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<\/p>\nIndia’s largest two-wheeler maker by volume — Hero MotoCorp (Hero) — posted a better-than-expected operating performance in the January-March (fourth quarter, or Q4) quarter of 2022-23 (FY23).<\/p>\n
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Riding on higher average selling prices which were up 5 per cent year-on-year (YoY) and volume growth of 7 per cent, the company registered a 12 per cent growth in revenue to Rs 8,306 crore.<\/p>\n
The company sold 127,000 units in the quarter, largely driven by domestic sales which were up 11.6 per cent, while exports saw a sharp fall of 57 per cent over the year-ago quarter.<\/p>\n
Overall volume growth for peers — Bajaj Auto (Bajaj) and TVS Motor Company (TVS) — was lower (flat to declining), given the sharp fall in exports.<\/p>\n
While exports of Hero were negligible, the segment accounted for 40 per cent of Bajaj and 21 per cent of TVS volumes in the quarter.<\/p>\n
Notwithstanding weak exports, both companies posted robust sales growth on the back of strong domestic volume growth and higher realisations (premium portfolio and better product mix, including three-wheelers).<\/p>\n
While Hero’s revenue performance was broadly in line with Street estimates, the company beat expectations on the profitability front.<\/p>\n
Operating profit margins came in at 13 per cent and were up 189 basis points (bps) YoY and 153 bps on a sequential basis.<\/p>\n
Growth in operating profit and margins was on account of lower raw material costs, ongoing cost-savings programme, and operating leverage.<\/p>\n
The metric — as a proportion of sales — fell 132-bps YoY to 68 per cent.<\/p>\n
Research analysts Mitul Shah and Aarti Gupta of Reliance Securities believe that a better product mix, regular price hike, and likely recovery in the two-wheeler industry, coupled with declining commodity cost, will support Hero’s margin expansion.<\/p>\n
As was the case with Hero, margin performance for Bajaj and TVS, too, was better than analyst expectations.<\/p>\n
Lower raw material costs and improving mix helped the two companies deliver a better margin show.<\/p>\n
At 10.3 per cent, TVS reported its highest-ever margins.<\/p>\n
Analysts of Motilal Oswal Research, led by Jinesh Gandhi, believe that margins are likely to remain stable in the quarter ahead as a moderate increase in raw material prices in the first quarter of 2023-24 (FY24) should be offset by a 2 per cent price hike.<\/p>\n
In addition to traction in the electric two-wheeler segment, Nuvama Research is positive on the stock, factoring in the consistently improving positioning in growth categories of premium motorcycles, scooters, and exports.<\/p>\n
While Bajaj’s margins hit an eight-quarter high at 19.3 per cent, analysts do not expect significant margin expansion as the benefits of favourable foreign exchange and improved mix are already reflected in Q4FY23 performance.<\/p>\n
While some of the headwinds from lower exports are factored in the valuations of the stock, Nomura Research believes that a rerating hinges on recovery in export on a low base and the success of the Triumph launch.<\/p>\n
Current valuations, too, are supportive as they are at the lower range of the price-to-earnings trading range.<\/p>\n
Volume growth and market-share gains will be key triggers for Hero.<\/p>\n
The company is looking at its highest-ever launches in a year and is targeting one launch per quarter.<\/p>\n
The launches will also include the first motorcycle from the alliance between Hero and Harley-Davidson.<\/p>\n
The company hopes to gain market share on the back of these launches and expectations of double-digit sector growth in FY24.<\/p>\n
While there may be near-term demand weakness, Reliance Research has a ‘buy’ rating on the stock, given attractive valuations.<\/p>\n