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Ready for an inclusive growth

We interacted with Hero MotoCorp (HMCL) senior management to understand the company’s business outlook and strategy. Following are the key takeaways: 1) HMCL is looking forward to an all-inclusive growth with focus towards its core rural portfolio along with mid/upper-end premium models, EVs and exports; 2) will be launching a record number of premium models across FY24, along with the one jointly developed with Harley Davidson; 3) looking forward to upgrade its loyal customers through customer data collected across workshops; 4) strategically targeting EVs from the top-end models like Vida to mid- and lower-end subsequently as managing the reduction in subsidies on lower-end EVs would be tough 5) not keen to increase its stake in Ather for now and is happy to see it prosper under its founders (looking forward to alliances and tech tie-ups in the space rather than aiming at any M&A); 6) going by consumer feedback, base effect, economic activities across rural/urban India, the management is looking forward to another year of >10% growth in the domestic 2W market, inclusive of both rural and urban growth this time; 7) looking forward to a long-term EBITDAM of ~14-16% (this would be tough to achieve in the near term due to rising mix of EVs). Maintain ADD with a DCF-based target price of Rs3,133, implying 13.5x FY25E core EPS.

The takeaways and our views:

* HMCL is aiming at an inclusive growth of its core portfolio and premium portfolio in FY24 with a record number of premium model launches this year. We believe, going by past launches in the 200cc category, it is too early to assume success of the models and increase our volume estimates. Also, with the model developed with Harley Davison to be launched soon, we would look forward to the vehicle specs, design and pricing.

* HMCL believes it would be tough to replicate the success of e-scooters in the mass- market bike segment as designing and managing costs would be a tough proposition. Thus, with ~35% scooterisation and government focus towards electrification, we believe, there is a risk of transition from mass-market bikes to mid-level e-scooters.

* 14-16% EBITDAM target is not for FY24-FY25 as per management, but for business thereafter as, by then, e2Ws would scale up post absorbing the elevated loss per unit in the initial phase. HMCL is aiming towards a higher mix of exports, spares and accessories in order to absorb the losses incurred on EVs at the current low scale.

* Post absorbing the ~30% increase in TCO during FY20-FY23, HMCL believes rural income is now coming back commensurately, driving demand revival. Also, rising finance penetration in rural markets is helping customers fund the higher TCO/down- payment needs. In EVs for rural markets, HMCL is waiting for subsidies to move out and give a stable pricing environment for consumers to evaluate the TCO equation.

Key risks:
* Faster than expected electrification in 2Ws along with sustenance of 20%+ market share of new players like Ola Electric could impact long-term growth of HMCL.

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