcorp. From Hero Honda CD100 in 1980s and 90s to Hero extreme, Hero motocorp has come a long way. So in this article, we will do the fundamental analysis of Hero Motocorp.

As usual, we will start the fundamental analysis of Hero Motocorp by analyzing the company and management, competitive strength, future growth prospect and the financial analysis to decide if Hero Motorcorp is fundamentally strong or not. Then we will analyse the valuations of the company to decide if it is worth investing in Hero Motocorp at current levels or not. 

Company and its business

• Hero was Established in 1984 as a joint venture between “Hero Group” and Japanese company “Honda”. And hence, it was called Hero Honda. With this agreement, Japanese company Honda agreed to share its technology for bike manufacturing in India.
• However, as per the agreement, Hero was not allowed to export bikes in the International market. Moreover, there were few more differences like Honda was reluctant to freely share the technology and Hero had to pay a high royalty to Honda. Later, in 2010, Hero Honda board of directors agreed to terminate the JV and Hero Honda was renamed to “Hero Motocorp”.
• Hero is the world’s #1 2 wheeler manufacturing company in terms of volume sales for continuously 19 years! (Yes, not just India, it is world’s #1)
• Its operation spans in 40 countries across the world with manufacturing facilities in 3 countries and R&D centers in India and Germany.
• Dr. Pawan Munjal is the Chairman, MD and CEO of Hero Motocorp. He is the 2nd gen member of Munjal family who founded Hero Motocorp and the man behind the growth of Hero Motocorp as the #1 2 wheeler company in the world for consecutively 19 years.
• As of today, Hero Motocorp has a market cap of Rs 64,800 Crore.

If we discuss about the product portfolio of Hero Morocorp, it entered into the 2 wheeler bike segment with CD100 in 1985. Since then, it has added many best selling bikes in the portfolio including Splendor and Passion. As of today, Hero motocorp has a wide range of product portfolio with many new variants in the category.With products such as Maestro Edge 125 – India’s first scooter with Fuel Injection, the XPulse 200 range, Xtreme 200S, the new Glamour, Super Splendor, Pleasure+ and the new generation Passion Pro, their entire portfolio is now younger, much more attractive and significantly diverse. Hero moto has recently created another world record, a historic milestone of 100 million motorcycles and scooters in cumulative sales in FY21. The milestone of 100 million is not just a number – it also demonstrates the faith and trust that the customers around the world have placed in Hero! Overall, on company and its business, I would rate it 10/10.

Overall, on competitive strength, I would rate it 9/10.

• Increasing preference for personal mobility: Due to the cheaper alternative of transport, 2-wheelers in India always have a strong demand. This demand is increasing further in rural parts of the country. Earlier, 2 wheelers were predominantly used by males. But now, there is a strong demand for 2 wheelers for women due to their increasing participation in education and employment. This is again driving growth for the 2 wheeler category in India.Hero Motocorp is eying the growing scooter segment in India and it has launched multiple products in scooter category including Destiny 125, Pleasure+ 110 and Maestro Edge 125.
• Premiumization: Next big trend in 2 wheeler is premiumization. Today, Indian youth prefer premium bikes with high performance that differentiate themselves from others. And they are willing to pay a premium price for it. Hero motocorp has excellent product planning protocols, creative design and engineering capabilities. With this, they are focused to have a strong presence in the premium segment with a robust portfolio of products over the next three to five years.Their teams are constantly working on new business models, new vehicle concepts and alternative mobility solutions, keeping Hero MotoCorp ahead of the curve.During FY20, they have further strengthened their premium motorcycle portfolio with the launch of various new benchmark-setting products. The XPulse 200, launched during last Diwali festive season won the ‘Indian Motorcycle of the Year’ Award for 2019. It has also begun to create a tremendous fan base across the global markets. 
• Growing Export Market: There is a high demand for Indian bikes all over the world. Africa and Latin America are one of the largest and fastest growing 2 wheeler market beyond Asia. Factors including young population, inadequate public infrastructure and rise of motorcycle taxis are driving the growth in these markets. Moreover, Bangladesh is rapidly rising as an emerging economy and 2 wheeler sales in the country has doubled in last 3 years. This creates huge growth opportunity for Hero Motocorp.
• Electric vehicle: Electric vehicles are going to be the future of mobility. In the next 10 years, electric vehicle market would explode in India. Hero Motocorp is among the leaders in the 2 wheeler Electric space with a range of 2 wheelers like Flash, Optima, Photon, etc. They are also among the early investors in electric 2 wheeler startup Ather which is also a leading electric 2 wheeler company in India. You can get more detail on its website heroelectric.in Although there are many new potential startups in 2 wheeler electric bike segment but you need a very strong financial strength to invest in the R&D, you need an extensive range of product portfolio and you also need a wide range of dealer networks. Hero motocorp has got all the required technical and financial capability, products range and extensive dealer network. With this, Hero motocorp is all set to dominate the 2 wheeler electric market of India. Overall, on the future growth prospect, I would rate it 10/10.

Financials

Over the last 6 years, Hero motocorp revenues have grown at CAGR of 2.4% and profits have grown at a CAGR of 9.5%. On growth ratio, I would rate it 5/10. But this is mainly due to sluggish growth in the auto sector in the last few years and I expect the profits and revenues to grow at much better rates in the future.

2. Profitability Ratio: 

The profitability was very high till 2017. But since then, the profitability has declined due to slowdown in auto sector. However, both ROE and ROCE are well above 20% til FY20. Hence, on profitability, I would rate it 8/10.