A Hero in the making

Though there are options galore in the current market for long term investors with quite a few stocks at mouth-watering levels, some do catch attention since they were doing quite well not too long ago. One of them is Hero MotoCorp. It has again come down to levels of around 1800 where I personally think it is a screaming buy for a 20%+ annual returns going forward. Post the split with Honda, it had reached similar levels but the moves made by Munjals have been well accepted by the stakeholders as well as the markets. And when things didn’t look as bad as they do now, it had again climbed to levels of close to 2200-2400 in a short span. Of course the timeframe may be longer this time than it was last time, but with Indian markets, one never knows.

Freedom to export where they please (which makes for a good long term business model much like happened in IT) and to tie up with whosoever they prefer to choose without any restrictions are obviously the factors which will make or mar its prospects.

So far, they have made the right moves with intentions to expand in SE Asia, Africa, Central and Latin America which are supposedly lucrative markets for 2 wheelers esp. in the 100-125 cc range which are Hero’s forte. The company is sprucing up its sales network in these export markets. Of course it must be remembered that though lucrative, they are no easy pickings with a strong field of not only global giants such as their erstwhile partner Honda and other Japanese biggies such as Yamaha, not to mention Italians such as Vespa but also our own home-grown giants such as Bajaj Auto and TVS. And the point to note is that this has been a mixed bag for our players at least in SE Asia with Bajaj enjoying reasonable success and TVS Motors still struggling to get its act together. So how Hero gets going in these markets would be the key thing to watch.

In line with this strategy, it has also chalked out moves for capex to cater to these export markets. Its first plant will be set-up at Neemrana, Rajasthan, commencing operations from 1QFY14. The second plant will be set-up in Gujarat commencing operations from 2QFY14. It will also be setting up a R&D center with at a 250-acre location near Jaipur in Rajasthan.

Post its break-up with Honda, it was obvious that Hero would need a strong technology partner for its 2 wheelers since its own R&D is yet to pick up on a significant scale. To address this, it has already tied-up with Erik Buell Racing (EBR) and AVL (Austria). While EBR brings technology for premium motorcycles and development of new models, AVL gives access to know-how on engine technologies and would be focused on modifying existing engines.

The Indian market predominantly favors 100cc motorcycles; almost 75% of total sales belong to this category. Splendor and Passion continue to drive HMC’s sales, contributing 45% to volumes. Hero Honda currently sells around 36,000 scooters a month. With only one model, it is already the second largest player in this segment also. It has recently launched ‘Maestro’ to appeal to the male segment. However the concerns are on margins since they have would already have spent resources on their new brand building. Ad-spends would be high for some time in the near future.

Thus, though near-term concerns remain on margins and factors beyond their control such as the macro-economic situation in the country as well as globally, with the right plans and strategy in place for volume as well as margin expansion, Hero should make a rewarding investment now.